Angel Equipedia

Table of Contents
Strategy ........................................................... 1 Agri-Chemicals ............................. 7

Rallis India .................................................. 10 United Phosphorous ............................... 12 Canara Bank ............................................. 86 IDBI .............................................................. 88 Union Bank of India ................................ 90 Central Bank of India ............................. 92 Syndicate Bank ........................................ 94 Allahabad Bank ........................................ 96 Corporation Bank .................................... 98 Indian Bank ............................................. 100 Andhra Bank .......................................... 102 United Bank of India ........................... 104 Vijaya Bank ............................................. 106 Bank of Maharashtra ........................... 108 J&K Bank ................................................. 110 NBFCs HDFC ....................................................... 112 LIC Housing Finance .......................... 114 Colgate ...................................................... 172 GCPL ........................................................ 174 GSKCHL .................................................. 176 Marico ........................................................ 178 TGBL ........................................................ 180 Britannia .................................................. 182
Automobile ................................... 15
Four-Wheeler M&M ............................................................. 22 Tata Motors ................................................ 24 Maruti Suzuki ............................................ 26 Ashok Leyland .......................................... 28 Two-Wheeler Bajaj Auto ................................................... 30 Hero MotoCorp ........................................ 32 TVS Motor .................................................. 34 Auto Ancillary Bosch .......................................................... 36 Exide Industries ........................................ 38 Amara Raja Batteries ............................. 40 Apollo Tyres ............................................... 42 Ceat .............................................................. 44 JK Tyre and Industries ........................... 46 Motherson Sumi ....................................... 48 Bharat Forge ............................................. 50 FAG Bearings ........................................... 52 Automotive Axles ..................................... 54 Subros ......................................................... 56
Infrastructure ........................... 185

E & C Companies L&T ............................................................ 190 JP Associates ........................................ 192 Sadbhav Eng. ........................................ 194 Punj Lloyd ............................................... 196 HCC .......................................................... 198 NCC .......................................................... 200 IVRCL ....................................................... 202 Simplex Infra ........................................... 204
Capital Goods ........................... 117

BTG BHEL ........................................................ 122 BGR Energy ........................................... 124 T&D/Industrials ABB INDIA ............................................. 126 Crompton Greaves .............................. 128 Thermax .................................................... 130 KEC International ................................. 132 Jyoti Structures ..................................... 134
Patel Engineering ................................. 206 Madhucon Projects .............................. 208 CCCL ....................................................... 210 Road Developers IRB Infra .................................................. 212 ITNL ........................................................... 214 Ashoka Buildcon ................................... 216
Media .......................................... 219

DB Corp .................................................. 222 HT Media ................................................. 224 Jagran Prakashan ................................. 226 PVR ........................................................... 228 SUN TV Networks ................................ 230
Cement ........................................ 137 Banking ......................................... 59

Private Sector Banks ICICI Bank ................................................. 66 HDFC Bank ............................................... 68 Axis Bank .................................................... 70 Yes Bank ..................................................... 72 Federal Bank ............................................. 74 South Indian Bank ................................... 76 Public Sector Banks State Bank of India ................................. 78 Punjab National Bank ............................ 80 Bank of Baroda ........................................ 82 Bank of India ............................................. 84 UltraTech .................................................. 144 ACC .......................................................... 146 Ambuja Cements .................................. 148 Shree Cement ....................................... 150 India Cements ....................................... 152 Madras Cements .................................. 154 JK Lakshmi Cement ............................. 156
Metals ......................................... 233

Ferrous Tata Steel ................................................ 236 SAIL .......................................................... 238 JSW Steel ............................................... 240 Bhushan Steel ....................................... 242 Monnet Ispat .......................................... 244 Mining NMDC ...................................................... 246 Sesa Goa ................................................ 248
FMCG .......................................... 159

ITC ............................................................. 162 HUL ........................................................... 164 Nestl ....................................................... 166 Asian Paints ............................................ 168 Dabur ......................................................... 170
January 2012
Please refer to important disclosures at the end of this report
Coal India ................................................ 250 MOIL ......................................................... 252 Non-Ferrous Hindustan Zinc ...................................... 254 Sterlite Industries ................................. 256 Hindalco ................................................... 258 Nalco ......................................................... 260
Power .......................................... 305

NTPC ........................................................ 308 CESC ....................................................... 310 GIPCL ...................................................... 312
Telecom ....................................... 355

Bharti Airtel ............................................. 360 Idea Cellular ........................................... 362 Reliance Comm. .................................... 364
Real Estate ................................ 315

DLF ............................................................ 318 HDIL .......................................................... 320 Anant Raj ................................................. 322
Mid-Cap
Abbott India ............................................ 368 Bajaj Electricals ..................................... 370 Blue Star .................................................. 372 CRISIL ...................................................... 374 Finolex Cables ........................................ 376 Goodyear India ....................................... 378 Graphite ................................................... 380 Greenply .................................................. 382 HAIL .......................................................... 384 HEG .......................................................... 386 Hitachi Home & Life ............................ 388 INEOS ABS ........................................... 390 ITD Cementation ................................... 392 Lakshmi Machine .................................. 394 MRF ........................................................... 396 NIIT ............................................................ 398 Page Industries ..................................... 400 Relaxo Footwear ................................... 402 Sintex ........................................................ 404 Siyaram Silk Mills ................................. 406 SpiceJet ................................................... 408 Taj GVK .................................................... 410 Tata Sponge Iron .................................. 412 TVS Srichakra ........................................ 414 Vesuvius India ........................................ 416
Oil & Gas .................................... 263

Reliance Inds. ........................................ 266 ONGC ...................................................... 268 GAIL ........................................................... 270 Cairn India ................................................ 272
Software ..................................... 325

Large Caps TCS ........................................................... 330 Infosys ...................................................... 332 Wipro ........................................................ 334 HCL Technologies ................................ 336 Mid Caps Tech Mahindra ....................................... 338 Mahindra Satyam .................................. 340 Mphasis .................................................... 342 MindTree .................................................. 344 Infotech Entreprises ............................ 346 Hexaware ................................................. 348 KPIT Cummins ....................................... 350 Persistent ................................................ 352
Pharmaceuticals ...................... 275

Sun Pharma ............................................ 280 Dr. Reddy's Lab. ................................... 282 Cipla .......................................................... 284 Lupin ......................................................... 286 Ranbaxy .................................................... 288 Glaxo Pharma ........................................ 290 Cadila Healthcare ................................. 292 Aventis ...................................................... 294 IPCA Labs ............................................... 296 Aurobindo Pharm. ................................. 298 Alembic Pharm. ..................................... 300 Indoco Remedies .................................. 302
January 2012
Dawn of a new cycle

TOP PICKS
Companies Large Caps Ashok Leyland Axis Bank ICICI Bank Infosys L&T Lupin NMDC RIL TCS United Phosphorus Mid Caps Abbott India Bajaj Electricals CEAT Goodyear India Greenply Inds. Hitachi Home Jagran Prakashan Relaxo Footwear Siyaram Silk Mills Tata Sponge Iron
Note: Prices as of January 19, 2012
Self-correcting mechanisms in place

CMP (`) Target (`) ` ` 27 952 796 2,592 1,274 442 175 785 1,076 142 32 1,361 1,061 3,047 1,608 593 231 923 1,262 182
Looking back at 2011, Indian equity markets were struck by a multitude of issues, ranging from persistently high inflation, monetary tightening, stalling mining activity to sinking capital formation. The Eurozone crisis made matters worse, causing global financial markets to become all the more risk-averse. But self-correcting mechanisms are already at play, which should make 2012 a better year for Indian equities. Most importantly, cooling of inflation and consequently interest rates should end the spell of margin compression, which has afflicted corporate earnings in the past several quarters. Also, India's widening current account deficit has been another macro overhang. But, here again, even at 49-50 levels, the 10-12% INR depreciation, in our view, should provide the requisite boost to India's exports to gradually self-correct the deficit.
Expect 19,300 Sensex by December 2012

Sensex FY2012 earnings growth is likely to be modest as high inflation and interest rates have battered margins. But with this scenario on its way to changing in FY2013, we expect the earnings growth rate to improve from 9.5% in FY2012 to 16.2% in FY2013. Also, in our view, risks that the government inertia continues and GDP growth remains at ~7% have already been largely factored in valuations by the market. We believe this offers a favorable risk-return trade-off, considering that several domestic negatives can be reversed by quick, simple and rational policy actions. For instance, quick approval of FDI reforms in aviation and insurance, among others, as well as pick-up in infrastructure ordering activity are low-hanging fruits. Already, ordering activity by NHAI and Power Grid is reasonably robust, and it is a matter of time before others would follow suit. The financial troubles of SEBs is another unnecessary crisis that is finally changing with recent tariff hikes. Amongst more difficult to push-through are measures to end the mining logjam, but in our view the government will soon have to balance environmental concerns and expedite mining and land acquisition to step up GDP growth. In fact, we do not expect domestic factors alone to have the capacity to trigger new lows for the markets. It is only the Eurozone crisis that may still lead to volatility in the near term, but policymakers there as well are taking steps to avert any crisis event - accordingly, as of now we are basing our market view on a likely orderly outcome in the Eurozone. Considering that valuations are also reasonable, with domestic macro indicators improving and with earnings trajectory likely to follow suit, we have a target of 19,300 for the Sensex by December 2012.
1,490 171 84 305 181 112 98 281 267 253
1,852 201 125 401 286 157 137 420 426 382
Select stocks to give better returns

Looking beyond the Sensex, there are a host of good investment opportunities in our view in companies across several sectors, such as banking, IT and pharma. On the other hand, there are sectors such as capital goods and cement where we still remain cautious. In this compendium, we have therefore given an overview of our entire coverage universe of 160+ stocks, having a combined market capitalization of ~`40lakh cr. Currently, we have a Buy recommendation on 82 of these, broadly preferring companies having high-quality cyclical businesses rather than high-quality defensives. Also, we have covered several mid caps, which in our view offer enormous potential - either because they are leading brands within their sectors trading cheaply or belong to high-growth sectors benefitting from rural, export or consumption themes. January 2011 Please refer to important disclosures at the end of this report 1
Strategy Self-correcting mechanisms in place

Looking back at 2011, Indian equity markets were struck by a multitude of issues, ranging from persistently high inflation, sledgehammer monetary policy, surging subsidies, plunging INR to falling domestic gas production, stalling mining activity and sinking capital formation. The Eurozone crisis made matters worse, causing global financial markets to become all the more risk-averse. But self-correcting mechanisms are already at play, which should make 2012 a better year for Indian equities. Multiple benefits out of reversal of inflation and interest rate cycle: In spite of slowing domestic growth, inflation has stubbornly remained above the RBI's indicated comfort level of 5-5.5% for two years now and above the 9% mark for 14 consecutive months. However, finally the WPI inflation trajectory has moderated, as evident from the 7.5% reading in December 2011, after hitting the double-digit mark in September 2011. Most importantly, primary inflation is on retreat and it is only a matter of time before manufacturing inflation also cools off in the backdrop of the policy-induced growth slowdown. past 4-5 months due to concerns of slower global growth prospects. However, crude oil prices have remained sticky at elevated levels, with Brent averaging ~US$113/barrel in FY2012YTD as compared to FY2011 average of US$87/barrel. But looking at earlier trends in peak crude oil expenditure as a percentage of global GDP over the past decade, we believe crude prices are close to their peak levels and expect crude to moderate going forward, thereby increasing headroom for monetary easing and lowering the current account deficit. Reversal of rate cycle expected to boost corporate earnings growth in FY2013: Cooling of inflation and consequently interest rates should end the spell of margin compression, which has afflicted corporate earnings in the past several quarters. We expect the scenario to improve in FY2013E with the peaking of inflation and interest rate cycle. Hence, while FY2012 earnings growth is likely to be modest, cooling inflation and interest rates should underpin healthier growth in FY2013. Hence, we expect Sensex EPS growth to improve from 9.5% in FY2012 to 16.2% in FY2013.
Exhibit 3: Sensex EPS estimates Exhibit 1: Inflationary pressures moderating

12.0 10.0 20.0 8.0 6.0 4.0 2.0 5.0 0.0 15.0 10.0 25.0
(`)
1,350 1,150 950 750 550 350 FY2010 FY2011 FY2012E
21.6 % 9.5% th grow gr h owt 16.2 %g row
th
1,290 1,110
1,014
834
Jun-11
Aug-11
Oct-11
Feb-09
Oct-09
Aug-09
Dec-08
Dec-09
Apr-10
Aug-10
Oct-10
Dec-10
Feb-10
Dec-11
Apr-09
Jun-09
Jun-10
Feb-11
Apr-11
(2.0)
0.0
WPI Inflation (%)
Food Inflation (%, RHS)
FY2013E
Source: MOSPI, Angel Research
Source: Angel Research
With inflation declining, the RBI has signalled a softening of its monetary policy stance to stimulate the slowing domestic growth momentum. The Central Bank has started with infusing `70,000cr of liquidity through Open Market Operations (OMO) and `30,000cr through a CRR cut. In the months to come, this is likely to be followed up with more liquidity infusion and eventually rate cuts as well, provided inflation keeps cooling on expected lines. Capital-intensive sectors have been battered with elevated interest burden for quite a while now; hence, relief on this front is likely to be a major catalyst in pushing up overall growth.
Exhibit 2: Expect at least 100bp cut in repo rate in CY2012

9.0 8.0 7.0 6.0 5.0 4.0 3.0 2.0
INR depreciation to boost export growth: India's widening current account deficit has been another macro overhang of late, ballooning from the already high 3% levels, but this was being masked by capital flows earlier. But with this kind of a high current account deficit, we had maintained the view that the INR was likely to depreciate, and this finally got accentuated once capital flows diminished recently. Now, even after retracing some of the losses, at 49-50 levels the 10-12% INR depreciation (not just against the USD but also the Chinese Yuan) in our view should provide the requisite boost to India's exports to gradually self-correct the deficit. Within our coverage universe, the major beneficiaries of INR depreciation are not surprisingly expected to be the IT, pharma and export-oriented auto ancillary companies. Amongst these, in our view, while valuations do not leave much upsides in IT, we still have a positive outlook on pharma. Policy reforms could add further boost: The risk that government inertia continues and GDP growth remains at ~7% is, in our view, already largely factored in valuations by the market. We believe this offers a favorable risk-return trade-off, considering that several of the policy issues can be reversed by quick, simple and rational policy actions that can have an immediate positive impact and minimal negative fallout for all stakeholders. Infrastructure spending: Pick-up in infrastructure ordering activity by government bodies in roads, ports and power transmission, among others, is one of the low-hanging fruits that would only have beneficiaries. Already, ordering activity by NHAI and Power Please refer to important disclosures at the end of this report
Jan-11
May-11
Nov-11
Mar-11
Jul-11
Sep-11
Jan-12
May-12
May-10
Nov-10
Repo rate (%)
Reverse Repo rate (%)
Source: RBI, Angel Research
Oil too may soften in-line with the fall in other commodities: Almost all commodities (be it metals, iron ore or coal) have corrected by a considerable 20-25% in USD terms over the 2 January 2012
Nov-12
Mar-12
Jul-12
Mar-10
Sep-10
Sep-12
Jul-10
Strategy
Grid is reasonably robust and it is a matter of time before other government bodies would follow suit. Quickly pushing non-contentious FDI reforms: The balance of payments concerns can be addressed further by potential FDI reforms in aviation, education and insurance to begin with, which are not contentious like retail FDI. Resolving SEB woes: The financial troubles of SEBs is another example of irrational policies that can and should be quickly set straight. So far, reported losses have been as high as `63,550cr, owing to inadequate/nil tariff hikes, power theft and high AT&C losses. This unnecessary crisis is finally changing with much required tariff revisions recently - 22 states have hiked tariffs and we continue to hold the view that SEBs are unlikely to become NPAs for banks or the main culprits for low PLFs of power companies (in our view, fuel availability is the key issue for the power sector). Addressing the fuel crisis: Fuel shortage due to the mining logjam is one of the more serious issues that the government needs to addres sooner rather than later. It does not make sense that a developing country like India, with a demographic dividend to take advantage of, is importing increasing quantities of even those resources that are abundantly available to it (read coal). Even in case of steel, we are a net importer; while, on the other hand, we have been exporting 50% of our annual iron ore production (now mired in mining bans). In fact, despite being the fifth largest in reserve size, India's expensive coal imports continue to rise alarmingly on account of domestic shortage. Considering growth in user industries (power, cement and metals), India's coal demand is expected to grow from 625mn tonnes in FY2011 to 855mn tonnes in FY2015. While production has been constrained, India's coal imports are likely to surge from 89mn tonnes in FY2011 to 175mn tonnes in FY2015. Production from newer mines has been lower on account of time-consuming clearance processes (mainly environment clearance and forest clearance). Further, land acquisition issues have been a big bottleneck. Hence, we hold the view that considering the small land requirement and deforestation implications for mining coal and iron ore as compared to the economic benefits, eventually in the near-tomedium term the government will have to balance environmental concerns and expedite mining and land acquisition bills as well as the actual auctioning and regulatory clearance of coal and iron ore blocks in order to step up GDP growth. Indian equities have already got de-rated and are now trading at a substantial discount to their long-term trading range, factoring in the negatives. Based on one-year forward earnings, the Sensex is trading at 13.4x, which translates into a considerable 20% discount to its five-year trading average.
Exhibit 9: Sensex one-year forward P/E

27.0 24.0 21.0 18.0 15.0 12.0 9.0 6.0
Apr-11
Jul-01
Jan-03
Oct-03
Apr-05
Jan-09
Oct-06
Oct-97
Oct-09
Apr-96
Apr-99
Jan-06
Jan-97
Apr-08
Jan-00
Sensex 1 year forward P/E
Oct-00
15 year Avg
5 year Avg
Source: Bloomberg, Angel Research
Earnings likely to get a fillip from reversal of inflation and interest rate cycle: Sensex FY2012 earnings growth is likely to be modest as high inflation and interests have battered margins. But with this scenario on its way to changing in FY2013, we expect the earnings growth rate to improve from 9.5% in FY2012 to 16.2% in FY2013. Also, the risk that the government inertia continues and GDP growth remains at ~7% is, in our view, already being largely factored in valuations by the market. We believe this offers a favorable risk-return trade-off, considering that several of the domestic negatives can be reversed by quick, simple and rational policy actions. In fact, we do not expect domestic factors alone to have the capacity to trigger new lows for the markets. It is only the Eurozone crisis that may still lead to continued volatility in the near term, but policymakers there as well are taking steps to avert any crisis event. While fiscal discipline and resultant deflation in the weaker countries could improve economic competitiveness, this would be a more painful solution for their respective citizens. We believe an orderly exit by some of the weaker countries from the Euro and subsequent currency devaluation by them to boost exports and employment would be a more long-lasting solution. But in either of the two scenarios, as of now we are basing our market view on a likely orderly outcome in the Eurozone. Considering that valuations are also reasonable and several of the domestic macro indicators such as inflation, interest rates and current account are either already improving or set to improve in the coming quarters with earnings trajectory likely to follow suit, we have a positive outlook on markets. We have a target of 19,300 for the Sensex by December 2012, assigning a multiple of 15x FY2013E earnings, in-line with the long-term average. Our target implies an upside of ~15% from current levels. Select stocks to give better returns: Looking beyond the Sensex, there are a host of good investment opportunities in our view in companies across several sectors such as banking, IT and pharma. For instance, we remain positive on Axis Bank and L&T, which we believe are strong structural stories available at cyclically low valuations. On the other hand, there are sectors such as capital goods and cement where we still remain cautious.
Expect 19,300 Sensex by December 2012

Valuations are cheap; Earnings downgrades behind us: Indian markets fell sharply in CY2011 and were one of the worst performers across the globe. This was mainly due to high inflation and interest rates taking a toll, reflected in GDP growth falling to 7%. Consequently, earnings growth trajectory for India Inc. also weakened considerably, as evident from poor 2QFY2012 earnings and similar expectations in the immediate short term as well. All this has resulted in the most important ingredient for healthy stock returns to fall in place - cheap valuations. Valuations of
January 2012
Jan-12
Apr-02
Jul-98
Jul-04
Jul-07
Jul-10
Strategy
In this compendium, we have therefore given an overview of our entire coverage universe of 160+ stocks, spanning all major sectors of the economy and having a combined market capitalization of ~`40lakh cr. Currently, we have a Buy recommendation on 82 of these, broadly preferring companies having high-quality cyclical businesses rather than high-quality defensives. Our Buys range from high-ROE businesses like TCS, Lupin and Jagran Prakashan to deep-value stocks like Ceat, IVRCL and Finolex Cables. There are several Buys from the mid cap space too, which in our view offer enormous potential - either because they are leading brands within their sectors trading cheaply or belong to high-growth sectors benefitting from rural, export or consumption themes. These include stocks like Siyaram, Greenply and Relaxo. Overall, with the environment begining to turn positive and a host of stocks to pick from, we firmly believe that 2012 is set to be a much better year for Indian equities!
Exhibit 12: Top 5 buys - cheapest on P/E basis

Company Sector Upside (%) P/E (x) FY13E/CY12E Siyaram Silk Mills TVS Srichakra Tata Sponge Iron Greenply Inds. Relaxo Footwear Mid Cap Mid Cap Mid Cap Mid Cap Mid Cap 60 51 51 58 50 3.8 4.0 4.2 5.1 6.0
Source: Company, Angel Research
Exhibit 13: Top 5 buys - highest on RoE basis

Company Sector Upside (%) RoE (%) FY13E/CY12E Bajaj Auto Jagran Prakashan TCS Auto & Auto Anc. Media IT Metals & Mining Pharma 20 40 17 32 34 44.7 33.8 33.3 31.1 28.6
Exhibit 10: Angel Universe Recommendation Summary

Sector (No of Companies) Auto & Auto Anc. (18) Capital Goods (7) Cement (7) Financials (25) FMCG (11) Infrastructure (14) IT (13) Media (5) Metals & Mining (13) Oil & Gas (4) Real Estate (3) Pharma/ Agri-Chemicals (14) Power (3) Telecom (3) Mid Cap (24) Angel Universe (164) Positive Neutral Neutral Positive 7 3 0 20 82 3 0 0 0 30 4 0 3 4 52 Sector view Positive Neutral Neutral Positive Neutral Positive Positive Positive Positive Positive Neutral Buy 9 2 1 13 0 10 5 3 4 3 2 Accum. 7 0 0 5 5 0 6 0 4 0 0 Neutral/ Reduce 2 5 6 7 6 4 2 2 5 1 1
NMDC Lupin
Exhibit 14: Companies with highest earning growth

Company Sector Reco Upside Adj PAT Gr. (%) FY13E / CY12E (%) 40 28 16 (41) 27 5 50 170.2 135.9 111.6 100.3 96.4 91.8 79.3 75.9 71.5 66.6
Hitachi Home
Mid Cap
Buy Buy Buy Sell Buy Neutral Neutral Neutral
ITD Cementation Mid Cap HEG ABB JK Tyre Blue Star Ranbaxy Shree Cement JSW Steel Relaxo Footwear Mid Cap Capital Goods Auto & Auto Anc. Mid Cap Pharma Cement
Metals & Mining Accumulate Mid Cap Buy
Exhibit 15: Companies with lowest earning growth

Company Sector Reco Upside Adj PAT Gr. (%) FY13E/ CY12E (%) 22 (248.5) (120.8) (14.1) (9.3) (8.6) (6.8) (5.6) (3.6)
Source: Angel Research; Note; No. represents no. of companies
Exhibit 11: Top 5 buys - cheapest on P/BV basis

Company JK Tyre CEAT IVRCL Sector Auto & Auto Ancillary Auto & Auto Ancillary Infrastructure Upside (%) 27 48 40 26 51 P/BV (x) FY13E/CY12E 0.30 0.44 0.49 0.55 0.58
CCCL* HCC* Jyoti Str. BHEL Andhra Bank BGR Thermax South Indian Bank
Infrastructure Infrastructure Capital Goods Capital Goods Financials Capital Goods Capital Goods Financials
Neutral Neutral Buy Neutral Neutral Neutral Neutral Neutral
Syndicate Bank Financials Finolex Cables Mid Cap

Source: Company, Angel Research; Note: *losses expected in FY13E/CY12E
January 2012
Strategy
Exhibit 16: Companies trading at cyclically higher valuations
Company Sector Aventis Marico Page Inds. CRISIL Ambuja Pharma FMCG Mid Cap Mid Cap Cement Reco Reduce Neutral Neutral Neutral Neutral CM P (` ) Target (` ) Upside (%) ` ` 2,230 152 2,505 914 160 1,937 (13) -
Exhibit 17: Companies trading at cyclically lower valuations

Company United Phos. RIL L&T Axis Bank NMDC Sector Agri -Chemicals Oil & Gas Infrastructure Financials Metals & Mining Reco CMP(` ) Target (` ) Upside (%) ` ` Buy Buy Buy Buy Buy 142 785 1,274 952 175 182 923 1,608 1,361 231 28 18 26 43 32
Exhibit 18: Contrarian Buys

Company Britannia TGBL Ashok Leyland Mahindra Satyam Mphasis Sector FMCG FMCG Auto & Auto Anc. IT IT Angel Reco. Accumulate Accumulate Buy Accumulate Accumulate Buy 7 3 25 11 12 Bloomberg Hold/Sell 8 9 26 12 29
Exhibit 19: Contrarian Avoids

Company KEC Bharti Airtel PVR Shree Cement India Cements Sector Capital Goods Telecom Media Cement Cement Angel Reco. Neutral Neutral Neutral Neutral Neutral Buy 24 41 9 25 27 Bloomberg Hold/Sell 7 16 17 16
Exhibit 20: Angel Universe Estimate Summary

Sales (` cr) ` Sales Gr. (%) CAGR Sector Auto & Auto Anc. Capital Goods Cement Financials FMCG Infrastructure IT Media Metals & Mining Oil & Gas Real Estate Pharma/Agri-Chemicals Power Telecom Mid Cap FY12E 328,375 88,364 48,521 234,600 93,457 117,029 168,612 7,356 430,082 487,316 13,238 65,996 69,888 109,927 49,834 FY13E 373,706 91,912 54,356 271,719 108,439 133,370 195,833 8,186 485,414 522,917 15,247 76,892 78,187 126,253 57,817 FY13E 13.8 4.0 12.0 15.8 16.0 14.0 16.1 11.3 12.9 7.3 15.2 16.5 11.9 14.9 16.0 12.4 FY12-13E 14.7 10.1 17.8 15.0 16.3 13.9 20.8 10.5 12.2 10.8 13.4 17.4 11.8 13.9 16.8 13.7 FY12E 38,282 13,505 10,729 135,042 18,412 17,836 41,677 2,840 85,136 105,744 5,973 14,184 17,260 34,829 4,900 546,348 FY13E FY13E 43,822 13,462 12,196 154,968 22,049 20,373 47,933 3,179 100,744 114,243 7,001 17,692 19,552 41,953 6,325 625,493 14.5 (0.3) 13.7 14.8 19.8 14.2 15.0 11.9 18.3 8.0 17.2 24.7 13.3 20.5 29.1 14.5 Op. Profit(` cr) ` Op. Profit Gr. (%) CAGR FY12-13E 10.7 6.6 19.7 15.9 19.0 11.5 20.5 8.0 10.3 6.3 17.0 23.9 16.4 14.1 14.1 12.8 FY12E 22,817 8,685 5,253 63,568 23,887 5,926 30,854 1,485 53,431 57,854 2,583 10,105 10,250 6,730 2,395 305,822 FY13E 25,725 8,479 6,122 71,687 28,223 7,111 35,743 1,666 61,206 63,251 3,222 13,174 11,213 10,655 3,342 350,819 Adj. PAT(` cr) ` Adj. PAT Gr. (%) CAGR FY13E FY12-13E 12.7 (2.4) 16.6 12.8 18.2 20.0 15.8 12.2 14.6 9.3 24.7 30.4 9.4 58.3 39.6 14.7 7.3 2.6 19.2 13.3 18.0 7.6 18.5 8.0 9.4 9.5 10.6 22.2 5.9 13.6 10.4 11.9 Cap (` Cr) ` 276,043 100,497 91,845 655,260 386,809 111,179 520,170 21,626 550,253 602,600 40,926 200,997 145,429 176,407 32,974 3,913,015 Market
Angel Universe 2,312,595 2,600,248 Source: BSE, Company, Angel Research
January 2012
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January 2011
Agri-Chemicals
COVERAGE
Companies United Phosphorous Rallis India CMP (`) ` 142 131 Target (`) ` 182 Reco Buy
POSITIVE
Industry arguments
Indian domestic market to post steady growth: The Indian organized agrichemical industry is estimated at ~US$1bn (`5,000cr, as of FY2009) i.e., 0.1% of the country's total GDP and 0.6% of agriculture GDP. Currently, the industry is mostly dominated by unorganized players. This provides a scope for organized players to grow higher than the industry's growth of 13-14%. We believe organized players are well placed to seize this high-growth opportunity on account of their well-spread distribution network, strong brands and robust new product pipeline. Agro-generic markets can at least expect a 6-8% CAGR, in-line with historical performance: Apart from domestic opportunities, the global agrichemical industry also offers opportunities in the form of generics. Agrichemical companies have been reducing their manufacturing capacity of low-value off-patent proprietary products, thus paving way for the growth of generic players. Consequently, generic firms, especially in the Indian space, are in a sweet spot, given their cost advantage. The global agrichemical industry, valued at US$40bn (CY2008), is dominated by the top six innovators, who enjoy a large market share of the patented (28%) and off-patent (32%) market. Pertinently, the top six innovators also enjoy a large share of the off-patent market due to high entry barriers for pure generic players. Thus, one-third of the total pie worth US$13bn (controlled by the top six innovators through proprietary off-patent products) provides a high-growth opportunity for larger integrated generic Indian players such as United Phosphorus (UPL). Generic players have been garnering a high market share, increasing from 32% levels in 1998 to 40% by 2006-end. The industry registered a 3% CAGR over 1998-2006, while generic players outpaced the industry with a 6% CAGR. Going ahead, assuming this trend plays out in terms of growth for the agrichemical industry and the same rate of genericisation occurs, the agrichemical generic industry could log in 6-8% yoy growth during the period. CRAMS - An opportunity on the anvil: Global agrichemical companies have been reducing the manufacturing capacity of low-value products to concentrate on higher-value products. Conversely, they are maintaining their strong hold on off-patent active ingredients (AI) through outsourcing the same. For instance, Bayer CropScience reduced its portfolio by 29 actives during 2000-06. Sales of patented products constituted approximately one-third of the total and another one-third is proprietary off-patent (patent of the molecule has expired but no credible generic brand has been able to garner significant market share from the patented brand). China has come to be known as the world's factory and this fact remains the same for agrichemicals as well. However, to diversify risks arising from a single location manufacturing base, many MNCs have been looking at other countries. Here, Indian agrichemical manufacturers can position themselves as suitable alternatives to their Chinese counterparts. Many players, including Rallis India (RAIL), plan to selectively target this opportunity by supplying AI to top industry players. As an illustration, RAIL is targeting cumulative revenue of `1,000cr over the next five years from this segment alone. Outlook and valuation: The outlook for the Indian agrichemical industry, given the growth opportunities, is likely to remain strong. However, currently given the low breadth of our coverage, our top pick is UPL, given its attractive valuations, which discount most of the negatives.
- Neutral
January 2011
Agri-Chemicals
The Indian organized agrichemical industry is estimated at ~US$1bn (`5,000cr, as of FY2009) i.e., 0.1% of the country's total GDP and 0.6% of agriculture GDP. Currently, the industry is mostly dominated by unorganized players (50% of the industry). This provides a scope for organized players to grow higher than the industry's growth of 13-14%. We believe organized players are well placed to seize this high-growth opportunity on account of having a well-spread distribution network, strong brands and robust new product pipeline.
Generic segments market share to increase

Generic players have been garnering a high market share, increasing from 32% levels in 1998 to 40% by 2006. Over 1998-2006, while the industry registered a CAGR of 3%, generic players outpaced the industry by posting a 6% CAGR during the period. Going ahead, given the opportunities and drop in rate of new molecule introduction by innovators, we expect generic players to continue to outpace the industry's growth and increase their market share in the overall pie. Historically, the global agrichemical industry has been logging in-line growth with global GDP. Going ahead, over CY2009-11E, the global economy is expected to grow by 3-4%. Assuming this trend plays out in terms of growth for the agrichemical industry and the same rate of genericisation occurs, the agrichemical generic industry can log in growth of 6-8% during the period and garner a market share of 44-45%.
Exhibit 1: Low consumption and penetration of the Indian agrichemical

(Kg/ha)
18.0 16.0 14.0 12.0 10.0 8.0 6.0 4.0 2.0 0.0
17.0
10.7
10.5
6.6
5.8 4.5
Exhibit 3: Market share trend of generic players

0.5
45 40 35
Taiwan
Japan
Holland
S. Korea
France
USA
India
Source: Industry, Angel Research
Agro-generic markets can at least expect a 6-8% CAGR, in-line with historical performance: Apart from domestic opportunities, the global agrichemical industry also offers opportunities in the form of generics. Agrichemical companies have been reducing their manufacturing capacity of low-value off-patent proprietary products, thus paving way for the growth of generic players.
30 25 20 1998 1999 2000 2001 2002 2003 2004 2005 2006

Innovators dominant in the off-patent space; Generic players in a sweet spot

The global agrichemical industry is dominated by the top six innovators, viz. Bayer, Syngenta, Monsanto, BASF, DuPont and Dow, which enjoy a large market share of patented (28%) and off-patent (32%) markets. Pertinently, the top six innovators also enjoy a large share of the off-patent market due to the high entry barriers for pure generic players. Thus, one-third of the total pie worth US$13bn (controlled by the top six innovators through proprietary off-patent products) provides a high growth opportunity for larger integrated generic players like UPL.
High investments - Formidable entry barrier

The global agrichemical industry is highly consolidated, primarily due to high entry barriers of significant and upfront investments required for product registration and to set up manufacturing facilities. As a result, price competition is limited due to the subst antial investments involved. Moreover, unlike the pharmaceutical sector, where bioequivalence of molecule can help a company get the permission to sell medicines, companies in the agrichemical sector have to compulsorily undergo field trials for each molecule and in each geography where the products would be marketed. Field trials are carried out by independent agencies across crops and seasons, which could take anywhere between 2-5 years, depending on the market (U.S. and EU) and government regulations. Thus, the process requires high investments both monetary and time, thereby restricting competition.
Exhibit 2: Global agrichemical market (US$40bn)
Proprietary Off Patent (Top -6) 32% Generic off patent 40% Proprietary Patent (Top -6) 28% Generic Top -5 61% Generic Others 39%
Exhibit 4: Timeline for the development of agrichemical products

Discovery Agrichemicals New No Short cut Approval and Product Launch Development I Field Trials (2-5 years) II III

Generic
Additional products going off-patent to boost growth

As per NuFarm and MAI, patents worth US$3bn-4bn (sales as of 2007) would expire during 2009-14, further widening the opportunity for generic players. 8 January 2012
Pharma New Generic Prove BioEquivalence
Agri-Chemicals
The trend is already well established - Top generic companies getting stronger
New entrants are also faced with another challenge of gaining entry into the existing distribution network. In most markets, agrichemical sales and distribution have evolved to become organized businesses and are controlled by few players. For instance, Tenkoz, Inc. is the largest agrichemical distributor in the U.S., with combined purchases representing 25% of the U.S. agrichemical market. Hence, to enter this market, a new player needs to have a basket of products to gain shelf space. But, a large product offering entails substantial investments in terms of time and money. This is evident from the fact that 53% of the generic market (one-third of the agrichemical industry) is controlled by the four largest generic players, including UPL. In all, around 81% of the industry is controlled by few players, making agrichemicals a highly consolidated sector.
CRAMS - An opportunity on the anvil

Global agrichemical companies have been reducing the manufacturing capacity of low-value products to concentrate on higher-value products. Conversely, they are maintaining their strong hold on off-patent AI through outsourcing the same. For instance, Bayer CropScience reduced its portfolio by 29 actives during 2000-06. Sales of patented products constituted approximately one-third of the total and another one-third is proprietary off-patent (patent of the molecule has expired but no credible generic brand has been able to garner a significant market share from the patented brand). China has come to be known as the world's factory and this fact remains the same for agrichemicals as well. However, to diversify risks arising from a single location manufacturing base, many MNCs have been looking at other countries. Here, Indian agrichemical manufacturers can position themselves as suitable alternatives to their Chinese counterparts. Many players, including RAIL, plan to selectively target this opportunity by supplying AI to the top industry players. As an illustration, RAIL is targeting cumulative revenue of `1,000cr over the next five years from this segment alone. Outlook and valuation: The outlook for the Indian agrichemical industry, given the growth opportunities, is likely to remain strong. However, currently given the low breadth of our coverage, our top pick is UPL, given its attractive valuations, which discount most of the negatives.
Exhibit 5: Trend in the market share of the top four generic players
(%) 60 50 40 30 20 10 0 CY2005 CY2006 CY2007 CY2008 39 40 53 43
Exhibit 6: Recommendation summary

Company Reco CMP (`) ` United Phosphorous Rallis Buy Neutral 142 131 Tgt Price (`) ` 182 Upside % 28.0 PE (x) 10.4 13.8 FY2013E EV/Sales (x) EV/EBITDA (x) 1.3 1.5 6.7 8.6 FY11-13E CAGR in EPS (%) 13.8 21.4 FY2013E RoCE (%) 16.0 30.3 ROE (%) 16.1 25.4
January 2012
Agriculture
RATING 52 WEEK HIGH / LOW MARKET CAP (` CR) ` LIQUIDITY BUY 172 / 121 6,560 MEDIUM
United Phosphorous
CMP/TP/Upside: `142 / `182 / 28% Company Background
TOP PICK
United Phosphorus Ltd. (UPL) is a global generic crop-protection, chemicals and seeds company. The company is fully integrated, which enables it to take advantage of the consolidated opportunities within the agrichemical industry. UPL is the largest Indian agrichemical company, reporting revenue of ~US$1.3mn as of March 2011.
SHAREHOLDING PATTERN (%) PROMOTERS FII 27.3 35.5
Structural Snapshot
Growth opportunity: The Indian agrichemical industry, estimated at ~US$1bn (`5,000cr) at the end of FY2009, contributed 0.1% to India's total GDP and 0.6% to its agriculture GDP. The pesticides industry can easily grow at 13-14%, in-line with GDP growth, with organized players, such as RAIL, likely to grow at a higher rate because of greater share of unorganized players. Apart from domestic opportunities, the global agrichemical industry also offers opportunities in the form of generics and contract manufacturing. Agrichemical companies have been reducing the manufacturing capacity of low-value off-patent proprietary products. Approximately, one-third of total agrichemical sales are estimated to be that of proprietary off-patent. Assuming this trend plays out in terms of growth for the agrichemical industry and the same rate of genericisation occurs, the agrichemical generic industry could log in 6-8% yoy growth during the period. With drugs going off-patent each year, generics represent a major outsourcing opportunity for agrichemical producers in India. Competitive position: UPL figures among the top five global generic agrichemical players, with presence across major markets, including the U.S., EU, Latin America and India. Nature of business: Highly dependent on monsoons; Highly competitive domestic industry, while exports possess high legal barriers.
STOCK RETURNS (%) UPL SENSEX 3M (2.7) 1Y (8.2) 3Y 11.6 21.3 5Y 3.3 10Y 17.3 (2.9) 82.9
(2.6) (12.3)
NOTE: ABOVE 1 YEAR ON CAGR BASIS
FINANCIAL PERFORMANCE OVERVIEW (%) SALES GROWTH* PAT GROWTH* OPM# ROE# 3M 40.5 (40.7) 15.7 1Y 7.3 4.1 19.7 17.0 3Y 17.1 16.7 16.0 18.1 5Y 20.2 15.1 18.4 10Y 17.0 19.9 27.6 42.8
NOTE: * ABOVE 1 YEAR ON CAGR BASIS, # ON AVERAGE BASIS
ANGEL ESTIMATES PARTICULARS PAT GROWTH (%) ROE (%) P/E P/BV FY2012E 20.3 17.1 11.2 1.8 FY2013E 7.7 16.1 10.4 1.6
Current Investment Arguments

Innovators dominant in the off-patent space: The global agrichemical industry, valued at US$40bn (CY2008), is dominated by the top six innovators, who enjoy a large market share of the patented (28%) and off-patent (32%) market. Pertinently, the top six innovators also enjoy a large share of the off-patent market due to high entry barriers for pure generic players. Thus, one-third of the total pie provides a high-growth opportunity for larger integrated generic players such as UPL. Generic segment's market share to increase: Generic players have been garnering a high market share, increasing from 32% in 1998 to 40% by 2006-end. The industry registered a 3% CAGR over 1998-2006, while generic players outpaced the industry with a 6% CAGR. Given the opportunities and a drop in the rate of new molecule introduction by innovators, we expect generic players to continue to outpace the industry's growth and increase their market share in the overall pie garnering a market share of 44-45%. Valuation: Generics are expected to register healthy growth due to increasing penetration and wresting market share from innovators and patent expiries during 2009-14. We maintain our Buy rating with a target price of ` 182.
BLOOMBERG CONSENSUS RECOMMENDATION BUY / HOLD / SELL 20 / 0 / 2
10
January 2012
PROFIT & LOSS STATEMENT

Y/E MARCH (` CR) ` TOTAL OPERATING INCOME FY2010 5,408 FY2011 5,805 FY2012E 6,935 FY2013E 7,424
BALANCE SHEET
Y/E MARCH (` CR) ` SOURCES OF FUNDS EQUITY SHARE CAPITAL RESERVES & SURPLUS SHAREHOLDERS FUNDS MINORITY INTEREST TOTAL LOANS DEFERRED TAX LIABILITY TOTAL LIABILITIES APPLICATION OF FUNDS GROSS BLOCK LESS: ACC. DEPRECIATION NET BLOCK CAPITAL WORK-IN-PROGRESS GOODWILL / INTANGILBLES INVESTMENTS CURRENT ASSETS CURRENT LIABILITIES NET CURRENT ASSETS OTHERS TOTAL ASSETS 2,519 1,229 1,290 41 482 761 4,324 1,462 2,863 67 5,503 3,690 1,442 2,247 74 1,135 761 4,368 2,269 2,099 66 6,383 3,939 1,706 2,233 79 1,540 761 5,013 2,259 2,281 41 6,894 4,096 1,983 2,113 82 1,540 761 5,872 2,396 3,013 17 7,510 88 2,904 2,992 14 2,382 116 5,503 92 3,359 3,753 14 2,500 116 6,383 92 3,939 4,305 14 2,459 116 6,894 92 4,544 4,897 14 2,483 116 7,510 FY2010 FY2011 FY2012E FY2013E
% CHG
TOTAL EXPENDITURE EBITDA
9.7
4,461 947
7.3
4,694 1,111
19.5
5,604 1,332
7.0
5,991 1,433
(% OF NET SALES)
DEPRECIATION & AMORTISATION EBIT INTEREST & OTHER CHARGES OTHER INCOME RECURRING PBT
17.9
215 732 145 34 621
19.7
214 897 312 94 678
19.7
263 1,068 250 20 838
19.7
277 1,156 250 51 956
% CHG
EXTRAORDINARY EXPENSE/(INC.) PBT (REPORTED) TAX PAT (REPORTED) ADD: SHARE OF EARNINGS OF ASSO. LESS: MINORITY INTEREST (MI) PAT AFTER MI (REPORTED) ADJ. PAT
23.8
(23) 598 81 517 19 6 526 549
9.2
(14) 664 73 591 (14) 10 558 572
23.5
838 126 712 (14) 10 688 688
14.1
956 191 765 (14) 10 740 740
% CHG
24.7
4.1
20.3
7.7
CASH FLOW STATEMENT

Y/E MARCH (` CR) ` PROFIT BEFORE TAX DEPRECIATION CHANGE IN WORKING CAPITAL LESS: OTHER INCOME DIRECT TAXES PAID CASH FLOW FROM OPERATIONS (INC.)/ DEC. IN FIXED ASSETS (INC.)/ DEC. IN INVESTMENTS INC./ (DEC.) IN LOANS AND ADV. OTHER INCOME CASH FLOW FROM INVESTING ISSUE OF EQUITY INC./(DEC.) IN LOANS DIVIDEND PAID (INCL. TAX) OTHERS CASH FLOW FROM FINANCING INC./(DEC.) IN CASH OPENING CASH BALANCES CLOSING CASH BALANCES FY2010 598 215 653 (81) 1,384 52 (328) (276) (315) (77) 308 (84) 1,024 554 1,578 FY2011 664 214 51 (73) 857 (1,204) (1,204) 312 (118) (103) (455) (364) (712) 1,578 866 FY2012E 838 263 (362) (126) 613 (254) (254) 41 (108) (67) 292 866 1,158 FY2013E 956 277 (265) (191) 777 (161) (161) (24) (135)
KEY RATIOS
Y/E MARCH VALUATION RATIO (X) P/E (ON FDEPS) P/BV EV/EBITDA PER SHARE DATA (`) ` EPS (BASIC) EPS (FULLY DILUTED) CASH EPS BOOK VALUE RETURNS (%) ROCE (PRE-TAX) ANGEL ROIC (PRE-TAX) ROE (159) 457 1,158 1,615 TURNOVER RATIOS (X) RECEIVABLES (DAYS) PAYABLES (DAYS) WC CYCLE (EX-CASH) (DAYS) 81 90 139 87 105 105 81 120 101 85 105 128 14.1 23.4 19.4 15.1 19.2 17.0 16.1 19.7 17.1 16.0 18.2 16.1 12.5 12.5 17.4 68.1 12.4 12.4 17.0 81.2 14.9 14.9 20.6 93.1 16.0 16.0 22.0 105.9 13.3 2.4 8.3 13.4 2.0 8.1 11.2 1.8 6.9 10.4 1.6 6.7 FY2010 FY2011 FY2012E FY2013E
Note: Financials on Consolidated basis
January 2012
11
Agriculture
RATING 52 WEEK HIGH / LOW MARKET CAP (` CR) ` LIQUIDITY NEUTRAL 186 / 114 2,553 MEDIUM
Rallis India
Company Background
CMP/TP/Upside: `131 / - / -
SHAREHOLDING PATTERN (%) PROMOTERS (TATA GROUP) FII 51.0 8.7
Rallis India (RAIL), part of the Tata Group, is one of the oldest and second largest pesticide agrichemical companies in the country. The company has a credible presence in the international market. Pesticide accounts for 97% of the company's total revenue, while plant nutrients, seeds and leather chemicals constitute the balance. Historically, contribution from the domestic business has stood at ~77%, while exports accounted for the balance.
Structural Snapshot
Growth opportunity: The Indian agrichemical industry, estimated at ~US$1bn (`5,000cr) at the end of FY2009, contributed 0.1% to India's total GDP and 0.6% to its agriculture GDP. The pesticides industry can easily grow at 13-14%, in-line with GDP growth, with organized players, such as RAIL, expected to grow at a higher rate on account of greater share of unorganized players. Apart from domestic opportunities, the global agrichemical industry also offers opportunities in the form of generics and contract manufacturing. Agrichemical companies have been reducing the manufacturing capacity of low-value off-patent proprietary products. Approximately, one-third of total agrichemical sales are estimated to be that of proprietary off-patent. Assuming this trend plays out in terms of growth for the agrichemical industry and the same rate of genericisation occurs, the agrichemical generic industry could log in 6-8% yoy growth during the period. With drugs going off-patent each year, generics represent a major outsourcing opportunity for agrichemical producers in India. Competitive position: RAIL is the second largest pesticide agrichemical companies in the country with a market share of ~13%. Nature of business: Highly dependent on monsoons; Highly competitive domestic industry, while exports possess high legal barriers.
STOCK RETURNS (%) RAIL SENSEX 3M (23.8) 1Y (0.6) 3Y 73.1 21.3 5Y 45.7 3.3 10Y 47.9 17.3
(2.6) (12.3)
FINANCIAL PERFORMANCE OVERVIEW (%) SALES GROWTH* PAT GROWTH* EBITDA MARGIN# ROE# 3M 18.6 (22.2) 7.3 1Y 21.4 27.7 18.2 27.2 3Y 16.5 36.6 14.9 25.2 5Y 12.5 34.2 11.0 19.5 10Y 0.6 4.4 19.4

Set to seize rising opportunities in the domestic pesticides market: India's overall pesticide consumption is one of the lowest in the world, and we believe RAIL is well placed to seize this opportunity on the back of its wide distribution network, strong brands and robust new product pipeline. Contract manufacturing to be the next growth driver: RAIL plans to focus on contract manufacturing for exports and selectively target and supply to top players. To facilitate the same, the company is setting up a new plant at Dahej. Overall, RAIL targets to achieve cumulative revenue of `1,000cr over the next five years from this segment alone. Valuation: Management is confident of the prospects for key crops (cotton and paddy) due to generally normal monsoons, which should aid continued healthy growth in the agrichemical industry. RAIL expects to outperform the industry, given its product pipeline. At current levels, the stock is trading at fair valuations of 13.8x FY2013E EPS. Hence, we remain Neutral on the stock.
12
January 2012

Y/E MARCH (` CR) ` TOTAL OPERATING INCOME FY2010 901 FY2011 1,093 FY2012E 1,342 FY2013E 1,570
BALANCE SHEET
Y/E MARCH (` CR) ` SOURCES OF FUNDS EQUITY SHARE CAPITAL RESERVES & SURPLUS SHAREHOLDERS FUNDS MINORITY INTEREST TOTAL LOANS DEFERRED TAX LIABILITY TOTAL LIABILITIES APPLICATION OF FUNDS GROSS BLOCK LESS: ACC. DEPRECIATION NET BLOCK CAPITAL WORK-IN-PROGRESS GOODWILL INVESTMENTS CURRENT ASSETS CURRENT LIABILITIES NET CURRENT ASSETS MIS. EXP. NOT WRITTEN OFF TOTAL ASSETS 309 156 153 112 140 326 304 22 5 433 404 174 229 169 125 26 467 389 77 1 628 504 208 348 129 125 28 627 478 150 780 604 247 370 129 125 28 731 559 172 824 20 405 424 8 433 19 485 505 2 117 3 628 19 622 659 121 780 19 774 807 120 8 824 FY2010 FY2011 FY2012E FY2013E
% CHG
TOTAL EXPENDITURE NET RAW MATERIALS OTHER MFG COSTS PERSONNEL OTHER EBITDA
5.2
726 506 137 67 15 175
21.4
894 634 188 73 199
22.7
1,095 785 170 113 27 247
17.0
1,289 926 199 132 31 281
(% OF NET SALES)
DEPRECIATION& AMORTISATION INTEREST & OTHER CHARGES OTHER INCOME RECURRING PBT
19.4
18 5 7 158
18.2
17 3 5 185
18.4
34 1 3 215
17.9
38 1 6 248
% CHG
EXTRAORDINARY EXPENSE/(INC.) PBT (REPORTED) TAX
49.5
(8) 150 51
16.6
185 58
16.5
215 54
15.3
248 62
(% OF PBT)
PAT (REPORTED) ADJ. PAT
32.3
99 99
31.4
127 126
25.0
161 161
25.0
186 186
% CHG
53.8
27.7
27.9
15.3
CASH FLOW STATEMENT

Y/E MARCH (` CR) ` PROFIT BEFORE TAX DEPRECIATION INC/DEC IN WORKING CAPITAL DIRECT TAXES PAID CASH FLOW FROM OPERATIONS (INC.)/ DEC. IN FIXED ASSETS (INC.)/ DEC. IN INVESTMENTS INC./ (DEC.) IN LOANS AND ADVANCES CASH FLOW FROM INVESTING ISSUE OF EQUITY INC./(DEC.) IN LOANS DIVIDEND PAID (INCL. TAX) OTHERS CASH FLOW FROM FINANCING INC./(DEC.) IN CASH OPENING CASH BALANCES CLOSING CASH BALANCES
KEY RATIOS
FY2011 185 17 88 58 114 (152) 115 FY2012E 215 34 97 (47) 152 (60) (2) FY2013E 248 38 86 (55) 200 (100) Y/E MARCH VALUATION RATIO (X) P/E (ON FDEPS) P/CEPS P/BV 25.9 21.9 6.0 2.7 14.0 20.3 17.8 4.8 2.3 12.9 15.9 13.1 3.9 1.8 10.0 13.8 11.4 3.2 1.5 8.6 FY2010 FY2011 FY2012E FY2013E
FY2010 153 18 110 (67) 61 (95) (4)
EV/SALES EV/EBITDA ` PER SHARE DATA (`) EPS (BASIC) EPS (FULLY DILUTED) CASH EPS
5.1 5.1 6.0 1.2 21.8
6.5 6.5 7.4 1.1 27.3
8.3 8.3 10.0 1.5 33.8
9.5 9.5 11.5 1.7 41.4
(99) (74) (44) 153 35 (3) 7 10
(37) 109 (36) (154) (81) 4 10 15
(61) 4 (25) (52) (73) 18 5 23
(100) (1) (34) (60) (95) 5 23 28
DPS BOOK VALUE RETURNS (%) ROCE (PRE-TAX) ANGEL ROIC (PRE-TAX) ROE TURNOVER RATIOS (X) INVENTORY / SALES (DAYS) RECEIVABLES (DAYS) PAYABLES (DAYS)
36.2 79.9 25.5
34.3 35.0 27.2
30.2 38.9 27.7
30.3 38.2 25.4
60 39 115
65 43 115
68 53 105
64 51 95
January 2012
13
14
January 2012
Automobile
COVERAGE
Companies Four-Wheeler Mahindra and Mahindra Tata Motors Maruti Suzuki Ashok Leyland Two-Wheeler Bajaj Auto Hero Motocorp TVS Motor Auto Ancillary Bosch India Exide Industries Amara Raja Batteries Apollo Tyres CEAT JK Tyre Motherson Sumi Bharat Forge FAG Bearings Automotive Axles Subros 7,160 120 206 65 84 70 150 277 1,141 428 24 7,514 Accum. 137 Accum. 250 74 125 89 Buy Buy Buy Buy 1,467 1,901 50 1,755 66 Buy Buy 2,025 Accum. 674 219 1,129 27 801 Buy 242 Accum. 1,195 Accum. 32 Buy CMP (`) ` Target (`) ` Reco
POSITIVE
Structural growth potential intact

The Indian automotive industry has been one of the biggest beneficiaries of the consistent economic growth in the country over the past decade. While India's GDP expanded at an 8.6% CAGR over FY2002-11, overall auto sales grew by 14.2%. This can be attributed to structural growth drivers such as GDP growth (leading to increasing affluence of rural and urban consumers), favorable demographics, low penetration levels, entry of global players and easy availability of finance. Given our expectations of healthy medium-term economic growth of 8%, we believe long-term structural growth drivers are intact, which should support a 12-13% CAGR in auto volumes. India's automotive industry, though one of the fastest growing, is still dominated by two-wheelers (2W), which account for 76% of the total industry, while passenger vehicles (PV) and commercial vehicles (CV) make up for 16% and 4%, respectively. We estimate the growth opportunity to be significantly higher in the PV and CV segments than the 2W segment on account of low penetration levels when compared to other emerging economies such as China and Brazil. Near-term environment to improve: We expect the near-term environment to turn positive for the PV and CV industry, with the likely easing of interest rates. Our volume growth estimates for FY2013 across segments are enumerated below. Passenger vehicles: We forecast PV volume growth to rebound and grow over 13% in FY2013 (vs. 2% in FY2012), led by revival in demand for passenger cars (PC) with likely easing of interest rates. We believe India's PC industry is at an inflexion point, with GDP per capita (PPP basis) crossing US$3,000 levels, considered to be a tipping point for motorization to take off. Commercial vehicles: While freight rates continue to hold up well, industrial activity is expected to pick up on the likely easing of interest rates, which is expected to revive medium and heavy commercial vehicle (MHCV) demand going ahead. We forecast MHCV demand to register 12-13% growth in FY2013 from moderate 6-7% growth expected in FY2012. We expect the light commercial vehicle (LCV) segment to grow at a faster rate (18% CAGR over FY2011-13E) than the overall CV segment (14.5% CAGR), as we expect penetration of the hub and spoke models to increase to more cities and towns going ahead. Two-wheelers: We expect 2W volume growth to moderate and post a 13.3% CAGR over FY2011-13E, after reporting a strong 26% CAGR over FY200911. Motorcycle sales are expected to post a 13.2% CAGR, while scooters sales are expected to outperform with an 18.5% CAGR over FY2011-13E. Competition to intensify: We expect competition to remain intense across all the automotive segments; however, it is likely to be tougher in the 2W segment as Honda Motorcycle and Scooters India (HMSI) has announced its plans to launch new models at aggressive price points in FY2013. Also, the PV segment is likely to witness heightened competition, led by new model launches, which are expected to keep Maruti Suzuki's (MSIL) market share under threat. Further, competition in the MHCV space is expected to be higher, marked by the entry of Mahindra and Mahindra (M&M) and Daimler. Despite higher competitive intensity affecting pricing power, softening of commodity prices recently is expected to provide margin stability. Outlook and valuation: Against the backdrop of likely easing of interest rates, we expect demand revival in the four-wheeler (4W) segment. Hence, we remain positive on Ashok Leyland (AL) and M&M. We also prefer Bajaj Auto (BJAUT) in the 2W space due to its strong growth traction in exports markets and superior margin profile. 15
169 Accum. 299 Accum. 1,359 Buy - Neutral - Neutral
Automobile Passenger vehicles

Low penetration levels offer a long-term growth opportunity
The Indian passenger vehicle (PV) industry, which comprises passenger cars (~80%, of which ~78% is dominated by the small car segment), utility vehicles (~13%) and vans (~7%) is amongst the largest PV markets in the world. However, this belies the fact that as compared to developed markets and most developing markets, India's PV penetration remains relatively low at 12 per 1,000 people compared to 451, 158 and 27 per 1,000 for U.S., Brazil and China, respectively. With India's GDP expected to grow at a sustainable rate of ~8% in the medium term, we expect GDP per capita (PPP basis, currently at US$3,586) to also grow at a healthy rate. Noticeably, as seen through cross-country analysis, motorization rates tend to accelerate when G DP per capita (PPP basis) crosses ~US$3,000. Accordingly, we believe the domestic PV industry is at an inflexion point and likely to witness sustainable long-term growth, driven by strong per capita income levels and a favorable demographic profile.
Exhibit 3: GDP per capita (PPP basis) growth trend

(US$) 8,000 7,000 6,000 5,000 4,000 3,000 2,000 1,000 0
FY2004
FY2006
FY2008
FY2009
FY2002
FY2003
FY2005
FY2010
India
China
Source: Bloomberg, Industry, Angel Research
The PV industry in India registered strong volume growth of 17% over FY2002-11, driven largely by buoyant economic growth, rising income levels and favorable demographics. Further, new model launches, easy availability of finance and growth in tier II and III cities and semi urban areas maintained the strong growth momentum.
Exhibit 4: Passenger vehicle sales volume trend Exhibit 1: PV penetration levels

GDP per capita (US$, PPP based)
50,000 45,000 40,000 35,000 30,000 25,000 20,000 15,000 10,000 5,000 0 0.0 100.0 200.0 300.0 400.0 500.0 600.0 China India Brazil Mexico Japan UK US Germany
(units) 16,000,000 14,000,000 12,000,000 10,000,000 8,000,000 6,000,000 4,000,000 2,000,000 0
FY2004
FY2006
FY2008
FY2009
FY2002
FY2003
FY2005
FY2010
FY2011
FY2007
India
China
Penetration (per 1,000 people)
Exhibit 2: Growth opportunity on offer

GDP per capita (PPP based) (US$) India U.S. Growth opportunity (x)
PV's (per 1'000) 12 451 37.6
3,586 47,184 13.2
Being a cyclical industry, demand has witnessed a sharp slowdown since the beginning of FY2012 on account of rising inflation, interest rates and fuel prices. Nonetheless, we expect volume growth to recover in FY2013, backed by the likely easing of interest rates coupled with structural growth drivers. Thus, we expect the domestic passenger vehicle industry to register a 8-10% CAGR over FY2011-13E.
Exhibit 5: PV growth story

('000 units) 3,500 3,000 2,500 (%) 35.0 30.0 25.0 20.0 15.0 10.0 5.0 0.0
Drawing parallels to China

In 2002, China's PV market was 1.2x the size of India's PV market. However, over FY2002-11, PV demand in China has risen at a meteoric rate, reporting a 38.4% CAGR, driven by strong sustainable economic growth, rising per capita income levels and structural changes. This is extremely high compared to a 17% CAGR witnessed in India's PV demand over the same period. Consequently, China's PV market is now ~6x the Indian PV market. However, importantly, India's GDP per capita in FY2008 was similar to that of China in 2002, the year when its motorization started to gain momentum. Therefore, we believe Indian markets also offer similar opportunities, led by improving road infrastructure, urbanization, larger segment of population entering the affordability zone and rising aspiration levels of Indian consumers.
2,000 1,500 1,000 500 0
FY2004
FY2006
FY2008
FY2009
FY2002
FY2003
FY2005
FY2010
PV sales
yoy growth (RHS)
Source: Bloomberg, SIAM, Angel Research
16
January 2012
FY2011
FY2007
FY2011
FY2007
Automobile
Exhibit 6: PV sales and GDP growth
(%) 35.0 30.0 25.0 20.0 15.0 10.0 5.0 0.0 (%) 12.0 10.0 8.0 6.0 4.0 2.0 0.0
Exhibit 8: Market share trend

FY2008 Maruti Suzuki Hyundai Tata Motors M&M Toyota GM Ford Volkswagen Honda Others 45.9 14.0 14.8 8.4 3.6 4.3 2.2 0.0 4.0 2.8 FY2009 47.0 15.9 13.9 7.8 3.1 4.0 1.8 0.1 3.4 3.0 FY2010 45.2 16.4 13.5 8.1 3.3 4.5 1.9 0.3 3.2 3.6 FY2011 YTD FY2012 45.9 14.6 12.1 7.3 3.4 4.3 4.0 2.3 2.4 3.7 38.0 15.6 13.3 9.6 5.8 4.6 3.8 3.5 2.0 3.8
FY2004
FY2006
FY2008
FY2009
FY2002
FY2003
FY2005
FY2010
Domestic PV sales
Real GDP (RHS)
Semi urban India holds a strong potential

According to industry sources, ~40% of PV sales in India are derived from the top 10 cities, suggesting that demand in other parts of the country remains untapped. Further, while 70% of total households in India reside in rural and semi-urban areas, automobile penetration levels there are still very low (just 3% for PV as per NCAER). However, government initiatives such as higher MSP for agricultural commodities and implementation of the Sixth Pay Commission coupled with increasing land prices across the country are putting more disposable income in the hands of semi-urban consumers, thereby fuelling growth. Additionally, with OEMs now actively focussing on semi-urban markets and tier II and III cities by increasing their reach, we expect demand to remain strong and, hence, drive overall industry demand.
FY2011
FY2007
Source: Bloomberg, Crisil, SIAM, Angel Research
Commercial vehicles
Demand for the commercial vehicle (CV) industry in India is driven by GDP growth in general and IIP growth in particular. Over FY2002-11, India's GDP and IIP grew at CAGRs of 8.6% and 8.9%, respectively, driving domestic CV volumes, which registered a 18.9% CAGR over the same period. Further, it has been observed that whenever MHCV sales fall, LCV sales follow suit and tend to decline. However, the trend has been divergent since FY2006, with LCV sales growing faster than MHCV sales, thereby shielding overall CV growth to a certain extent from the cyclical downturn. During April-November 2011, while the domestic CV industry posted strong growth of 20.0% yoy, riding on robust 29.3% growth in LCVs, MHCV sales posted modest 9.4% yoy growth.
Competitive intensity expected to remain high

Growth potential of the Indian car market and strong performance reported by the industry in the last decade have attracted many global OEMs to India. To gain a foothold in the domestic market, most OEMs have launched new models (especially in the compact segment) designed specifically for the Indian consumers, thereby increasing competition in the market. However, among the new launches in FY2012, we believe Eon from Hyundai, Liva from Toyota and Brio from Honda will be key threats to market leader Maruti Suzuki. We expect the competitive intensity in the industry to remain high, with 10 to 12 new product launches planned in 2013.
Exhibit 9: Domestic CV sales trend

(units) 800,000. 700,000 600,000 500,000 400,000 300,000 200,000 100,000 0 2.0 0.0 8.0 6.0 4.0 (%) 12.0 10.0
FY2004
FY2006
FY2008
FY2009
FY2002
FY2003
FY2005
FY2010
Exhibit 7: New vehicle launches trend

FY2008 Maruti Suzuki SX4, Dzire FY2009 A-star FY2010 Ritz, Eeco, SX4 upgrade, new Zen Estilo Hyundai Tata Motors i10 Indigo CS i20 Indica Vista, Nano M&M Xylo Indigo Manza new Bolero, XUV5OO Toyota GM Ford Volkswagen Honda Nissan Teanna Passat Jetta Fortunner Cruz, Beat Figo Polo Jazz Micra Vento Brio new Fiesta Etios Liva FY2011 YTD FY2012 new Wagon R, new Swift Alto K10, Kizashi new i20 Aria Eon new Indica
Domestic CV sales
Real GDP (RHS)
MHCV demand to follow IIP growth

Demand for MHCV is cyclical and correlates with the level of industrial activity in the economy. MHCV volumes fell sharply in FY2009 due to slowdown in industrial production and contraction in liquidity. However, volumes recovered over FY2009-11 (~33% CAGR), driven by strong economic activity and improvement in the operating environment for fleet operators, which benefited from higher freight availability, firm freight rates and relatively lower financing rates. With the expected easing of interest rates from 1QFY2013 and GDP to register a 8% CAGR over FY2011-13, we expect the demand scenario for MHCV to improve, leading to a 10-12% CAGR over the same period. Further, government initiatives such as improving road connectivity, infrastructure development Please refer to important disclosures at the end of this report 17
Source: Crisil, Angel Research
January 2012
FY2011
FY2007
Automobile
Exhibit 10: MHCV-IIP Co-relation
50.0 40.0 30.0 20.0 10.0 0.0 (10.0) (20.0) 10.0 14.0 12.0
Exhibit 11: MHCV market share trend

(%) 70.0 60.0 50.0
8.0 6.0 4.0
62.0
62.9
60.5
61.9
63.3
60.1
40.0 30.0 20.0 10.0 0.0 FY2006 FY2007 FY2008 FY2009 FY2010 FY2011 7.4 6.8 8.2 7.4 8.6 9.3 27.0 27.9 27.5 25.7 23.3 25.5
FY2004
FY2006
FY2008
FY2009
FY2002
FY2003
FY2002
FY2005
FY2010
(30.0) (40.0)
FY2011
FY2007
2.0 0.0
MHCV sales
IIP growth (RHS)
Tata Motors
Ashok Leyland
Eicher Motors
Others
and significant capacity addition in steel, power, cement and automobile sectors also augur well for MHCV demand.
LCV to outperform MHCV

LCV's, which are used primarily for last mile transport applications, have posted a strong 22.6% CAGR between FY2002 and FY2011, playing a vital role in the overall growth of the CV industry. This strong growth, in part, is primarily due to the creation of a new segment of small CVs (SCV), with a payload of less than one tonne (initiated by Tata Motors with the launch of the Ace in 2005). Over the past few years, the number of SCV applications has expanded significantly, not only within cities but also in smaller towns and rural markets. As a result, LCV sales as a proportion of total CV volume increased from 35% in FY2001 to 53% in FY2011. Despite headwinds building up, the LCV segment continues to grow steadily and has so far managed to buck the overall slowdown witnessed in other segments. The SCV segment, which accounts for over 75% of the LCV market, is driving growth on the back of strong demand for transportation of consumer goods within cities and replacement demand from upper-end three wheelers. Thus, we expect the LCV segment to grow at a 15% over FY2011-13E, driven by increasing structural factors such as preference for low payload vehicles, proliferation of the hub and spoke model and new launches.
While Tata Motors continues to dominate the LCV space with a 56% market share, led by the success of Tata Ace, it has been losing market share to MM post the launch of Maxximo in 2010. Strong growth witnessed in the SCV segment and its growing market size have prompted several players to enter the segment. Piaggio, Force Motors and Ashok Leyland (JV with Nissan) have already rolled out new products in the markets, leading to higher competition. As such, we expect Tata Motors to continue to lose its market share going ahead.
Exhibit 12: LCV market share trend

(%) 70.0 60.0 50.0 40.0 30.0 20.0 10.0 0.0 FY2006 FY2007 FY2008 FY2009 FY2010 FY2011 5.0 3.8 5.0 3.9 4.0 4.8 26.1 24.3 25.6 27.8 30.0 32.7 65.4 60.1 62.1 59.9 58.5 56.0
Tata Motors
MM
Force Motors
Others
Two wheelers
The Indian 2W industry posted a strong 13.4% CAGR over FY2002-11, led by various fundamental factors such as sustainable economic growth, low penetration levels, new launches, swelling replacement demand, inadequate public transport system and rising income levels, particularly in rural India. While demand is likely to sustain going ahead supported by rising income levels, young population, increasing demand from rural India and huge potential for exports, we expect growth in 2W volumes to moderate
Competition: New entrants to join in

The Indian CV industry is currently operating as a duopoly, with the top two players accounting for over 85% market share in the MHCV and LCV segments each. The MHCV segment is dominated by Tata Motors and Ashok Leyland with a market share of 60% and 26%, respectively. However, several international OEMs, including Daimler, Man, Navistar (through JV with MM) and Volvo (through JV with Eicher Motors), have entered the MHCV space and have either launched or are in the process of introducing their vehicles in the domestic market, thereby increasing competition. We believe MM could emerge as a formidable competitor, given its strong brand equity in the pick-up and UV segments, knowledge of the domestic market and established vendor and distribution network. Also, Daimler has invested EUR700mn for its new product Bharat Benz and is likely to compete aggressively in the market.
Exhibit 13: Industry growth trend

(units) 14,000,000 12,000,000 10,000,000 8,000,000 6,000,000 4,000,000 2,000,000 0 (%) 30.0 25.0 20.0 15.0 10.0 5.0 0.0 -5.0 -10.0
FY2002
FY2005
FY2007
FY2006
FY2009
FY2003
FY2004
2W sales
yoy growth (RHS)
18
January 2012
FY2008
FY2010
FY2011
Automobile
and increase in-line with the historical CAG R of 13.3% over FY2011-13E, after witnessing a strong 26% CAGR over FY2009-11 and increasing dependence on replacement demand.
Rural demand - The key growth driver

Demand for 2Ws is expected to have grown faster in rural areas compared to urban markets over the last few years, as reflected by the fact that Hero MotoCorp's (industry leader) contribution to sales from rural India has increased from ~38% in FY2009 to ~46% in 2QFY2012. 2Ws are the cheapest and efficient medium of commuting; thus, we expect 2W growth buoyancy in rural markets to continue, led by increasing government spending and rising income levels on the back of increased MSP for crops and other non-agrarian sources of income for rural consumers.
Exhibit 14: 2W - Segmental trend

(%) 100 90 80 70 60 50 40 30 20 10 0
76
77
78
80
82
83
80
78
78
76
18
17
16
15
13
12
14
15
16
18
FY2004
FY2006
FY2008
FY2009
FY2002
FY2003
FY2005
FY2010
FY2011
FY2007
Exhibit 17: MSP for key crops

(` per quintal) 4,000 3,000
Scooters
Motorcycles
Mopeds
Penetration levels to improve on rising income levels

Despite rapid growth in the 2W industry over the last decade, 2W penetration level in India remains low at ~7% compared to ~9% and ~14% in emerging countries like China and Indonesia, respectively. Penetration in terms of total households is also lower at ~36% as compared to other emerging markets such as Indonesia, China and Thailand. However, it appears higher at ~74%, considering households with income levels above `90,000 (assuming that households having annual income less than `90,000 do not have the ability to own a 2W). This suggests that strong growth, driven primarily by increased penetration levels, will be difficult to sustain over an extended period. Therefore, we expect domestic 2W sales growth to decelerate in the longer run.
2,000 1,000 0
FY2004
FY2006
FY2008
FY2009
FY2002
FY2003
FY2005
FY2010
FY2011
FY2010
Paddy (common) Gram
Cereals Arhar
Wheat Moong
Exhibit 18: Trend in agri GDP growth

(%) 30.0 25.0 20.0 15.0 10.0
Exhibit 15: Penetration levels (Population wise)

35 30
Thailand
5.0 0.0
FY2004
FY2006
FY2008
FY2009
FY2002
FY2003
FY2005
Penetration (%)
25
Vietnam
20 15 10 5 0 0 10,000 20,000 30,000 40,000 50,000

India Indonesia China US Brazil Japan
Nominal agri GDP growth
Huge export potential

India's motorcycle exports have registered a substantial 25% CAGR over FY2006-11, backed by India's low-cost manufacturing capabilities, reliance on offering quality products and exploring newer geographies. Key export markets for Indian players include Africa (Nigeria, Kenya and Uganda), Middle East, South Asia, Latin America (Colombia and Peru) and Southeast Asia (Sri Lanka and Bangladesh). Though Indian players compete with recognized global majors like Honda and Yamaha and costefficient Chinese manufacturers, they have been successful in increasing their market share in existing geographies and venture into newer ones. BJAUT and TVSL are the two largest motorcycle exporters in the country, accounting for ~64% and ~14% of the total motorcycles exported from India, respectively.
GDP per capita (US$ PPP basis)
Source: World Road Statistics-2008, Yamaha investor presentation, Angel Research
Exhibit 16: Penetration levels (Number of households)

(%) 120 100 80 60 40 20 0 India China Thailand Indonesia Brazil 36 42 38 93 98
January 2012
FY2011
FY2007
(5.0)
FY2012
FY2007
19
Automobile
Exhibit 19: Exports growth
(units) 1,200,000 1,000,000 1,500,000 800,000 600,000 400,000 500,000 200,000 0 FY2007 FY2008 FY2009 FY2010 FY2011 0 1,000,000 (units) 2,000,000
has announced significant capacity expansion plans (4mn units by 1HCY2013 from 1.6mn in March 2011) coupled with new model launches, importantly in the <125cc motorcycle segment. Currently, HMCL leads the <125cc motorcycle segment (71% share), led by Splendor and Passion; whereas, BJAUT commands a leadership position in the >125cc motorcycle segment (51.4%) on the back of the strength of Pulsar. However, with the impending launch of new motorcycles by HMSI, HMCL's market share seems more vulnerable to rising competition as compared to BJAUT.
Bajaj Auto Others
TVS Motor Total exports (LHS)
Hero MotoCorp
Exhibit 21: Motorcycle market share trend

(%) 60 50 40 45.8 33.5 49.4 52.4 51.9 48 47.5
Source: Bloomberg, ICRA, Angel Research
Exhibit 20: Share of Indian players in global markets on the rise

(%) 100.0 90.0 80.0 70.0 60.0 50.0 40.0 30.0 20.0 10.0 0.0 93.0 82.0 80.0 67.0 74.0
32.7 28
29.7
32.3
33.3
30 20
33.0 40.0 29.0 38.0
13 2.4 FY2007
9.4 4.3 FY2008
9.3 5.9
10 0
7.6 6.2
7.1
7.5
6.6
23.0 8.0
FY2009
FY2010
FY2011
YTDFY12
0.0
0.0
0.0
HMCL
Nigeria Colombia Srilanka Angola Bangladesh Uganda Kenya
BJAUT
TVS
HMSI
Yamaha
Others
FY2008
FY2010
Exhibit 22: HMSI leads scooter market

(%) 70 60 50 40 30 20 9.5 10 0 FY2007 FY2008 FY2009 FY2010 FY2011 YTDFY12 1.5 24.7 26.5 24.2 9.7 2.3 21.2 13.3 7.1 20.7 14.4 9.5 21.9 17 10.9 56 50.3 58.5 56.9 50.3 42.7
With a sizeable market size and rising per capita income in developing nations, which have demographic profiles similar to India, we believe Indian players are favorably placed to leverage upon their domestic experience and enter newer geographies (Brazil and few African countries). As a result, we expect motorcycle exports to continue to grow at a faster rate than domestic growth and register a CAGR of 14-15% over FY2011-13E.
Competition to get tougher

The overall 2W industry in India is dominated by HMCL, BJAUT and TVS Motor (TVSL), with a market share of 40.5%, 25.4% and 15.1%, respectively. The motorcycle segment (~78% of the total 2W market) is expected to witness intense competition in the wake of the termination of the joint venture between the Hero Group and Honda Motors and Scooters India (HMSI). Post the split with HMCL, HMSI has turned aggressive and
HMSI
TVS
HMCL
Suzuki
Others
Outlook and valuation: Against the backdrop of likely easing of interest rates, we expect demand revival in the four-wheeler (4W) segment. Hence, we remain positive on Ashok Leyland (AL) and M&M. We also prefer Bajaj Auto (BJAUT) in the 2W space due to its strong growth traction in exports markets and superior margin profile.
20
January 2012
Automobile
Reco Four-Wheeler Mahindra and Mahindra Tata Motors# Maruti Suzuki Ashok Leyland Two-Wheeler Bajaj Auto Hero Motocorp TVS Motor Auto-Ancillary Bosch India* Exide Industries Amara Raja Batteries Apollo Tyres# CEAT JK Tyre # Motherson Sumi# Bharat Forge # FAG Bearings* Automotive Axles^ Subros Accumulate Accumulate Buy Buy Buy Buy Accumulate Accumulate Buy Neutral Neutral 7,160 120 206 65 84 70 150 277 1,141 428 24 7,514 137 250 74 125 89 169 299 1,359 5.0 13.9 21.5 15.0 47.8 26.9 11.8 7.8 19.2 21.0 22.7 9.8 9.0 114.2 16.6 15.3 11.0 8.8 7.4 19.1 15.4 8.6 7.0 4.1 3.2 12.5 13.8 10.1 7.7 6.0 12.9 12.8 5.6 5.4 10.5 6.9 8.0 7.6 5.9 4.9 4.5 11.2 8.8 4.8 4.5 6.1 5.5 6.7 6.4 4.8 4.0 3.8 21.3 15.6 24.7 12.4 (3.1) 5.3 20.2 19.9 26.3 27.6 8.3 19.5 20.3 22.9 15.0 11.2 9.8 22.7 18.7 22.9 26.2 10.0 17.2 2.4 17.3 3.0 60.8 17.7 10.0 27.1 24.5 29.4 (7.5) Buy Accumulate Buy 1,467 1,901 50 1,755 2,025 66 19.6 6.5 31.6 13.4 16.2 9.2 12.5 14.1 8.4 8.8 9.3 4.5 7.6 7.7 3.9 55.0 66.2 23.7 44.7 55.0 21.8 11.0 21.0 17.4 Buy Accumulate Accumulate Buy 674 219 1,129 27 801 242 1,195 32 18.8 10.7 5.9 19.0 14.7 7.7 22.1 12.5 12.9 7.5 14.2 10.2 8.9 5.2 14.1 6.8 7.6 4.8 8.3 5.9 23.3 39.8 10.2 13.9 21.4 31.1 14.3 15.6 10.0 1.0 1.1 5.4 CM P (`) ` TP (`) ` Upside (%) P/E (x) FY12E FY13E EV/EBITDA (x) FY12E FY13E RoE (%) FY12E FY13E EPS CAGR (%) FY2011-13E
Source: Company, Angel Research; Note: * December year end, ^ September year end, # Consolidated basis
January 2012
21
Automobile
RATING 52 WEEK HIGH / LOW MARKET CAP (` CR) ` LIQUIDITY BUY 875 / 585 41,406 HIGH
M&M
Company Background
CMP/TP/Upside: `674 / `801 / 19%
SHAREHOLDING PATTERN (%) PROMOTERS (MAHINDRA GROUP) FII 25.3 32.1
Mahindra and Mahindra (M&M), a flagship company of Mahindra Group, is the largest manufacturer of UV and tractors in India with a 52% and 42% market share, respectively. The company is also the second largest player in the LCV space, with a 33% market share. M&M is also the only company in India that is present across all the automotive segments. M&M has an installed capacity of 6lakh and 2.3lakh units/year in the automotive and farm equipment segments, respectively. In FY2011, M&M acquired a 70% stake in Ssangyong Motor Co. (SYMC), transforming itself into a global UV player. Apart from the core auto business, the company has subsidiaries/associates in various businesses such as IT, NBFC, auto ancillaries, hospitality and infrastructure.
STOCK RETURNS (%) M&M SENSEX 3M 1Y (5.9) 3Y 63.5 51.0 21.3 5Y 7.7 3.3 10Y 37.3 17.3
Growth opportunity: We expect the Indian tractor industry to maintain its healthy growth rate (12-13% CAGR over FY2011-13E) backed by structural drivers such as rising rural income, labor shortage, improving credit availability and diversifying usage of tractors. The UV industry is also likely to continue its growth momentum (11-12%), given the commercial usage (people carrier) of vehicles in rural and urban India as well as increasing acceptance in personal usage. M&M, with its strengths in the UV and tractor segments, is expected to leverage upon the growth opportunity and register a strong 16.9% volume growth over FY2011-13E. Competitive position: M&M enjoys a strong competitive advantage in the tractor industry, given its dominant brands (Yuvraj, Swaraj and Arjun), wide distribution and service network, presence of a financing arm, and high resale value. In the UV space as well, M&M has a commanding position on account of a strong and proven product development capability and popular brands like Bolero, Scorpio and Xylo. Nature of business: Failure of monsoon and a significant increase in interest rate impacts demand; Branding and R&D create entry barriers.
Structural Snapshot
(16.8) (10.1) (2.6) (12.3)
BSE AUTO INDEX (2.7)
9.3 25.6
FINANCIAL PERFORMANCE OVERVIEW (%) SALES GROWTH* PAT GROWTH* OPM# ROE# 3M 35.4 1.4 12.3 1Y 25.5 25.0 13.0 28.0 3Y 26.9 38.9 11.6 25.7 5Y 10Y 23.2 20.7 30.0 35.5 11.0 10.1 27.7 23.7
NOTE: ABOVE 1 YEAR - * ON CAGR BASIS, # ON AVERAGE BASIS

New launches to help sustain the automotive segment's growth momentum: M&M's strong focus on product development has led to several new product launches (Maxximo, Gio and XUV 500) in the automotive segment since FY2010. Further, with its pipeline of new products, introduction of SYMC's products in India and a strong diesel portfolio, we expect M&M's automotive segment to sustain its growth momentum and witness strong growth of 18.3% over FY2011-13E. Investments constitute 71% of the balance sheet: M&M has majority stakes in various listed companies in sectors like technology, hospitality, real estate and finance. The high-growth potential of M&M's subsidiaries has supported M&M's valuation in the past and may continue to do so in the long term as well. We value M&M's investments at `174/share. Attractive valuations: We maintain our Buy rating as we expect M&M to leverage upon its dominant position in the UV and tractor segments, given its strong rural-centric product portfolio. Our SOTP target price for M&M works out to `801.
22
January 2012

Y/E MARCH (` CR) ` NET SALES FY2010 18,363 FY2011 23,044 FY2012E 29,108 FY2013E 33,641
BALANCE SHEET
Y/E MARCH (` CR) ` SOURCES OF FUNDS EQUITY SHARE CAPITAL RESERVES & SURPLUS SHAREHOLDERS FUNDS TOTAL LOANS DEFERRED TAX LIABILITY TOTAL LIABILITIES APPLICATION OF FUNDS GROSS BLOCK 5,276 2,538 2,739 964 6,398 6,047 5,200 847 10,947 6,228 2,842 3,386 986 9,325 6,143 6,768 (624) 13,073 7,986 3,369 4,617 639 11,158 8,184 7,692 492 16,906 8,947 3,959 4,988 716 12,101 9,359 8,256 1,103 18,907 283 7,544 7,827 2,880 240 10,947 294 10,020 10,313 2,405 354 13,073 307 13,539 13,846 2,705 354 16,906 307 15,841 16,148 2,405 354 18,907 FY2010 FY2011 FY2012E FY2013E
% CHG
42.1
15,647 2,716
25.5
20,038 3,006
26.3
25,491 3,617
15.6
29,395 4,245
% CHG
(% OF NET SALES) DEPRECIATION & AMORTIZATION INTEREST & OTHER CHARGES OTHER INCOME EXTRAORDINARY ITEMS PBT (ADJUSTED) TAX
204.5
14.8 371 157 658 (59) 2,788 759
10.7
13.0 414 71 998 (125) 3,394 858
20.3
12.4 527 81 771 3,780 964
17.4
12.6 590 72 781 4,364 1,156
LESS: ACC. DEPRECIATION NET BLOCK CAPITAL WORK-IN-PROGRESS GOODWILL INVESTMENTS CURRENT ASSETS CURRENT LIABILITIES NET CURRENT ASSETS MIS. EXP. NOT WRITTEN OFF TOTAL ASSETS
(% OF PBT)
PAT (REPORTED) PAT (ADJUSTED)
27.2
2,088 2,029
25.3
2,662 2,537
25.5
2,816 2,816
26.5
3,207 3,207
% CHG (% OF NET SALES)

BASIC EPS (`) ` ADJUSTED EPS (`) `
158.1 11.0
36.9 35.9
25.0 11.0
45.3 43.2
11.0 9.7
45.9 45.9
13.9 9.5
52.2 52.2
% CHG
148.7
20.5
6.2
13.9
CASH FLOW STATEMENT

Y/E MARCH (` CR) ` PROFIT BEFORE TAX DEPRECIATION CHANGE IN WORKING CAPITAL OTHERS OTHER INCOME DIRECT TAXES PAID CASH FLOW FROM OPERATIONS (INC.)/DEC. IN FIXED ASSETS (INC.)/DEC. IN INVESTMENTS OTHER INCOME CASH FLOW FROM INVESTING ISSUE OF EQUITY INC./(DEC.) IN LOANS DIVIDEND PAID (INCL. TAX) OTHERS CASH FLOW FROM FINANCING INC./(DEC.) IN CASH OPENING CASH BALANCE CLOSING CASH BALANCE FY2010 2,788 371 (394) 990 (658) (759) 2,337 (700) (612) 658 (653) 719 (1,173) 312 1,353 (1,494) 189 1,567 1,756 FY2011 3,394 414 342 685 (998) (858) 2,980 (973) (2,927) 998 (2,903) 1,006 (475) 624 2,373 (1,219) (1,141) 1,756 615 FY2012E 3,780 527 (195) (771) (964) 2,377 (1,411) (1,832) 771 (2,472) 1,613 300 898 1,015 921 615 1,535 FY2013E 4,364 590 (474) (781) (1,156) 2,543 (1,038) (943) 781 (1,201) (300) 898 (1,198) 144 1,535 1,680
KEY RATIOS
Y/E MARCH VALUATION RATIO (X) P/E P/CEPS P/BV EV/SALES EV/EBITDA PER SHARE DATA (`) ` EPS (BASIC) EPS (ADJUSTED) CASH EPS DPS BOOK VALUE RETURNS (%) ROCE (PRE-TAX) ANGEL ROIC (PRE-TAX) ROE TURNOVER RATIOS (X) ASSET TURNOVER (GROSS BLOCK) INVENTORY / SALES (DAYS) RECEIVABLES (DAYS) PAYABLES (DAYS) 3.6 22 23 69 4.0 23 21 65 4.1 23 21 65 4.0 24 21 66 23.2 18.7 31.0 21.6 15.8 28.0 20.6 15.0 23.3 20.4 15.6 21.4 36.9 35.9 42.4 9.7 138.1 45.3 43.2 50.2 12.0 175.4 45.9 45.9 54.5 12.5 225.3 52.2 52.2 61.9 12.5 262.8 18.8 15.9 4.9 1.7 12.6 15.6 13.4 3.8 1.3 10.7 14.7 12.4 3.0 1.0 8.9 12.9 10.9 2.6 0.9 7.6 FY2010 FY2011 FY2012E FY2013E
Note: Financials on Standalone basis
January 2012
23
Automobile
RATING 52 WEEK HIGH / LOW MARKET CAP (` CR) ` LIQUIDITY ACCUMULATE 261 / 138 58,824 HIGH
Tata Motors
Company Background
CMP/TP/Upside: `219 / `242 / 11%
Tata Motors (TTMT) is the largest CV manufacturer in India with a domestic market share of 60% and 63% in the MHCV and LCV segments, respectively. The company is also India's third largest PV manufacturer, with a domestic market share of 12%. The company operates from its plants in Jamshedpur, Pune, Lucknow, Sanand, Pantnagar and Dharwad. TTMT acquired U.K. based luxury car manufacturer Jaguar Land Rover (JLR) in June 2008; it now accounts for ~57% of its consolidated revenue.
Structural Snapshot
Growth opportunity: The global luxury car market has managed to weather economic uncertainty and has grown at a healthy rate, led by robust growth in China. With an eye on increasing the current 5% market share of China's luxury car market, JLR intends to start assembly operations and expand its dealership network in China. On the domestic front, while the LCV industry is expected to maintain its strong growth momentum, led by structural factors, we expect MHCV volumes to continue to grow at 1.5x GDP growth rate in the long term. Competitive position: Land Rover is competitively positioned currently, with presence across the premium SUV segments and series of new products that are lined up. Jaguar, however, is not present in the lower end of the luxury segment (~40% of luxury car market), which makes it vulnerable to competition. In spite of increasing competition in the domestic CV space, TTMT continues to enjoy its leadership position, led by innovative products, superior technology and a widespread distribution network. Nature of business: Cyclical and rate sensitive sector; Branding and R&D create entry barriers.
STOCK RETURNS (%) TATA MOTORS SENSEX 3M 17.1 1Y (8.4) (5.9) 3Y 93.8 51.0 21.3 5Y 10Y 3.5 24.6 9.3 25.6 3.3 17.3
(2.6) (12.3)
FINANCIAL PERFORMANCE OVERVIEW (%) SALES GROWTH* PAT GROWTH* OPM# ROE# 3M 25.8 12.4 1Y 33.1 13.7 65.8 3Y 51.5 67.3 8.1 18.1 5Y 40.7 9.4 10Y 10.3 39.1 33.9
10.5 494.0
22.8 22.2

ANGEL ESTIMATES PARTICULARS PAT GROWTH (%) ROE (%) P/E P/BV FY2012E (0.3) 39.8 7.7 2.7 FY2013E 2.3 31.1 7.5 2.1
JLR growth momentum to continue on new launches: We expect JLR volumes to remain strong, driven by robust growth in China (sales up 94% in 1HFY2012), recent launch of Evoque and new XF 2.2 coupled with the introduction of new Range Rover and Jaguar XE in FY2013. Further, favorable market mix (China's contribution increased from 11% in FY2011 to 15.7% in 1HFY2012) and sourcing from low-cost countries are likely to partially offset the impact of higher cost pressures at JLR. Domestic business to thrive on the strength of the CV segment: While we expect the CV segment to maintain its healthy growth rate (13% CAGR over FY2011-13E) on the back of the strong volume momentum in LCV sales, the PV segment is likely to remain under pressure and register a moderate 8% volume CAGR led by sluggish domestic demand and weak product offerings. Further, led by cost pressures and higher discounts in the PV segment, we expect standalone margins to remain under pressure. Valuations: At `219, the stock is trading at 7.5x and 4.8x FY2013E earnings and EV/EBITDA, respectively. We recommend Accumulate on the stock with an SOTP target price of ` 242 - assigning a value/share of `68 (10x FY2013E EPS) to domestic business, `153 (6.5x FY2013E EPS) to JLR and `21 to other subsidiaries. 24 January 2012 Please refer to important disclosures at the end of this report

BALANCE SHEET
Y/E MARCH (` CR) ` SOURCES OF FUNDS EQUITY SHARE CAPITAL RESERVES & SURPLUS SHAREHOLDERS FUNDS MINORITY INTEREST TOTAL LOANS DEFERRED TAX LIABILITY TOTAL LIABILITIES APPLICATION OF FUNDS GROSS BLOCK LESS: ACC. DEPRECIATION NET BLOCK CAPITAL WORK-IN-PROGRESS GOODWILL INVESTMENTS CURRENT ASSETS CURRENT LIABILITIES NET CURRENT ASSETS MIS. EXP. NOT WRITTEN OFF TOTAL ASSETS 63,823 34,232 29,590 8,916 3,423 2,219 42,446 41,721 725 44,873 71,463 39,699 31,764 11,729 3,585 2,544 51,035 46,984 4,051 53,673 86,138 44,867 41,271 11,198 3,585 3,030 57,792 53,077 4,715 63,799 99,664 50,847 48,817 11,960 3,585 3,289 60,044 58,451 1,592 69,243 571 7,827 8,398 214 35,108 1,154 44,873 635 18,537 19,171 247 32,791 1,464 53,673 635 25,663 26,297 247 35,791 1,464 63,799 635 32,606 33,241 247 34,291 1,464 69,243 FY2010 FY2011 FY2012E FY2013E
% CHG
30.5
84,747 7,772
33.1
106,316 16,817
17.5
127,335 17,378
12.3
143,608 18,844

DEPRECIATION & AMORTIZATION INTEREST & OTHER CHARGES OTHER INCOME EXTRAORDINARY ITEMS PBT (ADJUSTED) TAX
414.9 8.4
3,887 2,465 1,058 (1,045) 3,523 1,006
116.4 13.7
4,656 2,385 452 (209) 10,437 1,216
3.3 12.0
5,168 2,505 926 10,630 1,648
8.4 11.6
5,980 2,400 454 10,918 1,747
(% OF PBT)
PAT (REPORTED) ADD: SHARE OF EARNINGS OF ASSOC. LESS: MINORITY INTEREST (MI) PAT AFTER MI (ADJUSTED)
28.6
2,517 85 30 1,526
11.7
9,221 101 49 9,065
15.5
8,983 122 67 9,037
16.0
9,171 146 74 9,244

1.6
9.0 5.3
494.0 7.4
29.2 28.6
(0.3) 6.2
28.5 28.5
2.3 5.7
29.1 29.1
% CHG
434.1
(0.3)
2.3
CASH FLOW STATEMENT

Y/E MARCH (` CR) ` PROFIT BEFORE TAX DEPRECIATION CHANGE IN WORKING CAPITAL OTHERS OTHER INCOME DIRECT TAXES PAID CASH FLOW FROM OPERATIONS (INC.)/DEC. IN FIXED ASSETS (INC.)/DEC. IN INVESTMENTS OTHER INCOME CASH FLOW FROM INVESTING ISSUE OF EQUITY INC./(DEC.) IN LOANS DIVIDEND PAID (INCL. TAX) OTHERS CASH FLOW FROM FINANCING INC./(DEC.) IN CASH OPENING CASH BALANCE CLOSING CASH BALANCE FY2010 3,523 3,887 5,099 (1,448) (1,058) (1,006) 8,997 (3,736) (962) 1,058 (3,640) 1,405 135 365 3,113 (1,209) 4,148 3,984 8,743 FY2011 10,437 4,656 (1,122) (1,063) (452) (1,216) 11,240 (10,453) (325) 452 (10,327) 4,700 (2,317) 1,002 2,094 1,291 2,205 8,743 10,948 FY2012E 10,630 5,168 821 (926) (1,648) 14,045 (14,145) (486) 926 (13,704) 3,000 1,856 1,144 1,484 10,948 12,432 FY2013E 10,918 5,980 (186) (454) (1,747) 14,511 (14,287) (259) 454 (14,092) (1,500) 2,228 (3,728) (3,308) 12,432 9,124
KEY RATIOS
Y/E MARCH VALUATION RATIO (X) P/E P/CEPS P/BV EV/SALES EV/EBITDA PER SHARE DATA (`) `) EPS (BASIC) EPS (ADJUSTED) CASH EPS DPS BOOK VALUE RETURNS (%) ROCE (PRE-TAX) ANGEL ROIC (PRE-TAX) ROE TURNOVER RATIOS (X) ASSET TURNOVER (GROSS BLOCK) INVENTORY / SALES (DAYS) RECEIVABLES (DAYS) PAYABLES (DAYS) 1.5 44 24 134 1.8 38 21 110 1.8 39 21 109 1.7 40 21 108 8.9 11.5 21.3 24.7 30.4 65.8 20.8 25.3 39.8 19.3 22.7 31.1 5.3 5.3 19.0 3.0 25.9 28.6 31.8 43.2 4.0 60.0 28.5 31.7 44.8 5.0 82.4 29.1 29.1 48.0 6.0 104.3 40.9 11.5 7.6 1.0 12.0 7.7 5.1 3.6 0.7 5.3 7.7 4.9 2.7 0.6 5.2 7.5 4.6 2.1 0.5 4.8 FY2010 FY2011 FY2012E FY2013E
January 2012
25
Automobile
RATING 52 WEEK HIGH / LOW MARKET CAP (` CR) ` LIQUIDITY ACCUMULATE 1,345 / 906 32,609 HIGH
Maruti Suzuki
Company Background
CMP/TP/Upside: `1,129 / `1,195 / 6%
SHAREHOLDING PATTERN (%) PROMOTERS (MNC) FII 54.2 19.4
Maruti Suzuki (MSIL), a subsidiary of Suzuki Motor Corporation, Japan (with a 54.2% stake), is the largest passenger car (PC) company in India, accounting for 48.7% of the domestic PC market. MSIL derives ~77% of its overall sales from the compact car segment and has a dominant position in the segment with a market share of ~50%, led by popular models like Alto, Wagon R and Swift. The company operates from two facilities in India (Gurgaon and Manesar) and is in the process of expanding its manufacturing capacity to 1.9mn units (currently 1.65mn) by FY2013. MSIL has also steadily increased its presence internationally and exports now account for ~11% of its overall sales volume.
STOCK RETURNS (%) MARUTI SUZUKI SENSEX 3M 5.9 1Y (11.3) (5.9) 3Y 25.0 51.0 21.3 5Y 4.4 3.3 10Y 17.3
Structural Snapshot
Growth opportunity: We expect the domestic PV industry to report a healthy rate in the long term, as we believe the Indian PV industry is at an inflection point with GDP per capita (PPP basis) crossing US$3,000 levels - a tipping point for motorization to take off. MSIL, with its strong product offering, new launches in the pipeline and strong competitive advantage over foreign entrants due to its widespread distribution network (nearly 3,006 and 968 service and sales outlets, respectively), is likely to emerge as the key beneficiary of the long-term growth potential. Competitive position: Growth potential of the Indian PC market and compact car segment in particular (~78% of the total PC market) has attracted many global OEMs, leading to 6-8 new small car launches over the past two years. Thus, MSIL's domestic market share has declined to 48.7% (down 350bp) in FY2011. While MSIL's market share is expected to remain under pressure in purview of increasing competition, its strengths include dominance in the compact car segment suited for Indian conditions and wide distribution reach. Nature of business: Cyclical and rate-sensitive sector; Branding and R&D create entry barriers.
9.3 25.6
(2.6) (12.3)
FINANCIAL PERFORMANCE OVERVIEW (%) PAT GROWTH* OPM# ROE# 3M (59.8) 6.3 1Y 24.7 (6.9) 8.1 17.5 3Y 26.6 10.5 8.9 16.6 5Y 24.7 13.5 10.6 18.6 10Y 18.4 9.8 16.3 SALES GROWTH* (14.4)

Operating margins to improve in FY2013: We expect EBITDA margins to improve by ~200bp in FY2013 on account of operating leverage benefits due to volume improvement, softening of commodity prices and a 2-3% decline in imported raw-material content, led by localization initiative (imports in JPY forms ~26% of net sales). Suzuki focusing to make MSIL a small car manufacturing hub: Suzuki Motor Corp., Japan, intends to make MSIL a manufacturing hub to leverage upon India's low-cost manufacturing capability and tap the increasing global demand for small cars due to rising fuel prices and stricter emission standards. Thus, we believe there is a huge potential for MSIL to increase its presence in the exports market. Valuation: At `1,129, MSIL is trading at 14.2x FY2013E earnings. We maintain our Accumulate rating on the stock with a target price of ` 1,195, valuing it at 15x FY2013E earnings (in-line with our Sensex target multiple of 15x).
26
January 2012

BALANCE SHEET
Y/E MARCH (` CR) ` SOURCES OF FUNDS EQUITY SHARE CAPITAL RESERVES & SURPLUS SHAREHOLDERS FUNDS TOTAL LOANS DEFERRED TAX LIABILITY TOTAL LIABILITIES APPLICATION OF FUNDS GROSS BLOCK 10,407 5,382 5,025 388 7,177 3,772 3,568 205 12,794 11,738 6,208 5,529 1,429 5,107 6,356 4,080 2,277 14,341 14,263 7,278 6,985 1,141 5,500 6,077 3,988 2,089 15,714 17,313 8,533 8,780 693 6,202 6,642 4,596 2,046 17,720 145 11,691 11,835 821 137 12,794 145 13,723 13,868 309 164 14,341 145 14,946 15,090 459 164 15,714 145 16,952 17,097 459 164 17,720 FY2010 FY2011 FY2012E FY2013E
% CHG
42.3
25,672 3,427
24.7
33,376 2,924
(7.7)
31,741 1,776
17.8
36,513 2,961

139.1 11.8
825 34 1,024 (79) 3,514 1,095
(14.7) 8.1
1,014 24 1,223 (36) 3,073 820
(39.2) 5.3
1,070 37 1,339 2,009 532
66.7 7.5
1,255 37 1,465 3,133 830
(% OF PBT)
31.2
2,498 2,419
26.7
2,289 2,252
26.5
1,477 1,477
26.5
2,303 2,303

125.5 8.3
86.4 83.7
(6.9) 6.2
79.2 77.9
(34.4) 4.4
51.1 51.1
55.9 5.8
79.7 79.7
% CHG
125.5
(6.9)
(34.4)
55.9
CASH FLOW STATEMENT

Y/E MARCH (` CR) ` PROFIT BEFORE TAX DEPRECIATION CHANGE IN WORKING CAPITAL OTHERS OTHER INCOME DIRECT TAXES PAID CASH FLOW FROM OPERATIONS (INC.)/DEC. IN FIXED ASSETS (INC.)/DEC. IN INVESTMENTS FY2010 3,514 825 48 764 (1,024) (1,095) 3,032 (1,212) (4,003) 75 1,024 (4,116) 123 202 (1,081) (757) (1,841) 1,939 98 FY2011 3,073 1,014 338 669 (1,223) (820) 3,050 (2,372) 2,070 116 1,223 1,037 (512) 252 (1,416) (1,677) 2,410 98 2,509 FY2012E 2,009 1,070 177 (1,339) (532) 1,384 (2,237) (393) 1,339 (1,291) 150 254 (104) (11) 2,509 2,498 FY2013E 3,133 1,255 (16) (1,465) (830) 2,077 (2,602) (702) 1,465 (1,840) 296 (296) (59) 2,498 2,439
KEY RATIOS
Y/E MARCH VALUATION RATIO (X) P/E P/CEPS P/BV EV/SALES EV/EBITDA PER SHARE DATA (`) ` EPS (BASIC) EPS (ADJUSTED) CASH EPS DPS 86.4 83.7 112.2 6.0 409.5 79.2 77.9 113.0 7.5 479.8 51.1 51.1 88.1 7.5 522.2 79.7 79.7 123.1 8.8 591.6 13.5 10.1 2.8 0.8 7.6 14.5 10.0 2.4 0.6 8.7 22.1 12.8 2.2 0.7 14.1 14.2 9.2 1.9 0.6 8.3 FY2010 FY2011 FY2012E FY2013E
(INC.)/DEC. IN LOANS AND ADVANCES OTHER INCOME CASH FLOW FROM INVESTING ISSUE OF EQUITY INC./(DEC.) IN LOANS DIVIDEND PAID (INCL. TAX) OTHERS CASH FLOW FROM FINANCING INC./(DEC.) IN CASH OPENING CASH BALANCE CLOSING CASH BALANCE
BOOK VALUE RETURNS (%) ROCE (PRE-TAX) ANGEL ROIC (PRE-TAX) ROE TURNOVER RATIOS (X) ASSET TURNOVER (GROSS BLOCK) INVENTORY / SALES (DAYS) RECEIVABLES (DAYS) PAYABLES (DAYS)
22.6 47.1 22.8
14.1 28.4 17.5
4.7 9.2 10.2
10.2 18.8 14.3
3.0 13 11 37
3.3 13 9 33
2.6 15 9 38
2.5 15 9 33
January 2012
27
Automobile
Ashok Leyland
Company Background
TOP PICK
CMP/TP/Upside: `27 / `32 / 19%
SHAREHOLDING PATTERN (%) PROMOTERS (HINDUJA GROUP) FII 38.6 16.6
Ashok Leyland (AL) is the country's second largest CV manufacturer. The company has a strong presence in the MHCV segment, with a domestic market share of ~23%. AL enjoys a dominant position in southern India, with a ~48% market share, and is currently focusing on expanding its presence in northern India by increasing its touch points in the region. The company, through its JV with Nissan Motor and John Deere, intends to expand its product portfolio and has recently launched new vehicles Dost (to tap the growing LCV demand) and Backhoe Loader (construction equipment segment), respectively.
STOCK RETURNS (%) ASHOK LEYLAND SENSEX 3M 8.7 1Y (7.7) (5.9) 3Y 52.5 51.0 21.3 5Y 10Y 2.7 22.5 9.3 25.6 3.3 17.3
Structural Snapshot
Growth opportunity: Given the healthy GDP growth expectation over the long run, government's thrust on infrastructure development and normal monsoons, we expect MHCV volumes to continue to grow at 1.5x GDP growth rate in the long term. AL being a core CV player is expected to benefit from the upswing in MHCV demand. Competitive position: Increased competitive activity due to the emergence of new players in the MHCV segment (Eicher Motors, Mahindra Navistar and Daimler) and slowdown in demand in southern India (AL's stronghold) have weakened AL's domestic MHCV market share to 23.7% in 2QFY2012 from 27.6% in 2QFY2011. Nature of business: Cyclical and rate-sensitive sector; Branding (to a lesser extent than passenger vehicle segment) and R&D create entry barriers.
(2.6) (12.3)
FINANCIAL PERFORMANCE OVERVIEW (%) SALES GROWTH* PAT GROWTH* OPM# ROE# 3M 14.0 (7.8) 10.7 1Y 53.4 64.2 10.7 16.5 3Y 12.7 11.8 9.5 17.2 5Y 16.4 9.6 20.4 10Y 17.2 10.2 19.4
15.8 21.4

Demand scenario to improve with easing interest rates: MHCV demand, which has moderated recently due to high interest rates and slowdown in industrial activity, is expected to pick up with the likely easing of interest rates from 1QFY2013. Therefore, we expect AL's volume growth to rebound to ~12% in FY2013E from near flat levels in FY2012. Pantnagar plant ramp-up to mitigate raw-material cost pressures: AL plans to ramp-up production at its Pantnagar facility (relatively more profitable with cost savings of ~`35,000/vehicle) to ~35,000 vehicles in FY2012 from 12,800 in FY2011. We expect these benefits to partially offset the impact of raw-material cost pressures, enabling AL to maintain its operating margins at 10-11% over FY2011-13. Attractively valued: At `27, AL is trading at attractive valuations of 10.2x its FY2013E earnings. We maintain our Buy rating on the stock with a target price of ` 32, valuing the stock at 12x its FY2013E earnings.
28
January 2012

BALANCE SHEET
Y/E MARCH (` CR) ` SOURCES OF FUNDS EQUITY SHARE CAPITAL RESERVES & SURPLUS SHAREHOLDERS FUNDS TOTAL LOANS DEFERRED TAX LIABILITY TOTAL LIABILITIES APPLICATION OF FUNDS GROSS BLOCK 6,019 1,769 4,250 561 326 4,152 2,961 1,191 5 6,334 6,692 2,058 4,634 358 1,230 4,367 3,528 839 4 7,065 7,425 2,400 5,025 371 1,348 4,441 3,486 956 4 7,705 8,180 2,776 5,404 409 1,400 4,955 4,079 876 4 8,093 133 3,536 3,669 2,280 385 6,334 133 3,830 3,963 2,658 444 7,065 266 4,037 4,303 2,958 444 7,705 266 4,425 4,691 2,958 444 8,093 FY2010 FY2011 FY2012E FY2013E
% CHG
21.5
6,648 760
53.4
10,148 1,218
9.7
11,208 1,266
14.8
12,849 1,466

DEPRECIATION & AMORTIZATION INTEREST & OTHER CHARGES OTHER INCOME EXTRAORDINARY ITEMS PBT (ADJUSTED) TAX (% OF PBT) PAT (REPORTED) PAT (ADJUSTED)
66.6 10.3
204 102 91 40 505 121 24.0 424 384
60.3 10.7
267 189 41 2 800 171 21.3 631 630
4.0 10.2
342 231 32 726 152 21.0 573 573
15.8 10.2
376 231 38 897 197 22.0 700 700

BASIC EPS (`) ` ADJUSTED EPS (`) ` % CHG
114.6 5.2
1.6 1.4 114.6
64.2 5.5
2.4 2.4 64.2
(9.0) 4.6
2.2 2.2 (9.0)
22.0 4.9
2.6 2.6 22.0
CASH FLOW STATEMENT

Y/E MARCH (` CR) ` PROFIT BEFORE TAX DEPRECIATION CHANGE IN WORKING CAPITAL OTHERS OTHER INCOME DIRECT TAXES PAID CASH FLOW FROM OPERATIONS (INC.)/DEC. IN FIXED ASSETS (INC.)/DEC. IN INVESTMENTS OTHER INCOME CASH FLOW FROM INVESTING ISSUE OF EQUITY INC./(DEC.) IN LOANS DIVIDEND PAID (INCL. TAX) OTHERS CASH FLOW FROM FINANCING INC./(DEC.) IN CASH OPENING CASH BALANCE CLOSING CASH BALANCE
KEY RATIOS
FY2011 800 267 (185) (80) (41) (171) 591 (470) (904) 41 (1,333) 378 233 (209) 402 (340) 515 175 FY2012E 726 342 (96) (32) (152) 787 (746) (118) 32 (833) 300 233 67 21 175 196 FY2013E 897 376 (11) (38) (197) 1,027 (793) (52) 38 (807) 311 (311) (91) 196 105 Y/E MARCH VALUATION RATIO (X) P/E P/CEPS P/BV EV/SALES EV/EBITDA PER SHARE DATA (`) ` EPS (BASIC) EPS (ADJUSTED) CASH EPS DPS BOOK VALUE RETURNS (%) ROCE (PRE-TAX) ANGEL ROIC (PRE-TAX) ROE TURNOVER RATIOS (X) 9.2 12.4 10.7 14.2 17.0 16.5 12.5 14.9 13.9 13.8 16.3 15.6 1.4 1.4 2.2 0.8 8.8 2.4 2.4 3.4 1.0 10.0 2.2 2.2 3.4 0.8 11.3 2.6 2.6 4.0 1.0 12.7 18.7 12.2 3.1 1.1 11.3 11.4 8.0 2.7 0.7 6.9 12.5 7.8 2.4 0.6 6.8 10.2 6.7 2.1 0.6 5.9 FY2010 FY2011 FY2012E FY2013E
FY2010 505 204 366 227 (91) (121) 1,090 (643) (63) 91 (614) 322 156 (523) (45) 430 85 515
ASSET TURNOVER (GROSS BLOCK) INVENTORY / SALES (DAYS) RECEIVABLES (DAYS) PAYABLES (DAYS)
1.4 73 49 110
1.8 62 35 90
1.8 64 35 90
1.8 63 35 92
January 2012
29
Automobile
RATING 52 WEEK HIGH / LOW MARKET CAP (` CR) ` LIQUIDITY BUY 1,823 / 1,190 42,453 HIGH
Bajaj Auto
Company Background
CMP/TP/Upside: `1,467 / `1,755 / 20%
SHAREHOLDING PATTERN (%) PROMOTERS (BAJAJ GROUP) FII 50.0 16.1
Bajaj Auto (BJAUT) is the second largest 2W manufacturer in the country (~26% market share) and a market leader in the 3W segment (~55% market share). BJAUT has three manufacturing facilities in India, located at Waluj, Chakan and Pantnagar, with a total installed capacity (2W - 4.5mn and 3W - 0.5mn) of 5mn units. BJAUT also happens to be one of India's largest auto exporters, with exports forming ~28% of revenue (~32% of total volumes) in FY2011. Led by two dominant brands, Discover and Pulsar (~65% of motorcycle volumes), BJAUT reported a strong 32% volume CAGR over FY2009-11.
Structural Snapshot
STOCK RETURNS (%) BAJAJ AUTO SENSEX 3M (10.4) 1Y 11.2 (5.9) 3Y 80.5 51.0 21.3 5Y 3.3 10Y 17.3
Growth opportunity: While the Indian 2W industry is expected to report a CAGR of 13.3% over FY2011-13E, we also expect competition in the markets to intensify. However, given BJAUT's strong focus in the premium motorcycle segment and significant exposure to the 3W and exports markets, we expect BJAUT to sustain its healthy growth momentum and register a 13-14% volume CAGR over the same period. Competitive position: Although HMCL dominates the overall 2W industry, it has limited presence in the higher-end motorcycle segment (>125cc), where BJAUT commands a ~51.4% market share. While we expect BJAUT to be impacted by increasing competition in the domestic motorcycles space, strong focus on the premium motorcycle segment and exposure to exports offer a strong competitive advantage to the company. Nature of business: The 2W business is relatively stable, less dependent on interest rates and has moderate entry barriers. The 3W business, however, is subject to new permits and licenses issued by various state authorities.
9.3 25.6
(2.6) (12.3)
FINANCIAL PERFORMANCE OVERVIEW (%) SALES GROWTH* PAT GROWTH* OPM# ROE# 3M 21.2 19.2 21.0 1Y 39.3 54.1 19.7 70.2 3Y 22.6 50.4 17.0 64.7 5Y 16.7 15.7 10Y 18.1 16.5
21.4 24.7 47.9 34.1

Continued focus on Discover and Pulsar brands to aid market share gains: BJAUT revamped its strategy in FY2010 and focused on its dominant brands Discover and Pulsar, which enabled it to strengthen its competitive position in the motorcycle segment, leading to an increase in market share from 28% in FY2009 to 32.3% in FY2011. With the launch of Discover 125cc (May 2011) and likely new launches of Pulsar and Discover by FY2012-end, we expect BJAUT to further strengthen its position and improve upon its market share. Exports to remain the key growth driver: BJAUT has registered a strong CAGR of ~35% in export volumes over FY2006-11, aided by ~43% and ~25% volume CAGR in the 2W and 3W segments, respectively. With a strong focus and expansion in Africa, Latin America and Asia, we estimate BJAUT to sustain its sales momentum and register a ~24% volume CAGR over FY2011-13E. Attractive valuations: We prefer BJAUT over HMCL in the 2W space, owing to its diversified business model and healthy revenue and earnings visibility. The stock is currently trading at attractive valuations of 12.5x FY2013E earnings. We recommend Buy on the stock with a target price of ` 1,755, valuing it at 15x FY2013E earnings. 30 January 2012 Please refer to important disclosures at the end of this report

BALANCE SHEET
Y/E MARCH (` CR) ` SOURCES OF FUNDS EQUITY SHARE CAPITAL RESERVES & SURPLUS SHAREHOLDERS FUNDS TOTAL LOANS DEFERRED TAX LIABILITY TOTAL LIABILITIES APPLICATION OF FUNDS GROSS BLOCK 3,379 1,900 1,480 42 4,022 1,584 2,858 (1,274) 4,269 3,395 1,912 1,483 70 4,795 2,873 3,955 (1,083) 5,265 3,688 2,049 1,639 37 6,169 5,255 6,246 (991) 6,855 3,921 2,198 1,723 39 7,845 6,261 7,151 (891) 8,716 145 2,784 2,928 1,339 2 4,269 289 4,621 4,910 325 30 5,265 289 6,361 6,650 175 30 6,855 289 8,222 8,512 175 30 8,716 FY2010 FY2011 FY2012E FY2013E
% CHG
35.3
9,515 2,406
39.3
13,329 3,280
20.4
15,955 4,047
14.1
18,412 4,418
% CHG (% OF TOTAL OP. INCOME)

145.0 20.2
136 6 144 (82) 2,489 705
36.3 19.7
123 2 1,193 590 3,758 1,008
23.4 20.2
136 21 321 4,210 1,032
9.2 19.4
149 2 357 4,624 1,239
(% OF PBT)
28.3
1,703 1,784
26.8
3,340 2,750
24.5
3,179 3,179
26.8
3,385 3,385

132.0 15.5
58.8 61.7
54.1 17.2
115.4 95.0
15.6 16.6
109.9 109.9
6.5 15.3
117.0 117.0
% CHG
132.0
54.1
15.6
6.5
CASH FLOW STATEMENT

KEY RATIOS
FY2011 3,758 123 815 (481) (1,193) (1,008) 2,014 (44) (774) 1,193 375 145 (1,013) 1,345 (2,810) (2,333) 55 101 156 FY2012E 4,210 136 171 (321) (1,032) 3,165 (260) (1,374) 321 (1,314) (150) 1,439 (1,589) 262 156 419 FY2013E 4,624 149 212 (357) (1,239) 3,389 (235) (1,675) 357 (1,554) 1,524 (1,524) 312 419 731 Y/E MARCH VALUATION RATIO (X) P/E P/CEPS P/BV EV/SALES EV/EBITDA PER SHARE DATA (`) ` EPS (BASIC) EPS (ADJUSTED) CASH EPS DPS BOOK VALUE RETURNS (%) ROCE (PRE-TAX) ANGEL ROIC (PRE-TAX) ROE TURNOVER RATIOS (X) 58.8 54.5 74.4 66.2 67.0 70.2 64.5 64.8 55.0 54.8 56.3 44.7 58.8 61.7 63.6 20.0 101.2 115.4 95.0 119.7 40.0 169.7 109.9 109.9 114.6 42.5 229.8 117.0 117.0 122.1 45.0 294.1 24.9 23.1 14.5 3.3 16.5 15.4 12.3 8.6 2.2 11.4 13.4 12.8 6.4 1.8 8.8 12.5 12.0 5.0 1.4 7.6 FY2010 FY2011 FY2012E FY2013E
FY2010 2,489 136 790 171 (144) (705) 2,737 (49) (2,213) 144 (2,117) (231) 372 (796) (655) (35) 137 101
3.5 12 9 51
4.9 11 7 51
5.6 12 9 48
6.0 12 9 47
January 2012
31
Automobile
RATING 52 WEEK HIGH / LOW MARKET CAP (` CR) ` LIQUIDITY ACCUMULATE 2,248 / 1,378 37,956 HIGH
Hero MotoCorp
Company Background
CMP/TP/Upside: `1,901 / `2,025 / 7%
SHAREHOLDING PATTERN (%) PROMOTERS (MUNJAL GROUP) FII 52.2 33.8
Hero MotoCorp (HMCL) is a leading 2W manufacturer in the world and the market leader in the domestic motorcycle segment with a 54.6% market share (48% market share including exports). HMCL has three manufacturing facilities in India, located at Gurgaon (1.95mn), Dharuhera (1.95mn) and Haridwar (2.25mn), with a total capacity of 6.15mn units/year. Over 200611, HMCL recorded a healthy volume CAGR of 12.5% (in-line with industry CAGR of ~12%), backed by its strong brands (Passion and Splendor) and a well-entrenched dealership network, which has a good presence across rural areas (~45% of total volumes).
STOCK RETURNS (%) 3M 1Y 7.8 (5.9) 3Y 33.1 51.0 21.3 5Y 10Y HERO MOTOCORP (8.0) BSE AUTO INDEX (2.7) SENSEX 22.1 20.9 9.3 25.6 3.3 17.3
Structural Snapshot
Growth opportunity: We expect the Indian 2W industry to post a 13.3% CAGR over FY2011-13E, driven by rising income levels, strong sustainable rural demand and huge exports potential. HMCL is well equipped to capitalize on this opportunity backed by its strong brands, new product launches and wider reach. Therefore, we expect HMCL to post a 12.7% volume CAGR over FY2011-13E. Competitive position: While HMCL continues to dominate the domestic motorcycle industry, competitive pressures primarily from Bajaj Auto, Honda (post the split from Hero) and Yamaha have led to loss of market share (domestic motorcycle market share of 54.6% in FY2011 compared to 58.5% in FY2010) and lower pricing power. Nature of business: Relatively stable as it is less dependent on interest rates; Moderate entry barriers.
(2.6) (12.3)
FINANCIAL PERFORMANCE OVERVIEW (%) SALES GROWTH* PAT GROWTH* OPM# ROE# 3M 16.9 15.6 1Y 22.1 12.4 57.4 3Y 23.0 28.0 14.3 50.8 5Y 17.2 10Y 19.8
20.5 (11.5)
15.5 22.2 13.5 14.7 45.2 56.2

Increase in competitive activity to restrict volume growth: We believe competition in the domestic motorcycle segment is set to intensify further as HMSI is planning to launch a new 100cc motorcycle in 4QFY2012. With ~93% of HMCLs total motorcycle volumes being derived from the <125cc segment, we expect HMCL to slightly underperform the industry and report a 12.7% volume CAGR during the period. Limited room for margin expansion on higher advertisement and R&D spends: While HMCL managed to maintain its margins in 1HFY2012, led by operating leverage benefits and softening of raw-material prices, we expect the company's EBITDA margin to remain under pressure due to rising competition, leading to higher advertisement spends. Further, increased R&D spends to develop indigenous technology will also impact margins. Valuation: At `1,901, HMCL is trading at 14.1x FY2013E earnings. We recommend Accumulate rating on the stock with a target price of ` 2,025, valuing it at 15x (in-line with historical multiple) FY2013E earnings.
32
January 2012

BALANCE SHEET
Y/E MARCH (` CR) ` SOURCES OF FUNDS EQUITY SHARE CAPITAL RESERVES AND SURPLUS SHAREHOLDERS FUNDS TOTAL LOANS DEFERRED TAX LIABILITY TOTAL LIABILITIES APPLICATION OF FUNDS GROSS BLOCK LESS: ACC. DEPRECIATION 2,519 1,092 1,427 48 232 3,926 2,883 4,831 (1,949) 3,684 5,308 1,458 3,850 125 231 5,129 1,505 6,145 (4,640) 4,694 6,046 2,577 3,469 121 231 6,459 2,759 7,167 (4,408) 5,872 6,861 3,640 3,221 137 231 8,510 3,268 7,967 (4,699) 7,400 40 3,425 3,465 66 153 3,684 40 2,916 2,956 1,491 247 4,694 40 4,094 4,134 1,491 247 5,872 40 5,622 5,662 1,491 247 7,400 FY2010 FY2011 FY2012E FY2013E
% CHG
27.9
13,096 2,662
22.1
16,865 2,380
20.9
19,845 3,431
13.2
22,512 3,833

58.0 16.9
191 2 363 150 2,982 600
(10.6) 12.4
402 16 443 86 2,491 477
44.1 14.7
1,118 12 509 2,810 464
11.7 14.6
1,063 21 539 3,288 592
NET BLOCK CAPITAL WORK-IN-PROGRESS GOODWILL INVESTMENTS CURRENT ASSETS CURRENT LIABILITIES NET CURRENT ASSETS MIS. EXP. NOT WRITTEN OFF TOTAL ASSETS
(% OF PBT)
20.1
2,232 2,082
19.1
1,928 1,842
16.5
2,346 2,346
18.0
2,696 2,696

76.3 13.2
111.8 104.2
(11.5) 9.6
96.5 92.2
27.4 10.1
117.5 117.5
14.9 10.2
135.0 135.0
% CHG
76.3
(11.5)
27.4
14.9
CASH FLOW STATEMENT

Y/E MARCH (` CR) ` PROFIT BEFORE TAX DEPRECIATION CHANGE IN WORKING CAPITAL OTHERS OTHER INCOME DIRECT TAXES PAID CASH FLOW FROM OPERATIONS (INC.)/DEC. IN FIXED ASSETS (INC.)/DEC. IN INVESTMENTS OTHER INCOME CASH FLOW FROM INVESTING ISSUE OF EQUITY INC./(DEC.) IN LOANS DIVIDEND PAID (INCL. TAX) OTHERS CASH FLOW FROM FINANCING INC./(DEC.) IN CASH OPENING CASH BALANCES CLOSING CASH BALANCES
KEY RATIOS
FY2011 2,491 402 807 (492) (443) (477) 2,288 (2,865) (1,203) 443 (3,626) (1,425) 2,437 303 1,315 (23) 62 39 FY2012E 2,810 1,118 830 (509) (464) 3,785 (734) (1,330) 509 (1,555) 1,168 (1,168) 1,062 39 1,101 FY2013E 3,288 1,063 585 (539) (592) 3,805 (831) (2,051) 539 (2,343) 1,168 (1,168) 294 1,101 1,395 Y/E MARCH VALUATION RATIO (X) P/E P/CEPS P/BV EV/SALES EV/EBITDA PER SHARE DATA (`) ` EPS (BASIC) EPS (ADJUSTED) CASH EPS DPS BOOK VALUE RETURNS (%) ROCE (PRE-TAX) ANGEL ROIC (PRE-TAX) ROE TURNOVER RATIOS (X) 64.1 109.6 57.3 47.2 34.3 57.4 43.8 40.8 66.2 41.7 38.0 55.0 111.8 104.2 113.8 110.0 173.5 96.5 92.2 112.4 105.0 148.0 117.5 117.5 173.5 50.0 207.0 135.0 135.0 188.3 50.0 283.5 18.2 16.7 11.0 1.9 12.1 20.6 16.9 12.8 1.7 14.4 16.2 11.0 9.2 1.3 9.3 14.1 10.1 6.7 1.0 7.7 FY2010 FY2011 FY2012E FY2013E
FY2010 2,982 191 2,581 (2,104) (363) (600) 2,687 (137) (557) 363 (331) 12 2,568 (4,887) (2,307) 49 13 62
6.5 9 3 62
4.9 9 2 84
4.1 9 2 86
4.1 10 2 88
January 2012
33
Automobile
TVS Motor
Company Background
CMP/TP/Upside: `50 / `66 / 32%
SHAREHOLDING PATTERN (%) Promoters (TVS GROUP) FII 59.3 4.7
TVS Motor (TVSL), a flagship company of TVS Group, is the third largest 2W manufacturer in India. The company is present across the motorcycles, scooters and mopeds segments, having a market share of 8%, ~22% and 100%, respectively. The company successfully ventured into the 3W segment in FY2009 and garnered a 5% market share as of FY2011. The company has three manufacturing facilities in India, located at Hosur (Tamil Nadu), Mysore (Karnataka) and Solan (Himachal Pradesh) with 2W and 3W capacity of 2.75mn and 75,000 units, respectively. TVSL is also the second largest exporter of two-wheelers in the country. Exports accounted for ~14% of its total revenue in FY2011.
STOCK RETURNS (%) TVS MOTOR SENSEX 3M 1Y (5.9) 3Y 82.6 51.0 21.3 5Y 10Y (23.2) (18.6) (2.6) (12.3) 4.8 14.9 9.3 25.6 3.3 17.3
Structural Snapshot
Growth opportunity: We expect the Indian 2W industry to report a 13.3% CAGR over FY2011-13E, driven by rising income levels, strong sustainable rural demand and huge exports potential. While TVSL's motorcycle segment is likely to remain vulnerable to competition, scooters, mopeds and exports are expected to register healthy performance going ahead. Competitive position: TVSL has seen a decline in its two-wheeler market share to ~15% from ~19% in FY2006 mainly due to weakness in the motorcycle segment, led by intense competition from market leaders. However, with the successful launch of Wego, TVSL has been able to claw-back its market share in the scooters segment and retain its number two position in the segment. Nature of business: Relatively stable as it is less dependent on interest rates; Moderate entry barriers.
FINANCIAL PERFORMANCE OVERVIEW (%) SALES GROWTH* PAT GROWTH* OPM# ROE# 3M 23.2 39.7 6.9 1Y 42.0 6.2 22.1 3Y 24.3 5.2 13.4 5Y 10Y 13.9 13.1 14.7 12.6 4.6 10.5 6.8 16.9
71.8 308.1

New product launches to drive volume growth: TVSL recorded robust volume growth of 33.2% yoy in FY2011, led by recovery in the 2W industry's volumes and new product launches like Jive, Wego and Max4R. With the expected launch of new models like Victor 125cc and variants of Apache, we expect TVSL to ramp up its production and post a healthy volume CAGR of 11% over FY2011-13E. Better product mix to sustain operating margins: With growing proportion of higher-margin 3W in the total volume mix (3W expected to post a 14% CAGR vs. 11% for 2W over FY2011-13E) and successful launch of higher priced Wego, we expect TVSM's overall realization to improve, thereby helping it to sustain its operating margins at ~6.5% in FY2012 and FY2013. Attractive valuations: Due to the recent correction in the stock price, TVSL is trading at attractive valuations of 8.4x FY2013e earnings. We maintain our Buy recommendation on the stock with a target price of ` 66, valuing it at 11x FY2013E earnings.
34
January 2012

BALANCE SHEET
Y/E MARCH (` CR) ` SOURCES OF FUNDS EQUITY SHARE CAPITAL RESERVES & SURPLUS SHAREHOLDERS FUNDS TOTAL LOANS DEFERRED TAX LIABILITY TOTAL LIABILITIES APPLICATION OF FUNDS GROSS BLOCK 1,909 953 956 27 739 965 734 231 30 1,983 1,972 1,035 938 57 661 1,202 1,073 129 1,785 2,102 1,150 952 53 703 1,455 1,211 245 1,952 2,222 1,273 949 56 759 1,773 1,368 405 2,170 24 842 865 1,003 115 1,983 48 952 999 785 1,785 48 1,144 1,192 760 1,952 48 1,362 1,409 760 2,170 FY2010 FY2011 FY2012E FY2013E
% CHG
18.5
4,243 187
42.0
5,896 393
17.4
6,878 504
14.1
7,879 546

0.4 4.2
103 75 67 32 44 (12)
109.6 6.2
107 70 33 (11) 259 54
28.4 6.8
116 53 10 346 86
8.2 6.5
122 57 12 379 95
(% OF PBT)
(26.7)
88 120
20.6
195 206
25.0
259 259
25.0
284 284

306.6 2.7
1.9 2.5
71.8 3.3
4.1 4.3
25.8 3.6
5.5 5.5
9.6 3.4
6.0 6.0
% CHG
306.6
71.8
25.8
9.6
CASH FLOW STATEMENT

Y/E MARCH (` CR) ` PROFIT BEFORE TAX DEPRECIATION CHANGE IN WORKING CAPITAL OTHERS OTHER INCOME DIRECT TAXES PAID CASH FLOW FROM OPERATIONS (INC.)/DEC. IN FIXED ASSETS (INC.)/DEC. IN INVESTMENTS OTHER INCOME CASH FLOW FROM INVESTING ISSUE OF EQUITY INC./(DEC.) IN LOANS DIVIDEND PAID (INCL. TAX) OTHERS CASH FLOW FROM FINANCING INC./(DEC.) IN CASH OPENING CASH BALANCE NET CASH CREDIT ADJUSTMENT CLOSING CASH BALANCE
KEY RATIOS
FY2011 259 107 7 (85) (33) (54) 202 (93) 78 33 18 24 (218) 60 (260) (394) (174) 101 (79) 6 FY2012E 346 116 19 (10) (86) 384 (125) (42) 10 (157) (25) 67 (92) 135 6 141 FY2013E 379 122 (30) (12) (95) 364 (122) (57) 12 (167) 67 (67) 131 141 272 Y/E MARCH VALUATION RATIO (X) P/E P/CEPS P/BV EV/SALES EV/EBITDA PER SHARE DATA (`) ` EPS (BASIC) EPS (ADJ.) CASH EPS DPS 1.9 2.5 4.7 0.6 18.2 4.1 4.3 6.6 1.1 21.0 5.5 5.5 7.9 1.2 25.1 6.0 6.0 8.5 1.2 29.7 19.8 10.7 2.7 0.6 13.5 11.5 7.6 2.4 0.4 6.3 9.2 6.3 2.0 0.3 4.5 8.4 5.8 1.7 0.3 3.9 FY2010 FY2011 FY2012E FY2013E
FY2010 44 103 103 144 (67) 12 339 (30) (262) 67 (225) 97 33 (102) 28 142 42 83 101
BOOK VALUE RETURNS (%) ROCE (PRE-TAX) ANGEL ROIC (PRE-TAX) ROE TURNOVER RATIOS (X) ASSET TURNOVER (GROSS BLOCK) INVENTORY / SALES (DAYS) RECEIVABLES (DAYS) PAYABLES (DAYS)
4.4 4.5 14.3
15.2 16.0 22.1
20.8 21.5 23.7
20.6 22.3 21.8
2.3 26 17 51
3.2 24 15 49
3.6 26 14 52
3.9 26 14 51
January 2012
35
Automobile
RATING 52 WEEK HIGH / LOW MARKET CAP (` CR) ` LIQUIDITY ACCUMULATE 7,480 / 5,783 22,482 MEDIUM
Bosch
Company Background
CMP/TP/Upside: `7,160 / `7,514 / 5%
Bosch (BOS), promoted by Robert Bosch GmbH is the largest auto ancillary company in India and a dominant player in the fuel injection segment with ~75% market share. The company has a diverse product portfolio of diesel and gasoline fuel injection systems, automotive aftermarket products, auto electricals, special purpose machines, packaging machines, electric power tools and security systems. The automotive segment contributes 90% to BOS's total revenue. The company also has one of the largest distribution networks of spare parts in the country, with after-market component sales accounting for ~20% of revenue. BOS has five manufacturing facilities located at Bangalore, Nashik, Naganathpura, Jaipur and Goa.
STOCK RETURNS (%) BOSCH SENSEX 3M 2.4 1Y 15.9 (5.9) 3Y 33.7 51.0 21.3 5Y 10Y 15.8 41.3 9.3 25.6 3.3 17.3
Structural Snapshot
Growth opportunity: We expect the Indian auto industry to grow at a 12-13% CAGR over FY2011-13E, led by sustainable growth in the economy; and rising consumer confidence and income levels, which we believe are prime drivers of the demand in the auto industry, particularly in segments such as passenger vehicles, commercial vehicles and tractors. Further, increasing dieselization levels in the domestic passenger vehicle segment are likely to augur well for BOS in the long run. Competitive position: BOS is a market leader in the fuel injection equipment segment with ~75% market share and has a track record of industry-shaping innovations, leading to higher pricing power. Nature of business: Cyclical as automotive sales are dependent on interest rate; Access to technology creates entry barriers; Sensitive to exchange rates (EUR/INR), since the company has net imports of ~20% of net sales.
(2.6) (12.3)
20.5 25.4 21.7 22.7

ANGEL ESTIMATES PARTICULARS PAT GROWTH (%) ROE (%) P/E P/BV CY2011E 24.6 21.3 21.0 4.5 CY2012E 10.3 19.5 19.1 3.7
Dependent on favorable CV/tractor sales for growth: BOS's prospects are largely derived from demand arising in the CV and tractor segments, which are estimated to register a 12-14% CAGR each over FY2011-13E. Further, greater visibility on newer growth opportunities is emerging for the company, following its investments in new and innovative technologies such as common rail systems and gasoline systems. As such, we estimate BOS to record a strong ~17% CAGR in its top line over CY2010-12E. Technology leadership lends bargaining power: BOS commands a ~75% market share in the domestic fuel injection equipment segment, which is extremely technology intensive. Also, the company has a proven track record of industry-shaping innovations. Being a technology leader in the industry, the company enjoys strong pricing power and, hence, higher margins, which are expected to remain stable going ahead. Valuations: At `7,160, BOS is trading at 19.1x CY2012E earnings. We believe BOS will continue to enjoy premium valuations due to its technological leadership and strong and diversified product portfolio. We maintain our Accumulate rating on the stock with a target price of ` 7,514, valuing it at 20x CY2012E earnings (in-line with average historical multiple).
BLOOMBERG CONSENSUS RECOMMENDATION BUY / HOLD / SELL 9/2/0
36
January 2012

Y/E DEC. (` CR) ` TOTAL OPERATING INCOME CY2009 5,009 CY2010 6,882 CY2011E 8,187 CY2012E 9,402
BALANCE SHEET
Y/E DEC. (` CR) ` SOURCES OF FUNDS EQUITY SHARE CAPITAL RESERVES & SURPLUS SHAREHOLDERS FUNDS TOTAL LOANS DEFERRED TAX LIABILITY TOTAL LIABILITIES APPLICATION OF FUNDS GROSS BLOCK LESS: ACC. DEPRECIATION 2,865 2,358 507 100 6 1,418 2,758 1,320 1,438 3,468 3,017 2,588 430 224 6 1,607 3,752 1,863 1,889 4,156 3,697 2,854 843 185 6 1,778 4,003 1,736 2,267 5,079 4,188 3,154 1,033 210 6 2,138 4,689 1,968 2,721 6,108 31 3,354 3,385 284 (201) 3,468 31 4,067 4,098 276 (218) 4,156 31 4,990 5,021 276 (218) 5,079 31 6,018 6,050 276 (218) 6,108 CY2009 CY2010 CY2011E CY2012E
% CHG
5.6
4,183 826
37.4
5,629 1,253
19.0
6,660 1,527
14.8
7,707 1,695

(3.6) 16.5
304 1 285 64 742 203
51.7 18.2
254 4 207 1,202 344
21.8 18.6
267 2 248 1,507 437
11.0 18.0
300 2 268 1,662 482
NET BLOCK CAPITAL WORK-IN-PROGRESS GOODWILL INVESTMENTS CURRENT ASSETS CURRENT LIABILITIES NET CURRENT ASSETS MIS. EXP. NOT WRITTEN OFF TOTAL ASSETS
(% OF PBT)
27.3
604 540
28.6
859 858
29.0
1,070 1,070
29.0
1,180 1,180

(2.4) 11.2
192.2 171.8
59.1 12.8
273.5 273.4
24.6 13.4
340.8 340.8
10.3 12.9
375.7 375.7
% CHG
(0.5)
59.1
24.6
10.3
CASH FLOW STATEMENT

Y/E DEC. (` CR) ` PROFIT BEFORE TAX DEPRECIATION CHANGE IN WORKING CAPITAL OTHERS OTHER INCOME DIRECT TAXES PAID CASH FLOW FROM OPERATIONS (INC.)/DEC. IN FIXED ASSETS (INC.)/DEC. IN INVESTMENTS OTHER INCOME CASH FLOW FROM INVESTING ISSUE OF EQUITY INC./(DEC.) IN LOANS DIVIDEND PAID (INCL. TAX) OTHERS CASH FLOW FROM FINANCING INC./(DEC.) IN CASH OPENING CASH BALANCE CLOSING CASH BALANCE CY2009 742 304 130 209 (285) (203) 897 (75) (551) 285 (341) (1) 20 94 (672) (559) (3) 1,071 1,068 CY2010 1,202 254 (178) 159 (207) (344) 886 (277) (190) 207 (260) (8) 110 (471) (368) 258 1,068 1,326 CY2011E 1,507 267 (395) (248) (437) 694 (641) (170) 248 (563) 146 (146) (16) 1,326 1,310 CY2012E 1,662 300 (180) (268) (482) 1,031 (515) (360) 268 (607) 147 (147) 277 1,310 1,588
KEY RATIOS
Y/E DEC. VALUATION RATIO (X) P/E P/CEPS P/BV EV/SALES EV/EBITDA PER SHARE DATA (`) ` EPS (BASIC) EPS (ADJUSTED) CASH EPS DPS BOOK VALUE RETURNS (%) ROCE (PRE-TAX) ANGEL ROIC (PRE-TAX) ROE TURNOVER RATIOS (X) ASSET TURNOVER (GROSS BLOCK) INVENTORY / SALES (DAYS) RECEIVABLES (DAYS) PAYABLES (DAYS) 1.8 42 49 61 2.3 37 36 60 2.4 38 35 63 2.4 39 35 64 15.7 14.0 15.9 26.2 28.2 20.9 27.3 27.6 21.3 24.9 25.6 19.5 171.8 171.8 268.5 30.0 1,078 273.4 273.4 354.3 40.0 1,305 340.8 340.8 425.7 40.0 1,599 375.7 375.7 471.2 40.0 1,927 41.7 26.7 6.6 4.0 31.7 26.2 20.2 5.5 2.8 18.8 21.0 16.8 4.5 2.3 12.9 19.1 15.2 3.7 1.9 11.2 CY2009 CY2010 CY2011E CY2012E
January 2012
37
Automobile
RATING 52 WEEK HIGH / LOW MARKET CAP (` CR) ` LIQUIDITY ACCUMULATE 175 / 99 10,221 MEDIUM
Exide Industries
Exide Industries (Exide) is a leading automobile and industrial battery manufacturer in India. The company commands a ~70% and ~65% market share in the OEM and organized replacement battery segment and a 40-45% share in the industrial battery segment. Exide has technological tie-ups with majors such as Shin Kobe and Furukawa Battery. The automotive and industrial battery segments accounted for ~65% and ~35% of the company's total revenue in FY2011, respectively. Exide also has a 50% stake in ING Vysya Insurance Ltd., a JV with ING Group, Netherlands.
Structural Snapshot
STOCK RETURNS (%) EXIDE IND. SENSEX 3M (1.1) 1Y (11.9) (5.2) 3Y 42.2 52.7 22.5 5Y 10Y 24.5 45.1 9.4 25.7 3.4 17.4
Growth opportunity: We expect growth traction in the automotive battery segment to continue, driven by OE M sales and a steady increase of 10-12% in the auto replacement segment, given that average battery life is 3-4 years. Further, revival in demand for telecom and UPS batteries is likely to sustain industrial battery demand going ahead. Additionally, strong relationship with OEMs (creating brand awareness amongst consumers) presents a significant growth opportunity in the replacement market, which still has presence of large unorganized players. We believe Exide is well placed to capitalize on this growth opportunity as it has unparalleled distribution network, excellent customer relationships and strong brand loyalty. Competitive position: Exide continues to dominate the organized automotive and industrial battery segments, led by its strong brands (Exide and SF Sonic) and a wide distribution network. However, recently Exide has lost 6-7% market share in the organized replacement 4W segment, led by aggressive strategy adopted by Amara Raja Batteries. Consequently, Exide reduced its auto battery prices by 8-10% in September 2011, leading to significant margin erosion. Nature of business: While OEM demand is dependent on new vehicle sales, replacement demand is relatively stable; branding, quality/technology and strong OEM presence create entry barriers.
(1.2) (12.1)
FINANCIAL PERFORMANCE OVERVIEW (%) SALES GROWTH* PAT GROWTH* OPM# ROE# 3M 19.0 (16.2) 13.2 1Y 20.0 17.8 19.4 25.5 3Y 17.0 37.4 19.7 27.7 5Y 27.0 18.4 10Y 19.4 17.5
44.4 30.3 28.3 23.6

Demand scenario for auto and industrial batteries to remain positive: We expect the auto and industrial battery segments to post revenue CAGRs of 15% and 12%, respectively, over FY2011-13E, driven by strong battery demand. As such, we expect Exide to register revenue CAGRs of 14% and 10% in the auto and industrial battery segments, respectively. Captive sourcing to reduce the impact of lead price volatility: While Exide's profitability in 1HFY2012 was impacted by poor inventory management and mounting competitive pressures, we believe increased lead sourcing from captive smelters to ~70% in FY2013 (~55% in FY2011) will help reduce the impact of lead price volatility and enhance margins. We believe captive sourcing of lead reduces the company's raw-material costs by 10-15%. Valuations: At `120, the stock is trading at 13.8x FY2013E earnings, adjusted for its stake in the insurance business. We maintain our Accumulate view on the stock with an SOTP target price of ` 137. We assign a value/share of `125 to its core operations and `12 to its stake in ING Vysya Life Insurance.
38
January 2012

BALANCE SHEET
Y/E MARCH (` CR) ` SOURCES OF FUNDS EQUITY SHARE CAPITAL RESERVES & SURPLUS SHAREHOLDERS FUNDS TOTAL LOANS DEFERRED TAX LIABILITY TOTAL LIABILITIES APPLICATION OF FUNDS GROSS BLOCK 1,336 660 677 38 1,335 912 593 319 2,369 1,561 725 836 66 1,378 1,329 796 532 2,812 1,842 823 1,019 55 1,619 1,347 927 420 3,113 2,027 930 1,096 61 1,968 1,611 1,158 453 3,578 85 2,135 2,220 90 59 2,369 85 2,657 2,742 2 68 2,812 85 2,958 3,043 2 68 3,113 85 3,423 3,508 2 68 3,578 FY2010 FY2011 FY2012E FY2013E
% CHG
11.8
2,902 892
20.0
3,672 881
9.8
4,331 671
15.9
4,858 938

62.8 23.5
81 14 12 (0) 811 273
(1.2) 19.4
83 9 151 33 907 274
(23.9) 13.4
98 10 71 634 184
39.9 16.2
107 10 114 935 271
(% OF PBT)
33.7
537 537
30.2
666 633
29.0
450 450
29.0
664 664
% CHG
(% OF NET SALES) ` BASIC EPS (`) ` ADJUSTED EPS (`)
89.7
14.2 6.3 6.3
17.8
13.9 7.8 7.4
(28.9)
9.0 5.3 5.3
47.4
11.4 7.8 7.8
% CHG
78.5
17.8
(28.9)
47.4
CASH FLOW STATEMENT

KEY RATIOS
FY2011 940 83 (214) 13 (151) (274) 398 (253) (43) 151 (144) (88) 95 (249) (241) 12 3 15 FY2012E 634 98 144 (71) (184) 621 (270) (241) 71 (440) 149 (149) 32 15 47 FY2013E 935 107 (45) (114) (271) 612 (191) (349) 114 (426) 199 (199) (13) 47 34 Y/E MARCH VALUATION RATIO (X) P/E P/CEPS P/BV EV/SALES EV/EBITDA PER SHARE DATA (`) ` EPS (BASIC) EPS (ADJUSTED) CASH EPS DPS BOOK VALUE RETURNS (%) ROCE (PRE-TAX) ANGEL ROIC (PRE-TAX) ROE TURNOVER RATIOS (X) 40.8 81.1 31.0 30.8 57.3 25.5 19.3 40.3 15.6 24.8 53.6 20.3 6.3 6.3 7.3 1.0 25.8 7.8 7.4 8.4 1.5 31.9 5.3 5.3 6.4 1.5 35.5 7.8 7.8 9.1 2.0 41.0 19.0 16.5 4.7 2.4 10.1 15.3 14.3 3.8 1.9 10.0 22.7 18.7 3.4 1.7 12.8 15.4 13.3 2.9 1.4 8.8 FY2010 FY2011 FY2012E FY2013E
FY2010 810 81 (59) (23) (12) (273) 524 (100) (667) 12 (755) 530 (227) 56 (159) 200 (31) 34 3
2.9 50 23 42
3.1 59 25 46
2.9 63 25 49
3.0 60 25 49
January 2012
39
Automobile
RATING 52 WEEK HIGH / LOW MARKET CAP (` CR) ` LIQUIDITY BUY 263 / 158 1,759 LOW
Amara Raja Batteries

Amara Raja Batteries (AMRJ), a JV between Galla family and Johnson Controls, U.S., is India's second largest manufacturer in the organized VRLA batteries market finding applications in the automotive (~55% of total revenue) and industrial (~45% of total revenue) segments. AMRJ has a market share of 25% in 4W OEM, 30% in 4W replacement and 25% in 2W replacement battery markets. The company also commands dominant market shares of 42% and 32% in the telecom and UPS battery segments, respectively. AMRJ derives ~45% and ~35% of its industrial segment's revenue from the telecom and UPS battery segments, respectively.
STOCK RETURNS (%) AMRJ SENSEX 3M (0.6) 1Y 20.3 (5.9) 3Y 69.2 51.0 21.3 5Y 10Y 26.6 35.8 9.3 25.6 3.3 17.3
Structural Snapshot
Growth opportunity: We expect growth traction in the automotive battery segment to continue, driven by OE M sales and a steady increase of 10-12% in the auto replacement segment, given that average battery life is 3-4 years. Further, demand revival for telecom and UPS batteries is also likely to sustain industrial battery demand going ahead. Additionally, strong relationship with OEMs (creating brand awareness amongst consumers) presents a significant growth opportunity in the replacement market, which still has presence of large unorganized players. On the back of these opportunities, capacity expansion and increasing reach, we expect AMRJ to benefit going ahead. Competitive position: While Exide is the market leader in the organized automotive battery segment, AMRJ has consistently increased its market share by 1) aggressively positioning its products (Amaron batteries), 2) offering higher warranty and 3) strengthening its distribution network. AMRJ is a dominant player in the industrial battery segment due to its strong ties with customers. Nature of business: While OEM demand is dependent on new vehicle sales, replacement demand is relatively stable; branding, quality/technology and strong OEM presence create entry barriers.
(2.6) (12.3)
FINANCIAL PERFORMANCE OVERVIEW (%) SALES GROWTH* PAT GROWTH* OPM# ROE# 3M 42.8 64.1 15.7 1Y 20.3 (7.1) 14.5 24.8 3Y 17.6 16.1 15.7 26.7 5Y 10Y 37.1 29.3 43.9 21.8 15.5 13.4 26.8 16.7

Growth in the auto battery segment to drive top-line performance: We expect AMRJ's automotive battery segment to post a robust ~22% revenue CAGR over FY2011-13E, led by better positioning of its products, availability of additional capacity and increasing distribution reach. Telecom and UPS battery segments to sustain industrial battery demand: AMRJ pioneered the use of maintenance-free batteries, which have applications in the railway signaling, telecom and power supply solutions segments. We expect the telecom and power backup (UPS/inverter) segments to drive demand for industrial batteries, leading to a ~16% revenue CAGR in AMRJ's industrial battery segment over FY2011-13E. Valuations: At `206, AMRJ is trading attractively at 8.6x FY2013E earnings. We mainatin our Buy rating on the stock. We assign a multiple of 10.5x (~35% discount to Exide's multiple of 16x) FY2013E earnings to arrive at a target price of `250.
40
January 2012

BALANCE SHEET
Y/E MARCH (` CR) ` SOURCES OF FUNDS EQUITY SHARE CAPITAL RESERVES & SURPLUS SHAREHOLDERS FUNDS TOTAL LOANS DEFERRED TAX LIABILITY TOTAL LIABILITIES APPLICATION OF FUNDS GROSS BLOCK 491 185 306 23 16 631 319 312 656 539 224 315 38 16 742 349 393 761 629 273 356 38 28 926 412 513 935 686 326 360 41 43 1,098 463 634 1,079 17 527 544 91 22 656 17 629 646 95 20 761 17 783 800 115 20 935 17 961 978 80 20 1,079 FY2010 FY2011 FY2012E FY2013E
% CHG
11.5
1,176 288
20.3
1,506 256
23.7
1,868 311
15.4
2,167 348

DEPRECIATION & AMORTIZATION INTEREST & OTHER CHARGES OTHER INCOME EXTRAORDINARY ITEMS PBT (ADJUSTED) TAX (% OF PBT) PAT (REPORTED) PAT (ADJUSTED)
70.4 19.7
43 8 17 8 255 88 34.4 167 159
(11.4) 14.5
42 2 10 221 73 33.0 148 148
21.8 14.3
49 3 8 267 88 33.0 179 179
11.6 13.8
53 2 11 304 100 33.0 203 203

97.7 10.9
19.6 18.6
(7.1) 8.4
17.3 17.3
21.0 8.2
20.9 20.9
13.8 8.1
23.8 23.8
% CHG
97.7
(7.1)
21.0
13.8
CASH FLOW STATEMENT

KEY RATIOS
FY2011 221 42 (97) 2 (10) (73) 86 (63) 10 (53) 4 29 (88) (55) (22) 62 40 FY2012E 267 49 (66) (8) (88) 154 (90) (12) 8 (94) 20 25 (5) 55 40 95 FY2013E 304 53 (77) (11) (100) 168 (60) (15) 11 (64) (35) 25 (60) 44 95 139 Y/E MARCH VALUATION RATIO (X) P/E P/CEPS P/BV EV/SALES EV/EBITDA PER SHARE DATA (`) ` EPS (BASIC) EPS (ADJUSTED) CASH EPS DPS BOOK VALUE RETURNS (%) ROCE (PRE-TAX) ANGEL ROIC (PRE-TAX) ROE TURNOVER RATIOS (X) 35.9 42.5 33.5 30.2 30.3 24.8 30.9 32.3 24.7 29.3 32.9 22.9 19.6 18.6 23.7 2.9 63.7 17.3 17.3 22.2 4.6 75.6 20.9 20.9 26.7 2.5 93.7 23.8 23.8 30.0 2.5 114.6 10.5 8.7 3.2 1.2 6.1 11.9 9.3 2.7 1.0 7.0 9.8 7.7 2.2 0.8 5.6 8.6 6.9 1.8 0.7 4.8 FY2010 FY2011 FY2012E FY2013E
FY2010 255 43 (66) 87 (17) (88) 214 (47) 31 17 1 (195) 8 (36) (223) (8) 70 62
3.2 47 56 35
3.4 52 57 37
3.7 53 56 36
3.8 55 56 38
January 2012
41
Automobile
Apollo Tyres
Company Background
CMP/TP/Upside: `65 / `74 / 15%
Apollo Tyres (APTY) is India's second largest tyre manufacturer with an overall tyre market share of ~18%. The company has a leadership position in the heavy and LCV tyre segments, with 23% and 26% market share, respectively. APTY acquired Dunlop's South African operations in 2006 and Vredestein Branden BV (Netherlands) in May 2009. These acquisitions now account for 38% of APTY's consolidated revenue. The company has eight manufacturing plants located across India (1,125TPD), South Africa (175TPD) and Europe (170TPD), with a total installed capacity of 1,470TPD. APTY's main brands include Apollo (India); Dunlop (South Africa); and Maloya, Regal and Vredestein (Europe).
STOCK RETURNS (%) APOLLO TYRES SENSEX 3M 19.0 1Y 15.6 (5.9) 3Y 50.7 51.0 21.3 5Y 10Y 12.8 24.2 9.3 25.6 3.3 17.3
Structural Snapshot
Growth opportunity: We believe the Indian tyre industry is going through a structural shift as radialization levels in the truck and bus radial (TBR) segment are expected to reach 40% over the next two-three years from 16% in FY2011. Further, expected steady growth of 8-10% in replacement demand (~65% of total demand) should lend a greater degree of stability to overall tyre demand in our view. We expect APTY to be the key beneficiary of the structural shift that the Indian tyre industry is going through, given its dominant position in the TBR as well as replacement segment coupled with leading brands and a strong distribution reach. Competitive position: APTY is a market leader in the CV segment, with a ~27% market share. However, increasing radialization in the TBR segment is expected to lead to higher earnings growth and margin improvement for the tyre industry, including players like APTY. Nature of business: Cyclical as demand for CV tyres is linked to the macroeconomic environment; low entry barriers, sensitive to exchange rates since the company has net imports of ~25% of net sales at standalone level, global rubber prices impact profitability.
(2.6) (12.3)
FINANCIAL PERFORMANCE OVERVIEW (%) SALES GROWTH* PAT GROWTH* OPM# RoE# 3M 47.3 8.0 1Y 9.2 11.1 17.1 3Y 23.6 16.7 11.4 22.1 5Y 10Y 27.7 22.7 40.0 31.9 11.2 21.4 10.2 19.0
46.0 (32.5)

Steady performance in domestic and overseas business to aid growth: Structural growth factors in combination with timely ramp-up at the Chennai facility (incremental capacity of 450TPD by 1QFY2013) is likely to result in a 25% revenue CAGR in domestic operations. Further, overseas subsidiaries are expected to maintain a healthy growth momentum and register a 13% revenue CAGR. Lower raw-material prices to boost margins: Domestic and international natural rubber prices have declined by 21% and 33%, respectively, from their peak levels. With rubber prices expected to rule steady and price hikes carried out in 1HFY2012, we expect APTY's operating margins to improve by 70bp in FY2013 to 9.4%. Valuations: At `65, APTY is trading at 7x FY2013E earnings. We maintain our Buy rating on the stock with a target price of ` 74, valuing it at 8.0x FY2013E earnings.
42
January 2012

BALANCE SHEET
Y/E MARCH (` CR) ` SOURCES OF FUNDS EQUITY SHARE CAPITAL RESERVES & SURPLUS SHAREHOLDERS FUNDS TOTAL LOANS DEFERRED TAX LIABILITY TOTAL LIABILITIES APPLICATION OF FUNDS GROSS BLOCK 5,563 3,120 2,443 536 118 6 2,439 1,614 824 3,926 6,903 3,501 3,403 503 117 11 3,290 2,113 1,177 5,210 7,625 3,806 3,819 534 117 17 4,185 2,593 1,592 6,079 7,962 4,152 3,810 557 117 21 4,663 2,809 1,853 6,358 50 1,917 1,968 1,707 251 3,926 50 2,362 2,413 2,480 316 5,210 50 2,681 2,732 3,030 316 6,079 50 3,060 3,111 2,930 316 6,358 FY2010 FY2011 FY2012E FY2013E
% CHG
62.6
6,936 1,185
9.2
7,880 988
33.3
10,773 1,046
12.5
12,049 1,248

180.7 14.6
254 134 117 59 855 261
(16.6) 11.1
272 198 29 11 536 106
5.9 8.9
305 273 29 498 134
19.3 9.4
346 264 31 668 200
(% OF PBT)
30.5
594 653
19.8
430 441
27.0
363 363
30.0
468 468

369.5 8.0
13.0 13.0
(32.5) 5.0
8.7 8.7
(17.6) 3.1
7.2 7.2
28.8 3.5
9.3 9.3
% CHG
369.5
(32.5)
(17.6)
28.8
CASH FLOW STATEMENT

Y/E MARCH (` CR) ` PROFIT BEFORE TAX DEPRECIATION CHANGE IN WORKING CAPITAL OTHERS OTHER INCOME DIRECT TAXES PAID CASH FLOW FROM OPERATIONS (INC.)/DEC. IN FIXED ASSETS (INC.)/DEC. IN INVESTMENTS OTHER INCOME CASH FLOW FROM INVESTING ISSUE OF EQUITY INC./(DEC.) IN LOANS DIVIDEND PAID (INCL. TAX) OTHERS CASH FLOW FROM FINANCING INC./(DEC.) IN CASH OPENING CASH BALANCE CLOSING CASH BALANCE FY2010 855 254 (208) 789 (117) (261) 1,312 (3,533) (1) 117 (3,417) 816 44 1,231 2,091 (13) 362 349 FY2011 536 272 (395) 139 (29) (106) 416 (1,307) (5) 29 (1,284) 773 29 (93) 709 (158) 349 191 FY2012E 498 305 (11) (29) (134) 628 (753) (6) 29 (729) 550 44 506 405 191 595 FY2013E 668 346 (232) (31) (200) 551 (360) (4) 31 (334) (100) 88 (188) 29 595 624
KEY RATIOS
January 2012
43
Automobile
RATING 52 WEEK HIGH / LOW MARKET CAP (` CR) ` LIQUIDITY BUY 125 / 67 289 LOW
CEAT
Company Background
TOP PICK
CMP/TP/Upside: `84 / `125 / 48%
SHAREHOLDING PATTERN (%) PROMOTERS (RPG GROUP) FII 50.2 2.0
Ceat, part of the RPG Group, is amongst the leading tyre manufacturers in the country with an overall market share of ~12%. The companys manufacturing facilities are located in Bhandup, Nashik and Halol. The company has an overall production capacity of 615TPD (including outsourced). The company exports to countries across Asia, Africa, Europe and America. Exports constitute ~20% of Ceat's total volumes. The company has recently acquired the global rights of the CEAT brand from Italian tyre maker Pirelli - this will enable the company to expand its global presence. Ceat also operates in Sri Lanka through a JV and has a 60% share in Sri Lanka's tyre market.
STOCK RETURNS (%) CEAT SENSEX 3M 1Y (5.9) 3Y 51.0 21.3 5Y 10Y 11.6 17.3 13.4 (30.8) (2.6) (12.3) 32.1 (14.2) 3.3
Structural Snapshot
Growth opportunity: We believe the Indian tyre industry is going through a structural shift as radialization levels in the truck and bus radial (TBR) segment are expected to reach 40% over the next two-three years from 16% in FY2011. Further, expected steady growth of 8-10% in replacement demand (~65% of total demand) should lend a greater degree of stability to overall tyre demand in our view. Availability of radial tyres from the new facility in Halol and increasing focus on replacement demand is expected to help Ceat register a strong 21.4% revenue CAGR over FY2011-13E. Competitive position: The Indian tyre industry is extremely competitive and is dominated by MRF and Apollo Tyres. However, increasing radialization in the TBR segment is expected to lead to higher earnings growth and margin improvement for the tyre industry, including players like Ceat. Nature of business: Cyclical as demand for CV tyres is linked to the macroeconomic environment; low entry barriers; Sensitive to exchange rates since the company has net imports of ~12% of net sales: Global rubber prices impact profitability.
9.3 25.6
FINANCIAL PERFORMANCE OVERVIEW (%) SALES GROWTH* PAT GROWTH* OPM# ROE# 3M 32.7 5.5 1Y 23.6 3.1 4.3 3Y 14.2 4.9 10.0 5Y 10Y 5.1 6.6 14.7 13.4 5.9 12.1
(63.3) (83.3) (32.2) 108.4
ANGEL ESTIMATES PARTICULARS PAT GROWTH (%) ROE (%) P/E P/BV FY2012E (3.1) 0.5 FY2013E 11.2 4.1 0.4

Improving product mix and stable raw-material prices to aid margin expansion: Ceat is ramping up its radial capacity at the Halol plant to 150TPD, which is likely to be fully operational by 1QFY2013. With the completion of the proposed expansion, the product mix of truck:non-truck is likely to improve to 60:40 (currently 67:33), resulting in better product mix, thereby fetching better margins. Additionally, pricing action (~10% in 1HFY2012) and stable raw-material prices going ahead (declined 21% from the peak in domestic markets) are expected to result in a ~150bp margin expansion in FY2013. Valuations: At `84, CEAT is trading at attractive valuations of 4.1x FY2013E earnings. We believe recent action of hiking stake by promoters in the company from 48.47% in March 2010 to 50.2% as of September 2011 in combination with recent announcement of issue of warrants to the promoters is likely to boost investor sentiments. In addition, we believe monetization of surplus land at Bhandup (23.6acre should fetch over `440cr, on a conservative basis) will further act as a positive trigger for the stock (not completely factored in our valuation). We maintain our Buy view on the stock with a target price of ` 125, valuing it at 6.0x FY2013E earnings.
44
January 2012

BALANCE SHEET
Y/E MARCH (` CR) ` SOURCES OF FUNDS EQUITY SHARE CAPITAL RESERVES & SURPLUS SHAREHOLDERS FUNDS TOTAL LOANS DEFERRED TAX LIABILITY TOTAL LIABILITIES APPLICATION OF FUNDS GROSS BLOCK LESS: ACC. DEPRECIATION NET BLOCK CAPITAL WORK-IN-PROGRESS INVESTMENTS CURRENT ASSETS CURRENT LIABILITIES NET CURRENT ASSETS MIS. EXP. NOT WRITTEN OFF TOTAL ASSETS 1,256 487 769 234 59 1,032 790 241 1,303 1,882 520 1,361 123 87 1,216 1,094 121 1,692 2,196 592 1,604 110 78 1,399 1,239 160 1,952 2,381 666 1,715 71 92 1,629 1,454 174 2,054 34 594 629 654 20 1,303 34 615 649 1,019 24 1,692 34 575 609 1,319 24 1,952 34 626 661 1,369 24 2,054 FY2010 FY2011 FY2012E FY2013E
% CHG
18.6
2,511 296
23.6
3,361 107
26.6
4,251 141
16.6
4,870 249

1,178.1 10.5
27 72 42 (0) 239 74
(63.7) 3.1
34 100 60 (5) 39 11
31.1 3.2
71 149 53 (27) (7)
76.4 4.9
74 151 66 90 19
(% OF PBT)
31.0
165 165
28.5
22 28
28.0
(19) (19)
21.0
71 71

5.9
48.2 48.3
(83.3) 0.8
6.5 8.0
(0.4)
(5.6) (5.6)
1.4
20.8 20.8
% CHG
(83.3)
CASH FLOW STATEMENT

KEY RATIOS
FY2011 39 34 369 (232) (60) (11) 139 (515) (28) 60 (483) 365 16 (129) 252 (92) 140 48 FY2012E (27) 71 (40) (53) 7 (41) (301) 8 53 (240) 300 20 280 (0) 48 47 FY2013E 90 74 (8) (66) (19) 71 (147) (14) 66 (95) 50 20 30 6 47 53 Y/E MARCH VALUATION RATIO (X) P/E P/CEPS P/BV EV/SALES EV/EBITDA PER SHARE DATA (`) ` EPS (BASIC) EPS (ADJUSTED) CASH EPS DPS BOOK VALUE RETURNS (%) ROCE (PRE-TAX) ANGEL ROIC (PRE-TAX) ROE TURNOVER RATIOS (X) 21.9 24.4 29.6 4.9 4.7 4.3 3.8 3.8 (3.1) 8.7 9.2 11.2 48.2 48.3 55.0 4.0 183.6 6.5 8.0 18.0 2.0 189.6 (5.6) (5.6) 15.2 5.0 178.0 20.8 20.8 42.4 5.0 192.9 1.8 1.5 0.5 0.3 2.5 13.0 4.7 0.4 0.3 10.9 5.5 0.5 0.3 10.5 4.1 2.0 0.4 0.3 6.1 FY2010 FY2011 FY2012E FY2013E
FY2010 239 27 (260) 343 (42) (74) 233 (237) (16) 42 (210) 9 0 (93) (84) (61) 202 140
2.3 41 45 81
2.2 51 44 96
2.2 52 46 95
2.2 52 46 94
January 2012
45
Automobile
JK Tyre and Industries

JK Tyre and Industries (JKI) is the third largest tyre manufacturer in the country with an overall market share of 15.7%. The company operates from four plants in India, with a current installed capacity of 9.9mn tyres annually and is in the process of increasing it to 12.7mn tyres annually by FY2013. While 80% of JKI's tonnage volume is contributed by the CV segment, the PC segment accounts for ~10% of the volumes. JKI acquired Tornel in Mexico in FY2009.
Structural Snapshot
Growth opportunity: We believe the Indian tyre industry is going through a structural shift, as radialization levels in the truck and bus radial (TBR) segment are expected to reach 40% over next two-three years from 16% in FY2011. Further, expected steady growth of 8-10% in replacement demand (~65% of total demand) should lend a greater degree of stability to overall tyre demand in our view. Being a first mover in the TBR space, we expect JKI to benefit from the incremental demand for radial tyres. Competitive position: The Indian tyre industry is extremely competitive and is dominated by MRF and Apollo Tyres. However, increasing radialization in the TBR segment is expected to lead to higher earnings growth and margin improvement for the tyre industry, including players like JKI. Nature of business: Cyclical as demand for CV tyres is linked to the macroeconomic environment; Low entry barriers; Sensitive to exchange rates since the companys net imports constitute ~10% of its net sales at a standalone level; Global rubber prices impact profitability.
STOCK RETURNS (%) JK TYRE SENSEX 3M 1Y (5.9) 3Y 51.0 21.3 5Y 10Y 1.7 (41.9) (2.6) (12.3) 21.4 (14.3) 13.7 9.3 25.6 3.3 17.3
FINANCIAL PERFORMANCE OVERVIEW (%) SALES GROWTH* PAT GROWTH* OPM# RoE# 3M** 13.2 2.1 1Y 30.1 4.8 7.7 3Y 6.2 6.3 5Y 18.1 7.0 7.6 10Y 18.5 7.3 4.4
- (70.6)
40.6 14.7
NOTE: ABOVE 1 YEAR - * ON CAGR BASIS, # ON AVERAGE BASIS, **Standalone basis

Favorable product mix: We expect JKI to benefit from the structural shift that the Indian tyre industry is going through, given that currently there is a shortage of radial tyres. Thus, we believe JKI will be able to fully utilize its existing TBR capacity (highly profitable) of 1mn units. Further, commissioning of additional capacities at existing plants and gradual ramp-up at the Chennai plant are likely to lead to operating leverage benefits. This coupled with a stable raw-material pricing scenario (declined 21% from the peak in domestic markets) is expected to improve operating margins by 90bp in FY2013 to 5.1%. Tornel turnaround to improve consolidated performance: Tornel, which turned profitable in FY2010 reporting net profit of `56cr (net loss of `40cr in FY2009), registered a sharp drop in profitability in FY2011 to `2cr due to cost pressures. We expect profitability to improve in FY2012, led by stable raw-material prices, thereby improving overall consolidated performance. Valuations: At `70, JKI is trading at attractive valuations of 3.2x FY2013E earnings. We maintain our Buy rating on the stock with a target price of ` 89, valuing it at 4.0x FY2013E earnings.
46
January 2012

BALANCE SHEET
Y/E MARCH (` CR) ` SOURCES OF FUNDS EQUITY SHARE CAPITAL RESERVES & SURPLUS SHAREHOLDERS FUNDS TOTAL LOANS DEFERRED TAX LIABILITY TOTAL LIABILITIES APPLICATION OF FUNDS GROSS BLOCK 3,133 1,369 1,764 188 80 1,520 1,405 115 2,148 3,377 1,522 1,855 296 87 2,066 1,688 379 2,617 4,006 1,650 2,356 280 58 2,016 1,814 201 2,896 4,391 1,791 2,600 307 65 2,402 2,102 300 3,274 41 809 850 1,159 139 2,148 41 817 858 1,614 145 2,617 41 796 837 1,914 145 2,896 41 873 915 2,214 145 3,274 FY2010 FY2011 FY2012E FY2013E
% CHG
(17.2)
4,069 502
30.1
5,661 284
17.9
6,716 294
16.5
7,751 417

11.0
100 119 30 (0) 313 93
(43.4) 4.8
109 116 53 (0) 112 49
3.6 4.2
128 163 47 44 7 5
41.5 5.1
141 188 47 135 44
(% OF PBT)
29.8
220 224
44.1
63 66
76.9
2 47
33.0
90 91

4.9
54.5 54.5
(70.6) 1.1
16.1 16.1
(29.4) 0.7
0.6 11.3
96.4 1.1
22.2 22.2
% CHG
(70.6)
(29.4)
96.4
CASH FLOW STATEMENT

Y/E MARCH (` CR) ` PROFIT BEFORE TAX DEPRECIATION CHANGE IN WORKING CAPITAL OTHERS OTHER INCOME DIRECT TAXES PAID CASH FLOW FROM OPERATIONS (INC.)/ DEC. IN FIXED ASSETS (INC.)/ DEC. IN INVESTMENTS OTHER INCOME CASH FLOW FROM INVESTING ISSUE OF EQUITY INC./(DEC.) IN LOANS DIVIDEND PAID (INCL. TAX) OTHERS CASH FLOW FROM FINANCING INC./(DEC.) IN CASH OPENING CASH BALANCE CLOSING CASH BALANCE FY2010 313 100 114 (209) (30) (93) 195 (190) (5) 30 (164) (5) (224) 17 221 9 40 51 91 FY2011 112 109 (230) 119 (53) (49) 8 (353) (7) 53 (306) 455 17 (150) 322 24 91 115 FY2012E 51 128 124 (47) (5) 251 (613) 28 47 (538) 300 14 286 (2) 115 113 FY2013E 135 141 (70) (47) (44) 114 (412) (7) 47 (372) 300 14 286 27 113 140
KEY RATIOS
January 2012
47
Automobile
Motherson Sumi
Motherson Sumi Systems (MSS), a JV between Samvardhana Motherson Group (SMG, 36.3% stake) and Sumitomo Wiring Systems, Japan (25% stake), is the worlds largest supplier of rear view mirrors and Indias biggest supplier of wiring harness. MSS is considered to be a JV specialist (24 JVs) and has a successful history of acquisitions, which have helped it expand its product portfolio, gain access to technology and evolve into a leading global OEM supplier. MSSs most notable acquisitions include Visiocorp (now referred as Samvardhana Motherson Reflectec, SMR) in FY2009, a global leader in automotive rear view mirrors; and Peguform in FY2012, a leading supplier of door and instrument panels and cockpit assemblies. The company is present across 23 countries and has over 90 manufacturing facilities worldwide.
STOCK RETURNS (%) MOTHERSON SENSEX 3M 1Y (5.9) 3Y 37.7 51.0 21.3 5Y 10Y (18.3) (13.1) (2.6) (12.3) 15.4 42.8 9.3 25.6 3.3 17.3
Structural Snapshot
Growth opportunity: While the near-term demand scenario of the domestic PV industry remains subdued due to increasing fuel prices and interest rates, we expect the domestic PV industry to post a 10-11% CAGR over FY2011-14E, led by structural growth drivers and the likely easing of interest rates. Further, buoyancy in global PV markets amid an uncertain environment indicates that global PV growth is likely to be healthy going ahead. MSS, being a preferred supplier to OEMs globally with a presence across the value chain, is expected to be the key beneficiary of the rising demand for passenger cars globally. Competitive position: MSS is a market leader with a domestic market share of 65% and 53% in the wiring harness and rear view mirror segments, respectively. MSS also commands a 22% global market share in the rear view mirror segment for passenger cars. MSS enjoys strong pricing power, given its leading position and diversified customer base. Nature of business: Cyclical and sensitive to interest rates; Technology and strong OEM presence create entry barriers.
FINANCIAL PERFORMANCE OVERVIEW (%) SALES GROWTH* PAT GROWTH* OPM# ROE# 3M 19.5 (71.8) 8.7 1Y 20.9 55.0 10.6 27.7 3Y 59.8 34.2 10.0 29.0 5Y 10Y 52.5 43.2 29.0 36.0 12.0 14.5 32.8 34.9

Focus on increasing content per car to sustain leadership position: MSS's wide product portfolio, global manufacturing presence, good relationships with OEMs and ability to provide end-to-end solutions have enabled it to increase the content per car that it supplies to its customers. Further, Peguform's acquisition will enhance MSS's product offerings significantly and strengthen its position as a key tier-I supplier globally. SMR turnaround to boost performance: SMR has shown a substantial improvement in its performance since its acquisition by MSS and has bagged orders worth EUR800mn to be supplied over the life of the new models. We believe scale-up of SMR operations along with a gradual improvement in operating margins through cost rationalization and in-house sourcing will boost the overall performance of MSS. Valuations: At `150, MSS is trading at 12.5x its FY2013E earnings. We maintain Accumulate on the stock with a target price of ` 169, valuing at 14x FY2013E earnings.
48
January 2012

BALANCE SHEET
Y/E MARCH (` CR) ` SOURCES OF FUNDS EQUITY SHARE CAPITAL RESERVES & SURPLUS SHAREHOLDERS FUNDS TOTAL LOANS DEFERRED TAX LIABILITY TOTAL LIABILITIES APPLICATION OF FUNDS GROSS BLOCK 3,182 1,727 1,455 181 47 2,097 1,592 505 2 2,190 3,821 2,055 1,766 460 45 2,793 1,963 830 3,101 4,571 2,330 2,241 366 54 3,140 2,195 945 3,606 5,118 2,637 2,481 409 59 3,457 2,444 1,013 3,963 37 1,127 1,165 818 4 2,190 39 1,570 1,609 1,263 1 3,101 39 1,825 1,864 1,513 1 3,606 39 2,182 2,221 1,513 1 3,963 FY2010 FY2011 FY2012E FY2013E
% CHG
162.3
6,375 549
20.9
7,483 888
17.1
8,965 835
13.5
10,094 1,024

93.6 7.9
260 63 118 (5) 348 109
61.9 10.6
246 58 47 7 624 188
(6.0) 8.5
274 91 56 526 158
22.7 9.2
307 91 62 688 206
(% OF PBT)
31.4
234 248
30.1
443 384
30.0
368 351
30.0
482 464

41.4 3.7
6.6 6.4
55.0 4.7
9.9 9.9
(8.6) 3.7
9.1 9.1
32.3 4.3
12.0 12.0
% CHG
41.4
55.0
(8.6)
32.3
CASH FLOW STATEMENT

Y/E MARCH (` CR) ` PROFIT BEFORE TAX DEPRECIATION CHANGE IN WORKING CAPITAL OTHERS OTHER INCOME DIRECT TAXES PAID CASH FLOW FROM OPERATIONS (INC.)/DEC. IN FIXED ASSETS (INC.)/DEC. IN INVESTMENTS OTHER INCOME CASH FLOW FROM INVESTING ISSUE OF EQUITY INC./(DEC.) IN LOANS DIVIDEND PAID (INCL. TAX) OTHERS CASH FLOW FROM FINANCING INC./(DEC.) IN CASH OPENING CASH BALANCE CLOSING CASH BALANCE FY2010 348 260 (157) 184 (118) (109) 408 (239) 8 118 (114) 2 (77) 57 (209) (228) 67 277 343 FY2011 624 246 (265) 49 (47) (188) 419 (918) 2 47 (870) 1 446 80 (62) 465 15 343 356 FY2012E 526 274 54 (56) (158) 640 (655) (9) 56 (608) 250 113 137 169 356 525 FY2013E 688 307 (231) (62) (206) 496 (591) (5) 62 (534) 125 (125) (164) 525 362
KEY RATIOS
January 2012
49
Automobile
Bharat Forge
Company Background
CMP/TP/Upside: `277 / `299 / 8%
Bharat Forge (BHFC), a global forging conglomerate, is the largest exporter of automotive components from India and a leading chassis component manufacturer in the world. The company manufactures a wide range of safety and critical components for passenger cars, SUVs, LCVs, MHCVs and tractors through its facilities spread across 11 locations globally - India (4), Germany (3), China (2), U.S. (1) and Sweden (1). BHFC also produces forged and machined components for non-automotive industries, such as power generation, marine, oil and gas, railways and construction. The automotive industry currently contributes ~75% to the company's consolidated revenue, although through diversification BHFC expects the share of the automotive industry's revenue to fall to 55% by FY2013.
STOCK RETURNS (%) BHARAT FORGE SENSEX 3M 1Y (5.9) 3Y 49.7 51.0 21.3 5Y 10Y
Structural Snapshot
Growth opportunity: We expect the domestic CV industry to witness a 14.5% CAGR over FY2011-13E, which augurs well for BHFC as it is a leading player in the domestic CV forging industry and nearly 55% of domestic revenue is derived from the segment. Further, the expected pick-up in CV demand in the U.S. and European markets will boost the performance of overseas subsidiaries going ahead. Competitive position: BHFC is a market leader in the domestic automotive forging market and enjoys ~90% market share in the domestic CV forging space. Nature of business: Cyclical and sensitive to interest rates; Low entry barriers.
(3.9) (19.7) (2.6) (12.3)
(5.5) 28.0 9.3 25.6 3.3 17.3
FINANCIAL PERFORMANCE OVERVIEW (%) SALES GROWTH* PAT GROWTH* OPM# ROE# 3M** 26.6 56.1 23.7 1Y 52.2 13.8 17.0 3Y 2.8 (1.2) 9.2 5.3 5Y 10Y 11.0 26.7 3.2 24.5 11.3 16.5 10.6 24.5
NOTE: ABOVE 1 YEAR - * ON CAGR BASIS, # ON AVERAGE BASIS, **STANDALONE BASIS

Thrust on non-auto business to diversify product portfolio: BHFC intends to increase its non-automotive revenue to 40% (25% of consolidated revenue in FY2011) by FY2012E. To achieve this goal, BHFC has set up an 80MT hammer (40,000 TPA capacity) and a ring rolling (25,000 TPA capacity) facility in Baramati in addition to the existing 60,000 TPA non-auto facility in Mundhwa. We expect BHFC to benefit from new investments by various players in the power, oil and gas and capital goods sectors, leading to strong demand for non-automotive forgings. Improvement in overseas subsidiaries and JVs to boost consolidated performance: BHFC's international operations posted losses (pre-tax) in FY2010 due to a decline in demand and high operational costs. However, strong turnaround in Chinese JV (FAW-BF) and other subsidiaries due to restructuring and operational efficiencies led to improved performance and returned to profitability in FY2011. We expect international subsidiaries to sustain their growth momentum due to buoyant truck demand in the U.S. and Europe and increasing contribution from industrial forgings and improving utilization levels (currently 50-55%). Valuations: At `277, the stock is trading at 13.8x FY2013E earnings. We maintain our Accumulate rating on the stock with a target price of ` 299, valuing it at 15x FY2013E earnings.
50
January 2012

BALANCE SHEET
Y/E MARCH (` CR) ` SOURCES OF FUNDS EQUITY SHARE CAPITAL RESERVES & SURPLUS SHAREHOLDERS FUNDS TOTAL LOANS DEFERRED TAX LIABILITY TOTAL LIABILITIES APPLICATION OF FUNDS GROSS BLOCK 4,135 1,727 2,408 199 274 2,417 1,419 998 3,878 4,501 2,038 2,463 307 367 2,764 1,807 957 41 4,134 4,818 2,327 2,490 241 398 3,234 2,216 1,019 41 4,189 5,050 2,640 2,410 253 444 3,895 2,453 1,442 41 4,590 45 1,418 1,463 2,253 84 3,878 47 1,906 1,953 1,895 132 4,134 47 2,261 2,308 1,595 132 4,189 47 2,662 2,708 1,595 132 4,590 FY2010 FY2011 FY2012E FY2013E
% CHG
(30.3)
3,081 204
52.2
4,310 689
20.5
5,071 951
12.8
5,740 1,053

(43.2) 6.2
245 130 106 (17) (48) 12
237.2 13.8
255 153 155 (1) 438 140
38.1 15.8
289 127 116 651 215
10.7 15.5
313 136 116 720 238
(% OF PBT)
(24.5)
(59) (63)
31.9
298 290
33.0
436 423
33.0
483 468

(1.9)
(2.1) (2.8)
5.8
12.5 12.5
46.0 7.0
18.2 18.2
10.6 6.9
20.1 20.1
% CHG
46.0
10.6
CASH FLOW STATEMENT

Y/E MARCH (` CR) ` PROFIT BEFORE TAX DEPRECIATION CHANGE IN WORKING CAPITAL OTHERS OTHER INCOME DIRECT TAXES PAID CASH FLOW FROM OPERATIONS (INC.)/DEC. IN FIXED ASSETS (INC.)/DEC. IN INVESTMENTS OTHER INCOME CASH FLOW FROM INVESTING ISSUE OF EQUITY INC./(DEC.) IN LOANS DIVIDEND PAID (INCL. TAX) OTHERS CASH FLOW FROM FINANCING INC./(DEC.) IN CASH OPENING CASH BALANCE CLOSING CASH BALANCE FY2010 (48) 245 274 189 (106) (12) 542 16 (273) 106 (151) 100 62 26 (470) (282) 109 488 598 FY2011 438 255 (1,148) 1,091 (155) (140) 341 (475) (93) 155 (412) (267) (358) 27 382 (215) (287) 598 311 FY2012E 651 289 98 (116) (215) 708 (251) (31) 116 (166) (300) 82 (382) 160 311 471 FY2013E 720 313 (67) (116) (238) 613 (244) (46) 116 (174) 82 (82) 357 471 828
KEY RATIOS
Y/E MARCH VALUATION RATIO (X) P/E P/CEPS P/BV EV/SALES EV/EBITDA PER SHARE DATA (`) ` EPS (BASIC) EPS (ADJUSTED) CASH EPS DPS BOOK VALUE RETURNS (%) ROCE (PRE-TAX) ANGEL ROIC (PRE-TAX) ROE TURNOVER RATIOS (X) ASSET TURNOVER (GROSS BLOCK) INVENTORY / SALES (DAYS) RECEIVABLES (DAYS) PAYABLES (DAYS) 0.8 80 58 124 1.2 54 46 98 1.3 54 47 97 1.4 55 47 97 (1.0) (1.2) (4.1) 10.8 11.4 17.0 15.9 17.8 19.9 16.9 19.7 18.7 (2.8) (2.8) 8.9 1.0 65.7 12.5 12.5 23.5 3.5 83.9 18.2 18.2 30.6 3.0 99.1 20.1 20.1 33.5 3.0 116.3 (97.6) 31.1 4.2 2.3 38.4 22.2 11.8 3.3 1.5 11.1 15.3 9.1 2.8 1.2 7.6 13.8 8.3 2.4 1.0 6.4 FY2010 FY2011 FY2012E FY2013E
January 2012
51
Automobile
RATING 52 WEEK HIGH / LOW MARKET CAP (` CR) ` LIQUIDITY BUY 1,435 / 752 1,896 LOW
FAG Bearings
Company Background
CMP/TP/Upside: `1,141 / `1,359 / 19%
STOCK RETURNS (%) FAG BEARINGS SENSEX 3M (8.8) 1Y 38.3 (5.9) 3Y 68.7 51.0 21.3 5Y 10Y 11.0 36.2 9.3 25.6 3.3 17.3
FAG Bearings (FAG), a group company of Germany-based Schaeffler Group, is one of the leading suppliers of ball bearings with ~14% domestic market share. FAG manufactures ball bearings, cylindrical bearings, spherical bearings and tapered roller bearings through its plant located in Vadodra, Gujarat. The company is a market leader in the spherical bearing space, with a ~55% market share. FAG also imports specialized and heavy-size bearings from its global associates to meet the requirements of the domestic industrial segment. As a result, trading portfolio constitutes 34% to its net sales. FAG caters to leading domestic OEM players as well as the replacement market. In the industrial segment, the company supplies to the automotive, construction machinery, steelworks, power transmission engineering, material handling engineering, wind power plants and railways segments.
Structural Snapshot
Growth opportunity: We expect the primary drivers of the bearings industry i.e., auto and industrial segment to post a steady performance going ahead. While the auto sector is expected to grow at a healthy rate, driven by structural growth drivers, expectations of ~8% growth in the Indian economy over the medium term will lead to healthy demand from the industrial sector, driven by demand from capital goods and infrastructure companies. As such, demand for bearings is expected to grow at a steady rate, aiding FAG to register a CAGR of 18.8% in net sales over CY2010-12E. Competitive position: Although 8-10 players operate in the domestic bearings industry, competitive intensity is slightly muted as each player dominates different segments of the bearing industry. FAG has a strong presence with a ~55% market share in the spherical bearings space. Nature of business: Cyclical as demand for bearings is correlated with IIP data and PV sales; access to high-end technology creates entry barriers. Cheaper imports from China and counterfeit products pose a threat in the after-market segment. Sensitive to exchange rates (EUR/INR), since the companys net imports constitute ~21% of its net sales.
(2.6) (12.3)
20.5 25.2 25.9 24.2

Strong fundamentals: FAG's net asset turnover remains high (~7x in CY2010) due to largely depreciated assets. Additionally, sound business model, debt-free status and low capital expenditure enable FAG to generate strong cash flows and record consistent RoCE of ~30%. Attractive valuations: We have a positive view on FAG, considering its strong parentage, debt-free status and cash balance worth `180/share on books. At `1,141, the stock is trading at attractive valuations of 10.1x CY2012E earnings. We maintain our Buy view on the stock with a target price of ` 1,359.
52
January 2012

Y/E DEC (` CR) ` NET SALES CY2009 820 CY2010 1,047 CY2011E 1,272 CY2012E 1,478
BALANCE SHEET
Y/E DEC (` CR) ` SOURCES OF FUNDS EQUITY SHARE CAPITAL RESERVES & SURPLUS SHAREHOLDERS FUNDS TOTAL LOANS DEFERRED TAX LIABILITY TOTAL LIABILITIES APPLICATION OF FUNDS GROSS BLOCK 413 272 142 7 0.3 461 143 317 466 419 278 141 9 0.3 628 201 426 576 451 300 152 9 0.5 797 221 576 737 475 322 153 10 0.6 1,013 263 750 913 17 445 462 5 466 17 557 573 3 576 17 717 734 3 737 17 894 910 3 913 CY2009 CY2010 CY2011E CY2012E
% CHG
7.6
709 111
27.7
861 186
21.5
1,019 253
16.2
1,200 278

(31.4) 13.6
20 1 9 (8) 107 34
67.0 17.8
20 1 17 (2) 183 60
36.1 19.9
22 2 27 257 85
9.7 18.8
23 2 28 281 93
(% OF PBT)
31.8
73 66
32.9
123 122
33.0
172 172
33.0
188 188

(31.6) 8.0
39.4 39.4
85.5 11.6
73.1 73.1
41.6 13.5
103.5 103.5
9.4 12.7
113.3 113.3
% CHG
(31.6)
85.5
41.6
9.4
CASH FLOW STATEMENT

Y/E DEC (` CR) ` PROFIT BEFORE TAX DEPRECIATION CHANGE IN WORKING CAPITAL OTHERS OTHER INCOME DIRECT TAXES PAID CASH FLOW FROM OPERATIONS (INC.)/DEC. IN FIXED ASSETS (INC.)/DEC. IN INVESTMENTS OTHER INCOME CASH FLOW FROM INVESTING ISSUE OF EQUITY INC./(DEC.) IN LOANS DIVIDEND PAID (INCL. TAX) OTHERS CASH FLOW FROM FINANCING INC./(DEC.) IN CASH OPENING CASH BALANCE CLOSING CASH BALANCE
KEY RATIOS
CY2010 183 20 (24) 30 (17) (60) 132 (8) 0 17 9 10 (36) (26) 115 173 288 CY2011E 257 22 (34) (27) (85) 133 (33) (0) 27 (6) 12 (12) 115 288 403 CY2012E 281 23 (28) (28) (93) 155 (24) (0) 28 3 12 (12) 147 403 550 Y/E DEC VALUATION RATIO (X) P/E P/CEPS P/BV EV/SALES EV/EBITDA PER SHARE DATA (`) ` EPS (BASIC) EPS (ADJUSTED) CASH EPS DPS BOOK VALUE RETURNS (%) ROCE (PRE-TAX) ANGEL ROIC (PRE-TAX) ROE TURNOVER RATIOS (X) 20.8 31.4 15.1 31.8 58.0 23.5 35.3 69.9 26.3 30.9 70.6 22.9 39.4 39.4 56.0 4.5 276.4 73.1 73.1 86.1 5.0 343.7 103.5 103.5 116.5 6.0 440.2 113.3 113.3 127.0 6.0 546.4 28.9 20.4 4.1 2.0 15.5 15.6 13.2 3.3 1.4 8.6 11.0 9.8 2.6 1.1 5.9 10.1 9.0 2.1 0.9 4.8 CY2009 CY2010 CY2011E CY2012E
CY2009 107 20 43 36 (9) (34) 163 (5) 0 9 4 9 (67) (58) 109 64 173
2.0 58 50 53
2.5 40 42 53
2.9 40 43 54
3.2 41 44 54
January 2012
53
Automobile
RATING 52 WEEK HIGH / LOW MARKET CAP (` CR) ` LIQUIDITY NEUTRAL 471 / 320 647 LOW
Automotive Axles
CMP/TP/Upside: `428 / - / Company Background
Automotive Axles (ATXL), a JV between Kalyani Group and Meritor Heavy Vehicle Systems, USA (35.5% stake each), is one of India's largest independent manufacturers of rear drive axle assemblies. ATXL's product portfolio includes a wide range of rear drive axles and air brakes, which are used in commercial vehicles. In SY2011, ATXL also forayed into the automotive brakes business by acquiring a brake manufacturing facility from Kalyani Global Engineering for `14.6cr; it currently forms ~17% of ATXL's total revenue. The company exports to the U.S., France, Italy, China, Australia and Brazil. Exports account for 6% of the company's total revenue. ATXL's domestic clients include Ashok Leyland (~55% of revenue), Tata Motors (~25% of revenue), Eicher Motors, Asia Motor Works and Indian army, amongst others.
STOCK RETURNS (%) ATXL SENSEX 3M 9.5 1Y 9.8 (5.9) 3Y 65.4 51.0 21.3 5Y 10Y
Structural Snapshot
Growth opportunity: We expect MHCV volumes to witness a healthy CAGR of 10% over FY2011-13E, with the likely easing of interest rates coupled with a stable freight rate environment, increasing infrastructure spending by the government and easy availability of finance. As ATXL derives ~95% of its revenue from the MHCV segment, it is likely to be one of the major beneficiaries. We expect the company to report a 12-13% volume CAGR, leading to a 15-16% revenue CAGR over the same period. Competitive position: The independent rear axle assembly market is dominated by three players - ATXL, Axles India (JV between Wheels India and Dana Corp., USA) and HV Axles (subsidiary of Tata Motors). ATXL is the market leader in this segment. Nature of business: Cyclical in nature, as demand for CV is linked to economic growth.
(6.9) 20.6 9.3 25.6 3.3 17.3
(2.6) (12.3)
FINANCIAL PERFORMANCE OVERVIEW (%) SALES GROWTH* PAT GROWTH* OPM# ROE# 3M 63.0 102.1 12.7 1Y 51.2 30.6 11.3 25.7 3Y 10.6 1.1 12.1 18.2 5Y 5.9 13.3 10Y 18.4 15.1 17.1 21.7
28.2 36.0
ANGEL ESTIMATES PARTICULARS PAT GROWTH (%) ROE (%) P/E P/BV SY2012E 28.2 27.6 8.8 2.2 SY2013E 13.7 26.2 7.7 1.9

Improvement in utilization levels to help maintain operating margins: The increase in volume off-take will aid in higher utilization levels, which will help ATXL offset the impact of increased raw-material prices to a certain extent. We expect operating margins to remain at 11-12% over SY2012E and SY2013E, leading to a 17.3% CAGR in its bottom line. Valuations: At `428, ATXL is fairly valued at 7.7x SY2013E earnings. We recommend a Neutral rating on the stock.
54
January 2012

Y/E SEPT. (` CR) ` NET SALES SY2010 668 SY2011 1,010 SY2012E 1,203 SY2013E 1,374
BALANCE SHEET
Y/E SEPT. (` CR) ` SOURCES OF FUNDS EQUITY SHARE CAPITAL RESERVES & SURPLUS SHAREHOLDERS FUNDS TOTAL LOANS DEFERRED TAX LIABILITY TOTAL LIABILITIES APPLICATION OF FUNDS GROSS BLOCK 281 149 133 8 234 87 147 288 317 171 146 10 335 174 161 318 354 197 156 11 361 153 208 375 384 226 158 12 467 213 255 424 15 189 204 71 14 288 15 229 244 62 12 318 15 276 291 72 12 375 15 333 348 64 12 424 SY2010 SY2011 SY2012E SY2013E
% CHG
150.8
581 87
51.2
896 114
19.2
1,059 144
14.2
1,213 161

171.1 13.0
21 4 4 66 22
31.8 11.3
23 7 3 87 30
26.6 12.0
26 9 1 111 37
11.3 11.7
28 8 1 126 42
(% OF PBT)
33.1
44 44
33.9
58 58
33.3
74 74
33.3
84 84

356.2 6.6
29.1 29.2
30.6 5.7
38.1 38.1
28.2 6.1
48.8 48.8
13.7 6.1
55.5 55.5
% CHG
356.2
30.6
28.2
13.7
CASH FLOW STATEMENT

Y/E SEPT. (` CR) ` PROFIT BEFORE TAX DEPRECIATION CHANGE IN WORKING CAPITAL OTHERS OTHER INCOME DIRECT TAXES PAID CASH FLOW FROM OPERATIONS (INC.)/DEC. IN FIXED ASSETS (INC.)/DEC. IN INVESTMENTS OTHERS CASH FLOW FROM INVESTING ISSUE OF EQUITY INC./(DEC.) IN LOANS DIVIDEND PAID (INCL. TAX) OTHERS CASH FLOW FROM FINANCING INC./(DEC.) IN CASH OPENING CASH BALANCE CLOSING CASH BALANCE
KEY RATIOS
SY2011 87 23 (11) 5 (3) (30) 72 (38) 3 (35) (9) 18 (43) (35) 2 9 11 SY2012E 111 26 (40) (1) (37) 59 (37) 1 (36) 10 27 (17) 7 11 18 SY2013E 126 28 7 (1) (42) 119 (31) 1 (30) (8) 27 (35) 54 18 72 Y/E SEPT. VALUATION RATIO (X) P/E P/CEPS P/BV EV/SALES EV/EBITDA PER SHARE DATA (`) ` EPS (BASIC) EPS (ADJUSTED) CASH EPS DPS BOOK VALUE RETURNS (%) ROCE (PRE-TAX) ANGEL ROIC (PRE-TAX) ROE TURNOVER RATIOS (X) 25.1 23.5 23.3 29.9 29.6 25.7 34.1 33.1 27.6 33.1 37.6 26.2 29.1 29.2 43.0 8.5 134.9 38.1 38.1 53.6 10.0 161.4 48.8 48.8 66.2 15.0 192.7 55.5 55.5 74.3 15.0 230.6 14.7 10.0 3.2 1.1 8.2 11.2 8.0 2.7 0.7 6.1 8.8 6.5 2.2 0.6 4.9 7.7 5.8 1.9 0.5 4.0 SY2010 SY2011 SY2012E SY2013E
SY2010 66 21 (70) (4) (22) (8) (7) 4 (3) 25 15 (29) 11 0 9 9
2.4 41 52 33
3.4 36 57 38
3.6 39 58 40
3.7 40 58 39
January 2012
55
Automobile
Subros
Company Background
Subros (SUBR) was established in 1985 as a JV between Suri Group (40% stake), Denso Corporation (technology partner, 13% stake) and Suzuki Motor Corporation (13% stake). The company is India's leading manufacturer of AC systems, with a market share of ~40%. SUBR operates from four manufacturing facilities in India (Noida, Manesar, Pune and Sanand) and has an annual capacity of 1.2mn AC kits. MSIL, TTMT and M&M are the major customers of the company, accounting for ~70%, ~16% and ~8% of its total revenue, respectively.
Structural Snapshot
STOCK RETURNS (%) SUBROS SENSEX 3M 1Y (5.9) 3Y 51.0 21.3 5Y 10Y (10.2) (38.7) (2.6) (12.3) 12.6 (14.0) 26.5 9.3 25.6 3.3 17.3
Growth opportunity: While the near-term demand scenario of the domestic PV industry remains subdued due to higher fuel prices and interest rates, we expect the PV industry to register an 8-10% CAGR over FY2011-13E, led by structural growth drivers and the likely easing of interest rates. With an eye on future growth opportunity, SUBR is expanding its capacity and expects to leverage upon its dominant position in the industry. Competitive position: SUBR has been able to maintain its formidable position in the automotive AC systems segment (~40% share), led by upgrading technology and strong customer focus.
FINANCIAL PERFORMANCE OVERVIEW (%) PAT GROWTH* OPM# ROE# 3M (35.9) 7.9 1Y 20.3 1.6 8.1 13.1 3Y 18.0 1.1 9.1 11.8 5Y 14.0 10.3 10Y 10.9 9.4 SALES GROWTH* (24.0)
4.0 26.4 14.6 14.5
Nature of business: Cyclical, as demand for PV is dependent upon the level of interest rates; Sensitive to exchange rates (JPY/INR), since the companys net imports constitute ~45% of its net sales; Technology and OEM presence create entry barriers.

Volume growth dependent upon growth in the PV industry: The PV industry is witnessing a slowdown in volume growth, as consumer sentiment remains weak due to macroeconomic concerns such as rising interest rates, high inflation and fuel price hikes. Given the company's dependence on the PV segment, we expect volume growth to remain under pressure and report flat growth in FY2012 and FY2013. Sustain leadership position with capacity expansion: SUBR plans to expand its capacity to 1.5mn units per year in the first phase (FY2012E) and further to ~2mn units per year in the next two-three years. The company is also setting up a new 50,000/year capacity in Chennai, targeting CV makers. We expect the capacity expansion initiative to assure supply to the increasing needs of its OE customers, thereby helping SUBR to maintain its market share. Valuations: At `24, SUBR is trading at 6x FY2013E earnings. We maintain our Neutral rating on the stock.
56
January 2012

Y/E MARCH (` CR) ` NET SALES FY2010 905 FY2011 1,089 FY2012E 1,016 FY2013E 1,166
BALANCE SHEET
Y/E MARCH (` CR) ` SOURCES OF FUNDS EQUITY SHARE CAPITAL RESERVES & SURPLUS SHAREHOLDERS FUNDS TOTAL LOANS DEFERRED TAX LIABILITY TOTAL LIABILITIES APPLICATION OF FUNDS GROSS BLOCK 483 256 227 69 0 193 117 76 372 548 281 267 115 2 269 190 79 463 667 324 343 53 3 271 121 149 548 721 373 348 58 3 330 184 146 554 12 195 207 154 11 372 12 218 230 218 15 463 12 230 242 292 15 548 12 236 248 292 15 554 FY2010 FY2011 FY2012E FY2013E
% CHG
30.4
813 93
20.3
1,001 88
(6.7)
928 88
14.7
1,067 99

46.9 10.3
38 16 1 40 11
(5.3) 8.1
41 18 2 (1) 33 3
0.5 8.7
43 25 3 23 3
12.1 8.5
49 25 4 29 4
(% OF PBT)
28.9
28 28
10.5
30 29
15.0
20 20
15.0
24 24

109.5 3.1
4.7 4.7
1.6 2.6
4.9 4.8
(31.0) 1.9
3.3 3.3
24.0 2.1
4.1 4.1
% CHG
109.5
1.6
(31.0)
24.0
CASH FLOW STATEMENT

Y/E MARCH (` CR) ` PROFIT BEFORE TAX DEPRECIATION CHANGE IN WORKING CAPITAL OTHERS OTHER INCOME DIRECT TAXES PAID CASH FLOW FROM OPERATIONS (INC.)/ DEC. IN FIXED ASSETS (INC.)/ DEC. IN INVESTMENTS OTHER INCOME CASH FLOW FROM INVESTING ISSUE OF EQUITY INC./(DEC.) IN LOANS DIVIDEND PAID (INCL. TAX) OTHERS CASH FLOW FROM FINANCING INC./(DEC.) IN CASH OPENING CASH BALANCE CLOSING CASH BALANCE
KEY RATIOS
FY2011 33 41 (28) 5 (2) (3) 45 111 2 2 (108) 64 6 2 56 5 13 18 FY2012E 23 43 (50) (3) (3) 11 (58) (1) 3 (55) 74 7 67 22 18 40 FY2013E 29 49 22 (4) (4) 92 (59) (0) 4 (55) 18 (18) 19 40 59 Y/E MARCH VALUATION RATIO (X) P/E P/CEPS P/BV EV/SALES EV/EBITDA PER SHARE DATA (`) ` EPS (BASIC) EPS (ADJUSTED) CASH EPS DPS BOOK VALUE RETURNS (%) ROCE (PRE-TAX) ANGEL ROIC (PRE-TAX) ROE TURNOVER RATIOS (X) 15.5 15.1 14.4 11.4 10.7 13.1 8.9 8.9 8.3 9.1 10.1 10.0 4.7 4.7 11.1 0.7 34.5 4.9 4.8 11.7 0.8 38.4 3.3 3.3 10.5 1.0 40.3 4.1 4.1 12.2 2.5 41.3 5.2 2.2 0.7 0.3 3.1 4.9 2.1 0.6 0.3 3.9 7.4 2.3 0.6 0.4 4.5 6.0 2.0 0.6 0.3 3.8 FY2010 FY2011 FY2012E FY2013E
FY2010 40 38 3 10 (1) (11) 79 77 0 1 (75) 19 4 (0) 16 2 11 13
2.0 37 21 43
2.1 45 17 49
1.7 43 18 53
1.7 44 19 52
January 2012
57
58
January 2012
Banking
Coverage
Companies Private Sector Banks ICICI Bank HDFC Bank AXIS Bank YES Bank Federal Bank South Indian Bank Public Sector Banks State Bank of India Punj. Natl. Bank Bank of Baroda Bank of India Canara Bank IDBI Bank Union Bank Central Bank Syndicate Bank Allahabad Bank Corporation Bank Indian Bank Andhra Bank United Bank Vijaya Bank Bank of Maha. J&K Bank NBFCs HDFC LIC Housing 691 237 262 Neutral Accum. 1,884 911 743 306 421 93 188 76 84 142 387 204 97 60 53 45 742 2,359 1,059 906 510 107 222 106 158 450 223 70 53 820 Buy Buy Buy Neutral Buy Buy Buy Neutral Buy Accum. Buy Accum. Neutral Buy Neutral Buy Accum. 796 485 952 287 364 23 1,061 520 1,361 361 Buy Accum. Buy Buy Neutral Neutral CMP (`) TP (`) ` ` Reco
POSITIVE
Monetary softening a key positive

The persistently high inflation was until recently a key headwind for the sector, leading to declining savings, high interest rates and growth concerns. The recent decline in inflation rates is consequently a key positive that has already allowed the RBI to soften its monetary stance, with more likely to follow. Provided inflation continues to decline on expected lines, easing interest rates are likely to revive growth and with a lag, asset quality concerns are also likely to gradually recede. Capital shortage leading to better margin focus: The banking industry has delivered healthy net interest margins (NIMs) off late, which are expected to sustain in the coming quarters because: a) nominal GDP growth of 12-14% should sustain 15%+ credit growth over FY2012-13 i.e., above the banking sector's internal capital generation through retained earnings; and b) PSU banks are facing capital shortage, leading to focus on NIMs rather than aggressive balance sheet expansion. Stricter Basel 3 draft guidelines by the RBI are expected to add to capital shortage woes. In fact, with major banks like SBI, ICICI Bank and HDFC Bank (~30% combined market share) focusing on profitable growth rather than just market share gains, other smaller banks have also got a leeway to price their loans. Earnings downside due to higher NPAs restricted due to countercyclical buffer: Economic slowdown and high interest rates have already negatively impacted the asset quality of banks, in particular PSU banks and until economic revival is well underway, for some more quarters asset quality may remain volatile. However, at the sector level, at worst we expect flat earnings growth in FY2013, leaving book values largely intact. This is on account of not just a healthy NIM outlook, but also due to provision buffers created in the past two years. Firstly, we expect peak credit costs (provisioning for NPAs) in this cycle to be 5-10bp lower than the earlier 1.0% peak experienced by PSU banks in FY2004, considering improvements in recovery mechanisms since then. Further, in this cycle (FY2007-1HFY2012), credit costs have already increased from 0.3% to 0.65%. Moreover, current credit costs of 0.65% include a 10-15bp buffer due to (a) RBI's prudent counter-cyclical provisioning norm; and (b) temporary technical NPAs in PSU banks due to the recent adoption of computerized NPA recognition. Hence, we do not expect more than a 10-15bp net increase in credit costs from here on at worst and even that may not materialize if the economy revives faster than expected. Margin of safety in valuations: We believe the sector's valuations, close to their lowest levels since FY2003, over discount asset-quality concerns, thus providing a margin of safety for investors. We continue to prefer large private banks with better asset-quality outlook and a strong structural investment case - within which we prefer Axis Bank and ICICI Bank from a valuation perspective. We also like risk-return trade-off at current valuations for Yes Bank, but we are now Neutral on old private banks such as Federal Bank due to relatively expensive valuations. Even after the recent bounce-back, PSU banks are currently trading at 0.8x, a level below which they have not traded for more than 8% of the time since FY2003 (well below the average of 1.1x). We believe this offers cyclical valuation upsides as the macro-environment turns more positive. Within the PSU segment as well, we prefer banks with structural strengths and a more conservative asset-quality profile (for instance, relatively low yield on advances and moderate credit growth in the past two years) - this includes banks such as State Bank of India and Bank of Baroda. Please refer to important disclosures at the end of this report 59
January 2011
Banking Monetary softening a key positive

The persistently high inflation was until recently a key headwind for the sector, leading to declining savings, high interest rates and growth concerns. The recent decline in inflation rates is consequently a key positive that has already allowed the RBI to soften its monetary stance, with more likely to follow. With inflation cooling off (especially food inflation, which we believe will soon start getting mirrored in manufacturing inflation as well, appropriately the RBI has stepped in to infuse liquidity through a substantial `70,000cr of Open Market Operations and in the latest policy, `30,000cr through a 50bps CRR cut. Provided inflation continues to decline on expected lines, easing interest rates are likely to revive growth and with a lag, asset quality concerns are also likely to gradually recede. sheet size, refinancing of some of the foreign debt through Indian banks is also likely to support credit demand in the short term. Moreover, while deposit accretion has already been healthy during the quarter, it is expected to increase further, considering the additional inflow of funds through NRE deposits (sharp rate hikes on NRE deposits recently by almost all banks), giving banks extra room to lend even after meeting higher government demand and regulatory requirements, while keeping lending rates from rising.
Exhibit 3: Credit deposit trends

(%)
35.0 28.0 21.0 14.0
Exhibit 1: Primary articles inflation has plummeted
7.0 Jul-06 Aug-08 Dec-06 Jul-11 Sep-10 Nov-09 Feb-11 Dec-11 May-07 Mar-08 Oct-07 Apr-10 Jan-09 Jun-09
Credit growth
Deposit growth Deposit growth
b) Capital shortage in PSU banks and conservative stance of large private banks leading to focus on margins rather than aggressive balance sheet expansion During 2QFY2012, earnings growth for the banking sector was aided by sequential margin expansion for almost all banks, which offsetted asset-quality pressures. The banking industry has been swift in passing on the rate hikes by the RBI though hikes in lending rates over the past six months. Further, with SBI (which is facing capital adequacy issues) as well as ICICI Bank and HDFC Bank (having combined market share of ~30%) focusing on profitable growth rather than just market share gains, other smaller banks have also got a leeway to price their loans. SBI's capital adequacy dropped significantly post the pension adjustments from its reserves during 4QFY2011 (tier-I of 7.5% in 2QFY2012 compared to 9.6% in 3QFY2011). Further, with the government being strapped for cash due to its own fiscal woes coupled with distressed market conditions, capital infusion has been delayed by the government and its eventual size has also reduced from more than `15,000cr to about `6,000cr7,000cr. This has all the more made SBI more focused on preserving capital and generating more capital internally through higher NIMs. Moreover, its loan book has witnessed continued assetquality stress over the past six months, further reducing the headroom for the bank's management (which changed post 3QFY2011 results) to adopt aggressive market share strategies. ICICI Bank has continued with its strategy for improvement in profitability rather than growth, exiting unattractive retail-loan segments and generally de-growing its balance sheet. With all these three large banks looking to maintain or improve their margins rather than chasing market share gains, borrowers had to settle for higher rates, leading to higher margin expansion for most other banks as well, creating a cushion to absorb NPA provisioning expenses. Reflecting this, even though easing liquidity has kept deposit rates in check in the past six months, banks have been able to increase their lending rates by 50bp-100bp, leading to a ~15bp qoq increase in reported NIMs in 2QFY2012.
Jan-11 May-11 Nov-11 Mar-11 Jul-11 Sep-11 Jan-12 May-12 May-10 Nov-10 Nov-12 Mar-12 Jul-12 Mar-10 Sep-10 Sep-12 Jul-10
Exhibit 2: Expect at least 100bp cut in repo rate in CY2012

9.0 8.0 7.0 6.0 5.0 4.0 3.0 2.0
Repo rate (%)
Reverse Repo rate (%)
Capital shortage leading to focus on margins

The banking industry has delivered healthy net interest margins (NIMs) off late, which are expected to sustain in the coming quarters because of two factors, viz.: a) Credit growth above 15% i.e., above the rate of internal generation of capital through retained earnings While we expect significant credit under-penetration (0.7x of GDP vs. 2-3x for developed countries) to sustain credit demand in the longer term, there are a number of factors, which in our view should aid in credit growth over the shorter term too. Nominal GDP, which is still expected to grow by 12-14% over the next couple of years, in our view, should lead to sustainable credit demand of at least ~15% levels over FY2012-13. High prevailing inflation is expected to keep working capital requirements for businesses elevated, leading to a marginal push in credit demand. Also, with almost all European banks looking to cut their balance
60
January 2012
Banking
Exhibit 4: Margin expansion* qoq (2QFY2012) for banks under our coverage
(bp) 60.0 50.0 40.0 30.0 20.0 10.0 (10.0) (20.0)
Macro slowdown to impact asset quality; Earnings downside restricted due to countercyclical buffer
Macroeconomic headwinds in the form of high interest rates and slowing growth have led to higher cost of borrowings as well as lower earnings for most businesses. While the base rates for most banks have increased by 250-300bp over the past 12-18 months, GDP growth has slowed down to 7% (average of 8.1% over FY2010-11), indicating a slowing growth scenario. Economic slowdown and high interest rates have already negatively impacted the asset quality of banks, in particular PSU banks and until economic revival is well underway, for some more quarters asset quality may remain volatile. However, at the sector level, at worst, we expect flat earnings leaving book values largely intact. This is on account of not just a healthy NIM outlook, but also due to provision buffers created in the past two years. Firstly, we expect peak credit costs (provisioning for NPAs) in this cycle to be 5-10bp lower than the earlier 1.0% peak experienced by PSU banks in FY2004, considering improvements in recovery mechanisms since then. Further, in the last cycle (FY1999-07), SBI's slippages (incremental NPAs) were 3x higher in the worst year compared to the best. In this cycle (FY20071HFY2012), credit costs were as low as 0.3%, but have already increased to 0.65%. Moreover, current credit costs of 0.65% also include 10-15bp buffer due to (a) RBI's prudent countercyclical provisioning norm; and (b) temporary technical NPAs in PSU banks due to the recent adoption of computerized NPA recognition. This buffer should partially offset higher NPAs in FY2013E. Hence, we do not expect more than a 10-15bp net increase in credit costs from here on, leading to flat sectoral earnings at worst. On a relative basis, within the sector, large private banks and few PSU banks with better asset quality are expected to outperform. We view relatively lower yield on advances and moderate credit growth in the last two years as some of the indicators of a more conservative asset-quality profile. On that basis, we find few of the private banks including Axis Bank as well as some PSU banks such as State Bank of India and Bank of Baroda amongst large caps as well as Syndicate Bank and Bank of Maharashtra amongst mid caps to have a relatively more conservative profile than what the markets seem to be factoring in. On the other hand, for some of the mid-size PSU banks such as Andhra Bank and Central Bank of India, we remain cautious about asset-quality concerns.
INDBK DENABK ALLBK
UNBK YESBK
ANDBK BOM CENTBK
VIJAYA UCOBK
IOB ICICIBK
CANBK SIB
SBI UTDBK PNB
IDBI FEDBK
(40.0)
Source: Company, Angel Research; Note: Domestic NIMs for SBI, BOB and BOI
Going forward, stricter Basel III draft guidelines by the RBI are expected to further add to capital shortage woes, leading to further focus of banks on NIMs rather than balance sheet growth. Under the proposed norms, banks will need to increase the equity capital component of their capital structure over FY2013-17E currently the minimum equity capital requirement stands at 3.6%, which will need to be increased to a much higher level of 8% by FY2017E. Several PSU banks are likely to face capital shortage on account of these draft norms (which have a high probability of getting implemented in our view). On a relative basis, banks with a larger equity capital base (most prominently including large private banks) will be in an advantageous position to grow faster than the sector average with healthy profitability.
Exhibit 5: Core tier-I* ratio (%) for the banking industry (1HFY2012)
Bank Tier I (%) Core Tier I (%) Kotak Mah. Bank Federal Bank Karur Vysya Bank City Union Bank ICICI Bank IndusInd Bank J&K Bank HDFC Bank Dev.Credit Bank Karnataka Bank South Ind.Bank Indian Bank Oriental Bank Dhanlaxmi Bank Dena Bank Allahabad Bank Andhra Bank 15.9 14.0 12.8 12.4 13.1 11.4 11.3 11.4 11.2 10.8 10.8 9.9 9.9 8.7 9.3 8.9 8.8 15.9 14.0 12.8 12.4 12.4 11.4 11.3 11.3 11.2 10.8 10.8 9.4 9.2 8.7 8.6 8.6 8.5 Canara Bank Yes Bank Axis Bank Bank of Baroda Union Bank Syndicate Bank 9.1 9.4 8.5 8.8 8.5 8.6 Bank Tier I (%) Core Tier I (%) 8.4 8.3 8.3 8.0 7.7 7.7 7.6 7.6 7.3 7.3 6.9 6.7 6.4 6.1 5.9 5.9 5.3
Corporation Bank 8.4 Punjab Natl.Bank United Bank Bank of India St Bk of India Vijaya Bank IOB Central Bank IDBI Bank UCO Bank BOM 8.4 8.9 8.3 7.5 9.2 7.0 7.9 7.8 8.6 7.1
Source: Company, Angel Research; Note: * Core Tier-I capital equals Net Worth
January 2012
HDFCBK J&KBK OBC
BOI CRPBK
BOB SYNBK
(30.0)
AXSB
61
Banking
Exhibit 6: Movement in yields - 1HFY2012
Bank Yield on Prov. cost as a % Assets (%) of overall assets 8.6 8.2 7.5 9.5 9.6 8.8 8.5 9.1 8.5 8.6 8.9 9.8 8.5 8.9 8.7 8.8 9.4 8.9 9.1 8.9 8.9 8.4 8.9 0.5 0.5 0.4 0.3 0.8 0.8 0.5 0.6 0.3 0.9 0.8 0.8 0.5 1.3 1.0 0.8 0.9 1.0 0.6 1.2 1.0 1.1 0.4 Risk-adjusted Slippages PCR (%) yields as % annualised (%) of assets 8.0 7.8 7.1 9.2 8.8 8.0 8.1 8.6 8.3 7.9 8.3 9.2 8.2 7.6 7.9 8.2 8.6 8.0 8.5 7.6 8.0 7.5 8.5 1.3 1.4 1.5 0.5 3.3 1.6 2.3 2.0 0.8 4.8 3.7 1.4 2.4 0.8 2.1 3.8 2.2 6.3 2.4 3.6 3.6 4.6 1.4 81.3 77.7 78.2 74.7 84.3 75.1 68.6 79.4 92.0 60.5 66.1 61.7 64.7 86.0 52.0 56.8 79.6 63.8 70.1 71.8 78.5 65.0 77.1
HDFCBK AXSB ICICIBK SIB FEDBK PNB CANBK INDBK J&KBK UNBK VIJAYA ANDHBK CRPBK BOM UCOBK CENTBK ALLBK OBC IDBI IOB SYNBK UBI DENABK
However, in case of saving account growth, the sharp increase in saving account market share for these banks was halted in FY2008 with the onset of the global recession, due to which customers once again started reverting back to public sector banks to park their savings. The major benefactor of this shift in customer mindset was SBI, which had witnessed a significant decline in CASA market share until FY2007. SBI, by leveraging its tremendous trust factor in the country and driven by relatively faster branch expansion (9.1% CAGR vs. 2-5% for most PSBs), was able to increase its market share of saving deposits substantially by 360bp to 25.9% during FY2007-11 (one of the few PSBs to do so).
Exhibit 7: Savings account deposits market share

(%) 80.0
70.0 60.0 50.0 40.0 30.0 20.0 10.0 FY2004 FY2006 FY2008 FY2009 FY2000 FY2001 FY2002 FY2003 FY2005 FY2010 FY2011
FY2011
SBI group
Public ex -SBI group
Private
Exhibit 8: Current account deposits market share

(%) 60.0
50.0 40.0 30.0 20.0
CASA market share and fee income underpin structural outlook

The sector's valuations have corrected significantly over the last year on account of cyclical concerns. While we remain cautious on asset quality in the near-term, we believe at current valuations there is enough margin of safety to pick banks that have a relatively more conservative asset-quality outlook and have structural strengths to take advantage of the medium to long-term growth opportunity in the banking sector. In evaluating the structural outlook, in our view, CASA market share and fee income remain the key factors.
10.0 FY2004 FY2006 FY2008 FY2009 FY2000 FY2001 FY2002 FY2003 FY2005 FY2010 1HFY12 FY2007
SBI group
Public ex -SBI group
Private
Private banks to continue garnering CASA market share

Large private sector banks have increased their CASA market share multifold over the last decade (FY2000-FY2010) at the expense of public sector banks, including SBI. Riding on rapid branch and ATM expansion with urban-centric outlook, enhanced efficiency through technological upgradations and increased employee productivity and superior customer service oriented towards expanding the retail customer base, large private banks were able to increase their CASA market share from as low as 2.6% in FY2000 to 16.0% as of 1HFY2012. In case of current accounts, large and small private banks have consistently (right through the U.S. sub-prime crisis also) increased their market share (29.4% as of 1HFY2012 vs. 8.5% in FY2000).
Post FY2008, large private banks have still managed to incrementally gain CASA market share albeit at a lower rate. On the other hand, public sector banks excluding SBI have continued to lose market share, though at a slower pace compared to pre-recession levels. However, in our view, from here on, we expect large private banks to once again start gaining momentum in expanding their CASA base, driven by relatively stronger capital adequacy and easier capital access, robust branch expansion over FY2007-FY2011 and further network expansion expected over the next couple of years. While all public sector banks are expected to see further downslide in saving account market shares as private banks continue to make inroads into their hinterlands, SBI with its pan-India presence, robust branch network of more than 13,500 branches and stronger core competitiveness is expected to see further traction in its saving account deposits.
62
January 2012
1HFY12
FY2007
Banking
Fee income share higher for private banks
Large private banks (ICICI Bank, HDFC Bank and Axis Bank) and SBI have accounted for a lion's share of newer fee income streams that have originated due to the economic upsurge witnessed over the last decade. Relatively high fee income intensity of private banks, driven by their dominant position, competitiveness and sustained traction in streams such as wealth management, transaction banking, cards, forex and capital markets has led to higher fee income contribution in the overall profitability for these banks. Also, riding on credit (1,110bp gains over FY200011) and CASA market share gains (1,450bp gain over FY200011), private banks have been able to increase their fee income from 1.3% of total average assets in FY2000 to 1.6% as of FY2011. Large private banks such as Axis Bank (2.0%), HDFC Bank (1.8%) and ICICI Bank (1.7%) have a much higher contribution of fee income to average assets compared to public sector banks (0.9%, 0.7% ex. SBI) as of FY2011. Only SBI, owing to its strong corporate and government business relationships, has been able to maintain its dominance among public banks with fee income/assets at 1.3% as of FY2011. Earnings outlook cautious but not pessimistic: Although the current macro headwinds faced by the banking sector due to Euro crisis and Indian domestic growth concerns are meaningful, current valuations near Lehman crisis lows suggest a high margin of safety, especially in case of select structurally strong banks. Earnings for PSU banks are expected to modest in FY2013E on account of higher estimated provisioning expenses. However, countercyclical buffers, which banks have created in the past couple of years, create additional buffer to absorb incremental NPA provisioning expenses. Hence, with banks now shifting focus on sustaining margins and impending peak credit costs only expected to be at worst 10-15bp away from the current costs, earnings growth for the sector as a whole is likely to be at worst flat in FY2013E. Inflation picking up again or credit growth slipping below 12% would pose downside risks to our estimates, however in our base case we expect credit growth to sustain at 15% over FY2012-13E. Prefer large private banks: From a stock-selection point of view, we continue to prefer large private banks with a relatively better asset-quality outlook and a strong structural investment case - within which we prefer Axis Bank and ICICI Bank from a valuation perspective. We also like risk-return trade-off at current valuations for Yes Bank, but are now Neutral on old private banks like Federal Bank due to its relatively expensive valuations. Within the PSU segment as well, we prefer banks with structural strengths and a more conservative asset-quality profile (for instance, relatively low yield on advances and moderate credit growth in the past two years) - this includes banks such as State Bank of India and Bank of Baroda.
Exhibit 9: Fee income to assets (%) - FY2011

(%)
2.00 1.60 1.20 0.80 0.40 CANBK IDBI BOI UNBK INDBK ALLBK IOB BOM SYNBK OBC J&KBK AXSB SBI BOB HDFCBK ICICIBK DENABK ANDHBK UTDBK CENTBK YESBK PNB CRPBK UCOBK VIJAYA
Exhibit 10: Public sector banks P/ABV trends

2.00 1.70 1.40
Margin of safety in valuations

Valuations at significantly low levels: We believe the sector's valuations, which are close to their lowest levels since FY2003, over discount asset-quality concerns, hence providing a margin of safety for investors. Even after the recent bounce-back, PSU banks are currently trading at 0.8x, a level below which they have not traded for more than 8% of the time since FY2003 (well below the average of 1.1x). Pre-2003, valuations were structurally lower (median of 0.5x over FY2000-03) primarily because of asset-quality concerns (gross NPA ratios upwards of 10%), poorer recovery standards, and lower provisioning coverage ratios for the banking sector (limited provisioning to overall assets despite elevated NPA ratios). Since the re-rating (post FY2003), valuations have slipped lower than the current 0.8x only in 35 weeks (i.e. less than 8% of the time) and that too during the Lehman crisis period, when the entire global financial system was reeling under a severe economic slump.
1.10 0.80 0.50
Jan-06
Nov-06
Jun-06
Feb-08
Dec-08
May-09
Aug-05
Oct-09
Mar-05
Mar-10
Jan-11
Jul-08
P/ABV
Median
15th percentile
Exhibit 11: Large private banks P/ABV trends

3.40 3.00 2.60 2.20 1.80 1.40 1.00 0.60
Mar-06 Sep-06 Mar-08 Sep-08 Mar-09 Sep-09 Mar-05 Sep-05 Mar-10 Sep-10 Mar-11 Sep-11 Mar-07 Sep-07
P/ABV
Median
15th percentile
85th percentile
January 2012
Aug-10
Sep-07
85th percentile
Nov-11
Apr-07
Jun-11
63
Banking
Exhibit 12: Aggregate P&L for Private and Public sector banks
Parameter (` cr) ` NII Other Income Op. Income Op. expenses Private* FY2011 FY2012 29,908 16,952 46,860 20,528 35,169 19,477 54,646 24,410 30,236 5,018 25,218 7,620 17,598 FY2013 FY2011 Public FY2012 FY2013 NII (-) Prov. Exp. Adj NII 66,205 169,242 29,834 36,371 5,781 30,590 9,533 21,058 76,610 92,633 32,459 60,173 18,782 41,391 191,525 82,896 108,629 44,974 63,655 18,683 44,972 217,958 95,769 122,189 50,152 72,037 23,114 48,923 Treasury Int. Sens. Inc. Other Inc. Op. Inc. Provisions PBT Tax expenses Net Profit 6,180 20,152 6,078 14,073 Opex PBT Taxes ROA Leverage
Exhibit 13: Aggregate DuPont for Private and Public sector banks
Parameter Private* FY2011 FY2012 3.1 0.6 2.5 0.0 2.5 1.7 4.2 2.1 2.1 0.6 1.4 10.5 3.0 0.4 2.6 0.0 2.6 1.6 4.2 2.1 2.1 0.7 1.5 11.3 FY2013 3.0 0.4 2.6 0.0 2.7 1.6 4.3 2.1 2.1 0.7 1.5 12.0 FY2011 2.8 0.7 2.1 0.1 2.2 0.9 3.1 1.7 1.3 0.4 0.9 21.0 PSU FY2012 2.8 0.9 1.9 0.1 2.0 0.8 2.8 1.6 1.2 0.4 0.8 20.5 FY2013 2.8 0.8 1.9 0.0 2.0 0.8 2.8 1.6 1.2 0.4 0.8 20.6
42,714 124,864 144,923 166,446 23,492 44,378 46,602 51,513
Pre prov. profit 26,332
Growth (%) 32.0 25.0 19.7 15.0 8.7 8.8 Source: Company, Angel Research; Note*: For banks under our coverage
ROE 15.0 16.7 17.6 18.9 17.2 16.4 Source: Company, Angel Research; Note*: For banks under our coverage
Exhibit 14: Recommendation Summary

Company Reco. CMP (`) ` Tgt. price (` ) ` Upside (%) FY2013E P/ABV (x) FY2013E Tgt P/ABV (x) FY2013E P/E (x) FY2011-13E EPS CAGR (%) FY2013E RoA (%) FY2013E RoE (%)
Private Sector Banks ICICIBk* HDFCBk AxisBk YesBk FedBk SIB Buy Accumulate Buy Buy Neutral Neutral 796 485 952 287 364 23 1,061 520 1,361 361 33.3 7.1 43.0 26.0 1.5 3.3 1.5 1.8 1.0 1.1 2.0 3.5 2.2 2.3 12.5 16.8 8.3 9.9 8.3 6.8 19.2 30.8 18.2 17.7 13.0 13.5 1.3 1.8 1.5 1.3 1.1 0.9 14.4 21.0 20.2 20.1 12.5 17.5
Public Sector Banks SBI* PNB BOB BOI CanBk IDBI# UnionBk CentBk SynBk AllBk CorpBk IndBk AndhBk UtdBk VijBk BOM J&KBk NBFCs HDFC Neutral 691 4.4 22.4 13.2 2.6 1.7 34.0 21.7 Buy Buy Buy Neutral Buy Buy Buy Neutral Buy Accumulate Buy Accumulate Neutral Buy Neutral Buy Accumulate 1,884 911 743 306 421 93 188 76 84 142 387 204 97 60 53 45 742 2,359 1,059 906 510 107 222 106 158 450 223 70 53 820 25.2 16.2 21.9 21.3 15.2 18.1 26.4 11.5 16.1 9.7 16.6 18.4 10.6 1.5 1.0 1.0 1.0 0.9 0.6 0.8 0.6 0.6 0.7 0.6 0.8 0.7 0.6 0.7 0.7 0.8 1.9 1.2 1.3 1.1 0.7 0.9 0.7 0.7 0.7 0.9 0.7 0.8 0.9 9.1 5.7 5.8 6.7 5.4 4.6 4.8 4.8 3.6 4.0 4.2 4.9 4.7 4.2 5.5 4.6 4.4 26.0 7.3 9.3 0.1 (7.0) 9.9 (0.3) (24.3) 13.7 9.6 (1.8) 3.8 (4.8) 4.3 4.1 26.3 14.9 0.8 1.0 1.1 0.6 0.8 0.7 0.7 0.4 0.7 0.9 0.8 1.2 0.8 0.6 0.5 0.7 1.4 17.9 19.7 19.1 13.3 15.8 13.4 15.4 11.4 16.5 17.6 15.5 18.4 14.6 12.1 11.6 16.9 18.6
LICHF Accumulate 237 262 10.2 1.8 2.0 9.1 12.7 Source: Company, Angel Research; Note:*Target multiples=SOTP Target Price/ABV (including subsidiaries), #Without adjusting for SASF
64
January 2012
January 2012
65
Banking
ICICI Bank
Company Background
TOP PICK
CMP/TP/Upside: `796 / `1,061 / 33%
ICICI Bank is India's largest private sector bank, with a 5.5% market share in credit. The bank has a pan-India extensive network of 2,500+ branches and ~7,000 ATMs as well as large overseas presence (overseas loans comprise 25% of total loans). The bank also has market-leading subsidiaries in life insurance, general insurance and asset management.
SHAREHOLDING PATTERN (%) PROMOTERS FII 61.3
Structural Snapshot
Growth opportunity: Credit penetration in India remains fairly low (70% of GDP) vs. not just developed economies (U.S. - 220% and Japan - 320%), but also emerging economies (China - 140%), indicating 17-18% average credit growth potential for several decades (2-2.5x our real GDP growth). ICICI Bank, with its strong capital adequacy and expanding branch network, has the potential to grow a few percentage points faster than this. Competitive position: The bank is comparable to other private banks in its retail customer proposition. Focused strategies post the Lehman-crisis have also brought profitability on assets largely at par with peers. Nature of business: Cyclical and rate-sensitive sector; Significant entry barriers for new players.
STOCK RETURNS (%) ICICI BANK BANKEX SENSEX 3M 1Y 3Y 24.5 28.3 21.3 5Y 10Y (12.0) (22.2) (6.4) (12.5) (2.6) (12.3) (4.2) 24.0 7.1 25.5 3.3 17.3
FINANCIAL PERFORMANCE OVERVIEW (%) PAT GROWTH* NIM# ROE# 3M 21.6 2.5 1Y 0.5 28.0 2.6 11.7 3Y (2.8) 7.4 2.5 10.2 5Y 10Y OP. INC. GROWTH* 12.3 11.2 38.0 15.2 41.4 2.5 2.1 10.9 13.5

Focused strategy has improved return on assets; RoE to follow: Over the past three years, the bank's management has firmly focused on reducing the risk profile of its loans, de-growing its balance sheet to reduce riskier loans (such as unsecured personal loans) as well as wholesale deposits. CASA deposits have improved to 45% (as of FY2011) from 22% in FY2007, operating costs have declined from 2.2% to 1.8% of assets, and NPA provision costs have declined almost by two-thirds from peak levels. As a result, return on assets have risen close to optimum levels, but return on equity still lags peers, as the bank's huge equity capital raising prior to the downturn is leveraged much below its potential - something that is expected to improve gradually over the next few years. Well positioned to garner strong market share gains in CASA deposits: While improving its profitability and risk profile, the bank also simultaneously increased its branch network from ~950 in 3QFY2008 to 2,500+ by 2QFY2012. Coupled with strong capital adequacy at 19.0%, this has laid the platform for strong credit growth and CASA market share gains. Valuations attractive: We expect ICICI Bank to deliver a strong earnings CAGR of 19.2% over FY2011-13 and an RoE of 14.4% by FY2013. The stock is trading at 1.5x FY2013E ABV (also 1.5x after adjusting value of subsidiaries), a substantial discount of 55% to H.DFC Bank. We have valued subsidiaries at `136 and the core bank at `925 (1.95x FY2013E ABV). We maintain our Buy view on the stock with a target price of ` 1,061.
ANGEL ESTIMATES PARTICULARS PAT GROWTH (%) ROE (%) P/ABV FY2012E 20.3 13.2 1.6 FY2013E 18.0 14.4 1.5
66
January 2012

Y/E MARCH (` CR) ` NET INTEREST INCOME FY2010 8,114 FY2011 9,017 FY2012E 10,324 FY2013E 12,539
BALANCE SHEET
Y/E MARCH (` CR) ` SHARE CAPITAL - EQUITY - PREFERENCE RESERVE & SURPLUS DEPOSITS FY2010 1,465 1,115 350 50,503 202,017 FY2011 1,502 1,152 350 53,939 225,602 FY2012E 1,502 1,152 350 57,393 270,723 FY2013E 1,502 1,152 350 61,511 327,574
- YOY GROWTH (%)

OTHER INCOME
(10.8)
7,478
11.1
6,648
14.5
7,340
21.5
9,106
- YOY GROWTH (%)

OPERATING INCOME
(3.9)
15,592
(11.1)
15,665
10.4
17,664
24.1
21,645
- YOY GROWTH (%)

OPERATING EXPENSES
(7.6)
5,860
0.5
6,617
12.8
7,708
22.5
9,215
- GROWTH (%)
BORROWINGS TIER 2 CAPITAL
(7.5)
60,947 32,967
11.7
72,813 36,391 15,987 406,234 20,907 13,183 134,686 216,366
20.0
90,516 37,119 19,531 476,783 20,304 15,549 160,910 255,312
21.0
113,196 37,862 23,067 564,712 21,292 18,497 186,795 308,927
- YOY GROWTH (%)

PRE - PROVISION PROFIT
(16.8)
9,732
12.9
9,048
16.5
9,955
19.6
12,429
OTHER LIABILITIES & PROVISIONS 15,501 TOTAL LIABILITIES 363,400 27,514
- YOY GROWTH (%)

PROVISION AND CONTINGENCIES
(1.0)
4,390
(7.0)
2,290
10.0
1,507
24.9
CASH IN HAND AND WITH RBI 2,185 BAL.WITH BANKS & MONEY AT CALL 11,359 INVESTMENTS ADVANCES 120,893 181,206
- YOY GROWTH (%)

PROFIT BEFORE TAX
(13.0)
5,342
(47.8)
6,758
(34.2)
8,449
45.0
10,245
- YOY GROWTH (%)

PROVISION FOR TAXATION
11.7
1,317
26.5
1,606
25.0
2,250
21.3
2,932
- GROWTH (%)
FIXED ASSETS OTHER ASSETS TOTAL ASSETS
(17.0)
3,213 19,215 363,400
19.4
4,744 16,347 406,234
18.0
5,428 19,281 476,783
21.0
6,263 22,937 564,712
- AS A % OF PBT
PAT
24.7
4,025
23.8
5,151
26.6
6,198
28.6
7,313
- YOY GROWTH (%)
17.6
28.0
20.3
18.0
- GROWTH (%)
(4.4)
12.1
17.9
19.0
KEY RATIOS
Y/E MARCH PROFITABILITY RATIOS (%) NIMS COST TO INCOME RATIO ROA ROE* B/S RATIOS (%) CASA RATIO CREDIT/DEPOSIT RATIO CAR - TIER I ASSET QUALITY (%) GROSS NPAS NET NPAS SLIPPAGES LOAN LOSS PROV. /AVG. ASSETS PROVISION COVERAGE PER SHARE DATA (`) ` EPS ABVPS (75% COVERAGE FOR NPAS) DPS 36.1 449.8 12.0 44.7 478.3 14.0 53.8 508.3 18.0 63.5 544.0 21.0 5.1 2.1 1.5 1.2 59.5 4.5 1.1 1.5 0.5 76.0 4.5 1.1 1.6 0.3 77.0 4.6 1.2 1.9 0.4 75.0 41.7 89.7 19.4 14.0 45.1 95.9 19.5 13.2 46.3 94.3 18.1 11.1 46.7 94.3 16.1 10.1 2.4 37.6 1.0 9.7 2.6 42.2 1.3 11.7 2.5 43.6 1.4 13.2 2.6 42.6 1.3 14.4 FY2010 FY2011 FY2012E FY2013E
KEY RATIOS
Y/E MARCH VALUATION RATIOS P/E P/ABV DIVIDEND YIELD (%) DUPONT ANALYSIS* NII (-) PROV. EXP. ADJ NII TREASURY INT. SENS. INC. OTHER INC. OP. INC. OPEX PBT TAXES ROA LEVERAGE ROE 2.3 1.2 1.0 0.2 1.2 1.8 3.0 1.6 1.4 0.4 1.0 9.5 9.7 2.4 0.6 1.8 (0.1) 1.7 1.7 3.5 1.8 1.7 0.4 1.3 9.2 11.7 2.4 0.4 2.1 (0.0) 2.0 1.6 3.7 1.8 1.9 0.5 1.4 9.8 13.2 2.5 0.4 2.0 0.0 2.1 1.7 3.7 1.8 1.9 0.6 1.3 10.7 14.4 22.1 1.8 1.5 17.8 1.7 1.8 14.8 1.6 2.3 12.5 1.5 2.6 FY2010 FY2011 FY2012E FY2013E
Note: * Core ROEs excluding income and investment in subsidiaries
January 2012
67
Banking
HDFC Bank
Company Background
CMP/TP/Upside: `485 / `520 / 7%
SHAREHOLDING PATTERN (%) PROMOTERS (HDFC) FII 23.2 47.0
HDFC Bank is the second-largest private sector bank in India with a pan-India network of 2,150 branches and 6,500+ ATMs. The bank is promoted and 23% owned by HDFC, India's largest housing finance company. HDFC Bank has been at the forefront of modern retail banking in India. The bank has pioneered the transaction banking model in India, which has enabled it to garner substantial CASA deposits as well as fee income, while the focus on retail lending (which forms ~50% of total loans as against 20% industry average) has further helped the bank in maintaining above-industry margins.
STOCK RETURNS (%) HDFC BANK BANKEX SENSEX 3M (1.2) 1Y 16.7 3Y 37.2 28.3 21.3 5Y 10Y 17.9 26.2 7.1 25.5 3.3 17.3
Structural Snapshot
Growth opportunity: Over the medium term, private banks such as HDFC Bank have the potential to sustain an average growth rate of 22-23% every year (~5% faster than the sector's average) by expanding their branch networks by 15-20% p.a. vs. 5-8% by their PSU counterparts. Competitive position: Amongst the most competitive banks in the sector, HDFC Bank has an A-list management and superior customer proposition in terms of service, technology and product bouquet - enabling consistent market share gains, especially in retail banking. Nature of business: Cyclical and rate-sensitive sector; Significant entry barriers for new players.
(6.4) (12.5) (2.6) (12.3)
FINANCIAL PERFORMANCE OVERVIEW (%) PAT GROWTH* NIM# ROE# 3M 31.4 4.2 1Y 20.3 33.2 4.4 16.7 3Y 26.0 35.2 4.5 16.6 5Y 10Y OP. INC. GROWTH* 16.2 31.7 35.9 35.2 34.0 4.7 17.4 4.2 18.3

Strong capital adequacy and expanding network to drive credit and CASA market share gains: HDFC Bank's strong growth over FY2005-11 was supported by doubling of its CASA market share to ~6%. We expect this traction in CASA market share to continue on the back of a 15-20% yoy increase in branches. Strong capital adequacy of 16.3% will provide further support for ~5% higher-than-industry average growth. Sustained traction in fee income: Apart from traditional CEB and forex income, the bank earns substantial fee income from transaction banking, cards and third-party distribution, among others. Overall, the bank's core fee income stood at ~1.7% of ATA in FY2011, one of the highest in the sector - offering another competitive advantage to the bank. Premium valuations: HDFC Bank has always traded at a substantial 32% premium (5 year average) to Sensex, almost being viewed as a defensive stock due to a remarkably consistent ~30% earnings growth every year for more than a decade. In the near term, due its conservative risk management, the bank looks set to continue its 30% earnings growth trajectory. That said, we believe the stock's premium valuations (3.3x FY2013 ABV) are likely to limit major outperformance as the markets enters a new upcycle vs. cheaper private sector peers that have a similar medium-term growth outlook. Hence, we recommend an Accumulate rating on the stock with a target price of ` 520.
68
January 2012

BALANCE SHEET
Y/E MARCH (` CR) ` SHARE CAPITAL RESERVE & SURPLUS DEPOSITS FY2010 458 21,065 167,404 FY2011 465 24,914 208,586 FY2012E 465 28,889 254,475 FY2013E 465 34,064 323,184
- YOY GROWTH (%)

OTHER INCOME
13.0
3,983
25.7
4,335
15.5
5,200
24.6
6,434
- YOY GROWTH (%)

OPERATING INCOME
14.8
12,370
8.8
14,878
20.0
17,378
23.7
21,608
- GROWTH (%)
17.2
7,012 5,904
24.6
7,447 6,947 28,993 277,353 25,101 4,568 70,929 159,983
22.0
10,151 7,920 36,469 338,370 19,086 8,459 86,989 198,379
27.0
12,765 9,108 45,902 425,487 24,239 10,637 110,723 247,973
- YOY GROWTH (%)

OPERATING EXPENSES
13.6
5,940
20.3
7,153
16.8
8,369
24.3
10,290
OTHER LIABILITIES & PROVISIONS 20,616 TOTAL LIABILITIES 222,459 15,483
- YOY GROWTH (%)

4.5
6,430
20.4
7,725
17.0
9,009
23.0
11,319 CASH IN HAND AND WITH RBI
- YOY GROWTH (%)

23.5
2,141
20.2
1,907
16.6
1,469
25.6
BAL.WITH BANKS & MONEY AT CALL 14,459 1,378 INVESTMENTS ADVANCES 58,608 125,831
- YOY GROWTH (%)

PROFIT BEFORE TAX
12.2
4,289
(10.9)
5,819
(23.0)
7,540
(6.2)
9,940
- YOY GROWTH (%)

30.0
1,340
35.7
1,892
29.6
2,375
31.8
3,225
- GROWTH (%)
27.3
2,123 5,955 222,459
27.1
2,171 14,601 277,353
24.0
2,569 22,889 338,370
25.0
3,133 28,782 425,487
- AS A % OF PBT
PAT
31.3
2,949
32.5
3,926
31.5
5,165
32.4
6,715
- YOY GROWTH (%)
31.3
33.2
31.5
30.0
- GROWTH (%)
21.4
24.7
22.0
25.7
KEY RATIOS
Y/E MARCH PROFITABILITY RATIOS (%) NIMS COST TO INCOME RATIO ROA ROE B/S RATIOS (%) CASA RATIO CREDIT/DEPOSIT RATIO CAR - TIER I ASSET QUALITY (%) GROSS NPAS NET NPAS SLIPPAGES LOAN LOSS PROV. /AVG. ASSETS PROVISION COVERAGE PER SHARE DATA (`) ` EPS ABVPS (75% COVERAGE FOR NPAS) DPS 12.9 94.0 2.4 16.9 109.1 3.3 22.2 126.2 4.4 28.9 148.4 5.7 1.4 0.3 2.6 1.0 78.4 1.0 0.2 1.1 0.3 82.5 1.1 0.2 1.1 0.3 80.8 1.2 0.3 1.1 0.3 76.9 52.0 75.2 17.4 13.3 52.7 76.7 16.2 12.2 53.1 78.0 14.5 11.0 51.4 76.7 13.6 10.4 4.3 48.0 1.5 16.1 4.4 48.1 1.6 16.7 4.2 48.2 1.7 18.9 4.3 47.6 1.8 21.0 FY2010 FY2011 FY2012E FY2013E
KEY RATIOS
Y/E MARCH VALUATION RATIOS P/E P/ABV DIVIDEND YIELD (%) DUPONT ANALYSIS NII (-) PROV. EXP. ADJ NII TREASURY INT. SENS. INC. OTHER INC. OP. INC. OPEX PBT TAXES ROA LEVERAGE ROE 4.1 1.1 3.1 0.2 3.3 1.8 5.0 2.9 2.1 0.7 1.5 11.1 16.1 4.2 0.8 3.5 (0.0) 3.4 1.8 5.2 2.9 2.3 0.8 1.6 10.7 16.7 4.0 0.5 3.5 (0.0) 3.4 1.7 5.2 2.7 2.4 0.8 1.7 11.2 18.9 4.0 0.4 3.6 0.0 3.6 1.7 5.3 2.7 2.6 0.8 1.8 12.0 21.0 37.6 5.2 0.5 28.7 4.4 0.7 21.8 3.8 0.9 16.8 3.3 1.2 FY2010 FY2011 FY2012E FY2013E
January 2012
69
Banking
RATING 52 WEEK HIGH / LOW MARKET CAP (` CR) ` LIQUIDITY BUY 1461/785 39,271 HIGH
Axis Bank
Company Background
TOP PICK
CMP/TP/Upside: `952 / `1,361 / 43%
SHAREHOLDING PATTERN (%) PROMOTERS (GOVT. INSTITUTIONS) FII 37.6 40.2
Axis Bank is India's third-largest private sector bank after ICICI Bank and HDFC Bank. The bank was promoted by government institutions, led by UTI (SUUTI holds 24% stake currently, which will eventually be divested). The bank has an extensive network of 1,446 branches and 7,500 ATMs spread across 953 centers (~60% in metro and urban regions). The bank's strong growth has been backed by robust retail branch expansion, strong corporate relationships and a wide range of fee income products.
Structural Snapshot
Growth opportunity: After years of reporting high growth, private banks such as Axis Bank put together still have only about 15% market share. Hence, there is still substantial headroom for them to gain market share (potentially averaging 22-23% growth over the medium term), especially in low-cost retail deposits. Rapid branch expansion (15-20% p.a.) is the key to such high growth. Competitive position: Being a modern private bank with superior customer proposition in terms of service, technology and product bouquet, Axis Bank is positioned to gain market share in not just credit, but more importantly in CASA deposits and fee-based services. Nature of business: Cyclical and rate-sensitive sector; Significant entry barriers for new players.
STOCK RETURNS (%) AXIS BANK BANKEX SENSEX 3M 1Y 3Y 29.5 28.3 21.3 5Y 10Y (15.9) (25.7) (6.4) (12.5) (2.6) (12.3) 12.2 41.9 7.1 25.5 3.3 17.3
FINANCIAL PERFORMANCE OVERVIEW (%) PAT GROWTH* NIM# ROE# 3M 23.7 3.4 1Y 25.1 34.8 3.2 19.3 3Y 36.7 46.8 3.1 19.2 5Y 10Y OP. INC. GROWTH* 23.9 44.0 45.5 47.5 44.4 3.0 2.6 19.3 21.5

Branch expansion to support faster market share gains: Axis Bank has expanded its branch network at a robust 33% CAGR and increased the number of ATMs by eight-fold during FY2004-11, resulting in a multi-fold increase in the market share of low-cost CASA deposits to 4%. In fact, in FY2011 alone, the bank opened 407 branches (41% yoy growth) and further expansion plans remain strong (250+ additions p.a.), which are expected to sustain further market share gains and superior earnings growth. Fee income continues to drive higher profitability: The bank's fee income also has been sector leading at 2.0% of assets (almost twice the level in PSU banks over FY2009-11). In 9MFY2012 as well, the bank witnessed healthy growth in most fee segments, including corporate (44%), treasury (32%) and retail (35%); and moderate growth is expected to continue going forward. Valuations attractive: The stock is trading at attractive valuations of 1.5x FY2013E ABV - at a substantial ~54% discount to HDFC Bank, despite similar earnings quality, profitability and growth expectations in the medium term. In our view, markets have over-discounted asset-quality concerns for the bank and current valuations provide a substantial margin of safety. In fact, despite the bank's healthy medium-term growth potential, competitive positioning and profitability, its current P/E valuation at 8.3x FY2013E earnings is at a substantial 35% P/E discount even to the Sensex. We recommend Buy, valuing the stock at 2.2x FY2013E ABV to arrive at a target price of ` 1,361. Please refer to important disclosures at the end of this report
70
January 2012

BALANCE SHEET
- YOY GROWTH (%)

OTHER INCOME
35.8
3,946
31.1
4,632
23.9
5,416
22.7
6,205
- YOY GROWTH (%)

OPERATING INCOME
39.2
8,950
17.4
11,195
16.9
13,548
14.6
16,184
- GROWTH (%)
BORROWINGS TIER 2 CAPITAL OTHER LIABILITIES & PROVISIONS TOTAL LIABILITIES
20.4
10,014 7,156 6,134 180,648 9,482
33.9
19,275 6,993 8,209 242,713 13,886 7,522 71,992 142,408
24.0
23,673 8,392 9,181 298,097 15,253 5,217 97,795 170,889
22.0
28,789 10,238 10,963 362,527 18,608 6,344 118,323 208,485
- YOY GROWTH (%)

OPERATING EXPENSES
37.3
3,710
25.1
4,779
21.0
5,928
19.5
7,410
- YOY GROWTH (%)

29.8
5,241
28.8
6,416
24.0
7,620
25.0
- YOY GROWTH (%)

43.1
1,389
22.4
1,280
18.8
1,438
15.1
- YOY GROWTH (%)

PROFIT BEFORE TAX
58.5
3,851
(7.9)
5,136
12.3
6,182
6.3
7,246
- YOY GROWTH (%)

38.3
1,337
33.3
1,747
20.4
2,006
17.2
2,351
- GROWTH (%)
27.9
1,222 3,906 180,648
36.5
2,273 4,632 242,713
20.0
2,981 5,962 298,097
22.0
3,517 7,251 362,527
- AS A % OF PBT
PAT
34.7
2,515
34.0
3,388
32.4
4,176
32.4
4,895
- YOY GROWTH (%)
38.5
34.8
23.2
17.2
- GROWTH (%)
22.3
34.4
22.8
21.6
KEY RATIOS
Y/E MARCH PROFITABILITY RATIOS (%) NIMS COST TO INCOME RATIO ROA ROE B/S RATIOS (%) CASA RATIO CREDIT/DEPOSIT RATIO CAR - TIER I ASSET QUALITY (%) GROSS NPAS NET NPAS SLIPPAGES LOAN LOSS PROV. /AVG. ASSETS PROVISION COVERAGE PER SHARE DATA (`) ` EPS ABVPS (75% COVER FOR NPAS) DPS 62.1 393.8 12.0 82.5 462.5 14.0 101.7 540.7 20.5 115.4 618.8 23.0 1.3 0.4 2.2 0.8 68.2 1.1 0.3 1.4 0.5 74.3 1.4 0.3 1.7 0.4 76.6 1.2 0.3 1.8 0.4 76.2 46.7 73.8 15.8 11.2 41.1 75.3 12.7 9.4 40.6 72.8 12.3 9.0 40.9 72.8 12.1 8.8 3.1 41.4 1.5 19.2 3.2 42.7 1.6 19.3 3.1 43.8 1.5 20.3 3.1 45.8 1.5 20.2 FY2010 FY2011 FY2012E FY2013E
KEY RATIOS
Y/E MARCH VALUATION RATIOS P/E P/ABV DIVIDEND YIELD (%) DUPONT ANALYSIS NII (-) PROV. EXP. ADJ NII TREASURY INT. SENS. INC. OTHER INC. OP. INC. OPEX PBT TAXES ROA LEVERAGE ROE 3.0 0.8 2.2 0.4 2.7 2.0 4.6 2.3 2.3 0.8 1.5 12.5 19.2 3.1 0.6 2.5 0.2 2.7 2.0 4.7 2.3 2.4 0.8 1.6 12.1 19.3 3.0 0.5 2.5 0.1 2.6 1.9 4.5 2.2 2.3 0.7 1.5 13.1 20.3 3.0 0.5 2.6 0.1 2.6 1.8 4.4 2.2 2.2 0.7 1.5 13.6 20.2 15.3 2.4 1.3 11.5 2.1 1.5 9.4 1.8 2.2 8.3 1.5 2.4 FY2010 FY2011 FY2012E FY2013E
January 2012
71
Banking
Yes Bank
Company Background
CMP/TP/Upside: `287 / `361 / 26%
Yes Bank is the youngest private sector bank in the country, promoted by professional bankers. The bank started its operations in CY2004 and has been growing at a scorching pace, focusing on niche assets to maintain profitable margins and asset quality. The bank's thrust so far has been primarily on wholesale banking operations for mid-size corporates. Now aiming for a higher share of retail deposits, the bank has recently doubled its network to 305 branches (targeting the urban affluent segment) and is planning to expand its network to 750 branches by FY2015.
Structural Snapshot
STOCK RETURNS (%) YES BANK BANKEX SENSEX 3M (1.2) 1Y 6.2 3Y 57.0 28.3 21.3 5Y 12.4 3.3 10Y 17.3
Growth opportunity: Being a modern, new-generation private bank, on a small base, Yes bank has grown its wholesale-oriented balance sheet at a scorching pace of 89.5% CAGR over FY2005-11. Subject to the conducive domestic macro environment, a 30% CAGR in balance sheet is achievable over the next five years, but the key execution challenge for the bank is to grow its savings deposit base at an even faster pace. Competitive position: The bank has demonstrated a healthy track record in the niche corporate and wholesale segments; however, as it grows larger, developing a retail customer base will be important for sustaining profitability - this remains the key execution challenge.
(6.4) (12.5) (2.6) (12.3)
7.1 25.5
FINANCIAL PERFORMANCE OVERVIEW (%) PAT GROWTH* NIM# ROE# 3M 33.3 2.7 1Y 37.2 52.2 2.7 21.1 3Y 39.3 53.8 2.7 20.7 5Y 58.3 67.4 2.6 19.0 10Y OP. INC. GROWTH* 35.0
Nature of business: Cyclical and rate-sensitive sector; Significant entry barriers for new players.

A-list management and ability to raise capital: Yes Bank has an A-list top management team, which brings to table rich experience from the best banks in India. The bank's performance also benefits from management's ability to raise equity capital (at increasing, book-accretive premiums). Strong asset quality: The bank has maintained strong asset quality in spite of growing at a fast clip over the past few years (gross and net NPA ratios at just 0.3% and 0.04%, respectively), which has been aided by the smaller size of its balance sheet so far. The bank has also been astute in managing its growth rate and asset-liability durations in-line with the changing external environment. Valuations provide margin of safety from retail growth challenges: Yes Bank's growth premium has reduced over time due to execution challenges in creating a retail deposit base (now trading at 1.8x due to cyclical slowdown vs. five-year median of 2.5x). However, taking the challenges of building a retail deposit base head-on, the bank has doubled its branch network over the past 18 months to 305 branches and aggressively increased savings rate to 7% as a smart customer acquisition strategy. While it has fallen short of its retail expansion goals in the past and challenges remain significant, valuations at 1.8x FY2013E ABV in our view provide a better risk-return trade-off than inthe past. Hence, we recommend a Buy rating on the stock with a target price of ` 361.
72
January 2012

Y/E MARCH (` CR) ` NET INTEREST INCOME FY2010 788 FY2011 1,247 FY2012E 1,579 FY2013E 1,861
BALANCE SHEET
- YOY GROWTH (%)

OTHER INCOME
54.1
576
58.2
623
26.6
789
17.9
939
- YOY GROWTH (%)

OPERATING INCOME
32.3
1,363
8.3
1,870
26.5
2,368
19.0
2,800
- GROWTH (%)
65.7
2,564 2,185 1,745 36,383 1,995 678 10,210 22,193
71.4
3,333 3,358 2,583 59,007 3,076 420 18,829 34,364
18.0
5,842 3,962 3,085 71,700 3,524 1,434 23,381 40,549
21.0
6,117 4,715 3,696 85,569 4,263 1,711 27,990 48,253
- YOY GROWTH (%)

OPERATING EXPENSES
44.1
500
37.2
680
26.6
874
18.3
1,136
- YOY GROWTH (%)

19.5
863
35.9
1,190
28.5
1,494
30.0
- YOY GROWTH (%)

63.6
137
37.9
98
25.5
117
11.4
BAL.WITH BANKS & MONEY AT CALL 172 INVESTMENTS ADVANCES
- YOY GROWTH (%)

PROFIT BEFORE TAX
121.6
726
(28.2)
1,092
19.4
1,377
46.6
1,492
- YOY GROWTH (%)

55.9
249
50.3
365
26.0
447
8.4
484
- GROWTH (%)
78.9
115 1,191 36,383
54.8
132 2,186 59,007
18.0
156 2,656 71,700
19.0
181 3,170 85,569
- AS A % OF PBT
PAT
34.2
478
33.4
727
32.4
930
32.4
1,008
- YOY GROWTH (%)
57.2
52.2
27.9
8.4
- GROWTH (%)
58.9
62.2
21.5
19.3
KEY RATIOS
Y/E MARCH PROFITABILITY RATIOS (%) NIMS COST TO INCOME RATIO ROA ROE B/S RATIOS (%) CASA RATIO CREDIT/DEPOSIT RATIO CAR - TIER I ASSET QUALITY (%) GROSS NPAS NET NPAS SLIPPAGES LOAN LOSS PROV. /AVG. ASSETS PROVISION COVERAGE PER SHARE DATA (`) ` EPS ABVPS ( 75% COVERAGE FOR NPAS) DPS 14.1 91.0 1.5 20.9 109.3 2.5 26.8 132.6 3.0 29.0 157.0 4.0 0.3 0.1 0.9 0.3 78.4 0.2 0.0 0.2 0.1 88.6 0.2 0.0 0.3 0.1 88.6 0.2 0.0 0.5 0.2 88.5 10.5 82.8 20.6 12.9 10.3 74.8 16.5 9.7 11.7 74.8 16.3 9.7 13.2 73.6 16.3 9.6 2.8 36.7 1.6 20.3 2.7 36.3 1.5 21.1 2.5 36.9 1.4 22.2 2.5 40.6 1.3 20.1 FY2010 FY2011 FY2012E FY2013E
KEY RATIOS
Y/E MARCH VALUATION RATIOS P/E P/ABV DIVIDEND YIELD (%) DUPONT ANALYSIS NII (-) PROV. EXP. ADJ NII TREASURY INT. SENS. INC. OTHER INC. OP. INC. OPEX PBT TAXES ROA LEVERAGE ROE 2.7 0.5 2.2 0.3 2.5 1.6 4.1 1.7 2.5 0.8 1.6 12.6 20.3 2.6 0.2 2.4 (0.1) 2.3 1.4 3.7 1.4 2.3 0.8 1.5 13.9 21.1 2.4 0.2 2.2 0.0 2.3 1.2 3.4 1.3 2.1 0.7 1.4 15.6 22.2 2.4 0.2 2.1 0.0 2.2 1.2 3.3 1.4 1.9 0.6 1.3 15.6 20.1 20.4 3.2 0.5 13.7 2.6 0.9 10.7 2.2 1.0 9.9 1.8 1.4 FY2010 FY2011 FY2012E FY2013E
January 2012
73
Banking
Federal Bank
Company Background
Federal Bank is the largest old generation private sector bank, having a large presence in Kerala with 486 of its 823 branches. Close to half of its branch network is located in semi-urban areas. NRI customers in the Middle East form a substantial part of the bank's business; NRI deposits constitute ~21% of its total deposits. Over the past one year, the bank's new CEO (coming from Standard Chartered Bank) has been focusing on improving its asset quality.
Structural Snapshot
Growth opportunity: Federal Bank's growth is expected to be in-line with the sector, though with a bias towards market share loss in the long term.
STOCK RETURNS (%) FEDERAL BANK BANKEX SENSEX 3M (6.9) 1Y (3.4) 3Y 32.2 28.3 21.3 5Y 10Y 12.9 41.1 7.1 25.5 3.3 17.3
(6.4) (12.5) (2.6) (12.3)
Competitive position: The bank enjoys a strong albeit niche customer legacy, but with limited scope for broad-based growth into other regions or product segments, in our view. Nature of business: Cyclical and rate-sensitive sector; Significant entry barriers for new players.
FINANCIAL PERFORMANCE OVERVIEW (%) OP. INC. GROWTH* PAT GROWTH* NIM# ROE# 3M 1.5 36.2 3.5 1Y 16.6 26.4 3.8 12.0 3Y 21.5 16.8 3.7 11.5 5Y 10Y 22.1 20.1 21.1 25.4 3.5 13.9 3.4 16.3

Asset quality to improve: During FY2011, the bank had witnessed elevated NPAs from its retail and SME loan book. However, management is taking various steps to stabilize its asset-quality woes and expects higher recoveries and lower slippages going forward, subject to the external environment. RBI's move to deregulate NRE FD rates negative for the bank: One of the key differentiators for the bank was the lower cost of NRE deposits comprising ~12% of its total deposits (type of NRI deposits where interest income is tax-free and where RBI-regulated rates were as low as 3-4% until recently). However, following RBI's recent deregulation, banks have increased NRE FD rates by almost 500bp, leaving negligible cost advantage from these deposits over domestic FD rates. Consequently, over a one-year period, as these deposits re-price upwards to new interest rates, the bank's NIM could be impacted by up to 45bp, posing a negative for the bank's earnings outlook. Valuations limit upside: Old private bank stocks such as Federal Bank have outperformed since the RBI's intention of awarding more bank licenses, potentially due to increased M&A expectations (leading to inadequate margin of safety at current valuations in our view). Valuations at 1.0x FY2013 ABV are higher than the 0.6-0.7x range at which mid-size PSU banks with similar KPIs are trading. While in the medium term we expect a gradual increase in the bank's leverage to lead to higher RoEs, relatively high valuations coupled with the diminished advantage of low-cost NRE deposits are likely to limit upside from current levels. Hence, we recommend a Neutral rating on the stock.
74
January 2012

BALANCE SHEET
- YOY GROWTH (%)

OTHER INCOME
7.3
531
23.8
517
11.0
504
5.5
565
- YOY GROWTH (%)

OPERATING INCOME
2.9
1,942
(2.7)
2,263
(2.5)
2,442
12.1
2,610
- GROWTH (%)
BORROWINGS BOND CAPITAL OTHER LIABILITIES & PROVISIONS TOTAL LIABILITIES
12.0
1,227 320 1,380 43,676 2,319 405 13,055 26,950
19.3
1,582 306 1,445 51,456 2,935 813 14,538 31,953
17.0
3,121 677 1,670 61,491 3,271 1,230 18,480 37,066
19.0
3,682 677 2,018 72,554 3,893 1,451 21,780 43,738
- YOY GROWTH (%)

OPERATING EXPENSES
6.0
677
16.6
836
7.9
959
6.9
1,103
- YOY GROWTH (%)

PRE-PROVISION PROFIT
18.5
1,265
23.5
1,427
14.7
1,483
15.0
- YOY GROWTH (%)

0.4
405
12.8
525
3.9
392
1.6
- YOY GROWTH (%)

PROFIT BEFORE TAX
(13.2)
860
29.6
902
(25.3)
1,091
1.3
1,110
- YOY GROWTH (%)

8.4
395
4.9
315
21.0
354
1.7
360
- GROWTH (%)
20.4
290 658 43,676
18.6
290 927 51,456
16.0
336 1,108 61,491
18.0
384 1,308 72,554
- AS A % OF PBT
PAT
46.0
465
34.9
587
32.4
737
32.4
750
- YOY GROWTH (%)
(7.2)
26.4
25.5
1.7
- GROWTH (%)
12.4
17.8
19.5
18.0
KEY RATIOS
Y/E MARCH PROFITABILITY RATIOS (%) NIMS COST TO INCOME RATIO ROA ROE B/S RATIOS (%) CASA RATIO LOAN DEPOSIT RATIO CAR - TIER I ASSET QUALITY (%) GROSS NPAS NET NPAS SLIPPAGES LOAN LOSS PROV. /AVG. ASSETS PROVISION COVERAGE PER SHARE DATA (`) ` EPS ABVPS (75% COVER. FOR NPAS) DPS 27.2 273.9 5.0 34.3 298.3 8.5 43.1 332.7 7.5 43.8 367.2 8.0 3.0 0.5 3.3 1.0 84.3 3.5 0.6 3.2 1.0 83.4 3.1 0.5 2.4 0.6 82.6 2.7 0.5 2.1 0.5 80.1 26.2 74.7 18.4 16.9 26.9 74.3 16.8 15.6 26.4 73.6 16.6 14.6 25.6 73.0 15.4 13.7 3.5 34.9 1.1 10.3 3.8 36.9 1.2 12.0 3.5 39.3 1.3 13.7 3.1 42.3 1.1 12.5 FY2010 FY2011 FY2012E FY2013E
KEY RATIOS
January 2012
75
Banking
South Indian Bank

South Indian Bank (SIB) is a small old generation private sector bank with ~84% of its branches in southern India (66% in Kerala alone). Like Federal Bank, SIB also has a large NRI customer base (14% of total deposits). Of late, the bank has aggressively started focusing on the gold loan portfolio - a highly profitable and secured loan segment. Gold loans accounted for ~26% of the bank's loan book as of 2QFY2012 and management is targeting to further increase the same.
Structural Snapshot
Growth opportunity: SIB's growth is expected to be in-line with the sectors growth, though with a slight bias towards market share loss in the long term; Momentum in the gold loan portfolio is expected to sustain the bank's high growth in the near term. Competitive position: Gold loans have been a key differentiator of late; Else primarily a niche customer legacy, with limited scope for broad-based growth into other regions or product segments. Nature of business: Cyclical and rate-sensitive sector; significant entry barriers for new players.
STOCK RETURNS (%) BANKEX SENSEX 3M 1Y 0.7 3Y 58.2 28.3 21.3 5Y 10Y SOUTH IND BANK (3.6) 23.7 28.9 7.1 25.5 3.3 17.3
(6.4) (12.5) (2.6) (12.3)
FINANCIAL PERFORMANCE OVERVIEW (%) PAT GROWTH* NIM# ROE# 3M 35.7 3.0 1Y 27.2 25.1 2.8 18.5 3Y 22.5 24.5 2.7 17.2 5Y 20.9 2.8 16.7 10Y 16.1 2.8 17.4 OP. INC. GROWTH* 31.0

Strong business growth: SIB has been growing at a healthy pace primarily due to a rapidly growing gold loan portfolio (84% CAGR over FY2009-11). Gold loans (at ~`6,500cr) now constitute ~26% of the overall loan book. The bank's plans to raise substantial `1,000cr of equity capital (~59% of FY2011 net worth) to maintain its strong growth are temporarily on hold due to market conditions. NIMs likely to have peaked out: SIB's NIMs have been healthy despite its relatively low CASA deposits due to increasing share of high-yielding gold loans. However, increasing competition in the gold loan space and entry of several players are likely to reduce the so-far above-average profitability of this segment going forward. Also, the RBI's recent move of deregulating interest rates on NRE deposits has diminished the competitive cost advantage of these deposits, in our view. Assuming all the NRE term and savings deposits (comprising 8.5% of deposits) re-price over the next one year, the bank's NIMs could get impacted by up to 35bp. Valuations limit upside: Old private bank stocks such as SIB have outperformed since the RBI's intention of awarding more bank licenses, potentially due to increased M&A expectations (leading to inadequate margin of safety at current valuations, in our view). Current valuations at 1.1x FY2013E ABV have factored in the positives, in our view, and are considerably above the valuations of small and mid-size PSU banks, which have similar fundamentals, even after factoring in robust growth witnessed due to the sharp rise in gold loans. Hence, we maintain our Neutral stance on the stock.
39.7 21.1
ANGEL ESTIMATES PARTICULARS PAT GROWTH (%) ROE (%) P/ABV FY2012E 33.8 21.1 1.3 FY2013E (3.6) 17.5 1.1
76
January 2012

Y/E MARCH (` CR) ` NET INTEREST INCOME FY2010 568 FY2011 791 FY2012E 1,018 FY2013E 1,115
BALANCE SHEET
- YOY GROWTH (%)

OTHER INCOME
8.7
208
39.2
197
28.7
228
9.6
243
- YOY GROWTH (%)

OPERATING INCOME
26.9
777
(5.6)
988
16.1
1,246
6.5
1,358
- GROWTH (%)
27.2
1 330 706 25,534 1,391 597 7,156 15,823
29.2
25 265 962 32,820 1,828 638 8,924 20,489
18.0
30 313 1,197 38,771 2,280 775 8,583 26,021
16.0
35 363 1,387 44,924 2,644 898 9,909 30,184
- YOY GROWTH (%)

OPERATING EXPENSES
13.0
366
27.2
463
26.2
572
9.0
680
- YOY GROWTH (%)

11.5
411
26.3
525
23.6
675
19.0
678 CASH IN HAND AND WITH RBI
- YOY GROWTH (%)

14.5
43
27.9
80
28.4
95
0.5
- YOY GROWTH (%)

PROFIT BEFORE TAX
(24.5)
367
84.4
446
19.6
579
25.6
558
- YOY GROWTH (%)

21.9
134
21.3
153
30.0
188
(3.6)
181
- GROWTH (%)
33.6
153 415 25,534
29.5
357 585 32,820
27.0
422 691 38,771
16.0
488 800 44,924
- AS A % OF PBT
PAT
36.4
234
34.3
293
32.4
391
32.4
377
- YOY GROWTH (%)
20.0
25.1
33.8
(3.6)
- GROWTH (%)
25.3
28.5
18.1
15.9
KEY RATIOS
Y/E MARCH PROFITABILITY RATIOS (%) NIMS COST TO INCOME RATIO ROA ROE B/S RATIOS (%) CASA RATIO CREDIT/DEPOSIT RATIO NETWORTH/ ASSETS CAR - TIER I ASSET QUALITY (%) GROSS NPAS NET NPAS SLIPPAGES NPA PROVISIONING EXP. / ASSETS NPA PROVISION COVERAGE PER SHARE DATA (`) ` EPS ABVPS (75% COVERAGE FOR NPAS) DPS 2.1 12.9 0.4 2.6 15.0 0.5 3.5 17.8 0.6 3.3 20.4 0.6 1.3 0.4 1.5 0.2 70.8 1.1 0.3 0.7 0.1 73.9 0.9 0.2 1.4 0.2 75.8 0.8 0.2 1.8 0.2 75.1 23.1 68.8 16.7 15.4 12.4 21.5 68.9 18.4 14.0 11.3 21.0 74.2 19.3 12.7 10.4 20.9 74.2 19.4 12.5 10.3 2.5 47.1 1.0 17.0 2.8 46.8 1.0 18.5 2.9 45.9 1.1 21.1 2.7 50.1 0.9 17.5 FY2010 FY2011 FY2012E FY2013E
KEY RATIOS
Y/E MARCH VALUATION RATIOS P/E P/ABV DIVIDEND YIELD (%) (%) DUPONT ANALYSIS NII (-) PROV. EXP. ADJ NII TREASURY INT. SENS. INC. OTHER INC. OP. INC. OPEX PBT TAXES ROA LEVERAGE ROE 2.5 0.2 2.3 0.3 2.6 0.6 3.2 1.6 1.6 0.6 1.0 16.7 17.0 2.7 0.3 2.4 0.1 2.6 0.5 3.1 1.6 1.5 0.5 1.0 18.4 18.5 2.8 0.3 2.6 0.1 2.7 0.6 3.2 1.6 1.6 0.5 1.1 19.3 21.1 2.7 0.3 2.4 0.0 2.4 0.5 3.0 1.6 1.3 0.4 0.9 19.4 17.5 11.0 1.8 1.8 8.8 1.5 2.2 6.6 1.3 2.6 6.8 1.1 2.6 FY2010 FY2011 FY2012E FY2013E
January 2012
77
Banking
State Bank of India

CMP/TP/Upside: `1,884 / `2,359 / 25% Company Background
State Bank of India (SBI) is the largest bank in India, with an asset size of ~`12,40,000cr. The bank has the widest network of ~13,500 branches, with dominant presence across all regions of the country, including twothirds of its branches in rural and semi-urban areas (in comparison, the second largest PSU bank has ~5,300 branches and the largest private sector bank has ~2,500 branches). The bank also has 164 overseas branches, which account for ~14% of its total loans. It has subsidiaries in life insurance, asset management, credit cards and capital markets, among others; and five regional subsidiary banks (having ~4,800 branches and combined asset size of ~`3,75,000cr).
SHAREHOLDING PATTERN (%) PROMOTERS (GOVT.) FII 59.4 10.7
STOCK RETURNS (%) BANKEX SENSEX 3M 1Y 3Y 18.0 28.3 21.3 5Y 10Y ST. BK OF INDIA (1.8) (24.9) (6.4) (12.5) (2.6) (12.3) 10.3 24.7 7.1 25.5 3.3 17.3
Structural Snapshot
Growth opportunity: Enjoying maximum public confidence, SBI is one of the few PSU banks to have gained not only credit market share but also savings market share over FY2007-11. Post capital infusion by the Government of India, we expect SBI's growth to be a notch higher than the expected medium-term sectoral growth of 17-18%. Competitive position: SBI's dominant savings market share (~26%) enables it to have one of the lowest cost of funds. Moreover, government business contributes significant free floats and fee income (at 1.3% of average assets, highest amongst PSU banks). Poor asset quality, especially from priority sector lending, has been the bank's Achilles heel. Nature of business: Cyclical and rate-sensitive sector; Significant entry barriers for new players.
FINANCIAL PERFORMANCE OVERVIEW (%) PAT GROWTH* NIM# ROE# 3M 12.4 3.2 1Y 25.1 (9.8) 3.0 13.3 3Y 22.3 7.1 2.7 15.8 5Y 13.4 2.8 16.2 10Y 17.8 3.0 17.8 OP. INC. GROWTH* 14.3 15.9 14.6

Improving savings market share: Until FY2007, SBI lost CASA market share to private sector banks pursuing aggressive branch expansion. However, since then the bank's market share of savings deposits has expanded substantially by 400bp to 26.4% (FY2007-1HFY2012), driven by relatively fast branch expansion (8.3% CAGR vs. 2-5% for most PSU banks), leveraging its tremendous trust factor in the country. Even in FY2011, the bank added 1,000+ branches to further bolster its already strong network to 13,542 branches. Provisioning costs to decline: Provisioning costs for the bank in 1HFY2012 at 0.9% of assets were already higher than 2008 levels of ~0.5%, partly due to one-time regulatory provisions. Consequently, although SBI's core RoEs have improved over the past few years, actual RoEs are below core levels, leaving scope for improvement even after factoring in higher NPAs in the coming quarters. Hence, unlike other PSU banks, SBI is likely to report a healthy earnings CAGR of 26% over FY2011-13E. Reasonable valuations: In light of its dominant position and reach, strong savings market share gains, high fee income and superior earnings quality, current valuations at 1.2x FY2013E ABV adjusting for value of subsidiaries (1.5x without adjusting for subsidiaries) are quite reasonable, in our view. Hence, we maintain our Buy recommendation on the stock with a target price of ` 2,359
78
January 2012

BALANCE SHEET
Y/E MARCH (` CR) ` SHARE CAPITAL RESERVE & SURPLUS DEPOSITS FY2010 635 65,314 804,116 FY2011 635 64,351 933,933 FY2012E 635 72,421 1,074,023 FY2013E 635 82,289 1,256,607
- YOY GROWTH (%)

OTHER INCOME
13.4
14,968
37.4
15,825
29.6
15,473
15.6
17,965
- YOY GROWTH (%)

OPERATING INCOME
17.9
38,640
5.7
48,351
(2.2)
57,626
16.1
66,702
- GROWTH (%)
8.4
71,031 31,980
16.1
79,945 39,624 105,248 1,223,736 94,396 28,479 295,601 756,719
15.0
87,865 45,171 117,473 1,397,587 69,811 34,770 378,524 862,660
17.0
102,802 51,495 140,535 1,634,363 81,679 40,681 468,124 983,433
- YOY GROWTH (%)

OPERATING EXPENSES
15.1
20,319
25.1
23,015
19.2
26,776
15.8
31,327
OTHER LIABILITIES & PROVISIONS 80,337 TOTAL LIABILITIES 1,053,414 61,291
- YOY GROWTH (%)

29.8
18,321
13.3
25,336
16.3
30,850
17.0
- YOY GROWTH (%)

2.3
4,396
38.3
10,385
21.8
14,576
14.7
- YOY GROWTH (%)

PROFIT BEFORE TAX
17.7
13,925
136.2
14,951
40.4
16,274
10.8
19,224
- YOY GROWTH (%)

(1.8)
4,759
7.4
6,686
8.9
5,562
18.1
6,100
- GROWTH (%)
16.5
4,413 35,113 1,053,414
19.8
4,764 43,778 1,223,736
14.0
5,280 46,542 1,397,587
14.0
5,992 54,454 1,634,363
- AS A % OF PBT
PAT
34.2
9,166
44.7
8,265
34.2
10,713
31.7
13,124
- YOY GROWTH (%)
0.5
(9.8)
29.6
22.5
- GROWTH (%)
9.2
16.2
14.3
17.0
KEY RATIOS
Y/E MARCH PROFITABILITY RATIOS (%) NIMS COST TO INCOME RATIO ROA ROE* B/S RATIOS (%) CASA RATIO CREDIT/DEPOSIT RATIO CAR - TIER I ASSET QUALITY (%) GROSS NPAS NET NPAS SLIPPAGES LOAN LOSS PROV. /AVG. ASSETS PROVISION COVERAGE PER SHARE DATA (`) ` EPS ABVPS (75% COVER. FOR NPAS) DPS 144.4 972.5 30.0 130.1 967.6 30.0 168.7 1,067.2 31.5 206.7 1,237.9 39.5 3.0 1.7 2.2 0.5 59.2 3.3 1.6 2.8 0.7 65.0 4.8 2.1 3.7 0.9 65.0 6.1 2.3 3.7 1.0 69.0 47.3 78.6 13.4 9.5 49.4 81.0 12.0 7.8 50.4 80.3 12.0 7.6 50.6 78.3 11.7 7.4 2.5 52.6 0.9 15.7 3.0 47.6 0.7 13.3 3.4 46.5 0.8 16.6 3.4 47.0 0.8 17.9 FY2010 FY2011 FY2012E FY2013E
KEY RATIOS
Y/E MARCH VALUATION RATIOS P/E P/ABV DIVIDEND YIELD (%) DUPONT ANALYSIS* NII (-) PROV. EXP. ADJ NII TREASURY INT. SENS. INC. OTHER INC. OP. INC. OPEX PBT TAXES ROA LEVERAGE ROE 2.4 0.4 1.9 0.2 2.1 1.3 3.4 2.0 1.4 0.5 0.9 17.7 15.7 2.9 0.9 2.0 0.1 2.0 1.3 3.3 2.0 1.3 0.6 0.7 19.1 13.3 3.2 1.1 2.1 0.0 2.1 1.1 3.3 2.1 1.2 0.4 0.8 20.9 16.6 3.2 1.1 2.2 0.0 2.2 1.1 3.3 2.1 1.2 0.4 0.8 21.2 17.9 13.0 1.9 1.6 14.5 1.9 1.6 11.2 1.8 1.7 9.1 1.5 2.1 FY2010 FY2011 FY2012E FY2013E
January 2012
79
Banking
RATING 52 WEEK HIGH / LOW MARKET CAP (` CR) ` LIQUIDITY BUY 1,234 / 752 28,865 MEDIUM
Punjab National Bank

CMP/TP/Upside: `911 / `1,059 / 16% Company Background
Punjab National Bank (PNB) is the country's second-largest bank, with a balance sheet size of over `4lakh cr and a pan-India network of 5,300+ branches. The bank's network is primarily spread over northern India, in Punjab, Haryana and Uttar Pradesh. More than 63% of its branches are based in rural and semi-urban hinterland, which results in a large legacy of low-cost CASA deposits (at 36.3% of deposits, one of the highest in the sector).
Structural Snapshot
Growth opportunity: PNB has been growing its loan book well ahead of the industry's over the past three years (26.5% vs 18.5% industry growth). However, in our view, it will be difficult for PSU banks such as PNB to translate this kind of balance sheet growth into similar level of earnings growth in the medium term, with the key constraints being asset-quality issues as well as loss in CASA market share. Accordingly, we expect the bank to report earnings growth a notch below the sector's average, though better than mid-size PSU banks. Competitive position: The bank enjoys a strong CASA legacy but has been losing CASA market share consistently to private banks (down from 7.9% in FY2002 to 6.7% in 1HFY2012). Overall, we expect PSU banks as a group to lose market share to private banks in the medium to long term.
STOCK RETURNS (%) BANKEX SENSEX 3M 1Y 3Y 26.0 28.3 21.3 5Y 12.0 3.3 10Y 17.3 PNJB NTL BANK (7.0) (20.1) (6.4) (12.5) (2.6) (12.3)
7.1 25.5
FINANCIAL PERFORMANCE OVERVIEW (%) PAT GROWTH* NIM# ROE# 3M 12.1 3.6 1Y 27.6 13.5 3.6 24.4 3Y 27.0 29.3 3.4 25.6 5Y 20.0 3.4 10Y 18.4 3.6 OP. INC. GROWTH* 17.5
Nature of business: Cyclical and rate-sensitive sector; Significant entry barriers for new players.
25.2 25.3

Strong CASA legacy, but losing market share: PNB enjoys a structural advantage of having a better CASA ratio of 36.3%, which is driven by strong rural and semi-urban presence, especially in North India. That said, the bank is losing its market share like most other public sector banks on account of slow branch expansion and competition from private banks - savings market share declined by 50bp to 7.4% during FY2008-1HFY2012. Persistent asset-quality pressures: Asset-quality pressures for the bank continue to persist. Management expects strong recoveries and upgradations in 2HFY2012, but taking into account the bank's relatively high exposure to risky sectors (reflected in higher yields) and the overall deteriorating macro-economic environment, we remain cautious on asset-quality pressures. Reasonable valuations: The bank's valuations have corrected to 1.0x FY2013E ABV vs. its five-year range of 1.1-1.6x and median of 1.4x due to the asset-quality concerns faced by the sector. Taking into account the bank's structurally low cost of deposits vs. peers and valuations at the lower end of its historical trading range, we currently have a positive stance on the bank.Hence, we maintain our Buy recommendation on the stock with a target price of ` 1,059.
22.5 22.6
80
January 2012

BALANCE SHEET
- YOY GROWTH (%)

OTHER INCOME
20.6
3,610
39.3
3,613
18.4
4,001
17.9
4,231
- YOY GROWTH (%)

OPERATING INCOME
23.6
12,088
0.1
15,420
10.8
17,977
5.8
20,705
- GROWTH (%)
18.9
8,572 10,690 10,318 296,633 18,328
25.5
20,399 11,190 12,328 378,325 23,777 5,914 95,162 242,107
21.0
23,639 12,869 14,760 455,296 24,609 11,382 127,317 278,423
17.0
27,641 14,928 17,413 532,377 28,793 13,309 151,569 322,970
- YOY GROWTH (%)

OPERATING EXPENSES
21.5
4,762
27.6
6,364
16.6
7,261
15.2
8,350
- YOY GROWTH (%)

13.2
7,326
33.6
9,056
14.1
10,715
15.0
- YOY GROWTH (%)

PROV. AND CONT.
27.5
1,422
23.6
2,492
18.3
3,371
15.3
- YOY GROWTH (%)

PROFIT BEFORE TAX
44.9
5,905
75.3
6,564
35.3
7,345
42.3
7,560
- YOY GROWTH (%)

PROV FOR TAXATION
24.0
1,999
11.2
2,130
11.9
2,383
2.9
2,453
- GROWTH (%)
20.6
2,513 6,320 296,633
29.7
3,106 8,259 378,325
15.0
3,625 9,940 455,296
16.0
4,112 11,623 532,377
- AS A % OF PBT
PAT
33.9
3,905
32.5
4,434
32.4
4,962
32.4
5,107
- YOY GROWTH (%)
26.4
13.5
11.9
2.9
- GROWTH (%)
20.1
27.5
20.3
16.9
KEY RATIOS
Y/E MARCH PROFITABILITY RATIOS (%) NIMS COST TO INCOME RATIO ROA ROE B/S RATIOS (%) CASA RATIO CREDIT/DEPOSIT RATIO CAR - TIER I ASSET QUALITY (%) GROSS NPAS NET NPAS SLIPPAGES LOAN LOSS PROV. /AVG. ASSETS PROVISION COVERAGE PER SHARE DATA (`) ` EPS 123.9 139.9 628.1 22.0 156.6 756.0 28.5 161.2 882.3 30.0 1.7 0.5 1.8 0.4 81.2 1.8 0.8 2.3 0.6 73.2 2.7 1.0 2.2 0.6 75.0 4.1 1.3 2.8 0.9 75.0 40.8 74.8 14.2 9.1 38.5 77.4 12.4 8.4 36.6 73.5 12.4 8.4 36.0 72.9 12.4 8.3 3.2 39.4 1.4 26.6 3.6 41.3 1.3 24.4 3.5 40.4 1.2 22.6 3.4 40.3 1.0 19.7 FY2010 FY2011 FY2012E FY2013E
KEY RATIOS
ABVPS ( 75% COVERAGE FOR NPAS) 514.8 DPS 22.0
January 2012
81
Banking
RATING 52 WEEK HIGH / LOW MARKET CAP (` CR) ` LIQUIDITY BUY 1,007 / 631 29,109 MEDIUM
Bank of Baroda
Company Background
CMP/TP/Upside: `743 / `906 / 22%
Bank of Baroda (BoB) is the third-largest public sector bank in India, with a balance sheet size of almost `3.9lakh cr. The bank has a network of ~3,500 domestic branches and over 1,800 ATMs, mainly in western India (~45% of total branch network). The bank has a strong presence overseas, with over 25% of its advances coming from overseas branches.
Structural Snapshot
Growth opportunity: BoB has grown faster than the industry, leading to 87bp credit market share gains over FY2008-11, while maintaining a better asset-quality profile and CASA market share performance than peers. In the medium to long term, we expect BoB's growth to largely range from in-line to a notch above its peer average. Competitive position: BoB has delivered healthy performance over the past few years, backed by investments in its channels to improve its customer proposition. That said, in the medium to long term, we expect PSU banks such as BoB to lose their market share to private banks, though at a lower rate than witnessed during FY2002-08 and at a relatively low rate than midsize PSU banks. Nature of business: Cyclical and rate-sensitive sector; Significant entry barriers for new players.
STOCK RETURNS (%) BANKEX SENSEX 3M 1Y (9.9) 3Y 45.6 28.3 21.3 5Y 10Y BANK OF BARODA (0.8) 25.9 33.9 7.1 25.5 3.3 17.3
(6.4) (12.5) (2.6) (12.3)
FINANCIAL PERFORMANCE OVERVIEW (%) PAT GROWTH* NIM# ROE# 3M 14.4 2.8 1Y 32.8 38.7 2.8 23.5 3Y 24.9 43.5 2.6 21.3 5Y 21.3 2.7 18.2 10Y 15.9 OP. INC. GROWTH* 21.4
38.7 31.5 3.0 17.0

Improvement in core return ratios: The bank's credit growth (~29% CAGR) comfortably outpaced the sector's growth (~20% CAG R) during FY2007-11, which increased the bank's leverage and operating efficiency closer to optimum levels (operating expenses declined from 2% of assets in FY2007 to 1.3% in 1HFY2012), driving improvement in core RoE from 12.4% to 21.5%. Moreover, this growth has, in our view, not been driven by aboveaverage risk taking, considering the bank's moderate yields (evidenced in low net NPA ratio at 0.5% in 2QFY2012). Focus on channel improvements: The bank has drawn aggressive expansion plans for opening ~550 branches (~15% of existing branch network) in FY2012. Also, being one of the larger west-based PSU banks, it has been one of the better performers relative to peers on the channel improvement front (such as internet banking, phone banking and cash management), reflected in healthy CASA at a 20.6% CAGR over FY2007-11. Attractive valuations: BoB has been rerated in recent years due to healthy improvement in its core profitability. The bank's current valuations at 1.0x FY2013E ABV are similar to valuations at which its peers are trading, while, in our view, the bank has a better asset-quality and earnings outlook as compared to peers. As a result, it is one of our preferred picks amongst large PSU banks. Hence, we maintain our Buy recommendation on the stock with a target price of ` 906.
82
January 2012

BALANCE SHEET
- YOY GROWTH (%)

OTHER INCOME
15.9
2,806
48.2
2,809
18.0
3,003
17.1
3,448
- YOY GROWTH (%)

OPERATING INCOME
1.8
8,746
0.1
11,611
6.9
13,390
14.9
15,612
- GROWTH (%)
25.4
6,160 7,190 8,598 278,317 13,540
26.6
12,906 9,402 9,657 358,397 19,868 30,066 71,261 228,676
19.0
15,394 10,906 13,149 427,496 23,626 35,863 92,655 265,265
17.0
18,012 12,651 15,770 500,170 27,642 41,959 111,153 307,707
- YOY GROWTH (%)

OPERATING EXPENSES
11.0
3,811
32.8
4,630
15.3
4,808
16.6
5,677
- YOY GROWTH (%)

6.6
4,935
21.5
6,982
3.8
8,583
18.1
- YOY GROWTH (%)

14.6
697
41.5
1,331
22.9
1,936
15.8
- YOY GROWTH (%)

PROFIT BEFORE TAX
(27.5)
4,238
90.9
5,650
45.4
6,647
25.8
7,499
- YOY GROWTH (%)

26.8
1,180
33.3
1,409
17.6
1,994
12.8
2,433
- GROWTH (%)
22.2
2,285 4,347 278,317
30.6
2,300 6,226 358,397
16.0
2,661 7,427 427,496
16.0
3,020 8,689 500,170
- AS A % OF PBT
PAT
27.8
3,058
24.9
4,242
30.0
4,653
32.4
5,066
- YOY GROWTH (%)
37.3
38.7
9.7
8.9
- GROWTH (%)
22.8
28.8
19.3
17.0
KEY RATIOS
KEY RATIOS
January 2012
83
Banking
Bank of India
Company Background
Bank of India (BoI) is amongst the five largest banks in India, with a balance sheet size of over `3.5 lakh cr. The bank has a pan-India network of 3,700+ branches, of which ~63% are located in rural and semi-urban areas. The bank also has considerable presence overseas, which accounts for ~24% of its total loans (amongst the highest in the Indian banking industry).
Structural Snapshot
Growth opportunity: The bank's relatively high pace of credit growth has led to market share gains of ~50bp over FY2007-11. However, to match this with similar level of earnings growth in the medium term, asset-quality issues as well as loss in CASA market share are expected to be the key constraints. Competitive position: Overall, we expect PSU banks such as BoI to lose their market share to private banks in the medium to long term. BoI has also been embattled with asset-quality issues in recent years. Nature of business: Cyclical and rate-sensitive sector; Significant entry barriers for new players.
STOCK RETURNS (%) BANKEX SENSEX 3M 1Y 3Y 6.3 28.3 21.3 5Y 10Y BANK OF INDIA (10.4) (28.6) (6.4) (12.5) (2.6) (12.3) 8.5 34.9 7.1 25.5 3.3 17.3
FINANCIAL PERFORMANCE OVERVIEW (%) PAT GROWTH* NIM# ROE# 3M (20.4) 2.3 1Y 24.8 42.9 2.6 17.3 3Y 18.1 7.4 2.6 20.2 5Y 22.3 2.7 10Y 15.3 2.7 OP. INC. GROWTH* 16.3

Embattled with asset-quality issues: Asset-quality pressures, which had moderated in FY2011 post the severe stress witnessed in FY2010, have once again risen in 1HFY2012, with slippages rate rising to 4.2%. While the spike was partly due to the migration to system-based NPA recognition platform, the rate of slippages could remain on the higher side in the coming quarters as well due to the weakening macro environment. As a result, earnings, which are expected to decline by ~6% yoy in FY2012 due to lower NIMs, are likely to remain subdued even in FY2013. Consequently, the bank's RoEs, which were unsustainably high at 28% in FY2008 and FY2009 and subsequently declined to 14% in FY2010 itself, are likely to remain at sub-14% till FY2013, as the bank continues to pay the price for high risk-taking in FY2008-09. Modest fee income and funding mix: The bank's international operations contribute a substantial ~24% to its advances and enable a wider spectrum of fee-based services to its corporate and retail customers. The bank has a relatively moderate funding mix, with domestic CASA ratio at 30.2% as of 2QFY2012. Outlook and valuation: At the CMP, the stock is trading at cyclically low valuations of 1.0x FY2013E ABV compared to its historical range of 1.1-1.6x, with a median of 1.3x. However, valuations are relatively high compared to peers, considering the poor RoE outlook for the bank due to macro headwinds. Accordingly, we recommend a Neutral rating on the stock.
28.8 25.7 21.9 20.9
ANGEL ESTIMATES PARTICULARS PAT GROWTH (%) ROE (%) P/ABV FY2012E (5.6) 13.9 1.1 FY2013E 6.1 13.3 1.0
84
January 2012

BALANCE SHEET
- YOY GROWTH (%)

OTHER INCOME
4.7
2,617
35.7
2,642
(0.6)
3,125
15.1
3,335
- YOY GROWTH (%)

OPERATING INCOME
(14.3)
8,373
1.0
10,452
18.3
10,886
6.7
12,265
- GROWTH (%)
21.1
14,079 8,320 8,590 274,982 15,603
30.1
12,862 9,160 12,975 351,173 21,782 15,528 85,872 213,096
15.0
14,704 10,717 13,218 401,490 22,342 17,752 98,141 249,323
16.0
17,037 12,432 15,919 465,185 25,916 20,569 113,439 289,214
- YOY GROWTH (%)

OPERATING EXPENSES
(2.1)
3,668
24.8
5,068
4.1
4,786
12.7
5,456
- YOY GROWTH (%)

18.5
4,705
38.2
5,384
(5.6)
6,100
14.0
- YOY GROWTH (%)

(13.8)
2,211
14.4
1,889
13.3
3,088
11.6
- YOY GROWTH (%)

PROFIT BEFORE TAX
71.1
2,494
(14.6)
3,495
63.5
3,012
1.0
3,689
- YOY GROWTH (%)

(40.1)
753
40.2
1,007
(13.8)
663
22.5
1,197
- GROWTH (%)
17.9
2,352 5,829 274,982
26.5
2,481 12,413 351,173
17.0
2,751 11,181 401,490
16.0
3,092 12,954 465,185
- AS A % OF PBT
PAT
30.2
1,741
28.8
2,489
22.0
2,349
32.4
2,492
- YOY GROWTH (%)
(42.1)
42.9
(5.6)
6.1
- GROWTH (%)
21.9
27.7
14.3
15.9
KEY RATIOS
KEY RATIOS
January 2012
85
Banking
Canara Bank
Company Background
CMP/TP/Upside: `421 / `510 / 21%
Canara Bank is the largest south-based PSU bank (overall fifth largest bank in India), with a balance sheet size of over `3.5lakh cr. The bank has a reasonably large pan-India presence, with about 45% of its 3,400+ branches outside South India (the bank also has 2,600+ ATMs).
Structural Snapshot
Growth opportunity: The bank's relatively high pace of credit growth has led to market share gains of 44bp over FY2008-11. However, in our view, it will be difficult for PSU banks such as Canara Bank to translate such growth in balance sheet into similar level of earnings growth in the medium term, with the key constraints being asset-quality issues as well as loss in CASA market share. Accordingly, we expect the bank to post earnings growth a notch below the sector's average, though better than mid-size PSU banks. Competitive position: Overall, we expect PSU banks such as Canara Bank to lose market share to private banks in the medium to long term. Moreover, amongst larger banks, Canara Bank has a relatively low CASA ratio of 25.8%, leading to lower margins. Nature of business: Cyclical and rate sensitive sector; Significant entry barriers for new players.
STOCK RETURNS (%) CANARA BANK BANKEX SENSEX 3M (7.3) 1Y (27.6) 3Y 27.1 28.3 21.3 5Y 9.9 3.3 10Y 17.3
(6.4) (12.5) (2.6) (12.3)
7.1 25.5
FINANCIAL PERFORMANCE OVERVIEW (%) PAT GROWTH* NIM# ROE# 3M (15.4) 2.3 1Y 23.3 33.2 2.7 26.4 3Y 21.7 37.0 2.5 25.3 5Y 10Y OP. INC. GROWTH* 11.5 16.2 14.2 24.5 30.3 2.5 2.8 22.7 23.6

Weak deposit franchise likely to keep NIMs under pressure: Canara Bank has a relatively weak deposit mix, with a CASA ratio of 25.8% and a relatively high proportion of bulk deposits and CDs at ~30% of deposits. Accordingly, we expect the bank's NIM to dip by ~50bp for FY2012 compared to FY2011. Asset quality to remain an overhang: The bank's advances grew at an above-average 26% CAGR over FY2008-11, driven by strong traction in infrastructure-related loans, which now contribute ~17% to its total loans. The bank has already experienced substantial slippages in the past three quarters, partly due to migration to system-based NPA recognition, but the rate of slippages could remain on the higher side due to the weakening macro environment. As a result, earnings, which are expected to decline in FY2012 due to lower NIMs, are likely to remain flat even going into FY2013. Valuations largely factor in the negatives: The stock has considerably underperformed its peers (Bank Nifty by 15% over the past one year), primarily due to concerns regarding NIMs and asset quality. Cyclically low valuations of 0.9x FY2013E ABV vs. five-year average of 1.2x and range of 0.8-1.4x, in our view, largely factor in the negatives and a downward bais on interest rates is a positive for the bank. Hence, we recommend Buy on the stock with a target price of ` 510.
86
January 2012

BALANCE SHEET
- YOY GROWTH (%)

OTHER INCOME
20.4
2,858
37.7
2,703
0.5
3,001
14.7
3,389
- YOY GROWTH (%)

OPERATING INCOME
17.7
8,538
(5.4)
10,526
11.0
10,866
12.9
12,409
- GROWTH (%)
25.6
1,041 7,399 6,977 264,741 15,719
25.3
5,198 9,063 7,805 336,079 22,015 8,693 83,700 212,467
16.0
6,023 10,695 8,957 389,406 22,166 10,073 95,892 250,711
16.0
6,975 12,299 10,636 450,939 25,712 11,664 113,121 288,318
- YOY GROWTH (%)

OPERATING EXPENSES
19.5
3,478
23.3
4,419
3.2
4,698
14.2
5,403
- YOY GROWTH (%)

13.5
5,061
27.1
6,107
6.3
6,168
15.0
- YOY GROWTH (%)

24.1
1,239
20.7
1,081
1.0
1,827
13.6
- YOY GROWTH (%)

PROFIT BEFORE TAX
(17.8)
3,821
(12.8)
5,026
69.0
4,341
11.2
4,975
- YOY GROWTH (%)

48.6
800
31.5
1,000
(13.6)
912
14.6
1,493
- GROWTH (%)
22.5
2,859 3,217 264,741
25.5
2,844 6,359 336,079
18.0
3,197 7,368 389,406
15.0
3,591 8,532 450,939
- AS A % OF PBT
PAT
20.9
3,021
19.9
4,026
21.0
3,430
30.0
3,483
- YOY GROWTH (%)
45.8
33.2
(14.8)
1.5
- GROWTH (%)
20.6
26.9
15.9
15.8
KEY RATIOS
KEY RATIOS
January 2012
87
Banking
RATING 52 WEEK HIGH / LOW MARKET CAP (` CR) ` LIQUIDITY BUY 156/78 9,167 MEDIUM
IDBI BANK
Company Background
CMP/TP/Upside: `93 / `107 / 15%
IDBI Bank is the sixth largest PSU bank in India, with a branch network of ~900 branches and a balance sheet size of over `2.5lakh cr. IDBI was incorporated in 1964 as a development financial institution; but in October 2004, it was transformed into a banking company with the reverse merger of IDBI and its subsidiary IDBI Bank. The bank now offers an array of wholesale and retail banking products, apart from providing long-term finance for industrial development.
Structural Snapshot
Growth opportunity: IDBI Bank is in a position to grow its CASA deposits and balance sheet a notch faster than its peers over the medium to long term, in our view, on account of its relatively new and fast expanding branch network than other PSU banks. Competitive position: Overall, we expect PSU banks, including IDBI Bank, to lose their market share to private banks in the medium to long term. However, compared to its peers, the bank is rapidly transforming its deposit base from wholesale to retail, which is expected to improve core profitability in the medium term. Legacy asset-quality issues, however, continue to hound the bank. Nature of business: Cyclical and rate-sensitive sector; Significant entry barriers for new players.
STOCK RETURNS (%) IDBI BANK BANKEX SENSEX 3M 1Y 3Y 15.5 28.3 21.3 5Y 10Y (13.0) (35.7) (6.4) (12.5) (2.6) (12.3) (1.0) 20.4 7.1 25.5 3.3 17.3
FINANCIAL PERFORMANCE OVERVIEW (%) PAT GROWTH* NIM# ROE# 3M 20.2 1.9 1Y 44.5 60.0 1.8 15.8 3Y 38.6 31.3 1.3 13.7 5Y 31.0 24.1 1.0 12.4 10Y 17.9 9.1 0.7 9.5 OP. INC. GROWTH* (3.5)

Strong branch expansion and relatively healthy fee income: IDBI Bank enjoys the advantage of a modern, 100% CBS branch network, which is growing organically at a much faster rate than other PSU banks (17-18% CAGR post the FY2007 UWB acquisition). Relative to other PSU banks, on account of the bank's strong corporate relationships and government mandates, the bank's fee income at 0.8% of overall assets is also healthy. SASF - A burden on the bank's books: At the time of its merger, IDBI Bank had to set up a stressed asset stabilization fund (SASF) of ~`9,000cr, through which the bank has witnessed only ~`3,500cr worth of cash recoveries (as of FY2011). The possibility of an entire recovery seems implausible and the large remaining unrecoverable amount of ~`5,541cr would eventually have to be reduced from its net worth (denting net worth by ~36%). Outlook and valuation: The bank has been among the fastest-growing banks in terms of CASA deposits over the past few years (CAGR of 36% over FY2007-11) even when compared to private banks and now has a market share of 2.1% (as of FY2011). At the CMP, the bank is trading at moderate valuations of 0.8x FY2013E P/ABV, adjusting for the SASF amount (0.6x without adjusting). In our view, the bank is one of the PSU banks to watch out for, especially once near-term asset quality headwinds subside. Hence, we recommend a Buy rating on the stock with a target price of ` 107
88
January 2012

BALANCE SHEET
- YOY GROWTH (%)

OTHER INCOME
82.0
2,181
91.9
2,084
7.3
2,144
17.1
2,451
- YOY GROWTH (%)

OPERATING INCOME
39.6
4,437
(4.4)
6,413
2.9
6,787
14.3
7,889
- GROWTH (%)
49.2
35,010 12,699 8,031 233,573 13,903 679 73,345 138,202
7.6
36,607 14,962 6,754 253,377 19,559 1,207 68,269 157,098
14.0
39,868 16,608 7,638 285,840 13,374 7,078 82,940 174,379
14.0
44,328 18,601 8,613 323,610 15,246 8,014 96,023 195,304
- YOY GROWTH (%)

OPERATING EXPENSES
58.4
1,831
44.5
2,255
5.8
2,627
16.2
3,277
- YOY GROWTH (%)

36.9
2,605
23.1
4,158
16.5
4,160
24.8
- YOY GROWTH (%)

78.0
1,561
59.6
1,877
0.1
1,501
10.9
BAL.WITH BANKS & MONEY AT CALL 1,661 INVESTMENTS ADVANCES
- YOY GROWTH (%)

PROFIT BEFORE TAX
226.3
1,045
20.3
2,281
(20.0)
2,659
10.6
2,951
- YOY GROWTH (%)

6.0
14
118.3
631
16.6
798
11.0
958
- GROWTH (%)
33.6
2,997 4,446 233,573
13.7
3,037 4,206 253,377
11.0
3,324 4,745 285,840
12.0
3,650 5,372 323,610
- AS A % OF PBT
PAT
1.3
1,031
27.6
1,650
30.0
1,861
32.4
1,994
- YOY GROWTH (%)
20.1
60.0
12.8
7.1
- GROWTH (%)
35.5
8.5
12.8
13.2
KEY RATIOS
KEY RATIOS
January 2012
89
Banking
Union Bank of India

Union Bank of India is the seventh largest public sector bank, with a balance sheet size of almost `2.5lakh cr. The bank has a reasonably large pan-India presence with 3,000+ branches and over 2,700 ATMs. The bank was one of the early adopters of core banking technology amongst PSU banks.
Structural Snapshot
Growth opportunity: The bank's relatively high pace of credit growth has led to market share gains of ~40bp over FY2008-11. However, declining CASA market share (~60bp over FY2008-11) and weakening asset quality are expected to be an impediment to such balance sheet growth, translating into equally high earnings growth in the medium term. Competitive position: Overall, we expect PSU banks such as Union Bank of India to lose their market share to private banks in the medium to long term. Moreover, amongst larger banks, Union Bank of India has been witnessing relatively high asset-quality concerns of late. Nature of business: Cyclical and rate-sensitive sector; Significant entry barriers for new players.
STOCK RETURNS (%) UNION BANK BANKEX SENSEX 3M 1Y 3Y 6.9 28.3 21.3 5Y 9.7 3.3 10Y 17.3 (24.5) (40.6) (6.4) (12.5) (2.6) (12.3)
7.1 25.5
FINANCIAL PERFORMANCE OVERVIEW (%) OP. INC. GROWTH* PAT GROWTH* NIM# ROE# 3M 5.7 16.2 2.9 1Y 33.9 0.3 3.0 20.9 3Y 24.1 14.5 2.7 24.8 5Y 22.4 2.8 10Y 18.3 3.0

CASA ratio expected to sustain at ~32% levels: We are relatively positive on the bank's CASA growth outlook, owing to its large branch expansion in recent years compared to its peers. The bank has opened ~400 branches in the past two years, which in our view should aid the bank in maintaining its CASA ratio at ~32% levels. The bank is aiming to open another 225 branches during FY2012. High provisioning impacting profitability: Union Bank of India had managed to improve its asset quality over FY2011 (slippage ratio of 1.4% as of 4QFY2011). However, from 1QFY2012, the bank, on account of stress from SME and agri portfolio and shift to system-based NPA recognition platform, had seen its slippages balloon from 1.4% in 4QFY2011 to 4.8% as of 2QFY2012 and provision coverage ratio decline to 60.5%. Although the asset quality improved in 3QFY2012 with slippage ratio declining to 1.5%, higher provisioning expenses (75.7% of PPP) negatively impacted the profitability. However, with slippages expected to decline in the coming few quarters, profitabilty is expected to improve back to normalised levels, in our view. Reasonable valuation: In our view, Union Bank of India is structurally among the more profitable and competitive PSU banks. Going ahead, pick-up in recoveries from the technically slipped accounts is likely to cushion further stress. Moreover, asset-quality stress seems to have been largely factored into the price, in our view. The stock is trading at cheap valuations of 0.8x FY2013E P/ABV, lower than other large PSU banks, and well below its five-year median of 1.2x and range of 0.9-1.5x. Hence, we recommend a Buy rating with a target price of ` 222.
25.3 29.6 24.0 24.6
90
January 2012

BALANCE SHEET
- YOY GROWTH (%)

OTHER INCOME
9.9
1,975
48.3
2,039
9.8
2,101
15.3
2,201
- YOY GROWTH (%)

OPERATING INCOME
33.2
6,167
3.2
8,255
3.0
8,925
4.8
10,073
- GROWTH (%)
22.6
3,125 6,090 5,483 195,162 12,468
19.1
7,126 6,190 7,443 235,984 17,610 2,488 58,399 150,986
14.0
8,109 6,995 8,380 268,553 15,002 5,371 70,245 170,614
17.0
9,461 8,044 9,878 313,295 17,553 6,266 84,820 196,206
- YOY GROWTH (%)

OPERATING EXPENSES
16.4
2,508
33.9
3,950
8.1
3,902
12.9
4,487
- YOY GROWTH (%)

13.3
3,659
57.5
4,305
(1.2)
5,023
15.0
- YOY GROWTH (%)

18.7
826
17.6
1,350
16.7
2,158
11.2
- YOY GROWTH (%)

PROFIT BEFORE TAX
13.9
2,833
63.3
2,955
59.9
2,865
16.4
3,072
- YOY GROWTH (%)

20.2
758
4.3
873
(3.1)
930
7.2
997
- GROWTH (%)
23.6
2,305 3,361 195,162
26.5
2,293 4,208 235,984
13.0
2,531 4,789 268,553
15.0
2,864 5,587 313,295
- AS A % OF PBT
PAT
26.8
2,075
29.6
2,082
32.4
1,936
32.4
2,075
- YOY GROWTH (%)
20.2
0.3
(7.0)
7.2
- GROWTH (%)
21.2
20.9
13.8
16.7
KEY RATIOS
Y/E MARCH PROFITABILITY RATIOS (%) NIMS COST TO INCOME RATIO ROA ROE B/S RATIOS (%) CASA RATIO CREDIT/DEPOSIT RATIO CAR - TIER I ASSET QUALITY (%) GROSS NPAS NET NPAS SLIPPAGES LOAN LOSS PROV. /AVG. ASSETS PROVISION COVERAGE PER SHARE DATA (`) ` EPS ABVPS (75% COVER. FOR NPAS) DPS 41.1 173.6 5.5 39.6 203.3 8.0 36.7 223.0 7.0 39.4 246.9 7.5 2.2 0.8 1.8 0.4 74.0 2.4 1.2 2.4 0.6 67.6 3.7 1.8 3.0 0.8 65.0 5.1 2.2 3.1 0.8 65.0 31.7 70.2 12.5 7.9 31.8 74.6 13.0 8.7 32.4 73.9 12.9 8.5 32.2 72.7 11.5 7.5 2.4 40.7 1.2 26.2 3.0 47.8 1.0 20.9 2.8 43.7 0.8 16.3 2.8 44.5 0.7 15.4 FY2010 FY2011 FY2012E FY2013E
KEY RATIOS
Y/E MARCH VALUATION RATIOS P/E P/ABV DIVIDEND YIELD (%) DUPONT ANALYSIS NII (-) PROV. EXP. ADJ NII TREASURY INT. SENS. INC. OTHER INC. OP. INC. OPEX PBT TAXES ROA BEFORE PREF DIVIDEND PREF. DIVIDEND ROA LEVERAGE ROE 2.4 0.5 1.9 0.3 2.2 0.8 3.0 1.4 1.6 0.4 1.2 1.2 22.5 26.2 2.9 0.6 2.3 0.2 2.5 0.7 3.2 1.8 1.4 0.4 1.0 0.0 1.0 21.7 20.9 2.7 0.9 1.8 0.1 2.0 0.7 2.7 1.5 1.1 0.4 0.8 0.0 0.8 21.3 16.3 2.7 0.9 1.8 0.1 1.9 0.7 2.6 1.5 1.1 0.3 0.7 0.0 0.7 21.7 15.4 4.6 1.1 2.9 4.8 0.9 4.3 5.1 0.8 3.7 4.8 0.8 4.0 FY2010 FY2011 FY2012E FY2013E
January 2012
91
Banking
Central Bank of India

Central Bank of India is one of the larger mid-size PSU banks, with a balance sheet size of ~`2.2lakh cr. The bank has one of the largest branch networks of ~4,000 branches, which are well spread across several major states of India. The bank also has the second highest proportion of rural and semi-urban branches (63% of total branches). In the past, the bank's focus on low-yielding bulk corporate loans was contributing to lower profitability, but slowly the bank is trying to increase its retail lending (still low at about 11% of loans).
Structural Snapshot
STOCK RETURNS (%) BANKEX SENSEX 3M 1Y (47.0) 3Y 31.0 28.3 21.3 5Y 3.3 10Y 17.3 CENTRAL BANK (26.5)
Growth opportunity: Mid-size PSU banks such as Central Bank of India are expected to gradually lose their market share, as private sector banks make inroads into their hinterlands. Competitive position: In the context of the overall sector, mid-size PSU banks, in our view, have a relatively weak competitive position compared to private as well as large PSU banks. Central Bank of India also suffers from relatively low branch and employee productivity, leading to further loss in competitiveness within its peer set. Nature of business: Cyclical and rate-sensitive sector; Significant entry barriers for new players.
(6.4) (12.5) (2.6) (12.3)
7.1 25.5
FINANCIAL PERFORMANCE OVERVIEW (%) OP. INC. GROWTH* PAT GROWTH* NIM# ROE# 3M 8.1 (35.6) 2.7 1Y 54.0 12.4 2.8 23.2 3Y 28.2 33.6 2.1 21.2 5Y 34.2 2.3 19.7 10Y 37.5 3.0 18.1 17.6 13.1

Low branch productivity and structurally higher opex structure: The bank suffers from low branch and employee productivity in terms of business per branch as well as business per employee. Business per branch for FY2011 was ~34% lower than large and medium PSU peer banks. Due to this, the bank suffers from higher operating expenses, as reflected in opex-to-average assets ratio of ~1.6% during FY2009-11. Near-term asset-quality concerns: A late starter in CBS implementation, the bank commenced the switchover to NPA-based recognition system only post 1QFY2012. The bank still has to switch over accounts below `10lakhs (comprising 20% of loan book) in 2HFY2012, which could lead to increased NPAs. Also, the bank's exposure to the infrastructure sector is relatively high at ~21% of the funded exposure, with the power sector accounting for over two-thirds of the same. Valuations: At the CMP, the stock is trading at cheap valuations of 0.6x FY2013E ABV compared to its trading range of 0.6-1.5x with a median of 1.1x since its listing in 2007. However, we believe this is outweighed by the substantial near-term concerns on asset quality. While the stock has corrected substantially over the past year, it is still trading higher than some of the other mid-size PSU banks with better asset-quality outlook and return ratios. Hence, we maintain our Neutral rating on the stock.
92
January 2012

BALANCE SHEET
Y/E MARCH (` CR) ` SHARE CAPITAL - EQUITY - PREFERENCE RESERVE & SURPLUS DEPOSITS FY2010 1,771 404 1,367 5,921 162,107 FY2011 2,021 404 1,617 6,827 179,356 FY2012E 2,264 647 1,617 9,843 199,085 FY2013E 2,264 647 1,617 10,721 224,966
- YOY GROWTH (%)

OTHER INCOME
14.2
1,735
109.2
1,265
5.6
1,297
11.5
1,357
- YOY GROWTH (%)

OPERATING INCOME
62.2
4,281
(27.1)
6,590
2.5
6,921
4.6
7,628
- YOY GROWTH (%)

OPERATING EXPENSES
29.8
2,222
54.0
3,999
5.0
3,646
10.2
3,938
- GROWTH (%)
BORROWINGS TIER 2 CAPITAL OTHER LIAB. & PROV. TOTAL LIABILITIES CASH IN HAND AND WITH RBI
23.5
2,751 4,575 5,545 182,672 17,012
10.6
7,283 5,605 8,666 209,757 14,082 1,201 54,504 129,725
11.0
8,107 6,278 7,937 233,513 12,941 3,503 60,454 145,292
13.0
9,140 7,031 9,130 263,253 14,623 3,949 69,276 162,728
- YOY GROWTH (%)

19.4
2,059
80.0
2,591
(8.8)
3,275
8.0
3,690
- YOY GROWTH (%)

43.3
509
25.9
932
26.4
1,820
12.7
1,931
- YOY GROWTH (%)

PROFIT BEFORE TAX
(0.5)
1,550
83.2
1,659
95.2
1,455
6.1
1,760
BAL.WITH BANKS & MONEY AT CALL 2,205 INVESTMENTS ADVANCES 50,563 105,383
- YOY GROWTH (%)

67.5
491
7.1
407
(12.3)
422
20.9
571
- AS A % OF PBT
PAT
31.7
1,058
24.5
1,252
29.0
1,033
32.4
1,189
- GROWTH (%)
23.3
2,343 5,165 182,672
23.1
2,425 7,819 209,757
12.0
2,619 8,705 233,513
12.0
2,864 9,813 263,253
- YOY GROWTH (%)

PREFERENCE DIVIDEND PAT AVL. TO EQ SHAREHOLDERS
85.3
61 998
18.3
131 1,121
(17.5)
160 874
15.1
160 1,029
- YOY GROWTH (%)
102.1
12.4
(22.1)
17.8
- GROWTH (%)
23.7
14.8
11.3
12.7
KEY RATIOS
KEY RATIOS
Y/E MARCH VALUATION RATIOS P/E P/ABV DIVIDEND YIELD (%) DUPONT ANALYSIS NII (-) PROV. EXP. ADJ NII TREASURY INT. SENS. INC. OTHER INC. OP. INC. OPEX PBT TAXES ROA PREF. DIVIDEND ROA POST PREF. DIVIDEND LEVERAGE ROE 1.5 0.3 1.2 0.5 1.7 0.6 2.3 1.3 0.9 0.3 0.6 0.0 0.6 42.1 25.4 2.7 0.5 2.2 0.2 2.4 0.5 2.9 2.0 0.8 0.2 0.6 0.1 0.6 40.6 23.2 2.5 0.8 1.7 0.1 1.8 0.5 2.3 1.6 0.7 0.2 0.5 0.1 0.4 32.0 12.6 2.5 0.8 1.7 0.1 1.8 0.5 2.3 1.6 0.7 0.2 0.5 0.1 0.4 27.6 11.4 3.1 0.7 2.9 2.7 0.6 4.5 5.6 0.7 2.0 4.8 0.6 2.6 FY2010 FY2011 FY2012E FY2013E
January 2012
93
Banking
Syndicate Bank
Syndicate Bank is a south-based mid-size PSU bank, with an asset base in excess of `1.6lakh cr. The bank has 2,500+ branches, with a more spreadout network than other regional banks, having 53% branches in the south and the remaining spread across several states of the country (23% of branches in the northern region). The bank also has a reasonable presence overseas, which accounts for ~10% of its total loans.
Structural Snapshot
Growth opportunity: Mid-size PSU banks such as Syndicate Bank are expected to gradually lose their market share, as private sector banks make inroads into their stronghold regions.
STOCK RETURNS (%) BANKEX SENSEX 3M 1Y 3Y 9.9 28.3 21.3 5Y 10Y SYNDICATE BANK (18.9) (16.9) (6.4) (12.5) (2.6) (12.3) 2.5 24.7 7.1 25.5 3.3 17.3
Competitive position: In the context of the overall sector, mid-size PSU banks such as Syndicate Bank, in our view, have a relatively weak competitive position compared to private as well as large PSU banks. Nature of business: Cyclical and rate-sensitive sector; Significant entry barriers for new players.
FINANCIAL PERFORMANCE OVERVIEW (%) PAT GROWTH* NIM# ROE# 3M 32.0 3.3 1Y 35.6 28.8 3.0 17.6 3Y 20.7 7.3 2.4 18.6 5Y 14.3 2.5 10Y 16.1 3.1 OP. INC. GROWTH* 14.8 16.5 14.3

Better asset quality and moderate NIM to drive profitability: The bank witnessed a surge in slippages in 2QFY2012 to 3.6% due to the switchover to system-based NPA recognition platform; slippages are also likely to remain above average levels due to the deteriorating domestic macro environment. However, the bank's conservative lending, visible in its low yield on advances and moderate advances growth (16% CAGR over FY2010-12E), is expected to lead to better asset quality than peers. Moreover, the bank's calculated NIM improved by 90bp in FY2011 over FY2010 to healthy 3.0%. In-line with our view that margins are likely to remain stable for the sector as a whole, we expect Syndicate Bank's NIM to also remain healthy in the coming quarters. Attractive valuations: We expect Syndicate Bank to deliver RoEs of 18.5% and 16.5% in FY2012 and FY2013, respectively, on the back of its better asset-quality outlook than peers and moderate NIM. The bank has a modest CASA franchise with a CASA ratio of 30.8% (as of 3QFY2012), while fee income is also modest at 0.6% of average assets (as of FY2011). However, that said, the bank's relatively cheap valuations and low asset-quality concerns turn the tide in the stock's favor. The stock is currently trading at a substantial discount (0.6x FY2013E ABV) vs. its five-year range of 0.7-1.3x and median of 0.9x. Also, the valuations appear cheap compared to its peers, which are trading at higher multiples, although they have similar or poorer fundamentals. We value the stock at 0.7x FY2013E ABV and continue to maintain our Buy recommendation with a target price of ` 106.
20.9 22.7
94
January 2012

BALANCE SHEET
- YOY GROWTH (%)

OTHER INCOME
7.5
1,167
60.0
915
16.7
1,065
13.2
1,166
- YOY GROWTH (%)

OPERATING INCOME
27.6
3,907
(21.6)
5,298
16.4
6,179
9.4
6,955
- GROWTH (%)
1.0
8,555 3,618 4,225 139,051 7,189
15.9
6,010 3,518 4,364 156,539 10,443 1,523 35,068 106,782
16.0
6,972 4,045 5,197 181,585 10,224 3,632 41,795 122,799
17.0
8,138 4,571 6,124 211,965 11,962 4,239 53,368 138,763
- YOY GROWTH (%)

OPERATING EXPENSES
12.8
2,034
35.6
2,548
16.6
2,658
12.6
3,022
- YOY GROWTH (%)

13.5
1,874
25.3
2,750
4.3
3,521
13.7
- YOY GROWTH (%)

12.1
700
46.8
1,464
28.1
1,861
11.7
- YOY GROWTH (%)

PROFIT BEFORE TAX
10.2
1,174
109.3
1,285
27.1
1,660
3.6
2,005
- YOY GROWTH (%)

13.3
361
9.5
237
29.2
332
20.8
651
- GROWTH (%)
10.9
701 2,198 139,051
18.1
693 2,031 156,539
15.0
779 2,356 181,585
13.0
883 2,750 211,965
- AS A % OF PBT
PAT
30.7
813
18.5
1,048
20.0
1,328
32.4
1,355
- YOY GROWTH (%)
(10.9)
28.8
26.8
2.0
- GROWTH (%)
6.8
12.6
16.0
16.7
KEY RATIOS
KEY RATIOS
January 2012
95
Banking
Allahabad Bank
Company Background
CMP/TP/Upside: `142 / `158 / 12%
Allahabad Bank is a mid-size public sector bank, with a branch network of over 2,400 branches and balance sheet of ~`1.6lakh cr. The bank's branches are mostly concentrated in the northern (~40%) and eastern (~40%) states of India.
Structural Snapshot
Growth opportunity: Mid-size PSU banks such as Allahabad Bank are expected to gradually lose their credit market share, as private sector banks make inroads into their hinterlands. Competitive position: In the context of the overall sector, mid-size PSU banks, in our view, have a relatively weak competitive position compared to private as well as large PSU banks. Nature of business: Cyclical and rate-sensitive sector; Significant entry barriers for new players.
STOCK RETURNS (%) BANKEX SENSEX 3M 1Y 3Y 37.7 28.3 21.3 5Y 9.3 3.3 10Y 17.3 ALLAHABAD BANK (6.8) (31.1) (6.4) (12.5) (2.6) (12.3)
7.1 25.5

1Y 3Y 26.9 13.4 2.6 19.9 5Y 21.2 2.7 10Y 19.3 3.1
Healthy retail deposit base: Allahabad Bank has a substantial 41% of its branches in the CASA deposit-rich rural areas, which ensure relatively high sustainability of the low-cost deposits reservoir, also reflected in the strong 24.0% CAGR in the bank's saving account deposits over FY2009-11. Although the bank's CASA market share reduced by 25bp over FY2006-1HFY2012 to 2.4%, the decline in market share has been one of the lowest in its peer group. Also, the bank has a relatively low share of wholesale deposits and CDs at 12.1%. Higher yielding loans could lead to higher NPAs: Allahabad Bank had one of the highest reported yield on advances for 2QFY2012 (12.6%) amongst all PSU banks. The bank's yield on advances has risen by 185bp yoy, the highest increase within the PSU segment, indicating increased risk taking in the form of higher yielding loans over the past one year. While the bank's provisioning costs are on the higher side (0.9% for 1HFY2012 compared to average 0.8% for PSUs), its risk-adjusted yields are still well above sector average, indicating the possibility of negative surprises on the asset-quality front. As a result, with no additional room for expansion in yields and asset quality expected to further see deterioration due to the higher risk taking, higher-than-peer average return ratios for the bank could come under pressure. Outlook and valuation: The bank's return ratios are on the higher side; however, higher estimated provisioning expenses are expected to impact profitability going forward. That said, positives for Allahabad Bank includemoderate CASA ratio of 30.6% and better-than-peer average fee income at 0.8x of assets. The bank is trading at valuations of 0.7x FY2013E ABV compared to its median of 1.0x and 5 year range of 0.6-1.2x. Hence, we recommend an Accumulate rating on the stock with a target price of ` 158.
FINANCIAL PERFORMANCE OVERVIEW (%) PAT GROWTH* NIM# ROE# 3M 21.2 3.4 OP. INC. GROWTH* 23.9 29.4 18.0 3.0 21.0
15.0 43.0 21.4 24.4
96
January 2012

BALANCE SHEET
- YOY GROWTH (%)

OTHER INCOME
22.8
1,516
51.8
1,370
30.6
1,336
11.0
1,401
- YOY GROWTH (%)

OPERATING INCOME
32.7
4,166
(9.6)
5,393
(2.5)
6,588
4.9
7,232
- GROWTH (%)
24.8
1,424 4,012 3,455 121,699 7,184
24.4
3,006 3,912 3,974 151,286 7,901 3,126 43,247 93,625
11.0
3,348 4,460 4,339 168,463 9,516 3,369 45,113 106,732
14.0
3,814 5,084 4,907 191,938 10,848 3,839 51,365 121,675
- YOY GROWTH (%)

OPERATING EXPENSES
26.2
1,618
29.4
2,338
22.2
2,642
9.8
3,004
- YOY GROWTH (%)

15.6
2,549
44.5
3,055
13.0
3,946
13.7
- YOY GROWTH (%)

34.1
777
19.9
1,124
29.2
1,473
7.2
- YOY GROWTH (%)

PROFIT BEFORE TAX
(5.9)
1,772
44.7
1,931
31.0
2,473
15.4
2,529
- YOY GROWTH (%)

64.7
565
9.0
508
28.1
643
2.3
820
- GROWTH (%)
21.8
1,118 1,379 121,699
30.8
1,148 2,239 151,286
14.0
1,240 2,493 168,463
14.0
1,371 2,840 191,938
- AS A % OF PBT
PAT
31.9
1,206
26.3
1,423
26.0
1,830
32.4
1,708
- YOY GROWTH (%)
57.0
18.0
28.6
(6.6)
- GROWTH (%)
24.6
24.3
11.4
13.9
KEY RATIOS
KEY RATIOS
January 2012
97
Banking
Corporation Bank
Corporation Bank is a mid-size PSU bank, with a balance sheet size of ~`1.4lakh cr. The bank's branches are mainly concentrated in the southern states (~50%) with majority being in Karnataka (~26%). The bank, unlike most other PSU banks, has more than half of its branches located in urban and metropolitan areas (~56%).
Structural Snapshot
Growth opportunity: Mid-size PSU banks such as Corporation Bank are expected to gradually lose their credit market share, as private sector banks make inroads into their hinterlands. Competitive position: In the context of the overall sector, mid-size PSU banks, in our view, have a relatively weak competitive position compared to private as well as large PSU banks. Further, unlike most PSUs, Corporation Bank has more than half of its branches located in urban and metropolitan areas, and although this has often prompted the bank to be ahead of other PSU banks in implementing newer technologies and services, it also exposes the bank to much higher competition from private banks. Nature of business: Cyclical and rate-sensitive sector; Significant entry barriers for new players.
STOCK RETURNS (%) CORP. BANK BANKEX SENSEX 3M 1Y 3Y 27.3 28.3 21.3 5Y 10Y (6.6) (30.4) (6.4) (12.5) (2.6) (12.3) 4.0 12.4 7.1 25.5 3.3 17.3
FINANCIAL PERFORMANCE OVERVIEW (%) PAT GROWTH* NIM# ROE# 3M 14.0 2.1 1Y 25.5 20.8 2.4 21.9 3Y 25.8 24.4 2.2 21.1 5Y 18.8 26.0 2.4 19.4 10Y 17.2 18.4 2.9 18.1 OP. INC. GROWTH* 21.3

Modern, cost-efficient network to support moderate CASA growth: During FY2007-11, growth in the bank's average CASA deposits was robust relative to peers at 20.4%. We believe the bank's efficient and expanding network, supported by a consistent track record in early adoption of emerging technologies, creates a positive traction in its deposit franchise, though this is tempered mainly by substantial competition from larger banks. Low operating cost and superior asset quality: Large corporates comprise ~38% of the bank's credit book, leading to relatively low yield on advances, but simultaneously offering superior asset quality to the bank. Corporation Bank is also among the most cost-efficient PSU banks, both in terms of its operating expenses as a percentage of average assets as well as branch and employee productivity. Valuations reasonable: The bank's low CASA ratio (~22%) has contributed to higher margin pressures, given the prevailing high interest rates. Accordingly, peaking of interest rates bodes well for it. Currently, the stock is trading at 0.6x FY2013E ABV (five-year range of 0.8x-1.4x and median of 1.0x), which we believe provides a margin of safety from current macro headwinds. Also, the structural positive for the bank is its proactive investment in modern distribution and payment systems, which has led to consistently faster CASA growth compared to peers. We value the bank at 0.8x FY2013E ABV and recommend a Buy rating on the stock with a target price of ` 450.
98
January 2012

BALANCE SHEET
- YOY GROWTH (%)

OTHER INCOME
12.6
1,493
54.5
1,324
1.9
1,488
16.1
1,510
- YOY GROWTH (%)

OPERATING INCOME
34.9
3,397
(11.3)
4,264
12.4
4,485
1.5
4,988
- GROWTH (%)
25.3
4,290 4,788 4,081 111,667 8,835
25.9
10,628 5,338 3,658 143,509 8,142 2,250 43,453 86,850
15.0
3,539 6,085 5,157 157,301 8,727 3,146 43,346 99,009
15.0
4,063 6,876 5,945 180,578 10,036 3,612 51,535 111,881
- YOY GROWTH (%)

OPERATING EXPENSES
21.4
1,260
25.5
1,642
5.2
1,812
11.2
2,084
- YOY GROWTH (%)

20.4
2,137
30.3
2,622
10.4
2,673
15.0
- YOY GROWTH (%)

22.0
474
22.7
689
1.9
840
8.7
BAL.WITH BANKS & MONEY AT CALL 1,957 885 INVESTMENTS ADVANCES 34,523 63,203
- YOY GROWTH (%)

PROFIT BEFORE TAX
29.8
1,662
45.2
1,934
22.0
1,833
5.4
2,019
- YOY GROWTH (%)

19.9
492
16.3
520
(5.2)
367
10.2
655
- GROWTH (%)
30.3
293 2,857 111,667
37.4
331 2,482 143,509
14.0
352 2,720 157,301
13.0
392 3,123 180,578
- AS A % OF PBT
PAT
29.6
1,170
26.9
1,413
20.0
1,466
32.4
1,364
- YOY GROWTH (%)
31.1
20.8
3.7
(7.0)
- GROWTH (%)
28.5
28.5
9.6
14.8
KEY RATIOS
KEY RATIOS
January 2012
99
Banking
Indian Bank
Company Background
CMP/TP/Upside: `204 / `223 / 10%
Indian Bank is a Chennai-based mid-size public sector bank, with 1,927 branches and a balance sheet size of ~`1.3lakh cr. Around two-thirds of the bank's branches are spread across the southern states with majority being in the parent state of Tamil Nadu (43%).
Structural Snapshot
Growth opportunity: Mid-size PSU banks such as Indian Bank are expected to gradually lose their market share as private sector banks make inroads into their hinterlands. Competitive position: In the context of the overall sector, mid-size PSU banks such as Indian Bank, in our view, have a relatively weak competitive position compared to private as well as large PSU banks. Nature of business: Cyclical and rate-sensitive sector; significant entry barriers for new players.
STOCK RETURNS (%) INDIAN BANK BANKEX SENSEX 3M (2.7) 1Y (2.6) 3Y 17.0 28.3 21.3 5Y 3.3 10Y 17.3
(6.4) (12.5) (2.6) (12.3)
7.1 25.5

1Y 3Y 19.5 19.9 3.6 24.6 5Y 27.0 3.5 10Y NA 3.4
Healthy profitability: Indian Bank's performance has broadly been positive and balanced since its listing in 2007, leading to a gradual improvement in the quality of earnings, visible amongst other things in the substantial 80bp decline in the bank's operating costs as a percentage of assets. Additionally, the bank's CMD has a five-year tenure, which provides a reasonable strategic stability to the bank. Relatively high yields: A large portion of SME and mid-corporate loans has contributed to the bank's relatively high yield on advances, while asset quality has held up reasonably so far, resulting in the bank enjoying one of the highest risk-adjusted yields in its peer group (90bp higher than sector average in FY2011). This has supported NIMs, which, in FY2011, were higher than even larger banks having 40% CASA deposits vs. Indian Bank's 30%. Past experience shows that bank's that delivered high NIMs on the back of high yields later paid the price for the higher risk taken, in the form higher NPAs in subsequent years. Accordingly, going ahead, as in case of other banks with unsustainably high yields, we are cautious on the bank's asset quality and NIM outlook. Valuations higher than peers: At the CMP, the stock is trading at 0.8x FY2013E ABV, which is at the lower end of its five-year range of 0.8-1.3x, providing valuation upsides as the macro environment improves. However, valuations are relatively high compared to peers, which are trading at 0.50.7x FY2013E ABV and even some of the larger banks trading at about 0.8x FY2013E ABV. As these relatively high valuations are primarily attributable to the bank's high NIMs, which may not sustain in the medium term, we believe the risk-return trade-off in case of Indian Bank is less favorable. Hence, we recommend an Accumulate rating on the stock with a target price of ` 223, implying a 9.7% upside from current levels.
FINANCIAL PERFORMANCE OVERVIEW (%) PAT GROWTH* NIM# ROE# 3M 12.7 3.5 OP. INC. GROWTH* 16.6 16.5 10.5 3.7 23.5 20.6 20.5
25.5 26.8
100
January 2012

BALANCE SHEET
Y/E MARCH (` CR) ` SHARE CAPITAL - EQUITY - PREFERENCE RESERVE & SURPLUS DEPOSITS FY2010 830 430 400 7,442 88,228 FY2011 830 430 400 8,691 105,804 FY2012E 830 430 400 10,034 121,675 FY2013E 830 430 400 11,433 138,709
- YOY GROWTH (%)

OTHER INCOME
21.2
1,316
27.7
1,182
11.6
1,224
11.2
1,254
- YOY GROWTH (%)

OPERATING INCOME
27.1
4,478
(10.2)
5,218
3.6
5,730
2.4
6,265
- YOY GROWTH (%)

OPERATING EXPENSES
22.9
1,730
16.5
1,926
9.8
2,169
9.3
2,465
- GROWTH (%)
BORROWINGS TIER 2 CAPITAL OTHER LIABILITIES & PROVISIONS TOTAL LIABILITIES CASH IN HAND AND WITH RBI
21.6
657 300 3,932 101,389 7,061
19.9
800 1,300 4,293 121,718 6,878 1,684 34,784 75,250
15.0
2,840 1,521 5,118 142,018 7,909 2,840 39,640 88,042
14.0
3,234 1,734 5,772 161,712 9,016 3,234 45,071 100,368
- YOY GROWTH (%)

22.3
2,747
11.3
3,292
12.6
3,561
13.6
3,800
- YOY GROWTH (%)

23.3
396
19.8
657
8.2
964
6.7
1,083
- YOY GROWTH (%)

PROFIT BEFORE TAX
(10.6)
2,352
66.1
2,634
46.6
2,597
12.4
2,717
- YOY GROWTH (%)

31.7
797
12.0
920
(1.4)
843
4.6
881
- AS A % OF PBT
PAT
33.9
1,555
34.9
1,714
32.4
1,755
32.4
1,835
- GROWTH (%)
20.8
1,580 1,282 101,389
21.1
1,606 1,516 121,718
17.0
1,818 1,769 142,018
14.0
2,008 2,015 161,712
- YOY GROWTH (%)

PREFERENCE DIVIDEND (INCL DDT) PAT AVL. FOR EQ. SHAREHOLDERS
24.9
46 1,509
10.2
46 1,668
2.4
37 1,717
4.6
37 1,798
- YOY GROWTH (%)
25.5
10.5
2.9
4.7
- GROWTH (%)
20.5
20.1
16.7
13.9
KEY RATIOS
KEY RATIOS
January 2012
101
Banking
RATING 52 WEEK HIGH / LOW MARKET CAP (` CR) ` LIQUIDITY NEUTRAL 159/79 5,420 MEDIUM
Andhra Bank
Company Background
Andhra Bank is a mid-size PSU bank, with a balance sheet size of ~`1.2lakh cr. The bank has a network of over 1,652 branches, mainly concentrated in the southern region (66% in the parent state of Andhra Pradesh).
Structural Snapshot
Growth opportunity: Mid-size PSU banks such as Andhra Bank are expected to gradually lose their credit market share, as private sector banks make inroads into their hinterlands. Competitive position: In the context of the overall sector, mid-size PSU banks, in our view, have a relatively weak competitive position compared to private as well as large PSU banks. Further, in case of Andhra Bank, assetquality pressures going ahead could lead to underperformance within the mid-PSU segment. Nature of business: Cyclical and rate-sensitive sector; Significant entry barriers for new players.
STOCK RETURNS (%) BANKEX SENSEX 3M 1Y 3Y 19.1 28.3 21.3 5Y 10Y ANDHRA BANK (20.8) (25.7) (6.4) (12.5) (2.6) (12.3) 1.6 28.2 7.1 25.5 3.3 17.3

Moderate fee income, low CASA: During FY2007-11, fee income for the bank posted a CAGR of only 12.8% compared to advances reporting a CAGR of 26.5%. However, at 0.8% of overall assets for FY2011, fee income for the bank is moderate compared to other mid-size PSU banks. On the CASA front, the bank's market share has fallen by 35bp over FY2005-1HFY2012 and the bank's CASA ratio, at 26.1%, is on the lower end compared to peers. Risk-adjusted yields expected to fall: The bank has one of the highest yields in the industry (12.5% as of 2QFY2012), also reflected in the relatively strong NIM of 3.3% (as of FY2011). This can be partly attributed to the bank's high concentration in the hinterland of its home state. That said, it is difficult for banks to remain insulated from competition on the lending side and, as a result, we expect a decline in the bank's risk-adjusted yields and overall profitability over the medium term. Also, in the current environment, the bank's provisioning expenses are likely to increase at a faster rate, given the high yield on advances and relatively high exposure to riskier sectors. Valuations provide inadequate margin of safety: At the CMP, the stock is trading at 0.7x FY2013E ABV, which is at the lower end of its five-year range of 0.7-1.3x, providing valuation upsides once the macro-environment improves. However, relatively high risk exposures, particularly the power sector (more than 20% of the loan book), create risk of higher deterioration in the banks asset quality in the coming quarters, in our view. Considering, the bank's peers are also trading at similar valuations of 0.7x, with similar or better asset-quality outlook, we remain Neutral on the stock.
21.1 26.5 20.8 25.7
ANGEL ESTIMATES PARTICULARS PAT GROWTH (%) ROE (%) P/ABV FY2012E (0.9) 18.1 0.8 FY2013E (8.6) 14.6 0.7
102
January 2012

BALANCE SHEET
- YOY GROWTH (%)

OTHER INCOME
34.9
965
46.8
897
18.5
838
10.1
926
- YOY GROWTH (%)

OPERATING INCOME
26.0
3,159
(7.0)
4,118
(6.6)
4,655
10.5
5,129
- GROWTH (%)
30.8
2,832 3,020 2,392 90,342 6,699
18.6
4,620 3,020 2,612 108,901 7,184 3,275 24,204 71,435
18.0
5,442 3,382 3,284 128,275 7,068 3,207 34,703 80,008
14.0
6,193 3,822 3,714 145,976 8,058 3,649 40,128 90,409
- YOY GROWTH (%)

OPERATING EXPENSES
32.1
1,350
30.3
1,705
13.0
1,833
10.2
2,097
- YOY GROWTH (%)

22.2
1,810
26.3
2,413
7.5
2,822
14.4
- YOY GROWTH (%)

40.5
374
33.3
646
16.9
1,077
7.5
- YOY GROWTH (%)

PROFIT BEFORE TAX
(4.1)
1,436
72.8
1,767
66.7
1,745
23.8
1,699
- YOY GROWTH (%)

59.9
390
23.1
500
(1.3)
489
(2.6)
551
- GROWTH (%)
27.1
356 1,825 90,342
27.3
317 2,485 108,901
12.0
363 2,927 128,275
13.0
400 3,331 145,976
- AS A % OF PBT
PAT
27.2
1,046
28.3
1,267
28.0
1,256
32.4
1,148
- YOY GROWTH (%)
60.1
21.2
(0.9)
(8.6)
- GROWTH (%)
31.9
20.5
17.8
13.8
KEY RATIOS
KEY RATIOS
January 2012
103
Banking
United Bank of India

United Bank of India is a mid-size public sector bank, with operations mostly concentrated in the eastern and northeastern states of India (81%). These states have contributed to the bank's high CASA deposits, though low credit demand especially in the northeast has prompted the bank to so far rely more on large corporate loans, including in consortium.
Structural Snapshot
Growth opportunity: Mid-size PSU banks such as United Bank of India are expected to gradually lose their credit market share as private sector banks make inroads into their hinterlands. Competitive position: In the context of the overall sector, mid-size PSU banks, in our view, have a relatively weak competitive position compared to private as well as large PSU banks. Nature of business: Cyclical and rate-sensitive sector; Significant entry barriers for new players.
STOCK RETURNS (%) UNITED BANK BANKEX SENSEX 3M 1Y 3Y 28.3 21.3 5Y 3.3 10Y 17.3 (17.0) (35.9) (6.4) (12.5) (2.6) (12.3)
7.1 25.5

FINANCIAL PERFORMANCE OVERVIEW (%) PAT GROWTH* NIM# ROE# 3M 13.7 2.9 1Y 43.9 49.7 2.7 14.1 3Y 27.0 46.6 2.3 10.3 5Y 14.0 17.4 2.4 10.5 10Y 15.3 37.3 2.9 17.4 OP. INC. GROWTH* 15.9
High CASA ratio with healthy growth in savings account deposits: United Bank of India has grown its CASA deposits at a healthy CAGR of 19.4% over FY2007-11 compared to 12.2% for its peers. A high CASA ratio (39.9% as of 2QFY2012) has allowed the bank to maintain healthy margins (3.2% for 2QFY2012). The bank has further levers in the form of low CD ratio (69.4% as of 2QFY2012) and change in loan mix (retail and SME constitute a low 30.0% of total advances as of 2QFY2012) for improving its margins. Asset quality has been a concern recently: The bank's slippage run-rate averaged ~`250cr for FY2011; however, in 2QFY2012, this figure has jumped more than 2x to `621cr. While partly attributable to the shift to systembased NPA recognition platform, chunky NPAs from some large corporate accounts, particularly iron and steel, have also added to the pain (lent in consortium). The bank's risk-adjusted yields are already on the lower side and, in our view, should see improvement in the medium term; however, in the near term, asset quality could remain volatile. Valuations inexpensive: We believe the bank has several levers for structurally improving its ROA, but challenges of improving yields while maintaining the asset quality continue to remain an investment concern on the stock. That said, the bank is trading at inexpensive valuations of 0.6x FY2013E ABV (one of the lowest in the industry). The bank's peers are trading in the range of 0.6x-0.8x FY2013 ABV, in spite of having similar and in some cases much lower CASA ratios. We value the stock at 0.7x FY2013E ABV; and hence, recommend a Buy rating on the stock with a target price of ` 70.
104
January 2012

BALANCE SHEET
Y/E MARCH (` CR) ` SHARE CAPITAL - EQUITY - PREFERENCE RESERVE & SURPLUS DEPOSITS FY2010 866 316 550 3,037 68,180 FY2011 1,144 344 800 3,877 77,845 FY2012E 1,144 344 800 4,231 85,629 FY2013E 1,144 344 800 4,608 96,761
- YOY GROWTH (%)

OTHER INCOME
19.8
559
55.9
637
14.6
640
11.6
631
- YOY GROWTH (%)

OPERATING INCOME
13.8
1,950
14.0
2,806
0.4
3,126
(1.4)
3,406
- YOY GROWTH (%)

OPERATING EXPENSES
18.0
1,074
43.9
1,299
11.4
1,381
9.0
1,588
- GROWTH (%)
25.0
915 1,525 2,481 77,005 4,707
14.2
2,887 1,525 2,763 90,041 5,943 1,385 26,259 53,502
10.0
2,968 1,769 3,188 98,930 5,566 1,979 26,107 62,063
13.0
3,344 1,999 3,613 111,469 6,289 2,229 29,225 70,131
- YOY GROWTH (%)

2.8
876
21.0
1,507
6.3
1,745
15.0
1,818
- YOY GROWTH (%)

44.2
465
72.1
838
15.8
942
4.2
958
- YOY GROWTH (%)

PROFIT BEFORE TAX
8.0
411
80.1
669
12.4
803
1.7
860
- YOY GROWTH (%)

132.6
88
63.0
145
20.0
260
7.1
279
- AS A % OF PBT
PAT
21.5
322
21.7
524
32.4
542
32.4
581
- GROWTH (%)
19.6
651 1,578 77,005
26.4
819 2,133 90,041
16.0
873 2,343 98,930
13.0
954 2,640 111,469
- YOY GROWTH (%)

PREFERENCE DIVIDEND PAT AVL. TO EQ. SHAREHOLDERS
181.0
17 305
62.5
67 457
3.5
88 454
7.1
84 497
- YOY GROWTH (%)
166.1
49.7
(0.7)
9.5
- GROWTH (%)
24.1
16.9
9.9
12.7
KEY RATIOS
KEY RATIOS
Y/E MARCH VALUATION RATIOS P/E P/ABV DIVIDEND YIELD (%) DUPONT ANALYSIS NII (-) PROV. EXP. ADJ NII TREASURY INT. SENS. INC. OTHER INC. OP. INC. OPEX PBT TAXES ROA PREFERENCE DIVIDEND ROA AFTER PREF DIV LEVERAGE ROE 2.0 0.7 1.3 0.3 1.6 0.5 2.1 1.5 0.6 0.1 0.5 0.0 0.4 26.4 11.6 2.60 1.00 1.59 0.24 1.83 0.53 2.36 1.56 0.80 0.17 0.63 0.08 0.55 25.84 14.1 2.6 1.0 1.6 0.1 1.8 0.5 2.3 1.5 0.8 0.3 0.6 0.1 0.5 25.3 12.1 2.6 0.9 1.7 0.1 1.8 0.5 2.3 1.5 0.8 0.3 0.6 0.1 0.5 25.6 12.1 6.2 0.7 3.3 4.5 0.6 3.7 4.5 0.6 4.2 4.2 0.6 5.0 FY2010 FY2011 FY2012E FY2013E
January 2012
105
Banking
Vijaya Bank
Company Background
Vijaya Bank is a mid-size PSU bank with a balance sheet size of ~`90,000cr. The bank's branches are mainly concentrated in the southern states (~60%), with majority being in the parent state of Karnataka (~40%). The bank, unlike most other PSU banks, has more than half of its branches located in the urban and metropolitan areas (~56%).
Structural Snapshot
Growth opportunity: Mid-size PSU banks such as Andhra Bank are expected to gradually lose their credit market share as private sector banks make inroads into their hinterlands. Competitive position: In the context of the overall sector, mid-size PSU banks, in our view, have a relatively weak competitive position compared to private as well as large PSU banks. Moreover, in our view, Vijaya Bank is structurally weaker compared to its peers in terms of relatively low CASA deposits, higher operating costs and lower fee income as a percentage of assets. Nature of business: Cyclical and rate-sensitive sector; Significant entry barriers for new players.
STOCK RETURNS (%) VIJAYA BANK BANKEX SENSEX 3M 1Y 3Y 17.4 28.3 21.3 5Y 10Y (3.8) (41.7) (6.4) (12.5) (2.6) (12.3) 1.5 22.2 7.1 25.5 3.3 17.3

Unfavorable deposit mix: The bank's CASA market share has declined continuously over FY2005-1HFY2012 (42bp) and stands at a small 1.0% as of 1HFY2012. In fact, with the persistence of higher FD interest rates, the bank has seen further erosion in its CASA ratio over the past few quarters. Along with a low CASA ratio (25% as of 2QFY2012), the bank also has a high proportion of bulk deposits (~33% as of FY2011). Owing to an unfavorable deposit mix, we expect the bank's NIM to remain under pressure in the medium term. Lower return ratios: The bank's RoA and RoE, at 0.5% and 13.8% in FY2011, are on the lower side. Apart from low CASA, this is also on account of lower fee income (0.55% of average assets as of FY2011) and high operating expenses (1.65% of average assets). The bank is also facing asset-quality pressures, as evident in its higher slippages (5.0% in 1QFY2012 and 3.7% for 2QFY2012) and lower provision coverage ratio of 66.1% as of 2QFY2012. Valuations seem justified: Considering the persistent asset-quality issues and lower estimated RoAs, the current valuations of 0.7x FY2013E ABV look expensive compared to peers that have better return ratios and earnings profile. The bank, in our view, is commanding high valuations due to expectations of large recoveries from its existing NPAs. However, we believe these valuations provide inadequate comfort in light of the bank's weaker fundamentals. Hence, we have a Neutral rating on the stock.
106
January 2012

BALANCE SHEET
Y/E MARCH (` CR) ` SHARE CAPITAL RESERVE & SURPLUS DEPOSITS FY2010 934 2,542 61,932 FY2011 1,673 3,144 73,248 FY2012E 1,673 3,499 82,771 FY2013E 1,673 3,837 92,703
- YOY GROWTH (%)

OTHER INCOME
28.8
679
34.3
533
2.7
551
14.0
609
- YOY GROWTH (%)

OPERATING INCOME
(2.8)
2,129
(21.5)
2,480
3.3
2,550
10.6
2,889
- GROWTH (%)
13.6
289 1,650 2,877 70,222 4,100
18.3
525 1,500 1,600 81,691 4,882 542 25,139 48,719
13.0
1,404 1,830 2,439 93,615 5,380 1,872 24,181 59,437
12.0
1,567 2,068 2,646 104,495 6,026 2,090 26,170 67,163
- YOY GROWTH (%)

OPERATING EXPENSES
16.7
1,072
16.5
1,433
2.8
1,197
13.3
1,357
- YOY GROWTH (%)

15.9
1,057
33.8
1,047
(16.5)
1,353
13.4
- YOY GROWTH (%)

17.6
356
(1.0)
439
29.2
604
13.2
- YOY GROWTH (%)

PROFIT BEFORE TAX
(0.4)
701
23.3
608
37.8
748
16.3
828
- YOY GROWTH (%)

29.5
194
(13.3)
84
23.1
172
10.7
269
- GROWTH (%)
17.1
493 1,551 70,222
17.3
486 1,924 81,691
22.0
540 2,205 93,615
13.0
585 2,461 104,495
- AS A % OF PBT
PAT
27.6
507
13.8
524
23.0
576
32.4
560
- YOY GROWTH (%)
93.3
3.3
10.0
(2.9)
- GROWTH (%)
12.5
16.4
14.6
11.6
CASH FLOW
KEY RATIOS
January 2012
107
Banking
Bank of Maharashtra
Bank of Maharashtra (BoM) is a mid-size Pune-based public sector bank, with operations mostly concentrated in the parent state of Maharashtra (~65% branches as of FY2011). The bank has the highest number of branches in Maharashtra (1,021 as of FY2011) after State Bank of India, which has allowed the bank to grow in-line with the state's progress over the past decade.
Structural Snapshot
Growth opportunity: Mid-size PSU banks such as BoM are expected to gradually lose their credit market share as private sector banks make inroads into their hinterlands.
STOCK RETURNS (%) BANKEX SENSEX 3M 1Y 3Y 22.8 28.3 21.3 5Y (1.1) 3.3 10Y 17.3 BANK OF MAHA. (3.5) (25.6) (6.4) (12.5) (2.6) (12.3)
7.1 25.5
Competitive position: In the context of the overall sector, mid-size PSU banks, in our view, have a relatively weak competitive position compared to private as well as large PSU banks. However, amongst mid-size PSU banks, BoM benefits from having ~65% of its branches in Maharashtra, which has healthy credit demand (evidenced from the state's high credit to GDP of 157% compared to pan-India ratio of 72.7%). Nature of business: Cyclical and rate-sensitive sector; Significant entry barriers for new players.
FINANCIAL PERFORMANCE OVERVIEW (%) PAT GROWTH* NIM# ROE# 3M 1Y 32.4 2.8 11.3 3Y 18.3 (3.3) 2.4 16.8 5Y 10Y OP. INC. GROWTH* 23.2 3.4 16.8 12.3 42.3 20.7 2.6 17.2 2.8 17.6

Better asset quality than peers: The bank does not have materially high exposure to any industry, except the power sector (13.0% of overall gross advances), of which 71% is towards SEB lending, where no material NPV loss is expected. Also, the bank had implemented system-based NPA recognition system in FY2011 itself and since then has been seeing recoveries and upgrades from technical slippages. Conservative credit growth, moderate yield loan book and recoveries post CBS implementation have allowed the bank to progressively improve its asset quality over the past few quarters. The bank's capital adequacy is below 8%, but it expects adequate equity capital infusion from the government to take it above 8%. Healthy CASA ratio: BoM has enjoyed a healthy CASA ratio in the vicinity of 40% over the past several years on the back of strong rural and semi-urban presence (accounting for ~55% of the entire branch network). The bank also has a large share of local government accounts in Maharashtra (~30% of saving accounts) and gets healthy fee income business from the state government. Valuation inexpensive for BoM: At the CMP, the stock is trading at attractive valuations, in our view, of 0.7x FY2013E ABV vs. its five-year range of 0.6-1.2x and median of 0.9x. On the back of high NIM, moderate fee income and better asset quality than peers, we expect the bank to deliver a healthy 26.3% earnings CAGR over FY2011-13E. We value the stock at 0.8x and, hence, recommend a Buy rating with a target price of ` 53, implying an upside of 18.4%.
50.2 (32.5)
108
January 2012

BALANCE SHEET
Y/E MARCH (` CR) ` SHARE CAPITAL RESERVE & SURPLUS DEPOSITS FY2010 431 2,428 63,304 FY2011 1,070 2,901 66,845 FY2012E 1,070 3,233 74,198 FY2013E 1,260 4,402 84,585
- YOY GROWTH (%)

OTHER INCOME
3.2
591
51.9
531
29.3
617
15.9
630
- YOY GROWTH (%)

OPERATING INCOME
18.2
1,887
(10.2)
2,499
16.2
3,162
2.1
3,580
- GROWTH (%)
21.1
129 2,668 2,096 71,056 5,315
5.6
577 2,500 2,550 76,442 3,846 203 22,491 46,881
11.0
640 2,875 2,835 84,851 4,823 424 22,360 53,913
14.0
735 3,335 3,082 97,398 5,498 487 25,075 62,539
- YOY GROWTH (%)

OPERATING EXPENSES
7.5
1,073
32.4
1,644
26.5
1,447
13.2
1,635
- YOY GROWTH (%)

11.4
815
53.2
855
(12.0)
1,715
13.0
1,945
- YOY GROWTH (%)

2.6
246
5.0
467
100.5
986
13.4
878
- YOY GROWTH (%)

PROFIT BEFORE TAX
(13.0)
569
90.1
388
111.0
729
(11.0)
1,067
- YOY GROWTH (%)

11.3
129
(31.8)
57
88.0
248
46.4
346
- AS A % OF PBT
PAT
22.7
440
14.8
330
34.0
481
32.4
721
- GROWTH (%)
17.6
660 2,063 71,056
16.3
667 2,354 76,442
15.0
718 2,613 84,851
16.0
799 3,000 97,398
- YOY GROWTH (%)

PREFERENCE DIVIDEND PAT AVL. TO EQ. SHAREHOLDERS
17.2
440
(24.8)
34 297
45.6
65 416
49.8
62 659
- YOY GROWTH (%)
17.2
(32.5)
40.3
58.4
- GROWTH (%)
20.4
7.6
11.0
14.8
KEY RATIOS
KEY RATIOS
Y/E MARCH VALUATION RATIOS P/E P/ABV DIVIDEND YIELD (%) DUPONT ANALYSIS NII (-) PROV. EXP. ADJ NII TREASURY INT. SENS. INC. OTHER INC. OP. INC. OPEX PBT TAXES ROA PREFERENCE DIVIDEND ROA AFTER PREF DIV. LEVERAGE ROE 2.0 0.4 1.6 0.3 1.9 0.6 2.5 1.6 0.9 0.2 0.7 0.7 29.1 19.7 2.7 0.6 2.0 0.1 2.1 0.6 2.8 2.2 0.5 0.1 0.4 0.0 0.4 27.6 11.3 3.2 1.2 1.9 0.0 2.0 0.7 2.7 1.8 0.9 0.3 0.6 0.1 0.5 26.0 13.7 3.2 1.0 2.3 0.0 2.3 0.7 3.0 1.8 1.2 0.4 0.8 0.1 0.7 23.1 16.9 4.4 0.9 4.4 7.3 0.8 4.4 5.2 0.7 3.3 4.6 0.7 4.4 FY2010 FY2011 FY2012E FY2013E
January 2012
109
Banking
J&K Bank
Company Background
CMP/TP/Upside: `742 / `820 / 11%
Jammu and Kashmir (J&K) Bank is a mid-size public sector bank, with a branch network of over 550 branches and operations mostly concentrated in the parent state of J&K (~80% branches as of FY2011). The bank has the highest number of branches (~450) in J&K (SBI with 156 branches comes a distant second), allowing the bank to maintain a favorable deposit mix along with healthy margins.
Structural Snapshot
Growth opportunity: The bank's growth potential is linked to that of J&K state, whose GDP is at present growing at 6.6%, below India's overall GDP growth rate of 7-8% and where credit demand is below the country's average (credit-to-GDP at 52% vs. 88% at all-India level). Competitive position: In the context of the overall sector, mid-size PSU banks, in our view, have a relatively weak competitive position compared to private as well as large PSU banks. However, J&K Bank is mostly insulated from competition in its core market areas, rendering slight advantage to the bank compared to other mid-size PSU banks. Nature of business: Cyclical and rate-sensitive sector; Significant entry barriers for new players.
STOCK RETURNS (%) J&K BANK BANKEX SENSEX 3M (10.3) 1Y 3.7 3Y 33.7 28.3 21.3 5Y 10Y 3.6 31.8 7.1 25.5 3.3 17.3
(6.4) (12.5) (2.6) (12.3)

Robust asset quality: Over the years, the bank has maintained robust asset quality, with the best-in-industry provision coverage ratio (92.0% as of 2QFY2012). Slippages declined considerably (0.8% for 2QFY2012 compared to 1.3% for 4QFY2011) and were lower compared to most other PSU banks in 2QFY2012. Strong branch network and legacy - Dominant market share: The bank, with ~450 branches, has the highest number of branches in J&K (SBI with 156 comes a distant second). Due to its strong branch network and legacy of banking relationships, the bank has a dominant 70% market share in deposits in J&K. CASA deposits constituted strong 47.8% of incremental deposits growth from FY2004-11. This strong base of low-cost deposits is expected to sustain relatively high NIM of 3.2-3.4% vs. other mid-size banks. Outlook and valuation: The stock is trading at 0.8x FY2013E ABV vis--vis its historic range of 0.8-1.4x and five-year median of 1.0x. Immediate levers in the form of increased CD ratio from the current low of 59.5% to higher yielding advances are likely to provide near-term higher momentum to NII growth for the bank relative to other mid-size banks. However, the bank's increasing non-J&K exposure on the asset side poses medium-term concerns. Also, the stock has been one of the best-performing stocks in the PSU space in the past one year and current relatively high valuations are likely to limit outperformance. Hence, we recommend an Accumulate rating on the stock with a target price of ` 820.
28.3 13.9 17.6 20.0
110
January 2012

BALANCE SHEET
- YOY GROWTH (%)

OTHER INCOME
11.9
416
37.9
365
16.9
325
11.1
372
- YOY GROWTH (%)

OPERATING INCOME
59.2
1,536
(12.4)
1,908
(11.0)
2,129
14.4
2,376
- GROWTH (%)
BORROWINGS BOND CAPITAL OTHER LIABILITIES & PROVISIONS TOTAL LIABILITIES
12.8
500 600 1,199 42,547 2,745
20.0
505 600 1,249 50,508 2,975 574 19,696 26,194
12.0
424 672 1,377 56,569 3,252 1,131 20,354 30,647
9.0
463 732 1,419 61,835 3,545 1,237 20,222 35,550
- YOY GROWTH (%)

OPERATING EXPENSES
21.7
577
24.3
759
11.6
812
11.6
918
- YOY GROWTH (%)

PRE-PROVISION PROFIT
22.6
958
31.4
1,149
7.0
1,317
13.0
- YOY GROWTH (%)

21.2
167
20.0
215
14.6
190
10.7
- YOY GROWTH (%)

PROFIT BEFORE TAX
4.6
792
29.1
934
(11.5)
1,127
34.8
1,202
- YOY GROWTH (%)

25.3
279
18.0
319
20.6
366
6.6
390
- GROWTH (%)
10.2
204 715 42,547
13.6
394 676 50,508
17.0
428 757 56,569
16.0
454 828 61,835
- AS A % OF PBT
PAT
35.3
512
34.2
615
32.4
761
32.4
812
- YOY GROWTH (%)
25.0
20.1
23.7
6.6
- GROWTH (%)
12.9
18.7
12.0
9.3
KEY RATIOS
Y/E MARCH PROFITABILITY RATIOS (%) NIMS COST TO INCOME RATIO ROA ROE B/S RATIOS (%) CASA RATIO CREDIT/DEPOSIT RATIO CAR - TIER I ASSET QUALITY (%) GROSS NPAS NET NPAS SLIPPAGES LOAN LOSS PROV. /AVG. ASSETS PROVISION COVERAGE PER SHARE DATA (`) ` EPS ABVPS (75% COVER. FOR NPAS) DPS 105.7 620.8 22.0 126.9 717.4 26.0 157.0 837.2 32.0 167.4 965.1 34.0 2.0 0.3 0.9 0.4 90.1 1.9 0.2 1.2 0.3 92.7 2.3 0.3 1.3 0.3 91.0 2.9 0.5 1.6 0.4 85.0 40.7 61.9 15.9 12.8 40.5 58.6 13.7 11.3 40.1 61.2 14.2 11.8 40.7 65.2 14.9 12.5 2.9 37.6 1.3 18.2 3.4 39.8 1.3 19.0 3.4 38.1 1.4 20.2 3.5 38.6 1.4 18.6 FY2010 FY2011 FY2012E FY2013E
KEY RATIOS
January 2012
111
NBFC
RATING 52 WEEK HIGH / LOW MARKET CAP (` CR) ` LIQUIDITY NEUTRAL 737 / 583 101,811 HIGH
HDFC
Company Background
HDFC is India's leading housing finance company, with a balance sheet size of over `1.5lakh cr. The company's primary business is to provide loans for the purchase or construction of residential houses. HDFC's distribution network spans 298 outlets, covering more than 90 locations across India. From its origins as a specialized mortgage company, HDFC has grown into a financial conglomerate with market leading group companies in banking, asset management and insurance.
Structural Snapshot
Growth opportunity: While overall credit penetration in India is in any case low, the underpenetration is much starker in retail loans (it stands at ~6% of GDP in India, as against 70-100% in most developed countries). Growing urbanization, increasing number of nuclear families, rising disposable income and greater availability of cheap home loans are expected to drive healthy 20%+ growth in the home loan segment over the medium to long term. Competitive position: The housing finance industry is a keenly competitive segment, with banks having a significant presence. However, large housing finance companies, like H DFC, with a dedicated focus on the segment - leading to robust loan sourcing and appraisal as well as high credit rating enabling competitive cost of funds - should be able to withstand competition from banks, even going forward. The company also has one of the most well regarded top managements in the industry as well as a well-established conservative risk management philosophy. Nature of business: Cyclical and rate-sensitive sector
STOCK RETURNS (%) HDFC BANKEX SENSEX 3M 2.5 1Y 5.8 3Y 30.7 28.3 21.3 5Y 16.6 3.3 10Y 27.4 17.3
(6.4) (12.5) (2.6) (12.3)
7.1 25.5

Consistency in performance: HDFC has witnessed healthy growth in its loan portfolio, registering a CAGR of 21.1% over FY2006-11. During the period, HDFC's earnings have also witnessed an equally healthy 18.8% CAGR. This has been backed by the company's strong asset quality, low operating costs and ability to keep cost of funds on the lower side. We expect HDFC's loan book to continue growing at 20% over FY2011-13, resulting in earnings growth of 16.0% and an average RoE of 36.9% over the same period. Valuations expensive: At the CMP, HDFC's core business (after adjusting `226/share towards the value of subsidiaries) is trading at 4.4x FY2013E ABV (including subsidiaries the stock is trading at 4.3x FY2013E ABV). We expect HDFC to post a healthy PAT CAGR of 15.7% over FY2011-13E. However, considering that the stock is currently trading at 4.3x one-year forward P/ABV (only slightly lower than its median of 4.6x over the past five years) and at a ~55% premium to the Sensex in P/E terms (compared to an average of ~37% over the past five years), we consider the stock to be fully valued and, hence, recommend Neutral on the stock.
112
January 2012

BALANCE SHEET
Y/E MARCH (` CR) ` SHARE CAPITAL RESERVE & SURPLUS LOAN FUNDS FY2010 287 14,911 96,565 FY2011 293 17,023 115,410 FY2012E 293 18,629 139,642 FY2013E 304 23,872 164,468
- YOY GROWTH (%)

OTHER INCOME
10.9
910
25.4
1,071
13.5
1,293
17.4
1,531
- YOY GROWTH (%)

OPERATING INCOME
71.3
4,298
17.7
5,318
20.7
6,112
18.5
7,192
- GROWTH (%)
OTHER LIABILITIES & PROVISIONS TOTAL LIABILITIES INVESTMENTS ADVANCES
15.2
4,878 116,641 10,727 97,967
19.5
6,775 139,502 11,832 117,127
21.0
8,567 167,131 12,658 141,723
17.8
10,326 198,970 13,611 170,068
- YOY GROWTH (%)

OPERATING EXPENSES
19.9
324
23.7
381
14.9
438
17.7
526
- YOY GROWTH (%)

2.4
3,974
17.7
4,937
15.0
5,674
20.0
6,666
- YOY GROWTH (%)

21.6
58
24.2
70
14.9
78
17.5
156
- YOY GROWTH (%)

PROFIT BEFORE TAX
16.0
3,916
20.7
4,867
11.1
5,596
100.6
6,510
- GROWTH (%)
15.0
222 7,725 116,641
19.6
234 10,309 139,502
21.0
276 12,474 167,131
20.0
323 14,969 198,970
- YOY GROWTH (%)

21.7
1,090
24.3
1,332
15.0
1,533
16.3
1,785
- AS A % OF PBT
PAT
27.8
2,826
27.4
3,535
27.4
4,064
27.4
4,725
- YOY GROWTH (%)
23.8
25.1
15.0
16.3
- GROWTH (%)
14.7
19.6
19.8
19.1
KEY RATIOS
Y/E MARCH PROFITABILITY RATIOS (%) NIMS COST TO INCOME RATIO ROA ROE* B/S RATIOS (%) CREDIT/DEPOSIT RATIO ASSET QUALITY (%) GROSS NPAS NET NPAS PROVISION COVERAGE PER SHARE DATA (`) ` 0.80 0.13 83.7 0.77 100.0 0.75 100.0 0.77 100.0 424.4 475.6 475.6 492.0 3.4 7.5 2.6 31.6 3.6 7.2 2.9 40.8 3.4 7.2 2.7 39.0 3.3 7.3 2.6 FY2010 FY2011 FY2012E FY2013E
KEY RATIOS
Y/E MARCH VALUATION RATIOS P/E P/ABV DUPONT ANALYSIS* NII 34.0 (-) PROV. EXP. ADJ NII TREASURY INT. SENS. INC. OTHER INC. OP. INC. OPEX PBT TAXES 3.3 0.1 3.2 0.2 3.4 0.6 4.0 0.3 3.7 1.1 2.6 12.0 31.6 3.5 0.1 3.5 0.3 3.8 0.5 4.3 0.3 4.0 1.1 2.9 14.2 40.8 3.3 0.1 3.3 0.2 3.5 0.6 4.1 0.3 3.8 1.1 2.7 14.3 39.0 3.2 0.1 3.1 0.2 3.3 0.6 4.0 0.3 3.7 1.0 2.6 12.9 34.0 35.1 6.5 28.7 5.9 24.9 5.4 22.2 4.3 FY2010 FY2011 FY2012E FY2013E
EPS ABVPS (75% COVER FOR NPAS) DPS
19.7 105.9 7.2
24.1 118.1 9.0
27.7 129.0 10.4
31.1 158.9 11.6
ROA LEVERAGE ROE
January 2012
113
NBFC
LIC Housing Finance

LIC Housing Finance (LICHF) is the second biggest specialized mortgage lender in India, with a balance sheet size of ~`63,000cr. The credit portfolio for LICHF is ~`56,000cr, of which more than 90% is derived from the retail segment. The company has a network of over 200 offices spread across the country and is promoted by the state-owned life insurance behemoth, Life Insurance Corporation of India (LIC), which owns a 37% stake in the company.
SHAREHOLDING PATTERN (%) PROMOTERS (GOVT. INSTITUTION) FII 36.5 40.3
Structural Snapshot
Growth opportunity: While overall credit penetration in India is, in any case, low, the underpenetration is much starker in retail loans (it stands at ~6% of GDP in India, as against 70-100% in most developed countries). As a result, we expect healthy 20%+ growth in the home loan segment over the medium to long term. Competitive position: The housing finance industry is a keenly competitive segment, with banks having a significant presence. However, large housing finance companies, like LICHF, with a dedicated focus on the segment leading to robust loan sourcing and appraisal as well as high credit rating enabling competitive cost of funds - should be able to withstand competition from banks, even going forward. Nature of business: Cyclical and rate-sensitive sector.
STOCK RETURNS (%) LIC HOUSING BANKEX SENSEX 3M 2.2 1Y 39.3 3Y 70.2 28.3 21.3 5Y 48.5 3.3 10Y 37.8 17.3
(6.4) (12.5) (2.6) (12.3)
7.1 25.5
FINANCIAL PERFORMANCE OVERVIEW (%) OP. INC. GROWTH* PAT GROWTH* NIM# ROE# 3M 5.9 (58.0) 2.8 1Y 64.9 47.2 3.1 25.8 3Y 35.9 36.0 3.0 25.2 5Y 10Y 32.7 24.7 36.1 23.1 3.3 NA 23.6 21.0

Strong pick-up in loan offtake over the past couple of years: LICHF has been able to grow its loan book at a 35.9% CAGR over FY2009-11, driven by a strong parent brand, success of its home loan products (~25% of its loan book comprised teaser loans as of FY2011) and strategic focus on tier-2 and tier-3 cities to sell its home loans. Concerns on the regulatory front: LICHF's loan disbursements through its product 'Advantage-5' are still under scrutiny from the NHB and could be classified as teaser loan, leading to higher provisioning for the company. Also, capital adequacy requirements are relatively less strict for HFCs (12% CAR required with no specific requirement for tier-1 capital) as compared to NBFCs (15% CAR required, 10% minimum tier-1 in case of IFCs). As of FY2011, the CAR of LICHF stood at 14.6% (tier-1 ratio of 8.7% including 1HFY2012 profits), and considering LICHF is leveraged 12-13 times, the company might experience equity dilution in future if CAR requirements are raised. At present we have built in `500cr of capital infusion in the company. Valuations reasonable: The stock used to trade in a lower range earlier (0.8x-2.0x and median of 1.25x), but it has been rerated over the past three years to a 1.9x average. At the CMP, the stock is trading at a P/ABV multiple of 1.8x FY2013E ABV. Considering that interest rates have peaked and the company has healthy growth prospects, we recommend an Accumulate rating on the stock with a target price of ` 262.
114
January 2012

Y/E MARCH (` CR) ` NET INTEREST INCOME FY2010 937 FY2011 1,441 FY2012E 1,667 FY2013E 1,991
BALANCE SHEET
Y/E MARCH (` CR) ` SHARE CAPITAL RESERVE & SURPLUS LOAN FUNDS FY2010 95 3,293 34,758 FY2011 95 4,074 45,163 FY2012E 99 5,350 58,887 FY2013E 99 6,387 72,431
- YOY GROWTH (%)

OTHER INCOME
17.6
137
53.8
331
15.7
193
19.4
228
- YOY GROWTH (%)

OPERATING INCOME
51.1
1,073
141.4
1,771
(41.6)
1,860
18.1
2,219
- GROWTH (%)
OTHER LIABILITIES & PROVISIONS TOTAL LIABILITIES INVESTMENTS ADVANCES
36.7
2,096 40,242 1,389 38,081
29.9
4,298 53,630 1,403 51,090
30.4
3,774 68,110 1,783 64,884
23.0
4,858 83,775 2,196 79,807
- YOY GROWTH (%)

OPERATING EXPENSES
21.1
192
65.0
216
5.0
256
19.3
307
- YOY GROWTH (%)

24.2
882
12.9
1,555
18.4
1,604
19.8
1,912
- YOY GROWTH (%)

20.4
(28)
76.3
261
3.2
288
19.2
166
- YOY GROWTH (%)

PROFIT BEFORE TAX
(641.2)
910
(1,017.3)
1,294
10.4
1,316
(42.3)
1,746
- GROWTH (%)
37.6
36 736 40,242
34.2
47 1,090 53,630
27.0
59 1,384 68,110
23.0
70 1,702 83,775
- YOY GROWTH (%)

25.2
249
42.1
320
1.7
342
32.7
453
- AS A % OF PBT
PAT
27.4
662
24.7
974
26.0
974
26.0
1,293
- YOY GROWTH (%)
24.6
47.2
(0.0)
32.7
- GROWTH (%)
37.0
33.3
27.0
23.0
KEY RATIOS
Y/E MARCH PROFITABILITY RATIOS (%) NIMS COST TO INCOME RATIO ROA ROE ASSET QUALITY (%) GROSS NPAS NET NPAS PROVISION COVERAGE PER SHARE DATA (`) ` EPS ABVPS (75% COVER FOR NPAS) DPS 13.9 71.3 3.0 20.5 87.8 3.5 19.6 109.9 3.3 26.1 130.8 0.69 0.12 82.6 0.47 0.03 93.7 0.53 0.05 90.0 0.58 0.06 90.0 2.7 17.8 1.9 23.6 3.1 12.2 2.1 25.8 2.8 13.8 1.6 20.3 2.7 13.8 1.7 21.7 FY2010 FY2011 FY2012E FY2013E
KEY RATIOS
Y/E MARCH VALUATION RATIOS P/E P/ABV DIVIDEND YIELD (%) DUPONT ANALYSIS NII (-) PROV. EXP. ADJ NII TREASURY INT. SENS. INC. OTHER INC. OP. INC. OPEX PBT TAXES ROA LEVERAGE 4.4 ROE 2.7 (0.1) 2.8 0.0 2.8 0.4 3.2 0.6 2.6 0.7 1.9 12.4 23.5 3.1 0.6 2.5 0.4 2.9 0.3 3.2 0.5 2.8 0.7 2.1 12.4 25.8 2.7 0.5 2.3 0.0 2.3 0.3 2.6 0.4 2.2 0.6 1.6 12.7 20.3 2.6 0.2 2.4 0.0 2.4 0.3 2.7 0.4 2.3 0.6 1.7 12.7 21.7 17.0 3.3 1.3 11.6 2.7 1.5 12.1 2.2 1.4 9.1 1.8 1.9 FY2010 FY2011 FY2012E FY2013E
January 2012
115
116
January 2012
Capital Goods
COVERAGE
Companies BTG BHEL BGR T&D/Industrials ABB Crompton Greaves Thermax KEC Intl' Jyoti Structures 727 134 496 53 50 427 158 Sell Buy 266 228 - Neutral - Neutral CMP (`) ` Target (`) ` Reco
NEUTRAL
Glass half full

India is going through a slowdown in investment cycle because of various cyclical and structural issues - such as high interest rates, slowdown in consumer demand, policy inaction and high inflationary pressures. We believe the environment is gloomy and would remain the same for a few more quarters. Therefore, we are looking beyond the current slowdown and selecting companies that are expected to excel and benefit from the next uptick in the investment cycle. We prefer companies that have a strong business model in place, experienced management at the helm of affairs, strong product portfolio and offer attractive risk reward ratio. Slowdown is here to be experienced: The great Indian capex cycle, which witnessed a sharp increase in the past few years due to favorable policies, abundance liquidity and ever-burgeoning demand, has come to a standstill. A number of factors have led to this slowdown; these are structural (policy inaction and unavailability of resources like land and fuel) and cyclical (overcapacity, high interest rates, inflationary pressures and high commodity prices) in nature. Further, outbreak of scams and unfavorable government policies, such as environment clearance and uncertainty over tax regime, has also dented investor (domestic and international) confidence. Therefore, as expected, the number of projects that have been stalled and cancelled has increased. Similarly, there has been an uptick in the number of shelved projects in recent times. Therefore, we believe there is some more pain left in the system (near term) as our economy grapples with these issues and given the world economy is also in weak shape. But things to pick up going ahead: Notwithstanding, it should be noted that there is a pertinent need of infrastructure in the country, which is acknowledged by one and all - though it is difficult to gauge the timelines, given the number of variables impacting it positively and negatively at any given point in time. Therefore, we believe the next upturn in the Indian capex cycle could be led by infrastructure. Our analysis of potential ordering in various segments suggests a healthy pipeline. Within the infrastructure segment, sectors such as power, metro rail, railways and defense, are likely to contribute more. We expect industrial capex to subsequently increase, given its dependence on infrastructure growth. Sector wise, order pipeline from the cement sector looks weak, as the sector grapples with an oversupply situation created during the boom time. However, order pipeline from the steel segment looks strong. On the non ferrous side, we expect a capex of >`60,000cr from three majors - Sterlite, Hindalco and Nalco - in the next five years. Hence, we look beyond: Based on an analysis of the above fundamentals, CRG (`134/`158/18%) and Jyoti (`50/`61/22%) are the top buys in our coverage universe. We continue to maintain our negative view on BHEL despite low valuations, as we believe the company is facing structural issues.We maintain our Sell call on ABB (`727/`427/-41%) on account of expensive valuations and Neutral on BGR, Thermax and KEC.
- Neutral - Neutral 61 Buy
January 2011
117
Capital Goods Slowdown is here to be experienced

The great Indian capex cycle, which witnessed a sharp increase in the past few years due to favorable policies, abundance liquidity and ever-burgeoning demand, has come to a standstill. A number of factors have led to this slowdown; these are structural (policy inaction and unavailability of resources like land and fuel) and cyclical (overcapacity, high interest rates, inflationary pressures and high commodity prices) in nature. These factors have resulted in a slowdown in many capex projects. Further, outbreak of scams and unfavorable government policies, such as environment clearance and uncertainty over tax regime, has also dented investor (domestic and international) confidence. Therefore, as expected, the number of projects that have been stalled and cancelled has increased - for government and private alike. The total project cost (TPC) of these projects increased to>`4 lakh cr in September 2011 (~41.0% yoy jump). Private sector (~47% yoy) projects have suffered more compared to government projects (~24.0% yoy). Similarly, there has been an uptick in the number of shelved projects in recent times. Also, industrial production activity has been decelerating in the past year, which suggests that ordering for the capital goods sector could remain weak for the next few quarters. Therefore, we believe there is some more pain left in the system (near term) as our economy grapples with these issues and given the world economy is also in doldrums. in the Indian capex cycle could be led by infrastructure. Our analysis of potential ordering in various segments suggests a healthy pipeline. Within the infrastructure segment, sectors such as power, metro rail, railways and defense, are likely to contribute more.
Exhibit 3: Power projects expected to be commission in the next five years

Central sector NPCIL NTPC NTPC NTPC SJVNL NHPC State Sector AP Power Develop & Co. Pragati Power Mahagenco GSPC Pipavav Power UPRUVNL Private Sector Tata Power Adani Power Mundra UMPP Mundra SEZ power plant Sasan UMPP Salaya Phase I & II Jharsugudha Nashik TPP Karcham Wangtoo Goindwal Sahib Power project Coal Coal Coal Coal Coal Coal Hydro Coal Gujarat Gujarat MP Gujarat Orissa Maha. HP Punjab 4,000 3,960 3,960 2,520 2,400 1,200 1,000 540 Karim Nagar Pragati III Bhusawal TPS Expansion Pipavav Power project Paricha TPS extn - Stg 2 Unt 5 Gas Gas Coal Gas Coal AP Delhi Maha. Gujarat UP 2,100 1,500 1,000 700 500 Project Kundamkulam Sipat STPP Jajjhar Power plant Simhadri Stage 2 Rampur Hydro Electric Project Uri II Fuel State Capacity (MW) 2,000 1,980 1,500 1,000 414 240 Nuclear Tamil Nadu Coal Chattisgarh Coal Coal Hydro Hydro Haryana AP HP J&K
Exhibit 1: Projects stalled are on a rise...

300,000 250,000 200,000
Reliance Power Essar Power Sterlite Energy India Bulls power
(` cr)
150,000
JP Associates
100,000 50,000 0
Dec-96 Dec-99 Sep-06 Dec-08 Sep-09 Sep-00 Dec-02 Sep-03 Dec-05 Sep-97 Mar-96 Jun-98 Mar-99 Jun-04 Mar-08 Mar-02 Mar-05
GVK

Mar-11 Dec-11 Jun-95 Jun-01 Jun-10 Jun-07
(50,000)
Exhibit 4: Major T&D projects in the next five years

Particulars Transmission system for Karanpura (2000 MW) East-South Link HVDC Bipole Phase II (2,000 MW) Transmission for Parbati and Koldam Transmission System for Charra (2,000MW) Transmission system for Sipat Phase -II (1,000 MW) Transmission system for North Easter Hydel projects Description 3,000 MW HVDC North karanpura Hyderabad-Raichur-Davagere and Hyderabad-Gooty-Bangalore Seoni-Chhegaon (II line) and Chhegaon-Nagda 765 kV SC Damwe (1,000MW), Dehnang (520 MW) and Subansiri (500MW) Cost (US$ mn) 1,403
4Q Avg - Govt
4Q Avg - Pvt
Source: Industry data, Angel Research
Exhibit 2: ... so are projects cancelled

40,000 35,000 30,000 25,000
(` cr)
830.0 660.0 532.0
20,000 15,000 10,000 5,000 0

Dec-96 Dec-99 Sep-06 Dec-08 Sep-09 Sep-00 Dec-02 Sep-03 Dec-05 Sep-97 Jun-98 Mar-96 Mar-99 Jun-04 Mar-08 Jun-95 Jun-01 Mar-02 Mar-05 Jun-10 Mar-11 Dec-11 Jun-07
449.0 447.0 293.0 199.0 NA NA
(5,000)
Transmission system for Jayamkondam (2,000 MW)
4Q Avg - Govt
4Q Avg - Pvt
Transmission system for Bhusawal Phase II (2,000 MW) Transmission system for Sugen CCPP (1100 MW) Transmission system for Teesta III (1,200MW) Transmission system for Gas-Based Power Plant near Hazira (1,500MW) Transmission system for Gas-Based Power Plant near Pallatana (740 MW) Source: Crisil, Angel Research -
But things to pick up going ahead

Notwithstanding, it should be noted that there is a pertinent need of infrastructure in the country, which is acknowledged by one and all - though it is difficult to gauge the timelines, given the number of variables impacting it positively and negatively at any given point in time. Therefore, we believe the next upturn
NA NA
118
January 2012
Capital Goods
Exhibit 5: Major MRTS projects - Though they are behind schedule in most cases
Cost ` (` cr) Chennai Metro Rail Project Hyderabad Elevated MRTS project Charkop-Bandra-Mankhurd-Metro Railway project Delhi metro Rail project phase II Bangalore Metro Rail Project Kochi Metro Rail Project Jacob Circle- Wadala-Chembur Monorail project route I Versova-Andheri-Ghatkopar Metro Rail Project Source: Crisil, Angel Research 146,000 121,000 120,000 89,000 82,000 30,000 24,000 Length (km) 50 38 68 33 25 25 11 Planned completion date Dec-15 Dec-13 Dec-15 Total 22057 37357 1.7x 0 10000 20000 FY2006-10 FY2011-15 30000 40000 Infrastructure 14642 28349 1.9x Industrial 7415 9008 1.2x
Exhibit 8: Expected industrial and infrastructure spend (` cr) `
Dec-12 Dec-11 Mar-12
We expect industrial capex to increase, given its dependence on infrastructure growth. Sector wise, order pipeline from the cement sector looks weak, as the sector grapples with an oversupply situation created during the boom time. However, order pipeline from the steel segment looks strong. Major players such as Tata Steel, JSW Steel, SAIL, POSCO, Arcelor Mittal and Vedanta have announced capacity addition plans totaling 60mn tonnes, which are expected to be commissioned over the next five years. On the non ferrous side, we expect a capex of >`60,000cr from three majors - Sterlite, Hindalco and Nalco - in the next five years.
Some activity on reforms - Attempt to resolve some structural issues

There have been some minor activities on the reform front in the past six months, such as the new land reforms bill being introduced, some no-go areas being allowed for mining, new infrastructure lending norms for setting up of debt funds, increasing consensus on the likely imposition of import duties and higher power tariffs by various SEBs.
Hence, we look beyond

We see a remote possibility of any near-term solution for the problem in hand. However, we prefer to look beyond the current slowdown and select companies that are expected to excel and benefit from the next uptick in the investment cycle. These include companies that have a strong business model in place, experienced management at the helm of affairs, strong product portfolio and offer attractive risk reward ratio. Against this backdrop we prefer CRG (`134/`158/18%) and Jyoti Structures(`50/`61/22%) as our top buys in our coverage universe. We continue to maintain our negative view on BHEL despite low valuations, as we believe the company is facing structural issues.We maintain our Sell call on ABB (`727/`427/ -41%) on account of expensive valuations and Neutral on BGR, Thermax and KEC.
Exhibit 6: Cement capex showing a downward trend

50.0 45.0 40.0 35.0 30.0 25.0 20.0 15.0 10.0 5.0 0.0 FY10 FY11 FY12E FY13E FY14E FY15E 25.9 20.3 20.6 24.4 18.5 45.7
Expected Addition MnT
Source: Industry data, Angel Research. It should be noted that some upward revision can be expected on the back of unannounced capex
Exhibit 7: Major capacity expansion plans (next five years)

Company Capacity (mn tonnes) SAIL JSPL JSW Steel Tata Steel Posco Arcelor Mittal Vedanta Essar Steel Bhushan Steel RINL Monnet Ispat Total Source: Crisil, Angel Research 10.0 7.6 6.2 6.0 6.0 6.0 5.0 4.0 3.5 2.7 2.4 59.4 Multiple states Orissa/Jharkhand Karnataka Orissa Orissa/Karnataka Jharkhand/Orissa Orissa Orissa Orissa Brownfield expansion (Vizag) Chattishgarh Location
January 2012
119
Capital Goods
Exhibit 9: Our Coverage Universe Valuation Comparison
P/E (x) Price FY11/ CY10 BTG Space BHEL BGR 266 228 10.7 5.1 9.3 6.3 10.2 6.8 3.2 1.7 2.6 1.5 2.2 1.3 39.4 67.1 2.5 (13.4) 33.6 39.0 30.8 25.0 23.0 20.1 FY12E/ FY13E/ CY11E CY12E P/BV (x) FY11/ FY12E/ FY13E/ CY10 CY11E CY12E EPS CAGR (%) FY09-11 FY11-13E RoE(%) FY11/ FY12E/ FY13E/ CY10 CY11E CY12E
T&D/Industrials ABB* CRG Thermax Kec Intl' Jyoti Stryctures 727 134 496 53 50 243.6 9.2 15.5 6.7 4.1 81.8 16.5 14.4 7.9 3.5 40.9 11.0 15.2 6.0 4.1 6.4 2.6 4.5 1.5 0.7 6.0 2.4 3.6 1.3 0.6 5.3 2.0 3.1 1.1 0.5 (66.0) (2.7) 32.7 28.7 8.0 144.2 (8.2) 1.8 5.7 0.1 2.6 33.8 31.9 34.7 18.7 7.6 15.1 28.0 24.9 18.5 13.9 19.9 21.9 26.6 13.7
Source: Company, Angel Research; Note: *December year ending
Exhibit 10: Capital Goods sector performance and rating comparison

Angel Rating Buy ABB AIA Engineering BEML Ltd Bharat Electronics BHEL BGR Carborundum Universal Crompton Cummins India Larsen & Toubro Siemens India Thermax Voltas
Recommendation Hold 5 2 1 0 14 7 0 13 6 8 5 16 7 Sell 34 5 0 0 13 19 3 16 8 4 13 12 12 1m 31.8 7.8 16.1 6.2 14.7 19.0 409 16.4 18.3 23.4 15.7 24.1 12.3
Stock price performance over 3m 2.0 (5.0) 8.1 (2.4) (18.1) (29.7) (9.5) (7.2) (2.0) (48.1) (10.4) 15.0 (11.7) 6m (17.8) (22.9) (8.4) (13.0) (32.9) (52.2) (7.9) (35.7) (20.5) (59.9) (18.1) (15.5) (44.6) 12m (1.4) (23.6) (43.3) (11.7) (39.1) (63.8) 14.6 (53.8) (26.2) (56.0) 1.6 (32.0) (57.8)
Sell Not Rated Not Rated Not Rated Neutral Neutral Not Rated Buy Not Rated Buy Not Rated Neutral Not Rated
0 4 3 11 20 7 5 16 12 37 2 11 12
120
January 2012
January 2012
121
Capital Goods
BHEL
Company Background
BHEL is the largest manufacturer of power equipment (boiler and turbine generators) in India with ~65% market share. The company operates in two segments - power (80% of FY2011 revenues) and industry (20% of FY2011 revenue). The company has 15 manufacturing facilities spread across the country with a combined manufacturing capacity of 15GW p.a. and is planning to reach 20GW p.a. by FY2012E. Sets produced by BHEL account for ~62% of India's installed power capacity, which generate ~74% of India's power. Notably, BHEL is the first domestic company to foray into the supercritical technology.
STOCK RETURNS (%) BHEL SENSEX 3M 1Y (27.9) 3Y (2.1) 13.8 21.3 5Y 10Y (18.1) (39.1) (2.6) (12.3) 3.2 33.4 0.7 31.3 3.3 17.3
Structural Snapshot
Growth opportunity: BHEL has strong revenue visibility for the next couple of years owing to its robust order backlog of `1.6 lakh cr (3.8x FY2011 revenue). However, there is uncertainty over the company's long-term growth prospects, considering the tough competition posed by international and domestic players in recent times. In our view, even if BHEL manages to bag orders, against our expectations, they will come at a cost of its margins. Nature of business: Technology-intensive, High RoE project business; Prospects rely on the power sector.
BSE CAP GOODS (10.6)
Competitive position: Losing its dominant position in the power equipment space to domestic players (who have collaborated with foreign players) and international competitors.
29.2 34.5 29.8 21.2

Deteriorating dynamics in the BTG space: Recent trends in biddings and projects wins indicate that BHEL's leadership position is under threat, thus hinting for a loss in its market share going ahead. Further, given the structural issues faced by the power sector, times look tough for BTG players in the near to medium term. Concerns visible beyond 2013: While the current operating metrics appear sound (strong OB/Sales of 3.8x and 20% + EBITDA margin), we expect BHEL to face pressure going ahead. In our view, the company's growth and margins are likely to trim mainly due to 1) deceleration of order inflow growth - from a 26.2% CAGR over FY2006-11 to negative growth over FY201114E; and 2) a 200-250bp margin dip from FY2013 due to higher imported content of supercritical equipment. Hence, we believe the companys earnings could face severe strain in the times to come. More underperformance likely: BHEL has underperformed the Sensex by 26.9% (vindicating our negative stance on the stock) over the last twelve months and is trading at historically low one-year forward valuations of 10.2x FY2013, owing to 1) delay in big-ticket orders; 2) weak investment capex and 3) changing competitive dynamics in the BTG space. We believe these concerns are far from over and, hence, expect the stock to further underperform and maintain our Neutral view on the stock.
ANGEL ESTIMATES PARTICULARS PAT GROWTH (%) ROE (%) P/E P/BV FY2012E 15.9 30.8 9.3 2.6 FY2013E (9.3) 23.0 10.2 2.2
122
January 2012
PROFIT & LOSS

Y/E MARCH (` CR) ` OPERATING INCOME FY2010 33,653 FY2011 42,538 FY2012E 51,482 FY2013E 51,689
BALANCE SHEET
Y/E MARCH (` CR) ` SOURCES OF FUNDS EQUITY SHARE CAPITAL RESERVES & SURPLUS SHAREHOLDERS FUNDS TOTAL LOANS 490 15,406 15,896 148 (1,529) 14,516 490 19,666 20,155 270 (2,165) 18,260 490 24,907 25,397 1,480 (2,165) 24,712 490 29,495 29,984 1,480 (2,165) 29,299 FY2010 FY2011 FY2012E FY2013E
% CHG
24.6
27,828 5,825
26.4
33,963 8,575
21.0
41,275 10,207
0.4
42,209 9,480
(% OF NET SALES)
DEPRECIATION & AMORTISATION INTEREST & OTHER CHARGES OTHER INCOME
17.3
339 37 1,165
20.2
478 56 1,027
19.8
731 69 850
18.3
856 100 900 DEFERRED TAX LIABILITY TOTAL LIABILITIES APPLICATION OF FUNDS GROSS BLOCK LESS: ACC. DEPRECIATION NET BLOCK CAPITAL WORK-IN-PROGRESS INVESTMENTS CURRENT ASSETS 6,858 4,249 2,609 1,552 6 43,002 32,656 10,346 2 14,516 8,344 4,734 3,610 2,203 11 51,621 39,188 12,432 4 18,260 9,941 5,466 4,476 2,206 11 62,707 44,692 18,015 4 24,712 11,449 6,321 5,127 1,998 11 64,473 42,314 22,158 4 29,299
(% OF PBT)
RECURRING PBT EXTRAORDINARY EXPENSE/(INC.) PBT (REPORTED) TAX
17.6
6,621 6,621 2,294
11.3
9,066 9,066 3,012
8.3
10,257 10,257 3,241
9.5
9,424 9,424 3,063
(% OF PBT)
PAT (REPORTED) LESS: MINORITY INTEREST (MI) PRIOR PERIOD ITEMS PAT AFTER MI (REPORTED) ADJ. PAT
34.6
4,327 4,327 4,327
33.2
6,053 6,053 6,053
31.6
7,015 7,015 7,015
32.5
6,361 6,361 6,361
CURRENT LIABILITIES NET CURRENT ASSETS MIS. EXP. NOT WRITTEN OFF TOTAL ASSETS
% CHG
38.9
39.9
15.9
(9.3)
CASH FLOW STATEMENT

Y/E MARCH (` CR) ` PROFIT BEFORE TAX DEPRECIATION (INC)/DEC IN WORKING CAPITAL LESS: OTHER INCOME DIRECT TAXES PAID CASH FLOW FROM OPERATIONS (INC.)/DEC.IN FIXED ASSETS (INC.)/DEC. IN INVESTMENTS OTHER INCOME CASH FLOW FROM INVESTING ISSUE OF EQUITY INC./(DEC.) IN LOANS DIVIDEND PAID (INCL. TAX) OTHERS CASH FLOW FROM FINANCING INC./(DEC.) IN CASH OPENING CASH BALANCES CLOSING CASH BALANCES FY2010 6,621 339 (2,403) 1,165 2,021 1,345 (1,752) 1,165 (587) (18) 1,332 119 (1,350) (474) 10,330 9,856 FY2011 9,066 478 (2,236) 1,027 3,649 2,617 (2,137) (5) 1,027 (1,115) 122 1,774 0.1 (1,652) (150) 9,856 9,706 FY2012E 10,257 731 (5,986) 850 3,241 911 (1,600) 850 (750) 1,210 1,774 (564) (403) 9,706 9,303 FY2013E 9,424 856 1,099 900 3,063 7,416 (1,300) 900 (400) 1,774 (1,774) 5,242 9,303 14,546
KEY RATIOS
Y/E MARCH VALUATION RATIOS P/E P/CEPS P/BV EV/SALES EV/EBITDA ` PER SHARE DATA (`) EPS (BASIC) EPS (FULLY DILUTED) CASH EPS DPS BOOK VALUE RETURNS (%) ROCE (PRE-TAX) ANGEL ROIC (PRE-TAX) ROE TURNOVER RATIOS (X) INVENTORY / SALES (DAYS) RECEIVABLES (DAYS) PAYABLES (DAYS) 93 200 332 87 207 345 91 220 359 100 235 354 37.7 176.3 30.0 44.4 123.3 33.6 40.1 79.4 30.8 29.6 57.0 23.0 17.7 17.7 19.1 4.7 64.9 24.7 24.7 26.7 6.2 82.3 28.7 28.7 31.7 6.2 103.7 26.0 26.0 29.5 6.2 122.5 15.0 13.9 4.1 1.7 9.5 10.7 9.9 3.2 1.3 6.5 9.3 8.4 2.6 1.2 5.6 10.2 9.0 2.2 0.9 5.5 FY2010 FY2011 FY2012E FY2013E
January 2012
123
Capital Goods
BGR Energy
Company Background
BGR Energy Systems (BGR) is one of the leading players in the the Balance of Plant (BoP) and EPC space of the power sector. The company has taken several big leaps over the years - from being a mere manufacturer of a few BoP components to executing turnkey BoP projects and now gradually executing full-fledged EPC contracts. In 2010, BGR ambitiously ventured into setting up a manufacturing facility of 4,000MW for supercritical boilers and turbine generators in a JV with Hitachi (76:24).
Structural Snapshot
Growth opportunity: BoP orders for most of the projects in the 12th plan are yet to be placed (in contrast to BTG orders). As per industry estimates, ~1,110 BoP packages (`1,40,000cr) are expected to get tendered during the 12th plan, thus providing adequate opportunities to the company. Competitive position: BGR is a preferred player in the BoP segment, as the company is one of the few players that have a strong expertise in BoP and EPC. The company is a new entrant in the BTG space and has won only one order on the back of extremely competitive pricing (negative for the company in context of operating margins). Nature of business: Mainly a project business thriving on power BoP and EPC projects, which face moderate competition.
STOCK RETURNS (%) BGR SENSEX 3M 1Y (27.9) 3Y 13.4 13.8 21.3 5Y 3.3 10Y 17.3 (29.7) (63.8) (2.6) (12.3)
0.7 31.3
NOTE: Returns in excess of 1 year on a CAGR basis
FINANCIAL PERFORMANCE OVERVIEW (%) PAT GROWTH* OPM# ROE# 3M (34.0) 14.3 1Y 54.5 60.1 11.3 39.0 3Y 46.2 54.0 11.1 31.0 5Y 43.3 51.2 11.0 34.9 10Y SALES GROWTH* (32.1)

Growth to remain under pressure: Over the past 6-8 quarters, BGR has been witnessing a dry spell on the order inflow front, barring the recent aggressively won NTPC bulk order and one large order in the EPC space. Therefore, the order inflow trend has been largely disappointing. Further, with persistent headwinds in the power sector, we do not expect any trend reversal in the near to medium term. Moreover, the recently bagged orders are of high gestation period and would contribute majorly post FY2013. Hence, we do not expect a substantial pick up in revenue till FY2013 (11.7% decline in FY2012E and 7.6% growth in FY2013E), leading to earnings decline of 19.5% and 6.8% for FY2012E and FY2013E, respectively. Investment commitments + Elongated working capital = Soaring debt: BGR's working capital has seen severe deterioration over the past few quarters (from 74 days in FY2010 to 225 days in 1HFY2012), mainly due to high receivables (owing to the retention money from SEBs such as RRVUNL and TNEB, which are facing high financial strain). Amid issues impairing the power sector, credit availability may harden for SEBs, as banks have already chosen to remain risk-averse. Hence, in our view, tight liquidity is likely to transmit negatively on BGR's books. Along with this, BTG venture is expected to stretch its balance sheet - we expect the leverage to rise from 1.3x in 1HFY2012 to 1.9x in FY2013. Valuation: At the CMP, the stock is trading at PE multiple of 6.8x FY2013E EPS, which we believe is reasonable amidst the structural issues (slowdown of order inflow in BTG space and high leverage) faced by the company. Hence, we maintain our Neutral view on the stock.
ANGEL ESTIMATES PARTICULARS PAT GROWTH (%) ROE (%) P/E P/BV FY2012E (19.5) 25.0 6.3 1.5 FY2013E (6.8) 20.1 6.8 1.3
124
January 2012
PROFIT & LOSS

Y/E MARCH (` CR) ` OPERATING INCOME % CHG TOTAL EXPENDITURE EBITDA FY2010 3,073 59.2 2,729 344 FY2011 4,750 54.5 4,214 536 FY2012E 4,196 (11.7) 3,670 525 FY2013E 4,513 7.6 3,993 520
BALANCE SHEET
Y/E MARCH (` CR) ` SOURCES OF FUNDS EQUITY SHARE CAPITAL RESERVES & SURPLUS SHAREHOLDERS FUNDS TOTAL LOANS 72 634 706 807 155 1,672 72 880 952 1,337 308 2,649 72 1,056 1,128 3,037 308 4,525 72 1,214 1,286 3,137 308 4,783 FY2010 FY2011 FY2012E FY2013E
(% OF NET SALES)
11.2
10 54 25
11.3
17 60 22
12.5
16 125 10
11.5
25 139 12 DEFERRED TAX LIABILITY TOTAL LIABILITIES APPLICATION OF FUNDS GROSS BLOCK LESS: ACC. DEPRECIATION NET BLOCK CAPITAL WORK-IN-PROGRESS INVESTMENTS CURRENT ASSETS 182 37 145 10 1 3,644 1,896 1,515 1,672 251 53 198 86 1 5,115 2,397 2,364 2,649 776 69 706 86 1 6,329 2,244 3,731 4,525 2,613 95 2,518 85 1 5,148 2,607 2,178 4,783
(% OF PBT)
8.2
305 305 104
4.6
481 481 158
2.5
394 394 134
3.3
367 367 125
(% OF PBT)
34.0
201 201 201
32.8
323 323 323
32.5
260 260 260
32.5
242 242 242
% CHG
74.4
60.1
(19.5)
(6.8)
CASH FLOW STATEMENT

Y/E MARCH (` CR) ` PROFIT BEFORE TAX DEPRECIATION (INC)/DEC IN WORKING CAPITAL LESS: OTHER INCOME DIRECT TAXES PAID CASH FLOW FROM OPERATIONS (INC.)/DEC.IN FIXED ASSETS (INC.)/DEC. IN INVESTMENTS OTHER INCOME CASH FLOW FROM INVESTING ISSUE OF EQUITY INC./(DEC.) IN LOANS DIVIDEND PAID (INCL. TAX) OTHERS CASH FLOW FROM FINANCING INC./(DEC.) IN CASH OPENING CASH BALANCES CLOSING CASH BALANCES FY2010 305 10 18 (25) (104) 205 (65) 25 (40) 0.0 98 59 83 39 287 615 902 FY2011 481 17 (706) (22) (158) (388) (147) 22 (125) 0.2 530 84 210 446 143 902 1045 FY2012E 394 16 (2,190) (10) (134) (1,923) (525) 10 (515) 0.00 1,700 84 1,616 (823) 1045 222 FY2013E 367 25 1,968 (12) (125) 2,224 (1,837) 12 (1,825) 0.00 100 84 16 415 222 637
KEY RATIOS
January 2012
125
Capital Goods
RATING 52 WEEK HIGH / LOW MARKET CAP (` CR) ` LIQUIDITY SELL 908 / 542 15,481 MEDIUM
ABB India
Company Background
CMP/TP/Downside: `727 / `427 / 41%
SHAREHOLDING PATTERN (%) PROMOTERS (ABB GROUP) FII 75.0 3.0
ABB India (ABB) is the Indian subsidiary of Switzerland-based ABB Group, which is one of the world's leading power and automation engineering companies. The group provides solutions for energy-efficient generation, power transmission and distribution (T&D) and process automation. The power-related segment is the company's major revenue contributor, accounting for ~53% of its total CY2010 revenue, while 40% is contributed by the automation segment.
Structural Snapshot
Growth opportunity: Improving ordering in the T&D segment and the HVDC project will help support order inflow for the coming quarters. Also from a long-term perspective, ABB has substantial growth avenues from the power segment - PGCIL has envisaged T&D capex of `1lakh cr for the 12th plan, 28% of which is expected to be deployed in sub-station segment. In contrast, the weak investment cycle prevailing across the industrial sector is likely to restrict order inflow for the automation segment. Competitive position: ABB benefits from the strong pedigree of its parent group, enabling it to bring the world's latest technology into the country, such as flexible AC transmission systems (FACTS) and SCADA. However, in the past few years, power products segment, namely transformers, is facing stiff competition from Chinese/Korean players, leading to a loss in the company's market share. Nature of business: Mix of products and projects; Moderate-to-high entry barriers in case of high-end technological products.
STOCK RETURNS (%) ABB SENSEX 3M 2.0 1Y (1.4) (27.9) 3Y 16.8 13.8 21.3 5Y 10Y 0.2 33.2 0.7 31.3 3.3 17.3
(2.6) (12.3)
FINANCIAL PERFORMANCE OVERVIEW (%) SALES GROWTH* PAT GROWTH* OPM# RoE# 3M 29.2 3.8 1Y 0.8 1.3 2.6 3Y 2.0 7.0 15.9 5Y 10Y 1.6 9.4 16.2 23.0 8.9
92.6 (82.2) (49.5) (22.0)
23.1 21.6

Changed dynamics lead to a loss in market share: After the exclusion of the circuit breaker in the scope of the substation contract in early FY2012, new entrants such as L&T, EMC, Crompton Greaves and Techno Electric have rushed to capture this segment as - 1) separate scope of work has made it easier for general contractors to bid; and 2) general products and civil works constitute a major portion of the sub-station contract. Especially in the 765kV segment, these new entrants have posed a tough competition to traditional T&D majors such as ABB, Areva and Siemens (which together commanded 100% market share in FY2011) and have already captured ~71% market share YTD FY2012. As a result, order intake from this segment is likely to decline going ahead. Unjustifiably rich valuations: In an environment where most capital goods stocks (including some of ABB's closest peers) are trading at a significant discount to their historical average, ABB trades at premium valuations, despite continued earnings disappointments and deteriorating return ratios (~14% in CY2012E from 29% in CY2008). At the CMP, the stock trades at 40.9x its CY2012E P/E, which is highly expensive compared to its peers such as Crompton Greaves (11.0x its FY2013E P/E) and Areva T&D (21.8x its CY2012E P/E). We believe the market is factoring in a possible delisting that is keeping the stock at elevated levels. But, we maintain Sell on the stock on valuation basis with a target price of ` 427. (PE multiple of 24.0x CY2012E EPS)
126
January 2012
PROFIT & LOSS

Y/E DECEMBER (` CR) ` OPERATING INCOME CY2009 6,237 CY2010 6,287 CY2011E 7,661 CY2012E 8,895
BALANCE SHEET
Y/E DECEMBER (` CR) ` SOURCES OF FUNDS EQUITY SHARE CAPITAL RESERVES & SURPLUS SHAREHOLDERS FUNDS TOTAL LOANS 42 2,381 2,424 2,424 42 2,381 2,424 2,424 42 2,520 2,562 100 2,662 42 2,847 2,890 100 2,990 CY2009 CY2010 CY2011E CY2012E
% CHG
(8.8)
5,710 527
0.8
6,203 84
21.9
7,277 384
16.1
8,216 679
(% OF NET SALES)
DEPRECIATION& AMORT. INTEREST & OTHER CHARGES OTHER INCOME
8.5
49 24 73
1.3
52 17 86
5.0
94 30 25
7.6
108 37 37 DEFERRED TAX LIABILITY TOTAL LIABILITIES APPLICATION OF FUNDS GROSS BLOCK LESS: ACC. DEPRECIATION NET BLOCK CAPITAL WORK-IN-PROGRESS INVESTMENTS CURRENT ASSETS 879 206 673 116 17 4,749 3,132 1,617 2,424 998 232 766 58 17 4,926 3,348 1,579 2,424 1,598 326 1,272 50 17 5,921 4,601 1,319 2,662 1,823 434 1,389 50 17 6,024 4,495 1,529 2,990
(% OF PBT)
13.8
527 527 173
85.3
100 100 37
8.8
285 285 97
6.5
571 571 194
(% OF PBT)
32.8
355 355 355
36.9
63 63 63
34.0
188 188 188
34.0
377 377 377
% CHG
(35.2)
(82.2)
197.7
100.3
CASH FLOW STATEMENT

Y/E DECEMBER (` CR) PROFIT BEFORE TAX DEPRECIATION (INC)/DEC IN WORKING CAPITAL LESS: OTHER INCOME DIRECT TAXES PAID CASH FLOW FROM OPERATIONS (INC.)/DEC.IN FIXED ASSETS (INC.)/DEC. IN INVESTMENTS OTHER INCOME CASH FLOW FROM INVESTING ISSUE OF EQUITY INC./(DEC.) IN LOANS DIVIDEND PAID (INCL. TAX) OTHERS CASH FLOW FROM FINANCING INC./(DEC.) IN CASH OPENING CASH BALANCES CLOSING CASH BALANCES CY2009 527 49 (63) (73) (173) 268 (163) 44 73 (46) (50) 4 (50) 176 348 524 CY2010 100 52 102 (86) (37) 131 (104) 86 (19) (50) (50) 63 524 587 CY2011E 285 94 (158) (25) (97) 100 (592) 25 (567) 100 (50) 50 (417) 587 170 CY2012E 571 108 (130) (37) (194) 318 (225) 37 (188) (50) (50) 80 170 250
KEY RATIOS
Y/E DECEMBER VALUATION RATIOS P/E (ON FDEPS) P/CEPS P/BV EV/SALES EV/EBITDA ` PER SHARE DATA (`) EPS (BASIC) EPS (FULLY DILUTED) CASH EPS DPS BOOK VALUE RETURNS (%) ROCE (PRE-TAX) ANGEL ROIC (PRE-TAX) ROAE TURNOVER RATIOS (X) INVENTORY / SALES (DAYS) RECEIVABLES (DAYS) PAYABLES (DAYS) 40 171 197 41 168 181 42 165 188 42 163 188 21.2 28.7 15.7 1.3 1.8 2.6 11.4 13.9 7.6 20.2 22.4 13.9 16.7 16.7 19.0 2.0 113.7 3.0 3.0 5.4 2.0 114.4 8.9 8.9 13.3 2.0 120.9 17.8 17.8 22.9 2.0 136.4 43.4 38.2 6.4 2.4 28.2 243.6 134.1 6.4 2.4 176.7 81.8 54.5 6.0 2.0 39.9 40.9 31.8 5.3 1.7 22.4 CY2009 CY2010 CY2011E CY2012E
January 2012
127
Capital Goods
Crompton /Greaves CMP/TP/Upside: `134 `158 / 18%

Company Background
Crompton Greaves (CG), part of the US$4bn Avantha Group, is one of the leading players in the power T&D equipment business in India. The company operates across three segments - power systems (65% of FY2011 revenue), consumer products (20% of FY2011 revenue) and industrial systems (15% of FY2011 revenue). CG is a globally diversified company and derives ~50% of its revenue from international operations, led by a series of acquisitions undertaken over FY2006-11. Europe and North America are the two biggest markets outside Asia and jointly account for ~29% of the company's revenue.
SHAREHOLDING PATTERN (%) PROMOTERS (AVANTHA GROUP) FII 41.7 16.0
Structural Snapshot
STOCK RETURNS (%) CROMPTON SENSEX 3M 1Y (27.9) 3Y 21.8 13.8 21.3 5Y 10Y (7.2) (53.8) (2.6) (12.3) 2.4 55.0 0.7 31.3 3.3 17.3
Growth opportunity: The power systems segment has been a key growth driver for the company, on the back of the phenomenal growth opportunities in the Indian T&D sector, coupled with strategic overseas acquisitions by CG. But the company's growth has trickled to single-digit levels since FY2010, led by a deteriorating business environment in Europe and North America. The company's other segments - industry and consumer - are currently on the back foot, owing to deceleration in investment capex and inflationary pressures. Hence, we believe currently CG is facing business headwinds, which are likely to keep its growth under check. Nonetheless, the upcoming opportunities in the domestic T&D space should help the company sail through the current slowdown - PGCIL has envisaged T&D capex of `1 lakh cr for the 12th plan, 28% of which is expected to be deployed in the sub-station segment, thus providing a number of opportunities to CG. Competitive position: CG is losing its market share in the domestic T&D and industrial space to new players. However, the company has a strong foothold in the consumer segment. Nature of business: Diversified; More skewed towards the T&D space (domestic and international); Low entry barriers for new players.
FINANCIAL PERFORMANCE OVERVIEW (%) SALES GROWTH* PAT GROWTH* OPM# ROE# 3M 12.8 (45.4) 8.4 1Y 9.5 12.4 13.4 33.8 3Y 13.6 29.8 12.9 41.0 5Y 31.2 11.7 10Y 74.0 9.9 19.4 22.6
41.5 30.3

Business under stress: We believe CG's power and industrial segment are facing several headwinds on the international and domestic business fronts, as reflected in the pressure witnessed in its recent quarterly numbers, mainly due to increasing competitive pressures (taking a toll on profitability) and general slowdown faced by economies (impeding the revenue visibility). To put things in perspective, CG has a sizeable exposure in the currently troubled geographies of Europe (17% of FY2011 revenue) and North America (11.5% of FY2011 revenue). Likewise, CG's consumer segment, which had expanded admirably in the past is currently facing the brunt of inflationary pressures. Therefore, we believe CG's near-to-medium term performance would be under pressure. Valuations factoring most of the concerns: While CG is facing business headwinds, we expect an earnings recovery (50.2% in FY2013) on the back of low base. In addition, the latent potential in the company, decent return ratios (~18%) and current undemanding valuations of 11.0x PE FY2013 (on our conservative estimates) makes CG attractive. We maintain Buy on the stock with a target price of 158 (PE multiple of 13.0x FY2013E EPS).
128
January 2012
PROFIT & LOSS

BALANCE SHEET
Y/E MARCH (` CR) ` SOURCES OF FUNDS EQUITY SHARE CAPITAL RESERVES & SURPLUS SHAREHOLDERS FUNDS TOTAL LOANS 128 2,376 2,504 501 95 3,104 128 3,146 3,275 470 124 3,885 128 3,501 3,629 967 124 4,736 128 4,116 4,244 867 124 5,252 FY2010 FY2011 FY2012E FY2013E
% CHG
4.6
7,864 1,277
9.5
8,661 1,344
9.6
9,978 984
9.0
10,629 1,324
(% OF NET SALES)
DEPRECIATION& AMORTISATION INTEREST & OTHER CHARGES OTHER INCOME
14.0
155 43 110
13.4
194 35 114
9.0
285 50 91
11.1
296 48 103 DEFERRED TAX LIABILITY TOTAL LIABILITIES APPLICATION OF FUNDS GROSS BLOCK LESS: ACC. DEPRECIATION NET BLOCK CAPITAL WIP INVESTMENTS CURRENT ASSETS 2,986 1,723 1,262 114 554 4,102 3,017 1,085 3,104 3,780 1,949 1,831 110 675 4,550 3,389 1,160 3,885 4,530 2,234 2,296 110 400 5,603 3,781 1,822 4,736 4,930 2,530 2,400 110 500 6,140 4,007 2,133 5,252
(% OF PBT)
RECURRING PBT EXTRAORDINARY INC/(EXP) PBT (REPORTED) TAX
9.2
1,189 35 1,224 365
9.3
1,229 (38) 1,191 310
12.3
739 0 739 219
9.5
1,084 0 1,084 303
(% OF PBT)
PAT (REPORTED) LESS: MINORITY INTEREST (MI) PRIOR PERIOD ITEMS PAT (AFTER MI) ADJUSTED PAT
30.7
824 3 860 825
25.2
919 0.4 889 927
29.7
519 0 519 519
28.0
780 0 780 780
% CHG
47.3
12.4
(44.0)
50.2
CASH FLOW STATEMENT

Y/E MARCH (` CR) ` PROFIT BEFORE TAX DEPRECIATION (INC)/DEC IN WORKING CAPITAL LESS: OTHER INCOME DIRECT TAXES PAID CASH FLOW FROM OPERATIONS (INC.)/DEC.IN FIXED ASSETS (INC.)/DEC. IN INVESTMENTS OTHER INCOME CASH FLOW FROM INVESTING ISSUE OF EQUITY INC./(DEC.) IN LOANS DIVIDEND PAID (INCL. TAX) OTHERS CASH FLOW FROM FINANCING INC./(DEC.) IN CASH OPENING CASH BALANCES CLOSING CASH BALANCES FY2010 1,189 155 (13) (110) (365) 857 (168) (386) 110 (444) 55.0 (217) 95 (52) (257) 103 566 669 FY2011 1,229 194 (446) (114) (310) 553 (845) (121) 114 (852) (31) 165 124 (195) (370) 669 298 FY2012E 739 285 (679) (91) (219) 35 (750) 275 91 (384) 497 165 332 (18) 298 281 FY2013E 1,084 296 (254) (103) (303) 719 (400) (100) 103 (397) (100) 165 (265) 57 281 338
KEY RATIOS
January 2012
129
Capital Goods
Thermax
Company Background
Thermax provides a range of engineering solutions to the energy (78% of FY2011 revenue) and environment (22% of the FY2011 revenue) sectors, aided through a combination of technology and strategic alliances. The company offers industrial boilers (small/medium-sized) and integrated solutions in the areas of heating, cooling, power, waste management, air pollution controls and chemicals. After attaining a leadership position in the mid-size industrial boilers market, the company (through a JV with Babcock and Wilcox) has forayed into supercritical boilers to reap the opportunities outlined in the Indian power sector.
STOCK RETURNS (%) THERMAX SENSEX 3M 1Y (27.9) 3Y 40.9 13.8 21.3 5Y 10Y 15.0 (32.0) (2.6) (12.3) 3.8 43.1 0.7 31.3 3.3 17.3
Structural Snapshot
Growth opportunity: The energy segment derives substantial orders from economy-linked industrial sectors such as metal, cement, power, refinery, paper and pulp, sugar and food. We believe sector-related dynamics (currently negative) would continue to be a lead indicator for order inflow going ahead. Competitive position: Leading player in the small and medium-size industrial boilers market. The company is one of the few companies in the world that provides total integrated solutions in the areas of heating, cooling, power, water and waste management, air pollution controls and chemicals. Nature of business: Being sensitive to fluctuations in the industrial capex, the business is highly cyclical. Business generates superior return ratios (>25%) but has moderate entry barriers.
FINANCIAL PERFORMANCE OVERVIEW (%) SALES GROWTH* PAT GROWTH* EBITDA MARGIN# ROE# 3M 19.4 13.6 10.8 1Y 58.5 47.3 10.8 31.9 3Y 15.3 9.5 11.6 30.0 5Y 26.8 11.9 10Y 27.4 10.6
30.1 30.1 34.2 22.2

Weak outlook on industrial capex: Thermax trails its fortune towards industrial capex, especially in sectors such as metals, cement and oil and gas, which form its mainstream arena for offering products and solutions. However, the tough macro climate has paused additional investments in major industrial sectors, thereby halting new order disbursements. Hence, we expect subdued performance on the order inflow front from Thermax, leading to a passive top-line and earnings CAGR of 5.1% and 0.9%, respectively over FY201113E. Slowdown in the power sector - A concern for the BTG venture: In FY2010, Thermax ventured into BTG equipment manufacturing through a JV with B&W (estimated TPC of `825cr) for manufacturing supercritical boilers, but it is yet to bag any orders for the same. Also, the company has witnessed competitive pressures as equipment ordering has been sedate due to various concerns. Further, management has refrained from entering into aggressive pricing for bagging orders. Therefore, visibility of returns on this investment is an overhang on the stock. Strong fundamentals at reasonable valuations: We believe Thermax is one of the best plays for revival in industrial capex due to its strong business fundamentals (negative working capital, negligible debt, healthy return ratios (~28-30%) and net cash balance of ~8.1% of the market cap). However, the stock has rallied >20% in the past fifteen days and is currently trading at reasonable PE multiples of 15.2x FY2013E EPS, leaving limited upside to our fair value. Hence, we recommend a Neutral rating on the stock.
130
January 2012
PROFIT & LOSS

Y/E MARCH (` CR) ` TOTAL INCOME FY2010 3,368 FY2011 5,336 FY2012E 5,826 FY2013E 5,896
BALANCE SHEET
Y/E MARCH (` CR) ` SOURCES OF FUNDS EQUITY SHARE CAPITAL RESERVES& SURPLUS SHAREHOLDERS FUNDS MINORITY INTEREST TOTAL LOANS DEFERRED TAX LIABILITY TOTAL LIABILITIES APPLICATION OF FUNDS GROSS BLOCK 742 205 537 11 370 2,431 2,239 191 0 1,110 1,068 282 785 35 241 2,997 2,514 482 0 1,545 1,328 354 974 25 241 3,092 2,473 619 0 1,859 1,488 442 1,047 15 241 3,253 2,506 747 0 2,050 24 1,054 1,078 9 8 14 1,110 24 1,291 1,315 52 148 30 1,545 24 1,605 1,629 52 148 30 1,859 24 1,896 1,920 52 48 30 2,050 FY2010 FY2011 FY2012E FY2013E
% CHG
(2.7)
2,973 395
58.5
4,763 574
9.2
5,197 629
1.2
5,301 596
(% OF NET SALES)
11.7
44.2 2 52
10.8
54.1 4 58
10.8
71.9 4 56
10.1
87.3 3 70
(% OF PBT)
13.0
400 115 286 142
10.1
574 574 197
9.2
610 610 198
12.2
575 575 187
LESS: ACC. DEPRECIATION NET BLOCK CAPITAL WORK-IN-PROGRESS INVESTMENTS CURRENT ASSETS CURRENT LIABILITIES NET CURRENT ASSETS MIS. EXP. NOT WRITTEN OFF TOTAL ASSETS
(% OF PBT)
49.6
144 (0.4) 144 259
34.3
377 (4.7) 382 382
32.5
412 412 412
32.5
389 389 389
% CHG
(9.9)
47.3
7.9
(5.6)
CASH FLOW STATEMENT

Y/E MARCH (` CR) ` PROFIT BEFORE TAX DEPRECIATION (INC)/DEC IN WORKING CAPITAL LESS: OTHER INCOME DIRECT TAXES PAID CASH FLOW FROM OPERATIONS (INC.)/DEC.IN FIXED ASSETS (INC.)/DEC. IN INVESTMENTS OTHER INCOME CASH FLOW FROM INVESTING ISSUE OF EQUITY INC./(DEC.) IN LOANS DIVIDEND PAID (INCL. TAX) OTHERS CASH FLOW FROM FINANCING INC./(DEC.) IN CASH OPENING CASH BALANCES CLOSING CASH BALANCES FY2010 286 44 469 52 142 604 (74) (227) 52 (249) 4 69 11 (66) 300 370 670 FY2011 574 54 (212) 58 195 163 (350) 129 58 (163) 140 125 42 15 57 670 750 FY2012E 610 72 (314) 56 198 114 (250) 56 (194) 98 (98) (178) 750 572 FY2013E 575 87 29 70 187 434 (150) 70 (80) (100) 98 (198) 157 572 729
KEY RATIOS
January 2012
131
Capital Goods
RATING 52 WEEK HIGH / LOW MARKET CAP (` CR) ` LIQUIDITY NEUTRAL 98 / 32 1,378 LOW
KEC International
KEC International (KEC) is a flagship company of the RPG Group. The company is a global player in the T&D space, present across 45 countries (~51% of revenue from international operations). The company acquired U.S.-based SAE Tower Holdings LLC (SAE) in FY2011. KEC has also forayed into new business verticals such as cable, telecom, railway and water resource management - though currently these businesses are at a nascent stage.
SHAREHOLDING PATTERN PROMOTERS (RPG GROUP) FII 42.0 2.4
Structural Snapshot
Growth opportunity: Globally the thumb rule entails that for every rupee invested in generation, an equivalent amount is to be invested in T&D; however, India has spent only 50%, thus creating a huge opportunity for players in the T&D space. PGCIL has envisaged T&D capex of ~`1 lakh cr for the 12th plan, 55% of which is estimated to be transmission and sub-station capex, thus providing a number of opportunities to the company, given its strong presence in the domestic T&D market. Moreover, KEC has strong revenue visibility for the next couple of years, owing to its strong robust backlog of `9,340cr (2.0x FY2011 revenue). Competitive position: KEC is among the top three players in the domestic transmission EPC space.
STOCK RETURNS (%) KEC SENSEX 3M 1Y (27.9) 3Y 16.2 13.8 21.3 5Y (9.3) 3.3 10Y 17.3 (9.5) (42.1) (2.6) (12.3)
0.7 31.3
FINANCIAL PERFORMANCE OVERVIEW (%) SALES GROWTH* PAT GROWTH* OPM# ROE# 3M 26.2 (55.2) 7.2 1Y 14.5 7.7 10.3 34.7 3Y 16.6 5.3 9.8 41.9 5Y 17.0 14.1 10.9 77.4 10Y -
Nature of business: Predominantly a contract business undertaking transmission line and substation works for transmission utilities, domestically as well as globally. The business entails a sparse technological aspect compared to the equipment businesses (like BTG, transformers and circuit breakers), thus, making it a low entry-barrier business. Working capital requirements are usually high on account of the high working capital days (81 days).

Diversified play: KEC has diversified business operations, with equal exposure to domestic and international markets. The company has also ventured in new businesses of railway and water, which have fared well and order inflows have started picking up. Against this backdrop, the company has performed well on the order inflow front in the past few quarters - (`1,200 in 2QFY2012, `1,300cr in 1QFY2012; `1,300cr in 4QFY2011, `2,300 in 3QFY2011). Therefore, diversification has helped the company to insulate itself from the slowdown in any particular segment/geography. SAE to aid positively: SAE's contribution to the company so far has been extremely positive (constituting ~13% of the company's revenue with 13%+ EBITDA margin and 20% of the company's order backlog). In addition, KEC is poised to benefit by tapping opportunities offered by different geographies (Brazil and Mexico), where KEC was not present earlier. Valuations: Amidst strong order wins in quick succession (`1,600cr) in past few days, the stock has witnessed a substantial rally, gaining ~50%. At the CMP, the stock trades at reasonable valuations of 6.0x FY2013 PE. We believe the recent run-up in the stock price has factored in most of the positives and further upside seems limited. Hence, we recommend Neutral on the stock. 132 January 2012 Please refer to important disclosures at the end of this report
PROFIT & LOSS

BALANCE SHEET
Y/E MARCH (` CR) ` SOURCES OF FUNDS EQUITY SHARE CAPITAL RESERVES & SURPLUS SHAREHOLDERS FUNDS TOTAL LOANS 49 736 785 787 46 1,620 51 895 947 1,432 50 2,428 51 1,032 1,084 1,782 50 2,916 51 1,226 1,277 1,882 50 3,209 FY2010 FY2011 FY2012E FY2013E
% CHG
13.9
3,501 406
14.5
4,011 462
20.9
4,945 462
14.7
5,643 561
(% OF NET SALES)
10.4
27 86 2
10.3
41 108 3
8.6
50 149 4
9.0
58 165 4 DEFERRED TAX LIABILITY TOTAL LIABILITIES APPLICATION OF FUNDS GROSS BLOCK LESS: ACC. DEPRECIATION NET BLOCK CAPITAL WORK-IN-PROGRESS INVESTMENTS CURRENT ASSETS 836 157 679 38 2,680 1,778 903 1,620 1,038 237 802 39 3,587 2,281 1,306 2,428 1,213 286 927 40 4,448 2,780 1,668 2,916 1,413 344 1,069 35 4,929 3,105 1,824 3,209
(% OF PBT)
0.6
294 0 294 104
0.8
316 0 316 111
1.3
267 0 267 93
1.0
342 0 342 113
(% OF PBT)
35.2
191 191 191
35.1
205 205 205
35.0
173 173 173
33.0
229 229 229
% CHG
60.3
7.7
(15.6)
32.2
CASH FLOW STATEMENT

Y/E MARCH (` CR) ` PROFIT BEFORE TAX DEPRECIATION (INC)/DEC IN WORKING CAPITAL LESS: OTHER INCOME DIRECT TAXES PAID CASH FLOW FROM OPERATIONS (INC.)/DEC.IN FIXED ASSETS (INC.)/DEC. IN INVESTMENTS OTHER INCOME CASH FLOW FROM INVESTING ISSUE OF EQUITY INC./(DEC.) IN LOANS DIVIDEND PAID (INCL. TAX) OTHERS CASH FLOW FROM FINANCING INC./(DEC.) IN CASH OPENING CASH BALANCES CLOSING CASH BALANCES FY2010 294 27 (323) (2) (104) (107) (201) 2 (199) 0.0 165 (36) 106 129 (71) 144 73 FY2011 316 41 (315) (3) (111) (71) (211) 3 (208) 2.1 645 (36) (243) 611 89 73 161 FY2012E 267 50 (431) (4) (93) (212) (176) 4 (172) 0.0 350 (36) 314 (70) 161 91 FY2013E 342 58 (52) (4) (113) 232 (195) 4 (192) 0.0 100 (36) 64 104 91 196
KEY RATIOS
Y/E MARCH VALUATION RATIOS P/E (ON FDEPS) P/CEPS P/BV EV/SALES EV/EBITDA ` PER SHARE DATA (`) EPS (BASIC) EPS (FULLY DILUTED) CASH EPS DPS BOOK VALUE RETURNS (%) ROCE (PRE-TAX) ANGEL ROIC (PRE-TAX) ROE TURNOVER RATIOS (X) INVENTORY / SALES (DAYS) RECEIVABLES (DAYS) PAYABLES (DAYS) 22 179 186 24 187 180 29 193 180 31 196 181 32.3 35.2 44.4 24.1 25.7 34.7 17.5 18.5 24.9 18.4 19.4 26.6 7.7 7.7 8.8 1.2 29.8 8.0 8.0 9.6 1.2 35.4 6.7 6.7 8.7 1.2 40.7 8.9 8.9 11.2 1.2 48.2 6.9 6.0 1.8 0.5 5.0 6.7 5.6 1.5 0.6 5.7 7.9 6.1 1.3 0.6 6.6 6.0 4.8 1.1 0.5 5.4 FY2010 FY2011 FY2012E FY2013E
January 2012
133
Capital Goods
Jyoti Structures
Jyoti Structures Ltd. (JSL) is one of the leading EPC players in the transmission line and substation segments, with business presence across transmission line towers, substation and rural electrification. The company offers a wide range of services in design, engineering, tower testing, manufacturing, construction and project management. In addition to its strong domestic presence, JSL is also exploring T&D capex opportunities on the global front through recent overseas JVs and investments (Jyoti America and Gulf Jyoti).
Structural Snapshot
Growth opportunity: Globally the thumb rule entails that for every rupee invested in generation, an equivalent amount is to be invested in T&D; however, India has spent only 50%, thus creating a huge opportunity for players in the T&D space. PGCIL has envisaged T&D capex of `1 lakh cr for the 12th plan, 55% of which is expected to be deployed in transmission and substation projects, thus providing an array of opportunities to JSL, given its strong foothold in the T&D segment. Competitive position: JSL is among the top three players in the transmission EPC space in the country. Nature of business: Predominantly a contract business, undertaking transmission line and substation works for PGCIL and SEBs. The business entails a sparse technological aspect compared to the equipment businesses (like BTG, transformers, and circuit breakers) - thus, low entry barriers (new players entering the transmission EPC space are on the rise). In addition, the business is subject to high working capital requirements (118 days as of 1HFY2012).
STOCK RETURNS (%) JYOTI STRUC. SENSEX 3M (19.4) 1Y (57.6) (27.9) 3Y 13.8 21.3 5Y 10Y 27.0 17.3 (7.2) (20.5) 3.3
0.7 31.3
(2.6) (12.3)

Expect stable order inflows: Despite seasonal weakness in the T&D segment, JSL's performance has been fairly decent (bagged orders worth `1,200cr in 1HFY2012 against reported revenue of `1,270cr). Further, ordering has gathered steam, especially from PGCIL, which has tendered orders worth `7,400cr in 3QFY2012. As per the announcements, JSL has pocketed orders worth ~`400cr in 3QFY2012, indicating its consistency in securing orders. We expect ordering to further strengthen in 4QFY2012 (seasonally the strongest quarter), factoring in orders worth ~`1,500cr for 2HFY2012 for JSL, registering 28.5% growth over 1HFY2012. Diversification to gradually materialize: JSL has been actively tapping the overseas markets by entering into JVs in South Africa and the Gulf. In addition, the company recently forayed into the U.S. by setting up a transmission tower plant (revenue potential of ~`340cr annually - @100% capacity utilization). We believe these ventures will benefit the company in the long run, thereby insulating it from domestic headwinds. Valuation: The stock has underperformed the BSE Sensex by ~17% over the past three months. At the CMP of `50, the stock is trading at undemanding valuations (PE 4.1x and PBV 0.5x on FY2013E) with limited downside. Hence, we maintain Buy on the stock with a Target Price of ` 61 by assigning PE multiple of 5.0x to its FY2013E EPS.
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PROFIT & LOSS

BALANCE SHEET
Y/E MARCH (` CR) ` SOURCES OF FUNDS EQUITY SHARE CAPITAL RESERVES & SURPLUS SHAREHOLDERS FUNDS TOTAL LOANS 16 475 491 369 18 878 16 560 576 477 18 1,071 16 667 683 727 18 1,428 16 757 773 604 18 1,395 FY2010 FY2011 FY2012E FY2013E
% CHG
15.8
1,901 229
12.7
2,132 268
18.0
2,518 313
(2.5)
2,459 303
(% OF NET SALES)
10.7
18 80 6
11.2
21 96 5
11.0
24 124 7
11.0
27 134 6 DEFERRED TAX LIABILITY TOTAL LIABILITIES APPLICATION OF FUNDS GROSS BLOCK LESS: ACC. DEPRECIATION NET BLOCK CAPITAL WORK-IN-PROGRESS INVESTMENTS CURRENT ASSETS 244 69 175 2 17 1,350 665 684 878 283 87 196 8 17 1,572 722 850 1,071 318 111 208 4 17 2,158 959 1,200 1,428 358 137 221 4 17 1,878 724 1,154 1,395
(% OF PBT)
4.6
138 1 137 53
3.1
156 156 56
4.1
173 173 56
4.1
148 148 48
(% OF PBT)
38.7
83 83 84
36.1
100 100 100
32.5
116 116 116
32.5
100 100 100
% CHG
(0.9)
18.4
16.7
(14.1)
CASH FLOW STATEMENT

Y/E MARCH (` CR) ` PROFIT BEFORE TAX DEPRECIATION (INC)/DEC IN WORKING CAPITAL LESS: OTHER INCOME DIRECT TAXES PAID CASH FLOW FROM OPERATIONS (INC.)/DEC.IN FIXED ASSETS (INC.)/DEC. IN INVESTMENTS OTHER INCOME CASH FLOW FROM INVESTING ISSUE OF EQUITY INC./(DEC.) IN LOANS DIVIDEND PAID (INCL. TAX) OTHERS CASH FLOW FROM FINANCING INC./(DEC.) IN CASH OPENING CASH BALANCES CLOSING CASH BALANCES FY2010 138 18 (86) (6) (53) 10 (58) 0 6 (52) 0.1 56 (10) 10 47 15 39 54 FY2011 156 21 (152) (5) (56) (36) (50) 0 5 (45) 0.0 108 (14) 2 93 13 54 67 240 (40) 67 27 (133) 125 27 152 FY2012E 173 24 (390) (7) (56) (257) (30) 0 7 (23) 0 250 (10) FY2013E 148 27 171 (6) (48) 291 (40) 0 6 (34) 0.0 (123) (10)
KEY RATIOS
January 2012
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136
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Cement
COVERAGE
Companies UltraTech ACC Ambuja Cements Shree Cement India Cements Madras Cements J K Lakshmi Cement CMP (`) ` 1,197 1,153 160 2,148 74 108 44 Target (`) ` Reco - Neutral - Neutral - Neutral - Neutral - Neutral - Neutral 51 Buy
NEUTRAL
Valuations ahead of the cycle

All-India capacity utilization to remain low: All-India cement capacity stood at ~288mtpa in FY2011. During the past four years, cement capacity has witnessed a 12.6% CAGR, which was almost double the growth rate in cement demand (6.9% CAGR). As a result, industry utilization levels declined from the highs of FY2007 (90.6%) to 73.3% in FY2011. However, going ahead, we expect the pace of capacity addition to moderate, with only 31mtpa of capacity to come on stream over FY2012-13 (5.3% CAGR). But the bigger concern for the sector now is demand slowdown. Over FY2001-10, cement demand grew by 1x India's GDP growth rate. But, all-India cement demand, after being mediocre at 4.5% in FY2011, is expected to remain muted at 5% during FY2012 vs. GDP growth of 8.5% and 7% in FY2011 and FY2012E, respectively. Even after factoring 8% demand growth rate for FY2013E, industry capacity utilization for the year is expected to be only 75.0% (although higher than 73.3% and 72.0% in FY2011 and FY2012E, respectively). State-wise demand-supply dynamics: About 90% of India's total limestone reserves are concentrated in nine states, mainly Andhra Pradesh (AP), Karnataka, Gujarat, Rajasthan and Madhya Pradesh (MP). In the long run, naturally a large part of cement capacity will also be located in these states. But as far as the scenario for the next several years is concerned, due to the abundant availability of limestone, even in case of the other states with balance 10% of India's limestone reserves, those reserves itself are more than adequate to meet nearby cement demand for several decades. This negates the need for relying on the clustered capacities in few of the cement hubs like AP and Rajasthan and has led to concentration of excess supply in these states. We expect capacities in these states, especially in AP and Rajasthan, to face prolonged utilization pressures, as they do not have any major supply-deficit region nearby to supply their excess, without sacrificing on margins to the extent of substantial freight cost differential. On the other hand, companies with capacities in potentially favorable states (i.e., states where either there is a supply deficit or surplus that can be more economically supplied to nearby deficit states) are better placed. Amongst our coverage universe, Ambuja Cements has the highest capacity in such favorable states (81% of its total capacity) followed by ACC and UltraTech (51% and 42% of total capacities, respectively). Outlook and valuation: In our view, the cement sector's valuations in terms of EV/sales and EV/tonne are ahead of the cycle when compared to utilization levels and are almost 23% more expensive than historical valuations during periods of similar utilization levels. But, despite low capacity utilization, cement companies have managed to maintain relatively healthy pricing due to production discipline adopted by them, which has led to high valuations currently. However, in our view, this is a thin investment thesis to rely on, as there exists persistent risk of breakdown in the production discipline. Hence, we maintain our Neutral view on the sector. Though, Ambuja Cements has the most favorable locational presence, it is trading at rich valuations and therefore, we maintain our Neutral recommendation on the stock. Among other large caps, we prefer ACC over UltraTech on a relative basis considering its better locational presence. But, we have a Neutral view on the stock, as we expect limited absolute upside. While valuations are cheap for India Cements, Madras Cements and Shree Cement, we have a Neutral view on them due to their unfavorable locational presence, especially for south-based players. That said, we maintain our Buy recommendation on JK Lakshmi Cement due to its attractive valuations, as it is trading at EV/tonne of US$35 on current capacity.
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All-India capacity utilization to remain low: All-India cement capacity stood at ~288mtpa in FY2011. During the past four years, the Indian cement industry witnessed ambitious capacity addition of ~109mtpa at a CAGR of 12.6%, on the back of high capacity utilization (86.4% in FY2006 and 90.4% in FY2007) and comparatively low per capita cement consumption in India (which prevails even now). However, demand grew at a modest pace of 6.9% over the same period, forcing industry utilization levels to decline continuously from the highs of FY2007 to 73.3% in FY2011. Going forward, we estimate another 31mtpa of capacity to come on stream during FY2012-13 at a CAGR of 5.3%. Of this, ~20mtpa capacity is expected to be added in FY2012 and ~11mtpa in FY2013. YTD 11mtpa of capacity has been added in FY2012, which includes ACC (3mtpa in Maharashtra), Ambuja Cements (1.1mtpa in Chhattisgarh and 0.9mtpa in Maharashtra), JP Associates (1mtpa in UP) and KCP (1.5mtpa in AP). However, the bigger concern for the sector now is demand slowdown. Over FY2001-10, cement demand grew by 1x India's GDP growth rate. However, all-India cement demand, after being mediocre at 4.5% in FY2011, is expected to remain muted at 5% during FY2012 vs. GDP growth of 8.5% and 7% in FY2011 and FY2012E, respectively. Even after factoring in 8% demand growth rate for FY2013E, industry capacity utilization for the year is expected to be only 75.0% (although higher than 73.3% and 72.0% in FY2011 and FY2012E, respectively). Further, it should be noted that we have not taken into consideration the capacities of cement players such as Bharathi Cement, JSPL, Murli Agro, Vicat-Sagar, JSW Cement, ABG Cement and few others who are not members of the CMA (combined FY2013 capacity estimated to be 29.2mtpa).
Exhibit 1: All-India cement capacity additions player wise in FY2012-13E

Capacity additions in FY2012E-mt Companies UltraTech ACC Ambuja Cements Jaiprakash India Cements Shree Cement Madras Cements Dalmia Cement JK Cement Century Cements Others Total Production Utilization (%) FY11-mt 48.8 27.1 25.0 23.7 15.6 13.5 12.5 9.0 7.9 7.8 96.9 287.6 211.0 73.3 3.5 10.5 0.6 1.7 3.9 2.7 2.7 0.4 1.4 2.0 5.0 1.1 3.0 0.9 1.0 South East & NE West North Central FY12E-mt 48.8 30.1 27.0 29.7 15.6 13.5 14.5 9.0 7.9 7.8 104.2 307.8 221.5 72.0 3.0 1.5 3.2 4.7 0.3 0.3 0.4 2.9 3.3 3.0 South Capacity additions in FY2013E-mt East & NE West North Central FY13E-mt 48.8 30.1 27.0 32.7 15.6 13.5 14.5 9.0 7.9 10.0 110.3 319.1 239.3 75.0
Source: CMA, Company, Angel Research
Exhibit 2: All-India cement capacity utilization trend

(mn tns) 350.0 300.0 250.0 200.0 150.0 100.0
146.0 106.9 150.5 116.4 164.7 133.6 209.2 174.3 230,6 187.6 266.2 201.0 319.1 239.3 105.7 76.2 110.9 83.2 120.2 100.5 133.0 110.1 157.1 123.5 178.9 161.6 287.6 211.0 307.8 221.5 171.1 147.8 117.0 87.9 84.2 62.4 96.2 69.6
(%) 95.0 90.0 85.0 2 6 80.0 75.0 70.0 65.0
50.0 0.0
FY95 FY96 FY97 FY98 FY99 FY00 FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 Capacity
Source: CMA, Company, Angel Research
Production
Utilization (RHS)
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Cement
State-wise demand-supply dynamics
Around 90% of India's total limestone reserves are concentrated in nine states - AP, Karnataka, Gujarat, Rajasthan, Meghalaya, Himachal Pradesh (HP), Jammu & Kashmir (J&K), MP and Chhattisgarh. In the long run, when reserves of the other remaining states (balance 10%) would deplete, major capacities would come up in these reserve-rich states. Despite such major capacity additions, the number of years of these reserves (based on current capacity) would still stretch into thousands because of the abundant availability of limestone in these reserve-rich nine states. However, as far as the scenario for the next several years is concerned, due to the abundant availability of limestone, even in case of the other states with balance 10% of India's limestone reserves, those reserves itself are adequate to meet the internal cement demand within those states and even of the neighboring states that have negligible limestone reserves for several decades. So, except for few states with nil/minimal limestone reserves, most Indian states have abundant limestone reserves and, consequentially, enough cement capacities have come up in all these states, negating the need for relying on the clustered capacities in few of the cement hubs like AP and Rajasthan. However, limestone concentration in the earlier-mentioned nine states has led to huge capacity clusters coming up over there (68% of India's total cement capacity in FY2011), which has led to concentration of most of the all-India excess supply in these states. We expect capacities in these states, especially in AP and Rajasthan, to face prolonged utilization pressures as they do not have any major supply-scarce region nearby to supply their excess. With cement being a low-value commodity, even few hundred kilometers of distance can add meaningfully to the per tonne freight cost, which would eat away into the margins of those players with capacities located in these clusters. To arrive at player-wise locational advantage based on these state-wise cement demand-supply dynamics, we have divided the states into four categories as follows: I) States where the state's own cement demand is more than cement capacities located within the state i.e., indigenous supply-deficit states II) States where although own cement demand is less than cement capacities located within the state, but there are indigenous supplydeficit states nearby where the entire excess can be supplied III) States where own cement capacities exceed own demand as well as that of nearby supply-deficit states, but the state's excess capacity as a percentage of its total capacity is less than 25% IV) States where own cement capacities exceed own demand as well as that of nearby supply-deficit states, but the state's excess capacity as a percentage of its total capacity is more than 25%.
Category I: Indigenous supply-deficit states

These are states where their own cement demand is more than cement capacities located within the states. Logically, capacities that operate in such states would be expected to witness the highest capacity utilization at highest margins (due to relatively lower freight cost). Indigenous supply deficit in these states is expected to be met by excess capacities of nearby states, though at a relatively lower margin than the indigenous capacities (on account of freight cost differential).
Exhibit 3: Demand-supply dynamics in Category I states

State Maharashtra UP West Bengal Punjab Haryana Kerala Bihar NCR J&K Goa Puducherry Chandigarh N.E. states except Meghalaya 0.2 1.8 2.1 3.2 73.2 11.3 (1.9) (1.4) Meghalaya Meghalaya Indigenous Indigenous capacity (mtpa) consumption (mt) FY09 FY13E FY09 FY13E 13.1 8.3 6.3 4.8 2.3 0.6 1.0 0.0 0.5 0.0 0.0 0.0 20.7 13.6 9.4 4.8 3.4 0.6 2.6 0.0 0.5 0.0 0.0 0.0 21.9 17.9 7.7 6.3 7.3 7.9 5.1 4.8 1.1 0.5 0.4 0.4 32.4 25.3 11.4 10.3 9.9 9.2 6.7 5.8 1.1 0.7 0.4 0.3 CAGR (%) Cap. 12.1 13.3 10.5 0.0 10.2 27.0 Cons. 10.3 9.1 10.6 13.2 8.0 3.8 7.2 5.2 0.5 9.4 (0.1) (9.9) Indigenous surplus/ (deficit) -mt FY09 FY13E (8.8) (9.6) (1.3) (1.5) (5.0) (7.3) (4.1) (4.8) (0.6) (0.5) (0.4) (0.4) Potential nearby states to meet deficit FY09E FY13E Gujarat, Karnataka MP, Rajasthan, Uttarakhand Odisha, Chhattisgarh HP, Rajasthan HP, Rajasthan TN, Karnataka Jharkhand, MP Rajasthan HP Karnataka TN Rajasthan Net surplus/ (deficit) -mt FY09E FY13E -
(11.7) Gujarat, Karnataka (11.7) (2.0) (5.5) (6.5) (8.6) (4.1) (5.8) (0.9) (0.7) (0.4) (0.3) MP, Rajasthan Chhattisgarh HP HP, Rajasthan TN, Karnataka Jharkhand, MP Rajasthan HP Karnataka TN Rajasthan
Source: CMA, Company, Angel Research; Note: FY2009 figures are actual, FY2009E and FY2013E figures are Angel Research estimates; FY2013E capacity of Murli Agro (3mtpa) in Maharashtra and Khyber (0.3mtpa) in J&K has not been considered in the above analysis
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Cement
Maharashtra and Uttar Pradesh (UP) are two of the major states within this category. Looking at Maharashtra's dynamics, the state has most of its internal capacities located on its eastern side, which can supply their entire production to meet the state's own demand emanating from its central and eastern regions (to the east of the Western Ghats). The supply-deficit southern and western parts of the state can be catered most economically by Karnataka and Gujarat, respectively, rather than AP. Similarly, in case of UP, the state's supply deficit can logically be met mostly by surplus capacities of MP, as MP's capacity cluster is closer to most parts of UP, leading to relatively minimal demand left to be catered by Rajasthan. Companies that either have capacity or are coming up with new capacities in these states are expected to be benefitted the most. Over FY2012-13E, major capacity additions expected in these states are Century Ply-boards (3.2mtpa comprising 1.6mtpa each in Bihar and Assam), ACC (3mtpa in Maharashtra), Heidelberg (1.9mtpa in UP) and Century Textiles (1.8mtpa in Maharashtra). Companies that are expected to have substantial (more than 25% of their total) capacities in these states by FY2013E are Century Plyboards, Heidelberg Cement, Ambuja Cements (41%), Century Textile, Birla Corp. and UltraTech (26%).
Exhibit 4: Player-wise capacities in Category I states

Companies UltraTech Ambuja Cements ACC JP Associates Century Textile Heidelberg Cement Century Ply-boards Birla Corp Others Total Capacities as of FY11-mt 12.7 10.2 3.8 4.5 1.9 1.5 0.0 2.2 7.1 43.9 % to company's total capacity 25.9 40.8 14.2 19.0 24.4 48.9 0.0 36.7 15.3 Additions in Capacities FY12E-mt as of FY12E-mt 0.9 3.0 1.0 0.8 0.6 6.2 12.7 11.1 6.8 5.5 1.9 1.5 3.0 7.7 50.1 Additions in Capacities FY13E-mt as of FY13E-mt 1.8 1.9 3.2 6.9 12.7 11.1 6.8 5.5 3.7 3.4 3.2 3.0 7.7 57.0 % to company's total capacity 25.9 41.1 22.7 16.8 37.0 56.7 72.7 32.3 17.9
Source: Company, Angel Research, Note: Total include capacities of ACC, Ambuja Cements and other CMA companies
Category II: States where indigenous cement supply is more than indigenous cement demand, but have cement-deficit states nearby to supply their entire excess
Capacities in these states are also expected to report relatively healthy capacity utilization, though at notch lower margins, since supply of excess capacities to nearby states would be at freight cost disadvantage compared to indigenous capacities over there. State wise, capacities of Himachal Pradesh can theoretically park their entire surplus (after catering to own demand) to nearby supply-deficit states of J&K, Haryana and Punjab. Capacities of Gujarat are expected to supply their surplus to Western Maharashtra more economically. In FY2009, Odisha and Uttarakhand were cement-scarce states, but they have become supply surplus in FY2011 on account of capacity addition of 3.8mtpa and 3.0mtpa, respectively, during FY2010-11. During FY2012-13E, we expect no capacity additions in these states. Companies that are expected to benefit by having substantial (more than 25% of their total) capacities in these states in FY2013E are OCL India, Lafarge, Gujarat Sidhee Cement, Saurashtra Cement, Century Ply boards, Ambuja Cements (40%) and ACC (28%).
Exhibit 5: Demand-supply dynamics in Category II states

State Gujarat Odisha HP Indigenous Indigenous capacity (mtpa) consumption (mt) FY09 FY13E FY09 FY13E 19.4 4.7 6.2 24.7 8.5 10.1 12.1 5.5 1.9 19.3 7.7 4.4 CAGR (%) Cap. 6.2 16.0 13.0 Cons. 12.4 9.0 23.1 Indigenous surplus/ (deficit) -mt FY09 FY13E 7.3 (0.8) 4.3 5.4 0.7 5.7 Potential nearby states to supply surplus/ meet deficit FY09E FY13E Maharashtra Chhattisgarh J&K, Haryana, Uttarakhand, Punjab Jharkhand Uttarakhand Meghalaya 5.2 1.0 1.6 5.2 4.0 1.7 3.1 2.4 0.7 3.9 3.4 0.5 0.0 41.4 2.3 5.5 8.6 (5.5) 2.1 (1.4) 0.9 1.3 0.6 1.2 Bihar HP Other N.E states Bihar UP Other N.E. states Maharashtra West Bengal J&K, Haryana, Punjab Net surplus/ (deficit) -mt FY09E FY13E 0.6 -
Source: CMA, Company, Angel Research; Note: FY2009 figures are actual, FY2009E and FY2013E figures are Angel Research estimates, FY2013E capacity of Adhunik Cement (1.5mtpa) in Meghalaya has not been considered in the above analysis
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Cement
Exhibit 6: Player-wise capacities in Category II states
Companies Ambuja Cements ACC JP Associates UltraTech OCL India Lafarge Gujarat Siddhi & Saurashtra Cement Sanghi Inds. Shree Cement Century Ply-boards Others Total Capacities as of FY11-mt 10.7 8.3 8.0 8.0 5.4 3.4 2.7 2.6 1.8 1.2 2.1 54.2 % to company's total capacity 42.8 30.6 33.8 16.4 100.0 51.9 100.0 100.0 13.3 100.0 18.8 Additions in FY12E-mt Additions in Capacities FY13E-mt as of FY13E-mt 10.7 8.3 8.0 8.0 5.4 3.4 2.7 2.6 1.8 1.2 2.1 54.2 % to company's total capacity 39.6 27.5 24.5 16.4 100.0 51.9 100.0 100.0 13.3 27.3 17.0
Source: Company, Angel Research, Note: Total includes capacities of ACC, Ambuja Cements and other CMA companies
Category III: States where own cement capacities exceed own demand as well as that of nearby supply-deficit states, but the state's excess capacity as a percentage of its total capacity is less than 25%
During FY2009-13E, the pace of capacity addition in these states is expected to be much higher than the growth in indigenous as well as nearby states demand, which is expected to result in higher theoretical net surplus (i.e., surplus after catering to demand of its own and nearby supply-deficit states) for these states. State wise, in FY2009, Karnataka had no net surplus (after meeting its own demand and that of nearby supply-deficit states of Goa, Southern Maharashtra and Northern Kerala, which it could cater to most economically). Over FY2009-13E, we expect capacity addition of 10.9mtpa at a CAGR of 15.0% vs. state's demand CAGR of 3.5% to result in net surplus for the state. Also, we expect net surplus of TN and MP to increase significantly in FY2013E from FY2009 levels. Excess capacities of these states also have the option to cater to supply deficits in states farther away, but after sacrificing on margins. Major capacities that are coming up in these states over FY2012-13E include JP Associates 3mtpa capacity in Karnataka and Madras Cements 2mtpa capacity in TN. Companies that are expected to have substantial (more than 25% of their total) capacities in these states in FY2013E are Chettinad Cement, Prism Cement, Kesoram Industries, Dalmia Cement, Madras Cements (68%), Century Textile, ACC (39%), JK Cement, India Cements (38%) and JP Associates.
Exhibit 7: Demand-supply dynamics in Category III states

State TN Karnataka Indigenous Indigenous capacity (mtpa) consumption (mt) FY09 FY13E FY09 FY13E 24.4 14.7 36.3 25.6 15.9 11.7 18.1 13.4 CAGR (%) Cap. 10.4 15.0 Cons. 3.4 3.5 Indigenous surplus/ (deficit) -mt FY09 FY13E 8.6 3.0 18.1 12.2 Potential nearby states to supply surplus/ meet deficit FY09E FY13E Kerala Goa, Maharashtra, Kerala MP 19.0 27.7 8.4 11.3 10.0 7.8 10.6 16.4 Bihar, UP Kerala Goa, Maharashtra, Kerala Bihar, UP 1.8 5.9 Net surplus/ (deficit) -mt FY09E FY13E 1.2 9.4 4.8
Source: CMA, Company, Angel Research; Note: FY2009 figures are actual, FY2009E and FY2013E figures are Angel Research estimates, FY2013E capacity of Vicat- Sagar(5.5mtpa) and JSW Steel (5.2mtpa) in Karnataka and few others has not been considered in the above analysis, Total such capacities in FY2013E in Karnataka is 10.7mtpa
Exhibit 8: Player-wise capacities in Category III states

Companies JP Associates ACC UltraTech Chettinad Cement Madras Cements Dalmia Cement India Cements Kesoram Inds. Prism Cement Century Cements JK Cement Others Capacities as of FY11-mt 9.0 11.9 10.0 8.5 7.8 6.5 5.9 5.8 5.6 3.8 3.0 4.3 % to company's total capacity 38.0 43.8 20.5 100.0 62.7 72.2 37.7 79.3 100.0 48.7 38.1 Additions in Capacities FY12E-mt as of FY12E-mt 2.0 1.2 9.0 11.9 10.0 8.5 9.8 6.5 5.9 5.8 5.6 3.8 3.0 5.5 Additions in Capacities FY13E-mt as of FY13E-mt 3.0 0.4 1.0 12.0 11.9 10.0 8.5 9.8 6.5 5.9 5.8 5.6 4.2 3.0 6.5 89.7 % to company's total capacity 36.7 39.5 20.5 100.0 67.6 72.2 37.7 79.3 100.0 42.0 38.1 28.1
Total 82.0 28.5 3.2 85.3 4.4 Source: Company, Angel Research, Note: Total include capacities of ACC, Ambuja Cements and other CMA companies
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Cement
Category IV: States where own cement capacities exceed own demand as well as that of nearby supply-deficit states, but the state's excess capacity as a percentage of its total capacity is more than 25%
Even in FY2009, these states had high net surplus as a percentage to total capacity, which is expected to further increase in FY2013E on account of a) 34.6mtpa of expected capacity addition in these states at a CAGR of 9% during FY2010-13E; b) expected decline in demand in AP particularly; and c) expected reduction in surplus demand of nearby states, particularly for Chhattisgarh. State wise, we expect capacities of Rajasthan to park some of their excess to nearby supply-deficit states of Haryana, Punjab, UP, Chandigarh and NCR. Similarly, excess capacities of Chhattisgarh would be in a position to supply some of their surplus to West Bengal and Assam. But the state with the highest capacity, AP is expected to have the highest net surplus, as it is surrounded by cement-surplus states on all sides (Karnataka and TN in south; and Chhattisgarh and Odisha in north) and even supply-deficit states nearby such as Maharashtra can be more economically catered by other states, as explained earlier. Amongst our coverage, companies that are expected to have the highest exposure to these states (i.e., capacity in these states as a percentage to its total capacity) in FY2013E would be Shree Cement (87%), followed by JK Lakshmi Cement(79%), India Cements (55%), UltraTech (37%) and Madras Cements (25%).
Exhibit 9: Demand-supply dynamics in Category IV states

State AP Rajasthan Indigenous Indigenous capacity (mtpa) consumption (mt) FY09 FY13E FY09 FY13E 38.5 33.9 55.6 47.0 18.0 11.0 13.6 13.9 CAGR (%) Cap. 9.6 8.5 Cons. (6.7) 6.1 Indigenous surplus/ (deficit) -mt FY09 FY13E 20.6 22.9 42.0 33.0 Potential nearby states to supply surplus/ meet deficit FY09E FY13E Odisha Haryana, UP, Chandigarh, NCR Chhattisgarh 11.2 15.6 4.2 5.9 8.6 9.2 7.1 9.7 West Bengal, Odisha, Assam Source: CMA, Company, Angel Research; Note: FY2009 figures are actual, FY2009E and FY2013E figures are Angel Research estimates, FY2013E capacity of Bharathi Cement (5mtpa), Nagarjuna(2mtpa), Deccan (1.8mtpa),JSPL (2.5mtpa) and few others has not been considered in the above analysis; Total such capacities in FY2013E in AP is11.1mtpa and Chhattisgarh is 2.5mtpa Haryana, UP, Punjab, Chandigarh, NCR West Bengal, Assam 4.0 8.2 Net surplus/ (deficit) -mt FY09E FY13E 20.6 10.7 42.0 16.4
Exhibit 10: Player-wise capacities in Category IV states

Companies UltraTech Shree Cement India Cements Penna Cement JP Associates Binani Cement Zuari Cement Ambuja Cements My Home Inds. JK Cement Birla Corp JK Lakshmi Cement Madras Cements ACC Orient Cement Others Total Capacities as of FY11-mt 18.1 11.7 8.6 7.7 2.2 6.3 5.7 4.1 4.9 4.9 2.3 4.2 3.7 3.1 3.0 17.2 107.5 % to company's total capacity 37.1 86.7 55.2 100.0 9.3 100.0 100.0 16.4 100.0 61.9 37.9 88.4 29.2 11.4 60.0 37.4 Additions in FY12E-mt 0.5 5.0 1.1 2.2 2.0 10.7 Capacities as of FY12E 18.1 11.7 8.6 8.2 7.2 6.3 5.7 5.2 4.9 4.9 4.5 4.2 3.7 3.1 3.0 19.2 118.2 Additions in Capacities FY13E-mt as of FY13E-mt 18.1 11.7 8.6 8.2 7.2 6.3 5.7 5.2 4.9 4.9 4.5 4.2 3.7 3.1 3.0 19.2 118.2 % to company's total capacity 37.1 86.7 55.2 100.0 22.0 100.0 85.1 19.3 100.0 61.9 47.8 79.2 25.2 10.2 60.0 37.0
Source: Company, Angel Research, Note: Total include capacities of ACC, Ambuja Cements and other CMA companies
Based on this analysis of India's cement capacity clusters and state-wise demand supply dynamics, we have assigned a weighted average score to cement players based on their capacity locations in various categories at the end of FY2013E. Amongst our coverage universe, Ambuja Cements is expected to emerge as the company having the most favorable locational presence and Shree Cement and India Cements having the worst. This analysis is not to indicate that plants in category III and IV states would not actually sell anything out of the implied net surplus. Rather, in our view, it indicates that margins of the plants in these states would be most at risk, due to the freight cost disadvantage i.e. sales of the implied net surplus would involve a tradeoff with margins.
142
January 2012
Cement
Exhibit 11: Player-wise ranking based on locational advantage; captive power as a percentage of total power and EBIT margins
Company Cement Capacity in FY13E/CY12E (in mtpa) Category -I Category -II Century Ply-boards Heidelberg Cement Ambuja Cements ACC Century Textile JP Associates UltraTech Orient Cement Birla Corp Prism Cement Madras Cements Kesoram Inds. Dalmia Cement India Cements JK Lakshmi Cememts JK Cement Shree Cement Mangalam Cement 4.4 6.0 27.0 30.1 10.0 32.7 48.8 5.0 9.3 5.6 14.5 7.3 9.0 14.1 5.3 7.9 13.5 2.0 73 57 41 23 37 17 26 40 32 7 7 10 27 40 28 24 16 10 13 Category -III 43 39 42 37 20 19 100 68 79 72 38 38 Category -IV 19 10 21 22 37 60 48 25 21 28 55 79 62 87 100 % to total capacity as of FY13E/CY12E Weighted average score 3.73 3.12 3.03 2.63 2.53 2.36 2.31 2.20 2.14 2.00 1.89 1.79 1.72 1.59 1.52 1.38 1.27 1.00 Loctation Captive power Captive as % of total power req. 116 10 106 85 61 72 81 76 59 81 80 65 62 97 95 149 125 FY11/CY10 EBIT margins 26.1 8.1 21.2 18.4 17.6 17.7 14.7 22.6 16.6 5.9 15.2 14.8 8.8 3.1 7.5 7.3 7.1 6.4 wise capacity in FY13E/ Ranks 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 CY12E (in MW) 71 8 400 361 77 339 529 50 77 157 75 72 132 66 106 260 35
Rain Commodities 2.9 100 1.00 19 7.2 Source: Company, Angel Research; Note: Power requirement has been computed assuming PLFs of 70% and power consumption per tonne of cement to be same as per the latest available Annual Report; Power capacities do not include wind power capacity in case of ACC, Madras Cements, India Cements, Mangalam Cement and power tie-ups in case of JK Lakshmi Cement and India Cements; Smaller players have been ignored while giving the weighted scores and ranks.
Outlook and valuation: Our concern on the cement sector stems from low capacity utilization, which is due to poor demand growth and excess capacity. In our view, the cement sector's valuations in terms of EV/sales and EV/tonne are trading ahead of the cycle when compared to utilization levels and are almost 23% more expensive than historical valuations during periods of similar utilization levels. But, despite low capacity utilization, cement companies have managed to maintain relatively healthy pricing due to production discipline adopted by them, which has led to high valuations currently. However, in our view, this is a thin investment thesis to rely on, as there exists persistent risk of breakdown in the production discipline. Hence, we maintain our Neutral view on the sector. Though Ambuja Cements has the most favorable locational presence, it is trading at rich valuations and, hence, we maintain our Neutral recommendation on the stock. Among other large caps, we prefer ACC over UltraTech on a relative basis considering its better locational presence. But, we have a Neutral view on the stock, as we expect limited absolute upside. While valuations are cheap for India Cements, Madras
Cements and Shree Cement, we have a Neutral view on them due to their unfavorable locational presence, especially for south-based players. That said, we maintain our Buy recommendation on JK Lakshmi Cement due to its attractive valuations, as it is trading at EV/tonne of US$35 on current capacity (US$ 23 on FY2013E basis).
Exhibit 12: One-year forward EV/sales vs. utilization

3.0 2.5 2.0 85.0 1.5 1.0 0.5 0.0
Oct-04 Oct-06 Oct-08 Oct-09 Apr-04 Apr-06 Apr-08 Oct-01 Oct-02 Oct-03 Oct-05 Apr-09 Apr-01 Apr-02 Oct-10 Apr-03 Oct-11 Apr-05 Apr-10 Oct-07 Apr-11 Apr-07
95.0 90.0
80.0 75.0 70.0
EV/Sales(x)-LHS
Utilization 1yr fwd(%) -RHS

CMP Company UltraTech ACC^ Ambuja Cements^ Shree Cement India Cements Madras Cements (`) ` 1,197 1,153 160 2,148 74 108 Target Sales (` cr) ` FY13E 20,033 10,777 9,635 5,205 4,224 3,254 1,751 OPM (%) FY12E 21.7 20.3 24.0 23.5 18.6 30.5 16.5 FY13E 21.7 21.3 24.5 25.1 18.4 28.3 17.2 PAT (`cr) ` FY12E 2,037 1,074 1,213 247 258 351 72 FY13E 2,267 1,269 1,412 434 282 363 95 EV/EBITDA (x) FY12E 8.3 10.1 11.0 6.8 5.4 5.6 3.9 FY13E 7.2 8.0 9.1 4.6 5.2 5.0 2.7 EV/Tonne (US $) FY12E 129 118 155 77 52 53 30 FY13E 123 112 148 57 51 45 23 Reco Neutral Neutral Neutral Neutral Neutral Neutral Buy Upside (%) 16 (`) FY12E ` - 18,228 51 9,493 8,484 4,260 4,032 3,060 1,483
JK Lakshmi Cement 44
Source: Company, Angel Research; Note: ^December year ending companies
January 2012
143
Cement
RATING 52 WEEK HIGH / LOW MARKET CAP (` CR) ` LIQUIDITY NEUTRAL 1,234/890 32,796 MEDIUM
UltraTech
Company Background
CMP/TP/Upside: `1,197 / - / -
SHAREHOLDING PATTERN (%) PROMOTERS (ADITYA BIRLA GROUP) FII 3.4 17.1
UltraTech (UTCEM) became India's largest cement player on a standalone basis, with total capacity of 48.8mtpa, post the merger of Samruddhi (erstwhile cement division of Grasim) with itself in 2010. UTCEM also acquired a controlling stake in Dubai-based ETA Star (cement capacities of 3mtpa in the Middle East and Bangladesh) in 2010, which took its consolidated total capacity to 51.8mtpa. UTCEM is a pan-India player, with 22 cement plants spread across the country. Of its total capacity, the southern, western and northern regions constitute the maximum share (26%, 26% and 23%, respectively), as against 14% by the eastern and northeastern region and 11% by the central region.
STOCK RETURNS (%) UTCEM SENSEX 3M 6.7 1Y 18.3 3Y 46.5 21.3 5Y 1.2 3.3 10Y 17.3
Structural Snapshot
Growth opportunity: The Indian cement industry is expected to witness 7-8% growth in the medium term, given the low per capita cement consumption levels in India currently as compared to other countries (India's 176kg vs. China's 1,210kg and world average of 433kg, as per industry estimates) and past experiences of cement growth in other countries during similar growth phases as India's. However, significant capacity addition during the past four years (~109mtpa, 12.6% CAGR) vs. modest demand growth (6.9% CAGR) has resulted in a decline in utilization levels from 90.4% in FY2007 to 73.3% in FY2011. Competitive position: Being a pan-India player, UTCEM is relatively insulated from the risks of demand slowdown and price correction in any particular region. Nature of business: Cyclical; Low entry barriers for new players.
(2.6) (12.3)
NOTE: ABOVE 1 YEAR ON CAGR BASIS,
FINANCIAL PERFORMANCE OVERVIEW (%) SALES GROWTH* PAT GROWTH* OPM# ROE# 3M 23.1 93.4 22.4 1Y 87.4 28.4 20.5 18.4 3Y 33.8 11.3 24.6 25.4 5Y 31.9 43.4 10Y -
26.8 21.9 35.4 25.8

Increased use of captive power to protect margins: Currently, UTCEM has 504MW of captive power capacity, which the company is planning to expand by 70MW. Increased use of captive power for its overall power requirements would aid the companys operating margins. Relatively unfavorable capacity location among cement majors: About 42% of UTCEM's total capacity is expected to achieve relatively higher capacity utilization, as it is located in states with favorable demand supply dynamics. However, its balance 58% capacity, which is located in AP, Rajasthan, Chhattisgarh, Karnataka, TN and MP, is expected to operate at relatively lower utilization and margins, as all these states have overcapacities after fulfilling their own cement demand and surplus demand of nearby states. Capacity expansion in favorable states: Over the next three years, UTCEM has planned to set-up brownfield clinkerization plants at Chhattisgarh (4.8mtpa) and Karnataka (4.4mtpa) and split grinding units at various locations. This capacity expansion is expected to aid its growth in the next up cycle. Current valuation: The stock is trading at relative expensive valuation of EV/tonne of US$145 on current capacity (US$123 on FY2013E capacity). Hence, we remain Neutral on the stock.
144
January 2012

BALANCE SHEET
Y/E MARCH (` CR) ` SOURCES OF FUNDS EQUITY SHARE CAPITAL RESERVES& SURPLUS SHAREHOLDERS FUNDS TOTAL LOANS DEFERRED TAX LIABILITY TOTAL LIABILITIES APPLICATION OF FUNDS GROSS BLOCK LESS: ACC. DEPRECIATION NET BLOCK CAPITAL WORK-IN-PROGRESS INVESTMENTS CURRENT ASSETS CURRENT LIABILITIES NET CURRENT ASSETS MIS. EXP. NOT WRITTEN OFF TOTAL ASSETS 8,078 3,136 4,942 259 1,670 1,472 1,299 173 7,044 17,942 6,542 11,401 1,105 3,730 3,757 3,454 304 16,541 19,142 7,451 11,691 1,905 3,730 4,880 4,334 546 17,873 20,542 8,427 12,115 3,505 3,730 5,551 4,797 754 20,105 124 4,484 4,609 1,605 831 7,044 274 10,392 10,666 4,145 1,730 16,541 274 12,074 12,348 3,795 1,730 17,873 274 13,946 14,220 4,155 1,730 20,105 FY2010 FY2011 FY2012E FY2013E
% CHG
10.4
5,079 2,038
87.9
10,668 2,707
36.3
14,316 3,911
9.9
15,736 4,297
(% OF NET SALES)
28.9
388 118 56
20.5
766 277 122
21.7
909 230 139
21.7
976 223 141
(% OF PBT)
RECURRING PBT
3.5
1,588
6.8
1,786
4.8
2,911
4.3
3,239
% CHG
16.7
1,588 495
12.5
1,786 382
62.9
2,911 873
11.3
3,239 972
(% OF PBT)
31.2
1,093 1,093
21.4
1,404 1,404
30.0
2,037 2,037
30.0
2,267 2,267
% CHG
BASIC EPS (`) `
11.9
87.8
28.4
51.2
45.1
74.3
11.3
82.7
% CHG
11.9
(41.7)
45.1
11.3
CASH FLOW STATEMENT

Y/E MARCH (` CR) ` PROFIT BEFORE TAX DEPRECIATION CHANGE IN WORKING CAPITAL ADD: INTEREST EXPENSES LESS: OTHER INCOME DIRECT TAXES PAID CASH FLOW FROM OPERATIONS (INC.)/ DEC. IN FIXED ASSETS (INC.)/ DEC. IN INVESTMENTS OTHER INCOME CASH FLOW FROM INVESTING ISSUE OF EQUITY INC./(DEC.) IN LOANS DIVIDEND PAID (INCL. TAX) OTHERS CASH FLOW FROM FINANCING INC./(DEC.) IN CASH OPENING CASH BALANCES CLOSING CASH BALANCES FY2010 1,588 388 (90) 118 56 389 1,559 (259) (635) 56 (838) (537) 87 118 (742) (20) 104 84 FY2011 1,786 766 (93) 277 122 519 2,095 (1,223) (542) 122 (1,642) 1 (1) 141 252 (392) 61 84 145 FY2012E 2,911 909 (34) 230 139 873 3,004 (2,000) 139 (1,861) (350) 355 230 (935) 207 145 352 FY2013E 3,239 976 (98) 223 141 972 3,228 (3,000) -
KEY RATIOS
Y/E MARCH VALUATION RATIO (X) P/E (ON FDEPS) P/CEPS P/BV EV/SALES EV/EBITDA ` PER SHARE DATA (`) EPS (BASIC) EPS (FULLY DILUTED) CASH EPS 141 (2,859) 360 395 223 (258) 110 352 462 DPS BOOK VALUE RETURNS (%) ROCE (PRE-TAX) ANGEL ROIC (PRE-TAX) ROE TURNOVER RATIOS (X) INVENTORY / SALES (DAYS) RECEIVABLES (DAYS) PAYABLES (DAYS) 39 11 92 38 11 81 45 14 99 50 16 106 24.4 26.6 26.6 16.5 17.7 18.4 17.4 19.4 17.7 17.5 20.9 17.1 87.8 87.8 119.0 7.0 370.2 51.2 51.2 79.2 5.1 389.2 74.3 74.3 107.5 13.0 450.6 82.7 82.7 118.3 14.4 518.9 13.6 10.1 3.2 2.2 7.5 23.4 15.1 3.1 2.6 12.4 16.1 11.1 2.7 1.8 8.3 14.5 10.1 2.3 1.6 7.2 FY2010 FY2011 FY2012E FY2013E
January 2012
145
Cement
RATING 52 WEEK HIGH / LOW MARKET CAP (` CR) ` LIQUIDITY NEUTRAL 1,233 / 917 21,643 MEDIUM
ACC
Company Background
CMP/TP/Upside: `1,153 / - / -
SHAREHOLDING PATTERN (%) PROMOTORS (MNC) FII 50.3 17.3
In 2005, ACC was acquired by the world's second largest cement company, Holcim. Currently, Holcim Group in India (ACC and Ambuja Cements taken together) has the largest cement capacity in the country (57mtpa). ACC has a standalone total capacity of 30mtpa, with 16 cement plants spread across the country. Similar to UltraTech, the company is also a pan-India player but with a southern inclination (36% of its total capacity is in south as against 22% in north, 22% in east and northeast, 17% in central and 4% in west).
Structural Snapshot
STOCK RETURNS (%) ACC SENSEX 3M 2.3 1Y 14.1 3Y 32.3 21.3 5Y 3.3 10Y 17.3 1.0 21.0
Growth opportunity: Considering the low per capita cement consumption levels in India currently as compared to other countries (India's 176kg vs. China's 1,210kg and world average of 433kg, as per industry estimates) and past experiences of cement growth in other countries during similar growth phases as India's, we expect the Indian cement industry to witness 7-8% growth in the medium term. However, significant capacity addition during the past four years (~109mtpa, 12.6% CAGR) vs. modest demand growth (6.9% CAGR) has resulted in a decline in utilization levels from 90.4% in FY2007 to 73.3% in FY2011. Competitive position: ACC is a pan-India player and, hence, is relatively insulated from the risks of demand slowdown and price correction in any particular region. Nature of business: Cyclical; Low entry barriers for new players.
(2.6) (12.3)
FINANCIAL PERFORMANCE OVERVIEW (%) SALES GROWTH* PAT GROWTH* OPM# ROE# 3M 31.3 14.2 1Y (3.9) 23.5 17.9 3Y 3.9 (3.6) 25.1 24.7 5Y 19.4 26.3 10Y 11.6 19.8
67.6 (30.3)
30.0 30.0 30.1 23.5

Favorable capacity location to augur well for the company: Around 51% of ACC's total capacity is located in states where either cement supply is less than cement demand; or if it is more, excess can economically be supplied to nearby supply-deficit states and, hence, all such capacities can rationally achieve relatively higher capacity utilization. Even its entire south India plant capacity is at Karnataka and TN, where demand-supply dynamics are far better than those seen in AP. Growth to be driven by capacity addition: Post the expansion of Wadi plant and the commissioning of the 3mtpa Chanda plant, ACC's total capacity currently stands at 30mtpa. The company's capacity has increased by ~7mtpa since CY2008-end. These capacity additions are expected to drive its growth going ahead, as was reflected by the 11.4% yoy increase in its dispatches during CY2011. Higher fuel availability for CPPs - Lower power and fuel costs: Power and fuel costs are expected to be lower for the company, as it currently has 87% self sufficiency in power with 361MW of captive power plant (CPP), access to highest coal linkage in the industry and few captive coal blocks. Current valuation: The stock is trading at EV/tonne of US$128 on current capacity (US$112 on FY2013E capacity), which in our view is fair. Hence, we continue to remain Neutral on the stock.
ANGEL ESTIMATES PARTICULARS PAT GROWTH (%) ROE (%) P/E P/B CY2011E (4.1) 15.7 20.2 3.0 CY2012E 18.2 16.7 17.1 2.7
146
January 2012

Y/E DECEMBER (` CR) ` TOTAL OPERATING INCOME CY2009 8,191 CY2010 7,976 CY2011E 9,493 CY2012E 10,777
BALANCE SHEET
Y/E DECEMBER (` CR) ` SOURCES OF FUNDS EQUITY SHARE CAPITAL RESERVES& SURPLUS SHAREHOLDERS FUNDS TOTAL LOANS DEFERRED TAX LIABILITY TOTAL LIABILITIES APPLICATION OF FUNDS GROSS BLOCK LESS: ACC. DEPRECIATION NET BLOCK CAPITAL WORK-IN-PROGRESS INVESTMENTS CURRENT ASSETS CURRENT LIABILITIES NET CURRENT ASSETS MIS. EXP. NOT WRITTEN OFF TOTAL ASSETS 6,826 2,668 4,158 2,156 1,476 2,256 3,114 (858) 6,932 8,077 2,995 5,082 1,563 1,703 2,753 3,746 (993) 7,355 9,640 3,467 6,173 404 1,503 3,816 3,843 (28) 8,052 10,044 3,959 6,085 723 1,603 4,513 4,069 443 8,853 188 5,828 6,016 567 349 6,932 188 6,282 6,469 524 362 7,355 188 6,981 7,169 521 362 8,052 188 7,808 7,995 496 362 8,853 CY2009 CY2010 CY2011E CY2012E
% CHG
12.5
5,547 2,644
(2.6)
6,163 1,812
19.0
7,612 1,881
13.5
8,516 2,261
(% OF NET SALES)
32.9
342 84 77
23.5
393 57 98
20.3
472 103 206
21.3
492 99 209
(% OF PBT)
RECURRING PBT
3.3
2,294
6.7
1,461
13.6
1,512
11.1
1,879
% CHG
32.1
2,294 688
(36.3)
1,461 341
3.5
1,512 439
24.2
1,879 610
(% OF PBT)
30.0
1,607 1,607
23.4
1,120 1,120
29.0
1,074 1,074
32.4
1,269 1,269
% CHG
BASIC EPS (`) `
32.5
85.5
(30.3)
59.6
(4.1)
57.1
18.2
67.5
% CHG
32.5
(30.3)
(4.1)
18.2
CASH FLOW STATEMENT

Y/E DECEMBER (` CR) ` PROFIT BEFORE TAX DEPRECIATION INTEREST EXPENSE CHANGE IN WORKING CAPITAL LESS: OTHER INCOME DIRECT TAXES PAID CASH FLOW FROM OPERATIONS (INC.)/ DEC. IN FIXED ASSETS (INC.)/ DEC. IN INVESTMENTS OTHER INCOME CASH FLOW FROM INVESTING ISSUE OF EQUITY INC./(DEC.) IN LOANS DIVIDEND PAID (INCL. TAX) OTHERS CASH FLOW FROM FINANCING INC./(DEC.) IN CASH OPENING CASH BALANCES CLOSING CASH BALANCES CY2009 2,294 342 84 575 77 727 2,492 (1,544) (797) 77 (2,264) 85 505 84 (505) (276) 984 708 CY2010 1,461 393 57 507 98 395 1,925 (657) (227) 98 (786) (43) 667 57 (767) 372 708 1,080 CY2011E 1,512 472 103 (371) 206 439 1,072 (404) 200 206 2 (3) 374 103 (480) 595 1,080 1,675 CY2012E 1,879 492 99 (58) 209 610 1,593 (723) (100)
KEY RATIOS
Y/E DECEMBER VALUATION RATIO (X) P/E (ON FDEPS) P/CEPS P/BV EV/SALES EV/EBITDA ` PER SHARE DATA (`) EPS (BASIC) EPS (FULLY DILUTED) CASH EPS 209 (614) (25) 442 99 (566) 412 1,675 2,087 DPS BOOK VALUE RETURNS (%) ROCE (PRE-TAX) ANGEL ROIC (PRE-TAX) ROE TURNOVER RATIOS (X) INVENTORY / SALES (DAYS) RECEIVABLES (DAYS) PAYABLES (DAYS) 35 11 193 39 9 203 42 9 182 46 10 170 36.3 90.8 29.4 19.9 50.7 17.9 18.3 37.7 15.7 20.9 39.7 16.7 85.5 85.5 103.7 26.9 320.1 59.6 59.6 80.5 35.5 344.2 57.1 57.1 82.3 19.9 381.4 67.5 67.5 93.7 23.5 425.4 13.5 11.1 3.6 2.3 6.9 19.3 14.3 3.3 2.4 10.0 20.2 14.0 3.0 2.0 10.1 17.1 12.3 2.7 1.7 8.0 CY2009 CY2010 CY2011E CY2012E
January 2012
147
Cement
Ambuja Cements
Swiss cement major, Holcim acquired a controlling stake in Ambuja Cements (ACEM) in 2005. In India, Holcim Group currently controls one-fifth of the total cement capacity through ACEM and ACC. On standalone basis, ACEM is the third largest cement player in India with total capacity of 27mtpa. The company majorly focuses on northern and western India, with no plants in southern India. Of its current total capacity, 40% capacity is in the western, 38% in northern, 16% in eastern and northeastern and 6% in central region.
Structural Snapshot
Growth opportunity: Considering the low per capita cement consumption levels in India currently as compared to other countries (India's 176kg vs. China's 1,210kg and world average of 433kg, as per industry estimates) and past experiences of cement growth in other countries during similar growth phases as India's, we expect the Indian cement industry to witness 7-8% growth in the medium term. Over FY2012-13E, regions where the company has a major presence, northern and western India are expected to witness healthy demand, at a CAGR of 8.0% and 6.7%, respectively, with minimal capacity addition at a CAGR of 5.0% and 2.0%, respectively, which is expected to improve utilization for the region as well as for the company. Competitive position: ACEM is present all over India except south, which is facing a supply glut and, hence, the company is best positioned amongst cement majors to sustain higher utilizations and margins. Nature of business: Cyclical; Low entry barriers for new players.
STOCK RETURNS (%) ACEM SENSEX 3M 3.0 1Y 25.4 3Y 29.7 21.3 5Y 1.7 3.3 10Y 18.4 17.3
(2.6) (12.3)
FINANCIAL PERFORMANCE OVERVIEW (%) SALES GROWTH* PAT GROWTH* OPM# ROE# 3M 15.4 12.8 17.4 1Y 4.4 1.5 26.4 17.9 3Y 9.7 0.8 26.0 20.4 5Y 23.3 10Y 19.3
21.4 20.5 29.6 29.1 25.1 21.3

Most favorable capacity location among cement majors: ACEM has 81% of its total capacity located in states where supply either is less than demand or is in excess and can be economically sold to nearby supply-deficit states. Logically capacities in these states are expected to report relatively higher utilization and margins. Capacity addition to lead to volume growth: During the past two years, Ambuja has added ~5mtpa of grinding capacities at various locations to reach its current overall capacity of 27mtpa. Going ahead, we expect these capacity expansions undertaken by the company to drive its volume growth. New clinker capacities/CPPs to aid margin expansion: Stabilization of production at the company's new clinker plants with capacity of 2.2mtpa each at Bhatapara and Rauri has resulted in elimination of external high-cost clinker purchase. The company is also expected to record savings in energy cost, following the commissioning of 66MW of new captive power capacities in CY2010, which has taken its overall captive power capacity beyond 400MW. Current valuation: The stock is trading at rich valuations of EV/tonne of US$166 on current capacity (US$148 on FY2013E capacity), which we believe factors in the positives such as favorable locational presence. Hence, we continue to remain Neutral on the stock.
ANGEL ESTIMATES PARTICULARS PAT GROWTH (%) ROE (%) P/E P/BV CY2011E (2.0) 15.7 20.3 3.0 CY2012E 16.5 16.5 17.4 2.7
148
January 2012

BALANCE SHEET
Y/E DECEMBER (` CR) ` SOURCES OF FUNDS EQUITY SHARE CAPITAL RESERVES& SURPLUS SHAREHOLDERS FUNDS TOTAL LOANS DEFERRED TAX LIABILITY TOTAL LIABILITIES APPLICATION OF FUNDS GROSS BLOCK LESS: ACC. DEPRECIATION NET BLOCK CAPITAL WORK-IN-PROGRESS INVESTMENTS CURRENT ASSETS CURRENT LIABILITIES NET CURRENT ASSETS MIS. EXP. NOT WRITTEN OFF TOTAL ASSETS 6,224 2,784 3,440 2,714 727 1,979 1,741 238 3 7,122 8,779 3,151 5,628 931 626 3,135 2,394 741 7,926 9,710 3,589 6,121 439 676 3,810 2,330 1,480 8,716 10,148 4,047 6,102 728 726 4,684 2,604 2,080 9,636 305 6,166 6,471 166 486 7,122 307 7,023 7,330 65 531 7,926 307 7,813 8,120 65 531 8,716 307 8,733 9,040 65 531 9,636 CY2009 CY2010 CY2011E CY2012E
% CHG
16.4
5,210 1,971
4.7
5,567 1,951
12.9
6,472 2,012
13.6
7,304 2,330
(% OF NET SALES)
27.9
297 22 151
26.4
387 49 120
24.0
438 56 190
24.5
458 37 182
(% OF PBT)
RECURRING PBT
8.4
1,803
7.4
1,635
11.2
1,708
9.0
2,018
% CHG
8.5
1,803 585
(9.3)
(27) 1,662 398
4.4
1,708 495
18.1
2,018 605
(% OF PBT)
32.4
1,218 1,218
24.0
1,264 1,237
29.0
1,213 1,213
30.0
1,412 1,412
% CHG
BASIC EPS (`) `
3.0
8.0
1.5
8.1
(2.0)
7.9
16.5
9.2
% CHG
2.8
0.8
(2.0)
16.5
CASH FLOW STATEMENT

Y/E DECEMBER (` CR) ` PROFIT BEFORE TAX DEPRECIATION (INC)/DEC IN WORKING CAPITAL ADD: INTEREST EXPENSES LESS: OTHER INCOME LESS: DIRECT TAXES PAID CASH FLOW FROM OPERATIONS (INC.)/ DEC. IN FIXED ASSETS (INC.)/ DEC. IN INVESTMENTS OTHER INCOME CASH FLOW FROM INVESTING ISSUE OF EQUITY INC./(DEC.) IN LOANS DIVIDEND PAID (INCL. TAX) OTHERS CASH FLOW FROM FINANCING INC./(DEC.) IN CASH OPENING CASH BALANCES CLOSING CASH BALANCES CY2009 1,803 297 522 22 151 585 1,909 (1,284) (395) 151 (1,528) 8 (123) 214 22 (352) 29 852 881 CY2010 1,662 387 395 49 120 398 1,974 (771) 101 120 (550) 55 (101) 462 49 (557) 867 881 1,748 CY2011E 1,708 438 (530) 56 190 495 986 (439) (50) 190 (298) 423 56 (479) 209 1,748 1,957 CY2012E 2,018 458 (19) 37 182 605 1,706 (728) (50)
KEY RATIOS
Y/E DECEMBER VALUATION RATIO (X) P/E (ON FDEPS) P/CEPS P/BV EV/SALES EV/EBITDA ` PER SHARE DATA (`) EPS (BASIC) EPS (FULLY DILUTED) CASH EPS 182 (596) 492 37 (530) 581 1,957 2,538 DPS BOOK VALUE RETURNS (%) ROCE (PRE-TAX) ANGEL ROIC (PRE-TAX) ROE TURNOVER RATIOS (X) INVENTORY / SALES (DAYS) RECEIVABLES (DAYS) PAYABLES (DAYS) 41 10 113 38 7 136 43 8 133 44 10 123 24.9 47.4 20.1 20.8 35.6 17.9 18.9 27.2 15.7 20.4 29.5 16.5 8.0 8.0 9.9 1.4 42.4 8.1 8.1 10.7 3.0 47.7 7.9 7.9 10.7 2.8 52.8 9.2 9.2 12.2 3.2 58.8 20.0 16.1 3.8 2.9 10.5 19.9 14.9 3.4 3.0 11.2 20.3 14.9 3.0 2.6 11.0 17.4 13.1 2.7 2.2 9.1 CY2009 CY2010 CY2011E CY2012E
January 2012
149
Cement
RATING 52 WEEK HIGH / LOW MARKET CAP (` CR) ` LIQUIDITY NEUTRAL 2,200/1,505 7,482 LOW
Shree Cement
Company Background
CMP/TP/Upside: `2,148 / - / -
Shree Cements (SRCM) is the leading cement company in North India, with current total capacity of 13.5mtpa spread across Rajasthan (11.7mtpa) and Uttarakhand (1.8mtpa). The company has ambitiously grown its cement capacity by five times in the past six years. In FY2011 alone, the company added 3.3mtpa of cement capacity and 1mtpa of clinker capacity. Also, SRCM has ventured into the power generation business and is expected to have 560MW of capacity by FY2012-end post the commissioning of the new 300MW capacity.
Structural Snapshot
STOCK RETURNS (%) SRCM SENSEX 3M 14.5 1Y 20.4 3Y 64.2 21.3 5Y 3.3 10Y 17.3 7.7 46.9
Growth opportunity: North India, the company's major market, expects capacity addition at a CAGR of only 2.0% over FY2012-13E, as against modest expected growth in demand, at a CAGR of 6.7%, which is expected to slightly improve utilizations for the capacities operating in the region. Competitive position: SRCM currently controls 19% of the total capacity in north India and faces tough competition from 14 odd players. Nature of business: Cyclical; Low entry barriers for new players.
(2.6) (12.3)
FINANCIAL PERFORMANCE OVERVIEW (%) SALES GROWTH* PAT GROWTH* OPM# ROE# 3M 19.1 23.4 1Y (3.2) 25.2 13.5 3Y 18.7 (9.1) 32.4 38.9 5Y 10Y 38.4 22.4 63.9 23.5 35.7 30.5 41.4 24.6

One of the lowest-cost cement producers: SRCM is one of the lowest-cost cement producers in north India, primarily because of its captive power plant and lesser power consumption per tonne of cement (one of the lowest in the industry due to higher proportion of PPC (~80%) in overall sales volumes) and lower freight cost as its grinding units are close to demand centers. Growth to be driven by capacity addition: SRCM has recently added 3.3mtpa of cement capacity by commissioning new grinding plants and by de-bottlenecking. The company is also expected to commission new merchant power capacity of 300MW in 3QFY2012E. We expect these capacity additions to drive its revenue growth going ahead. Having the most unfavorable plant locations amongst our coverage companies: SRCM has 87% of its total capacity located in Rajasthan, which is expected to face prolonged utilizations and margin pressures, as state-wise it is India's second biggest capacity cluster (44.8mtpa of total capacity in FY2011) and has huge demand supply gap even after catering to surplus demand of nearby states (Punjab, Haryana, Chandigarh, NCR and UP), in addition to its own demand. The balance 13% capacity is in Uttarakhand, where demand supply dynamics are much better than Rajasthan's and, hence, capacities in the state are expected to witness relatively higher utilizations. Current valuation: SRCM's cement business is trading at EV/tonne of US$85 on current capacity (US$57 on FY2013E capacity), which, when considering its unfavorable plant locations, in our view offers inadequate margin of safety. Hence, we maintain our Neutral recommendation on the stock.
263.2 (61.8)
150
January 2012

BALANCE SHEET
Y/E MARCH (` CR) ` SOURCES OF FUNDS EQUITY SHARE CAPITAL RESERVES& SURPLUS SHAREHOLDERS FUNDS TOTAL LOANS DEFERRED TAX LIABILITY TOTAL LIABILITIES APPLICATION OF FUNDS GROSS BLOCK LESS: ACC. DEPRECIATION NET BLOCK CAPITAL WORK-IN-PROGRESS INVESTMENTS CURRENT ASSETS CURRENT LIABILITIES NET CURRENT ASSETS MIS. EXP. NOT WRITTEN OFF TOTAL ASSETS 2,951 2,199 752 967 1,592 1,582 967 615 3,927 4,042 2,875 1,167 1,028 1,196 1,439 908 531 3,922 5,242 3,542 1,700 78 1,546 1,339 948 391 3,716 5,442 4,288 1,154 78 1,846 1,726 1,015 711 3,789 35 1,798 1,833 2,106 (12) 3,927 35 1,951 1,986 2,008 (72) 3,922 35 2,164 2,198 1,608 (90) 3,716 35 2,537 2,572 1,308 (90) 3,789 FY2010 FY2011 FY2012E FY2013E
% CHG
34.2
2,204 1,439
(3.6)
2,626 886
21.3
3,260 999
22.2
3,897 1,309
(% OF NET SALES)
39.5
570 129 129
25.2
676 175 124
23.5
667 199 126
25.1
747 153 134
(% OF PBT)
RECURRING PBT
14.8
868
78.2
159
48.7
260
24.6
542
% CHG
20.1
868 192
(81.7)
48 110 (99)
63.4
260 13
108.9
542 108
(% OF PBT)
22.1
676 676
(90.0)
210 258
5.0
247 247
20.0
434 434
% CHG
BASIC EPS (`) `
17.0
194.0
(61.8)
74.1
(4.5)
70.8
75.9
124.5
% CHG
17.0
(61.8)
(4.5)
75.9
CASH FLOW STATEMENT

Y/E MARCH (` CR) ` PROFIT BEFORE TAX DEPRECIATION CHANGE IN WORKING CAPITAL LESS: OTHER INCOME DIRECT TAXES PAID CASH FLOW FROM OPERATIONS (INC.)/ DEC. IN FIXED ASSETS (INC.)/ DEC. IN INVESTMENTS OTHER INCOME CASH FLOW FROM INVESTING ISSUE OF EQUITY INC./(DEC.) IN LOANS DIVIDEND PAID (INCL. TAX) OTHERS CASH FLOW FROM FINANCING INC./(DEC.) IN CASH OPENING CASH BALANCES CLOSING CASH BALANCES FY2010 868 570 33 129 190 1152 (1183) (747) 129 (1802) 610 53 557 (97) 509 416 FY2011 110 676 98 124 (71) 831 (1152) 396 124 (631) (98) 57 (155) 45 416 461 FY2012E 260 667 293 126 13 1080 (250) (350) 126 (474) (400) 34 19 (453) 153 461 614 FY2013E 542 747 (140) 134 108 907 (200) (300) 134 (366) (300) 61 (361) 180 614 794
KEY RATIOS
Y/E MARCH VALUATION RATIO (X) P/E (ON FDEPS) P/CEPS P/BV EV/SALES EV/EBITDA ` PER SHARE DATA (`) EPS (BASIC) EPS (FULLY DILUTED) CASH EPS DPS BOOK VALUE RETURNS (%) ROCE (PRE-TAX) ANGEL ROIC (PRE-TAX) ROE TURNOVER RATIOS (X) INVENTORY / SALES (DAYS) RECEIVABLES (DAYS) PAYABLES (DAYS) 26 7 140 40 10 130 35 9 104 33 9 92 26.2 95.7 45.2 5.4 19.2 13.5 8.7 24.5 11.8 15.0 44.1 18.2 194.0 194.0 357.8 15.2 526.2 74.1 74.1 254.2 16.3 570.1 70.8 70.8 262.2 9.9 631.1 124.5 124.5 338.8 17.4 738.2 11.1 6.0 4.1 1.8 4.6 29.0 8.4 3.8 1.9 7.6 30.3 8.2 3.4 1.6 6.8 17.2 6.3 2.9 1.1 4.6 FY2010 FY2011 FY2012E FY2013E
January 2012
151
Cement
India Cements
CMP/TP/Upside: `74/ - / Company Background
India Cements (ICEM) is the largest cement company in south India, with a capacity of 13mtpa spread across four plants each in TN and AP. The company also has a plant at Parli in Maharashtra (1.1mtpa). It has recently commissioned a plant of 1.5mtpa capacity at Banswara in Rajasthan through its subsidiary, Trinetra Cement, thereby taking its consolidated capacity to 15.6mtpa. The company also bought franchise rights of IPL team, Chennai Super Kings, for 10 years in 2008 for US$91mn.
SHAREHOLDING PATTERN (%) PROMOTERS

FII
25.8
32.2
Structural Snapshot
Growth opportunity: South India, the company's major market, is expected to witness capacity addition of 13.5mtpa during FY2012-13E, which will add to its existing overcapacity woes, amidst minimal demand growth. Hence, the region is expected to remain a laggard with capacity utilization likely to be 64% in FY2013E. Competitive position: Despite being the leading player in south, ICEM controls only 12.4% of the region's current total capacity of 104.7mtpa, which is distributed among 21 odd players. Nature of business: Cyclical; Low entry barriers for new players.
STOCK RETURNS (%) ICEM SENSEX 3M 1Y 3Y 21.3 5Y 3.3 10Y 6.3 17.3 (2.0) (25.1) (11.7) (21.4) (2.6) (12.3)
FINANCIAL PERFORMANCE OVERVIEW (%) SALES GROWTH* PAT GROWTH* OPM# ROE# 3M 29.5 23.3 1Y (7.3) 10.2 1.2 3Y 3.9 18.5 9.9 5Y 17.3 24.4 19.7 10Y 10.5 18.0 2.1
- (87.1) (58.8)
5.1 (0.3)

Worst plant locations amongst our coverage: About 93% of the company's consolidated total capacity is located in TN, AP and Rajasthan. As per our estimates, for FY2013E, capacity situation in TN is expected to be slightly better than the other two, as a large part of its excess of 18.1mt can be supplied to Kerala (where the total deficit is expected to be 8.6mt). However, AP is expected to have India's highest indigenous demand supply gap (42mt) and no nearby supply deficit-state to sell its excess more economically than other states. Further, Rajasthan's net demand supply gap is expected to be huge at 16.4mt even after factoring in supplies of 16.6mt to nearby supplydeficit states (Punjab, Haryana, Chandigarh, NCR and UP). Capacities in all these states are expected to witness prolonged utilization and margin pressures. Large capex burden: As of FY2011, ICEM had invested `1,040cr (17.5% of gross block) in CWIP, which is not expected to result in creation of any additional cement capacities in the near future as the amount has been utilized by the company in acquiring limestone-bearing lands and railway sidings (as per management's guidance) and hence, the company's return ratios for the next few years are expected to remain subdued. Key valuation parameter: Though the stock is trading at low valuations of EV/tonne of US$60 on current capacity (US$51 on FY2013E capacity), we believe this is justified considering the company's unfavorable locational presence. Hence, we maintain our Neutral recommendation on the stock.
152
January 2012

Y/E MARCH (` CR) ` TOTAL OPERATING INCOME FY2010 3687 FY2011 3417 FY2012E 4032 FY2013E 4224
BALANCE SHEET
Y/E MARCH (` CR) ` SOURCES OF FUNDS EQUITY SHARE CAPITAL RESERVES& SURPLUS SHAREHOLDERS FUNDS TOTAL LOANS DEFERRED TAX LIABILITY TOTAL LIABILITIES APPLICATION OF FUNDS GROSS BLOCK LESS: ACC. DEPRECIATION NET BLOCK CAPITAL WORK-IN-PROGRESS INVESTMENTS CURRENT ASSETS CURRENT LIABILITIES NET CURRENT ASSETS MIS. EXP. NOT WRITTEN OFF TOTAL ASSETS 5,710 1,792 3,919 703 314 2,645 1,042 1,602 6,538 5,926 2,092 3,834 1,040 160 2,904 1,118 1,785 6,820 6,226 2,341 3,885 1,040 190 3,095 1,139 1,956 7,071 6,576 2,604 3,972 940 190 3,270 1,160 2,110 7,212 307 3,829 4,136 2,133 269 6,538 307 3,783 4,090 2,456 274 6,820 307 3,734 4,041 2,756 274 7,071 307 3,875 4,182 2,756 274 7,212 FY2010 FY2011 FY2012E FY2013E
% CHG
9.8
2945 743
(7.3)
3067 350
18.0
3283 748
4.8
3446 778
(% OF NET SALES)
20.1
233 143 121
10.2
244 142 98
18.6
249 324 166
18.4
263 317 175
(% OF PBT)
RECURRING PBT
22.8
488
108.5
62
48.7
341
46.9
372
% CHG
(32.9)
(44) 531 177
(87.3)
(28) 90 22
451.6
0 341 83
9.1
0 372 90
(% OF PBT)
33.3
354 311
24.2
68 40
24.2
258 258
24.2
282 282
% CHG
BASIC EPS (`) `
(39.2)
10.1
(87.1)
1.3
545.2
8.4
9.1
9.2
% CHG
(33.8)
(87.1)
545.2
9.1
CASH FLOW STATEMENT

Y/E MARCH PROFIT BEFORE TAX DEPRECIATION CHANGE IN WORKING CAPITAL LESS: OTHER INCOME DIRECT TAXES PAID CASH FLOW FROM OPERATIONS (INC.)/ DEC. IN FIXED ASSETS (INC.)/ DEC. IN INVESTMENTS OTHER INCOME CASH FLOW FROM INVESTING ISSUE OF EQUITY INC./(DEC.) IN LOANS DIVIDEND PAID (INCL. TAX) OTHERS CASH FLOW FROM FINANCING INC./(DEC.) IN CASH OPENING CASH BALANCES CLOSING CASH BALANCES FY2010 531 233 (644) 121 177 (177) (195) (155) 121 (229) 284 145 72 (18) 375 (31) 85 54 FY2011 90 244 (204) 98 22 11 (553) 154 98 (302) 323 54 (0) 270 (21) 54 33 FY2012E 341 249 (196) 166 83 146 (300) (30) 166 (164) 300 129 178 (7) (26) 33 8 FY2013E 372 263 (23) 175 90 347 (250) 175 (75) 141 (141) 130 8 138
KEY RATIOS
January 2012
153
Cement
RATING 52 WEEK HIGH / LOW MARKET CAP (` CR) ` LIQUIDITY NEUTRAL 123/80 2,561 LOW
Madras Cements
CMP/TP/Upside: `108/ - / Company Background
Madras Cements (MC) is one of the largest cement players in southern India, with a capacity of 11.5mtpa spread across five locations in TN (total 7.5mtpa); one in AP (3.7mtpa); and one in Karnataka (0.3mtpa). Apart from this, the company also has a plant at Kolaghat in West Bengal (1mtpa). Madras Cements is in the process of setting up another 2mtpa unit at its Ariyalur plant, thereby taking its total TN capacity to 9.5mtpa and all India capacity to 14.5mtpa. The company also has wind power generation capacity of ~159MW.
Structural Snapshot
STOCK RETURNS (%) MC SENSEX 3M 8.7 1Y 10.8 3Y 17.3 21.3 5Y (9.9) 3.3 10Y 17.7 17.3
Growth opportunity: South India, the company's major market, is expected to witness a capacity addition of 13.5mtpa during FY2012-13E, which will add to its existing overcapacity woes, amidst minimal demand growth. Hence, the region is expected to remain a laggard with capacity utilization likely to be 64% in FY2013E. Competitive position: MC controls only 11% of the current total capacity in the south (104.7mtpa) and faces stiff competition from 21 odd players.
(2.6) (12.3)
FINANCIAL PERFORMANCE OVERVIEW (%) SALES GROWTH* PAT GROWTH* OPM# ROE# 3M 27.6 32.6 1Y (7.0) 23.7 12.8 3Y 9.0 28.7 23.6 5Y 20.9 21.4 31.8 10Y 15.5 16.2 27.4
Nature of business: Cyclical; Low entry barriers for new players.
256.6 (40.4) (19.9)

New captive power plants (CPPs) to reduce power costs: MC has recently commissioned 40MW of CPP and is expected to add another 45MW of CPPs, thereby taking its total CPP capacity to ~157MW. Going ahead, we expect the CPPs to considerably reduce power costs for the company. Capacity addition to drive volume growth: MC is in the process of expanding its Ariyalur plant capacity by 2mtpa. Also, in the past two years, the company has added ~2.5mtpa of capacities at various locations to reach its current overall capacity of 12.5mtpa. We expect capacity expansions undertaken by the company to propel its volume growth going ahead. Unfavorable plant locations: Around 93% of company's total capacity is in TN (68%) and AP (25%). As per our estimates, in FY2013E, AP is expected to have India's highest indigenous demand supply gap (42mt) and no nearby supply-deficit state, where it can supply more economically than other states. However, capacity situation in TN is slightly better, with the expected demand supply gap of 18.1mt and a nearby supply-deficit state of Kerala (total deficit expected to be 8.6mt), where it can supply a large part of its excess more economically than Karnataka. Capacities in both these states are expected to register extended low capacity utilization and margins. Current valuation: It is trading at moderate valuations of EV/tonne of US$72 on current capacity of 12.5mtpa (US$45 on FY2013E capacity). However, considering its unfavorable locational presence and risk of margin pressure (if ongoing production discipline in southern India breaks down), we remain Neutral on the stock.
35.9 24.3
154
January 2012

BALANCE SHEET
Y/E MARCH (` CR) ` SOURCES OF FUNDS EQUITY SHARE CAPITAL RESERVES& SURPLUS SHAREHOLDERS FUNDS TOTAL LOANS DEFERRED TAX LIABILITY TOTAL LIABILITIES APPLICATION OF FUNDS GROSS BLOCK LESS: ACC. DEPRECIATION NET BLOCK CAPITAL WORK-IN-PROGRESS INVESTMENTS CURRENT ASSETS CURRENT LIABILITIES NET CURRENT ASSETS MIS. EXP. NOT WRITTEN OFF TOTAL ASSETS 4,811 1,119 3,693 318 89 1,135 546 589 21 4,710 5,266 1,320 3,946 543 89 1,099 590 509 28 5,115 5,616 1,573 4,043 493 89 1,283 658 625 28 5,278 5,666 1,828 3,838 493 139 1,249 657 592 28 5,090 24 1,534 1,558 2,567 585 4,710 24 1,711 1,735 2,791 589 5,115 24 2,013 2,037 2,641 600 5,278 24 2,325 2,349 2,141 600 5,090 FY2010 FY2011 FY2012E FY2013E
% CHG
14.0
1944 857
(7.0)
1987 617
17.5
2128 932
6.3
2334 920
(% OF NET SALES)
30.6
196 151 20
23.7
221 139 40
30.5
253 182 27
28.3
255 153 29
(% OF PBT)
RECURRING PBT
3.8
530
13.4
297
5.2
524
5.4
541
% CHG
(2.9)
531 177
(44.0)
297 86
76.5
524 173
3.2
541 179
(% OF PBT)
33.3
354 354
29.0
211 211
33.0
351 351
33.0
363 363
% CHG
BASIC EPS (`) `
(2.9)
14.9
(40.4)
8.9
66.6
14.8
3.2
15.2
% CHG
(2.9)
(40.4)
66.6
3.2
CASH FLOW STATEMENT

Y/E MARCH (` CR) ` PROFIT BEFORE TAX DEPRECIATION CHANGE IN WORKING CAPITAL LESS: OTHER INCOME DIRECT TAXES PAID CASH FLOW FROM OPERATIONS (INC.)/ DEC. IN FIXED ASSETS (INC.)/ DEC. IN INVESTMENTS OTHER INCOME CASH FLOW FROM INVESTING ISSUE OF EQUITY INC./(DEC.) IN LOANS DIVIDEND PAID (INCL. TAX) OTHERS CASH FLOW FROM FINANCING INC./(DEC.) IN CASH OPENING CASH BALANCES CLOSING CASH BALANCES 103 56 (7) 55 (4) 39 35 225 35 22 168 5 35 40 (150) 49 11 (210) (8) 40 32 (500) 51 (551) 21 32 53 FY2010 531 196 (119) 20 89 498 (576) 20 (556) FY2011 297 221 85 40 86 477 (680) 40 (640) FY2012E 524 253 (124) 27 173 453 (300) 27 (273) FY2013E 541 255 54 29 179 642 (50) (50) 29 (71)
KEY RATIOS
January 2012
155
Cement
RATING 52 WEEK HIGH / LOW MARKET CAP (` CR) ` LIQUIDITY BUY 57/36 538 LOW
JK Lakshmi Cement
JK Lakshmi Cement (JKLC) is a mid-size cement company with current total capacity of 4.75mtpa spread across Rajasthan (4.2mtpa) and Gujarat (0.5mtpa). The company is looking forward to increase its total capacity to 5.3mtpa, by commissioning a 0.55mtpa split grinding unit at Jhajjar in Haryana by March 2012. The company also has plans to set up a 2.7mtpa green field plant at Durg in Chhattisgarh by March 2013, taking its total capacity to 8.0mtpa.
Structural Snapshot
Growth opportunity: JKLC's major market is north India, which expects capacity addition at a CAGR of only 2.0% over FY2012-13E, as against modest expected growth in demand, at a CAGR of 6.7%, which is expected to slightly improve utilizations for the capacities operating in the region. Competitive position: The company controls only 7% of the total capacity of Rajasthan and Gujarat (69.5mtpa as of FY2011) and faces tough competition from some 15 odd players in these states. Nature of business: Cyclical; Low entry barriers for new players.
STOCK RETURNS (%) JKLC SENSEX 3M 1Y 3Y 21.3 5Y 3.3 10Y 17.3 6.4 (15.3) (2.6) (12.3) 29.2 (13.4) 22.9
FINANCIAL PERFORMANCE OVERVIEW (%) SALES GROWTH* PAT GROWTH* OPM# ROE# 3M 1Y 3Y 6.0 22.3 19.0 5Y (2.2) 25.3 32.7 10Y 33.1 (11.5) 11.6 13.9 3.9 17.7 14.0 19.6 19.3

Rising captive power usage to improve profitability: JKLC has a power purchase tie-up with VS Lignite for 21MW power for the next 20 years at `3.2/unit (closer to its captive power cost) in addition to its current total captive power capacity of 66MW, which has been expanded recently by 30MW. Thus, effectively the company has access to 87MW of cheaper power, which is more than sufficient for its current capacity. Strong balance sheet: As of September 2011, JKLC's debt stood at `997cr, of which `94cr was on account of deferred sales tax (interest free). The company's cash and investments stand at `550cr. Thus, JKLC's balance sheet is well placed, with net debt/equity at 0.33x, which will help the company to leverage, if required, for its current (Durg plant) as well as future expansion plans. Unfavorable plant locations to affect profitability: JKLC has 79% of its total capacities in Rajasthan, which is state-wise India's second biggest capacity cluster with 44.8mtpa of total capacity in FY2011. Capacities in Rajasthan face huge demand-supply gap even after catering to surplus demand of nearby supply-deficit states (Haryana, Punjab, NCR, Chandigarh and UP), apart from meeting its own demand. Current valuation: JKLC is trading at cheap valuations in terms of replacement cost (EV/tonne of US$35 on current capacity and US$23 on FY2013E capacity), even after considering its presence in unfavourable locations. Hence, we maintain our Buy recommendation on the stock with a target price of ` 51.
12.1 (82.9) (41.6)
156
January 2012

BALANCE SHEET
Y/E MARCH (` CR) ` SOURCES OF FUNDS EQUITY SHARE CAPITAL RESERVES& SURPLUS SHAREHOLDERS FUNDS TOTAL LOANS DEFERRED TAX LIABILITY TOTAL LIABILITIES APPLICATION OF FUNDS GROSS BLOCK LESS: ACC. DEPRECIATION NET BLOCK CAPITAL WORK-IN-PROGRESS INVESTMENTS CURRENT ASSETS CURRENT LIABILITIES NET CURRENT ASSETS MIS. EXP. NOT WRITTEN OFF TOTAL ASSETS 1,904 841 1,063 182 481 666 357 309 2,035 2,319 938 1,381 74 528 554 367 188 2,171 2,469 1,036 1,432 624 128 537 396 141 2,325 2,469 1,140 1,329 1,274 128 704 482 222 2,953 61 960 1,021 922 92 2,035 61 985 1,046 1,017 107 2,171 61 1,039 1,101 1,117 107 2,325 61 1,117 1,178 1,667 107 2,953 FY2010 FY2011 FY2012E FY2013E
% CHG
21.7
1066 425
(11.5)
1136 183
12.4
1238 245
18.1
1450 301
(% OF NET SALES)
28.5
80 55 35
13.9
85 60 21
16.5
99 85 35
17.2
104 108 38
(% OF PBT)
RECURRING PBT
10.5
324
35.3
60
36.4
96
29.9
127
% CHG
43.1
(6) 331 90
(81.6)
60 20
61.0
96 24
31.6
127 32
(% OF PBT)
27.1
241 235
32.9
40 40
25.0
72 72
25.0
95 95
% CHG
BASIC EPS (`) `
31.4
19.2
(82.9)
3.3
80.0
5.9
31.6
7.8
% CHG
31.4
(82.9)
80.0
31.6
CASH FLOW STATEMENT

Y/E MARCH (` CR) ` PROFIT BEFORE TAX DEPRECIATION CHANGE IN WORKING CAPITAL LESS: OTHER INCOME DIRECT TAXES PAID CASH FLOW FROM OPERATIONS (INC.)/ DEC. IN FIXED ASSETS (INC.)/ DEC. IN INVESTMENTS OTHER INCOME CASH FLOW FROM INVESTING ISSUE OF EQUITY INC./(DEC.) IN LOANS DIVIDEND PAID (INCL. TAX) OTHERS CASH FLOW FROM FINANCING INC./(DEC.) IN CASH OPENING CASH BALANCES CLOSING CASH BALANCES 219 36 (54) 238 (107) 327 220 96 18 (12) 90 (148) 220 72 100 18 82 (46) 72 26 550 18 532 50 26 76 FY2010 331 80 (45) 35 90 241 (228) (392) 35 (585) FY2011 60 85 (8) 21 20 96 (307) (47) 21 (334) FY2012E 96 99 0 35 24 136 (700) 400 35 (265) FY2013E 127 104 (31) 38 32 130 (650) 38 (612)
KEY RATIOS
January 2012
157
158
January 2012
FMCG
COVERAGE
Companies ITC H UL Nestle Asian Paints Dabur Colgate GCPL GSKCHL Marico TGBL Britannia CMP (`) ` 209 392 4,077 2,728 97 967 399 2,486 152 94 451 Target (`) ` Reco - Neutral - Neutral - Neutral - Neutral 110 430 Accu. Accu. - Neutral - Neutral - Neutral 102 495 Accu. Accu.
NEUTRAL
Positives priced in
FMCG Index has outperformed the broader markets by 31% in the past one year, with industry stalwarts HUL and ITC leading the outperformance by 31% and 17%, respectively. Most stocks touched their all-time highs during the past year on the back of steady top-line growth and earnings growth. Also, with a hoard of uncertainties surmounting the local as well as global economies, the defensive nature of the stocks played out well towards their outperformance. Low consumption Key to growth: Consumption in many categories with high growth rates is still very low in urban India (like penetration of deodorants at ~6%, skin creams at ~30% and noodles at ~21%). In rural India, penetration of these products is even lower. With rising income levels and changing consumer behavior in the country, consumer spending on branded FMCG products is set to rise. Also, growth in modern retail (currently contributing ~6% to FMCG sales) offers scope for further growth. Premium product offerings A trump card for growth: FMCG companies see a vast scope for premium products in light of changing consumer lifestyles, urbanization, higher disposable income and increasing awareness. Most FMCG companies have introduced premium products, which come with health and wellness benefits and cater to specific needs of consumers. We believe companies will be able to garner higher margins and profitability in the long run, as acceptability to such products gains traction. Distribution strength and expansion to drive growth: Most FMCG companies in the past few years have been ramping up their distribution to reach the large untapped domestic population. HUL has a direct reach to almost 1.5mn outlets and indirect reach to 6.5mn outlets. Marico and Godrej indirectly reach to ~3mn outlets, while Nestle and Colgate have a reach to more than 4mn outlets. Nestle and Asian Paints are in the process of expanding their capacities to cater to the growing demand for their products. Companies looking for growth opportunities outside India: Intense competition in categories such as soaps and detergents, personal care and other homecare products has motivated many FMCG companies to scout for growth opportunities overseas. Dabur, GCPL Marico and TGBL have been very aggressive in their expansion plans overseas. These companies are present in various developing countries in the Latin American, Southeast Asian and MENA regions. Though there are advantages of overseas expansion, companies are also subject to various risks such as currency fluctuations, political and economic instability, and execution and integration risks. Outlook and valuation: FMCG Index has outperformed the broader markets by 31% in the past one year, with industry stalwarts HUL and ITC leading the outperformance by 31% and 17%, respectively. Our FMCG universe is trading at 25x FY2013E earnings against its historical median of 23x (upper end of the range 19-26x). In terms of valuations, the sector is trading at ~80% premium to Sensex P/E, against its historical premium of ~50%. Though we remain positive on the long-term domestic consumption story, we believe all the above-mentioned positives are already factored in and, hence, we maintain our Neutral stance on the sector. Further, we believe as valuations for companies in the sector are at their highs, any further upside would be a function of a positive surprise in a company's earnings growth. That said, we remain positive on select companies that offer products where penetration level is low and at the same time profitability is high such as Dabur, Britannia and TGBL.
January 2011
159
FMCG
The Indian FMCG industry in FY2010 stood at `1,30,000cr, contributing 2.2% to the country's GDP. In the past five years, the industry has grown at ~2x the country's GDP. According to a report by Booz & Company, the industry is expected to report a 12% CAGR and become a `4,00,000cr industry by 2020. Further, the industry is set for a paradigm shift with increasing income levels (both urban and rural India) and changing consumer behavior as its key growth drivers.
Exhibit 2: FMCG sales growth trajectory in the past 10 years

Product category Shampoos Utensils Cleaners Talcum Powder Soft Drinks Skin cream Chocolates Baby Food Ice-cream Coffee Noodles Malt based beverages Floor cleaner Toilet cleaner Ketchup Breakfast cereals Baby oils Milk powder Rural (%) 46 17 25 12 19 7 5 9 8 2 10 2 2 3 1 2 3 1 Urban (%) 62 59 48 37 30 28 28 25 23 21 20 18 16 15 10 8 7 6 Benefitting Companies HUL, P&G, Dabur HUL, Jyothy Labs, GCPL Dabur HUL, Dabur, Marico Nestle Nestle HUL HUL, Nestle HUL, ITC, Nestle, GSK GSK HUL, GCPL HUL, GCPL Nestle, HUL Britannia, Dabur Nestle HUL
Exhibit 1: FMCG sales growth trajectory in the past 10 years

140,000 120,000 100,000
(` cr)
80,000 60,000 40,000 20,000 0

FY04 FY06 FY08 FY09 FY01 FY02 FY03 FY05 FY10 FY07
Deodorants
Home care Nature of competition

From unorganized players: In categories like biscuits, hair oil, soaps and skin creams, the market is fragmented as infrastructure is poor and limits the penetration of MNCs and national players in rural areas. Also, low brand awareness and spurious and duplicate products are a threat to organized players in these categories. Among organized players (Domestic): The competitive scenario is high in many categories. FMCG companies have always been in the limelight for their strategies towards competition, be it price war between HUL and P&G or Coke and Pepsi; or their innovative marketing strategies. Among organized players (International): International companies are launching products in the domestic market, thus posing competition to domestic players. For instance, Unilever launched Sure; GSKCH launched Lucozade; ITC launched Lucky Strikes (a product of its global shareholder, British American Tobacco). Inorganic expansion to fill the portfolio gap: GCPL's acquisition of Issue, Megasari and GSL; Marico's acquisition of Code10; Dabur's acquisition of Hobi and Namaste Group. Various products under this category such as laundry bars, mosquito repellents, dish washing cleaners and surface cleaners are available in various variants and have a vast presence in the unorganized market. Most of these products are available at low price points, giving low margins to players operating in the segment; however, products such as air care and electric variants of mosquito repellents are premium-price products. In terms of opportunity, due to the low penetration of most of these products, these segments offer a number of opportunities to grow upon volumes and increased acceptability in the market.
Personal care
Under this category, products such as soaps, shampoos, toothpastes and hair oil are available in many variants, across various price points. Use of these products is not affected by any economic condition. These are mass products and have limited volume growth opportunities; however, sales of these products are least affected by inflation. On the other hand, products such as skin care and cosmetics have comparatively low penetration in India, even when these are available at various price points. All these are expanding segments and offer companies attractive opportunities to tap on. In personal care, deodorants have the lowest penetration, even when many variants are available, and pricing varies from brand to brand. Thus, deodorant offers a great potential to enhance volume growth.
Penetration levels indicate lot of headroom

We believe companies that have underpenetrated products in rural and urban India will grow at a faster pace compared to companies that have highly penetrated products.
Packaged goods
Penetration level is low in the packaged goods category as compared to home and personal care categories. The packaged goods category witnesses high competition in products such as biscuits, chocolates, ice cream and edible oil due to availability of variants across various price points and presence of the unorganized market. All these are mass products and offer attractive volume growth opportunities. Other products such as soups, noodles, malt-based beverages and snack bars are all niche category products with limited acceptability in the market due to premium pricing. Volume growth of these products as such
160
January 2012
FMCG
does not get affected in any economic condition, as targeted consumers do not face any financial crunches. Also, the small size of these segments ensures modest volume growth.
Exhibit 3: One-year forward P/E

4,500,000 4,000,000 3,500,000
(M Cap)
3,000,000 2,500,000 2,000,000 1,500,000 1,000,000 500,000 0

Sep-06 Mar-08 Dec-08 Sep-09 Mar-05 Dec-05 Jun-10 Mar-11 Dec-11 Jun-07
Outlook and valuation

Consumption in many categories with high growth rates is still very low in urban India (like penetration of deodorants at ~6%, skin creams at ~30% and noodles at ~21%). In rural India, penetration of these products is even lower. With rising income levels and changing consumer behavior in the country, consumer spending on branded FMCG products is set to rise. Also, growth in modern retail (currently contributing ~6% to FMCG sales) offers scope for further growth. FMCG Index has outperformed the broader markets by 31% in the past one year, with industry stalwarts HUL and ITC leading the outperformance by 31% and 17%, respectively. Our FMCG universe is trading at 25x FY2013E earnings against its historical median of 23x (upper end of the range 19-26x). In terms of valuations, the sector is trading at ~80% premium to Sensex P/E, against its historical premium of ~50%. Though we remain positive on the long-term domestic consumption story, we believe all the above-mentioned positives are already factored in and, hence, we maintain our Neutral stance on the sector. Further, we believe as valuations for companies in the sector are at their highs, any further upside would be a function of a positive surprise in a company's earnings growth. That said, we remain positive on select companies that offer products where penetration level is low and at the same time profitability is high such as Dabur, Britannia and TGBL.
Mcap
15x
18x
21x
24x
27x
Exhibit 4: Our FMCG universe P/E trends

33 31 29 27
(P/E)
25 23 21 19 17 15
Mar-08
Dec-08
Dec-05
Sep-09
Mar-05
Jun-10
Mar-11
P/E
Median
15th percentile
85th percentile

Company Reco Mcap (` cr) ` ITC HUL Nestle* Asian Paints Dabur Colgate GCPL GSKCHL* Marico TGBL Britannia Neutral Neutral Neutral Neutral Accumulate Neutral Accumulate Neutral Neutral Accumulate Accumulate 162,824 84,625 39,310 26,168 16,830 13,151 12,907 10,456 9,339 5,807 5,384 CMP (` ) ` 209 392 4,077 2,728 97 967 399 2,486 152 94 451 TP (`) ` 110 430 102 495 Upside (%) 14 8 9 10 P/E (x) FY12E 28.1 33.4 40.2 26.6 25.3 30.0 24.1 30.1 30.7 17.3 29.2 FY13E 23.7 29.4 33.2 21.6 21.2 25.6 18.5 25.3 23.9 13.6 20.0 EV/Sales (x) FY12E 6.2 3.7 5.1 2.7 3.3 4.9 3.2 3.5 2.5 0.8 1.1 FY13E 5.2 3.2 4.2 2.3 2.8 4.2 2.5 2.9 2.1 0.7 0.9 RoE (%) FY12E 33.8 87.7 91.3 39.6 43.1 111.6 36.6 32.6 29.9 8.4 37.8 FY13E 34.2 85.1 73.8 38.3 42.0 108.1 29.4 31.8 29.0 10.2 46.0 CAGR # Sales 17.6 12.7 20.2 17.3 20.5 14.9 22.9 17.3 17.8 9.0 17.5 EPS 17.4 17.2 20.2 19.8 18.2 12.9 20.2 17.5 28.2 42.3 36.0
Source: Company, Angel Research; Note: * December year end
January 2012
Dec-11
Sep-06
Jun-07
161
FMCG
ITC
Company Background
ITC is a diversified conglomerate, present across various categories cigarettes (60% of revenue); hotels (3% of revenue); paperboards and packaging (9% of revenue); agri-business (14% of revenue); and other FMCG (branded apparel, personal care, stationery, safety matches and specialty papers; 14% of revenue). Although ITC is a market leader in the cigarettes category, it is rapidly gaining market share even in its evolving businesses of packaged foods and confectionery, branded apparel, personal care and stationery.
Structural Snapshot
Growth opportunity: In the ~ `24,000cr cigarette industry in India, ITC has a 73% volume and 82% revenue market share, where volume growth has been on an average at ~2% in the last decade. We believe cigarette consumption in India will continue to grow at this average. Cigarettes generate ~65% of ITC's gross revenue and 81% of operating profit. Also, the branded packaged food industry (reporting a ~19% CAGR currently) accounts for 52% of the overall FMCG market, providing a huge market potential to be captured. Competitive position: ITC is a leader in the cigarettes category with 73% volume and 82% revenue market share; ~5% market share in soaps. Nature of business: Defensive; Diversified branded business.
STOCK RETURNS (%) ITC BSE FMCG SENSEX 3M 0.8 2.5 1Y 20.0 13.4 3Y 36.1 27.7 21.3 5Y 16.1 3.3 10Y 16.2 17.3 19.7 24.4
(2.6) (12.3)
NOTE: * ABOVE 1 YEAR ON CAGR BASIS
FINANCIAL PERFORMANCE OVERVIEW (%) SALES GROWTH* PAT GROWTH* OPM# ROE# 3M 20.5 21.5 35.3 1Y 16.6 22.8 33.8 33.2 3Y 15.0 16.6 32.8 29.3 5Y 16.7 16.7 32.5 10Y 17.6 17.2 27.1

Cigarettes to grow by double digits and post impressive EBIT margin: We believe the cigarette business is well poised to post double-digit sales and EBIT growth in FY2013E. The company has taken prices hikes in brands such as Classic, Navy Cut and Gold Flake. Non-cigarette FMCG to register a ~20% CAGR over FY2011-13E: While cigarettes remain the main profit center for the company, investments in non-cigarette businesses such as FMCG, hotels and paperboards have started yielding positive results. Over FY2011-13E, we expect non-cigarette EBIT to register a ~20% CAGR, aided by 1) reduction in non-cigarette FMCG losses (likely breakeven in FY2013); 2) improvement in hotel margins, aided by higher ARRs and uptick in the economy; and 3) higher margins in the paperboards and packaging business. Valuation: At the CMP of `209, the stock is trading at 23.7x FY2013E EPS. We recommend Neutral on the stock with a fair value of ` 219, based on our SOTP valuation.
28.6 28.2
ANGEL ESTIMATES PARTICULARS PAT GROWTH (%) ROE (%) P/ E FY2012E 16.3 33.8 28.1 FY2013E 18.6 34.2 23.7
162
January 2012

Y/E MARCH (` CR) ` NET SALES TOTAL OPERATING INCOME % CHG TOTAL EXPENDITURE EBITDA FY2010 18,153 18,153 16.3 12,079 6,074 FY2011 21,168 21,168 16.6 14,014 7,153 FY2012E 24,706 24,706 16.7 16,319 8,388 FY2013E 29,294 29,294 18.6 19,290 10,004
BALANCE SHEET
Y/E MARCH (` CR) ` SOURCES OF FUNDS EQUITY SHARE CAPITAL PREFERENCE CAPITAL RESERVES& SURPLUS SHAREHOLDERS FUNDS TOTAL LOANS DEFERRED TAX LIABILITY TOTAL LIABILITIES APPLICATION OF FUNDS GROSS BLOCK 11,968 3,825 8,142 1,009 5,727 8,143 8,064 79 14,957 12,766 4,421 8,345 1,333 5,555 10,203 8,582 1,621 16,854 14,900 5,135 9,765 1,192 6,240 11,112 8,443 2,670 19,867 17,667 5,905 11,762 1,413 6,875 12,659 9,371 3,287 23,337 382 13,683 14,064 108 785 14,957 774 15,179 15,953 99 802 16,854 780 17,571 18,350 77 802 19,229 780 21,035 21,814 57 802 22,673 FY2010 FY2011 FY2012E FY2013E

EBIT
25.0 33.5
5,465
17.8 33.8
6,497
17.3 34.0
7,674
19.3 34.2
9,233

RECURRING PBT
26.8 30.1
6,015
18.9 30.7
7,268
18.1 31.1
8,479
20.3 31.5
LESS: ACC. DEPRECIATION 10,052 NET BLOCK CAPITAL WORK-IN-PROGRESS GOODWILL INVESTMENTS CURRENT ASSETS CURRENT LIABILITIES NET CURRENT ASSETS MIS. EXP. NOT WRITTEN OFF TOTAL ASSETS
% CHG
TAX (% OF PBT) ADJ. PAT
24.7
1,954 32.5 4,061
20.8
2,281 31.4 4,988
16.7
2,679 31.6 5,799
18.6
3,177 31.6 6,876

` ADJ. EPS (`)
24.4 22.4
5.2
22.8 23.6
6.4
16.3 23.5
7.4
18.6 23.5
8.8
% CHG
24.4
22.8
16.3
18.6
CASH FLOW STATEMENT

Y/E MARCH (` CR) ` PROFIT BEFORE TAX DEPRECIATION CHANGE IN WORKING CAPITAL INTEREST / DIVIDEND (NET) DIRECT TAXES PAID OTHERS CASH FLOW FROM OPERATIONS (INC.)/ DEC. IN FIXED ASSETS (INC.)/ DEC. IN INVESTMENTS CASH FLOW FROM INVESTING ISSUE OF EQUITY INC./(DEC.) IN LOANS DIVIDEND PAID (INCL. TAX) INTEREST / DIVIDEND (NET) CASH FLOW FROM FINANCING INC./(DEC.) IN CASH OPENING CASH BALANCES CLOSING CASH BALANCES
KEY RATIOS
FY2011 7,268 656 5 (336) 2,281 (25) 5,287 (1,122) 172 (950) 904 (9) 4,452 (336) (3,220) 1,117 1,126 2,243 FY2012E 8,479 714 (750) (395) 2,679 5,368 (1,993) (685) (2,678) 6 (22) 3,403 (395) (3,024) (340) 2,243 1,910 FY2013E 10,052 770 (671) (414) 3,177 6,562 (2,988) (635) (3,623) (20) 3,412 (414) (3,018) (79) 1,910 1,831 Y/E MARCH VALUATION RATIO (X) P/E (ON FDEPS) P/CEPS P/BV 40.1 17.1 5.7 4.8 8.5 25.5 32.6 28.6 10.1 2.1 7.3 21.5 28.1 25.0 8.9 1.8 6.2 18.3 23.7 21.3 7.5 1.8 5.2 15.3 FY2010 FY2011 FY2012E FY2013E
FY2010 6,015 609 291 (267) 1,954 206 4,901 (1,204) (2,889) (4,093) 721 (70) 1,630 (267) (712) 95 1,031 1,126
DIVIDEND YIELD (%) EV/SALES EV/EBITDA PER SHARE DATA (`) ` EPS (BASIC) EPS (FULLY DILUTED) CASH EPS DPS BOOK VALUE RETURNS (%) ROCE ANGEL ROIC (PRE-TAX) ROE TURNOVER RATIOS (X) INVENTORY / SALES (DAYS) RECEIVABLES (DAYS) PAYABLES (DAYS)
5.2 5.2 12.2 10.0 36.8
6.4 6.4 7.3 4.5 20.6
7.4 7.4 8.4 3.8 23.5
8.8 8.8 9.8 3.8 28.0
36.8 50.2 29.2
40.8 57.3 33.2
41.8 55.3 33.8
42.7 56.4 34.2
91 18 71
91 16 77
83 17 72
81 17 72
January 2012
163
FMCG
RATING 52 WEEK HIGH / LOW MARKET CAP (` CR) ` LIQUIDITY NEUTRAL 420/265 84,625 HIGH
HUL
Company Background
SHAREHOLDING PATTERN (%) PROMOTERS (UNILEVER) FII 52.5 18.7
HUL, a 52% subsidiary of Unilever, is one of India's largest consumer goods companies. HUL is present across four main product categories 1) soaps and detergents (45% of revenue); 2) personal products (mainly shampoos, skin care and toothpaste; 30% of revenue); 3) beverages (mainly tea and coffee; 12% of revenue); 4) packaged foods and ice cream (6% of revenue); and 5) others, mainly consisting of water purifiers. The company, with its iconic brands such as Lux, Lifebuoy, Surf Excel, Rin, Wheel, Fair & Lovely, Pond's, Vaseline, Lakm, Dove, Clinic Plus, Sunsilk, Pepsodent, Closeup, Axe, Brooke Bond, Bru, Knorr, Kissan and Walls, has a vast presence in rural as well as urban Indian markets, with one of the largest distribution networks spanning over 6.3mn retail outlets.
STOCK RETURNS (%) HUL BSE FMCG SENSEX 3M 18.1 2.5 1Y 30.6 13.4 3Y 15.6 27.7 21.3 5Y 12.4 16.1 3.3 10Y 6.5 16.2 17.3
Growth opportunity: According to industry sources, penetration of the soaps and detergent segment is pegged at ~98% in India, offering little room for growth. HUL is now increasing its focus in product categories with low penetration, such as the skin care (estimated penetration level at~30% in urban India and ~19% in rural India). Competitive position: HUL has ~45% value share of the toilet soaps market, with its key brands Lux, Lifebuoy, Hamam, Breeze, Pears, Dove and Liril. In detergents, the company has ~37% value share of the detergents market, with its four key brands - Surf, Rin, Wheel and Sunlight. The company is a leader in tea (Brooke Bond and Lipton) and coffee (Bru) and other packaged foods like Annapurna (atta and salt), Kissan (Ketchups and Jams) and Knorr (soups, meals and noodles). Nature of business: Defensive sector; Branded business.
Structural Snapshot
(2.6) (12.3)
27.0 23.3
ANGEL ESTIMATES PARTICULARS PAT GROWTH (%) ROE (%) P/E FY2012E 20.6 87.7 33.4 FY2013E 13.7 85.1 29.4

Increasing innovation and brand repositioning to accelerate growth: HUL has been re-launching products from its existing brands and has increased the pace of new launches, targeting the mid/premium market segment. For the S&D and personal products segments, we model in revenue CAGRs of 8.5% and 15.7% and expect margin to come in at ~12% and ~25%, respectively, over FY2011-13E. Healthy domestic growth rates and strong balance sheet provide further impetus: HUL is a cash-rich, zero-debt company enjoying high RoE of ~75%. We have modeled in a recurring earnings CAG R of ~17% over FY2011-13E, though we expect the company's margin to be under pressure due to high input cost inflation. Rich valuations: The stock is trading at rich valuations of ~30x FY2013E EPS against its five-year historical valuations of 24x. We see limited upside in the stock at these levels and continue to maintain our Neutral rating on the stock.
164
January 2012

Y/E MARCH (` CR) ` NET SALES TOTAL OPERATING INCOME FY2010 17,524 17,524 FY2011 19,401 19,401 FY2012E 21,886 21,886 FY2013E 24,662 24,662
BALANCE SHEET
Y/E MARCH (` CR) ` SOURCES OF FUNDS EQUITY SHARE CAPITAL RESERVES& SURPLUS SHAREHOLDERS FUNDS TOTAL LOANS DEFERRED TAX LIABILITY TOTAL LIABILITIES APPLICATION OF FUNDS GROSS BLOCK 3,582 1,420 2,162 274 1,264 5,368 6,733 (1,365) 2,335 3,760 1,590 2,169 299 1,261 6,095 7,400 (1,305) 2,424 4,241 1,828 2,413 424 1,761 6,561 8,223 (1,663) 2,935 4,779 2,096 2,683 478 2,261 7,067 9,074 (2,007) 3,415 218 2,365 2,584 (249) 2,335 216 2,418 2,634 (210) 2,424 216 2,929 3,145 (210) 2,935 216 3,408 3,624 (210) 3,415 FY2010 FY2011 FY2012E FY2013E
% CHG
(13.4)
14,975 2,548
10.7
17,036 2,365
12.8
18,911 2,975
12.7
21,202 3,460

EBIT
(4.1) 14.5
2,364
(7.2) 12.2
2,144
25.8 13.6
2,737
16.3 14.0
3,192

RECURRING PBT
(3.9) 13.5
2,707
(9.3) 11.1
2,730
27.7 12.5
3,290
16.6 12.9
LESS: ACC. DEPRECIATION 3,767 NET BLOCK CAPITAL WORK-IN-PROGRESS GOODWILL INVESTMENTS CURRENT ASSETS CURRENT LIABILITIES NET CURRENT ASSETS TOTAL ASSETS
% CHG
PBT (REPORTED) TAX
(10.5)
2,806 604
0.9
2,937 631
20.5
3,290 757
14.5
3,767 885
(% OF PBT)
ADJ. PAT
22.3
2,103
23.1
2,099
23.0
2,534
23.5
2,881
(% OF NET SALES)
` ADJ. EPS (`)
12.6
9.6
11.9
9.7
11.6
11.7
11.7
13.3
% CHG
(16.0)
0.9
20.6
13.7
CASH FLOW STATEMENT

Y/E MARCH (` CR) ` PROFIT BEFORE TAX DEPRECIATION CHANGE IN WORKING CAPITAL INTEREST / DIVIDEND (NET) DIRECT TAXES PAID OTHERS CASH FLOW FROM OPERATIONS (INC.)/ DEC. IN FIXED ASSETS (INC.)/ DEC. IN INVESTMENTS CASH FLOW FROM INVESTING ISSUE OF EQUITY INC./(DEC.) IN LOANS DIVIDEND PAID (INCL. TAX) INTEREST / DIVIDEND (NET) CASH FLOW FROM FINANCING INC./(DEC.) IN CASH OPENING CASH BALANCES CLOSING CASH BALANCES FY2010 2,707 184 1,375 (117) 604 (67) 3,477 (502) (931) (1,434) 32 (422) 1,656 (117) (1,929) 115 1,777 1,892 FY2011 2,730 221 (242) (190) 631 (416) 1,472 (203) 3 (199) (73) 1,642 (190) (1,525) (252) 1,892 1,640 FY2012E 3,290 238 896 (168) 757 26 3,526 (607) (500) (1,107) 0.2 2,023 (168) (1,855) 565 1,640 2,205 FY2013E 3,767 268 281 (184) 885 11 3,257 (592) (500) (1,092) 2,402 (184) (2,218) (52) 2,205 2,153
KEY RATIOS
Y/E MARCH VALUATION RATIO (X) P/E P/CEPS P/BV DIVIDEND YIELD (%) EV/SALES EV/EBITDA EV / TOTAL ASSETS PER SHARE DATA (`) ` EPS (BASIC) EPS (FULLY DILUTED) CASH EPS DPS BOOK VALUE RETURNS (%) ROCE (PRE-TAX) ANGEL ROIC (PRE-TAX) ROE TURNOVER RATIOS (X) INVENTORY / SALES (DAYS) RECEIVABLES (DAYS) PAYABLES (DAYS) 45 14 110 53 18 114 46 14 108 46 13 106 103.6 90.5 90.1 80.5 102.1 87.7 100.5 85.1 9.6 9.7 10.6 6.5 12.0 9.7 9.7 10.7 6.5 12.2 11.7 11.7 12.8 8.0 14.6 13.3 13.3 14.6 9.5 16.8 38.8 37.0 32.8 1.7 4.7 32.3 35.2 36.7 36.5 32.1 1.7 4.3 34.9 34.0 33.4 30.5 26.9 2.0 3.7 27.4 27.8 29.4 26.9 23.3 2.4 3.3 23.4 23.7 FY2010 FY2011 FY2012E FY2013E
January 2012
165
FMCG
RATING 52 WEEK HIGH / LOW MARKET CAP (` CR) ` LIQUIDITY NEUTRAL 4,549 / 3,160 39,310 MEDIUM
Nestl
Company Background
CMP/TP/Upside: `4,077 / - / -
Nestl India, a 61.9% subsidiary of its global parent Nestl SA, is one of the largest and most diversified food and beverage (F&B) companies in India. The company's product portfolio in CY2010 comprised milk products and nutrition (~44% of sales), prepared dishes and cooking aids (~27%), chocolates and confectionery (~15%) and beverages (~14%). While Nestl entered the Indian market way back in 1912, when it began as a trading company, its real activity in the country started in 1961 when it set up its first factory at Moga, Punjab, to develop milk. Nestl has seven factories across the country and is now involved in the manufacturing and marketing of a range of quality products across the F&B segment.
STOCK RETURNS (%) NESTL BSE FMCG SENSEX 3M (1.2) 2.5 1Y 11.6 13.4 3Y 40.1 27.7 21.3 5Y 16.1 3.3 10Y 16.2 17.3 29.6 23.5
Structural Snapshot
Growth opportunity: Nestl enjoys a strong position across categories in the F&B space through a diversified portfolio of established brands, including Maggi, Nescaf, Everyday, Kit Kat and Milkmaid. Growth opportunities for the company lay in underpenetrated categories such as instant noodles, value-added dairy products, chocolates and confectionery, which are witnessing an uptrend in consumer demand. Also, changing lifestyles and focus on health and wellness will be the key growth drivers for the company. Competitive position: Nestl is a market leader in baby foods, infant formula, dairy whitener, sweetened condensed milk, instant coffee, wafer and white chocolates, instant noodles and ketchups and No. 2 in healthy soups and chocolates. Nature of business: Defensive sector; Branded business.
(2.6) (12.3)
FINANCIAL PERFORMANCE OVERVIEW (%) SALES GROWTH* PAT GROWTH* OPM# ROE# 3M 19.9 19.5 20.9 1Y 21.9 25.0 20.0 3Y 21.3 24.5 19.7 5Y 10Y 20.4 14.7 21.7 21.1 19.4 18.9
- 114.0
119.3 109.1 93.7

Best play on the emerging growth opportunity in the F&B space: Nestl enjoys a strong position across categories in the F&B space through its diversified portfolio of established brands such as Maggi, Nescaf, Everyday, Kit Kat and Milkmaid. We are particularly bullish on underpenetrated categories such as instant noodles, value-added dairy products, chocolates and confectionery, which are witnessing an uptrend in consumer demand. However, valuations at 155% premium to the Sensex capture full potential: At the CMP, Nestl is trading at ~180% premium to the Sensex, significantly ahead of its five-year average historical premium of ~76%. While Nestl has been able to maintain these premium valuations because of its strong parentage, dominant brands, high RoE and OPM, we believe current valuations capture the full potential of near-term growth. We remain cautious in terms of Nestl being able to maintain this triple-digit premium to the Sensex on account of gross margin pressures due to rising input costs and competition in the high-growth noodles category from HUL, GSKCHL and ITC. Nestl is trading at 33.2x FY2013E EPS, above its historical valuations of 28x. We remain Neutral on the stock.
ANGEL ESTIMATES PARTICULARS PAT GROWTH (%) ROE (%) P/E CY2011E 19.3 91.3 40.2 CY2012E 21.0 73.8 33.2
166
January 2012

Y/E DECEMBER (` CR) ` NET SALES TOTAL OPERATING INCOME CY2009 5,129 5,129 CY2010 6,255 6,255 CY2011E 7,536 7,536 CY2012E 9,040 9,040
BALANCE SHEET
Y/E DECEMBER (` CR) ` SOURCES OF FUNDS EQUITY SHARE CAPITAL PREFERENCE CAPITAL RESERVES& SURPLUS SHAREHOLDERS FUNDS TOTAL LOANS DEFERRED TAX LIABILITY TOTAL LIABILITIES APPLICATION OF FUNDS 96 485 581 32 613 96 759 855 33 889 96 1,189 1,285 33 1,319 96 1,824 1,921 33 1,954 CY2009 CY2010 CY2011E CY2012E
% CHG
18.6
4,095 1,034
21.9
5,005 1,250
20.5
6,053 1,483
19.9
7,244 1,796

EBIT
19.8 20.2
923
20.8 20.0
1,122
18.7 19.7
1,330
21.1 19.9
1,612

RECURRING PBT
19.7 18.0
917
21.5 17.9
1,145
18.5 17.6
1,363
21.2
GROSS BLOCK 1,641 745 896 80 203 857 1,422 (566) 613 1,855 842 1,013 349 151 1,046 1,670 (624) 889 2,217 995 1,222 111 151 1,720 1,884 (165) 1,319 2,659 1,178 1,480 133 151 2,342 2,152 190 1,954
17.8
LESS: ACC. DEPRECIATION 1,650 NET BLOCK CAPITAL WORK-IN-PROGRESS GOODWILL INVESTMENTS CURRENT ASSETS CURRENT LIABILITIES NET CURRENT ASSETS TOTAL ASSETS
% CHG
TAX
19.4
262
21.2
326
18.4
386
21.2
468
(% OF PBT)
ADJ. PAT
27.3
655
28.1
819
28.0
977
28.0
1,182
(% OF NET SALES)
ADJ. EPS (`) `
13.6
67.9
13.4
84.9
13.2
101.3
13.3
122.6
% CHG
22.6
25.0
19.3
21.0
CASH FLOW STATEMENT

Y/E DECEMBER (` CR) ` PROFIT BEFORE TAX DEPRECIATION CHANGE IN WORKING CAPITAL INTEREST / DIVIDEND (NET) DIRECT TAXES PAID OTHERS CASH FLOW FROM OPERATIONS (INC.)/ DEC. IN FIXED ASSETS (INC.)/ DEC. IN INVESTMENTS CASH FLOW FROM INVESTING ISSUE OF EQUITY INC./(DEC.) IN LOANS DIVIDEND PAID (INCL. TAX) INTEREST / DIVIDEND (NET) CASH FLOW FROM FINANCING INC./(DEC.) IN CASH OPENING CASH BALANCES CLOSING CASH BALANCES
KEY RATIOS
CY2010 1,145 128 140 (18) 326 (11) 1,057 (483) 53 (431) 545 (18) (527) 100 156 255 CY2011E 1,363 153 33 (17) 386 7 1,153 (124) (124) 547 (17) (530) 499 255 754 CY2012E 1,650 183 71 (18) 468 1 1,420 (464) (464) 547 (18) (529) 426 754 1,180 Y/E DECEMBER VALUATION RATIO (X) P/E (ON FDEPS) P/CEPS P/BV 60.0 51.3 67.6 1.2 7.6 37.8 48.0 41.5 46.0 1.2 6.2 31.3 40.2 34.8 30.6 1.2 5.2 26.0 33.2 28.8 20.5 1.2 4.3 21.2 CY2009 CY2010 CY2011E CY2012E
CY2009 917 111 131 (13) 262 (14) 871 (206) (168) (375) 547 (13) (534) (38) 194 156
DIVIDEND YIELD (%) EV/SALES EV/EBITDA PER SHARE DATA (`) ` EPS (BASIC) EPS (FULLY DILUTED) CASH EPS DPS BOOK VALUE RETURNS (%) ROCE (PRE-TAX) ANGEL ROIC (PRE-TAX) ROE TURNOVER RATIOS (X) INVENTORY / SALES (DAYS) RECEIVABLES (DAYS) PAYABLES (DAYS)
67.9 67.9 79.5 48.5 60.3
84.9 84.9 98.2 48.5 88.7
101.3 101.3 117.2 48.5 133.3
122.6 122.6 141.7 48.5 199.2
164.3 250.4 124.2
149.4 219.0 114.0
120.5 213.6 91.3
98.5 224.0 73.8
35 5 42
34 4 44
34 5 43
34 5 43
January 2012
167
FMCG
Asian Paints
Company Background
CMP/TP/Upside: `2,728/ - / -
Asian Paints (APL) is India's largest paints company, with a market share of ~50%. The company is mainly present in the decorative segment, which contributes over 75% to its sales. The company features among the top 10 decorative paint players globally. APL has a large distribution network of around 25,000 dealers and 18,000 'Colour World' outlets. The company's international revenue comes from countries in the Caribbean, Middle East, South Pacific and Asian regions.
Structural Snapshot
Growth opportunity: The paint industry's volume growth rate is pegged at 1.5-2x India's GDP growth. Increasing income levels and strong demand for decorative paints and premium products will be the key growth drivers for companies with a strong brand presence and a widespread distribution network. Also, shift from the unorganized to the organized sector will be a growth trigger for the paint industry. As per capita consumption increases from the current estimated 1-1.5kg, large companies, like APL, are expected to continue to deliver strong revenue growth. Competitive position: APL is the market leader in the paints industry, with a market share of over 50% in terms of volumes, followed by Berger Paints, Nerolac and Akzo Nobel. With 20,000 Colour World stores in India, the company has an added competitive advantage over its competitors. Nature of business: Branded business; High entry barriers; Relatively cyclical when compared to peers in the FMCG sector.
STOCK RETURNS (%) APL BSE FMCG SENSEX 3M (12.8) 2.5 1Y 2.0 13.4 3Y 43.3 27.7 21.3 5Y 16.1 3.3 10Y 16.2 17.3 27.8 31.3
(2.6) (12.3)
(3.6) 23.1 44.6 32.0

Uncertainty over demand conditions hover: Although APL has not witnessed any slowdown in demand for paints, we do not expect growth to be as robust considering the price hikes (~12% yoy). Also, due to the slowdown in the current environment, we expect demand for paints to remain sluggish. Margin pressure to continue: We expect APL to sustain its OPM at ~17% in FY12E and do not expect it to witness any improvement in gross margin and operating margin in the remaining quarters. The company has been facing raw-material cost pressure since many quarters. Management maintains that price of TiO2 is very high and is not expected to witness a decline so soon. Currently, TiO2 price is higher by over 40% yoy. Sluggishness in the international business: APL's international business has been sluggish for a few quarters now. We do not expect any positive surprises on this front, as a number of uncertainties prevail in many countries where the company operates. Valuation: At the CMP, the stock is trading at 21.6xFY2013E EPS against its five-year historical average valuations of 20x. We believe the stock is richly valued and offers limited upside from the CMP. We wait for better entry opportunities and, hence, remain Neutral on the stock.
ANGEL ESTIMATES PARTICULARS PAT growth (%) RoE (%) P/E FY2012E 16.6 39.6 26.6 FY2013E 23.2 38.3 21.6
168
January 2012

BALANCE SHEET
Y/E MARCH (` CR) ` SOURCES OF FUNDS EQUITY SHARE CAPITAL PREFERENCE CAPITAL RESERVES& SURPLUS SHAREHOLDERS FUNDS MINORITY INTEREST TOTAL LOANS DEFERRED TAX LIABILITY TOTAL LIABILITIES APPLICATION OF FUNDS 96 1,614 1,710 94 229 56 2,090 96 2,092 2,187 110 235 85 2,617 96 2,682 2,778 121 180 85 3,164 96 3,444 3,540 122 125 85 3,872 FY2010 FY2011 FY2012E FY2013E
% CHG
22.3
5,454 1,227
15.3
6,393 1,313
18.0
7,550 1,542
16.7
8,743 1,865

EBIT
83.2 18.4
1,144
7.0 17.0
1,200
17.5 17.0
1,415
20.9 17.6
1,723

RECURRING PBT
92.0 17.1
1,256
4.9 15.6
1,260
17.9 15.6
1,486
21.8 16.2
GROSS BLOCK 1,815 LESS: ACC. DEPRECIATION NET BLOCK CAPITAL WORK-IN-PROGRESS GOODWILL INVESTMENTS CURRENT ASSETS CURRENT LIABILITIES NET CURRENT ASSETS TOTAL ASSETS
1,500 628 873 407 37 624 1,844 1,695 149 2,090
1,988 715 1,273 43 37 922 2,319 1,977 342 2,617
2,152 842 1,310 323 37 922 2,741 2,168 572 3,164
2,357 984 1,374 354 37 922 3,625 2,440 1,186 3,872
% CHG
TAX
102.4
373
0.3
379
17.9
453
22.2
554
(% OF PBT)
ADJ. PAT
29.7
836
30.1
843
30.5
983
30.5
1,211
% CHG
(% OF NET SALES) ` ADJ. EPS (`)
107.9
12.5 87.0
1.0
10.9 87.9
16.6
10.8 102.5
23.2
11.4 126.3
% CHG
107.9
1.0
16.6
23.2
CASH FLOW STATEMENT

Y/E MARCH (` CR) ` PROFIT BEFORE TAX DEPRECIATION CHANGE IN WORKING CAPITAL INTEREST / DIVIDEND (NET) DIRECT TAXES PAID OTHERS CASH FLOW FROM OPERATIONS (INC.)/ DEC. IN FIXED ASSETS (INC.)/ DEC. IN INVESTMENTS CASH FLOW FROM INVESTING INC./(DEC.) IN LOANS DIVIDEND PAID (INCL. TAX) INTEREST / DIVIDEND (NET) CASH FLOW FROM FINANCING INC./(DEC.) IN CASH OPENING CASH BALANCES CLOSING CASH BALANCES FY2010 1,256 84 134 (5) 373 12 1,105 (354) (546) (900) (79) 236 (5) (310) (105) 210 105 FY2011 1,260 113 (303) (24) 379 109 776 (123) (298) (421) 5 357 (24) (328) 27 106 133 FY2012E 1,486 127 (184) (18) 453 (104) 855 (444) (444) (55) 393 (18) (430) (19) 133 114 FY2013E 1,815 141 (208) (31) 554 1 1,164 (236) (236) (55) 449 (31) (472) 456 114 570
KEY RATIOS
Y/E MARCH VALUATION RATIO (X) P/E (ON FDEPS) P/CEPS P/BV DIVIDEND YIELD (%) EV/SALES EV/EBITDA PER SHARE DATA (`) ` EPS (BASIC) EPS (FULLY DILUTED) CASH EPS DPS BOOK VALUE RETURNS (%) ROCE (PRE-TAX) ANGEL ROIC (PRE-TAX) ROE TURNOVER RATIOS (X) INVENTORY / SALES (DAYS) RECEIVABLES (DAYS) PAYABLES (DAYS) 52 30 75 62 28 78 56 36 72 56 35 69 61.3 59.3 57.4 51.0 57.4 43.3 49.0 53.3 39.6 49.0 53.1 38.3 87.0 87.0 95.8 27.0 178.3 87.9 87.9 99.7 32.0 228.0 102.5 102.5 115.8 35.0 289.6 126.3 126.3 141.0 40.0 369.1 31.4 28.5 15.3 1.0 3.8 20.9 31.0 27.4 12.0 1.2 3.3 19.3 26.6 23.6 9.4 1.3 2.8 16.4 21.6 19.3 7.4 1.5 2.3 13.3 FY2010 FY2011 FY2012E FY2013E
January 2012
169
FMCG
Dabur
Company Background
CMP/TP/Upside: `97 / `110 / 14%
Dabur is a leading Indian FMCG company, offering products in the hair oil, shampoo, oral care, home care, skin care, foods and healthcare categories. The company has many iconic brands such as Dabur, Vatika, Hajmola, Real and Fem. The company has 17 manufacturing facilities, with a presence in over 60 countries. The company is currently headed by Mr. Sunil Duggal.
SHAREHOLDING PATTERN (%) PROMOTERS (BURMAN GROUP) FII 68.7 19.2
Structural Snapshot
Growth opportunity: Dabur will be one of the major beneficiaries of the Indian consumption story, with ~50% of its revenue generated from rural and semi urban India. Also, with increasing awareness levels among consumers, companies in the health and wellness segment would tend to grow at a faster pace. Dabur, a well-established brand in the fruit juices and health supplements categories, will be one of the major beneficiaries of rural growth and changing consumer preferences. Competitive position: Dabur is a market leader in heavy amla-based oil, with a ~57% market share; Fem is a market leader in bleaches; Dabur is No. 1 in Chywanprash and honey products and No. 2 in glucose. Nature of business: Defensive sector; Branded business.
STOCK RETURNS (%) DABUR BSE FMCG SENSEX 3M (2.5) 2.5 1Y (3.5) 13.4 3Y 28.9 27.7 21.3 5Y 16.1 3.3 10Y 16.2 17.3 11.5 24.3
(2.6) (12.3)

Niche positioning and acquisitions to drive growth: Dabur's niche positioning, based on its ayurvedic/herbal offerings, provides it an attractive and unique proposition in terms of product portfolio. We believe the recent acquisitions will contribute steadily to the company's top-line growth. We model in a 20% CAGR in revenue over FY2011-13E, with the health supplements, baby care, home care and foods segments leading the companys growth. Margin to remain under pressure: We expect Dabur to remain under margin pressure due to increased raw-material prices. Also, due to new product launches, various marketing initiatives and increased competition, the company's ad spends could witness a spike. We have modeled in OPM of ~18% for FY2012E and FY2013E. Acquisition rationale: Acquisitions of Hobi Group and Namaste Group provide Dabur an entry into attractive new markets. Management has stated that these integrations are on track, and the company plans to introduce its core products in international markets. Valuations: At the CMP, the stock is trading at 21.2x FY2013E EPS. We maintain our Accumulate recommendation on the stock with a target price of ` 110.
170
January 2012

BALANCE SHEET
Y/E MARCH (` CR) ` SOURCES OF FUNDS EQUITY SHARE CAPITAL RESERVES& SURPLUS SHAREHOLDERS FUNDS MINORITY INTEREST TOTAL LOANS DEFERRED TAX LIABILITY TOTAL LIABILITIES APPLICATION OF FUNDS GROSS BLOCK 986 339 647 30 264 1,106 920 186 1,129 1,934 435 1,499 43 427 1,853 1,458 395 2,465 2,354 534 1,820 59 377 2,180 1,676 505 2,773 2,691 647 2,044 67 377 2,560 1,932 629 3,129 87 848 935 4 179 11 1,129 174 1,217 1,391 4 1,051 19 2,465 174 1,525 1,699 4 1,051 19 2,773 174 1,910 2,084 4 1,021 19 3,129 FY2010 FY2011 FY2012E FY2013E
% CHG
20.9
2,761 629
20.3
3,323 755
27.0
4,258 922
14.3
4,831 1,089
% CHG
(% OF NET SALES) EBIT
33.7
18.6 573
20.0
18.5 673
22.1
17.8 823
18.1
18.4 976

RECURRING PBT
36.0 16.9
601
17.5 16.5
708
22.2 15.9
832
18.6 16.5
994
% CHG
PBT (REPORTED) TAX (% OF PBT) ADJ. PAT
35.1
599 100 16.7 501
17.8
708 139 19.6 569
17.6
832 166 20.0 666
19.4
994 199 20.0 795
LESS: ACC. DEPRECIATION NET BLOCK CAPITAL WORK-IN-PROGRESS GOODWILL INVESTMENTS CURRENT ASSETS CURRENT LIABILITIES NET CURRENT ASSETS TOTAL ASSETS

ADJ. EPS (`) `
28.1 14.8
2.9
13.4 13.9
3.3
17.0 12.8
3.8
19.4 13.4
4.6
% CHG
28.1
13.4
17.0
19.4
CASH FLOW STATEMENT

Y/E MARCH (` CR) ` PROFIT BEFORE TAX DEPRECIATION CHANGE IN WORKING CAPITAL INTEREST / DIVIDEND (NET) DIRECT TAXES PAID CASH FLOW FROM OPERATIONS (INC.)/ DEC. IN FIXED ASSETS (INC.)/ DEC. IN INVESTMENTS CASH FLOW FROM INVESTING ISSUE OF EQUITY INC./(DEC.) IN LOANS DIVIDEND PAID (INCL. TAX) INTEREST / DIVIDEND (NET) CASH FLOW FROM FINANCING INC./(DEC.) IN CASH OPENING CASH BALANCES CLOSING CASH BALANCES FY2010 601 56 (48) 12 100 510 (134) (104) (238) (14) (51) 151 12 (228) 44 148 192 FY2011 708 82 (135) 10 139 546 (961) (163) (1,124) 872 203 10 659 80 192 272 FY2012E 832 99 182 47 166 935 (436) 50 (386) 357 47 (404) 144 272 416 FY2013E 994 113 (36) 44 199 921 (345) (345) (30) 408 44 (482) 93 540 634
KEY RATIOS
Y/E MARCH VALUATION RATIO (X) P/E (ON FDEPS) P/CEPS P/BV DIVIDEND YIELD (%) EV/SALES EV/EBITDA PER SHARE DATA (`) ` EPS (BASIC) EPS (FULLY DILUTED) CASH EPS DPS BOOK VALUE RETURNS (%) ROCE ANGEL ROIC (PRE-TAX) ROE TURNOVER RATIOS (X) INVENTORY / SALES (DAYS) RECEIVABLES (DAYS) PAYABLES (DAYS) 46 13 50 63 32 64 49 30 62 49 30 62 52.3 51.6 57.1 37.5 34.6 48.9 31.4 29.7 43.1 33.1 33.4 42.0 5.8 2.9 6.4 2.0 10.8 3.3 3.3 3.7 1.2 8.0 3.8 3.8 4.4 1.8 9.8 4.6 4.6 5.2 2.0 12.0 33.6 15.1 9.0 2.1 5.0 26.7 29.6 25.9 12.1 1.2 4.3 23.3 25.3 22.0 9.9 1.8 3.3 18.8 21.2 18.5 8.1 2.1 2.9 15.8 FY2010 FY2011 FY2012E FY2013E
January 2012
171
FMCG
RATING 52 WEEK HIGH / LOW MARKET CAP (` CR) ` LIQUIDITY NEUTRAL 1,085 / 784 13,151 MEDIUM
Colgate
Company Background
Colgate-Palmolive, a 51% subsidiary of Colgate Palmolive Company, U.S., is a leading FMCG player in the Indian oral care market. The oral care segment contributes ~96% to the company's revenue, with the personal care and household care segment contributing the balance. The company, under the Palmolive brandname, is present in the personal care segment.
Structural Snapshot
Growth opportunity: Low per capita consumption of toothpaste in India (127gms/person) as compared to 200+ gms/person in China, Malaysia and Philippines and 500+ gms/person in U.S. presents a key growth opportunity to the company. Further, increasing awareness about personal oral hygiene and higher spends on FMCG products provide a huge growth opportunity to oral care product companies. Competitive position: Colgate enjoys a leadership position in the Indian oral care space, with ~53% market share in toothpaste, ~46% in toothpowder and ~40% in toothbrush categories in volume terms. Nature of business: Defensive sector; Branded business.
STOCK RETURNS (%) COLGATE BSE FMCG SENSEX 3M (3.7) 2.5 1Y 16.8 13.4 3Y 34.7 27.7 21.3 5Y 16.1 3.3 10Y 16.2 17.3 21.5 20.4
(2.6) (12.3)
FINANCIAL PERFORMANCE OVERVIEW (%) Sales Growth* PAT GROWTH* OPM# RoE# 3M 19.1 (0.6) 17.1 1Y 13.2 (4.9) 20.3 3Y 14.6 20.2 23.6 5Y 14.5 22.1 10Y 7.1 19.2

Oral care category witnessing high competition: We believe competition in the oral care category is set to intensify for all players. Colgate has launched premium products, such as Colgate Sensitive Pro-Relief toothpaste and Colgate 3600 Sensitive Pro-Relief toothbrush, post Glaxo's launch of Sensodyne and HUL showing aggression through product launches and higher ad spends. We also expect P&G to intensify competition in India, as it is doing globally. This could lead to much higher ad spends and affect Colgate's profitability. Limited earnings growth and OPM under pressure: As expected, Colgate is witnessing a slippage in margins from FY2010. While we have modeled in a margin contraction of 52bp for FY2012E, we highlight the same is at risk to - 1) higher excise duty due to further roll-back, 2) rise in competitive intensity and 3) deterioration in product mix. Moreover, we have modeled in a higher tax rate for FY2011-13E at 26%, as income tax benefits at Baddi facility reduce from 100% to 30%. Expensive valuations for a muted earnings CAGR: At the CMP of `967, the stock is trading at P/E of 25.6x FY2013E EPS, against its five-year historical average of 22x. In terms of earnings growth, we do not expect any positive surprises and, hence, we maintain our Neutral rating on the stock and wait for better entry opportunities.
24.9 20.9 117.1 78.8
- 113.4 140.9
172
January 2012

BALANCE SHEET
Y/E MARCH (` CR) ` SOURCES OF FUNDS EQUITY SHARE CAPITAL RESERVES& SURPLUS SHAREHOLDERS FUNDS TOTAL LOANS DEFERRED TAX LIABILITY TOTAL LIABILITIES APPLICATION OF FUNDS GROSS BLOCK LESS: ACC. DEPRECIATION NET BLOCK CAPITAL WORK-IN-PROGRESS GOODWILL INVESTMENTS CURRENT ASSETS CURRENT LIABILITIES NET CURRENT ASSETS MIS. EXP. NOT WRITTEN OFF TOTAL ASSETS 494 288 206 6 41 21 591 552 39 313 539 325 214 12 41 39 704 643 61 367 580 360 219 12 41 39 834 761 73 384 666 402 264 13 41 39 1,026 850 176 532 14 313 326 5 (18) 313 14 370 384 0 (17) 367 14 387 401 0 (17) 384 14 536 549 0 (17) 532 FY2010 FY2011 FY2012E FY2013E
% CHG
15.8
1,537 425
13.2
1,770 451
14.8
2,046 504
14.9
2,335 596

EBIT
59.7 21.7
388
6.0 20.3
416
11.9 19.8
469
18.2 20.3
554

RECURRING PBT
59.3 19.8
485
7.4 18.8
520
12.6 18.4
592
18.2 18.9
694
% CHG
TAX
38.4
62
7.3
117
13.8
154
17.2
180
(% OF PBT)
ADJ. PAT
12.7
423
22.6
403
26.0
438
26.0
514

` ADJ. EPS (`)
45.8 21.6
31.1
(4.9) 18.1
29.6
8.8 17.2
32.2
17.2 17.5
37.8
% CHG
43.4
(4.9)
8.8
17.2
CASH FLOW STATEMENT

Y/E MARCH (` CR) ` PROFIT BEFORE TAX DEPRECIATION CHANGE IN WORKING CAPITAL INTEREST / DIVIDEND (NET) DIRECT TAXES PAID OTHERS CASH FLOW FROM OPERATIONS (INC.)/ DEC. IN FIXED ASSETS (INC.)/ DEC. IN INVESTMENTS CASH FLOW FROM INVESTING ISSUE OF EQUITY INC./(DEC.) IN LOANS DIVIDEND PAID (INCL. TAX) INTEREST / DIVIDEND (NET) CASH FLOW FROM FINANCING INC./(DEC.) IN CASH OPENING CASH BALANCES CLOSING CASH BALANCES FY2010 485 38 (23) (24) 62 70 484 (111) 17 (93) 0 (0) 318 (24) (294) 96 251 348 FY2011 520 34 4 (27) 117 31 446 (51) (18) (69) (5) 351 (27) (329) 48 348 396 FY2012E 592 35 119 (38) 154 (30) 525 (40) (40) 421 (34) (388) 98 396 493 FY2013E 694 42 59 (48) 180 7 575 (88) (88) 365 (43) (323) 164 565 729
KEY RATIOS
Y/E MARCH VALUATION RATIO (X) P/E (ON FDEPS) P/CEPS P/BV DIVIDEND YIELD (%) EV/SALES EV/EBITDA PER SHARE DATA (`) ` EPS (BASIC) EPS (FULLY DILUTED) CASH EPS DPS BOOK VALUE RETURNS (%) ROCE ANGEL ROIC (PRE-TAX) ROE TURNOVER RATIOS (X) INVENTORY / SALES (DAYS) RECEIVABLES (DAYS) PAYABLES (DAYS) 21 2 79 25 7 78 18 2 80 17 2 80 150.3 156.1 122.5 113.4 124.9 111.6 120.9 108.1 31.1 31.1 33.9 20.0 24.0 29.6 29.6 32.1 22.1 28.2 32.2 32.2 34.8 22.0 29.5 37.8 37.8 40.8 23.0 40.4 31.1 28.5 40.3 2.1 6.5 33.0 32.7 30.1 34.2 2.3 5.7 30.6 30.0 27.8 32.8 2.3 4.9 26.8 25.6 23.7 23.9 2.4 4.2 22.4 FY2010 FY2011 FY2012E FY2013E
January 2012
173
FMCG
GCPL
Company Background
CMP/TP/Upside: `399 / `430 / 8%
GCPL is a leading FMCG company in the household and personal care products category, with brands such as Good Knight, HIT, Cinthol, Godrej No.1 and Expert. The company has built a foothold in Africa, Latin America, Indonesia and U.K. through several acquisitions. Currently, ~36% of the company's revenue comes from its international business.
SHAREHOLDING PATTERN (%) PROMOTERS (GODREJ GROUP) FII 67.3 19.9
Structural Snapshot
Growth opportunity: GCPLs strategic presence in Africa, where large MNCs have less presence, offers it a firm ground to tap the untapped market. Also, the company's international business reduces its dependence on the domestic soap category, where competition is fierce. Competitive position: GCPL has ~10% market share in the soaps category, with brands like Godrej No.1, Cinthol and Fairglow. In the hair color category, GCPL has a ~29% market share; while in the household insecticides category, the company has a market share of 37%. Nature of business: Defensive sector; Branded business.
STOCK RETURNS (%) GCPL BSE FMCG SENSEX 3M (3.0) 2.5 1Y (3.9) 13.4 3Y 44.2 27.7 21.3 5Y 16.1 3.3 10Y 16.2 17.3 20.9 39.8
(2.6) (12.3)
FINANCIAL PERFORMANCE OVERVIEW (%) SALES GROWTH* PAT GROWTH* OPM# ROE# 3M 24.5 (2.5) 17.6 1Y 78.4 41.8 17.6 38.4 3Y 48.9 44.6 17.5 43.2 5Y 40.9 32.1 18.2 76.3 10Y 0.0 0.0 0.0 0.0

Acquisitions to drive a 16% CAGR in EPS over FY2011-13E: Management has constantly reiterated that all recent international acquisitions have been EPS-accretive. Over FY2011-13E, we expect GCPL to post a 16% CAGR in its EPS, largely driven by consolidation of its recent acquisitions. Dependence on soaps to decline, home care to emerge as the largest category: Over FY2011-13E, we expect the personal wash (including soaps) category to contribute 24-25% to the company's total consolidated revenue. Further, we expect the home care segment's contribution to increase to 50-51%. We believe the shift in revenue mix is likely to help GCPL de-risk its dependence on the highly competitive soaps market and increase its focus on the high-margin, high-growth insecticides business. Synergistic benefits and cross-pollination opportunities: We believe there are synergistic benefits in terms of distribution and supply-chain networks through the integration of Godrej Household Products Ltd., which is likely to reflect over FY2011-13E. Moreover, GHPL's strong presence in southern India complements GCPL's strong presence in northern India well, giving GCPL a balanced presence. Valuation: The stock is trading at 18.5x FY2013E EPS, against its five-year historical average of 20x. We maintain our Accumulate rating on the stock with a target price of ` 430.
174
January 2012

Y/E MARCH (` CR) ` NET SALES OTHER OPERATING INCOME TOTAL OPERATING INCOME FY2010 2,041 2 2,044 FY2011 3,643 3 3,646 FY2012E 4,470 7 4,477 FY2013E 5,503 7 5,510
BALANCE SHEET
Y/E MARCH (` CR) ` SOURCES OF FUNDS EQUITY SHARE CAPITAL RESERVES& SURPLUS SHAREHOLDERS FUNDS MINORITY INTEREST TOTAL LOANS DEFERRED TAX LIABILITY TOTAL LIABILITIES APPLICATION OF FUNDS GROSS BLOCK 359 153 206 1 368 67 910 553 357 998 660 377 282 15 2,795 1,506 867 639 3,732 860 439 420 56 2,945 1,717 1,230 487 3,908 1,038 514 524 69 3,095 1,934 1,483 451 4,139 31 924 955 37 7 998 32 1,693 1,725 2,005 1 3,732 32 2,119 2,151 1,755 1 3,908 32 2,550 2,582 1,555 1 4,139 FY2010 FY2011 FY2012E FY2013E
% CHG
46.3
1,634 407
78.4
3,002 641
22.8
3,688 782
23.1
4,509 993

EBIT
96.6 20.0
384
57.3 17.6
591
22.1 17.5
720
27.0 18.1
918

RECURRING PBT
104.2 18.8
420
54.0 16.2
612
21.9 16.1
686
27.5 16.7
893 LESS: ACC. DEPRECIATION NET BLOCK CAPITAL WORK-IN-PROGRESS GOODWILL INVESTMENTS CURRENT ASSETS CURRENT LIABILITIES NET CURRENT ASSETS TOTAL ASSETS
% CHG
100.7
80 19.1 340
45.7
130 21.3 482
12.1
151 22.0 535
30.2
196 22.0 696

ADJ. EPS (`) `
96.7 16.6
10.5
41.8 13.2
14.9
11.0 12.0
16.5
30.2 12.7
21.5
% CHG
96.7
41.8
11.0
30.2
CASH FLOW STATEMENT

Y/E MARCH (` CR) ` PROFIT BEFORE TAX DEPRECIATION CHANGE IN WORKING CAPITAL INTEREST / DIVIDEND (NET) DIRECT TAXES PAID CASH FLOW FROM OPERATIONS (INC.)/ DEC. IN FIXED ASSETS (INC.)/ DEC. IN INVESTMENTS CASH FLOW FROM INVESTING ISSUE OF EQUITY INC./(DEC.) IN LOANS DIVIDEND PAID (INCL. TAX) INTEREST / DIVIDEND (NET) CASH FLOW FROM FINANCING INC./(DEC.) IN CASH OPENING CASH BALANCES CLOSING CASH BALANCES FY2010 420 24 (13) (16) 80 310 34 (67) (33) 5 (241) 104 (16) (324) (47) 352 305 FY2011 612 50 (319) 25 130 353 (2,743) 67 (2,676) 498 1,969 197 25 2,244 (78) 305 227 FY2012E 686 62 345 55 151 1,143 (240) (240) (250) 109 55 (414) 489 227 716 FY2013E 893 75 (38) 46 196 780 (191) (191) (200) 265 46 (511) 78 448 526
KEY RATIOS
January 2012
175
FMCG
GSKCHL
Company Background
CMP/TP/Upside: `2,486/ - / -
GSKCHL is one the largest players in the health foods industry in India and a clear market leader in the hot malted beverages category. The company's flagship product, Horlicks is a highly popular brand with a rich heritage, ranking No. 1 in the malted beverages category with a ~50% market share. The company also sells other malted beverages brands, such as Boost, Maltova and Viva. GSKCHL is also present in the biscuits segment through its Horlicks biscuits range. In addition, the company promotes and distributes a number of OTC products from its global parent, which include prominent household names like Eno, Crocin and Iodex. GSKHCL has a strong marketing and distribution network in India, comprising over 1,800 wholesalers and 400,000 retail outlets.
STOCK RETURNS (%) GSKCHL BSE FMCG SENSEX 3M 7.1 2.5 1Y 17.1 13.4 3Y 65.3 27.7 21.3 5Y 16.1 3.3 10Y 16.2 17.3
Structural Snapshot
Growth opportunity: The hot malted beverages category offers a potential for sustainable growth, owing to its low penetration levels. The category's growth has started to pick up on account of rising per capita income, growing modern retail trade, higher promotional activity and better rural penetration. Moreover, increasing awareness about such products along with a mindset shift towards healthier beverages provides a huge opportunity to leaders like GSKCHL. Since kids are the key growth drivers of this category, brand positioning would continue to play a critical role in the performance of such products. Competitive position: GSKCHL is a clear market leader in the malted beverages category, with a market share of 70%. The company's core brands, Horlicks and Boost, have stood the test of times from competition like Cadbury, Heinz and Nestle, owing to their strong brand equity, innovative variants and a strong foothold in key markets like southern India. Nature of business: Defensive; Branded business.
33.1 20.4
(2.6) (12.3)
27.8 24.0
ANGEL ESTIMATES PARTICULARS PAT GROWTH (%) ROE (%) P/ E CY2011E 16.1 32.6 30.7 CY2012E 18.9 31.8 25.9

Anchor brands to perform well coupled with new launches: We expect GSKHCL to perform well with its anchor brands Horlicks and Boost. Also, with the launch of innovative and premium products, GSKCHL tends to maintain its margins and market share. In the MFD (milk food drinks) category, we expect Horlicks to witness double-digit volume growth by CY2012E. Similarly, Boost is expected to post double-digit volume growth. Though the company has pricing power, innovative launches such as small pack sizes will help the company garner a market share in rural markets and penetrate new areas. Earnings growth and margins to remain stable at ~17%: Over CY2011-12, we expect the company's margin to remain at ~17% due to intensive competition in the business environment (leading to a considerable expenditure in advertisements) and mounting high raw-material inflation. We expect the company's earnings to witness a 17% CAGR over CY2010-12E. Valuation: At the CMP, the stock is trading at 25.9xFY2013E EPS, against its five-year historical average valuations of 20x. We believe the stock is richly valued and offers limited upside from the CMP. We wait for better entry opportunities and, hence, remain Neutral on the stock.
176
January 2012

Y/E DECEMBER (` CR) ` NET SALES TOTAL OPERATING INCOME CY2009 1,922 1,922 CY2010 2,306 2,306 CY2011E 2,723 2,723 CY2012E 3,174 3,174
BALANCE SHEET
Y/E DECEMBER (` CR) ` SOURCES OF FUNDS EQUITY SHARE CAPITAL RESERVES& SURPLUS SHAREHOLDERS FUNDS TOTAL LOANS DEFERRED TAX LIABILITY TOTAL LIABILITIES APPLICATION OF FUNDS GROSS BLOCK LESS: ACC. DEPRECIATION NET BLOCK CAPITAL WORK-IN-PROGRESS GOODWILL INVESTMENTS CURRENT ASSETS CURRENT LIABILITIES NET CURRENT ASSETS TOTAL ASSETS 492 364 128 38 66 1,173 511 662 894 533 397 136 108 66 1,423 800 623 933 707 437 270 57 66 1,508 753 755 1,148 858 486 372 69 66 1,753 861 892 1,399 42 863 905 (11) 894 42 918 960 (27) 933 42 1,133 1,175 (27) 1,148 42 1,384 1,426 (27) 1,399 CY2009 CY2010 CY2011E CY2012E
% CHG
24.6
1,611 311
20.0
1,818 489
18.1
2,276 447
16.5
2,637 537

EBIT
30.8 16.2
269
57.3 21.2
449
(8.5) 16.4
407
72.8 16.9
488

RECURRING PBT
37.3 14.0
354
67.1 19.5
446
(9.4) 14.9
523
20.0 15.4
622
% CHG
TAX
23.9
124
26.1
152
17.2
175
18.9
208
(% OF PBT)
ADJ. PAT
35.0
230
34.1
294
33.5
348
33.5
413
(% OF NET SALES)
ADJ. EPS (`) `
12.0
54.7
12.7
71.2
12.8
82.7
13.0
98.3
% CHG
21.2
30.2
16.1
18.9
CASH FLOW STATEMENT

Y/E DECEMBER (` CR) ` PROFIT BEFORE TAX DEPRECIATION CHANGE IN WORKING CAPITAL INTEREST / DIVIDEND (NET) DIRECT TAXES PAID OTHERS CASH FLOW FROM OPERATIONS (INC.)/ DEC. IN FIXED ASSETS (INC.)/ DEC. IN INVESTMENTS CASH FLOW FROM INVESTING ISSUE OF EQUITY INC./(DEC.) IN LOANS DIVIDEND PAID (INCL. TAX) INTEREST / DIVIDEND (NET) CASH FLOW FROM FINANCING INC./(DEC.) IN CASH OPENING CASH BALANCES CLOSING CASH BALANCES
KEY RATIOS
CY2010 334 40 169 (41) 152 4 354 111 (111) (0.00) 245 (41) (204) 39 820 859 CY2011E 523 40 (122) (32) 175 (2) 232 123 (123) 133 (32) (101) 8 976 985 CY2012E 622 49 23 (39) 208 3 449 162 (162) 162 (39) (124) 163 985 1,147 Y/E DECEMBER VALUATION RATIO (X) P/E (ON FDEPS) P/CEPS P/BV DIVIDEND YIELD (%) EV/SALES EV/EBITDA EV / TOTAL ASSETS PER SHARE DATA (`) ` EPS (BASIC) EPS (FULLY DILUTED) CASH EPS DPS BOOK VALUE RETURNS (%) ROCE (PRE-TAX) ANGEL ROIC (PRE-TAX) ROE TURNOVER RATIOS (X) INVENTORY / SALES (DAYS) RECEIVABLES (DAYS) PAYABLES (DAYS) 51 6 71 49 8 74 49 8 74 49 7 72 32.3 94.2 27.9 36.9 1,418.7 32.2 39.1 447.4 32.6 38.3 156.1 31.8 54.7 54.7 65.3 18.0 215.2 71.2 71.2 80.7 50.0 228.3 82.7 82.7 92.3 27.0 279.4 98.3 98.3 109.9 33.0 339.1 46.4 38.9 11.8 0.7 5.1 31.8 11.0 35.7 31.5 11.1 2.0 4.2 25.8 10.4 30.7 27.5 9.1 1.1 3.6 21.7 8.5 25.9 23.1 7.5 1.3 3.0 17.8 6.8 CY2009 CY2010 CY2011E CY2012E
CY2009 354 42 211 (20) 124 (5) 458 41 (41) 89 (20) (68) 349 471 820
January 2012
177
FMCG
Marico
Company Background
Marico is one of India's leading FMCG companies, offering products in the beauty and wellness segment. The company is present in over 25 countries across Asia and the Africa. The company offers products in the hair care, skin care and edible oils segments. Marico's product portfolio includes brands such as Parachute, Saffola, Hair & Care, Nihar, Mediker, Revive and Manjal. The company's brand Parachute is a household name in India.
Structural Snapshot
Growth opportunity: The beauty and wellness segment is riding on a positive growth path, on the back of fast-changing lifestyles, growing health consciousness, high disposable incomes and demand for quality products. Marico has a strong brand portfolio comprising Parachute, Saffola, Nihar, Mediker, Revive and After-Shower in this segment. Further, speciality clinics, like Kaya, are expected to gain growth momentum with increasing income levels and awareness. Competitive position: Marico has a 53% market share in the oils category, where Parachute has a 46% market share of the Indian coconut oil market. Saffola constitutes 53% of the super premium refined edible oil market. Nature of business: Defensive; Branded business.
STOCK RETURNS (%) MARICO BSE FMCG SENSEX 3M 0.3 2.5 1Y 15.5 13.4 3Y 39.1 27.7 21.3 5Y 16.1 3.3 10Y 16.2 17.3 21.8 39.7
(2.6) (12.3)
FINANCIAL PERFORMANCE OVERVIEW (%) SALES GROWTH* PAT GROWTH* OPM# ROE# 3M 25.1 9.4 12.0 1Y 17.6 (1.6) 13.1 36.5 3Y 18.0 16.5 13.7 41.0 5Y 22.3 24.2 10Y 16.9 18.7

Impressive volume growth across categories/strong pricing power: We expect Marico to post healthy volume growth in its core brands in FY2012E. The company has not witnessed significant slowdown in volume growth despite steep price hikes. Over the past few months, raw-material prices have been softening; so, we do not expect any steep price hikes further. Although margins will not improve significantly due to softening of raw-material prices, we believe they will stabilize going forward. International business gaining momentum: Marico's international business now contributes ~23% to its top line. The company maintains its leadership position in different categories in different regions. The recently acquired ICP in Vietnam is expected to contribute ~5% to Marico's top line. We believe the company's international business will post a ~31% CAGR over FY2011-13E. Valuation: At the CMP, the stock is trading at 23.9x FY2013E EPS against its five-year historical average valuations of 22x. We believe the stock is richly valued and offers limited upside from the CMP. We wait for better entry opportunities and, hence, maintain our Neutral view on the stock.
13.6 12.1 46.5 39.0
178
January 2012

BALANCE SHEET
Y/E MARCH (` CR) ` SOURCES OF FUNDS EQUITY SHARE CAPITAL RESERVES& SURPLUS SHAREHOLDERS FUNDS TOTAL LOANS TOTAL LIABILITIES APPLICATION OF FUNDS GROSS BLOCK LESS: ACC. DEPRECIATION 468 242 226 113 146 83 62 897 414 483 1,112 640 337 304 65 519 89 30 1,220 518 703 1,709 696 408 288 104 524 89 30 1,288 610 678 1,713 735 496 239 147 529 89 30 1,672 726 946 1,980 61 593 654 446 1,112 61 854 915 772 1,709 61 1,130 1,192 500 1,713 61 1,442 1,504 455 1,980 FY2010 FY2011 FY2012E FY2013E
% CHG
11.4
2,286 375
17.6
2,719 410
20.8
3,299 480
14.9
3,764 577
% CHG
(% OF NET SALES) EBIT
23.4
14.1 315
9.2
13.1 339
17.1
12.7 401
20.3
13.3 494

RECURRING PBT
17.5 11.8
298
7.6 10.8
376
18.2 10.6
399
23.4 11.4
NET BLOCK 497 CAPITAL WORK-IN-PROGRESS GOODWILL INVESTMENTS DEFERRED TAX ASSET CURRENT ASSETS CURRENT LIABILITIES NET CURRENT ASSETS TOTAL ASSETS
% CHG
25.7
64 20.9 241
6.5
85 25.9 238
18.7
78 20.0 305
27.9
99 20.0 390

` ADJ. EPS (`)
18.5 9.1
3.9
(1.6) 7.6
3.9
28.2 8.1
5.0
28.2 9.0
6.4
% CHG
18.5
(1.6)
28.2
28.2
CASH FLOW STATEMENT

Y/E MARCH (` CR) ` PROFIT BEFORE TAX DEPRECIATION CHANGE IN WORKING CAPITAL INTEREST / DIVIDEND (NET) DIRECT TAXES PAID OTHERS CASH FLOW FROM OPERATIONS (INC.)/ DEC. IN FIXED ASSETS (INC.)/ DEC. IN INVESTMENTS CASH FLOW FROM INVESTING ISSUE OF EQUITY INC./(DEC.) IN LOANS DIVIDEND PAID (INCL. TAX) INTEREST / DIVIDEND (NET) CASH FLOW FROM FINANCING INC./(DEC.) IN CASH OPENING CASH BALANCES CLOSING CASH BALANCES FY2010 298 60 (135) 15 64 39 212 (149) (71) (219) 18 72 47 15 28 21 90 111 FY2011 376 71 (111) 23 85 49 323 (497) (9) (506) 29 326 47 23 284 102 111 213 FY2012E 399 79 (109) 25 78 47 363 (96) (19) (115) 0 (272) 28 25 (325) (77) 213 136 FY2013E 497 83 (97) 11 99 16 411 (81) (21) (103) (45) 78 11 (135) 174 112 286
KEY RATIOS
January 2012
179
FMCG
RATING 52 WEEK HIGH / LOW MARKET CAP (` CR) ` LIQUIDITY ACCUMULATE 120/80 5,807 MEDIUM
TGBL
Company Background
CMP/TP/Upside: `94 / `102 / 9%
Tata Global Beverages Limited (TGBL) is an emerging player in the global beverage market. The company has made a strategic shift from being a local tea company to a global beverage company through various acquisitions and strategic partnerships with global beverage giants such as PepsiCo and Starbucks. As a result, the company has made an entry into the top 10 global companies list in the hot drinks category, posing a challenge to global players like Nestl, Unilever and Kraft Foods. The company's product portfolio comprises leading global brands like Tetley and Eight O' Clock and local brands like Tata Tea.
STOCK RETURNS (%) TGBL BSE FMCG SENSEX 3M 2.5 1Y 13.4 3Y 14.3 27.7 21.3 5Y 5.9 16.1 3.3 10Y 18.7 16.2 17.3 7.3 (10.7) (2.6) (12.3)
Structural Snapshot
Growth opportunity: Growth opportunity: TGBL holds a strong growth potential with increasing consumption of healthy beverages in India and globally. Acquisitions and strategic partnerships with global beverage giants like PepsiCo and Starbucks offer a huge market potential for TGBL, as it can develop and market products in local as well as global markets. Competitive position: TGBL, led by its various acquisitions in recent years, has become a global non-alcoholic beverage company. The company now features among the global top 10 players list in the hot drinks category. The company has a 1.5% share in the global list and is a leader in the Indian tea market. Also, the company is the second largest global tea marketing company and the third largest player (post the acquisition of Eight O' Clock coffee through its subsidiary Tata Coffee) in the branded coffee market in the U.S. Nature of business: Branded business; Highly competitive.
FINANCIAL PERFORMANCE OVERVIEW (%) SALES GROWTH* PAT GROWTH* OPM# ROE# 3M 11.3 6.6 1Y 3.4 8.6 5.4 3Y 11.6 14.9 7.4 5Y 14.0 (3.2) 17.0 10.1 10Y -
27.5 (44.8) 114.9

We estimate TGBL to post a ~9% CAGR over FY2011-13E on the basis of price and volume-led growth. Despite slow revenue growth, we expect healthy expansion of 150bp in the company's OPM over FY2011-13E, from 8.6% in FY2011 to ~10% in FY2013E, due to changes in cost structure and selective price hikes in key products. Adjusted earnings for the company are expected to witness a robust ~40% EPS CAGR over FY2011-13E, primarily due to increased OPM. Valuation: Despite its leadership position in the Indian packaged tea market, No. 2 position in the global tea market and generating ~90% of its total revenue from branded products, TGBL is trading at 13.6x FY2013E EPS (which is at a discount to its FMCG peers, trading at 20-35x FY2013E EPS). Also, on EV/Sales basis, the stock is trading at 0.7x FY2013E EV/Sales (historical average of 1x EV/ Sales). Hence, we recommend an Accumulate rating on the stock with a target price of ` 102.
180
January 2012

BALANCE SHEET
Y/E MARCH (` CR) ` SOURCES OF FUNDS EQUITY SHARE CAPITAL RESERVES& SURPLUS SHAREHOLDERS FUNDS MINORITY INTEREST TOTAL LOANS DEFERRED TAX LIABILITY TOTAL LIABILITIES APPLICATION OF FUNDS 62 3,662 3,723 1,057 1,797 75 6,652 62 3,895 3,957 1,108 1,042 64 6,170 62 3,976 4,038 1,108 942 64 6,152 62 4,152 4,214 1,108 842 64 6,227 FY2010 FY2011 FY2012E FY2013E
% CHG
19.3
5,269 514
3.4
5,469 513
9.0
5,919 602
9.0
6,389 720

EBIT
(2.3) 8.9
411
(0.0) 8.6
414
17.3 9.2
492
19.5 10.1
600

REPORTED PBT
(3.8) 7.1
641
0.8 6.9
494
18.8 7.5
558
21.9 8.4
694 GROSS BLOCK LESS: ACC. DEPRECIATION NET BLOCK CAPITAL WORK-IN-PROGRESS GOODWILL INVESTMENTS CURRENT ASSETS CURRENT LIABILITIES NET CURRENT ASSETS TOTAL ASSETS 1,470 752 718 47 2,929 519 3,998 1,560 2,438 6,652 1,563 842 721 39 3,038 587 3,376 1,590 1,786 6,170 1,703 952 750 43 3,038 615 3,620 1,914 1,705 6,152 1,856 1,073 783 46 3,038 623 3,757 2,020 1,736 6,227
% CHG
PBT (RECURRING) TAX
(49.0)
633 248
(22.9)
451 202
12.8
558 184
24.4
694 229
(% OF PBT)
ADJ. PAT
38.6
382
40.9
211
33.0
336
33.0
427

ADJ. EPS (`) `
73.2 6.6
6.2
(44.8) 3.5
3.4
59.4 5.2
5.4
27.2 6.0
6.9
% CHG
73.2
(44.8)
59.4
27.2
CASH FLOW STATEMENT

Y/E MARCH (` CR) ` PROFIT BEFORE TAX DEPRECIATION CHANGE IN WORKING CAPITAL INTEREST / DIVIDEND (NET) DIRECT TAXES PAID OTHERS CASH FLOW FROM OPERATIONS (INC.)/ DEC. IN FIXED ASSETS (INC.)/ DEC. IN INVESTMENTS CASH FLOW FROM INVESTING ISSUE OF EQUITY INC./(DEC.) IN LOANS DIVIDEND PAID (INCL. TAX) INTEREST / DIVIDEND (NET) CASH FLOW FROM FINANCING INC./(DEC.) IN CASH OPENING CASH BALANCES CLOSING CASH BALANCES FY2010 641 103 42 91 248 (147) 482 (89) 1,472 1,384 (634) 146 91 (871) 815 1,089 1,904 FY2011 494 99 (143) 44 202 (71) 221 (85) 5 (81) (63) (755) 145 44 (1,007) (907) 1,904 997 FY2012E 558 111 140 65 184 (8) 681 (144) (29) (173) 0.1 (100) 255 65 (420) 54 997 1,052 FY2013E 694 121 (114) 48 229 12 531 (157) (8) (165) (100) 251 48 (399) (70) 1,052 981
KEY RATIOS
Y/E MARCH VALUATION RATIO (X) P/E (ON FDEPS) P/CEPS P/BV DIVIDEND YIELD (%) EV/SALES EV/EBITDA PER SHARE DATA (`) ` EPS (BASIC) EPS (FULLY DILUTED) CASH EPS DPS BOOK VALUE RETURNS (%) ROCE ANGEL ROIC (PRE-TAX) ROE TURNOVER RATIOS (X) INVENTORY / SALES (DAYS) RECEIVABLES (DAYS) PAYABLES (DAYS) 53 31 83 61 33 83 62 34 83 62 34 83 6.2 10.4 6.7 5.4 8.0 8.4 9.6 10.2 6.2 6.2 7.9 2.0 59.6 3.4 3.4 5.0 2.0 63.4 5.4 5.4 7.2 4.0 64.6 6.9 6.9 8.9 4.0 67.4 14.5 11.4 1.5 2.2 0.9 9.6 26.4 17.9 1.4 2.2 0.8 9.8 16.6 12.5 1.4 4.4 0.7 8.0 13.6 10.6 1.4 4.3 0.7 7.0 FY2010 FY2011 FY2012E FY2013E
January 2012
181
FMCG
Britannia
Company Background
CMP/TP/Upside: `451/ `495 / 10%
SHAREHOLDING PATTERN (%) PROMOTERS (WADIA GROUP) FII 51.0 12.6
Britannia is one of the foremost food companies in India. The company is present across the biscuits, dairy products and breads segments and has recently forayed into the breakfast cereals category with the launch of Healthy Start. Britannia derives ~85% of its revenue from the biscuits segment, where it has formidable brands such as Tiger (glucose biscuits), Treat (cream biscuits), 50-50 (crackers), Good Day (premium cookies and the company's highest selling brand) and Nutrichoice (premium high-fiber biscuits).
Structural Snapshot
Growth opportunity: The biscuit industry, which has been steadily recording double-digit value growth over FY2008-11, is one of the largest growing FMCG categories in India. The industry stands at ~`10,782cr in value and has recorded a 9.2% CAGR over FY2006-11. Biscuit volume growth was estimated to be at ~6% yoy in FY2011, despite no significant change in distribution network, implying that the key reason for increased biscuit volumes is higher per capita consumption of biscuits to ~2.1kg/year (1.8kg/year in FY2009), with a 55% penetration level in the rural market and 85% penetration in the urban market. Competitive position: Britannia is the market leader in the sweet cookies and Marie biscuit segments, which constitute 35% of the biscuit market. In the Marie biscuit segment, Britannia has a 37% market share, followed by Parle and ITC (11% and 7% share, respectively). Overall, Britannia enjoys the No. 2 position in the Indian biscuit market with a 38% market share. Nature of business: Defensive; Branded business.
STOCK RETURNS (%) BRITANNIA BSE FMCG SENSEX 3M (0.5) 2.5 1Y 27.0 13.4 3Y 20.0 27.7 21.3 5Y 16.1 3.3 10Y 16.2 17.3 15.2 14.2
(2.6) (12.3)
FINANCIAL PERFORMANCE OVERVIEW (%) SALES GROWTH* PAT GROWTH* OPM# ROE# 3M 18.2 18.8 4.8 1Y 23.8 5.3 34.3 3Y 17.7 7.3 24.8 5Y (1.1) 7.7 10Y 8.5 8.4 19.7 12.7
24.7 (10.1)
24.5 24.4

Renewed product portfolio to aid growth: Britannia has recently forayed into breakfast cereals, milk and premium category biscuits. We believe this rejig in product portfolio offers significant uptrading benefits to the company, thereby fuelling growth. Also, with increased per capita consumption and penetration, the company will continue to grow at a pace faster than its historical growth. Cooling raw-material prices to help improve margins: Over the past one year, raw-material prices have been trending high, putting significant margin pressure on Britannia. However, prices of major commodities (like sugar and wheat) have shown some signs of cooling in the past one quarter. While we have limited visibility on raw-material prices over the longer term, with the onset of normal monsoons, we do not expect a significant rise in the prices of these commodities going ahead. Moreover, we believe the company's various cost-rationalization methods and improving sales mix will aid operating margins to increase from the current level of 5.3% to 5.8% in FY2012E and 7.1% in FY2013E. Valuation: At the CMP, the stock is trading at 20x FY2013 EPS, however on account of subdued operating margins, the company is trading at attractive 0.9x FY2013E EV/Sales against its historical average of 1.5x EV/Sales. We expect Britannia to post margin expansion of 130bp over FY2013. Hence, we maintain our Accumulate rating on the stock with a target price of ` 495, based on 22x FY2013E EPS.
182
January 2012

BALANCE SHEET
Y/E MARCH (` CR) ` SOURCES OF FUNDS EQUITY SHARE CAPITAL RESERVES& SURPLUS SHAREHOLDERS FUNDS TOTAL LOANS DEFERRED TAX LIABILITY TOTAL LIABILITIES APPLICATION OF FUNDS GROSS BLOCK 548 266 282 10 491 529 492 37 819 594 290 304 12 545 625 597 29 889 758 342 416 16 485 799 754 45 961 872 402 470 18 125 946 883 63 676 24 372 396 430 (7) 819 24 427 451 431 6 889 24 500 524 431 6 961 24 620 644 25 6 676 FY2010 FY2011 FY2012E FY2013E
% CHG
9.4
3,241 162
23.8
3,990 224
17.8
4,677 287
16.8
5,387 412

EBIT
(38.2) 4.8
125
38.0 5.3
179
28.0 5.8
234
43.8 7.1
352

RECURRING PBT
(45.6) 3.7
121
43.8 4.3
198
30.7 4.7
252
50.2 6.1
LESS: ACC. DEPRECIATION 368 NET BLOCK CAPITAL WORK-IN-PROGRESS GOODWILL INVESTMENTS CURRENT ASSETS CURRENT LIABILITIES NET CURRENT ASSETS TOTAL ASSETS
% CHG
TAX
(33.9)
4
18.4
53
27.3
68
46.0
99
(% OF PBT)
ADJ. PAT
2.5
117
26.7
145
27.0
184
27.0
269

` ADJ. EPS (`)
(35.4) 3.4
9.8
24.7 3.4
12.2
26.7 3.7
15.4
46.0 4.6
22.5
% CHG
(35.4)
24.7
26.7
46.0
CASH FLOW STATEMENT

Y/E MARCH (` CR) ` PROFIT BEFORE TAX DEPRECIATION CHANGE IN WORKING CAPITAL INTEREST / DIVIDEND (NET) DIRECT TAXES PAID CASH FLOW FROM OPERATIONS (INC.)/ DEC. IN FIXED ASSETS (INC.)/ DEC. IN INVESTMENTS CASH FLOW FROM INVESTING ISSUE OF EQUITY INC./(DEC.) IN LOANS DIVIDEND PAID (INCL. TAX) INTEREST/DIVIDEND PAID (NET) CASH FLOW FROM FINANCING INC./(DEC.) IN CASH OPENING CASH BALANCES CLOSING CASH BALANCES
KEY RATIOS
FY2011 198 45 7 13 53 190 (47) (54) (102) 2 70 15 (83) 5 23 29 FY2012E 252 52 60 3 68 232 (169) 60 (109) 112 7 (119) 4 29 33 FY2013E 368 60 32 15 99 356 (117) 360 243 (406) 148 19 (573) 27 33 60 Y/E MARCH VALUATION RATIO (X) P/E (ON FDEPS) P/CEPS P/BV 46.2 26.8 13.6 1.5 1.5 32.2 37.1 28.4 11.9 1.2 1.2 23.3 29.2 22.8 10.3 1.1 1.1 18.2 20.0 16.4 8.4 0.9 0.9 12.7 FY2010 FY2011 FY2012E FY2013E
FY2010 121 38 100 (25) 73 183 (40) (68) (108) (2) 112 (21) (93) (17) 41 23
DIVIDEND YIELD (%) EV/SALES EV/EBITDA PER SHARE DATA (`) ` EPS (FULLY DILUTED) CASH EPS DPS BOOK VALUE RETURNS (%) ROCE ANGEL ROIC (PRE-TAX) ROE TURNOVER RATIOS (X) INVENTORY / SALES (DAYS) RECEIVABLES (DAYS) PAYABLES (DAYS)
9.8 16.8 5.0 33.2
12.2 15.9 6.5 37.8
15.4 19.8 8.0 43.8
22.5 27.5 10.6 53.9
14.9 15.1 26.7
21.0 15.9 34.3
25.3 19.1 37.8
43.0 33.3 46.0
29 4 33
27 5 33
32 5 35
32 5 35
January 2012
183
184
January 2012
Infrastructure
COVERAGE
Companies E & C Companies Larsen & Toubro Jaiprakash Asso. Sadbhav Engg. Punj Lloyd Hind. Const. Nagarjuna Const. IVRCL Simplex Infra Patel Engg. Madhucon Proj CCCL Road Developers IRB Infra ITNL Ashoka Buildcon 159 185 195 182 227 245 Buy Buy Buy 1,274 66 117 49 22 46 40 198 98 52 18 1,608 88 150 Buy Buy Buy CMP (`) ` Target (`) ` Reco
POSITIVE
Negatives capped
Infrastructure development inevitable for India's economic growth in the medium term: Importance of infrastructure development is well acknowledged by the government and, therefore, it is focusing on infrastructure creation with active participation of the private sector. For bridging the infrastructure deficit and for sustaining a higher growth rate, the Twelfth Five Year Plan (FY2012-17) envisages a total investment of ~US$1,000bn in infrastructure (Eleventh Five Year Plan investment: ~US$500bn). Near-term scenario to remain murky: However, during the past one year, infrastructure stocks have been punished by investors, leading to a huge decline in their prices (30-70%). This downward spiral in infrastructure stocks has been caused mainly due to 1) deteriorating business environment owing to high interest rates; policy inaction; and negative investment climate for the infrastructure sector; and 2) stretched balance sheet on account of elongated working capital (WC) and elevated debt levels, leading to consistent earnings underperformance. Further, given no visible signs of reversal of trends, we continue with our view that the environment for the sector will remain murky in the near term. The infrastructure sectors valuations (FY2013 PE of 7.0-18.0x vs. past average of 20.0-30.0x) have slipped to historical lows, after the dismal performance of 2011. This has been on the back of consistent earnings downgrades (30-40% downgrade in FY2012/FY2013 earnings) and well-known concerns plaguing the sector. We do not expect more earnings downward revision, given the already subdued expectations and peaking of interest rates. Further, there have been recent positive developments on the reform front in the past six months, such as new land reforms bill being introduced, some no-go areas being allowed for mining, new infrastructure lending norms for setting up of debt funds, increasing consensus on the likely imposition of import duties and hikes in power tariffs by various SEBs. Therefore, we expect outperformance from the sector in the medium to long term; but any meaningful rerating of the sector will have to be preceded by consistent and aggressive push on infrastructure spend/policy reforms from the governments side and interest rate cuts. Valuations offer favorable risk reward ratio: We have revised downwards our earnings estimates (20-30%) - building in subdued order inflows leading to flat revenue growth, flat/declining margins and no major respite on the debt front - for most companies for FY2012/13. Further, considering the macro and micro variables, we believe our EPS estimates face limited downside risks. Further, earnings catalysts are weak and so is positive news flow; but after the underperformance in the past 12 months, the sector trades at undemanding valuations on subdued earnings estimates. Hence, we believe the time has come for the recognition of opportunities on offer. We are positive on companies that have: 1) strong execution skills (L&T, SEL and IRB) - necessary for maintaining revenue momentum; 2) balance sheet strength (L&T, IRB and SEL) - very important due to the high interest rate scenario and poor environment for raising fund; and 3) decent order book (L&T, IVRCL, SEL and IRB) - to weather the drying up of orders. Hence, we maintain L&T, IVRCL and SEL as our top picks in the E&C space and recommend IRB in the development space.
- Neutral - Neutral 59 56 233 77 Buy Buy Buy Buy
- Neutral - Neutral
January 2012
185 185
Infrastructure Near-term scenario to remain murky

During the past one year, infrastructure stocks have been punished by investors leading to a huge decline in their prices (30-70%). This downward spiral in infrastructure stocks has been caused mainly due to a deteriorating business environment and stretched balance sheet. out that of the 590 major projects of `150cr or more, 283 have been delayed. Further, infrastructure projects draw investments in India and as a result of these problems the inflow of FDI is also showing a decline. Negative investment climate for the infrastructure sector: On account of the above-mentioned reasons, there has been a considerable slowdown in investments in infrastructure from both the government and private sector. Consequently, there has been a slowdown in order inflow for companies across all infrastructure sectors, which is becoming a cause of concern, as diminishing order book has a direct impact on revenue visibility. Further, given no visible signs of reversal of trends, we continue with our view that the environment for the sector will remain murky in the near term.
Deteriorating business environment

During the past few quarters, business environment for infrastructure companies has been miserable due to several headwinds faced by the sector such as: 1) high interest rates; 2) policy inaction; and 3) negative investment climate for the infrastructure sector. High interest rate scenario: Consistent hike in repo rates by the RBI (in order to contain inflation) has accentuated the already high interest cost for companies in the sector. High interest cost (owing to a high interest rate regime and increased debt levels) resulted in a decline in the bottom line of most companies under our coverage. However, the recent RBI commentary indicates a pause in further interest rate hikes. Therefore, in our business models, we have not factored in any further rates hikes, thus interest costs of companies would increase primarily due to higher debt levels. Further, going ahead, we are penciling in some respite on the interest rate front in FY2013, giving infrastructure companies the much-needed relief.
Stretched balance sheet - A worry

Elongated WC: During the last few quarters, WC requirement across sectors has gone up significantly. This jump in WC can be attributed to the increase in the following factors: 1) loans and advances - to lend support to subsidiaries and small subcontractors; and 2) debtors - liquidity crunch faced by clients and lack of bargaining power on the contractor's front. Further, given the current headwinds faced by the economy, we do not expect any improvement in 2HFY2012. Elevated debt levels: Companies' debt levels, which are already above comfort limits, have further increased to 1) fund their growing WC requirements; and 2) equity infusion in subsidiaries.
Exhibit 1: Interest cost as a percentage of sales on a rise

Simplex In. Sadbhav NCC MPL L&T JAL IVRCL IRB Infra HCC CCCL 5.0
Exhibit 3: Average WC trend (days)

190 170 150 130
10.0 1QFY12 15.0 20.0
171
141 120 103 93 103
110 90 70
2QFY11
2QFY12
Exhibit 2: Increase in interest cost on a yoy basis (` cr) `

200 180 160 140 120 100 80 60 40 20 0 CCCL HCC IRB Infra IVRCL L&T MPL NCC Sadbhav Simplex In.
50 FY2007 FY2008 FY2009 FY2010 FY2011 FY2012E
Exhibit 4: Debt levels above comfort levels

10,000 9,000 8,000 7,000 6,000 5,000 4,000 3,000 2,000 1,000 31.5 25.7 20.1 20.2 20.3 15.1 9.9 4.7 14.5 35.0 30.0 25.0 20.0 15.0 10.0 5.0 -
2QFY11
2QFY12
L&T
Sadbhav
IRB Infra
MPL
NCC
Policy inaction: Policy paralysis (slowdown in decision making, corruption scandals and a government fearful of a political backlash to any bold moves) has led to derailing of key infrastructure projects in the country. This is evident from the government's latest quarterly project implementation status report, which points 186 January 2012
FY2011 (` cr)
1HFY12
% chg over FY11
Simplex In.
CCCL
HCC
IVRCL
Infrastructure
Outlook: The infrastructure sectors valuations (FY2013 PE of 7.0-18.0x vs. the past average of 20.0-30.0x) have slipped to historical lows, after the dismal performance in 2011. This has been on the back of consistent earnings downgrades (30-40% downgrade in FY2012/FY2013 earnings) and well-known concerns plaguing the sector. We do not expect more earnings downward revision, given the already subdued expectations and peaking of interest rates. Further, there have been recent positive developments on the reform front in the past six months, such as new land reforms bill being introduced, some no-go areas being allowed for mining, new infrastructure lending norms for setting up of debt funds, increasing consensus on the likely imposition of import duties and hikes in power tariffs by various SEBs. Therefore, we expect outperformance from the sector in the medium to long term; but any meaningful rerating of the sector will have to be preceded by consistent and aggressive push on infrastructure spend/policy reforms from the governments side and interest rate cuts.
Structural outlook remains strong

Infrastructure development inevitable for India's economic growth in the medium term: Over the years, India has been experiencing infrastructure-related concerns such as power deficits, inadequate road network and insufficient facilities at its ports. Therefore, it is imperative to rapidly increase the investment in infrastructure from the current levels. The government's focused initiatives towards infrastructure creation with active participation of the private sector will hold key to the Indian economy's growth. For bridging infrastructure deficit and for sustaining a higher growth rate, the Twelfth Five Year Plan (FY2012-17) envisages a total investment of ~US$1,000bn in infrastructure (Eleventh Five Year Plan investment: ~US$500bn).
Exhibit 5: Sector-wise investment (` cr) `

1,400,000 1,200,000 1,000,000 800,000 600,000 400,000 200,000 -
Railways
Electricity
10th plan (FY03-07)
11th plan (FY07-12)
12th plan* (FY12-17)
Characteristics of the construction industry
Source: Planning Commission, Angel Research, Note: *Estimated; Others include water supply, airports, ports, storage and gas.
(1) High level of fragmentation: The Indian construction industry is highly fragmented, which can be attributed to low entry barriers due to limited capital requirement. Capital expenditure required is only to the extent of equipment required to execute the projects unlike manufacturing, which requires production facilities. (2) WC-intensive: The construction industry has high WC requirements, and these requirements enhance during the slowdown/tight liquidity scenario. Further, any delay in payment especially from government departments pushes up receivables. Despite high levels of fragmentation and WC requirements, the construction industry is expected to be the biggest beneficiary of the surge in infrastructure investment over the next five years, as construction accounts for ~65% of the total investment in infrastructure. Hence, investments in the infrastructure sector over the next 5-10 years - power, roads, bridges, city infrastructure, ports, airports and telecommunications - would provide the necessary impetus to the construction industry.
Exhibit 6: Subdued expectations for most companies

EPS (`) ` FY2010 Larsen & Toubro Jaiprakash Asso. Sadbhav Engg. Punj Lloyd Hind. Const. Nagarjuna Const. IVRCL Infra Simplex Infra Patel Engg. Madhucon Proj CCCL IRB Infra ITNL Ashoka Buildcon
EPS growth (%) FY2013E 71.0 4.2 9.0 2.9 0.6 3.8 4.6 25.9 14.5 4.7 1.6 13.1 25.7 24.7 FY2010 11.5 10.2 (28.6) 51.1 7.2 30.2 (6.5) 9.2 42.4 (2.4) 26.6 119.2 130.8 FY2011 15.5 18.1 122.1 (12.8) (18.4) (25.3) (16.1) (38.1) (10.2) (48.8) 17.3 25.9 25.5 FY2012E 18.3 (50.2) 14.5 (44.1) (36.1) (11.9) (20.3) (20.5) (12.6) 9.5 9.8 FY2013E 10.5 53.5 (1.9) 53.3 7.8 22.5 36.8 3.5 6.3 9.8 5.3 17.6
FY2011 54.3 5.5 8.0 (5.4) 1.2 6.4 5.9 21.5 17.6 5.6 2.5 13.6 22.3 19.2
FY2012E 64.2 2.7 9.1 1.9 (1.0) 3.6 3.8 18.9 14.0 4.4 (1.1) 11.9 24.4 21.0
47.0 4.7 3.6 (10.9) 1.3 7.8 7.9 25.6 28.4 6.2 5.0 11.6 17.7 15.3
January 2012
Irrigation
Telecom
Others
Road
187
Infrastructure
Valuations offer favorable risk reward ratio: We have revised downwards our earnings estimates (20-30%) - building in subdued order inflows leading to flat revenue growth, flat/declining margins and no major respite on the debt front - for most companies for FY2012/13. Further, considering the macro and micro variables, we believe our EPS estimates face limited downside risks. Further, earnings catalysts are weak and so is positive news flow; but after the underperformance in the past 12 months, the sector trades at undemanding valuations on subdued earnings estimates. Hence, we believe the time has come for the recognition of opportunities on offer. We are positive on companies that have: 1) strong execution skills (L&T, SEL and IRB) - necessary for maintaining revenue momentum; 2) balance sheet strength (L&T, IRB and SEL) very important due to the high interest rate scenario and poor environment for raising fund; and 3) decent order book (L&T, IVRCL, SEL and IRB) - to weather the drying up of orders. Hence, we maintain L&T, IVRCL and SEL as our top picks in the E&C space and recommend IRB in the development space.
Exhibit 7: Recommendation Summary

Company CMP TP/ SOTP E&C Companies L&T JP Assoc. Sadbhav Punj Lloyd HCC NCC IVRCL 1,274 1,608 66 117 49 22 46 40 88 150 59 56 233 77 Buy 43,905 53,779 60,258 Buy 13,832 13,763 16,017 Buy Neutral Neutral Buy Buy Buy Neutral Buy Neutral 2,209 7,850 4,093 5,074 5,651 4,889 3,476 1,816 2,199 2,602 2,585 17.2 7.6 8.2 16.2 6.4 6.4 6.9 15.2 1.6 17.4 5.6 54.3 5.5 8.0 (5.4) 1.2 6.4 5.9 21.5 17.6 5.6 2.5 63.7 2.7 9.1 1.9 (3.1) 3.6 3.8 18.9 14.0 4.4 (1.1) 70.9 4.2 9.0 2.9 0.6 3.8 4.6 25.9 14.5 4.7 1.6 14.2 (12.6) 6.0 (25.8) (22.4) (11.5) 9.8 (9.2) (8.1) (20.5) 23.5 12.0 14.7 18.5 7.2 6.7 9.2 5.6 9.4 7.0 20.0 24.2 12.8 25.9 12.9 10.6 10.4 7.0 11.8 18.0 15.7 13.1 16.9 33.6 12.0 8.6 7.6 6.8 11.1 11.0 3.2 2.8 3.3 4.0 3.4 4.5 3.1 2.7 3.8 2.7 Rating Top-line (` cr) ` EPS (`) ` P/E OB/ FY11 FY12E FY13E CAGR (%) FY11 FY12E FY13E CAGR (%) FY11 FY12E FY13E Sales(x)
9,585 10,592 3,915 5,095 5,598 5,562 3,271 1,952 2,350 4,633 5,749 6,458 6,485 3,586 2,503 2,451
Simplex In. 198 Patel Engg 98 Madhucon CCCL 52 18
Road Developers IRB Infra ITNL ABL 159 185 195 182 227 245 Buy Buy Buy 2,438 4,049 1,302 3,037 5,169 1,627 3,781 6,609 1,831 24.5 27.8 18.6 13.6 22.3 19.2 11.9 24.4 21.0 13.1 25.7 24.7 (2.1) 7.4 13.6 11.6 8.3 10.2 13.3 7.6 9.3 12.1 7.2 7.9 5.2 5.0
Exhibit 8: SOTP break-up

Company Core Const. ` L&T JP Assoc. Sadbhav Punj Lloyd HCC NCC IVRCL Simplex In. Patel Engg Madhucon CCCL IRB Infra ITNL ABL 1,276 31 81 47 4 31 37 233 42 23 17 116 59 104 % to TP 79 35 54 100 12 52 66 100 45 30 100 64 26 42 Real Estate ` 24 12 2 17 2 % to TP 27 37 3 18 3 ` 70 16 8 16 52 61 143 141 Road BOT % to TP 46 51 14 17 68 34 63 58 Invst. In Subsidiaries ` 332 19 4 % to TP 21 34 2 25 ` 33 18 19 Others % to TP 37 31 21 11 Total ` 1,608 88 150 47 32 59 56 233 94 77 17 182 227 245
188
January 2012
January 2012
189
Infrastructure
RATING 52 WEEK HIGH / LOW MARKET CAP (` CR) ` LIQUIDITY BUY 1,933 / 971 77,931 HIGH
L&T
Company Background
TOP PICK
CMP/TP/Upside: `1,274 / `1,608 / 26%
L&T, the largest Indian infrastructure conglomerate, is present across almost all the infrastructure segments and is at the forefront of the Indian infra growth story. Over the years, the company has diversified across various segments to encash the untapped infra opportunity, not only in India but in other geographies as well, and has an excellent track record of achieving the same. Over the past 10 years (FY2001-11), L&T has reported a CAGR of 19.5% and 28.8% in its top line and bottom line, respectively.
Structural Snapshot
Growth opportunity: Over the years, India has been experiencing infrastructurerelated concerns such as power deficits, inadequate road network and insufficient facilities at its ports. Therefore, it is imperative to rapidly increase the investment in infrastructure from the current 6% of GDP (China invests 11% of GDP in infrastructure). L&T's strong balance sheet, sound execution engine, wide array of capabilities and integrated operations tailored to suit India's infrastructure growth story lead us to place faith in the company and its talent to tap the potential opportunity. Competitive position: L&T faces competition in most of the segments; but given its quality of construction and financial strength, the company has been able to evade it and maintain above-industry return ratios. Nature of business: Cyclical; Capital intensive; Low entry barriers for new players in most segments.
STOCK RETURNS (%) L&T SENSEX 3M 1Y 3Y 20.5 21.3 5Y 3.3 10Y 17.3 (9.0) (23.4) (2.6) (12.6) 10.2 32.6
31.4 28.8 27.0 23.3

Concerns overdone: L&T stock has underperformed BSE Sensex by ~25.3% in the past three months, owing to factors such as slowing order inflows and rising competition (especially in the BTG equipment segment), leading to fears of slippage on revised order inflow guidance. We believe though L&T would find it difficult to meet its guidance for FY2012, it is better placed than its peers on a number of parameters (such as diversification and balance sheet strength), and further its current market price factors in the shortterm negatives. Best stock to play the Indian infrastructure theme: We believe L&T is best placed to benefit from the gradual recovery in the capex cycle, given its diverse exposure to sectors, strong balance sheet and cash flow generation as compared to its peers, which grapple with issues such as strained cash flow, high leverage and limited net worth and technological capabilities. Valuations attractive: On the valuation front, due to the recent correction, the stock is trading at PE of 13.4x FY2013E earnings, adjusted for subsidiary value, which is lower than its historical PE of 15-20x. Hence, we believe the recent correction provides a good opportunity to Buy with a SOTP target price of ` 1,608.
190
January 2012

BALANCE SHEET
Y/E MARCH (` CR) ` SOURCES OF FUNDS EQUITY SHARE CAPITAL RESERVES& SURPLUS SHAREHOLDERS FUNDS TOTAL LOANS DEFERRED TAX LIABILITY TOTAL LIABILITIES APPLICATION OF FUNDS GROSS BLOCK LESS: ACC. DEPRECIATION NET BLOCK CAPITAL WORK-IN-PROGRESS INVESTMENTS CURRENT ASSETS CURRENT LIABILITIES NET CURRENT ASSETS MIS. EXP. NOT WRITTEN OFF TOTAL ASSETS 7,236 1,728 5,508 858 13,705 26,362 21,243 5,119 25,190 8,897 2,224 6,673 785 14,685 34,951 27,823 7,128 29,271 10,241 2,911 7,330 942 15,685 43,277 33,436 9,840 33,797 12,144 3,727 8,417 1,130 17,185 49,799 37,075 12,724 39,457 121 18,191 18,312 6,801 77 25,190 122 21,725 21,846 7,161 263 29,271 122 25,031 25,153 8,381 263 33,797 123 28,794 28,918 10,276 263 39,457 FY2010 FY2011 FY2012E FY2013E
% CHG
9.2
32,295 4,739
18.6
38,306 5,599
22.5
47,442 6,337
12.0
53,060 7,198
(% OF NET SALES)
DEPRECIATION& AMORTISATION INTEREST & OTHER CHARGES OTHER INCOME (INCL ASS/JV PFT )
12.9
380 505 768
12.9
562 647 1,087
11.9
687 750 1,606
12.1
816 853 1,734
(% OF PBT)
16.6
4,623 (1,394) 6,016 1,641
19.8
5,475 (429) 5,904 1,946
24.7
6,506 6,506 2,111
23.9
7,263 7,263 2,356
(% OF PBT)
PAT (REPORTED) LESS: MINORITY INTEREST (MI) PRIOR PERIOD ITEMS PAT AFTER MI (REPORTED) ADJ. PAT (EXCL. DIV. FROM SUBS)
27.3
4,376 4,376 2,893
33.0
3,958 3,958 3,342
32.4
4,395 4,395 3,921
32.4
4,906 4,906 4,361
% CHG
11.5
15.5
17.3
11.2
CASH FLOW STATEMENT

Y/E MARCH (` CR) ` PROFIT BEFORE TAX DEPRECIATION CHANGE IN WORKING CAPITAL LESS: OTHER INCOME DIRECT TAXES PAID CASH FLOW FROM OPERATIONS (INC.)/ DEC. IN FIXED ASSETS (INC.)/ DEC. IN INVESTMENTS OTHER INCOME CASH FLOW FROM INVESTING ISSUE OF EQUITY INC./(DEC.) IN LOANS DIVIDEND PAID (INCL. TAX) OTHERS CASH FLOW FROM FINANCING INC./(DEC.) IN CASH OPENING CASH BALANCES CLOSING CASH BALANCES FY2010 5,881 387 (1,143) 768 1,519 5,124 (1,481) (5,442) 768 (6,154) 2,133 168 863 249 1,687 657 775 1,432 FY2011 5,904 562 1,711 1,087 1,946 1,723 (1,589) (979) 1,087 (1,482) 347 360 996 345 57 299 1,432 1,730 1,220 1,085 (4) 131 573 1,730 2,304 1,895 1,139 (3) 753 (147) 2,304 2,157 FY2012E 6,506 687 2,139 1,606 2,111 1,337 (1,501) (1,000) 1,606 (895) FY2013E 7,263 816 3,030 1,734 2,356 958 (2,091) (1,500) 1,734 (1,858)
KEY RATIOS
January 2012
191
Infrastructure
JP Associates
Company Background
CMP/TP/Upside: `66 / `88 / 33%
Jaiprakash Associates (JAL), the flagship company of Jaypee Group, was set up in 1958 by Jai Prakash Gaur, who started as a small-time construction contractor in Kota, Rajasthan. Over the years, JAL has transformed itself into a large infrastructure conglomerate in India. The company is present across the following sectors: 1) cement (the third-largest group, ~26.2mt capacity in FY2011); 2) power (the largest private sector hydro-electric power utility, ~1,700MW operational capacity); 3) real estate (one of the largest land banks in NCR, with over 695mn sq. ft. area; 4) engineering and construction (E&C, the largest company in the hydro-electric power sector); 5) expressways/ highways (Yamuna expressway is one of the biggest toll projects); and 6) hospitality.
STOCK RETURNS (%) JAL SENSEX 3M (9.5) 1Y (27.9) 3Y 12.7 21.3 5Y (7.7) 3.3 10Y 17.3
Growth opportunity: Over the years, India has been experiencing infrastructurerelated concerns such as power deficits, inadequate road network and insufficient facilities at its ports. For bridging the infrastructure deficit and for sustaining a higher growth rate, the Twelfth Five-Year Plan envisages a total investment of ~US$1,000bn in infrastructure. Thus, JAL, being a diversified infrastructure conglomerate, is expected to benefit from the same. Competitive position: JAL faces stiff competition in all the segments. The company also operates in the commodity business (mainly cement), which gives it low bargaining power. Nature of business: Low entry barriers in all segments where JAL operates, except the technology-intensive hydro power segment.
Structural Snapshot
(2.6) (12.6)
FINANCIAL PERFORMANCE OVERVIEW (%) SALES GROWTH* PAT GROWTH* OPM# ROE# 3M 2.0 11.4 23.9 1Y 33.6 18.1 27.2 13.0 3Y 47.9 24.4 29.5 14.0 5Y 33.0 9.0 30.0 14.6 10Y -

Cement capacity expansion instills confidence: JAL is on its way to become one of the leading players in the cement space, following capacity expansion from 9.0mtpa in FY2008 to 35.9mtpa in the next few years. We believe the cement capacity that JAL proposes to set up would enable it to enjoy operating leverage benefits and catapult it into the league of cement majors like ACC and Ambuja. Diversified play: JAL is a unique play on the ongoing infrastructure theme with a bouquet of offerings in construction, cement, power and real estate. Moreover, not only does the company have diversified offerings, it also enjoys large benefits in each of them. We expect the company to benefit as the infrastructure theme pans out going ahead. Valuations: We have valued JAL's cement and construction business at 6x EV/EBITDA - `62.2/share and `31.2/share, respectively. We have valued its power and real estate business on mcap basis (giving 15% holding company discount), which contributes `57.0/share to our target price. The hotel segment contributes `0.8/share. Treasury shares (`5.7/share) have been valued at the current market price, whereas net debt is accounted for on a per share basis in our valuation at `68.6. We recommend a Buy rating on the stock with an SOTP target price of ` 88, implying an upside of 33% from current levels. 192 January 2012 Please refer to important disclosures at the end of this report
PROFIT & LOSS

BALANCE SHEET
Y/E MARCH (` CR) ` SOURCES OF FUNDS EQUITY SHARE CAPITAL RESERVES & SURPLUS SHAREHOLDERS FUNDS TOTAL LOANS DEFERRED TAX LIABILITY TOTAL LIABILITIES APPLICATION OF FUNDS GROSS BLOCK LESS: ACC. DEPRECIATION NET BLOCK CAPITAL WORK-IN-PROGRESS INVESTMENTS CURRENT ASSETS CURRENT LIABILITIES NET CURRENT ASSETS MIS. EXP. NOT WRITTEN OFF TOTAL ASSETS 5,853 7,246 27,366 5,647 7,506 32,325 6,759 7,441 34,691 8,526 8,123 35,676 12,847 2,228 10,619 3,892 5,576 14,796 2,840 11,957 6,353 6,484 18,966 3,619 15,348 4,447 7,428 21,311 4,494 16,817 3,113 7,596 425 8,076 8,501 17,909 956 27,366 425 8,972 9,397 21,708 1,220 32,325 425 9,379 9,804 23,666 1,220 34,691 425 10,088 10,514 23,942 1,220 35,676 FY2010 FY2011 FY2012E FY2013E
% CHG
68.4
7,465 2,891
33.6
10,076 3,756
(0.5)
10,396 3,368
16.4
12,108 3,909
(% OF NET SALES)
27.9
456 1,056 -
27.2
608 1,394 -
24.5
779 1,728 -
24.4
875 1,713 -
(% OF PBT)
1,379 719.5 2,098 390
1,754 0.8 1,755 587
861 861 279
1,321 1,321 429
(% OF PBT)
18.6
1,708 1,708 989
33.4
1,169 1,169 1,168
32.5
582 582 582
32.5
893 893 893
% CHG
10.2
18.1
(50.2)
53.5
CASH FLOW STATEMENT

Y/E MARCH (` CR) ` PROFIT BEFORE TAX DEPRECIATION CHANGE IN WORKING CAPITAL LESS: OTHER INCOME DIRECT TAXES PAID CASH FLOW FROM OPERATIONS INC./ (DEC.) IN FIXED ASSETS INC./ (DEC.) IN INVESTMENTS OTHER INCOME CASH FLOW FROM INVESTING ISSUE OF EQUITY INC./(DEC.) IN LOANS DIVIDEND PAID (INCL. TAX) OTHERS CASH FLOW FROM FINANCING INC./(DEC.) IN CASH OPENING CASH BALANCES CLOSING CASH BALANCES FY2010 1,065 456 2,725 271 (1,474) 3,077 (214) 2,863 87 4,803 176 (594) 5,307 971 2,909 3,879 FY2011 1,755 608 1,676 587 100 4,410 908 5,318 (4) 3,799 166 (172) 3,801 (1,417) 3,879 2,463 FY2012E 861 779 (532) 279 1,892 2,264 945 3,209 1,958 175 1,784 467 2,463 2,930 FY2013E 1,321 875 674 429 1,094 1,010 168 1,178 276 183 92 8 2,930 2,937
KEY RATIOS
Y/E MARCH VALUATION RATIO (X) P/E P/CEPS P/BV EV/SALES EV/EBITDA ` PER SHARE DATA (`) EPS (BASIC) EPS (FULLY DILUTED) CASH EPS DPS BOOK VALUE RETURNS (%) ROCE (PRE-TAX) ANGEL ROIC (PRE-TAX) ROE TURNOVER RATIOS (X) INVENTORY / SALES (DAYS) RECEIVABLES (DAYS) PAYABLES (DAYS) 49 58 239 42 67 186 46 74 195 45 69 205 10.2 15.2 13.0 10.5 14.6 13.0 7.7 10.2 6.1 8.6 10.7 8.8 4.7 4.7 10.2 1.1 40.0 5.5 5.5 8.4 0.8 44.2 2.7 2.7 6.4 0.8 46.1 4.2 4.2 8.3 0.9 49.4 14.2 6.5 1.7 2.7 9.7 12.0 7.9 1.5 2.4 8.9 24.2 10.3 1.4 2.5 10.3 15.7 7.9 1.3 2.2 9.0 FY2010 FY2011 FY2012E FY2013E
January 2012
193
Infrastructure
Sadbhav Eng.
Company Background
CMP/TP/Upside: `117 / `150 / 29%
Sadbhav Engineering Ltd. (SEL) was incorporated in 1988. The company is a leading EPC and infrastructure development company based in Ahmedabad. SEL is present in the roads and highways (87% of order book), irrigation (4%) and mining (9%) sectors. The company forayed into the road sector in 1995 and has since then executed several projects for NHAI and state governments. Currently, SEL is one of the largest BOT players in India with nine projects (operational: 4; under construction: 5) in its portfolio through its 77.8% owned subsidiary, Sadbhav Infrastructure Project Ltd. (SIPL).
Structural Snapshot
STOCK RETURNS (%) SEL SENSEX 3M (9.6) 1Y 13.7 3Y 54.7 21.3 5Y 18.0 3.3 10Y 17.3
Growth opportunity: SEL currently has an order book of `6,259cr (2.8x FY2011 revenue, which provides decent revenue visibility. However, in recent times, the road sector has witnessed very aggressive competition. SEL has stayed away from such competition, which has resulted in drying of order inflow for the company. Competitive position: During the past few quarters, the road sector has witnessed aggressive bidding due to the entry of many new players. Going ahead as well, we do not expect any significant moderation in competition, given the lack of opportunities from the other parts of the economy. Nature of business: Low entry barriers; Rate sensitive.
(2.6) (12.6)
FINANCIAL PERFORMANCE OVERVIEW (%) SALES GROWTH* PAT GROWTH* OPM# ROE# 3M 65.0 10.5 1Y 75.8 10.2 23.5 3Y 35.0 31.2 10.8 20.7 5Y 50.1 61.6 11.2 21.0 10Y -
32.1 122.1

Sound balance sheet: SEL has a sound balance sheet with parent net debt/equity at 0.6x as of 2HFY2012 - only company in our universe to have reduced its debt in FY2011. The company's working capital position (73 days - 1HFY2012) is also much better than its peers. This has insulated the company's earnings to a great extent in such an exorbitant interest rate scenario, which has been the key concern for the decline in the sector's earnings and has aided the company to outperform on the bourses. Funds tied up for projects in hand: SEL had successfully raised `400cr through stake dilution (22.2% in August 2010) in SIPL. This has made SEL fully tied up for the projects in hand. This money raising was a timely development for SEL, given its then huge equity commitment towards under development projects. Also, this helped the company to focus on project execution, which is SEL's forte, leading to early completion of projects - a rare phenomenon in the industry. Valuations: At current levels, the stock is trading at PE of 13.0x FY2013E standalone earnings. Our SOTP-based target price works out to `150/share, implying a 29% upside from current levels, based on a target P/E multiple of 9.0x to its FY2013E earnings and valuing its BOT arm on DCF (FCFE) basis. Hence, we recommend a Buy rating on the stock with a SOTP target price of ` 150. SEL is also one of our top picks in the sector.
194
January 2012

BALANCE SHEET
Y/E MARCH (` CR) ` SOURCES OF FUNDS EQUITY SHARE CAPITAL RESERVES & SURPLUS SHAREHOLDERS FUNDS TOTAL LOANS DEFERRED TAX LIABILITY TOTAL LIABILITIES APPLICATION OF FUNDS GROSS BLOCK LESS: ACC. DEPRECIATION NET BLOCK GOODWILL INVESTMENTS CURRENT ASSETS CURRENT LIABILITIES NET CURRENT ASSETS MIS. EXP. NOT WRITTEN OFF TOTAL ASSETS 332 122 210 144 1,009 534 476 830 372 142 230 326 1,434 952 482 1,038 412 173 238 381 1,718 1,043 676 1,295 456 208 248 477 1,726 1,045 681 1,405 13 379 392 424 14 830 15 611 626 396 16 1,038 15 749 764 515 16 1,295 15 929 944 445 16 1,405 FY2010 FY2011 FY2012E FY2013E
% CHG
TOTAL EXPENDITURE EBITDA (% OF NET SALES) DEPRECIATION & AMORTISATION INTEREST & OTHER CHARGES OTHER INCOME
17.0
1,119 138 11.0 23 33 17
75.8
1,983 226 10.2 27 43 20
17.8
2,333 270 10.4 31 57 39
(0.7)
2,311 273 10.6 35 53 95
(% OF PBT)
17.0
98 98 44
11.1
176 176 56
17.9
221 221 72
33.8
281 281 91
(% OF PBT)
45.0
54 54 54
32.0
120 120 120
32.4
149 149 137
32.4
190 190 134
% CHG
(28.6)
122.1
14.5
(1.9)
CASH FLOW STATEMENT

Y/E MARCH (` CR) ` PROFIT BEFORE TAX DEPRECIATION CHANGE IN WORKING CAPITAL LESS: OTHER INCOME DIRECT TAXES PAID CASH FLOW FROM OPERATIONS (INC.)/ DEC. IN FIXED ASSETS (INC.)/ DEC. IN INVESTMENTS OTHER INCOME CASH FLOW FROM INVESTING ISSUE OF EQUITY INC./(DEC.) IN LOANS DIVIDEND PAID (INCL. TAX) OTHERS CASH FLOW FROM FINANCING INC./(DEC.) IN CASH OPENING CASH BALANCES CLOSING CASH BALANCES
KEY RATIOS
FY2011 176 27 (34) 20 56 161 (39) (182) 20 (202) 123 (28) 10 (3) 81 40 45 85 FY2012E 221 31 218 39 72 (77) (40) (55) 39 (56) 119 11 108 (24) 85 60 FY2013E 281 35 (86) 95 91 215 (44) (95) 95 (44) (70) 11 (80) 91 60 151 Y/E MARCH VALUATION RATIO (X) P/E P/CEPS P/BV EV/SALES 32.4 22.7 4.5 1.7 15.4 14.6 11.9 2.8 0.9 9.1 12.8 10.4 2.3 0.8 8.2 13.0 10.3 1.9 0.8 7.5 FY2010 FY2011 FY2012E FY2013E
FY2010 98 23 155 17 44 (95) (72) (20) 17 (74) 213 6 (3) 204 35 10 45
EV/EBITDA ` PER SHARE DATA (`) EPS (BASIC) EPS (FULLY DILUTED) CASH EPS DPS BOOK VALUE RETURNS (%) ROCE (PRE-TAX) ANGEL ROIC (PRE-TAX) ROE TURNOVER RATIOS (X) INVENTORY / SALES (DAYS) RECEIVABLES (DAYS) PAYABLES (DAYS)
4.3 3.6 5.1 0.4 26.1
8.0 8.0 9.8 0.5 41.8
10.0 9.1 11.2 0.5 51.0
12.7 9.0 11.3 0.5 63.0
16.4 17.1 14.7
21.3 22.9 23.5
20.4 21.8 19.7
17.7 19.2 15.7
12 104 128
10 93 125
11 109 136
13 124 145
January 2012
195
Infrastructure
Punj Lloyd
Company Background
Punj Lloyd (Punj) is a diversified global engineering and construction company, with presence across the infrastructure (34% of order book), pipeline (20%), and process (20%) segments . Punj Group has three main entities - Punj, headquartered in India; SEC in Singapore; and Simon Carves in the U.K. Punj started as a pipeline company in 1982. Over the years, Punj, with the help of various JVs and acquisitions, has increased its expertise in basic infrastructure projects, such as roads, power, cross-country pipelines, urban infrastructure, tankages and terminals, and process plants, among others. Punj was listed in 2006; and in the same year, it acquired SEC and Simon Carves.
STOCK RETURNS (%) PUNJ SENSEX 3M (11.2) (2.6) 1Y (12.6) 3Y 21.3 5Y 3.3 10Y 17.3 (50.7) (24.5) (25.4)
Structural Snapshot
Growth opportunity: Currently, Punj has an order book of `26,690cr (3.4x FY2011 revenue) - ~45% domestic and the balance from overseas. Further, Punj Group is very diversified in terms of geography, as it is actively involved in projects in India, South Asia, South East Asia, the Caspian, Middle East and North Africa (MENA) and in some parts of U.K. and Europe. This offers a number of opportunities to Punj. Competitive position: Punj faces competition in most of the segments across geographies. For orders from the Middle East, Punj has been facing stiff competition from the Koreans who have bagged majority of the new orders, resulting in lower order booking for Punj. Nature of business: Low entry barriers in most segments, except the pipeline and oil and gas segments.
FINANCIAL PERFORMANCE OVERVIEW (%) SALES GROWTH* PAT GROWTH* OPM# ROE# 3M 3.4 8.4 1Y 5.2 3Y 0.4 4.1 5Y 36.0 5.9 6.5 10Y 20.3 (24.9)

Elongated working capital --> Increase in leverage: Over the past five years, there has been a steady deterioration in the company's working capital (164 days as of 2HFY2012 from 49 days in FY2007). Also, given significant delays for release of payments by PSU clients, has led to the company's net debt to equity deteriorated to 1.4x at the end of 2HFY2012 from 0.5x at the end of FY2007. Auditor qualification: Punj has total auditor qualification of ~`1,400cr (~47% of net worth FY2011), which is significantly above comfort levels. Further, lack of clarity on these and material impact of the same would remain an overhang on the stock. Quality of order book: Punj has not removed the slow-moving Libyan orders (`3,900cr) from its order book (`26,990cr), despite political instability in Libya. Further, these orders have been slow moving since the last 3-4 quarters. Poor profitability: Punj's performance at the earnings level has been poor with the company posting losses at consolidated level in the past few years. Further, going ahead as well, limited clarity on the same remains a concern. Valuations: We have valued Punj on 0.5x P/BV (FY2013) and have arrived at a fair value of `47. We continue to maintain our Neutral view on the stock due to the above-mentioned concerns.
ANGEL ESTIMATES PARTICULARS PAT GROWTH (%) ROE (%) P/E P/BV
FY2012E 2.1 25.7 0.5
FY2013E 53.3 3.1 16.8 0.5
196
January 2012

BALANCE SHEET
Y/E MARCH (` CR) ` SOURCES OF FUNDS EQUITY SHARE CAPITAL RESERVES & SURPLUS SHAREHOLDERS FUNDS TOTAL LOANS DEFERRED TAX LIABILITY TOTAL LIABILITIES APPLICATION OF FUNDS GROSS BLOCK LESS: ACC. DEPRECIATION NET BLOCK CAPITAL WORK-IN-PROGRESS INVESTMENTS CURRENT ASSETS CURRENT LIABILITIES NET CURRENT ASSETS MIS. EXP. NOT WRITTEN OFF TOTAL ASSETS 3,120 943 2,178 160 382 8,828 3,843 4,985 7,709 3,365 1,113 2,252 213 384 9,367 4,468 4,898 7,752 3,865 1,407 2,458 293 384 11,157 5,452 5,704 8,843 4,185 1,725 2,460 209 384 12,191 6,013 6,178 9,236 66.4 2,961 3,027 4,455 184 7,709 66.4 2,912 2,979 4,542 156 7,752 66.4 2,961 3,027 5,586 156 8,843 66.4 3,043 3,110 5,896 156 9,236 FY2010 FY2011 FY2012E FY2013E
% CHG
(12.3)
10,083 365
(24.9)
7,438 411
22.1
8,786 799
10.5
9,699 893
(% OF NET SALES)
3.5
227 387 108
5.2
269 463 189
8.3
294 506 98
8.4
318 545 113
(% OF PBT)
(76.7)
(141) (162) 21 137
(141.8)
(133) (149) 16 66
101.3
97 97 34
79.0
143 143 46
(% OF PBT)
654.4
(116) (2) (108) (363)
417.3
(50) (3) (60) (179)
35.0
63 63 63
32.5
96 96 96
% CHG
51.1
53.3
CASH FLOW STATEMENT

Y/E MARCH (` CR) ` PROFIT BEFORE TAX DEPRECIATION CHANGE IN WORKING CAPITAL LESS: OTHER INCOME DIRECT TAXES PAID CASH FLOW FROM OPERATIONS (INC.)/DEC. IN FIXED ASSETS (INC.)/DEC. IN INVESTMENTS OTHER INCOME CASH FLOW FROM INVESTING ISSUE OF EQUITY INC./(DEC.) IN LOANS DIVIDEND PAID (INCL. TAX) OTHERS CASH FLOW FROM FINANCING INC./(DEC.) IN CASH OPENING CASH BALANCES CLOSING CASH BALANCES FY2010 21 227 1,786 108 137 (1,783) (338) 279 108 50 648 896 6 (6) 1,532 (201) 812 611 FY2011 16 269 (690) 189 66 721 (297) (2) 189 (111) (8) 87 6 (79) (6) 604 611 1,215 FY2012E 97 294 1,087 98 34 (829) (580) 98 (482) 1,043 14 1,029 (282) 1,215 933 FY2013E 143 318 216 113 46 85 (237) 113 (124) 310 14 296 258 933 1,191
KEY RATIOS
Y/E MARCH VALUATION RATIO (X) P/E P/CEPS P/BV EV/SALES EV/EBITDA ` PER SHARE DATA (`) EPS (BASIC) EPS (FULLY DILUTED) CASH EPS DPS BOOK VALUE RETURNS (%) ROCE (PRE-TAX) ANGEL ROIC (PRE-TAX) ROE TURNOVER RATIOS (X) INVENTORY / SALES (DAYS) RECEIVABLES (DAYS) PAYABLES (DAYS) 145 85 151 221 102 194 205 98 197 214 102 206 2.0 2.2 (13.2) 1.8 2.1 (5.9) 6.1 7.0 2.1 6.4 7.2 3.1 (10.9) (10.9) (4.1) 0.2 91.2 (5.4) (5.4) 2.7 0.2 89.7 1.9 1.9 10.7 0.4 91.2 2.9 2.9 12.5 0.4 93.6 0.5 0.5 15.0 17.8 0.5 0.6 12.0 25.7 4.5 0.5 0.7 7.8 16.8 3.9 0.5 0.6 7.1 FY2010 FY2011 FY2012E FY2013E
January 2012
197
Infrastructure
HCC
Company Background
Established in 1926, Hindustan Construction Company (HCC) is one of India's oldest construction and infrastructure development companies. HCC's core business is diversified across three broad verticals: 1) engineering and construction (E&C); 2) asset development; and 3) real estate. HCC's E&C order book is dominated by the power (hydro and nuclear) segment 58% of OB, followed by road (22%) and irrigation (20%).
Structural Snapshot
Growth opportunity: Since the past few quarters, order inflow for HCC has been very sluggish due to various concerns affecting the sector (read power), resulting in a decline in its order book. This trend is expected to continue for some more quarters, given the power sector is facing cyclical and structural problems; hence, HCC's medium-term growth prospects look weak. Competitive position: HCC is expected to maintain its market share in the hydro and nuclear power segments, as there are just a handful of players in these segments. However, in the road segment, HCC is expected to lose its market share on account of intense bidding and entry of many new players, which will make it difficult for HCC to win new projects. Nature of business: Cyclical; Rate sensitive; Low entry barriers except for the hydro and nuclear power segments.
STOCK RETURNS (%) HCC SENSEX 3M 1Y 3Y 21.3 5Y 3.3 10Y 27.2 17.3 (21.3) (46.9) (2.6) (12.6) (1.3) (22.3)
FINANCIAL PERFORMANCE OVERVIEW (%) PAT GROWTH* OPM# ROE# 3M 1Y 12.3 13.2 4.7 3Y 9.9 (1.0) 12.8 6.2 5Y (1.7) 10Y 7.1 SALES GROWTH* (6.2) 11.7 15.6 25.1 11.9 13.0 6.5 13.2
- (12.8)

Huge investments and elongated working capital = Balance sheet stretched: HCC's balance sheet is loaded with debt (`4,171cr as of 2QFY2012; net D/E = 2.7 - standalone level) because of its BOT/real estate investments and funding of its working capital requirements (328 days as of 1HFY2012). Going ahead as well, owing to its commitments, we believe HCC will not get any respite on these fronts. Deteriorating business environment: Slowdown on the execution front, along with macro headwinds faced by the sector, has resulted in eroding the company's profitability. Further, the fact that there are no signs of reversal in sight paints a bleak outlook for the company in the medium term. Uncertainty on the Lavasa project: Lavasa received clearance for the construction and development for Phase 1 in November 2011, post one year of legal battle with MOEF, which resulted in huge losses to HCC. However, the project still remains under the cloud of uncertainty and continues to be an overhang on the stock. Valuations: We have valued HCC on an SOTP basis with a fair value of `32/share, by assigning 6x FY2013E earnings for the EPC arm (`3.9/share). The company's real estate venture (`11.7/share) has been valued on NAV basis (50% discount). BOT assets (`16.3/share) have been valued by giving a 30% discount to the Private Equity deal. Although our fair value implies an upside of 52.7% from current levels, we continue to maintain our Neutral recommendation on the stock, owing to the above-mentioned concerns.
ANGEL ESTIMATES PARTICULARS PAT GROWTH (%) ROE (%) P/E P/BV FY2012E 1.0 FY2013E 3.1 33.6 1.1
198
January 2012

BALANCE SHEET
Y/E MARCH (` CR) ` SOURCES OF FUNDS EQUITY SHARE CAPITAL RESERVES & SURPLUS SHAREHOLDERS FUNDS TOTAL LOANS DEFERRED TAX LIABILITY TOTAL LIABILITIES APPLICATION OF FUNDS GROSS BLOCK LESS: ACC. DEPRECIATION NET BLOCK CAPITAL WORK-IN-PROGRESS INVESTMENTS CURRENT ASSETS CURRENT LIABILITIES NET CURRENT ASSETS MIS. EXP. NOT WRITTEN OFF TOTAL ASSETS 1,814 664 1,150 35 409 4,624 2,043 2,581 4,174 1,987 803 1,184 26 531 6,096 2,677 3,419 5,160 2,161 973 1,189 62 627 6,817 2,820 3,996 5,873 2,370 1,159 1,211 63 740 7,257 3,980 3,277 5,290 30 1,502 1,517 2,515 143 4,174 61 1,462 1,522 3,471 166 5,160 61 1,225 1,271 4,436 166 5,873 61 1,201 1,246 3,878 166 5,290 FY2010 FY2011 FY2012E FY2013E
% CHG
10.0
3,201 443
12.3
3,553 540
(4.3)
3,446 470
18.3
4,050 583
(% OF NET SALES)
12.2
114 205 13
13.2
153 290 17
12.0
170 411 12
12.6
186 355 17
(% OF PBT)
RECURRING PBT
10.7
122
15.2
112
(12.0)
(99)
28.9
59
% CHG
5.8
122 40
(8.4)
112 41
(188.8)
(166) (266) (78)
(159.3)
59 20
(% OF PBT)
33.2
81 81 81
36.4
71 71 71
29.4
(187) (187) (187)
33.6
39 39 39
% CHG
7.2
(12.8)
CASH FLOW STATEMENT

KEY RATIOS
FY2011 112 153 832 17 41 (625) (164) (123) 17 (270) (38) 957 (28) 10 901 5 188 194 FY2012E (266) 170 666 12 (78) (695) (210) (96) 12 (294) 965 (64) 901 (88) 194 105 FY2013E 59 186 (755) 17 20 963 (210) (113) 17 (306) (558) (64) (622) 35 105 141 Y/E MARCH VALUATION RATIO (X) P/E P/CEPS P/BV EV/SALES 16.1 6.7 0.9 1.0 8.2 18.5 5.9 0.9 1.1 8.5 1.0 1.4 12.0 33.6 5.8 1.1 1.1 8.7 FY2010 FY2011 FY2012E FY2013E
FY2010 122 114 647 13 40 (465) (120) (43) 13 (150) 459 193 (28) 25 649 34 154 188
2.7 1.3 3.2 0.8 25.0
1.2 1.2 3.7 0.9 25.1
(3.1) (3.1) (0.3) 0.9 21.0
0.6 0.6 3.7 0.9 20.5
8.6 9.0 6.5
8.3 8.6 4.7
5.4 5.6 -
7.1 7.3 3.1
318 1 186
360 0.4 229
438 283
391 299
January 2012
199
Infrastructure
NCC
Company Background
CMP/TP/Upside: `46 / `59 / 28%
Nagarjuna Construction Company (NCC), starting off as a building/industrial construction company, has emerged as an EPC contractor with a diversified product portfolio. NCC's presence across all the key infrastructure verticals: 1) roads (4% of order book); 2) buildings (39%); 3) water (11%); 4) irrigation (12%); 5) electrical (4%); 6) power (9%); 7) oil and gas (6%); and 8) metals (2%) endows it with a relatively de-risked business model. NCC has also ventured in international geographies (11% of order book) such as Oman and UAE, which further diversifies its business.
Structural Snapshot
STOCK RETURNS (%) NCC SENSEX 3M 1Y 3Y 21.3 5Y 3.3 10Y 17.3 (18.0) (59.9) (2.6) (12.6) (7.8) (26.6) 36.5
Growth opportunity: Currently, NCC has an order book of ~`16,570cr (3.3x FY2011 revenue), which provides good revenue visibility. NCC's order inflow has been decent at `3,095cr in 1HFY2012, on account of its presence in nine verticals. Management expects the road, building, water and electrical segments to gather momentum and add significantly to the company's order book. Further, NCC's order book will get a boost because of its captive power plant orders worth ~`5,000cr. Competitive position: NCC faces tough competition in all the segments it operates in. During the past few quarters, the road sector has witnessed entry of many new players, leading to aggressive bidding. NCC has not been able to bag any road BOT project in past 8-10 quarters due to its conservative bidding strategy. Nature of business: Low entry barriers; Rate sensitive.
FINANCIAL PERFORMANCE OVERVIEW (%) PAT GROWTH* OPM# ROE# 3M 1Y 6.2 9.6 7.1 3Y 13.5 0.3 9.6 8.9 5Y 10Y SALES GROWTH* (9.2) 9.5 22.5 35.3 9.3 41.6 9.7 8.9 10.2 14.8
(75.2) (18.4)

Strong and diversified infrastructure play: The government's focused initiatives towards infrastructure creation with active participation of the private sector will hold key to the Indian economy's growth. For bridging the infrastructure deficit and for sustaining a higher growth rate, the Twelfth Five-Year Plan envisages a total investment of ~US$1trillion in infrastructure. NCC, with its diversified presence, is well placed to benefit from the opportunities presented by this spending. Valuations: At the current price, the stock is trading at attractive valuations (4.5x its FY2013E earnings adjusted for its investments and subsidiaries) and at 0.5x FY2013E on P/BV basis (standalone). We have valued NCC on an SOTP basis with a target price of `59/share, by assigning 8.0x FY2013E earnings for its E&C arm (`30.7/share) and 5.0x FY2013E earnings for its international subsidiaries (`7.6/share). The company's real estate venture (`1.9/share) has been valued on P/B basis and its BOT assets (`8.4/share) have been valued on DCF basis. The company's power ventures (`10.8/ share) have been valued on P/BV basis (0.5-1). Our target price implies an upside of 28% from current levels. Hence, we recommend Buy on the stock with a SOTP target price of ` 59.
200
January 2012

BALANCE SHEET
Y/E MARCH (` CR) ` SOURCES OF FUNDS EQUITY SHARE CAPITAL RESERVES & SURPLUS SHAREHOLDERS FUNDS TOTAL LOANS DEFERRED TAX LIABILITY TOTAL LIABILITIES APPLICATION OF FUNDS GROSS BLOCK LESS: ACC. DEPRECIATION NET BLOCK CAPITAL WORK-IN-PROGRESS INVESTMENTS CURRENT ASSETS CURRENT LIABILITIES NET CURRENT ASSETS MIS. EXP. NOT WRITTEN OFF TOTAL ASSETS 756 202 553.8 43.4 941 4,092 1,845 2,247 3,785 923 249 674.5 46.9 1,201 4,946 1,974 2,971 4,894 1,053 327 726.4 50.5 1,501 4,965 2,051 2,915 5,192 1,233 418 814.8 56.7 1,849 5,755 2,401 3,354 6,074 51.3 2,178 2,230 1,530 25 3,785 51.3 2,327 2,379 2,484 31 4,894 51.3 2,377 2,428 2,734 31 5,192 51.3 2,433 2,484 3,559 31 6,074 FY2010 FY2011 FY2012E FY2013E
% CHG
15.1
4,294 483
6.2
4,586 488
0.4
4,609 486
12.8
5,208 542
(% OF NET SALES)
10.1
53 196 69
9.6
69 257 103
9.5
78 361 89
9.4
92 424 119
(% OF PBT)
22.6
303 (34) 337 116
38.9
266 266 97
65.6
135 135 44
81.8
146 146 47
(% OF PBT)
34.5
221 4.1 217 200
36.7
168 4.8 163 163
32.4
91 91 91
32.4
99 99 99
% CHG
30.2
(18.4)
(44.1)
7.8
CASH FLOW STATEMENT

Y/E MARCH (` CR) ` FY2010 FY2011 266 69 768 103 97 (635) (170) (260) 103 (327) 954 30 (6) 918 (44) 184 140 FY2012E 135 78 (45) 89 44 126 (134) (300) 89 (345) 249 42 207 (12) 140 128 FY2013E 146 92 464 119 47 (393) (186) (348) 119 (415) 826 42 784 (24) 128 104 PROFIT BEFORE TAX (EXCLUDING MI) 337 DEPRECIATION CHANGE IN WORKING CAPITAL LESS: OTHER INCOME DIRECT TAXES PAID CASH FLOW FROM OPERATIONS (INC.)/ DEC. IN FIXED ASSETS (INC.)/ DEC. IN INVESTMENTS OTHER INCOME CASH FLOW FROM INVESTING ISSUE OF EQUITY INC./(DEC.) IN LOANS DIVIDEND PAID (INCL. TAX) OTHERS CASH FLOW FROM FINANCING INC./(DEC.) IN CASH OPENING CASH BALANCES CLOSING CASH BALANCES
KEY RATIOS
Y/E MARCH VALUATION RATIOS (X) P/E P/CEPS P/BV EV/SALES 5.9 4.7 0.5 0.5 5.2 7.2 5.1 0.5 0.7 7.2 12.9 7.0 0.5 0.7 7.8 12.0 6.2 0.5 0.8 8.6 FY2010 FY2011 FY2012E FY2013E
53 477 69 116 (272) (148) (201) 69 (280) 361 286 39 (6) 602 49 135 184
EV/EBITDA ` PER SHARE DATA (`) EPS (BASIC) EPS (FULLY DILUTED) CASH EPS DPS BOOK VALUE RETURNS (%) ROACE (PRE-TAX) ANGEL ROIC (PRE-TAX) ROE TURNOVER RATIOS (X) INVENTORY / SALES (DAYS) RECEIVABLES (DAYS) PAYABLES (DAYS)
8.4 7.8 9.9 1.3 86.9
6.4 6.4 9.0 1.0 92.7
3.6 3.6 6.6 1.4 94.6
3.8 3.8 7.4 1.4 96.8
12.8 13.4 10.2
9.7 10.0 7.1
8.1 8.3 3.8
8.0 8.2 4.0
57 89 126
59 99 131
64 97 139
61 84 135
January 2012
201
Infrastructure
IVRCL
Company Background
CMP/TP/Upside: `40 / `56 / 40%
STOCK RETURNS (%) IVRCL SENSEX 3M 1Y 3Y 21.3 5Y 3.3 10Y 8.0 (59.5) (11.0) (27.7) 26.8 (2.6) (12.6) 17.3
IVRCL is one of the leading construction companies in India. Set up in 1987, the company is based in Hyderabad and is promoted by E Sudhir Reddy. IVRCL has a track record of executing infrastructure projects over the past two decades. The company is the leader in water management and irrigation systems in India. The company also operates in the construction of road, buildings, industrial structures and power transmission towers. IVRCL has two listed subsidiaries, namely: 1) IVRCL Assets and Holdings (IVRCLAH) and 2) Hindustan Dorr Oliver (HDO). IVRCLAH currently holds BOT projects assets (to be demerged and amalgamated with IVRCL from FY2013) and land bank. H DO is mainly involved in industrial projects in areas of mining and minerals, water and wastewater, fertilizers and chemicals and pulp and paper.
Structural Snapshot
Growth opportunity: Currently, IVRCL has a robust order book of ~`25,500cr (4.5x FY2011 revenue), which provides good revenue visibility. Diversified across six segments, the order book is dominated by the irrigation and water segment (42%), followed by the transportation (26%) and building (20%) segments. In the past few quarters, despite order inflow being very sluggish for the sector, IVRCL has scored well. The company witnessed order inflow of ~`8,000cr in 1HFY2012. However, going ahead, times are challenging for contractors as the sector is under pressure and facing various headwinds. Competitive position: IVRCL faces tough competition in all the segments it operates in and has no bargaining power. Nature of business: Low entry barriers; Rate sensitive.
FINANCIAL PERFORMANCE OVERVIEW (%) PAT GROWTH* OPM# ROE# 3M 1Y 2.9 9.1 8.2 3Y 15.6 (9.1) 9.1 11.0 5Y 10Y SALES GROWTH* (2.7) 9.0 30.5 35.9 11.2 28.6 9.4 12.6 9.1 18.2
(65.1) (25.3)

Equity infusion - The key catalyst: IVRCL is looking for funds either through monetizing captive road projects or monetizing its land bank, given its equity commitment over the next 12-18 months and its already stretched balance sheet. Management has chalked out a plan to reduce the company's debt levels by FY2012-end and is looking to amalgamate its BOT assets back to IVRCL - thereby creating clarity over the end-use of funds. If this is achieved, it would not only improve IVRCL's working capital cycle but also lend a fillip for the execution of its parent company. Trading at undemanding valuations: At current levels, IVRCL is trading at valuations of mere 0.5x FY2013E P/BV and 8.6x PE on FY2013E basis (standalone basis). We have valued IVRCL on an SOTP basis - the core construction business has been valued at P/E of 8.0x FY2013E EPS of `4.6 (`37.0/share), whereas its stake in subsidiaries IVRCLAH (`15.5/share) and HDO (`3.8/share) has been valued on mcap basis, post assigning a 20% holding company discount. Hence we maintain Buy on the stock with a SOTP target price of ` 56.
202
January 2012

BALANCE SHEET
Y/E MARCH (` CR) ` SOURCES OF FUNDS EQUITY SHARE CAPITAL RESERVES & SURPLUS SHAREHOLDERS FUNDS TOTAL LOANS DEFERRED TAX LIABILITY TOTAL LIABILITIES APPLICATION OF FUNDS GROSS BLOCK LESS: ACC. DEPRECIATION NET BLOCK CAPITAL WORK-IN-PROGRESS INVESTMENTS CURRENT ASSETS CURRENT LIABILITIES NET CURRENT ASSETS MIS. EXP. NOT WRITTEN OFF TOTAL ASSETS 750 184 566 35 614 4,952 2,437 2,264 (1) 3,478 924 232 692 26 635 5,703 2,713 2,739 4,092 1,049 326 723 45 685 6,378 2,658 3,457 4,910 1,199 432 767 48 735 7,338 3,060 4,001 5,550 53 1,800 1,853 1,613 12 3,478 53 1,934 1,987 2,096 9 4,092 53 2,016 2,069 2,832 9 4,910 53 2,121 2,174 3,367 9 5,550 FY2010 FY2011 FY2012E FY2013E
% CHG
10.3
4,961 531
2.9
5,137 515
(0.9)
5,104 494
15.4
5,865 593
(% OF NET SALES)
9.7
54 212 64
9.1
76 263 57
8.8
93 345 93
9.2
107 397 93
(% OF PBT)
19.4
329 329 118
24.3
233 233 75
62.5
149 149 48
51.0
183 183 59
(% OF PBT)
35.7
211 211 211
32.1
158 158 158
32.4
101 101 101
32.4
124 124 124
% CHG
(6.5)
(25.3)
(36.1)
22.5
CASH FLOW STATEMENT

Y/E MARCH (` CR) ` PROFIT BEFORE TAX DEPRECIATION CHANGE IN WORKING CAPITAL LESS: OTHER INCOME DIRECT TAXES PAID CASH FLOW FROM OPERATIONS (INC.)/ DEC. IN FIXED ASSETS (INC.)/ DEC. IN INVESTMENTS OTHER INCOME CASH FLOW FROM INVESTING ISSUE OF EQUITY INC./(DEC.) IN LOANS DIVIDEND PAID (INCL. TAX) OTHERS CASH FLOW FROM FINANCING INC./(DEC.) IN CASH OPENING CASH BALANCES CLOSING CASH BALANCES FY2010 329 54 248 64 129 (58) (104) (105) 64 (145) 220 (21) 68 266 63 101 164 FY2011 233 76 497 57 75 (320) (165) (21) 57 (129) 483 (18) (37) 428 (21) 164 143 FY2012E 149 93 710 93 48 (609) (144) (50) 93 (101) 736 (19) 717 8 143 151 FY2013E 183 107 550 93 59 (413) (153) (50) 93 (109) 535 (19) 517 (6) 151 145
KEY RATIOS
Y/E MARCH VALUATION RATIOS P/E P/CEPS P/BV EV/SALES EV/EBITDA ` PER SHARE DATA (`) EPS (BASIC) EPS (FULLY DILUTED) CASH EPS DPS BOOK VALUE RETURNS (%) ROACE (PRE-TAX) ANGEL ROIC (PRE-TAX) ROE TURNOVER RATIOS (X) INVENTORY / SALES (DAYS) RECEIVABLES (DAYS) PAYABLES (DAYS) 15 118 142 17 141 180 20 147 189 21 140 174 14.2 14.8 11.5 11.6 12.1 8.2 8.9 9.2 5.0 9.3 9.6 5.8 7.8 7.9 9.9 1.5 69.4 5.9 5.9 8.8 1.6 74.4 3.8 3.8 7.3 1.7 77.5 4.6 4.6 8.6 1.8 81.4 5.0 4.0 0.6 0.5 4.7 6.7 4.6 0.5 0.5 5.9 10.6 5.5 0.5 0.7 7.6 8.6 4.6 0.5 0.7 7.2 FY2010 FY2011 FY2012E FY2013E
January 2012
203
Infrastructure
Simplex Infra
Company Background
CMP/TP/Upside: `198 / `233 / 18%
Simplex Infrastructure (Simplex) is one of oldest construction companies in India, based in Kolkata. Over the years, Simplex has diversified across various segments to encash upon the untapped construction opportunities, and it has an excellent track record of achieving the same. The company is present across eight segments - buildings (24% of order book), bridges (7%), industrial (14%), marine (2%), pilling (5%), power (25%), rail and roads (13%) and urban infrastructure (10%).
Structural Snapshot
Growth opportunity: Simplex is a pure construction play (not an asset developer) and has its order book growth linked to industrial capex and infrastructure spend. In the past many quarters, there has been a slowdown in industrial capex owing to various issues, such as slowdown in demand, high interest rates and delays on clearances. Recent management commentary and our interaction with various industry heads indicate that the slowdown is expected to persist in the near term and revival can be expected only in 2HFY2013. On the infrastructure front, apart from the road segment, no other segment is witnessing decent order awarding. Competitive position: Simplex faces fierce competition in most of the segments, given the market is highly fragmented and requires little specialization. Nature of business: Working capital intensive; Cyclical and interest-rate sensitive sector; Low technological intensity and no entry barriers.
STOCK RETURNS (%) SIMPLEX SENSEX 3M 1Y 3Y 21.3 5Y 3.3 10Y 17.3 (8.5) (45.6) (2.6) (12.6) 12.0 (11.9) 45.0
FINANCIAL PERFORMANCE OVERVIEW (%) SALES GROWTH* PAT GROWTH* OPM# ROE# 3M 25.7 9.0 1Y 7.1 9.8 10.3 3Y 5Y 10Y 20.3 (19.8) 28.7 5.8 (36.2) 35.6 9.5 12.6 9.4 15.0 8.5 15.6
(33.5) (16.1)

Diversified play: Simplex is involved in the different segments of the infrastructure sector, indicating the company's strong execution capabilities. In terms of its client profile, Simplex has a healthy mix of private (62% of order book), government (29%) and PPP projects (9%). This successful diversification has not only provided Simplex the experience of executing different and complex projects but has also qualified it to bid for bigger ticket-size projects going ahead. Better placed than most peers: Simplex has faced problems on two major fronts - high leverage on the balance sheet (net D/E 1.6x as of 1HFY2012) and slowdown on the order inflow front. These problems are primarily due to higher working capital days (from 92 days in FY2010 to 123 days in 1HFY2012 - but not due to huge investments in ambitious BOT projects) and slowing economy. Therefore, once the economy revives, Simplex would be one of the infra companies to benefit the most, considering that it has no structural issues compared to peers. Valuations attractive: Due to the recent correction, the stock is trading at PE of 7.6x FY2013E earnings, which is lower than its historical PE of 1520x. Hence, we believe the recent correction provides a good opportunity to Buy with a target price of ` 233.
204
January 2012

BALANCE SHEET
Y/E MARCH (` CR) ` SOURCES OF FUNDS EQUITY SHARE CAPITAL RESERVES & SURPLUS SHAREHOLDERS FUNDS TOTAL LOANS DEFERRED TAX LIABILITY TOTAL LIABILITIES APPLICATION OF FUNDS GROSS BLOCK LESS: ACC. DEPRECIATION NET BLOCK CAPITAL WORK-IN-PROGRESS INVESTMENTS CURRENT ASSETS CURRENT LIABILITIES NET CURRENT ASSETS MIS. EXP. NOT WRITTEN OFF TOTAL ASSETS 1,277 289 988 19 3 3,125 1,760 1,364 2,374 1,509 385 1,123 27 23 3,767 2,048 1,719 2,893 1,684 495 1,189 30 78 4,517 2,284 2,233 3,530 1,859 616 1,243 33 183 5,035 2,842 2,193 3,652 10 968 978 1,302 88 2,374 10 1,078 1,088 1,661 138 2,893 10 1,160 1,170 2,216 138 3,530 10 1,277 1,287 2,220 138 3,652 FY2010 FY2011 FY2012E FY2013E
% CHG
(3.1)
4,110 454
7.1
4,412 477
13.8
5,042 520
16.6
5,872 613
(% OF NET SALES)
10.0
157 122 26
9.8
167 148 38
9.4
184 235 40
9.5
206 255 40
(% OF PBT)
13.0
201 201 71
18.8
200 (18) 218 92
28.1
141 141 46
20.8
193 193 62
(% OF PBT)
35.6
129 1.9 127 127
42.3
126 1.4 125 107
32.4
95 1.1 94 94
32.4
130 1.4 129 129
% CHG
9.2
(16.1)
(11.9)
36.8
CASH FLOW STATEMENT

Y/E MARCH (` CR) ` PROFIT BEFORE TAX (EXCL. MI) DEPRECIATION CHANGE IN WORKING CAPITAL LESS: OTHER INCOME DIRECT TAXES PAID CASH FLOW FROM OPERATIONS (INC.)/ DEC. IN FIXED ASSETS (INC.)/ DEC. IN INVESTMENTS OTHER INCOME CASH FLOW FROM INVESTING ISSUE OF EQUITY INC./(DEC.) IN LOANS DIVIDEND PAID (INCL. TAX) OTHERS CASH FLOW FROM FINANCING INC./(DEC.) IN CASH OPENING CASH BALANCES CLOSING CASH BALANCES FY2010 201 92 314 26 46 (93) (118) (1) 26 (93) 107 12 82 177 (9) 119 110 FY2011 217 96 357 38 16 (97) (241) (20) 38 (223) 358 11 (29) 318 (2) 110 108 FY2012E 140 109 518 40 46 (354) (178) (55) 40 (193) 555 12 543 (4) 108 104 FY2013E 191 121 (88) 40 62 297 (178) (105) 40 (243) 5 12 0 (7) 47 104 152
KEY RATIOS
Y/E MARCH VALUATION RATIO (X) P/E P/CEPS P/BV EV/SALES EV/EBITDA ` PER SHARE DATA (`) EPS (BASIC) EPS (FULLY DILUTED) CASH EPS DPS BOOK VALUE RETURNS (%) ROACE (PRE-TAX) ANGEL ROIC (PRE-TAX) ROE TURNOVER RATIOS (X) INVENTORY / SALES (DAYS) RECEIVABLES (DAYS) PAYABLES (DAYS) 54 139 141 55 153 141 59 165 141 61 158 143 13.0 13.7 13.5 11.8 12.3 10.3 10.4 10.8 8.3 11.3 11.8 10.5 25.6 25.6 44.2 2.0 196.9 25.1 21.5 40.9 2.0 219.0 18.9 18.9 41.0 2.0 235.6 25.9 25.9 50.2 2.0 259.2 7.7 4.5 1.0 0.5 4.8 9.2 4.8 0.9 0.5 5.3 10.4 4.8 0.8 0.6 5.9 7.6 3.9 0.8 0.5 5.0 FY2010 FY2011 FY2012E FY2013E
January 2012
205
Infrastructure
RATING 52 WEEK HIGH / LOW MARKET CAP (` CR) ` LIQUIDITY NEUTRAL 258 / 73 687 MEDIUM
Patel Engineering
Patel Engineering (PEL) provides the entire range of civil engineering services involved in the design and construction of hydroelectric projects, commercial buildings, industrial complexes, dams, tunnels, underground structures, bridges and national highways. The power (40%) and irrigation (46%) segments account for a majority of PEL's total order book and the balance is contributed by the transportation segment (14%).
Structural Snapshot
Growth opportunity: Though there is a large potential in hydropower development in India, it is hit by several headwinds such as land acquisition, environment and forest clearances, geological surprises, rehabilitation and resettlement (R&R) issues, funding issues, free power conditions imposed by states, and law and order problems in some projects. With the current policy paralysis, we do not expect these problems to be resolved and the resultant ordering activity from the hydro power segment is expected to be slow. After the political crisis in Andhra Pradesh, ordering activity in the irrigation segment has come down considerably - sensing that many companies have diversified into different segments, which PEL has not been able to carry out. On the transportation front, PEL is serving a one-year ban from the NHAI's side and, hence, order inflow is expected to be muted. Competitive position: PEL faces fierce competition in the transportation and irrigation segment, given the market is highly fragmented and requires little specialization. The company is expected to maintain its market share in the hydro power segments, as there are just a handful of players. Nature of business: Working capital intensive; Cyclical and interest-rate sensitive sector; Relatively high technological intensity than peers and moderateto-high entry barriers.
STOCK RETURNS (%) PEL SENSEX 3M 1Y 3Y 21.3 5Y 3.3 10Y 17.3 3.3 (61.1) (15.4) (26.8) 20.2 (2.6) (12.6)
FINANCIAL PERFORMANCE OVERVIEW (%) SALES GROWTH* PAT GROWTH* OPM# ROE# 3M 23.8 11.8 1Y 8.9 14.3 8.8 3Y 23.3 (6.8) 15.4 26.6 5Y 30.5 10.6 14.8 27.0 10Y -
(31.0) (38.1)

Structural issues on the business front: PEL's core E&C business is currently facing strong headwinds, with its large projects facing delays and drying of order inflow for the last many quarters. Further, the longer gestation nature of its order book and increasing debt levels put the company's growth visibility for the next few quarters under doubt. Further, there is no clarity on the execution schedule of its 1,050MW thermal power project owing to pending clearances. Valuations: Given the sharp fall in the stock price in the past 12 months, PEL's valuations have come down drastically vindicating our negative stance on the stock. However, we are concerned about the growth prospects of the company and believe that it is facing structural issues, which will take time to be sorted out. Further, there are better plays available in the infrastructure space than PEL. Hence, we maintain our Neutral view on the stock. Key risks to our recommendation: 1) Pick-up in order inflow from the power segment in the near term; 2) earlier-than-expected execution from its slow-moving orders; and 3) raising of capital and the resultant decline in debt levels.
206
January 2012

BALANCE SHEET
Y/E MARCH (` CR) ` SOURCES OF FUNDS EQUITY SHARE CAPITAL RESERVES & SURPLUS SHAREHOLDERS FUNDS TOTAL LOANS DEFERRED TAX LIABILITY TOTAL LIABILITIES APPLICATION OF FUNDS GROSS BLOCK LESS: ACC. DEPRECIATION NET BLOCK CAPITAL WORK-IN-PROGRESS INVESTMENTS CURRENT ASSETS CURRENT LIABILITIES NET CURRENT ASSETS MIS. EXP. NOT WRITTEN OFF TOTAL ASSETS 861 306 555 204 70 3,758 1,020 2,738 7 3,574 1,008 364 644 209 78 4,548 1,170 3,378 8 4,317 1,108 446 662 259 278 4,695 1,397 3,298 8 4,505 1,233 537 697 309 428 5,011 1,669 3,342 8 4,784 7 1,356 1,363 2,138 11 3,574 7 1,421 1,428 2,806 13 4,317 7 1,510 1,517 2,905 13 4,505 7 1,601 1,608 3,092 13 4,784 FY2010 FY2011 FY2012E FY2013E
% CHG
29.7
2,682 509
8.9
2,979 497
(5.9)
2,807 464
9.6
3,117 469
(% OF NET SALES)
DEPRECIATION& AMORTISATION INTEREST & OTHER CHARGES OTHER INCOME (INCL ASS/JV PFT)
15.9
109 192 98
14.3
82 284 89
14.2
82 331 98
13.1
90 332 107
(% OF PBT)
32.0
305 305 93
40.4
220 220 54
65.6
149 149 45
69.7
154 154 46
(% OF PBT)
30.5
212 13.9 198 198
24.6
166 8.1 158 123
30.0
104 6.5 98 98
30.0
108 6.7 101 101
% CHG
42.4
(38.1)
(20.3)
3.5
CASH FLOW STATEMENT

Y/E MARCH (` CR) ` PROFIT BEFORE TAX (EXCL. MI) DEPRECIATION CHANGE IN WORKING CAPITAL LESS: OTHER INCOME DIRECT TAXES PAID CASH FLOW FROM OPERATIONS (INC.)/ DEC. IN FIXED ASSETS (INC.)/ DEC. IN INVESTMENTS OTHER INCOME CASH FLOW FROM INVESTING ISSUE OF EQUITY INC./(DEC.) IN LOANS DIVIDEND PAID (INCL. TAX) OTHERS CASH FLOW FROM FINANCING INC./(DEC.) IN CASH OPENING CASH BALANCES CLOSING CASH BALANCES FY2010 291 109 627 98 108 (433) (295) 21 98 (176) 344 391 23 (166) 547 (62) 295 232 FY2011 212 82 629 89 54 (478) (152) (8) 89 (71) 668 8 (100) 560 11 232 243 FY2012E 142 82 (184) 98 45 266 (150) (200) 98 (252) 99 9 90 104 243 348 FY2013E 147 90 139 107 46 (55) (175) (150) 107 (218) 186 9 177 (96) 348 252
KEY RATIOS
January 2012
207
Infrastructure
Madhucon Projects
Madhucon Projects Ltd. (MPL) is a Hyderabad-based construction company promoted by N. Seethaiah and N. Krishnaiah. The company operates in the road (58% of order book), irrigation (19%), power (10%), mining (7%) and real estate (6%) segments. MPL has a portfolio of seven road BOT projects (four operational and three under development); three power projects (300MWx2 and a recent international foray); a coal mine in Indonesia; and land bank in Hyderabad.
Structural Snapshot
Growth opportunity: MPL's two major growth drivers (road and power sectors) are very differently poised currently. NHAI has set aggressive targets (~7,000km of project awarding in FY2012E) and is on course to implement the same (~4,500km already awarded). In contrast, the power sector is currently plagued with various structural and cyclical issues and there seems to be no respite in the near to medium term on the same. Competitive position: MPL faces fierce competition in most of the segments, given the market is highly fragmented and requires little specialization.
STOCK RETURNS (%) MPL SENSEX 3M 1Y 3Y 21.3 5Y 3.3 10Y 17.3 (26.0) (46.7) (2.6) (12.6) 14.2 (20.0)
FINANCIAL PERFORMANCE OVERVIEW (%) SALES GROWTH* PAT GROWTH* OPM# ROE# 3M 18.3 13.0 1Y 30.8 9.5 6.9 3Y 35.0 (4.5) 10.4 8.1 5Y 10Y 39.6 31.6 4.2 24.1 12.4 14.1 8.7 18.6
Nature of business: Capital intensive, cyclical and interest-rate sensitive sector; Low technological intensity and no entry barriers.
(10.4) (10.2)

Captive order inflows drive the order book's growth: As of 2QFY2012, MPL had an order book of `6,500cr (3.6x FY2011 revenue), lending good revenue visibility. In recent times, the order book has witnessed traction from the road segment. However, in the past, the quality of the company's order book was affected by the high share of projects pending financial closure (FC); these concerns are now put to rest with the FC for two of its road projects achieved, which contribute significantly (>35% of order book) to the overall scheme of things. Capital raising - The key catalyst: We believe the key triggers to watch out for MPL should be pick-up in execution in the development business and building of an attractive asset portfolio to raise money. However, these plans would fructify somewhere in 2HFY2013 only and will be based on market conditions prevailing then. Hence, we believe until then the stock would perform in-line with peers and real value would be created only on unlocking at the subsidiary level. It should be noted that failing to raise money would stretch the company's already leveraged balance sheet (net D/E of 1.3x as of 1HFY2012). Valuations: We have assigned P/E of 5.0x on FY2013E standalone earnings (`23.5/share) and valued the BOT projects on DCF basis (`40.1/share) and other investments in Madhucon Infra and the real estate venture on BV basis (`12.0/share and `2.0/share, respectively). At the CMP, the stock is trading at a discount to our SOTP target price of ` 77, hence we maintain our Buy rating on the stock.
208
January 2012

BALANCE SHEET
Y/E MARCH (` CR) ` SOURCES OF FUNDS EQUITY SHARE CAPITAL RESERVES & SURPLUS SHAREHOLDERS FUNDS TOTAL LOANS DEFERRED TAX LIABILITY TOTAL LIABILITIES APPLICATION OF FUNDS GROSS BLOCK LESS: ACC. DEPRECIATION NET BLOCK CAPITAL WORK-IN-PROGRESS INVESTMENTS CURRENT ASSETS CURRENT LIABILITIES NET CURRENT ASSETS MIS. EXP. NOT WRITTEN OFF TOTAL ASSETS 491 218 273 639 753 563 189 1,101 505 264 241 756 1,386 1,020 366 1,363 535 317 218 870 1,894 1,135 759 1,847 595 383 213 1,043 2,355 1,452 902 2,159 7 571 578 513 10 1,101 7 601 609 751 4 1,363 7 630 637 1,206 4 1,847 7 660 668 1,487 4 2,159 FY2010 FY2011 FY2012E FY2013E
% CHG
35.4
1,253 135
30.8
1,644 172
7.5
1,734 218
28.2
2,248 255
(% OF NET SALES)
DEPRECIATION& AMORTISATION INTEREST & OTHER CHARGES
9.8
46 25
9.5
48 63 8.9
11.2
53 126 9.8
10.2
66 147 10.7
OTHER INCOME (INCL PFT FROM ASS/JV) 5.6
(% OF PBT)
8.1
69 69 24
12.5
71 71 23
19.7
50 50 17
20.4
53 53 18
(% OF PBT)
34.1
46 46 46
33.0
47 47 41
34.0
33 33 33
34.0
35 35 35
% CHG
(2.4)
(10.2)
(20.5)
6.3
CASH FLOW STATEMENT

Y/E MARCH (` CR) ` PROFIT BEFORE TAX (EXCL. MI) DEPRECIATION CHANGE IN WORKING CAPITAL LESS: OTHER INCOME DIRECT TAXES PAID CASH FLOW FROM OPERATIONS (INC.)/ DEC. IN FIXED ASSETS (INC.)/ DEC. IN INVESTMENTS OTHER INCOME CASH FLOW FROM INVESTING ISSUE OF EQUITY INC./(DEC.) IN LOANS DIVIDEND PAID (INCL. TAX) OTHERS CASH FLOW FROM FINANCING INC./(DEC.) IN CASH OPENING CASH BALANCES CLOSING CASH BALANCES
KEY RATIOS
FY2011 71 48 168 9 23 (81) (7) (117) 9 (116) 238 2 (30) 206 9 55 64 FY2012E 50 53 392 10 17 (316) (30) (113) 10 (134) 456 4 451 1 64 65 FY2013E 53 66 94 11 18 (5) (60) (174) 11 (223) 281 4 277 49 65 115 Y/E MARCH VALUATION RATIOS (X) P/E P/CEPS P/BV EV/SALES 8.4 4.2 0.7 0.6 6.2 9.4 4.3 0.6 0.6 6.2 11.8 4.5 0.6 0.8 7.0 11.1 3.8 0.6 0.7 6.9 FY2010 FY2011 FY2012E FY2013E
FY2010 69 46 11 6 26 73 (29) (266) 6 (290) 193 3 (2) 187 (29) 85 55
EV/EBITDA ` PER SHARE DATA (`) EPS (BASIC) EPS (FULLY DILUTED) CASH EPS DPS BOOK VALUE RETURNS (%) ROACE (PRE-TAX) ANGEL ROIC (PRE-TAX) ROE TURNOVER RATIOS (X) INVENTORY / SALES (DAYS) RECEIVABLES (DAYS) PAYABLES (DAYS)
6.2 6.2 12.5 0.4 78.1
6.4 5.6 12.0 0.2 82.2
4.4 4.4 11.5 0.5 86.1
4.7 4.7 13.6 0.5 90.2
9.0 9.7 8.2
10.1 10.6 6.9
10.3 10.7 5.2
9.4 9.9 5.3
17 28 133
25 51 153
59 76 195
61 74 182
January 2012
209
Infrastructure
CCCL
Company Background
CCCL was incorporated in 1997 by four ex-L&T professionals with over 20 years of experience each in the construction sector. CCCL provides integrated turnkey construction services across four segments - industrial, commercial, infrastructure and residential. The commercial (42.9%) and infrastructure (46.3%) segments dominate the company's order book - `5,936cr (as of 2QFY2012). The company majorly operates in southern India and, over the past 4-5 years, CCCL has also increased its presence in the northern and western regions, albeit slowly.
Structural Snapshot
STOCK RETURNS (%) CCCL SENSEX 3M 1Y 3Y 21.3 5Y 3.3 10Y 17.3 (6.8) (65.8) (18.6) (2.6) (12.6)
Growth opportunity: For CCCL, order visibility in the commercial segment is mainly restricted to hospitals and educational institutions, but this segment faces stiff competition. In infrastructure space, the number of enquiries in the power sector remains high but the conversion ratio is negligible. Hence order inflow from both these segments is expected to be subdued for some time. However, on the residential front, demand for low-cost housing and premium segment housing seems to be on the rise, which augurs well for CCCL. Competitive position: The construction industry is fragmented in India with numerous players, which results in immense competition, especially for jobs involving low technology and capital requirement. Thus, orders of smaller ticket size (CCCL's market) face maximum competition, particularly during the slowdown. Nature of business: Cyclical; Rate sensitive; Low entry barriers.
FINANCIAL PERFORMANCE OVERVIEW (%) SALES GROWTH* PAT GROWTH* OPM# ROE# 3M 9.5 1.4 1Y 11.3 7.0 7.7 3Y 14.2 7.7 13.1 5Y 10Y -
- (48.9) (19.2)

ANGEL ESTIMATES PARTICULARS PAT GROWTH (%) ROE (%) P/E P/BV FY2012E 0.5 FY2013E 4.9 11.0 0.5
Slow-moving orders: As of 2QFY2012, of its total order book of `5,936cr, CCCL had ~`2,000cr (`1,000cr - power and metro projects each) worth of slow-moving orders, which would keep its revenue growth under check for the next few quarters. EBITDAM to remain under pressure: Since the past few quarters, CCCL has been reporting EBITDAM of 1.4-4.8%, owing to: 1) management's error in estimating commodity prices for fixed price contracts; 2) high labor and procurement costs; and 3) low-margin legacy orders. Further, as per management, pressure on EBITDAM is expected to remain for the next few quarters, which continues to be an overhang on the stock. Return ratios take a hit: In the past, CCCL has enjoyed superior return ratios, because of which the stock traded at a premium to its peers. Currently, the company's return ratios have taken a hit due its poor performance. Going ahead, we see pressure on return ratios to continue and expect some improvement only in FY2013. Valuations: CCCL is trading at PE of 11.0x FY2013E EPS, inspite of its poor earnings visibility and a deteriorating business environment. Hence, we believe the stock is fairly valued and recommend a Neutral rating.
210
January 2012

BALANCE SHEET
Y/E MARCH (` CR) ` SOURCES OF FUNDS EQUITY SHARE CAPITAL RESERVES & SURPLUS SHAREHOLDERS FUNDS TOTAL LOANS DEFERRED TAX LIABILITY TOTAL LIABILITIES APPLICATION OF FUNDS GROSS BLOCK LESS: ACC. DEPRECIATION NET BLOCK CAPITAL WORK-IN-PROGRESS INVESTMENTS CURRENT ASSETS CURRENT LIABILITIES NET CURRENT ASSETS MIS. EXP. NOT WRITTEN OFF TOTAL ASSETS 190 33 157 15 9 1,358 554 805 1 988 220 47 173 36 3 1,514 605 909 0 1,121 250 63 186 36 33 1,631 646 984 0 1,240 280 81 198 36 43 1,742 674 1,068 0 1,345 37 552 589 339 60 988 37 591 628 431 61 1,121 37 560 596 582 61 1,240 37 577 614 670 61 1,345 FY2010 FY2011 FY2012E FY2013E
% CHG
7.3
1,797 179
11.3
2,046 153
6.9
2,267 82
4.3
2,316 135
(% OF NET SALES)
DEPRECIATION& AMORTISATION INTEREST & OTHER CHARGES
9.1
11 33
7.0
14 49 5
3.5
16 73 6
5.5
18 80 7
OTHER INCOME (INCL PFT FROM ASS/JV) 6
(% OF PBT)
4.5
142 142 50
5.5
95 95 36
(0) (0) 10
15.5
44 44 14
(% OF PBT)
PAT (REPORTED) LESS: SHARE OF JV PARTNERS PROFIT PRIOR PERIOD ITEMS PAT AFTER MI (REPORTED) ADJ. PAT
35.5
92
37.7
59 12.2
(10) 9.5 (20) (20)
32.4
30 30 30
92 92
47 47
% CHG
26.6
(48.8)
CASH FLOW STATEMENT

Y/E MARCH (` CR) ` PROFIT BEFORE TAX (EXCL. MI) DEPRECIATION CHANGE IN WORKING CAPITAL LESS: OTHER INCOME DIRECT TAXES PAID CASH FLOW FROM OPERATIONS (INC.)/ DEC. IN FIXED ASSETS (INC.)/ DEC. IN INVESTMENTS OTHER INCOME CASH FLOW FROM INVESTING ISSUE OF EQUITY INC./(DEC.) IN LOANS DIVIDEND PAID (INCL. TAX) OTHERS CASH FLOW FROM FINANCING INC./(DEC.) IN CASH OPENING CASH BALANCES CLOSING CASH BALANCES FY2010 142 11 221 6 38 (112) (38) 47 6 16 141 11 6 136 40 130 170 FY2011 83 14 189 5 36 (133) (51) 6 5 (39) 93 11 6 88 (85) 170 85 FY2012E (10) 16 103 6 10 (113) (30) (30) 6 (54) 151 12 139 (28) 85 58 FY2013E 44 18 (4) 7 14 45 (30) (10) 7 (33) 87 12 75 87 58 145
KEY RATIOS
Y/E MARCH VALUATION RATIOS P/E P/CEPS P/BV EV/SALES EV/EBITDA ` PER SHARE DATA (`) EPS (BASIC) EPS (FULLY DILUTED) CASH EPS DPS BOOK VALUE RETURNS (%) ROACE (PRE-TAX) ANGEL ROIC (PRE-TAX) ROE TURNOVER RATIOS (X) INVENTORY / SALES (DAYS) RECEIVABLES (DAYS) PAYABLES (DAYS) 169 2 100 185 2 94 194 1 95 196 1 97 19.3 23.3 16.6 13.2 15.0 7.7 5.6 5.9 (3.3) 9.0 9.8 4.9 5.0 5.0 5.6 0.5 31.9 2.5 2.5 3.3 0.5 34.0 (1.1) (1.1) (0.2) 0.6 32.3 1.6 1.6 2.6 0.6 33.2 3.6 3.2 0.6 0.3 2.8 7.0 5.4 0.5 0.3 4.4 0.5 0.4 10.3 11.0 6.8 0.5 0.3 6.3 FY2010 FY2011 FY2012E FY2013E
January 2012
211
Infrastructure
IRB Infra
Company Background
CMP/TP/Upside: `159 / `182 / 15%
Incorporated in 1998, IRB is the pioneer and one the largest players in the road BOT business in India, with strong in-house integrated execution capabilities. IRB's road business can be divided into two verticals: 1) engineering and construction (E&C); and 2) toll collection and maintenance. The E&C arm complements its BOT vertical and leads to time and cost control for projects in hand/under development. IRB's current road portfolio comprises 18 projects - of which 10 are operational and eight are under construction/development. The company also has one airport project, which is at a very nascent stage; decent land bank; and one small wind mill project.
STOCK RETURNS (%) IRB SENSEX 3M 1Y 3Y 13.6 21.3 5Y 3.3 10Y 17.3 (6.0) (22.1) (2.6) (12.6)
Structural Snapshot
Growth opportunity: IRB has a road BOT portfolio of 6,722 lane km, of which 3,413 lane km is operational and the balance is under construction/ development. Further, IRB has projects worth `5,218cr at RFP (request for proposal) and `35,304cr at RFQ (request for qualification) stages. Competitive position: The road sector has witnessed the entry of many new players during the past few quarters, which has led to aggressive bidding. Going ahead as well, we do not expect any significant moderation in the intensity of competition, given the lack of opportunities from the other parts of the economy. However, the fact that IRB has decent orders in hand insulates it, to some extent, from the current competitive frenzy in the road segment. Nature of business: Low entry barriers; Rate sensitive; Capital intensive.
FINANCIAL PERFORMANCE OVERVIEW (%) SALES GROWTH* PAT GROWTH* OPM# ROE# 3M 50.1 11.1 43.7 1Y 43.0 17.4 44.9 20.2 3Y 49.3 58.4 45.3 17.1 5Y 10Y -

Integrated business model: IRB's integrated business model ensures the timely completion of projects, reduces its reliance on subcontractors and controls costs. Further, it allows capturing the entire value in the BOT development business, including EPC margins, developer returns and operation and maintenance (O&M) margins. OB/Sales providing good revenue visibility: IRB achieved its yearly order inflow guidance by winning the Ahmedabad Vadodara project and is staying away from current competition. The order book of `7,568cr, excluding O&M orders (4.5x FY2011 E&C revenue), lends good revenue visibility for the next few years. Negligible dependence on capital markets: As per our analysis, IRB has an equity requirement of ~`2,148cr (FY2012-14E), and its internal accruals/ support (cash flows from the E&C and BOT segments) would substantially fund this requirement. Further, the company would be able to keep its debt equity position within reasonable limits. Valuations: At the CMP of `159, the stock is trading at a discount to our FY2013E SOTP target price of `182/share - road BOT SPVs have been valued on DCF basis (FCFE method) (`61.4/share); the construction segment has been valued on 6.0x EV/EBITDA basis (`115.9/share); and its investments have been valued on 1x P/BV (`4.4/share). Hence, with a Buy rating, the stock is our top pick in the road sector.
212
January 2012

BALANCE SHEET
Y/E MARCH (` CR) ` SOURCES OF FUNDS EQUITY SHARE CAPITAL RESERVES & SURPLUS SHAREHOLDERS FUNDS TOTAL LOANS DEFERRED TAX LIABILITY TOTAL LIABILITIES APPLICATION OF FUNDS GROSS BLOCK LESS: ACC. DEPRECIATION NET BLOCK CAPITAL WORK-IN-PROGRESS INVESTMENTS CURRENT ASSETS CURRENT LIABILITIES NET CURRENT ASSETS MIS. EXP. NOT WRITTEN OFF TOTAL ASSETS 4,019 551 3,467 880 45 1,148 482 666 1 5,060 4,132 769 3,362 2,508 55 2,038 794 1,244 1 7,171 7,397 1,098 6,299 1,442 61 2,839 811 2,028 1 9,830 7,397 1,553 5,844 3,515 67 2,502 1,161 1,341 1 10,768 332 1,708 2,040 2,915 27 5,060 332 2,100 2,433 4,626 23 7,171 332 2,436 2,768 6,949 23 9,830 332 2,810 3,143 7,512 23 10,768 FY2010 FY2011 FY2012E FY2013E
% CHG
71.9
906 799
43.0
1,344 1,094
24.6
1,723 1,313
24.5
2,254 1,528
(% OF NET SALES)
46.9
182 249 49
44.9
225 357 64
43.3
328 551 97
40.4
455 587 116
(% OF PBT)
11.7
417 417 13
11.2
576 576 112
18.2
532 532 126
19.3
602 602 156
(% OF PBT)
3.2
403 18 385 385
19.4
464 12 452 452
23.7
406 10 395 395
26.0
445 11 434 434
% CHG
119.2
17.4
(12.6)
9.8
CASH FLOW STATEMENT

Y/E MARCH (` CR) ` PROFIT BEFORE TAX (EXCL. MI) DEPRECIATION CHANGE IN WORKING CAPITAL LESS: OTHER INCOME DIRECT TAXES PAID CASH FLOW FROM OPERATIONS (INC.)/ DEC. IN FIXED ASSETS (INC.)/ DEC. IN INVESTMENTS OTHER INCOME CASH FLOW FROM INVESTING ISSUE OF EQUITY INC./(DEC.) IN LOANS DIVIDEND PAID (INCL. TAX) OTHERS CASH FLOW FROM FINANCING INC./(DEC.) IN CASH OPENING CASH BALANCES CLOSING CASH BALANCES FY2010 417 182 (141) 49 13 677 (984) 66 49 (869) 429 76 (66) 288 95 415 510 FY2011 564 225 (112) 64 112 725 (1,741) (10) 64 (1,687) (0) 1,710 60 1 1,652 690 510 1,200 FY2012E 521 328 191 97 126 436 (2,198) (6) 97 (2,107) 2,323 60 2,264 592 1,200 1,792 FY2013E 590 455 (94) 116 156 866 (2,073) (6) 116 (1,963) 564 60 504 (593) 1,792 1,199
KEY RATIOS
January 2012
213
Infrastructure
ITNL
Company Background
CMP/TP/Upside: `185 / `227 / 23%
IL&FS Transportation Networks Ltd. (ITNL) was incorporated in 2000 by IL&FS as a transportation infrastructure company. The company is currently one of the largest private sector BOT road operators in India. Owing to the financial background of its promoters (IL&FS), ITNL, unlike peers does not have own in-house construction arm and outsources construction work to third-party contractors. In March 2008, ITNL commenced its international operations through the acquisition of Elsamex S.A., a provider of maintenance services primarily for highways and roads in Spain and other European countries. Over the years, ITNL has also diversified into metro, bus and airport projects - though they are very small contributors in terms of revenue.
STOCK RETURNS (%) ITNL SENSEX 3M 1Y 3Y 21.3 5Y 3.3 10Y 17.3 (10.5) (25.5) (2.6) (12.6)
Structural Snapshot
Growth opportunity: In FY2011, ITNL had a market share of ~7% of road projects awarded by NHAI. Currently, ITNL has a portfolio of 7,026 lane km, of which 2,979 lane km is operational and the balance (4,047 lane km) is under construction. Further, ITNL has a good bid pipeline with projects worth `61,412cr at RFQ (request for qualification) and `7,177cr at RFP (request for proposal) stages. Competitive position: During the past few quarters, the road sector has witnessed aggressive bidding due to the entry of many new players. We do not expect any significant moderation in competition, given the lack of opportunities from the other parts of the economy. However, ITNL has decided to stay away from aggressive bidding to win projects, as it has a decent order book in hand. Hence, we are not factoring in any major order inflows for FY2012-13, resulting in subdued growth numbers going ahead. Nature of business: Low entry barrier; Rate sensitive; Capital intensive.
FINANCIAL PERFORMANCE OVERVIEW (%) SALES GROWTH* PAT GROWTH* OPM# ROE# 3M 42.1 8.2 28.4 1Y 68.5 25.9 28.5 21.8 3Y 5Y 10Y -

Set to capitalize on emerging opportunities: ITNL is well poised to leverage on the growing opportunities in the road segment, owing to its: strong parentage and experienced management. Further, inspite of being diversified geographically across India (presence in 14 states), outsourcing of construction work helps in timely and cost-effective operations. Hedged revenue stream: We believe ITNL has a hedged road BOT asset portfolio currently, as it is bi-furcated equally into toll and annuity projects in revenue terms. This relatively insulates the company from traffic-related revenue risks and resultant chances of disappointment. Valuations: At the CMP of `185, the stock is trading at a ~23% discount to our FY2013E SOTP target price of `227/share. We have valued the company's investments on DCF/Mcap/BV basis and its construction segment has been valued on 6.0x EV/EBITDA basis. Hence, we maintain our Buy view on the stock; however, given the high leverage on the company's balance sheet, we expect the stock to underperform IRB Infra.
214
January 2012

BALANCE SHEET
Y/E MARCH (` CR) ` SOURCES OF FUNDS EQUITY SHARE CAPITAL RESERVES & SURPLUS SHAREHOLDER'S FUNDS TOTAL LOANS DEFERRED TAX LIABILITY TOTAL LIABILITIES APPLICATION OF FUNDS GROSS BLOCK LESS: ACC. DEPRECIATION NET BLOCK CAPITAL WORK-IN-PROGRESS INVESTMENTS CURRENT ASSETS CURRENT LIABILITIES NET CURRENT ASSETS MIS. EXP. NOT WRITTEN OFF TOTAL ASSETS 1,913 295 1,618 6 454 2,303 787 1,516 5,260 3,342 365 2,978 3 194 3,235 1,355 1,881 4 8,068 8,862 451 8,411 3 214 4,013 1,829 2,184 4 11,297 11,280 590 10,690 3 225 4,441 2,103 2,338 4 13,740 194 1,474 1,704 3,322 78 5,260 194 2,045 2,274 5,467 144 8,068 194 2,440 2,670 8,301 144 11,297 194 2,861 3,090 10,324 144 13,740 FY2010 FY2011 FY2012E FY2013E
% CHG
96.1
1,609 794
68.5
2,893 1,156
27.7
3,750 1,419
27.9
5,040 1,569
(% OF NET SALES)
33.1
60 294 84
28.5
61 498 79
27.5
86 675 87
23.7
139 749 109
(% OF PBT)
16
524 524 186
12
675 675 224
12
745 745 264
14
789 789 279
(% OF PBT)
PAT (REPORTED) ADD: SHARE OF ASSOCIATE LESS: MINORITY INTEREST (MI) PAT AFTER MI (REPORTED) ADJ. PAT
35
338 9 3 344 344
33
450 (5) 12 434 434
35
481 9 15 475 475
35
510 9 19 500 500
% CHG
1,213
25.9
9.5
5.3
CASH FLOW STATEMENT

Y/E MARCH (` CR) ` PROFIT BEFORE TAX (EXCL. MI) DEPRECIATION CHANGE IN WORKING CAPITAL LESS: OTHER INCOME DIRECT TAXES PAID CASH FLOW FROM OPERATIONS (INC.)/ DEC. IN FIXED ASSETS (INC.)/ DEC. IN INVESTMENTS OTHER INCOME CASH FLOW FROM INVESTING ISSUE OF EQUITY INC./(DEC.) IN LOANS DIVIDEND PAID (INCL. TAX) OTHERS CASH FLOW FROM FINANCING INC./(DEC.) IN CASH OPENING CASH BALANCES CLOSING CASH BALANCES FY2010 524 60 301 84 190 93 (49) (9) 84 (58) 590 1,262 (25) (1,478) 348 383 116 550 FY2011 663 61 387 79 224 33 (2,748) 260 79 (2,409) 2,145 (79) 287 2,353 (23) 550 528 FY2012E 730 86 236 87 264 229 (2,993) (19) 87 (2,925) 2,834 (80) 9 2,763 67 528 595 FY2013E 771 139 184 109 279 338 (2,418) (11) 109 (2,320) 2,023 (80) 9 1,952 (30) 595 565
KEY RATIOS
January 2012
215
Infrastructure
Ashoka Buildcon
Ashoka Buildcon (ABL) is an integrated road player involved in building and operating roads and bridges in India on a BOT basis. The company is based in Nashik, Maharashtra. The company's business is organized into four divisions: 1) BOT division; 2) engineering and construction (E&C) division; 3) RMC and bitumen division; and 4) toll collection contract division. ABL, traditionally a state player, has transformed into a national player by winning four NHAI projects totaling to a TPC of ~`5,156cr. ABL has executed 3,095 lane km (1,155 lane km - third party; and 1,941 lane km - captive), which makes it one of the most seasoned players in the road segment.
STOCK RETURNS (%) ABL SENSEX 3M 1Y 3Y 21.3 5Y 3.3 10Y 17.3 (18.6) (28.9) (2.6) (12.6)
Structural Snapshot
Growth opportunity: ABL currently has a portfolio of 3,709 lane km - operational 1,204 lane km and 2,505 lane km under construction/development. Going ahead, we believe ABL will be more conservative while bidding, owing to: 1) strong order book in hand (`5,150cr 5.0x FY2011 C&EPC revenue) and 2) focus on arranging the equity required for the current portfolio. Competitive position: During the past few quarters, the road sector has witnessed aggressive bidding due to the entry of many new players. Going ahead as well, we do not expect any significant moderation in competition, given the lack of opportunities from the other parts of the economy. Nature of business: Low entry barriers; Rate sensitive; Capital intensive.
FINANCIAL PERFORMANCE OVERVIEW (%) SALES GROWTH* PAT GROWTH* OPM# ROE# 3M 56.8 23.3 1Y 63.7 25.5 19.4 14.9 3Y 5Y 10Y -

Integrated business model: ABL's integrated business model ensures timely completion of projects, reduces its reliance on subcontractors and controls costs. In the past, many industry players have witnessed severe strain on the financials and profitability of their projects because of their inability to control these important factors. Even in current times, there are developers who do not have an integrated business model and are dependent on contractors for construction activities, thus making them vulnerable. Road sector, opportunities galore: Of the 49,254km of the planned NH under the National Highways Development Project (NHDP), the NHAI is still left with ~21,117km that has to be awarded. State highways and mega projects also provide a number of opportunities for road focused player like ABL. Valuations: At the CMP of `195, the stock is trading at a discount to our FY2013E SOTP target price of `245/share. The company's road BOT SPVs have been valued on NPV basis (`104/share). The construction segment has been valued at 5.0x EV/EBITDA basis (`141/share). Hence, we maintain our Buy recommendation on the stock; but given the expected increase in leverage on the balance sheet (consolidated net D/E is expected to rise from 1.4x in FY2011 to 3.0x by FY2013E), owing to its commitments towards the current portfolio, we expect the stock to underperform IRB Infra.
216
January 2012

BALANCE SHEET
Y/E MARCH (` CR) ` SOURCES OF FUNDS EQUITY SHARE CAPITAL RESERVES & SURPLUS SHAREHOLDERS FUNDS TOTAL LOANS DEFERRED TAX LIABILITY TOTAL LIABILITIES APPLICATION OF FUNDS GROSS BLOCK LESS: ACC. DEPRECIATION NET BLOCK CAPITAL WORK-IN-PROGRESS INVESTMENTS CURRENT ASSETS CURRENT LIABILITIES NET CURRENT ASSETS MIS. EXP. NOT WRITTEN OFF TOTAL ASSETS 791 330 461 814 149 685 440 245 1,669 1,389 368 1,020 673 139 815 371 445 2,289 1,809 483 1,326 1,149 160 1,172 509 663 3,297 2,249 605 1,644 2,047 168 1,485 631 855 4,714 46 404 462 1,122 3 1,669 53 830 893 1,283 2 2,289 53 941 1,003 2,181 2 3,297 53 1,071 1,134 3,468 2 4,714 FY2010 FY2011 FY2012E FY2013E
% CHG
53.5
581 214
63.7
1,050 252
25.0
1,274 353
12.5
1,407 424
(% OF NET SALES)
26.9
66 49 19
19.4
69 71 34
21.7
115 104 24
23.1
122 144 27
(% OF PBT)
15.8
118 118 32
23.3
146 (89) 235 24
15.0
158 158 46
14.7
185 185 54
(% OF PBT)
27.1
86 6 80 80
10.4
210 2 208 101
29.0
112 1 111 111
29.0
132 1 130 130
% CHG
130.8
25.5
9.8
17.6
CASH FLOW STATEMENT

Y/E MARCH (` CR) ` PROFIT BEFORE TAX (EXCL. MI) DEPRECIATION CHANGE IN WORKING CAPITAL LESS: OTHER INCOME DIRECT TAXES PAID CASH FLOW FROM OPERATIONS (INC.)/ DEC. IN FIXED ASSETS (INC.)/ DEC. IN INVESTMENTS OTHER INCOME CASH FLOW FROM INVESTING ISSUE OF EQUITY INC./(DEC.) IN LOANS DIVIDEND PAID (INCL. TAX) OTHERS CASH FLOW FROM FINANCING INC./(DEC.) IN CASH OPENING CASH BALANCES CLOSING CASH BALANCES FY2010 118 66 38 5 31 111 (478) (58) 47 (489) 399 (6) 393 15 69 85 FY2011 235 69 224 34 24 21 (457) 9 34 (414) 220 161 (13) 369 (24) 85 60 FY2012E 156 115 192 24 46 10 (896) (21) 24 (893) 898 898 15 60 75 FY2013E 184 122 180 27 54 44 (1,339) (8) 27 (1,319) 1,287 1,287 12 75 87
KEY RATIOS
Y/E MARCH VALUATION RATIOS P/E P/CEPS P/BV EV/SALES EV/EBITDA ` PER SHARE DATA (`) EPS (BASIC) EPS (FULLY DILUTED) CASH EPS DPS BOOK VALUE RETURNS (%) ROACE (PRE-TAX) ANGEL ROIC (PRE-TAX) ROE TURNOVER RATIOS (X) INVENTORY / SALES (DAYS) RECEIVABLES (DAYS) PAYABLES (DAYS) 60 50 190 61 66 141 68 76 126 85 88 148 10.7 11.3 21.2 9.3 9.6 14.9 8.5 8.7 11.7 7.5 7.7 12.2 17.6 15.3 27.8 87.8 19.2 19.2 32.3 169.7 21.0 21.0 42.9 190.6 24.7 24.7 47.8 215.4 12.8 7.0 2.2 2.6 9.6 10.2 6.1 1.2 1.7 8.9 9.3 4.6 1.0 1.9 8.9 7.9 4.1 0.9 2.4 10.4 FY2010 FY2011 FY2012E FY2013E
January 2012
217
218
January 2012
Media
COVERAGE
Companies DB Corp. HT Media Jagran PVR SUN TV CMP (`) ` 185 131 98 138 297 Target (`) ` 274 170 137 Reco Buy Buy Buy
POSITIVE
Offering value... at a discount

Size and growth of the M&E industry: The Indian media and entertainment (M&E) industry is expected to post a ~14% CAGR over CY2011-15 to ~`1,276bn. Within the M&E industry, television is expected to outperform print media, increasing its contribution to the overall industrys revenue, from the current 45.5% to 49.4% in CY2015E. Advertising revenue, the key driver during CY2006-09,is likely to register a lower 13.6% CAGR over CY2010-14E, inline with the recent slowdown in the economy. Radio and internet advertising is likely to outperform the M&E industry's growth rate, owing to lower base, growing acceptability and being a cheaper platform for advertising. Print media: The Indian print media sector contributed ~30% to the total revenue ( `1,276bn) of the Indian M&E industry. The sector registered a modest 6.4% CAGR over CY2007-10 to `193bn, largely due to growth in advertising and circulation, driven by rising penetration and new edition launches. Advertisement revenue registered a 7.9% CAGR during the period. However, the sector's performance was adversely impacted during the current year, owing to higher newsprint prices and lower demand due to the economic slowdown, leading to a decline in advertising growth rate. The print media sector is expected to post a CAGR of 10% to `310bn by CY2015E. Advertising will increase its dominance as the primary revenue source for the industry; it is expected to constitute 76% of the overall revenue in CY2015E from the current 65%. The segment's advertising revenue is expected to report a higher CAGR of 13.3% compared to 2.1% CAGR in circulation revenue, driven by rising spends across sectors once macroeconomic concerns subside. Regional players to ride the print media sector's growth: Currently, English print contributes ~40% to the total revenue of the sector. However, with growth accelerating in the smaller towns and cities of India, especially Tier II and III cities, regional print players are expected to benefit the most. Hindi print is estimated to grow faster than English print, leading to a reduction in ad premium gap between English and Hindi. Outlook and valuation: With improving scenario, we are factoring in better visibility in advertising spends (particularly FY2013E) as business confidence levels restore and consumer spending rises. Further, higher stress on the development of Tier-II, III and rural markets is expected to drive the penetration levels of media segments. Swift action in terms of policymaking (CAS implementation, roll-out of Phase III radio licensing and revision of FDI caps) is likely to improve the investment environment for both domestic entrepreneurs and foreign investors. Given the media sector's significant underperformance and cheap valuations of the underlying stocks (Jagran Prakashan trading at ~12.8x FY2013E earnings, against its five-year median of 21x), we expect the sector to outperform the broader markets going forward.
- Neutral - Neutral
January 2012
219
Size and growth of the M&E industry

The Indian M&E industry is expected to post a ~14% CAGR over CY2011-15 to `1,276bn. Factoring the macroeconomic concerns, we expect the industry to grow by 13% in 2012 to `834bn from `737bn in 2011. Within the M&E industry, television is expected to outperform print media, increasing its contribution to the overall industrys revenue, from the current 45.5% to 49.4% in CY2015E. Advertising revenue, the key driver during CY2006-09, is likely to register a lower 13.6% CAGR over CY2010-14E, in-line with the recent slowdown in the economy. Radio and internet advertising is likely to outperform the M&E industry's growth rate, owing to lower base, growing acceptability and being a cheaper platform for advertising.
Exhibit 1: Advertising revenue across segments

CAGR (` bn) ` Television Print Media Radio OOH advt. Internet advt. Total ad. mkt. CY2006 CY2007 61 85 6 12 2 166 71 100 7 14 4 196 CY2008 CY2009 83 108 8 16 6 221 88 103 8 14 8 220 CY2010 103 126 10 17 10 266 CY2011 118 143 12 19 13 305 CY2012 136 162 15 22 18 353 CY2013 157 183 18 24 22 404 CY2014 183 208 21 27 28 467 CY2015 CY07-10 CY10-15 241 236 25 30 36 568 13.2 8.0 10.6 6.7 36.9 10.6 18.5 13.4 20.1 12.0 29.2 16.4
Source: FICCI-KPMG M&E Report 2011, Angel Research
Opportunities galore in the media sector

Favorable demographic composition: About 70% of the Indian population is below 30 years of age, presenting an excellent opportunity for marketers. Huge advertising potential: India's advertising to GDP ratio is still at a low 0.5% vs. developed economies like U.S., where it is as high as 0.9% Low media penetration: Media spend in India as a percentage of GDP is at 0.4%. This ratio is almost half of the world's average of 0.8% and is much lower compared to developed countries like U.S. and Japan. This indicates the potential for growth in spends, as the industry in India matures.
revenue (~`1,276bn) of the Indian M&E sector. The sector registered a modest 6.4% CAGR over CY2007-10 to `193bn, largely owing to advertising growth and circulation, driven by rising penetration and new edition launches. Advertisement revenue registered a 7.9% CAGR during the period. However, the sector's performance was adversely impacted during the current year, owing to higher newsprint prices and lower demand due to the economic slowdown, leading to a decline in advertising growth rate. The print media sector is expected to post a lower CAGR of 10% to `31,000cr by CY2015. Advertising is expected to increase its dominance as the primary revenue source for the industry and is expected to constitute 76% of the overall revenue in CY2015 from the current 65%. The segment's advertising revenue is expected to register a higher CAGR of 13.3% compared to a 2.1% CAGR in circulation revenue, driven by rising spends across sectors once macroeconomic concerns subside.
Print media
The Indian print media sector contributed ~30% to the total
Exhibit 2: Print media sector - Size and growth trends

CAGR (` bn) ` Print Media Advertising Circulation CY07 160 100 60 CY08 173 108 64 CY09 175 103 72 CY10 193 126 67 CY11 211 143 68 CY12 232 162 70 CY13 254 183 71 CY14 280 208 72 CY15 310 236 74 CY07-10 6.4 7.9 3.6 CY11-15E 10.1 13.3 2.1
Regional players to ride the print media sector's growth

Currently, English print contributes ~40% to the total revenue of the sector. However, with growth accelerating in the smaller towns and cities of India, especially Tier II and III cities, regional print players will benefit the most. Hindi print is estimated to grow faster than English print, leading to a correction in ad premium gap.
Exhibit 3: English print vs. Hindi print

(` bn) CY2011 CY2012 ` Hindi 64 70 Advertising 42 48 Circulation 21 22 English Advertising Circulation 84 58 26 91 64 27 CAGR CY2013 CY2014 CY2015 CY10-15 77 87 96 10.8 55 64 73 14.5 22 23 23 1.8 97 70 27 105 77 28 112 84 28 7.5 9.7 1.9
220
January 2012
Abundant opportunities for regional print companies

Large untapped local ad market: Tier II and III cities of India are on a growth path, whereby local advertisement markets will see a surge in growth. Regional print companies are best suited to cater to their needs in these areas, wherein regional players are customizing their editions towards local public through split editions and city-specific supplements to meet local advertisement demands. Demographic catalyst: Regional print companies, unlike English newspapers, have a niche clientele to be addressed in their respective geographies. This provides these players a competitive advantage over English dailies. Regional print companies have an edge over English dailies when it comes to brand association in remote areas, making them the preferred choice among local and national advertisers. Regional print companies are an effective mode of advertising for local educational institutes, real estate firms, and retail firms. Also, national advertisers like FMCG companies, consumer durable companies and auto companies invest a sizeable portion of
their ad spends in these companies. Dependable platform of media: Regional print players, who have been present in the market for a long period, are seen as a dependable source of information and have influenced generations in these markets, ensuring strong brand loyalty amongst readers. Also, in Tier II and III cities of India, digital media like the internet is still at a nascent stage and is highly underpenetrated. This offers an advantage to regional players, as regional print is the main source of content in local and regional markets.
Television
The television sector registered a CAGR of 11.4% over CY2007-10 to `29700cr in CY2010, largely driven by advertising, which posted a robust CAGR of 12% during the period. Subscription revenue registered a modest CAGR of 11.4% during the period on the back of growth in subscriber base, following the advent of digital distribution platforms (DTH/CAS). However, carriage fee remains as one of the biggest concerns for broadcasters, as channels increasingly compete for premium placements.
Exhibit 4: Television sector - Size and growth trends

CAGR (` bn) ` TV distribution TV advertising Total CY07 140 71 211 CY08 158 83 241 CY09 169 88 257 CY10 194 103 297 CY11 222 118 340 CY12 253 136 389 CY13 298 157 455 CY14 350 183 533 CY15 416 214 630 CY07-10 11.4 13.2 12.0 CY11-15E 17.0 16.0 16.7
The television sector is expected to register a CAGR of 16.7% to `630bn by CY2015E, backed by robust growth in advertising and subscription revenue, registering a CAGR of 13.2% and 11.4%, respectively, over CY2010-15E.
stocks (Jagran Prakashan trading at ~12.8x FY2013E earnings, against its five-year median of 21x), we expect the sector to outperform the broader markets going forward.

With improving scenario, we are factoring in better visibility in advertising spends (particularly FY2013E) as business confidence levels restore and consumer spending rises. Further, higher stress on development of Tier-II, III and rural markets is expected to drive penetration levels of media segments. Swift action in terms of policymaking (delay in CAS implementation, roll-out of Phase III radio licensing and revision of FDI caps) is likely to improve the investment environment for both domestic entrepreneurs and foreign investors. Given the media sector's significant underperformance and cheap valuations of the underlying
Exhibit 5: Jagran trading at discount vs its 5yr average PE and 5yr Sensex avg PE
55.0 50.0 45.0 40.0 35.0 30.0 25.0 20.0 15.0 10.0 5.0
Sep-10
Dec-06
Mar-08
Nov-08
May-11
Apr-06
Feb-10
Jun-09
5 yr avg Sensex PE
5 yr avg Jagran PE
Jagran PE

Company Reco Mcap (` cr) ` DB Corp HT Media Jagran PVR SUN TV Buy Buy Buy Neutral Neutral 3,390 3,085 3,095 374 11,698 CMP (` ) ` 185 131 98 138 297 TP (`) ` 274 170 137 143 Upside (%) 48.1 29.5 40 3.9 P/E (x) FY12E 14.3 15.3 14.7 17.2 14.4 FY13E 12.3 13.9 12.8 14.0 13.0 EV/Sales (x) FY12E 2.3 1.6 2.4 0.8 5.4 FY13E 2.0 1.4 2.2 0.6 4.9 RoE (%) FY12E 26.2 14.4 30.2 6.2 30.0 FY13E 25.4 13.9 33.8 7.2 27.3 CAGR # Sales 12.6 12.9 8.9 12.4 7.4 EPS 2.1 7.1 4.7 48.4 5.3
January 2012
Jan-12
Jul-07
221
Media
DB Corp
Company Background
CMP/TP/Upside: `185 / `274 / 48%
DBCL is one of the leading publishing houses, with its newspapers cumulatively commanding the highest readership and circulation in the country. The company publishes seven newspapers and 64 editions in three languages (Hindi, Gujarati, Marathi and English) across 13 states in India. Dainik Bhaskar, its flagship publication, is the market leader in terms of readership in Madhya Pradesh, Chattisgarh, Chandigarh and Haryana. DBCL's combined average daily readership of Dainik Bhaskar, Divya Marathi, Business Bhaskar, Divya Bhaskar and Saurashtra Samachar is 19.2mn readers, making it the most widely read newspaper group in India.
STOCK RETURNS (%) DB CORP BSE MIDCAP SENSEX 3M 1Y 3Y 23.0 21.3 5Y (1.4) 3.3 10Y 17.3 (17.8) (24.9) (8.5) (20.9) (2.6) (12.3)
Structural Snapshot
Growth opportunity: DBCL has a relatively advertising-focused revenue model, and its multistate leadership ensures high advertising revenue. Dainik Bhaskar has a strong foothold in the Hindi belt. Divya Bhaskar contributes steady ~17% to the company's total revenue. According to IRS 3Q2011 survey, DBCL increased its readership, with 4.9% ror growth over 2Q. Dainik Bhaskar reported strong growth of 7.7% in Chhattisgarh and 2% in Madhya Pradesh. The company recently forayed into Maharashtra, which is 1) the third largest state with an average GDP growth rate of 14.5%, 2) per capita income of the state stands at a healthy `79,515, 3) the state has a high literacy rate of 77% and a penetration gap of 71%, and 4) the state ad market is estimated at ~`700cr (excl. Mumbai) and is growing at 15% per year. Competitive position: DBCL leads its nearest competitor in its market with a huge margin in terms of circulation. The company has made significant inroads in terms of expanding its footprints in the urban regions of Madhya Pradesh, Rajasthan, Gujarat, Haryana, Punjab and Chandigarh, cementing its aggressive dominance in these markets in terms of readership. Nature of business: Ad revenue cyclical; High brand loyalty; Significant entry barriers for new players.
FINANCIAL PERFORMANCE OVERVIEW (%) SALES GROWTH* PAT GROWTH* OPM# ROE# 3M 17.6 (37.1) 21.8 1Y 19.1 42.2 31.1 35.0 3Y 13.7 50.8 25.6 31.8 5Y 10Y -
ANGEL ESTIMATES PARTICULARS PAT GROWTH (%) ROE (%) P/E FY2012E (8.0) 26.2 14.3 FY2013E 15.8 25.4 12.3

Well-planned aggression edges DBCL over peers: We believe DBCL's continuous endeavors to diversify its print business coupled with aggressive expansion into new markets (urban towns beyond metros) backed by exhaustive market research and focus on achieving leadership is the key differentiating factor compared to its peers. The company has been successful in executing its expansion plans with launches in Maharashtra and Jharkhand. Peg a 15% CAGR in ad revenue, new launches to contribute 2-3%: We expect ~15% yoy growth in ad revenue over FY2012E/FY2013E for DBCL (lower than FY2011 ad revenue growth) to factor in a slump in the macroeconomic environment and high base of FY2011. Valuation: At the CMP of `185, DBCL is trading at attractive valuations of 12x FY2013E consolidated EPS of `15.5. We maintain our Buy view on the stock with a target price of `274. Downside risks to our estimates include: any further rise in newsprint prices; competition becoming fierce; and higher-thanexpected loss increase in the breakeven period of its new launches.
222
January 2011

BALANCE SHEET
Y/E MARCH (` CR) ` SOURCES OF FUNDS EQUITY SHARE CAPITAL SHARE CAPITAL SUSPENSE ACCOUNT RESERVES& SURPLUS SHAREHOLDERS FUNDS MINORITY INTEREST TOTAL LOANS DEFERRED TAX LIABILITY TOTAL LIABILITIES 182 1 466 649 4 321 61 1,035 183 3 643 829 0 237 69 1,136 183 803 986 0 187 69 1,243 183 997 1,180 0 149 69 1,399 FY2010 FY2011 FY2012E FY2013E
% CHG
TOTAL EXPENDITURE COST OF MATERIALS EBITDA
10.7
720 328 331
19.1
862 378 389
13.0
1,024 443 390
12.2
1,134 483 452

RECURRING PBT
144.2 31.5
281
17.6 31.1
359
0.2 27.6
355
16.0 28.5
411
APPLICATION OF FUNDS
% CHG
TAX
258.9
106
27.8
98
(1.0)
117
15.8
GROSS BLOCK 136 LESS: ACC. DEPRECIATION NET BLOCK CAPITAL WORK-IN-PROGRESS GOODWILL INVESTMENTS NET CURRENT ASSETS MIS. EXP. NOT WRITTEN OFF TOTAL ASSETS 660 112 547 61 39 21 354 13 1,035 807 173 634 68 33 16 373 11 1,136 831 223 609 125 33 16 449 11 1,243 906 282 625 136 33 16 578 11 1,399
(% OF PBT)
PAT (REPORTED) LESS: MINORITY INTEREST (MI) ADJ. PAT
37.6
175 (8) 183
27.4
259 0.3 260
33.0
238 238
33.0
275 275
(% OF NET SALES)
ADJ. EPS (`) `
17.4
10.0
20.8
14.1
16.8
13.0
17.4
15.0
% CHG
283.9
41.4
(8.0)
15.8
CASH FLOW STATEMENT

Y/E MARCH (`CR) ` PROFIT BEFORE TAX DEPRECIATION CHANGE IN WORKING CAPITAL INTEREST / DIVIDEND (NET) DIRECT TAXES PAID OTHERS CASH FLOW FROM OPERATIONS (INC.)/ DEC. IN FIXED ASSETS (INC.)/ DEC. IN INVESTMENTS CASH FLOW FROM INVESTING INC./(DEC.) IN LOANS DIVIDEND PAID (INCL. TAX) INTEREST / DIVIDEND (NET) CASH FLOW FROM FINANCING INC./(DEC.) IN CASH OPENING CASH BALANCES CLOSING CASH BALANCES FY2010 281 38 (14) 25 101 2 229 (38) 3 (34) (242) 42 13 (48) 147 46 193 FY2011 359 43 (37) 1 98 30 298 (154) 4.22 (150) (84) 85 1 (167) (20) 193 173 FY2012E 355 50 19 2 117 (8) 301 (81) (81) (50) 77 2 (129) 91 173 264 FY2013E 411 59 (29) 1 136 (2) 304 (86) (86) (38) 81 1 (121) 97 264 361
KEY RATIOS
Y/E MARCH VALUATION RATIO (X) P/E P/BV DIVIDEND YIELD (%) EV/SALES EV/EBITDA PER SHARE DATA (`) ` EPS (FULLY DILUTED) CASH EPS DPS BOOK VALUE RETURNS (%) ROCE ANGEL ROIC (PRE-TAX) ROE TURNOVER RATIOS (X) ASSET TURNOVER (GROSS BLOCK) INVENTORY / SALES (DAYS) RECEIVABLES (DAYS) PAYABLES (DAYS) WC (DAYS) 1.6 25 67 59 56 1.5 21 70 48 58 1.7 24 65 57 48 1.8 26 63 54 50 30.7 34.8 40.3 31.8 35.9 35.0 28.6 34.7 26.2 29.8 37.9 25.4 10.0 12.2 2.0 35.7 14.1 16.5 4.0 45.2 13.0 15.7 3.6 53.8 15.0 18.2 3.8 64.4 18.5 5.2 1.1 3.3 10.6 13.1 4.1 2.2 2.8 8.9 14.3 3.4 1.9 2.3 8.5 12.3 2.9 2.1 2.0 7.0 FY2010 FY2011 FY2012E FY2013E
January 2011
223
Media
HT Media
Company Background
CMP/TP/Upside: `131 / `170 / 30%
HT Media (HTML) is the second largest print media company in terms of readership/circulation and the largest listed company in terms of revenue. The company's two key offerings, Hindustan Times and Hindustan, feature in the top five newspapers in their respective categories in terms of readership. The company is a market leader in Delhi (Hindustan Times), Bihar and Jharkhand (Hindustan) and has emerged as a strong contender in the financial daily segment (Mint).
Structural Snapshot
Growth opportunity: Hindustan is the leading player in Bihar and Jharkhand, which are among the fastest growing states in India. In the past three years, Hindustan has grown by 37% with the addition of 32.8lakh readers. Also, with rising consumption in these markets, HT Media with its regional print is set to ride the growth path. Competitive position: According to IRS 3Q2011 survey, Hindustan continues to maintain its leadership position with 75% AIR share in Bihar and is the number one player in Jharkhand. AIR growth in UP and UT markets has been one of the fastest in the print sector. Mint stood at the second position in the business daily category with a 29% readership share. Nature of business: Ad revenue cyclical; High brand loyalty; Significant entry barriers for new players.
STOCK RETURNS (%) HT MEDIA BSE MIDCAP SENSEX 3M (6.3) 1Y (8.5) 3Y 28.6 23.0 21.3 5Y (4.7) (1.4) 3.3 10Y 17.3
(8.5) (20.9) (2.6) (12.3)
FINANCIAL PERFORMANCE OVERVIEW (%) SALES GROWTH* PAT GROWTH* OPM# ROE# 3M 1Y 3Y 5Y 111.4 110.0 13.8 13.1 10Y 13.4 2384.1 219.5 13.0 2087.8 482.7 10.4 12.8 19.7 16.1 16.9

Steady ad revenue growth, Burda JV to scale up the top line: HTML recorded impressive ad revenue during the quarter, with yoy growth of 12.5% and a robust 35.4% qoq increase in the English print and 24.5% yoy/18% qoq in the Hindi print segments, despite tough macroeconomic conditions. We estimate this growth in ad revenue to prolong with the English print (HT and Mint) and Hindi print (HMVL) businesses, posting CAGRs of ~12% and 18% over FY2011-13, respectively. Hindustan's ad revenue will grow the most in UP (we peg a CAGR of ~20% over FY2011-13), while HT Mumbai will be the maximum growth driver for the English print's ad revenue (we peg a CAGR of ~13% over FY2011-13). Burda JV, which has recently achieved EBITDA breakeven, is likely to contribute ~`80cr in FY2012 and ~`90cr in FY2013 to the company's top line. New businesses continue to grow, expect OPM of ~18% over FY2011-13: In terms of operating performance, HTML's new businesses continued to grow during the quarter (radio and internet gained traction). Going forward, we believe continuous improvement in ad yields will help HTML post margins of ~18% during FY2012-13. Valuation: At the CMP, the stock trades at 13.9x FY23013E EPS. We maintain our Buy view on the stock with a target price of ` 170. Downside risks to our estimates include - 1) any further rise in newsprint prices, 2) competition becoming fierce and 3) higher-than-expected losses/increase in the breakeven period of its new launches.
224
January 2011

BALANCE SHEET
Y/E MARCH (` CR) ` SOURCES OF FUNDS EQUITY SHARE CAPITAL RESERVES& SURPLUS SHAREHOLDERS FUNDS MINORITY INTEREST TOTAL LOANS DEFERRED TAX LIABILITY TOTAL LIABILITIES APPLICATION OF FUNDS GROSS BLOCK 1,033 322 712 475 671 109 200 362 576 95 1,413 1,213 408 805 760 756 115 242 398 604 152 1,736 1,363 498 865 685 1,003 197 292 514 836 166 1,880 1,646 605 1,041 685 1,064 162 327 575 923 141 2,064 47 924 971 22 402 18 1,413 47 1,255 1,302 130 312 (9) 1,736 47 1,445 1,492 149 247 (9) 1,880 47 1,653 1,700 170 202 (9) 2,064 FY2010 FY2011 FY2012E FY2013E
% CHG
TOTAL EXPENDITURE COST OF MATERIALS PERSONNEL OTHERS EBITDA
4.9
1,163 515 252 78 250
25.1
1,450 671 301 89 317
13.7
1,651 777 334 101 360
12.1
1,853 889 372 108 402
% CHG
RECURRING PBT
184.4
191
26.9
257
13.4
307
11.7
338
LESS: ACC. DEPRECIATION
% CHG
PBT (REPORTED) TAX
860.7
188 54
34.9
257 71
19.3
307 86
10.3
338 95
NET BLOCK INVESTMENTS CURRENT ASSETS CASH LOANS & ADVANCES OTHER CURRENT LIABILITIES NET CURRENT ASSETS TOTAL ASSETS
(% OF PBT)
ADJ. PAT
28.2
138
27.7
181
28.0
202
28.0
223

ADJ. EPS (`) `
589.8 9.8
5.9
31.1 10.2
7.7
11.4 10.0
8.6
10.4 9.9
9.5
% CHG
589.8
31.1
11.4
10.4
CASH FLOW STATEMENT

Y/E MARCH (`CR) ` PROFIT BEFORE TAX DEPRECIATION CHANGE IN WORKING CAPITAL INTEREST / DIVIDEND (NET) DIRECT TAXES PAID OTHERS CASH FLOW FROM OPERATIONS (INC.)/ DEC. IN FIXED ASSETS (INC.)/ DEC. IN INVESTMENTS CASH FLOW FROM INVESTING INC./(DEC.) IN LOANS DIVIDEND PAID (INCL. TAX) INTEREST / DIVIDEND (NET) CASH FLOW FROM FINANCING INC./(DEC.) IN CASH OPENING CASH BALANCES CLOSING CASH BALANCES FY2010 188 71 66 15 86 (6) 248 (144) (133) (277) 31 8 (1) 22 (7) (1) (8) FY2011 257 84 (41) (6) 95 51 251 (70) (284) (354) (90) 10 (6) 86 (17) (8) (25) FY2012E 307 90 44 (6) 86 23 371 (294) 75 (219) (65) 11 (6) (70) 82 (25) 57 FY2013E 338 107 (9) (15) 95 (3) 324 (317) 0 (317) (45) 12 (15) (42) (35) 57 22
KEY RATIOS
Y/E MARCH VALUATION RATIOS(X) P/E P/BV DIVIDEND YIELD (%) EV/SALES EV/EBITDA EV / TOTAL ASSETS PER SHARE DATA (`) ` EPS (FULLY DILUTED) DPS BOOK VALUE RETURNS (%) ROCE ANGEL ROIC (PRE-TAX) ROE TURNOVER RATIOS (X) ASSET TURNOVER (GROSS BLOCK) RECEIVABLES (DAYS) PAYABLES (DAYS) WC CYCLE (EX-CASH) (DAYS) 1.4 63 142 (4) 1.5 52 115 8 1.5 61 143 (6) 1.4 61 142 (3) 13.5 15.5 15.2 14.8 19.6 15.9 14.9 19.5 14.4 14.9 17.4 13.9 5.9 0.4 41.3 7.7 0.4 55.4 8.6 0.4 63.5 9.5 0.5 72.4 22.4 3.2 0.3 2.4 13.5 2.4 17.1 2.4 0.3 1.9 10.3 1.9 15.3 2.1 0.3 1.6 8.7 1.7 13.9 1.8 0.4 1.4 7.8 1.5 FY2010 FY2011 FY2012E FY2013E
January 2011
225
Media
Jagran Prakashan
TOP PICK
Dainik Jagran with AIR of ~16.4mn is the most read newspaper in India published by Jagran Prakashan (JPL). The company enjoys a leadership position in Uttar Pradesh, the largest Hindi market for almost a decade now. The company is present in the rapidly growing Hindi markets in Bihar, Delhi, Haryana, Jharkhand, Punjab and Uttar Pradesh. Apart from its commanding position in print media, JPL is also involved in the internet, OOH and event management business.
Structural Snapshot
Growth opportunity: JPL is the leading player in Uttar Pradesh, where print media readership is estimated at less than 15%. With a leadership position in Uttar Pradesh and the state's ad market pegged at ~`800cr, JPL is slated to benefit first, once macroeconomic concerns start to fade. Further, regional print players are expected to benefit with increased focus of national advertisers on the growing regional ad market. Competitive position: According to IRS 3Q2011 survey, Dainik Jagran continues to maintain its leadership position with 16.5mn readers, growing by 0.4% qoq (3.2% yoy) in Uttar Pradesh. AIR in Uttar Pradesh stood at 9mn as compared to 7mn for Amar Ujala. Bihar, Jharkhand and Uttaranchal also registered modest growth as per the survey. Nature of business: Ad revenue cyclical; High brand loyalty; Significant entry barriers for new players.
STOCK RETURNS (%) JPL BSE MIDCAP SENSEX 3M 1Y 3Y 20.9 23.0 21.3 5Y 7.9 (1.4) 3.3 10Y 17.3 (7.8) (21.0) (8.5) (20.9) (2.6) (12.3)

Healthy ad revenue growth on account of higher color inventory, peg a 10% CAGR: For FY2012-13E, we expect ad revenue to grow by ~9% yoy. We maintain a conservative stance on management's robust guidance of 14-15% yoy growth due to lower national advertisements (management guidance) and low pick-up in advertisements from the education sector (expect pressure to ease in 2HFY2012). Also, with upcoming elections in Uttar Pradesh, the company will monetize its leadership position further. Underperformance a good entry point; JPL attractive at 12.8x FY2013E EPS: JPL acquired the print business from Mid-Day Multimedia, whose presence in markets such as Mumbai, Delhi, Bangalore and Pune (recently launched) is likely to fill the gap in JPL's portfolio vs. its peers HT Media (HT and Hindustan) and DB Corp. (Dainik Bhaskar and DNA), who offer both English and Hindi publications to their advertisers. Hence, we believe JPL's combined offerings are going to record a healthy 9% CAG R in revenue over FY2011-13E. With JPL's wider portfolio (including Mid-Day Publications), we believe the company is well poised to benefit from steady growth in print media. We believe the underperformance of the stock and attractive valuations (at the CMP, the stock trades at 12.8x FY2013E EPS) provide a good entry point for investors.
226
January 2011

BALANCE SHEET
Y/E MARCH (` CR) ` SOURCES OF FUNDS EQUITY SHARE CAPITAL RESERVES& SURPLUS SHAREHOLDERS FUNDS TOTAL LOANS DEFERRED TAX LIABILITY TOTAL LIABILITIES APPLICATION OF FUNDS GROSS BLOCK LESS: ACC. DEPRECIATION NET BLOCK CAPITAL WORK-IN-PROGRESS INVESTMENTS CURRENT ASSETS CURRENT LIABILITIES NET CURRENT ASSETS TOTAL ASSETS 564 194 369 25 167 417 186 231 792 730 258 472 74 202 498 290 208 956 763 326 437 38 202 521 271 250 926 867 404 462 43 202 537 297 240 948 60 552 612 121 58 792 63 639 702 192 62 956 63 629 692 172 62 926 63 670 734 152 62 948 FY2010 FY2011 FY2012E FY2013E
% CHG
14.4
660 282
29.6
864 357
9.4
967 368
8.3
1,039 408
(% OF NET SALES)
RECURRING PBT
30.0
259
29.2
308
27.6
314
28.2
345
% CHG
PBT (REPORTED) TAX
91.7
259 83
18.8
306 98
2.0
314 104
9.8
345 104
(% OF PBT)
PAT (REPORTED) PAT AFTER MI (REPORTED) ADJ. PAT
32.1
176 176 176
31.7
208 208 210
33.0
210 210 210
30.1
241 241 241
% CHG
(% OF NET SALES) ADJ. EPS (`) `
92.0
18.7 5.6
19.5
17.2 6.6
0.1
15.8 6.7
14.6
16.7 7.6
% CHG
92.0
19.5
0.1
14.6
CASH FLOW STATEMENT

Y/E MARCH (`CR) ` PROFIT BEFORE TAX DEPRECIATION CHANGE IN WORKING CAPITAL INTEREST / DIVIDEND (NET) DIRECT TAXES PAID OTHERS CASH FLOW FROM OPERATIONS (INC.)/ DEC. IN FIXED ASSETS (INC.)/ DEC. IN INVESTMENTS CASH FLOW FROM INVESTING ISSUE OF EQUITY INC./(DEC.) IN LOANS DIVIDEND PAID (INCL. TAX) INTEREST / DIVIDEND (NET) CASH FLOW FROM FINANCING INC./(DEC.) IN CASH OPENING CASH BALANCES CLOSING CASH BALANCES FY2010 259 51 (12) (9) 83 (21) 185 (38) (10) (48) (20) 123 (9) (135) 2 83 85 FY2011 310 65 (31) (1) 98 34 280 (216) (35) (251) 71 155 (9) (75) (47) 85 36 FY2012E 314 69 (46) 3 104 (29) 206 3 3 (20) 185 (2) (203) 7 36 43 FY2013E 345 78 (23) 2 104 299 (108) (108) (20) 200 (3) (217) (27) 43 16
KEY RATIOS
Y/E MARCH VALUATION RATIOS (X) P/E P/BV DIVIDEND YIELD (%) EV/SALES EV/EBITDA EV / TOTAL ASSETS PER SHARE DATA (`) ` EPS (FULLY DILUTED) DPS BOOK VALUE RETURNS (%) ROCE (PRE-TAX) ANGEL ROIC (PRE-TAX) ROE TURNOVER RATIOS (X) ASSET TURNOVER (GROSS BLOCK) RECEIVABLES (DAYS) PAYABLES (DAYS) WC CYCLE (EX-CASH) (DAYS) 1.7 70 50 57 1.7 69 46 51 1.8 68 50 56 1.7 66 50 57 30.0 43.9 30.0 33.3 46.3 31.6 31.8 42.8 30.2 35.2 46.8 33.8 5.6 3.5 20.3 6.6 4.2 22.2 6.7 5.0 21.9 7.6 5.4 23.2 17.6 4.8 3.6 3.5 11.5 4.0 14.8 4.4 4.3 2.7 9.1 3.4 14.7 4.5 5.1 2.4 8.8 3.5 12.8 4.2 5.5 2.2 8.0 3.4 FY2010 FY2011 FY2012E FY2013E
January 2011
227
Media
PVR
Company Background
PVR is one of India's leading multiplex cinema operators. The company is the pioneer of the multiplex culture in the country, as it was the first to establish a multiplex cinema in India, PVR Anupam, in Saket, Delhi, in 1997. The company is also present in the entertainment space through PVR Blu-O bowling alleys.
SHAREHOLDING PATTERN (%) Promoters FII 44.8 3.0
Structural Snapshot
Growth opportunity: Increasing urbanization, changing consumer lifestyle and growing youth population in the country will drive growth of multiplex companies. Also, as compared to western developed countries, India is significantly low in terms of number of movie screens/million. Competitive position: PVR currently has 158 screens and 40,062 seats in 36 properties. In 2QFY2012, occupancy level increased to 36% (30% in 2QFY2011), ATP stood at `152 and footfalls increased to 7.1mn from 5.7mn. Nature of business: Capital intensive; Low entry barriers for new players.
STOCK RETURNS (%) PVR BSE SMALLCAP SENSEX 3M 12.0 1Y 1.9 3Y 10.0 22.0 21.3 5Y (8.7) (3.7) 3.3 10Y 17.3
(9.1) (29.5) (2.6) (12.3)

3Y 19.8 13.9 2.2 5Y 10Y De-risked business due to various entertainment offerings: PVR is present across the movie value chain (exhibition-production-distribution) and has forayed into retail entertainment through PVR Blu-O, which is expected to show strong growth going ahead. PVR's earnings are expected to register a CAGR of ~80% over FY2011-13E on incremental earnings from its newly opened properties (further, it is likely to open a new property in 2HFY2012E), reduction in depreciation cost and an impressive movie pipeline. Set for expansion: PVR has ambitious plans to open 55 new screens in FY2012 (keeping a conservative stance, we have factored in opening of 20 screens in FY2012; however, opening of more than 20 screens in FY2012 poses an upside risk to our estimates). For FY2012, we have factored in 4,800 seat additions, resulting from four new properties. Valuation: Due to over capacity and low occupancies, the sector is suffering from low RoEs (PVRs RoE also stands at low 7.2% in FY2013E). At the CMP, the stock is trading at 14x FY2013E EPS. We maintain our Neutral view on the stock.
FINANCIAL PERFORMANCE OVERVIEW (%) SALES GROWTH* PAT GROWTH* OPM# ROE# 3M 2.5 20.2 1Y 36.9 12.8 2.5
58.2 504.7 (27.7)
228
January 2011

Y/E MARCH (` CR) ` NET SALES TOTAL OPERATING INCOME FY2010 334 334 FY2011 457 457 FY2012E 507 507 FY2013E 577 577
BALANCE SHEET
Y/E MARCH (` CR) ` EQUITY SHARE CAPITAL RESERVES& SURPLUS SHAREHOLDERS FUNDS MINORITY INTEREST TOTAL LOANS DEFERRED TAX LIABILITY TOTAL LIABILITIES APPLICATION OF FUNDS GROSS BLOCK 380 93 352 34 107 132 59 73 0 566 455 119 389 32 1 234 67 167 0.38 589 437 167 324 109 11 216 75 141 585 461 220 294 92 21 262 82 180 587 FY2010 26 283 309 60 180 17 566 FY2011 27 314 341 54 162 31 589 FY2012E 27 331 358 54 141 31 585 FY2013E 27 353 380 54 121 31 587
% CHG
(5.1)
300 34
36.9
372 85
10.9
423 84
13.9
481 97

EBIT
(27.5) 10.2
7
149.2 18.7
18
(1.4) 16.6
37
14.9 16.7
43
% CHG
RECURRING PBT TAX
(43.0)
1 (0)
163.9
16 15
104.7
36 15
17.9
LESS: ACC. DEPRECIATION 45 NET BLOCK 18 CAPITAL WORK-IN-PROGRESS GOODWILL INVESTMENTS CURRENT ASSETS CURRENT LIABILITIES NET CURRENT ASSETS MIS. EXP. NOT WRITTEN OFF TOTAL ASSETS
(% OF PBT)
ADJ. PAT
(14.6)
1
97.9
8
40.0
22
40.0
27

BASIC EPS (`) ` ADJ. EPS (`) `
(84.5) 0.4
0.5 0.5
504.7 1.8
3.0 3.0
166.1 4.3
8.0 8.0
22.8 4.6
9.8 9.8
% CHG
(84.5)
504.7
166.1
22.8
CASH FLOW STATEMENT

Y/E MARCH (`CR) ` PROFIT BEFORE TAX DEPRECIATION CHANGE IN WORKING CAPITAL INTEREST / DIVIDEND (NET) DIRECT TAXES PAID OTHERS CASH FLOW FROM OPERATIONS (INC.)/ DEC. IN FIXED ASSETS (INC.)/ DEC. IN INVESTMENTS CASH FLOW FROM INVESTING INC./(DEC.) IN LOANS DIVIDEND PAID (INCL. TAX) INTEREST / DIVIDEND (NET) CASH FLOW FROM FINANCING INC./(DEC.) IN CASH OPENING CASH BALANCES CLOSING CASH BALANCES FY2010 1 27 (7) 11 (0) (3) 29 (85) 8 (77) 33 3 11 60 12 8 21 FY2011 16 67 (24) 9 15 (11) 42 (61) 89 28 (18) 3 9 (11) 58 21 79 FY2012E 36 47 (9) 7 15 2 70 (60) 7 (52) (21) 5 7 (33) (15) 79 64 FY2013E 45 53 (25) 6 18 12 73 (7) (10) (17) (20) 5 6 (30) 25 64 89
KEY RATIOS
Y/E MARCH VALUATION RATIO (X) P/E P/BV DIVIDEND YIELD (%) EV/SALES EV/EBITDA EV / TOTAL ASSETS PER SHARE DATA (`) ` EPS (FULLY DILUTED) DPS BOOK VALUE RETURNS (%) ROCE (PRE-TAX) ANGEL ROIC (PRE-TAX) ROE TURNOVER RATIOS (X) ASSET TURNOVER (GROSS BLOCK) RECEIVABLES (DAYS) PAYABLES (DAYS) WC CYCLE (EX-CASH) (DAYS) 0.9 16 59 57 1.2 22 45 122 1.3 23 45 92 1.4 23 44 104 1.3 1.5 0.5 3.1 3.5 2.5 6.2 7.2 6.2 7.4 9.1 7.2 0.5 1.0 120.6 3.0 1.1 125.7 8.0 1.5 132.0 9.8 1.5 140.1 261.5 1.1 0.7 1.5 15.6 0.9 45.8 1.1 0.8 0.9 5.4 0.8 17.2 1.0 1.1 0.8 5.4 0.8 14.0 1.0 1.1 0.6 4.2 0.7 FY2010 FY2011 FY2012E FY2013E
January 2011
229
Media
SUN TV Networks
Sun TV (STNL) is the leading broadcaster in the south Indian states of Tamil Nadu, Andhra Pradesh, Karnataka and Kerala. The company is promoted by Kalanithi Maran. The group is present across the media value chain, viz. broadcasting, radio, films, cable distribution, DTH and print media. STNL has the largest broadcasting network in South India, with 20 channels in the GEC, kids, movies and news space. Besides TV broadcasting, STNL owns FM radio licenses for 45 cities. STNL has a strong movie library comprising more than 8,500 titles, with rights across all the four major south Indian languages. Apart from having an extensive movie library, STNL purchases around 90% of all movie releases in these languages.
STOCK RETURNS (%) COMPANY BSE200 INDEX SENSEX 3M 1Y 3Y 20.9 22.1 21.3 5Y (5.8) 3.5 3.3 10Y 19.0 17.3 10.3 (41.4) (3.4) (14.1) (2.6) (12.3)
Structural Snapshot
Growth opportunity: STNL has a leadership in the southern states, having a combined ad market size of ~`2,700cr. Also, with increased income levels, consumption of media is bound to rise. Moreover, national advertisers are recognizing the potential of regional players. Nature of business: Ad revenue cyclical; High brand loyalty; Significant entry barriers for new players. Competitive position: The southern regional markets of Tamil Nadu, Andhra Pradesh, Karnataka and Kerala account for ~73% of the total regional advertisement revenue. STNL is well placed to ride the regional wave, with its dominant market share across lucrative southern markets through its bouquet of 20 channels across genres like GECs, music, news and movies, including flagship channels - Sun TV (Tamil Nadu, market share 68%), Gemini TV (Andhra Pradesh, market share 36%), Udaya TV (Karnataka, market share of 40%) and Surya TV (Kerala, market share of 33%).
FINANCIAL PERFORMANCE OVERVIEW (%) SALES GROWTH* PAT GROWTH* OPM# ROE# 3M 6.2 7.6 0.8 1Y 38.6 48.1 78.4 35.4 3Y 32.3 33.1 74.8 28.3 5Y 10Y -

STNL's ad revenue to be at par with regional advertising, we peg a 14% CAGR: During FY2011-13E, we peg STNL's ad revenue to post a 14% CAGR, at par with regional advertising during the period, driven by 1) absorption of rate hikes (8-32% hike in ad rates across Tamil channels and 6-43% in Telugu channels effective from January 2011 and another set of price hikes taken effective from April 2011); 2) increasing DTH subscriber base; and 3) dominant position in South India, where competition is limited. DTH to drive a 15.9% CAGR in pay revenue: During FY2011-13E, we expect STNL to register a robust 15.9% CAGR in overall DTH revenue. The digitization drive across the nation and consumers shifting to superior-quality DTH from cable television would also benefit STNL, as it is a known player in South India (STNL receives ~60% of its revenue from Sun Direct). We expect STNL's DTH subscriber base to reach ~9mn by FY2013. Valuation: At the CMP, the stock is trading at 13x FY2013E (below its median of 23x). We remain positive on STNL's business, considering the companys vast dominance in its markets. We believe the recent not-in-favor incidents still are an overhang on the stock. Accordingly, we expect the stock price to remain range-bound. Hence, we remain Neutral on the stock.
230
January 2011

BALANCE SHEET
Y/E MARCH (` CR) ` SOURCES OF FUNDS EQUITY SHARE CAPITAL PREFERENCE CAPITAL RESERVES& SURPLUS 197 88 1,689 1,973 37 34 2,045 197 88 2,219 2,504 37 34 2,575 197 88 2,766 3,051 37 34 3,122 197 88 3,401 3,686 37 34 3,757 FY2010 FY2011 FY2012E FY2013E
% CHG
TOTAL EXPENDITURE COST OF PRODUCTION EBITDA EBIT
39.8
362 119 1,091 770
38.6
436 135 1,578 1,097
3.8
452 139 1,638 1,168
11.1
501
SHAREHOLDERS FUNDS 155 1,820 1,304 MINORITY INTEREST TOTAL LOANS DEFERRED TAX LIABILITY TOTAL LIABILITIES APPLICATION OF FUNDS GROSS BLOCK LESS: ACC. DEPRECIATION NET BLOCK ADJ. PAT 520 770 813 900 NON CURRENT ASSETS
% CHG
PBT (REPORTED) TAX
40.5
800 299
43.0
1,144 383
6.0
1,212 406
11.3
1,349 454
1,888 990 898 30 1,035 461 574 2,045
2,257 1,471 786 35 1,522 344 1,178 2,575
2,577 1,941 635 40 2,051 390 1,661 3,122
2,891 2,457 434 35 2,665 394 2,270 3,757
(% OF PBT)
37.4
33.5
33.5
33.6

ADJ. EPS (`) `
41.2 35.8
13.2
48.1 38.2
19.5
5.6 38.9
20.6
10.7 38.8
22.8
CURRENT ASSETS CURRENT LIABILITIES NET CURRENT ASSETS TOTAL ASSETS
% CHG
41.2
48.1
5.6
10.7
CASH FLOW STATEMENT

Y/E MARCH (`CR) ` PROFIT BEFORE TAX DEPRECIATION CHANGE IN WORKING CAPITAL INTEREST / DIVIDEND (NET) DIRECT TAXES PAID OTHERS CASH FLOW FROM OPERATIONS (INC.)/ DEC. IN FIXED ASSETS (INC.)/ DEC. IN INVESTMENTS CASH FLOW FROM INVESTING DIVIDEND PAID (INCL. TAX) INTEREST / DIVIDEND (NET) CASH FLOW FROM FINANCING INC./(DEC.) IN CASH OPENING CASH BALANCES CLOSING CASH BALANCES FY2010 800 480 (169) (38) 383 3 1,036 (302) (100) (402) (345) 36 (307) 327 488 815 FY2011 1,144 470 (12) (41) 406 36 1,260 (329) (200) (529) (231) 39 (190) 541 815 1,356 FY2012E 1,212 470 (12) (41) (406) 36 1,260 (329) (931) (200) (231) 39 (190) 541 815 1,356 FY2013E 1,349 516 (54) (41) (454) (0) 1,316 (346) (970) (200) (265) 39 (223) 547 1,356 1,903
KEY RATIOS
Y/E MARCH VALUATION RATIO (X) P/E P/BV DIVIDEND YIELD (%) EV/SALES EV/EBITDA EV / TOTAL ASSETS PER SHARE DATA (`) ` EPS (FULLY DILUTED) DPS BOOK VALUE RETURNS (%) ROCE (PRE-TAX) ANGEL ROIC (PRE-TAX) ROE TURNOVER RATIOS (X) ASSET TURNOVER (GROSS BLOCK) INVENTORY / SALES (DAYS) RECEIVABLES (DAYS) PAYABLES (DAYS) 0.8 1 83 10 0.9 1 81 8 0.8 1 81 8 0.8 1 81 8 39.7 57.6 27.9 47.5 76.0 35.4 41.0 82.4 30.0 37.9 101.9 27.3 13.2 7.5 47.8 19.5 5.0 61.3 20.6 5.8 75.2 22.8 5.8 91.3 22.5 6.2 2.5 7.8 10.4 5.5 15.2 4.8 1.7 5.6 7.2 4.4 14.4 3.9 1.9 5.4 6.9 3.6 13.0 3.3 1.9 4.9 6.2 3.0 FY2010 FY2011 FY2012E FY2013E
January 2011
231
232
January 2011
Metals
COVERAGE
COMPANIES Ferrous Tata Steel SAIL JSW Steel Bhushan Steel Monnet Ispat Mining NMDC Sesa Goa Coal India MOIL Non-Ferrous Hind. Zinc Sterlite Inds Hindalco Nalco 126 115 146 56 142 147 162 Accum. BUY Accum. Neutral 175 189 350 253 231 208 Buy Accum. Neutral Neutral 435 91 667 334 436 510 699 293 528 Buy Neutral Accum. Reduce Buy CMP (`) TARGET (`) ` ` RECO
POSITIVE
Strong capacity expansion ahead

Domestic demand to witness strong growth during CY2011-15: India's per capita steel consumption stands at 46kg, compared to global average per capita consumption of 198kg and China's per capita consumption of 427kg, implying a strong potential for increasing consumption going forward. Over the past decade, steel consumption has grown at an average of 1.2x GDP growth. Going forward, with GDP expected to grow by 7-8%, we expect steel demand to post a CAGR of 10% over the next decade. Capacity expansion lined up to meet growth: Indian steelmakers have lined up strong expansion plans to meet the growing steel demand. Steel capacity is expected to increase from 78mn tonnes in FY2011 to 100mn tonnes by FY2014. Indian steelmakers enjoy a cost advantage over global peers on account of availability of iron ore at lower cost, captive iron ore mines and low cost of labor. Near-term outlook remains gloomy, although INR depreciation mutes price declines: Globally, steel prices have declined by 12-20% during July-December 2011. However, domestic steel prices remained flat on account of INR depreciation against the USD. Given that the spread between steel prices and key inputs has declined sharply, we believe steel companies' operating margins are close to their bottom levels. Steel consumption in India grew by only 1.8% in 1HFY2012 on account of subdued demand. Nevertheless, steel demand growth improved to 7.7% yoy in 3QFY2012. Aluminium capacity to leap-frog: India is ranked sixth among the countries with highest bauxite reserves. Indian bauxite reserves are expected to last over 300 years, with proven and probable reserves estimated at ~1.2bn tonnes. However, India's aluminium capacity currently stands at only 1.5mn tonnes (~3.5% of world capacity). Per capita consumption for aluminium is much lower in India compared to developed economies (2kg in India as compared to 22kg in the U.S.). Over the past decade, aluminium consumption has grown at an average of 1.4x GDP growth. Going forward, with GDP expected to grow by 7-8%, we expect aluminium demand to witness a CAGR of 12% over the next decade. Hence, Hindalco aims to ramp up its capacity from 0.5mn tonnes to 1.5mn tonnes in four years, while Sterlite aims to ramp up its capacity from 0.7mn tonnes to 2.5mn tonnes over the medium term. Weakening INR softens price decline for domestic base metal players: Base metal prices have also declined by 15-20% during 3QFY2012 on account of escalating Eurozone debt crisis. Although base metal prices are likely to remain under pressure in the near term due to concerns on growth, high cost of production should lend support to prices. While the copper market is struggling with supply constraints, downside for aluminium prices is capped due to high energy cost. Moreover, INR depreciation against the USD would partially offset the impact of lower LME prices for domestic players. Selective stocks look attractive: Metal stocks have been battered over the past one year on account of escalating Eurozone debt crisis, subdued domestic demand and rising input costs without the corresponding increase in finished product prices. Nevertheless, we believe the recent decline has left some of the stocks undervalued. We like companies with captive resources, strong visibility over expansion plans, low leverage levels and compelling valuations. Hence, our top picks are NMDC, Tata Steel, Sterlite Industries and Hindustan Zinc.
January 2012
233
Metals
Domestic demand to witness strong growth during CY2011-15: India's per capita steel consumption stands at 46kg, compared to global average per capita consumption of 198kg and China's per capita consumption of 427kg, implying a strong potential for increasing consumption going forward. Over the past decade, steel consumption has grown at an average of 1.2x GDP growth. Going forward, with GDP expected to grow by 7-8%, we expect steel demand to witness a CAGR of 10% over the next decade. Depressed steel operating margins currently imply limited margin risks hereon: The spread between steel prices and raw-material prices (iron ore and coking coal) remains low currently. Considering that ~75% of the world's steel companies are not integrated, we believe steel companies' operating margins are close to their bottom levels.
Exhibit 4: Spread between steel prices and raw materials remains low
1,300 1,200 1,100 1,000 900 800 700 600 500 400 300 200 100 0
Jan-09 Mar-09 May-09 Jul-09 Sep-09 Jul-08 Sep-08 May-08 Nov-08 Nov-09 Jan-08 Mar-08 Jan-10 Mar-10 May-10 Jul-10 Sep-10 Nov-10
Exhibit 1: Per capita consumption - Comparison

1,200 1,000 800
(kgs)
(US$/tonne)
Jan-11
Mar-11 May-11
Jul-11 Sep-11
Nov-11
600 400 200 0 South Korea China Russia World India
Jan-12
Coking coal (fob, Australia)
Iron ore (fob, Australia)
World HRC price
Exhibit 2: Steel consumption forecast

120 102 100 80 60 40 20 70
(mn tonnes)
GR CA
of 1
0.0
Near-term outlook remains gloomy, although INR depreciation mutes price declines: Globally, steel prices have declined by 12-20% during July-December 2011. However, domestic steel prices remained flat on account of INR depreciation against the USD. Steel consumption in India grew by only 1.8% in 1HFY2012 on account of subdued demand. Looking ahead, we expect steel consumption to pick up from 2HFY2012. as evident from improvement in steel demand improved in 3QFY2012 (+7.7% yoy).
Exhibit 5: July-December 2011 price movement

0 (5)
(%)
CY2011
CY2015
(10) (15) (20) (25)

INR depreciation India HRC China domestic USA HRC World HRC CIS HRC Iron ore
Capacity expansion lined up to meet growth: Indian steelmakers have lined up strong expansion plans to meet the growing steel demand. Steel capacity is expected to increase from 78mn tonnes in FY2011 to 100mn tonnes by FY2014. These capacities will be aided by cost advantage that Indian companies have over global peers on account of availability of iron ore at lower cost, captive iron ore mines and low cost of labor.
Exhibit 3: Domestic steel capacity expansion

120 100
(mn tonnes p.a.)
8 11 78
102
80 60 40 20 0
Aluminium capacity to leap-frog: India is ranked sixth among the countries with highest bauxite reserves. Indian bauxite reserves are expected to last over 300 years, with proven and probable reserves estimated at ~1.2bn tonnes. However, India's aluminium capacity currently stands at only 1.5mn tonnes (~3.5% of world capacity). Per capita consumption in India for aluminium is much lower in India compared to developed economies (2kg in India as compared to 22kg in the U.S.). Over the past decade, aluminium consumption has grown at an average of 1.4x GDP growth. Going forward, with GDP expected to grow by 7-8%, we expect aluminium demand to witness a CAGR of 12% over the next decade. Hence, Hindalco aims to ramp up its capacity from 0.5mn tonnes to 1.5mn tonnes in four years, while Sterlite aims to ramp up its capacity from 0.7mn tonnes to 2.5mn tonnes over the medium term.
FY2011
FY2012E
FY2013E
FY2014E
Total
234
January 2012
Mar-12
Metals
Weakening INR softens price decline for domestic base metal players: Base metal prices have also declined by 15-20% during 3QFY2012 on account of escalating Eurozone debt crisis. Although base metal prices are likely to remain under pressure in the near term due to concerns on growth, high cost of production should lend support to prices. While the copper market is struggling with supply constraints, downside for aluminium prices is capped due to high energy cost. Zinc and lead prices are unlikely to see any major upside as the market remains in surplus. Moreover, INR depreciation against the USD would partially offset the impact of lower LME prices for domestic players. Selective stocks look attractive: Metal stocks have been battered over the past one year on account of escalating Eurozone debt crisis, subdued domestic demand and rising input costs without any corresponding rise in finished product prices. Nevertheless, we believe the recent decline has left some of the stocks undervalued. We like companies with captive resources, strong visibility over expansion plans, low leverage and compelling valuations. Hence, our top picks are NMDC, Tata Steel, Sterlite Industries and Hindustan Zinc.
Exhibit 7: Rating scale

Most preferred Moderate Least preferred
Exhibit 6: July-December 2011 price movement

0 (5) (10)
(%)
(15) (20) (25) (30)
MCX lead
MCX zinc
INR depreciation
MCX aluminium
Exhibit 8: Comparison of companies under our coverage FERROUS

Rating parameters Captive resources Visibility over volume growth Leverage levels Valuation
LME aluminium
LME lead
LME zinc
MINING
NMDC Sesa CIL MOIL HZL
NON-FERROUS
Sterlite Hindalco Nalco
Tata
SAIL
JSW
Bhus Monnet

CMP Target Reco Market Cap Upside (` cr) ` (%) PER (x) FY12E FY13E P/BV (x) FY12E FY13E EV/EBITDA (x) FY12E FY13E ROE (%) FY12E FY13E RoCE (%) FY12E FY13E (`) Price (`) ` ` Ferrous Tata Steel SAIL JSW Steel Bhushan Monnet Mining NMDC Sesa Goa Coal India MOIL Non-Ferrous Hind. Zinc Sterlite Inds Hindalco Nalco 126 115 146 56 142 147 162 Accum. Buy Accum. Neutral 53,345 38,715 28,029 14,471 13 28 11 8.9 8.1 8.4 14.5 8.3 6.3 7.3 11.9 1.9 0.8 0.9 1.2 1.6 0.7 0.8 1.1 5.3 3.2 5.5 6.6 4.0 2.5 5.1 4.0 23.7 11.0 11.0 8.6 20.9 12.5 11.3 9.9 22.7 9.7 7.6 6.5 20.0 11.4 7.9 9.5 175 189 350 253 231 208 Buy Accum. Neutral Neutral 69,501 16,465 221,262 4,251 32 10 8.7 6.2 14.9 9.6 7.8 6.0 14.3 8.8 2.7 1.1 4.9 1.7 2.2 0.9 3.9 1.5 4.6 4.5 9.9 4.1 3.6 4.5 9.0 3.4 35.8 19.3 37.8 19.4 31.1 17.0 30.5 18.4 44.7 19.3 35.2 21.1 39.1 17.5 28.0 19.7 435 91 667 334 436 510 699 293 528 Buy Neutral Accum. Reduce Buy 41,745 37,690 14,888 7,085 2,805 17 5 (12) 21 7.3 9.9 9.8 8.8 9.2 6.4 7.4 5.7 8.6 6.9 1.0 0.9 0.9 1.1 1.2 0.8 0.8 0.8 0.9 1.0 5.6 7.9 4.9 10.0 9.2 4.6 5.6 3.6 8.7 6.3 24.4 9.7 10.0 12.8 13.7 14.2 11.7 15.3 11.7 16.7 10.5 7.2 10.1 7.6 8.0 11.1 9.4 14.6 7.4 11.0
January 2012
235
Metal
Tata Steel
Company Background
CMP/TP/Upside: `435 / `510 / 17%
SHAREHOLDING PATTERN (%) PROMOTERS (TATA) FII 30.7 15.0
Incorporated in 1907, Tata Steel is the world's tenth largest steel company and the world's second most geographically diversified steel producer with major operations in India and Europe. During April 2007, the company acquired Corus (now Tata Steel Europe), the second largest steel producer in Europe, for US$12bn. The companys India operations capacity stands at 6.8mn tonnes, while its European operations capacity stands at 16.0mn tonnes.
Structural Snapshot
Growth opportunity: With domestic steel demand expected to increase at a CAGR of 10% over the coming decade, Tata Steel aims to ramp up its domestic capacity from 6.8mn tonnes currently to 15.9mn tonnes by FY2015.
STOCK RETURNS (%) TATA STEEL SENSEX 3M 1Y 3Y 29.4 30.8 20.9 5Y 10Y 0.8 (28.9) (3.3) (12.8) 0.8 21.5 4.1 25.0 3.1 17.1
BSE METAL INDEX (1.3) (30.9)

Competitive position: The company's India operations are one of the lowest-cost producers of steel, as they are backed by captive mines (100% integration for iron ore and 50% integration for coking coal). However, the company's European operations have a higher cost of production as they do not have captive iron ore/coking coal mines. Nature of business: Cyclical; Any change in global prices of steel and key inputs (iron ore and coking coal) has a direct bearing on the company's profitability.
FINANCIAL PERFORMANCE OVERVIEW (%) SALES GROWTH* PAT GROWTH* OPM# ROE# 3M 14.5 (81.4) 8.4 1Y 16.0 13.5 30.9 3Y (3.2) (2.1) 11.2 13.0 5Y 10Y 41.9 33.0 15.0 24.8 17.3 22.1 24.7 31.3

Expansion plans on track: Tata Steel is expanding its domestic capacity at its Jamshedpur plant from 6.8mn tonnes to 9.7mn-tonnes. The plant is expected to be commissioned by 4QFY2012. We expect this expansion to contribute over `2,500cr p.a. to the company's consolidated EBITDA, once the new plant reaches optimum capacity utilization. Further, the company's expansion plans of setting up a 6mn-tonne integrated steel plant in two phases of 3mn tonnes each in Odisha for a capex of `34,500cr are also on track. All of these expanded facilities will be backed by captive iron ore. Higher integration levels for Tata Steel Europe (TSE) to boost earnings: Tata Steel is in the process of developing a coking coal mine in Mozambique and an iron ore mine in Canada to enhance integration levels of TSE. The projects are expected to be commissioned in phases, beginning from 2HFY2012, resulting in 20% integration for coking coal and 10% integration for iron ore. We expect these backward-integration strategies at Mozambique and Canada to boost TSE's earnings from 2HFY2013E. Valuation: The stock is currently trading at 5.6x and 4.6x FY2012E and FY2013E EV/EBITDA, compared to its five-year average EV/EBITDA of 7.2x. We continue to like Tata Steel on the back of its upcoming brownfield capacity in India and restructuring initiatives at its European operations. Hence, we maintain our Buy recommendation on the stock with an SOTP target price of ` 510.
236
January 2012

BALANCE SHEET
Y/E MARCH (` CR) ` SOURCES OF FUNDS EQUITY SHARE CAPITAL RESERVES & SURPLUS SHAREHOLDERS FUNDS MINORITY INTEREST TOTAL LOANS DEFERRED TAX LIABILITY OTHER LIABILITIES TOTAL LIABILITIES APPLICATION OF FUNDS GROSS BLOCK LESS: ACC. DEPRECIATION NET BLOCK CAPITAL WORK-IN-PROGRESS GOODWILL DEFFERED TAX ASSET INVESTMENTS CURRENT ASSETS CURRENT LIABILITIES NET CURRENT ASSETS TOTAL ASSETS 97,289 60,764 36,525 9,271 14,542 5,418 43,868 29,983 13,885 79,641 113,986 61,592 52,393 15,625 15,298 176 7,847 59,769 33,761 26,008 101,722 118,986 66,352 52,634 10,825 15,298 176 4,347 67,029 37,926 29,103 112,383 119,986 72,351 47,635 19,625 15,298 176 4,347 72,182 42,852 29,329 116,411 887 21,927 22,814 884 53,307 1,654 964 79,641 959 34,427 35,564 889 60,684 2,188 879 101,722 959 42,766 43,724 889 63,184 2,188 879 112,383 959 48,512 50,252 889 60,684 2,188 879 116,411 FY2010 FY2011 FY2012E FY2013E
% CHG
(30.5)
94,350 8,043
16.0
102,758 15,996
3.7
107,884 15,288
13.8
122,320 17,806
(% OF NET SALES)
DEPRECIATION& AMORTISATION EBIT INTEREST & OTHER CHARGES OTHER INCOME RECURRING PBT EXTRAORDINARY INC/(EXPENSE) PBT (REPORTED) TAX PAT (REPORTED)
7.9
4,492 3,551 3,022 1,186 1,715 (1,684) 31 2,152 (2,121) 127 (15) (2,009) (1,822)
13.5
4,415 11,581 2,770 981 9,792 2,310 12,102 3,246 8,856 60 66 8,983 7,435
12.4
4,759 10,528 2,843 739 8,424 3,887 12,311 2,780 9,531 69 73 9,674 5,786
12.7
5,999 11,806 3,034 939 9,711 0 9,711 3,205 6,506 80 80 6,666 6,666
ADD: SHARE OF EARNINGS OF ASSO. LOSS TO MINORITY INTEREST PAT AFTER MI (REPORTED) ADJ. PAT
(1.8)
6.3
(22.2) 4.7
15.2 4.8
CASH FLOW STATEMENT

Y/E MARCH (` CR) ` PROFIT BEFORE TAX DEPRECIATION CHANGE IN WORKING CAPITAL LESS: OTHER INCOME DIRECT TAXES PAID CASH FLOW FROM OPERATIONS (INC.)/ DEC. IN FIXED ASSETS (INC.)/ DEC. IN INVESTMENTS FY2010 31 4,492 8,443 1,186 (2,463) 11,688 (198,882) 194,182 FY2011 12,102 4,415 (6,819) 981 (3,235) 7,444 (10,164) 1,785 (981) (9,359) 4,557 2,151 (714) 5,993 4,078 6,815 10,893 FY2012E 12,311 4,759 2,413 739 (2,780) 17,443 (15,825) (3,500) (739.0) (13,064) 2,500 (1,335) (36) 1,129 5,508 10,893 16,401 FY2013E 9,711 5,999 (475) 939 (3,205) 12,970 (9,800) (938.8)
KEY RATIOS
Y/E MARCH VALUATION RATIO (X) P/E (ON FDEPS) P/CEPS P/BV EV/EBITDA PER SHARE DATA (`) ` EPS (BASIC) ADJUSTED EPS (FULLY DILUTED) DPS BOOK VALUE (24.9) (20.5) 257.3 99.0 77.5 12.9 370.9 100.9 59.3 13.7 446.1 69.5 68.3 9.4 514.6 15.5 1.7 9.9 5.6 3.1 1.2 5.2 7.3 2.9 1.0 5.6 6.4 3.4 0.8 4.6 FY2010 FY2011 FY2012E FY2013E
(INC.)/ DEC. IN LOANS AND ADVANCES OTHER INCOME CASH FLOW FROM INVESTING ISSUE OF EQUITY INC./(DEC.) IN LOANS DIVIDEND PAID (INCL. TAX) OTHERS CASH FLOW FROM FINANCING INC./(DEC.) IN CASH OPENING CASH BALANCES CLOSING CASH BALANCES
(1,185.9) (5,886) 2,446 (6,261) (1,321) (5,135) 667 6,148 6,815
RETURNS (%) (10,739) (2,500) (920) 941 (2,479) (248) 16,401 16,153 ROCE (PRE-TAX) ANGEL ROIC (PRE-TAX) ROE TURNOVER RATIOS (X) ASSET TURNOVER (GROSS BLOCK) WC CYCLE (EX-CASH) (DAYS) SOLVENCY RATIOS (X) NET DEBT TO EQUITY 2.0 1.4 4.2 1.1 3.7 0.9 3.9 1.0 44 1.1 34 1.1 41 1.2 34 5.5 22.9 (8.0) 13.9 33.1 30.8 10.5 26.7 24.4 11.1 33.6 14.2
INTEREST COVERAGE (EBIT / INTEREST) 1.2
January 2012
237
Metal
SAIL
Company Background
Incorporated in 1973, SAIL is one of the leading steelmaking companies in India with an annual steel production capacity of 13.5mn tonnes. Major plants owned by SAIL are located at Bhilai, Bokaro, Durgapur, Rourkela, Burnpur and Salem. The company's steel plants are fully backed by captive iron ore mines. SAIL has a Navratna status; thus, it enjoys significant operational and financial autonomy. During February 2011, SAIL received clearances for Chiria iron ore mines, which have proven reserves of 1.8bn tonnes.
Structural Snapshot
Growth opportunity: With domestic steel demand expected to witness a CAGR of 10% over the next decade, SAIL aims to almost double its capacity to benefit from this demand by FY2015E. Competitive position: Although the company's operations are backed by captive iron ore mines, its high employee costs result in high conversion cost of steel. Nature of business: Cyclical; Changes in the global prices of steel and coking coal (key input) have a direct bearing on the company's profitability. The company derives 30% of coking coal requirement from Coal India, while it imports 70% of its coking coal requirement from Australia.
STOCK RETURNS (%) SAIL SENSEX 3M 1Y 3Y 6.1 30.8 20.9 5Y 10Y (10.6) (39.9) (3.3) (12.8) (0.5) 34.0 4.1 25.0 3.1 17.1

FINANCIAL PERFORMANCE OVERVIEW (%) SALES GROWTH* PAT GROWTH* OPM# ROE# 3M 2.2 12.2 1Y 5.0 17.7 13.7 3Y 2.7 20.6 17.9 5Y 8.9 4.0 10Y 11.2 -

Volume growth to double, albeit in 2-3 years: SAIL is expected to increase its saleable steel production capacity from 13.5mn tonnes to 23.1mn tonnes by FY2015E for a capex of `70,000cr. We expect robust profitability from these plants, with captive iron ore backing the upcoming steel expansion. Also, we expect SAIL's older loss-making plants to be modernized as part of its modernization program. Post the expansion and modernization of the steel plants, SAIL will also benefit from the improvement in its product mix. However, SAIL has reported delays in some of these projects by one year. We do not rule out further delays and cost overruns in its expansion plans. Cost pressures to persist: SAIL reported disappointing profitability during 1HFY2012 on account of higher input, power, fuel and staff costs. The companys 1HY2012 operating margins average 11.0% compared to average of 16.2% in 1HFY2011. Going forward, we expect these cost pressures to persist, which are expected to keep margin improvement muted in FY2012E. Further, we do not expect any meaningful rise in steel prices in the near term. Nevertheless, declining coking coal prices (partially offset by INR depreciation against the USD) should benefit the companys margins slightly. Valuation: The stock is currently trading at 7.9x and 5.6x FY2012E and FY2013E EV/EBITDA, significantly higher than its peers. Moreover, the company has reported delays and cost overruns in most of its expansion projects. Hence, we have a Neutral view on the stock.
7.0 (27.7) (13.5)
23.4 20.7 26.5 40.6
238
January 2012

BALANCE SHEET
Y/E MARCH (` CR) ` SOURCES OF FUNDS EQUITY SHARE CAPITAL RESERVES & SURPLUS SHAREHOLDERS FUNDS TOTAL LOANS DEFERRED TAX LIABILITY TOTAL LIABILITIES APPLICATION OF FUNDS GROSS BLOCK LESS: ACC. DEPRECIATION NET BLOCK CAPITAL WORK-IN-PROGRESS INVESTMENTS CURRENT ASSETS CURRENT LIABILITIES NET CURRENT ASSETS MIS. EXP. NOT WRITTEN OFF TOTAL ASSETS 37,419 22,310 15,109 15,309 45 40,035 17,686 22,350 52,812 40,466 23,833 16,633 22,581 61 38,833 17,676 21,159 60,434 62,266 25,449 36,817 15,081 61 36,745 19,944 16,802 68,761 77,766 27,920 49,845 9,581 61 39,638 20,771 18,868 78,355 4,130 29,613 33,743 17,638 1,430 52,812 4,130 33,474 37,604 21,260 1,557 60,434 4,130 36,801 40,931 26,260 1,557 68,761 4,130 41,394 45,525 31,260 1,557 78,355 FY2010 FY2011 FY2012E FY2013E
% CHG
(5.5)
31,362 9,945
5.0
35,839 7,544
7.7
40,445 6,261
18.8
46,068 9,414
(% OF NET SALES)
DEPRECIATION EBIT
24.5
1,337 8,608
17.7
1,484 6,060
13.6
1,616 4,645
17.1
2,472 6,942
(% OF NET SALES)
INTEREST EXPENSES OTHER INCOME RECURRING PBT
21.2
402 1,926 10,132
14.2
472 1,440 7,027
10.1
508 1,549 5,686
12.6
1,099 1,734 7,577
% CHG
EXTRAORDINARY INC/(EXPENSE) PBT (REPORTED) TAX PAT (REPORTED) ADJ. PAT
7.7
10,132 3,378 6,754 6,754
(30.6)
7,157 2,276 4,881 4,881
(19.1)
5,686 1,876 3,809 3,809
33.3
7,577 2,500 5,077 5,077
% CHG
9.4
(27.7)
(22.0)
33.3
CASH FLOW STATEMENT

Y/E MARCH (` CR) ` PROFIT BEFORE TAX DEPRECIATION CHANGE IN WORKING CAPITAL LESS: OTHER INCOME DIRECT TAXES PAID CASH FLOW FROM OPERATIONS (INC.)/ DEC. IN FIXED ASSETS (INC.)/ DEC. IN INVESTMENTS OTHER INCOME CASH FLOW FROM INVESTING ISSUE OF EQUITY INC./(DEC.) IN LOANS DIVIDEND PAID (INCL. TAX) OTHERS CASH FLOW FROM FINANCING INC./(DEC.) IN CASH OPENING CASH BALANCES CLOSING CASH BALANCES FY2010 10,132 1,426 1,427 (4,435) 3,619 5,097 (10,371) 2 (2,112.9) (8,257) 45 8,886 1,402 169.4 7,359 4,199 18,522 22,721 FY2011 7,157 1,607 (3,265) (930) 2,303 2,496 (10,851) (8) (1,697) (9,162) 20 3,609 1,400 536 1,693 (4,973) 22,721 17,748 FY2012E 5,686 1,616 1,125 1,876 6,550 (14,300) (14,300) 5,000 483 4,517 (3,232) 17,748 14,516 FY2013E 7,577 2,472 (827) 2,500 6,721 (10,000) (10,000) 5,000 483 4,517 1,238 14,516 15,754
KEY RATIOS
Y/E MARCH VALUATION RATIO (X) P/E (ON FDEPS) P/CEPS P/BV EV/EBITDA PER SHARE DATA (`) ` EPS (FULLY DILUTED) CASH EPS DPS BOOK VALUE RETURNS (%) ROCE (PRE-TAX) ANGEL ROIC (PRE-TAX) ROE TURNOVER RATIOS (X) RECEIVABLES (DAYS) PAYABLES (DAYS) SOLVENCY RATIOS (X) NET DEBT TO EQUITY INTEREST COVERAGE (EBIT / INT.) (0.2) 21.4 0.1 12.8 0.3 9.1 0.3 6.3 33 132 36 118 35 118 35 118 19.2 65.8 21.9 10.7 34.9 13.7 7.2 15.7 9.7 9.4 15.1 11.7 16.4 19.6 3.3 81.7 11.8 15.4 2.6 91.0 9.2 13.1 1.0 99.1 12.3 18.3 1.0 110.2 5.6 4.7 1.1 3.3 7.7 5.9 1.0 5.5 9.9 6.9 0.9 7.9 7.4 5.0 0.8 5.6 FY2010 FY2011 FY2012E FY2013E
January 2012
239
Metal
RATING 52 WEEK HIGH / LOW MARKET CAP (` CR) ` LIQUIDITY ACCUMULATE 1,056 / 464 14,888 HIGH
JSW Steel
Company Background
CMP/TP/Upside: `667 / `699 / 5%
SHAREHOLDING PATTERN (%) PROMOTERS (JINDAL) FII 37.7 21.6
Incorporated in 1994, JSW Steel is India's second largest private sector steel maker with a steel making capacity of 11mn tonnes. The company has the most modern, eco-friendly steel plants with the latest technologies for both upstream and downstream processes. The company has an iron ore mine in Karnataka, which fulfills 15% of its requirement (temporarily shut down due to mining ban in Karnataka). During FY2011, the company acquired 49% stake in Ispat Industries for an enterprise value of US$3bn; the combined capacity of both the companies stands at 14mn tonnes.
Structural Snapshot
STOCK RETURNS (%) JSW Steel SENSEX 3M 1Y 3Y 45.9 30.8 20.9 5Y 8.7 3.1 10Y 27.7 17.1 13.9 (32.3) (3.3) (12.8)
Growth opportunity: JSW Steel had expanded its capacity by 3.2mn tonnes (completed during 1QFY2012), taking its total capacity to 11mn tonnes the benefits of which will be fully reflected in FY2013. Further, the company aims to expand its steel capacity in Vijaynagar plant from 10mn tonnes to 12mn tonnes by FY2014. Competitive position: Although the company does not have significant captive resources, its conversion cost is one of the lowest in India on account of large-scale production. With capacity expansion at its Vijaynagar plant (from 10mn tonnes to 12mn tonnes), we expect the company to reap the benefits of economies of scale, which is expected to lower unit cost of steel production. Nature of business: Cyclical; Changes in the global prices of steel and key inputs (iron ore and coking coal) have a direct bearing on the company's profitability.

4.1 25.0
FINANCIAL PERFORMANCE OVERVIEW (%) SALES GROWTH* PAT GROWTH* OPM# ROE# 3M** 35.3 74.8 15.9 1Y 27.2 32.8 20.4 14.3 3Y 24.6 3.4 20.2 13.7 5Y 23.6 10Y 31.3 35.7 24.1 24.5 18.6 21.2
NOTE: ABOVE 1 YEAR - * ON CAGR BASIS, # ON AVERAGE BASIS, ** STANDALONE BASIS

Utilization levels to improve going forward: JSW Steel's Vijaynagar plant operated at low utilization levels (30-60%) during 2QFY2012 due to shortage of iron ore on the back of ban in iron ore mining in Karnataka. However, we expect mining operations to be restored gradually (in 3-6 months), which will result in improved iron ore supplies. Thus, we model utilization levels of 77% and expect sales volume growth of 22.3% for FY2013. Further, commissioning of the beneficiation plant during FY2012 is expected to lower iron ore cost for the company. We expect domestic iron ore prices to remain firm; hence, sourcing of low-grade iron ore fines will reduce the impact of increasing iron ore costs. Valuation: The stock is currently trading at a 4.9x and 3.6x FY2012E and FY2013E EV/EBITDA, compared to its five-year historical average of 7.4x. On P/BV basis, the stock is trading at 0.9x and 0.8x FY2012E and FY2013E, respectively. Moreover, considering the anticipated improvement in utilization in FY2013, we recommend an Accumulate rating on the stock with a target price of ` 699.
240
January 2012

BALANCE SHEET
Y/E MARCH (` CR) ` SOURCES OF FUNDS EQUITY SHARE CAPITAL RESERVES & SURPLUS SHAREHOLDERS FUNDS SHARE WARRANTS MINORITY INTEREST TOTAL LOANS DEFERRED TAX LIABILITY TOTAL LIABILITIES APPLICATION OF FUNDS GROSS BLOCK LESS: ACC. DEPRECIATION NET BLOCK CAPITAL WORK-IN-PROGRESS GOODWILL INVESTMENTS CURRENT ASSETS CURRENT LIABILITIES NET CURRENT ASSETS TOTAL ASSETS 26,792 5,339 21,453 6,956 899 628 5,470 8,073 (2,603) 27,334 32,684 6,873 25,811 6,508 1,093 2,914 9,565 10,601 (1,036) 35,289 41,751 8,850 32,902 1,440 1,093 2,914 10,428 11,073 (645) 37,704 47,751 11,357 36,394 1,340 1,093 2,914 11,383 11,739 (355) 41,386 187 9,070 9,257 219 16,173 1,685 27,334 223 15,777 16,000 529.4 236 16,474 2,049 35,289 223 17,179 17,420 529.4 231 17,474 2,049 37,704 223 19,757 19,997 529.4 236 18,574 2,049 41,386 FY2010 FY2011 FY2012E FY2013E
% CHG
19.0
14,887 4,071
27.2
19,238 4,879
35.9
27,002 5,543
26.8
33,076 8,132
(% OF NET SALES)
DEPRECIATION& AMORTISATION EBIT
21.5
1,299 2,772
20.4
1,560 3,319
17.0
1,976 3,566
19.6
2,507 5,625
(% OF NET SALES)
INTEREST & OTHER CHARGES OTHER INCOME RECURRING PBT EXTRAORDINARY INC/(EXPENSE) PBT (REPORTED) TAX
14.7
1,108 128 1,792 408 2,200 647
13.9
945 68 2,442 2,442 782
10.9
1,257 100 2,410 2,410 771
13.6
1,608 100 4,118 4,118 1,318
(% OF PBT)
PAT (REPORTED) ADD: SHARE OF EARNINGS OF ASSO. LESS: MINORITY INTEREST (MI) PAT AFTER MI (REPORTED) ADJ. PAT
29.4
1,553 11 33 1,598 1,321
32.0
1,659 71 24 1,754 1,754
32.0
1,639 4 1,643 1,643
32.0
2,800 23 (5) 2,818 2,818
% CHG
64.2
32.8
(6.3)
71.5
CASH FLOW STATEMEENT

Y/E MARCH (` CR) ` PROFIT BEFORE TAX DEPRECIATION CHANGE IN WORKING CAPITAL LESS: OTHER INCOME DIRECT TAXES PAID CASH FLOW FROM OPERATIONS (INC.)/ DEC. IN FIXED ASSETS (INC.)/ DEC. IN INVESTMENTS OTHER INCOME CASH FLOW FROM INVESTING ISSUE OF EQUITY INC./(DEC.) IN LOANS DIVIDEND PAID (INCL. TAX) OTHERS CASH FLOW FROM FINANCING INC./(DEC.) IN CASH OPENING CASH BALANCES CLOSING CASH BALANCES FY2010 2,200 1,299 (471) 793 459 3,361 (2,736) (209) 13 (2,932) 629 57 1,149 (576) (147) 450 303 FY2011 2,442 1,560 (1,314) 567 427 2,830 (7,674) (12) 53 (7,633) 5,936 401 240 1,001 5,096 293 1,755 2,048 FY2012E 2,410 1,976 (241) 771 3,374 (4,000) (4,000) 1,000 241 759 167 2,048 2,216 FY2013E 4,118 2,507 (1,314) 1,318 3,993 (5,900) 23 (5,877) 1,100 241 859 (1,025) 2,216 1,191
KEY RATIOS
Y/E MARCH VALUATION RATIO (X) P/E (ON FDEPS) P/CEPS P/BV EV/EBITDA PER SHARE DATA (`) ` EPS (FULLY DILUTED) CASH EPS DPS BOOK VALUE RETURNS (%) ROCE (PRE-TAX) ANGEL ROIC (PRE-TAX) ROE TURNOVER RATIOS (X) INVENTORY (DAYS) RECEIVABLES (DAYS) PAYABLES (DAYS) SOLVENCY RATIOS (X) NET DEBT TO EQUITY INTEREST COVERAGE 1.7 2.5 0.7 3.5 0.7 2.8 0.7 3.5 71 11 43 69 12 40 70 12 40 70 12 40 10.7 17.3 16.1 10.9 16.8 14.3 10.1 14.1 10.0 14.6 17.9 15.3 63.8 154.8 9.5 480.0 78.6 148.5 10.0 704.6 68.3 162.2 10.0 768.2 117.1 238.7 10.0 883.7 10.5 4.3 1.4 6.8 8.5 4.5 0.9 5.4 9.8 4.1 0.9 4.9 5.7 2.8 0.8 3.6 FY2010 FY2011 FY2012E FY2013E
January 2012
241
Metal
RATING 52 WEEK HIGH / LOW MARKET CAP (` CR) ` LIQUIDITY REDUCE 530 / 297 7,085 MEDIUM
Bhushan Steel
Company Background
CMP/TP/Downside: `334 / `293 / 12%
Incorporated in January 1983, Bhushan Steel is India's third largest secondary steel producer company with an existing steel production capacity of 2.2mn tonnes. The company is the largest auto-grade steelmaker in India and specializes in manufacturing value-added flat products. The company has three manufacturing units in India Uttar Pradesh (Sahibabad unit), Maharashtra (Khopoli unit) and Odisha (Meramandali unit) and a strong sales network across many countries.
Structural Snapshot
Growth opportunity: Bhushan Steel is on the verge of a massive expansion plan to ramp up its steel capacity. The company has already completed Phase-I and Phase-II during FY2010 and FY2011, respectively, wherein its primary steelmaking capacity was raised from 0.9mn tonnes to 2.2mn tonnes. Going forward, the company is expected to commission Phase-III during October 2012, wherein it will increase its capacity from 2.2mn tonnes to 4.7mn tonnes by FY2014. Competitive position: The company does not have a captive iron ore or coal mines; thus, its profitability is affected by any increase in iron ore and coal prices.
STOCK RETURNS (%) BHUSHAN SENSEX 3M 1Y 3Y 77.9 30.8 20.9 5Y 10Y 3.9 (18.0) (3.3) (12.8) 32.6 61.6 4.1 25.0 3.1 17.1

FINANCIAL PERFORMANCE OVERVIEW (%) SALES GROWTH* PAT GROWTH* OPM# ROE# 3M 43.4 (20.1) 29.2 1Y 24.1 22.1 29.1 21.0 3Y 18.5 34.6 25.2 22.7 5Y 10Y 20.2 22.4 46.2 36.7 22.4 18.9
Nature of business: Cyclical; Change in the global prices of steel and key inputs (iron ore and coal) have a direct bearing on the company's profitability.

Volume growth sweetened by increasing E BITDA/tonne: With the commissioning of Bhushan Steel's Phase-III expansion plan, we expect the company's sales volume to grow at a 24.8% CAGR over FY2011-15E, much higher than its peers. Despite lack of captive iron ore and coal mines, Bhushan Steels cost of production is expected to be lower than other non-integrated producers due to a) combination of BF-EAF technology to produce steel and b) lower conversion costs. The usage of BF-EAF technology is expected to result in lower coal costs. Debt equity ratio at uncomfortable level for a non-integrated commodity producer: Bhushan Steel's debt-equity ratio stood at 2.8x as of March 31, 2011. Going forward, on the back of massive expansion plans, the company's debt-equity ratio is expected to remain high at 2.8x and 2.4x for FY2012 and FY2013, respectively, which exposes the company to a huge financial risk in case of sharp decline in steel prices. Valuation: Although we expect, the companys production and sales volume to grow to 4.1mn tonnes in FY2015 from 1.6mn tonnes in FY2011, we remain concerned over its high debt levels. Further, at the CMP, the stock is trading at 10.0x FY2012E and 8.7x FY2013E EV/EBITDA, a significant premium to its peers. Hence, we recommend a Reduce rating on the stock with a target price of `293 (valuing the stock at 8.4x FY2013E EV/EBITDA).
25.6 20.7
242
January 2012

BALANCE SHEET
Y/E MARCH (` CR) ` SOURCES OF FUNDS EQUITY SHARE CAPITAL RESERVES& SURPLUS SHAREHOLDERS FUNDS TOTAL LOANS DEFERRED TAX LIABILITY TOTAL LIABILITIES APPLICATION OF FUNDS GROSS BLOCK LESS: ACC. DEPRECIATION NET BLOCK CAPITAL WORK-IN-PROGRESS INVESTMENTS CURRENT ASSETS CURRENT LIABILITIES NET CURRENT ASSETS MIS. EXP. NOT WRITTEN OFF TOTAL ASSETS 3,686 1,607 2,079 11,109 370 3,770 1,604 2,167 15,725 14,424 1,858 12,566 7,393 278 5,018 2,068 2,950 23,187 18,024 2,534 15,490 7,800 278 5,513 2,101 3,412 26,980 20,524 3,315 17,210 6,500 278 9,109 2,101 7,008 30,996 42 3,949 3,992 11,404 330 15,725 111 5,785 5,896 16,593 698 23,187 111 6,578 6,689 19,593 698 26,980 111 7,394 7,505 22,793 698 30,996 FY2010 FY2011 FY2012E FY2013E
% CHG
13.8
4,188 1,453
24.1
4,963 2,037
24.5
6,126 2,591
5.9
6,317 2,915

41.1 25.8
209 210 118
40.2 29.1
233 414 65
27.2 29.9
676 910 68
12.5 31.7
781 1,102 72
(% OF PBT)
RECURRING PBT
10.2
1,151
4.5
1,456
6.4
1,073
6.5
1,105
% CHG
PBT (REPORTED) TAX
105.3
1,151 306
26.4
1,456 423
(26.3)
1,073 268
2.9
1,105 276
(% OF PBT)
PAT AFTER MI (REPORTED) ADJ. PAT
26.5
846 846
29.0
1,033 1,033
25.0
805 805
25.0
828 828
% CHG
100.8
22.1
(22.1)
2.9
CASH FLOW STATEMENT

Y/E MARCH PROFIT BEFORE TAX DEPRECIATION CHANGE IN WORKING CAPITAL LESS: OTHER INCOME DIRECT TAXES PAID CASH FLOW FROM OPERATIONS (INC.)/ DEC. IN FIXED ASSETS (INC.)/ DEC. IN INVESTMENTS OTHER INCOME CASH FLOW FROM INVESTING ISSUE OF EQUITY INC./(DEC.) IN LOANS DIVIDEND PAID (INCL. TAX) OTHERS CASH FLOW FROM FINANCING INC./(DEC.) IN CASH OPENING CASH BALANCES CLOSING CASH BALANCES FY2010 1,151 209 (953) 176 186 397 (2,901) (259) 24 (3,136) 700 3,062 11 1,017 2,735 (4) 124 120 FY2011 1,476 278 (825) 494 272 1,051 (5,642) 100 24 (5,518) 875 5,130 11 1,612 4,382 (85) 120 35 FY2012E 1,073 676 (48) 268 1,433 (4,007) (4,007) 3,000 12 2,988 413 35 448 FY2013E 1,105 781 202 276 1,811 (1,200) (1,200) 3,200 12 3,188 3,798 448 4,247
KEY RATIOS
Y/E MARCH VALUATION RATIO (X) P/E (ON FDEPS) P/BV EV/EBITDA PER SHARE DATA (`) ` EPS (FULLY DILUTED) CASH EPS DPS BOOK VALUE RETURNS (%) ROCE (PRE-TAX) ANGEL ROIC (PRE-TAX) ROE TURNOVER RATIOS (X) RECEIVABLES (DAYS) PAYABLES (DAYS) SOLVENCY RATIOS (X) NET DEBT TO EQUITY NET DEBT TO EBITDA 2.8 7.5 2.8 8.0 4.4 2.8 7.3 2.1 2.4 6.3 1.9 47 85 45 85 45 85 45 85 9.4 34.4 26.5 9.3 18.4 21.0 7.6 11.3 12.8 7.4 11.1 11.7 39.8 49.7 0.5 186.2 48.6 59.6 0.5 277.7 37.9 69.7 0.5 315.0 39.0 75.8 0.5 353.4 8.4 1.8 12.4 6.9 1.2 11.5 8.8 1.1 10.0 8.6 0.9 8.7 FY2010 FY2011 FY2012E FY2013E
January 2012
243
Metal
Monnet Ispat
Company Background
CMP/TP/Upside: `436 / `528 / 21%
Incorporated in 1990, Monnet Ispat and Energy (MIL) principally manufactures sponge iron (capacity - 1.0mn tonnes), ingots (capacity - 0.3mn tonnes), structural steel (capacity - 0.2mn tonnes) and ferro alloys (capacity - 58ktpa). MIL has a captive coal mine (reserves - 90mn tonnes; production - 1.2mn tonnes) for production of sponge iron. The company's plants are located in Raipur and Raigarh in Chhattisgarh. The company has been allocated several coal blocks such as Gare Palma IV/5, Urtan North, Rajgamar and Mandakini - which are under various stages of clearances.
Structural Snapshot
STOCK RETURNS (%) MIL SENSEX 3M 1Y 3Y 37.2 30.8 20.9 5Y 10Y (13.7) (25.9) (3.3) (12.8) 13.3 53.9 4.1 25.0 3.1 17.1
Growth opportunity: MIL is setting up a 1.5mn-tonne steel-melting-shop facility (downstream) alongwith finishing lines and 0.6mn tonnes of a pig iron plant. Total capex for the project is pegged at `4,000cr. The plant is expected to begin progressive commissioning in mid-FY2013E. However, full benefits of these facilities would be witnessed in FY2014E. Also, the company has acquired two coal assets in Indonesia during CY2011. The company aims to commence production from these mines in FY2013E. MIL targets production of ~5m tonnes of coal once it reaches full capacity. Competitive position: Although the company's sponge iron operations are backed by a captive non-coking coal mine, MIL lacks integration for iron ore. Nature of business: Cyclical; Global changes in the prices of steel and iron ore (key input) have a direct bearing on the company's profitability.

FINANCIAL PERFORMANCE OVERVIEW (%) SALES GROWTH* PAT GROWTH* OPM# RoE# 3M 27.1 17.3 26.1 1Y 6.3 (0.9) 29.6 15.1 3Y 10.7 19.7 28.4 17.2 5Y 10Y 22.4 32.2 23.2 44.5 26.8 25.0 19.8 24.3

Significant value unlocking lies ahead in Monnet Power: MIL is setting up a 1,050MW (2x525) power plant through Monnet Power. The plant is being set up at a cost of `5,000cr, with equity contribution of `1,200cr and the balance being funded through debt. MIL has diluted a 12.5% stake to Blackstone for a consideration of `275cr, thus valuing the total equity stake at `2,200cr. We expect the plant to be operational in FY2014E. With a captive coal block (Utkal B-2) backing this project, we expect robust profitability from the power business. Valuation: MIL is on the verge of a massive expansion in its steel and power businesses. Although there could be some delays in the commencement of the power plant, it is backed by captive coal. The stock is currently trading at 6.3x FY2013E EV/ E B ITDA, below its five-year historical trading range of 7.5x. Given the strong visibility over its expansion plans, we recommend Buy on the stock with a target price of ` 528, valuing the steel business at 5.0x FY2013E EV/EBITDA and investment in Monnet Power at 2.0x P/BV.
244
January 2012

BALANCE SHEET
Y/E MARCH (` CR) ` SOURCES OF FUNDS EQUITY SHARE CAPITAL RESERVES& SURPLUS SHAREHOLDERS FUNDS SHARE WARRANTS TOTAL LOANS DEFERRED TAX LIABILITY TOTAL LIABILITIES APPLICATION OF FUNDS GROSS BLOCK 1,439 311 1,128 721 545 1,143 268 875 18 3,288 1,477 383 1,094 1,513 550 2,092 345 1,747 4,903 3,077 459 2,618 713 550 2,683 394 2,289 6,170 4,377 576 3,800 413 550 3,289 494 2,794 7,558 54 1,592 1,646 27 1,495 120 3,288 64 2,026 2,090 2,672 141 4,903 64 2,293 2,357 3,672 141 6,170 64 2,680 2,744 4,672 141 7,558 FY2010 FY2011 FY2012E FY2013E
% CHG
(4.4)
1,017 464
6.3
1,108 465
25.4
1,453 519
50.0
2,088 872
(% OF NET SALES)
31.3
72 392
29.6
73 392
26.3
75 444
29.5
118 755

INTEREST & OTHER CHARGES OTHER INCOME
26.8 26.5
74 32
(0.1) 24.9
50 22
13.3 22.5
79 25
69.9 25.5
238 27
(% OF PBT)
SHARE IN PROFIT OF ASSOCIATES RECURRING PBT EXTRAORDINARY EXPENSE/(INC.) PBT (REPORTED) TAX PAT AFTER MI (REPORTED) ADJ. PAT
9.1
350 184 331 60 269 288
6.2
365 365 80 285 285
6.3
389 389 85 304 304
5.0
1.0 544 544 119 425 425
LESS: ACC. DEPRECIATION NET BLOCK CAPITAL WORK-IN-PROGRESS INVESTMENTS CURRENT ASSETS CURRENT LIABILITIES NET CURRENT ASSETS MIS. EXP. NOT WRITTEN OFF TOTAL ASSETS
% CHG
24.1
(0.9)
6.8
39.7
CASH FLOW STATEMENT

Y/E MARCH (` CR) ` PROFIT BEFORE TAX DEPRECIATION CHANGE IN WORKING CAPITAL LESS: OTHER INCOME DIRECT TAXES PAID CASH FLOW FROM OPERATIONS (INC.)/DEC. IN FIXED ASSETS (INC.)/DEC.IN INVESTMENTS OTHER INCOME CASH FLOW FROM INVESTING ISSUE OF EQUITY INC./(DEC.) IN LOANS DIVIDEND PAID (INCL. TAX) OTHERS CASH FLOW FROM FINANCING INC./(DEC.) IN CASH OPENING CASH BALANCES CLOSING CASH BALANCES FY2010 331 72 78 61 64 478 (485) (330) 15 (799) 151 216 28 58 281 (40) 246 205 FY2011 365 74 (348) (27) 86 (25) (831) (5) 22 (814) 10 1,177 (135) 1,322 483 205 688 FY2012E 389 75 (71) 85 309 (800) (800) 1,000 38 962 471 688 1,159 FY2013E 544 118 (200) 119 343 (1,000) (1,000) 1,000 38 962 306 1,159 1,465
KEY RATIOS
Y/E MARCH VALUATION RATIO (X) P/E (ON FDEPS) P/BV EV/SALES EV/EBITDA PER SHARE DATA (`) ` EPS (FULLY DILUTED) CASH EPS DPS BOOK VALUE RETURNS (%) ROCE (PRE-TAX) ANGEL ROIC (PRE-TAX) ROE TURNOVER RATIOS (X) RECEIVABLES (DAYS) PAYABLES (DAYS) SOLVENCY RATIOS (X) NET DEBT TO EQUITY INTEREST COVERAGE 0.4 5.3 0.7 7.9 0.8 5.6 1.0 3.2 32 60 44 81 44 81 44 81 13.0 17.3 18.2 9.6 15.5 15.1 8.0 12.7 13.7 11.0 15.1 16.7 44.7 65.9 5.0 307.1 44.3 55.7 5.0 324.8 47.3 59.0 5.0 366.2 63.5 84.4 5.0 426.4 9.8 1.4 2.1 6.7 9.8 1.3 2.7 9.1 9.2 1.2 2.4 9.2 6.9 1.0 1.8 6.3 FY2010 FY2011 FY2012E FY2013E
January 2012
245
Metal
NMDC
Company Background
TOP PICK
CMP/TP/Upside: `175 / `231 / 32%
Incorporated in November 1958, government-owned NMDC is India's largest iron ore producer with a capacity of 36mn tonnes. The company operates high-grade iron ore mines at Kirandul and Bacheli in Chhattisgarh and Donimalai in Karnataka. The average mine life of NMDC is 38 years currently.
Structural Snapshot
Growth opportunity: With Indias steel capacity expected to grow from 78mn tonnes in FY2011 to 100mn tonnes by FY2014, NMDCs iron ore mining capacity is expected to witness a CAGR of 11.0% over FY2011-15 to reap the benefits of steel capacity expansion as production of 1 tonne of steel requires ~1.8 tonnes of iron ore. Further, NMDC is setting up a 3mn-tonne steel plant along with Russian steelmaker Severstal by FY2015E. Competitive position: NMDC enjoys high margins compared to its peers due to high-grade captive iron ore mines and low-cost production. Nature of business: Cyclical; Change in iron ore price has a direct bearing on the company's profitability. However, NMDC is less affected by fluctuations in iron ore prices as it sells iron ore in the domestic market at a discount (30-50%) to global prices.
STOCK RETURNS (%) NMDC SENSEX 3M 1Y 3Y 6.0 30.8 20.9 5Y 10Y (27.9) (30.1) (3.3) (12.8) 18.2 71.9 4.1 25.0 3.1 17.1


Targets production of 40mn tonnes by FY2014-15E: Management aims to ramp up the company's production capacity to 40mn tonnes by FY2014-15E through increased exploration of its existing mines and development of new mines, i.e., Deposit 11B and Deposit 13 in Bailadila and Kumaraswany, respectively, in Karnataka. We expect NMDC's sales volume to post a CAGR of 11% during FY2011-13E. Strong balance sheet could pave way for overseas acquisitions: During September 2011, NMDC purchased a 50% stake in Australia-based Legacy Iron Ore (Legacy) as a cornerstone investor for `92cr. Also, the company is currently prospecting various mining assets, including an iron ore mine and a phosphate mine in Australia, an iron ore mine in Brazil and a coking coal asset in Russia. With a strong balance sheet having net cash of `20,725cr (September 30, 2011), we do not rule out the company acquiring more mining assets overseas. However, given that NMDC is a government-owned company, we do not foresee a big-ticket acquisition. Valuation: Over the past five years, NMDC has traded at an average EV/EBITDA of 13.7x, compared to its current valuation of 3.6x FY2013 EV/EBITDA. Strong balance sheet, presence in sellers market (iron ore), relative immunity to iron ore price declines, low cost of production, high-grade mines, long mine life and compelling valuations make NMDC an attractive bet at these levels. Valuing the stock at 5.5x FY2013E EV/EBITDA, we derive a fair price of ` 231 and recommend a Buy rating on the stock.
246
January 2012

BALANCE SHEET
Y/E MARCH (` CR) ` SOURCES OF FUNDS EQUITY SHARE CAPITAL RESERVES& SURPLUS SHAREHOLDERS FUNDS DEFERRED TAX LIABILITY TOTAL LIABILITIES APPLICATION OF FUNDS GROSS BLOCK LESS: ACC. DEPRECIATION NET BLOCK 1,771 984 787 561 76 14,264 12,855 683 726 1,348 12,916 17 14,357 2,273 1,174 1,099 677 136 19,172 17,228 1,043 901 1,781 17,391 14 19,317 3,273 1,313 1,960 745 136 24,333 22,359 1,043 932 1,755 22,578 14 25,432 4,273 1,471 2,802 819 136 30,316 28,225 1,043 1,048 1,802 28,514 14 32,286 396 13,876 14,272 85 14,357 396 18,818 19,215 103 19,317 396 24,933 25,329 103 25,432 396 31,786 32,183 103 32,286 FY2010 FY2011 FY2012E FY2013E
% CHG
(17.5)
1,817 4,422
82.2
2,722 8,646
11.7
2,552 10,149
12.6
2,867 11,437
(% OF NET SALES)
DEPRECIATION& AMORTISATION EBIT (% OF NET SALES) OTHER INCOME
70.9
73 4,349 69.7 862
76.1
125 8,521 75.0 1,206
79.9
140 10,009 78.8 1,905
80.0
157 11,280 78.9 2,074
(% OF PBT)
SHARE IN PROFIT OF ASSOCIATES RECURRING PBT
16.5
5,211
12.4
9,727
16.0
11,914
15.5
CAPITAL WORK-IN-PROGRESS 13,354 INVESTMENTS CURRENT ASSETS CASH LOANS & ADVANCES OTHERS CURRENT LIABILITIES NET CURRENT ASSETS MIS. EXP. NOT WRITTEN OFF TOTAL ASSETS
% CHG
EXTRAORDINARY INC/(EXPENSE) PBT (REPORTED) TAX PAT AFTER MI (REPORTED) ADJ. PAT
(21.6)
5,211 1,760 3,451 3,451
86.7
9,727 3,228 6,499 6,499
22.5
11,914 3,932 7,983 7,983
12.1
13,354 4,407 8,947 8,947
% CHG
(21.1)
88.3
22.8
12.1
CASH FLOW STATEMENT

Y/E MARCH (` CR) ` PROFIT BEFORE TAX DEPRECIATION CHANGE IN WORKING CAPITAL OTHERS DIRECT TAXES PAID CASH FLOW FROM OPERATIONS INC./ (DEC.) IN FIXED ASSETS INC./ (DEC.) IN INVESTMENTS INC./ (DEC.) IN LOANS AND ADVANCES OTHER INCOME CASH FLOW FROM INVESTING INC./(DEC.) IN LOANS DIVIDEND PAID (INCL. TAX) OTHERS CASH FLOW FROM FINANCING INC./(DEC.) IN CASH OPENING CASH BALANCES CLOSING CASH BALANCES FY2010 5,211 73 926 (832) (1,770) 3,604 (422) 828 407 (895) (895) 3,115 9,740 12,855 FY2011 9,727 122 (525) (1,143) (3,319) 4,861 (517) 1,022 506 (853) (142) (994) 4,373 12,855 17,228 FY2012E 11,914 140 (56) (3,932) 8,066 (1,068) (1,068) (1,868) (1,868) 5,131 17,228 22,359 FY2013E 13,354 157 (70) (4,407) 9,035 (1,074) -
KEY RATIOS
Y/E MARCH VALUATION RATIO (X) P/E (ON FDEPS) P/CEPS P/BV EV/EBITDA PER SHARE DATA (`) ` EPS (BASIC) EPS (FULLY DILUTED) CASH EPS DPS (1,074) (2,094) (2,094) 5,867 22,359 28,225 BOOK VALUE RETURNS (%) ROCE (PRE-TAX) ANGEL ROIC (PRE-TAX) ROE TURNOVER RATIOS (X) INVENTORY / SALES (DAYS) RECEIVABLES (DAYS) PAYABLES (DAYS) 60 25 105 56 16 54 56 16 54 56 16 54 33.4 347.9 26.6 50.6 795.9 38.8 44.7 577.0 35.8 39.1 425.8 31.1 2.0 36.0 3.2 48.5 4.0 63.9 4.5 81.2 8.7 8.7 8.9 16.4 16.4 16.7 20.1 20.1 20.5 22.6 22.6 23.0 20.1 19.7 4.9 12.8 10.7 10.5 3.6 6.0 8.7 8.6 2.7 4.6 7.8 7.6 2.2 3.6 FY2010 FY2011 FY2012E FY2013E
January 2012
247
Metal
Sesa Goa
Company Background
CMP/TP/Upside: `189 / `208 / 10%
SHAREHOLDING PATTERN (%) PROMOTERS (VEDANTA) FII 55.1 24.7
Incorporated in 1965, Sesa Goa's primary business includes mining and exporting of iron ore. The company has mining operations in Goa and Karnataka with total reserves of 306mn tonnes and mining capacity of 22mn tonnes. Sesa Goa also operates a metallurgical coke division (capacity - 0.6mn tonnes). In 2007, Vedanta Resources, a diversified metals and mining group, acquired 51% controlling stake in Sesa Goa from Mitsui & Co. Ltd. During CY2011, Sesa Goa acquired a 20% stake in oil-producer Cairn India for ~`13,000cr.
Structural Snapshot
STOCK RETURNS (%) SESA GOA SENSEX 3M 1Y 3Y 35.0 30.8 20.9 5Y 10Y (12.9) (39.7) (3.3) (12.8) 18.4 65.3 4.1 25.0 3.1 17.1
Growth opportunity: Sesa Goa had obtained a Prospecting License in CY2005 from the Jharkhand government and applied for a mining lease during 2009. Iron ore reserves in these mines are estimated to be ~60mn tonnes. Although the commencement of production looks unlikely in the near term, there could be potential volumes from these mines over the medium term. Competitive position: Sesa Goa has low cost of production at its Goa mines (contributes 80% to its volumes). However, its iron ore realization depends on global prices. Nature of business: Cyclical; Any change in global iron ore price has a direct bearing on the company's profitability.

FINANCIAL PERFORMANCE OVERVIEW (%) PAT GROWTH* OPM# ROE# 3M (32.2) 32.9 1Y 57.1 60.6 56.5 40.7 3Y 34.0 39.7 53.8 44.8 5Y 37.9 49.0 10Y 37.8 72.2 SALES GROWTH* (14.0)

Commencement of operations in Karnataka to drive volume growth: During 1QFY2012, the Supreme Court had imposed a blanket ban in Karnataka (capacity - 6mn tonnes), where Sesa Goa operated its mines. The mines are currently being inspected for any irregularities. We expect the Supreme Court to lift the ban in the coming three-six months and, henceforth, Sesa Goa should restart production. Thus, commencement from Karnataka mines could restore its FY2013E volumes to FY2011 levels of 21mn tonnes. Western Cluster Ltd. (WCL) - A long-term story: During August 2011, Sesa Goa acquired a 51% stake in WSL, Liberia, for a cash consideration of US$90mn (~`400cr). WCL will develop the Western Cluster Iron ore project in Liberia, which includes development of iron ore deposits and the required infrastructure for iron ore export. WCL has potential iron ore resources of over 1bn tonnes (~330mn tonnes of saleable product); it is in close proximity to the existing port infrastructure and has access to land for railway corridor. Sesa Goa aims to commence production from this mine in 3-4 years. Valuation: The stock is currently trading at an EV/EBITDA of 4.5x each for FY2012E and FY2013E EV/EBITDA, compared to its five-year historical average of 5.5x. We believe the current stock price discounts negatives such as acquisition of a minority stake in the unrelated oil business via acquisition of Cairn India's stake, increased export duty and railway freight and lower volumes from Goa mines. Hence, we recommend an Accumulate rating on the stock with an SOTP target price of ` 208.
53.0 41.2 49.9 45.8
248
January 2012

Y/E MARCH (` CR) ` TOTAL REVENUE FY2010 5,858 FY2011 9,205 FY2012E 7,979 FY2013E 9,073
BALANCE SHEET
Y/E MARCH (` CR) ` SOURCES OF FUNDS EQUITY SHARE CAPITAL RESERVES& SURPLUS SHAREHOLDERS FUNDS TOTAL LOANS DEFERRED TAX LIABILITY TOTAL LIABILITIES APPLICATION OF FUNDS GROSS BLOCK LESS: ACC. DEPRECIATION NET BLOCK CAPITAL WORK-IN-PROGRESS INVESTMENTS CURRENT ASSETS CASH CURRENT LIABILITIES NET CURRENT ASSETS TOTAL ASSETS 2,751 574 2,177 79 4,565 4,416 2,392 1,240 3,176 9,997 3,065 649 2,416 729 8,800 3,660 897 1,726 1,934 13,878 4,265 745 3,519 429 12,123 4,339 1,990 1,009 3,330 19,401 5,265 855 4,410 79 12,123 6,258 3,743 1,096 5,162 21,773 83 7,835 7,918 1,961 75 9,997 87 12,724 12,810 999 68 13,878 87 15,309 15,395 3,937 68 19,401 87 17,681 17,768 3,937 68 21,773 FY2010 FY2011 FY2012E FY2013E
% CHG
18.1
2,710 3,149
57.1
4,002 5,203
(13.3)
4,665 3,314
13.7
5,361 3,712
(% OF NET SALES)
53.7
75 3,074
56.5
96 5,107
41.5
96 3,218
40.9
109 3,603

INTEREST & OTHER CHARGES OTHER INCOME RECURRING PBT EXTRAORDINARY INC/(EXPENSE) PBT (REPORTED) TAX
23.4 52.5
56 426 3,445 3,445 806
66.1 55.5
38 540 5,608 5,560 1,337
(37.0) 40.3
196 380 3,401 3,401 986
12.0 39.7
216 418 3,805 3,805 1,141
(% OF PBT)
PAT (REPORTED) LESS: MINORITY INTEREST (MI) PAT AFTER MI (REPORTED) ADJ. PAT
23.4
2,639 10 2,629 2,629
24.1
4,222 4,222 4,222
29.0
2,415 2,718 2,718
30.0
2,663 2,818 2,818
% CHG
32.2
60.6
(35.6)
3.6
CASH FLOW STATEMENT

Y/E MARCH (` CR) ` PROFIT BEFORE TAX DEPRECIATION CHANGE IN WORKING CAPITAL LESS: OTHER INCOME DIRECT TAXES PAID CASH FLOW FROM OPERATIONS (INC.)/DEC. IN FIXED ASSETS (INC.)/DEC. IN INVESTMENTS FY2010 3,445 75 179 (363) 764 2,571 (149) (3,078) FY2011 5,560 96 (304) (451) 1,368 3,533 (984) (4,131) FY2012E 3,401 96 (303) 986 2,208 (900) (3,323) FY2013E 3,805 109 (79) 1,141 2,694 (650) -
KEY RATIOS
Y/E MARCH VALUATION RATIO (X) P/E (ON FDEPS) P/CEPS P/BV EV/EBITDA PER SHARE DATA (`) ` EPS (BASIC) EPS (FULLY DILUTED) CASH EPS 2,150 (2,965) (6.6) 328 85 (420) 149 34 183 303.6 (3,919) 2,938 133 2,804 1,093 897 1,990 154 (496) 445 (445) 1,753 1,990 3,743 DPS BOOK VALUE RETURNS (%) ROCE (PRE-TAX) ANGEL ROIC (PRE-TAX) ROE TURNOVER RATIOS (X) INVENTORY (DAYS) RECEIVABLES (DAYS) PAYABLES (DAYS) 261 20 351 265 20 403 270 24 250 270 24 250 41.7 136.3 41.6 42.9 465.4 40.7 19.3 31.9 19.3 17.5 16.8 17.0 31.6 29.6 32.5 3.3 95.3 49.1 47.5 48.5 5.0 144.0 30.6 30.6 31.6 1.5 173.0 31.7 31.7 32.9 5.0 199.7 6.4 5.8 2.0 7.6 4.0 3.9 1.3 5.1 6.2 6.0 1.1 4.5 6.0 5.8 0.9 4.5 FY2010 FY2011 FY2012E FY2013E
(INC.)/DEC. IN LOANS AND ADVANCES OTHER INCOME CASH FLOW FROM INVESTING ISSUE OF EQUITY INC./(DEC.) IN LOANS DIVIDEND PAID (INCL. TAX) OTHERS CASH FLOW FROM FINANCING INC./(DEC.) IN CASH OPENING CASH BALANCES CLOSING CASH BALANCES (2,168) (5,394) 537 2,358 206 6 2,682 (141) 14 34
January 2012
249
Metal
RATING 52 WEEK HIGH / LOW MARKET CAP (` CR) ` LIQUIDITY NEUTRAL 422 /289 221,262 HIGH
Coal India
Company Background
Coal India (CIL), a Navratna company, is the largest coal producing company in the world, based on its raw coal production (431mn tonnes in FY2011). The company is also the largest coal reserve holder in the world, based on its reserve base (18bn tonnes). The company caters to large thermal power generation companies, steel and cement producers and other industrial companies in the public and private sector.
Structural Snapshot
Growth opportunity: As per Ministry of Coal, Indian demand for coal is expected to grow from 625mn tonnes in FY2011 to 886mn tonnes in FY2015, considering the growth in user industries (power, cement and metals). To cater to this rising demand, CIL aims to increase its production at a faster pace over the medium term. However, CIL is facing constraints to ramp up its production currently on account of stricter stance on environmental issues by the government. Also, in order to improve its margins, CIL aims to increase the current capacity of its benficiation plants from 22mn tonnes to 111mn tonnes by FY2017. Competitive position: CIL enjoys ~81% share in India's coal production and has virtual monopoly in the Indian market.
STOCK RETURNS (%) CIL SENSEX 3M 3.0 1Y 7.5 14.2 3Y 27.8 20.9 5Y 16.0 3.1 10Y 16.1 17.1
BSE METAL INDEX 2.6
(3.3) (12.8)
FINANCIAL PERFORMANCE OVERVIEW (%) SALES GROWTH* PAT GROWTH* OPM# ROE# 3M 12.7 19.7 20.9 1Y 12.6 12.9 28.0 36.7 3Y 13.2 36.4 19.5 34.3 5Y 10.3 12.2 10Y -
Nature of business: The company sells ~80% of its production to power companies, whose business is stable. Also, CIL is not exposed to significant coal price fluctuations as it sells coal at a significant discount (10-30%) to global benchmark prices.
19.7 20.5 30.9 30.9

Production growth to remain muted in the near term: We expect CIL's production to grow by only 6.7% and 3.4% in FY2012 and FY2013, respectively, on account of the imposition of stringent environmental laws by regulatory authorities. On the sales volumes front, the company is currently facing shortage of railway rakes, despite improvement in availability of railway rakes during FY2012. Lower e-auction sales could hit margins: CIL sells 11-12% of its total volumes via e-auction, which commands a premium of 80-150% over regulated coal prices. However, during 2QFY2012, CIL diverted some portion of coal (meant for e-auction) to power producers at lower rates. Although CIL has resumed e-auction sales post 2QFY2012, any further diversion of e-auction coal to power producers at lower rates could hit the company's margins. Valuation: We believe the probability of raising coal prices by CIL from current levels is low in the near term. Also, we believe the company is unlikely to meet its production and offtake targets for FY2012E. Moreover, considering the current valuation of 9.0x FY2013E EV/EBITDA, we recommend a Neutral rating on the stock.
250
January 2012

BALANCE SHEET
Y/E MARCH (` CR) ` SOURCES OF FUNDS EQUITY SHARE CAPITAL RESERVES & SURPLUS SHAREHOLDERS FUNDS MINORITY INTEREST TOTAL LOANS SHIFTING AND REHAB. FUND TOTAL LIABILITIES APPLICATION OF FUNDS GROSS BLOCK LESS: ACC. DEPRECIATION NET BLOCK CAPITAL WORK-IN-PROGRESS INVESTMENTS CURRENT ASSETS CURRENT LIABILITIES NET CURRENT ASSETS NET DEFERRED TAX ASSETS TOTAL ASSETS 34,945 22,914 12,031 2,108 1,282 54,313 41,385 12,929 1,086 29,436 36,852 23,878 12,974 2,087 1,064 64,396 44,873 19,523 873 36,525 40,852 25,897 14,955 2,087 1,064 74,127 45,091 29,036 873 48,018 43,852 28,052 15,800 2,087 1,064 85,147 45,179 39,968 873 59,796 6,316 19,531 25,848 24 2,087 1,477 29,436 6,316 27,001 33,317 33 1,554 1,621 36,525 6,316 38,614 44,931 33 1,434 1,621 48,018 6,316 50,512 56,828 33 1,314 1,621 59,796 FY2010 FY2011 FY2012E FY2013E
% CHG
9.3
33,870 10,745
12.6
36,177 14,057
25.6
46,189 16,911
6.7
50,055 17,269
(% OF NET SALES)
DEPRECIATION EBIT
24.1
1,329 9,416
28.0
1,673 12,384
26.8
2,019 14,892
25.7
2,154 15,114
% CHG
INTEREST & OTHER CHARGES OTHER INCOME SHARE IN PROFIT OF ASSOCIATES PROVISION RECURRING PBT EXTRAORDINARY INC/(EXPENSE) PBT (REPORTED) TAX PAT (REPORTED) EXTRAORDINARY (EXPENSE)/INC. NET INCOME PAT (REPORTED) ADJ. PAT
895.2
89 4,901 209 14,228 (54.0) 13,965 4,342 9,622 211.3 9,834 9,834 9,676
31.5
79 4,796 578 17,101 (60.2) 16,463 5,596 10,867 10,867 10,867 10,928
20.2
45 6,626 21,472 21,472 6,656 14,816 14,816 14,816 14,816
1.5
41 7,406 22,479 22,479 6,968 15,510 15,510 15,510 15,510
% CHG
142.1
12.9
35.6
4.7
CASH FLOW STATEMENT

Y/E MARCH PROFIT BEFORE TAX DEPRECIATION CHANGE IN WORKING CAPITAL LESS: OTHER INCOME DIRECT TAXES PAID CASH FLOW FROM OPERATIONS (INC.)/ DEC. IN FIXED ASSETS (INC.)/ DEC. IN INVESTMENTS (INC.)/ DEC. IN LOANS AND ADVANCES OTHER INCOME CASH FLOW FROM INVESTING ISSUE OF EQUITY INC./(DEC.) IN LOANS DIVIDEND PAID (INCL. TAX) OTHERS CASH FLOW FROM FINANCING INC./(DEC.) IN CASH OPENING CASH BALANCES CLOSING CASH BALANCES FY2010 13,965 679 2,268 406.4 3,999 13,320 (1,998) 223 (1,775) (62) (2,210) 109 (2,163) 9,383 29,695 39,078 FY2011 16,463 1,673 (3,822) 306 5,623 8,997 (2,487) 3,184 697 (410) (2,583) 82 (2,911) 6,784 39,078 45,862 FY2012E 21,472 2,019 (323) 6,656 16,512 (4,000) 0 (4,000) (120) (3,202) (3,322) 9,190 45,862 55,052 FY2013E 22,479 2,154 (620) 6,968 17,045 (3,000) 0 (3,000) (120) (3,613) (3,733) 10,312 55,052 65,364
KEY RATIOS
Y/E MARCH VALUATION RATIO (X) P/E (ON FDEPS) P/CEPS P/BV EV/SALES EV/EBITDA PER SHARE DATA (`) ` EPS (BASIC) EPS (FULLY DILUTED) CASH EPS DPS BOOK VALUE RETURNS (%) ROCE (PRE-TAX) ROE TURNOVER RATIOS (X) INVENTORY (DAYS) RECEIVABLES (DAYS) PAYABLES (DAYS) 47 18 8 45 20 8 45 20 8 45 20 8 36.3 43.8 37.6 36.7 35.2 37.8 28.0 30.5 15.6 15.6 17.7 3.5 41.0 17.2 17.2 19.9 3.9 52.8 23.5 23.5 26.7 3.9 71.2 24.6 24.6 28.0 4.4 90.0 22.5 19.8 8.6 4.1 17.0 20.4 17.6 6.6 3.5 12.5 14.9 13.1 4.9 2.6 9.9 14.3 12.5 3.9 2.3 9.0 FY2010 FY2011 FY2012E FY2013E
January 2012
251
Metal
MOIL
Company Background
Incorporated in 1962, MOIL is the largest producer of manganese ore by volume (~50% of India's production) in India with a capacity of 1.1mn tonnes and reserves of 22mn tonnes (constituting 16% of India's manganese reserves). Based on its current production, MOIL has a mine life of 20 years. MOIL produces high, medium and low-grade manganese ore. All its mines are located in Maharashtra and Madhya Pradesh, benefiting from the well-developed road and rail infrastructure of these states. MOIL is also actively involved in exploration and development activities to increase its reserves.
Structural Snapshot
STOCK RETURNS (%) MOIL SENSEX 3M 1Y 3Y 30.8 20.9 5Y 3.1 10Y 17.1 3.4 (39.6) (3.3) (12.8)
Growth opportunity: With steel capacity expected to grow from 78mn tonnes in FY2011 to 100mn tonnes by FY2014, MOIL is expanding its capacity at a CAGR of 10.7% over FY2011-2015 as production of 1 tonne of steel requires ~33kg of manganese ore. Competitive position: MOIL enjoys a market share of ~50% in India. Although the company is one of the lowest cost producers, it faces threat of imports from other countries. Nature of business: Cyclical; Change in global manganese ore price has a direct bearing on MOIL's profitability.

4.1 25.0
FINANCIAL PERFORMANCE OVERVIEW (%) PAT GROWTH* OPM# ROE# 3M (31.9) 44.7 1Y 17.6 26.1 67.3 30.9 3Y 5.3 8.4 66.8 42.5 5Y 10Y SALES GROWTH* (12.6) 28.0 20.7 39.1 40.1 63.3 48.5 46.9 37.9

Production capacity to expand, albeit gradually: MOIL has started expanding its existing mines to augment its production capacity to 1.5mn tonnes by FY2015 from 1.0mn tonnes in FY2011. Also, the company has entered into JVs with SAIL and Rashtriya Ispat Nigam Ltd. (RINL) to set up two ferro alloy plants in Chhattisgarh and Andhra Pradesh. The proposed installed capacity in case of the JV with SAIL is 1,06,000 tonnes and that in case of RINL is 57,500 tonnes. The plants are expected to be commissioned in CY2013. Steep decline in manganese ore prices: Manganese ore prices have slumped by over 40% since January 2011 on account of oversupply in global markets. Going forward, we do not expect any meaningful increase in manganese ore prices until there is sharp de-stocking globally. Although we expect sales volume growth of 10.0% yoy in FY2012, lower realizations are expected to result in margin contraction during FY2012. Valuation: The stock is currently trading at 4.1x and 3.4x FY2012E and FY2013E EV/EBITDA. Although the company's sales volumes are expected to post a CAGR of 8-10% during FY2011-15, we do not foresee any meaningful rise in manganese ore prices in the coming year. Hence, we recommend Neutral on the stock.
252
January 2012

Y/E MARCH (` CR) ` TOTAL OPERATING INCOME FY2010 969 FY2011 1,140 FY2012E 939 FY2013E 986
BALANCE SHEET
Y/E MARCH (` CR) ` SOURCES OF FUNDS EQUITY SHARE CAPITAL RESERVES & SURPLUS SHAREHOLDERS FUNDS DEFERRED TAX LIABILITIES TOTAL LIABILITIES APPLICATION OF FUNDS GROSS BLOCK LESS: ACC. DEPRECIATION 357 160 197 22 1,742 1,487 63 192 272 1,471 1,690 396 190 206 29 2 2,204 1,880 159 165 311 1,893 2,130 513 218 296 2 2,485 2,149 175 161 318 2,167 2,465 597 245 352 2 2,760 2,399 193 168 319 2,441 2,795 168 1,509 1,677 13 1,690 168 1,960 2,128 2 2,130 168 2,295 2,463 2 2,465 168 2,626 2,794 2 2,795 FY2010 FY2011 FY2012E FY2013E
% CHG
(25.0)
367 602
17.6
373 767
(17.7)
427 512
5.0
440 546

DEPRECIATION EBIT
(34.5) 62.1
25 577
27.4 67.3
33 735
(33.3) 54.5
27 485
6.6 55.3
28 518

OTHER INCOME
(35.6) 59.5
130
27.4 64.4
145
(34.0) 51.6
180
6.9 52.5
205 NET BLOCK CAPITAL WORK-IN-PROGRESS INVESTMENTS CURRENT ASSETS CASH LOANS & ADVANCES OTHERS CURRENT LIABILITIES NET CURRENT ASSETS TOTAL ASSETS
(% OF PBT)
RECURRING PBT
18.4
707
16.5
880
27.1
665
28.4
723
% CHG
EXTRAORDINARY INC/(EXPENSE) PBT (REPORTED) TAX
(29.8)
707 240
24.5
880 292
(24.4)
665 221
8.7
723 240
(% OF PBT)
PAT (REPORTED)
34.0
466
33.2
588
33.2
444
33.2
483
% CHG
(29.7)
26.1
(24.4)
8.7
CASH FLOW STATEMENT

Y/E MARCH (` CR) ` PROFIT BEFORE TAX DEPRECIATION CHANGE IN WORKING CAPITAL LESS: OTHER INCOME DIRECT TAXES PAID CASH FLOW FROM OPERATIONS (INC.)/ DEC. IN FIXED ASSETS (INC.)/ DEC. IN INVESTMENTS CASH FLOW FROM INVESTING DIVIDEND PAID (INCL. TAX) CASH FLOW FROM FINANCING INC./(DEC.) IN CASH OPENING CASH BALANCES CLOSING CASH BALANCES FY2010 707 25 (103) (127.5) 238 264 (23) (0) 101 (110) (110) 255 1,232 1,487 FY2011 880 33 (29) 0.2 303 580 (49) (2) (51) (137) (137) 393 1,487 1,880 FY2012E 665 27 (5) 221 467 (88) (88) (109) (109) 269 1,880 2,149 FY2013E 723 28 (24) 240 487 (84) (84) (153) (153) 250 2,149 2,399
KEY RATIOS
Y/E MARCH VALUATION RATIO (X) P/E (ON FDEPS) P/CEPS P/BV EV/EBITDA PER SHARE DATA (`) ` EPS (BASIC) EPS (FULLY DILUTED) CASH EPS DPS BOOK VALUE RETURNS (%) ROCE (PRE-TAX) ANGEL ROIC (PRE-TAX) ROE TURNOVER RATIOS (X) INVENTORY (DAYS) RECEIVABLES (DAYS) PAYABLES (DAYS) WC CYCLE (EX-CASH) (DAYS) 46 32 23 39 50 40 22 42 50 40 20 57 50 40 20 52 38.1 424.0 31.1 38.5 365.8 30.9 21.1 180.3 19.4 19.7 145.4 18.4 27.8 27.8 29.2 5.6 99.8 35.0 35.0 36.9 7.0 126.7 26.4 26.4 28.1 5.0 146.6 28.8 28.8 30.4 7.0 166.3 9.1 8.7 2.5 4.6 7.2 6.9 2.0 3.1 9.6 9.0 1.7 4.1 8.8 8.3 1.5 3.4 FY2010 FY2011 FY2012E FY2013E
January 2012
253
Metal
RATING 52 WEEK HIGH / LOW MARKET CAP (` CR) ` LIQUIDITY ACCUMULATE 156/107 53,345 MEDIUM
Hindustan Zinc
Company Background
CMP/TP/Upside: `126 / `142 / 13%
Incorporated in 1966, Hindustan Zinc Ltd. (HZL), a subsidiary of Sterlite Industries, is a vertically integrated company with its mining and smelting operations located mainly in Rajasthan and Andhra Pradesh. HZL's current zinc reserves stand at 34.1mn tonnes with a production capacity of 1.1mn tonnes of zinc p.a., indicating a mine life of 31 years. HZL currently operates three underground mines, namely Sindesar Khurd, Rajpura Dariba, and Zawar Mines, and one open cast mine, Rampura Agucha Mine.
Structural Snapshot
Growth opportunity: HZL is expanding its silver-rich zinc mine at Sindesar Khurd, which is expected to result in robust growth in zinc (8.0% CAGR over FY2011-13) and silver volumes (38.0% CAGR over FY2011-13). Further, given its cash-rich balance sheet, the company is searching for the next leg of growth. Competitive position: The company has high-grade zinc-lead mines; It is one of the lowest-cost producers of zinc-lead in the world. Nature of business: Cyclical. Change in global prices of zinc, lead and silver have a direct bearing on its profitability.
STOCK RETURNS (%) HZL SENSEX 3M 5.6 1Y (5.5) 3Y 54.6 30.8 20.9 5Y 10Y 10.2 49.1 4.1 25.0 3.1 17.1
BSE METAL INDEX (1.3) (30.9) (3.3) (12.8)


Mining in Kayar could be the next phase of growth: Since expansion at Sindesur Khurd is nearing its completion, HZL has now commenced work at its underground Kayar mine, which has 11mn tonnes of high-grade reserves (10-12% zinc content). The company aims to mine 1mn tonnes per year, once it is fully operational. Further, HZL is currently exploring over 6,200 sq. km. area in 10 Reconnaissance Permits. In the past seven years, the company's exploration activities have resulted in addition of 167mn tonnes of ore (net of depletions) to its reserve and resource base. Current zinc prices below the marginal cost of production: Zinc prices have declined by ~20% during the past six months on account of sovereign debt crisis in Europe. At current levels of US$2,000/tonne, zinc prices are around the marginal cost of production for many mines across the world. Hence, we believe probability of a further decline from these levels is low. Valuation: Despite the recent decline in zinc price, we expect HZL's net profit to grow by 21.8% and 7.4% yoy in FY2012E and FY2013E, respectively; on account of expansion of its zinc-lead smelting capacity. Furthermore, the company's balance sheet remains strong with cash and equivalents at `16,255cr as of December 31, 2011 (cash per share - `38.4). At the CMP, the stock is trading at 4.0x FY2013E EV/EBITDA, a discount to its five-year historical average of 4.6x. Hence, we recommend Accumulate on the stock with a target price of ` 142.
254
January 2012

BALANCE SHEET
Y/E MARCH (` CR) ` SOURCES OF FUNDS EQUITY SHARE CAPITAL RESERVES& SURPLUS SHAREHOLDERS FUNDS TOTAL LOANS 423 17,701 18,124 60 711 18,896 845 21,688 22,533 945 23,478 845 26,918 27,763 945 28,708 845 32,834 33,679 945 34,624 FY2010 FY2011 FY2012E FY2013E
% CHG
43.3
3,347 4,792
23.3
4,416 5,623
18.8
5,487 6,440
8.3
6,015 6,904

DEPRECIATION EBIT
75.3 58.3
334 4,458
17.3 55.4
475 5,148
14.5 53.4
530 5,911
7.2 52.8
573 6,331 DEFERRED TAX LIABILITY TOTAL LIABILITIES APPLICATION OF FUNDS GROSS BLOCK LESS: ACC. DEPRECIATION NET BLOCK CAPITAL WORK-IN-PROGRESS INVESTMENTS CURRENT ASSETS 8,241 2,077 6,164 1,113 10,949 1,995 928 1,326 669 18,896 9,802 2,548 7,254 875 9,335 7,589 5,633 1,575 6,014 23,478 10,802 3,078 7,724 575 9,335 13,176 10,856 2,102 11,074 28,708 11,329 3,651 7,678 275 9,335 19,264 16,822 1,927 17,337 34,624

82.0 55.6
44 600
15.5 51.9
19 852
14.8 50.2
20 1,413
7.1 49.7
13 1,529
(% OF PBT)
RECURRING PBT EXTRAORDINARY INC/(EXPENSE) PBT (REPORTED) TAX PAT AFTER MI (REPORTED) ADJ. PAT
12.0
5,014 5,014 973 4,041 4,041
14.2
5,981 21.2 5,960 1,059 4,900 4,900
19.3
7,304 7,304 1,333 5,971 5,971
19.5
7,847 7,847 1,436 6,411 6,411
CASH CURRENT LIABILITIES NET CURRENT ASSETS TOTAL ASSETS
% CHG
48.2
21.3
21.8
7.4
CASH FLOW STATEMENT

Y/E MARCH PROFIT BEFORE TAX DEPRECIATION CHANGE IN WORKING CAPITAL LESS: OTHER INCOME DIRECT TAXES PAID CASH FLOW FROM OPERATIONS (INC.)/ DEC. IN FIXED ASSETS (INC.)/ DEC. IN INVESTMENTS (INC.)/ DEC. IN LOANS AND ADVANCES OTHER INCOME CASH FLOW FROM INVESTING INC./(DEC.) IN LOANS DIVIDEND PAID (INCL. TAX) OTHERS CASH FLOW FROM FINANCING INC./(DEC.) IN CASH OPENING CASH BALANCES CLOSING CASH BALANCES FY2010 5,014 335 173 (563) 785 4,173 (2,247) (3,922) (96) 2,288 (3,977) 43 198 33.0 (187) 8 919 928 FY2011 5,960 475 (239) (835) 1,116 4,244 (1,446) 1,870 28 (4,082) (3,631) (60) 296 8 (363) 250 5,383 5,633 FY2012E 7,304 530 (86) 1,333 6,415 (700) (700) 491 (491) 5,224 5,633 10,856 FY2013E 7,847 573 (51) 1,436 6,934 (227) -
KEY RATIOS
Y/E MARCH VALUATION RATIO (X) P/E (ON FDEPS) P/CEPS P/BV EV/EBITDA PER SHARE DATA (`) ` EPS (BASIC) EPS (FULLY DILUTED) CASH EPS DPS BOOK VALUE (227) 742 (742) 5,965 10,856 16,822 RETURNS (%) ROCE (PRE-TAX) ANGEL ROIC (PRE-TAX) ROE TURNOVER RATIOS (X) INVENTORY (DAYS) RECEIVABLES (DAYS) PAYABLES (DAYS) 49 7 52 63 8 39 63 12 50 63 12 50 26.4 88.5 24.9 24.3 76.0 24.1 22.7 75.9 23.7 20.0 78.5 20.9 42.9 53.3 65.7 79.7 9.6 9.6 10.4 6.0 11.6 11.6 12.7 0.7 14.1 14.1 15.4 1.5 15.2 15.2 16.5 1.0 13.2 12.2 2.9 8.9 10.9 9.9 2.4 7.0 8.9 8.2 1.9 5.3 8.3 7.6 1.6 4.0 FY2010 FY2011 FY2012E FY2013E
January 2012
255
Metal
Sterlite Industries
Incorporated in 1975, Sterlite Industries India Ltd. (Sterlite) is India's largest non-ferrous metals and mining company. The company produces zinc, lead and silver through its 65%-owned subsidiary, Hindustan Zinc (HZL), with zinc production capacity of 1.1mn tonnes. HZL contributes ~80% to Sterlite's consolidated E B ITDA. Sterlite also produces aluminium (capacity - 0.7mn tonnes including its associate Vedanta Aluminium). The company also has world-class copper smelting and refining operations (capacity - 0.4mn tonnes). In February 2011, Sterlite, through its wholly owned subsidiary, Sterlite Infra, acquired 100% stake in Namibian Skorpian mines for US$707mn. Skorpion mines have reserves and resources of 8.7mn tonnes of zinc and lead.
SHAREHOLDING PATTERN (%) PROMTERS (VEDANTA) FII 53.3 19.5
STOCK RETURNS (%) STERLITE SENSEX 3M 1Y 3Y 18.9 30.8 20.9 5Y 10Y
Structural Snapshot
Growth opportunity: The company is expanding its copper smelting operations from 0.4mn tonnes to 0.8mn tonnes by FY2013. Also, the company aims to ramp up aluminium production from 0.7mn tonnes currently to 2.5mn tonnes (although the timeframe is unclear currently). The allocated coal block for its aluminium operations have received forest stage-1 clearance. The company expects to get forest stage-2 clearance by 4QFY2012 and, thereafter, it can commence production in two quarters. Also, Sterlite is expanding the power capacity at its aluminium operations from the current levels of 1,470MW to 3,870MW. Competitive position: Although the company's fortunes are related to the increase/decrease in global non-ferrous metal prices, it is one of the lowest-cost zinc producers in the world. However, its cost of production for aluminium and power is high due to lack of captive bauxite and coal mines. Nature of business: Cyclical; Any change in global zinc, lead and aluminium prices as well as domestic power tariffs has a direct bearing on the company's profitability.
(9.6) (35.6) (3.3) (12.8)
(3.6) 43.1 4.1 25.0 3.1 17.1

25.7 44.4 29.2 25.8 24.9 24.1
ANGEL ESTIMATES PARTICULARS PAT GROWTH(%) ROE (%) P/E P/BV FY2012E (5.5) 11.0 8.1 0.8 FY2013E 28.3 12.5 6.3 0.7

Zinc-lead expansion and power to aid growth: As mentioned in our investment arguments for HZL, it is expanding its silver-rich zinc mine at Sindesar Khurd, which is expected to result in robust growth in zinc (8.0% CAGR over FY2011-13E) and silver volumes (38.0% CAGR over FY2011-13E). Sterlite Energy Limited (SEL) to reach full production capacity in FY2013: Sterlite is setting up a 2400MW power plant for commercial operations via its subsidiary, SEL. SEL has already commissioned two units of 600MW each at Jharsuguda. SEL will synchronize the remaining two units of 600MW each during 4QFY2012, the benefits of which will be witnessed in FY2013. Valuation: At the CMP, the stock is trading at 3.2x FY2012E and 2.5x FY2013E EV/EBITDA, a significant discount to its five-year historical average of 7.1x. On P/BV basis, the stock is trading at 0.8x and 0.7x FY2012E and FY2013E, respectively. Hence, we recommend Buy on the stock with an SOTP target price of ` 147 (65% of value is derived from HZL).
256
January 2012

BALANCE SHEET
Y/E MARCH (` CR) ` SOURCES OF FUNDS EQUITY SHARE CAPITAL RESERVES& SURPLUS SHAREHOLDERS FUNDS MINORITY INTEREST TOTAL LOANS DEFERRED TAX LIABILITY TOTAL LIABILITIES APPLICATION OF FUNDS GROSS BLOCK LESS: ACC. DEPRECIATION NET BLOCK CAPITAL WORK-IN-PROGRESS INVESTMENTS CURRENT ASSETS CURRENT LIABILITIES NET CURRENT ASSETS TOTAL ASSETS 18,179 5,913 12,266 11,084 20,304 17,511 4,932 12,580 56,234 31,189 9,791 21,397 12,150 12,955 27,939 8,813 19,126 65,629 36,689 11,552 25,136 12,050 12,955 33,259 9,965 23,294 73,436 43,189 13,712 29,477 13,550 12,955 35,242 11,121 24,121 80,103 168 36,844 37,012 8,410 9,260 1,552 56,234 336 41,100 41,436 10,291 11,729 2,174 65,629 336 45,906 46,242 10,291 14,729 2,174 73,436 336 52,074 52,410 10,291 15,229 2,174 80,103 FY2010 FY2011 FY2012E FY2013E
% CHG
16.7
18,207 6,475
23.3
22,379 8,049
21.1
28,362 8,480
17.5
32,401 10,883
(% OF NET SALES)
26.4
750 5,725
26.6
1,030 7,019
23.0
1,761 6,719
25.1
2,159 8,724
(% OF NET SALES)
INTEREST & OTHER CHARGES OTHER INCOME RECURRING PBT
23.2
292 1,506 6,939
23.1
301 2,472 9,191
18.2
1,031 3,132 8,820
20.2
1,142 3,679 11,261
% CHG
EXTRAORDINARY INC/(EXPENSE) PBT (REPORTED) TAX PAT (REPORTED) ADD: SHARE OF EARNINGS OF ASSO. LESS: MINORITY INTEREST (MI) PAT AFTER MI (REPORTED) ADJ. PAT
20.5
(297) 6,642 1,233 5,409 59 1,724 3,744 3,986
32.4
(57) 9,134 1,812 7,322 (285) 1,995 5,043 5,088
(4.0)
8,820 1,411 7,409 (750) 1,852 4,807 4,807
27.7
11,261 2,477 8,783 (420) 2,196 6,168 6,168
% CHG
14.1
27.7
(5.5)
28.3
CASH FLOW STATEMENT

Y/E MARCH (` CR) ` PROFIT BEFORE TAX DEPRECIATION CHANGE IN WORKING CAPITAL LESS: OTHER INCOME DIRECT TAXES PAID CASH FLOW FROM OPERATIONS (INC.)/ DEC. IN FIXED ASSETS (INC.)/ DEC. IN INVESTMENTS FY2010 6,642 750 (7,316) (1,483) 1,233 (2,822) (6,898) (4,098) (10,996) 7,653 2,246 449 (2,201) 11,651 (2,167) 5,505 3,338 FY2011 9,134 1,030 (315) (1,974) 1,735 5,855 (5,349) 8,964 (4,500) (885) 2,563 502 (457) 1,604 6,575 3,338 9,912 FY2012E 8,820 1,761 (574) (2,602) 1,411 5,994 (5,400) (5,400) 3,000 3,000 3,594 9,912 13,506 FY2013E 11,261 2,159 (114) (2,616) 2,477 8,213 (8,000) (8,000) 500 500 713 13,506 14,220
KEY RATIOS
Y/E MARCH VALUATION RATIO (X) P/E (ON FDEPS) P/CEPS P/BV EV/EBITDA PER SHARE DATA (`) ` EPS (BASIC) EPS (FULLY DILUTED) CASH EPS DPS BOOK VALUE RETURNS (%) ROCE (PRE-TAX) ANGEL ROIC (PRE-TAX) ROE TURNOVER RATIOS (X) INVENTORY / SALES (DAYS) RECEIVABLES (DAYS) PAYABLES (DAYS) 59.0 8.4 57.0 82.9 19.0 88.9 82.9 19.0 88.9 82.9 19.0 88.9 11.8 16.3 12.7 11.5 16.4 13.0 9.7 14.7 11.0 11.4 17.4 12.5 11.9 11.9 14.1 1.3 110.1 15.0 14.3 18.2 1.8 123.3 14.3 14.3 19.5 1.7 137.6 18.3 18.3 24.8 2.1 155.9 9.7 8.2 1.0 3.9 8.0 6.3 0.9 3.5 8.1 5.9 0.8 3.2 6.3 4.7 0.7 2.5 FY2010 FY2011 FY2012E FY2013E
(INC.)/ DEC. IN LOANS AND ADVANCES OTHERS CASH FLOW FROM INVESTING ISSUE OF EQUITY INC./(DEC.) IN LOANS DIVIDEND PAID (INCL. TAX) OTHERS CASH FLOW FROM FINANCING INC./(DEC.) IN CASH OPENING CASH BALANCES CLOSING CASH BALANCES
January 2012
257
Metal
Hindalco
Company Background
CMP/TP/Upside: `146 / `162 / 11%
SHAREHOLDING PATTERN (%) PROMOTERS (BIRLA) FII 32.1 34.1
Incorporated in 1958, Hindalco is one of the world's largest aluminium rolling companies and one of biggest producers of primary aluminium in Asia. The company is also into copper smelting and has one of the world's largest custom copper smelter with a capacity of 0.5mn tonnes (non-integrated). The companys aluminium operations in India have a capacity of 0.5mn tonnes with captive bauxite mines (reserves - 443mn tonnes). During February 2007, Hindalco acquired Novelis for US$6bn, making the combined entity the world's largest rolled-aluminium producer. Novelis has a market share of ~17% in the global flat-rolled aluminium product market. In FY2011, Novelis sales volume stood at 2.7mn tonnes of aluminium products.
STOCK RETURNS (%) HINDALCO SENSEX 3M 8.0 1Y (37.6) 3Y 41.1 30.8 20.9 5Y (1.6) 3.1 10Y 8.8 17.1
Structural Snapshot
Growth opportunity: Hindalco aims to expand its India operations three-fold over the next four years, with per capita consumption of aluminium in India being one of the lowest (2kg compared to 22kg in the U.S.) and anticipated 12% growth in aluminium demand in the coming decade. Competitive position: Hindalco's India aluminium operations enjoy higher margins compared to global peers as its operations are backed by captive bauxite and coal mine (which contribute ~75% to Hindalco's standalone EBIT). Nature of business: Cyclical; High capital requirements and difficulty in securing bauxite and coal mines pose significant entry barriers for new players.
BSE METAL INDEX (1.3) (30.9) (3.3) (12.8)

4.1 25.0
FINANCIAL PERFORMANCE OVERVIEW (%) SALES GROWTH* PAT GROWTH* OPM# ROE# 3M** 7.2 10.8 1Y 18.7 11.1 9.7 3Y 6.3 1.6 10.6 11.1 5Y 10Y 43.0 40.5 9.3 13.7 13.2 14.5 16.2 15.0
15.8 (37.2)

Aluminium capacity to increase three-folds in the next four years: Hindalco aims to increase its aluminium capacity by almost three-folds in the next four years to 1.5mn tonnes. Consequently, we expect production and sales volume to record significant growth over FY2011-14E. All of these new capacities will be backed by captive bauxite and coal mines; however, there is lack of clarity on production from Mahan coal block on account of environmental issues currently. Novelis to expand its capacity: Novelis plans to increase its capacity by ~20% by FY2014E. Capacity at its Pinda operations in Brazil is being increased by ~220kt, while the balance will be through debottlenecking (a 3-4% increase in capacity every year). We expect steady EBITDA of ~US$1bn per year from Novelis, given its stable conversion business. Valuations attractive: The stock is currently trading at FY2012E and FY2013E EV/EBITDA of 5.5x and 5.1x, respectively, compared to its five-year historical average of 6.8x. On P/BV basis, the stock is trading at 0.9x and 0.8x FY2012E and FY2013E, respectively. Moreover, given the strong visibility over its expansion plans, we recommend Accumulate on the stock with an SOTP target price of ` 162.
258
January 2012

BALANCE SHEET
Y/E MARCH (` CR) ` SOURCES OF FUNDS EQUITY SHARE CAPITAL RESERVES & SURPLUS SHAREHOLDERS FUNDS MINORITY INTEREST TOTAL LOANS DEFERRED TAX LIABILITY TOTAL LIABILITIES APPLICATION OF FUNDS 191 21,353 21,545 1,737 23,999 3,938 51,219 191 28,832 29,024 2,217 27,692 3,760 62,692 191 31,912 32,104 2,416 31,192 3,760 69,471 191 35,485 35,677 2,606 34,692 3,760 76,735 FY2010 FY2011 FY2012E FY2013E
% CHG
(7.5)
50,976 9,746
18.7
64,076 8,002
5.8
68,461 7,824
3.7
70,170 8,911

DEPRECIATION& AMORTISATION EBIT INTEREST & OTHER CHARGES OTHER INCOME RECURRING PBT
227.3 16.1
2,784 6,962 1,104 323 6,181
(17.9) 11.1
2,750 5,252 1,839 431 3,843
(2.2) 10.3
2,834 4,990 972 792 4,811
13.9 11.3
3,152 5,758 1,095
GROSS BLOCK 856 LESS: ACC. DEPRECIATION 5,519 NET BLOCK CAPITAL WORK-IN-PROGRESS GOODWILL INVESTMENTS CURRENT ASSETS CURRENT LIABILITIES NET CURRENT ASSETS TOTAL ASSETS
41,189 16,622 24,567 5,801 4,433 11,246 23,188 18,017 5,172 51,219
39,265 15,801 23,464 13,131 8,941 10,855 27,985 21,684 6,301 62,692
47,265 18,635 28,630 12,430 8,941 10,855 24,927 16,313 8,614 69,471
57,265 21,788 35,478 11,730 8,941 10,855 26,278 16,547 9,731 76,735
% CHG
PBT (REPORTED) TAX PAT (REPORTED) PAT AFTER MI (REPORTED) ADJ. PAT
(1,121.7)
6,181 1,829 4,352 3,925 3,910
(37.8)
3,843 964 2,879 2,456 2,456
25.2
4,811 1,263 3,547 3,349 3,349
14.7
5,519 1,487 4,032 3,842 3,842
% CHG
826.2
(37.2)
36.3
14.7
CASH FLOW STATEMENT

Y/E MARCH (` CR) ` PROFIT BEFORE TAX DEPRECIATION CHANGE IN WORKING CAPITAL LESS: OTHER INCOME DIRECT TAXES PAID CASH FLOW FROM OPERATIONS (INC.)/ DEC. IN FIXED ASSETS (INC.)/ DEC. IN INVESTMENTS FY2010 6,181 2,784 (598) (2,799) 635 4,932 (4,171) (1,614) (348) (5,437) 2,754 (321) 327 1,677 428 (76) 2,263 2,187 FY2011 3,843 2,725 (703) 1,675 1,313 6,226 (7,717) 507 (519) (6,691) 10 3,738 384 2,539 825 361 2,186 2,547 FY2012E 4,811 2,834 407 1,263 6,789 (7,300) (7,300) 3,500 269 3,231 2,721 2,556 5,277 FY2013E 5,519 3,152 (377) 1,487 6,808 (9,300) -
KEY RATIOS
Y/E MARCH VALUATION RATIO (X) P/E (ON FDEPS) P/CEPS P/BV EV/EBITDA PER SHARE DATA (`) ` EPS (FULLY DILUTED) CASH EPS DPS BOOK VALUE 20.4 35.0 1.4 112.6 12.8 27.2 1.4 151.7 17.5 32.3 1.4 167.8 20.1 36.5 1.4 186.4 7.2 4.2 1.3 4.0 11.4 5.4 1.0 5.3 8.4 4.5 0.9 5.5 7.3 4.0 0.8 5.1 FY2010 FY2011 FY2012E FY2013E
(INC.)/ DEC. IN LOANS AND ADVANCES OTHER INCOME CASH FLOW FROM INVESTING ISSUE OF EQUITY INC./(DEC.) IN LOANS DIVIDEND PAID (INCL. TAX) OTHERS CASH FLOW FROM FINANCING INC./(DEC.) IN CASH OPENING CASH BALANCES CLOSING CASH BALANCES
RETURNS (%) (9,300) 3,500 269 3,231 739 5,277 6,016 ROCE (PRE-TAX) ANGEL ROIC (PRE-TAX) ROE TURNOVER RATIOS (X) RECEIVABLES (DAYS) PAYABLES (DAYS) SOLVENCY RATIOS (X) NET DEBT TO EQUITY 0.5 0.5 2.9 0.5 5.1 0.5 5.3 39 83 42 50 42 50 42 50 14.0 21.6 20.9 9.2 15.4 9.7 7.6 13.0 11.0 7.9 12.9 11.3
January 2012
259
Metal
Nalco
Company Background
CMP/TP/Upside: `56/ - / -
Nalco, a Navratna company, is one of India's largest aluminium producer and has Asia's largest integrated aluminium complex. The company engages into alumina refining (capacity - 2.1mn tonnes), aluminium smelting (capacity - 0.7mn tonnes) and power generation (capacity - 1,200MW). Nalco has a captive bauxite mine at Panchpatmalli with a mining capacity of 6.3mn tonnes p.a. The company also sells excess power. Nalco exports its products to Southeast Asia, Far East, Indian subcontinent, Gulf, China and the U.S.
Structural Snapshot
STOCK RETURNS (%) NALCO SENSEX 3M 1Y 3Y 8.3 30.8 20.9 5Y 1.8 3.1 10Y 15.0 17.1 (6.6) (39.0) (3.3) (12.8)
Growth opportunity: Nalco aims to diversify into the power, copper and uranium businesses. The company also aims to set up aluminium projects in Andhra Pradesh and Indonesia. However, these plans are still at a nascent stage. Competitive position: Although the company has captive bauxite mines to produce aluminium, its costs are relatively higher on account of higher employee and power costs. Nature of business: Cyclical; High capital requirements and difficulty in securing bauxite and coal mines pose significant entry barriers for new players.

4.1 25.0
FINANCIAL PERFORMANCE OVERVIEW (%) SALES GROWTH* PAT GROWTH* OPM# ROE# 3M 8.9 (37.8) 9.6 1Y 17.1 26.6 9.9 3Y 6.7 27.2 10.5 5Y 3.2 (7.0) 17.3 10Y 9.7 5.0 19.7

Margins to remain under pressure: Nalco has been facing coal supply issues, which have disrupted its operations in the past four quarters. The company sources its annual coal requirement from Mahanadi Coalfields Ltd., but the supply is not evenly distributed. In our view, the company's power costs will remain high on account of rise in coal prices domestically and INR depreciation against the USD (which increases the cost of imported coal). Further, prices of other key raw materials, such as caustic soda and carbon, have also increased during FY2012E. These factors along with a steep decline in global aluminium price (~20%)during June-December 2011 are expected to result in a decline in Nalco's margins during FY2012E. Limited growth visibility: Nalco aims to diversify into other businesses such as power and mining other metals. However, there is little clarity on its proposed expansion plans, as they are in various stages of financial closure and significant progress is yet to be made. Valuations: The stock is currently trading at FY2012E and FY2013E EV/ EBITDA of 6.6x and 4.0x, respectively, compared to its five-year historical average of 6.8x. On P/BV basis, the stock is trading at FY2012E and FY2013E of 1.2x and 1.1x, respectively. However, given the limited visibility over its expansion plans and the recent rise in cost of production, we recommend Neutral on the stock.
31.3 (13.6)
37.2 43.3
ANGEL ESTIMATES PARTICULARS PAT GRoWTH (%) ROE (%) P/E P/BV FY2012E (7.0) 8.6 14.5 1.2 FY2013E 21.9 9.9 11.9 1.1
260
January 2012

BALANCE SHEET
Y/E MARCH (` CR) ` SOURCES OF FUNDS EQUITY SHARE CAPITAL RESERVES & SURPLUS SHAREHOLDERS FUNDS TOTAL LOANS DEFERRED TAX LIABILITY TOTAL LIABILITIES APPLICATION OF FUNDS GROSS BLOCK 11,018 6,182 4,836 2,243 987 5,210 2,220 11,056 12,076 6,583 5,494 1,744 1,332 6,045 2,741 11,873 13,333 7,090 6,243 1,444 1,332 7,268 3,720 12,566 14,533 7,806 6,727 1,344 1,332 8,411 4,486 13,328 644 9,751 10,396 661 11,056 1,289 9,876 11,165 15 693 11,873 1,289 10,570 11,858 15 693 12,566 1,289 11,331 12,619 15 693 13,328 FY2010 FY2011 FY2012E FY2013E
% CHG
1.6
4,071 1,102
17.1
4,471 1,585
15.1
5,668 1,304
30.5
7,154 1,944
(% OF NET SALES)
21.8
319 783
26.6
422 1,163
19.0
507 797
21.7
716 1,227
(% OF NET SALES)
15.5
2 374 1,155
19.5
362 1,525
11.6
2 532 1,326
13.7
2 585
LESS: ACC. DEPRECIATION 1,810
% CHG
EXTRAORDINARY INC/(EXPENSE) PBT (REPORTED) TAX PAT (REPORTED) PAT AFTER MI (REPORTED) ADJ. PAT
(39.6)
1,155 341 814 814 814
32.0
1,525 455 1,069 1,069 1,069
(13.0)
1,326 332 995 995 995
36.5
1,810 597 1,213 1,213 1,213
NET BLOCK CAPITAL WORK-IN-PROGRESS GOODWILL INVESTMENTS CURRENT ASSETS CURRENT LIABILITIES MIS. EXP. NOT WRITTEN OFF TOTAL ASSETS
% CHG
(35.3)
31.3
(7.0)
21.9
CASH FLOW STATEMENT

Y/E MARCH (` CR) ` PROFIT BEFORE TAX DEPRECIATION CHANGE IN WORKING CAPITAL LESS: OTHER INCOME DIRECT TAXES PAID CASH FLOW FROM OPERATIONS (INC.)/ DEC. IN FIXED ASSETS (INC.)/ DEC. IN INVESTMENTS (INC.)/ DEC. IN LOANS AND ADVANCES OTHERS CASH FLOW FROM INVESTING ISSUE OF EQUITY INC./(DEC.) IN LOANS DIVIDEND PAID OTHERS CASH FLOW FROM FINANCING INC./(DEC.) IN CASH OPENING CASH BALANCES CLOSING CASH BALANCES FY2010 1,155 319 (20) 8.8 292 1,172 (678) 84 (593) 304 (304) 275 2,878 3,152 FY2011 1,525 422 288 (56) 548 1,631 (833) 65 (768) 219 (219) 643 3,152 3,795 FY2012E 1,326 507 460 332 1,962 (957) (957) 301 (301) 704 3,795 4,499 FY2013E 1,810 716 560 597 2,489 (1,100) (1,100) 452 (452) 937 4,499 5,436
KEY RATIOS
Y/E MARCH VALUATION RATIO (X) P/E (ON FDEPS) P/CEPS P/BV EV/EBITDA PER SHARE DATA (`) ` EPS (BASIC) EPS (FULLY DILUTED) CASH EPS DPS BOOK VALUE RETURNS (%) ROCE (PRE-TAX) ANGEL ROIC (PRE-TAX) ROE TURNOVER RATIOS (X) INVENTORY / SALES (DAYS) RECEIVABLES (DAYS) PAYABLES (DAYS) 427 13 718 498 7 970 498 7 970 440 7 970 7.3 2.5 8.1 10.1 1.9 9.9 6.5 1.7 8.6 9.5 1.5 9.9 3.2 3.2 4.4 0.6 40.3 4.1 4.1 5.8 0.9 43.3 3.9 3.9 5.8 1.0 46.0 4.7 4.7 7.5 1.5 49.0 17.8 12.8 1.4 9.4 13.5 9.7 1.3 5.9 14.5 9.6 1.2 6.6 11.9 7.5 1.1 4.0 FY2010 FY2011 FY2012E FY2013E
January 2012
261
262
January 2012
Oil & Gas

COVERAGE
Companies RIL ONGC GAIL Cairn India CMP (`) ` 785 272 369 347 Target (`) ` 923 324 434 Reco Buy Buy Buy
POSITIVE
Gas reforms to address ballooning demand

India set to become a top refining hub: Currently, India is the fifth largest refining country in the world, accounting for ~4% of the world's refining capacity. India's exports of refined petroleum products stood at 50mn tonnes during FY2011. RIL, with ~30% of India's refining capacity, accounts for more than 70% share in the exports of refined petroleum products from India. Going forward, India's refinery capacity is expected to increase from 193mn tonnes in FY2011 to 239mn tonnes by FY2015. Hence, India's exports of refined petroleum products are expected to rise to 70mn tonnes by FY2014, making it one of the world's major exporters of refined petroleum products. Gas demand to remain strong in India; increase in regulated gas prices to encourage supplies: India's per capita consumption of gas stands at 50kgoe compared to world average of 450kgoe. Currently, gas constitutes only 11% of India's energy basket compared to 25% of the global energy basket, providing scope to increase gas penetration. Domestic gas demand witnessed a 13.5% CAGR during FY2007-11; and going forward as well, gas demand is expected to post a CAGR of 10-12% over the medium term. The key constraint has been on the supply front. Gas supplies have declined in the past one year on account of a steep fall in production from KG-D6 basin (average of 39mmscmd in December 2011 compared to average of 55mmscmd in December 2010), which constitutes ~35% of India's total gas production. This has resulted in increased demand-supply gap for natural gas. One of the key reasons discouraging oil majors to increase their gas production was irrational (lower) APM (administered price mechanism) gas pricing. However, during May 2010, the government increased APM prices from US$1.8/mmbtu to US$4.2/mmbtu. Despite this increase, current domestic prices are at a significant discount to international prices. ONGC sells gas to the priority sector at US$4.2/mmbtu and to the non-priority sector at US$4.2-5.3/mmbtu compared to international LNG price of US$11-14/mmbtu. RIL and ONGC have been demanding higher prices for some of their upcoming production blocks as the current price of US$4.2-5.7/mmbtu is unviable to undertake production from certain blocks. Hence, going forward, to boost investments in exploratory blocks, the government is expected to take further policy measures, such as increase domestic gas price, which would boost profits of majors such as RIL and ONGC and incentivize them to make higher investments to expand their E&P activities. This would also be a positive for GAIL, which is in the process of almost doubling its gas transmission capacity. Recent decline in the stock price makes valuations attractive: Over the past 6-8 months, stock prices of oil and gas companies have declined significantly. While RIL's stock has fallen due to declining production from KG-D6 basin, we expect RIL to ramp up its production over the next two years with the help of BP's technical expertise. For ONGC, although there is an overhang on the subsidy-sharing mechanism, its inexpensive valuation makes it an attractive bet at these levels. GAIL stock has also recently declined, with the fall in broad markets, although its operating business remains stable and expansion plans are on track. We continue to maintain our positive view on RIL, ONGC and GAIL.
- Neutral
January 2012
263
Oil & Gas

India set to become a top refining hub: Currently, India is the fifth largest refining country in the world, accounting for ~4% of the world's refining capacity. India's exports of refined petroleum products stood at 50mn tonnes during FY2011. RIL, with ~30% of India's refining capacity, accounts for more than 70% share in the exports of refined petroleum products from India. Going forward, India's refinery capacity is expected to increase from 193mn tonnes in FY2011 to 239mn tonnes by FY2015. Hence, India's exports of refined petroleum products are expected to rise to 70mn tonnes by FY2014, making India one of the world's major exporters of refined petroleum products. the government increased APM prices from US$1.8/mmbtu to US$4.2/mmbtu. Despite this increase, current domestic prices are at a significant discount to international prices. ONGC sells gas to the priority sector at US$4.2/mmbtu and to the non-priority sector at US$4.2-5.3/mmbtu compared to international LNG price of US$11-14.0/mmbtu. RIL and ONGC have been demanding higher prices for some of their upcoming production blocks, as the current price of US$4.2-5.7/mmbtu is unviable to undertake production from certain blocks. Hence, going forward, to boost investments in exploratory blocks, the government is expected to take further policy measures, such as increase domestic gas price, which would boost profits of majors such as RIL and ONGC and incentivize them to make higher investments to expand their E&P activities. This would also be a positive for GAIL, which is in the process of almost doubling its gas transmission capacity.
Exhibit 1: World's top five refining countries

20 18 16 14
(mnbpd)
18
12 10 8 6 4 2 US
10
Exhibit 3: Natural gas pricing in India

Producer Gas price (US$/mmbtu) 4.2 4.8-5.2 2.5 5.3 4.2 8.0 11.0-14.0 ONGC (APM) ONGC and OIL (Non APM) ONGC & OIL (North East) PMT/ Ravva/Lakshmi
China
Russian Federation
Japan
India
Refining capacity
Source: BP Statistical Review, Angel Research
Exhibit 2: India refining capacity expansion (over FY2011-15)

80 70
(mn tonnes p.a.)
RIL KG-D6 Term R-LNG Spot LNG

Source: PLNG, Angel Research
60 50 40 30 20 10
MRPL BPCL NOCL HPCL HMEL
Exhibit 4: India's natural gas demand forecast

350 300
NRL IOC CPL Bina RIL Essar Spice
250
(mmscmd)
Existing
New addition
200 150 100
Gas demand to remain strong in India; increase in regulated gas prices to encourage supplies: India's per capita consumption of gas stands at 50kgoe compared to world average of 450kgoe. Currently, gas constitutes only 11% of India's energy basket compared to 25% of the global energy basket, providing a scope to increase gas penetration. Domestic gas demand reported a 13.5% CAG R during FY2007-11; and going forward as well, gas demand is expected to post a 10-12% CAGR over the medium term. The key constraint has been on the supply front. Gas supplies have declined in the past one year on account of a steep fall in production from KG-D6 basin (average of 39mmscmd in December 2011 compared to average of 55mmscmd in December 2010), which constitutes ~35% of India's total gas production. This has resulted in increased demand-supply gap for natural gas. One of the key reasons discouraging oil majors to increase their gas production was irrational (lower) APM (administered price mechanism) gas pricing. However, during May 2010,
50 0 FY2013E FY2014E FY2015E FY2016E FY2017E
Price sensitive demand
Price resistant demand
Source: PLNG, Angel Research
RIL is demanding higher price than US$4.2/mmbtu for the development of a satellite field in the KG-D6 block and R-series, as it estimates that current prices of US$4.2/mmbtu are not viable to develop the satellite field. The current international price is around ~US$11-14/mmbtu compared to the domestic price range of US$4.2-US$5.7/mmbtu. RIL has also requested the government to approve pricing formula based on Asian LNG price for its forthcoming production from the coal bed methane (CBM) block. Similarly, ONGC is also demanding a higher price to develop its KG-DW 98/2 block to be viable. Recent decline in the stock price makes valuations attractive: Over the past 6-8 months, stock prices of oil and gas companies have declined significantly. While RIL's stock has fallen due to declining production from KG-D6 basin, we expect RIL to ramp Please refer to important disclosures at the end of this report
264
January 2012
Oil & Gas

up its production over the next two years with the help of BP's technical expertise. For ONGC, although there is an overhang on the subsidy-sharing mechanism, its inexpensive valuation makes it an attractive bet at these levels. GAIL stock has also recently declined, with the fall in broad markets, although its operating business remains stable and expansion plans are on track. We continue to maintain our positive view on RIL, ONGC and GAIL.

CMP Target Reco Market Cap Upside (` cr) ` Buy Buy Buy Neutral 257,271 232,453 46,820 66,056 (%) 18 19 18 PER (x) FY12E 12.2 8.7 11.7 10.9 FY13E 11.4 8.2 10.4 8.6 P/BV (x) FY12E 1.4 1.7 2.1 1.4 FY13E 1.2 1.5 1.8 1.2 EV/EBITDA (x) FY12E 6.8 3.8 6.4 7.2 FY13E 6.3 3.3 5.6 5.1 ROE (%) FY12E 12.9 21.5 19.3 14.0 FY13E 12.4 19.9 18.7 15.3 RoCE (%) FY12E FY13E 9.6 20.5 22.4 16.5 9.7 19.2 22.3 18.6 (`) Price (`) ` ` RIL ONGC GAIL Cairn India 785 272 369 347 923 324 434 -
January 2012
265
Oil & Gas

Reliance Inds.
Company Background
TOP PICK
CMP/TP/Upside: `785 / `923 / 18%
SHAREHOLDING PATTERN (%) PROMOTERS (AMBANI) FII 44.7 20.5
Reliance Industries (RIL), India's one of the largest listed company, ranks amongst the biggest petrochemical companies in Asia. The company is also the world's largest polyester producer and has the world's largest refinery in Jamnagar. RIL operates in three business segments: petrochemicals (23% of gross sales), refining (73% of gross sales), and oil and gas (4% of gross sales). During 2002, RIL discovered huge natural gas reserves (12TCF of gas) in KG D6 block of Andhra Pradesh. In February 2011, RIL sold 30% stake in 23 oil and gas blocks to U.K.-based BP for US$7.2bn.
Structural Snapshot
STOCK RETURNS (%) RIL SENSEX 3M 1Y 3Y 6.8 10.0 20.9 5Y 1.9 3.1 10Y 19.8 17.1 (11.0) (25.6) (3.3) (12.8)
Growth opportunity: Any increase in regulated domestic gas price could pave way for exploring new gas blocks. Also, the company aims to expand its business in telecom, retail and petrochemicals transportation. Competitive position: RIL has higher refining margins compared to global peers, as its Jamnagar refinery can refine the most complex varieties of crude and manufacture various grades of fuel. Nature of business: Changes in global refining margins and prices of petrochemical products have a direct bearing on the companys profitability.
BSE O&G INDEX (8.7) (20.5)

3.8 24.9
FINANCIAL PERFORMANCE OVERVIEW (%) SALES GROWTH* PAT GROWTH* OPM# ROE# 3M** 42.4 (13.6) 8.6 1Y 30.5 27.1 14.7 13.8 3Y 24.7 7.1 15.1 13.5 5Y 10Y 26.3 28.4 16.5 22.6 16.0 16.2 17.4 17.0

Ramp-up in KG-D6 could re-rate the stock: RIL's upstream segment still has significant upside in store, considering the huge untapped resources. RIL's natural gas production stands at ~40mmscmd, significantly below its potential of 80mmscmd from KG-D6 due to constraints over reservoir pressure. Nevertheless, we believe RIL can ramp up its production over the medium term with the help of BP's technical expertise. Also, RIL has recently concluded several three-year exploration phases on the prospective eastern coast and is expected to commence with the development phase soon. RIL expects to commence significant E&P activities from CY2014E. Foray into newer businesses: RIL has been eyeing inorganic routes for diversifying its asset portfolio by entering into newer ventures, such as retail and telecom, on the back of significant cash pile (`74,539cr as on December 31, 2011) and treasury stocks. Initiatives such as shale gas acquisitions, with in-place reserves of ~12TCF, could prove to be a potential trigger for the stock in the long term. Valuations attractive: Over the last five years, RIL has traded at an average one-year forward P/E of 17.7x, while currently it is trading at a P/E of 12.2x FY2012E and 11.4x FY2013E. On a P/B basis, the stock trades at 1.4x FY2012E and 1.2x FY2013E. We maintain our Buy view on the stock with an SOTP target price of ` 923.
266
January 2012

BALANCE SHEET
Y/E MARCH (` CR) ` SOURCES OF FUNDS QUITY SHARE CAPITAL RESERVES& SURPLUS HAREHOLDERS FUNDS MINORITY INTEREST TOTAL LOANS DEFERRED TAX LIABILITY TOTAL LIABILITIES APPLICATION OF FUNDS 2,978 138,598 141,576 574 64,606 10,678 216,860 2,981 151,112 154,094 802 84,106 11,071 250,073 2,981 169,426 172,409 802 70,314 12,714 256,239 2,981 188,972 191,954 802 65,390 14,839 272,985 FY2010 FY2011 FY2012E FY2013E
% CHG
34.7
172,846 30,894
30.5
226,850 38,961
19.1
280,833 35,758
5.0
294,807 37,747
(% OF NET SALES)
15.2
10,946 19,948
14.7
14,121 24,840
11.3
11,445 24,313
11.4
11,965 25,781
(% OF NET SALES)
INTEREST & OTHER CHARGES OTHER INCOME RECURRING PBT EXTRAORDINARY INCOME/EXP PBT (REPORTED) TAX PAT (REPORTED) MINORITY INTEREST (LOSS) PAT AFTER MI (REPORTED) ADJ. PAT(CORE)
9.8
2,060 2,185 20,074 8,606 28,680 4,256 24,424 79.6 24,503 15,897
9.3
2,411 2,543 24,972 (917) 24,055 4,783 19,272 22.0 19,294 20,211
7.7
2,721 6,037 27,628 27,628 6,631 20,998 34.0 21,032 21,032
7.8
2,480 6,339 29,640 29,640 7,114 22,526 41.0 22,567 22,567
GROSS BLOCK LESS: ACC. DEPRECIATION NET BLOCK CAPITAL WORK-IN-PROGRESS INVESTMENTS CURRENT ASSETS CURRENT LIAB. AND PROV. NET CURRENT ASSETS MIS. EXP. NOT WRITTEN OFF TOTAL ASSETS
224,125 63,934 160,191 17,034 13,112 69,106 42,586 26,520 2 216,860
238,293 80,193 158,099 29,742 21,596 98,080 57,445 40,634 1 250,073
254,973 91,638 163,335 15,000 21,596 118,476 62,170 56,306 1 256,239
275,371 103,603 171,767 17,172 21,596 126,720 64,272 62,448 1 272,985
5.2 9.1
27.1 7.1
4.1 6.6
7.3 6.8
CASH FLOW STATEMENT

Y/E MARCH ( ` CR) PROFIT BEFORE TAX DEPRECIATION CHANGE IN WORKING CAPITAL LESS: OTHER INCOME DIRECT TAXES PAID CASH FLOW FROM OPERATIONS (INC.)/ DEC. IN FIXED ASSETS (INC.)/ DEC. IN INVESTMENTS OTHERS CASH FLOW FROM INVESTING ISSUE OF EQUITY INC./(DEC.) IN LOANS DIVIDEND PAID (INCL. TAX) OTHERS CASH FLOW FROM FINANCING INC./(DEC.) IN CASH OPENING CASH BALANCES CLOSING CASH BALANCES FY2010 28,680 14,001 (5,939) (1,786) (3,140) 31,815 (23,017) 2,645 2,160 (18,231) 513 (5,822) (2,219) (14,907) (22,436) (8,851) 22,742 13,891 FY2011 24,055 16,820 (13,501) (1,722) (4,243) 33,338 (33,604) (8,102) 9,666 (32,040) 196 20,701 (2,431) (8,378) 14,950 16,248 13,891 30,139 FY2012E 27,628 11,445 825 (3,316) (6,631) 29,952 (1,938) 6,037 4,099 (13,793) (2,683) (1,078) (17,554) 16,497 30,139 46,636 FY2013E 29,640 11,965 1,010 (3,859) (7,114) 31,643 (22,570) 6,339 (16,215) (4,924) (2,981) (371)
KEY RATIOS
Y/E MARCH VALUATION RATIO (X) P/E (ON FDEPS) P/BV EV/SALES EV/EBITDA PER SHARE DATA (`) ` EPS (FULLY DILUTED) CASH EPS DPS BOOK VALUE RETURNS (%) ROCE (PRE-TAX) ANGEL ROIC (PRE-TAX) ROE TURNOVER RATIOS (X) ASSET TURNOVER (GROSS BLOCK) (8,276) 7,152 46,636 53,789 INVENTORY / SALES (DAYS) RECEIVABLES (DAYS) PAYABLES (DAYS) WC CYCLE (EX-CASH) (DAYS) 1.1 48.8 13.4 78.8 8.7 1.1 48.6 14.4 70.3 15.9 1.3 46.5 14.3 69.5 11.6 1.3 49.3 15.1 73.7 10.1 9.4 13.5 14.3 10.6 13.2 13.8 9.6 12.6 12.9 9.7 13.0 12.4 74.9 99.8 7.0 475 58.9 115.7 8.5 517 64.3 108.9 9.0 578 69.0 115.8 10.0 644 10.5 1.7 1.4 9.1 13.3 1.5 1.0 7.0 12.2 1.4 0.8 6.8 11.4 1.2 0.7 6.3 FY2010 FY2011 FY2012E FY2013E
January 2012
267
Oil & Gas

ONGC
Company Background
CMP/TP/Upside: `272 / `324 / 19%
ONGC is the third largest oil and gas exploration and production company in the world, ranking 23rd among the leading global energy majors. The companys primary business includes exploration, development and production of crude oil, natural gas, LPG and other value-added petroleum products. ONGC has 2P reserves of 1,025mtoe of hydrocarbon, indicating a reserve life of 17 years. The company has also set up a subsidiary, ONGC Videsh (OVL), for overseas oil exploration and production. OVL has 2P reserves of 199mtoe, indicating a reserve life of 21 years.
Structural Snapshot
STOCK RETURNS (%) ONGC SENSEX 3M 1Y 3Y 17.3 10.0 20.9 5Y 3.2 3.1 10Y 27.2 17.1 (2.9) (10.6) (3.3) (12.8)
Growth opportunity: Over FY2007-11, although ONGC (standalone) has incurred a capex of `45,851cr (38% of its average operating cash flow), its O+OEG (oil and oil equivalent gas) production has recorded a CAGR of only 0.4%. Nevertheless, we expect robust volume growth from OVL, which aims to increase its production at a CAGR of 12.4% during FY2011-13. Also, a concrete subsidy-sharing formula by the government could make ONGC's cash flows more predictable. Competitive position: The company has a huge base of oil and gas producing blocks in India. ONGC accounted for ~57% of India's O+OEG production in FY2011 (crude oil - 82% and natural gas - 48%). Nature of business: Regulated; Any increase in global crude oil price results in a higher subsidy burden for ONGC, thus affecting its profits.
BSE O&G INDEX (8.7) (20.5)

3.8 24.9
FINANCIAL PERFORMANCE OVERVIEW (%) SALES GROWTH* PAT GROWTH* OPM# ROE# 3M** 24.3 60.4 54.2 1Y 15.6 15.7 41.2 20.7 3Y 6.7 4.2 42.2 21.4 5Y 9.7 8.4 10Y 16.8 15.7
42.7 41.9 24.1 25.5

Gas volumes expected to boost valuations: ONGC aims to increase gas production from North Tapti, B193 and 28 cluster, B22 cluster WO series cluster, B46 cluster, cluster 7 and B series. The company aims to increase its production to 26bcm in FY2013E from 23bcm in FY2011. As far as oil is concerned, ONGC's existing oil fields are matured and, thus, production from these fields is declining. Nevertheless, management expects incremental oil production from marginal fields (including D1 extension, B193 cluster, B22 clusters, North Tapti, WO series and B46 cluster), which will help arrest the decline in crude production. ONGC aims to raise its crude oil output to 28mn tonnes by FY2014E from 24mn tonnes in FY2011. OVL's volume story intact: OVL's production has increased steadily from 8.0mtoe in FY2007 to 9.5mtoe in FY2011. Going forward, we expect OVL's volumes to grow to 12mtoe by FY2013E, with incremental productions from Myanmar, Sakhalin-1 and Venezuela coming on stream. Moreover, any increase in crude oil or gas price improves margins for OVL, as it does not share under-recoveries. Valuation: The stock is currently trading at 8.7x and 8.2x FY2012E and FY2013E P/E, compared to its five-year average P/E of 10.2x. Further, considering the anticipated volume growth from OVL during FY2011-13E, we continue to maintain our Buy rating on the stock with an SOTP target price of ` 324.
ANGEL ESTIMATES PARTICULARS PAT growth (%) ROE (%) P/E P/BV FY2012E 19.1 21.5 8.7 1.7 FY2013E 6.5 19.9 8.2 1.5
268
January 2012

BALANCE SHEET
Y/E MARCH (` CR) ` SOURCES OF FUNDS EQUITY SHARE CAPITAL RESERVES& SURPLUS SHAREHOLDERS FUNDS MINORITY INTEREST TOTAL LOANS DEFERRED TAX LIABILITY 2,139 99,268 101,407 1,643 6,267 10,291 4,278 111,049 115,327 2,002 6,291 11,153 19,850 154,623 4,278 129,227 133,505 2,435 9,427 10,355 19,850 175,572 4,278 148,279 152,557 2,897 10,862 10,355 19,850 196,521 FY2010 FY2011 FY2012E FY2013E
% CHG
(2.7)
56,805 44,949
15.6
69,174 48,436
6.4
70,221 54,937
10.3
79,727 58,355
(% OF NET SALES)
44.2
18,719 26,230
41.2
20,628 27,808
43.9
21,135 33,802
42.3
22,593 35,762

(5.6) 25.8
1,102 5,273
6.0 23.6
437 6,946
21.6 27.0
600 7,641
5.8 25.9
680 8,405
LIABILITY FOR ABANDONMENT COST 17,459 TOTAL LIABILITIES APPLICATION OF FUNDS GROSS BLOCK LESS: ACC. DEPRECIATION NET BLOCK CAPITAL WORK-IN-PROGRESS GOODWILL INVESTMENTS CURRENT ASSETS CURRENT LIABILITIES NET CURRENT ASSETS MIS. EXP. NOT WRITTEN OFF TOTAL ASSETS 193,300 117,757 75,543 25,616 9,539 5,159 50,566 30,198 20,369 841 137,067 137,067
(% OF PBT)
RECURRING PBT
17.3
30,401
20.2
34,316
18.7
40,843
19.3
43,487
227,273 132,981 94,293 27,379 8,993 3,356 59,412 39,605 19,807 796 154,623
252,273 154,116 98,157 28,194 8,993 3,356 77,661 41,586 36,076 796 175,572
277,273 176,709 100,564 29,283 8,993 3,356 96,362 42,833 53,528 796 196,521
% CHG
PBT (REPORTED) TAX PAT (REPORTED) ADD: SHARE OF EARNINGS OF ASS. LESS: MINORITY INTEREST (MI) PAT AFTER MI (REPORTED) ADJ. PAT
(2.2)
30,441 10,714 19,728 8 332 19,404 19,404
12.9
34,316 11,491 22,825 3 372 22,456 22,456
19.0
40,843 13,676 27,166 10 443 26,733 26,733
6.5
43,487 14,562 28,925 10 471 28,463 28,463
% CHG
(2.3)
15.7
19.1
6.5
CASH FLOW STATEMENT

Y/E MARCH ( ` CR) PROFIT BEFORE TAX DEPRECIATION CHANGE IN WORKING CAPITAL LESS: OTHER INCOME DIRECT TAXES PAID CASH FLOW FROM OPERATIONS (INC.)/ DEC. IN FIXED ASSETS (INC.)/ DEC. IN INVESTMENTS (INC.)/ DEC. IN LOANS AND ADV. OTHERS CASH FLOW FROM INVESTING INC./(DEC.) IN LOANS DIVIDEND PAID (INCL. TAX) OTHERS CASH FLOW FROM FINANCING INC./(DEC.) IN CASH OPENING CASH BALANCES CLOSING CASH BALANCES FY2010 30,441 8,863 (473) (2,300) (7,748) 28,783 (21,253) (2,249) 532 1,868 (21,102) (304) (8,078) 109 (8,273) (592) 22,588 21,997 FY2011 34,316 11,353 6,955 (125) (10,519) 41,980 (19,685) 1,951 (96) (6,495) (24,326) 40 (10,143) (1,658) (11,760) 5,894 21,997 27,890 FY2012E 40,843 21,135 1,416 (7,641) (13,676) 42,077 (25,815) 7,641 (18,175) 3,136 (8,556) (5,420) 18,482 27,890 46,373 FY2013E 43,487 22,593 860 (8,405) (14,562) 43,973 (26,089) 8,405 (17,684) 1,435 (9,411) (7,976) 18,313 46,373 64,685
KEY RATIOS
Y/E MARCH VALUATION RATIO (X) P/E (ON FDEPS) P/CEPS P/BV EV/SALES EV/EBITDA ` PER SHARE DATA (`) EPS (BASIC) EPS (FULLY DILUTED) CASH EPS DPS BOOK VALUE RETURNS (%) ROCE (PRE-TAX) ANGEL ROIC (PRE-TAX) ROE TURNOVER RATIOS (X) INVENTORY / SALES (DAYS) RECEIVABLES (DAYS) PAYABLES (DAYS) 27 26 137 28 27 134 29 27 131 29 28 132 19.9 31.2 20.0 19.1 29.6 20.7 20.5 33.9 21.5 19.2 35.1 19.9 22.7 22.7 44.6 8.3 119 26.2 26.2 50.4 8.5 135 31.2 31.2 56.0 9.0 156 33.3 33.3 59.7 10.0 178 12.0 6.1 2.3 2.1 4.7 10.4 5.4 2.0 1.8 4.4 8.7 4.9 1.7 1.5 3.8 8.2 4.6 1.5 1.3 3.3 FY2010 FY2011 FY2012E FY2013E
January 2012
269
Oil & Gas

RATING 52 WEEK HIGH / LOW MARKET CAP (` CR) ` LIQUIDITY BUY 486/361 46,820 HIGH
GAIL
Company Background
CMP/TP/Upside: `369 / `434 / 18%
Incorporated in August 1984, GAIL is engaged in the transmission and distribution of natural gas, LPG, liquid hydrocarbons and petrochemicals. The company's segments include natural gas marketing, natural gas transmission, LPG transmission projects and other hydrocarbon production. Currently, GAIL operates a natural gas transmission network of ~8,000km, with a capacity of 170mmscmd. The company also has 27 oil and gas exploration blocks and three coal bed methane blocks. The company has also diversified into exploration and production and city gas distribution (CGD).
Structural Snapshot
STOCK RETURNS (%) GAIL SENSEX 3M 1Y 3Y 21.3 10.0 20.9 5Y 10Y (9.8) (23.2) (3.3) (12.8) 15.3 23.5 3.8 24.9 3.1 17.1
Growth opportunity: Currently, gas constitutes only 11% of India's energy basket compared to 25% of the global energy basket, providing scope to increase gas penetration. GAIL is well-poised to benefit from increasing gas demand in India as it is currently doubling its transmission capacity. Competitive position: Dominant; GAIL has a market share of 78% in natural gas transmission and 70% in natural gas marketing. Nature of business: Regulated; Tariffs of the company's transmission business are regulated by Petroleum and Natural Gas Regulatory Board (PNGRB).
BSE O&G INDEX (8.7) (20.5)


Volume story yet to unfold: GAIL is expanding its transmission capacity from 170mmscmd currently to 300mmscmd in the next two years for a capex of `30,000cr. The company expects incremental gas volumes from the KG basin, GSPC, marginal fields and new LNG terminals. Although stagnant production at KG basin and higher LNG prices are a cause of concern on the volume front in the near term, we believe GAIL's volume growth could be strong (over the medium term) as and when KG-D6 ramps up its production. Upstream segment could see triggers: GAIL's asset portfolio includes prospective basins such as Myanmar fields and CBM blocks. We view these blocks as a potential upside for the stock. Of the 27 exploratory blocks owned by GAIL, nine blocks have potential hydrocarbon discoveries. Any material success in the form of a major discovery could be a key catalyst for the stock. Valuations attractive: Over the past five years, GAIL has traded at an average one-year forward P/E of 16.0x, while currently it is trading at a P/E of 11.7x FY2012E and 10.4x FY2013E. On a P/B basis, the stock trades at 2.1x FY2012E and 1.8x FY2013E, compared to its five-year average P/BV of 2.7x. Further, considering the anticipated volume growth in the next twothree years, we maintain our Buy rating on the stock with an SOTP target price of ` 434.
270
January 2012

BALANCE SHEET
Y/E MARCH (` CR) ` SOURCES OF FUNDS EQUITY SHARE CAPITAL RESERVES& SURPLUS SHAREHOLDERS FUNDS TOTAL LOANS DEFERRED TAX LIABILITY TOTAL LIABILITIES APPLICATION OF FUNDS GROSS BLOCK LESS: ACC. DEPRECIATION NET BLOCK CAPITAL WORK-IN-PROGRESS GOODWILL INVESTMENTS CURRENT ASSETS CURRENT LIABILITIES NET CURRENT ASSETS TOTAL ASSETS 17,904 9,115 8,789 5,426 2,073 13,884 10,378 3,506 19,794 22,144 9,741 12,404 5,879 2,583 11,146 8,815 2,331 23,197 30,394 10,680 19,715 830 2,583 13,883 10,325 3,558 26,685 35,894 11,846 24,049 380 2,583 14,691 11,133 3,558 30,569 1,268 15,655 16,924 1,480 1,390 19,794 1,268 17,985 19,253 2,310 1,633 23,197 1,268 21,051 22,320 2,826 1,539 26,685 1,268 24,549 25,818 3,321 1,430 30,569 FY2010 FY2011 FY2012E FY2013E
% CHG
5.1
20,327 4,669
29.9
27,004 5,455
5.0
27,550 6,530
13.4
31,104 7,547
(% OF NET SALES)
18.7
562 4,107
16.8
650 4,804
19.2
939 5,591
19.5
1,166 6,381

INTEREST & OTHER CHARGES OTHER INCOME SHARE IN PROFIT OF ASSOCIATES RECURRING PBT
17.2 16.4
70 541 4,578
17.0 14.8
83 519 5,240
16.4 16.4
106 439 5,924
14.1 16.5
125 445 6,701
% CHG
8.6
4,578 1,439 3,140 3,140 3,140
14.4
5,240 1,679 3,561 3,561 3,561
13.1
5,924 1,906 4,018 4,018 4,018
13.1
6,701 2,188 4,512 4,512 4,512
% CHG
12.0
13.4
12.8
12.3
CASH FLOW STATEMENT

Y/E MARCH (` CR) ` PROFIT BEFORE TAX DEPRECIATION CHANGE IN WORKING CAPITAL LESS: OTHER INCOME DIRECT TAXES PAID CASH FLOW FROM OPERATIONS (INC.)/ DEC. IN FIXED ASSETS (INC.)/ DEC. IN INVESTMENTS (INC.)/ DEC. IN LOANS AND ADVANCES OTHERS CASH FLOW FROM INVESTING INC./(DEC.) IN LOANS DIVIDEND PAID OTHERS CASH FLOW FROM FINANCING INC./(DEC.) IN CASH OPENING CASH BALANCES CLOSING CASH BALANCES FY2010 4,578 562 1,453 (541) (1,375) 4,677 (3,300) (336) 220 (3,416) 280 (1,113) 287 (546) 715 3,456 4,172 FY2011 5,240 650 (893) (436) (1,484) 3,077 (4,632) (509) 412 (4,729) 984 (1,109) (263) (388) (2,040) 4,172 2,131 FY2012E 5,924 939 1,707 (439) (1,906) 6,237 (3,201) 439 (2,761) 516 (951) (106) (542) 2,934 2,131 5,065 FY2013E 6,701 1,166 464 (445) (2,188) 5,714 (5,050) -
KEY RATIOS
Y/E MARCH VALUATION RATIO (X) P/E (ON FDEPS) P/CEPS P/BV EV/SALES EV/EBITDA PER SHARE DATA (`) ` EPS (FULLY DILUTED) CASH EPS DPS 445 (4,605) 495 (1,015) (125) (645) 464 5,065 5,529 BOOK VALUE RETURNS (%) ROCE (PRE-TAX) ANGEL ROIC (PRE-TAX) ROE TURNOVER RATIOS (X) INVENTORY / SALES (DAYS) RECEIVABLES (DAYS) PAYABLES (DAYS) 9.0 20.4 86.4 8.4 18.0 69.0 9.0 19.5 73.0 8.4 17.5 78.3 22.1 38.3 19.8 22.4 38.1 19.7 22.4 31.1 19.3 22.3 28.1 18.7 7.5 133.4 7.5 151.8 7.5 176.0 8.0 203.5 24.8 29.2 28.1 33.2 31.7 39.1 35.6 44.8 14.9 12.6 2.8 1.7 9.0 13.1 11.1 2.4 1.4 8.1 11.7 9.4 2.1 1.2 6.4 10.4 8.2 1.8 1.1 5.6 FY2010 FY2011 FY2012E FY2013E
January 2012
271
Oil & Gas

Cairn India
Company Background
Cairn India is an oil and gas exploration and production company in India with interests in 11 blocks. Cairn India estimates its Rajasthan block potential resource at ~6.5bboe with resource in Mangala, Bhagyam, Aishwarya (MBA) and other fields at ~4.0bboe. MBA fields hold resource of 2.1bboe, of which 2P reserves are over 1.0bboe. The company operates the largest oil-producing field in the Indian private sector. The company has pioneered the use of cutting-edge technology in India to extend production life. Cairn India is working closely alongside the central and state governments and has operational partnership with ONGC, Videocon, Tata and Marubeni. During FY2012, Vedanta acquired a majority stake (59%) in Cairn India.
STOCK RETURNS (%) CAIRN SENSEX 3M 15.8 1Y 1.7 3Y 30.5 10.0 20.9 5Y 19.0 3.1 10Y 17.1
Structural Snapshot
Growth opportunity: Cairn India aims to commence production from its blocks in Sri Lanka once it establishes commerciality. Also, there are various exploratory upsides untapped in Barmer Hills and other fields waiting to be developed and commercialized. Competitive position: Although crude oil sales price is determined globally, Cairn India's cost of production of crude oil is ~US$3/bbl, one of the lowest in the world.
BSE O&G INDEX (8.7) (20.5) (3.3) (12.8)

3.8 24.9
FINANCIAL PERFORMANCE OVERVIEW (%) PAT GROWTH* OPM# ROE# 3M 1Y 3Y 68.0 7.6 5Y 67.5 5.7 10Y 47.8 5.7 SALES GROWTH* (1.3) 533.3 (85.6) 502.6 79.3 80.2 17.1 - 205.3
Nature of business: Cyclical; Cairn India's profitability is co-related to the increase/decrease in global crude oil price.

Production beyond 175kbopd post FY2013: Cairn India's management aims to ramp up crude oil producing capacity of 175kbopd by FY2012E from 149kbopd in FY2011. However, management opined that due to constraints in pipeline capacity, ramp-up beyond 175kbopd could be pushed to FY2014E. Exploratory upsides awaited: There are various exploratory upsides untapped in Barmer Hills and other fields waiting to be developed and commercialized. Currently, various schemes related to exploratory drillings and optimization of producing fields are awaiting approvals from the government. Cairn India has recently announced two discoveries in Mannar Basin, Sri Lanka. Management is expected to give details on the commerciality and potential reserves in the block during 4QFY2012E. Valuation: Cairn India has the infrastructure in place to ramp up production, while it is awaiting approvals from the government. We expect production to increase in the coming quarters gradually to reach a production level of 175kbopd by FY2013E. However, we believe the current stock price discounts this production growth. Although we believe there are various exploratory untapped upsides in Barmer Hills and other fields waiting to be developed, but currently we lack operational visibilities on these blocks. Hence, we remain Neutral on the stock.
272
January 2012

BALANCE SHEET
Y/E MARCH (` CR) ` SOURCES OF FUNDS EQUITY SHARE CAPITAL RESERVES& SURPLUS EQUITY APPLICATION MONEY SHAREHOLDERS FUNDS TOTAL LOANS DEFERRED TAX LIABILITY TOTAL LIABILITIES APPLICATION OF FUNDS GROSS BLOCK 722 96 626 9,163 25,319 1,712 2,373 1,481 893 37,714 6,654 730 5,924 6,067 25,319 1,094 7,961 2,927 5,034 94 43,533 9,354 1,777 7,577 5,067 25,319 1,094 10,252 2,478 7,774 94 46,926 11,874 2,917 8,957 4,067 25,319 1,094 17,684 2,582 15,102 94 54,634 33,868 3,401 445 37,714 1,943 31,925 1,902 38,336 55 40,293 2,678 561 43,533 1,902 44,408 55 46,365 561 46,926 1,902 52,115 55 54,073 561 54,634 FY2010 FY2011 FY2012E FY2013E
% CHG
13.3
643 981
533.3
2,033 8,245
11.8
2,968 8,519
18.7
3,035 10,594
(% OF NET SALES)
TOTAL RECOUPED COST EBIT
60.4
357 623
80.2
1,193 7,052
74.2
1,046 7,473
77.7
1,140 9,454
(% OF NET SALES)
38.4
29 422 1,016
68.6
291 129 6,890
65.1
355 462 7,580
69.4
305 462
LESS: ACC. DEPRECIATION 9,612 NET BLOCK CAPITAL WORK-IN-PROGRESS GOODWILL INVESTMENTS CURRENT ASSETS CURRENT LIABILITIES NET CURRENT ASSETS MIS. EXP. NOT WRITTEN OFF TOTAL ASSETS
% CHG
4.5
1,016 (35) 1,051 1,051 1,051
577.9
6,890 556 6,334 6,334 6,334
10.0
7,580 1,508 6,072 6,072 6,072
26.8
9,612 1,905 7,708 7,708 7,708
33.4 64.8
502.6 61.6
(4.1) 52.9
26.9 56.6
CASH FLOW STATEMENT

Y/E MARCH (` CR) ` PROFIT BEFORE TAX DEPRECIATION CHANGE IN WORKING CAPITAL LESS: OTHER INCOME DIRECT TAXES PAID OTHERS CASH FLOW FROM OPERATIONS (INC.)/ DEC. IN FIXED ASSETS (INC.)/ DEC. IN INVESTMENTS OTHER INCOME CASH FLOW FROM INVESTING ISSUE OF EQUITY INC./(DEC.) IN LOANS INTEREST PAID (INCL. TAX) CASH FLOW FROM FINANCING INC./(DEC.) IN CASH OPENING CASH BALANCES CLOSING CASH BALANCES FY2010 1,016 178 (708) (435) (175) 234 110 (3,366) 2,529 236 (601) 2 (880) (168) (1,045) (1,537) 1,897 637 FY2011 6,890 1,223 (1,009) (129) (1,259) (615) 6,331 (2,565) 624 (2,934) (4,875) 67 (733) (199) (866) 590 637 1,227 FY2012E 7,580 1,046 1,330 (462) (1,508) 1,127 9,113 (2,700) 462 (2,238) (2,678) (355) (3,033) 3,842 1,227 5,069 FY2013E 9,612 1,140 344 (462) (1,905) 305 9,033 (2,520) -
KEY RATIOS
Y/E MARCH VALUATION RATIO (X) P/E (ON FDEPS) P/CEPS P/BV EV/SALES EV/EBITDA PER SHARE DATA (`) ` EPS (BASIC) EPS (FULLY DILUTED) CASH EPS 462 BOOK VALUE (2,058) (305) (305) 6,671 5,069 11,740 RETURNS (%) ROCE (PRE-TAX) ANGEL ROIC (PRE-TAX) ROE TURNOVER RATIOS (X) INVENTORY / SALES (DAYS) RECEIVABLES (DAYS) PAYABLES (DAYS) 51.6 51.5 615.3 11.0 31.8 202.0 25.2 48.6 122.7 36.9 46.1 89.0 1.7 2.4 3.2 17.4 23.3 17.1 16.5 21.4 14.0 18.6 25.0 15.3 178.1 211.9 243.8 284.3 5.4 5.4 7.4 33.3 33.3 39.6 31.9 31.9 37.4 40.5 40.5 46.5 64.2 46.9 1.9 42.2 69.8 10.4 8.8 1.6 6.2 7.8 10.9 9.3 1.4 5.3 7.2 8.6 7.5 1.2 4.0 5.1 FY2010 FY2011 FY2012E FY2013E
January 2012
273
274
January 2012
Pharmaceuticals
COVERAGE
Companies Sun Pharma Dr Reddy's Cipla Lupin Ranbaxy Glaxo Pharma Cadila Healthcare Aventis Ipca labs Aurobindo Pharma Alembic Pharmaceutical Indoco Remedies CMP (`) ` 529 1,696 332 442 463 1,967 654 2,230 279 97 38 418 Target (`) ` Reco 569 Accum. 1,920 Accum. 369 Accum. 593 Buy - Neutral - Neutral 965 358 166 77 583 Buy Buy Buy Buy Buy 1,937 Reduce
POSITIVE
Industry arguments
Generic markets expected to post a 9% CAGR until 2015: The global generic industry is expected to post a 9% CAGR to US$135bn-150bn by CY2015, outpacing the global pharmaceuticals industry's expected growth rate of 4-6%. The quantum of products going off-patent in the next five years is equal to the worth of products that have gone off-patent in the past 10 years. Going ahead, rising healthcare spending, ageing population and increasing acceptance for generics are the key growth drivers for the industry. The key U.S. generic market is likely to report a 6% CAGR to US$48bn in CY2015, driven by unprecedented level of patent expiry. Europe is expected to post a 6.9% CAGR to US$40bn in CY2015, led by increasing penetration levels and initiatives by the government to rein rising healthcare cost. Other international generic markets are estimated to post a 13.3% CAGR to US$55bn in CY2015. More than half of the global generic growth in the next five years would come from international markets. Indian domestic formulation to log in steady health: The Indian domestic formulation industry posted a 14% CAGR during FY2003-08, from ~US$3.9bn in FY2003 to US$7.7bn in FY2008, outpacing the global pharma industry's growth rate of 7%. Over FY2008-13E, the Indian domestic formulation market is expected to report a robust 12.9% CAGR to US$13.7bn on the back of chronic therapeutic segments such as anti-diabetic, CVS, CNS and lifestyle diseases like gastrointestinal. This growth is expected to be primarily led by volumes and new product introductions in the chronic therapeutic and lifestyle segments and increased market penetration. CRAMS - Long-term drivers intact: The CRAMS sector is likely to post secular growth of 8.8% over CY2009-12E to US$52bn, as all drivers of outsourcing are intact. India still accounts for 5-6% of the total global outsourcing pie. Going ahead, we expect India's share to grow to lower teens on account of strong process-chemistry skills and low-cost advantage. The Indian CRAMS sector is likely to post secular growth of 29.0% over CY2009-12E to US$5.1bn. Biotech drugs - The next leg of opportunity: Biotech drugs have been growing faster than traditional drugs. The 20-year patent protection on the first batch of biotech drugs, which entered the regulated markets in late 1980s, is set to expire in the ensuing years. Over 2010-15, biotech drugs worth US$79bn of global sales would face patent expiries. However, unlike traditional drugs, biotech drugs are complex to manufacture and, hence, difficult to establish comparability of generics with innovator drugs. This has posed regulatory hurdles for the approval of biogeneric drugs. Thus, while Europe has legislation for the same on a drug-specific basis, U.S. is yet to have its legislation in place. Indian companies like Ranbaxy, DRL, Wockhardt and Biocon have made investments for the same and are targeting the semi-regulated and regulated markets in the coming years. Outlook and valuation: With the expected 21% earnings CAGR over FY2011-13E for our universe, we remain overweight on the sector. In the generic segment, we prefer Sun Pharma, Cipla, Lupin, Cadila, Aurobindo Pharma and Indoco.
January 2012
275
Pharmaceuticals
Generic markets expected to post a 9% CAGR till 2015: The global generic industry (at US$80bn in CY2008) is expected to post a 9% CAGR to US$135bn-150bn by CY2015, outpacing the global pharmaceuticals industry's expected growth rate of 4-6%. The quantum of products going off-patent in the next five years is equal to the worth of products that have gone off-patent in the past 10 years. Going ahead, rising healthcare spending, ageing population and increasing acceptance for generics are the key growth drivers for the industry.
Exhibit 3: India DMF fillings

3000 50.0 40.0 2000 30.0 20.0 10.0 0 0.0 India China Italy Japan Germany
1000
Exhibit 1: Growing demand for generics

$135-150bn
DMF Filings
% in Total DMF Filings
$80bn International Europe North America 2008 Developed Countries Emerging Generics Markets
New Products patent expirations Future Portfolio
Europe: Increasing genericisation

The European generic market (US$25bn in CY2008) is expected to post a CAGR of 6.9% to US$40bn in CY2015, driven by increasing penetration levels and initiatives by the government to rein rising healthcare cost. The Latin and CCE Europe regions, comprising France, Portugal, Spain, Italy and Hungary, are expected to grow at a much faster pace of 10-15% CAGR. Government and payors are keen to control spiraling healthcare costs, thereby reducing pharmaceutical expenditure by using generics. On the European front, post the change in the overall market structure and setbacks for few companies, Indian companies have become more selective in their approach.
Current portfolio
2015
U.S. generics: Unprecedented level of patent expiries

The U.S. generic market (worth US$32bn in CY2008) is likely to post a CAGR of 6% to US$48bn in CY2015, driven by unprecedented level of patent expiry. As a result, major global innovators will lose about US$70bn of branded value global sales over the next three years, comprising 14-41% of their existing revenue. With the U.S. comprising 50% of the overall branded market, it would capture the maximum upsides from the same. Volume CAGR of 8% in the U.S. market over the past 10 years has been one of the key growth drivers, which, to some extent, has offset the significant price erosion. Generic companies would continue to benefit from the ongoing manufacturing challenges across the industry, resulting into a much more stable base business.
Exhibit 4: Underpenetrated European region (Volume terms)

100 80 60 40 20 0 16 12 12
Growth Potential
69 59 58 55
Growth Potential
10
10
UK
Denmark
Germany
France
Netherland
Austria
Portugal
Belgium
Spain
Exhibit 2: Healthy volume growth in the U.S. market

3.0 2.5
o CAG R
f 8%
Exhibit 5: Indian companies EU presence

Companies Strategy Adopted Not actively targeting the EU region. Mainly present in Romania, France and U.K. DRL is reducing Betapharm cost by outsourcing production to India and reducing its workforce. The company has won few tenders in Germany. Focusing on the branded generic markets like France and Spain Acquired Hormosan in Germany. Targeting U.K., France and German markets Entering into supply contracts and selling dossiers
2.5 2.6 2.8
(Rx Volume, bn)
2.0 1.5 1.0 0.5 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009E 1.4 1.5 1.6 1.7 1.8 2.0 2.3
Ranbaxy
Dr. Reddy's
Cadila
The U.S. generic market is one of the most competitive markets. However, Indian companies are well geared to tap the opportunities by distinguishing themselves through: Visible Para IV opportunities - Ranbaxy, DRL and Sun Pharma Targeting limited competition opportunities - DRL, Sun Pharma, Lupin and Cadila Healthcare. Increasing the portfolio basket by ramping ANDA filings: Sun Pharma, Lupin, DRL and Cadila Healthcare. 276 January 2012
Lupin
Ipca Labs
Indoco Remedies Entering into supply contracts and selling dossiers

Italy
Pharmaceuticals International markets: Fastest growing markets

The international generic market (pegged at US$23bn in CY2008) is estimated to post a CAGR of 13.3% to US$55bn in CY2015. More than half of global generic growth in the next five years would come from international markets. Growth is likely to be driven by rising income levels, increased market penetration, longevity of brand and increasing government focus on public healthcare spending. Among these markets, Japan, China, Russia, Brazil, Mexico and South Africa are the focus areas. With international markets expected to grow at twice the rate of the U.S. and Europe, Indian companies have become aggressive in expanding these markets with a special focus on Japan, Russia/ CIS and LatAm markets.
Exhibit 8: Pruning cost - Top priority for global MNCs

Companies GlaxoSmithKline Pharma Cost Saving GBP 500mn by CY2012 Comment Majority of the API manufacture and internal manufacturing to outsource to low cost destination Half of the cost saving to come from outsourcing of R&D and Manufacturing Through Restructuring and Outsourcing
Pfizer
US $3bn by CY2012 Euro 2bn by CY2013
Sanofi-Aventis AstraZeneca
Exhibit 6: To grow at twice the pace of developed markets

North America 6.0
Reduce R&D Mainly through cost saving investment by US$1bn by CY2014
Exhibit 9: Recent acquisitions and alliances

Europe 6.9
Global MNC Acquisition
Indian companies
Global Generic
8.7
Abbott Daiichi Sankyo

13.3
Piramal Healthcare Ranbaxy Shantha Biotech
International Markets
Sanofi Aventis Manufacturing Alliances GlaxoSmithKline Pharma Pfizer
0.0
2.0
4.0
6.0
8.0
10.0
12.0
14.0
Dr Reddy's Aurobindo Pharma Claris Life sciences Strides Arcolab
Exhibit 7: Indian companies in international markets

Companies Ranbaxy Dr. Reddy's Cipla Cadila Lupin % of revenue from Major presence international markets 26 13 54 15 18 Japan, Russia, Latam and South Africa Russia, LatAm and exposure through GSK alliance Asia-Pac, South Africa and Middle East Japan, Brazil, South Africa, Asia Pacific and CIS Japan, South Africa, Asia Pacific
Pfizer Pfizer
Biogenerics: Opportunity on the anvil

Biotech drugs, which constitute 10-15% of the global pharmaceutical industry, have been growing faster than traditional drugs. The 20-year patent protection on the first batch of biotech drugs, which entered the regulated markets in the late 1980s, is set to expire in the ensuing years. Over 2010-15, biotech drugs worth US$79bn of global sales would face patent expiries. However, unlike traditional drugs, biotech drugs are complex to manufacture and, hence, it is difficult to establish comparability of generics with innovator drugs. This has posed regulatory hurdles for the approval of biogeneric drugs. Thus, while Europe has legislation for the same on a drug-specific basis, U.S. is yet to have its legislation in place. Indian companies like Ranbaxy, DRL, Wockhardt and Biocon have made investments for the same and are targeting the semi-regulated and regulated markets in the coming years.
Innovator-generic model gaining currency, Indian companies to be the beneficiaries

With the CY2011-14 patent expiry cliff approaching along with increasing genericisation, global MNC players are now focusing on generic opportunities, especially in emerging markets to diversify their revenue base and to reduce cost. Global MNC players have started tapping volume-driven branded-generic emerging markets through acquisitions or by entering into alliances with Indian companies. In their pursuit to reduce R&D and manufacturing cost, global MNC players have increased outsourcing to lowcost destinations like India. Increasing focus of global MNC players bodes well for the Indian pharma sector by providing stable revenue flow by entering into long-term contracts.
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Pharmaceuticals
Exhibit 10: Worldwide sale of expiring products
60 50 40 30 20 31 10 0 CY2010 CY2011 CY2012 CY2013 CY2014 CY2015 4 46 31 24 22 25
Consolidation imminent
The Indian formulation industry is highly fragmented, with 300-400 units in the organized and 15,000 in the unorganized segments. The industry is dominated by Indian companies. In fact, around seven of the top 10 global players are Indian. On the basis of market share, the top five and top 10 players account for 23% and 37% of the total formulation sales, respectively. Further, new product introductions would be lesser than earlier. Hence, going forward, we believe the Indian formulation market is set for consolidation, given the challenges ahead. However, we believe consolidation, though imminent, could take longer as valuations of most companies remain expensive, as evident by Abbott's takeover of Piramal Healthcare.
Biotech products to play a dominant role in future

6 11
(US $bn)
20
22
16
Conventional Products
Biotech Products
Exhibit 11: Biotech product pipeline of Indian companies

Biocon Dr. Reddy's Ranbaxy Wockhardt Insulin, EPO, GCSF,Monoconal Antibodies GCSF, Monoconal Antibodies EPO EPO, Insulin,GSF, Hepatitis Vaccine
CRAMS: Long-term growth drivers intact

The CRAMS sector is expected to register secular growth of 8.8% over CY2009-12E to US$52bn from the current US$40bn, as all the drivers of outsourcing are intact. India still accounts for 5-6% of the total global outsourcing pie. Going ahead, we expect India's share to increase to lower teens on the back of strong process-chemistry skills and low-cost advantage. The Indian CRAMS sector is expected to register secular growth of 29.0% over CY2009-12E to US$5.1bn from the current US$2.4bn.
Domestic formulation - Shift towards the chronic segment

The Indian domestic formulation industry registered a CAGR of 14% during FY2003-08, from around US$3.9bn in FY2003 to US$7.7bn in FY2008, outpacing the global pharma industry's growth rate of 7%. Going ahead, the Indian domestic formulation market is expected to report a robust CAGR of 12.9% to US$13.7bn over FY2008-13E from US$7.7bn on the back of chronic therapeutic segments like anti-diabetic, CVS, CNS and lifestyle diseases like gastrointestinal. Growth is expected to be driven primarily by volumes and new product introductions in the chronic therapeutic and lifestyle segments and increasing market penetration.
Exhibit 13: CRAMS sector - Global, India growth trend

60.0 50.0
51.5
CAG 8 R of .8%
6 5.1 5
40
(US$ bn)
(US$ bn)
40.0 30.0 20.0 10.0 0.0 22.0 18.0
23.0
4 3 2 2.4
G CA
of
9%
28.5
1 0
Exhibit 12: Key therapeutics segments - Growth in demand

(` cr) ` Anti-Diabetic Anti-Infective CVS Dermatology Gastro Intestinal Gynaecologicals Neuro/CNS Pain/Analgesics Respiratory Vit./Min./Nutrients Others Total FY2008 1,600 5,730 3,480 1,750 3,500 1,810 1,760 2,840 2,880 2,630 4,120 32,100 FY2013E 3,780 11,030 7,280 3,140 6,740 3,480 3,150 4,060 4,730 4,010 7,460 58,860 % CAGR (FY2008-2013) 18.8 14.0 15.9 12.4 14.0 14.0 12.3 7.4 10.4 8.8 12.6 12.9
CY2009
CY2012E
CY2009
CY2012E
Global CMO
Indian CRAMS
CRAMS - Recent slow growth an aberration; but drivers in place

So far, growth has been subdued for almost all players in the CRAMS segment (except Divis Labs) on account of inventory rationalization resulting in an 11-27% decline in the top line along with contraction in operating margins. Several big global M&A deals were also completed in late CY2009, due to which there were delays in budget approvals. However, most companies are now witnessing an uptick in order enquiries from global innovators, indicating improvement in the global scenario.
Risks
Price control
After a long wait of over five years, the NPPP draft has been taken up for discussion. The NPPP-2011 draft entails significant changes as compared to 1994 Drug Policy Control Order (DPCO). The key differences between NPPP-2011 vs. DPCO 1994 are a) essentiality of drugs vs. economic criteria/market share principle; b) market and cost-based pricing; and c) control of formulation prices vs. control starting from API level. The draft is a shift from
278
January 2012
Pharmaceuticals
cost-based pricing to market-based pricing, which is a step in the right direction. Under market-based pricing, the ceiling price would be based on the weighted average price of the top three brands by value. However, on the negative side, the scope of the policy now covers at least 60% of the drugs in value terms from the earlier 10-20% and includes combination drugs, which were not covered in National List of Essentials Medicines (NLEM) 2011. The draft is now open for comments from the industry post which a new DPCO would come into existence. While the financial impact appears benign, given the cost competitiveness of the markets, companies are, however, wary that this may trigger greater regulatory oversight on the industry going forward. Increasing genericisation: One of the prominent risks faced by the industry is the transformation of the branded-generic market to generic-generic market, which leads to significant price erosion and margin compression. The point in case is Germany where the entire market in 2008 was transformed into generic-generic on the back of government's/payors' push to reduce healthcare cost. Now, most of the other EU markets are slowly moving towards the generic-generic model. Regulatory overhang: Though most of the Indian pharmaceuticals companies have successfully complied with cGMP of US FDA, the increasing stringency of the regulator continues to pose a risk to the sector. Volatile currency movements: Generic players derive around 50-60% of there revenue from exports, owing to which they are exposed to foreign exchange fluctuations. Delays in entering contracts: CRAMS players have been incurring capex on building up new facilities. Any delay in entering contracts would pose a downside risk.
Outlook
With the expected earnings CAGR of 21% over FY2011-13E for our universe of stocks, we remain overweight on the sector, maintaining a positive future outlook for earnings growth. In the generic segment, we prefer Lupin, Cadila, Arobindo, and Indoco Remedies.
Exhibit 14: Comparative Valuation Table

Company CMP (`) ` Sun Pharma Dr Reddy's Cipla Lupin Ranbaxy* Glaxo Pharma* Cadila Healthcare Aventis* Ipca labs Aurobindo Pharma Alembic Pharmaceutical Indoco Remedies 529 1,696 332 442 463 1,967 654 2,230 279 97 38 418 Tgt Price (` ) ` 569 1,920 369 593 965 1,937 358 166 77 583 Accu. Accu. Accu. Buy Neutral Neutral Buy Reduce Buy Buy Buy Buy Reco Upside % 8 13 11 34 48 (13) 28 71 103 40 PE (x) 20.5 17.7 18.0 14.9 8.8 22.6 13.6 24.9 10.1 5.9 6.3 7.5 FY2013E EV/Sales (x) 5.7 3.1 3.2 2.4 1.4 5.1 2.1 3.1 1.5 0.9 0.7 0.9 FY11-13E EV/EBITDA (x) 16.3 12.1 15.3 12.2 5.9 14.4 11.1 20.3 7.2 6.0 4.5 6.0 FY2013E CAGR in EPS (%) 21.4 22.7 23.8 23.9 21.8 14.6 19.4 15.4 14.8 4.5 52.1 15.6 RoCE (%) 21.5 22.0 16.5 24.8 27.7 41.0 25.5 15.7 23.3 10.6 26.6 13.9 ROE (%) 21.4 25.2 17.9 28.6 30.0 30.7 31.6 17.1 24.9 15.5 30.9 16.4
Source: Company, Angel Research; Note: *December year end
January 2012
279
Pharmaceuticals
Sun Pharma
Company Background
CMP/TP/Upside: `529 / `569 / 8%
Sun Pharma is an international specialty pharma company present globally across 40 markets, with a strong presence in India and U.S. In India and rest of the world markets, the company's key chronic therapy areas include cardiology, psychiatry, neurology, gastroenterology and diabetology. Sun Pharma is a market leader in specialty therapy areas in India. The company has emerged as a leading pharma company in India, where it is the sixth largest by prescription sales. Also, in the U.S., the key geography, the company has expanded significantly through both inorganic and organic routes.
Structural Snapshot
STOCK RETURNS (%) SUN PHARMA BSE HC INDEX SENSEX 3M 9.7 4.1 1Y 9.1 (5.3) 3Y 33.2 29.7 21.3 5Y 9.8 3.3 10Y 17.0 17.3 22.6 33.6
Growth opportunity: In India, the current spending on healthcare (public and private) is estimated at 6% of GDP and is expected to increase to 10% of GDP by 2016. Thus, on a conservative basis also, the industry can grow at a 14-15% CAGR. On the other hand, the global generic industry, at US$80bn (CY2008), is expected to grow at a CAGR of 9% to US$135bn-150bn by CY2015. Indian companies, on account of their relative positioning, can grow at around 20% during the period. Competitive position: Sun Pharma has a market share of ~4.4% in domestic formulations and is the largest Indian filer of ANDAs in the U.S.
(2.6) (12.3)
Nature of business: Defensive sector insulated from economic cycles; Highly competitive industry, with a high payback period.

Strongest ANDA pipeline: Sun Pharma's U.S. business posted a ~30% CAGR over FY2005-11, which contributed 30% to its total turnover in FY2011. Sun Pharma, along with Caraco and Taro, now has 151 ANDAs pending USFDA approval, which account for one of the highest in the Indian pharma space. The company has filed ~30 ANDAs in each of the past few years and has plans to file ~25 ANDAs in FY2012 as well. Domestic business: Sun Pharma's domestic formulation business has grown above the industry's average over FY2005-10 at a 24% CAGR; it contributed 42% to the company's total turnover in FY2011. The company has strength of 2,600MRs and one of the highest field force productivity of ~`70lakh/ MR per year, which has resulted into high margins from the segment. The company has a market share of ~4.4%, with exposure to psychiatry, neurology, CVS, diabetic and gastroenterology. In FY2011, Sun Pharma launched 39 products in the domestic market. Valuation: Management has guided 28-30% top-line growth for FY2012, with OPM in the historic range post the inclusion of Taro's financials at the consolidated level. Further, management expects R&D expenses to be ~6% of net sales and capex at `450cr for FY2012. Growth reported during the year can also be attributed to the consolidation of Taro's financials. We expect Sun Pharma's net sales to post a 27.3% CAGR to ` 9,277cr and EPS to register a 21.4% CAGR to ` 25.9 over FY2011-13E. We recommend Accumulate on the stock with target price of ` 569.
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January 2012

BALANCE SHEET
Y/E MARCH (` CR) ` SOURCES OF FUNDS EQUITY SHARE CAPITAL RESERVES & SURPLUS SHAREHOLDERS FUNDS MINORITY INTEREST 104 8,288 8,392 193 171 (89) 8,667 104 9,703 9,806 847 426 (365) 10,714 104 11,345 11,448 912 426 (27) 12,759 104 13,440 13,544 995 426 (18) 14,946 FY2010 FY2011 FY2012E FY2013E
% CHG
TOTAL EXPENDITURE EBITDA DEPRECIATION & AMORTISATION INTEREST & OTHER CHARGES OTHER INCOME
(0.8)
2,514 1,493 153
34.8
3,754 1,967 204
29.7
4,889 2,528 250
25.0
6,019 3,253 272
TOTAL LOANS DEFERRED TAX LIABILITY 167 273 244 272 TOTAL LIABILITIES APPLICATION OF FUNDS GROSS BLOCK LESS: ACC. DEPRECIATION NET BLOCK CAPITAL WORK-IN-PROGRESS GOODWILL INVESTMENTS PAT (REPORTED) LESS: MINORITY INTEREST (MI) PAT AFTER MI (REPORTED) ADJ. PAT 1,676 (4) 1,680 1,680 1,907 91 1,816 1,816 2,163 65 2,098 2,098 2,759 CURRENT ASSETS 83 2,676 2,677 CURRENT LIABILITIES NET CURRENT ASSETS MIS. EXP. NOT WRITTEN OFF TOTAL ASSETS
(% OF PBT)
RECURRING PBT
9.6
1,743
13.4
2,036
9.7
2,526
8.4
3,258
2,334 801 1,533 145 406 3,629 3,712 758 2,954 8,667
3,345 822 2,523 271 772 2,231 6,340 1,423 4,917 10,714
3,658 1,184 2,474 145 772 2,231 8,642 1,505 7,138 12,759
4,108 1,412 2,696 145 772 2,231 10,993 1,891 9,103 1 14,946
% CHG
PBT (REPORTED) TAX
(10.6)
1,743 68
16.8
2,036 128
24.1
2,526 364
29.0
3,257 498
(% OF PBT)
3.9
6.3
14.4
15.3
% CHG
(7.6)
8.1
15.5
27.6
CASH FLOW STATEMENT

Y/E MARCH (` CR) ` PROFIT BEFORE TAX DEPRECIATION (INC)/DEC IN WORKING CAPITAL DIRECT TAXES PAID CASH FLOW FROM OPERATIONS (INC.)/DEC.IN FIXED ASSETS (INC.)/DEC. IN INVESTMENTS OTHER INCOME CASH FLOW FROM INVESTING ISSUE OF EQUITY INC./(DEC.) IN LOANS DIVIDEND PAID (INCL. TAX) OTHERS CASH FLOW FROM FINANCING INC./(DEC.) IN CASH OPENING CASH BALANCES CLOSING CASH BALANCES FY2010 1,743 153 (467) 162 1,267 (174) (1,770) (1,944) 8 (333) (60) (385) (1,062) 1,669 607 FY2011 2,036 204 (53) 2,187 (1,137) 1,398 262 (254) (402) 357 (299) 2,149 607 2,756 FY2012E 2,526 250 (2,659) 25 92 (187) (187) (455) 113 (343) (438) 2,756 2,319 FY2013E 3,258 272 (2,058) 489 983 (450) (450) (581) (44) (625) (93) 2,319 2,226
KEY RATIOS
Y/E MARCH VALUATION RATIO (X) P/E (ON FDEPS) P/CEPS P/BV EV/SALES EV/EBITDA `) PER SHARE DATA (`) EPS (BASIC) EPS (FULLY DILUTED) CASH EPS DPS BOOK VALUE RETURNS (%) ROCE (PRE-TAX) ANGEL ROIC (PRE-TAX) ROE TURNOVER RATIOS (X) INVENTORY / SALES (DAYS) RECEIVABLES (DAYS) PAYABLES (DAYS) 88 88 36 81 75 29 100 87 27 115 105 24 16.7 21.1 21.8 18.2 24.4 20.0 19.4 27.7 19.7 21.5 28.0 21.4 13.0 13.0 88.5 13.8 81.0 17.5 17.5 97.5 16.6 94.7 20.3 20.3 113.3 18.8 110.5 25.9 25.9 142.3 24.0 130.8 40.5 6.0 6.5 13.6 36.4 30.2 5.4 5.6 9.2 26.7 26.1 4.7 4.8 7.1 20.9 20.5 3.7 4.0 5.7 16.3 FY2010 FY2011 FY2012E FY2013E
January 2012
281
Pharmaceuticals
RATING 52 WEEK HIGH / LOW MARKET CAP (` CR) ` LIQUIDITY ACCUMULATE 1,716 / 1,387 28,748 HIGH
Dr. Reddy's Lab.

Company Background
CMP/TP/Upside: `1696 / `1920 / 13%
Dr. Reddy's Laboratories (DRL) is an integrated global pharmaceutical company. The company operates through three businesses - pharmaceutical services and active ingredients, global generics and proprietary products. The companys key areas include gastro-intestinal, cardiovascular, diabetology, oncology, pain management, anti-infective and paediatrics. DRL's key markets include India, U.S., Russia and CIS, and Germany.
Structural Snapshot
Growth opportunity: In India, the current spending on healthcare (public and private) is estimated at 6% of GDP and is expected to increase to 10% of GDP by 2016. Thus, on a conservative basis also, the industry can grow at a 14-15% CAGR. On the other hand, the global generic industry, at US$80bn (CY2008), is expected to grow at a CAGR of 9% to US$135bn-150bn by CY2015. Indian companies, on account of their relative positioning, can grow at around 20% during the period. Competitive position: DRL is one of the largest players in the domestic formulation market, with a market share of ~2.2%. Nature of business: Defensive sector insulated from economic cycles; highly competitive industry, with a high payback period.
STOCK RETURNS (%) DRL BSE HC INDEX SENSEX 3M 11.9 4.1 1Y 2.1 (5.3) 3Y 54.9 29.7 21.3 5Y 9.8 3.3 10Y 17.0 17.3 15.9 13.3
(2.6) (12.3)
FINANCIAL PERFORMANCE OVERVIEW (%) SALES GROWTH* PAT GROWTH* OPM# ROE# 3M 21.3 7.3 20.6 1Y 6.5 16.8 21.0 25.1 3Y 14.4 30.7 10.5 15.7 5Y 25.8 51.1 14.8 17.9 10Y 16.8 7.8 16.1 18.1

Robust growth in the U.S. ahead: After attaining a critical mass (US$426mn with 11 new product launches in FY2011), DRL aims to scale up its business to the next orbit in the U.S. market on the back of a strong product pipeline (75 ANDAs are pending approval, of which 36 are Para IVs and 11 are FTFs). Management has guided for one limited competition opportunity every year for the next few years. Strategic alliances to provide long-term growth: In order to tap the emerging market opportunities, DRL entered into an alliance with GSK in FY2011 to develop and market branded formulations across emerging markets. On the biogeneric front, the company has developed nine products (four products launched in India) on mammalian cell culture with global brand sales of US$30bn. The company has also entered into a marketing agreement with Valent Pharma to market Cloderm cream in the U.S. market. This deal is expected to provide an impetus to the company's proprietary products business going forward. Valuation: DRL has revised its earlier revenue guidance of US$3bn to US$2.7bn by FY2013E with RoCE of 25%. Growth would be driven by the U.S. business, uptick in the domestic formulation and Russian markets and increased contribution from GSK's alliance. We expect DRL's net sales to post a 13.3% CAGR to `9,584cr and adjusted EPS to record a 22.7% CAGR to `96.0 over FY2011-13E. At the CMP, the stock is trading at 19.3x FY2012E and 17.7x FY2013E earnings. We maintain our Accumulate view on the stock with a target price of ` 1,920.
282
January 2012

Y/E MARCH (` CR) ` TOTAL OPERATING INCOME % CHG EBITDA (% OF NET SALES) DEPRECIATION & AMORTISATION INTEREST & OTHER CHARGES OTHER INCOME (% OF PBT) RECURRING PBT % CHG EXTRAORDINARY EXPENSE/(INC.) PBT (REPORTED) TAX (% OF PBT) LESS: MINORITY INTEREST (MI) PAT AFTER MI (REPORTED) ADJ. PAT % CHG FY2010 7,085 2.4 1,420 20.2 416 37 37 3 1,066 6.3 860 205 99 48.0 107 921 4.1 FY2011 7,544 6.5 1,566 21.0 415 28 9 1 1,208 13.3 (37) 1,244 140 11.3 1,104 1,076 16.8 FY2012E 8,796 16.6 2,199 25.2 481 36 9 1 1,767 46.3 1,767 283 16.0 1,484 1,484 37.9 FY2013E 9,659 9.8 2,410 25.1 522 44 9 0 1,929
BALANCE SHEET
Y/E MARCH (` CR) ` SOURCES OF FUNDS EQUITY SHARE CAPITAL RESERVES & SURPLUS SHAREHOLDERS FUNDS TOTAL LOANS DEFERRED TAX LIABILITY TOTAL LIABILITIES APPLICATION OF FUNDS NET FIXED ASSETS CAPITAL WORK-IN-PROGRESS 9.2 INVESTMENTS 1,929 309 16.0 1,620 1,620 9.2 CURRENT ASSETS CASH LOANS & ADVANCES OTHER CURRENT LIABILITIES NET CURRENT ASSETS MIS. EXP. NOT WRITTEN OFF TOTAL ASSETS 31 4,206 658 422 3,126 2,004 2,202 5,901 31 4,832 573 448 3,811 2,276 2,556 7,100 31 5,477 319 523 4,635 2,475 3,002 7,725 31 7,228 1,558 575 5,095 2,681 4,547 9,423 1,759 487 2,478 487 3,016 492 3,164 497 84 4,207 4,292 1,466 144 5,901 84 4,515 4,599 2,357 144 7,100 84 5,702 5,787 1,794 144 7,725 84 6,998 7,084 2,195 144 9,423 CY2009 FY2010 CY2010 FY2011 CY2011E FY2012E CY2012E FY2013E
CASH FLOW STATEMENT

Y/E MARCH (` CR) ` PROFIT BEFORE TAX DEPRECIATION (INC)/DEC IN WORKING CAPITAL LESS: OTHER INCOME DIRECT TAXES PAID CASH FLOW FROM OPERATIONS (INC.)/DEC.IN FIXED ASSETS (INC.)/DEC. IN INVESTMENTS OTHER INCOME CASH FLOW FROM INVESTING ISSUE OF EQUITY INC./(DEC.) IN LOANS DIVIDEND PAID (INCL. TAX) OTHERS CASH FLOW FROM FINANCING INC./(DEC.) IN CASH OPENING CASH BALANCES CLOSING CASH BALANCES FY2010 1,066 416 38 37 99 1,384 (158) 5 37 (116) 0 (483) (123) (1,775) (1,169) 99 560 658 FY2011 1,208 415 (439) 9 140 1,034 (718) 9 (709) 892 (221) (1,081) (410) (86) 658 573 FY2012E 1,767 481 (700) 9 283 1,256 (544) 9 (534) (563) (297) (116) (976) (254) 573 319 FY2013E 1,929 522 (306) 9 309 1,827 (153) 9 (144) 402 (324) (522) (445) 1,239 319 1,558
KEY RATIOS
January 2012
283
Pharmaceuticals
Cipla
Company Background
CMP/TP/Upside: `332 / `369 / 11%
Cipla is a leading pharmaceutical company in India with a strong presence in the export and domestic markets. On the export front, Cipla follows the partnership model - it has 5,700 product registrations in around 180 countries. In the domestic formulation market, Cipla is a market leader with a market share of over 5%.
Structural Snapshot
Growth opportunity: In India, the current spending on healthcare (public and private) is estimated at 6% of GDP and is expected to increase to 10% of GDP by 2016. Thus, on a conservative basis also, the industry can grow at a 14-15% CAGR. On the other hand, the global generic industry, at US$80bn (CY2008), is expected to grow at a CAGR of 9% to US$135bn-150bn by CY2015. Indian companies, on account of their relative positioning, can grow at around 20% during the period. Competitive position: Amongst Indian companies, Cipla is a leader in the domestic formulation market with a market share of 5.3%. Nature of business: Defensive sector insulated from economic cycles; Highly competitive industry, with a high pay-back period.
STOCK RETURNS (%) CIPLA BSE HC INDEX SENSEX 3M 14.8 4.1 1Y (5.6) (5.3) 3Y 22.6 29.7 21.3 5Y 9.8 3.3 10Y 17.0 17.3 5.7 13.5
(2.6) (12.3)

Export segment to be the growth driver: Exports contributed 52% to the company's total turnover in FY2011, with Africa, U.S. and Latin America constituting more than 60% of total exports. In the U.S., Cipla has entered into a partnership with 22 players and has cumulative 64 approved ANDAs, of which 35 have been launched, while 46 are pending for approval. Cipla has developed eight CFC-free inhalers for the EU region, of which six have been submitted for regulatory approvals. Launch of CFC-free inhalers in Europe and U.S. with a potential market size of more than US$3bn would be the long-term growth driver for the company. Increasing penetration in the domestic market: Cipla is one of the largest players in the domestic formulation market, with a market share of ~5%, contributing 46% to the total turnover in FY2011. Cipla's distribution network in India consists of a field force of ~7,000 employees. The company plans to increase its focus on domestic markets with new therapies such as oncology and neuro-psychiatry in the offering. Cipla plans to focus on growing its market share and sales by increasing penetration in the Indian market, especially in rural areas and plans to expand its product portfolio by launching biosimilars, particularly relating to the oncology, anti-asthmatic and anti-arthritis categories. Valuation: Over FY2011-13E, we expect net sales to post a 15.5% CAGR to `8,164cr and EPS to record a 23.8% CAGR to `18.4 over FY2011-13E. Further with significant capex been incurred and with most of the facilities commercialized, management expects Cipla's return ratio to improve as productivity level increases. We recommend an Accumulate rating on the stock with a revised target price of ` 369.
20.0 24.0
284
January 2012

BALANCE SHEET
Y/E MARCH (` CR) ` SOURCES OF FUNDS EQUITY SHARE CAPITAL RESERVES & SURPLUS SHAREHOLDERS FUNDS MINORITY INTEREST TOTAL LOANS DEFERRED TAX LIABILITY TOTAL LIABILITIES APPLICATION OF FUNDS GROSS BLOCK LESS: ACC. DEPRECIATION NET BLOCK CAPITAL WORK-IN-PROGRESS INVESTMENTS CURRENT ASSETS CURRENT LIABILITIES NET CURRENT ASSETS TOTAL ASSETS 2,897 886 2,011 684 246 4,367 1,214 3,153 6,095 4,241 1,147 3,094 285 590 4,660 1,179 3,481 7,451 4,741 1,353 3,388 285 590 5,341 1,331 4,010 8,274 5,142 1,640 3,502 284 590 6,294 1,551 4,743 9,120 161 5,750 5,911 5.1 179.2 6,095 161 6,506 6,666 571.4 213.1 7,451 161 7,437 7,598 431.4 245.2 8,274 161 8,605 8,767 85.4 267.8 9,120 FY2010 FY2011 FY2012E FY2013E
% CHG
7.4
4,292 2,453 445 319 1,075 1,066
12.4
4,981 2,915 541 1,525 1,143
14.3
5,602 3,181 564 666 1,191 1,404
16.4
6,430 3,698 617 808 1,306 1,734
(% OF NET SALES)
DEPRECIATION & AMORTISATION INTEREST & OTHER CHARGES OTHER INCOME RECURRING PBT
19.9
167 23 88 1,230
18.7
254 5 79 1,158
20.0
280 11 101 1,433
21.2
303 9 120 1,790
% CHG
8.9
(95.0) 1,325 244
(5.8)
1,158 191
23.8
1,433 263
24.9
1,790 325
(% OF PBT)
PAT (REPORTED)
18.4
1,081
16.5
967 22 990
18.3
1,171 1,171
18.2
1,465 1,465
ADD: SHARE OF EARNINGS OF ASSOCIATE ADJ. PAT 986
% CHG
(1.8)
0.3
18.3
25.1
CASH FLOW STATEMENT

Y/E MARCH (` CR) ` PROFIT BEFORE TAX DEPRECIATION (INC)/DEC IN WORKING CAPITAL LESS: OTHER INCOME DIRECT TAXES PAID CASH FLOW FROM OPERATIONS (INC.)/DEC.IN FIXED ASSETS (INC.)/DEC. IN INVESTMENTS OTHER INCOME CASH FLOW FROM INVESTING ISSUE OF EQUITY INC./(DEC.) IN LOANS DIVIDEND PAID (INCL. TAX) OTHERS CASH FLOW FROM FINANCING INC./(DEC.) IN CASH OPENING CASH BALANCES CLOSING CASH BALANCES
KEY RATIOS
FY2011 1,158 254 (289) 225 898 (945) (344) (1,289) 566 (194) (2) 371 (20) 66 101 FY2012E 1,433 280 (474) 235 1,005 (500) (500) (140) (239) (379) 125 101 157 FY2013E 1,790 303 (637) 302 1,153 (400) (400) (346) (296) (642) 111 157 253 Y/E MARCH VALUATION RATIO (X) P/E (ON FDEPS) P/CEPS P/BV EV/SALES 24.6 21.3 4.5 5.0 24.9 27.5 21.4 4.0 4.4 23.7 22.3 18.4 3.5 3.8 19.2 18.0 15.1 3.0 3.2 15.3 FY2010 FY2011 FY2012E FY2013E
FY2010 1,326 190 (174) 256 1,086 (526) (166) (692) 669 (935) (155) 36 (386) 9 53 62
13.5 13.5 15.5 2.0 73.6
12.0 12.0 15.5 2.4 83.0
14.9 14.9 18.1 3.0 94.6
18.4 18.4 22.0 3.7 109.2
15.6 17.3 19.2
13.1 14.3 15.7
14.3 15.1 16.4
16.5 17.4 17.9
94 111 54
97 102 56
101 108 51
102 110 51
January 2012
285
Pharmaceuticals
Lupin
Company Background
TOP PICK
CMP/TP/Upside: `442 / `593 / 34%
Lupin, established in 1968, is primarily engaged in the manufacture and global distribution of APIs and finished dosages. Over the years, the company forayed into the U.S. market through a differentiated export strategy of tapping branded generics and, consequently, gaining a large share of the U.S. prescription market. Further, to expand its global footprint, Lupin prudently adopted the inorganic growth route. In-line with this, over the past two years, the company made small acquisitions across geographies.
Structural Snapshot
Growth opportunity: In India, the current spending on healthcare (public and private) is estimated at 6% of GDP and is expected to increase to 10% of GDP by 2016. Thus, on a conservative basis also, the industry can grow at a 14-15% CAGR. On the other hand, the global generic industry, at US$80bn (CY2008), is expected to grow at a CAGR of 9% to US$135bn-150bn by CY2015. Amongst the niche segments targeted by the company, oral contraceptives address an opportunity of US$3bn-4bn in the U.S. market, with high entry barriers. Competitive position: Lupin is the fifth largest domestic formulation company, with a prescription market share of 2.1% in U.S. generics.
STOCK RETURNS (%) LUPIN BSE HC INDEX SENSEX 3M (6.2) 4.1 1Y (3.5) (5.3) 3Y 54.8 29.7 21.3 5Y 9.8 3.3 10Y 17.0 17.3 31.4 45.3
(2.6) (12.3)
Nature of business: Defensive sector insulated from economic cycles; Highly competitive industry, with a high payback period.

U.S. market - The key driver: The high-margin branded generic business has been the key differentiator for Lupin in the Indian pharma space. On the generic turf, Lupin is currently the fifth largest generic player in the U.S. in terms of prescriptions. In the OC segment, Lupin has filed 25-30 ANDAs and expects to get approvals from 2HFY2012. Currently, Lupin's cumulative filings stand at 152, of which 51 have been approved. As of FY2011, Lupin had 60 Para IV, of which 15 are FTFs. Overall, we expect the U.S. market to report a 28.8% CAGR over FY2011-13E. Domestic formulations on a strong footing: Lupin continues to make strides in the Indian market. Currently, Lupin ranks No.5, climbing up from being No.11 six years ago. Lupin has been the fastest growing company among the top five companies in the domestic formulation space, registering a strong 20.0% CAGR over the past three years. Six of Lupin's products are among the country's top 300 brands. Lupin introduced 41 new products in the Indian market in FY2011 and has a strong field force of 4,000 MRs. Valuation: We expect Lupin's revenues to grow at a 20.2% CAGR to `8,426cr and earnings to grow at a 24.0% CAGR to `29.7/share over FY2011-13E. Currently, the stock is trading at 19.8x and 14.9x FY2012E and FY2013E earnings, respectively. We maintain our Buy view on the stock with a target price of ` 593.
32.1 29.1
Bloomberg consensus recommendation BUY / HOLD / SELL 38 / 7 / 4
286
January 2012

BALANCE SHEET
Y/E MARCH (` CR) ` SOURCES OF FUNDS EQUITY SHARE CAPITAL RESERVES & SURPLUS SHAREHOLDERS FUNDS MINORITY INTEREST TOTAL LOANS DEFERRED TAX LIABILITY TOTAL LIABILITIES APPLICATION OF FUNDS GROSS BLOCK LESS: ACC. DEPRECIATION NET BLOCK CAPITAL WORK-IN-PROGRESS GOODWILL INVESTMENTS CURRENT ASSETS CURRENT LIABILITIES NET CURRENT ASSETS TOTAL ASSETS 2,294 707 1,586 358 320 26 2,775 1,189 1,586 3,877 2,945 907 2,039 224 320 3 3,503 1,452 2,051 4,636 3,455 1,063 2,392 224 320 3 4,240 1,880 2,361 5,300 3,955 1,277 2,678 224 320 3 5,248 2,361 2,888 6,113 89 2,479 2,568 25 1,140 144 3,877 89 3,192 3,281 52 1,162 141 4,636 89 4,033 4,122 52 958 169 5,300 89 5,047 5,136 52 726 199 6,113 FY2010 FY2011 FY2012E FY2013E
% CHG
26.2
3,887 854
19.7
4,641 1,066
19.0
5,569 1,247
21.4
6,643 1,630
(% OF NET SALES)
18.0
124 38 14
18.7
171 32 9
18.3
187 49 43
19.7
214 56 43
(% OF PBT)
RECURRING PBT
2
836
1
996
4
1,179
3
1,556
% CHG
37.9
836 136
19.2
996 117
18.3
1,179 181
32.0
1,556 232
(% OF PBT)
LESS: MINORITY INTEREST (MI) PAT AFTER MI (REPORTED) ADJ. PAT
16.3
18 682 682
11.7
17 863 863
15.4
997 997
14.9
1,324 1,324
% CHG
35.9
26.5
15.6
32.7
CASH FLOW STATEMENT

Y/E MARCH (` CR) ` PROFIT BEFORE TAX DEPRECIATION (INC)/DEC IN WORKING CAPITAL LESS: OTHER INCOME DIRECT TAXES PAID CASH FLOW FROM OPERATIONS (INC.)/DEC.IN FIXED ASSETS (INC.)/DEC. IN INVESTMENTS OTHER INCOME CASH FLOW FROM INVESTING ISSUE OF EQUITY INC./(DEC.) IN LOANS DIVIDEND PAID (INCL. TAX) OTHERS CASH FLOW FROM FINANCING INC./(DEC.) IN CASH OPENING CASH BALANCES CLOSING CASH BALANCES (608) 6 (83) (164) 597 356 124 78 202 (471) 26 23 (206) 35 (122) 225 202 426 (510) (205) (157) (31) (392) (48) 426 378 (500) (231) (310) (136) 376 (608) (110) 818 (490) 18 (153) 855 (510) (202) FY2010 836 124 (448) FY2011 996 171 (240) FY2012E 1,179 187 (358) FY2013E 1,556 214 (327)
KEY RATIOS
Y/E MARCH VALUATION RATIO (X) P/E (ON FDEPS) P/CEPS P/BV EV/SALES EV/EBITDA 1,241 (500) ` PER SHARE DATA (`) EPS (BASIC) EPS (FULLY DILUTED) CASH EPS DPS BOOK VALUE RETURNS (%) ROCE (PRE-TAX) ANGEL ROIC (PRE-TAX) ROE (541) 200 378 578 TURNOVER RATIOS (X) INVENTORY / SALES (DAYS) RECEIVABLES (DAYS) PAYABLES (DAYS) 79 85 75 73 78 35 75 79 31 80 85 56 21.9 28.3 34.1 21.0 26.9 29.5 21.3 26.4 26.9 24.8 30.2 28.6 15.3 15.3 18.1 3.1 57.7 19.3 19.3 23.2 3.9 73.5 22.4 22.4 26.5 3.0 92.4 29.7 29.7 34.5 5.9 115.1 28.9 24.4 7.7 4.3 24.1 22.9 19.1 6.0 3.6 19.2 19.8 16.7 4.8 3.0 16.3 14.9 12.8 3.8 2.4 12.2 FY2010 FY2011 FY2012E FY2013E
January 2012
287
Pharmaceuticals
Ranbaxy
Company Background
Ranbaxy Laboratories (Ranbaxy), India's largest pharmaceutical company, is an integrated, research-based, international pharmaceutical company. The company is currently present in 23 of the top 25 pharmaceutical markets of the world. Ranbaxy has a global footprint in 46 countries, manufacturing facilities in seven countries and serves customers in over 125 countries.
Structural Snapshot
Growth opportunity: In India, the current spending on healthcare (public and private) is estimated at 6% of GDP and is expected to increase to 10% of GDP by 2016. Thus, on a conservative basis also, the industry can grow at a 14-15% CAGR. On the other hand, the global generic industry, at US$80bn (CY2008), is expected to grow at a CAGR of 9% to US$135bn-150bn by CY2015. Indian companies, on account of their relative positioning, can grow at around 20% during the period. Competitive position: Ranbaxy is one of the largest players in the domestic formulation market, with a market share of ~4.8%. Nature of business: Defensive sector insulated from economic cycles; Highly competitive industry, with a high payback period.
STOCK RETURNS (%) RANBAXY BSE HC INDEX SENSEX 3M 4.1 1Y (5.3) 3Y 28.8 29.7 21.3 5Y 2.2 9.8 3.3 10Y 7.2 17.0 17.3 (10.0) (19.2) (2.6) (12.3)
FINANCIAL PERFORMANCE OVERVIEW (%) SALES GROWTH* PAT GROWTH* OPM# ROE# 3M 7.7 5.0 1Y 18.0 16.9 21.8 3Y 9.8 23.1 2.6 17.1 5Y 11.5 5.9 10Y 11.9 9.4

USFDA issues resolve on Ranbaxy issue: Ranbaxy has signed a consent decree with the USFDA regarding the ongoing cGMP issues. We note that the consent decree lays out a plan of action as agreed by the two parties to resolve the outstanding issues. However, the timeline regarding the resolution is still unclear. Further, the company will be provisioning US$500mn as potential civil and criminal liabilities that could arise from the Department of Justice (DoJ) investigation. Additionally, recently the DoJ has announced the filing of consent decree for Ranbaxy's Paonta Sahib and Dewas facilities. Although the clarity and roadmap of the re-approval for both the facilities have emerged, forfeiting exclusivity is a clear negative for the company. Looking for profitable growth: Ranbaxy's OPM collapsed from 12.6% in CY2006 to 6.1% in CY2009 on USFDA issues, high operating leverage and realized losses in forex hedges. However, the company is now targeting to achieve profitable growth by closing down low-margin facilities in various emerging markets, reduce its work force in Europe and transfer its new drug discovery research division to Daiichi. Further, resolution of the USFDA issue would help reduce costs incurred on remedial measures. Going forward, Ranbaxy aims to achieve double-digit margins in its base business. Valuation: The stock is trading at EV/sales of 1.9x CY2011E and 1.4x CY2012E, which is attractive. Moreover, considering that the current financials do not include major upsides from other Para IV opportunities (which could be at risk) besides Nexium and Lipitor, we believe the downside is limited. However, given the low profitability in the base business and lack of clarity on Para-IVs going forward, we recommend Neutral on the stock.
- 654.7
41.9 21.2 20.3 22.9
BLOOMBERG CONSENSUS RECOMMENDATION BUY / HOLD / SELL 1 5 / 10 / 19
288
January 2012

BALANCE SHEET
Y/E DECEMBER (` CR) ` SOURCES OF FUNDS EQUITY SHARE CAPITAL RESERVES& SURPLUS SHAREHOLDERS FUNDS MINORITY INTEREST TOTAL LOANS DEFERRED TAX LIABILITY TOTAL LIABILITIES APPLICATION OF FUNDS GROSS BLOCK LESS: ACC. DEPRECIATION NET BLOCK CAPITAL WORK-IN-PROGRESS GOODWILL INVESTMENTS CURRENT ASSETS CURRENT LIABILITIES NET CURRENT ASSETS TOTAL ASSETS 4,125 1,727 2,398 623 2,093 541 6,009 4,111 1,897 7,552 4,804 2,157 2,647 382 1,901 498 8,693 4,140 4,553 9,982 5,284 2,502 2,783 200 1,901 498 8,503 5,161 3,343 8,725 5,710 2,830 2,880 200 1,901 498 10,113 5,876 4,237 9,716 210 4,133 4,343 53.3 3,630 (474) 7,552 211 5,394 5,605 64.7 4,335 (23) 9,982 211 6,367 6,578 79.7 2,104 (37) 8,725 211 8,027 8,237 94.8 1,424 (40) 9,716 CY2009 CY2010 CY2011E CY2012E
% CHG
2.5
6,885 3,208 513 1,417 1,746 445
18.0
7,096 3,153 578 1,506 1,858 1,440
15.4
8,463 3,762 693 1,795 2,213 1,733
18.4
9,137 3,595 818 2,116 2,609 2,885
(% OF NET SALES)
6.1
268 71 443
16.9
553 61 661
17.0
310 74 93
24.0
336 64 100
(% OF PBT)
54.2
817 (193) 1,010 699
34.6
1,911 410.5 2,322 585
5.9
1,585 1,585 331
3.6
2,800 2,800 563
(% OF PBT)
69.2
311 14 296 144
25.2
1,737 240 1,497 1,086
20.9
1,254 15 1,239 1,239
20.1
2,237 15 2,222 2,222
% CHG
(218.5)
654.7
14.1
79.3
CASH FLOW STATEMENT

Y/E DECEMBER (` CR) PROFIT BEFORE TAX DEPRECIATION CHANGE IN WORKING CAPITAL LESS: OTHER INCOME DIRECT TAXES PAID CASH FLOW FROM OPERATIONS INC./ (DEC.) IN FIXED ASSETS INC./ (DEC.) IN INVESTMENTS OTHER INCOME CASH FLOW FROM INVESTING ISSUE OF EQUITY INC./(DEC.) IN LOANS DIVIDEND PAID (INCL. TAX) OTHERS CASH FLOW FROM FINANCING INC./(DEC.) IN CASH OPENING CASH BALANCES CLOSING CASH BALANCES CY2009 1,010 268 (27) 105 (243) 902 490 (52) 105 333 1 (446) (1,279) (1,723) (1,154) 2,395 1,242 CY2010 2,322 553 (299) 661 (619) 1,297 426 (56) 661 (290) 27 825 (98) (317) 436 2,023 1,242 3,264 CY2011E 1,585 310 (89) 93 (317) 1,397 299 93 206 (2,231) (290) 30 (2,491) (1,300) 3,264 1,965 CY2012E 2,800 336 1,155 100 (560) 3,631 425 100 325 (680) (520) (56) (1,256) 2,050 1,965 4,015
KEY RATIOS
Y/E MARCH VALUATION RATIO (X) P/E (ON FDEPS) P/CEPS P/BV EV/SALES EV/EBITDA PER SHARE DATA (`) EPS (BASIC) EPS (FULLY DILUTED) CASH EPS DPS BOOK VALUE RETURNS (%) ROCE (PRE-TAX) ANGEL ROIC (PRE-TAX) ROE TURNOVER RATIOS (X) INVENTORY / SALES (DAYS) RECEIVABLES (DAYS) PAYABLES (DAYS) 91 76 67 82 70 86 79 80 62 73 77 38 2.4 5.8 3.3 10.1 22.1 21.8 15.2 31.3 20.3 27.7 61.7 30.0 7.1 7.1 13.4 103.3 35.5 35.5 48.7 2.0 133.1 29.4 29.4 36.8 5.9 156.2 52.8 52.8 60.7 10.6 195.6 65.6 34.5 4.5 3.0 49.1 13.0 9.5 3.5 2.4 14.3 15.7 12.6 3.0 1.9 11.3 8.8 7.6 2.4 1.4 5.9 CY2009 CY2010 CY2011E CY2012E
January 2012
289
Pharmaceuticals
Glaxo Pharma
Company Background
CMP/TP/Upside: `1,967 / - / -
GlaxoSmithKline Pharmaceuticals (Glaxo) is the third largest pharmaceutical player in the Indian market with a market share of 5%. The company's product portfolio includes both prescription medicines and vaccines. Glaxo sells prescription medicines across therapeutic areas such as anti-infectives, dermatology, gynaecology, diabetes, oncology, cardiovascular diseases and respiratory diseases. A large portion of the company's revenue comes from the acute therapeutic portfolio. However, the company is now scouting for opportunities in the high-growth therapeutic areas such as CVS, CNS, diabetes and oncology. Further, with a strong parentage, Glaxo plans to increase its product portfolio through patented launches and vaccines.
STOCK RETURNS (%) GLAXO BSE HC INDEX SENSEX 3M 4.1 1Y (5.3) 3Y 19.8 29.7 21.3 5Y 9.8 3.3 10Y 17.0 17.3 (6.1) (14.6) (2.6) (12.3) 12.5 20.4
Structural Snapshot
Growth opportunity: In India, the current spending on healthcare (public and private) is estimated at 6% of GDP and is expected to increase to 10% of GDP by 2016. Thus, on a conservative basis also, the industry can grow at a 14-15% CAGR. Competitive position: Glaxo is the second largest MNC company in the Indian domestic formulation industry with a market share of ~5%. Nature of business: Defensive sector insulated from economic cycles; Highly competitive industry, with a high payback period.
FINANCIAL PERFORMANCE OVERVIEW (%) SALES GROWTH* PAT GROWTH* OPM# ROE# 3M 4.4 (7.7) 29.0 1Y 12.8 15.5 35.3 30.9 3Y 10.4 16.5 33.2 31.5 5Y 7.4 10Y 7.5
13.1 23.2 32.2 24.3 31.3 29.3

Renewed focus on the Indian market: Glaxo is among the top five players in the Indian market, having a market share of ~5%. Post the IPR regime, the company has renewed its focus on the domestic market with the launch of five patented products (mainly Tykerb and Rotarix) in the last two years. In CY2011, the company plans to launch 4-6 branded generic products, two oncology products and Synflorix vaccine. During 1QCY2011, the company launched two new products namely the branded generic Calpol-T in the fast-growing pain segment and Ansolar (Sunscreen gel), which is a product from the Stiefel dermatology range. The company has also received marketing approvals for two innovative products - namely Votrient for renal carcinoma and Revolade for platelet depletion. New product launches since CY2007 accounted for 26% yoy top-line growth registered by the company in CY2010. Further, in-line with market dynamics, Glaxo has launched patented products at discounts in India compared to the other markets. Outlook and valuation: Glaxo has a strong balance sheet with cash of ~`2,000cr (~12% of market cap), which could be used for future acquisitions or higher dividend payouts. We expect Glaxo's net sales to post a 13.9% CAGR to `2,788cr and EPS to register a 14.6% CAGR to `86.9 over CY2010-12E. At current levels, the stock is trading at 27.3x and 22.6x CY2011E and CY2012E earnings, respectively. We continue to remain Neutral on the stock.
290
January 2012

BALANCE SHEET
Y/E DECEMBER (` CR) ` SOURCES OF FUNDS EQUITY SHARE CAPITAL PREFERENCE CAPITAL RESERVES& SURPLUS SHAREHOLDERS FUNDS TOTAL LOANS DEFERRED TAX LIABILITY TOTAL LIABILITIES APPLICATION OF FUNDS 85 1,701 1,786 5 (45) 1,747 85 1,867 1,952 5 (57) 1,900 85 2,153 2,238 5 (35) 2,208 85 2,476 2,561 5 (35) 2,532 CY2009 CY2010 CY2011E CY2012E
% CHG
12.6
1,234 674
12.9
1,392 759
13.7
1,577 870
13.9
1,798 991
(% OF NET SALES)
DEPRECIATION& AMORTISATION INTEREST & OTHER CHARGES OTHER INCOME RECURRING PBT
35.3
16 0 101 761
35.3
18 1 126 872
35.5
17 113 971
35.5
18 122 1,100
% CHG
8.6
(7) 769 261
14.5
18 854 293
11.4
971 342
13.3
GROSS BLOCK 1,100 363 LESS: ACC. DEPRECIATION NET BLOCK CAPITAL WORK-IN-PROGRESS INVESTMENTS CURRENT ASSETS 737 737 CURRENT LIABILITIES NET CURRENT ASSETS TOTAL ASSETS 241 93 21 148 2,183 699 1,484 1,747 254 109 9 118 2,510 845 1,665 1,900 271 111 21 118 2,698 741 1,957 2,208 290 113 21 118 3,144 864 2,280 2,532 333 363 383 403
(% OF PBT)
PAT (REPORTED) EXCEPTIONAL ITEMS PAT AFTER MI (REPORTED) ADJ. PAT
33.9
508 508 500
34.4
561 561 578
35.2
629 186 443 443
33.0
737
% CHG
8.1
15.5
(23.4)
66.4
CASH FLOW STATEMENT

Y/E DECEMBER (` CR) ` CY2009 CY2010 872 18 88 126 314 538 (20.6) (30) 126 75 0.26 (296) (48) (344) 269 1,734 2,003 CY2011E 971 17 (247) 113 370 257 (33) (0) 113 81 (293) (6) (299) 39 2,003 2,042 CY2012E 1,099 18 31 122 423 604 (20) 122 PROFIT BEFORE TAX AND EXCEPTIONALS 761 DEPRECIATION (INC)/DEC IN WORKING CAPITAL LESS: OTHER INCOME DIRECT TAXES PAID CASH FLOW FROM OPERATIONS (INC.)/DEC.IN FIXED ASSETS (INC.)/DEC. IN INVESTMENTS OTHER INCOME CASH FLOW FROM INVESTING ISSUE OF EQUITY INC./(DEC.) IN LOANS DIVIDEND PAID (INCL. TAX) OTHERS CASH FLOW FROM FINANCING INC./(DEC.) IN CASH OPENING CASH BALANCES CLOSING CASH BALANCES 16 20 101 185 511 (21) (580) 101 (500) 0 (394) 1,160 766 777 957 1,734
KEY RATIOS
Y/E DECEMBER VALUATION RATIO (X) P/E (ON FDEPS) P/CEPS P/BV EV/SALES EV/EBITDA PER SHARE DATA (`) EPS (BASIC) EPS (FULLY DILUTED) CASH EPS 102 DPS (354) (354) 353 2,042 2,396 BOOK VALUE RETURNS (%) ROCE (PRE-TAX) ROE TURNOVER RATIOS (X) INVENTORY / SALES (DAYS) RECEIVABLES (DAYS) PAYABLES (DAYS) 47 11 81 46 9 82 45 11 76 44 14 69 39.9 29.8 40.6 30.9 41.5 21.1 41.0 30.7 30.0 210.9 40.0 230.4 34.6 264.2 41.7 302.4 60.0 60.0 61.9 66.2 66.2 68.3 72.0 72.0 54.3 86.9 86.9 89.1 32.8 31.8 9.3 7.8 22.2 29.7 28.8 8.5 6.8 19.3 27.3 36.2 7.4 6.0 16.8 22.6 22.1 6.5 5.1 14.4 CY2009 CY2010 CY2011E CY2012E
January 2012
291
Pharmaceuticals
Cadila Healthcare
Cadila Healthcare (Cadila) operates in the API, formulations, animal health products and cosmeceutical segments. The company's global operations are spread across the U.S., Europe, Japan, Brazil, South Africa and 25 other emerging markets. Having already achieved the US$1bn mark in 2011, the company is expected to achieve sales of over US$3bn by 2015 and be a research-driven pharmaceutical company by 2020.
Structural Snapshot
Growth opportunity: In India, the current spending on healthcare (public and private) is estimated at 6% of GDP and is expected to increase to 10% of GDP by 2016. Thus, on a conservative basis also, the industry can grow at a 14-15% CAGR. On the other hand, global generic industry, at US$80bn (CY2008), is expected to grow at a CAGR of 9% to US$135bn-150bn by CY2015. Indian companies, on account of their relative positioning, can grow at around 20% during the period. Competitive position: Cadila is the fifth largest player in the domestic formulation market. Nature of business: Defensive sector insulated from economic cycles; Highly competitive industry, with a high payback period.
STOCK RETURNS (%) CADILA BSE HC INDEX SENSEX 3M (13.8) 4.1 1Y (17.5) (5.3) 3Y 56.9 29.7 21.3 5Y 9.8 3.3 10Y 17.0 17.3 24.9 32.5
(2.6) (12.3)

Strong domestic portfolio: Cadila is the fifth largest player in the domestic market, with sales of about `2,232cr in FY2011, contributing 49% to its overall top line. The company enjoys a leadership position in the CVS, GI, women healthcare and respiratory segments, with a sales force of 4,500MRs. Going forward, the company expects its domestic formulation business to grow at above-industry average of 12-14% on the back of new product launches and field force expansion. Exports on a strong footing: Cadila has a two-fold focus on exports (contributed around 51% to its FY2011 top line), wherein it is targeting developed as well as emerging markets. The company has developed a formidable presence in the developed markets of U.S., Europe (France and Spain) and Japan. In the U.S., the company achieved critical scale of US$215mn in FY2011. In Europe, the company's growth going forward would be driven by new product launches and improvement in margin by product transfer to Indian facilities. In emerging markets, Cadila is aggressively targeting Brazil and the CIS region. Outlook and valuation: We expect Cadila's net sales to post a 19.2% CAGR to `6,343cr and EPS to report a 19.4% CAGR to `48.2 over FY2011-13E. At current levels, the stock is trading at 17.3x FY2012E and 13.6x FY2013E earnings. We recommend Buy on the stock with the revised target price of ` 965.
34.9 25.9 31.1 26.3
292
January 2012

Y/E MARCH (` CR) ` TOTAL OPERATING INCOME % CHG TOTAL EXPENDITURE EBITDA (% OF NET SALES) DEPRECIATION& AMORTISATION INTEREST & OTHER CHARGES OTHER INCOME RECURRING PBT % CHG PBT (REPORTED) TAX (% OF PBT) PAT (REPORTED) LESS: MINORITY INTEREST (MI) PAT AFTER MI (REPORTED) ADJ. PAT % CHG FY2010 3,687 25.9 2,866 708 19.8 134 82 16 620 57.5 616 74.1 12.0 542 24.7 517 522 59.3 FY2011 4,630 25.6 3,604 861 19.3 127 70 13 842 35.8 842 106.4 12.6 736 25.1 711 711 36.3 FY2012E 5,360 15.8 4,197 1,038 19.8 142 69 26 979 16.2 979 191.1 19.5 787 15.7 772 772 8.5 FY2013E 6,490 21.1 5,136 1,207 19.0 158 54 44 1,186
BALANCE SHEET
Y/E MARCH (` CR) ` SOURCES OF FUNDS EQUITY SHARE CAPITAL RESERVES & SURPLUS SHAREHOLDERS FUNDS MINORITY INTEREST TOTAL LOANS DEFERRED TAX LIABILITY TOTAL LIABILITIES APPLICATION OF FUNDS GROSS BLOCK 21.2 LESS: ACC. DEPRECIATION 1,186 183.7 15.5 1,003 15.0 987 987 28.0 NET BLOCK CAPITAL WORK-IN-PROGRESS INVESTMENTS CURRENT ASSETS CURRENT LIABILITIES NET CURRENT ASSETS MIS. EXP. NOT WRITTEN OFF TOTAL ASSETS 873 1,201 248 21 1,775 866 909 10 2,872 999 1,349 431 21 2,283 1,119 1,164 3,448 1,138 1,519 248 26 2,893 1,445 1,447 3,724 1,296 1,689 248 26 3,810 1,760 2,050 1 4,499 2,074 2,348 2,657 2,985 68 1,560 1,629 39 1,091 114 2,872 102 2,069 2,171 67 1,097 113 3,448 102 2,648 2,750 83 735 157 3,724 102 3,389 3,492 98 735 173 4,499 FY2010 FY2011 FY2012E FY2013E
CASH FLOW STATEMENT

Y/E MARCH (` CR) ` PROFIT BEFORE TAX DEPRECIATION (INC.)/DEC. IN WORKING CAPITAL LESS: OTHER INCOME DIRECT TAXES PAID CASH FLOW FROM OPERATIONS (INC.)/DEC.IN FIXED ASSETS (INC.)/DEC. IN INVESTMENTS OTHER INCOME CASH FLOW FROM INVESTING ISSUE OF EQUITY INC./(DEC.) IN LOANS DIVIDEND PAID (INCL. TAX) OTHERS CASH FLOW FROM FINANCING INC./(DEC.) IN CASH OPENING CASH BALANCES CLOSING CASH BALANCES FY2010 616 134 (40) 16 77 616 (299) (84) 16 (368) (177) (75) 2 (250) (1) 252 251 FY2011 824 127 (211) 13 106 621 (291) (0) 13 (278) 7 (176) (130) (299) 44 251 295 FY2012E 979 142 (193) 26 147 754 (292) 6 26 (260) (363) (193) 152 (404) 90 295 385 FY2013E 1,186 158 (215) 44 167 918 (328) 44 (284) (246) (246) 388 385 773
KEY RATIOS
Y/E MARCH VALUATION RATIO (X) P/E P/CEPS P/BV EV/SALES EV/EBITDA ` PER SHARE DATA (`) EPS (BASIC) EPS (FULLY DILUTED) CASH EPS DPS BOOK VALUE RETURNS (%) ROCE (PRE-TAX) ANGEL ROIC (PRE-TAX) ROE TURNOVER RATIOS (X) INVENTORY / SALES (DAYS) RECEIVABLES (DAYS) PAYABLES (DAYS) 67 47 73 62 49 76 67 58 90 72 58 92 20.9 32.0 37.0 23.2 35.5 37.4 25.0 37.0 31.4 25.5 37.4 31.6 24.7 24.7 31.9 5.0 79.7 33.8 33.8 40.9 7.4 106.1 37.7 37.7 44.6 8.1 134.3 48.2 48.2 56.0 10.3 170.6 26.4 20.5 8.2 4.0 20.1 19.3 16.0 6.2 3.2 16.5 17.3 14.6 4.9 2.6 13.2 13.6 11.7 3.8 2.1 11.1 FY2010 FY2011 FY2012E FY2013E
January 2012
293
Pharmaceuticals
RATING 52 WEEK HIGH / LOW MARKET CAP (` CR) ` LIQUIDITY REDUCE 2,430 / 1 ,747 5,135 LOW
Aventis
Company Background
CMP/TP/Downside: `2,230 / `1,937 / 13%
Sanofi, a leading global pharmaceutical company, operates in India through four entities - Aventis Pharma Limited, Sanofi-Synthelabo (India) Limited, Sanofi Pasteur India Private Limited and Shantha Biotechnics. Aventis Pharma, focuses its activities on seven major therapeutic areas namely - cardiovascular diseases, metabolic disorders, thrombosis, oncology, central nervous system disorders, internal medicine and vaccines. Predominately a domestic company, the company is the second largest MNC in India, enjoying a market share of 1.4%.
Structural Snapshot
STOCK RETURNS (%) AVENTIS BSE HC INDEX SENSEX 3M (2.7) 4.1 1Y 20.7 (5.3) 3Y 38.8 29.7 21.3 5Y 10.1 9.8 3.3 10Y 19.9 17.0 17.3
Growth opportunity: In India, the current spending on healthcare (public and private) is estimated at 6% of GDP and is expected to increase to 10% of GDP by 2016. Thus, on a conservative basis also, the industry can grow at a 14-15% CAGR. Competitive position: Aventis is the third largest MNC in the domestic formulation industry. The company has a market share of 1.4%. Nature of business: Defensive sector insulated from economic cycles; Highly competitive industry, with a high payback period.
(2.6) (12.3)
FINANCIAL PERFORMANCE OVERVIEW (%) SALES GROWTH* PAT GROWTH* OPM# ROE# 3M 13.5 15.9 16.1 1Y 11.4 (1.5) 13.2 15.9 3Y 7.9 2.6 20.5 20.5 5Y 6.1 1.3 10Y 7.1 8.7

Focus on top-line growth: Aventis recorded a revenue CAGR of 5.3% to `1,085cr over CY2006-10 on the back of slower-than-expected growth on the domestic formulation front and loss of distribution rights of Rabipur vaccine. Going forward, to grow in-line with the industry's average in the domestic segment, Aventis has rolled out its Prayas project, an initiative to increase its penetration in rural areas. Under the project, the company would launch low-price products in the anti-infective and NSAID therapeutic segments and increase its field force. The project is expected to provide incremental revenue of `500cr over the next five years. Aventis also plans to launch CVS and vaccine products in the domestic market post the acquisition of Shantha Biotech by its parent company. We expect the company's net sales to log a 13.6% CAGR over CY2010-12E, majorly driven by its domestic formulation sales. Valuation: Aventis has a strong balance sheet with significant cash, which could be used for future acquisitions or higher dividend payouts. We expect the companys net sales to post a 12.6% CAGR to `1,450cr and EPS to register a 15.4% CAGR to `89.7cr over CY2010-12E. At current levels, the stock is trading at 26.1x and 24.9x CY2011E and CY2012E earnings, respectively. We recommend Reduce on the stock with a target price of ` 1,937.
21.7 21.1 24.2 26.4
294
January 2012

BALANCE SHEET
Y/E DECEMBER (` CR) ` SOURCES OF FUNDS EQUITY SHARE CAPITAL RESERVES & SURPLUS SHAREHOLDERS FUNDS TOTAL LOANS 23 909 932 932 23 991 1,014 1,014 23 1,119 1,142 1,142 23 1,253 1,277 1,277 CY2009 CY2010 CY2011E CY2012E
% CHG
0.7
827 148
11.4
942 143
12.1
1,042 182
13.1
1,187 214
(% OF NET SALES)
DEPRECIATION & AMORTISATION INTEREST & OTHER CHARGES OTHER INCOME SHARE IN PROFIT OF ASSOCIATES RECURRING PBT
15.2
17 0.1 59 241
13.2
21 2.9 55 233
14.9
22 62 280
15.3
24 0 59 299 TOTAL LIABILITIES APPLICATION OF FUNDS GROSS BLOCK LESS: ACC. DEPRECIATION NET BLOCK CAPITAL WORK-IN-PROGRESS INVESTMENTS CURRENT ASSETS 335 190 145 27 5.2 1,014 274 740 15 932 375 204 171 13 0.4 1,214 394 820 10 1,014 396 227 170 13 0.4 1,149 207 942 17 1,142 417 250 167 13 0.4 1,300 225 1,076 20 1,277
% CHG
PBT (REPORTED) TAX
(7.0)
241 84.0
(3.4)
234 79.0
19.9
280 82.6
6.9
299 92.4
(% OF PBT)
PAT (REPORTED) EXTRA-ORDINARY ITEMS PAT AFTER MI (REPORTED) ADJ. PAT
34.8
157
33.8
155 75.7
29.6
197 197 197
30.9
206 206 206 CURRENT LIABILITIES NET CURRENT ASSETS DEFERRED TAX ASSETS TOTAL ASSETS
157 157
231 155
% CHG
(5.3)
(1.5)
27.1
4.8
CASH FLOW STATEMENT

Y/E DECEMBER (` CR) ` PROFIT BEFORE TAX DEPRECIATION (INC)/DEC IN WORKING CAPITAL LESS: OTHER INCOME DIRECT TAXES PAID CASH FLOW FROM OPERATIONS (INC.)/DEC.IN FIXED ASSETS (INC.)/DEC. IN INVESTMENTS OTHER INCOME CASH FLOW FROM INVESTING ISSUE OF EQUITY INC./(DEC.) IN LOANS DIVIDEND PAID (INCL. TAX) OTHERS CASH FLOW FROM FINANCING INC./(DEC.) IN CASH OPENING CASH BALANCES CLOSING CASH BALANCES CY2009 241 17 4 111 92 59 (41) 111 70 (43) 2 (41) 88 497 586 CY2010 234 21 (10) 113 79 52 (27) (5) 113 82 (55) (9) (64) 69 586 655 CY2011E 280 22 (101) 120 89 (8) (21) 0 120 99 (69) (69) 21 655 677 CY2012E 299 24 (31) 109 96 88 (21) 109 88 (72) (0) (72) 103 677 780
KEY RATIOS
Y/E DECEMBER VALUATION RATIO (X) P/E (ON FDEPS) P/CEPS P/BV EV/SALES EV/EBITDA ` PER SHARE DATA (`) EPS (BASIC) EPS (FULLY DILUTED) CASH EPS DPS BOOK VALUE RETURNS (%) ROCE (PRE-TAX) ANGEL ROIC (PRE-TAX) ROE TURNOVER RATIOS (X) INVENTORY / SALES (DAYS) RECEIVABLES (DAYS) PAYABLES (DAYS) 72 25 49 75 18 47 73 20 41 70 24 36 14.8 40.5 17.9 12.6 36.9 15.9 14.8 40.1 18.3 15.7 40.7 17.1 68.4 68.4 75.9 20.0 404.6 67.3 67.3 109.1 55.0 440.3 85.5 85.5 95.2 25.7 495.9 89.7 89.7 100.0 26.9 554.5 32.6 29.4 5.5 4.7 30.8 33.1 20.4 5.1 4.1 31.3 26.1 23.4 4.5 3.6 24.5 24.9 22.3 4.0 3.1 20.3 CY2009 CY2010 CY2011E CY2012E
January 2012
295
Pharmaceuticals
IPCA Labs
Company Background
CMP/TP/Upside: `279 / `358 / 28%
Ipca Labs is a market leader in the anti-malarials and rheumatoid arthritis segments. The company is also a notable name in the domestic formulation segment, with 150 formulations across major therapeutic segments. The company has seven production units, approved by most of the discerning regulatory authorities including USFDA, UKMHRA, Australia-TGA, South Africa-MCC and Brazil-ANVISA.
Structural Snapshot
Growth opportunity: In India, the current spending on healthcare (public and private) is estimated at 6% of GDP and is expected to increase to 10% of GDP by 2016. Thus, on a conservative basis also, the industry can grow at a 14-15% CAGR. On the other hand, the global generic industry, at US$80bn (CY2008), is expected to grow at a CAGR of 9% to US$135bn-150bn by CY2015. Indian companies, on account of their relative positioning, can grow at around 20% during the period. Competitive position: Ipca Labs is a market leader in the anti-malarials and rheumatoid arthritis segments in India. Nature of business: Defensive sector insulated from economic cycles; Highly competitive industry, with a high payback period.
STOCK RETURNS (%) IPCA LABS BSE HC INDEX SENSEX 3M 4.1 1Y (5.3) 3Y 58.3 29.7 21.3 5Y 9.8 3.3 10Y 17.0 17.3 12.7 (13.5) (2.6) (12.3) 16.8 42.7
Domestic formulations business: Ipca Labs has been successful in changing its business focus to the high-margin chronic and lifestyle segments from the low-margin anti-malarial segment. The company's chronic and lifestyle segments, comprising CVS, anti-diabetics, pain-management, CNS and dermatology products, constitute more than 50% of its domestic formulation sales. Management has ramped up its field force significantly with the addition of divisions in the domestic formulations segment, taking the current strength to nearly 5,000MRs. Exports to be the next growth avenue: On the formulations front, Ipca Labs has been increasing its penetration in regulated markets, viz. Europe and U.S., by expanding the list of generic drugs backed by its own API. In the emerging and semi-regulated markets, the company plans to focus on building brands in the CVS, CNS, pain management and anti-malarial segments along with tapping new geographies. On the API front, where it is among the low-cost producers, Ipca Labs is aggressively pursuing supply tie-ups with pharma MNCs. Indore SEZ approval and tender business to enhance momentum: Ipca Labs is awaiting USFDA approval for its Indore SEZ. Once approved, the facility would cater to the U.S. generic market and should post sales of `300cr-350cr. Further, the company has received approval from the WHO for its anti-malarial product, making the company eligible to participate in the global tender worth US$300mn along with three other players. Valuation: We expect IPCA Labs' revenues to witness a 16.3% CAGR to `2,569cr and EPS to register a 14.8% CAGR to `27.5 over FY2011-13E, driven by the U.S. and domestic markets and the API segment. We recommend Buy on the stock with a target price of ` 358. 296 January 2012 Please refer to important disclosures at the end of this report
33.7 29.2 25.4 24.7

BALANCE SHEET
Y/E MARCH (` CR) ` SOURCES OF FUNDS EQUITY SHARE CAPITAL RESERVES & SURPLUS SHAREHOLDERS FUNDS MINORITY INTEREST TOTAL LOANS DEFERRED TAX LIABILITY TOTAL LIABILITIES APPLICATION OF FUNDS GROSS BLOCK 881 243 638 38 33 899 11 120 768 210 689 1,398 988 289 699 113 41 1,059 11 118 930 249 810 1,663 1,178 350 828 113 41 1,292 72 188 1,032 376 915 1,897 1,366 420 946 113 41 1,521 114 217 1,191 419 1,103 2,202 25 840 865 (1) 455 79 1,398 25 1,026 1,052 (1) 531 81 1,663 25 1,219 1,244 (1) 531 123 1,897 25 1,506 1,531 (1) 531 141 2,202 FY2010 FY2011 FY2012E FY2013E
% CHG
21.2
1,233 326
21.2
1,523 360
17.2
1,755 452
15.4
2,000 548
(% OF NET SALES)
20.9
47 26 3 263
19.1
56 31 8 297
20.5
61 40 1 371
21.5
70 40 1 461
LESS: ACC. DEPRECIATION NET BLOCK CAPITAL WORK-IN-PROGRESS INVESTMENTS CURRENT ASSETS CASH LOANS & ADVANCES OTHER CURRENT LIABILITIES NET CURRENT ASSETS TOTAL ASSETS
% CHG
EXTRAORDINARY EXPENSE/(INC.) PBT (REPORTED) TAX PAT (REPORTED) ADD: SHARE OF EARNINGS OF ASSO. PAT AFTER MI (REPORTED) ADJ. PAT
35.3
(3) 266 63 204 2 205 202
13.1
(43) 341 78 262 262 218
24.9
371 120 251 251 251
24.2
461 115 346 346 346
14.3 13.2
8.1 13.9
15.0 11.4
37.8 13.6
CASH FLOW STATEMENT

Y/E MARCH (` CR) ` PROFIT BEFORE TAX DEPRECIATION (INC)/DEC IN WORKING CAPITAL DIRECT TAXES PAID CASH FLOW FROM OPERATIONS (INC.)/DEC.IN FIXED ASSETS (INC.)/DEC. IN INVESTMENTS CASH FLOW FROM INVESTING ISSUE OF EQUITY INC./(DEC.) IN LOANS DIVIDEND PAID (INCL. TAX) OTHERS CASH FLOW FROM FINANCING INC./(DEC.) IN CASH OPENING CASH BALANCES CLOSING CASH BALANCES
KEY RATIOS
FY2011 341 56 (120) (78) 198 (182) (8) (190) 76 (61) (23) (8) 11 11 FY2012E 371 61 (44) (78) 310 (190) (190) (59) (59) 62 11 72 FY2013E 461 70 (146) (97) 288 (188) (188) (59) 1 (58) 42 72 114 Y/E MARCH VALUATION RATIO (X) P/E (ON FDEPS) P/CEPS 17.0 13.8 4.0 2.5 12.0 13.3 11.0 3.3 2.1 11.2 13.9 11.2 2.8 1.8 8.8 10.1 8.4 2.3 1.5 7.2 FY2010 FY2011 FY2012E FY2013E
FY2010 266 47 (98) (46) 169 (134) (134) (7) (38) 10 (35) (1) 12 11
P/BV EV/SALES EV/EBITDA PER SHARE DATA (`) ` EPS (BASIC) EPS (FULLY DILUTED) CASH EPS DPS BOOK VALUE RETURNS (%) ROCE (PRE-TAX) ANGEL ROIC (PRE-TAX) ROE TURNOVER RATIOS (X) INVENTORY / SALES (DAYS) RECEIVABLES (DAYS) PAYABLES (DAYS)
16.4 16.4 20.1 2.8 69.1
20.9 20.9 25.3 4.2 83.7
20.0 20.0 24.9 4.0 99.0
27.5 27.5 33.1 5.5 121.8
21.9 22.6 27.0
19.9 21.1 22.8
22.0 24.1 21.9
23.3 25.9 24.9
80 85 26
81 82 25
79 81 31
41 43 16
January 2012
297
Pharmaceuticals
Aurobindo Pharm.
Aurobindo Pharmaceuticals Ltd. (APL) manufactures generic pharmaceuticals and active pharmaceutical ingredients. The company's manufacturing facilities are approved by several leading regulatory agencies such as US FDA, UK MHRA, WHO, Health Canada, MCC South Africa and ANVISA Brazil. The company's robust product portfolio is spread over six major therapeutic/ product areas, encompassing antibiotics, anti-retrovirals, CVS, CNS, gastroenterological and anti-allergic.
Structural Snapshot
Growth opportunity: In India, the current spending on healthcare (public and private) is estimated at 6% of GDP and is expected to increase to 10% of GDP by 2016. Thus, on a conservative basis also, the industry can grow at a 14-15% CAGR. On the other hand, global generic industry, at US$80bn (CY2008), is expected to grow at a CAGR of 9% to US$135bn-150bn by CY2015. Indian companies, on account of their relative positioning, can grow at around 20% during the period. Competitive position: A leader in the ARV business globally. Nature of business: Defensive sector insulated from economic cycles; Highly competitive industry, with a high payback period.
STOCK RETURNS (%) APL BSE HC INDEX SENSEX 3M 4.1 1Y (5.3) 3Y 50.9 29.7 21.3 5Y (7.9) 9.8 3.3 10Y 15.1 17.0 17.3 (23.9) (62.1) (2.6) (12.3)
FINANCIAL PERFORMANCE OVERVIEW (%) SALES GROWTH* PAT GROWTH* OPM# ROE# 3M 23.9 17.7 1Y 22.5 15.9 17.1 24.6 3Y 21.3 33.7 16.1 22.7 5Y 22.6 10Y 15.0

Growth triggers in place: APL has increased its global filings (ANDAs and dossiers) dramatically from 313 in FY2008 to 1,171 in FY2010, as it proposes to scale up from SSP and Cephs to NPNC products. Further, the company's transformation from being a pure API supplier to becoming a formidable formulations player has increased its cost efficiencies, as 90% of its formulation is now backward integrated. Thus, to leverage on its cost efficiency and strong product filings, APL entered into long-term supply agreements with Pfizer (March 2009) and AstraZeneca (September 2010), which provide significant revenue visibility going ahead. APL is also in discussion with other MNCs for more supply agreements. U.S. and ARV formulation segments: APL's business, excluding the supply agreements, would primarily be driven by the U.S. and ARV segments on the formulation front. APL has been an aggressive filer in the U.S. market, with 209 ANDAs filed and 134 approvals received until FY2011. Amongst peers, APL is the third largest ANDA filer. APL expects to file 15-20 ANDAs every year going forward. We believe APL is well placed to tap this opportunity. We expect the base business (ex-Pfizer) to post a 36.0% CAGR over FY2010-12 and contribute US$268mn by FY2012, as the company moves towards the high revenue-generating NPNC and injectable (SSP and Cephs) products. Outlook and valuation: We estimate APL's net sales to log a 12.7% CAGR to `5,343cr over FY2011-13E. Even after factoring in lower profitability going forward, the stock trades at attractive valuations. Hence, even after the downtrend, we maintain our Buy recommendation on the stock with a target price of ` 166.
65.7 24.2 15.2 13.1 22.9 17.7
298
January 2012

BALANCE SHEET
Y/E MARCH (` CR) ` SOURCES OF FUNDS EQUITY SHARE CAPITAL SHARE APPLICATION MONEY RESERVES & SURPLUS SHAREHOLDERS FUNDS MINORITY INTEREST TOTAL LOANS DEFERRED TAX LIABILITY TOTAL LIABILITIES APPLICATION OF FUNDS GROSS BLOCK LESS: ACC. DEPRECIATION NET BLOCK CAPITAL WORK-IN-PROGRESS GOODWILL INVESTMENTS CURRENT ASSETS CURRENT LIABILITIES NET CURRENT ASSETS MIS. EXP. NOT WRITTEN OFF TOTAL ASSETS 2,312 697 1,615 570 96 0.3 2,506 708 1,798 4,079 2,387 699 1,688 704 51 39 3,392 886 2,506 4,987 2,947 905 2,042 352 51 0.3 3,397 1,138 2,259 4,704 3,427 1,137 2,290 352 51 0.3 4,024 1,320 2,704 5,397 28 1,801 1,829 4 2,155 91 4,079 29 2,416 2,445 9 2,414 118 4,987 29 2,845 2,874 9 1,687 133 4,704 29 3,292 3,321 9 1,917 150 5,397 FY2010 FY2011 FY2012E FY2013E
% CHG
16.2
2,752 617
22.5
3,422 704
6.6
3,849 670
14.4
4,477 766
(% OF NET SALES)
18.3
149 73 44 645
17.1
172 62 25 751
14.8
206 54 43 603
14.6
232 57 52 629
% CHG
EXTRAORDINARY EXPENSE/(INC.) PBT (REPORTED) TAX PAT (REPORTED) ADD: SHARE OF EARNINGS OF ASSO. LESS: MINORITY INTEREST (MI) PAT AFTER MI (REPORTED) ADJ. PAT
100
(110) 754 191 563 563 454
16.4
(37) 788 225 563 563 526
(20)
603 142 462 462 462
4.3
629 149 480 1 480 480
% CHG
50.7
15.9
(12.2)
3.9
CASH FLOW STATEMENT

Y/E MARCH (` CR) ` PROFIT BEFORE TAX DEPRECIATION (INC.)/DEC. IN WORKING CAPITAL LESS: OTHER INCOME DIRECT TAXES PAID CASH FLOW FROM OPERATIONS (INC.)/DEC.IN FIXED ASSETS (INC.)/DEC. IN INVESTMENTS OTHER INCOME CASH FLOW FROM INVESTING ISSUE OF EQUITY INC./(DEC.) IN LOANS DIVIDEND PAID (INCL. TAX) OTHERS CASH FLOW FROM FINANCING INC./(DEC.) IN CASH OPENING CASH BALANCES CLOSING CASH BALANCES
KEY RATIOS
FY2011 788 172 (593) 25 (180) 162 (209) 38 25 (146) 260 (37) (123) 100 115 73 188 FY2012E 603 206 90 43 (127) 730 (208) (38) 43 (204) (727) (32) 77 (683) (157) 188 31 FY2013E 629 232 (308) 52 (132) 370 (480) 52 (428) 230 (34) 62 258 200 31 169 Y/E MARCH VALUATION RATIO (X) P/E (ON FDEPS) P/CEPS P/BV EV/SALES 4.8 3.8 1.5 1.4 7.7 5.0 3.8 1.2 1.2 7.2 6.1 4.2 1.0 1.0 6.7 5.9 4.0 0.8 0.9 6.0 FY2010 FY2011 FY2012E FY2013E
FY2010 754 149 (134) 44 (153) 573 (400) (9) 44 (365) 5 (1) (29) (239) (263) (55) 128 73
20.2 16.3 25.6 1.0 65.7
19.3 18.1 25.2 1.1 84.0
15.9 15.9 22.9 1.0 98.7
16.5 16.5 24.5 1.0 114.1
12.1 15.0 29.6
11.7 14.4 24.6
9.6 11.2 17.4
10.6 11.7 15.5
101 94 74
107 92 67
113 99 69
106 94 71
January 2012
299
Pharmaceuticals
Alembic Pharm.
Alembic Pharmaceuticals (Alembic) is a leading pharmaceutical company in India. The company is vertically integrated to develop pharmaceutical formulations and intermediates. Alembic is the market leader in the macrolides segment of anti-infective drugs in India. Alembic's manufacturing facilities are located in Vadodara and Baddi in Himachal Pradesh (for the domestic and non-regulated export market). The companys Panelav facility houses the API and formulation manufacturing (both US FDA approved) plants.
Structural Snapshot
Growth opportunity: In India, the current spending on healthcare (public and private) is estimated at 6% of GDP and is expected to increase to 10% of GDP by 2016. Thus, on a conservative basis also, the industry can grow at a 14-15% CAGR. On the other hand, global generic industry, at US$80bn (CY2008), is expected to grow at a CAGR of 9% to US$135bn-150bn by CY2015. Indian companies, on account of their relative positioning, can grow at around 20% during the period. Competitive position: Alembic is the market leader in the macrolides segment of anti-infective drugs in India. Nature of business: Defensive sector insulated from economic cycles; Highly competitive industry, with a long payback period.
STOCK RETURNS (%) ALEMBIC BSE HC INDEX SENSEX 3M (15.8) 4.1 1Y (5.3) 3Y 29.7 21.3 5Y 9.8 3.3 10Y 17.0 17.3
(2.6) (12.3)
FINANCIAL PERFORMANCE OVERVIEW (%) SALES GROWTH* PAT GROWTH* OPM# ROE# 3M 15.1 34.5 15.3 1Y 3Y 5Y 10Y -

Growth triggers in place: Alembic has been restructuring its business portfolio, which would aid in improving its growth and operating performance. The company's domestic formulation business (57% of sales in FY2012) has 75% of its revenue coming from the anti-infective, respiratory, gynecological and gastro therapeutic space. Alembic has a strong field force of ~2,700 MRs. Alembic's exports formulation business contributed 14% to its total turnover, with U.S. and Europe contributing the most. In the U.S., YTD the company has filed for 41 ANDAs and has received 15 approvals. The international API business contributes 28% to the total turnover. Going forward, management expects its domestic formulation business to grow at industry pace. Further, revenue from the U.S. generic market is expected to scale up on the back of product approvals. Profitability and return ratios to improve: We expect Alembic's margins to improve from current levels of 12.2% in FY2011 to 15.0% by FY2013, given the improving productivity of the field force going ahead. The company plans to reduce debt (currently at `339cr) going ahead, as it does not foresee any major capital expenditure requirements except the normal capex, which would aid improvement in its return ratios. Outlook and valuation: Alembic's growth and profitability have improved post the restructuring carried out by management. Over FY2011-13, we expect Alembic to post a CAGR of 15.4% and 52.1% in its sales and net profit, respectively. At the CMP, the stock is trading at attractive valuations and we recommend a Buy view on the stock with a target price of ` 77.
300
January 2012

Y/E MARCH (` CR) ` TOTAL OPERATING INCOME FY2011 1,184 FY2012E 1,370 FY2013E 1,576
BALANCE SHEET
Y/E MARCH (` CR) ` SOURCES OF FUNDS EQUITY SHARE CAPITAL RESERVES & SURPLUS SHAREHOLDERS FUNDS TOTAL LOANS DEFERRED TAX LIABILITY TOTAL LIABILITIES APPLICATION OF FUNDS 38 259 297 328 5 630 38 304 341 343 5 690 38 361 400 359 5 764 FY2011 FY2012E FY2013E
% CHG
TOTAL EXPENDITURE EBITDA DEPRECIATION & AMORTISATION INTEREST & OTHER CHARGES OTHER INCOME
1,040 144 30 26 18
15.7
1,171 199 39 31 18
15.0
1,339 236 43 32 18
(% OF PBT)
RECURRING PBT
25
71
16
112
13
143 GROSS BLOCK 434 162 272 27 3.3 542 214 328 630 484 200 283 7 3 643 247 396 690 534 243 291 8 3 746 284 462 764
% CHG
EXTRAORDINARY EXPENSE/(INC.) PBT (REPORTED) TAX 71 21
57.3
112 22
28.3
LESS: ACC. DEPRECIATION 143 29 NET BLOCK CAPITAL WORK-IN-PROGRESS INVESTMENTS CURRENT ASSETS CURRENT LIABILITIES NET CURRENT ASSETS TOTAL ASSETS
(% OF PBT)
PAT (REPORTED) PAT AFTER MI (REPORTED) ADJ. PAT
30.2
50 50 50
20.0
89 89 89
20.0
115 115 115
% CHG
80.3
28.3
CASH FLOW STATEMENT

Y/E MARCH (` CR) ` PROFIT BEFORE TAX DEPRECIATION (INC)/DEC IN WORKING CAPITAL DIRECT TAXES PAID CASH FLOW FROM OPERATIONS (INC.)/DEC.IN FIXED ASSETS (INC.)/DEC. IN INVESTMENTS CASH FLOW FROM INVESTING ISSUE OF EQUITY INC./(DEC.) IN LOANS DIVIDEND PAID (INCL. TAX) OTHERS CASH FLOW FROM FINANCING INC./(DEC.) IN CASH OPENING CASH BALANCES CLOSING CASH BALANCES
Note: Financials on Consolidated basis on Consolidated basis
KEY RATIOS
FY2011 71 30 (49) 19 33 (63) (0) (63) (32) (29) 119 29 (1) 7 6 FY2012E 112 39 (68) 22 60 (31) (0) (31) 15 (45) (30) (1) 6 6 FY2013E 143 43 (56) 29 101 (51) (51) 16 (57) 1 (40) 10 6 15 Y/E MARCH VALUATION RATIO (X) P/E (ON FDEPS) P/CEPS P/BV EV/SALES EV/EBITDA PER SHARE DATA (`) ` EPS (BASIC) EPS (FULLY DILUTED) CASH EPS DPS BOOK VALUE RETURNS (%) ROCE (PRE-TAX) ANGEL ROIC (PRE-TAX) ROE TURNOVER RATIOS (X) INVENTORY / SALES (DAYS) RECEIVABLES (DAYS) PAYABLES (DAYS) 71 72 67 71 72 69 70 71 68 16.2 16.7 14.9 24.3 25.2 28.0 26.6 27.3 30.9 2.6 2.6 4.2 1.5 15.7 4.7 4.7 6.8 1.9 18.1 6.1 6.1 8.3 2.3 21.2 14.5 9.1 2.4 0.9 7.2 8.0 5.6 2.1 0.8 5.3 6.3 4.6 1.8 0.7 4.5 FY2011 FY2012E FY2013E
January 2012
301
Pharmaceuticals
Indoco Remedies
Indoco has a strong brand portfolio of 120 products and a base of 1,600MRs. The company operates in various therapeutic segments, including anti-infective, anti-diabetic, CVS, ophthalmic, dental care, pain management and respiratory. Prominent Indoco brands include Cyclopam, Vepan, Febrex Plus, ATM, Sensodent-K and Sensoform. The company's Top-10 brands contribute over 50% to its domestic sales. Indoco now proposes to scale up its exports business through higher exposure to the regulated markets.
Structural Snapshot
Growth opportunity: In India, the current spending on healthcare (public and private) is estimated at 6% of GDP and is expected to increase to 10% of GDP by 2016. Thus, on a conservative basis also, the industry can grow at a 14-15% CAGR. On the other hand, the global generic industry, at US$80bn (CY2008), is expected to grow at a CAGR of 9% to US$135bn-150bn by CY2015. Indian companies, on account of their relative positioning, can grow at around 20% during the period. Competitive position: Indoco ranks 23rd in the industry in terms of the number of prescription drugs offered. Nature of business: Defensive sector insulated from economic cycles; Highly competitive industry, with a high payback period.
STOCK RETURNS (%) INDOCO BSE HC INDEX SENSEX 3M 4.1 1Y (5.3) 3Y 50.4 29.7 21.3 5Y 4.0 9.8 3.3 10Y 17.0 17.3 6.9 (13.5) (2.6) (12.3)
FINANCIAL PERFORMANCE OVERVIEW (%) SALES GROWTH* PAT GROWTH* OPM# ROE# 3M 9.4 (9.5) 12.4 1Y 20.7 21.5 13.5 15.5 3Y 22.6 17.3 13.2 13.9 5Y 14.9 14.5 14.9 10Y 15.2
11.4 12.1 16.6 18.0

Domestic formulations back on the growth trajectory: Indoco operates in various therapeutic segments, including anti-infective, anti-diabetic, CVS, ophthalmic, dental care, pain management and respiratory. Post the restructuring of its domestic business in FY2009, which has resulted in improved working capital cycle, Indoco is back on its growth trajectory with its domestic formulation business outpacing the industry's growth rate in the past two quarters. Further, the company plans to increase its sales force by 180MRs in FY2012E to increase its penetration in tier-II/rural markets. Scaling-up on the export front: Indoco has also started focusing on regulated markets by entering into long-term supply contracts. The company is currently executing several contract-manufacturing projects, covering a number of products for its clients in the U.K., Germany and Slovenia. Further, Indoco has entered into a supply agreement with Watson (U.S. market) and Aspen Pharma (emerging markets) for ophthalmic products. Although milestone payments from the contracts have commenced in FY2011, we expect substantial revenue flow from the deals to commence from FY201314. Valuations: For FY2012, management has maintained its guidance of 20% growth, with 2HFY2012 expected to be more robust than 1HFY2012. We expect revenues to post a 19.5% CAGR to `694cr and EPS to post a 17.4% CAGR to `55.5 over FY2011-13E. At ` 418, the stock is trading at 9.8x and 7.5x FY2012E and FY2013E earnings, respectively. We recommend a Buy with a target price of ` 583.
302
January 2012

BALANCE SHEET
Y/E MARCH (` CR) ` SOURCES OF FUNDS EQUITY SHARE CAPITAL RESERVES & SURPLUS SHAREHOLDERS FUNDS TOTAL LOANS DEFERRED TAX LIABILITY TOTAL LIABILITIES APPLICATION OF FUNDS GROSS BLOCK 268 70 197 31 251 78 173 401 296 83 213 82 268 87 181 476 413 105 308 25 325 108 216 549 473 126 346 25 403 129 274 645 12 298 311 66 24 401 12 338 350 100 26 476 12 378 390 126 33 549 12 430 442 165 38 645 FY2010 FY2011 FY2012E FY2013E
% CHG
14.4
345 174 46 56 69 53
20.7
414 213 29 67 105 64
16.5
477 253 34 73 118 82
22.5
581 307 40 89 144 104
(% OF NET SALES)
DEPRECIATION & AMORTISATION INTEREST & OTHER CHARGES OTHER INCOME RECURRING PBT PBT (REPORTED) TAX
13.3
12 3 0 43 43 1
13.5
13 2 0 57 57 5
14.7
19 6 2 66 66 14
15.2
21 LESS: ACC. DEPRECIATION 8 2 86 86 18 NET BLOCK CAPITAL WORK-IN-PROGRESS INVESTMENTS CURRENT ASSETS CURRENT LIABILITIES NET CURRENT ASSETS MIS. EXP. NOT WRITTEN OFF TOTAL ASSETS
(% OF PBT)
2.4
42 42
9.7
51 51
21.1
52 52
20.5
68 68
% CHG
33.5
21.5
2.2
30.7
CASH FLOW STATEMENT

Y/E MARCH (` CR) ` PROFIT BEFORE TAX DEPRECIATION (INC)/DEC IN WORKING CAPITAL LESS: OTHER INCOME DIRECT TAXES PAID CASH FLOW FROM OPERATIONS (INC.)/DEC.IN FIXED ASSETS (INC.)/DEC. IN INVESTMENTS OTHER INCOME CASH FLOW FROM INVESTING ISSUE OF EQUITY INC./(DEC.) IN LOANS DIVIDEND PAID (INCL. TAX) OTHERS CASH FLOW FROM FINANCING INC./(DEC.) IN CASH OPENING CASH BALANCES CLOSING CASH BALANCES FY2010 43 12 1 8 48 (48) (48) 13 (3) (2) 8 9 29 38 FY2011 57 13 (13) 4 53 (80) (80) 75 (10) (48) 17 (10) 38 27 FY2012E 66 19 (21) 2 7 55 (59) 2 (57) 73 (12) (45) 16 14 27 41 FY2013E 86 21 (47) 2 13 45 (60) 2 (58) 96 (16) (55) 25 12 41 52
KEY RATIOS
January 2012
303
304
January 2012
Power
COVERAGE
Companies NTPC CESC GIPCL CMP(`) ` 171 240 72 Target (`) ` 199 304 95 Reco Buy Buy Buy
NEUTRAL
Plagued with problems

Huge capacity addition expected over FY2011-15E, but PLFs to decline: India's power generation capacity currently stands at 1,86,654MW, and we expect 83,000MW of generation capacity to be added in India over FY201115E at a CAGR of 10.3%. Currently coal-based power capacity at 1,04,000MW commands a dominant share of ~55% in overall power generation capacity. This dominance is set to continue with coal-based capacity expected to account for 77% of the generation capacity estimated to be added over FY2011-15E. However, domestic coal production (Coal India being the major player with 80% share of domestic production) has not been sufficient to meet the country's overall coal demand. Coal India's production, which reported a CAGR of 4.6% over FY2007-11, is expected to remain low on account of imposition of stringent environment laws. In all, we expect domestic coal production to witness a 5.4% CAGR over FY2011-15E. Hence, although 64,000MW of coal-based capacity is expected to be added over FY2011-15E, incremental domestic coal would support only 28,000MW of capacity. Domestic coal deficit is expected to result in imports increasing from 89mt in FY2011 to 175mt in FY2015. Domestic coal shortage coupled with poor outlook for gas output is expected to result in allIndia PLF declining by 418bp over the aforementioned period, leading to 8.0% growth in power generation, lagging the 10.3% growth in generation capacity. Private sector players most affected due to fuel issues: A substantial portion of private sector power projects are expected to operate under competitive bidding (case 1 and case 2) and merchant routes. Projects operating under this route have minimal protection from fuel-related issues. Currently, fuel-related issues faced by power generators pertain to the unexpected increase in cost of fuel compared to the cost on which long-term PPAs were signed (due to instances such as Indonesian regulation and lower-than-contracted domestic coal supply). These issues are expected to cause fuel shortage, resulting in higher coal cost. Long-term PPAs under case 1 and case 2 routes were signed by these companies, taking into account the predetermined fuel cost; and they do not provide for passing on the increase in coal cost. In effect, this has pushed the IRRs for these projects down substantially, making them unviable for project promoters. CPSUs such as NTPC are better placed in this situation, considering that they operate under cost-plus PPAs, which permit them to pass on the increase in fuel costs. Further, CPSUs get preference with respect to allocation of coal linkages. Thus, private sector players are the most vulnerable to fuel-related issues. Sector's valuations at above-comfort levels considering the headwinds: Stocks in the power sector have corrected substantially in the past one year, with the BSE Power Index losing ~26% (vs. a 12% decline in the Sensex) during the period. Post this correction, top Indian IPPs are trading at P/BV of 1.3-2x on FY2013E, which we believe is still above comfort levels, considering the concerns surrounding the sector. In this scenario, we believe power generators operating under the cost-plus route (allowed to pass on the increase in fuel costs and guaranteed regulated returns) and with assured power offtake due to long-term PPAs are better placed than their private sector peers. We maintain our Buy view on NTPC (cumulative PPAs for 1,00,000MW and payment assured under the tripartite agreement), CESC (standalone power business trading at attractive valuations, P/BV of 0.6x on FY2013E basis) and GIPCL (P/BV of 0.7x on FY2013E basis)
January 2012
305
Power Huge capacity addition expected over FY2011-15E, but PLFs to decline
India's capacity addition has gathered pace over the past few years, and we expect a total of 83,000MW of capacity to be added over FY2011-15E. The expected capacity addition over this period is double the capacity addition over FY2007-11. Growth in capacity is expected to be driven by private sector players. Capacity addition during this period is set to be buoyed by the commissioning of four UMPPs of 4,000MW each.
Little progress in the development of captive coal blocks

Of the 195 captive coal blocks that have been allotted by Ministry of Coal since it began the allocation of captive coal blocks in 1993, only ~30 have started mining till date. Obtaining environment and forest clearances as well as obtaining mining lease from state governments are the major hurdles in the development of allotted captive coal blocks. We do not expect much improvement in production from captive coal blocks as progress in the development of captive mining blocks has been very slow. During June 2011, Ministry of Coal de-allocated 24 captive coal blocks allotted to various companies due to slow progress in development.
Exhibit 1: Cumulative capacity addition over FY2007-11 and FY2011-15E

90,000 80,000 70,000 60,000
(MW)
83,000
India's coal imports to increase by 86mtpa over FY2011-15E

Despite having the fourth highest coal reserves globally (proven reserves of 114bn metric tonnes), India faces coal deficit as domestic coal production (Coal India being the major player with 80% share of domestic production) has not been sufficient to meet the demand. Over FY2007-11, while India's coal demand witnessed a 7.7% CAGR, coal production grew at a lower 5.6%. Delay in development of coal blocks due to issues in land acquisition and obtaining environment clearance are the prime reasons for the slow rate of coal production. Going ahead, we expect India's coal imports to surge from 89mt in FY2011 to 175mt in FY2015.
50,000 40,000 30,000 20,000 10,000 0
41,297
FY2007-11
FY2001-15E
Source: CEA, Company, Angel Research
Domination of coal-based capacities set to continue

India's coal-based power capacity of ~1,04,000MW commands a dominant share of ~55% in overall power generation capacity. This is set to continue with coal-based capacity expected to account for 77% of generation capacity estimated to be added over FY2011-15E. However, although we expect ~64,000MW of coal-based capacity to be added over the aforementioned period, incremental domestic coal would support only 28,000MW of capacity, resulting in low PLF for coal-based plants. Further, with the country's gas output not expected to pick up, we expect low PLFs for gas-based plants as well. Thus, despite a 10.3% CAGR in India's generation capacity over FY2011-15E, power generation CAGR is expected to be much lower at 8.0%.
Imported coal not to provide succor

Although a number of future capacities have been designed to operate on imported coal (both exclusively and with a mix of domestic coal), imported coal is not expected to solve the problem of coal shortage. While imported coal is suitable only for coastal power projects, the increase in global coal prices, in the past one year coupled with strong depreciation of INR vs. USD, has made coal imports expensive. We expect India's coal imports to increase from 89mt in FY2011 to 175mt in FY2015.
Exhibit 3: Newcastle Mckloskey index

250 200 150 100 50 0 Rising coal prices (INR terms) 9000 8000 7000 6000 5000 4000 3000 2000 1000 0
Coal shortage in power stations to worsen.

With poor growth in coal production over the past few years, Coal India has not signed any long-term fuel supply agreement for projects commissioned after March 2009. Further, as per the new clause in the fuel supply agreements of Coal India, the company is not bound to pay any penalty if it supplies 50% of the contracted quantity as against the earlier stipulated 90%. Poor infrastructure for handling coal in ports and deficiencies in rail and road infrastructure are also leading to coal shortage in power plants.
Sep-07
May-07
Sep-11
Jan-11
May-11
Jan-07
Sep-08
May-08
Sep-09
Jan-09
May-09
Jan-06
Sep-06
May-06
Jan-08
US $/tonne - LHS
Rs / tonne - RHS
Exhibit 2: Indias Incremental coal production to be insufficient

FY12E Inc. coal prodn. to be available for power sector (mt) Capacity that can be supported (MW) New coal based capacity exp. (MW) Shortage (MW) 10 FY13E 30 FY14E 34 FY15E 39 Total 112
2,386 14,250 (11,864)
7,380 16,500 (9,120)
8,475 16,500 (8,025)
9,720 16,750
27,960 64,000
(7,030) (36,040)
Source: Min. of Coal, Angel Research: Note: A number of upcoming power projects incl.uded above have been alloted captive coal blocks, higher pace of coal production in these blocks would lead to lower overall coal shortage.
A major portion of India's coal imports are met by Indonesia, and a large number of projects of India's IPPs are expected to be fuelled by Indonesian coal on the basis of long-term fuel supply agreements with Indonesian companies. The Indonesian government's new regulation that linked coal exports to a market-linked reference price is a huge setback for Indian power generators as most of the fuel supply agreements were signed at prices that were at a steep discount to current market rates. As power generators are not liable to pay penalty if the PLF touches the stipulated level, they would not be inclined to operate at higher levels if the selling price is not viable. Some of the major projects affected due to Indonesian regulations are Tata Power's UMPP at Mundra, Reliance Power's Krishnapatnam UMPP and Adani Power's Mundra power projects. Please refer to important disclosures at the end of this report
306
January 2012
Sep-10
Jan-10
May-10
Jan-12
Power
thus the power-deficit situation is set to continue
India's overall power deficit stood at 8.5% in FY2011. Over FY2011-15E, the country's power demand is expected to witness a CAGR of 7.4%. Generation growth is set to be higher than demand growth at 8.0% CAGR (although lower than growth in capacity at 10.3%). Despite higher generation growth (vs. demand growth) power deficit situation is expected to continue, although the level of deficit is expected to reduce. to operate on imported coal from Indonesia, which is adding to its fuel woes. CPSUs such as NTPC are better placed in this situation, considering that they operate under cost-plus PPAs, which permit them to pass on the increase in fuel costs. Further, CPSUs get preference with respect to allocation of coal linkages. Thus, private sector players are the most vulnerable to fuel-related issues.
Exhibit 4: All- India power-deficit scenario

12.0 10.0
Exhibit 5: IPP projects classification

Fuel (MW) Coal Cost Plus Case 1 linkage Case 1 captive Case 2 Imported Case 2 Captive Merchant - w/o linkage Off-take type Reliance Power 1,633* 447 3,960
$
Tata Power 3,218 4,000 81# -
Adani Power 6,520 -
JSW Energy 1,406 1,734 270 168 72 3,650
8.0
(%)
6.0 4.0 2.0 0.0 FY06 FY07 FY08 FY09 FY10 FY11 FY12E FY13E FY14E FY15E
3,960 7,920^ 153 240 100 2,400 20,813
Merchant - linkage coal Merchant Renewable Cost Plus Case 1 Gas Hydro Yet to be tied up Merchant PPA Total
Source: CEA, Angel Research
140 336 447 8,222
6,520
Private sector players most affected due to fuel issues

A substantial portion of the private sector power projects (existing and under commissioning) are expected to operate under competitive bidding (case 1 and Case 2) and merchant routes. Projects operating under these routes have minimal protection from fuel-related issues. Currently, fuel-related issues faced by power generators pertain to the unexpected increase in cost of fuel compared to the cost on which long-term PPAs were signed (due to instances such as Indonesian regulation) and lower-than-contracted domestic coal supply. These issues are expected to cause fuel shortage, leading to higher coal cost. Long-term PPAs under case 1 and case 2 routes were signed by these companies, taking into account the predetermined fuel cost; and they do not provide for passing on the increase in coal cost. In effect, this has pushed the IRRs for these projects down substantially, making them unviable for project promoters. For instance, Reliance Power which has been allotted captive coal blocks for operating the Sasan and Tilaiya UMPPs, too is not very well placed in this regard as the company has won these projects by quoting aggressively and is thus liable to supply power at very low tariff. Reliance Power plans to use excess coal from the captive coal blocks allotted for Sasan UMPP for running its Chitrangi Power Project. However, there is no certainity as to whether the company would be allowed to use the excess coal as the matter is sub-judice. If the company is not allowed to use the excess captive coal, then the companys IRRs at company level would decline sharply. Further, the company s port based UMPP at Krishnapatnam is expected
Source: Company, Angel Research; Note: Incl. installed projects, projects under construction and projects in advanced stage of development; * Incl. 433MW CCPP plants; # Operates on heavy fuel oil; ^Sasan and Tilaiya UMPPs; $ Chitrangi power project
Sector valuations at above comfort levels considering the headwinds: Stocks in the power sector have corrected substantially in the past one year, with BSE Power Index losing ~26% (vs. a 12% decline in BSE Sensex) during the period. Post this correction, top Indian private IPPs are trading at P/BV of 1.3-2x on FY2013E basis, which we believe is above comfort levels, considering the concerns surrounding the sector. In this scenario, in our view, power generators operating under the cost-plus route (allowed to pass on the increase in fuel costs and guaranteed of regulated returns) and with assured power off-take due to long-term PPAs are better placed than their private sector peers. We maintain our Buy recommendation on NTPC (cumulative PPAs for 1,00,000MW and payment assured under tripartite agreement), CESC (power business trading at attractive valuations, P/BV of 0.6x on FY2013E basis) and GIPCL (P/BV of 0.7x on FY2013E basis)
Exhibit 6: Recommendation summery

Company M Cap (` cr) NTPC* CESC GIPCL 141,327 2,993 1,092 CMP (`) 171 240 72 TP (`) 199 304 95 Buy Buy Buy Reco Net Sales (` cr) ` FY12E 63,970 4,533 1,384 FY13E 71,871 4,880 1,437 OPM (% ) FY12E 24.5 24.2 33.3 FY13E 25.0 23.5 30.9 Net Profit (` cr) ` FY12E 9,580 511 154 FY13E 10,517 525 166 RoE (%) FY12E 13.3 11.3 10.8 FY13E 13.4 10.5 10.8 P/BV (x) FY12E FY13E 1.9 0.6 0.7 1.7 0.6 0.7
Source: Company, Angel Research; Note: *Financials on consolidated basis
January 2012
307
Power
NTPC
Company Background
CMP/TP/Upside: `171 / `199 / 16%
Established in 1975, NTPC is India's largest power generation company. NTPC has an installed capacity of 36,014MW (including 3,364MW under JVs), spread across 28 power stations. The company's capacity has grown by 6,790MW over FY2007-11. The company envisions being a 75,000MW company by FY2017. NTPC enjoys healthy operational efficiency and has consistently reported high PLF of ~90% compared to all-India PLF of ~75%.
Structural Snapshot
Growth opportunity: India's overall capacity addition for FY2011 stood at ~12,000MW, which is just a fraction of the ~1,00,000MW of capacity added by China every year. NTPC accounts for 17.8% of India's installed capacity and contributed to 27.2% of the country's power generation during FY2011. NTPC (including JVs) currently has 12,928MW of capacity under construction, of which ~10,000MW will be commissioned in FY2012-13. The company's future growth would be driven by the timely execution of its huge capacity addition plans. NTPC has recently completed the tendering process for awarding BTG orders for 7,200MW (800x9) of super-critical thermal plants. The company is also expected to award BTG orders for another 5,940MW (660x9) of projects shortly (the issue is currently subjudice). Competitive position: NTPC is comfortably ahead of its competitors due to cumulative PPAs for 1,00,000MW. Payment for power supply is guaranteed under the tripartite agreement till FY2016 and on the basis of first charge thereafter. NTPC receives over 80% of its coal requirements from domestic sources and is preferred by the Ministry of Coal over private IPPs with respect to long-term as well as short-term coal supply. Nature of business: Low risk; Stable and regulated returns.
STOCK RETURNS (%) NTPC SENSEX 3M (0.3) 1Y (8.5) 3Y (1.3) 5.0 21.3 5Y 4.4 0.0 3.3 10Y 17.3
BSE PWR INDEX (4.3) (25.7) (2.6) (12.3)

FINANCIAL PERFORMANCE OVERVIEW (%) SALES GROWTH* PAT GROWTH* OPM# ROE# 3M^ 18.4 15.0 21.1 1Y 19.0 5.8 22.8 14.0 3Y 14.1 7.8 24.9 14.5 5Y 15.8 9.9 10Y 11.7 9.6
26.8 26.9 14.6 14.0
NOTE: ABOVE 1 YEAR - * ON CAGR BASIS, # ON AVERAGE BASIS, ^ON STANDALONE BASIS

Earnings protected by the regulated return model: NTPC, being a central public utility (CPU) governed by the CERC's regulations, earns RoE of 15.5% (on regulated equity). Additionally, the company has been consistently realizing various generation-linked incentives, which add 2-3% to its RoE. Enjoys robust fuel security: NTPC, which received coal linkages for nine new projects with total capacity of 10,920MW in FY2011, would be a beneficiary of the Ministry of Coal's linkage policy for the Twelfth Plan, which gives priority to CPUs. Strong fuel security augurs well for NTPC, whose recovery of fixed costs is linked to the stipulated level of PAF, which in turn is critically linked to coal availability. Additionally, NTPC targets to mine 47mn tonnes of captive coal by FY2017. Valuation reasonable: For a company with significant fuel security, high RoEs of 18-19% (on regulated equity) as well as significant capacity expansion plans, which enviably have both fuel security and assured offtake, in our view, NTPC is trading reasonably at 1.7x FY2013E P/BV. Hence, we maintain our Buy recommendation on the stock with a target price of ` 199 by assigning a target multiple of 2x on FY2013E P/BV.
308
January 2012

BALANCE SHEET
Y/E MARCH (` CR) ` SOURCES OF FUNDS EQUITY SHARE CAPITAL RESERVES& SURPLUS SHAREHOLDERS FUNDS MINORITY INTEREST TOTAL LOANS DEFERRED TAX LIABILITY TOTAL LIABILITIES APPLICATION OF FUNDS GROSS BLOCK LESS: ACC. DEPRECIATION NET BLOCK CAPITAL WORK-IN-PROGRESS GOODWILL INVESTMENTS CURRENT ASSETS CURRENT LIABILITIES NET CURRENT ASSETS MIS. EXP. NOT WRITTEN OFF TOTAL ASSETS 71,527 32,723 38,804 37,682 1 11,778 33,215 12,908 20,307 20 108,592 79,210 34,346 44,863 44,855 1 8,357 38,045 15,274 22,771 120,847 96,400 37,174 59,225 39,665 1 7,357 41,907 15,896 26,010 132,259 114,400 40,530 73,869 43,665 1 6,357 41,014 16,549 24,464 148,357 8,246 55,993 64,239 279 43,844 230 108,592 8,246 61,053 69,298 485 50,392 672 120,847 8,246 66,964 75,210 485 55,892 672 132,259 8,246 73,812 82,058 485 65,142 672 148,357 FY2010 FY2011 FY2012E FY2013E
% CHG
9.0
35,156 13,075
19.0
44,302 13,117
11.4
48,269 15,701
12.3
53,907 17,964
(% OF NET SALES)
DEPRECIATION & AMORTISATION INTEREST & OTHER CHARGES OTHER INCOME RECURRING PBT EXTRAORDINARY EXPENSE/(INC.) PBT (REPORTED) TAX
27.1
2,894 2,078 2,947 11,049 11,049 2,211
22.8
2,720 2,493 4,488 12,393 12,393 3,044
24.5
2,828 2,821 2,648 12,700
25.0
3,356 3,157 2,131 13,581 -
12,700 3,120
13,581 3,065
(% OF PBT)
PAT (REPORTED) LESS: MINORITY INTEREST (MI) ADJ. PAT AFTER MI (REPORTED)
20.0
8,838 (0.0) 8,838
24.6
9,348 (5.2) 9,354
24.6
9,580 (5.2) 9,586
22.6
10,517 (5.2) 10,522

BASIC EPS (RS)
9.2 18.3
10.7
5.8 16.3
11.3
2.5 15.0
11.6
9.8 14.6
12.8
% CHG
9.2
5.8
2.5
9.8
CASH FLOW STATEMENT

Y/E MARCH (` CR) ` PROFIT BEFORE TAX DEPRECIATION CHANGE IN WORKING CAPITAL LESS: OTHER INCOME DIRECT TAXES PAID CASH FLOW FROM OPERATIONS (INC.)/ DEC. IN FIXED ASSETS (INC.)/ DEC. IN INVESTMENTS OTHER INCOME CASH FLOW FROM INVESTING ISSUE OF EQUITY INC./(DEC.) IN LOANS DIVIDEND PAID (INCL. TAX) OTHERS CASH FLOW FROM FINANCING INC./(DEC.) IN CASH OPENING CASH BALANCES CLOSING CASH BALANCES FY2010 11,049 2,894 408 2,947 2,799 8,606 (14,009) (82) 2,947 (11,144) 5,022 3,682 1,340 (1,198) 17,250 16,053 FY2011 12,393 2,720 (2,839) 2,590 3,044 6,639 (13,736) 3,420 2,590 (7,726) 6,548 3,654 2,894 1,807 16,053 17,860 FY2012E 12,700 2,828 (2,000) 2,648 3,120 7,761 (12,000) 1,000 2,648 (8,352) 5,500 3,669 1,831 1,240 17,860 19,099 FY2013E 13,581 3,356 (2,235) 2,131 3,065 9,506 (22,000) 1,000 2,131 (18,869) 9,250 3,669 5,581 (3,781) 19,099 15,318
KEY RATIOS
January 2012
309
Power
CESC
Company Background
CMP/TP/Upside: `240 / `304 / 27%
CESC is a licensed power distributor in Kolkata and Howrah. The company supplies power from its own generation plants (capacity of 1,225MW located across four power stations). The company also purchases power from WBSEDCL during peak periods to meet customer demand. Over the past few years, CESC has consistently reported PLF in excess of 90%. On the distribution front as well, the company's operational efficiency has improved over the years, with T&D losses coming down from 22.8% in FY2001 to 12.9% in FY2011. CESC holds a 94% stake in its subsidiary, Spencer's Retail, which is involved in the retail business.
STOCK RETURNS (%) CESC SENSEX 3M 1Y 3Y 0.4 5.0 21.3 5Y 0.0 3.3 10Y 17.3 (11.9) (25.8) (2.6) (12.3) (6.2) 36.2
Structural Snapshot
Growth opportunity: CESC is expanding its generation business and is setting up projects within and outside West Bengal through its subsidiaries. Currently, 1,200MW of capacity is under construction and another 5,869MW of projects are under various stages of development. Competitive position: CESC is the sole power distributor in Kolkata and Howrah, with 2.5mn customers. However, the company would be facing competition for signing PPAs of its upcoming power generation projects. CESC is well placed in terms of fuel security with assured fuel supply for ~90% of its existing operations. Nature of business: While CESC's power distribution business has low risks with stable regulated returns, its retail venture is currently in losses.
BSE PWR INDEX (4.3) (25.7)

FINANCIAL PERFORMANCE OVERVIEW (%) SALES GROWTH* PAT GROWTH* OPM# ROE# 3M 12.2 (26.5) 19.8 1Y 19.6 12.9 25.0 12.0 3Y 12.3 12.4 24.0 12.3 5Y 9.4 19.1 13.5 10Y 8.5 10.3
23.3 25.6

Expansion plans on track: CESC has 1,200MW of generation projects under construction at Haldia (600MW) and Chandrapur (600MW), which are expected to be operational by FY2014. The company has planned capex of ~`2,300cr in its license area over FY2011-14, a portion of which would be added to its regulated equity, thereby contributing to its future earnings. Retail business on the recovery path: Spencer's Retail has been a loss-making venture since it became CESC's subsidiary in FY2008 and reported an accumulated loss of `778cr as of FY2011. However, on a positive note, the retail business has turned EBITDA-positive on store level since 1QFY2011. Spencer's Retail is attempting to improve its margins by focusing more on the high-margin food business and is expected to breakeven at the EBITDA level by FY2014. Valuations attractive: Currently, CESC's licensed operations, which have a direct exposure to retail customers, generate healthy cash flow. Further, tariff regulation allows for monthly variable cost adjustment, enabling the company to pass on the increase on a regular basis to its customers. The stock is currently trading at 0.6x FY2013E P/BV on a standalone basis, which is attractive, considering the healthy cash inflows. We maintain our Buy recommendation on the stock with an SOTP target price of ` 304, after valuing Power, Retail and Real Estate businesses at ` 282, ` 11 and ` 11 respectively.
310
January 2012

BALANCE SHEET
Y/E MARCH (` CR) ` SOURCES OF FUNDS EQUITY SHARE CAPITAL RESERVES& SURPLUS SHAREHOLDERS FUNDS TOTAL LOANS DEFERRED TAX LIABILITY TOTAL LIABILITIES APPLICATION OF FUNDS GROSS BLOCK LESS: ACC. DEPRECIATION NET BLOCK CAPITAL WORK-IN-PROGRESS INVESTMENTS CURRENT ASSETS CURRENT LIABILITIES NET CURRENT ASSETS MIS. EXP. NOT WRITTEN OFF TOTAL ASSETS 126 3,697 3,823 3,708 7,531 9,990 4,131 5,859 278 679 2,884 2,176 708 7 7,531 126 4,179 4,304 3,952 8,256 10,704 4,490 6,214 272 1,084 2,893 2,213 680 6 8,256 126 4,626 4,751 4,352 9,103 11,341 4,790 6,550 567 1,184 3,171 2,376 795 6 9,103 126 5,091 5,217 4,952 10,169 11,852 5,104 6,748 593 2,084 3,198 2,460 738 6 10,169 FY2010 FY2011 FY2012E FY2013E
% CHG
8.6
2,605 750
19.6
3,010 1,001
13.0
3,436 1,098
7.6
3,735 1,145
(% OF NET SALES)
22.3
206 178 156
25.0
267 272 152
24.2
300 313 153
23.5
314 351 176
(% OF PBT)
RECURRING PBT
30.0
521
24.8
614
24.0
638
26.8
656
% CHG
12.4
(1) 522 89
17.8
614 126
3.8
638 127
2.8
656 131
(% OF PBT)
17.0
433 432
20.5
488 488
19.9
511 511
19.9
525 525
% CHG
BASIC EPS (RS)
5.8
34.5
12.9
38.9
4.5
40.7
2.8
41.8
% CHG
5.8
12.7
4.5
2.8
CASH FLOW STATEMENT

Y/E MARCH (` CR) ` PROFIT BEFORE TAX DEPRECIATION CHANGE IN WORKING CAPITAL LESS: OTHER INCOME DIRECT TAXES PAID CASH FLOW FROM OPERATIONS (INC.)/ DEC. IN FIXED ASSETS (INC.)/ DEC. IN INVESTMENTS OTHER INCOME CASH FLOW FROM INVESTING ISSUE OF EQUITY INC./(DEC.) IN LOANS DIVIDEND PAID (INCL. TAX) OTHERS CASH FLOW FROM FINANCING INC./(DEC.) IN CASH OPENING CASH BALANCES CLOSING CASH BALANCES FY2010 522 206 734 156 89 1,217 (1,050) (368) 156 (1,262) 151 58 178 (85) (131) 1,251 1,120 FY2011 614 267 (109) 152 126 494 (708) (406) 152 (961) 244 58 186 (281) 1,120 839 FY2012E 638 300 (214) 153 127 444 (932) (100) 153 (879) 400 58 (6) 336 (99) 839 740 FY2013E 656 314 (84) 176 131 579 (537) (900) 176 (1,262) 600 58 542 (141) 740 599
KEY RATIOS
January 2012
311
Power
GIPCL
Company Background
CMP/TP/Upside: `72 / `95 / 32%
GIPCL is majorly (~63%) owned by various state-owned companies of Gujarat. The company currently has 805MW generation capacity, with 500MW (125x4) lignite-based capacity operational at Surat and the remaining 305MW (160MW+145MW) gas-based capacity operational at Vadodara. The company's Surat Lignite Power Plant (SLPP) station II (2x125) was declared commercial in FY2011.
Structural Snapshot
Growth opportunity: Currently, GIPCL is in the midst of examining the feasibility of developing a new 600MW lignite-based power plant in Surat, through which it intends to make the best use of the coal mines in its possession, which have adequate lignite to support 1,000MW of power generation for 35 years. Competitive position: GIPCL has assured offtake for its entire capacity, currently operational through MoUs and PPAs, under the cost-plus model. The company is also well placed in terms of fuel security with regards to SLPP stations due to its captive lignite mines (Vastan and Mangrol). Nature of business: Low risk; Stable and regulated returns.
STOCK RETURNS (%) GIPCL SENSEX 3M 1Y 3Y 15.7 5.0 21.3 5Y 2.4 0.0 3.3 10Y 18.8 17.3 (9.0) (24.0) (2.6) (12.3)
BSE PWR INDEX (4.3) (25.7)

NOTE: ABOVE 1 YEAR ON CAGR BASIS;

SLPP expansion to lead to profit growth: GIPCL's SLPP station II was built at a cost of `1,630cr (including the cost of development of Mangrol mines). Although SLPP station II commercialized at the beginning of FY2011, it stabilized only by FY2011-end. Hence, the plant had a low PAF for FY2011. Now that the plant has stabilized, the availability factor has also improved, which would result in an improvement in recovery of fixed costs. During 1HFY2012, SLPP II reported PAF of 67% vs. 57% in 1HFY2011. Enjoys reasonably strong fuel security: GIPCL is well placed in terms of fuel security, with its entire fuel requirements for 500MW SLPP stations I and II being met from its captive lignite mines. For gas-based plants, which have gas requirements of 1.55-1.60 mmscmd, the company has entered into tie-ups with GAIL and RIL-Niko for 1.01mmscmd; while for the remaining quantity, the company has tied up with GSPC and GAIL for the supply of spot gas on 'as and when' required basis. Valuations attractive: Considering the fuel security and cost-plus return business model, which assures RoE of 14% (excl. generation-linked incentives) at 75% and 80% PAF for lignite and gas-based plants, respectively , the stock is trading attractively at 0.7x FY2013 P/BV. The stock has corrected by 9% in the past three months, which provides a good entry point to investors. We have assigned a P/BV of 0.9x on FY2013 book value to arrive at a target price of `95. We maintain our Buy rating on the stock.
7.3 26.4 25.3 33.7 11.2 10.8
312
January 2012

BALANCE SHEET
Y/E MARCH (` CR) ` SOURCES OF FUNDS EQUITY SHARE CAPITAL RESERVES & SURPLUS SHAREHOLDERS FUNDS TOTAL LOANS DEFERRED TAX LIABILITY TOTAL LIABILITIES APPLICATION OF FUNDS GROSS BLOCK LESS: ACC. DEPRECIATION NET BLOCK CAPITAL WORK-IN-PROGRESS INVESTMENTS CURRENT ASSETS CURRENT LIABILITIES NET CURRENT ASSETS MIS. EXP. NOT WRITTEN OFF TOTAL ASSETS 1,936 1,210 726 1,755 27 291 427 (135) 13 2,387 3,865 1,335 2,530 30 373 418 (46) 11 2,525 3,865 1,501 2,364 25 30 479 464 15 11 2,445 3,865 1,667 2,198 75 30 487 494 (7) 11 2,306 151 1,095 1,246 1,064 76 2,387 151 1,214 1,365 1,114 47 2,525 151 1,323 1,475 924 47 2,445 151 1,445 1,596 664 47 2,306 FY2010 FY2011 FY2012E FY2013E
% CHG
(18.7)
720 219
16.0
777 312
27.0
923 461
3.8
993 444
(% OF NET SALES)
23.3
88 16 14
28.7
125 70 4
33.3
166 111 4
30.9
166 80 4
(% OF PBT)
RECURRING PBT
10.8
128
3.3
121
2.1
188
2.0
202
% CHG
17.9
128 22
(5.7)
121 (42)
55.0
188 34
7.7
202 36
(% OF PBT)
PAT (REPORTED) ADJ PAT
16.8
107 107
(34.6)
163 163
18.0
154 154
18.0
166 166
% CHG
BASIC EPS (RS)
24.5
7.1
52.5
10.8
(5.6)
10.2
7.7
11.0
% CHG
24.5
52.5
(5.6)
7.7
CASH FLOW STATEMENT

Y/E MARCH (` CR) ` PROFIT BEFORE TAX DEPRECIATION CHANGE IN WORKING CAPITAL LESS: OTHER INCOME DIRECT TAXES PAID CASH FLOW FROM OPERATIONS (INC.)/ DEC. IN FIXED ASSETS (INC.)/ DEC. IN INVESTMENTS (INC.)/ DEC. IN LOANS AND ADVANCES OTHER INCOME CASH FLOW FROM INVESTING ISSUE OF EQUITY INC./(DEC.) IN LOANS DIVIDEND PAID (INCL. TAX) OTHERS CASH FLOW FROM FINANCING INC./(DEC.) IN CASH OPENING CASH BALANCES CLOSING CASH BALANCES FY2010 128 88 21 14 23 201 (436) 35 14 (387) 224 44 (5) 185 (2) 3 2 FY2011 121 125 (65) 4 (7) 184 (209) (3) 4 (208) 49 44 (18) 24 (0) 2 1 FY2012E 188 166 (30) 4 34 286 (25) 4 (21) (190) 44 (234) 31 1 32 FY2013E 202 166 13 4 36 341 (50) -
KEY RATIOS
Y/E MARCH VALUATION RATIO (X) P/E (ON FDEPS) P/CEPS P/BV EV/SALES EV/EBITDA ` PER SHARE DATA (`) EPS (BASIC) EPS (FULLY DILUTED) CASH EPS 4 (46) (260) 44 (304) (9) 32 23 DPS BOOK VALUE RETURNS (%) ROCE (PRE-TAX) ANGEL ROIC (PRE-TAX) ROE TURNOVER RATIOS (X) INVENTORY / SALES (DAYS) RECEIVABLES (DAYS) PAYABLES (DAYS) 38 61 206 35 57 198 31 57 174 34 59 176 5.8 18.3 8.8 7.6 11.9 12.5 11.9 12.0 10.8 11.7 12.1 10.8 7.1 7.1 12.9 2.9 82.4 10.8 10.8 19.0 2.9 90.3 10.2 10.2 21.2 2.9 97.5 11.0 11.0 21.9 2.9 105.5 10.2 5.6 0.9 2.3 9.8 6.7 3.8 0.8 2.0 7.1 7.1 3.4 0.7 1.4 4.3 6.6 3.3 0.7 1.2 3.9 FY2010 FY2011 FY2012E FY2013E
January 2012
313
314
January 2012
Real Estate
COVERAGE
Companies DLF HDIL Anant Raj CMP 210 82 59 Target (`) ` 115 78 Reco Buy Buy - Neutral
NEUTRAL
Reality caught up with real estate

The real estate sector has witnessed a topsy-turvy ride over the past five years with a boom period during CY2007, backed by strong liquidity, high foreign direct investment (FDI) in the sector, large PE investment and strong demand from the end-user segment. This was followed by a downfall in CY2008 due to the sub-prime crisis, which led to considerable liquidity crisis worldwide and a sharp drop in real estate demand in all markets. However, as the world recovered in CY2009, Indian real estate also recovered with prices touching their 2007-08 peaks mostly on the back of investor participation. Boom to bubble: However, in CY2011, reality caught the real estate sector. With inflation touching all-time high, the RBI was forced to increase rates 13 times; and with real estate prices touching all-time high, affordability became a major issue. Accordingly, property transactions in major Indian cities declined by 20-30% for the year. With global uncertainty looming, demand in the commercial and retail segments was sluggish; and due to oversupply in these segments, rentals did not witness any uptick and remained stagnant, thus adding more pressure to the sector. At the end of CY2011, companies are left with negative to mediocre growth, high leverage, high inventory, high interest cost, increased raw-material costs and below-par profits, which are not enough to reduce their debt. The last resort for these companies is to sell their non-core assets to deleverage their balance sheet, which has seen a proportioned increase in debt over a period of time and became a major overhang for these companies. No material uptick expected in CY2012/FY2013: We do not expect any material uptick in CY2012 going ahead, as all segments in the sector are facing sluggish demand and overcapacity. The commercial segment is expected to witness significant supply in CY2012, which will result in vacancy levels above 20%. Vacancy in the retail segment is also expected to remain above 20% over CY2011-13; and with retail FDI put on the backburner, we can expect a number of cancellations/project delays in this segment going ahead. Further, with interest rates remaining high and prices not correcting, we do not expect demand to improve in the residential segment in the coming twothree quarters as end-users are postponing their purchases in anticipation of a decline in interest rates and prices. Valuations at a discount, but outlook cautious: Despite the fact that most real estate stocks are available at their all-time low prices we maintain our negative stance as, we do not foresee any instant catalyst for the sector in the near term. The sector is facing a cash crunch and is highly leveraged at this point of time. The sector is also witnessing a slowdown in demand, which has significantly affected cash flows. Going ahead, we feel real estate stocks will move on company-specific news - such as deleveraging by DLF could see a strong momentum in the stock or speedy approvals for projects and rehabilitation in Mumbai could result in positive momentum for HDIL. Currently, we have a Neutral recommendation on DLF, owing to concerns of high debt, but quicker sale of non-core assets may result in a change in our recommendation in the future. The stock is trading at 18.6x FY2013 EPS and 1.4x FY2013E P/BV. HDIL is currently trading at 3.3x FY2013 EPS and 0.3x FY2013E P/BV and ARIL is trading at 6.5x FY2013 EPS and 0.4x FY2013E P/BV, which we beleive are attractive. We have a Buy rating on HDIL and ARIL with a target price of `115 and `78, respectively.
January 2012
315
Real Estate Boom to bubble

The real estate sector has witnessed a topsy-turvy ride over the past five years with a boom period during CY2007, backed by strong liquidity, high foreign direct investment (FDI) in the sector, large PE investment and strong demand from the enduser segment. This was followed by a downfall in CY2008 due to the sub-prime crisis, which led to considerable liquidity crisis worldwide and a sharp drop in demand for real estate in all markets. However, as the world recovered in CY2009, Indian real estate also recovered with prices touching their 2007-08 peaks mostly on the back of investor participation. The sector went on a strong expansion mode, where developers started to diversify in areas other than their expertise and started to create land banks at high prices. Many developers ventured into hospitality, while some entered the insurance and telecom businesses. A number of residential developers entered the malls and office space, which usually requires more capital and has a larger gestation period. This was mainly due to high liquidity, cheap money because of low interest rates, cheap labor and construction material costs and in anticipation of full recovery in demand in the coming years. In doing so, the sector piled on lot of debt during the period. However, in CY2011, reality caught the real estate sector. With inflation touching all-time high, the RBI was forced to increase rates 11 times; and with real estate prices touching their all-time highs, affordability became a major issue. Accordingly, property transactions in major Indian cities declined by 20-30% for the year. With global uncertainty looming, demand in the commercial and retail segment was sluggish; and due to oversupply in these segments, rentals did not witness any uptick and remained stagnant, thus adding more pressure to the sector. At the end of CY2011, companies are left with negative to mediocre growth, high leverage, high inventory, high interest cost, increased raw-material costs and below-par profits, which are not enough to reduce their debt. The last resort for these companies is to sell their non-core assets to deleverage their balance sheet, which has seen a proportioned increase in debt over a period of time and became a major overhang for these companies.
No material uptick expected in CY2012/FY2013

Commercial demand to pick up after four-five quarters
After registering a sharp decline in the past few quarters, capital values have started to strengthen and registered a marginal appreciation across most micro markets. The commercial sector is expected to get a huge supply in CY2012, according to Jones Lang LaSalle (JLL). CY2012 is likely to see 57.7msf of office space to be operational, with only 39.0msf estimated to be absorbed. Vacancy is estimated to be above 20%, which will keep commercial rates stagnant over the coming quarters. JLL expects vacancy to remain above 22.9% in CY2012 and gradually reduce in CY2013.
Exhibit 3: Office vacancy in 3QCY2011

30 27.6 25 20 15 12.7 10 5 0 Delhi Mumbai Chennai Banglore 19.8
19.7
Office Vacancy
Source: JLL, Angel Research
Exhibit 4: Vacancy levels to remain high...

60 50
(mn. sq.ft.)
40.5
32.9 32.0
33.1
30
(` cr) 30,000
26889 12498 19257 18175 22389
(` cr) 14,000
10 0 2005 2006 2007 2008
25,000 20,000 15,000 10,000
12,000 10,000 8,000
2009
19.6
Exhibit 1: Declining sales and profit over the years...
22.8 22.3
20
28.8 28.8
2010
30.5
2011E
35.9
2012E
39.0
2013E
New Completion
Net Absorbtion
11220
7547 4715
6,000 4599 4,000 2,000 0
Retail segment's vacancy levels to remain above 20%

Vacant space in shopping centers had increased during 2008-09, primarily on account of high real estate costs and lower consumption, owing to which many retailers shifted gears from the rapid expansion mode to the consolidation mode. Therefore, in the short term, vacant spaces are likely to increase, given the considerable rationalization in the supply pipeline. On the other hand, we believe demand is yet to pick up, especially in tier-II and III cities, which is not the case with metros, where catchment areas are witnessing high demand. We expect prices to remain under pressure, as the segment has fragmented supply dynamics. Initial recovery volumes are likely to be cornered by experienced players such as Phoenix Mills and not necessarily large ones. JLL expects vacancy in the segment to remain above 20% over CY2011-13; and with retail FDI being postponed in the sector, the segment can witness a number of cancellations/ project delays going ahead.
5,000 0
3655
FY2007
FY2008
FY2009
FY2010
FY2011
Net Sales
Adjusted Net Profit
Source: Capitaline, BSE Realty Index, Angel Research
Exhibit 2: Increasing debt and interest costs

(` cr) 50,000 45,000 40,000 35,000 30,000 25,000 20,000 15,000 10,000 5,000 0 Fy2007 FY2008 FY2009 FY2010 FY2011 500 19967 31988 39407 41322 46082 0 726 995 1,500 1,000 2208 2250 2,500 2,000 2947 3,000 (` cr) 3,500
Total Debt / Loan Funds
Interest
Source: Capitaline, BSE Realty Index, Angel Research
316
January 2012
43.5 40.9
42.5
40
41.6
55.1
57.7
Real Estate Residential absorption expected to remain low

Residential property sales in Mumbai have plummeted by over 70% since their peak of 2007, as high prices and rising interest rates have dented demand. Mumbai registrations declined by 20% yoy and were at their 31-month low in November 2011. With interest rates remaining high and prices not correcting, we do not expect demand to improve in the coming two-three quarters as end-users are postponing their purchases in anticipation of a fall in interest rates and prices. According to Knight Frank, a global real estate consultant, unsold inventory levels are estimated to be approximately 27% of the under-construction stock. Further, the investors segment, which makes up approximately 20% of the market demand, has been observed to be actively reducing its real estate portfolio, thereby adding significant supply into the market. Unsold inventory in residential real estate was the highest in Delhi-NCR at 102,758 units, followed by the Mumbai metropolitan region at 90,512. Bangalore came next with 46,596 units, and Pune followed with 40,734 units, according to PropEquity. In Mumbai and Delhi, residential prices are currently ruling 1520% above their 2008 peak levels; whereas prices in most other markets are still 10-15% lower than their last peak levels. This has resulted in tapering of volumes in regions such as Mumbai and NCR. We believe FY2012-13 will see consolidation, with residential prices remaining soft in Mumbai and Gurgaon (may see a correction of 15-20% in some overheated areas), with a modest to flat 5% decline expected in other markets.
What to expect in CY2012/FY2013

Sale of non-core assets to reduce debt and focus more on their core business area Strategically and economically planning new land purchases Greater focus on residential projects than commercial and retail segments, as they can quickly monetize the land Higher focus on mid-income and affordable housing, which can drive future volumes and increase cash flow generation Labor shortages expected to continue, as the sector continues to face shortage of 10mn people, which is around 30% of the requirement Margins to remain under pressure with cost of construction rising and demand expected to remain sluggish Raising money to fund future projects through FCCBs and QIPs, among others, as FDI, PE investment and bank funding have dried up
Strong reforms needed - Attempt to speed up approvals

The real estate sector is witnessing a number of policy changes, as the government is initiating several policy changes to improve the transparency in the sector and speed up the approval process. For instance, the Maharashtra government has taken a number of policy decisions to ease the accumulation of approvals and regulations in the Mumbai realty market. Accordingly, the state cabinet has approved the setting up of a housing regulator. This will surely help the sector to become more transparent in future. The Maharashtra government has also approved to amend the eligibility criteria for slum dwellers in Mumbai for rehabilitation housing. As per the new criteria, those who have moved into the pre-1995 constructed slum after 1995 are also eligible for rehabilitation on payment of a transfer fee. This will speed up the rehabilitation process and will be positive for companies like HDIL.
Exhibit 5: : Vacancy to remain above 20% over CY2011-13

20 18 16 14
18.3
(mn. sq.ft.)
12 10 6 4
12.1
15.6 11.3
8.5
9.4 9.6
10.8 9.9
6.6
6.3
6.9
Valuations at a discount, but outlook cautious

Despite the fact that most real estate stocks are available at their all-time low prices we maintain our negaive stance as, we do not foresee any instant catalyst for the sector in the near term. The sector is facing a cash crunch and is highly leveraged at this point of time. The sector is also witnessing a slowdown in demand, which has significantly affected cash flows. Going ahead, we feel real estate stocks will move on company-specific news - such as deleveraging by DLF could see a strong momentum in the stock or speedy approvals for projects and rehabilitation in Mumbai could result in positive momentum for HDIL. Currently, we have a Neutral recommendation on DLF, owing to concerns of high debt, but quicker sale of non-core assets may result in a change in our recommendation in the future. The stock is trading at 18.6x FY2013 EPS and 1.4x FY2013E P/BV. HDIL is currently trading at 3.3x FY2013 EPS and 0.3x FY2013E P/BV and ARIL is trading at 6.5x FY2013 EPS and 0.4x FY2013E P/ BV, which we beleive are attractive. We have a Buy rating on HDIL and ARIL with a target price of `115 and `78, respectively.
P/E (x) P/BV (x) FY12E 1.4 0.3 0.4 FY13E 1.4 0.3 0.4 EV/Sales (x) FY12E 5.7 3.5 4.7 FY13E 5.2 2.9 3.7 CAGR Sales 11.2 25.0 37.4
#
4.1 3.7
4.0
2 0
2005
3.8 2.8
2006
2007
2008
2009
2010
4.0
2011E
2012E
2013E
New Completion
Net Absorbtion
Exhibit 6: High inventory levels

(msf) NCR Mumbai Bengaluru Pune Chennai Absorption 10 6 6 3 3 New launches 8 5 4 2 1 Inventory 132 99 80 48 32 Inventory in months of sale 12 16 15 15 12
Source: PropEquity, Angel Research
Exhibit 7: Our coverage universe valuation comparison

Company Reco CMP (`) ` DLF HDIL ARIL Neutral Buy Buy 210 82 59
#
TP (`) ` 115 78
Upside (%) 40.2 32.2
FY12E 22.9 4.1 9.6
FY13E 18.6 3.3 6.5
EPS 8.5 12.9 30.0
Source: Company, Angel Research; Note:
FY2011-13
January 2012
317
Real Estate
DLF
Company Background
SHAREHOLDING PATTERN (%) PROMOTERS FII / NRIS / OCBS 78.6 15.9
DLF is India's largest real estate developer with over 60 years of experience in the industry. The company is mainly involved in the development of residential, commercial and retail properties. DLF has a unique business model with earnings arising from development and rentals. The company has also forayed into infrastructure, SEZ and hotel businesses. The company has 363msf of planned projects with 52msf of projects under construction. The company has land resource of 70msf for office and retail development, with 13msf of projects under construction.
Structural Snapshot
STOCK RETURNS (%) DLF REALTY INDEX SENSEX 3M 1Y 3Y 2.5 (1.2) 21.3 5Y 3.3 10Y 17.3 (12.1) (18.2) (8.1) (32.5) (2.6) (12.3)
Growth opportunity: Demand for real estate is expected to remain strong in the long term. Residential demand is expected to stand at approximately 4.25mn units, registering a 15% CAGR over 2010-14. Commercial demand over 2010-14 is estimated to be approximately 241msf. Demand for the retail segment is expected to reach 55msf by 2014.This provides strong growth visibility for the future. Competitive position: Strong brand; Largest land bank in India. Nature of business: Interest-rate sensitive; Cyclical.
FINANCIAL PERFORMANCE OVERVIEW (%) SALES GROWTH* PAT GROWTH* ROE# 3M 6.9 (11.0) 1Y 3Y 5Y 10Y 29.2 (11.6) (4.7) (42.3) 39.3 6.7 47.4 11.8 52.2 54.7 50.8 49.4 56.1 47.2 31.2 25.3

High leverage remains a concern: At the end of 2QFY2012, DLF's debt stood at `25,450cr, with debt-to-equity ratio of 0.9x. The company has been trying hard to offload its non-core assets but has managed to only sell around `1,000cr of non-core assets due to delay in approvals. The company further plans to sell its non-core assets worth `6,000cr-7,000cr, which we feel might take a bit longer due to delay in approvals in the current tight liquidity environment. High debt will be a major overhang for the stock in the coming quarters. Bumpy road ahead: DLF faces lot of challenges 1) bringing down its gearing levels in FY2012E 2) getting fast approvals to have successful new launches and 3) monetizing its non-core assets at a reasonable value. We estimate DLF to sell ~12msf of residential volumes in FY2012E and expect flat growth in FY2013E. In our view, there is a limited upside to our launch estimates, considering the steep price increase in the recent months. For FY2012, we have assumed a 5% reduction in commercial and retail prices, but flat growth in residential prices, from current levels. Valuations attractive: The stock is trading at 1.4x FY2013 P/BV and 18.6x FY2013 EPS. However, the stock lacks near-term triggers, given the kind of muted visibility on debt reduction and new launches. Hence, we recommend Neutral on the stock.
EBITDA MARGIN# 46.3
NOTE: ABOVE 1 YEAR- * ON CAGR BASIS, # ON AVERAGE BASIS
ANGEL ESTIMATES PARTICULARS PAT GROWTH (%) ROE (%) P/BV P/E FY2012E (4.8) 6.3 1.4 22.9 FY2013E 22.9 7.5 1.4 18.6
318
January 2012
PROFIT & LOSS

BALANCE SHEET
Y/E MARCH (` CR) ` SOURCES OF FUNDS EQUITY SHARE CAPITAL PREFERENCE CAPITAL RESERVES& SURPLUS SHAREHOLDERS FUNDS MINORITY INTEREST TOTAL LOANS DEFERRED TAX LIABILITY TOTAL LIABILITIES APPLICATION OF FUNDS GROSS BLOCK LESS: ACC. DEPRECIATION NET BLOCK CAPITAL WORK-IN-PROGRESS GOODWILL INVESTMENTS CURRENT ASSETS CURRENT LIABILITIES & PRO. NET CURRENT ASSETS TOTAL ASSETS 17,884 1,326 16,558 11,129 1,268 5,505 27,306 8,777 18,529 52,989 19,828 1,956 17,872 10,312 1,384 996 33,272 13,101 20,170 50,734 22,519 2,664 19,855 11,343 1,384 996 32,173 13,248 18,925 52,503 24,612 3,452 21,160 12,478 1,384 996 32,319 13,460 18,859 54,877 339 5,920 24,173 24,513 628 21,677 251 52,989 340 1,810 24,182 24,522 575 23,990 (163) 50,734 340 1,810 24,931 25,270 595 24,990 (163) 52,503 340 1,810 25,785 26,125 615 26,490 (163) 54,877 FY2010 FY2011 FY2012E FY2013E
% CHG
(26.0)
3,911 3,512
28.8
5,808 3,753
9.5
5,904 4,562
11.8
6,490 5,212
(% OF NET SALES)
47.3
325 1,110 428
39.3
631 1,706 584
43.6
708 2,020 262
44.5
788 2,124 265
(% OF PBT)
RECURRING PBT PBT (REPORTED) TAX
17.1
2,505 2,505 702
29.2
2,000 2,000 459
12.5
2,095 2,095 524
10.3
2,565 2,565 641
(% OF PBT)
PAT (REPORTED) ADD: SHARE OF EARNINGS OF ASS. LESS: MINORITY INTEREST (MI) PRIOR PERIOD ITEMS PAT AFTER MI (REPORTED) ADJ. PAT
28.0
1,802 0.8 10.8 (94.2) 1,720 1,802
23.0
1,541 8.8 (7.2) 97.2 1,640 1,541
25.0
1,571 10.0 (20.0) 1,561 1,571
25.0
1,924 15.0 (20.0) 1,919 1,924
% CHG
(61.5)
(4.7)
(4.8)
22.9
CASH FLOW STATEMENT

Y/E MARCH (` CR) ` PROFIT BEFORE TAX DEPRECIATION CHANGE IN WORKING CAPITAL LESS: OTHER ADJUSTMENTS DIRECT TAXES PAID CASH FLOW FROM OPERATIONS (INC)./DEC. IN FIXED ASSETS (INC.)/DEC IN INVESTMENTS INTEREST RECEIVED OTHERS CASH FLOW FROM INVESTING ISSUE OF EQUITY INC./(DEC.) IN LOANS DIVIDEND PAID (INCL. TAX) INTEREST PAID CASH FLOW FROM FINANCING INC./(DEC.) IN CASH OPENING CASH BALANCES CLOSING CASH BALANCES
KEY RATIOS
FY2011 2,000 631 (960) 1,706 (459) 2,917 (1,126) 4,509 (1,816) 1,567 (4,110) 2,314 (565) (1,706) (4,066) 418 928 1,346 FY2012E 2,095 708 639 2,020 (524) 4,939 (3,722) 10 (3,712) 1,000 (449) (2,020) (1,470) (243) 1,346 1,103 FY2013E 2,565 788 (213) 2,124 (641) 4,623 (3,228) 15 BOOK VALUE 144.4 144.5 148.9 153.9 (3,213) 1,500 (813) (2,124) (1,437) (27) 1,103 1,077 RETURNS (%) ROCE (PRE-TAX) ANGEL ROIC (PRE-TAX) ROE TURNOVER RATIOS (X) ASSET TURNOVER (GROSS BLOCK) INVENTORY / SALES (DAYS) RECEIVABLES (DAYS) PAYABLES (DAYS) 0.6 576 93 410 0.5 525 64 436 0.5 540 63 564 0.5 522 62 506 6.8 8.9 7.3 6.0 8.1 6.7 7.5 10.1 6.3 8.2 11.3 7.5 Y/E MARCH VALUATION RATIOS P/E (ON FDEPS) P/CEPS P/BV EV/SALES EV/EBITDA ` PER SHARE DATA (`) EPS (FULLY DILUTED) CASH EPS DPS 10.1 12.0 2.1 9.7 13.4 4.2 9.2 13.4 4.2 11.3 15.9 5.5 20.8 18.1 1.5 7.6 16.1 21.8 16.3 1.5 6.1 15.6 22.9 16.3 1.4 5.7 13.1 18.6 13.7 1.4 5.2 11.7 FY2010 FY2011 FY2012E FY2013E
FY2010 2,505 325 5,743 911 (856) 8,628 (13,325) (3,109) 127 (16,306) 4,523 5,381 (383) (2,103) 7,417 (261) 1,189 928
January 2012
319
Real Estate
RATING 52 WEEK HIGH / LOW MARKET CAP (` CR) ` LIQUIDITY BUY 199 / 53 3,446 Low
HDIL
Company Background
CMP/TP/Upside: `82 / `115 / 40%
Housing Development & Infrastructure Limited (HDIL) has established itself as one of India's premier real estate development companies. HDIL is also the largest slum rehabilitation company, with significant operations in the Mumbai Metropolitan Region. The company has completed more than 100mn sq. ft. of construction in all verticals of real estate and has rehabilitated around 30,000 families in the past decade. The company's operations range from residential, commercial and retail projects to slum rehabilitation and land development.
Structural Snapshot
Growth opportunity: Nearly 15% of the population in urban areas resides in slums. According to the census of India, 35% of the individuals living in urban areas reside in a single-room house; and in nearly 68% of the cases, four or more individuals reside in these single-room houses. Nearly one-fourth of the Indian population is below the poverty line. There is a shortage of nearly 24.71mn units of houses in urban areas. In Mumbai, more than 54% of the population lives in slum clusters situated in certain pockets of the city. A slum population of 7.5mn could translate into 1.5mn families with an average household size of five people. This could translate into SRA potential of 644msf and revenue potential of `2,00,000cr for redevelopers. Competitive position: Largest player in slum rehabilitation.
STOCK RETURNS (%) HDIL REALTY INDEX SENSEX 3M (13.8) 1Y (47.2) 3Y (9.4) (1.2) 21.3 5Y 3.3 10Y 17.3
(8.1) (32.5) (2.6) (12.3)
FINANCIAL PERFORMANCE OVERVIEW (%) SALES GROWTH* PAT GROWTH* ROE# 3M 18.3 (30.5) 1Y 22.7 60.1 10.0 3Y (7.9) 53.0 13.1 5Y 33.9 47.6 55.1 44.5 10Y -
Nature of business: Interest-rate sensitive; Cyclical; Strong entry barriers in slum rehabilitation.
44.5 (16.5)
EBITDA MARGIN# 52.7

Slum rehabilitation to drive growth: HDIL is the largest listed slum rehabilitation developer in the Mumbai property market. SRA projects do not involve upfront investment in land compared to conventional real estate projects. The cost per sq. ft. in a slum re-development project is around `3,000/sq. ft. versus `5,000-6,000/sq. ft. (including land cost) in case of freehold land due to high property prices in Mumbai. This has resulted in a higher margin for HDIL on account of access to cheap land bank in Mumbai. Slum redevelopment also has relatively high entry barriers because it requires expertise and experience, as it entails dealing with government agencies and slum dwellers regularly until project completion. Strong revenue visibility: HDIL has strategically deleveraged its business model by launching various projects through the conventional route since March 2009, thereby reducing its overdependence on the TDR market. Currently, HDIL has ~14.5msf of residential projects under construction, 80% of which are pre-booked, resulting in `4,600cr of revenue to be booked over FY2012-14E. Further, HDIL has ~25.7msf of new projects in the pipeline in FY2012-13, which would help maintain sales volume. Valuations attractive: The stock is currently trading at attractive valuations of just 0.3x FY2013 P/BV and 3.3x FY2013 EPS. The stock is trading at 43% discount to its one-year forward NAV. We continue to maintain our Buy recommendation on the stock with a target price of ` 115. At our target price the stock will be trading at 4.6x FY2013 EPS and 0.4x FY2013 P/BV.
ANGEL ESTIMATES PARTICULARS PAT GROWTH (%) ROE (%) P/BV P/E FY2012E 1.7 8.5 0.3 4.1 FY2013E 23.0 9.4 0.3 3.3
320
January 2012
PROFIT & LOSS

BALANCE SHEET
Y/E MARCH (` CR) ` SOURCES OF FUNDS EQUITY SHARE CAPITAL RESERVES& SURPLUS SHAREHOLDERS FUNDS MINORITY INTEREST TOTAL LOANS DEFERRED TAX LIABILITY TOTAL LIABILITIES APPLICATION OF FUNDS 359 6,684 7,043 0 4,102 5 11,150 415 8,813 9,228 5 4,320 7 13,559 415 9,706 10,121 5 4,520 7 14,652 415 11,014 11,429 5 4,720 7 16,160 FY2010 FY2011 FY2012E FY2013E
% CHG
(13.0)
(713) 810
22.7
(747) 1,122
19.9
(1,119) 1,121
25.1
(1,420) 1,383
(% OF NET SALES)
53.2
(72) (46) 14
60.1
(84) (84) 31
50.1
(30) (93) 53
49.3
(40) (97) 64
(% OF PBT)
2
705 705 (133)
3
986 986 (159)
5
1,051 1,051 (210)
5
1,309 1,309 (275) GROSS BLOCK LESS: ACC. DEPRECIATION NET BLOCK CAPITAL WORK-IN-PROGRESS GOODWILL INVESTMENTS CURRENT ASSETS CURRENT LIABILITIES NET CURRENT ASSETS TOTAL ASSETS 194 11 183 22 259 243 11,319 876 10,443 11,150 242 14 228 92 220 52 15,558 2,331 13,227 13,559 428 44 384 92 220 52 16,577 2,414 14,163 14,652 574 84 489 92 220 52 18,143 2,577 15,566 16,160
(% OF PBT)
PAT (REPORTED) LESS: MINORITY INTEREST (MI) PRIOR PERIOD ITEMS & OTHERS PAT AFTER MI (REPORTED) ADJ. PAT
18.9
572 (0) 572 572
16.2
827 827 827
20.0
841 841 841
21.0
1,034 1,034 1,034
% CHG
(15.5)
44.5
1.7
23.0
CASH FLOW
Y/E MARCH (` CR) ` PROFIT BEFORE TAX DEPRECIATION & OTHERS CHANGE IN WORKING CAPITAL LESS: OTHER INCOME DIRECT TAXES PAID CASH FLOW FROM OPERATIONS (INC.)/ DEC. IN FIXED ASSETS (INC.)/ DEC. IN INVESTMENTS OTHER CASH FLOW FROM INVESTING ISSUE OF EQUITY (INC.)/DEC. IN LOANS DIVIDEND PAID (INCL. TAX) OTHERS CASH FLOW FROM FINANCING INC./(DEC.) IN CASH OPENING CASH BALANCES CLOSING CASH BALANCES
KEY RATIOS
FY2010 705 113 (1,615) 14 (120) (931) (342) 0 14 (328) 2,078 (42) (0) (61) 1,976 716 75 792 FY2011 981 167 (3,451) 31 (159) (2,493) (118) 191 31 104 234 218 1,375 1,827 (562) 792 230 FY2012E 1,051 123 (1,068) 53 (210) (157) (187) 53 (134) 200 (41) 159 (131) 230 99 FY2013E 1,309 137 (1,411) 64 (275) (303) (146) 64 (82) 200 177 377 (8) 99 91 Y/E MARCH VALUATION RATIOS P/E (ON FDEPS) P/CEPS P/BV EV/SALES EV/EBITDA ` PER SHARE DATA (`) EPS (BASIC) EPS (FULLY DILUTED) CASH EPS DPS BOOK VALUE RETURNS (%) ROCE (PRE-TAX) ANGEL ROIC (PRE-TAX) ROE TURNOVER RATIOS (X) INVENTORY / SALES (DAYS) RECEIVABLES (DAYS) PAYABLES (DAYS) 1,878 44 179 1,970 55 297 1,913 57 364 1,627 49 307 7.5 7.8 10.0 8.4 8.8 10.0 7.7 7.8 8.5 8.7 8.8 9.4 15.9 13.7 15.5 169.7 19.9 19.8 21.8 228.6 20.3 20.3 21.0 250.1 24.9 24.9 25.9 281.6 6.0 5.3 0.5 4.4 8.3 4.2 3.8 0.4 4.0 6.7 4.1 3.9 0.3 3.5 7.0 3.3 3.2 0.3 2.9 5.8 FY2010 FY2011 FY2012E FY2013E
January 2012
321
Real Estate
RATING 52 WEEK HIGH / LOW MARKET CAP (` CR) LIQUIDITY BUY 106 / 36 1,740 MEDIUM
Anant Raj
Company Background
CMP/TP/Upside: `59 / `78 / 32%
Anant Raj Industries Limited (ARIL), established in 1969, is one the leading developers in the National Capital Region (NCR). The company has forayed into Special Economic Zones (SEZs), IT parks, hotels, commercial complexes, malls and residential/service apartments.
Structural Snapshot
Growth opportunity: The demand-supply gap in the residential sector across key cities in India continues to be wide, with demand picking up recently while supply remaining constrained due to the slow pace of construction activity. In the top seven cities of the country, latent demand is expected to be three times higher than the supply and this gap is expected to remain till 2014. Within the segment, the gap for mid-income housing is expected to be three times the supply, which is expected to drive growth in the coming years. Competitive position: Land bank in the prime residential area; Largely focused on the residential sector in NCR. Nature of business: Interest-rate sensitive; Cyclical.
STOCK RETURNS (%) ANANT RAJ REALTY INDEX SENSEX 3M 1Y 3Y (1.2) 21.3 5Y 3.3 10Y 17.3 10.7 (40.4) (8.1) (32.5) (2.6) (12.3) (3.3) (26.3) 58.2
FINANCIAL PERFORMANCE OVERVIEW (%) PAT GROWTH* OPM# ROE# 3M 1Y 3Y 5Y 10Y SALES GROWTH* (31.3) 55.8 48.1 (11.1) 55.5 4.6 78.0 6.0 49.5 39.4 43.0 25.9 82.4 53.4 11.5 8.9

Strong growth ahead: In FY2011, ARIL added nearly 218 acres of land in Gurgaon, Manesar, Sonepat, Neemrana and Delhi, with an investment of `837cr - providing the company a potential to generate revenue of `6,000cr-7,000cr over the next five years. ARIL is expected to execute over 3mn sq. ft. of commercial real estate projects in the next 36 months and 1.35lakh sq. yards for industrial plot development. The company is also building 10mn sq. ft. of residential real estate in the next 48 months and 2.80lakh sq. yards for plotted development. This is expected to drive the company's revenue growth over the next 48 months. Going ahead, we may see residential contribution from new launches at Neemrana and Sector 63 (expected to be launched in the beginning of 4QFY2012). Kirti Nagar Mall set to improve lease rental: Partial commencement of Kirti Nagar Mall has contributed only `2cr in 2QFY2012. We expect rental income of `15cr in 2HFY2012 from Kirti Nagar Mall, as it is 60% leased out and 25% under fittings. Rental income is likely to increase by 32% yoy to `100cr in FY2012 on commencement of Kirti Nagar Mall, incremental rent from Manesar IT project and operation of Tricolour Hotel (4QFY2012). Valuations attractive: The stock is currently trading 6.5x FY2013 EPS and 0.4x FY2013 P/BV. The stock is trading at 47% discount to its one-year forward NAV. We continue to maintain our Buy recommendation on the stock with a target price of ` 78. At our target price the stock will be trading at 8.5x FY2013 EPS and 0.6x FY2013 P/BV.
(24.7) (29.4) (27.2)
ANGEL ESTIMATES PARTICULARS PAT GROWTH (%) ROE (%) P/BV P/E FY2012E 7.7 4.8 0.4 9.6 FY2013E 48.5 6.7 0.4 6.5
322
January 2012
PROFIT & LOSS

BALANCE SHEET
Y/E MARCH (` CR) ` SOURCES OF FUNDS EQUITY SHARE CAPITAL RESERVES& SURPLUS SHAREHOLDERS FUNDS TOTAL LOANS DEFERRED TAX LIABILITY TOTAL LIABILITIES APPLICATION OF FUNDS GROSS BLOCK LESS: ACC. DEPRECIATION NET BLOCK CAPITAL WORK-IN-PROGRESS INVESTMENTS CURRENT ASSETS CURRENT LIABILITIES NET CURRENT ASSETS MIS. EXP. NOT WRITTEN OFF TOTAL ASSETS 1,860 54 1,806 746 295 1,015 189 826 2.7 3,821 2,081 76 2,005 903 258 1,761 158 1,603 1.9 4,771 2,699 91 2,608 385 258 1,971 304 1,667 4,918 3,461 112 3,348 258 2,132 391 1,742 5,348 59 3,477 3,595 139 1 3,821 59 3,665 3,724 966 1 4,771 59 3,813 3,872 966 1 4,918 59 4,043 4,102 1,166 1 5,348 FY2010 FY2011 FY2012E FY2013E
% CHG
14.2
(28) 259
48.1
(189) 236
25.3
(242) 289
39.5
(335) 407
(% OF NET SALES)
90.3
(11) (4.9) 53.4
55.5
(13) (21.0) 28.9
54.4
(14) (57.9) 24.3
54.9
(22) (63.9) 37.3
(% OF PBT)
18.0
296 296 (58)
12.6
230 230 (62)
10.0
241 241 (60)
10.4
359 359 (90)
(% OF PBT)
19.6
238 (0.1) (0.1) 238 238
27.0
168 0.2 168 168
25.0
181 181 181
25.0
269 269 269
% CHG
14.9
(29.4)
7.7
48.5
CASH FLOW STATEMENT

KEY RATIOS
FY2011 230 13 (727) 0 (62) (546) (378) 37 0 (726) 827 (21) 125 931 (341) 489 148 FY2012E 241 14 (52) (60) 143 (100) (100) (21) 2 (19) 24 148 173 FY2013E 359 22 (227) (90) 64 (377) BOOK VALUE 121.8 126.2 131.2 139.0 (245) RETURNS (%) 200 (34) 0 166 (15) 173 158 ROCE (PRE-TAX) ANGEL ROIC (PRE-TAX) ROE TURNOVER RATIOS (X) ASSET TURNOVER (GROSS BLOCK) INVENTORY / SALES (DAYS) RECEIVABLES (DAYS) PAYABLES (DAYS) 0.2 16 306 517 0.2 311 207 83 0.2 519 199 73 0.2 448 188 103 6.7 11.0 6.9 5.2 7.2 4.6 5.7 6.4 4.8 7.5 7.8 6.7 Y/E MARCH VALUATION RATIOS P/E (ON FDEPS) P/CEPS P/BV EV/SALES EV/EBITDA PER SHARE DATA (`) ` EPS (FULLY DILUTED) DPS 8.1 0.6 5.7 0.6 6.1 1.0 9.1 1.2 7.3 7.0 0.5 4.9 5.4 10.3 9.6 0.5 6.0 10.9 9.6 8.9 0.4 4.8 8.8 6.5 6.0 0.4 3.7 6.8 FY2010 FY2011 FY2012E FY2013E
FY2010 296 12 201 2 (60) 451 (602) 14 79 (508) 59 (71) (21) (47) (80) (137) 626 489
January 2012
323
324
January 2012
Software
COVERAGE
Companies Large Caps TCS Infosys Wipro HCL Tech Mid Caps Tech Mahindra Mahindra Satyam Mphasis Mindtree Infotech Entp Hexaware KPIT Cummins Persistent 608 72 347 441 135 81 146 319 666 82 387 502 96 163 Accu. Accu. Accu. Accu. Buy Accu. 1076 2592 404 419 1262 3047 425 520 Buy Buy Accu. Buy CMP (`) ` Target (`) ` Reco
POSITIVE
Growth momentum to moderate...

The IT-BPO sector in India reported aggregate revenue of US$88.1bn in FY2011, indicating a market share of ~6% of the total global outsourcing market and taking its contribution to ~6.4% of national GDP. The share of the IT-BPO industry in total Indian exports increased from less than 4% in FY1998 to 26% in FY2011.
Investment arguments
INR depreciation - IT sector to be the biggest beneficiary
During September-December 2011, INR depreciated by 10-12% against USD, providing an advantage to IT companies. Although an exports-driven sector like IT faces headwinds on account of a weaker demand scenario due to slow global growth, the INR depreciation from peak levels is expected to counter this to an extent by improving the bottom line of Indian IT companies. Thus, we have moderated our quarterly near-term volume growth expectations for IT companies; however, INR depreciation is aiding in the slight upward revision of earnings of IT companies for FY2013. Consequently, we estimate INR revenue growth to be at 15.5-19.0%, higher than USD revenue growth, which is expected to be at 12.2-15.0% for tier-1 IT companies with TCS leading the pack.
- Neutral
- Neutral
USD revenue growth to moderate in the near term

The recent financial results of Oracle for the quarter ending November 2011 raised questions about the health of the technology sector, as the company's new software sales grew by merely 2% yoy because of delays in decision making by clients, which led to deals not being closed. In addition, recently Gartner has lowered its global technology spending growth forecast to 3.7% (earlier - 4.6%) to US$3.8tn for CY2012. Given the current economic uncertainties, we see a moderation in IT budgets for CY2012 and expect volume growth of tier-I Indian IT companies to scale down to sub-15% from 18% plus in FY2012E. However, we do not foresee any pricing erosion as of now because the current pricing is still at a discount to peak levels and risks are lower as compared to what they were in CY2008, when Lehman bankruptcy was filed.

The global macro data is pointing towards a bleak outlook for future global corporate profits, and there is now cautiousness coming from few IT players in terms of IT budgets for CY2012. However, as per TPI's recent report, deal pipelines of IT companies were higher in 3QCY2011, but few project ramp ups are getting delayed. Thus, we expect tier-I IT companies (except Wipro) to replicate growth of 20% plus in FY2012. Further, we expect moderation in volumes to sub-15% only in FY2013. However, in INR terms, we expect growth to be higher due to assumed INR depreciation. We remain cautiously optimistic on the IT sector, as on one hand global uncertainties are prevailing along with concerns regarding IT budgets for CY2012, while on the other software companies are deriving benefits from steep INR depreciation. We prefer diversified players such as TCS, Infosys and HCL Tech (top pick) in tier-I IT companies. In case of tier-II IT companies, we like MindTree and Hexaware Technologies. January 2012 Please refer to important disclosures at the end of this report 325
Software INR depreciation - IT sector to be the biggest beneficiary

During September-December 2011, one of the most volatile periods in terms of currency was witnessed, as INR depreciated by 10-12%, providing an advantage to IT companies. Although an exports-driven sector like IT faces headwinds on account of a weaker demand scenario due to slow global growth, the INR depreciation from peak levels is expected to counter this to an extent by improving the bottom line of Indian IT companies. Thus, we have moderated our quarterly near-term volume growth expectations for IT companies to sub 15% for FY2013; however, INR depreciation is aiding in the slight upward revision of earnings of IT companies for FY2013. Consequently, we estimate INR revenue growth to be at 15.5-19.0%, higher than USD revenue growth, which is expected to be at 12.2-15.0% for tier-1 IT companies, with TCS leading the pack. Going ahead in FY2013, growth will be led because of increased offshoring, acceptability of outsourcing/offshoring in Continental Europe and growth from Asia Pacific region.
Technological indicators
The recent financial results of Oracle, the global enterprise giant for the quarter ending November 2011, raised questions about the health of the technology sector, as the company's new software sales grew by merely 2% yoy because of delays in decision making by clients, which led to deals not being closed. In addition, recently Gartner has lowered its global technology spending growth forecast because of the sluggish economy and the euro crisis. Gartner now expects worldwide spending on technology to grow by 3.7% to US$3.8tn in CY2012, down from its earlier forecast of 4.6% growth. In 2011, global tech spending grew by 6.9% to US$3.7tn compared to 2010.
Our take
Given the current economic uncertainties, we see a moderation in IT budgets for CY2012 and expect volume growth of tier-I Indian IT companies to scale down to sub-15% from 20% plus in FY2012E. However, we do not foresee any pricing erosion as of now because the current pricing is still at a discount to peak levels and risks are lower as compared to what they were in CY2008, when Lehman bankruptcy was filed. The relative stability of consensus forecasts of S&P 500 earnings in 2011 also corroborates the same thing, as earnings forecasts of the S&P 500 have declined by just 4.0% in 2011, well below the 23.5% erosion in 2008. Even the recent data of 3QCY2011 from TPI indicated that the total contract value of IT contracts in the global markets jumped by 31% qoq and 41% yoy to US$25.1bn (an all-time high), largely driven by mega deals related to M&A, with HCL Tech and TCS dominating in all the regions. Thus we believe the expected moderation in demand is a cyclical blip and is basically due to delays in decision making from clients' end; so on a longer-term basis, we expect the Indian IT industry to grow by 12-14%, with tier-I IT players surpassing these rates as the Indian IT-BPO industry is expected to reach US$200bn by 2020 from US$88.1bn in 2011.
Exhibit 1: INR revenue growth trend

45 40 35 30
(%)
32.4 29.5 24.1 22.2 19.0 16.5 15.8 15.7
25 20 15 10 5 0 FY2008 FY2009 FY2010 FY2011
FY2012E
FY2013E
Infosys
TCS
Wipro
HCL Tech
USD revenue growth to moderate in the near term

Worldwide economic trends
In June 2011, the IMF had forecasted that global GDP is set to grow by 4.3% and 4.5% for CY2011 and CY2012, respectively. However, rising sovereign debt due to quantitative easing (QE) measures and bailouts led to gross debt to GDP of developed economies such as U.S., U.K. and Eurozone surge to an alarmingly uncomfortable zone. Further, as the effect of QE measures is gradually fading, economic data points for developed economies are also moving back into the alarming zone. As a result, the IMF has marginally downgraded its global GDP growth forecast to 4.2% and 4.3% for CY2011 and CY2012, respectively. This forecast is again expected to be downgraded further, given the contraction in manufacturing activities across the globe. The downgrade has, however, been steep for the U.S., from 2.5% and 2.7% for CY2011 and CY2012 to 1.6% and 2.0%, respectively. In case of Eurozone, the forecast has been trimmed marginally from 2.0% and 1.7% to 1.9% and 1.4% for CY2011 and CY2012, respectively. However, the recent key economic data points of the U.S. have turned mixed with industrial production, consumer confidence, employment and PMI indicating some stability, which we believe would help Indian IT services players in covering up the risk of slower demand in the European region.
Exhibit 2: USD revenue growth trend

40 35 30 24.9 25
(%)
20 15 10 5 0 FY2008 FY2009 FY2010 FY2011
16.4
17.8 13.5 15.0 14.8 13.1 12.2
FY2012E
FY2013E
Infosys
TCS
Wipro
HCL Tech
Industry-wise trends: The BFSI segment (the major contributor with a 45-50% share in exports) is expected to continue to lead in terms of value due to persistent work related to 1) regulatory compliance, 2) data analytics, 3) operational efficiency and 4) risk and fraud prevention. BFSI was leading the growth of all the tier-1 IT companies since 2HFY2010, specially for Infosys and TCS; however, now incremental growth is tapering off slightly from 6.5-7.0% qoq to 3-3.5% qoq for tier-1 IT companies.
326
January 2012
Software
For the retail and CPG segment, IT spend continues to grow on account of multi-channel integration to encash on the digital consumer behavior, with HCL Tech and TCS being the highest gainers averaging above 6.0% qoq growth since the past four quarters. Also, retail clients are spending on digital marketing and mobile and social technology to provide multi-channel experience, retail commerce and mobile marketing to increase digital consumers' engagements. However, the energy and utilities vertical is gaining strong traction, especially for businesses relating to oil and gas and smart grid and safety, mostly for cost-cutting measures with Wipro and HCL Tech being the highest beneficiary companies amongst the tier-1 IT space. The telecom vertical is still a very soft spender and continues to witness weak client budgets. This vertical was heavily impacted for Infosys and TCS due to one of their top clients, British Telecom, cutting down heavily on its capex and downsizing its operations. Managements of both the companies maintain that the client-specific issue has taken a back seat, and they foresee a slow recovery in the sector. We believe telecom service providers of matured markets will start spending to migrate to next-generation networks such as 4G to support the heavy voice and burgeoning data traffic.
Exhibit 3: Revenue growth trend - BFSI industry

15 10
(% qoq)
5 0 (5) (10)
2QFY10 3QFY10 4QFY10 1QFY11 2QFY11 3QFY11 4QFY11 1QFY12 2QFY12
Exhibit 6: Revenue growth trend - Energy and utilities industry

50 40 30
(% qoq)
20 10 0 (10) (20)
3QFY10 4QFY10 1QFY11 2QFY11 3QFY11 4QFY11 1QFY12 2QFY12
Infosys
TCS
Wipro
HCL Tech
Exhibit 4: Revenue growth trend - Retail and CPG industry

20
Infosys
TCS
Wipro
HCL Tech
10
(% qoq)
(10)
Infosys
TCS
Wipro
HCL Tech
The manufacturing segment, which came back with higher spend on IT post the recession, especially with industries such as hi-tech and semiconductor looking at immediate go-to-market strategies and, thus, spending on product engineering, supply-chain management and consulting to drive cost efficiencies, is now seeing some signs of slowdown, but no project cuts are being seen.
Service-wise trends: Changed business needs of various industries after coming out of 2008 slowdown had led to a surge in demand for discretionary services such as enterprise application (EAS) and engineering and R&D (ERD). Investments in EAS are mostly on the back of simplifying internal processes and harmonizing business processes across the enterprise to make organizations smarter and leaner - primarily focusing on increasing efficiencies and reducing throughput. Even ERD services were witnessing a spurt in demand, with product companies getting aggressive and trying to launch a series of new products by shortening the go-to-market cycle. Currently, due to uncertain macroeconomic behavior, clients are delaying discretionary spends and have become prudent in spending on IT. Geography-wise trends: Geographically, U.S., traditionally the largest market for IT companies, has been going very strongly as far as clients' spending on IT is concerned, though the macro data points at a bleak outlook. The U.S. has been the frontrunner in awarding transformational deals. Growth is very much broad-based for the U.S. and is driven across industries and services. Europe is back to spending - manufacturing and energy and utilities have returned to normalcy, with clients spending on higher value-added services. European clients are primarily spending on IT to drive cost efficiencies by outsourcing runthe-business (RTB) type of work and through rationalization of existing multiple applications and systems. European companies are now opening up to offhsoring their work, and the biggest beneficiaries emerging from these trends are TCS and HCL Tech. Rest of the World, on the other hand, is witnessing more of greenfield projects, relating to clients of developed economies looking out for expansion in these regions. Please refer to important disclosures at the end of this report 327
Exhibit 5: Revenue growth trend - Manufacturing industry

15 10
(% qoq)
5 0 (5)
(10)
Infosys
TCS
Wipro
HCL Tech
January 2012
Software Hiring intact

IT players got into the hiring mode from 2HFY2010, with high lateral hiring to tap the sudden increase in demand. With a strengthening demand landscape, Infosys and TCS had earlier indicated initial robust gross hiring targets yet again for FY2012 of 45,000 and 60,000, even on the total employee base of 1,30,820 and 1,98,614 respectively. TCS recently increased its gross hiring target for FY2012 to 66,000 employees. These hiring numbers are much higher than the initial hiring numbers of 30,000 each indicated in FY2011 by Infosys and TCS. Also, due to the unanticipated pent-up demand as well as higher attrition rates of 20-25% annualized, gross hiring numbers for FY2011 stood much higher at 43,120 and 69,685 for Infosys and TCS, respectively. Even though the macro landscape remains weak, tier-I companies are on track to meet their hiring guidance for FY2012, so that if there is any spurt in demand (as it happened when the economy came out of the downturn), these companies have their resources ready and can address incremental demand. Companies are now looking at planned hiring to address the strengthening demand pipeline as well as to flatten their employee pyramids. Infosys and TCS have already given campus offers to 28,000 and 43,600 people (most of which have already been given), respectively, indicating that majority of the hiring in FY2012 will be of freshers. Also, with cooling attrition rates, we do not expect attrition to be a spoilsport anymore, as companies resort back to planned hiring. is case of HCL Tech is expected to flow in FY2012 itself, as it is a June-ending company. So for FY2013, we expect margin of HCL Tech to decline to 14.9% due to headwinds of wage inflation and SG&A investments.
Exhibit 8: EBIT margin profile

32 29.7 30.4 29.5 29.3 29.1
27 23.7
(%)
26.5
28.0
28.2
27.9
22 21.0 17 17.8
23.4
22.7 21.0 20.8
16.6 12 FY2009 FY2010
15.1 FY2011
15.9 FY2012E
14.9 FY2013E
Infosys
TCS
Wipro
HCL Tech

The global macro data is pointing towards a bleak outlook for future global corporate profits, and there is now cautiousness coming from few IT players in terms of IT budgets for CY2012. However, as per TPI's recent report, deal pipelines of IT companies was higher in 3QCY2011, but few project ramp ups are getting delayed. Thus, we expect tier-I IT companies (except Wipro) to replicate growth of 20% plus in FY2012. Further, we expect moderation in volumes to sub-15% only in FY2013. However, in INR terms, we expect growth to be higher due to INR depreciation assumed. We remain cautiously optimistic on the IT sector, as on one hand global uncertainties are prevailing along with concerns regarding IT budgets for CY2012, while on the other software companies are deriving benefits from steep INR depreciation. We prefer diversified players such as TCS, Infosys, and HCL Tech (top pick) in tier-I IT companies. In case of tier-II IT companies, we like MindTree and Hexaware Technologies.
Exhibit 7: Hiring trend

Net additions FY2010 Infosys TCS Wipro HCL Tech Total employees Infosys TCS Wipro HCL Tech 113,796 160,429 108,071 58,129 130,820 133,560 198,614 202,190 122,385 126,490 73,420 77,046 141,822 214,770 145,088 226,751 8,946 16,668 10,261 4,103 FY2011 1QFY12 17,024 38,185 14,314 15,291 2,740 3,576 4,105 3,626 2QFY12 8,262 12,580 5,240 3,474 3QFY12 3,266 11,981 5,004 2,556
131,730 1,36,734 80,520 83,076
Margins to be mixed
IT companies are going to benefit on the operating margin front due to INR depreciation, as generally every 1% depreciation in INR leads to a 35-40bp increase in the OPM of an IT company. However, going ahead from FY2012 to FY2013, we expect margin of tier-1 IT companies (except HCL Tech) to remain almost flat, as most of the impact of INR depreciation will come in FY2012 itself - as assuming INR/USD rate of `51 for 4QFY2012, the average rate of INR/USD for FY2012 comes at `48.5, and we are assuming an average rate of `50 for FY2013, which implies 3.1% depreciation. All the benefit of INR depreciation 328 January 2012 Please refer to important disclosures at the end of this report

Company Reco CMP (`) ` Large Caps TCS Infosys Wipro HCL Tech* Buy Buy Accumulate Buy 1,076 2,592 404 419 1,262 3,047 425 520 17.3 17.6 5.2 24.1 19.5 18.0 15.3 13.0 29.9 32.0 19.7 17.5 16.6 15.3 14.6 10.5 20.6 18.9 13.1 22.1 32.1 25.8 15.3 20.9 33.3 23.8 20.6 23.1 Tgt Price (`) ` Upside (%) Target P/E (x) FY2013E EBITDA (%) FY2013E P/E (x) FY2011-13E EPS CAGR (%) FY2013E RoCE (%) FY2013E RoE (%)
Mid Caps Tech Mahindra Mahindra Satyam Mphasis^ Mindtree Infotech Entp. Hexaware # KPIT Cummins Persistent Accumulate Accumulate Accumulate Accumulate Neutral Buy Accumulate Neutral 608 72 347 441 135 81 146 319 666 82 387 502 96 163 ^
9.5 13.4 11.7 13.8 19.0 11.6 -
8.0 11.0 10.5 10.0 8.5 11.0 10.0 9.5
16.8 14.8 16.6 14.7 16.0 18.7 15.4 23.0
7.3 9.7 9.4 8.8 8.6 9.3 8.9 9.1
29.9 33.0 (3.1) 42.1 11.9 74.1 19.9 0.1
14.6 11.7 14.0 20.3 16.2 21.4 19.5 19.3
20.0 13.8 14.2 17.4 13.1 19.8 16.9 14.2
Source: Company, Angel Research; Note: * June ending;
October ending; # December ending
January 2012
329
Software
TCS
Company Background
TOP PICK
CMP/TP/Upside: `1,076 / `1,262 / 17%
SHAREHOLDING PATTERN (%) PROMOTERS (TATA SONS) FII 74.1 13.4
TCS is Asia's largest IT services provider and is amongst the top 10 technology firms in the world. The company has a global footprint with an employee base of over 2lakh professionals, offering services to more than 1,000 clients across various industry segments. The company has one of the widest portfolios of services offerings, spanning across the entire IT service value chain - from traditional application development and maintenance to consulting and package implementation to products and platforms.
Structural Snapshot
Growth opportunity: Penetration of Indian IT companies in the total outsourcing market remains fairly low at ~6% vis--vis other large global players such as IBM and Accenture, indicating the enormous growth potential for the Indian IT industry to leverage its low-cost advantage and proven skills; and reach an estimated US$200bn by FY2020. Hence, TCS, with its expanding footprint in untapped geographies like France, Germany, and other emerging nations, can potentially report incremental revenue growth of 14-15% annually. Competitive position: TCS is India's largest IT services company, enjoying an ~11% share of the total Indian IT industry's revenue. TCS has a strong presence in the BFSI vertical (highest revenue generator for the IT industry). Also, TCS has precisely expanded its presence in emerging verticals as well as in geographies, which are now becoming its main growth streams due to the current underpenetration. Nature of business: High RoE business, as it requires skilled workforce rather than heavy capex; Exposed to currency fluctuations and, to an extent, any severe slowdown in the U.S. and Europe.
STOCK RETURNS (%) TCS BSE IT INDEX SENSEX 3M 2.6 (0.7) 1Y (9.9) (17.3) 3Y 63.3 36.3 21.3 5Y 10.9 3.3 10Y 17.3
0.7 13.0
(2.6) (12.3)

Well placed for long-term growth: TCS has expanded its service lines and network in various geographies, which led to TCS becoming a large-scale player, outperforming Infosys since the last five quarters. Also, the key IT spend-thrift industry segments - BFSI (44%) and retail and CPG (12%) - are expected to continue to be the company's growth drivers. Going ahead, with demand likely to come from the emerging verticals, we expect TCS to further gain market share and post USD revenue CQGR of 3.4% over 3QFY2012-4QFY2013. Margins to be remain upbeat: TCS has shown considerable margin improvement of ~230bp over the past nine quarters, with current EBIT margin at 29.0%. Going ahead, the headwinds of wage inflation on operating margins will be more or less absorbed by INR depreciation, so we expect the company's EBIT margin for FY2012 and FY2013 to be at 28.2% and 27.9%, respectively. Valuations attractive: The stock is trading at attractive valuations of 16.6x FY2013E EPS. We recommend a Buy rating with a target price of ` 1,262, valuing the stock at 19.5x FY2013E EPS.
330
December 2011

BALANCE SHEET
Y/E MARCH (` CR) ` CASH AND CASH EQUIVALENTS OTHER CURRENT FIN.ASSETS ACCOUNTS RECEIVABLE UNBILLED REVENUES OTHER CURRENT ASSETS PROPERTY AND EQUIPMENT INTANGIBLE ASSETS INVESTMENTS OTHER NON CURRENT ASSETS TOTAL ASSETS CURRENT LIABILITIES SHORT TERM BORRROWINGS REDEEMABLE PREF. SHARES LONG TERM DEBT OTHER NON CURRENT LIAB. MINORITY INTEREST SHAREHOLDERS FUNDS TOTAL LIABILITIES FY2010 1,025 3,653 5,810 1,201 2,127 4,171 3,242 3,784 2,610 27,621 5,289 231 100 11 673 377 20,940 27,621 FY2011 1,554 3,934 8,201 1,349 1,449 5,200 3,379 1,839 2,575 32,788 5,834 33 100 6 1,097 315 25,404 32,788 FY2012E 1,119 6,297 10,424 1,760 1,700 6,560 3,380 1,500 2,600 41,465 8,568 30 100 4 1,499 350 30,913 41,465 FY2013E 2,560 8,900 12,404 2,094 2,000 7,684 3,380 1,500 3,618 51,031 10,613 100 4 1,827 400 38,087 51,031
% CHG
COST OF REVENUE GROSS PROFIT SGA EXPENSES EBITDA
8.0
15,724 14,303 5,625 8,679
24.3
19,937 17,387 6,189 11,198
32.4
26,060 23,352 8,476 14,876
19.0
31,752 27,046 9,477 17,568
% OF NET SALES
DEP. AND AMORTIZATION EBIT
28.9
721 7,958
30.0
721 10,477
30.1
939 13,936
29.9
1176 16,392
% OF NET SALES
OTHER INCOME, NET PROFIT BEFORE TAX PROVISION FOR TAX
26.5
226 8,184 1,209
28.1
532 11,009 2,174
28.2
394 14,330 3,442
27.9
936 17,329 4,505
% OF PBT
PAT MINORITY INTEREST FINAL PAT
14.8
6,975 102 6,873
19.7
8,835 120 8,715
24.0
10,888 112 10,776
26.0
12,823 154 12,669
% CHG
32.9
26.7
23.6
17.6
CASH FLOW STATEMENT

Y/E MARCH (` CR) ` PRE TAX PROFIT FROM OPS. DEPRECIATION OTHER INCOME/PRIOR PERIOD AD TAX CASH PROFITS NET TRADE WORKING CAPITAL FY2010 7,958 721 226 1,209 7,593 1,489 FY2011 10,477 721 532 2,174 9,437 (5,448) 3,989 (1,750) 5,597 (138) (3,275) 435 419 328 (4,580) (3,895) 529 1,025 1,554 FY2012E 13,936 939 394 3,442 11,714 (2,518) 9,196 (2,300) 339 (1) (2,839) (4,801) 400 (5,267) (4,831) (435) 1,554 1,119 FY2013E 16,392 1,176 936 4,505 13,845
KEY RATIOS
Y/E MARCH VALUATION RATIO(X) P/E P/BV EV/SALES EV/EBITDA (3,201) 10,644 (2,300) (1,785) (4,085) 327 ANGEL ROIC 41.5 32.8 41.1 34.3 42.8 34.9 43.1 33.3 (5,496) (5,118) 1,441 1,119 2,560 ROE TURNOVER RATIOS (X) ASSET TURNOVER (FIXED ASSETS) RECEIVABLES DAYS 7.2 71 7.2 80 7.5 77 7.7 77 EV/TOTAL ASSETS PER SHARE DATA (`) ` EPS CASH EPS BOOK VALUE RETURN RATIOS (%) ROCE (PRE-TAX) 28.8 32.0 33.6 32.1 35.1 38.8 107.0 44.5 48.2 129.8 55.1 59.9 157.9 64.7 70.7 194.6 7.3 6.2 4.9 3.9 30.6 10.1 6.7 23.3 24.2 8.3 5.4 18.2 19.5 6.8 4.1 13.6 16.6 5.5 3.4 11.2 FY2010 FY2011 FY2012E FY2013E
CASHFLOW FROM OPERATING ACTV. 9,081 (INC)/DEC IN FIXED ASSETS (INC)/DEC IN INVESTMENTS (INC)/DEC IN NET INTANGIBLE ASST (INC)/DEC IN NON CURRENT ASST (1,142) (5,709) 177 (925)
CASHFLOW FROM INVESTING ACTV. (7,600) INC/(DEC) IN DEBT INC/(DEC) IN EQUITY/PREMIUM DIVIDENDS (397) 571 (2,158)
CASHFLOW FROM FINANCING ACTV. (1,920) CASH GENERATED/(UTILIZED) CASH AT START OF THE YEAR CASH AT END OF THE YEAR (438) 1,463 1,025
December 2011
331
Software
Infosys
Company Background
TOP PICK
CMP/TP/Upside: `2,592 / `3,047 / 18%
Infosys is the second largest IT company in India, employing over 1,45,000 professionals. The company services more than 650 clients across various verticals, such as financial services, manufacturing, telecom, retail and healthcare. Infosys has the widest portfolio of service offerings amongst Indian IT companies, spanning across the entire IT service value chain - from traditional application development and maintenance to consulting and package implementation to products and platforms.
Structural Snapshot
Growth opportunity: Penetration of Indian IT companies in the total outsourcing market remains fairly low at ~6% vis--vis other large global players such as IBM and Accenture. This indicates an enormous growth potential for the Indian IT industry to leverage its low-cost advantage and proven skills; and grow to an estimated US$200bn by FY2020. Hence, Infosys, with its expanding footprint in untapped geographies like France, Germany, China, and other emerging nations, can potentially report incremental revenue growth of 13-15% annually. Competitive position: Infosys, the bellwether of the Indian IT industry, has a broad-based service portfolio, superior client proposition in terms of quality of service, state-of-the-art technology and a strong product bouquet. The company enjoys ~8% share of the total Indian IT industry's revenue and best-in-class EBIT margin of ~30%. Nature of business: High RoE business, as it requires skilled workforce rather than heavy capex; Exposed to currency fluctuations and, to an extent, any severe slowdown in the U.S. and Europe.
STOCK RETURNS (%) INFOSYS BSE IT INDEX SENSEX 3M (0.7) 1Y (17.3) 3Y 27.6 36.3 21.3 5Y 3.7 3.3 10Y 18.6 17.3 (5.0) (20.3) (2.6) (12.3)
0.7 13.0
FINANCIAL PERFORMANCE OVERVIEW (%) SALES GROWTH* PAT GROWTH* OPM# ROE# 3M 30.8 33.3 33.7 1Y 20.9 9.7 32.6 25.0 3Y 18.1 13.6 33.4 28.3 5Y 22.7 10Y 27.0 23.6 30.6 32.7 33.6 30.6 33.5

Beneficiary of a diversified portfolio: Infosys enjoys a diversified revenue portfolio - non-discretionary services contribute ~60% to its overall revenue. Also, the company's focus on key IT spend-thrift verticals like BFSI (35%), manufacturing (20%) and retail and CPG (16%) is expected to continue to aid its growth. But due to delays in ramp up of the projects, we expect moderation in its volume growth in the near term and expect a revenue CQGR of 2.9% over 3QFY2012-4QFY2013 vis--vis 4.0% in 9MFY2012. Strong client addition, hiring intact: Infosys has been consistently adding a robust number of clients in its portfolio, despite a weak macro landscape. In fact, the company is on track to hire 45,000 gross employees on its total employee base of 130,820 (FY2011), in-line with its FY2012 guidance, and despite fears of an economic slowdown. Valuations attractive: Revenue momentum of the company has weakened since the past few quarters due to declining revenue from BT, one of its major clients. This trend is set to alter soon, as revenue contribution from BT has already declined significantly. The stock is trading at attractive valuations of 15.3x FY2013E EPS of `169. We recommend a Buy rating with a target price of ` 3,047, valuing the stock at 18x FY2013E EPS.
332
December 2011

BALANCE SHEET
Y/E MARCH (` CR) ` ASSETS CASH AND CASH EQUIVALENTS TRADE RECEIVABLES UNBILLED REVENUE OTHER CURRENT ASSETS TOTAL CURRENT ASSETS PROPERTY, PLANT AND EQUP. GOODWILL OTHER NON-CURRENT ASSETS 12,111 3,494 841 641 20,928 4,439 829 1,426 27,622 16,666 4,653 1,243 917 23,689 4,844 825 1,905 31,263 21,280 5,403 1,496 1,194 29,478 5,113 830 2,070 37,491 26,571 6,319 1,743 1,392 36,220 5,140 830 2,632 44,822 FY2010 FY2011 FY2012E FY2013E
% CHG
COST OF REVENUE GROSS PROFIT SELLING AND MKTG EXP.
4.8
12,078 10,664 1,184
20.9
15,054 12,447 1,512
24.1
18,900 15,220 1,776
16.5
21,936 17,831 2,177
% OF NET SALES
GENERAL AND ADMIN EXP. EBITDA
5.2
1,628 7,852
5.5
1,971 8,964
5.2
2,510 10,933
5.5
2,922 12,732
% OF NET SALES
34.5
942 6,910
32.6
862 8,102
32.0
931 10,002
32.0
TOTAL ASSETS 1,173 LIABILITIES 11,559 CURRENT INCOME TAX LIAB. UNEARNED REVENUE EMPLOYEE BENEFIT OBLIGATIONS OTHER LIABILTIES TOTAL LIABILITIES SHARE CAPITAL RETAINED EARNINGS TOTAL LIABILTIES AND EQUITY 724 531 131 1,707 3,549 3,333 20,668 27,622 817 518 140 2,012 3,960 3,368 23,826 31,263 850 528 150 2,135 4,167 3,368 29,847 37,491 900 540 140 2,135 4,180 3,368 37,165 44,822
% OF NET SALES
OTHER INCOME PROFIT BEFORE TAX PROVISION FOR TAX
30.4
990 7,900 1,681
29.5
1,211 9,313 2,490
29.3
1,680 11,683 3,324
29.1
1,946 13,505 3,849
% OF PBT
PAT
21.3
6,219
26.7
6,823
28.5
8,358
28.5
9,656
% CHG
3.8
9.7
22.5
15.5
CASH FLOW STATEMENT

Y/E MARCH (` CR) ` PRE TAX PROFIT FROM OPS. DEPRECIATION OTHER INCOME TAX CASH PROFITS (INC)/DEC IN NET TRADE WC FY2010 6,910 942 990 1,681 7,161 230 FY2011 8,102 862 1,211 2,490 7,685 (1,360) 6,325 (1,267) 3,602 (348) (104) 1,823 (1,256) 2,337 (3,593) 4,555 12,111 16,666 FY2012E 10,002 931 1,680 3,324 9,289 (1,069) 8,220 (1,200) 99 (29) (141) (1,269) 2,337 (2,337) 4,614 16,666 21,280 FY2013E 11,559 1,173 1,946 3,849 10,828 (1,392) 9,436 (1,200) (40) (370) (192) (1,808) 2,337 (2,337) 5,291 21,280 26,571
KEY RATIOS
Y/E MARCH VALUATION RATIO (X) P/E P/CEPS P/BV EV/SALES EV/EBITDA EV/TOTAL ASSETS PER SHARE DATA (`) ` EPS CASH EPS DIVIDEND BOOK VALUE RETURN RATIOS (%) ROCE (PRE-TAX) ANGEL ROIC ROE TURNOVER RATIOS(X) ASSET TURNOVER (FIXED ASSETS) RECEIVABLES DAYS 3.4 70 3.6 78 4.3 74 4.6 74 25.0 58.7 25.8 25.9 56.1 25.0 26.7 61.8 25.1 25.8 63.6 23.8 109 125 25.0 421 119 134 34.9 477 146 162 34.9 583 169 189 34.9 710 23.7 20.7 6.2 5.8 16.9 4.8 21.7 19.3 5.4 4.8 14.7 4.2 17.7 16.0 4.4 3.7 11.6 3.4 15.3 13.7 3.6 3.1 9.6 2.7 FY2010 FY2011 FY2012E FY2013E
CASHFLOW FROM OPERATING ACTV. 7,391 (INC)/DEC IN FIXED ASSETS (INC)/DEC IN INVESTMENTS (INC)/DEC IN DEFERRED TAX ASST. (INC)/DEC IN NON CURRENT ASS. (716) (3,746) (302) (243)
CASHFLOW FROM INVESTING ACTV. (4,933) INC/(DEC) IN DEBT INC/(DEC) IN EQUITY/PREMIUM DIVIDENDS 333 1,673
CASHFLOW FROM FINANCING ACTV. (1,340) CASH GENERATED/(UTILIZED) CASH AT START OF THE YEAR CASH AT END OF THE YEAR 1,118 10,993 12,111
December 2011
333
Software
Wipro
Company Background
CMP/TP/Upside: `404 / `425 / 5%
SHAREHOLDING PATTERN (%) PROMOTERS (AZIM H. PREMJI) FII 79.2 7.4
Wipro is one the leading Indian companies, majorly offering IT services. The company is also engaged in the IT hardware (11% of slaes) and consumer care and lighting (10% of slaes) businesses. Wipro's IT arm is India's fourth largest IT firm, employing more than 1,30,000 professionals, offering a wide portfolio of services such as ADM, consulting and package implementation, and servicing more than 300 clients.
Structural Snapshot
Growth opportunity: Low penetration of Indian IT companies in the total outsourcing market (~6%) offers an enormous growth potential for Indian IT players to increase their revenue pie. Also, Wipro's strong foothold in the short-term growth areas of remote infrastructure management (RIM) can give Wipro the capability to crack large IMS deals. Competitive position: Wipro enjoys ~6.5% of the total Indian IT industry's revenue. The company is present in emerging verticals and geographies, which are now becoming its main growth streams due to the current underpenetration. Further, Wipro has a low presence in the BFSI industry (highest revenue generator for the IT industry) and in the EAS vertical, as compared to its peers - this can drag the company's incremental revenue growth. Nature of business: High RoE business, as it requires skilled workforce rather than heavy capex; Exposed to currency fluctuations and, to an extent, any severe slowdown in the U.S. and Europe.
STOCK RETURNS (%) WIPRO BSE IT INDEX SENSEX 3M (0.7) 1Y (17.3) 3Y 42.6 36.3 21.3 5Y 1.6 3.3 10Y 9.8 17.3 13.0 (14.9) (2.6) (12.3)
0.7 13.0

Benefits of restructuring exercise to flow: Wipro started the restructuring of its organizational structure a couple of quarters back and structured it as vertical-focused, whereby P/L responsibility lies only with the verticals. Post this, there has been a consistent improvement in Wipro's contract win rates. Also, the company managed to increase its clients in the US$100mn+ revenue bracket from one in 3QFY2011 to five in 2QFY2012, with employee attrition rates declining. That said, we expect Wipro to post USD revenue CQGR of 2.6% over 3QFY2012-4QFY2013. Margins levers limited: At the operating front, Wipro has headwinds such as wage inflation and low utilization level as the company targets ~70% of its gross hires as freshers, which are expected to pull down its margins. The only tailwind for Wipro is INR depreciation; thus, we expect EBIT margin of the IT services business to be at 21.2% and 20.5% for FY2012 and FY2013, respectively, from 22.0% in 1QFY2012. Valuations: The stock is trading at reasonable valuations of 14.6x FY2013E EPS; lower valuation as against Infosys and TCS due to muted 9MFY2012 performance, FY2013 revenue growth expected to remain lesser than peers and weak OPM. We recommend an Accumulate rating on the stock with a target price of ` 425, valuing it at 15.3x FY2013E EPS.
334
December 2011

BALANCE SHEET
Y/E MARCH (` CR) ` GOODWILL PROPERTY, PLANT AND EQUIP. OTHER NON-CURRENT ASSETS INVENTORIES TRADE RECEIVABLES OTHER CURRENT ASSETS AVAILABLE FOR SALE INVST. CASH AND CASH EQUIVALENTS TOTAL ASSETS SHARE CAPITAL SHARE PREMIUM RETAINED EARNINGS TOTAL EQUITY LONG TERM LOANS NON-CURRENT TAX LIABILITY BANK OVERDRAFT TRADE PAYABLES OTHER CURRENT LIABILITIES TOTAL EQUITY AND LIABILITIES FY2010 5,781 5,346 878 793 5,093 2,111 3,042 6,488 32,993 294 2,919 16,579 19,655 1,811 307 4,440 3,875 650 32,993 FY2011 5,837 5,509 898 971 6,163 1,974 4,928 6,114 37,144 491 3,012 20,325 24,037 1,976 502 3,304 4,405 591 37,144 FY2012E 6,550 5,484 1,200 1,197 8,017 2,857 6,093 4,985 42,139 491 3,012 24,258 27,970 2,025 580 3,716 5,121 545 42,139 FY2013E 6,550 5,327 1,400 1,325 8,790 2,509 9,293 7,603 49,072 491 3,012 29,346 33,058 2,025 700 3,978 5,904 700 49,072
% CHG
COST OF REVENUES GROSS PROFIT SELLING AND MKTG. EXP. GENERAL AND ADMIN. EXP. DEP. AND AMORTIZATION EBITDA
6.2
18,630 8,494 1,861 1,482 783 5,934
14.7
21,285 9,814 2,218 1,829 821 6,588
22.2
26,701 11,303 2,781 2,027 1,026 7,521
15.6
30,785 13,165 3,271 2,389 1,156 8,661
% OF NET SALES
EBIT
21.9
5,151
21.2
5,767
19.8
6,495
19.7
7,504
% OF NET SALES
19.0
337 5,541 929
18.5
472 6,303 971
17.1
476 7,018 1,342
17.1
973 8,533 1,707
% OF PBT
16.8
4,612 18 4,594
15.4
5,332 35 5,297
19.1
5,675 19 5,656
20.0
6,826 16 6,810
% CHG
18.5
15.3
6.8
20.4
CASH FLOW
Y/E MARCH (` CR) ` FY2010 FY2011 5,832 821 472 (971) (2,101) 4,018 (985) (56) (1,951) 103 (20) (3,616) 165 617 (1,558) (775) (374) 6,488 6,114 FY2012E 6,542 1,026 476 (1,342) (2,568) 4,113 (1,000) (713) (1,265) 193 (302) (3,569) 49 (1,723) (1,674) (1,129) 6,114 4,985 FY2013E 7,560 1,156 973 (1,707) 608 8,575 (1,000) (3,200) 274 (200) (4,234) (1,723) (1,723) 2,618 4,985 7,603 PRE TAX PROFIT FROM OPERATIONS 5,204 DEPRECIATION OTHER INCOME/PRIOR PERIOD AD TAX NET TRADE WORKING CAPITAL 783 337 (929) (840)
KEY RATIOS
Y/E MARCH VALUATION RATIO (X) P/E P/BV EV/SALES EV/EBITDA EV/TOTAL ASSETS PER SHARE DATA (`) ` EPS CASH EPS DIVIDEND BOOK VALUE RETURN RATIOS (%) ROCE (PRE-TAX) ANGEL ROIC ROE TURNOVER RATIOS (X) ASSET TURNOVER (FIXED ASSETS) RECEIVABLES DAYS PAYABLE DAYS 0.9 67 79 0.9 66 71 1.0 68 65 1.0 70 65 15.6 29.1 23.4 15.5 28.5 22.0 15.4 26.5 20.2 15.3 29.2 20.6 18.9 44.3 4.0 89.3 21.7 45.1 6.0 98.0 23.1 49.5 6.0 114.0 27.8 58.3 6.0 134.7 21.4 4.5 3.4 15.4 2.8 18.6 4.1 2.9 13.7 2.4 17.5 3.5 2.4 12.0 2.1 14.6 3.0 1.9 9.7 1.7 FY2010 FY2011 FY2012E FY2013E
CASHFLOW FROM OPERATING ACTV. 4,537 (INC)/DEC IN FIXED ASSETS (INC)/DEC IN INTANGIBLES (INC)/DEC IN INVESTMENTS INC/(DEC) IN NON-CURRENT LIAB. (1,150) 182 (1,455) (436)
(INC)/DEC IN NON-CURRENCT ASSETS (70) CASHFLOW FROM INVESTING ACTV. (3,107) INC/(DEC) IN DEBT INC/(DEC) IN EQUITY/PREMIUM DIVIDENDS CASHFLOW FROM FINANCING ACTV. CASH GENERATED/(UTILIZED) CASH AT START OF THE YEAR CASH AT END OF THE YEAR (157) 982 (679) 146 1,576 4,912 6,488
December 2011
335
Software
HCL Technologies
HCL Tech is India's fifth largest IT services companies, with over 80,000 employees catering to more than 450 clients. The company's service offerings include enterprise application (EAS), custom applications, engineering and research and development (ERD) and infrastructure management (IMS). In December 2008, HCL Tech acquired U.K.-based SAP consulting company, Axon, which now contributes ~11% to its consolidated revenue.
Structural Snapshot
Growth opportunity: Low penetration of Indian IT companies in the total outsourcing market (~6%) offers an enormous growth potential to IT companies such as HCL Tech. Further, the company's leading position in the high-growth area of remote I MS (~25% of revenue) will aid it to win large infrastructure-led application development contracts. Hence, HCL Tech, with its expanding client base and footprint, can potentially report average growth of 15-20%. Competitive position: HCL Tech is strongly positioned in the EAS and IMS verticals, which places it well for short-term as well as long-term growth. In addition, strong consulting experience derived from Axon gives the company an edge over other players in the high-margin consulting business. Nature of business: High RoE business, as it requires skilled workforce rather than heavy capex; Exposed to currency fluctuations and, to an extent, any severe slowdown in the U.S. and Europe.
STOCK RETURNS (%) HCL TECH BSE IT INDEX SENSEX 3M 3.3 (0.7) 1Y (17.1) (17.3) 3Y 53.7 36.3 21.3 5Y 10Y 5.0 12.8 0.7 13.0 3.3 17.3
(2.6) (12.3)
22.1 14.4 21.0 21.5 24.5 23.1

Strategic portfolio offers real growth and warrants relative strength: Post the recovery in the global environment, HCL Tech has displayed an industry-leading growth trajectory and has a strong position in IMS. Also, verticals like manufacturing and BFSI recorded robust order bookings of US$1.9bn (FY2011 revenue - US$972mn) and US$750mn (FY2011 revenue - US$905mn) in FY2011 and delivered CQGR (past four quarters) of 6.5% and 5.0%, respectively. We believe such a strategic portfolio should limit client budget erosion for the company vis--vis its peers during a downturn and expect HCL Tech to be the outperformer among tier-I IT companies, with USD revenue to report a 3.5% CQGR over the next four quarters on the back of its high-value services portfolio. Margins to remain almost flat: All the benefits of INR depreciation in the EBIT margin of HCL Tech are expected to flow in FY2012 itself, as it is a June-ending company. To cushion this, HCL Tech has some margin levers such as managing SG&A costs, expanding utilization levels and turnaround in the BPO segment. Thus, we expect the company's EBIT margin to be at 14.9% in FY2013 from 15.1% in FY2011. Valuations attractive: The stock is trading at attractive valuations of 10.5x FY2013E EPS, a steep 33% discount to Infosys, which we believe is unjustified due to industry-leading growth rates and improving profitability. We recommend Buy on the stock with a target price of ` 520, valuing it at 13x FY2013E EPS.
336
December 2011

Y/E JUNE (` CR) ` NET SALES FY2010 12,564 FY2011 16,034 FY2012E 20,767 FY2013E 23,979
BALANCE SHEET
Y/E JUNE (` CR) ` CASH AND CASH EQUIVALENT ACCOUNT RECEIVABLES, NET UNBILLED RECEIVABLES DEPOSIT WITH BANKS INVESTMENT SECURITIES OTHER CURRENT ASSETS TOTAL CURRENT ASSETS PROPERTY AND EQUIPMENT INTANGIBLE ASSETS, NET FY2010 469 2,514 536 1,091 782 885 6,376 1,849 4,312 50 964 13,571 3,133 2,663 739 6,535 7,037 13,571 FY2011 520 2,591 816 1,079 643 1,255 6,902 2,217 4,188 110 95 1,039 14,624 3,376 2,124 689 6,189 8,435 14,624 FY2012E 370 3,584 993 769 458 1,385 7,560 2,741 4,137 78 68 1,108 15,750 3,198 1,884 608 5,689 10,060 15,750 FY2013E 420 4,139 1,120 871 519 1,599 8,668 2,942 4,085 89 77 1,202 17,127 3,204 1,222 577 5,002 12,124 17,127
% CHG
COST OF REVENUES GROSS PROFIT SG&A EXPENSES EBITDA
18.2
8,188 4,377 1,796 2,581
27.6
10,749 5,285 2,371 2,914
29.5
13,917 6,850 2,993 3,857
15.5
16,458 7,520 3,327 4,193
% OF NET SALES
20.5
501 2,080
18.2
498 2,416
18.6
562 3,295
17.5
620 3,572
FIXED DEPOSITS WITH BANKS
% OF NET SALES
16.6
(55) 2,025 240
15.1
26 2,441 485
15.9
30 3,325 831
14.9
INVESTMENT SECURITIES HTM 10 3,583 860 OTHER ASSETS TOTAL ASSETS CURRENT LIABILITIES BORROWINGS OTHER LIABILTIES TOTAL LIABILITIES TOTAL STOCKHOLDER EQUITY TOTAL LIABILITIES AND EQUITY
% OF PBT
PAT FOREX LOSS FINAL PAT
11.9
1,785 (476) 1,310
19.9
1,956 (82) 1,874
25.0
2,494 (133) 2,361
24.0
2,723 81 2,804
% CHG
2.6
43.0
25.5
18.8
CASH FLOW STATEMENT

Y/E JUNE (` CR) ` PRE TAX PROFIT FROM OPS. DEPRECIATION EXPENSES (DEFFERED) OTHER INCOME TAX NET TRADE WORKING CAPITAL FY2010 1,908 501 (476) 117 (240) (290) FY2011 2,259 498 (82) 182 (485) (484) 1,888 (797) 56 45 (50) (75) (821) (539) 229 (615) (1,016) 51 469 520 FY2012E 3,131 562 (133) 194 (831) (1,479) 1,443 (1,035) 568 (81) (69) (617) (241) (656) (975) (149) 520 371 FY2013E 3,453 620 81 130 (860) (890) 2,534 (770) -
KEY RATIOS
Y/E JUNE VALUATION RATIO(X) P/E P/CEPS P/BV EV/SALES EV/EBITDA EV/TOTAL ASSETS PER SHARE DATA(`) ` EPS 19.0 26.3 8.0 102.2 26.8 34.1 8.0 121.4 33.7 42.1 8.0 144.8 40.0 49.3 9.0 174.4 22.0 15.9 4.1 2.3 11.3 2.2 15.6 12.3 3.5 1.8 9.9 2.0 12.4 10.0 2.9 1.4 7.6 1.9 10.5 8.5 2.4 1.2 6.8 1.7 FY2010 FY2011 FY2012E FY2013E
CASHFLOW FROM OPERATING ACTV. 1,520 (INC)/DEC IN FIXED ASSETS (INC)/DEC IN INTANGIBLES (INC)/DEC IN INVESTMENTS INC/(DEC) IN NON CURRENT LIAB. (652) 109 (528) (25)
(188) (31) (94) (1,083) (662) (656) (1,402) 50 370 420 CASH EPS DIVIDEND BOOK VALUE RETURN RATIOS(%) ROCE (PRE-TAX) ANGEL ROIC ROE TURNOVER RATIOS(X) ASSET TURNOVER (FIXED ASSETS) RECEIVABLES DAYS 1.8 76 2.2 59 2.7 63 2.9 63 15.3 18.8 18.6 16.5 19.9 22.2 20.9 23.6 23.5 20.9 23.6 23.1
(INC)/DEC IN NON CURRENT ASSETS (103) CASHFLOW FROM INVESTING ACTV. (1,199) INC/(DEC) IN DEBT INC/(DEC) IN EQUITY/PREMIUM DIVIDENDS (314) 770 (640)
CASHFLOW FROM FINANCING ACTV. (272) CASH GENERATED/(UTILIZED) CASH AT START OF THE YEAR CASH AT END OF THE YEAR 49 420 469
December 2011
337
Software
Tech Mahindra
Company Background
CMP/TP/Upside: `608 / `666 / 9%
Tech Mahindra was founded in 1986 as a joint venture between Mahindra Group and British Telecom (BT). Later on, it started servicing other external clients as well (solely in the telecom industry), though still it derives ~40% of its revenue from BT. In June 2009, Tech Mahindra acquired a 42.7% stake in erstwhile Satyam Computers (now Mahindra Satyam).
Structural Snapshot
Growth opportunity: Trends such as the advent of 4G technology, superfast broadband and telecom ventures and M&As present numerous prospects for Tech Mahindra to capture IT spend coming from these areas. Also, Tech Mahindra can leverage the skills of Mahindra Satyam in the enterprise solutions space to expand its service offerings. Tech Mahindra, by acquiring Mahindra Satyam, has effectively tried to achieve diversification of its revenue portfolio (eventually to be merged with itself). Competitive position: Tech Mahindra has a strong proposition in terms of service, technology and product bouquet in the telecom industry in which it has marquee clientele such as AT&T, Airtel, Alcatel and Vodafone. Nature of business: High RoE business, as it requires skilled workforce rather than heavy capex; Exposed to currency fluctuations and, to an extent, any severe slowdown in the U.S. and Europe.
STOCK RETURNS (%) TECH MAHINDRA BSE IT INDEX SENSEX 3M 5.2 (0.7) 1Y (11.7) (17.3) 3Y 36.3 21.3 5Y 10Y 17.3 36.5 (19.2) 3.3
0.7 13.0
(2.6) (12.3)

Mahindra Satyam, a feather in the cap: Mahindra Satyam has now reached a stage of stability and is showing robust growth traction on the back of its diversified portfolio. Increasing revenue visibility of Mahindra Satyam and management's capability of maintaining margins have led to an overall upgrade of Mahindra Satyam's earnings. Non-BT business to drive the company's growth, but BT retendering contracts: Management is witnessing traces of demand revival from telecom service providers and foresees them to return to spending on 4G technology and cloud only in FY2013. We expect the non-BT business to report a CQGR of 2.5% and 2.6% in 2HFY2012E and FY2013E, respectively, with BT's quarterly revenue expected to be flat from here. However, there is a caveat that BT's revenue may see a downside if the company loses out its market share in the retendering process initiated by BT. In fact, even if the company manages to hold the share or increase it, it can be margin dilutive as the client has initiated this retendering process as part of its cost-cutting drive with lower pricing expectations. Thus, we expect the company to post a 9.2% CAGR in its USD revenue over FY2011-13E. Valuations: The stock is trading at reasonable valuations of 7.3x FY2013E EPS, which we believe over-discount in the negatives from the BT business. Also, after the merger of Tech Mahindra and Mahindra Satyam, the share of BTs revenue in the combined entity will come down to 18-20%. We recommend an Accumulate rating on the stock with a target price of ` 666, valuing it at 8x FY2013E EPS.
338
December 2011

BALANCE SHEET
Y/E MARCH (` CR) ` EQUITY CAPITAL SHARE PREMIUM PROFIT AND LOSS OTHER RESERVES NET WORTH TOTAL DEBT MINORITY INTEREST TOTAL CAPITAL EMPLOYED GROSS BLOCK ACCUMULATED DEPRECIATION CAPITAL WIP INVESTMENTS SUNDRY DEBTORS CASH AND CASH EQUIVALENTS LOANS AND ADVANCES SUNDRY CREDITORS OTHER LIABILITIES PROVISION TOTAL CAPITAL DEPLOYED FY2010 122 237 1,783 744 2,887 2,135 14 5,035 1,131 (527) 321 3,015 1,042 219 673 (461) (129) (277) 5,035 FY2011 126 233 2,365 627 3,351 1,223 16 5,174 1,273 (670) 125 2,908 1,247 267 832 (510) (53) (308) 5,174 FY2012E 126 233 3,355 726 4,439 907 16 5,362 1,433 (845) 140 2,909 1,249 448 901 (542) (65) (338) 5,362 FY2013E 126 233 4,376 747 5,482 407 16 5,904 1,588 (1,031) 160 2,932 1,371 715 1,026 (574) (15) (342) 5,904
% CHG
COST OF REVENUES GROSS PROFIT SG&A EXPENSES EBITDA
3.6
2,871 1,754 622 1,133
11.1
3,403 1,737 734 1,003
9.5
3,731 1,898 923 975
10.4
4,150 2,065 1,019 1,046
% OF NET SALES
DEP. AND AMORTIZATION EBIT INTEREST EXPENSE OTHER INCOME PROFIT BEFORE TAX PROVISION FOR TAX PAT SHARE FROM ASSOCIATES EXCEPTIONAL ITEM FINAL PAT ADJ. PAT
24.5
134 999 218 75 856 144 712
19.5
144 860 100 117 877 132 746 44
17.3
174 800 140 243 903 203 699 368 1,065 1,065
16.8
186 859 54 140 946 217 728 373 1,099 1,099
(9) 700 709
(143) 643 786
% CHG
(25.1)
10.9
35.5
3.2
CASH FLOW STATEMENT

Y/E MARCH (` CR) ` FY2010 780 134 73 (144) 834 (539) 295 (407) (2,580) (8) FY2011 760 144 114 (132) 788 (358) 429 54 107 (36) 125 (912) (117) (61) (504) 49 218 267 FY2012E 660 174 240 (203) 1,241 3 1,244 (175) (1) (11) (186) (316) 99 (75) (876) 181 267 448 FY2013E 805 186 137 (217) 1,287 (261) 1,026 (176) (23) (3) (202) (500) 21 (77) (556) 267 448 715 PRE TAX PROFIT FROM OPERATIONS DEPRECIATION OTHER INCOME TAX CASH PROFITS NET TRADE WORKING CAPITAL CASHFLOW FROM OPERATING ACTV. (INC)/DEC IN FIXED ASSETS (INC)/DEC IN INVESTMENTS (INC)/DEC IN DEFERRED TAX ASSET
KEY RATIOS
Y/E MARCH VALUATION RATIO (X) P/E P/BV EV/SALES EV/EBITDA EV/TOTAL ASSETS PER SHARE DATA () EPS CASH EPS DIVIDEND BOOK VALUE RETURN RATIOS (%) ROCE (PRE-TAX) ANGEL ROIC ROE TURNOVER RATIOS (X) ASSET TURNOVER (FIXED ASSETS) RECEIVABLES DAYS PAYABLE DAYS 5.0 77 49 7.1 81 43 7.7 81 43 8.7 81 41 19.8 22.2 24.6 16.6 18.0 23.5 14.9 16.8 24.0 14.6 17.1 20.0 53.6 64.0 3.3 221.4 49.3 60.3 4.0 257.0 84.5 93.9 4.0 336.6 83.3 97.4 4.0 415.6 11.3 2.7 2.1 8.7 10.6 12.3 2.4 1.7 8.9 12.2 7.2 1.8 1.5 8.6 11.5 7.3 1.5 1.2 7.3 10.6 FY2010 FY2011 FY2012E FY2013E
CASHFLOW FROM INVESTING ACTV. (2,995) INC/(DEC) IN DEBT INC/(DEC) IN EQUITY/PREMIUM RESERVES ON AMALGAMATION DIVIDENDS 2,135 5 288 (50)
CASHFLOW FROM FINANCING ACTV. 2,381 CASH GENERATED/(UTILIZED) CASH AT START OF THE YEAR CASH AT END OF THE YEAR (319) 538 219
December 2011
339
Software
Mahindra Satyam
Mahindra Satyam (Satyam) was incorporated by Raju brothers in 1987, with a strong focus on the manufacturing industry and the enterprise business solutions (EBS) vertical. The Mahindra Group acquired Satyam in April 2009 after the erstwhile founders reported financial irregularities in January 2009 and it is now back on its growth track after two years of metamorphosis undertaken by Tech Mahindra's management. The company's new management took over its reins and has again put the company on the map of the Indian IT industry (sixth largest Indian IT services provider) with improved business flow, strong client mining and better margins.
STOCK RETURNS (%) BSE IT INDEX SENSEX 3M (0.7) 1Y 9.0 (17.3) 3Y 36.3 21.3 5Y 10Y MAHINDRA SATYAM 2.3 41.6 (31.7) (6.2) 0.7 13.0 3.3 17.3
Structural Snapshot
Growth opportunity: Low penetration of Indian IT companies in the total outsourcing market (~6%) offers an enormous growth potential for Indian IT players to increase their revenue pie. Hence, Satyam, with its restored reputation, diversified portfolio, expanding footprint in untapped geographies and strong management competence, can potentially get incremental revenue growth of 12-14% annually. Competitive position: Satyam has a broad-based service portfolio, with its major strength in enterprise solutions, application development and maintenance. Post the restatement of FY2009 and FY2010 financials, the company has been able to demonstrate a sharp improvement in its business traction. Nature of business: High RoE business, as it requires skilled workforce rather than heavy capex; Exposed to currency fluctuations and, to an extent, any severe slowdown in the U.S. and Europe.
(2.6) (12.3)
FINANCIAL PERFORMANCE OVERVIEW (%) SALES GROWTH* PAT GROWTH* OPM# ROE# 3M 27.0 651.5 15.3 1Y 3Y 5Y 10Y (6.1) (15.3) 8.8 10.7 9.2 5.7 1.4 13.8 15.8 20.6 14.3 15.9
68.9 (33.6) (12.4) 14.5

Anchor verticals boosting growth: Satyam has a strong presence in EBS (~40% of its revenue) and manufacturing (~32% of its revenue), which are showing modest traction. The company expects this service and vertical, respectively, to augment growth, which is coherent with the demand color given by most other tier-I IT companies. We expect the company's core competence in EBS to supplement the 15.3% CAGR in USD revenue over FY2011-13E. Adequate margin levers to bolster earnings growth income: Satyam has adequate margin levers such as 1) employee pyramid rationalization (employees < 3 years of experience are very less at ~20% vis--vis industry at ~40 to 45%); 2) strong volume growth expected on the back of a strengthening deal pipeline expected to improve utilizations to 75% by FY2013 from the current 74%; 3) better pricing on the back of improvement in business mix; and 4) current SGA at 20.5% of sales, which can be brought down to 19.0% by FY2013. Valuations attractive: The stock is trading at attractive valuations of 9.7x FY2013E EPS. We recommend an Accumulate rating on the stock with a target price of ` 82, valuing it at 11x FY2013E EPS.
340
December 2011

Y/E MARCH (` CR) ` NET REVENUES FY2010 5,481 FY2011 5,145 FY2012E 6,477 FY2013E 7,365
BALANCE SHEET
Y/E MARCH (` CR) ` SHARE CAPITAL RESERVES AND SURPLUS TOTAL SHAREHOLDERS' FUNDS MINORITY INTEREST LOAN FUNDS DEFERRED TAX LIABILITY INVESTIFATION SUSPENSE ACC. TOTAL CAPITAL EMPLOYED FIXED ASSETS INVESTMENTS SUNDRY DEBTORS CASH AND BANK BALANCES OTHER CURRENT ASSETS LOANS AND ADVANCES LIABILITIES PROVISIONS NET CURRENT ASSETS PROFIT AND LOSS ACCOUNT TOTAL CAPITAL DEPLOYED FY2010 235 4,395 4,630 20 42 4 1,230 5,927 987 627 923 2,177 496 385 882 1,540 1,558 2,749 5,927 FY2011 235 4,386 4,621 23 32 7 1,230 5,913 950 435 1,159 2,754 379 378 1,546 1,558 1,624 2,896 5,913 FY2012E 235 5,248 5,484 25 28 5 1,230 6,772 1,104 359 1,437 2,154 389 602 1,220 1,652 1,771 3,530 6,772 FY2013E 235 6,123 6,358 25 28 5 1,230 7,646 1,162 445 1,634 2,671 403 729 1,418 1,841 2,238 3,793 7,646
% CHG
EMPLOYEE COSTS GROSS PROFIT SG&A EXPENSES EBITDA
(37.8)
3,981 1,500 1,043 457
(6.1)
3,594 1,551 1,096 455
25.9
4,123 2,355 1,376 979
13.7
4,792 2,573 1,484 1,089
% TO NET SALES
8.3
214 243
8.8
185 270
15.1
171 808
14.8
191 898
% TO NET SALES
INTEREST CHARGES OTHER INCOME PBT TAX
4.4
33 106 315 22
5.3
10 294 555 58
12.5
16 260 1,053 188
12.2
17 238 1,119 242
% OF PBT
EXCEPTIONAL ITEM FINAL PAT ADJ. PAT
7.0
417 (125) 292
10.4
641 (147) 494
17.9
862 862
21.7
874 874
% CHG
(258.2)
68.9
74.4
1.4
CASH FLOW STATEMENT

Y/E MARCH (` CR) ` PRE TAX PROFIT FROM OPS. DEPRECIATION OTHER INCOME TAX CASH PROFITS NET TRADE WORKING CAPITAL FY2010 210 214 106 22 507 62 FY2011 260 185 294 58 679 510 1,189 (148) 192 1 (147) 3 (99) (11) (503) (513) 577 2,177 2,754 FY2012E 792 171 260 188 1,034 (747) 287 (325) 76 (2) (634) 2 (883) (4) (4) (600) 2,754 2,154 FY2013E 881 191 238 242 1,066 50 1,116 (250) (86)
KEY RATIOS
Y/E MARCH VALUATION RATIO (X) P/E P/BV EV/SALES EV/EBITDA EV/TOTAL ASSETS ` PER SHARE DATA (`) EPS CASH EPS 2.5 0.8 39.4 4.2 0.3 39.3 7.3 8.8 46.7 7.4 9.1 54.1 28.9 1.8 1.2 13.9 1.1 17.2 1.8 1.1 12.7 1.0 9.9 1.5 1.0 6.5 0.9 9.7 1.3 0.8 5.4 0.8 FY2010 FY2011 FY2012E FY2013E
CASH FLOW FROM OPERATING ACTV. 569 (INC)/DEC IN FIXED ASSETS (INC)/DEC IN INVESTMENTS (INC)/DEC IN DEFERRED TAX (INC)/DEC IN NON CURRENT ASST. INC/(DEC) IN MINORITY INTEREST 38 (627) (1) (125) 1
BOOK VALUE (263) (599) 517 2,154 2,671 RETURN RATIOS (%) ROCE (PRE-TAX) ANGEL ROIC ROE TURNOVER RATIOS (X) ASSET TURNOVER (FIXED ASSETS) RECEIVABLES DAYS PAYABLE DAYS 5.6 61 81 5.4 82 157 5.9 81 108 6.3 81 108 4.1 6.5 6.3 4.6 8.6 10.7 11.9 17.5 15.7 11.7 18.0 13.8
CASH FLOW FROM INVESTING ACTV. (714) INC/(DEC) IN DEBT INC/(DEC) IN EQUITY/PREMIUM (772) 2,593
CASH FLOW FROM FINANCING ACTV. 1,821 CASH GENERATED/(UTILIZED) CASH AT START OF THE YEAR CASH AT END OF THE YEAR 1,676 501 2,177
December 2011
341
Software
Mphasis
Company Background
CMP/TP/Upside: `347 / `387 / 12%
SHAREHOLDING PATTERN (%) PROMOTERS (HP) FII 60.5 20.3
MphasiS is a mid-tier Indian IT company formed by the acquisition of MphasiS by BFL in 1999. In 2006, EDS acquired a majority stake in MphasiS and subsequently HP bought EDS in May 2008, thereby making Mphasis an HP company. The company provides application, infrastructure and BPO services to clients in the banking, capital markets, insurance, telecommunication and manufacturing industries. MphasiS is one of the largest BPO service providers in India, providing voice as well as transaction-based services.
Structural Snapshot
Growth opportunity: MphasiS derives ~65% of its revenue from HP channel, out of which 10% is directly from HP as a client. The revenue growth outlook from HP as a client is sluggish and the rest of the revenue derived from HP channel always faces risk of price cuts. Rest ~35% of the company's revenue comes from the direct channel, which is now the focus area of the company. Low penetration of Indian IT companies (~6%) in the total outsourcing market offers enormous potential for Mphasis to increase its focus on the direct channel business. Competitive position: MphasiS is strongly positioned in the enterprise services and infrastructure services verticals, thus placing it well for short-term as well as long-term growth - provided the company expands its footprint and diversifies its client portfolio. Nature of business: High RoE business, as it requires skilled workforce rather than heavy capex; Exposed to currency fluctuations and, to an extent, any severe slowdown in the U.S. and Europe.
STOCK RETURNS (%) MPHASIS BSE IT INDEX SENSEX 3M (0.7) 1Y (17.3) 3Y 31.7 36.3 21.3 5Y 10Y 5.6 (49.2) (2.6) (12.3) 3.6 23.3 0.7 13.0 3.3 17.3
FINANCIAL PERFORMANCE OVERVIEW (%) PAT GROWTH* OPM# ROE# 3M 1Y 1.2 19.3 21.1 3Y 28.1 47.7 22.0 31.1 5Y 10Y SALES GROWTH* (2.3) 17.9 40.2 45.4 40.6 51.8 20.0 20.8 28.0 21.3
(35.4) (24.6)

Revenue growth expected to come from non-HP channel: MphasiS is witnessing modest growth from the non-HP channel business. The company's ITO business is witnessing modest growth, with open billable employee position standing at 300 on the total billable employee base of 6,500 in ITO. In fact, this business segment has reported a 7.6% CQGR over 2QFY2010-4QFY2011 and is expected to continue as a growth driver for the company. However, continued sluggish performance of the HP-ES business has begun to hurt MphasiS' revenue from the HP channel. Also HP's long-term direction towards having six worldwide offshore development centers, including India, may pose a threat to Mphasis' volumes. Over FY2011-13E (October ending), we expect Mphasis to record USD and INR revenue CAGR of 5.9% and 8.9%, respectively. Cash pile to support inorganic growth: MphasiS is looking at an inorganic strategy to supplement its growth further. Recently, management acquired Wyde, an international software vendor and creator of Wynsure - an insurance policy administration IP solution - to scale up its insurance portfolio. Also, in our view, there is a good possibility that the company may use its cash pile (~`2,000cr) to announce a buyback. Valuations: The stock is trading at 9.4x FY2013E EPS. We recommend an Accumulate rating on the stock with a target price of ` 387, valuing it at 10.5x FY2013E EPS.
ANGEL ESTIMATES PARTICULARS PAT GROWTH (%) ROE (%) P/E FY2012E (0.2) 17.3 8.9 FY2013E (5.9) 14.2 9.4
342
December 2011

Y/E OCTOBER (` CR) ` NET SALES FY2010 5,036 FY2011 5,098 FY2012E 5,679 FY2013E 6,030
BALANCE SHEET
Y/E OCTOBER (` CR) ` SHARE CAPITAL RESERVES AND SURPLUS TOTAL SHAREHOLDERS FUNDS TOTAL DEBT TOTAL LIABILITIES GROSS BLOCK - FIXED ASSETS ACCUMULATED DEPRECIATION CAPITAL WORK-IN-PROGRESS GOODWILL INVESTMENTS DEFERRED TAX ASSET DEBTORS AND UNBILLED REV. CASH AND CASH EQUIVALENTS INTEREST RECEIVABLE LOANS AND ADVANCES CURRENT LIABILITIES PROVISIONS TOTAL ASSETS FY2010 210 3,089 3,300 45 3,345 1,026 784 9 389 1,460 75 1,198 178 0 945 802 350 3,345 FY2011 210 3,812 4,023 292 4,315 1,134 850 10 870 1,777 98 1,307 290 0 1,130 955 495 4,315 FY2012E 210 4,535 4,745 286 5,031 1,309 1,043 22 870 1,927 95 1,338 497 0 1,185 892 277 5,031 FY2013E 210 5,208 5,419 286 5,705 1,484 1,242 20 870 2,200 95 1,421 761 0 1,208 806 307 5,705
% CHG
COST OF REVENUE GROSS PROFIT SELLING AND MKTG EXP. GENERAL AND ADMIN EXP. EBITDA
17.9
3,352 1,684 220 199 1,265
1.2
3,698 1,400 232 184 985
11.4
4,063 1,616 275 220 1,121
6.2
4,546 1,484 268 217 999
% OF NET SALES
DEP. AND AMORTIZATION EBIT INTEREST INCOME, NET OTHER INCOME, NET FOREX GAIN PROFIT BEFORE TAX PROVISION FOR TAX
25.1
164 1,101 1 50 58 1,210 119
19.3
155 830 (2) 111 66 1,005 183
19.7
193 928 164 (27) 1,065 245
16.6
199 800 213 (11) 1,002 231
% OF PBT
PAT
9.8
1,091
18.2
822
23.0
820
23.0
772
% CHG
19.0
(24.6)
(0.2)
(5.9)
CASH FLOW STATEMENT

Y/E OCTOBER (` CR) ` FY2010 FY2011 894 155 111 1,160 (183) 4 981 (198) (481) (22) (317) (1,018) 247 98 148 111 178 290 FY2012E 901 193 164 1,259 (245) (367) 646 (186) 3 (151) (334) (6) 98 (104) 207 290 497 FY2013E 789 199 213 1,201 (231) (162) 809 (173) PRE TAX PROFIT FROM OPERATIONS 1,160 DEPRECIATION OTHER INCOME NET CASH FROM OPERATIONS TAX NET TRADE WORKING CAPITAL CASHFLOW FROM OPERATING ACTV. (INC)/DEC IN FIXED ASSETS (INC)/DEC IN INTANGIBLES INC/(DEC) IN DEFERRED TAX LIAB. (INC)/DEC IN INVESTMENTS 164 50 1,374 (119) (275) 979 (86) (94) (6) (699)
KEY RATIOS
Y/E OCTOBER VALUATION RATIO (X) P/E P/BV EV/SALES EV/EBITDA EV/TOTAL ASSETS ` PER SHARE DATA (`) EPS CASH EPS BOOK VALUE (273) (446) 98 (98) 264 497 761 RETURN RATIOS (%) ROCE (PRE-TAX) ANGEL ROIC ROE TURNOVER RATIOS (X) ASSET TURNOVER (FIXED ASSETS) RECEIVABLES DAYS PAYABLE DAYS 1.8 70 6 1.4 87 5 1.2 86 5 1.1 86 5 32.9 91.3 33.1 19.8 60.6 20.4 18.4 54.1 17.3 14.0 43.1 14.2 157.4 186.1 227.3 259.4 52.0 59.8 39.2 46.6 39.1 48.4 36.8 46.3 6.7 2.2 1.1 4.5 1.7 8.8 1.9 1.1 5.6 1.3 8.9 1.5 0.9 4.6 1.0 9.4 1.3 0.8 4.6 0.8 FY2010 FY2011 FY2012E FY2013E
CASHFLOW FROM INVESTING ACTV. (884) INC/(DEC) IN DEBT INC/(DEC) IN EQUITY/PREMIUM DIVIDENDS CASHFLOW FROM FINANCING ACTV. CASH GENERATED/(UTILIZED) CASH AT START OF THE YEAR CASH AT END OF THE YEAR 42 (38) 98 (94) (1) 179 178
December 2011
343
Software
MindTree
Company Background
CMP/TP/Upside: `441 / `502 / 14%
Established in 1999 by 10 industry professionals, MindTree is a mid-tier Indian IT services company employing over 10,000 professionals. The company has so far managed to keep up with its performance despite its main founder, Mr. Ashok Soota, exiting the company on March 31, 2011. MindTree offers a range of services spread across two businesses - IT services (ITS) and product engineering services (PES).
Structural Snapshot
Growth opportunity: According to Nasscom, the Indian IT industry is expected to grow by 10-11% annually, given its under penetration in the global outsourcing market. This endows huge opportunities for a fairly diversified mid-cap player like MindTree to increase its reach and scale of operations. In addition, as per IDC, the offshore product development (OPD) market in 2010 crossed the US$10bn mark and is expected to report a 19% CAGR to US$16bn by 2013. Given MindTree's niche focus of PES, it can easily average 14-15% growth in the PES business. Competitive position: MindTree is a fairly diversified mid-cap IT player, with superior client mining skills and higher repeat business as compared to other mid-cap players.
STOCK RETURNS (%) MINDTREE BSE IT INDEX SENSEX 3M (0.7) 1Y (17.3) 3Y 23.0 36.3 21.3 5Y 3.3 10Y 17.3 11.9 (18.4) (2.6) (12.3)
0.7 13.0
FINANCIAL PERFORMANCE OVERVIEW (%) SALES GROWTH* PAT GROWTH* OPM# ROE# 3M 35.0 17.3 1Y 16.4 11.8 13.1 3Y 26.8 0.3 13.5 18.2 5Y 10Y -
Nature of business: High RoE business, as it requires skilled workforce rather than heavy capex; Exposed to currency fluctuations and, to an extent, any severe slowdown in the U.S. and Europe.
99.2 (52.6)

Niche focus on resurging PES along with robust traction from IT services: MindTree is gaining traction in its PES business (~36% of its revenue) for its wireless, android-related space. Management is confident that the company will be able to grow its other accounts except Kyocera - wireless handset manufacturing business, which the company exited in October 2011. Along with that, the company's ITS business is continuously showing strong traction with a 6.3% revenue CQGR over the last four quarters. Adequate margin levers in place: On the margin front, MindTree has been doing well since past few quarters to rationalize its employee pyramid and cut down on SG&A. These steps by the company as well as INR depreciation helped MindTree to move its EBIT margin from 7.1% in FY2011 to 13.9% in 3QFY2012. Going ahead, for FY2013, Mindtree faces headwinds of wage inflation, which can be partially absorbed by tailwinds such as improving utilization level, effort shift offshore and lowering SG&A expenses from current levels. Hence, we expect EBIT margin of MindTree to move to 11.3% in FY2012 and 10.5% in FY2013 from 7.1% in FY2011. Valuations attractive: MindTree has been one of the good performers in the Indian IT mid-cap space, reporting 21.5% yoy revenue growth in FY2011. Fears of operational mayhem that took place post the company entered wireless handset manufacturing are behind, as the company exited the business. We recommend an Accumulate rating on the stock with a target price of `502, valuing it at 10x FY2013E EPS.
ANGEL ESTIMATES PARTICULARS PAT GROWTH (%) ROE (%) P/E FY2012E 107.9 21.5 8.5 FY2013E (2.9) 17.4 8.8
344
December 2011

BALANCE SHEET
Y/E MARCH (` CR) ` SHARE CAPITAL RESERVES AND SURPLUS TOTAL SHAREHOLDERS' FUNDS TOTAL DEBT TOTAL LIABILITIES FY2010 40 631 671 3 674 515 253 25 286 15 127 21 237 52 195 484 211 49 674 FY2011 40 736 776 5 781 562 262 3 303 111 22 283 46 251 579 181 53 781 FY2012E 40 937 977 4 981 614 337 12 289 130 18 317 228 311 856 244 68 981 FY2013E 40 1,133 1,173 4 1,177 666 432 19 254 150 20 374 331 417 1,122 289 80 1,177
% CHG
SOFTWARE DEVELOPMENT EXP. GROSS PROFIT
4.7
798 498
16.4
1,015 495
28.0
1,270 661
18.0
1,509 769
% OF NET SALES
SG&A EXPENSES EBITDA
38.4
252 246
32.8
317 178
34.2
368 293
33.8
GROSS BLOCK - FIXED ASSETS 435 334 ACCUMULATED DEPRECIATION CAPITAL WORK-IN-PROGRESS TOTAL FIXED ASSETS GOODWILL INVESTMENTS DEFERRED TAX ASSETS, NET SUNDRY DEBTORS CASH AND BANK BALANCE
% OF NET SALES
DEP. AND AMORTIZATION EBIT INTEREST EXPENSE, NET OTHER INCOME, NET PROFIT BEFORE TAX PROVISION FOR TAX
18.9
65 180 3 77 255 40
11.8
71 107 24 131 29
15.2
75 218 36 254 44
14.7
94 239 16 255
LOANS AND ADVANCES 51 TOTAL CURRENT ASSETS CURRENT LIABILITIES PROVISIONS TOTAL ASSETS
% OF PBT
FINAL PAT
15.6
215
22.1
102
17.3
210
20.0
204
% CHG
310.8
(52.6)
107.9
(2.9)
CASH FLOW STATEMENT

Y/E MARCH (` CR) ` FY2010 177 65 77 320 40 (59) 221 (55) (26) (2) 131 15 (136) (82) (14) FY2011 107 71 24 202 29 (127) 46 (89) 16 15 (57) 2 15 (12) 5 (6) 52 46 FY2012E 218 75 36 329 44 (18) 267 (61) (19) 4 (76) (1) (9) (9) 182 46 228 FY2013E 239 94 16 350 51 (105) 194 (60) (20) PRE TAX PROFIT FROM OPERATIONS DEPRECIATION OTHER INCOME/PRIOR PERIOD AD NET CASH FROM OPERATIONS TAX NET TRADE WORKING CAPITAL CASHFLOW FROM OPERATING ACTV. (INC)/DEC IN FIXED ASSETS (INC)/DEC IN INVESTMENTS (INC)/DEC IN DEFERRED TAX ASSETS (INC)/DEC IN INTANGIBLES CASHFLOW FROM INVESTING ACTV. INC/(DEC) IN DEBT INC/(DEC) IN EQUITY/PREMIUM DIVIDENDS
KEY RATIOS
Y/E MARCH VALUATION RATIO (X) P/E P/BV EV/SALES EV/EBITDA EV/TOTAL ASSETS ` PER SHARE DATA (`) EPS CASH EPS (2) BOOK VALUE (82) (9) (9) 103 228 331 RETURN RATIOS (%) ROCE (PRE-TAX) ANGEL ROIC ROE TURNOVER RATIOS (X) ASSET TURNOVER (FIXED ASSETS) RECEIVABLES DAYS PAYABLE DAYS 4.5 73 114 5.0 63 71 6.7 60 70 9.0 60 70 26.8 39.7 32.0 13.7 17.2 13.1 22.2 35.5 21.5 20.3 35.4 17.4 170 190 241 288 54.4 70.9 24.9 42.3 51.7 70.3 50.2 73.5 8.1 2.6 1.3 6.6 2.4 17.7 2.3 1.1 9.3 2.1 8.5 1.8 0.8 5.0 1.5 8.8 1.5 0.6 4.0 1.1 FY2010 FY2011 FY2012E FY2013E
CASHFLOW FROM FINANCING ACTV. (232) CASH GENERATED/(UTILIZED) CASH AT START OF THE YEAR CASH AT END OF THE YEAR 3 49 52
December 2011
345
Software
Infotech Entreprises
Infotech Enterprises (Infotech), a mid-cap Indian IT company, specializes in geographical spatial solutions and engineering design services with a focus on the aerospace, rail and hi-tech segments. Infotech has entered into long-term strategic relationships with global clients, such as Bombardier, Boeing, Hamilton Sunstrand and Alstom Transport, and has signed multi-million dollar contracts with them. The company's offerings are spread across two verticals - network and content engineering (NCE, contributing ~31% to revenue) and engineering manufacturing and industrial products (ENGG, contributing ~69% to revenue).
STOCK RETURNS (%) INFOTECH BSE IT INDEX SENSEX 3M (0.7) 1Y (17.3) 3Y 44.0 36.3 21.3 5Y 10Y 17.5 (21.4) (2.6) (12.3) (5.7) 14.9 0.7 13.0 3.3 17.3
Structural Snapshot
Growth opportunity: Currently, India accounts for ~12% of the total offshore engineering services market. As per Nasscom, Indian IT players are well positioned to increase their market share in engineering offshoring to 30% by 2020. Infotech, being a leader in aerospace engineering, has strong relationships with clients in this space and, hence, can capitalize on this opportunity. Competitive position: Strong foothold in the geospatial solutions area, where only few Indian players like Rolta and Wipro are present.
FINANCIAL PERFORMANCE OVERVIEW (%) SALES GROWTH* PAT GROWTH* OPM# ROE# 3M 32.7 20.6 1Y 24.6 15.2 13.4 3Y 20.8 18.4 19.0 14.7 5Y 10Y 26.8 42.8 22.6 29.8 19.0 21.7 19.0 17.3
Nature of business: High RoE business, as it requires skilled workforce rather than heavy capex; Exposed to currency fluctuations and, to an extent, any severe slowdown in the U.S. and Europe.
(8.5) (18.3)

Revenue momentum to continue: Infotech has been witnessing a 5.2% CQGR in its revenue over 2QFY2011-3QFY2012 because of inorganic growth due to the acquisition of Daxcon and Wellsco. Management had guided for 22-25% yoy growth in INR revenue in FY2012, which is already achieved in 9MFY2012 due to sharp INR depreciation. Also, the company has got price increase from some of its selective clients, which instills confidence in the company's performance going ahead. So, over FY2011-13E, we expect the company to post a USD and I N R revenue CAG R of 17.6% and 23.2%, respectively. Margins to increase, courtesy INR depreciation: Infotech's EBIT margin improved in 3QFY2012 after a declining trajectory seen since 3QFY20102QFY2012, despite management's repetitive indications of focusing on improving margins. This year, management expects EBIT margin to exit at ~13%, which can be easily achieved now, given the sharp INR depreciation. We expect EBIT margin to go move up to 13.3% for FY2012 and then decline to 12.0% in FY2013 due to wage inflation and fresher hiring, which will lead to lower utilization level. Valuations: The stock is trading at fair valuations of 8.6x FY2013E EPS. We recommend Neutral on the stock.
346
December 2011

BALANCE SHEET
Y/E MARCH (` CR) ` EQUITY CAPITAL SHARE PREMIUM ACCOUNT RESERVES AND SURPLUS SHAREHOLDERS FUNDS BORROWINGS TOTAL CAPITAL EMPLOYED GROSS BLOCK ACCUMULATED DEP. CWIP DEFERRED TAX ASSET INVESTMENTS SUNDRY DEBTORS CASH AND CASH EQUIVALENTS LOANS AND ADVANCES OTHER CURRENT ASSETS SUNDRY CREDITORS OTHER CURRENT LIABILITIES PROVISIONS TOTAL CAPITAL DEPLOYED FY2010 28 363 516 906 4 911 494 239 61 3 202 207 234 134 33 66 50 101 911 FY2011 56 334 655 1,046 1,046 560 288 65 1.5 91 268 350 185 34 79 25 118 1,046 FY2012E 56 334 782 1,172 1,172 620 352 65 1.7 98 301 426 220 12 92 77 50 1,172 FY2013E 56 334 944 1,334 1,334 680 424 65 2.0 105 369 549 236 10 113 94 51 1,334
% CHG
COST OF REVENUES GROSS PROFIT SELLING AND MKTG EXP. GENERAL AND ADMIN EXP. EBITDA
7.1
543 410 87 115 208
24.6
735 453 119 154 180
31.5
950 612 140 200 272
15.4
1,108 694 171 234 288
% MARGIN
21.9
44 165
15.2
49 132
17.4
64 208
16.0
72 216
% MARGIN
OTHER INCOME PROFIT BEFORE TAX PROVISION FOR TAX
17.3
46 208 51
11.1
30 160 27
13.3
(13) 196 65
12.0
30 246 81
% OF PBT
24.3
158 (13) 171
16.9
133 (7) 140
33.0
131 (8) 139
33.0
165 (10) 175
% CHG
85.0
(18.3)
(0.3)
25.7
CASH FLOW STATEMENT

Y/E MARCH (` CR) ` PRE TAX PROFIT FROM OPS. DEPRECIATION EXPENSES DEFFERED OTHER INCOME NET CASH FROM OPERATIONS TAX NET TRADE WORKING CAPITAL CASHFLOW FROM OPER. ACTV. (INC)/DEC IN FIXED ASSETS (INC)/DEC IN INVESTMENTS (INC)/DEC IN DEFERRED TAX ASSET FY2010 165 44 (13) 46 265 51 (57) 157 (58) (162) 14 FY2011 132 49 (7) 30 215 27 (109) 79 (71) 111 1 42 (4) 16 (16) (4) 116 234 350 FY2012E 208 64 (8) (13) 268 65 (48) 155 (60) (7) (67) (13) (13) 76 350 426 FY2013E 216 72 (10) 30 328 81 (44) 203 (60) (7) (67) (13) (13) 123 426 549
KEY RATIOS
Y/E MARCH VALUATION RATIO (X) P/E P/BV EV/SALES EV/EBITDA EV/TOTAL ASSETS PER SHARE DATA (`) ` EPS CASH EPS DIVIDEND BOOK VALUE RETURN RATIOS (%) ROCE (PRE-TAX) ANGEL ROIC ROE TURNOVER RATIOS (X) ASSET TURNOVER(GROSS BLOCK) RECEIVABLES DAYS PAYABLE DAYS 1.9 90 50 2.1 73 36 2.5 67 33 2.6 68 34 18.1 39.8 18.9 12.6 24.4 13.4 17.8 35.7 11.9 16.2 35.1 13.1 15.4 19.3 1.0 81.6 12.6 17.0 1.3 94.2 12.5 18.3 1.0 106.5 15.8 22.3 1.0 121.3 8.8 1.7 1.1 5.1 1.2 10.7 1.4 0.9 5.9 1.0 10.8 1.3 0.6 3.6 0.8 8.6 1.1 0.5 2.9 0.6 FY2010 FY2011 FY2012E FY2013E
CASHFLOW FROM INVESTING ACTV. (207) INC/(DEC) IN DEBT INC/(DEC) IN EQUITY/PREMIUM DIVIDENDS CASHFLOW FROM FINANCING ACTV. CASH GENERATED/(UTILIZED) CASH AT START OF THE YEAR CASH AT END OF THE YEAR (15) (22) (13) (50) (100) 334 234
December 2011
347
Software
Hexaware
Company Background
CMP/TP/Upside: `81 / `96 / 19%
Hexaware is a mid-cap Indian IT company and is the 18 th largest Indian software exporter according to Nasscom 2010 rankings. Under the leadership of Chairman Mr. Atul Nishar and Vice Chairman and CEO Mr. Chandrashekar (ex-Wipro Technologies), Hexaware has differentiated itself from its peers and built a niche position in the airlines vertical and in PeopleSoft implementation. Hexaware offers its services to clients mainly in the BFSI and travel and transportation industries.
Structural Snapshot
Growth opportunity: Having established a strong position in the BFSI and travel and transportation space, Hexaware can now look at expanding its footprint to other high-growth areas like retail, lifesciences and healthcare, which can even help in de-risking the company's product portfolio. Competitive position: Hexaware has niche capabilities in multiple areas, such as capital markets and travel and transportation. The company, in our view, is best placed in the mid-cap IT space to capture growth in the enterprise services area. Nature of business: High RoE business, as it requires skilled workforce rather than heavy capex; Exposed to currency fluctuations and, to an extent, any severe slowdown in the U.S. and Europe.
STOCK RETURNS (%) HEXAWARE BSE IT INDEX SENSEX 3M (9.7) (0.7) 1Y 33.6 (17.3) 3Y 101.1 36.3 21.3 5Y 10Y (1.6) 28.2 0.7 13.0 3.3 17.3
(2.6) (12.3)
FINANCIAL PERFORMANCE OVERVIEW (%) SALES GROWTH* PAT GROWTH* OPM# ROE# 3M 29.9 18.7 1Y 1.5 8.9 10.9 3Y 0.5 (8.2) 13.5 11.9 5Y 9.2 (1.4) 10Y 8.3 0.5
283.9 (36.4)

Recent deal wins provide strong revenue visibility: Hexaware has been reporting strong growth on account of robust performance of its anchor service verticals - enterprise solutions and business intelligence. The company managed to outperform the entire IT pack with a 7.5% CQGR over 2QCY2010-3QCY2011. Hexaware has won six large deals (all above US$25mn) in the past six quarters. Of these, three deals were more than US$100mn; so on a cumulative basis, these deals are over US$600mn, which gives incremental revenue visibility for the company. So, we expect Hexaware to report a strong CAGR of 24.8% in its USD revenue over CY2010-12E. Margins to head northwards: Hexaware has adequate levers to expand its margins, such as 1) strong volume growth and improvement in utilization level (currently at 70.6%), 2) broadening of the employee pyramid (~17% of the total employees having below three years of experience), 3) ability to grow even with maintaining SGA at absolute levels, and 4) enterprise solutions and business intelligence offering improved business mix. All these are expected to increase the company's EBIT margin to 15.5% and 16.7% for CY2011 and CY2012, respectively, from 6.6% in CY2010. Valuations attractive: The stock is trading at reasonable valuations of 9.3x CY2012E EPS. We recommend a Buy rating on the stock with a target price of ` 96, valuing it at 11x FY2013E EPS.
14.6 14.1 15.2 14.7
348
December 2011

Y/E DECEMBER (` CR) ` REVENUES CY2009 1,039 CY2010 1,055 CY2011E 1,435 CY2012E 1,772
BALANCE SHEET
Y/E DECEMBER (` CR) ` LIABILITIES SHARE CAPITAL RESERVES FOREX MTM TOTAL SHAREHOLDERS' FUNDS BORROWINGS TOTAL LIABILITIES ASSETS GROSS FIXED ASSETS ACCUMULATED DEP. NET FIXED ASSETS CASH AND CASH EQUIVALENT DEBTORS OTHERS TOTAL CURRENT ASSETS CURRENT LIABILITY - FOREX MTM OTHER CURRENT LIABILITIES DEFERRED TAX TOTAL ASSETS 576 140 436 426 153 111 690 44 227 11 866 560 152 408 475 192 163 830 255 17 1,000 610 178 431 516 230 251 997 265 20 1,184 650 214 436 652 277 315 1,244 327 23 1,376 29 861 (41) 850 16 866 29 934 26 989 11 1,000 59 1,065 1,124 60 1,184 59 1,262 1,320 56 1,376 CY2009 CY2010 CY2011E CY2012E
% CHG
DIRECT COSTS GROSS PROFIT SG&A EXPENSES EBITDA
(9.8)
564 474 272 202
1.5
692 363 269 94
36.1
889 546 297 249
23.5
1,094 678 347 331
% TO REVENUES
19.5
27 175
8.9
24 70
17.4
26 223
18.7
35 295
% TO REVENUES
OTHER INCOME FOREX GAIN PBT TAX
16.9
31 (62) 145 10
6.6
50 (25) 95 9
15.5
44 24 291 45
16.7
54 (10) 339 78
% OF PBT
PAT EXCEPTIONAL ITEM FINAL PAT
7.2
134 134
9.8
85 22 108
15.3
247 247
23.0
261 261
% CHG
127.2
(36.4)
187.0
5.6
CASH FLOW STATEMENT

Y/E DECEMBER (` CR) ` PRE TAX PROFIT FROM OPS. DEPRECIATION OTHER INCOME TAX CASH PROFITS NET TRADE WORKING CAPITAL CY2009 175 27 (31) 10 161 (54) CY2010 70 24 25 9 109 (107) 2 4 (6) 67 64 (5) 39 (51) (17) 49 426 475 CY2011E 223 26 68 45 273 (115) 158 (50) (3) (26) (79) 49 30 (116) (37) 41 475 516 CY2012E 295 35 44 78 297 (49) 247 (40) (3) (43) (4) (65) (69) 136 516 652
KEY RATIOS
Y/E DECEMBER VALUATION RATIO (X) P/E P/BV EV/SALES EV/EBITDA EV/TOTAL ASSETS ` PER SHARE DATA (`) EPS CASH EPS DIVIDEND BOOK VALUE RETURN RATIOS (%) ROCE (PRE-TAX) ANGEL ROIC ROE TURNOVER RATIOS(X) ASSET TURNOVER (FIXED ASSETS) DEBTOR DAYS 2.4 63 2.6 60 3.3 59 4.1 57 20.2 39.8 15.8 6.9 13.2 10.9 18.8 33.4 21.9 21.4 40.8 19.8 4.6 5.5 0.7 29.1 2.9 4.5 1.5 33.8 8.2 9.3 4.0 38.4 8.7 10.1 2.2 45.1 17.7 2.8 1.9 9.6 2.3 28.1 2.4 1.8 20.2 1.9 9.8 2.1 1.3 7.6 1.6 9.3 1.8 1.0 5.3 1.3 CY2009 CY2010 CY2011E CY2012E
CASH FLOW FROM OPERATING ACTV. 107 (INC)/DEC IN FIXED ASSETS (INC)/DEC IN DEFERRED TAX ASSET INC/(DEC) IN NON CURRENT LIAB. CASH FLOW FROM INVESTING ACTV. INC/(DEC) IN DEBT INC/(DEC) IN EQUITY/PREMIUM DIVIDENDS (13) (3) 83 67 (3) (6) (24)
CASH FLOW FROM FINANCING ACTV. (33) CASH GENERATED/(UTILIZED) CASH AT START OF THE YEAR CASH AT END OF THE YEAR 141 285 426
December 2011
349
Software
KPIT Cummins
Company Background
CMP/TP/Upside: `146 / `163 / 12%
KPIT Cummins (KPIT), a mid-tier Indian IT company, specializes in the manufacturing segment, with a focus on automotive and industrial solutions and services. The company focuses on three areas of solutions - enterprise services, auto and engineering and SAP. KPIT has been growing strongly, both organically and inorganically. The company has successfully acquired eight companies in eight years, which scaled up KPIT's revenue many fold.
Structural Snapshot
Growth opportunity: KPIT has a strong foothold in the manufacturing space and can look to expand it further to emerging geographies. The company, in our view, can expand its footprints into other growth areas like energy and utilities and lifesciences and healthcare, which can even help in de-risking its product portfolio. Competitive position: KPIT is a niche IT services company; It is a leader in the auto engineering space and is amongst the largest offshore vendors in this space in India. KPIT faces huge client concentration risk as it derives ~22% of its revenue from Cummins. Nature of business: High RoE business, as it requires skilled workforce rather than heavy capex; Exposed to currency fluctuations and, to an extent, any severe slowdown in the U.S. and Europe.
STOCK RETURNS (%) BSE IT INDEX SENSEX 3M (0.7) 1Y (5.1) (17.3) 3Y 87.5 36.3 21.3 5Y 10Y KPIT CUMMINS (11.6) 1.6 29.5 0.7 13.0 3.3 17.3
(2.6) (12.3)

Niche focus on the manufacturing industry segment: During 4QFY20102QFY2012, KPIT reported a stellar revenue CQGR of 8.7% on the back of recovery in its anchor vertical, manufacturing. Currently, KPIT is well placed to benefit from fundamental changes in the auto industry and increasing use of electronics in the auto industry's end-products. However, the company's entire focus on the manufacturing vertical makes us slightly cautious about its FY2013 growth outlook, if any slowdown kicks in developed economies. Thus, we expect organic USD revenue to grow by 8.5% yoy in FY2013. Also, we have not built in any impact of Revolo (hybrid technology solution for automobiles to be developed in a JV with Bharat Forge) in our estimates due to poor visibility. Margin improvement looks challenging: Even though the company is growing ahead of other IT companies in terms of its revenue, on the operating front it is displaying a muted performance since the past few quarters even after management's repeated commentary of trying to improve it. Also, due to limited margin levers in hand other than INR depreciation (as employee pyramid is almost rationalized and SG&A costs are optimal), the company's EBIT is expected to remain at 12.0% and 11.5% for FY2012 and FY2013, respectively, from 11.0% in FY2011. Valuations: The stock is trading at moderate valuations of 8.9x FY2013E EPS. We recommend Accumulate with a target price of ` 163, valuing the stock at 10x FY2013E EPS.
350
December 2011

BALANCE SHEET
Y/E MARCH (` CR) ` SHARE CAPITAL RESERVES AND SURPLUS SHARE PREMIUM TOTAL SHAREHOLDERS' FUNDS TOTAL DEBT DEFERRED TAX LIABILITY, NET TOTAL LIABILITIES GROSS BLOCK - FIXED ASSETS ACCUMULATED DEPRECIATION CAPITAL WORK-IN-PROGRESS GOODWILL INVESTMENTS SUNDRY DEBTORS CASH AND BANK BALANCE LOANS AND ADVANCES SUNDRY CREDITORS OTHER LIABILITIES PROVISIONS TOTAL ASSETS FY2010 16 370 387 111 5 503 251 128 29 95 75 139 105 68 64 43 23 503 FY2011 16 458 128 603 111 6 720 294 169 33 130 48 253 210 110 118 38 32 720 FY2012E 16 589 128 736 121 6 863 422 213 45 150 69 278 167 155 129 33 49 863 FY2013E 16 730 128 877 101 6 984 472 279 69 150 100 330 216 184 153 46 59 984
% CHG
COST OF REVENUE GROSS PROFIT S&M EXPENSES G&A EXPENSES EBITDA
(7.8)
409 323 66 95 161
37.6
644 363 76 134 152
39.9
902 506 113 180 214
18.7
1,072 599 130 211 258
% OF NET SALES
DEP. AND AMORTIZATION EBIT INTEREST EXPENSE, NET OTHER INCOME, NET PROFIT BEFORE TAX PROVISION FOR TAX
22.1
31 131 3 (25) 103 17
15.1
41 111 3 3 110 15
15.2
44 170 5 8 173 40
15.4
66 192 5 7 195 47
% OF PBT
PAT SHARE IN PROFIT OF ASSOCIATES FINAL PAT
16.5
86 86
14.0
95 95
22.9
133 5 139
24.0
148 148
% CHG
30.3
10.6
46.1
6.8
CASH FLOW STATEMENT

Y/E MARCH (` CR) ` PRE TAX PROFIT FROM OPS. DEPRECIATION OTHER INCOME/PRIOR PERIOD AD TAX CASH PROFITS NET TRADE WORKING CAPITAL CASHFLOW FROM OPERATING ACTV. (INC)/DEC IN FIXED ASSETS (INC)/DEC IN INVESTMENTS INC/(DEC) IN DEFERRED TAX LIAB. (INC)/DEC IN INTANGIBLES CASHFLOW FROM INVESTING ACTV. INC/(DEC) IN DEBT INC/(DEC) IN EQUITY/PREMIUM DIVIDENDS CASHFLOW FROM FINANCING ACTV. CASH GENERATED/(UTILIZED) CASH AT START OF THE YEAR CASH AT END OF THE YEAR FY2010 128 31 (25) (17) 117 (135) (18) (32) (75) (1) (67) (174) (8) 145 6 131 (62) 167 105 FY2011 108 41 3 (15) 136 (99) 37 (47) 27 1 (35) (54) 128 7 121 105 105 210 FY2012E 165 44 8 (40) 183 (47) 135 (140) (22) (20) (182) 10 7 5 (43) 210 167 FY2013E 187 66 7 (47) 214 (34) 180 (73) (30) -
KEY RATIOS
Y/E MARCH VALUATION RATIO (X) P/E P/BV EV/SALES EV/EBITDA EV/TOTAL ASSETS PER SHARE DATA (`) ` EPS CASH EPS BOOK VALUE RETURN RATIOS (%) (103) (20) 7 (27) 49 167 216 ROCE (PRE-TAX) ANGEL ROIC ROE TURNOVER RATIOS (X) ASSET TURNOVER (FIXED ASSETS) RECEIVABLES DAYS PAYABLE DAYS 1.9 79 67 1.6 71 52 1.8 72 52 1.8 72 52 26.0 47.6 22.2 15.4 32.0 15.7 19.7 33.9 18.8 19.5 35.0 16.9 10.8 14.7 48.8 11.4 16.7 73.9 15.3 21.7 90.2 16.3 26.2 107.4 13.5 3.0 1.6 7.4 2.4 12.8 2.0 1.1 7.2 1.5 9.6 1.6 0.8 5.4 1.3 8.9 1.4 0.6 4.2 1.1 FY2010 FY2011 FY2012E FY2013E
December 2011
351
Software
Persistent
Company Background
Persistent is a leading player in the global outsourced software product development (OPD) market and has service offerings across the various stages of product lifecycle. The company primarily focuses on the infrastructure, telecom and lifesciences industry segments. Persistent has over 18 years of experience working with software product companies and has developed and released more than 3,000 products till now. The company has invested and plans to continuously invest in new technologies and frameworks in the areas of cloud computing, analytics, enterprise collaboration and enterprise mobility.
STOCK RETURNS (%) PERSISTENT BSE IT INDEX SENSEX 3M (0.7) 1Y (17.3) 3Y 36.3 21.3 5Y 3.3 10Y 17.3 0.6 (26.9) (2.6) (12.3)
Structural Snapshot
Growth opportunity: Persistent has a dominant market share of ~16% (in CY2010) in the Indian OPD market. As per IDC, of the global size of US$40bn in 2010 for R&D and product engineering, the Indian OPD market accounted for ~US$1bn. The offshore segment of the global OPD market in 2010 crossed the US$10bn mark and is expected to report a 19% CAGR to US$16bn by 2014. Hence, Persistent, with its existing capabilities, can potentially average 10-15% growth annually. Competitive position: Persistent is a leading player in the niche OPD market within the IT industry. The company caters to ISVs across the entire product development chain. As the company's revenue profile is entirely discretionary in nature, Persistent faces higher risk than its peers to its revenue profile in case of any slowdown. Nature of business: High RoE business, as it requires skilled workforce rather than heavy capex; Exposed to currency fluctuations and, to an extent, any severe slowdown in the U.S. and Europe.
0.7 13.0
FINANCIAL PERFORMANCE OVERVIEW (%) SALES GROWTH* PAT GROWTH* OPM# ROE# 3M 37.3 12.0 26.0 1Y 29.1 21.5 20.4 18.7 3Y 5Y 10Y -

Established footprint in the resurging OPD market: Persistent is witnessing a strong uptick in its deal pipeline, as clients are flocking to generate new products in a shorter time to capture market share. This is driving many ISVs and wireless equipment manufacturers to spend on R&D and engineering services. Thus, Persistent is expected to post USD revenue CAGR of 14.8% over FY2011-13E. But these spends are highly discretionary in nature, thus exposing the company to a number of risks in case of any economic slowdown. Optimal margin levers in hand: On the operating front, Persistent has adequate margin levers, such as 1) employee pyramid rationalization; 2) higher revenue productivity due to the expected increase in IP-led revenue contribution; 3) a gradual increase in utilization to 74.7% in FY2013 from 74% in 3QFY2012; and 4) INR depreciation against USD. We expect the companys EBIT margin to increase to 16.9% and 17.0% for FY2012 and FY2013, respectively, from 14.9% in FY2011. Valuations attractive: The stock is trading at fair valuations of 9.1x FY2013E EPS. We recommend a Neutral rating on the stock, valuing it at 9.5x FY2013E EPS, owing to risks to its revenue profile in case of any economic slowdown.
352
December 2011

Y/E MARCH (` CR) ` NET SALES FY2010 601 FY2011 776 FY2012E 1,003 FY2013E 1,122
BALANCE SHEET
Y/E MARCH (` CR) ` SHARE CAPITAL RESERVES AND SURPLUS HEDGE RESERVES TOTAL SHAREHOLDERS' FUNDS DEFERRED PAYMENT LIABILITY TOTAL LIABILITIES GROSS BLOCK - FIXED ASSETS ACCUMULATED DEPRECIATION CAPITAL WORK-IN-PROGRESS FY2010 40 580 16 639 5 644 371 188 48 232 156 136 192 34 72 148 32 644 FY2011 40 696 8 747 3 750 454 228 60 287 250 158 100 23 87 121 40 750 FY2012E 40 810 8 861 3 864 654 287 65 433 250 201 31 29 115 167 48 864 FY2013E 40 933 8 984 3 987 804 354 60 510 250 221 72 33 129 189 57 987
% CHG
DIRECT COSTS
1.2
337
29.1
472
29.3
595
11.9
671
% OF NET SALES
GROSS PROFIT
56.1
264
60.9
304
59.4
407
59.8
451
% OF NET SALES
S&M EXPENSES G&A EXPENSES EBITDA
43.9
46 71 146
39.1
62 83 158
40.6
69 111 228
40.2
81 112 258
% OF NET SALES
DEPRECIATION EBIT OTHER INCOME FOREX GAIN/(LOSS) PROFIT BEFORE TAX PROVISION FOR TAX
24.3
34 113 8 3 124 9
20.4
42 116 17 17 150 11
22.7
59 169 17 (1) 185 54
23.0
TOTAL FIXED ASSETS 67 191 21 (6) 206 66 INVESTMENTS SUNDRY DEBTORS CASH AND BANK BALANCE OTHER CURRENT ASSETS LOANS AND ADVANCES CURRENT LIABILITIES PROVISIONS TOTAL ASSETS
% OF PBT
PAT
7.3
115
7.1
140
29.5
130
32.0
140
% CHG
74.0
21.5
(6.9)
7.5
CASH FLOW STATEMENT

Y/E MARCH (` CR) ` PRE TAX PROFIT FROM OPS. DEPRECIATION OTHER INCOME/PRIOR PERIOD AD NET CASH FROM OPERATIONS TAX NET TRADE WORKING CAPITAL CASHFLOW FROM OPERATING ACTV. (INC)/DEC IN FIXED ASSETS (INC)/DEC IN INVESTMENTS (INC)/DEC IN DEFERRED TAX ASSETS FY2010 113 34 11 158 9 7 156 (48) (68) 1 FY2011 116 42 34 193 11 (44) 138 (97) (94) (5) (2) (198) (6) (26) (32) (92) 192 100 FY2012E 169 59 15 243 54 (22) 167 (205) (15) (220) (16) (16) (69) 100 31 FY2013E 191 67 15 273 66 (7) 200 (145) 2 (143) (16) (16) 41 31 72
KEY RATIOS
INC/(DEC) IN DEFERRED PAYMENT LIAB. 5 CASHFLOW FROM INVESTING ACTV. INC/(DEC) IN DEBT INC/(DEC) IN EQUITY/PREMIUM DIVIDENDS CASHFLOW FROM FINANCING ACTV. CASH GENERATED/(UTILIZED) CASH AT START OF THE YEAR CASH AT END OF THE YEAR (110) 132 (2) 129 175 17 192
December 2011
353
354
December 2011
Telecom
COVERAGE
Companies Bharti Airtel Idea Cellular Reliance Comm. CMP (`) ` 342 85 92 Target (`) ` Reco - Neutral - Neutral - Neutral
NEUTRAL
Data-based revenue to be the next growth driver

The Indian telecom sector is the second largest telecom market in the world after China with over 800mn subscribers and 14 operational service providers currently. In the past few years, the industry has witnessed accelerated growth of 31% in its subscriber base due to scorching growth in the wireless space.
Investment arguments
Data-based revenue - Next leap of growth for Indian telecom players: Globally, introduction of 3G services in various economies has resulted in a surge in data traffic of mobile operators. We expect this trend to replicate in India post the launch of 3G services. Currently, non-voice revenue contributes merely 10% to the overall industry's revenue in India, which is much lower than other countries where the contribution of data-based revenue is 20-35%. We expect contribution of non-voice revenue in the Indian telecom industry to reach 20-22% by FY2015, which is expected to improve the current ARPU profile of telecom operators. Growth in voice-based services is expected to stabilize at 5-6% from here on, but non-voice services are expected to grow by 10-15%. Regulatory uncertainty persists: TRAI has deemed that any spectrum held beyond 6.2MHz in a circle is 'excess spectrum' and has levied a one-time fee on the excess spectrum held by any operator based on a market-based value of the spectrum for each circle. As per TRAI's recommendations, the liability for Bharti due to the above-said issue arises to ~`2,870cr, while the impact for Idea boils down to ~`1,085cr. Also, telecom licenses in India will start coming for renewals from 2014, which will again pose a financial liability in front of telecom companies. In FY2015 and FY2016, license renewals for Bharti and Idea are due in eight and nine circles, respectively. These renewals, as per TRAI's recommendations, will require Bharti and Idea to shell out `5,500cr and `5,300cr, respectively, for the contracted spectrum (up to 6.2MHz).

The Indian telecom sector is currently experiencing heat due to a number of policy uncertainties related to spectrum and license fee payments. Also, INR has depreciated sharply by ~10-12% against USD in the past four months, which has increased the liabilities of telecom companies like Bharti and RCom in INR terms due to huge forex debt in their books. In our view, the telecom sector is poised for improvement in its revenue mix, as data revenue starts to pick post the launch of 3G. Tariff war in voice-based services, which was launched by new players, has turned into a curse for their own sustainability. We do not expect further price war amongst telecom companies, as evidenced by the rational pricing move by various telecom players for 3G services. We prefer Bharti amongst telcos due to its low-cost integrated model (owned tower infrastructure), potential opportunity to scale up in Africa, established leadership in revenue and subscriber market share, and relatively better KPIs. However, overall due to the risk of increasing license and spectrum charges, slowing voice growth, higher debt/interest burden (adjusted for forex movement) as well as expensive valuations (especially for Bharti), we remain Neutral on the sector. January 2012 Please refer to important disclosures at the end of this report 355
Telecom Data-based revenue - Next leap of growth for Indian telecom players
Launch of 3G services
Globally, data has started to dominate revenue growth of large telecom players post the launch of 3G. Introduction of 3G services in various economies has resulted in a surge in data traffic of mobile operators. We expect this trend to be replicated in India post the launch of 3G services. Currently, non-voice revenue contributes merely 10% to the overall industry's revenue in India, which is much lower than other countries where contribution of data-based revenue is 20-35%. to move towards high data usage with 3G services roll-out and smart handsets available at cheaper rates.
Exhibit 3: Internet penetration in various countries

90 80 70 60
(%)
81 74 70 73 74
55 47 33 37 31 28 19 12 7
50 40 30 20 10 0 Japan US Brazil Russia
China
Indonesia
India
2009
2015E
Exhibit 1: Contribution of non-voice revenue to the telecom sectors revenue

35 30 25
(%)
Source: BCG report: The Internet's new billion
32
30 27 27 26 21 23
Exhibit 4: Penetration in mobile internet users

70 60 61 54
20 15 10
(%)
10
50 40 30 30 17 12 6 5 2 India 29 15
5 0
US China Korea UK Singapore Japan Average India
20 10 0 China
Source: Delloite Assocham MVAS study paper
Russia
Brazil
Indonesia
Launch of 3G in any country has aided in the growth of data revenue considerably. For most of the large telecom players all over the world, data-based revenue is growing in high teens and mid-twenties. However, overall growth of companies is in high single digits or low double digits. We expect contribution of non-voice revenue in the Indian telecom industry to reach 20-22% by FY2015, which is expected to improve the current ARPU profile of telecom operators.
2009
2015E
Source: BCG report: The Internet's new billion
Key concerns
Regulatory concerns
The telecom sector in India is currently surrounded by a number of policy uncertainties related to spectrum and license fee payments. TRAI released the much-awaited new telecom policy in October 2011, which was a qualitative extension of the proposed draft in February 2011. The draft just laid the background for the forthcoming strategies to be adopted by the Department of Telecom (DoT); however, it lacked details on spectrum and licenserelated issues as well as on M&A policies in the sector. Following are few regulatory issues looming around the players in the sector: Excess spectrum: TRAI has deemed that any spectrum held beyond 6.2MHz in a circle is 'excess spectrum' and has levied a one-time fee on the excess spectrum held by any operator based on a market-based value of the spectrum for each circle. These prices are for spectrum in the 1,800Mhz band for a period of 20 years. Also, TRAI has suggested that the price of 800MHz should remain same as 900MHz, i.e., 1.5 times the price of 1,800MHz spectrum. The impact of the currently given pricing on telecom companies is as follows:
Exhibit 2: Revenue growth of large telecom operators (yoy, June 2011)

30 25 20 15.2
(%)
26.3 24.0
25.5
15 9.9 10 5 0 Verizon (5) AT&T China Mobile 4.1 3.3 4.1 1.9 (0.8) Vodafone 7.3
Voice based revenue growth
Data based revenue growth
Overall revenue growth
Source: Delloite Assocham MVAS study paper
Low internet penetration

Internet penetration in India stands very low at merely 7% as against other countries where internet penetration is above 25%. Also, mobile internet user base in India is very less as compared to other countries. With the increasing affordability of smart phones after the launch of 3G services, we expect internet users on mobile phones to grow in tandem with this. Also, mobile handset manufacturing companies are trying to expand their application store to tap more and more customers. Based on these factors, we expect the Indian telecom sector's revenue growth to be led by data-based services. We expect the system 356 January 2012
Exhibit 5: Impact of excess spectrum charges

Operator Bharti Idea No. of circles 13 7 Charges (` cr) ` 2,870 1,085 Per share ` impact (`) 8.7 3.3
Telecom
License renewals: Telecom licenses in India were issued with a validity of 20 years, so licenses will start coming up for renewals from 2014. In FY2015 and FY2016, license renewals for Bharti and Idea are due in eight and nine circles, respectively; and this time, as per TRAI's recommendations, licenses will be given for a period of 10 years. These renewals, as per TRAI's recommendations, will require Bharti and Idea to shell out `11,500cr and `9,100cr, respectively, for the total spectrum these companies have, out of which `5,500cr and `5,300cr, respectively, would be for contracted spectrum (up to 6.2MHz). License fee: In India, telecom operators give a fraction of their aggregate gross revenue (AGR) as license fees. Currently, license fee is 10% for Metro and A circle, 8% for B circle and 6% for C circle. TRAI has recommended a uniform license fee of 6% across all circles, to be achieved gradually over the next four years. However, DoT has come up with a suggestion to levy a uniform license fee of 8%. This, if implemented, will be EBITDA accretive for all incumbents, as a major part of their revenue comes from Metro and A circles.
Industry trends
Momentum in net subscriber addition declines
Over the past six months, net subscriber addition run rate across all operators has declined significantly. Over September-November 2011, subscriber net addition was weak (lowest since the last few years) across all telecom operators. Indian subscriber base grew at an average rate of merely 0.7% mom, led by incumbents such as Idea, which added 3.8mn subscribers from September-November 2011. Idea was followed by RCom, Bharti, Vodafone and Aircel, which added 2.0mn, 1.9mn, 1.8mn and 1.2mn subscribers over September-November 2011, growing at an average rate of 0.7%, 0.6%, 0.6% and 1.0% mom, respectively. Amongst new entrants, Uninor emerged as a surprise by adding 4.5mn subscribers over September-November 2011, leaving behind all other telecom players.
Exhibit 6: Total subscriber base

Company (mn) Bharti RCom Jun-11 169.2 143.3 141.5 88.5 95.1 91.0 58.0 5.2 3.2 1.4 11.7 3.3 26.3 6.9 1.4 845.9 Jul-11 170.7 144.8 143.0 90.2 96.1 88.3 58.6 5.3 3.2 1.4 12.3 3.5 27.4 7.0 1.4 853.2 Aug-11 171.8 146.1 144.1 90.6 98.4 88.6 59.2 5.3 3.2 1.4 12.8 3.4 27.7 6.4 1.5 860.7 Sep-11 172.8 147.1 145.0 91.1 100.2 88.7 59.8 5.3 3.2 1.2 13.3 3.5 29.7 6.3 1.5 868.5 Oct-11 173.7 148.1 145.9 91.6 101.8 87.7 60.3 5.4 3.2 1.2 14.0 3.5 32.3 6.1 1.6 876.4 Nov-11 174.7 149.1 146.8 92.1 104.0 83.3 61.0 5.4 3.2 1.2 14.5 3.6 34.2 5.5 1.6 880.1
Heavy debt and adverse forex movements

The balance sheet of all major telecom operators is highly stretched due to heavy debt in it, raised mainly to pay the 3G spectrum fees. In addition to that, Bharti raised US$9.7bn loan when it acquired Zain in June 2010. Due to this, the balance sheet of telecom players is exposed to interest rate scenarios and foreign exchange fluctuations. Players in the telecom sector (especially Bharti) continue to be haunted by sharp INR depreciation due to huge forex debt in their books. Bharti has foreign currency denominated loans worth ~US$11.5bn in its books. Given the recent INR depreciation against USD, the company is suffering from higher interest outgo and higher principal repayments, which are negatively affecting its profitability. Bharti, as per its accounting policy, is accounting for forex loss occurred on interest being paid on forex debt in the profit and loss statement; however, the forex loss on balance sheet items (revaluation losses) is included in the foreign currency translation reserve. Due to the steep INR depreciation over the past four months (~15%), even after reporting ~`2,240cr of profit in 1HFY2012, the companys net worth is standing almost flat from FY2011 (`51,623cr) to 2QFY2012 (`51,258cr), as the foreign currency translation reserve is taking a hit, moving from `1,402cr to `736cr. Currently, the effective interest cost of Bharti is ~5.4%, which is much lower than the domestic interest cost. Bharti, due to huge forex debt in its books, is always exposed to the risk that the effective interest costs might turn out to be higher than reported costs in the long run, courtesy foreign currency movement, if interest rate parity kicks in. Keeping this scenario in mind, if we were to assume effective interest costs to be ~10.5% (nearer to domestic borrowing cost), the interest outgo of Bharti would increase manifold. This would increase Bharti's interest cost by 100% and FY2013E EPS would be reduced to `15.9 from `22.2, thus implying that Bharti would be trading at very expensive valuations of 22-23x PE.
Vodafone BSNL Idea TTSL Aircel MTNL Loop Mobile HFCL Shyam Telelink S Tel Uninor Videocon DB Etisalat Total
Source: COAI, AUSPI, Angel Research
VLR data points favorable for tier-I companies, led by Idea

As per the recent VLR data released for November 2011, of the total 884.4mn subscribers, 71.8% i.e., 635.4mn subscribers, were active subscribers on the date of peak VLR. Service provider wise, Idea leads the tally with a share of 92.3%, followed by Bharti with 89.5%, Vodafone with 83.3% and RCom with 64.9%, whereas S Tel is at the bottom with 31.4%.
Exhibit 7: VLR data of incumbents

100 90 80
(%)
88.9
89.5 81.0 83.3
91.6
92.3
70 62.7 60 52.8 50 Bharti Vodafone Idea Rcom BSNL Aircel 53.0 52.4 64.9 54.4
Aug-11
Sep-11
Oct-11
Nov-11
Source: TRAI, Angel Research
January 2012
357
Telecom
RMS vs. SMS
As per the revenue market share (RMS) data for 2QFY2012, Bharti leads at 30.8% with subscriber market share (SMS) of 19.9%, whereas Idea has its RMS and SMS at 14.0% and 11.5%, respectively. RMS for Bharti and Idea is higher than SMS, which indicates that the quality of subscribers added by these companies is good. On the contrary, in case of RCom, SMS is at 16.9%, which is much ahead of RMS that is only at 8.2%. This is evident from the ARPU profile of these companies; also, RCom has peak VLR of merely 63.5% (in September 2011) as posed to its peers Bharti, Idea and Vodafone - the peak VLR of these companies varies from 80-92% (for September 2011). Thus, though the pace of subscriber addition sported by each of the companies remains modest, additions made by Bharti and Idea are value additions, whereas those by RCom are more of volume additions.

The Indian telecom sector is currently experiencing heat due to a number of policy uncertainties related to spectrum and license fee payments. Also, INR has depreciated sharply by ~15% against USD in the past four months, which has increased the liabilities of telecom companies like Bharti and RCom in INR terms due to huge forex debt in their books. This has led to a sharp correction in the stock prices of Bharti, Idea and RCom. In our view, the telecom sector is poised for improvement in its revenue mix, as data revenue starts to pick post the launch of 3G. Tariff war in voice-based services, which was launched by new players, has turned into a curse for their own sustainability. We do not expect further price war amongst telecom companies, as evidenced by the rational pricing move by various telecom players for 3G services. We prefer Bharti amongst telcos due to its low-cost integrated model (owned tower infrastructure), potential opportunity to scale up in Africa, established leadership in revenue and subscriber market share, and relatively better KPIs. However, overall, due to the risk of increasing license and spectrum charges, slowing voice growth, higher debt/interest burden (adjusted for forex movement) as well as expensive valuations (especially for Bharti), we remain Neutral on the sector.
Exhibit 8: RMS vs. SMS of incumbents (as of 2QFY2012)

35 30 25 19.9 20
(%)
30.8
21.0 16.7 14.0 11.5 10.5 8.2 7.7 4.9 6.9 16.9
15 10 5 0 Bharti Vodafone
Idea RMS
Rcom SMS
BSNL
Aircel
Source: TRAI, Angel Research

Company Reco CMP (` ) ` Bharti Airtel Idea Cellular RCom Neutral Neutral Neutral 342 85 92 Tgt Price (` ) ` Upside (%) FY2013E P/BV (x) 2.1 2.0 0.4 FY2013E P/E (x) 15.4 27.3 15.9 FY2011-13E EPS CAGR (%) 18.2 6.7 (5.7) FY2013E RoCE (%) 11.7 10.0 3.3 FY2013E RoE (%) 13.7 7.3 2.8
358
January 2012
January 2012
359
Telecom
Bharti Airtel
Company Background
Bharti Airtel (Bharti) is India's leading telecommunication service provider, offering mobile services in all the 22 circles of the country and having a subscriber base of 175mn. In 2010, Bharti acquired Zain's telecom business in 15 countries of Africa and is currently present in 17 African countries (48.4mn subscribers). The company is also present internationally, in Sri Lanka (1.5mn subscribers) and Bangladesh (4.3mn subscribers). Bharti also holds a 42% stake in Indus Towers, a JV between Bharti, Vodafone and Idea Cellular.
Structural Snapshot
STOCK RETURNS (%) SENSEX 3M 1Y (0.6) 3Y 1.9 21.3 5Y 0.1 3.3 10Y 17.3 BHARTI AIRTEL (11.1)
Growth opportunity: The Indian telecom industry draws only 10% of its revenue from non-voice/data services, while telecom industries in the rest of the world derive 20-35% of their revenue from non-voice services. Thus, we expect data revenue to pick up for Indian players, taking India closer to world averages after the recent launch of 3G services. Bharti, having higher paying subscribers (indicated by its ARPU profile), is likely to see quicker 3G conversions in its subscriber base. For voice-based services, we expect MOU growth to moderate to 5% yoy for FY2013 due to lower subscriber addition. Competitive position: Having the largest network and market share is a proven competitive advantage in the telecom business globally - Bharti being the largest player with a subscriber market share of 19.9% and revenue market share of 30.8% (indicating higher ARPU customers) clearly enjoys this advantage, reflected in its higher margins. Nature of business: Stable demand (moderately defensive sector); High barriers for new players to achieve viable scale of operations due to entrenched networks of established players.
(2.6) (12.3)
FINANCIAL PERFORMANCE OVERVIEW (%) SALES GROWTH* PAT GROWTH* OPM# ROE# 3M 13.5 33.7 1Y 42.1 33.7 12.4 3Y 30.1 (1.7) 38.5 17.0 5Y 38.5 24.5 39.6 28.6 10Y -
(38.2) (33.7)

Turnaround in Africa operations: Bharti is on its way to turnaround its Africa business by bringing down network operating expenditure. In terms of KPIs, Bharti has managed to increase its minutes of usage (MOU) for Africa to 128min in 2QFY2012 from 115min in FY2011 and is expecting prices to remain stable. Thus, we expect OPM of the Africa business to improve to 26.6% and 27.0% by FY2012 and FY2013, respectively, from 25.3% in FY2011. Adverse forex movements: Bharti remains one of the key losers in the depreciating INR scenario due to huge forex debt (~US$11.5bn) in its books. The company is always exposed to the risk that the effective interest costs might turn out to be higher than reported costs in the long run, courtesy foreign currency movement, if interest rate parity kicks in, thereby leading to effective costs nearer to domestic borrowing costs, which is much higher. Valuation: In our view, the stock is trading at reasonably fair valuations of 6.4x FY2013E EV/EBITDA and 15.4x FY2013E EPS. We remain Neutral on the stock owing, to uncertain regulatory environment and risk of adverse forex movements.
360
January 2012

BALANCE SHEET
Y/E MARCH (` CR) ` SHARE CAPITAL RESERVES AND SURPLUS TOTAL SHAREHOLDERS FUNDS MINORITY INTEREST TOTAL DEBT OTHER LIABILITIES TOTAL LIABILITIES GROSS BLOCK - FIXED ASSETS ACCUMULATED DEPRECIATION GOODWILL OTHER NON-CURRENT ASSETS INVESTMENTS SUNDRY DEBTORS CASH AND CASH EQUIVALENTS OTHER CURRENT ASSETS CURRENT LIABILITIES NET CURRENT ASSETS NET DEFERRED TAX TOTAL ASSETS FY2010 1,899 40,295 42,194 2,529 10,190 5,300 60,212 69,725 21,462 5,989 1,825 5,236 3,571 2,532 2,381 10,882 (2,350) 1,249 60,212 FY2011 1,899 46,868 48,767 2,856 61,671 4,665 117,959 96,810 31,668 63,732 1,918 622 5,493 958 3,921 28,548 (17,962) 4,506 117,959 FY2012E 1,899 51,749 53,648 2,486 68,201 3,000 127,335 112,790 44,464 64,893 3,751 1,315 7,012 1,488 5,421 32,224 (17,936) 6,987 127,335 FY2013E 1,899 59,751 61,650 2,486 57,731 3,500 125,366 122,790 58,257 64,893 3,753 1,315 7,751 3,509 6,921 35,752 (17,171) 8,044 125,366
% CHG
ROAMING AND ACCESS CHRG. NETWORK OPERATING EXP. LICENSE FEE OTHER EXPENSES TOTAL EXPENDITURE EBITDA
13.2
4,481 8,912 4,088 7,513 24,993 16,854
42.1
7,499 12,993 5,166 13,774 39,432 20,035
19.6
9,800 15,751 5,996 15,487 47,034 24,060
13.7
11,123 16,975 6,732 17,564 52,394 28,441
% OF NET SALES
DEP. AND AMORTIZATION EBIT INTEREST CHARGES PROFIT BEFORE TAX PROVISION FOR TAX
40.3
6,284 10,589 18 10,640 1,345
33.7
10,206 9,719 2,182 7,666 1,778
33.8
12,797 11,263 3,944 7,320 2,026
35.2
13,793 14,648 3,435 11,213 2,803
% OF PBT
PAT MINORITY INTEREST ADJ. PAT
12.6
9,295 187 9,108
23.2
5,887 (148) 6,035
27.7
5,294 (32) 5,326
25.0
8,410 (36) 8,446
% CHG
5.7
(33.7)
(11.7)
58.6
CASH FLOW STATEMENT

Y/E MARCH (` CR) ` PRE TAX PROFIT FROM OPS. DEPRECIATION OTHER INCOME TAX NET TRADE WORKING CAPITAL FY2010 10,571 6,284 70 (1,345) (851) FY2011 7,537 10,206 129 (1,778) 14,038 30,279 (27,085) (57,743) 4,614 328 (94) (83,237) 51,481 982 444 51,384 (1,575) 2,532 958 FY2012E 7,320 12,797 (2,026) 504 18,626 (15,980) (1,161) (692) (1,832) (22,147) 6,530 444 4,050 530 958 1,488 FY2013E 11,213 13,793 (2,803) 1,256 23,495 (10,000) (3) (11,059) (10,470) 444 (10,414) 2,022 1,488 3,509
KEY RATIOS
CASHFLOW FROM OPERATING ACTV 14,546 (INC)/DEC IN FIXED ASSETS (INC)/DEC IN INTANGIBLES (INC)/DEC IN INVESTMENTS (INC)/(DEC) IN MINORITY INTR. (INC)/DEC IN NON-CURRENT ASST. (13,633) (1,953) (1,431) 1,458 (801)
CASHFLOW FROM INVESTING ACTV. (17,608) INC/(DEC) IN DEBT INC/(DEC) IN EQUITY DIVIDENDS (1,690) 3,131 444
CASHFLOW FROM FINANCING ACTV. 4,480 CASH GENERATED/(UTILIZED) CASH AT START OF THE YEAR CASH AT END OF THE YEAR 1,418 1,115 2,532
January 2012
361
Telecom
Idea Cellular
Company Background
SHAREHOLDING PATTERN (%) PROMOTERS (ADITYA BIRLA GROUP) FII 46.0 11.8
Idea Cellular (Idea), part of the Aditya Birla Group, is the third largest telecommunication service provider in India in terms of revenue. The company provides mobile services in all the 22 circles of the country and has 104mn subscribers. Idea had won 3G licenses in 11 out of the 22 circles in India and is currently providing 3G services in 20 circles (in seven circles by 3G roaming agreements). The company also holds a 16% stake in Indus Towers, which is a JV with Bharti, Vodafone and Idea.
Structural Snapshot
Growth opportunity: The Indian telecom industry draws only 10% of its revenue from non-voice/data services, while telecom industries in the rest of the world derive 20-35% of their revenue from non-voice services. So, we expect data revenue to pick up for Indian players, taking India closer to world averages after the recent launch of 3G services. Idea, having higher paying subscribers (indicated by ARPU profile as compared to most of its peers), would see quicker 3G conversions in its subscriber base. Competitive position: Idea enjoys subscriber market share of 11.5% and revenue market share of 14.0%. Over the past three months, though the industry's subscriber net additions have declined sharply, Idea's subscriber growth has been higher than the industry's. However, the companys OPM is at ~26%, which is lagging industry leader Bharti Airtel's OPM of 32-33%. Nature of business: Stable demand (moderately defensive sector); High barriers for new players to achieve viable scale of operations due to entrenched networks of established players.
STOCK RETURNS (%) SENSEX 3M 1Y 22.9 3Y 24.3 21.3 5Y 3.3 10Y 17.3 IDEA CELLULAR (9.9)
(2.6) (12.3)
FINANCIAL PERFORMANCE OVERVIEW (%) SALES GROWTH* PAT GROWTH* OPM# ROE# 3M 26.3 (41.2) 25.7 1Y 24.6 (9.4) 24.5 7.0 3Y 32.1 (4.9) 26.5 7.2 5Y 39.2 32.7 30.2 11.5 10Y -

Robust revenue growth; ahead of its peers: Idea has reported a revenue CAGR of 32% over FY2008-11 as compared to its peers Bharti and RCom, which reported CAGRs of 30% and 6%, respectively. Modest growth in network minutes coupled with tariff hike undertaken by Idea in the prepaid segment is expected to help Idea to maintain its revenue growth momentum, aiding the company in improving its operating margin. We expect Idea to post a revenue CAGR of 20.3% over FY2011-13E. Regulatory uncertainty persists: Idea's financial performance is relatively more susceptible to regulatory uncertainties due to less free cash flow generation, which exposes it to relatively higher risks, if any unanticipated financial liability kicks in on the back of regulatory requirements. Also, in FY2015 and FY2016, license renewals are due for nine circles for Idea, which will again require the company to shell out more cash to fulfill the requirements. Valuation: The stock is trading at fair valuations of 6.4x FY2013E EV/EBITDA. We remain Neutral on the stock owing to the highly uncertain regulatory environment.
362
January 2012

BALANCE SHEET
Y/E MARCH (` CR) ` SHARE CAPITAL RESERVES AND SURPLUS TOTAL SHAREHOLDERS FUNDS TOTAL DEBT DEFERRED TAX LIABILITIES TOTAL LIABILITIES GROSS BLOCK - FIXED ASSETS ACCUMULATED DEPRECIATION NET BLOCK FY2010 3,300 8,530 11,874 7,859 214 19,950 27,059 8,891 18,168 547 18,714 1,130 466 290 2,556 298 3,845 223 19,950 FY2011 3,301 8,947 12,296 12,023 310 24,632 33,698 11,213 22,485 3,647 26,132 555 1,478 3,560 386 7,280 264 24,632 FY2012E 3,301 9,637 12,985 12,800 320 26,109 38,198 14,080 24,118 2,572 26,690 628 1,384 3,819 465 6,623 325 26,109 FY2013E 3,301 10,660 14,007 11,900 320 26,231 42,398 17,439 24,959 1,592 26,551 738 1,567 4,740 589 7,620 404 26,231
% CHG
NETWORK OPERATING EXP. LICENSE AND WPC CHARGES ROAMING AND ACCESS CHRGS. OTHER EXPENSES TOTAL EXPENDITURE EBITDA
22.9
3,127 1,347 1,800 2,766 9,040 3,407
24.6
4,013 1,773 2,475 3,451 11,713 3,791
23.2
4,709 2,147 3,196 4,085 14,137 4,955
17.5
5,489 2,563 3,636 4,769 16,458 5,982
% OF NET SALES
27.4
2,015 1,392
24.5
2,432 1,359
26.0
2,867 2,089
26.7
CAPITAL WIP 3,359 TOTAL FIXED ASSETS 2,623 INVESTMENTS DEBTORS CASH LOANS AND ADVANCES OTHER CURRENT ASSETS CURRENT LIABILITIES PROVISIONS TOTAL ASSETS
% OF NET SALES
INTEREST EXPENSE OTHER INCOME PROFIT BEFORE TAX PROVISION FOR TAX
11.2
401 84 1,075 121
8.8
396 963 98
10.9
1,128 960 270
11.7
1,119 1,504 481
% OF PBT
PAT
11.3
954
10.2
864
28.1
690
32.0
1,022
% CHG
8.3
(9.4)
(20.1)
48.1
CASH FLOW STATEMENT

Y/E MARCH (` CR) ` PRE TAX PROFIT FROM OPS. DEPRECIATION OTHER INCOME TAX CASH PROFITS NET TRADE WORKING CAPITAL FY2010 991 2,015 84 121 2,969 (1,059) FY2011 963 2,432 98 3,296 2,288 5,584 (9,849) 1,130 96 504 (8,119) 4,164 (441) 3,723 1,188 290 1478 FY2012E 960 2,867 270 3,557 (1,012) 2,546 (3,426) 10 (3,416) 776 776 (94) 1,478 1384 FY2013E 1,504 3,359 481 4,382 (79) 4,303 (3,220)
KEY RATIOS
Y/E MARCH VALUATION RATIO (X) P/E P/BV EV/SALES EV/EBITDA EV/TOTAL ASSETS ` PER SHARE DATA (`) EPS 2.9 9.0 36.0 2.7 10.0 37.2 2.1 10.8 39.3 3.1 13.3 42.4 29.3 2.4 2.9 10.4 1.8 31.1 2.3 2.5 10.2 1.6 40.5 2.2 2.1 7.9 1.5 27.3 2.0 1.7 6.4 1.5 FY2010 FY2011 FY2012E FY2013E
CASHFLOW FROM OPERATING ACTV. 1,910 (INC)/DEC IN FIXED ASSETS (INC)/DEC IN INVESTMENTS INC/(DEC) IN DEFERRED TAX ASSET (INC)/DEC IN PROFIT AND LOSS ACC. (4,062) 915 101 23
CASH EPS (3,220) (900) (900) 183 1,384 1567 BOOK VALUE RETURN RATIOS (%) ROCE (PRE-TAX) ANGEL ROIC ROE TURNOVER RATIOS (X) ASSET TURNOVER (FIXED ASSETS) DEBTOR DAYS PAYABLE DAYS 0.7 12 156 0.6 12 173 0.7 12 171 0.8 12 169 7.0 7.3 8.0 5.5 7.0 7.0 8.0 9.4 5.3 10.0 11.4 7.3
(INC)/DEC IN NON-CURRENCT ASSTS 2,240 CASHFLOW FROM INVESTING ACTV. (784) INC/(DEC) IN DEBT INC/(DEC) IN EQUITY/PREMIUM (1,053) (2,869)
CASHFLOW FROM FINANCING ACTV. (3,923) CASH GENERATED/(UTILIZED) CASH AT START OF THE YEAR CASH AT END OF THE YEAR (2,797) 3,086 290
January 2012
363
Telecom
Reliance Comm.
Reliance Communications (RCom), part of the Anil Dhirubhai Ambani Group, is India's fourth largest telecommunication service provider (TSP). The company offers GSM and CDMA wireless services in the country, with a subscriber base of 149mn. Other than mobile services, RCom offers broadband, wire line, DTH and passive infrastructure services. The company owns 50,000 towers to provide passive infrastructure services.
SHAREHOLDING PATTERN (%) PROMOTERS (ADAG) FII 67.9 8.5
Structural Snapshot
Growth opportunity: In India, internet penetration is only at ~7%. RCom, being one of the leading players in offering broadband services, has a number of opportunities to tap in this underpenetrated market. Improvement in wireless revenue and reduction in free network minutes are expected to provide some impetus to RCom's growth. Competitive position: RCom enjoys subscriber market share (SMS) of 16.9% but has revenue market share (RMS) of only 8.2%, as it offers numerous intra-network free minutes to its subscribers, due to which its ARPU is lower than peers. In addition, on account of huge duplication of capex on CDMA and GSM license and spectrum, the company has poor asset utilization as its revenue are 0.28x its total balance sheet size vis--vis Bharti having 0.63x. Nature of business: Stable demand (moderately defensive sector); High barriers for new players to achieve viable scale of operations due to entrenched networks of established players.
STOCK RETURNS (%) SENSEX 3M 1Y 3Y 21.3 5Y 3.3 10Y 17.3 RELIANCE COMM. 20.5 (30.1) (20.9) (27.2) (2.6) (12.3)
FINANCIAL PERFORMANCE OVERVIEW (%) PAT GROWTH* OPM# ROE# 3M 1Y 3.8 37.5 3.3 3Y 2.9 38.7 10.3 5Y 10Y SALES GROWTH* (4.6) 28.3 -
(43.5) (71.4) (30.6)

Decent revenue growth: RCom has hiked voice tariffs on both on-net and off-net calls for GSM subscribers; and on CDMA, the company has raised tariffs on only off-net calls. Since the hike has been undertaken largely on the GSM subscriber base, the impact of the same will be less as compared to its peers, as the company is primarily CDMA based. Going forward, we expect RCom's mobile segment's subscriber base to record a 10.3% CAGR over FY2010-13E and ARPM to stabilize at `0.46/min in FY2013. Highly leveraged balance sheet: As of 2QFY2012, RCom had gross debt of `33,700cr in its books, which translates to gross debt/equity of 0.95x. In March 2011, RCom signed an agreement with China Development Bank to raise `6,000cr (US$1.33bn) for refinancing 3G spectrum debt and reducing interest expenditure. Also, RCom has raised debt to fund its FCCB amounting to US$1.1bn due in March 2012. The recent INR depreciation could result in higher cash outgo for this as well, posing a risk to RCom's balance sheet. Valuation: Currently, RCom is striving to reduce the debt in its books and has again made the announcement to sell stake in its tower assets, which might help the company to deleverage its balance sheet and can be a positive trigger to the stock price. We remain Neutral on the stock owing to the highly uncertain regulatory environment and dreary outlook of its financials.
364
January 2012

Y/E MARCH (` CR) ` NET SALES % CHG NETWORK EXPENDITURE LICENSE FEE ACCESS CHARGES OTHER EXPENSES TOTAL EXPENDITURE EBITDA FY2010 21,614 (2.8) 6,173 1,145 2,138 4,907 14,363 7,251 FY2011 22,430 3.8 5,472 1,157 2,648 4,750 14,026 8,404 FY2012E 19,740 (12.0) 5,585 1,120 2,739 4,484 13,927 5,813 FY2013E 22,978 16.4 6,035 1,217 2,998 5,198 15,448 7,530
BALANCE SHEET
Y/E MARCH (` CR) ` SHARE CAPITAL RESERVES AND SURPLUS TOTAL SHAREHOLDERS' FUNDS MINORITY INTEREST TOTAL DEBT DEFERRED TAX LIABILITY TOTAL LIABILITIES GROSS BLOCK - FIXED ASSETS ACCUMULATED DEPRECIATION CAPITAL WORK-IN-PROGRESS FY2010 1,032 42,329 43,361 658 29,715 99 73,834 78,665 19,067 11,656 4,998 4,160 3,312 819 2,073 5,410 14,708 4,027 73,834 FY2011 1,032 39,717 40,749 825 37,376 78,950 82,090 27,341 18,191 4,998 109 4,002 5,327 1,146 5,086 12,686 2,490 78,950 FY2012E 1,032 40,227 41,259 825 32,200 100 74,383 83,590 31,643 19,680 4,998 100 3,245 2,015 2,567 4,540 13,546 1,757 74,383 FY2013E 1,032 41,209 42,241 825 29,200 295 72,561 85,090 36,743 19,490 4,998 100 3,777 4,202 2,657 5,170 14,983 1,838 72,561
% OF NET SALES
DEP. AND AMORTIZATION EBIT INTEREST CHARGES OTHER INCOME, NET PROFIT BEFORE TAX PROVISION FOR TAX
33.5
3,747 3,504 (1,186) 636 5,289 445
37.5
6,504 1,900 1,072 677 1,518 12
29.4
4,302 1,511 1,166 639 984 65
32.8
5,100 2,430 1,243 480 1,667 300
GOODWILL INVESTMENTS SUNDRY DEBTORS CASH AND CASH EQUIVALENTS OTHER CURRENT ASSETS LOANS AND ADVANCES CURRENT LIAB PROVISIONS TOTAL ASSETS
% OF PBT
8.4
4,843 137 4,704
0.8
1,506 161 1,346
6.6
919 205 714
18.0
1,367 180 1,187
% CHG
(20.6)
(71.4)
(46.9)
66.2
CASH FLOW STATEMENT

Y/E MARCH (` CR) ` PRE TAX PROFIT FROM OPES. DEPRECIATION MINORITY INTEREST OTHER INCOME TAX NET TRADE WORKING CAPITAL FY2010 4,653 3,747 139 636 (445) 347 FY2011 841 6,504 160 677 (12) (2,971) 4,878 (8,191) (99) 4,051 (4,239) 7,660 (3,836) 121 3,869 4,509 819 5,327 FY2012E 345 4,302 205 639 (65) (69) 4,948 (2,988) 100 9 (2,879) (5,176) 205 (5,380) (3,312) 5,327 2,015 FY2013E 1,187 5,100 180 480 (300) 221 6,508 (1,311) 195 (1,116) (3,000) 205 (3,205) 2,187 2,015 4,202
KEY RATIOS
Y/E MARCH VALUATION RATIO (X) P/E P/BV EV/SALES EV/EBITDA EV/TOTAL ASSETS PER SHARE DATA (`) ` EPS CASH EPS DIVIDEND BOOK VALUE RETURN RATIOS (%) ROCE (PRE-TAX) ANGEL ROIC ROE TURNOVER RATIOS (X) ASSET TURNOVER (FIXED ASSETS) RECEIVABLES DAYS PAYABLE DAYS 0.3 61 390 0.3 60 356 0.3 67 344 0.3 56 337 4.7 6.7 10.8 2.4 3.8 3.3 2.0 3.2 1.7 3.3 5.6 2.8 23.0 40.9 1.0 210 6.5 38.0 0.6 197 3.5 24.3 1.0 200 5.8 30.5 1.0 205 4.0 0.4 2.0 6.0 0.6 14.2 0.5 2.3 6.0 0.6 26.5 0.5 2.5 8.4 0.7 15.9 0.4 1.9 5.8 0.6 FY2010 FY2011 FY2012E FY2013E
CASHFLOW FROM OPERATING ACTV. 8,797 (INC)/DEC IN FIXED ASSETS (INC)/DEC IN INTANGIBLES INC/(DEC) IN DEFERRED TAX LIAB. (INC)/DEC IN INVESTMENTS (2,295) 224 71 5,406
CASHFLOW FROM INVESTING ACTV. 3,406 INC/(DEC) IN DEBT INC/(DEC) IN EQUITY/PREMIUM DIVIDENDS (9,447) (3,419) 205
CASHFLOW FROM FINANCING ACTV. (13,067) CASH GENERATED/(UTILIZED) CASH AT START OF THE YEAR CASH AT END OF THE YEAR (864) 1,683 819
January 2012
365
366
January 2012
Mid-Cap
January 2012
367
Mid-Cap
RATING 52 WEEK HIGH / LOW MARKET CAP (` CR) ` LIQUIDITY BUY 1,683 / 1,178 3,165 LOW
Abbott India
Company Background
TOP PICK
CMP/TP/Upside: `1,490 / `1,852 / 24%
Abbott India (AIL) is a step down subsidiary of Abbott Laboratories, USA. The company has a strong distribution network with 18 distribution points, which cater to 11,000 stockists and 70,000 retailers. The company has a formulation facility at Verna, Goa. As of December 2010, AIL had an employee base of 1,747. The company caters to five main segments - primary care, specialty care, hospital care, consumer healthcare and super specialty care, with brands such as Brufen, Cremaffin, Digene, Zolfresh, Thyronorm, Pediasure, Forane and Heptral. AIL merged with Solvay Pharma India Ltd. (SPIL) in CY2011, which was acquired by Abbott Laboratories.
STOCK RETURNS (%) ABBOTT INDIA BSE MIDCAP SENSEX 3M 1.8 1Y 21.6 3Y 53.2 23.0 21.3 5Y (1.4) 3.3 10Y 17.3 23.4 20.1
Structural Snapshot
Growth opportunity: As per PwC, the Indian pharmaceutical industry is expected to grow by 15-20% over CY2010-15E, aided by increasing per capita income, growing health insurance penetration, better health awareness, higher government expenditure, rising number of chronic diseases, innovative product launches due to product patents and expanded healthcare access to rural and semi urban markets. The increase in product portfolio after the merger with SPIL and focus on therapeutic areas like nutrition and diagnostics will help the company to report better growth. Competitive position: AIL became the second largest pharmaceutical MNC (in revenue terms) in India post its merger with SPIL, overtaking Pfizer and Aventis Pharma. The company is well placed in the industry because of its strong product portfolio. Nature of business: High entry barriers.
(8.5) (20.9) (2.6) (12.3)
FINANCIAL PERFORMANCE OVERVIEW (%) SALES GROWTH* PAT GROWTH* OPM# ROE# 3M 61.2 15.5 1Y 30.5 6.7 21.2 3Y 18.5 (2.8) 9.6 25.0 5Y 15.4 0.6 10Y 11.1 3.2
82.6 (21.4)
10.7 13.0 25.5 29.0

Synergies with SPIL to improve the business model: Amalgamation of SPIL with AIL expanded the company's product portfolio, giving access to untapped therapeutic segments like women's health and vaccines, in addition to increasing exposure to its existing therapeutic segments. Besides increased revenue, the synergy between the two companies is expected to improve operating efficiencies, thus leading to margin expansion. Multiple revenue drivers to lead to a 24% CAGR in the top line: AIL's advertisement and employee costs as a percentage of sales have been continuously increasing since CY2006. Continued focus on these factors is expected to drive the company's revenue going forward. Moreover, AIL's focus on therapeutic areas such as diagnostics and nutrition and its agreement with Zydus Cadila (India) to market 25 products in emerging markets from CY2013E could further add to its revenue. Valuations attractive: AIL is a cash-rich company, hence we expect cash reserves and RoIC to increase to `594cr and 114.3%, respectively, by CY2013E. Due to excess cash in its books, we believe AIL may be a potential delisting candidate. The stock is currently trading at PE of 14.5x its CY2013E (20% discount to its three-year median of 18.0x). We maintain our Buy view on the stock with a target price of ` 1,852, based on target PE of 18.0x for CY2013E.
368
January 2012

Y/E DEC. (` CR) ` TOTAL OPERATING INCOME CY2010 1,037 CY2011E 1,516 CY2012E 1,734 CY2013E 1,979
BALANCE SHEET
Y/E DEC. (` CR) ` SOURCES OF FUNDS EQUITY SHARE CAPITAL RESERVES & SURPLUS SHAREHOLDERS FUNDS TOTAL LOANS DEFFERED TAX LIABILITY (NET) TOTAL LIABILITIES APPLICATION OF FUNDS GROSS BLOCK LESS: ACC. DEPRECIATION NET BLOCK CAPITAL WORK-IN-PROGRESS INVESTMENTS CURRENT ASSETS CURRENT LIABILITIES NET CURRENT ASSETS MISC EXP NOT WRITTEN OFF TOTAL ASSETS 118 69 50 1 403 148 255 306 199 110 88 1 37 661 223 438 564 219 127 92 1 37 822 252 570 699 240 144 96 1 37 1,026 286 739 873 14 292 305 0 306 21 545 566 (2) 564 21 680 702 (2) 699 21 854 876 (2) 873 CY2010 CY2011E CY2012E CY2013E
% CHG
TOTAL EXPENDITURE OPERATING PROFIT
30.5
967 69
46.2
1,319 197
14.4
1,495 239
14.1
1,696 283
(% OF NET SALES)
DEPRECIATION& AMORTISATION INTEREST RECURRING PBT OTHER INCOME
6.7
11 0 58 36
13.0
15 0 181 20
13.8
16 223 45
14.3
18 265 61
(% OF NET SALES)
PBT (REPORTED) TAX
3.5
94 33
1.3
201 66
2.6
268 89
3.1
326 108
(% OF PBT)
PAT (REPORTED) LESS: MINORITY INTEREST (MI) PRIOR PERIOD ITEMS PAT AFTER MI (REPORTED) EXTRAORDINARY EXPENSE/(INC.) ADJ. PAT
35.2
61 61 (0) 61
33.0
135 135 135
33.0
180 180 180
33.0
219 219 219
% CHG
(21.4)
120.8
33.4
21.6
CASH FLOW STATEMENT

Y/E DEC. (` CR) ` PROFIT BEFORE TAX DEPRECIATION CHANGE IN WORKING CAPITAL OTHERS DIRECT TAXES PAID CASH FLOW FROM OPERATIONS (INC.)/DEC. IN FIXED ASSETS (INC.)/DEC. IN INVESTMENTS OTHERS CASH FLOW FROM INVESTING ISSUE OF EQUITY INC./(DEC.) IN LOANS DIVIDEND PAID (INCL. TAX) OTHERS CASH FLOW FROM FINANCING INC./(DEC.) IN CASH OPENING CASH BALANCES CLOSING CASH BALANCES
KEY RATIOS
CY2011E 201 15 (41) (20) (66) 89 (18) (37) 20 (35) (42) 79 37 142 189 330 CY2012E 268 16 (18) (45) (89) 133 (20) 45 25 (45) (45) 113 330 444 CY2013E 326 18 (19) (61) (108) 156 (22) 61 39 (45) ROE 21.2 30.9 28.4 27.7 (45) 150 444 594 TURNOVER RATIOS (X) INVENTORY / SALES (DAYS) RECEIVABLES (DAYS) PAYABLES (DAYS) 41 19 49 40 19 62 45 19 62 45 19 62 Y/E DEC. VALUATION RATIO (X) P/E (ON FDEPS) P/CEPS P/BV EV/SALES 51.9 52.9 10.4 2.9 42.9 23.5 21.1 5.6 1.8 14.2 17.6 16.2 4.5 1.5 11.2 14.5 13.4 3.6 1.3 9.0 CY2010 CY2011E CY2012E CY2013E
CY2010 94 11 (18) (9) (33) 46 (12) (4) (16) (27) (0) (27) 13 176 189
EV/EBITDA PER SHARE DATA (`) ` EPS (BASIC) EPS (FULLY DILUTED) CASH EPS DPS BOOK VALUE RETURNS (%) ROCE (PRE-TAX) ANGEL ROIC (PRE-TAX)
44.6 44.6 52.9 17.0 223.3
63.4 63.4 70.5 17.0 266.6
84.6 84.6 92.2 18.0 330.2
102.9 102.9 111.2 18.0 412.1
24.0 65.6
41.2 115.4
34.9 106.7
33.4 114.3
January 2012
369
Mid-Cap
Bajaj Electricals
TOP PICK
Bajaj Electricals Ltd. (BEL) is a 72-year old company with a turnover of `2,763cr. The company is part of the US$7bn (over `38,000cr) Shekhar Bajaj Group. BEL has six strategic business units - engineering and projects (~30% of revenue), lighting, luminaries (~23% of revenue), and consumer durable (appliances, fans, Morphy Richards, contributing ~47% to revenue). The company has 19 branch offices spread in different parts of the country. The company is supported by a chain of about 1,000 distributors, 4,000 authorized dealers, over 4,00,000 retail outlets and more than 282 customer care centers in the country.
STOCK RETURNS (%) BSE MIDCAP SENSEX 3M 1Y 3Y 62.1 23.0 21.3 5Y (1.4) 3.3 10Y 17.3 BAJAJ ELECTRICAL(14.8) (18.3) (8.5) (20.9) (2.6) (12.3) 28.3 48.0
Structural Snapshot
Growth opportunity: Currently, the domestic home appliances market is growing at ~20% annually on the back of rapid urbanization and improving purchasing power of Indian consumers. The current market size of irons, water heaters, ovens toasters grills, and mixers is estimated to be `6,000cr, which is growing at ~15% annually. The organized sector constitutes ~68% of the market share. The lighting sector is estimated at `3,600cr, which is growing 10% annually. The CFL market is around `1,900cr, growing ~30% annually. Market size for the luminaries segment is estimated at `2,500cr. Organized players account for 60-65% of the market. Competitive position: BEL is a strong brand and is one of India's leading companies in small appliances, fans, and lighting and luminaries. In India, BELS luminaries segment maintains its No. 2 position with a ~17% market share in the organized sector, after Philips. The company's fan segment is among the top three in India, with a market share of ~16.5% in the organized sector. Nature of business: Branded business contributes nearly 70% to total revenue.
NOTE: ABOVE 1 YEAR- *ON CAGR BASIS, # ON AVERAGE BASIS

Strong brand image - Leveraging on strong brands and substantial market share: BEL has strong brand positioning and a well-spread distribution network. As per the company's internal estimates, it is the fastest growing player in the domestic appliances market, which is growing at 20% per year. In the small appliances market, BEL enjoys a market share of over 15-30% across all product categories. Future growth drivers - Rural markets, acquisitions and newer verticals: BEL plans to capitalize on growth in the rural markets. The company has also identified 7-8 potential acquisition candidates across businesses. Management expects about 15% of future sales to come from the acquired businesses. The company also plans to foray into newer verticals, including water management, which is an underpenetrated and rapidly growing market. Valuations cheap: With the recent sharp correction, the stock is available at attractive valuation on just 9.3x FY2013 earnings, against its five-year historical average of 11x one-year forward earnings. We recommend Buy on the stock with a target price of ` 201, valuing the stock at 11x FY2013 earnings. Key concern: Pursuing growth in the asset-heavy and low entry barrier engineering and projects segment.
370
January 2012
PROFIT & LOSS

BALANCE SHEET
Y/E MARCH (` CR) ` SOURCES OF FUNDS EQUITY SHARE CAPITAL PREFERENCE CAPITAL RESERVES& SURPLUS SHAREHOLDERS FUNDS TOTAL LOANS DEFERRED TAX LIABILITY (NET) TOTAL LIABILITIES APPLICATION OF FUNDS GROSS BLOCK LESS: ACC. DEPRECIATION NET BLOCK CAPITAL WORK-IN-PROGRESS INVESTMENTS CURRENT ASSETS CURRENT LIABILITIES NET CURRENT ASSETS TOTAL ASSETS 170 68 102 0 37 1,199 692 507 646 230 77 153 37 1,575 1,039 536 726 248 91 157 2 37 1,682 1,059 623 819 281 106 175 3 37 1,921 1,196 725 940 20 0.2 475 494 152 (1) 646 20 591 611 116 (2) 726 20 685 705 116 (2) 819 20 816 836 106 (2) 940 FY2010 FY2011 FY2012E FY2013E
% CHG
TOTAL EXPENDITURE OTHER EBITDA
26.1
1,994 131 233
23.1
2,503 160 238
17.6
2,975 203 248
13.5
3,348 231 311
(% OF NET SALES)
10.5
9 37 8
8.7
11 29 6
7.7
14 29 8
8.5
15 27 8
(% OF PBT)
4.3
195 195 75
2.8
204 (15) 219 74
3.9
214 214 74
3.0
277 277 95
(% OF PBT)
PAT (REPORTED) PRIOR PERIOD ITEMS PAT AFTER MI (REPORTED) ADJ. PAT
38.6
120 8 120 112
33.8
145 145 130
34.4
140 140 140
34.4
182 182 182
% CHG
22.4
16.5
8.0
29.7
CASH FLOW STATEMENT

Y/E MARCH PROFIT BEFORE TAX DEPRECIATION (INC.)/ DEC. IN WORKING CAPITAL LESS: OTHER INCOME DIRECT TAXES PAID CASH FLOW FROM OPERATIONS (INC.)/ DEC. IN FIXED ASSETS (INC.)/ DEC. IN INVESTMENTS OTHER INCOME CASH FLOW FROM INVESTING ISSUE OF EQUITY INC./(DEC.) IN LOANS DIVIDEND PAID (INCL. TAX) OTHERS CASH FLOW FROM FINANCING INC./(DEC.) IN CASH OPENING CASH BALANCES CLOSING CASH BALANCES
KEY RATIOS
FY2011 219 11 (64) 6 74 86 (60) (0) 6 (54) 0 (35) 42 32.2 (45) (13) 61 48 FY2012E 214 14 (90) 8 74 56 (20) 8 (12) 0 47 16.0 (30) 13 48 61 FY2013E 277 15 (89) 8 95 101 (34) 8 (26) (10) 51 6.1 (55) 20 61 81 Y/E MARCH VALUATION RATIOS P/E (ON FDEPS) P/CEPS P/BV EV/SALES 14.6 13.2 3.4 0.8 7.5 11.6 10.8 2.8 0.6 7.4 12.1 11.0 2.4 0.5 7.1 9.3 8.6 2.0 0.5 5.5 FY2010 FY2011 FY2012E FY2013E
FY2010 201 9 (192) 8 75 (66) (13) (5) 8 (10) 163 (62) 27 9.4 83 7 54 61
EV/EBITDA ` PER SHARE DATA (`) EPS (BASIC) EPS (FULLY DILUTED) CASH EPS DPS BOOK VALUE RETURNS (%) ROCE (PRE-TAX) ANGEL ROIC ROE TURNOVER RATIOS (X) INVENTORY / SALES (DAYS) RECEIVABLES (DAYS) PAYABLES (DAYS)
12.0 11.7 13.2 2.4 50.7
14.7 14.7 10.8 3.6 61.8
14.1 14.1 11.0 4.0 70.9
18.3 18.3 8.6 4.4 84.0
40.4 36.7 31.7
33.1 27.2 26.2
30.4 23.5 21.3
33.6 27.9 23.6
32 107 115
34 121 126
33 122 129
31 116 123
January 2012
371
Mid-Cap
Blue Star
Company Background
Blue Star is the largest central air-conditioning company in India. The company clocked an annual turnover of `2,976cr in FY2011, a network of 29 offices, six manufacturing facilities and over 1,200 dealers across the country. The company caters to corporate, commercial and residential customers and has established leadership in the field of commercial refrigeration equipment, ranging from water coolers to cold storages. The company also offers comprehensive electrical contracting, plumbing, fire fighting products, and services. Blue Star's other businesses include marketing and maintenance of hi-tech professional electronic and industrial products.
STOCK RETURNS (%) BLUE STAR BSE MIDCAP SENSEX 3M (22.0) 1Y (57.0) 3Y 3.7 23.0 21.3 5Y (1.4) 3.3 10Y 17.3 (4.8) 32.8
Structural Snapshot
Growth opportunity: We believe the surge in demand for the commercial space and the increasing corporate and government thrust to set up an efficient cold chain infrastructure in the country are likely to boost demand for centralized air-conditioning and cold storage in India. The cumulative non-residential opportunity in air conditioners is estimated to be close to `38,000cr over the next five years. A number of opportunities are also expected to arise due to the expansion and modernization of airports in the country. Competitive position: The company has a strong brand and is India's largest central air-conditioning company. Nature of business: Major presence in the commercial segment, which is highly cyclical in nature and depends on economic growth. The company operates through fixed price contracts and, thus, is exposed to the risk of any increase in raw-material prices.
(8.5) (20.9) (2.6) (12.3)
FINANCIAL PERFORMANCE OVERVIEW (%) PAT GROWTH* OPM# ROE# 3M 1Y 17.9 8.5 31.5 3Y 10.2 (3.1) 9.9 46.4 5Y 20.5 9.3 49.8 10Y 19.5 7.7 37.0 SALES GROWTH* (13.0) 2.3 -
(153.8) (25.4)
26.5 21.0

Demand slowdown and declining margins: There are still no signs of any pick-up in demand in the IT/commercial real estate sectors. The power sector is also slowing down with no new projects being announced in the airports or metro rail segments. Further, order finalizations continue to be deferred. Consequently, the company continues to witness a challenging environment, as reflected in its weak top-line growth during 2QFY2012. Overall, management is not very optimistic and expects the current scenario to continue for the next four-five quarters. Copper fluctuation and forex to remain a concern: Blue Star, which had entered into fixed price contracts, is expected to witness significant pressure on its EBIT margin going forward, due to forex volatility and copper price fluctuations. The company has indicated healthy growth in the VRF and packaged air-conditioning markets; however, concerns on managing foreign exchange fluctuations continue to linger. Further, management expects OPM to contract by 3-5% on a yoy basis until 1QFY2013. Valuations fair: The stock is currently trading at 19.6x and 10.2x its FY2012E and FY2013E EPS, respectively. We expect a weak outlook for the company until 1QFY2013. Hence, we maintain our Neutral view on the stock.
372
January 2012
PROFIT & LOSS

BALANCE SHEET
Y/E MARCH (` CR) ` SOURCES OF FUNDS EQUITY SHARE CAPITAL RESERVES& SURPLUS SHAREHOLDERS FUNDS TOTAL LOANS DEFERRED TAX LIABILITY (NET) TOTAL LIABILITIES APPLICATION OF FUNDS GROSS BLOCK LESS: ACC. DEPRECIATION NET BLOCK CAPITAL WORK-IN-PROGRESS INVESTMENTS CURRENT ASSETS CURRENT LIABILITIES NET CURRENT ASSETS MIS. EXP. NOT WRITTEN OFF TOTAL ASSETS 351 180 171 28 4 1,393 1,097 296 499 406 212 194 28 27 1,957 1,252 705 1 955 466 248 217 33 27 2,005 1,248 757 1,034 526 290 236 37 27 2,252 1,530 722 1,021 18 474 492 9 (1) 499 18 493 511 445 (1) 955 18 572 590 445 (1) 1,034 18 659 677 345 (1) 1,021 FY2010 FY2011 FY2012E FY2013E
% CHG
0.9
2,250 275
17.9
2,722 254
11.0
3,141 163
11.0
3,431 236
(% OF NET SALES)
10.9
35 8 45
8.5
32 26 34
4.9
37 36 34
6.4
41 28 34
(% OF PBT)
16.3
277 277 65
14.6
231 231 73
27.1
125 20 105 26
16.8
201 201 50
(% OF PBT)
23.5
211 211 211
31.6
158 158 158
25.0
79 79 79
25.0
151 151 151
% CHG
12.7
(25.4)
(50.2)
91.8
CASH FLOW STATEMENT

Y/E MARCH (` CR) ` PROFIT BEFORE TAX DEPRECIATION (INC.)/ DEC. IN WORKING CAPITAL LESS: OTHER INCOME DIRECT TAXES PAID CASH FLOW FROM OPERATIONS (INC.)/ DEC. IN FIXED ASSETS (INC.)/ DEC. IN INVESTMENTS OTHER INCOME CASH FLOW FROM INVESTING ISSUE OF EQUITY INC./(DEC.) IN LOANS DIVIDEND PAID (INCL. TAX) OTHERS CASH FLOW FROM FINANCING INC./(DEC.) IN CASH OPENING CASH BALANCES CLOSING CASH BALANCES
KEY RATIOS
FY2011 231 32 (370) 34 73 (214) (55) (23) 34 (44) 436 74 (65) 297 39 13 52 FY2012E 105 37 (101) 34 26 (20) (64) 34 (30) 1 1 (50) 52 3 (163) 41 3 43 FY2013E 201 41 76 34 50 234 (64) 34 (30) (100) 63 Y/E MARCH VALUATION RATIOS P/E (ON FDEPS) P/CEPS P/BV EV/SALES 7.3 6.3 3.1 0.6 5.6 9.8 8.1 3.0 0.5 6.1 19.6 13.4 2.6 0.5 9.5 10.2 8.0 2.3 0.4 6.6 FY2010 FY2011 FY2012E FY2013E
FY2010 277 35 (114) 45 65 87 (22) 0 45 24 (15) 84 (4) (103) 8 6 13
23.5 23.5 27.4 8.0 54.7
17.6 17.6 21.2 7.0 56.8
8.7 8.7 12.8 65.6
16.8 16.8 21.4 6.0 75.3
53.8 58.7 49.3
30.6 33.4 31.5
12.7 13.5 14.3
18.9 20.1 23.8
34 92 134
41 89 143
47 91 134
46 87 132
January 2012
373
Mid-Cap
CRISIL
Company Background
CRISIL is India's largest credit rating agency, with a market share of around 60%, and one of the biggest research houses in India. With the recent acquisition of Pipal Research Corp. (Pipal), robust credit demand and strong infrastructure spend, the company has witnessed strong growth across all its segments. The company has also recently announced buyback of shares, which is the second time in a span of one year. The buyback will be carried out with a maximum price of `1,000/share and up to an aggregate amount of `80cr.
Structural Snapshot
Growth opportunity: CRISIL has been growing at ~2x India's credit growth since CY2005. The company is expected to greatly benefit from strong credit growth in India. We believe credit demand will continue to grow at a faster rate than India's nominal GDP, as financial depth continues to increase and we expect credit demand to witness a 17% CAGR over CY2010-14. Competitive position: Commands a premium position over other players due to first-mover advantage and a strong parent group (Standard and Poor's). Nature of business: High RoE business as it requires skilled workforce; High entry barriers for new players.
STOCK RETURNS (%) CRISIL BSE MIDCAP Sensex 3M 5.7 1Y 55.3 3Y 58.1 23.0 21.3 5Y (1.4) 3.3 10Y 17.3 29.6 44.1
(8.5) (20.9) (2.6) (12.3)
FINANCIAL PERFORMANCE OVERVIEW (%) SALES GROWTH* PAT GROWTH* OPM# ROE# 3M 38.3 (20.2) 38.1 1Y 17.5 (0.2) 34.5 49.6 3Y 16.0 34.9 35.5 44.9 5Y 10Y 35.1 33.9 53.0 35.8 32.7 36.5 41.8 30.2

Acquisition of Pipal to boost research revenue: Pipal is a strong player providing offshore research services to the corporate sector, while CRISIL's Irevna is a leading offshore research provider to the financial sector. The synergy between the two firms will help CRISIL to service its clients better and further expand its client base, resulting in strong growth going ahead. Post the acquisition, with the combined strength of the two firms, we expect a 22% CAGR in the research segment's revenue over CY2010-12. Asset-light business model: We expect CRISIL to post a 25% CAGR in its overall revenue over CY2010-12 and continue to maintain its leadership position. CRISIL benefits from its asset-light business model, which is high on intellectual assets (employee cost-to-sales is around 40%). Further, the company is debt free and has 50% plus RoE. Additionally, CRISIL enjoys a strong parentage. Valuations Expensive: The stock is currently trading at 26.4x CY2012 earnings (as against its historical median of 22x one-year forward EPS). We remain Neutral on the stock .
374
January 2012
PROFIT & LOSS

Y/E DEC (` CR) ` NET SALES CY2009 537 CY010 631 CY2011E 819 CY2012E 990
BALANCE SHEET
Y/E DEC (` CR) ` SOURCES OF FUNDS EQUITY SHARE CAPITAL RESERVES& SURPLUS SHAREHOLDERS FUNDS TOTAL LOANS DEFERRED TAX LIABILITY TOTAL LIABILITIES APPLICATION OF FUNDS GROSS BLOCK 184 64 120 64 118 323 200 122 10 434 310 85 225 0 26 343 214 129 14 394 320 112 208 20 398 233 166 14 408 326 140 186 20 542 275 267 14 488 7.2 427 434 434 7.1 387 394 394 7.1 401 408 408 7.1 481 488 488 CY2009 CY010 CY2011E CY2012E
% CHG
4.4
338 199
17.5
413 218
29.7
540 278
21.0
651 340
(% OF NET SALES)
DEPRECIATION& AMORTISATION INTEREST & OTHER CHARGES ADJ.OTHER INCOME
37.1
15 23
34.5
21 68
34.0
27 20
34.3
28 20
(% OF PBT)
11.1
207 207 47
25.6
264 264 59
7.2
271 271 62
6.0
332 LESS: ACC. DEPRECIATION 332 86 NET BLOCK CAPITAL WORK-IN-PROGRESS INVESTMENTS CURRENT ASSETS CURRENT LIABILITIES NET CURRENT ASSETS DEFERRED TAX ASSETS (NET) TOTAL ASSETS
(% OF PBT)
PAT (REPORTED) PAT AFTER MI (REPORTED) EXTRAORDINARY INCOME POST TAX ADJ. PAT
22.5
161 161 161
22.2
205 205 45 160
23.0
209 209 209
26.0
246 246 246
% CHG
14.4
(0.2)
29.9
17.8
CASH FLOW STATEMENT

Y/E DEC (` CR) ` PROFIT BEFORE TAX DEPRECIATION CHANGE IN WORKING CAPITAL LESS: OTHER INCOME DIRECT TAXES PAID CASH FLOW FROM OPERATIONS INC./ (DEC.) IN FIXED ASSETS INC./ (DEC.) IN INVESTMENTS CY2009 207 15 16 23 47 169 (54) 1 CY010 267 21 (14) 70 59 145 (62) 91 11 70 111 (79) (168) (3) (250) 6 158 163 CY2011E 271 27 (24) 20 62 192 (10) 6 (5) 20 11 (71) (124) (195) 7 161 169 CY2012E 332 28 9 20 86 263 (6) (6) 20 8 (165) (165) 105 169 274
KEY RATIOS
Y/E DEC VALUATION RATIOS P/E (ON FDEPS) P/CEPS P/BV EV/SALES EV/EBITDA ` PER SHARE DATA (`) EPS (BASIC) EPS (FULLY DILUTED) CASH EPS DPS BOOK VALUE RETURNS (%) ROCE (PRE-TAX) ANGEL ROIC (PRE-TAX) 46.6 183.6 40.6 47.4 130.2 49.6 62.7 118.0 52.0 69.7 151.0 54.9 22.3 22.3 24.3 10.0 60.0 29.0 29.0 31.9 20.0 55.6 29.4 29.4 33.2 15.0 57.5 34.7 34.7 38.6 20.0 68.8 41.1 37.6 15.2 11.8 31.7 31.6 28.6 16.4 10.0 29.0 31.1 27.5 15.9 7.7 22.7 26.4 23.7 13.3 6.3 18.3 CY2009 CY010 CY2011E CY2012E
INC./ (DEC.) IN LOANS AND ADVANCES (9) OTHER INCOME CASH FLOW FROM INVESTING ISSUE/(BUY BACK) OF EQUITY DIVIDEND PAID (INCL. TAX) OTHERS CASH FLOW FROM FINANCING INC./(DEC.) IN CASH OPENING CASH BALANCES CLOSING CASH BALANCES
23 (40) (85) (16) (101) 28 129 158
ROE TURNOVER RATIOS (X) RECEIVABLES (DAYS) PAYABLES (DAYS) WORKING CAPITAL CYCLE
58 122 (21)
58 120 (19)
58 100 (8)
61 93 (2)
January 2012
375
Mid-Cap
Finolex Cables
Company Background
CMP/TP/Upside: `34 / `51 / 51%
Finolex Cables (Finolex) is the second largest power and telecom cable manufacturer in India. The company has manufacturing facilities in Goa, Pune and Roorkee. Finolex specializes in PVC insulated cables, making its own compounds from PVC resins. The company's business operations are carried out through four broad divisions - electrical cables, communication cables, copper rods and others. The electrical cables division is the company's largest division. Recently, Finolex also entered the city distribution cable segment, with the commissioning of its high tension (HT) power cables manufacturing facility near Pune.
STOCK RETURNS (%) BSE MIDCAP SENSEX 3M 1Y 3Y 23.0 21.3 5Y (1.4) 3.3 10Y 1.7 17.3 FINOLEX CABLES (10.6) (31.7) (8.5) (20.9) (2.6) (12.3) 12.0 (19.7)
Structural Snapshot
Growth opportunity: Unorganized players account for a market share of ~50% in the cables industry in India. There is a growing inclination among consumers to use cables with a recognized brand name, as the cost of cables is estimated to be only ~2.5% of a building's total construction cost. Also, greater urban development requirements and needs for aesthetics mean that in future there would be increased usage of underground cables. These cables have to necessarily be coated by a layer of insulation. Finolex mainly manufactures PVC insulated cables; hence, the company is suitably placed to exploit this opportunity going forward. Competitive position: The company has low flexibility to pass on the increase in raw-material prices as the sector faces overcapacity. Nature of business: Commodity business; Low entry barriers for new players.
FINANCIAL PERFORMANCE OVERVIEW (%) SALES GROWTH* PAT GROWTH* OPM# ROE# 3M 1.7 4.2 8.0 1Y 25.8 (9.3) 8.4 12.1 3Y 13.7 (0.8) 9.4 5.0 5Y 11.5 10.1 8.2 10Y 2.2 11.8 8.2 22.2 14.5

LT and HT cables segments to drive growth: Finolex is poised to register moderate growth over the next few years, owing to growth in the existing low lension (LT) cables segment and entry into the HT and extra high voltage (EHV) cables verticals. In the LT cables segment, we expect organized players to gradually gain market share as their distribution reach expands and customers increasingly demand high-quality and branded wires. Entry into the HT cables segment gives accessibility to the generation and distribution segment, where the market opportunity is estimated at `37,000cr over the next 10 years. Tax benefits from the Roorkee plant to help in the company's turnaround: Finolex has shifted a major chunk of production to its Roorkee plant, where the company would have to pay low excise duty and would avail income tax benefits. Owing to this, we expect excise duty and tax rates for the company to remain low at 12% and 22%, respectively, in FY2013E. The company has further increased the capacity of this plant by 50%. Proximity to the growing north Indian markets and tax benefits availed by this plant are expected to boost the company's turnaround. Valuations attractive: At the CMP, the stock is trading at 4.0x its FY2013E EPS. The company holds a 32.4% share in Finolex Industries, which at the current market value works out to `17/share. We maintain our Buy recommendation on the stock with a target price of ` 51.
376
January 2012
PROFIT & LOSS

BALANCE SHEET
Y/E MARCH (` CR) ` SOURCES OF FUNDS EQUITY SHARE CAPITAL RESERVES& SURPLUS SHAREHOLDERS FUNDS TOTAL LOANS 31 613 643 275 32 950 31 687 717 260 31 1,009 31 753 784 200 31 1,015 31 859 889 130 31 1,050 FY2010 FY2011 FY2012E FY2013E
% CHG
20.7
1,422 197
25.8
1,864 172
2.2
1,914 167
12.5
2,141 200
(% OF NET SALES)
12.2
37 19 24
8.4
39 17 26
8.0
40 15 30
8.5
42 11 32 DEFERRED TAX LIABILITY TOTAL LIABILITIES APPLICATION OF FUNDS GROSS BLOCK LESS: ACC. DEPRECIATION NET BLOCK CAPITAL WORK-IN-PROGRESS INVESTMENTS CURRENT ASSETS 802 384 419 29 280 415 193 222 950 839 422 417 17 245 536 207 329 1,009 860 462 398 17 255 559 215 345 1,015 903 504 400 18 255 623 246 378 1,050
(% OF PBT)
14.6
165 76 89 32
18.3
142 34 107 20
21.3
143 34 108 24
17.7
179 12 167 37
(% OF PBT)
35.4
58 58 134
19.0
87 87 121
22.0
84 84 119
22.0
130 130 142
% CHG
63.8
(9.3)
(2.0)
19.5
CASH FLOW STATEMENT

Y/E MARCH PROFIT BEFORE TAX DEPRECIATION (INC.)/ DEC. IN WORKING CAPITAL LESS: OTHER INCOME DIRECT TAXES PAID CASH FLOW FROM OPERATIONS (INC.)/ DEC. IN FIXED ASSETS (INC.)/ DEC. IN INVESTMENTS (INC.)/ DEC. IN LOANS AND ADVANCES OTHER INCOME CASH FLOW FROM INVESTING INC./(DEC.) IN LOANS DIVIDEND PAID (INCL. TAX) OTHERS CASH FLOW FROM FINANCING INC./(DEC.) IN CASH OPENING CASH BALANCES CLOSING CASH BALANCES
KEY RATIOS
FY2011 107 39 (106) 26 20 (7) (25) 35 (19) 26 18 (15) 13 1 (27) (16) 37 21 FY2012E 108 40 (11) 30 24 82 (21) (10) 30 (1) (60) 18 7 (71) 10 21 32 FY2013E 167 42 (30) 32 37 110 (44) (12) 32 (25) (70) 25 8 (87) (1) 32 30 Y/E MARCH VALUATION RATIOS P/E (ON FDEPS) P/CEPS P/BV EV/SALES 9.0 5.4 0.8 0.3 2.4 6.0 4.1 0.7 0.3 3.0 6.1 4.2 0.7 0.2 2.6 4.0 3.0 0.6 0.2 1.8 FY2010 FY2011 FY2012E FY2013E
FY2010 89 37 (81) 24 32 (10) (29) 34 1 24 30 (21) 11 21 (11) 9 28 37
3.8 3.8 6.2 0.6 42.0
5.7 5.7 8.2 0.7 46.9
5.5 5.5 8.1 1.0 51.3
8.5 8.5 11.2 1.4 58.1
17.1 18.2 9.3
13.6 16.2 12.8
12.6 13.9 11.2
15.3 16.9 15.6
41 15 44
45 18 36
50 23 36
48 22 35
January 2012
377
Mid-Cap
Goodyear India
Company Background
TOP PICK
CMP/TP/Upside: `305 / `401 / 31%
Goodyear India (GIL) is a subsidiary of Goodyear Tire and Rubber Company, U.S., which holds a 74% stake in the company. GIL is the sixth largest tyre manufacturing company in India, with an overall domestic market share of 5.1%. The company has a manufacturing facility in Ballabgarh, which produces farm tyres, wherein the company is a dominant player. GIL also trades in radial passenger and off-the-road bias tyres manufactured by Goodyear South Asia Tyres Pvt. Ltd. (GSATPL), Aurangabad, pursuant to an offtake agreement.
Structural Snapshot
Growth opportunity: Growing levels of farm mechanization have led to the Indian tractor industry's volumes witnessing a strong 26% CAGR over FY200911, leading to continued strong replacement demand for tractor tyre manufacturers like GIL. The company also caters to the passenger radial tyre segment, which contributes ~23% to its total revenue. As per ICRA's estimates, passenger car penetration in India is at only 13 cars per 1,000 people compared to other emerging markets like Brazil (160), China (45) and Indonesia (42) this presents a significant growth opportunity for the company. Competitive position: GIL is the sixth largest tyre manufacturing company in India with a market share of 5.1%. The company is a leader in the tractor tyre segment, with a market share of 22.3% for tractor front tyres and 35.9% for tractor rear tyres. Nature of business: Cyclical and rate sensitive; Low entry barriers.
STOCK RETURNS (%) GOODYEAR BSE MIDCAP SENSEX 3M (2.1) 1Y 25.0 3Y 61.7 23.0 21.3 5Y (1.4) 3.3 10Y 17.3 11.7 25.1
(8.5) (20.9) (2.6) (12.3)
FINANCIAL PERFORMANCE OVERVIEW (%) SALES GROWTH* PAT GROWTH* OPM# ROE# 3M 15.8 (15.8) 7.1 1Y 27.6 2.3 8.7 30.8 3Y 13.4 23.5 8.9 27.9 5Y 13.5 52.7 8.5 29.0 10Y 10.0 6.0 17.4

Brand in commodity business: GIL caters to two major segments - tractor tyres and passenger vehicle tyres. The company is a market leader in the tractor tyre segment; while in the passenger vehicle tyre segment, GIL supplies to high-end car companies like Audi, BMW, Land Rover, Mitsubishi and Porsch, for which demand is inelastic as compared to other manufacturers or segments. GIL has a brand name in the commodity business, reporting a stupendous RoIC of 412.8% for CY2010 compared to less than 20% for its peers. Sale of Ballabgarh land - A trigger: In February 2011, GIL had announced to the BSE that it would be selling a piece of land located in Ballabgarh, Faridabad, after it obtains necessary approvals. This may give an upside trigger to the stock. Valuations attractive: GIL has cash reserves of `363cr for CY2013E; hence, we believe it may be a potential delisting candidate. Since the company is a cash-rich company, we have incorporated cash (at a 50% discount) in our valuations. The stock is currently trading at PE of 7.7x its CY2012E earnings, which is at a discount to its five-year median of 8.1x. We maintain our Buy recommendation on the stock with a target price of ` 401, based on target PE of 9x for CY2012E.
378
January 2012

Y/E DEC. (` CR) ` TOTAL OPERATING INCOME CY2009 1,016 CY2010 1,297 CY2011E 1,562 CY2012E 1,835
BALANCE SHEET
Y/E DEC. (` CR) ` SOURCES OF FUNDS EQUITY SHARE CAPITAL RESERVES & SURPLUS SHAREHOLDERS FUNDS TOTAL LOANS DEFFERED TAX LIABILITY (NET) TOTAL LIABILITIES APPLICATION OF FUNDS GROSS BLOCK LESS: ACC. DEPRECIATION NET BLOCK CAPITAL WORK-IN-PROGRESS INVESTMENTS CURRENT ASSETS CURRENT LIABILITIES NET CURRENT ASSETS MISC EXP NOT WRITTEN OFF TOTAL ASSETS 277 157 120 36 325 257 69 226 304 166 139 59 395 312 83 281 365 185 180 30 518 385 133 342 402 207 194 15 651 447 203 413 23 192 215 11 226 23 248 271 10 281 23 294 317 15 10 342 23 364 387 15 10 413 CY2009 CY2010 CY2011E CY2012E
% CHG
10.5
893 123
27.6
1,184 113
20.5
1,451 110
17.5
1,685 150
(% OF NET SALES)
12.1
13 4 107 5
8.7
15 4 94 17
7.1
19 5 86 12
8.2
22 5 123 14
(% OF NET SALES)
PBT (REPORTED) TAX
0.5
111 38
1.3
111 36
0.8
98 31
0.8
137 45
(% OF PBT)
34.4
73 73 (0) 73
32.6
75 75 0 75
32.0
67 67 67
33.0
92 92 92
% CHG
127.0
2.3
(10.9)
37.6
CASH FLOW STATEMENT

KEY RATIOS
CY2010 111 15 45 10 (36) 146 (50) (15) (65) (19) (3) (21) 59 159 218 CY2011E 98 19 4 (12) (31) 78 (31) 12 (19) 15 (20) (5) 54 218 272 CY2012E 137 22 21 (14) (45) EV/EBITDA 4.4 4.3 4.0 2.4 121 (22) 14 (8) (22) ROE 39.0 30.8 22.7 26.0 (22) 91 272 363 TURNOVER RATIOS (X) INVENTORY / SALES (DAYS) RECEIVABLES (DAYS) PAYABLES (DAYS) 19 35 105 17 27 96 23 34 97 23 34 97 PER SHARE DATA (`) ` EPS (BASIC) EPS (FULLY DILUTED) CASH EPS DPS BOOK VALUE RETURNS (%) ROCE (PRE-TAX) ANGEL ROIC (PRE-TAX) 53.8 149.2 37.6 412.8 28.9 356.4 33.9 338.5 31.7 31.7 37.2 7.0 93.1 32.4 32.4 39.1 7.0 117.4 28.9 28.9 37.3 7.5 137.5 39.8 39.8 49.3 8.0 168.0 Y/E DEC. VALUATION RATIO (X) P/E (ON FDEPS) P/CEPS P/BV EV/SALES 9.6 8.2 3.3 0.5 9.4 7.8 2.6 0.4 10.6 8.2 2.2 0.3 7.7 6.2 1.8 0.2 CY2009 CY2010 CY2011E CY2012E
CY2009 111 13 79 (20) (38) 145 (37) 15 (22) (16) (3) (19) 104 55 159
January 2012
379
Mid-Cap
RATING 52 WEEK HIGH / LOW MARKET CAP (` CR) ` LIQUIDITY BUY 102 / 66 1500 Low
Graphite
Company Background
CMP/TP/Upside: `77 / `102 / 33%
Graphite India Ltd. (GIL) is India's largest and the world's fifth largest manufacturer of graphite electrodes, which is a key input in steel production through the electric arc furnace (EAF) route. The company accounts for ~6.5% of global electrode capacity and has over 40 years of technical expertise in the industry. GIL's manufacturing units have currently reached almost full capacity utilization levels. GIL's new expansion plan at Durgapur is progressing as per schedule and is expected to be completed by FY2012-end. The company is well poised in the global graphite electrode industry through its quality, scale of operations and low-cost production base.
Structural Snapshot
STOCK RETURNS (%) GRAPHITE BSE MIDCAP SENSEX 3M 1Y 3Y 38.7 23.0 21.3 5Y (1.4) 3.3 10Y 17.3 1.7 (24.3) (8.5) (20.9) (2.6) (12.3) 5.8 34.2
Growth opportunity: The World Steel Association expects global steel consumption to grow on a yoy basis by 6.5% in CY2011 and 5.4% in CY2012. These forecasts assume that developing economies would continue to drive global growth and the impact of European sovereign debt crisis on Asian demand would be contained. Recovery of steel demand in developed countries will be relatively modest compared to the more robust growth across Asia. India's steel demand is projected to grow on a yoy basis by 4.3% in CY2011 to 67.7mt and 7.9% to 73mt in CY2012. This coupled with higher contribution of EAF share to total crude steel production would directly benefit the graphite electrode industry. Competitive position: GIL has a low-cost model on the back of lower employee cost. Thus, the company enjoys higher margin compared to competitors. The company has no pricing power over its products. Nature of business: Commodity business; Strong entry barriers for new players.
FINANCIAL PERFORMANCE OVERVIEW (%) SALES GROWTH* PAT GROWTH* OPM# ROE# 3M 42.5 16.4 1Y 7.2 21.4 13.5 3Y 2.7 39.0 15.1 5Y 13.4 (1.3) 22.0 10Y 27.4 15.3 18.2
(32.4) (19.5) (14.9)
42.2 35.6

GIL set to ride on the industry's rebound: The graphite electrodes industry is expected to grow faster, compared to EAF steel production over the next few years, as destocking of graphite electrodes inventory at the steel manufacturers' end is expected to reverse. GIL, with capacity expansion from 78,000mt/year to 98,000mt/year, to be completed by FY2012E, is well poised to reap the benefits of this growth. We expect GIL's market share to increase to 9.7% by FY2013E and its top line to witness a 19.3% CAGR over FY2011-13E. Strong labor cost advantages: GIL has strong labor cost advantages compared to its global peers, as other companies have their plants in countries where labor costs are significantly higher compared to India. SGL Carbon SE, the largest global player, has plants located mainly across Europe and North America, while GrafTech Ltd., the second largest global player, has plants in France, Spain, South Africa, Brazil and Mexico. Valuations attractive: The stock is trading at attractive valuations of 0.9x and 0.8x its FY2012E and FY2013E BV, respectively. We have valued the stock on its five-year median of 1.1x one-year forward BV to arrive at a target price of `102. We countinue to maintain our Buy rating on the stock.
ANGEL ESTIMATES PARTICULARS PAT GROWTH (%) ROE (%) P/BV P/E FY2012E (1.3) 11.9 0.9 8.0 FY2013E 40.6 15.3 0.8 5.7
380
January 2012
PROFIT & LOSS

BALANCE SHEET
Y/E MARCH (` CR) ` SOURCES OF FUNDS EQUITY SHARE CAPITAL RESERVES& SURPLUS SHAREHOLDERS FUNDS TOTAL LOANS DEFERRED TAX LIABILITY (NET) TOTAL LIABILITIES APPLICATION OF FUNDS GROSS BLOCK LESS: ACC. DEPRECIATION NET BLOCK CAPITAL WORK-IN-PROGRESS INVESTMENTS CURRENT ASSETS CURRENT LIABILITIES NET CURRENT ASSETS TOTAL ASSETS 1,010 485 524 20 187 1,230 281 949 1,681 1,047 534 513 103 225 1,448 364 1,084 1,924 1,247 588 658 232 225 1,709 425 1,284 2,400 1,467 652 814 15 225 2,012 483 1,529 2,583 34 1,249 1,283 324 74 1,681 39 1,483 1,522 341 62 1,924 39 1,589 1,629 701 71 2,400 39 1,772 1,811 701 71 2,583 FY2010 FY2011 FY2012E FY2013E
% CHG
(10.1)
950 397
7.2
1,136 308
19.2
1,396 324
19.3
1,590 463
(% OF NET SALES)
29.5
50 14 32
21.4
49 8 34
18.9
54 26 34
22.6
64 42 34
(% OF PBT)
RECURRING PBT
8.8
365
12.0
286
12.4
279
8.8
392
% CHG
17.9
1 364 129
(21.4)
13 274 85
(2.7)
279 92
40.6
392 129
(% OF PBT)
PAT (REPORTED) PRIOR PERIOD ITEMS PAT AFTER MI (REPORTED) ADJ. PAT
35.5
235 235 235
30.9
189 189 189
33.0
187 187 187
33.0
262 262 262
% CHG
0.3
(19.5)
(1.3)
40.6
CASH FLOW STATEMENT

Y/E MARCH PROFIT BEFORE TAX DEPRECIATION (INC.)/ DEC. IN WORKING CAPITAL LESS: OTHER INCOME DIRECT TAXES PAID CASH FLOW FROM OPERATIONS (INC.)/ DEC. IN FIXED ASSETS (INC.)/ DEC. IN INVESTMENTS (INC.)/ DEC. IN LOANS AND ADVANCES OTHER INCOME CASH FLOW FROM INVESTING ISSUE OF EQUITY INC./(DEC.) IN LOANS DIVIDEND PAID (INCL. TAX) OTHERS CASH FLOW FROM FINANCING INC./(DEC.) IN CASH OPENING CASH BALANCES CLOSING CASH BALANCES
KEY RATIOS
FY2011 274 49 (9) 34 85 194 (119) (38) 34 (123) 129 17 80 (169) (104) (32) 80 48 FY2012E 279 54 (170) 34 92 36 (330) 34 (295) 360 80 (29) 251 (8) 48 40 FY2013E 392 64 (209) 34 129 83 (2) CASH EPS 16.6 3.5 58.5 12.2 3.5 77.9 12.3 3.5 83.3 16.7 3.5 92.7 34 37 80 (58) (138) (18) 40 22 DPS BOOK VALUE RETURNS (%) ROCE (PRE-TAX) ANGEL ROIC ROE TURNOVER RATIOS (X) INVENTORY / SALES (DAYS) RECEIVABLES (DAYS) PAYABLES (DAYS) 193 83 79 207 80 71 211 79 72 210 79 75 20.5 24.9 19.6 14.4 16.8 13.5 12.5 14.2 11.9 16.0 17.2 15.3 Y/E MARCH VALUATION RATIOS P/E (ON FDEPS) P/CEPS P/BV EV/SALES EV/EBITDA ` PER SHARE DATA (`) EPS (BASIC) EPS (FULLY DILUTED) 13.7 10.7 9.7 9.7 9.6 9.6 13.4 13.4 7.2 4.6 1.0 1.0 3.5 7.9 6.3 1.0 1.3 6.3 8.0 6.2 0.9 1.1 6.0 5.7 4.6 0.8 0.7 3.2 FY2010 FY2011 FY2012E FY2013E
FY2010 364 50 (114) 32 129 139 (21) (86) 32 (76) 3 (204) 70 111 (160) (97) 177 80
January 2012
381
Mid-Cap
Greenply
Company Background
TOP PICK
CMP/TP/Upside: `181 / `284 / 58%
Greenply Industries Ltd. (Greenply) is India's largest interior infrastructure company. The company operates in the `13,000cr wood panels industry in India, with a 25% organized market share in plywood and 15% share in laminates. The company has a strong retail network of 32 outlets, a distribution network of over 15,000 dealers and presence in over 300 cities across India. The company is also present in 65 countries, through its flagship decorative laminate brand Greenlam. Recently, the company has significantly increased its capacity in the plywood and laminate segments and has ventured into the MDF segment, which is expected to be the company's next growth driver.
STOCK RETURNS (%) GREENPLY BSE MIDCAP SENSEX 3M (14.4) 1Y (5.1) 3Y 57.3 23.0 21.3 5Y (1.4) 3.3 10Y 17.3 13.3 23.7
Structural Snapshot
Growth opportunity: The total size of the Indian interior infrastructure industry is around `13,000cr. The industry is estimated to grow by 5-7% annually. The industry comprises - plywood (`7,800cr, 20% organized); laminates (`3,000cr, 50% organized); and MDF and particle boards (`2,200cr, of which 90%+ is imported). The industry is witnessing a shift in consumer preference towards branded products and, thus, companies like Greenply have witnessed far superior growth as compared to the industry's growth. Competitive position: Greenplys products command a premium over other players due to the companys strong brand and after-sales services. Nature of business: High entry barriers for new players due to strict control on the issue of new licenses.
(8.5) (20.9) (2.6) (12.3)
FINANCIAL PERFORMANCE OVERVIEW (%) SALES GROWTH* PAT GROWTH* OPM# ROE# 3M 43.1 8.9 1Y 39.6 9.0 8.4 3Y 31.0 10.5 17.7 5Y 10Y 36.4 25.9 12.2 (14.6) 11.6 21.8 10.8 19.1
537.4 (49.4) (13.5)

Banking on MDF: Greenply has forayed into the lucrative, high-growth MDF market, with the largest MDF plant in India (1,80,000m 3/year capacity). The MDF opportunity is especially huge as it constitutes 20% of wood panel consumption in India, while plywood constitutes 80% - the reverse holds true globally. The MDF segment is expected to achieve 45% utilization in FY2012, which would lend a boost to the company's EBITDA margin and result in higher PAT. Capacity expansion and higher utilization to boost top line: Greenply's laminate capacity increased by nearly two-folds in FY2010 and is expected to achieve 100%+ utilization in FY2012. The company has further expanded its plywood capacity by 3.75mn sq. ft., which is expected to contribute ~`45cr to its FY2012 top line. Valuations attractive: The stock is currently trading 5.1x FY2013E earnings (as against its historical range of 3.3-9.3x one-year forward EPS). We maintain our Buy view on the stock with a target price of ` 284, valuing the stock at 8x FY2013E earnings.
382
January 2012
PROFIT & LOSS

BALANCE SHEET
Y/E MARCH (` CR) ` SOURCES OF FUNDS EQUITY SHARE CAPITAL RESERVES& SURPLUS SHAREHOLDERS FUNDS TOTAL LOANS DEFERRED TAX LIABILITY TOTAL LIABILITIES APPLICATION OF FUNDS GROSS BLOCK 632 92 539 13 3 4 426 288 137 1 699 724 124 601 11 3 9 530 286 244 1 868 775 171 605 3 9 636 343 294 911 810 219 591 3 9 692 373 319 922 11 261 272 407 19 699 12 311 323 520 25 868 12 361 373 510 28 911 12 442 454 440 28 922 FY2010 FY2011 FY2012E FY2013E
% CHG
20.2
771 101
39.6
1,107 110
17.2
1,264 162
10.4
1,378 197
(% OF NET SALES)
11.6
(22) (24) 2
9.0
(41) (38) 0
11.4
(47) (48) 0
12.5
(49) (41) 0
(% OF PBT)
RECURRING PBT
0.0
57
0.0
31
0.0
68
0.0
107 LESS: ACC. DEPRECIATION NET BLOCK CAPITAL WORK-IN-PROGRESS GOODWILL INVESTMENTS CURRENT ASSETS CURRENT LIABILITIES NET CURRENT ASSETS MIS. EXP. NOT WRITTEN OFF TOTAL ASSETS
% CHG
28.5
57 7
(45.8)
31 6
118.7
68 14
58.9
107 21
(% OF PBT)
13.0
50 50 50
19.5
25 25 25
20.0
54 54 54
20.0
86 86 86
% CHG
32.9
(49.4)
115.2
58.9
CASH FLOW STATEMENT

Y/E MARCH PROFIT BEFORE TAX DEPRECIATION CHANGE IN WORKING CAPITAL LESS: OTHER INCOME DIRECT TAXES PAID CASH FLOW FROM OPERATIONS (INC.)/ DEC. IN FIXED ASSETS (INC.)/ DEC. IN INVESTMENTS (INC.)/ DEC. IN LOANS AND ADVANCES OTHER INCOME CASH FLOW FROM INVESTING ISSUE OF EQUITY INC./(DEC.) IN LOANS DIVIDEND PAID (INCL. TAX) OTHERS CASH FLOW FROM FINANCING INC./(DEC.) IN CASH OPENING CASH BALANCES CLOSING CASH BALANCES
KEY RATIOS
FY2011 31 41 (94) 0 6 (28) (90) (5) (18) 0 (113) 29 112 (4) (2) 135 (6) 19 13 FY2012E 68 47 (57) 0 14 43 (40) 0 (40) (10) (4) 13 (1) 2 13 15 FY2013E 107 49 (23) 0 21 111 (35) CASH EPS 32.4 1.5 123.3 27.4 1.5 133.9 41.7 1.5 154.5 55.8 1.5 188.3 0 (35) (70) (4) (4) (78) (1) 15 14 DPS BOOK VALUE RETURNS (%) ROCE (PRE-TAX) ANGEL ROIC (PRE-TAX) ROE TURNOVER RATIOS (X) INVENTORY RECEIVABLES (DAYS) PAYABLES (DAYS) 77 60 97 64 55 83 66 61 77 70 64 79 13.7 15.0 21.9 8.8 9.1 8.4 13.0 13.3 15.5 16.1 16.4 20.8 Y/E MARCH VALUATION RATIOS P/E (ON FDEPS) P/CEPS P/BV EV/SALES EV/EBITDA ` PER SHARE DATA (`) EPS (BASIC) EPS (FULLY DILUTED) 22.4 20.5 10.4 10.4 22.4 22.4 35.6 35.6 8.8 5.6 1.5 0.9 7.8 17.4 6.6 1.4 0.8 8.6 8.1 4.3 1.2 0.7 5.7 5.1 3.2 1.0 0.5 4.4 FY2010 FY2011 FY2012E FY2013E
FY2010 57 22 49 2 7 118 (324) (2) 13 2 (311) 46 149 (4) 4 195 3 16 19
January 2012
383
Mid-Cap
RATING 52 WEEK HIGH / LOW MARKET CAP (` CR) ` LIQUIDITY BUY 2,930 / 1,620 1,775 LOW
HAIL
Company Background
CMP/TP/Upside: `2,008 / `2,510 / 25%
Honeywell Automation India Ltd. (HAIL) is an 81% subsidiary of Honeywell International, which is a diversified technology and manufacturing leader. HAIL is a leading provider of integrated automation and software solutions. The company operates through five business units, namely process solutions; building solutions; sensing and control; environmental and combustion control; and exports. HAIL imports its products (import cost is ~27% of its net sales) from its parent; the products are assembled in local markets to form a part of its engineering contracts.
Structural Snapshot
STOCK RETURNS (%) HAIL BSE MIDCAP SENSEX 3M (16.9) 1Y (17.2) 3Y 36.6 23.0 21.3 5Y (1.4) 3.3 10Y 17.3 2.7 31.0
Growth opportunity: The automation industry is bound to register sustainable growth owing to a) increased dependence of the process industry on instrumentation and automation and b) higher infrastructure spending across all sectors. For HAIL in particular, increased outsourcing contracts won by its parent would also add to its top-line growth. Assuming industry GDP (at factor cost) to grow at CAGR of 12.2% over CY2011-13E, domestic sales (~63% of net sales) growth is expected to be at 5.2%, 5.5% and 10.6% for CY2011E, CY2012E and CY2013E, respectively. The process industry (which constitutes ~65% of HAILs total revenue) has been witnessing annual growth rate of 20-25% since 2008, is expected to grow in-line with India's GDP growth. The industry is currently undergoing automation, to principally bring down costs and improve product quality, thereby increasing productivity. Competitive position: HAIL caters to diverse segments with differing competition levels; however, due to its technological edge, the company is one of the preferable vendors among peers. Nature of business: Cyclical.
(8.5) (20.9) (2.6) (12.3)
FINANCIAL PERFORMANCE OVERVIEW (%) SALES GROWTH* PAT GROWTH* OPM# ROE# 3M 13.7 6.5 1Y 15.3 10.5 21.9 3Y 16.1 17.3 12.6 25.0 5Y 22.4 24.8 12.5 10Y 18.1 18.5 11.7
(39.4) (20.8)
26.2 24.8

Client base in the diversified sector to minimize the downside: HAIL has its presence in diversified products, industries and geographies. The diverse client base of HAIL includes NTPC, Reliance Industries, Tata Steel, HCL and ITC in the domestic market, which provides fair growth visibility. HAIL also executes contracts won by its parent in the domestic as well as global market. India seen as a global engineering base and a sourcing hub: India offers cost-effective manufacturing capabilities, which can successfully meet Honeywell's global requirements. Consequently, Honeywell is looking forward to almost double its sourcing from India (partly from HAIL) over the next two years. Valuations attractive: HAIL is trading at attractive TTM PE of 17.9x compared to its peer average TTM PE of 26x and is at a significant discount of 35% to its five-year median PE. We recommend Buy on the stock with a target price of ` 2,510, based on target PE of 18x for CY2013E earnings.
BLOOMBERG CONSENSUS RECOMMENDATION BUY / HOLD / SELL 1 / 0 /1
384
January 2012

Y/E DEC. (` CR) ` TOTAL OPERATING INCOME CY2010 1,355 CY2011E 1,434 CY2012E 1,542 CY2013E 1,739
BALANCE SHEET
Y/E DEC. (` CR) ` SOURCES OF FUNDS EQUITY SHARE CAPITAL RESERVES & SURPLUS SHAREHOLDERS FUND TOTAL LOANS DEFERRED TAX LIABILITY (NET) TOTAL LIABILITIES APPLICATION OF FUNDS GROSS BLOCK LESS: ACC. DEPRECIATION NET BLOCK CAPITAL WORK-IN-PROGRESS INVESTMENTS CURRENT ASSETS CURRENT LIABILITIES NET CURRENT ASSETS MISC EXP. NOT WRITTEN OFF TOTAL ASSETS 147 71 75 1 818 391 426 502 169 87 82 1 907 413 494 578 194 104 90 1 1020 441 579 670 223 124 99 2 1178 494 684 785 9 525 533 (31) 502 9 604 613 (35) 578 9 697 705 (35) 670 9 811 820 (35) 785 CY2010 CY2011E CY2012E CY2013E
% CHG
15.3
1,212 143
5.8
1,306 128
7.6
1,397 146
12.7
1,565 174
(% OF NET SALES)
DEPRECIATION & AMORTISATION INTEREST RECURRING PBT OTHER INCOME
10.5
13 0 130 9
8.9
15 1 112 10
9.4
17 1 127 14
10.0
20 1 153 19
(% OF NET SALES)
PBT (REPORTED) TAX
0.7
139 34
0.7
122 34
0.9
141 40
1.1
172 49
(% OF PBT)
24.4
105 105 (1) 106
30.0
88 88 88
30.0
102 102 102
30.0
123 123 123
% CHG
(20.8)
(17.1)
15.3
21.4
CASH FLOW STATEMENT

Y/E DEC. (` CR) ` PROFIT BEFORE TAX DEPRECIATION CHANGE IN WORKING CAPITAL OTHERS DIRECT TAXES PAID CASH FLOW FROM OPERATIONS (INC)/ DEC IN FIXED ASSETS (INC)/DEC IN INVESTMENTS OTHERS CASH FLOW FROM INVESTING ISSUE OF EQUITY INC/(DEC) IN LOANS DIVIDEND PAID (INCL. TAX) OTHERS CASH FLOW FROM FINANCING INC/(DEC) IN CASH OPENING CASH BALANCE CLOSING CASH BALANCE
KEY RATIOS
CY2011E 122 15 (103) (10) (34) (10) (22) 6 (16) (9) (9) (35) 211 176 CY2012E 141 17 (27) (9) (40) 83 (25) 5 (21) (9) 4 (4) 58 176 234 CY2013E 172 20 (47) (14) (49) EV/EBITDA 10.9 12.5 10.6 8.5 83 (29) 6 (23) (9) 7 ROE 21.9 15.4 15.4 16.2 (2) 58 234 292 TURNOVER RATIOS (X) INVENTORY / SALES (DAYS) RECEIVABLES (DAYS) PAYABLES (DAYS) 48 87 118 65 88 115 65 88 115 65 88 115 PER SHARE DATA (`) ` EPS (BASIC) EPS (FULLY DILUTED) CASH EPS DPS BOOK VALUE RETURNS (%) ROCE (PRE-TAX) ANGEL ROIC (PRE-TAX) 24.4 40.4 19.5 28.1 19.1 29.5 19.6 31.4 120.3 120.3 134.8 10.0 603.3 99.7 99.7 116.8 10.0 692.9 114.9 114.9 134.7 10.0 797.8 139.4 139.4 162.2 10.0 927.3 Y/E DEC. VALUATION RATIO (X) P/E (ON FDEPS) P/CEPS P/BV EV/SALES 16.7 14.9 3.3 1.2 20.1 17.2 2.9 1.1 17.5 14.9 2.5 1.0 14.4 12.4 2.2 0.9 CY2010 CY2011E CY2012E CY2013E
CY2010 139 13 14 (86) (34) 46 9 61 70 0 (9) (2) (11) 105 106 211
January 2012
385
Mid-Cap
HEG
Company Background
CMP/TP/Upside: `184 / `213 / 16%
HEG is a leading manufacturer and exporter of graphite electrodes used in the EAF method of steel production. The company has the world's largest single-site plant of 80,000MT capacity for production of graphite electrodes. HEG is vertically integrated into power generation with a capacity of 77MW. The company has a diversified customer portfolio comprising POSCO, US Steel, Arcelor Mittal, Krupp Thyssen, Nucor, Usinor, SAIL, TISCO, Jindal and Hyundai.
Structural Snapshot
Growth opportunity: The graphite industry is highly consolidated with 75% capacity contributed by the top 10 major global players. Graphite electrode is a non-replaceable raw material used in steel production through the EAF route. Use of the EAF method for steel production has grown from 14% in CY1970 to 29% in CY2010 and is expected to rise to ~50% by CY2020; further, global demand for steel is expected to grow by 5.4% yoy (as per WSA) in CY2012. Hence, increased steel demand along with shift to the EAF method of production will drive the company's growth. Competitive position: HEG enjoys an advantage over global players due to its low-cost structure, since most of the top players are located in the high-cost regions of U.S., Europe and Japan. Nature of business: Cyclical and sensitive to exchange rate since the company has net exports of ~33% (as a percentage of net sales); Significant entry barriers for new players.
STOCK RETURNS (%) HEG BSE MIDCAP SENSEX 3M (11.6) 1Y (18.1) 3Y 16.8 23.0 21.3 5Y (1.4) 3.3 10Y 17.3 1.6 21.3
(8.5) (20.9) (2.6) (12.3)
FINANCIAL PERFORMANCE OVERVIEW (%) SALES GROWTH* PAT GROWTH* OPM# ROE# 3M 6.5 10.2 1Y (1.5) 20.1 14.1 3Y 5.6 (3.3) 25.0 21.4 5Y 16.3 10Y 8.8
(54.5) (34.9)
27.7 12.0 25.1 21.8 22.2 20.0

Profit to grow by 136.7% yoy in FY2013E: Capacity expansion from 66,000MT to 80,000MT, which was expected to be operational soon, would drive the company's volumes going forward. Further, HEG's realization is expected to increase by 17.7% yoy in FY2013E, subsequent to the 40-50% price hike by global players during 3QCY2011. These factors would lead to a 412bp yoy expansion in OPM from 13.2% in FY2012E to 17.3% in FY2013E, along with a 136.7% yoy increase in net profit from `48cr in FY2012E to `114cr in FY2013E. Value addition through investment in BEL: HEG has a 25.8% stake in Bhilwara Energy Ltd. (BEL), which operates in the power generation business with 270MW operational capacity. Based on IFC's investment in BEL for a 10.8% stake (`230cr) in 2010, HEG's implied value of its stake in BEL stands at ~`560cr. We have not incorporated the same in our valuations; however, it could provide a further upside to the stock. Valuations attractive: The stock is currently trading at P/B of 0.9x for FY2013E, which is at a 37% discount to its five-year historical median of 1.4x. We maintain our Buy recommendation on the stock with a target price of ` 213, based on a target P/B of 1.0x for FY2013E.
LATEST PROMOTER ACTION PARTICULARS DATE % STAKE INVOLVED 3.02 BUY BACK OF SHARES 11-NOV-11
386
January 2012

BALANCE SHEET
Y/E MARCH (` CR) ` SOURCES OF FUNDS EQUITY SHARE CAPITAL RESERVES & SURPLUS SHAREHOLDERS FUNDS TOTAL LOANS DEFFERED TAX LIABILITY (NET) TOTAL LIABILITIES APPLICATION OF FUNDS GROSS BLOCK LESS: ACC. DEPRECIATION NET BLOCK CAPITAL WORK-IN-PROGRESS INVESTMENTS CURRENT ASSETS CURRENT LIABILITIES NET CURRENT ASSETS MISC EXP NOT WRITTEN OFF TOTAL ASSETS 995 337 658 58 169 912 159 753 0 1,638 1,044 386 659 79 196 1,108 147 961 1,894 1,319 452 868 10 196 1,275 216 1,059 2,132 1,319 527 792 5 196 1,509 266 1,243 2,236 43 790 833 731 75 1,638 43 868 910 910 74 1,894 40 744 784 1,274 74 2,132 40 810 850 1,313 74 2,236 FY2010 FY2011 FY2012E FY2013E
% CHG
10.3
793 338
(1.5)
890 224
21.9
1,179 179
27.2
1,429 299
(% OF NET SALES)
29.9
51 59 227 15
20.1
57 37 130 38
13.2
66 65 48 16
17.3
75 90 133 19
(% OF NET SALES)
PBT (REPORTED) TAX
1.3
242 71
3.5
168 39
1.2
64 15
1.1
152 38
(% OF PBT)
PAT (REPORTED) SHARE OF EARNINGS OF ASSOCIATE LESS: MINORITY INTEREST (MI) PRIOR PERIOD ITEMS PAT AFTER MI (REPORTED) EXTRAORDINARY EXPENSE/(INC.) ADJ. PAT
29.4
171 14 185 (4) 189
23.3
129 (8) 121 (2) 123
24.0
48 48 48
25.0
114 114 114
% CHG
0.5
(34.9)
(60.7)
136.7
CASH FLOW STATEMENT

Y/E MARCH (` CR) ` PROFIT BEFORE TAX DEPRECIATION CHANGE IN WORKING CAPITAL OTHERS DIRECT TAXES PAID CASH FLOW FROM OPERATIONS (INC.)/DEC. IN FIXED ASSETS (INC.)/DEC. IN INVESTMENTS OTHERS CASH FLOW FROM INVESTING ISSUE OF EQUITY INC./(DEC.) IN LOANS DIVIDEND PAID (INCL. TAX) OTHERS CASH FLOW FROM FINANCING INC./(DEC.) IN CASH OPENING CASH BALANCES CLOSING CASH BALANCES
KEY RATIOS
FY2011 168 57 (201) 67 (39) 53 (70) (27) (46) (143) 0 180 (36) (46) 98 7 4 12 FY2012E 64 66 (105) (16) (15) (7) (206) 16 (191) (3) 364 (34) (138) 190 (8) 12 4 FY2013E 152 75 (177) (19) (38) EV/EBITDA 3.8 6.4 10.1 6.2 (7) 5 19 24 38 (35) (13) ROE 26.5 14.1 5.7 14.0 (10) (7) 6 11 TURNOVER RATIOS (X) INVENTORY / SALES (DAYS) RECEIVABLES (DAYS) PAYABLES (DAYS) 121 124 69 140 137 63 153 120 67 141 115 68 PER SHARE DATA (`) ` EPS (BASIC) EPS (FULLY DILUTED) CASH EPS DPS BOOK VALUE RETURNS (%) ROCE (PRE-TAX) ANGEL ROIC (PRE-TAX) 17.9 20.9 9.4 11.0 5.6 6.4 10.2 11.3 44.3 44.3 56.4 10.1 195.4 29.7 29.7 43.5 10.3 219.9 12.1 12.1 28.6 10.0 196.3 28.6 28.6 47.4 10.5 212.7 Y/E MARCH VALUATION RATIO (X) P/E (ON FDEPS) P/CEPS P/BV EV/SALES 3.9 3.1 0.9 1.1 6.0 4.1 0.8 1.3 15.2 6.4 0.9 1.3 6.4 3.9 0.9 1.1 FY2010 FY2011 FY2012E FY2013E
FY2010 242 51 12 69 (71) 304 (65) (85) 101 (49) 0 (151) (36) (70) (256) (2) 6 4
January 2012
387
Mid-Cap
Hitachi Home & Life

CMP/TP/Upside: `112/ `157 / 40% Company Background
TOP PICK
SHAREHOLDING PATTERN (%) PROMOTERS (MNC) FII 69.9 0
Hitachi Home & Life Solutions (HHLS) is a subsidiary of Japan's Hitachi Appliances, which holds a 68% stake in the company. HHLS manufactures and sells air conditioners (AC) and is engaged in the trading of refrigerators, washing machines and chillers. The company has manufacturing facilities in Kadi (north Gujarat) and Jammu, with a total capacity of 2,30,000 units per year. The AC segment includes room AC (RAC), commercial/ductable AC and telecom AC categories. HHLS is a leader in the AC market in the premium category.
Structural Snapshot
STOCK RETURNS (%) HITACHI BSE MIDCAP SENSEX 3M 1Y 3Y 31.7 23.0 21.3 5Y (1.4) 3.3 10Y 17.3 (32.3) (44.9) (8.5) (20.9) (2.6) (12.3) (0.4) 28.7
Growth opportunity: Penetration of the RAC market in India is ~3%, which is extremely low as compared to China (20%) and U.S. (90%); however, it is expected to increase to ~5% by FY2015E. Increasing per capita income, which posted a 15% CAGR over FY2006-11 and low penetration levels offer a huge opportunity to the company in the AC market. Competitive position: HHLS is a leader in telecom ACs, with a 42% market share; while in commercial/ductable AC, it has a market share of 17%. In the RAC segment, with a 7% market share, HHLS ranks fourth after LG, Samsung and Voltas. The company has better pricing power due to which it sells ACs at a 10-15% premium over most of its peers. Nature of business: Cyclical and sensitive to exchange rate since the company has ECBs of JPY930mn from Japan; Low entry barriers.
FINANCIAL PERFORMANCE OVERVIEW (%) SALES GROWTH* PAT GROWTH* OPM# ROE# 3M (2.1) 1.6 1Y 19.3 7.4 18.4 3Y 19.6 (0.5) 22.9 5Y 24.4 13.5 28.9 10Y 10.3 19.3
(255.0) (36.2) (11.5)
0.9 (0.4)

Entry into tier-II and tier-III cities with low-price products: HHLS, which caters to the premium segment, has also entered the low-price RAC segment with the launch of Kaze, with two-star and three-star rating to cater to the medium-class mass segment. The company has increased its presence from 236 towns in June 2010 to ~300 towns currently and is expanding its dealer and distributer base. Innovation and energy-efficient products to drive growth: HHLS continuously spends on R&D to come up with innovative products like its recently launched i-Clean with automatic filter clean technology, higher energy efficiency and five-star rating. Demand for such products has been increasing on account of growing concerns about global warming, surging electricity prices and increasing calls to use energy-efficient products by the government. Valuations attractive: The stock is trading at attractive PE of 8.5x its FY2013E, which is much cheaper as compared to its peers BlueStar and Voltas, which have PE of 9.5x and 9.1x for FY2013E, respectively. Hence, we maintain our Buy rating on the stock with target price of ` 157, based on a target PE of 12x for FY2013E.
388
January 2012

BALANCE SHEET
Y/E MARCH (` CR) ` SOURCES OF FUNDS EQUITY SHARE CAPITAL RESERVES & SURPLUS SHAREHOLDERS FUNDS TOTAL LOANS DEFFERED TAX LIABILITY (NET) TOTAL LIABILITIES APPLICATION OF FUNDS GROSS BLOCK LESS: ACC. DEPRECIATION NET BLOCK CAPITAL WORK-IN-PROGRESS INVESTMENTS CURRENT ASSETS CURRENT LIABILITIES NET CURRENT ASSETS MISC EXP NOT WRITTEN OFF TOTAL ASSETS 159 54 105 15 330 243 88 207 199 68 131 7 485 360 125 262 209 85 124 6 493 343 150 279 229 104 125 6 574 397 176 308 23 124 147 60 1 207 23 149 172 90 0 262 23 157 180 99 0 279 23 183 206 99 2 308 FY2010 FY2011 FY2012E FY2013E
% CHG
36.1
582 58
19.3
707 56
11.5
806 45
17.1
932 64
(% OF NET SALES)
9.1
12 2 45 12
7.4
16 6 34 6
5.3
17 13 15 1
6.4
19 3 42 1
(% OF NET SALES)
PBT (REPORTED) TAX
1.8
57 11
0.7
40 11
0.1
16 5
0.1
43 13
(% OF PBT)
19.2
46 46 (0) 46
26.6
29 29 29
30.0
11 11 11
30.0
30 30 30
% CHG
113.3
(36.2)
(62.1)
170.2
CASH FLOW STATEMENT

KEY RATIOS
FY2011 40 16 (64) 9 (11) (9) (40) 9 (31) 30 (3) (8) 19 (26) 28 2 FY2012E 16 17 (13) 0 (5) 16 (10) 1 (9) 9 (3) 6 12 2 14 FY2013E 43 19 (30) 0 (13) 19 (21) 1 (20) (3) ROE 36.6 18.4 6.3 15.6 (3) (4) 14 10 TURNOVER RATIOS (X) INVENTORY / SALES (DAYS) RECEIVABLES (DAYS) PAYABLES (DAYS) 85 51 133 121 53 156 140 52 156 129 52 156 Y/E MARCH VALUATION RATIO (X) P/E (ON FDEPS) P/CEPS P/BV EV/SALES EV/EBITDA 5.6 4.5 1.8 0.5 5.0 8.8 5.7 1.5 0.5 6.1 23.1 9.0 1.4 0.4 7.6 8.5 5.2 1.2 0.3 5.4 FY2010 FY2011 FY2012E FY2013E
FY2010 57 12 (8) (12) (11) 37 (49) 2 (47) 10 (3) 5 11 6 23 28
PER SHARE DATA (`) ` EPS (BASIC) EPS (FULLY DILUTED) CASH EPS DPS BOOK VALUE RETURNS (%) ROCE (PRE-TAX) ANGEL ROIC (PRE-TAX) 25.2 32.7 16.9 19.0 10.1 10.6 15.1 16.1 20.0 20.0 25.2 1.5 63.9 12.8 12.8 19.8 1.5 74.9 4.8 4.8 12.4 1.5 78.2 13.1 13.1 21.4 1.5 89.8
January 2012
389
Mid-Cap
RATING 52 WEEK HIGH / LOW MARKET CAP (` CR) ` LIQUIDITY BUY 723/340 1,053 LOW
INEOS ABS
Company Background
CMP/TP/Upside: `599 / `694 / 16%
INEOS ABS India Ltd. (INEOS), an 83% subsidiary of INEOS Global Group, is India's leading manufacturer of an engineering plastic named acrylonitrile butadiene styrene (ABS, constitutes ~86% of the company's total revenue). The company has three manufacturing plants in Gujarat, at Nandesari (ABS production), Katol (SAN production) and Moxi (to blend the resins manufactured in the former two plants). Over CY2005-10, on the back of capacity expansion and inorganic growth, INEOS reported a 13% and 33% CAGR in its top line and bottom line, respectively.
Structural Snapshot
STOCK RETURNS (%) INEOS BSE MIDCAP SENSEX 3M 1.6 1Y 49.5 3Y 88.1 23.0 21.3 5Y (1.4) 3.3 10Y 17.3 25.7 34.1
Growth opportunity: According to CRISIL Research, the domestic ABS industry is expected to grow by 17% yoy to 127,000 TPA in CY2011 due to healthy demand from the automobile and home appliances segments. There has been a consistent gap between the demand and supply of ABS in the market. This provides INEOS a huge opportunity to grow going forward. Competitive position: INEOS is the market leader and holds 60% share in the ABS resins segment and 68% share in the SAN resins segment in the domestic market, which comprises only two players. Nature of business: Cyclical; Sensitive to exchange rate, since 80% of its raw material is imported.
(8.5) (20.9) (2.6) (12.3)

Transfer of business to Styrolution: The business of INEOS along with INEOS Nova (sister concern) and BASF (styrene, ABS and polystyrene businesses) has been transferred to Styrolution, a 50/50 JV of INEOS Group and BASF. INEOS has come up with an open offer for the remaining 16.7% stake, success of which may lead to delisting of the company. The JV will be launched on a global scale and will be a globally competitive producer of styrene, ABS and polystyrene, with a leading position in North America, Asia and Europe. Styrolution is estimated to report annual sales of over EUR5bn for FY2012. Capacity expansion: As per CRISIL Research, supply of ABS should post a 17% CAGR to meet the growing demand, which is expected to witness a 10% CAGR, during CY2010-15E. Assuming the market share of INEOS to remain constant at 60%, volumes for INEOS's ABS resin are likely to grow by 17%, for which the company has already expanded its capacity by ~33% to 80,000 TPA in 2011. Debt-free and cash-rich position: INEOS had zero debt with a cash surplus (including investments) of around `147cr in June 2011, which enables the company to finance the extended capacity through internal accruals and/or even assist in the buy back. Valuations attractive: The stock is trading at attractive EV/EBITDA of 8x compared to peer average of 10.2x and has delivered better RoEs of ~20% over peer average of ~16%. We maintain our Buy view on stock with a target price of ` 694, based on target PE of 15x for CY2012E earnings.
LATEST PROMOTER ACTION PARTICULARS OPEN OFFER DATE 22-OCT-11 % STAKE INVOLVED 16.7
390
January 2012

Y/E DEC (` CR) ` TOTAL OPERATING INCOME CY2009 559 CY2010 742 CY2011E 896 CY2012E 1,049
BALANCE SHEET
Y/E DEC (` CR) ` SOURCES OF FUNDS EQUITY SHARE CAPITAL RESERVES & SURPLUS SHAREHOLDERS FUND TOTAL LOANS DEFERRED TAX LIABILITY (NET) TOTAL LIABILITIES APPLICATION OF FUNDS GROSS BLOCK LESS: ACC. DEPRECIATION NET BLOCK CAPITAL WORK-IN-PROGRESS INVESTMENTS CURRENT ASSETS CURRENT LIABILITIES NET CURRENT ASSETS MIS. EXP. NOT WRITTEN OFF TOTAL ASSETS 310 168 142 11 71 199 128 71 296 318 181 136 12 93 281 166 115 356 327 196 131 13 120 323 201 122 387 337 213 124 14 157 405 244 161 456 18 255 272 24 296 18 317 334 21 356 18 377 395 (8) 387 18 448 466 (10) 456 CY2009 CY2010 CY2011E CY2012E
% CHG
(7.4)
473 86
32.8
629 113
20.7
795 101
17.0
931 117
(% OF NET SALES)
DEPRECIATION & AMORTISATION INTEREST RECURRING PBT OTHER INCOME
15.4
14 1 70 4
15.2
14 2 97 5
11.3
14 87 12
11.2
17 100 16
(% OF NET SALES)
PBT (REPORTED) TAX
0.8
75 26
0.7
103 33
1.3
98 30
1.5
116 35
(% OF PBT)
34.6
49 49 0 49
31.8
70 70 (0) 70
30.0
69 69 (0) 69
30.0
81 81 (0) 81
% CHG
171.2
43.0
(1.6)
17.9
CASH FLOW STATEMENT

Y/E DEC (` CR) ` PROFIT BEFORE TAX DEPRECIATION CHANGE IN WORKING CAPITAL OTHERS DIRECT TAXES PAID CASH FLOW FROM OPERATIONS (INC)/ DEC IN FIXED ASSETS (INC)/DEC IN INVESTMENTS OTHERS CASH FLOW FROM INVESTING ISSUE OF EQUITY INC/(DEC) IN LOANS DIVIDEND PAID (INCL. TAX) OTHERS CASH FLOW FROM FINANCING INC/(DEC) IN CASH OPENING CASH BALANCE CLOSING CASH BALANCE
KEY RATIOS
CY2010 103 14 (21) (8) (33) 55 (8) (21) 4 (25) (7) (0) (7) 23 37 60 CY2011E 98 14 (30) (18) (30) 35 (10) (28) (6) (43) (8) (6) (14) (23) 60 37 CY2012E 116 17 (14) (13) (35) EV/EBITDA 10.9 8.0 8.8 7.1 72 (10) (36) 4 (42) (10) 5 ROE 18.0 23.1 18.9 18.9 (5) 25 37 61 TURNOVER RATIOS (X) INVENTORY / SALES (DAYS) RECEIVABLES (DAYS) PAYABLES (DAYS) 38 56 99 35 54 96 36 55 92 36 55 96 PER SHARE DATA (`) ` EPS (BASIC) EPS (FULLY DILUTED) CASH EPS DPS BOOK VALUE RETURNS (%) ROCE (PRE-TAX) ANGEL ROIC (PRE-TAX) 24.0 39.9 27.5 50.7 20.7 34.7 20.4 38.8 27.9 27.9 36.1 3.5 154.9 39.8 39.8 47.8 4.0 190.1 39.2 39.2 47.4 4.8 224.5 46.2 46.2 55.8 5.8 265.0 Y/E DEC VALUATION RATIO (X) P/E (ON FDEPS) P/CEPS P/BV EV/SALES 21.5 16.6 3.9 1.7 15.0 12.5 3.2 1.2 15.3 12.6 2.7 1.0 12.9 10.7 2.3 0.8 CY2009 CY2010 CY2011E CY2012E
CY2009 75 14 (14) (10) (26) 40 (3) (26) 1 (29) (6) 1 (5) 6 32 37
January 2012
391
Mid-Cap
ITD Cementation
ITD Cementation is a subsidiary of Thailand-based Italian Thai Development Public Company Ltd., which holds a 70% stake in the company. ITD Cementation provides EPC services to infrastructure projects in India. The company's business operation areas include construction of maritime structures, mass rapid transit systems, hydro power, tunnels, dams, industrial structures, airports, highways, bridges, flyovers, tube heading and foundation and specialist engineering. The company's order book comprises 40% private orders and 60% government orders.
SHAREHOLDING PATTERN (%) PROMOTERS FII 69.6 -
Structural Snapshot
STOCK RETURNS (%) ITD CEM. BSE MIDCAP SENSEX 3M 1Y 3Y 23.0 21.3 5Y (1.4) 3.3 10Y 3.5 17.3 (11.1) (40.9) (8.5) (20.9) (2.6) (12.3) 16.1 (23.9)
Growth opportunity: While companies in the construction sector are witnessing near-term challenges, the long-term outlook for the sector continues to remain encouraging. Earnings growth is likely to revive in the coming years, primarily aided by a low base and reversal in the rate cycle. The sector's fortune is likely to pick up in FY2013E and beyond, as the government is gearing up for the Twelfth Five-Year Plan (2012-17), releasing new infrastructure projects and addressing concerns about the access to long-term financing and land acquisition. Competitive position: Despite the competition faced from its peers, the company is able to maintain its leadership position in the foundation and piling work in India, which contributes almost 45% to its revenue with a gross margin of 12-13%. Nature of business: Cyclical and rate-sensitive sector.
FINANCIAL PERFORMANCE OVERVIEW (%) SALES GROWTH* PAT GROWTH* OPM# ROE# 3M 18.0 315.4 10.9 1Y 8.7 72.0 9.2 2.6 3Y 10.5 7.9 8.6 1.5 5Y 15.8 15.1 8.3 1.8 10Y 15.5 5.0 6.7 -

Strong order book and completion of unprofitable project: ITD Cementation has been reporting low profit in the past few years due to higher proportion of unprofitable NH I road projects in its order book. However, the company expects the share of NH I road projects to come down from 20% to just 5% of the current order book, which stood at `3,310cr as of March 2011. The company is also planning to increase the share of high-margin projects in the order book going forward. These factors together will help the company's bottom line to reach `25cr in CY2012E from `9cr in CY2010. Successful restructuring of loans to drive the bottom line: The company is in the process of reducing its interest cost by switching some of its high interest cost loans ( ~13%) to low interest cost loans (~11%). Successful restructuring of loans and reduction in cost will further drive the company's earnings. Valuations attractive: The stock is currently trading at attractive valuation of 0.4x P/BV for CY2012E, which is at a 35% discount to its three-year median of 0.6x. We recommend Buy on ITD Cementation with a target P/BV of 0.5x for CY2012E and a target price of ` 171.
392
January 2012

Y/E DEC. (` CR) ` TOTAL OPERATING INCOME CY2009 973 CY2010 1,057 CY2011E 1,262 CY2012E 1,528
BALANCE SHEET
Y/E DEC. (` CR) ` SOURCES OF FUNDS EQUITY SHARE CAPITAL RESERVES & SURPLUS SHAREHOLDERS FUNDS TOTAL LOANS 12 342 354 497 2 852 12 350 361 525 0 886 12 359 370 577 947 12 382 394 646 1,040 CY2009 CY2010 CY2011E CY2012E
% CHG
1.5
880 92
8.7
960 97
19.4
1,147 115
21.1
1,385 143
(% OF NET SALES)
9.5
31 71 (10) 17
9.2
31 78 (12) 24
9.1
35 87 (7) 23
9.4
37 96 10 26 DEFFERED TAX LIABILITY TOTAL LIABILITIES APPLICATION OF FUNDS GROSS BLOCK LESS: ACC. DEPRECIATION NET BLOCK CAPITAL WORK-IN-PROGRESS INVESTMENTS CURRENT ASSETS 294 135 159 2 23 956 289 667 2 852 322 165 158 12 37 1,014 335 679 0 886 352 200 152 12 37 1,170 424 746 947 370 237 133 12 37 1,370 512 858 1,040
(% OF NET SALES)
PBT (REPORTED) TAX
1.8
8 2
2.3
12 3
1.8
16 5
1.7
36 11
(% OF PBT)
PAT (REPORTED) LESS: MINORITY INTEREST (MI) PRIOR PERIOD ITEMS PAT AFTER MI (REPORTED) EXTRAORDINARY EXPENSE/(INC.) AD.J PAT
29.5
5 5 0 5
23.3
9 9 0 9
30.0
11 11 0 11
30.0
25 25 0 25
CURRENT LIABILITIES NET CURRENT ASSETS DEFERRED TAX ASSETS TOTAL ASSETS
% CHG
(275.0)
72.0
16.9
135.9
CASH FLOW STATEMENT

KEY RATIOS
CY2010 12 31 12 59 (3) 111 (39) (14) 17 (36) 28 (2) (77) (51) 24 11 35 CY2011E 16 35 (67) 64 (5) 43 (30) 23 (7) 52 (2) (87) (36) (0) 35 35 CY2012E 36 37 (118) 70 (11) 14 (18) 26 8 69 (2) (96) (28) (6) 35 29 Y/E DEC. VALUATION RATIO (X) P/E (ON FDEPS) P/CEPS P/BV EV/SALES 28.9 4.3 0.4 0.6 6.7 16.8 3.9 0.4 0.6 6.3 14.4 3.4 0.4 0.5 5.7 6.1 2.5 0.4 0.5 5.1 CY2009 CY2010 CY2011E CY2012E
CY2009 8 31 (78) 56 (2) 14 (27) (10) 14 (23) 82 (1) (72) 9 (0) 11 11
EV/EBITDA ` PER SHARE DATA (`) EPS (BASIC) EPS (FULLY DILUTED) CASH EPS DPS BOOK VALUE RETURNS % ROCE (PRE-TAX) ANGEL ROIC (PRE-TAX) ROE TURNOVER RATIOS (X) INVENTORY / SALES (DAYS) RECEIVABLES (DAYS) PAYABLES (DAYS)
4.6 4.6 31.2 1.0 307.3
7.9 7.9 34.6 1.5 313.7
9.3 9.3 39.9 1.5 321.5
21.9 21.9 54.0 1.5 341.9
7.2 7.5 1.5
7.5 8.2 2.6
8.4 9.3 2.9
10.2 11.0 6.6
132 155 120
123 170 127
123 160 135
120 155 135
January 2012
393
Mid-Cap
Lakshmi Machine
CMP/TP/Upside: `1,597 / `2,214 / 74% Company Background
Lakshmi Machine Works (LMW) is one of the largest manufacturers of textile spinning machinery in the world. The company is a leader in India and one of the only three players globally that manufactures the entire range of spinning machinery. LMW diversified into the foundry segment where it manufactures ductile iron and grey iron castings in its state-of-the-art Nobake Foundry. The company also entered the CNC machine tools segment in a technical collaboration with M/s. Mori Seiki Co. Ltd., Japan, and is a brand leader in manufacturing customized products currently.
Structural Snapshot
STOCK RETURNS (%) LMW BSE MIDCAP SENSEX 3M (18.1) 1Y (27.8) 3Y 23.0 21.3 5Y (1.4) 3.3 10Y 17.3 40.0 (15.0) 36.6
Growth opportunity: LMW is placed advantageously owing to the promising future prospects of the textile industry in India. With an installed capacity of 41.3mn spindles, India is the second largest player in the global textile spinning industry, behind China with over 100mn spindles. The other countries are small compared to these two giants, with none of them having installed spindle capacity of more than 15mn. Being the largest player in the world's second largest textile machinery market offers significant advantages to LMW, enabling it to compete effectively against the global majors operating in India. Competitive position: LMW is the largest player in the India and one of the only three players globally that manufactures the entire range of spinning machinery. In India, the company has a high market share of around 70% in yarn spinning and preparatory machines. The company has been able to sustain this market share on the back of strong after-sales service coupled with providing the world's best technology to customers at the cheapest rates. LMW also enjoys an edge over competition, as it caters to 1,300 domestic textile players out of the total universe of around 1,600. The company has been innovating on technology for the past 15 years. Nature of business: Engineering business, hence highly cyclical; Dependent on a single segment - textile spinning; High entry barriers for new players.
(8.5) (20.9) (2.6) (12.3)
FINANCIAL PERFORMANCE OVERVIEW (%) SALES GROWTH* PAT GROWTH* OPM# ROE# 3M 9.6 (13.5) 12.8 1Y 58.7 12.4 17.7 3Y (6.7) 13.5 14.1 5Y 1.2 10Y 19.2 6.6 13.0 14.9 12.7 23.8 20.4
58.3 (14.1)

Strong order book to translate into robust sales growth: LMW has a strong order book of `4,500cr at the end of 3QFY2012, which is 2.5x its FY2011 net sales. Further, the upturn in the spinning industry has lent a boost to the companys order inflow. Thus, we expect a low probability of order deferments. Valuations attractive: Currently, the stock is trading at 11.5x and 8.7x its FY2012E and FY2013E EPS, respectively, against its five-year median of 13x one-year forward earnings. At the end of 1HFY2012, LMW had net cash worth `642cr and investments worth `154cr. The combined value of cash and investment works out to `707/share. We have a Buy recommendation on the stock with a target price of ` 2,214, valuing it at 12x FY2013 EPS.
394
January 2012
PROFIT & LOSS

BALANCE SHEET
Y/E MARCH (` CR) ` SOURCES OF FUNDS EQUITY SHARE CAPITAL RESERVES& SURPLUS SHAREHOLDERS FUNDS MINORITY INTEREST 12 908 920 11 798 809 11 902 913 11 1,043 1,055 FY2010 FY2011 FY2012E FY2013E
% CHG
(15.5)
970 161
58.7
1,571 223
24.3
1,948 282
19.4
2,322 341
(% OF NET SALES)
14.2
96 1 82
12.4
105 109
12.6
112 4 71
12.8
120 5 94 DEFERRED TAX LIABILITY (NET) TOTAL LIABILITIES APPLICATION OF FUNDS GROSS BLOCK LESS: ACC. DEPRECIATION NET BLOCK CAPITAL WORK-IN-PROGRESS INVESTMENTS 1,371 922 449 3 104 1,037 640 397 954 1,465 1,025 442 77 1,330 1,012 318 836 1,565 1,136 428 8 77 1,535 1,108 427 940 1,670 1,254 416 10 77 1,894 1,315 579 1,082 33 954 28 836 28 940 28 1,082
(% OF PBT)
56.3
146 146 46
47.9
227 227 73
30.0
236 236 79
30.4
310 310 102
(% OF PBT)
31.5
100 100 97
32.3
153 153 153
33.6
157 157 157
33.0
208 208 208 CURRENT ASSETS CURRENT LIABILITIES NET CURRENT ASSETS TOTAL ASSETS
% CHG
(9.3)
58.3
2.4
32.4
CASH FLOW STATEMENT

Y/E MARCH PROFIT BEFORE TAX DEPRECIATION INC./ (DEC.) IN WORKING CAPITAL LESS: OTHER INCOME DIRECT TAXES PAID CASH FLOW FROM OPERATIONS (INC.)/ DEC. IN FIXED ASSETS (INC.)/ DEC. IN INVESTMENTS FY2010 146 96 (173) 82 46 (59) (19) (0) FY2011 227 105 163 109 73 313 (91) 27 (59) 109 (14) 40 (235) (275) 24 732 756 FY2012E 236 112 152 71 79 350 (108) (103) 71 (141) 53 1 (51) 158 756 914 FY2013E 310 120 120 94 102 353 (107) (51) 94
KEY RATIOS
Y/E MARCH VALUATION RATIOS P/E (ON FDEPS) P/CEPS P/BV EV/SALES EV/EBITDA ` PER SHARE DATA (`) EPS (BASIC) EPS (FULLY DILUTED) CASH EPS 80.7 80.7 158.5 15.0 744.2 136.2 136.2 229.4 30.0 717.9 139.4 139.4 238.7 40.0 810.2 184.5 184.5 290.7 50.0 936.2 19.8 10.1 2.1 1.1 7.7 11.7 7.0 2.2 0.6 4.7 11.5 6.7 2.0 0.4 3.1 8.7 5.5 1.7 0.2 1.9 FY2010 FY2011 FY2012E FY2013E
(INC.)/ DEC. IN LOANS AND ADVANCES 138 OTHER INCOME CASH FLOW FROM INVESTING ISSUE OF EQUITY INC./(DEC.) IN LOANS DIVIDEND PAID (INCL. TAX) OTHERS CASH FLOW FROM FINANCING INC./(DEC.) IN CASH OPENING CASH BALANCES CLOSING CASH BALANCES
82 201 22 (15) (37) 105 627 732
DPS (64) 66 (2) (68) 221 914 1,135 BOOK VALUE RETURNS (%) ROCE (PRE-TAX) ANGEL ROIC ROE TURNOVER RATIOS (X) INVENTORY / SALES (DAYS) RECEIVABLES (DAYS) PAYABLES (DAYS)
7.0 7.8 11.3
13.2 16.0 17.7
19.1 22.5 18.2
21.9 26.7 21.1
32 18 225
42 14 184
43 13 189
36 12 181
January 2012
395
Mid-Cap
RATING 52 WEEK HIGH / LOW MARKET CAP (` CR) ` LIQUIDITY BUY 7,950 / 5,332 3,049 MEDIUM
MRF
Company Background
CMP/TP/Upside: `7,192 / `9,647 / 34%
MRF is a market leader in the tyre industry with a ~30% market share. The company is present across all categories of tyres, with an installed capacity of 3.2cr tyres. MRF also exports tyres to over 65 countries in America, Europe, Middle East, Japan and the Pacific region.
Structural Snapshot
Growth opportunity: There is an industry shift towards radial tyres in the truck segment, where capital expenditure for radial tyres is 3.2x that of crossply tyres. Thus, in order to generate normalized RoCE and RoE, tyre companies would need to earn EBITDA margins of ~20% on radial tyres in comparison to ~9% on cross-ply tyres, leading to a 20-25% higher pricing for radial tyres. As radialization in the tyre industry is already past the S-curve inflection point of 8-10%, volumes of radial tyres are likely to witness a CAGR of more than 25% for the next five years. Competitive position: MRF is a leader in passenger car tyres, two and three-wheeler tyres and tractor front tyres, with a market share of 23.9%, 27.5% and 25.9%, respectively; while in the tractor rear tyre segment, the company holds the second position, with a market share of 25.9%. Nature of business: Rate sensitive; Sensitive to exchange rates since the company has net imports of ~16% (of net sales); Low entry barriers.
STOCK RETURNS (%) MRF BSE MIDCAP SENSEX 3M 8.8 1Y 11.0 3Y 58.4 23.0 21.3 5Y (1.4) 3.3 10Y 17.3 11.4 25.6
(8.5) (20.9) (2.6) (12.3)
FINANCIAL PERFORMANCE OVERVIEW (%) SALES GROWTH* PAT GROWTH* OPM# ROE# 3M 24.3 405.2 7.2 1Y 30.7 (1.7) 8.3 14.9 3Y 24.5 16.1 10.5 17.6 5Y 21.2 9.8 10Y 19.2
38.4 21.4 9.0 15.8 13.0

Stable rubber prices - A positive: Rubber prices have reduced by 21% from `258/kg in May 2011 to `203/kg in November 2011. We expect rubber prices to stabilize going forward, leading to a 100bp improvement in MRF's operating margin, from 8.3% in SY2011 to 9.3% in SY2013E. Reinvestment needs exceed current earnings: The debt-equity ratio of the tyre industry stood at 1.2x as of September 2011, leaving no scope for companies to raise further debt for capacity expansion. Also, considering the gloomy market conditions, raising equity would be difficult. Thus, it would be challenging for companies to meet the rising radial tyre demand (over 20% CAGR). Consequently, companies would increase tyre prices, so as to earn sufficient profit for funding the required capacity. Most companies have already taken a price hike of 10-12% in 1HFY2012. Hence, we expect MRF's net profit to witness an 22.3% CAGR over SY2011-13E. Valuations attractive: The stock is currently trading at PE of 6.0x its SY2013E, at a 21% discount to its five-year median of 8x. Hence, we maintain our Buy recommendation on the stock with a target price of ` 9,647, based on a target PE of 8x for SY2013E.
ANGEL ESTIMATES PARTICULARS PAT GROWTH (%) ROE (%) P/E P/BV SY2012E 20.6 16.5 7.4 1.1 SY2013E 24.1 17.3 6.0 1.0
396
January 2012

Y/E SEPT (` CR) ` TOTAL OPERATING INCOME SY2010 7,453 SY2011 9,743 SY2012E 11,368 SY2013E 12,685
BALANCE SHEET
Y/E SEPT (` CR) ` SOURCES OF FUNDS EQUITY SHARE CAPITAL RESERVES & SURPLUS SHAREHOLDERS FUNDS TOTAL LOANS DEFFERED TAX LIABILITY (NET) TOTAL LIABILITIES APPLICATION OF FUNDS GROSS BLOCK LESS: ACC. DEPRECIATION NET BLOCK CAPITAL WORK-IN-PROGRESS INVESTMENTS CURRENT ASSETS CURRENT LIABILITIES NET CURRENT ASSETS MISC EXP NOT WRITTEN OFF TOTAL ASSETS 3,368 2,039 1,329 498 73 2,102 964 1,138 3,038 4,210 2,287 1,923 423 73 2,899 1,543 1,356 3,775 5,052 2,584 2,468 375 73 3,336 1,853 1,483 4,399 6,062 2,935 3,127 300 73 3,705 2,050 1,655 5,155 4 1,686 1,691 1,362 (15) 3,038 4 2,294 2,298 1,492 (15) 3,775 4 2,694 2,698 1,716 (15) 4,399 4 3,192 3,197 1,973 (15) 5,155 SY2010 SY2011 SY2012E SY2013E
% CHG
31.6
6,636 817
30.7
8,938 805
16.7
10,405 963
11.6
11,511 1,174
(% OF NET SALES)
11.0
261 63 493 42
8.3
248 93 464 25
8.5
297 112 555 34
9.3
352 130 692 38
(% OF NET SALES)
PBT (REPORTED) TAX
6.6
535 181
4.8
489 274
4.9
589 177
5.5
730 219
(% OF PBT)
EXTRAORDINARY INCOME PAT (REPORTED) LESS: MINORITY INTEREST (MI) PAT AFTER MI (REPORTED) EXTRAORDINARY EXPENSE/(INC.) ADJ. PAT
36.6
354 354 7 348
59.1
404 619 1 618 277 342
31.8
412 412 412
31.6
511 511 511
% CHG
39.7
(1.7)
20.6
24.1
CASH FLOW STATEMENT

Y/E SEPT (` CR) ` PROFIT BEFORE TAX DEPRECIATION CHANGE IN WORKING CAPITAL OTHERS DIRECT TAXES PAID CASH FLOW FROM OPERATIONS (INC.)/DEC. IN FIXED ASSETS (INC.)/DEC. IN INVESTMENTS OTHERS CASH FLOW FROM INVESTING ISSUE OF EQUITY INC./(DEC.) IN LOANS DIVIDEND PAID (INCL. TAX) OTHERS CASH FLOW FROM FINANCING INC./(DEC.) IN CASH OPENING CASH BALANCES CLOSING CASH BALANCES
KEY RATIOS
SY2011 894 248 59 (34) (274) 892 (767) 8 25 (734) 130 (11) 404 119 277 53 330 SY2012E 589 297 (142) (34) (177) 533 (794) 34 (760) 224 (13) 211 (16) 330 314 SY2013E 730 352 (143) (38) (219) EV/EBITDA 5.2 5.1 4.5 3.9 682 (935) 38 (897) 257 (13) ROE 22.8 14.9 16.5 17.3 245 29 314 344 TURNOVER RATIOS (X) INVENTORY / SALES (DAYS) RECEIVABLES (DAYS) PAYABLES (DAYS) 54 40 53 51 39 63 52 39 65 52 39 65 PER SHARE DATA (`) ` EPS (BASIC) EPS (FULLY DILUTED) CASH EPS DPS BOOK VALUE RETURNS (%) ROCE (PRE-TAX) ANGEL ROIC (PRE-TAX) 21.9 28.0 14.7 18.8 16.2 20.1 17.2 20.3 819.6 819.6 1,434.6 50.0 3,987.5 806.0 806.0 1,390.0 25.0 5,421.0 972.1 972.1 1,672.9 30.0 6,363.1 1205.9 1205.9 2,035.2 30.0 7,539.0 Y/E SEPT VALUATION RATIO (X) P/E (ON FDEPS) P/CEPS P/BV EV/SALES 8.8 5.0 1.8 0.6 8.9 5.2 1.3 0.4 7.4 4.3 1.1 0.4 6.0 3.5 1.0 0.4 SY2010 SY2011 SY2012E SY2013E
SY2010 535 261 (492) 34 (181) 157 (844) 84 (26) (786) 690 (21) (47) 622 (7) 60 53
January 2012
397
Mid-Cap
RATING 52 WEEK HIGH / LOW MARKET CAP (` CR) ` LIQUIDITY BUY 61/35 706 LOW
NIIT
Company Background
CMP/TP/Upside: `43 / `55 / 29%
SHAREHOLDING PATTERN (%) (%) PROMOTERS FII 34.0 26.6
Founded in 1981, NIIT is a comprehensive education and training services provider to individuals and enterprises. The company is currently present in 40 countries and offers services in three business segments - individual learning solution (ILS - 62% to revenue), school learning solutions (SLS 18% to revenue) and corporate learning solutions (CLS - 20% to revenue). NIIT's training solutions in IT, BPO, banking, executive management education and communication and professional life skills enroll five mn learners every year.
Structural Snapshot
Growth opportunity: The Indian private education sector is expected to report at a CAGR of 19% over FY2011-15E, with growth across all the segments, majorly led by higher education and K-12. Also, the country is witnessing a rise in income levels, increased demand for education and growth in private sector participation. All this offers NIIT the potential to report average growth of 15-20% per year. Competitive position: NIIT is a leading IT training company in India and has tie-ups with many foreign institutes. Nature of business: Corporate and individual segment impacted by macro economic growth trends; Medium entry barriers for new players.
STOCK RETURNS (%) NIIT BSE MIDCAP SENSEX 3M 1Y 3Y 23.0 21.3 5Y (1.4) 3.3 10Y 2.3 17.3 (10.9) (23.8) (8.5) (20.9) (2.6) (12.3) 22.2 (10.9)
FINANCIAL PERFORMANCE OVERVIEW (%) PAT GROWTH* OPM# ROE# 3M. 215.2 10.0 1Y 4.1 31.2 12.8 16.5 3Y 7.4 6.7 12.1 15.0 5Y 22.6 18.9 15.3 10Y 6.2 2.0 11.5 SALES GROWTH* (16.8)

ILS and CLS business to drive growth: The ILS and CLS businesses are emerging to be NIIT's growth drivers. We expect enrollment growth for ILS to be stronger in FY2012, with strong recruitment plans announced by Indian IT majors (including Infosys and TCS), thereby resulting in demand for vocational courses and gross hiring targets of 45,000 and 66,000 in FY2012, respectively, leading to a revenue CAGR of 13.8% over FY2011-13E. CLS, which was heavily impacted by the downturn, has rebounded in terms of growth and has managed to bag a strong order book of US$77.8mn (62% executable in the next three months). Focus to improve profitability: NIIT is strategically moving towards turning asset-light by targeting more annuity-based revenue. Management aims to do so by being selective in government SLS contracts, which are highly capitalintensive and have long debtor cycles (thus impacting returns), targeting more private schools in the SLS business. Also, annuity contracts bagged in CLS (related to learning products and training solutions) are expected to accelerate revenue growth and improve margins. With the realignment of its focus, management expects to improve the company's profitability, reduce debtor cycle and reduce debt by ~`250cr from the proceeds of the transaction of divestment of ElementK business (NIIT's U.S. subsidiary operating in the areas of online products for corporates and e-learning libraries) in FY2012 itself. Hence, we expect the company to post a PAT CAGR of 19.3% over FY2011-13E. Valuations attractive: We value NIIT on an SOTP basis, arriving at a target EV/EBITDA of 3.5x on FY2013E consolidated EBITDA of `176cr. We recommend a Buy rating on the stock with a target price of ` 55.
11.9 12.2
398
January 2012
PROFIT & LOSS

BALANCE SHEET
Y/E MARCH (` CR) ` EQUITY CAPITAL RESERVES AND SURPLUS NET WORTH FY2010 33 463 504 405 2 911 814 322 45 536 127 340 62 154 70 211 168 42 911 FY2011 33 517 557 366 3 925 877 397 62 542 164 390 53 135 117 234 243 45 925 FY2012E 33 566 609 278 3 890 837 478 60 419 100 328 223 142 61 213 170 41 890 FY2013E 33 638 681 257 3 941 797 552 60 305 120 285 354 139 86 191 163 38 941
% CHG
OPERATING EXPENSES EBITDA
4.4
1,043 157
4.1
1,089 159
(5.2)
1,023 161
(8.5)
907
TOTAL DEBT 176 MINORITY INTEREST TOTAL CAPITAL EMPLOYED GROSS BLOCK ACCUMULATED DEPRECIATION CAPITAL WIP TOTAL FIXED ASSETS OTHER INCOME PROFIT BEFORE TAX PROVISION FOR TAX (33) 49 11 (18) 56 9 (22) 58 15 (6) 97 31 INVESTMENTS SUNDRY DEBTORS CASH AT BANK LOANS AND ADVANCES OTHER CURRENT ASSETS SUNDRY CREDITORS SHARE IN PROFIT OF ASSOCIATES FINAL PAT 32 70 45 92 43 85 50 116 OTHER LIABILITIES PROVISIONS TOTAL CAPITAL DEPLOYED
% OF NET SALES
13.1
75 82
12.8
86 74
13.6
81 79
16.3
74 102
% OF NET SALES
6.8
5.9
6.7
9.5
% OF PBT
PAT
22.2
38
16.0
47
26.4
42
31.8
66
% CHG
0.6
31.2
(7.5)
36.8
CASH FLOW STATEMENT

Y/E MARCH (` CR) ` FY2010 45 75 4 11 32 145 (118) 27 (38) (21) (55) 56 (16) 27 15 (13) 75 62 FY2011 39 86 (18) 9 45 143 20 163 (91) (37) (129) (39) 17 22 (43) (9) 62 53 FY2012E 79 81 (22) 15 43 166 17 184 42 64 107 (87) 0 33 (120) 171 53 223 FY2013E 102 74 (6) 31 50 190 (14) 177 40 (20) 20 (21) 45 (66) 130 223 354 PRE TAX PROFIT FROM OPERATIONS DEPRECIATION OTHER INCOME/PRIOR PERIOD AD TAX SHARE OF PROFIT FROM ASSOCIATES CASH PROFITS NET TRADE WORKING CAPITAL CASHFLOW FROM OPERATING ACTV. (INC)/DEC IN FIXED ASSETS (INC)/DEC IN INVESTMENTS CASHFLOW FROM INVESTING ACTV. INC/(DEC) IN DEBT INC/(DEC) IN EQUITY/PREMIUM DIVIDENDS CASHFLOW FROM FINANCING ACTV. CASH GENERATED/(UTILIZED) CASH AT START OF THE YEAR CASH AT END OF THE YEAR
KEY RATIOS
Y/E MARCH VALUATION RATIO (X) P/E P/BV EV/SALES EV/EBITDA EV/TOTAL ASSETS ` PER SHARE DATA (`) EPS CASH EPS BOOK VALUE RETURN RATIOS (%) ROCE (PRE-TAX) ANGEL ROIC ROE TURNOVER RATIOS (X) ASSET TURNOVER (FIXED ASSETS) RECEIVABLES DAYS PAYABLE DAYS 2.2 96 79 2.3 107 75 2.8 101 76 3.6 96 77 9.0 12.1 13.9 8.0 11.4 16.5 8.9 15.7 14.0 10.9 25.2 17.1 4.3 8.8 30.6 5.6 10.8 33.8 5.2 10.1 37.0 7.1 11.6 41.4 10.0 1.4 0.8 5.9 1.0 7.6 1.3 0.7 5.4 0.9 8.3 1.2 0.6 4.1 0.7 6.0 1.0 0.4 2.8 0.5 FY2010 FY2011 FY2012E FY2013E
January 2012
399
Mid-Cap
RATING 52 WEEK HIGH / LOW MARKET CAP (` CR) ` LIQUIDITY NEUTRAL 2,772 / 1,243 2,818 LOW
Page Industries
Page Industries is the exclusive licensee of Jockey International, Inc. (USA). The company manufactures and distributes the JOCKEY brand of innerwear and leisurewear for men and women in India, Sri Lanka, Bangladesh and Nepal. Promoters of Page Industries and Jockey International have been associated in a business relationship for more than five decades. Page Industries' promoter, the Genomal family, was the sole licensee of Jockey International for 44 years in Philippines. Page Industries has extended its licensing agreement with Jockey International, Inc. until December 31, 2030; further, in this agreement, U.A.E. was added as a new geography for the company.
STOCK RETURNS (%) BSE MIDCAP SENSEX 3M 1Y 61.6 3Y 100.9 23.0 21.3 5Y (1.4) 3.3 10Y 17.3 PAGE INDUSTRIES 1.3
Structural Snapshot
Growth opportunity: The apparel industry is valued at over `1,50,000cr, of which the innerwear market accounts for `10,750cr. Further, the Indian leisurewear market is estimated at `4,860cr, with men's leisurewear market size at `4,500cr and that of women at `360cr. According to McKinsey & Co., Indian income levels are expected to almost triple by 2025 and create strong 583mn potential buyers of branded innerwear and leisure wear belonging to the middle class. Further, India's aggregate consumption will quadruple by 2025, as Indians would spend an average of 5% of their income per year on apparel necessities. Competitive position: JOCKEY is one of the most trusted and well-respected innerwear brands in India, with strong brand presence and leadership position, penetrating 17% and 8.6% of the potential premium and super-premium innerwear and leisurewear segments, respectively. The company's advertising and branding budget is a good ~6% of its net sales. In addition, Page Industries commands a wide, pan-India distribution network, encompassing 16,000 retail outlets in 1,100 cities and towns. At present, Page Industries is the market leader with a 14.4% market penetration level in these segments. Nature of business: Branded business.
(8.5) (20.9) (2.6) (12.3)
FINANCIAL PERFORMANCE OVERVIEW (%) PAT GROWTH* OPM# ROE# 3M (27.1) 14.1 1Y 44.8 47.5 18.4 52.6 3Y 36.7 34.9 17.0 44.6 5Y 38.7 18.0 10Y 47.6 17.6 SALES GROWTH* (2.1) 37.2 33.0
41.9 61.5

Entering new segments to fuel growth: Page Industries has tied up with Speedo International, a swimwear brand, to manufacture, market and distribute the brand in India. Under the exclusive licensing agreement, the company has started manufacturing swimwear, water shorts, apparel, equipment and footwear in India. This segment is expected to contribute to the company's growth going ahead. Valuations Stretched: The stock is currently trading at rich valuations of 30.5x and 25.1x its FY2012E and FY2013E EPS, respectively. We maintain our Neutral view on the stock.
400
January 2012
PROFIT & LOSS

BALANCE SHEET
Y/E MARCH (` CR) ` SOURCES OF FUNDS EQUITY SHARE CAPITAL RESERVES& SURPLUS SHAREHOLDERS FUNDS TOTAL LOANS DEFERRED TAX LIABILITY TOTAL LIABILITIES APPLICATION OF FUNDS GROSS BLOCK LESS: ACC. DEPRECIATION NET BLOCK CAPITAL WORK-IN-PROGRESS GOODWILL INVESTMENTS CURRENT ASSETS CURRENT LIABILITIES NET CURRENT ASSETS TOTAL ASSETS 101 24 78 5 3 187 117 70 156 126 33 93 7 3 235 98 138 241 168 48 120 3 268 143 126 249 188 64 124 3 321 197 124 252 11 88 99 55 2 156 11 113 124 115 3 241 11 143 154 92 3 249 11 181 192 57 3 252 FY2010 FY2011 FY2012E FY2013E
% CHG
33.3
274 66
44.8
401 90
46.6
569 152
29.7
752 183
(% OF NET SALES)
19.4
9 3 5
18.4
10 5 12
21.1
14 7 6
19.6
16 7 6
(% OF PBT)
RECURRING PBT
8.3
59
13.8
87
4.4
137
3.6
166
% CHG
25.0
59 19
49.2
(0) 88 29
56.3
137 45
21.4
166 55
(% OF PBT)
32.3
40 40 40
33.3
59 59 59
33.0
92 92 92
33.0
111 111 111
% CHG
25.4
47.5
56.4
21.4
CASH FLOW STATEMENT

Y/E MARCH PRE TAX CASH FROM OPERATIONS OTHER INCOME/PRIOR PERIOD AD NET CASH BEFORE TAX TAX CASH PROFITS NET TRADE WORKING CAPITAL OPERATING ACTIVITIES (INC.)/DEC. IN FIXED ASSETS (INC.)/DEC. IN INVESTMENTS (INC.)/DEC. IN LOANS/ADVANCES INVESTING ACTIVITIES INC./(DEC.) IN DEBT DIVIDENDS FINANCING ACTIVITIES CASH GENERATED/(UTILISED) CASH AT START OF THE YEAR CASH AT END OF THE YEAR
KEY RATIOS
FY2011 92 6 97 29 68 (95) (26) (27) 27 (1) 60 (34) 26 (0) 3 3 FY2012E 146 6 152 45 107 13 119 (35) (35) (23) (61) (84) 0 3 3 FY2013E 176 6 182 55 127 1 128 (20) (20) (35) (74) ROE 42.7 52.6 65.8 64.2 (109) (0) 3 3 TURNOVER RATIOS (X) INVENTORY / SALES (DAYS) RECEIVABLES (DAYS) PAYABLES (DAYS) 87 20 132 96 17 97 90 15 77 82 16 82 Y/E MARCH VALUATION RATIOS P/E (ON FDEPS) P/BV EV/SALES EV/EBITDA 70.4 28.2 8.4 43.3 47.7 22.6 5.9 32.2 30.5 18.1 4.0 19.0 25.1 14.5 3.0 15.5 FY2010 FY2011 FY2012E FY2013E
FY2010 63 5 68 18 49 (15) 34 (25) 2 (6) (28) 18 (31) (14) (7) 10 3
PER SHARE DATA (`) ` EPS (BASIC) EPS (FULLY DILUTED) CASH EPS DPS BOOK VALUE RETURNS (%) ROCE (PRE-TAX) ANGEL ROIC (PRE-TAX) 39.6 39.1 40.6 35.3 56.3 56.8 66.9 68.0 35.6 35.6 43.6 21.0 88.8 52.5 52.5 61.3 30.3 111.0 82.1 82.1 94.6 54.6 138.4 99.7 99.7 113.9 65.9 172.2
January 2012
401
Mid-Cap
Relaxo Footwear
TOP PICK
Relaxo Footwear (Relaxo) is a key player in the retail footwear industry. The company has a strong foothold in the slippers market and a strong distribution channel of 350 distributors and 30,000 retailers. The company currently has 127 company-owned retail outlets across India, with a concentrated presence in New Delhi, Punjab, Haryana, Uttar Pradesh and Gujarat. With increasing number of company-owned outlets and substantial increase in advertisement expense for the recognition of its high-value brands (Flite and Sparx), Relaxo has been successful in changing consumers' perception towards the company from being a Hawaii slipper company to a brand providing a variety of choices to consumers, which include lightweight slippers, sports shoes, canvas and sandals.
STOCK RETURNS (%) RELAXO BSE MIDCAP SENSEX 3M (39.2) 1Y (18.0) 3Y 102.1 23.0 21.3 5Y (1.4) 3.3 10Y 17.3
Structural Snapshot
Growth opportunity: Assuming that Relaxo's target customers are low-income group people, including labor and urban BPL population, the company has a potential target customer base of ~52cr. However, in FY2011, Relaxo sold only 8.7cr pairs of footwear, which provides the company a huge scope for further penetration. Also, Relaxo is over concentrated in Northern India, where it sells almost 65% of its products, which gives the company a significant growth potential in terms of geographical expansion. Competitive position: Relaxo, with a major market share in Hawaii slippers, is positioned next to Bata, the largest listed player in the footwear segment in terms of sales. Nature of business: Both into retail and wholesale business.
45.6 32.9
(8.5) (20.9) (2.6) (12.3)
FINANCIAL PERFORMANCE OVERVIEW (%) SALES GROWTH* PAT GROWTH* OPM# ROE# 3M 10.1 8.4 1Y 23.9 9.6 22.0 3Y 31.0 35.4 11.1 24.9 5Y 27.9 10.8 22.3 10Y 17.2 9.4 18.4
(52.4) (28.8)
52.6 14.1

Top line expected to grow at an 18% CAGR: We expect Relaxo's top line to register an 18% CAGR over FY2011-13E to `950cr on the back of a 12% increase in realization and changing revenue mix (high-value brands Sparx and Flite contributing 60% to the company's revenue). We also expect this to lead to an improvement in the company's operating margin by 225bp from 9.6% in FY2011 to 11.9% in FY2013E. Flite PU-Fashion to add ~`50cr to the top line by FY2013E: Relaxo launched ` Flite Pu-Fashion in June 2011, a product for fashion-conscious consumers with special features such as longevity, skid-resistance and lightweight. The company has also set up a new plant at Bahadurgarh, Haryana, for the production of this product. Flite Pu-Fashion is expected to add ~`50cr to the company's top line by FY2013E. Valuations attractive: The stock is currently trading at attractive valuations of 6x FY2013E earnings, which is at a 30% discount to its three-year historical median of 8.6x. We recommend Buy on Relaxo with a target PE of 9x for FY2013E and a target price of ` 420.
402
January 2012

BALANCE SHEET
Y/E MARCH (` CR) ` SOURCES OF FUNDS EQUITY SHARE CAPITAL RESERVES & SURPLUS SHAREHOLDERS FUNDS TOTAL LOANS 6 104 110 147 22 279 6 129 135 186 27 347 6 160 166 197 27 390 6 213 219 198 27 444 FY2010 FY2011 FY2012E FY2013E
% CHG
35.9
477 76
23.9
620 66
18.8
735 80
16.7
837 113
(% OF NET SALES)
DEPRECIATION& AMORTISATION INTEREST RECURRING PBT OTHER INCOME (% OF NET SALES) PBT (REPORTED) TAX
13.8
15 11 50 4 0.7 54 16
9.6
21 16 30 6 0.9 36 9
9.8
23 18 39 7 0.8 46 12
11.9
25 18 70 7 0.7 76 20 DEFFERED TAX LIABILITY TOTAL LIABILITIES APPLICATION OF FUNDS GROSS BLOCK LESS: ACC. DEPRECIATION NET BLOCK CAPITAL WORK-IN-PROGRESS INVESTMENTS CURRENT ASSETS 286 64 222 7 0 116 69 47 3 279 353 84 268 1 0 162 90 73 5 347 399 107 292 4 0 186 97 89 5 390 451 133 318 6 0 225 110 115 5 444
(% OF PBT)
30.0
38 38 (0) 38
24.7
27 27 27
26.8
34 34 34
26.8
56 56 56
% CHG
160.2
(28.8)
25.0
66.6
CASH FLOW
Y/E MARCH (` CR) ` PROFIT BEFORE TAX DEPRECIATION CHANGE IN WORKING CAPITAL OTHER INCOME DIRECT TAXES PAID CASH FLOW FROM OPERATIONS (INC.)/DEC. IN FIXED ASSETS (INC.)/DEC. IN INVESTMENTS OTHERS CASH FLOW FROM INVESTING ISSUE OF EQUITY INC./(DEC.) IN LOANS DIVIDEND PAID (INCL. TAX) OTHERS CASH FLOW FROM FINANCING INC./(DEC.) IN CASH OPENING CASH BALANCES CLOSING CASH BALANCES
KEY RATIOS
FY2010 54 15 (16) 34 (16) 72 (80) (5) (85) 39 (2) (26) 11 (2) 3 1 FY2011 36 21 (25) 36 (9) 59 (62) (1) (63) 39 (2) (32) 5 1 1 2 FY2012E 46 23 (16) 11 (12) 52 (49) 7 (42) 11 (2) (18) (9) 1 2 3 FY2013E 76 25 (25) 11 (20) 68 (54) 7 (47) 1 (3) (18) (20) 1 3 4 Y/E MARCH VALUATION RATIO (X) P/E (ON FDEPS) P/CEPS P/BV EV/SALES EV/EBITDA ` PER SHARE DATA (`) EPS (BASIC) EPS (FULLY DILUTED) CASH EPS DPS BOOK VALUE RETURNS % ROCE (PRE-TAX) ANGEL ROIC (PRE-TAX) ROE TURNOVER RATIOS (X) INVENTORY / SALES (DAYS) RECEIVABLES (DAYS) PAYABLES (DAYS) 44 14 53 49 12 47 57 13 48 56 12 48 21.8 22.4 41.0 13.0 13.2 22.0 14.6 14.9 22.4 19.7 20.2 29.1 31.4 31.4 44.3 1.5 91.6 22.4 22.4 39.9 1.5 112.2 28.0 28.0 46.8 1.9 138.3 46.6 46.6 67.9 2.3 182.6 8.9 6.3 3.1 0.9 6.3 12.5 7.0 2.5 0.8 7.8 10.0 6.0 2.0 0.7 6.7 6.0 4.1 1.5 0.6 4.7 FY2010 FY2011 FY2012E FY2013E
January 2012
403
Mid-Cap
Sintex
Company Background
CMP/TP/Upside: `74 / `126 / 70%
Sintex is a dominant player in the plastics business in India. The company has moved on to providing technology-intensive products and complete business solutions based on plastics. The company is currently engaged in a variety of plastic-related businesses, such as prefabricated structures and monolithic construction (contributes ~43% to FY2011 revenue) and custom molding for the automotive, electrical equipment and medical imaging industries (contributes ~47% to FY2011revenue). In textiles, the company's products are skewed towards the high-end and design-intensive segment of the market, which gives it high operating margins and contribute ~10% to the revenue. The company has 36 manufacturing locations, of which 20 are outside India through inorganic expansion (U.S., Europe and North Africa).
STOCK RETURNS (%) SINTEX BSE MIDCAP SENSEX 3M 1Y 3Y 1.4 23.0 21.3 5Y (1.4) 3.3 10Y 17.3 (38.9) (51.7) (8.5) (20.9) (2.6) (12.3) (6.5) 40.9
Structural Snapshot
Growth opportunity: Increasing government spending on rural India, education, health, sanitation, army barracks, cold chain solution and work shelter will spur demand for the prefab segment, which has an estimated market opportunity of `10,000cr. Higher spending on mass housing (as there would be an estimated shortage of more than 50mn houses) and slum rehabilitation, among others, will be the major growth drivers for the monolithic segment going ahead. The custom moulding industry also offers a market opportunity of over `1,500cr globally. Further, the global textile market is worth `20,000cr, and it is growing at ~5% annually. All this presents a huge growth potential for the company. Competitive position: Sintex has developed a strong brand presence and is the market leader in the prefab segment. The company enjoys the flexibility to pass on any increase in raw-material prices due to the pass-through clause in its contracts with clients. Nature of business: Capital-intensive business and dependent on government orders.
FINANCIAL PERFORMANCE OVERVIEW (%) PAT GROWTH* OPM# ROE# 3M (27.1) 14.1 1Y 34.8 35.9 18.0 21.2 3Y 24.6 25.9 17.0 19.7 5Y 10Y SALES GROWTH* (2.1) 39.3 31.7 38.0 34.3 18.0 17.8 20.9 14.9

FCCB issue overdone: Sintex's stock has taken a harsh beating on the bourses due to sharp currency fluctuation, which can result in higher outflow when the FCCBs mature in March 2013; in our view, this concern is a bit overdone. The company is in quite a comfortable position when it comes to FCCB repayment in March 2013. Of the US$278mn due, the company has US$170mn of USD-denominated cash deposits and the remaining US$110mn is most likely be refinanced through a USD-denominated ECB. Future growth drivers: Sintex has a strong order book in excess of `3,000cr in its building material segment providing reasonable revenue visibility in the coming years. We believe the prefabs/monolithic segment continues to benefit, as social spending on housing/education is unlikely to be cut substantially. Revenue is also distributed across states/clients such as army/ police/postal services. Valuations cheap: With the recent sharp correction, the stock is available at attractive valuation on just 4.7x FY2013E earnings, post factoring in most of the negatives in our estimates, against its five-year average of 11.7x one-year forward earnings. We recommend a Buy rating on the stock with a target price of ` 126, valuing the stock at 8x FY2013E earnings, which is at a discount to its historical average. 404 January 2012 Please refer to important disclosures at the end of this report
PROFIT & LOSS

BALANCE SHEET
Y/E MARCH (` CR) ` SOURCES OF FUNDS EQUITY SHARE CAPITAL RESERVES& SURPLUS SHAREHOLDERS FUNDS MINORITY INTEREST TOTAL LOANS DEFERRED TAX LIABILITY TOTAL LIABILITIES APPLICATION OF FUNDS 27 1,920 1,947 19 2,630 169 4,765 27 2,374 2,402 2,774 206 5,381 27 2,677 2,704 2,774 206 5,683 27 3,085 3,112 2,774 206 6,092 FY2010 FY2011 FY2012E FY2013E
% CHG
5.9%
2,781 538
34.8%
3,668 807
5.1%
3,945 758
11.0%
4,359 860
(% OF NET SALES)
16.2%
144.5 73 88
18.0%
149.1 109 60
16.1%
192.6 133 56
16.5%
210.5 133 52
(% OF PBT)
27.4%
408 408 71
11.0%
609 609 151
13.1%
489 (46.1) 443 121
10.1%
569 569 141 GROSS BLOCK LESS: ACC. DEPRECIATION NET BLOCK CAPITAL WORK-IN-PROGRESS GOODWILL INVESTMENTS CURRENT ASSETS CURRENT LIABILITIES NET CURRENT ASSETS TOTAL ASSETS 2,558 775 1,783 172 267 3,345 801 2,544 4,765 3,328 916 2,412 136 219 378 3,301 1,064 2,236 5,381 3,678 1,108 2,569 100 219 378 3,486 1,068 2,417 5,683 3,978 1,319 2,659 219 378 3,900 1,063 2,836 6,092
(% OF PBT)
17.4
337 (2) (6) 329 337
24.8
458 (0) 2 460 458
27.4
321 321 367
24.8
428 428 428
% CHG
2.3
35.9
(19.8)
16.5
CASH FLOW STATEMENT

Y/E MARCH PROFIT BEFORE TAX DEPRECIATION CHANGE IN WORKING CAPITAL ADD/LESS: OTHERS DIRECT TAXES PAID CASH FLOW FROM OPERATIONS (INC.)/ DEC. IN FIXED ASSETS (INC.)/ DEC. IN INVESTMENTS INTEREST/DIVIDEND OTHER ADJUSTMENTS CASH FLOW FROM INVESTING ISSUE OF EQUITY INC./(DEC.) IN LOANS DIVIDEND PAID (INCL. TAX) OTHERS CASH FLOW FROM FINANCING INC./(DEC.) IN CASH OPENING CASH BALANCES CLOSING CASH BALANCES FY2010 408 144 (736) (6) (71) (260) (127) (61) 27 (11) (172) 465 (18) 18 465 33 1,144 1,177 FY2011 609 149 105 (151) 713 (734) (378) (1,112) 0 143 (38) 103 208 (190) 1,177 986 FY2012E 489 193 (193) 57 (121) 424 (314) (314) (19) (103) (123) (12) 986 974 FY2013E 569 211 (224) (141) 414 (200) (200) (19) (19) 195 974 1,169
KEY RATIOS
Y/E MARCH VALUATION RATIOS P/E (ON FDEPS) P/CEPS P/BV EV/SALES EV/EBITDA PER SHARE DATA (`) ` EPS (FULLY DILUTED) CASH EPS DPS BOOK VALUE RETURNS (%) ROCE (PRE-TAX) ANGEL ROIC ROE TURNOVER RATIOS (X) INVENTORY / SALES (DAYS) RECEIVABLES (DAYS) PAYABLES (DAYS) 38 6 114 31 5 93 35 5 99 35 5 89 12.5 17.1 18.0 16.5 17.8 21.2 14.2 13.7 12.6 15.1 14.9 14.7 12.1 17.5 0.6 62.0 17.0 22.5 0.6 80.5 11.9 19.0 0.6 91.7 15.8 23.6 0.6 106.7 6.1 4.2 2.9 1.9 11.7 4.4 3.3 2.2 1.4 7.8 6.2 3.9 1.9 1.3 8.3 4.7 3.1 1.7 1.2 7.1 FY2010 FY2011 FY2012E FY2013E
January 2012
405
Mid-Cap
RATING 52 WEEK HIGH / LOW MARKET CAP (` CR) ` LIQUIDITY BUY 464 / 224 250 Low
Siyaram Silk Mills

TOP PICK
Siyaram Silk Mills (SSM) is one of the leading textile manufacturers in India. The company enjoys a strong brand presence across the country, with brands such as Siyaram, Mistair, J Hampstead and Oxemberg in its kitty. SSM has built a strong brand presence in the country through continuous advertisement and brand-building efforts over the past 30 years. The company has created a niche for itself in a highly competitive industry. SSM enjoys a dominant position in its fabric segment under the Siyaram brand, which constitutes nearly 83% of its revenue.
Structural Snapshot
STOCK RETURNS (%) SIYARAM BSE MIDCAP SENSEX 3M 1Y 3Y 73.6 23.0 21.3 5Y (1.4) 3.3 10Y 17.3 (3.3) (10.3) (8.5) (20.9) (2.6) (12.3) 3.9 28.3
Growth opportunity: SSM generates 75% of its revenue through Tier-II and III cities. Thus, the company is expected to greatly benefit from the growing middle-class population in the country, especially in small towns, and the shift in preference towards branded products. The company has also diversified into readymade garments, which are slowly gaining popularity up in Tier-II and III cities. Competitive position: SSM commands a premium over other players due to its strong brand presence and wide distribution network. Nature of business: Branded business, relatively more capital-intensive than other branded companies due to in-house manufacturing operations.

Higher utilization and capacity expansion to drive growth: SSM's yarn segment achieved 57% capacity utilization in FY2011 compared to 41.9% in FY2009, which is further expected to improve to 80% in FY2012E. In the fabric segment, the company plans to add 286 looms (479 current looms) in a phased manner over FY2011-13. SSM has also added around 400 machines in its readymade garment (RMG) segment. Consequently, SSM is expected to report a 15.7% CAGR in its revenue over FY2011-13. Wide distribution network across India: SSM has one the largest distribution networks in Tier-II and III cities across the country. The company has a strong network of over 1,500 dealers and 500 agents supplying to more than 40,000 outlets across India. This enables the company to easily launch new products with a high success ratio and low marketing cost, giving it an edge over competitors. The company spends significantly on advertising (`35cr in FY2011). SSM currently has Mahendra Singh Dhoni as its brand ambassador and has signed Hrithik Roshan as the ambassador for its new campaigns. Valuations attractive: The stock is currently trading at 3.8x FY2013E earnings (as against its historical median of 6x one-year forward EPS). We maintain our Buy recommendation on the stock with a target price of ` 426, valuing the stock at 6x FY2013E earnings.
406
January 2012
PROFIT & LOSS

Y/E MARCH (` CR) ` TOTAL OPERATING INCOME FY2010 660 FY2011 859 FY2012E 982 FY2013E 1,150
BALANCE SHEET
Y/E MARCH (` CR) ` SOURCES OF FUNDS EQUITY SHARE CAPITAL RESERVES& SURPLUS SHAREHOLDERS FUNDS TOTAL LOANS DEFERRED TAX LIABILITY TOTAL LIABILITIES APPLICATION OF FUNDS GROSS BLOCK 337 137 200 0 28 251 102 149 378 387 157 231 1 18 408 135 272 522 436 181 256 75 3 429 150 279 613 526 210 316 3 491 172 320 639 9.4 160 170 190 18 378 9.4 211 220 286 17 522 9.4 259 269 328 17 613 9.4 313 322 300 17 639 FY2010 FY2011 FY2012E FY2013E
% CHG
24.4
589 70
30.2
750 109
14.4
858 124
17.0
1,011 139
(% OF NET SALES)
DEPRECIATION& AMORTISATION INTEREST & OTHER CHARGES ADJ.OTHER INCOME
10.6
20 12 11
12.7
21 15 10
12.7
24 22 10
12.1
30 23 11
(% OF PBT)
22.3
49 49 15
11.9
83 83 25
11.6
89 89 28
11.1
97 97 31
LESS: ACC. DEPRECIATION NET BLOCK CAPITAL WORK-IN-PROGRESS INVESTMENTS CURRENT ASSETS CURRENT LIABILITIES NET CURRENT ASSETS TOTAL ASSETS
(% OF PBT)
31.3
34 34 34
30.5
58 58 58
31.5
61 61 61
31.5
66 66 66
% CHG
194.2
71.2
5.3
9.5
CASH FLOW STATEMENT

Y/E MARCH PROFIT BEFORE TAX DEPRECIATION CHANGE IN WORKING CAPITAL LESS: OTHER INCOME DIRECT TAXES PAID CASH FLOW FROM OPERATIONS (INC.)/DEC. IN FIXED ASSETS (INC.)/DEC. IN INVESTMENTS FY2010 49 20 46 11 15 89 (11) (28) FY2011 83 21 (95) 10 25 (26) (51) 10 (29) 10 (60) 96 (8) (3) 85 (0.1) 2.9 2.9 FY2012E 89 24 (7) 10 28 67 (123) 15 10 (98) 42 (12) 30 (0.1) 2.9 2.8 FY2013E 97 30 (40) 11 31 45 (15) 11 (4) (28) (13) (41) 0.2 2.8 3.0
KEY RATIOS
Y/E MARCH VALUATION RATIOS P/E (ON FDEPS) P/CEPS P/BV EV/SALES EV/EBITDA ` PER SHARE DATA (`) EPS (BASIC) EPS (FULLY DILUTED) CASH EPS DPS BOOK VALUE RETURNS (%) ROCE (PRE-TAX) ANGEL ROIC (PRE-TAX) 13.0 13.6 21.6 19.5 20.7 29.6 17.7 19.4 24.9 17.5 18.8 22.5 35.9 35.9 57.5 6 181.2 61.5 61.5 83.8 7 234.6 64.8 64.8 90.4 11 286.6 70.9 70.9 102.4 12 343.9 7.4 4.6 1.5 0.6 5.8 4.3 3.2 1.1 0.6 4.7 4.1 3.0 0.9 0.6 4.6 3.8 2.6 0.8 0.5 3.9 FY2010 FY2011 FY2012E FY2013E
(INC.)/DEC. IN LOANS AND ADVANCES (8) OTHER INCOME CASH FLOW FROM INVESTING INC./(DEC.) IN LOANS DIVIDEND PAID (INCL. TAX) OTHERS CASH FLOW FROM FINANCING INC./(DEC.) IN CASH OPENING CASH BALANCES CLOSING CASH BALANCES
11 (36) (43) (7) (2) (52) 0.8 2.1 2.9
ROE TURNOVER RATIOS (X) INVENTORY / SALES (DAYS) RECEIVABLES (DAYS) PAYABLES (DAYS)
52 64 45
51 64 51
59 69 53
59 64 51
January 2012
407
Mid-Cap
SpiceJet
Company Background
SpiceJet is India's second largest low-cost carrier (LCC), after Indigo, and the fourth largest airline overall with a market share of 15.5% (as of November 2011). The company is the only listed airline to have reported profit in FY201011. The company, earlier a domestic airline, has recently diversified into international routes; the airline is flying to Colombo and Nepal and is waiting for clearance to fly to nearby Asian countries. Despite a weak macroeconomic environment, the company has been expanding its fleet size.
Structural Snapshot
Growth opportunity: Long-term demand for air travel is expected to remain high due to the low penetration of air traffic in India. It is estimated that only 43 travelers per 1,000 travel by air, which is 12 times lower when compared to the U.S. (520/1,000), and nearly five times lower than China (215/1,000). The Indian aviation sector as a whole is going to experience enormous growth over the next 15-20 years. Airbus expects the sector to register a 10% CAGR over the next 20 years. However, the sector is witnessing low load factor due to excess capacity. Competitive position: The aviation industry is a highly competitive industry and SpiceJet does not hold any sustainable competitive advantage. However, when sector load factors are low, being a 100% LCC enables higher load factor than full-cost carriers (FCCs); and opting for fleet addition through operating lease leads to a relatively healthier, flexible balance sheet for SpiceJet Nature of business: Cyclical; Prone to over capacity due to easy availability of finance; Profitability impacted by higher fuel prices.
STOCK RETURNS (%) SPICEJET BSE MIDCAP SENSEX 3M (0.2) 1Y (67.8) 3Y 23.0 21.3 5Y (1.4) 3.3 10Y 17.3 14.5 (17.7)
(8.5) (20.9) (2.6) (12.3)
FINANCIAL PERFORMANCE OVERVIEW (%) SALES GROWTH* OPM# ROE# 3M 22.0 (30.2) 1Y 34.5 3.9 3Y 31.3 5Y 56.7 10Y -
PAT GROWTH* (2,4746)
64.7 (191.2) (225.1) (6.6) (12.4) -

Strong demand and capacity expansion to boost top line: Demand for the aviation sector is expected to witness a 15% CAGR over FY2011-13. In the 11 months of CY2011, demand had grown by 17.6% yoy. SpiceJet currently has a fleet of 31 Boeing aircraft and seven Bombardier aircraft. By FY2013-end, SpiceJet would have expanded its fleet size to 37 Boeings and 15 Bombardiers. We expect net sales to post a 36.8% CAGR to `5,489cr over FY2011-13. High fuel cost and competition to dent margins: Due to the significant increase in fuel cost and high competition, SpiceJet was unable to fully pass on its cost to the customer. This resulted in a significant decline in the company's margins, because of which the company has been reporting losses over the past three quarters. We expect SpiceJet to report loss in FY2012 as well as in FY2013 due to high fuel cost and impractical ticket pricing by competitors. Valuations in the near term: We value SpiceJet on P/E basis; and since the company is not expected to report profit, we remain Neutral on the stock. The key risk to our call is that any substantial fleet reduction by the larger, deeply loss-making airlines could improve the operating environment for the sector.
ANGEL ESTIMATES PARTICULARS PAT GROWTH (%) ROE (%) P/E P/BV FY2012E 5.8 FY2013E 22.0
408
January 2012
PROFIT & LOSS

Y/E MARCH (` CR) ` TOTAL OPERATING INCOME FY2010 2,181.1 FY2011 2,934.4 FY2012E 4,164.6 FY2013E 5,489.1
BALANCE SHEET
Y/E MARCH (` CR) ` SOURCES OF FUNDS EQUITY SHARE CAPITAL RESERVES& SURPLUS SHAREHOLDERS FUNDS TOTAL LOANS TOTAL LIABILITIES APPLICATION OF FUNDS GROSS BLOCK LESS: ACC. DEPRECIATION NET BLOCK CAPITAL WORK-IN-PROGRESS INVESTMENTS CURRENT ASSETS CURRENT LIABILITIES NET CURRENT ASSETS TOTAL ASSETS 263 36 227 165 597 893 (296) 96 292 45 247 451 411 703 (291) 407 1,392 75 1,317 473 845 (371) 946 1,792 133 1,659 535 1,116 (581) 1,078 242 (584) (342) 438 96 405 (84) 321 86 407 441 (281) 160 786 946 441 (399) 42 1,036 1,078 FY2010 FY2011 FY2012E FY2013E
% CHG
29.1
2,155 26
34.5
2,819 116
41.9
4,420 (256)
31.8
5,517 (28)
(% OF NET SALES)
1.2
8 6 61
3.9
9 5 26
(6.1)
30 44 37
(0.5)
58 59 27
(% OF PBT)
83
73 6 68 6
20
128 2 126 25
(13)
(292) (292) -
(23)
(118) (118) -
(% OF PBT)
9.4
61 61 61
19.6
101 101 101
(292) (292) (292)
(118) (118) (118)
% CHG
(117.4)
64.7
(388.7)
(59.7)
CASH FLOW STATEMENT

Y/E MARCH PROFIT BEFORE TAX DEPRECIATION CHANGE IN WORKING CAPITAL FY2010 73 8 178 FY2011 128 9 (52) (8) 25 53 (306) (69) (375) 163 54 (154) 64 (258) 451 192 FY2012E (292) 30 97 (165) (619) (34) (653) 131 700 (18) 813 (5) 192 188 FY2013E (118) 58 246 187 (342) (68)
KEY RATIOS
Y/E MARCH VALUATION RATIOS P/E (ON FDEPS) P/CEPS P/BV EV/SALES EV/EBITDA EV/EBITDAR PER SHARE DATA (`) ` 14.0 7.4 (1.5) 0.2 19.1 1.2 8.5 7.8 2.7 0.3 6.5 1.4 (3.2) (3.6) 5.8 0.4 (6.0) 5.0 (7.9) (15.6) 22.0 0.3 (64.5) 2.8 FY2010 FY2011 FY2012E FY2013E
EXPENSES (DEFFERED)/WRITTEN OFF (32) DIRECT TAXES PAID CASH FLOW FROM OPERATIONS (INC.)/ DEC. IN FIXED ASSETS 6 221 (139)
(INC.)/ DEC. IN LOANS AND ADVANCES 42 CASH FLOW FROM INVESTING ISSUE OF EQUITY INC./(DEC.) IN LOANS OTHERS CASH FLOW FROM FINANCING INC./(DEC.) IN CASH OPENING CASH BALANCES CLOSING CASH BALANCES
EPS (BASIC) (98) 0 19 20 143 308 451 (410) EPS (FULLY DILUTED) CASH EPS 250 (55) 195 (29) 188 159 BOOK VALUE TURNOVER RATIOS (X) INVENTORY / SALES (DAYS) RECEIVABLES (DAYS) PAYABLES (DAYS) WORKING CAPITAL CYCLE
2.5 1.5 2.9 (14.1)
2.5 2.5 2.7 7.9
(6.6) (6.6) (5.9) 3.6
(2.7) (2.7) (1.4) 1.0
2 3 103 (104)
2 2 86 (77)
2 2 68 (46)
3 3 64 (43)
January 2012
409
Mid-Cap
Taj GVK
Company Background
CMP/TP/Upside: `76 / `121 / 59%
TAJGVK is a JV between Indian Hotels Co. Ltd. (I HCL) and Hyderabad-based GVK Group. The company operates in Hyderabad with three properties - Taj Krishna with 260 rooms, Taj Deccan with 151 rooms and Taj Banjara with 122 rooms. The company also operates Taj Chandigarh with 149 rooms and Taj Mount Road in Chennai with 215 rooms. The company is expected to soon commence operations of its new 189-room property in Begumpet, Hyderabad, which will take its owned rooms to 1,086. The company will also start a new 275-room five-star deluxe hotel in Santacruz, near Terminal 1C of the Mumbai International Airport, under the Taj brand and will invest ~`110cr in the hotel project. The hotel project is expected to be commercially operational by mid-2014.
STOCK RETURNS (%) TAJ GVK BSE MIDCAP SENSEX 3M 1Y 3Y 23.0 21.3 5Y (1.4) 3.3 10Y 19.9 17.3
Growth opportunity: India is the second fastest growing economy in the world. As a result, the country is witnessing increased business activities, thus leading to more number of business travelers, both domestic and international. In addition to domestic business travelers, the number of domestic leisure travelers is also increasing because of the overall increase in income levels in India. Over 2000-10, average annual growth in international tourism stood at 3.4%, increasing from 674mn in 2000 to 940mn in 2010, with emerging markets (5.6%) strongly outpacing advanced economies (1.8%). Over 2011-21, India is expected to register 8.8% annual growth in travel and tourism's (WTTC-Travel & Tourism 2011). Competitive position: TAJGVK has a strong brand presence. The company has a strong customer base and has a leadership position in Hyderabad. Nature of business: Cyclical and capital-intensive business; Low entry barriers for new players.
Structural Snapshot
(13.6) (36.4) (8.5) (20.9) (2.6) (12.3)
17.0 (19.6)
FINANCIAL PERFORMANCE OVERVIEW (%) PAT GROWTH* OPM# ROE# 3M (42.0) 32.1 1Y 13.6 37.1 14.1 3Y 0.2 39.0 15.1 5Y 6.5 10Y 17.3 SALES GROWTH* (1.8)
19.5 (14.9)
(1.3) 25.1 42.2 35.0 22.0 17.8

Strengthening its foothold in the Hyderabad market: TajGVK is the market leader in Hyderabad, where it has a share of nearly 30% in premium-segment rooms. The company is coming up with a 189-room property in Begumpet to strengthen its foothold further and to tap mid-market room demand. The company also plans to add service apartments and retail space in its existing Taj Krishna property. We believe TajGVK would emerge as a prime beneficiary of the growth in demand in Hyderabad after the expansion. Asset-light strategy to keep balance sheet healthy: TajGVK has built its Begumpet property using an asset-light strategy. This would require a lower capital outlay as compared to a greenfield expansion, and we expect the company's debt-equity ratio to be at a comfortable level of 0.2x in FY2013E, which provides TajGVK adequate room to plan further expansions, without hampering its balance sheet quality. Valuations attractive: The stock is currently trading at attractive valuations of 9.6x and 7.6x its FY2012E and FY2013E EPS, respectively. We have valued the stock at 12x its FY2013E earnings. We maintain our Buy view on the stock with a revised target price of ` 121.
410
January 2012
PROFIT & LOSS

BALANCE SHEET
Y/E MARCH (` CR) ` SOURCES OF FUNDS EQUITY SHARE CAPITAL RESERVES& SURPLUS SHAREHOLDERS FUNDS TOTAL LOANS DEFERRED TAX LIABILITY TOTAL LIABILITIES APPLICATION OF FUNDS GROSS BLOCK LESS: ACC. DEPRECIATION NET BLOCK CAPITAL WORK-IN-PROGRESS INVESTMENTS CURRENT ASSETS CURRENT LIABILITIES NET CURRENT ASSETS MIS. EXP. NOT WRITTEN OFF TOTAL ASSETS 483 107 375 84 0 36 63 (27) 2 434 492 128 364 124 0 46 54 (8) 1 482 667 152 514 20 0 53 78 (25) 1 510 707 181 525 20 0 54 89 (35) 1 512 13 280 293 125 16 434 13 309 321 141 19 482 13 347 360 131 19 510 13 399 412 81 19 512 FY2010 FY2011 FY2012E FY2013E
% CHG
(3.9)
143 86
13.6
163 96
19.6
200 110
16.0
229 131
(% OF NET SALES)
37.6
20 12 1
37.1
21 11 1
35.5
24 12 1
36.3
29 7 1
(% OF PBT)
RECURRING PBT
2
55
2
66
2
75
1
96
% CHG
EXTRAORDINARY INCOME/(EXP.) PBT (REPORTED) TAX
(32.8)
(0) 55 19
19.7
66 22
14.6
75 26
27.2
96 33
(% OF PBT)
34.0
36 36
34.1
43 43
34.0
50 50
34.0
63 63
% CHG
(31.3)
19.5
14.7
27.2
CASH FLOW STATEMENT

Y/E MARCH PROFIT BEFORE TAX DEPRECIATION CHANGE IN WORKING CAPITAL DIRECT TAXES PAID CASH FLOW FROM OPERATIONS (INC)./ DEC IN FIXED ASSETS (INC)./ DEC IN INVESTMENTS (INC)/ DEC IN LOANS AND ADVANCES CASH FLOW FROM INVESTING ISSUE OF EQUITY INC./(DEC.) IN LOANS DIVIDEND PAID (INCL. TAX) OTHERS CASH FLOW FROM FINANCING INC./(DEC.) IN CASH OPENING CASH BALANCES CLOSING CASH BALANCES
KEY RATIOS
FY2011 66 21 (12) 22 52 (49) (5) (54) 16 (6) (5) 5 2 3 5 FY2012E 75 24 21 26 95 (70) (2) (72) (10) (10) (1) (21) 1 5 6 FY2013E 96 29 8 33 100 (40) (40) (50) (10) (1) (61) (2) 6 5 Y/E MARCH VALUATION RATIOS P/E (ON FDEPS) P/CEPS P/BV 13.2 8.6 1.6 0.7 2.6 7.0 11.1 7.5 1.5 0.7 2.4 6.4 9.6 6.5 1.3 0.6 1.9 5.5 7.6 5.2 1.2 0.5 1.5 4.3 FY2010 FY2011 FY2012E FY2013E
FY2010 55 20 7 19 63 (36) (0) (2) (38) (14) (13) 2 (24) 1 2 3
EV/ROOM (` CR.) ` EV/SALES EV/EBITDA PER SHARE DATA (`) ` EPS (FULLY DILUTED) CASH EPS DPS BOOK VALUE RETURNS (%) ROCE (PRE-TAX) ANGEL ROIC (PRE-TAX) ROE TURNOVER RATIOS (X) INVENTORY / SALES (DAYS) RECEIVABLES (DAYS) PAYABLES (DAYS)
5.8 8.9 2.0 46.7
6.9 10.2 1.0 51.3
7.9 11.8 1.6 57.4
10.1 14.7 1.6 65.7
15.4 19.1 12.9
16.5 21.5 14.1
17.3 17.7 14.6
19.9 20.8 16.4
7 11 152
6 12 131
6 13 121
7 13 133
January 2012
411
Mid-Cap
Tata Sponge Iron

TOP PICK
Tata Sponge Iron (TSIL) is an associate company of Tata Steel, which holds a 39.7% stake in the company. TSIL is a leading manufacturer of sponge iron, which is used as a raw material in steel manufacturing through the EAF route. The company has an installed capacity of 3,90,000 TPA and a 26MW captive power plant based on waste heat recovery from its kilns. The company is trying to get into coal mining through its 45% stake in Talcher coal block in Orissa, with estimated reserves of 120mn tonnes.
Structural Snapshot
Growth opportunity: Sponge iron is used as a substitute of scrap in the manufacturing of crude steel by EAF method, which is used in 60% of crude steel production. Increasing scrap prices and declining supply have led to higher demand for sponge iron. In addition, the company is in the process of backward integration into coal mining and power generation. Once mining activities at Talcher block begin, the company's OPM will gradually improve as coal constitutes ~55% of its raw-material cost. TSIL also plans to expand its power-generation capacity to 51MW over the next two to three years. Competitive position: TSIL is better placed in the industry owing to healthy relations with its customers. Unlike TSIL, most major sponge iron manufacturers are forward integrated, as they are also involved in the manufacture of steel, thereby reducing competition for TSIL. Nature of business: Cyclical; Low entry barriers.
STOCK RETURNS (%) TSIL BSE MIDCAP SENSEX 3M (16.1) 1Y (27.9) 3Y 23.2 23.0 21.3 5Y (1.4) 3.3 10Y 17.3 17.6 30.1
(8.5) (20.9) (2.6) (12.3)
FINANCIAL PERFORMANCE OVERVIEW (%) PAT GROWTH* OPM# RoE# 3M 108.7 17.2 1Y 30.0 19.9 22.2 21.9 3Y 14.1 3.1 25.3 24.0 5Y 28.5 10Y 19.6 SALES GROWTH* (1.2)
35.6 28.1 25.0 25.2 24.7 26.0

Assured supply of iron ore from Tata Steel: TSIL has a long-term supply agreement with its associate company Tata Steel, for the assured supply of iron ore, which insulates it from the price volatility in the spot market. Approval on coal block - A trigger: TSIL has deposited money for the first phase of land acquisition with the Orissa government and has received environmental clearance for the block (Talcher). However, forest clearance for the block is currently pending. Progress on the same could be a potential trigger for the stock. Attractive valuations: TSIL is a debt-free company with cash reserves of `188cr and RoIC of 57.6% for FY2011. We expect the company's revenue to witness a 16% CAGR over FY2011-13E, with cash reserves of `221cr and RoIC of 44% for FY2013E. The stock is currently trading at attractive valuations with P/B of 0.6x for FY2013E, which is at a ~28% discount to its five-year median of 0.9x. Hence, we maintain our Buy recommendation on the stock with a target price of ` 382, based on target P/B of 0.9x for FY2013E.
412
January 2012

BALANCE SHEET
Y/E MARCH (` CR) ` SOURCES OF FUNDS EQUITY SHARE CAPITAL RESERVES & SURPLUS SHAREHOLDERS FUNDS TOTAL LOANS 15 405 420 0 46 466 15 492 507 39 546 15 563 579 20 34 632 15 637 653 14 34 701 FY2010 FY2011 FY2012E FY2013E
% CHG
(14.7)
396 124
30.0
526 150
2.6
563 130
14.6
659 136
(% OF NET SALES)
23.8
19 0 104 22
22.2
19 131 19
18.7
21 0 109 21
17.1
22 0 114 24 DEFFERED TAX LIABILITY (NET) TOTAL LIABILITIES APPLICATION OF FUNDS GROSS BLOCK LESS: ACC. DEPRECIATION NET BLOCK CAPITAL WORK-IN-PROGRESS INVESTMENTS CURRENT ASSETS 359 154 206 122 1 215 78 138 466 360 171 189 129 34 287 93 194 546 396 192 204 148 60 311 91 220 632 435 213 222 156 60 370 107 263 701
(% OF NET SALES)
PBT (REPORTED) TAX
4.2
126 42
2.8
150 49
3.0
130 42
3.0
137 45
(% OF PBT)
33.0
85 85 85
32.6
101 101 101
32.6
88 88 88
33.0
92 92 92
CURRENT LIABILITIES NET CURRENT ASSETS MISC EXP NOT WRITTEN OFF TOTAL ASSETS
% CHG
(30.0)
19.9
(13.6)
5.1
CASH FLOW STATEMENT

KEY RATIOS
FY2011 150 19 38 (18) (49) 140 (8) (34) 8 (33) (0) (14) 2 (12) 95 93 188 FY2012E 130 21 (30) (26) (42) 51 (55) (26) 21 (60) 20 (16) 4 (5) 188 183 FY2013E 137 22 (5) (24) (45) 85 (47) 24 (23) (6) (18) (24) 38 183 221 Y/E MARCH VALUATION RATIO (X) P/E (ON FDEPS) P/CEPS P/BV EV/SALES 4.6 3.8 0.9 0.6 2.4 3.9 3.3 0.8 0.2 1.1 4.5 3.6 0.7 0.2 1.3 4.2 3.4 0.6 0.2 0.9 FY2010 FY2011 FY2012E FY2013E
FY2010 126 19 (5) (15) (42) 85 (101) 7 (94) 0 (12) (0) (12) (21) 115 93
54.9 54.9 67.5 8.0 272.8
65.8 65.8 77.8 9.3 329.3
56.9 56.9 70.3 9.0 375.7
59.8 59.8 73.9 10.0 423.9
24.0 40.2 22.0
25.7 57.6 21.9
18.4 48.8 16.1
16.9 44.0 15.0
42 20 61
35 16 59
36 20 59
36 20 59
January 2012
413
Mid-Cap
TVS Srichakra
Company Background
CMP/TP/Upside: `317 / `478 / 51%
TVS Srichakra (TVSSL), a part of the TVS Group, is a leading manufacturer of two and three-wheeler tyres in India with a market share of 25% (in FY2011). TVSSL manufactures a variety of tyres, including industrial pneumatic tyres, farm and implement tyres, skid steer tyres, multipurpose tyres and floatation tyres, for the export market, which constitutes 11% of its revenue. The company has increased its installed capacity of automotive tyres by 170% to 3.3cr units over FY2009-11 to meet the increasing demand for two and threewheeler tyres. TVSSL earns 58% of its revenue from the OE segment, 30% from the replacement segment and the rest 11% from exports.
STOCK RETURNS (%) TVSSL BSE MIDCAP SENSEX 3M (19.2) 1Y 17.0 3Y 76.5 23.0 21.3 5Y (1.4) 3.3 10Y 17.3 20.4 25.6
Structural Snapshot
Growth opportunity: The Indian two-wheeler industry is expected to grow at a 13% CAGR over FY2011-13E, which is likely to drive volume at a 10% CAGR over FY2011-13E for TVSSL. In addition, the company is increasing its focus on the replacement and export segments, which are likely to drive its revenue. Also, TVSSL has increased its debt to `385cr in 1HFY2012 for the expansion plan at the Madurai plant to increase its SKUs in order to increase the number of segments it caters to. Competitive position: The company is the second largest player with a market share of 25% (in FY2011) in the two and three-wheeler tyre segments, next to MRF - who is the leader with a 28% market share. Nature of business: Rate-sensitive sector; Dependent on the two and threewheeler population growth.
(8.5) (20.9) (2.6) (12.3)
24.8 20.8

Volume growth to drive operating leverage and improve margins: We expect the company's volume to witness an 10% CAGR over 2011-13E, led by ramp-up in capacity utilization from 48% in FY2011 to 58% in FY2013E. The leverage benefits, along with expected softening of rubber prices going forward, will lead to 99bp expansion in operating margin to 9.3% in FY2013E from 8.4% in FY2011. Increase in promoters' stake - A positive for the company: TVSSL's promoters have increased their stake from 39.5% in September 2008 to 44.7% in December 2012. This is a positive signal for investors, as it demonstrates the confidence of the promoters in the company's future growth outlook. Valuations attractive: The stock is trading at attractive valuations of 4.0x FY2013E earnings, which is at a 24% discount to its five-year historical median of 5.3x. We recommend Buy on TVSSL with a target PE of 6x for FY2013E and a target price of ` 478.
414
January 2012

BALANCE SHEET
Y/E MARCH (` CR) ` SOURCES OF FUNDS EQUITY SHARE CAPITAL RESERVES & SURPLUS SHAREHOLDERS FUNDS TOTAL LOANS 8 78 86 174 8 268 8 106 114 256 10 380 8 139 147 388 10 545 8 191 199 376 10 585 FY2010 FY2011 FY2012E FY2013E
% CHG
21.6
636 65
54.9
995 91
31.2
1,300 124
13.2
1,461 151
(% OF NET SALES)
9.3
12 16 38 6
8.4
16 30 45 12
8.7
23 51 49 13
9.3
27 52 72 16 DEFFERED TAX LIABILITY TOTAL LIABILITIES APPLICATION OF FUNDS GROSS BLOCK LESS: ACC. DEPRECIATION NET BLOCK CAPITAL WORK-IN-PROGRESS INVESTMENTS CURRENT ASSETS 192 80 112 3 3 315 166 150 0 268 250 95 155 10 3 481 269 212 0 380 300 118 182 10 3 682 331 350 0 545 330 145 185 10 3 764 376 387 0 585
(% OF NET SALES)
PBT (REPORTED) TAX
0.8
43 14
1.1
57 18
0.9
62 19
1.0
88 27
(% OF PBT)
31.2
30 30 30
31.5
39 39 (0) 39
31.0
43 43 43
31.0
61 61 61
% CHG
233.0
31.0
9.5
42.4
CASH FLOW STATEMENT

KEY RATIOS
FY2011 57 16 (66) 20 (18) 10 (65) (7) 7 (65) 81 (10) (20) 52 (3) 9 5 FY2012E 62 23 (135) 39 (19) (30) (50) 13 (37) 132 (10) (51) 71 3 5 8 FY2013E 88 27 (38) 35 (27) EV/EBITDA 6.2 5.4 5.0 4.0 85 (30) 0 16 (13) (12) (10) (52) ROE 39.6 39.2 32.8 35.3 (73) (1) 8 7 TURNOVER RATIOS (X) INVENTORY / SALES (DAYS) RECEIVABLES (DAYS) PAYABLES (DAYS) 81 62 95 89 58 99 77 69 93 82 69 94 PER SHARE DATA (`) ` EPS (BASIC) EPS (FULLY DILUTED) CASH EPS DPS BOOK VALUE RETURNS % ROCE (PRE-TAX) ANGEL ROIC (PRE-TAX) 19.9 21.0 19.7 20.7 18.5 19.2 21.2 21.9 39.0 39.0 54.4 10.0 112.0 51.1 51.1 71.7 12.5 148.6 55.9 55.9 85.7 12.5 192.1 79.7 79.7 114.6 12.5 259.2 Y/E MARCH VALUATION RATIO (X) P/E (ON FDEPS) P/CEPS P/BV EV/SALES 8.1 5.8 2.8 0.6 6.2 4.4 2.1 0.5 5.7 3.7 1.7 0.4 4.0 2.8 1.2 0.4 FY2010 FY2011 FY2012E FY2013E
FY2010 43 12 2 19 (14) 62 (49) (2) (5) (56) 17 (8) (20) (10) (5) 13 9
January 2012
415
Mid-Cap
Vesuvius India
Company Background
CMP/TP/Upside: `325 / `401 / 23%
SHAREHOLDING PATTERN (%) Promoters (MNC) FII 55.6 10.2
Vesuvius India Ltd. (VIL) is a subsidiary of Vesuvius Group Ltd., U.K. (a wholly owned subsidiary of Cookson Group Plc.), which holds a 55.6% stake in the company. VIL provides refractory products and services for the construction and maintenance of industrial equipment and processes. The company caters to different industries such as iron and steel plant; CFBC and other boilers; aluminium calciner, aluminium melting and holding furnaces; and DRI plants and iron pellet plants. The company is a supplier of refractories to large companies such as SAIL, JSW Steel, Rashtriya Ispat Nigam, ESSAR and L&T.
STOCK RETURNS (%) Vesuvius BSE MIDCAP SENSEX 3M (17.3) 1Y 6.3 3Y 55.5 23.0 21.3 5Y (1.4) 3.3 10Y 17.3 4.0 23.9
Structural Snapshot
Growth opportunity: The refractory market in India constituted ~3.5% of the global refractory sales in FY2010, of which ~28% was imported from China. About 75% of the refractories produced are used in the iron and steel industry. Global refractory demand is expected to witness a 5.3% CAGR (as per Freedoniea Group, a market research firm) over CY2009-14E. As per World Steel Association (WSA) estimates, global steel demand is expected to increase by 5.4% yoy in CY2012E, while India's steel demand is estimated to grow by 7.9% yoy in CY2012 due to increased infrastructure demand. Competitive position: VIL is a market leader in the Indian refractory market, with a market share of 25%. The company is well placed in the industry due to its strong customer base. Nature of business: High entry barriers.
(8.5) (20.9) (2.6) (12.3)
FINANCIAL PERFORMANCE OVERVIEW (%) SALES GROWTH* PAT GROWTH* OPM# RoE# 3M 21.7 12.2 18.1 1Y 21.7 29.3 18.1 20.8 3Y 11.3 14.4 16.9 18.1 5Y 10Y 15.0 20.0 11.1 14.9 17.1 18.9 19.1 20.0

Reduction in imports to provide huge opportunities: About 30-35% of the total refractories are imported in India, which we believe would reduce going forward due to capacity expansion plans of ~15% in CY2011 by major domestic players. This would lead to substitution of imports by domestic players. Capacity expansion to drive revenue growth by CY2012E: VIL doubled the capacity of its Kolkata plant from 400 pieces per day to 800 pieces per day, which was expected to be operational by CY2011. The company's revenue is expected to post a ~17.1% CAGR over CY2010-12E, primarily driven by import substitution and higher steel demand. Valuations: We expect the stock to rerate on the back of net profit reporting a 13.5% CAGR over CY2010-12E. The stock is currently trading at PE of 10.6x its CY2012E earnings, which is attractive for an MNC with no debt and RoIC of 42.4% for CY2010. Thus, we maintain our Buy view on the stock with a target price of `401, based on a target PE of 13x for CY2012E.
ANGEL ESTIMATES PARTICULARS PAT GROWTH (%) RoE (%) P/E P/BV CY2011E 9.4 19.4 12.4 2.2 CY2012E 17.8 19.5 10.6 1.9
416
January 2012

Y/E DEC. (` CR) ` TOTAL OPERATING INCOME CY2009 362 CY2010 440 CY2011E 525 CY2012E 603
BALANCE SHEET
Y/E DEC. (` CR) ` SOURCES OF FUNDS EQUITY SHARE CAPITAL RESERVES & SURPLUS SHAREHOLDERS FUNDS TOTAL LOANS DEFFERED TAX LIABILITY (NET) TOTAL LIABILITIES APPLICATION OF FUNDS GROSS BLOCK LESS: ACC. DEPRECIATION NET BLOCK CAPITAL WORK-IN-PROGRESS INVESTMENTS CURRENT ASSETS CURRENT LIABILITIES NET CURRENT ASSETS MISC EXP NOT WRITTEN OFF TOTAL ASSETS 161 79 82 21 193 77 115 218 181 90 92 20 373 226 147 259 254 109 145 20 446 310 137 302 254 129 125 5 577 356 221 352 20 193 213 5 218 20 233 253 6 259 20 276 296 6 302 20 325 346 6 352 CY2009 CY2010 CY2011E CY2012E
% CHG
2.5
298 64
21.7
360 80
19.2
433 91
15.0
497 106
(% OF NET SALES)
17.7
13 1 50 6
18.1
13 1 66 9
17.4
19 1 71 9
17.6
20 1 86 9
(% OF NET SALES)
PBT (REPORTED) TAX
1.5
56 19
2.0
75 26
1.8
81 27
1.5
95 32
(% OF PBT)
PAT (REPORTED) LESS: MINORITY INTEREST (MI) SHARE IN PROFITS OF ASSOCIATES PAT AFTER MI (REPORTED) EXTRAORDINARY EXPENSE/(INC.) ADJ. PAT
33.2
37 37 (0) 38
34.7
49 49 0 49
34.0
53 53 53
34.0
63 63 63
% CHG
18.8
29.3
9.4
17.8
CASH FLOW STATEMENT

KEY RATIOS
CY2010 75 13 (31) (0) (26) 31 (19) 9 (10) (21) (9) 1 (9) 1 55 56 CY2011E 81 19 21 (9) (27) 84 (73) 9 (0) (64) (10) (10) 11 56 67 CY2012E 95 20 (10) (9) (32) EV/EBITDA 9.5 7.6 6.5 4.9 63 15 9 (1) 23 (12) ROE 18.9 20.8 19.4 19.5 (12) 74 67 141 TURNOVER RATIOS (X) INVENTORY / SALES (DAYS) RECEIVABLES (DAYS) PAYABLES (DAYS) 30 99 95 31 96 229 31 97 215 31 97 215 PER SHARE DATA (`) ` EPS (BASIC) EPS (FULLY DILUTED) CASH EPS DPS BOOK VALUE RETURNS (%) ROCE (PRE-TAX) ANGEL ROIC (PRE-TAX) 25.1 33.8 28.0 42.4 25.7 37.3 26.5 42.4 18.5 18.5 24.8 3.7 105.1 23.9 23.9 30.3 4.0 124.6 26.2 26.2 35.7 4.0 145.8 30.8 30.8 40.6 5.0 170.3 Y/E DEC. VALUATION RATIO (X) P/E (ON FDEPS) P/CEPS P/BV EV/SALES 17.6 6.5 3.1 1.7 13.6 5.3 2.6 1.4 12.4 9.1 2.2 1.1 10.6 8.0 1.9 0.9 CY2009 CY2010 CY2011E CY2012E
CY2009 56 13 32 (10) (19) 73 (37) 6 8 (23) (9) 5 (4) 45 9 55
January 2012
417
Disclaimer
This document is solely for the personal information of the recipient, and must not be singularly used as the basis of any investment decision. Nothing in this document should be construed as investment or financial advice. Each recipient of this document should make such investigations as they deem necessary to arrive at an independent evaluation of an investment in the securities of the companies referred to in this document (including the merits and risks involved), and should consult their own advisors to determine the merits and risks of such an investment. Angel Broking Limited, its affiliates, directors, its proprietary trading and investment businesses may, from time to time, make investment decisions that are inconsistent with or contradictory to the recommendations expressed herein. The views contained in this document are those of the analyst, and the company may or may not subscribe to all the views expressed within. Reports based on technical and derivative analysis center on studying charts of a stock's price movement, outstanding positions and trading volume, as opposed to focusing on a company's fundamentals and, as such, may not match with a report on a company's fundamentals. The information in this document has been printed on the basis of publicly available information, internal data and other reliable sources believed to be true, but we do not represent that it is accurate or complete and it should not be relied on as such, as this document is for general guidance only. Angel Broking Limited or any of its affiliates/ group companies shall not be in any way responsible for any loss or damage that may arise to any person from any inadvertent error in the information contained in this report. Angel Broking Limited has not independently verified all the information contained within this document. Accordingly, we cannot testify, nor make any representation or warranty, express or implied, to the accuracy, contents or data contained within this document. While Angel Broking Limited endeavours to update on a reasonable basis the information discussed in this material, there may be regulatory, compliance, or other reasons that prevent us from doing so. This document is being supplied to you solely for your information, and its contents, information or data may not be reproduced, redistributed or passed on, directly or indirectly. Angel Broking Limited and its affiliates may seek to provide or have engaged in providing corporate finance, investment banking or other advisory services in a merger or specific transaction to the companies referred to in this report, as on the date of this report or in the past. Neither Angel Broking Limited, nor its directors, employees or affiliates shall be liable for any loss or damage that may arise from or in connection with the use of this information. Note: Please refer to the important Stock Holding Disclosure' report on the Angel website (Research Section). Also, please refer to the latest update on respective stocks for the disclosure status in respect of those stocks. Angel Broking Limited and its affiliates may have investment positions in the stocks recommended in this report.
Ratings (Returns) :
Buy (> 15%)
Accumulate (5% to 15%) Reduce (-5% to -15%)
Neutral (-5 to 5%) Sell (< -15%)

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Table of Contents

Strategy ........................................................... 1 Agri-Chemicals ............................. 7

Infrastructure ........................... 185

Capital Goods ........................... 117

Media .......................................... 219

Cement ........................................ 137 Banking ......................................... 59

Metals ......................................... 233

FMCG .......................................... 159

Please refer to important disclosures at the end of this report

Power .......................................... 305

Telecom ....................................... 355

Real Estate ................................ 315

Oil & Gas .................................... 263

Software ..................................... 325

Pharmaceuticals ...................... 275

Please refer to important disclosures at the end of this report

Dawn of a new cycle

Self-correcting mechanisms in place

Expect 19,300 Sensex by December 2012

1,490 171 84 305 181 112 98 281 267 253

Select stocks to give better returns

Strategy Self-correcting mechanisms in place

Exhibit 3: Sensex EPS estimates Exhibit 1: Inflationary pressures moderating

WPI Inflation (%)

Food Inflation (%, RHS)

Source: MOSPI, Angel Research

Source: Angel Research

Exhibit 2: Expect at least 100bp cut in repo rate in CY2012

Repo rate (%)

Reverse Repo rate (%)

Source: RBI, Angel Research

Exhibit 9: Sensex one-year forward P/E

Sensex 1 year forward P/E

Source: Bloomberg, Angel Research

Expect 19,300 Sensex by December 2012

Please refer to important disclosures at the end of this report

Exhibit 12: Top 5 buys - cheapest on P/E basis

Source: Company, Angel Research

Exhibit 13: Top 5 buys - highest on RoE basis

Exhibit 10: Angel Universe Recommendation Summary

Source: Company, Angel Research

Exhibit 14: Companies with highest earning growth

Buy Buy Buy Sell Buy Neutral Neutral Neutral

Metals & Mining Accumulate Mid Cap Buy

Source: Company, Angel Research

Exhibit 15: Companies with lowest earning growth

Source: Angel Research; Note; No. represents no. of companies

Exhibit 11: Top 5 buys - cheapest on P/BV basis

Neutral Neutral Buy Neutral Neutral Neutral Neutral Neutral

Syndicate Bank Financials Finolex Cables Mid Cap

Source: Company, Angel Research; Note: *losses expected in FY13E/CY12E

Please refer to important disclosures at the end of this report

Exhibit 17: Companies trading at cyclically lower valuations

Source: Company, Angel Research

Source: Company, Angel Research

Exhibit 18: Contrarian Buys

Exhibit 19: Contrarian Avoids

Source: Bloomberg, Angel Research

Source: Bloomberg, Angel Research

Exhibit 20: Angel Universe Estimate Summary

Angel Universe 2,312,595 2,600,248 Source: BSE, Company, Angel Research

Please refer to important disclosures at the end of this report

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