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TMIndia Strategy 6 th April 2011RR, All Rights Reserved Page 1 of 32


INDEXContentsPage No.Indian EconomyIndian Economy Overview ewDestination India3 to 945 to 9Sectoral UpdatesAirlinesBankingCementITMetals & MiningPowerTelecom10 to 1711121314151617Stock PicksAnanat Raj IndustriesBajaj FinanceDeccan ChronicleIndian BankIRB InfraJubilant FoodworksKSB PumpsMICNestleNIIT TechYes BankZylog System18 to 30192021222324252627282930Contact UsDisclaimer3132RR, All Rights Reserved Page 2 of 32


INDIANECONOMYRR, All Rights Reserved Page 3 of 32


India StrategyIndia CallingWorld's largest democracy with 1.2 billionpeople.Stable political environment and responsiveadministrative set up.Well established judiciary to enforce rule oflaw.Land of abundant natural resources anddiverse climatic conditions.Rapid economic growth: GDP to grow by8.6% in FY11 and 9.0% in FY12.Investor friendly policies and incentivebased schemes.Attractive FDI Location in the WorldHealthy macro-economic fundamentals:Investment rate is expected to be 37% in2010-11 and 38.4% in 2011-12Domestic Savings rate is expected to be34% in 2010-11 and 36% in 2011-12.Cost competitiveness; low labour costs.Total labour force of nearly 530 million.Large pool of skilled manpower; strongknowledge base with significant Englishspeaking population.Young country with a median age of 30years by 2025: India's economy will benefitfrom this "demographic dividend".Indian Economy – An OverviewIndia is among the fastest growing economies in the world with the last 5years recording an average of over 8% growth. The economy hasweathered the global slowdown and all indicators point to good growthrates in 2009. Growth has been supported by a strong domestic demandand a competitive export strategy.India is the seventh largest and the second most populous country in theworld with a history that spans thousands of years. India, today, has adynamic economy and is recognised as a leader among the developingcountries with a huge potential for growth. Companies across the globerecognise the growth opportunities in India for investment and businessand most trans-nationals have a sizeable presence in the country.Indian economy is estimated to grow at 8.6% in 2010-11 as compared tothe growth rate of 8.0% in 2009-10. The growth rate of 8.6% in GDPduring 2010-11 has been due to the robust growth rates of over 8% inthe sectors of manufacturing, construction, trade, hotels, transport andcommunication, financing, insurance, and, real estate and businessservices. Agriculture sector registered a growth rate of 5.4% in 2009-10.A growth rate of 18.3% is estimated for GDP at current prices in the year2010-11.India has undergone a paradigm shift owing to its competitive stand inthe world. The Indian economy is on a robust growth trajectory andboasts of a stable annual growth rate, rising foreign exchange reservesand booming capital markets among others.India has been an important destination for foreign direct investment asalso for FII investments. India is a free-market democracy with a legaland regulatory framework that rewards free enterprise, entrepreneurshipand risk taking.Overseas investors are looking at India as an attractive investmentdestination owing to the prospects of high returns. A number ofCorporates and Multi National Companies from all over the world haveestablished business in India and have expanded over the years.India has witnessed a number of success stories - both Indian andmultinational firms have registered higher profits, increased turnover andhigher sales over the years. This has induced them to reinvest profitsand inject fresh capital into their processes in order to reap the benefitsof the India growth story.Indian Economy – At a GlanceThe proportion of population in the workingage group (15-59 years) is likely to increasefrom approximately 58% in 2001 to morethan 64% by 2021.Huge untapped market potential.Progressive simplification andrationalization of direct and indirect taxstructures.Reduction in import tariffs.Full current account convertibility.Compliance with WTO norms.Major Economic IndicatorsLatestReal GDP growth rate (FY’11) 8.60%Nominal GDP (USD Billion) 1506Inflation rate WPI (Feb’11) 8.31%IIP (Jan’11) 3.70%USD/INR Exchange Rate 44.77BSE Sensex (31 st March 2011) 19445Forex Reserves (USD Billion) 304Fiscal Deficit (% of GDP) FY’11 5.1%Current Account Balance (USD Billion) -15.8Export USD Billion) (Jan 2011) 21.0Import USD Billion) (Jan 2011) 28.6Business Confidence Index 158.1Consumer Confidence Index 73.0RR, All Rights ReservedPage 4 of 32


India Strategy12.0%10.0%8.0%6.0%4.0%2.0%0.0%9.7%GDP Growth Rate (%)GDP Growth (%)6.1%6.5%8.2%FY08 FY09 FY10 April'10 toDec'108.6%FY11 EDestination IndiaStrong GDP GrowthIndia is expected to witness a GDP growth of 8.6% for the fiscal year2010-11. The area sown under the Rabi crop is higher than in last yearwhich augurs well for agricultural production. Even as the index ofindustrial production (IIP) continues to be volatile, other indicators, suchas the latest Purchasing Managers’ Index (PMI), direct and indirect taxcollections, merchandise exports and bank credit, suggest that thegrowth momentum persists. Lead indicators of services sector activityalso remain robust.1600140012001000800600400200014.0%12.0%10.0%8.0%6.0%4.0%2.0%0.0%Nominal GDP (USD Billion)GDP (USD Billion)150612851159FY08 FY09 FY10WPI InflationInflation Rate (%)12.1%10.8%8.8%8.3%CY08 CY09 CY10 Jan11 to Feb'11However, continuing uncertainty about energy and commodity pricesmay vitiate the investment climate, posing a threat to the current growthtrajectory. In particular, the weak performance of capital goods in the IIPsuggests that investment momentum may be slowing down.A Consumption EconomyIn Indian economy, the share of investment remained constant over thepast few years. Government policies have made the situation worse withmajor focus of economic policies being on stimulating the economyfollowing the global credit crisis in late 2008. Economic policies haveincreasingly become more populist in nature with several social welfareprograms designed to provide food, employment, income and shelter tothe poor people.More important than the share of investment in the GDP, the quality,quantity and timing of investment are also important. Various factors likebureaucracy, corruption and outdated labor and land laws have furtherrepelled the adequate investments in modern farming, infrastructure andindustrial and infrastructure projects.Economic Reforms - To Boost GrowthGoods & Services Tax (GST)400380360340320300280260240220200277IIP (Base 1993-94)286IIP316309FY08 FY09 FY10 April'09 toJan'10335April'10 toJan'11In implementation of GST, though, the deferral has been disappointing,the question that continues to haunt tax payers is - when will it happenand do we have a definitive date? Some states are demandingunreasonable concessions - including on rate structure, central salestax's continuance and exemption for many items from under GST's ambit– that threaten to distort the purpose of indirect tax rationalisation.To make the implementation into reality, it is critical that the Centre andthe States need to reach a consensus by resolving differences. Once theconsensus has been reached at, necessary amendments would beneeded in constitution for GST regime to commence.Direct Tax Code (DTC)Economic Reforms like Implementation ofGoods and Services Tax and Direct TaxCode are likely to Boost GrowthProbability of DTC being implemented is relatively higher. Revised draftof DTC has addressed issues relating the Minimum Alternate Tax (MAT),taxation of long-term savings, capital gains and housing loans. MinimumAlternate Tax paid by eligible companies to be computed based onprofits and not on assets and retirement funds to continue to be exemptfrom tax on withdrawal.The Bill is presently with the Standing Committee. Though, there arelimited insights into the deliberations of the standing committee, it isanticipated to be passed smoothly.RR, All Rights ReservedPage 5 of 32


India StrategyExportsFinancial Sector Reforms - To Boost InvestmentsBankingPursuant to announcement made by Finance Minister regarding RBIconsidering issuing additional bank licenses to private sector, RBI hascome out with discussion paper seeking views/comments from variousstakeholders. The guidelines have covered points relating to capitalrequirements, ownership profile and business model.ImportsRecently RBI has the released gist of comments on the discussionpapers, which highlights comments, deliberations and issues raised byvarious stakeholders. It is expected that final guidelines to be releasedby early part of 2011 and new licenses would be issued in residualperiod of 2011.InsuranceInsurance bill that proposes to increase the FDI from current 26% to 49%has still not been introduced in the parliament. It is expected that somesteps to be taken in the direction to hike the FDI during the coming year.0-20-40-60-80-100-120-140450.0400.0350.0300.0250.0200.0150.0100.050.00.08.0%7.0%6.0%5.0%4.0%3.0%2.0%1.0%0.0%Balance of PaymentsBoP (USD Billion)CY08 CY09 CY10 Jan-11-8-88.4-115.1-126.2Gross Fiscal Deficit414.0Gross Fiscal Deficit (Rs '000 Cr)381.4337.0126.9FY08 FY09 FY10 FY11Fiscal Deficit (As a % of GDP)Fiscal Deficit (As a % of GDP)6.0% 6.7%5.1%4.1%2.7%FY08 FY09 FY10 FY'11 E FY'12 EPrivate sector entry in the industry would be completing a decade of itspresence. Going forward (once the norms for IPO are set out) privatesector would tap the capital markets to unlock value for the Indianpromoters and meet the capital requirements.MicrofinanceMicro-finance sector has been facing some heat after the AndhraPradesh government has taken steps against the industry. MFIordinance passed in Oct 2010, prohibits MFIs from extending andrecovering loans to the rural poor without registration with the districtadministration. Later on it has passed the bill that seeks to regulate theindustry. This has created collection problems for MFI sector, which has~30% exposure to Andhra Pradesh.RBI has setup Malegam committee to go into modalities for regulation ofMicrofinance Institutions. Meanwhile, RBI has had deliberations withbankers and MFI industry to look into issues of funding and has advisedbanks not to choke the funds as it may create further issues. It isexpected that some concrete and better regulatory framework andbusiness model to emerge for MFIs in 2011.Fiscal Situation – Comfortable LevelThe budgeted level of fiscal deficit for 2011-12 gives some comfort onthe demand front; a potential increase in the subsidies on petroleumproducts and fertilizers as a result of high crude prices could putpressure on expenditure. It is critical, therefore, to focus on the quality ofexpenditure, keeping the aggregate under control without compromisingon the delivery of services.Economic activity expected to remain strong will ensure strong taxbuoyancy. Moreover given the strong uptick in consumption demand,Govt will have some headroom for increasing taxes, additional cessesetc on some sectors such as cigarette, high end personal vehicles etc togenerate revenues for schemes such as NREGA, right to education andother rural development schemes etc. Success of various primary issuesincluding Coal India will likely keep up the appetite for Govt. divestmentprogramme.However, high crude Oil prices is likely to inflate oil subsidy burden asLPG, diesel regulation may suffer because of fear of fueling inflation.Though, de-regulation of complex fertilizer prices with a move towardsnutrient based pricing regime was a welcome step, but Urea remains theRR, All Rights ReservedPage 6 of 32


India StrategyForeign Exchange Reserve (USD Billion)major contributor to subsidy provision and Govt has not shown a firmmove on de-regulating prices. Increasing populism in the form of Foodsecurity act entailing increase in food subsidy bill.0.0-2.0-4.0-6.0-8.0-10.0-12.0-14.0-16.0-18.027026025024023022021020016416216015815615415215014874.073.072.071.070.069.068.067.066.065.0Current Account (USD Billion)India Current Account (USD Billion)March'10 June'10 Sept.'10-13.0-12.1-15.8India’s External Debt (USD Billion)External Debt (USD Billion)261.5224.4 224.5FY08 FY09 FY10Business Confidence IndexIndia Business Confidence162.1158.1156.8155.9153.8Jan'10 April'10 July'10 Oct'10 Jan'11Consumer Confidence IndexIndia Consumer Confidence73.068.868.068.2June'09 Dec,09 June'10 Dec'10Current Account – Deficit SituationThe Reserve Bank had expressed concern about the widening of thecurrent account deficit (CAD) and the nature of its financing in its ThirdQuarter Review. Going by the recent robust export performance, CAD for2010-11 is now estimated to come lower than earlier expected, at around2.5 per cent of GDP.Current account balance continued to worsen from FY10 levels for thesixth quarter in a row, reaching USD 41 bn in 9MCY10, which is on thehigher side. The higher current account deficit was more thancompensated by USD 50 bn of net inflows into the capital account.Within the capital account, the portfolio inflows remained robust. Tradecredit remained strong because of improvement in international financingconditions and healthy recovery in Indian economic activity. The monthlytrade data suggests that trade deficit continues to widen in Q4CY10 and,therefore, until invisibles improve markedly, current account deficit willremain on higher side.Current account deficit may remain high in the near term. While thewidening current account deficit is more than compensated by highercapital account inflows, concerns remain, especially because large partof it is funded by FII and ECB inflows, which are heavily influenced bythe global risk appetite. Any rise in global risk aversion could trigger highvolatility in capital flows to EMs including India. However, the damagewould be contained given large forex reserves of India (more than USD280 bn) that could provide sufficient cushion.Infrastructural Development – Focus AreaActivism demonstrated by the Ministry of Environment and Forests withrespect to the necessary clearances required for the construction ofseveral infrastructure projects resulted in a substantial slowdown in theexecution of power projects.Clearances to the several projects stuck at the Ministry of Environmentand Forests especially with respect to power and metal sector willprovide a trigger to the spending in the sector. This we believe is afunction of political disconnect at the center and timely resolution willhelp drive infrastructure spend during 2011.We expect the stalemate with respect to the above issues to continue atleast till the first half of CY11 and hence a substantial move forward willhappen only in the second half of 2011.Particularly with respect to the NHAI, for the year FY11, out of 2500 kmtargeted for completion, 988 km has been completed in the first 8 monthsof FY11 and out of 9000 km targeted for award only 3671 km wasawarded.Announcement of cut in the toll rates for 3-axle vehicles is expected toreduce the NHAI toll collections by about 10% -15%. This may affectviability of future projects leading to higher proportion of annuity/cashbased projects. Ministry of Finance has suggested a limit on the annuityspends of NHAI which may further delay the road development program.The overall targeted spend on infrastructure stands at Rs.5.28 trillion forFY12 as against Rs.4.6 trillion for FY11.RR, All Rights ReservedPage 7 of 32


India StrategyFDISteady FDI FlowAutomatic RouteApproval from Govt.FDI can be divided into two broad categories: investment underautomatic route and investment through prior approval of Government.The pickup in FDI inflows further reflects growing investor interest in theIndian economy on the back of strong fundamentals and simplifiedprocedures.India Attracted UDS 17.08 bn of FDI fromApril 2010 to January 2011Cumulative FDI Stands at USD 143.98 bnMauritius with 42% ShareSingapore with 9% ShareUS with 7% ShareThe FDI policy rationalization and liberalization measures taken by theGovernment have resulted in increased inflows of FDI over the years.FDI equity inflow in the month of January 2011 stood at 1.04 billion.During the financial year 2010-11 (April 2010-January 2011), FDI worthUS$ 17.08 billion was attracted in India. Cumulative amount of FDI from(August 1991 to January 2011) registered in India stood at US$ 143.98billion.During 2010-11 (April 2010-January 2011), Mauritius was the topinvesting country for India with 42% of the total inflows. Singapore wassecond with 9% share, U.S.A stood third with 7% share.U.K andNetherlands were on fourth and fifth places with 5% and 4% sharesrespectively.140.0120.0100.080.060.040.020.00.0-20.0-40.0-60.051.6FII Flow (Rs ‘000 Cr)FII Flow (Rs '000 Crore)-42.8117.6110.6FY08 FY09 FY10 FY11Recent Scams have Shaken Investor’sConfidenceFII Flow – Strong EnoughIndia has been an important destination for foreign direct investment asalso for FII investments. India is a free-market democracy with a legaland regulatory framework that rewards free enterprise, entrepreneurshipand risk taking.Accommodative monetary policy adopted by major developed countrieshas resulted in funds flowing from developed countries to emergingmarkets in search of better returns. Given India's strong growth story,foreign institutional investors' (FIIs) inflows have already reached Rs110.6 Cr in FY11 as against inflows of around Rs 117.6 Cr in FY10 andan outflow of Rs 42.6 Cr in FY’09. Strong FII inflows will help in easingthe current tight systemic liquidity and generates demand for bonds.Political Situation – States Election to WatchBunching of various scams/irregularities/ investigations including CWG,2G spectrum, housing loan related bank bribery has shaken theinvestors confidence. This has raised doubts in the minds of largecommunity of India investors about India’s track record on governance.However, a timely and effective action on this will restore confidence.But the Market shrug off the Same asCorruption is an Integral Part of EmergingEconomiesOutcome of States Election to be CloselyWatchLoss of Congress in the state of Bihar is likely to restrict its ability to takebold steps. Further 4 states (Assam, Kerala, Tamil Nadu and WestBengal) will go for poll during CY11. Outcome of West Bengal and TamilNadu may have an impact on the current composition of UPA Coalitionpartners as TMC and DMK are 2nd and 3rd largest parties in UPA with19 and 18 seats respectively.Telengana and Naxal related issues continue to remain unresolved andthis overhang is likely to have negative impact on business climate andinvestor’s confidence.The ongoing projects of Vendanta in Orissa and Lavasa in Maharashtraare facing a lot of regulatory issues including environmental clearances.Speedy resolution of the same and clear-cut spelt policies going forwardcould be a way to attract much needed foreign capital for large projects.RR, All Rights ReservedPage 8 of 32


India StrategyInflation - The Key RiskWPI Inflation is high driven by HighCommodity PricesFood Inflation is Rising Owing to DemandSide ForcesThe Rising Inflation is likely to Induce RBIto go for Rate HikeInflation continues to be a major concern, with wholesale price index(WPI) inflation numbers close to double-digit. Inflation rose to 8.58% inOct'10 - mainly due to high food and non-food articles prices. In comingmonths, food prices might move lower on better than advance estimatesfor kharif crops production. However, commodity prices are expected tomove northward on accommodative monetary policy in advancedcountries and stronger than expected demand in emerging economies.Going forward, inflation is likely to come down on favourable base effect.However, the strong domestic demand and high commodity prices willcontinue to put upward pressure on inflation.The food inflation is driven by demand side forces or at least enduringlags in supply. This means it is also non transient and calls for amonetary policy response.The policy-makers continue to remain concerned about high inflation. Inthe mid-term monetary policy, RBI has hinted at slower pace of ratehikes going forward. In coming months, the trend in inflation will be thecrucial factor for further policy actions.Historical Rate Actions by RBIDate of Action CRR (%)Repo Rate(%)Reverse Repo Rate(%)5-Sep-08 9 9 617-Oct-08 6.5 9 63-Nov-08 6 7.5 68-Dec-08 5.5 7.5 515-Dec-08 5.5 6.5 55-Jan-09 5.5 5.5 423-Jan-09 5 5.5 45-Mar-09 5 5 3.522-Apr-09 5 4.75 3.2519-Feb-10 5.5 4.75 3.255-Mar-10 5.75 4.75 3.2522-Mar-10 5.75 5 3.520-Apr-10 6 5.25 3.752-Jul-10 6 5.5 426-Jul-10 6 5.75 4.516-Sep-10 6 6 52-Nov-10 6 6.25 5.2525-Jan-11 6 6.50 5.5017-March-11 6 6.75 5.75RR, All Rights ReservedPage 9 of 32


SECTORALUPDATESRR, All Rights Reserved Page 10 of 32


India Strategy438.1Airline Sector UpdateSurging Air Traffic (Lakh)520.2140. 88 49. 36CY09 CY10 Jan-10 Jan-11Air Traffic Started Recovering sincemid of CY2009 and CY2010Companies have Started Adding Seatsor CapacityInternational Scenario is alsosupportiveMarket Share (%)Rising Crude Oil Price is a MajorConcernDomestic Players has Better Scope ofGrowth Compared to InternationalPlayersNonetheless, as the Indian economy posts a strong recovery fromthe lows seen in early 2009, aviation industry too has been gettingback in form. It has posted a strong recovery in last few quarters.Things started to improve slowly as the industry entered into inFY10. Airlines took some disciplined capacity reduction steps onthe supply side while demand for aviation too started improvingwith the Indian economy recovering rapidly from the lowswitnessed in the March 2009 quarter. Air-traffic numbers turnedback into positive by middle of calendar year 2009 and businessatmosphere improved continuously in the calendar year 2010. Bythe end of last calendar year fares had started to move beyond thepre-crisis levels and the industry continues to do well even assurging crude has yet again emerged as a risk factor.Surge in Air TrafficAfter hitting a trough in second half of FY09, air traffic started seeing a lotof improvement in the second half of 2009. In the year 2010, air trafficmoved further high with a strong performance during most of the year.As per Director General of Civil Aviation (DGCA), during the calendaryear 2010 the domestic airlines carried 520.21 lakhs as compared to438.40 lakhs in 2009, showing a growth of over 16%. The fourth quarterof 2010 registered 147.05 lakh passengers, up from 134.78 lakh in April-June, 2010, 119.84 lakh in July-September and 118.54 lakh in January-March quarter. Clearly, there has been continuous improvement in thedemand side of aviation industry in each quarter of 2010.Continued ExpansionThe overall demand scenario has improved significantly as the outlook ofIndian economy improved and as a result, the industry that was cuttingcapacity till June 2009, started adding incremental capacity from start of2010. The analysis of capacity as reflected in available seat perkilometre (ASKM ) and demand as reflected in revenue per seat perkilometre (RPKM) shows that the airlines has been consistentlyincreasing capacity for last one year or so.International Scenario - ImprovingAviation industry across the global had one of the worst years in 2009,although things started to improve towards the end of the year.According to the data compiled by the International Air TransportAssociation (IATA), scheduled air traffic worldwide fell by 3.5% YoY in2009 which was the largest decline in since the Second World Waryears.However, things started to improve towards the end of 2009 with trafficbeginning to improve. The progress continued throughout the year 2010and the outlook of the global industry improved considerably over theyear.High Fuel Prices – A ConcernWhile the industry has been posting significant improvements in wake ofrising demand and improving economic outlook, fuel cost, which makesfor 40% of the total operational cost for aviation, has been surging rapidlyoff late owing to rising crude oil prices. In fact global crude oil prices haveremained at elevated levels of above $110 a barrel for more than amonth due to the ongoing political unrest in some of the Middle-East andAfrican countries. The only major threat facing the industry is surge incrude prices. The IATA believes that 2011 would see a consecutivesecond year of profitability but with industry profits falling by at least 40%to $9.1 billion on account of surge in crude prices and some other costs.Nascent Stage of IndustryFrom a medium terms perspective however, the outlook of airlines lookpretty robust. Compared with its global peers, the Indian aviation Industryis still in a very nascent stage. India's air passenger per capita at 0.09 isstill at very low levels as compared to even China at 0.30, or Australia at5.63 and US with 4.69.RR, All Rights ReservedPage 11 of 32


India StrategyBanking Sector UpdateHigh Margins on the Back ofHigh Loan-Deposit Ratioand High Deposit & Lending RatesNon Food Credit Growth IncreasedDriven byRetail and InfrastructureCautious Lending by Banks has lead toHigh Asset QualityInterbank Liquidity Improved with theincreased Rates by BanksHigh Oil Prices to Further Increase theInflationGiven rise to Increase Deposit RatesIndian banks are in a difficult spot. Structurally they remainattractive and following the recent price corrections, valuations arenow entering attractive territory for longer-term investors. Further,macro trends – inter-bank liquidity and domestic food inflation –have also seen some improvement at the margin. However, therecent rise in oil prices has again increased concerns at the macrolevel. Indeed, indeed if oil prices remain at these levels or increasefurther, then Indian banks could remain under pressure. At thecurrent Valuations, Indian Banks are attractively priced.Margins - Near PeakMargins for Indian banks have expanded to be close to peak levels,mainly driven by:1) Loan-deposit ratios for the system have moved up close to peak levelsof 75%.2) Banks have raised both deposit and lending rates over the past sixmonths.Given the nature of their balance sheets, loan re-pricing filters throughfaster than deposit re-pricing for Indian banks, contributing to theexpansion in margins.Loan Growth – Picked UpNon-food credit growth has picked up to 23% as of January 2011 fromthe bottom of 10% as of October 2009. The key segments which havedriven the 12.6% of growth acceleration include – retail (3.4%),infrastructure (0.8%), other large corporates (3.9%), NBFCs (1%) andother services (3%). Small & medium industries growth lagged overallsystem growth in the initial parts of the recovery but has recently startedto pick up.Asset Quality - ImprovedAt the system level, Indian banks have not lent as aggressively in thiscycle when compared with other regional peers and versus their ownhistories. This augur well from a new impaired loan perspective whichshould be relatively lower in the event growth were to slow down sharply.Interbank liquidity – ImprovingNet repo balances have improved in the month of March and Liquidityconditions are further expected to improve further in next quarter asdeposit growth continues to move up following rate increases by thebanks.High Oil Price – A Major ConcernsUnlike other Asian economies, the Indian economy runs a twin-deficit(current account and fiscal deficit) which implies that the ability of theeconomy to withstand higher oil prices and the ability of the policymakers to respond is much lower. This becomes important for banksfrom two perspectives:• Every US$10/bbl change in crude oil prices would cause India’simport bill and current account deficit to rise by about US$8.1 bn(0.4% of GDP). This will put a further strain on domestic liquidityconditions.• Inflation in India has already been running at elevated levels forthe past year. Oil prices hike if pass on to customers will lead toa further rise in inflation expectations. In this environment,nominal deposit rates will likely have to rise further from currentlevels.Attractively Valued for Long Term PerspectiveFollowing the recent sharp correction, Indian banks’ valuations havecorrected to be close to historical average levels (at the aggregate sectorlevel). If we look at individual banks, there are a few names wherevaluations have become very attractive relative to their own history.RR, All Rights ReservedPage 12 of 32


India StrategyMetals & Mining Sector UpdateSteel Production Expected to Increasewith the Proposed Capacity AdditionSupply to Outpace the DemandLeading to either Export or Price DeclineSponge Iron Production in India Grew at aCAGR of 23% Over 2002-2008Indian Iron Ore Industry is HighlyFragmentedRegulation, Increasing Logistics CostImpacting ExportsSharing of 26% of Profit from MiningActivitiesIron Ore Supply toRemain Tight in 2011 with DemandGrowing Across the WorldRussian Mines – Old TechnologyUS Mines – Declining ProductionChina – Turned Net importerIndian steel producers have had smooth sailing during the lastdecade, with demand growth far exceeding supply growth. Therewas easy availability of raw material like coal and lump ore. As aresult, the steel producers enjoyed fat margins. The dynamics ofthe business are now changing. Primary producers are bringing onstream ~20mtpa of capacity bunched together over 12-15 months,which is unprecedented. Indian steel consumers will have a greaterchoice of domestic supplies. However, it will no longer be smoothsailing for primary steel producers.Expected Temporary OversupplyThe country is expected to witness 20mtpa capacity addition over thenext 12-15 months. The said capacity addition is almost one third of thecurrent annual domestic production. With accelerating real GDP growth,demand growth too is likely to accelerate. However, the incrementaldemand is expected fall short of expected supply of steel leading tooversupply.Leading to Export or Price DeclineDomestic steel producers will have to look for export opportunities, whichis highly unlikely given the current global economic environment. Theproducers may have to compromise on pricing front.Secondary Producers – To Loose Market ShareThe double impact of rising coal and iron ore cost has squeezed marginsfor the sponge iron industry. As a result, sponge iron production hasstagnated in the last two years and may begin to decline. Constrainedsponge iron availability resulted in scrap imports surging 50% to 5.2mtons during FY08-FY10. However, new pig iron supply from primaryproducers will provide an alternate to steel scrap imports in comingyears. This will lead to primary producers gaining market share fromsecondary producers.Challenges Ahead in Iron Ore MiningIncreasing environmental concerns are leading to stricter regulatoryenforcement, which has adversely impacted iron ore mining in India.Older mines are getting deeper and new mining licenses are not coming.As a result, growth in domestic iron ore production has been crippledduring the last two years. Higher royalties on iron ore mining haveresulted in increased cost of mining and stricter enforcement oftransportation permits is leading to higher logistics cost. Exports havebeen hit by periodic increases in export duties and hikes in rail freight foriron ore meant for exports.Draft MMDRA ProposalThe draft Mines and Minerals Development and Regulation Act(MMDRA) has been passed with consensus by the Group of Ministers(GoM) headed by Finance Minister, Mr Pranab Mukherjee. The industryhas reacted negatively and the Cabinet has yet to take view though initialreactions have been negative. The draft MMDRA proposes sharing of26% profit from mining activities.Global Iron Ore Prices on PeakIron ore sales realizations are touching new highs. The iron ore market,which headed into oversupply in 2HCY08 due to scheduledcommissioning of a number projects that were to bring ~300mtpa of newcapacity over 2008-2010, has become tight once again.Australia –Source for New Supplies of Coking CoalOver the last decade, coking coal supplies from US, Canada and Russiahave either remained stagnant or have declined due to high cost ofproduction, aging and safety concerns. Volatility in coking coal prices hasdeterred investments in these countries. Australia, which is vulnerable tofloods and cyclones during monsoons, remains the main source of newcoking coal supplies.RR, All Rights ReservedPage 13 of 32


India StrategyCement Sector UpdateAdverse Weather Conditions, Slowdownin Infra projects will Lead to Decline inCement DemandStates Elections will Further Impact theDemandCapacity addition will Lead to LowCapacity UtilisationCement Prices to Remain StableRaw Material Price to Increase on theback ofRising Fuel PricesAnnounced Hike in Excise Duty, if notPassed to End User, will Impact theBottomline of CompaniesThe current price discipline prevalent in the cement industry will bethreatened in FY12 by Fresh supply and sluggish demand growthwill negatively impact the cement sector growth.Cement Demand Showed Slowdown Post MonsoonCement sales in 3QFY11 grew by a modest 3% YoY (similar to that inthe subdued monsoon quarter, 2QFY11). This was due to adverseweather conditions, the slowdown in infrastructure project execution andto lower offtake in housing demand.Bleak Outlook for Cement Demand GrowthThe low demand growth (~5% YoY) is expected to persist until October2011 on account of the continuing slowdown in construction activity. Theupcoming elections during May-June 2011 in five states viz. Assam,West Bengal, Tamil Nadu, Pondicherry, Kerala (accounting for 20% oftotal cement consumption) would further impact demand growth as theseState Governments shift focus towards populist rural and socialspending. Then between June-September 2011 the monsoons are likelyto impact demand growth. Therefore infrastructure project execution isexpected to pick up only from October 2011 onwards.Impending Capacity Addition to Keep Utilization SubduedWe expect overall addition of 50mn mt of cement capacity during FY11-12 with 30mn mt being added over the next one year. This should keeputilization levels subdued at 74%, similar to FY11 levels. Cementcapacity of 15mn mt was added during 9mFY11 raising installed capacityto 280mn mt. We expect another 30mn mt of new capacity to be addedby FY12 followed by a further ~13mn mt of capacity in FY13.Price Stability to be Threatened from July 2011 OnwardsWhile we expect price stability to be in vogue across India over the nextthree months, muted demand growth in the rest of FY12 and lowerutilization will pose challenges to this price discipline and then lead toprice declines. This should result in flattish realization YoY for FY12 asthe realization growth YoY in 1HFY12 would be neutralized by YoYrealization decline in 2HFY12. Over the last two months, cement pricesin the northern half of India have increased by Rs50-70/bag (20-25% riseover December 2010 prices) as manufacturers cut production andsqueezed supply in line with the lower demand offtake. Cement dealersexpect companies to hike prices by Rs10-15/bag over the next month,which would bring cement prices closer to Rs300/bag.Cost Pressure Mounts due to International EventsCoal prices have risen by 30% over the last three months after the floodsin Australia in December 2010 disrupted supplies. Thereafter, the recentcivil unrest in the Middle East has led to a surge in fuel oil prices which inturn pushed coal prices upward as it is an alternative to fuel oil in manycases. These cost increases should negatively impact operating margins(by 150-300bps) of all cement companies during FY11-13.Union Budget 2012 Impacts Excise Duty Hike of Rs 2-4 per BagWhile manufacturers may be able to pass on the hike in the near termdue to the price discipline in vogue, we expect manufacturers’ netrealization to be lowered by Re 1 per bag (~0.5%) in FY12. This shouldresult in a 2-3% reduction in FY12 operating profits for cementcompanies under our coverage. Additionally, the negative impact ofexcise hike is expected to be neutralized by the lowering of the customslevy on pet coke.RR, All Rights ReservedPage 14 of 32


India StrategyPower Sector UpdateAbsence of Latent Demand,GDP Growth,And Inefficient Use of Electricity….….Will Lead to Increase ElectricityDemand in India….….On the Other Side, With IncreasedCapacities, the Supply is Expected toIncrease with Faster PaceGiven Rise to Fall or Stability in PricesRegulatory Interventions to Lower PowerPricesMixed Impact of the BudgetAnnouncementsPower sector is going to experience excess supply by FY’13triggered by faster supply growth compared to demand and whichcan bring down power prices. Further, the discom financials whichare already incurring losses as a result of high power prices willworsen further leading to default.Electricity Consumption to Grow at 9.5% CAGR and IndustrialElectricity Consumption to Grow at 11.2%Assuming real GDP compounding of 9.3%, India will derive an electricityconsumption growth of 9.5% for India as can be inferred from detailedanalysis of latent demand, power shortage, and inefficient use ofelectricity in India.Considering (1) absence of significant latent demand, (2) industrial GDPgrowth similar to past five year average and (3) increase in electricity useper USD of industrial GDP, the estimate for maximum electricity demandgrowth for industries at 11.2% CAGR during FY10-FY27E.Supply to Grow at a Faster Pace Starting FY12E - 13.0% OverFY11E- 15EThe current race to jump onto the power bandwagon has resulted in anumber of major power capacity plans being announced/ implementedby private players in the last 4-5 years. The first chunks of underconstruction projects are ready for commissioning. Addition of22,706MW (including captive) in FY12E, a growth of 11.6% is expected.Thereafter, growth is likely to accelerate to 13.4% during FY12E-FY15E,resulting in a surplus situation by FY13E end.High merchant prices unlikely to sustain due to over-supplyThe lucrative merchant prices are unlikely to sustain (YTD FY11 averageof Rs4.5/unit) in the coming years. The current downtrend in merchantprices is expected to continue and get pronounced in FY12E. As perindustry analysis, Rs2.7/unit is the tariff at which discoms' losses do notincrease further (break even tariff - Rs1.6/unit). Thus, merchant pricesare expected to continue their decline and stabilize at Rs2.7/unit,maximum leeway being till FY13E.Discoms' Financials - A Potential Trigger for Lowering of PowerPricesWhile demand supply dynamics are bound to significantly bring downpower prices, discoms' financials otherwise would be a potential trigger.Industry estimates for 56 discom accounts over FY06-FY10 reveals thatpower purchase cost (especially merchant power) has contributed tomost of the increased losses (almost doubled to Rs746bn) in the pasttwo years. Going forward, 80% of increased merchant volumes will becontributed by private players, resulting in actual cash outflow fordiscoms, an unsustainable situation. As a result, payment defaults andregulatory interventions (capping merchant prices, resorting to powercuts) will lead to lowering of power prices.Budget 2011-12 ImpactBudget got a mixed bag for power sector while on the one hand itprovided excise duty exemption for equipment supply to UMPPs and onthe other hand it reduced budget outlay for APDRP and RGGVY whichwill be negative for T&D companies.Extension of Income Tax exemption under section 80IA by one year upto31st March 2012 is positive for power utilities as tax holidays wouldcontinue to be available. SEZ and SEZ developers brought under thepurview of MAT and dividend distribution tax to Impact some playersnegatively. Further, the Economic Survey 2010-11 stressed the need tobring key reforms to the power sector going forward. We believe anystep in this direction will address concerns over mounting SEB losses.RR, All Rights ReservedPage 15 of 32


India StrategyTelecom Sector UpdateReduction in Price WarStableAverage Revenue Per Minute (ARPM)Regulatory Uncertainties are Likely toContinueMobile Number Portability is Not aConcernHowever, Margins are Likely to RemainUnder PressureCompanies with High Tower Base areLikely to Benefit3G Segment is the Likely Contributor ofGrowth in Topline and BottomlineReduction in price war intensity and stability in ARPM positive forthe sector. Revenue market share maintained by incumbent despiteaggressive launches by new entrants. Risk of regulatoryuncertainty looms over the sector; however expected NTP2011could bring upon the level playing field and clarity on M&Aguidelines.Reduction in Price War Intensity and Stability in ARPM Positive forthe SectorThe current macro environment of the telecom industry price warintensity has so far stabilized, as compared to last year. In Q3FY11results of telecom operators (Bharti, Idea, Rcom and Vodafone) the keynotable point was the tepid decline in ARPM (Average Revenue PerMinute) across the board. The industry is adding up strong number ofsubscribers with total addition during Q3FY11 of 64.2 million higher thanaverage of last couple of quarters. Strong traffic with stable APRM woulddrive the revenue growth for the sector, going forward. Revenue marketshare at the end of Q3FY11 signifies the share of incumbents remainintact, except Rcom.Regulatory Uncertainty Looms Over the SectorTelecom sector has always been negatively impacted by the regulatoryuncertainties. TRAI has issued recommendation in regard to re-pricing,re-framing of spectrum and increase in spectrum charge. Theserecommendations would negatively impact the incumbents, ifimplemented. The stock prices have already discounted on the news inlast few months. NTP 2011 could be the next big news for the sector.Not Much Impact due to MNP except in Margin PressureThe initial data released by TRAI shows 3.8 or 0.5% of total subscriberbase has opted for MNP, which is not a significant number. Bharti, Ideaand Vodafone are the key beneficiaries and Rcom is among players whohave lost the subscribers according to media reports. However, to retainthe high ARPU clients we expect the margins would remain underpressure for couple of quarters. And the reduction in post-paid rentals tocompete in the industry would also impact the players like Bharti andVodafone in near term as they have higher proportion of high ARPUcustomers.Tower Power: Stake Sale- Value UnlockingThe hefty tower base of ~53000, 77695, 8944 and 107789 with Rcom,Bharti infratel, idea and Indus (JV between Bharti, Vodafone and Idea),respectively gives an edge to incumbents over the new entrants foranother round of funding if required. The tenancies have been risingnorthwards that also indicates strong performance by these companies.3G - Next Growth EngineMost of the telecom operators who have the 3G spectrum have startedoffering services in the selective areas. The heat over 3G revenues isover hyped and it is expected contribute to the total revenue in thegradual course of time. Having paid a healthy amount for 3G spectrum,the pricing for the 3G services offered by the players reveals intenseprice war would take a back seat.Outlook and ValuationsFrom the operational performance point of view, the pressure on theincumbents has eased down. We do not expect another phase of intenseprice war happening in the market with lowest ARPU in the world. Strongtraffic demand on network and robust subscriber addition with stableARPM would drive the revenues going forward. But uncertainties overthe regulatory framework remain a concern over the sector. It is unlikelythat recommendations made by TRAI for re-pricing of spectrum andadditional spectrum fee would be accepted by the operators in currentform. If implemented in current form then it could be significantlynegative for the sector and it would further put pressure on theprofitability and balance sheet of incumbents.RR, All Rights ReservedPage 16 of 32


India StrategyIT Sector UpdateRealisations to Improve, However,Margins are Expected to Remain StableCompanies are now Moving from LinearRevenue Model to Non-Linear RevenueModelNew Hiring Implying Further Headroomfor Increase in Utilization RateOnsite Revenue Contribution to IncreaseOwing to low IT SpendingCompanies are Hiring Freshers and NonEngg Graduates to Volume BasedServices to Drive ProfitabiltySalary Hike, Concern RemainsIn the Indian IT space, realisations are expected to improve on theback of increased billing rate and change in revenue mix, but themargins are not likely to improve with realization due to incrementalcost involved. Companies are now shifting their business model tonon linear to provide more flexibility in pricing. Companies areexpected to witness further improvement in utilization rate. ITspend cut from the client’s end is expected to result in low offshorerevenue contribution. Salary hike will remain the key concerns forthe Indian IT players.Realisations to ImproveRealisations are expected to improve on the back of:• Increase in Billing rate• Change in Business Mix• Value Added ServicesIn addition, companies also resort to non-linear pricing for maintenanceand IT infrastructure projects.However, Improved realisations may not result in margin benefit ashigher value-added services also require high cost resources and,hence, profitability may be in line or below company average.Changing Business ModelIndian IT companies have long talked about non-linear business models;however, it was only during the crisis that witnessed serious progressand commitment on investment in these areas. It was the pressureduring the downturn that led Indian IT to incorporate newer aspects ofgrowth and they have decided to shift to non-linear model.Improved Utilization RateUtilisation is the second most important value driver in an ITorganization. Historically, most big IT companies have operated in the68-72% utilization range. The utilization rate is now stands near 75%.With the intention to increase employee strength with significant hiring,the companies are expected to witness low bench rate and hence higherutilization.Offshore to ShrinkGenerally, margins are higher in offshore projects as compared to that ofonsite projects. Companies are always strived to increase the offshoreproportion of their revenue to improve overall profitability. However, witha strong comeback in discretionary spending over the past two quarters,the onsite proportion has once again started inching up.Employee PyramidOne of the emerging factors to increase margins and reduce cost is thebroadening of employee pyramid. Earlier, companies added lowerfresher in the system lead to the average experience age of theworkforce increasing. With emergence of volume-based service lines,companies are now hiring freshers and non-engineering graduates whocan be readily absorbed and aid in broadening the pyramid. Theseservice lines are readily scalable and can yield margins better thancompany average despite the per capita productivity (revenue peremployee) being lower than value-added services.Salary Hike Remains an IssueSalary hike has always been a major margin dragger for Indian IT firmsas it remains the single major cost component. Further, as the key valueproposition has largely revolved around cost-benefit offered, salary hikeshave always been looked upon as eroding this value proposition. Evenas cost arbitrage remains a significant rationale, we believe the ITindustry with its service delivery maturity and ability to createtransformational business impact through consulting in clientorganization has become a key partner and not just a low cost provider.RR, All Rights ReservedPage 17 of 32


STOCKSPICKSRR, All Rights Reserved Page 18 of 32


India StrategyAnantraj IndustriesView - BullishCMP: Rs. 8652 Week High/ Low: Rs 165.50/ Rs. 66.10NSEAnantrajBSE 515055Face Value (Rs) 2Equity Shares (Cr) 29.51Market Cap (Rs Cr) 2420Average Volume(Cr)1M 4123M 6866M 61612M 537Return Analysis (%)In(%) Anantraj SensexRelative toSensex1M 12.13 -1.68 13.813M -20.00 -10.13 -9.876M -38.45 -9.80 -28.6512M -36.94 3.32 -40.26Shareholding Pattern (%) (Dec. ‘10)DII,3.20%FII,25.10%Public,10.40%Stock PerformancePromotors,61.30%250.00200.0012,000.00150.008,000.00100.0050.004,000.000.000.00Mar-10 Jun-10 Sep-10 Dec-10 Mar-11Key FinancialsTotal Volume ('000) (LHS) Anantraj Ind NiftyParticulars FY'09 FY'10 9MFY'10 9MFY'11NetRevenue252 286 252.7 266.8EBITDA 220 258 234 154EBITDAMargin(%)87.3 90.2 92.6 57.7PAT 206 238 206.76 111.31PATMargin(%)81.7 83.2 81.8 41.7AnnualizedEPS(Rs)7 8.07 9.35 5.03P/E(x) 12.29 10.66 9.20 17.11Investment RationaleQuality and Diversified Land PortfolioThe company has 1,000 acres of land bank in the Delhi-NCR area out ofwhich 500 acres is in Delhi and 450 acres is within 30 kms of Delhi. Theland portfolio is well diversified across various segments includingresidential, commercial/retail, IT parks, Special Economic Zones (SEZs)and hotels.Strategically Land AcquisitionThe company has acquired most of its land bank through the allocationroute from Delhi Development Authority (DDA) at significantly lower pricescompared to prevailing rates. The company has reportedly huge land bankin NCR. With the impending zoning changes, the company is expected toget benefit hugely.Foray into Project ConstructionIn order to further diversify, the company is now entering into projectconstruction segment and target to develop 6 mn sq ft of area in thecoming 2 years. To prove its delivery capabilities, the company has startedexecuting projects in high growth area of Delhi, Gurgaon and Sonepat andis target to develop constructed space worth Rs 1000 Cr.Lease Income to Grow with new ProjectsThe company drives 17% of its revenue from lease/ rent income byproviding space in commercial/retail, IT parks, SEZs and hotels. Around68% of land bank constitute for the segment, most of which located atprime locations in NCR.New Residential Launches on the Anvil in CY11The company has been actively pursuing land acquisitions in CY10 andexpects to launch two more residential projects over the next six months atSec-91 Gurgaon (15.5 acre land parcel acquired for ~INR 0.9 bn, withsaleable area of 1.2 msf) and Neemrana in Rajasthan (18 acre land parcelacquired for ~INR 130 mn with saleable area of ~2 msf).Industry OutlookAccording to various industry estimates, Tier-I cities of Delhi-NCR,Mumbai and Bengaluru. Tier-II cities, such as Kolkata and Chennai, areexpected to see a gradual recovery in 2011.Strong Balance SheetIn spite operating in a highly debt sensitive industry in which most of itspeers operate with high leverage, the minimal debt and huge cashprovides advantage to the company to acquire land at reasonable costand timely execution of projects.Stable & Strong Cash FlowsARIL is developing a portfolio of leased assets on which it will earnconsistent revenues on an annuity basis. While this strategy is capitalintensive, ARIL has regularly monetized its assets over the past threeyears, keeping its balance sheet light.About The CompanyAnant Raj Industries Limited (ARIL) is established in 1969 that hasbecome synonymous with the highest quality, excellence and innovation inthe field of real estate development.The company is a leading infrastructure and construction company basedout of Delhi-NCR. The company builds and develops residentialproperties, commercial space, IT parks, SEZs and hotels. The companyalso manufactures ceramic tiles and sells them under the brand ‘Romano’.The company had consolidated its various group companies carryingsimilar business activities by way of a series of mergers and acquisitions.After the said mergers, the company's main focus is on the developmentof IT Parks, hospitality and housing projects.RR, All Rights ReservedPage 19 of 32


India StrategyBajaj FinanceView - BullishCMP: Rs. 69552 Week High/ Low : Rs 839.10/ Rs 312NSEBAJFINANCBSE 500034Face Value (Rs) 10Equity Shares (Cr) 33.96Market Cap (Rs Cr) 2544.47Average Volume (Cr)1M 631.073M 10626M 117012M 1091Return Analysis (%)In(%) BAJFINANC SensexRelative toSensex1M 8.24 -1.68 6.563M -7.74 -10.13 -17.876M -25.85 -9.80 -35.6512M -24.48 3.32 -21.16Shareholding Pattern (%) (Dec. ‘10)FII, 6.05%Public,25.50%DII,12.94%Stock PerformancePromotors, 55.51%8007006001,000.00800.00500600.00400300400.00200100200.0000.00Mar-10 Jun-10 Sep-10 Dec-10 Mar-11Key FinancialsTotal Volume ('000) (LHS) Bajaj Fin NiftyParticulars FY'09 FY'10 9MFY'10 9MFY'11NetRevenue 594.81 910 585 929EBITDA 216.37 337.5 247 523EBITDAMargin(%) 36.38% 37.09% 42.22% 56.30%PAT 33.91 89.41 64.22 176PATMargin(%) 5.70% 9.83% 10.98% 18.95%AnnualizedEPS(Rs) 9.27 24.43 23.40 64.00P/E(x) 73.68 27.96 29.19 10.67Investment RationaleSustainable Business ModelBAF till FY09 was focusing on financing of 2 and 3-wheelers, consumerdurables, personal loans, and small business loans which are unsecuredin nature. However, in order to build a stable and scalable book, thecompany introduced secured products like loan against property (LAP),loan against shares (LAS) and construction equipment finance. We expectsecured products like loan against property, construction equipmentfinance and infrastructure finance to drive loan book CAR of 32% overFY11-13E, while unsecured business lines would be in consolidationphase after witnessing strong growth during FY09-11. Consequently, weexpect secured assets to constitute 55-60% of the book by FY13E from30% in FY10.Tie–up with Central Bank of India to Co-finance Retail and SMELoansThe company has formed an alliance with Central Bank of India (CBI) toco-finance retail and SME loans in which these loans would be partiallyassigned to CBI on a periodic basis. The administration and servicing ofthese loans will be managed by BAF. The company intends to assign Rs10.0bn of co-financing loans over the next 18 months. 30% of SME loansand 35% of mortgages will be assigned to Central Bank on which BAF willalso earn upfront fees (0.50%-1.25%) and service charges (0.75%-1.00%).Loan Composition – Focus on Secured BookSecured loan products like loan against property, construction equipmentfinance and infrastructure finance are expected to drive loan book CAGRof 32% over FY11-13E, while unsecured business lines would be inconsolidation phase after witnessing strong growth during FY09-11.Consequently, secured assets are expected to constitute around 55-60%of the book by FY13E vs 30% in FY10.Diversified Borrowing MixBAF raises funds from diversified sources which include term loans frombanks (constituted 43% of FY10 borrowings), non-convertible debentures(40%), fixed deposits and money market borrowings such as commercialpaper. BAF has one of the lowest borrowings cost amongst peers,highlighting its ability to raise funds at competitive rates from financialinstitutions (Exhibit 13). It enjoys credit rating of AA+ from CRISIL andLAA+ from ICRA.Diversified Product OfferingBAF transformed from primarily being a captive business model (BajajAuto’s finance arm) focused on 2-wheeler and consumer durable businessto a diversified NBFC with full suite of lending products.About The CompanyBajaj Finance Ltd was promoted by erstwhile Bajaj Auto Limited and BajajAuto Holdings Limited. Bajaj Auto Limited is a manufacturer of two andthree-wheelers and Bajaj Auto Holdings Limited is an investment companythat is a wholly owned subsidiary company of Bajaj Holdings & InvestmentLimited. As per the Scheme of Demerger of erstwhile Bajaj Auto Limited,the shareholding of Bajaj Auto Limited in BAF has now been vested withBajaj FinServ Limited. Bajaj Finance is engaged primarily in the businessof financing of two-wheelers, consumer durables, personal loans, smallbusiness loans, mortgages, and loan against securities. It recently alsoventured into construction equipment and infrastructure finance andintends to build the scale gradually. It operates through a network of 2,500Bajaj auto and consumer durable dealerships and 63 branch offices.RR, All Rights ReservedPage 20 of 32


India StrategyDeccan ChronicleView - BullishCMP: Rs. 8252 Week High/ Low : Rs 180.00 / Rs 55.55NSEDCHLBSE 532608Face Value (Rs) 2Equity Shares (Cr) 24.22Market Cap (Rs Cr) 1994Average Volume (Cr)1M 25893M 12506M 97012M 810Return Analysis (%)In(%) DCHL SensexRelative toSensex1M 36.98 -1.68 35.303M -26.50 -10.13 -36.636M -40.85 -9.80 -50.6512M -53.57 3.32 -50.25Shareholding Pattern (%) (Dec. ‘10)Public,11.12%DII,25.51%Promotors,73.50%Stock Performance300.00250.0040,000.00200.0032,000.00150.0024,000.00100.0016,000.0050.008,000.000.000.00Mar-10 Jun-10 Sep-10 Dec-10 Mar-11Key FinancialsTotal Volume ('000) (LHS) Deccan Chron NiftyParticulars FY'09 FY'10 9MFY'10 9MFY'11Net Revenue 815 892.5 700.84 668.1EBITDA 268.25 450.27 371.25 313.24EBITDAMargin(%) 32.91 50.45 52.97 46.89PAT 140 261 254.59 209.02PATMargin(%) 17.18% 29.24% 36.33% 31.29%AnnualizedEPS(Rs) 5.72 10.77 14.01 11.45P/E(x) 14.34 7.61 5.85 7.16Investment RationaleIndustry RevivalMedia companies were one among the biggest victims of the globalfinancial crisis as their ad revenues fall sharply during 2008. Things havenow looking up and media companies have made a smart recovery in thepast two quarters. Much can be attributed to the softening of newsprintprices, overall improvement in advertisement situation and a perk-up incirculation aided by cut in cover prices.Synergies with Merged SubsidiariesThe company merged its subsidiaries Sieger Solutions, Asianage Holdingsand Deccan Chronicle Bangalore with itself. Sieger Solutions is the onlymerged entity which has significant revenues and profits. It would take afew quarters for the company to secure a steady flow of revenues fromthese subsidiaries then the long-term benefits involved in the merger willbecome visible.Pure English Play in South IndiaThe company continues to be a pure English print media play in the southIndian markets of Hyderabad, Chennai and Bangalore. We expect admarkets in these cities to remain robust due to steady recovery in the ITindustry (these cities are IT hubs).Launch of Odyssey 360’To cash on the growing digital market, Odyssey, the wholly ownedsubsidiary of Deccan Chronicle Holdings has launched a music portal-‘Odyssey 360’.Advertisement Tariff to Derive MarginsThe company increased its Advertisement Tariff by 30% and 50% wefApril, 2008 and October, 2008 respectively. The company furtherincreased the adv. Rates by 20% w.e.f. October, 2010. Going forward,when the increased tariffs come into play, are expected to drive theprofitability of the company.Competitively PositedAs per the ABC, readership of the company is 13.5 lakh per day. TheCompany is second in Bangalore with 2.45 lakh, Chennai - 3.03 lakh,Hyderabad - 5.56 lakh and rest of Andhra Pradesh – 2.46 lakh.OutlookThe company has taken various initiatives like merger of subsidiaries withitself, Advertisement tariff. This coupled with revival in industry scenario,are expected to impact positively on the financials of the company.Company’s BackgroundDeccan Chronicle Holdings Ltd. owned ‘The Deccan Chronicle’ is one ofthe largest English language publications in the South with a totalcirculation of around one million copies, 70% of which comes from AP andrest is from Tamil Nadu. It recently entered the Bangalore. In addition, thecompany now also owns Asian Age, an international newspaper based inDelhi, Financial Chronicle, a financial daily, and AndhraBhoomi, a telegulanguage newspaper.In the past few years, the company has been expanding its portfolio tobecome a multi-region player from being a South India focussed publisher.It also owns Deccan Chargers, one of the most prolific team in IPL. Bulk ofthe company’s revenues and profits are generated from Deccan Chroniclefranchisee. However, most of its recent forays holds good long-termpotential.RR, All Rights ReservedPage 21 of 32


India StrategyIndian BankView - BullishCMP: Rs. 23152 Week High/ Low: Rs.316.50 / Rs168NSEINDIANBBSE 532814Face Value (Rs) 10Equity Shares (Cr) 82.97Market Cap (Rs Cr) 9958Average Volume (Cr)1M 340.793M 398.226M 524.3712M 667.93Return Analysis (%)In(%) INDIANB SensexRelative toSensex1M 10.56 -1.68 8.883M -7.54 -10.13 -17.676M -16.21 -9.80 -26.0112M 32.33 3.32 35.65Shareholding Pattern (%) (Dec. ‘10)FII,10.70%DII, 4.30%Public,5.00%Investment RationaleHigh NIMs Coupled with Sound Asset Quality Led to Superior ROAsIndian Bank’s loan book is skewed towards high yielding segments suchas SME, retail and agriculture, which form about 43% of the banksadvances. As a result, despite having a moderate CASA ratio of 32%, thebank’s NIMs are the highest amongst its peer set at around 3.7% ascompared to ~3.1% for its peers. Best in class NIMs coupled with soundasset quality and cost efficiencies has led to superior ROAs for the bank.Indian Bank’s ROA at 1.7% for FY10 is one of the highest in the industry.Loan Book to Grow at CAGR of 20% for FY11-13Indian Bank has displayed a robust loan book growth in the past, withadvances expanding by a CAGR of 27.6% from FY05 to FY10 ascompared to a systemic CAGR of 24.6% for the same period. Goingahead we expect loan growth to moderate from current levels based on aslowdown in general bank lending to infrastructure, telecom, andmicrofinance sectors. Despite moderation, the advance book expansion isexpected to remain strong, at around 20% CAGR for FY11-13.Adequately Capitalized to Fund GrowthThe bank is adequately capitalized with a CAR of 12.4% and a Tier 1 CARof 9.7%. The bank has further headroom to raise Rs 50720 mn of Tier IIcapital. Additionally the government stake in the bank is high at 80%, thusthe bank has adequate room to raise fresh capital to fund its expansionplans. The bank is planning an FPO in FY12, although the plans are yet tobe finalized, it is expected that the bank would raise around Rs.15000 mnfrom the issue.Healthy NII Growth of 17% CAGR Despite NIM CompressionAssuming a NIM compression of 37 bps in FY12, keeping in mind the tightliquidity scenario, coupled with the rise in interest rates. Despite NIMpressure in FY12, the NIM of the bank is expected to remain healthy at~3.3%. Healthy NIMs coupled with strong growth in advances is expectedto lead to a 17% CAGR in NII for FY11-13.Stock Performance400300200100Prom otors,80.00%0Mar-10 Jun-10 Sep-10 Dec-10 Mar-11Total Volume ('000) (LHS) Indian Bank Nifty1000080006000400020000Asset Quality Concerns OverdoneDespite its focus on riskier, high yielding assets, the bank’s asset quality issound. This can be attributed to its strong relationships with its clients aswell as its prudent attitude towards asset quality. With the shift towardssystem based recognition of NPAs, the asset quality of Indian Bankwitnessed a setback with slippages spiking to 5.1% in Q1FY11. In the lasttwo quarters, however slippages have moderated and stood at 1.4% forQ3FY11. Going ahead we expect asset quality to improve on the back ofsystem recognition of NPAs which would lead to better monitoring andcontrol.OutlookIndian Bank’s superior ROAs, best in class NIMs, sound asset quality andstrong loan book growth, we believe it should trade at a premium to itspeer group.Key FinancialsParticulars FY'09 FY'10 9MFY'10 9MFY'11Net Revenue 6830 7857 5832 6789EBITDA 1020 1573 1875 2388EBITDAMargin(%) 14.93% 20.02% 32.15% 35.17%PAT 1245 1555 1145 1275PATMargin(%) 18.23% 19.79% 19.63% 18.78%AnnualizedEPS(Rs) 28.1 35.25 35.52 39.56P/E(x) 8.08 6.44 6.39 5.74About The CompanyIndian Bank, established on 15th August 1907, is a south based mid-sizedpublic sector bank with a global branch network of 1822 branches and1085 ATMs. The bank is a frontrunner in specialized banking with over 90branches for handling forex transactions and over 60 special SMEbranches. Indian bank occupies a leadership position in rural developmentand is a pioneer in introducing self-help groups and financial inclusionprojects in the country. The banks focus on financial inclusion is reflectedthrough its loan book 43% of which is focused on the agricultural, retailand MSME segments.RR, All Rights ReservedPage 22 of 32


India StrategyIRB InfraView - BullishCMP: Rs. 22252 Week High/ Low: Rs.312.80/ Rs.148.00NSEIRBBSE 532947Face Value (Rs) 10Equity Shares (Cr) 33.23Market Cap (Rs Cr) 7357.27Average Volume(Cr)1M 733.533M 1142.126M 1194.6212M 1111.71Return Analysis (%)In(%) IRB SensexRelative toSensex1M 16.16 -1.68 14.483M -2.91 -10.13 -13.046M -15.13 -9.80 -24.9312M -17.53 3.32 -14.21Shareholding Pattern (%) (Dec. ‘10)DII,3.40%Public,8.40%FII,13.30%Stock PerformanceProm otors,74.90%50040010000800030060002004000100200000Mar-10 Jun-10 Sep-10 Dec-10 Mar-11Key FinancialsTotal Volume ('000) (LHS) IRB Infra NiftyParticulars FY'09 FY'10 9MFY'11Net Revenue 992 1704 115.53EBITDA 438 798 19.87EBITDA Margin (%) 44.15% 46.83% 17.20%PAT 177 403 18.5PAT Margin (%) 17.84% 23.65% 16.01%Ann. EPS (Rs) 5.29 11.6 0.42P/E(x) 38.56 17.59 485.71Investment RationaleGalloping Order Book Ensuring CashflowThe company is one of the leading infrastructure development &construction companies in the roads & highway sector in India with 16projects covering 5,735 kms, out of which 10 projects (3,313 lane kms) arealready in operation and generate gross cash accruals of close to Rs4.26bn. With 8 projects covering 4,250 lane kms added to its portfolio over thelast 4 years, IRB today boasts of being amongst the largest roaddevelopers in the country, with a market share of 7%.Competitive Order WinIRB's FY10 wins (Jaipur-Deoli, Amritsar-Pathankot, Goa-Karnataka,Talegaon- Amravati) came in at the early stages of the recent awardingactivity, when competition among bidders was relatively low. This can beclearly gauged from the fact that the company bagged most of the projectscloser to the highest possible NHAI grant (40% of NHAI estimates of TPC)and very close to the second highest bidder.Favorable Industry OpportunitiesIndia's thrust on road infrastructure provides a BOT opportunity of 35,000kms entailing a massive investment of close to Rs 2,250 bn or USD 51bn.This massive opportunity, ideally supported by strong political will anddeveloper friendly PPP framework has created favorable macro tailwindsfor premier road developers like IRB. The company, owing to itsaggressive management, is expected to leverage its strong projectmanagement and execution skills and exploit significant growth potentialof road BOT space in India.Qualified for Mega ProjectsIn a bid to accelerate the pace of road development in India, NHAI haslined up development of 9 mega highway projects of ~500 km each,involving an investment of USD1 bn each. Cumulatively, the 9 megahighways will cost Rs450 bn and are expected to be built on PPP basis.Out of the 9 mega highway projects, NHAI plans to award 5 mega roadprojects, involving an investment of over Rs 250 bn, over the next 6-12months. NHAI has already invited bids for the Pali-Pindwara project(Rs23.4 bn NHAI TPC, Length-244 kms) and Ahmedabad-Vadodara(Rs21.3 bn NHAI TPC, Length 102 Kms). NHAI has also indicated that thebids for Kishangarh-Udaipur-Ahmedabad (557 kms) is likely to be called inQ1FY12E.High Margins Owing to Cost ControlsWith its rich road construction experience, IRB has gained significantinsights into managing key costs of a road construction project. Thetestimony to this fact is the 20% EBIDTA margins that the E&C divisionenjoys. We attribute these superior margin profiles to IRB's in-housedesign & engineering capabilities, own equipment bank and minimalsubcontracting and backward integration through own aggregate mines.About The CompanyIRB Infrastructure Developers Ltd (IRB) is a holding company for theinfrastructure assets of the IRB group. IRB, India's premier roadinfrastructure company, operates through two business verticals viz, roadBOT and construction business. IRB is a pioneer in the road BOTbusiness and is one of the largest road BOT operators in the country withover 16 BOT projects under its belt, out of which 10 are operational. Theconstruction business complements its BOT vertical by executing theengineering and construction (E&C) and the Operation & Management(O&M) portion of BOT concessions. Being an early entrant in the roadBOT space has helped IRB build an extremely lucrative portfolio of roadBOT concessions along with a rich experience of structuring and operatingthese concessions. IRB, through its E&C business arm- Modern RoadMakers (MRM), has gathered significant experience in constructing inhouseroad projects and also funded road construction projects.RR, All Rights ReservedPage 23 of 32


India StrategyJubilant Foodworks Ltd.View - BullishCMP: Rs. 54852 Week High/ Low: Rs 670.70 / Rs 251.65Market statsNSEJUBLFOODBSE 533155Face Value (Rs) 10Equity Shares (Cr) 6.36Market Cap (Rs Cr) 3531Average Volume (Cr)1M 533.793M 628.766M 815.8212M 1335Return Analysis (%)In(%) JUBLFOOD SensexRelative toSensex1M 1.44 -1.68 2.273M -10.25 -10.13 5.686M 13.34 -9.80 1.0012M 62.40 3.32 39.16Shareholding Pattern (%) (Dec. ‘10)Public,8.03%FII, 7.51%DII,30.68%Stock PerformancePromotors,53.78%800.00700.0040,000.00600.0032,000.00500.00400.0024,000.00300.0016,000.00200.00100.008,000.000.000.00Mar-10 Jun-10 Sep-10 Dec-10 Mar-11Key FinancialsTotal Volume ('000) (LHS) Jubilant NiftyParticulars FY'09 FY'10 9MFY'10 9MFY'11NetRevenue314 475 299.88 484.45EBITDA 33.57 66.17 47.01 87.12EBITDAMargin(%)10.69% 13.93% 15.68% 17.98%PAT 7.3 32.97 22.57 52.67PATMargin(%)2.32% 6.94% 7.53% 10.87%AnnualizedEPS(Rs)1.26 5.18 5.04 10.89P/E(x) 123.02 29.92 30.75 14.23Investment RationaleExclusive Franchisee NetworkOver 50-year history, the company has grown into a global network of over9000 pizza stores in more than 60 countries, involving over 2,000franchisees. It operates pizza delivery stores pursuant to a MasterFranchise Agreement with Domino’s International, which provides it withthe exclusive right to develop and operate Domino’s pizza stores and theassociated trademarks in the operation of pizza stores in India, Nepal,Bangladesh and Sri Lanka. This provides the ability to use Dominos’globally recognised brand name, as well as operational support for pizzaand food technology (such as recipes), commissary and logisticsmanagement support, global marketing and vendor development knowhow.Robust Supply ChainThe company operates through four regional supply chain centers, orcommissaries, located in Noida (Delhi NCR), Mumbai, Bangalore andKolkata. These commissaries primarily manufacture “dough” (base of thepizza) and act as warehouse for most of other ingredients. The centralizedsourcing, warehousing and distribution of raw materials reduces thestorage space required at its stores, enabling it to minimize its storeoperating costs, without incurring significant additional expenses at thecommissary levelRobust Growth in Same Store SalesThe company continues to post positive surprise on same store salegrowth, 2nd consecutive quarter of positive surprise. Though, current trendin same store sales growth cannot be extrapolated into future - but there isdefinite case for upward revision for some years.Expansion PlansThe company plans to expand presence by entering into new cities andtowns where it currently has no operations. To minimise additional capitalexpenditure and ensure quality control, it has developed a back-endproduction facility model which would enable to service 2-3 stores in a city.It envisages that future growth would be driven by new stores in Tier 2 andTier 3 towns and, therefore, back-end production facilities will play a keyrole for the success in these cities. It seeks to open around 70 stores eachyear in order to build up same store sales in the long term.Favorable Industry EnvironmentThe Indian food industry displays high potential for growth with the supportof over 17.5% of the world’s total population. At present, the industry isestimated to be $150 bn in 2009 with the growth rate over 5%. The strongemergency and growth of the retail sector (approx. 20% per annum)coupled with constant development in the food industry provide a highlyconducive environment for existing and potential players in the foodsegment in India. So the company has developed capabilities and requiredstrengths to take full advantages of the opportunities present in thedomestic food services industry.Company BackgroundThe company, a Jubilant Bhartia Group Company was incorporated onMarch 16, 1995 as a private limited company with the name Domino'sPizza India Pvt Ltd. It is a food service company. The company offers amenu of quality pizza and side dishes to their customers. They operatetheir stores pursuant to a Master Franchise Agreement with Domino'sInternational, which provides them with the exclusive right to develop andoperate Domino's pizza delivery stores and the associated trademarks inthe operation of stores in India, Nepal, Bangladesh and Sri Lanka. Thepizza stores in Sri Lanka are operated by their sub-franchisee, DP Lanka.RR, All Rights ReservedPage 24 of 32


India StrategyKSB PumpsView - BullishCMP: Rs. 53052 Week High/ Low: Rs. 610.00 / Rs. 410.00NSEKSBPUMPSBSE 500249Face Value (Rs) 10Equity Shares (Cr) 1.74Market Cap (Rs Cr) 922Average Volume(Cr)1M 3.913M 3.026M 2.9712M 6.80Return Analysis (%)In(%) KSBPUMPS SensexRelative toSensex1M 4.55 -1.68 2.873M -4.71 -10.13 -14.846M -8.68 -9.80 -18.4812M 9.10 3.32 12.42Shareholding Pattern (%) (Dec. ‘10)Investment RationaleCatering to Diversified Set of IndustriesThe company is the only player that manufactures pumps and valves tosupport functions of agricultural sector and water and sewagemanagement systems apart from industrial applications such as power,petrochemicals, etc. The growth of the pump and valves sector is drivenby the growth and increased investments in power and energy sectorsapart from the agricultural sector. Pumps and valves form part of largeprojects across the aforesaid industries. KSB manufactures various pumpsand valves of various specifications to enable fluid transportation.The company also takes up project execution on turnkey basis and catersto niche industrial as well as highly competitive low margin agricultural anddomestic (residential/commercial buildings) segments. On industrial frontthe company caters to diverse industries such as chemicals,petrochemicals/ refiners, breweries/distilleries etc and power generation(both thermal and nuclear for feeding water to boilers).Competitive EdgeWithin the KSB Group globally, KSB India has relatively the highest rangeof pumps and valves to offer. Even among its competitors in India, KSBIndia has a large range of pumps to offer under one roof. Both these givethe company the required competitive edge over its peers.Strategically Located PlantsThe company has 5 plants in India, two in Pune that cater to therequirements of irrigation and power projects, one in Nashik thatmanufactures multistage pumps, water and submersible motor pumps, avalve manufacturing plant in Coimbatore and a foundry in Ahmednagar tosupport captive consumption of castings.Public,22.47%FII,40.54%Promotors,26.26%DII,10.73%Growing Order Book, but with Low MarginsThe company doesn’t sharing its current order book, however hinted thatthe order book is up on YOY basis. The company is expected to furtherbag some more projects in coming months. At the time of revival ineconomy in 2009, the competition increased as everybody wanted to grabwhatever orders came even at lower margins. So, the company also bagscertain orders at low margin as compared to its normal run rate impactingthe overall profitability in CY09.Stock Performance300.00250.0040,000.00200.0032,000.00150.0024,000.00100.0016,000.0050.008,000.000.000.00Mar-10 Jun-10 Sep-10 Dec-10 Mar-11Key FinancialsTotal Volume ('000) (LHS) Deccan Chron NiftyParticulars FY'09 FY'10 9MFY'10 9MFY'11Net Revenue 564 609 412 436EBITDA 112 76.4 80.6 64.9EBITDAMargin(%) 19.9% 12.5% 19.6% 14.9%PAT 66.4 51.6 48.9 39.6PATMargin(%) 11.8% 8.5% 11.9% 9.1%AnnualizedEPS(Rs) 38.2 29.6 37.5 30.3P/E(x) 13.1 16.8 13.3 16.5Diversified Revenue StreamKSB earns 30% of its revenues by way of sales of standard products, 65%through project based (made to order) revenues and the remaining by wayof after sales services.Company’s BackgroundThe company was incorporated in 1960 by KSB AG, Germany, one of thelargest pump and valve manufacturers in the world. The company hasgrown geographically and owns plants at Pune, Sinnar and Nashik inMaharashtra and Coimbatore in Tamilnadu. The company has its ownfoundry plant is at Ahmednagar in Maharashtra, which caters to most of itsin-house needs.Apart from the power and energy sectors, the areas of application of KSBPumps’ products range from building services to industrial processes,water engineering, mining and energy technology. The company alsoprovides solutions for heating and air-conditioning problems. KSB Pumpsproducts are used in chemical, petrochemical and other industries totransport aggressive, corrosive, explosive, solids-laden and viscousliquids. They are also used to carry industrial and municipal waste water.RR, All Rights ReservedPage 25 of 32


India StrategyMIC ElectronicsView - BullishCMP: Rs. 2552 Week High/ Low: Rs. 44.70 / Rs. 16.60NSEMICBSE 532850Face Value (Rs) 10Equity Shares (Cr) 2.05Market Cap (Rs Cr) 257.87Average Volume(Cr)1M 392.233M 500.876M 523.4112M 502.13Return Analysis (%)In(%) MIC SensexRR, All Rights ReservedRelative toSensex1M -4.99 -1.68 -3.313M -20.03 -10.13 -9.906M -37.34 -9.80 -27.5412M -42.64 3.32 -45.96Shareholding Pattern (%) (Dec. ‘10)Public,43.85%FII,14.72%Stock Performance604020Prom otors,32.51%DII,9.92%0Mar-10 Jun-10 Sep-10 Dec-10 Mar-11Key FinancialsTotal Volume ('000) (LHS) MIC Nifty70006000500040003000200010000Particulars FY'09 FY'10 9MFY'10 9MFY'11NetRevenue 293.0 277.0 197.2 165.9EBITDA 74.9 75.9 68.4 65.8EBITDAMargin(%) 26 27 35 40PAT 63.4 55.2 53.5 49.0PATMargin(%) 22 20 27 29AnnualizedEPS(Rs) 6.2 5.3 7.1 6.5P/E(x) 4.0 4.7 3.5 3.9Investment RationaleRobust Demand Outlook to Generate Huge Revenue StreamsThe display market and Indian live-entertainment industry is expected togrow at a CAGR of 61% & 18% respectively in the next five years, and theRs.17.5 billion out-of home advertisement industry is expected to grow at aCAGR of 12.5%. The company being present in all the above mentionedsegments would benefit hugely from this demand boom. The expectedincrease in the advertisements by corporates, growing use of LED screensin event coverage, expanding application range including informationdissemination, interactive mass communications, and theatre and cinemaapplications would drive the growth of the company in the future.Strong Order BookThe company has been experiencing strong order flow from varioussectors including defense, Railways, Corporates etc. The latest disclosedorder book of the company stood at Rs.200 Cr. Apart from this thecompany has also bagged multiple orders worth Rs.24 Cr, which includedan agreement with the UPNEDA to supply LED Solar Street Lightingsystems, Supply of a gamut of True color LED Systems and emergencylighting solutions to the Indian Railways and supply of LED Displaysystems to various corporates, which would enable MIC to enter bigcorporate houses and cater all their LED lighting needs.Tie-up with IOCL to Boost RevenueThe company has entered into an exclusive tie-up with IOCL for marketingits solar based LED lanterns on a commercial basis in the rural marketthrough IOCL’s Outlets. The rural market will be a very big opportunity forMIC, considering the fact that there are about 6 lakh villages in India andthere is a requirement of 80 million lanterns. Apart from this, thecompanies intend to jointly provide home lighting solutions, Solarizationand community charging solutions for the rural market. We believe that thetie-up with IOCL will not only enhance the brand value of MIC butconsidering MIC’s unique technology and IOCL’s huge distributionnetwork, the move will boost the revenue outlook for the company.Expansion Plans and Acquisitions to Add to CapacitiesThe company has recently announced Rs.170 Cr expansion plan for thenext fifteen months to enhance its capacities. It has planned to expandcapacities in the LED lighting segment and set up a new plant incherapally. The company has also picked up 51% stake in Avni Energy forRs.10 Cr. Avni Energy has a plant in Tirupati besides a sales office andR&D centre in Bangalore. The acquisition will help MIC to build upcapacities to meet the rising demand for LED lighting products acrossvarious segments. The management expects the order intake to rise morethan 50% after all these capacities come on board.Shifting Focused on Core Business SegmentThe company had recently sold out its entire stake of 68.26% in its stepdown subsidiary Infostep India. The exit is part of MIC's plan to focus on itscore business of LED Lighting & display systems. We believe that the shiftin focus of MIC towards core business segment and parting away with noncore business segments would add strength to its business model. In theshort term though, it would take away some of the contributions in theconsolidated topline and bottom-line of MIC.About The Company CompanyMIC Electronics is one of the Leading Players in the design, development& manufacturing of LED Video Displays, high-end Electronic andTelecommunication equipment and development of Telecom softwaresince 1988.The Company is headquartered in Hyderabad with nationwidepresence in the form of a vast network of marketing, sales and servicesupport centers. To meet the demand of its products worldwide, it hasestablished offices in Australia, Korea and USA. The company is graduallysetting up operations in other international markets also. Its clienteleincludes L&T, Indian Railways, RBI, LIC, BHEL, RIL, etc.Page 26 of 32


India StrategyNestleView - BullishCMP: Rs. 368252 Week High/ Low: Rs. 4199 / Rs. 2570NSENESTLEBSE 500790Face Value (Rs) 10Equity Shares (Cr) 9.64Market Cap (Rs Cr) 35495Average Volume (Cr)1M 20.943M 23.426M 28.7912M 29.67Return Analysis (%)In(%) NESTLE SensexRelative toSensex1M 4.55 -1.68 2.273M 0.96 -10.13 5.686M 10.92 -9.80 1.0012M 39.72 3.32 39.16Shareholding Pattern (%) (Dec. ‘10)Public,18.21%Investment RationaleDomestic Sales Growth Remains RobustDomestic sales growth remains robust for Nestle as its low unit pricedpacks and enhanced distribution continue to expand its customer base.However, exports, institutional accounts and out of home categoriescontinue to suffer due to weakness in economic environment.Plans to Gain Market ShareMarket expansion is greater focus than market share gains. Nestle has reiteratedits commitment to put in efforts to maintain its market sharesacross products. However, it has also stated that with very poorpenetration for most of its categories in India, market development wouldbe the key growth driver and not market share gains.Focus on New ProductsNew product pipeline will remain a focus area. Nestle will continue with itsinnovate and renovate strategy. We expect this activity to accelerate asnow Nestle wants to be ready with new product launches in time for therevival in consumer spending so as to provide support to its new products.New Launches‘Indianization’ of global products would be the key for new launches.Realizing from the failure of some its new launches like Cerivita, Nestlehas now realized that it is important to alter its global products to suittastes and preferences of Indian consumers before they are launched inIndia. This will be the key focus area going forward before new productsare rolled out.Inflation to HurtRaw material cost inflation remains a mixed bag. While milk and sugarhave seen a strong price hike, other raw materials like vegetable oils, milksolids, coffee and wheat have seen benign cost inflation. On an overallbasis, raw material cost scenario has been marginally negative for Nestle.DII,19.03%Prom otors,73.50%Capex PlansAggressive capex plans will continue in CY10-11E as well. With the strongvolume growth being witnessed by Nestle across most categories, it hasbecome essential to double its capacity roughly every four years. As partof this capacity expansion, Nestle intends to maintain its capex at a highlevel.Stock Performance5,000.004,000.002,500.002,000.003,000.001,500.002,000.001,000.001,000.00500.000.000.00Mar-10 Jun-10 Sep-10 Dec-10 Mar-11Key FinancialsTotal Volume ('000) (LHS) Nestle NiftyParticulars FY'09 FY'10 9MFY'10 9MFY'11Net Revenue 5130 6255 3777.59 4583.79EBITDA 1002.2 1231.3 828.7 934.1EBITDAMargin(%) 19.5% 19.7% 21.9% 20.4%PAT 655 818 542 615.25PAT Margin(%) 12.8% 13.1% 14.3% 13.4%AnnualizedEPS(Rs) 67.9 84.9 74.96 85.08P/E(x) 54.2 43.4 49.1 43.3OutlookNestle ranks among the fastest-growing companies in FMCG space. Itoffers structural high growth drivers such as urbanization, changinglifestyles and hence greater focus on convenience of processed foods. Itsinnovation pipeline is strong and market dominance gives it pricing power.Key near-term challenges are rising input costs. We believe Nestle'smargins will be protected through improving mix and judicious priceincreases.Company’s BackgroundNestle, owned 61.8% by Nestle Switzerland, is one of India's largestbranded food companies. It operates across 4 main categories - baby milkproducts and cereals, coffee, culinary and chocolates and confectionery. Ithas dominating market shares across most of its categories. Key strengthsare strong brand equity, extensive distribution in urban India, healthybalance sheet a nd high quality management.RR, All Rights ReservedPage 27 of 32


India StrategyNIIT Technologies Ltd.View - BullishCMP: Rs. 18752 Week High/ Low: Rs. 234.90 / Rs. 164.00NSENIITTECHBSE 532541Face Value (Rs) 10Equity Shares (Cr) 6.36Market Cap (Rs Cr) 1105Average Volume(Cr)1M 44.913M 78.666M 111.1012M 139.34Return Analysis (%)In(%) NIITTECH SensexRR, All Rights ReservedRelative toSensex1M -6.81 -1.68 -8.493M -8.49 -10.13 -18.626M -5.38 -9.80 -15.1812M 9.28 3.32 12.6Shareholding Pattern (%) (Dec. ‘10)Public,27.75%DII,32.86%Stock PerformancePromotors,73.50%500.00400.005,000.004,000.00300.003,000.00200.002,000.00100.001,000.000.000.00Mar-10 Jun-10 Sep-10 Dec-10 Mar-11Key FinancialsTotal Volume ('000) (LHS) NIIT Tech NiftyParticulars FY'09 FY'10 9MFY'10 9MFY'11Net Revenue 502.07 493.58 363.45 564.46EBITDA 88 114 84 104EBITDAMargin(%)17.6% 23.2% 23.1% 18.5%PAT 88.5 95.09 65.5 85.67PATMargin(%)17.6% 19.3% 18.0% 15.2%AnnualizedEPS(Rs)15.1 16.2 14.87 19.32P/E(x) 12.4 11.6 12.6 9.7Investment RationaleStrong Volume Growth, Scope for Pricing ImprovementNIIT Tech should continue to report strong volume growth on the back ofan improved demand environment driven by the insurance and travelvertical. Pricing remains stable with a positive bias and may improvetowards the end of FY11.The company did not experience any pricingnegotiations in the new contracts signed.EBIDTA Margin to Remain Under Pressure in FY11 Owing toHardware Component, Improvement Expected in FY12NIIT Tech commands the highest EBITDA margins among most of the midtier IT players. Utilisation levels have peaked out at 82%, but higher offshoring from the current 43% would have a positive impact. Uptick inpricing and growth of non linear services would also boost the margins inthe long term. However, salary increases & total hardware component(BSF contract) of Rs1200mn for FY11 would have a negative impact.US and APAC to Lead Growth, Europe to be MutedScenario in the US has improved significantly in the near term and woulddrive volumes further. Europe remains stable and will lag the US in termsof growth. NIIT Tech has stronger client ties in Europe; this would bepositive when the Europe starts to recover. The company has no exposureto the PIIGS region. The APAC market also provides huge untappedopportunities led by government work in India.Non-Linear Initiatives Support the Growth, Discretionary SpendImprovesNon linear initiatives account for 27% of revenue. This is expected toincrease to 30% and 35% by the end of FY11 and FY12 respectively.Cloud computing is a new service line and will make only a smallcontribution till the end of FY12.Increased Manpower Intake/Guidance Aurgur WellThe company added 364 to its headcount in 3Q11 (a 7.3% qoq increase),ahead of its guidance of 200 net adds per quarter. In this context,management upgraded the quarterly headcount addition target to 300,citing better demand visibility.Well Placed to Capture the Recovery in the Niche VerticalsThe company is focused mainly on four key verticals: BFSI, travel,transportation & logistics, and retail & manufacturing. Over the years, NTLhas built strong domain expertise in its niche industry verticals. With ourrecent surveys/ channel checks showing signs of a revival in IT spendingand with the demand environment getting more broadbased, the ITspending in these lagging sectors especially travel, transportation &logistics and manufacturing is likely to catch up in 2011. This will result instrong business visibility in the coming years. Moreover, the company hasthe advantage of a well-balanced geographical mix of revenues from itsNorth American, European and Asia- Pacific operations.Company’s BackgroundIn 2004 the company was spun off the information technology (IT)company currently. The company provides application development andmanagement services, managed services, and package implementationand business process outsourcing (BPO) services in the banking financialservices and insurance (BFSI), travel, transportation & logistics, retail &manufacturing and government industry verticals. As of December 2010,The company had about 5,358 employees across offices in NorthAmerica, Europe, Asia and Australia. North America contributes about35% of its total revenues; Europe, the Middle East and Africa togethercontribute about 35% followed by Asia Pacific and India with 14% and16% contributions respectively. The major clients of the company includeBritish Airways, Singapore Airlines, Holcim Group, Emirates, ToyotaMotors, DB Systel, Tesco, Cathay Pacific and Myanmar Air.Page 28 of 32


India StrategyYes BankView - BullishCMP: Rs. 28552 Week High/ Low: Rs. 382.00 / Rs. 233.55NSEYESBANKBSE 532648Face Value (Rs) 10Equity Shares (Cr) 33.96Market Cap (Rs Cr) 9916.75Average Volume(Cr)1M 20853M 28886M 247712M 2274Return Analysis (%)In(%) Yes Bank SensexRelative toSensex1M 16.98 -1.68 18.663M -1.98 -10.13 8.156M -14.59 -9.80 -4.7912M 19.33 3.32 16.01Shareholding Pattern (%) (Dec. ‘10)Corporate, 1.80%Public,11.50 %FII, 60.10%Stock PerformancePromotors, 26.60%500.00400.0050,000.0040,000.00300.0030,000.00200.0020,000.00100.0010,000.000.000.00Mar-10 Jun-10 Sep-10 Dec-10 Mar-11Key FinancialsTotal Volume ('000) (LHS) Yes Bank NiftyParticulars FY'09 FY'10 9MFY'10 9MFY'11NetInterest 2438 2945 2121 3256IncomeEBITDA 418.6 500.2 605.8 841.6EBITDAMargin(%)17.2 17.0% 28.6% 25.9%PAT 303.8 477.7 337.7 523.8PATMargin(%)12.5% 16.2% 15.9% 16.1%AnnualizedEPS(Rs)10.2 14.1 15.00 20.13P/E(x) 27.9 20.3 19.0 14.2Investment RationaleContinue to Witness Strong Growth in AdvancesThe Bank is expected to continue to grow much ahead of the industrygiven that it is the youngest bank in the sector with low credit base and anaggressive growth strategy. Management has guided its loan growth to bearound 2x the industry’s loan growth. Management expects the bank’stotal business to increase at a CAGR of 35% till FY 2015 with a totalbusiness size of Rs. 2.25 lakh Crs.Aggressive Branch Expansion to Increase Retail BaseThe Bank is expanding its retail base aggressively. The bank plans toincrease the number of branches to 750 by 2015 from current of 185. Inour view, extensive branch expansion will strengthen its asset baseleading to higher growth and increase its low cost deposits therebyenhancing the bank’s CASA share.Non-Interest Income Continues to Aid Topline GrowthBank’s fee income is expected to expand further at a CAGR of 26% overFY 2010-2013E. Financial advisory and transaction banking will continueto be the key focus areas for growth in non interest income.Asset Quality Remains the Best in the IndustryThe bank's asset quality remains healthy with one of the lowest proportionof stressed assets (0.5% of total loan book). However, any increasedloans to retail and SME segment along with a significant credit growth mayalso result in higher slippages. Nevertheless it is noteworthy to mention,that even after factoring in an increase in NPAs it still remains low ascompared to its peer group. The bank’s provision coverage ratio stood at76% as on December 2010.CASA to Improve GraduallyYes Bank's proportion of low cost deposits i.e. current account savingaccount (CASA) is amongst the lowest in the sector. However, in absolutenumbers CASA has grown at 81% CAGR during FY’07-FY’10. The bankhas historically relied more on wholesale deposits to ramp up loan growth.In addition relatively lower branches impacted the CASA mobilization ofthe bank. YES Bank's CASA mix is inclined towards current account whichconstitutes approximately 85% of its low cost deposits.OutlookThe bank with its aggressive expansion strategy coupled with low creditbase is expected to grow much faster than other player in the space. TheNon interest income is expected to continue to grow. The banks is likely tomaintain its asset quality. This coupled with high CASA ratio, margins ofthe bank is expected to improve.About The CompanyYes Bank, founded by Mr. Rana Kapoor and his highly competent topmanagement team, is India’s new age private sector Bank. It began itsoperations in May 2004 and is one of the banks which have the distinctionof obtaining RBI’s Greenfield banking license. The bank is recognizedamongst the top five private banks in terms of business size and is one ofthe fastest growing banks in recent times. Yes Bank is recognizedamongst the top five private banks in terms of business size and is one ofthe fastest growing banks in recent times. The total balance sheet size ofthe bank is Rs. 52,000 Crs with a total business (advances & deposits) ofRs. 70,000 Crs as on 31st December 2010.RR, All Rights ReservedPage 29 of 32


India StrategyZylog SystemsView - BullishCMP: Rs. 42552 Week High/ Low: Rs. 612 / Rs. 276.80NSEZYLOGBSE 532883Face Value (Rs) 10Equity Shares (Cr) 1.64Market Cap (Rs Cr) 697Average Volume(Cr)1M 150.653M 146.106M 137.7512M 135.12Return Analysis (%)In(%) ZYLOG SensexRelative toSensex1M 3.68 -1.68 23M 3.27 -10.13 -6.866M -26.53 -9.80 -36.3312M -3.77 3.32 -0.45Shareholding Pattern (%) (Dec. ‘10)Investment RationaleDiversified OfferingsCompany provide complete Product Lifecycle Management services,ranging from new product development and product advancement toproduct migration, re-engineering, sustenance and support.The company has recently launched `Wi5` services in Chennai. Theservice will enable customers to access high-speed wireless broadbandconnectivity through their laptops, desktops or mobile devices bysubscribing to`Wi5` service on the move. With this launch, the companyhas entered ISP business in the country and has obtained a category “A”internet service provider license to operate in all of India`s DoT circles.Tied up with Normad DigitalThe company has entered into a JV with Nomad Digital, UK based Wi-Fitechnology major, to provide wireless internet access to India’s massiverailway network. Nomad Digital has one of the biggest market share in thedomain of providing mobile wireless services for transportation.There is a gap which the Zylog are perfectly poised to fill up with the helpof this alliance. The Indian Consumer has been longing for high-speedseamless internet connectivity at an affordable price. With the offerings bythe JV, the consumer will now be at par with the rest of the world in termsof internet access, entertainment system, and other value added services.Expansion on Spree.The company plans to invest Rs 200 Cr to expand its ‘Wi5’ wirelessbroadband services in five metropolitan cities Delhi, Mumbai, Bangalore,Hyderabad and Kolkata in coming two years. With a launch of Wi5services, the company expects a business of Rs 500 crore spreading inthe next five years.Public,59.62%Stock PerformanceProm otors,23.31%DII, 4.44%FII,12.63%The company also plans to expand its presence in e-governance segment.For this it is eyeing at acquiring two overseas companies by the end of thecurrent fiscal year. The company is in talks with various target companiesin e-governance segment with revenue of less than Rs 50 crore ($10 mn).Inorganic GrowthWith an intention to enter Canada, the company recently acquiredCanadian firm Brainhunter Inc. Brainhunter is engaged in consulting andengineering services in Canada with major presence in government,telecom, banking, financial services and insurance (BFSI), and oil &pipeline verticals.800.00600.0010,000.008,000.006,000.00400.004,000.00200.002,000.000.000.00Mar-10 Jun-10 Sep-10 Dec-10 Mar-11Key FinancialsTotal Volume ('000) (LHS) Zylog NiftyParticulars FY'09 FY'10 9MFY'10 9MFY'11Net Revenue 735 783 572 674EBITDA 72.6 153.9 111.3 167.2EBITDAMargin(%) 9.88% 19.65% 19.47% 24.81%PAT 85.2 92.2 65.6 103.5PATMargin(%) 11.59% 11.77% 11.46% 15.36%AnnualizedEPS(Rs) 51.8 56.0 53.1 83.9P/E(x) 8.2 7.6 8.0 5.1RR, All Rights ReservedThe acquisition will bring in Zylog’s to capitalize upon the Brainhunter'sready access to a large talent pool, over 1,400 contractors and more than400 customers. The deal will also help the company to save costs onaccount of offshoring contracts, sourcing of contractors from India for nongovernment businesses and further reduction in non-billable staff.However, synergies remain a key monitorable as Brainhunter is largerthan Zylog in terms of revenues and is into the staffing solutions business,which is non-core to Zylog.Company’s BackgroundZylog Systems, established in 1996, is an ISO 9001 certified provider ofOnshore, Offshore & Near shore technology solutions and services toenterprises & technology companies across the globe. The companyworks with some of the world’s leading innovative ISVs and softwareenabledbusinesses, ranging from start-ups to establish industry leaders. Itprovides complete Product Lifecycle Management services, ranging fromnew product development and product advancement to product migration,re-engineering, sustenance and support. By leveraging their experience inproduct engineering, they bring products to market faster, with high qualityand reduced costs.Page 30 of 32


India StrategyFor Further Details/Clarifications please contact:RR Information & Investment Research Pvt. Ltd.47, MM Road Jhandewalan New Delhi-110055 (INDIA)Tel: 011-23636362/63research@rrfcl.comwww.rrfinance.comwww.rrfcl.comRR Research Products and Services:Online Equity Calls during Market Hours (9:00 AM to 3:30 PM)Online Commodity Calls during Market Hours (10:00 AM to 11:30 PM)Daily Morning Pack‣ Equity Morning Bell‣ Debt Morning Bell‣ Commodity Morning Bell‣ Currency Morning BellDaily Market ReviewWeekly Pack‣ Equity Fundamental - Weekly‣ Equity Technical Analysis - Weekly‣ Derivative – Weekly‣ Debt - Weekly‣ Commodity - Weekly‣ Currency – Weekly‣ Mutual Fund WatchFundamental Research‣ Economic Analysis‣ Industry Analysis‣ Company Research & Valuations‣ Result Updates‣ News UpdatesIPO AnalysisMutual Fund AnalysisInvestment Monitor – The complete monthly magazine design for Indian investorsShare Views with Zee Business.And many more…RR Research can also be viewed and downloaded from following websites:www.moneycontrol.comwww.valuenotes.comwww.reportjunction.comwww.capitalmarket.comwww.myiris.comRR, All Rights ReservedPage 31 of 32


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