September 2010

India Strategy

E

uphoric

t

imes

Research Team (Rajat@MotilalOswal.com)

India Strategy

Contents

Section A: India Strategy

..............................................................................................................

A–1 to 47

Section B: 2QFY11 Highlights & Ready Reckoner

..................................................................

B–1 to 14

Section C: Sector & Companies

..............................................................................................

C–1 to 212

1.

Automobiles

Bajaj Auto

Hero Honda

Mahindra & Mahindra

Maruti Suzuki India

Tata Motors

Banking

Andhra Bank

Axis Bank

Bank of Baroda

Bank of India

Canara Bank

Corporation Bank

Dena Bank

Dewan Housing

Federal Bank

HDFC

HDFC Bank

ICICI Bank

Indian Bank

LIC Housing

Oriental Bank

Punjab National Bank

Rural Electricfication

Shriram Transport

South Indian Bank

State Bank

Union Bank

Yes Bank

Cement

ACC

Ambuja Cement

Birla Corporation

Grasim Industries

India Cements

Shree Cement

UltraTech Cement

Engineering

ABB

BHEL

Crompton Greaves

Larsen & Toubro

Siemens

Thermax

FMCG

Asian Paints

Britannia Industries

Colgate Palmolive

Dabur India

2-10

6

7

8

9

10

11-38

17

18

19

20

21

22

23

24

25

26

27

28

29

30

31

32

33

34

35

36

37

38

39-50

44

45

46

47

48

49

50

51-61

56

57

58

59

60

61

62-78

68

69

70

71

GSK Consumer

Godrej Consumer Products

Hindustan Unilever

ITC

Marico

Nestle India

United Spirits

6.

Information Technology

HCL Technologies

Infosys

MphasiS

Patni Computer

TCS

Tech Mahindra

Wipro

Infrastructure

Hindustan Construction

IVRCL

Jaiprakash Associates

Nagarjuna Construction

Simplex Infrastructure

Media

Deccan Chronicle

HT Media

Jagran Prakashan

Sun TV Network

Zee Entertainment

Metals

Hindalco

Hindustan Zinc

JSW Steel

Nalco

Sesa Goa

SAIL

Sterlite Industries

Tata Steel

72

73

74

75

76

77

78

79-92

86

87

88

89

90

91

92

93-100

96

97

98

99

100

101-110

106

107

108

109

110

111-122

115

116

117

118

119

120

121

122

123-138

128

129

130

131

132

133

134

135

136

137

138

11. Pharmaceuticals

Aventis Pharma

Biocon

Cadila Healthcare

Cipla

Divi’s Laboratories

Dishman Pharma

Dr Reddy’s Labs.

GSK Pharma

Glenmark Pharma

Jubilant Organosys

Lupin

Opto Circuits

Piramal Healthcare

Ranbaxy Labs.

Sun Pharmaceuticals

12. Real Estate

Anant Raj Industries

DLF

HDIL

Mahindra Lifespaces

Phoenix Mills

Unitech

13. Retailing

Pantaloon Retail

Titan Industries

14. Telecom

Bharti Airtel

Idea Cellular

Reliance Communication

Tulip Telecom

15. Textiles

Alok Industries

Arvind Mills

Bombay Rayon

Raymond

Vardhman Textiles

16. Utilities

CESC

NTPC

Power Grid Corp.

PTC India

Reliance Infrastructure

Tata Power

17. Others

Sintex Industries

United Phosphorus

139-161

147

148

149

150

151

152

153

154

155

156

157

158

159

160

161

162-174

169

170

171

172

173

174

175-180

179

180

181-188

185

186

187

188

189-197

193

194

195

196

197

198-210

205

206

207

208

209

210

211-212

211

212

2.

7.

8.

3.

9.

4.

5.

10. Oil & Gas

BPCL

Cairn India

Chennai Petroleum

GAIL

Gujarat State Petronet

HPCL

IOC

Indraprastha Gas

MRPL

ONGC

Reliance Industries

Note:

All stock prices and indices for India Strategy as on 24 September 2010, unless otherwise stated

September 2010

India Strategy

September 2010

India Strategy

BSE Sensex:

20,045

S&P CNX:

6,018

As on:

24 September 2010

Euphoric times

Indian markets are in euphoric times. In September 2010, Nifty crossed the landmark

6,000 and Sensex breached 20,000, levels last seen 32 months ago in January 2008. The

Indian markets are valued at 16x FY12E earnings, at a premium to other emerging markets.

YTD CY10, FII inflow stands at over US$19b, the highest ever so far. The euphoria is

also spreading to the primary markets. CY10 is likely to end up as the year of highest

domestic fund-raising in the primary markets. Technical indicators such as traded volumes

and open interest are significantly higher compared to last market peak of January 2008.

YEARLY TREND IN NET FII INVESTMENTS (US$ B)

SENSEX P/E: 20% PREMIUM TO LONG-PERIOD AVERAGE

17.8

6.7

1.5

2.7

0.7

8.6

10.8

8.1

17.6 19.3

27

22

17

12

24.6

24.6

10 Year

Average 14.4x

17.3

-12.2

10.7

8.7

7

Source: SEBI/MOSL

What should be the investment strategy in these euphoric times? We address this critical

question by a multi-pronged approach to assess markets:

1.

Top-down analysis,

considering various macro factors such as economic growth,

liquidity & interest rates, external sector, etc.

2.

Bottom-up analysis

of major sectors to identify theme(s) that will play out over the

next few years, and the key investment opportunities therein

3.

Earnings analysis

of our coverage universe both for 2HFY11 and FY11-12, and

4.

Valuation analysis,

including premium/discount to market and to long-period averages.

Top-down analysis: growth back to the 9% potential level

Growth is back and the major drivers are in place. While official pronouncements of FY11

GDP growth are being revised upwards, we are optimistic of growth being close to the

potential at 9%.



A good monsoon has raised expectations of a bumper crop in FY11 and the broader

agricultural growth is likely to turn up to 3.8%.



Industry is riding on a capex boom to clock 10.3% growth (FY11E).

Navin Agarwal

(Navin@MotilalOswal.com)

/ Rajat Rajgarhia

(Rajat@MotilalOswal.com)

September 2010

A–1

India Strategy



The service sector is also likely to emerge from a slowdown to register a growth of

9.7%.

Our optimism stems from the fact that the investment cycle is still at play and the government

has continued to support the economy. We have also seen private consumption recovering

in 1QFY11. Besides, interest rates and policy environment would remain largely supportive;

no major concern is likely to emanate from the inflationary situation and higher trade

deficit.

Bottom-up analysis: opportunities across sectors

Despite rich valuations overall, specific large-cap stocks in high-growth sectors still hold

the potential to deliver steady returns over the next two years. In Autos, we like M&M,

Tata Motors and Maruti. We prefer SBI, PNB, BoB and Canara Bank among state-

owned banks, and ICICI Bank among private sector banks. In the Engineering space, we

like BHEL, L&T and Siemens. Infosys and HCL Tech are our key ideas in the IT sector.

In Metals, we like JSW Steel and Sterlite. Among Utilities, we like NTPC and PowerGrid.

In the Real Estate space, our top picks are DLF and Unitech. Read on, as we have listed

the outlook on the various sectors and the growth drivers.

Earnings analysis: expect 20% growth in 2HFY11/FY12

In 2HFY11, we expect Sensex earnings growth of 22%, against 25% in 1HFY11.

Moderation in 2HFY11 is due to a higher base (since recovery in corporate earnings

commenced in 3QFY10). Sensex earnings growth would be 20% excluding the swing of

Tata Motors and Tata Steel. In 1HFY11 it was 5%. For FY12, we estimate Sensex earnings

growth at 18% and expect Sensex EPS of Rs1,259 (Rs1,068 in FY11E).

Valuation analysis: identifying relatively cheap sectors, re-rating

possibilities

Sensex valuations in terms of P/E are at a 10% premium to the historical 10-year long-

term average (LTA) at 15.8x FY12E EPS. In terms of P/BV, valuations are at a 15%

premium at 2.9x FY12E BV, with RoE at 17.8% (lower than the LTA of 18.7%). While

the valuations are not excessive, we believe that the data points matter – more so in the

event of market extremes. Some sectors like State-owned (PSU) Banks, Private Sector

Banks, FMCG, Metals, Telecom trade at meaningful premiums to the long-term average.

Sectors like Auto, Cement, Engineering, Pharma, Utilities trade at similar levels to the

long-term averages.

Our view

At the current levels of 20,000 Sensex and 6,000 Nifty, India is an interesting bottom-up

market. Despite rich valuations overall, specific large cap stocks in high-growth sectors

still hold the potential to deliver steady returns for the next 2-3 years.

Top Picks:

SBI,

BHEL, M&M, Infosys

and

GAIL.

September 2010

A–2

India Strategy

Euphoric times

Indian markets are in euphoric times. This is evident in the strong performance of

benchmark indices, above average valuations, unprecedented FII flows, large IPO

subscriptions, increased traded volumes, and so on. Based on a top-down and bottom-up

analysis, our investment view is that at current levels of over 20,000 Sensex and 6,000

Nifty, India remains an interesting bottom-up market. Despite rich valuations overall, specific

large-cap stocks in high-growth sectors still hold the potential to deliver steady returns

over the next two years.

Indian markets close to creating new highs

Indian equity markets have delivered yet another quarter of solid performance, with

benchmark indices rising 13-14% in 3QCY10. YTD CY10, India is one of the best

performing markets globally, and is poised to be one of the earliest to scale its previous

peak and create new highs. In September 2010, Nifty crossed the landmark 6,000 and

Sensex breached 20,000, levels last seen 32 months ago in January 2008.

GLOBAL MARKETS: INDIA AMONG TOP PERFORMERS IN CY10

3QCY10

CY10YTD

FROM PEAK OF CY07/08

Brazil

India - Nifty

UK

Taiw an

S&P 500

US

Russia

MSCI - Asia

South Korea

China

Japan

1

6

9

12

11

11

11

10

14

13

13

India - Nifty

South Korea

MSCI - Asia

US

UK

S&P 500

Russia

Brazil

Taiw an

China

Japan

-10

-5

6

4

3

3

3

1

0

10

16

India - Nifty

Brazil

South Korea

Taiw an

UK

US

MSCI - Asia

S&P 500

Russia

China

Japan

Perf from

Peak (%)

-4

-6

-10

-17

-17

-23

-27

-27

-37

-40

-46

3QCY10 QTD

Return (%)

CY10 YTD

Return (%)

SECTOR PERFORMANCE

3QCY10

CY10YTD

FROM PEAK OF CY07/08

PSU-Banks

Pvt-Banks

Telecom

Real Estate

Metal

FMCG

Auto

Sensex

IT

Engineering

Pharma

Utilities

Oil

-2

4

4

18

16

15

15

14

11

9

27

26

35

PSU-Banks

Pvt-Banks

FMCG

Auto

Pharma

Sensex

IT

Engineering

Telecom

Utilities

Oil

Metal

Real Estate

-2

-2

2

2

20

15

14

14

13

29

39

33

45

Auto

PSU-Banks

FMCG

Pharma

IT

Pvt-Banks

Sensex

Metal

Engineering

Oil

Utilities

Telecom

Real Estate

-72

-4

-13

-21

-24

-32

-48

17

71

61

49

40

39

Source: Bloomberg/MOSL

September 2010

A–3

India Strategy

CY10 YTD: TOP PERFORMING STOCKS …

… WORST PERFORMING STOCKS

65

52

44

NIFTY CY10 YTD Change: 16%

-8

-7

-6

-5

-4

44

42

41

40

40

-19

-18

-17

-15

NIFTY CY10 YTD Change: 16%

37

33

-42

20K (JAN-08) TO 20K (SEP-10): TOP PERFORMING STOCKS

… WORST PERFORMING STOCKS

168

107

-32

-30

-27

91

86

81

80

78

-35

71

59

56

-88

-79

-70

-67

-60

-56

Source: MOSL

Indian markets: valuations at premium to other emerging markets

Indian markets are up 16% YTD CY10. Almost the whole of this upmove came in 3QCY10

alone. Given no major upgrades to corporate earnings, this run-up implies sharp rise in

market valuations. Currently, the Indian market is valued at 16x FY12E earnings, the

highest among emerging markets. The valuation premium is high even after considering

the fact that both earnings growth and RoE for India are among the highest.

INDIAN MARKETS AT PREMIUM TO PEERS

EPS (RS)

INDEX

VALUE

CY10/

FY11

CY11/

FY12

CY12/ 2-YR EPS

FY13 CAGR (%)

CY10/

FY11

PE (X)

CY11/

FY12

CY12/

FY13

CY10/

FY11

PB (X)

CY11/

FY12

CY12 /

FY13

CY10 /

FY11

ROE (%)

CY11 /

FY12

CY12 /

FY13

Brazil

India

Indonesia

China

Philippines

Malyasia

Korea

Russia

69,228

20,105

3,473

2,611

4,124

1,460

1,856

1,484

5,270

1,068

206

171

266

93

180

244

6,792

1,259

245

204

292

104

196

229

7,990

1,493

287

236

332

114

214

261

23.1

18.3

18.1

17.7

11.7

10.8

9.1

3.4

13.1

18.8

16.8

15.3

15.5

15.8

10.3

6.1

10.2

16.0

14.2

12.8

14.1

14.0

9.4

6.5

8.7

13.5

12.1

11.1

12.4

12.8

8.7

5.7

1.8

3.4

3.3

2.2

2.4

2.2

1.4

1.0

1.6

2.9

3.0

1.9

2.2

2.0

1.2

0.9

1.4

2.5

2.6

1.7

2.0

1.9

1.1

0.8

13.4

17.9

19.9

14.2

15.4

14.0

15.6

18.3

21.2

14.8

15.7

14.4

16.7

18.7

21.3

15.0

16.0

14.5

13.2

12.8

12.6

17.2

14.0

13.9

Source : Bloomberg / MOSL

September 2010

A–4

India Strategy

Other pointers to market euphoria

In the run-up to 6,000 Nifty and 20,000 Sensex, technical indicators such as traded volumes

and open interest are significantly higher compared to the last market peak of January

2008. While the average daily volumes have made a new peak in September 2010, it also

marks a big rise MoM. Similarly, the average open interest in F&O are at a new high. The

only difference in the F&O segment is a big drop in futures open interest as compared to

the previous peak of January 2008.

TECHNICAL INDICATORS ALSO SUGGEST EUPHORIA

1,600

Avg. Daily Volumes (Rs b)

2,400

Average OI (Rs B)

Futures OI as % of Total OI (RHS)

100%

80%

60%

40%

20%

1,200

1,800

800

1,200

600

0

400

0

Source: BSE/NSE/MOSL

Highest ever foreign flows driving up markets

The key factor driving up the euphoria in Indian markets has been inflows from FIIs

(foreign institutional investors). YTD CY10, FII inflow stands at over US$19b, the highest

ever so far. Even more interestingly, of the US$19b, US$12.6b (65%) of FII inflow came

in the September quarter alone. In fact, this quarterly figure is higher than the annual

inflows of past several years (barring CY07 and CY09). Further, more than half of the

quarter's inflows were in the month of September alone (also

see box on next page).

YEARLY TREND IN NET FII INVESTMENTS (US$ B) …

… QUARTERLY TREND IN NET FII INVESTMENTS (US$ B)

17.8

6.7

1.5

2.7

0.7

8.6

10.8

8.1

17.6 19.3

-12.2

Source: SEBI/MOSL

September 2010

A–5

India Strategy

FII flows - the September factor

For the last five years now, September has seen the highest FII activity, whether it be

inflows or outflows. Also, more often than not, September has been a positive month

over August for market benchmark indices, and even more often than not, December

levels for the indices have been higher than September.

SEPTEMBER – A DECISIVE MONTH FOR FII FLOWS

FII NET INVT (US$ B)

IN SEP

FOR THE CY

SEP INVT AS %

TO FULL YEAR

SENSEX CHANGE (%)

SEP OVER AUG

DEC OVER SEP

Sep-02

Sep-03

Sep-04

Sep-05

Sep-06

Sep-07

Sep-08

Sep-09

Sep-10

0.1

0.9

0.6

1.0

1.4

4.7

-1.7

4.1

6.4

0.7

6.7

8.6

10.8

8.1

17.8

-12.2

17.6

19.3

10

13

7

9

17

27

14

23

33

-6

5

9

11

6

13

-12

-7

12

13

31

18

9

11

17

-25

20

-

Source: SEBI/MOSL

In sharp contrast to FII activity, domestic institutional investors were virtually absent from

the markets, and were actually net sellers to the tune of US$4.6b in the latest quarter.

QUARTERLY TREND IN NET DII INVESTMENTS (US$ B)

QUARTERLY TREND IN NET DOMESTIC MUTUAL FUND INVESTMENTS (US$ B)

5.9

4.8

3.0

2.1

0.9

3.0 3.2

2.1

0.4

2.4

0.5

0.5 0.7

1

.3

0.5 0.7

2.0

1

.6

1

.0

0.4 0.4

0.6

0.9

0.7 0.7

0.3

0.7

0.0

-0.2

-0.8

-1

.6

1.8

0.8

-0.2

-0.2 -0.3

-0.5

-1

.3

-5.2

-3.2

Source: SEBI/NSE/MOSL

CY10 will be the year

of highest domestic fund-

raising in the form of IPO/

rights issue

Euphoria spreading to primary markets: biggest ever capital raising

With markets close to scaling their previous peaks, the euphoria is also spreading to the

primary markets. CY10 is likely to end up as the year of highest domestic fund-raising in

the form of IPOs/rights issues. YTD CY10, domestic issues at over Rs500b are close to

the highest ever full year figure of Rs529b in CY07.

Given the pipeline of capital raising from both public and private sectors in 4QCY10, we

expect CY10 total capital raising to significantly surpass the previous high of CY07.

September 2010

A–6

India Strategy

CAPITAL RAISING BY INDIAN COMPANIES (RS B): DOMESTIC ISSUES SET TO SCALE NEW HIGHS

Domestic (Public & Rights)

645

576

Overseas (ADR / GDR / FCCB)

1,065

232

495

QIP

941

Stake Sale & Others

802

135

37

30

344

209

61

178

62

501

38

326

222

304

529

319

CY05

316

CY06

CY07

428

254

CY08

CY09

CY10 YTD

Source: CMIE/MOSL

IPO subscription money is also an interesting indicator of level of investor participation

and, in turn, level of euphoria. For instance, in September alone, average over-subscription

was 11x i.e. investible amount of over Rs370b chased IPOs of Rs34b. The correlation

between market levels and over-subscription times remains strong as ever.

IPO SUBSCRIPTION: BAROMETER OF EUPHORIA

6,800

Jan 08 to Feb 08:

Reliance Pow er 62x

REC 27x

5,600

Jul 09 to Oct 09:

Adani Pow er 18x

NHPC 24x

Oil India 31x

I-Bulls Pow er 16x

Sep 10:

Carrier Point 47x

Eros Intl 27x

Va Tech 36x

4,400

Nifty Index

HOLIDAY

PERIOD OF

NEW ISSUE

3,200

Jan 10 to Mar 10:

JSW Energy 2x

DB Realty 3x

NTPC 1x

NMDC 1x

2,000

11X OVERSUBSCRIPTION FOR IPOs IN SEPTEMBER 2010

COMPANY

ISSUE SIZE

(RS M)

CLOSE

DATE

SUBSCRIPTION

TIMES (X)

Orient Green Power Company Ltd

Ramky Infrastructure Ltd

9,000

5,300

3,570

3,500

2,680

2,481

2,250

1,475

1,250

1,150

1,050

515

34,221

24-Sep-10

23-Sep-10

15-Sep-10

21-Sep-10

28-Sep-10

24-Sep-10

28-Sep-10

21-Sep-10

27-Sep-10

21-Sep-10

27-Sep-10

17-Sep-10

1

3

1

27

24

8

16

12

36

47

2

9

11

Source: MOSL

An investible amount of over

Rs370b chased IPOs of

Rs34b in September 2010

Indosolar Ltd

Eros International Media Ltd

Tecpro Systems Ltd

Electrosteel Steels Ltd

Ashoka Buildcon Ltd

Microsec Financial Services Ltd

Va Tech Wabag Ltd

Career Point Infosystems Ltd

Cantabil Retail India Ltd

Tirupati Inks Ltd

Total of above

September 2010

A–7

India Strategy

Going forward, the issuance of fresh paper is likely to continue given the nearly US$10b

disinvestment program of the government and huge equity raising by the private sector to

fund growth capital (e.g. sectors such as Utilities, Real Estate, Infrastructure) or to

deleverage (e.g. companies such as Tata Steel, Tata Motors).

What should be the investment strategy in these euphoric times?

We address this critical question by a multi-pronged approach to assess markets:

1. Top-down analysis,

considering various macro factors such as economic growth,

liquidity & interest rates, external sector, etc.

2. Bottom-up analysis

of major sectors to identify theme(s) that will play out over the

next few years, and the key investment opportunities therein.

3. Earnings analysis

of our coverage universe both for 2HFY11 and FY11-12, and

4. Valuation analysis,

including premium/discount to market and to long-period averages.

… and our view:

At the current levels of 20,000 Sensex and 6,000 Nifty, India is an

interesting bottom-up market. Despite rich valuations overall, specific large-cap stocks in

high-growth sectors still hold the potential to deliver steady return for the next 2-3 years.

We present our analysis in the following pages.

September 2010

A–8

India Strategy

Top-down analysis

GDP growth back to the 9% potential level

Growth is back and the major drivers are in place. While official pronouncements of FY11

growth are being revised upwards, we are optimistic of growth being close to the potential

at 9.1%.



A good monsoon has raised expectations of a bumper crop in FY11 and the broader

agricultural growth is likely to turn up to 3.8%.



Industry is riding on a capex boom to clock 10.3% growth (FY11E).



The service sector is also likely to emerge from a slowdown to register a growth of

9.7%.

Our optimism stems from the fact that the investment cycle is still at play and the government

has continued to support the economy. We have also seen private consumption recovering

in 1QFY11. Besides, interest rates and policy environment would remain largely supportive;

no major concern is likely to emanate from the inflationary situation and higher trade

deficit.

GDP ON A CYCLICAL UPTURN (%)

12

10

8

6

4

EXPECTED GDP GROWTH CLOSER TO POTENTIAL 9%

9.5

8.5

6.4

5.8

4.4

3.8

7.5

9.7

9.2

6.7

7.4

9.1

9.1

Source: CSO/MOSL

September 2010

A–9

India Strategy

A. DRIVERS

I. Agriculture – a source of comfort this time

2010 is among the best years in terms of rainfall, with a total surplus of 2% (as predicted

by the IMD). Initial deficit of June was made up subsequently due to the La Nina effect.



Crucially, water reservoirs are now 11% higher than the 10-year average and Kharif

sowing has advanced to cover 97.4% of normally sown area.



First advance estimates place the FY11 Kharif foodgrain production at 115m tonnes,

11m tonnes (or 10%) higher than FY10. Rabi outlook too appears bright, with delayed

La Nina effect and overall foodgrain production is estimated at 232m tonnes for FY11,

close to the bumper crop of 234m tonnes in FY09.

Given the strong correlation between monsoon, food production and non-food production,

we expect the entire agriculture sector to perform well, with an estimated growth of 3.8%

in real terms. This would nudge up the overall GDP by 0.6% in FY11.



Besides the direct impact on GDP, a good rainfall helps hydro-electricity generation.

Higher foodgrain production lowers the fiscal burden for agricultural support and food

management operations by the government.



The outlook of softening food prices also augurs well for moderation of inflation in

coming months.



Higher support prices have resulted in improved terms of trade for agriculture, leading

to higher income in the rural sector. This provides a boost to rural consumption and

improves the credit quality of agricultural loans.

ONE OF THE BEST YEARS OF MONSOON PERFORMANCE AND PREDICTION TOO

Actual Rainfall (% of LPA)

IMD's Forecast (% of LPA)

Source: IMD/MOSL

September 2010

A–10

India Strategy

RESERVOIR LEVELS HAVE BEEN REPLENISHED FROM THE DIP OF 2009

FOODGRAIN OUTPUT EXPECTED TO BE CLOSER TO THE BUMPER YEAR

OF FY09

87%

72%

67%

51%

68%

Kharif

Rabi

Total Foodgrains

2006

2007

2008

2009

2010

Source: Ministry of Agriculture/MOSL

Enormous volumes of

projects (exceeding US$2t)

are in the pipeline

II. Industry - recovery riding on the capex dhoom



The July 2010 IIP at 13.8% implied continued momentum, led by capex spending and

strong showing of the manufacturing sector. Though some sub-sectors within IIP

continued to demonstrate weakness (e.g., consumer non-durables), a sustainable course

of industrial revival based on capacity creation is underway. However, since capex

spend is usually lumpy in nature, large fluctuations around the trend path are likely.



Corporate sector health is improving, with more rating upgrades in recent months

compared with negative rating developments (including downgrades and companies

placed on watch list or for which rating has been withdrawn/suspended).



Enormous volumes of projects (exceeding US$2t) are in the pipeline. (However, there

has been some setback in new projects in 2QFY11 due to heavy rains and concerns

on few big ticket projects due to land and environmental issues).



The improved outlook for agriculture and rural income is also likely to exert a positive

demand linkage on the industry, particularly demand for consumer durables and non-

durables in the later part of the year.



We expect continued industrial momentum to drive 10% IIP growth in FY11.

INDUSTRIAL RECOVERY REMAINS STRONG; EXPECT IIP

GROWTH TO STAY CLOSE TO DOUBLE-DIGIT LEVEL

CAPEX TO LEAD TO A MORE SUSTAINABLE INDUSTRIAL RESURGENCE

24%

18%

12%

6%

0%

Source: Ministry of Commerce & Industry/MOSL

September 2010

A–11

India Strategy

MORE UPGRADES THAN NEGATIVE RATING EVENTS

(DOWNGRADES + RATINGS WATCH + WITHDRAWN + SUSPENDED)

SOME DECELERATION IN 2QFY11 NOTWITHSTANDING, THE OUTSTANDING

PROJECTS IN THE PIPELINE ARE HUGE AND CONTINUE TO GROW

Upgraded

Initial ratings (RHS)

800

600

400

200

0

Negative rating event

Reaffirmed (RHS)

4,800

3,600

2,400

1,200

0

8,000

6,000

4,000

2,000

0

Added & Revived

Shelved & Deleted

Outstanding (RHS)

Completed

Cost variation

150,000

102,000

54,000

6,000

-42,000

Source: CMIE/MOSL

B. ENABLERS

I. Liquidity – all aces with RBI

Deposit growth lagging behind government borrowing and credit demand will result in a

funding gap in FY11. Factoring in total government borrowings of Rs5.9t, credit growth of

22% and deposit growth of 18%, we arrive at a funding gap of Rs1.2t in FY11. While this

gives an upward push to interest rates, they are unlikely to move much in the credit market

due to:

(1) Substitution of bank finance by non-bank and foreign sources,

(2) Increased competition within the banking system, and

(3) Pause in RBI’s rate hike cycle.

It is plausible that the money market would continue to reflect the immediate liquidity

situation and rates may rise intermittently. However, at the same time, G-sec yields may

have a softening bias (expect 7.6% by end-March 2011) due to (1) moderation in inflation,

(2) RBI’s softening stance, and (3) the narrowing of premium over US yields.

The role of RBI is critical in closing the funding gap. We expect RBI to change its stance

to a more accommodative one. More specifically, we expect RBI to (1) limit its rate hike

cycle to one more round of 25bp in its November-2 policy measure, (2) inject liquidity

through open market operations (~Rs1t), (3) eventually intervene in the forex market

suitably to stem the Rupee and improve monetary base. In this context, the recent hike in

FII investment limit for debt instruments (by US$5b each in government securities and

debt market) comes as a relief.

The funding gap that would remain after RBI’s measures would need to be bridged through

residual adjustments by banks: (1) support through repo window, (2) increased recourse to

borrowing, and (3) liquidation of non-SLR portfolio. A higher deposit growth or a lower

credit offtake would result in automatic closing of the funding gap.

September 2010

A–12

India Strategy

A FUNDING GAP OF RS 1T EXISTS, WITH PROJECTED DEPOSIT (@ 18%) AND CREDIT (@22%) GROWTH

FY11 SEP-MAR FY11E EARLIER

SEP-MAR FY11E REVISED

Government Borrowing Program

1

2

3

Central Govt. Borrowing (dated)

4,570

State Govt. Borrowing

1,321

Total Mkt Borrowing (Centre+State) 5,891

1,143

156

4,592

7,920

7,126

2,309

-1,514

2,250

920

3,170

286

60

2,824

6,147

5,950

1,412

-1,216

1,970

920

2,890

286

60

2,544

6,147

5,950

1,272

-1,076

Redemption

4 Central Govt.

5 State Govt.

6 Net Government Borrowing

Banking Sector (Incremental)

7 Bank Deposit

8 Bank Credit

9 SLR Investment

10 Banking Sector Balance (7-8-9)

RBI NEEDS TO RESORT TO OMO IN CASE FOREIGN

INFLOWS ARE INADEQUATE TO FUEL M3 GROWTH

REPO RATE AND THE PREMIUM OVER REVERSE REPO - BOTH

CLOSER TO THE LONG-TERM AVERAGE

OMO by RBI

Net Reverse Repo

RBI Repo Rate

12.0

9.0

6.0

3.0

0.0

Repo Premium over Reverse Repo

4.0

3.0

2.0

1.0

0.0

FY05

FY06

FY07

FY08

FY09

FY10

FY11E

Source: RBI/MOSL

YIELD DIFFERENTIAL BETWEEN INDIA AND US AT HISTORICAL HIGH; SHOULD DECLINE

10-Year India G-Sec Yield (%) (LHS)

12.0

9.5

7.0

4.5

2.0

5.8

4.3

11.7

10 Year US G-Sec Yield (%)

Diff of 594

bps

5.1

Diff of 528 bps

Diff of 530

bps

Source: Bloomberg/MOSL

September 2010

A–13

India Strategy

II. Economic reforms - two steps forward, one step back

The government has committed to take various initiatives for reform in areas ranging from

decontrol of administered price regime, taxation, financial sector and foreign direct

investments. However, many of these measures have hit roadblocks in the nature of political

opposition or delays on account of differences. While in some cases (as in oil price decontrol),

the government has walked halfway, the most ambitious tax reforms have either been

diluted significantly (DTC) or have been surrounded in political deadlock (GST).

REFORM MEASURES – A SCORE CARD

REFORM AREA

STATUS

COMMENT

i) Oil Price Decontrol

The Government deregulated the price of petrol and

hiked in price of diesel, kerosene and LPG on June

25.

The bill introduced and deadline delayed by one year

to April 1, 2012. Most of the provisions in the original

DTC pertaining to MAT, SEZ, Capital Gains, Tax

treatment of Long term savings, etc watered down

meaningfully.

Roadmap for deregulation of diesel, kerosene and

LPG not laid down, no clarity on under-recovery

sharing formula, subsidy released after long delay.

Broadly status quo with meaningful changes limited

to the insurance sector, foreign entities and income

from sources abroad. The objective of low rate,

simplified tax structure and revenue neutrality looks

an impossible trinity now.

With sharp political differences coming into the fore,

GST has hit a roadblock. However, important

progress regarding rates, central clearing and scope

of the tax.

However, PSUs subsequently excluded from this.

Disinvestment plans to continue separately.

The Government has adopted a consultative

approach to some of these contentious areas of

reform. However, no indication so far of raising the

limit for insurance sector.

ii) Direct Tax Code (DTC)

iii) Goods and Services Tax

(GST)

The deadline for GST extended to April 1, 2012. Major

disagreement cropped up between centre and a few

states over loss of State's autonomy to tax and the

ambit of Centre's power.

iv) Minimum Free Float

The Government prescribed a minimum 25% non-

promoter holding norm for listed companies.

The Government has floated discussion paper on

five areas, viz., i) defense sector, ii) multi-brand retail

iii) issue of shares for considerations other than cash,

iv) approval of foreign/ technical collaborations in

case of existing ventures/tie-ups in India, and v)

limited liability partnerships.

v) Foreign Direct Investment

(FDI)

vi) Banking Licence

RBI issued a discussion paper specifying 1) new

branch licences will be limited, and 2) new banks

should promote financial inclusion and support

inclusive economic growth.

Some issues highlighted are high entry norm,

permitting corporate houses/NBFCs to open banks,

cap on promoter holding and other shareholding,

foreign ownership, etc.

Despite decontrol Government has continued and in

fact increased subsidy of various non-urea fertilizers

to keep a check on their prices. The government

plans to issue smart cards to millions of farmers so

that they can be given subsidy directly under the

NBS regime.

The move is expected to provide a fillip to the bond

market, help infrastructure growth finance and

improve capital flow. However, the move has been

criticized in its impact on the currency.

vii) Fertiliser Subsidy

Nutrient Based Subsidy (NBS) regime announced in

FY10 budget implemented in April 2010 by which

prices of all non-urea fertilizers has been

decontrolled.

viii) FII Debt Limit

Government announced an increase in the overall

investment limit of FIIs by US$ 5b each for

Government and corporate debt securities taking the

overall ceiling at US$10b and US$20b respectively.

September 2010

A–14

India Strategy

C. MODERATORS

I. Inflation - likely to remain higher than comfort level



The August 2010 WPI inflation at 8.5% (new series) reflected a moderation in headline

inflation from the double-digit levels of 1QFY10. Moreover, all three major categories

of the WPI basket, viz., Primary (at 15.8% in August from 18.9% in July), Energy (at

12.5% v/s 13.3% in July) and Manufacturing (at 4.8% from 5.4% in July) displayed

moderation.



Primary articles (mainly food) contributed the most (44.1%) to inflation while fuel

contributed another 22.4% to overall inflation. Manufacturing inflation, on the other

hand, has come down below the RBI's threshold level of 5% and contributed only

34% of overall inflation despite comprising ~65% of the reconstituted WPI basket.



While a normal monsoon and satisfactory progress of Kharif sowing hold promise of

further food price moderation, leading to 6.4% end-March inflation, the average for

FY11 would be 8.4%.



While domestic factors favor a moderation in inflation, international prices of food and

fuel are likely to firm up. Global recovery has provided an upward thrust to commodity

prices.

SOME RELIEF FROM DOUBLE-DIGIT INFLATION; EXPECT

MODERATION GOING FORWARD

HOWEVER, INFLATION WOULD REMAIN A MEDIUM-TERM CHALLENGE (%)

FY11

12%

8%

4%

0%

-4%

FY10

FY09

7.1

6.5

5.5

4.4

3.3

3.6 3.4

4.8

6.5

8.0

8.4

6.5

3.6

Source: RBI/MOSL

WHILE PRIMARY INFLATION MAY REMAIN ELEVATED, SOME

SOFTENING OF THE MANUFACTURING INFLATION IS LIKELY

HIGH INFLATION IS KEEPING REAL INTEREST RATES NEGATIVE (%)

WPI All (Wt:100%)

Fuel Grp (Wt:14%)

24%

12%

Primary (Wt:22%)

Manufactured (Wt:64%)

SBI 1yr deposit rate

10

5

0

Real Interest rate

0%

-5

-12%

-24%

-10

Source: RBI/MOSL

September 2010

A–15

India Strategy

II. External sector - still time for the alarm bell to ring



India's export growth revived during August to 22% (YoY) from a low of 13% in July.

Imports grew at 32%. Trade deficit (US$13b) remained high, though lower than the

pre-crisis high of US$16b (August 2008). The cumulative trade gap for April-August

at US$57b is within our estimate of US$140b for FY11 at the current run rate and

does not raise any cause for immediate concern.



As a ratio of GDP, the trade deficit at 9.3% for FY11 is likely to be funded in large part

by invisible surplus (US$101b, 6.7% of GDP), which is expected to revive in FY11 as

displayed by the upturn in IT companies. This leaves a current account deficit of

US$39b, or 2.6% of GDP for FY11. Even a very conservative estimate of net capital

flow at US$50b in FY11 (v/s US$52b of FY10) leaves an overall balance of payments

surplus of US$11b (0.7% of GDP).

HIGHER IMPORTS THAN EXPORTS WIDENED THE TRADE DEFICIT

MULTI-SPEED WORLD RECOVERY AFFECTED INDIA'S EXPORTS WHILE

IMPORTS REMAINED STRONG ON DOMESTIC GROWTH

Imports

42

Exports

Trade balance

US

11%

EU

UK

India

28

6%

14

0

-14

0%

-6%

-11%

Source: Ministry of Commerce & Industry/MOSL

NON INTERVENTION BY RBI HAS LED TO AN APPRECIATION OF THE RUPEE IN REAL TERMS

RBI's forex purchase (LHS)

8

0

-8

-16

-24

INR/USD

52

49

46

43

40

Source: RBI/MOSL

September 2010

A–16

India Strategy

EXTERNAL BALANCE REMAINS EVENLY POISED DESPITE SETBACK ON CURRENT A/C

1QFY10

2QFY10

3QFY10

4QFY10

1QFY11

FY09

FY10

FY11E

In US$ B

Exports

Imports

Trade Deficit

Invisible Surplus

Current A/c Deficit

Net Capital Flow

BoP Surplus

As % of GDP

Exports

Imports

Trade Deficit

Invisible Surplus

Current A/c Deficit

Net Capital Flow

BoP Surplus

36

62

-26

21

-4

4

0

13

23

-9.5

7.9

-1.7

1.5

-0.2

40

62

-29

20

-9

19

10

14

22

-10.3

7.2

-3.1

6.7

3.5

48

73

-31

19

-12

15

3

14

23

-9.3

5.6

-3.6

4.4

0.7

53

86

-31

18

-13

16

3

15

25

-8.9

5.2

-3.7

4.6

0.9

51

83

-34

21

-14

18

4

14

24

-9.8

5.8

-3.9

5.2

1.3

189

308

-119

90

-30

9

-20

15

25

-9.7

7.4

-2.4

0.5

-1.8

182

300

-117

79

-38

52

13

14

22

-8.9

6.0

-2.9

4.1

1.2

200

340

-140

101

-39

50

11

14

23

-9.3

6.7

-2.6

3.2

0.6

Source: RBI/MOSL

September 2010

A–17

India Strategy

Bottom-up analysis

Opportunities across sectors

Auto: 4-Wheelers – business momentum to remain strong

Volume growth outlook is positive



Passenger car segment to witness volume growth acceleration, as we have crossed

inflection point of US$1,000 per capita income (as witnessed in case of China), post

which volumes are estimated to grow atleast 15-20% CAGR.



Commercial vehicles has witnessed beginning of new cycle, which is expected to stronger

than previous cycle driven by structural improvement in economy as well as more

balanced product mix (between LCV and M&HCV).



Above average monsoon augurs well for strong demand for tractors and two wheelers.

While tractor demand would be driven by shortage of manpower, two-wheeler demand

would be driven by need for personal transportation aided by improving rural roads.

New launches, higher production capacity will aid volumes



Maruti Suzuki has doubled it capacity addition plans from 0.25m to 0.5m (~40% of

existing capacity), which is expected to be operational in phases from 3QFY12. Also,

it is further expanding its reach to penetrate rural markets where demand is very

buoyant.



M&M is finalizing for a new tractor plant with capacity of 50,000 units (expandable to

0.1m units), which is ~30% of its existing tractor capacity. Further, it is expanding its

tractor product portfolio with launch of 15HP tractor targeting small farmers (~82% of

farmers) with <5 acres of farm size.



In commercial vehicle segment, both Tata Motors and Ashok Leyland are launching

their new generation trucks. Further, Tata Motors plans to launch passenger variant of

Ace LCV targeting needs of public transportation in rural areas.

Top ideas



M&M:

M&M’s volumes are expected to grow by ~18% CAGR over FY10-12,

driven by a rural focus and robust growth in its UV and tractor portfolio, with upside

risk from the launch of CVs by its JV. Margins are expected to be above 15% due to

its dominant position in segments and low competition.



Tata Motors:

Tata Motor’s business is at the start of a new CV cycle (domestic) and

JLR’s business recovery will result in the company sustaining higher margins driven

by operating leverage (domestic and JLR) and cost cuts at JLR. We estimate ~20%

CAGR over FY10-12 in CV and JLR volumes translating into consolidated EBITDA

margins being sustained above 13%.



Maruti:

Despite increased competition, Maruti is expected to post volumes of 18%

CAGR over FY10-14 based on its competitive advantage in the form of a wide and

relevant product portfolio, strong distribution network and the lowest cost of ownership

across the lifecycle. Its ability to improve efficiencies (increasing throughput by 0.3m

cars without capex) and reduce cost will enable it to compete effectively against

competition.

Above average

monsoon augurs well for

strong demand

We like M&M,

Tata Motors, and Maruti

September 2010

A–18

India Strategy

CHINA CAR VOLUMES V/S PER CAPITA INCOME

INDIA CAR VOLUMES V/S PER CAPITA INCOME

Car Volumes (units)

7,200,000

5,400,000

3,600,000

1,800,000

0

Car volumes grew 15%

CAGR as per capita income

doubled to US$1,000

Per Capita GDP (US$)

4,000

3,000

2,000

1,000

0

Car Volumes (units)

6,400,000

4,800,000

3,200,000

1,600,000

0

Per Capita GDP (US$)

3,400

2,400

1,400

400

-600

Car volumes grew 50% CAGR as per

capita income doubled to US$2,000

Car volumes to grow 20% CAGR as

per capita income doubles to US$2,000

Car volumes grew 17% CAGR

as per capita income doubled

to US$1,000

MARUTI’S VOLUMES

MARUTI’S PROFITABILITY A KEY DRIVER OF VALUATIONS

Volumes

Volumes to grow at least

at 17% CAGR (FY10-14)

20.1

13.4

4.8

13.3

3.6

28.6

Grow th (%)

EBITDA Margins (%)

1

4.2

1

2.2

12M Rolling Cash PE (x)

1

4.9

1

3.4

1

2.1 1 .2

1

1

2.1

21.9

15.0

15.0

15.0

8.7

7.7

1

0.0

9.0

9.9

1

2.4

1

3.9

1

0.4

1

2.8

9.5

1

2.5

1 .6

1

9.6 6.3

7.8

9.3

9.3

1

0.5

COMMERCIAL VEHICLE GROWTH V/S IIP GROWTH

TRACTOR VOLUMES CORRELATED TO AGRICULTURE GROWTH

Commercial vehicle volumes highly

dependent on industrial production

36.4

25.0

28.2

25.5

12.8

-7.0

32.0

IIP Grow th

CV Grow th (RHS)

35.0

25.0

15

6.1

6

0

-6

-12

12

Agri Grow th

Tractor Grow th (RHS)

40

20

0

-20

-40

-6.8

-34.0 -27

-22.2

TATA MOTORS: EBITDA MARGINS CORRELATED TO VOLUME GROWTH

M&M: EBITDA MARGINS CORRELATED TO VOLUME GROWTH

EBITDA Margins (%) - RHS

76

40

4

-32

-68

Volume Grow th (%)

16

12

8

4

0

EBITDA Margin (%) - RHS)

90

60

30

0

-30

FY06

FY07

FY08

FY09

Volume Grow th (%)

18

15

12

9

6

FY10

FY11

FY06

FY07

FY08

FY09

FY10

FY11

Source: Company/MOSL

September 2010

A–19

India Strategy

Credit growth in

India shows strong

relationship with GDP

Banking: Positive outlook as loan growth accelerates

Credit growth recovery ahead



While systemic loan growth is strong at ~20% (on a lower base), a broad based pick-

up is yet to be seen. With large industries running to near full capacity utilization,

capex-related demand will increase and lead to broad-based growth.



Strong IIP growth, strong order backlog of engineering companies, and rising

consumption leading to demand for retail finance increases our confidence for strong

loan growth ahead. Demand for funds for infrastructure will be a key driver.



Credit growth in India shows strong relationship with GDP. Over the past five years,

loan growth as a multiplier to real GDP has averaged 2.8x and for the past 10 years,

the average is higher at 3.3x. While our base case scenario assumes loan growth of

20-22%, GDP growth of 8.5-9% could drive loan growth of over 25% in 2-3 years.

Current rate cycle to impact earnings positively

During an earlier rate hike cycle most PSU banks under-performed, due to MTM hits and

higher NPA concerns. But this time, we expect performance to be better.



BPLR hikes are in sync with deposit hikes this time against a four to six month lag

(last time), thereby protecting margins. Besides, with systemic incremental CD ratio

at ~100%, banks will gain better pricing power.



Bank earnings are better hedged to rising G Sec yields with 70-75% G Secs in HTM

and lower modified duration of the AFS portfolio. We do not foresee a spike in bond

yields.

Operating leverage to drive ROA



Improvement in core income, higher efficiency and better use of technology will help

to absorb rising cost pressure. We model cost to core income to gradually decline to

~48% by FY12 for our coverage universe.



While we have built-in for higher credit costs, operating leverage will drive ROA.

In a rising deposit rate scenario we prefer banks with a strong liability franchise. We

prefer banks like SBI, PNB, BoB and Canara Bank among state-owned banks. We like

ICICI Bank and Yes Bank among private banks.

We prefer banks with a

strong liability franchise

CREDIT GROWTH IN RELATION TO REAL GDP GROWTH

CREDIT GROWTH IN RELATION TO IIP GROWTH WITH A SIX-MONTH LAG

Bank Credit Grow th (%)

37.0

8.5

6.4

23.7

17.3

5.8

4.4

15.3

3.8

15.3

7.5

30.9

Real GDP Grow th (%)

Credit YoY Grow th (%)

48

IIP YoY Grow th (%)

24

16

8

0

-8

9.7

9.5

28.1

9.2

6.7

7.4

9.1

36

24

12

0

22.3

17.3 17.0

22.8

18.2

Source: Company/MOSL

September 2010

A–20

India Strategy

MOVEMENT IN NIMS OF PSU, PRIVATE BANKS (%)

CORE CI RATIO FOR OUR COVERAGE UNIVERSE

NIMs of PSU

3.3

3.1

3.4

3.4

3.3

3.0

2.6

2.2

2.1

2.7

2.5

2.7

2.8

NIMs of Pvt

3.2

3.0

3.0

2.9

2.6

2.6

2.5

3.2

PSU Banks

Pvt Banks

2.8

IMPROVEMENT IN ASSET QUALITY FOR OUR UNIVERSE (NET NPAS, %)

IMPROVEMENT IN ROA DRIVEN BY OPERATING LEVERAGE (%)

PSU Bk

Pvt Bk

1.4

1.1

1.2

1.2

1.0

0.7

PSU Bk

1.3

1.3

1.3

Pvt Bk

1.5

1.3

1.4

1.6 1.6

0.9

1.0

0.9

0.9

1.1

1.0

1.1

1.1

ROE FOR PSU BANKS BETTER DUE TO HIGHER LEVERAGE (%)

24.2

20

15

16.9

22.5

PSU Bk

19.4

16.5

Pvt Bk

18.9

16.9

20.0

17.2

19.9

17.8

20.6

19.4

17.6

18.0

18.1

17.7

16.3

18.7

11.4

Data is average for top six PSU banks, three private banks (ex ICICI Bank)

Cement: capacity utilization to bottom in 2QFY11



Driven by a structural shift in demand drivers, the cement industry is at an inflection

point as the growth trajectory is estimated to shift from a historical average of 8% to

10-12% over the next five years.



~120mt of capacity addition is planned in expectation of strong demand, which would

result in an adverse demand-supply period until mid-FY12.



We estimate capacity addition to slow with ~41mt of added capacity over 18 months

from 3QFY11 against ~67mt addition over 18 months until 2QFY11 (from 1QFY10 to

2QFY11).

September 2010

A–21

India Strategy

2QFY11 capacity utilization of ~71% is estimated to be bottom-of-the-cycle utilization

and expected to improve gradually. We estimate the return of pricing power to the

industry in 2HFY12.



A higher level of consolidation (~56% of capacity is controlled by he top-five groups

against ~48% in the previous down cycle in FY01) can provide a positive surprise in

pricing discipline.

PER CAPITA CEMENT CONSUMPTION (KG)

CAPACITY ADDITION TO SLOW AFTER 2QFY11



Momentum in capacity addition to

India

1,200

900

600

300

0

China

1,056

China's PCI doubled to US$2,000

Cement volumes grew by 13.3% CAGR

China's PCI doubled to

US$1,000 Cement volumes

grew by 6.6% CAGR

358

slowdown, with ~41mt expected in

18 months post 2QFY11 as against

64mt in 18 months till 2QFY11

323

302

7.9

2.7 4.0 8.4

5.9

270

5.8

527

India's PCI crossed

US$1,000

107

6.8 11.3

215

18.2

154

11.9

13.6

11.2

CAPACITY UTILIZATION TO BOTTOM OUT IN 2QFY11

104

99

84

87

84

81

76

71

73

74

75

80

77

88

83

89

84

91

90

83

85

95

94

90

100

102

95

95

90

87

82

Estimate capacity utilization to

bottom out in 2QFY11 at 71%

88

84

81

71

81

79

73

87

82

82

90

90

83

83

Source: Company/MOSL

DEMAND-SUPPLY EQUILIBRIUM TO TURN FAVORABLE BY 2HFY12

MILLION TONNES

FY00

FY01

FY02

FY03

FY04

FY05

FY06

FY07

FY08

FY09

FY10

FY11E

FY12E

FY13E

FY14E

Cement Capacity (Y/E)

Growth (%)

Clinker Exports

Cement Despatches

Growth (%)

Domestic Consumption

Growth (%)

Cement Exports

110.2

5.2

1.19

94

14.9

92.1

15.4

2.0

119.2

8.2

2.00

93.4

-0.6

90.3

-1.9

3.2

134.4

12.8

1.8

102.4

9.6

99.1

9.7

3.3

139.6

3.8

3.5

111.0

8.5

107.6

8.6

3.5

146.2

4.7

5.6

117.1

5.5

113.8

5.8

3.4

153.8

5.3

6.0

125.1

6.8

121.1

6.4

4.1

Growth (%)

-5.3

61.5

5.4

3.9

Capacity Util (%)

86.5

80.2

77.6

82.2

Effective Cap.

(Qly add-up)*

101.0 107.0 122.4 129.5

Effective Cap. Util. (%) 94.3

89.3

85.2

88.6

^ based on Year ending capacity; *Effective cap is adj for

-2.6

84.3

21.2

85.5

157.6

165.7 189.0 215.2 272.5 304.2 325.2 341.4 357.7

2.4

5.2

14.0

13.9

26.6

11.6

6.9

5.0

4.8

3.2

3.1

2.4

2.9

2.8

3.0

3.0

3.0

3.0

141.6 154.9 167.7 181.4 200.2 216.5 242.1 270.8 303.0

13.2

9.4

8.2

8.2

10.4

8.1

11.8

11.9

11.9

135.6 149.4 164.0 178.2 197.7 213.5 239.1 267.8 300.0

12.0

10.2

9.8

8.7

10.9

8.0

12.0

12.0

12.0

6.0

5.9

3.65

3.2

2.5

3.0

3.0

3.0

3.0

47.5

-2.3 -37.8 -12.3 -21.9

20.0

0.0

0.0

0.0

92.0

95.5

90.1

85.7

74.6

72.2

75.5

80.3

85.6

298.0 322.9 343.9

82.3

84.9

89.0

Source: CMA/MOSL

136.8 144.2 150.1 156.7 171.3 200.7 237.3 275.6

90.1

91.3

96.6 101.0

99.4

91.9

85.6

79.7

non-operative cap & is quarterly add-up of cap additions

September 2010

A–22

India Strategy

India is on the cusp of a

meaningful capex boom

Engineering: capex dhoom

Capex

dhoom:

We believe India is on the cusp of a meaningful capex boom, driven by

impending large investment in infrastructure and industrial activity. Rapid economic growth

over the past decade has strained India’s infrastructure. The investment ratio (defined as

the percentage of GDP to the GDP growth rate) declined from 50 over 1988-1997 to 38

over 1998-2007. Under-investment in a time of high economic growth aggravated

constraints. India, in our opinion, is among leading global destinations for infrastructure

and investment spending over the next decade.

Chinese equipment suppliers—a dwindling force:

Chinese equipment suppliers are

executing 31GW of power projects in India, or 33% of projects under execution. With two

Reliance UMPPs in its order-book, Shanghai Electric has the highest order-book in India.

We believe stricter performance benchmarks and stress on a local manufacturing base

will put Chinese suppliers at a disadvantage.

Key ideas



BHEL:

The biggest beneficiary of the US$25b annual power equipment opportunity,

will maintain its dominant position in the industry.



L&T:

The best play on India’s capex boom; will grow 25% over four years.



Siemens:

One of the biggest beneficiaries of accelerating T&D expenditure. It is

also a key partner in Siemens AG’s widening footprint in developing markets, creating

a strong export opportunity.

COMPRISES 10% OF GDP

PRIVATE SECTOR SHARE TO GO UP FROM 25%

IN TENTH PLAN TO 50% IN TWELFTH PLAN

We like BHEL ,

L&T, and Siemens

TWELFTH PLAN TARGET FOR INFRASTRUCTURE SPENDING…

AT 4.5X OF TENTH PLAN

4.5x

1,025

7.55%

9.95%

US$b

% of total

36.2

24.9

50.0

2.3x

514

5.08%

227

10th plan

actual

11th plan

revised

12th plan

target

10th plan

actual

11th plan

revised

12th plan

target

10th plan

actual

11th plan

revised

12th plan

target

Source: IPA

INDIA TO BE AMONG THE BIGGEST MARKETS FOR POWER CAPACITY ADDITION (GW)

VALUATION: P/E-EPS GROWTH MATRIX

2005 (MW)

2030 (MW)

48

36

Crom pton

24

12

0

15

20

L&T

Siem ens

ABB

Cum m ins

BHEL

Therm ax

BGR

25

30

35

EPS CAGR (%)-(FY10-12E)

40

Source: Company/MOSL

September 2010

A–23

India Strategy

Information Technology: volume growth revives; offshoring trends positive



Expanding geographical footprint:

Traditional dependence on the US for IT exports

may wane, especially after Europe, Japan, Australia and New Zealand (ANZ) showed

inclination to engage with offshore vendors during the downturn.



Discretionary spend a matter of time, IMS to drive growth:

Of the large

addressable package implementation services market size of US$70b, combined market

share of the top-four Indian IT players is ~5%. This is expected to increase as customers

focus on greater cost efficiency.



Infrastructure Management Services (IMS), where the market is 2.5x times the market

size of ADM and the share of Indian IT companies is ~2%, will continue to grow

faster than the industry, spelling scope for Indian companies.



Strong MNC offshoring trend:

About US$37b worth of contracts are due for

renegotiation over the next few months, where incumbents are MNCs. They would

have to necessarily offshore to save these contracts and offer clients better pricing.



Acquisitions seem imminent:

As industry players seek to garner a higher share of

the huge IMS pie, develop expertise in services higher up the value chain and expand

geographic reach, we expect firms to scout for acquisitions, driven by the need to

fulfill gaps in these offerings. Given the highly fragmented nature of the industry, we

expect smaller generic providers to be squeezed into niches and big players to grow

bigger. This will be due to (1) a strong balance sheet, (2) greater scale efficiencies, (3)

one-stop shops, and (4) global delivery capabilities. Hiving off of MNC captives to

independent service providers may not be over just yet.

Key ideas

We have evaluated players on their (1) discretionary delta, (2) operating leverage, and (3)

the ability to capitalize on MNC offshoring.



Buy

Infosys due to (1) greater discretionary delta (package implementation contributed

24.9% to its revenue in 1QFY11), (2) better operational scope.



Buy

HCL Tech due to (1) continued traction in IMS (22% of revenue), (2) pick-up in

lagging segments like engineering services and enterprise application services (42%

of revenue), (3) large deals prowess in a returning deals scenario and expected

successes in impending contract renegotiations.



Mphasis is a clear play on an aggressive MNC offshoring trend to save market share

due to its (1) limited risk of pricing cut recurrence, (2) increasing volumes due to a

strong MNC offshoring trend, substantiated by a 15% QoQ headcount addition in ITO

in 3QFY10, and 2,700 open positions in ITO and applications.

Among IT stocks,

we like Infosys, HCL Tech,

and Mphasis

EBITDA MARGINS - VOLUMES GROWTH MATRIX (2-YEAR FORWARD METRICS) P/E-EPS GROWTH MATRIX (2-YEAR FORWARD METRICS)

35%

Infosys

30%

25%

Patni

20%

15%

10%

Tech Mahindra

14%

18%

22%

Wipro

Mphasis

HCL Tech

26%

30%

TCS

24

TCS

18

Tech Mahindra

12

Patni

6

0

0%

Mphasis

Wipro

Infosys

HCL Tech

4%

8%

2-Yr Vol. CAGR (%)

12% 16% 20% 24%

2-Yr Vol. CAGR (%)

28%

32%

Source: Company/MOSL

September 2010

A–24

India Strategy

Strong domestic demand

will enable Indian steel

companies to grow faster

than overseas peers

Metals: strong domestic demand, Buy JSW Steel, Sterlite

Strong domestic demand – buy volume growth

Indian steel demand is likely to grow by double digits though global steel demand growth

will be modest. Over two to three years, Indian steel makers will grow faster, as global

peers will struggle to grow due to slower demand growth. We believe steel prices will

trend sideways due to lower global capacity utilization rates and modest growth in global

demand. There will be less volatility in the prices of raw material iron ore and coking coal.

We believe Indian steel companies with strong execution skills and key strategic advantages

will emerge winners.

Aluminum producers have a key cost advantage due to the availability of high quality

bauxite and coal in close proximity. But we expect the cost of production to rise gradually

due to higher manpower costs, mining taxes, challenges in opening new bauxite mines and

rising dependence on coal imports due to slower growth in coal production in India. Those

who are able to manage the socio political environment, open new bauxite and coal mines,

and have new capacities will merge winners.

JSW Steel, Sterlite to complete expansions in 6-12 months



JSW Steel will complete expansion of capacity by 3mtpa to 11mtpa by March 2011,

leading to volume growth of nearly 40% in FY12. Over 2-3 years, capacity will rise by

5mtpa to 16mtpa through brown field and green field expansions.



Tata Steel India will expand capacity by 3mtpa to 10mtpa towards the end of FY12.

Overseas investments in mining assets will benefit the company in a small way from

FY13.



SAIL planned Rs700b capex to increase capacity by 10mtpa to 23mtpa, but execution

is sluggish.



Hindalco will complete a US$5b capex in 2HFY12, which will increase capacity 2.5x

to 1.3mtpa. A bauxite mine for Utkal Alumina is expected to become operational by

2HFY12.



Sterlite will commission a 3,600MW power plant, 325ktpa aluminum smelter, and 100ktpa

lead smelter in 12 months. We expect FY12 EBITDA to be 80-90% higher than FY10

EBITDA.

STEEL SALES VOLUME FOR KEY PRODUCERS OVER FY10-14 (M TONNES)

STERLITE INDSUTRIES: EPS GROWTH OVER FY10-12 (RS)

JSW Steel

Tata Steel

15.0

SAIL

17.0

Zinc & Lead

Sterlite Energy

Balco

CMT

21.4

1.2

4.5

3.7

1.8

9.9

Standalone

22.2

1.2

3.8

3.8

2.6

10.8

23.6

1.2

4.0

3.8

2.7

12.1

12.5

13.5

9.1

10.2

8.5

6.8

10.7

12.0

14.7

0.7

0.6

4.1

0.6

8.6

FY11

6.2

5.7

6.5

6.1

9.5

2.5

0.8

7.8

FY10

12.2

FY10

FY11E

FY12E

FY13E

FY14E

FY12

FY13

FY14

Source: Company/MOSL

September 2010

A–25

India Strategy

STERLITE: METAL VOLUME GROWTH, MERCHANT POWER

HINDALCO (STANDALONE) VOLUME GROWTH OVER FY10-14 (%)

ZINC (000 tons)

Silver (tons)

Merchant Pow er (m kw h; RHS)

11,580

8,578

578

139

0

FY10

710

1,418

197

FY11E

760

270

FY12E

800

324

800

223

Aluminium

Alumina

940

1,160

867

11,580

569

335

467

486

241

247

199

FY11E

FY12E

FY13E

FY14E

FY13E

FY14E

FY10

Source: Company/MOSL

Favorable policy initiatives

have improved the outlook

for Oil & Gas

Oil & Gas: favorable policy initiatives

2010: a historic year for the Indian oil sector:

2010 has been a landmark year for the

Indian oil sector and is expected to end with a bang. The government, on one hand doubled

the APM gas price to US$4.2/mmbtu and on the other deregulated petrol prices and

increased kerosene and cooking gas (LPG) prices. It has in-principle deregulated diesel

prices and we expect clarity on the deregulation before FPO/divestments in IOC and

ONGC.

Domestic gas prices likely to be hiked:

After the raising of APM gas prices to RIL’s

KG-D6 price of US$4.2/mmbtu, the government indicated it would avoid a situation of

market-distorting low prices of domestic gas. With higher prices for new ONGC C-Series

fields at US$5.25/mmbtu, we believe the base price is set to increase.

Investment to continue even though KG-D6 won’t ramp up in near term:

RIL’s

KG-D6 gas production (~60mmscmd) increased gas availability in India by 55% to

~170mmscmd. But demand is significantly higher than supply, led by the power and fertilizer

sectors. RIL’s indication that it will not ramp-up KG-D6 gas volumes is unlikely to negatively

affect the sector and given an expected sharp rise in gas availability after FY13, we

expect infrastructure investment (pipelines and CGD) to peak in 2-3 years.

GAIL to invest ~Rs300b in pipeline network 2-3 years:

GAIL is implementing pipeline

projects that will double its network to 14,000km and capacity to 300mmscmd at a budgeted

cost of ~Rs300b by FY13-14. Besides doubling its key HVJ-DVPL capacity, it will build

three trunk pipelines: (1) Dabhol-Bangalore, (2) Kochi-Mangalore-Bangalore and (3)

Jagdishpur-Haldia. GAIL also intends to boost its City Gas Distribution (CGD) network

from 15 to over 50 cities in 3-5 years. This will entail a likely spend of ~Rs100b.

September 2010

A–26

India Strategy

INCREASED GAS AVAILABILITY WILL BENEFIT GAIL

400

APM (ONGC)

NEC-25 (RIL)

APM (OIL)

KG (GSPC)

KG-D6 (RIL)

KG (ONGC)

Private / JVs

LNG

300

200

100

0

Mar-09

Mar-10

Mar-11

Mar-12

Mar-13

Mar-14

Mar-15

Mar-16

EXPECT DOMESTIC GAS PRICES TO RISE

KG-D6

Current

8

7

4.2

5

4

2

APM

C Series

PMT

7.0

LNG

KG-D6

12

9

6

3

0

FY12E

APM

C Series

PMT

LNG

8.0

5.7

5.3

4.2

5.3

5.3

5.3

5.7

GAIL’S SIGNIFICANT CAPACITY ADDITION

PIPELINE NETWORK (KM)

PIPELINE NETWORK (KM)

-

300

14

7

150

FY10

PETCHEM CAPACITY (KTA)

FY14

FY10

CGD NETWORK (NO.)

FY14

800

-

50

410

15

FY10

FY14

FY10

FY14

Source: Company/MOSL

September 2010

A–27

India Strategy

We are bullish about growth

options for generation and

transmission companies

Utilities: capacity addition to accelerate



Capacity addition to accelerate:

118GW of projects are under construction and will

be commissioned over four to five years. Over the past five years, however, the

capacity addition was just 41GW and the current installed base is 165GW. The share

of the private sector is 19% of installed capacity and will contribute 32% of capacity

addition in the Eleventh Plan. About 45% of the capacity is under construction.



Demand growth moderate, availability constrained:

All-India demand has been

5.6% CAGR since 2001, which is substantially lower than real GDP growth. The base

deficit in India has been over 10% since FY07 due to continued slippages in capacity

addition in over the 8-10th plan period. CEA estimates the base deficit will be 3% by

FY12 given substantial capacity addition over FY11-13. Per capita availability in India

is expected to rise ~2x, from 623units in FY09 to 1,182units by FY17.



Merchant power drives capacity addition:

Short term trading accounts for 9% of

all-India power availability (4% from UI mechanism). Development of a vibrant trading

market is constrained by factors such as transmission corridor and grid congestion,

challenges that being addressed. Merchant projects have improved project economics,

which is driving investment in the chain, largely by the private sector.

Key catalysts



Capex/equity issues up significantly:

NTPC has budgeted for an FY11 capex of

Rs224b (up 120%), making is one of the largest capex spenders in the economy. This

is also a lead indicator of increased execution at ground level. PGCIL aims at FY11

capex of Rs129b, up 23%. Private sector/CPSUs raised Rs425b through the equity

route over FY08-10 to fund projects under development. Fresh equity infusion has

been highest at Rs318b.



Key players expected to add 52GW capacity:

Capacity addition by key players is

expected to be 52GW over FY08-13 out of which ~10GW was commissioned until

FY10. This indicates a high growth phase for some incumbents in the sector. Among

leading players with sizable capacity addition over FY08-13, NTPC will add 14GW,

Adani Power, 6.6GW, TPWR, 5.3GW, R Power, 4.5GW, Lanco Infratech, 3.8GW,

JPL 3.4GW and Jaiprakash Power 1.5GW.

Positive on sector; Buy NTPC, PowerGrid:

We are bullish about growth options for

generation and transmission companies. Our top picks in the sector are

NTPC

and

Powergrid

among large caps and we like

CESC

and

PTC India

in the mid-caps space.

ALL-INDIA INSTALLED CAPACITY (MW)

CAGR 15%

300

225

CAGR

%

150

75

0

CAGR 5%

CAGR 12%

CAGR 11%

CAGR 10%

CAGR 6%

CAGR 5%

CAGR 5%

September 2010

A–28

India Strategy

CPSUS BOOST CAPEX BUDGET (RS B)

FY09

FY10E

FY11E

CAGR

(%)

FY11

% YoY

FUND RAISING (RS B)

NTPC*

PGCIL

DVC

NHPC

SJVNL

THDC

NEEPCO

Total

132

81

34

37

6

6

2

298

101

105

81

39

5

6

4

341

224

129

85

49

5

9

9

510

37

24

50

24

36

4

65

33

121

23

5

26

0

50

125

Securitization

GDR/ADR

FCCB

Pre IPO /IPO/FPO

QIP

Rs134.5b

Rs273.7b

184.1

121.6

Rs13.0b

13.0

FY08

FY09

FY10

YoY (% )

36.7

14.6

49.4

50GW CAPACITY TO BE ADDED BY KEY LISTED PLAYERS OVER FY08-13 (MW)

FY08

FY09

FY10

FY11E

FY12E

FY13E

TOTAL

CPSUs

NTPC

NHPC

Established Utilities

CESC

GVK

GMR

Lanco Infratech

Tata Power

New IPPs

Adani Power

Essar Energy

Indiabulls Power

Jaiprakash Power

Jindal Power

JSW Energy

Reliance Power

Sterlite Energy

Total

1,740

510

-

-

-

-

-

-

-

-

-

750

-

-

-

3,000

750

-

-

-

-

-

250

-

-

-

-

250

-

-

-

1,250

1,240

-

250

-

-

833

-

660

-

-

-

-

735

300

-

4,018

2,490

449

-

-

-

1,818

525

660

-

-

-

-

2,010

300

1,200

9,452

3,000

1,043

-

-

-

600

1,325

2,640

1,200

-

1,000

-

135

1,320

1,200

13,463

4,690

1,800

-

870

1,050

500

3,200

2,640

-

1,350

500

2,400

-

2,580

-

21,580

13,910

3,802

250

870

1,050

3,751

5,300

6,600

1,200

1,350

1,500

3,400

2,880

4,500

2,400

52,763

Source: CEA

Real Estate: look for commercial recovery, execution ramp-up

The big story



Commercial, retail recovery to gain momentum:

The real estate sector has been

in recovery mode since June 2009. The residential vertical is in a strong growth phase

and the commercial and retail verticals have been showing signs of recovery since

1QFY11. We expect commercial and retail verticals to enter into a growth phase over

the next few months.



Companies poised for performance with strong execution ramp-up:

Though

most domestic RE companies have a nascent history of about four years in equity

markets, listed stocks have been through a major up and down cycle. While the RE

valuation benchmarks are still evolving given their nascent equity market history, RE

companies are set for a transformational ramp-up in delivery and execution. We expect

key RE companies to deliver ~146msf of RE projects over FY11-13, which is almost

equal to their cumulative deliveries since their inception.

September 2010

A–29

India Strategy

REAL ESTATE COMPANIES TO WITNESS STRONG PERFORMANCE OVER FY11-13 (MSF)

UNDER

CONST.

DELIVERY

TILL DATE

DELIVERY

AS (X) OF

FY10

FY11

FY12

FY13

(FY11-13) TOTAL DELIVERIES

DLF

Unitech

HDIL

IBREL

Purvankara

Sobha

Brigade

Mah. Life.

Jaypee Infra

GPL

Omaxe

Total

55

34

10

12

12

9

6

5

24

42

45

253

45

34

11

1

4

14

7

5

0

8

13

141

30

20

9

7

11

13

6

5

19

9

17

146

0.7

0.6

0.8

7.0

3.1

0.9

0.9

1.0

-

1.2

1.3

1.0

2

5

0

1

1

2

0

1

0

4

0

15

3

6

1

1

2

3

3

1

1

2

5

27

13

8

2

1

4

4

2

3

3

3

7

49

14

6

6

5

5

5

2

2

15

4

5

69

% of total deliveries between FY11-13

19

33

47

IMPROVED MOMENTUM VISIBLE IN PERFORMANCE (DLF)

9

6

3

0

-3

Sales (msf)

Office(Lease and sale) (msf)

Retail(Lease and sale) (msf)

Market price (Rs/sh)

NAV(Rs/sh)

Annual Completions

Vacancy rate (%)

Absorption

26

21

17

23

1,000

750

500

250

0

8

6

5

12

PAN INDIAN ABSORPTION TREND IN RETAIL VERTICAL

Annual Completions

Absorption

24

Vacancy rate (%)

27

14

17

26

16

25

13

15

13

4

4

9

10

8

9

10

15

7

6

4

7

4

3

2005

2006

2007

2008

2009

2010

2011F

2012F

Source: Jones Lang LaSalle Meghraj (JLLM)



Buy DLF:

It is best geared to leverage up-tick in the commercial vertical. Its improved

cash flow will address concerns of debt and 22% earnings CAGR are expected until

FY12.



Buy Unitech:

It has an impressive execution scale-up and strong sales momentum

and the most comfortable balance sheet among large caps. 25% earnings CAGR are

expected until FY12.

September 2010

A–30

India Strategy

2QFY11 earnings preview

Another quarter of 25% Sensex earnings growth

We expect 2QFY11 earnings of the MOSL Universe (excluding RMs) to grow 21% YoY

and 5% QoQ. EBITDA growth is higher at 23%. The Sensex will also deliver impressive

earnings growth of 25% YoY and 8% QoQ. Here too, EBITDA growth is higher at 26%.

The Oil & Gas sector leads growth during the quarter, driven by Reliance and Cairn India.

Banking continues to deliver steady 22% earnings growth. Metals (+105% YoY) and Auto

(+87% YoY) growth rates are high, driven by Corus and JLR. Sectors in which earnings

growth will be significantly down are Cement and Telecom; however, Telecom will be flat

QoQ.

QUARTERLY EARNINGS PERFORMANCE, MOSL UNIVERSE (RS B)

SALES

SECTOR

(NO OF COMPANIES)

SEP-10

VAR %

YOY

VAR %

QOQ

SEP-10

EBITDA

VAR %

YOY

VAR %

QOQ

NET PROFIT

SEP-10

VAR %

YOY

VAR %

QOQ

Auto (5)

Banks (22)

Cement (7)

Engineering (6)

FMCG (11)

IT (7)

Infrastructure (5)

Media (5)

Metals (8)

Oil Gas & Petchem (11)

Pharma (15)

Real Estate (6)

Retail (2)

Telecom (4)

Textiles (5)

Utilities (6)

Others (2)

MOSL (127)*

MOSL Excl. RMs (124)

Sensex (29)

505

311

98

232

197

304

68

21

717

2,537

136

36

25

248

37

231

23

5,728

4,254

2,811

27.3

34.1

-6.3

13.5

18.4

16.7

12.6

23.8

10.7

29.4

5.0

29.0

-13.2

26.7

23.6

13.9

23.6

22.3

19.4

18.6

4.1

3.7

-13.7

15.0

4.9

7.6

-10.6

4.4

2.7

10.4

-1.0

2.3

-23.0

15.0

15.9

1.4

-3.3

6.7

5.9

4.9

71

263

18

32

43

75

10

9

113

364

29

16

3

81

8

64

4

1,203

1,093

698

52.1

23.3

-46.9

18.0

16.9

10.7

16.4

34.0

36.7

98.4

0.6

7.8

-10.9

11.0

25.7

14.0

35.5

34.7

22.9

26.1

1.7

3.0

-38.6

25.1

9.8

6.2

-7.1

9.2

-18.4

161.0

-14.0

-1.4

-19.4

13.8

13.7

15.6

0.7

23.0

5.4

7.7

41

137

9

22

29

57

3

5

60

224

20

9

1

22

2

37

3

680

591

367

87.2

21.9

-58.1

17.3

15.2

11.0

12.6

24.3

105.3

116.7

15.9

-1.5

8.0

-34.5

18.3

8.0

47.8

39.1

20.8

-0.8

1.8

-47.3

23.8

8.8

4.6

23.5

11.4

-19.7

681.1

5.6

-4.6

-2.4

-2.0

25.4

15.3

7.0

38.7

5.4

24.6

7.8

Source: MOSL

2QFY11 PAT YOY GROWTH ACROSS SECTORS

2QFY11 PAT QOQ GROWTH ACROSS SECTORS

105

87

30 25 24 22

21 18 17 16 15 13 11

8

36 25

24 23

15 11

9

8

6

5

5

2 -1

-2 -2 -5

-20

8 -1

-34

-58

-47

Source: MOSL

September 2010

A–31

India Strategy

QUARTERLY PAT TREND MOSL UNIVERSE EX RMS (RS B)

PAT GROWTH MOSL UNIVERSE EXCL RMS

70

QoQ Grow th (%)

45

20

-5

-30

YoY Grow th (%)

Source: MOSL

Sectors with consistent growth rates over the past six quarters include Banking, Engineering,

FMCG, IT and Media (highlighted in table below). Most of these sectors also trade at

premium valuations. Telecom will post its fifth consecutive quarter of earnings decline.

In 2HFY11, the earnings growth pattern across sectors will change with sectors like Cement,

Engineering, Real Estate, Infrastructure, Utilities reporting significantly better earnings

growth than they did in the preceding half. The Telecom sector will continue to post

negative earnings growth in 2HFY11.

QUARTERLY PAT TREND (MOSL UNIVERSE - RS B)

SECTOR

SEP

2007

DEC

2007

MAR

2008

JUN

2008

SEP

2008

DEC

2008

MAR

2009

JUN

2009

SEP

2009

DEC

2009

MAR

2010

JUN

2010

SEP

2010E

DEC

2010E

MAR

2011E

Auto

Banking

Cement

Engineering

FMCG

IT

Infrastructure

Media

Metals

Oil & Gas Ex RMs

Pharma

Real Estate

Retail

Telecom

Textiles

Utilities

Others

MOSL Univ (Excl RMs)

15.2

71.0

16.9

14.5

18.4

37.8

1.9

3.1

69.6

101.2

14.8

27.9

0.8

32.0

1.5

24.6

1.3

453

16.9

83.3

16.9

16.5

19.8

39.9

2.9

3.8

64.7

94.7

14.2

30.9

0.6

34.1

1.4

27.7

1.1

469

17.1

86.3

16.3

23.7

17.5

40.2

4.1

22.2

69.0

17.1

13.8

19.6

39.1

2.7

13.6

93.1

14.3

16.5

19.9

45.6

3.3

3.0

110.7

105.2

13.1

27.4

1.2

39.2

1.2

28.0

2.1

537

-9.4

115.8

14.7

19.7

21.0

48.1

3.4

2.5

35.1

51.0

12.7

10.8

0.8

39.1

0.6

29.6

1.4

397

3.6

111.7

18.7

31.8

20.6

46.4

5.2

2.5

16.2

77.6

4.1

3.1

0.8

39.8

1.1

36.7

2.6

423

7.2

103.5

23.5

14.5

23.1

48.2

3.4

3.9

17.2

101.5

14.6

7.2

0.6

45.8

0.8

36.6

2.2

454

22.2

112.4

22.3

18.4

24.7

51.2

2.6

4.3

29.2

103.3

17.6

8.8

1.2

33.6

1.8

33.9

1.7

489

29.7

122.7

16.4

22.3

26.3

53.9

4.5

4.3

63.6

88.2

8.7

9.1

1.3

36.2

2.0

32.9

1.4

524

38.5

117.6

14.8

40.8

23.9

55.5

4.7

3.8

99.3

99.6

19.5

8.7

1.4

35.3

2.0

35.9

3.4

605

41.8

134.7

17.7

17.4

26.2

54.4

2.4

4.8

74.7

98.5

19.3

9.0

1.3

22.5

1.7

31.8

2.4

561

41.5

137.1

9.3

21.5

28.5

56.9

3.0

5.3

60.0

134.1

20.4

8.6

1.3

22.0

2.1

36.6

2.5

591

43.8

144.7

17.2

27.4

31.1

63.0

5.1

5.3

85.8

136.6

20.8

9.6

1.3

24.3

2.3

37.9

46.3

155.4

21.9

53.7

29.1

66.3

6.5

4.2

104.0

141.7

22.2

12.9

1.4

20.6

2.9

41.5

2.4

3.6

99.1 102.3

80.1 138.0

14.4

35.1

0.8

37.6

1.5

28.6

2.7

508

14.6

26.3

0.7

39.7

0.6

27.9

2.0

539

2.5

3.7

659

734

Source: MOSL

September 2010

A–32