January 2012
India Strategy
Also featuring
Page 6-12
Research Team (Rajat@MotilalOswal.com)

India Strategy | Get on track please !
Contents
Section A: India Strategy - Get on track please !....................................................................... A–1 to 52
Section B: 3QFY12 Highlights & Ready Reckoner
..................................................................
B–1 to 12
Section C: Sectors & Companies
............................................................................................
C–1 to 197
1.
Automobiles
Bajaj Auto
Hero MotoCorp
Mahindra & Mahindra
Maruti Suzuki India
Tata Motors
Capital Goods
ABB
BGR Energy
BHEL
Crompton Greaves
Cummins India
Havells India
Larsen & Toubro
Siemens
Thermax
Cement
ACC
Ambuja Cement
Birla Corporation
Grasim Industries
India Cements
Shree Cement
UltraTech Cement
Consumer
Asian Paints
Britannia Industries
Colgate Palmolive
Dabur India
GSK Consumer
Godrej Consumer Products
Hindustan Unilever
ITC
Marico
Nestle India
Pidilite Industries
United Spirits
Financials
Andhra Bank
Axis Bank
Bank of Baroda
Bank of India
Canara Bank
Dewan Housing
Federal Bank
HDFC
HDFC Bank
ICICI Bank
IDFC
Indian Bank
IndusInd Bank
ING Vysya Bank
LIC Housing Finance
M & M Financial Services
2-9
5
6
7
8
9
10-22
14
15
16
17
18
19
20
21
22
23-32
26
27
28
29
30
31
32
33-47
36
37
38
39
40
41
42
43
44
45
46
47
48-77
53
54
55
56
57
58
59
60
61
62
63
64
65
66
67
68
Oriental Bank
Power Finance Corporation
Punjab National Bank
Rural Electricfication
Shriram Transport
South Indian Bank
State Bank
Union Bank
Yes Bank
6.
Healthcare
Aventis Pharma
Biocon
Cadila Healthcare
Cipla
Divi’s Laboratories
Dishman Pharma
Dr Reddy’s Labs.
GSK Pharma
Glenmark Pharma
IPCA Laboratories
Jubilant Organosys
Lupin
Opto Circuits
Ranbaxy Labs.
Strides Acrolab
Sun Pharmaceuticals
Torrent Pharma
Infrastructure
Gammon India
Hindustan Construction
IVRCL
Jaiprakash Associates
Nagarjuna Construction
Simplex Infrastructure
Media
HT Media
Jagran Prakashan
Sun TV Network
Zee Entertainment
Metals
Hindalco
Hindustan Zinc
Jindal Steel & Power
JSW Steel
Nalco
Sesa Goa
SAIL
Sterlite Industries
Tata Steel
69
70
71
72
73
74
75
76
77
78-97
81
82
83
84
85
86
87
88
89
90
91
92
93
94
95
96
97
98-106
101
102
103
104
105
106
107-114
111
112
113
114
115-127
119
120
121
122
123
124
125
126
127
128-143
132
Cairn India
Chennai Petroleum
GAIL
Gujarat State Petronet
HPCL
IOC
Indraprastha Gas
MRPL
ONGC
Petronet LNG
Reliance Industries
11. Real Estate
Anant Raj Industries
DLF
HDIL
Mahindra Lifespaces
Oberoi Realty
Phoenix Mills
Unitech
12. Retail
Jubilant Food
Pantaloon Retail
Shoppers Stop
Titan Industries
13. Technology
Cognizant Technology
HCL Technologies
Infosys
MphasiS
TCS
Tech Mahindra
Wipro
14. Telecom
Bharti Airtel
Idea Cellular
Reliance Communication
Tulip Telecom
15. Utilities
Adani Power
CESC
Coal India
JSW Energy
Lanco Infratech
NHPC
NTPC
Power Grid Corp.
PTC India
Reliance Infrastructure
Tata Power
16. Others
United Phosphorus
133
134
135
136
137
138
139
140
141
142
143
144-154
148
149
150
151
152
153
154
155-161
158
159
160
161
162-172
166
167
168
169
170
171
172
173-181
178
179
180
181
182-196
186
187
188
189
190
191
192
193
194
195
196
197
197
2.
3.
4.
7.
8.
5.
9.
10. Oil & Gas
BPCL
Note:
All stock prices and indices for Section C as on 27 December 2011, unless otherwise stated

India Strategy
BSE Sensex:
15,874
S&P CNX:
4,751
As on:
4 January 2012
Get on track please!
Assessing key trends in 2012
2011 has turned out to be at best a forgettable year for the Indian equity markets. India
has been the worst performing markets globally with 25% negative returns; Given the
sharp currency depreciation, performance in USD terms has been even worse at -37%,
making India by-far the worst performing global market. Also, the Sensex returns in each
quarter of 2011 have been negative, indicating a gradual build-up of the headwinds.
Besides the global headwinds, everything that could have gone wrong domestically has
gone wrong. Policy paralysis, stubbornly high inflation, high interest rate scenario and
ending the year with an unfavorable currency movement. All these had an impact in GDP
growth, fiscal deficit and corporate profitability. While some of the domestic issues are
cyclical (like interest rates, currency, etc) and will get corrected over a period of time;
several of them are more structural like lack of reforms, fuel linkages and subsidy issues.
And finally, the biggest issue at this point: When will the Policy engine start cranking?
Trend #1: GDP growth hard lands; finds its base at 6-7%
After six consecutive quarters of slowdown, India is staring at sub-7% growth for FY12
(8.6% in FY11), which could dip further to ~6.5% levels in FY13. During the course of the
year, several downgrades of high magnitude were effected giving it a semblance of ‘hard
landing’. So far the agriculture and services have continued to perform with service sector
displaying only moderate slowdown. Of much bigger concern, is the industrial downturn
that crashed to -5.1% in Oct-11 from 7.5% in Jan-11.
In the last 15 years service sector has fallen below 8% only in four occasions. Given the
strong resilience of the service sector, it is fair to assume 8-9% service sector growth
going forward. In view of the continued weakness in the industrial sector we have cut our
FY12 growth estimate to 6.8% from 7.2% estimated earlier. Our FY13 GDP growth
estimate is 6.6%. However, if industrial slowdown further aggravates affecting the service
sector as well, it may take GDP growth closer to 6.5% level or even to 6% in worst case.
Trend #2: Monetary policy - from tight to loose
The biggest positive surprise may emanate from rapid decline in inflation in 4QFY12.
Inflation will come down within 7% by end-March 2012. However, because of an interplay
of several factors, inflation is expected to remain range-bound within 5-6% for large part
of FY13. Thus there is every chance that inflation might surprise on the positive.
This gives enormous policy space to RBI to effect rate cuts in the backdrop of rapid
slowdown of growth. We hold that the rate cut cycle would begin as early as Jan-12 now.
We also expect RBI to continue with its series of open market operations (OMOs)
aggregating INR860b for FY12. However, depending upon the prevailing liquidity situation
a CRR cut may be effected too coinciding with rate cuts. In aggregate we expect RBI to
ease rates by 150bp over CY12 / FY13.
Trend #3: Fiscal policy - from loose to tight
In FY12, the fiscal situation has slipped considerably and expected to clock a full 1%
higher at 5.6% vs. 4.6% placed in the Union Budget FY12. Hence, market borrowing
January 2012
A–1

India Strategy | Get on track please!
targets have already been announced to exceed by a steep INR930b, also reflecting
unavailability of some alternate source of borrowing.
Any meaningful fiscal correction would remain a challenge in FY13 as well. Revenues
would be affected by growth slowdown. On the other hand an expanding welfare net on
account of possible implementation of the food securities bill would weigh on the
expenditure. Thus there is no headroom left on fiscal front to come up with a counter-
cyclical policy response. While fiscal consolidation would still be a challenge, we expect
government to announce a fiscal deficit ~5.0% of GDP in the Union Budget for FY13.
FY12 earnings muted; mild recovery in FY13
For full year FY12, we expect MOSL Universe (ex RMs) to report aggregate sales growth
of 22% YoY and PAT growth of 9% YoY. In YTDFY12 (i.e. trailing three quarters), aggregate
sales growth of 22% and PAT growth of 10% has been estimated. Thus, the residual
growth required in 4QFY12 is ~9%, which we believe, is achievable.
We expect FY13 Sensex EPS of 1,266, up a 15% over FY12, despite a 15% downgrade
from 1,492 expected a year ago (i.e. in Dec-2010). This is because, base FY12 EPS
itself saw an 18% downgrade from 1,263 expected in Dec-2010 to current 1,105. In
effect, FY11-13E EPS CAGR for the Sensex has gone down sharply from 19% to 11%.
3QFY12: Lowest growth in last 23 quarters ex global crisis
We expect MOSL Universe (ex RMs, oil refining and marketing companies) to report
PAT growth of 7% YoY in 3QFY12. This would be the lowest PAT growth in the last 23
quarters, excluding four quarters of global crisis (3QFY09-2QFY10), when YoY PAT growth
was negative. The results would clearly reflect the macroeconomic backdrop of persistent
high inflation, high interest rates, and weak currency.
We expect 51 out of 136 companies ex RMs (i.e. 38%) to report PAT de-growth YoY.
This is the highest ever in any quarter excluding the four global crisis quarters.
Aggregate EBITDA margin (ex Financials) would be 14% - 200bp lower than FY05-
12 average of quarterly margin, and 150bp lower than FY05-12 average of 3Q margin.
Aggregate PAT margin would be 7.3%, lowest ever 3Q margin over FY05-12.
Top-5 PAT growth sectors would be: Cement (38% YoY), Utilities (29%), Private
Banks (20%), Consumer (17%) and Technology (17%). The top-5 PAT de-growth
sectors would be: Infrastructure (-64% YoY), Real Estate (-23%), Telecom (-17%),
Metals (-13%) and Capital Goods (-8%).
Sensex PAT will grow 9% YoY. The last 4-quarter average growth in Sensex PAT is
9%. This is the lowest 4-quarter average growth ex global crisis quarters.
Investment strategy
Post a dismal performance of 2011, Indian market valuations have slipped to below historical
averages (FY13 PE of 12x vs 10-year average of 14.6x). We believe that a bulk of the
earnings downgrades (15% downgrade in FY13 earnings) and the entire rate tightening
(375bp rate hikes) is now behind. However, there is poor visibility of Implementation of
key reforms. While the monetary cycle is expected to ease hereon, any meaningful re-
rating of the Indian markets will have to be preceded either by confidence in implementation
of key reforms or a turnaround in the cycle in earnings downgrades.
Our Model Portfolio has Overweight positions in Private Banks, Technology, Autos,
HealthCare and Telecom sectors and Underweight positions in Oil & Gas, Infrastructure
& Related sectors and Consumer sectors. Our top bets for 2012 are:
ICICI Bank
/
SBI,
Infosys
/
HCL Tech, Bharti, Maruti
/
Tata Motors, Coal India
and
CIPLA.
Strategy
Navin Agarwal
Navin@MotilalOswal.com
Rajat Rajgarhia
Rajat@MotilalOswal.com
Economist
Dipankar Mitra
Dipankar.Mitra@MotilalOswal.com
Sources of exhibits in this section
include RBI, CMIE, Bloomberg, IMF,
UN, Rogers International, Industry,
Companies, and MOSL database
January 2012
A–2

Sensex
close
(MoM%)
2011 – India At A Glance
January
February
March
Cabinet reshuffle
Mobile number portability
launched
Criminal suit lodged against Karnataka's
CM
B S Yeddyurappa,
arrested later in Oct
Govt approves long pending
POSCO project
for
12mtpa of steel
Hero MotoCorp
(erstwhile Hero Honda)
splits from Honda, Japan
S
E
N
S
E
X
Pranab Mukherjee presents
FY12 Union
Budget;
fiscal deficit at 4.6% of GDP
Budget Session: Only 3 bills passed
Arrest of
A Raja,
former Telecom Minister
in 2G Scam
Reliance Inds
announces 30% stake sale
in KG-D6 to BP for USD7.2b
Lanco
acquired Aussie coal mines, Griffin,
for USD760m
Union cabinet approved
GST Bill
Government approved
9.5% interest on
Provident Fund
deposits
Census 2011
puts India's population at
1.21b; 2001-11 CAGR of 1.6%
Brent prices rise 11%
MoM on MENA crisis
S
E
N
S
E
X
18,328
(-11%)
17,823
(-3%)
S
E
N
S
E
X
19,445
(+9%)
April
May
June
India wins ICC World Cup
after 28 years
Ex-chief of Commonwealth Games Organiz-
ing Committee
Suresh Kalmadi arrested
on charges of forgery
Anna Hazare
launches movement for Jan Lokpal
bill to curb corruption
S
E
N
S
E
X
Left parties dethroned
in West Bengal after 34yrs,
and also in Kerala.
Mamta Bannerjee
of Trinamool
Congress takes over as the first woman Chief Minister of
West B engal.
Jayalalitha
back to head Tamil Nadu
FY11 GDP growth placed at 8.6%
RBI hikes rates 50bp,
savings bank rate up 50bp
after 19 yrs; new MSF LAF window introduced
S
Captive coal mines
deallocated
Infosys 3.0
announced
E
N
S
E
X
Diesel price hike of INR3/liter and LPG
by INR50/cylinder
MOEF clears several coal blocks in No-Go
areas
Tariff increases by several telecom
operators
… end of RPM decline?
Govt announces
13% hike in MSP
(Minimum Support Prices) of major
kharif
crops
19,136
(-2%)
18,503
(-3%)
S
E
N
S
E
X
18,846
(+2%)
July
August
September
Union Cabinet reshuffle
MMDR Act
approved by the Cabinet
RBI hikes rates 50bp
Union Cabinet approves draft of
Lokpal Bill
Far-reaching
Power sector reforms
initiated
SEBI raises the trigger for open offer
to 25%
of equity from 15%; mandatory
open offer size raised to 26% from 20%
S
E
N
S
E
X
MO 7th Annual Global Investor Conference
Anna Hazare
starts fast on 20 Aug; ends
on 28 Aug after Parliament assurance on
Lokpal Bill
Land Acquisitions Bill
introduced in Parliament
Cabinet approves
Mines &Minerals (Development &
Regulation) Bill
Vedanta-Cairn
deal gets final nod; this is the fourth
largest M&A deal involving an Indian company
ONGC FPO deferred
given the poor response
S
E
N
S
E
X
Supreme Court bans iron ore mining
in parts of Karnataka
New bank licenses:
RBI issues draft
guidelines
RIL-BP
deal gets govt nod
S
E
N
S
E
X
18,197
(-3%)
16,677
(-8%)
16,454
(-1%)
October
November
December
Draft National Telecom Policy
unveiled; key issues unaddressed
Govt clears
digitization of cable TV
India first F1 circuit
at Noida (UP) unveiled
RBI hikes rates 25bp;
deregulates savings
deposits rates
NHB directs
pre-payment penalty waiver
Bangalore metro
starts; India’s third
World cheapest tablet
'Akash'
launched
Tata Group names
Cyrus P Mistry
as the successor to
Ratan Tata, who will retire in 2012
Top Maoist leader
Kishenji
ki lled
Sep-11
inflation at double digits
after 13 months
2QFY12 GDP growth placed at 6.9%,
falls
below 7% after 9 quarters
Oct-11 trade deficit highest ever at
USD20b.
Tamil Nadu discom files for tariff hikes
S
E
N
S
E
X
FDI in retail deferred
INR sinks to 54
Lok Sabha passes
Lokpal Bill;
Rajya
Sabha adjourned without a vote on it
Bills on
Food security, Mining
introduced in Parliament
TCS
emerges India's No1 market cap company
Oct-11 IIP growth at -5.1%;
first negative in 28 months
Kingfisher
sharply curtails services
S
E
N
S
E
X
S
E
N
S
E
X
17,705
(+8%)
16,123
(-9%)
15,728
(-2%)

2012 – Events Calendar
January
February
March
EUREKA INDIA Conference, 2012
London
Mar 5-6 |
New York
Mar 7-8
3QFY12 Monetary Policy review
Advance estimate of FY12 GDP
State Elections in Punjab,
Uttarakhand, Manipur
3QFY12 GDP
State Elections in UP
Union Budget FY13
Budget session of Parliament
3QFY12 BOP
State Elections in Goa
Results for all 5 State Elections
April
May
Orient India Conference, 2012
S’pore
May 23-24 |
Hong Kong
May 25
June
FY13 Monetary Policy
FY12 BOP
4QFY12
Preview
&
India
Strategy
FY12 GDP
July
1QFY13
Preview
&
India
Strategy
August
September
1QFY13 BOP
Parliament Monsoon session
1QFY13 Monetary Policy review
India’s Presidential election
1QFY13 GDP
October
2QFY13
Preview
&
India
Strategy
November
December
2QFY13 Monetary Policy review
2QFY13 GDP
US Presidential Election
2QFY13 BOP
Parliament Winter session

India Strategy | Get on track please!
2011: A forgettable year
Both for the markets and for the economy
2011 has turned out to be at best a forgettable year for the Indian equity markets.
Besides global headwinds, almost everything that could have gone wrong domestically
has gone wrong – policy paralysis, stubbornly high inflation, high interest rates, fiscal
slippage, and towards the year-end, a sharp fall in the rupee. All these had an impact
on GDP growth, fiscal deficit and corporate profitability.
In 2011, the Sensex returned negative 25%, which is the second highest negative
return since 1980s. Also, the Sensex returns in each quarter of 2011 have been negative,
indicating a gradual build-up of headwinds. This is only the fourth such incidence of
four consecutive quarters of negative Sensex returns in last 3 decades. While some of
the domestic issues are cyclical (like interest rates, currency, etc) and will get corrected
over a period of time, some of them are more structural like lack of reforms, no fuel
linkages, and high subsidy levels. And finally, the biggest issue at this point: When will
the policy engine start cranking?
2011: Second highest negative returns over 3 decades (Sensex returns, % YoY)
2010
2004
2002
1997
1994
1993
1989
1984
1983
1982
1980
Year
17
13
4
19
17
29
17
7
7
22
19
4
8
17
19
4
-8
-1
In INR
Positive Years
Negative Years
2007
2006
2005
1992
1990
1988
1981
Year
47
47
42
37
35
65
49
37
22
25
2009
2003
1999
1991
1985
Year
81
73
64
23
9
In USD
20
12
2001
2000
1998
1996
1995
2011
2008
Year
-25
-37
-52
-61
Return Return
in INR in USD
> -25
Note: Returns for calendar years
1987
1986
Year
-18
-21
-16
-1
-21
-21
-26
-23
-3
-29
89
82
60
-16
-15
-1
-8
Return Return
4
-3
25
27
Return Return
51
30
54
34
Return Return
in INR in USD
30 to 60
82
28
94
95
Return Return
in INR in USD
>60
in INR in USD
in INR in USD
-25 to 0
0 to 30
Sensex Return Range (%)
2011: 4th incidence of 4 consecutive quarters of negative returns (Sensex Returns, % QoQ)
80
Next 2 quarter market
return 2%
124
Next 2 quarter
market return 23%
Next 2 quarter
market return 50%
Next 2
quarter
market
return?
40
0
-40
January 2012
A–3

India Strategy | Get on track please!
2011: India among worst performing markets globally
In 2011, India is the worst performing market globally; its 25% negative return is lower
than several emerging economies like Brazil, Russia, etc. Given the sharp rupee
depreciation, performance in USD terms is even worse at -37%. Post this huge
underperformance, India quotes at FY13 P/E of 12x with expected FY13 earnings growth
of 15%. P/B at 2.2x is at the higher end of the global spectrum, but is well supported by
above-average RoE of 18%.
CY11 world equity returns (%): India the worst performer
US
S&P 500
UK
South Korea
India's performance in
2011 was impacted by a
sharp currency move
in 4QCY11
Return in local
currency (%)
0
-6
-11
-17
-18
-20
-21
-22
-22
6
US
S&P 500
UK
Japan
South Korea
MSCI EM
China
Russia
Taiw an
Brazil
India - Sensex
-37
Return in
USD (%)
0
-6
-12
-13
-20
-22
-22
-24
-27
6
Japan
Brazil
MSCI EM
Taiw an
China
Russia
India - Sensex
-25
India v/s global market valuations
Global Indices EPS growth & PE CY12/FY13
EPS Grow th CY12/FY13 (%)
India's PE IS now at
global averages, despite a
higher earnings growth
and superior RoE
PE (x) CY12 / FY13
28
19
19
19
15
15
14
11
10
9
9
Average EPS Grow th: 12%
Average PE: 11x
8
7
7
6
-6
5
13
9
13
12
11
12
9
13
12
9
9
9
14
12
15
Global Indices P/B & RoE CY12/FY13
P/B (x) CY12 / FY13
0.7
1.0
1.1
1.1
RoE (%) CY12 / FY13
1.2
1.2
1.4
1.4
1.5
Average P/B :1.6x
Average RoE: 14.2%
1.7
1.8
1.9
2.0
2.2
2.2
2.7
8
14
12
12
10
13
15
16
12
16
16
15
15
18
15
21
January 2012
A–4

India Strategy | Get on track please!
2011 sectoral performance: Consumer is an exception with positive return
2011 has been the year of consumption, with both the Central government sponsored
schemes and impact of Sixth Pay Revision pumping in large amounts in the hands of the
consumers. Asset price inflation (largely land and gold), drove increased sense of affluence
amongst the masses. Hike in Minimum Support Price for foodgrains, continued support
under NREGS among other things have driven rural incomes and demand. Consumer has
been the only sector with positive returns in CY11.
Given the several macro headwinds, both industrial and infrastructure capex has been
impacted leading to Capital Goods being amongst the worst performing sectors with -48%
returns. All businesses with high gearing have severely underperformed due to rising interest
rates and increased concerns on refinancing. This, coupled with stagnating volumes, has
led to halving of the market cap of the Real Estate sector. Metals (-47%) and Utilities
(-40%) have been the victims of limited access to natural resources, declining demand
scenario, and increased leverage. Current stock prices imply negative value being assigned
by the markets to many of the projects in pipeline / acquisitions by companies in these
sectors.
Sectoral performance for CY11
Real Estate
-52
Capital Goods
Metal
Utilities
Banks - PSU
BSE Mid-Cap
Oil
Sensex
Banks - Pvt
Auto
Technology
Healthcare
Telecom
Consumer
-48
-47
-40
-39
-34
-29
-25
-22
-20
-16
-13
-9
10
(%)
Best & worst performers in Sensex in CY11
(%)
HUL
ITC
15
3
3
0
-4
-4
-4
-25
-40
-42
-49
-50
-51
-51
-52
-53
31
Bajaj Auto
Sun Pharma
TCS
Hero Moto
Bharti Airtel
Coal India
Sensex
ICICI Bank
SBI
BHEL
L&T
Jaiprakash
Tata Steel
Sterlite
Hindalco
TCS emerges No1
market cap company
Top 10 companies by market cap (USD b)
Dec-06
42
40
28
27
27
25
22
20
18
15
Company
Reliance Inds
ONGC
TCS
Coal India
Infosys
State Bank of India
NTPC
Bharti Airtel
ITC
ICICI Bank
Dec-10
77
62
51
44
44
40
37
30
30
29
Company
TCS
Reliance Inds
ONGC
Coal India
Infosys
ITC
NTPC
Bharti Airtel
State Bank of India
HDFC Bank
Dec-11
42.83
42.76
41
36
30
30
25
25
19
19
Company
ONGC
After being among India's top 5
market cap companies for the last
Reliance Inds
Infosys
five years, TCS finally emerged
TCS
as No1 in Dec-2011, overtaking
Bharti Airtel
Reliance Industries.
TCS and ITC are the only 2
companies from the Top-10 of
2006 with a 50% higher USD
market cap in 2011.
NTPC
Rel. Comm.
Wipro
ICICI Bank
ITC
January 2012
A–5

India Strategy | Get on track please!
2011 v/s 2008
Many similarities, but a few differences too
Key parameters (2008 v/s 2011)
2008
2011
Chg during year (%)
Nifty
BSE Midcap Index
-52
-67
-25
-34
-32
19
25
2011 witnessed the second biggest fall in Indian markets (25%) after 2008, when markets
fell 52%. We draw several interesting observations from a comparison of the years, 2008
and 2011. There are several similarities and also a few differences in key elements related
to both, stock markets and the macro economy.
CNX Bank Index
-49
INR/USD Deprec. (%) 24
Outperformers*
23
2011 v/s 2008 for markets: Global concerns then, domestic now
Element #1 Market fall - sector & stock performance
Similarities
Markets fell 52% in 2008 and 25% in 2011. 4 of the Top 5 sector
underperformers are common while the top performer remains FMCG.
Differences
The fall in 2008 was triggered by a global financial crisis. The fall in 2011
can be attributed to several domestic factors including persistent high
inflation and interest rates, fiscal disarray, trade deficit, and policy paralysis.
Impact
In 2008, Financials, and Globals (both cyclicals such as Metals, Oil and
non-cyclicals like IT) got hammered. In contrast, in 2011, domestic plays
like Engineering feature higher on the underperformers list. Also, in 2011,
IT has outperformed unlike in 2008, when it was at best a market performer.
... but they underperform in 2011 with a 32% decline
CNX Bank Index
14,000
Underperformers*
27
25
*No. of companies relative to Nifty
How Nifty stocks fared
Price decline
2008
2011
>75%
50-75%
25-50%
<25%
Positive Change
Total
4
23
17
4
2
50
0
9
16
17
8
50
Financials collapse 49% in 2008, inline with markets...
CNX Bank Index
12,000
9,000
6,000
3,000
0
2008
Rogers International Commodity Index
46% fall in CY08
Fall of 49% in CY08
10,500
7,000
3,500
0
2011
Rogers International Commodity Index
7% fall in CY11
Fall of 32% in CY11
Commodity prices plunge during the 2008 global crisis ...
6,000
4,500
3,000
1,500
0
... but not so much in 2011
4,800
3,600
2,400
1,200
0
January 2012
A–6

India Strategy | Get on track please!
Both domestic, global sectors led the fall in 2008 ...
Real Estate
-82
Metal
BSE Mid-Cap
Engineering
Utilities
Auto
Oil
Pvt - Banks
Sensex
IT
Telecom
Pharma
PSU - Banks
FMCG
-74
-67
-65
-60
-57
-55
-54
-52
-51
-48
-33
-33
(market performance, %)
... Consumer facing sectors outperform in 2011
Real Estate
Engineering
Metal
Utilities
PSU - Banks
BSE Mid-Cap
Oil
Sensex
Pvt - Banks
Auto
IT
Pharma
Telecom
-52
-48
-47
-40
-39
-34
-29
-25
-22
-20
-16
-13
-9
(market performance, %)
-14
FMCG
10
Element #2 Fund flows - quantum and composition
Similarities
In 2008, total fund flow into the market (FII+DII) collapsed to USD5b,
from USD23b and USD12b in the preceding two years. Likewise, in 2011,
total fund flow was down to USD5b from USD23b-24b in the preceding
two years.
Differences
In 2008, heavy FII selling was offset by strong support from domestic
institutions. However, in 2011, there has hardly been any FII selling. But,
at the same time, retail participation has been very weak now, with DII
inflows of just USD6b v/s USD17b in 2008. Thus, the net institutional
participation has largely remained similar.
Impact
(1) In 2008, FII exodus triggered a collapse in mid-cap stocks, which is
relatively milder in 2011. (2) Traded cash volume fall during the year is
lower in 2011 at 35% (49% in 2008), but the absolute daily average volume
itself is down 20% at INR140b, compared to INR182b in 2008, even as
the average benchmark index for 2011 is 26% higher at 17,700 compared
to 14,000 for 2008.
2008: DII's offset FII outflow
FII (USDB)
18
8
4
DII (USDB)
Net
4.8B
5
17
7
13
5
6
QIP, others
Domestic
Funds raised plunge (USD B)
(USD B)
2011: FII's negative; DII's low Funds raised plunge as in 2008
FII (USDB)
Net
25B
Net
23B
18
5
0
-5
CY10
29
Net
5.4B
6
5
CY09
CY10
6
CY11
YTD
26
Overseas
DII (USDB)
(USD B)
27
2
Overseas
QIP, others
Domestic
19
4
10
7
12
8
18
Net
12B
CY06
Net
23B
CY07
-12
CY08
13
7
CY06
CY07
11
CY08
CY09
CY11
Domestic includes Public, Rights; Overseas includes ADR/GDR/FCCB's
January 2012
A–7

India Strategy | Get on track please!
In 2008, Mid-caps collapse on FII exodus ...
BSE - Midcap Index
12,000
9,000
Fall of 67% in CY08
6,000
3,000
0
... but fall lower in 2011
BSE - Midcap Index
9,600
7,200
4,800
2,400
0
Fall of 34% in CY11
Traded volumes fall sharply in 2008 ...
Daily Avg Cash Volume (INR B)
300
225
150
75
0
... in 2011, even absolute volumes are 20% lower than 2008
200
Daily Avg Cash Volume (INR B)
2008
49% fall in volum es in CY08
150
100
50
0
2011
35% fall in volum es in CY11
Element #3 Earnings & valuation
Similarities
Back in 2008, over 18 months from December 2007, FY09 Sensex EPS
got downgraded 23%. Currently, in the last 12 months, FY12 Sensex EPS
has got downgraded 13%. In December 2008, Sensex was trading at 1-
year forward P/E of ~12x; currently, it is trading at ~12.6x.
Differences
In Dec-2008, valuation discount to LPA was higher at 21% v/s 15%
currently. Also, the market recovery from the lows of 2008-09 was sharp,
but average 2009 Sensex was flat over average 2008 due to earnings
growth holiday from FY08-10. In contrast, currently, we still see 15%
growth in Sensex EPS in FY13, translating to FY11-13 EPS CAGR of
11% and FY10-13 EPS CAGR of 15% (in line with long-period).
Impact
Expect 2012 average Sensex to be higher than the 2011 average of 17,700.
Sensex EPS downgrade was sharper in 2008 at 23% ...
FY09 EPS Revision Trend
1,064
1,002
1,011
1,016
894
23% Dow ngrade
in Earnings
877
820
(INR)
... than in 2011 (13%)
FY12 EPS Revision Trend
1,263 1,252
1,203 1,196
1,186
(INR)
13% Dow ngrade in
Earnings
1,156 1,144
1,131
1,105
Dec-07
Mar-08
Jun-08
Sep-08
Dec-08
Mar-09
Jun 09
* New series from Jun-11 includes Coal India, Sun Pharma
January 2012
A–8

India Strategy | Get on track please!
In Dec-08, Sensex P/E at 21% discount to LPA ...
22.0
19.0
19.1
16.0
13.0
10.0
15-year avg: 14.6x
1 Year Forw ard PE (x)
21.1
17.6
21% discoun t
to LPA
... current P/E discount to LPA lower at 15%
1 Year Forw ard PE
18.0
16.5
16.2
15.0
13.5
12.0
15-year avg: 14.6x
12.6
17.6
15% disco unt
to LPA
14.8
11.6
2011 v/s 2008 for economy: Slower downturn; sharp recovery unlikely
We compare 2011 macroeconomic situation with that of 2008 on 5 elements: Growth,
Inflation & rates, Credit & liquidity, Fiscal scene and External situation. Essentially, 2008
was a period of a sharp economic downturn followed by an equally sharp recovery. In
contrast, 2011 has been a slower downhill but signs of firm recovery yet to emerge.
Interestingly, in 2008, we had both fiscal and monetary tools available to stimulate revival.
Currently, however, we have only one – monetary tool to stimulate growth.
Element #1 Growth slowdown: Sharp then, more gradual now
Real sector indicators including GDP and IIP growth was on a downhill on both the
occasions although the fall was sharper in the post-Lehman period.
GDP growth decline in 2008 was sharp ...
9.4
9.7
8.5
GDP (%)
... but much more gradual in 2011
GDP (%)
8.4
8.4
2008
8.0
7.8
Sep-07
Dec-07
Mar-08
Jun-08
Sep-08
5.6
2011
7.8
7.7
Dec-10
Mar-11
Jun-11
IIP (%)
9.4
9.5
5.3
6.2
3.7 3.6
2.0
2.2
-5.1
6.9
Dec-08
Sep-10
Sep-11
Like GDP, even IIP growth fall in 2008 was sharp ...
16.8
11.7
13.1
11.0
8.6
5.6 5.4
7.2
3.9
1.3
-1.6
IIP (%)
10.9
... in 2011 IIP has been low and languishing in last 6 months
7.5
6.7
-1.3
January 2012
A–9

India Strategy | Get on track please!
Element #2 Inflation & rates: Yet to ease, unlike then
In 2008, inflation had risen quickly in the pre-Lehman period followed by
a collapse towards the year-end. In 2011, inflation stayed higher through out the
year and is showing some signs of easing only in Nov-Dec.
Repo rate saw a cycle in 2008, while in 2011, they have on risen so far. Yield curve is
very flat in 2011 unlike 2008.
In 2008, inflation eased almost as fast as it rose ...
Inflation (%)
7.9 8.2
10.9
11.2 11.1 10.8
10.7
8.7
6.7
9.5 9.5
9.7
... but in 2011, inflation remains stubbornly high
Inflation (%)
9.7 9.6 9.5
9.4
9.8
10.0
9.7
9.1 8.1
7.7
5.7
4.5
Repo rates were cut significantly in 2008 ...
Repo Rate (%)
9.0
7.8
7.8
9.0
... while they end on a high in 2011
Repo Rate (%)
8.0
8.0
8.3
8.5
8.5
8.5
2008
5.5
5.4
5.4 5.6 5.2
5.2 5.3 5.3
7.5
6.5
6.5
6.5
2011
7.5
7.3
6.8
6.8
2008 year-end yields were low
(G-sec yield curve % - 31 Dec 2008)
2011 year-end yield curve is elevated and flat
8.6 8.5 8.7 8.8 8.6 8.8 8.8
8.4 8.5 8.5
8.3
8.0 8.1
8.5
8.5
6.3 6.3 6.4
4.9 4.9 4.9 5.0
(G-sec yield curve % - 31 Dec 2011)
3M 6M 1Y 2Y 3Y 5Y 6Y 7Y 8Y 9Y 10Y 13Y 19Y 24Y 28Y
3M 6M 1Y 2Y 3Y 5Y 6Y 7Y 8Y 9Y 10Y 13Y 19Y 24Y 28Y
January 2012
A–10

India Strategy | Get on track please!
Element #3 Credit & liquidity: Still tight, unlike then
Bank credit growth was on an upswing pre-Lehman and collapsed
subsequently. In 2011, bank credit gradually and continually slowed down.
Liquidity was moderately stressful followed by significant easing in CY08. In contrast,
through out CY11 liquidity has been under severe stress with no signs of easing so far.
In 2008, RBI eased liquidity post Lehman crisis
450
225
Liquidity (INR B)
In 2011, RBI kept a tight leash on liquidity to check inflation
100
-225
Liquidity (INR B)
0
-550
-225
-450
-675
-875
-1200
Excessive credit growth in 2008 corrected sharply ...
Bank credit growth (YoY, %)
... but in 2011, credit growth slipped towards below average
31
23
2008
26
26
25
24
25
25
23
22
23
23
26
23
2011
21
21
22
21
20
19
18
18
23
17
Element #4 Fiscal scene: No headroom for stimulus this time
Fiscal consolidation in 2008 left significant headroom for fiscal stimulus
to counter slowdown impact of global crisis. But, unlike in 2008, there is no fiscal
flexibility now.
While G-Sec yields were rising in both 2008 and 2011, higher deficit and stressed
liquidity ensured that yields are currently at much higher levels than 2008.
Fiscal Deficit as a % to GDP trend FY05-FY09 (%)
(% of GDP)
Fiscal discipline reversed
in FY09 due to economic
stimulus of 3-3.5% of GDP
Fiscal Deficit as a % to GDP trend FY09-FY13E (%)
6.0
6.0
6.4
5.6
5.0
4.7
3.9
4.0
3.3
2.5
FY05
FY06
FY07
FY08
FY09
FY09
FY10
FY11
FY12E
FY13E
January 2012
A–11

India Strategy | Get on track please!
Element #5 External sector: Trade worse, reserves better
In both CY08 and CY11 exports slowed down. However, deficit came
down in the later half of CY08 as trade itself shrank and rupee depreciation helped
restore trade balance.
Current account deficit worsened and forex reserves depleted in CY08. Early signs of
the same are visible in CY11 too.
Indian rupee depreciated by 19% vs USD in 2011; in 2008, the depreciation was 24%.
In 2008, trade balance collapsed mid-year but recovered
Imports
15
15
17
18
19
Exports
19 19
Trade balance
18
16
14
11
13
21
24
In 2011, trade balance has worsened towards the end
Imports
31
24
28
Exports
27
29
25
Trade balance
24
20
22
-8
-6
-12
-5
-11
-10
-13
-16
-15
-12
-12
-6
-19
-10
-31
-9
-32
-5
-12
-36
-17
-45
-12
-39
-12
-41
-15
-39
-11
-20
-35
-40
-14
-36
-23 -21 -23
-30 -29 -29 -32 -34 -31
-26 -23
-35
Current Account deteriorated in 2008 ...
FY05
FY06
FY07
FY08
FY09
... and the weakness persists ever since
FY09
FY10
FY11
FY12
-0.4
2008
-1.2
-1.0
-1.3
-2.3
Foreign Reserves (USD B)
Avg. INR/USD
42.1 42.8
42.8 42.9
45.6
48.7 49.0 48.6
253 248 256
-2.3
2011
-2.6
-2.8
-2.5
CAD as % of GDP
CAD as % of GDP
2008 saw sharp fall in forex reserves and rupee
In 2011 too, rupee fell, but reserves held up
Foreign Reserves (USD B)
45.4 45.4 45.0 44.4 44.9 44.9 44.4 45.3
47.6
49.3
50.9
52.6
304 301
Avg. INR/USD
39.4 39.7
40.4 40.0
310 314 315 312 306 295
293 301
286
305
299 302
319 322
316
314 312 316
311
January 2012
A–12

India Strategy | Get on track please !
Get on track please !
Low expectations for CY12/FY13 create upside opportunity
I. Backdrop: Derailed in 2011!
In 2011, the India story derailed with most macroeconomic parameters ending the year
significantly offtrack.
GDP growth hard lands:
After six consecutive quarters of slowdown, India is staring
at sub-7% growth for FY12 (8.6% in FY11), which could dip further to 6-6.5% levels
in FY13
Industrial growth plummets:
Last reported i.e. for October 2011, IIP growth was a
negative 5.1% YoY, which is unprecedented in recent times. April-October 2011 IIP
growth was only 3.5% YoY.
Inflation sky-rockets to 9%+ …:
Inflation remained above 9% in each of the first
11 months of 2011, and even touched double digits in September 2011.
… despite relentless rate hikes:
In 2011, RBI hiked rates 7 times by 225bp on top
of 150bp rise in 2010. This did little to curb inflation, but perhaps was a key reason
behind the "empty middle" structure of IIP (i.e. low intermediates and capital goods
growth).
Amidst global headwinds …:
Europe's debt crisis and US growth crisis caused the
IMF to downgrade global growth projections several times in 2011.
… the domestic policy engine too derailed:
Key reforms including FDI in retail,
Land Acquisition, Lokpal, DTC, GST, etc. currently are hostage to policy paralysis
and political brinkmanship, severely denting attractiveness of India as an investment
destination.
The rupee is in a tailspin:
All of the above finally took their toll on the Indian rupee
towards the end of 2011. Thus, although the rupee is down only 2% for the year on an
average, it closed 2011 down a sharp 19% YoY at 53.1 v/s 44.7 a year ago.
Key variable
2010 / FY11
GDP growth (YoY %)
IIP (YoY %)
Inflation (YoY %)
Repo rate increase (bp)
Fiscal deficit (% of GDP)
Govt. borrowing (INR b)
Trade deficit (USD b)
Current A/c deficit (% of GDP)
8.6
8.3
9.6
200
4.7
4,470
131
2.6
2011E / FY12E
6.8
3.0
9.6
225
5.6
5,100
140
2.5
46.7 (53.1)
INR/USD (Closing)
45.7 (44.7)
Note: Repo rate, trade deficit and INR/USD are on a calendar year basis.
GDP growth hard lands
3QCY11 GDP growth came down below 7%. This represents almost six consecutive
quarters of slowdown. During the course of the year, several downgrades of high magnitude
were effected, giving a semblance of 'hard landing'. So far, agriculture and services have
continued to perform, with services displaying only moderate slowdown. From the demand
side, consumption growth has held steady, while investment and foreign demand showed
significant weakness.
January 2012
A–13

India Strategy | Get on track please !
Nearly six consecutive quarters of slowdown takes growth below 7%
9.4
8.8
2011
8.4
8.4
7.8
7.7
6.9
Mar-10
Jun-10
Sep-10
Dec-10
Mar-11
Jun-11
Sep-11
Industry
Industrial growth plummets
Of much bigger concern was the industrial downturn that crashed to -5.1% in October
2011 from 7.5% in January 2011. Within industry, while all segments have been affected
by last count, it's the empty middle structure that has been of bigger concern, viz., the
capital and intermediate goods that had shown a degrowth of 25.5% and 4.7% in October
2011. Industrial growth holds the key for achieving ~7% growth.
Industrial downturn is more concentrated in the empty middle
20
15
10
5
0
-5.1
Industrial growth plunges deep into negative territory
IIP YoY
Poly. (IIP YoY)
FY10
FY11
7MFY12
Inflation sky-rockets to 9%+ despite relentless rate hikes
While growth has slowed down, inflation kept stubbornly high despite successive rate
hikes by RBI. Inflation remained above 9% in each of the 11 months of 2011 up to November
2011 and touched double digit in September 2011. Moreover, each component of inflation,
viz., primary, fuel and manufacturing remained high above RBI's comfort level at 5%.
Inflation remained 9%+ for the WHOLE of 2011
9.0
9.0
January 2012
A–14

India Strategy | Get on track please !
In response, RBI hiked rates 7 times by 225bp on top of 150bp rise in 2010. Accordingly
interest rates across the market spectrum increased. The higher cost of borrowing hit
investment and consumer durables demand that acted on top of deteriorating business
sentiment. The government too increased its borrowing program, putting pressure on yields.
In the later part, however, deposit growth picked up and credit growth slowed down,
somewhat easing pressure on yields.
RBI raised rates by 225bp in 2011 on top of 150bp increase in 2010
Reverse Repo Rate
10%
8%
6%
4%
2%
4.75%
3.25%
6.25%
5.25%
8.25%
9.50%
8.50%
7.50%
Repo Rate
MSF rate
Europe, US caught in global turmoil
Global factors too played spoilsport. Global growth projections were downgraded multiple
times by IMF. For a large part of 2011, there were fears of US slipping into double dip
recession. In the second half, US rating downgrade by S&P altered the financial market
landscape. Sovereign debt crisis in Europe engulfed bigger nations, with tight debt market
conditions coupled with risks of bank failure. The prolonged negotiations over US debt
deal and Euro bailout packages dented market sentiment. In all, 2011 was a period when
risk aversion engulfed capital flows to EMEs affecting their equity and currency markets.
IMF downgraded 2011 global growth projections multiple times
2011
4.5
4.5
2012
4.5
4.4
4.4
4.3
4.0
4.0
Jan-11
Apr-11
Jun-11
Sep-11
January 2012
A–15

India Strategy | Get on track please !
India's policy engine derailed
Apart from macroeconomic risks and global headwinds, policy paralysis has emerged as
the most significant factor affecting business climate in India. Since the revelations of
various high profile scams from November 2010 onwards, the policy making apparatus
has slowed down to a considerable extent, affecting both the executive and the legislature.
Not only have project approvals slowed down, many projects have faced severe regulatory
clampdown along with many policy flip flops in particular areas. Key reforms including
DTC, GST, Land Acquisition, FDI in retail, Lokpal, etc were held hostage to government
indecision and political brinkmanship, denting India's attractiveness as an investment
destination.
Parliament business improves, but several key bills still held up
14th Lok Sabha (2004-2009)
28
22
17
12
6
3
0 0
0
6
3
16
102
14
9
15th Lok Sabha (2009 onw ards)
28
20
17
11
20
15
19
16
26
II. 2012: Will India get back on track?
The current situation of high, multivariate global and domestic uncertainty prevents an
unequivocal view on whether the Indian economy will get back on track in 2012. Instead,
we observe some key emerging macro trends for 2012, and assess their impact at the
micro level on sectors and companies.
Trend #1
Impact #1
Trend #2
Impact #2
FY13 GDP growth finds its base at 6-7%
We have factored in much lower topline growth for FY13 in key sectors.
Monetary policy - from tight to loose
Interest rate plays, which have been punished by the markets, could be
interesting contrarian bets.
Fiscal policy - from loose to tight
Financials, Autos to benefit; mixed bag for Industrials
Currency at a new normal of 50
Beneficiaries of weaker INR have started to outperform
The other PPP - Policy, Politics, Public
This PPP is a key catalyst to the 4th and 5th P's - Perception and P/Es (i.e.
valuation). Getting it right, we believe, will reflect in India's stock market
valuations improving even before trends 1-4 start reflecting in corporate
sector earnings.
A–16
Trend #3
Impact #3
Trend #4
Impact #4
Trend #5
Impact #5
January 2012

India Strategy | Get on track please !
Trend #1
Growth finds its base at 6-7%
The current growth phase of India has largely been driven by services growth that has
also been the most resilient component of the economy while industry as everywhere
added much cyclicality to growth. In the last 15 years, services growth has fallen below
8% only on four occasions, the last time in FY03. Again, since FY02, out of 42 quarters,
service sector registered 9%+ growth in 28 quarters. Only during the prolonged period of
recession, service growth faltered below 8%. Part of the reason for resilience of the
service sector comes from (i) educated skill force, (ii) lower capital requirement than
industry, (iii) efficiency drive within industry both domestic and abroad, (iv) relatively low
base for various domestic service industries, e.g., travel and tourism. Given the strong
resilience of the service sector, it is fair to assume 8-9% service sector, growth going
forward.
In view of the continued weakness in the industrial sector, we have cut our FY12 growth
estimate to 6.8% from 7.2%. The baseline case rests on the premise that the industrial
downturn would be somewhat isolated without affecting the service sector in a big way,
this is observed over long period of data.
We believe that a large part of FY13 would be spent in spillover effects of downturn in
FY12. However, we expect things to improve in 2HFY13. Industrial growth may perform
a notch higher on lower base while the service sector might be affected over a longer
period of industrial downturn. While we have placed our initial FY13 estimate at 6.6%,
there is a possibility that growth can falter to 6.1% under stress case, or even to 5.5% in
the worst case scenario.
India's GDP growth finds its base at 6-7%
FY12 (%)
Baseline Stress case Worst case
Overall growth
Agriculture
Industry
Services
6.8
3.8
3.0
9.4
6.5
3.8
2.8
9.0
6.0
3.8
2.1
8.4
6.6
3.5
4.0
8.5
FY13 (%)
Baseline Stress case Worst case
6.1
3.0
3.5
8.0
5.5
3.0
2.5
7.5
Source: RBI/MOSL
Impact #1
FY13 revenue growth drags
Lower GDP growth will find its reflection in lower revenue growth for India's corporate
sector. Thus, for the MOSL Universe (ex RMs), aggregate revenue growth estimate for
FY13 is only 10%, which is sharply lower than the preceding 6-year average of 23%.
For FY12, our revenue growth estimate made in 1QFY11 was 13%, which currently
stands at 22%, despite downgrade in FY12 GDP growth. This is on the back of (1) sustained
high inflation, (2) weakening INR. In contrast, our revenue growth estimate for FY13 has
been cut from 13% in 1QFY11 to 10% currently, modeling in low GDP growth, moderate
inflation, and no major weakness in INR. Lower revenue growth is also reflecting in most
sectors - Auto, Capital Goods and Infrastructure are the usual suspects, but even Consumer,
Retail, Healthcare and Private Banking are unlikely to escape the slowdown impact.
January 2012
A–17

India Strategy | Get on track please !
Revenue growth trend of MOSL universe and sectors: Reflecting slowing GDP growth
MOSL universe ex RMs (%)
37.9
29.7
18.7
8.3
22.6 21.6
MOSL Ex RMs
MOSL universe quarterly estimate (%)
FY12E Grow th Ex RMs (%)
FY13E Grow th Ex RMs (%)
19
15
13
14
1313
12
11
10
9.5
10
21
22
Auto sector
Auto
43.2
31.7 30.4
30.0 28.3
26.4
14.0
9
10
Capital goods sector (%)
38.0
31.7
27.5
19.3 18.3
Capital Goods
Infrastructure sector (%)
Infrastructure
33.0
29.5
36.1
28.8
Retail sector(%)
57.0
49.1
Retail
31.9
25.1
15.3
8.8
5.9
10.0
29.0
23.5
18.8
9.7
Consumer sector revenue growth (%)
Consumer
19.7
19.3
17.8
18.0
16.2
15.0
19.7
Healthcare sector (%)
39.4
Healthcare
Private bank sector (%)
40.4
42.8
31.0
23.5
17.2
17.5
20.3
Banks - Private
24.8
14.6
9.7
13.8 14.0
13.9
Trend #2
Monetary policy - from tight to loose
The biggest positive surprise may emanate from rapid decline in inflation in 4QFY12.
Inflation is expected to come down within 7% by end-March 2012. However, because of
an interplay of several factors including (i) rather sharp decline in food prices, (ii) expectation
of stable oil prices, (iii) international commodity prices remaining under pressure, and (iv)
the base effect, inflation is expected to remain range-bound within 5-6% for a large part
of FY13.
January 2012
A–18

India Strategy | Get on track please !
Thus, there is every chance that inflation might surprise positively. In our calculations for
base case, we have assumed a similar increase in FY13 actual prices (index levels) as
witnessed in FY12. The underlying index has grown on at average of 0.8 points every
month in the last 3-5 years. Even a similar level of index growth in FY13 would bring down
inflation to ~5.5% level by end-June. However, if the price rise is less, the fall in inflation
can be even sharper to low single digits.
In 2012, expect the inflation genie to be bottled ...
(%)
... in fact, inflation could even spring a positive surprise
WPI (Proj. Static Index)
12
9.1
9
6
3
0
5.4
4.2
2.5
Positive Scenario
Base Scenario
Expect 150bp rate cuts in CY12/FY13 ...:
Easing inflation gives enormous policy
space to RBI to effect rate cuts in the backdrop of rapid slowdown of growth. Surely, the
growth-inflation balance is tilting in favor of growth, and RBI may effect larger than
expected rate cuts rate cuts soon. We hold that the rate cut cycle would begin as early as
January 2012 now.
... and perhaps even a CRR cut:
We also expect RBI to continue with its series of open
market operations (OMOs) aggregating INR860b for FY12, especially in the backdrop of
currency intervention draining out liquidity. Further, depending upon the prevailing liquidity
situation, a CRR cut too may be effected along with rate cuts. In aggregate, we expect
RBI to ease rates by 150bp over CY12 / FY13. Thus, high inflation and interest rate cycle
that had battered profitability should ease in FY13. However, a comprehensive revival of
the investment climate would hinge upon the government policy machinery working in full
steam once again.
January 2012
A–19

India Strategy | Get on track please !
Expect 150bp cut in policy rates over CY12 / FY13
Reverse Repo Rate
10%
9.50%
8%
8.25%
8.50%
8.00%
7.50%
6%
6.50%
5.50%
4%
7.00%
6.00%
Repo Rate
MSF rate
Impact #2
Interest rate plays could be interesting contrarian bets
Smaller companies hurt by sustained high interest rate regime:
At the aggregate
level, the Indian corporate sector has a very low leverage. However, this is mainly led by
the large companies which have net cash. Excluding them, much of India Inc has fairly
high debt. Debt-servicing burden e.g. for BSE 500 companies (ex Financials), aggregate
Interest/EBITDA for 2QFY12 was fairly comfortable at 21%, albeit much higher than the
long-period average. But excluding the top 50 companies, many of which are net cash,
2QFY12 Interest/EBITDA was very high at 45%.
BSE 500 Interest/EBITDA trend fairly comfortable in toto …
Interest / EBIDTA (%)
22.3
17.8
15.4
11.3
11.2
10.3
16.1
14.4
14.3
12.7
12.7
11.8
12.0 11.9
10.5
21.0
40.2
30.4
20.7
16.2
16.1
13.6
22.7
20.9
24.7
27.1
21.7
23.5
21.7
20.2
19.9
32.4
… but at high levels for BSE 500 (ex top 50) companies
Interest / EBIDTA (%)
45.4
8.9
High net debt sectors/companies underperformed in 2011 and vice-versa:
In the
last three years, Net Debt to Market Cap has risen in few sectors like Infrastructure,
Telecom, Real Estate and Metals. There are several companies where Net Debt/Market
Cap is well in excess of 100%. Quite predictably, most such sectors and companies have
severely underperformed the market in 2011.
January 2012
A–20

India Strategy | Get on track please !
Sectors with high Net Debt/Mkt Cap have tended to underperform in CY11
FY08
Infrastructure
Telecom
Real Estate
Metals
Utilities
Oil & Gas
Health care
Consumer
Cement
Auto
Technology
Capital Goods
MOSL
28
7
10
18
11
12
6
1
5
-3
-6
-5
7
Net Debt / Mkt Cap (%)
FY09
FY10
FY11
136
20
66
42
20
24
9
0
7
28
-8
-10
18
69
17
32
11
21
16
2
-2
-2
3
-5
-7
9
161
57
39
16
13
15
2
-2
-2
-1
-5
-8
10
FY12E
354
63
57
32
20
12
3
-1
-3
-4
-7
-7
12
Relative
Perf. (%)
-42
-16
-27
-23
-15
-4
12
34
21
4
9
-23
N.A.
Note: Negative Net debt / Mkt Cap denotes net cash
Many companies have very high Net Debt/Market Cap;
All underperformed in CY11, but some of them are interesting contrarian bets for 2012
FY08
Lanco Infratech
Gammon India
NCC
GVK Power & Infra
Jaiprakash Associates
Hindustan Construction
Dishman Pharma
IVRCL
Simplex Infra.
Reliance Comm
Pantaloon Retail
Adani Power
JSW Steel
HDIL
JSW Energy
Tata Steel
Jubiliant Organosys
India Cements
BPCL
Tulip Telecom
Unitech
Hindalco
28
10
23
20
34
47
27
17
21
10
31
-
78
20
-
95
33
26
110
12
16
104
Net Debt / Mkt Cap (%)
FY09
FY10
FY11
142
182
111
86
154
216
83
80
145
63
97
-
450
180
-
335
248
64
179
76
148
248
59
40
43
62
84
57
42
33
54
56
34
37
82
32
40
79
50
49
145
36
31
46
149
129
111
127
191
149
100
90
98
144
84
95
87
56
74
81
110
83
116
67
51
49
FY12E
943
465
396
360
359
336
314
301
218
200
172
170
169
138
130
128
128
126
125
121
103
101
CY11 Rel.
Perf. (%)
-60
-50
-52
-47
-26
-41
-52
-53
-32
-27
-40
-27
-32
-48
-38
-26
-12
-14
-3
-17
-46
-28
Interest rate plays could be interesting contrarian bets in 2012:
We believe receding
inflation pressure sets the backdrop for RBI to ease liquidity and cut policy rates. Recent
RBI statements also clearly indicate a shift in policy stance from inflation control to growth
revival. In this circumstance, the above beaten down interest-rate plays will most likely be
the first ones to bounce back in 2012, given high delta in interest cost saving and hence
PAT growth off a low base. PSU banks are also good bounce-back candidates due to the
following (1) receding interest rates and recovering growth ease asset concerns, and (2)
fiscal control (see next point) eases yields and boosts portfolio gains.
January 2012
A–21

India Strategy | Get on track please !
Trend #3
Fiscal policy - from loose to tight
In FY12, the fiscal situation has slipped considerably and fiscal deficit is expected to be
5.6%, a full 1% higher than the FY13 Budet estimate of 4.6%. Major reasons:
Slowing revenue growth and rise in non-plan expenditure, especially subsidies on
account of oil and fertilizers that were inadequately provided for in the Budget.
The primary non-debt receipts of disinvestment too are unlikely to meet the INR400b
target under the current market conditions.
Hence, market borrowing targets have already been announced to exceed by a steep
INR930b, also reflecting unavailability of some alternate source of borrowing in the nature
of (i) proceeds from market stabilization scheme (MSS), (ii) small savings, and (iii)
drawdown of cash balances. In the aggregate, taking into account higher recourse to
short-term (T-bill) financing as well, fiscal deficit for FY12 is expected to touch as high as
5.6% - implying a reversal on the path of fiscal rectitude.
No headroom for fiscal stimulus:
We believe there is no headroom left on fiscal front to
come up with a counter-cyclical policy response, as any meaningful fiscal correction would
remain a challenge in FY13 as well:
Revenues would be affected by growth slowdown. With deferment of major tax reforms,
no major improvement in revenue buoyancy is expected in the near term either.
On the other hand, an expanding welfare net on account of possible implementation of
the Food Securities Bill would weigh on the expenditure. Subsidies on oil etc are
expected to remain high unless the prices come down.
Expect FY13 fiscal deficit at 5% of GDP:
Given the sensitivity of sovereign debt crisis
and its implications for financial market as also from reprioritization of domestic demand,
a fiscal course correction seems imperative. However, a significant part of it may come
from cutback on planned expenditure. Given that the FY12 fiscal slippage was partly on
account of unanticipated growth slowdown, the FY13 budget calculations are expected to
be conducted on more realistic assumptions. While fiscal consolidation would still be a
challenge, we expect the government to announce a fiscal deficit of ~5% of GDP in the
Union Budget for FY13.
No headroom for fiscal stimulus - even coming back to
FRBM targets would be a challenge
Revised FRBM Target
5.5
4.7
4.8
4.1
5.6
5.0
Actual/Expected
So far the tax and receipts trend has been weak
while expenditures have grown
Tax revenue
65%
59%
53%
47%
41%
35%
Total receipts
Total expenditure
FY11
FY12
FY13
January 2012
A–22

India Strategy | Get on track please !
Fiscal deficit so far has shot up to crisis years' levels
Fiscal deficit
160%
Revenue deficit
Union Budget - how the numbers stack up
FY11BE FY11RE FY12BE
Receipts
Revenue receipts
Net tax revenue
Non-tax Revenue
Capital receipts (net)
Of which,
Net mkt borrowings
PSU disinvestment
Expenditure
Of which,
Interest payments
Subsidies outgo
Gross fiscal deficit
As % of GDP
(incl 3G auction in FY11)
11,087
6,822
5,341
1,481
4,265
3,450
400
11,087
2,487
1,162
3,814
5.5
12,316
7,838
5,637
2,201
4,477
3,354
227
12,166
2,408
1,642
4,010
5.1
12,377
7,899
6,645
1,254
4,478
3,430
400
12,577
2,680
1,436
4,128
FY12E
12,956
7,641
6,387
1,254
5,315
4,695
14
12,956
2,696
1,800
5,151
FY13E
14,146
8,483
7,136
1,347
5,66
5,017
350
14,146
3,020
2,200
5,162
120%
80%
40%
0%
4.6
5.6
5.0
E – MOSL estimates
Impact #3
Financials, Autos to benefit; mixed bag for Industrials
Fiscal discipline is expected to translate into lower crowding out of private borrowers, and
hence, positive for some interest rate sensitives like Financials and Autos. However, certain
other industrial rate-sensitive sectors like Infrastructure, Capital Goods and Real Estate
may also feel the somewhat negative impact of fiscal discipline by way of lower project
orders from the government.
Financials - lower crowding out, higher asset quality, bigger portfolio gains:
Expect Financials to be the biggest beneficiary of fiscal discipline. Lower government
borrowing program reduces crowding out of private borrowers, and eases interest
rates. This, in turn, has two impacts: (1) Higher asset quality, given better debt-servicing
capacity of borrowers, and (2) Bigger portfolio gains, as yields on government securities
ease.
Autos - bigger positive for 4-wheelers, CVs, relative to 2-wheelers, tractors:
A major proportion of 4-wheelers (cars, UVs, UVs, etc), CVs are bought on credit.
Hence, they are likely to be big beneficiaries of fiscal discipline, which has salutary
impact on both quantum and cost of credit.
Industrials - mixed bag:
The low-interest rate aftermath of fiscal discipline is positive
for Industrials, especially those with high working capital borrowings. However, fiscal
discipline is also usually accompanied by government cutting down more on development
expenditure than on welfare expenditure (food & fuel subsidies, education, healthcare,
etc). Thus, sectors depending on business from government-dominated areas such as
roads, irrigation, mass housing, etc, may see moderation in order flows.
January 2012
A–23

India Strategy | Get on track please !
Trend #4
Currency at a new normal of 50
The other component of twin deficit, viz, the current account deficit too widened in 1HFY12
over 1HFY11. While export growth showed much buoyancy in 1QFY12, it sharply fell
August 2011 onwards. Trade deficit, therefore, expanded in 2Q and 3QFY12.
Going forward, export growth is expected to come down further on a combination of high
base and global headwinds. The expanded trade deficit is inadequately compensated by
expanding trade in services and remittances, resulting in higher current account deficit.
This is combined with drying up of capital flows on the back of both risk aversion and loss
of business confidence in India. While several measures have been initiated to ease debt
capital inflows, till external sector weaknesses persist, total capital flows are unlikely to
improve soon.
Exports growth has plummeted as per the latest indication
Imports (Y-o-Y%)
100%
75%
50%
25%
0%
-25%
-50%
Exports (Y-o-Y%)
50
40
30
20
10
0
-10
-20
Trade balance has widened
Imports
Exports
Trade balance
Drying up of capital flow weakened the entire external account (USDb)
FY09
Exports
Imports
Trade Deficit
Invisible Surplus
Current A/c deficit
Net capital flow
BoP Surplus
Forex Reserves
INR/USD
As % of GDP
Exports
Imports
Trade Deficit
Invisible Surplus
Current A/c deficit
Net capital flow
BoP Surplus
Forex Reserves
189
309
-120
92
-28
8
-20
252
45.9
15.5
25.4
-9.8
7.5
-2.3
0.6
-1.7
20.7
FY10
182
301
-118
80
-38
52
13
279
47.4
13.2
21.8
-8.6
5.8
-2.8
3.7
1.0
20.2
FY11
251
381
-131
86
-44
57
13
305
45.6
14.5
22.0
-7.6
5.0
-2.6
3.3
0.8
17.6
FY12E
320
460
-140
91
-49
40
-9
295
48
16.0
23.0
-7.0
4.6
-2.5
2.0
-0.5
14.8
FY13E
384
543
-159
102
-57
50
-7
288
48
17.0
24.0
-7.0
4.5
-2.5
2.2
-0.3
12.7
January 2012
A–24

India Strategy | Get on track please !
Thus, reflecting the deterioration of the external account, a depreciation of INR was long
overdue. However, INR at 52-53 is largely corrected for its fundamentals, as reflected in
the real effective exchange rate (REER) measure that tracks the competitiveness of the
currency against major trading partners adjusted for relative inflation. The REER value
now has plummeted from a high of 118 in July 2011 to the long period fair value ~100.
Given that India's inflation may come down rather sharply, REER would start going below
100 soon if the nominal rupee holds at the current level. We, therefore, expect INR to
move back to 50 in 2012, largely consistent with its fair value, given the current balance of
payments position.
Rupee largely corrected for fundamentals, expect it to rule at 50/USD
REER (LHS)
120
116
112
108
104
100
INR/USD (RHS)
54
52
50
48
46
44
Impact #4
Beneficiaries of weak INR have started to outperform
We analyzed the stock performance of select Nifty companies from the time INR went
into a tailspin i.e. August 2011 to date. Our key findings are:
IT, Pharma, exporters have started to outperform:
All major companies in IT
(TCS, Infosys, Wipro) and Healthcare (Sun, Cipla, Dr Reddy's) outperformed the
Nifty. Bajaj Auto, a major exporter of 2/3 wheelers also outperformed.
Bharti, Maruti underperform:
Bharti has underperformed mainly due to expected
huge MTM losses on its forex denominated loans. Maruti is expected to take a hit on
its yen-denominated raw material imports.
Commodity stocks underperform:
All commodity majors - Tata Steel, Sterlite,
Hindalco - have underperformed as the fall in commodity prices was higher than the
fall in INR.
INR / USD movement (Aug-Dec 2011)
54
INR / USD
51
48
45
42
Best and worst performers over Aug-Dec 2011
26 20
7 4
2 2 1
-1 -2
-5
-16
-22 -24
-31 -31
-35 -35
-40
-42-43-44
January 2012
A–25

India Strategy | Get on track please !
Trend #5
The other PPP - Policies, Politics and Public
Political party alliances
Seats
UPA
INC
TMC
DMK
NCP
Others
NDA
BJP
JD (United)
Shiv Sena
Others
Other Parties
Left
BSP
BJD
AIADMK
TDP
Samajwadi Party
Others &
Independents
Lok Rajya
Sabha Sabha
271
207
19
18
9
18
152
114
20
11
7
103
22
21
14
9
6
22
26
97
71
6
7
7
6
68
51
8
4
5
61
19
18
6
5
4
5
21
a) Policy paralysis
In 2012, many hopes related to major reform measures were belied.
The major tax reforms have already been significantly delayed from their initial timeline.
Second, industry has been subjected to various executive and judicial actions related
to land and environment.
Third, many sectors have witnessed sharp policy reversals in a short period of time,
completely altering business prospects of many projects.
Fourth, the routine procedural matters have slowed down reportedly even at state
government levels that has added to the uncertainty.
Fifth, key reforms such as FDI in retail, insurance have been embroiled in political
controversies.
b) Assembly elections - what to expect?
To the extent the current coalition needs to garner electoral mandate for requisite space
for policy actions, assembly elections in five states slated during end-January 2012 to early
March 2012 become important. Of particular interest is UP elections, not only because it
is a large state with maximum Lok Sabha seats (contribute 80 seats to Lok Sabha), but
also its outcome would have direct implication for functioning of the coalition at the center.
While observers have pointed toward a hung assembly, post election formations would be
keenly watched by the market for implications on political stability and direction of policy.
UP elections - would any party have majority this time?
Result date
04.03.2012 (Sunday)
04.03.2012 (Sunday)
04.03.2012 (Sunday)
04.03.12 (Sunday)
Total
543
243
UPA: United Progressive Alliance
NDA: National Democratic Alliance
Assembly election – key dates
State
Punjab
Uttarakhand
Manipur
Uttar Pradesh
Date of Poll
30.01.2012 (Monday)
30.01.2012 (Monday)
28.01.2012 (Saturday)
04.02.12 (Saturday)
to 28.02.12 (Tuesday)
– Seven phases
Goa
03.03.2012 (Saturday)
04.03.2012 (Sunday)
RLD, 10
INC+, 22
BJP+, 51
Others, 16
BSP, 206
Total seats
402
SP, 97
c) Lokpal or not - a significant event in Indian politics
Lokpal Bill is set to be one of the big events in the arena of governance, having far
reaching implications for Indian polity. The just concluded session however, did not see the
passage of Lokpal Bill after a cliffhanger marathon session of the Parliament. If passed,
it holds the promise to significantly check the governance deficit that is seen to have
engulfed India. If an effective Lokpal bills is passed, it holds the promise to unearth a
significant number of corruption cases, the fallout of which may take much time to taper
off. On the other hand, if it is not passed or passed in significantly diluted form, the citizens'
movement led by Anna Hazare, may be rekindled, the political fallout of which too could
be significant.
January 2012
A–26

India Strategy | Get on track please !
Impact #5
Watch out for change in PP - Perception and P/E
The PPP of Policies, Politics and Public action do have limited impact on corporate sector
revenue or profits. However, getting it right meaningfully impacts two other P's - Perception,
and hence, P/Es (read, stock valuations).
All other negatives apart, poor performance on the PPP front is also a key reason for
India's current market valuations ruling below long-period averages.
Sensex 1-year forward P/E at 12.6x is at a 15% discount to 15-year average of 14.8x,
despite FY10-13E EPS CAGR being in line with FY93-13 EPS CAGR of 15%.
Sensex 1-year forward P/B at 2.2x is at a 15% discount to 15-year average of 2.6x.
despite current RoE at 18% being only at 5% discount to 15-year average of 19%.
The first signs of positive change in PPP will reflect in India's market valuations improving
even before trends 1-4 start reflecting in corporate sector earnings.
Sensex P/E at 15% discount to LPA …
27
24.6
22
17
12
7
8.3
10.7
15 Year
Average 14.8x
12.6
24.6
… though Sensex long-term EPS CAGR intact
1500
1200
900
600
300
0
FY93-96:
45% CA GR
FY96-03:
1 CA GR
%
FY03-08:
25% CA GR
FY1993-2013:
15% CAGR
FY1 3:
0-1
1 CA GR
5%
FY08-1
0:
0% CA GR
Sensex P/B at 15% discount to LPA …
4.8
4.2
3.9
3.0
2.1
1.2
1.6
1.7
3.8
15 Year
Average 2.6x
2.2
… whereas Sensex RoE is only at 5% discount to LPA
25
22
19
16
13.9
13
15 Year Average
18.9%
17.9
16.3
24.2
January 2012
A–27

India Strategy | Get on track please !
FY12 earnings muted; mild recovery in FY13
Weak currency, easing monetary cycle are positive triggers for earnings
For full year FY12, we expect MOSL Universe (ex RMs) to report aggregate sales growth
of 22% and PAT growth of 9%. In YTDFY12 (i.e. trailing three quarters), aggregate
sales growth of 22% and PAT growth of 10% is estimated. Thus, the residual growth
required in 4QFY12 is ~9%, which we believe, is achievable.
Likewise, in YTDFY12, Sensex companies clocked sales growth of 23%, EBITDA growth
of 13% and PAT growth of 12%. Residual 4Q PAT growth required is ~15%, which is
expected to be led by SBI, given its washout 4QFY11.
FY12 numbers likely to be achieved
FY11
1Q
MOSL ex RMs
Sales
YoY (%) *
EBITDA
YoY (%) *
EBITDA margin (%)
PAT
YoY (%) *
PAT margin (%)
Sensex Aggregate
Sales
YoY (%) *
EBITDA
YoY (%) *
EBITDA margin (%)
PAT
4,290
-
1,127
-
26.3
623
-
14.5
2,816
-
694
-
24.6
380
4,601
-
1,172
-
25.5
638
-
13.9
3,027
-
742
-
24.5
398
4,873
-
1,262
-
25.9
696
-
14.3
3,185
-
792
-
24.9
428
5,536
-
1,343
-
24.3
738
-
13.3
3,644
-
817
-
22.4
431
5,389
26
1,302
15
24.2
699
12
13.0
3,544
26
802
16
22.6
418
5,574
21
1,313
12
23.5
707
11
12.7
3,708
22
841
13
22.7
464
5,871
20
1,384
10
23.6
743
7
12.6
3,871
22
868
10
22.4
469
6,434
16
1,489
11
23.1
805
9
12.5
4,282
17
910
11
21.2
495
20,300
23
5,212
21
25.7
2,846
19
14.0
13,327
23
3,231
23
24.2
1,711
21
12.8
24,693
22
5,872
13
23.8
3,093
9
12.5
16,399
23
3,654
13
22.3
1,932
13
11.8
27,048
10
6,716
14
24.8
3,606
17
13.3
17,527
7
4,058
11
23.2
2,200
14
12.6
2Q
3Q
4Q
1Q
2Q
FY12
3QE
4QE
FY11
FY12E
FY13E
YoY (%) *
-
-
-
-
10
17
9
15
PAT margin (%)
13.5
13.1
13.5
11.8
11.8
12.5
12.1
11.6
* FY11 YoY growth are not comparable with FY10 due to changes in Sensex constituent companies
Expect FY13 aggregate PAT growth of 17%
Our bottom-up FY13 aggregates for MOSL Universe (ex RMs) suggest sales growth of
10%, EBITDA growth of 14%, and PAT growth of 17%. EBITDA margin is expected to
expand 110bp after having shrunk 190bp in FY12. All sectors are expected to deliver
positive growth, with huge positive growth swings in Healthcare, Telecom, Infrastructure,
Real Estate, NBFCs, Metals and Auto, and a meaningful negative swing in Oil & Gas.
FY11-13E PAT CAGR works out to 13%.
January 2012
A–28

India Strategy | Get on track please !
All sectors expected to clock positive PAT growth in FY13
89
73
FY13 PAT growth distribution: Degrowth in only 6%
of companies
Earnings grow th
9
13
10
16
17
33
17
24
54
57
26
FY07
FY08
FY09
41
31
>30%
23
13
23
24
22
17
FY12E
23
FY13E
15-30%
22
23
30
40
0-15%
<0%
6
31
31
28 26 23
23 19 19 19 18
18 17 17 16 14
11 9
25
1
FY10
FY11
Expect meaningful positive growth swings in many
sectors in FY13
89
73
FY12 PAT grow th (%)
FY13 PAT grow th (%)
26
0
7
28
11
4
Expect healthy FY11-13 PAT CAGR in many sectors
18
19
16
1
-28
-14
-9
-29
Annual performance - MOSL universe
(INR billion)
Sales
EBITDA
Net profit
FY12E FY13E FY12E
FY13 FY11-13 FY12E FY13E FY12E
FY13FY11-13 FY12E FY13E FY12E
FY13 FY11-13
YOY% YOY% CAGR%
YOY% YOY% CAGR%
YOY% YOY% CAGR%
Auto (5)
2,948
Cap. Goods (9) 1,535
Cement (7)
702
Consumer (12) 1,013
Financials (28) 1,854
Private Bks (9) 418
PSU Bks (11) 1,219
NBFC (8)
216
Health Care (17) 692
Infrastructure (7) 424
Media (4)
82
Metals (9)
3,645
3,360
1,669
824
1,177
2,158
503
1,386
269
789
467
92
3,864
26
18
20
20
17
18
17
15
14
6
4
12
31
32
8
24
25
17
14
9
17
16
16
20
14
24
14
10
12
6
-3
-1
22
19
13
15
20
13
18
18
17
19
15
20
14
8
8
9
13
14
14
21
19
16
369
203
155
206
1,461
349
901
211
154
62
30
607
1,427
1,153
88
22
394
371
433
222
189
244
1,702
428
1,011
264
177
72
35
704
1,508
1,215
107
27
428
459
11.5
8.1
25.7
19.0
14.6
15.1
15.7
9.6
13.2
9.9
-0.5
-3.7
11.5
6.8
14.3
23.3
23.5
19.8
17.4
9.3
21.6
18.7
16.5
22.4
12.2
25.1
14.6
15.6
15.3
16.0
5.7
5.4
21.5
21.3
8.6
23.7
14.4
8.7
23.6
18.9
15.6
18.7
13.9
17.1
13.9
12.7
7.1
5.7
8.5
6.1
17.8
22.3
15.8
21.7
196
139
85
137
711
202
371
138
67
11
18
321
733
634
44
10
283
75
233
152
105
163
846
240
430
176
126
13
21
357
755
643
55
12
323
130
4
5
22
17
11
23
8
7
-28
-29
0
-9
12
16
0
24
16
-14
24
10
8
9
11
19
9
23
19
19
19
16
28
89
18
18
11
3
1
26
23
14
73
17
57
16
17
15
11
7
22
18
15
21
12
17
17
-9
9
1
7
9
12
23
15
22
20
32
12
13
13
Oil & Gas (12) 14,297 13,806
Excl. RMs (9) 6,541 6,479
Real Estate (10) 218
265
Retail (4)
246
Technology (7) 1,559
Telecom (4)
1,147
292
1,762
1,316
Utilities (11)
2,008 2,441
22
22
22
580
683
28.0
17.7
22.7
356
418
Others (1)
80
93
36
15
25
16
19
31.5
19.7
25.5
6
10
MOSL (147) 32,449 34,376
24
6
14 6,146 7,009
13.5
14.0
13.8 3,193 3,718
El. RMs (144) 24,693 27,048
22
10
15 5,872 6,716
12.7
14.4
13.5 3,093 3,606
Sensex (30)
8,341 8,859
21
6
13 1,703 1,903
9.7
11.8
10.8
909 1,043
For Banks : Sales = Net Interest Income, EBIDTA = Operating Profits; Sensex numbers are free float adjusted
January 2012
A–29

India Strategy | Get on track please !
Earnings growth healthy despite toning down key assumptions
FY11A
Auto
2 Wheeler Volume Growth (%)
4 Wheeler Volume Growth (%)
Capital Goods
Avg order intake growth (%)
Cement
Volume Growth (%)
Price Change (INR/bag)
Consumer
Value Growth (%)
EBITDA Margins (%)
Financials
Credit Growth (%)
Credit cost (% of assets)
Metals
Steel (USD/ton)
Aluminium (USD/ton)
Copper (USD/ton)
Zinc (USD/ton)
Oil & Gas
Brent Oil Price (USD/bbl)
Singapore GRM (USD/bbl)
Technology
USD Revenue Growth (top-tier) %
USD / INR
Telecom
Market Subscribers (m)
ARPU (INR/month)
RPM (INR
26
23
5.0
4.5
0.0
18.0
20.4
21.4
0.9
811
2,257
7,075
2,186
86.1
5.2
15
0
-8.0
7.3
20.0
19.7
20.3
18.0
0.8
832
2,370
7,706
2,125
111.3
8.4
12
15
10.0
11.9
10.0
16.2
20.8
16.0
0.9
795
2,250
8,000
2,000
100
8.2
FY13 domestic volume growth downgraded from 15% to 12% due
to slowdown in retail demand.
FY12 volume growth cut to flat v/s 5% growth earlier.
FY12 cut due to slowing capex cycle; some rebound expected in FY13
Downgraded our FY12 volume growth assumptions from 8% to
7.3%, but FY13 remains unchanged. Recent months shown recovery.
Upgraded price increase for FY12 from INR15/bag to INR20/bag
No major recent changes in sales growth assumptions
Cut for FY12, FY13 due to higher input cost prices and weak INR
Credit growth cut on back of moderation in economic growth
Credit cost up due to higher stress in corporate loans, higher interest rates
Cut from USD840 given global demand slowdown
Cut from USD2,500
Cut from USD9,000
Cut from USD2,200
Vulnerability of supply dynamics to geopolitical risk (MENA crisis, likely
sanctions on Iran) and 2) decline in OPEC spare capacity.
GRMs to remain USD7-9/bbl as shutdown of ~2.5mbpd capacity would
help in absorbing new capacity coming up in 2012-13.
26
45.5
812
201
0.44
19
48
932
192
0.44
15
48
1,028
204
0.46
2-6% cut in FY13 revenue growth on expected 3-4% budget cuts
Despite revenue cut, earnings upgrade on weaker INR (45 earlier)
Assumptions broadly unchanged in recent times
FY12E
FY13E
Remarks about major recent changes in assumptions
Expect FY13 Sensex EPS growth of 15% with some downside risk
We expect FY13 Sensex EPS of INR1,266, up a healthy 15% over FY12, despite a 15%
downgrade from INR1,492 expected a year ago (i.e. in December 2010). This is because,
over the same time, base FY12 EPS itself has seen an 18% downgrade from INR1,263
expected in December 2010 to currently expected INR1,105.
FY13 EPS up 15% YoY despite 15% downgrade since Dec-2010 …
FY13 EPS (INR)
19
18
18
FY13 EPS Grow th YoY (%)
19
18
18
17
15
… due to 18% downgrade of FY12 EPS as well
FY12 EPS (INR)
20
19
19
18
17
13
12
10
8
1,105
FY12 EPS Grow th YoY (%)
18
1,492 1,471 1,431
1,409 1,397 1,376
1,337 1,331 1,266
1,263 1,252
1,203 1,196 1,186 1,156
1,144 1,131
Dec 10 Mar 11 May 11June 11 Jun 11 Aug 11Sep 11 Nov 11 Dec 11
New
Series
Dec 10 Mar 11May 11June 11Jun 11 Aug 11Sep 11Nov 11Dec 11
New
Series
January 2012
A–30

India Strategy | Get on track please !
Contributors to EPS downgrade
Six companies have contributed to 4% or higher downgrade in both the years FY12
and FY13: SBI (-16%, -23%), Tata Steel (-17%, -12%), BHEL (-4%, -8%), L&T (-
5%, -8%), NTPC (-6%, -8%), and DLF (-5%, -5%).
At the other extreme, only six companies have helped stem the downgrade: Coal India
(+11%, +14%), Tata Motors (+1%, +3%), ITC (+1%, +2%), TCS (+2%, +2%), Bajaj
Auto (+1%, +1%) and Sun Pharma (+2%, +1%).
Breakdown of FY12 Sensex EPS downgrade from INR1,263 in Dec-10 to INR1,105 in Dec-11
(%)
11
2 2
0 0 0 0 0 1 1 1
-1 -1 -1
-3 -3 -2 -2
-4
-6 -6 -6 -5 -5
-9 -8
-13 -12
-17 -16
Breakdown of FY13 Sensex EPS downgrade from INR1,492 in Dec-10 to INR1,266 in Dec-11
(%)
14
3
0 0 0 0 0 0 0 1 1 2 2
-1
-4 -3 -3
-6 -5 -5 -5 -5 -5
-8 -8 -8 -7
-12
-16
-23
Key drivers of Sensex FY13 EPS growth of ~15%
Tata Steel's earnings growth as Indian capacities get commissioned; Bharti's turnaround
in Africa operations and rebound in domestic profitability. These two companies alone
add 200bp to growth.
FMCG majors ITC and Hindustan Unilever are expected to grow 16-18%, providing
a solid base for Sensex EPS growth.
The two Autos will report very strong growth, Maruti 48% and M&M 32%. Maruti is
expected to rebound after a dismal FY12, while M&M's growth is driven by lower
losses at Ssangyong.
HDFC Bank (up 25%) will continue its robust growth, and Hero MotoCorp (17%)
and ICICI Bank (15%) will grow at stable rates.
January 2012
A–31

India Strategy | Get on track please !
IT (mainly TCS) and Pharma (mainly Cipla) will benefit from currency depreciation.
Our earnings assume INR of 48, which leaves more upgrade scope for these companies
at current currency levels.
The four commodities (Reliance, ONGC, Sterlite and Hindalco) will see almost no
growth in earnings due to lower price assumptions. Depreciating currency could provide
some upside to our estimates.
FY10-13 EPS CAGR at 15%, in line with LPA
In effect, FY11-13E EPS CAGR for the Sensex has gone down sharply from 19% to
11%. Interestingly, after a growth holiday of FY08-10, FY10-13E EPS CAGR works out
to 15%, which is in line with Sensex's long period EPS CAGR.
FY11-13 EPS CAGR down to 11%, but FY10-13 EPS CAGR in line with long period average
FY10-13:
15% CAGR
FY1993-2013:
15% CAGR
FY96-03:
1% CAGR
250
266
291
278
280
216
236
272
FY03-08:
25% CAGR
450
523
718
FY08-10:
0% CAGR
833
820
834
1,105
1,024
1,266
FY93-96:
45% CAGR
81
129
181
348
The 3H stress test for FY13 Sensex EPS
Given the current situation of high domestic and global uncertainty, FY13 Sensex EPS
could come under stress from three constituent categories, which we call 3H -
H #1
Heavyweights (i.e. companies with high share of FY13 aggregate Sensex
PAT)
H #2
Huge contributors (i.e. companies accounting for a high share of incremental
FY13 Sensex PAT)
H #3
High growers (i.e. companies expected to deliver high growth in FY13 PAT).
Accordingly, we performed a 3H stress test as under.
H #1 - Heavyweights: 7 companies with FY13 Sensex PAT share of 5% or higher
Going by our current estimates, there are 7 companies with 5% or higher share of aggregate
FY13 Sensex PAT - ONGC, Reliance Inds, Coal India, SBI, TCS, Tata Motors and NTPC.
January 2012
A–32

India Strategy | Get on track please !
H #1: Identifying the Heavyweights
12
10
8
7
6 5
5 4 4
3 3 3 3 3 3
2 2 2 2
2 2 2 1 1
1 1 1 1 1
0
7 Heavyw eights i.e. companies w ith FY13
Sensex PAT share of 5% or higher
H #2 - Huge contributors: 7 companies with FY13 Sensex PAT delta of 5% or
higher
Contribution to FY13 incremental Sensex PAT is well distributed. As in the case of H#1,
here too, only 7 Sensex companies are expected to contribute 5% or higher - Bharti, Coal
India, TCS, SBI, Tata Steel, Tata Motors and HDFC Bank.
H #2: Identifying the Huge contributors
14
Only 7 companies expected to
contribute 5% or higher to FY13
Sensex EPS grow th
7 7 7
5 5
4 4 4 4 3
3 3 3 3
2 2 2
2 2 1 1 1 1
0 0 0 0 0
9
H #3 - High growers: 7 companies with FY13 PAT growth of 20% or higher
Coincidentally, like in H#1 and H#2, exactly 7 Sensex companies are expected to deliver
PAT growth in excess of 20% - Bharti, Tata Steel, Maruti, M&M, Cipla, HDFC Bank and
Jindal Steel & Power.
FY13 Sensex Companies PAT growth (%)
66
51 48
32
Only 7 companies expected to
clock FY13 PAT grow th > 20%
27 25
22 19
18 18 17 16 16 16
15 14 14 14 14 13 13 12
10
7 4
3 1 1 1 0
January 2012
A–33

India Strategy | Get on track please !
The 3H stress test
Combining, H #1, #2 and #3, we have 14 companies. On these 3H companies, we did a
sensitivity analysis of change in Sensex EPS growth for every 10% PAT downgrade in
each of them. ONGC has the highest impact of 140bp on Sensex EPS growth and Maruti
the lowest at 10bp. The cumulative impact of a highly unlikely 10% PAT downgrade in all
the 14 companies is 790bp.
Change in FY13 Sensex EPS growth for every 10% PAT downgrade in 3H companies
140
130
90
80
60
60
50
50
30
30
30
20
10
10
ONGC
RIL
Coal
India
SBI
Tata TCS
Motors
Bharti NTPC HDFC JSPL
Bank
Tata
Steel
M&M Cipla Maruti
Sensex FY13 PAT by geography: Domestic to grow faster than Global
Over 50% of earnings in Sensex comes from Global businesses (including part of
Hybrid). Our estimates are based on USD/INR of 48, which leaves room for upgrade
for this segment. Importantly, a large proportion of Global earnings comes from Cyclical,
leading to higher volatility in estimates.
In our estimates, Global Cyclicals are likely to report decline in 2HFY12 earnings,
and very low growth in FY13. This would mean higher quality of earnings for 2HFY12
and FY13.
Domestic Consumer in our estimates (including Autos) will have stronger growth in
FY13 v/s FY11/12.
Global Non-cylicals (Technology, Healthcare) have very stable growth rates of
16-18%, and are likely to see upgrade driven by weak currency.
Sensex FY13 PAT by geography: Domestic to grow faster than Global
Quarter & Full Year Growth (%)
June
2011
Domestic Plays
12
Domestic Consumer
18
Domestic Non-Consumer 9
Global Plays
Global Cyclical
Global Non-Cyclical
Hybrid
Bharti Airtel
Tata Motors
Sensex (30)
13
13
13
-12
-28
1
10
Sep
2011
17
8
21
22
27
11
-13
-38
6
17
Dec
2011
13
8
15
5
-1
20
14
13
15
9
Mar
2012E
27
11
32
-1
-11
17
28
48
17
15
FY11 FY12E FY13E
8
14
6
31
37
18
44
-33
503
21
17
8
20
10
8
17
5
-4
10
13
15
21
14
9
6
16
33
66
13
14
June
2011
45
13
32
48
33
15
8
3
5
100
Quarter & Full Year Contribution (%)
Sep
2011
42
12
30
51
37
14
7
2
5
100
Dec
2011
47
12
35
44
28
15
9
3
6
100
Mar
2012E
53
12
41
37
22
15
10
4
6
100
FY11 FY12E FY13E
45
12
33
46
33
14
9
4
5
100
47
12
35
45
31
14
8
3
5
100
47
12
35
43
29
14
10
4
5
100
January 2012
A–34

India Strategy | Get on track please !
FY13 Corporate Scoreboard
Top 10 by sales growth (%)
129
1
60
60
60
2
3
Bottom 10 by sales growth (%)
4
5
54
49
48
47
42
39
38
-3
-3
-3
-11
-10
-9
Top 10 by EBITDA growth (%)
119
96
85
82
78
64
61
61
60
57
Bottom 10 by EBITDA growth (%)
1
2
-3
50
-9
-17
-18
-8
-5
-5
-2
-2
Top 10 by net profit growth (%)
179
172
113
92
82
81
Bottom 10 by net profit growth (%)
0
-2
1
1
1
-4
-6
76
76
72
72
66
-18
-26
-12
-6
Source: MOSL
January 2012
A–35

India Strategy | Get on track please !
Valuations and Model Portfolio
Post a dismal performance of 2011, Indian market valuations have slipped to below historical
averages (rolling 12-month forward PE of 12.6x v/s 10-year average of 14.6x) driven by
persistent downgrade in earnings and economic growth, rising interest rates, deteriorating
confidence in implementation of key reforms, global concerns and adverse fund-flows.
We believe that a bulk of the earnings downgrades (15% downgrade in FY13 earnings)
and the entire rate tightening (13 rate hikes aggregating 375bp) is now behind. However,
there is poor visibility of implementation of key reforms. While the monetary cycle is
expected to ease hereon, any meaningful re-rating of the Indian markets will have to be
preceded either by confidence in implementation of key reforms or a turnaround in the
cycle in earnings downgrades. Neither of these two variables seem likely at least in this
quarter. The outcome of UP state elections and the Budget for 2012-13 will be two very
significant events for the markets.
Sensex P/E (x)
27
22
17
12
7
8.3
10.7
1.2
24.6
3.9
3.0
12.6
2.1
1.6
10 Year Avg: 2.7x
1.7
2.2
Sensex P/BV (x)
4.8
4.2
10 Year Avg: 14.6x
Indian Market cap to GDP (%)
103
82
Average of 61%
44
27
27
23
52
83
55
Sensex Earnings yield v/s Bond yield (%)
2.2
94
87
59
1.7
1.2
0.7
0.2
10 Year Avg: 1.05x
0.5
0.9
2.0
1.6
Private Banks
+
Our Model Portfolio has Overweight positions in Private Banks, Technology, Autos, Health
Care and Telecom sectors and Underweight positions in Oil & Gas, Infrastructure &
Related sectors and Consumer sectors.
Private sector banks are well capitalized, continue to report strong credit growth and
reasonable asset quality. We prefer ICICI Bank (very attractive valuations) and HDFC
Bank (very consistent strong growth in a headwinded environment). We expect meaningful
increases in Restructured Assets of PSU banks in 2HFY12 and asset quality will remain
A–36
January 2012

India Strategy | Get on track please !
the key driver to stock performance, going forward. We model credit cost of 90bp for
PSU banks in FY13 v/s FY08-FY11 average of 65bp. Our preference is for PSU banks
with the best liability franchise (SBI, PNB). We also prefer NBFCs which will benefit
from any change in interest rate cycle but have least asset quality concerns or regulatory
overhang.
Private Banks PB (x)
Pvt Banks Sec tor - PB (x)
4.1
2.9
1.7
1.2
0.5
0.5
LPA of 2.6x
2.0
4.2
2.6
1.9
1.2
1.8
0.7
1.3
ICICI Bank PB (x)
3.3
P/B (x)
Avg(x)
2.9
Peak(x )
Min(x)
PSU Banks PB (x)
Public Banks Sec tor - PB (x )
1.9
1.5
1.9
SBI PB (x)
2.6
2.1
1.6
P/B (x)
Avg(x)
2.3
Peak(x )
Min(x )
1.1
0.7
0.8
LPA of 1.2x
0.9
1.1
0.6
1.5
0.8
1.0
NBFC PB (x)
NBFC Sec tor - PB (x )
5.2
4.2
3.2
LPA of 3.0x
2.2
1.2
1.6
2.4
4.5
IDFC PB (x)
5.0
3.8
2.5
1.3
1.0
0.0
2.3
1.0
P/B (x)
Av g(x )
Peak(x )
4.9
Min(x )
Technology
+
Despite relative outperformance of the Technology sector, we are Overweight on the
sector. While volume growth is expected to slow down to 14.5% in FY13 from 17% in
FY12, tailwind of currency depreciation continues to drive upgrades in earnings estimates.
We model FY13 earnings based on INR48/USD and will be reviewing our currency
assumptions once again.
January 2012
A–37

India Strategy | Get on track please !
Technology PE relative to Sensex
Technology PE Relative to Sensex PE (%)
80
50
20
-10
-40
-33
57
34
LPA of 3%
Infosys PE (x)
34
27
20
13
6
10.4
P/E (x)
Avg
29.0
19.1
Peak(x)
Min
17.6
Autos
+
We are Overweight on Autos led by expectation of reversal of rising interest rate cycle,
fall in commodity prices and sharp correction in st