4 January 2008
India Strategy
2007 was the sixth
consecutive year of
positive returns for
Indian equities
We believe that 2008
would be another
eventful year…
…with earnings growth
expected to remain
robust…
…lower inflation and
possible softening of
interest rates
India will achieve the
landmark of US$1 trillion
GDP in 2008…
…and add another
US$1 trillion in the
next 5-6 years
Get ready for the next
trillion dollar
opportunity!!!
R
ESULTS
P
REVIEW
Quarter ended December 2007
Welcome 2008!
Research Team (Rajat@MotilalOswal.com)
Prices as of Friday, 28 December 2007

Results Preview
Contents
India Strategy
1. Automobiles
Amtek Auto
Ashok Leyland
Bajaj Auto
Bharat Forge
Eicher Motors
Hero Honda
Mahindra & Mahindra
Maruti Suzuki India
Swaraj Mazda
Tata Motors
TVS Motor
3-50
51-72
62
63
64
65
66
67
68
69
70
71
72
5. FMCG
Asian Paints
Britannia Industries
Colgate Palmolive
Dabur India
GSK Consumer
Godrej Consumer Products
Hindustan Unilever
ITC
Marico
Nestle India
Tata Tea
United Spirits
HCL Technologies
Infosys
MphasiS
Patni Computer
Sasken Communication
Satyam Computer
TCS
Tech Mahindra
Wipro
128-145
134
135
136
137
138
139
140
141
142
143
144
145
150
151
152
153
154
155
156
157
158
11. Pharmaceuticals
Aurobindo Pharma
Aventis Pharma
Biocon
Cadila Healthcare
Cipla
Dishman Pharma
Divi’ Laboratories
s
Dr Reddy’ Labs.
s
GSK Pharma
Jubilant Organosys
Lupin
Nicholas Piramal
Pfizer
Ranbaxy Labs.
Shasun Chemicals
Sun Pharmaceuticals
Wockhardt
211-235
219
220
221
222
223
224
225
226
227
228
229
230
231
232
233
234
235
6. Information Technology146-158
2. Banking
Andhra Bank
Axis Bank
Bank of Baroda
Bank of India
Canara Bank
Corporation Bank
Federal Bank
HDFC
HDFC Bank
ICICI Bank
Indian Bank
Indian Overseas Bank
J&K Bank
Karnataka Bank
Oriental Bank
Punjab National Bank
State Bank
Syndicate Bank
Union Bank
Vijaya Bank
73-99
80
81
82
83
84
85
86
87
88
89
90
91
92
93
94
95
96
97
98
99
12. Real Estate
DLF
Unitech
236-238
237
238
12. Retailing
Pantaloon Retail
Shopper's Stop
Titan Industries
239-245
243
244
245
7. Infrastructure
BL Kashyap
Gammon India
GMR Infrastructure
Hindustan Construction
IVRCL
Jaiprakash Associates
Nagarjuna Construction
Patel Engineering
159-171
164
165
166
167
168
169
170
171
13. Telecom
Bharti Airtel
Idea Cellular
Reliance Communication
246-253
251
252
253
14. Textiles
Alok Industries
Arvind Mills
Gokaldas Exports
Himatsingka Seide
Raymond
Vardhman Textiles
Welspun India
254-265
259
260
261
262
263
264
265
8. Media
Zee Entertainment
172-173
173
9. Metals
Hindalco
Hindustan Zinc
Jindal Steel
JSW Steel
Nalco
Sterlite Industries
SAIL
Tata Steel
174-188
181
182
183
184
185
186
187
188
3. Cement
ACC
Ambuja Cement
Birla Corporation
Grasim Industries
India Cements
Shree Cement
UltraTech Cement
100-113
107
108
109
110
111
112
113
15. Utilities
CESC
NTPC
Neyveli Lignite
PTC India
Reliance Energy
Tata Power
266-275
270
271
272
273
274
275
4. Engineering
ABB
Alstom Projects
Bharat Electronics
BHEL
Crompton Greaves
Cummins India
Larsen & Toubro
Siemens
Suzlon Energy
Thermax
28 December 2007
114-127
118
119
120
121
122
123
124
125
126
127
10. Oil & Gas
BPCL
Cairn India
Chennai Petroleum
GAIL
HPCL
IOC
Indraprastha Gas
MRPL
ONGC
Reliance Industries
189-210
201
202
203
204
205
206
207
208
209
210
16. Others
Ashapura Minechem
Blue Star
Bombay Rayon
Concor
Everest Kanto Cylinders
Great Offshore
Greaves Cotton
United Phosphorus
276-283
276
277
278
279
280
281
282
283
2

Results Preview
QUARTER ENDED DECEMBER 2007
India Strategy
BSE Sensex: 20,207
S&P CNX: 6,080
28 December 2007
2007 has been an eventful year:
Sensex at an all-time high, continued earnings
momentum, new norms on p-notes by SEBI, record foreign flows, large-size IPOs, etc
made 2007 an eventful year for Indian equities. The Sensex rose 47% during the year
to close at its highest ever annual closing of 20,287, following similar gains in 2006
(47%) and 2005 (42%). On the macro-economics front, the two highlights of 2007
were: significant rupee appreciation, and continuous RBI intervention to control inflation.
2008 – another eventful year ahead:
We believe that 2008 would be another eventful
year. While we expect robust earnings growth to continue, liquidity would be a key
factor driving markets. A possible rate cut would not only boost liquidity but also market
sentiment. The forthcoming Budget and elections would be key events to watch for.
We expect policy measures hereon to take populist hues.
India – the next trillion dollar opportunity:
In FY08, India will achieve the landmark
of US$1 trillion GDP. The first 25 years of the journey saw India’s nominal GDP growing
at 6.4% per annum to just under US$0.5 trillion in 2002. In the last 6 years, India’s GDP
more than doubled to US$1 trillion at a CAGR of 15.9%. In the next five years, we
expect India’s GDP at US$2 trillion (assuming current Re/US$ parity).
Forecasting strong earnings growth in FY09 & FY10:
We expect Sensex EPS to
grow 23% in FY08 after 27% CAGR during FY03-07. In FY09, we estimate 21%
growth in Sensex EPS to Rs1,064. We are now introducing our Sensex EPS estimate of
Rs1,373 for FY10 - a growth of 29%. Significant growth drivers in FY10 would be the
commissioning of Reliance Petroleum and E&P of Reliance Industries.
Sensex target of 21,000-25,000:
With strong earnings growth ahead and positive
outlook on interest rates, we believe that valuations will remain rich for Indian equities.
We base our Sensex target range on a P/E band of 14-17x FY10E EPS of Rs1,373. We
also add an embedded value of 1,800 points. Our Sensex target range is now 21,000-
25,000, which implies an upside range of 4-24% based on FY10 estimates.
Our top picks:
Our top large cap bets are HDFC, Bharti, Tata Steel, GAIL, ITC,
Bajaj Auto, JSPL, Ranbaxy, and Grasim. Amongst the mid caps, we prefer Sintex,
Mahindra Lifespaces, Bombay Rayon, Indian Bank, United Phosphorus, Amtek Auto,
Birla Corp and Dish TV. Our top contrarian bets for 2008 are TCS, M&M and ICICI
Bank.
Navin Agarwal (Navin@MotilalOswal.com)/Rajat Rajgarhia (Rajat@MotilalOswal.com)
28 December 2007
3

India Strategy
2007 has been an eventful year
Sensex at an all-time high, continued earnings momentum, new norms on p-notes by SEBI,
record foreign flows, large-size IPOs, etc made 2007 an eventful year for Indian equities.
2007 has been the sixth consecutive year of positive returns for the Indian capital markets.
The Sensex rose 47% during the year to close at its highest ever annual closing of 20,287,
following similar gains in 2006 (47%) and 2005 (42%).
The sharp appreciation was a result of continued momentum in corporate earnings growth
(Sensex EPS to grow 22.9% in FY08) and sustained investor confidence in Indian equities.
Primary market offerings (IPOs) during the year totaled about Rs445b – the highest ever
and 1.5x the total primary offerings of Rs296b in 2006. FIIs continued to be net buyers of
Indian equities for the 9th year in a row, investing US$17.4b – the highest ever and 2x the
FII inflows of US$8b in 2006. Domestic mutual funds, however, made a net investment of
US$1.6b in 2007, lower than US$3.4b in 2006.
On the macro-economics front, the two highlights of 2007 were: significant rupee
appreciation, and continuous RBI intervention to control inflation.
Sensex closed above 20,000
2007 was the 6
th
consecutive year of positive returns for Indian equities, with the BSE
Sensex appreciating 47% to close at its highest ever annual closing of 20,287.
YEARLY RETURNS ON BSE SENSEX
2007 was the sixth
consecutive year of positive
returns for Indian equities
Indian Market Annual Return (%) - LHS
105
CAGR of 20.2%
70
Trend in Sensex - RHS
22,000
6th consecutive year
of positive return
16,500
35
0
-35
11,000
5,500
0
Source: Motilal Oswal Securities
28 December 2007
4

India Strategy
India emerged as one of the best performing markets globally in 2007. The second half of
the year saw significant outperformance by Indian equities over the rest of the world. As
the earnings growth continued to remain strong and interest rate risks reduced, Indian
equities witnessed significant upmove. In 4QCY07, Indian markets were amongst the
very few to deliver positive returns.
PERFORMANCE OF MAJOR MARKETS — CY07 (%)
China
India - Nifty
India - Sensex
Brazil
South Korea
Thailand
Russia
MSCI - Asia
Taiwan
US
UK
S&P 500
Japan
-11.1
10.3
8.7
6.4
3.8
3.5
19.2
26.2
32.3
47.1
43.6
55.9
54.8
PERFORMANCE OF MAJOR MARKETS — 4QCY07 (%)
India - Nifty
India - Sensex
Russia
Brazil
Thailand
1.5
-0.2
-2.5
-3.1
-3.8
-4.5
-5.2
-8.8
5.7
10.6
17.3
22.2
In 4QCY07, Indian
markets were amongst
the very few to deliver
positive returns
UK
South Korea
MSCI - Asia
S&P 500
US
China
Japan
Taiwan-10.2
Source: Bloomberg/Motilal Oswal Securities
28 December 2007
5

India Strategy
CY07 PERFORMANCE OF INDIVIDUAL SENSEX STOCKS
COMPANY NAME
SECTOR
PRICE 29/12/2006
PRICE 31/12/2007
YTD CHG (%)
Reliance Energy
Utilities
Larsen & Toubro
Engineering
Reliance Inds.
Oil & Gas
BHEL
Engineering
Tata Steel
Metals
St Bk of India
Banking
DLF
Real Estate
NTPC
Utilities
HDFC
Banking
HDFC Bank
Banking
Reliance Comm
Telecom
Bharti Airtel
Telecom
BSE Sensex
Index
ONGC
Oil & Gas
ICICI Bank
Banking
Grasim Industries
Cement
Hindalco Industries
Metals
ITC
FMCG
Ranbaxy Labarotary.
Pharma
Maruti Suzuki
Auto
Ambuja Cement
Cement
Bajaj Auto
Auto
Hindustan Unilever
FMCG
M&M
Auto
ACC
Cement
Satyam Computer
IT
TCS
IT
Wipro
IT
Cipla
Pharma
Tata Motors
Auto
Infosys Technologies
IT
Note: DLF price is from the listing day
520
1,443
1,270
1,149
426
1,246
570
136
1,625
1,070
471
629
13,787
870
890
2,789
174
176
392
927
141
2,619
217
906
1,086
484
1,219
605
251
900
2,241
2,135
4,172
2,881
2,584
935
2,371
1,074
250
2,872
1,728
747
995
20,287
1,237
1,232
3,652
215
210
426
990
147
2,613
214
861
1,025
449
1,083
526
213
742
1,768
Source: Motilal Oswal
310.7
189.1
126.8
124.9
119.3
90.3
88.4
83.3
76.8
61.5
58.4
58.2
47.1
42.1
38.4
30.9
23.4
19.5
8.7
6.8
4.0
-0.2
-1.2
-5.0
-5.6
-7.2
-11.1
-13.1
-15.2
-17.6
-21.1
Securities
Sensex: highlights for the quarter ended December 2007
?
Highest absolute rise in any quarter – 2,996 points (or 17%)
?
Highest ever single-day absolute rise – 894 points on 14 November 2007
?
All the benchmark indices hit the lower circuit on 17 October 2007, post the SEBI
proposals on P-notes
?
The fastest 1,000-point rise from 18,000-19,000 in five trading sessions; another 1,000-
point rise (19,000 to 20,000) in eleven trading sessions
Market capitalization has increased to US$1,823b from US$549b in 2005 and US$281b in
2003. The number of >US$1b market cap companies have increased to 236 in 2007 from
127 in 2006, 93 in 2005 and 68 in 2004. Several emerging sectors such as wireless, media,
real estate, and infrastructure have provided significant investment opportunities. Going
forward, we expect such investment opportunities to expand, which will drive newer investors
into India.
28 December 2007
6

India Strategy
NUMBER OF COMPANIES WITH MARKET CAP OVER US$1B
255
236
195
127
93
75
27
15
2002
2003
2004
2005
2006
2007
68
53
135
Source: Motilal Oswal Securities
The key factors driving this unprecedented performance are: (1) Continued earnings
momentum (FY08E EPS revised to Rs883 from Rs822 in March 2007; FY09E EPS revised
11.4% to Rs1,064 from Rs955 in March 2007); (2) significant inflows from FIIs; and (3)
strong participation from investors in primary market (indicated by robust subscription to
initial public offerings).
Strong inflows have kept markets buoyant
Indian capital markets have been attracting strong inflows from both foreign and local
investors (collective investment of US$19b by FIIs and domestic mutual funds in 2007
v/s US$11.4b in 2006). In 2007, net FII investment in Indian equities was US$17.4b as
against US$8b in 2006 and US$10.8b in 2005. Domestic mutual funds have invested
US$1.6b in 2007 against US$3.4b in 2006. Insurance companies have emerged as yet
another large investor group – their net investments in equities in 2007 is multiple times of
the domestic mutual funds and will continue to grow at a significant pace going forward.
MUTUAL FUND NET INVESTMENT (US$B)
Strong inflows kept
markets buoyant
FII NET INVESTMENT (US$B)
20.0
17.4
3.6
3.0
2.4
3.4
15.0
10.8
10.0
6.7
5.0
2.7
0.8
0.0
8.5
8.0
1.6
1.2
-1.1
-0.6
0.1
-0.3
-1.2
0.0
Source: SEBI/Motilal Oswal Securities
28 December 2007
7

India Strategy
The response to record
new equity offerings was
overwhelming
Highest new equity offerings in 2007; overwhelming response
The Indian market witnessed new equity offerings of around Rs445b in 2007, the highest
ever since 2001 and 1.5x the new equity offerings of Rs296b in 2006. The total number of
companies that made new offerings was 106 and the total bids submitted by various classes
of investors amounted to Rs13,107b v/s equity offerings of Rs445b, an average
oversubscription of 29.5x. The largest primary offering by a debutant was Rs92b by DLF.
ICICI Bank raised Rs101b to top the chart of largest public offerings.
DOMESTIC PUBLIC ISSUE SUBSCRIPTION
TOP 10 ISSUES BY SIZE
ISSUE SIZE
(RS B)
TOTAL SUBSCRIPTION
(RS B)
NO. OF TIMES
OVERSUBSCRIBED
ICICI Bank Ltd
DLF Ltd
Power Grid Corporation of India Ltd
Idea Cellular Ltd
Mundra Port & Special Economic Zone Ltd
Housing Development & Infrastructure Ltd
Power Finance Corporation Ltd
Puravankara Projects Ltd
Central Bank of India
Indian Bank
Total of above
Grand total (106 companies) - CY07
Grand total (92 companies) - CY06
101
92
30
21
18
15
10
9
8
8
311
445
296
976
9.7
303
3.3
1,925
64.5
1,053
49.6
2,042
115.3
83
5.6
769
77.2
16
1.9
502
61.5
251
32.1
7,921
25.5
13,107
29.5
8,214
27.7
Source: Motilal Oswal Securities
Though SEBI guidelines on
p-notes had resulted in a
negative market reaction
initially…
SEBI ushered in some new guidelines
The Securities and Exchange Board of India (SEBI) ushered in guidelines regarding
promissory notes (p-notes), has now allowed short-selling by FIIs and recently published
guidelines on insider trading. The guidelines on p-notes shook market confidence for a
while but normalcy was restored after further clarifications on the issue.
Guidelines on p-notes:
SEBI announced guidelines relating to p-notes on 16 October
2007 and the market reacted negatively. The Sensex lost 1,400 points over the next four
trading sessions. Clarifications on certain issues relating to the guidelines, however, restored
normalcy. Key features of the guidelines were:
…subsequent clarifications
restored normalcy
?
?
?
?
?
No more issuing of p-notes by sub-accounts.
No more issuing of derivative-based p-notes.
Existing positions with above conditions should be squared off in the next 18 months.
No fresh p-notes to be issued by any FII having more than 40% of its investments in
p-notes.
If derivative-based p-note positions are less than 40% of total investments, then fresh
p-note based investments to be made only at an incremental rate of 5%.
28 December 2007
8

India Strategy
FII AND MARKET VOLUMES AFTER P-NOTES
1,600
1,350
1,100
850
600
Total Mkt Vol (Rs B) - LHS
FII (Cash & F&O Vol (Rs B) - RHS
550
425
300
175
50
Source: Motilal Oswal Securities
The unprecedented rupee
appreciation has not had a
material impact on overall
corporate growth
Rupee appreciated 11% v/s the dollar
The Indian rupee appreciated 11% v/s the US dollar in 2007 to close at a 9-year high of
Rs39.42/US$. Strong capital flows in the system and higher interest rates in the domestic
market have led to an unprecedented rally in the Indian rupee. Moreover, as the RBI’s key
concern during the year was to fight inflation, it allowed the rupee to appreciate to make
imports cheaper. While strong rupee appreciation has had a significant impact on the
earnings of export-oriented sectors such as technology, textiles, global commodities, it did
not have a material impact on the overall growth of the corporate sector.
RUPEE V/S DOLLAR RATE (RS/US$)
(8.4)
50
47
44
41
38
(2.5)
(7.2)
(3.4)
0.6
4.9
4.7
(3.7)
1.8
11.0
Annual appreciation/(depreciation)
Source: Bloomberg/Motilal Oswal Securities
Through 2007, RBI was
preoccupied with
inflation control
RBI raised CRR by 225bp in 2007
In the beginning of 2007, as the inflation numbers rose significantly above 6%, the RBI
acted swiftly to raise CRR and benchmark interest rates. The central bank maintained its
stance of tightening money supply throughout the year and raised CRR by 225bp in various
tranches. It also raised the benchmark interest rates by 50bp. As a result, banks had to
9
28 December 2007

India Strategy
increase their lending and deposit rates. Overall, the system saw an increase of 150-200bp
in lending rates over an 100-150bp increase in the previous year, which impacted the retail
asset finance business.
TREND IN INFLATION (%)
TREND IN CRR RATE HIKE (%)
9.0
7.0
8.7
6.7
6.6
7.90
7.05
6.20
6.00
5.25
4.75
4.50
Sep
04
Oct
04
Dec
06
Jan
07
Feb
07
5.00
5.50
5.75
6.25
7.00
6.50
7.50
5.0
3.0
1.0
3.3
3.5
5.35
Mar Apr Apr Aug Nov
07
07
07
07
07
14 Apr 28 Apr
Source: RBI/Motilal Oswal Securities
12-MONTH COMMERCIAL PAPER RATES (%)
11.5
10.0
8.5
11.1
9.4
7.6
7.0
6.6
5.5
7.1
Source: Bloomberg/Motilal Oswal Securities
ICICI HIKES PLR BY 300BP IN FY07 (%)
16.0
14.5
13.0
11.5
10.0
Source: Motilal Oswal Securities
28 December 2007
10

India Strategy
2008 – another eventful year ahead
We believe that 2008 would be another eventful year as 2007. While we expect robust
earnings growth to continue, liquidity would be a key factor driving markets. With inflation
under control, credit growth slowing down, and a stable currency, the RBI could cut interest
rates. A rate cut would not only boost liquidity but also market sentiment. The forthcoming
Budget and elections would be key events to watch for. We expect policy measures
hereon to take populist hues. As India is largely a domestic growth story, we do not expect
any significant impact on corporate earnings from a US slowdown.
Robust earnings growth to keep the momentum going
Earnings growth for the Indian corporate sector is likely to remain strong. We expect a
robust 22.9% growth in Sensex EPS in FY08 to Rs883 and 20.5% growth in FY09 to
Rs1,064. The fundamental factors underpinning India’s growth story remain intact: (1)
continued strong growth and positive surprises in corporate earnings; (2) multiple growth
engines of consumption, investment and outsourcing driving consistent surprises in economic
growth; and (3) reduction in macro-level risks of inflation and interest rates.
QUAR TERLY SENSEX PAT GROWTH (%)
We expect earnings growth
to remain robust for the
next two years
QUARTERLY SENSEX SALES GROWTH (%)
38.0
32.8
31.0
24.0 21.7
17.0
10.0
21.1
14.6
30.2
31.9
48.0 42.1
36.0
21.8
15.5 14.5 16.0
43.4
32.8
24.1
30.8 29.9
33.1
27.4
22.9
11.3
14.4
5.8
24.0
12.0
0.0
19.1 18.5
Source: Motilal Oswal Securities
Buoyant corporate earnings growth coupled with the lower interest rate risk and inflation
will continue to provide further momentum to Indian equities. We expect 2008 to be eventful
as well, with strong pipeline of large public offerings (Reliance Power, L&T Infotech,
NHPC, etc), value unlocking initiatives by various companies, likely earnings upgrades,
etc.
Liquidity to be a key factor driving markets
During the next couple of quarters, liquidity will be an important factor to watch for. While
global markets are seeing significant correction, Indian markets are still making new highs,
driven by strong domestic liquidity. Indian companies have lined up huge capital raising
28 December 2007
11

India Strategy
plans. Liquidity has to be supportive to ensure subscription to these primary issues and
also create positive demand in secondary markets. Foreign flows have been subdued post
the new SEBI norms; strong domestic liquidity has been driving markets. We expect
foreign flows to increase, as more hedge funds get registration.
Domestic liquidity is likely
to remain strong
through 2008…
The key driver of domestic liquidity has been strong government finances, which has
resulted in less crowding out of money from the system. Given the strong returns generated
by equities, more conservative institutions have also begun investing in equities. The
government has proposed to make relaxations to channelize some part of the corpus of
postal deposits, money managed by trusts, etc into stock markets. Overall, we expect
significant growth in liquidity. However, there is a risk of bunching of large primary issues,
which could either result in lukewarm response to a few issues or selling in the secondary
market to invest in the primary market.
TREND IN FOREX RESERVES (US$B)
300
225
150
75
3
0
2
6
6
15
21
17
22
26
32
38
42
54
75
141
110
152
199
273
Source:Bloomberg/Motilal Oswal Securities
…and RBI could consider
reducing rates or CRR
in 2HCY08
Interest rates could soften
Another important macro-economic indicator to watch in 2008 would be domestic interest
rates. With inflation under control, credit growth slowing down, and a stable currency, the
RBI could reverse some of the measures it took in 2007. We believe that if inflation were
to remain below 5% and M3 growth remains at ~20%, RBI could consider reducing rates
or CRR in 2HCY08. Moreover, as global central banks reduce rates, the spread between
Indian and global benchmark rates will further widen.
SPREAD OF 10 YEAR G-SEC YIELD – INDIA AND US
16.0
12.0
14.0
10-Year India G-Sec Yield (%)
10 Year US G-Sec Yield (%)
Diff of 840bp
8.0
7.8
Diff of 380bp
4.0
0.0
5.6
4.0
Source:Bloomberg/Motilal Oswal Securities
28 December 2007
12

India Strategy
US BOND YIELDS V/S INDIAN BOND YIELDS YTD (%)
10-Year India G-Sec Yield (%) - LHS
8.5
8.2
7.3
6.0
4.7
4.8
4.6
3.5
5.0
8.2
Diff of 320bp
10 Year US G-Sec Yield (%) - RHS
7.8
7.9
Diff of 380bp
4.0
Source: Bloomberg/Motilal Oswal Securities
INFLATION V/S REAL INTEREST RATE (%)
Inflation (%)
12.0
8.0
4.0
0.0
-4.0
Real Interest Rate (%)
Source: Bloomberg/Motilal Oswal Securities
28 December 2007
13

India Strategy
Primary market offerings are
likely to remain buoyant
in 2008
Primary market to hog the limelight
Primary market offerings are likely to remain buoyant in 2008, with issues like Reliance
Power, L&T Infotech, National Hydro Power Corporation, SBI, etc lined up. The Reliance
Power IPO itself is likely to raise US$3b. With markets trading at all-time highs and
significant expansion plans by Indian corporates, we expect more capital raising plans to
be announced. Indian companies raised significantly higher capital in 2007 than in 2006.
We believe that 2008 would see even higher capital raising than 2007.
Budget, elections – key events to watch
The key catalyst for Indian markets in the next couple of months could be the Union
Budget, to be presented in February-end. As the central elections are just 14 months away
and this Budget would be effectively the last one before the elections, we expect the
government to announce measures to boost consumer confidence and rural sentiment.
The verdict of the recent
state elections has gone
against the ruling
Congress coalition
The verdict of the recent state elections has gone against the ruling Congress coalition.
Also, prior to the central elections in early 2009, there would be several important states
going for elections in 2008. We expect the policy direction from the Budget onwards to tilt
more towards populist measures.
INDIA: ELECTION SCHEDULE
OFFICE/STATE
MONTH YEAR
LOKSABHA SEAT
ASSEMBLY SEAT
Karnataka *
Feb/Mar-08
Meghalaya
Mar-08
Nagaland
Mar-08
Tripura
Mar-08
Jammu & Kashmir
Nov-08
Madhya Pradesh
Dec-08
Mizoram
Dec-08
Nct Delhi
Dec-08
Chhatisgarh
Dec-08
Rajasthan
Jan-09
Sikkim
May-09
Andhra Pradesh
May-09
Central Elections
May-09
* for Karnataka, the month is tentative
28
2
1
2
6
29
1
7
11
25
1
42
543
224
60
60
60
87
230
40
70
90
200
32
294
Source: Election Commission
We expect policy decisions
hereon to take populist hues
We expect the government to announce a populist Budget, and as tax collection has been
growing at ~20% CAGR for the last couple of years, a decline in tax rates is also a
possibility. Any reduction in individual and corporate tax rates will be viewed very positively
by the markets.
In FY08 YTD, direct tax collections have been strong at 42% YoY, with corporate tax
collections higher by 40% YoY. The government has already collected almost 77% of its
annual estimates v/s 63% in the corresponding period last year.
28 December 2007
14

India Strategy
IMPRESSIVE TAX COLLECTION (RS B)
APRIL-DECEMBER
FY08
FY07
% RISE
BUDGETED
FY08
ACHIEVED
%
BUDGETED
FY07
ACHIEVED
%
Direct Tax
Corporate Tax
Income Tax
2,050
1,277
774
1,440
913
516
42.4
39.8
50.1
2,672
1,684
988
76.7
2,290
62.9
75.8
1,465
62.3
78.3
825
62.5
Source: Motilal Oswal Securities
US slowdown – impact on India to be limited
Possible slowdown in the US and its consequent impact on global markets has been a
concern for the last few months. We believe that India is more a domestic growth story,
driven by rising consumption and an unprecedented step up in spending on infrastructure
and capex. Sectors such as Banking, Real Estate, Construction and Engineering are pure
plays on India’s domestic economy. The only impact of a US slowdown in terms of corporate
earnings would be for IT, driven by relatively lower spending by global IT companies.
India would not be
totally insulated from
a US slowdown…
The contribution of the IT sector to the overall GDP is just 5.4% while it contributes 11.2%
of the FY08E Sensex EPS of Rs883, 11.7% of the FY09E Sensex EPS of Rs1,064, and
10.5% of the FY10E Sensex EPS of Rs1,373.
SECTOR-WISE CONTRIBUTION TO OVERALL SENSEX PROFIT (%)
SECTOR
FY02
FY07
FY08E
FY09E
FY10E
MKT CAP
CONTRIBUTION (%)
Automobiles
Banking
Cement
Engineering
FMCG
Global Cyclicals
IT
Others
Pharma
Real Estate
Telecom
Utilities
Total
4.1
17.9
3.6
4.2
14.8
32.9
8.3
1.5
5.2
-
6.3
1.4
100.0
6.0
12.6
4.5
4.4
4.4
37.9
12.5
-
2.2
-
7.7
7.8
100.0
5.2
11.3
4.2
4.3
3.7
37.9
11.2
-
1.0
6.1
9.0
6.2
100.0
5.2
11.8
3.8
4.8
3.6
36.8
11.7
-
1.0
5.4
10.3
5.7
100.0
4.7
3.7
11.5
14.3
2.9
2.6
5.0
8.6
3.3
4.4
41.1
27.7
10.5
11.1
-
-
0.9
1.1
4.7
6.4
10.6
11.5
4.8
8.7
100.0
100.0
Source: Motilal Oswal Securities
…but the impact would
be limited
The slowdown in US could, however, impact global interest rates, liquidity, and commodity
prices. The impact of some of these global macro-economic variables will be visible in the
near-term on Indian equities.
28 December 2007
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India Strategy
India – the next trillion dollar opportunity
From the “Hindu rate of growth” of 3.5% till 1980, India’s real GDP growth accelerated
to 6% following the reforms during early 1990s. Since FY03, the GDP growth has averaged
8.5% per annum; and during FY07 the momentum increased to 9.4%. Faster growth has
resulted in India becoming the world’s 12th largest economy in FY07, with GDP of US$911b;
or the third largest (after the US and China) in purchasing power parity terms.
India’ first trillion dollars: 1977 to 2008
s
In FY08, India will achieve the landmark of US$1 trillion GDP. The first 25 years of the
journey saw India’s nominal GDP growing at 6.4% per annum to just under US$0.5 trillion
in 2002. In the last 6 years, India’s GDP more than doubled to US$1 trillion at a CAGR of
15.9%. Higher GDP growth rate combined with lower population growth rate has led to
accelerated growth in per capita GDP.
The next trillion dollar (NTD) era: 2008 to 2013
In the next five years, we expect India’s GDP at US$2 trillion. The growth rate in the
NTD era will be almost the same as that of the last 6 years. However, given the high base,
the GDP added in the next 5 years will be more than what got added in the last 30 years,
and twice that of the last 6 years.
30 YEARS FOR THE FIRST US$1 TRILLION; 6 YEARS TO THE NEXT TRILLION
In FY08, India will achieve
the landmark of US$1
trillion GDP…
…and in the next five years,
we expect India’ GDP at
s
US$2 trillion
2,500
Second US$ Trillion
2,000
CAGR of 13% in 5 years
1,500
First US$ Trillion
CAGR of 15.9% in 6 years
CAGR of 6.4% for 25
1,000
500
0
Source: Motilal Oswal Securities
28 December 2007
16

India Strategy
ACCELERATED GROWTH IN PER CAPITA GDP (US$)
2,000
Per Capita GDP expected to grow to US$
1,750 in 2013 from US$ 812 in 2007
1,550
CAGR of
13.7%
1,100
Acceleration in Per Capita
GDP from 2003
CAGR of
11.9%
650
CAGR of 2.2%
200
Source: Motilal Oswal Securities
India bounces back to world reckoning
India’s resurgence in the global economy started in 1993. It has been going from strength
to strength ever since, including the dotcom era. The pace of growth has only accentuated
from 2004, with India rapidly integrating with the global financial markets.
INDIA’S SHARE OF WORLD GDP – MARKET PRICES
2.0
1.8
1.6
1.4
1.2
1.0
1.9% of World GDP of US$11
1.8% of World GDP of US$48 Trillion
1.1% of World GDP of US$25
Source: IMF / Motilal Oswal Securities
India is now one of the
world’ fastest growing
s
trillion dollar plus
economies
Today, India is among the world’s fastest growing trillion dollar plus economies. Its share
of world market capitalization at 2% mirrors its share of world GDP. India continues to
grow much faster than the developed world. As a large, well-populated economy, India
can strive to significantly improve its global standing along the lines of China, which has
rapidly increased its share of world GDP to the current 5.5%.
28 December 2007
17

India Strategy
CHINA’S SHARE OF WORLD GDP – MARKET PRICES
6.0
4.8
3.5
2.3
1.0
Source: IMF/Motilal Oswal Securities
Steady GDP growth would
lead to exponential growth
in various businesses
Exponentiality in the NTD era
A steady GDP growth rate of 16% between 2002 and 2007 has led to exponential growth
in various businesses in India. We believe the next five years will accentuate this
exponentiality, which will also spread to several more sectors of the economy.
We have analyzed major exponentialities/discontinuities in the following three areas:
1. Macro economy
2. Key industries
3. Corporate sector profits
Macro economic exponentialities
We have analyzed the components of India’s GDP: C + I + G + X, i.e. private
Consumption
expenditure, private
Investment, Government
expenditure, and net eXports (or eXternal
sector).
BREAKDOWN OF INDIA’S GDP BY COMPONENTS
Consumption (%)
GDP
(US$ B)
101
0.5
6.7
18.8
190
8.4
19.0
246
8.2
22.6
Govt. (%)
268
12.3
20.4
Pvt Invt. (%)
386
16.6
18.3
480
16.2
19.5
Net Exports (%)
1,006
27.7
18.7
2,003
23.8
22.6
73.9
75.1
71.0
67.3
66.2
-1.2
65.2
-0.9
2002
56.4
56.4
1977
-2.5
1982
-1.8
1987
1992
1997
-2.8
2007
-2.8
2012
Source: CSO / Motilal Oswal Securities
28 December 2007
18

India Strategy
We see the following macroeconomic exponentialities in the NTD era:
?
Consumption (C):
Rising affluence levels will result in sustained growth for luxuries
like cars, ACs and travel
?
Government expenditure (G):
Quantum improvement in government finances; with
zero revenue deficit for the Centre government for the first time ever
?
Private capex (I):
Mega thrust on infrastructure – accentuating India’s capex-led
growth story
?
External sector (X):
Forex capital flows consistently higher than current account
deficit – helping to keep interest rates benign
Consumption: sustained demand for luxury goods
Like most emerging economies, India’s private final consumption expenditure is lagging
GDP growth. The main reason is that given India’s low per capita GDP of US$1,000,
much of private consumption goes into necessities – food, clothing and home utilities (rent,
fuel, power) – which do not rise in the same proportion as income levels. Also, middle
income households tend to curtail current consumption in favor of saving for assets such
as house, jewelry, etc.
PRIVATE FINAL CONSUMPTION EXPENDITURE LAGGING GDP GROWTH … LIKELY TO STABILIZE
We foresee sustained demand
for luxury goods…
Private Final Consumption Exp. (Rs b)
64.1
62.8
61.8
59.7
PFCE (% to GDP)
57.9
56.9
56.8
56.8
56.7
56.6
39,774
56.4
45,144
14,632
15,439
17,094
18,656
20,646
23,273
27,023
30,780
34,980
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
Source: Motilal Oswal Securities
Rising affluence to drive demand for comforts and luxuries:
The top 40% of India’s
population accounts for about 70% of income, and 67% of consumption expenditure. In
this segment, the propensity to consume is much lower than the bottom 60%, which also
explains the fall in final consumption expenditure.
INCOME AND CONSUMPTION DISTRIBUTION (2003-04)
% OF POPULATION BY
INCOME PERCENTILE
POPULATION
(MILLION)
PER CAPITA
GDP (US$)
SHARE OF INCOME
(%)
SHARE OF CONS.
EXP (%)
.
Top 10%
Next 30%
Bottom 60%
109
326
653
1,878
34.1
30.0
662
36.1
36.6
265
29.7
33.4
Source: Rama Bijapurkar’s book “We Are Like That Only”
28 December 2007
19

India Strategy
The consumption pie of the top 40% is marked by a higher share of comforts and luxuries.
The NTD era will see affluence levels rising. As a result, there will continue to be a
sustained rise in demand for luxury goods and services such as cars, ACs and travel.
Comforts such as low-end household appliances (TVs, refrigerators), cellphones, healthcare
and education will also grow much faster than necessities.
Government: quantum improvement in finances
For two decades beginning 1982, government finances steadily worsened, marked by high
revenue and fiscal deficits, both at the Center and at the combined Center and State
levels. The situation turned into a crisis in 2002, with combined revenue deficit hitting a
new high of 7% of GDP and fiscal deficit almost at 10% of GDP.
To address this crisis, in 2003, the government passed the FRBM Act (Fiscal Responsibility
and Budgetary Management Act). The FRBM provides, inter alia, for zero revenue deficit
and 3% fiscal deficit by financial year FY08. Since then, there has been a marked
improvement in government finances. Going forward, we have assumed that revenue
deficit will remain zero, whereas the FRBM actually provides for revenue surpluses.
This quantum improvement in government finances has been possible – and seems
sustainable – due to a surge in tax collections. Corporate tax in particular is witnessing
significant buoyancy due to high 30% compounded growth in corporate profits in the last
five years. For the first time in 2009, direct tax collections are expected to exceed indirect
taxes (customs and excise). Government’s dependence on buoyant tax collections to manage
its finances is significantly higher than in the past.
BUOYANT TAX COLLECTIONS HELP IMPROVE GOVERNMENT FINANCES
…and a quantum
improvement in
government finances
Direct Tax
Indirect Tax
10.3
Tax % to GDP
11.6
13.4
10,561
8,713
7,342
8.8
8.2
5,481
6,211
4,665
1,717
1,886
2,544
1,871 2,162
3,049
3,662
Source: India Union Budget Documents / Planning Commission / Motilal Oswal Securities
The government’s fiscal discipline has huge positive implications in the NTD era:
?
End to government dis-savings, freeing resources (6% of GDP) for developmental
expenditure, mainly infrastructure
?
Significantly lower crowding out of private sector debt, helping to keep interest rates
in check
28 December 2007
20

India Strategy
The thrust on infrastructure
spending would continue
Investment: major thrust on infrastructure
The NTD era coincides with India’s XI
th
Five-Year Plan (2008-12), which is about two
main issues – (1) high, inclusive real GDP growth rate of 9%, with inflation not exceeding
4.5%; and (2) massive infrastructure growth.
The X
th
Plan infrastructure spend is estimated at Rs8.8 trillion (US$220 billion), an average
5.5% of GDP. The XI
th
Plan projection for infrastructure spend is 2.3x at Rs20 trillion
(US$500 billion) – average 7.5% of GDP, with terminal year spend as high as 9.2% of
GDP.
INFRASTRUCTURE SPEND TO RISE FROM 6% OF GDP IN 2007 TO 9.2% OF GDP BY 2012
Infrastructure spend (Rs B)
% to GDP
7.2
9.2
7,380
5,706
5.6
5.0
6.0
CAGR of 24%
4,436
3,510
2,069
2,505
2,829
CAGR of 17%
1,141
1,493
1,751
1,278
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
Source: Planning Commission / Motilal Oswal Securities
The government’s track record of slippages in previous plans puts a question mark on the
above targets. However, this time around, the environment is far more enabling by way of:
?
Improved finances of the government, allowing it to lead infrastructure capex; and
?
Rising private sector participation in infrastructure spend (public-private mix of 70:30
in the XI
th
Plan, compared to 88:12 in the X
th
Plan).
IMPROVED GOVERNMENT FINANCES TO PROPEL PUBLIC SECTOR CAPEX
Public Sector Capex (Rs b)
% to GDP
10.6
8.1
8.8
6,510
4,774
3,840
11.4
8,021
11.8
9,446
6.9
6.1
6.3
7.1
7.4
7.3
1,565
1,493
1,746
2,205
2,644
3,048
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
Source: Planning Commission / Motilal Oswal Securities
28 December 2007
21

India Strategy
External sector: huge forex capital flows rein in interest rates
Ever since India opened up its economy in 1992, its forex capital flows have consistently
been higher than its current account deficit. As a result, forex reserves have bulged from
close to zero in 1991 to a healthy US$200 billion in 2007.
CAPITAL INFL OWS CONSISTENTLY HIGHER THAN CURRENT ACCOUNT DEFICIT
4.4
3.6
3.0
2.0
2.4
3.1
2.5
2.5
2.1
2.5
2.1
1.9
2.3
3.0
2.5
3.2
4.5
0.7
1.4
0.8
-0.5
-1.6
-0.5
-1.2
-1.8
-1.3 -1.5
-1.1 -1.1
-0.6
-0.4
-1.3
-1.0
Current Account Balance (% of GDP)
-3.4
1991
1993
1995
1997
1999
Foreign Capital Inflow (% of GDP)
2001
2003
2005
2007
INDIA’S FOREX RESERVES ARE BULGING (US$ BILLION)
199
141
110
75
26
32
38
42
54
152
Bulging forex reserves
suggest a benign to
favorable interest
rate scenario
2
6
6
15
21
17
22
Source: RBI / Motilal Oswal Securities
Huge forex capital flows do pose problems for the RBI (India’s central bank), to manage
the triad of exchange rate, interest rate and inflation. However, the overall impact of such
flows has been positive for India. The industry now has access to almost unlimited capital
at very low cost. The trend of forex capital flows is likely to continue, suggesting a benign-
to-favorable interest rate scenario.
28 December 2007
22

India Strategy
Exponentiality in key industries
In the NTD era, we clearly see exponential opportunity in some key industries based on:
(1) Emerging trends in India, and
(2) The experience in China during its journey from US$1 trillion in 1998 to US$2 trillion in
2003.
We discuss below the key drivers for some of the clear winners in the NTD era – Financial
Services, Wireless Telecom, Cars, Engineering & Construction, Cement, and Steel.
Financial Services
?
Domestic savings rate has risen exponentially in the last 5 years from 23.5% of GDP
to 32.4% of GDP. Total savings in last five years was ~US$1.1 trillion. In the NTD
era, we expect the savings to increase to US$2.5 trillion. This large savings base
implies huge opportunity for financial intermediation.
INDIA’S DOMESTIC SAVINGS ARE CONTINUOUSLY RISING
Financial Services, Wireless
Telecom, Cars, Engineering
& Construction, Cement, and
Steel would be some of the
sectors to watch
Gross Domestic Savings (US$ B)
32.4
29.7
26.4
24.8
23.5
179
216
261
31.1
Gross Domestic Savings / GDP (%)
32.3
32.3
646
567
498
384
313
437
112
109
113
134
Source: CMIE / Motilal Oswal Securities
?
?
?
Increased foreign capital flows further expand financial intermediation opportunity.
Bank credit has grown at 24% compounded in the last five years. India’s low credit-
GDP ratio compared to many other countries implies higher growth potential for banks
and NBFCs.
Penetration of financial services such as brokerage and insurance in India remains
low.
28 December 2007
23

India Strategy
CREDIT TO GDP RATIO (%) - INDIA IS LOWER THAN MANY COUNTRIES
Japan
USA
Canada
South Africa
UK
Malaysia
China
Germany
New Zealand
Thailand
France
Chile
Brazil
Singapore
Turkey
Philippines
India
57
51
51
71
86
83
111
110
144
136
136
133
168
185
206
224
319
Source: RBI Annual Report, 2006-07
?
India’s consumer finance to GDP ratio at 10% is very low as compared to the global
average of 28%. Other developing economies like Thailand, Taiwan, and Malaysia
have consumer finance to GDP ratio of 22%, 55%, and 60% respectively. Hence,
there is a tremendous scope for retail loans to grow in India.
HOUSEHOLD CREDIT % TO GDP
80
60
Mature Markets: 58.0%
40
Emerging Asia: 27.5%
20
Emerging Europe: 12.1%
Latin America: 9.2%
0
Philippines
Indonesia
India
China
Thailand
Taiwan
Malaysia
Source: Motilal Oswal Securities
28 December 2007
24

India Strategy
Wireless Telecom
?
India’s wireless sector has been the biggest success story in infrastructure reforms,
with total number of phone subscribers increasing to 241m in August 2007, up from
55m in FY03. Planning Commission projects 600m subscribers by FY12, of which
90% are likely to be wireless connections. The bulk of the growth is coming from the
rural areas, where tele-density remains low.
?
Current penetration of mobile phone services in India at 14% (in 2006) is much lower
than China’s 35%, which itself is rising at an exponential rate. India is expected to
catch up with China over time, implying a sustained phase of high growth. Further
monthly additions at 8m have already outpaced connections growth in China.
?
Over time, the “network effect” and rising income levels will lead to higher minutes of
usage and expand ARPU (average revenue per user) despite declining rates per minute.
?
Value-added services such as GPRS and special SMSs will also help expand ARPU.
MOBILE PENETRATION (% OF POPULATION) – INDIA V/S CHINA
35.1
30.1
China
20.9
16.0
11.4
3.2
India
5.0
8.6
1.2
2002
14.3
25.8
0.6
2001
2003
2004
2005
2006
Source: China National Bureau of Statistics / Motilal Oswal Securities
Cars
?
In 1999, numbers of car sold in China was lower than in India. Growth rate in China
has significantly accelerated since then, and currently, the number is thrice that of
India.
?
In India, unequal distribution of incremental GDP will lead to a rise in higher income
groups, who also have access to higher credit, driving demand for cars.
?
The government is implementing National Highways Development Project, the largest
highway project ever undertaken, covering ~25,000kms of highway development.
Besides this, through Bharat Nirman, the government aims to connect all rural areas
with over 500 people with all weather roads by FY12. Construction of new roads and
improvement in existing roads, including in rural India, will drive demand for automobiles.
28 December 2007
25

India Strategy
CARS (’000S) – INDIA V/S CHINA
3,870
2,770
China
2,071
2,276
India
819
981
1,052
1,269
1,092
507
410
639
571
607
591
704
558
612
Source: China National Bureau of Statistics / Motilal Oswal Securities
Engineering & Construction
?
The NTD era coincides with the XI
th
Five-Year Plan, which proposes a major thrust
on infrastructure. As per the Planning Commission, the investments in Infrastructure
sector is envisaged at US$494b, representing 7.5% of GDP during the XIth Five Year
Plan, vs 5.5% of GDP in the X
th
Plan, implying a 5-year CAGR of 26% through 2012.
Also, the infrastructure spending in FY12 is estimated at US$143b, at 9.2% of GDP.
?
The share of private sector in the overall spending is expected to increase from 16.7%
in the Xth Plan to 29.7% in the XIth plan. This trend will facilitate faster project
awards, and also lead to industry consolidation.
?
Much of engineering and construction activity – especially services – is non-tradable
i.e. local players will continue to enjoy lion’s share of the opportunity pie.
?
Bulging order books allow engineering and construction companies to cherry pick
orders with healthy margins and other terms of trade, mainly payments.
?
Higher spend on infrastructure and rise in residential and commercial real estate activity
are positive for both cement and steel.
INFRASTRUCTURE INVESTMENT BY SECTOR
SECTOR
TENTH PLAN
RS B
% SHARE
ELEVENTH PLAN
RS B
% SHARE
GROWTH
(X)
Electricity
Roads & Bridges
Telecom
Railways
Irrigation
Water Supply, Sanitation
Ports
Airports
Storage
Gas
Total
2,982
1,449
1,234
1,197
1,115
648
41
68
48
87
8,868
33.6
16.3
13.9
13.5
12.6
7.3
0.5
0.8
0.5
1.0
100.0
6,165
3,118
2,670
2,580
2,231
1,991
739
347
224
205
20,272
30.4
2.1
15.4
2.2
13.2
2.2
12.7
2.2
11.0
2.0
9.8
3.1
3.6
18.1
1.7
5.1
1.1
4.6
1.0
2.4
100.0
2.3
Source: Planning Commission
28 December 2007
26

India Strategy
Cement
?
In 1998, when China was a trillion dollar economy, it consumed 3.3 times the cement
that India consumes today. The main reason was China’s huge spend on infrastructure.
Acceleration of India’s infrastructure spend in the NTD era should drive cement
demand at higher pace than the past track record of 1.3-1.5x real GDP growth.
?
Cement companies are currently operating at 100% capacity, constraining supplies.
About 130 million tonnes of fresh cement capacity addition is expected in the NTD
era. However, if cement demand grows at 14-15% per annum (against the past 10-
12%), we believe that the threat of possible oversupply situation would be delayed and
prices could sustain at reasonably high levels.
CEMENT PRODUCTION (MILLION TONNES) – INDIA VS CHINA
1,240
1,069
967
China
512
536
573
597
661
725
862
77
1998
82
1999
94
94
102
India
111
117
126
142
155
2000
2001
2002
2003
2004
2005
2006
2007
Source: China National Bureau of Statistics/Motilal Oswal Securities
Steel
?
Current steel production level gap between India and China is 10x.
?
India has significant global competitive advantage in terms of captive iron ore and
coal. Rising oil prices and freight costs have further strengthened this competitive
advantage.
?
Global consolidation in the steel industry will also lead to higher control on pricing.
CRUDE STEEL PRODUCTION (MILLION TONNES) – INDIA V/S CHINA
China
283
222
353
420
32
32
India
39
43
2003
2004
2005
2006
Source: China National Bureau of Statistics / Motilal Oswal Securities
28 December 2007
27

India Strategy
Exponentiality in corporate sector profits
Rising private sector participation in the Indian economy and easy access to capital (both
domestic and foreign) are the two key drivers of exponentiality in India’s corporate sector
sales and profits. We present below a more structured analysis of the same.
ANALY SIS OF EXPONENTIALITY IN CORPORATE SECTOR PR OFITS
AREA OF PROFITABILITY
MAJOR REASONS FOR EXPONENTIALITY
Across-the-board
Engineering, Construction
Specific consumer
goods sectors
?
Privatization and corporatization of businesses
?
Increasing shift from unorganized to organized sector
?
Easy access to capital, both debt and equity, and both domestic
and foreign
?
Global market opportunity for certain products and services (e.g.
textiles, IT)
?
Technology advancement and product innovations (e.g. laptops,
cellphones, etc)
?
Exponential capex spend in the public sector due to (1) improving
government finances, and (2) PSU and Capital goods sector
divestment, leading to greater autonomy and easier access to
capital
?
Exponential capex in the private sector to meet demand from both,
consumers as well as government
?
Natural shift in consumer spend pie from necessities to comforts
and luxuries
?
Exponentially higher purchasing power of the affluent class due to
unequal distribution of incomes
?
Rising affordability of many products and services due to (1) rising
per capita GDP, (2) availability of credit and (3) economies of scale,
driving down product prices
?
Low penetration of several products and services (e.g. cellphones,
air travel, etc)
?
Demand for newer products and services with higher exposure to
global trends via various media
Source: Motilal Oswal Securities
TAX BUOYANCY
FINANCIAL
YEAR
CORP
.
TAX
PERSONAL
TAX
1995-96
2.19
1.75
1996-97
2.21
1.77
1997-98
2.18
1.78
1998-99
2.22
1.79
1999-00
2.25
1.81
2000-01
2.26
1.80
2001-02
2.29
1.78
2002-03
2.29
1.82
2003-04
2.33
1.84
2004-05
2.29
1.83
2005-06
2.31
1.84
Source: Report of Working
Group on Centre’s Resources
for XI Plan
Corporate profitability in the NTD era
Projecting corporate sector profits going forward is a challenging task. We have relied on
the concept of corporate tax buoyancy used by Indian economic planners to forecast
corporate taxes in the XI
th
Five Year Plan.
Tax buoyancy is the factor or multiple at which taxes grow for a given growth in nominal
GDP. The observed tax buoyancy in India for the last 10 years is tabled alongside.
In the XI
th
Plan, which coincides with the NTD era, India’s Planning Commission has
factored in gross corporate tax buoyancy of 2.1x. Adjusting for loss of taxes due to SEZs,
the net corporate tax buoyancy over the XI
th
Plan period works out to 1.62x i.e. a 5-year
corporate profit CAGR of 22.5% (1.62 x nominal GDP growth rate of 13.9%). Assuming
this holds true, corporate profits to GDP should rise from 5% of GDP in 2007 to 7.8% in
the NTD era.
28
28 December 2007

India Strategy
CORPORATE PROFITS TO GDP (%)
7.8
6.7
5.8
5.0
3.5
2.2
1.6
2.4
1.8
2.1
3.1
1.3
Source: Motilal Oswal Securities
28 December 2007
29

India Strategy
Forecasting strong earnings growth in FY09 & FY10
We estimate 21% growth in
Sensex EPS in FY09 followed
by 29% growth in FY10
We expect Sensex EPS to grow 23% in FY08 after 27% CAGR during FY03-07. In
FY09, we estimate 21% growth in Sensex EPS to Rs1,064. We are now introducing our
Sensex EPS estimate of Rs1,373 for FY10 - a growth of 29%.
TREND IN SENSEX EPS AND GROWTH
Sensex EPS (Rs)
35.8
1,550
1,200
28.0
29.1
16.4
Sensex EPS Growth (%)
37.3
22.9
20.5
29.0
1,373
1,064
883
718
40.0
30.0
20.0
10.0
0.0
850
500
150
FY03
FY04
FY05
FY06
348
450
523
272
FY07
FY08E
FY09E
FY10E
EPS growth YoY (%)
Source: Motilal Oswal Securities
Over the last several quarters, we have witnessed consistent upgrades to our earnings
estimates. We had revised our Sensex EPS estimate to Rs846 for FY08 and to Rs989 for
FY09, post 1QFY08 results. Post 2QFY08, we had further upgraded our EPS estimates
to Rs855 for FY08 and Rs1,007 for FY09. With improving visibility on earnings, we have
further revised our EPS estimates to Rs883 for FY08 and Rs1,064 for FY09.
TREND IN FY08 SENSEX EPS OVER LAST NINE QUARTERS (RS)
TREND IN FY09 SENSEX EPS OVER LAST FIVE QUARTERS (RS)
FY 08 EPS (LHS)
% Growth Rev. in FY08 EPS-(RHS)
17.7
19.0 22.9
883
846
855
22
810
780
822
26
1,040
1,100
FY 09 EPS
10.0
16.2
% Growth Revision in FY09 EPS
16.9
17.8
20.5
24
1,064
13.3 12.1 13.1 13.7 16.4 15.9
910
845
780
709
715
650
733
732
1,007
955
989
20
18
14
10
980
16
920
891
12
860
Dec-06
Mar-07
Jun-07
Sep-07
Dec-07
8
EPS growth YoY (%)
Source: Motilal Oswal Securities
28 December 2007
30

India Strategy
We did a top-down analysis of the key assumptions in arriving at our earnings growth
estimates for various sectors. While rupee appreciation remains a key threat to earnings
estimates, the high base impact in sectors such as Metals and Cement may slow down
earnings momentum during FY10. Sectors that could positively surprise are Banking,
Engineering, FMCG and Pharma. We believe that earnings risk of global commodities,
which constitute over 1/3rd of the earnings of our Universe, is evenly balanced. As we
gain greater visibility of the various commodity cycles during the year, we would revise
our estimates.
Composition of earnings moving in favor of high growth sectors
The earnings contribution of sectors such as IT, Telecom, Utilities and Global Cyclicals
has increased considerably over the last six years. During FY07-10, we expect contribution
from sectors like Engineering, Real Estate and Telecom to increase. The significant increase
in the proportion of Global Cyclicals is due to commissioning of operations of Reliance
Petroleum and also the monetisation of gas reserves.
SECTORAL CONTRIBTUION TO SENSEX EARNINGS
SECTOR
FY02
FY07
FY10
MKT CAP
CONTRIBUTION (%)
Automobiles
4.1
6.0
4.7
Banking
17.9
12.6
11.5
Cement
3.6
4.5
2.9
Engineering
4.2
4.4
5.0
FMCG
14.8
4.4
3.3
Global Cyclicals
32.9
37.9
41.1
IT
8.3
12.5
10.5
Others
1.5
-
-
Pharma
5.2
2.2
0.9
Real Estate
-
-
4.7
Telecom
6.3
7.7
10.6
Utilities
1.4
7.8
4.8
Total
100.0
100.0
100.0
Global Cyclicals comprises of ONGC, Reliance, Tata Steel and Hindalco.
SECTORAL CONTRIBUTION T O TOTAL SENSEX EARNINGS
FY07
FY10
3.7
14.3
2.6
8.6
4.4
27.7
11.1
-
1.1
6.4
11.5
8.7
100.0
Cement
Engineering
FMCG
4.4%
4.4%
Banking 4.5%
12.6%
Automobiles
6.0%
Cement
2.9%
Banking
11.5%
Engineering
FMCG
5.0%
3.3%
Utilities
7.8%
Telecom
7.7% Pharma
2.2%
IT
12.5%
Global
Automobiles
Cyclicals
4.7%
Utilities
37.9%
4.8%
Telecom
10.6%
Real Estate
4.7% Pharma
0.9%
Global
Cyclicals
41.1%
IT
10.5%
Source: Motilal Oswal Securities
28 December 2007
31

India Strategy
Sensex target of 21,000-25,000
We have upgraded our Sensex EPS estimates for FY08 and FY09 by 3% and 6%,
respectively. We are also introducing our Sensex EPS estimate of Rs1,373 for FY10 – a
growth of 29%. Significant growth drivers in FY10 would be the commissioning of Reliance
Petroleum and E&P of Reliance Industries. Our estimates factor an EPS CAGR of 25%
over FY08-10. With strong earnings growth ahead and positive outlook on interest rates,
we believe that valuations will remain rich for Indian equities. We base our Sensex target
range on a P/E band of 14-17x FY10E EPS of Rs1,373. We also add an embedded value
of 1,800 points. Our Sensex target range is now 21,000-25,000, which implies an upside
range of 4-24% based on FY10 estimates.
In our view, the key themes to bet on in 2008 are financial services, consumer goods, and
value unlocking stories.
Financial services:
We expect financial services to be a major beneficiary of sustained
economic growth and higher penetration of various financial products. With interest rates
expected to remain stable/soft, banks will be able to improve their margins. Credit growth
will remain at 22-24% in FY09, and banks are expected to make significant treasury gains,
going forward. Within financial services, we also like brokerages and insurance plays. Our
top bets in financials are HDFC, ICICI Bank, Bank of India and IndiaBulls.
Large cap bets
?
HDFC
?
Bharti
?
Tata Steel
?
GAIL
?
ITC
?
Bajaj Auto
?
JSPL
?
Ranbaxy
?
Grasim
Mid-cap bets
?
Sintex
?
Mahindra Lifespaces
?
Bombay Rayon
?
Indian Bank
?
United Phosphorus
?
Amtek Auto
?
Birla Corporation
?
Dish TV
Contrarian bets
?
TCS
?
M&M
?
ICICI Bank
Consumer goods:
We expect FMCG volume growth to improve in the coming year due
to rising consumer confidence and income levels. We believe that rural demand could be
at an inflection point, as positive outlook on agri commodity prices will boost farm incomes,
substantially. Infrastructure development will create employment for semi-skilled and
unskilled labor. The middle class should gain from expected reduction in income tax rates,
resulting in consumer upgradation in skin care and processed foods. Although strong raw
material prices will limit significant margin expansion, companies with dominant market
shares in select categories will grow ahead of the market. We are positive on segments
like Processed Foods, Skin Care, Alcoholic Beverages and Paints. We prefer a stock
specific approach, with United Spirits and ITC as our top bets in large caps; Nestle and
Asian Paints in mid caps and GSK Consumer in small caps.
Value unlocking opportunities:
Corporate India has been on a value unlocking drive. In
2007, companies like IndiaBulls, RCom, Bharti, ICICI Bank, Zee, DLF, etc benefited from
this trend. In 2008, given the strong liquidity environment and increasing appetite for Indian
equities, we expect the pace of value unlocking to accelerate and expect more companies
to be involved in this process. Some of the companies with corporate action lined up
include Reliance Energy, Jaiprakash, Bajaj Auto, JSPL, M&M, SBI, L&T, HCC, and
Pantaloon.
28 December 2007
32

India Strategy
Our top picks:
Our top large cap bets are HDFC, Bharti, Tata Steel, GAIL, ITC, Bajaj
Auto, JSPL, Ranbaxy, and Grasim. Amongst the mid caps, we prefer Sintex, Mahindra
Life, Bombay Rayon, Indian Bank, United Phosphorus, Amtek Auto, Birla Corp and Dish
TV. Our top contrarian bets for 2008 are TCS, M&M and ICICI Bank.
SENSEX P/E (X)
SENSEX EARNINGS YIELD V/S BOND YIELD
Sensex ( RHS )
78
60
42
24
6
Sensex P/E ( LHS)
25,600
19,600
13,600
7,600
1,600
2.0
1.5
1.0
0.5
0.0
0.2
1.8
15 Year Median is 15.7x
15 Year Avg is 0.74x
0.6
SENSEX P/BV (X)
SENSEX ROE (%)
4.5
3.5
2.5
1.5
15 Year Average 2.2x
26
22
18
15 Year Average 18.1%
14
10
0.5
Source: Motilal Oswal Securities
28 December 2007
33

Model Portfolio
MOST MODEL PORTFOLIO
SECTOR WEIGHT /
PORTFOLIO PICKS
BSE-100
MOST
WEIGHT
WEIGHT RELATIVE
TO BSE-100
EFFECTIVE SECTOR
STANCE
Banks
HDFC
ICICI Bank
SBI
Bank of India
Indian Bank
Engg./Infrastrcuture/Real Estate
Larsen & Toubro
DLF
BHEL
Mahindra Life
Nagarjuna Construction
Information Technology
TCS
HCL Tech
Telecom
Bharti Airtel
Reliance Comm
FMCG
ITC
Nestle India
United Spirit
Metals
Tata Steel
Jindal Steel & Power
SAIL
Petrochemicals
Reliance Inds.
Auto
Mahindra & Mahindra
Maruti Suzuki
Bajaj Auto
Oil & Gas
GAIL
ONGC
Others
Sintex Inds.
Dish TV
Bombay Rayon
Cement
Grasim Industries
Birla Corp
Pharmaceuticals
Ranbaxy Labs
Cash
Total
20.3
3.3
6.5
2.7
0.3
0.0
15.1
5.2
1.3
2.1
0.0
0.0
8.6
1.3
0.4
6.3
3.0
2.5
4.7
2.6
0.3
0.5
7.1
2.3
1.0
0.8
12.6
10.1
4.1
0.8
0.7
0.8
5.2
0.9
2.5
10.4
0.0
0.0
0.0
2.9
1.2
0.0
2.7
0.5
0.0
100.0
22.0
6.0
5.0
4.0
4.0
3.0
15.0
5.0
3.0
3.0
2.0
2.0
10.0
6.0
4.0
8.0
5.0
3.0
7.0
3.0
2.0
2.0
7.0
3.0
2.0
2.0
7.0
7.0
6.0
2.0
2.0
2.0
6.0
3.0
3.0
6.0
2.0
2.0
2.0
4.0
2.0
2.0
2.0
2.0
0.0
100.0
1.7
2.7
-1.5
1.3
3.7
3.0
-0.1
-0.2
1.7
0.9
2.0
2.0
1.4
4.7
3.6
1.7
2.0
0.5
2.3
0.4
1.7
1.5
-0.1
0.7
1.0
1.2
-5.6
-3.1
1.9
1.2
1.3
1.2
0.8
2.1
0.5
-4.4
2.0
2.0
2.0
1.1
0.8
2.0
-0.7
1.5
Overweight
Buy
Neutral
Buy
Buy
Buy
Neutral
Neutral
Buy
Neutral
Buy
Buy
Overweight
Buy
Buy
Overweight
Buy
Buy
Overweight
Buy
Buy
Buy
Neutral
Buy
Buy
Buy
Underweight
Buy
Overweight
Buy
Buy
Buy
Overweight
Buy
Buy
Underweight
Buy
Buy
Buy
Overweight
Buy
Buy
Neutral
Buy
28 December 2007
34

MOSt Universe
ANNUAL PERFORMANCE - MOST UNIVERSE
SECTOR
Y/E MARCH
FY08E
SALES
FY09E
FY10E CH. (%)*
FY08E
EBITDA
FY09E
FY10E CH. (%)*
FY08E
NET PROFIT
FY09E
(RS BILLION)
FY10E CH. (%)*
Auto (11)
1,000 1,145 1,306
14.5
121
142
162
17.4
79
92
104
16.6
Banks (20)
693
847 1,046
22.3
527
655
814
24.1
281
339
418
20.7
Cement (7)
419
492
532
17.2
139
159
157
14.5
81
88
86
9.7
Engineering (10)
946 1,234 1,552
30.5
142
189
249
33.8
101
135
176
33.1
FMCG (12)
555
642
732
15.7
107
125
148
17.0
76
91
110
19.9
IT (9)
854 1,090 1,372
27.6
208
260
325
25.0
176
215
245
22.0
Infrastructure (8)
216
296
401
37.5
36
52
77
44.9
15
21
29
38.6
Media (1)
17
21
25
22.5
6
8
10
36.1
4
5
6
39.3
Metals (8)
2,874 3,125 3,297
8.7
594
698
744
17.6
322
394
439
22.4
Oil Gas & Petchem (10)
7,536 6,858 7,666
-9.0
923
979 1,259
6.0
540
575
794
6.6
Pharma (17)
408
471
476
15.6
81
96
111
18.4
64
70
82
9.4
Real Estate (2)
188
261
368
39.1
114
151
219
32.0
97
114
164
16.5
Retail (3)
96
139
187
44.3
7
11
15
46.4
3
5
7
55.5
Telecom (3)
527
714
894
35.4
219
307
394
40.4
129
172
228
33.4
Textiles (7)
119
141
172
18.6
19
25
30
31.6
6
9
12
45.6
Utilities (6)
605
683
835
12.9
162
176
214
8.4
101
110
120
8.0
Others (8)
148
187
229
26.9
32
43
54
33.1
20
29
35
39.4
Most (142)
17,201 18,346 21,092
6.7 3,437 4,076 4,981
18.6 2,096 2,464 3,054
17.5
MOSt Excl. Banks (122)
16,508 17,499 20,046
6.0 2,910 3,421 4,167
17.6 1,815 2,125 2,637
17.0
MOSt Excl.Oil & Gas (132)
9,665 11,489 13,426
18.9 2,514 3,097 3,722
23.2 1,557 1,888 2,260
21.3
MOSt Excl. Tata Steel (141)
15,929 17,012 19,730
6.8 3,236 3,843 4,742
18.8 1,999 2,335 2,914
16.8
MOST Excl. RMs (139)
12,695 14,452 17,190
13.8 3,267 3,906 4,817
19.5 1,991 2,361 2,956
18.6
* Growth FY09 over FY08; For Banks : Sales = Net Interest Income, EBITDA = Operating Profits; Tata Steel figures are consolidated incl. Corus.
VALUATIONS - MOST UNIVERSE
SECTOR
P/E
(X)
(NO. OF COMPANIES)
FY08E
FY09E
FY10E
FY08E
EV/EBITDA
(X)
FY09E
FY10E
P/BV
(X)
FY08E
FY09E
FY08E
ROE
(%)
FY09E
FY10E
DIV.
YLD (%)
EARN.
CAGR
FY08E (FY10-08)
Auto (11)
Banks (20)
Cement (7)
Engineering (10)
FMCG (12)
IT (9)
Infrastructure (8)
Media (1)
Metals (8)
Oil Gas & Petchem (10)
Pharma (17)
Real Estate (2)
Retail (3)
Telecom (3)
Textiles (7)
Utilities (6)
Others (8)
Most (142)
MOSt Excl. Banks (122)
MOSt Excl.Oil & Gas (132)
MOSt Excl. Tata Steel (141)
MOST Excl. RMs (139)
N.M. - Not Meaningful
18.4
20.2
12.8
41.7
26.7
20.5
88.6
36.5
13.5
17.1
20.6
26.7
70.7
28.1
16.0
32.3
18.5
21.3
21.4
22.7
21.9
21.8
15.8
16.7
11.6
31.4
22.2
16.8
63.9
26.2
11.1
16.0
18.8
22.9
45.5
21.1
11.0
29.9
13.2
18.1
18.3
18.7
18.7
18.4
14.0
13.6
11.9
24.0
18.5
14.8
46.5
21.1
9.9
11.6
16.0
15.9
29.8
15.9
8.7
27.3
10.9
14.6
14.8
15.6
15.0
14.7
11.0
N.M
7.5
29.5
18.1
16.2
39.6
24.8
7.9
10.3
16.6
23.4
30.4
17.3
10.3
19.7
11.7
N.M
13.6
N.M
N.M
N.M
9.1
N.M
6.2
22.2
15.2
12.6
28.7
18.0
6.5
9.5
13.7
17.0
21.0
12.2
8.3
19.1
8.6
N.M
11.4
N.M
N.M
N.M
7.7
N.M
6.0
16.9
12.6
9.8
19.2
13.7
5.9
7.2
11.4
11.2
15.0
9.2
7.2
16.1
6.5
N.M
9.1
N.M
N.M
N.M
3.8
3.4
4.4
12.3
8.3
6.2
7.9
4.6
3.1
3.5
4.7
12.5
10.2
7.6
1.4
3.9
4.4
4.6
4.8
5.0
4.7
4.8
3.3
2.8
3.3
9.9
7.3
4.9
6.6
4.0
2.5
2.9
3.9
9.1
8.6
5.8
1.3
3.6
3.3
3.8
4.0
4.1
3.9
3.9
20.9
17.0
34.4
29.5
31.3
30.1
9.0
12.7
22.7
20.2
22.9
46.8
14.4
26.9
8.7
12.0
23.7
21.6
22.5
22.1
21.7
21.9
20.7
16.5
28.3
31.5
32.7
29.0
10.3
15.3
22.2
18.3
20.6
39.6
19.0
27.7
11.4
11.9
24.8
20.9
21.8
21.8
20.9
21.3
Source:
20.0
1.6
14.8
17.8
1.0
21.9
22.5
1.3
3.5
32.6
0.5
31.8
33.8
2.3
20.0
26.5
1.2
17.9
12.9
0.2
38.1
16.1
0.3
31.5
20.2
1.0
16.7
21.0
1.5
21.3
20.6
1.1
13.3
40.1
0.7
29.7
17.3
0.2
54.1
28.4
0.0
33.0
12.8
1.3
35.5
12.0
1.0
8.8
24.5
1.0
30.3
21.6
1.0
20.7
22.4
1.1
20.5
21.8
0.9
20.5
21.7
1.0
20.7
22.1
1.0
21.9
Motilal Oswal Securities
28 December 2007
35

MOSt Universe
3QFY08: lowest PAT growth in last eight quarters
Aggregate estimates for our universe of 142 companies suggest a rather weak corporate
performance in 3QFY08. Sales growth would be fairly healthy at 17% YoY. However,
EBITDA margin is likely to be down 130bp. As a result, PAT growth would be muted at
11% YoY, the lowest in the last eight quarters. A major drag on aggregate PAT would be
a 4% de-growth in Metals, and flat performance by Oil & Gas and Autos. Telecom and
Engineering are expected to sustain their growth momentum. FMCG PAT growth would
be much higher than the last few quarters at 22%. Sensex PAT growth is estimated at
14.4% YoY (18.8% if Tata Steel’s consolidated numbers are considered).
QUARTER-WISE SALES GROWTH (% YOY)
QUARTER-WISE NET PROFIT GROWTH (% YOY)
20%
15%
10%
5%
0%
17.9
14.3
8.3
16.6
60%
45%
30%
15%
0%
20.5
50.0
20.7
10.4
Mar-07
June-07
Sep- 07
Dec-07
Mar-07
June-07
Sep- 07
Dec-07
Source: Motilal Oswal Securities
QUARTERLY PERFORMANCE - MOST UNIVERSE
SECTOR
(NO. OF COMPANIES)
DEC.06
SALES
DEC.07
CHG. (%)
DEC.06
EBITDA
DEC.07
CHG. (%)
DEC.06
NET PROFIT
DEC.07
CHG. (%)
(RS MILLION)
Auto (11)
Banks (20)
Cement (7)
Engineering (10)
FMCG (12)
IT (9)
Infrastructure (8)
Media (1)
Metals (8)
Oil Gas & Petchem (10)
Pharma (17)
Real Estate (2)
Retail (3)
Telecom (3)
Textiles (7)
Utilities (6)
Others (8)
MOSt (142)*
MOSt Excl. Banks (122)
MOSt Excl.Oil & Gas (132)
MOST Excl. RMs (139)
Sensex (Excl DLF)
Sensex (Tata Steel Cons)
* Tata Steel Standalone
231,149
155,276
77,075
164,328
122,986
174,926
35,690
4,177
317,177
1,677,042
93,269
10,027
15,216
98,164
23,258
127,917
23,439
3,351,115
3,195,839
1,674,073
2,302,333
1,318,061
1,537,052
252,852
172,685
90,098
218,251
142,201
220,475
46,190
4,474
329,707
1,939,984
103,555
12,931
24,100
136,982
29,820
150,136
33,247
3,907,689
3,735,003
1,967,705
2,672,069
1,528,626
1,796,686
9.4
11.2
16.9
32.8
15.6
26.0
29.4
7.1
4.0
15.7
11.0
29.0
58.4
39.5
28.2
17.4
41.8
16.6
16.9
17.5
16.1
16.0
16.9
29,657
118,193
24,274
24,719
24,695
46,316
5,516
1,357
121,132
188,843
18,147
6,950
1,399
39,031
4,116
28,756
5,234
688,336
570,143
499,493
655,716
398,021
409,009
30,730
135,954
29,963
33,944
29,573
53,828
7,041
1,471
110,733
184,454
20,517
5,754
1,875
57,177
4,991
40,996
6,828
755,829
619,875
571,375
735,623
452,662
481,993
3.6
15.0
23.4
37.3
19.8
16.2
27.7
8.4
-8.6
-2.3
13.1
-17.2
34.1
46.5
21.2
42.6
30.4
9.8
8.7
14.4
12.2
13.7
17.8
19,250
59,472
15,874
17,616
17,184
37,842
2,481
875
70,852
108,326
13,702
4,524
629
22,562
1,698
22,852
3,103
418,841
359,369
310,515
397,655
245,771
247,914
Source:
19,408
0.8
72,252
21.5
18,117
14.1
22,386
27.1
21,002
22.2
44,885
18.6
3,056
23.2
991
13.2
67,854
-4.2
108,317
0.0
14,858
8.4
4,659
3.0
826
31.3
32,921
45.9
1,614
-4.9
25,379
11.1
3,971
28.0
462,497
10.4
390,245
8.6
354,180
14.1
453,034
13.9
281,060
14.4
294,531
18.8
Motilal Oswal Securities
28 December 2007
36

MOSt Universe
Retail would be the fastest
growing sector, followed
by Telecom
Sales growth of 17% YoY
?
We expect our Universe of 142 companies to record sales growth of 17% YoY in
3QFY08. The major sectors driving sales growth would be – Telecom (40%),
Engineering (35%), Infrastructure (29%), IT (26%) and Cement (17.5%). The growth
rate would be dragged down mainly by Metals (4%) and Autos (9%).
?
The Telecom sector is expected to witness revenue growth of 40% on the back of
sustained strong addition to the wireless subscriber base (+24m in 3QFY08). Idea
Cellular would lead the pack with revenue growth of 49% YoY, followed by Bharti
(42%) and Reliance Communication (33%).
?
We expect the Engineering sector to record sales growth of 35% YoY, on sustained
capex in the Indian economy, especially in the power sector. Companies which are
expected to grow faster than the industry average are ABB (44%), Suzlon (43%) and
L&T (35%).
?
The Infrastructure sector is expected to record revenue growth of 29% YoY, driven
by strong order book position. All companies under coverage should show YoY growth
of 30% or higher except Nagarjuna Construction (22% YoY) and Jaiprakash Associates
(15% YoY). BL Kashyap is expected to show hyper growth of 75% YoY.
?
IT is expected to register strong YoY growth of 26%. Mphasis should grow 109%
YoY given its low base. Wipro (34% YoY) and Satyam (30% YoY) are the others that
would grow faster than the industry average.
?
Sales growth for Metals would be low at 4% YoY due to lower international prices of
non-ferrous metals, stronger rupee and lower import duty. Hindustan Zinc is expected
to be hit hardest, with sales growth down 27.5% YoY, followed by Sterlite (down 25%
YoY) and Nalco (down 17% YoY). The steel pack is expected to fare much better –
Jindal Steel (up 49%), SAIL (up 24%), Jindal Steel & Power (up 49%) and Tata Steel
(up 11% standalone, and 432% consolidated).
?
Auto sales growth would be muted at 9%. The growth laggards would be two-wheelers
(2% YoY) and CVs (5% YoY). This would be more than offset by growth in Cars/
UVs (20% YoY) and auto ancillaries (25% YoY).
SECTORAL SALES GROWTH - QUARTER ENDED DECEMBER 2007 (%)
72
54
36
18
0
MOSt Universe Sales Growth = 16.6%
Source: Motilal Oswal Securities
28 December 2007
37

MOSt Universe
Telecom would show the
highest EBITDA jump,
followed by Utilities
EBITDA margins excluding Banks and Utilities to drop 160bp
?
We expect our Universe of 116 companies (excluding Banks and Utilities) to register
EBITDA growth of just 6.6% YoY. This is sharply lower than the estimated topline
growth of 17%, implying a fairly steep 160bp drop in EBITDA margin. The major
drags on margin would be the currency sensitive sectors – Metals (-460bp), IT (-
210bp YoY, +50bp QoQ) and Textiles (-100bp). Only two sectors are expected to see
meaningful margin expansion – Telecom (+200bp) and Cement (+180bp).
?
Metals EBITDA is expected to be down 10% YoY, with EBITDA margin down 460bp
YoY. Margins would be dragged down by non-ferrous metals, adversely affected by
lower LME prices, stronger rupee and lower import duty. The worst affected would
be Nalco (-1,430 bp), Hindustan Zinc (-780bp), Sterlite (-700bp) and Hindalco (-630bp).
?
IT sector EBITDA would be up 16% YoY against revenue growth of 26% YoY, implying
a 210bp drop in margin. This is due to the double whammy of a stronger rupee coupled
with rising manpower costs.
?
Textiles sector EBITDA should be up 21% YoY. However, margins would be down
100bp due to falling product prices and the rising rupee. We expect the worst hit to
include Himatsingka (-760bp) and Arvind (-210bp).
?
The Telecom sector is expected to report strong EBITDA growth of 47% YoY (EBITDA
margin expansion of 200bp) on the back of operating leverage following high subscriber
addition.
?
Cement is expected to see healthy EBITDA growth of 23% YoY. Though cement
prices are higher almost 10% YoY, cost pressures, mainly coal and freight, should
check margin expansion at just 180bp YoY.
SECTORAL EBITDA GROWTH - QUARTER ENDED DECEMBER 2007 (%)
66
42
MOSt Universe EBITDA Growth = 9.8%
18
-6
-30
Source: Motilal Oswal Securities
28 December 2007
38

MOSt Universe
Telecom would witness the
fastest net profit growth
in our universe, followed
by Retail
PAT growth of 10% YoY – lowest in last eight quarters
?
We expect overall PAT growth to be muted at 10% YoY. The major drags on profit
growth would be Metals (-4% YoY), Oil, Gas & Petchem (flat YoY) and Autos (+2%).
The sectors with the highest PAT growth would be Telecom (+46% YoY) and
Engineering (+27% YoY). Bank, FMCG and Infrastructure are all expected to report
22-23% growth YoY.
?
As in the past several quarters, Telecom would be the highest profit growth sector.
Idea Cellular would lead the pack with a growth of 110% YoY, followed by RCom
(50%) and Bharti (37%).
?
Engineering PAT is expected to grow 27% YoY, led by Crompton Greaves (+52%
YoY) ABB (+41% YoY), Siemens (+36% YoY) and L&T (+31% YoY).
?
FMCG would be a sector to watch out for. As many as 8 companies out of 12 are
expected to clock PAT growth in excess of 25% – Britannia (+124% YoY), Marico
(+49% YoY), United Spirits (+48% YoY), Nestle (+37% YoY), Asian Paints (+29%
YoY), Colgate (+28% YoY) and Dabur (+27% YoY).
?
Two sectors are expected to register PAT de-growth – Textiles (-5% YoY) and Metals
(-4% YoY).
?
Profit growth for Sensex companies is expected to be 20% YoY (based on consolidated
profit for Tata Steel and excluding DLF as its 3QFY07 numbers are not available).
The top five performers are expected to be Tata Steel (+126% YoY consolidated),
RCom (+50% YoY), Bharti (+37% YoY), HDFC Bank (+35% YoY) and L&T (+31%
YoY). The bottom five are likely to be Hindalco (-26% YoY), Tata Motors (-23%
YoY), Cipla (-7% YoY), ACC (-3% YoY) and M&M (-2%).
SECTORAL NET PROFIT GROWTH - QUARTER ENDED DECEMBER 2007 (%)
50
34
18
2
-14
MOSt Universe Net Profit Growth = 10.4%
Source: Motilal Oswal Securities
28 December 2007
39

MOSt Universe
QUARTERLY PERFORMANCE - MOST UNIVERSE
SECTOR
(NO. OF COMPANIES)
DEC.06
EBITDA MARGIN (%)
DEC.07
CHG. (%)
DEC.06
NET PROFIT MARGIN (%)
DEC.07
CHG. (%)
Auto (11)
Banks (20)
Cement (7)
Engineering (10)
FMCG (12)
IT (9)
Infrastructure (8)
Media (1)
Metals (8)
Oil Gas & Petchem (10)
Pharma (17)
Real Estate (2)
Retail (3)
Telecom (3)
Textiles (7)
Utilities (6)
Others (8)
MOSt (142)*
MOSt Excl. Banks (122)
MOSt Excl.Oil & Gas (132)
MOST Excl. RMs (139)
Sensex (Excl DLF)
Sensex (Tata Steel Cons)
*Tata Steel Standalone
12.8
76.1
31.5
15.0
20.1
26.5
15.5
32.5
38.2
11.3
19.5
69.3
9.2
39.8
17.7
22.5
22.3
20.5
17.8
29.8
28.5
30.2
26.6
12.2
78.7
33.3
15.6
20.8
24.4
15.2
32.9
33.6
9.5
19.8
44.5
7.8
41.7
16.7
27.3
20.5
19.3
16.6
29.0
27.5
29.6
26.8
-0.7
2.6
1.8
0.5
0.7
-2.1
-0.2
0.4
-4.6
-1.8
0.4
-24.8
-1.4
2.0
-1.0
4.8
-1.8
-1.2
-1.2
-0.8
-1.0
-0.6
0.2
8.3
38.3
20.6
10.7
14.0
21.6
7.0
21.0
22.3
6.5
14.7
45.1
4.1
23.0
7.3
17.9
13.2
12.5
11.2
18.5
17.3
18.6
16.1
7.7
41.8
20.1
10.3
14.8
20.4
6.6
22.1
20.6
5.6
14.3
36.0
3.4
24.0
5.4
16.9
11.9
11.8
10.4
18.0
17.0
18.4
16.4
Source: Motilal Oswal
-0.7
3.5
-0.5
-0.5
0.8
-1.3
-0.3
1.2
-1.8
-0.9
-0.3
-9.1
-0.7
1.0
-1.9
-1.0
-1.3
-0.7
-0.8
-0.5
-0.3
-0.3
0.3
Securities
EBITDA MARGIN GROWTH - QUARTER ENDED DECEMBER 2007 (%)
NET PROFIT MARGIN GROWTH - QUARTER ENDED DECEMBER 2007 (%)
6
-2
-10
-18
-26
5
1
MOSt Universe EBITDA Margin Growth = -120bp
-3
-7
-11
MOSt Universe Net Profit Margin Growth = -70bp
SECTORAL CONTRIBUTION TO GROWTH IN SALES, EBITDA AND NET PROFIT (%)
SECTOR
CONTRIBUTION
TO SALES GR.
SECTOR
CONTRIBUTION
TO EBITDA GR.
SECTOR
CONTRIBUTION
TO NP GR.
Oil Gas & Petchem (10)
Engineering (10)
IT (9)
Telecom (3)
Utilities (6)
Auto (11)
FMCG (12)
Banks (20)
Cement (7)
Metals (8)
Infrastructure (8)
Pharma (17)
Others (8)
Retail (3)
Textiles (7)
Real Estate (2)
Media (1)
47.2
9.7
8.2
7.0
4.0
3.9
3.5
3.1
2.3
2.3
1.9
1.8
1.8
1.6
1.2
0.5
0.1
Telecom (3)
Banks (20)
Utilities (6)
Engineering (10)
IT (9)
Cement (7)
FMCG (12)
Pharma (17)
Others (8)
Infrastructure (8)
Auto (11)
Textiles (7)
Retail (3)
Media (1)
Real Estate (2)
Oil Gas & Petchem (10)
Metals (8)
26.9
26.3
18.1
13.7
11.1
8.4
7.2
3.5
2.4
2.3
1.6
1.3
0.7
0.2
-1.8
-6.5
-15.4
Banks (20)
29.3
Telecom (3)
23.7
IT (9)
16.1
Engineering (10)
10.9
FMCG (12)
8.7
Utilities (6)
5.8
Cement (7)
5.1
Pharma (17)
2.6
Others (8)
2.0
Infrastructure (8)
1.3
Retail (3)
0.5
Auto (11)
0.4
Real Estate (2)
0.3
Media (1)
0.3
Oil Gas & Petchem (10)
0.0
Textiles (7)
-0.2
Metals (8)
-6.9
Source: Motilal Oswal Securities
28 December 2007
40

MOSt Universe
Scoreboard (quarter ended December 2007)
TOP 10 BY SALES GROWTH (%)
WORST 10 BY SALES GROWTH (%)
160%
130%
100%
70%
0%
-8%
-16%
-24%
40%
-32%
TOP 10 BY EBITDA GROWTH (%)
WORST 10 BY EBITDA GROWTH (%)
400%
300%
200%
100%
0%
0%
-15%
-30%
-45%
-60%
TOP 10 BY NET PROFIT GROWTH (%)
WORST 10 BY NET PROFIT GROWTH (%)
1200%
900%
600%
300%
0%
0%
-20%
-40%
-60%
-80%
Matrix: Excluding DocPharma
Source: Motilal Oswal Securities
28 December 2007
41

THIS SPACE IS INTENTIONALL LEFT BLANK
Y
Note:
In our quarterly performance tables, our four-quarter numbers may not always add up to the full-year numbers. This is because of
differences in classification of account heads in the company’s quarterly and annual results or because of differences in the way we
classify account heads as opposed to the company.
28 December 2007
42

MOSt Universe
Ready reckoner: valuations
CMP (RS)
28.12.07
RECO
FY08E
EPS (RS)
FY09E
FY10E
FY08E
P/E (X)
FY09E
FY10E
FY08E
EV/EBITDA
FY09E
FY10E
FY08E
ROE (%)
FY09E
FY10E
Automobiles
Amtek Auto
Ashok Leyland
Bajaj Auto
Bharat Forge
Eicher Motors
Hero Honda
Mahindra & Mahindra
Maruti Suzuki
Swaraj Mazda
Tata Motors
TVS Motor
Sector Aggregate
Cement
ACC
Ambuja Cements
Birla Corporation
Grasim Industries
India Cements
Shree Cement
Ultratech Cement
Sector Aggregate
Engineering
ABB
Alstom Projects
Bharat Electronics
BHEL
Crompton Greaves
Cummins India
Larsen & Toubro
Siemens
Suzlon Energy
Thermax
Sector Aggregate
FMCG
Asian Paints
Britannia
Colgate
Dabur
Godrej Consumer
GSK Consumer
Hind. Unilever
ITC
Marico
Nestle
Tata Tea
United Spirits
Sector Aggregate
425
50
2,611
354
407
699
834
984
325
731
72
Buy
Buy
Buy
Buy
Neutral
Buy
Buy
Buy
Neutral
Buy
Neutral
30.1
3.1
134.4
12.5
24.6
43.9
62.1
68.1
21.3
47.8
1.7
35.4
3.5
155.1
16.5
30.2
51.4
74.7
79.6
25.6
56.7
2.7
39.8
4.0
171.7
19.0
34.2
56.6
81.8
93.6
28.7
64.0
3.4
14.1
16.3
19.4
28.3
16.5
15.9
13.4
14.4
15.2
15.3
42.7
18.4
14.4
15.5
6.1
12.4
12.0
10.9
12.1
12.8
62.9
46.8
20.3
40.9
37.1
25.9
46.6
42.7
44.1
39.4
41.7
28.4
20.2
22.1
28.5
18.7
17.7
27.1
25.1
25.2
31.9
18.1
42.9
26.7
12.0
14.3
16.8
21.5
13.5
13.6
11.2
12.4
12.7
12.9
26.6
15.8
13.2
14.8
6.0
11.3
11.4
9.1
10.0
11.6
48.9
38.2
16.4
30.1
26.1
20.6
36.7
32.1
29.6
27.0
31.4
24.0
16.1
18.4
22.7
15.8
15.2
24.4
21.7
20.4
25.3
11.8
27.7
22.2
10.7
12.6
15.2
18.7
11.9
12.4
10.2
10.5
11.3
11.4
21.2
14.0
14.6
14.9
5.8
11.7
11.1
8.6
10.2
11.9
37.1
31.2
14.2
21.6
18.8
15.7
29.9
24.8
22.0
20.0
24.0
20.1
12.7
16.2
18.8
13.7
12.4
21.4
18.0
17.7
20.6
10.3
20.0
18.5
9.4
9.1
14.2
15.9
7.7
9.8
14.9
7.9
9.1
11.5
17.8
11.0
9.1
10.2
3.5
6.2
8.1
5.6
8.2
7.5
40.9
38.1
12.0
26.4
29.4
18.5
40.0
27.0
30.4
28.2
29.5
17.3
12.0
20.3
22.5
14.5
11.1
23.8
16.3
16.1
19.4
5.8
30.0
18.1
8.0
8.0
11.4
12.7
6.2
8.0
12.7
6.6
7.9
9.4
12.5
9.1
8.1
9.5
3.0
5.0
6.8
4.0
6.2
6.2
31.9
30.0
9.3
18.8
22.5
14.0
31.8
21.2
22.4
18.9
22.2
14.2
9.4
16.6
18.5
12.5
9.4
20.6
13.7
13.6
15.5
4.7
23.9
15.2
6.8
7.1
9.5
10.6
5.1
6.8
10.8
5.4
7.0
8.4
10.3
7.7
8.7
9.3
2.3
4.8
6.2
2.9
5.9
6.0
23.8
23.1
7.6
13.2
17.2
9.9
26.3
16.7
17.4
13.4
16.9
11.8
7.2
14.6
15.5
11.0
7.2
17.9
11.2
11.9
12.7
3.8
18.6
12.6
18.4
20.5
21.0
17.9
14.8
32.4
21.3
22.7
24.7
19.4
4.7
20.9
31.2
34.5
40.9
29.9
36.4
64.5
45.0
34.4
39.7
37.8
29.9
30.7
37.6
28.1
30.7
44.7
21.9
37.8
29.5
37.6
25.3
136.3
53.1
130.1
25.9
83.4
25.8
67.5
64.5
7.6
17.6
31.3
17.8
20.4
20.7
17.0
15.9
31.7
20.4
21.3
24.6
20.3
7.3
20.7
27.3
27.6
30.6
25.3
25.5
46.5
37.3
28.3
43.9
36.2
29.2
32.3
38.4
29.3
30.5
44.7
21.0
42.7
31.5
16.7
21.0
19.7
17.0
15.7
27.3
19.7
20.3
23.0
20.1
8.7
20.0
21.0
23.1
25.2
20.0
21.1
34.2
27.2
22.5
45.9
34.4
26.8
34.6
38.7
31.0
29.5
44.2
23.6
42.1
32.6
1,009
149
329
3,630
304
1,318
978
Neutral
Buy
Buy
Buy
Buy
Buy
Buy
70.0
9.6
54.0
293.5
25.4
120.5
80.6
76.2
10.1
54.5
321.0
26.6
144.5
97.8
69.0
10.0
57.0
309.1
27.3
154.0
95.6
1,486