6 July 2007

India Strategy

Though Rupee

appreciation continues to

threaten corporate

earnings…

…inflation has been

tamed and interest rates

are beginning to soften

The last six months have

seen unprecedented flows

into the primary

markets…

…which we believe

reflects sustained faith in

Indian equities

Adopt a sector / stock-

specific investment

approach to maximize

returns

R

ESULTS

P

R E V I E W

Quarter ended June 2007

Joyous ride

Research Team (Rajat@MotilalOswal.com)

Prices as of Friday, 29 June 2007

Contents

India Strategy

1. Automobiles

Amtek Auto

Ashok Leyland

Bajaj Auto

Bharat Forge

Eicher Motors

Hero Honda

Mahindra & Mahindra

Maruti Udyog

Punjab Tractors

Swaraj Mazda

Tata Motors

TVS Motor

2. Banking

Andhra Bank

Bank of Baroda

Bank of India

Canara Bank

Corporation Bank

Federal Bank

HDFC

HDFC Bank

ICICI Bank

Indian Overseas Bank

J&K Bank

Karnataka Bank

Oriental Bank

Punjab National Bank

State Bank

Syndicate Bank

Union Bank

UTI Bank

Vijaya Bank

3. Cement

ACC

Ambuja Cement

Birla Corporation

Grasim Industries

India Cements

Shree Cement

UltraTech Cement

4. Engineering

ABB

Alstom Projects

Bharat Electronics

BHEL

Crompton Greaves

Cummins India

Larsen & Toubro

Siemens

Suzlon Energy

Thermax

29 June 2007

3-38

39-61

50

51

52

53

54

55

56

57

58

59

60

61

62-87

69

70

71

72

73

74

75

76

77

78

79

80

81

82

83

84

85

86

87

88-101

95

96

97

98

99

100

101

102-116

107

108

109

110

111

112

113

114

115

116

5. FMCG

117-135

Asian Paints

124

Britannia Industries

125

Colgate Palmolive

126

Dabur India

127

GSK Consumer

128

Godrej Consumer Products

129

Hindustan Unilever

130

ITC

131

Marico

132

Nestle India

133

Tata Tea

134

United Spirits

135

6. Information Technology136-155

Geometric Software

142

HCL Technologies

143

Hexaware Technologies

144

i-flex solutions

145

Infosys

146

Infotech Enterprises

147

KPIT Cummins

148

MphasiS

149

Patni Computer

150

Sasken Communication

151

Satyam Computer

152

TCS

153

Tech Mahindra

154

Wipro

155

7. Infrastructure

BL Kashyap

Gammon India

GMR Infrastructure

Hindustan Construction

IVRCL

Jaiprakash Associates

Nagarjuna Construction

Patel Engineering

8. Media

Zee Telefilms

9. Metals

Hindalco

Jindal Steel

JSW Steel

Nalco

SAIL

Tata Steel

10. Oil & Gas

BPCL

Chennai Petroleum

GAIL

HPCL

156-168

161

162

163

164

165

166

167

168

169-170

170

171-182

177

178

179

180

181

182

183-200

192

193

194

195

IOC

Indraprastha Gas

IPCL

ONGC

Reliance

196

197

198

199

200

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

12. Retailing

Pantaloon Retail

Shopper's Stop

Titan Industries

13. Telecom

Bharti Airtel

Reliance Communication

VSNL

14. Textiles

Alok Industries

Arvind Mills

Gokaldas Exports

Himatsingka Seide

Raymond

Vardhman Textiles

Welspun India

15. Utilities

CESC

NTPC

Neyveli Lignite

PTC India

Reliance Energy

Tata Power

16. Others

Ashapura Minechem

Blue Star

Concor

Great Offshore

United Phosphorus

201-226

210

211

212

213

214

215

216

217

218

219

220

221

222

223

224

225

226

227-234

232

233

234

235-241

239

240

241

242-254

248

249

250

251

252

253

254

255-266

261

262

263

264

265

266

267-271

267

268

269

270

271

2

Results Preview

QUARTER ENDED JUNE 2007

India Strategy

BSE Sensex: 14,651

S&P CNX: 4,318

29 June 2007

The BSE Sensex has appreciated by 12% in 1QFY08 to close at an all-time high of

14,650. This positive return is on the back of a 5% decline in 4QFY07. From a state of

viewing the markets as

half full

in 4QFY07, we are now enjoying a

joyous ride.

Continued

upswing in global equities (several markets at all-time highs), sustained confidence in

Indian equities (given the strong response to large equity offerings in recent times), easing

of inflation and rate concerns have been the key drivers of this performance. Indian markets

have been

climbing

one

wall of worry

after another, the latest being the sharp Rupee

appreciation and its impact on corporate earnings.

We estimate 1QFY08 earnings growth of 18% for Sensex, a deceleration from the average

growth of 26% recorded in the last eight quarters. This could partly be attributed to the

decline in profits of ONGC (higher subsidy sharing), impact of Rupee appreciation on

export-oriented sectors and the impact of higher interest rates on Autos. With inflation

estimated at 4-5% in the near term, forecast of normal monsoons and stable interest rates,

we believe that the macro environment is better than a quarter ago. FY08 would be the

third consecutive year of ~9% real GDP growth, with per capita GDP estimated to cross

US$1,000. Amongst the concerns, currency fears continue to loom large and could lead to

downgrades in earnings of few sectors. However, given the contribution from diverse

sectors to earnings, we do not see a serious risk to our estimates.

We are estimating an 18% growth in Sensex EPS in FY08 to Rs846 and a growth of 17%

in FY09 to Rs989. Our target range for the Sensex, based on FY09E earnings is 13,500-

16,500 (12-15x FY09E EPS plus 1,700 points of embedded value). The top-3 sectors to

play the strong earnings momentum are – Wireless, Engineering, and Financials. We also

believe that 2HFY08 could see a revival of positive trends for few sectors that witnessed

significant underperformance till date. Our top-3 bets here are Four-wheelers, Cement

and Real Estate. Our top large-cap bets are Bharti / Reliance Communications, L&T,

SBI, Maruti / Tata Motors, Infosys, DLF, Tata Steel, and Grasim / Ambuja Cement. Amongst

the mid-caps, we prefer Indian Bank, United Phosphorus, Birla Corp / Kesoram, Great

Offshore, HCC, Sobha Developers, SREI, and Nicholas.

1QFY08 – a quarter of new highs for India

?

1QFY08 marked a new high for the Indian markets, with the BSE Sensex closing at

14,650.

?

The quarter marked the highest issuance of capital by Indian corporates. It also

witnessed the largest issuance by a single corporate (ICICI Bank) from India.

?

During the quarter, the Rupee saw its maximum appreciation in the last 10 years.

From 'half full' in April 2007...

...to 'joyous ride' in July 2007

Navin Agarwal (Navin@MotilalOswal.com)/Rajat Rajgarhia (Rajat@MotilalOswal.com)

29 June 2007

3

India Strategy

From a high of 6.5% in

January, inflation has

declined to 4%…

Inflation, interest rate worries lessen

In our

India Strategy

dated 5 April 2007, we had highlighted that inflation would decline

significantly due to the base effect from May onwards. From a high of 6.5% in January

2007, inflation has declined to 4% as per the latest data. Besides the base impact, various

measures by the government and RBI also helped. RBI has also been successful in bringing

down the credit growth from 28% in March to 24% now. We expect inflation to remain in

the range of 4-5% over the next few months. With monsoons expected to be normal, we

remain less concerned about inflation. This will also remove concerns on the pricing power

of number of commodities, which got restricted in 1HCY07.

The taming of inflation would mark the onset of a stable interest rate regime. Since December

2006, interest rates have risen by 200-400bp. Moreover, as the RBI raised CRR thrice, it

also resulted in a credit squeeze. We believe that RBI is unlikely to take up any further

monetary tightening (although consensus is equally divided about one last step of tightening).

In the last couple of months, bulk deposit rates have already declined by 200bp and we

expect them to decline further. Moreover, we also believe that availability of finance would

increase significantly due to strong deposit growth and this would have a positive impact

on sectors that faced liquidity crunch earlier.

Currency risk, the threat of the season

The Rupee has gained 6.5% against the US Dollar in 1QFY08 to close at a 9-year high of

Rs40.7/US$. This is led by strong inflows to the system, high interest rates and RBI’ bias

s

towards a stronger Rupee to help fight inflation. While a rising Rupee is a sign of confidence

in the growth of the economy, it creates its own share of worries, as all export-oriented

industries lose out. Infosys, which averaged an earnings growth of 55% in the last four

quarters, is estimated to grow at just 22% in 1QFY08.

Software Services account for 13% of Sensex profits and have a 17% weightage in the

index. Moreover, Rupee appreciation would also have an adverse impact on all Global

Commodities, resulting in lower realizations and import-parity prices in the domestic market.

Overall, more than half of Sensex earnings are sensitive to currency movements. We

believe that a significant appreciation from current levels could lead to downgrade in

earnings estimates for Corporate India. Our earnings factor a Rupee-Dollar rate of Rs42/

US$ in FY08 and Rs41/US$ in FY09, v/s the current rate of Rs40.5/US$.

1QFY08 earnings growth – slowest in the last five quarters

We estimate growth in Sensex earnings during 1QFY08 at 18%, the slowest in the last

five quarters. This could be attributed to the following reasons: (1) decline in profits of

ONGC due to higher subsidy share, (2) impact of Rupee appreciation on Software Services,

and (3) impact of higher interest rates on Autos. The growth in Sensex EBITDA is expected

to be even slower at 12%. If the Rupee continues to appreciate, it could pose a risk to our

earnings estimates for the remaining quarters of the year. Investors would be keenly

awaiting the guidance that top IT majors provide.

4

… and bulk-deposit rates

have begun to fall…

… though Rupee

appreciation continues to

threaten corporate earnings

1QFY08 earnings growth

has been the slowest in

the last five quarters…

29 June 2007

India Strategy

… and earnings upgrades

can no longer be taken for

granted during FY08

FY08 earnings risks are evenly balanced

We are estimating Sensex EPS growth at 18% for FY08. For the last three years, we

have consistently witnessed significant upgrades to our estimates with each passing quarter.

We believe that in FY08, we are evenly balanced, with risks to either side. Given the

strong currency movement, we consider our estimates for Software Services and Global

Commodities at risk. On the positive side, we believe that Telecom, Engineering, and

Financials could witness earnings upgrades.

Third consecutive year of ~9% GDP growth, fifth year of over 7.5% growth

The Indian economy grew by 9.4% in FY07 on top of a 9% growth in FY06. GDP growth

for FY08 is expected to be ~9%, making it the third consecutive year of ~9% GDP growth,

and an unprecedented fifth consecutive year of 7.5%+ GDP growth. In FY07, India has

emerged as a trillion-dollar economy and per capita income is expected to cross US$1,000

in FY08. This, we believe, has the potential to propel the economy into a virtuous spiral of

consumption, savings and investment.

Very positive response to large equity issuances

CY07 is expected to be the year of largest capital raising by Indian corporates. Banks and

real estate companies have already led the list of raising significant capital in the first six

months. While the initial impression prior to the raisings was concerning (expected response

to the issue, impact of money flowing from secondary to primary markets, etc), the actual

response has positively surprised the markets. In the first six months of CY07, India’

s

corporate sector has raised equity of over Rs600b, higher than in any of the previous six

years. Some of the large equity issues include ICICI Bank (Rs200b), DLF (Rs92b), Sterlite

(~Rs92b), and Idea Cellular (Rs21b). More important is the investor response – an average

oversubscription of 15.6 times! We believe this reflects sustained confidence in Indian

equities and will encourage more corporates to raise money in primary markets.

Valuations fair; adopt sector / stock approach

We are estimating an 18% growth in Sensex EPS in FY08 to Rs846 and a growth of 17%

in FY09 to Rs989. Our target range for the Sensex based on FY09E earnings is 13,500-

16,500 (12-15x FY09E EPS and addition of 1,700 points as embedded value). We see

scope for returns in specific sectors / stocks.

?

The top-3 sectors to play on strong earnings momentum in our view are Telecom,

Engineering, and Financials. These three sectors are witnessing earnings upgrades

and are likely to maintain very strong business momentum for FY08 and FY09. Despite

the strong performance of these stocks, we believe that earnings comfort remains

very high and the stocks have room to move up further.

?

We also believe that 2HFY08 could see a revival of positive trends for few sectors

that witnessed significant underperformance till date. Our top-3 bets here are Four-

wheelers, Real Estate and Cement. While Four-wheelers and Real Estate would be

5

Yet, FY08 would be the fifth

consecutive year of strong

GDP growth…

… and the last six months

have seen unprecedented

flows into the primary

markets

Though the index may not

offer much upside, specific

sectors/stocks hold out

significant opportunities

29 June 2007

India Strategy

direct beneficiaries of stable/lower interest rates and greater availability of finance,

the Cement sector would benefit from the strong demand-supply scenario and ability

hike prices due to low inflation.

?

Our top large-cap bets are Bharti / Reliance Communications, L&T, SBI, Maruti /

Tata Motors, Infosys, DLF, Tata Steel, and Grasim / Ambuja Cement. Amongst the

mid-caps, we prefer Indian Bank, United Phosphorus, Birla Corp / Kesoram, Great

Offshore, HCC, Sobha Developers, SREI, and Nicholas.

29 June 2007

6

India Strategy

Enjoying a ‘

joyous ride’

Indian markets are scaling new highs

In 1QFY08, the BSE Sensex appreciated by 12% to close at its all-time high of 14,650.

This positive return is on the back of a 5% decline in 4QFY07. We believe this performance

captures the combined effect of at least three positives:

In 1QFY08, the Sensex

appreciated by 12% to close

at an all-time high of 14,650

1. Continuing upswing in global equity markets

2. Sustained confidence in Indian equities

3. Improved outlook on inflation and interest rates

These positives collectively outweigh the only major concern – sharp Rupee appreciation

dampening earnings growth in some sectors, mainly IT.

SENSEX RETURN OVER THE PAST 41 QUARTERS (%)

40

Sensex returns have been

positive in 7 out of the

last 10 quarters

22

4

-14

-32

Source: Motilal Oswal Securities

Several global indices,

including BRICs, have hit

their all-time highs

in CY07 so far

Continuing upswing in global equity markets

Several global indices, including BRICs, have hit their all-time highs in CY07 so far. The

upswing in global equities has had a positive impact on Indian markets also. However,

Indian equities have delivered amongst the lowest returns in CY07 YTD. Indian markets

have actually underperformed markets such as China, Brazil and South Korea. A strong

pull-back in 2QCY07 suggests that India is quickly narrowing the gap.

29 June 2007

7

India Strategy

YTD CY07 RETURNS IN KEY STOCK MARKETS (%)

Brazil

South Korea

Thailand

Taiw an

14.3

13.5

12.9

8.9

7.6

7.2

6.3

6.2

5.3

-1.3

22.3

21.6

Indian markets have

underperformed other

global markets in the

first half of CY07

China

India - Nifty

US

MSCI - Asia

India - Sensex

UK

Japan

Russia

2QCY07 RETURNS IN KEY STOCK MARKETS (%)

China

24.5

20.0

18.7

15.3

13.0

12.7

12.1

8.5

5.0

4.9

4.8

-2.0

Source: Bloomberg/Motilal Oswal Securities

But a strong pull-back

in the quarter ended

June suggests that

India is quickly

narrowing the gap

South Korea

Brazil

Thailand

India - Nifty

Taiw an

India - Sensex

US

MSCI - Asia

Japan

UK

Russia

The best performing stocks in the Sensex in CY07 YTD have shown a strong sectoral

bias. While Engineering, Wireless, and Financials have been the best performers, the worst

performers have been Autos, Pharma, and Technology. Surprisingly, only 13 out of the 30

Sensex stocks have delivered positive returns in CY07 YTD.

29 June 2007

8

India Strategy

SENSEX STOCKS: POSITIVE RETURN IN YTD CY07

COMPANY NAME

SECTOR

YTD CHG (%)

SENSEX STOCKS: NEGATIVE RETURN IN YTD CY07

COMPANY NAME

SECTOR

YTD CHG (%)

L&T

BHEL

Reliance

Engineering

Engineering

Oil & Gas

Telecom

Banking

Metals

Banking

Utilities

Utilities

Telecom

Banking

Banking

Oil & Gas

50.5

33.8

32.7

32.1

25.3

24.8

21.6

17.3

10.4

9.8

7.1

6.5

3.0

Tata Motors

Maruti Udyog

Bajaj Auto

Dr Reddy’ Labs.

s

Cipla

Wipro

Infosys Tech.

ACC

Ambuja Cem.

Hind. Unilever

ITC

Hero Honda Motor

Ranbaxy Labs.

Hindalco Inds.

Satyam Computer

TCS

Grasim Inds.

Auto

Auto

Auto

Pharma

Pharma

IT

IT

Cement

Cement

FMCG

FMCG

Auto

Pharma

Metals

IT

IT

Cement

-28.0

-23.3

-22.3

-18.6

-17.1

-15.2

-15.1

-14.5

-13.6

-12.8

-12.5

-12.1

-10.9

-10.0

-8.1

-8.0

-6.9

Stocks that witnessed

earnings upgrades are

the best performers and

vice versa

Bharti

HDFC

Tata Steel

SBI

Rel Energy

NTPC

RCOM

HDFC Bank

ICICI Bank

ONGC

Source: Motilal Oswal Securities

Inflation has declined from a

high of 6.5% in January

to a comfortable 4%

Inflation, interest rate worries reduce considerably

In our

India Strategy

dated 5 April 2007, we had highlighted that inflation would decline

significantly due to the base effect from May onwards. In FY07, the inflation index increased

sharply from April to October, on the back of increase in fuel, food and commodity prices.

Over the last quarter, the base impact has already resulted in moderation of inflation from

a high of 6.5% to 4% as of July 6.

INFLATION (%)

9.0

8.7

6.6

Inflation at 4% is at

the lower end of the

comfort band

7.0

5.0

3.5

3.0

1.0

4.3

3.3

4.0

Source: Bloomberg/Motilal Oswal Securities

Over the next three months,

we expect inflation to

moderate further

While the base effect had its impact, this is not the only factor that has helped to tame

inflation. Over the last quarter, inflation has increased by just 0.8% and over the last five

weeks, the inflation index has remained flat. Primary articles inflation (food inflation, largely),

which was the key driver for high inflation has moderated from 12.1% in April to 6.75% in

June. Even the primary articles inflation index has remained flat over the three months.

With the base impact being even stronger over the next three months (2QFY08), we

expect inflation to remain low.

9

29 June 2007

India Strategy

WHOLESALE PRICE INDEX

214

209

204

199

194

Absolute index has remained flat,

resulting in positive surprise

Source: Bloomberg/Motilal Oswal Securities

With inflation easing, we do

not expect further monetary

tightening by RBI

Owing to high inflation and runaway credit growth, the RBI had adopted a tough monetary

stance and hiked CRR by 150bp over the period November 2006 – March 2007, sucking

out Rs450b of liquidity from the markets. The main intention was to slow down credit

growth; especially towards sectors like real estate, stock markets, commodity markets,

personal loans, etc and controlling inflation. While this resulted in a tight liquidity situation

and rising rates during that period, we believe that the measures are having their desired

effects and we do not expect further monetary tightening.

CREDIT GROWTH YOY (%)

42.0

Credit growth of 24%

in 1QFY08 is the

slowest in last several

quarters

34.0

26.0

18.0

10.0

Source: Motilal Oswal Securities

The resultant easing of the

tight credit crunch would

favorably impact sectors

like Autos

The taming of inflation would give a significant boost to the regime of stable interest rates.

Since December 2006, interest rates have risen by 200-400bp. Moreover, as the RBI

raised CRR thrice, it also resulted in a credit squeeze. We believe that RBI is unlikely to

take up any further monetary tightening (although consensus is equally divided about a last

step of tightening). In the last couple of months, bulk deposit rates have already declined

by 200bp and we expect them to decline further. We also believe that availability of finance

would increase significantly due to strong deposit growth and this would have a positive

impact on sectors that faced liquidity crunch earlier.

10

29 June 2007

India Strategy

10-YEAR G-SEC YIELD

12-MONTH COMMERCIAL PAPER RATES

9.0

8.2

8.0

7.2

7.0

8.0

12.0

11.10

10.6

9.2

7.8

8.80

9.46

8.55

7.13

6.0

5.1

5.0

6.4

5.85

5.0

Source: Bloomberg/Motilal Oswal Securities

Among the triggers for

higher credit flow, interest

rate stability are a

potential CRR cut…

We see following triggers for higher credit flow and stable interest rates in 2HFY08:

?

CRR hike is an interim measure to control liquidity, bring down inflation and lower

credit growth. As credit growth slows down to 24-25% with a decline in inflation, RBI

will be under less pressure to increase rates, CRR. Liquidity management is important

considering the strong capital flows and its impact on currency but RBI will have to

balance out these measures through other liquidity control tools. Once the currency

rate stabilizes, we see no reason for CRR to remain at high levels of 6.5% (RBI has

always maintained its medium term target of 3%). A potential cut in CRR will not only

augment the liquidity of the system but will also pave the way for reduction in lending

rates.

EVERY MEASURE OF RBI HAS BEEN FOLLOWED BY A RATE HIKE BY BANKS

TREND IN CRR HIKE

ICICI HIKES PLR BY 300BP IN FY07

6.60

6.25

6.00

5.90

5.50

5.25

5.20

4.75

4.50

Sep

04

Oct

04

Dec

06

Jan

07

Feb

07

Mar

07

5.00

5.75

6.50

16.0

14.5

13.0

11.5

10.0

Apr

Apr

07

07

14 Apr 28 Apr

Source: Motilal Oswal Securities

29 June 2007

11

India Strategy

… an easing of the stiff

competition for high-cost

deposits amongst banks…

?

Banks have increased deposit rates significantly over the last few months. This has

resulted in significant growth in bank deposits. With more money in hand than to lend,

banks have reduced their rush of grabbing high cost deposits. Moreover, the increase

in lending rates over the last few months has also created some resistance from

borrowers. We believe that banks would now be more moderate in pricing both deposits

and loans. Sustained growth in deposits coupled with slowdown in credit offtake would

improve the availability of funds for several sectors and lead to stable lending rates.

INCREMENTAL CD RATIO

DEPOSIT GROWTH CONVERGENCE TO LOAN GROWTH LEADS TO DECLINING C/D RATIO

DEPOSIT GROWTH YOY (%)

26.0

160.0

130.0

100.0

70.0

40.0

22.0

18.0

14.0

10.0

Source: Motilal Oswal Securities

… and the possibility of a cut

in SLR to below 25%

?

The government has approved the bill to empower RBI to cut SLR below 25%. We

expect banks to be net buyers of government bonds at the current rate of SLR.

Considering the increased appetite of insurance and pension funds for government

bonds, we expect the demand for bonds to outstrip supply significantly in FY08. This

would allow the RBI to reduce the rate of SLR to channelize more funds from the

banking sector towards credit growth.

Rupee appreciation,

however, continues to pose a

threat to corporate earnings

Rupee appreciation – a threat to earnings

The Indian Rupee has appreciated 6% against the US Dollar to close at a 9-year high of

Rs40.7/US$ in 1QFY08. Over the last nine years, while the currency rate has moved in

both directions, it has remained in range of Rs42-48/US$. Post 3QFY07, strong capital

flows in the system, high interest rates and RBI’ bias towards a stronger Rupee to help

s

fight inflation has led to the strong Rupee appreciation.

29 June 2007

12

India Strategy

RUPEE V/S DOLLAR RATE (RS/US$)

50

48

46

44

42

40

QUARTERLY TREND IN RUPEE APPRECIATION V/S DOLLAR (QOQ, %)

8.00

4.00

0.00

-4.00

-8.00

FOREX RESERVE (US$B)

240

180

120

60

0

42

54

110

75

141

152

199

213

Source: Bloomberg/Motilal Oswal Securities

Over 50% of the Sensex

earnings are from sectors

that are sensitive to

currency movements

The outlook on currency assumes significant importance while estimating the earnings of

Indian corporates. Almost 13% of Sensex earnings come from Software Services, which

are directly impacted by currency movement. Also, for Global Commodities lower import-

parity prices and realizations impact earnings. On an average, over 50% of the Sensex

earnings are from sectors that are sensitive to currency movements. Assuming all other

factors constant, our estimates could witness a significant downgrade with any further

currency gains in FY08. Infosys, which averaged earnings growth of 55% in the last four

quarters, is likely to witness just 22% earnings growth in 1QFY08.

29 June 2007

13

India Strategy

CURRENCY IMPACT ON SENSEX STOCKS

COMPANY

(%) PROFIT

IN SENSEX

FY08E

WEIGHT

IN INDEX

(%)

IMPACT OF CURRENCY

Automobile

Bajaj Auto

Hero Honda

Maruti Udyog

Tata Motors

Banking

HDFC

HDFC Bank

ICICI Bank

State Bank

Cement

ACC

Ambuja Cements

5.51

1.12

0.80

1.51

2.08

12.86

1.66

1.33

3.61

6.26

4.50

1.19

1.37

4.93

1.61

0.74

0.92

1.66

21.12

4.94

3.13

9.19

3.86

4.47

1.12

1.41

1.94

8.80

2.82

5.98

6.59

2.23

4.36

17.17

10.01

3.14

2.40

1.62

4.18

1.58

2.60

16.80

4.13

12.67

3.00

1.13

0.88

0.99

9.89

5.93

3.96

3.06

2.01

1.05

No direct impact

No direct impact; Translation gains on outstanding FCCBs could

be positive

Source: Motilal Oswal Securities

Positive impact due to foreign currency loans and capex

Negative impact at operational level. But will record large

translation gains on FCCBs

Negative impact at operational level

Negative - Every 1% currency gains reduces EPS by ~2%

Negative impact due to import parity prices

Negative; Every 1% currency gain lower EPS by

1.25-1.5% (ex other income)

Positive; Reduces the input price pressure

Neutral

Postive; Net imports at 12% of revenues

Neutral; Net exports just at 2%; L&T Infotech contributes 10%

to Cons PAT

No direct impact

Cement exports & import of coal off-sets impact of currency

movement

No direct impact

No direct impact; Indirect impact is through inflation

Neutral; Exports are 20% of sales but to neigbhouring countries

Neutral; Exports are almost nil

Neutral; Exports are just 6%

Positive impact due to foreign currency loans and capex,

exports are just 8%

Grasim Industries 1.93

Engineering

BHEL

Larsen & Toubro

FMCG

Hind. Unilever

ITC

IT

Infosys

TCS

Wipro

Metals

Hindalco

Tata Steel

Oil & Gas

ONGC

Reliance Inds.

Pharma

Cipla

Dr Reddy’ s Labs

Ranbaxy Labs

Telecom

Bharti Airtel

Reliance Comm

Utilities

NTPC

Reliance Energy

4.59

2.62

1.97

3.81

1.44

2.38

12.78

4.01

4.25

3.03

8.86

2.24

6.63

28.90

17.81

11.08

1.70

0.64

0.50

0.56

9.35

5.41

3.94

7.13

6.38

0.75

Satyam Computer 1.49

Impacted adversely by Rupee appreciation

29 June 2007

14

India Strategy

The Indian economy,

nevertheless, is headed

towards the fifth consecutive

year of strong GDP growth

Fifth consecutive year of strong GDP growth

The Indian economy grew by 9.4% in FY07 on top of a 9% growth in FY06. GDP growth

for FY08 is expected to be 8.5-9%, making it the third consecutive year of ~9% GDP

growth, and an unprecedented fifth consecutive year of 7.5%+ GDP growth. In FY07,

India is expected to emerge as a trillion-dollar economy and per capita income is expected

to cross US$1,000 in FY08. This, we believe, has the potential to propel the economy into

a virtuous spiral of consumption, savings and investment.

REAL GDP GROWTH (%)

12

9

6

3

0

5.6

5.1

1.3

5.9

4.8

8.5

7.3

7.3 7.8

7.5

6.5

6.1

4.4

5.8

3.8

9.0

9.4

9.0

NOMINAL GDP GROWTH (%)

16

13.8

14

11

9.1

9

6

7.8

7.9

11.8

12.5

12.0

15.2

14.0

RISING PER CAPITA INCOME (US$)

1,800

1,400

1,000

600

200

Per Capita GDP expected to grow to US$

1786 in 2014 from US$ 812 in 2007

Acceleration in Per Capita

GDP from 2003

CAGR of 1

3.9%

CAGR of 2.2%

CAGR of 1 .9%

1

Source: Motilal Oswal Securities

29 June 2007

15

India Strategy

Government finances are

improving, signaling no

crowding out of private

capital raising

Steady improvement in government finances

Sustained economic growth has gone a long way in improving the picture of government

finances. Over FY02-07, the government’ revenue receipts (net of devolvement to states)

s

have grown at 16% CAGR, against the nominal GDP growth of 12% CAGR. Fiscal

deficit to GDP is down sharply from 6.1% in FY02 to 3.7% in FY07RE. The government’

s

stronger financial position has meant that its borrowing program did not crowd out private

capital, leading to a stable interest regime.

FISCAL DEFICIT UNDER CHECK

Fiscal Def icit (Rs B) - LHS

1,750

1,500

1,250

1,000

750

Fiscal Deficit as % to GDP (RHS)

7

6

5

4

3

INTEREST COST TO RECEIPTS DECLINING

Interest (Rs b) - LHS

1,650

1,400

1,150

900

650

400

Interest % to Revenue Receipts - RHS

55

50

45

40

35

30

Source: Motilal Oswal Securities

CY07 is likely to be the year

of largest capital raising by

Indian corporates

Large equity issuance has generated very strong response

CY07 is expected to be the year of largest capital raising by Indian corporates. Banks and

real estate companies have already led the list of raising significant capital in the first six

months. While the initial impression prior to the raisings was concerning (expected response

to the issue, impact of money flowing from secondary to primary markets, etc), the results

have been impressive till now. In the first six months of CY07, India’ corporate sector

s

has raised equity of over Rs600b, higher than in any of the previous six years. Some of the

large equity issues include ICICI Bank (Rs200b), DLF (Rs92b), Sterlite (~Rs92b), and

Idea Cellular (Rs21b). More important is the investor response – an average

oversubscription of 15.6 times! We believe this reflects sustained faith in Indian equities

and will encourage more corporates to raise money in primary markets.

16

29 June 2007

India Strategy

MONTHLY TREND IN NET FII INVESTMENTS (US$B)

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

2.2

2.10

1.1

1.40

0.0

0.70

-1.1

0.00

-2.2

-0.70

Source: Motilal Oswal Securities

CAPITAL RAISING: KEY ISSUES IN CY07

TOP 10 ISSUES BY SIZE

ISSUE SIZE

(RS B)

SUBSCRIPTION

AMOUNT (RS B)

NO. OF TIMES

OVERSUBSCRIBED

ICICI Bank (Including Green Shoe)

DLF

101

92

21

15

10

8

5

5

4

4

265

303

1,153

303

1,053

98

769

251

161

14

219

293

4,315

5,148

11.5

3.3

49.6

6.6

77.2

32.1

30.2

2.8

49.3

80.9

16.3

17.0

The appetite for primary

market offerings reflects

sustained faith in

Indian equities

Idea Cellular

Housing Development & Infrastructure

Power Finance Corporation

Indian Bank

Bharat Earth Movers

Fortis Healthcare

Firstsource Solutions

Akruti Nirman

Total of above

Grand total (52 companies)*

*Excluding 5 Companies for which subscription data not available

Source: Motilal Oswal Securities

Earnings growth at 18% in 1QFY08, slowest in five quarters

We estimate 1QFY08 PAT growth for Sensex companies at 18%. This would be the

slowest earnings growth in the last five quarters, and also lower than the previous 8-

quarter average growth of 26%. Our EBITDA growth estimate is even lower at 12%.

QUARTERLY SENSEX PAT GROWTH (%)

50.0

40.0

30.0

20.0

10.0

0.0

32.8

24.4

30.3

30.0

44.3

33.2

17.9

10.5

5.7

Source: Motilal Oswal Securities

29 June 2007

17

India Strategy

The three major reasons for the slow earnings growth are:

?

Higher subsidy burden on ONGC (ex-ONGC, growth is 24%)

?

Impact of stronger Rupee on Software Services (ex-IT, growth is still 18%)

?

Impact of higher interest rates on Autos (ex-Autos, growth is 20%)

A key offsetting factor has been the performance of the Telecom sector, led by Reliance

Communications, with PAT growth of 116% and Bharti, with PAT growth of 99%. Excluding

these two companies, EBITDA growth is just 8% and PAT growth 12%. Telecom and

financials contribute 50% of growth to the Sensex earnings.

SECTORAL CONTRIBUTION TO TOTAL SENSEX EARNINGS

SECTORAL CONTRIBUTION TO GROWTH IN SENSEX EARNINGS

Utilities

8.2%

Telecom

11.1%

Pharma

1.9%

Automobiles

5.1%

Banking

10.6%

Cements

5.1%

Engineering

2.4%

FMCG

4.9%

Utilities

6.4%

Automobiles

-2.4%

Banking

14.8%

Cements

6.9%

Telecom

37.6%

Engineering

4.4%

FMCG

3.0%

Pharma

0.2%

Oil & Gas

10.0%

Metals

3.8%

Source: Motilal Oswal Securities

Oil & Gas

30.0%

Metals

7.3%

IT

13.5%

IT

15.2%

Going forward, the Rupee could remain strong. Likewise, with crude prices remaining

high, ONGC could continue to bear higher share of subsidy. Though interest rates could

ease, Autos continue to be dogged by intense competition.

FY08 earnings risks are evenly balanced

We are estimating an EPS growth of 18% for the Sensex in FY08. For our universe of 139

stocks, earnings are likely to grow at 19%. For the last three years, we have consistently

witnessed significant upgrades to our estimates during the course of the year. Our end-of-

the-year estimates have been significantly higher than our beginning-of-the-year estimates.

In FY08, while there could

be negative surprises in

Software Services and

Global Commodities…

29 June 2007

18

India Strategy

GROWTH IN SENSEX EPS

Sensex EPS (Rs)

1,050

825

600

450

375

150

FY 03

FY 04

FY 05

FY 06

348

272

35.8

28.0

29.1

523

Sensex EPS Grow th (%)

989

37.3

718

846

30.0

20.0

16.4

17.7

16.9

10.0

0.0

FY 07E

FY 08E

FY 09E

40.0

REVISION IN FY08 SENSEX EPS ESTIMATE

900

850

FY 08 EPS

% Grow th Revision in FY08 EPS

838

810

835

846

822

16

19

800

750

709

700

650

Dec-05

Mar-06

June-06

733

732

780

13

10

Sep- 06

Dec-06

Jan-07

Feb-07

Mar-07

Jun-07

Source: Motilal Oswal Securities

… but Telecom, Engineering

and Financials could throw

up positive surprises

We believe that in FY08, we are evenly balanced with risks to our estimates on either side.

The single biggest threat to our estimates is currency movement. Given the strong Rupee

appreciation, we consider our estimates for Software Services and Global Commodities at

risk. For every 1% gain in the Rupee, Infosys’EPS falls by 1.25-1.5%. Software Services

have 17% weightage in the BSE Sensex, although their contribution to Sensex profits is

lower at 13%. On the positive side, we believe that Telecom, Engineering, and Financials

could witness earnings upgrades.

29 June 2007

19

India Strategy

CONTRIBUTION TO SENSEX EPS GROWTH

COMPANY

WEIGHT IN

SENSEX (%)

FY08E EPS

GROWTH (%)

FY08 CONTRIBUTION

TO SENSEX EPS (%)

Reliance Inds.

Infosys

ICICI Bank

Larsen & Toubro

Bharti Airtel

HDFC

ITC

ONGC

Reliance Comm

State Bank

Satyam Computer

HDFC Bank

BHEL

Tata Steel

TCS

Hind. Unilever

NTPC

Grasim Industries

Tata Motors

Wipro

Bajaj Auto

Hindalco

Ambuja Cements

Cipla

ACC

Reliance Energy

Ranbaxy Labs

Maruti Udyog

Dr Reddy’ s Labs

Hero Honda

12.7

10.0

9.2

6.0

5.9

4.9

4.4

4.1

4.0

3.9

3.1

3.1

2.8

2.6

2.4

2.2

2.0

1.9

1.7

1.6

1.6

1.6

1.4

1.1

1.1

1.1

1.0

0.9

0.9

0.7

6.2

26.8

11.2

26.8

50.0

16.9

4.2

18.4

45.9

16.1

22.5

22.6

29.7

30.8

23.2

10.1

14.7

15.6

9.8

23.5

3.3

-5.7

20.9

14.0

27.8

11.2

22.9

14.2

-36.2

8.8

11.6

7.1

7.5

3.7

4.0

3.1

3.5

7.4

2.9

5.9

3.0

2.2

1.9

9.7

1.8

1.5

2.0

3.0

2.6

1.3

1.6

3.5

2.0

0.9

1.5

1.1

0.8

1.3

0.8

0.8

Source: Company/Motilal Oswal Securities

Valuations fair; adopt sector / stock approach to maximize returns

We are estimating an 18% growth in Sensex EPS in FY08 to Rs846 and a growth of 17%

in FY09 to Rs989. Our target range for the Sensex based on FY09E earnings is 13,500-

SENSEX P/E (X)

SENSEX EARNINGS YIELD V/S BOND YIELD

Sensex ( RHS )

78

60

42

24

6

Sensex P/E ( LHS)

15000

2.0

1.5

1.8

1.4

11500

15 Year Median is 15.8x

8000

4500

1000

1.0

0.5

0.0

0.15

15 Year Avg is 0.73x

0.7

Source: Motilal Oswal Securities

29 June 2007

20

India Strategy

SENSEX P/BV (X)

SENSEX ROE (%)

4.5

26

3.5

22

2.5

15 Year Avg. 2.1x

18

15 Year Average 17.6%

1.5

14

0.5

10

Source: Motilal Oswal Securities

Follow a sector/stock-

specific investment approach

to maximize returns

16,500 (12-15x FY09E EPS and addition of 1,700 points as embedded value). We see

scope for returns in specific sectors / stocks.

?

The top-3 sectors to play on strong earnings momentum in our view are Telecom,

Engineering, and Financials. These three sectors are witnessing earnings upgrades

and are likely to maintain very strong business momentum for FY08 and FY09. Despite

the strong performance of these stocks, we believe that earnings comfort remains

very high and the stocks have room to move up further.

?

We also believe that 2HFY08 could see a revival of positive trends for few sectors

that witnessed significant underperformance till date. Our top-3 bets here are Four-

wheelers, Real Estate and Cement. While Four-wheelers and Real Estate would be

direct beneficiaries of stable/lower interest rates and greater availability of finance,

the Cement sector would benefit from the strong demand-supply scenario and ability

hike prices due to low inflation.

?

Our top large-cap bets are Bharti / Reliance Communications, L&T, SBI, Maruti /

Tata Motors, Infosys, DLF, Tata Steel, and Grasim / Ambuja Cement. Amongst the

mid-caps, we prefer Indian Bank, United Phosphorus, Birla Corp / Kesoram, Great

Offshore, HCC, Sobha Developers, SREI, and Nicholas.

29 June 2007

21

Model Portfolio

MOST MODEL PORTFOLIO

SECTOR WEIGHT /

PORTFOLIO PICKS

BSE-100

MOST

WEIGHT

WEIGHT RELATIVE

TO BSE-100

EFFECTIVE SECTOR

STANCE

Banks

SBI

HDFC

HDFC Bank

PNB

Indian Bank

Information Technology

Infosys

TCS

Satyam Computers

Engg./Infrastrcuture/Real Estate

L&T

DLF

HCC

Telecom

Bharti Airtel

Reliance Comm

Cement

Grasim Industries

Ambuja Cements

Birla Corp

Auto

Maruti Udyog

Tata Motors

Mahindra & Mahindra

Petrochemicals

Reliance Inds.

Metals

Tata Steel

Pharmaceuticals

Ranbaxy Labs

Nicholas

Oil & Gas

ONGC

FMCG

ITC

Utilities

Others

Cash

Total

18.8

2.7

3.4

2.2

0.6

0.0

13.6

6.9

1.7

2.2

11.4

4.2

0.0

0.0

7.4

4.1

2.7

3.7

1.3

1.0

0.0

5.4

0.6

1.1

1.1

10.2

8.8

4.6

1.8

3.7

0.7

0.0

4.7

2.9

5.7

3.0

4.2

6.5

0.0

100.00

19.0

6.0

4.0

4.0

3.0

2.0

15.0

6.0

5.0

4.0

14.0

6.0

5.0

3.0

11.0

6.0

5.0

10.0

5.0

3.0

2.0

9.0

3.0

3.0

3.0

7.0

7.0

5.0

5.0

5.0

3.0

2.0

3.0

3.0

2.0

2.0

0.0

0.0

0.0

100.0

0.2

3.3

0.6

1.8

2.4

2.0

1.4

-0.9

3.3

1.8

2.6

1.8

5.0

3.0

3.6

1.9

2.3

6.3

3.7

2.0

2.0

3.6

2.4

1.9

1.9

-3.2

-1.8

0.4

3.2

1.3

2.3

2.0

-1.7

0.1

-3.7

-1.0

-4.2

-6.5

Overweight

Buy

Buy

Buy

Buy

Buy

Overweight

Buy

Buy

Buy

Overweight

Buy

-

Buy

Overweight

Buy

Buy

Overweight

Buy

Buy

Buy

Overweight

Buy

Buy

Buy

Underweight

Neutral

Overweight

Buy

Overweight

Buy

Buy

Neutral

Buy

Underweight

Buy

Underweight

Underweight

29 June 2007

22

MOSt Universe

ANNUAL PERFORMANCE - MOST UNIVERSE

SECTOR

Y/E MARCH

FY07E

SALES

FY08E

FY09E CH. (%)*

FY07E

EBITDA

FY08E

FY09E CH. (%)*

FY07E

NET PROFIT

FY08E

(RS BILLION)

FY09E CH. (%)*

Auto (12)

922 1,038 1,170

12.6

117

130

149

Banks (19)

656

817 1,000

24.6

432

528

659

Cement (7)

294

342

370

16.1

91

115

114

Engineering (10)

707

953 1,205

34.8

104

141

181

FMCG (12)

462

544

627

17.7

90

100

117

IT (14)

715

926 1,173

29.6

180

225

280

Infrastructure (8)

167

220

303

31.6

26

34

50

Media (1)

14

18

21

25.1

3

5

8

Metals (6)

974 2,021 2,138 107.4

296

417

458

Oil Gas & Petchem (9)

6,847 6,519 6,463

-4.8

810

855

843

Pharma (17)

364

407

478

11.9

75

85

101

Retail (3)

62

97

140

56.7

5

7

10

Telecom (3)

370

520

650

40.5

141

210

268

Textiles (7)

100

120

143

20.6

16

21

26

Utilities (6)

498

595

668

19.5

130

163

177

Others (5)

90

120

144

34.1

21

28

34

MOSt (139)

13,243 15,259 16,695

15.2 2,536 3,063 3,475

MOSt Excl. Banks (120)

12,587 14,442 15,695

14.7 2,104 2,536 2,816

MOSt Excl.Oil & Gas (130)

6,396 8,740 10,231

36.6 1,726 2,208 2,632

MOSt Excl. Banks & Oil (111)

5,740 7,922 9,231

38.0 1,294 1,680 1,973

NM - Not Meaningful; * Growth FY08 over FY07; For Banks : Sales = Net Interest Income, EBITDA

11.4

80

87

22.2

217

265

26.5

59

72

35.7

75

98

10.9

63

71

24.9

149

187

31.6

12

14

69.7

2

3

40.8

174

229

5.6

439

471

14.0

54

61

40.8

2

3

49.0

79

115

25.6

6

7

25.2

90

101

34.3

13

18

20.8 1,514 1,801

20.5 1,297 1,536

27.9 1,075 1,330

29.8

858 1,065

= Operating Profits

98

327

69

127

86

228

19

5

262

471

73

5

141

10

106

23

2,051

1,724

1,580

1,253

9.2

22.2

21.4

31.6

11.9

25.2

18.7

56.8

31.2

7.3

12.3

33.2

45.4

17.9

12.3

37.7

19.0

18.4

23.7

24.1

VALUATIONS - MOST UNIVERSE

SECTOR

P/E

(X)

(NO. OF COMPANIES)

FY07E

FY08E

FY09E

FY07E

EV/EBITDA

(X)

FY08E

FY09E

P/BV

(X)

FY07E

FY08E

FY07E

ROE

(%)

FY08E

FY09E

DIV.

YLD (%)

EARN.

CAGR

FY07E (FY09-07)

Auto (12)

Banks (19)

Cement (7)

Engineering (10)

FMCG (12)

IT (14)

Infrastructure (8)

Media (1)

Metals (6)

Oil Gas & Petchem (9)

Pharma (17)

Retail (3)

Telecom (3)

Textiles (7)

Utilities (6)

Others (5)

MOSt (139)

MOSt Excl. Banks (120)

MOSt Excl.Oil & Gas (130)

MOSt Excl. Banks & Oil (111)

N.M. - Not Meaningful

15.8

16.7

14.2

36.2

25.7

27.5

52.5

59.0

9.3

12.7

22.4

59.8

35.1

12.4

18.8

21.4

18.6

19.0

21.1

22.2

14.5

13.6

11.7

27.5

23.0

22.0

44.2

37.6

7.1

11.8

20.0

44.9

24.1

10.5

16.8

15.5

15.7

16.0

17.0

17.9

12.8

11.0

12.2

21.4

18.9

18.0

32.0

25.9

6.2

11.8

16.6

31.0

19.6

7.5

15.9

11.9

13.8

14.3

14.4

15.2

9.7

N.M

9.2

25.6

17.3

21.7

26.9

41.6

5.5

7.6

17.0

30.5

20.1

9.5

13.2

13.5

N.M

11.9

N.M

14.6

8.4

N.M

7.2

18.9

15.3

17.0

21.9

24.2

4.7

7.1

14.8

22.2

13.4

8.5

10.9

10.0

N.M

10.0

N.M

11.4

6.9

N.M

6.9

14.8

12.6

13.3

16.1

16.5

4.0

7.0

12.2

16.4

10.2

7.1

10.9

7.8

N.M

8.8

N.M

9.6

3.9

2.8

5.3

11.3

8.1

8.4

6.1

5.2

2.7

2.8

5.7

11.7

6.9

1.1

2.4

5.6

4.1

4.4

4.6

5.3

3.2

2.2

3.8

8.7

6.7

6.5

5.1

4.7

1.8

2.4

4.7

8.2

5.4

1.0

2.2

4.4

3.3

3.6

3.6

4.2

24.4

16.8

37.5

31.1

31.4

35.7

11.7

13.6

29.3

24.4

25.3

19.6

23.5

8.9

12.6

26.1

22.1

23.4

22.0

23.9

22.3

16.1

33.0

31.5

29.2

33.3

11.6

17.7

24.9

22.1

23.4

18.2

25.0

9.4

12.9

28.4

21.1

22.3

21.4

23.3

21.4

16.1

24.9

32.6

30.7

31.6

14.2

18.6

23.2

18.9

23.4

21.7

24.1

11.9

12.5

29.0

20.0

21.0

20.9

22.7

1.8

1.3

1.4

0.7

2.2

1.2

0.3

0.3

2.3

2.3

1.2

0.2

0.1

1.8

1.9

0.8

1.4

1.5

1.2

1.2

11.1

22.9

8.0

30.2

16.7

23.6

28.1

50.8

22.6

3.6

16.2

38.9

33.6

28.4

8.8

34.1

16.4

15.3

21.2

20.8

Source: Motilal Oswal Securities

29 June 2007

23

MOSt Universe

1QFY08: slower PAT growth

We expect 1QFY08 to be a quarter of steady corporate performance. For our Universe of

136 companies (excluding the major oil marketing companies, OMCs), we estimate revenue

growth of 17% YoY, EBITDA growth of 14% YoY and PAT growth of 19% YoY. The

major sectors driving profit growth during the quarter would be Telecom, Banks, Engineering,

IT and Cement. Performance has been impacted by a strong Rupee appreciation, which

has limited the growth of the IT sector to 25%. The impact of interest rates has also been

felt on the earnings of Autos. On the OMCs, we have assumed oil bonds to accrue in

1QFY08, which is resulting in aggregate profit growth being very strong at 40%. However,

the timing of issue of oil bonds remains uncertain.

QUARTER-WISE SALES GROWTH (YOY)

QUARTER-WISE NET PROFIT GROWTH (YOY)

40%

30%

20%

10%

0%

34.7%

26.5%

17.1%

16.0%

80%

64.2%

60%

40%

20%

0%

18.9%

46.0%

39.5%

Sep- 06

Dec-06

Mar-07

June-07

Sep- 06

Dec-06

Mar-07

June-07

Source: Motilal Oswal Securities

QUARTERLY PERFORMANCE - MOST UNIVERSE

SECTOR

(NO. OF COMPANIES)

JUN.06

SALES

JUN.07

CHG. (%)

JUN.06

EBITDA

JUN.07

CHG. (%)

JUN.06

NET PROFIT

JUN.07

CHG. (%)

(RS MILLION)

Auto (12)

Banks (19)

Cement (7)

Engineering (10)

FMCG (12)

IT (14)

Infrastructure (8)

Media (1)

Metals (6)

Oil Gas & Petchem (9)

Pharma (17)

Retail (3)

Telecom (3)

Textiles (7)

Utilities (6)

Others (5)

MOSt (139)

MOSt Excl. Banks (120)

MOSt Excl.Oil & Gas (130)

MOSt Excl. Banks & Oil (111)

MOSt Excl Metals & Oil (124)

199,362

143,083

69,392

113,765

106,971

154,901

35,617

3,882

187,689

83,228

11,881

80,305

19,268

120,409

19,754

211,790

176,202

83,103

150,298

125,599

198,265

44,681

4,030

220,121

95,755

19,398

114,186

26,878

135,361

25,752

6.2

23.1

19.8

32.1

17.4

28.0

25.4

3.8

17.3

11.5

15.1

63.3

42.2

39.5

12.4

30.4

16.0

15.6

20.9

20.6

21.5

26,477

98,793

22,648

12,085

21,385

36,890

4,360

726

60,101

127,580

17,345

657

29,214

3,377

28,408

4,025

494,070

395,278

366,490

267,698

306,389

25,342

112,653

28,261

17,481

24,214

45,628

5,355

1,180

70,181

193,152

18,948

1,115

45,227

4,146

33,378

5,423

631,684

519,031

438,532

325,879

368,351

-4.3

14.0

24.8

44.6

13.2

23.7

22.8

62.7

16.8

51.4

9.2

69.5

54.8

22.8

17.5

34.7

27.9

31.3

19.7

21.7

20.2

17,235

42,031

14,331

8,041

15,005

31,750

2,171

549

35,310

53,199

11,735

282

13,559

1,287

21,022

2,625

270,131

228,101

216,933

174,902

181,623

17127

53293

17712

10824

16932

39792

2275

744

41572

106746

14577

401

27335

999

23267

3323

376,920

323,627

270,173

216,881

228,602

-0.6

26.8

23.6

34.6

12.8

25.3

4.8

35.6

17.7

100.7

24.2

42.3

101.6

-22.4

10.7

26.6

39.5

41.9

24.5

24.0

25.9

1,507,953 1,682,085

2,857,463 3,313,505

2,714,379 3,137,302

1,349,509 1,631,420

1,206,426 1,455,217

1,161,820 1,411,299

Source: Motilal Oswal Securities

29 June 2007

24

MOSt Universe

Retail would be the fastest

growing sector, followed

by Telecom

Sales to jump 16% YoY

?

We expect our Universe of 139 companies to record sales growth of 16% YoY in

1QFY08. A key observation is that growth is robust across sectors – Telecom (42%),

Engineering (31%), Infrastructure (25%), Banks (23%) and Cement (20%). For the

first time ever, IT is likely to report flat revenue growth QoQ, with volume growth

being offset by Rupee appreciation.

?

Telecom is expected to witness revenue growth of 42.2% on the back of sustained

strong addition to the wireless subscriber base. Bharti leads the pack, with a revenue

growth of 55.4% YoY followed by Reliance Communication (33.1% YoY).

?

We expect the Engineering sector to record sales growth of 32.1% YoY, on the back

of sustained capex in the Indian economy, especially in the power sector. Siemens is

likely to grow the fastest at 63.5% YoY, followed by Suzlon at 45%, ABB at 35% and

BHEL at 30%.

?

The Infrastructure sector is expected to record revenue growth of 25.4% YoY, driven

by strong order book position. All companies under coverage should show growth of

over 28% YoY except Jaiprakash Associates (2.5% YoY).

?

We expect Banks to register income growth of 23% YoY, on the back of strong credit

growth in a buoyant economy. Private sector banks are emerging as the growth leaders

with HDFC Bank and UTI Bank expected to grow at over 44% YoY.

?

Cement is likely to witness sales growth of 20% YoY, driven by 11-12% volume growth

and 7-8% higher prices. India Cement should see the highest growth at 37% YoY

followed by Shree Cement, with 32% growth.

?

The Pharma sector is likely to report sales growth of 15% YoY, on the back of two

themes – acquisitions (e.g. Dishman’ acquisition of Carbogen AMICS, consolidation

s

of Wockhardt’ Pinewood and Dumex acquisitions), and CRAMS (44% YoY growth

s

for Divi’ Labs, 32% YoY growth for Nicholas Piramal). Pharma MNCs are expected

s

to report muted growth due to divestments (consumer healthcare for Pfizer and animal

healthcare for GSK).

SECTORAL SALES GROWTH - QUARTER ENDED JUNE 2007 (%)

80

60

40

20

0

MOSt Universe Sales Growth = 16%

Source: Motilal Oswal Securities

29 June 2007

25

MOSt Universe

Retail would show the

highest EBITDA jump,

followed by Media

EBITDA margins excluding Banks and OMCs to drop 60bp

?

We expect our Universe of 117 companies (excluding Banks and OMCs) to register

EBITDA growth of 14.7% YoY. This is lower than our topline growth estimate of

17.7%, implying a 60bp drop in EBITDA margins. The major drags on margins are –

Autos (-130bp), Pharma (-110bp), IT (-80bp YoY, -230bp QoQ) and FMCG (-80bp).

Only two sectors are expected to see meaningful margin expansion – Telecom (+320bp)

and Cement (+150bp).

?

The Auto sector would witness margin decline of 130bp due to higher input costs

(mainly metals and rubber), which cannot be passed on due to competitive pressures.

EBITDA for two-wheeler companies is likely to decline by over 25%. Among four-

wheeler companies, M&M, Maruti and Ashok Leyland should manage low EBITDA

growth, while Tata Motors is expected to degrow 15%.

?

Several Pharma majors – Ranbaxy, Cipla, Dr Reddy’ Pfizer – are expected to see

s,

degrowth in EBITDA, muting overall sector EBITDA growth to just 9.2% YoY.

?

IT sector margins could see a sharp 230bp drop QoQ due to the double whammy of

wage hikes and a stronger Rupee. For the first time ever, sector EBITDA is expected

to degrow (-9.5% QoQ).

?

FMCG margins could be down 80bp YoY, led by high prices of key inputs (wheat, milk,

palm oil, etc), and rising ad spend.

?

The Telecom sector is expected to report strong EBITDA growth of 54.8% YoY

(EBITDA margin expansion of 320bp) on the back of operating leverage following

high subscriber addition.

?

Cement should see healthy EBITDA growth of 24.8% YoY. Though cement prices

are up 7-8% YoY, cost pressures – mainly coal and freight – would check margin

expansion at just 150bp YoY.

?

Oil marketing companies (OMCs) could see a huge swing in their EBITDA from a

negative Rs11b to a positive Rs57b, subject to the government issuing oil bonds. We

have factored in oil bonds worth Rs53b in our 1QFY08 estimates; these were not

captured in 1QFY07.

SECTORAL EBITDA GROWTH - QUARTER ENDED JUNE 2007 (%)

80

55

30

5

-20

MOSt Universe EBITDA Growth = 27.9%

Source: Motilal Oswal Securities

29 June 2007

26

MOSt Universe

Telecom would witness the

fastest net profit growth

in our universe

Net profit excluding OMCs to grow 19% YoY

?

We expect overall PAT growth to be a high 39.5% YoY. One major reason for this is

the low base effect of OMCs, which reported losses in 1QFY07 due to under-recoveries

not offset by oil bonds. Excluding OMCs, PAT growth would a steady 19% YoY.

Profit growth for the Sensex companies would also be in line at 18% YoY.

?

Telecom would witness the highest profit growth. Reliance Communication would

lead the pack, with expected PAT growth of 116% YoY, followed by Bharti (99%

YoY).

?

Banks, Cement, Engineering, IT and Pharma are expected to register PAT growth in

the range of 24-32% YoY.

?

Infrastructure PAT growth would be muted at 4.8% mainly due to higher provision for

income tax. For the first three quarters of FY07, companies did not fully provide for

tax, claiming exemption under Section 80IA of the Indian Income-tax Act. Such

exemption was subsequently clarified and denied in the Union Budget of February

2007, and most companies provided for tax arrears only in 4QFY07.

?

Only two sectors are expected to register PAT degrowth – Textiles (-22% YoY) and

Autos (-0.6% YoY). Textiles continues to be hit by: (1) lower volume exports to US

and EU, (2) high competition from China, and now (3) stronger Rupee. In the case of

autos, 4% EBITDA degrowth should be offset by positive financial leverage to restrict

PAT degrowth at just 0.6% YoY.

?

Among Sensex stocks, the top-3 performers in terms of PAT growth YoY are expected

to be Reliance Communication (+116%), Bharti (+99%) and L&T (+59%). The bottom-

3 would be Cipla (-31%), Hero Honda (-17%) and Bajaj Auto (-15.5%).

SECTORAL NET PROFIT GROWTH - QUARTER ENDED JUNE 2007 (%)

120

80

40

0

-40

MOSt Universe Net Profit Growth = 39.5%

Source: Motilal Oswal Securities

29 June 2007

27

MOSt Universe

QUARTERLY PERFORMANCE - MOST UNIVERSE

SECTOR

(NO. OF COMPANIES)

JUN.06

EBITDA MARGIN (%)

JUN.07

CHG. (%)

JUN.06

NET PROFIT MARGIN (%)

JUN.07

CHG. (%)

Auto (12)

Banks (19)

Cement (7)

Engineering (10)

FMCG (12)

IT (14)

Infrastructure (8)

Media (1)

Metals (6)

Oil Gas & Petchem (9)

Pharma (17)

Retail (3)

Telecom (3)

Textiles (7)

Utilities (6)

Others (5)

MOSt (139)

MOSt Excl. Banks (120)

MOSt Excl.Oil & Gas (130)

MOSt Excl. Banks & Oil (111)

MOSt Excl Metals & Oil (124)

13.3

69.0

32.6

10.6

20.0

23.8

12.2

18.7

32.0

8.5

20.8

5.5

36.4

17.5

23.6

20.4

17.3

14.6

27.2

22.2

26.4

12.0

63.9

34.0

11.6

19.3

23.0

12.0

29.3

31.9

11.5

19.8

5.7

39.6

15.4

24.7

21.1

19.1

16.5

26.9

22.4

26.1

-1.3

-5.1

1.4

1.0

-0.7

-0.8

-0.3

10.6

-0.1

3.0

-1.1

0.2

3.2

-2.1

1.1

0.7

1.8

2.0

-0.3

0.2

-0.3

8.6

29.4

20.7

7.1

14.0

20.5

6.1

14.1

18.8

3.5

14.1

2.4

16.9

6.7

17.5

13.3

9.5

8.4

16.1

14.5

15.6

8.1

30.2

21.3

7.2

13.5

20.1

5.1

18.5

18.9

6.3

15.2

2.1

23.9

3.7

17.2

12.9

11.4

10.3

16.6

14.9

16.2

-0.6

0.9

0.7

0.1

-0.5

-0.4

-1.0

4.3

0.1

2.8

1.1

-0.3

7.1

-3.0

-0.3

-0.4

1.9

1.9

0.5

0.4

0.6

Source: Motilal Oswal Securities

EBITDA MARGIN GROWTH - QUARTER ENDED JUNE 2007 (%)

NET PROFIT MARGIN GROWTH - QUARTER ENDED JUNE 2007 (%)

12

8

4

0

-4

-8

MOSt Universe EBITDA Margin Growth = 180bp

12

MOSt Universe Net Profit Margin Growth = 190bp

8

4

0

-4

Source: Motilal Oswal Securities

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 (9)

IT (14)

Engineering (10)

Telecom (3)

Banks (19)

Metals (6)

FMCG (12)

Utilities (6)

Cement (7)

Pharma (17)

Auto (12)

Infrastructure (8)

Textiles (7)

Retail (3)

Others (5)

Media (1)

38.2

9.5

8.0

7.4

7.3

7.1

4.1

3.3

3.0

2.7

2.7

2.0

1.7

1.6

1.3

0.0

Oil Gas & Petchem (9)

Telecom (3)

Banks (19)

Metals (6)

IT (14)

Cement (7)

Engineering (10)

Utilities (6)

FMCG (12)

Pharma (17)

Others (5)

Infrastructure (8)

Textiles (7)

Retail (3)

Media (1)

Auto (12)

47.6

11.6

10.1

7.3

6.3

4.1

3.9

3.6

2.1

1.2

1.0

0.7

0.6

0.3

0.3

-0.8

Oil Gas & Petchem (9)

50.1

Telecom (3)

12.9

Banks (19)

10.5

IT (14)

7.5

Metals (6)

5.9

Cement (7)

3.2

Pharma (17)

2.7

Engineering (10)

2.6

Utilities (6)

2.1

FMCG (12)

1.8

Others (5)

0.7

Media (1)

0.2

Retail (3)

0.1

Infrastructure (8)

0.1

Auto (12)

-0.1

Textiles (7)

-0.3

Source: Motilal Oswal Securities

29 June 2007

28

MOSt Universe

Scoreboard (quarter ended June 2007)

TOP 10 BY SALES GROWTH (%)

WORST 10 BY SALES GROWTH (%)

160%

130%

100%

70%

40%

0%

-4%

-8%

-12%

-16%

-20%

-24%

TOP 10 BY EBITDA GROWTH (%)

WORST 10 BY EBITDA GROWTH (%)

250%

200%

150%

0%

-23%

-46%

100%

50%

0%

-69%

-92%

TOP 10 BY NET PROFIT GROWTH (%)

WORST 10 BY NET PROFIT GROWTH (%)

925%

600%

0%

-20%

450%

-40%

300%

-60%

150%

0%

-80%

Matrix: Excluding DocPharma

Source: Motilal Oswal Securities

29 June 2007

29

THIS SPACE IS INTENTIONALLY LEFT BLANK

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’ quarterly and annual results or because of differences in the way we

s

classify account heads as opposed to the company.

29 June 2007

30

MOSt Universe

Ready reckoner: valuations

CMP (RS)

29.6.07

RECO

FY07E

EPS (RS)

FY08E

FY09E

FY07E

P/E (X)

FY08E

FY09E

FY07E

EV/EBITDA

FY08E

FY09E

FY07E

ROE (%)

FY08E

FY09E

Automo biles

Amtek Auto

407

Ashok Leyland

38

Bajaj Auto

2,129

Bharat Forge

308

Eicher Motors

353

Hero Honda

689

Mahindra & Mahindra 723

Maruti Udyog

743

Punjab Tractors

273

Swaraj Mazda

315

Tata Motors

670

TVS Motor

61

Sector Aggregat e

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

GSK Consumer

Godrej Consumer

Hind. Unilever

ITC

Marico

Nestle

Tata Tea

United Spirits

Sector Aggregate

811

1,575

370

103

573

141

189

155

55

1,160

853

1,291

Buy

Buy

Neutral

Neutral

Buy

Neutral

Neutral

Buy

Buy

Buy

Neutral

Buy

28.1

47.3

14.2

3.3

30.2

5.9

7.0

7.2

1.9

33.9

50.6

25.4

33.7

77.9

16.4

4.0

34.5

7.1

7.7

7.5

2.6

42.1

48.5

36.7

41.3

90.4

18.5

4.9

39.1

8.3

8.7

9.0

3.2

49.3

79.9

58.8

28.8

33.3

26.0

31.4

19.0

23.7

27.1

21.6

29.4

34.2

16.9

50.9

25.7

24.0

20.2

22.5

25.4

16.6

19.9

24.6

20.7

21.2

27.6

17.6

35.2

23.0

19.6

17.4

20.0

20.9

14.7

16.9

21.7

17.2

17.1

23.6

10.7

21.9

18.9

17.9

26.0

22.9

25.4

12.7

18.1

23.6

13.5

17.4

20.5

8.2

28.7

17.3

14.5

12.1

19.5

20.1

10.5

15.7

21.8

13.0

13.4

16.9

5.5

22.3

15.3

11.8

10.1

17.2

17.0

9.0

13.5

18.7

10.4

11.0

14.4

4.4

17.1

12.6

35.7

17.9

68.9

58.8

22.9

123.8

56.5

26.1

69.0

53.8

14.0

17.2

31.4

35.1

25.3

75.6

54.1

22.7

145.8

60.6

24.0

66.5

59.7

7.3

20.6

29.2

34.4

23.6

80.8

50.2

22.2

167.0

65.9

25.5

58.0

63.1

11.0

22.2

30.7

1,095

806

1,830

1,538

253

340

2,196

1,396

1,494

505

Neutral

Neutral

Buy

Buy

Neutral

Neutral

Buy

Neutral

Neutral

Buy

80.3

16.6

89.2

48.8

6.9

10.6

63.9

31.9

30.0

16.1

119.2

23.5

102.3

63.2

9.2

13.2

81.0

45.3

43.0

22.8

30.8

28.8

120.1

79.0

12.0

15.7

103.5

58.0

64.8

30.2

13.6

48.5

20.5

31.5

36.6

32.2

34.4

43.8

49.7

31.3

36.2

9.2

34.3

17.9

24.3

27.6

25.8

27.1

30.8

34.7

22.1

27.5

35.6

27.9

15.2

19.5

21.2

21.7

21.2

24.1

23.0

16.7

21.4

47.0

41.7

11.3

19.0

27.2

18.6

34.0

27.0

36.7

19.6

25.6

29.8

28.9

9.8

14.4

20.4

14.8

24.5

20.2

23.0

14.6

18.9

22.7

23.0

8.0

11.4

16.8

12.0

19.1

17.0

16.1

10.6

14.8

36.7

33.3

27.5

28.8

33.8

26.0

25.7

43.3

29.0

39.7

31.1

49.5

37.5

25.3

29.6

33.6

27.5

27.0

48.0

29.4

40.1

31.5

53.0

35.7

24.0

29.3

32.3

27.7

28.5

47.0

31.6

41.9

32.6

934

125

267

2,638

207

1,274

900

Neutral

Buy

Buy

Buy

Buy

Buy

Buy

58.7

8.8

42.4

214.7

18.6

99.1

62.8

75.0

10.7

49.6

248.3

19.7

135.3

79.0

70.0

10.0

48.1

232.5

19.2

151.6

82.3

15.9

14.1

6.3

12.3

11.2

12.9

14.3

14.2

12.5

11.7

5.4

10.6

10.5

9.4

11.4

11.7

13.3

12.4

5.5

11.3

10.8

8.4

10.9

12.2

10.7

9.9

3.7

9.4

9.1

8.2

8.8

9.2

8.1

7.7

2.6

8.0

7.3

5.6

6.8

7.2

8.5

7.5

2.2

7.9

6.8

4.4

6.2

6.9

35.1

47.3

48.1

29.6

45.2

92.6

55.7

37.5

33.6

37.6

38.1

26.5

31.9

70.4

44.2

33.0

25.6

26.6

28.2

20.5

23.7

46.5

32.5

24.9

Buy

Buy

Sell

Buy

Neutral

Neutral

Buy

Buy

Neutral

Neutral

Buy

Neutral

24.9

3.2

127.1

12.0

21.8

43.4

55.1

53.9

11.0

15.3

55.0

2.8

31.7

3.6

131.3

16.1

27.2

47.2

66.6

61.5

10.3

17.0

60.4

2.8

36.0

4.1

144.1

19.7

30.8

53.3

77.4

75.0

11.3

19.9

67.3

3.1

16.4

11.7

16.8

25.7

16.2

15.9

13.1

13.8

24.8

20.5

12.2

21.7

15.8

12.8

10.5

16.2

19.2

13.0

14.6

10.8

12.1

26.6

18.5

11.1

21.5

14.5

11.3

9.2

14.8

15.7

11.5

12.9

9.3

9.9

24.2

15.9

10.0

19.7

12.8

9.8

7.0

12.0

14.4

7.5

10.0

13.1

7.5

14.1

11.5

8.5

10.6

9.7

7.4

6.1

11.3

10.8

5.3

8.9

11.4

6.2

14.6

10.6

7.7

10.4

8.4

6.1

5.2

9.5

8.5

4.1

7.6

9.9

4.6

13.4

9.4

6.7

8.3

6.9

22.0

25.7

22.9

18.4

14.8

34.3

24.8

22.6

10.3

21.2

28.8

8.2

24.4

22.3

25.1

20.5

19.9

16.1

30.7

22.7

20.9

9.3

20.6

24.8

7.9

22.3

20.6

24.8

19.6

19.9

15.9

28.9

20.6

20.7

9.7

21.1

23.2

8.1

21.4

PULL OUT

29 June 2007

31