valueguide_oct2011

8/3/2019 ValueGuide_Oct2011

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Sharekhan ValueGuide October 20111


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October 2011 Sharekhan ValueGuide2


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CONTENTS

The headwinds from theWest grew stronger last

month as the crisis inGreece escalatedthreatening to engulf theentire euro region. Theeconomic data comingfrom the USA alsopointed to moreweakness and the dim outlook for growth globally led to risk aversion-driven sell-off in equities and commodities whereas the flight-to-safety-driven rally pushed up the US Dollar and bonds.

REGULAR FEATURESReport Card 4Earnings Guide I

TECHNICALS

Sensex 24

Sharekhan Top Picks 07Stock Update 11

Mutual Funds 23Sector Report 20Sector Update 21

From Sharekhans Desk EQUITY

06

Darkest before dawn

ADVISORY DESK

Smart Trades 38

Derivative Trades 38

MID Trades 38

PMS DESK

ProPrimeTop Equity 33

ProPrimeDiversified Equity 34

ProTechDiversified 35

ProTech Nifty Thrifty 36

ProTech Trailing Stops 37

FUNDAMENTALS

DERIVATIVES

View 25

TECHNICALS

Crude Oil 26Gold 27Silver 27

FUNDAMENTALS

Copper 27Lead 27Zinc 28

Gold 29Silver 29Crude Oil 29

Zinc 30Lead 30Pepper 30

TECHNICALS

USD-INR 31EUR-INR 31

FUNDAMENTALS

USD-INR 32EUR-INR 32

GBP-INR 32JPY-INR 32

GBP-INR 31JPY-INR 31

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COMMODITY

CURRENCY

Viewpoint 22


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STOCK IDEAS STANDING (AS ON SEPTEMBER 30, 2011)

REPORT CARD

COMPANY RECO PRICE RECO CURRENT PRICE AS ON GAIN- ABSOLUTE PERFORMANCE RELATIVE TO SENPRICE TARGET DATE RECO 30-SEP-11 LOSS (%) 1M 3M 6M 12M 1M 3M 6M

EVERGREENHDFC 540.0 730.0 19-Nov-07 Hold 640.9 18.7 -3.3 -9.3 -7.3 -11.4 -2.0 3.5 8.3 6.5

HDFC Bank 71.6 518.0 23-Dec-03 Hold 467.7 553.1 -0.9 -7.0 0.4 -5.4 0.4 6.0 17.3 13.7

Infosys Technologies 689.0 2591.0 30-Dec-03 Hold 2533.1 267.6 8.1 -13 -21.3 -15.3 9.5 -0.7 -8 1.9Larsen & Toubro 1768.0 1911.0 18-Feb-08 Buy 1357.6 -23.2 -15.6 -24.9 -17.1 -33.3 -14.5 -14.3 -3.1 -19.

Reliance Ind 283.5 1040.0 5-Feb-04 Buy 808.4 185.1 3.3 -10.0 -22.3 -17.4 4.6 2.6 -9.2 -0.7

Tata Consultancy Services 426.3 1201.0 6-Mar-06 Buy 1037.3 143.4 -0.5 -12.2 -11.6 13.4 0.8 0.2 3.3 36.3

APPLE GREENAditya Birla Nuvo 714.0 1050.0 6-Dec-05 Hold 913.3 27.9 0.2 1.7 12.8 7.1 1.5 16.1 31.8 28.

Apollo Tyres 37.0 71.0 27-Jul-09 Hold 55.3 49.3 -6.6 -28.9 -20.0 -31.4 -5.4 -18.9 -6.6 -17.

Bajaj Auto 293.1 1447.0 15-Nov-05 Hold 1536.0 424.0 -2.4 9.2 8.0 7.5 -1.1 24.5 26.1 29.2

Bajaj Finserv 545.0 600.0 26-May-08 Buy 524.4 -3.8 -2.3 2.0 0.3 -1.6 -1.1 16.3 17.1 18.3

Bajaj Holdings 741.9 1009.0 26-May-08 Buy 719.4 -3.0 -4.1 -0.8 -5.3 -9.2 -2.8 13.2 10.7 9.

Bank of Baroda 239.0 850.0 25-Aug-06 Buy 762.3 219.0 3.5 -12.7 -19.5 -10.9 4.9 -0.4 -5.9 7.1

Bank of India 358.0 305.0 22-Sep-11 Reduce 315.3 2.0 2.0 -22.5 -32.6 -38.0 3.3 -11.6 -21.2 -25.5

Bharat Electronics 1108.0 2100.0 25-Sep-06 Buy 1534.1 38.5 0.5 -3.6 -8.0 -10.6 1.8 10.0 7.5 7.4

Bharat Heavy Electricals 602.0 2077.0 11-Nov-05 BUY 1639.7 172.4 -7.3 -19.2 -19.7 -32.7 -6.1 -7.9 -6.2 -19

Bharti Airtel 313.0 468.0 8-Jan-07 Buy 378.0 20.8 -6.6 -4.0 6.0 3.5 -5.4 9.5 23.9 24.4

Corp Bank 218.0 550.0 19-Dec-03 Buy 421.8 93.5 -4.0 -19.8 -31.1 -36.8 -2.7 -8.5 -19.5 -24.0

Crompton Greaves 50.4 218.0 19-Aug-05 Hold 152.5 202.6 1.4 -41.1 -44.1 -50.9 2.7 -32.8 -34.7 -40.9

Divi's Labs 767.0 1047.0 31-May-11 Buy 735.5 -4.1 1.4 -6.6 10.4 8.0 2.7 6.6 28.9 29.8

GAIL 476.0 567.0 1-0ct-10 Buy 410.6 -13.8 0.0 -5.8 -10.4 -12.6 1.3 7.5 4.7 5.1

Glenmark Pharmaceuticals 599.0 426.0 17-Jul-08 Buy 323.0 -46.1 -1.0 1.9 14.0 7.9 0.3 16.3 33.2 29.7

GCPL 145.0 487.0 7-May-09 Buy 400.5 176.2 -6.3 -7.0 10.2 -0.2 -5.0 6.1 28.8 19.9

Grasim 1119.0 2630.0 30-Aug-04 Buy 2341.8 109.3 8.2 12.8 -3.8 6.5 9.6 28.7 12.4 28.0

HCL Technologies 103.0 523.0 30-Dec-03 Buy 409.2 297.2 -0.4 -17.3 -14.1 -1.4 0.9 -5.7 0.4 18.5

Hindustan Unilever 324.0 ** 29-Jul-11 Hold 340.6 5.1 6.3 0.2 19.9 12.5 7.7 14.3 40.1 35.ICICI Bank 284.0 1210.0 23-Dec-03 Buy 875.4 208.2 0.2 -20.0 -20.5 -20.3 1.6 -8.8 -7.2 -4.2

Indian Hotel Company 76.6 106.0 17-Nov-05 Buy 71.4 -6.9 -1.0 -6.7 -14.0 -26.8 0.3 6.4 0.5 -12.

ITC# 34.8 227.0 12-Aug-04 Buy 198.0 469.8 -1.0 -2.4 11.3 13.6 0.3 11.3 30.0 36.6

Lupin 80.7 520.0 6-Jan-06 Buy 474.4 487.8 5.7 6.3 14.6 23.0 7.1 21.2 33.8 47.8

M&M 116.0 865.0 1-Apr-04 Buy 804.8 593.8 9.0 16.5 16.8 18.2 10.5 32.9 36.4 42.1

Marico 7.7 153.0 22-Aug-02 Hold 143.9 1768.2 -3.0 -7.5 3.4 13.4 -1.7 5.5 20.9 36.4

Maruti Suzuki 1092.0 1316.0 30-Aug-11 Buy 1083.0 -0.8 -0.8 -6.0 -13.6 -24.3 0.5 7.2 0.9 -9.

Piramal Healthcare 417.0 345.0 9-May-11 Reduce 357.6 16.6 -1.1 -7.2 -11.5 -26.2 0.1 5.9 3.4 -11.2

PTC India 79.0 115.0 22-Mar-11 Buy 68.2 -13.7 -1.3 -12.4 -16.5 -39.6 -0.1 -0.1 -2.5 -27.4

Punj Lloyd 69.0 ** 9-Feb-11 Reduce 54.1 27.5 -7.3 -28.6 -16.1 -57.2 -6.1 -18.5 -2.0 -48.5

SBI 476.0 2308.0 19-Dec-03 Hold 1911.1 301.5 -3.2 -20.5 -30.0 -40.3 -1.9 -9.3 -18.2 -28.2

Sintex Industries^ 143.0 233.0 26-Sep-08 Buy 127.2 -11.0 -12.0 -29.6 -15.9 -33.5 -10.8 -19.6 -1.7 -20.

TGBL (Tata Tea)^ 78.9 109.0 12-Aug-05 Hold 85.8 8.7 -8.3 -9.5 -10.6 -27.3 -7.1 3.3 4.5 -12.

Wipro 356.0 ** 21-Sep-11 Reduce 340.8 4.5 1.7 -18.4 -28.4 -23.1 3.0 -6.9 -16.3 -7.6

EMERGINGSTARAxis (UTI) Bank 229.4 1300.0 24-Feb-05 Buy 1018.9 344.3 -5.0 -21.0 -26.6 -32.9 -3.8 -9.9 -14.2 -19

Cadila Healthcare# 198.3 1045.0 21-Mar-06 Buy 759.0 282.8 -10.2 -16.8 -3.3 16.5 -9.0 -5.1 13.0 40.

Eros International Media 186.0 247.0 15-Nov-10 Buy 241.4 29.8 12.4 34.4 76.9 - 13.8 53.4 106.6

Greaves Cotton^ 53.2 117.0 24-Dec-09 Buy 88.8 66.8 -2.0 2.6 -6.3 7.4 -0.7 17.0 9.5 29.2

ITNL 362.0 330.0 14-Sep-10 Buy 199.5 -44.9 9.0 -2.9 -13.4 -36.3 10.4 10.8 1.2 -23.5

IRB Infra 234.0 228.0 29-Nov-10 Buy 163.0 -30.4 11.0 -4.4 -22.4 -36.8 12.5 9.1 -9.3 -24.0

N E W

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EQUITY FUNDAMENTALS


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COMPANY RECO PRICE RECO CURRENT PRICE AS ON GAIN- ABSOLUTE PERFORMANCE RELATIVE TOPRICE TARGET DATE RECO 30-SEP-11 LOSS (%) 1M 3M 6M 12M 1M 3M 6M

REPORT CARD

STOCK IDEAS STANDING (AS ON SEPTEMBER 30, 2011)

**Price target under review Reco price adjusted for stock split #Reco price adjusted for bo

EQUITY FUNDAMENTALS

N E W

Max India 212.0 234.0 24-Nov-09 Buy 188.9 -10.9 -2.8 3.0 18.2 11.3 -1.5 17.5 38.1

Opto Circuits India 199.0 355.0 13-May-08 Buy 221.0 11.1 -15.7 -24.6 -18.2 -24.1 -14.6 -14.0 -4.5

Patels Airtemp 88.2 84.0 7-Dec-07 Buy 56.0 -36.5 3.2 -17.2 -21.2 -42.6 4.5 -5.5 -7.9

Thermax 124.2 550.0 14-Jun-05 Hold 442.4 256.2 -9.6 -24.6 -25.5 -43.9 -8.4 -14.0 -13.0

Yes Bank 332.0 360.0 2-Dec-10 Buy 272.6 -17.9 -1.8 -12.7 -11.2 -21.5 -0.5 -0.4 3.8

Zydus Wellness 184.0 646.0 15-Oct-09 Hold 540.4 193.7 -7.9 -13.0 -5.2 -6.3 -6.7 -0.8 10.8

UGLYDUCKLINGAshok Leyland # 36.0 32.0 13-Sep-10 Buy 26.1 -27.5 5.0 7.4 -4.4 -24.6 6.4 22.5 11.7

Bajaj Corp 109.0 142.0 30-Aug-11 Buy 106.1 -2.7 -11.0 -7.2 8.1 -22.8 -9.9 5.9 26.3

CESC 282.0 413.0 29-Jun-11 Buy 277.6 -1.6 -8.1 -5.9 -9.5 -27.0 -6.9 7.3 5.7 -

Deepak Fert 50.6 194.0 17-Mar-05 Buy 165.6 227.3 0.5 2.5 7.4 -2.1 1.8 16.9 25.5

Federal Bank 258.0 500.0 16-Mar-10 Buy 368.2 42.7 -0.8 -16.7 -9.9 -3.8 0.5 -4.9 5.3

Gayatri Projects 393.0 355.0 5-Apr-10 Buy 139.4 -64.5 -9.2 -33.5 -38.3 -62.7 -8.0 -24.2 -27.9

Genus Power Infrastructure 20.7 23.0 21-Jun-10 Buy 13.7 -34.1 -5.9 -19.2 -26.5 -35.9 -4.6 -7.8 -14.1

India Cements 72.0 80.0 12-Aug-11 Hold 72.6 0.8 8.3 4.5 -22.4 -36.0 9.7 19.2 -9.4 -

Ipca Laboratories 132.0 381.0 5-Nov-07 Buy 257.2 94.8 -17.2 -25.0 -14.1 -16.2 -16.1 -14.5 0.3

ISMT 43.0 67.0 8-Oct-09 Buy 33.9 -21.3 3.0 -14.2 -30.1 -28.8 4.3 -2.1 -18.3 -

Jaiprakash Associates 16.7 107.0 30-Dec-03 Buy 72.8 336.4 19.3 -9.6 -21.2 -39.1 20.8 3.1 -7.9 -

Kewal Kiran Clothing 427.0 810.0 7-Oct-10 Hold 819.3 91.9 7.5 18.0 51.4 116.3 9.0 34.6 76.9

NIIT Technologies 210.0 256.0 19-Jan-11 Buy 196.5 -6.4 1.6 9.3 11.1 1.1 2.9 24.7 29.8

Orbit Corporation 142.0 84.0 23-Dec-09 Buy 32.3 -77.3 -11.4 -21.5 -38.9 -72.4 -10.2 -10.5 -28.7

Polaris Software Lab 164.0 179.0 3-Nov-10 Buy 132.6 -19.2 2.4 -24.5 -28.1 -16.6 3.7 -13.9 -16.0

Pratibha Industries 65.2 61.0 18-Jan-10 Buy 43.2 -33.7 -4.2 -19.2 -35.8 -46.9 -3.0 -7.8 -25.0

Provogue India 61.0 78.0 6-Jul-10 Buy 31.5 -48.4 12.2 -9.0 -24.4 -50.0 13.7 3.8 -11.7 -

Punjab National Bank 180.0 1150.0 19-Dec-03 Buy 953.0 429.4 2.5 -12.5 -19.8 -24.8 3.9 -0.2 -6.3

Ratnamani Metals 54.0 148.0 8-Dec-05 Buy 102.5 89.8 -0.3 6.2 -17.4 -22.0 1.0 21.1 -3.4

Selan Exploration 58.0 500.0 20-Mar-06 Buy 298.1 414.0 5.5 6.1 -10.6 -1.1 6.9 21.0 4.5

Shiv-Vani Oil & Gas 370.0 340.0 4-Oct-07 Buy 195.7 -47.1 19.0 -10.8 -32.6 -57.0 20.5 1.8 -21.2

Subros 41.2 39.0 26-Apr-06 Buy 28.5 -30.9 -6.2 -5.7 -8.7 -41.0 -4.9 7.6 6.7 -

Sun Pharma 60.4 575.0 24-Dec-03 Buy 462.5 665.7 -5.3 -6.5 5.2 15.2 -4.0 6.7 23.0 3

Torrent Pharma 185.0 640.0 4-Oct-07 Hold 539.1 191.4 -10.1 -15.7 -5.9 -3.5 -9.0 -3.8 10.0

UltraTech Cement 384.0 1150.0 10-Aug-05 Hold 1141.6 197.3 6.7 23.5 1.5 8.0 8.1 40.8 18.5

Union Bank of India 46.0 295.0 19-Dec-03 Buy 244.7 432.0 0.9 -16.5 -27.7 -35.4 2.2 -4.7 -15.5

United Phosphorus 163.0 222.0 27-Aug-09 Buy 137.7 -15.5 -5.4 -8.6 -6.7 -22.2 -4.1 4.2 9.0

V-Guard Industries 162.0 249.0 6-Sep-10 Buy 210.0 29.6 1.6 -4.6 26.8 8.7 2.9 8.8 48.2

VULTURE'S PICKMahindra Lifespace 799.0 450.0 9-Jan-08 Buy 298.0 -62.7 -4.7 -16.2 -21.7 -36.8 -3.5 -4.4 -8.5

Orient Paper and Industries 21.4 70.0 30-Aug-05 Buy 60.9 184.3 4.3 10.5 12.3 4.5 5.7 26.1 31.2

Tata Chemicals 411.0 400.0 31-Dec-07 Buy 316.2 -23.1 -5.6 -12.9 -5.1 -18.8 -4.3 -0.7 10.9

Unity Infraprojects 138.4 103.0 26-Feb-08 Buy 44.0 -68.2 -14.8 -29.9 -29.9 -59.8 -13.7 -20.0 -18.1

CANNONBALLAllahabad Bank 73.0 230.0 25-Aug-06 Buy 157.7 116.0 -12.0 -20.0 -29.3 -30.0 -10.8 -8.8 -17.4

Andhra Bank 120.1 118.0 22-Sep-11 Reduce 123.8 -3.0 -5.0 -7.8 -14.6 -19.4 -3.7 5.2 -0.2

IDBI Bank 106.0 140.0 19-Jun-09 Hold 102.6 -3.3 -4.1 -22.3 -25.6 -30.5 -2.9 -11.4 -13.1

Madras Cement 88.0 ** 10-Feb-11 Hold 100.3 13.9 14.4 24.6 -0.3 -12.1 15.9 42.2 16.5

Phillips Carbon Black 135.0 205.0 21-Aug-09 Buy 140.4 4.0 -4.5 4.4 -0.7 -33.7 -3.2 19.1 16.0

Shree Cement 445.0 1875.0 17-Nov-05 Hold 1847.8 315.2 11.4 5.1 -10.3 -12.1 12.9 19.9 4.8

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Darkest before dawn

FROM SHAREKHANS DESK

f r o m s

h a r e

k h a n

s d e s

kThe headwinds from the West grew stronger last month as the crisis in Greece escalatedthreatening to engulf the entire euro region. The economic data coming from the USA alsopointed to more weakness and the dim outlook for growth globally led to risk aversion-driven sell-off in equities and commodities whereas the flight-to-safety-driven rally pushedup the US Dollar and bonds.

Meanwhile the news flow at home is also concerning as skeletons of the 2G scam continueto tumble out and threaten to engulf very senior members in the cabinet this time around.On the macro front, the Reserve Bank of India continues with its hawkish stance andfurther raised policy rates by 25 basis points in its policy review meet last month.

However, the greater threat at this moment is from Europe, where the Greece debt crisishas come to a head and is threatening to turn into a contagion. Debt-laden Greece has cashto operate until October. In order to qualify for more bail-out funds and avert a debtdefault, it has cut pensions and hiked taxes amid mass protests, pushing the nation closer torecession; but more austerity measures are demanded by its international lenders. If Greecedoes default on its sovereign debt, it could trigger a major global banking crisis as severalglobal banks have exposure to its sovereign debt. The market got a taste of the things tocome when last month due to their heavy exposure to Greece French banks crashed, creatingpanic on the bourses.

Meanwhile, Italys credit rating has been downgraded by a notch by Standard and Poorsbecause of its weak growth prospects and political instability. Following the downgrade of Italy, the third largest economy of the euro zone, international pressure has mounted on theEuropean policy makers to solve the debt crisis. UK Chancellor of the Exchequer has warnedthat Europe has to find a solution by the time the Group of 20 leaders meet in Cannes in

November this year. The Greece debt crisis requires some real hard decisions but the eurozone leaders may not possess the political will to do so as each is answerable to his owncountrymen, who are not in favour of bailing out Greece.

Though the global situation remains uncertain, it is much different than it was in 2008.Unlike the euphoria of 2008, the market mood is quite sombre and there is no element of shock. The credit swaps already indicate that the financial markets are already discountinga default by Greece (as high as 98%) if not by the other fringe countries in Europe. Moreover,a record level of funds has flown out of the equity markets. A recent release shows thatthere has been a withdrawal of over $72 billion from equity funds in the USA; that isslightly higher than what was witnessed during October 2008-February 2009, five monthsafter the Lehman crash. The Indian market is trading at around 13.0-13.5x one-year forwardearnings as against the lofty valuations of over 20x it enjoyed in early 2008.

Besides, this is not the first time the world is facing a financial crisis and we have seen thatpanic situations do not last forever. But in the hindsight, such a panic-driven sell-off isalways an opportunity to buy quality stocks at ridiculously low valuations. Thus, investorsshould look at buying in a gradual or staggered manner as it is not possible to absolutelytime the markets.


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Sharekhan Top PicksSHAREKHANTOP PICKS

The stock markets have been very volatile in recent times mainlydue to the uncertainty regarding the euro zone sovereign debt crisis,the mixed data emanating from the USA and the headwinds facedby the domestic economy. This has led to the benchmark indicesreturning a loss of 2.3% in the Sensex and that of 2.0% in theNifty since our Top Picks basket was last revised on September 2,2011. The CNX Midcap Index declined by 3.3% during the sameperiod. Our basket of Top Picks performed in line with thebenchmark indices in the above period.

Over the past seven months, the Top Picks basket has outperformedthe benchmark indices with a marginal decline of 2.2% as againstthe negative returns of 10.8% in the Sensex and a 10.9% drop inthe Nifty over the same period.

* CMP as on September 30, 2011

NAME CMP* PER ROE (%) TARGET UPS(RS) FY11 FY12E FY13E FY11 FY12E FY13E TARGET

Bharti Airtel 378 24.6 18.9 13.3 18.5 17.9 17.0 468 23.8

CESC 277 7.1 5.9 5.4 9.1 10.1 10.2 413 49.3

Divis Laboratories 728 22.5 19.1 15.3 23.9 24.2 25.9 1047 43.8

GAIL 411 14.6 13.3 11.7 19.8 19.0 18.8 567 38.0

Godrej Consumer 401 27.3 23.7 19.5 35.6 27.8 27.0 487 21.5

Grasim 2344 9.9 8.2 7.3 14.8 15.1 14.4 2630 12.2

ITC 198 30.9 25.4 21.0 33.2 34.4 33.6 227 14.7

Mahindra & Mahindra 803 19.1 17.1 14.7 22.8 23.3 22.8 865 7.8

Orient Paper 60 8.2 5.8 5.4 16.0 19.4 17.4 70 15.8

TCS 1038 23.4 19.8 17.3 42.0 38.9 35.3 1201 15.8

Given the spike in volatility and the fact that we have an eventfulmonth ahead, we believe it would be prudent to reduce someexposure in the mid-cap space. Incidentally, the mid-cap stocks havebeen more resilient in the past six months, as is evident from thestrong outperformance of the CNX Mid-cap Index compared tothe benchmark indices, the Sensex and the Nifty. Hence, we arepulling out PTC India and United Phosphorous from the basketand bringing in only one stock in their place, ie Grasim Industries,this month. Another change is related to the churn within thetechnology sector where we are bringing in Tata ConsultancyServices (TCS) in place of HCL Technologies (HCL Tech). We expectTCS to announce strong quarterly results whereas HCL Techsperformance could get dented by wage hikes and the adverse impactof the sharp fluctuation in the exchange rate.

ABSOLUTE OUTPERFORMANCE (RETURNS IN %)

-40.0%

-20.0%

0.0%

20.0%

40.0%

60.0%

80.0%

100.0%

120.0%

140.0%

Y TDFY 2 01 2 Y TDCY2011

CY 2 01 0 CY 2 00 9 S in ce Ja n2009

Sharekhan Sensex Nif ty

CONSTANTLY BEATING NIFTY AND SENSEX (RETURNS IN %)

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Sharekhan Sensex Ni f ty

SHAREKHAN TOP PICEQUITY FUNDAMENTALS


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CESC 277 7.1 5.9 5.4 9.1 10.1 10.2 413 49.3

Remarks: CESC is engaged in generation and distribution of power across Kolkata city. The power distribution business in Kolkata is growing at a healthy rate and generates substafree cash to fund CESCs expansion plans. Moreover, the integrated status (having generation and distribution businesses) is a clear advantage for utility business considerthe concerns over the deteriorating financial position of the State Electricity Boards (SEBs).CESC is doubling its generation capacity by FY15 through an addition of 600MW of capacity in Chandrapur and 600MW of capacity in Haldia over its existing cap1225MW. While 75% of the output would be sent on regulated price, the remaining would be kept for the merchant route.

Fuel supply assurance for a significant portion of requirement (80%) acts as a long term strength for the firm. This would emerge as a competitive advantage in a scenawhere most of the domestic peers are not having assured supply of fuel and with fuel shortage likely to go up only in the coming days.

Loss making retail arm of the company, Spencers had been a drag for CESC for a couple of years; however in FY11, the company has reported a profit at store level and tmanagement intends to turn around the retail business in the next two years. The initial signs are visible.

CESC is one of the cheapest utility stocks available in the Indian market, trading at 0.6x FY12 BV, and significantly lower to the average multiple of the comparable compprimarily due to the loss making retail arm. However, improving financial health of the retail business and the growing scale of the power utility business has redsignificantly the share of retail losses on the overall balance sheet. The current market price ignores the turnaround possibility, with substantial discounting. Hence, we ha Buy recommendation on CESC with a target price of Rs413 (SoTP based), which also factors negative value of Rs123 per share for the losses of the retail arm.

BHARTI AIRTEL 378 24.6 18.9 13.3 18.5 17.9 17.0 468 23.8

Remarks: Bharti Airtel continues to lead the domestic telecom market in terms of both the subscriber base (21%) and the revenue market share (32.3%).In the last two quarters the subscriber addition for the industry has moderated with the return of rationality and players shifting focus to revenue earning customers. Tdespite a fall in the subscriber net additions, the overall revenue of the industry grew by 6% sequentially in June 2011 quarter with Bharti Airtel gaining 50-basis-point mshare.On the back of its improving market share, Bharti Airtel has hiked its on-net tariff by 20%, reflecting the return of pricing power. This was followed by tariff hikes by tGSM players. We view this development as a positive for the industry specially for the incumbent players like Bharti Airtel. The benefits of the same are likely to be rein the companys financials by the end of H2FY12.

An improving domestic 2G environment, visible volume and margin progress on the acquired African operations, and a strong data opportunity in the form of 3G adoawaiting in the wings coupled with the stocks attractive valuation keep us bullish.

Factoring in the tariff hike, we have upgraded our FY13 earnings estimate for the company. Following the earnings upgrade, the stock now trades at a trailing EV/EBITD10.0x, which appears attractive in view of the 21.7% EBITDA CAGR over FY2011-13E. The implied EV/EBITDA-to-growth is ~0.52x which compares favourably average of 0.64x for the leading emerging market telecom companies (including China Mobile, Telecom, Indosat, Idea Cellular and Bharti Airtel). Thus we maintain a BBharti Airtel valuing it at an EV/EBITDA of 8x. This leads to a price target of Rs468.

DIVIS LABORATORIES 728 22.5 19.1 15.3 23.9 24.2 25.9 1047 43.8

Remarks: Coupled with an IPR-respecting and non-compete with customer policy, Divis has an unstinted focus on the contract manufacturing (CM) space, thereby edging ovIndian peers.

Its India-centric business model develops and produces all APIs/intermediates with a substantial cost advantage. Divis enjoys EBITDA margin of >40% each, possiblhighest amongst its peers globally.

After a full year of inventory downsizing, the outstanding results in H2FY11 have re-affirmed our confidence in the companys growth potential. The biggest thrust is lcome in FY12 as the new facility at Vishakhapatnam is fully operational. The nutraceutical business could become a big opportunity with limited competition.

A near debt-free balance sheet and strong cash flow (FCF likely to reach Rs306 crore by FY13E) are likely to help build a war chest for pursuing strategic investm(biosimilars).

The appreciation of the rupee and slowdown in R&D allocation of the MNC clientele remain the key challenges for the company.

With the order inflow picking up from H2FY11 and its new plant getting operational, Divis has a strong revenue growth visibility and the operating leverage in the businboost its margins. Consequently, we estimate the companys revenue and earnings to grow at a CAGR of 23% and 21% respectively over FY11-13. At the current market pthe stock trades at PE of 19.1x and 15.3x discounting its FY12E and FY13E earnings respectively. We maintain our Buy recommendation.

NAME CMP PER ROE (%) TARGET UPSIDE(RS) FY11 FY12E FY13E FY11 FY12E FY13E TARGET (%

SHAREKHAN TOP PICKS EQUITY FUNDAMENTALS


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SHAREKHAN TOP PICEQUITY FUNDAMENTALS

NAME CMP PER ROE (%) TARGET UPS(RS) FY11 FY12E FY13E FY11 FY12E FY13E TARGET

GODREJ CONSUMER 401 27.3 23.7 19.5 35.6 27.8 27.0 487 21.5

Remarks: Godrej Consumer Products Ltd (GCPL) is a major player in the Indian FMCG market with a strong presence in the personal care, hair care and home care segments The recent acquisitions (in line with the 3x3 strategy) have immensely improved the long-term growth prospects of the company.

On the back of strong distribution and advertising & promotional support, we expect GCPL to sustain the market share in its core categories of soap and hair colodomestic market. On the other hand, continuing its strong growth momentum the household insecticide business is expected to grow by 19% YoY.

In the international markets, the Indonesian and Argentine businesses are expected to achieve a CAGR of around 25% and 15% respectively over FY11-13. Ovexpect GCPLs consolidated revenues to grow at a CAGR of about 19% over FY11-13.Due to the recent domestic and international acquisitions, the companys business has transformed from a commodities soap business into the business of value-personal care and home care products. Hence, we expect its OPM to be in the range of 16-18% in the coming years. Overall, we expect GCPLs bottom line to grow at of about 18% over FY11-13.

We believe increased competitive activity in the personal care and hair care segments and the impact of high food inflation on the demand for its products are the to the companys profitability.

At the current market price the stock trades at 23.7x its FY12E EPS of Rs16.9 and at 19.5x its FY13E EPS of Rs20.5. We have a Buy recommendation on the stock

GAIL 411 14.6 13.3 11.7 19.8 19.0 18.8 567 38.0

Remarks: GAIL India, a leading gas transmission company, is aggressively expanding its pipeline network and plans to invest more than Rs30,000 crore over FY10-14 in manner to double its gas pipeline network to over 14,000km and its transmission capacity to around 300mmscmd. This provides strong revenue visibility in its core gbusiness.

We also see value accretion from doubling of the petrochemical capacity by FY14, and from the exploration and production (E&P) and city gas distribution (CGD) going forward.

A higher than expected fuel subsidy burden and regulatory risk in its core transmission business are the key risks for the company.

Despite the subsidy burden, the strong growth visibility in its core gas transmission business would drive its earnings growth of 11.9% CAGR during FY11-13.

At the current market price, the stock trades at a PE of 11.7x and EV/EBITDA of 7.8x based on our FY13 estimates. We have a Buy recommendation on the stock witarget of Rs567.

GRASIM 2344 9.9 8.2 7.3 14.8 15.1 14.4 2630 12.2

Remarks: Grasim Industries is well placed to capture the growing opportunity in its core business of VSF in terms of both volume and healthy realisation. In addition, the pof its cement business (ie its key subsidiary UltraTech Cement) has shown signs of improvement with an increase in the average cement price.

Due to the improved demand environment, the performance of the VSF division continues to shine. The VSF realisation has increased by Rs10-12 per kg after Q1FYaccount of a pick-up in the global demand. Hence in Q2FY2012 the realisation is expected to remain healthy.

The cement capacity of the company at the consolidated level is the highest among the other domestic players at 52.75MTPA. Hence the company will be the key beof a likely pick-up in the demand through government infrastructure projects in the coming couple of months.

On the other hand, the company is planning to expand its VSF capacity by another 120,000 tonne by FY2013 and its cement capacity by 9.2MTPA by FY2014. Wthe capacity addition will provide volume growth in the longer run.

We believe the company will benefit due to its strong balance sheet as most of its capex will be met through internal accruals.

However, in light of the upcoming capacity and stabilisation of the newly-added capacity, the cement prices are expected to come under pressure. Moreover, cost pin terms of coal prices and higher freight cost remains a key concern.

At the CMP of Rs2,344 the stock trades at PE of 8.2x and 7.3x its FY2012 and FY2013 earnings estimates on a consolidated basis.


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NAME CMP PER ROE (%) TARGET UPSIDE(RS) FY11 FY12E FY13E FY11 FY12E FY13E TARGET (%

ORIENT PAPER 60 8.2 5.8 5.4 16.0 19.4 17.4 70 15.8

Remarks: Orient Paper & Industries Ltd (OPIL), a part of the CK Birla group, is a diversified conglomerate operating in three segments: cement, paper and fans. The cement divcontributes over 53% of the total revenue. The company benefits due to its diversified business model.

Due to the recent increase in cement prices, the present realisation of the company is higher by over 26% over FY11. The surge in the realisation will be able to offset the inflation and the profitability of the division is likely to improve (marginally).

In the electrical division, due to the new product launches and market share gains we expect the company to deliver over 12% revenue growth in FY12. Going forwarddivision can grow on the back of lighting products (CFL) and household appliances.

Further, the proposed restructuring plan to demerge the cement division augurs well for the company as the uncertainty in the profitability of the paper division was one omajor overhangs on the stock. Hence the stock could get re-rated going ahead.

However, the key concern remains the poor volume offtake in its key market area, ie Andhra Pradesh (which accounts for 37% of its total dispatches). Further, with the lincrease in supply the cement prices may again come under pressure.

At the current market price of Rs60, the stock trades at PE of 5.4x and EV/EBIDTA of 3.6x discounting its FY13E earnings.

ITC 198 30.9 25.4 21.0 33.2 34.4 33.6 227 14.7

Remarks: ITCs cigarette business, which contributes around 60%, continues to be a cash cow for the company. The company endeavours to make a mark in the Indian FMCG marand with successful brands such as Bingo, Sunfeast and Aashirwaad, ITC is already in the reckoning among the best in the industry. With the new portfolio of personal products gaining market share, its FMCG business promises to compete with the likes of Hindustan Unilever and Procter & Gamble.

After a sharp increase of 16% in Union Budget FY10-11, the government has spared cigarettes from an excise duty hike in the FY2012 budget. Also key states incluKerala, Karnataka, Andhra Pradesh and Maharashtra have kept VAT on cigarette unchanged in their respective state budgets. We expect ITCs cigarette sales volume grow at mid single digits in FY12.

ITCs other businesses, such as hotel, agri, non-cigarette FMCG business and paper, paperboard and packaging, are showing a strong up-move and will provide a cushioto the overall profit in FY12.

An increase in taxation and the governments intention to curb the consumption of tobacco products remain the key risks to ITCs cigarette business over the longer te

We expect ITCs bottom line to grow at a CAGR of about 21.2% over FY11-13. At the current market price, the stock trades at 25.4x its FY12E earnings and 21.0x its FYearnings. We maintain our Buy recommendation on the stock.

TCS 1038 23.4 19.8 17.3 42.0 38.9 35.3 1201 15.8

Remarks: TCS pioneered the IT services outsourcing business from India and is the largest IT service firm in the country. It is a leader in most service offerings and is in the procesfurther consolidating its leadership position through the organic and inorganic route as well by winning large deals.

TCS has consistently increased its market share amongst the top 5 Indian outsourcers with market share in terms of revenues increasing from 29.2% in the March 20

quarter to 30.4% in the June 2011 quarter.We continue to like TCS amongst the offshore IT vendors on account of its mammoth scale of operations and resilient cost model that allows it to withstand headwinds isector. On the other hand, at the current juncture TCS is well placed to garner incremental deals in the sector with the organisational structure in place, unlike Wipro Infosys that are going through a phase of organisational restructuring.

At the current market price the stock trades at 19.8 and 17.3x its FY2012E and FY2013E earnings respectively. We have a Buy recommendation on the stock with a prtarget of Rs1,201.

SHAREKHAN TOP PICKS EQUITY FUNDAMENTALS


11/52


STOCK UPDATEQUITY FUNDAMENTALS

Price target revised to Rs142COMPANY DETAILSPrice target: Rs142Market cap: Rs1,563 cr52 week high/low: Rs146/73NSE volume (No of shares): 42,263BSE code: 533229NSE code: BAJAJCORPSharekhan code: BAJAJCORPFree float (No of shares): 2.2 cr

(%) 1m 3m 6m 12m

Absolute 4.1 4.1 31.7 -14.3

Relative to Sensex 2.3 16.1 49.0 0.9

PRICE PERFORMANCE

UGLYDUCKLING BUY; CMP: RS104 SEPTEMBER30, 2011BAJAJ CORP

Event: acquisition of property for Rs75 crore for its corporate officeBCL has acquired Uptown Properties and Leasing Pvt Ltd for Rs75 crore. Uptown owns abuilding in Worli with a built-up area of 33,600 square feet. The sole reason behind theacquisition is to develop a corporate office on the acquired plot to bring in all the scattereddivisions at various locations under one roof to improve the operational efficiencies.

Expensive acquisition compared to recent dealsThe move to spend a substantial chunk of this cash on non-yielding assets such as prop-erty, that too at a premium, would dilute its earnings and is seen as a de-rating factor by us.More so, since the company would have to spend additional Rs15-20 crore on eitherrefurbishing the existing property or rebuilding a new structure.

Valuation corrects in response to moveTo factor in the deal, we have downgraded our earnings estimates by 1.6% and 2.4% for

FY2012 and FY2013 respectively. The BCL stock has already reacted negatively to theannouncement of the property deal and factors in the negative implication of the same atthe current market price. Going forward, any initiative on the companys part to expandits limited product portfolio or strengthen its core business would be the key upside triggerfor the stock.At the current market price the stock trades at 13.4x its FY2012E EPS of Rs7.8 and 11.1xits FY2013E EPS of Rs9.5. We maintain our Buy recommendation on the stock with theprice target of Rs142.

SHAREHOLDING PATTERN

The author doesnt hold any investment in any of the companies mentioned in the article. For further details, please visit the Research section of our website, sharekhan.com.

Promoters86%

Domesticinstitutions

4%

Others5%

FIIs5%

Annual report reviewCOMPANY DETAILSPrice target: Rs2,100Market cap: Rs12,872 cr52 week high/low: Rs1927/1547NSE volume (No of shares): 28,966BSE code: 500049NSE code: BELSharekhan code: BELFree float: 1.9 cr(No of shares)

(%) 1m 3m 6m 12m

Absolute -6.6 -5.0 -6.1 -6.7

Relative to Sensex 0.4 3.7 1.8 -0.3

PRICE PERFORMANCE

APPLE GREEN BUY; CMP: RS1,609 SEPTEMBER5, 2011BHARATELECTRONICS

Revenues marginally below targetBharat Electronics Ltd (BEL) reported gross revenues of Rs5,529.7 crore for FY2011 as againsta revenue target of Rs5,620 crore. This was mainly on account of a slow order offtake in theinitial part of the year. The net sales were up 5.6% to Rs5,471.7 crore. The margins were up 20basis points to 16%. The reported net profit was up 19.5% to Rs861.5 crore.Working capital turns negativeFor FY2011, the working capital turned negative to Rs2,330 crore (150 days) on the backof close to doubling of advances received from customers. BEL closed the year with ad-vances from customers to the tune of Rs6,441.1 crore, up 84% over FY2010. This led toa negative working capital of 150 days. Debtor days increased to 194 days from 153 days

mainly due to a higher execution in the latter part of the year (66% revenues in H2FY2011),budgetary constraints of customers and milestone based payments on some deals. How-ever, the inventory days were lower at 164 days compared to 173 days in FY2010.Valuation and viewBEL is one of the strongest plays on the Indian defense sector. FY2011 saw a slow revenuegrowth marred by delays in execution of orders. However, FY2012 looks promising withthe large order book of Rs23,830 crore as of June 2011, giving strong revenue visibility forthe next few years The company is sitting on a huge cash reserve of Rs6,519 crore translat-ing into a cash of Rs815 per share which would cushion the downside. We remain positiveon BEL on a 12 month perspective with a Buy rating and target price of Rs2,100. At thecurrent market price, the stock trades at 14x FY2012E and 12.4x FY2013E earnings.



Foreign6%

Institutions15%

Non-promotercorporate

2%Promoters

75%

Public &Others

2%


12/52


STOCK UPDATE EQUITY FUNDAMENTALS

Competition pressure intensifies,

PT revised to Rs2,077

COMPANY DETAILS

Price target: Rs2,077Market cap: Rs81,110 cr52 week high/low: Rs2695/1651NSE volume (No of shares): 4.0 lakhBSE code: 500103NSE code: BHELSharekhan code: BHELFree float (No of shares): 13.6 cr

(%) 1m 3m 6m 12m

Absolute -4.8 -12.4 -11.1 -30.4

Relative to Sensex -6.1 -7.4 -4.7 -21.4

PRICE PERFORMANCE

APPLE GREEN BUY; CMP: RS1,657 SEPTEMBER19, 2011BHARATHEAVYELECTRICALS

BHEL gets a fair share in NTPC bulk tenderingBharat Heavy Electricals Ltd (BHEL) is likely to get Rs6,520 crore worth of orders due tofavourable specifications in the tender for 7,200MW (9x 800MW) National Thermal PowerCorporation (NTPC) power projects, provided it matches the L1 quotations.However, concerns for BHEL intensifyPricing pressure and risk of aggressive bidding: The new players like BGR are aggressivelybidding to get a break-through in the supercritical equipment market. Overcapacity situa-tion by 2014 and aggressive bidding from the new entrants could further trigger a pricewar in the coming years.Margin pressure: While BHEL has maintained 16%+ EBITDA margins over the past fewyears the sustenance of such margins looks difficult in the BTG industry, which is gettinghighly competitive.

Outlook: We have fine-tuned our estimates in view of its annual report details. We havelowered our order inflow expectation for FY2012 and FY2013 in view of the slow orderawarding activities in the infrastructure sector and the unfavorable changes in the compe-tition landscape. We are expecting a compounded annual growth rate (CAGR) of 9.9% inthe bottom line over FY2011-13. This slowdown is also reflected in its price performance.BHELS one-year forward price/earnings (P/E) multiple has fallen from over 20x (enjoyedtill FY2010) to 11.2x now. We are revising our target multiple to 14x on FY2013 earningsestimate. Hence, our revised price target stands at Rs2,077. In view of the 25% upsidepotential, we maintain our Buy call on the stock.



Promoters68%

Foreign13%

Institutions13%

Others6%

Annual report reviewCOMPANY DETAILSPrice target: Rs413Market cap: Rs3,567 cr52 week high/low: Rs423/257NSE volume (No of shares): 1.9 lakhBSE code: 500084NSE code: CESCSharekhan code: CESCFree float (No of shares): 6.6 cr

(%) 1m 3m 6m 12m

Absolute -13.8 -3.1 -7.7 -32.4

Relative to Sensex -14.1 3.6 -1.8 -23.0

PRICE PERFORMANCE

UGLYDUCKLING BUY; CMP: RS284 SEPTEMBER16, 2011CESC

Kolkata utility business performancePositive cash generation continued but higher working capital squeezed cash: The util-ity business of CESC generated cash to the tune of Rs436 crore from operations, 26%lower than previous year, while PAT grew by 13% in same period. This indicates asignificant proportion of its funds was blocked in working capital, as evident from thesubstantial rise in its loans and advances (up Rs165 crore). CESCs debtors days, in-ventory days remained in line with last year. Current liabilities turn over days fell to194 days from 225 days in FY2010.The net debt of the company now stands at Rs3,017crore, factoring the cash of Rs838 crore.Returns ratio improved; still low: At the company level (stand-alone), the RoE hoveredaround 9% in FY2011, reflecting an expansion of 48 basis points over FY2010. Eventhe return on capital employed (RoCE) of the company expanded by 146 basis points

YoY to 7.6%. A strong growth at the EBIT level could be attributed to the 25% growthregistered in the EBITDA.Improved performance of Spencers

Healthy same store sales growth, store level profit maintained: Spencers maintained ahealthy same store sales growth of around 14-15% (YoY). Further, the gross marginremained at 19% and managed to have a store level breakeven with a 2% margin.Hence, losses at EBITDA level have come down from Rs225 crore in FY2010 to Rs169crore in FY2011. The management expects it could achieve EBITDA level break evenin the next six-seven quarters.Working capital efficiency reflected: Spencers witnessed significant improvement ininventory days which came down from 57 days in FY2010 to 42 days in FY2011. Thereceivable days have fallen from 9 days in FY2010 to 7 days in FY2011.



Promoters52%

Foreign18%

Institutions18%

Others12%


13/52



Annual report reviewCOMPANY DETAILSPrice target: Rs247Market cap: Rs2,093 cr52 week high/low: Rs251/124NSE volume (No of shares): 2.4 lakhBSE code: 533261NSE code: EROSMEDIASharekhan code: EROSMEDIAFree float (No of shares): 2.0 cr

(%) 1m 3m 6m 12m

Absolute 19.5 52.1 68.3 -

Relative to Sensex 19.2 64.7 82.2 -

PRICE PERFORMANCE

EMERGINGSTAR BUY; CMP: RS229 SEPTEMBER12, 2011EROS INTERNATIONALMEDIA

Performance for FY2011For the year ended March 2011, Eros International Media Ltd (EIML) reported a 10.3%growth in operating revenues to Rs707 crore. The company released 77 films, down from115 in FY2010. The company had five films in the list of Top 10 box office grossers for2010 including Housefull (own production), Golmaal 3 (co-production), Dabanggand Endhiran (overseas distribution). The EBITDA margin improved 460 basis pointsto 22.2% mainly on the back of strong box-office collection, improving mix of revenuestowards television syndication and monetisation of content library. The net profit surged43.1% to Rs117.8 crore for the year ended March 2011.Free cash flow turns negative with increase in content investmentsFor FY2011, the free cash flow turned negative to Rs55.1 crore, down from a positive cashflow of Rs73.1 crore in FY2010, mainly on the back of an higher content investment. Thecontent investment in FY2011 doubled to Rs536.5 crore, up from Rs262 crore in FY2010.The working capital increased by Rs140.2 crore against a decrease of Rs21 crore in FY2010,mainly due to an increase in advances against production/purchase of film rights.ValuationOver the years EIML has consistently been increasing and improving its scale and qualityof earnings. Going ahead, we remain positive on EIMLs earning trajectory with a strongfilms slate for the upcoming years. Further, an increasing share of new media initiativeswould yield better margins in the coming years. At the current market price of Rs229, thestock is trading at 13.7x and 11.1x FY2012 and FY2013 earnings estimates respectively.We maintain our Buy recommendation on EIML with a price target of Rs247. We willtake a fresh review on our target price post Q2FY2012 earnings.



Foreign9% Institutions

3%Non-promoter

corporate2%

Promoters78%

Public &Others15%

Annual report reviewCOMPANY DETAILSPrice target: Rs2,630Market cap: Rs21,543 cr52 week high/low: Rs2625/1981NSE volume (No of shares): 79,536BSE code: 500300NSE code: GRASIMSharekhan code: GRASIMFree float (No of shares): 6.9 cr

(%) 1m 3m 6m 12m

Absolute 10.7 13.4 -4.8 6.0


PRICE PERFORMANCE

APPLE GREEN BUY; CMP: RS2,350 SEPTEMBER23, 2011GRASIMINDUSTRIES

KEY POINTSThe VSF & chemical division propelled FY2011s revenue growth. However on accountof a muted revenue growth in cement division and margin contraction by over 700 basispoints (bps), the net profit declined by 21.6% year on year (YoY) to Rs2,163.9 crore.UltraTech (subsidiary of Grasim) completed the acquisition of ETA Star Cement Com-pany with its assets comprising of 2.3 million TPA clinker facility. Consequent to thisacquisition, the cement capacity stands augmented at 52MTPA. Further, on the VSFfront, the company has acquired a 33% stake in Aditya Holding AB, Sweden, whichacquired Domsjo Fabriker AB (Domsjo), Sweden and hence Grasim has secured itscaptive pulp requirement for VSF production.In order to maintain its market share UltraTech is setting up an additional cementcapacity of 9.2MTPA which is expected to come on stream by Q1FY2014. In the VSFdivision the company is setting up a greenfield project of 120,000TPA at Vilayat, Gujaratand is carrying out a brownfield expansion at Harihar with a capacity of 36,500TPA.The project is likely to commence production by FY2013.The current debt equity ratio stands at 0.4x which ensures comfortable debt raising topart fund its expansion plan. On the other hand the company has made an additionalinvestment of Rs1,257 crore in a liquid mutual fund scheme.We continue to prefer Grasim as our top pick among the other large players due to itsstrong balance sheet, comfortable debt - equity ratio, attractive valuation and diversi-fied business. We maintain our Buy recommendation on the stock with price target of Rs.2630. At the current market price the stock discounts its FY2013 estimated earningper share (EPS) by 7.3x.



Promoters26%

Public &others32%

Foreign24%

Institutions18%


14/52


Annual report reviewCOMPANY DETAILSPrice target: Under reviewMarket cap: Rs73,032 cr52 week high/low: Rs354/265NSE volume (No of shares): 23.3 lakhBSE code: 500696NSE code: HINDUNILVRSharekhan code: HINDUNILVRFree float (No of shares): 102.6 cr

(%) 1m 3m 6m 12m

Absolute 9.3 6.9 26.4 24.6


PRICE PERFORMANCE

APPLE GREEN HOLD; CMP: RS338 SEPTEMBER19, 2011HINDUSTANUNILEVER

KEY POINTSOperating cash flows declined YoY: The net cash generated from the operating activi-ties stood at Rs1,910.2 crore in FY2011 as against Rs3,479.6 crore in FY2010. Thedecline in the cash generated from operations can largely be attributed to the increasein the commodity prices during the year. Hence, the free cash flows reduced to Rs1,795.8crore in FY2011 from Rs3,077.6 crore in FY2010.Return ratios remained strong: The return ratios remained strong with the RoE andRoCE standing at 79.4% and 101.1% respectively in FY2011 as against 87.7% and103.5% respectively in FY2010.Dividend pay-out maintained above 75%: Despite a flat growth in the adjusted PATand a single-digit growth in the reported PAT, the company maintained the strongdividend pay-out. Its dividend pay-out ratio stood at 76.9% in FY2011 as against78.7% in FY2010.

Outlook and valuation: We shall review our estimates for HUL after the declaration of its Q2FY2012 results. We maintain our Hold recommendation on the stock but due tothe stocks rich valuations we keep our price target under review. At the current mar-ket price the stock trades at 29.9x its FY2012E EPS of Rs11.3 and 26.0x its FY2013EEPS of Rs13.0.



Promoters52%

DomesticInstitutions

12%

FIIs19%

Others17%

Asset quality woes continueCOMPANY DETAILSPrice target: Rs140Market cap: Rs10,491 cr52 week high/low: Rs202/101NSE volume (No of shares): 20.5 lakhBSE code: 500116NSE code: IDBISharekhan code: IDBIFree float (No of shares): 34.3 cr

(%) 1m 3m 6m 12m

Absolute 3.2 -17.7 -23.3 -29.9

Relative to Sensex 1.8 -6.8 -11.1 -13.8

PRICE PERFORMANCE

CANNONBALL HOLD; CMP: RS106 SEPTEMBER27, 2011IDBI BANK

We recently interacted with the management of IDBI Bank to have an update on the growthprospects in emerging environment. IDBI Banks asset quality woes are unlikely to endsoon as the bank is expected to report higher slippages over the next couple of quarters.

The bank continues to consolidate its business and has guided for a 13-15% growth inadvances over the next two years. The incremental credit growth would be mainly in thepriority sector, mortgage and corporate segment (working capital loan).

Despite the initative taken the CASA mobilisation remains below the targeted levels due toa sharp increase in the term deposit rates. However, the retail term deposits are growingwhich would add comfort on the asset liability management (ALM) front.

The asset quality pressures are expected to continue for the next couple of quarters. Apartfrom that the bank has significant exposure to sensitive sectors like power, infrastructure(27%) and SME (8%). Its exposure to the power sector is about 11%, though the expo-sure to the state electricity boards (SEBs) is nominal. The management expects the ac-counts in the infrastructure and aviation sectors to get restructured which would lead to asignificant increase in the proportion of the restructured loans.

Going ahead, in line with the subdued growth in the advances, the bank is expected togrow its fee income by 10-12% in FY2012-13.

We have recently downgraded the stock from Buy to Hold (refer to report dated 22 Septtitled Asset quality concerns intensify) and revised its price target to Rs140.



Promoter65%

MF & FI16%

Foreign

3%

Public & others16%



15/52



Annual report review; price target revised to Rs22COMPANY DETAILSPrice target: Rs228Market cap: Rs5,733 cr52 week high/low: Rs290/132NSE volume (No of shares): 14.4 lakhBSE code: 532947NSE code: IRBSharekhan code: IRBFree float (No of shares): 8.4 cr

(%) 1m 3m 6m 12m

Absolute 17.1 8.2 -3.2 -36.8

Relative to Sensex 10.4 10.2 0.1 -27.5

PRICE PERFORMANCE

EMERGINGSTAR BUY; CMP: RS173 SEPTEMBER21, 2011IRB INFRASTRUCTUREDEVELOPERS

KEY POINTSSignificant order wins over FY2009-10 led to buoyant FY2011 results: IRBs portfoliocurrently consists of 17 projects worth Rs17,600 crore (~6,822 lane km). Over FY2009-10, IRB won six projects worth Rs8,165 crore, recently it won the Tumkur-Chitradurgproject and a mega highway Ahmedabad-Vadodara project. The recent build-up in theportfolio led to a 43% sales growth in FY2011. However, due to a MTM loss of Rs47crore on a derivative contract, the PAT grew by only 17% in FY2011. Adjusting forthe same, the PAT growth stood at 30%.Debt level rises, working capital & operating cash flows improve: The D/E ratio cur-rently stands at 1.4x, further with Tumkur and Ahmedabad projects to start construc-tion work in FY2012 and FY2013 the D/E could reach 2.5x. The net working capitaldays improved further to 62 days in FY2011 vs 102 days in FY2010 due to betterinventory management, and lower loans and advances. The operating cash flow forFY2011 improved by 19% YoY to Rs1,078 crore on the back of a strong BOT portfo-lio and limited working capital requirement.

Marginally lowering estimates, maintain Buy (PT 228): We have kept revenue andEBITDA estimates unchanged, but reduced PAT estimates by 5% and 3% for FY2012and FY2013 respectively by factoring in the slightly higher depreciation charge andinterest cost. The project awarding activity by NHAI has gained momentum & consid-ering IRBs rich experience & strong financials, we expect it to make the most of thehuge opportunity. We lower our target PE multiple to factor in the current macroenvironment which revises our price target to Rs228. The stock still provides a goodupside from the current levels and is a long-term bet. Currently, the stock trades at11.4x its FY2012E earnings and 2x FY2012E BV.



Promoters75%

Institutions4%

Public &others

5%

Foreign13%

CorporateBodies

3%

Price hike in cigarettesCOMPANY DETAILSPrice target: Rs227Market cap: Rs148,571 cr52 week high/low: Rs211/150NSE volume (No of shares): 73.5 lakhBSE code: 500875NSE code: ITCSharekhan code: ITCFree float (No of shares): 773.8 cr

(%) 1m 3m 6m 12m

Absolute -5.5 3.1 14.9 11.8

Relative to Sensex -5.7 10.1 24.9 34.3

PRICE PERFORMANCE

APPLE GREEN BUY; CMP: RS192 SEPTEMBER23, 2011ITC

KEY POINTSWNC prices increased by 10%: ITC has increased the prices of the Wills Navy Cut(WNC) brand of cigarettes by 10% to Rs44 from Rs40 earlier. Year-to-date priceincrease in the cigarette portfolio currently stands at 5.1%.Price hikes to lessen the impact of VAT increase in key states: The recent price hikes inthe cigarette portfolio have been undertaken largely to mitigate the impact of the re-cent hike in the value-added tax (VAT) in the key states of Tamil Nadu, West Bengaland Andhra Pradesh (which together contribute close to 32% to the cigarette rev-enues).Price increases unlikely to affect the cigarette sales volume: The cigarette sales volumesare price inelastic and hence we dont expect the recent price hikes to have any materialimpact on the sales volumes of ITCs cigarette business. We maintain our volume growthexpectation of about 7% for FY2012.Outlook and valuations: Since our last update the stock has corrected by ~5%. Thisprovides an opportunity for the investors to invest in the stock with the expectation of a decent upside of 19% from the current levels. Hence, in view of the decent upside andthe better earnings visibility over the next two years, we maintain our Buy recommen-dation on the stock with the price target of Rs227. At the current market price thestock trades at 24.5x its FY2012E earnings per share (EPS) of Rs7.8 and 20.5x itsFY2013E EPS of Rs9.4.



DomesticInstitutions

36%

FIIs47%

Others17%


16/52



Price target revised to Rs865COMPANY DETAILSPrice target: Rs865Market cap: Rs49,916 cr52 week high/low: Rs826/585NSE volume (No of shares): 19.1 lakhBSE code: 500520NSE code: M&MSharekhan code: M&MFree float (No of shares): 46 cr

(%) 1m 3m 6m 12m

Absolute 12.3 15.8 18.5 13.0


PRICE PERFORMANCE

APPLE GREEN BUY; CMP: RS813 SEPTEMBER29, 2011MAHINDRA ANDMAHINDRA

XUV 5OO: PRICING IS A GAME CHANGERXUV 5OO pricing disruptive; to dramatically alter perception for M&MMahindra and Mahindra (M&M)s XUV 5OO, perceived to be an entry segment luxurysports utility vehicle (SUV), has surprised with its disruptive pricing. The basic two-wheel drive model starts from Rs10.8 lakh and extends to Rs11.95 lakh ex showroomDelhi. The four-wheel drive starts from Rs12.88 lakh.M&Ms XUV 5OO will compete with Tata Motors Aria and Toyota Innova.It incorporates new hi-tech features incorporated in the new vehicle are GPS, DVD,micro hybrid technology, voice command system, cruise control, parking sensors, sixairbags, hill control system and antilock braking system (ABS) with electronic brakeforcedistribution (EBD).The company spent Rs650 crore in developing XUV 5OO besides the investment inChakan plant.We expect the new XUV 5OO to sustain 1000 units/ month in domestic market withexports may double this demand

M&M to become the most entrenched player in Indian UV space: In August 2011, thecompany had launched the entry-level Scorpio at Rs7.59 lakh ex Delhi. This offering hasincreased the affordability of its SUV range. The XUV 5OO is positioned to migrate theentry-level SUV customers to the premium end beyond XUV 5OO to SsangYong productslike Korando and Rexton.Valuation: For M&M our FY2012 and FY2013 EPS estimates are pegged at Rs46.8 andRs54.8 respectively. We are upgrading our sum-of-the-parts (SOTP) price target to Rs865per share based on a higher price/earnings multiple (from 12x to 13x on FY2013E EPS) tothe core business. We maintain our Buy recommendation on the stock.



Institutions23%

Foreign34%

Promoters25%

Non Corp Holdings10%

Public & Others8%

Price target revised to Rs153COMPANY DETAILSPrice target: Rs153Market cap: Rs8,789 cr52 week high/low: 173/112NSE volume (No of shares): 2.4 lakhBSE code: 531642NSE code: MARICOSharekhan code: MARICOFree float (No of shares): 22.8 cr

(%) 1m 3m 6m 12m

Absolute 0.6 14.1 19.4 28.3


PRICE PERFORMANCE

APPLE GREEN HOLD; CMP: RS143 SEPTEMBER15, 2011MARICO

Volume growth momentum: Marico registered a strong volume growth of 21% yearon year in Q1FY2012. However, going ahead the company expects factors like theslowdown in the global economy and the high food inflation and rising interest rates inthe domestic economy to have some impact on consumer sentiments which, in turn, islikely to affect the demand for the companys products.Situation in international market: The business environment in the Middle East andNorth Africa region remains bleak due to continued political uncertainty in most of theconstituent countries. Inflation is another key factor which is hurting consumer senti-ment in most of the countries in which Marico operates.Gross margins to remain under pressure in the coming quarters: Though the companyhas taken price increases in its portfolio but the gap persists between the increase in the

raw material prices and the price hikes implemented by the company. Hence the grossprofit margin would remain under pressure in Q2FY2012 as well. We expect the grossprofit margin to be lower by over 500 basis points on a Y-o-Y basis in Q2FY2012.Outlook and valuation: The higher raw material cost would continue to put pressureon the margin for the next one to two quarters. However, considering the productportfolio of strong brands and the companys ability to launch innovative products indomestic as well as international markets, we believe the long-term growth story of Marico is intact. Hence, we maintain our Hold recommendation on the stock with arevised price target of Rs153. At the current market price the stock trades at 28.3x itsFY2012E EPS of Rs5.0 and 21.5x its FY2013E EPS of Rs6.7.



Promoters62%

Foreign &Institutions31%

Others7%


17/52



Annual report reviewCOMPANY DETAILSPrice target: Rs1,316

Market cap: Rs33,351 cr52 week high/low: Rs1600/1045NSE volume (No of shares): 4.3 lakhBSE code: 532500NSE code: MARUTISharekhan code: MARUTIFree float (No of shares): 13.2 cr

(%) 1m 3m 6m 12m

Absolute -0.9 -1.4 -0.7 -17.3

Relative to Sensex -4.6 4.6 4.8 -4.6

PRICE PERFORMANCE

APPLE GREEN BUY; CMP: RS1,155 SEPTEMBER20, 2011MARUTISUZUKIINDIA

The pace of FY2011 growth surprised; however future outlook cautiousThe confluence of negative macro cycles such as interest rates, fuel prices and inflationarypressures is expected to hurt passenger car demand in FY2012. The earlier growth expec-tation of 10-15% has been downgraded to single digit growth.A significant stress is being witnessed in the petrol segment due to a dramatic shift indemand for alternative fuels. Almost the entire FY2012 and medium term growth wouldcome from diesel, CNG and hybrid carsMaruti leads competition on capacity expansion curveThe Manesar II line has been commissioned at a time when the demand for the Swift dieselhas hit a euphoric high. An additional 2.5 lakh unit capacity with the cost of Rs1800crorehas placed the company much ahead of the competition on the expansion curve. Themanagement indicated the total Manesar capacity having touched 7.5 lakh units per an-num following the commissioning of Manesar III in FY2013.Macro headwinds pose formidable challengesHigher interest rates and commodity prices pose challenges for the entire industry. InFY2011, Marutis contribution per vehicle declined by 9%, reflecting a significant stresson the contribution margins. An additional challenge specific to the company is linkedwith the YenValuationWe see a dramatic improvement in realisation and contribution margins from Q4FY2012onwards as the full effect of the Manesar II line would be felt by then. Our estimates forFY2012 and FY2013 remain unchanged at Rs93.5 and Rs109.7 respectively. We are valu-ing the company at Rs1,316, discounting FY2013E earnings by 12x and have a Buy ratingon the stock. The key risk is the ongoing tiff with the workers at Manesar.



Promoters54%

Institutions24%

Foreign19%

Public & Others3%

Annual report reviewCOMPANY DETAILSPrice target: Rs70Market cap: Rs1,196 cr52 week high/low: Rs69/44NSE volume (No of shares): 1.5 lakhBSE code: 502420NSE code: ORIENTPPRSharekhan code: ORIENTPPRFree float (No of shares): 12.8 cr

(%) 1m 3m 6m 12m

Absolute 4.4 4.6 34.5 -3.2


PRICE PERFORMANCE

VULTURES PICK BUY; CMP: RS62 SEPTEMBER15, 2011ORIENTPAPER ANDINDUSTRIES

KEY POINTSOrient Paper & Industries (OPIL) posted an impressive 20.9% revenue growth onaccount of stabilisation of its new cement capacity, expansion of its market mix and animpressive performance by its electrical division. However, on account of continuedlosses in its paper division coupled with overall margin contraction, the companys netprofit declined by 10.2% to Rs143.1 crore.During the year OPIL has finalised an expansion of the cement capacity by 3 million-tonne-per-annum (mtpa) at Karnataka. The plant is expected to commence productionafter FY2014 and the overall cement capacity will enhance to 8mtpa. In the electricaldivision the company has planned to add household appliances to its products portfo-lio. In the paper division, to overcome the water shortage issue, the company has set uptwo water reservoirs.In order to unlock value for the shareholders and provide better focus to each of thebusinesses, the management has recently announced to carry out a de-merger of itscement business. The appointed date for the said de-merger is April 2012. We believethe development could be value unlocking for the shareholders.The current debt equity ratio of the company stands at 0.6x which will ensure comfort-able debt raising to part fund the Karnataka plant.Due to increase in debtor days and decrease in creditor days the working capital cyclehas increased as compared to FY2010.In addition to a strong balance sheet and attractive valuation, the demerger of thecement division will act as a re-rating factor for the stock. Hence we maintain our Buyrecommendation on the stock with a price target of Rs70. At the CMP, the stock tradesat a PE multiple of 5.6x discounting its FY2013 estimated earnings.



Promoters34%

Public &others28%

Foreign2%

Institutions36%


18/52


Price target revised to Rs1,040COMPANY DETAILSPrice target: Rs1,040Market cap: Rs245,934 cr52 week high/low: Rs1187/713NSE volume (No of shares): 6.3 lakhBSE code: 500325NSE code: RELIANCESharekhan code: RELIANCEFree float (No of shares): 164.8 cr

(%) 1m 3m 6m 12m

Absolute 9.2 -10.2 -12.7 -10.4

Relative to Sensex 7.9 -4.4 -7.3 -4.0

PRICE PERFORMANCE

EVERGREEN BUY; CMP: RS825 SEPTEMBER9, 2011RELIANCEINDUSTRIES

The comptroller and auditor general (CAG) tabled in parliament yesterday its final reporton the functioning of hydrocarbon production-sharing contract (PSC) in KG-D6 block.Major points of CAG report

Reliance Industries Ltd (RIL) did not relinquish 25% of the total contract area at theend of Phase-I and Phase-II in June 2004 and 2005 respectively. Hence RIL violatedthe PSC in KG D6 block.The Directorate General of Hydrocarbons (DGH) should have forced the contractor torelinquish the stipulated area and the authority failed to pursue technical aspects.The DGH and the petroleum ministry were unequipped to oversee the PSC.Front ending of capital expenditure (capex) by RIL would result in lower profit petro-leum for the Government of India (GoI).

Our view: While the report recommended revisiting the profit-sharing formula,the CAGremained silent on the notional loss that an increased capex in D6 may cause to the gov-

ernment. Moreover, the charges on RIL about front ending of capex and cost estimationare too difficult aspects to prove reasonably. Hence, there is hardly any material impact of the report on RIL, though some negative sentiment to remain.Valuation: We believe lingering concerns on the global macro environment is likely toimpact on RILs petrochem and refinery business. So we have revised down our net profitby 9% for FY2012 and by 8% for FY2013. While we roll over our valuation multiple baseto FY2013, we cut down our multiple on petrochem and refinery business from 7x to 6.5x(on EV to EBITDA). Consequently, we revise our target price by 13% to Rs1,040 butretain Buy rating.



Promoters45%

Institutions28%

Corporatebodies

5%

Others22%

Gearing up for a strong production ramp-upCOMPANY DETAILSPrice target: Rs500Market cap: Rs483 cr52 week high/low: Rs411/264NSE volume (No of shares): 66,383BSE code: 530075NSE code: SELANSharekhan code: SELANFree float (No of shares): 1.0 cr

(%) 1m 3m 6m 12m

Absolute 0.6 -0.6 -13.6 -5.5

Relative to Sensex 2.6 8.5 -3.7 14.4

PRICE PERFORMANCE

UGLYDUCKLING BUY; CMP: RS284 SEPTEMBER26, 2011SELANEXPLORATIONTECHNOLOGY

Firm realisation and healthy OPM reflected in strong net profit growth: In Q1FY2012,the net revenues (adjusted for the petroleum profit) of Selan Exploration Technology(Selan) grew by 42% backed by a stupendous growth (of 46%) in the realization.Sequentially, the sales grew by 24%, which is a reflection of the growth in both volume(up 10%) and realisation (up 13%). OPM expanded by 118 basis points YoY and1823 bps QoQ to 73.6%. Net profit grew by 49% YoY and 68% QoQ to Rs 12.9crore in Q1 FY12.Initial signs of a ramp-up; aggressive production ramp-up likely from FY2013: Selanhas commercialised two new wells in the Lohar oil field, which could bring incremen-tal output of 50,000 barrels a year. Another recently drilled well is likely to getcommercialised in this fiscal. It aims to drill 15-20 wells in the Bakrol and Indrora oil

fields where the seismic survey data is quite encouraging. Hence, management expects500,000 to 700,000 barrels of annual production over the next two years.Experienced new management would support aggressive growth plan: The companyhas roped in highly experienced team to manage the operations under the leadership of Andrew Wenk as the president and CEO. Mr Wenk has two decades of experience inthe oil exploration industry with stints in companies like Cairn India (the Rajasthanblock) and Reliance Industries (the Krishna-Godavari basin).Retain Buy: We expect the production to scale up to around 240,000 barrels in FY2012and to 440,000 barrels in FY2013. Consequently, we expect Selans net sales and earn-ings to grow at a compounded annual growth rate (CAGR) of 47% and 49% respec-tively over FY2011-13. We remain positive on the stock and retain our Buy call with aprice target of Rs500 (based on EV/EBITDA FY2013E multiple of 5.5x).



Promoters42%

Others56%

Foreign2%



19/52


Annual report reviewCOMPANY DETAILSPrice target: Rs400Market cap: Rs8,374 cr52 week high/low: Rs446/302NSE volume (No of shares): 3.1 lakhBSE code: 500770NSE code: TATACHEMSharekhan code: TATACHEMFree float (No of shares): 13.9 cr

(%) 1m 3m 6m 12m

Absolute -8.1 -8.7 2.2 -21.8

Relative to Sensex -6.2 0.7 11.5 -10.1

PRICE PERFORMANCE

VULTURES PICK BUY; CMP: RS329 SEPTEMBER14, 2011TATACHEMICALS

KEY POINTSTata Chemicals Ltd (TCL) posted a dreary financial performance in FY2011 withadjusted net profit declining by ~8% year on year (YoY) during the year. The sales forFY2011 grew by 15.9% to Rs11,060.2 crore on the back of an increase in the realisationof soda ash and sodium bicarbonate in India and Africa and a rise in the trading vol-ume of traded fertiliser (DAP and MOP).The net operating cash flow during FY2011 stood at Rs427 crore as compared toRs843 crore in FY2010. The operating cash flow declined mainly due to an increase indebtors as well as inventories during the year.The companys return ratios decreased from the levels of FY2010 and remained south-ward during FY2011. The return on equity (RoE) stood at 12.0% while the return oncapital employed (RoCE) stood at 13.3% during the year.The dividend pay-out ratio for the company improved from 29.1% in FY2010 to 36.9%

during FY2011. Going forward, TCLs revenue would grow at a compounded annualgrowth rate (CAGR) of 13% and adjusted profit after tax (PAT) will grow at a 20%CAGR. With its liberal dividend pay-out policy we expect TCL to maintain a 31%dividend pay-out over the next two years.Consequently, we maintain our Buy recommendation on the stock with a price targetof Rs400. We value TCL at 9x FY2013E earnings per share (EPS) and investmentvalue of Rs41 per share. At the current market price the stock is trading at 9.9x and8.7x its FY2012E and FY2013E respective earnings.



Price target revised to Rs550COMPANY DETAILSPrice target: Rs550Market cap: Rs5,839 cr52 week high/low: Rs927/477NSE volume (No of shares): 67,302BSE code: 500411NSE code: THERMAXSharekhan code: THERMAXFree float (No of shares): 4.0 cr

(%) 1m 3m 6m 12m

Absolute 3.0 -13.1 -9.4 -35.7

Relative to Sensex -2.7 -11.1 -6.4 -25.7

PRICE PERFORMANCE

EMERGINGSTAR HOLD; CMP: RS490 SEPTEMBER22, 2011THERMAX

Loses out in NTPC 800MW boilers tenderingThermax returned empty handed from the bulk tendering for boilers of NTPCs 7x 800MWpower project as it emerged as the third lowest bidder. Sluggish order awarding by thepower utilities along with a rising number of domestic players could put additional pricingand thereby margin pressure. Moreover, the revenue flow from the supercritical spacewould only start from FY2014 provided it bags some supercritical order in FY2012-13.Downgrade estimatesThermax growth outlook is clouded by the significant slowdown in the industrial capexcycle. Moreover, given the lack of order inflow, the competitive environment has alsointensified. In view of these concerns, we have lowered our order inflow and earningsestimates. We are now estimating a compounded annual growth rate of 12.7% in revenuesover FY2011-13, lower than the 26.7% CAGR posted over FY2006-11. We also sense amargin pressure for FY2012-13 (margin expected at ~11% versus 13% posted for the lastfive years.Price target revised to Rs550In view of the tough business environment, we have also downgraded valuation multiples(14x as compared to 16x earlier) and revised the target price to Rs550 (at 14x FY2013Eearnings). We maintain our Hold rating on the stock. The positive trigger for our targetprice would be in the form of the company winning big orders in the supercritical orcaptive power categories. Conversely, downward risk would emerge from a slow industrycapex cycle in the form of sluggish order inflow and margin pressure.



Promoters31%

Foreign14%Institutions29%

Others26%

Promoters38.9%

MF & FI13.0%

Foreign10.3%

Public &others14.7%



20/52


Sky is not falling...hope persistsINFORMATION TECHNOLOGY SEPTEMBER21, 2011

Escalating uncertainties in the euro zone on account of the sover-

eign debt crisis coupled with turmoil in the US region post the Stan-dard & Poor (S&P)s downgrade of US credit ratings have sparkedfears of a slowdown in demand for the Indian IT sector. Conse-quently, in the last three months, the BSE IT index has materiallyunderperformed the broader market indices with a fall of 9.3%vis--vis a 2.8% fall in the BSE Sensex. The price damage in someof the frontline counters in the IT space is higher than the fall in theBSE IT index in the last three months. For instance HCL Technolo-gies (12.6%), Infosys (10.8%) and Wipro (11.5%) have all cor-rected down more than the BSE IT index fall.

Though the current environment does indicate towards an uncer-tain tomorrow, nevertheless the Indian IT companies have evolvedmuch stronger and clients have become more disciplined after thelast downturn. Thus we expect that if there is a downturn, thetransition will be much smoother than the last time. However, wehave revised our earnings estimates for FY2013 and reduced ourtarget multiples for companies in our IT universe to factor in the

growing uncertainties and concerns in the sector. Overall, we re-

main cautiously optimistic on the sector and selectively positive onthe companies. Our top picks in the large cap space are TCS andHCL Technologies and in the mid cap space we remain positive onNIIT Technologies.

Once bitten twice shyThe price erosion in 2008-09 came into effect post the 2008 Lehmancrisis. However the current price damage has happened prior toany major event unfolding in the sector apart from the historicS&P downgrade of US credit rating and on account of euro zoneuncertainties. But the fear of another potential crisis has lead to adwindling of investors confidence in the sector. At the current junc-ture it is very difficult to gauge the magnitude of the impact on thesector and our interaction with companies managements also sug-gests the same. Most of the companies managements say there yethasnt been any impact on the business volume apart from someinstances of delay in the decision making.

With the company going through a transition phase of organisational restructuring coupled with it facing client spe-cific issues, we expect Infosys growth trajectory to remain rela-tively weaker than TCS in the medium term.

Nevertheless, we continue to remain positive on Infosys or-ganic led growth model and industry leading margin profile.

Infosys:Downgraded to Hold Hold; CMP: Rs2,433

We continue to like TCS amongst the offshore IT vendors onaccount of its mammoth scale of operation and resilient costmodel to withstand headwinds in the sector.

On the other hand, at the current juncture TCS is well placedto garner incremental deals in the sector with organisationalstructure in place. On the back of current uncertainties in the

Tata Consultancy Services:Price target revised to Rs1,201 Buy; CMP: Rs1,043

In the medium term we expect Wipro to demonstrate a rela-tively weaker earnings growth vis--vis its peers owing to itundergoing an organisational restructuring phase.

Wipro:Downgraded to Reduce Reduce; CMP: Rs356

We continue to remain positive on HCL Technologies with itsability to gain market share during the downturn and strongpresence in the infrastructure management services (IMS) space.

HCL Technologies:Price target revised to Rs523 Buy; CMP: Rs406

The companys premium priced offerings and non-linear solu-tions driven approach would provide long term sustenance tothe business model.

On the other hand, deployment of cash reserves in opportuneinorganic initiatives would provide the much needed push tothe revenue trajectory in the medium term.

global macro environment and potential risk of further down-grade of estimates for FY2013 in the event of further deteriora-tion of the macro environment, we have reduced our targetmultiple for TCS by 10% to 20x FY2013E earnings.

Consequently we have reduced our target price to Rs1,201 basedon revised earnings estimates for FY2013. We maintain ourBuy rating on the stock.

We expect Wipros earnings to grow at a CAGR of 5.6% overFY2011-13E. We downgrade our rating from Hold to Reducewith a reduced target price of Rs346. At our target price thestock would be valued at 14.5x FY2013E earnings.

We expect HCL Technologies earnings to grow at a CAGR of 25% over FY2011-13E. We maintain our Buy rating on thestock with a reduced target price of Rs523. At our target pricethe stock would be valued at 13.6x FY2013E earnings.

EQUITY FUNDAMENTALSSECTOR REPORT


21/52


Asset quality concerns intensifyBANKING SEPTEMBER22, 2011

Key pointsNew stress points emerge: Amid rising concerns over the growthof the domestic economy and the growing asset quality risks,the banking sector continues to underperform the broader indi-ces. Apart from the traditional issues of moderation in creditgrowth, margin pressure in a rising interest rate cycle and therisk of higher delinquencies from SME, MFI and some otherrisky segments, the asset quality risks have also emerged fromthe infrastructure sector especially power generation compa-nies due to execution delays and a sharp deterioration in thefinancials of the state utilities.

Revision in earnings: Due to the long gestation period and highoutlay of infrastructure projects, a good part of the loans are

likely to get restructured which would increase the stock of re-structured loans for banks. Some of the earlier restructured loansas well as the fresh restructured loans could slip into non-per-forming assets (NPAs), thereby requiring banks to have higherprovisions. In order to factor the same we have assumed one-third of the power sector loans would get restructured. Takingcue from the past cycle (2008-2009) we also assume 15% of the restructured loans to slip into NPAs resulting in increase in

provisions estimates (provision for the restructured loans and

loss in the present value terms). That results in downward revi-sion in our earnings estimates for FY2012 and FY2013 byaround 5-15% for banks under our coverage.

Selectively positive with preference for private sector banks: Wehave downgraded our price target for most banks under ourcoverage due to the downward revision in earnings and a re-duction in valuation multiples. In our view, the rising creditcosts and slower business growth would lead to dip in returnson equity (RoEs) and hence should lead to a downgrade of thevaluation multiples. Since these stocks have corrected substan-tially from recent peaks and partly factor the above stated con-cerns, we remain selective in the banking space with a prefer-

ence for private banks due to their steady business growth andlower exposure to the sensitive sectors. HDFC Bank (a defen-sive bet), ICICI Bank (sturdy core income growth and attrac-tive valuations) and Federal Bank (attractive valuations andexpected turnaround over medium term) are our preferred picksin private banks space. Among PSBs we prefer Bank of Baroda(higher return ratios and reasonable valuations).

VALUATION SUMMARY

Banks Price Reco P/BV RoE (%) RoA (%)

target FY12E FY13E FY12E FY13E FY12E FY13E

PSU banks

Andhra Bank 118 Reduce 0.9 0.8 19.9 20.3 1.2 1.2

Allahabad Bank 230 BUY 0.8 0.7 19.0 20.3 1.0 1.1

Bank of Baroda 850 BUY 1.3 1.1 20.3 21.6 1.1 1.2

Bank of India 305 Reduce 0.9 0.8 15.3 16.9 0.7 0.8

Corporation Bank 550 BUY 0.8 0.7 17.8 18.9 0.9 0.9

IDBI Bank 140 HOLD 0.7 0.7 13.9 14.4 0.7 0.8

Punjab National bank 1,150 BUY 1.3 1.1 21.1 21.2 1.2 1.2

SBI 2,308 HOLD 1.7 1.4 16.9 18.7 0.9 0.9

Union Bank 295 BUY 0.9 0.8 16.9 17.6 0.9 0.9

Pvt banks

Axis Bank 1,300 BUY 2.0 1.7 19.6 18.8 1.5 1.4

Federal Bank 500 BUY 1.1 1.0 13.0 14.5 1.2 1.2

HDFC Bank 518 HOLD 4.0 3.4 18.7 19.5 1.6 1.6

ICICI Bank 1,210 BUY 1.7 1.5 10.4 11.6 1.4 1.5

Yes Bank 360 BUY 1.8 1.5 19.9 18.0 1.4 1.2

The author doesnt hold any investment in any of the companies mentioned in the article.

For further details, please visit the Research section of our website, sharekhan.com

EQUITY FUNDAMENTALS SECTOR UPDAT


22/52


Urea makers have the advantage

Key points

The volume sales data of the leading 13 fertiliser companiesin India shows a decline in the offtake of the complex (non-urea) fertiliser products due to a considerable increase in theaverage selling price of non-urea fertiliser under the Nutrient-Based Subsidy (NBS) reg

valueguide_oct2011

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