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1QFY2014 Results Preview | July 3, 2013
Table of Contents
Strategy 1QFY2014 Sectoral Outlook Automobile Banking Capital Goods Cement FMCG Infrastructure Information Technology Media Metals Oil & Gas Pharmaceutical Power Telecom Stock W atch Watch 12 15 21 23 25 27 30 33 34 37 40 43 45 48 2-10
Note: Stock prices as of June 28, 2013 Refer to important Disclosures at the end of the report
Strategy
Subdued revenues to weigh on earnings
The slowdown in economic activity is expected to continue reflecting in the subdued revenue performance for corporates. For 1QFY2014, we expect the Sensex as well as our coverage companies to report a muted revenue performance. We expect Sensex companies to report a 2.4% yoy growth in revenues. For our coverage universe, we expect growth in revenues to come in at 4.1% yoy. On a sequential basis, revenues are likely to decline for both, the Sensex and our coverage companies by 8.5% qoq and 6.9% qoq respectively. We expect oil and gas (owing mainly to ONGC) and metal companies to weigh down the revenue growth of our overall coverage universe. As a result of the deceleration in revenues, we expect only a modest earnings growth for the Sensex and our coverage companies, ie 5.6% yoy and 1.3% yoy, respectively. On a sequential basis, the earnings performance for the Sensex as well as our coverage companies is likely to decline by 11.1% and 7.2% qoq respectively. Overall, we expect earnings during the quarter to be supported by the performance of BFSI, IT, FMCG and pharmaceutical companies. We believe that margins have bottomed out. As against a decline in operating margins for the past few quarters, we expect an improvement in margins on a yoy basis, during 1QFY2014. We expect the Sensex and our other coverage companies to report a margin growth of 78bp yoy and 35bp yoy respectively. But on a sequential basis, we expect a slight contraction in margins for both the Sensex and our coverage companies by 8bp qoq and 2bp qoq, during the quarter.
Outlook and V aluation: We are positive in our outlook for equities Valuation:
owing to factors such as the bottoming out of economic growth, moderation in inflation and narrowing of fiscal and current account deficits. We also believe that any further INR depreciation is likely to be stemmed and we expect the currency to stabilize owing to factors such as moderating concerns in global markets regarding impact of the US Feds QE exit and domestically a decline in gold imports. We expect that over the medium-term the sharp depreciation is also likely to boost growth in exports, especially as economic revival in the U.S gains ground. At the same time owing to our growth as well as real interest rate differentials, the economy is expected to continue attracting healthy capital inflows. We expect the Sensex' EPS to grow by 14.5% to `1,384 in FY2014 and by 14.4% to `1,583 in FY2015, implying a CAGR of 14.5% over FY2013-15. We maintain our 12-month Sensex target of 22,000, with a target multiple of 14x FY2015E earnings. The target implies an upside of 13.4% from the present levels and is likely to be back-ended.
Exhibit 1: 1QFY2014 Angel coverage performance estimates

Sector Agriculture (2) Auto (7) Auto Anc. (6) Banks - New private (4) Banks - Old private (2) Banks - Large PSU (7) Banks - Mid PSU (14) Banks - Housing finance (2) Capital Goods (7) Cement (7) FMCG (12) Infrastructure (11) IT (13) Media (5) Metals (9) Mining (1) Oil & Gas (4) Pharmaceuticals (13) Power (2) Telecom (3) Coverage Universe (131) Source: Company, Angel Research Refer to important Disclosures at the end of the report Net Sales (%, yoy) (%, qoq) 18.7 5.1 0.9 24.9 7.3 8.2 8.7 22.4 1.5 (1.2) 13.2 7.4 13.6 12.3 (0.5) 7.4 (6.4) 18.2 3.5 7.9 4.1 20.1 (13.3) 1.5 0.8 (6.3) (6.5) (8.0) (12.9) (43.7) (3.7) 2.8 (26.1) 5.2 2.4 (9.0) (11.0) (2.4) 15.0 0.5 2.0 (6.9) Net P rofit Profit (%, yoy) (%, qoq) 7.7 6.8 (4.8) 26.6 2.1 0.2 (9.8) 24.1 (15.6) (26.2) 15.6 (8.4) 9.7 10.5 (18.3) 1.5 0.4 11.1 0.6 (0.3) 1.3 15.8 (23.5) 9.0 (3.2) (14.9) 5.7 23.2 (18.4) (70.7) (19.1) 3.1 (43.1) 2.4 4.9 (23.4) (16.8) 4.9 6.6 (6.9) 104.7 (7.2) Operating Margins (bps, qoq) (bps, yoy) 75 70 39 92 (473) (172) (179) 11 (29) (504) (25) 35 (35) 15 (130) (280) 127 (137) 131 131 35 (171) (51) 14 11 48 315 231 (185) (946) 70 10 48 75 312 (233) (488) 76 (89) 31 13 (2)
Strategy
Exhibit 2: 1QFY2014 Sensex performance estimates
Net Sales Sector Auto (5) Finance (4) Capital Goods (1) FMCG (2) Infrastructure (1) IT (3) Metals (4) Mining (1) Oil & Gas (3) Pharma (3) Power (2) Telecom (1) Sensex (30) Source: Company, Angel Research (%, yoy) 6.4 13.1 (3.0) 13.6 9.6 12.2 (3.7) 7.4 (6.4) 24.1 1.7 7.7 2.4 (%, qoq) (12.7) (4.1) (57.4) 0.7 (35.4) 4.0 (10.6) (11.0) (2.4) 21.5 (0.7) 1.9 (8.5) Net P rofit Profit (%, yoy) 8.6 13.9 (12.7) 18.1 1.6 10.0 (7.6) 1.5 1.4 16.3 (4.2) 1.0 5.6 (%, qoq) (23.2) 0.5 (75.2) 1.6 (48.5) 1.8 (33.5) (16.8) 3.5 5.1 (7.1) 54.2 (11.1) Operating Margins (bps, yoy) 77 (97) 25 4 141 (56) (120) (280) 133 (361) 189 199 78 (bps, qoq) (61) 352 (972) 35 (158) 70 (260) (488) 71 (193) (16) 49 (8)
Exhibit 3: Sensex companies' 1QFY2014 performance estimates

Net Sales (` cr) Sector Bajaj Auto Bharti Airtel BHEL Cipla Coal India Dr. Reddy HDFC HDFC Bank Hero Moto Corp Hindalco HUL ICICI Bank Infosys ITC Jindal Steel Gail India L&T M&M Maruti Suzuki NTPC ONGC RIL SBI Sterlite Sun Pharma Tata Motors Tata Power Tata Steel TCS Wipro Total Source: Company, Angel Research W eight (%) Weight 1.7 2.3 0.9 1.2 1.2 1.7 8.2 7.7 1.0 0.8 3.8 7.5 7.4 10.8 0.6 1.0 4.7 2.7 1.2 1.8 4.3 9.3 3.2 0.8 2.5 3.2 0.9 1.1 5.4 1.3 100.0 1QFY2014E 4,642 20,859 8,186 2,113 17,719 3,340 1,892 6,245 6,245 6,810 6,942 6,205 11,217 7,714 5,106 12,296 13,100 10,438 10,424 16,519 20,285 82,561 15,352 8,372 3,377 46,839 2,035 32,728 18,021 10,186 417,766 1QFY2013 4,714 19,362 8,439 1,917 16,500 2,541 1,554 5,014 6,208 5,964 6,250 5,073 9,616 6,652 4,680 11,089 11,955 9,248 10,529 15,960 20,084 91,875 14,618 10,591 2,658 43,171 2,284 33,821 14,868 10,653 407,888 % chg (1.5) 7.7 (3.0) 10.2 7.4 31.4 21.7 24.6 0.6 14.2 11.1 22.3 16.7 16.0 9.1 10.9 9.6 12.9 (1.0) 3.5 1.0 (10.1) 5.0 (21.0) 27.1 8.5 (10.9) (3.2) 21.2 (4.4) 2.4 1QFY2014E 726 784 804 367 4,524 453 1,226 1,845 568 328 852 2,284 2,403 1,898 598 918 911 850 785 2,516 5,532 5,392 3,740 1,198 961 2,683 177 487 3,829 1,633 51,270 Net P rofit (` cr) Profit 1QFY2013 718 776 921 400 4,458 336 1,002 1,417 615 425 727 1,815 2,289 1,602 385 1,134 897 726 424 2,499 6,078 4,473 3,752 1,419 796 2,685 312 598 3,281 1,580 48,538 % chg 1.0 1.0 (12.7) (8.2) 1.5 34.8 22.3 30.1 (7.8) (22.7) 17.2 25.8 5.0 18.5 55.3 (19.0) 1.6 17.1 85.2 0.7 (9.0) 20.5 (0.3) (15.5) 20.8 (0.1) (43.3) (18.5) 16.7 3.3 5.6
Refer to important Disclosures at the end of the report
Strategy Sectoral Analysis

Automobile - Margins to support moderate earnings growth
For 1QFY2014, we expect our coverage automobile companies to report a modest revenue growth of 5.5% yoy. This would largely be driven by strong growth in net average realizations backed by superior product-mix and price increases. Volumes, however, are expected to decline 4% yoy due to continuous slowdown across most of the segments. The top-line growth is expected to be driven by strong growth at Mahindra & Mahindra (M&M; led by the tractor segment) and Tata Motors (led by Jaguar-Land Rover [JLR]). We expect margins to improve by about 80bp yoy mainly due to easing of commodity prices, favorable exchange rate movement for the sector and lower levels of discounting. We expect Maruti Suzuki (MSIL), Tata Motors (TTMT) and M&M to drive the sector's earnings (of 8.7% yoy) during the quarter. Excluding Tata Motors, our coverage automobile universe is expected to post a modest top-line growth of 1.0% yoy; nevertheless, earnings are likely to register a strong growth of 13.9% yoy as margins are likely to swell by about 120bp yoy.
FMCG - Healthy revenue performance to drive earnings

We expect our FMCG universe to post a healthy 13.2% yoy top-line growth owing to higher volumes, better realizations and superior mixes. On an average we expect a reasonably healthy volume growth (in high single digits) in the domestic market for these companies. The FMCG coverage universe is expected to post a strong 15.6% yoy earnings growth driven by healthy top-line performance. On the margins front, we expect some companies to report a contraction owing to the impact of INR depreciation on imported raw materials and higher advertising and sales promotion expenditure.
Infrastructure - Challenging environment to weigh on earnings

For the infrastructure sector, subdued revenue performance, along with high interest cost and pressure on margins, are expected to result in a muted performance at the earnings level. Against this backdrop, we expect a decline in the earnings of companies under our coverage, with L&T being the only exception. There has been no respite for infrastructure companies from persistent headwinds such as high interest rates and slower-than-anticipated revival in industrial capex. Further, stretched balance sheets and working capital on the back of investment in subsidiaries and delay in payments from clients continue to pose a problem. This has resulted in execution slowdown and shrinking bottom-lines for most infrastructure companies. We believe that a stock-specific approach would yield higher returns, given the disparity among the companies in our coverage universe and changing dynamics, affecting them either positively or negatively. Hence, we remain positive on companies having 1) a comfortable leverage position; 2) superior return ratios and 3) lesser dependence on capital markets for raising equity for funding projects.
Banking - New Private Banks to continue their outperformance

We expect our coverage new private banks to continue outperforming their nationalized counterparts and older private banks and report a robust earnings performance. Aided by strong NII growth of 26.4% yoy and healthy non-interest income growth of 22.3% yoy, new private banks are expected to report a strong 24.9% yoy growth in operating profit and 26.6% yoy increase in earnings. On the other hand, our coverage PSU banks and older private banks are expected to register moderate operating performance, with operating income growth of 7-8% yoy each. Despite modest growth of 5.1% yoy in operating profit, PSU banks are expected to report an earnings decline of 3.1% yoy, primarily dragged by an 18.2% yoy increase in provisioning. Older private banks are expected to report a 1.7% decline in operating profit and a subdued 2.1% yoy growth in earnings.
Capital goods - Headwinds continue to affect earnings

Amid slowdown in the Indian economy, investments across various sectors have substantially decelerated. The headwinds in the power sector have limited order visibility further for companies in boiler turbine generator (BTG) space, especially from private utilities. Although some orders are expected from state and central utilities, tough competition in BTG space is likely to result in margin contraction and finalization of these orders is also likely to witness delay due to ongoing headwinds (such as fuel crisis, constraints in land acquisition and poor health of state electricity boards [SEBs]). Although transmission and distribution (T&D) companies are comparatively better placed due to steady ordering, they are still facing execution risks due to delay in clearances and revenue deferrals.
4
Cement - Lower realization to weigh on earnings

We expect our cement universe to report a substantial 26.2% yoy decline in earnings, impacted by lower realization and a substantial increase in operating costs. We expect the top-line to decline marginally by 1.2% yoy, impacted by both lower volumes and weak realizations. The operating margin is expected to decline steeply by 504bp yoy and this sharp contraction can be attributed to lower realization and increase in freight and raw material costs.
Strategy
IT - INR depreciation and moderate volume growth to drive earnings
Traditionally, 1Q of a financial year is a strong quarter for IT companies as client budgets on discretionary, operational and capital spending, which are frozen by 4Q, witness a flush in this quarter. We expect 1QFY2014 to be better than 4QFY2013, but not as good as 1Q is traditionally, due to economic uncertainty across developed economies, leading clients to delay their incremental budget flush from their end. We expect revenue growth in 1QFY2014 to be volume driven and pricing to remain stable. On the back of INR depreciation and moderate volume growth, profitability of tier-I companies such as Infosys, TCS and HCL Tech is expected to increase by 6.5%, 0.4% and 3.0% qoq, respectively. The profitability of Wipro is expected to decline by 6.0% qoq due to hiving off of non-IT businesses along with negative impact of wage hikes. Amongst mid-tier IT companies, earnings growth is expected to be a mixed bag. companies to report an earnings growth of 11.1% yoy during the quarter.
Telecom - Expect modest revenue growth

For 1QFY2014, we expect a modest revenue growth for the industry on the back of increase in MOU, inch up in voice ARPM and increasing share of VAS in revenues. We expect our coverage telecom companies to post a revenue growth of 7.9% yoy and 2.0% qoq. On the margins front, we expect the EBITDA margin of Idea Cellular and Reliance Communications (RCom) to decline by 70bp and 27bp qoq to 26.9% and 30.6%, respectively, while EBITDA margin of Bharti Airtel is expected to inch up by 49bp qoq to 32.2%, aided by a low base effect. In our view, the telecom industry can improve structurally only after data revenues start picking up. We are currently Neutral on the telecom sector and will refrain from taking any call till financial clarity on the stocks emerges.
Metals - Earnings to remain under pressure

We expect our overall coverage metal companies to report a steep 18.3% decline in earnings performance. Our coverage steel companies are faced with decline in revenue as well as pressure on margins due to lower prices on a yoy basis. Our coverage non-ferrous companies are expected to continue facing a double whammy of declining product prices coupled with higher input costs. We expect non-ferrous companies to report lower bottom-lines on a yoy basis owing to a decline in LME prices coupled with sticky costs.
Fed signals U.S economy on the mend, reduction in asset purchases

The Federal Reserve (Fed) in its June policy meeting maintained status quo on rates and asset purchases. The Fed indicated that it would continue with its ultra accommodative monetary policy stance, keeping interest rates near zero at 0.25%, at least until unemployment remains above 6.5% and inflation is maintained near its 2% medium-term objective. The Federal Open Market Committee (FOMC) decided to continue with asset purchases of US$85bn per month (US$45bn in treasury securities and US$40bn in mortgage backed securities) to maintain downward pressure on interest rates. At the same time, the Fed signaled at the economic recovery gaining strength and hence a subsequent tapering of the asset purchases. In his statement Federal Reserve Chairman Ben Bernanke stated that, "Going forward, the economic outcomes that the Committee sees as most likely involve continuing gains in labor markets, supported by moderate growth that picks up over the next several quarters as the near-term restraint from fiscal policy and other headwinds diminishes. We also see inflation moving back toward our 2% objective over time. If the incoming data are broadly consistent with this forecast, the Committee currently anticipates that it would be appropriate to moderate the monthly pace of purchases later this year; and if the subsequent data remain broadly aligned with our current expectations for the economy, we would continue to reduce the pace of purchases in measured steps through the first half of next year, ending purchases around midyear."
Oil and Gas - ONGC to weigh on earnings performance

We expect a mixed performance on the profitability front for our coverage oil and gas companies. Overall, we expect Sensex and our coverage oil and gas companies to report an almost flat earnings performance, weighed down by ONGC's numbers. We expect earnings for ONGC to decline by 9.0% yoy, largely due to a yoy increase in other expenses. Excluding ONGC, our coverage oil and gas companies are likely to post an improved earnings growth of 7.0% yoy and Sensex oil and gas companies are likely to report a healthy 12.5% yoy growth in earnings.
Pharmaceuticals - Robust revenue growth but margins under pressure

The Indian pharmaceutical sector is expected to post a robust revenue growth for 1QFY2014. We expect our coverage pharmaceutical universe to register a growth of 18.2% yoy in the top-line. But on the operating front, we expect margins to decline by 137bp. With pressure on margins coupled with a higher tax rate, we expect our coverage pharmaceutical
Strategy
Exhibit 4: Economic Projections released by the Federal Reserve
2013 Real GDP growth Unemployment rate CPI Inflation Source: Federal Reserve 2.0-2.6 6.9-7.5 0.8-1.5 2014 2.2-3.6 6.2-6.9 1.4-2.0 2015 2.3-3.8 5.7-6.4 1.6-2.3
Exhibit 7: FIIs net sold Indian equities and debt during June 2013
(USDbn) 6.0 4.0 2.0 (2.0) (4.0) (6.0)
Jul-11 Aug-11 Oct-11 Jul-12 Aug-12 Nov-11 Dec-11 Apr-11 Jun-11 Jan-12 Oct-12 Nov-12 Dec-12 Mar-12 Apr-12 May-11 Sep-11 Jun-12 Jan-13 Mar-13 Apr-13 May-12 Sep-12 May-13 Feb-12 Feb-13 Jun-13
FII net equity inflows
FII net debt inflows
The equity markets, particularly those in emerging economies, reacted negatively to the Fed's indication of a sooner-thanexpected exit from QE3. The USD has strengthened against most currencies in advanced economies as well as in emerging markets. The risk-off trade has led to an outflow of capital from emerging markets. In the Indian markets, FIIs net sold USD1.8bn of equity and US5.4bn of debt during June 2013. As a consequence of these global factors, the INR has come under sharp pressure since May 2013 and depreciated by about 9% since the beginning of the year. After this initial bout of reaction, we expect stemming of the outflows and normalization in capital inflows going ahead although inflows in equities are likely to remain lower than the US$26bn poured in during FY2013.
Source: SEBI, Angel Research
CAD comes in at 4.8% for FY2013, expected to moderate going ahead

As expected, based on the already released trade data, the Current Account Deficit (CAD) moderated significantly in 4QFY2013 to US$18.2bn as compared to US$31.8bn in 3QFY2013 and US$21.2bn in the corresponding quarter of the previous year. The CAD as a proportion of GDP came in much lower at 3.6% of GDP as compared to the record-high of 6.5% of GDP (6.7% of GDP reported earlier) during 3QFY2013. For FY2013 as a whole, CAD has come in at 4.8% of GDP (lower than the estimated 5.0% of GDP) as compared to 4.2% of GDP in FY2012. Overall, for FY2013 as a whole, the trade deficit widened to 10.6% of GDP from 10.2% of GDP in FY2012 as exports reported a decline of 1.0% despite flat import growth. At the same time, growth in invisibles declined by 3.7% in FY2013 as
Exhibit 5: Majority of stock markets tumbled in 2013YTD

(%) 30.0 20.0 10.0 0.0 (10.0) (20.0) (30.0)
Brazil India Indonesia Russia Malaysia S. Korea China Japan HK Euro area UK US
2012
2013 YTD
against a robust 40.8% growth in FY2012, mainly owing to the de-growth of business services and huge net outflow of investment income (US$22.4bn vis--vis US$16.5bn in FY2012). Despite the huge record-high annual CAD at US$88.2bn, the Balance of Payments (BoP) remained positive with accretion of foreign exchange reserves amounting to US$3.8bn vis-a-vis US$12.9bn of drawdown on reserves in FY2012. The healthy financing of the CAD during FY2013 can be attributed to inflows through FII and FDI.
Source: Bloomberg, Angel Research
Exhibit 6: As USD gains strength, most currencies depreciate

(%) 10.0
2012
2013 YTD
(-depreciation/+ appreciation)
5.0 0.0 (5.0) (10.0) (15.0)
Brazil
India
Indonesia
Russia
Malaysia
S. Korea
China
Japan
HK
Euro area
UK
Going ahead, we believe that the CAD is likely to moderate during FY2014 owing to two important factors - 1) pick-up in export growth as the US economy revives and 2) normalization of gold imports. Despite an almost 16.0% correction in gold prices (in INR terms) since January 2013, gold imports have increased by 121% yoy in April 2013 and 88% yoy in May 2013 reflecting the huge volume growth. We believe that
Strategy
Exhibit 8: Sharp moderation in CAD during 4QFY2013
(USD bn) 35.0 30.0 25.0 20.0 15.0 10.0 5.0 0.0
1Q11 2Q11 3Q11 4Q11 1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13 1Q09 2Q09 3Q09 4Q09 1Q10 2Q10 3Q10 4Q10 4Q13
Exhibit 9: Much lower trade deficit ex oil and gold

(USD bn) 200.0 (USDINR) 58.0 150.0 53.0 100.0 48.0 43.0 38.0 FY2008 FY2009 Trade deficit FY2010 FY2011 Ex oil, ex gold FY2012 FY2013 USD/INR (RHS)
(% of GDP) 7.0 6.0 5.0 4.0 3.0 2.0 1.0 0.0
50.0
0.0
Current account deficit
Current account deficit/GDP (RHS)
Source: RBI, Angel Research
Exhibit 10: BoP positive in FY2013 supported by strong capital inflows (in USD bn)
4QFY12 A . Current Account I. Trade balance a) Exports b) Imports II. Invisibles a) Services b) Transfers c) Income (21.8) (51.5) 80.2 131.7 29.8 17.5 16.8 (4.6) 16.5 15.3 1.4 13.9 2.7 0.3 2.3 0.2 2.0 2.0 4.7 (0.0) (3.4) (0.6) (5.7) 1QFY13 (17.1) (43.8) 75.0 118.8 26.8 15.0 16.7 (4.9) 16.5 1.9 3.8 (1.9) 6.0 0.1 0.5 5.4 9.4 9.5 6.6 (0.0) (0.7) 1.1 0.5 2QFY13 (21.1) (47.8) 72.6 120.4 26.7 16.3 15.9 (5.6) 20.7 15.9 8.2 7.7 5.2 0.1 1.0 4.1 5.5 4.8 2.8 (0.0) (5.8) 0.2 (0.2) 3QFY13 (31.8) (58.4) 74.2 132.6 26.6 16.6 15.8 (5.8) 31.5 11.9 2.1 9.8 10.8 0.3 2.8 7.7 5.2 5.3 2.7 (0.0) 3.5 1.1 0.8 4QFY13 (18.2) (45.6) 84.8 130.4 27.5 17.0 15.7 (5.2) 20.5 17.0 5.7 11.3 9.2 0.5 4.2 4.5 (3.6) (3.5) 2.8 (0.0) (2.1) 0.3 2.7 FY12 (78.2) (189.8) 309.8 499.5 111.6 64.1 63.5 (16.0) 67.8 39.2 22.1 17.2 19.3 2.3 10.3 6.7 16.2 16.0 11.9 (0.1) (6.9) (2.4) (12.8) FY13 (88.2) (195.7) 306.6 502.2 107.5 64.9 64.0 (21.5) 89.3 46.7 19.8 26.9 31.1 1.0 8.5 21.7 16.6 16.1 14.8 (0.1) (5.0) 2.7 3.8
B. Capital account I. Foreign Investment a) FDI b) FII II. Loans a) External assistance b) Commercial borrowings c) Short-term credit
III. Banking Capital a) Commercial banks of which NRI deposits IV. Rupee debt service V. Other capital
C. Errors and omissions D. Overall Balance Source: RBI, Angel Research
this excessive buying of gold can be attributed to front-ended demand and is likely to normalize going forward particularly as investment demand for the yellow metal is expected to remain sluggish. In terms of volumes, gold imports are likely to come in at 50 tonnes in June 2013 as compared to 162 and 142 tonnes in April and May 2013 respectively. Gold
is the second-largest item of import and amounts to about 10% of total imports in our economy. As far as financing the CAD is concerned, we expect the interest rate and growth differentials of our economy to continue providing an impetus for attracting capital flows.
Strategy INR depreciation to be stemmed

The softening of global commodity prices has been a welcome respite but weakness in the currency could possibly offset its positive impact on these variables in the short-term and also affect performance of corporates exposed to foreign debt. The INR depreciated sharply by 10% since May 2013 and even breached the 60- mark, reaching a record-low of 60.77 to the USD in intraday trade on June 26, 2013. We believe that any further INR depreciation is likely to be stemmed and we expect the currency to stablize owing to factors such as stability in the financial markets and decline in gold imports and hence moderation in the trade deficit. We believe that the U.S is unlikely to taper off liquidity in a hurry and hence further INR depreciation on global cues looks unwarranted. The Fed looks to be firmly in the drivers seat as commodity prices remain benign and inflationary pressures remain well-anchored. In addition, real GDP growth in the U.S for 1Q2013 has been revised downwards to 1.8% from 2.4%. In this scenario, the Fed is unlikely to exit from its accomodative policy stance. We believe that the tapering is likely to be done gradually and in an orderly fashion without any risks to global financial stability. At the same time, over the medium-term the sharp depreciation is expected to boost growth in exports as economic revival in the U.S gains ground. In the interim, the government has stepped in and hiked import duty on gold by 200bp to 8% and the RBI has imposed restrictions on banks with regard to importing gold, sale of gold coins etc. These measures are likely to impact demand for gold along with the deceleration in prices dampening investment demand. We believe that in the near-term, the government is likely to consider some more steps to stabilize the currency such as increasing FII/ECB investment limits, liberalizing norms for attracting more stable FDI investment across more sectors and may even contemplate a sovereign bond issue. We believe that the weakness in the currency played a major role in the Reserve Bank of India (RBI) staying put on policy rates, despite decelerating inflation, in its June monetary policy meeting. In its guidance on future rate cuts, the RBI emphasized that 'a durable receding of inflation' would open up space for monetary policy easing. We maintain our expectation of a 50bp reduction in the repo rate during FY2014 to address downside risks to economic growth.
Moderation in inflation to within comfort levels is a much needed breather

Headline Wholesale Price Index (WPI) inflation has moderated considerably to 4.7% in May 2013 from an average of 7.4% in FY2013. Core (non-food, manufactured) inflation in particular
Exhibit 11: Sharp INR depreciation since May 2013

(USDINR) 62.0 60.0 58.0 56.0 54.0 52.0 50.0 48.0 46.0
Dec-12 Jan-12 Jun-12 Jan-13 Jun-13 Apr-12 Mar-12 Aug-12 Sep-12 Feb-12 Oct-12 Jul-12 Nov-12 May-12 Mar-13 Feb-13 Apr-13 May-13
Exhibit 13: WPI and core inflation in RBI's comfort zone

(%) 10.0 9.0 8.0 7.0 6.0 5.0 4.0 3.0 2.0
Apr-11 Aug-11 Oct-11 Jun-11 Dec-11 Apr-12 Aug-12 Feb-12 Oct-12 Jun-12 Dec-12 Feb-13 Apr-13
Core Inflation
WPI Inflation
Source: Office of Economic Advisor, Angel Research
Exhibit 12: Key monetary policy rates

(%) 10.0 9.0 8.0 7.0 6.0 5.0 4.0 6.25 7.25 Repo rate Reverse Repo rate CRR
Exhibit 14: Moderation in CPI and WPI inflation

(%) 12.0 10.0 8.0 6.0 4.0
WPI Inflation
CPI inflation
Jan-12
Mar-12
Apr-12
Aug-12
Jun-12
Dec-12
Jan-13
May-12
Nov-12
Mar-13
Feb-12
Sep-12
Feb-13
Oct-12
Apr-13
Jul-12
2.0 Jun-08
Jun-09
Jun-10
Jun-11
Jun-12
Jun-13
Source: RBI, Angel Research Refer to important Disclosures at the end of the report
May-13
3.0
4.00
2.0
Strategy
has collapsed to a three-year low owing to softening global commodity prices and weak pricing power. The Consumer Price Index (CPI) inflation also reversed the trend of an uptick and moderated marginally during May 2013 to 9.3% from 9.4% in April 2013. The difference of about 440bp between the WPI and CPI can be attributed mainly to the high weightage (almost 50%) for food articles in the CPI, which remain elevated. We believe that WPI inflation is likely to be at a moderate 5.5% level by March 2013 and CPI inflation is also likely to moderate to similar levels as food inflation eases going ahead. In this context, the recent move by the Cabinet Committee on Economic Affairs (CCEA) to hike minimum support prices (MSP) for kharif crops moderately in the range of 0-15% during 2013-14 as against increases of 15-53% in the previous crop season is a key positive. Cereal inflation remains at elevated levels and hence we believe that these reasonable hikes, in particular for cereals such as rice (` 60-65), are likely to contain inflationary pressures. We expect factors such as the onset of a normal monsoon, decent rabi production in FY2013 and the moderate hikes in MSP for kharif crops to bring down food inflation. Further, the moderation in food inflation is likely to lead to further easing of rural wage-inflation (which has softened to about 17.3% in April 2013 from 18.3% in January 2013) thus breaking the wage-price spiral. The moderation in inflation is a huge positive and we believe it is likely to have a cascading effect on a number of other variables. So far with negative real interest rates in the economy, financial savings as a proportion of total household savings have come down dramatically to about 36% in FY2012 from 52% during FY2008. As a result, savings in physical non-productive assets like gold have soared. In the medium-term, we believe that a moderation in gold demand and shift in the preference towards saving in financial assets would boost investment in the economy.
Exhibit 15: Moderate hikes announced in MSP for kharif crops (in %) for 2013-14 crop season
Kharif Crops Paddy (Common variety) Paddy (A - grade) Jowar (Hybrid) Jowar (Maldandi) Bajra Maize Ragi Arhar (Tur) Moong Urad Cotton (Medium Staple) Cotton (Long Staple) Groundnut In Shell Sunflower Seed Soyabeen (Black) Soyabeen (Yellow) Sesamum Nigerseed Source: GoI, Angel Research FY2009 31.8 30.4 40.0 38.7 40.0 35.5 52.5 29.0 48.2 48.2 38.9 47.8 35.5 46.7 48.4 32.4 74.1 94.0 FY2010 11.8 11.4 15.0 9.5 3.6 FY2011 5.3 5.1 4.8 4.7 4.8 4.8 5.5 30.4 14.9 15.1 9.5 6.1 3.7 3.6 1.8 1.9 FY2012 8.0 7.8 11.4 11.1 11.4 11.4 8.8 6.7 10.4 13.8 12.0 10.0 17.4 19.1 17.9 17.4 17.2 18.4 FY2013 15.7 15.3 53.1 52.0 19.9 19.9 42.9 20.3 25.7 30.3 28.6 18.2 37.0 32.1 33.3 32.5 23.5 20.7 FY2014 4.8 5.1 6.4 11.5 11.7 2.3 2.8 2.6 8.1 13.6 14.3 7.1 -
Strategy Outlook and Valuation

We are positive in our outlook for equities owing to factors such as the bottoming out of economic growth, moderation in inflation and narrowing of fiscal and current account deficits. We also believe that any further INR depreciation is likely to be stemmed and we expect the currency to stabilize owing to factors such as moderating concerns in global markets regarding impact of the US Feds QE exit and domestically a decline in gold imports. We expect that over the medium-term the sharp depreciation is also likely to boost growth in exports, especially as economic revival in the U.S gains ground. At the same time owing to our growth as well as real interest rate differentials, the economy is expected to continue attracting healthy capital inflows. We expect the Sensex' EPS to grow by 14.5% to `1,384 in FY2014 and by 14.4% to `1,583 in FY2015, implying a CAGR of 14.5% over FY2013-15. We maintain our 12-month Sensex target of 22,000, with a target multiple of 14x FY2015E earnings. The target implies an upside of 13.4% from the present levels and is likely to be back-ended.
Exhibit 16: Sensex EPS growth over FY2013-15

(` )
1,700 1,500 1,300 1,100 900 700 500 FY2013 FY2014E FY2015E 1,208
14.5 wth % gro
owth % gr 14.4
Exhibit 17: Sensex one-year forward P/E

30.0 25.0
1,583
20.0 15.0 10.0 5.0 Jun-01
1,384
Jun-03
Jun-05
Jun-07
Jun-09 15 year Avg
Jun-11 5 year Avg
Jun-13
Sensex 1 year forward P/E
Source: Angel Research
10
1QFY2014 Sectoral Outlook
11
Automobile
Another quarter of weak volumes
The domestic automotive industry has begun FY2014 on a somber note after having witnessed a sharp deceleration in growth (cumulative domestic sales grew at a modest pace of ~3% yoy) in FY2013. The primary factors that impacted growth in FY2013 like slowdown in economic activity, poor consumer and business sentiments and higher fuel prices continued to suppress demand in 1QFY2014 as well. Except for Mahindra and Mahindra (MM) and Jaguar - Land Rover (JLR), all the other companies in our coverage universe witnessed a volume de-growth. While the medium and heavy commercial vehicle (MHCV), passenger car (PC) and motorcycle segments continued to remain the most impacted, growth in the utility vehicle (UV) and light commercial vehicle (LCV) segments too tapered off in 1QFY2014. The tractor segment however witnessed a strong growth during the quarter, with inventory correction having been undertaken by companies in 4QFY2013 and also on account of festival season demand and expectation of a normal monsoon. Going ahead, we expect the demand environment for the sector to remain sluggish in 2QFY2014 as well and expect a marginal recovery in volumes in 2HFY2014 led by continuous softening of interest rates, expectation of a normal monsoon, festival season demand and also on account of the base effect. Sensex. The outperformance was led by the expectations of volume recovery following continuous easing of interest rates. Index heavyweights like MSIL and MM outperformed the BSE Auto index, led by a favorable exchange rate movement and strong growth in tractor volumes, respectively.
Exhibit 1: 1QFY2014 - Stock price performance

Tata Motors MRF Motherson Sumi Maruti Suzuki MM Hero MotoCorp Exide Industries Cummins India Bajaj Auto Bosch Ashok Leyland (15.6) (8.4) (8.4) (10.0) 0.0 10.0 Relative to Auto index (%) 20.0 Absolute 30.0 (13.3) (15.6) (6.0) (8.4) (0.4) (1.2) 6.9 0.6 5.0 7.8 (4.7) (2.7) 0.6 2.5 4.5 7.8 13.0 20.2 12.2
(20.0)
CV sales continue to be sluggish

The commercial vehicle (CV) segment continued its downward slide in 1QFY2014 (down 5.2% in FY2014 YTD after declining 2% in FY2013) led by weakness across the MHCV and LCV segments. While slowdown in economic activity, softening of freight rates and lower cargo availability led to a sharp decline in MHCV volumes; LCV volumes too remained muted due to weak growth in consumption. We expect the demand scenario to remain challenging in 1HFY2014; however, we expect CV volumes to recover in 2HFY2014 and register an overall growth of 6-8% in FY2014. For 1QFY2014, we expect CV manufacturers to report a loss on the bottom-line front due to the sharp fall in volumes, leading to lower utilization levels, and contraction in operating margins. We expect Ashok Leyland (AL) to register an ~20% yoy decline in net sales following an ~21% yoy drop in volumes. We expect its EBITDA margins to witness a sharp contraction of ~350bp yoy to 4.5% for the quarter due to adverse product-mix and lower utilization levels, leading to a bottom-line loss of `74cr. On a standalone basis, we expect TTMT to register a decline of ~17% yoy in its revenues due to an ~19% yoy decline in volumes. Led by lower volumes, adverse product-mix and relatively higher discounts, we expect EBITDA margins to decline ~380bp yoy, resulting in a net loss of ~`270cr. However, led by a strong performance at JLR (expected to post a strong revenue growth of ~15% yoy driven by an ~11% yoy growth in volumes), consolidated revenues are expected to witness a healthy growth of ~9% yoy. On the operating front, we expect EBITDA margins to remain stable, backed by superior product and geography mix at JLR (JLR margins expected to improve 100bp yoy to 15.4%) and also due to softening of commodity prices. However, consolidated bottom-line is expected to remain flat yoy due to a sharp increase in depreciation expense.
12
Margins to improve leading to healthy earnings growth

For 1QFY2014, we expect automotive original equipment manufacturers' (OEM) in our coverage universe to register a healthy revenue growth of ~5% yoy. This would largely be driven by strong growth in net average realizations backed by superior product-mix and price increases. Volumes, however, are expected to decline ~6% yoy due to continuous slowdown across most of the segments. The top-line growth is expected to be driven by strong growth at MM (led by the tractor segment) and Tata Motors (led by JLR). Sequentially, the top-line is expected to report a significant decline of ~13% due to the base effect. We expect EBITDA margins to improve ~70bp yoy to 13%, mainly due to easing of commodity prices, favorable exchange rate movement and lower levels of discounting. Primary commodities like steel, aluminum, copper and natural rubber have witnessed a decline of 7-13% yoy in their prices, during the quarter. As a result, we expect net profit to post a healthy growth of ~7% yoy. We expect Maruti Suzuki (MSIL) and MM to drive the sector's earnings during the quarter. Excluding Tata Motors (TTMT), our OEM coverage universe is expected to post a modest top-line growth of ~1% yoy; nevertheless, earnings are likely to register a strong growth of ~14% as EBITDA margins are expected to swell by ~120bp.
Auto index outperforms the Sensex

The BSE Auto index outperformed the Sensex in 1QFY2014 by clocking gains of 7.2% as against gains of 3% posted by the
Automobile
Exhibit 2: TTMT and AL Quarterly volumes
Segment
TTMT Total CV Total PV Exports (incl. above) AL
1QFY2014 1QFY2013 % chg

153,172 116,088 37,084 11,435 21,721 188,774 (18.9) 126,634 62,140 13,071 (8.3) (40.3) (12.5)
FY2013
810,086 581,148 228,938 50,831 114,713
FY2012 % chg
906,579 (10.6) 585,187 (0.7) 321,392 (28.8) 63,078 (19.4) 102,126 12.3
27,585 (21.3)
Source: Company; Angel Research
Slowdown in UV sales weighs down overall PV segment sales

The domestic passenger vehicle (PV) industry managed to remain in the positive in FY2013 (grew at a rate of 2.2% yoy) despite a 6.7% decline in the PC segment, primarily due to a strong growth of 52.2% in the UV segment. However, the growth in the UV segment has slowed down considerably of late and the segment posted a modest growth of just 4.1% YTD in FY2014. This, coupled with an 11.3% volume decline in PC sales, has led to a significant decline of 8.6% YTD in FY2014 for the PV segment. While demand for petrol cars remains weak due to higher fuel prices, demand for diesel cars too has moderated sharply over the last few months. Going ahead, we expect PV sales to remain subdued and expect the segment to post a volume growth of 5-6% in FY2014. MSIL reported an ~10% yoy decline in volumes in 1QFY2014 on account of a slowdown in petrol and diesel car sales and also due to decline in exports. However, with a 10% yoy growth in net average realization, due to superior product-mix and price increases, we expect only a marginal decline of ~1% in the top-line (excluding Suzuki Power Train operations). On the operating front, we expect the EBITDA margin to improve significantly by ~410bp yoy to 11.4%, primarily driven by a favorable exchange rate. Consequently the net profit of the company is expected to surge ~85% yoy to `785cr.
additional capacity at Honda Motors and Scooters India and the success of the Maestro and Ray models. However, growth in the motorcycle segment has dipped in the negative zone during the quarter (down 1.4% YTD in FY2014; flat in FY2013) due to the high base of last year and also on account of postponement of purchases by the consumers. On a qoq basis though, motorcycle sales recovered due to the festival season in the North and inventory de-stocking in the last quarter. Going ahead, we expect the demand environment to improve for the 2W industry (expect a 6-8% growth for FY2014) led by expectations of a normal monsoon which would likely revive rural demand. For 1QFY2014, we expect Hero MotoCorp (HMCL) to post a marginal growth of ~1% yoy in its top-line, aided by an ~6% yoy growth in net average realization, driven by a favorable product-mix and price increases. Total volumes though posted a decline of ~5% yoy due to the slowdown in domestic motorcycle demand. On the operating front, we expect EBITDA margins to remain stable yoy as increase in power, freight and transportation costs and higher marketing spends are likely to be mitigated by easing of commodity prices and favorable currency movement. However, the bottom-line is expected to decline by ~8% yoy as the tax benefits at the Haridwar plant expired in FY2013. For Bajaj Auto (BJAUT), we expect the top-line to decline by ~2% yoy, despite a ~9% yoy growth in net average realization. Improvement in realization was led by a better product-mix (higher share of three-wheelers in the volume-mix) and price increases executed by the company in the export and domestic markets. Total volumes declined by ~9% yoy due to a ~13% yoy decline in volumes in the motorcycle segment. Export sales too registered a drop of ~13% yoy. We expect EBITDA margins to improve ~50bp yoy to 18.4%, largely led by a superior product-mix and softening of commodity prices, leading to a flat bottom-line. Exhibit 4: BJAUT, HMCL and TVSL Quarterly volumes
Segment
BJA UT BJAUT Motorcycles Three-wheelers
Exhibit 3: MSIL and MM Quarterly volumes

Segment
MSIL Domestic Exports MM Automotive - exports Tractor - domestic Tractor - exports
1QFY2014 1QFY2013 % chg

266,434 245,346 21,088 197,562 4,771 71,390 3,187
FY2013
FY2012 % chg
3.3 4.4 (5.5) 9.6 16.9 11.2 (4.6)
295,896 (10.0) 1,171,434 1,133,695 263,264 32,632 185,606 118,184 7,841 56,561 3,020 (6.8) 1,051,046 1,006,316 (35.4) 6.4 0.0 (39.2) 26.2 5.5 120,388 787,256 530,915 32,456 211,596 12,289 127,379 718,586 453,987 29,177 221,730
1QFY2014 1QFY2013 % chg

979,275 860,151 119,124 1,078,971 982,623 96,348 415,645 1,640,290 519,160 510,081 9,079 64,839
FY2013
FY2012 % chg
(2.6) (2.0) (6.8) (2.1) (2.6) (7.5) (8.1) 21.7
(9.2) 4,237,162 4,349,560 (12.5) 3,757,105 3,834,405 23.6 480,057 515,155
Automotive - domestic118,214
Exports (incl. above) 362,563 HMCL TVSL Two-wheelers Three-wheelers Exports (incl. above) 1,559,003 494,494 477,199 17,295 72,154
(12.8) 1,547,157 1,579,824 (5.0) 6,073,581 6,235,195 (4.8) 2,032,515 2,198,493 (6.4) 1,983,676 2,158,375 90.5 11.3 48,839 245,628 40,118
13,692 (10.2)
2W sales remain under pressure

The demand slowdown witnessed in the two-wheeler (2W) industry in FY2013 (grew by just 2.9% yoy) continued in 1QFY2014 with domestic sales growing by only 1% YTD in FY2014. The growth, although meager, continues to be driven by momentum in the scooter segment (grew 13.9% YTD in FY2014 vs 14.2% growth in FY2013) led by the availability of
288,442 (14.8)
Auto ancillaries
Auto ancillary companies under our coverage universe (ex. Apollo Tyres and Motherson Sumi Systems) are expected to report a poor performance for the quarter due to continued weakness
13
Automobile
in demand for OEMs and sluggish sales in the replacement segment. Additionally, operating margins are expected to remain under pressure due to unfavorable currency movement and reduced operating leverage. Nevertheless, easing of commodity prices is expected to provide some respite to the ancillary manufacturers. We expect Apollo Tyres and Motherson Sumi Systems to outperform in the auto ancillary space in 1QFY2014 driven by easing cost pressures and improving utilization levels at the new plants respectively. We expect Apollo Tyres (APTY) to post an ~2% yoy decline in the consolidated top-line, primarily on account of an ~15% and ~2% yoy decline in South Africa and India revenues respectively. However, we expect the European operations to register a revenue growth of ~3% yoy. We expect operating margins to improve ~40bp yoy to 11.5%, driven by a decline in the prices of natural rubber. As a result, we expect the consolidated bottom-line of the company to improve by ~5% yoy for the quarter. We expect Bharat Forge (BHFC) to report an ~23% yoy decline in standalone revenues, following an ~24% yoy decline in volumes (tonnage terms). The volume decline was led by continued weakness in the domestic and export markets (mainly the US and Europe). We expect operating margins to decline sharply by ~290bp yoy to 22.2%, largely on account of lower utilization levels, which is likely to result in an ~37% yoy decline in the company's bottom-line. We expect Bosch (BOS) to report a marginal growth of ~1% yoy in its revenues for the quarter as MHCV demand continues to remain under pressure. On the operating front, we expect margins to improve ~160bp yoy to 16.8%, largely due to Exhibit 5: Quarterly estimates Automobile
Company AL BJAUT HMCL MSIL MM TTMT* TVSL CMP (`) 20 1,917 1,662 1,538 967 281 33 Net Sales 1QFY14E 2,357 4,642 6,245 10,424 10,438 46,839 1,692 (19.8) (1.5) 0.6 (1.0) 12.9 8.5 (5.5) OPM (%) chg bp (347) 52 (25) 408 70 24 (14) 4.5 18.4 11.2 11.4 12.5 13.5 5.8 Net P rofit Profit 1QFY14E (74) 726 568 785 850 2,683 50 1.0 (7.8) 85.2 17.1 (0.1) (3.1) EPS (`) % chg 1.0 (7.8) 85.2 17.0 (0.1) (3.1) (0.3) 25.1 28.4 27.2 14.4 8.4 1.0 EPS (`) FY13 0.5 105.2 106.1 79.2 56.9 32.0 4.4 FY14E 1.0 118.8 110.3 106.6 61.2 36.2 5.0 FY15E 2.2 139.7 140.0 121.4 70.2 41.5 5.8 FY13 37.1 18.2 15.7 19.4 17.0 8.8 7.5 P/E (x) FY14E 19.2 16.1 15.1 14.4 15.8 7.8 6.6 FY15E 9.0 13.7 11.9 12.7 13.8 6.8 5.7 % chg 1QFY14E % chg 1QFY14E (`) 27 2,096 1,820 1,822 1,103 347 35 Buy Accum. Accum. Buy Accum. Buy Accum.
easing of commodity prices and also due to the low base effect of last year. As a result, the net profit is expected to remain flat during the quarter. Exide Industries (EXID) is expected to register a revenue growth of ~4% yoy, with growth in the automotive replacement market offsetting weak OEM sales. We expect EBITDA margins to decline ~140bp yoy to 13.6% on account of increase in lead prices (up ~5% yoy) and also due to increase in power costs and distribution expenses, leading to an ~5% yoy decline in net profit. We expect Motherson Sumi Systems (MSS) to register a 6% yoy growth in its consolidated revenues, driven by a strong growth of ~24% yoy (~4% qoq) in Samvardhana Motherson Reflectec (SMR) revenues, which were aided by improving utilization levels. However revenues at Peguform (accounting for ~50% of total revenue) are expected to remain flat yoy as well as qoq. We expect EBITDA margins to improve by ~165bp yoy to 8.8% led by improvement in operating performance at SMR, which is expected to result in an ~6% yoy growth in the adjusted net profit.
Outlook
While the near term environment continues to remain challenging for the automotive sector, we believe the long-term structural growth drivers for the industry such as GDP growth (leading to increasing affluence of rural and urban consumers), favorable demographics, low penetration levels, entry of global players and easy availability of finance will remain intact. We continue to prefer stocks that have strong fundamentals, high exposure to rural and export markets and command superior eyland, pricing power. We maintain our positive view on Ashok L Leyland, Maruti Suzuki and T ata Motors. Tata (` cr)
T arget Reco. Target
Source: Company, Angel Research; Note: Price as on June 28, 2013; * Consolidated numbers; ^ OPM adjusted for royalty payment
Exhibit 6: Quarterly estimates Auto Ancillary

Company Apollo Tyres* Bharat Forge& Bosch# Exide Industries CMP (`) 57 221 8,948 121 Net Sales 1QFY14E 3,091 707 2,168 1,615 332 6,665 (2.3) (22.8) 0.5 4.1 (12.4) 6.2 OPM (%) chg bp 39 (291) 163 (142) (427) 165 11.5 22.2 16.8 13.6 12.5 8.8 Net P rofit Profit 1QFY14E 145 66 249 145 29 221 4.7 (36.9) 0.8 (4.9) (37.6) 5.9 EPS (`) % chg 4.7 (36.9) 0.8 (4.9) (37.6) 5.9 2.9 2.9 79.4 1.7 17.4 3.8 EPS (`) FY13 11.8 12.3 305.2 6.2 95.8 9.8 FY14E 12.8 14.5 373.5 7.8 88.4 12.5 FY15E 14.9 17.3 438.7 9.1 109.5 14.8 FY13 4.8 18.0 29.3 19.7 14.8 20.3 P/E (x) FY14E 4.4 15.2 24.0 15.5 16.1 15.8 FY15E 3.8 12.8 20.4 13.3 13.0 13.4 T arget Target (`) 141 222 % chg 1QFY14E % chg 1QFY14E
(` cr)
Reco. Neutral Neutral Neutral Buy Neutral Accum.
FAG Bearings# 1,420 Motherson Sumi* 198
Source: Company, Angel Research; Note: Price as on June 28, 2013, * Consolidated numbers; # December ending; & Full year EPS is consolidated
Analyst - Y aresh K othari Yaresh Kothari

14
Banking
Banking stocks underperformed broader market, as global events offset improvement in domestic macro fundamentals
Banking stocks under our coverage underperformed broader market during the quarter, as nearly half of our coverage PSU banks registered a sequential decline of more than 12%, even while private banks witnessed a sequential gain of upto 6%. At the beginning of the quarter, improvement in domestic macro fundamentals triggered a rally in the banking stocks, however, global factors (weaker currency on back of strengthening dollar and hints of the US Fed gradually tapering its bond buying in near term) led them to decline in the concluding month of the quarter. Domestic macro fundamentals (particularly inflation and current account deficit) have clearly shown signs of improvement; however, global factors particularly weaker currency has moderated their effect. At the shorter end of the interest rate curve, the three-month CD and CP rates have eased significantly sequentially. At the longer end of the yield curve, many banks have recently reduced their peak retail term deposit rates, which is likely to provide some respite from margin pressures emanating from asset quality challenges and lower average base rate. Overall, we expect private banks to report robust earnings performance with a 25.0% yoy growth, while PSU banks are expected to report a bottom-line de-growth of 3.1% yoy. Dissecting private banks performance, new private banks are expected to report strong earnings growth of 26.6% yoy, as against muted 2.1% yoy growth for the older ones. Within PSU banks, large-PSUs are expected to report flat earnings performance, whereas mid-PSUs are expected to report earnings de-growth of 9.8% yoy, respectively.
Credit growth outlook remains tough; Deposits growth remains moderate

Credit growth for the banking system, as of May 31, 2013 stood at 14.1% yoy (as against credit growth of 18.3% yoy witnessed at a similar time last year). Challenging economic growth environment, elevated interest servicing costs and policy woes in select sectors have affected investment sentiments. Hence, incremental credit demand remains weak, largely comprising of working capital needs. Going forward, in our view, credit growth for FY2014 is likely to be around 15%, as pipeline for credit disbursement for banks, as indicated by their Managements, remains thin, largely comprising of sanctions already in place. Deposit growth has also remained moderate at 13.4% yoy as of May 31, 2013. Moderate deposit growth, in our view, is on account of cyclical slowdown, persistently elevated retail inflation and shift in savings pattern towards physical assets. Though WPI inflation has moderated significantly, however, high food
Exhibit 1: 1QFY2014 stock performance

(%) LIC Housing Finance Ltd UCO Bank Yes Bank Ltd HDFC Bank Ltd HDFC Ltd. ICICI Bank Ltd Jammu & Kashmir Bank Ltd Axis Bank Ltd Syndicate Bank Bank Of Maharashtra Vijaya Bank State Bank of India Canara Bank Central Bank Of India South Indian Bank Ltd Corp Bank Punjab National Bank IDBI Bank Ltd Andhra Bank Federal Bank Ltd Bank of Baroda United Bank of India Union Bank of India Oriental Bank of Commerce Dena Bank Indian Overseas Bank Bank of India Allahabad Bank Indian Bank Source: Bloomberg, Angel Research Returns (qoq) 12.9 9.4 5.9 5.5 4.1 1.2 0.4 (0.2) (3.3) (4.0) (4.8) (6.1) (6.7) (7.0) (8.6) (9.1) (9.7) (12.0) (14.5) (15.0) (15.1) (16.1) (16.4) (18.9) (23.1) (23.4) (24.5) (29.6) (36.2) Returns (yoy) (6.0) (23.4) 33.8 17.0 31.7 17.6 21.1 27.8 (0.6) 0.2 (23.3) (9.9) (13.2) (24.3) (7.1) (16.6) (19.8) (24.4) (31.7) (8.9) (21.7) (21.4) (12.8) (19.3) (30.3) (40.2) (34.1) (40.5) (36.2)
Exhibit 2: Deposits growth remains moderate

(%) 30.0 25.0 20.0 15.0 10.0 5.0 0.0
May-09 Aug-09 May-10 Nov-09 Feb-10 Aug-10 May-11 Nov-10 Feb-11 Aug-11 May-12 Nov-11 Feb-12 Aug-12 May-13 Nov-12 Feb-13
Credit growth
Deposit growth
Exhibit 3: Liquidity pressures eased in 1QFY2014

(` bn) 500 (500) (1,000) (1,500) (2,000)
Jan-13 Aug-12 Dec-12 Sep-12 Feb-13 Nov-12 Mar-13 May-13 Oct-12 Apr-13 Jun-13 Jul-12
15
Banking
inflation has kept retail inflation elevated (food items have 50% weightage in retail inflation calculation). With expectations of good monsoons this time around, softening global commodities and recent moderate revisions to kharif crops minimum support prices, food inflation should eventually taper off, leading to moderation in retail inflation as well. Even, the yellow metal is expected to trend downwards and hence is not likely to attract investors, as it did in past when it gave substantial returns. Hence, we expect deposit growth to pick up going forward, as retail inflation is expected to moderate and there is incremental shift back from Gold to financial savings. rates. Though, deposit rates are reduced now, however, they are almost flat compared to 3QFY2013 levels, as most of the banks which have reduced rates in current quarter, had increased rates in 4QFY2013 owing to tight liquidity conditions. During 1QFY2014, even when the RBI effected a 25bp reduction in policy rates, almost all banks maintained their base lending rates, as their funding costs remain affected by elevated systemic deposits rates. Unless the systemic deposit rates moderate from the current elevated levels, there would be limited scope for bankers to lower their lending rates here on. None of our coverage banks reduced their base rates during the quarter, however, many of them had reduced rates in last quarter which is expected to get reflected partially in this quarter. On an average basis, the base rate for Andhra Bank and Allahabad Bank was sequentially lower by 16bp each, followed by Federal Bank and UCO Bank by 14bp each and Indian Overseas Bank, Indian Bank and J&K Bank by 13bp each. Short-term borrowing costs have moderated significantly during the quarter, as reflected in the 75-100bp sequential correction in the three-month CD and CP rates. Substantial correction in short-term funding costs, in our view, is likely to provide some support to the margins.
Margins to remain under pressure

During the quarter, more than half of our coverage banks reduced their retail term deposit rates (peak rates within 1-3 year tenure) by 10-60bp, while most others maintained their rates. The highest decline in peak retail term deposit rates was witnessed in case of South Indian Bank and Bank of Baroda (around 60bp), followed by UCO Bank (35bp). Despite moderate deposit growth for quite some time now, comfortable systemic liquidity (on back of subdued credit demand) prompted most of our coverage banks to reduce their retail term deposit
Exhibit 4: 4QFY2013 and 1QFY2014 Lending and deposit rates

Avg . Base rates (%) Avg. Bank ANDHBK ALLBK FEDBK UCOBK IOB INDBK J&KBK UTDBK SYNBK BOB BOI CENTBK BOM PNB UNBK CRPBK HDFCBK VIJAYA CANBK OBC DENABK IDBI SBI AXSB ICICIBK SIB YESBK 4QFY13 10.41 10.36 10.34 10.34 10.38 10.33 10.38 10.37 10.37 10.36 10.36 10.36 10.36 10.36 10.36 10.35 9.70 10.30 10.34 10.34 10.34 10.34 9.72 10.00 9.75 10.50 10.50 1QFY14 10.25 10.20 10.20 10.20 10.25 10.20 10.25 10.25 10.25 10.25 10.25 10.25 10.25 10.25 10.25 10.25 9.60 10.20 10.25 10.25 10.25 10.25 9.70 10.00 9.75 10.50 10.50 bp change (16) (16) (14) (14) (13) (13) (13) (12) (12) (11) (11) (11) (11) (11) (11) (10) (10) (10) (9) (9) (9) (9) (2) 4QFY13 14.66 14.61 17.75 14.73 15.50 14.61 14.88 14.60 14.62 14.61 14.61 15.00 15.00 14.00 14.86 15.00 18.20 14.75 14.59 14.75 15.75 14.84 14.47 17.75 18.50 19.00 19.75 Avg . BPLR rates (%) Avg. 1QFY14 14.50 14.45 17.75 14.50 15.50 14.50 14.75 14.60 14.50 14.50 14.50 15.00 15.00 14.00 14.75 15.00 18.10 14.75 14.50 14.75 15.75 14.75 14.45 17.75 18.50 19.00 19.75 bp change (16) (16) (23) (11) (13) (0) (12) (11) (11) (11) (10) (9) (9) (2) 4QFY13 9.20 9.15 9.25 9.10 9.00 9.00 8.50 9.00 9.05 9.36 9.25 9.00 8.75 9.00 9.00 9.10 8.75 9.25 9.10 9.00 9.00 9.00 8.75 9.00 9.00 9.60 9.25 FD rates* (%) 1QFY14 9.00 9.00 9.00 8.75 9.00 9.00 8.50 8.75 9.00 8.75 9.00 9.00 9.10 9.00 9.00 9.10 8.75 9.10 9.00 8.75 8.75 9.00 8.75 8.75 9.00 9.00 9.10 bp change (20) (15) (25) (35) (25) (5) (61) (25) 35 (15) (10) (25) (25) (25) (60) (15)
Source: Company, Angel Research; Note: * 1-3 year maturity bucket
16
Banking
Exhibit 5: Gross NPA trends (%) Private vs PSU
4.00 3.50 3.02 3.00 2.50 2.42 2.00 1.50 2QFY11 4QFY11 2QFY12 4QFY12 2QFY13 4QFY13 2.35 2.70 2.85 2.57 2.36 2.33 2.45 2.27 2.24 2.17 2.01 2.05 2.06 2.00
0.00 2QFY11 4QFY11 2QFY12 4QFY12 2QFY13 4QFY13 1.00
Exhibit 6: Net NPA trends (%) Private vs PSU

3.87
2.50 2.04 2.12 2.01 2.00 1.47 1.50 1.13 1.07 1.09 1.16 1.56 1.50
3.76 3.34 2.98
3.67
1.73
1.90
0.50
0.79
0.69
0.56
0.56
0.54
0.54
0.46
0.49
0.54
0.55
0.53
Pvt Banks
PSU Banks
Pvt Banks
PSU Banks
Source: Company, Angel Research
Exhibit 7: Gross NPA trend (%) for the banking industry

3.70 3.50 3.30 3.10 2.85 2.90 2.70 2.50 2.30 2.10 3QFY11 2QFY12 1QFY13 4QFY13 2.40 2.28 2.43 2.73 2.80 3.09 3.42 3.49 3.32
Exhibit 8: Net NPA trend (%) for the banking industry

1.90 1.80 1.70 1.60 1.50 1.40 1.30 1.20 1.10 1.00 0.90 3QFY11 2QFY12 1QFY13 4QFY13 1.00 1.04 0.99 1.36 1.28 1.30 1.49 1.74 1.80 1.72
New private banks expected to post strong earnings performance

Aided by strong NII growth of 26.4% yoy and healthy noninterest income growth of 22.3% yoy, new private banks are expected to report a strong 24.9% yoy growth in operating profit and 26.6% yoy increase in earnings. On the other hand, our coverage PSU banks and older private banks are expected to register moderate operating performance, with operating income growth of 7-8% yoy each. Despite modest growth of 5.1% yoy in operating profit, PSU banks are expected to report earnings decline of 3.1% yoy, primarily dragged by 18.2% yoy increase in provisioning. While older private banks are expected to report 1.7% decline in operating profit and subdued 2.1% yoy growth in earnings.
restructuring) for the banking sector has remained elevated and much above comfort levels, for quite some time now. However, the pace of the asset quality deterioration has witnessed signs of moderation in the past two quarters. While the annualized slippage ratio was higher by 26bp yoy from 2.7% in FY2012 to 2.9% in FY2013, the increase was, however, lower than what was witnessed in 9MFY2013 and 1HFY2013, when the annualized slippage ratio increased by 38bp (to 3.0% from 2.6% in 9MFY2012) and 57bp yoy (to 3.2% from 2.6% in 1HFY2012), which suggest that 2HFY2013 has been better than 1HFY2013. Sustained moderation in inflation, in our view, should ease margin pressures for corporates and SMEs and eventually should revive growth. Overall, we believe that asset quality pressures should gradually recede from current levels, however, since economic revival is expected to be slow and gradual, stressed asset creation would continue to remain the key thing to watch out for in the next few quarters. On the fresh restructuring front, as guided by their respective Managements, the pipeline appears sizeable for PSU banks such as SBI, BOB, CANBK, UNBK, DENABK, INDBK and ALBK. As far as the progress on state electricity board (SEB) restructuring under the centre's Financial Restructuring Plan (FRP) is concerned, four states - Tamil Nadu, Uttar Pradesh, Haryana and Rajasthan have finalized restructuring of their short-term debt under the FRP during the quarter, which is expected to be implemented either in this quarter or in next quarter. Other states like Madhya
17
Asset quality performance remains the key monitorable in the near term
Asset quality concerns continued to plague the sector's fundamentals with increased intensity in FY2013, than in FY2012. On an aggregate basis, NPA ratios for PSU banks have trended northwards every quarter since the beginning of FY2012. These banks have found themselves to be relatively more exposed to overleveraged companies in sensitive sectors, whose financials have bore the most severe brunt of the slowing economic growth environment and persisting burden of elevated interest servicing costs. Incremental stressed assets formation (slippages and fresh
Banking
Pradesh and Andhra Pradesh are yet to finalize plan for restructuring their short term debt under the FRP . As per the FRP , 50% of the short-term debt of discoms would be converted to bonds (which would be eventually taken over by states over a period of 2-5 years), while the balance 50% would be restructured by the banks. Conversion of short-term debt to bonds (priced at around 9-10%) would result in 200-300bp reduction in yields for banks and would be negative for banks from an NIM perspective. Corporate debt restructuring (CDR) referrals have also risen significantly over the last several quarters, closely tracking the deteriorating economic growth environment. Under CDR mechanism, fresh approvals of around `17,000cr in 4QFY2013 (in case the implementation is delayed for any reason) and the pending cases of around `31,000cr (only those which are approved and implemented during the quarter), would add to the restructuring book of participating banks during the quarter. Private banks have continued to perform relatively much better vis--vis their PSU counterparts on the asset quality front. Though they have not been sparred from asset quality pressures, however, they have managed to keep most of their asset quality largely intact until now in a challenging economic environment, by not only reporting much lower slippages, but also performing better on the recoveries and upgrades front. Even going ahead, we would expect private banks to continue outperforming their nationalized peers on the asset quality front.
Exhibit 9: CDR snapshot

Referred No. of cases Add. (` cr) FY10 FY11 1QFY12 2QFY12 3QFY12 4QFY12 FY12 1QFY13 2QFY13 3QFY13 4QFY13 FY13 31 49 18 18 23 28 87 41 33 25 31 130 20,175 22,614 4,595 21,095 19,187 23,012 67,889 20,528 18,907 20,957 31,256 91,648 298,141 Approved No. of cases 31 27 10 7 17 16 50 17 18 35 39 109 401 Add. (` cr) 17,763 6,615 8,141 2,095 21,364 8,001 39,601 17,957 18,925 24,581 17,035 78,498 229,013
Exhibit 11: Corporate and G-Sec bond yields

(%) 9.5 9.0 8.5 8.0 7.5 7.0
7.46 7.55 7.70 8.62 8.69 8.67 8.73
31-Mar-13
30-Jun-13
6.5 6.0
AAA 1 Yr
9.00
AAA 3 Yr
8.99
AAA 5 Yr
8.97
AAA 10 Yr
8.91
Gsec 1Yr
7.79
Gsec 3Yr
7.83
Gsec 5Yr
7.96
Gsec 10Yr
Exhibit 12: 10-year G-sec yields movement

(%) 8.2 8.0 7.8 7.6
Outstanding 522 Source: CDR Cell, Angel Research
Exhibit 10: Industry-wise approvals under CDR

Industry Iron & Steel Infrastructure Power Textiles Construction Telecom Fertilizers Pharmaceuticals NBFC Sugar Cements Ship-Breaking/Ship Building Petrochemicals Hospitality Refineries Others Total Source: CDR Cell, Angel Research No. 59 20 18 74 7 11 8 14 8 27 11 3 3 12 1 125 401 Agg . Debt (` cr) Agg. 52,682 21,912 18,460 17,767 14,362 11,681 8,455 7,895 7,316 7,125 6,595 6,213 5,493 4,951 4,874 33,233 229,013 % 23.0 9.6 8.1 7.8 6.3 5.1 3.7 3.4 3.2 3.1 2.9 2.7 2.4 2.2 2.1 14.5 100.0
7.4 7.2 7.0 6.8 6.6 1-Apr-13 15 -Apr-13 29 -Apr-13 13 -May-13 27 -May-13 10 -Jun-13 24 -Jun-13
Decline in bond yields capped, still treasury gains would be healthy if not substantial as expected earlier
During 1QFY2014, the Indian 10-year benchmark bond yields trended significantly lower for the first two months on account of monetary policy expectations/outcome. It however lost some ground and edged higher in the last month on back of global factors (weak currency and hints of US Fed gradually tapering its bond buying in the near term). In April, the yields trended southwards gradually, as easing global commodities prices, sustained moderation in WPI Inflation and subdued industrial activity, revived hopes of increased headroom for easing by the central bank. To add to it, the
7.96
7.46
18
Banking
Indian government reduced withholding tax rate for foreigners on Indian debt (both public and private), in a bid to attract more inflows, which aided the downward movement in yields. In its annual policy on May 3, the RBI obliged with a 25bp rate cut, but hinted at little room for further easing, thereby stemming any immediate downward movement in yields. During most of May, the yields trended lower on infusion of liquidity by the central bank via OMOs, issue of a new 10-year bond paper and increased expectation of further monetary easing when economic data release indicated continued moderation in inflation and subdued industrial activity. During the end of the month, comments from the RBI governor pertaining to elevated retail inflation weighed on rate cut hopes and yields inched upwards. In June, the yields edged higher, as northward momentum in bond prices was driven by weak currency, monetary policy expectations/actual outcome and on statement from the US Fed indicating a gradual tapering of bond purchase program in the near term. Overall, the 10-year bonds ended the quarter at 7.46% (7.96% as of March 31, 2013) and hence the treasury gains for the banking sector during the quarter are expected to be healthy, if not substantial as expected earlier. Within the private banks space, we maintain our Buy rating on AXSB and ICICIBK, given their favorable cyclical and structural outlook. After the recent underperformance, most PSU banks are trading below their historic low valuations. We believe the time is right to invest in them. We would recommend investing in those PSU banks, which would stand to gain the most from an eventual turn-around, which would lead to lower re-pricing of high-cost deposits (relative benefit for banks with low-CASA) and higher recoveries (relative benefit for banks that have experienced maximum asset quality pain, and importantly, also provided for it already). For PSUs, we would recommend a basket investment strategy, as we still do not rule out possibilities of a single negative surprise in asset quality affecting one bank's quarterly performance. Screening for these criteria, as well as Tier-1 capital adequacy and valuations, amongst large-caps we prefer SBI, PNB and BOB and amongst mid-caps, post the , sharp correction, we recommend a Buy on BOM, SYNDBK SYNDBK, INDBK , CRPBK , ALBK and UTDBK . INDBK, CRPBK, UTDBK.
Exhibit 14: New Private banks price band (P/ABV)*

4.00 3.50 3.00 2.50
Outlook and valuation

Domestic macro fundamentals (particularly inflation) have clearly shown signs of improvement, however, global factors (weak currency on back of strengthening dollar and hints of the US Fed gradually tapering its bond buying in near term) have moderated their effect. Banking stocks have significantly underperformed the broader markets, which we believe is an overreaction to the recent events.
2.00 1.50 1.00 0.50

Sep-04 Jun-06 May-09 Dec-09 Sep-11 Feb-11 Jul-10 Nov-05 Aug-07 Apr-05 Jan-07 Mar-08 Oct-08 Nov-12 Apr-12 Jun-13
Source:C-line, Angel Research, Note:*under our coverage
Exhibit 13: PSU banks price band (P/ABV)*

1.80 1.50 1.20 0.90 0.60 0.30
Nov-05 Apr-05 Jun-06 Aug-07 Jan-07 Mar-08 Oct-08 Dec-09 May-09 Sep-11 Nov-12 Sep-04 Feb-11 Apr-12 Jun-13 Jul-10
Source:C-line, Angel Research, Note:* For PSU banks excl. SBI and IDBI
19
Banking
Exhibit 15: Quarterly estimates
Company CMP (`) AXSB FEDBK HDFCBK ICICIBK SIB YESBK ALLBK ANDHBK BOB BOI BOM CANBK CENTBK CRPBK DENABK IDBI INDBK IOB J&KBK OBC PNB SBI SYNBK UCOBK UNBK UTDBK VIJAYA HDFC LICHF 1,323 409 669 1,070 23 461 90 82 575 232 53 360 62 350 70 71 115 50 1,227 207 651 1,954 109 62 186 49 45 873 255 Operating Income 1QFY14E 4,440 641 6,245 6,205 419 1,053 1,517 1,211 3,807 3,358 1,031 3,029 2,005 1,341 798 2,120 1,408 1,872 758 1,578 4,997 15,352 1,659 1,603 2,591 787 650 1,892 500 % chg 26.3 4.1 24.6 22.3 12.7 38.6 (6.1) 3.2 6.7 16.4 24.3 19.4 17.9 18.1 5.8 18.6 2.4 9.8 20.6 2.8 2.8 5.0 6.7 25.6 12.0 (12.5) 12.5 21.7 25.0 Net P rofit Profit 1QFY14E 1,411 192 1,845 2,284 128 378 288 350 1,138 758 207 751 447 353 165 548 371 214 257 325 1,264 3,740 446 301 557 103 124 1,226 301 % chg 22.4 0.8 30.1 25.8 4.0 30.2 (43.9) (3.4) (0.1) (14.5) 47.1 (3.1) 33.2 (4.8) (30.8) 28.3 (19.6) (8.3) 4.4 (17.1) 1.5 (0.3) 1.3 (17.0) 8.9 (40.8) 11.7 22.3 32.1 FY13 110.7 49.0 28.3 72.2 3.8 36.3 23.7 23.0 106.0 46.1 10.6 64.8 8.1 93.8 23.2 14.1 35.7 6.1 217.6 45.5 134.3 206.2 33.3 5.6 36.0 8.3 9.4 31.4 20.3 EPS (`) FY14E 133.8 49.8 36.3 86.2 4.0 43.0 27.6 19.2 120.6 55.2 12.1 76.7 12.6 94.9 22.0 19.8 35.2 12.5 215.5 55.7 152.4 227.4 27.4 14.8 39.3 12.4 9.2 37.0 25.4 FY15E 161.5 56.6 45.1 99.5 4.3 49.7 33.2 23.1 144.6 68.2 12.9 86.4 18.7 104.9 24.9 22.8 41.0 19.7 Adj B VPS (`) BVPS FY13 705.2 369.2 152.2 578.2 20.4 162.0 168.7 129.1 735.5 345.2 70.9 472.9 88.5 594.1 134.7 142.1 221.5 116.2 FY14E 810.8 410.5 180.2 634.0 23.7 197.4 192.6 144.0 834.7 391.8 80.0 534.2 100.7 673.7 152.6 158.7 248.7 133.4 FY15E 936.0 454.9 215.0 698.0 27.0 238.5 224.0 161.3 951.3 449.8 89.9 603.3 114.7 757.6 175.1 178.2 281.8 150.9 FY13 12.0 8.4 23.6 14.8 6.1 12.7 3.8 3.6 5.4 5.0 4.9 5.6 7.6 3.7 3.0 5.0 3.2 8.1 5.6 4.5 4.8 9.5 3.3 11.0 5.2 5.8 4.8 27.8 12.6 P/E (x) FY14E 9.9 8.2 18.4 12.4 5.8 10.7 3.3 4.3 4.8 4.2 4.4 4.7 4.9 3.7 3.2 3.6 3.3 4.0 5.7 3.7 4.3 8.6 4.0 4.2 4.7 3.9 4.9 23.6 10.0 FY15E 8.2 7.2 14.8 10.7 5.3 9.3 2.7 3.5 4.0 3.4 4.1 4.2 3.3 3.3 2.8 3.1 2.8 2.5 5.8 3.3 3.7 6.9 3.9 3.9 3.9 2.4 4.2 20.0 8.7 P/AB V (x) P/ABV FY13 FY14E FY15E 1.9 1.1 4.4 1.9 1.1 2.8 0.5 0.6 0.8 0.7 0.7 0.8 0.7 0.6 0.5 0.5 0.5 0.4 1.2 0.5 0.8 1.4 0.7 0.9 0.8 0.5 0.6 5.4 2.0 1.6 1.0 3.7 1.7 1.0 2.3 0.5 0.6 0.7 0.6 0.7 0.7 0.6 0.5 0.5 0.4 0.5 0.4 1.1 0.5 0.7 1.2 0.6 0.8 0.7 0.4 0.5 4.9 1.8 (`)
( ` cr)
Target Reco.
1.4 1,778 Buy 0.9 3.1 455 Accum. 752 Accum.
1.5 1,454 Buy 0.9 1.9 0.4 0.5 0.6 0.5 0.6 0.6 0.5 0.5 0.4 0.4 0.4 0.3 24 Accum. 489 Accum. 123 Buy - Neutral 761 Buy 270 Buy 61 Buy 422 Buy 69 Accum. 436 Buy 79 Accum. 80 Accum. 141 Buy 53 Accum.
210.2 1,003.2 1,167.6 1,314.9 62.3 176.2 376.2 802.2 423.6 472.0
0.9 1,315 Accum. 0.4 0.6 236 Accum. 883 Buy
943.2 1,104.0
284.8 1,364.7 1,567.0 1,799.1 27.9 15.7 47.4 20.0 10.8 43.6 29.2 158.9 71.3 247.1 101.0 78.5 161.7 125.2 179.8 80.2 283.6 116.7 85.2 179.8 144.2 201.3 97.2 324.3 135.2 93.3 201.1 165.5
1.1 2,518 Buy 0.5 0.6 0.6 0.4 0.5 4.3 1.5 136 Buy - Neutral 243 Buy 57 Buy 49 Accum. - Neutral 298 Buy
Source: Company, Angel Research; Note: Price as on June 28, 2013
Analyst - V aibhav Agrawa l/ Sourabh T aparia/Harshal P atkar Vaibhav Agrawal/ l/Sourabh Taparia/Harshal Patkar
20
Capital Goods
We expect companies in our capital goods universe to post a flat cumulative top-line growth, on account of declining order backlog and delays in execution (due to GDP slowdown leading to deferral in investments). On the bottom-line front, continued margin pressure due to tough competition in the sector and in some cases higher interest costs, are expected to be a drag on the companies' profitability. net profit is expected to decline sharply to `8cr due to margin pressure and high interest cost. We maintain our Neutral recommendation on the stock.
KEC International (CMP/TP: `32/`49) (Rating: Buy)

For 1QFY2014, KEC International (KEC) is expected to register a strong top-line growth of 11.6% yoy to `1,522cr on back of strong execution of its robust order book. However, on the EBITDA front, the company's margin is expected to contract by ~227bp yoy to 5.3% on account of execution of few low margin orders in relatively new segments. Consequently, we expect PAT to decline sharply to `11cr on account of margin pressure and elevated interest costs. We recommend Buy on the stock with a target price of `49.
ABB (CMP/TP: `611/`461) (Rating: Sell)

For 2QCY2013, we expect ABB India (ABB) to post a 3% yoy growth to `1,940cr. At the operating level, ABB's margin is expected to expand by 132bp yoy to 5.6%, aided by cost control measures and supply chain optimizations. However, a higher interest cost is likely to drag down ABB's bottom-line by 15.0% yoy to `44cr. On account of high valuations, we assign Sell rating to the stock with a target price of `461.
Thermax (CMP/TP: `597/-) (Rating: Neutral)

For 1QFY2014, we expect Thermax to report a 4% yoy decline in top-line to `944cr, as weak order inflow since the past few quarters will drag down the company's revenue. The company's EBITDA margin is likely to be flat yoy at 9.8%. Falling revenue and flat margins are expected to result in a yoy fall of 3.7% in the company's PAT to `65cr. We maintain our Neutral rating on the stock.
BHEL (CMP/TP: `174/-) (Rating: Neutral)

We expect Bharat Heavy Electricals (BHEL) to post a 3% yoy decline in top-line to `8,186cr in 1QFY2014. On the EBITDA front, the company's margin is expected to expand by 25bp yoy to 14.5%. Consequently, we expect PAT to decline by 12.7% yoy to `804cr. We maintain our Neutral recommendation on the stock as we expect tepid order inflow to continue for the next few quarters.
Key Developments
CCEA approves coal price pass-through mechanism
The Cabinet Committee on Economic Affairs (CCEA) has approved coal price pass-through mechanism, which allows power producers to pass on the cost of expensive imported coal to distribution companies/ consumers. According to the Fuel Supply Agreement (FSA), Coal India (CIL) is supposed to supply 65% of the total coal requirement through domestic mines while power producers could import 15% through CIL or independently. Since imported coal is expensive, Power Purchase Agreements (PPAs) signed by some of the private companies were rendered unviable. However, CCEA's decision to pass on the higher cost of imported coal to distribution companies / consumers will ensure viability of these contracts, going forward. The compensatory tariff will be decided on case-by-case basis after examining the total quantity of coal which needs to be imported to fill the gap due to shortage of domestic supply of coal. The move is expected to benefit power plants commissioned after 2009 by power generation companies such as Reliance Power, Adani Power and Lanco Infratech, among others. The move is expected to aid the revival of stalled projects and attract new investments in the power sector, thereby benefitting capital goods companies.
21
BGR Energy (CMP/TP: `130/-) (Rating: Neutral)

We expect BGR Energy's (BGR) top-line for the quarter to grow by 7.0% yoy to `654cr. However, its EBITDA margin is expected to contact by 61bp to 13.8%. The interest cost is expected to remain high (owing to elevated interest rate scenario and enhanced working capital requirements), which is likely to drag the bottom-line down by 29.5% yoy to `24cr. We recommend Neutral on the stock.
Crompton Greaves (CMP/TP: `87/`117) (Rating: Buy)

For 1QFY2014, we project Crompton Greaves to report a modest top-line growth of 7.1% yoy to `3,011cr. A weak capex cycle, along with strained consumer sentiments, is likely to impact the company's growth. On the EBITDA front, the company's margin is expected to decline by 103bp yoy to 4.9%. Though we expect a modest revenue growth, however, due to stress on AT to fall by 22.4% yoy margins, we expect the company's P PA to `67cr . W e recommend Buy on the stock with a target 67cr. We price of `117.
Jyoti Structures (CMP/TP: `20/-) (Rating: Neutral)

For 1QFY2014, we expect Jyoti Structures' top-line to grow by 13.8% yoy to `745cr. However, tough competition is expected to result in a flat performance on the margin front to 9.8%. Its
Capital Goods
BSE Capital Goods Index underperforms Sensex: The BSE Capital Goods Index posted a flat performance qoq, underperforming the Sensex by ~2%. Almost all the stocks in our capital goods universe underperformed the Sensex, except for Thermax and ABB. In fact ABB outperformed the Sensex by 22% on account of rumors of ABB getting delisted from the stock exchanges. However, the Management has debunked the rumor stating that it has no intention to delist the company or buy any additional shares from the market. KEC International, Jyoti Structures and BGR Energy were the worst performers, underperforming the Sensex by more than 25%, amid concerns regarding their declining margins (KEC and BGR) and deteriorating working capital (Jyoti Structures). to witness delay due to ongoing headwinds (such as fuel crisis, constraints in land acquisition and poor health of state electricity boards [SEBs]). Although transmission and distribution (T&D) companies are comparatively better placed due to steady ordering from PGCIL, they are still facing execution risks due to delay in clearances and revenue deferrals.
Margin pressure continues to be a concern

Execution delays and deferral in payments by clients has lead to delay in booking revenues, although expenditure continues to be incurred, thereby, resulting in margin pressure as well as deterioration of working capital. High competitive intensity, partly due to limited orders on the horizon, has led to further deterioration in margins. Overall, the outlook remains challenging: Against the backdrop of economic slowdown, we believe the overall picture remains gloomy for market leaders (read BHEL, BGR and ABB among others). Although the government has initiated efforts such as forming of Cabinet Committee on Investments to fast-track projects and framing of SEB restructuring policies to improve their financial condition, we believe it will take a while for the sector to witness any significant and dramatic growth. Given this, we expect the slowdown to continue for the next couple of quarters. Therefore, companies catering to the power sector will witness a high degree of discomfort unless core concerns soothe. Valuations: We prefer companies operating with diversified revenue streams across different geographies. Hence, Crompton Greaves and KEC International are our preferred picks over the medium to long term, in spite of margin pressure in the near term. In the BTG space, we continue to maintain our negative stance, owing to concerns of heightened competition and slowing of order inflows.
Exhibit 1: 1QFY2014 - Sensex vs CG stocks

30 20 10 (%)
25
6 1 (2) (7)
(10) (20) (30) (40) (50) ABB
(25) (33) (46) KEC
BHEL
CG
Thermax
BGR
Jyoti
BSE CG SENSEX Index

Weak order intake due to downturn in investment cycle
Amid slowdown in the Indian economy, investments across various sectors have substantially decelerated. In tandem, the headwinds in the power sector have further limited order visibility for companies in BTG space, especially from private utilities. Although some orders are expected from state and central utilities, tough competition in BTG space is likely to result in margin contraction. Further, finalization of these orders is likely

Company ABB* BHEL BGR Energy CG Jyoti Structures KEC Intl. Thermax CMP 611 174 130 87 20 32 597 Net Sales 1,940 8,186 654 3,011 745 1,522 944 3.0 (3.0) 7.0 7.1 13.8 11.6 (4.0) OPM (%) 5.6% 14.5% 13.8% 4.9% 9.8% 5.3% 9.8% 132 25 (61) (103) 2 (227) (0) Net P rofit Profit 44 804 24 67 8 11 65 (15.0) (12.7) (29.5) (22.4) (56.0) (68.1) (3.7) EPS (`) % chg (15.0) (12.7) (29.5) (22.4) (56.0) (68.1) (3.7) FY13 6.5 27.3 22.5 (0.6) 4.7 2.5 27.0 2.1 3.3 3.3 1.0 0.9 0.4 5.4 EPS (`) FY14E 11.5 20.6 21.7 6.6 7.3 6.1 29.8 FY15E 16.9 16.1 28.3 8.9 10.2 8.5 33.0 FY13 94.2 6.4 5.8 4.3 12.7 22.1 P/E (x) FY14E 53.0 8.5 6.0 13.2 2.8 5.3 20.0 FY15E 36.1 10.8 4.6 9.8 2.0 3.8 18.1 Tar get arg (`) 461 117 49 (`) 1QFY14E % chg 1QFY14E chg bp 1QFY14E % chg 1QFY14E
( ` cr)
Reco. Sell Neutral Neutral Buy Neutral Buy Neutral
Source: Company; Angel Research; Note: Price as on June 28, 2013; * December year ending
Analyst - Amit P atil Patil

22
Cement
Cement demand fails to pick-up
All-India cement demand rose by a marginal ~5.5% in FY2013 as demand from the real estate and infrastructure sectors was impacted due to the overall economic slowdown. Cement demand failed to pick-up in 1QFY2014 as well, with macroeconomic scenario continuing to remain weak. Further, construction activity in the northern and central regions was affected due to labour shortage. The early arrival of monsoon in many parts of the country has impacted the pre-monsoon demand which is generally witnessed during June-end. This year the monsoon hit the Kerala coast in time on June 1, 2013. After hitting the Kerala coast in time, the monsoon has progressed rapidly and covered most parts of the country well ahead of the normal scheduled time. The overall rainfall during June 1 to June 26 is 154% of the long period average (LPA). highest price decline. Although there was no sign of demand pick-up, prices were hiked in May. Currently cement prices in the region are in the range of `250-300/bag. Central region: Construction activity in this region too was impacted on account of labor shortage . In April, the price decline was in the range of `10-15/bag. Prices continue to remain weak and are currently in the range of `250-290/bag. Western region: The western region has been facing poor demand over the last one year due to drought-like situation in many parts of Maharashtra and shortage of construction material. The demand scenario was poor in 1QFY2014 as well, resulting in price correction of `15/bag in April. While prices remained flat in Maharashtra during May, a price hike of ~`25/ bag was carried out in Gujarat in early May. The price hike however could not be sustained in Gujarat as supplies from south and weak demand pushed prices lower. Eastern region: The eastern region has been best placed in terms of pricing amongst all regions. However, prices declined in this region as well in April by `15/bag. While prices did recover in the month of May demand scenario remains poor.
Exhibit 1: Regionwise rainfall

Actual (mm) All-India North west Central South Peninsula East and North East Source: IMD, Angel Research 130.7 94.4 172.2 141.3 99.8 Normal (mm) 84.7 31 72.8 92.6 203.7 Excess/(Deficit) % 54 205 137 53 (51)
Imported coal prices down 9% yoy

During 1QFY2014, average prices of New Castle Mckloksey 6,700kc coal were down by 5.8% qoq and 9.0% yoy to US$86 per tonne. Although, INR depreciation vs US$ limited downside in coal prices, the coal price were still down by 3.3% qoq and 6.2% yoy in INR terms.
Cement prices subdued

Poor demand resulted in a decline in cement prices across the country in April . However, companies resorted to price hikes in May in most parts of the country to reverse the weak pricing scenario. Although prices have been hiked, they look unsustainable due to poor cement off-take at these price levels. The advent of monsoons is expected to result in further slowdown in cement demand. Southern region: During April, the price correction was the highest in Andhra Pradesh, where prices went as low as `190/ bag. Other states in the region such as Tamil Nadu and Kerala too witnessed a price correction during the month. The dramatic price fall in Andhra Pradesh was due to the break-down in pricing discipline with new entrants including Jaypee Cement pushing their output into the market at extremely low prices (`180/bag) to gain market share. However, Andhra Pradesh witnessed a strong price recovery in May, with prices going up by `90/bag. Price recovery in Andhra Pradesh led to price hikes of ~1% in neighboring states of Tamil Nadu and Karnataka. Currently cement prices in the region are in the range of `275-335/bag. Northern region: Prices declined in the northern region during April as construction activities were affected by labor shortage on account of harvesting activities. Price correction was in the range of `5-10/bag with NCR and Haryana witnessing the
Exhibit 2: Newcastle Mccloskey coal prices

250 200 150 100 50 0
Dec-05 Dec-06 Dec-07 Dec-08 Dec-09 Dec-10 Dec-11 Dec-12 Jun-06 Jun-07 Jun-08 Jun-09 Jun-10 Jun-11 Jun-12
9,000 8,000 decline in coal prices qoq & yoy 7,000 6,000 5,000 4,000 3,000 2,000 1,000 0
USD/tonne
INR/tonne
Key developments
Coal India revises prices: During May, Coal India announced a revision in prices of certain grades of coal. The coal grades G3 and G4 having a Gross Calorific Value (GCV) between 6,000 and 6,300 will see a 12% reduction in prices. This is on account of lower international coal prices. However, to neutralize the loss of revenue on this account, Coal India also announced a 10% increase in prices of a large segment of coal from G6-to G-17 with a GCV ranging from 2200 to 6000. As cement companies use low grade coal for both, cement operations and captive power generation, this price hike is expected to push the operating cost of cement manufacturers procuring coal from Coal India.
23
Cement
JK L akshmi Cement: During the quarter a fire incident occurred Lakshmi in JK Lakshmi's under-construction Durg plant. It was due to the ruckus created by some agitated villagers from one of the nearby villages who had sought employment for all the inhabitants of the village irrespective of their age and expertise. The Management said it didnt concede to the demand as there was no requirement for so many laborers. As per the Management, a certain administration building and equipments got damaged due to the fire, resulting in an estimated loss of `120cr. However, since the plant is insured the company expects to be compensated for the loss. The commissioning of the plant is now expected to be delayed by 2-3 months.
Exhibit 4: 1QFY2014 top-line performance of companies

10.0 8.0 6.0 4.0
(%)
8.4
2.8
2.6
2.0 0.0 (2.0) (4.0) (6.0) (8.0) (5.2) ACC (1.5) (2.5) Ambuja Ultratech India Cements Madras Cements JK Lakshmi Shree Cement
(5.8)
Cement stocks - Performance on the bourses

Cement stocks posted mixed performance in the bourses during 1QFY2014. Amongst stocks under our coverage Shree Cement, Ambuja Cement and ACC outperformed Sensex (up 3%) posting returns of 5.4%, 7.6% and 15.0% respectively. However, India Cements fell steeply by 32.1% impacted by the alleged involvement of the promoter's relative in the Indian Premier League (IPL) betting scam.
Margins to remain under pressure

Cement companies are confronted with weak cement prices and increase in operating costs such as raw material, freight etc. While companies under coverage are expected to post lower realization on a yoy basis, cost per tonne too is expected to be substantially higher. Thus, we expect all the companies under our coverage to post decline in margins on a yoy basis. Overall we expect a 504bp yoy decline in OPM for our cement universe.
1QFY2014 expectations
Top-line to decline by 1.2% yoy
We expect our cement universe to report a marginal 1.2% yoy decline in top-line on account of both lower volumes and weak realizations. Amongst the companies under our coverage, Madras Cement is expected to post the highest top-line growth of 8.4% yoy. Exhibit 3: Sensex vs Cement stocks (1QFY2014)
Cement majors Sensex ACC Ambuja India Cements JK Lakshmi Cement Madras Cements Shree Cements Ultratech Source: BSE, Angel Research Abs. Return (%) 3.0 5.4 7.6 (32.1) (0.5) (9.4) 15.0 0.4 2.4 4.7 (35.1) (3.4) (12.4) 12.1 (2.5) Relative to Sensex (%)
Exhibit 5: OPM (%) performance in 1QFY2014E

Company ACC^ Ambuja^ Ultratech India Cements Madras Cements JK Lakshmi Shree Cement* 1QFY2014E 1QFY2013 17.0 23.0 23.1 17.1 23.2 22.3 27.1 24.8 28.6 25.8 23.1 31.0 22.8 33.0 yoy (bp) 4QFY2013 (783) (561) (269) (606) (784) (49) (584) 16.9 21.7 23.8 14.7 15.2 17.7 28.5 qoq (bp) 6 129 (71) 235 799 458 (141)
Source: Company, Angel Research; Note: ^December year ending; *June year ending

Earnings of cement companies remained strong in 1HFY2013 despite modest demand growth due to the healthy pricing scenario. However, worsening of the cement demand scenario has put pressure on pricing. For FY2014 as a whole cement demand growth is expected to remain muted at ~6%. We maintain our Neutral view on the sector . sector.
(` cr)

Company ACC^ Ambuja^ India Cements J K Lakshmi CMP (`) 1,223 187 57 97 Net Sales 1QFY14E 2,736 2,434 1,235 502 1,073 1,494 4,948 (1.5) (5.2) 2.8 (5.8) 8.4 2.6 (2.5) OPM (%) chg bp (783) (561) (606) (49) (784) (584) (269) 17.0 23.0 17.1 22.3 23.2 27.1 23.1 Net P rofit Profit 1QFY14E 270 359 46 50 109 228 609 (35.4) (23.3) (39.1) 0.2 (11.5) (35.1) (21.7) EPS (`) % chg (35.4) (23.3) (39.1) 0.2 (11.5) (35.1) (21.7) FY13 74.7 10.2 7.0 16.3 17.0 296.7 100.3 14.4 2.3 1.5 4.1 4.6 65.0 22.2 EPS (`) FY14E 74.9 10.2 8.9 17.8 18.5 322.8 106.1 FY15E 93.1 12.2 10.9 21.8 22.8 374.3 119.8 FY13 16.4 18.3 8.1 5.9 13.4 15.7 18.7 P/E (x) FY14E 16.3 18.3 6.4 5.4 12.4 14.5 17.7 FY15E 13.1 15.3 5.2 4.4 10.0 12.5 15.7 Tar get arg (`) 1,361 143 % chg 1QFY14E % chg 1QFY14E
Reco. Accum. Neutral Neutral Buy Neutral Neutral Neutral
Madras Cem. 228 Shree Cem.* 4,668 UltraTech 1,876
Source: Company, Angel Research; Note: Price as on June 28, 2013; ^December year ending; *June year ending
Analyst - V Srinivasan
24
FMCG
Advertising and Promotional activities of companies intensify
Despite the slowdown, FMCG companies posted a better-thanexpected performance on the volume front in 4QFY2013 aided by escalated advertising and sales promotion (A&P) activities. With the economic slow-down persisting, companies have intensified A&P activities further in the form of discounts, increased grammage, 'buy one - get one' offers, gift offerings etc. A fall in input costs has provided companies with elbow room to carry out these A&P activities; some portion of the cost savings arising out of the price correction have been passed on to the consumers. A normal monsoon is highly critical for both, the overall economy and the FMCG sector, as it would keep prices of agricultural commodities under check. This will result in low inflation and also boost incomes of rural consumers. Such higher incomes would result in better demand for FMCG products. This year the monsoon hit the Kerala coast in time on June 1, 2013. After hitting the Kerala coast in time, the monsoon has progressed rapidly and covered most parts of the country well ahead of its normal time. The overall rainfall during June 1 to June 26 is 154% of the long period average (LPA).
Exhibit 2: Regionwise rainfall

Actual (mm) All-India North west Central South Peninsula East and North East Source: IMD, Angel Research 130.7 94.4 172.2 141.3 99.8 Normal (mm) 84.7 31 72.8 92.6 203.7 Excess/(Deficit) % 54 205 137 53 (51)
Raw-material prices on a downward trend

During the quarter, prices of inputs were mostly lower on a sequential basis. While wheat was down by 4.2% on a sequential basis, sugar was down by 2%. Prices of safflower oil, soyabean oil and groundnut oil too were down by 5.6%, 10.8% and 8.3% respectively. However, prices of some of the inputs were higher on a yoy basis. The price of wheat was higher by 22.2% yoy, while sugar prices were higher by 6.9% yoy.
Key developments during the quarter

HUL open offer begins
HUL's promoter Unilever PLC decided to make a voluntary open offer to buy a 22.52% stake, which would take its stake in HUL to 75%. The open offer has been priced at `600/share. The size of the open offer is estimated at US$5.4bn. The voluntary open offer began on June 20, 2013 and is expected to close on July 4, 2013.
Exhibit 1: Input cost trend during 1QFY2014

1QFY14 P rices Prices Wheat (`/quintal) Barley (`/quintal) Sugar (`/ quintal) Coffee (US $/10 tonne) Cocoa (US$/MT) Palm Oil (MYR/tonne) Copra (`/quintal) Safflower (`/ quintal) Soyabean Oil (`/10kg) Groundnt Oil (`/MT) Crude (US$/ barrel) Caustic Soda (`/kg) Soda Ash (`/kg) 1,515 1,326 3,284 1,942 2,291 2,314 4,430 4,006 668 114,367 103 1,486 1,066 yoy (%) 22.2 (6.1) 6.9 (2.8) 3.1 (28.3) 4.4 11.6 6.2 (5.2) (4.8) (20.7) (4.4) qoq (%) (4.2) (2.7) (2.0) (5.2) 5.4 (0.5) (4.9) (5.6) (10.8) (8.3) (8.1) (17.0) (2.5)
Britannia undergoes corporate restructuring

Britannia Industries restructured its top management during the quarter. Post the restructuring, Vinita Bali, the managing director of the company, will only focus on the international business. Varun Berry, the chief operating officer (COO) has been assigned with heading the India business.
Diageo open offer does not elicit interest

Diageo's open offer to acquire a 26% stake in United Spirits (USL) at a price of `1,440/share (much below the current market price) didn't elicit a favorable response from the investors. Of the 3.8cr shares of USL that were on offer, shareholders tendered just 64,169 shares and only 58,688 shares were accepted. The USL Board has approved the preferential allotment of 10% shares to Diageo.
Source: Bloomberg, C-Line, Angel Research
South-west monsoon has a strong beginning

India's agriculture sector is hugely reliant on the south-west monsoon (which occurs during June-September every year) for meeting its irrigation needs. Thus the south-west monsoon, which has had a strong beginning this year, will ensure adequate water supply for agriculture activities. This is expected to lead to a healthy agricultural output for the current year.
FMCG stocks' performance on the bourses

Most of the FMCG stocks under our coverage outperformed the sensex, with Britannia (up 28.1%), HUL (up 25.5%) and GSK Consumer (up 22.8%) being the top gainers. While Britannia's stock price surged post the excellent results posted by the company for 4QFY2013, the hike in HUL's stock price
25
FMCG
was on account of the open offer. GSK Consumer too rose substantially on account of its inclusion in the MSCI index.
Exhibit 4: Top-line growth in 1QFY2014E

30.0 25.0 20.0 17.5 13.0 10.3 7.9 11.7 16.0 14.9 11.1 5.9 28.1
Exhibit 3: Stock performance in 1QFY2014

United Spirits TGBL Nestle (1.7) ITC HUL GSK Consumer GCPL Dabur India Colgate Palmolive Britannia (5.8) (10) (5) 0 Asian Paints 5 10 (%) 15 20 25 30 Marico 4.9 25.5 22.8 4.7 13.6 8.6 28.1 4.8 6.0 14.4
15.0 10.0 5.0 -
14.0
Britannia
ITC
HUL
OPM performance to be mixed

While the reduction in commodity prices is a positive for FMCG companies, the same has been offset, to an extent, by the INR's depreciation. Thus companies using imported raw materials are not expected to benefit much from the correction in commodity prices. Further, A&P expenditure too is expected to be on a higher side on a yoy basis for most companies. In all, we expect a mixed performance on the OPM front from companies under coverage.
1QFY2014 expectations Top-line growth for universe estimated at 12.3%

We expect our FMCG universe (excl. ITC) to post a top-line growth of 12.3% yoy during the quarter. We expect top-line growth to be on account of higher volumes, better realizations and superior mixes. On an average we expect a reasonably healthy volume growth (in high single digits) in the domestic market for most of the companies. Domestic volume growth is expected to be aided, to an extent, by normalization in canteen stores department (CSD) procurement. CSD procurement had reduced considerably for FY2013 as a whole due to budget rationalization. Godrej Consumer Products (GCPL) is expected to post the highest top-line growth of 28.1% driven by the company's international operations in Indonesia and Africa. Sensex companies ITC and HUL are expected to post a top-line growth of 16.0% and 11.1% respectively. On the volume front, ITC is expected to post a flat performance; its top-line growth is expected to be led by higher realization. We expect HUL's 1QFY2014 volume growth to be at ~6% yoy.

Although the slowdown witnessed in the FMCG sector is expected to persist for the next few quarters, we believe India's long-term consumption story is intact. Consumption in many categories, with potential for high growth rates, is still very low in urban India. In rural India, the penetration of these products is even lower. With rising income levels and changing consumer behavior in the country, consumer spending on branded FMCG products is set to rise. That said the current valuation of FMCG stocks are rich even after considering their reasonably strong fundamentals . W e have a Neutral view on the sector . We sector.

Company CMP (`) Asian Paints ^ 4,630 Britannia Colgate GCPL HUL ITC Marico ^ Nestle * TGBL^ USL# 672 1,353 816 585 324 209 4,867 134 2,171 Net Sales 1QFY14E 2,836 1,393 868 1,652 1,779 857 6,942 7,714 1,397 2,144 1,816 2,314 11.7 14.0 14.9 13.0 28.1 17.5 11.1 16.0 10.3 7.9 5.9 12.5 OPM (%) chg bp (134) 128 (199) 120 18 283 (41) 1 (58) (52) 87 (408) 15.9 6.6 19.5 15.3 14.5 18.0 13.0 34.7 14.0 21.1 10.5 12.2 Net P rofit Profit 1QFY14E 290 66 137 188 167 135 852 1,898 136 266 107 102 0.5 52.4 16.3 26.1 28.0 26.4 17.2 18.5 9.5 8.2 37.7 (29.9) EPS (`) % chg 0.5 52.4 16.3 26.1 28.0 26.4 17.2 18.5 9.5 8.2 37.7 (29.9) FY13 116.1 19.1 36.5 4.4 20.6 103.9 14.7 9.4 5.6 110.8 6.5 10.8 30.2 5.5 10.0 2.2 4.9 32.0 3.9 2.5 2.2 27.6 1.7 7.8 EPS (`) FY14E 141.5 21.3 44.2 5.4 25.1 122.2 17.1 11.3 7.3 127.5 7.8 42.1 FY15E 162.7 25.5 51.7 6.3 29.7 148.7 18.4 13.3 8.7 154.1 8.6 67.7 FY13 39.9 35.1 37.0 35.3 39.7 49.5 39.7 34.6 37.0 43.9 20.7 201.8 P/E (x) FY14E 32.7 31.6 30.6 29.0 32.5 42.1 34.2 28.8 28.8 38.2 17.2 51.6 FY15E 28.5 26.4 26.2 24.7 27.5 34.6 31.8 24.3 24.1 31.6 15.6 32.1 Tar get arg (`) 145 % chg 1QFY14E % chg 1QFY14E
Asian Paints
Colgate
Dabur
GCPL
GSKCH
Marico
Nestle
(` cr)
Reco. Neutral Neutral Neutral Neutral Neutral Neutral Neutral Neutral Neutral Neutral Accumu. Neutral
Dabur India ^ 156 GSK Cons.* 5,140
Source: Company, Angel Research; Note: Price as on June 28, 2013; * December year ending; ^Consolidated; #Quaterly numbers pertains to standalone financials
Analyst - V Srinivasan
TGBL
26
Infrastructure
For 1QFY2014, we expect average revenue growth for our coverage universe to remain subdued at 7.4% yoy on the back of slowdown in execution. The slowdown in execution pace has been due to: a) a challenging macro environment; b) policy paralysis; c) slower-than-anticipated order inflows; d) stretched working capital; and e) delays in payments from clients. lower EBITD AM, we expect the company to post a 21.7% yoy EBITDAM, decline in earnings to `32cr for the quarter . quarter.
CCCL (CMP/TP: `9/-) (Rating: Neutral)

Consolidated Construction Consortium (CCCL) is expected to continue to post poor numbers on all fronts for 1QFY2014. On the back of slow moving order book and lower-than-anticipated order inflows in FY2013, we expect the company to post a top-line of `458cr, a decline of 5% yoy. On the EBITDA front, we expect the company to continue with its dismal performance and register a dip of 116bp yoy to 1.5%, owing to poor performance on the execution front. On the bottom-line front, the company is expected to post a loss of `15cr for the quarter vs a loss of `16cr in 1QFY2013.
Exhibit 1: Average yoy revenue growth (%)

25.0 19.7 20.0 15.0 16.6 16.9 12.6 10.2 10.0 5.0 0.0 2QFY12 3QFY12 4QFY12 1QFY13 2QFY13 3QFY13 4QFY13 1QFY14 8.7 7.4 3.1
IRB (CMP/TP: `96/`157) (Rating: Buy)

% yoy growth
Source: Company, Angel Research; Note: For our analysis, we have selected 11 companies, as detailed in Exhibit 6
During 1QFY2014, the sector did not witness any respite from the several headwinds such as high interest and inflationary cost pressures and slowdown in order inflows. Thus, subdued revenue performance, along with pressure on EBITDAM and high interest cost, are expected to result in a muted performance at the earnings level. Against this backdrop, we expect a decline in the earnings of companies under our coverage, with L&T being the only exception.
Exhibit 2: Average yoy earnings growth (%)

25.0 20.0 13.7 15.0 9.1 10.0 5.0 0.0 2QFY12 (5.0) (10.0) (12.8) (15.0) (4.7) 3QFY12 4QFY12 1QFY13 2QFY13 3QFY13 4QFY13 1QFY14 (0.3) 9.1 5.7 22.2
IRB Infrastructure Developers (IRB) is expected to post a mixed performance for the quarter. We expect E&C segment revenues to decline by 19.4% yoy to ` 605cr, as Jaipur-Deoli and Talegaon-Amravati road BOT projects are near completion (~95% complete) and hence, will contribute meagerly to E&C revenue. However, the BOT segment is expected to report a healthy 45% yoy growth to ` 378cr, leading to a modest top-line growth of 0.4% to `983cr. We expect the blended EBITDA margin to be at 44.8%, a growth of 137bp yoy. Depreciation for the quarter is expected to jump 36.3% yoy, owing to commissioning of the Jaipur-Deoli and Talegaon-Amravati project. We project net profit before tax and after tax (post minority interest) at ` 156cr and ` 111cr , 111cr, respectively , after factoring a blended tax rate of 29% for the respectively, quarter . quarter.
ITNL (CMP/TP: `146/`230) (Rating: Buy)

We expect IL&FS Transportation Networks (ITNL) to post a mixed set of numbers for the quarter, with decent performance on the revenue front, but muted show at the earnings level, owing to high interest cost. The company's consolidated revenue is expected to grow by 6.0% yoy to `1,675cr for 1QFY2014. We expect the company to register an EBITDAM of 27.4%. Further, on the back of higher interest cost, which is expected to come in at `313cr, we expect ITNL's earnings to decline by 13.2% yoy to `106cr.
% yoy growth
Source: Company, Angel Research; Note: For our analysis, we have selected 11 companies, as detailed in Exhibit 6
ABL (CMP/TP: `190/`255) (Rating: Buy)
For 1QFY2014, Ashoka Buildcon (ABL) is expected to post a consolidated revenue of `508cr, indicating a growth of 9.0% yoy. The under-construction captive road BOT projects will drive its E&C revenue. The E&C segment will continue to dominate the company's revenue by contributing `426cr (up 8% yoy) while the BOT segment's share is expected to be `82cr (up 3% yoy). On the margin front, we expect ABL's EBITDAM to decline by 95bp yoy to 21%. On the back of higher depreciation and
IVRCL (CMP/TP: `15/`29) (Rating: Buy)

We expect IVRCL to continue with its poor performance for the quarter. On the revenue front, it is expected to post a modest growth of 3.4% yoy to `1,249cr on the back of slowdown in execution. We expect the EBITDA margin to contract by 208bp yoy to 8.2%. The company is expected to post a bottom-line loss of `3cr vs a loss of `6cr in 5QFY2012, primarily on account of slowdown in execution and higher interest costs for the quarter . quarter.
JAL (CMP/TP: `54/`90) (Rating: Buy)

We expect Jaiprakash Associates (JAL) to post a top-line growth
27
Infrastructure
of 9.3% yoy to `3,289cr for the quarter. C&EPC revenue is expected to increase by 9.1% yoy to `1,327cr. On the cement business front, we expect JAL to post a revenue of `1,463cr on a volume of 3.8mt with realization of `3,750/tonne, for the quarter. We expect the company to post a blended EBITDA margin of 26.2%, registering a decline of 90bp yoy for the quarter. On the bottom-line front, we expect a PAT of `101cr, registering a yoy decline of 26.9% in 1QFY2014. This is mainly on account of a 20% yoy jump expected in the interest cost to `559cr.
Unity Infra (CMP/TP: `25/`41) (Rating: Buy)

For Unity Infraprojects (Unity Infra), we project a muted 3.2% yoy growth in revenue to `408cr for 1QFY2014, due to slowdown in execution on account of the gloomy macro environment. On the EBITDAM front, we expect a dip of 9bp to 13.5%. The bottom-line is expected to post a decline of 17.3% yoy to `15cr for the quarter . quarter.
No respite from high interest cost

The high interest cost owing to a high interest rate regime and increasing debt levels has put most of the infrastructure companies under our coverage under pressure, resulting in a decline in the bottom-line. In the latest Mid Quarter Monetary Policy Review, the Reserve Bank of India (RBI) has maintained its status quo on policy rates. This can be attributed to anticipation of upside pressures on inflation, the sharp INR depreciation and risk of a reversal in capital flows. Nonetheless, owing to onset of a normal monsoon, moderation in inflation and expectation of stabilization of INR, we expect additional repo rate cuts of about 50bp in FY2014.
L&T (CMP/TP: `1,404/`1,761) (Rating: Buy)

For 1QFY2014, owing to a large order book (~`1.54trillion) and robust order inflows in the past couple of quarters, we expect Larsen & Toubro (L&T) to record a revenue of `13,100cr, indicating a growth of 9.6% yoy. On the EBITDA front, we expect the company's margin to witness an expansion of 141bp yoy to 10.5%. We project the net profit to come in at `911cr for 1QFY2014, registering a growth of 1.6% yoy . We estimate the yoy. company's order inflow to be at ~`30,000cr for the quarter, which is in-line with the Management's guidance of 20% growth in order book for the full year.
Exhibit 3: Interest cost as a % of sales for E&C companies

(%) 18.0 16.0 14.0 12.0 10.0 8.0 6.0 4.0 2.0 0.0 JAL IVRCL Unity NCC CCCL Infra 4QFY13 4QFY12 Simplex In. 3QFY13 Sadbhav L&T
NCC (CMP/TP: `24/`42) (Rating: Buy)

We expect a subdued performance from NCC for 1QFY2014. On the top-line front, NCC is expected to post subdued growth of 2.6% to `1,511cr. The EBITDA margin is expected to grow by 7bp yoy to 8.0% for the quarter. On the earnings front, we expect the net profit to grow by 10.1% yoy to `18cr . This would 18cr. be primarily on account of pick-up in execution and lower base of last year. We expect an interest cost of `102cr (up 9.0% yoy) owing to an elongated working capital cycle.
SEL (CMP/TP: `95/`139) (Rating: Buy)

We expect Sadbhav Engineering (SEL) to post good numbers for the quarter on the top-line front, mainly on account of pick up in execution and a low base of 1QFY2013. The company is expected to post revenue of `591cr, a growth of 40.2% yoy. The EBITDA margin is expected to witness a jump of 133bp yoy to 10.6%, mainly due to pick-up in execution. On the earnings front, the company is expected to post a dip of 56.5% yoy to `23cr.
Order inflow remains muted

Order inflows for companies under our coverage have largely been disappointing for the past few quarters. Moreover, the road sector has also seen significant slowdown in awarding of projects. During FY2013, the road sector had only awarded ~1,400km of road projects. Also, infrastructure companies are bidding very cautiously for road projects and are looking to procure EPC (engineering, procurement and construction) contracts. The main reasons for companies going slow on road BOT projects are: 1) high interest cost and tough business environment; 2) difficulty in achieving financial closure; and 3) banks turning cautious against lending for road projects and demanding higher equity contribution. For 4QFY2013, L&T, NCC and IVRCL showed some growth in their order inflows. However, owing to policy paralysis at the government's end, delays arising due to constraints in land acquisition and environmental clearance issues, most players witnessed a decline in order inflows for the quarter.
28
Simplex Infra (CMP/TP: `76/`131) (Rating: Buy)

Simplex Infrastructures is expected to continue its subdued performance on the revenue front, as we expect the company to report a decline in revenue of 4.5% yoy to `1,514cr, for 1QFY2014. This is mainly due to its slow moving order book. We expect the EBITDA margin to fall by 27bp to 9.4%. The bottom-line is expected to be under pressure due to increase in interest cost (expected to jump 16.7% yoy) and lower-than-expected revenue growth, resulting in a yoy decline of 51.3% to `14cr for the quarter.
Infrastructure
Exhibit 4: Order inflow yoy growth trend during 4QFY2013 (%)
Simplex In. NCC L&T Sadbhav IVRCL (50) 50 100 150 200 250 (16) 32 (26) 43

There has been no respite for infrastructure companies from persistent headwinds such as high interest rates and slower-than-anticipated revival in industrial capex. Further, stretched balance sheets and working capital on the back of investment in subsidiaries and delays in payment from clients continues to pose a problem. This has resulted in execution slowdown and shrinking bottom-lines for most infrastructure companies. However, the infrastructure sector has seen some positive developments as well during the quarter, ie in the form of government introducing several reforms to address key issues, including the ones related to environmental clearances and land acquisition. Further, the government is also assisting the infrastructure sector with low-cost funding in an effort to revive it. We believe that although interest rate cuts and increasing investment in the sector remain key triggers for infrastructure stocks, removal of bottlenecks such as delays in environmental clearances and land-acquisition issues are also of prime importance for the execution pace to pick up. We prefer to remain selective: We believe that stock-specific approach would yield higher returns, given the disparity among the companies in our coverage universe and changing dynamics affecting them, either positively or negatively. Hence, we remain positive on companies having 1) a comfortable leverage position; 2) superior return ratios and 3) less dependence on capital markets for raising equity for funding projects. We recommend L&T , ITNL and SEL as our top picks in the sector . L&T, sector.
285 300
IVRCL
Sadbhav
L&T
NCC
Simplex In.
Order backlog remains decent

Despite sluggish order inflow during FY2013, the order book for companies under our coverage universe remained decent. Slowdown in execution pace has also kept the company's order book at higher levels. This order backlog gives comfort for growth over the next couple of years. For few companies such as NCC, IVRCL and SEL, the order book has been boosted by captive orders during the last financial year.
Exhibit 5: Decent order book provides revenue visibility

6.0 5.0 4.0 3.0 2.0 1.0 0.0 Simplex In. Sadbhav L&T IVRCL NCC 40.0 35.0 30.0 25.0 20.0 15.0 10.0 5.0 0.0 (5.0) (10.0) (15.0)
OB/Sales (x), RHS
Order book growth yoy (%), LHS

Company ABL^ CCCL IRB Infra^ ITNL^ IVRCL JAL L&T NCC SEL Simplex In. Unity Infra CMP (`) 190 9 96 146 15 54 1,404 24 95 78 25 Net Sales 1QFY14E 508 458 983 1,675 1,249 3,289 13,100 1,511 591 1,514 408 9.0 (5.0) 0.4 6.0 3.4 9.3 9.6 2.6 40.2 (4.5) 3.2 OPM (%) chg bp (95) (116) 137 (212) (208) (90) 141 7 133 (27) (9) 21.0 1.5 44.8 27.4 8.2 26.2 10.5 8.0 10.6 9.4 13.5 Net P rofit Profit 1QFY14E 32 (15) 111 106 (3) 101 911 18 23 14 15 (21.7) (21.8) (13.2) (26.9) 1.6 10.1 (56.5) (51.3) (17.3) EPS (`) % chg (21.7) (3.3) (21.8) (13.2) (49.4) (30.0) 0.0 10.1 (56.5) (51.3) (17.3) 6.1 (0.8) 3.3 5.4 (0.1) 0.5 14.9 0.7 0.2 2.7 2.0 EPS (`) FY13 16.0 (4.2) 16.7 26.8 (3.3) 2.2 67.5 2.4 0.9 10.8 12.5 FY14E 18.0 (2.9) 15.7 29.8 1.4 2.5 77.9 2.7 5.9 11.9 11.0 FY15E 22.2 (0.4) 16.6 32.1 1.8 2.9 88.3 3.6 6.7 18.7 11.5 FY13 11.9 5.7 5.5 24.3 20.8 10.0 109.6 7.0 2.0 P/E (x) FY14E 10.6 6.1 4.9 10.4 21.2 18.0 9.1 16.1 6.6 2.3 FY15E 8.6 5.8 4.6 8.2 18.8 15.9 6.7 14.3 4.2 2.2 Tar get arg (`) 255 157 230 29 90 1,761 42 139 131 41 % chg 1QFY14E % chg 1QFY14E
( ` cr)
Reco. Buy Neutral Buy Buy Buy Buy Buy Buy Buy Buy Buy
Source: Company, Angel Research; Note: Price as on June 28, 2013, Target prices are based on SOTP methodology; ^Consolidated numbers; *FY2013 figures are for 9 months
Analyst: Viral Shah

29
Information Technology
Currency tailwinds for the sector
For the Indian IT sector, which has been bogged down by concerns over the US Immigration Bill, lower growth, salary hikes and higher visa costs, the rupee (INR) depreciation could prove to be a silver lining. Since the beginning of the current financial year, the Indian currency has tumbled over ~8% against the US dollar (USD); rupee depreciation improves the competitiveness of Indian IT services companies. In particular, it will enable vendors to enhance win rates in infrastructure management services (IMS) based deals. Margin pressure exerted by these deals (which in some cases involves transfer of assets and employees) can be offset by gains from a weaker rupee. We expect Indian IT companies' 1QFY2014 margins to benefit by ~80-130bp on account of the rupee's recent fall. During the quarter, the performance of Indian IT stocks was negatively impacted due to overhang in terms of the US Immigration Bill. The proposed immigration reforms in the US appear to have negative ramifications not only in terms of costs, but also with regards revenues. Apart from increasing salaries for H1B employees as well as increased charges for H1B visas (US$10k fees for every additional worker on visa over the 50% limit), the proposed bill will necessitate increased local hiring by offshore technology companies, thereby increasing average onsite costs as well as render reduced flexibility of a low onsite bench that offshore players have enjoyed until now. Despite the imminent challenges that occur upon enactment of the bill, many constituents of the bill may undergo revision as the bill faces an extensive legislative process and a fairly long timeline. We expect the bill to undergo several changes as there will be major challenges in staffing and delivery of services if implemented, resulting in services disruptions, thereby raising debates in the House. Economic indicators: The US' real GDP grew by 1.8% in 1QCY2013, up from 0.4% in 4QCY2012. But US' corporate profits after tax for 1QCY2013 came in at -1.9%, the first negative reading since 1QCY2012. For May 2013, data points for the US economy are mixed. For instance, 1) non-manufacturing index inched up to 53.7 from 53.1 in April 2013; 2) unemployment rate stood at 7.6% as against 7.5% in April 2013; 3) industrial production came in flat mom; 4) the Manufacturing index declined to 49.0 as against 50.7 in April 2013; 5) retail sales grew by 0.6% as against 0.1% in April 2013; and 6) factory orders grew by 1.0% mom as against fall of 4.0% in April 2013. These mixed economic data points from the US indicate towards a gradual recovery in the demand scenario in the country. Given the current uncertain environment, we expect volume growth of tier-I Indian IT companies to be in the range of 8-12% for FY2014.
Our take: We expect IT budgets to remain flattish in CY2013. According to Forrester Research, overall, after a period of slow tech market growth in 2012, tech buying will steadily improve in 2013 and 2014, led by the US. The European tech market will remain depressed for most of 2013 before starting to improve as 2014 nears. The Asia Pacific tech market will hold steady. The IT spend now is driven by trends such as increased off-shoring of work from Europe and vendor consolidation. Market share gains in the renewal deal pipeline will be a key differentiator of volume growth across players, in our view.
Exhibit 1: Relative performance to the Sensex

26.2 (7.8) (8.6) 2.6
(%)
KPIT Cummins Persistent Mindtree
(5.0) (4.8) 0.0 (2.4) (10.5) (3.7)
Hexaware Mphasis Mahindra Satyam Tech Mahindra HCL Tech Wipro TCS Infosys BSE IT Index
(13.5) (9.5) (16.0) (8.0) 0.0 8.0 16.0 24.0 32.0
Cyclically a healthy quarter with modest volume growth

Traditionally, 1Q of the financial year is a strong quarter for IT companies as client budgets on discretionary, operational and capital spending, which are frozen by 4Q, witness a flush in this quarter. We expect 1QFY2014 to be better than 4QFY2013, but not as good as traditionally 1Q is, due to economic uncertainty across developed economies leading clients to delay the incremental budget flush from their end. We expect revenue growth in 1QFY2014 to be volume driven and pricing to remain stable. For 1QFY2014, volume growth is expected to be in the range of 1.1-4.2% qoq for tier-I IT companies, with TCS leading the pack. For tier-II companies, we expect growth to be modest at 1-3.0% qoq, with KPIT Cummins and Persistent Systems leading the pack. KPIT Cummins has given a USD revenue growth guidance of 13.3-15.7% yoy for FY2014, which is encouraging and higher than Nasscoms' industry growth estimate of 12-14%.
Exhibit 2: Trend in volume growth (qoq) Tier-I

6 5.3 5.0 4.5 4 2.7
(%)
4.4 3.7 3.0 2.5
4.2 3.8
3.8 2.0 0.8 0.2 1.3
1.8
1.8
1.7 1.1
0 (1.0) (2) 1QFY13 2QFY13 3QFY13 4QFY13 1QFY14E
Infosys
TCS
HCL Tech
Wipro*
Source: Company, Angel Research; Note: *For the IT services segment
30
USD revenue to grow
The cross-currency movement, this quarter, has been positive for Indian IT companies. So we expect a positive impact of ~20-30bp qoq on USD revenue of Infosys, TCS, Wipro and HCL Tech on this account. For 1QFY2014, on the back of fair volume growth, stable pricing and positive cross-currency movement, we expect USD revenue of tier-I IT companies to grow by 1.0-4.0% qoq, with TCS leading the pack.
Exhibit 5: Trend in INR revenue growth (qoq) - Tier-I

16 14 12 10 12.1 9.5 8.6 7.3 5.1 2.5 2.9 0.7 1QFY13 2QFY13 3QFY13 5.7 2.9 3.0 2.7 0.3 2.4 2.2 (0.6) 1QFY14E 9.7 9.3 6.7 13.5
(%)
8 6 4 2 0 (2)
4QFY13
Infosys
TCS
HCL Tech
Wipro*
Exhibit 3: Trend in USD revenue growth (qoq) - Tier-I

7 6 5 4
(%)
6.3
Operating margins to enhance

3.6 4.0 3.2 3.1 1.4 0.5 1.5 1.0 3.5
4.6 3.0 3.0 2.6 1.7 3.2 3.3 2.4
3 2 1 0 (1) (2)
1QFY13 (1.1) (1.4)
2QFY13
3QFY13
4QFY13
1QFY14E
Infosys
TCS
HCL Tech
Wipro*
For tier-II IT companies, USD revenue growth is expected to be 0.8-3.0% qoq, with Persistent Systems and KPIT Cummins leading the pack.
Exhibit 4: Trend in USD revenue growth (qoq) - Tier-II

14 12 10 8
(%)
Indian IT companies are going to benefit on the operating margin front due to INR depreciation, as generally every 1% depreciation in the INR leads to a 30-40bp increase in the OPM of an IT company. We expect the EBITDA margin of Infosys to grow by 109bp qoq to 27.6%, after having fallen for five consecutive quarters. TCS is expected to post an almost flat EBITDA margin sequentially (at 28.3%) as the gains due to currency will be absorbed by the headwinds on account of wage hikes given during the quarter. HCL Tech is expected to report a 92bp qoq expansion in EBITDA margin to 23.3%. Wipro's (IT services) EBITDA margin is also expected to remain flat sequentially due to wage hikes given by the company since June 1, 2013. For tier-II IT companies under our coverage, we expect INR depreciation to aid operating margin by 80-150bp on a qoq basis. The EBITDA margin of Hexaware is expected to post the maximum expansion of 146bp qoq to 20.7% as the company faced some major client specific issues two quarters back which severely impacted margins. The company is recouping back the losses since then along with it being aided by the factor of INR depreciation. The EBITDA margin of Tech Mahindra (excluding Mahindra Satyam), KPIT Cummins, MindTree and Persistent Systems is expected to inch up by 94bp, 106bp, 115bp and 125bp qoq to 20.9%, 18.8%, 20.1% and 26.1%, respectively. The EBITDA margin of Tech Mahindra (including Mahindra Satyam) is expected to move up by 105bp qoq to 21.1%. Exhibit 6: EBITDA margin profile - Tier-I
35 32 29 29.5 23.8 32.6 30.6 29.1 29.1 24.0 28.4 23.7 28.5 29.0 26.5 23.5 22.6 23.0 22.4 23.3 23.1 28.4 28.3 27.6
6 4 2 0 2QFY13 (2) 3QFY13 4QFY13 1QFY14E 1.0 0.8 2.9 2.1 1.3 3.0
Tech Mahindra*
Mphasis
MindTree
Persistent
Hexaware
KPIT Cummins
Source: Company, Angel Research; Note: *Exclude numbers of Mahindra Satyam
INR revenue growth to stand tall, courtesy INR depreciation

1QFY2014 has been a volatile quarter as far as currency is concerned. During 1QFY2014, the INR depreciated by ~11% qoq against the USD, which will result in a surge in INR revenue growth for Indian IT companies and boost their operating margins by 80-130bp qoq. On an average basis, the INR appreciated by ~3% qoq during 1QFY2014. For 1QFY2014, in INR terms, revenue growth is expected to be in the range of 6.7-9.7% qoq for tier-I IT companies. For tier-II IT companies, INR revenue growth is expected to be at 6.4-9.1% qoq, with Persistent Systems leading the pack.
(%)
26 23 20 17
22.0 18.4
22.2
4QFY12
1QFY13
2QFY13
3QFY13
Infosys
TCS
HCL Tech
4QFY13 1QFY14E Wipro* Wipro*
Source: Company, Angel Research; Note: *For IT services segment Refer to important Disclosures at the end of the report
31
Earnings growth to be modest
On the back of INR depreciation and moderate volume growth, profitability of tier-I companies such as Infosys, TCS and HCL Tech is expected to increase by 6.5%, 0.4% and 3.0% qoq, respectively. The profitability of Wipro is expected to decline by 6.0% qoq due to hiving off of non-IT businesses along with negative impact of wage hikes. Amongst mid-tier IT companies, earnings growth is expected to be a mixed bag. Tech Mahindra (excluding Mahindra Satyam) is expected to post a 26.6% qoq growth in net profit on an adjusted basis. On a consolidated basis, Tech Mahindras net profit (including Mahindra Satyam) is expected to grow by 7.6% qoq. The net profit of Persistent Systems and Infotech Enterprises is expected to decline marginally on a sequential basis due to lower other income and higher tax rate. In case of KPIT Cummins, the profitability is expected to go up by ~22% qoq to `63cr on the back of higher other income qoq and INR depreciation coupled with decent volume growth. all elements of an industry's value chain including suppliers, employees, customers, and business partners), mobility (access to anytime, anywhere information) and analytics (real-time intelligence). We believe FY2014 will again have the trend of divergent growth rates among tier-I companies with TCS and HCL Tech growing higher than the industry's average (in mid teens) and Infosys growing in single digits. The IT spend now is driven due to trends such as increased off-shoring of work from Europe and vendor consolidation. Market share gains in the renewal deal pipeline will be a key differentiator of volume growth across players in our view. Market share gain focused players, with the current business momentum (HCL Tech, TCS and Cognizant), are once again expected to outperform peers and show better revenue growth and greater margin control. We expect that growth in FY2014 will be largely led by market share shifts with competitive intensity increasing. Management commentaries within the sector indicate that IT budgets are almost flattish in CY2013. We expect TCS and HCL Tech to lead growth in the tier-I IT pack in FY2014. TCS' stock price has run up considerably and is currently trading at 18.5x FY2014E EPS and 16.6x FY2015E EPS, which leaves little room for upside. So we recommend an Accumulate rating on the stock with a target price of `1,640. Further, we recommend an Accumulate rating on HCL Tech and Wipro with a target price of `870 and `389 respectively. Among mid-caps, we like Tech Mahindra due to the inorganic growth it would witness post the two acquisitions done recently and Mahindra Satyam merger; we recommend Buy on it with a target price of `1,250.

For FY2014, Nasscom estimates total revenues (domestic+exports; excludes hardware) to grow by about 13-15% to reach US$106-111bn; of this, exports are likely to be about US$84-87bn, a growth of about 12-14%. While the global macro data have been steady, we believe that the demand environment for the IT sector remains mixed. As per Nasscom, five major technology changes are expected to open new opportunities for service providers - smart computing (expected to drive industry-specific solutions), Software-as-a-Service (SaaS to play a dominant role), social technologies (empower

Company TCS Infosys Wipro HCL Tech* CMP (`) 1,518 2,493 350 776 Net Sales 1QFY14E 18,021 11,217 10,186 7,025 2,029 4,109 1,525 543 657 364 619 498 9.7 7.3 (7.6) 9.3 6.4 6.9 8.5 7.0 7.3 9.1 8.7 7.3 OPM (%) chg bp (5) 109 66 92 94 105 84 146 115 125 106 57 28.3 27.6 21.1 23.3 20.9 21.1 18.0 20.7 20.1 26.1 18.8 17.6 Net P rofit Profit 1QFY14E 3,829 2,403 1,633 1,071 233 542 184 82 86 51 63 54 6.5 0.4 (6.0) 3.0 26.6 7.6 4.1 4.0 9.6 (2.1) 22.5 (1.1) EPS (`) % chg 6.5 0.4 (6.0) 3.0 26.6 7.6 4.1 4.0 9.6 (2.1) 22.5 (1.1) FY13 71.2 164.9 27.0 56.2 59.7 91.7 34.8 10.9 81.7 46.9 10.6 20.7 19.6 42.1 6.5 15.2 17.5 23.5 8.7 2.7 20.7 12.7 6.9 4.9 EPS (`) FY14E 82.2 170.7 27.7 59.5 66.5 93.7 38.0 10.7 87.4 53.6 13.2 21.2 FY15E 91.5 187.5 29.9 63.3 73.0 101.5 43.5 11.7 97.0 59.7 14.4 22.6 FY13 21.3 15.1 13.0 13.8 17.7 11.6 10.7 8.0 10.3 10.6 11.6 8.5 P/E (x) FY14E 18.5 14.6 12.7 13.0 15.9 11.3 9.8 8.1 9.6 9.3 9.3 8.3 FY15E 16.6 13.3 11.7 12.3 14.5 10.4 8.5 7.4 8.6 8.4 8.5 7.8 Tar get arg (`) 1,640 389 870 1,250 391 105 925 565 144 190 % chg 1QFY14E % chg 1QFY14E
( ` cr)
Reco. Accum. Neutral Accum. Accum. Buy Accum. Buy Accum. Accum. Buy Accum.
TechM (ex. MSat) 1,059 TechM(in. MSat)1,059 Mphasis^ Hexaware# Mindtree Persistent Infotech Entp. 371 87 837 499 177
KPIT Cummins 122
Source: Company, Angel Research; Note: Price as on June 28, 2013; *June ending so 4QFY2013 estimates; ^October ending so 3QFY2013 estimates; #December ending so 2QCY2013 estimates; Change is on a qoq basis
Analyst - Ankita Somani

32
Media
Healthy top-line growth
For 1QFY2014, we expect our Media universe to post a cumulative top-line growth of 12.3% yoy. Resilient local advertising revenues as well as improvement in national advertising revenues are expected to aid print media companies to post modest growth in revenues. Sun TV Network (Sun TV)'s top-line is expected to be bolstered by increasing advertisement spend by FMCG companies to promote new product variants. PVR is also expected to post a healthy revenue growth on the back of robust seat additions. Exhibit 1: Newsprint prices flat in INR terms
800 750 700 650 600 550 500 450 400 Apr-06 15,000 Apr-07 Apr-08 Apr-09 USD/tonne Apr-10 Apr-11 INR/tonne Apr-12 Apr-13 25,000 20,000
Newsprint prices flat yoy in INR terms
total 38 cities. The remaining cities are also showing considerable progress, except for Coimbatore and Visakhapatnam, where digitization figures are still below 50%. The firm government support behind the digitization drive, apparent from the phase 1 and phase 2 implementations augurs well for all the players across the broadcasting value chain.
Advertising limit imposed

The broadcasting industry has agreed to abide by a 12-minute limit on advertising for one hour programming starting October 1, 2013. In the interim period (from July 1 to September 30), news channels need to restrict advertising to 20 minutes/hour, while all other channels have to limit this to 16 minutes/hour. TRAI's decision to implement advertising limit will lead to reduction in ad inventory and hence, it would be a negative for the broadcasting industry. However in the medium to long term, growth in ad rates due to limited inventory is expected to at least partially compensate for the loss of ad revenues.
40,000 35,000 30,000
Exhibit 2: Relative performance to Sensex during 1QFY2014

8 6 4 2 (2) (4) (6) (8) (10) (12) (14) DBCORP HTMEDIA (12) JAGRAN PVR SUNTV SENSEX (4) (3) 3 6 6
During 1QFY2014, the average prices of newsprint declined by 2.3% qoq and 3.3% yoy to ~$601. However, due to 2.1% qoq and 2.3% yoy depreciation in rupee (INR) vs dollar (USD), newsprint prices are flat qoq and yoy in INR terms.
Margin pressure expected to ease for print media companies

Entry into new markets (DB Corp in Maharashtra), new editions in existing markets (HT Media's Moradabad edition in UP) and acquisitions (Jagran acquiring Nai Dunia), along with high newsprint prices and sluggish advertising revenues (due to GDP slowdown) led to significant margin erosion for print media companies last year. However, with losses reducing in emerging markets and moderating newsprint prices, margin pressure is expected to ease off, going forward.
Key Developments
Phase 2 Digitization
According to the Information and Broadcasting (I&B) Ministry, nearly 100% digitization has been achieved in 22 out of the
Outlook and valuation: The underperformance of print media stocks can be attributed to OPM pressure on account of losses in emerging editions, higher newsprint costs and cyclical nature of ad revenue growth (sluggish due to slower GDP growth). Due to these cyclical headwinds, stocks are currently trading at relatively cheaper valuations. However, considering the structural positives of the print business (high brand loyalty and significant entry barriers) and reduction in losses of emerging editions, in our view, print media stocks deserve a premium to the Sensex. Hence, we maintain our Buy rating on DB Corp, Jagran Prakshan and HT Media.

Company Jagran D B Corp HT Media PVR CMP (`) 81 240 97 322 Net Sales 1QFY14E 343 400 494 279 477 8.1 6.9 0.9 65.0 12.1 OPM (%) chg bp (232) 281 155 (220) (96) 22.5 22.5 15.2 17.8 74.9 Net P rofit Profit 1QFY14E 52 52 46 8 183 % chg (6.7) 28.1 13.9 10.0 11.4 EPS (`) 1QFY14E 1.6 2.9 2.0 3.2 4.6 % chg (6.7) 28.1 13.9 10.0 11.4 FY13 8.1 11.9 7.1 11.3 18.3 EPS (`) FY14E 6.4 14.2 8.3 17.2 20.0 FY15E 7.8 16.8 9.1 21.5 23.3 FY13 10.1 20.1 13.6 28.6 20.7 P/E (x) FY14E 12.7 16.9 11.7 18.7 19.0 FY15E 10.5 14.3 10.7 15.0 16.3 Tar get arg (`) 107 290 117 % chg 1QFY14E
( ` cr)
Reco. Buy Buy Buy Neutral Neutral
Sun TV Network 380
Source: Company, Angel Research; Note: Price as on June 28, 2013

33
Metals
We expect the profitability of steel companies under our coverage universe to decline yoy during 1QFY2014. This is on account of decreasing prices of steel amidst slowing demand. The steel prices in US, China and CIS declined by 4.3%, 10.4% and 7.4% qoq, respectively, during 1QFY2014. In India, prices fell by 1.7% qoq. For 2QFY2014, coking coal contract prices are likely to settle at US$165/tonne, compared to US$170/tonne as in 1QFY2014. Iron ore contract prices for 2QFY2014 are expected to decline as spot iron ore prices have risen during 1QFY2014. Going forward, although we expect steel consumption to pick up, concerns on account of slowdown in capex cycle, high interest rates and slowdown in construction demand continue to persist. Non-ferrous companies' bottom-lines are also likely to decline during 1QFY2014 amidst lower base metal prices coupled with sticky costs. Going forward, we do not expect them to rise meaningfully due to subdued global economic outlook. The BSE Metal Index posted a negative return of 11.5% in 1QFY2014. Steel stocks under our coverage declined during 1QFY2014 due to poor quarterly results. Stock prices of SAIL, Tata Steel and JSW Steel declined by 18.9%, 12.5% and 2.1%, respectively. On the non-ferrous side, all the stocks declined except Hindalco Industries (Hindalco). Sterlite Industries (Sterlite)' stock price was down by 10.7%, impacted by Tamil Nadu Pollution Control Board (TNPCB) order demanding the closure of the company's Tuticorin copper smelter. National Aluminium (Nalco) and Hindustan Zinc (HZL) were also down 13.1% and 15.7% respectively. Among the miners, NMDC and Coal India recorded a fall in their stock prices, which corrected by 23.1% and 2.1%, respectively, during the quarter. announced in September 2012 the proposal to merge its associate JSW Ispat with itself. This merger scheme was later approved by the shareholders and the respective high courts in April 2013 and it paved the way for the company becoming the second largest steel player in India, next only to SAIL.
Supreme Court permits category "B" mines to commence operations

Accepting the recommendations of Central Empowered Committee, the Supreme Court in the last quarter allowed category "B" mines to commence production with a rider that the miners will have to comply with Rehabilitation and Reclamation (R&R) formalities. Approximately 63 mining leases under category "B" were allowed to start mining.
Coal India revised price of coal

During 1QFY2014, Coal India's board approved the revision in prices of certain grades of coal. The Board decreased the price of the coal grade G3 and G4 having a Gross Calorific Value (GCV) between 6,000 and 6,300 by 12.0%, in line with decline in international coal prices. However, to neutralize the loss of revenue on that account, the board raised prices of larger segments of coal from grades G6-to G-17 with a GCV ranging from 2,200 to 6000 by 10.0%.
TNPCB orders closure of Sterlite's smelter, however Green Panel later allows resumption of operations
During 1QFY2014, TNPCB ordered Sterlite to shut its Tuticorin smelter after receiving complaints from local people about gas leakages from the plant. However, later in June 2013 the National Green Tribunal (NGT) gave its nod to restart the smelter as it did not find severe violations during its investigations.
Exhibit 1: Metal stocks performance 1QFY2014

NMDC SAIL HZL Nalco Tata Steel BSE Metal Index Sterlite MOIL Sesa COAL JSW Hindalco (25.0) (20.0) (15.0) (10.0) (%) (5.0) 0.0 5.0 10.0
Ferrous sector
Global steel prices continued their downward trend in 1QFY2014, led by lower demand and decline in spot iron ore prices. In the US, China and CIS, steel prices declined by 4.3%, 10.4% and 7.4% qoq, respectively. In India also prices fell by 1.7% qoq.
Exhibit 2: World HRC prices fall qoq

800 750
(US$/tonne)
4000 3900 3800 3700 3600 3500 3400

(Yuan/tonne)
700 650 600 550 500

Jul-12 Jul-12 Aug-12 Sep-12 Nov-12 Sep-12 Oct-12 Nov-12 Jan-13 Dec-12 Mar-13 Apr-13 Feb-13 May-13 Jan-13 Apr-13 Jun-13 Jun-13
Key events
JSW Steel completes merger with JSW Ispat
During 1QFY2014 JSW Steel completed all the formalities relating to the merger of JSW Ispat with itself. The combined entity came into effect on June 1, 2013. JSW Steel had
3300 3200
USA HRC/tonne
China HRC/tonne
34
Metals
Exhibit 3: Domestic HRC prices fall qoq
39,000 37,000
(`/tonne)
Exhibit 5: Iron ore exports to China decline

6 5 4 3 2 1 0
33,000 31,000 29,000 27,000 25,000 Dec-10
(mn tonnes)
35,000
Apr-12
May-12
Jun-12
Aug-12
Sep-12
Oct-12
Nov-12
Dec-12
Jan-13
Mar-13
Feb-13
Apr-13
Jul-12
May-11
Oct-11
Mar-12
Aug-12
Jan-13
Jun-13
Iron ore and coking coal prices flat

Global iron ore prices decreased during the quarter due to lower demand from China. Declining supplies from India were more than offset by rising exports from Australia. Australia exported 122.1mn tonne (i.e. a 12.9% yoy growth in the 4-month period between January 2013-April 2013). During the quarter, average spot iron ore prices for 63.5% Fe grade (CFR, China) declined by 14.7% qoq to US$127/tonne. Hence, iron ore contract prices for 2QFY2014 are likely to fall on a qoq basis. Domestic iron ore prices have declined during 1QFY2014 on account of lower (seasonal) demand for steel. Media reports suggest that quarterly coking coal contracts for July-September quarter are likely to be signed at US$165/tonne.
Steel imports on a rise

Steel imports have continued to rise over the past one year resulting in Indian steel players having to face the threat of imports from FTA countries (which attract lower import duty). During April 2012 - February 2013, steel imports by India have increased by 19.6% yoy to 7.5mn tonne. To counter rising imports, the Central Government imposed a 20% import duty on some flat steel products from China, in 4QFY2013, to protect domestic steel mills. Nevertheless, given the recent INR depreciation and demand slowdown in India, we expect steel imports to decline during FY2014.
Exhibit 6: Production and consumption - Steel

8,000 7,000 500 400
(000 tonnes)
Exhibit 4: Iron ore prices and inventory in China

210 180 150
(US $/tonne)
120
(000 tonnes)
6,000 5,000 4,000 3,000 2,000 1,000 0

Sep-11 Oct-11 Jul-11 Nov-11 Apr-11 Jan-12 Jun-11 Aug-11 Dec-11 May-11 Feb-12 Sep-12 Oct-12 Jul-12 Nov-12 Apr-12 Jun-12 Mar-12 Aug-12 May-12 Dec-12 Jan-13 Feb-13
300 200 100 0 (100)
105 90 75 60
(mn tonnes)
120 90 60 30 0 Jun-10 Oct-10 Feb-11 Jun-11 Oct-11
45 30 15 0 Feb-12 Jun-12 Oct-12 Feb-13 Jun-13
Net production
Real consumption
Net imports - RHS
Iron ore inventory (RHS)
Indian Iron ore 63% Fe, CFR China (LHS)
Outlook
Margins to expand on a yoy basis
Current international iron ore prices are in the range of US$115-120/tonne, which is near the marginal cost of production for several Chinese iron ore miners. Hence, we do not expect any further meaningful downside from the current price levels. Contracted coking coal prices have declined gradually over the past one year. A decline in coking coal prices is expected to benefit Indian steelmakers, although INR depreciation against the USD would partially offset the same. According to World Steel, global crude steel production increased by 1.2% to 132mn tonne in April, whereas it increased 2.6% yoy to 136mn tonne in May. Global capacity utilization levels during April and May stood at 80.0% and 79.6%, respectively.
35
Iron ore exports from India continued to decline

During FY2013, India's Iron ore exports to China declined by 64.3% yoy to 21.7mn tonne mainly impacted by the ban on mining imposed by the Supreme court in Karnataka in FY2012 and then later in FY2013 the government in Goa banned all mining activities and export of iron ore from Goa which subsequently led to suspension of environment clearances of all the 93 mining leases issued by the MoEF in Goa. As per Federation of Indian Mineral Industries (FIMI)' estimates, iron ore mining in Karnataka will take a minimum of two years to operate at a capacity as prior to the ban, after the Supreme Court allowing resumption of mining at category-A & B mines in the state.
May-13
Metals
1QFY2014 expectations: For 1QFY2014, on a yoy basis, we expect net sales of steel companies to decline due to lower steel prices. Thus, we expect the top-line of steel companies under our coverage to decline modestly yoy. Also, we expect their margins to decline due to lower prices on a yoy basis. For SAIL, we expect net sales to decline by 1.8% yoy and PAT to decline by 49.0% yoy due to anticipated decline in realizations coupled with sticky costs. For Tata Steel, we expect its top-line to decline by 3.2% yoy due to lower realization; its PAT is expected to decline by 18.5% yoy. NMDC's PAT is expected to decline by 19.2% yoy, due to lower realizations. We remain positive on NMDC and Tata Steel.
Exhibit 8: Inventory chart

180 160 140 120 100 80 60 40 20 0 Sep-11 Jan-12 May-12 Sep-12 Jan-13 May-13
Copper
Aluminium
Zinc
Non-ferrous sector
During the quarter, base metal prices declined sharply. Domestic aluminium companies continued to suffer on account of low aluminium prices due to subdued demand. On a sequential basis, average copper, aluminium, and zinc prices decreased by 9.6%, 8.3% and 9.4%, respectively, mainly due to lower demand in China and overcapacity across the globe. On a yoy basis, average copper, aluminium and zinc prices declined by 8.1%, 7.2% and 4.5% respectively.
Outlook
Non-ferrous companies are expected to face a double whammy of declining product prices coupled with higher input costs during FY2014. Base metal prices have declined over the past one year and hence realizations for companies are expected to decline during FY2014 (partially offset by INR depreciation against the USD). Further, although several aluminium companies (globally) have announced production cuts, we are yet to see any meaningful decline in actual production. Thus, lower realizations coupled with higher prices of key inputs such as caustic soda, CP pitch and petroleum coke are expected to hit margins of non-ferrous companies during FY2014 in our view. 1QFY2014 expectations: For 1QFY2014, we expect mixed performance from non-ferrous companies. We expect HZL and Nalco to report margin expansion. However, we expect some non-ferrous companies to report lower bottom-lines on a yoy basis owing to a decline in LME prices coupled with sticky costs. We expect Hindalco's bottom-line to decline by 22.7% yoy; while we expect Sterlite Industries' PAT to decline by 15.5% yoy mainly due to temporary closure of its Tuticorin copper smelter. We have a positive stance on Hindustan Zinc.
Exhibit 7: Average base metal prices (US$/tonne)

1QFY14 Copper Aluminium Zinc 7,197 1,873 1,842 1QFY13 7,829 2,019 1,929 yoy % (8.1) (7.2) (4.5) 4QFY13 7,965 2,043 2,033 qoq % (9.6) (8.3) (9.4)
On a yoy basis, inventory levels at the LME warehouse for copper, aluminium and zinc rose by 153.9%, 5.4% and 16.9%, respectively. However, on a qoq basis, copper and aluminium inventories increased by 47.2% and 0.9% respectively whereas zinc inventory declined by 8.9%

Company Coal India Hindalco Hind. Zinc JSW Steel MOIL Nalco NMDC SAIL Sterlite Inds Tata Steel CMP (`) 303 100 102 657 200 29 106 51 84 274 Net Sales 1QFY14E 17,719 6,810 2,916 11,147 241 1,798 2695 10,452 8,372 32,728 7.4 14.2 7.5 23.4 (0.6) 4.7 (5.1) (1.8) (21.0) (3.2) OPM (%) chg bp (280) 50 94 (223) 116 226 (1,403) (591) 681 (111) 32.7 8.3 53.6 17.4 43.3 20.0 67.0 8.3 28.6 8.9 Net P rofit Profit 1QFY14E 4524 328 1617 585 104 245 1540 486 1,198 487 1.5 (22.7) 2.3 (32.1) 4.5 10.0 (19.2) (49.0) (15.5) (18.5) EPS (`) % chg 1.5 (22.7) 2.3 (32.1) 4.5 10.0 (19.2) (49.0) (15.5) (18.5) 7.2 1.7 3.8 26.2 6.2 1.0 3.9 0.9 3.0 5.1 EPS (`) FY13 27.5 15.8 16.3 62.5 25.7 2.3 16.0 5.3 18.3 3.4 FY14E 28.4 13.4 16.0 81.8 26.8 2.6 16.2 5.2 18.1 30.9 FY15E 30.9 15.0 17.6 109.6 28.8 2.6 17.6 7.2 20.2 47.6 FY13 11.0 6.3 6.2 10.5 7.8 12.8 6.6 9.7 4.6 80.1 P/E (x) FY14E 10.7 7.5 6.4 8.0 7.4 11.3 6.5 9.7 4.6 8.9 FY15E 9.8 6.7 5.8 6.0 6.9 11.1 6.0 7.1 4.1 5.8 Tar get arg (`) 345 145 248 156 100 378 % chg 1QFY14E % chg 1QFY14E
(` c r) cr
Reco. Accum. Neutral Buy Neutral Buy Neutral Buy Neutral Buy Buy
Source: Company, Angel Research; Note: Price as on June 28, 2013; EPS calculation based on fully diluted equity; Denotes consolidated numbers
Analyst : Bhavesh Chauhan / Vinay Rachh

36
Oil & Gas

Brent crude oil remained in the price range of US$98-112
during 1QFY2014. Overall, average Brent crude oil declined by 9.6% qoq during the quarter. supplies and weaker demand projections by the International Energy Agency (IEA).
Petrochemical prices decreased qoq in 1QFY2014

Average prices of petrochemical products decreased modestly on a qoq basis during 1QFY2014 on account of decline in prices of crude and muted demand.
The West Texas Intermediate (WTI) crude oil price remained

flat qoq during the quarter, inspite of a downward move in the price of Brent crude oil.
Average Henry Hub natural gas price rose by 17.1% qoq

after falling steeply over the past one year. The price of Asian spot LNG remained firm on account of demand-supply mismatch in the continent.
Exhibit 3: Petchem prices decline during 1QFY14

110 100 90
( ` /kg)
80 70 60 50 40 30
May-10 May-12 Feb-10 Feb-12 May-11 Feb-13
May-13 Jun-13
Prices of petrochemical products declined by 7.9% on a

qoq basis during 1QFY2014. During April and May 2013, the Indian crude oil basket stood at US$102/bbl and US$101/bbl, respectively. Although international crude oil prices declined, a sharp depreciation in the INR against the USD resulted in higher under-recoveries for oil marketing companies (OMCs) on account of they selling diesel, kerosene and domestic LPG at subsidized rates. During the first half of June 2013, OMCs lost `286cr per day on this account. OMCs lost `6.3/liter, `27.8/liter and `335/cylinder on diesel, kerosene and domestic LPG, respectively.
Feb-11
PTA
MEG
CHIPS
POY
Source: Industry sources, Angel Research
Exhibit 4: World oil supply improved in 1QFY2014

93 93 92
Exhibit 1: Indian crude basket trend

116 112 108 104
(mnbpd)
92 91 91 90 90 89
(US$/bbl)
100 96 92 88 84 80
Jul-12 Aug-12 Sep-12 Oct-12 Nov-12 Dec-12 Jan-13 Feb-13 Mar-13 Apr-13 May-13
US gas prices rise; Asian gas prices also remain firm

The average Henry Hub natural gas price rose by 17.1% qoq due to higher demand in the USA. Further, Asian spot LNG prices continued to remain high on account of higher demand in Asia.
Source: PPAC, Angel Research
Brent crude price declined during 1QFY2014

The price of Brent crude oil remained lower, ie in a range of US$98-112 during 1QFY2014, mainly because of higher
Exhibit 5: US gas prices rose qoq in 1QFY2014

5.5
Exhibit 2: Brent crude remained volatile during 1QFY2014

125 120
(US $ /barrel)
(US $/mmbtu)
130
4.5
3.5
115 110 105
2.5
1.5
Jun-12 Aug-12 Oct-12 Nov-12 Dec-12 Jan-13 Feb-13 Mar-13
95 90 85 Jun-12 Aug-12 Oct-12 Dec-12 Feb-13 Apr-13
Source: Bloomberg, Angel Research Refer to important Disclosures at the end of the report
Sep-12
Apr-13
Jul-12
100
37
May-13
Aug-10
Aug-12
Nov-10
Aug-11
Nov-11
Nov-12
Oil & Gas

Exhibit 6: Crude inventory rose in 1QFY2014
420 400
ONGC made three major oil and gas discoveries

During the concluded quarter, ONGC had struck three major oil and gas discoveries. These discoveries were in three different locations. The first discovery was in KG-DWN-98/2, where the company had previously made 9 gas discoveries. The second one was in the NELP block KG-DWN-2005/1 in KG deep offshore basin, and the third was in GK-28 # 9 in GK-28 PML,
(000 bbls)
380 360 340 320
Dec-12
May-13
Nov-12
Mar-13
Oct-12
Jan-13
Aug-12
Sep-12
Feb-13
Apr-13
Jun-13
Jul-12
Kutch Shallow Offshore basin.
PNGRB slashed GAIL's KG D6 pipeline tariff by 53%

The oil and gas sector regulator Petroleum and Natural Gas Regulatory Board (PNGRB) during 1QFY2014 slashed the KG D6 pipeline tariff of GAIL by 80% to `5.56/mmbtu with retrospective effect from November 2008. The pipeline had a rated capacity of 16mmscmd and the volumes carried in FY2012 and FY2013 were 14.7mmscmd and 7.3mmscmd, respectively. The revision in tariff was due to lower depreciation charged by GAIL on this pipeline which PNGRB disapproved. The
Exhibit 7: Motor gasoline inventory remain flat in 1QFY14

280
240
(000 bbls)
200
160
120
May-13 Dec-12 Sep-12 Feb-13 Nov-12 Mar-13 Aug-12 Oct-12 Jan-13 Apr-13 Jun-13 Jul-12
contribution from KG D6 pipeline to GAIL's total volumes was not significant given GAIL's average run-rate of 115-120mmscmd.
Key developments
Government doubles gas price
On June 27, 2013, the Cabinet Committee of Economic Affairs (CCEA) raised the price of gas to US$8.4/mmbtu effective April 1, 2014 for a period of five years. The hike in gas price is EPS accretive for upstream PSUs despite the risk of increase in subsidy burden. Also, it is positive for private companies such as Reliance Industries (RIL). Moreover, a higher gas price will act as an incentive for upstream companies to raise production from newer blocks. We raised our FY2015 EPS estimates for ONGC and RIL by 9.5% and 6.9%, respectively, to factor in higher gas prices.
RIL announces significant gas condensate discovery in deepwater KG D6 block

During 1QFY2014 RIL and its partners BP and NIKO had struck a significant gas and condensate discovery in the KG D6 block. The discovery named D-55 lied over 2000 meters below the already producing reservoirs in D1-D3 gas fields. The company however did not state the amount of possible reserves the discovery might hold but the discovery was notified with the government authorities.
Poor 1QFY2014 performance by oil & gas stocks

During 1QFY2014, the BSE Oil and Gas Index recorded an increase of 6.9%, mainly due to reforms in the Oil and Gas sector like gas price increase and partial diesel deregulation. However, GAIL's stock continued to decline, as has been the trend over the past several months; for the quarter it fell 1.6%. ONGC's stock posted an increase of 6.3% on the back of reforms. Cairn India posted a 6.4% increase due to better guidance on ramping up production from its flagship Rajasthan blocks. RIL was the major gainer due to gas price hike; the stock rose by 11.6% in the quarter.
CCI clears 25 oil & gas blocks

During 1QFY2014, the Cabinet Committee on Investment (CCI) granted clearances to 25 oil & gas blocks worth `24,900cr which was a huge positive for companies such as Reliance Industries (RIL), Oil and Natural Gas Corporation (ONGC) and Cairn India as it enabled them to start expediting exploration projects. Some of these blocks were stuck up as the Defence Ministry had imposed stringent conditions that restricted companies to locate any pipelines or structures on sea surface for exploration and production activities.
38
Oil & Gas

Exhibit 8: 1QFY2014 stock performance
14.0 12.0 10.0 8.0
(%)
6.0 4.0 2.0 0.0 (2.0) (4.0) RIL BSE O&G Index Cairn ONGC GAIL
For 1QFY2014, we expect a mixed performance on the profitability front for our coverage companies. For RIL, we expect the operating profit to increase by 9.3% yoy on account of improvement in profitability from its Petrochemicals and Refining segments. For ONGC, we expect net sales to increase by 1.0% yoy while its PAT is expected to decrease by 9.0% yoy due to yoy increase in expenses. GAIL is expected to report a top-line growth of 10.9% yoy on account of increase in volumes. However, its net profit is expected to decrease by 19.0% yoy. Cairn India's net sales are expected to decrease by 4.7% yoy while its bottom-line is expected to decrease by 3.5%, in line with a decline in its top-line.

Company Cairn India GAIL ONGC ^ RIL ^ CMP (`) 290 313 330 862 Net Sales 1QFY14E 4,232 12,296 20,285 82,561 (4.7) 10.9 1.0 (10.1) OPM (%) chg bp (147) (582) 15 159 77.2 11.3 55.6 8.9 Net P rofit Profit 1QFY14E 2857 918 5,532 5,392 (3.5) (19.0) (9.0) 20.5 EPS (`) % chg (3.5) (19.0) (9.0) 20.5 19.3 7.2 6.5 16.6 EPS (`) FY13 60.1 31.7 28.3 71.1 FY14E 53.3 34.1 34.7 75.0 FY15E 49.6 35.7 41.9 76.9 FY13 4.8 9.9 11.7 12.1 P/E (x) FY14E 5.4 9.2 9.5 11.5 FY15E 5.8 8.8 7.9 11.3 Tar get arg (`) 345 387 % chg 1QFY14E % chg 1QFY14E
( ` cr)
Reco. Buy Neutral Buy Neutral
Source: Company, Angel Research; Note: Price as on June 28, 2013; ^Standalone numbers for the quarter and consolidated numbers for the full year
Analyst : Bhavesh Chauhan / Vinay Rachh

39
Pharmaceutical
Pharma sector continues its outperformance
During 1QFY2014, the BSE healthcare (HC) index continued its outperformance. The HC index rose by 9.4% as against a rise of 2.8% in Sensex. The performance of the market was impacted by macro dynamics of the economic developments in India and abroad. In such scenario, Pharmaceuticals, which is not impacted much by the economic developments emerged resilient and outperformed the broader indices. fixing a Ceiling Price (CP). Manufacturers would be free to fix any price for their products equal to or below the CP . The CP would be fixed on dosage basis, such as per tablet / capsule / standard injection as listed in NLEM-2011. As per indication, roughly around 28% of the industry has come under price control, as against around 18% under the current regime. ConclusionConclusion-The proposed drug pricing policy, is in line with the earlier New Drug Pricing Policy declared in 2012. The order has recommended that the retail price of the essential 348 drugs will be fixed at simple average price of brands that have more than 1 % market share. We don't believe that the policy in its current form is negative, as the policy is based on average price mechanism and thus follows competition. Given the price competition already prevailing, the policy is unlikely to have any major negative implication for the sector. However amongst the domestic and MNC players, the latter would be impacted the most, as they mostly price their products much higher than the competition and in many cases derive 100% of their sales from the domestic markets. Domestic companies not having a significantly high exposure to the domestic market will be insulated to a large extent, as pricing is not the key driver for their growth. Their products are therefore competitively priced. Moreover, with the realistic price control under place, which is more attuned to market forces, the policy will boost the overall volume growth in the industry.
Exhibit 1: BSE HC Index vs. the Sensex

15.0 10.0 5.0
(%)
0.0 (5.0) 1QFY2013 2QFY2013 3QFY2013 4QFY2013 1QFY2014
(10.0) (15.0)
BSE HC Index Sensex
Source: C-line, Angel Research
The upward rally during the quarter was driven by both large and mid-caps. Among the large caps the major gainers were Sun Pharma and Lupin which rose by 24% each. DR. Reddys on the other hand rose by 21%. However, Large Caps like Cipla and Cadila rose by 2% and 5% respectively during the period. Ranbaxy labs, amongst the large caps were the only major looser during the quarter, which declined by 31% during the quarter, as the company continued to real under many negative news flows in spite of settling the US suit. Among the mid-caps, the major gainers were IPCA Labs, Aurobindo and Alembic Pharma rose by 25.0% and 19.0% each respectively. Indoco Remedies on the other hand grew only by 6.0% during the period. Dishman Pharma on the other hand dipped by 23.0% during the quarter. Amongst the MNC pack, Glaxo was up by 5%, whereas Aventis Pharmaceuticals was down by only 7.0%.
Ranbaxy settles the US suit:

Ranbaxy Laboratories (Ranbaxy) settled the US suit by pleading guilty to felony charges relating to manufacture and distribution of certain adulterated drugs made at two of its Indian manufacturing units. The US subsidiary of Ranbaxy agreed to pay a penalty fine of US$500mn, which is the largest settlement with a generic medicine maker till date. Ranbaxy also agreed to pay a criminal fine and forfeiture totaling US$150mn, and to settle civil claims under the False Claims Act and related State laws for US $350mn. Ranbaxy USA pleaded guilty to three felony counts under Federal Food Durg and Cosmetics Act (FDCA), and four felony counts of knowingly making materially false statements to the Food and Drug Administration (FDA). With this settlement, the long lawsuit is now over for the company and since the amount in terms of penalty is same as earlier provided by the company, it's positive for the company, both from a short and longer term perspective. Thus, with this development, one of the overhangs on the stock is out. However, we believe that the market will closely monitor
Key developments
Drug Price Control Order (DPCO, 2013)-No Surprises
After the release of the New Drug Pricing Policy in 2012, the final draft of the new Drug Price Control Order (2013) was issued. The policy is on the lines of the New Drug Pricing Policy notified earlier and would come into effect from July 1, 2013. According to the new drug pricing order, the government will bring prices of 348 essential drugs (all formulations) mentioned in the National List of Essential Medicines (NLEM) under control against the current practice of controlling prices of 74 bulk drugs and their formulations. The formulations will be priced only by
40
Pharmaceutical
the company's operating performance, which we believe will take some time to improve. In the latest quarter the company posted operating margins of ~6-7%, which is much below its peers and hence was the main reason for the company's stock's underperformance on the bourses. According to the Management it will take 3-4 years before margins come in line with its peers. While the concerns on the business' profitability, and now legal hassles, are increasing for the company, we believe that after the recent significant dip the worst is discounted in the stock price. Even in a worst case scenario, wherein the company's US business takes a further hit and if we accord an EV/Sales of 1.5x, the stock still trades at a discount to its peers by around 60%. Hence we recommend a Buy on it with a price target of `384. As regards global markets, the company has decided to look to partner with a global player to contact the clinical trials for the product. The IND for the product was submitted in 2004. Globally, there are estimated to be around 35cr diabetics, out of which 85% are suffering from diabetic dyslipidemia. The drug thus targets around 30cr population. In India, there are around 6.5cr diabetics and around 5.2cr suffer from diabetic dyslipidemia. In terms of capex, the company has indicated that the company would not have to invest for the same. While the comparable market size is not there, as the molecule is first in class, the product can add significantly to company's numbers. As per reports, the Management is said to have indicated that it needs to spend another US$150mn-US$200mn to launch the drug outside India. The company expects it to be a blockbuster drug, which means over US$1bn of sales a year globally. In India, the company expects to achieve sales of around `100cr in the next three years. We expect the full impact of the drug to be visible in FY2015. On a conservative basis the company can add `30-50cr in FY2015 on the sales front. We maintain our Buy with a price target of `929.
Swedish company Meda expands collaboration with Cipla:

Swedish generics maker Meda Pharma (Meda) is broadening its collaboration with Indian drug major Cipla, expanding its exclusive rights on Dymista and future product developments. Through the extended partnership, Meda now has full coverage in all growth markets in Latin and South America, Middle East, Africa and Asia, including more than 120 markets. Meda and Cipla will cooperate on product development of Dymista. Cipla will be responsible for formulation, while Meda will be responsible for clinical development, registration, marketing and sales. The companies will also collaborate on future production of Dymista and new products developed. Dymista was launched by Meda in the US in the autumn of 2012 and in 2013 in Europe. Registration is underway in other key markets. According to Meda, the product can be worth US$6bn in the US and the European Union. The company's been receiving milestone payments for the product during FY2013. Once the supplies are initiated the product will be a long-term growth driver for the company. With the product being new in those markets, it would take time to scale up. The product can contribute meaningfully by FY2015E. We conservatively estimate the product to contribute US$40mn in FY2014 and US$80mn in FY2015E. We maintain Buy on Cipla with a target price of `477.
1QFY2014 result expectations

The Indian pharma sector is expected to post a robust growth on the sales front for 1QFY2014. We expect our coverage universe to register an 18.2% yoy top-line growth. On the operating front, the margins are expected to decline by 135.2bp. This, along with higher taxation, is expected to lead to the companies in our coverage posting an earnings growth of 11.1% during the quarter. Among large-caps, Sun Pharma is expected to post a 27.1% yoy sales growth. Cipla is expected to post a net sales growth of 10.2% yoy. Other players, namely Lupin and Cadila are expected to report a growth of 31.1% and 20.1% yoy, respectively. Dr Reddy's Laboratories (DRL) is expected to post a top-line growth of around 31.4% while Ranbaxy is expected to post a de-growth of -10.2% yoy. Amongst small caps, Indoco Remedies is expected to post a 20.8% yoy sales growth. Amongst the MNC pack, Sanofi India is likely to post a 12.5% yoy growth in net sales, while Glaxo is expected to post a 1.5% yoy growth of sales.
Exhibit 2: Estimated Sales growth and OPM for 1QFY2014

50.0 40.0 30.0 20.0 10.0 0.0 (10.0) (20.0) Sun Pharma Lupin Cipla
Sales growth
Zydus Cadila Healthcare to launch India's first NCE LIPAGLYN:

Cadila Healthcare launched the first NCE molecule in India, which is the world's first drug for treating diabetic dyslipidemia and combines lipid and glucose lowering effects in one single molecule. The drug has been approved by the Drug Controller General of India (DCGI) and is expected to be launched in India by the end of 2QFY2014, and hence the full impact will be realised in 2HFY2014.
39.4 27.1 31.1 21.2 10.2 22.2 10.5 31.4 21.1
(10.2) Ranbaxy
OPM
DRL
41
Pharmaceutical
Sun Pharma, DRL and Lupin to outperform
Among large-caps in our coverage universe, for 1QFY2014, Sun Pharma is likely to clock 27.1% yoy growth on the sales front, led by both exports and domestic sales. The operating profit margin (OPM) for the company would decline by around 640bp yoy to around 39.4%. The net profit is likely to grow to 20.8% yoy during the quarter. Lupin, on the other hand, is expected to register a strong revenue growth of 31.1%. Its OPM is expected to expand by 220bp during the period, on account of which, the net profit will increase by around 31.0% for the quarter. DRL is expected to post a top-line growth of 31.4% to `3,340cr, due to impact of a higher base of the corresponding period of the previous year. The company is expected to see strong traction in its Indian and Russian formulation businesses as well. The company is expected to post an OPM of 21.1%, down from 21.9% in 1QFY2013. The company is expected to post a net profit of `453cr, a growth of 34.8% yoy. Cipla is expected to post a net sales growth of 10.2% to `2,113cr. Its OPM (excluding technical know-how fees) is expected to come in at 22.2%, down by 380bp from the last corresponding period. This is expected to aid the net profit to dip by 8.4% yoy to `367cr. Ranbaxy is expected to post a decline of 10.2% in sales to `2,850cr during 2QCY2013. Its OPM is expected to come in at 10.5% vs 14.4% in 2QCY2012. However, the net profit is likely to come in at ` 148.1cr, Vs ` 304cr during the corresponding period of last year. Cadila is expected to post yet another strong quarter with a 20.1% growth in net sales to `1,820cr, on the back of robust growth on the exports front. On the OPM front, we expect the company's OPM to dip by 190bp yoy to 15.7%. The net profit is expected to grow by 21.7% yoy to `237cr, on back of higher tax outgo.
Mid-caps to report robust numbers

We estimate Ipca Laboratories' top-line to grow by 28.6% to `811cr for 1QFY2014. The OPM is expected to dip by 100bp yoy to end at 20.8%. The adjusted net profit is expected to de-grow by 5.1% yoy, on back of dip in OPM. Aurobindo Pharma is expected to post a net sales growth of 38.7% yoy. The margins are likely to expand to 16.2% vs 10.3% in 1QFY2014, which will lead the net profit of `182cr vs `79cr in 1QFY2014. Indoco Remedies is expected to report a top-line growth of 20.8% to `183cr.The OPM is expected to expand by 10bp yoy to 13.8%. As a result, the net profit is expected to increase by 39.1% yoy to `14.4cr.
Outlook and Valuation

With expected earnings CAGR of ~20% over FY2012-15E for our universe of stocks, we remain overweight on the sector maintaining a positive future outlook and expectation of firm earnings growth. In the generic segment, we prefer Cipla, Lupin, Cadila Healthcare, Aurobindo Pharma and Indoco Remedies. Although the CRAMS segment is currently witnessing some pressure, there have been indications of gradual recovery and ramp-up from most of the CRAMS players. Thereby, with the valuations rendering attractive, we recommend Dishman Pharma in this segment.

Company CMP (`) Alembic Pharma 133 Aurobindo Cadila Cipla Dr. Reddys Glaxo # Indoco Rem. Ipca Lab. Lupin Ranbaxy Lab # Sanofi India # Sun Pharma. 181 773 391 2215 2339 64 658 780 310 2421 1009 Net Sales 1QFY14E 434 1,660 1,820 2,113 349 3,340 662 183 811 2,910 2,850 421 3,377 18.6 38.7 20.1 10.2 10.5 31.4 1.5 20.8 28.6 31.1 (10.2) 12.5 27.1 OPM (%) chg bp 139 590 (190) (380) (190) (80) (550) 10 (100) 220 (390.0) (20.0) (640) 15.7 16.2 15.7 22.2 24.6 21.1 25.6 13.8 20.8 21.2 10.5 13.8 39.4 Net P rofit Profit 1QFY14E 46.4 182.0 237.1 367.2 33.5 453.0 144.3 14.4 109.4 367.3 148.1 42.0 961.0 50.6 130.4 21.7 (8.4) (13.4) 34.8 (15.0) 39.1 (5.1) 31.0 (51.3) 3.7 20.8 EPS (`) % chg 50.6 130.4 21.7 (8.4) (13.4) 34.8 (15.0) 39.1 (5.1) 31.0 (51.3) 3.7 20.8 FY13 8.8 12.9 32.0 19.2 12.4 103.2 80.1 4.6 26.9 29.4 25.9 77.0 33.6 2.5 6.3 11.6 4.6 4.2 26.9 17.0 1.6 8.8 8.3 3.5 18.3 9.3 EPS (`) FY14E 10.7 17.3 38.3 21.0 15.0 112.3 76.6 6.1 36.0 34.8 17.5 92.4 33.0 FY15E 13.9 20.6 46.5 23.8 16.8 126.8 83.3 7.8 44.4 41.8 22.5 99.1 39.8 FY13 15.1 14.0 24.2 20.4 4.6 21.5 29.2 13.9 24.4 26.5 12.0 31.4 30.0 P/E (x) FY14E 12.4 10.4 20.2 18.6 3.8 19.7 30.5 10.5 18.3 22.4 17.7 26.2 30.6 FY15E 9.5 8.8 16.6 16.4 3.4 17.5 28.1 8.2 14.8 18.7 13.8 24.4 25.3 Tar get arg (`) 271 929 477 168 2,535 78 877 384 % chg 1QFY14E % chg 1QFY14E
(` cr)
Reco. Neutral Buy Buy Buy Buy Accum. Neutral Buy Neutral Accum. Buy Neutral Neutral
Dishman Pharma 57
Source: Company, Angel Research; Note: Price as on June 28, 2013; Note: Our numbers does not include MTM on Foreign Debt. # 2Q'CY2013
Analyst: Sarabjit K our Nangra Kour

42
Power
All-India power generation highlights
During 2MFY2014, the overall power generation in India rose by 4.9% yoy to 161.8BU, aided by a 10.9% yoy increase in installed capacity to 225,133MW. During this period, thermal power generation grew by 5.6% yoy to 137.4BU while hydro power generation grew by 5.3% yoy to 19.1BU. However, nuclear power generation declined by 14.6% yoy to 4.8BU.
Capacity addition
During 2MFY2014, 1,852MW of capacity was added compared to targeted capacity of 1,093MW. Private utilities added 1,569MW while State utilities added 250MW, both exceeding the targeted capacity addition. However, Central Utilities fell short of their target, adding only 33MW. Exhibit 2:Generation capacity addition: Targeted vs achieved
(MW) 25,000 20,000 15,000 10,000 5,000 0 FY04 FY06 Target (T) LHS FY08 FY10 FY12 2MFY14 Achievement (A) LHS A as a % of T (RHS) (%) 160.0 140.0 120.0 100.0 80.0 60.0 40.0 20.0 0.0
Operational performance (PLF):

The all-India plant load factor (PLF) of thermal power plants during 2MFY2014 stood at 70.8% vs 74.5% in 2MFY2013, mainly owing to fuel availability constraints. NTPC reported a sharp 753bp yoy decline in PLF from 87.0% to 79.5% (due to delay in procurement of imported coal). However, NTPCs PLF is still much higher than the all-India PLF during the same period.
Generation for companies under coverage:

During 2MFY2014, NTPC's power generation declined by 2.0% yoy to 388.1BU while GIPCL's generation (excluding 145MW Baroda plant) declined by 5.6% yoy to 0.3BU.
Source: CEA, Angel Research
Fuel availability position

As on June 13, 2013, 18 thermal power stations had coal stocks for less than 7 days which includes 6 power stations having coal stocks for less than 4 days. The southern region was the worst affected with it having 10 of the 18 stations having coal stocks for less than 7 days. However, the current fuel availability position is much better than in March 2013, when 21 thermal power stations had coal stocks for less than 7 days, including 16 power stations having coal stocks for less than 4 days.
The Planning Commission has set a power capacity addition target of 88,537MW for the current Five-Year Plan period ending March 2017, with private utilities expected to contribute the bulk of the total targeted capacity addition. However, we believe the target is over-ambitious in the wake of multiple headwinds facing the power sector such as shortage in domestic fuel availability, land acquisition delays etc. Exhibit 3: Capacity addition target for 12th plan
Type Thermal Hydro Nuclear Total Central 14,878 6,004 5,300 26,182 State 13,922 1,608 0 15,530 Private 43,540 3,285 0 46,825 Total 72,340 10,897 5,300 88,537
Imported coal prices down qoq and yoy

During 1QFY2014, average prices of New Castle Mckloksey 6,700kc coal were down by 5.8% qoq and 9.0% yoy to US$86 per tonne. Although, Rupee depreciation vs dollar limited the downside in coal prices, coal price were still down by 3.3% qoq and 6.2% yoy in INR terms. Exhibit 1: New Castle Mccloskey coal prices
250 200 150 100 50 0
Oct-11 Apr-11 Oct-12 Apr-12 Apr-09 Oct-06 Oct-07 Oct-08 Oct-09 Apr-06 Apr-07 Apr-08 Oct-10 Apr-10 Apr-13
Transmission lines and substations

As of May 2013, 1,693 circuit kilometers (ckm) were added to the transmission lines, as against the targeted 1,213ckm. In the same period, total addition to the transmission sub-station category was 6,195MVA, as against the targeted 715MVA.
9,000 8,000 decline in coal prices qoq & yoy 7,000 6,000 5,000 4,000 3,000 2,000 1,000 0
Power-deficit situation
The country continues to face a power deficit due to delays in capacity addition on account of domestic fuel shortage, holdup in clearances as well as deficiencies in the transmission & distribution (T&D) system. India's overall and peak power-deficit levels during 2MFY2014 stood at 6.9% and 6.0% respectively, as against 7.8% and 8.4% reported in 2MFY2013.
USD/tonne
INR/tonne
43
Power
Exhibit 4: India - Power-deficit scenario
20.0 16.6 16.0 12.2 12.0 8.0 8.8 4.0 0.0
FY 2012 FY2003 FY2004 FY2005 FY2006 FY2007 FY2008 FY2009 FY2010 FY2011 FY2013 2MFY2014
13.8 11.2 11.7 12.3 12.0 12.7 9.8 9.6 7.1 7.3 8.4 9.9 11.0 10.1 8.5 10.6 9.0 8.5 8.7 6.9 6.0
supply of coal. The move is expected to benefit power plants commissioned after 2009 by power generation companies such as Reliance Power, Adani Power and Lanco Infratech, among others.
NTPC and CIL expected to sign FSA soon

NTPC is yet to sign a FSA pact with CIL due to disagreement between the two companies, primarily on account of quality of coal. However, both companies have reached an agreement on quality of coal and are expected to sign the FSA soon. The agreement envisages NTPC paying CIL according to the calorific value of coal received at its plants after verification by a third party. The FSA agreement also ensures that Coal India would be eligible for incentives only if it supplies 90% of coal under old FSA agreement (for plants commissioned before March 2009) and 80% of coal under revised FSA agreement (for plants commissioned after March 2009).
Overall
Peak
Source:CEA, Angel Research
Exhibit 5: Region-wise power deficit (2MFY2014)

Region (%) Northern Western Southern Eastern Northeastern All India Source: CEA, Angel Research Overall (6.8) (1.1) (14.8) (1.9) (8.6) (6.9) Peak (5.2) (1.8) (16.7) (3.4) (9.2) (6.0)
Exhibit 6: Performance on the bourses in 1QFY2014

(%) 4 2 (2) (4) (6) (8) (10) NTPC GIPCL BSE Power SENSEX (8) (1) 1 3
Key developments
CCEA approves coal price pass-through mechanism
The Cabinet Committee on Economic Affairs (CCEA) has approved coal price pass-through mechanism which allows power producers to pass on the cost of expensive imported coal to distribution companies / consumers. According to the Fuel Supply Agreement (FSA), Coal India (CIL) is supposed to supply 65% of the total coal requirement through domestic mines and power producers could import 15% through CIL or independently. Since imported coal is expensive, Power Purchase Agreements (PPAs) signed by some of the private companies were rendered unviable. However, CCEA's decision to pass on the higher cost of imported coal to distribution companies / consumers will ensure viability of these contracts, going forward. The compensatory tariff will be decided on case-by-case basis after examining the total quantity of coal which needs to be imported to fill the gap due to shortage of domestic
Source: BSE, Angel Research
Outlook: The power sector is currently facing many headwinds such as fuel shortage, delay in land acquisition, and environmental clearances among others. The government has shown its intent on reforms with restructuring plans for state electricity boards (SEBs) and setting up the Cabinet Committee on Investment (CCI) to fast track projects. If the government continues with its emphasis on implementation of policies such as Captive Coal Allocation Policy and Land Acquisition Policy along with focus on other supportive measures, then it will be a positive for the sector in the medium to long term. We recommend Accumulate on NTPC and GIPCL . GIPCL.

Company GIPCL NTPC CMP (`) 69 144 Net Sales 1QFY14E 355 16,519 1.8 3.5 OPM (%) chg bp (19) 135 38.0 24.1 Net P rofit Profit 1QFY14E 54 2,516 (3.8) 0.7 EPS (`) % chg (3.8) 0.7 FY13 14.5 13.4 3.5 3.1 EPS (`) FY14E 13.7 13.4 FY15E 14.8 14.5 FY13 4.7 10.7 P/E (x) FY14E 5.0 10.7 FY15E 4.6 9.9 Tar get arg (`) 78 163 % chg 1QFY14E % chg 1QFY14E
( ` cr)
Reco. Accum. Accum.
Source: Company, Angel Research; Note: Price as on June 28, 2013.

44
Telecom
During April - June 2013, the benefits of quasi-consolidation in the telecom industry became increasingly visible. The top-3 companies - Bharti Airtel (Bharti), Idea Cellular (Idea) and Vodafone India (Vodafone) - increased their combined gross revenue (GR) market share in the Indian wireless industry again in the March 2013 quarter, as per data released by the Telecom Regulatory Authority of India (TRAI). These three telecom companies together clocked a 68.5% GR market share in the quarter ending March 2013, notably their highest ever as a composite. This represents a qoq market share gain of 75bp and a yoy market share gain of 168bp. Even as most of the sequential market share gain accrued because of Idea, Bharti has done well over the past one year. Further, most operators have recently reduced promotions (free minutes on every plan) and plan validities (tenure of the plan). The reduction in free minutes would require subscribers to recharge more frequently, which in turn would lead to increase in the average revenue per minute (ARPM) and thus overall revenues. Decisions regarding one-time excess spectrum fee, 3G roaming pact cancellations and modalities of spectrum refarming are yet to be made, which in our view, will continue to be an overhang on the sector and again advocates the challenging regulatory outlook for industry players. companies signed in April this year. Assuming RJI has signed the agreement for balance life of the BWA spectrum, which is 17 years, the rent comes to ~`13,070 per tower per month, which is much less than what Bharti Infratel is operating at, ie ~`36,000 per tower. Due to lack of clarity on the agreement's tenure and payment timelines, it is difficult to ascertain the impact on financials but the incremental cash flows for RCom would aid in repayment of debt. Since April 2 this year, when the fibre optic network sharing deal was announced, RCom shares have gained on wide speculation of such a deal coming in. Bharti, Idea and V odafone slash 2G data usage rates: Vodafone Vodafone slashed 2G data charges by 80% in three circles for both prepaid and post-paid users on a pay-as-you-go basis. The new rates will be rolled out across India in phases. At present, Vodafone's new rates are applicable in Karnataka, Uttar Pradesh (west), Madhya Pradesh and Chhattisgarh circles. It has reduced the price from 10 paisa per 10 KB to 2 paisa per 10KB. Following this, Bharti as well as Idea slashed 2G data usage rates. Bharti slashed data usage charges by 90% for pre-paid subscribers in Punjab and Haryana. The company said that volume based charges on its recharge vouchers for 2G data usage of three denominations have been reduced to 1 paisa per 10 KB from 10 paisa per 10 KB. With this price cut, Bharti's 2G data plan is now the cheapest in the country. Idea also announced reduction in 2G data tariff to 2 paisa per 10 KB from the existing 2 paisa per KB in eight circles - Tamil Nadu & Chennai, Karnataka, Kolkata, West Bengal, Assam, North East, Bihar, and Orissa. We expect other players in the industry to follow this move to increase the share of data subscribers in their overall subscriber base. The benefits of these schemes are that they are being launched under 'pay-as-you-go' basis which eliminates the issue of recharges apart from ensuring adoption.
Exhibit 1: Stock return analysis of leading Indian TSPs

140 120 100 80
(%)
114.4 86.7 86.7
60 40 20 0.0 0 (20) (4.4) Bharti Idea

Chg. (3 months) Chg. (1 year)
24.2
RCom
Key developments
Reliance Jio, RCom sign `12,000cr telecom tower sharing pact: Reliance Jio Infocomm (RJI), the telecom arm of Reliance Industries, has entered into a definitive agreement with Reliance Communications (RCom), for sharing tower infrastructure. The deal entails RJI utilizing up to 45,000 sites of RCom's existing nationwide network for its 4G services and the same would enable it in launching its LTE services. The aggregate value of the deal is `12,000cr (~US$2.1bn) over the lifetime of the agreement. As per the agreement, there is potential for a joint working arrangement to build additional towers. No other details of the deal were available. This agreement comes on the back of a `1,200cr fibre optic network sharing deal that the two
VLR data points favorable for tier-I companies

As per the recent visitor location register (VLR) data released for March 2013, of the total 877mn subscribers, 83.31%, ie 731mn subscribers were active subscribers on the date of peak VLR. Service-provider wise, Idea leads the tally with a share of 98.9%, followed by Vodafone with 95.6%, Bharti with 95.0% and RCom with 86.8%, whereas MTNL and Loop Mobile stood at the bottom with 46.1%. Idea's VLR data has shown noteworthy enhancement in its peak VLR data from 95.4% in October 2012 to 98.9% in March 2013, which indicates that almost all the subscribers in Idea's portfolio are active subscribers. RCom has shown substantial improvement in its peak VLR data from 76.2% in September 2012 to 86.8% in March 2013 as the company
45
Telecom
removed inactive customers (subscribers who have not had any usage in the last 60 days) from its subscriber base, focused on the quality of its subscribers and removed free minutes from the network. All the other incumbent players also reported considerable improvements in their peak VLR data in the past six months, keeping in notice the regulatory requirements regarding inactive SIM users (SIM not recharged since last six months). The share of urban wireless subscribers as of March 2013 increased from 60.50% to 60.53% whereas the share of rural wireless subscribers has decreased from 39.50% to 39.47%. The overall wireless teledensity in India as of March 2013 has reached 70.85%. During February - April 2013, Vodafone led the subscriber addition by adding 3.9mn subscribers, taking its subscriber base to 153.8mn. Vodafone was followed by RCom, Bharti and Idea, which added 3.8mn, 3.6mn and 2.2mn subscribers, respectively. We believe the incumbents went competitive to acquire subscribers left out by new operators who were forced to either shut down or scale down their operations in February 2013 by the Supreme Court.
Exhibit 2: VLR data of incumbents

110 100 90
(%)
95.0
95.0 94.1
95.6
98.2
98.9 86.8
86.4
80 70 62.6 60 50 Bharti Vodafone Idea Rcom BSNL Aircel 54.0 53.8 64.6
Exhibit 4: Total subscriber base

Company (mn) Bharti RCom Vodafone BSNL Idea TTSL Aircel MTNL Loop Mobile HFCL Shyam Telelink S Tel Uninor Videocon DB Etisalat Nov-12 183.6 134.1 150.8 97.2 114.1 85.3 65.3 5.1 3.0 1.6 15.7 40.6 4.0 Dec-12 181.9 118.5 147.5 97.2 113.9 82.0 63.3 5.1 3.0 1.7 14.9 41.5 3.6 Jan-13 184.2 118.3 147.7 97.2 116.4 80.4 61.6 5.1 3.0 1.6 14.4 40.1 2.3 Feb -13 eb-13 186.6 119.9 149.9 97.2 119.3 80.3 60.9 4.9 3.0 1.4 14.0 31.8 2.1 871.3 Mar -13 Mar-13 188.2 123.0 152.4 97.2 121.6 80.0 60.1 4.8 3.0 1.4 11.9 31.7 2.0 877.2 Apr -13 Apr-13 188.8 123.7 153.8 97.2 122.9 79.5 60.1 4.7 3.0 1.4 10.0 31.8 2.1 879.0
Dec-12
Jan-13
Feb-13
Mar-13
Source: TRAI, Angel Research
RMS vs SMS
As per revenue market share (RMS) data for 4QFY2013, Bharti leads at 28.1% with a subscriber market share (SMS) of 21.5%, whereas Idea has its RMS and SMS at 16.5% and 13.9%, respectively. RMS for Bharti and Idea is higher than SMS, which indicates that the quality of subscribers added by these companies is good. Conversely, in case of RCom, SMS is at 14.2%, which is much higher than its RMS, which is only 7.0%. This is evident from the average revenue per user (ARPU) profile of these companies; also, even though RCom's peak VLR has improved but it still stood at 86.8% (in March 2013) which is less as compared to its peers Bharti, Idea and Vodafone - the peak VLR of these vary from 95-99% (for March 2013).
Total 900.5 874.2 872.2 Source: COAI, AUSPI, Angel Research
MOU to inch up
In 4QFY2013, Bharti (excluding Africa), Idea as well as RCom posted sequential increase in minutes of usage (MOU) on the back of decline in churn level and modest subscriber addition. For 1QFY2014, we expect the overall MOU profile for Bharti (excluding Africa), Idea and RCom to increase by ~1.0% each
Exhibit 3: RMS vs SMS of incumbents (as of 4QFY2013)

30 25 20
(%)
28.1 21.5 17.8 17.4 16.5 13.9 14.2 11.1 7.0 7.4 2.6 6.8
15 10 5 0 Bharti Vodafone
Exhibit 5: Trend in MOU per month per subscriber

500 455 450 431 433 435 417 460
Idea RMS
Rcom SMS
BSNL
Aircel
400
(min)
Source: TRAI, Angel Research
406 350 300 250 200 4QFY12 1QFY13 2QFY13 Bharti (ex-Africa) 3QFY13 Idea 4QFY13 RCom 227 228 236 379 379 359 291 271 384
410
Modest momentum in net subscriber addition

The country's total wireless subscriber base increased from 871.3mn in February 2013 to 879.0mn at the end of April 2013, registering an average monthly growth of 0.4%.
294
1QFY14E
46
Telecom
to 460min, 410min and 294min, respectively. This is on account of decent growth in subscriber addition as well as increase in network traffic of incumbent players due to subscribers acquired which were left out by new operators who were forced to either shut down or scale down their operations in February 2013 by the Supreme Court.

For 1QFY2014, we expect a modest revenue growth for the industry on the back of increase in MOU, inch up in voice ARPM and increasing share of VAS in revenues. Amongst the top three operators, we expect Bharti and Idea to post a revenue growth of 1.9% and 2.6% qoq, respectively. RCom is expected to post a 1.4% qoq growth in revenues. On the margins front, we expect the EBITDA margin of Idea and RCom to decline by 70bp and 27bp qoq to 26.9% and 30.6%, respectively, while EBITDA margin of Bharti is expected to inch up by 49bp qoq to 32.2%, aided by a low base effect. The rupee has fallen over 9% in the last three months to ~`60. Telecom firms which have foreign currency debt exposure are set to be hurt by the ongoing slide in the rupee but Bharti is better placed as it is repaying its debt from the cash flows of African operation. In Africa, a majority of Bharti's revenue is coming from Nigerian geography, the currency of which (Nigerian naira - NGN) has in fact appreciated in the last three months. So Bharti is not expected to undergo any negative impact due to the rupee's sharp depreciation. Due to translation of accounts into rupee denomination, the company might see translation losses on the interest repayments front but it will not incur any economic losses. Also, rupee's depreciation boosts Bharti's Africa subsidiary's USD revenue and EBITDA. On the other hand, RCom's interest and principal repayments are incurred from cash flows of domestic operations. As a result, given the rupee's sharp depreciation, the company will face significant forex losses. If the rupee remains at current levels, the losses incurred by RCom on account of interest and principal payments, might turn out to be actual economic losses. In our view, the telecom industry can improve structurally only after data revenues start picking up. We are currently neutral on the telecom sector and will refrain from taking any call till financial clarity on the stocks emerges. Bharti continues to be our preferred pick amongst telcos due to its low-cost integrated model (owned tower infrastructure), potential opportunity to scale up in Africa, established leadership in revenue and subscriber market share, relatively better KPIs and due to potential upside in its stock price on account of listing of Bharti Infratel.
ARPM to recover
During 1QFY2014, we expect ARPM for Bharti, Idea and RCom to be at `0.43/min, `0.42/min and `0.44/min, respectively.
Exhibit 6: Trend in ARPM

0.45 0.44 0.44 0.44
( ` /min)
0.44 0.43 0.43
0.44
0.44
0.43 0.43 0.42 0.42 0.41 0.41 0.40 4QFY12 1QFY13 2QFY13 3QFY13 4QFY13 1QFY14E 0.41 0.42 0.41 0.41 0.43 0.43 0.43 0.42
Bharti (ex-Africa)
Idea
RCom
ARPU to improve
For 1QFY2014, we expect the combination of increase in MOU and ARPM with a modest increase in subscriber base to push up the APRU of Bharti (excluding Africa), Idea as well as RCom by 2.1%, 2.0% and 1.0% qoq to `197/month, `171/month and `129/month, respectively.
Exhibit 7: Trend in ARPU per month

200 180 189 185 177 185 158 148 193 197
(` /month)
160 140 120 100 80
160
156
167
171
128 119 100 98 101
129
Bharti (ex-Africa)
Idea
RCom

Company Bharti Idea Rcom CMP (`) 291 141 118 Net Sales 1QFY14E 20,859 6,218 5,484 1.9 2.6 1.4 OPM (%) chg bp 49 (70) (27) 32.2 26.9 30.6 Net P rofit Profit 1QFY14E 784 314 68 54.2 1.9 EPS (`) % chg 54.2 1.9 2.1 1.0 0.3 EPS (`) FY13 6.0 3.1 3.2 FY14E 10.2 4.0 3.4 FY15E 14.6 4.9 5.3 FY13 48.6 46.2 36.4 P/E (x) FY14E 28.5 35.3 34.5 FY15E 19.9 28.6 22.4 Targ et rge (`) 321 % chg 1QFY14E % chg 1QFY14E
( ` cr)
Reco. Accum. Neutral Neutral
Source: Company, Angel Research; Note: Price as on June 28, 2013; Change is on a qoq basis
Analyst - Ankita Somani

47
Stock Watch
48
Stock W atch | July 3, 2013 Watch

Company Name Reco CMP (`) 142 136 256 57 20 228 1,917 221 8,948 106 121 1,420 1,662 103 967 1,538 198 22 281 33 90 82 1,323 575 232 53 360 62 350 70 409 873 669 1,070 71 115 50 Target Price (`) 232 285 27 2,096 170 141 1,820 154 1,103 1,822 222 27 347 35 123 1,778 761 270 61 422 69 436 79 455 752 1,454 80 141 53 Mkt Cap (` cr) 2,752 6,013 4,378 2,848 5,348 345 55,485 5,153 28,095 362 10,319 2,360 33,193 424 59,529 46,460 11,643 132 75,825 1,558 4,503 4,583 62,018 24,201 13,819 3,476 15,964 6,445 5,356 2,442 6,997 135,659 159,647 123,455 9,456 4,947 4,611 Sales (` cr) FY14E FY15E 1,657 10,298 3,418 13,852 14,038 834 23,005 6,198 9,821 5,325 7,053 1,525 25,298 7,972 45,254 47,923 28,442 1,426 215,016 7,715 6,705 5,195 19,237 16,287 14,459 4,291 12,044 8,406 5,554 3,255 2,802 8,573 27,560 26,119 9,416 6,077 8,027 1,906 11,310 3,892 15,487 16,442 965 26,460 6,793 11,394 5,974 8,061 1,742 27,665 8,754 51,197 55,002 31,493 1,624 237,404 8,584 7,535 5,834 23,261 18,707 16,176 4,724 13,495 9,546 6,156 3,623 3,274 10,142 33,766 30,474 10,392 6,845 9,204 OPM (%) FY14E FY15E 14.1 16.5 14.5 11.4 7.6 9.3 18.0 14.6 17.0 8.4 14.2 14.5 14.1 7.1 11.4 11.2 7.5 10.0 13.3 6.0 2.5 2.7 3.2 2.2 2.3 3.0 2.1 2.5 2.0 2.3 2.9 3.6 4.6 3.1 1.9 2.9 2.4 14.1 16.5 14.5 11.5 8.7 10.6 18.5 14.9 17.2 8.3 14.5 15.7 13.7 7.0 11.7 10.9 7.8 9.9 13.6 6.1 2.5 2.7 3.2 2.3 2.2 3.0 2.2 2.5 2.0 2.4 2.9 3.6 4.6 3.1 2.0 2.9 2.6 EPS (`) FY14E FY15E 7.7 20.5 18.5 12.8 1.0 17.3 118.8 14.5 373.5 40.8 7.8 88.4 110.3 37.5 61.2 106.6 12.5 4.9 36.2 5.0 27.6 19.2 133.8 120.6 55.2 12.1 76.7 12.6 94.9 22.0 49.8 37.0 36.3 86.2 19.8 35.2 12.5 8.9 23.2 20.4 14.9 2.2 27.1 139.7 17.3 438.7 48.5 9.1 109.5 140.0 44.0 70.2 121.4 14.8 6.8 41.5 5.8 33.2 23.1 161.5 144.6 68.2 12.9 86.4 18.7 104.9 24.9 56.6 43.6 45.1 99.5 22.8 41.0 19.7 PER (x) FY14E FY15E 18.4 6.6 13.9 4.4 19.2 13.2 16.1 15.2 24.0 2.6 15.5 16.1 15.1 2.8 15.8 14.4 15.8 4.5 7.8 6.6 3.3 4.3 9.9 4.8 4.2 4.4 4.7 4.9 3.7 3.2 8.2 23.6 18.4 12.4 3.6 3.3 4.0 15.9 5.9 12.6 3.8 9.0 8.4 13.7 12.8 20.4 2.2 13.3 13.0 11.9 2.3 13.8 12.7 13.4 3.2 6.8 5.7 2.7 3.5 8.2 4.0 3.4 4.1 4.2 3.3 3.3 2.8 7.2 20.0 14.8 10.7 3.1 2.8 2.5 P/BV (x) FY14E FY15E 3.8 1.1 3.3 0.7 1.7 1.2 5.9 2.0 4.3 0.4 2.6 2.3 5.5 0.4 3.3 2.2 3.9 0.4 1.7 1.1 0.5 0.6 1.6 0.7 0.6 0.7 0.7 0.6 0.5 0.5 1.0 4.9 3.7 1.7 0.4 0.5 0.4 3.2 0.9 2.7 0.6 1.5 1.1 4.6 1.8 3.7 0.4 2.3 2.0 4.3 0.4 2.8 1.9 3.1 0.4 1.4 1.0 0.4 0.5 1.4 0.6 0.5 0.6 0.6 0.5 0.5 0.4 0.9 4.3 3.1 1.5 0.4 0.4 0.3 RoE (%) FY14E FY15E 22.2 18.0 26.6 17.5 6.2 9.5 40.4 13.6 18.0 17.3 18.1 15.5 39.8 16.4 22.7 16.1 27.5 10.0 24.6 18.1 12.5 12.2 17.6 15.0 13.7 16.2 14.1 10.6 14.3 14.8 12.7 30.0 21.8 15.6 12.9 14.2 9.1 21.9 17.4 23.8 17.3 12.5 14.0 37.7 14.7 17.9 17.6 18.2 16.5 40.7 16.6 21.9 15.8 25.8 12.7 23.2 18.5 13.6 13.3 18.5 16.0 15.1 15.3 14.2 14.3 14.2 14.8 13.1 30.3 22.8 16.2 13.5 14.8 13.0 EV/Sales (x) FY14E FY15E 1.6 0.6 1.3 0.3 0.5 0.5 2.0 0.9 2.5 0.2 1.2 1.4 1.1 0.3 1.1 0.8 0.5 0.4 0.4 0.1 1.4 0.5 1.1 0.3 0.4 0.4 1.7 0.8 2.1 0.1 1.0 1.1 1.0 0.3 0.9 0.7 0.5 0.3 0.4 0.1 -
Agri / Agri Chemical Rallis Neutral United Phosphorus Buy Auto & Auto Ancillary Amara Raja Batteries Accumulate Apollo Tyres Neutral Ashok Leyland Buy Automotive Axle# Neutral Bajaj Auto Accumulate Bharat Forge Neutral Bosch India* Neutral CEAT Buy Exide Industries Buy FAG Bearings* Neutral Hero Motocorp Accumulate JK Tyre Buy Mahindra and Mahindra Accumulate Maruti Buy Motherson Sumi Accumulate Subros Buy Tata Motors Buy TVS Motor Accumulate Financials Allahabad Bank Buy Andhra Bank Neutral Axis Bank Buy Bank of Baroda Buy Bank of India Buy Bank of Maharashtra Buy Canara Bank Buy Central Bank Accumulate Corporation Bank Buy Dena Bank Accumulate Federal Bank Accumulate HDFC Neutral HDFC Bank Accumulate ICICI Bank Buy IDBI Bank Accumulate Indian Bank Buy IOB Accumulate
Please refer to important disclosures at the end of this report.
49

Company Name J & K Bank LIC Housing Finance Oriental Bank Punjab Natl.Bank South Ind.Bank St Bk of India Syndicate Bank UCO Bank Union Bank United Bank Vijaya Bank Yes Bank Capital Goods ABB* BGR Energy BHEL Blue Star Crompton Greaves Jyoti Structures KEC International Thermax Cement ACC Ambuja Cements India Cements J K Lakshmi Cement Madras Cements Shree Cement^ UltraTech Cement Construction Ashoka Buildcon Consolidated Co IRB Infra ITNL IVRCL Infra Buy Neutral Buy Buy Buy 190 9 96 146 15 255 157 230 29 1,000 174 3,194 2,837 462 1,928 1,715 3,997 7,444 5,673 2,234 1,824 4,312 8,041 5,892 21.0 2.4 45.5 27.4 8.1 21.5 6.2 46.4 28.9 8.4 18.0 (2.9) 15.7 29.8 1.4 22.2 (0.4) 16.6 32.1 1.8 10.6 6.1 4.9 10.4 8.6 5.8 4.6 8.2 0.9 0.4 0.9 0.7 0.2 0.8 0.4 0.8 0.6 0.2 10.2 15.2 14.9 2.0 10.1 14.5 14.2 2.6 1.9 0.5 3.2 2.5 0.5 1.9 0.4 3.5 2.5 0.5 Accumulate 1,223 Neutral Neutral Buy Neutral Neutral Neutral 187 57 97 228 4,668 1,876 1,361 143 22,970 28,822 1,746 1,140 5,433 16,262 51,435 11,820 10,171 4,929 2,247 4,234 6,607 21,947 13,254 11,762 5,434 2,742 4,788 7,520 25,049 19.3 23.5 17.4 21.0 23.9 27.5 23.8 20.9 24.6 17.1 23.1 24.0 26.7 23.8 74.9 10.2 8.9 17.8 18.5 322.8 106.1 93.1 12.2 10.9 21.8 22.8 374.3 119.8 16.3 18.3 6.4 5.4 12.4 14.5 17.7 13.1 15.3 5.2 4.4 10.0 12.5 15.7 2.8 3.0 0.5 0.8 2.0 3.6 2.9 2.5 2.7 0.5 0.7 1.7 2.9 2.5 18.1 17.1 7.7 15.5 17.2 27.8 17.7 20.3 18.7 9.0 16.3 18.2 25.6 17.3 1.7 2.3 0.7 0.4 1.6 1.8 2.4 1.4 1.9 0.6 0.8 1.3 1.4 2.1 Sell Neutral Neutral Buy Buy Neutral Buy Neutral 611 130 174 163 87 20 32 597 461 230 117 49 12,944 937 42,662 1,463 5,600 167 827 7,108 8,073 3,756 44,054 2,896 13,446 3,360 7,709 5,780 9,052 4,569 39,326 3,087 15,272 3,597 8,399 6,430 5.5 11.3 16.8 5.6 6.7 9.7 6.7 9.5 6.9 10.7 15.1 6.1 7.6 9.8 7.2 9.6 11.5 21.7 20.6 9.3 6.6 7.3 6.1 29.8 16.9 28.3 16.1 11.7 8.9 10.2 8.5 33.0 53.0 6.0 8.5 17.5 13.2 2.8 5.3 20.0 36.1 4.6 10.8 13.9 9.8 2.0 3.8 18.1 4.8 0.9 1.8 2.9 1.4 0.6 0.7 3.4 4.6 0.8 1.7 2.5 1.3 0.5 0.6 3.0 9.3 22.3 23.5 17.5 11.4 8.8 20.2 17.9 13.1 23.4 16.1 19.1 14.0 11.4 23.0 17.4 1.6 0.8 0.8 0.6 0.5 0.3 0.3 1.0 1.4 0.7 0.9 0.5 0.5 0.3 0.3 0.9 Reco CMP (`) 255 207 651 23 1,954 109 62 186 49 45 461 Target Price (`) 1,315 298 236 883 24 2,518 136 243 57 49 489 Mkt Cap (` cr) 5,950 12,856 6,026 23,008 3,076 133,633 6,567 4,651 11,115 1,821 2,232 16,563 Sales (` cr) FY14E FY15E 3,101 2,113 6,790 20,914 1,795 66,417 7,125 6,545 11,101 3,386 2,714 4,451 3,426 2,525 7,676 23,879 2,054 76,734 8,188 6,859 12,543 3,884 3,046 5,526 OPM (%) FY14E FY15E 3.6 2.3 2.6 3.3 2.8 3.0 2.6 2.7 2.6 2.3 1.9 2.8 3.6 2.3 2.7 3.4 2.8 3.0 2.6 2.6 2.6 2.5 2.0 2.8 EPS (`) FY14E FY15E 215.5 25.4 55.7 152.4 4.0 227.4 27.4 14.8 39.3 12.4 9.2 43.0 210.2 29.2 62.3 176.2 4.3 284.8 27.9 15.7 47.4 20.0 10.8 49.7 PER (x) FY14E FY15E 5.7 10.0 3.7 4.3 5.8 8.6 4.0 4.2 4.7 3.9 4.9 10.7 5.8 8.7 3.3 3.7 5.3 6.9 3.9 3.9 3.9 2.4 4.2 9.3 P/BV (x) FY14E FY15E 1.1 1.8 0.5 0.7 1.0 1.2 0.6 0.8 0.7 0.4 0.5 2.3 0.9 1.5 0.4 0.6 0.9 1.1 0.5 0.6 0.6 0.4 0.5 1.9 RoE (%) FY14E FY15E 19.9 18.4 12.9 16.2 17.2 15.4 16.2 14.3 14.1 10.1 10.7 23.9 16.8 18.3 13.1 16.5 16.5 17.0 14.6 13.6 15.2 14.8 11.6 22.8 EV/Sales (x) FY14E FY15E -
Accumulate 1,227 Buy Accumulate Buy Accumulate Buy Buy Neutral Buy Buy Accumulate Accumulate
50

Company Name Jaiprakash Asso. Larsen & Toubro Nagarjuna Const. Punj Lloyd Sadbhav Engg. Simplex Infra Unity Infra FMCG Asian Paints Britannia Colgate Dabur India GlaxoSmith Con* Godrej Consumer HUL ITC Marico Nestle* Tata Global IT HCL Tech^ Hexaware* Infosys Infotech Enterprises KPIT Cummins Mindtree Mphasis& NIIT Persistent TCS Tech Mahindra Wipro Media D B Corp HT Media Jagran Prakashan PVR Sun TV Network Reco Buy Buy Buy Neutral Buy Buy Buy Neutral Neutral Neutral Neutral Neutral Neutral Neutral Neutral Neutral Neutral Accumulate CMP (`) 54 1,404 24 35 95 78 25 4,630 672 1,353 156 5,140 816 585 324 209 4,867 134 Target Price (`) 90 1,761 42 139 131 41 145 870 105 190 144 925 391 30 565 1,640 1,250 389 290 117 107 Mkt Cap (` cr) 11,883 86,528 625 1,157 1,432 385 189 44,411 8,041 18,406 27,137 21,615 27,767 126,515 256,335 13,457 46,926 8,311 54,067 2,589 143,171 1,970 2,355 3,479 7,805 310 1,996 297,184 13,608 86,185 4,401 2,281 2,702 1,276 14,975 Sales (` cr) FY14E FY15E 14,850 68,946 6,167 12,954 2,462 6,308 2,146 12,332 6,417 3,588 7,183 3,617 7,801 29,167 34,294 5,273 9,447 8,069 29,424 2,158 45,153 2,037 2,614 2,707 6,372 1,144 1,505 74,795 8,102 41,659 1,750 2,205 1,664 1,359 2,287 15,631 78,040 6,945 14,740 2,731 7,033 2,339 14,524 7,502 4,130 8,340 4,259 9,017 33,164 39,991 6,044 10,968 8,957 32,837 2,374 48,993 2,254 2,923 2,978 6,852 1,267 1,677 84,926 8,709 45,137 1,925 2,380 1,825 1,540 2,551 OPM (%) FY14E FY15E 24.9 10.5 8.0 9.8 10.6 9.4 13.7 16.5 6.1 20.5 16.8 16.1 16.2 13.6 36.8 14.8 22.1 9.8 22.6 19.6 27.6 17.9 17.2 20.3 18.0 9.0 25.9 28.8 19.7 21.2 25.1 15.1 20.9 17.3 69.7 25.0 10.5 8.2 9.8 10.6 9.6 13.8 16.3 6.2 20.9 16.8 16.4 15.9 13.7 37.0 14.9 22.3 9.7 22.0 19.8 26.8 17.7 16.7 20.2 18.2 9.1 26.2 28.7 19.1 21.4 26.6 15.6 23.0 17.4 70.4 EPS (`) FY14E FY15E 2.5 77.9 2.7 0.5 5.9 11.9 11.0 141.5 21.3 44.2 5.4 122.2 25.1 17.1 11.3 7.3 127.5 7.8 59.5 10.7 170.7 21.2 13.2 87.4 38.0 4.3 53.6 82.2 93.7 27.7 14.2 8.3 6.4 17.2 20.0 2.9 88.3 3.6 0.9 6.7 18.7 11.5 162.7 25.5 51.7 6.3 148.7 29.7 18.4 13.3 8.7 154.1 8.6 63.3 11.7 187.5 22.6 14.4 97.0 43.5 5.4 59.7 91.5 101.5 29.9 16.8 9.1 7.8 21.5 23.3 PER (x) FY14E FY15E 21.2 18.0 9.1 68.7 16.1 6.6 2.3 32.7 31.6 30.6 29.0 42.1 32.5 34.2 28.8 28.8 38.2 17.2 13.0 8.1 14.6 8.3 9.3 9.6 9.8 4.4 9.3 18.5 11.3 12.7 16.9 11.7 12.7 18.7 19.0 18.8 15.9 6.7 37.4 14.2 4.2 2.2 28.5 26.4 26.2 24.7 34.6 27.5 31.8 24.3 24.1 31.6 15.6 12.3 7.4 13.3 7.8 8.5 8.6 8.5 3.5 8.4 16.6 10.4 11.7 14.3 10.7 10.5 15.0 16.3 P/BV (x) FY14E FY15E 0.8 2.6 0.2 0.4 1.6 0.3 0.2 10.3 10.3 29.8 11.3 13.1 7.0 32.9 9.5 5.6 19.1 2.1 3.2 1.8 3.0 1.3 1.7 2.0 1.4 0.4 1.6 5.7 2.1 2.6 3.7 1.3 2.6 1.9 4.7 0.8 2.3 0.2 0.4 1.4 0.3 0.2 8.2 8.2 21.7 8.8 10.5 5.8 23.8 7.7 4.6 13.8 2.0 2.6 1.6 2.6 1.1 1.4 1.6 1.2 0.4 1.4 4.7 1.7 2.2 3.1 1.2 2.3 1.7 4.1 RoE (%) FY14E FY15E 4.2 15.5 2.7 0.6 10.2 4.5 9.3 35.4 35.7 108.6 41.5 34.1 24.8 113.4 36.1 21.4 57.7 9.5 24.6 23.0 20.8 15.2 18.5 21.8 14.2 10.3 17.7 30.8 21.2 20.5 23.4 11.5 21.0 10.3 26.4 4.7 15.6 3.6 1.1 10.5 6.7 9.0 32.2 34.6 96.2 40.1 33.7 24.2 87.0 34.9 21.0 50.7 9.7 21.7 22.3 19.5 14.0 16.7 19.5 14.2 11.9 16.7 28.1 18.9 19.0 23.4 11.4 23.1 12.0 27.3 EV/Sales (x) FY14E FY15E 2.6 1.4 0.5 0.5 0.9 0.5 0.6 3.5 1.2 5.0 3.7 5.5 3.7 4.2 7.1 2.6 5.0 1.0 1.7 1.0 2.5 0.6 0.9 1.0 0.7 0.1 0.9 3.7 1.7 1.6 2.4 0.7 1.7 1.4 6.2 2.6 1.2 0.4 0.5 0.8 0.5 0.6 2.9 1.0 4.3 3.2 4.6 3.1 3.7 6.1 2.2 4.2 0.9 1.4 0.9 2.2 0.5 0.7 0.8 0.6 (0.0) 0.7 3.2 1.5 1.3 2.1 0.6 1.6 1.2 5.4
Accumulate 776 Buy 87 Neutral 2,493 Accumulate 177 Buy 122 Accumulate 837 Accumulate 371 Buy 19 Accumulate 499 Accumulate 1,518 Buy 1,059 Accumulate 350 Buy Buy Buy Neutral Neutral 240 97 81 322 380
51

Company Name Metal Bhushan Steel Coal India Electrosteel Castings GMDC Hind. Zinc Hindalco JSW Steel MOIL Monnet Ispat Nalco NMDC SAIL Sesa Goa Sterlite Inds Tata Steel Sarda Prakash Industries Godawari Power Oil & Gas Cairn India GAIL ONGC Reliance Industries Gujarat Gas* Indraprastha Gas Petronet LNG Gujarat State Petronet Pharmaceuticals Alembic Pharma Aurobindo Pharma Aventis* Cadila Healthcare Cipla Dr Reddy's Dishman Pharma GSK Pharma* Indoco Remedies Ipca labs Lupin Ranbaxy* Sun Pharma Reco CMP (`) 464 303 13 127 102 100 657 200 125 29 106 51 143 84 274 95 29 74 290 313 330 862 190 268 125 57 133 181 2,421 773 391 2,215 57 2,339 64 658 780 310 1,009 Target Price (`) 345 18 193 145 248 193 156 166 100 378 153 40 102 345 387 167 271 929 477 2,535 168 78 877 Mkt Cap (` cr) 10,519 191,354 420 4,027 43,288 19,098 14,669 3,353 797 7,448 41,927 20,919 12,411 28,062 26,592 341 387 241 55,303 39,703 282,417 278,329 2,443 3,758 9,356 3,227 2,499 5,259 5,575 15,836 31,430 37,644 461 19,810 588 8,296 34,906 13,114 104,277 Sales (` cr) FY14E FY15E 13,794 72,174 1,976 1,920 12,358 89,352 47,613 1,010 2,326 7,656 10,461 44,060 3,742 44,462 140,917 1,494 2,615 2,344 16,482 52,102 170,063 397,546 3,707 3,700 40,356 1,171 1,736 6,641 1,682 7,280 9,274 13,377 1,394 2,854 760 3,243 11,641 11,400 13,509 17,088 76,311 2,017 2,239 13,659 93,672 48,385 1,046 2,709 7,988 11,892 54,786 4,426 45,568 151,537 1,568 2,776 2,509 16,228 52,876 198,461 421,695 3,850 4,218 40,872 1,287 2,008 7,637 1,917 8,640 10,796 15,350 1,534 3,145 922 3,826 13,933 12,060 15,846 OPM (%) FY14E FY15E 30.9 33.3 11.8 53.1 51.4 8.8 17.4 46.5 21.4 13.1 71.6 9.4 32.9 23.2 9.7 19.1 12.1 14.9 69.4 15.7 36.2 9.4 11.7 23.4 5.8 91.9 17.1 15.9 16.6 15.5 23.1 20.4 22.5 28.6 15.3 20.5 21.3 10.5 41.0 33.5 28.4 12.7 52.9 51.6 9.2 18.7 47.6 23.1 13.5 72.6 11.5 32.8 24.7 10.8 20.3 12.0 15.4 53.3 16.1 38.3 8.6 12.4 22.8 6.4 91.9 18.9 15.9 16.6 15.7 23.1 20.1 22.4 28.6 15.3 21.5 21.3 12.5 41.0 EPS (`) FY14E FY15E 49.3 28.4 1.3 21.6 16.0 13.4 81.8 26.8 33.3 2.6 16.2 5.2 30.0 18.1 30.9 31.3 9.8 38.7 53.3 34.1 34.7 75.0 23.7 26.7 15.0 10.1 10.7 17.3 92.4 38.3 21.0 112.3 15.0 76.6 6.1 36.0 34.8 17.5 33.0 66.6 30.9 2.6 25.0 17.6 15.0 109.6 28.8 43.1 2.6 17.6 7.2 29.8 20.2 47.6 36.5 10.4 47.0 49.6 35.7 41.9 76.4 25.7 30.4 16.7 11.3 13.9 20.6 99.1 46.5 23.8 126.8 16.8 83.3 7.8 44.4 41.8 22.5 39.8 PER (x) FY14E FY15E 9.4 10.7 10.2 5.9 6.4 7.5 8.0 7.4 3.8 11.3 6.5 9.7 4.8 4.6 8.9 3.0 2.9 1.9 5.4 9.2 9.5 11.5 8.0 10.1 8.3 5.7 12.4 10.4 26.2 20.2 18.6 19.7 3.8 30.5 10.5 18.3 22.4 17.7 30.6 7.0 9.8 4.9 5.1 5.8 6.7 6.0 6.9 2.9 11.0 6.0 7.1 4.8 4.1 5.8 2.6 2.8 1.6 5.8 8.8 7.9 11.3 7.4 8.8 7.5 5.1 9.5 8.8 24.4 16.6 16.4 17.5 3.4 28.1 8.2 14.8 18.7 13.8 25.3 P/BV (x) FY14E FY15E 1.0 2.9 0.1 1.3 1.2 0.5 0.8 1.1 0.3 0.6 1.4 0.5 0.6 0.5 0.8 0.3 0.2 0.2 0.8 1.4 1.6 1.2 2.2 2.1 1.7 0.9 3.9 1.7 3.7 4.3 3.0 4.2 0.4 9.1 1.3 4.3 5.2 2.8 6.2 0.9 2.5 0.0 1.1 1.0 0.5 0.7 1.0 0.3 0.6 1.2 0.5 0.6 0.4 0.7 0.3 0.2 0.2 0.8 1.3 1.4 1.1 2.0 1.8 1.5 0.8 2.9 1.4 3.7 3.6 2.6 3.5 0.4 8.3 1.1 3.4 4.1 2.5 5.1 RoE (%) FY14E FY15E 11.3 37.6 2.6 25.1 19.4 7.3 9.0 15.4 8.3 5.4 22.1 5.2 14.3 11.3 9.6 11.8 6.5 12.3 16.5 16.4 18.3 11.5 29.6 22.7 22.9 17.3 35.0 19.5 15.7 23.5 17.2 23.5 11.0 31.1 12.9 26.0 26.2 17.0 22.0 13.5 36.2 5.2 23.8 18.4 7.6 9.6 14.7 9.9 5.5 21.4 6.8 12.5 11.4 13.4 12.4 6.5 12.8 13.6 15.2 19.4 11.7 28.2 21.8 21.5 16.8 34.7 18.9 16.7 23.5 16.8 21.8 11.2 31.0 14.7 25.4 24.8 19.1 22.0 EV/Sales (x) FY14E FY15E 2.4 1.8 0.5 1.6 1.2 0.6 0.7 0.9 1.4 0.4 2.2 0.7 4.1 0.6 0.6 0.6 0.4 0.5 2.0 0.3 1.4 0.7 0.5 1.1 0.3 1.5 1.2 2.9 2.5 3.1 2.9 1.0 6.1 1.0 2.7 3.0 1.1 7.2 1.9 1.7 0.1 1.2 0.7 0.5 0.6 0.7 1.0 0.4 2.0 0.6 3.4 0.5 0.5 0.5 0.3 0.4 1.7 0.2 1.0 0.6 0.5 0.9 0.3 1.3 1.1 2.4 2.1 2.6 2.5 0.8 5.4 0.8 2.3 2.5 1.0 5.9
Neutral Accumulate Buy Buy Buy Neutral Neutral Buy Buy Neutral Buy Neutral Buy Buy Buy Buy Buy Buy Buy Neutral Buy Neutral Neutral Neutral Buy Neutral Neutral Buy Neutral Buy Buy Accumulate Buy Neutral Buy Neutral Accumulate Neutral Neutral
52

Company Name Power GIPCL NTPC Real Estate DLF MLIFE Telecom Bharti Airtel Idea Cellular Rcom Others Abbott India* Bajaj Electricals Cera Sanitaryware Cravatex Finolex Cables Force Motors Goodyear India* Hitachi Honeywell Automation* IFB Agro ITD Cementation Jyothy Laboratories MRF Page Industries Relaxo Footwears Siyaram Silk Mills Styrolution ABS India* TAJ GVK Tata Sponge Iron TTK Healthcare Tree House TVS Srichakra United Spirits Vesuvius India* Reco CMP (`) 69 144 181 421 291 141 118 1,464 172 496 305 49 270 301 125 2,525 143 153 180 12,928 4,098 796 230 395 60 283 501 242 176 2,171 366 Target Price (`) 78 163 236 476 321 1,659 237 562 459 68 437 345 177 198 234 199 14,416 4,611 343 617 108 371 686 297 230 439 Mkt Cap (` cr) 1,038 118,487 32,187 1,720 116,484 46,882 24,376 3,110 1,714 627 79 756 351 694 340 2,233 128 176 2,988 5,483 4,570 955 215 695 375 435 389 869 135 31,551 743 Sales (` cr) FY14E FY15E 1,444 76,734 8,293 888 85,489 25,640 22,751 1,863 3,885 630 248 2,563 2,304 1,458 1,053 1,842 495 1,430 1,220 11,799 1,057 1,146 1,158 1,068 300 814 435 153 1,591 12,294 600 1,482 86,680 9,622 1,002 94,229 28,459 24,628 2,081 4,472 795 284 2,899 2,649 1,542 1,169 2,131 651 1,573 1,476 12,587 1,282 1,333 1,322 1,223 319 849 516 194 1,720 14,162 638 OPM (%) FY14E FY15E 33.4 24.5 36.5 30.6 31.9 26.9 30.9 11.8 5.4 14.4 6.5 9.8 3.1 8.3 6.3 7.7 12.7 11.1 13.3 14.1 19.4 10.9 11.9 9.6 35.8 17.0 6.2 53.0 6.1 12.0 20.1 33.0 24.3 36.1 30.6 31.9 27.2 31.3 12.4 7.2 13.6 7.2 9.8 3.6 9.0 7.1 7.8 12.9 11.0 13.6 13.5 19.6 11.4 11.9 9.6 36.2 17.6 7.1 52.8 6.4 12.0 19.4 EPS (`) FY14E FY15E 13.7 13.4 5.7 38.8 10.2 4.0 3.4 71.2 10.9 42.8 27.1 10.1 28.0 32.3 13.8 112.4 29.3 19.1 5.5 1,792.4 124.8 45.9 72.9 38.1 7.9 64.6 24.3 12.4 24.5 42.1 35.7 14.8 14.5 6.7 43.4 14.6 4.9 5.3 82.9 19.7 51.1 38.2 11.3 43.7 37.0 17.7 132.4 39.5 26.9 9.0 1,802.0 153.7 60.9 85.7 44.1 9.1 69.2 33.3 15.6 38.8 67.7 36.5 PER (x) FY14E FY15E 5.0 10.7 31.7 10.8 28.5 35.3 34.5 20.6 15.7 11.6 11.2 4.9 9.6 9.3 9.1 22.5 4.9 8.0 32.6 7.2 32.8 17.3 3.2 10.4 7.6 4.4 20.6 19.5 7.2 51.6 10.3 4.6 9.9 26.8 9.7 19.9 28.6 22.4 17.6 8.7 9.7 8.0 4.4 6.2 8.1 7.1 19.1 3.6 5.7 19.9 7.2 26.7 13.1 2.7 9.0 6.6 4.1 15.1 15.4 4.6 32.1 10.0 P/BV (x) FY14E FY15E 0.6 1.3 1.1 1.2 2.1 3.0 0.7 4.1 2.1 2.8 1.8 0.7 0.3 1.7 1.3 2.8 0.7 0.4 3.8 1.5 16.3 3.6 0.6 1.4 1.0 0.6 3.4 2.3 0.8 3.6 1.8 0.5 1.2 1.1 1.1 1.9 2.7 0.7 3.5 1.8 2.2 1.5 0.6 0.3 1.5 1.1 2.5 0.6 0.4 3.3 1.3 12.0 2.9 0.5 1.2 0.9 0.5 2.9 2.0 0.7 3.3 1.6 RoE (%) FY14E FY15E 12.3 12.8 3.7 11.2 7.2 8.4 2.1 21.6 13.5 26.6 15.7 14.3 3.1 19.5 15.0 13.3 15.4 5.3 12.1 23.5 56.3 23.0 19.8 14.4 13.9 14.5 17.6 11.8 10.9 9.1 19.4 12.0 12.7 4.1 11.4 9.4 9.4 3.1 21.5 20.3 25.2 18.5 13.8 4.7 19.3 16.7 13.8 17.6 7.1 17.7 19.2 51.8 24.6 19.6 14.7 14.4 13.8 20.8 13.1 15.9 10.7 17.1 EV/Sales (x) FY14E FY15E 0.8 2.2 6.0 2.5 2.0 2.2 2.7 1.4 0.4 1.0 0.5 0.2 0.1 0.3 0.4 1.1 0.4 0.5 2.8 0.5 4.4 1.0 0.4 0.6 1.6 0.1 0.7 5.9 0.3 2.9 1.0 0.5 2.1 5.0 2.2 1.8 2.0 2.3 1.1 0.4 0.8 0.4 0.2 0.1 0.2 0.3 0.9 0.3 0.5 2.2 0.5 3.6 0.8 0.4 0.5 1.3 (0.0) 0.6 4.5 0.2 2.5 0.9
Accumulate Accumulate Buy Accumulate Accumulate Neutral Neutral Accumulate Buy Accumulate Buy Buy Buy Accumulate Buy Neutral Buy Buy Accumulate Accumulate Accumulate Neutral Buy Buy Buy Buy Buy Buy Buy Neutral Buy
Source: Company, Angel Research, Note: *December year end; #September year end; &October year end; ^June year end; Price as on June 28, 2012
53
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Ratings (Returns) :
Buy (> 15%) Reduce (-5% to -15%)
Accumulate (5% to 15%) Sell (< -15%)
Neutral (-5 to 5%)
54

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Research Team Fundamental: Sarabjit Kour Nangra Vaibhav Agrawal Bhavesh Chauhan Viral Shah Sharan Lillaney V Srinivasan Yaresh Kothari Ankita Somani Sourabh Taparia Bhupali Gursale Vinay Rachh Amit Patil Twinkle Gosar Tejashwini Kumari Akshay Narang Harshal Patkar Technicals: Shardul Kulkarni Sameet Chavan Sacchitanand Uttekar Derivatives: Siddarth Bhamre Institutional Sales Team: Mayuresh Joshi Meenakshi Chavan Gaurang Tisani Akshay Shah Production Team: Tejas Vahalia Dilip Patel Research Editor Production Incharge tejas.vahalia@angelbroking.com dilipm.patel@angelbroking.com VP - Institutional Sales Dealer Dealer Sr. Executive mayuresh.joshi@angelbroking.com meenakshis.chavan@angelbroking.com gaurangp.tisani@angelbroking.com akshayr.shah@angelbroking.com Head - Derivatives siddarth.bhamre@angelbroking.com Sr. Technical Analyst Technical Analyst Technical Analyst shardul.kulkarni@angelbroking.com sameet.chavan@angelbroking.com sacchitanand.uttekar@angelbroking.com VP-Research, Pharmaceutical VP-Research, Banking Sr. Analyst (Metals & Mining) Sr. Analyst (Infrastructure) Analyst (Mid-cap) Analyst (Cement, FMCG) Analyst (Automobile) Analyst (IT, Telecom) Analyst (Banking) Economist Research Associate Research Associate Research Associate Research Associate Research Associate Research Associate sarabjit@angelbroking.com vaibhav.agrawal@angelbroking.com bhaveshu.chauhan@angelbroking.com viralk.shah@angelbroking.com sharanb.lillaney@angelbroking.com v.srinivasan@angelbroking.com yareshb.kothari@angelbroking.com ankita.somani@angelbroking.com sourabh.taparia@angelbroking.com bhupali.gursale@angelbroking.com vinay.rachh@angelbroking.com amit.patil@angelbroking.com gosar.twinkle@angelbroking.com tejashwini.kumari@angelbroking.com akshay.narang@angelbroking.com harshal.patkar@angelbroking.com
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1QFY2014 Results Preview | July 3, 2013

1QFY2014 Results Preview | July 3, 2013

Exhibit 1: 1QFY2014 Angel coverage performance estimates

1QFY2014 Results Preview | July 3, 2013

Exhibit 3: Sensex companies' 1QFY2014 performance estimates

Refer to important Disclosures at the end of the report

1QFY2014 Results Preview | July 3, 2013

Strategy Sectoral Analysis

FMCG - Healthy revenue performance to drive earnings

Infrastructure - Challenging environment to weigh on earnings

Banking - New Private Banks to continue their outperformance

Capital goods - Headwinds continue to affect earnings

Cement - Lower realization to weigh on earnings

1QFY2014 Results Preview | July 3, 2013

Telecom - Expect modest revenue growth

Metals - Earnings to remain under pressure

Fed signals U.S economy on the mend, reduction in asset purchases

Oil and Gas - ONGC to weigh on earnings performance

Pharmaceuticals - Robust revenue growth but margins under pressure

1QFY2014 Results Preview | July 3, 2013

FII net equity inflows

FII net debt inflows

Source: SEBI, Angel Research

CAD comes in at 4.8% for FY2013, expected to moderate going ahead

Exhibit 5: Majority of stock markets tumbled in 2013YTD

Source: Bloomberg, Angel Research

Exhibit 6: As USD gains strength, most currencies depreciate

5.0 0.0 (5.0) (10.0) (15.0)

Source: Bloomberg, Angel Research

Refer to important Disclosures at the end of the report

1QFY2014 Results Preview | July 3, 2013

Exhibit 9: Much lower trade deficit ex oil and gold

(% of GDP) 7.0 6.0 5.0 4.0 3.0 2.0 1.0 0.0

Current account deficit

Current account deficit/GDP (RHS)

Source: RBI, Angel Research

Source: RBI, Angel Research

C. Errors and omissions D. Overall Balance Source: RBI, Angel Research

Refer to important Disclosures at the end of the report

1QFY2014 Results Preview | July 3, 2013

Strategy INR depreciation to be stemmed

Moderation in inflation to within comfort levels is a much needed breather

Exhibit 11: Sharp INR depreciation since May 2013

Exhibit 13: WPI and core inflation in RBI's comfort zone

Source: RBI, Angel Research

Source: Office of Economic Advisor, Angel Research

Exhibit 12: Key monetary policy rates

Exhibit 14: Moderation in CPI and WPI inflation

Source: RBI, Angel Research

1QFY2014 Results Preview | July 3, 2013

Refer to important Disclosures at the end of the report

1QFY2014 Results Preview | July 3, 2013

Strategy Outlook and Valuation

Exhibit 16: Sensex EPS growth over FY2013-15

Exhibit 17: Sensex one-year forward P/E

Jun-09 15 year Avg

Jun-11 5 year Avg

Sensex 1 year forward P/E

Source: Angel Research

Source: Angel Research

Refer to important Disclosures at the end of the report

1QFY2014 Results Preview | July 3, 2013

1QFY2014 Sectoral Outlook

Refer to important Disclosures at the end of the report