Asia Pacific Equity Research

20 February 2006

Bharat PE Thik hai

Indian Market Strategy
India remains a weight of money story. Local savers are shifting to equities and the market continues to benefit from international flows into emerging equity markets. We already have an Indian set PE, OK (thik hai). Our Sensex Index target set in October 2005 was hit on 6 February. We are increasing the December 2006 target to 11000. This is based on the market sustaining current forward PE of 17 (MSCI India). We rate the market as a neutral relative to Asian and emerging markets. Our Bharat PE theme remains the key driver of our positive view on Indian equities. Simply it is still rational for Indian savers to switch from low yielding cash and bonds into equities. Locals are the marginal buyers setting the valuation. We suspect that India will continue to benefit from demand for emerging market equities. But India may get less of those flows than other emerging markets due to high relative valuations. The key risks to the market are high valuations and a deteriorating current deficit. Both make the market more vulnerable to a decline in risk appetite than other Asian and emerging markets. We recommend that investors manage risk in this liquidity driven expensive market by investing in liquid large caps such as BHEL, ACC, Infosys, HDFC, L&T, ITC, and Bajaj Auto.
Table 1: Indian top picks high RoEs and PEs
Ticker Bajaj Auto ITC HDFC Bharat Heavy Electricals Ltd Larsen & Toubro Infosys Technologies Associated Cement Companies BJAT.BO ITC.BO HDFC.BO BHEL.BO LART.BO INFY.BO ACC.BO Rating OW OW OW OW N OW OW PER FY06 FY07 22.4 26.4 23.0 30.2 33.7 30.7 21.2 17.8 23.2 19.0 22.6 26.3 23.3 17.2 DY FY06 (%) 1.5 1.2 1.5 0.6 0.9 0.5 1.7 ROE FY06 (%) 22.5 24.3 28.5 20.9 23.8 32.5 26.2

Asia Pacific Market Strategy Adrian Mowat

(852) 2800-8599 adrian.mowat@jpmorgan.com

Joanne Goh
(65) 6882-2450 joanne.sc.goh@jpmorgan.com

Figure 1: Sensex performance

11000 8000 5000 2000 Jan-03
Source: Datastream

Jan-04

Jan-05

Jan-06

Figure 2: MSCI India Relative to MSCI Asia Pac ex Japan

150 125 100 75 Jan-03 Jan-04 Jan-05 Jan-06

Source: MSCI, Datastream

Figure 3: MSCI India Relative to MSCI EM Asia

150 125 100 75 Jan-03 Jan-04 Jan-05 Jan-06

Source JPMorgan, DataStream, MSCI, fiscal years to March

Source: MSCI, Datastream

J.P. Morgan Securities (Asia Pacific) Limited

See page 14 for analyst certification and important disclosures, including investment banking relationships. JPMorgan does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. Customers of JPMorgan in the United States can receive independent, third-party research on the company or companies covered in this report, at no cost to them, where such research is available. Customers can access this independent research at www.morganmarkets.com or can call 1-800-477-0406 toll free to request a copy of this research.

Adrian Mowat (852) 2800-8599 adrian.mowat@jpmorgan.com

Asia Pacific Equity Research 20 February 2006

Figure 1: 12 month forward PE

Start with the risks

Our base case is that economic and profit growth remains robust in India. This supports current valuations. Local investors confidence continues to build sustaining the secular shift from cash and bonds into equities. Investors should focus on two key risks: 1. High valuations 2. Deteriorating current account deficit Other risks include: 3. Rapid rise in property prices in Mumbai and Delhi 4. Agricultural output -a poor monsoon could lead to the import of agricultural staples adding to the pressure on the current account. Poor rural income growth would also increase the risk of political change. Politics is likely to increase market volatility. There are five state elections in 2006. In 2004 the BJP lost the general election to the surprise of the international investor and business community against the backdrop of a strong economy. Be prepared for the government to pursue populist policies.
State Assam Kerala Pondicherry Tamilnadu West Bengal Ruling Party Indian National Congress (INC) United Democratic Front (Congress led alliance ) INC + Tamil Manila Cong. AIDMK CPI State election schedule) May May May Apr-May Apr-May

India Ho ng Ko ng A ustralia Singapo re A P ex Japan M alaysia China Taiwan P hilippines Thailand Indo nesia Ko rea

9.0
Source: MSCI, IBES

12.0

15.0

18.0

Figure 2: Valuations say sell - JPMorgans CVIs

Poland Philippine Malay sia Singapore Taiw an Hungary Indonesia Australia China Thailand Hongkong Brazil Turkey Czech Mex ico S. Africa India Korea Russia -1.5
Cheap

5.

Table 2: State elections in 2006

-1.0

-0.5

0.0

0.5

1.0

1.5

2.0

2.5

Expensive

Source: JPMorgan. Updated as of 10 February, CVI composite valuations indicators

Source: Election Commission of India Note Kerala and West Bengal elections would see INC in direct confrontation with its UPA alliance.

See Table 11: Indian Valuations and Composite Valuation Indicator Calculation page 17 for details of all time highs and lows in MSCI India valuations.
Table 3: India may get less of the flows - BRIC Relative Valuations
12 M Fwd PE Brazil Russia China India 7.9 11.2 13.1 17.1 2006 Div Yld (%) 5.6 1.4 2.4 1.4 2006 RoE (%) 27.9 14.3 16.7 22.0 2003-2006 EPS growth (%) 20.8 14.0 20.2 19.1

High Valuations
India is the most expensive market in Asia ex Japan based on either 12 month forward PE or dividend yield. Our composite valuation indicators are one standard deviation expensive. Bears on India have been incorrectly selling the market based on valuations for some time. Our base case is that the market will re-rate and we have therefore held our nerve while the quant signals have indicated that it is time to sell.

Source: DataStream, JPMorgan calculations BRIC = Brazil, Russia, India and China

Adrian Mowat (852) 2800-8599 adrian.mowat@jpmorgan.com

Asia Pacific Equity Research 20 February 2006

Current Account Deficit

Indias current account deficit continues to deteriorate. While capital flows remain strong this is manageable. But it does make the market vulnerable to a classic emerging market crisis of confidence. If international appetite for Indian investments slows then the currency should weaken and in response interest rates rise. The rise in interest rates would in turn slow economic growth and thus make the country less attractive for investors which would potentially result in a further decline in capital inflow, a weaker currency and yet higher rates.
Figure 3: Long term chart of 12M rolling trade deficit
US$ bn 60 40 20 0 -20 -40 -60 Dec-91 Dec-93 Dec-95 Dec-97 Dec-99 Dec-01 Dec-03 BoP Merchandise BoP Current A/C BoP Inv isibles
Source: JPMorgan economics

Figure 4: JPMorgan is forecasting a weaker Rupee

INR/US$
50 45 40 35 30 94 95 96 97 98 99 00 01 02 03 04 05 06 47.5

Source: DataStream, JPMorgan economics. JPMorgan forecast of 47.5 Rupees /US$ for end of 2006

Investors should watch foreign exchange reserves, local interest rates and market momentum. Domestic monetary conditions are tightening with banks now net borrowers from the Reserve Bank of India. The further deterioration in any of these three indicators is a potential sell signal in our view.

Adrian Mowat (852) 2800-8599 adrian.mowat@jpmorgan.com

Asia Pacific Equity Research 20 February 2006

The Bharat PE Bull Case

Table 4: Indian Equity Market Drivers
Videsh (Foreign) High relative real GDP growth Relative valuation National service discount Lower capital gains tax ADR local arbitrage Earnings less sensitive to FX
Source: JPMorgan

Figure 5: Number of FIIs registered

900 800 700 600 500 400 Jan-99 Jan-00
Source: Bseindia.com

823

Bharat (India, Local) Shift from bonds to equities Currency revaluation Tax change Initial public offering and investor base More local institutions

Jan-01

Jan-02

Jan-03

Jan-04

Jan-05

Our new Index targets for MSCI India and the Sensex are 445 and 11000 respectively. An index targets indicates our expectation for the direction of the market and magnitude of returns. We expect volatility to increase relative to returns in 2006. The quantitative checks on our index targets illustrate the re-rating that we think the markets will sustain and the risk of today's high valuations. If we use our composite valuation indicators to calculate an MSCI index based on median valuation the result is 352, 21% below our new target. Based on Indias three year average forward PE the end 2006 index target would be 342. Our target is based on the assumption that the current forward valuation of the MSCI India is sustained at 17 times, resulting in a target of 445.

Table 6: Number of demat accounts

Month Year Dec-03 Dec-04 Dec-05 No. of Accounts (million) Client Accounts 4.6 6.0 7.3 % oya 29 22

Source: NSDL.co.in Demat accounts facilitate direct holding of securities in electronic format.

Figure 6: Cumulative net purchases of FII and mutual fund over 2005
US$ mn 12,000 10,000 8,000 6,000 4,000 2,000 0 Jan-05
Source: SEBI, AMFI

FII Flow s

Demand for Indian equities

Index performance and demand for equities have complemented each other over last two years. A larger base of FIIs, domestic mutual funds and private insurance firms have provided both healthy demand for equities and reduced volatility. Local savers confidence in equities has increased with the combination of healthy returns and lower volatility. Tax breaks for long term equity mutual investments have further generated demand for equities.
Table 5: Mutual fund returns (18 February 2006)
Category Equity-Diversified Equity-ELSS Equity-Index Balanced Income Liquid Gilt Source: http://www.myiris.com/mutual/index.php Annual Return % 54.7 51.0 45.4 32.9 6.5 5.4 3.7

Equity Fund Net Sunscription Mar-05 May -05 Jul-05 Sep-05 Nov -05

Debt schemes have suffered net redemptions of US$4.2 billion in last two years compared to US$6.8 billion net subscriptions for equity schemes. The slow but continuous rise of bond yield is good for relative attractiveness of equities.

Adrian Mowat (852) 2800-8599 adrian.mowat@jpmorgan.com

Asia Pacific Equity Research 20 February 2006

Figure 7: Data on mutual fund subscriptions by category

INR bn 300 200 100 0 (100) (200) (300) 2000 2001 Equity Flow s
Source: AMFI India

end of to agricultural power subsidies. To achieve the three objectives of boosting rural incomes, lowering subsidies and low consumer prices requires the reform of agricultural production and distribution to reduce waste and boost efficiency. This is beginning to happen with corporate investment in agricultural business providing capital and knowledge. If political obstacles can be overcome agricultural reform could add a further leg to India's growth story.
2005

2002

2003

2004 Debt Flow s

Figure 8: Consensus real GDP growth expectations

8.0 7.8 7.6 7.4

% FY 06

Economic momentum
Indias economic vulnerability is low relative to its history. The drivers of economic growth have broadened and the dependency on the monsoon declined. Large foreign exchange reserves provide a cushion against a reversal in balance of payment flows. Domestic consumption and investments momentum continues to surprise on the upside. The current fiscal year (FY06) consensus GDP growth expectation has moved up from 6.9% to 7.8%. If current momentum is maintained FY07 growth forecast will need to be revised higher. The monsoon continues to be a risk and therefore economist will be unlikely to revise forecasts higher until after the monsoon season. Past reform is contributing to economic momentum. With the removal of regulatory constraints and availability of capital investment in new sectors, such as retail, real estate, airline, and BPO, is growing rapidly. The job creation by these investments further helps support strong consumption growth. Sustainable long term growth in India requires that the benefits are shared. The electoral defeat of the BJP led government in 2004 surprised the investment community who where focusing India's strong industrial and service sector performance rather than poor income growth in rural area. 60% of India's workforce is employed in agriculture. Political success requires rural income growth. The flexibility for price increases or further subsidies is limited. India's finance ministers main concern is keeping inflation low. It is estimated that 55% of household income is spent on food; therefore a general increase in agricultural prices would be unacceptable. Agricultural subsidies including subsidies power exceed US$12 billion. Power sector reform requires the eventual

7.2 7.0 6.8 6.6 Apr-05 Jun-05 Aug-05 Oct-05 Dec-05 Feb-06

FY 07

Source: Consensus economics

Figure 9: GDP growth with forecasts

% 10.0 8.0 6.0 4.0 2.0 0.0 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06
Source: JPMorgan economics, JPMorgan estimates

Figure 10: Long term chart of inflation

% 20.0 15.0 10.0 5.0 0.0 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05
Source: JPMorgan economics

Adrian Mowat (852) 2800-8599 adrian.mowat@jpmorgan.com

Asia Pacific Equity Research 20 February 2006

Figure 11: Long term chart of fiscal deficit/GDP ratio

8.0 7.0 6.0 5.0 4.0 3.0 Mar 98 Mar 99 Mar 00 Mar 01 Mar 02 Mar 03 Mar 04 Mar 05 Mar 06
Source: JPMorgan economics

Table 7: Earnings growth by MSCI sectors

MSCI INDIA Cons Discretionary Cons Staples Energy IG Financials Health Care Industrials IT Materials Telecom Utilities IG
Source: MSCI, DataStream, IBES

2005 (%) 13.1 3.8 16.5 14.8 15.4 2.9 4.2 30.8 8.6 (28.9) 5.1

2006 (%) 16.8 18.2 16.4 9.3 24.2 42.8 22.5 29.6 5.2 (11.9) 1.3

Table 8: MSCI Sector and average operating margin outlook

% 2005 (E) 15.4 18.5 11.7 19.2 12.9 24.8 19.4 15.1 13.9 2006(E) 17.0 19.4 13.3 21.3 13.8 25.8 20.0 11.9 13.9

Earnings growth
Strong domestic demand and the strategic advantage of India IT sector has supported index earnings growth CAGR of 23.5% over last three years. Consensus expectation is earnings growth of 17% for FY07.
Figure 12: Rising earnings expectations IBES EPS trend
25.0 24.0 23.0 22.0 21.0 20.0 May -05 Jul-05 Sep-05 Nov -05 Jan-06 CY 05 EPS CY 06 EPS

Consumer Discretionary Consumer Staples Energy Financials Health Care Industrials Information Technology Materials Telecommunication Services Utilities
Source: MSCI, DataStream, IBES

It is interesting to note that inflation has remained rather moderate with fast growth of broad money supply. (Figure 13). Normally higher inflation has negative impact on corporate profitability and PE multiple. IBES estimates show relatively better operating margin in 2006, for each of the sectors except Telecom.
Figure 13: Money supply (M3) and Inflation
25 20 15 10 Aug-93 Feb-95 Aug-96 Feb-98 Aug-99 Feb-01 Aug-02 Feb-04 Aug-05 M3 Grow th (%YoY) (L) WPI (% YoY) 15 12 9 6 3 0

Source: MSCI, DataStream, IBES

The global economic growth outlook for 2006 continues to remain healthy and this is expected to support IT sector earnings growth outlook. Increased proportion of offshore execution should provide support to operating margin outlook. We remain positive on Indian consumers and demand outlook. Metal and mining stocks have already derated and pose limited risk to index performance. We are witnessing early phase of corporate capex cycle. The economic environment gives us confidence in better pricing power and demand outlook in short to medium term and we would not be excessively worried about the adverse impact on return on equities at this juncture.

Source: JPMorgan economics

The trajectory of short term interest rate would important parameter to watch. Our current expectation is another 25 bps increase before December 2006. Higher interest cost for the current quarter could cause negative surprise for the highly leveraged small and mid cap companies.

Adrian Mowat (852) 2800-8599 adrian.mowat@jpmorgan.com

Asia Pacific Equity Research 20 February 2006

Conclusion
Figure 14: Relative performance of mid-cap versus large cap

Our base case is that economic and profit growth remains robust in India. This supports current valuations. Local investors confidence continues to build sustaining the secular shift from cash and bonds into equities. This drives Indian equities higher. Our new Sensex target is 11000. The Indian market is expensive. Based on the MSCI India the forward PE at of our end 2006 target would be 17 times. This plus a widening current account make the market vulnerable to a reversal in risk appetite. We are managing the risks of investing in this market by recommending a neutral weighting relative to both Asia Pacific ex Japan and global emerging market. Also we recommend investors focus on large cap blue chip stocks. The valuation discounts of small and mid cap companies are not high enough to compensate for the lower liquidity in our view. There is anecdotal evidence that interest costs for small to medium size companies is rising generating the risk of earnings disappointments. See page 8 for our Indian model portfolio.

500 400 300 200 100 0 Jan-01

Source: DataStream

CNX Midcap

Nifty

Jan-02

Jan-03

Jan-04

Jan-05

Jan-06

Figure 15 Forward PE and trailing PE plus long bond yield

35 30 25 20 15 10 5 12 M Fw d PE 10 y ear Treasury (R) Trailing PE % 14.0 12.0 10.0 8.0 6.0 4.0

Feb-99 Feb-00 Feb-01 Feb-02 Feb-03 Feb-04 Feb-05

Source: MSCI, IBES, DataStream

Figure 16: P/B and RoE

5 P/B 4 3 2 1 99 00 01 02 03 04 05 16.0 % RoE (L) 24.0

20.0

12.0

Source: MSCI, DataStream

Adrian Mowat (852) 2800-8599 adrian.mowat@jpmorgan.com

Asia Pacific Equity Research 20 February 2006

Table 9: Indian model portfolio

Ticker Consumer Discretionary Tata Motors Bajaj Auto Consumer Staples ITC Energy Reliance Industries Oil and Natural Gas Commission Financials HDFC ICICI Bank Health care Cipla Industrials Bharat Heavy Electricals Limited Larsen & Toubro Information Technology Infosys Technologies Patni Computer Satyam Computers Materials Gujarat Ambuja Cements Associated Cement Companies Telecommunication Services Bharti Tele-Ventures Limited Utilities Tata Power MSCI Total TAMO.BO BJAT.BO ITC.BO RELI.BO ONGC.BO HDFC.BO ICBK.BO CIPL.BO BHEL.BO LART.BO INFY.BO PTNI.BO SATY.BO GACM.BO ACC.BO BRTI.BO TTPW.BO 2/17 Price 255 773.2 2401.3 198 161.7 491 693.3 1119.8 2364 1300.1 586.5 450 529.2 780 1863.1 2286.1 389 2786.0 483.4 740.6 488 85.6 579.9 98 362.8 424 487.7 410 Rating OW OW OW NR NR OW OW OW OW N OW OW OW OW OW OW OW Change (%) 2 wk Ytd 8.3 15.6 7.7 18.4 12.2 20.0 14.7 17.6 6.0 13.8 0.2 3.1 -0.5 -22.1 -3.6 -4.7 3.7 5.4 -0.4 7.9 2.8 0.3 7.0 16.3 9.4 19.4 5.7 23.7 1.1 34.4 3.9 24.0 -0.2 -4.0 0.0 -7.0 0.8 -2.4 1.9 0.4 1.7 10.4 1.1 7.5 -0.1 8.6 8.7 2.9 -1.3 4.9 -0.7 6.1 0.9 11.9 3.6 7.0 MSCI Weight 7.6 3.2 1.5 9.2 3.8 17.3 9.2 3.8 18.6 4.9 7.7 6.1 0.8 9.5 2.3 2.5 20.8 12.0 0.0 3.6 7.2 0.9 0.5 1.1 0.0 2.8 0.5 100 JPM Weight 9.0 5.0 4.0 9.3 9.3 13.0 9.2 3.8 15.7 8.0 7.7 3.0 3.0 11.0 7.0 4.0 22.0 13.5 3.0 5.5 10.0 4.0 6.0 3.0 3.0 4.0 4.0 100 Dev. (%) 1.4 1.8 2.5 0.1 5.5 -4.3 0.0 0.0 -2.9 3.1 0.0 -3.1 2.2 1.5 4.7 1.5 1.2 1.5 3.0 1.9 2.8 3.1 5.5 1.9 3.0 1.2 3.5 0 PER FY06 FY07 22.6 19.9 18.4 16.3 22.4 17.8 34.1 28.1 26.4 23.2 13.8 12.7 10.9 10.3 9.0 7.6 20.0 16.0 23.0 19.0 18.8 16.4 32.8 24.4 29.3 24.9 25.8 22.1 30.2 22.6 33.7 26.3 31.1 24.2 30.7 23.3 16.9 13.4 24.3 18.2 11.3 11.3 18.6 15.3 21.2 17.2 14.0 14.6 30.9 20.7 15.3 14.9 21.4 19.8 20.5 17.8 DY FY06 1.3 2.3 1.5 1.8 1.2 1.7 1.3 4.4 1.2 1.5 1.4 1.1 1.0 1.1 0.6 0.9 0.6 0.5 0.7 0.9 1.7 2.1 1.7 3.4 0.0 2.1 1.5 1.3 ROE FY06 20.7 27.9 22.5 29.3 24.3 22.2 20.8 31.5 18.7 28.5 17.2 21.1 27.9 32.8 20.9 23.8 30.4 32.5 16.8 22.9 28.6 21.9 26.2 NA 30.2 NA 9.3 21.8

Source JPMorgan estimates, DataStream, MSCI, IBES data used for non rated stocks

Adrian Mowat (852) 2800-8599 adrian.mowat@jpmorgan.com

Asia Pacific Equity Research 20 February 2006

JPMorgan India Universe

9

Adrian Mowat (852) 2800-8599 adrian.mowat@jpmorgan.com

Asia Pacific Equity Research 20 February 2006

Table 10: JPMorgan India Coverage Universe Note that for companies with a December year end we use prior year i.e. FY06 is December 05
Price as of Feb 17, 2006 Auto & Auto Parts Bajaj Auto Hero Honda Mahindra & Mahindra Maruti Udyog Tata Motors Consumer Goods HLL ITC Tata Tea Limited Cement ACC Grasim Gujarat Ambuja Cements Ultratech Cemco Financial Services Bank of Baroda Canara Bank Ltd Centurion Bank of Punjab HDFC HDFC Bank ICICI Bank IDFC Punjab National Bank Ltd State Bank of India Union Bank of India Healthcare Aurobindo Pharma Ltd Cadila Healthcare Cipla Dr. Reddy's laboratories Glenmark Matrix Laboratories Ranbaxy Laboratories Ltd. Sun Pharmaceutical Wockhardt Machinery & Engineering BHEL L&T Media & Entertainment Zee Telefilms Software & IT Services
10

JPM Reco OW OW OW OW OW N OW OW OW N OW UW N UW OW OW OW OW N UW OW UW OW OW OW OW N N UW N UW OW N OW

Market Cap. (US$MM) 5466 3996 3183 4949 6554 11467 13650 1167 2364 3333 2602 1517 1870 2436 758 7293 5217 11735 1804 3024 10155 1228 655 732 3570 2215 854 875 3685 3163 1180 10259 6991 1626

Avg. Daily Turnover (US$MM) 2.7 2.3 3.5 8.1 9.9 4.4 5.9 1.3 3.4 2.4 3.3 0.5 1.5 1.9 0.6 6.8 1.9 8.2 2.7 2.3 23.9 0.7 1.7 0.2 2.8 5.7 0.7 1.5 4.9 1.1 0.8 2.8 6.6 1.6

FY05

EPS FY06E

FY07E

EPS Growth FY07E (%) 26.1 17.7 16.4 14.3 12.9 19.3 13.9 11.0 23.1 16.5 -2.9 51.9 7.1 7.9 113.3 21.2 73.3 14.2 7.7 18.2 4.5 1751.5 43.1 17.8 151.6 44.9 53.5 118.7 20.0 17.7 33.8 28.0 29.1

P/E FY06E (X) 22.4 18.1 9.8 20.6 18.4 39.8 26.4 16.9 21.2 14.8 3.1 38.8 5.9 6.0 67.1 23.0 26.7 18.8 8.3 9.2 3.7 416.6 22.6 29.3 75.2 68.4 33.6 63.0 28.3 21.7 30.2 33.7 20.0 FY07E (X) 17.8 15.4 8.4 18.0 16.3 33.4 23.2 15.2 17.2 12.7 3.2 25.5 5.5 5.6 31.5 19.0 15.4 16.4 7.7 7.7 3.6 22.5 15.8 24.9 29.9 47.2 21.9 28.8 23.6 18.4 22.6 26.3 15.5 FY06E (x) 5.0 9.6 3.1 4.1 5.3 24.9 6.6 3.1 5.6 1.5 0.6 5.3 1.1 1.5 4.9 6.2 4.5 3.1 1.2 1.6 1.0 4.3 4.8 8.3 4.8 7.2 3.3 6.2 10.1 7.1 6.4 8.2 2.5

P/BV FY07E (x) 4.2 7.7 2.8 3.4 4.6 23.2 5.6 2.8 4.7 1.3 0.6 4.5 0.9 1.3 4.2 5.1 3.1 2.7 1.1 1.4 0.8 3.7 3.9 6.8 4.0 6.8 3.0 5.6 7.6 5.5 5.2 7.0 2.2 FY06E (%) 22.5 51.3 30.4 20.0 27.9 60.7 24.3 17.9 26.2 9.9 20.0 13.5 19.0 26.4 7.4 28.5 17.6 17.2 15.7 18.8 29.1 1.0 20.7 27.9 6.3 10.2 9.5 9.9 34.9 31.8 20.9 23.8 12.9

ROE FY07E (%) 23.9 48.2 32.1 19.0 27.0 67.7 23.5 17.7 27.0 9.7 17.6 17.6 17.7 23.6 14.1 28.8 21.6 17.3 14.9 18.9 24.5 16.4 24.2 26.9 13.5 14.1 13.5 19.8 31.5 28.8 23.0 26.0 14.6

Foreign Holding (%) 21.1 26.0 32.1 70.2 39.9 14.7 16.9

05E Divi. Yield (%) 1.5 3.0 1.9 0.6 2.2 2.1 NA 1.8 NA NA 1.4 NA 2.6 3.0 NA 1.5 0.6 1.4 NA 2.1 1.3 4.6

81.31 40.58 53.66 29.50 38.61 5.38 4.90 45.47 21.14 96.56 22.95 0.28 22.98 33.11 -0.29 46.48 22.38 27.19 55.36 81.84 22.81 -2.08 19.35 13.66 2.08 2.75 10.38 18.78 19.13 17.90 38.95 58.21 7.81

107.10 49.19 60.95 37.00 42.08 5.82 6.12 54.66 27.39 109.16 27.88 13.97 38.99 43.89 0.39 56.47 27.84 31.24 51.64 93.64 31.96 1.38 22.94 18.05 17.09 4.67 7.72 6.98 26.81 22.08 61.60 67.92 8.75

135.11 57.89 70.98 42.29 47.51 6.94 6.97 60.67 33.73 127.17 27.08 21.23 41.77 47.35 0.84 68.44 48.24 35.67 55.59 110.73 33.39 25.47 32.83 21.27 43.00 6.77 11.85 15.26 32.18 25.99 82.44 86.94 11.30

42.4

24.7 10.9 21.0 46.1 16.1 0.5 32.3 14.6 6.8 22.8 0.2 41.6

0.0 1.5 0.9 0.6 0.3 0.3 1.0 0.7 0.9 0.6 0.9 0.6

Adrian Mowat (852) 2800-8599 adrian.mowat@jpmorgan.com

Asia Pacific Equity Research 20 February 2006

Price as of Feb 17, 2006 HCL Infosystems HCL Technologies Hexaware Technologies I-Flex Solutions Infosys Tech Mphasis BFL NIIT NIIT Technologies Patni Computer Polaris Software Labs Satyam Computers Tata Consultancy Services Wipro Technology - Hardware Moser Baer India Telecom Services Bharti Tele-Ventures MTNL VSNL Transportation Jet Airways (India) Ltd Utilities CESC Ltd NTPC Reliance energy Tata Power

JPM Reco OW OW UW UW OW UW UW OW OW UW OW OW OW UW OW UW N UW UW N UW OW

Market Cap. (US$MM) 975 4411 352 1852 17206 635 119 159 1499 245 5389 17543 15920 540 15448 2081 2416 1920 484 22557 2744 2171

Avg. Daily Turnover (US$MM) 0.7 1.7 1.5 1.8 15.7 0.8 0.2 0.2 0.9 0.8 15.5 5.3 4.1 0.3 2.5 3.5 9.2 2.3 0.6 2.0 3.6 2.0

2004 13.72 21.27 5.47 27.16 68.14 8.18 10.66 15.16 21.47 7.59 22.37 47.13 11.46 5.24 5.89 12.69 14.92 52.23 15.37 7.04 28.82 20.71

EPS FY06E 17.21 25.85 7.40 22.58 90.83 9.83 14.03 17.59 21.41 4.27 30.50 59.75 14.30 15.39 11.75 7.76 14.97 63.98 14.54 6.36 27.19 22.74

FY07E 22.76 33.56 9.49 37.13 119.49 12.38 18.37 23.53 28.59 8.63 40.64 82.10 19.50 27.53 17.51 8.33 16.60 63.36 16.07 7.04 26.17 24.69

EPS Growth FY07E (%) 32.2 29.8 28.2 64.5 31.6 26.0 30.9 33.8 33.5 102.1 33.3 37.4 36.4 78.9 48.9 7.3 10.9 -1.0 10.5 10.7 -3.7 8.6

P/E FY06E (X) 15.0 23.6 17.8 47.9 30.7 17.9 19.5 10.4 22.6 26.0 24.3 27.2 34.9 14.0 30.9 18.9 25.2 15.4 18.0 19.1 22.2 21.4 FY07E (X) 11.3 18.2 13.9 29.1 23.3 14.2 14.9 7.8 16.9 12.9 18.2 19.8 25.6 7.8 20.7 17.6 22.7 15.6 16.3 17.3 23.1 19.8 FY06E (x) 6.6 4.5 4.6 6.6 9.9 3.7 2.0 2.5 3.0 2.0 5.6 14.7 9.0 1.0 9.3 0.8 1.8 3.3 1.4 2.3 1.7 2.0

P/BV FY07E (x) 5.4 4.0 3.7 5.6 7.4 3.4 1.7 2.0 2.8 1.8 4.6 9.3 6.7 0.9 6.7 0.8 1.7 2.7 1.4 2.1 1.7 2.0 FY06E (%) 43.8 19.2 24.5 13.8 32.5 20.4 10.1 24.3 13.4 7.6 22.9 54.0 26.4 7.0 30.2 4.1 7.0 21.4 7.8 11.7 7.7 9.3

ROE FY07E (%) 47.5 22.3 25.3 19.3 31.8 23.9 11.2 26.2 16.8 13.8 25.4 46.8 26.5 11.1 32.1 4.3 7.4 17.5 8.2 12.1 7.4 9.7

Foreign Holding (%) 19.1 18.0 23.2 52.5 25.5 33.3 42.6 5.7 67.9 6.2 6.3 73.9 48.5 21.5 13.8

05E Divi. Yield (%) 4.3 2.6 0.7 0.6 0.5 2.0 1.8 3.1 0.6 1.6 0.9 0.7 NA 0.5 NA 3.0 1.3 NA

4.9 0.1

0.9 2.0 0.8 1.5

Source: Datastream, Bloomberg, JPMorgan Estimates

**Figures for HLL, Patni Computer & Ranbaxy Laboratories Ltd are on a Calendar year-end basis as opposed to other stocks which are on a financial year-end basis.

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Asia Pacific Equity Research 20 February 2006

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Asia Pacific Equity Research 20 February 2006

Companies Recommended in This Report (as of COB 16 February 2006) Associated Cement Companies Ltd (ACC.BO/Rs586.75/Overweight), Bajaj Auto (BJAT.BO/Rs2,372.75/Overweight), Bharat Heavy Electricals (BHEL) (BHEL.BO/Rs1,873.15/Overweight), Bharti Tele-Ventures (BRTI.BO/Rs362.55/Overweight), Cipla Limited (CIPL.BO/Rs540.75/Overweight), Gujarat Ambuja Cements (GACM.BO/Rs85.55/Overweight), HDFC (Housing Development Finance Corporation) (HDFC.BO/Rs1,338.50/Overweight), ICICI Bank (ICBK.BO/Rs598.00/Overweight), Infosys Technologies (INFY.BO/Rs2,780.60/Overweight), ITC Limited (ITC.BO/Rs166.70/Overweight), Larsen & Toubro (LART.BO/Rs2,344.90/Neutral), Patni Computer (PTNI.BO/Rs474.10/Overweight), Satyam Computers (SATY.BO/Rs742.20/Overweight), Tata Motors (TAMO.BO/Rs800.10/Overweight), Tata Power (TTPW.BO/Rs500.70/Overweight) Analyst Certification The research analyst who is primarily responsible for this research and whose name is listed first on the front cover certifies (or in a case where multiple research analysts are primarily responsible for this research, the research analyst named first in each group on the front cover or named within the document individually certifies, with respect to each security or issuer that the research analyst covered in this research) that: (1) all of the views expressed in this research accurately reflect his or her personal views about any and all of the subject securities or issuers; and (2) no part of any of the research analyst's compensation was, is, or will be directly or indirectly related to the specific recommendations or views expressed by the research analyst in this research. Important Disclosures: Market Maker: JPMSI makes a market in the stock of Infosys Technologies. Liquidity Provider: JPMSI and/or one of its affiliates normally provides liquidity in the stock of Associated Cement Companies Ltd, Bajaj Auto, Bharat Heavy Electricals (BHEL), Bharti Tele-Ventures, Cipla Limited, Gujarat Ambuja Cements, HDFC (Housing Development Finance Corporation), ICICI Bank, ITC Limited, Larsen & Toubro, Patni Computer, Satyam Computers, Tata Motors, Tata Power. Lead or Co-manager: JPMSI or its affiliates acted as lead or co-manager in a public offering of equity and/or debt securities for HDFC (Housing Development Finance Corporation), Satyam Computers, Tata Power within the past 12 months. Analyst Position: The covering analyst, research associate, or member(s) of their respective household(s) have a long position in the securities of ICICI Bank. Beneficial Ownership (1% or more): JPMSI or its affiliates beneficially own 1% or more of a class of common equity securities of ICICI Bank, Infosys Technologies, Tata Motors. Client of the Firm: Associated Cement Companies Ltd is or was in the past 12 months a client of JPMSI. Bajaj Auto is or was in the past 12 months a client of JPMSI. Bharti Tele-Ventures is or was in the past 12 months a client of JPMSI. Gujarat Ambuja Cements is or was in the past 12 months a client of JPMSI. HDFC (Housing Development Finance Corporation) is or was in the past 12 months a client of JPMSI; during the past 12 months, JPMSI provided to the company non-investment banking securities-related service. ICICI Bank is or was in the past 12 months a client of JPMSI; during the past 12 months, JPMSI provided to the company noninvestment banking securities-related service and non-securities-related services. Infosys Technologies is or was in the past 12 months a client of JPMSI. Larsen & Toubro is or was in the past 12 months a client of JPMSI; during the past 12 months, JPMSI provided to the company non-investment banking securities-related service and non-securities-related services. Patni Computer is or was in the past 12 months a client of JPMSI. Satyam Computers is or was in the past 12 months a client of JPMSI; during the past 12 months, JPMSI provided to the company investment banking services. Tata Motors is or was in the past 12 months a client of JPMSI. Tata Power is or was in the past 12 months a client of JPMSI; during the past 12 months, JPMSI provided to the company investment banking services and non-securities-related services. Investment Banking (past 12 months): JPMSI or its affiliates received in the past 12 months compensation for investment banking services from Satyam Computers, Tata Power. Investment Banking (next 3 months): JPMSI or its affiliates expect to receive, or intend to seek, compensation for investment banking services in the next three months from Larsen & Toubro, Satyam Computers, Tata Motors, Tata Power.

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Non-Investment Banking Compensation: JPMSI has received compensation in the past 12 months for products or services other than investment banking from HDFC (Housing Development Finance Corporation), ICICI Bank, Larsen & Toubro. An affiliate of JPMSI has received compensation in the past 12 months for products or services other than investment banking from ICICI Bank, Tata Power.

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JPMorgan Equity Research Ratings Distribution, as of January 3, 2006 Overweight (buy) 41% 46% 35% 63% Neutral (hold) 42% 45% 49% 55% Underweight (sell) 17% 38% 17% 43%

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*Percentage of investment banking clients in each rating category. For purposes only of NASD/NYSE ratings distribution rules, our Overweight rating falls into a buy rating category, our Neutral rating falls into a hold rating category, and our Underweight rating falls into a sell rating category.

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Options related research: If the information contained herein regards options related research, such information is available only to persons who have received the proper option risk disclosure documents. For a copy of the Option Clearing Corporations Characteristics and Risks of Standardized Options, please contact your JPMorgan Representative or visit the OCCs website at http://www.optionsclearing.com/publications/risks/riskstoc.pdf. General: Information has been obtained from sources believed to be reliable but JPMorgan Chase & Co. or its affiliates and/or subsidiaries (collectively JPMorgan) do not warrant its completeness or accuracy except with respect to any disclosures relative to JPMSI and/or its affiliates and the analysts involvement with the issuer. Opinions and estimates constitute our judgement as of the date of this material and are subject to change without notice. Past performance is not indicative of future results. This material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. Securities, financial instruments or strategies mentioned herein may not be suitable for all investors. The opinions and recommendations herein do not take into account individual client circumstances, objectives, or needs and are not intended as recommendations of particular securities, financial instruments or strategies to particular clients. The recipient of this report must make its own independent decisions regarding any securities or financial instruments mentioned herein. JPMSI distributes in the U.S. research published by non-U.S. affiliates and accepts responsibility for its contents. Clients should contact analysts and execute transactions through a JPMorgan subsidiary or affiliate in their home jurisdiction unless governing law permits otherwise. Planned Frequency of Updates: JPMorgan provides periodic updates on companies/industries based on company-specific developments or announcements, market conditions or any other publicly available information. U.K. and European Economic Area (EEA): Issued and approved for distribution in the U.K. and the EEA by JPMSL. Investment research issued by JPMSL has been prepared in accordance with JPMSLs Policies for Managing Conflicts of Interest in Connection with Investment Research which can be found at http://www.jpmorgan.com/pdfdoc/research/ConflictManagementPolicy.pdf. All research issued to private clients in the U.K. is subject to the following: the investments and strategies discussed here may not be suitable for all investors; if you have any doubts you should consult your investment advisor. The investments discussed may fluctuate in price or value. Investors may get back less than they invested. Changes in rates of exchange may have an adverse effect on the value of investments. Germany: This material is distributed in Germany by J.P. Morgan Securities Ltd. Frankfurt Branch and JPMorgan Chase Bank, N.A., Frankfurt Branch who are regulated by the Bundesanstalt fr Finanzdienstleistungsaufsicht. Australia: This material is issued and distributed by JPMSAL in Australia to wholesale clients only. JPMSAL does not issue or distribute this material to retail clients. The recipient of this material must not distribute it to any third party or outside Australia without the prior written consent of JPMSAL. For the purposes of this paragraph the terms wholesale client and retail client have the meanings given to them in section 761G of the Corporations Act 2001. Hong Kong: The 1% ownership disclosure as of the previous month end satisfies the requirements under Paragraph 16.5(a) of the Hong Kong Code of Conduct for persons licensed by or registered with the Securities and Futures Commission. (For research published within the first ten days of the month, the disclosure may be based on the month end data from two months prior.) J.P. Morgan Broking (Hong Kong) Limited is the liquidity provider for derivative warrants issued by J.P. Morgan International Derivatives Ltd and listed on The Stock Exchange of Hong Kong Limited. An updated list can be found on HKEx website: http://www.hkex.com.hk/prod/dw/Lp.htm. Korea: This report may have been edited or contributed to from time to time by affiliates of J.P. Morgan Securities (Far East) Ltd, Seoul branch. Singapore: JPMSI and/or its affiliates may have a holding in any of the securities discussed in this report; for securities where the holding is 1% or greater, the specific holding is disclosed in the Legal Disclosures section above. India: FOR PRIVATE CIRCULATION ONLY NOT FOR SALE. Revised January 3, 2006.

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JPMorgan India Research Team

Sachin Seth Subramanian Balakrishnan Suresh Ganapathy Manoj Singla Mythili Balakrishnan Vijay Chugh Latika Chopra Gautam Chhaochharia Saurabh Kumar Rohit Tandon Jesal Shah Ravi Agarwal Sanjay Chawla Malvika Agarwal Financials Financials Financials IT IT Autos and Consumer Autos and Consumer Utilities, Capital Goods & Building materials Utilities, Capital Goods & Building materials Utilities, Capital Goods & Building materials Health Care Health Care Telecom Telecom (91-22) 56393004 (91-22) 56393003 (91-22) 56393002 (91-22) 56393017 (91-22) 56393008 (91-22) 56393001 (91-22) 56393002 (91-22) 56393010 (91-22) 56393020 (91-22) 56393011 (91-22) 56393012 (91-22) 56393013 (91-22) 56393019 (91-22) 56393007 sachin.sheth@jpmorgan.com subramanian.balakrishnan@jpmorgan.com suresh.x.ganapathy@jpmorgan.com manoj.singla@jpmorgan.com mythili.balakrishnan@jpmorgan.com vijay.chugh@jpmorgan.com latika.chopra@jpmorgan.com gautam.chhaochharia@jpmorgan.com saurabh.s.kumar@jpmorgan.com rohit.k.tandon@jpmorgan.com jesal.n.shah@jpmorgan.com ravi.k.agrawal@jpmorgan.com sanjay.x.chawla@jpmchase.com malvika.agarwal@jpmorgan.com

Table 11: Indian Valuations and Composite Valuation Indicator Calculation

Country 17-Feb Valuation Value Measure MSCI 404.0 P/E 19.6 P/B 3.9 D/Y 1.3 12m Fwd 16.0 PER Bond/Earni 1.5 ngs Yield Ratio Bond / 5.4 Dividends Yield Ratio Composite score LT Avg 16.1 2.9 1.7 12.8 1.7 6.4 LT Std. Dev. 4.8 0.8 0.3 3.0 0.7 2.5 3Y Avg 15.3 3.1 1.9 13.1 1.0 3.4 3Y Std. Dev. 2.3 0.5 0.3 1.9 0.2 0.9 High 33.7 5.4 2.6 23.6 3.8 11.1 Date Feb-94 Aug-94 3-Apr Sep-94 Feb-94 Sep-94 Index Level 168.6 173.1 126 163.4 168.6 163.4 Low 10.4 1.8 1.0 8.4 0.6 2.3 Date Nov-98 1-Sep Feb-00 1-Sep 3-Apr 3-Apr Index Level 102.5 119.1 275.1 119.1 126 126 Percent from High Low -42% -27% -50% -32% -61% -51% 88% 118% 32% 91% 131% 137% No. of SD From LT Average 0.7 1.3 -1.3 1.1 -0.2 -0.4 0.7 No. of SD From ST Average 1.9 1.7 -1.9 1.6 2.3 2.1 1.8 1.2 Total Score

Source: DataStream, JPMorgan calculations, compose score is the number of standard deviation from average