The Front Page

September 3, 2010

Whats Inside: Vardhman Textiles (BUY); Insurance; Cement; From our Singapore desk (Dumb Commodities); Events

Market Front Page

Index Movements
Sensex Nifty BSE Smallcap CNX Midcap Na sda q DJIA IBOV FTSE CAC Closing 18,238 5,486 9,821 8,861 2,200 10,320 66,808 5,371 3,631 % Chg 0.2 0.3 1.1 0.9 1.1 0.5 ( 0.4) 0.1 0.2 US$m 1,049 2,855 17,976 Index 387 17,472 274 Latest 112 (25) 34 MTD 11 34 % YTD 4.4 5.5 17.5 19.2 (3.0) (1.0) (2.6) (0.8) (7.7) % Chg 2.4 (0.5) (8.6) Stocks 54 7,783 105 YTD 319 (3,464)

Corporate Front Page

ADR/GDR (US$)
HDFC Bank Relia nce Infosys Satyam Wipro ICICI Ba nk SBI Ste rlite Tata Motors Latest 167.4 40.3 59.8 4.7 13.1 43.1 118.3 14.0 22.4 Latest 1,250 75 2,145 7,635 Clo sing 46.8 59.9 72.1 % Chg % Pre m 0.6 (0.3) 0.1 2.2 (0.1) 0.3 (1.7) 1.5 2.5 %Chg (0.0) 1.5 1.8 0.4 % Chg (0.1) 0.3 (0.1) 8.0 4.6 19.1 0.5 1.4 33.2 51.6 0.3 0.1 1.6 3.1 %Y TD 14.0 (5.5) (3.8) 3.5 %Y TD 0.2 (10.6) (3.9) 3.0 (50.0)

The marketing agreement between GAIL and RIL to sell D6 gas stands inoperative due to a Government policy that does not allow RIL to sell gas independently. (BL) DLF has put on hold its plan to sell its non-core assets including ultraluxury hotel chain Aman Resorts and wind energy business for the next three quarters. (ET) M&M has announced the launch of the Maxximo, its sub-2-tonne mini truck, in the Tamil Nadu market. (BL) TCS has become the second largest insurance BPO provider in the UK after winning two deals worth GBP250mn. (BS) IOC seeks land adjacent to its Haldia refinery for expansion. (BL) Rishad Premji, son of Wipro Chairman Azim Premji, has been appointed as Chief Strategy Officer of IT Business at Wipro. (BL) Sunil Mittal's son, Shravin Mittal, joins Bharti's international business. (BL) HPCL plans to invest around Rs150bn in setting up a 9mn ton per year refinery on the west coast. (ET) Cipla to buy 25% in its S Africa unit. (BS) Consortium led by Tata Power plans to develop a 240MW geothermal power project in Indonesia. (ET) Hero Honda launches the 125cc Super Splendor with drum brakes and self-start version. (BL) Maruti to roll out 1,000 units of Swift special edition. (BL) Petronet plans Rs23bn expansion at LNG terminal. (BS) Neyveli Lignite mulls 2,000MW supercritical plant in TN. (BL) CPCL lines up Rs 7,000-cr projects. (BS) SBI opens exclusive branch in Hyderabad for ultra HNIs. (BS) BEML, CADES in tie-up to manufacture aircraft parts. (BL)

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Charts Front Page

Sensex intraday 18,350 18,300 18,250 18,200 18,150
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Sensex price volume trend 140 120 100 80 60 40 20 Vol umes (Rs bn) Sensex 22,000 19,500 17,000 14,500 12,000 9,500

0 7,000 Sep-06 Aug-07 Aug-08 Aug-09 Aug-10

Market Front Page

Top Movers BSE 200
Top Gainers Suzlon Energy Ltd Guja rat NRE Coke Ltd Indian Oversea s Ba nk Ispat Industries Ltd Exide Industries Ltd P rice (Rs) 51 61 134 20 157 C hg Y TD (%) (%) 10.1 7.7 7.0 6.1 6.0 - 43.2 - 16.4 21.7 -8.9 35.9 Top Losers Hero Honda Motors Ltd Hindusta n Co pper Ltd Adani Power Ltd Hindusta n Zinc Ltd Adani Ente rprise s Ltd Price (Rs) 1696 448 133 1084 656 Chg (%) -3.9 -3.8 -3.6 -2.8 -2.8 Y TD (%) 2.7 61.7 34.6 - 10.4 50.5

Corporate Front Page

The promoters of Binani Cement have increased their stake in the company by 5% through buyback. (BL) Koutons Retail is mulling raising funds through a public issue or private placement. (BL) Sobha Developers announced the launch of a super luxury project Sobha Classic on Sarjapur Road in Bangalore. (BL) SKIL Infrastructure plans to raise Rs25bn by selling less than 20% stake in two phases that includes a private placement to overseas funds besides a public issue. (ET) Shriram Transport Finance plans to raise funds from venture capital and PE firms for a new property development and management company. (ET) PNB plans to acquire a 64% stake in JSC Dana Bank for US$24mn by 2010 in Kazakhstan. (ET) Adani Power has been shortlisted by Kosovo government to bid for 1238MW thermal Power project in Kosovo. (FE)

V olume spurts
Company Ne stle India Ltd Guja rat NRE Coke Ltd BEML Ltd Shre e Renuka Suga rs Ltd Te ch Mahindra Ltd Amte k Auto Ltd Exide Industries Ltd Suzlon Energy Ltd Indian Oversea s Ba nk Balrampur Chini Mills Ltd CMP 3,129.6 61.0 1,061.1 67.9 676.7 183.1 156.8 51.3 134.3 88.0 M.Cap (US$ m) 6,450 699 945 972 1,803 819 2,848 1,914 1,563 488 Vol. (in '000) 671 6,450 426 22,184 823 1,297 3,961 49,747 3,428 4,333 10D A.Vol (in '000) 139 1,892 134 7,512 284 492 1,639 20,629 1,439 1,946 % Chg 385 241 218 195 190 164 142 141 138 123

Economy Front Page

The sugar industry has offered to supply around 1,000 million litres ethanol to oil marketing companies for blending it with petrol. (BS) NHAI on road to achieve its land acquisition target. (BS) NHB looks at rating of intermediaries in housing finance. (BS) Sponge iron companies raise prices by 3-5%. (BS) Sale proceeds of carbon credits will not escape tax when the new Direct Taxes Code comes into effect from April 1, 2012. (BL) Mutual funds asset base grows 3.3% in August (BL) Bankers, retailers seek fee cut in debit card processing. (ET)

FII - FII trades

Scrip Maruti Pnb Bob Union bank Rec Grasim Ing vysya bank 1/9/2010 Volume '000 455 54 15 273 550 12 107 Price 1,300 1,291 816 340 334 2,088 345 Prem % 2.2 9.0 0.8 0.8 1.2 2.0 2/9/2010 Volume '000 142 45 201 180 383 11 665 Price 1,324 1,312 827 344 333 2,132 344 Prem % 3.1 8.5 0.0 0.3 1.2 2.9 0.2

Insider Trading
Company APL Apollo Tubes Ltd APL Apollo Tubes Ltd APL Apollo Tubes Ltd Bajaj Auto Educomp Solution Essar Shipping GMR Inds Gujarat Gas Company Ltd HBL Power HDFC India Steel Works Ltd Premier Ltd Name of Acquirer / Seller Rajasthan Global Securities Ltd Rajasthan Global Securities Ltd Rajasthan Global Securities Ltd Madhur Bajaj - self Gopal Jain Essar Shipping & Logistics GMR Holdings Sugata Sircar Beaver Engg Bimal Jalan TB Investments Ltd Doshi Holdings 01/09/2010 04/08/2010 01/09/2010 26/08/2010 27/08/2010 Transaction Date 04/08/2010 03/08/2010 04/08/2010 31/08/2010 Buy /Sale Sell Buy Buy Buy Sell Buy Sell Buy Buy Buy Buy Buy Quantity 956,486 70,000 51,905 320,000 45,000 14,111,177 10,542,993 20,000 196,500 7,400 27,000,000 92,799 Price (Rs) 134.5 125.0 134.5 2,729.0 550.0 98.6 107.5 346.0 27.4 622.5 5.1 124.6 Deal Size (Rs m) 129 9 7 873 25 1,391 1,133 7 5 5 138 12 Shares Transaction (%) 0.0 0.0 0.0 0.0 0.0 2.3 52.8 0.0 0.1 0.0 11.5 0.3 Holding after Transaction (%) 6.2 2.7 0.0 0.7 0.2 74.4 22.0 1.4 55.1 0.0 11.5 42.2

Deal size worth more than Rs5m considered. The exchange does not report transaction prices, so we have assumed them to be closing prices for the respective days. Hence, actual deal sizes may vary from the figures above.

BSE/ NSE - Bulk Deals

Company Camlin Ltd. Cranes Soft Cranes Software Internati Eih Associated Hotels Marg Limited Oricon Enter Oricon Enter Piramal Health Piramal Health Piramal Health Piramal Health Surana Telecom And Pow Lt Name of Acquirer / Seller Morgan Stanley Mauritius Company Ltd A/C Kuruto Fund A/C Kuruto Fund The Royal Bank Of Scotland Plc As Trustee Of Jupiter India F Reliance Mutual Fund Clearwater Capital Partners Singapore Fund Iii Private Limited Beaumaris Investments Limited Bmk Laboratories Private Limited Bmk Laboratories Private Limited Phl Holdings Private Limited Phl Holdings Private Limited Emerging India Focus Funds Transaction Date 2/9/2010 2/9/2010 2/9/2010 2/9/2010 2/9/2010 2/9/2010 2/9/2010 2/9/2010 2/9/2010 2/9/2010 2/9/2010 2/9/2010 Buy /Sale Buy Sell Sell Buy Buy Buy Sell Buy Buy Sell Sell Sell Quantity 310,000 1,104,488 2,080,743 136,000 165,000 961,641 961,641 3,000,000 9,000,000 3,000,000 9,000,000 125,000 Price (Rs) 53.8 7.0 7.1 198.9 219.8 351.5 351.5 510.0 510.0 510.0 510.0 20.0 Deal Size (Rs m) 17 8 15 27 36 338 338 1,530 4,590 1,530 4,590 2

Vardhman Textiles - BUY

VTEX IN Rs315 Mid-caps 03 Sep 2010 Initiating Coverage
12-month TP Market cap (US$ m) (Rs) 374 (19%) 388 347/145 58 0.4 1.1 32.8 67.2 1.1 13.3 18.4 3M
21.8 12.9 39.9 1.0 33.2

The art of spinning profits

VTL, Indias largest yarn manufacturer, is one of the best-placed to benefit from the rise in yarn realisations (up ~60% in 15 months), thanks to a benign cost environment (cotton prices in India are up only 20% in 15 months, thanks to a bumper crop). Continued expansion in EBITDA margins on yarn (>200bps YoY), coupled with the companys planned capacity expansion by 20%+ over the next two years, should support a re-rating of the stock to 8x 1-year forward PE (near its historical average multiple). Accordingly, we set a 1-year-forward target price of Rs374 and initiate coverage with a BUY. Indian yarn manufacturers enjoying an unprecedented bull run: Global yarn prices have risen 60% in the last 18 months on a combination of soaring demand and a 50% rise in cotton prices (as stock levels approached 15-year lows). Indian cotton prices, on the other hand, rose only ~20% in the last 18 months, as production rose ~3% in FY10, and is expected to rise by a further 10% in FY11. This has taken EBITDA margins of Indian yarn manufacturers to a multi-year highthey rose from 15.3% in FY09 to 22.1% in 1QFY11. Integrated model partly mitigates downturn risk: Global demand weakness poses significant risk to margins (yarn spreads at their nadir during the previous cycle were 40% below current levels). VTLs forward integration into fabric manufacturing offers some succour in case of a decline in yarn prices, as yarn is the input for fabric. That said, since the company is a net seller of yarn (only ~1/3rd of yarn is utilised internally), VTLs consolidated EBITDA margin will lose ~20bps for every 1% decline in yarn spreads.
Indian manufacturers benefited from multiyr high yarn-cotton spreads
Yarn prices Spreads (RHS) 180 150 120 90 60 30 0 Jun09 Dec09 Jun10 (Rs/kg) (Rs/kg) 60 50 40 30 20 10 0 Cotton prices

52Wk High/Low (Rs) Diluted o/s shares (m) Daily volume (US$ m) Dividend yield FY11ii (%) Free float (%) Shareholding pattern (%) Promoters FIIs DIIs Others Price performance (%) 1M
Vardhman Text Rel. to Sensex Nahar Spinning Alok Textiles Arvind Textiles 4.5 3.6 2.6 -5.9 19.9

1Y
117.2 99.2 139.1 -14.4 33.0

Stock movement
Shares ('000) 1,000 800 600 Volume (LHS) Price (RHS) (Rs) 400 350 300 250 200 150 100 50 0 Jun-10 Aug-10 Jul-10

Financial Summary
Y/e 31 Mar Revenues (Rs m) EBITDA Margins (%) Pre-Exceptional PAT Reported PAT (Rs m) Adjusted EPS (Rs) Growth (%) PER (x) ROE (%) Debt/Equity (x) EV/EBITDA (x) Price/Book (x) FY09A 29,654 15.3 578 1,713 10.2 -37.1 30.9 4.2 1.7 9.2 1.3 FY10A 33,507 21.0 2,392 2,615 42.2 313.6 7.5 14.9 1.5 5.9 1.1 FY11ii 36,590 22.9 2,881 2,881 50.9 20.4 6.2 15.4 1.4 5.0 1.0 FY12ii 38,411 21.8 2,650 2,650 46.8 -8.0 6.7 12.5 1.3 5.0 0.8 FY13ii 45,459 21.6 3,282 3,282 58.0 23.9 5.4 13.6 1.2 4.2 0.7

400 200 0 Jan-10 Sep-09 Feb-10 Nov-09 Dec-09 Mar-10 May-10 Jun-10 Oct-09 Apr-10

Sangeetha Saranathan sangeetha@iiflcap.com (91 22) 4646 4644

Source: Company, IIFL Research

Price as at close of business on 02 September 2010

Vardhman Textiles

Company snapshot
VTL, with an 870,000-spindle capacity, is Indias largest yarn manufacturer. Yarn manufacturing is a highly fragmented industry VTL, the largest player, has a volume market share of just about 2%, and Nahar Spinning, the second-largest player, has a share of about 1%. No single supplier has pricing power, so yarn prices are largely market-determined. Similarly, no single yarn manufacturer has significant control over raw-material prices, as none has any major share of procurementVTL, the largest cotton procurer, accounts for less than 2% of Indias cotton production. The company has forward-integrated into producing fabrics and sewing threads, and plans to commence garment production soon. As a result, revenues from yarn currently account for less than 60%, while valueadded products (mainly fabrics and sewing thread) account for ~20% and ~10%, respectively.
Figure 1: Yarn accounts for a little over half of VTLs its revenues; forward integration has increased value-added products share of revenue to about a third of the total
FY10 revenue composition Fabric 21%

Promoter background The Vardhman textile group was set up by Mr S P Oswal in 1962 in the north Indian city of Ludhiana. The group, under his familys management, has since expanded its capacities to become the largest yarn manufacturer in the country. Mr Oswal remains actively involved in managing the firms operations and in setting its strategy and direction, and is aided in the groups various businesses by his daughter Ms Suchita Jain and son-in-law Mr Sachit Jain. The promoters own 67% of the companys equity.
Figure 2: Promoters own over 2/3 of the companys equity
Others 18%

Domestic investors 13% Promoters 68%

FII 1% Yarn 56%

Source: Company, IIFL Research

Fibre 7% Sewing thread 10% Steel 6%

Source: Company, IIFL Research

sangeetha@iiflcap.com

Vardhman Textiles

I. Indias largest diversified yarn manufacturer VTL started as a yarn manufacturer in 1965, with a 12,000-spindle yarn-spinning capacity, and currently has an 870,000-spindle yarnmanufacturing unit. From manufacturing plain greige yarn, the company has grown to become a leading manufacturer of a range of value-added yarn products, including blended yarns, sewing threads, and handknitted yarn. It is also Indias largest exporter of cotton yarn, accounting for almost 5% of the countrys total yarn exports. De-risking by value addition: Greige yarn is a commoditised product, with both realisations and input prices being market-determined. To improve its pricing power, VTL started manufacturing value-added products such as compact yarn, melange, dyed, hand-knitted, slubs and mercerised yarn, which command 3-5% pricing premium.
Figure 3: Commodity products now account for <50% of yarn revenues; higher share of value-added products has improved VTLs pricing power
Share of yarn revenues C ompaction yarn 25%

Indian cotton yarn manufacturers have been in a sweet spot, as: 1) a bumper domestic crop has pulled cotton prices lower than the global average; and 2) global yarn prices remain firm, as demand from developed markets has revived, while global cotton prices have remained firm. While domestic raw-cotton prices increased 30% in FY10, global yarn prices rose by >50% YoY. This was also reflected in VTLs EBITDA margin, which widened from ~15% in FY09 to 21% in FY10.
Figure 4: Thanks to soaring yarn prices, yarn-cotton spreads are at a multi-year high
Yarn prices 180 150 120 90 60 30 (Rs/kg) Cotton prices Spreads (RHS) (Rs/kg) 60 50 40 30 20 10 0 Jun06 Dec06 Jun07 Dec07 Jun08 Dec08 Jun09 Dec09 Jun10

C ommoditised yarn 45%

0
Source: Bloomberg, Company, IIFL Research

Figure 5: High yarn-cotton spreads boosted EBITDA margins to a multi-year high

Yarn
Specialised yarn 30%
Source: Company, IIFL Research

EBITDA margins 20.0% 18.0% 16.0% 14.0% 12.0% FY06

Source: Company, IIFL Research

Yarn-cotton spreads have hit 10-year highs Yarn-cotton spreads are a function of two factors: (a) cotton prices, which are dependent on domestic raw-cotton production; and (b) yarn prices, which are driven by global textile demand and global cotton prices.

FY07

FY08

FY09

FY10

sangeetha@iiflcap.com

Vardhman Textiles

Yarn prices to remain high: Global prices of yarn rose ~45% in FY10, and have since rise by another 15%. We expect yarn prices to rise further, as global cotton prices remain firm (up 11% in the last six months) owing to a decline in global supply (floods in Pakistan have weighed severely). Any significant slowdown in global demand would pose a downside risk to yarn realisations and yarn manufacturers margins. Domestic cotton price likely to rise: India is one of the few cottonsurplus countries; in FY10, the country exported 8.3m bales of cotton 30% of its domestic production. FY11 is expected to see bumper production of 32.5m bales, driven mainly by an increase in acreage (7% YoY) and yield growth thanks to higher penetration of BT cotton (~90%). Such a huge surplus could widen the discount at which cotton trades domestically vs global markets. While global cotton prices are up 11% in the last six months, domestic cotton prices are still up only 5%, even after the ban on exports was lifted a few months ago. II. Diversified into fabrics VTL entered fabric manufacturing in 1992, starting with greige (unprocessed) fabric, and subsequently entered the processed-fabric market in 1999. The company produces fabrics both for tops (shirting) and bottom weights (trousers). In the fabric segment too, the company has attempted to move away from commoditised products (unprocessed fabric) to value-added products such as dyed yarn, special white, and melange fabrics. With pricing power and scale economies kicking in, this segment has witnessed a significant improvement in EBITDA margin during FY07-FY10 (up ~300bps during this period).

Figure 6: Better realisations and economies of scale supported fabric margin expansion
Fabric segm ent Fabric revenue growth (YoY) 18.0% (YoY growth) EBITDA margins (RHS) (% of revenues) 18.0% 15.0% 12.0% 12.0% 9.0% 6.0% 6.0% 3.0% 0.0% FY07
Source: Company, IIFL Research

0.0% FY08 FY09 FY10

III. Garment foray further efforts at forward integration VTL recently entered into a JV with Nisshinbo Textile Inc to manufacture garments, in a step to forward-integrate further. VTL owns 51% of this JV. The company aims to install capacity to produce 1.2m pieces of garments by December 2010 and raise it to 1.8m pieces by FY12. This should contribute <3% of its consolidated EBITDA by FY12. While forward-integration would certainly support margin expansion, sales of garments would imply developing very different skill-sets to deliver to customers. Most of the companys revenues so far have come from products of standardised processes (yarn and fabrics); garment manufacturing, on the other hand, will require much more customisation in each set of orders from clients. Furthermore, the company will need to develop at least some basic level of apparel design skills.

sangeetha@iiflcap.com

Vardhman Textiles

IV. Sewing-thread is VTLs only B2C business VTL started its sewing-threat business in FY02, in a joint venture with American & Efird (A&E); VTL owns 51% in this subsidiary. Unlike its other businesses (yarn, fabric, steel and fibres), where the company sells to industrial customers (including apparel manufacturers and vendors of large retailers), sewing thread is the only business where Vardhman sells its products to consumers. This makes it one of the most profitable segments for the company (EBITDA margins of ~20%, vs consolidated margins of 16-18%). VTL is the second largest producer of sewing thread in India, after Madura Coats, according to company sources. The company does not plan any significant capacity addition in this segment in the near future, as returns on its yarn and fabric manufacturing businesses appear more profitable at current prices.
Figure 7: Strong domestic consumer demand has supported high margins in FY08-10
Sew ing thread Revenue growth (YoY) 12.0% 10.0% 8.0% 6.0% 4.0% 2.0% 0.0% -2.0% -4.0% FY07
Source: Company, IIFL Research

V. De-merger of unrelated (steel) business Following the acquisition of a sick textile company, which also had steel assets, the company came into steel-manufacturing capacities, which have since been integrated into the books of VTL. The steel division contributed ~6% of VTLs consolidated revenues during FY10 and registered EBITDA margin of ~15% in FY10. As the steel business is not a part of the core textile-manufacturing business, the company has decided to de-merge it, with effect from January 2011 onwards. Capacity addition likely to continue to take advantage of TUFS The TUFS scheme introduced in April 1999, which provides subsidy on import of capital goods, has been extended multiple times. Based on current information, it is due to expire at the end of FY12the government recently clarified that it would not be extending it further beyond FY12. However, industry lobbying efforts are on in full swing.
Figure 8: Free cash flows to remain positive as above-normal yarn margins should support strong operating cash flow
Free cash flows C apex (RHS) 10,000 8,000 6,000 4,000 2,000 FY07 FY08 FY09 FY10 FY11ii FY12ii FY13ii

EBITDA margins (RHS) 25.0% 20.0% 15.0% 10.0% 5.0% 0.0%

4,000 2,000 (2,000) (4,000) (6,000) (8,000)

FY08

FY09

FY10

Source: Company, IIFL Research

sangeetha@iiflcap.com

Vardhman Textiles

Should the scheme indeed expire in FY12, VTL plans to launch a significant capacity addition programme, adding ~20% to its current capacities (Rs10bn capex on its current gross block of ~Rs40bn). Currently, only a Rs3bn investment in yarn capacities has been finalised, and the rest will depend on the extension of the TUFS scheme. We estimate that the company will secure funding for the entire TUFS scheme during the next 18 months, and this expansion plan should be completed by FY13. Despite such significant capex spending, we estimate that VTL should remain FCF-positive during FY11-13ii, supported by operating cash flows (due to super-normal high margins). Change in accounting policy offers upside potential to our estimates VTL depreciates its assets over an average period of 10 years. Under IFRS, the management could potentially decide to depreciate its assets over 15-20 years, given that average age of these assets is well above 15 years. Should the management consider such a shift in its policy, the lower depreciation could lead to 7-9% upside to our FY12-13 EPS estimates. Stock trades at ~50% below its historical peak multiple At its current 1-year-forward PER of 6.4x FY11ii EPS, the stock trades at a >50% discount to its historical peak multiple of 15.4x, and also below its 5-year average multiple of 7.7x. The continued bull run in yarn prices and higher volumes should support a re-rating in the stock. That said, given that risk to yarn realisations remains high (global indicators still tepid), we believe the stock should trade closer to its historical average levels. Based on this, we value the stock at 8x 1-year forward PE, which gives a 12-month target price of Rs37419% above the CMP.

Figure 9: Trading below historical average P/E

1-yr fw d PE 15 12 9 6 3 0 Dec-05 Dec-06 Dec-07 Dec-08 Dec-09 Apr-10 Aug-05 Aug-06 Aug-07 Aug-08 Aug-09 Aug-10 Apr-05 Apr-06 Apr-07 Apr-08 Apr-09 (x) 5-yr historical average

Source: Bloomberg, Company, IIFL Research

sangeetha@iiflcap.com

Vardhman Textiles

Annexure 1
VTL started business as a yarn manufacturer, but has since expanded into fabrics, garments, sewing threads, fibres and steel manufacturing.
Figure 10: Group structure
Vardhaman Textile

Figure 11: Cotton accounts for the largest share of raw materials largely procured domestically
Raw materials

Acrylic 8% Others 13%

Vardhman textiles Yarn,fabric,steel

Vardhman Yarns and Threads Sewing thread J&V with A&E, USA

Vardhman Spinning Cotton Yarn JV with Marubeni & Toho Rayon, Japan

Vardhman Acrylics Acrylic Staple fibre

Source: Company, IIFL Research

C otton 79%

Source: Company, IIFL Research

VTL sources most of its raw materials domestically Cotton constitutes over 80% of VTLs raw-material utilisation. The company depends almost entirely on the domestic market for cotton procurement, except in the case of specific customer requirements that necessitate procurement of a certain variety of cotton from specific countries. The company manufactures yarn from a wide variety of raw cottonfrom counts as low as 20 to as high as 200. India, being one of the few countries in the world with climatic conditions that suit the output of a variety of raw cotton, offers ready supply of all counts.

VTL sells mostly to vendors directly Although VTL sells most of its yarn to its customers directly (Gap and Esprit, among others), these prices are driven largely by market conditions. While supply to customers directly assures the company of offtake at assured margins, maintaining quality is key to retaining vendor relationships.
Figure 12: Yarn demand is mainly driven by global markets (US and Europe mainly)

33% used for captive purposes

Yarn

33% to domestic fabric manufacturers

80% sold directly to vendors 20% sold in the wholesale market

33% exported
Source: Company, IIFL Research

sangeetha@iiflcap.com

Vardhman Textiles

Financial summary
Income statement summary (Rs m)
Y/e 31 Mar Revenue EBITDA EBIT Interest expense Exceptional items Others items Profit before tax Tax expense Net profit FY09A 29,654 4,524 2,090 1,068 1,134 70 2,226 513 1,713 FY10A 33,507 7,050 4,484 852 222 -260 3,595 980 2,615 FY11ii 36,590 8,386 5,607 1,165 0 -207 4,236 1,355 2,881 FY12ii 38,411 8,362 5,414 1,369 0 -129 3,916 1,266 2,650 FY13ii 45,459 9,804 6,518 1,521 0 -167 4,830 1,547 3,282

Balance sheet summary (Rs m)

Y/e 31 Mar Cash & cash equivalents Sundry debtors Trade Inventories Loans and advances Fixed assets Other assets Total assets Short-term debt Sundry creditors Other current liabilities Long-term debt/Convertibles FY09A 2,226 2,434 -372 859 501 5,648 -1,781 3,867 1,307 -1,283 405 -271 -1,015 3,010 FY10A 3,595 2,566 -736 -6,288 644 -219 -2,271 -2,490 26 553 1,444 -215 -756 -1,438 FY11ii 4,236 2,778 -1,355 -2,731 1,091 4,019 -3,000 1,019 0 0 2,109 -236 -4,591 -1,700 FY12ii 3,916 2,948 -1,266 -1,361 1,195 5,433 -3,500 1,933 0 0 1,980 -218 -1,195 2,500 FY13ii 4,830 3,286 -1,547 -2,856 1,361 5,073 -3,500 1,573 0 0 -293 -269 -1,361 -350 Networth Total liabilities & equity FY09A 5,130 3,459 7,396 4,091 26,308 51 46,435 2,889 2,734 4,538 22,443 13,832 46,435 FY10A 3,546 4,758 12,970 3,483 25,986 29 50,772 3,752 3,004 5,297 22,679 16,042 50,772 FY11ii 1,846 5,814 14,645 4,210 26,207 29 52,753 6,483 3,375 4,802 19,407 18,686 52,753 FY12ii 4,346 6,314 15,506 5,157 26,759 29 58,112 7,844 3,551 5,572 20,026 21,119 58,112 FY13ii 3,996 7,473 17,203 6,601 26,973 29 62,276 10,700 3,990 6,578 16,877 24,132 62,276

Cashflow summary (Rs m)

Y/e 31 Mar Profit before tax Depreciation & Amortization Tax paid Working capital Other operating items Operating Cash-flow Capital expenditure Free cash flow Equity raised Investments Debt financing/disposal Dividends paid Other items Net change in Cash & cash equivalents
Source: Company data, IIFL Research

Ratio analysis
Y/e 31 Mar Sales growth (%) Core EBITDA growth (%) Core EBIT growth (%) Core EBITDA margin (%) Core EBIT margin (%) Net profit margin (%) Tax rate (%) Net Debt/Equity (%) Return on Equity (%) Return on Assets (%)
Source: Company data, IIFL Research

FY09A 24.2 35.9 22.4 15.3 7.0 5.8 23.1 170.9 4.2 3.7

FY10A 13.0 55.8 114.6 21.0 13.4 7.8 27.3 152.0 14.9 5.1

FY11ii 9.2 18.9 25.1 22.9 15.3 7.9 32.0 140.4 15.4 5.5

FY12ii 5.0 -0.3 -3.4 21.8 14.1 6.9 32.3 130.6 12.5 4.6

FY13ii 18.3 17.2 20.4 21.6 14.3 7.2 32.0 119.6 13.6 5.3

sangeetha@iiflcap.com

Insurance
Life insurance more headwinds to valuation likely We believe there are added risks to valuations of life-insurance companies, arising from: a) a potential increase in surrender rate of policies in force; and b) an increase in tax rate on profits attributable to shareholders, from 12.5% to 30% under Direct Tax Code (DTC). A 100pps increase in surrender rate could take 1519% off new business value (NBV), depending on the residual life of policies in force. The increase in tax rate could adversely affect EV by 19%. With valuations of most life insurers at FY12ii P/EV of 2x or more, we believe risks are not adequately priced in yet. Risk to EV from higher surrender rate: YoY growth rates of renewal premium have moderated in 1QFY11, with some insurers even reporting declines. We believe this points to an increase in surrender rates of policies. Higher surrender rates than expected would adversely affect NBV and EV, given the negative variance between expected and realisable revenue. We estimate that a 10pps increase in the surrender rate would negatively affect NBV by 15-19%, depending on policies residual life. Ambiguity in DTC over applicability of new tax rules for policies in force could lead to an increase in the surrender rate over the next 12-18 months. Further negative impact from higher tax rate: The tax rate on profit attributable to shareholders will increase from 12.5% to 30% from FY13. This would adversely affect EV by 19% and shave off 300bps from new business margin (NBM) too. Taking into account the effect of the regulatory cap on pricing and higher tax rate, we reiterate our view that NBM would likely be 8-14% for our coverage universe. Risks not fully priced: Our valuation for life insurers implies market capitalisation/EV at 2x or more, with the exception of Max New York Life and Reliance Life. We believe the current market-implied valuations are yet to reflect the negative implications of the above changes. Our valuation itself is subject to additional risks as discussed above. We expect material change in valuations over the next 12 months as the uncertainty surrounding growth, margin and capital requirements crystallize.
Valuation summary FY12ii Max India (MNYL) Reliance Capital (Reliance Life) Bajaj FinServ (BALIC) ABNL (Birla Sunlife) ICICI Bank (ICICI Prudential) SBI (SBI Life) HDFC (HDFC Standard Life)
Source: IIFL Research

3 September 2010
YoY change in conservation ratio
20 (%) 10 1 0 -3 (10) (20) -17 MYNL BALIC -6 ICICI Pru Life 5 11 13

HDFCSL

BSLI

Source: Companies, IIFL Research

Impact of higher surrender rate on NBV

5th year 6th year 7th year 8th year 0.0 (5.0) (10.0) (15.0) (14.7) (20.0) (25.0) (19.2) (18.4) (16.9)

Total value of Stake in life life insurance insurance (%) (Rs m) 39,241 65,003 65,260 75,446 146,225 136,157 83,677 74 100 26 74 74 74 74

Value of life Life insurance insurance as % of SOTP per share 125 264 117 492 97 159 43 80.7 60.0 31.3 30.7 14.0 9.0 8.0

Target Recommendation price 155 REDUCE 697 REDUCE 361 REDUCE 883 ADD 864 REDUCE 2,802 BUY 622 ADD

CMP 153 775 488 813 1,004 2,759 633

Source: IIFL Research

Sampath Kumar sampath.kumar@iiflcap.com 91 22 4646 4665 Prabodh Agarwal prabodh@iiflcap.com 65 6511 61 61 Sumeet Singh sumeet.singh@iiflcap.com 91 22 4646 4673

Reliance Life

SBI Life

Insurance

Moderation in the growth rate of renewal premium brings added risk to valuation Insurance majors reported a moderation in the growth rate of renewal premium in 1QFY11. Renewal premium for a few, such as Bajaj Allianz Life (BALIC) and ICICI Prudential Life (ICICI Pru Life), registered declines. BALIC reported a decline for the second consecutive quarters. We believe this points to a higher surrender rate of policies than previously expected.
Figure 1: YoY growth in renewal premium
120 (%) 100 80

Figure 2: Reported conservation ratio

100 (%) 80 60

40 20 0 BALIC Reliance Life 1QFY10 ICICI Pru Life Max New York Life FY10 SBI Life Birla Sunlife HDFCSL

1QFY11

Source: Companies, IIFL Research

60 40 20 0 BALIC (20) 1QFY10 2QFY10 3QFY10 4QFY10 1QFY10 Reliance Life ICICI Pru Life Max New York Life

Our sensitivity analysis shows that every 10pps increase in surrender rate of policies will affect NBV adversely by 1519%, depending on the residual life of policies in force. Surrender of policies before residual life, but after the lock-in period will result in negative variance between expected and realisable revenue (assuming the contracted policys tenure at 10 years). The impact is likely to be higher for policies contracted for longer terms. Should a larger portion of policies run off on account of surrender, value accruing through NBV in EV will get affected significantly, and perhaps may not provide any significant value uplift above the invested capital. Currently, EV/invested capital ranges from 1.4x to 1.8x, depending on the valuation methodology and other associated factors such as guarantees and options underwritten by the insurer.

Source: Companies, IIFL Research

An increase in surrender rates is reflected in the conservation ratio reported by life-insurance companies. The conservation ratio is computed as renewal premium received during a quarter, divided by renewal and new business premium during the year-ago period. In 1QFY11, the conservation ratio declined YoY for BALIC, ICICI Pru Life and Max New York Life (MNYL), while it rose for SBI Life, Birla Sun Life (BSLI) and HDFC Standard Life (HDFCSL). The ratio remained unchanged for Reliance Life.

sampath.ku mar@iiflcap. c om

Insurance

Figure 3: Impact of a 10pps increase in surrender rate of policies in force on new business value (NBV) for a 10-year contract
5th year 0.0 6th year 7th year 8th year

Estimating the impact of the above on EV would be difficult. We will have no choice but to wait for life insurers to provide guidance on the above issue. As such, we keep our EV estimates and appraisal value for life insurers unchanged. Ambiguity over applicability of new tax rules under DTCtaxation of proceeds on redemption or at the end of contract maturitycould accentuate the propensity to surrender policies before the new rules take effect. DTC is likely to be implemented from 1 April 2012. Without transitory provisions from the existing regime to the new regime providing relief for policies in force, surrender levels could be significantly higher and hence will have a significant negative impact on EV as well. Negative impact on EV from higher tax rate for life insurers under DTC Tax rate on profits attributable to shareholders will increase from 12.5% plus surcharge to 30% from FY13. NBV and EV disclosed and estimated for most life insurers have thus far considered a tax rate of 12.5% plus surcharge. Our discussions with life insurers suggest that EV would need to written down for higher effective tax rate. A higher tax rate would likely shave off new business margin (NBM) by at least 300bps and NBV by 19%.

(5.0)

(10.0)

(15.0) (16.9) (20.0) (%) (25.0) (19.2) (18.4)

(14.7)

Source: IIFL Research

Figure 4: EV/invested capital

2.0 (x) 1.8 1.5 1.4 1.0 1.5

In our previous note (Industry in turmoil, 26 July 2010), we had considered the effect of higher tax rate of 25% when estimating sustainable NBM for life insurers. With the effective tax rate being higher than anticipated, there could be further downside to our estimate of sustainable NBM of 8-14%. Estimating the adverse impact of higher tax rate on NBM and NBV is much simpler, but that on EV is less simple. Here too, we will have no choice but to wait for life insurers to provide guidance on the impact on EV.

0.5

0.0 MNYL
Source: Companies, IIFL Research

BSLI

HDFCSL

Current valuations do not adequately factor in downside risks With valuations of most life insurers at FY12ii implied market capitalisation/EV of 2X or more, we believe current market prices do not factor the downside risks adequately. We believe this would likely be due to uncertainty on many fronts, including outlook for growth, margin 3

sampath.ku mar@iiflcap. c om

Insurance

and capital requirement. We believe valuations would likely reflect the underlying risk over the next 12 months as the uncertainties in many areas begin crystallizing

Figure 5: Value for life insurance business/Invested capital

(x) 6.0 5.0 4.0 3.0 2.0 1.0 0.0 MNYL Reliance Life BSLI ICICI Pru Life HDFCSL BALIC SBI Life

Source: Company, IIFL Research

sampath.ku mar@iiflcap. c om

Quick Take
Cement Another weak month
The initial set of cement despatch numbers for August 2010 indicates another lacklustre month (2-3% YoY growth) for the industry. Weak demand on account of heavy monsoon rainfall and a lull in infrastructure projects is likely to have depressed growth in August 2010. We expect growth rates to recover as the high-base effect wanesbut any such recovery will be modest, as infrastructure activity remains sluggish. Cement prices continue to decline on account of a sharp increase in supplies, as more capacities started in the past 2-3 quarters are stabilising. 3 September 2010 Cement prices decline across regions: As per our interactions with dealers, cement prices have declined across all regions in August 2010. Average cement price for the country for August 2010 declined 2% MoM and 15% YoY to Rs207 per bag. The sharpest decline was in Hyderabad, where average cement price declined 6% MoM and 36% YoY to Rs132 per bag.
Figure 1: Cement despatches (m tonnes) and YoY growth % for August 2010
Company ACC Ambuja Cements A V Birla group Jaiprakash Associates Total
Source: Companies, IIFL Research

August 2009 1.65 1.42 2.89 0.72 6.69

August 2010 1.57 1.42 2.96 1.09 7.05

YOY growth (%) -4.8 0.0 2.4 51.6 5.4

Initial set of numbers indicates continuation of low growth: Despatch numbers of four major cement producers indicate growth at 2-3% for August 2010. While growth numbers of ACC and Ambuja Cements were better than in July 2010, Grasim Industries and Jaiprakash Associates reported a slowdown. Our interactions with dealers indicate that ACC and Ambuja Cements maintained their volume sales, through steeper price cuts vis--vis peers. Our interactions with dealers indicate that demand remains sluggish: Despatches in the first five months in FY11 are likely to have grown at 4.8% YoY. The high base of 12.6% for the year-ago period coupled with heavy monsoon rainfall and a slowdown in infrastructure projects has depressed despatch growth in the current year. The base will turn favourable for the next seven months as growth last year was at 8.4%. That said, we believe it will be difficult to maintain double-digit monthly growth for the rest of the year, given continuing sluggishness in demand from the infrastructure segment (we will keep a close watch on this). We retain our FY11 growth expectation at 7%.

Figure 2: Despatch trend for the industry and companies that have reported August data
Aggregate grow th rate for companies reported 25.0 20.0 15.0 10.0 5.0 0.0 May-09 Oct-09 May-10 Feb-10 Jun-09 Mar-10 Jul-09 Jan-10 Jun-10 Nov-09 Dec-09 Sep-09 Apr-09 Aug-09 Apr-10 Jul-10 Aug-10 Industry

YoY grow th (%)

Source: Companies, CMA, IIFL Research

J Radhakrishnan

radhakrishnan@iiflcap.com

(91 22) 4646 4653

Cement

Figure 3: All-India average cement prices continue to decline owing to poor demand and increasing supplies
260 (Rs per 50kg bag) 240 220 200 180 160 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun Jul Aug Sep 2007 2008 2009 2010

Source: Industry, IIFL Research

Figure 4: Valuation snapshot

Market cap (US$m) ACC* Ambuja Cements* Grasim Inds India Cements # Kesoram Inds # Madras Cements Shree Cement # 3,572 4,052 696 289 519 CMP (Rs) 894 125 107 297 103 Sell Sell Add Sell Sell Sell Add Rating EV/EBIDTA (x) 8.4 7.8 3.4 13.6 9.8 10.5 5.8 7.7 7.2 2.8 9.7 9.8 7.4 5.1 PER (x) P/BV FY12ii 2.3 2.2 1.0 0.9 0.8 1.5 2.4 2.0 EV/tonne FY12ii 106 151 NA 62 96 84 86 121

FY11ii FY12ii FY11ii FY12ii 14.4 14.3 9.1 50.0 11.5 20.6 16.6 14.7 14.1 8.2 20.2 10.9 10.8 11.3 12.8

4,138 2,089

1,401 1,890

5,429 925 Sell 8.5 7.5 14.9 UltraTech Cement *CY10ii and CY11ii numbers. #Adjusted for other segments Source: IIFL Research

radhakrishnan@iiflcap.com

Dumb Commodities
Best places to find price cues
This week has been even quieter than the last oneat this rate we will run out of topics for Dumb Commodities in about six months. Luckily, Ben Bernanke again proved that there is no better place than the Fed to look for clues on gold price. Next, we are going to explain why the Americas are better places to look for clues on palm-oil prices. Lastly, we discuss how Coal India could slip up. Quote of the week: In particular, the Committee is prepared to provide additional monetary accommodation through unconventional measures Ben Bernanke, Chairman of the Federal Reserves Mr Bernankes Jackson Hole speech has pretty much sealed US$1,200 as the interim anchor for gold price. Hint: unconventional measures means quantitative easing, which is a polite name for printing money. We cant help but feel a dj vu of May 2009, when we wrote The Gold Report. Not much has changed: a huge amount of liquidity is still clogged in the banking system (now also on large corporations balancesheets); and velocity of money is low. Thus, the arguments we made (when gold price was below US$900) ring even truer now than before. To our ears, Mr Bernankes lengthy speech sounded eerily like he was directly addressing us on the issues raised by our report (in the Gold from now on section), and explaining how he hopes to get to our Scenario W (W for Wonderland), but is ready to go down Scenario L (L for Lame) if necessary. I urge you to read our report alongside Mr Bernankes speech. We quote below exactly what we wrote in May 2009 describing Scenario L: Gold price would shoot up to US$1,500 or US$2,000, depending on when the Fed is done with inflation, before settling back at a higher equilibrium (say US$1,200 per oz) on an elevated general price level.

From our Singapore desk

03 September 2010 Wonder about palm oil prices? Look to Argentina and the US When the famous palm oil analyst Dorab Mistry speaks, people listen. DD MMM YYYY So, when he recently proclaimed his forecast of zero production growth in 2010 and MYR3,000 price target for crude palm oil, the market took cue. But not many people paid attention to his pre-conditions for the price forecast: soybean oil will need to rise to US$1,050 FOB Argentina and will maintain a healthy premium over palm oil. This is because of the hard reality that palm oil is at the bottom of the pecking order of edible oils, long being perceived as a cheap, inferior substitute to soybean oil due to its high content of saturated fatty acid. Thus, its consumption and prices are hostage to other edible oils. Why eat palm oil when soybean oil is cheap, after all? Figure1:PricespreadofrefinedsoybeanoiloverRBDpalmoil
(US$/MT) 600 500 400 300 200 100 0 (100) J96 J97 J98 J99 J00 J01 J02 J03 J04 J05 J06 J07 J08 J09 J10 PricespreadofrefinedsoybeanoiloverRBDpalmoil

Source:Bloomberg,IIFLResearch

At the moment, the price of soybean oil is at US$879 per tonne FOB Argentina, and its premium over palm oil is pretty thin. This price, in our view, is still a hyped-up one after the Russian wheat mania. Short of a last minute weather disaster in the US, we are staring at bumper harvests of soybean (and plenty of unutilised crushing capacities in China) this year.
|

Billy X Wang, CFA | billy@iiflcap.com +65 6511 6162

Zuo Li | zuoli@iiflcap.com +65 6511 6163

Dumb Commodities Figure2:SoybeanoilpriceFOBspotArgentina There is a big price difference between coal at pit-mouth and coal at destination. In 2005 (when Chinas coal transportation bottlenecks were endemic), thermal coals sold for RMB150 (US$22 or Rs1,031) per tonne at pit-mouth in Inner Mongolia could fetch RMB400 (US$59 or Rs2,749) in Shenyang (a second-tier city in the nearby Liaoning Province). The Chinese bottlenecks have been somewhat eased by frenetic construction of railway infrastructure. But the problem still lingers: a severe snowstorm in 2008 had shut down almost all coal deliveries from the Shanxi Province, and last month China had coal trucks to thank for the biggest traffic jam in human history (120km long, lasting 11 days; see photo below). Figure3:Aglimpseofwhatstobecome

Source:Bloomberg,IIFLResearch

Overall, we believe there is still downside to soybean oil price when the US harvest is firmly in hand. This could imply an even larger downside to palm oil prices, as the soybean oil price premium needs to widen to at least US$100-150 per tonne to be healthy. Coal India any way out? Forget about insurgency in Indias coal regionsthat will soon be the least of Coal Indias woes. The companys biggest worry, from my vantage Chinese viewpoint, is how to move its coal out. Make no mistake: I dont discount the bright long-term fundamentals of Coal India. But my only surprise on hearing of Coal Indias struggle to get more rail wagons to deliver its coal to customers was that this problem didnt come up earlier. Indias electricity generation is only one-fifth of Chinas, yet India already has this coal transportation headache. It can only get worse.

Source:AP,IIFLResearch

Given Indias speed record on infrastructure building, Im not holding my breath for major railway expansions anytime soon. Coal India can choose to generate electricity itself, but in that case, it may face grid deficiencies, not to mention the unpleasant subsidy rates. It can extend even further into aluminium smelting (like China Power Investment Corporation is doing), but that can only consume a small portion of its total production. Or maybe it can build railways itself?

billy @iif lcap.com

Monday

Tuesday

Wednesday

Thursday

Friday

Saturday

AUGUST2010 23 24
Mphasis

25

26

27
Havells India, HCL Info

28
Pantaloon Retail

SEPTEMBER2010 30 Aug 31 Aug 1

Shiv-vani Oil & Gas (FY10)

4
Tanla Soln (FY10) 5 Sep

Jul CPI-

IW

Jul Exports- 13.20% Jul Imports- 34.30%

10

11

Jul IIP-

13

14

15

16

17

18

Aug WPI-

Black: Quarterly results, Blue: Economic data, Red: India Holiday.

Jul-Sep 10
Economics / Politics

Oct-Dec 10

Jan-Mar 11
RBIs Monetary Policy meeting (end Jan) 3QFY11 Quarterly GDP

RBIs Monetary Policy meeting on 27th July, RBIs Monetary Policy meeting (end Oct) 2010 2QFY11 Quarterly GDP 1QFY11 Quarterly GDP India Cements 1.5mtpa plant in Rajasthan to start (Sep)

Cement

Bharathi Cement 2mtpa (2nd unit) in Chettinad Cement 2mtpa expansion at Cuddapah to start (Dec) Karikali, TN (Mar) Ambuja Cements 1.5mtpa unit in Bhatapara Jaiprakash Associates 3.5mtpa to start (Dec) expansion at Nalgonda, AP (Mar) Shree cements 1.5mtpa plant in Ras to start Jaiprakash Associates 3mtpa expansion (Nov) at Dalla, UP (Mar) ACC Wadi clinker unit to support 3mtpa cement to start (Oct) Prism Cements 3mtpa plant to start (Dec) JP Associates 2nd phase addition in Gujarat to start (Nov)

Media Metals

Sun TV To release its high budget movie Indhiran Sterlite: 1st phase of 2400MW will commence operation JSWs Chilean iron ore mine to commence shipments Sterlite: 100ktpa lead smelter is expected to commence operation FPO of IOC (Dec) Sun Pharma: Israeli Supreme court decision on Taro acquisition agreement Dr Reddys: Potential USFDA approval for fondaparinux Lupin: launch of Allernaze in US Ranbaxy: Launch of generic Aricept in US Sun Pharma: resolution of Caraco manufacturing quality issues in US Opto Circuits: Launch of Dior drug eluting balloon in Europe Dr Reddys: court review decision on Allegra D24 preliminary injunction Piramal Healthcare: Closure of sale of domestic formulations business to Abbott Labs Sterlite: 2nd phase of 2400MW will commence operation

Oil & Gas Pharma

Jul-Sep 10
Real Estate Peninsula land QIP fund raising Anantraj - QIP fund raising IPO of Oberoi constructions DoT to revert on TRAI 2G recommendations BWA spectrum allocation expected

Oct-Dec 10
Listing of Unitech Infrastructure on completion of restructuring of Unitechs non-core assets.

Jan-Mar 11

Telecom

MNP to be implemented Indus to complete court process for tower transfer RCOM GTLI tower deal to be implemented 3G spectrum allocation expected

3G services will be rolled out

Utilities

JSPL - Second 135 MW unit of 540MW plant at Chhattisgarh (Jul / Aug) KSK Unit III & IV (135MW each) at Wardha Warora EGoM meeting on July 27 to decide on gas allocation to Reliance Power from RILs KG-D6 field

Key to our recommendation structure BUY - Absolute - Stock expected to give a positive return of over 20% over a 1-year horizon. SELL - Absolute - Stock expected to fall by more than 10% over a 1-year horizon. In addition, Add and Reduce recommendations are based on expected returns relative to a hurdle rate. Investment horizon for Add and Reduce recommendations is up to a year. We assume the current hurdle rate at 10%, this being the average return on a debt instrument available for investment. Add - Stock expected to give a return of 0-10% over the hurdle rate, ie a positive return of 10%+. Reduce - Stock expected to return less than the hurdle rate, ie return of less than 10%.

Published in 2010. India Infoline Ltd 2010 This report is published by IIFLs Institutional Equities Research desk. IIFL has other business units with independent research teams separated by Chinese walls, and therefore may, at times, have different or contrary views on stocks and markets. This report is for the personal information of the authorised recipient and is not for public distribution. This should not be reproduced or redistributed to any other person or in any form. This report is for the general information of the clients of IIFL, a division of India Infoline, and should not be construed as an offer or solicitation of an offer to buy/sell any securities. We have exercised due diligence in checking the correctness and authenticity of the information contained herein, so far as it relates to current and historical information, but do not guarantee its accuracy or completeness. The opinions expressed are our current opinions as of the date appearing in the material and may be subject to change from time to time without notice. India Infoline or any persons connected with it do not accept any liability arising from the use of this document. The recipients of this material should rely on their own judgment and take their own professional advice before acting on this information. India Infoline or any of its connected persons including its directors or subsidiaries or associates or employees shall not be in any way responsible for any loss or damage that may arise to any person from any inadvertent error in the information contained, views and opinions expressed in this publication. India Infoline and/or its affiliate companies may deal in the securities mentioned herein as a broker or for any other transaction as a Market Maker, Investment Advisor, etc. to the issuer company or its connected persons. India Infoline generally prohibits its analysts from having financial interest in the securities of any of the companies that the analysts cover. In addition, the company prohibits its employees from conducting F&O transactions or holding any shares for a period of less than 30 days.