Market Outlook

India Research
September 16, 2011

Dealers Diary
The market opened on a firm note, however it soon pared gains. Intraday volatility continued as the market trimmed losses after slipping into the red to hit a fresh intraday low in morning trade. The market once again trimmed losses after sliding to a fresh intraday low in mid-morning trade. Volatility continued in early afternoon trade as key benchmark indices weakened once again after recouping almost the entire intraday losses. The market trimmed losses in afternoon trade as European shares opened on a firm note. The market surged in late trade on news reports that the government has eased rules on overseas borrowing. The Sensex and Nifty ended with gains of 1.0% and 1.3%, respectively. The mid-cap and small-cap indices closed with gains of 0.6% and 0.3%, respectively. Among the front runners, Tata Motors, DLF, SBI, HDFC and Sterlite Inds gained 2-6%, while L&T, BHEL, Hindustan Unilever, Maruti Suzuki and Tata Steel 1-2%. Among mid caps, Jai Corp., BGR Energy, TVS Motor, Shree Global Trd and DB Realty gained 6-16%, while Marico, TTK Prestige, IPCA Lab, SREI Infra and KGN Inds lost 5-10%.

Domestic Indices BSE Sensex Nifty MID CAP SMALL CAP BSE HC BSE PSU BANKEX AUTO METAL OIL & GAS BSE IT Global Indices Dow Jones NASDAQ FTSE Nikkei Hang Seng Straits Times Shanghai Com

Chg (%) 1.0 1.3 0.6 0.3 0.0 0.8 1.8 1.7 0.5 1.2 2.1 Chg (%) 1.7 1.3 2.1 1.8 0.7 1.0 (0.2)

(Pts) 63.2 34.7 18.4 2.5 63.5 141.5 98.9 106.0 (Pts) 34.5 110.5 150.3 26.6 (5.8)

(Close) 5,076 6,367 7,214 5,951 7,635 8,734 8,730 5,146 (Close) 2,607 5,338 8,669 2,766 2,479

166.9 16,877

197.4 11,062 57.9 12,195

186.5 11,433

Markets Today
The trend deciding level for the day is 16,781/5,045 levels. If NIFTY trades above this level during the first half-an-hour of trade then we may witness a further rally up to 17,017 17,158/5,122 5,169 levels. However, if NIFTY trades below 16,781/5,045 levels for the first half-an-hour of trade then it may correct up to 16,641 16,405/4,998 4,921 levels.
Indices SENSEX NIFTY S2 16,405 4,921 S1 16,641 4,998 R1 17,017 5,122 R2 17,158 5,169

136.1 19,182

Indian ADRs Infosys Wipro ICICI Bank HDFC Bank Advances / Declines Advances Declines Unchanged

Chg (%) 1.6 3.0 3.6 0.4

(Pts) 0.8 0.3 1.3 0.1 BSE 1,545 1,235 106

(Close) $50.6 $9.8 $37.9 $31.4 NSE 834 623 65

News Analysis
Petrol price hiked by `3.1/litre RBI Monetary Policy Preview Expect a 25bp hike in repo rate Monthly Update: August 2011 Financials Much awaited NTPC bulk tendering out, BHEL, BGR and L&T bag orders Marico information update: Signaling caution Jyoti Structures enter into JV with US-based Lauren Engineers
Refer detailed news analysis on the following page

Net Inflows (September 14, 2011) ` cr Purch Sales FII MFs 2,117 418 2,126 575

Net (9) (157)

MTD 984 (1,068)

YTD 176 5,207

Volumes (` cr) BSE NSE 2,571 10,582

FII Derivatives (September 15, 2011) ` cr Index Futures Stock Futures Gainers / Losers Gainers Company Jai Corp. Power Finance Tata Motors Patni Computer Unitech Price (`) 96 156 151 294 28 chg (%) 15.5 8.1 6.0 5.4 5.1 Company Marico Pipavav Shipyard Sun TV Network Gujarat NRE Coke Amtek Auto Losers Price (`) 143 86 280 27 141 chg (%) (10.1) (4.0) (3.1) (2.6) (2.3) Sebi Registration No: INB 010996539
1

Purch 3,099 1,899

Sales 2,844 1,497

Net 254 401

Open Interest 16,662 29,269

Please refer to important disclosures at the end of this report

Market Outlook | India Research

Petrol price hiked by `3.1/litre

Oil marketing companies (OMCs) have hiked petrol prices by approximately `3.1/litre as firm crude oil prices coupled with depreciating rupee were resulting in higher underrecoveries (revenue losses) on sale of petrol. As per Indian Oil Corporation, OMCs were losing `3.1/litre (including taxes) after considering the impact of the recent rupee depreciation (4.2% during September 2, 2011, to September 16, 2011) against the US dollar. A 5.0% depreciation in the rupee results in an increase in under-recoveries by approximately `9,000cr annually. Despite the decline in crude oil prices from US$127/bbl in April 2011 to US$115/bbl currently, OMCs have reportedly lost `2,450cr during April-August 2011 on account of selling petrol at lower prices. Factoring in the recent rupee depreciation, the hike in petrol prices is expected to have an insignificant impact on overall under-recoveries. OMCs continue to lose `260cr per day on account of selling diesel, domestic LPG and kerosene at subsidised prices at current prices. Hence, we continue to maintain our under-recoveries estimates of `100,450cr for FY2012, primarily on account of selling diesel, LPG cylinder and kerosene at subsidised prices. We maintain our Buy ratings on ONGC and GAIL with target prices of `326 and `508, respectively.

RBI Monetary Policy Preview Expect a 25bp hike in repo rate

The Reserve Bank of India (RBI) will be conducting the mid-quarter review of its monetary policy today. The RBI in its previous policy review had surprised the street by raising the repo rate by 50bp as against consensus expectations of 25bp. We expect the RBI to carry out a final hike of 25bp in repo rate for the current interest rate cycle. The street consensus is also for a 25bp hike. Though the moderation in growth has become more evident of late, headline inflation has remained sticky above 9% levels for the last nine months. In fact, the latest inflation reading accelerated to a 13-month high, approaching double digit. Core inflation (nonfood manufacturing) the variable that the RBI tracks closely for August 2011 accelerated to 7.8% from 7.5% a month ago. Hence, we expect a 25bp repo rate hike in the policy review today. However, post the expected hike today, we expect the RBI to take a pause, as rising global growth concerns and declining fiscal stimulus measures in developed economies (on concerns of expanding fiscal deficits and unsustainable public debt to GDP) are likely to keep commodity and energy prices in check at least in the short term. Moreover, with signs of a slowdown on the domestic growth front, evident from slowing GDP growth rates, tepid IIP growth, moderating trend in PMI, declining vehicle sales and cement dispatches growth rates, we believe policy rates are close to their peak of the current interest rate cycle. Hence, apart from the actual rate action, in our view the markets would also be looking for hints of any softening in the RBIs stance that suggest that due to the global headwinds to growth, the RBI may look to pause after the current policy action.

September 16, 2011

Market Outlook | India Research

Monthly Update: August 2011 Financials

Slower growth pointing to peaking of interest rates Rising global growth concerns and declining fiscal stimulus measures in developed economies (on concerns of expanding fiscal deficits and unsustainable public debt to GDP) are likely to keep commodity and energy prices in check at least in the short term. Moreover, with signs of a slowdown on the domestic growth front, evident from slowing GDP growth rates, tepid IIP growth, moderating trend in PMI, declining vehicle sales and cement dispatches growth rates, we believe policy rates are close to their peak. Although recent indications from the RBI suggest another 25bp hike in the repo rate in the upcoming monetary policy review, we believe the RBI may pause after that hike. Further rate hikes could increase asset quality risks Our base case, looking at declining credit growth and improving liquidity, is that lending and deposit rates have largely peaked. However, further rate hikes by the RBI (post an expected 25bp hike in the repo rate on 16th September, 2011) could increase asset quality risks for the whole banking sector. Hence, amongst mid caps we prefer banks with a more conservative asset-quality profile (i.e., relatively lower yield on advances, lower infra exposure and switchover to system-based recognition system nearly complete). Switch strategy HDFC Bank to Axis Bank HDFC Banks fundamentals and earnings outlook remain strong, but at 3.1x FY2013E ABV, we believe the stock is fairly valued. Axis Bank is trading at attractive valuations of 1.7x FY2013E ABV almost at 46% discount to HDFC Bank vs. an average discount of 32% since July 2006. While the banks ALM position vis--vis HDFC Bank is currently a disadvantage, however with the interest rate cycle close to peak, in our view the bank will also benefit more once interest rates cool off a bit in CY2012. We believe such a large discount for Axis Bank to HDFC Bank is unjustified, considering its similar earnings quality and profitability. We have valued Axis Bank at 2.5x FY2013E ABV to arrive at a target price of `1,555. Switch strategy UCO Bank to United Bank of India United Bank of India (UTDBK) is trading at 0.6x FY2013E P/ABV, one of the lowest in the industry. Considering similar RoAs (0.6% over FY201113) for both UTDBK and UCO, superior CASA deposit franchise for UTDBK and higher relative contraction in NIMs expected for UCO over FY201113, we recommend a switch from UCO (0.8x FY2013 P/ABV) to UTDBK. We value UTDBK at 0.8x FY2013E P/ABV, implying an upside of 30.0%; hence, we recommend a Buy rating on the stock with a target price of `97. BOM Sound fundamentals, attractive valuation Recommend Buy We like Bank of Maharashtra (BOM) due to its sustainable and healthy CASA franchise, improving asset quality, lower exposure to riskier sectors and attractive valuations. Return ratios are expected to improve on the back of steady risk-adjusted NIMs, reduction in operating expenses and gradual improvement in fee income. Hence, we recommend Buy on the stock with a target price of `61

September 16, 2011

Market Outlook | India Research

Much awaited NTPC bulk tendering out, BHEL, BGR and L&T bag orders
Media reports have indicated that BGR has emerged as L1 for NTPCs second bulk tendering of SC equipment (9x800MW) in the turbine generator segment. In tandem with a split ratio of 4:3:2 for the number of units (tender condition), BGR is eligible to receive four units of turbine generators. The order potential for BGR amounts to ~`3,200cr (@`1.01cr per MW). Similarly, BHEL and L&T have emerged as L2 and L3 respectively, thereby bagging orders worth ~`2,400cr and `1,600cr respectively. Markedly, BHEL was preferred over L&T, who was initially declared L4, however placed L2 due to pre-agreed cabinet decision favouring BHEL. After a dry intake spell of nearly eight months, this is an extremely positive development for BGR, which desperately needs big orders to lend revenue visibility to its manufacturing venture. With its 4GW BTG manufacturing unit scheduled to commission in FY2013/14, the order will start contributing to the revenue from FY2014. But given the huge competition in the space, order bagging would help to put rest concerns on its venture, at least for the time being. Further, we believe the order is bagged on aggressive terms as it is bided at 10-12% lower ASP than the historical price and would imply tight rope walk for the company on margin front. However, management has indicated the company is expecting profit margin of 10% on this order but we would wait for more clarity on the same. Further, given the bleak outlook for the power segment, we would like to maintain our Neutral view on the stock. Also, the stock price gained >14% yesterday and closed at `368, factoring in most of the positives from the order. With preferential placement as L2 (vs. L4 in the original bidding), BHEL additionally gained by securing orders to the tune of ~`2,400cr apart from orders to the tune of `4,200cr for the Boilers. L&T on the other hand would be getting orders for 2 Turbines worth `1,600cr. However, BHEL and L&T would need to supply at the L1 price. We believe with given rising competition in the BTG space, from domestic and international players, BHEL would face margin pressure and the concerns of margin coming down for BHEL would come true. Therefore we maintain Neutral on BHEL. For L&T given its wide areas of expertise and market leader position in other sectors we believe that L&T is better placed to handle competition and hence we maintain Buy on the same with a target price of `1,903.

Marico information update: Signaling caution

Marico released an investor update highlighting that the consensus earnings estimates are unlikely to be met by the company given: High raw-material pressure still hovering, which will impact the companys operating leverage Modest demand environment due to the global economic turmoil, which might lead to volume loss High ad spends due to new product launches, which may compress operating margins further

The company also maintained that it might not resort to any further price hikes as it might affect its volume growth. We had been considering the above risks in our forward estimates; however, owing to further cautious stance adopted by the company, we marginally tweak our estimates downwards and remain Neutral on the stock.

September 16, 2011

Market Outlook | India Research

Jyoti Structures enter into JV with US-based Lauren Engineers

Jyoti Structures has entered into a JV with US-based Lauren Engineers and Constructors to garner more EPC business, mainly in the power generation and oil and gas sectors. The JV company will be named as Lauren Jyoti Private Ltd. Following the deal, Jyoti Structures also acquired a 50% stake in Lauren Engineers and Constructors India. The JV company has bagged an order worth `551cr from Godavari Green Energy to set up a 50MW solar thermal power plant in Rajasthan. However, not much detail has been disclosed pertaining to the order size for Jyoti Structures. We also await more clarity on the nature on the JV. The stock trades at an attractive valuation of 5.7x and 4.8x, FY2012E and FY2013E EPS, respectively. Since the steep market drift previous month, the stock has made an impressive recovery of 12% vs. Sensex gain of 6.5%. We continue to maintain our Buy recommendation on the stock with a target price of `100.

Economic and Political News

Food inflation for the week ended September 3, 2011, came in at 9.47% India's services exports in July stood at US$10.4bn, down 5.8% mom Cabinet okays 7% hike in government employees basic salary India likely to miss five-year infrastructure investment goal of US$500bn

Corporate News
IOC plans to invest US$1.87bn in Gujarat refinery Maruti to shut factories on Friday due to disruption in supply of critical components Tata Steel invests 800mn in Netherlands M&M to divest 8% stake in Mahindra Holidays McNally Bharat bags orders worth `75cr from Bhavnagar Energy Company Ltd.
Source: Economic Times, Business Standard, Business Line, Financial Express, Mint

September 16, 2011

Market Outlook | India Research

Research Team Tel: 022-3935 7800 E-mail: research@angelbroking.com Website: www.angelbroking.com

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Ratings (Returns):

Buy (> 15%) Reduce (-5% to 15%)

Accumulate (5% to 15%) Sell (< -15%)

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September 16, 2011