Hindalco:: Mahan visit—coal availability more critical than execution timelines ::Credit Suisse,

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Last week we visited Renukoot smelter (70% of Al production) and
Mahan smelter (upcoming project of $2.3 bn capex). Mahan is critical
as market currently assigns a negative value to the project.
● On Mahan timelines, our discussion with plant supervisors
suggested that multiple activities need to be completed to allow
first metal tapping by Dec-11. In our view, contingencies built into
the execution plan are low and could result in further delay of
couple of months but a six month delay is ruled out.
● More important is availability of coal as with captive coal, Mahan
would be value accretive even at current LME (Fig 1) but with the
linkage and E-auction mix, Mahan would not be accretive.
Adjoining region has coal availability of 60 mt with E-auction coal
of 6 mt versus project requirement of 4.1 mt (at full utilisation).
● We do not ascribe value to Mahan currently as a decision on
captive mine is pending. If the decision is in favour of Hindalco,
then the negative value ascribed to the project could turn to zero
(mine development takes >15 months and so it is too early to
ascribe positive value). Next EGoM meeting is on 9 October.

Mahan project currently gets negative value in CMP
We visited Renukoot smelter in Uttar Pradesh (70% of existing
aluminium production) and Mahan smelter in Madhya Pradesh
(upcoming greenfield project of $2.3 bn capex) last week. Mahan is a
critical project as it is currently being given a negative value in CMP.
With Utkal refinery delayed, Mahan should be evaluated as a
standalone smelter. In our view, alumina source is not as critical as it
only impacts transportation cost. Instead, coal availability is crucial for
Mahan. With captive mines, Mahan would be value accretive even at
current LME (Figure 1) but with a linkage and E-auction mix, Mahan
would not be accretive (a scenario built into the current price).
Adjoining region has only 6mt of E-auction coal
Our discussion with plant head suggested that options other than
captive mine are to depend on tapering linkage and E-auction coal.
The region has total coal availability of 60 mt with E-auction coal of 6
mt. Total coal requirement of the project is 4.1 mt and FY12 need is
2.3 mt (FY12 target is 57% utilisation = 204 kt) - a high requirement to
be met just through E-auction from adjoining areas. Therefore, delay
in getting tapering linkage implies lower utilisation for the project.
Favourable Mahan coal decision may alter negative value
As we show in Figure 1, Mahan would be EBITDA positive with a
combination of E-auction and tapering linkage but PBT negative.
Therefore, getting captive mine is essential. Our target price values
Mahan at zero currently as a decision on captive mine is still pending.
If the decision is in favour of Hindalco, then at least the negative value
ascribed to the project would turn to zero (mine development would at
least take 15 months, thus too early to ascribe positive value).
Mahan timelines: walking a tight rope
As per schedule, first unit of power plant (150 MW) and first metal
tapping in Mahan smelter is expected by Dec-11. Our discussion with
the plant supervisors suggested that several parallel activities need to
be completed before the end result is achieved. Given multiple
activities and low contingencies built into the execution (our view), it is
plausible that the commissioning schedule may be pushed out by
another couple of months but a further delay of six months is ruled out
(unless coal availability impacts project timelines).
● Power plant: Hydro test and synchronisation for the first unit in
next three months; Cooling tower under construction; cabling to
the control tower needs to be done. A 220 KV transmission line to
be ready by Nov-11; ash handling to be complete by Dec-11.
● Smelter (359 kt): Wagon procurement to start after application
with Railways is cleared (Coal & alumina would move by Railways
and have lead time of 2.5 months); 40 pots to be set up by Dec-11
Renukoot: impressed about how it is still going strong
Renukoot smelter, completing 50 years next year, has a conversion
cost comparable to Hirakud due to continuous improvement!
● Application for Renukoot smelter expansion to 476 kt from 410 kt
production (FY11) has been submitted to MoEF.
● Current bauxite mine life of 15 years (with 30% external sourcing)
can be extended to 25 years if Hindalco gets bauxite reserves
applied in Madhya Pradesh.
● Interaction with plant heads suggested margin on value-added
products (two-third of volumes) is 40-50%.

India IT Services: Viewing wealth creation through the lens of per employee metrics; evaluating trade-offs is key:: JPMorgan

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 Should large-cap Indian IT firms look to shift operating bands of per
capita EBIT upwards? Yes, we believe in the long run firms must look to
execute strategies (like non-linearity, higher-value solutions etc.) that actively
improve per capita EBIT as (a) the law of large numbers catches up and (b)
growth tapers off putting the focus on non-linearity. But this cannot come at the
cost of growth (or “g” in the equation) if a trade-off between growth and per
capita metrics exists. This is understood from the equation = EV = EBIT*(1-tax
rate)*(1-g/ROIC)/(Cost of capital – g). Reduced to a per employee basis,
EV/employee = EBIT/employee*(1-tax rate)*(1-g/ROIC)/(Cost of capital – g).
Per capita market cap depends operationally on (a) per capita EBIT, (b)
absolute EBIT growth and (c) sustainable ROIC. Of these three parameters, we
find that per capita market cap is by far the most sensitive to growth.
 More than per capita metrics, investors and firms must assess whether
business models offer sustainable growth at comfortable ROIC (>30%).
Theoretically, a 5% improvement in per capita market cap (thus easing the onus
of creating investor returns on employee growth/hiring) is generated by a 5%
improvement in per capita EBIT. But this is very difficult to accomplish in
practice as can be seen from Infosys’ per capita EBIT trend in the last 8-10 years
(virtually in a narrow range; non-linearity has not accomplished much of note).
 A much better lever to pull is growth if there is a growth versus per capita
profit trade-off. A 1% extra growth rate over the next 5-6 years accomplishes
the same as a rather difficult (if not impractical) 1-2% improvement in per capita
EBIT per year over the same period. How can one practically view trade-offs
such as these in business? A consulting-dominated proposition invariably
fetches higher per capita profits, but unless it scales (via downstream) for
growth, investor value from consulting-alone is limited from the point of view
of returns. In our view, Accenture understood the trade-off well as evidenced in
its moderating trend in its per capita EBIT over the past 3 years but cranking up
growth and margins in the bargain (through combined, tighter consulting +
outsourcing). This has improved Accenture’s per capita market cap relative
to Infosys. Cognizant’s per capita EBIT is ~30% lower than Infosys, yet it plays
on the “g” of the equation leading to increase of its per capita market cap.
 Pay attention to Q factor. For pair comparisons between two companies (Say
Company 1 and company 2), the premium that the market accords to relative
growth is what we call the Q factor (defined as relative ratio of per capita market
cap/Per capita post-tax EBIT). By taking ratios between companies, we
eliminate the impact of P/E dislocation in the sector due to shock events.
Companies’ whose Q scores have improved have done so due to higher change
in growth expectations relative to peers. They have also returned greater
shareholder wealth relative to the chosen index (Infosys). The company that has
increased its Q factor the most over a long-enough secular time frame (3 and 5
years) is Accenture. Change in Q is most sensitive to change in growth
expectations – much less to changes in EBIT/employee. Maximizing per capita
profitability must be subordinate to maximizing growth for investor returns as
long as head-room for growth exists.

Buy HCL Technologies- Return Potential: 23% ::Goldman Sachs,

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Buy
HCL Technologies Ltd. (HCLT.BO)
Return Potential: 23% Equity Research
IMO: A sustainable advantage; incremental US$1bn by FY14; CL-Buy
Source of opportunity
We believe Infrastructure Management Outsourcing (IMO) will be the
fastest growth segment in global IT outsourcing over next few years. In
our view, HCL is one of the best positioned firms globally, with sustainable
competitive advantage in IMO. HCL posted 9.7% IMO revenue CQGR in
FY10/FY11 (vs. our 8.0% CQGR estimate made in Sep 2009). We revisit the
IMO opportunity now, and forecast 29% revenue CAGR in FY11-FY14E (an
extra US$1bn over US$830mn in FY11). We estimate IMO revenues to
reach 31% of HCL’s revenues by FY14E, driving 17%/21% sales /EPS CAGR
over FY11-14E. We add HCL to Conviction Buy List, with 28% pot. upside.
Catalyst
(1) Stable revenue growth, driven by resilient IMS business against the
backdrop of concerns over global IT spending. (2) News flows on new client
additions or deal wins could underscore its longer-term growth trajectory.
(3) Recovery in EBIT margin after 1QFY12, when wage hikes will compress it.
Valuation
Our 12-month Target Price of Rs501 (unchanged) is derived using Director’s
Cut methodology, using a val-ratio (EV/GCI to CROCI/WACC) of 1.3X (derived
from the average of HCL’s median and trough val-ratio). HCL is trading at
11.3X on FY13E EPS of Rs34.71, at a 25% discount to its 7-year historical
average of 15X. On concerns over global growth, HCL has fallen by 20% in
the past three months (vs. -15% for the sector). We view this as a good
buying opportunity, based on the greater resilience of HCL’s revenue
composition vs. its Indian peers and improving CROCI profile. Our bear case
of further weakness in the US/EU, suggests 13% downside vs. 28% upside to
our base case. We add HCL to our regional Conviction Buy List.
Key risks
Competitive threats to its IMO dominance with increased focus from peers,
significant slowdown in tech spending in 2012, Indian rupee appreciation.
INVESTMENT LIST MEMBERSHIP
Asia Pacific Buy List
Asia Pacific Conviction Buy List
Coverage View: Neutral

News Headlines :OCT 8: Deutsche bank,

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News Headlines
Cash-strapped finance ministry questions oil subsidy (Reuters)
India is taking a closer look at its fuel subsidy costs by questioning the low refining
margins of its state-run oil firms, a government source said on Wednesday, signalling
a veiled threat of cuts that could hurt the companies' profits.
After SBI's rating cut, govt takes stock of its banks (BS)
After Moody’s Investors Service downgraded the standalone rating of the country’s
largest lender, State Bank of India, the government has swung into action and started
taking stock of capital requirements of the public sector banks and their ratings.
SBI to be fully capitalised: Finance Ministry (ET)
The finance ministry says it is committed to capitalising State Bank of India, while
playing down Moody's downgrade of the country's largest lender on Tuesday. The
bank needs Rs 14,000-21,000 crore for the next five years.
Services PMI shrinks first time in over 2 years (Reuters)
India's service sector has contracted for the first time in more than two years as new
business all but dried up and expectations weakened amid concern over a flagging
world economy, a survey showed on Wednesday.
Fiscal deficit in line with past trends, says FinMin (BS)
Even as the fiscal deficit has touched 66 per cent of Budget estimates in just five
months, the finance ministry asserted this was in line with the average trend of the
past five years. Target of reining in the deficit at 4.6 per cent of GDP would be met.
Credit growth slows, deposits up in first half of FY12 (BS)
Bank credit rose 3.9 per cent in the April-September period, lower than the 5.6 per
cent growth in the same period of the previous financial year. Bankers attribute the
fall to higher lending rates and the slowdown in economic activity this financial year.
Banks breathe easy as liquidity improves (BS)
For the first time since the start of this financial year, liquidity in the banking system
has turned to surplus mode. Most banks have parked funds worth Rs 41,530 crore
with RBI in the last two days under the liquidity adjustment facility.
Mundra Port sole bidder for Chennai port terminal (BS)
Mundra Port and Special Economic Zone, India’s largest private port, has emerged as
the sole bidder for Chennai port’s Rs 3,680-crore mega container terminal project. A
senior official of the Chennai Port said Mundra Port would invest Rs 3,125 crore.
Essar Power to invest $8 billion in thermal power projects in nxt 3 years (ET)
Betting big on power business, Essar Power has earmarked an investment of $8
billion in the next three years for setting up thermal power projects in the country. It
plans to increase its capacity by 8,000 MW power by 2014.
Carlyle buys 9 percent stake in India Infoline (Reuters)
U.S. Private equity giant Carlyle Group has bought 9 percent of financial services firm
India Infoline (IIFL) on the open market, the companies said on Wednesday, building
a stake worth $38 million based on current prices.
SAIL's Visvesvaraya steel plant to get captive iron ore mine (ET)
The mines ministry will soon allot an iron ore lease in Karnataka's Bellary district to
SAIL's Visvesvaraya Iron and Steel Ltd (VISL) plant, ending the company's seven-yearlong wait for a captive mine.
JSW steel to restore full production in 4 weeks (BS)
JSW Steel, which had cut production to 30 per cent of installed capacity at its 10-
million tonnes-per-annum (mtpa) Karnataka unit after the ban on mining and sale of
iron ore, is optimistic of restoring normal output by the end of this month.
Suzlon receives 25.5 MW order from GAIL (BS)
Suzlon Energy Limited, the wind turbine supplier, announced its third consecutive
order from GAIL--the gas utility company.
ECB Keeps Banks Afloat; Governments Act on Greece (Bloomberg Finance LP)
The  ECB will reintroduce year-long loans, giving banks access to unlimited cash
through Jan. 2013, and resume purchases of covered bonds to encourage lending.
Bank of England Expands Bond-Purchase Program (Bloomberg Finance LP)
The Monetary Policy Committee raised the ceiling for so-called quantitative easing to
275 billion pounds ($421 billion) from 200 billion pounds.
Volcker Rule Draft Puts U.S. Banks’ Short-Term Trades Under More Scrutiny
(Bloomberg Finance LP)
Banks seeking to gain from or hedge against short-term price movements in
securities and derivatives would face restrictions under a proprietary- trading ban.

JSW Energy - Unable to weather fuel pangs; reinstating with Hold ::Deutsche bank,

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JSW Energy
Reuters: JSWE.BO Bloomberg: JSW IN Exchange: BSE Ticker: JSWE
Unable to weather fuel pangs; reinstating with Hold


Regulatory hurdles, high fuel cost limits RoE; Hold on balanced risk/reward
This note marks the transfer of coverage from Manish Saxena to Abhishek Puri.
We reinstate our rating on JSW Energy at Hold and our target price at INR50. The
recent upsurge in merchant tariffs (~70% of capacity) could be partially offset by a
regulatory order, resulting in significant under-recoveries for ~12% of capacity and
high cost-curves from spot fuel purchases. Unlike a utility business, earnings
volatility on the back of commodity prices is likely to keep ROE below 12%; but
with 48% underperformance, stock valuations may get support from rising tariffs


Long-term fuel sourcing is the single biggest challenge
While it was good to be an early entrant in merchant markets, the company’s fuel
contracts could not come to pass, as the company’s partner lost out on the rights
to mine in a court case in Indonesia, resulting in sharp earnings volatility. While it
remains in a sweet spot for its southern assets (860MW) on the back of
constraints in grid-connectivity with the rest of India, it remains to be seen how
State Electricity Boards (SEBs) position themselves in an environment of rising fuel
costs and numerous other thermal producers finding constraints on generation.
Regulatory and environmental hurdles have pushed back capacity addition
JSW Energy’s new capacity addition plans of 2.2GW are about 1-3 years behind its
initial plans. Our assumptions factor in remaining capacities to come on-stream
largely in FY14 – implying revenue growth of 21% over the forecast period. Based
on the Deutsche Bank coal forecast of USD120-115/t, we estimate that the
company’s EPS will decline by a 13% CAGR.
Valuations largely pricing in visible concerns, PPA risks to forefront
We value JSW at INR50 on a SoTP basis for its power projects, using 12.5-14.5%
cost of equity, in line with peers, despite the high sensitivity of its earnings to
commodity prices. Although current valuations at 1.2-1.3x BV are pricing in visible
concerns on coal/tariffs, PPA risks in Rajasthan (first-year tariff cap) could impact
valuations further (INR-4/sh impact) if imposed and ROEs are likely to remain
below 12% over the forecast period. Any upside risks may come from waiting for
better fuel or merchant pricing, and/or higher final tariff approvals by regulators

Sell INFOSYS Expect FQY12 guidance to be lowered on macro risks: Societe Generale,

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INFOSYS
Expect FY12 guidance to be lowered on macro risks. Sell maintained


 Update We believe Infosys will probably lower its FY12 guidance when it reports Q2 2012
earnings (to end-September) on 12 October. For Q2, we expect revenue of $1,720m and
EPS at $0.66 vs the consensus of $1,637m and $0.67 respectively. Our negative stance
stems from several factors: 1/ increased pressure in the financial services sector (35% of
group revenue) due to growing macroeconomic uncertainty over the past three months,
affecting several investment banks in the short-term (such as UBS, Bank of America,
Goldman Sachs) which are planning important restructuring measures. Our industry contacts
mentioned lower volume growth as well as a slight decline in pricing in constant currency.
We expect this situation to last about six months before any stabilisation; 2/ tough comps in
Europe (21% of group revenue) with Q2 2011 up 22% yoy. We note that Infosys also
reported a 3% decline sequentially at constant currency in the past quarter;  3/ probable
pricing pressure going forward as most indicators point to a worsening environment ahead,
negatively impacting IT demand (no budget flush likely in Q4 11 and reduced growth
prospects for 2012); and  4/ ongoing reorganisation.  Upside risks include:  1/ intact
structural demand if clients continue the offshore trend and favour tier-1 Indian vendors like
Infosys and 2/ depreciation of the Indian rupee vs the US dollar would help EPS as 1%
depreciation has a positive 40bp impact on operating margin.
 Impact For FY12 (to end-March), we expect revenue of $6.8bn (+13% yoy vs guidance
for +18-20% yoy to $7.13-7.25bn and the consensus of $6.61bn) and EPS unchanged at
$2.77 (vs guidance of $2.88-2.92 and the consensus at $2.77).
 Target price & rating Although the share price is down 34% YTD, we believe that there are still
important downside risks. Consequently, we maintain our Sell rating with a TP of $43 based on
a mix of multiples (12m forward EV/Sales, EV/EBIT) and DCF, specifically 2.6x 12m forward
EV/Sales (historical trough), 8x 12m forward EV/EBIT and DCF (WACC 10.3%, long-term
margin 26%, terminal growth 2.5%).  Risks: currency swings (INR vs USD, EUR and GBP),
ongoing reorganisation, potential acquisitions.
 Next events & catalysts Infosys has scheduled a conference call for Q2 2012 (to endSeptember) on 12 October at 10:30am CET (2:00 pm IST). Dial-in: UK +44 0808 101 1573

Bharti/Idea likely to miss consensus estimates in 2Q? ::Goldman Sachs

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Bharti/Idea likely to miss consensus estimates in 2Q?
2Q consensus likely to come down in coming weeks, in our view
We believe Bloomberg consensus is yet to factor in higher forex estimates
for Bharti and higher wages/D&A/3G interest expenses for Idea in 2QFY11
estimates, therefore we see downside risks to consensus. Our 2Q net profit
estimates are 30.5%/16.8% below consensus for Bharti/Idea. However, we
believe consensus is yet to fully evolve and see consensus numbers
coming down before the 2Q results. On the operational front, we believe
that the market is largely factoring in the seasonal weakness (our revenue
estimates are largely in line with consensus).
Bharti may miss consensus estimates for sixth quarter in a row
Bharti has missed Bloomberg consensus estimates for the last five
quarters, either due to relatively weaker execution or limited visibility from
management on the impact of expenses like branding costs, tax rates or
amortization/interest expenses. This quarter too we see the risk of a
consensus miss, as it may be difficult for analysts (and hence consensus)
to factor in exactly the forex MTM loss impact. If this trend of missing
consensus continues, we do not rule out a PE de-rating for Bharti.
Idea misses consensus ests every 2Q; history may repeat itself...
Idea has shown consistently strong execution but ends up missing
consensus estimates every 2Q. This is led by a double impact: 1)
pronounced impact on MOU/ARPU due to seasonality as it is a purewireless operator/higher proportion of rural subs; 2) higher employee costs
every 2Q. Combined, these factors lead to negative operational leverage.
In 2QFY12, apart from the above two factors, we estimate higher D&A/int.
expense for 3G, which in our view consensus is yet to factor in.
Looking beyond 2Q: operators to benefit from tariff hikes/3G
Despite a weak 2Q, we reiterate our Buy on Bharti/Idea, as we expect the
tariff hike benefits/3G uptake to be fully reflected in their financials in the
next six months, hence see strong qoq/yoy growth. We reduce our
FY12E/FY13E/FY14E EPS for Bharti by 9.1%/4.8%/4.5% to
Rs14.84/Rs26.85/Rs34.66, and for Idea by 4.1%/2.5%/1.3% to
Rs2.77/4.47/6.78 as we factor in a slowing net adds trend and model in a
higher forex impact due to adverse currency movements. Our 12m SOTPbased TPs for Bharti/Idea fall accordingly 2% to Rs450/Rs108 respectively

UBS : Coal India - Upgrade to Buy post recent correction; price target of Rs400 „

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UBS Investment Research
Coal India
Upgrade to Buy post recent correction

„ Event: recent correction provides attractive risk-reward opportunity
We upgrade Coal India to Buy rating after the sharp correction of 16% in the past
one month (versus a 5% fall in the Nifty). This correction has been led by negative
newsflow on: 1) the proposed mining tax; 2) concerns about wage negotiations;
and 3) a production miss in H1. We believe that these concerns do not impact the
structural story ie: 1) strong domestic coal demand; 2) a virtual monopoly; 3) ASP
significantly lower than global prices—potential for price hikes; 4) low earnings
volatility; and 4) one of the lowest cost producers globally. Globally, thermal coal
prices have been flat over the past three months.
„ Impact: no changes to our estimates; H2 production could be higher
We forecast FY12/FY13 ASP of Rs1,344/1,400 and volumes of 452/473mt.
Though CIL missed its April-August production target of  163mt by 7% due to
heavy rains, it also sold inventory of c20mt during this period. It can increase
production in H2 post the monsoon. We have factored in an incremental wage
burden of US$1bn for FY12. Our worst-case earnings impact from the proposed
mining tax is c19% on PAT. However, there could be significant changes in the
bill before it is passed and there is no clarity on the timeline of its implementation
„ Action: upgrade to Buy, structural theme intact
We believe the recent correction outweighs the recent negative newsflow and the
structural story is very much intact.
„ Valuation: upgrade to Buy rating, maintain price target of Rs400
We continue to value CIL on 15x FY13E PE.

BUY Jain Irrigation Systems (JAIR.BO) Research Tactical Idea ::Morgan Stanley Research,

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Jain Irrigation Systems (JAIR.BO)
Research Tactical Idea
We believe the share price will rise relative to the country index over the next 30 days.
This is because the stock has traded off recently, making short term valuation much more compelling. We expect
improvement in capital effeciency in the quarter, driven by reduction in receivable day in micro irrigation business, to act
as a key near-term catalyst.
We estimate that there is about a 70% to 80% or "very likely" probability for the scenario.
Estimated probabilities are illustrative and assigned subjectively based on our assessment of the likelihood of the
scenario.
Stock Rating: Overweight
Industry View: Attractive

SELL Ultratech Cement Ltd (ULTC.BO) Research Tactical Idea ::Morgan Stanley Research,

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Ultratech Cement Ltd (ULTC.BO)
Research Tactical Idea
We believe the share price will fall relative to the country index over the next 30 days.
The stock has outperformed broader markets in the last couple of months on the back of positive newsflow on cement
prices making near term valuations less attractive. Moreover, we believe that QE Sep-11 earnings could disappoint
notwithstanding the Street's muted expectations, given price weakness in Jul-11 and Aug-11and muted volumes.
We estimate that there is about a 70% to 80% or "very likely" probability for the scenario.
Estimated probabilities are illustrative and assigned subjectively based on our assessment of the likelihood of the
scenario.
Stock Rating: Equal-weight
Industry View: Attractive

Goldman Sachs: Telecom Services Equity Research Draft NTP on Oct 10?; Free national roaming

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India: Telecom Services
Equity Research
Draft NTP on Oct 10?; Free national roaming; no spectrum pricing
Details of Draft New telecom policy 2011 as per media articles
Bharti (BRTI.BO, Buy, Rs367.05) and Idea (IDEA.BO, Buy, Rs94.55) stock
prices are down 4.19%/7.72% vs. Sensex up 2.63% today, we believe on
concerns related to the Draft New Telecom Policy. Although the Draft New
Telecom Policy is widely expected on 10
th
 Oct ‘11, we do not expect
spectrum pricing issues to be discussed in it (based on our conversations
with industry participants). As per CNBC, the key topics discussed in the
draft NTP are nation-wide free roaming, framework for exit policy for
operators to surrender license and setting up of a Telecom Finance
Corporation to facilitate investment in the sector. In addition, CNBC
reported the telecom ministry is planning to allow inter-circle-MNP and the
Ministry is mulling to incorporate a framework to increase the availability
of spectrum for telecom services, to provide one national license across the
country and to permit sharing of networks.
Nationwide free roaming puts 5-6% of revenues at risk  
If free nationwide roaming is introduced then we see 5-6% of cellular
revenues at risk for Bharti/Idea and c 7-8% of EBITDA at risk as these
revenues have higher margins. However we note that discussions are in
draft stage and there is no timeline/visibility on if/when it will get
implemented.  We believe a rational exit policy will facilitate M&A and
hence would likely reduce further competitive intensity in the market.
Draft policy unlikely to discuss spectrum pricing in our view
Based on our discussions with industry participants we see a low
possibility on excess spectrum pricing discussed in NTP as there is limited
visibility on valuation for excess 2G spectrum. Based on TRAI’s Feb-11
recos, the impact of excess spectrum (immediate one time payment) on
Bharti/Idea is Rs 10.9/Rs 4.8 per share and on license renewal (NPV) is Rs
22.0/Rs.18 per share.
Consensus miss risks/Nigeria business impact also NT concerns
The other key concerns for Bharti/Idea are risks of consensus miss in 2Q
(our 2Q estimates are 30.5%/16.8% below consensus for Bharti/Idea) and
Airtel services in Nigeria impacted as sacked workers grounded the
network and impacted services (as per media articles e.g. All Africa). Bharti
mgmt mentioned in a press release that it has not sacked any employees.

Goldman Sachs, NIFTY saw a Friday rally, closed at 4888, down 1.1% wow

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NIFTY saw a Friday rally, closed at 4888, down 1.1% wow
 All India local sectors ended in red for the week. Public Sector Banks closed down 5.6% wow
 Ytd foreign outflows of US$ 556 mn and domestic inflows of US$ 5.6 bn as of close of Oct 05, 2011
 Our economics team has revised down their GDP growth forecast to 7.0% for FY12
 We lowered our Sep-2012 target for NIFTY to 5900, and now expect CY 2012 EPS growth of 10%
Overview
NIFTY lost 1.1% during the week with all sectors
ending in red territory. CNX Public Sector Bank
index (-5.6% wow) was the major underperformer
after Moody’s downgrade of SBI rating. Our
economics team revised down their FY12 GDP
growth forecast for India by 30 bp to 7.0%. This is
primarily due to weaker external demand in the
US and EU. We lowered our 12 month NIFTY
target level to 5900 and now expect 2012 EPS
growth to 10%.
NIFTY price performance
NIFTY lost -1.1% wow, down 20.3% ytd
Source: NSE, DataStream, GS Global ECS Research.
Foreign and domestic flows
Foreign investors sold US$ 481mn wow while DIIs
bought US$ 261mn wow (as of Oct 5, 2011). Now
FII Net Sell stands at US$ 556mn ytd while DIIs are
Net Buyers of US$ 5.6bn ytd.
Earnings sentiment
MSCI India Telecommunications saw the weakest
EPS sentiment (-7.2% wow). MSCI India is trading
at 12.6x times 12m forward earnings at a premium
of 29% to MXAPJ.
Commodities
Commodity lost 2.2% wow. Agriculture (-3.6%)
and Energy (-3.2%) underperformed wow. Guar
seed was the major underperformer (-8.8% wow).
Focus
Monsoon Monitor

India Equity Strategy:Sep-Q preview ::Deutsche Bank,

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India Equity Strategy:Sep-Q preview
Early signs of revenue growth slowdown?


Slowdown in broader economy likely to weigh on Sensex revenue growth
The key highlight of the upcoming September-quarter earnings season is likely to
be a slowdown in Sensex revenue growth. According to our analysts, Sensex
companies are likely to report 23% yoy growth in revenues vs. the 25% average
growth seen in the past 2 quarters. However, we would like to highlight that
excluding Reliance and ONGC, revenue growth for Sensex companies is likely to
show a sharp deceleration, coming in at 16% yoy versus an average of 23% yoy in
the past 2 quarters. Sensex’s EBITDA and PAT growth, however, are unlikely to
fall as sharply but are still likely to remain relatively subdued at 12% yoy and 11%
yoy, respectively (vs. 13% and 8% average yoy growth in the past 2 quarters).
Property and Cement lag on revenue growth; Oil & Gas, IT and Banks lead
We expect Property to report negative top-line growth of -4%yoy, due to a weak
demand environment and slower execution due to the monsoon. We expect
Cement/Construction to show muted revenue growth of 5% on account of JPA
(sole representative for the sector in Sensex), even as non-Sensex Cement stocks
are likely to witness reasonably robust growth of 17% yoy. Oil & Gas should post
the highest revenue growth (+40% yoy), with RIL benefitting from a 47% rise in
global crude prices and ONGC benefitting  from higher net oil realization (~+40-
50% yoy). IT Services are also likely to post robust yoy revenue growth (+20%).
Financials are likely to witness 19% growth in net interest income, as system loan
growth was on an average of about 20% in the September quarter.
Cement, Auto and Utilities lag on EBITDA growth; Financials, Pharma lead
Cement/Construction should post negative EBITDA growth of -12%, with JPA’s
Cement operations impacted by price  weakness in central India, while the
Construction business suffered from lower demand. The Autos business is likely
to witness just 3% EBITDA growth, as TaMo’s domestic and global businesses
face raw material price pressure and Maruti’s operations are likely to get hit by
high commodity price and a 9% yoy  appreciation in Yen/INR. Power Utilities
should also witness muted EBITDA growth (+4%) mainly due to declining PLFs for
NTPC and TPWR, offsetting a coal-price hike-induced 24% EBITDA growth in Coal
India. We expect Banks to post the highest sectoral EBITDA growth at 20%,
buoyed by ~20% system credit growth  and strong fee income growth in private
sector banks. Pharma should follow with 18% yoy EBITDA growth mainly due to
Sun Pharma’s acquisition of Taro.
Further downgrade to consensus Sensex earnings estimates likely
In response to elevated cost pressures, we have already witnessed ~6%/9% cuts
to consensus/Deutsche Bank estimates for FY12 Sensex EPS. We would not rule
out further cuts to consensus estimates for FY12, with macro headwinds (both
global and local) likely to persist in the near term. Currently, consensus estimates
for FY12 Sensex EPS growth range between 15% and 16%, which is much higher
than the Sensex EPS growth run rate of ~10% in 1HFY12. We see the rural
economy (buoyed by the strong monsoon) as relatively insulated from macro
headwinds, which should help moderate prevailing pressure in other segments of
the economy. Hence, we suggest positioning into companies that stand to benefit
from continuing positive momentum in  India’s rural economy/hinterland, e.g.,
M&M, Hero Honda, Bajaj Auto, ITC, Asian Paints and Grasim.

Reaction to USDA stocks report ::Macquarie Research,

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Reaction to USDA stocks report
Summary
 We highlight our reaction to today’s USDA report, yet another stocks report
that is full of surprises and changes in estimates. We had expected an
increase in corn ending stocks, but stocks at 1,128m/bu is a little surprising.
The big surprise, though, has come on the wheat balance sheet, with stocks
far higher than expected. These numbers imply the large discount for wheat
during the Jun – Aug period did not inspire any increase in feed demand,
which we find shocking.

Our reaction
 The USDA increased corn ending stocks for the 10/11 season today by
208m/bu to 1,128m/bu. This is up from the September WASDE report
estimate of 920m/bu. This implies that feed and residual demand was only
412m/bu during the Jun-Aug period. The USDA in the September WASDE
report predicted 10/11 total feed & residual demand at 5,000m bu; this report
suggests this number was actually 4,761m/bu. This change is far larger than
the market had anticipated. In sum the implication from this report is that the
burden of rationing demand in the 11/12 season has eased.
 The more surprising change is the large wheat stocks the USDA reported.
The combination of the drop in wheat production to 2,008m/bu and the higherthan-
expected ending stocks at 2,150m/bu implies wheat feeding was far
lower than anticipated. This, in combination with the low estimate for corn
demand, implies that feed demand was low in the Jun-Aug period, which is
surprising given the USDA’s GCAU numbers.
 Finally, the bullish element of the report was the shift in the spring wheat
production: the USDA lowered production by 60m/bu to 462m/bu. This was
toward the low end of trade estimates. The shift lower came as the USDA
dropped yields to 38.3 bu/a, down from last seasons 46.1bu/a.
 We will be following up with more in-depth analysis of the implications of
today’s USDA report in forthcoming Agri View.

Buy Mangalam Cement, Target : | 139::ICICI Securities,

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C eme n t   u t i l i s a t i o n   r a t e s   t o   imp r o v e…
We met the management of Mangalam Cement to get an update on
development in its power and cement business. The following are the key
takeaways from the meeting.

• The proposed expansion of the 1.25 MTPA cement grinding unit
is expected to come on stream by Q4FY13. After the expansion,
the total cement capacity would reach 3.25 MTPA by FY13E. We
expect the capacity utilisation  rates to improve in H2FY12 on
account of a pick-up in demand during the period as the monsoon
season ends. We expect the utilisation rate at ~78% in FY12E and
~82% in FY13E as compared to ~76% in FY11
• The thermal captive power plant (CPP) addition of 17.5 MW has
increased the total thermal CPP capacity to 35 MW. Also, there is
~13.65 MW of wind power plant, which takes the total captive
power capacity to ~49 MW. The current power requirement for
the cement operation is ~22 MW. Hence, the company can sell
the surplus power on a merchant basis. However, the company
has not been selling surplus power as the merchant power rates
are in line with the current power generation cost of | 3.8 per unit
• The company has started using petcoke as fuel for the cement
and power plant operations as against domestic coal previously.
The calorific value of petcoke is ~8500 Kcal/kg

V a l u a t i o n
At the CMP of | 101, the stock is trading at 9.0x and 6.0x its FY12E and
FY13E earnings, respectively. It is trading at EV/EBITDA of 4.5x and 6.6x
FY12E and FY13E EBITDA, respectively. On an EV/tonne basis, the stock
is trading at $34 and $39 its FY12E and FY13E capacities, respectively. We
are maintaining our target price on the stock at | 139 with a BUY rating.
At our target price, the stock is trading at $45 per tonne (~65% discount
to replacement cost of $125 per tonne) at FY13E capacity of 3.25MT.



Cement sales volume to grow at ~5% CAGR during FY11-13E
As the utilisation rates are expected to increase in H2FY12 on account of
an expected pick-up in cement, we expect the FY12E utilisation rate at
~78% as against ~76% in FY11. In FY13E, the utilisation rate is expected
to increase to ~82%. The total cement  sales  volume  is  expected  to  grow
~4% YoY in FY12E to 1.66 MT and ~6% YoY in FY13E to 1.76 MT


Valuations
The company plans to expand its clinker capacity by 0.4 MTPA at its
existing unit and set up a new grinding unit of 1.25 MTPA in Aligarh (UP),
which are expected to be commissioned by Q4FY13. The total capital
outlay is ~| 400 crore over FY12E  and FY13E for the expansion plan.
After the expansion projects, the total cement capacity would reach 3.25
MTPA by FY13E. We expect cement sales volume of 1.66 MTPA in FY12E
and 1.76 MTPA in FY13E. EBITDA per tonne is expected at | 474 per
tonne in FY12E and | 475 per tonne in FY13E.
At the CMP of | 101, the stock is trading at 9.0x and 6.0x its FY12E and
FY13E earnings, respectively. It is trading at EV/EBITDA of 4.5x and 6.6x
FY12E and FY13E EBITDA, respectively. On an EV/tonne basis, the stock
is trading at $34 and $39 its FY12E and FY13E capacities, respectively. We
are maintaining our target price on the stock at | 139 with a BUY rating.
At our target price, the stock is trading at $45 per tonne (~65% discount
to replacement cost of $125 per tonne) at FY13E capacity of 3.25MT.

Exhibit : Valuation
Valuation remarks
FY13E Cement Capacity of MCL (MTPA) 3.25
Replacement Cost - MCL @ $45 per tonne 676
FY13E Net Debt (MCL) 298
Equity Value - MCL 378
FY10 Book Value of MTPL 20
Equity Value - MTPL @ 1x P/BV 20
Target Market Cap 398
NoS (Post merger) 2.85
Target Price 139
CMP 101
Potential Upside 38%
Source: Company, ICICIdirect.com Research

Auto WIN -- Regional auto industry highlights:: JPMorgan

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Key items this month
 What is changing? We analyze: (1) the impact of the replacement of old fuelefficient
car subsidy with much stricter new subsidy policy, the increasing
competitive pressure in the medium- and low-end SUV segment as more and
more local-branded SUVs enter the Chinese car market and the signal of a new
round of price war in the car market with the upper medium-end segment facing
the brunt of price discounting in China; (2) Suzuki’s decision to dissolve its
cross-shareholding relationship with VW in Japan; (3) the favorable margin
outlook of tire industry on the back of declining natural-rubber prices in Korea;
(4) the expected weak festive car demand due to weaker consumer sentiment
driven by high interest rates and fuel prices in India; (5) weak Taiwan auto sales
in August, down slightly 4% Y/Y, but sequentially 41% M/M, reflecting the
seasonal weakness of the lunar calendar of July, where customers tend not to
buy cars or property in Taiwan; and (6) the implications of Astra’s move to cut
down-payments on Toyota Avanza in a post-Lebaran promotion in Indonesia.
 Information: We discuss: (1) the impact of BMW’s recall of 3-series cars in
the US to fix a rear-light defect and the likely joint venture between Guangzhou
Auto and JEEP in China; (2) the sharp rise in August domestic sales volume on
the back of the progress in resolving supply shortages and Toyota’s continuous
market-share gain in Japan; (3) Kia’s launch of a new compact car model “All
New Pride” in Korea; (4) Honda’s launch of hatchback “Brio” with aggressive
pricing and HMSI’s capacity expansion plans with the commencement of
groundwork on its third two-wheeler plant in India; (5) the implications of
TWD’s depreciation against JPY and the negative correlation between strong
JPY and auto margins in Taiwan; and (6) the impact of the local assembly of
Peugeot cars beginning 2012 and the appointment of new heads at Ford and
Mazda in Indonesia.
 Non-consensus calls: We highlight: our recommendation to invest in Tata
Motors on the current weakness, as: (a) the valuations appear to already factor
in the challenging environment ahead; (b) JLR’s soon-to-be-launched ‘Evoque’
will create a new segment for Land Rover; (c) China, which accounts for 15%
of its volumes, is likely to witness a healthy growth over the near term, in India.


India
Festive demand to be weaker: The Indian car market is expected to witness sedate
demand this festive season given weaker consumer sentiment driven by higher
interest rates and fuel prices.
We reiterate our view that Maruti (MRTI.BO, Neutral) will face headwinds over the
near term as growth rates moderate and competition intensifies.
Mr. P Balendran, Vice President of GM India (Economic Times) said, “Carmakers
generally see a growth of 20% or more in volumes during the festival season.
However, now with an unprecedented hike in interest rates, hike in petrol prices, high
inflation, and negative market sentiments we are not expecting incremental volume
of more than 5% during this festival season.”
Since July 2009, petrol prices have risen by 60% in India and interest rates have
moved up by c 300 bps. This is already impacting demand for automobiles and we
expect sales to be impacted further. Growth rates for passenger cars have moderated
to just 2% yoy given the rising cost of ownership. Last week’s fuel price and interest
rate hike has dampened sentiments further.

Mahindra & Mahindra - New launches expected to continue to drive volume momentum ::Credit Suisse,

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● We visited Mahindra’s Chakan plant for the official unveiling of the
XUV 500. Priced at an attractive Rs1.08 mn, it is positioned
between the Scorpio and premium SUVs starting at Rs1.5 mn.
● The company has an ambitious sales target of 2,000 units/month.
It aims to redefine a new segment like the Scorpio did, by not only
exploiting the pricing gap in the SUV segment but also targeting
sedan buyers of cars like the Honda City and Toyota Corolla.
● The vehicle seems to be great value for money and management
stressed that pricing would not be detrimental to margins. The
entire project cost was only Rs8.5 bn, once again highlighting the
frugal engineering capabilities of Indian R&D engineers.
● Despite the festive season having just started, Mahindra already
has a waiting period on its products; usually at this time, it has an
inventory of 2-3 weeks. We reiterate our view that driven by new
product launches Mahindra's volumes should continue to surprise
the street, and with margin improvements on the horizon, earnings
growth would be even higher. Maintain an OUTPERFORM rating.


Mahindra XUV500 launched
Mahindra launched its new global SUV – XUV500. The vehicle, the
first in India to be developed on a monocoque platform, is designed
with global standards of safety and emissions showcasing R&D
capabilities. The result of increased R&D spend (up 4.5x in five years)
has helped M&M accelerate new launches and deliver better-thanindustry
volume growth . The W6 model is priced at Rs1.08 mn and
the W8 at Rs1.195 mn (ex showroom Delhi) compared to initial
expectations of Rs1.4 mn making it very attractive value for money.
New segment targeted
The company expects to redefine the auto segment with this launch
as Scorpio did over 10 years’ ago. While cannibalisation of Scorpio
volumes remaining a concern, the company believes in its ability to
create different niches and also derives confidence from the Toyota
Fortuner able to create a 1,000 unit per month segment at the Rs2 mn
price point. There would be a phased roll-out with an initial five-city
launch in India and global launch just in South Africa. Eventually, the
company aims to exploit full export potential once visibility is built. The
company also aims to realise greater synergies with Ssangyong (high
powered engines, distribution networks where strong presence).


Management stressed that pricing is not predatory for the company.
The total cost of the project is just Rs8.5 bn, highly commendable
considering that it is built on a new platform. The pricing assumes
VAT incentives would not be available and any reversal of that is a
bonus.
Volumes to remain robust
The company expects volumes to continue robust. Mahindra has
experienced a ~25% growth in volumes this year compared to flat
growth for passenger vehicles. The company believes that its
products that are higher priced at least above Rs600,000 are less
sensitive to adverse macro conditions compared to the lower-priced
Maruti at Rs300,000 or Hyundai at Rs400,000. The company’s
exclusive diesel portfolio has also helped its volumes, with people
shunning petrol vehicles. While Mahindra still commands ~60%
market share in UVs; the bumper launch of models like Figo, Polo,
Beat etc in the passenger car market meant that saturation was
reached their earlier. The company is now seeing greater growth from
Tier 2 cities with both the Scorpio and Xylo having >60% sales from
rural and semi-urban areas. The company has high expectations from
the current festival season and already it is running short on all its
models with waiting periods for all compared to normal inventory
levels of about two weeks.

Copper supply side still struggling ::Macquarie Research,

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Copper supply side still struggling
Feature article
 While the short-term attention has decisively shifted to demand side risks on
the downside, the poor performance of copper supply should not be
overlooked. We review Chilean production so far this year as an example of
the problems facing the industry.
Latest news
 Despite further ups and downs during the day’s trading, LME metals finished
relatively flat on Thursday compared with recent days. After spending time
below $7,000/t, copper recovered to $7,210/t. Palladium has another big selloff,
down 3.6% to $621/oz.
 The sharp fall in copper prices over the past week has squeezed Chinese
traders’ profitability on copper imports. Including the trade premium of $150/t
CIF China, the profit of delivering the copper cathodes from the bonded
warehouse through customs has come down from roughly $100–150/t the
previous week into negative territory today. Our checks indicate bonded
warehouse inventory in China has come down significantly in the month of
September to 300kt (or below) as a result of Chinese buying for arbitrage
trading rather than real consumers buying/restocking. LME copper cancelled
warrants also rose significantly in the month of September to 31kt as of 29
September compared with only 6kt at the beginning of the month. We believe
Chinese copper imports will continue to increase in September and in 4Q11
on the back of this arbitrage buying. However, inventory will be building up on
the SHFE registered warehouses before the end of the year rather than being
consumed at the end uses due to a slower growth rate of consumption looking
ahead as of result of continued tightening in the economy.
 Coal inventory in China’s QHD Port continued to drop, registering at 4.7mt – a
new low since this year – by 28 September. Since 21 September (the start of
maintenance work on the Daqin Railway), coal stock decreased at a rate of
300kt per day. As a result, over the past nine days coal destocking has
accumulated to 2.403mt in QHD Port, which indicates a larger impact from
Daqin maintenance this time vs the last one in April, when the coal stock
dropped by the same amount during one month.
 In the Australian coal space, coal companies have been continuing to secure
port tonnages. Whitehaven Coal has announced an additional shipping quota
of 8.4mtpa has been secured at Newcastle from 2012–2016 to facilitate
Gunnedah Basin expansion. Meanwhile, Aston Resources has secured up to
7.1mtpa under a NCIG Substitute Shipper Agreement with an existing
operator for their Maules Creek project from 2013–2016. This is in addition to
a 1.7mtpa allocation at PWCS from 2013 and helps to overcome the
infrastructure access issues facing the project previously.
 During the third day of its analyst site visit to the Pilbara, BHP Billiton affirmed
it commitment to the Port Hedland Outer Harbour and has its long-term hub
strategy and marketing approach around exactly that. Furthermore, the
double tracking of ~285km of the Newman rail trunk has unlocked
considerably greater rail capacity and cut the average journey time from mine
to port by around an hour.

The global economic outlook and impact on agriculture demand:: Macquarie Research,

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The global economic outlook and
impact on agriculture demand
Feature article
 With the threat of another recession looming, we look at how agricultural
commodities tend to fare during economic downturns. We get Macquarie’s macro
economists to offer their outlook on the European, US and Chinese economies.
On the back of this, we look to see what the likely impact on agricultural demand
will be. History shows that consumption volumes have hardly ever fallen during
past downturns (supply shocks and prices being more of an influence on demand).
Only growth levels are sometimes negatively impacted. Although the outlook for
mature economies is deteriorating, the income elasticity of demand is very low for
agri/food commodities in these markets. Emerging markets tend to have higher
elasticities, but fortunately, the outlook for these economies is much more positive.
Latest market update
 Sugar: After the tumbling of investor confidence and long liquidation last week,
sugar prices staged a sharp rally this week, shooting back above 26.5c/lb.
Opportunistic buying from MENA and China has supported prices, although the
expiry of the October contract likely attracted late buying and some short covering.
The white premium should come under increasing pressure as Europe, Russia
and India start churning out white sugar. As Brazilian mills begin winding down
early for the intercrop period, the focus will switch to these origins and we expect
less support for the May contract. We still think prices will ease into mid 2012,
before rising again in H2 on renewed concerns over the Brazilian crop, which
could see only modest recovery from this season’s expected 490mt.
 Coffee: Macro risk aversion and a weakening Brazilian real has pushed NY
Arabica sharply down to 230c/lb. Cash differentials however remain firm, reflecting
growing expectations that Colombia’s crop could suffer (heavy rains will likely
hamper the progress and quality of the upcoming harvest). Dry weather concerns
have sparked fears that Brazil’s flowering for next crop could falter, although this
seems premature in our view. While it is still possible for NY futures to rally again
before the next Brazilian crop arrives (on tight physical intercrop availability),
higher robusta supplies from a record Vietnam crop could provide substitution
pressure to naturals in roasters’ blends, thus easing demand pressures.
 Cocoa: Talk of the West African upcoming main crops being larger than expected
has kept NY cocoa under pressure at $2,650/t, with the ICCO suggesting 2011/12
market may be in surplus. Although Macquarie still expects a small deficit, the
risks are for this to shrink. Supply will likely exceed expectations, due the
developing La Nina which last year aided African yields (although we note that
Indonesia will likely have another bad crop); equally grindings may be weaker than
expected, given the poor EU economic outlook.
 Cotton: Not having tumbled as much as the other softs during last week’s
commodity sell-off, cotton futures had less of a retracement to carry out this week.
Remaining stuck in a 99-105c/lb, the market continues to factor the poor
conditions of the US crop and Pakistan’s flood losses – offset by strong supply
growth elsewhere. Chinese yarn exports are down 25% year-to-date, reflecting
weak foreign demand for textiles and falling consumer confidence.
 Macquarie has been shortlisted for the Commodity Research House & Agricultural
Bank of the year categories at the forthcoming Commodity Business Awards

Valuations comforting…time to Accumulate::ICICI Securities,

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Soft economic data points coming out of western economies (weak PMI readings breaching the
critical level of 50 globally, discouraging consumer confidence retesting the 2008 lows and stressed
housing sector) coupled with the perplexing sovereign debt crisis in the peripheral Euro zone has
once again raised the odds of a double dip recession in the troubled western economies
ƒ Indian markets have corrected by more than 20% in CY11 and are trading below 14x FY12E EPS of |
1165
ƒ We expect more of a time based correction. We expect the Indian markets  to oscillate in a broad
trading range till the time reasonable clarity emerges from various local and global macro
headwinds
ƒ We believe that any sharp cuts should be bought into from a three to five years perspective. Buying
is recommended in our large cap, midcap and diversified model portfolio depending on risk return
appetite as choppy markets provide an opportunity to accumulate fundamentally sound stocks
ƒ Given the global macro headwinds along with domestic uncertainty, a good investments strategy to
adopt would be staggered accumulation of portfolio of stocks through SIP
ƒ Our analysis shows that when investments are made whenever the markets are below 18 x TTM
(current valuation), there is a good probability of making handsome returns in the next three years


z Global investors have reduced their exposure to emerging markets due to rising risk aversion
z Developed markets have remained outperformers despite being the epicentre of the current
global financial crises


z Post revision of earnings to 4% and 5% for FY12 and FY13E, respectively, we expect the Sensex EPS to
grow by 7% and 16% in FY12E and FY13E, respectively
z There may be further downgrades as globally exposed sectors like IT  and metals & mining contribute
12% and 16% to the overall Sensex earnings for FY12E

How to play equities in 2011? – The SIP way…

ƒ We believe the rest of CY11 will be a volatile due to news emerging from the western world. Also,
the markets will react sharply to any surprise coming from within the country on the
political/economic front. In such a scenario, we stick to our previous strategy of buying equities
systematically in a staggered manner. We would, thus, recommend following our model portfolio
investment approach
ƒ Don’t time …rather accumulate quality
ƒ We expect more of a time based correction and expect the markets to oscillate in a broad trading
range till the time reasonable clarity emerges from the various local and global macro headwinds
ƒ In case of a negative outlier event, the markets  may fall further in the  wake of panic selling.
However, we do not expect the markets to sustain at such levels. In such an environment, timing
the markets would be extremely difficult. We believe that any sharp cuts should be bought into
from a three to five years perspective. Buying is recommended in large caps and selective quality
midcaps

HDFC Bank- Managementspeak: very much on track :: JPMorgan

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We hosted the HDFC Bank management (Aditya Puri, MD&CEO and
Paresh Sukthankar, ED) on a two-day road show in Singapore.
Management does not see much stress yet, and is sanguine on riding out a
tougher FY13.
 Asset quality – no visible stress yet. The generally vulnerable segments
like SME and retail are holding up. Management does admit that,
theoretically, NPLs should normalize upward from current levels (e.g.,
retail credit costs are below expected loss levels). There are, however,
no visible signs of that happening yet, despite the slight slowdown in the
economy.
 Loan growth targets muted. Management maintains its growth
aspirations at 300-500bp above system (JPMe 18% for FY12E). The
bank remains conservative in its loan growth target despite an improved
competitive position, mainly due to the heightened environmental risk.
The loan mix is unlikely to change, and HDFCB intends to keep term
lending (especially infra-related) at a minimum.
 Margin outlook stable. Management sees the different moving parts of
NIM drivers cancelling each other out and expects NIMs to remain
broadly stable. Deposit cost pressures continue (HDFCB's largely retail
base cushions the impact) but are being compensated for by pricing
power in lending. Management does not see the need to move up the risk
ladder to preserve NIMs.
 Remains top pick. HDFCB remains our top pick in the financials space.
We do not see any risk to our estimates, despite the weakening macro
picture – we think HDFCB’s ability to manage a tough environment is
proven. We see the 3.4x PBV (one-year forward) supported by resilient
fundamentals and improving return ratios.

Telecom ƒ:: Q2FY12 Result Preview::ICICI Securities

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Telecom
ƒ Sharp decline in subscriber addition
Subscriber addition has fallen considerably in Q2FY12, with only 13.9
million subscribers added in the first two months of the quarter against
28.6 million added in April–May 2011.  We expect the industry to add
21.2 million subscribers in Q2FY12 as against 40.2 million in Q1FY12.
The slowdown in net adds was on the back of cessation of
unsustainable customer acquisition offers from new entrants, reduction
in the dual SIM phenomena and inactive subscribers added during
previous quarters beginning to reflect in higher churn. We expect 2.3%
QoQ revenue growth for telecom service providers on the back of 2.5%
subscriber growth.
ƒ Traffic growth to moderate in cyclically weak quarter
The second quarter is cyclically weak  in  terms  of  volume  growth  for
telecom operators. We expect 2.6% QoQ domestic volume growth for
our telecom coverage universe in Q2FY12 to 448 billion minutes as
against 4.8% growth in Q1FY12. ARPM across players is expected to
remain stable (41-44 paisa).
ƒ EBITDA margin to remain subdued
Margins are expected to contract on a QoQ basis across telecom service
providers due to lower traffic growth and increasing network operating
expenses on the back of 3G rollout. However, this would be partly
compensated by lower selling and promotional expenses on account of
lower subscriber addition. The only exception would be TTML, which is
expected to witness a slight expansion in EBITDA margins on account of
increasing data usage on Photon+ devices. Margins for Tulip Telecom
are expected to expand on account of rising share of revenue from fibre
optic network. PAT margins would show a mixed trend, with all
operators expected to charge 3G license fees amortisation in P&L.
However, RCom may report lower interest expense on account of
refinanced debt from Chinese banks. Telecom operators may report
foreign currency translation loss due to severe depreciation of the INR
against US$ in the last few weeks.
ƒ Regulatory developments - positive sentiment for industry
The telecom ministry had indicated at a more balanced and growth
oriented new telecom policy by October 2011. This, coupled with the
ongoing 2G investigation, has helped rebuild investor confidence in the
sector, which is also reflected in a re-rating of both Airtel and Idea
Cellular in the last few months. However, DoT’s draft policy indicates
one-time spectrum fees and spectrum re-farming, which would be a
dampener for both players. The CBI has indicated towards further probe
in ADAG’s role in SWAN Telecom, which may lead to more downside in
RCom.


Company specific view
Company Remarks
Bharti Airtel Higher network operating expense due to 3G rollout would be partly compensated by
lower SG&A expenses on account of lower subscriber addition in the domestic
market. The African business would post about 67 bps expansion to ~27%. We
expect it to add 4.6 million subscribers in India and SA and 2.3 million in Africa. India
ARPU would fall 1.2% to | 188 while that of Africa would decline 0.8% to US$7.2. We
expect other businesses to grow at a moderate 3% QoQ
Idea Cellular We expect Idea to add 6.7 million subscribers with a 2.1% QoQ decline in ARPU to |
158. MoU is expected to decrease 2.0% to 389 resulting in ARPM remaining at 41
paisa
OnMobile OnMobile is expected to witness a slowdown in its domestic business owing to new
recommendations of Trai regarding confirmation by subscribers for activation of VAS.
Also, declining discretionary spend by subscribers owing to the economic slowdown
and tighter sharing norms from telcos would be a dampener
Reliance Comm. We expect RCom to add 6.3 million subscribers. We expect ARPU to fall 3.0% to |
100 while MoU would decline 2.5% to 227 and ARPM is expected to remain stable at
44 paisa. The broadband and global revenues are expected to decline 9.3% QoQ
TTML Subscriber addition is expected to be around 1.8 million though active subscribers
may fall. ARPU is expected to decline marginally by 0.7% to | 183 (for active
subscribers) while MoU is expected to decline by 0.2% to 415. Key metrics would
fare better due to increasing usage of data card services
Tulip Telecom We expect improved realisation to aid revenue growth though new client addition
may remain at moderate levels
Source: Company, ICICIdirect.com Research

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Textiles ƒ, Others:: Q2FY12 Result Preview::ICICI Securities

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Textiles
ƒ Signs of revival
Cotton prices remained flat at |  39,000/candy at the end of Q2FY12.
During the quarter, prices fluctuated from | 30,000-40,000/candy. On the
back of the upcoming festive season, textile players are witnessing a
pick-up in demand and the piled up inventory is clearing. We expect
26% revenue growth for our textile universe, led by strong growth in
Alok Industries and Kewal Kiran Clothing.
ƒ Operating margin to dip YoY but remain flat sequentially
On the operating front, we expect a YoY dip for varied reasons.
However, on a sequential basis, we expect a flattish trend in operating
margins. Vardhman Textiles, which enjoyed a bumper FY11 where
margins touched an all-time high of 29.7%, is likely to retrace back to
the range of 15-18% as prices have corrected from peak levels.
ƒ Manmade fibre players: Q2FY12E - a better quarter sequentially
Prices of key raw materials and end products held well during Q2FY12.
Prices of PTA and MEG (key raw materials) increased by ~4% and
~11%, respectively, while prices of  chips and polyester oriented yarn
increased by 4.5% and 1.1%, respectively. With a sharp correction in
cotton prices since April 2011, prices of manmade fibres are also falling


Company specific view
Company Remarks
Alok Industries We expect 35% YoY revenue growth backed by increased capacities and the recent
rupee depreciation. EBITDA margin is likely to dip 140 bps YoY to 27.2% due to cost
pressures and higher share of the polyester business. Due to higher fixed costs, we
expect muted PAT growth of 5% (| 83.5 crore)
Bombay Rayon
Fashions
We expect 18% YoY sales growth to | 616.1 crore. We expect volumes in the
garment segment to remain flat at 10.3 million pieces (up 2.5% YoY) and in the fabric
segment to increase 22% YoY to 26.6 million metre. We expect garment realisations
of |  261/piece and fabric realisation of | 131/metre (up 15%)
JBF Industries We expect 26.4% YoY increase in revenues to | 1,782.9 crore on the back of
improved realisations. While volumes are likely to remain flat, a YoY increase in
realisations will boost consolidated revenues. We expect the company to maintain an
EBITDA margin of 10.5%
Kewal Kiran We expect KKCL to report a healthy 38% YoY growth in topline to | 100.5 crore led by
29% growth in the apparel segment and higher growth in the accessories segment
(albeit on a small base). We expect realisations to grow by 13% YoY to | 769 per
piece on the back of price hikes taken in Q1FY12
Vardhman
Textiles
Vardhman's Q2FY12E revenues are likely to increase 14% YoY to | 1,037.7 crore. We
believe the inventory pain was over in Q1FY12 itself. Hence, we expect Vardhman to
report an EBITDA margin of 14.9% in Q2FY12E, down from the abnormally high levels
of FY11 (due to superior realisations). (Q2FY11 - 24.4%)
Source: Company, ICICIdirect.com Research


Others  
: Company Specific View (Q2FY12E)
Company Remarks
Everest Kanto We expect the company to sell 2.5 lakh cylinders with average realisations of | 9000
per cylinder. With the recovery in CNG cylinders sales and improvement in margins
in the last three quarters, we expect strong volume growth and margins for the
company to remain sustainable
InfoEdge On the back of sustained hiring across the board, revenues are expected to grow
29.8% YoY. However, with higher spend on marketing and promotional activities,
margins are expected to remain under pressure
Nitin Fire With the rising sales of fire fighting equipment and industrial cylinders sales, we
believe the company would post robust revenues and earnings growth in the quarter.
We expect the company to sell 2.8 cylinders with average realisations of | 8400 per
cylinders
Orbit Corporation We expect pre-sales volumes to remain weak during Q2FY12 given that lower
offtakes in Mumbai Orbit's revenue is expected to witness a decline of 3% QoQ on
account of slower execution across projects in Mumbai. Key monitorable: pre-sales
volume, execution pick up, sales collection & debt level
Praj Industries The company's order book growing to | 850 crore from | 750 crore in the previous
quarter, had led to the strong growth in revenues. However, margins for the company
have still remained subdued due to lower engineering income. We believe the current
high ethanol demand would continue to drive growth for the company
Source: Company, ICICIdirect.com Research

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India Metal and Mining-- Taxing times ::Macquarie Research,

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India Metal and Mining
Taxing times
Event
 Approval of the new MMRD bill: Cabinet Ministers, Government of India,
have approved the new mining bill. But an important hurdle is yet to be
crossed, which is Parliament’s approval. Overall, this is negative for existing
pure mining companies where profits could be impacted by 9-12%.
Impact
 Taxes and more: The new draft proposal calls for a 26% share of profits for
coal mining; for non-coal mining, the new liability is equivalent to royalty paid.
This will go for the development of local communities which were the
traditional land owners of the mining area. To put this in perspective, the
government collected $1bn in terms of royalty in FY10 (from minerals other
than coal) and a 26% tax on mining profits for Coal India could add another
$650mn to this fund. Also, a cess on royalty of 10% going to State and 2.5%
to the Central government will be levied. Including these proposals, the metal
sector in India for some commodities will be at the highest end of taxation.
 Still some time to go: The bill has to be tabled in the Parliament next, which
can suggest changes to the bill as well. Only after an approval from
Parliament is received will the bill become an act. The current bill has a lot of
areas still not explained, for instance, how should coal mines allocated for
captive use be taxed, will companies be given benefits for CSR expenses etc.
These issues can be raised in the Parliament before an approval is given.
 Could attract investment in medium term: The Act opens up opportunities
by providing for cluster development of smaller mines, making the awarding of
licenses time bound, introducing the open-sky policy for the Reconnaissance
Permit, seamless transition from prospecting to mining licenses as well as
introducing transferability of PL/ML. These changes could help attract foreign
investment as returns become more assured and process becomes simpler.
Outlook
 Coal – impacted the worst with a 26% tax on profits. Coal India might be
able to pass it on as it did pass a 5% Central Excise duty imposed in the
budget last March. However, it will become less competitive compared to
imports and we expect a PE de-rating will happen.
 Iron ore will have to be absorbed: With this, iron ore taxation rises above
70%. We believe that, as iron ore prices decline, the industry will see tax cuts.
 Steel – little impact: The impact should be about $5/t and can be partly passed.
 Zinc and lead – have to be absorbed: The impact on zinc and lead is linked
directly to international prices, given the nature of royalties. We believe this
will have to be absorbed.
 Aluminium – negligible impact: The low contribution of bauxite in the value
chain has reduced the impact on aluminium.
 Cement – The impact may be close to Rs3/bag, unlikely to be passed on in
this oversupplied market.

Tea ƒ:: Q2FY12 Result Preview::ICICI Securities

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Tea
ƒ High export realisations due to global shortage
Kenya’s tea production has declined  by 16.3% to 178.1 million kg in
January-June 2011 from 213 million kg in January-June 2012.
Simultaneously, tea production in Sri Lanka has remained flat at 220
million kg compared to 222 million  kg in 2010. This has resulted in
higher global tea prices and higher exports realisations for Indian
companies. Tea realisation in North India is higher by ~10%, which
could help in higher earnings for the North India based companies. We
believe tea prices will remain high for the current financial year. Export
in North India during the same period has been 87 million kg with the
average realisations of | 185.0 per compared to 85.5 million kg with
average realisations of | 163 per kg in 2010.
ƒ Domestic production to increase to above 1000 million kg
Tea production in India would increase to above 1000 million kg in 2011,
higher than 966 million kg in 2010 led by the normal monsoon in North
India. Tea production during January-July 2011 has been 491 million kg,
6% higher than 462 million kg in  January-July 2010. However, higher
export demand for Indian tea in European countries due to lower
production in the African region has resulted in higher realisations.
ƒ North India based companies to benefit from export
McLeod Russell and Jayshree Tea, based in West Bengal and Assam,
are the biggest beneficiaries of higher exports prices. North India based
companies are known for high quality tea and demand for this tea
mainly comes from European countries. We believe North India based
companies would witness both volumes and realisations growth.

Company specific view
Company Remarks
Harrison
Malayalam
The company is likely to witness robust earnings led by elevated rubber prices and
improvement in export realisations of tea. We expect the company to sell 5.2 million
kg of tea with average realisations of | 86 per kg and 2499 tonnes of rubber with the
average realisations of | 210 per kg
Jayshree Tea We expect the company to sell 11.9 million kg with average realisations of | 144 per
kg. However, with increase in wages by ~| 3 per kg, margins are likely to come
down to 22.7% from 25.2% in Q2FY11. We expect higher export realisations in Q3
could results in improvement in margins
McLeod Russel We expect the company to sell 24.9 million kg of tea with average realisation of |166
per kg in India and 6.3 million kg with average realisations of | 88 per kg in overseas
subsidiary. However, margins will witness some moderation due to 23% increase in
employee cost
Source: Company, ICICIdirect.com Research

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Sugar :: Q2FY12 Result Preview::ICICI Securities

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Sugar
ƒ Sugar prices remain at ~| 28-29/kg, sugarcane cost likely to go up
We have seen domestic sugar prices remaining in a range of | 28-29/kg.
However, higher export realisations at ~ | 32-34/kg would help millers
as the government has also allowed 0.5 million tonnes (MT) of exports.
Simultaneously, global prices have also remained above 26 cents/lb. We
believe higher realisations for Renuka do Brasil and VDI would result in
higher earnings for Renuka Sugars. We expect sugarcane prices to
witness a significant increase for  Uttar Pradesh (UP) millers due to
elections in UP in June 2012.
ƒ By-product realisations to help curb sugar losses
Sugar production at 24.2 MT in SY11 and high availability of sugarcane
has increased by-product volumes. Ethanol prices are at | 27/litre and
power  tariffs  at  ~|  4  per  unit.  We  believe  strong  earnings  from  byproducts could help millers to curb losses from sugar.
ƒ Total 2.7 lakh tonnes of exports allowed in 2011 sugar season
The government has allowed 2.7 lakh tonnes of sugar exports in
trenches, out of which 1.2 MT were under advance general licence
(AGL) and 1.5 MT under open general licence (OGL). High exports
realisations have helped millers to offset their losses due to subdued
domestic realisations. We believe the government would further allow
1.5-2.0 MT of exports in new season as sugar production is likely to
remain high at ~26 MT


: Company Specific View (Q2FY12E)
Company Remarks
Balrampur Chini We expect sugar sales volumes to be at 1.6 lakh tones with sugar realisations at |
29.5 per kg. Moreover, power volumes will increase from 14.7 crore units in Q1FY12
to 20.4 crore units in Q2FY12 at an average tariff of | 4.5 per unit. Export allowance of
0.5 MT would improve the margins
Bajaj Hindustan The company expects sales of 3.3 lakh tonnes of sugar with the average price of |
29.0 per kg. In the power segment, we expect it to record sales of 8.3 crore units with
average tariff of | 4 per unit. However, we expect the interest cost to remain high at
~| 145 crore, which remains a drag for the company
Dhampur Sugar We expect the company to sell 0.9 lakh tonnes of sugar with average realisations of |
29.5 per kg. The company would be selling 9.7 crore units with average tariffs of |
4.6 per unit. We believe sugarcane prices in the new season could witness a
significant increase due to elections in the state in June 2012
Shree Renuka
Sugars
The company is expected to sell 2.6 lakh tonnes at an average realisation of | 29/kg
in India and 2.1 lakh tonnes in Brazil with average realisations of 26 cents/lb. In the
distillery and power segment, the company is likely to fetch better realisations at | 27
per litre and | 4.6 per unit
Source: Company, ICICIdirect.com Research

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