Market Outlook

India Research
December 14, 2011

Dealers Diary
Indian markets are expected to open in red taking cues from gap down opening in most of the Asian markets and negative closing in most of the global markets yesterday. The Indian markets snapped its three-day losing streak and ended higher yesterday as in the late-session short covering crept in ahead of November inflation numbers scheduled to be announced today. Globally, US and most of the European markets closed on a negative note yesterday as the Federal Reserve left rates unchanged and declined to signal another round of quantitative easing. The Fed said it would continue its trade of US$400bn of short-term debt with long-term securities to extend the average maturity of its holdings, but did not unveil any new stimulus program. In addition retail sales data of US came in lower than expected at 0.2% (estimated at 0.5%) which also contributed to the weakening of US stocks. The markets today would be closely watching out for domestic November inflation number (expected 9.02%). Also, industrial production data of Eurozone for October 2011, which is expected to be flat mom, will be on radar.

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 (%) 0.8 0.8 (0.6) (0.7) 0.4 0.4 0.1 1.0 2.0 1.2 0.5 Chg (%) (0.6) (1.3) 1.2 (1.2) (0.7) (0.6) (1.9)

(Pts) 36.0 (31.7) (42.3) 21.3 29.3 9.0 86.3 92.9 28.3 (Pts) (66.5) (33.0) 62.3 (101.0) (128.5) (16.0) (43.0)

(Close) 4,801 5,482 5,918 5,929 6,684 9,864 8,391 7,890 5,816 (Close) 11,955 2,579 5,490 8,553 18,447 2,686 2,249

132.2 16,003

200.3 10,189

Markets Today
The trend deciding level for the day is 15,951 / 4,785 levels. If NIFTY trades above this level during the first half-an-hour of trade then we may witness a further rally up to 16,131 16,259 / 4,841 4,881 levels. However, if NIFTY trades below 15,951 / 4,785 levels for the first half-an-hour of trade then it may correct up to 15,823 15,643 / 4,745 4,688 levels.
Indices SENSEX NIFTY S2 15,643 4,688 S1 15,823 4,745 R1 16,131 4,841 R2 16,259 4,881

Indian ADRs Infosys Wipro ICICI Bank HDFC Bank

Chg (%) 0.1 (0.5) (0.4) 1.3

(Pts) 0.1 (0.1) (0.1) 0.4

(Close) $51.7 $10.3 $26.2 $27.1

News Analysis
Mining sector update - MOIL vs. CIL vs. NMDC FMCG sector update - New packaging norm to have a negative impact L&T bags order worth `2,164cr Political update
Refer detailed news analysis on the following page

Advances / Declines Advances Declines Unchanged

BSE 1,052 1,691 111

NSE 520 907 66

Net Inflows (December 12, 2011)

` cr FII MFs ` cr Index Futures Stock Futures Purch
1,518 459

Sales
1,837 635

Net
(319) (176)

MTD
1,492 (523)

YTD
(2,532) 5,423 Volumes (` cr) BSE NSE 2,067 9,283

FII Derivatives (December 13, 2011)

Purch
1,594 1,641

Sales
2,102 1,592

Net
(508) 50

Open Interest
11,457 25,166

Gainers / Losers
Gainers Company
GMR Infra Areva T&D Hindalco Inds Jindal Steel Grasim Inds

Losers Company
Pantaloon Retail Apollo Hosp Amtek Auto Jain Irrigation Sintex Inds

Price (`)
19 200 129 525 2,412

chg (%)
5.3 5.2 4.8 4.3 4.2

Price (`)
158 574 102 105 81

chg (%)
(7.2) (7.1) (6.1) (5.8) (5.4)

Please refer to important disclosures at the end of this report

Sebi Registration No: INB 010996539

Market Outlook | India Research

Mining sector update - MOIL vs. CIL vs. NMDC

Recent declines in the stock prices of the three mining companies, viz. Coal India (CIL), MOIL and NMDC, have led to questions in the minds of investors as to which company can provide higher upside from here. We analyzed all the three miners on different factors categorized under the parameters of industry (market share, end-user dependency and mining tax), business (mine life, risk to volume growth, immunity to price declines and staff cost) and valuation (EV/EBITDA). Our analysis points out that NMDC could be a winner amongst the three. On the industry front, we believe CIL is better placed as compared to MOIL and NMDC as the company is dependent on the power sector, which is relatively stable as compared to the steel sector. However, the upcoming 26% mining tax will hurt CIL the most. However, it should be noted that CIL spends ~5% of its net sales (~18% of its net profit) on corporate social responsibility (CSR), which could be reduced to partially mitigate the impact of mining tax. Further, it could take some price hikes to partially offset the impact of mining tax. On the volume growth front, NMDC scores the best, as it is poised for the highest volume growth over FY2011-13 compared to CIL and MOIL. MOILs volume growth is at lower risk, as its mines are located in Maharashtra and Madhya Pradesh, which have a relatively well developed infrastructure. However, even if NMDC misses its volume growth target, its volume growth would still be higher than MOIL and CIL as per our estimates. On the pricing front, we believe CIL and NMDC have an advantage, as they sell their products at a significant discount to international benchmarks. Although absence of government intervention in regulating manganese ore prices has given MOIL the leeway to sell its product at market-driven prices, we believe oversupply in the manganese ore market and huge inventory built-up should mute price hikes for MOIL over the coming year. On the valuation parameter front, NMDC scores over CIL and MOIL. While we have seen significant declines in the stock prices of CIL, MOIL and NMDC, we believe NMDCs better-than-expected 1HFY2012 performance and robust growth prospects do not warrant a steep decline in its stock price. While risks to NMDCs financial forecasts are limited, CIL could disappoint on the production front and higher-than-expected wage hikes could dent its profitability. In our view, although MOILs valuations are attractive, there is a downside risk to its sales volumes targets; also, the stock lacks near-term catalysts. For NMDC, despite robust 1HFY2012 performance, it is currently trading at a significant discount to its historical trading range. Hence, we recommend Buy on NMDC with a target price of `231.

December 14, 2011

Market Outlook | India Research

FMCG sector update - New packaging norm to have a negative impact

Recently the Ministry of Consumer Affairs, Food & Public Distribution issued a notification on 19 consumer product categories to be sold in standardized pack sizes with effect from July 1, 2012. In our view, this regulation by the Government of India will have a negative impact on the FMCG companies in our universe. FMCG companies have always resorted to tinkering with the pack sizes to manage the slippage in operating margins during a high raw-material inflationary scenario. If this regulation is implemented, then these companies will have to stick to standard pack sizes. Also, some companies according to the notification might have to introduce new pack sizes in few product categories. We believe the impact would be more on products that come in the following price points `1, `2, `5, `10, because companies normally do not tinker with these price points but make changes in the pack sizes in order to protect the fall in margins when witnessing high raw-material prices. Product categories where this regulation will have an adverse impact are biscuits, tea and soaps and detergents. If this regulation is implemented, FMCG companies might have to do away with these popular price points, as taking price hikes by reducing the grammage at these price points will no more be possible. These pack sizes have become very popular among rural markets, which for all FMCG companies have become a sizeable market. We believe Britannia and HUL will have an adverse impact of this regulation, whereas Dabur, Nestle and GSKCH will largely comply with the proposed regulation.

L&T bags order worth `2,164cr

Larsen & Toubro (L&T) Construction has bagged a major order valued at `2,164cr in the infrastructure segment from GMR Infrastructure. The order is for the construction of stretches consisting of six laning of Kishangarh Udaipur Ahmedabad Highway and will be executed on EPC basis. This mega project involves upgrading the existing four-lane section of the golden quadrilateral to six lane. With this order, the companys outstanding order book stands at ~`1,49,553cr (3.4x FY2011 revenue), which provides revenue visibility. This order booking takes the total declared orders to ~`7,364cr for L&T until now in this quarter against the order received worth `13,336cr in 3QFY2011. The drying up of order inflows is one of the major concerns for the stock and has led to underperformance in the recent past. However, at the CMP of `1,172, the stock is trading at PE of 10.7x FY2013E earnings, after adjusting for investments, which is below the historical trading multiple for L&T, and we believe this factors in most of the negatives surrounding the stock. We have used the SOTP methodology to value the company to capture all its business initiatives and investments/stakes in the different businesses. Ascribing separate values to its parent business on a P/E basis and

December 14, 2011

Market Outlook | India Research

investments in subsidiaries on P/E, P/BV and mcap basis, our target price works out to `1,714, which provides 46.3% upside from current levels. Hence, we maintain our Buy recommendation on the stock.

Political update
Mines and minerals bill tabled in parliament; industry leaders apprehensive The Mines and Minerals (Development and Regulation) Bill was tabled in the parliament. The bill will succeed the 54-year-old legislation governing the segment. The bill, which was approved by the Cabinet on September 30, 2011, requires coal miners to share 26% of their profits with the locals affected by the projects. The main highlights of the bill include i) companies engaged in the mining of coal and other minerals are required to share revenue with local communities where they operate; ii) coal and lignite companies to share 26% of their net profit; iii) other miners to pay an amount equivalent to the royalty paid for mineral extraction; iv) the proceeds from the above are proposed to help communities create and maintain local infrastructure. The proposed reform is increasingly perceived as a deterrent to the mining sector. Industry veterans have expressed concerns that it would hit the industry hard particularly the provisions of profit sharing and royalty issue. They also believe that imposition of the proposed mandatory contribution would raise the incidence of taxation (~60%) on mining industry highest taxed in the world, thereby making it an unattractive sector for serious investors. Consequently, it would lead to a huge valuation loss to companies. Responding to concerns voiced by captains of the mining industry, S K Srivastava, Additional Secretary, Ministry of Mines, assured the industry leader that adequate steps will be taken to ensure viability of the mining sector. Cabinet clears key bills on Judicial Accountability, Citizen's Charter and black money As per media reports, the Cabinet committee cleared bills on Judicial Accountability, Citizen's Charter, the Whistleblowers Bill, and Prevention of Money Laundering. Most of these relate to the rhythms of the Lokpal Bill. The Judicial Accountability Bill proposes to lay down judicial standards and provide for accountability of judges. The bill mainly advises judges to restrain themselves from making unwarranted comments against other constitutional bodies. It had also proposed to make it compulsory for the judges to declare their assets and the setting up of a national judicial oversight committee, which will look into the misbehaviour of judges. The Citizen's Charter (something that Anna Hazere strongly proposed in the Lokpal Bill) seeks to ensure the citizen's Right to Service and set up a grievance redressal mechanism. It envisages the setting up of a Central Public Grievance Redressal Commission. The Whistleblowers Bill seeks to protect persons making a public interest disclosure related to an act of corruption, misuse of power or criminal offence by a public servant. It designates the Central and State Vigilance Commissions to receive

December 14, 2011

Market Outlook | India Research

disclosures from whistleblowers and lays down safeguards for protection of whistleblowers. The Cabinet also discussed the National Food Security Bill, but reports suggest Trinamool and other allies wanted to discuss some aspects of the bill further. This will now be brought up at a meeting next week. Lokpal Bill on the move finally; discussions and decision making gather pace The Parliamentary Standing Committee tabled the Lok Bill report in the Rajya Sabha last week. It was overshadowed and thereby delayed due to political uproar on FDI in retail. It has gathered steam this week, as Anna Hazare threatened to go on a fourth and lengthy hunger strike later this month, should the bill fall apart. There have been rifts and disagreements between government panel and Annas block over the inclusion of PM, CBI and other top bureaucrats. However, an agreement is said to have reached between PM, top congress leaders and majority of political parties to include provisions, which would allow to investigate the prime minister, albeit with safeguards, for charges of corruption. 57 lakh junior bureaucrats (central government employees) will also be accountable under the Lokpal. In addition, the premier investigating agency, CBI, will report to the Lokpal when investigating complaints of corruption against government servants. The draft will be discussed officially today at an all-party meet called by the prime minister. Power Ministry pushes for 14% duty on power equipment imports Finally putting an ear to the demands by the domestic power equipment players for providing a level playing field against cheap imports of Chinese power equipment, the Power Ministry has floated a Cabinet note recommending imposition of 14% on imports of such electrical equipment. The issue had triggered various rounds of discussions for a long time before a consensus emerged that immediate steps were required to protect the domestic industry from aggressive competition from Chinese equipment makers. The proposals contained in the Cabinet note proposes imposition of 5% customs duty, 5% special additional duty and 4% countervailing duty on imported power equipment. The note has been sent for the approval of the Heavy Industries, Public Enterprises Ministry and Finance Ministry. An announcement to this effect is likely to be made in the general budget next year. This comes as a positive for companies such as BHEL, L&T and other new entrants in the BTG. Many high-value BTG orders in the past were secured by Chinese players due to pricing advantage (cheap imports), which discriminated the domestic players. An import duty will supposedly remove the pricing advantage on imports. Alternatively, the forthcoming orders in the BTG space are now likely to be more skewed towards domestic players, especially BHEL who has unmatched experienced and quality levels in the BTG domain. While this partially scales down the proportion of Chinese imports (and consequently greater order potential for BHEL going ahead), structural concerns loom large on BHEL (delay in big ticket orders amid concerns in the power sector,
December 14, 2011

Market Outlook | India Research

weak investment capex due to high interest rate regime, which could take more time to gather momentum than earlier anticipated; and changing dynamics in the BTG space). Hence, we remain Neutral on the stock.

Economic and Political News

FDI in the food processing sector down 32% in 2010-11 Fitch revises Indias growth projection to 7% in 2011-12 Railways record 10% growth in April-November earnings

Corporate News
Glenmark seeks arbitration after US firm breaches pact GMR adds 384MW from its subsidiary to Andhra grid Madhucon projects gets letter of intent for Indonesian power project Tata Power secures funding for 25MW solar project in Gujarat
Source: Economic Times, Business Standard, Business Line, Financial Express, Mint

December 14, 2011

Market Outlook | India Research

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December 14, 2011