3QFY2012ResultPreview-January2012

8/3/2019 3QFY2012ResultPreview-January2012

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3QFY2012 Results Preview||||| January 3, 2012

Refer to important Disclosures at the end of the report

Note: Stock prices as on December 30, 2011

Table of Contents

StrategyStrategyStrategyStrategyStrategy 2-62-62-62-62-6

3QFY2012 Sectoral Outlook3QFY2012 Sectoral Outlook3QFY2012 Sectoral Outlook3QFY2012 Sectoral Outlook3QFY2012 Sectoral Outlook

Automobile 8

Banking 11

Capital Goods 15

Cement 18

FMCG 20

Infrastructure 22

Metals 26

Oil & Gas 29

Pharmaceutical 32

Power 35

Real Estate 37

Software 39

Telecom 42

Stock WStock WStock WStock WStock Watchatchatchatchatch 4545454545


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Refer to important Disclosures at the end of the report 2


Strategy

We expect Sensex companies to maintain healthy top-line growth

momentum, with projected growth of 18.5% yoy in sales.

However, growth is likely to be slower than the ~23% growth

witnessed in 2QFY2012. On the bottom-line front, margin woes

are likely to continue, leading to low 7.7% yoy earnings growth

for Sensex companies. Ex. ONGC, Sensex earnings growth is

likely to be ~11%, as ONGC's earnings are expected to decline

37% due to higher subsidy-sharing burden. Across the board,

margin compression, as witnessed over the past few quarters,

is likely to continue in 3QFY2012 as well. On a yoy basis,

operating margin is expected to contract by a rather steep 300bp

to 22.3%. On a sequential basis, margin compression is expectedto be 40bp. Net profit margin is expected to come in lower at

12.4%, implying a decline of 176bp yoy (40bp qoq).

We expect strong numbers to be posted by BFSI and IT stocks

in 3QFY2012, accounting for ~83% of Sensex' net profit growth.

Top-line growth is likely to be dominated by auto and oil and

gas stocks, accounting for combined top-line growth of ~58%.

Sensex IT companies are expected to report strong 31.3%

yoy sales growth, partly aided by the recent sharp INR

depreciation. On the back of sharp depreciation of INR vis--

vis the USD, profitability of companies such as TCS, Infosys and

Net Sales (Net Sales (Net Sales (Net Sales (Net Sales (````` cr)cr)cr)cr)cr) Net PNet PNet PNet PNet Profit (rofit (rofit (rofit (rofit (````` cr)cr)cr)cr)cr)

CompanyCompanyCompanyCompanyCompany WWWWWeightage (%)eightage (%)eightage (%)eightage (%)eightage (%) 3QFY2012E3QFY2012E3QFY2012E3QFY2012E3QFY2012E 3QFY20113QFY20113QFY20113QFY20113QFY2011 % chg% chg% chg% chg% chg 3QFY2012E3QFY2012E3QFY2012E3QFY2012E3QFY2012E 3QFY20113QFY20113QFY20113QFY20113QFY2011 % chg% chg% chg% chg% chg

Finance 23.4 25,149 21,657 16.1 7,223 6,244 15.7

IT 18.1 32,307 24,598 31.3 6,620 5,445 21.6

Oil & Gas 13.5 95,564 80,613 18.5 10,728 12,219 (12.2)

FMCG 11.9 12,241 10,481 16.8 2,344 1,962 19.5

Auto 9.2 68,269 56,004 21.9 4,813 4,783 0.6

Engineering 6.0 23,044 20,436 12.8 2,332 2,244 3.9

Metals 5.6 49,547 46,470 6.6 2,985 3,640 (18.0)

Telecom 3.6 18,133 15,756 15.1 1,445 1,304 10.9

Power 3.2 21,757 17,834 22.0 2,825 2,782 1.6

Pharma 2.9 3,562 3,102 14.8 720 583 23.5

Mining 1.6 17,664 12,692 39.2 3,650 2,626 39.0

Real Estate 0.6 2,719 2,480 9.6 414 466 (11.1)

Construction 0.5 3,304 2,949 12.0 70 233 (70.2)

SensexSensexSensexSensexSensex 100.0100.0100.0100.0100.0 373,263373,263373,263373,263373,263 315,072315,072315,072315,072315,072 18.518.518.518.518.5 46,16946,16946,16946,16946,169 44,53044,53044,53044,53044,530 3.73.73.73.73.7

SensexSensexSensexSensexSensex##### 18.918.918.918.918.9 7.77.77.77.77.7

Exhibit 1: Sensex earnings summary

Source: Company, Angel Research; Note: #On free-float adjusted basis

3QFY2012 Sensex earnings - Margin woes likely to lead to sub-10% profit growth

Wipro is expected to rebound by healthy 25.1%, 23.4% and 12.8%

yoy, respectively, resulting in combined PAT growth of 21.6% yoy.

Sensex pharmaceutical companies are expected to buck the

trend of margin compression, with a strong 574bp yoy OPM

expansion on the back of 14.8% yoy top-line growth, partly

aided by the recent depreciation of the INR vs. USD. Bottom-

line growth is expected to be healthy at 23.5% yoy.

We expect Sensex BFSI companies to post healthy 16.9%

yoy bottom-line growth on the back of stable to improving

margins and healthy performance of private banks. Ex. BFSI,

growth in Sensex profit is expected to be weak 5.2% yoy. While oil and gas stocks are expected to contribute a sizeable

~31% to the top-line growth of the Sensex, operating margins

are expected to decline rather steeply. Operating margin for

ONGC is expected to fall sharply by 13.5% yoy and 11.6%

qoq, resulting in a sharp 37.1% yoy fall in earnings despite a

relatively lower (17.3%) decline in sales. The sharp compression

is expected on account of higher subsidy-sharing burden. For

RIL, we expect strong 31% yoy top-line growth on the back of

rise in prices of petrochemical products. However, margin

compression is expected to limit the bottom-line expansion to

22.2% yoy.


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Earnings growth of Angel coverage universe likely to

moderate to ~4%.

Earnings growth trajectory for our coverage universe is also

expected to moderate considerably in 3QFY2012, as higher

input costs and interest rates continue to hamper margins and

the overall profitability of corporates. For our coverage universe

as a whole, we expect top-line growth to remain healthy at

close to 17% levels. However, the compression in OPM is likely

to restrict operating profit growth to just ~6% and net profit

(primarily due to higher interest costs) is likely to rise at an even

slower pace of 3.5% yoy.

Standout performers among the sectors under our coverage

are likely to be IT, FMCG and pharma companies. FMCG and

pharma companies being the typical defensives have been least

impacted by the ongoing domestic as well as the global

slowdown.

The FMCG sector's earnings growth trajectory remains

healthy, backed by the ever-growing consumer demand and

relative price inelasticity of their products. For 3QFY2012, we

expect our FMCG coverage universe to register healthy ~18%

top-line growth, backed by modest volume growth and price

hikes. OPMs are likely to expand on the back of better product

mix and cut in ad spends, resulting in healthy ~20% growth in

operating as well as net profit.

IT companies are expected to reap the benefits of

depreciating INR vs. the USD. Demand for IT solutions also

remains better than expected, leading to modest volume growth.

While tier-I IT companies are expected to register strong earnings

growth, earnings for mid-tier IT companies are likely to be a

mixed bag. Overall, we expect our IT coverage universe to

register earnings growth of 23% on the back of strong ~31%

top-line growth.

Pharma companies under our coverage universe are

expected to register strong ~47% earnings growth (ex. Ranbaxy

at ~11%) on the back of reasonable top-line growth and lower

forex losses for Ranbaxy.

On the flip side, cyclical sectors viz. capital goods,

construction and real estate are likely to face the brunt of higher

interest costs at the time of overall demand slowdown. For our

capital goods universe, we expect moderate 12.7% yoy

top-line growth. However, on the bottom-line front, we expect

most companies to post a decline mainly on account of marginpressure and, in some cases, due to higher interest costs. The

adverse impact of slowdown coupled with higher interest rates

is likely to be more prominent on infrastructure companies, with

Strategy

Though Sensex auto companies are expected to contribute

a significant 26.8% to Sensex' top-line growth, their contribution

to earnings growth is expected to be just 2.8%. Healthy revenuegrowth is expected to be led by strong volume growth, price

increases along with better product mix and favorable currency

movement (primarily on the JLR front). Operating margins are

expected to contract by 194bp yoy, led by a yoy increase in

raw-material prices. Further, higher discounts offered by most

companies (except two-wheeler makers) to prop-up sales are

also likely to weigh on margin performance. Overall, we expect

revenue growth of ~22% for Sensex auto companies and a

marginal 0.6% yoy increase in net profit.

We expect Sensex FMCG companies to post decent 16.8%yoy growth in sales, aided by modest volume growth coupled

with price hikes taken by companies. Margins are expected to

improve by ~60bp yoy for FMCG companies, on the back of

better product mix and cut in ad spends. Bottom-line growth for

Sensex FMCG companies is expected to be healthy at 19.5% yoy.

From the telecom pack, Bharti Airtel is expected to report

15.1% yoy top-line growth on the back of modest improvement

in KPIs and decent growth in subscriber base. While operating

profit growth is expected to be healthy at 24% yoy, net profit

growth is expected to be relatively lower at 10.9% yoy partly onaccount of further depreciation of the INR during the quarter.

Metal companies are expected to witness an 18% yoy decline

in their net profit, despite 6.6% yoy top-line growth due to a

220bp and 180bp compression in operating and net profit

margins, respectively. While sales are expected to increase due

to higher realizations, relatively higher raw-material costs and

other environmental clearance issues are likely to hamper

earnings growth. For Coal India, we expect strong growth of

39% yoy in net profit on account of the sharp price increase

taken during February 2011.

Although the capital goods sector is expected to witness

reasonable sales growth of 12.8% yoy, PAT margin is estimated

to fall by 86bp yoy, resulting in muted bottom-line growth of

3.9% yoy.

In the construction sector, we expect JP Associates to report

disappointing performance with a 70.2% yoy decline in the

bottom line due to abysmal OPM of the cement segment and

higher interest costs.


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Source: Bloomberg, Angel Research

Exhibit 3: India's underperformance vs global markets in CY2011

MSCI - India MSCI - EM MSCI - World

70

80

90

100

110

Jan-1

1

Fe

b-1

1

Mar-

11

Apr-

11

May-1

1

Jun-1

1

Jul-11

Aug-1

1

Sep-1

1

Oc

t-11

Nov-1

1

Dec-1

1

earnings expected to decline by ~16% yoy despite ~10%

revenue growth. Even for our real estate coverage universe, we

project earnings to decline by ~9% yoy, despite a ~12% top-line growth.

For our financials coverage universe, reasonable growth in

earnings of large private sector banks is likely to be mainly

Strategy

offset by weak growth for most public sector banks, especially

the smaller ones. Overall, we expect large private banks to

post ~16% yoy growth in net interest income (NII), while PSUbanks are expected to register ~11% yoy growth. On the net

profit front, the picture becomes even starker with earnings

growth of large private banks at ~19% vis--vis weak ~3%

growth expected for public sector banks.

Net Sales (Net Sales (Net Sales (Net Sales (Net Sales (`````cr)cr)cr)cr)cr) Operating POperating POperating POperating POperating Profit (rofit (rofit (rofit (rofit (`````cr)cr)cr)cr)cr) Net PNet PNet PNet PNet Profit (rofit (rofit (rofit (rofit (`````cr)cr)cr)cr)cr)

CompanyCompanyCompanyCompanyCompany 3QFY2012E3QFY2012E3QFY2012E3QFY2012E3QFY2012E 3QFY20113QFY20113QFY20113QFY20113QFY2011 % chg% chg% chg% chg% chg 3QFY2012E3QFY2012E3QFY2012E3QFY2012E3QFY2012E 3QFY20113QFY20113QFY20113QFY20113QFY2011 % chg% chg% chg% chg% chg 3QFY2012E3QFY2012E3QFY2012E3QFY2012E3QFY2012E 3QFY20113QFY20113QFY20113QFY20113QFY2011 % chg% chg% chg% chg% chg

Auto & Auto Ancillary 82,262 68,118 20.8 9,699 9,236 5.0 5,570 5,557 0.2

Capital Goods 21,340 18,940 12.7 3,087 3,104 (0.6) 1,960 2,001 (2.0)

Cement 11,775 9,917 18.7 2,335 1,938 20.5 1,028 932 10.3

Construction 24,389 22,247 9.6 3,395 3,302 2.8 1,218 1,453 (16.1)

Financials 64,659 57,325 12.8 37,437 33,317 12.4 17,971 16,658 7.9

FMCG 24,559 20,878 17.6 4,907 4,107 19.5 3,534 2,958 19.5

IT 44,423 33,979 30.7 11,354 8,393 35.3 8,144 6,622 23.0

Metals 75,893 69,562 9.1 13,199 14,216 (7.2) 7,282 8,327 (12.6)

Mining 17,664 12,692 39.2 4,328 3,445 25.6 3,650 2,626 39.0

Oil & Gas 108,068 93,409 15.7 23,051 25,827 (10.8) 13,769 15,197 (9.4)

Pharmaceuticals 14,740 13,492 9.3 2,888 3,080 (6.2) 2,484 1,686 47.3

Power 17,701 14,650 20.8 4,335 4,075 6.4 2,407 2,542 (5.3)

Real Estate 3,421 3,060 11.8 1,585 1,522 4.2 698 768 (9.1)

Telecom 22,991 19,712 16.6 7,444 5,930 25.5 1,599 1,547 3.4

Angel UniverseAngel UniverseAngel UniverseAngel UniverseAngel Universe 533,884533,884533,884533,884533,884 457,977457,977457,977457,977457,977 16.616.616.616.616.6 129,043129,043129,043129,043129,043 121,491121,491121,491121,491121,491 6.26.26.26.26.2 71,31471,31471,31471,31471,314 68,87468,87468,87468,87468,874 3.53.53.53.53.5

Exhibit 2: Angel universe estimates summary

Source: Company, Angel Research; Note: Only for coverage stocks for which quarterly results are estimated

Valuations de-rated due to slowdown fears

Indian markets fell by one-fourth in CY2011 and were one of

the worst performers across the globe due to fears of globalslowdown and slowing domestic growth trends hampering the

India growth story. The recent spate of economic data, namely

GDP growth falling below 7%, industrial production contracting

for the first time in more than two years and marginal exports

growth point towards the entrenchment of the current economic

slowdown.


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5



Source: IMF, Angel Research

Exhibit 4: Sensex one-year forward P/E

6.0

9.0

12.0

15.0

18.0

21.0

24.0

27.0

Sensex 1 year forwa rd P/E 15 year Avg 5 year Avg

Apr-

96

Jan-9

7

Oct-97

Jul-98

Apr-

99

Jan-0

0

Oct-00

Jul-01

Apr-

02

Jan-0

3

Oct-03

Jul-04

Apr-

05

Jan-0

6

Oct-06

Jul-07

Apr-

08

Jan-0

9

Oct-09

Jul-10

Apr-11

Source: IMF, Angel Research

Exhibit 5: Earnings yield vs. Bond yield

3.0

5.0

7.0

9.0

11.0

13.0

Earnings Yield 10Yr G-Sec Yield

Apr-

99

Jan-0

0

Oct-00

Jul-01

Apr-

02

Jan-0

3

Oct-03

Jul-04

Apr-

05

Jan-0

6

Oct-06

Jul-07

Apr-

08

Jan-0

9

Oct-09

Jul-10

Apr-

11

Source: Angel Research

Exhibit 6: FY2012 EPS growth to be sub-10%

834

1,014

1,110

1,290

350

550

750

950

1,150

1,350

FY2010 FY2011 FY2012E FY2013E

(`)

21.6% g

rowth

9.5%grow

th16.2

% growth

The earnings growth trajectory for Indian corporates has

moderated due to higher raw-material costs and interest rates

hurting margins over the past few quarters. Consequently,

valuations of Indian equities have got de-rated; and companies

are now trading at a substantial discount to their long-term

trading range. Based on one-year forward earnings, the Sensex

is trading at 12.5x, which translates into a 26% and 11% discount

to its five and 10-year trading average. The signaling of peaking

interest rates by the Reserve Bank of India (RBI) and cooling,

albeit moderately, inflation levels provide some silver linings.

Hence, while FY2012 earnings growth is likely to be modest, cooling

inflation and interest rates should underpin healthier growth in

FY2013. We expect Sensex companies to deliver EPS growth of9.5% in FY2012 and improve it further to 16.2% in FY2013,

translating into a reasonable 12.8% CAGR over FY2011-13E.

Strategy

The primary growth drivers of Sensex EPS over FY2011-13E

are expected to be the BFSI, oil and gas and IT sectors, with the

BFSI sector expected to contribute more than 30% (31.7%) tothe overall growth in Sensex EPS during the period, while

contribution from the oil and gas and IT sectors is estimated to

be at 19.9% and 15.5%, respectively. Strong performance by

the BFSI sector highlights the sustained earnings outlook for

HDFC Bank and a low base effect for SBI, which has not posted

growth in PAT over FY2009-11. IT companies are expected to

do well, backed by the recent sharp depreciation of the INR vis-

-vis the USD and higher volumes. On the other hand, sectors

such as telecom, power and FMCG are expected to

underperform the others. The combined contribution of these

three sectors to Sensex EPS growth is expected to be 11.8%over FY2011-13E.

Source: Angel Research

Exhibit 7: BFSI, Oil & Gas and IT to dominate growth

5.4 0.54.3

31.77.0

15.57.8

19.9 2.8 1.40.3 3.4 100.0

-

20.0

40.0

60.0

80.0

100.0

A

uto

Con

str.

En

gg.

Finance

FMCG IT

Metals

Oil

&G

as

Phar

ma

Power

Rea

lEs

tate

Telecom

To

tal

(%)

We remain confident on the long-term prospects of the Indian

growth story due to benefits of demographic dividend, a

primarily internal consumption-driven economy, its relative better

positioning globally, reasonable earnings growth trajectory and

reasonable valuations vis--vis India's structurally positive

outlook. The peaking of inflation and interest rate cycle bode

well for Indian Inc., which has been battered with twin pressures

of higher raw-material costs and decadal high interest rates.As inflation peaks out, we expect the interest rate cycle to peak

out with expected policy rate cuts from CY2012 to stimulate the

slowing domestic growth momentum. The recent sharp

depreciation of the INR vis--vis the USD is likely to improve

the competitiveness of Indian exports in overseas markets.

Accordingly, we continue to like export-oriented IT and pharma

stocks. We also maintain our positive stance on large private

sector banks on the back of attractive valuations and structural

positives. We maintain our 12-18 months Sensex target of

18,000, assigning a conservative multiple of 14x FY2013E

earnings. Our target implies an upside of ~17% from current

levels, which is likely to be back-ended.


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Strategy

Net Sales (Net Sales (Net Sales (Net Sales (Net Sales (`````cr)cr)cr)cr)cr) Net PNet PNet PNet PNet Profit (rofit (rofit (rofit (rofit (`````cr)cr)cr)cr)cr) WWWWWeightageeightageeightageeightageeightage % Contribution% Contribution% Contribution% Contribution% Contribution

CompanyCompanyCompanyCompanyCompany 3QFY2012E3QFY2012E3QFY2012E3QFY2012E3QFY2012E 3QFY20113QFY20113QFY20113QFY20113QFY2011 % chg% chg% chg% chg% chg 3QFY2012E3QFY2012E3QFY2012E3QFY2012E3QFY2012E 3QFY20113QFY20113QFY20113QFY20113QFY2011 % chg% chg% chg% chg% chg (%)(%)(%)(%)(%) to Sensex growthto Sensex growthto Sensex growthto Sensex growthto Sensex growth#####

Bajaj Auto 4,720 4,028 17.2 791 667 18.6 1.7 3.9

Bharti Airtel 18,133 15,756 15.1 1,445 1,304 10.9 3.6 3.1

BHEL 10,873 9,023 20.5 1,465 1,403 4.4 1.6 1.4

Cipla 1,662 1,501 10.7 295 233 26.7 1.3 2.5

Coal India 17,664 12,692 39.2 3,650 2,626 39.0 1.6 6.4

DLF 2,719 2,480 9.6 414 466 (11.1) 0.6 (0.8)

HDFC 1,553 1,328 17.0 1,047 891 17.5 7.2 9.3

HDFC Bank 4,468 3,905 14.4 1,419 1,088 30.5 6.3 16.6

Hero Honda 6,012 5,118 17.5 629 509 23.6 1.4 3.8

Hindalco 5,909 5,918 (0.1) 480 460 4.3 1.2 0.9

HUL 5,815 5,027 15.7 663 573 15.7 3.4 2.8

ICICI Bank 4,544 4,061 11.9 1,644 1,437 14.4 6.3 13.0

Infosys 9,222 7,106 29.8 2,197 1,780 23.4 10.8 22.2

ITC 6,427 5,453 17.8 1,681 1,389 21.0 8.5 12.8

Jindal Steel & Power 3,848 3,168 21.5 1,005 951 5.7 1.5 1.5

JP Associates 3,304 2,949 12.0 70 233 (70.2) 0.5 (5.6)

L&T 12,171 11,413 6.6 867 841 3.1 4.4 1.5

M&M 7,981 6,074 31.4 654 617 6.0 2.4 1.7

Maruti Suzuki 7,335 9,277 (20.9) 179 565 (68.3) 1.1 (12.1)

NTPC 16,187 13,421 20.6 2,223 2,371 (6.3) 2.1 (1.9)

ONGC 17,200 20,804 (17.3) 4,454 7,083 (37.1) 3.5 (32.9)

RIL 78,364 59,809 31.0 6,274 5,136 22.2 10.0 39.2

SBI 14,584 12,364 18.0 3,113 2,828 10.1 3.7 8.0

Sterlite 8,798 8,294 6.1 771 1,105 (30.2) 1.1 (9.4)

Sun Pharma 1,900 1,601 18.7 425 350 21.4 1.6 1.9

Tata Motors 42,221 31,506 34.0 2,560 2,425 5.6 2.5 5.5

Tata Power 5,570 4,413 26.2 603 410 46.8 1.2 8.4

Tata Steel 30,992 29,089 6.5 729 1,123 (35.1) 1.8 (17.3)

TCS 13,256 9,663 37.2 2,936 2,346 25.1 5.4 11.1

Wipro 9,829 7,829 25.5 1,487 1,319 12.8 1.9 2.6

TTTTTotalotalotalotalotal 373,263373,263373,263373,263373,263 315,072315,072315,072315,072315,072 18.518.518.518.518.5 46,16946,16946,16946,16946,169 44,53044,53044,53044,53044,530 3.73.73.73.73.7 100.0100.0100.0100.0100.0 100.0100.0100.0100.0100.0

SensexSensexSensexSensexSensex##### 18.918.918.918.918.9 7.77.77.77.77.7

Exhibit 8: Earnings estimates for Sensex companies

Source: Angel Research; Note: #based on free-float weightages


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7



3QFY2012 Sectoral Outlook


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Automobile

Strong demand for LCVs driving CV sales

The CV segment continued its strong growth rate, reporting

20.5% yoy growth YTD in FY2012, led by robust growth in the

LCV segment, which grew by 30.9% yoy. LCV demand continues

to be driven by growth in the agriculture sector; increasing

preference for low payload vehicles; structural factors such as

proliferation of the hub and spoke model; and new launches.

The M&HCV segment, however, witnessed 8.4% yoy growth

mainly due to slowdown in industrial activity and higher

financing rates. Going ahead, we expect the LCV segment to

sustain its strong performance and grow at a CAGR of 16-18%

over the next two years.

Healthy volume growth despite macro concerns

The Indian automotive industry sustained its healthy volume

momentum, registering 15.4% yoy growth YTD in FY2012despite slowdown in economic growth, high interest rate

environment and rising fuel prices. Volume growth continues to

be driven by two-wheelers (up 17.9%), light commercial vehicles

(LCV, up by an impressive 30.9%) and three-wheelers (up

15.5%); however, interest-rate sensitive segments such as

medium and heavy commercial vehicles (M&HCV, up 8.4%)

and passenger vehicles (PV, up marginally by 2.7%) continued

to report moderate growth. During 3QFY2012, Bajaj Auto

(BJAUT), Hero MotoCorp (HMCL), Mahindra and Mahindra

(MM) and Tata Motors (TTMT) surprised positively on the volume

front, while Maruti Suzuki (MSIL), Ashok Leyland (AL) and TVS

Motor (TVSL) posted lower-than-expected volumes. Going

ahead, we expect two-wheeler and LCV sales to continue to

grow at a healthy rate; however, macroeconomic concerns are

likely to plague PV and M&HCV performance. In the long run

though, volume outlook is expected to be positive, aided by

rising income levels, easy availability of finance, new product

launches and improved outlook for exports.

For 3QFY2012, we expect our auto universe to witness strong

revenue growth of ~21% yoy, led by healthy volume growth,

price increases along with better product mix and favorable

currency movement (primarily on the JLR front). We expect

EBITDA margins to contract by ~140bp yoy (flat qoq) to 12%,

led by a yoy increase in raw-material prices. Further, higher

discounts offered by most of the companies (except two-wheeler

makers) to prop-up sales are also likely to weigh on margin

performance. While commodity prices still remain at higher

levels on a yoy basis, they have stabilized sequentially, indicating

improvement in margins going ahead. Led by operating margin

pressures, adjusted net profit (excluding forex loss) is likely to

register modest ~3% yoy growth.

Interest rates and fuel prices continued their upward trend

As most of the consumers in the auto industry rely on financing

(PV: ~75% and CV: ~85%), a gradual increase in interest rates

by the RBI over the past 18 months has resulted in higher EMI

outflow for consumers, leading to postponement of new vehicle

purchases. Further, increased fuel prices (petrol prices up by

`7.6 and diesel prices up by`3.2 YTD in FY2012) have

negatively affected sales.

Auto Index outperforms the Sensex

The BSE Auto Index performed better than the Sensex (1.9%outperformance) during the quarter; however, on an absolute

basis, it registered a decline of 4.2%. Concerns regarding

volume growth in the sector due to increasing macro-economic

issues weighed on investor sentiments and, therefore, affected

the stock price performance. Among the front runners, TTMT

and BJAUT were the major gainers, led by better-than-expected

volume performance; MM and MSIL, however, underperformed

sharply during the quarter. While MSIL's performance suffered

on account of labor issues (resulting in production losses) and

impact of adverse currency movement on margins, correction

in MM was triggered by weak 2QFY2012 results.


Exhibit 1: Interest rates vs. auto sales

(40.0)

(20.0)

0.0

20.0

40.0

60.0

80.0

10.0

11.0

12.0

13.0

14.0

15.0

S BI PLR y oy change i n CV+ PV vol ume ( RHS)

Apr-

07

Oct-07

Apr-

08

Oct-08

May-0

9

Nov-0

9

May-1

0

Nov-1

0

May-1

1

Nov-1

1


Exhibit 2: Stock price performance

6.5

(12.8)

3.8

(5.5)

(18.6)

(1.9)

(14.9)

(14.9)

14.3

10.7

(8.7)

8.0

(1.4)

(14.4)

2.3

(10.7)

(10.7)

18.5

( 25 .0 ) (2 0. 0) (1 5. 0) (1 0. 0) ( 5. 0) 0 .0 5 .0 1 0. 0 1 5. 0 2 0. 0 2 5.0

Apollo Tyres

Ashok Leyland

Bajaj Auto

Bharat Forge

Exide Industries

Hero MotoCorp

M&M

Maruti Suzuki

Tata Motors

Relative to Auto index (%) Absolute (%)


10/53

9



Automobile

Festive season fails to boost PV sales

The PV industry continues to face the brunt of fuel price hikes

and increased interest rates as most buyers are waiting on the

sidelines and are postponing their purchases. As a result, market

conditions remained challenging, resulting in modest volume

growth of 2.7% yoy YTD in FY2012. Noticeably, volumes in the

domestic PC segment (~75% of PV sales) registered a decline

of 3.5% yoy during the period. The arbitrage between petrol

and diesel prices has increased significantly in recent times

(currently at ~`24 against five-year historical average of ~`14),

leading to a shift in consumer demand in favor of diesel cars.

Thus, demand for petrol cars has been severely affected and is

expected to have declined by ~11% in 1HFY2012 as against a

strong 24% increase for diesel cars. We expect the demand

environment to remain challenging in 2HFY2012 as well;however, the likely easing of interest rates from 1QFY2013 will

lead to revival in demand. We remain positive on the long-term

prospects of the PV sector and estimate the segment to register a

CAGR of 10-12% over the next two years.

During 3QFY2012, MSIL's volume declined by 27.6% yoy (5%

qoq), primarily led by the labor strike at its plants (Gurgaon

and Manesar) in October 2011, resulting in a production loss

of over 40,000 units. Consequently, MSIL's market share

dropped significantly by ~775bp yoy to 41.4% in the PC market

YTD in FY2012. We expect MSIL to report a ~68% yoy declinein its net profit during the quarter, led by lower production and

adverse currency movement. However, we expect MSIL to regain

During 3QFY2012, TTMT is likely to report robust ~34% yoy

growth in net sales backed by strong volume growth (on the

JLR as well as standalone level) and favorable currency

movement, primarily on the JLR front. Adjusted net profit is,

however, likely to report modest ~6% yoy growth mainly on

account of margin pressures. AL is expected to post ~150%

yoy growth in its adjusted net profit, largely due to low base

and ~23% yoy growth in revenue.

Two-wheeler sales volume remains strong

The two-wheeler segment sustained its strong performance,

defying the economic slowdown, and registered 18% yoy growth

YTD in FY2012. Two-wheeler sales continued to be benefitted

by inadequate public transport system, rising income levels

(particularly in rural areas) and strong replacement demand in

urban markets. Domestic volumes grew by 16.1% yoy, while

exports registered robust 31% yoy growth YTD in FY2012. The

scooter and motorcycle segments maintained their strong growth

traction, recording 25.1% and 17% yoy growth, respectively.We expect two-wheeler majors to witness top-line growth of

17-18% yoy during 3QFY2012, largely backed by volume

growth. Led by strong sales growth, HMCL continued to regain

its market share, which now stands at 40.3% (39.2%) compared

to 26.6% (26.1%) and 14.3% (15%) for BJAUT and TVSL,

respectively. Going ahead, we expect two-wheeler sales to

maintain their volume momentum and register a 12-14% CAGR

in volumes over the next couple of years.

some lost ground by the end of 4QFY2012, led by new product

launches (Ertiga and compact Dzire) and normalization in

production levels at its Manesar plant.

Source: Company; Angel Research

Exhibit 3: TTMT and AL Quarterly volumes

SegmentSegmentSegmentSegmentSegment 3QFY123QFY123QFY123QFY123QFY12 3QFY113QFY113QFY113QFY113QFY11 % chg% chg% chg% chg% chg 9MFY9MFY9MFY9MFY9MFY1212121212 9MFY9MFY9MFY9MFY9MFY1111111111 % chg% chg% chg% chg% chg

TTMTTTMTTTMTTTMTTTMT 227,111227,111227,111227,111227,111 186,873186,873186,873186,873186,873 21.521.521.521.521.5 626,583626,583626,583626,583626,583 566,987566,987566,987566,987566,987 10.510.510.510.510.5

M&HCV 53,982 50,883 6.1 157,431 149,616 5.2

LCV 89,636 74,677 20.0 256,629 201,844 27.1

TTTTTotal CVotal CVotal CVotal CVotal CV 143,618143,618143,618143,618143,618 125,560125,560125,560125,560125,560 14.414.414.414.414.4 414,060414,060414,060414,060414,060 351,460351,460351,460351,460351,460 17.817.817.817.817.8

Utility vehicles 13,745 9,472 45.1 36,375 29,013 25.4

PC 69,748 51,841 34.5 176,148 186,514 (5.6)

TTTTTotal PVotal PVotal PVotal PVotal PV 83,49383,49383,49383,49383,493 61,31361,31361,31361,31361,313 36.236.236.236.236.2 212,523212,523212,523212,523212,523 215,527215,527215,527215,527215,527 (1.4)(1.4)(1.4)(1.4)(1.4)

Exports (incl. above) 14,135 15,962 (11.4) 45,025 42,658 5.5

ALALALALAL 23,21523,21523,21523,21523,215 18,43718,43718,43718,43718,437 25.925.925.925.925.9 66,12066,12066,12066,12066,120 64,42664,42664,42664,42664,426 2.62.62.62.62.6

Exhibit 5: BJAUT, HMCL and TVSL Quarterly volumes


BJABJABJABJABJAUTUTUTUTUT 1,075,4411,075,4411,075,4411,075,4411,075,441 946,850946,850946,850946,850946,850 13.613.613.613.613.6 3,332,3933,332,3933,332,3933,332,3933,332,393 2,875,7342,875,7342,875,7342,875,7342,875,734 15.915.915.915.915.9

Motorcycles 946,749 838,487 12.9 2,937,157 2,550,350 15.2

Three-wheelers 128,692 108,363 18.8 395,236 325,357 21.5

Exports (incl. above) 380,912 296,644 28.4 1,232,410 927,875 32.8

HMCLHMCLHMCLHMCLHMCL 1,589,2861,589,2861,589,2861,589,2861,589,286 1,428,0301,428,0301,428,0301,428,0301,428,030 11.311.311.311.311.3 4,663,1784,663,1784,663,1784,663,1784,663,178 3,948,0123,948,0123,948,0123,948,0123,948,012 18.118.118.118.118.1

TVSLTVSLTVSLTVSLTVSL 529,681529,681529,681529,681529,681 524,171524,171524,171524,171524,171 1.11.11.11.11.1 1,672,0781,672,0781,672,0781,672,0781,672,078 1,512,9651,512,9651,512,9651,512,9651,512,965 10.510.510.510.510.5

Motorcycles 194,922 208,632 (6.6) 651,047 617,996 5.3

Scooters 136,550 122,696 11.3 412,205 342,538 20.3

Mopeds 189,268 182,735 3.6 576,569 524,568 9.9

Three-wheelers 8,941 10,108 (11.5) 32,257 27,863 15.8

Exports (incl. above) 68,881 51,394 34.0 230,140 164,337 40.0

Source:Company, Angel Research

Exhibit 4: MSIL and MM Quarterly volumes


MSILMSILMSILMSILMSIL 239,528239,528239,528239,528239,528 330,687330,687330,687330,687330,687 (27.6)(27.6)(27.6)(27.6)(27.6) 773,361773,361773,361773,361773,361 927,665927,665927,665927,665927,665 (16.6)(16.6)(16.6)(16.6)(16.6)

Domestic 211,803 299,527 (29.3) 684,892 820,350 (16.5)

Exports 27,725 31,160 (11.0) 88,469 107,315 (17.6)

MMMMMMMMMM 190,743190,743190,743190,743190,743 153,833153,833153,833153,833153,833 24.024.024.024.024.0 531,714531,714531,714531,714531,714 423,710423,710423,710423,710423,710 25.525.525.525.525.5

Automotive - domestic 117,402 90,205 30.2 327,897 255,965 28.1

Automotive - exports 7,587 5,020 51.1 20,543 13,480 52.4

Tractor - domestic 62,009 55,488 11.8 173,519 145,492 19.3

Tractor - exports 3,745 3,120 20.0 9,755 8,773 11.2

Source: Company; Angel Research


11/53



Automobile

Analyst - YAnalyst - YAnalyst - YAnalyst - YAnalyst - Yaresh Karesh Karesh Karesh Karesh Kothariothariothariothariothari

Auto ancillaries to track the auto sector

While the OE demand has witnessed a slowdown in 3QFY2012

on account of macro concerns like rising interest rates andslowdown in industrial activity, replacement sales have also seen

weaker off-take due to general weakness in overall economic

activity thereby negatively affecting ancillary manufacturers. We

however, expect the demand scenario to improve in the OE as

well as replacement segments from 1QFY2013 aided by likely

easing of interest rates.

During 3QFY2012, we expect auto ancillary companies to report

moderate growth in net profit on account of slowdown in

domestic auto sales and operating margin pressures. We expect

a sequential contraction in the operating margins of Bosch andFAG Bearings, mainly due to INR depreciation as imports form

a substantial portion of raw-material costs for both the

companies. Motherson Sumi (ex. Peguform) is likely to witness

yet another challenging quarter as the company's new plants

are still in the process of ramping up. We expect Exide Industries

to post improved performance sequentially; however, on a yoy

basis, the company's results would be impacted due to increased

competitive activity and slowdown in OE and replacement

demand in the passenger vehicle segment. Apollo Tyres is likely

to benefit from the strong performance of its European

subsidiary, led by seasonal demand for winter tyres; domestic

performance is expected to remain subdued due to sluggishdemand for CV tyres in the OE and replacement segments. We

expect Bharat Forge to report strong top-line growth driven by

diversified business model (one-third of revenue from non-auto

business); however, margins are expected to trend marginally

lower due to cost pressures.

Outlook

Considering the near-term macroeconomic challenges,

we expect the auto industry to register volume growth of

12-13% yoy for FY2012. However, we believe low penetration

levels coupled with a healthy and sustainable economicenvironment and favorable demographics supported by

increasing per capita income levels will drive long-term growth

of the Indian auto industry. As such, we prefer stocks that have

strong fundamentals, ability to deliver strong top-line

performance and are available at attractive valuations. In the

auto sector, we continue to prefer companies with a strong

pricing power and high exposure to rural and exports markets.

Among auto majors, we maintain our positive outlook onAmong auto majors, we maintain our positive outlook onAmong auto majors, we maintain our positive outlook onAmong auto majors, we maintain our positive outlook onAmong auto majors, we maintain our positive outlook on

Mahindra and Mahindra and Ashok LMahindra and Mahindra and Ashok LMahindra and Mahindra and Ashok LMahindra and Mahindra and Ashok LMahindra and Mahindra and Ashok Leyland.eyland.eyland.eyland.eyland.

Exhibit 6: Quarterly estimates Automobile (((((`````cr)

Source: Company, Angel Research; Note: Price as on December 30, 2011, * Consolidated numbers; OPM adjusted for royalty payments

CompanyCompanyCompanyCompanyCompany CMPCMPCMPCMPCMP Net SalesNet SalesNet SalesNet SalesNet Sales OPM (%)OPM (%)OPM (%)OPM (%)OPM (%) Net PNet PNet PNet PNet Profitrofitrofitrofitrofit EPS (EPS (EPS (EPS (EPS (`````))))) EPS (EPS (EPS (EPS (EPS (`````))))) P/E (x)P/E (x)P/E (x)P/E (x)P/E (x) TTTTTaaaaargrgrgrgrgeeeeettttt Reco.Reco.Reco.Reco.Reco.

(((((`````))))) 3QFY12E3QFY12E3QFY12E3QFY12E3QFY12E % chg% chg% chg% chg% chg 3QFY12E3QFY12E3QFY12E3QFY12E3QFY12E chg bpchg bpchg bpchg bpchg bp 3QFY12E3QFY12E3QFY12E3QFY12E3QFY12E % chg% chg% chg% chg% chg 3QFY12E3QFY12E3QFY12E3QFY12E3QFY12E % chg% chg% chg% chg% chg FY11FY11FY11FY11FY11 FY12EFY12EFY12EFY12EFY12E FY13EFY13EFY13EFY13EFY13E FY11FY11FY11FY11FY11 FY12EFY12EFY12EFY12EFY12E FY13EFY13EFY13EFY13EFY13E (((((`````)))))

AL 23 2,742 23.1 10.1 265 108 149.7 0.4 149.7 2.4 2.1 2.5 9.6 10.9 9.3 29 Buy

BJAUT 1,593 4,720 17.2 20.0 (34) 791 18.6 27.3 18.6 95.0 106.2 114.6 16.8 15.0 13.9 1,719 Accumulate

HMCL^ 1,905 6,012 17.5 12.4 124 629 23.6 31.2 23.6 92.2 116.5 130.1 20.7 16.4 14.6 - Neutral

MSIL 920 7,335 (20.9) 5.3 (417) 179 (68.3) 6.2 (68.3) 77.9 48.7 75.1 11.8 18.9 12.3 1,051 AccumulateMM 683 7,981 31.4 12.0 (313) 654 6.0 11.1 5.8 43.2 48.0 54.6 15.8 14.2 12.5 829 Buy

TTMT* 178 42,221 34.0 11.8 (235) 2,560 5.6 8.1 5.3 28.6 26.9 29.5 6.2 6.6 6.0 193 Accumulate

TVSL 52 1,728 7.1 6.5 40 60 7.1 1.3 7.1 4.3 5.5 6.0 12.0 9.5 8.7 66 Buy

Exhibit 7: Quarterly estimates Auto Ancillary (((((`````cr)

Source: Company, Angel Research; Note: Price as on December 30, 2011, * Consolidated numbers; # December year ending; & Full year EPS is consolidated

CompanyCompanyCompanyCompanyCompany CMPCMPCMPCMPCMP Net SalesNet SalesNet SalesNet SalesNet Sales OPM (%)OPM (%)OPM (%)OPM (%)OPM (%) Net PNet PNet PNet PNet Profitrofitrofitrofitrofit EPS (EPS (EPS (EPS (EPS (`````))))) EPS (EPS (EPS (EPS (EPS (`````))))) P/E (x)P/E (x)P/E (x)P/E (x)P/E (x) TTTTTaaaaargrgrgrgrgeeeeettttt Reco.Reco.Reco.Reco.Reco.


Apollo Tyres* 59 2,900 22.4 8.5 (303) 78 (35.3) 1.5 (35.3) 8.7 7.2 9.3 6.7 8.2 6.3 74 Buy

Bharat Forge& 251 917 21.6 23.5 (79) 97 16.8 4.1 16.8 12.5 18.0 19.9 20.2 13.9 12.6 299 Buy

Bosch# 6,778 1,930 9.9 17.8 140 230 9.4 73.3 9.4 273.4 340.8 375.7 24.8 19.9 18.0 7,514 Accumulate

Exide Industries 105 1,211 15.4 9.6 (566) 72 (42.2) 0.8 (42.2) 7.4 5.5 7.7 14.1 18.9 13.6 128 Buy

FAG Bearings# 1,047 307 17.1 18.8 (104) 39 14.1 23.2 14.1 73.1 103.5 113.3 14.3 10.1 9.2 1,246 Buy

Motherson Sumi* 135 2,343 12.5 8.6 (282) 79 (25.9) 2.0 (25.9) 9.9 8.9 12.0 13.6 15.2 11.2 169 Buy


12/53

11



Banking

Banking Index underperforms the Sensex

Banking stocks continued with their poor run in 3QFY2012 amid

continued concerns on the credit quality front. 2QFY2012 resultsgenerated some interest in banking stocks, leading to ~15%

gain in the Bankex in October; however, domestic macro

concerns in the form of slowing economic and credit growth,

coupled with deepening sovereign debt crisis in Europe led to

heavy selling in all Indian indices, including Bankex. Expectations

of cut in Cash Reserve Ratio (CRR) by the Reserve Bank of India

(RBI) led to a sharp surge in banking stocks in the first week of

December; however, with the RBI resorting to open market

operations only to ease liquidity in the 3QFY2012 monetary

policy, led to further selling in the Bankex.

By the end of the quarter, the Bankex was down by 15.6%

sequentially, underperforming the Sensex by 9.6%. Within our

coverage universe, only LIC Housing Finance and HDFC

managed to give positive returns of 4.6% and 1.7% qoq,

respectively.

Exhibit 1: 3QFY2012 stock performance

(%)(%)(%)(%)(%) Returns (qoq)Returns (qoq)Returns (qoq)Returns (qoq)Returns (qoq) Returns (yoy)Returns (yoy)Returns (yoy)Returns (yoy)Returns (yoy)

LIC Housing Finance 4.6 13.3

HDFC 1.7 (10.5)

SensexSensexSensexSensexSensex (6.1)(6.1)(6.1)(6.1)(6.1) (24.6)(24.6)(24.6)(24.6)(24.6)

Federal Bank (8.5) (15.2)HDFC Bank (8.7) (9.0)

South Indian Bank (9.7) (16.8)

Yes Bank (12.4) (23.7)

Bank of Baroda (12.7) (25.8)

Indian Bank (13.5) (25.1)

State Bank of India (15.3) (42.4)

Bank of India (15.5) (41.0)

BankexBankexBankexBankexBankex (15.6)(15.6)(15.6)(15.6)(15.6) (31.6)(31.6)(31.6)(31.6)(31.6)

Jammu & Kashmir Bank (15.8) (13.7)

Bank of Maharashtra (16.5) (42.0)

Corp Bank (17.0) (45.0)

Vijaya Bank (17.2) (55.6)

Canara Bank (17.9) (44.8)

Punjab National Bank (18.1) (36.1)

Axis Bank (20.7) (40.1)

Indian Overseas Bank (20.8) (50.0)

ICICI Bank (21.8) (40.2)

IDBI Bank (24.0) (52.8)

Allahabad Bank (27.1) (49.1)

UCO Bank (30.4) (60.8)

Union Bank of India (30.6) (51.1)

Oriental Bank of Commerce (32.8) (51.6)

Syndicate Bank (34.3) (46.6)

Andhra Bank (35.4) (46.9)

Central Bank Of India (35.9) (57.4)Dena Bank (37.3) (58.1)

United Bank of India (37.5) (53.2)


Source: RBI, Angel Research; Note: #Between March 26, 2010 andDecember 17, 2010, * Between March 25, 2011 and December 16, 2011

Exhibit 2: Deposits increase, while credit offtake slows

399,781

313,401328,324

467,890

-

100,000

200,000

300,000

400,000

500,000

C re di t o fft ake ( ` c r) D ep os it m ob il is at io n ( ` c r)

FY2 011 # FY20 12*

(`cr)

Source: RBI, Angel Research

Exhibit 3:Average LAF borrowings higher in 3QFY2012

(2,000)

(1,500)

(1,000)

(500)

-

500

1,000

Jan-1

1

Fe

b-1

1

Mar-

11

Apr-

11

May-1

1

Jun-1

1

Jul-11

Aug-1

1

Sep-1

1

Oc

t-11

Nov-1

1

Dec-1

1

(` bn)

Considering the slowing growth momentum, we expect credit

growth to slow down to 16-17% for FY2012-13.

Credit growth slows on expected lines amid a

weakening economic outlook

Credit growth for the banking sector has been on a decliningtrend since the beginning of FY2011. Credit growth as of

December 16, 2011, dropped to its lowest level since April

2010 (20 months) to below 18% (at 17.1%) because of slowing

economy as well as a high base effect (23.9% yoy growth).

Incremental credit in FY2012 YTD is lower by 17.9% yoy

compared to FY2011 YTD; however, deposit accretion continues

to be healthy with incremental YTD deposits growing by 49.3%

yoy. Despite increasing deposit growth rates, liquidity pressures

increased in 3QFY2012, compared to 2QFY2012 (LAF

borrowings averaged ~`86,500cr in 3QFY2012 vs.

~`42,800cr in 2QFY2012) as the widening fiscal deficit led toa substantial increase in government borrowing requirements.

While most large banks chose not to raise their deposit rates

over the past quarter, few mid-size banks increased them by

15-25bp. On the advances side as well, most banks kept their

lending rates constant over the last quarter with a few banks

increasing their base rates by 25-50bp. Amongst banks underour coverage, Jammu and Kashmir Bank had the highest

average base rate increase (39bp), followed by Yes Bank (38bp)

and Federal Bank (36bp).


13/53



Banking

Exhibit 4: 2QFY2012 and 3QFY2012 Lending and deposit rates

Source: Company, Angel Research

AvgAvgAvgAvgAvg. Base rates. Base rates. Base rates. Base rates. Base rates BPLR ratesBPLR ratesBPLR ratesBPLR ratesBPLR rates FD ratesFD ratesFD ratesFD ratesFD rates

BankBankBankBankBank 2QFY122QFY122QFY122QFY122QFY12 3QFY123QFY123QFY123QFY123QFY12 BP changeBP changeBP changeBP changeBP change 2QFY122QFY122QFY122QFY122QFY12 3QFY123QFY123QFY123QFY123QFY12 BP changeBP changeBP changeBP changeBP change 2QFY122QFY122QFY122QFY122QFY12 3QFY123QFY123QFY123QFY123QFY12 BP changeBP changeBP changeBP changeBP changeJ&KBK 9.92 10.31 39 14.50 15.00 50 9.50 9.50 -

YESBK 10.05 10.43 38 19.75 20.00 25 9.60 9.60 -

FEDBK 10.16 10.52 36 17.25 17.75 50 9.90 9.50 (40)

BOM 10.37 10.70 33 15.00 15.00 - 9.35 9.35 -

HDFCBK 9.74 10.00 26 18.50 18.50 - 9.25 9.25 -

SBI 9.74 10.00 26 14.75 14.75 - 9.25 9.25 -

CENTBK 10.50 10.75 25 15.00 15.00 - 9.40 9.40 -

IDBI 10.50 10.75 25 15.25 15.25 - 9.50 9.50 -

PNB 10.50 10.75 25 14.25 14.25 - 9.40 9.40 -

UCOBK 10.50 10.75 25 15.00 15.00 - 9.50 9.50 -

ICICIBK 9.76 10.00 24 18.75 18.75 - 9.25 9.25 -

UNBK 10.52 10.75 23 15.00 15.50 50 9.25 9.25 -

BOI 10.53 10.75 22 15.00 15.00 - 9.25 9.25 -ALLBK 10.54 10.75 21 15.00 15.00 - 9.50 9.50 -

INDBK 10.55 10.75 20 15.00 15.00 - 9.25 9.50 25

BOB 10.55 10.75 20 15.00 15.00 - 9.35 9.35 -

OBC 10.55 10.75 20 15.00 15.00 - 9.75 9.75 -

ANDHBK 10.55 10.75 20 15.00 15.00 - 9.40 9.40 -

DENABK 10.52 10.70 18 15.75 15.75 - 9.60 9.60 -

SIB 10.32 10.50 18 19.00 19.00 - 9.75 9.75 -

SYNBK 10.57 10.75 18 15.00 15.00 - 9.35 9.35 -

IOB 10.58 10.75 17 15.00 15.50 50 9.25 9.50 25

CANBK 10.58 10.75 17 15.00 15.00 - 9.25 9.25 -

UTDBK 10.44 10.60 16 14.85 14.85 - 9.25 9.25 -

CRPBK 10.52 10.65 13 15.00 15.00 - 9.50 9.65 15

AXSB 9.88 10.00 13 17.75 17.75 - 9.25 9.25 -VIJAYA 10.54 10.65 11 15.00 15.00 - 9.35 9.35 -

Overall, we expect large private banks to post 16.2% yoy growth

in net interest income, while PSU banks are expected to register

10.8% yoy growth. Large private banks are expected to

outperform on the pre-provisioning profit front also with growth

of 13.7% yoy compared to 12.3% yoy for PSU banks. While

large private banks are expected to report healthy 19.3% yoy

growth on the net profit front, PSU banks are likely to post weak

2.6% yoy growth (growth of 0.3% yoy only excluding SBI) due

to higher provisioning expenses.Asset quality to be the key monitorable for banks going forward

Most PSU banks witnessed asset-quality stress and reported

higher slippages (11 out of 21 PSU banks reporting more than

a 20% qoq increase in their absolute net NPA levels) in

2QFY2012, primarily on account of completion of transition to

system-based NPA recognition. Apart from slippages arising

due to the switchover to system-based NPA recognition platform,

delinquencies from the SME and agri books further aggravated

asset-quality pressures and led to higher provisioning expenses

for most banks during 2QFY2012. While broadly asset quality

deteriorated for PSU banks, private banks on the contrary, whichhave sharply improved their asset quality over the past two years,

remained comfortable on the asset-quality front. Apart from

some concerns from the MFI segment, which led to higher

restructuring during 2QFY2012 for ICICI Bank (~`740cr),

Axis Bank (~`230cr), Yes Bank (~`90cr) and South Indian Bank

(~`81cr), overall slippages remained contained for private banks

under our coverage.

The incremental increase in base rates by banks, trailing the

hikes in repo rates by the RBI over the past year (average increase

of 250-300bp in base rates), coupled with the slowdown in

economic activity over the same period, evidenced from the

GDP growth slowing to below 7% for 2QFY2012 and IIP

contracting for the first time in more than two years by 5.1%yoy in October 2011, is expected to have made debt servicing

more challenging for borrowers. Moreover, on account of high

(albeit cooling) inflation as well as high fiscal and current account

deficits, interest rates are expected to remain high until the onset

of FY2013. Also, with sectors such as infra, real estate and

exports continuing to face macro headwinds, asset-quality

concerns are expected to linger. However, that said, incremental

provisioning expenses in the current fiscal by banks on account

of switchover to system-based NPA recognition and to meet the

increase in NPA prudential norms and the mandated provision

coverage ratio of 70% have led to a high base. Hence, the

percentage increase in actual provisioning expenses in the P&L

is not expected to increase significantly, even though genuine

slippages are expected to increase going forward.


14/53

13



Banking


Exhibit 6: Net NPA trends (%) Private vs. PSU

1.31

1.39

1.15

1.05

0.90

0.78

0.62 0.62 0.59

1.04

1.22 1.26

1.271.21 1.18

1.26 1.28

1.53

0.30

0.50

0.70

0.90

1.10

1.30

1.50

1.70

2QFY10 3QFY10 4QFY10 1QFY11 2QFY11 3QFY11 4QFY11 1QFY12 2QFY12

Pvt Banks PSU Banks


Exhibit 9: Corporate and G-Sec bond yields

9.60

9.55

9.51

9.56

8.43

8.32

8.38

8.42

9.54

9.58

9.52

9.42

8.43

8.44

8.53

8.57

7.0

7.5

8.0

8.5

9.0

9.5

10.0

AAA 1 Yr AAA 3 Yr AAA 5 Yr AAA 10 Yr Gsec 1Yr Gsec 5Yr Gsec 7Yr Gsec 10Yr

(%)

29-Se p-11 30-De c-11


Exhibit 5: Gross NPA trends (%) Private vs. PSU

2.96

3.19 3.123.20

3.06 2.89

2.65

2.552.45

2.32

2.53 2.562.64 2.58 2.59 2.61

2.71

2.96

1.50

1.80

2.10

2.40

2.70

3.00

3.30

3.60

2QFY10 3QFY10 4QFY10 1QFY11 2QFY11 3QFY11 4QFY11 1QFY12 2QFY12

Pvt Banks PSU Banks

Apart from higher absolute NPAs, another major concerning

factor for banks in the coming quarters would be the recent

build-up in their restructured books. With banks preferring the

restructuring route currently to minimize provisioning expenses

and considering the downside risks to economic growth,

slippages could start flowing from these accounts and aggravate

the asset-quality situation once the moratorium period ends.

Bond yields ease after hitting three-year high during the quarter

The 10-year G-sec yields continued their uptick and reached a

three-year high (9%) in the first fortnight of November, as

inflationary expectations, weakening INR and rising fiscal deficit

hurt bond market sentiments. With the government mostly set

to exceed its annual fiscal deficit target, bond yields continuedto harden until the RBI reassured bond market investors by

injecting liquidity into the system through its open market

operations. Inflation figures for November eased significantly


Exhibit 7: Gross NPA trend (%) for the banking industry

2.372.46

2.362.43 2.47 2.40

2.272.43

2.73

1.50

1.80

2.10

2.40

2.70

3.00

3.30

3.60

2QFY10

3QFY10

4QFY10

1QFY11

2QFY11

3QFY11

4QFY11

1QFY12

2QFY12


Exhibit 8: Net NPA trend (%) for the banking industry

1.061.16

1.09 1.08 1.071.00 0.98

1.04

1.28

0.30

0.50

0.70

0.90

1.10

1.30

1.50

1.70

2QFY1

0

3QFY1

0

4QFY1

0

1QFY11

2QFY11

3QFY11

4QFY11

1QFY1

2

2QFY1

2

and the RBI's dovish stance concerning interest rates helped aid

in further easing bond yiels to 8.3% towards the end of

December. The 10-year G-sec yields rose sharply again by

~25bp in the last week of December to end at 8.6% for CY2011.

Most banks have already booked MTM losses on bond yields

to upwards of 8.5% for 2QFY2012 and, hence, are expected

to report only marginal MTM losses (particularly for banks

carrying a relatively higher modified duration investment book)

in 3QFY2012 results. Also, considering the sharp movement in

yields during the quarter, several banks could report trading

gain as well.

Outlook and valuation

The broad lending and deposit rates seem to have settled down.Further, with interest rates only poised to start declining from

FY2013, we expect margins of banks to remain at relatively

similar levels for 2HFY2012, as witnessed in 2QFY2012.


Exhibit 10: 10-year G-sec yields movement

8.0

8.2

8.4

8.6

8.8

9.0

9.2

30

-Sep-1

1

7-Oct-11

14

-Oct-11

21-Oct-11

28

-Oct-11

4-Nov-1

1

11-Nov-1

1

19

-Nov-1

1

25-Nov-1

1

2-Dec-1

1

9-Dec-1

1

16

-Dec-1

1

23

-Dec-1

1

30

-Dec-1

1


15/53



Banking

Analyst - VAnalyst - VAnalyst - VAnalyst - VAnalyst - Vaibhav Agrawaaibhav Agrawaaibhav Agrawaaibhav Agrawaaibhav Agrawal/l/l/l/l/Shrinivas BhutdShrinivas BhutdShrinivas BhutdShrinivas BhutdShrinivas Bhutdaaaaa/////VVVVVarun Varun Varun Varun Varun Varmarmarmarmarmaaaaa

Source:C-line, Angel Research

Exhibit 12: Large Pvt. banks price band (P/ABV)

-

0.50

1.00

1.50

2.00

2.50

3.003.50

4.00

Apr-

01

Nov-0

1

Jun-0

2

Jan-0

3

Aug-0

3

Mar-

04

Oct-04

May-0

5

Dec-0

5

Jul-06

Fe

b-0

7

Sep-0

7

Apr-

08

Nov-0

8

Jun-0

9

Jan-1

0

Aug-1

0

Mar-

11

Oct-11

Source:C-line, Angel Research, Note:* For PSU banks , excl. SBI and IDBI

Exhibit 11: PSU banks price band (P/ABV)*

-

0.20

0.40

0.60

0.80

1.00

1.20

1.40

1.60

1.80

Apr-

01

Nov-0

1

Jun-0

2

Jan-0

3

Aug-0

3

Mar-

04

Oct-04

May-0

5

Dec-0

5

Jul-06

Fe

b-0

7

Sep-0

7

Apr-

08

Nov-0

8

Jun-0

9

Jan-1

0

Aug-1

0

Mar-

11

Oct-11

However, leftover upward deposit re-pricing coupled with increased

saving deposit rates in cases of some banks could result in marginal

NIM contraction. With interest rates having been at the higher-

end for quite some time now and macro headwinds continuing to

hit sectors such as power, textile and real estate where banks

have significant exposures material asset-quality concerns have

started to emerge. While NPA ratios of most PSU banks were

expected to deteriorate during 2QFY2012on account of switchover

to system-based NPA recognition, fresh slippages from agri-based

and SME segments and higher NPAs from metals and

export-oriented sectors led to higher-than-estimated provisioning

expenses for most banks under our coverage.

Accordingly, we prefer banks with a more conservativeasset-quality profile, especially among mid caps (for instance,

relatively lower yield on advances and moderate credit

growth) this includes banks such as Bank of Baroda amongst PSU

large caps as well as Syndicate Bank and Bank of Maharashtra.

Also, from a medium-term perspective, we continue to prefer large

private banks with a strong structural investment case within which

we prefer Axis Bank and ICICI Bank from a valuation perspective.

Exhibit 13: Quarterly estimates (((((````` cr)cr )cr)cr )cr)CompanyCompanyCompanyCompanyCompany CMPCMPCMPCMPCMP Operating Income Net POperating Income Net POperating Income Net POperating Income Net POperating Income Net Profit EPS (rofit EPS (rofit EPS (rofit EPS (rofit EPS (`````) Adj B) Adj B) Adj B) Adj B) Adj BVPS (VPS (VPS (VPS (VPS (`````))))) P/E (x) P/ABP/E (x) P/ABP/E (x) P/ABP/E (x) P/ABP/E (x) P/ABV (x)V (x)V (x)V (x)V (x) TTTTTargetargetargetargetarget Reco.Reco.Reco.Reco.Reco.

(((((`````))))) 3QFY12E3QFY12E3QFY12E3QFY12E3QFY12E % chg% chg% chg% chg% chg 3QFY12E3QFY12E3QFY12E3QFY12E3QFY12E % chg% chg% chg% chg% chg FY11FY11FY11FY11FY11 FY12EFY12EFY12EFY12EFY12E FY13EFY13EFY13EFY13EFY13E FY11FY11FY11FY11FY11 FY12EFY12EFY12EFY12EFY12E FY13EFY13EFY13EFY13EFY13E FY11FY11FY11FY11FY11 FY12EFY12EFY12EFY12EFY12E FY13EFY13EFY13EFY13EFY13E FY11FY11FY11FY11FY11 FY12EFY12EFY12EFY12EFY12E FY13EFY13EFY13EFY13EFY13E (((((`````)))))

AXSB 807 3,428 19.0 1,012 13.5 82.5 93.5 109.3 462.5 524.4 607.8 9.8 8.6 7.4 1.7 1.5 1.3 1,216 Buy FEDBK 338 636 11.7 203 42.0 34.3 43.1 43.8 298.3 332.7 367.2 9.8 7.8 7.7 1.1 1.0 0.9 - Neutral

HDFCBK 427 4,468 14.4 1,419 30.5 16.9 22.2 28.9 109.1 126.2 148.4 25.3 19.3 14.8 3.9 3.4 2.9 482 Accum.

ICICIBK 685 4,544 11.9 1,644 14.4 44.7 53.8 63.5 478.3 508.3 544.0 15.3 12.7 10.8 1.4 1.3 1.3 954 Buy

SIB 20 319 25.3 100 33.2 2.6 3.3 3.3 15.0 17.6 20.2 7.8 6.1 6.2 1.3 1.1 1.0 - Neutral

YESBK 239 610 25.9 234 22.2 20.9 26.8 29.0 109.3 132.6 157.0 11.4 8.9 8.2 2.2 1.8 1.5 298 Buy

ALLBK 115 1,700 29.9 452 8.7 29.9 38.4 35.9 160.5 190.2 217.9 3.9 3.0 3.2 0.7 0.6 0.5 131 Accum.

ANDHBK 80 1,169 12.6 303 (8.3) 22.6 22.4 20.5 116.0 124.5 134.3 3.5 3.6 3.9 0.7 0.6 0.6 - Neutral

BOB 661 3,454 16.4 1,208 13.0 108.0 118.4 129.0 534.4 625.6 724.9 6.1 5.6 5.1 1.2 1.1 0.9 797 Buy

BOI 266 2,758 4.7 624 (4.4) 45.5 42.9 45.5 287.1 289.9 305.7 5.9 6.2 5.8 0.9 0.9 0.9 290 Accum.

BOM 39 789 22.3 146 61.4 6.2 9.6 9.0 57.3 68.3 68.4 6.3 4.0 4.3 0.7 0.6 0.6 48 Buy

CANBK 364 2,817 (3.0) 912 (17.5) 90.9 77.4 78.6 401.1 444.4 486.0 4.0 4.7 4.6 0.9 0.8 0.7 413 Accum.

CENTBK 66 1,737 3.3 237 (41.2) 27.7 13.5 15.9 126.4 115.9 120.9 2.4 4.9 4.1 0.5 0.6 0.5 - Neutral

CRPBK 349 1,132 2.3 371 (3.1) 95.4 99.0 92.1 481.5 537.6 599.6 3.7 3.5 3.8 0.7 0.6 0.6 390 Accum.

DENABK 49 659 11.0 166 6.9 18.3 20.3 19.2 103.5 121.1 137.5 2.7 2.4 2.5 0.5 0.4 0.4 - Neutral

IDBI 78 1,683 1.9 488 7.4 16.8 18.9 20.3 128.5 138.6 153.2 4.6 4.1 3.8 0.6 0.6 0.5 84 Accum.

INDBK 184 1,457 13.3 458 (6.8) 38.8 40.0 41.8 184.4 215.7 248.2 4.7 4.6 4.4 1.0 0.9 0.7 199 Accum.

IOB 74 1,711 15.5 332 43.5 17.3 17.7 19.9 128.4 143.3 156.0 4.2 4.2 3.7 0.6 0.5 0.5 82 Accum.

J&KBK 677 538 15.2 201 19.5 126.9 157.0 167.4 717.4 837.2 965.1 5.3 4.3 4.0 0.9 0.8 0.7 724 Accum.

OBC 197 1,307 3.6 302 (26.1) 51.5 39.4 44.2 350.0 359.1 387.1 3.8 5.0 4.5 0.6 0.5 0.5 213 Accum.

PNB 784 4,568 12.5 1,274 16.9 139.9 156.6 161.2 628.1 756.0 882.3 5.6 5.0 4.9 1.2 1.0 0.9 926 Buy

SBI 1,620 14,584 18.0 3,113 10.1 130.1 168.7 206.7 967.6 1,067.2 1,237.9 12.4 9.6 7.8 1.7 1.5 1.3 2,029 Buy

SYNBK 69 1,581 15.9 316 23.2 18.3 21.8 23.1 116.1 132.7 150.6 3.7 3.1 3.0 0.6 0.5 0.5 90 Buy

UCOBK 46 1,289 1.0 296 (1.7) 12.6 14.9 15.5 67.6 76.1 82.2 3.6 3.1 2.9 0.7 0.6 0.6 - Neutral

UNBK 170 2,272 7.7 530 (8.4) 39.6 36.7 39.4 203.3 223.0 246.9 4.3 4.6 4.3 0.8 0.8 0.7 191 Accum.

UTDBK 47 788 11.7 138 (15.1) 13.3 13.2 14.4 101.2 101.9 107.5 3.5 3.5 3.2 0.5 0.5 0.4 54 Buy

VIJAYA 45 650 1.9 170 12.1 8.8 9.8 9.5 65.3 72.8 72.4 5.2 4.6 4.8 0.7 0.6 0.6 - Neutral

HDFC 649 1,553 17.0 1,047 17.5 24.1 28.3 31.2 118.1 129.3 159.3 26.9 23.0 20.8 5.5 5.0 4.1 - NeutralLICHF 222 458 (16.1) 275 28.6 20.5 20.5 27.2 87.8 104.2 126.0 10.8 10.8 8.1 2.5 2.1 1.8 - Neutral

Source: Company, Angel Research; Note: Price as on December 30, 2011


16/53

15



Capital Goods

Capital Goods - Despair continues

For 3QFY2012, we expect companies in our capital goods (CG)

universe to post moderate top-line growth of 12.7% yoy.However, on the bottom-line front, the picture is mixed, with

most companies in our coverage universe posting a decline

mainly on account of margin pressure and, in some cases, due

to higher interest cost.

ABB India (CMP/TP: `584/`427) (Rating: Sell)

For 4QCY2011, we expect ABB India (ABB) to post strong

top-line growth of 16.4% yoy to `2,412cr, driven by the

company's balanced performance across all segments. EBITDA

margin is likely witness a sharp uptick of 352bp yoy to 5.1%

(4QCY2010 margins were suppressed by higher provisioning

on account of rural electrification projects). Also, on a qoq basis,

we expect margins to improve by ~120bp. Aided by strongAided by strongAided by strongAided by strongAided by strong

revenue growth and an extremely low base of the priorrevenue growth and an extremely low base of the priorrevenue growth and an extremely low base of the priorrevenue growth and an extremely low base of the priorrevenue growth and an extremely low base of the prior-year-year-year-year-year

period, ABB's bottom line is expected to jump eightperiod, ABB's bottom line is expected to jump eightperiod, ABB's bottom line is expected to jump eightperiod, ABB's bottom line is expected to jump eightperiod, ABB's bottom line is expected to jump eight-fold to-fold to-fold to-fold to-fold to

`````61.9cr61.9cr61.9cr61.9cr61.9cr.....

Areva T&D (CMP/TP: `164/-) (Rating: Neutral)

For 4QCY2011, Areva T&D is expected to post subdued

top-line growth of 4.2% yoy to `1,383cr, mainly on account of

lower volumes, pricing pressures and execution slowdown.

Consequently, EBITDA margin is expected to compress by

~443bp yoy to 9.0%, although we expect a sequential

improvement of ~100bp due to slight easing of pricing

pressures. LLLLLed by muted growth and dip in margin, Areva'sed by muted growth and dip in margin, Areva'sed by muted growth and dip in margin, Areva'sed by muted growth and dip in margin, Areva'sed by muted growth and dip in margin, Areva's

PPPPPAAAAAT is expected to decline by 35.5% yoy toT is expected to decline by 35.5% yoy toT is expected to decline by 35.5% yoy toT is expected to decline by 35.5% yoy toT is expected to decline by 35.5% yoy to `````56.8cr56.8cr56.8cr56.8cr56.8cr.....

BHEL (CMP/TP: `239/-) (Rating: Neutral)

We expect BHEL to post top-line growth of 20.5% yoy to

`10,873cr for 3QFY2012. This growth is on the back of its

strong order book of ~`1.6tn, which provides revenue visibility.

On the EBITDA front, the company's margin is expectedto compress by ~296bp yoy to 20.0%. Hence, theHence, theHence, theHence, theHence, the

companycompanycompanycompanycompanys bottom-line growth is expected to be subdued ats bottom-line growth is expected to be subdued ats bottom-line growth is expected to be subdued ats bottom-line growth is expected to be subdued ats bottom-line growth is expected to be subdued at

4.4% yoy to4.4% yoy to4.4% yoy to4.4% yoy to4.4% yoy to `````1,465cr1,465cr1,465cr1,465cr1,465cr.....

BGR Energy (CMP/TP: `179/-) (Rating: Neutral)

We expect BGR Energy's (BGR) top line to be under pressure

due to high base created in 3QFY2011 and partly due to

execution delays. The top line is expected to decline by 28.3%

yoy to `901.1cr. On the operating front, EBITDA margin is

expected to come at 12.0%. Interest cost is expected to stretch

further (owing to hike in interest rates and enhanced workingcapital debt levels); which, along with slumped revenue, is likely

to drag the bottom line down by 46.1% yoy tothe bottom line down by 46.1% yoy tothe bottom line down by 46.1% yoy tothe bottom line down by 46.1% yoy tothe bottom line down by 46.1% yoy to `````47.2cr47.2cr47.2cr47.2cr47.2cr.....

Crompton Greaves (CMP/TP: `126/`146) (Rating: Buy)

For 3QFY2012, we project Crompton Greaves to report

moderate top-line growth of 10.5% yoy to `2,649cr, mainly

aided by a favorable currency translation gain for its

international revenue (thereby overshadowing persistent

weakness in the power system segment, which has remained a

drag since the past few quarters). On the EBITDA front, the

company's margin is expected to decline sharply by ~470bp

yoy to 9.5%. However, we expect an uptick of 110bp qoq in the

companys margin, factoring in the cooling of commodity prices

(read copper). PAT for the quarter is expected to drop by 42.6%

yoy to `133.6cr.

Jyoti Structures (CMP/TP: `39/`49) (Rating: Buy)

For 3QFY2012, we expect Jyoti Structures to post decent

top-line growth of 18.4% yoy to `652.7cr. We expect the

company's EBITDA margin to marginally contract by ~91bp

yoy to 10.5%. Interest cost is expected to increase due to higher

working capital borrowings. Against this backdrop, the

company's PAT is expected to decline by 16.0% yoy to `20.8cr.

KEC International (CMP/TP: `36/`45) (Rating: Buy)

For 3QFY2012, KEC International (KEC) is expected to register

strong growth of 18.2% yoy to `1,266cr on the back of executionof its robust order book. On the EBITDA front, despite increased

contribution from SAE Towers, the company's margin is expected

to contract by ~313bp yoy to 8.5% due to margin pressures

faced by the company in the domestic business. Interest cost is

expected to remain at elevated levels, but it is likely to be offset

by an extraordinary gain of `70cr (sale of land), which will

possibly boost the company's PAT by 48.1% yoy to `85.9cr.

Thermax (CMP/TP: `395/`457) (Rating: Buy)

For 3QFY2012, we expect Thermax to report a 3.0% yoy decline

in its top line to `1,204cr, as high base effect created in

3QFY2011 and weak order inflows since the last couple of

quarters will keep the company's revenue under strict check.

The company's EBITDA margin is likely to compress by ~110bp

yoy to 10.7% due to higher contribution of low-margin EPC

contracts in the aggregate revenue. Lower revenue and margin

contraction are expected to drag down the company's PAT by

10.8% yoy to `89.4cr.


17/53



Capital Goods

Source: C-line, Angel Research

Abs. ReturnsAbs. ReturnsAbs. ReturnsAbs. ReturnsAbs. Returns Relative to SensexRelative to SensexRelative to SensexRelative to SensexRelative to Sensex

(%)(%)(%)(%)(%) (%)(%)(%)(%)(%)

BSE Sensex (6.1) -

BSE Cap Goods (24.9) (18.8)

A B B (15.7) (9.7)

Areva T&D (24.7) (18.6)

B H E L (27.0) (20.9)

BGR Energy Sys. (44.4) (38.4)

Crompton Greaves (17.4) (11.3)

Jyoti Structures (41.9) (35.8)

K E C Intl. (40.8) (34.7)

Thermax (10.4) (4.4)

Exhibit 1: 3QFY2012 Sensex vs. CG stocks


Exhibit 2: CG index Relative returns to the Sensex

17.2

(6.2)

(14.1)

9.4

(9.7)(7.1)

48.6

(10.7)

0.6

(0.6)

3.5

(4.6) (5.8)(9.0)

8.2

(10.1)

(18.8)(30.0)

(20.0)

(10.0)0.0

10.0

20.0

30.0

40.0

50.0

60.0

3Q08

4Q08

1Q09

2Q09

3Q09

4Q09

1Q10

2Q10

3Q10

4Q10

1Q11

2Q11

3Q11

4Q11

1Q12

2Q12

3Q12

(%)

Key developments

T&D space on gradual recovery; PGCIL ordering

gathers momentum

After a dry spell in the initial part of the year, PGCIL's ordering

has intensified considerably. YTD FY2012 orders

(April-November) grew magnificently by 157% yoy to

~`9,000cr, largely driven by a spectacular surge in October

2011 (orders worth`4,074cr were tendered during the month).

Orders were dominated by the transmission towers segment

(34.4%), followed by the sub-stations (25%) and conductors

(21.8%) segments.

Capital Goods Index Leap from the valley into the well

During 3QFY2012, the Capital Goods (CG) Index was one of

the worst performers, falling 25% compared compared to the6.1% fall of the Sensex. Broader markets witnessed a steep

slide on the back of global crisis and sluggish domestic industrial

growth, led by elevated interest rates and stubbornly high

inflation. The discouraging economic indicators and chronic

lack of confidence among investors led to extremely bearish

sentiments for CG stocks. All companies in our CG universe

performed miserably, with BGR Energy, KEC International and

Jyoti Structures emerging as major losers, nosediving 40-45%

in absolute terms and underperforming the Sensex by 34-38%.

Rest of the companies in our universe lost around 10-27%.


Exhibit 3: PGCILs ordering on an uptick...

-

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

4,500

Ap r-1 1 M ay -1 1 J un -1 1 Ju l-1 1 A ug -1 1 S ep -1 1 O ct-1 1 No v-1 1

(cr)

Competition intensifiesThe T&D space is getting extremely competitive with market

leaders (KEC International, Kalpataru and Jyoti Structures,

among others) being invaded on their turf, mainly by industry

players and new entrants. In the tower EPC space, Electrical

Manufacturing Company (EMC) has clearly surprised by

pocketing orders worth `970cr YTD in FY2012 (30% of the

segment's orders), thereby comfortably surpassing the market

leaders. Notably, KEC International has struggled to secure

orders from PGCIL and has bagged only one order worth`70cr

YTD in FY2012 (vs.`740cr orders won last year).

In the 765kV sub-station segment, after the exclusion of the

circuit breaker in the scope of contract in early FY2012, new

entrants such as L&T, EMC, Crompton Greaves and Techno

Electric have rushed to capture the pie of this lucrative

high-voltage segment as general products and civil works

constitute a major portion of the sub-station contract. These

new entrants have posed a tough competition to traditional

T&D majors such as ABB, Areva and Siemens (which together

commanded 100% market share in the previous year) and have

already captured ~71% market share YTD in FY2012.

The transformer market is largely controlled by domestic players

YTD in FY2012. During this period, market share of Crompton

Greaves remained fairly stable at 22% and Transformers and

We believe investment activity is likely to remain subdued in the

near-to-medium term. Acceleration in awarding of road projects

and improved ordering in the T&D space are few silver

linings in the otherwise dampened investment climate.

Overall, a substantial pick-up in the implementation of

big-ticket economic reforms, growth impulse and anticipated

easing of monetary policy will remain key drivers for CG stocks,

in our view.


18/53

17



Capital Goods

Analyst - Shailesh KAnalyst - Shailesh KAnalyst - Shailesh KAnalyst - Shailesh KAnalyst - Shailesh Kanani / Hemang Thakeranani / Hemang Thakeranani / Hemang Thakeranani / Hemang Thakeranani / Hemang Thaker

Exhibit 4: Quarterly estimates (((((`````cr)cr)cr)cr)cr)

Source: Company; Angel Research; Note: Price as on December 30, 2011; * December year ending; For KEC, we expect an extraordinary income worth `70cr for 3QFY2012E.

CompanyCompanyCompanyCompanyCompany CMPCMPCMPCMPCMP Net SalesNet SalesNet SalesNet SalesNet Sales OPM (%)OPM (%)OPM (%)OPM (%)OPM (%) Net PNet PNet PNet PNet Profitrofitrofitrofitrofit EPS (EPS (EPS (EPS (EPS (`````))))) EPS (EPS (EPS (EPS (EPS (`````))))) P/E (x)P/E (x)P/E (x)P/E (x)P/E (x) TTTTTararararargggggeeeeettttt Reco.Reco.Reco.Reco.Reco.


ABB* 584 2,412 16.4 5.1 352 61.9 815.0 2.9 815.0 3.0 8.9 17.8 195.6 65.7 32.8 427 Sell

Areva* 164 1,383 4.2 9.0 (443) 56.8 (35.5) 2.4 (35.5) 7.8 7.2 8.4 21.0 22.8 19.5 - Neutral

BHEL 239 10,873 20.5 20.0 (296) 1,465 4.4 6.0 4.4 24.7 28.7 26.0 9.7 8.3 9.2 - Neutral

BGR 179 901.1 (28.3) 12.0 29 47.2 (46.1) 6.5 (46.1) 44.8 36.0 33.6 4.0 5.0 5.3 - Neutral

Crompt. Greav. 126 2,649 10.5 9.5 (469) 133.6 (42.6) 2.1 (42.6) 14.4 8.1 12.2 8.7 15.5 10.3 146 Buy

Jyoti Structures# 39 652.7 18.4 10.5 (91) 20.8 (16.0) 2.0 (16.1) 12.1 14.2 12.2 3.2 2.7 3.2 49 Buy

Kec Intl' 36 1,266 18.2 8.5 (314) 85.9 48.1 3.3 48.1 8.0 6.7 8.9 4.5 5.3 4.0 45 Buy

Thermax 395 1,204 (3.0) 10.7 (110) 89.4 (10.8) 7.5 (10.8) 32.0 34.6 35.6 12.3 11.4 11.1 457 Buy

Rectifier (TRIL) emerged as a leader in transformer orders,

pocketing 44% of the orders.

...However, BTG space remains in doldrums

With numerous headwinds surmounting the power sector

(inadequate coal supplies, land acquisition issues and huge

losses at SEB levels), the BTG space has come to a virtual

standstill. As per the corporate announcements made so far in

3QFY2012, no major order is booked in the BTG space. Instead,

management commentaries suggest further sluggishness in

the sector, owing to slowdown in the economy. Given the

below-expectation ordering and domestic players progressing

to set up BTG manufacturing facilities through JVs (seven players

in total vs. the previous monopoly of BHEL), we believecompetition in the BTG space is set to intensify and predatory

pricing is imminent.

Depreciating INR will have a mixed impact:Depreciating INR will have a mixed impact:Depreciating INR will have a mixed impact:Depreciating INR will have a mixed impact:Depreciating INR will have a mixed impact: The sudden and

substantial deprecation of the INR will certainly have its bearing

on companies in our CG universe. INR depreciation will help

reducing competition, especially from Chinese/Korean players

in the BTG and T&D space, as imported equipment (BTG or

T&D) will now turn expensive and will likely narrow the price

differential with domestic equipment.

In contrast, the INR slide weighs on operating costs for companiessuch as ABB, Areva and BGR, who import sizable quantity of

raw materials (18-40%). Companies such as Crompton Greaves,

Thermax, Jyoti Structures and KEC International will be

moderately affected, as their major raw materials (steel and

copper) are global commodities.

Overall, the outlook remains challenging:Overall, the outlook remains challenging:Overall, the outlook remains challenging:Overall, the outlook remains challenging:Overall, the outlook remains challenging: A handful of positives,

especially in the T&D space, does very little to warrant a change

in our pessimistic view. Against the backdrop of economicslowdown, we believe the overall picture remains gloomy for

market leaders (read BHEL, ABB and Crompton Greaves,

among others) as well as for mid-size companies (such as

Jyoti Structures, KEC International and BGR). While the

government is speeding up its efforts to resolve the key issues in

the power sector, we believe it will take a while for the sector to

witness dramatic improvements. Given this, we expect the

slowdown to continue for the next couple of quarters. Therefore,

companies catering to the power sector will witness a high

degree of discomfort unless the core concerns soothe.

VVVVValuations have come to attractive levels:aluations have come to attractive levels:aluations have come to attractive levels:aluations have come to attractive levels:aluations have come to attractive levels: Most companies in

our coverage universe have witnessed a sharp fall in stock prices

over the past couple of months, which was in-line with our

negative stance on the sector. This fall has brought stocks to

attractive levels, considering the latent opportunities offered by

these companies. Hence, we believe investors with a medium

to long-term view should start considering accumulating quality

large and mid-cap companies. Considering this, we prefer

companies with diversified revenue streams, healthy return

ratios, strong balance sheet and compelling valuations (on the

back of subdued expectations). Therefore, we like CromptonTherefore, we like CromptonTherefore, we like CromptonTherefore, we like CromptonTherefore, we like CromptonGreaves and Thermax in the largeGreaves and Thermax in the largeGreaves and Thermax in the largeGreaves and Thermax in the largeGreaves and Thermax in the large -----cap space andcap space andcap space andcap space andcap space and

Jyoti Structures in the mid-Jyoti Structures in the mid-Jyoti Structures in the mid-Jyoti Structures in the mid-Jyoti Structures in the mid-cap space. Fcap space. Fcap space. Fcap space. Fcap space. For BHELor BHELor BHELor BHELor BHEL, we continue, we continue, we continue, we continue, we continue

to maintain our negative stance, owing to structuralto maintain our negative stance, owing to structuralto maintain our negative stance, owing to structuralto maintain our negative stance, owing to structuralto maintain our negative stance, owing to structural

issues heightened competition, margin erosion and slowingissues heightened competition, margin erosion and slowingissues heightened competition, margin erosion and slowingissues heightened competition, margin erosion and slowingissues heightened competition, margin erosion and slowing

of order inflows.of order inflows.of order inflows.of order inflows.of order inflows.


19/53



Cement

Cement dispatches growth at decent 8.4% yoy inOctober-November 2011

Cement demand, after growing moderately (3.1% yoy) in1HFY2012, showed some signs of improvement and grew by

decent 8.4% yoy in October-November 2011. For 8MFY2012,

cement demand growth remained low at 4.4% yoy, as high

interest rates and policy inaction on the government's part

affected construction demand. In all, we expect cement demand

growth to be at ~5% for FY2012E.

During October-November 2011, JP Associates was the top

performer among large players with 27.1% yoy growth in its

dispatches; while, Ambuja Cements (Ambuja) reported dispatch

growth of 14.1% yoy. Dispatch growth for both the players was

on account of capacity addition and minimum/no exposure to

southern India, where a low-demand scenario continues.

Price situation

All-India average cement prices, after increasing during the

end of the previous quarter, continued their upward movement

and increased by`5-15/bag and`8-10/bag in October and

November, respectively. However, push-up in sales by calendar

year-ending companies has led to a `5-10/bag decline in

average prices from earlier levels during mid-December.

Southern region:Southern region:Southern region:Southern region:Southern region: Although demand in the region remains

sluggish, prices in the region have held ground due to the strong

production discipline amongst players in the region. Prices at

the start of the quarter were at `270-280/bag, and they are

now at`275-285/bag.

Northern region:Northern region:Northern region:Northern region:Northern region: Prices in the northern region, which had

increased on an average by`9-10/bag at the end of the last

quarter and witnessed an increase of `5-10/bag and

`10-15/bag during October and November, respectively, in

anticipation of demand pick-up after the end of monsoons,

corrected during mid-December on an average by

`15-20/bag as improvement in demand was lower than

expected. Prices are currently quoting at`255-275/bag .

Eastern region:Eastern region:Eastern region:Eastern region:Eastern region: In the eastern region, prices are currently

in the broad range of `300-330/bag, up `50-60/bag from

`245-265/bag at the end of 2QFY2012. This sharp increase in

prices was because of strong demand after the festivital season.

WWWWWestern region:estern region:estern region:estern region:estern region: Prices in the western region stood at

`230-275/bag during mid-September. Sand availability issues

prevalent in Maharashtra in the last quarter were sorted out

during 3QFY2012, which along with upbeat infrastructure

growth in Gujarat aided demand pick-up in the region. On the

back of good demand, prices moved upwards during the quarter

and are currently at`275-295/bag.

Central region:Central region:Central region:Central region:Central region: Prices in the central region, which were at

`225-240/bag at the beginning of the quarter, increased by

~`35/bag during the first two months of the quarter. However,

prices have fallen by`10-15/bag since then and are currently at

`250-265/bag as demand in the region continues to be moderate.

Cement stocks Performance on the bourses

During 3QFY2012, the large-cap cement stocks in our coverage

universe outperformed the Sensex, which lost 6.1%.

Shree Cements was the biggest gainer, up 18.2%. Ambuja, ACC

and UltraTech rose by 4.6%, 3.5% and 2.0%, respectively.

JK Lakshmi, however, was the biggest loser, falling by 11.5%.

Source: BSE, Angel Research

Exhibit 3: Cement stocks performance in the bourses in 3QFY2012

(6.1)

3.5

4.6

(9.2)

(11.5)

2.3

18.2

2.0

(12.0) (7.0) (2.0) 3.0 8.0 13.0 18.0

Sensex

ACC

Ambuja

In

3QFY2012ResultPreview-January2012

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