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Market Outlook India Research

July 23, 2010

Please refer to important disclosures at the end of this report Sebi Registration No: INB 010996539

Dealer’s Diary The key benchmark indices saw a subdued start on weak global cues. Asian stocks fell after US Federal Reserve Chairman Ben Bernanke said the US economic outlook was unusually uncertain; however, indices recovered in early afternoon trade as US index futures reversed initial losses. Rally in European stocks and US index futures triggered a strong rally on domestic bourses during the latter part of the trading session, with the Sensex and Nifty closing up by 0.8%. BSE mid-cap and small-cap gained 0.4% and 0.3%, respectively. Among the front liners, M&M, Bharti Airtel, Jaiprakash Associates, Tata Steel and Tata Motors gained between 2–3%, while ACC, Reliance Infra, Maruti Suzuki, Tata Power and Infosys lost between 0–1%. Among mid caps, United Breweries, United Breweries Holdings, ING Vysya Bank, Den Network and National Fertilizers were up by 5–20%, while Gee Kay Finance, Prism Cement, J&K Bank, KS Oils and Uco Bank declined by 3–5%. Markets Today

The trend deciding level for the day is 18040 / 5420 levels. If Nifty trades above this level during the first half-an-hour of trade then we may witness a further rally up to 18201 – 18288 / 5469 – 5495 levels. However, if NIFTY trades below 18040 / 5420 levels for the first half-an-hour of trade then it may correct up to 17953 – 17792 / 5394 – 5345 levels

Indices S2 S1 R1 R2

SENSEX 17,792 17,953 18,201 18,288 NIFTY 5,345 5,394 5,469 5,495

News Analysis

Result Reviews: ACC, Ambuja, Bajaj Auto, DRL, Gujarat Gas, Idea, Indoco, ITC, PNB

Result Previews: Areva T&D, BHEL, CESC, FAG, JP Associates, Wipro Refer detailed news analysis on the following page.

Net Inflows (July 21, 2010) Rs cr Purch Sales Net MTD YTD

FII 2,361 2,043 319 9,938 41,015

MFs 574 775 (201) (1,979) (10,518)

FII Derivatives (July 22, 2010)

Rs cr Purch Sales Net Open

Interest

Index Futures 1,540 1,508 32 18,008

Stock Futures 3,921 4,049 (128) 35,130

Gainers / Losers

Gainers Losers

Company Price (Rs)

Chg (%) Company Price (Rs)

Chg (%)

Bombay Dye 538 4.7 UCO Bank 86 (2.9)

Sintex 366 3.7 Mcleod Russel 225 (2.2)

JSW Energy 129 3.5 GTL 442 (2.1)

Biocon India 331 3.3 Kotak Bank 769 (2.0)

Gail India 475 3.3 Sun TV 443 (2.0)

Domestic Indices Chg (%) (Pts) (Close)

BSE Sensex 0.8% 135.9 18,113

Nifty 0.8% 42.6 5,442

MID CAP 0.4% 30.2 7,457

SMALL CAP 0.3% 25.2 9,491

BSE HC 0.2% 12.3 5,656

BSE PSU 0.7% 68.5 9,554

BANKEX 0.7% 80.2 11,460

AUTO 1.2% 103.3 8,431

METAL 1.3% 196.8 15,627

OIL & GAS 0.5% 52.7 10,575

BSE IT -0.1% (7.2) 5,457

Global Indices Chg (%) (Pts) (Close)

Dow Jones 2.0% 201.8 10,322

NASDAQ 2.7% 58.6 2,246

FTSE 1.9% 99.2 5,314

Nikkei -0.6% (58.0) 9,221

Hang Seng 0.5% 102.5 20,590

Straits Times 1.0% 29.6 2,956

Shanghai Com 1.1% 27.0 2,562

Indian ADRs Chg (%) (Pts) (Close)

Infosys 3.4% 2.0 $60.0

Wipro 4.9% 0.6 $13.3

Satyam 0.6% 0.0 $5.0

ICICI Bank 3.2% 1.2 $39.0

HDFC Bank 3.0% 4.4 $152.8

Advances / Declines BSE NSE

Advances 1,546 701

Declines 1,362 648

Unchanged 106 61

Volumes (Rs cr)

BSE 4,344

NSE 13,389

July 23, 2010 2

Market Outlook | India Research

Result Reviews ACC – 2QCY2010 ACC’s top line declined by 2.9% on a yoy basis in 2QCY2010, in line with our estimates. The decline was on account of a 2.8% fall in dispatches to 5.27mn tonnes coupled with flat realisations at Rs3,834/tonne. Dispatches declined due to unavailability of rail wagons and delay in the stabilisation of new plants. On the operating front, the company’s margins fell by 768bp on a yoy basis and stood at 29.4% (37.1%) on account of increased raw material, freight and power costs. On the bottom-line front, net profit declined by 26.1% yoy to Rs359cr, primarily because of the 23% decline in operating profits and due to a 22.7% increase in depreciation costs to Rs96.2cr. We continue to remain Neutral on the stock.

Ambuja Cements Ambuja Cements’ standalone top line grew by 10.8% yoy during the quarter, which was in line with our estimates. Top-line growth was primarily on account of a 10.8% yoy increase in dispatches to 5.4mn tonnes due to capacity additions. On the operating front, the company’s OPM improved by 485bp on a yoy basis to 30.8%, primarily due to the substantial reduction in clinker purchase on account of the commissioning of new clinkerisation units. On the bottom-line front, the company’s net profit grew by 20.5% to Rs391cr, in line with our estimates. We maintain a Neutral view on the stock. Bajaj Auto Bajaj Auto reported 66.4% yoy jump in top line to Rs3,890cr (Rs2,339cr), primarily on the back of the substantial 70% yoy increase in total volumes. Average realisation recorded a 2.4% yoy decline, primarily due to higher contribution of low-end bikes (Discover) in the sales mix. The company’s domestic motorcycle sales grew 71% (as against the industry growth of 24%) in 1QFY2011. Further, higher sales of the three-wheeler segment at 99,918 units (63,242) supported healthy revenue growth. The company exported 323,899 (178,295) vehicles, an increase of 81.7% yoy, in 1QFY2011. During the quarter, production constraints limited sales to a certain extent. The company expects motorcycle capacity of 300,000units/month to go on stream from 2QFY2011. In terms of volume market share, Bajaj Auto improved its position in the two-wheeler category by 524bp yoy to 20.8% (15.5%) in 1QFY2011, largely owing to a 745bp yoy increase in market share of the motorcycle segment to 27% (19.5%). However, the three-wheeler segment’s market share declined to 36.4% (41.2%) in 1QFY2011. On the operating front, Bajaj Auto’s margin expanded marginally by 50bp yoy to 20% during 1QFY2011, largely in line with our estimates. However, the company reported a 289bp qoq decline in EBITDA margin, largely because of the 275bp qoq increase in raw material costs, which accounted for 67.9% of net sales. The operating profit for the quarter increased by 70.6% yoy to Rs777cr (Rs455cr), which came in line largely with our estimates. The company recorded net profit growth of 101% yoy to Rs590cr (Rs294cr), which was higher than our expectation by 12%, primarily owing to higher other income of Rs81.7cr (Rs23.1cr). Further, improved operating leverage, lower depreciation, reduced tax rate and dip in exceptional items (VRS expenditure) on a yoy basis aided bottom-line growth. Our earnings estimates and rating are under review, which will be updated post the conference call.

July 23, 2010 3

Market Outlook | India Research Dr Reddy’s Labs Dr Reddy’s Labs (DRL) reported its 1QFY2011 results, which were primarily in line with our estimates. As per IFRS, the company reported net sales of Rs1,683cr (Rs1,819cr), down 7.5% on the back of high base, excluding the sales of Sumatriptan in 1QFY2010, the top line grew by 4.0%. On the global generic front, sales from US excluding Sumatriptan was flat at Rs390cr as the company witnessed slow pick-up in new product launches (generic version of Lotrel and Prograf). However, growth in India and Russia branded generic markets of 16% and 36%, respectively, were ahead of our expectations. On the PSAI front, the company reported a decline of 7.6% in net sales to Rs450cr (Rs487cr). DRL reported gross margins of 53.0% (55.9%) for the quarter on the back of higher other expenses. The company reported net profit of Rs210cr (Rs244cr), down 14.1% yoy but higher than estimates on the back of lower tax charges. The stock is trading at 23.4x FY2011E and 17.7x FY2012E earnings. We recommend Neutral on the stock. Gujarat Gas – 2QCY2010 Gujarat Gas’s results were in line with our expectations on the top-line front. Results were, however, marginally lower than our expectation on the bottom-line front on account of higher cost of gas (because of increased APM gas price and higher cost of LNG) and marginally higher operating expenditure. Top line increased by 23.4% yoy to Rs419cr (Rs339cr) as against our expectation of Rs417cr, whereas bottom line increased by 21.7% yoy to Rs57cr (Rs47cr) as against our expectation of Rs62cr. During the quarter, volume stood at 3.26mmscmd. Like 1QCY2010, higher gas volume was from domestic sources (Cairn and PMT), whereas LNG volumes stood at around 0.35mmscmd. Gross spread took a hit during the quarter and stood at Rs4.0/scm (against all-time high spread of Rs4.3/scm registered in 1QCY2010) on account of higher cost of gas procured, despite marginal 0.7% rupee appreciation. However, on a yoy basis, gross spread stood flat at Rs4.0/scm. Thus, OPM was flat on a yoy basis at 22.3%, but declined by 270bp on a sequential basis. We maintain a Neutral view on the stock. Idea Cellular Idea Cellular recorded strong broad-based growth of 22.8% yoy (9.1% qoq) in its consolidated top line in 1QFY2011. The mobility business segment grew by 21.4% yoy (10.3% qoq) on account of robust improvement in total minutes of usage, which were up by 69% yoy (20.5% qoq) to 82,274. The total subscriber base (including Spice) moved up by 8% qoq to 68.9mn in 1QFY2011. The EBIDTA margin witnessed strong erosion of 458bp yoy (327bp qoq) with increased roll out in seven new circles adding up to higher network operating costs and access charges. The tax rate was down from 9.5% in 4QFY2010 to 3.5% in 1QFY2011. Thus, mainly on account of lower operational profitability, the bottom line declined by 32.2% yoy (24.5% qoq). The stock rating is under review.

July 23, 2010 4

Market Outlook | India Research Indoco Remedies Indoco Remedies (Indoco) announced its 1QFY2011 result, which were below our expectations. Net sales came in at Rs111.4cr (Rs98.3cr), up 13.3% yoy driven by the export segment, which grew by 27.3% yoy to Rs35.8cr (Rs28.2cr). The company’s performance was disappointing on the domestic formulation front, with growth of mere 7.0% to Rs72.6cr (Rs67.8cr) as two of its key products Vepan and Febrex plus posted a dismal performance. The company’s OPM came in at 15.8% (18.9%) as gross margins for the quarter declined by 271bp to 56.3% on the back of higher raw material cost. As a result, net profit came in at Rs14.8cr (Rs16.8cr), down 12.2% yoy. For FY2011, the company has reiterated its guidance of 20–25% growth on the domestic formulation front and 30–35% growth on the export front, which would result in composite top-line growth of 23–28% with OPM in the range of 18–19%. The company plans to incur capex of Rs93cr (34% of GFA) in FY2011. The stock is currently trading at 11.2x FY2011E and 8.1x FY2012E earnings. We recommend Buy on the stock, as we believe the long-term drivers are intact (domestic segment: 120 products, 1500 MR; export segment: long-term supply agreement with Watson and Aspen), with a target price of Rs541. ITC ITC posted strong set of numbers for 1QFY2011, in line with our expectations. During the quarter, top-line growth of 16% yoy to Rs4,816cr (Rs4,148cr) was aided by 12.2% yoy growth in cigarette gross revenue (estimated decline of ~1–2% in volumes, growth driven by ~13–15% price hikes) coupled with strong growth of 44% yoy and 32% yoy in agri-business and non-cigarette FMCG business, respectively. Earnings grew by robust 22% yoy to Rs1,070cr (Rs879cr), largely on account of top-line growth, a 147bp yoy decline in tax rate and margin expansion. Operating margin expanded 111bp yoy to 33.4% (32.2%) due to a 192bp yoy decline in other expenditure aided by a 90bp expansion in cigarettes (driven by price hikes), ~Rs10cr yoy decline in non-cigarette FMCG losses to Rs89cr, and a 524bp yoy expansion in paperboards margins. At the CMP of Rs298, the stock is trading at modest valuations of 21.1x FY2012E earnings (~10% discount to other FMCG companies). However, owing to the recent run up in stock price (12% over the last three months vis-à-vis 3% in Sensex), we retain our Neutral rating on the stock with a revised fair value of Rs310 based on our SOTP model (in line with its historical P/E multiple of 22x one-year forward earnings).

July 23, 2010 5

Market Outlook | India Research Punjab National Bank Punjab National Bank announced its 1QFY2011 results. The bank registered net profit growth of 28.4% on a yoy basis to Rs1,068cr, which is better than our estimate of Rs908cr, mainly on account of better-than-estimated net interest income (NII). Strong growth in operating income and pressure on asset quality were the key highlights of the result. NII increased 40.6% yoy and 4.8% qoq to Rs2,619cr. Non-interest income stood at Rs872cr, down 10% yoy. Operating costs increased 10.2% yoy and 26.5% qoq to Rs1,392cr. The cost-to-income ratio stood at 39.9% during the quarter, lower than its eight-quarter average of 41.3%. The bank’s asset quality deteriorated during the quarter. Gross NPAs increased by 12.4% sequentially to Rs3,614cr. Net NPAs rose sharply by 30.6% qoq to Rs1,283cr compared to Rs982cr in 4QFY2010. The bank’s gross and net NPA ratios stood at 1.8% (1.7% in 4QFY2010) and 0.7% (0.5% in 4QFY2010), respectively. The provision coverage ratio declined to 64.5% compared to 69.5% in 4QFY2010 and 89.6% in 1QFY2010. The bank’s CAR decreased to 13.8% as compared to 14.2% in 4QFY2010 and 14.5% in 1QFY2010. The balance sheet details are not available yet. At the CMP, the stock is trading at valuations of 1.4x FY2012E ABV. We believe that the bank will not be able to sustain such high return on equity going forward (26.6% in FY2010). We have a Reduce rating on the stock, valuing it at 1.3x FY2012E ABV (closer to the median of its five-year range) to arrive at a 12-month target price of Rs948. Result Previews AREVA T&D India Areva T&D India is scheduled to announce its 2QCY2010 results. The company’s top line is expected to grow 16.5% yoy to Rs918cr. On the operating front, we expect the company to register a 552bp margin compression to 8.1%. Consequently, net profit is expected to decrease by 55.5% yoy to Rs22cr. We maintain our Neutral recommendation on the stock. BHEL For 1QFY2011, we expect the company to post sales and net profit of Rs6,816cr and Rs645cr, registering yoy growth of 21.8% and 37.2%, respectively. On the operating front, the company is expected to register a 253bp expansion in operating margin, which is expected to be around 11.8%. We remain Neutral on the stock. CESC CESC is expected to announce its 1QFY2011 results. We expect the company to register 7.5% yoy growth in its standalone top line to Rs870cr, aided by increased volumes due to the recent commissioning of the 250MW Budge-Budge plant and higher tariff charged during the quarter. In 1QFY2011, the company charged a higher tariff of Rs4.57/unit in the regulated area as against Rs3.91/unit in 1QFY2010. The company's standalone OPM is expected to expand by 421bp yoy to 27.7%. We expect CESC to record 23.5% yoy growth in its net profit to Rs130cr. We maintain a Buy on the stock with a target price of Rs460.

July 23, 2010 6

Market Outlook | India Research FAG Bearings – 2QCY10 FAG Bearings is slated to announce its 2QCY2010 results. The company is expected to deliver 23.5% yoy growth in revenue to Rs241cr for the quarter. On the operating front, the company is expected to post a 284bp yoy improvement in operating profit margin to 15.1%. Net profit is expected to increase by 18.5% yoy to Rs22.1cr. The stock rating is under review. Jaiprakash Associates Jaiprakash Associates (JAL) is expected to announce its 1QFY2011 results. For the quarter, we expect JAL to report a 31.7% yoy increase in its top line to Rs2,722cr, aided by cement capacity expansion and strong pick up from the construction and EPC segments. At the operating front, the company is expected to report a margin expansion of 610bp. JAL is expected to post profits of Rs229cr (decline of 8%) for the quarter on the back of high interest and depreciation costs despite strong top-line growth and margin expansion. We maintain Buy on the stock. Wipro We expect Wipro to witness 2.2% qoq growth in revenue to Rs7,134cr in 1QFY2011E backed by volumes as unfavourable cross-currency movement witnessed during 1QFY2011 would restrain further growth in revenue. The EBIDTA margin is expected to contract by 43bp on account of higher manpower intake with improved business environment. Thus, with lower operational profitability, we expect net profit to be down by 1.9% qoq to Rs1,213cr. We maintain Accumulate on the stock.

July 23, 2010 7

Market Outlook | India Research

Economic and Political News

GST to make India a US $2tr economy: Finance Minister

Government relaxes norms for setting up SEZ in small towns

Monsoon deficit pegged at 14%

Tripura tops NREGA in the country

Corporate News

PFC to raise Rs4,700cr from overseas in FY2011

Infosys Rs2,500cr SEZ to get operational by next March

Glenmark unit bags USFDA nod for generic contraceptive drug

Fortis drags Khazanah to Singapore regulator Source: Economic Times, Business Standard, Business Line, Financial Express, Mint

Events for the day

Allahabad Bank Results Areva T&D Results BHEL Results Biocon Results CESC Results FAG Bearings Results HPCL Results IFCI Results Jaiprakash Associates Results Uco Bank Results Wipro Results

July 23, 2010 8

Market Outlook | India Research Research Team Tel: 022-4040 3800 E-mail: research@angeltrade.com Website: www.angeltrade.com

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