my thesis

INDIAN INSTITUTE OF PLANNING AND MANAGEMENT MUMBAI

THESIS ON

“CORPORATE FINANCING AND CORPORATE VALUATION OF IND IAN COMPANIES”

SUBMITTED BY

APURVA PRASAD

FINANCE

BATCH - PGP/FW/06-08 REF. ID – IIPM/ FW/ 06-08/ MUM/ FIN/ 043

2

1.1 Abstract

Indian economy has positioned itself on the growth curve which is signified by indicators

such as 8-9 percent annual growth, rising foreign exchange reserves, rapidly growing

FDI, second fastest growing emerging market and an active capital market. The strong

banking system and a prudent regulatory environment enable capital formation due to

increased economic activity. However, 2008 has witnessed concerns in the economy

which are characterized by increase in inflation, rise in commodity price, increase in

interest rates, tightening liquidity, slow down in demand and capital expenditure. There

has been a global financial contagion arising out of credit markets which have impacted

almost all industries directly or indirectly. This has led to implementation of various

structural changes in the industry such as change in the business model/ revenue model or

a change in the finance mix in order to adapt with the dynamism of the economy.

Study of corporate financing and corporate valuations therefore commands importance

and become an interesting study. The research tool used applied in the thesis is in the

form of financial modeling and analysis of 50 companies that constitute S&P CNX

NIFTY index with an effort to understand the dynamics of Indian companies operating in

the current business environment. The thesis attempts to forecast the economic &

business environment with the help of valuation based tools.

3

1.2 Certificate i)

Scanned Copy

4

1.2

ii)

BONAFIDE CERTIFICATE

This is to certify that the Thesis titled “Corporate Financing & Corporate Valuation of

Indian Companies” is the original work and has been successfully carried out by

Mr.Apurva Prasad (IIPM/ FW/ 06-08/ MUM/ FIN/ 043). Mr.Apurva Prasad has initiated

the study and completed as per my expectations and under my guidance.

The final output is acceptable to me and is hereby finally approved.

Mr.Manoj Agarwal Date:

Head, Retail Clients, Inventure Growth & Securities Ltd.

5

1.3 Thesis Topic Approval

i)

Dear Apurva,

I have received your synopsis as well as the confirmation of your external guide you through

the thesis. This letter is a formal approval to the topic proposed by you

Please go ahead with the thesis. Make it a comprehensive thesis by using empirical data as

the basis of the research.

Your ref. id number is IIPM/FW/06-08/MUM/FIN/043

Furthermore, you are required to send me a total of at least 6 thesis guidance response

sheets at equal intervals before the coalescence of the thesis. Please find below the format

for the response sheet.

Best of Luck.

Sonal Pandey

From Sonal Pandey [email protected]

To Apurva Prasad <[email protected]>

Date: Wed, Apr 23, 2008 at 2:59 PM

6

1.3

ii)

Scanned Copy

7

1.3

iii)

Scanned Copy

8

1.4 Acknowledgement

This thesis has given me immense insights in the area of corporate finance and equity

research. This research has not just helped me to understand the fundamentals but also

the finer nuances of valuation and fundamental research. It has helped me to bridge the

theoretical and practical aspects of the research topic while providing me with deeper

insights and acquaintance.

Firstly, I would like to thank my internal guide Prof.Sonal Pandey and the institute for

approving the thesis topic and providing a learning platform. I am highly obligated and

would like to thank my external guide Prof R.C.M Pendyala and Mr.Manoj Agarwal for

providing me direction and guidance.

I wish to express my deepest appreciation to all the respondents for their valuable time

and their insights on the research topic. I thank my family and friends who have

supported me during the course of my research.

APURVA PRASAD

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1.5 Table of Content

SR.NO. PARTICULARS PAGE NO. 1 PREFATORY ITEMS 2-12

1.1 Abstract 2

1.2 Signatory Page/ Certificate 3

1.3 Topic Approval 5

1.4 Acknowledgement 8

1.5 Table of Contents 9

1.6 List of Charts 10

1.7 List of Tables 12

2 INTRODUCTION 13-14

2.1 Introduction 14

3 LITERATURE REVIEW 15-20

4 RESEARCH METHODOLOGY 21-22

5 RESEARCH ANALYSIS 23-104

5.1 Macroeconomic Analysis 24

5.2 Industry/ Sector Analysis 37

5.3 Company Analysis 65

6 CONCLUSION 105-108

6.1 Conclusion 106

6.2 Bibliography 108

7 APPENDICES 109-117

7.1 Thesis Synopsis 110

7.2 Response Sheets 112

7.3 Questionnaire 117

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1.5 List of Charts Page No.

Fig. 1 - Index of Industrial Production 24

Fig.2 - Production in Infrastructure Industries 25

Fig.3 – Performance of Basic Infrastructure Industries 25

Fig.4 – Money supply data 26

Fig.5 – Credit/ Deposit growth 26

Fig.6 – CRR trend 27

Fig.7 – Repo Rate trend 27

Fig.8 – G-Sec yield 28

Fig.9 - Foreign Trade growth 28

Fig.10 - Forex Reserve (Excluding Gold & SDRs) 29

Fig.11 - Inflation (WPI) trend 29

Fig.12 – WPI trend 30

Fig.13 - Crude Oil prices 30

Fig.14 – Crude Oil chart 31

Fig.15 – Commodity price trend 32

Fig.16 – NIFTY Chart 33

Fig.17 Weakness/ Threats Indicators 34

Fig.18 – Opportunities Indicator (i) 35

Fig.19 – Opportunities Indicator (ii) 36

Fig.20 – Opportunities Indicator (iii) 37

Fig.21 – Deposit Growth trend 38

Fig.22 – Credit Growth trend 39

Fig.23 – Repo Rate changes 39

Fig.24 – CRR changes 40

Fig.25 – G-Sec yield curve 40

Fig.26 - Sectoral Credit Growth 42

Fig.27 - Assets of Scheduled Commercial Banks (% change over 42

previous year)

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Page No.

Fig.28 - Assets of Scheduled Commercial Banks (Rs.crore) 43

Fig.29 - Liabilities with Scheduled Commercial Banks (% 43

change over previous year)

Fig.30 - Assets of Scheduled Commercial Banks (Rs.crore) 44

Fig.31 – Cement consumption growth 45

Fig.32 – Cement supply trend 46

Fig.33 – Cement demand / price trend 46

Fig.34 – Cement capacity utilization trend 47

Fig.35 – Cement Price Trend 47

Fig.36 - Cement Statistics: Production, Consumption & Prices 49

Fig.37 – Subscriber growth trend 50

Fig.38 - GSM Cellular Service 52

Fig.39 – Subscribers growth 52

Fig.40 - Textile Statistics 57

Fig.41 – Power demand/ supply scenario 58

Fig.42 - Power Generation Statistics 60

Fig.43 – Steel production growth 61

Fig.44 – Coke price trend 62

Fig.45 – Global Inventory & price trend 62

Fig.46 – NIFTY P/E & P/BV trend 106

Fig.47 – Sector Beta 107

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1.6 List of Tables Page No.

Table 1 – Auto sector 37

Table 2 – Cement sector 44

Table 3 – Telecom sector 50

Table 4 – Pharma sector 53

Table 5 – IT sector 54

Table 6 – Oil & Gas sector 55

Table 7 – Power sector 58

Table 8 – Metals sector 61

Table 9 – Company Valuations consolidated 107

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INTRODUCTION

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2.1 Introduction

Importance/ Background for the Research

The role of financial system in mobilizing and allocating the resources for capital

formation has been well established by many studies. In this paper, an attempt has been

made to understand the financing pattern of Indian companies represented Nifty-50.

Corporate valuations play a major role in determining long term growth of an economy;

therefore the thesis also intends to focus on corporate valuation aspects of the Indian

companies.

The combined market capitalization of the 50 companies that constitute the index is in

excess of $600 billion which comprises ~ 60% of the total market capitalization of the

total 6000 listed companies in India.

Objective

To study & analyze Corporate Financing and Corporate Valuation of Indian firms

represented by companies that constitutes the S&P CNX NIFTY index.

Scope of study

Corporate Financing – Financing Mix

Corporate Valuation – Relative valuation multiplier

Financial Statement Analysis – Ratio Analysis

EIC Analysis – Macroeconomic/ Sector/ Company

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LITERATURE REVIEW

16

Corporate Finance includes the following principles:-

• Invest in projects that yield a return (cash flows) greater than the minimum

acceptable hurdle rate (financing mix).

• Choose a financing mix that maximizes the value of the firm and matches the

assets being financed.

Corporate Finance Principles

The Investment Principle: The investment principle states simply that firms should

invest in assets only when they are expected to earn a return greater than a minimum

acceptable return. This minimum return, which we term a hurdle rate should reflect

whether the money is raised from debt or equity, and what returns those investing the

money should have made elsewhere on similar investments.

The Financing Principle: The financing principle states that the mix of debt and

equity chosen to finance investments should maximize the value of investments made. In

the context of the hurdle rate specified in the investment principle, choosing a mix of debt

and equity that minimizes this hurdle rate allows the firm to take more new investments

and increase the value of existing investments.

The Dividend Principle: Firms sometimes cannot find investments that earn their

minimum required return or hurdle rate. If this shortfall persists, firms have to return any

cash they generate to the owners.

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Tools of Corporate Finance

1. The first of these tools is the time value of money, which allows us to compare

cash received or paid at different points in time and to weight them based on

when they occur.

2. The second tool is financial statement analysis since much of the information that

we get in finance comes from these statements.

3. The third tool is an understanding of how to value an asset or valuation

Financial Statement Analysis

Financial statements serve important functions: a) They provide information on how the

firm has performed in the past and what is its current position. b) They are a convenient

device for the stakeholders (shareholders, creditors, regulators, and others) to set

performance norms and impose restrictions on the management of the firm. c) They

provide useful templates for financial forecasting and planning.

Financial ratio analysis is a study of ratios between various items or groups of items in

financial statements. Financial ratios have can be classified into Liquidity ratios,

Leverage ratios, Turnover ratios, Profitability ratios, Valuation ratios.

Liquidity Ratio

Liquidity refers to the ability of a firm to meet its obligation in the short run, usually one

year. Liquidity is generally based on the relationship between the current assets (the

surces for meeting short-term obligations) and current liabilities. The important liquidity

ratios are current ratio, acid-test ratio and cash ratio.

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Leverage Ratio

Financial leverage refers to the use of debt finance. Leverage ratios help in assessing the

risk arising from the use of debt capital. The important ratios (Structural & Coverage) are

Debt-Equity ratio and Interest Coverage ratio.

Turnover Ratio

Turnover ratios, also referred to as activity ratios or asset management ratios, measure

how efficiently the assets are employed by a firm. These ratios are based on the

relationship between the level of activity, representaed by sales or net profit and levels of

various assets. The important turnover ratios are: Inventory turnover ratio, Debtor days,

etc.

Profitability Ratio

Profitability reflects the final result of business operations. There are two types of

profitability ratios: profit margin ratios and rate of return ratios. The important ratios are

Net profit margin, Operating margin, etc.

Valuation Ratio

Valuation ratios indicate of the equity stock of the company is assessed in the capital

market. Since the market value of equity reflects the combined influence of risk and

return, valuation ratios are the most comprehensive measures of a firm’s performance.

The important valuation ratios are price-earnings ratio, EV-EBITDA, Price-book value,

etc.

Value maximization is the central theme in financial management and owners of

corporate securities hold management responsible for value enhancement. There are two

general approaches to the valuation process: 1) the top-down, three-step approach or 2)

the bottom-up, stock valuation, stockpicking approach. Both of these approaches can be

implemented by either fundamentalists or technicians. The difference between the two

approaches is the perceived importance of the economy and a firm’s industry on the

valuation of a firm and its stock. Although we know that the value of a security is

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determined by its quality and profit potential, the economic environment and the

performance of a firm’s industry influence the value of a security and its rate of return.

General Economic Influence

Monetary and fiscal policy measures enacted by various agencies of national

governments influence the aggregate economies of those countries. The resulting

economic conditions influence all industries and companies within the economies.

Fiscal policy initiatives, such as tax credits or tax cuts, can encourage spending. In

addition government spending has a strong multiplier effect. Monetary policy produces

similar economic changes. A restrictive monetary policy that targets interest rates would

raise the market interest rates and therefore firms’ cost. Monetary policy therefore affects

all segments of an economy and that economy’s relationship with other economies. It is

therefore difficult to conceive of any industry or company that can avoid the impact of

macroeconomic developments that affect the total economy.

Industry Influence

The second step in valuation process is to identify global industries that will prosper or

suffer in the long run or during the expected near-term economic environment. Industries

react to economic changes at different points in the business cycle. For example, firms

typically increase capital expenditure when they are at full capacity at the peak of the

economic cycle. In contrast, non-cyclical industries such as retail food would not

experience a significant decline during a recession but also would not experience a strong

increase during economic expansion.

Company Analysis

After determining that an industry’s outlook is good, an investor can analyze and

compare individual firms’ performance within the entire industry using financial ratios

and cash flow values.

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Relative Valuation

Relative valuation techniques implicitly contend that it is possible to determine the value

of an economic entity by comparing it to similar entities on the basis of several relative

ratios that compare its stock price to relevant variables that affect a stock’s value, such as

earnings, cash flow, book value, and sales.

______________________________________________________________________ 1. Corporate Finance 2e – Aswath Damodaran 2. Investment Analysis & Portfolio Managemen 8e – Reilly/ Brown 3. Financial Management 7e – Prasanna Chandra 4. Grahan and Dodd’s Security Analysis 5e – Cottle/ Murray/ Block

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RESEARCH METHODOLOGY

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Primary Research

Data Mining

Financial modeling on excel was used for the analysis of Profit & Loss statement and the

Balance Sheet of 50 companies. Analysis includes the following:-

• Financial Ratios such as ROE, ROCE, Liquidity ratio, Turnover Ratios

(inventory, debtor).

• Margin Analysis: - Raw Material cost, Operating Margin, Tax Rate.

• Year on Year Analysis, Unit Analysis, CAGR.

• Financing mix – Leverage ratios (structural & coverage).

• Valuation – P/E, P/BV, P/CEPS

The market capitalization data is as on 31/07/2008 and the Promoter stake is as on June

2008. Multex Global in icicidirect.com is the source for forward EPS data and quarterly

results of the companies. The multiple assigned to the stock is on the basis of EIC

analysis and it’s used to project a target price. Company Annual Reports &

moneycontrol.com is the source of the financial data which was used for financial

modeling.

Interview (qualitative)

The questionnaire covered areas of macroeconomic environment and industry view as

these factors determine the behaviour of the stock to a large extent. The views that were

taken from the respondents included factors such as GDP growth, Foreign exchange rate,

Inflation, Crude Oil, Earnings growth & Sector view. The performance of a stock and

thereby its valuation is a function of the economy and the industry that surrounds the

company. Following is the analysis of the views taken from the respondents. The

respondents whose views were analysed are Mr.Abhay Kumar, Unit Head, ICICI Direct;

Mr.Mukesh Gupta, MD, Scope Commodeal; Mr.Rahul Khandelwal, Research Analyst,

ABN AMRO, Mr.Abhishek Raichura, Manager, Motilal Oswal Securities Ltd.;

Mr.Jignesh Patel, Advisor, Motilal Oswal Securities Ltd.

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RESEARCH ANALYSIS

24

5.1 Macroeconomic Analysis

Fig. 1 - Index of Industrial Production

Source: Ministry of Finance

The revised annual growth achieved by the mining, manufacturing and electricity sectors

during April-June, 2008-09 was 4.7 %, 5.6 % and 2.0 % respectively as compared to 2.7

recent, 11.1 % and 8.3 % during the corresponding period of last year.

25

Fig.2 - Production in Infrastructure Industries


Fig.3 – Performance of Basic Infrastructure Industries


During April-June 2008-09, six core infrastructure industries registered a growth of 3.5

% (provisional) as against 6.4 % during the corresponding period of the previous year.

26

Fig.4 – Money supply data


During the current financial year 2007-08, broad money stock (M3) (up to July 18, 2008)

increased by 3.5 per cent as compared to 4.3 per cent during the corresponding period of

the last year. The year-on-year growth, as on July 18, 2008, was 20.0 per cent as

compared to 21.9 per cent of the corresponding date of last year

Fig.5 – Credit/ Deposit growth


27

During the current financial year (up to July 18, 2008) gross bank credit increased by 1.9

per cent as compared to the decline of 0.9 per cent during the same period of the previous

year. The Non-Food credit during the financial year (up to July 18, 2008), increased by

1.7 per cent as compared to the decline of 0.6 per cent during the same period of the last

year. The year-on-year growth of time deposits with SCBs as on July 18, 2008 was 22.1

per cent as compared to 25.3 per cent on the corresponding date of last year.

Fig.6 – CRR trend

An upward trend has been witnessed in the CRR which has increased from 4.75 % in

September 2004 to 8.75 % in July 2008 indicating efforts to tighten the money supply.

Fig.7 – Repo Rate trend

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The Repo rates have also increased from 6.00 % in March 2004 to 8.50 % in July 2008

suggesting a monetary tightening of the money supply. The current (as on 25th September

2008) Repo rate is at 9.00 % and its has increased 150 bps over the last year and a half.

The CRR rate and the Repo rate has been increased in CY2008 in order to arrest

inflationary pressures.

Fig.8 – G-Sec yield

G-sec yield bottomed out in July 2004 and has almost doubled to 9.10 % in the last 4

years.

Fig.9 - Foreign Trade growth


Exports, in dollar terms, during April-June, 2008 increased by 22.3 percent. Imports

increased by 29.7 percent. Oil imports increased by 50.2 percent and Non-oil imports

increased by 20.9 per cent.

29

Fig.10 - Forex Reserve (Excluding Gold & SDRs)


Fig.11 - Inflation (WPI) trend

30

Fig.12 – WPI trend


The annual rate of inflation based on Wholesale Price Index (WPI) stood at 12.01 per

cent for week ended July 26, 2008 compared with 4.70 per cent a year ago. This rate was

contributed by an increase of 10.32 per cent in Primary Articles, 7.12 per cent increase in

Fuel, Power, Lights and Lubricants and -10.75 per cent increase in Manufactured

Products as against an increase of 10.47 per cent, -1.74 per cent and 5.08 per cent

respectively on the corresponding date of last year. Inflation for the week ended

September 3, 2008 stood at 12.34 % which has been showing signs of stabilization after

it fell 29 bps over the last two weeks from its 13 year highs.

Fig.13 - Crude Oil prices

31

Fig.14 – Crude Oil chart

Source: http://www.wtrg.com/daily/crudeoilprice.html

Crude Oil spiked to $147/ bbl, its highest of all-time before declining to $107/ bbl as on

4th September, 2008. This slump in oil price was helped by Opec increasing production

by 350,000 bpd and non-Opec producers adding 550,000 bpd. With global economic

growth also looking less robust, oil prices have slumped from $140 levels.

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Fig.15 – Commodity price trend

33

Fig.16 – NIFTY Chart

Source: www.nseindia.com

34

Weakness/ Threats Indicators

Fig.17 - Weakness/ Threats Indicators

The recent turmoil in the global financial and credit markets have wiped out billions of

dollars from the balance sheet of the affected companies. This has produced a contagion

of spike in crude oil & commodity prices and a sharp increase in credit spreads. The

weakness & threats are evident in our economy caused by redemption pressure of the

portfolio investments of the FII and the dollar outflow. SENSEX & NIFTY have shed ~

40 % from its all time highs in January while capital market public issues have reduced

drastically. The valuations on the indices have come down and the open interest in the

derivative futures have also reduced substantially. The slowdown in economic growth

due to inflationary pressures and the interest rate scenario is the major threat to the

economy.

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Opportunities Indicators

Fig.18 – Opportunities Indicator (i)

Source: India Strategy Report

The opportunity for growth of the economy is largely a function of the growth of

domestic demand/ consumption, rising income (savings & investments) and changing

demographics. Factors such as growth in disposable income rise and consumption

increase illustrate the opportunity for Indian companies and capital markets. Capital

market growth opportunity is evident as there is a lot of scope for growth in equity and

debt market.

36

Fig.19 – Opportunities Indicator (ii)


Fig.20 – Opportunities Indicator (iii)


37

5.2 Industry/ Sector Analysis

Automobiles

The automobile sector contributes ~ 2% to the total market capitalization of NIFTY. The

ROE and the ROCE of the sector is 29.34% and 23.96% respectively with Hero Honda

recording the highest ROE of 32.79%. The Debt/ Equity of the sector is 0.35 with Tata

Motors having the highest leverage of 0.8 and Hero Honda having the lowest leverage of

0.07. The Operating Margin and the PAT Margin of the sector stands at 11.85% and

8.62% respectively. Current Ratio for the sector is 1.06 with Maruti having the highest

liquidity of 1.42 and Hero Honda having the lowest liquidity of 0.57. Dividend payout for

the sector is 25.35% and Ploughback ratio of the sector is 74.65%. Hero Honda retained

the least with the highest Dividend Payout of 39.72%.

Table 1 – Auto sector

Security Symbol Beta ROE

% ROCE %

Debt/ Equity

Operating Margin %

PAT Margin %

Current Ratio X

EPS Rs.

Dividend Payout %

M&M 0.74 29.89 21.13 0.46 11.62 8.16 1.37 46.15 26.58

MARUTI 0.7 26.47 24.15 0.09 12.14 9.74 1.42 60.21 7.17

TATAMOTORS 0.78 26.4 17.77 0.8 10.58 7.2 0.9 53.68 27.95

HEROHONDA 0.46 34.6 32.79 0.07 13.06 9.37 0.57 48.47 39.72

The auto sector continues to face challenging times, as the pressures of FY08 have

further intensified in FY09. Higher oil prices and interest rates remain key threats to

volume growth. The sharp rise in input prices would pose a challenge for margins. On the

volumes front, companies are banking on higher disposable income, led by strong

economic growth, favorable changes in personal income tax slabs, and new model

launches. However, financing constraints still need to be addressed, as banks have

significantly reduced their retail lendings. Large auto majors have now tied up with

cooperatives and NBFCs to provide financing to buyers. On the margins front, benefits

from productivity improvement and cost reduction programs undertaken by companies

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would continue to partially offset the pressures from rising input prices.

Commencement/ramping up of operations in tax-free zones like Uttaranchal would help

counter cost pressures through lower tax burden. Valuations of the auto majors have

become very attractive, with the long-term growth outlook still quite positive.

Banking

The Banking sector contributes ~ 8.5% to the total market capitalization of NIFTY. The

ROE for the sector recorded 17.6% for FY08.

Higher inflation, rising interest rates, regulatory actions to tighten liquidity coupled with

rising fiscal deficit are creating a challenging macro scenario for banks. While loan

growth would moderate around 20% growth, currently growing at 25%, marginally lower

margins for most banks (despite banks having shown their willingness to raise rates) can

be expected. Having a low cost liability base (CASA) would be a key differentiator for

the banking industry. Banks like HDFC Bank, Axis Bank, SBI, and PNB, which have

high CASA ratios are at an advantage.

Fig.21 – Deposit Growth trend

Deposits grew ~23% YoY and 2% QoQ (as on 6 June 2008) to Rs.32,570 billion. Strong

growth in deposits came on the back of higher interest rates offered by the banks.

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Fig.22 – Credit Growth trend

Credit grew 26% YoY (as on 6 June 2008) versus 22% in FY08. On a QoQ basis loans

grew by 1.4% compared to 2.1% QoQ in 1QFY08. In 1QFY09, the credit to deposit ratio

was 73.1%, which is lower than 73.6% recorded in FY08.

Fig.23 – Repo Rate changes

Fig.24 – CRR changes

40

In 1QFY09, the RBI has raised the repo rate by 75bps to 8.5% and CRR by 125bps to

8.75% (50bps to be effective in July 2008). CRR increase of 125bp would amount to

liquidity outflow from the system of Rs.45,000 crores.

Fig.25 – G-Sec yield curve

While the G-sec yields remained flat in FY08 on a YoY basis, they shot up significantly

in the last two months, as the high inflation numbers meant that interest rates would rise.

While one-year G-sec yield has increased by 168bp QoQ, 2-3 year yields increased

164bp and the 10 year G-sec yield increased by 74bp. On a YoY basis however, yields

are higher by 70-175bp across maturities

41

Data available till 18 July 2008 indicates that credit growth continues to outpace deposit

growth in the current financial year. Bank credit is growing at well over 25 per cent while

deposit growth slowed to 21 per cent by the third week of July 2008.

Growth in deposits, both demand as well as term, is showing signs of slowing. Slowdown

in demand deposit growth is sharper. Demand deposit growth slowed from a high of 25.1

per cent as at the end of May 2008 to 14.2 per cent by the first week of July 2008.

Additional data for the week ended 25 July 2008 indicates that demand deposit growth

plummeted to 5.9 per cent. The robust 25 per cent plus robust growth in credit is expected

to marginally slow down due the sharp increase in interest rates brought about by the RBI

during June–July 2008. Retail credit is expected to particularly slow down further. In the

broader context, however, demand for credit will remain healthy unless the RBI seeks to

further harden interest rates. It is possible that with elections around the corner and

inflation remaining in double digit figures the monetary authority may well attempt to

further clamp down on liquidity to dampen demand and therefore credit growth. We

expect credit growth to be around 22–23 per cent for 2008–09 as a whole. According the

disaggregated data available till 23 May 2008, growth in credit to industry accelerated

further to 26.9 per cent from 26.4 per cent a year ago. Growth in credit to small scale

industries accelerated sharply from 29.5 per cent to 52.1 per cent during this period.

However, the continuous rise in interest rates over the past one year did take its toll on

personal loans. Growth in personal loans slowed from 23.9 per cent a year ago to 15.9 per

cent as on 23 May 2008. The consumer durables segment was the worst affected and

witnessed a decline of six per cent.

42

Fig.26 - Sectoral Credit Growth

Fig.27 - Assets of Scheduled Commercial Banks (% change over previous year)

43

Fig.28 - Assets of Scheduled Commercial Banks (Rs.crore)

Fig.29 - Liabilities with Scheduled Commercial Banks (% change over previous

year)

44

Fig.30 - Assets of Scheduled Commercial Banks (Rs.crore)

Cement

The Cement sector contributes ~ 2% to the total market capitalization of NIFTY. The

promoter holding for the sector is 38.23% as on June 2008. The ROE and the ROCE of

the sector is 23.98% and 25.17% respectively. The Operating margin and PAT margin of

the sector is 29.78% and 23.96% respectively with Ambuja Cements recording the

highest Operating margin of 36.3%. The dividend payout of the sector is 24.58% while

retaining ~ 75% of the profit. The liquidity measure of the sector is 1.02 X.

Table 2 – Cement sector

Security Symbol Equity Market

Capitalisation Weightage Beta Promoter%

ACC 1,876,511,140 10,948 0.42% 0.73 43.00 AMBUJACEM 3,045,095,596 12,401 0.47% 0.48 46.50 GRASIM 916,742,280 16,567 0.63% 0.71 25.20

45

While volume growth is likely to remain stable, new capacities (~32MT in FY09) would

result in excess supply. However, these new capacities would impact demand-supply

equilibrium only in 2QCY09. In the interim, prices would remain under check on account

of high inflation and government monitoring. As a result, margins would remain under

pressure, with stable pricing and severe cost push. Excess supply situation is expected to

continue at least till FY11, curtailing pricing power for the industry. Valuations for the

industry are attractive – asset valuations for all cement companies are below replacement

cost of US$120/ton. However, the upside appears limited, especially with impending

excess supply situation and pressure on margins.

Fig.31 – Cement consumption growth

46

Fig.32 – Cement supply trend

In FY08, total capacity addition for the industry was 30MT, taking the total capacity to

198MT. Further, at least another 45MT of capacity is scheduled to commission in FY09.

As a result, FY09 is expected to witness excess supply based on capacity additions of

FY08 and FY09. While incremental demand would be around 16MT, incremental supply

would be at least 45MT.

Fig.33 – Cement demand / price trend

47

Fig.34 – Cement capacity utilization trend

Capacity utilization for 1QFY09 declined to 89% (v/s 100% in 1QFY08) on the back of

30MT of capacity addition in FY08. Cement industry’s capacity utilization for 1QFY09

is expected to decline on YoY basis for the first time in the last five years. Capacity

utilization for the industry is expected to ease off from optimum level of ~95% to ~88%

in FY09 and 75% in FY10 on the back of significant capacity addition over the next two

to three years.

Fig.35 – Cement Price Trend

Cement prices are expected to remain stable with 1.6% QoQ increase. Given high

inflation, the cement companies were under pressure to maintain prices. Part of the price

48

increase is on account of increase in freight and higher excise. Further, ban on exports

also resulted in flush of supply in Western and Northern markets, which also helped in

controlling cement prices. Cement prices in eastern region are expected to recover by

6.6% QoQ (~5.4% YoY) in line with strong demand growth in the region.

The cement production was up by about seven per cent to 14.7 million tonnes in June

2008. Production remained flat in the Western region. The Eastern and Central regions

reported a production rise of 4–5 per cent. Southern region, the largest cement producing

zone recorded a robust production growth of 13.4 per cent, lifting the overall production

growth during the month. The industry enhanced its annual installed capacity by 30

million tonnes to 198 million tonnes in 2007–08. As of June 2008 the total capacity

stands at about 202 million tonnes. During the June 2007 quarter, the industry had

operated nearly at peak levels. However, the utilisation dipped to 89 per cent in the June

2008 quarter. While this is partly due to a substantial increase in industry’s capacity, this

dip is also attributed to a slow down in May 2008. As a result, cumulative production

growth decelerated to six per cent during the quarter against a production rise of 7.4 per

cent in the year ago quarter. While we expect the same to pick up post monsoon, the slow

down in the June 2008 quarter is expected to lower the annual production growth for

2008–09. We expect the average capacity utilisation level to remain around 89 per cent

during the year. We, therefore, revise our annual production growth forecast, for the year

2008–09, to 10.5 per cent against the earlier forecast of 11.5 per cent. Cement prices in

Delhi inched up by Re.1 to Rs.229 per 50 kg bag in July 2008. Prices in Calcutta in-

creased by Rs.4 per to Rs.249, recording a price rise in four out of last five months. The

prices in Chennai inched up by Rs.3 to Rs.263 per 50 kg bag. The same in Mumbai

remained unchanged at Rs.253. Cement companies continue to reel under cost pressure.

Despite this, we expect cement prices in the North region to remain subdued considering

the impact of significant capacity additions made in the region in 2007–08. Prices in

other parts of the country are expected to remain stable in the near term.

49

Fig.36 - Cement Statistics: Production, Consumption & Prices

Construction

Macro environment for construction companies would be challenging over the medium

term, given the following:-

(1) Higher commodity prices and increased wage inflation would restrict EBITDA

margin expansion

(2) Volatile capital markets could impact business momentum for cash contractors and

infrastructure developers. Most of the companies have negative operating cash flows,

requiring frequent access to capital markets

(3) Project awards could possibly get delayed due to the forthcoming elections, both at

the center and in several states

Engineering

Macro environment for capital goods companies would be challenging over the medium

term, given the following:-

(1) Execution constraints, resulting in delayed revenue growth: The key issues are: (1)

availability of skilled manpower, (2) lack of reliable vendor base (limited availability of

50

critical components and poor quality of subcontractor base in India), (3) bureaucracy,

which includes issues like delays in land acquisition, rehabilitation, environmental/forest

clearances.

(2) Higher input costs: Rising commodity prices would be the single largest risk on the

earnings of the capital goods companies during FY09.

Telecom

Telecom sector contributes ~ 12% to the market capitalization of NIFTY in which Bharti

Airtel & Reliance Communications contribute ~ 6% & ~ 4% in NIFTY. Bharti Airtel

leads the sector with the highest Operating margin of 41.35% and EPS CAGR of 55 %.

Promoter holding for the sector stands high at 66.63%.

Table 3 – Telecom sector

Fig.37 – Subscriber growth trend

Security Symbol ROE ROCE Debt/Equity Operating

Margin PAT Margin EPS Promoter%

BHARTIARTL 30.82 25.82 0.32 41.35 24.45 32.87 66.50 IDEA 22.53 12.51 1.95 33.54 15.54 3.96 57.70 TATACOMM 5.25 5.07 0.12 19.23 10.47 12.07 76.20

51

Subscriber net additions remained strong during 1QFY09. We expect the industry to add

~25m subscribers in 1QFY09 v/s ~27m subscribers added in 4QFY08. QoQ decline

primarily reflects higher base due to year-end adjustments in some operators, especially

BSNL. Sustained subscriber momentum would support 11-14% quarterly average

subscriber growth for Bharti, RCOM, and Idea.

Momentum in subscriber additions continues to be strong, primarily driven by higher

coverage and attractive tariffs. News flow on international expansion/industry

consolidation could be further triggers while adverse regulatory environment and increase

in competitive activity pose key risks. Valuations of majors at 9-9.5x FY09E

EV/EBITDA and ~7x FY10E EV/EBITDA are attractive. Current valuations factor tough

regulatory environment and growth headwinds for incumbents resulting from entry of

potential new competition.

In June 2008, telecommunication sector added a total of 8.8 million subscribers taking

the total outstanding subscribers to 325.8 million subscribers. Total outstanding

subscribers grew by 44.8 per cent over the year–ago month. Wireless subscribers added a

total of 8.9 million subscribers taking the subscribers base to 286.9 million subscribers.

Wireline subscribers declined by 1.4 lakh subscribers to 38.9 million during the month.

Teledensity for the month increased to 28.3 per cent. The total outstanding cellular

subscribers witnessed a healthy growth of 56.5 per cent to 212.5 million subscribers.

Metros witnessed a decline in the GSM cellular subscribers addition for the second

consecutive month. In June 2008, GSM subscribers addition declined by 1.7 per cent to

seven lakh subscribers. Circle C witnessed a robust growth of 99.2 per cent cellular

subscribers addition. Outstanding mobile WLL subscribers grew by 51.3 per cent to 74.4

million subscribers. Uttar Pradesh (E) witnessed the highest subscriber addition of 7.7

lakh wireless subscribers. Andhra Pradesh made an addition of 7.1 lakh subscribers.

Wireless segment witnessed an addition of 7.3 lakh subscribers whereas, the wireline

segment declined by 0.2 lakh subscribers in June 2008. BSNL and MTNL’s wireline

subscribers declined by 2.1 lakh and 0.2 lakh subscribers whereas, their wireless

subscribers increased by 3.8 lakh and 0.9 lakh subscribers, respectively.

52

Fig.38 - GSM Cellular Service

Source: CMIE

Fig.39 – Subscribers growth

Source: CMIE

53

Real Estate

In FY08, the focus was on the real estate (RE) sector as a ‘theme’, with all RE stocks

moving in tandem. In FY09, the focus is likely to shift to specific companies within the

RE sector. We expect FY09 to be a year of consolidation for the RE industry, in which

the industry leaders would get differentiated from peers. Developers with staying power

would utilize this consolidation phase to emerge stronger and position themselves better

to capitalize on the growth phase post consolidation. Key differentiating factors for RE

companies would be: (1) financial soundness, (2) monetization visibility over the next 3-

4 years, and (3) execution capability. Our top picks are DLF and Indiabulls Real Estate.

Pharmaceuticals

Pharmaceutical sector contributes ~ 3% to the total market capitalization of NIFTY. The

average beta of the sector is 0.46 which corroborates the defensive nature of the sector.

The ROE and the ROCE of the sector is 23.8% and 20.10% respectively. The Operating

margin and PAT margin of the sector is 12.91% and 21.5% respectively. The current

ratio of the sector is 2.5 X and Dr.Reddy’s Laboratories has the highest current ratio of

3.21 X. The retention ratio of the sector is ~ 75% while the lowest ploughback is of

Ranbaxy Laboratories at 46.4%.

Table 4 – Pharma sector

Security Symbol Beta ROE ROCE

Operating Margin

PAT Margin

Current Ratio

Dividend Payout %

Ploughback %

CIPLA 0.48 21.59 21.07 20.1 16.57 2.69 22.75 77.25 DRREDDY 0.42 26.61 25.69 15.2 14.39 3.21 5.41 94.59 RANBAXY 0.57 23.31 10.41 8.71 12.96 1.53 53.6 46.4 SUNPHARMA 0.36 23.69 23.24 7.65 42.08 2.63 21.82 78.18

While the past three years have witnessed significant underperformance by

pharmaceutical stocks (led by deteriorating business fundamentals, especially in the US),

the past few months have witnessed increased investor interest led by positive news flows

related to patent challenge/settlement upsides and the stake sale by Ranbaxy promoters to

a Japanese innovator company. Investor interest is also building up due to relative

defensive nature of pharmaceutical earnings (given current market conditions) and the

54

recent depreciation of the Indian rupee against the US dollar and the euro. Geographical

diversification of revenues is gradually reducing Indian Pharma’s dependence on the

fiercely competitive US market, thus reducing the sensitivity to US profits. The key

success factors for pharma companies would be: (1) pragmatic mix of niche/FTF and

normal products, (2) geographically diversified revenue base, (3) vertical integration, and

(4) strong balance sheets to fund inorganic growth.

Information Technology

The IT sector contributes nearly 11% to the total market capitalization of NIFTY and has

a sector beta of 0.72. The sector ROE and ROCE stands at 31.15% and 30.14%

respectively. The sector Operating Margin and PAT margin stands at 25.17% and 23.45%

respectively. Infosys recorded the highest Operating and PAT margin whereas TCS

recorded the highest ROE & ROA. The sector liquidity ratio is high at 3.03 X and the

Dividend payout for the sector is ~ 38% and the sectoral promoter holding stood at ~

50% as on June 2008.

Table 5 – IT sector

The quarter began on a positive note, with better than expected guidance by Infosys and

Satyam for FY09. The rupee depreciated 4.7% against the dollar during 1QFY09, giving

further fillip to the IT sector. After months of uncertainty in US credit markets, there is

some pick-up in IT spend by few US-based BFS (banking and financial services) clients.

Risk of back-ended growth remains for FY09. IT companies having (a) wider service

Security Symbol ROE % ROCE

% Debt/Equity Operating Margin %

PAT Margin %

EPS Rs. Promoter%

HCLTECH 32.17 32.35 0.01 24.35 26.65 17.82 67.50 INFOSYSTCH 33.14 33.14 0 31.72 28.57 78.15 16.50 SATYAMCOMP 24.58 24.64 0 22.47 21.08 25.59 8.60 TCS 40.97 41.27 0 27.12 24.53 46.07 76.40 WIPRO 24.9 19.3 0.33 20.17 16.44 19.68 79.40

55

span; (b) faster scalability; (c) better bargaining power; (d) higher European share of

revenues; and (e) financial strength would be on better footing.

Oil & Gas

Oil & Gas sector contributes ~ 27% to the market capitalization of S&P CNX NIFTY

with Reliance Industries & ONGC contributing 12% & 8% respectively. The average

promoter holding % stands at ~ 64%.

Table 6 – Oil & Gas sector

Security Symbol Equity Market

Capitalisation Weightage Beta Promoter%

BPCL 3,615,421,240 11,855 0.45% 0.79 64.30 RELIANCE 14,536,486,010 320,893 12.26% 1.1 51.40 RPL 45,000,000,000 74,138 2.83% 1.26 75.40 CAIRN 18,944,297,380 45,807 1.75% 0.79 64.80 ONGC 21,388,725,300 213,085 8.14% 1.01 74.10 GAIL 8,456,516,000 31,763 1.21% 0.96 57.40

Performance of PSU oil companies (ONGC, GAIL, HPCL, BPCL and IOC) continued to

be determined by the sharing of under-recoveries rather than business fundamentals. With

controlled retail fuel prices and increasing oil prices, under-recoveries continued to

burgeon. ONGC looks positive, following the recent price correction and large E&P

potential. However, possible increase in its subsidy sharing remains a concern. GAIL

would witness large volume upsides (136mmscmd by FY10 – 29% CAGR), as RIL’s

KG-D6 gas supply begins (RIL’s gas would be directed towards priority sectors, which

are on GAIL’s current network). Subsidy sharing (partly moderated by higher LPG

realization, with increasing oil prices) and likely petchem downturn remains a concern.

RIL would see near-term upsides from (1) marketing tie-ups with potential gas buyers,

(2) oil and gas production start at its KG-D6 block (2HFY09), (3) start of its RPL

refinery (expected to be online ahead of scheduled December 2008), and (4) progress on

56

retail business. The key issue to watch, in our view, would be the ongoing litigation with

RNRL.

Textiles

FY09 began on a promising note for the textile industry, with (a) the rupee depreciating,

and (b) supply side correcting due to capacities closing down in China. However, the

positives were overshadowed by (i) sharp increase in raw material (cotton price up

60%) and fuel costs, and (ii) slowdown in demand in the key western markets. As a

result, despite several near-term macro fundamentals turning positive and valuations

appearing inexpensive, the textile industry is expected to be under pressure over the next

six months.

The cotton textiles production index growth is witnessing a slowdown during the last four

months. On the contrary, the textiles products production index has been reporting a

healthy growth for the last two months. Spun yarn production growth continued its

sluggish trend even in the year 2008–09. Cotton yarn is the predominant yarn in spun

yarn and forms 74 per cent of total spun yarn production. Thus, spun yarn production

largely mirrors the growth in cotton yarn output. Cotton yarn production grew by 1.6 per

cent during May 2008. Consequently, spun yarn production grew by just 1.5 per cent,

compared to a growth of five per cent during May 2007. Blended yarn production grew

by a mere 0.3 per cent during the month of May, whereas synthetic yarn production

witnessed a growth of three per cent. For the year 2008–09, cotton yarn production is

expected to grow by around 5.8 per cent. Consequently, spun yarn production is expected

to grow by six per cent to 4,242 thousand tonnes. Fabrics production grew by a decent

five per cent during May 2008, compared to a growth of 6.5 per cent in May 2007.

Cotton fabrics production grew by 2.6 per cent, whereas blended fabrics production grew

by a meager 0.7 per cent during the month. Synthetic fabrics production which accounts

for 41 per cent of the total fabrics production grew by 8.1 per cent during May 2008.

During the year 2007–08, yarns, fabrics and made- ups exports grew by a healthy 13.1

per cent, compared to a growth of 8.2 per cent in 2006–07. Readymade garments exports

57

grew by a decent 6.9 per cent during 2007–08, as against a growth of 3.1 per cent in

2006–07. This was despite the strengthening rupee.

Fig.40 - Textile Statistics

Source: CMIE

Media

The media sector has witnessed the entry of a large number of players in FY08. Each of

the media companies has been diversifying into new media verticals to become a media

conglomerate. The entry of new players has fragmented the advertising market, thereby

impacting the incumbent players. While channel launches (broadcasters) and entry into

new markets (newspapers) were driving stock valuations in FY08, the focus would shift

to earnings growth and cash flows in FY09. Companies with earnings visibility, strong

growth momentum and strong operating cash flows will be better placed. Print media

companies have strong cash flows and the likely ease off in newsprint prices by 4QFY09

could boost earnings. The key differentiating factors for media companies would be (1)

execution capabilities; (2) earnings visibility and growth momentum; and (3) strong

positioning.

58

Power

Power sector accounts for ~ 9% of the total market capitalization of NIFTY. The sector

ROE and ROCE stands at 11.51% and 7.78% respectively. The sector Operating Margin

and PAT Margin stands at 34.41% and 20.19% respectively. NTPC has recorded the

highest margin and ROE & ROCE in the power sector. The dividend payout of the sector

is 27.41%. The sector Debt/ Equity is 0.88 X where Power Grid has the highest leverage

at 1.76 X.

Table 7 – Power sector

Fig.41 – Power demand/ supply scenario

The capacity addition for YTM May 2008 stood at 435MW v/s target capacity addition of

645MW - a shortfall of 210MW. Also, the generation for the period till May 2008 stood

at 120Bus (target of 124Bus) - an achievement of 97%. The base load deficit (all- India)

for first two months of FY09 stood at 10.8%, while peak load deficit stood at 14.4%. The

base load deficit in the Western region, however, stood at 17.3% and peak load deficit

was recorded at 25.7%.

Security Symbol Beta ROE ROCE Debt/Equity Operating

Margin PAT Margin

Dividend Payout %

NTPC 1.11 14.15 11.27 0.52 30.29 20.01 38.38 POWERGRID 1.15 11.21 6.78 1.76 83.24 30.36 30 RELINFRA 1.82 8.9 5.82 0.63 7.85 15.7 14.57 TATAPOWER 1.26 11.77 7.27 0.61 16.27 14.7 26.69

59

The outlook for power utilities is challenging due to: (1) higher interest cost; (2)

execution constraints; and (3) volatile capital markets impacting fund raising plans for

several private sector projects. Besides, there have been delays in terms of land

acquisition, environmental clearances, tight demand-supply for main plant equipment, etc

which have further increased challenges for the sector.

Capacity addition below target, plant shutdown for maintenance and lower reservoir

levels resulted in a moderate 2.5 per cent increase in total power generation during April–

July 2008. Shortage of lignite and gas together with increase in time lag between

syncronisation of plant and commercial operation date also supported slower growth.

However, completion of plant maintenance and higher availability of dry coal post

monsoon together with expectation of a good monsoon is expected to result in a 6.3 per

cent growth in power generation during 2008–09. While thermal power generation

reported a 4.8 per cent increase, hydro power output dipped by 5.4 per cent during April–

July 2008. Decline in water levels at major reservoirs in India led to lower hydel power.

As on 7 August 2008, water levels recorded a sharp 35.3 per cent decline vis–a–vis year

ago levels. However, the situation improved considerably compared to the previous

week. A good rainfall in the coming months will result in higher hydel output. Under the

Indo–US civilian nuclear agreement, India has agreed to place its civil nuclear facilities

under International Atomic Energy Agency safeguards and, in exchange, the United

States agreed to work towards full civil nuclear cooperation with India. This agreement

will enable India meet its goal of adding 25,000 mw of nuclear power capacity through

imports of nuclear reactors and fuel by 2020. On signing the agreement, supply of raw

materials to existing nuclear power plants is likely to increase resulting in higher nuclear

power output. In line with expectation, average power deficit recorded a decline to 8.4

per cent in June 2008 compared to the previous month. Yet, states across India continued

to face acute power cuts. This may either hamper industrial production or may push up

the fuel cost involved in running captive power on account of rise in diesel prices.

60

Fig.42 - Power Generation Statistics

Source: CMIE

FMCG

The FMCG sector could be impacted by rising inflationary pressure. Recent price hikes

by the companies could soften demand growth and trigger down-trading. Strong pricing

power and high switching cost would be the key differentiator, as it would ensure

stability in margins and sustain volume growth. A selective approach, with preference for

companies in packed foods, decorative paints, cigarettes, detergents, IMFL and skin care

is preferred. Key differentiating factors for FMCG companies: (1) high pricing power; (2)

high consumer switching cost; and (3) product innovation.

Retail

Existing retailers would continue to grow topline and attract footfalls, though same-store

sales growth could slow down. Rising competition and entry of new players would

continue to offer bargains to consumers and retain the attraction of organized retail.

61

EBITDA margins are unlikely to expand due to rising lease rentals and manpower costs.

We expect specialty stores to flourish due to committed customers and strong brand

recall. The key differentiating factors for retail companies would be: (1) scale of

operations, and (2) cost control initiatives.

Metals

Metal sector contributes ~ 6% of the total market capitalization of NIFTY. Tata Steel

recorded the highest Operating & PAT Margin in the metal sector whereas Sterlite

Industries recorded the highest Dividend payout in the sector. The Debt/ Equity of the

metal sector stood at 0.51 X where Tata Steel has the highest leverage of 0.66 X.

Table 8 – Metals sector

Fig.43 – Steel production growth

Security Symbol

Market Capitalisation Beta ROE % ROCE

% Debt/ Equity

PAT Margin %

Current Ratio

EPS Rs.

STER 44,929 1.11 9.54 7.68 0.63 7.93 2.47 13.43 SAIL 58,094 1.38 34.07 28.76 0.24 17.96 1.59 18.24 TATASTEEL 47,873 1.1 17.03 11.61 0.66 23.65 3.92 63.62

62

Global crude steel output increased 3.9% to 554m tons during January-May 2008, driven

by 9.7% growth in China, 13.5% in India and 2.9% in the rest of the world (RoW).

China’s moving average total (MAT) growth rate has slowed from 21.5% in May 2007 to

11.2% in May 2008 due to slower capacity addition and closing of ~30m tons of

inefficient capacity, while India’s MAT growth rate has climbed steeply from 9.1% in

May 2007 to 16% in May 2008. China is still the largest contributor to growth and

accounted for 61% of the incremental crude steel production during January-May 2008.

Fig.44 – Coke price trend

Fig.45 – Global Inventory & price trend

63

Aluminium prices on LME are expected to average US$3,000/ton during FY09. Recent

hike in electricity rate in China will increase the cost of production of aluminium there.

Rising energy costs will ensure that aluminium remains firm. Aluminum prices have

increased 7% QoQ to US$2,991/ ton and 7% YoY.

Shortage of raw material – coking coal, iron ore and steel scrap – has shifted the cost

curve of the steel industry upwards and has constrained the global production of crude

steel, resulting in doubling of steel prices in a short span of six months. Integrated steel

producers like Tata Steel and JSPL are the key beneficiaries of this trend. While the costs

of steel producers using the blast furnace route have increased significantly, after 3x

increase in coking coal prices in 2008, the costs of sponge iron based mini steel mills has

not increased in a similar fashion due to use of domestically available coal. Mini mills

like Godawari, Raipur Alloy, Monnet Ispat, Tata Sponge, and Adhunik Metaliks are the

key beneficiaries of this trend.

Steel prices cool off in July

Backed by measures taken by primary steel producers to restrain prices at the dealer

level, average steel prices took a breather in July. On sequential basis, the benchmark hot

rolled coils recorded a 4.5 per cent fall to Rs.45,200 per tonne during the month. Prices of

other flat products like cold rolled coils and galvanised sheets recorded modest declines

of 0.6 per cent and 1.5 per cent, respectively. Rio Tinto, the second largest iron exporter,

reached an agreement with all of its customers in Asia for iron ore deliveries, with price

increases of a whopping 97 per cent. In tandem with global prices, domestic mining

major, NMDC, is pitching in for a substantial price hike in the range of 70–80 per cent

for its ore contracts in 2008–09. The three–month moratorium for holding steel prices

came to end in July 2008. While steel prices would remain stable in the near term, these

are expected to further firm up in phases in 2008–09 on account of mounting cost

pressures.

Healthy cash flows accruing from the buoyancy in steel prices would enable the industry

to service high cost of debt on existing term loans and working capital loans. The share of

big steel companies in total outstanding investments amount to a significant 61 per cent.

64

Most of the steel majors would be able to leverage their strong financial profile to fund

their ongoing projects and secure financial closure for their new projects. We thus do not

perceive rising interest rates as a major concern, which could stall or delay expansions in

the steel industry. Steel demand continued to remain upbeat in 2008–09, with

consumption of finished steel growing by a decent 6.8 per cent during April–May 2008.

However, production of finished steel continued to rise at a tepid pace. Aggregate

production growth during April–May stood at a modest 5.1 per cent.

65

5.3 Company/ Stock Analysis

ABB Ltd.

ABB intends to invest $ 100 million towards capex expenditure in CY08-CY09. It plans

to increase the transformer capacity to 22500 MVA from the current 15000 MVA.

66

ACC Ltd.

The Operating Margin has decreased by 315 bps YoY for April-June quarter 2008 due to

increase in raw material cost and lower realization.

The ROE has increased from 20.77% in FY04 to 34.47% in FY07. The Inventory

turnover has also increased from 6.05x to 6.79 times from FY04 to FY07. The short term

liquidity of the company has remained in the range of 0.80x to 0.95x over the past 4

years. The leverage of the company has reduced significantly and the interest coverage

has increased over the past 4 years. The Dividend % has increased to 200% and the

retention has remained between 62-74% over the past 4 years.

67

Bharti Airtel Ltd.

Revenue grew by 40.65% while PAT grew by 45% YoY for Q1FY09. The revenue has

increased largely on subscriber addition as ARPU has declined.

The ROE for FY08 stood at 31% and the short term liquidity of the company has

remained below 0.60x. The company has not distributed any dividends and thereby

retained its entire earnings with the business. The Financial leverage of the company is

calculated to be 1.06

The company has been assigned the multiple of 22 and based on its FY10E EPS of

Rs.54.60 the price target is Rs.1201.

CMP: Rs.812

EPS (Rs.) P/E Multiple

(x)

Price Target (Rs.)

Potential Upside %

FY08 35.31 23.00 FY09E 44.60 18.21 22 981 FY10E 54.60 14.87 22 1,201 47.93

68

BHEL

Revenue of the company has increased by 32% while PAT recorded a growth of 33%

YoY for Q1FY09. The Net Profit margin recorded 8.17% for Q1FY09.

The ROE of the company has increased significantly from 13% to 25% from FY04 to

FY07. The dividend per share has increased from Rs.6 to Rs.24.50 over the past 4 years.

The order book for the company stood at Rs.85200 crores as on March 2008. During

1QFY09, BHEL bagged orders worth more than Rs100b, including key order of 500MW

at Korba West and two units of 500MW each at Marwa thermal power project worth

Rs33.7b (3*500MW), Gas Turbine based Combined Cycle Power Plant of 1,371MW for

Pragati III worth Rs35.9b, 153MW captive power plant for Bhatinda refinery worth

Rs11.5b and Bokaro TPS of 500MW worth Rs18.4b for Damodar Valley Corporation

(DVC).

69

BPCL

The debt equity of the company has increased from 0.46x to 1.05x in FY07. The dividend

payout of the company has been in the range of 30 to 40% in the last 4 years. The Raw

Material cost stood at 92% of the revenue in FY07 and has gone higher due to sharp

increase in crude oil prices.

70

Cairn India Ltd.

Cipla Ltd.

The EBITDA margin for FY08 stood at 23.06% and the Net Profit margin stood at

16.57%. The Interest coverage of the company has increased from 31x to 73x. P/E stands

71

at 25.53 while P/CEPS is 21.46. Revenue grew 30% while PAT growth has been 16%

YoY for Q1FY09.

CMP: Rs.230


(x)

Price Target (Rs.)

Potential Upside %

FY08 9.01 25.53 FY09E 10.20 22.55 22 224 FY10E 11.60 19.83 22 255 10.96

The company has been assigned a multiple of 22x and based on FY10E EPS of Rs.11.60

price target is Rs.255.

DLF Ltd.

The Operating Margin for the company stood at 55.69% and the net profit margin stood

at 46.82% for FY08. The Interest coverage has increased to 8x in FY08 from 6.12x in

FY04. The stock is trading 38.63x its current EPS of 15.19.

72

Dr.Reddy’s Laboratories Ltd.

Revenue YoY growth and PAT YoY growth for Q1FY09 stood at 48 % and 44 %

respectively. Operating Margin increased by 586 bps YoY and the Net profit margin

stoof at 19.07 % for Q1FY09. Other Income contributed ~ 7% to the sales of the

company for FY08.

CMP: Rs.567


(x)

Price Target (Rs.)

Potential Upside %

FY08 28.26 20.08 FY09E 29.65 19.14 22 652 FY10E 38.94 14.58 22 857 50.93

The company has been assigned a multiple of 22x and based on FY10E EPS of Rs.38.94,

price target of Rs.857 has been set or a 50.93% upside from the CMP of Rs.567.

73

GAIL

Revenue YoY growth and PAT YoY growth for Q1FY09 stood at 34.98 % and 30.89 %

respectively. The Operating Margin & Net Profit Margin for Q1FY09 was 24.42 % and

15.65 % respectively. The interest coverage has increased from 23x to 50x in the last four

years for the company.

CMP: Rs.429


(x)

Price Target (Rs.)

Potential Upside %

FY08 30.76 13.97 FY09E 32.70 13.14 14 458 6.56 FY10E

The company has been assigned a multiple of 14 and based on the FY09E EPS of

Rs.32.70, target of Rs.458 is set or an upside of 6.56% from the CMP of Rs.429.

74

Grasim Industries Ltd.

The Viscose Staple Fibre installed capacity has been increased by 24 % in FY08 to

333,975 TPA. The Grey Cement capacity installed capacity has been increased by 28% to

16.75 MnTPA

CMP: Rs.2045


(x)

Price Target (Rs.)

Potential Upside %

FY08 289.44 7.07 FY09E 296.58 6.90 7 2,076 FY10E 295.15 6.93 7 2,066 1.01

The company has been assigned a multiple of 7 and based on the FY10E EPS of

Rs.295.15, target of Rs.2,066 is set or an upside of 1.01% from the CMP of Rs.2,045.

75

HCL Technologies Ltd.

HCL booked a forex loss of US$ 71.3million, out of which US$31 million was primarily

due to the cancellation of forex hedges worth US$540 million. The company still holds

forex cover of US$ 2 billion spread over the next seven quarters. The forex losses booked

by HCL are the highest in the industry due to which its net profit has declined sharply by

58.8 % (Q-o-Q) standing at Rs.141 crore. Taking out the effect of hedging losses, the

company has shown strong growth of 19.0% (Q-o-Q) in bottomline. Thus, the company

had a good operational performance but hedging losses overshadowed it.

HCL reported EBIT margins at 19.5% with expansion of 123 bps (Q-o-Q). The factors

that contributed to this were higher utilization rate, rupee depreciation, higher realization

and better realization in one of the BPO deals adding 85 bps, 191 bps, 14 bps and 43 bps,

respectively, to margins. However, this was compensated by the dip caused by higher

selling, general & administration cost (SGA), hedging losses, depreciation and shift to

onsite dragging margins by 108 bps, 82 bps, 10 bps and 10 bps, respectively.

76

HDFC Ltd.

The Revenue & PAT YoY growth during Q1FY09 has been at 26.63 % and 25.56 %

respectively. The BV of the company stands at Rs.282.31 per share and the P/BV is

8.32x.

HDFC Bank Ltd.

77

YoY Income growth & PAT growth for Q1FY09 was at 70.36 % and 44.55 %

respectively. The BV of the company is Rs.272.42 per share and is currently trading at

4.56x P/BV.

Hero Honda

The Sales YoY growth and PAT YoY growth stood at -0.60% and 43.74% respectively.

The sales realization reduced YoY due to slowing unit sales as the interest rate have

increased significantly in the past quarter which affected the 2-wheeler demand.

CMP: Rs.837


(x)

Price Target (Rs.)

Potential Upside %

FY08 48.47 17.27 FY09E 53.70 15.59 13 698 FY10E 60.10 13.93 13 781 -6.65

Multiple of 13x has been assigned and on the basis of FY10E EPS of Rs.60.10 a price

target of Rs.781 has been set or a downside of 6.65% from the CMP of Rs.837.

78

Hindalco Industries Ltd.

Sales realization has shown a negative growth of 0.65% YoY during Q1FY09 whereas

PAT growth is due to the growth in Other Income of 72.28%

CMP: Rs.124


(x)

Price Target (Rs.)

Potential Upside %

FY08 24.38 5.12 FY09E 18.95 6.58 6 114 FY10E 18.08 6.90 6 108 -13.04

Multiple of 6x has been assigned and based on the FY10E EPS of Rs.18.08, price target

of Rs.108 has been set or a downside of 13.04% from the CMP of Rs.124.

79

Hindustan Unilever Ltd.

Sales YoY growth & PAT YoY growth for Q1FY09 have been at 21.09 % and 13.20 %

respectively. The other income component decreased by 21.10 % YoY during Q1FY09.

The ROE of the company has increased from 60.88% to 122.52% from FY04 to FY07.

The dividend per share has also increased from Rs.5 to Rs.9.08 from FY04 to FY07.

ICICI Bank Ltd.

80

Idea Cellular Ltd.

The company incurred capex of 5,120 crores during FY08 and the subscriber addition

was up by 71 % to 24 million during FY08. The revenue for the company has grown at

139.17 % and PAT growth has been at 39.43 % during Q1FY09.

Infosys Technologies Ltd.

Revenue growth and PAT growth YoY has increased during Q1FY09 by 27.18 % and

22.76 % respectively. The company is completely debt free and therefore the cost of

81

capital is equal to the cost of debt. The BV is Rs.235.84 per share and the P/BV is 7.46x.

Employee expense is equal to 49.66 % of the Net Sales during FY08.

CMP: Rs.1759


(x)

Price Target (Rs.)

Potential Upside %

FY08 81.26 21.65 FY09E 95.10 18.50 20 1,902 FY10E 104.70 16.80 20 2,094 19.04

Multiple of 20x has been assigned and on the basis of FY10E EPS of Rs.104.70, price

target is Rs.2,094 or a 19.04 % upside from the CMP Rs.1,759.

ITC Ltd.

Revenue grew 17.28 % during Q1FY09 but the PAT grew a negative of 4.37 % YoY for

Q1FY09. The ROE has been above 20 % for the past 4 years. The Dividend payout has

increased from 36.64 % in FY04 to 48.67 % in FY07.

82

CMP: Rs.195


(x)

Price Target (Rs.)

Potential Upside %

FY08 8.28 23.56 FY09E 9.70 20.11 21 204 4.61 FY10E

Multiple of 21x has been assigned and on the basis of FY09E EPS of Rs.9.70, price target

is Rs.204 or an upside of 4.61 % from the CMP of Rs.195.

Larsen & Toubro Ltd.

Revenue growth & PAT growth YoY during Q1FY09 has been at 52.88 % and 33.33 %

respectively. The PAT margin for Q1FY09 was recorded at 7.18 %. The BV is Rs.270.78

per share and the P/BV is 9.99 at CMP of the stock and the Tax rate for FY08 was

32.01%

L&T maintained its guidance of 30-35 % revenue growth and 30 % growth in order

inflow for FY09 despite evidence of slowdown in products business and slower order

inflow from mature businesses. A pick up in order inflow is likely in the domestic oil &

gas segment and from projects in the Middle East.

83

Mahindra & Mahindra

PAT YoY recorded a negative growth of 16.67 % in Q1FY09. The Operating profit

margin reduced by 192 bps to 7.50 % and the Net Profit margin reduced by 166 bps to

4.83 % during Q1FY09. The Ploughback ratio or retained earnings has increased from 68

% to 74 % in FY07.

Maruti Suzuki India Ltd.

84

The company’s domestic sale volume grew lightly more than the industry at 12 %. The

company increased its market share in passenger cars from 51 % to 51.40 %. The

company’s share in A2 segment remains above 58 % and 21.90 % in the A3 segment

while the total market share in the 4=wheeler segment stands at 46 %.

Sales increased 2.91 % YoY while PAT registered a negative growth of 6.76 % during

Q1FY09.

CMP: Rs.695


(x)

Price Target (Rs.)

Potential Upside %

FY08 59.91 11.61 FY09E 67.35 10.33 10 674 FY10E 78.00 8.92 10 780 12.12

Multiple of 10x has been assigned and on the basis of FY10E EPS of Rs.78, price target

is Rs.780 or an upside of 12.12 % from the CMP of Rs.12.12 %.

National Alumunium Company Ltd.

85

Revenue growth was 24.81 % while PAT grew 17.61 % YoY for Q1FY09. The

Operating profit margin reduced by 202 bps to 45.87 % during Q1FY09. The CEPS of

the company is Rs.29.56 and the P/CEPS is 13.29 at CMP of Rs.393. The dividend yield

of the company was 1.91 % and the P/BV is 2.72x.

CMP: Rs.393


(x)

Price Target (Rs.)

Potential Upside %

FY08 25.22 15.61 FY09E 27.50 14.32 14 385 FY10E 33.30 11.83 14 466 18.38

Multiple of 14x has been assigned and on the basis of FY10E EPS of Rs.33.30, the price

target is Rs.433 or an upside of 18.38 % from the CMP of Rs.393.

NTPC

Q1FY09 recorded a growth of 6.35 % in revenue and a negative growth in PAT YoY.

The Operating profit margin reduced by 465 bps to 25.39 % YoY and the net profit

margin reduced by 833 bps to 18.09 % YoY during Q1FY09. The Dividend per share has

increased from Rs.1.39 to Rs.3.20 from FY04 to FY07 and the Debt Equity of the

company has been in the range of 0.42 to 0.52 in the last 4 years.

86

The topline increase saw more contribution from higher realizations, which were at

Rs.1.94 per unit for Q1FY09 and Rs.1.84 in Q1FY08. The coal and gas plants have run at

a plant load factor (PLF) of 92.19% and 67.20% as compared to 94.00% and 77.98%,

respectively for the corresponding quarter. The consumption of coal was also marginally

down to 28.71 million tonnes (MT) against 29.45 MT for the corresponding quarter. PAT

for the quarter excluding previous period sales, forex revaluation, incentives and wage

revision effect has grown by 5.28%. During the first quarter, NTPC has been able to

commission its two plants, one at Sipat with a capacity of 500 MW and other at Bhilai

(JV) of 250 MW. The Kahalgaon plant with a capacity of 500 MW has also become

operational from August 1 2008. In addition to these, NTPC further plans to add 2000

MW of own capacity and 500 MW of JV capacities during the current year itself.

CMP: Rs.178


(x)

Price Target (Rs.)

Potential Upside %

FY08 8.99 19.81 FY09E 10.19 17.48 20 204 FY10E 11.03 16.15 20 221 23.86

Multiple of 20 has been assigned and on the basis of FY10E EPS of Rs.11.03, price target

is Rs.221 or an upside of 23.86 % from the CMP of Rs.178.

87

ONGC

Revenue of ONGC grew at 46.59 % and PAT grew 43.94 % YoY during Q1FY09. The

operating margin improved to 58.42 % and the Net Profit margin stood at 32.97 % during

Q1FY09. The interest coverage has increased from 2.76x in FY04 to 6.70x in FY08.

Power & Fuel cost has been above 60 % of the revenue for the last 4 years. The CEPS

stood at Rs.11.59 and the P/CEPS stood at 13.91x and the dividend yield stood at 2 %.

The P/BV is 2.37x at CMP.

Punjab National Bank

88

Punjab National Bank (PNB) reported its Q1FY09 results, which were in line with our

expectations. The company reported a PAT of Rs 512.4 crore in Q1FY09 against Rs

425.05 crore in Q1FY08 (jump of 21% Y-o-Y). On the core business front, the bank

reported a modest growth of 20% and 21.4% on the advances and deposits, respectively.

The NIMs, on a Y-o-Y basis, have declined by 32 bps to 3.27% due to higher cost of

funds and higher CRR prescription. There was also a significant improvement on the

asset quality front as NNPAs have come down to 0.63% in Q1FY09 from 0.98% in

Q1FY08.

89

Power Grid Corporation

The ROE of the company has improved from 8.77 % to 11.21 % from FY04 to FY07

while the current ratio reduced from 1.05x to 0.54x during the same period. The retention

ratio has stayed above 70 % from during FY04 to FY07. For Q1FY09, revenue grew at

32.66 % while PAT declined by 32.31 % primarily due to increase in interest expense.

The Operating profit margin remains high at 82.54 % while PAT margin is at 23.66 % for

Q1FY09.

Ranbaxy Laboratories

90

Sales increased 18.45 % and PAT growth was recorded at 18.45 % and -91.85 %

respectively during Q1FY09. Multiple of 22x has been assigned and based on the FY10E

EPS of Rs.22.70, price target of Rs.499 has been set or a 8.71% upside from the CMP of

Rs.459

CMP: 459


(x)

Price Target (Rs.)

Potential Upside %

FY08 15.86 28.97 FY09E 18.77 24.48 22 413 FY10E 22.70 20.24 22 499 8.71

Reliance Industries Ltd.

Multiple of 19x has been assigned and based on the FY10E EPS of Rs.165.20, price

target of Rs.3,139 has been set or a 50.71% upside from the CMP of Rs.2,082.

91

CMP: Rs.2082


(x)

Price Target (Rs.)

Potential Upside %

FY08 105.40 19.76 FY09E 113.60 18.33 19 2,158 FY10E 165.20 12.61 19 3,139 50.71

Reliance Communications Ltd.

RCom’s broadband business grew by 56 % in FY08 whereas ARPU sharply declined as

compared to peers. Rcom had 5.26 crore subscribers as on July 2008 and 30295 towers

by end-June 2008.


of Rs.560 has been set or a 40.41% upside from the CMP of Rs.399.

CMP: Rs.399


(x)

Price Target (Rs.)

Potential Upside %

FY08 24.97 15.98 FY09E 30.27 13.18 15 454 FY10E 37.35 10.68 15 560 40.41

92

Reliance Infrastructure Ltd.

Multiple of 22x has been assigned and based on the FY10E EPS of Rs.47, price target of

Rs.1,034 has been set or a 1.48% upside from the CMP of Rs.1,018.

CMP: Rs.1018


(x)

Price Target (Rs.)

Potential Upside %

FY08 45.68 22.31 FY09E 47.50 21.45 22 1,045 FY10E 47.00 21.68 22 1,034 1.48

93

SAIL



CMP: Rs.137


(x)

Price Target (Rs.)

Potential Upside %

FY08 18.24 7.52 FY09E 20.60 6.66 7 144 4.92 FY10E

94

Satyam Computers Ltd.

Satyam Computers delivered an 8.5% Q-o-Q growth in topline at Rs.2621 crore, in line

with our estimate of Rs.2620 crore. EBITDA margins at 24.12% improved 133 bps ahead

of our expectation of 60 bps improvement. The big surprise was the company’s net profit

performance, which grew by 17% Q-o-Q to Rs 548 crore. The business mix of the

company safeguards the company, relative to its peers, from the impending financial

crises in the US (Satyam has the least exposure to the BFSI segment compared to TCS

and Infosys). The company has also had some significant deal wins this quarter, which

further re-iterate our confidence as one of the best picks in the sector.

95



CMP: Rs.421


(x)

Price Target (Rs.)

Potential Upside %

FY08 24.71 17.04 FY09E 30.40 13.85 15 456 FY10E 33.12 12.71 15 497 17.98

State Bank of India

96

Siemens Ltd.

Sterlite Industries Ltd.

Recent restructuring of the existing business of Sterlite in power, zinc, copper and

alumunium is value-neutral as the arrangement requires that for every four shares held in

Sterlite, seven shares of MALCO (Madras Alumunium) will be given. Acquisition of

97

Konkola mines in Zambia and American Smelting and Refining company (ASARCO)

will result in value creation.

CMP: Rs.514


(x)

Price Target (Rs.)

Potential Upside %

FY08 66.00 7.80 FY09E 61.90 8.32 7 433 FY10E 71.69 7.18 7 502 -2.50

Sun Pharmaceuticals Ltd.


of Rs.1,688 has been set or a 10.12% upside from the CMP of Rs.1,513.

CMP: Rs.1513


(x)

Price Target (Rs.)

Potential Upside %

FY08 48.12 31.44 FY09E 66.70 22.68 25 1,668 10.12 FY10E

98

Suzlon Energy Ltd.



CMP: Rs.234.75


(x)

Price Target (Rs.)

Potential Upside %

FY08 7.43 31.59 FY09E 12.35 19.01 20 247 5.22 FY10E

99

Tata Communications

Tata Motors

100

Tata Power Company Ltd.

Tata Steel Ltd.

Coking coal prices and iron ore prices have increased by 100 % and 60 % respectively

which is pushing the increase in prices. Corus is expected to produce 21 mt in FY09

while Tata Steel’s domestic production will increase by 0.8 mt to 5.7 mt in FY09.

101

Tata Consultancy Services Ltd.

Tata Consultancy Services once again delivered muted growth of 5.9% (q-o-q) as

compared to our expectation of 6.64% (q-o-q). Bottom line registered a de-growth of

0.9% compared to our expectation of flattish growth. The revenues for the quarter stood

at Rs 6411 crore and bottomline was at Rs 1243 crore. The muted performance was

attributable to certain client specific issues faced by the company. EBDITA margins at

23.89% saw a drop of 113 bps compared to our expectation of 61 bps drop. The

performance, we believe re-iterates our view of short-term concerns regarding client

spend and delays in project ramp-ups. On the positive side however, the company closed

12 large deals this quarter out of which 3 deals were in the range of $75 -$100 million.

We are confident of the delivery capability of the company, a healthy deal pipeline also

provides comfort regarding future growth visibility.


of Rs.1,042 has been set or a 22.41% upside from the CMP of Rs.850.

102

CMP: Rs.850


(x)

Price Target (Rs.)

Potential Upside %

FY08 51.36 16.57 FY09E 59.10 14.40 16 946 FY10E 65.10 13.07 16 1,042 22.41

Unitech Ltd.

103

Wipro Ltd.



CMP: Rs.431


(x)

Price Target (Rs.)

Potential Upside %

FY08 22.15 19.50 FY09E 26.73 16.16 16 428 FY10E 29.90 14.44 16 478 10.77

104

Zee Entertainment Ltd.



CMP: 226.05


(x)

Price Target (Rs.)

Potential Upside %

FY08 8.77 25.78 FY09E 10.69 21.15 20 214 FY10E 13.55 16.68 20 271 19.88

105

CONCLUSION

106

6.1 Conclusion

The GDP growth for 2008-09 is seen between 7.50 % - 8.00 %. The US$/ Rs. Foreign

exchange rate for CY2009 is estimated to be around Rs.43 to a dollar. 60 % of the

respondents view inflation returning to single digit by January 2009. Crude oil is

expected to consolidate in the range of $100 - $120/ bbl during CY2009. The historical

average of NIFTY P/E is 17.4 and the current P/E of NIFTY stands at 18.43 as on 29-

August 2008. The macroeconomic factors suggest NIFTY P/E to remain above the

historic average of 17.4x for CY2009. Current NIFTY P/BV of 3.83 x as on 29-August

2008 is below the historical average of 3.89 x. Among the sectors, banking sector looks

most positive followed by Oil & Gas and Capital goods sector. The β of banking sector is

1.1 which is relatively lower than the β of 1.3 of the Power sector and higher than β of

0.45 of the Pharma sector. Sugar sector & Fertilizer sector appears weak over a horizon

of more than 1 year. The stock upside is seen in Reliance Industries (50.93%), Bharti

Airtel (47.93%) and NTPC (23.86%) over the next 12-18 months from September 2008.

Fig.46 – NIFTY P/E & P/BV trend

NIFTY P/E & P/B

0

5

10

15

20

25

30

Jan-02

Jul-02

Jan-03

Jul-03

Jan-04

Jul-04

Jan-05

Jul-05

Jan-06

Jul-06

Jan-07

Jul-07

Jan-08

Jul-08

P/E

P/B

107

Table – Company Valuations consolidated

Company CMP Rs.

FY09E EPS

FY10E EPS

Multiple x

Target Rs. Upside

Bharti Airtel 812 44.60 54.60 22 1,201 47.93% Cipla 230 10.20 11.60 22 255 10.96% Dr.Reddy's Laboratories 567 29.65 38.94 22 857 50.93% GAIL Ltd. 429 32.70 14 458 6.56% Grasim Industries 2,045 296.58 295.15 7 2,066 1.01% Hero Honda 837 53.70 60.10 13 781 -7.00% Hindalco Industries 124 18.95 18.08 6 108 -13.04% Infosys Technologies 1,759 95.10 104.70 20 2,094 19.04% ITC Ltd. 195 9.70 21 204 4.61% Maruti Suzuki India Ltd. 695 67.35 78.00 10 780 12.12% NALCO 393 27.50 33.30 14 466 18.38% NTPC 178 10.19 11.03 20 221 23.86% Ranbaxy Laboratories 459 18.77 22.70 22 499 8.71% Reliance Industries 2,082 113.60 165.20 19 3,139 50.71% Reliance Communications 399 30.27 37.35 15 560 40.41% Reliance Infrastructure 1,018 47.50 47.00 22 1,034 1.48% SAIL 137 20.60 7 144 4.92% Satyam Computers 421 30.40 33.12 15 497 17.98% Sterlite Industries 514 61.90 71.69 7 502 -2.50% Sun Pharmaceuticals 1,513 66.70 25 1,668 10.12% Suzlon Energy 234 12.35 20 247 5.22% TCS 850 59.10 65.10 16 1,042 22.41% Wipro 431 26.73 29.90 16 478 10.77% Zee Entertainment 226 10.69 13.55 20 271 19.88%

Based on the fundamental analysis, the potential upside has been projected as seen in the

table. The valuations are subject to market risks and other systematic & unsystematic

risk.

Fig.47 – Sector Beta

SECTOR BETA

Auto

Banking

IT

Construction

Power

FMCG

Pharma

0

0.2

0.4

0.6

0.8

1

1.2

1.4

1.6

108

6.2 Bibliography

1. Corporate Finance 2e – Aswath Damodaran

2. Investment Analysis & Portfolio Managemen 8e – Reilly/ Brown

3. Financial Management 7e – Prasanna Chandra

4. Grahan and Dodd’s Security Analysis 5e – Cottle/ Murray/ Block

5. Financial Management – Khan & Jain

6. India Strategy – Enam Research

7. India Strategy – Motilal Oswal Research

8. Research reports – ICICI direct

9. www.icicidirect.com

10. www.moneycontrol.com

11. www.myiris.com

12. www.nseindia.com

13. finmin.nic.in

14. www.cmie.com

15. www.wrtg.com

109

APPENDICES

110

7.1 Thesis Synopsis

• Student details:

Name: APURVA PRASAD

Batch: PGP/06-08/FW

Specialization: Finance & Marketing

Phone No.: +91-9967293901

E-mail: [email protected]

• Area of Research: Corporate Finance

• Title of the Thesis: “To study & analyze Corporate Financing and

Corporate Valuation of Indian firms”

• Premise: S&P CNX-500/ Nifty-50

• Literature: Financial Management – Prasanna Chandra

Financial Management – M.Y.Khan & P.K.Jain

• Scope of thesis:

o Corporate Financing & Leverage of S&P CNX-500/ Nifty (Internal,

External).

o Capital Structure analysis of S&P CNX-500/ Nifty (EBIT-EPS/ ROI-ROE

analysis).

o Corporate Valuation & Risk/ Return of S&P CNX-500/ Nifty (valuation

models).

• Research Methodology:

o Primary Research: Data mining, Interview (Qualitative)

111

o Desk Research: Published Texts, documents, Internet.

• Relevance/ Importance of selected Research topic:

The role of financial system in mobilizing and allocating the resources for capital

formation has been well established by many studies. In this paper, an attempt has

been made to understand the financing pattern of Indian companies represented

by S&P CNX-500/ Nifty-50. Corporate valuations play a major role in

determining long term growth of an economy; therefore the thesis also intends to

focus on corporate valuation aspects of the Indian companies.

An empirical study on S&P CNX-500/ Nifty-50 with postulation that it qualifies

to infer on Indian companies since S&P CNX-500 stands for >90% market

capitalization of all listed companies in India; Nifty-50 contributes ~ 60% market

capitalization of all listed companies in India.

• Details of the External Guides

� Guide-1

o Name: Prof. R.C.M.Pendyala

o Designation: Visiting Faculty, IIPM Mumbai

o Qualification: MBA, AICWA

o Contact no: +91-9820356445

� Guide-2

o Name: Mr.Manoj Agarwal

o Designation: Head, Retail Clients,

Inventure Growth & Securities Ltd.

o Contact no: +91-9820719589

112

7.2 Response Sheets

RESPONSE SHEET # 1 Name: APURVA PRASAD

ID No.: IIPM/ FW/ 06-08/ MUM/ FIN/ 043

Progress of Thesis:

I have prepared the financial modeling format in excel which includes ratio analysis,

margin analysis and valuations for Nifty 50.

I have also been referring to Literature on Financial Analysis & Financial Management

Reference:

• Security Analysis – Graham & Dodd

• Financial Management – Prasanna Chandra

• Investment Analysis & Portfolio Management – Reilly Brown

• NSE Research Papers

P.S. Excel Fin Model attached with mail.

113

RESPONSE SHEET # 2

Name: APURVA PRASAD


Progress of Thesis:

I have secured data and analyzed it using the financial model prepared by me.

I have prepared the financial modeling format in excel which includes ratio analysis,

margin analysis and valuations for Nifty 50.

I have also been referring to Literature on Financial Analysis & Financial Management

Reference:

• Corporate Finance – Aswath Damodaran





P.S. Updated Excel Fin Model attached with mail.

114



Progress of Thesis:

• I’ve completed financial data mining for NIFTY-50 companies using excel

modeling.

• I’ve also identified important macroeconomic triggers and I’m working on

analysis of macroeconomic triggers viz Monetary measures, Inflation & Fiscal

structure, Forex & Debt market, Capital movement & Global economy.

• I have also been referring to Literature on Financial Analysis & Financial

Management.

Reference:






P.S. Consol financials & Updated Excel Fin Model attached with mail.

115



Progress of Thesis:

• I’ve prepared the draft & financial valuation of the NIFTY companies.

• I will frame the questionnaire and conduct the qualitative interview next.

Reference:






P.S. draft thesis attached

116



Date when Guide was consulted: 20-09-2008

Progress of Thesis:

• Received approval of thesis draft from guide as well as structural & contextual

approval.

• Formatting of the content

Reference:






117

7.3 Thesis Questionnaire 1. Indian GDP will grow at _____ % during 2008-09.

a) < 7 % b) 7-7.50 % c) 7.50-8.00 % d) > 8%

2. $ / Rs. will sustain _______ for CY2009.

( 37 ___ ___ 40 ___ ___ ___ ___ 45 ___ ___ 48 )

3. Inflation will reach single digits by ___________.

a) November 2008 b) January 2009 c) March 2009 d) May 2009

4. Crude oil will sustain _______ levels for CY2009.

a) < $ 80/bbl b) $ 80-100/ bbl c) $100-120/bbl d) >$120/bbl

5. Corporate earnings of the index companies are expected to grow at _____% for

FY09.

a) <15% b) 15-17% c) 17-19% d) >19%

6. My view on the following sectors for investment horizon of 1- 2years:-

(0- Underweight; 10- Overweight)

Pharma & Healthcare: 0 __ __ __ __ 5 __ __ __ __ 10 Information Technology: 0 __ __ __ __ 5 __ __ __ __ 10 Automobile: 0 __ __ __ __ 5 __ __ __ __ 10 Banking: 0 __ __ __ __ 5 __ __ __ __ 10 Real Estate: 0 __ __ __ __ 5 __ __ __ __ 10 Capital Goods: 0 __ __ __ __ 5 __ __ __ __ 10 Power: 0 __ __ __ __ 5 __ __ __ __ 10 Cement: 0 __ __ __ __ 5 __ __ __ __ 10 Fertilizer: 0 __ __ __ __ 5 __ __ __ __ 10 Sugar: 0 __ __ __ __ 5 __ __ __ __ 10 Shipping: 0 __ __ __ __ 5 __ __ __ __ 10 Oil & Gas: 0 __ __ __ __ 5 __ __ __ __ 10 Media & Entertainment: 0 __ __ __ __ 5 __ __ __ __ 10 Name: Designation/ Dept.: Organization: Contact No.:

my thesis

Documents

research topic

comprehensive thesis

credit growth trend

fundamental research

equity research

research tool

deposit growth trend

management mumbai thesis