1. October 2011
India Strategy
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Shaping up
Research Team (Rajat@MotilalOswal.com)
2. India Strategy | Shaping up
Contents
Section A: India Strategy - Shaping up ....................................................................................... A–1 to 41
Section B: 2QFY12 Highlights & Ready Reckoner .................................................................. B–1 to 12
Section C: Sectors & Companies ............................................................................................ C–1 to 200
1. Automobiles 2-9 Oriental Bank 71 Cairn India 135
Bajaj Auto 5 Power Finance Corporation 72 Chennai Petroleum 136
Hero Honda 6 Punjab National Bank 73 GAIL 137
Mahindra & Mahindra 7 Rural Electricfication 74 Gujarat State Petronet 138
Maruti Suzuki India 8 Shriram Transport 75 HPCL 139
Tata Motors 9 South Indian Bank 76 IOC 140
2. Capital Goods 10-24 State Bank 77 Indraprastha Gas 141
ABB 16 Union Bank 78 MRPL 142
BGR Energy 17 Yes Bank 79 ONGC 143
BHEL 18 Petronet LNG 144
6. Healthcare 80-98 Reliance Industries 145
Crompton Greaves 19
Aventis Pharma 83
Cummins India 20 11. Real Estate 146-156
Biocon 84
Havells India 21 Anant Raj Industries 150
Cadila Healthcare 85
Larsen & Toubro 22 DLF 151
Cipla 86
Siemens 23 HDIL 152
Divi’s Laboratories 87
Thermax 24 Mahindra Lifespaces 153
Dishman Pharma 88
3. Cement 25-34 Dr Reddy’s Labs. 89 Oberoi Realty 154
ACC 28 GSK Pharma 90 Phoenix Mills 155
Ambuja Cement 29 Glenmark Pharma 91 Unitech 156
Birla Corporation 30 Jubilant Organosys 92 12. Retail 157-163
Grasim Industries 31 Lupin 93 Jubilant Food 160
India Cements 32 Opto Circuits 94 Pantaloon Retail 161
Shree Cement 33 Ranbaxy Labs. 95 Shoppers Stop 162
UltraTech Cement 34 Strides Acrolab 96 Titan Industries 163
4. Consumer 35-49 Sun Pharmaceuticals 97
Asian Paints 38 Torrent Pharma 98 13. Technology 164-175
Britannia Industries 39 Cognizant Technology 168
7. Infrastructure 99-107 HCL Technologies 169
Colgate Palmolive 40
Gammon India 102 Infosys 170
Dabur India 41
Hindustan Construction 103 MphasiS 171
GSK Consumer 42
IVRCL 104 Patni Computer 172
Godrej Consumer Products 43
Jaiprakash Associates 105 TCS 173
Hindustan Unilever 44
Nagarjuna Construction 106 Tech Mahindra 174
ITC 45
Simplex Infrastructure 107 Wipro 175
Marico 46
Nestle India 47 8. Media 108-116 14. Telecom 176-184
Pidilite Industries 48 Deccan Chronicle 112 Bharti Airtel 181
United Spirits 49 HT Media 113 Idea Cellular 182
5. Financials 50-79 Jagran Prakashan 114 Reliance Communication 183
Andhra Bank 55 Sun TV Network 115 Tulip Telecom 184
Axis Bank 56 Zee Entertainment 116
Bank of Baroda 57 15. Utilities 185-199
Bank of India 58 9. Metals 117-129 Adani Power 189
Canara Bank 59 Hindalco 121 CESC 190
Dewan Housing 60 Hindustan Zinc 122 Coal India 191
Federal Bank 61 Jindal Steel & Power 123 JSW Energy 192
HDFC 62 JSW Steel 124 Lanco Infratech 193
HDFC Bank 63 Nalco 125 NHPC 194
ICICI Bank 64 Sesa Goa 126 NTPC 195
IDFC 65 SAIL 127 Power Grid Corp. 196
Indian Bank 66 Sterlite Industries 128 PTC India 197
IndusInd Bank 67 Tata Steel 129 Reliance Infrastructure 198
ING Vysya Bank 68 Tata Power 199
10. Oil & Gas 130-145
LIC Housing Finance 69 16. Others 200
BPCL 134
M & M Financial Services 70 United Phosphorus 200
Note: All stock prices and indices for Section C as on 26 September 2011, unless otherwise stated
3. October 2011
India Strategy
BSE Sensex: 15,865 S&P CNX: 4,772 As on: 4 October 2011
Shaping up
Valuations have slimmed ... but are they attractive yet?
Backdrop: A tale of two markets
In September 2010, Indian markets were in a euphoric mood. Sensex was at a new high
of 20,500, Sensex P/E at 18.5x (rolling 12-month forward) was almost at 25% premium
to long-period average (15-year), and CY10 net FII flow at USD29b was an all-time high.
By September 2011, Indian market is down 18%, and figures among the worst performing
global markets. Fund flow has dried up (nil net FII flow in YTD CY11), cash traded volumes
are down 39%, and valuations are 10% below long-period averages. Looking back, it was
almost as if the markets had added excess flab of optimism, and required a series of
work-outs to get back into shape.
Work-out #1 Dumb-bells of rising inflation and catch-up rate hikes
Inflation is at a 13-month high, but a cool-off is on the cards as QE-II impact is
wearing off on global commodities and global growth outlook is moderating.
Repo rates are at 36-month high; expect rates to peak out in 3QFY12 and start
easing as inflation cool-off would lead to real interest rates going well above LPA.
Impact #1: Sharp impact to earnings and valuations of interest-rate sensitives
e.g. Financials, Autos, Infrastructure.
Work-out #2 Treadmill of policy and political headwinds
Over the last one year, policy and political headwinds appeared in three broad forms -
1. Unearthing of a series of scams;
2. "Policy holiday" with little or no progress on key reforms such as FDI in multi-brand
retail and insurance, lowering of oil subsidy through diesel/LPG price hikes, GST
resolution, large infra projects etc.
3. Likely fiscal failure due to no/lower disinvestment proceeds and slowing down of
revenue collections.
Impact #2: PSU valuations downgraded; capex and infrastructure related sectors
and companies hurt.
Work-out #3 Weight-training of global headwinds
In the last 12 months, Indian markets have directly and indirectly borne the brunt of
several global headwinds. The major ones among them are -
1. US: QE-II, political deadlock over government debt ceiling, rating downgrade
2. Euro zone: Sovereign debt crisis
3. Global growth slowdown.
Impact #3: FII flows plunge, INR goes into a tailspin, global plays derated.
Work-out #4 Cycle of earnings downgrade
Since 2QFY11, Sensex EPS for FY12 has been downgraded by 9% and for FY13 by
10%. We now expect FY12 earnings growth of 11.8% and for FY13 at 16.9%.
Earnings downgrade cycle has continued in 2QFY12 as well, with FY12 earnings
down 1% and FY13 down 2.8%.
Sources of exhibits in this section include RBI, CMIE, Bloomberg, IMF, UN, Rogers International, Industry, Companies,
and MOSL database
October 2011 A–1
4. India Strategy | Shaping up
The key contributors to FY12 earnings downgrades since 2QFY11 are: SBI (35%),
ONGC (14%), NTPC (13%), Bharti (12%), etc. Earnings upgrades contributors are
TCS (12%) and Reliance (11%).
Impact #4: Market P/E is down 28% YoY, and is at a discount to adjusted LPA.
Valuations below historical averages, risk-reward favorable
Indian market 12-month forward PE at 13.3x and 12-forward P/B at 2.4x are at 10%
below the respective 15-year average valuations.
Indian valuation contraction has coincided with 1] a rate tightening cycle led by high
and persistent inflation 2] pressure on margins coupled with high interest rates driving
down RoE to 18% from historical average of over 20% 3] economic slowdown partly
contributed by government indecision and governance issues 4] earnings downgrade
cycle with FY12 earnings being downgraded by 9% in the past 4 quarters.
We believe that most of the negatives on the domestic side have largely played out
with inflation and interest rates expected to peak in 3QFY12. Also, we expect the
GDP and corporate earnings downgrade cycle to be largely complete.
Any further risk / downside to valuations now emanate largely from global factors.
The historical low valuations (PE of 9-11x and P/B of 1.6-1.7x) have followed global
events that drove large-scale risk aversion like the 9/11 and the global financial crisis
post the collapse of Lehman.
2QFY12 Earnings Preview - Another slow quarter
2QFY12 earnings will be reported amidst an adverse macro backdrop. Interest rates are up
further 50-75bp during the quarter, demand continued to weaken in domestic economy and
India rupee depreciated by ~10% against the USD. Key highlights of the earnings season:
Aggregate (ex RMs) Sales growth 20.9%, EBIDTA growth 11.7%, PAT growth 9.7%.
EBIDTA margin will contract 190bp YoY to 23.6% (2nd lowest in last 8 years), PAT
margin will contract 120bp YoY to 12.7% (lowest in last 8 years)
Number of companies in our Universe with growth rates of over 30% is the lowest at
19%, while percentage of companies with YoY decline is at a 8 quarter high of 33%.
Top 3 contributors to aggregate earnings are Financials, Oil & Gas and Metals, accounting
for 57% of the 2QFY12 earnings.
Sectors with strong YoY PAT growth include Cement (67% YoY due to low base effect),
Private Banks (+23% YoY) and Oil & Gas (excl. RMs) 21% YoY.
FMCG, Private Banks and Retailing are the only 3 sectors where all companies will
report earnings growth.
Sectors with disappointing / muted growth are PSU Banks, Telecom, Autos. Telecom
with a decline of 44% shaves off 200bp from aggregate growth.
Investment strategy
We believe the markets, led by uncertainty and fear, have gone through a significant
correction over the last one year to make them attractive for long-term investing. Earnings
downgrade cycle is arguably in its last leg, and this, along with below-average valuations,
Strategy provide cushion.
Navin Agarwal
In our model portfolio, we have raised weights on stocks where valuations now trade
Navin@MotilalOswal.com
below long-term averages while our outlook remains positive on them. Our top bets are
Rajat Rajgarhia
Rajat@MotilalOswal.com Infosys / HCL Tech, Bharti / Idea, SBI / Axis Bank, Hero Motocorp / Tata Motors,
Economist NTPC, Cipla. We have also allocated weights to several mid-caps across sectors
Dipankar Mitra (Financials, Pharma, Infrastructure, Real Estate, etc), where we believe return potential
Dipankar.Mitra@MotilalOswal.com could be significant.
October 2011 A–2
5. India Strategy | Shaping up
Shaping up: Backdrop
A tale of two markets - Sep-2010 and Sep-2011
Market #1 (September 2010): In less than two years post the 2008 global crisis,
Indian markets were in a euphoric mood. In September 2010, benchmark indices were
at near highs with Sensex at 20,500 levels. Sensex P/E at 18.5x (rolling 12-month
forward) was at a 25% premium to averages. FII inflows were USD19.3b in 9MCY10.
Market #2 (September 2011): Since September 2010, the Indian market has been
down 18%, and figures among the worst performing global markets. Sensex PE at
13.3x (rolling 12-month forward) is at a 10 % discount to averages while FII outflows
are USD0.2b in 9MCY11.
India among worst performing markets Multiple sectors underperform Stock divergence up since Sep-10
S&P 500 12-month returns -1 Real Estate -53 DLF-42
Metal -35 SBI -41
South Korea -6 Jaiprakash -40
Utilities -34
Tata Steel -36
Japan -7 Banks(PSU) -33 BHEL -34
Engineering -33 L&T -34
UK -8
BSE Midcap -24 Hindalco -33
Russia -11 Sterlite -32
Oil -19
Sensex -18
Taiw an -12 Sensex -18
Bharti 3
Banks(Pvt) -15 Bajaj Auto 4
India -18
IT -11 Hero Moto 5
MSCI EM -18 Auto -11 HUL 10
ITC 11
Telecom -3
Brazil -25 TCS 12
Pharma -2 SunPharma 14
China -28 16
FMCG 5 M&M
All returns in local currency
Fund flows slump: Against CY10 net FII inflow of USD29b, the YTD CY11 figure is
virtually nil. In fact, the quarter ending September 2011 saw net FII flows turning negative
after nine successive quarters of positive inflow. Total FII+DII flows are down from
USD24b in CY10 to USD5b in YTD CY11 (lowest in several years).
Fund flow into Indian markets falls sharply… … Negative FII flows in 2QFY12 after 9 positive quarters
Net FII Flow s (USD b) Net DII Flow s (USD b) Net FII Flow s (USD b) Net DII Flow s (USD b)
5 5 1 2
0
29 3 1 13
3 2 10
4 18 17 18 7 7 1
6 6 5
11 4 5 4 1
9 8 3 3 2 2 2 2
5 1
-1 -2 0
-5 -0.2 -3 -3 -2 -3 -1
-12 -5
Dec-10
Jun-11
Jun-09
Dec-09
Jun-10
Mar-10
Mar-11
Dec-07
Jun-08
Dec-08
Mar-08
Mar-09
Sep-09
Sep-10
Sep-11
Sep-07
Sep-08
CY04
CY05
CY06
CY07
CY08
CY09
CY10
CY11
YTD
October 2011 A–3
6. India Strategy | Shaping up
Primary markets down in line with secondary market sentiments: As of September
2011, aggregate market cap was USD1.6 trillion, down 23% YoY. In line with the secondary
market fall, for the 12 months ending September 2011, fund raising in the primary market
was down 30% over that a year earlier. IPOs and rights issue collections held up, but
private placements and overseas fund raising were down a combined 67%. Coal India and
Power Grid alone accounted for 40% of primary market issuance in last 12 months.
Market cap down 23%; USD1b club members down 17% Fund raising down 30%; Private, overseas placements
down 67%
1,597 214 Domestic (IPO + Rights) QIP Overseas (ADR/GDR/ FCCB)
(INR b)
234 1,000
<1 178 929
1,229 -23%
117
316 797
1-5 200 -15%
146 267 71 305 694
280 1-5 33
5-10 272 -14% 128 167 576
133 105
171 5-10 133
10-20 183 -34%
199 +16% 10-20 236 578 556
20 + 39 529 559
597 25
-37% 20 +
374 12 206
14
17 11
Sep 10 Sep 11 Sep 10 Sep 11 2007 2008 2009 2010 2011
12-months ending September
Mark et Cap (USD b) No of Companie s
Volumes and valuations plunge: The market mood is reflected in traded volumes (cash
volumes), which were about 39% lower than they were a year earlier. Market valuations
were down 28% from September 2010 levels, and are currently close to their lows, duly
adjusted for extraordinary events (Elections 2004 and Global financial crisis 2008).
Market volumes down 39% over corresponding volumes in September 2010
Daily Avg Cash Volume (BSE + NSE) INR b
Volumes are 39% lower
245 than Sep-10 levels
250 228
200
138
128
150
100
50
0
Oct-09
Mar-10
Oct-10
Mar-11
Nov-09
Dec-09
Jan-10
Feb-10
May-10
Jun-10
Jul-10
Nov-10
Dec-10
Jan-11
Feb-11
May-11
Jun-11
Jul-11
Sep-09
Sep-10
Sep-11
Apr-10
Aug-10
Apr-11
Aug-11
October 2011 A–4
7. India Strategy | Shaping up
8-year Sensex P/E (12-month forward): Valuations are down 28% YoY
NDA Global
30
out of financial
power 24.6 crisis
24
8-year avg 16x (ex events) against
15.4x including events 18.5
18
12 13.3
8 year low 12x (ex events)
10.3 10.7
against 10.3x incl events
6
Mar-04
Mar-05
Mar-06
Mar-07
Mar-08
Mar-09
Mar-10
Mar-11
Sep-03
Sep-04
Sep-05
Sep-06
Sep-07
Sep-08
Sep-09
Sep-10
Sep-11
Work-outs and impact
We have analyzed the major events that caused the September 2011 market story to be
starkly different from the September 2010 version. Looking back, it was almost as if the
markets added excess flab of optimism and required a series of work-outs to get back into
shape. These work-outs came in various forms and took their toll on various sectors and
benchmark heavyweight stocks.
Work-out #1: Dumb-bells of rising inflation and catch-up rate hikes
Impact #1: Sharp hit to earnings and valuations of interest-rate sensitive stocks
such as Financials, Autos & Infrastructure.
Work-out #2: Treadmill of government and governance failure
Impact #2: PSU valuations downgraded; Capital goods, infrastructure-related
sectors and companies hurt.
Work-out #3: Weight-training of global headwinds
Impact #3: Global plays like commodities, IT and Tata Motors de-rated.
Work-out #4: Cycle of earnings downgrades
Impact #4: Indian market valuations gradually de-rated to below LPA.
October 2011 A–5
8. India Strategy | Shaping up
Work-out #1 Dumb-bells of rising inflation and catch-up rate hikes
Inflation at 13-month high led by QE-II; expect easing hereon
After hitting a 20-month high of 10.9% in April 2010, inflation eased until November 2010.
The high base of FY11 caused markets to factor in 6-7% inflation in FY12. However,
November 2010 was an inflection point with inflation rebounding to a 13-month high of
9.8%. This trend reversal was due to:
(1) QE-II led rising global commodities including crude; and
(2) Continued uptrend in domestic food inflation despite record foodgrain production.
November 2010 was the inflection point for inflation … … mainly led by QE-II driven global commodity prices
Actual Inflation (%) MOSL Est Avg FY12 Inflation (%) Rogers Index Chg in INR YoY (%)
40 Non food Inflation - 1M Lag (%) - RHS 11
10.9
10.5 30 10
10.310.0 9.7 9.6 9.5 9.8
9.4 9.5 9.5 9.7 9.2 QE-II im pact
8.9 9.0 9.1 20 9
8.2
10 8
8.4 8.4 8.4 8.4
8.0 8.0
0 7
6.5 6.5 6.5 6.5
-10 6
May-10
Oct-10
Jun-10
Jul-10
Nov-10
Dec-10
Jan-11
Feb-11
Mar-11
May-11
Jun-11
Jul-11
Sep-10
Apr-10
Aug-10
Apr-11
Feb-11
May-10
Jun-10
Jul-10
Oct-10
Nov-10
Dec-10
Jan-11
Mar-11
May-11
Jun-11
Jul-11
Sep-10
Apr-10
Aug-10
Apr-11
Aug-11
The Rogers International Commodity Index is a composite, USD based, total return index and represents the
value of a basket of commodities consumed in the global economy, ranging from agricultural to energy and
metal products.
Cool-off on the cards
The equations described above are however, changing fast, led by international price trends.
After the end of QE-II, we are seeing a rapid decline in commodity prices, (1) hastened by
global growth concerns, and (2) reinforced by uncertainties in the financial markets. The
latest measure, Operation Twist, is unlikely to be a game-changer in this respect as it only
aims to flatten the yield curve while leaving overall money supply unchanged.
Even if international commodity prices hold at the current level, it would imply YoY Rogers
Index would come crashing to -7% by the end of March (Rogers Index converted in INR
terms to factor currency movement). This is bound to be reflected in Indian inflation as
well. We expect domestic inflation to fall to 7% by the end of March 2012 and ~6% by the
end of June 2012 in the normal course. However, this moderation can be significantly
quickened by softening international commodity prices. Inflation could be half our envisaged
level by June 2012 if domestic prices also moderate synchronously, and it may fall to as
low as 1.2% if the WPI Index remains static henceforth.
Such moderating imported inflation would help to offset some uptick in:
(1) Food inflation (expect a hike in the minimum selling price of rabi crops), and
(2) Fuel inflation (higher pass-through of fuel prices to lower the government’s oil subsidy
burden).
October 2011 A–6
9. India Strategy | Shaping up
A flat Rogers Index brings down change to -8% YoY … … which augurs well for India's inflation
Roger Index in INR
Rogers Index Chg in INR YoY (%) 12
200,000 50 9.8
36.6
29.0 30.1 9
180,000 23.7 32 8.2
32.9 29.8 16.0 6.3
30.8 24.6 7.2
160,000 9.4 8.2 7.8 14 6
12.6 11.3 -3.8 -6.8 WPI (Proj. Static Index)
4.4 6.1
140,000 1.6 -4 3 Positive Scenario 3.7
-7.6 Base Sce nario 1.2
120,000 -22 0
Nov-11E
Jan-12E
Mar-12E
Nov-10
Mar-11
May-11
Jul-11
Jan-11
Sep-10
Sep-11
Jun-10
Oct-10
Dec-10
Feb-11
Jun-11
Oct-11
Dec-11
Feb-12
Jun-12
Apr-10
Apr-11
Apr-12
Aug-10
Aug-11
Positive scenario: WPI index increases by 0.25 every month, nearly half of the base case scenario.
Static Index: Implies no price rise hereafter, taking a cue from international price trend.
Repo rates at 36-month high, SBI's PLR at a 14-year high
Twenty consecutive months of 8%+ inflation led the RBI to resort to 12 consecutive hikes
in the repo rate, aggregating 350bp, taking it to a 36-month high of 8.25%. Rate hikes
apart, the RBI has also kept a tight leash on the liquidity situation. This ensured effective
transmission of rate hikes by way of banks raising base rates/PLR nearly synchronously.
SBI's PLR rules at a 14-year peak.
12 successive repo rate hikes and tight liquidity … … have led to effective rate transmission (SBI's PLR, %)
Net repo balance (RHS) (INR b) Repo rate 15.0
SBI PLR at
9.00 1,400 14-year peak
8.25 8.50 8.25
13.8
7.75 700
12.5
6.50 0
11.3
5.25 4.75 -700
4.00 -1,400 10.0
May-97
May-98
May-99
May-00
Jun-01
Jun-02
Jun-03
Jul-04
Jul-05
Jul-06
Jul-07
Sep-11
Dec-09
Dec-10
Dec-11
Jun-09
Mar-10
Jun-10
Mar-11
Jun-11
Mar-12
Jun-12
Sep-09
Sep-10
Sep-11
Aug-08
Aug-09
Aug-10
Expect rates to peak in 3QFY12
Moderation in inflation can provide the necessary headroom to the RBI to soften its anti-
inflationary stance particularly when global growth and financial stability concerns are
resurfacing. However, as headline inflation may remain in high single digits until end
CY11, we believe the RBI could do one last 25bp hike in its October 2011 mid-term policy
before taking a pause. Recent weeks have increased the concerns on global growth outlook
and this will be an important variable for RBI to consider when it decides the next course
of action. If the downtrend in inflation accelerates, we expect the first cut in April 2012.
Policy rate cuts are likely to lag the drop in inflation, leading to real interest rates rising
significantly above long-period average rates. This implies that market rates could clearly
see downturns sooner in time and faster in magnitude if the commodity price downtrend
persists.
October 2011 A–7
10. India Strategy | Shaping up
Widening real interest rates may prompt faster rate cuts
(%) Real Interest Rate (WPI Proj. Static) Positive Scenario Base Scenario
12
8 8.1
5.5
4
5 Ye ar Avg 0.90% 2.9
0
-4
-8
Jun-10
Dec-10
Mar-11
Jun-11
Dec-11
Mar-12
Jun-12
Dec-06
Dec-07
Dec-08
Jun-09
Dec-09
Mar-10
Mar-07
Jun-07
Mar-08
Jun-08
Mar-09
Sep-11
Sep-08
Sep-09
Sep-10
Sep-06
Sep-07
Impact #1 Sharp hit to earnings and valuations of interest-rate sensitives
A sustained rise in interest rates has adversely affected rate sensitive sectors and stocks
in a variety of ways.
Example 1: SBI sees rising credit cost, lower valuation
SBI's credit cost hit at all-time high of 1.75% in the March 2011 quarter, and has stayed
well above 1% for last several quarters. Simultaneously, its 12-month forward P/B has
nearly halved from 2.5x levels in September 2010 to 1.3x levels currently.
SBI sees rising credit costs, lower valuation
SBI 1 Yr Bank Deposit Rate (%) RHS SBI Credit Cost (%) SBI 1 Yr Fw d P/B (x)
2.50 10
9
1.75
8
1.00
7
0.25
6
-0.50 5
Dec-08
Dec-09
Mar-10
Jun-10
Dec-10
Mar-11
Jun-11
Jun-06
Dec-06
Mar-07
Jun-07
Dec-07
Mar-08
Jun-08
Mar-09
Jun-09
Sep-11
Sep-08
Sep-09
Sep-10
Sep-06
Sep-07
Example 2: Maruti's volume estimate dwindles; valuations shrink
From August 2010 through February 2011, Maruti was expected to deliver FY12 volume
growth of 15-17%. However, rate hikes began to reflect on volumes from March 2011,
when every subsequent month saw a downgrade in volume growth estimates and they
now are -4.2%. (Note: The downgrades have been accentuated because of labor issues
as well). In sync, Maruti's Price/Cash EPS multiple also shrank 36% from a peak of 14x
in September 2010 to 9x currently.
October 2011 A–8
