1. Market Outlook
India Research
July 15, 2011
Dealer’s Diary Domestic Indices Chg (%) (Pts) (Close)
BSE Sensex 0.1% 22.2 18,618
The market edged lower in early trade reacting to three serial bomb blasts in Nifty 0.3% 14.4 5,600
Mumbai on Wednesday evening. A bout of volatility was witnessed as the key MID CAP 0.4% 26.3 7,015
benchmark indices trimmed losses after hitting fresh intraday lows in morning
SMALL CAP 0.2% 14.7 8,356
trade. The market further trimmed intraday losses in mid-morning trade. The
BSE HC 0.8% 52.1 6,533
market moved into the positive zone in early afternoon trade before surging in
BSE PSU 0.2% 15.8 8,587
the afternoon trade. The indices trimmed gains after hitting fresh intraday high
BANKEX 1.0% 133.0 12,879
in mid-afternoon trade. High volatility was witnessed in late trade as the key
benchmark indices gave up strong intraday gains. The Sensex and Nifty closed AUTO 0.2% 13.4 9,047
with gains of 0.1% and 0.3%, respectively. The mid-cap and small-cap indices METAL 0.7% 101.6 14,735
closed with gains of 0.4% and 0.2%, respectively. Among the front runners, OIL & GAS -0.2% (22.0) 9,130
DLF, Tata Motors, Cipla, ICICI and SBI gained 1–3%, while TCS, Infosys, BSE IT -1.5% (87.1) 5,835
RCOM, Bajaj Auto and ONGC lost 1–2%. Among mid caps, SpiceJet, PTC Global Indices Chg (%) (Pts) (Close)
India, Supreme Inds, Cholamandalam Investment and Finance, and IRB Infra Dow Jones -0.4% (54.5) 12,437
gained 5–8%, while SKS Microfinance, GSPL, Godfrey Philips, Himadri NASDAQ -1.2% (34.3) 2,763
Chemical and KGN Industries lost 3–10%.
FTSE -1.0% (59.5) 5,847
Nikkei -0.3% (27.0) 9,936
Markets Today
Hang Seng 0.1% 13.3 21,940
The trend deciding level for the day is 18,596/5,584 levels. If NIFTY trades Straits Times 0.0% 0.3 3,089
above this level during the first half-an-hour of trade then we may witness a Shanghai Com 0.5% 15.0 2,810
further rally up to 18,866–19,114/5,670–5,741 levels. However, if NIFTY
trades below 18,596/5,584 levels for the first half-an-hour of trade then it may Indian ADRs Chg (%) (Pts) (Close)
correct up to 18,348–18,079/5,513–5,427 levels. Infosys -0.2% (0.1) $61.2
Indices S2 S1 R1 R2 Wipro -0.6% (0.1) $12.8
SENSEX 18,079 18,348 18,866 19,114 ICICI Bank -0.2% (0.1) $47.2
5,427 5,513 5,670 5,741 HDFC Bank -0.4% (0.7) $177.4
NIFTY
News Analysis Advances / Declines BSE NSE
WPI inflation rises to 9.44% in June 2011 Advances 1,590 838
Power sector reforms to keep PFC’s NPA concerns at bay
Declines 1,219 582
1QFY2012 Result Review – TCS, Bajaj Auto, South Indian Bank
Refer detailed news analysis on the following page Unchanged 156 60
Net Inflows (July 13, 2011)
Volumes (` cr)
` cr Purch Sales Net MTD YTD
FII 2,559 2,408 151 6,138 7,460 BSE 2,782
MFs 464 523 (59) (145) 2,980 NSE 11,735
FII Derivatives (July 14, 2011)
Open
` cr Purch Sales Net
Interest
Index Futures 2,564 2,670 (106) 12,406
Stock Futures 1,628 1,458 169 32,047
Gainers / Losers
Gainers Losers
Company Price (`) chg (%) Company Price (`) chg (%)
Power Finance 213 9.7 GSPL 96 (5.4)
REC 220 7.4 United Phosph. 154 (2.3)
PTC India 82 6.0 TCS 1,125 (2.2)
Sun TV Network 332 5.8 Marico 161 (2.1)
1
IRB Infra 187 5.2 Gail India 456 (1.9)
Please refer to important disclosures at the end of this report Sebi Registration No: INB 010996539

2. Market Outlook | India Research
WPI inflation rises to 9.44% in June 2011
Wholesale price-based inflation for June 2011 rose to 9.44% from 9.06% in May 2011.
In spite of the high base effect (10.3% in June 2010), headline inflation continued to
remain above 9%. The latest headline inflation print was below the median (9.68%) of
Bloomberg’s survey of economists. Core (non-food manufacturing) inflation was flat at
7.3%. Inflation for April 2011 was revised upwards from 8.66% to 9.74%; with this revision
the headline inflation has persisted above the 9% mark for the last seven consequent
months.
Primary articles inflation rose after declining for the last four months. Driven by a sharp
rise in minerals (up 27.0% yoy vs. 11.9% yoy in May 2011), primary articles inflation
increased to 12.2% from 11.3% in May 2011. Fuel and power inflation rose from 12.3% in
May 2011 to 12.8% on the back of higher mineral oil prices. The full impact of the recent
diesel price hike is yet to be reflected in the numbers and will be felt in the July 2011
inflation print. Electricity inflation continued to show a negative tick for the second straight
month, hinting probably at a possibility of pending revision, in our view. Manufactured
products, which have a weightage of ~65% in the overall WPI inflation, continued to rise
at an accelerated pace (of 7.4%). Manufacturing articles inflation was driven by food
products (8.5%), chemicals (7.4%) and metals (8.9%).
The street is expecting the RBI to carry out one or two more hikes in its repo rate,
considering the elevated inflation numbers. However, we see cooling global commodity
prices, moderating food inflation, weakening domestic demand, slowing credit and higher
deposit mobilisation as signals that the economy is very close to the peak levels for both
inflation and broader interest rates.
Accordingly, although the RBI may still deem it necessary to hike the repo rate by another
25bp or so to anchor inflation expectations decisively; however, in our view, there is now
an increasingly distinct possibility that there may not be any more rate hikes from the
Central Bank. In case the RBI uses the relatively mild repo tool (as against the harsher CRR
hike), we do not expect banks to further increase broader deposit or lending rates.
Power sector reforms to keep PFC’s NPA concerns at bay
In a resolution passed in the State Power Minister’s meet on July 13, 2011, the states have
agreed to take various initiatives to improve the financial health of their electricity
distribution companies as part of the power sector reform agenda. The pass-through of
production costs though higher tariffs to bridge the gap between revenue and power
purchase costs and clearance of all outstanding subsidies to state power utilities by the
respective states were the focal outcomes of the meet.
With 87% of the loans to public sector utilities, PFC’s loan book is heavily exposed to the
ailing health of state electricity boards. While we had regarded the probability of default by
SEBs as very remote considering the serious negative systemic implications, yet the
possibility of any restructuring or rescheduling of their repayments was creating headwinds
for the otherwise cheaply valued PFC stock. However, with the power sector reforms
underway and improving outlook on SEBs’ liquidity position, PFC along with other power
lending firms stand to be the biggest beneficiary of the impending improvement in the
health of state electricity boards, removing a key overhang on the stock.
PFC’s loan growth visibility remains high (expected 20–25% CAGR in loan growth over
FY2011–13), underpinned by its huge outstanding loan sanctions of `1.7lakh crore (as of
December 31, 2010). Moreover, with banks having seen a 47% CAGR in power sector
lending in the past two years, their exposures in most cases have reached
close to board-mandated limits, creating even more space for specialised lenders such as
PFC to grow.
July 15, 2011 2

3. Market Outlook | India Research
At the CMP, the stock is trading at 1.2x FY2013 P/ABV. Historically, the stock has traded at
1.2–2.2x one-year forward ABV with a median of 1.7x. We have assigned an FY2013E
P/ABV multiple of 1.4x, 20% lower than PFC’s median P/ABV multiple since listing,
to factor in any potential asset quality concerns. We reiterate our Buy rating on the stock
with a target price of `254, implying an upside of 20.1% from the CMP.
1QFY2012 Result Review
TCS
TCS reported strong set of 1QFY2012 numbers, outperforming our as well as street
expectations. The company reported revenue of US$2,412mn, up 7.5% qoq, on the back
of robust volume growth of 7.4% qoq. In rupee terms, revenue came in at `10,797cr, up
6.3% qoq. EBIT margin declined by 214bp qoq to 26.2% due to wage hikes given in
1QFY2012, effective from April 1, 2011 (12–14% for offshore employees and 2–4% for
onsite employees). PAT came in at `2,380cr, almost flat qoq despite margin headwinds on
the back of higher other income of `289cr as against `224cr in 4QFY2012.
The company closed 10 large deals in 1QFY2012. Management indicated that it plans to
hire 17,000–20,000 employees in 2QFY2012 as it is witnessing a strong deal pipeline.
The company remains our top pick amongst tier-I IT companies because of its diversified
portfolio on all fronts service wise, industry exposure wise as well as geography wise.
We maintain our Buy rating on the stock. The target price is currently under review.
Bajaj Auto
Bajaj Auto (BAL) reported slightly lower-than-expected top-line growth of 22.8% yoy
(13.7% qoq) to `4,777cr, driven by 17.7% yoy (15.3% qoq) jump in volumes. The variance
in top-line growth from our expectation was due to lower average net realisations, which
declined by 1.8% qoq despite price hikes of ~2% taken during the quarter. On a yoy
basis, however, average net realisations grew by 4.3% to `41,973. Among the product
mix, Pulsar and Discover contributed ~65% of motorcycle sales during 1QFY2012. BAL’s
export revenue recorded strong ~40% yoy growth during the quarter to `1,688cr, owing to
a 31.9% yoy increase in exports volumes. Other operating income also posted robust
24.6% yoy growth to `190cr, aiding the top-line performance.
On the operating front, EBITDA margin for 1QFY2012 came in 71bp below our estimate
at 19.1%, registering a fall of 91bp yoy (145bp qoq). This was a result of higher
raw-material costs, which increased by 150bp yoy (210bp qoq). However, lower staff cost
and other expenditure restricted further contraction in EBITDA margin to a certain extent.
Overall, operating profit during the quarter witnessed 17.2% yoy (5.7% qoq) growth to
`911cr. BAL reported marginally lower-than-expected net profit growth of 20.5% yoy (5.2%
qoq) to `711cr against our estimate of `734cr, largely because of lower-than-expected
operating performance. Further, the bottom-line performance was aided by
lower-than-expected tax outgo.
At current levels, the stock is trading at 12.9x FY2013E earnings of `110. The stock rating
is currently under review.
July 15, 2011 3

4. Market Outlook | India Research
South Indian Bank
South Indian Bank registered healthy 41.2% yoy net profit growth for 1QFY2012 to `82cr.
The bottom line was marginally below our estimates due to considerably lower NII, which
was compensated by higher other income and lower operating expenses. Reported NIM
declined by ~30bp qoq to 2.77% on account of a sharp increase in cost of deposits of
~100bp qoq. The 85bp qoq rise in yield on advances could not completely compensate
for the pressure on cost of deposits. Calculated NIMs were down by sharp 41bp qoq.
Business growth continued to be strong with advances growing by 31.2% yoy (8.1% qoq)
and deposits rising by 35.5% yoy (6.4% qoq). CASA deposits grew by relatively lower
16.0%, leading to compression in CASA ratio from 25.1% in 1QFY2011 to 21.5% in
1QFY2012. Asset quality was largely stable with gross and net NPA ratios remaining flat
sequentially and provision coverage ratio stable at 73%. The bank made higher standard
assets provisions of ~`14cr compared to `2cr in 1QFY2011 and `6cr in 4QFY2011, on
account of the recent hike in provisioning requirements by the RBI.
Currently, the stock is trading at 1.3x FY2013E ABV, close to the upper end of the bank’s
five-year range, due to strong operating performance in the last few quarters, especially on
the gold loan front, as well as relatively large book-accretive QIP on the cards to capitalise
on the gold loan segment further. We have an Accumulate rating on the stock with a target
price of `26. We may revisit our estimates and recommendation post interaction with the
management.
Economic and Political News
Gold surges to record on US, EU debt turmoil
Fertiliser department alerts MEA on Potash cartel
TRAI says cancel 74 licences, DoT insists on only 12
Corporate News
Bharti Airtel offers to list Hexacom
Bajaj Auto recasts four-wheeler project with Renault
GVK’s plan to ‘take over’ BIAL hits a bump
GTL heads for debt restructuring
Source: Economic Times, Business Standard, Business Line, Financial Express, Mint
Events for the day
Balaji Tele Results
Essel Propack Results
Gujarat NRE Coke Results
Tata Sponge Results
July 15, 2011 4

5. Market Outlook | India Research
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