Edelweiss Q3 Preview

India Equity Research | Strategy Result Preview
RESULT PREVIEW Q3FY11

Twilight saga: Earnings expected to moderate in Q3FY11
Growth trajectory moderates January 7, 2011

Y-o-Y, Q3FY11E earnings growth for the Sensex is expected to come in at 18.5%,
which is below the 24.2% Y-o-Y growth rate clocked in Q2FY11. For companies in
our coverage universe (ex OMCs), earnings are expected to grow by 20.2% Y-o-Y. Edelweiss research team
Metals & mining and consumer facing sectors such as media, retail and hotels &
hospitality are expected to post robust earnings growth. Earnings are most likely to Dipojjal Saha
be under pressure in cement (e -28.8%) and telecom (e -32.1%). A large tailwind +91-22-6623 3377
to the earnings growth comes from oil & gas sector, wherein earnings growth for dipojjal.saha@edelcap.com
the sector (ex OMCs) is expected to be strong.
Margins paint a mixed picture

Although overall EBITDA margins (ex BFSI) are expected to expand Y-o-Y by 73 bps
for the Sensex and 74 bps for the coverage universe (ex OMCs), the inter-sectoral
data remains quite skewed. In fact, a major part of the margin improvement may
be driven by oil & gas (ex OMCs), wherein margins are set to expand by as much as
388 bps on a Y-o-Y basis. Apart from oil & gas (ex OMCs), only a few sectors such
as power, real estate, hotels & hospitality and media are expected to show margin
expansion. Most other sectors, such as autos, cement, construction and telecom,
however, could report a contraction in margins on a Y-o-Y basis.
Commodity driven sectors to post healthy growth rates

Commodity sectors such as oil & gas and metals are expected to post healthy top-
line and bottom-line growth. We believe that the outlook for these sectors also
remains healthy given the demand pickup on the back of improving traction in
global economy.
Metals and mining sector is expected to clock ~15.0% Y-o-Y earnings growth and
12.0% Y-o-Y revenue growth. Growth is expected to be strong both on the ferrous
as well as non-ferrous side on the back of firming prices (long products prices up by
INR 1000/t in December and aluminum up by 17% on Y-o-Y basis). Oil & gas sector
(ex OMCs) is expected to post a robust Y-o-Y growth rate in earnings driven by
strong results from Cairn India and GAIL, among others. For Reliance, we expect
GRMs to expand to USD 9.25/bbl on back of improvement in diesel and gasoline
cracks.
Headwinds emerge, FY11E and FY12E earnings downgraded

We are downgrading our earnings estimate for the Sensex from INR 1,070 to INR
1,048 and from INR 1,282 to INR 1,271 for FY11E and FY12E respectively. This
implies an earnings growth for ~21% for FY12E, which we believe could come under
pressure. As we head into FY12E, headwinds in form of higher raw material costs,
increasing wages and rising borrowing costs could intensify thereby increasing the
risk of downgrades to estimates.
Edelweiss Research is also available on www.edelresearch.com,, Bloomberg EDEL <GO>, Thomson First Call, Reuters and Factset. Edelweiss Securities Limited

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Table 1: Growth expectations for earnings, revenue and EBITDA margin for Q3FY11E
Sector PAT growth Revenue growth EBITDA margin
Y-o-Y Q-o-Q Y-o-Y Q-o-Q Y-o-Y Q-o-Q
(%) (%) (%) (%) (bps) (bps)
Agro related (19.2) 29.3 40.4 3.3 1,140 1,604
Auto 55.6 3.7 25.0 7.0 35 (5)
BFSI 21.6 8.0 21.9 1.9 NM NM
Cement (28.8) 68.9 (0.3) 9.8 (575) 547
Construction (15.0) 30.0 22.2 17.2 (219) (31)
Engg & Cap Goods 14.9 11.8 19.7 8.3 (31) 93
FMCG 12.8 6.4 18.3 6.7 (82) 66
Hospitality 46.5 406.8 33.1 44.6 220 1,730
IT 12.7 2.7 21.3 3.3 (169) (43)
Media 62.2 24.2 16.8 14.9 606 317
Metals & Mining 14.9 7.5 12.0 4.6 (147) 160
Miscellaneous 127.0 184.1 24.9 14.4 287 387
Oil & Gas 14.0 (52.1) 20.5 9.1 4 (533)
Pharmaceuticals (1.1) (6.5) 20.4 2.0 (95) (65)
Pipes 7.1 5.6 6.6 16.2 93 (134)
Power 10.4 12.6 22.0 1.8 249 183
Real Estate (16.6) (11.7) (1.6) (11.3) 1,038 853
Retail 33.1 5.3 31.0 0.8 (104) (28)
Telecom (32.1) 3.5 34.8 5.6 (327) 43
Coverage 13.1 (10.8) 20.2 6.9 (18) (177)
ex-OMCs 20.2 7.2 19.4 5.4 74 94
Sensex 18.5 1.6 16.8 3.5 73 25
Source: Edelweiss research
Note: OMCs includes BPCL, HPCL and IOCL
2 Edelweiss Securities Limited

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Contents
Results Preview.......................................................................................................................................................... 4
Market Review ........................................................................................................................................................... 8
Economy ................................................................................................................................................................. 10
Automobiles ............................................................................................................................................................ 12
Banking and Financial Services .................................................................................................................................. 14
Cement ................................................................................................................................................................... 18
Construction ............................................................................................................................................................ 20
Engineering and Capital Goods ................................................................................................................................... 23
FMCG ..................................................................................................................................................................... 26
Hospitality ............................................................................................................................................................... 28
IT ........................................................................................................................................................................... 30
Media ..................................................................................................................................................................... 32
Metals and Mining .................................................................................................................................................... 34
Oil and Gas ............................................................................................................................................................. 37
Pharmaceuticals ....................................................................................................................................................... 40
Pipes ...................................................................................................................................................................... 42
Power ..................................................................................................................................................................... 44
Real Estate .............................................................................................................................................................. 46
Retail ...................................................................................................................................................................... 48
Telecom .................................................................................................................................................................. 50
Agro Related / Miscellaneous ..................................................................................................................................... 52
Edelweiss Securities Limited 3

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Results Preview
Revenue growth healthy across sectors
Revenue growth is expected to be healthy Y-o-Y for Sensex (16.8%) as well as
Edelweiss coverage companies (19.4%). For the latter, growth is expected to be
strong in tech, pharma, oil & gas, power, retail, construction, and hospitality, among
others. While a strong demand environment is expected to drive growth in IT topline,
within pharma sector we expect the strong growth momentum to continue on the back of
robust growth in US generics from launch of key products during the quarter.
Growth rates for consumption-driven sectors are expected to be strong. Media, for
example, is expected to post a strong ~17% growth as revenue growth for broadcasters
and print players is expected to be strong in Q3FY11 due to festive season related ad
spends and a lower base of Q3 last year. Retail is also expected to register a high growth
rate of ~31% on back of strong sales in Q3FY11 as the festive season in FY11 was in Q3
versus Q2 in FY10. Premiumisation, space addition and higher same store sales were
also major contributing factors.
Sensex revenues are likely to rise 16.8% Y-o-Y in Q3FY11 with contribution across
companies.
Table 2: Revenue growth healthy across sectors

Sector # of Q3FY11E Q3FY10 Y-o-Y Q2FY11 Q-o-Q
companies INR bn INR bn (%) INR bn (%)
Agro related 6 54 39 40.4 53 3.3
Auto 8 606 485 25.0 567 7.0
BFSI 25 459 377 21.9 451 1.9
Cement 4 93 93 (0.3) 85 9.8
Construction 11 126 103 22.2 108 17.2
Engg & Cap Goods 21 392 327 19.7 362 8.3
FMCG 10 193 163 18.3 181 6.7
Hospitality 7 16 12 33.1 11 44.6
IT 10 319 263 21.3 308 3.3
Media 6 16 14 16.8 14 14.9
Metals & Mining 12 709 633 12.0 678 4.6
Miscellaneous 5 57 45 24.9 49 14.4
Oil & Gas 13 2,769 2,299 20.5 2,538 9.1
Pharmaceuticals 7 88 73 20.4 87 2.0
Pipes 2 31 29 6.6 27 16.2
Power 12 390 320 22.0 383 1.8
Real Estate 8 35 35 (1.6) 39 (11.3)
Retail 3 48 37 31.0 47 0.8
Telecom 4 260 193 34.8 246 5.6
Coverage 174 6,660 5,539 20.2 6,232 6.9
ex-OMCs 171 5,056 4,234 19.4 4,796 5.4
Sensex 30 3,038 2,601 16.8 2,934 3.5
Note: (1) Revenue for BFSI = Net Interest Income + Other Income
(2) OMCs includes BPCL, HPCL and IOCL

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EBITDA margins paint a mixed picture

Although EBITDA margins are set to expand Y-o-Y and Q-o-Q both for coverage companies
(ex OMCs) as well as Sensex companies, inter-sectoral trends paint a mixed picture. Only a
few sectors such as oil & gas (ex-OMCs), power, hospitality, and media are expected to
post margin expansions. Margins in the hotels & hospitality sector are expected to improve
as occupancy rates rise on the back of healthy ORs of 75-80% and 10-15% Y-o-Y rise in
ARRs.
Y-o-Y, margin headwinds, however, continue to mar most sectors. For example, with in
auto, margin contraction is expected on the back of rising commodity costs. In the
construction space, margins are expected to contract because of rising input costs while in
IT higher wage costs and currency appreciation are expected to drag down margins
~170bps. Telecom margins are set to decline on back of higher network expansion costs
and rapidly falling tariffs. Cement companies’ EBITDA margins are expected to slip due to
increased costs and lower realisations.
Margins of Sensex companies are expected to expand 73 bps Y-o-Y and 25 bps Q-o-Q.
Some stocks which are expected to post margin expansion on a Y-o-Y basis include Tata
Power and Reliance Industries.
Table 3: EBITDA margins paint a mixed picture

companies (%) (%) (bps) (%) (bps)
Agro related 6 32.5 21.0 1,140 16.4 1,604
Auto 8 14.2 13.9 35 14.3 (5)
Cement 4 19.5 25.3 (575) 14.1 547
Construction 11 15.9 18.1 (219) 16.2 (31)
Engg & Cap Goods 21 14.3 14.6 (31) 13.4 93
FMCG 10 22.0 22.9 (82) 21.4 66
Hospitality 7 35.5 33.3 220 18.2 1,730
IT 10 25.7 27.4 (169) 26.1 (43)
Media 6 39.6 33.5 606 36.4 317
Metals & Mining 12 20.0 21.5 (147) 18.4 160
Miscellaneous 5 20.1 17.2 287 16.2 387
Oil & Gas 13 9.6 9.6 4 14.9 (533)
Pharmaceuticals 7 20.6 21.5 (95) 21.2 (65)
Pipes 2 18.6 17.7 93 19.9 (134)
Power 12 26.9 24.4 249 25.0 183
Real Estate 8 46.0 35.7 1,038 37.5 853
Retail 3 8.3 9.4 (104) 8.6 (28)
Telecom 4 32.3 35.5 (327) 31.8 43
Coverage 149 15.9 16.1 (18) 17.7 (177)
ex-OMCs 146 21.7 21.0 74 20.8 94
Sensex 26 22.7 22.0 73 22.5 25
Note: (1) Coverage and Sensex aggregate excludes BFSI, as EBITDA margin is not relevant for the
sector
(2) OMCs includes BPCL, HPCL and IOCL

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Earnings trajectory likely to be softer

Y-o-Y core earnings growth is expected to come in at 18.5% for the Sensex and 20.2%
(ex OMCs) for our coverage universe. This is in comparison to 24.2% and 21.4%,
respectively for Q2FY11. Growth is expected to be robust for metals & mining and
consumer-facing sectors such as media, retail, and hotels & hospitality. Oil & gas (ex-
OMCs) is also expected to post robust earnings growth rate. Cement and telecom are
expected to register Y-o-Y declines. For Sensex, core earnings growth is expected at
18.5% Y-o-Y.
Table 4: Mixed quarter for earnings

companies INR bn INR bn (%) INR bn (%)
Agro related 6 3.5 4.3 (19.2) 2.7 29.3
Auto 8 51.3 33.0 55.6 49.5 3.7
BFSI 25 138.0 113.4 21.6 127.7 8.0
Cement 4 9.0 12.6 (28.8) 5.3 68.9
Construction 11 5.6 6.5 (15.0) 4.3 30.0
Engg & Cap Goods 21 35.1 30.6 14.9 31.4 11.8
FMCG 10 30.2 26.8 12.8 28.4 6.4
Hospitality 7 2.7 1.8 46.5 0.5 406.8
IT 10 61.6 54.7 12.7 60.0 2.7
Media 6 2.2 1.3 62.2 1.7 24.2
Metals & Mining 12 83.1 72.3 14.9 77.2 7.5
Miscellaneous 5 6.1 2.7 127.0 2.2 184.1
Oil & Gas 13 109.5 96.0 14.0 228.8 (52.1)
Pharmaceuticals 7 14.1 14.3 (1.1) 15.1 (6.5)
Pipes 2 2.9 2.7 7.1 2.8 5.6
Power 12 50.7 45.9 10.4 45.0 12.6
Real Estate 8 6.9 8.3 (16.6) 7.8 (11.7)
Retail 3 1.9 1.4 33.1 1.8 5.3
Telecom 4 24.5 36.0 (32.1) 23.6 3.5
Coverage 174 639 565 13.1 716 (10.8)
ex-OMCs 171 665 554 20.2 621 7.2
Sensex 30 399 336 18.5 392 1.6
Note: OMCs includes BPCL, HPCL and IOCL

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Commodity driven sectors to post healthy growth rates

Commodity-driven sectors such as metals and oil & gas are expected to post robust
bottom lines. Earnings with in the metals & mining sector could expand by as much as
18.9% while those of oil & gas (ex-OMCs) sector could catapult by as much as 60%.
Metals & mining: Although production volumes are likely to remain flat for most
ferrous as well as non-ferrous companies, margins could benefit Q-o-Q as costs are likely
to be stable or lower and steel prices have increased INR 700/t on an average Q-o-Q.
Global HRC prices also remained firm during the quarter and towards the end rose
between USD 25/t and 125/t across regions while coking coal contract prices for Q3FY11
dipped ~7% to USD 210/t. The Q-o-Q jump in copper and aluminum prices was 18.8%
and 12% respectively.
Oil & Gas: Ex-OMCs, the oil & gas sector’s earnings are expecetd to expand ~60%. For
RIL, we expect the GRMs to imrpove to USD 9.25/bbl on the back of improvement in
diesel and gasoline cracks. Petrochemical margins are also expected to benefit from
expansion in polyester intermediate margins. Other refiners are also likely to benefit
from an uptick in refining margins. Strong growth in petrochemical and LPG transmission
segments is expecetd to benefit GAIL while Cairn is also set to deliver a strong set of
results because of scale up in Mangala crude production.
Headwinds emerge, FY11E and FY12E earnings downgraded

We are downgrading our earnings estimate for the Sensex from INR 1,070 to INR 1,048
and from INR 1,282 to INR 1,271 for FY11E and FY12E respectively. This implies an
earnings growth for ~21% for FY12E, which we believe could come under pressure. As we
head into FY12E, headwinds in form of higher raw material costs, increasing wages and
rising borrowing costs could intensify.
We believe that increasing headwinds to earnings is reflected in earnings revisions cycle

for the Sensex as well. There have been no significant revisions to FY11E earnings since
April 2011 and earnings upgrades have virtually hit a roadblock. FY12E earnings
estimates too have remained largely unchanged.
Chart 1: Pace of earnings upgrades has virtually stalled

1,300
1,271
1,220
(Sensex EPS)
Earnings upgrades have

1,140
virtually stalled
1,081
1,055
1,060
980
953
900
May 09
May 10
Jan 10
Mar 10
Oct 09
Dec 09
Oct 10
Dec 10
Sep 09
Sep 10
Apr 09
Apr 10
Jun 09
Jun 10
Jul 09
Jul 10
Aug 09
Nov 09
Aug 10
Nov 10
Feb 10
FY11E FY12E
Source: Bloomberg, Edelweiss research

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Market Review
Overall, Q3FY11 was a mixed quarter for equities across the globe. DM equities outperformed
EM equities. Some markets such as Russia and Mexico were up in excess of 15% while for
India and Brazil, the performance was more subdued. In fact, contrary to Q2FY11, the
performance of Indian markets was much softer.
Chart 2: Indian stock markets were subdued in Q3FY11
Russia
Mexico
US
Korea
Japan
S Africa
Taiwan
UK
Thailand
Indonesia
China - Shanghai
Malaysia
Australia
HK
Singapore
Philippines
China - H share
Sensex
Nifty
Euro
Brazil
(1) 4 9 14 19
(% returns in Q3FY11)
Chart 3: Sensex since January 2009

25,000
21,500
(Sensex index)
18,000
14,500
11,000
7,500
4,000
May-09
May-10
Mar-09
Mar-10
Jan-09
Jan-10
Oct-09
Dec-09
Oct-10
Dec-10
Jun-09
Sep-09
Jun-10
Sep-10
Apr-09
Jul-09
Apr-10
Jul-10
Aug-09
Aug-10
Nov-09
Nov-10
Feb-09
Feb-10

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FII and DII net flows remain positive

For CY10, net FII inflows were a record USD 29.3 bn making India one of the highest
recipients of FII flows in EM Asia for CY10. FIIs were net buyers of ~USD 10.1 bn during
Q3FY11 vis-à-vis net buyers of USD 12.6 bn in Q2FY11.
DIIs have been net sellers of USD 2.0 bn in Q3FY11 against net sellers of USD 5.5 bn in
Q2FY11.
Overall, institutional investors continued to remain net buyers of USD 7.8 bn in Q3FY11
vis-à-vis USD 7.4 bn in Q2FY11.
Chart 4: FIIs flows remained healthy in Q3FY11

13.5
10.0
(USD bn)
6.5
3.0
(0.5)
(4.0)
Q1 FY09
Q2 FY09
Q3 FY09
Q4 FY09
Q1 FY10
Q2 FY10
Q3 FY10
Q4 FY10
Q1 FY11
Q2 FY11
Q3 FY11
Chart 5: DII flows were in negative zone

6.0
3.6
(USD bn)
1.2
(1.2)
(3.6)
(6.0)
Q1 FY09
Q2 FY09
Q3 FY09
Q4 FY09
Q1 FY10
Q2 FY10
Q3 FY10
Q4 FY10
Q1 FY11
Q2 FY11
Q3 FY11

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ECONOMY
Recovery balanced but concerns have risen
Growth prospects of global economy have improved January 7, 2011

The global economy is characterised by strengthening recovery in the US and
robust economic momentum in the emerging markets (EM). The US economy
expanded 2.6% Q-o-Q (annualised) in Q3CY10, up from 1.6% in the previous
quarter, but lower than 3.7% in Q1CY10. Improvement in private consumption
and rise in inventories contributed strongly to the GDP growth in Q3. Fed’s fresh Kapil Gupta
round of quantitative easing (QE2, involving purchase of US Treasuries up to USD +91-22-4063 5406
600 bn) has reduced the downside risks to the economy, while the extension of kapil.gupta@edelcap.com
tax cuts (which were due to expire in January 2011, and therefore could have
been a huge drag on the economic recovery), have improved the economy’s Dipojjal Saha
outlook for 2011. High frequency data such as retails sales, ISM manufacturing, +91-22-6623 3377
jobless claims have all shown improvement. Accordingly, growth projections for dipojjal.saha@edelcap.com
US economy for 2011 have been revised higher. However, weakness in the US
housing market persists, unemployment rate remains stubbornly high at ~10%,
core inflation is at record low and the private sector continues to de-leverage.
Accordingly, the Fed is likely to remain ultra-accommodative through CY11.
In Europe, Germany remains the main growth driver, benefitting from strong
economic momentum in EMs and ongoing recovery in the US. However, the
periphery remains trapped in lack of competitiveness, high level of indebtedness
and unemployment and ongoing fiscal retrenchment. We expect economic
performance to remain divergent in the region. The main risk to the region and to
the global economy arises from the lingering sovereign debt crisis in the region.
In emerging economies, policy stimulus, inventory re-stocking and sharp

turnaround in global trade since March 2009 led to strong recovery, such that
many EMs are now growing close to potential. Largely supportive financial markets
further aided the economic recovery. More recent trends suggest that investments
and private consumption trends are picking up in EMs even as policy stimulus fades.
Yet, policy environment in EMs is characterised by multiple challenges. The ultra-
loose monetary policy adopted by Fed, ECB, BoE, and BoJ is resulting in upward
pressure on domestic inflation in EMs (through higher global commodity/crude oil
prices) and upward pressure on exchange rates and asset prices (due to rising
capital inflows). Therefore, EMs policymakers have to walk a tightrope in the
coming quarters.
India’s economic expansion brisk and balanced, but, concerns have risen
After bottoming out in March 2009, India’s economic expansion has been very
robust. Sequential seasonally adjusted data suggest that the economy has now
regained its pre-crisis growth trajectory. With the release of Q2FY11 GDP
numbers (real GDP growth at 8.9% Y-o-Y), it is established that growth is brisk
and balanced. All the three sectors - services, industry and agriculture - are
showing strong output growth. On the demand side as well, private consumption
and investments have picked up strongly.
10 Edelweiss
Edelweiss Research Securities Limited
is also available on www.edelresearch.com,, Bloomberg EDEL <GO>, Thomson First Call, Reuters and Factset. Edelweiss Securities Limited

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The upswing in the industrial production growth has been the result of inventory re-
stocking (as demand recovered), very favourable base effect (as activity was very weak
last year), recovery in India’s exports (in line with recovery in global trade), benign
interest rate environment and recovery in business sentiments. Services too have shown
very strong momentum, growing at a solid 9.8% Y-o-Y in Q2FY11, over and above
10.5% Y-o-Y registered in the same quarter last year. Indeed, over the past three
quarters, the contribution of services to GDP growth has been rising, while that of the
industry has been declining. The current phase of recovery in services has been
characterised by falling contribution of the financial and business services segment
(finance, real estate, business and insurance) and rising contribution from trade, hotel
and transport services. Pick up in private consumption and recovery in global trade
supported this trend.
Going ahead, private consumption is likely to lead the economic momentum, with
investments gathering pace gradually through 2011. However, government support to
the economy will be gradually reducing, while trade deficit will continue to be a drag on
the economic growth. Overall, we expect real GDP to show some moderation in the
coming quarters, particularly in Q4FY11. For FY11, we project real GDP growth at 8.6%
Y-o-Y.
However, macro-headwinds have gathered pace for the Indian economy. The first is the
widening current account deficit and shifting nature of funding of the deficit towards non-
FDI flows. The latest data release for Q2FY11 shows that current account deficit has
widened to ~4% of GDP from 3.2% in the previous quarter, led by slower exports and
below trend growth in invisibles surplus. Rising crude oil prices suggest that even if exports
grow at healthy pace, current account deficit may remain elevated. At the same time, the
share of non-FDI inflows in the capital account has risen quite sharply from ~65% in
Q2FY10 to ~87% in Q2FY11. This is worrying because non-FDI flows tend to be volatile in
nature as they are highly influenced by the global risk appetite. Secondly, rising global
commodity and crude oil prices are adversely affecting the domestic inflation scenario.
Sequential trend in inflation suggests that price pressures have increased in recent months.
While rebound in food inflation in recent weeks (led by unseasonal rains in November and
associated speculative hoarding) may ease in the coming weeks, the core-inflation (non-
food manufacturing inflation) is also showing sideways movement. Accordingly, the central
bank is expected to remain hawkish in the coming quarters. Lastly, recent instances of
lapses in corporate governance have negatively impacted India’s image as an investment
destination.


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AUTOMOBILES
Growth rate to moderate
Key highlights of the sector during the quarter January 7, 2011

Demand remained robust during the festival season with two wheeler and car
segments registering double digit sequential volume growth. The exception was
the commercial vehicle space, where volumes declined on account of pre-buying
in the previous quarter on account of a change in emission norms.
Deepak Jain
In the two wheeler space, Hero Honda (HH) registered 11% Q-o-Q growth, +91-22- 6623 3313
whereas Bajaj’s (BAL) sequential growth declined 5% enabling HH to stem the deepak.jain@edelcap.com
losing market share. Maruti (MSIL) was able to compete stiffly against newer
Chetan Vora
launches and increase market share in the compact segment. Mahindra &
+91-22-6620 3101
Mahindra’s (M&M) tractor volumes jumped 29% Q-o-Q and the company
chetan.vora@edelcap.com
maintained its dominant position.
On the corporate action front, formally Hero Group agreed to buy out Honda’s
26% stake in Hero Honda, thereby increasing its controlling stake to 52%. M&M
signed a definitive agreement to acquire 70% stake in Ssangyong for USD 463
mn.
Result expectations for the sector and stocks under coverage

Q-o-Q, we expect EBITDA margins to remain steady as operating leverage
benefits are offset by rising commodity costs. PAT for the sector is expected to
grow 13% Y-o-Y and decline 3% Q-o-Q. On the company front, HH’s and Exide’s
sequential margins are likely to improve over 50bps. At the PAT level, HH is likely
to post highest growth in sequential profit by 14% primarily on volume growth.
On the negative side, Ashok Leyland’s profit is likely to dip 60% Q-o-Q due to
lower M&HCV volumes during the quarter.
Outlook over the next 12 months

In CY11, there are some macro headwinds (higher interest rates and crude oil
prices). These factors coupled with a high base could lead to volume growth
tapering off to mid teens (from over < 25% currently). Barring the small car and
LCV segments, the competitive scenario continues to remain benign which
indicates that EBITDA margins could sustain at high levels. Going into FY12, we
would get selective in our sector pickings.
Recommendations
Top picks: Mahindra & Mahindra, Tata Motors, Ashok Leyland, Escorts.
Edelweiss
12 Research Securities
Edelweiss is also available on www.edelresearch.com,, Bloomberg EDEL <GO>, Thomson First Call, Reuters and Factset.
Limited Edelweiss Securities Limited

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Stock Q3FY11E Q3FY10 Y-o-Y Q2FY11 Q-o-Q Key highlights and things to watch out for
(INR mn) (INR mn) (%) (INR mn) (%)
Ashok Leyland Revenues 21,105 18,155 16.2 27,140 (22.2) Volumes for the quarter were low on emission norms
getting implemented, accordingly pre-buying was
EBITDA 1,832 2,062 (11.2) 3,063 (40.2) witnessed in preceeding quarter. Hence the margins and
the profit would witness sharp decline on lower volumes
Core PAT 632 1,056 (40.2) 1,671 (62.2) besides rising raw material costs.
Bajaj Auto Revenues 41,174 32,956 24.9 43,418 (5.2) Company's volume skidded post festive season for the
month of Nov and Dec. Apart from raw material
EBITDA 8,181 7,235 13.1 8,972 (8.8)
pressures, exports realisation would be key thing to
Core PAT 6,286 5,210 20.7 6,821 (7.8) monitor
Escorts Revenues 8,328 6,039 37.9 6,744 23.5 Tractor volumes would drive the topline and accordingly
EBITDA 821 519 58.2 349 135.1 the bottomline growth. Volumes have increased 22% Q-o-
Q and up 25% Y-o-Y.
Core PAT 416 234 77.9 114 266.6
Exide Revenues 11,831 9,126 29.6 11,267 5.0 Sequentially sales would rise by over 5% on two wheeler
plant getting commissioned. Margins also would witness
EBITDA 2,634 2,184 20.6 2,450 7.5 positive growth as contribution from after market sales
would increase as compared to the preceeding quarter.
Core PAT 1,685 1,305 29.1 1,660 1.5
Hero Honda Motors Revenues 50,755 38,270 32.6 45,520 11.5 Volumes have been very strong for the quarter wherein
HH gained the market share. We expect pressures on
EBITDA 7,046 6,609 6.6 6,079 15.9
account of raw material to dilute and margins to improve
Core PAT 5,762 5,358 7.5 5,056 14.0 by 50bps sequentially.
Mahindra & Mahindra Revenues 59,919 44,971 33.2 53,618 11.8 Volumes were up 13% Q-o-Q and upward trend has been
maintained. Company would be able to maintain the
EBITDA 9,362 6,855 36.6 8,483 10.4 margins despite rise in raw material costs on benefit of
operating leverage flowing through.
Core PAT 6,554 4,297 52.5 7,273 (9.9)
Maruti Suzuki India Revenues 95,489 75,029 27.3 91,473 4.4 Company operated at full capacity for the quarter. It has
not announced any price hikes till date and in the
EBITDA 9,672 11,159 (13.3) 9,603 0.7 scenario of rising raw material costs and appreciating
Yen, margins would be under pressure.
Core PAT 6,055 6,695 (9.6) 5,982 1.2
Tata Motors Revenues 317,825 260,442 22.0 287,820 10.4 CV sales for Nov and Dec were quite strong and above
expectations accordingly realisation would be sequentially
EBITDA 46,610 30,574 52.4 41,839 11.4 up. Margins could improve as benefit of cost reduction
initiatives would be felt. JLR Q-o-Q volumes were up by
Core PAT 23,954 8,846 170.8 20,954 14.3 18% wherein further benefit of operating leverage is
expected
Valuation snapshot
Mkt Cap Price PAT growth (%, Y-o-Y) P/E (x) P/B (x) RoE (%) Div yld (%)
Reco USD mn (INR) FY11E FY12E FY11E FY12E FY11E FY12E FY11E FY12E FY11E FY12E
Ashok Leyland Buy 1,913 65 59.3 20.3 13.1 10.9 2.1 1.9 17.1 18.2 2.3 2.3
Bajaj Auto Hold 8,480 1,328 32.3 14.5 15.6 13.6 7.6 5.1 62.1 45.2 0.8 0.8
Escorts Buy 392 168 20.0 25.7 10.9 8.7 0.9 0.8 8.7 10.1 0.0 0.0
Exide Industries Buy 3,102 165 20.6 22.3 21.7 17.7 5.1 4.1 25.9 25.4 0.6 0.6
Hero Honda Motors Buy 8,313 1,886 (0.6) 14.7 17.0 14.8 7.4 5.5 51.8 42.7 1.3 1.9
Mahindra & Mahindra Buy 10,154 771 10.8 12.8 19.7 17.5 4.3 3.6 25.3 22.4 0.8 0.8
Maruti Suzuki India Hold 8,760 1,374 (4.6) 11.1 16.6 14.9 2.8 2.4 18.5 17.5 0.5 0.6
Tata Motors Buy 16,562 1,261 29.4 18.9 46.0 38.7 4.0 3.7 10.2 10.4 0.8 0.8

Quarterly preview
BANKING AND FINANCIAL SERVICES
Growth strong, margins to be under pressure
• Net reverse repo (at negative INR 600bn) for the quarter remained outside
the RBI’s comfort zone. In the mid quarter policy review, the RBI announced
liquidity enhancing measures- OMO of INR 480bn over the next month and
Nilesh Parikh
SLR cut from 25% to 24%. Consequently, banking system experienced
+91-22- 4063 5470
marginal relief from extreme conditions reflecting in net reverse repo coming
nilesh.parikh@edelcap.com
to negative INR 1.1tn by end of quarter, against a high of INR 1.7tn.
• Credit growth came in strong during the quarter (~6.4% Q-o-Q), while Kunal Shah
deposit growth continued to lag (~2% Q-o-Q). CD ratio touched 76% (up +91-22-4040 7579
~3% pts).
kunal.shah@edelcap.com
• SBI initiated a steep 100bps increase in the deposit rates in the relevant 1-2
year bucket putting it notch above the peers. The move was followed by the Vivek Verma
competitors; however, a hike in deposit rate was coupled with corresponding +91-22-4040 7576
increase in the lending rates, reflecting the pricing power wielded by the vivek.verma@edelcap.com
banking system. On 3rd Jan 2011, SBI raised deposit rates once again, this
time coupled with hike in lending rate- reflecting strong pricing power
• Gsec yields have inched up to a high of 8.2%; however towards the end of
the quarter it has cooled off to 7.9% (up <1bp Q-o-Q). We do not expect any
significant MTM depreciation hit on the investments.
• With sharp spike in wholesale rates NBFCs (including HFCs) will witness some
pressure on funding cost. However, due to rise in lending rates and pricing
power in some segments like power, compression in margins in this quarter
will be limited.

For banks under coverage we expect NII growth of 27% Y-o-Y/2% Q-o-Q and
earnings growth of 18% Y-o-Y/9% Q-o-Q. Overall earnings for the quarter are
likely to be subdued sequentially on the back of lower treasury income and higher
provisioning (by PSBs). Slippages may continue to remain high, but will be lower
than Q211. PSBs will be disclosing second pension option liability during the
quarter; hence the opex ratios can go up

• Considering the slow deposit mobilization and tight liquidity, we expect
upward pressure on retail deposit rates. We believe: (a) cost pressure will be
more prevalent and the impact will be disproportionate across banks,
impacting relatively weaker franchisee more, (b) with strong pricing power
demonstrated by the banking system as credit growth picks up amidst tight
liquidity, we expect lending spreads to remain stable, (c) hit on investment
spreads to adversely impact NIMs, more so, with the LDR touching high
(75%), leaving limited scope for benefit flowing from asset re-allocation.
• NPL formation in retail is coming off, reducing credit costs, especially for
private banks. Slippages for PSBs to stabilise only over next few quarters.
However recoveries/upgrade would ensure that credit cost increase is limited.
• We expect margins for NBFCs to compress going forward if wholesale costs
sustain at high levels – however impact would be relatively lower for NBFCs
Recommendations
Top picks: HDFC Bank, ICICI, Yes Bank, Federal Bank, Bank of Baroda, Union
Bank.
Edelweiss

Quarterly preview
Allahabad Bank NII + OI 12,766 10,151 25.8 13,139 (2.8) Loan book growth expected to remain strong; margins to
PPOP 6,707 5,169 29.8 7,435 (9.8) come off marginally; slippages/second pension liability a
key monitorable
Core PAT 3,448 3,454 (0.1) 4,026 (14.3)
Axis Bank NII + OI 27,200 23,372 16.4 26,483 2.7 Given the dependence on wholesale funding and
PPOP 14,410 12,046 19.6 13,784 4.5 increasing leverage, margins are expected to come off in
rising interest rate environment; slippages from the
Core PAT 8,448 6,560 28.8 7,351 14.9 restructured portfolio continues to be a key monitorable
Bank of Baroda NII + OI 27,524 22,609 21.7 27,194 1.2 Marginal compression in NIMs; business growth to remain
PPOP 15,006 11,257 33.3 15,466 (3.0) strong; second pension liability a key monitorable
Core PAT 8,907 8,325 7.0 10,193 (12.6)

Federal Bank NII + OI 5,847 4,976 17.5 5,825 0.4 Asset quality and growth to be the key monitorable; NIMs
PPOP 3,619 3,150 14.9 3,709 (2.4) expected to contract after touching high of 4.4% in
Q2FY11
Core PAT 1,646 1,103 49.3 1,405 17.2
HDFC NII + OI 11,487 10,067 14.1 11,937 (3.8) Disbursement growth estimated at more than 28%;
PPOP 10,303 9,060 13.7 10,746 (4.1) spreads (calc.) expected at 2.6%; to book investment
gain on IL&FS of INR 1.7 bn
Core PAT 8,744 6,713 30.2 8,075 8.3
HDFC Bank NII + OI 36,067 30,769 17.2 34,870 3.4 Strong growth momentum in core loan book- both retail
PPOP 19,040 16,502 15.4 18,592 2.4 and corporate segments contributing. Credit cost
expected to settle at lower levels.
Core PAT 10,635 8,185 29.9 9,121 16.6
ICICI Bank NII + OI 41,245 37,312 10.5 37,823 9.0 Growth expected to pick up during the quarter; NIMs to
PPOP 24,319 23,948 1.5 23,559 3.2 remain stable. Credit costs expected to decline further.
Core PAT 13,920 11,011 26.4 12,363 12.6

IDFC NII + OI 5,626 4,140 35.9 6,350 (11.4) Loan growth to be strong at 45% plus; rise in wholesale
PPOP 4,330 3,060 41.5 5,111 (15.3) rates to impact margins
Core PAT 3,511 2,708 29.7 3,342 5.1

Indian Overseas NII + OI 12,505 10,529 18.8 12,308 1.6 Growth to come in strong during the quarter; NIMs to
Bank PPOP 5,930 3,888 52.5 6,009 (1.3) decline marginally; slippages expected to decline; second
pension liability a key monitorable
Core PAT 2,036 1,017 100.2 2,061 (1.2)
ING Vysya Bank NII + OI 4,094 3,497 17.1 4,475 (8.5) Business momentum to remain; credit costs to come off;
PPOP 1,444 1,368 5.6 1,212 19.1 marginal compression in NIMs
Core PAT 775 606 27.9 753 3.0

Kotak Mahindra Bank NII + OI 16,372 14,347 14.1 17,902 (8.5) Advance growth expected to be flat Q-o-Q; margins to be
PPOP 1,444 1,368 5.6 1,212 19.1 under pressure both in banking and auto financing
businesses; securities business to show improved
Core PAT 775 606 27.9 753 3.0 profitability Q-o-Q; asset quality to improve and NPLs to
decline
LIC Housing Finance NII + OI 3,803 2,748 38.4 3,696 2.9 Disbursements in individual loan segment to be strong;
PPOP 3,303 1,859 77.7 3,190 3.6 slowdown in corporate developers loans; margins to
sustain at 2.9%; provisioning on teaser loans to be
Core PAT 2,455 1,536 59.9 2,342 4.9 estimated in Q4FY11
Manappuram NII + OI 2,775 1,500 85.0 2,438 13.8 Strong dibursement growth during the quarter;
General Finance PPOP 3,303 1,859 77.7 3,190 3.6 aggressively expanded branch network; NIMs to come off
due to rise in wholesale funding cost and shift towards
Core PAT 2,455 1,536 59.9 2,342 4.9 low yielding lower LTV loans
Oriental Bank NII + OI 12,938 11,106 16.5 12,912 0.2 Margins expected to contract; business growth expected
PPOP 7,886 5,720 37.9 8,051 (2.1) to pick up during the quarter
Core PAT 3,704 2,894 28.0 3,977 (6.9)

Power Finance Corp NII + OI 9,380 7,594 23.5 9,114 2.9 Disbursements growth to continue its strong momentum;
PPOP 9,027 7,342 23.0 8,748 3.2 NIMs to come off marginally; NPLs near zero levels; forex
notional loss estimated at INR 175 mn
Core PAT 6,544 5,418 20.8 6,303 3.8
Punjab National Bank NII + OI 38,708 30,601 26.5 36,950 4.8 Strong growth momentum coupled with stable margins
PPOP 20,739 16,612 24.8 20,621 0.6 will ensure healthy NII growth. Slippages/second pension
liability a key monitorable
Core PAT 11,177 10,113 10.5 10,746 4.0
REC NII + OI 8,682 6,783 28.0 8,746 (0.7) Disbursement growth to be flat Q-o-Q; margins to sustain
PPOP 8,285 6,445 28.5 8,361 (0.9) above 4%; NPLs to remain near zero
Core PAT 6,089 4,741 28.4 6,182 (1.5)

Reliance Capital NII + OI 13,762 14,888 (7.6) 12,998 5.9 MF AUMs come off marginally - PBT of INR 600 mn in
PPOP 2,061 1,215 69.7 1,358 51.7 AMC; strong traction in consumer financing; loss in
general insurance business; profitability to improve in
Core PAT 1,649 661 149.6 1,120 47.2 Reliance Money

Quarterly preview
SBI NII + OI 124,162 96,820 28.2 121,201 2.4 Marginal contraction in NIMs; business momentum to
PPOP 1,843 41,811 (95.6) 61,600 (97.0) improve; operating expenses and slippages- a key
monitorable
Core PAT 28,087 24,791 13.3 25,014 12.3
Shriram City Union NII + OI 1,708 1,503 13.7 1,647 3.7 Disbursement growth of more than 50%; NIMs to come
Finance PPOP 1,843 41,811 (95.6) 61,600 (97.0) off marginally; asset quality to be maintained - gross
NPLs near 2%
Core PAT 28,087 24,791 13.3 25,014 12.3
South Indian Bank NII + OI 2,499 2,149 16.3 2,422 3.2 Expect growth momentum to remain strong. Asset
PPOP 1,204 1,085 11.0 1,186 1.5 quality to remain impressive.
Core PAT 757 625 21.1 770 (1.8)

SREI Infrastructure NII + OI 1,625 1,212 34.1 1,906 (14.8) Project financing & advisory to report PAT of INR 350
PPOP 0 858 (100.0) 1,301 (100.0) mn; equipment financing (where SREI holds 50%) to
report profits of INR 400 mn
Core PAT 550 453 21.4 736 (25.2)
Syndicate Bank NII + OI 13,587 9,394 44.6 13,391 1.5 Marginal NIM contraction expected; business momentum
PPOP 7,762 4,725 64.3 7,765 (0.0) to pick up; slippages and second pension liability- a key
monitorable.
Core PAT 2,965 2,057 44.1 2,371 25.1
Union Bank NII + OI 20,090 15,294 31.4 20,455 (1.8) Marginal contraction in NIMs; business growth expected
PPOP 10,039 7,832 28.2 9,996 0.4 to be in line with industry; compared to previous quarter,
slippages may impove, but may remain on higher side;
Core PAT 4,888 5,341 (8.5) 3,034 61.1 second pension liability a key monitorable
Yes Bank NII + OI 4,891 3,388 44.4 4,442 10.1 Margins expected to witness some decline given the
PPOP 3,101 2,162 43.4 2,814 10.2 increase in wholesale cost , but strong growth will ensure
steady NII performance; fees income a key monitorable
Core PAT 1,860 1,260 47.6 1,763 5.5

Quarterly preview
Valuation snapshot
Allahabad Bank Buy 2,090 212 26.5 28.6 6.2 4.8 1.3 1.1 23.4 24.6 2.6 2.6
Axis Bank Buy 11,813 1,306 31.3 28.1 16.2 12.6 2.9 2.4 19.0 20.7 1.1 1.3
Bank of Baroda Buy 6,741 839 11.7 31.5 9.0 6.8 1.9 1.5 22.6 24.6 2.1 2.5
Federal Bank Buy 1,415 375 37.6 24.9 10.0 8.0 1.2 1.1 12.9 14.5 1.6 1.9
HDFC Bank Hold 23,853 2,328 33.4 32.0 27.1 20.5 4.3 3.7 17.1 19.6 0.7 0.9
HDFC Hold 22,841 707 22.5 20.7 30.0 24.9 5.7 5.7 20.8 20.7 1.0 1.2
ICICI Bank Buy 26,702 1,053 29.9 27.2 23.2 18.2 2.2 2.0 9.8 11.6 1.2 1.3
Indian Overseas Bank Hold 1,677 139 5.7 44.2 10.2 7.0 1.1 1.0 11.3 14.7 2.2 2.9
IDFC Hold 5,413 168 19.2 31.5 19.3 15.2 2.3 2.0 14.3 14.1 1.1 1.2
ING Vysya Bank Buy 918 344 29.7 28.6 13.1 10.2 1.7 1.5 13.3 15.2 0.7 0.9
Kotak Mahindra Bank Buy 7,222 445 23.1 22.2 21.6 17.7 3.1 2.6 16.5 16.0 0.4 0.5
LIC housing finance Reduce 1,906 182 43.2 21.9 9.1 7.6 2.1 1.9 23.6 21.2 1.8 1.9
Manappuram General
Hold 1,267 138 125.6 53.2 18.1 11.8 5.1 3.7 34.4 36.3 0.6 0.8
Finance
Oriental Bank Of
Buy 2,094 379 32.5 22.2 6.3 5.2 1.1 0.9 18.9 19.7 2.4 2.4
Commerce
Power Finance Corp Buy 7,552 298 20.2 20.8 13.4 11.1 2.3 1.9 18.0 18.9 0.0 0.0
Punjab National Bank Buy 8,289 1,191 17.4 28.8 8.2 6.4 1.9 1.5 25.4 26.7 2.3 2.9
Reliance Capital Hold 3,577 660 162.9 (9.5) 14.6 16.1 1.9 1.7 0.0 0.0 1.1 1.1
Rural Electrification
Buy 5,792 266 21.4 23.9 10.8 8.7 2.1 1.7 20.4 21.7 2.4 2.4
Corporation
Shriram City Union
Buy 631 578 18.5 22.5 12.4 10.1 2.5 2.0 21.0 21.4 0.7 0.7
Finance
South Indian Bank Buy 591 24 22.5 19.8 9.2 7.5 1.6 1.4 18.0 18.6 14.0 14.0
SREI Infrastructure
Under Review 284 111 4.5 19.3 9.1 7.7 1.0 0.9 10.9 11.9 0.0 0.0
Finance
State Bank of India Hold 36,789 2,625 36.9 29.3 13.3 11.3 2.2 1.7 17.8 18.0 1.7 1.8
Syndicate Bank Buy 1,336 116 34.8 20.8 5.5 4.6 1.0 0.9 19.4 20.1 3.4 4.3
Union Bank Of India Buy 3,568 320 5.9 38.8 7.4 5.3 1.5 1.2 22.5 25.3 1.7 1.7
Yes Bank Buy 2,165 283 49.5 38.1 13.5 9.8 2.6 2.1 20.9 23.4 0.5 0.5

Quarterly preview
CEMENT
Demand growth disappoints leading to price cuts

Cement prices remained weak for the major part of 3QFY11 (with the exception of
South, where prices held firm even in the absence of demand growth). During the
quarter, highest price correction was witnessed in the East region (drop of ~5%
QoQ) while higher prices in South, kept the West region insulated from significant Navin Sahadeo
downfall. Prices remained weak as the industry demand failed to meet the +91-22-6623 3473
navin.sahadeo@edelcap.com
expectations of companies. Though October 2010 saw record growth in industry
despatches (up 18% YoY), November 2010 saw a 2% YoY decline. Industry Prasad Baji
despatches for December 2010 are estimated to remain flat, leading us to an +91-22-4040 7415
industry growth of 5% YoY for 3QFY11 as well as YTD (Apr-Dec 2010). Non- prasad.baji@edelcap.com
availability of labour due to festive season and extended monsoon in parts of
country along with sand non-availability issues in some regions (mainly West)
kept the overall demand subdued in 3QFY11.

Depending on the sales mix, the average realisations for companies are estimated
to increase in the range of 0.5% to 6.6% QoQ for pan India players. Regional
players like India Cements are however estimated to report a ~20% increase in
realisations on the back of sharp bounce back in cement prices in South.
Realisations of Ambuja Cements are estimated to be flat QoQ due to no exposure
to South and high exposure to East (26%).
We estimate EBITDA margins to decline across all companies in the range of 100-
600 bps Y-o-Y due to increased costs and lower realisations. PAT too is estimated
to decline across companies in the range of 19% to 45% YoY.

With demand expected to pick up in the busy season 4QFY11, we expect near
term uptick in cement prices from the current low levels (due to declines in
3QFY11). But the prices are unlikely to get back to their peaks seen in the last
fiscal and will broadly remain under pressure in FY12 due to ramp up in utilization
levels of new capacities and further capacity expansion. Like FY11, if the demand
growth continues to disappoint in FY12, prices can see levels witnessed by the
industry during 2QFY11. We maintain our negative view on the sector
Recommendations
Top picks: Grasim Industries.
18 Edelweiss
Edelweiss Securities
Research is Limited
also available on www.edelresearch.com,, Bloomberg EDEL <GO>, Thomson First Call, Reuters and Factset. Edelweiss Securities Limited

Quarterly preview
ACC Revenues 19,412 19,214 1.0 16,372 18.6 With support from higher prices in South, we estimate
realisations to increase by 3.4% QoQ. Volume growth
EBITDA 3,490 4,307 (19.0) 1,599 118.2 however remains muted at 3.4% YoY due to subdued
demand across regions during the quarter.
Core PAT 2,271 2,807 (19.1) 1,000 127.1
Ambuja Cements Revenues 18,068 17,710 2.0 15,640 15.5 Estimate realisation to remain flat QoQ due to no
exposure to South (region which saw bounce back in
prices) and 26% exposure to East (region which saw
price decline of ~5% QoQ). State of West Bengal
EBITDA 3,354 4,312 (22.2) 2,832 18.4
increased VAT by 1% during the mid of the quarter,
which could not be passed on. Freight cost estimated to
be higher due to movement of clinker from other plants
Core PAT 1,902 2,397 (20.6) 1,521 25.0 to make up for shutdown at HP plant. Volumes growth
estimated to be muted at 3.6% YoY
Grasim Industries Revenues 47,725 47,884 (0.3) 44,390 7.5 With production resuming normalcy during the quarter,
VSF volumes are estimated to increase by ~21% QoQ
EBITDA 10,371 13,848 (25.1) 7,211 43.8 and remain nearly flat on YoY basis. With VSF prices
seeing an uptrend globally, we estimate realisation for
Core PAT 4,663 7,153 (34.8) 3,234 44.2 the quarter to increase by ~3.5%. Results are not
comparable on a YoY basis due to the merger with
Grasim's cement business.
India Cements Revenues 7,931 8,641 (8.2) 8,412 (5.7) Though the realisations are estimated to increase by 20%
QoQ, volumes are estimated to decline by 19% QoQ and
EBITDA 982 1,165 (15.7) 286 243.4 20% YoY. Estimate forex translation loss of INR12mn for
Core PAT 128 232 (44.7) (449) 128.5 the quarter.
Ultratech* Revenues 36,223 16,518 119.3 32,147 12.7 Results are not comparable on a YoY basis due to the
merger with Grasim's cement business. Sequentially, the
EBITDA 6,892 3,836 79.7 4,078 69.0 volumes are estimated to increase by 7.5% and
realisations are estimated to increase by 6.6%.
Core PAT 3,041 1,960 55.1 1,158 162.6
*Note: Ultratech not considered for preview calculations
Valuation snapshot
ACC Hold 4,237 1,023 (27.7) (4.2) 16.6 17.3 2.8 2.5 18.1 15.5 1.9 1.8
Ambuja Cement Reduce 4,509 134 (10.7) (15.5) 18.3 21.7 2.8 2.6 16.2 12.5 1.7 1.6
Grasim Hold 4,818 2,381 (29.2) 20.9 11.9 10.1 1.5 1.4 18.1 19.3 0.8 1.0
India Cements Reduce 722 106 (8.8) (11.1) 10.1 11.4 0.9 0.8 8.8 7.3 1.0 0.9
UltraTech Cement Reduce 6,113 1,011 NA NA 19.3 14.8 2.6 2.3 18.9 16.5 0.4 0.4


Quarterly preview
CONSTRUCTION
Execution to pick up, but concerns on profitability persist

After a subdued monsoon quarter, revenue growth is likely to return in Q3FY11.
Order award activity in NHAI road BOT projects showed signs of pick up towards
the end of the quarter after a six months’ lull. We expect activity to pick up by
Q4FY11 end with a large number of projects entering the bidding process.
Orders from the industrial capex space are picking up. However, uncertainty Manish Sarawagi
regarding Andhra irrigation projects continues; most companies have adopted a +91-22- 4040 7575
‘wait-and-watch’ attitude towards these projects with some slowing/stopping manish.sarawagi@edelcap.com
execution. Interest rates have also started inching up, albeit slowly.
Parvez Akhtar Qazi
Result expectations for the sector and stocks under coverage +91-22- 4063 5405
After a disappointing performance by construction companies in Q2FY11 on the parvez.qazi@edelcap.com
top line front, Q3FY11 is likely to be better as execution is expected to pick up
post the monsoon. In our coverage universe, we expect top line to grow 20% Y- Rohit Patni
o-Y and 27% Q-o-Q (ex JPA). Execution on Andhra irrigation projects will be a +91-22-6623 3392
key moniterable for HCC, IVRCL, and Patel Engineering. rohit.patni@edelcap.com
We expect EBITDA margins (ex IRB) to improve by 40bps Q-o-Q to 12.9%.

Rising interest rates and extension in working capital cycle across many
companies implies that overall interest charges are likely to jump sharply. As a
result, PAT margins (ex IRB) are likely to dip 30bps compared to Q3FY10.

Outlook for the construction sector is positive over the next year. We expect
order inflows to remain strong with the government’s emphasis on
infrastructure development. We expect traction in the roads space to build up
with a large number of projects slated to be awarded by NHAI. Irrigation, urban
infra, and power sectors are also expected to corner a fair share of government
focus. The increase in interest rates may hurt the realty space in FY12; as a
result, order award in the building contracting space may be impacted to some
extent. After a benign FY10 and 9mFY11, we expect both commodity prices and
interest rates to increase. However, the impact on construction companies is
expected to be minimal as the changes are more or less expected and are
unlikely to catch companies by surprise. Fund availability is not expected to be a
concern; this is likely to aid the funding-intensive construction sector, both in
the form of working capital availability and long-term funds for BOT projects. A
spate of BOT project wins as well as entry by many companies into the power
development space implies that we are likely to see a significant fund raising
exercise.
Recommendations
Top picks: IRB Infra.
20
Edelweiss Edelweiss
Research Securities
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on www.edelresearch.com,, Bloomberg EDEL <GO>, Thomson First Call, Reuters and Factset. Edelweiss Securities Limited

Quarterly preview
BL Kashyap & Sons Revenues 3,989 2,732 46.0 3,112 28.2 Pick up in execution and ability to improve margins will
EBITDA 340 228 48.8 237 43.3 be a key moniterable. Monetisation in Soul Space, the
real estate arm, needs to be watched.
Core PAT 143 107 33.0 102 40.0
Consolidated Revenues 5,566 4,509 23.4 4,895 13.7 Improvement in margins needs to be seen. Also, ability
Construction EBITDA 542 404 34.3 382 42.0 to manage working capital cycle with increasing share of
govt projects needs to be watched.
Core PAT 230 212 8.4 137 68.0
Gammon India Revenues 13,919 10,156 37.1 11,807 17.9 Execution is a key monitorable since management has
EBITDA 1,146 999 14.8 1,034 10.9 given an aggressive guidance for FY11. Also, declining
profitability is a key concern
Core PAT 314 209 50.5 240 30.8
HCC Revenues 10,568 9,026 17.1 8,846 19.5 Ability to improve execution and manage the streched
EBITDA 1,326 1,017 30.4 1,133 17.0 working capital cycle needs to be watched. Also, capacity
to manage interest costs amidst rising interest rates will
Core PAT 194 148 31.4 121 60.2 be under scanner.
IRB Infrastructure Revenues 5,506 4,331 27.1 4,903 12.3 Pick up in execution on EPC projects will need to be
EBITDA 2,687 2,271 18.3 2,364 13.7 watched. Also, any improvement in toll collection on
operational BOT projects needs to be seen.
Core PAT 1,148 914 25.5 991 15.8
IVRCL Infra Revenues 15,361 11,840 29.7 10,750 42.9 Traction in revenue growth will be the key monitorable.
EBITDA 1,473 1,156 27.5 953 54.6 Possible expansion in margins and ability to manage
working capital cycle needs to be watched.
PBT 485 458 5.9 233 108.3
Jaiprakash Assoc. Revenues 32,747 29,638 10.5 30,712 6.6 We expect JPA to post an improvement in revenues
across the key divisions of cement, real estate and EPC.
EBITDA 8,028 8,891 (9.7) 7,590 5.8 EBITDA margins are expected to be lower chiefly on
account of cement division which has been witnessing
Core PAT 1,579 3,140 (49.7) 1,155 36.7 depressed pricing and a stable cost environment.
Marg Revenues 2,447 2,066 18.4 2,315 5.7 EPC execution to maintain Q2 pace, while blended
margins ( external & internal ) could remain stable. Port
EBITDA 298 342 (12.8) 270 10.4 should continue to operate at 75-80% Phase I (6 MTPA)
capacity utilisation levels during the quarter. EPC order
Core PAT 151 206 (26.5) 134 13.0 inflow, driven by SEZ/Real estate activity, to be
monitored
Nagarjuna Const. Revenues 14,460 11,870 21.8 12,013 20.4 Company's guidance of a sharp pick in revenues in
EBITDA 1,449 1,181 22.7 1,234 17.4 H2FY11 needs to be watched out. Also, ability to manage
interest costs needs to be seen.
Core PAT 557 479 16.4 460 21.2
Patel Engg Revenues 8,958 6,330 41.5 7,659 17.0 High exposure to Andhra projects means that revenue
growth and working capital cycle needs to be monitored.
EBITDA 1,489 1,192 24.9 1,161 28.3 Possible expansion in margins due to rising share of
PBT 434 444 (2.2) 436 (0.5) realty revenues will also need to be seen.
Simplex Infra Revenues 12,504 10,668 17.2 10,515 18.9 With a pick-up in order intake, ability to translate orders
EBITDA 1,240 969 28.0 1,057 17.3 into revenue growth needs to be watched. Also,
managning working capital cycle will be a key metric.
Core PAT 328 231 42.0 269 21.9

Quarterly preview
Valuation snapshot
BL Kashyap & Sons Buy 141 31 22.3 44.6 12.5 8.6 1.1 1.0 9.5 12.3 0.3 0.3
Consolidated Construction Hold 244 60 (3.7) 30.3 12.9 9.1 1.7 1.4 15.3 17.4 0.8 0.8
Gammon India Buy 482 171 (20.2) 7.5 17.3 16.7 1.1 1.0 6.6 6.3 0.2 0.2
Hindustan Construction
Buy 619 46 26.7 39.6 27.0 19.4 1.8 1.6 6.6 8.7 0.9 0.9
Company
IRB Infrastructure
Buy 1,689 230 16.0 10.4 16.7 14.6 3.1 2.6 20.4 19.6 0.7 0.7
Developers
IVRCL Infrastructures &
Buy 752 128 (13.7) 18.5 19.3 16.3 1.7 1.5 9.2 9.3 0.6 0.6
Projects
Jaiprakash Associates Buy 4,925 105 16.7 27.4 21.4 16.8 2.4 2.1 11.7 13.5 0.9 1.1
Marg Buy 110 151 207.4 345.8 29.9 7.1 0.9 0.8 4.6 14.4 0.0 0.0
Nagarjuna Construction
Buy 800 141 23.9 10.7 16.0 14.4 1.5 1.4 9.7 9.9 0.9 0.9
Co
Patel Engineering Buy 461 299 8.7 20.3 10.2 8.4 1.3 1.2 15.5 16.2 0.7 0.7
Simplex Infrastructures Hold 444 407 18.1 31.6 14.0 10.3 1.8 1.6 14.0 16.0 0.5 0.5

Quarterly preview
ENGINEERING & CAPITAL GOODS
Strong revenue growth

Tendering activity has been strong, particularly in power and railways space, while
it has been muted in oil & gas and roads. Also, there was a strong negative
sentiment owing to mega order awards for power equipments to foreign players.
However, certain bid norm changes in the T&D industry for PGCIL and NTPC
tenders is likely to be positive for domestic T&D entities like Crompton, Areva T&D Amit Mahawar
etc. +91 22 4040 7451
amit.mahawar@edelcap.com
We expect the sector’s revenues to jump 20% Y-o-Y, led by 28% Y-o-Y growth in Rahul Gajare
BHEL and 24% Y-o-Y growth for Larsen & Toubro (L&T). Apart from large caps, +91-22-4063 5561
we also expect strong revenue growth in Thermax, Cummins India and BGR rahul.gajare@edelcap.com
Energy (BGR) in 3QFY11. We expect a 15% Y-o-Y growth in sector PAT, largely on
back of healthy execution during the quarter. Unlike H1FY11, we expect sector
OPMs to remain largely flattish Y-o-Y with input cost benefits largely over for
BHEL. While L&T could report a decent new order growth in 3QFY11, we expect
Q4FY11 to be strong for BHEL in terms of new business flow.

A large number of tenders in the power and railways space indicate a strong
ordering traction over the next few months. While NTPC’s bulk tender for 14,460
MW is expected to be awarded in the next few months benefiting companies in
the domestic space, major awards by PGCIL should be beneficial for companies in
T&D equipment and T&D EPC space. We particularly expect T&D equipment
companies to post strong performance in terms of earnings quality and execution,
as operations normalise for a few MNC equipment companies, which will further
be complemented by reducing intensity of competition from Korean and Chinese
players due to bid norm changes by PGCIL.
Top Picks: BHEL, Crompton Greaves, Thermax, Cummins India, KEC

International.
Edelweiss Research is also available on www.edelresearch.com,, Bloomberg EDEL <GO>, Thomson First Call, Reuters and Factset. Edelweiss Securities
Edelweiss Limited 23
Securities Limited

Quarterly preview
ABB Revenues 21,448 19,016 12.8 13,490 59.0 Expect a gradual pick up in profitability, new order
EBITDA 1,815 1,921 (5.5) 345 426.1 inflows in power should be a thing to watch out for.
Core PAT 1,150 1,200 (4.2) 115 900.0

AIA Engineering Revenues 3,000 2,546 17.8 2,585 16.1 Expect strong revenue growth during the quarter. Dip is
EBITDA 694 665 4.4 624 11.2 margin expected to moderate the earnings growth.
Core PAT 514 491 4.7 449 14.5

Bajaj Electricals Revenues 6,902 5,921 16.6 5,878 17.4 Revenue growth expected to be flat in E&P while the
margin is expected to improve compated to Q2FY11.
EBITDA 645 608 6.1 446 44.7 Consumer durable business expected to maintain strong
momentum while lighting business could see margin
Core PAT 331 341 (3.0) 234 41.3 pressure.
BGR Energy Revenues 11,388 6,351 79.3 11,356 0.3 We expect strong execution of its BOP and EPC projects
EBITDA 1,308 714 83.2 1,323 (1.1) to continue this quarter. Order inflows to be watched out
for.
Core PAT 719 419 71.6 778 (7.6)
BHEL Revenues 92,235 72,292 27.6 84,906 8.6 Expect robust execution for the quarter, driven by
expanded capacities. Also do not expect any material
EBITDA 20,279 15,617 29.9 16,324 24.2
input cost benefit during the quarter. New order inflows
Core PAT 13,484 10,726 25.7 11,423 18.0 key thing to watch out for.
Crompton Greaves Revenues 24,579 22,464 9.4 23,979 2.5 New order inflows for power systems division to be a key
monitorable both in India and oveseas subsidiaries.
EBITDA 3,496 3,200 9.3 3,332 4.9
Expect a stable margin performance for the quarter.
Core PAT 2,105 1,996 5.5 2,136 (1.5)
Cummins India Revenues 10,986 8,279 32.7 10,914 0.7 Revenue growth to remain strong led by both domestic &
export sales. We expect margins to fall Y-o-Y since
EBITDA 2,050 1,898 8.0 2,172 (5.6)
Q3FY10 was exceptionally strong where it had reported
Core PAT 1,556 1,481 5.1 1,679 (7.3) all time high EBITDA margins.
Elecon Engg Revenues 2,862 2,512 13.9 2,809 1.9 Expect moderate revenue growth. Dip in margin expected
EBITDA 416 390 6.7 400 4.0 to put pressure on earnings.
Core PAT 149 198 (24.7) 142 4.9

Havells India Revenues 6,872 5,913 16.2 6,966 (1.3) Domestic demand expected to continue to be strong.
New Product launch expected to add to other expenses.
EBITDA 848 801 5.9 838 1.2 Sylvania sales are strong in other emerging markets
especially the Latin American market.
Core PAT 629 589 6.8 579 8.6
Jyoti Structures Revenues 6,106 5,121 19.2 5,423 12.6 We expect execution to be strong with margins to remain
EBITDA 656 594 10.4 631 4.0 flat.
Core PAT 259 234 10.7 248 4.4

KEC International Revenues 12,785 9,377 36.3 10,007 27.8 Results are not comparable on a YoY basis due to the
acquisition of SAE towers. We expect KEC to report
EBITDA 1,302 926 40.6 1,009 29.0 strong revenue growth. The order pipeline is very strong
& we expect KEC to report robust order inflow growth.
Core PAT 614 420 46.2 427 43.8
Kalpataru Power Revenues 8,117 7,192 12.9 6,315 28.5 We expect execution to be strong with margins to remain
EBITDA 885 822 7.7 732 20.9 flat. KPPs is expected to remain healthy order inlfow
growth.
Core PAT 529 441 20.0 414 27.8
L&T Revenues 100,976 81,222 24.3 93,308 8.2 We expect revenues to pick up in 2HFY11 for the
company on the back of improved E&C execution. While
EBITDA 11,995 10,069 19.1 10,057 19.3 the compnay could achieve its FY11 order inflow growth
guidance, it might still miss on the BTG orders.
Core PAT 7,757 6,963 11.4 6,941 11.8
Punj Lloyd Revenues 24,585 29,178 (15.7) 19,876 23.7 Execution to remain a key challenge on the back of
EBITDA 2,261 2,242 0.8 1,832 23.4 infrastructure's heavy order book, which we see as a
major concern for the near term
Core PAT 615 125 392.0 239 157.3
Siemens Revenues 21,569 18,666 15.6 30,610 (29.5) We expect storng ordering momentum from domestic
EBITDA 2,892 3,632 (20.4) 4,020 (28.1) T&D market for Siemens for Q1FY11E. Overall business
margins a key concern for the company
Core PAT 1,761 2,364 (25.5) 2,536 (30.6)

Quarterly preview
Sterlite Technolgies Revenues 7,909 8,673 (8.8) 5,094 55.3 Expect pick up in orders for conductor as Power Grid has
EBITDA 1,172 1,044 12.3 906 29.4 started giving our orders. Margins expected to improve.
Core PAT 721 636 13.4 576 25.2

Techno Electric Revenues 2,201 1,670 31.8 2,068 6.4 Expect the company to post higher revenue and earnings
EBITDA 566 367 54.2 609 (7.1) from the renewable energy portfolio. Order inflows to be
watched out for.
Core PAT 412 308 33.8 446 (7.6)
Thermax Revenues 10,755 7,482 43.7 10,916 (1.5) We expect TMX to repeat its Q2FY11 performance.
EBITDA 1,263 894 41.3 1,286 (1.8) Revenue growth to remain strong on back of contractual
obligatins. Near term order inlflow to remain healthy.
Core PAT 843 565 49.2 895 (5.8)
Tractors India Revenues 3,185 2,116 50.5 3,545 (10.2) We expect a sharp Y-o-Y revenue growth with EBITDA
margins to remain flat.
EBITDA 274 179 53.1 292 (6.2)
Core PAT 113 63 79.4 143 (21.0)
Voltamp Revenues 1,594 1,445 10.3 1,243 28.2 Capacity utilisation expected to pick up, given excess
Transformers EBITDA 160 328 (51.2) 125 28.0 capacity in the small transformer range. Margins are
expected to continue to reel under pressure.
Core PAT 126 241 (47.7) 93 35.5
Voltas Revenues 11,788 9,928 18.7 10,651 10.7 Execution expected to be slower in the MEP division. The
EBITDA 1,028 898 14.5 1,075 (4.4) other product divisions are expected to record strong
growth. Also, order inflows from the international
Core PAT 737 757 (2.6) 924 (20.2) geographies are to be watched.
Valuation snapshot
ABB India Hold 3,738 799 (51.7) 203.7 98.8 32.5 6.7 5.6 6.9 18.8 0.3 0.3
AIA Engineering Buy 865 416 12.8 22.7 20.3 16.6 3.7 3.1 19.6 20.2 0.7 0.9
Bajaj Electricals Buy 520 238 13.7 28.1 15.7 12.2 3.8 3.1 26.9 27.9 1.3 1.6
BGR Energy Buy 1,066 670 44.5 31.0 16.6 12.6 4.8 3.5 33.9 32.1 0.4 0.4
Bharat Heavy Electricals Buy 24,938 2,308 27.7 24.6 20.6 16.5 5.6 4.4 30.5 29.9 1.0 1.0
Crompton Greaves Buy 4,306 304 8.8 14.9 21.7 18.9 5.9 4.6 31.0 27.5 0.5 0.5
Cummins India Buy 3,307 757 42.7 32.1 23.7 17.9 7.7 5.9 36.0 37.1 1.6 1.6
Elecon Engg. Buy 155 76 3.6 9.1 10.3 9.4 1.9 1.6 19.5 18.3 2.0 2.0
Havell's India Buy 1,077 391 319.9 30.4 16.7 12.8 7.4 4.9 55.2 46.1 0.7 0.7
Jyoti Structures Hold 247 136 17.6 15.6 10.4 9.0 1.9 1.6 19.4 18.8 0.7 0.7
KEC International Buy 538 107 37.5 29.9 11.3 8.7 2.5 2.0 25.6 25.2 1.2 1.2
Kalpataru Power
Hold 568 168 24.5 10.7 12.1 11.0 1.6 1.4 16.3 13.6 0.9 0.9
Transmission
Larsen & Toubro Hold 25,189 1,878 20.3 24.7 27.6 22.1 4.7 4.0 18.4 19.7 0.7 0.7
Punj Llyod Reduce 800 109 51.7 121.0 29.8 13.5 1.2 1.1 4.0 8.3 0.3 0.3
Siemens Hold 6,020 809 49.0 14.7 29.0 28.1 6.7 5.6 25.4 21.7 0.6 0.6
Sterlite Technologies Buy 594 76 13.9 21.8 10.6 8.7 2.3 1.8 26.8 25.6 0.7 0.7
Techno Electric Buy 425 336 16.2 17.2 14.0 11.9 3.2 2.6 25.9 24.0 0.7 0.6
Thermax Buy 2,210 840 50.3 31.8 25.8 19.6 7.2 5.4 31.4 31.7 0.6 0.6
TIL Ltd Buy 159 719 4.1 3.4 11.6 11.2 2.2 1.9 21.1 18.3 0.8 0.8
Voltamp Transformers Hold 173 775 4.3 9.3 9.1 8.3 1.9 1.6 23.4 21.2 1.6 1.6
Voltas Buy 1,595 218 8.3 25.7 18.7 14.9 5.4 4.3 31.9 32.2 0.8 0.8


Quarterly preview
FMCG
Volumes healthy; gross margins under pressure
Key highlights of the sector over the past 12 months January 7, 2011
Last year saw launches of several new products and categories. With competition
heating up amongst regional players and MNCs, A&P spends in the FMCG sector
have also skyrocketed. Last year saw a surge in M&A activities, with GCPL, Marico
and Dabur leading the pack. Past 12 months also saw COGS deflation, when
Abneesh Roy
almost all players benefitted. However, in the latter half input costs rose, led by
higher crude prices. Overall, most FMCG players have registered strong volume +91 22 6620 3141
growth in the past 12 months. abneesh.roy@edelcap.com
Nitin Mathur
Q3FY11 result season for the sector
+91 22 6620 3073
Volume growth was buoyant, led by recovery in urban and rural consumption with
nitin.mathur@edelcap.com
rural market growing at faster pace in some categories. Q3FY11 witnessed return
of pricing power to a certain extent. There was margin squeeze Y-o-Y due to
Harsh Mehta
higher input costs; however, some FMCG companies (like Dabur, United Spirits
+91 22 4063 5543
and Nestle) are better placed than others. Easing off promotional pressure will
harsh.mehta@edelcap.com
cool off A&P spending Q3FY11 onwards. However, companies will continue to
invest in ads, which, we believe, is good for the long term. Regulatory
environment continued to improve for branded liquor. Competition rose in
segments like noodles, toothpaste, shampoos and paints.
Outlook for the next 12 months

Favourable macroeconomic factors such as GDP and population growth, coupled
with rising income levels and lifestyle changes could drive growth in the FMCG
sector. With return of pricing power, we believe volumes with higher margins will
drive profitability. Potential price war in the oral care space is likely due to entry
of P&G which is likely to impact Colgate the most. Intense competition is being
seen in the noodles segment with the entry of ITC and GSK Consumer, which
Nestle has dominated for a long time. Cost inflation in crude linked input like LAB,
LLP, etc., is a concern for some FMCG players. Emami and GCPL are actively
looking for inorganic growth opportunities. Value destructive M&A is key concern.
Top picks
ITC, Hindustan Unilever, Dabur, Godrej Consumers Products, United Spirits.
26 Edelweiss

Quarterly preview
Asian Paints Revenues 19,800 16,200 22.2 18,108 9.3 Demand outlook positive for decorative paints. Volume
EBITDA 3,523 3,181 10.8 3,315 6.3 growth expected to bounce back this quarter due to
normal weather condition, festive season and positive
Core PAT 2,350 1,985 18.4 2,147 9.5 consumer sentiments. We expect A&P spends to rise on
account of higher competitive intensity and ad rate
inflation. Input prices have increased sharply, which
could impact margins
Colgate Revenues 5,544 4,906 13.0 5,518 0.5 Volumes expected to be strong, however on account of
EBITDA 1,125 1,008 11.6 1,122 0.3 rising competitive intensity from Anchor, HUL, Dabur ad
spends remains key concern
Core PAT 1,090 1,059 3.0 1,003 8.7
Dabur Revenues 10,651 9,262 15.0 9,728 9.5 Chyawanprash sales is expected to surprise positively .
EBITDA 1,997 1,773 12.6 2,028 (1.5) Pressure on margins will sustain following higher
commodity costs.
Core PAT 1,544 1,378 12.0 1,604 (3.7)
Emami Revenues 4,150 3,496 18.7 2,724 52.4 Emami is expected to maintain good volume growth but
some segments are likely to see slowdown as winter was
EBITDA 1,155 1,050 10.0 575 100.7
delayed. EBITDA margins will be under pressure led by
Core PAT 900 783 15.0 534 68.7 higher COGS.
Godrej Consumer Revenues 8,550 5,176 65.2 9,528 (10.3) Soaps decline is expected to reverse after a few quarters.
EBITDA 1,539 1,014 51.7 1,690 (8.9) Competitive intensity and increased COGS could lead to
stretched margins.
Core PAT 1,120 851 31.6 1,311 (14.5)
Hindustan Unilever Revenues 49,997 45,043 11.0 46,809 6.8 Volume growth is expected to remain in double digits in
EBITDA 7,688 7,185 7.0 5,631 36.5 spite of a relatively high base last year. However higher
COGS may impact margins.
Core PAT 6,562 6,249 5.0 5,661 15.9
ITC Revenues 53,476 45,319 18.0 50,612 5.7 All businesses are expected to do well. Cigarette volumes
are expecetd to be flat. Hotels, along with agri and paper
EBITDA 18,834 16,593 13.5 17,889 5.3 product businesses, are expected to contribute
meaningfully to profitability. Non-cigarette FMCG is
Core PAT 13,100 11,442 14.5 12,468 5.1 expected to surprise on the positive
Marico Revenues 7,800 6,696 16.5 7,788 0.2 High copra prices will impact margins.
EBITDA 940 988 (4.8) 993 (5.3)
Core PAT 640 622 2.9 707 (9.4)
Nestle India Revenues 16,400 13,518 21.3 16,373 0.2 Increased competitive intensity in noodles segment, a
EBITDA 3,050 2,281 33.7 3,219 (5.3) key concern. High raw material inflation is expected to
impact its margin.
Core PAT 1,890 1,429 32.2 2,186 (13.5)
United Spirits Revenues 16,500 13,468 22.5 13,542 21.8 Volume growth expected to be strong with stable
EBITDA 2,673 2,212 20.9 2,191 22.0 mollases prices.
Core PAT 1,046 968 8.0 746 40.2
Valuation snapshot
Asian Paints Buy 6,028 2,849 5.2 18.2 29.4 24.9 12.7 10.6 45.3 43.5 1.4 1.9
Colgate Hold 2,571 857 10.4 13.9 24.9 21.9 33.8 31.8 139.2 149.5 3.3 3.7
Dabur Buy 3,895 101 20.8 25.9 29.0 23.0 12.8 9.8 49.9 48.2 1.3 1.6
Emami Buy 1,448 434 37.4 25.6 28.1 22.4 7.9 6.5 30.4 31.8 1.2 1.6
Godrej Consumer Buy 2,815 394 44.6 23.1 26.0 21.1 7.0 5.7 35.3 29.7 1.2 1.4
Hindustan Unilever Buy 15,448 321 8.0 15.7 31.5 27.2 22.3 17.4 77.8 71.9 2.0 2.0
ITC Buy 30,424 179 18.4 17.9 27.4 23.2 8.0 6.8 31.6 31.7 1.5 1.8
Marico Buy 1,731 128 24.5 21.4 26.9 22.2 9.5 7.4 39.9 37.4 1.1 1.3
Nestle Hold 8,158 3,834 24.7 23.0 45.3 36.8 51.6 41.9 125.9 125.8 1.6 1.9
United Spirits Buy 3,904 1,409 130.1 37.5 33.4 24.3 4.1 3.7 13.4 16.3 0.9 1.2

Quarterly preview
HOSPITALITY
Good times to continue

Hotels across cities are witnessing better occupancies Y-o-Y due to strong revival in
business sentiments. As per DGCA, air traffic jumped 23.5% during April-November
2010 against the corresponding period in 2009, signaling strong revival in the
overall business environment. Occupancies are up 10-15% across major cities Y-o-
Y, with cities like Delhi, Kolkata, and Chennai witnessing more than 70% occupancy Manav Vijay
in October 2010. In the current tourist season, hotels are looking forward to ORs of +91-22-4063 5413
75-80% after a long lull. ARRs are expected to show strong growth and are manav.vijay@edelcap.com
expected to remain buoyant in Q4 as well. FTA growth in January-November 2010
was 10.4% (4.93 mn arrivals) against 14.8% during November 2010 Y-o-Y. Manish Sarawagi
+91-22- 4040 7575
Due to adverse publicity during Commonwealth Games 2010, FTA’s during October manish.sarawagi@edelcap.com
2010 were not as per expectations. 2011 Cricket World Cup during February and
March 2011 are expected to keep ORs high.

With ORs of 75-80% and 10-15% Y-o-Y rise in ARRs, we expect hotel companies to
report EBIDTA margins of 35-40%. After a turbulent 2009 and 2010, we expect the
current quarter to be one of best quarters for the Indian hospitality sector due to
the healthy business environment and general feel good factor in the economy. Due
to the continuous writing off of members by MHRIL, we expect membership
additions to remain under pressure. We expect the changes adopted by the
company to take a few more quarters to reflect positive results. Cox & Kings is
expected to post a normal 15-20% growth in sales. Same store sales (SSS) growth
in the case of Jubilant Foodworks (JFL) is expected to come off from the 40% plus
reported in H1FY11 due to the high base effect.

With strong revival in the economy, we expect hotel companies to report robust ORs
and ARRs over the next 12 months. Strong revival in domestic air traffic during
January-November 2010 is indicative of buoyancy in leisure and business traffic.
Sports events like Cricket World Cup in Q4FY11 are expected to be conducive to
hotels for reporting strong numbers. MHRIL is facing strong headwinds to increase
its membership base as growth in the number of rooms has slowed down
dramatically. With international operations already contributing more than 50% to
sales, we expect CNK to report strong growth in numbers (we have not factored in
any acquisition from CNK). The SSS growth of JFL is expected to come off due to
high base effect going forward.
Recommendations
Top picks: Indian Hotels, Taj GVK.
28 Edelweiss
Research is Limited

Quarterly preview
Cox and Kings Revenues 1,026 789 30.0 1,073 (4.4) Q3 being the strong quarter for the international
operations, strong uptick is expected from the
EBITDA 411 303 35.6 488 (15.8)
subsidiaries. Increasing working capital requirement
Core PAT 204 195 4.6 349 (41.5) needs to be tracked closly.
East India Hotels Revenues 3,374 2,383 41.6 2,169 55.6 Y-o-Y increase expected in ARRs, improvement in ORs,
timelines in regard to the rights issue, usage of the rights
EBITDA 1,243 781 59.2 122 918.9 money and the performance of BKC, Trident and Oberoi,
Core PAT 448 223 100.9 (150) 398.7 Nariman Point to be the key monitoriables
Hotel Leela ventures Revenues 1,670 1,277 30.7 1,056 58.1 Y-o-Y increase in ARRs, improvement in ORs, and the
EBITDA 736 511 44.0 243 202.9 announcement for the commencement of Delhi property
Core PAT 298 289 3.1 (48) 720.8

Indian Hotels Revenues 5,563 4,379 27.0 3,285 69.3 Increase in ARRs along with higher ORs are the main
data points to watch out. Some announcement in regard
EBITDA 1,949 1,512 28.9 366 432.5
to the improvement in international operations would also
Core PAT 971 649 49.6 (63) 1,641.3 be keenly awaited.
Jubilant Revenues 1,874 1,174 59.6 1,634 14.7 Same store sales expected to slow down due to high base
EBITDA 328 197 66.5 297 10.4 effect; EBIDTA margins are also expected to remain
muted close to 18%
Core PAT 201 114 76.3 184 9.2
Mahindra Holidays Revenues 1,458 1,247 16.9 1,135 28.5 New membership addition, along with writing off the old
members, introduction of new schemes and also the
EBITDA 543 398 36.4 286 89.9
effect of changes made in the sales strategy to help
Core PAT 340 238 42.9 183 85.8 improve the membership addition
Taj GVK Revenues 866 642 34.9 598 44.8 Increase in ARRS along with higher ORs are the main
EBITDA 413 260 58.8 193 114.0 data points to watch out. Numbers of business days lost
due to the ongoing Telengana issue is also an important
Core PAT 219 122 79.5 74 195.9 factor.
Valuations snapshot
Cox And Kings (India) Hold 808 537 32.3 26.9 26.2 20.6 2.2 2.0 13.8 13.6 0.4 0.4
EIH Hold 986 114 89.2 47.8 33.2 22.5 3.1 2.8 9.4 13.1 1.3 1.3
Hotel Leela Venture Buy 402 47 (11.6) 32.2 60.8 46.0 3.2 3.1 4.8 6.2 0.6 1.1
Indian Hotels Company Buy 1,613 101 263.6 90.6 35.5 20.2 2.6 2.2 7.6 11.8 1.0 1.0
Jubilant Foodworks Reduce 887 624 128.5 24.8 51.9 41.6 21.3 15.1 50.3 42.4 0.2 0.4
Mahindra Holidays &
Reduce 771 415 (2.5) 23.4 30.6 24.8 6.9 5.8 24.1 25.4 1.1 1.2
Resorts
Taj GVK Hotels & Resorts Buy 179 129 62.0 31.0 13.6 10.4 2.5 2.1 19.1 21.8 2.3 2.3


Quarterly preview
IT
Demand strong; margin headwind

Demand environment continued to remain strong during the quarter. Our recent
interaction with companies suggests that barring the impact of fewer working
days during the quarter, performance will be similar to that reported in Q2FY11.
The trend of stable pricing and high attrition seems to have remained unchanged.
While the employee pyramid is likely to be favourable, appreciation of INR vis-à- Ganesh Duvvuri
vis USD and GBP on an average for the quarter will act as a headwind for +91-22-2286 7586
margins. ganesh.duvvuri@edelcap.com
Result expectations for the sector and stocks under coverage Kunal Sangoi
We expect volume growth of 5-6% Q-o-Q in Q3FY11 across the board. While +91-22-6623 3370
pricing has remained stable, given that the USD has depreciated against the GBP kunal.sangoi@edelcap.com
and EUR, reported pricing is likely to show some uptick. Thus, in USD terms we
expect average revenue growth of 6-7% Q-o-Q.
EBITDA margins are likely to decline in Q3FY11 as utilisation will remain lower Q-
o-Q due to fewer working days and as the INR has appreciated against the USD
and GBP. While we expect 60bps Q-o-Q decline in margins for Infosys, Tata
Consultancy Services (TCS) is likely to face a fall of 80bps Q-o-Q also on account
of bad debt provision in Q2FY11. Wipro is likely to report stable margins as in
Q2FY11 their margins had declined 240bps Q-o-Q. HCL Tech (HCLT), in our view,
will report a marginal decline primarily due to INR appreciation and continued
investments in SG&A.
We expect Infosys to surpass its revenue guidance of USD 1,562 mn and report
USD 1,584 mn in Q3FY11. As Infosys’ current EPS guidance of INR 115-117 is
based on an exchange rate of INR 44.5 against the USD and the closing rate for
Q3FY11 is INR 45.1/USD, its EPS guidance is likely to be revised up ~5%.
In mid caps, like in the previous quarter, the December quarter too Infotech and
Hexaware are likely to report 10% and 7% USD growth (partly benefiting from
cross currency movement), respectively. While the former’s EBITDA margins are
likely to improve marginally (50bps), the latter’s are likely to improve 120bps Q-
o-Q.

We expect management commentary to remain positive during the results
season. We believe, demand remains strong and hence revenue growth is less of
a concern for tier 1 companies. But, given the continued high level of attrition and
competition precluding increase in billing rates, the challenge for the sector is to
defend margins. Companies believe that growth in FY11 was not driven by pent
up demand and hence not one-off, implying that growth could sustain in FY12. We
have revised our FY12 USD revenue growth assumption upwards to 26-30% and
believe the street will also follow suit (currently factoring in 22-24%) for tier 1 IT
companies that will lead to continued stock outperformance.
Recommendations
Top picks: Tata Consultancy Services, HCL Tech in large caps.
Infotech in mid caps.
30 Edelweiss

Quarterly preview
HCL Tech Revenues 37,826 30,325 24.7 36,116 4.7 High growth in Custom application development to
continue to lead revenue growth. EBITDA margins to
EBITDA 6,068 6,386 (5.0) 5,876 3.3 decline marginally due to INR appreciation and
investments in SG&A. Lower forex losses to boost net
Core PAT 3,612 2,740 31.8 3,000 20.4 profit. Cash flow generation to be keenly watched.
Hexaware Revenues 2,905 2,520 15.3 2,817 3.1 Revenue growth to be strong at 7% in USD; EBITDA
margins to improve to 10% level; forex gain to boost
EBITDA 283 450 (37.2) 240 17.7
PAT. Expect 5%+ guidance for Q1CY11 with positive
Core PAT 305 360 (15.2) 420 (27.3) margin trend commentary.
InfoEdge Revenues 770 589 30.8 712 8.2 Hiring momentum and improved real estate market to
drive revenue growth. Higher investments in non-
EBITDA 249 179 38.8 214 16.5
recruitment segment (through increased ad spend) to
Core PAT 194 156 24.0 179 8.5 impact margins negatively.
Infosys Revenues 71,032 57,410 23.7 69,470 2.2 Volume growth of 5.7% driven by short ROI projects.
EBITDA margin likely to decline by 60bps due to fewer
working days and INR appreciation against USD & GBP.
EBITDA 23,235 20,380 14.0 23,130 0.5
FY11 USD EPS guidance likely to be raised by ~5%.
Commentary on large deal wins to be keenly watched for
Core PAT 17,742 15,820 12.2 17,370 2.1 long-term visibility.
Infotech Revenues 3,134 2,391 31.1 2,955 6.1 EMI growth growth and favourable cross currency
movement to aid 10% USD growth. EBITDA margins to
EBITDA 501 518 (3.2) 457 9.6 improve only by 50bps due to continuing higher attrition.
New contract wins and pricing trend to be watched.
Core PAT 383 379 1.0 330 16.0
Mphasis Revenues 13,762 11,916 15.5 13,454 2.3 Volume growth to remain strong margins . Pricing
EBITDA 3,303 3,136 5.3 3,204 3.1 negotiation to conclude by end of Jan. and only go-to-
market likely to be impacted by price revision.
Core PAT 2,728 2,682 1.7 2,840 (3.9)
Patni Revenues 8,214 7,896 4.0 7,967 3.1 Growth muted as compared to peers. Margins to decline
due to INR appreciation. Expect muted guidance to
EBITDA 1,529 1,675 (8.7) 1,505 1.6
continue. Promoter stake sale could result in uncertainty
Core PAT 1,179 1,878 (37.2) 1,281 (8.0) for top management.
Rolta Revenues 4,436 3,756 18.1 4,276 3.7 Continued traction in IP based solutions, margins to
decline due to rupee impact; new order booking and
EBITDA 1,721 1,423 21.0 1,697 1.4
particularly in engineering services to watch out.
Core PAT 673 691 (2.6) 679 (0.9)
TCS Revenues 96,330 76,503 25.9 92,864 3.7 USD revenue growth of 7.2% with strong execution;
rupee appreciation and moderation in utilisation to lead
EBITDA 28,099 22,717 23.7 27,894 0.7 to margin decline by 1.2%. Client budget for CY11 and
margin outlook for FY12 to be watched out for
Core PAT 21,663 17,975 20.5 21,065 2.8
Wipro Revenues 80,141 69,380 15.5 77,719 3.1 USD revenue growth of 4.8% (USD 1,333 mn); margins
to remain flat Q-o-Q. Utilisation to remain stable, while
EBITDA 16,940 15,127 12.0 16,415 3.2 realisation to inch up due to corss-currency benefit.
Margin outlook for FY12 and growth avenues will be
Core PAT 13,160 12,033 9.4 12,849 2.4 closely watched
Valuation snapshot
HCL Tech Buy 7,212 478 30.1 33.9 20.6 15.4 3.9 3.3 21.1 23.6 0.9 0.9
Hexaware Technologies Buy 385 120 (43.2) 99.1 18.2 11.8 1.8 1.7 8.5 15.3 1.2 1.2
Info Edge Reduce 747 620 39.3 27.6 47.6 37.4 8.0 6.6 18.0 19.4 0.3 0.3
Infosys Technologies Hold 44,070 3,478 10.5 22.6 28.9 23.6 7.2 6.0 27.2 27.8 1.1 1.3
Infotech Enterprises Buy 426 173 (13.7) 20.9 13.2 11.2 1.9 1.6 15.2 15.7 1.4 1.3
Mphasis Reduce 3,154 681 79.4 20.0 15.8 13.1 6.1 4.3 48.1 38.6 0.5 0.6
Patni Computer Systems Hold 1,341 463 (5.1) (15.6) 11.5 14.0 2.0 1.7 16.1 13.1 14.1 0.5
Rolta India Buy 559 157 17.4 13.5 9.1 8.0 1.4 1.2 16.4 16.4 2.2 2.5
Tata Consultancy Services Buy 50,610 1,172 21.2 21.2 27.5 22.7 8.4 6.6 34.6 32.4 0.7 0.9
Wipro Hold 26,335 486 16.3 19.6 22.4 18.7 5.0 4.2 24.7 24.5 1.0 1.1

Quarterly preview
MEDIA
Ad growth strong due to festive season

Momentum in media spends continues with recovery in the overall economy. This
quarter should get additional benefit of a delayed festive season compared with
last year. Hence, ad spends are higher in Q3FY11. TV medium, in particular, has
benefited from increased competition in the FMCG space (one of the largest ad
spenders). Other categories like home and electronic appliances, automobile, real Abneesh Roy
estate, textiles, jewellery and luxury products too are contributing to the increase +91-22-6620 3141
in ad spends. Star Plus has further consolidated its No. 1 position in the GEC abneesh.roy@edelcap.com
space, with Colors at a strong No. 2. The fight for No. 3 has become intense
between Zee TV and Sony. Healthy capital market activity should benefit business Sameer Bahirat
news channels. Multiplexes have gained due to continuous flow of movies and +91-22-4040 7419
success of Golmaal 3. Increasing digitisation and DTH penetration continue to sameer.bahirat@edelcap.com
boost subscription revenues for all broadcasters. Dish TV too will benefit from the
robust DTH subscriber addition. Newsprint prices have continued to inch up
marginally this quarter.

An improving business scenario and increased ad spends will lead to increased ad-
revenues for Hindi GECs. Colors has maintained its strong No. 2 slot, which is
positive for IBN18, and it plans to close the gap with Star. Position of ZEEL’s
flagship channel, Zee TV, has been challenged among the top 3 GEC channels.
Sun TV continues to dominate the South Indian market. Increasing digitisation is
expected to continue to benefit subscription revenues of broadcasters. Ad revenue
growth for broadcasters and print players are expected to be strong in Q3FY11
due to festive season related ad spends and a lower base of Q3 last year.
Increasing competition could impact subscription revenues for print players to
some extent. Dish TV, the market leader in DTH, is likely to witness a healthy
subscriber addition.

We maintain a positive outlook on Dish TV, Jagran Prakashan, IBN18 (NewTV18)
and Sun TV. With the overall economy improving and improvement in media
spends, the advertising in media is expected to grow 14% Y-o-Y, in FY11. TV and
print media are expected to grow at 20% and 7% Y-o-Y, respectively, in FY11. On
the broadcasting front, we are more bullish on companies in the GEC space. Sun
TV is dominant in three out of the four South Indian markets. Broadcasting
companies are also increasing share of subscription revenues with increasing
digitisation and rapid increase in DTH subscriber numbers. Further, business news
channels are likely to benefit from the expected momentum in ad spends from
IPOs and budget in Q4FY11. Dish TV will continue to benefit from healthy addition
of DTH subscribers with some improvement in ARPUs. Performance of multiplexes
is expected to improve on the back of rapid expansion, a healthy movie pipeline,
improving occupancies and ATP hikes. Competitive intensity in print space is
expected to increase. Newsprint prices have trended up and would need to be
monitored closely.
Recommendations
Top picks: Dish TV, Jagran Prakashan, IBN18 (NewTV18), Sun TV.
Edelweiss

Quarterly preview
Dish TV Revenues 3,607 2,775 30.0 3,261 10.6 Dish TV is expected to benefit from the strong
momentum in DTH subscriber additions during the festive
EBITDA 610 116 425.7 498 22.5
season. ARPUs are expected to see some improvement
Core PAT (390) (762) 48.8 (452) 13.7 from uptrading.
IBN 18 Revenues 2,166 1,934 12.0 1,891 14.6 Entertainment channels are expected to deliver good
growth from the festive season related ad spends and a
lower base of Q3 last year. The business news channels
EBITDA 60 80 (25.0) 20 205.2
are expected to benefit from the momentum in ad spends
and the healthy capital market activity. Subscription
Core PAT (100) (106) 5.7 (129) 22.2 revenue is expected to benefit from increasing
digitization.
Jagran Prakashan Revenues 2,791 2,269 23.0 2,769 0.8 Jagran Prakashan is expected to report a strong ad
revenue growth due to festive season related ad spends
EBITDA 921 653 41.1 908 1.4 and a lower base of Q3 last year. The newsprint prices
have continued to trend upwards this quarter.
Subscription revenues could be impacted as a result of
Core PAT 500 397 25.8 555 (9.9)
increased competition.
PVR Revenues 1,000 985 1.5 1,062 (5.8) PVR's exhibition business is expected to benefit from
bouyant occupancies during the festive season and
EBITDA 200 226 (11.5) 221 (9.3) increase in ATP. PVR pictures movie release this quarter -
Khele Hum Jee Jaan Se hasn’t performed well at the box
office and this may affect the consolidated numbers for
Core PAT 67 86 (21.9) 80 (15.7)
PVR.
Sun TV Revenues 5,673 3,951 43.6 4,248 33.5 Sun TV is expected to record good growth from the
festive season related ad spends and a lower base of Q3
EBITDA 4,425 3,125 41.6 3,323 33.2 last year. Subscription revenue is expected to benefit
from increasing digitization. The movie business is
expected to report strong numebrs on the back of the
Core PAT 2,042 1,519 34.4 1,674 21.9
success of Endhiraan.
Zee News Revenues 676 1,706 (60.3) 616 9.8 Zee News is expected to benefit from the momentum in
EBITDA 81 364 (77.7) 70 15.4 ad spends. Subscription revenue growth to be driven by
increasing digitization.
Core PAT 31 191 (83.7) 2 1,293.0
Valuation snapshot
Dish TV India Buy 1,604 68 26.5 120.8 NM 181.6 39.4 32.4 NM 19.6 0.0 0.0
IBN18 Buy 600 93 120.2 492.9 151.6 25.6 4.6 3.9 4.0 16.4 0.0 0.0
Jagran Prakashan Buy 841 127 18.4 15.4 18.3 15.9 5.3 4.5 29.1 28.3 2.8 2.8
PVR Buy 88 146 NM 64.0 16.9 10.3 1.1 1.0 7.0 10.3 0.7 0.7
Sun TV Network Buy 4,739 545 37.9 17.9 30.7 26.3 9.0 7.3 32.8 30.5 0.8 1.0
Zee News Buy 73 14 (62.1) 58.3 20.3 12.6 1.8 1.6 9.5 13.5 0.0 0.0

Quarterly preview
METALS AND MINING
Fair quarter; improved outlook

Ferrous: Q3FY11 saw a sequential increase in average flat and long product
prices of 1.4% and 3.6%, respectively (Source: Steel prices - India, CRISIL).
Companies have increased prices of long products by INR 1,000/t and flat by INR
500-700/t in December. Global HRC prices also remained firm during the quarter
and towards the end rose between USD 25/t and 125/t across regions. Moreover, Prasad Baji
coking coal contract prices for Q3FY11 were down ~7% at USD 210/t. The above +91-22- 4040 7415
factors combined together should result in increased profitability for most steel prasad.baji@edelcap.com
companies. However, Tata Steel Europe would see lower EBITDA/t of only USD 29
due to the seasonally lower volumes and marginal decline in prices. Faisal Memon
+91-22-6623 3478
Non-ferrous: LME prices of base metals are up both Y-o-Y and Q-o-Q, with faisal.memon@edelcap.com
copper and aluminium up 30% and 17%, respectively, Y-o-Y. Base metal
companies are likely to witness improved margins Q-o-Q as costs are expected to Manan Tolat
remain constant, while prices are up Q-o-Q. However, rupee appreciation of 4% +91-22- 6620 3036
Q-o-Q will adversely impact earnings to an extent. manan.tolat@edelcap.com

For ferrous companies, we expect EBITDA/t to increase Q-o-Q due to lower coking
coal costs and increased product prices, though volumes are expected be flat Q-o-Q.
SAIL is likely to benefit from reduced volumes of carryover coking coal (@FOB USD
300/t), while JSPL’s 135 MW power plant could add to earnings. Bhushan Steel is
expected to benefit from its backward integration and lower proportion of coking
coal.
In the non-ferrous space, production volumes for most companies are likely to be
flat Q-o-Q. With prices increasing across base metals and costs likely to be stable,
margins are expected to improve Q-o-Q. Nalco could witness significant margin
improvement in Q3FY11 as its power costs are likely to decline with linkage coal
supply proportion increasing Q-o-Q. Sterlite’s power plant has commenced
generation, but earnings are unlikely to be affected since commercial operation
hasn’t begun. Hindalco‘s aluminium volume is up sequentially but copper is down
due to breakdown of cooling tower of sulphuric acid plant during the quarter.

Ferrous: As anticipated, steel companies have announced price hikes of INR 1,000-
1,500/t in January, factoring in both demand pull and cost push. We maintain our
view that iron ore prices have peaked and have a downside risk. Moreover, with
demand picking up both in developed world and emerging economies (particularly
India and China), steel fundamentals have improved. We expect steel prices to
increase by USD 75 to 100/t over November levels and margins to expand by USD
40-50/t in FY12.
Non-ferrous: Base metal prices have rebounded sharply with prices increasing 12-
19% sequentially. We believe that underlying demand continues to remain strong.
We do see tightness developing in aluminium, leading prices to rally to USD 2,550/t
in FY12.
Recommendations
Top picks: Ferrous: Tata Steel, JSW Steel, Bhushan Steel.
Non-ferrous: Hindalco.
34 Edelweiss
Research is Limited

Quarterly preview
Q3FY11E Q3FY10 Y-o-Y Q2FY11 Q-o-Q Key highlights and things to watch out for
Bhushan Steel Revenues 18,712 14,290 30.9 17,189 8.9 Volumes are expected to rise 10% Q-o-Q due to capacity
ramp up of the 2 mtpa greenfield plant. EBITDA/t is
EBITDA 6,592 3,903 68.9 4,893 34.7 expected to rise to USD 326/t (+27%) due to higher HR
integration and increased realisations
Core PAT 3,560 2,274 56.6 2,590 37.5
Coal India* Revenues 116,246 NA NM 116,677 (0.4) Volumes are expected to rise 5% Q-o-Q to 104 mt.
EBITDA 20,650 NA NM 18,590 11.1
Core PAT 18,083 NA NM 14,946 21.0
Hindalco Revenues 58,172 53,153 9.4 58,599 (0.7) Aluminium business to improve Q-o-Q as prices and
(Standalone) EBITDA 8,282 7,477 10.8 6,984 18.6 volumes are up 12% and 9% sequentially. Copper
production adversely affected due to breakdown of
Core PAT 5,350 4,272 25.2 4,338 23.3 cooling tower of sulphuric acid plant.
Hindustan Zinc Revenues 23,549 22,491 4.7 22,010 7.0 Margins to expand as zinc-lead prices increase 15-17% Q-
EBITDA 12,893 13,861 (7.0) 11,253 14.6 o-Q.
Core PAT 10,694 11,487 (6.9) 9,499 12.6

JSPL Revenues 35,838 26,753 34.0 30,780 16.4 Steel volumes are expected to be flat at ~570kt. We
(Consolidated) expect iron ore fines and pellet sales volumes of 0.5 mt
EBITDA 15,054 14,393 (5.0) 14,975 0.5 and 12kt respectively. JPL:we expect flattish sales units
and a dip in realisations, assumption of INR 4/unit
Core PAT 8,975 8,744 2.6 8,942 0.4
JSW Revenues 61,320 48,228 27.1 59,722 2.7 Assumed saleable volumes at 1.6 mt and blended
(Consolidated) EBITDA 10,484 10,788 (2.8) 10,227 2.5 realisations at INR 37 kt in India business. EBITDA/t
estimated at USD 145/t.
Core PAT 2,871 4,297 (33.2) 3,640 (21.1)
Nalco Revenues 15,998 14,176 12.8 14,792 8.1 With aluminium prices increasing 12% and power costs
EBITDA 5,519 2,961 86.4 3,477 58.7 expected to decline Q-o-Q, margins are likely to improve.
Core PAT 3,584 1,552 130.9 2,240 60.0

Prakash Industries Revenues 3,258 3,604 (9.6) 4,210 (22.6) Volumes are expected to decline 30% Q-o-Q due to the
EBITDA 813 881 (7.7) 910 (10.6) 40% production cut in December. Higher iron ore costs
will further dent EBITDA
Core PAT 525 660 (20.5) 709 (25.9)
SAIL Revenues 104,667 96,971 7.9 106,029 (1.3) Volumes are expected to be flat Q-o-Q at 3 mt.
EBITDA 20,525 23,969 (14.4) 14,915 37.6 Realisation increase and coking coal cost reduction is
expected to expand EBITDA/t Q-o-Q to INR 7k/t, up
Core PAT 15,178 16,756 (9.4) 10,900 39.2 ~40%.
Sesa Goa Revenues 19,997 18,892 5.9 9,183 117.8 Assumed iron ore sales volumes of 5 mt and blended
(Consolidated) EBITDA 9,886 10,360 (4.6) 3,398 190.9 price of USD 80/t.
Core PAT 8,830 8,275 6.7 3,849 129.4

Sterlite Revenues 69,409 67,467 2.9 60,884 14.0 Sequential increase in base metal prices to improve
(Consolidated) EBITDA 18,140 17,722 2.4 15,289 18.6 margins. Haven't factored in sales from SEL as company
hasn’t capitalised it in P/L this quarter.
Core PAT 10,404 7,313 42.3 10,080 3.2
Tata Steel Revenues 289,717 260,686 11.1 286,462 1.1 Indian operations expected to clock 1.6 mt of sales
(Consolidated) volumes and EBITDA/t of USD 365/t. European
EBITDA 31,827 28,171 13.0 36,723 (13.3) operations expected to clock volumes of 3.4 mt.
However, EBITDA to decline to USD 20/t due to
Core PAT 12,600 6,280 100.6 19,988 (37.0) marginally lower prices and high cost.
Usha Martin Revenues 7,965 5,919 34.6 7,702 3.4 Volumes expected to be flat Q-o-Q. Have assumed 3%
(Consolidated) EBITDA 1,657 1,304 27.1 1,589 4.3 sequential increase in realisations.
Core PAT 481 348 38.4 459 4.9

* Note: Coal India not considered for preview calculations

Quarterly preview
Valuation snapshot
Bhushan Steel Buy 2,153 459 10.4 27.5 10.4 8.2 2.0 1.6 21.2 21.8 0.1 0.2
Coal India Hold 43,087 309 8.8 25.5 18.3 14.5 5.8 4.4 36.0 34.6 1.1 1.1
Hindalco Industries Buy 10,619 251 (24.0) 34.8 15.7 11.7 2.0 1.7 13.3 15.6 0.4 0.4
Hindustan Zinc Buy 12,693 1,361 15.2 19.3 12.4 10.4 2.6 2.1 22.9 22.1 0.4 0.4
Jindal Steel & Power Hold 14,854 721 3.5 34.5 17.8 13.3 4.9 3.8 30.9 32.3 0.2 0.3
JSW Steel Buy 5,414 1,100 14.7 72.1 15.3 8.6 1.6 1.4 13.9 17.1 0.9 0.9
National Aluminium
Reduce 5,602 394 51.6 45.0 20.6 14.2 2.2 1.9 11.3 14.6 0.6 0.6
Company
Prakash Industries Buy 337 123 (4.5) 75.0 7.1 4.1 0.9 0.7 15.0 21.7 0.0 0.0
Sesa Goa Reduce 6,530 344 58.7 (23.4) 7.3 9.6 2.3 1.9 35.5 21.1 0.9 0.9
Steel Authority of India Buy 16,877 185 4.3 9.8 10.9 9.9 2.0 1.7 19.6 18.5 1.9 1.9
Sterlite Industries (India) Buy 13,617 184 30.8 42.5 11.2 7.4 1.5 1.2 13.9 18.0 0.5 0.5
Tata Steel Buy 13,605 683 NM 27.5 9.0 7.7 2.2 1.7 26.3 24.3 1.8 2.3
Usha Martin Buy 477 71 20.5 53.9 10.6 6.9 1.2 1.0 11.5 15.7 1.4 1.4

Quarterly preview
OIL & GAS
Improving quarter

WTI crude prices averaged USD 84.3/bbl (up 11% Q-o-Q and Y-o-Y) in Q3FY11.
Indian simple GRMs improved to USD 2.6/bbl (USD 1.3/bbl in Q2FY11). GRMs for
complex refiners also improved to USD 11.3/bbl (USD 8.6/bbl in Q2FY11)
increasing the simple-complex spread to USD 8.7/bbl. Product cracks improved
Niraj Mansingka, CFA
significantly during the quarter with average quarterly under-recoveries at INR
+91-22- 6623 3315
3.6/ltr for diesel, INR 16.1/ltr for kerosene, and INR 229/cyl for LPG. In
niraj.mansingka@edelcap.com
petrochemicals, the trend was mixed. Ethylene cracker margins eased
considerably (down 24% Q-o-Q) while polymer margins remained flat. However,
polyester intermediate margins improved 43-89% Q-o-Q due to increase in cotton
prices. Higher polyester (PFY/POY) prices led to expansion in polyester margins.

With crude prices remaining in the higher range and government deferring its
decision on diesel/LPG price hikes, under-recoveries were higher at INR 157 bn
compared to INR 112 bn in the previous quarter. We have assumed upstream,
OMCs (IOCL, BPCL, and HPCL) and GOI share of the total under-recoveries at
33.3%, 66.7%, and NIL, respectively, resulting in loss for OMCs. For RIL, we
expect refining throughput to be lower by 1.4 MMT due to maintenance shutdown
of a CDU unit and GRMs to improve to USD 9.25/bbl on the back of improvement
in diesel and gasoline cracks. O&G contribution is expected to dip with KG-D6 gas
production at 55 mmscmd. Petrochemical margins are likely to improve with
expansion in polyester intermediate margins. ONGC is set to report unexciting
results with higher gross realisation due to rising crude offset by higher subsidy
sharing (~INR 46.9 bn) and a dip in other income. Cairn India is set to deliver
stellar results once again with the Mangala crude production maintained at 125
kbpd (Q2FY11 exit rate). GAIL is expected to report strong quarterly numbers
with marginally higher transmission volumes (117 mmscmd) and strong growth in
petrochemical (on the back of its newly expanded plant at Pata) and LPG
transmission segments.

We recently revised up our FY12 and FY13 crude price estimates to USD 90/bbl
(USD 85/bbl) and USD 95/bbl (USD 90/bbl), respectively. The revision was to
factor in our view of rising crude prices due to reducing spare capacity, robust
growth in demand in emerging economies like China, and increased speculative
activity. Global refining margins have bottomed out and are likely to see a
continuous improvement on the back of higher crude prices. Recent slowdown in
global economy (CY08-10) has led to lower investments in the petrochemicals
industry, implying sustained improvement in margins till CY13 due to rising
demand. We expect a bull market for petrochemicals H2FY12 onwards. With a
positive stand on crude and refining/petchem margins, we believe integrated
players like RIL and pure crude plays like Cairn India will do well in a high crude
environment. Our belief that diesel de-control is unlikely and uncertainty on
subsidy-sharing makes us bearish on oil marketing companies.
Recommendations
Top picks: Cairn India, Reliance Industries.
Edelweiss Research is also available on www.edelresearch.com,, Bloomberg EDEL <GO>, Thomson First Call, Reuters and Factset. Edelweiss Securities
EdelweissLimited 37
Securities Limited

Quarterly preview
Aban Offshore Revenues 8,252 8,413 (1.9) 8,281 (0.4) No major surprises expected in Q3FY11 results with
earnings remaining flat, although, going forward, the
EBITDA 5,405 5,194 4.1 5,563 (2.8) company is likely to benefit from an improvement in rig
rates and recent signing of contracts for Aban Abraham
Core PAT 764 896 (14.8) 752 1.5 and Deep Venture.
BPCL Revenues 412,203 321,829 28.1 354,348 16.3 We expect under-recovery of INR 36.2 bn for BPCL
(gross). We assume overall sharing by upstream at
EBITDA (5,427) 6,444 (184.2) 24,865 (121.8) 33.3%. The company could report loss on same. Expect
refinery throughput to be higher at 5.8 MMT. Indian
Core PAT (8,327) 3,791 (319.7) 21,422 (138.9) simple GRMs in Q3FY11 averaged USD 2.6/bbl.
Cairn India Revenues 30,291 4,955 511.4 26,864 12.8 Rajasthan production to average ~125 kbpd in Q3FY11
against 115 kbpd in the previous quarter. Ramp up in
EBITDA 25,438 3,473 632.5 21,742 17.0
production and lower financing costs should lead to
Core PAT 17,682 2,910 507.7 15,851 11.6 favourable growth in earnings.
CPCL Revenues 87,726 68,498 28.1 81,222 8.0 Strong uptick in GRMs (USD 7.5/bbl compared to USD
EBITDA 4,524 1,206 275.0 2,552 77.3 4.1/bbl in Q2FY11) backed by higher inventory gains is
likely to boost CPCL’s results
Core PAT 2,241 2,206 1.6 978 129.2
Essar oil Revenues 121,024 99,580 21.5 109,420 10.6 Essar Oil’s results are expected to be exciting with a
EBITDA 7,862 2,210 255.7 6,120 28.5 surge in GRMs to USD 8.5/bbl compared to USD 6.5/bbl
in Q2FY11.
Core PAT 2,963 (2,260) 231.1 1,300 127.9
GAIL India Revenues 95,617 61,878 54.5 81,041 18.0 GAIL is expected to report strong quarterly numbers with
marginally higher transmission volumes (117 mmscmd)
EBITDA 17,366 12,696 36.8 14,329 21.2 and strong growth in the petrochemical (on the back of
its newly expanded plant at Pata) and LPG transmission
Core PAT 11,534 8,600 34.1 9,235 24.9 segments.
HPCL Revenues 388,368 278,742 39.3 308,702 25.8 Expect under-recovery of INR 35.3 bn for HPCL (gross).
We assume overall sharing by upstream at 33.3%. The
EBITDA (2,089) 3,544 (158.9) 24,829 (108.4) company is expected to report loss on the same. Indian
simple GRMs in Q3FY11 averaged USD 2.6/bbl. Refinery
Core PAT (5,389) 314 (1,816.2) 20,896 (125.8) throughput expecetd to rise 35% Q-o-Q.
IGL Revenues 4,625 2,846 62.5 4,451 3.9 IGL is expected to deliver unexciting results with
EBITDA 1,229 1,034 18.8 1,230 (0.1) sequential dip in volume growth in CNG and higher
blended gas costs sourced through LNG offset by
Core PAT 640 589 8.7 663 (3.4) marginal price hikes in CNG/PNG
IOCL Revenues 803,461 704,098 14.1 773,358 3.9 Expect under-recovery of INR 84.7 bn for IOCL (gross).
We assume overall sharing by upstream at 33.3%. The
EBITDA (5,241) 10,473 (150.0) 68,901 (107.6) company is expected to report loss on the same. Indian
simple GRMs in Q3FY11 averaged USD 2.6/bbl. Refinery
Core PAT (12,741) 6,966 (282.9) 52,940 (124.1) throughput expected to increase marginally Q-o-Q.
Petronet LNG Revenues 36,756 22,446 63.8 30,577 20.2 Booking of revenues from two spot cargoes imported in
Q2FY11 end and higher spot volumes in this quarter are
EBITDA 3,181 2,088 52.4 2,716 17.1
likely to lead to growth in earnings
Core PAT 1,618 832 94.5 1,311 23.4
ONGC Revenues 183,903 153,145 20.1 181,936 1.1 ONGC is set to report unexciting results with higher gross
realization due to rising crude offset by higher subsidy
EBITDA 111,580 91,430 22.0 110,851 0.7
sharing (~INR 46.9 bn) and dip in other income.
Core PAT 45,309 30,536 48.4 53,888 (15.9)
RIL Revenues 591,883 568,560 4.1 574,790 3.0 Refining throughput expected to be lower by 1.4 MMT but
GRMs set to improve to USD 9.25/bbl on the back of
improvement in diesel and gasoline cracks. O&G
EBITDA 99,158 78,440 26.4 93,960 5.5
contribution is expected to come down with KG-D6 gas
production at 55 mmscmd. Petrochemical margins should
Core PAT 51,871 40,080 29.4 49,230 5.4 improve with expansion in polyester intermediate
margins.
Shiv-Vani Oil Revenues 3,544 3,517 0.8 2,882 23.0 23% top-line growth Q-o-Q on the back of higher seismic
EBITDA 1,577 1,564 0.8 1,307 20.7 revenues which were impacted by monsoons in the
previous quarter. We expect EBITDA
Core PAT 448 579 (22.6) 326 37.4 margins to dip marginally to 44.5%.

Quarterly preview
Valuation snapshot
Aban Offshore Limited Hold 762 794 173.9 27.9 6.0 4.9 1.8 1.3 26.5 27.7 0.5 0.5
Bharat Petroleum
Reduce 4,937 619 (16.2) 40.9 15.9 11.2 1.4 1.3 9.5 12.1 2.1 2.9
Corporation
Cairn India Hold 14,333 342 396.2 60.8 12.5 7.8 1.8 1.4 14.3 19.4 0.0 0.0
Chennai Petroleum Corp. Hold 789 240 (38.6) 42.0 9.7 6.8 1.0 0.9 10.3 13.6 3.1 4.4
Essar Oil Buy 4,138 137 2,945.2 65.1 18.4 11.1 2.8 2.3 15.7 19.9 0.0 0.7
GAIL Buy 14,739 527 8.5 7.9 18.5 17.1 3.5 3.3 19.4 19.6 1.6 1.7
HPCL Reduce 2,895 387 (23.3) 29.5 11.7 9.0 1.0 1.0 9.0 10.9 2.3 3.1
Indian Oil Corporation Hold 18,301 342 (19.9) 14.1 9.6 8.4 1.4 1.3 15.6 16.0 3.0 3.4
Indraprastha Gas Buy 1,054 341 14.2 12.6 19.4 17.2 4.8 4.1 27.1 25.6 1.5 1.6
Petronet LNG Buy 2,060 124 25.6 19.9 18.4 15.3 3.6 3.1 21.2 22.0 1.6 1.8
ONGC Hold 57,932 1,227 35.9 8.6 9.9 9.1 2.2 2.0 24.5 23.2 3.7 4.0
Reliance Industries Hold 78,405 1,086 36.8 18.5 16.5 14.0 2.3 2.0 14.5 15.3 0.7 0.8
Shiv-Vani Oil & Gas
Buy 395 386 44.7 1.6 6.1 6.0 1.1 0.9 19.9 16.7 0.5 0.6
Exploration Services

Quarterly preview
PHARMACEUTICALS
Revenue growth to remain strong, but status quo in profitability

We expect growth momentum to continue across coverage stocks led by robust
growth in US generics from launch of key products during the quarter. We expect
moderation in growth for domestic formulations (vis-a-vis more than 20% growth
during H1FY11), while ROW markets (LATAM, Russia etc.) are likely to remain
strong. We expect growth to pick up in Europe. Margin outlook remains stable Perin Ali
from Q2FY11, while lower milestone/tech income will impact Y-o-Y performance. +91-22- 6620 3032
The closure of key acquisitions or deals is likely to have one-time impact on perin.ali@edelcap.com
margins and revenue growth for some players (Piramal Healthcare and Sun
Pharma).

We expect absolute earnings (Y-o-Y) to remain stable, despite higher revenue
growth, due to higher base of milestone income (Cipla, Torrent Pharma and
Aurobindo), new capacity additions driving higher fixed costs and lower tax rate in
Q3FY10. Sun Pharma (SUNP) is likely to have one-time impact on sales and
margins from full integration of Taro (lower EBITDA margin). Ex-Taro, base
business growth is likely to decline Q-o-Q from loss of exclusivity sales (Eloxatin).
This will be partly offset by incrementally higher sales from Effexor XR and
Rivastigmine. Lupin (LPC) will continue to post strong growth from higher sales in
domestic formulations and seasonally strong sales form Suprax. Aurobindo
Pharma (ARBP) will see ramp up in revenue post SEZ commercialization, which
will positively impact core margins. Torrent’s (TRP) export formulation growth is
likely to remain strong with recovery in US generics from higher capacity and new
product introductions. We do not include impact from forex in our estimates, but
appreciation of INR to USD and EUR could be a risk, given the large contribution
of exports to overall revenues.
Outlook for the next 12 months; Maintain positive outlook

We maintain positive outlook with emerging opportunities over the medium term.
Domestic formulations business is expected to deliver strong double digit growth,
while the US formulations business will benefit from strong product pipeline
offering niche opportunities for large Indian players. Sales from strategic
partnership deals are expected to ramp up for specific players (for e.g., Pfizer with
Aurobindo and Strides, GSK with Dr. Reddy’s) while new deals (Astrazeneca with
Torrent) will be accretive to sales over the medium term and will further add
upside to revenue outlook. ROW markets are expected to post sharp growth, with
Russia reverting to growth. The appreciating INR trend will play an important role
given the large contribution of exports to overall revenues. We believe FY13 will
be critical for most companies as higher scale of operations and forward
valuations will price in benefits from patent expiries, expected launch of niche
products in US generics, commencement of capacities and full scale of operations
from strategic partnerships by end FY12.
Top picks
Lupin, Aurobindo Pharma, Torrent Pharma, Apollo Hospitals.
40 Edelweiss
Edelweiss Research isSecurities Limited

Quarterly preview
Apollo Hospitals Revenues 6,746 5,446 23.9 6,720 0.4 Expect strong growth in mature hospitals and retail
EBITDA 1,106 833 32.8 1,127 (1.9) pharmacy business. Margins to remain steady over Q2
FY11. Ramp-up of subsidiaries/JVs hospitals and allied
Core PAT 480 421 14.0 501 (4.2) businesses to support strong earnings growth despite
significant capacity expansions
Aurobindo Revenues 11,299 9,274 21.8 11,373 (0.7) Core EBITDA margins to expand sequentially from ramp-
EBITDA 2,097 1,582 32.6 1,844 13.7 up in sales from SEZ. No forex impact build in our
estimates.
Core PAT 1,438 1,448 (0.7) 1,219 18.0
Cipla Revenues 15,445 13,682 12.9 16,034 (3.7) Higher margins over Q2 FY11 from lower fixed costs and
better sales mix. Revenues growth to remain steady,
EBITDA 3,428 3,336 2.8 3,396 0.9 although domestic business growth is likely to slow down
from higher base in Q2 FY11. No forex impact build in
Core PAT 2,614 3,130 (16.5) 2,480 5.4 our estimates.
Dr Reddy's Revenues 19,769 17,296 14.3 18,704 5.7 Exclusivity sales from launch of zafrilukast and
lansoprazole will drive strong growth in US generics.
EBITDA 3,503 2,657 31.8 3,225 8.6 Domestic formulations likely to depict strong growth of
16% Y-o-Y. Higher margins from exclusivity sales. No
Core PAT 3,055 3,430 (10.9) 2,915 4.8 forex impact build in our estimates.
Lupin Revenues 14,817 12,708 16.6 14,310 3.5 Strong growth in Japan, domestic and ROW markets. US
branded generics to grow 13% sequentially due to
EBITDA 3,080 2,618 17.6 2,957 4.2 seasonally strong sales in Suprax. Margins to remain
stable over Q2 FY11. No forex impact build in our
Core PAT 2,193 1,648 33.1 2,207 (0.6) estimates.
Piramal Healthcare Revenues 4,090 9,077 (54.9) 7,520 (45.6) Residual business growth is expected to recover from low
Ltd* base in Q2 FY11 as business suffered during transition
EBITDA 549 1,774 (69.1) (127) 532.3 period from closure of domestic formulations and
pathlabs deal. Other income to remain higher from
excess cash of INR 6 bn. No forex impact build in our
Core PAT 1,090 1,328 (17.9) (710) 253.5
estimate.
Sun Pharma Revenues 14,433 10,209 41.4 13,701 5.3 Reported sales and profits would fully reflect the
integration of Taro. Higher revenues from effexor XR and
EBITDA 3,813 3,684 3.5 4,670 (18.4) rivastigmine to drive strong growth in US base business.
No forex impact build in our estimates.
Core PAT 3,589 3,390 5.9 5,037 (28.7)
Torrent Revenues 5,859 4,801 22.0 5,815 0.8 Revenue growth to remain strong with higher growth in
Pharmaceuticals India, Brazil and other ROW markets. US generics
EBITDA 1,160 1,094 6.0 1,175 (1.3) business to depict strong growth from three new product
launches. Margins to decline sequentially due to one-time
Core PAT 768 830 (7.5) 762 0.8 licensing income last quarter. No forex impact build in our
estimate.
* Note: Piramal Healthcare not considered for preview calculations
Valuation snapshot
Apollo Hospitals
Buy 1,236 453 27.4 22.6 33.0 27.2 2.9 2.7 9.8 10.5 1.1 1.3
Enterprise
Aurobindo Buy 1,741 1,355 (1.1) 17.6 16.3 13.8 3.2 2.8 25.3 24.3 0.5 0.3
Cipla Reduce 6,443 364 4.0 20.2 27.9 23.2 4.4 3.8 16.6 17.6 0.8 1.0
Dr Reddy Labs Hold 6,407 1,716 27.1 35.7 30.3 21.8 5.5 4.4 24.5 26.9 0.6 0.8
Lupin Buy 4,817 490 21.5 22.8 24.2 19.7 6.8 5.4 29.4 28.9 0.8 1.0
Piramal Healthcare Under Review 2,231 484 (59.4) 69.9 40.8 24.0 0.7 0.7 2.9 2.8 0.5 0.9
Sun Pharma Hold 11,364 500 56.8 19.8 33.6 28.1 5.6 4.8 17.6 17.2 0.6 0.7
Torrent Pharmaceuticals Buy 1,100 589 2.3 27.2 16.8 13.2 4.7 3.6 31.2 30.9 1.0 1.3

Quarterly preview
PIPES
Gaining traction

• The rupee appreciated with respect to the dollar during the quarter, with
INR/USD average being 44.9 (up 4.0% Q-o-Q). Thias may have a marginal
negative impact on the companies as most earnings are USD denominated.
• Welspun Corp (~277 KMT pipes and ~57 KMT plates) and Jindal Saw (~105
Niraj Mansingka, CFA
KMT LSAW) announced new order accretion during the quarter
+91-22- 6623 3315
niraj.mansingka@edelcap.com
Q3FY11 results for pipe manufacturing companies are expected to be better than
Q2FY11 results due to increased pipe sales volumes. Going forward, we expect
orders to pick up as pipeline capex in India fructifies and the oil & gas sector
gathers momentum globally. We expect global EBITDA margins to sustain at
current ~USD 200/MT levels for SAW pipes. However, the domestic environment
will continue to stay highly competitive at margin levels of USD 70-80/MT.
While we expect Welspun to report higher sales volume for HSAW pipes (115 KT
Vs ~79 KT for Q2FY11) and higher plate sales (155 KT Vs ~128 KT for Q2FY11),
EBITDA margins for the company should be lower (INR 11,000/MT, INR 11,800 in
the previous quarter) in Q3FY11 due to absence of high margin orders executed
during the previous quarter. For Jindal Saw, we expect blended EBITDA margins
to normalize in this quarter from USD 13,700/mt in Q2FY11 to INR 11,650/MT in
Q3FY11. JSAW’s sales volume is expected to remain flat during the quarter. For
PSL, we continue to maintain blended pipes EBITDA margins at USD 70/MT.

We have a positive outlook on the sector on higher global oil & gas capex and
higher domestic traction of GAIL orders. Our long term crude price outlook is
positive, which is one of the catalysts for spending on pipeline infrastructure. We
remain positive on order pick-up as the global oil & gas capex picks-up. Day rates
for rigs have increased recently which is a leading indicator for fructification of oil
& gas capex globally. The large TransCanada order, in which Welspun Corp is a
contender, seems to be moving forward with government approval and is
expected to increase margins across the industry. On the domestic front, GAIL
orders have been slower than expected inspite of the recent auction of GAIL’s
Dabhol – Bangalore pipeline. Order traction from GAIL is expected to pick up with
a significant capacity expansion by FY12/13.
Recommendations
Top Picks: Jindal Saw.
42 Edelweiss
Research is Limited

Quarterly preview
Jindal Saw Revenues 9,762 13,705 (28.8) 8,009 21.9 For Jindal Saw we expect margins to normalize in this
quarter (EBITDA of ~INR 11,650/MT, in the previous
EBITDA 2,017 2,527 (20.2) 1,847 9.2 quarter it stood at ~INR 13,700/MT), but sales volume
for pipes is still not expected to pick up to Q1FY11 mark
Core PAT 1,100 1,464 (24.9) 1,022 7.6
PSL* Revenues 7,711 NA NM 6,935 11.2 In the last quarter, PSL had reported low coating income
(INR 1,035 mn). We expect the trend to reverse and
EBITDA 604 NA NM 546 10.6 assume higher coating revenues (INR 2,000 mn) in
Q3FY11. Margins (blended pipes EBITDA margin of USD
Core PAT 19 NA NM 139 (86.3) 70/MT) for PSL will continue to remain competitive.
Welspun Gujarat Revenues 21,057 15,204 38.5 18,524 13.7 We expect Welspun to report higher sales volume for
HSAW pipes (115 KT Vs ~79 KT for Q2FY11) and higher
plate sales (155 KT Vs ~128 KT for Q2FY11), EBITDA
EBITDA 3,713 2,580 43.9 3,442 7.9
margins for the company should be lower (INR
11,000/MT, INR 11,800 in the previous quarter) in
Core PAT 1,837 1,277 43.8 1,760 4.4 Q3FY11 due to some high margin orders booked in the
previous quarter
* Note: PSL not considered for preview calculations
Valuation snapshot
Jindal Saw Buy 1,288 211 (19.5) 11.7 11.5 10.3 1.4 1.2 13.5 12.5 0.0 0.0
PSL Buy 112 95 (16.8) 5.8 5.0 4.9 0.5 0.5 10.1 9.6 0.0 0.0
Welspun Gujarat Stahl
Under Review 787 174 15.8 11.0 5.6 5.1 1.0 0.8 22.0 20.0 1.4 1.7
Rohren


Quarterly preview
POWER
Present tense, but future perfect

• Capacity addition has been lack luster which will result in muted earnings
growth across players.
• EPC revenues / margins are expected to be better as project completion /

milestone payments will be concluded in Q3FY11 for Lanco and Reliance
Shankar K
Infra.
+91-22- 4040 7412
• Merchant prices remained subdued due to abnormal winter and cautious shankar.k@edelcap.com
stance adopted by SEBs.
Subhadip Mitra
• Traffic growth has been robust with a stable macroeconomic environment.
+91-22- 4040 7414
subhadip.mitra@edelcap.com
• Regulated power entities are expected to report flat / marginal sequential
earnings growth.
• Overall earnings for the quarter are likely to be subdued on the back of low
merchant prices and limited capacity addition.
• Earnings from core operations are likely to improve for GMR, GVK, Adani
Enterprises, Mundra Port and Lanco backed by higher volume growth.

• We expect merchant trades to be under pressure even in Q4FY11 due to the
winter season and onset of summer not before late March resulting in
average annual merchant tariff of ~ INR 4.5–5 /kwh for FY11.
• Capacity addition is also expected to rise in upcoming quarters, especially in

case of NTPC, Lanco, Tata Power, Adani Power and Nav Bharat Ventures.
These will augur well for earnings growth.
• Due to the buoyant macroeconomic environment, traffic growth (air+port) is

expected to be strong which will augur well for Mundra Port, GMR, GVK and
MARG.
• We expect the airport regulator to announce tariffs in Q4FY10/Q1FY11 which

would aid earnings going forward.
• Project execution is expected to pick up for Reliance Infrastructure and MARG

which will aid valuations.
Recommendations
Top picks: Tata Power, PTC, Navabharat Ventures.
44 Edelweiss

Quarterly preview
Adani Enterprises Revenues 63,576 63,724 (0.2) 57,519 10.5 The consolidated number is based on Adani Power's
Mundra I & II power plant, Mundra Port along with the
EBITDA 9,495 5,021 89.1 7,259 30.8 traditional trading and mining operations. The growth is
largely due to improved revenues from subsidiaries and
Core PAT 7,025 3,039 131.2 5,087 38.1 better margins in the coal business
CESC Revenues 11,061 7,970 38.8 11,050 0.1 Steady state operations, nominal increase in profits due
EBITDA 2,644 1,880 40.6 3,180 (16.9) to impact of tariff hike and impact of higher generation
capacity on YoY basis
Core PAT 1,188 1,020 16.5 1,550 (23.4)
GMR Infrastructure Revenues 17,131 10,667 60.6 12,217 40.2 Revenues and profitability needs to be watched after full
EBITDA 3,371 3,454 (2.4) 3,561 (5.3) operationalisation of terminal T3 at Delhi airport
Core PAT (505) 92 (648.4) (692) 27.1

GVK Power and Infra Revenues 4,817 4,735 1.7 5,034 (4.3) Traffic growth at the Mumbai and Bengaluru airport as
EBITDA 1,643 1,408 16.7 1,455 12.9 well as on the road project needs to be watched
Core PAT 408 458 (10.9) 428 (4.6)

Lanco Infratech Revenues 37,619 16,107 133.6 20,417 84.3 Higher EPC revenues and full operation of power plants
are expected to boost revenues. The margins are also
EBITDA 6,655 2,978 123.5 4,167 59.7
expected to be robust to better realisations and normalcy
Core PAT 1,874 1,068 75.4 705 166.0 in expenses.
Mundra Port SEZ Revenues 4,749 3,378 40.6 4,135 14.8 Uptick in coal volumes on account of all 4 330 MW units
of Mundra I & II now operational on imported coal. Need
EBITDA 3,134 2,331 34.5 2,737 14.5
to watch out for volumes at the SEZ which has been
Core PAT 2,405 1,633 47.3 2,117 13.6 sluggish in the past quarters
NTPC Revenues 129,699 111,837 16.0 151,138 (14.2) Lower profits on YoY basis due to loss of tax grossing up
EBITDA 39,005 38,907 0.3 38,719 0.7 benefit. New capacities added in Q3 will impact Q4
financials
Core PAT 22,723 23,650 (3.9) 21,074 7.8
Navabharat Ventures Revenues 2,829 2,638 7.2 2,880 (1.8) Lean merchant sales will impact earnings, tax is
expectedto be near zero due to MAT credit benefit. The
EBITDA 826 1,481 (44.2) 934 (11.6)
earnings is exclusive of sale of power unit to Essar Power
Core PAT 801 1,322 (39.4) 847 (5.4)
Power Grid Revenues 24,594 15,254 61.2 21,266 15.6 Expect commissioning of new projects to maintain PAT
EBITDA 21,053 12,467 68.9 17,858 17.9 growth.
Core PAT 5,859 4,878 20.1 6,139 (4.6)

PTC Revenues 17,156 16,976 1.1 24,693 (30.5) Expect stagnant volumes on YoY basis due to lean season
EBITDA 86 105 (18.1) 381 (77.4) for merchant trades.
Core PAT 162 159 1.9 358 (54.7)

Reliance Infra. Revenues 36,752 22,875 60.7 24,391 50.7 Expect PAT to decline on YoY basis, due to lower EPC
execution this year. However sequentially profits will
EBITDA 3,456 2,354 46.8 4,162 (17.0)
show growth since Q2 FY11 earnings had extraordinary
Core PAT 3,015 3,350 (10.0) 1,705 76.8 forex losses.
Tata Power Revenues 39,844 43,404 (8.2) 48,095 (17.2) Steady state operations, higher coal realisations may
EBITDA 13,301 5,468 143.3 11,373 17.0 surprise on positive side
Core PAT 5,721 5,234 9.3 5,674 0.8
Valuation snapshot
Adani Enterprises Hold 15,641 644 165.5 158.2 32.8 13.9 3.4 2.8 16.1 22.0 0.1 0.1
CESC Buy 1,039 377 12.7 1.4 9.7 9.6 1.1 1.0 12.1 11.1 1.2 1.2
GMR Infrastructure Buy 3,921 46 (44.2) NM NM 48.5 2.1 2.0 (0.1) 4.1 0.0 0.0
GVK Power and Infra Hold 1,460 42 (19.1) 29.3 46.1 23.5 2.0 1.8 4.4 8.2 0.0 0.0
Lanco Infratech Buy 3,279 62 242.1 104.1 13.7 12.4 3.3 2.6 27.7 23.7 0.0 0.0
Mundra Port & SEZ Hold 6,851 155 112.8 165.6 39.5 23.9 7.6 5.9 20.9 28.0 0.0 0.0
Navabharat Ventures Buy 556 330 (12.1) 17.2 5.8 5.2 1.3 1.1 23.0 20.2 2.5 2.5
NTPC Hold 36,758 202 (7.9) 13.9 19.5 17.2 2.5 2.3 13.1 13.8 2.0 2.1
Power Grid Corp of India Hold 10,115 99 22.2 9.1 18.4 16.9 2.1 1.9 13.3 12.0 1.4 1.5
PTC India Buy 780 120 17.8 0.8 37.4 37.1 1.6 1.6 4.5 4.4 1.1 1.1
Reliance Infrastructure Buy 4,650 860 8.7 6.4 16.8 15.8 1.5 1.4 9.3 9.2 1.0 1.0
Tata Power Co Buy 7,306 1,395 (4.4) 28.2 15.2 11.8 2.5 2.2 16.3 18.5 1.2 1.5

Quarterly preview
REAL ESTATE
Mixed quarter

Q3 is usually a strong quarter with execution pick up across India post monsoon
and festival seasons typically seeing strong demand for new homes. Although
execution is expected to improve Q-o-Q, a string of negative news flow largely on
account of the loan syndication bribery/2G telecom licence allocation cases
coupled with the Reserve Bank of India’s (RBI) policy intervention has dampened Aashiesh Agarwaal, CFA
sentiment. Our channel checks indicate that loan sanctions for developers may be +91-22- 4063 5491
delayed with interest rates also likely to see an upward bias. Also, volumes may aashiesh.agarwaal@edelcap.com
see pressure on account of loan-to-value ratio for housing loans being capped at
80%. The festival season, which typically sees strong volumes across India, is Adhidev Chattopadhyay
expected to post stable volumes on pan-India basis, but cities like Mumbai and +91 22 6623 3358
pockets of NCR are expected to post volume decline due to steep price rise over adhidev.chattopadhyay@edelcap.com
the past 12 months.

Although operational performance is expected to improve on account of improved
execution after a muted performance in Q2FY11, Q3FY11 is unlikely to bring much
cheer on a pan-India basis. However, South India markets of Bengaluru and
Chennai may post robust volumes.
In our coverage universe, we expect a majority of companies to register revenue

growth in the real estate business. Companies like DLF, Sobha Developers and
Anant Raj Industries are expected to post Q-o-Q revenue dip largely on account of
change in product mix and asset sales not being factored in.

Outlook for the real estate sector is cautious over the next year. We expect price
correction in overheated property markets like Mumbai and pockets of NCR with
prices for the rest of India expected to see marginal appreciation of 5-10%. In
terms of volumes, we expect the South India market to post uptick in volumes on
Y-o-Y basis on the back of continued hiring/salary hikes in the Indian IT/ITES
sector.
Although underlying demand for housing in India continues to be robust, the focus
over the next 12 months is likely to be on company-specific issues such as
corporate governance, execution capability, and funding position. Fund availability
is expected to be a concern; this is on the back of a number of loans coming up
for repayment in Q4FY11-FY12 and interest rates for loans likely to see a 100-
200bps increase.
Recommendations
Top picks: Anant Raj Industries, Phoenix Mills, Brigade Enterprises.
46 Edelweiss

Quarterly preview
Anant Raj Industries Revenues 720 826 (12.8) 1,329 (45.8) Revenues are expected to accure from residential project
at Manesar along with ~190mn of rental income. Key
EBITDA 266 763 (65.1) 627 (57.5) monitorables are incremental leasing activity in rental
projects and launches of new projects in Gurgaon and
Core PAT 205 670 (69.4) 481 (57.4) Neemrana
Brigade Enterprises Revenues 2,000 653 206.3 1,226 63.1 Revenues and PAT are estimated to grow Q-o-Q primarily
on account on booking of revenues of ~1.3 bn from sale
EBITDA 772 82 841.5 277 178.7 of Columbia Asia Hospital. Incremental leasing activity at
Gateway/Metropolis projects is a key monitorable
Core PAT 555 59 841.0 200 177.6
DLF Revenues 18,475 20,258 (8.8) 23,690 (22.0) Revenues are expected to decline Q-o-Q on account of
absence of significant number of new launches althogh
EBITDA 10,658 8,433 26.4 9,289 14.7 margins are expected to see improvement. Debt
reduction through operating cash flows/asset sales and
commercial leasing are key monitorables
Core PAT 3,611 4,679 (22.8) 4,184 (13.7)
Mahindra Lifespaces Revenues 1,200 1,089 10.2 890 34.8 Revenues are estimated to see Q-o-Q growth on account
of Aura, Gurgaon project reaching revenue completion
EBITDA 240 305 (21.3) 234 2.6
threshold. Leasing/operational status at Jaipur/Chennai
Core PAT 202 279 (27.5) 247 (18.1) SEZ are key monitorables
Orbit Corporation Revenues 960 1,496 (35.8) 977 (1.7) Revenues and PAT are expected to be flat Q-o-Q. Debt
reduction through operating cash flow generation and
EBITDA 480 398 20.6 502 (4.4)
acquistion progress on pipeline projects are key
Core PAT 154 325 (52.7) 160 (4.0) monitorables
Phoenix Mills Revenues 480 302 58.9 443 8.4 We expect marginal increase in rental income from High
Street Phoenix. Incremental leasing of Market City
EBITDA 346 177 95.3 317 9.0
projects is a key monitorable
Core PAT 241 102 135.9 221 8.9
Sobha Developers Revenues 3,534 3,070 15.1 4,308 (18.0) We estimate continued momentum in sales volumes Q-o-
Q, due to robust environment in Bengaluru market. The
EBITDA 742 623 19.1 971 (23.6) company could post revenue and PAT of INR 3.5 bn and
INR 0.4 bn, respectively, with EBITDA margin of 21%.
Any asset monetization will provide upside to our
Core PAT 437 408 7.0 589 (25.9)
estimates.
Unitech Revenues 7,513 7,745 (3.0) 6,445 16.6 Revenues are expected to see Q-o-Q growth mainly on
account of improved execution as the previous quarter
EBITDA 2,554 1,857 37.5 2,528 1.0 saw slow-down on account of monsoon and labour
Core PAT 1,502 1,760 (14.7) 1,738 (13.6) shortage. Cash flow position and debt repayment status
are key monitorables
Valuation snapshot
Anant Raj Industries Buy 648 100 (42.9) 67.2 23.0 13.7 0.8 0.8 3.7 6.0 0.5 0.5
Brigade Enterprises Buy 277 112 121.0 33.8 12.2 9.1 1.1 1.0 9.7 10.9 0.8 1.0
DLF Hold 10,405 278 27.8 4.4 20.5 19.6 1.6 1.5 7.8 8.1 0.6 0.6
Mahindra Lifespace
Hold 325 361 114.8 67.0 9.6 5.9 1.3 1.1 14.4 19.8 1.0 1.0
Developers
Orbit corporation Buy 189 77 73.8 69.3 5.2 3.1 0.8 0.7 17.5 24.1 1.6 2.7
The Phoenix Mills Buy 707 221 53.9 79.3 32.6 16.6 1.9 1.7 6.0 10.9 0.5 0.9
Sobha Developers Hold 700 323 64.7 50.6 14.2 9.4 1.6 1.4 12.3 16.2 0.0 0.0
Unitech Under Review 3,420 62 16.9 60.5 20.3 12.7 1.4 1.3 7.3 10.5 0.3 0.3


Quarterly preview
RETAIL
Sharp growth due to festive season
Key highlights of the sector over the past 12 months January 7, 2011
Past 12 months’ same store sales (SSS) picked up and it has been in double digits
since past few quarters, following increase in discretionary spend. Employee and
rent costs started to inch up. Past 12 months have witnessed delayed rollout of
stores. Footfalls have increased, followed by higher conversion ratios.
Abneesh Roy
+91 22 6620 3141
Q3FY11 result season for the sector
Record sales were observed by most retailers in Q3FY11 as festive season in FY11 abneesh.roy@edelcap.com
was in Q3 versus Q2 in FY10. Premiumisation trend is evident as consumers

Nitin Mathur
become more brand conscious and are willing to increase their discretionary
+91 22 6620 3073
spending. Higher same store sales were seen in both value and lifestyle retailing.
nitin.mathur@edelcap.com
Store expansion slows in the current quarter.
Harsh Mehta
Outlook for the next 12 months
+91 22 4063 5543
We believe momentum of urban demand will continue on the back of overall
harsh.mehta@edelcap.com
buoyancy in the economy. With better liquidity for developers, improving
consumer sentiments, and consolidation of retailers, the next few quarters will
continue to see strong profit growth for retailers. Also, cost savings from cheaper
inputs, reduced inventory levels, lower salary levels, cheaper procurement and
higher share of private labels will help improve margins. However, with rentals
inching up, long-term profitability may be impacted. Increase in tax rate on
rentals will be slightly negative for the sector. Future Group’s digital retailing arm,
FutureBazaar.com, is expected to generate a big portion of the group’s revenues
over the long term. Easing of FDI norms in cash & carry now allows retailers to
sell goods sourced from their foreign investment-funded wholesale ventures,
which was earlier meant for internal use. This will offer some relief to a number of
Indian companies which have formed joint ventures with foreign firms. Permitting
FDI in multi brand retail can be a big positive boost for the sector. We continue to
maintain our positive stance on the retail sector.
Top picks
Pantaloon Retail, Shoppers Stop, Titan Industries.
Edelweiss

Quarterly preview
Pantaloon Retail Revenues 25,249 19,128 32.0 25,814 (2.2) Expected to be strong as urban demand is back on track.
The company's sales of winter wear might be impacted
EBITDA 2,177 2,034 7.0 2,127 2.4 due to delayed onset of winter. We expect interest costs
to start trending down, which can lead to margin
Core PAT 598 507 18.0 428 39.9 expansion.
Shoppers Stop Revenues 6,100 4,074 49.7 6,287 (3.0) SSS is expected to be strong as urban demand is back on
track. Consolidated margins will be impacted due to
EBITDA 210 319 (34.2) 224 (6.4) increased stake in Hypercity (currently in investment
/expansion mode). Standalone margins are expected to
Core PAT 100 136 (26.5) 96 3.7 remain healthy
Titan Revenues 16,500 13,336 23.7 15,360 7.4 Jewellery sales will be good, despite rise in gold prices
EBITDA 1,600 1,073 49.2 1,736 (7.8) due to high marriage days and positive consumer
sentiments. Owing to increased focus on studded
Core PAT 1,200 784 53.2 1,278 (6.1) jewellery, margins could expand
Valuation snapshot
Pantaloon Retail India. Buy 1,758 372 19.2 37.3 25.4 18.5 2.2 2.0 9.0 11.2 0.1 0.1
Shoppers' Stop Buy 691 763 68.5 33.9 46.5 34.7 6.0 5.2 16.1 16.0 0.1 0.1
Titan Industries Buy 3,506 3,579 62.3 28.6 39.0 30.3 14.4 10.0 44.4 38.9 0.3 0.3

Quarterly preview
TELECOM
Seasonally strong quarter

Since Q3 is a seasonally strong quarter subscriber additions have accelerated and
we expect usage also to be higher. While the industry added about 52 mn
subscribers in the quarter ending September 2010, we expect 63 mn additions in
the quarter ending December 2010, a 21% growth Q-o-Q. The monthly subscriber
additions for Bharti Airtel (BHARTI) have remained stable at about 3 mn, but Ganesh Duvvuri
Vodafone and Idea seemed to have experienced some acceleration in November +91 22 2286 7586
2010. ganesh.duvvuri@edelcap.com
Result expectations for the sector and stocks under coverage Devyani Javeri
With strong subscriber growth and it being a festive season, we expect traffic +91-22- 6623 3360
growth to accelerate in Q3FY11. We expect 5-10% surge in network traffic for devyani.javeri@edelcap.com
listed telecos. We believe MOU are likely to bounce back to near Q1FY11 levels
after declining about 5.0-6.5% Q-o-Q in Q2FY11. In our view, RPMs will continue Rohit Patni
to decline around 1-2% Q-o-Q, as promotions too would have spurred traffic +91-22-6623 3392
growth. rohit.patni@edelcap.com
We expect EBITDA margins to expand ~70bps for BHARTI given the strong
growth in traffic. We expect Africa business margins to remain stable for the
company. For Reliance Communications (RCOM) and Idea Cellular (Idea), despite
strong minutes growth, we expect EBITDA margins to remain flat Q-o-Q as we
expect the increased pace of cell site expansion will lead to higher costs.
Additionally, the amortisation of licence fee and interest cost on debt related to
3G licence (which was being capitalised so far across telecos) for half the month
of December will impact RCOM’s Q3FY11 net profit. For Tulip Telecom, in a
seasonally strong quarter, we expect healthy sequential revenue growth of ~7.5%
and EBITDA margin expansion of 50bps Q-o-Q led by operating leverage in the
fiber and IP VPN business.

We expect some clarity on the policy front, especially on 2G spectrum pricing, in
the next 12 months. The new telecom minister Mr. Kapil Sibal seems to be
favouring consolidation in the sector and also believes more spectrum should be
allotted to operators fulfilling the subscriber criteria, contrary to TRAI’s
recommendation of a cap of 10MHz spectrum in a circle. We believe MNP will be
implemented pan-India on January 20, 2010, and will lead to increase in
competitive intensity and lower margins for the industry. 3G services will, in our
view, lead to dilution in margins in the medium term as operators will not achieve
scale as they are unlikely to price it cheaply. Stocks in the sector have continued
to underperform broad markets during the quarter. We maintain our cautious
stance on the sector as we believe valuations at 7-8x FY12E EV/EBITDA leave
little margin of safety given the uncertainties in the sector.
Recommendations
Top picks: Tulip Telecom.
50 Edelweiss
Research is Limited

Quarterly preview
BHARTI Revenues 160,382 103,053 55.6 152,150 5.4 Expect EBITDA margins to expand by ~70 bps led by
strong growth in domestic traffic estimated at 9.7% Q-o-
EBITDA 55,151 40,823 35.1 51,212 7.7 Q. Africa business margins to remain stable Q-o-Q. One-
time rebranding costs could impact margins.
Core PAT 17,719 22,356 (20.7) 16,612 6.7
Idea Revenues 39,986 31,494 27.0 36,592 9.3 Strong traffic growth and subscriber additions to drive
revenue growth. EBITDA margin to remain flat Q-o-Q as
EBITDA 9,603 8,141 18.0 8,788 9.3 increased pace of cell site expansion would lead to higher
costs. Absolute losses in new circles expected to remain
Core PAT 2,300 1,700 35.3 1,797 28.0 flat Q-o-Q.
RCOM Revenues 53,003 53,098 (0.2) 51,183 3.6 EBITDA margins to remain flat Q-o-Q as increased pace
of network rollouts would lead to higher costs.
EBITDA 17,224 18,127 (5.0) 16,595 3.8 Additionally, the amortization of license fee and interest
cost on debt related to 3G license (which was being
capitalized so far across telecos) for half the month of
Core PAT 3,593 11,301 (68.2) 4,459 (19.4)
December will impact RCOM’s Q3FY11 net profit.
TTSL Revenues 6,289 5,009 25.6 5,853 7.5 Expect EBITDA margin expansion of 50bps Q-o-Q led by
EBITDA 1,787 1,353 32.1 1,633 9.5 operating leverage in the fiber and IP VPN business;
Revenue contribution from the fiber business will be key
Core PAT 870 689 26.3 780 11.5 thing to watch out for.
Valuation snapshot
Bharti Airtel Hold 29,601 353 (21.0) 20.4 18.7 15.5 2.7 2.3 15.7 16.3 0.3 0.3
Idea Cellular Hold 5,075 70 (19.8) 1.6 33.4 32.8 1.9 1.8 6.0 5.7 0.0 0.0
Reliance Communications Reduce 6,366 140 (56.7) 7.5 15.5 14.3 0.7 0.7 4.3 4.5 0.6 0.6
Tulip IT services Buy 564 176 24.9 14.9 8.8 7.6 2.2 1.7 28.8 26.6 0.9 0.9

Quarterly preview
Agro Related
Deepak fertilisers Revenues 4,487 3,668 22.3 4,108 9.2 Update on the new TAN plant about the start of the
commercial production is the key moniterable. Better
EBITDA 866 683 26.7 766 13.0 volumes of TAN expected Q-o-Q, which was lower in
Q2FY11 due to lower mining activity owing to good
Core PAT 418 272 53.9 414 0.8 monsoons; higher capacity utilisation and good sales
growth for fertilisers
Jain Irrigation Revenues 8,231 6,410 28.4 6,411 28.4 Performance of domestic MIS segment expected to be
EBITDA 1,778 1,304 36.4 1,395 27.4 better Q-o-Q; it was subdued in Q2FY11 on account of
good monsoons
Core PAT 695 481 44.5 469 48.1
Lakshmi Energy and Revenues 2,737 2,027 35.0 3,848 (28.9) Update on retail launch; Expecting Q-o-Q improvement in
Foods EBITDA 534 487 9.7 584 (8.6) EBITDA margin; pricing outlook and offtake of Pusa rice
and FCI rice would be the key moniterables
Core PAT 241 237 1.5 240 0.3
Shree Renuka Revenues 24,810 14,287 73.7 24,600 0.9 Enhanced profitability expected in domestic operations
Sugars EBITDA 3,704 3,611 2.6 3,420 8.3 due to better sugar realisation, performance of Brazilian
subsidiaries could surprise on the upside
Core PAT 902 2,609 (65.4) 339 166.0
United Phosphorus Revenues 12,898 11,497 12.2 12,569 2.6 Challenging quarter due to adverse climatic conditions in
India and ROW markets. Incremental sales form
mancozeb business to partly offset muted sales growth in
EBITDA 10,599 1,952 443.0 2,326 355.7
base business. Margins to expand from lower RM costs,
lower fixed costs and stable pricing. No forex impact build
Core PAT 1,140 641 77.8 1,147 (0.6) in our estimates.
Usher Agro Revenues 1,239 855 45.0 1,145 8.3 Update on the status of rice processing capacity
expansion and pricing outlook for premium non-basmati
EBITDA 174 118 47.0 155 11.7
rice are key things to watch out for; Increase in capacity
Core PAT 85 68 26.6 81 5.0 utilisation of rice processing expected
Valuation snapshot
Deepak Fertilisers and
Buy 349 179 29.3 25.5 8.7 6.9 1.5 1.3 18.2 19.8 2.5 2.8
Petrochemicals
Jain Irrigation Systems Hold 1,948 232 64.9 37.7 28.4 20.7 6.4 5.0 24.0 27.2 0.4 0.4
Lakshmi Energy & Foods Buy 101 72 (3.0) 22.2 4.2 3.5 0.6 0.5 15.6 16.1 0.7 0.7
Shree Renuka Sugars Buy 1,409 95 (18.5) 56.1 13.2 9.4 2.3 1.9 19.0 22.4 1.1 1.1
United Phosphorus Buy 1,646 162 19.0 29.9 11.3 8.6 1.8 1.6 17.9 18.5 0.9 1.2
Usher Agro Buy 67 92 48.3 72.9 7.2 4.2 1.6 1.2 27.7 32.9 1.1 1.1

Quarterly preview
Miscellaneous
Jet Airways Revenues 35,964 28,856 24.6 31,050 15.8 Y-o-Y improvement in yields; operational performance on
the international routes; decision with regards to taking
EBITDA 7,807 5,085 53.5 4,707 65.9 back the planes given on lease to other international
carriers and clarity on the Jet Sahara case to be key
Core PAT 3,868 1,058 265.6 123 3,044.7 monitorables
Opto Circuits India Revenues 3,446 2,570 34.1 3,314 4.0 CSCX to be consolidated for one month in Q3. Our
EBITDA 1,120 881 27.1 1,057 6.0 estimates are ex-CSCX. Revenue growth in the invasive
segment will also be key given the disappointing growth
Core PAT 933 658 41.9 773 20.8 in Q2.
Sintex Industries Revenues 10,615 8,478 25.2 9,231 15.0 Seasonally strong quarter for the monolithic construction
EBITDA 1,752 1,269 38.0 1,716 2.1 business. Revenue growth and profitability for the
overseas subsidiaries will be the key thing to watch out
Core PAT 976 724 34.7 1,001 (2.5) for.
TCI Revenues 4,686 3,812 22.9 4,421 6.0 Revenues are expected to grow by 20% yoy due to
higher traction from SCS and XPS division.EBIDTA
EBITDA 365 276 32.5 353 3.7 margins are expected to decline sequentially due to
Core PAT 149 118 25.9 149 (0.5) higher raw material costs
VIP Revenues 1,907 1,602 19.0 1,464 30.2 Revenues are expected to grow at around 20% YoY
backed by strong sales in the soft luggage
EBITDA 313 279 12.0 179 74.7 segment.EBIDTA margins are expected be around 16.5%
due to increase contribution from high margin soft
Core PAT 212 145 45.7 114 85.6 luggage business.
Valuation snapshot
Jet Airways Buy 1,448 760 177.0 114.6 14.1 6.6 2.9 2.0 13.8 29.5 0.0 0.0
Opto Circuits India Buy 990 245 37.8 18.4 12.7 10.7 3.3 2.7 29.2 27.8 2.2 2.6
Sintex Industries Buy 1,083 180 0.0 0.0 7.4 6.1 1.0 0.9 17.3 17.5 0.9 1.1
Transport Corporation of
Buy 183 114 27.3 15.2 14.6 12.7 2.2 1.9 15.8 15.9 0.4 0.4
India
VIP industries Buy 414 663 65.6 40.3 19.6 14.0 8.8 6.1 53.3 51.7 1.4 1.8

Quarterly preview
Edelweiss Securities Limited, 14th Floor, Express Towers, Nariman Point, Mumbai – 400 021.
Board: (91-22) 2286 4400, Email: research@edelcap.com
Vikas Khemani Head Institutional Equities vikas.khemani@edelcap.com +91 22 2286 4206
Nischal Maheshwari Head Research nischal.maheshwari@edelcap.com +91 22 6623 3411
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India Equity Research | Strategy Result Preview

RESULT PREVIEW Q3FY11

 Growth trajectory moderates January 7, 2011

the sector (ex OMCs) is expected to be strong.

 Margins paint a mixed picture

 Commodity driven sectors to post healthy growth rates

 Headwinds emerge, FY11E and FY12E earnings downgraded

2 Edelweiss Securities Limited

Market Review ........................................................................................................................................................... 8

Banking and Financial Services .................................................................................................................................. 14

Engineering and Capital Goods ................................................................................................................................... 23

Metals and Mining .................................................................................................................................................... 34

Oil and Gas ............................................................................................................................................................. 37

Real Estate .............................................................................................................................................................. 46

Agro Related / Miscellaneous ..................................................................................................................................... 52

Edelweiss Securities Limited 3

Table 2: Revenue growth healthy across sectors

4 Edelweiss Securities Limited

 EBITDA margins paint a mixed picture

Table 3: EBITDA margins paint a mixed picture

Edelweiss Securities Limited 5

 Earnings trajectory likely to be softer

Table 4: Mixed quarter for earnings

6 Edelweiss Securities Limited

 Commodity driven sectors to post healthy growth rates

 Headwinds emerge, FY11E and FY12E earnings downgraded

We believe that increasing headwinds to earnings is reflected in earnings revisions cycle

Chart 1: Pace of earnings upgrades has virtually stalled

Earnings upgrades have

Source: Bloomberg, Edelweiss research

Edelweiss Securities Limited 7

Chart 2: Indian stock markets were subdued in Q3FY11

Source: Bloomberg, Edelweiss research

Chart 3: Sensex since January 2009

Source: Bloomberg, Edelweiss research

8 Edelweiss Securities Limited

 FII and DII net flows remain positive

Chart 4: FIIs flows remained healthy in Q3FY11

Chart 5: DII flows were in negative zone

Source: Bloomberg, Edelweiss research

Edelweiss Securities Limited 9

 Growth prospects of global economy have improved January 7, 2011

In emerging economies, policy stimulus, inventory re-stocking and sharp

Edelweiss Securities Limited 11

 Key highlights of the sector during the quarter January 7, 2011

 Result expectations for the sector and stocks under coverage

 Outlook over the next 12 months

Source: Edelweiss research

Edelweiss Securities Limited 13

 Key highlights of the sector during the quarter January 7, 2011

 Result expectations for the sector and stocks under coverage

 Outlook over the next 12 months

Core PAT 8,907 8,325 7.0 10,193 (12.6)

Core PAT 13,920 11,011 26.4 12,363 12.6

Core PAT 3,511 2,708 29.7 3,342 5.1

Core PAT 775 606 27.9 753 3.0

Core PAT 3,704 2,894 28.0 3,977 (6.9)

Core PAT 6,089 4,741 28.4 6,182 (1.5)

Edelweiss Securities Limited 15

Core PAT 757 625 21.1 770 (1.8)

16 Edelweiss Securities Limited

Source: Edelweiss research

Edelweiss Securities Limited 17

Growth trajectory moderates January 7, 2011

Margins paint a mixed picture

Commodity driven sectors to post healthy growth rates

Headwinds emerge, FY11E and FY12E earnings downgraded

EBITDA margins paint a mixed picture

Earnings trajectory likely to be softer

Commodity driven sectors to post healthy growth rates

Headwinds emerge, FY11E and FY12E earnings downgraded

FII and DII net flows remain positive

Growth prospects of global economy have improved January 7, 2011

Key highlights of the sector during the quarter January 7, 2011

Result expectations for the sector and stocks under coverage

Outlook over the next 12 months

Key highlights of the sector during the quarter January 7, 2011

Result expectations for the sector and stocks under coverage

Outlook over the next 12 months

Key highlights of the sector during the quarter January 7, 2011

Result expectations for the sector and stocks under coverage

Outlook over the next 12 months

Key highlights of the sector during the quarter January 7, 2011

Outlook over the next 12 months

Key highlights of the sector during the quarter January 7, 2011

Outlook over the next 12 months

Outlook for the next 12 months

Key highlights of the sector during the quarter January 7, 2011

Result expectations for the sector and stocks under coverage

Outlook over the next 12 months

Key highlights of the sector during the quarter January 7, 2011

Outlook over the next 12 months

Key highlights of the sector during the quarter January 7, 2011

Result expectations for the sector and stocks under coverage

Outlook over the next 12 months

Key highlights of the sector during the quarter January 7, 2011

Result expectations for the sector and stocks under coverage

Outlook over the next 12 months

Key highlights of the sector during the quarter January 7, 2011

Result expectations for the sector and stocks under coverage

Outlook over the next 12 months

Key highlights of the sector during the quarter January 7, 2011

Result expectations for the sector and stocks under coverage

Outlook for the next 12 months; Maintain positive outlook

Key highlights of the sector during the quarter January 7, 2011

Outlook over the next 12 months

Key highlights of the sector during the quarter January 7, 2011

Outlook over the next 12 months