ICICIdirect Strategy2011

ICICI Securities Limited
Index
House View...................................................................... 3
India- Likely to retain premium ..................................................5
Valuation- Earnings growth the key prerogative .......................6
Liquidity- So far, So good .........................................................13
Obvious positives........................................................... 19
India GDP growth- strong and robust .......................................20
Demographics favour India .......................................................22
No concern over government finance.......................................26
Global GDP growth- Asia will lead western laggards................28
Show stoppers- Domestic.............................................. 30
Inflation- getting structural in nature.........................................31
Higher crude prices will deteriorate fiscal situation ..................32
Currency- situation getting perplexing......................................33
Geopolitical concerns ...............................................................33
Delay in policy reforms .............................................................35
Show stoppers- Global ................................................... 36
US- Employment trend to remain weak in CY11 .......................37
EU peripheral- Negative news can surprise any moment .........38
China to slow down- Debate not clear yet................................41
Is Japan the next big problem ..................................................43
North Korea vs. South Korea - uncertain and futile ...................44
Asset bubbles- bullion and crude can be potential targets .......45
Outlook 2011- The year ahead ....................................... 47
Sectoral view ...........................................................................48
Top picks..................................................................................71
Flashback 2010- The year that went by ......................... 73
ICICIdirect.com | Equity Research

Page 2
House View
The year CY10 is best characterised as a progressive recovery in
developing countries and just a recovery in the developed world. CY11
should again see a stronger but lopsided economic growth. The divergence
is likely to be quite marked this year as well in terms of economic growth
rates, policy responses, interest rates, inflation and other challenges all of
which are likely to get transmitted into the performances of equity indices
across countries as it did in CY10. We believe it is quite unlikely that we
may see a reversal in divergences in performance of economic and various
asset classes reverting anytime soon. The US and Europe region would
continue liquidity induced revival hopes with BRIC brigade trying to attain a
fine balance between maintaining healthy growth amid liquidity and
commodity influenced issues such as inflation, currency volatility, etc.
We expect the CY11 Indian equity performance to be growth induced and

would mirror the trajectory of economic and corporate growth. We expect
sectors levered to the consumption theme to continue finding favour and
infra/capex related participation likely to be back-ended as elevated interest
rates, inflation, commodity prices and tight liquidity would mute the
confidence during the first half of CY11 despite compelling arguments in
terms of need for infrastructure creation and valuations.
We do not expect a de-rating in global confidence on India. Hence, we

expect the Sensex to grow in line with earnings CAGR of 21% over FY10-
12E EPS to 23165 levels (17x weighted average of FY12-13 EPS of 1363,
16% upside). In our bear case, we expect the Sensex to find comfort at
16924 levels (14x FY12E EPS of 1209, 15% downside), which could
We believe investors should continue sticking with their emanate from events such as fading of the US growth outlook, no respite
winning sectors and stocks bets in H1CY11 and look for on Euro zone worries, spike in commodities and geopolitical tensions.
sector rotation in H2CY11 on revisiting the growth outlook Also, persistent domestic corporate governance issues may take the
in some of our neutral sectors. The best course for sheen off India's image as an investment destination in the near term.
approaching the markets would be through laddering
one’s investments as we are not in a clear up trending We do not expect sector rotation/preference to undergo much change on
market the likely levers of higher growth even though valuation multiples appear to
be rich. We continue to maintain our positive stance on sectors like IT
(reaping the benefits of global growth, revival of discretionary spending,
rich valuations), banks (strong base growth to make up for rich valuation),
pharma (strong domestic and US led growth, M&A opportunity, rich
valuations), capital goods (strong Tier-I led growth, yet to be broad-based)
and sugar (global supply getting restricted, earnings volatility).
Axis Bank, TCS, GAIL, Oil India, HCL Tech, L&T and, Lupin We are neutral on auto (awaiting confirmation on structural demand, spike
among large caps and Aurobindo Pharma, Balrampur in commodity prices), oil & gas (pronounced government reforms, high
Chini, Hindustan Zinc, Natco Pharma and Escorts among crude prices), infra (robust order book, valuations compelling, pick-up in
midcaps are our preferred picks for 2011 execution missing), metals (global demand revival, higher raw material),
FMCG (stable growth, rich valuation at 80% premium to Sensex), aviation
(strong passenger traffic growth, high crude prices a dampener) and
hospitality (demand revival and asset heavy business).
We have a negative bias on real estate (increasingly unaffordable), telecom

(tepid growth, competition intensity diminishing, regulatory overhang),
cement (supply overhang getting longer, large caps lacking valuation
comfort) and shipping (growth missing and valuation compelling).
In commodities, we believe crude (restricted supply, 39% demand drivers

comprising US and Euro zone underperforming) and precious metals
especially gold (emerging as an indispensable asset in portfolio, crisis of
confidence in paper assets, safe haven status) could be potential targets for
bubble creation.

Page 3
Â Built in 16% upside for CY11- in our base case

Exhibit 1: Sensex target
Key Parameters Bull Case Base Case Bear Case
Global Factors
Economic Data flow Robust Moderate Worsening
Geopolitical Tension Low Low High
In our base case scenario, we project a 16% upside for
Commodity Prices Low Moderate High
Sensex to 23165 levels for CY11. Our index target
Domestic Growth
discounts 17x weighted average EPS of FY12E and FY13E
Inflation Low Moderate High
1363
Earnings Growth >20% 15%-20% <15%
Policy Reforms Very High High Low
Market Related variables
Premium/Discount to Global Indices multiples Rise in In line with historical trends Divergence
Divergence narrows
In line with CY10 trends Huge
Portfolio Flows Robust Inflows Redemptions
P/E Multiple (X) 18 17 14
75% x FY13E EPS +25%
Earnings Discounting FY13E x FY12E EPS FY12E
Sensex EPS 1414 1,363 1,209

CY11 BSE Sensex Target 25451 23165 16924
Equivalent Nifty Target 7642 6956 5080
Source: ICICIdirect.com Research
Among sectors, banking, IT and oil & gas constitute 54%

of total index earnings. These set of sectors will post a Exhibit 2: Trend in sectoral contribution for Sensex EPS
CAGR of 22% over FY10-FY12E, thereby reducing the 1209
1300
vulnerability towards any negative global events
1100 983 193
900 826 158 172

745 125 101
700 177 83
167 58 83
79 68 242
500 93
36 68 209
53
153 159 144
300 121
94 107
100 220 275
148 177
-100 FY09 EPS FY10 EPS FY11E EPS FY12E EPS
Banking and NBFC IT Oil and Gas Capital Goods Auto Metals Others*
*Others include FMCG, Power, Telecom, Pharma and Real Estate
Source: Bloomberg, ICICIdirect.com Research

[
Exhibit 3: Sensex target under various scenarios Exhibit 4: FY12E Sensex EPS
1400 10 1,209
27000 48 11
Bull Case 25451 1200 59
172 65
Base Case 23165 1000
22000 101
800 83
242
17000 Bear Case 16924 600
144
400 275
12000
200
7000 0
IT
Power
Real Estate
CG
Auto
FMCG
Pharma
Telecom
Sensex
Banking
Oil & Gas
Metals
Dec-07
Jun-08
Dec-08
Jun-09
Dec-09
Jun-10
Dec-10
Jun-11
Dec-11
Source: Bloomberg, ICICIdirect.com Research Source: Bloomberg, ICICIdirect.com Research

Page 4
India - Likely to retain premium

Â Growth the only selling point
Progressive economic growth (GDP growth expanded to 8.9% in H1FY11
compared to 7.5% FY10 growth) next only to China coupled with prospects
of 17% CAGR FY10-13E in corporate earnings launched India as an
investment magnet with record FII inflows of $28.4 billion (| 1.30 trillion) in
CY10. We believe that strong economic and corporate growth along with
generous monetary policies by the developed world would help India to
retain the premium and aid Indian equities in delivering a modest return of
16% in CY11.
Indian markets have historically traded at a 17% premium over developed
markets (US & UK) and had traded at a discount of 25-30% to its peer China.
The impairment to Chinese multiple is primarily attributed to lower Chinese
growth rather than India catching up with Chinese multiples. We feel that
other valuation parameters, such as P/BV (TTM 3.4x), market cap to GDP (at
1.1 as against historical range of 0.9 -1.78x), PEG (1.08) are quite apt given
sustainable RoE of 16.7%in FY12E (historically ranged between 15%
and21%).
Our bull case scenario assumes robust FII inflows and Sensex getting
priced for perfection (18x FY13E EPS of 1414). This would lead to an
outperformance to the tune of 27% at 25451 (bull case scenario) levels on
Sensex in CY11. However, we prefer to err on the side of caution in terms
of earnings and PE multiples and expect returns of 16% in CY11 to 23165
levels, in our base case scenario. We have derived our confidence from
Sensex companies CAGR growth of 17% in FY10-FY13E (in line with five
year CAGR of 13%) and premium multiples of 17x (in line with five years
range of 14-16x, excluding outliers).
In our bear case, we have built in dwindling of risk appetite emanating from
global factors and local factors. We believe the Sensex could witness a
pullback of 15% from current levels to 16924 (14x FY12E EPS of 1209). This
would happen in the event that a loose monetary policy approach in the
developed world and tight monetary policy in developing economies
backfires and does not produce the intended objectives of reviving growth
in the former and inflation and capital inflows threaten financial stability in
the latter. In addition, geopolitical problems such as South Korea–North
Korea, Iran–Israel, Sino-Indian dispute over Brahmaputra River, fresh
terrorist attack disturbing Indo-Pak relations, Maoists impacting investment
in mineral rich estates and domestic political issues (Parliament stalemate)
are potential worries for the market.
A spike in crucial commodities like (up 22% in 6M to US $ 93.5 bbl), coal
(up 40% CY10) and iron ore (up 55% CY10) are adding fuel to the current
concerns with commodity levered countries like Russia and Brazil likely to
find favour as FII inflow destinations. At the same time, this would create
problems for India in terms of fiscal pressure on the government in terms of
additional subsidy burden, disinvestment getting derailed and magnifying
inflation challenges. Further, on the domestic front, the Parliament
stalemate may impede or delay the passing of various reform oriented &
legislative bills that can also affect the stability of the government.
On the global liquidity front, we believe India is unlikely to see any major
impairment in FII inflows as the western world is unlikely to commence rate
tightening in CY11 in a hurry. India stocks continue to sparkle in the eyes of
FIIs as their holding in indices like the Nifty, Sensex and BSE midcap is
currently at peak levels of 17.9%, 15.9% and 13.6%, respectively. In
addition, healthy participation in disinvestment programme of | 49865 crore
during CY10 and likely strong pipeline of | 51000 crore would keep FII
interest alive for Indian equities.

Page 5
Valuation- Earnings growth the key prerogative

Â PE multiple premium, in line with historical averages …
Indian historical premium/discount to global peers
As compared to the developed world (US, UK), India has historically traded
at a 17% premium over the past seven years. Currently, we are trading at
18% premium to developed market and in line with historical trend.
Going ahead, we believe that strong earnings CAGR of 17% over FY10-13E
will lead the Sensex higher as P/E multiples are unlikely to expand as India
is already considered an expensive investment destination.
India has historically traded at a 25-30% discount to Exhibit 5: India’s PE multiple (premium/discount)
China. However, due to slowdown fears, the Chinese 80 160
equity market has significantly underperformed other
60 120
global equity markets including India in the last year. As a
80
result, Chinese premium has vanished and currently 40
trades on par with India 40
20
(%)
(%)
0
0
-40
-20 -80
-40 -120
Q1
Q2
Q3
Q4
Q1
Q2
Q3
Q4
Q1
Q2
Q3
Q4
Q1
Q2
Q3
Q4
Q1
Q2
Q3
Q4
CY06 CY07 CY08 CY09 CY10
Developed Markets Brazil Russia (RHS) China (RHS)
Consistency getting rewarded

With consistent nominal GDP growth coupled with in excess of 15%
corporate earnings, has helped India command a premium in terms of PE
multiple. Going ahead we believe that corporate India will clock 17%
earnings CAGR over FY10-13E, which is consistent with previous growth
trajectory. The above point is reiterated by the fact that sectors such as
Banking, IT and Oil & Gas have consistently delivered ~55% to total index
earnings over FY08-10. Hence, in the event of global impairment, Sensex
earnings are relatively less vulnerable to earnings of its counterparts like
China, Brazil and Russia (earnings mainly driven by exports and commodity
oriented). Hence, the premium multiple for India appears comfortable.
Exhibit 6: Higher visibility, better the premium multiple

20
16
12
(x)
0
Bovespa
Nifty
FTSE
Nikkei
Shanghai
DAX
CAC
MICEX
DowJones
Trailing PE 1yr fwd P/E 2yrs fwd P/E

Page 6
Â …and so are other valuation parameters
Exhibit 7: India 3.4x P/BV multiple justified on the back of robust return ratios…
4.0
3.4
3.5
3.0 2.7 2.6
2.5
2.0
2.0 1.8
(x)
1.6
1.5 1.3 1.3
1.0
0.5
-
Bovespa
Sensex
FTSE
Shanghai
DAX
CAC
MICEX
DowJones
Structural and sustainable RoEs of 15-17% over FY10- Exhibit 8: Trend in RoE of Sensex companies
FY12E augur well for Indian markets. This enables it to
command premium valuations across the emerging 17
market basket in terms of P/BV and PEG ratio 16.7
17 16.5
16
16 15.6
(%)
15.1
15
15
14
FY09
FY10
FY11E
FY12E
Exhibit 9: India vis-à-vis other markets in terms of PEG ratio

1.2 1.08
1.0 0.89
0.77
0.8
0.6
(x)
0.49 0.45 0.43 0.42

0.4 0.33
0.25
0.2
-
Germany
UK
France
Brazil
India
China
Russia
Japan
USA

Page 7
Valuation at higher end does not mean euphoria:

Though the Sensex is trading at the higher end of multiple bands, we
believe valuations are still reasonable and have yet not reached euphoric
levels as in 2007-08. This is since the market cap/GDP ratio had touched
record levels of 1.8x in early CY08.
Market capitalisation/GDP (x)
2.0 Exhibit 10: Market capitalisation to GDP ratio

1.5 1.5 1.6 1.5 12
1.0 1.01.1 1.4
(x)
0.9 10
0.5 0.5 0.5 0.7 0.5 1.2 1.1 1.1
8
0.0 1.0 0.8
0.8 0.7
Dec-03
Dec-04
Dec-05
Dec-06
Dec-07
Dec-08
Dec-09
Dec-10
0.8 6
(%)
0.7
(x)
0.5
0.6 0.4 4
Indicative valuation 0.4
2
Ratio = Market-Cap/GDP Valuation 0.2
Ratio < 0.50 Significantly Undervalued - 0
UK
Germany
Brazil
France
India
China
Russia
Japan
USA
0.50 < Ratio < 0.75 Modestly Undervalued
0.75 < Ratio < 0.90 Fair Valued
0.90 < Ratio < 1.15 Modestly Overvalued Mcap/GDP IMF GDP forecast for 2011(RHS)
Ratio > 1.15 Significantly Overvalued

Source: Bloomberg, IMF, ICICIdirect.com Research
Â Sensex vs. G-sec yields indicate equity valued fairly in short

term…
Earnings yield for Sensex on FY13E earnings works out to 7.1% that is less
attractive vis-à-vis G-Sec yields. Though it makes equity a tad expensive in
relation to debt, we believe that in an inflationary environment equities are
well placed and provide the best hedge. Also, G-Sec yields at 8% levels
have limited room for upside and will start correcting with inflation cooling
off by end of H1CY11. This will get equities back in the reckoning.
G sec yields attractive vs. earnings yield of the broader Exhibit 11: Equities a tad expensive in the short term
indices in short term 2
-1
(%)
-2
-3
-4
-5
Q1
Q2
Q3
Q4
Q1
Q2
Q3
Q4
Q1
Q2
Q3
Q4
Q1
Q2
Q3
Q4
Q1
Q2
Q3
Q4
CY06 CY07 CY08 CY09 CY10

Page 8
Â Large/small/mid cap PE divergence
Mid-caps to take time to recover but are turning attractive

The midcap P/E discount to the Nifty is now around 21%, in line with the
historical average. This is given that midcaps are usually more vulnerable to
pressures on economic fundamentals. We expect midcaps to consolidate in
H1CY11 in an environment that is plagued with inflationary pressures, tight
Indian markets discount inflationary expectations with liquidity and rising interest rate.
midcap
. stocks suffering the most
Also, from a market psyche perspective, risk aversion while buying midcaps
From the profitability perspective, midcaps have seen will be in force on the back of the recent spate of negative news flows
sharp margin erosion during higher inflation periods due relating to corporate governance practices in midcap companies. This will
to their inability to pass on increased cost burden suppress the investment multiples for these companies till further clarity
emerges.
Exhibit 12: Midcap discount hovering around its historical averages

50
40
30
(%)
20
10
-10
Feb
Mar
Apr
May
Sep
Nov
Feb
Sep
Nov
Mar
Apr
May
Sep
Nov
Feb
Mar
Apr
May
Feb
Mar
Apr
May
Sep
Nov
Feb
Mar
Apr
May
Sep
Nov
Dec
Dec
Dec
Dec
Dec
Oct
Jan
Jun
Jul
Oct
Jan
Jun
Jul
Jan
Jun
Jul
Oct
Jan
Jun
Jul
Oct
Jan
Jun
Jul
Oct
Aug
Aug
Aug
Aug
Aug
FY06 CY07 CY08 CY09 CY10
Exhibit 13: Inflation impacts midcaps profitability with a lag Exhibit 14: Impact of inflationary trend on midcap performance
12 150
40 12
10 10
20 100
8 8
0 6
(%)
(%)
6 50
4
-20
(%)
2 4 (%)
-40 0 0
2
H1FY08
H2FY08
H1FY09
H2FY09
H1FY10
H2FY10
H1FY11
-50
0
Apr-05
Oct-05
Apr-06
Oct-06
Apr-07
Oct-07
Apr-08
Oct-08
Apr-09
Oct-09
Apr-10
Oct-10
-2 -100
Net Sales Growth YoY PAT Growth YoY
Net profit Margin (YoY) WPI YoY (RHS) WPI YoY BSE Midcap 1 Yr Return (RHS)
Source: Bloomberg, ICICIdirect.com, Research Source: Bloomberg, ICICIdirect.com, Research

Page 9
Fund managers survey

We have done a mutual fund mangers survey of 11 major AMCs fund
managers to gauge the overall view for the market in 2011. Based on their
feedback, the compiled views are as follows:
Exhibit 15: Broader Indian equity market on a Exhibit 16: Medium term (3 months) view
valuation scale… about the broader market…
Most of the fund managers believe the market is fairly 60 55 80
valued. However, most of them had a cautious tone in the 64
short-term while their year-end consensus target projects a 36 60
40
10-20% upside i.e. 22000-24000 on Sensex
(%)
40
(%)
20
9
18 18
0 0 20
0
0 0
Overvalued
Overvalued
Undervalued
Undervalued
Fairly Valued
0
Grossly
Slightly
Grossly
Slightly
bullish
Bearish
Neutral
Bearish
Bullish
Very
Very
Options of Exhibit 17: Exhibit 17: Asset allocation strategy to be Exhibit 18: Year end BSE Sensex target…
adopted
A. Rewards far outweigh risk, move 100% of debt/cash
to equity 80 80
B. Risk/reward ratio is favourable to equity, move a part 64 64
of debt/cash to equity 60
60
C. Risk-reward ratio is balanced now; maintain the pre-
decided asset allocation (based on age, etc) 40
27
(%)
40
D. Equity is risky now; move a part of equity portfolio to
(%)
27
debt/cash 20 9
E. Equity is very risky now; move 100% of equity to 20 0 0
9
debt/cash 0
0 0 > 20000
< 16000
22000-
18000 -
16000-
24000
18000
22000
0
B
E
C
D
A
Exhibit 19: Will India continue to command Exhibit 20: Major global risk for Indian equity
valuation premium over other emerging markets?
Majority of the fund managers believe the major global risk markets?
80 73
for Indian equity market is higher crude oil prices followed by
80 73
the repercussions of the EU crisis
60 60
40 27
(%)
40
27
(%)
20
0
0 20 9
No
Yes. Will continue to
0 0
Yes. But premium
0
may reduce
recovery
Slow US
Higher
slowdown
EU crises
Others
Crude
enjoy
China

Page 10
Exhibit 21: Corporate earnings growth expected Exhibit 22: Corporate earnings growth expected
for FY11-12… for FY12-13…
100 60 55
82
80
40
Most of the fund managers are confident of 15-20% growth 60
27
over the next two years
(%)
(%)
40
20
20 9
9 9
0 0
0 0
Less than
10-15%
15-20%
>20%
Less than
10-15%
15-20%
>20%
10%
10%
Exhibit 23: Preference towards large caps or Exhibit 24: Will Indian equity markets
midcaps? underperform other emerging markets in 2011?
100 100
82 82
Majority of the fund managers believe large-caps will 80 80
outperform in 2011 as midcaps may take time to recover 60
60
(%)
Majority of them believe India may continue to outperform 40
(%)
among its emerging market peers… 18 40
20
18
0 20
Largecaps
Midcaps
No
Yes
Exhibit 25: Which global equity market are Exhibit 26: Benchmark 10 year G-Sec yields
expected to outperform in 2011? range expected in the next 3 months?
80 73 60
45
60
Consensus believes that among other global market, US 40
equity markets are likely to outperform in CY11 40 27 27
(%)
(%)
18 20
20
9
Total 70% of fund managers believe Indian benchmark 10
0
year G-Sec yields will remain below 8.2% 0
0
0
US
Brazil
European
countries
China
Above
Below
8-8.20%
7.75-8%
7.75%
8.20%

Page 11
Exhibit 27: Over 6 months horizon, which Asset class to outperform in 2011?
segment of the debt market is expect to deliver
60 55
better returns?
60
Most of the fund managers believe short-term and ultra 40
45
short-term funds will outperform in the next six months.
(%)
However, a majority of them believe that opportunity 40 18 18 18
20
also exist in longer duration funds 27 9
(%)
20
9 9 0
Gold
Indian equity
Global equity
Indian Debt
commodities
Opinion seems divided over outperformance among
Agro
Indian equity, global equity, Indian debt market and gold 0
in 2011
G-Sec
Income
Short term
term funds
Ultra short
Fund
Funds
Funds
Pharma and IT are the most preferred sectors among fund Exhibit 28: Sector preference…
managers while cement, capital goods, construction,
media and aviation are least preferred. But they expect
further price erosion to be a buying opportunity in the
above mentioned sectors
Aviation
IT
BFSI
Pharma
FMCG
Auto
Cement
Telecom
Capital
Media
Construction
Metals
Oil and Gas

Goods

Page 12
Liquidity- So far so good

Fund flow in Indian markets and FII dominance
The Indian economy remained relatively insulated from the global
economic meltdown mostly on account of the domestic consumption story,
thrust on infrastructure development and a strong banking system. The
resilience of the Indian economy has re-affirmed the faith of FII investors
who have been frantic buyers of Indian stocks. After pulling out | 53052
crore in CY08, investors have put in | 85368 crore in CY09 and | 130167
crore in CY10 till date. FIIs have been key market drivers while domestic
institutions have played a minor role as is evident from the accompanying
chart. Going ahead also we believe, FII’s will continue to have a dominant
presence in Indian markets.
Exhibit 29: FII, DII inflow and its impact on index movement
60000 7000
50000 6000
40000
5000
30000
(| crore)
20000 4000
10000 3000
0
2000
-10000
-20000 1000
-30000 0
Q2
Q3
Q4
Q1
Q2
Q3
Q4
Q1
Q2
Q3
Q4
Q1
Q2
Q3
Q4
CY07 CY08 CY09 CY10
FII DII Nifty (RHS)
Source: Bloomberg,, ICICIdirect.com Research
Â Institutional holding pattern

FII holding pattern in Indian stocks
FII holding in Nifty, Sensex and BSE mid-cap stocks is currently at peak
levels at 17.9%, 15.9% and 13.6% and is significantly above 13.8%, 12.1%
and 9.8% holding in March 2009 at the peak of the global economic crisis
re-affirming their faith in Indian equities. However, BSE small cap is not
finding favour as their participation is relatively low vis-à-vis their peak
holding at 6.7% in September 2008. Another important point worth noting
is that their participation has increased only in the later stages of the rally
and their current holding of 4.8% is still below their peak holding levels
indicating their risk aversion strategy.
Exhibit 30: FII holding in Nifty components Exhibit 31: FII holding in Sensex components
Unlike 2008, FII holding has risen in the main indices and
7000 20 25000 20
midcaps whereas their holdings in small cap is yet to find
6000 18 20000 18
favour as their current holding at 4.8% is below the record
level of 6.7% (September 2008) 5000 16 15000 16
(%)
(%)
4000 14 10000 14
3000 12 5000 12
2000 10 0 10
Q3
Q4
Q1
Q2
Q3
Q4
Q1
Q2
Q3
Q3
Q4
Q1
Q2
Q3
Q4
Q1
Q2
Q3
CY08 CY09 CY10 CY08 CY09 CY10
FII holding (RHS) Nifty (RHS) FII holding (RHS) Sensex (RHS)
Source: Capitaline, ICICIdirect.com Research Source: Capitaline, ICICIdirect.com Research

Page 13
Exhibit 32: FII holding in BSE midcap stocks Exhibit 33: FII holding in small cap stocks
10000 15 12000 8
8000 12 10000
6
8000
6000 9
6000 4
(%)
(%)
4000 6
4000
2000 3 2
2000
0 0 0 0
Q3
Q4
Q1
Q2
Q3
Q4
Q1
Q2
Q3
Q3
Q4
Q1
Q2
Q3
Q4
Q1
Q2
Q3
FII holding (RHS) BSE Midcap (RHS) FII holding(RHS) BSE Smallcap(RHS)
Domestic insurance companies holding pattern in Indian stocks

Exhibit 34: Holdings in Nifty Exhibit 35: Holdings in Sensex
Insurance companies holding in Nifty, Sensex and BSE 7000 8.0 25000 9
midcap stocks is currently at peak levels at 7.0%, 8.0% 6000 7.5 20000 9
and 3.0% while they have pared their holdings in BSE 7.0 8
5000 15000
small cap stocks, which clearly indicate their preference 6.5
(%)
8
(%)
4000 10000
towards large cap and fundamentally strong companies 6.0 7
with good corporate governance and paring of holding in 3000 5.5 5000 7
small cap stocks. Another important observation is that 2000 5.0 0 6
Q3
Q4
Q1
Q2
Q3
Q4
Q1
Q2
Q3
Q3
Q4
Q1
Q2
Q3
Q4
Q1
Q2
Q3
during the peak of economic crisis when FIIs were major
sellers with a sharp drop in their holding levels, insurance CY08 CY09 CY10 CY08 CY09 CY10
holding was almost constant. This provided much needed
support to the market Insurance holding (RHS) Nifty (RHS) Insurance holding (RHS) Sensex (RHS)
Exhibit 36: Holdings in BSE mid-cap index Exhibit 37: Holdings in small cap index
10000 3.50 12000 1.5
8000 10000
3.25 1.3
8000
6000
3.00 6000 1.0
(%)
(%)
4000
4000
2000 2.75 0.8
2000
0 2.50 0 0.5
Q3
Q4
Q1
Q2
Q3
Q4
Q1
Q2
Q3
Q3
Q4
Q1
Q2
Q3
Q4
Q1
Q2
Q3
Insurance holding BSE Midcap (RHS) Insurance holding BSE Smallcap(RHS)
FII flows in equity markets expected to be strong

Low interest rates in US, to drive liquidity flows to India
US economic recovery is still at a nascent stage with capacity utilisation at
75.2% which is significantly below its historical average of 80.6%.
Unemployment also remains at historically high levels at 9.8%, again
significantly higher than its historical average of 6.3%. This would compel
the Fed to continue with its loose monetary policy for an extended period of
time to stimulate growth and ensure unemployment rates drop to more
reasonable levels. Low interest rate in the US would lead to larger capital
inflows towards emerging markets like India.

Page 14
Exhibit 38: Loose monetary policy likely to continue and encourage carry trades
6.0
5.0
4.0
(%)
3.0
2.0
1.0
0.0
Q1
Q2
Q3
Q4
Q1
Q2
Q3
Q4
Q1
Q2
Q3
Q4
Q1
Q2
Q3
Q4
CY07 CY08 CY09 CY10
Source: US Fed,, ICICIdirect.com Research
Higher GDP growth to attract global capital flows

Exhibit 39: Foreign portfolio flows into BRIC economies over CY05-09
50 43
The movement of FII inflow largely depends on the
37
strength of domestic economy, interest rate differential 40 33
26 28
and currency movements. Emerging markets like India 30
20 21
would continue to attract FII investments on account of 19 19
20 12
(bn $)
its strong GDP growth. We expect FII flows to be

6 8 10 6 9
robust, going ahead, as they would increase their 10 3
0
exposure to India mainly led by the Indian growth story 0
and the sluggish growth and resultant lack of
-10
opportunities in their domestic markets -8
-20 -15 -15
CY05
CY06
CY07
CY08
CY09
Brazil India China Russian Federation
Source: World Bank, ICICIdirect.com Research
Exhibit 40: Portfolio flows relatively high in economies with robust GDP growth trends
Foreign portfolio flows as % of GDP

3.0
2.5
2.0
1.5
1.0
(%)
0.5
0.0
-0.5
-1.0
-1.5
CY05
CY06
CY07
CY08
CY09
Brazil India China Russian Federation
Source: World Bank, ICICIdirect.com Research

Page 15
Further, India has no restrictive capital control measures

Countries such as Brazil have increased the tax on capital inflows to 6%
while Thailand has levied 15% withholding tax on capital gains and interest
payments on foreign holdings of government and state-owned company
bonds. India has no such restriction on capital inflows, which is an added
advantage for domestic markets.
Caveat: Flight of capital to US in short term possible but long-term trend intact
Strength in the US dollar, combined with expectations of better than
expected growth in US markets, could lead to a temporary flight of capital
from Indian markets to the US. Jobless claims in the US are declining while
corporate earnings are showing signs of traction. Further, the valuation
level of US equities is also lower compared to emerging markets such as
India, which is trading at comparatively higher valuations. This could lead to
a temporary pullback of capital from Indian markets. However, the
phenomenon is likely to be short-lived as the long-term India growth story
remains intact.

Page 16
DII flows: Offers cushion on downside

Insurance: Flows into equities to remain robust on IPO offerings
In CY10, insurance companies were net buyers of equities worth | 10419
crore. Life insurance premium has grown at 19.7% in FY10. Of this, ~33%
was invested in equity markets. LIC, the market leader in the life insurance
sector with a share of 70.1%, has been gradually increasing its exposure in
equities from 22% in FY09 to 33% in FY10.
Exhibit 41: Insurance industry’s equity investment to remain robust over FY10-12E
370000
320000
270000
(| crore)
220000
170000
120000
70000
20000
FY09
FY10
FY11E
FY12E
Total premium collections Total equity investments
Source: IRDA, ICICIdirect.com Research
Mutual funds: Struggling with regulatory changes, inflows to be muted

Assets under management of domestic mutual fund houses have been
Redemption pressure from existing investors combined steadily rising over the last few years. This was except FY09, which
with a drop in new fund inflows because of Sebi reported a 17.4% reduction in AUM. Recently, with the change in regulation
regulation to remove entry load resulted in mutual fund w.r.t. entry load, we have seen significant outflows from the MF industry.
being net sellers to the tune of | 27981 crore in CY10. Going ahead, we expect inflows to be muted as the industry is still
However, any significant corrections will attract transiting over to new regulations.
outflows that have happened in CY10. Exhibit 42: AUM of domestic fund houses
Debt Equity Total AUM (%) growth
(| crores) (%) (| crores) (%) (| crores) in AUM
FY04 111478 79.8 28138 20.2 139616 -
FY05 107709 72.0 41891 28.0 149600 7.2
FY06 127161 54.8 104701 45.2 231862 55.0
FY07 196414 60.2 129974 39.8 326388 40.8
FY08 321012 63.5 184140 36.5 505152 54.8
FY09 307630 73.7 109670 26.3 417300 -17.4
FY10 424458 69.1 189521 30.9 613979 47.1
Nov-10 470500 70.7 194782 29.3 665282 8.4
Source: AMFI India, ICICIdirect.com Research
Exhibit 43: Domestic savings growth can be a potential for equity flows
India has a very healthy savings rate of 33%. Out of the FY08 FY09 FY10 FY11E FY12E
total savings, ~ 3.5% is invested in equity markets, GDP (| crore) 4540987 5228650 5868332 6748582 7760869
which results in a sum of | 74572 crore. A rise in Rate of Gross Domestic Savings (%) 36.4 32.5 34.0 34.0 34.0
domestic savings and enhanced risk taking ability would Savings (| crore) 1652919 1699311 1995233 2294518 2638695
result in a substantial re-allocation of funds towards (%) of Savings invested in equity markets 3.00 3.00 3.25 3.25 3.50
equity Savings available for equity investment (| crore) 49588 50979 64845 74572 92354
Source: RBI, ICICIdirect.com Research

Page 17
Â Primary/secondary market inflow

IPO/FPO offerings to remain robust in CY11, backed by disinvestments
PSU offerings raised a sum of | 49865 crore from primary markets, which
constituted 67% of the total primary market offering of | 73938 crore. Some
key FPOs lined up in CY11 are ONGC, IOC, SAIL and Hindustan Copper,
which are expected to raise sum of ~| 51000 crore from the primary market
in CY11. This is likely to keep the domestic markets buoyant with significant
participation from FII, DII and retail investors.
Exhibit 44: Primary market activity

Amount raised (| crore)
Year Total IPO FPO PSU Private
CY01 459 459 - 135 324
CY02 1986 1986 - 937 1049
CY03 2013 2013 - 720 1293
CY04 26964 26964 - 19008 7956
CY05 20997 11419 9579 5915 15082
CY06 24926 21561 3365 2771 22155
CY07 48329 38483 9846 4764 43565
CY08 19436 19151 286 1639 17797
CY09 15899 15869 30 8816 7083
CY10 73938 42314 31624 49865 24074
CY11E 51000 - 51000 51000 -
Big ticket FPO in pipeline
Company Expected Amount (| crore)
ONGC Feb-11 14000
SAIL Feb-11 15000
Hindustan Copper Feb-11 4000
IOC May-11 18000
Total 51000
FII Inflow- Post India rating upgrade in June
Source: Capitaline ,Media reports, ICICIdirect.com Research
Month Net FII Inflows (| crore)
Nov-10 18,520
Oct-10 24,771 India rating upgrade by rating agencies may lead to flush of funds
Sep-10 29,196 India currently has a BBB- rating from Fitch, which is similar to the rating of
Aug-10 11,185 Brazil but a notch lower than the BBB rating enjoyed by Russia and much
Jul-10 17,121 lower than the AA- rating enjoyed by China. India has a fairly good chance
Jun-10 10,245 of getting re-rated on account of strong GDP growth combined with the
May-10 -8,630 adherence to fiscal deficit targets. Re-rating of India would lead to strong FII
Apr-10 9,765
inflows.
Mar-10 18,834
Feb-10 2,114
Jan-10 -303

Page 18
Obvious positives
The India Shining story is become well anchored even now as GDP, which
has grown at an average of 8% per annum for the last five years, remained
resilient within the 6.5-7.5% range even in tough times of FY09 and FY10.
The growth trajectory made its sharp move upwards to as high as 8.9% in
Q2FY11. This is against the world GDP, which has not moved beyond the
4% to 5.3% range in the last seven years. The country’s savings rate at 33-
35% in the last five years lends economy adequate strength to face
turbulent conditions and bounce back sharply too. Robust IIP over 7% in
the last four or five years, except in a recessionary environment, has
resulted in industrial GDP contribution at 20-30% of overall GDP during the
same period. Sustained credit growth at over 20% CAGR along with IT
services maintaining their momentum led to services GDP contribution in
the 50-60% range of total GDP. The Indian economy has inherent strength
to sustain GDP growth at 8.5-9% for the next few years.
India, the world’s second highest populated country, has been able to
attract global players and extract benefits from its domestic consumption
boom. Its demographic profile remains the sole largest driver of its
consumption story. Already, India has doubled its passenger vehicle sales
from 10.2 lakh in CY05 to 21.2 lakh in YTD CY10. Cement sales have grown
at 9.2% CAGR while in power it added 34079 MW between FY06-10. Even
after the stellar performance of the last several years, Indian positives keep
continuing…
Within the global space, India is expected to be just next Total 49% of the dependant Indian population is in the age bracket of <14
to China in GDP growth for the next five years too as per years as against its competitors like China and Brazil where the proportion
IMF. is just 20% and 26%, respectively. In the 14-19 years age group, India has
146.7 million people, which is 12.6% of its population as against 9.1% (122
million people) for China. In the next two or three years, at least 80% of this
segment will be entering consumption. The <14 years chunk, going
forward, would further exponentially magnify the consumption from
existing levels. Even on a PPP basis, GDP per capita has increased to $3000
in CY09 and is estimated at $4900 for CY15 by the World Bank. This is still
lower than China and other economies, which are 2-3x of the same.
The emerging and developing economies contributed 45% The Indian automobile industry is being touted to be near an inflection
to the total World GDP in 2008 and are expected to point, which is expected to recount a story similar to China (CY04) with a
increase to 53.3% in 2011 and 56% in 2012. huge domestic demand outburst. In CY04, 2.3 million passenger vehicles
(PV) were sold by China. After that growth was exponential at over 50% per
annum during CY06-10. India in YTD CY10 has sold 2.1 million PV already.
Also the rise in per capita GDP on a PPP basis will be favourable for this
trend to emerge supporting the move. The increasing degree of
affordability of popular cars is an early signal of a structural demand shift.
Hence, this is the attraction for global players to come to India.
GFCF in the infrastructure sector has typically been in the range of 15-16%
of gross domestic capital formation. The government has plans of raising its
infrastructure spending proportion from 7.5% of GDP now to about 9% in
FY13, which was as low as 4.9% in FY06. As we analyse government’s
contribution, 75% in Xth plan and falling down to 65% in FY10 depicts
government’s liberal policies helping private participation to accelerate. It
has plans to raise the share to 39% by FY12E from 35% currently.
India and China contributed 6.6% and 23.8% to the total GDP of emerging
and developing economies in 2008, respectively. The contributions are
estimated to increase to 7% and 28.3%, respectively, in 2011 and further
to 7.1% and 28.9%, respectively, in 2012. The emerging and developing
economies contributed 45% to the total World GDP in 2008 and are
expected to increase to 53.3% in 2011 and 56% in 2012.

Page 19
India GDP growth: Strong and robust

Exhibit 45: Components of GDP : Services sector the key contributor to GDP growth
FY05 FY06 FY07 FY08 FY09 FY10 Q1FY11 Q2FY11
GDP Growth 7.5 9.5 9.7 9.2 6.7 7.4 8.9 8.9
Agri, forestry and fishing 18.9 18.1 17.2 16.4 15.7 14.6 14.0 11.3
Industry 28.0 27.9 28.7 28.8 28.0 28.5 29.2 29.1
a Mining 2.9 2.6 2.6 2.5 2.4 2.4 2.4 2.3
b Manufacturing 15.3 15.3 16.0 16.2 15.6 16.1 16.3 16.7
c Electricity Gas Water supply 2.1 2.0 2.0 2.0 2.0 2.0 2.0 2.0
d Construction 7.7 8.0 8.0 8.1 8.0 7.9 8.5 8.2
Services 53.1 53.9 54.2 54.8 56.4 56.9 56.7 59.5
a Trade, Hotels, Transport & Communication 24.5 25.1 25.6 25.9 26.1 26.5 26.7 27.6
b Financing, Insurance, real est and business services 14.7 15.1 15.8 16.4 16.9 17.2 17.8 17.8
c Community Social 13.9 13.7 12.8 12.5 13.4 13.1 12.3 14.2
Source: Ministry of Finance, ICICIdirect.com Research
The growth in GDP has seen its contributors taking a sharp move with share
of agriculture declining from 18.9% in FY05 to 14.6% in FY10 and that of
Services has grown from 53.1% to 56.9% over the same period.
Agricultural activities, though form a larger proportion of economy has
grown at a much lower pace of 2-4% over the years as against overall GDP
As global economic growth is expected to flourish from growth of nearly 8% on an average. Within the industrial sector
emerging economies development, India a strong play in components, construction activity has picked up pace whereas mining has
BRIC nations is expected to continue enjoying lagged behind. Strong IIP numbers are an indication of manufacturing
preference on account of robust GDP growth and growth momentum continuity. We believe, Indian economy has its inherent
favourable demographics strength to continue to grow at 8.5%-9% for next few years. As global
economic growth is expected to flourish from emerging economies
development, India a strong play in BRIC nations is expected to continue
enjoying preference on account of robust GDP growth and favourable
demographics.
Exhibit 46: Contribution to BRIC’s GDP
20 60
16
55
12
(%)
(%)
8
50
4
0 45
CY05
CY06
CY07
CY08
CY09
CY10
CY11E
CY12E
CY13E
CY14E
CY15E
India Russia Brazil China (RHS)
Source: IMF, ICICIdirect.com Research
Exhibit 47: Share of emerging economies rising in global output

80 24
77 77 77 77 76 74 20 21 20
70 71 69 19
67 67 17 18
15 16 64 63 62 16
60 61
(%)
(%)
13 59
12 12
50 9 9 10
8 8 8 8
40 4
CY00
CY01
CY02
CY03
CY04
CY05
CY06
CY07
CY08
CY09
CY10
CY11E
CY12E
CY13E
CY14E
CY15E
Developed as to total world BRICS as total World (RHS)

Page 20
Â GDP from consumption perspective

We expect the share of private consumption expenditure to improve in
CY11 as the growth in corporate sales, after remaining significantly
depressed over four consecutive quarters, staged a strong recovery in Q3
of 2009-10. We believe this would drive the recovery in consumption
demand growth.
Growth in consumption expenditure remained lower compared to the last

year (i.e. growth of 9.8% YoY v/s 14.5% last year), as growth in both private
final consumption expenditure and government final consumption
expenditure decelerated. Government final consumption expenditure grew
by ~17% YoY to ~7.67 lakh crore in FY10 as against growth of 36% YoY
reported in FY09. However, its share in consumption expenditure increased
from 11.7% to 12.3% YoY in FY10. The private final consumption
expenditure also grew at a lower pace by ~11% YoY (FY09 24% YoY) to Rs
35.71 lakh crore in FY10 while its share in terms of GDP declined by 40bps
to 57.3% in FY10. This could be attributed to lower pace of growth in
consumption demand that accounts for about 70% of aggregate demand, is
estimated to have grown at 4.8% in FY10 as per the RBI estimates.
Exhibit 48: GDP at current market price
1000000
995096
942549
880014
846341
825014
700000
788013
768876
(| crore)
744295
During the recovery phase, trends in private
605381
consumption and investment demand become critical,
509759
400000
482268
474543
468594
not only for determining the strength of the recovery but

456929
430708
429232
133579
124051
205194
190308
158390
167207
225635
216177
also for conditioning the timing and pace of
policy/stimulus exit 100000
Q1
Q2
Q3
Q4
Q1
Q2
Q3
Q4
FY09 FY10
Private Final Consumption Expenditure Government Final Consumption
(PFCE) Expenditure (GFCE)
Gross Fixed Capital Formation (GFCF)
Exhibit 49: Gross capital formation: Share as % of GDP by private and govt
70
60
60.4
60.3
58.8
57.4
57.3
56.9
56.3
50
53.2
Share of government in gross capital formation has 40

(%)
increased from 10% in FY08 to 12% in FY09 in order to 30

34.7
34.2
33.2
33
32.9
31.3
31.3
31
provide required support during the recessionary phase. 20

Its share remained same as 12% in FY10 10
10.3
14.1
11.5
11.6
13.7
12.2
13
9.2
0
However, with the economy gaining strength, the
Q1
Q2
Q3
Q4
Q1
Q2
Q3
Q4
government is expected to take a backseat on firming up

FY09 FY10
of private consumption demand
Private Final Consumption Expenditure Government Final Consumption
(PFCE) Expenditure (GFCE)
Gross Fixed Capital Formation (GFCF)

Page 21
Demographics favour India

India is at a critical juncture, in terms of global growth with the Indian
domestic consumption being driven by one of the youngest populations
(37.2 years- median age) coupled with increasing disposable incomes and
increasing per capita income . Another important fact that would support
the domestic consumption growth would be a relatively less the dependant
population where majority of them is young (49% of the total 57%). Going
forward, this would further exponentially magnify consumption from
existing levels.
Exhibit 50: Dependency ratio on working population Exhibit 51: Median age of leading countries
60 62
49 58
50
39 54
40 26 34 50
28 30
26 27 46
(%)
30 23 25
20 18 21 19 21
(%)
42
20 38
8
10 34
30
0
Thailand
US
HK
Germany
UK
Italy
Hungary
Ireland
France
China
Greece
Brazil
Japan
India
Malaysia
South
Indonesia
Malaysia
Russia
Spain
Portugal
Australia
SA
UK
Brazil
India
China
Area
Russia
Japan
USA
Euro
Age dependancy ratio (Old) Age dependancy ratio (Young)

Asia Europe ROW
Source: World Bank, ICICIdirect.com Research Source: World Bank, ICICIdirect.com Research
Exhibit 52: GDP per capita trend (on PPP basis) Exhibit 53: GDP per capita growth (on PPP basis)
60 55 18
50 46 15
43 40 41
36 12
40
30 33 32 34
29 31
in '000 $
9
30
6
(%)
20 12 3
10 2 3 5 4 7
0
0
CY02
CY03
CY04
CY05
CY06
CY07
CY08
CY09
CY10E
CY11E
CY12E
CY13E
CY14E
CY15E
-3
UK
India
China
Euro Area
Japan
USA
-6
USA India Japan
CY05 CY09 CY15E China Euro Area UK
Source: World Bank, ICICIdirect.com Research Source: World Bank, ICICIdirect.com Research
Â Robust leading indicators- Structural consumption growth

Exhibit 54: India-China PV sales trend Exhibit 55: India-China CV sales trend
25 140 10 40
120 35
20 8
100 30
(in lakhs)
(in lakhs)
15 6
(in lakhs)
(in lakhs)
80 25
10 60 4 20
40 15
5 2
20 10
0 0 0 5
CY01
CY02
CY03
CY04
CY05
CY06
CY07
CY08
CY09
CY10
CY01
CY02
CY03
CY04
CY05
CY06
CY07
CY08
CY09
CY10
India PV China PV(RHS) India CV China CV(RHS)
Source: Bloomberg, SIAM, ICICIdirect.com Research Source: Bloomberg, SIAM, ICICIdirect.com Research
PV- Passenger Vehicles CV – Commercial Vehicles

Page 22
The automobile industry generally acts as a leading indicator in the path of

economic growth. Post recession and global slowdown, India has seen a
strong rebound in the domestic market. The Indian automobile industry is
being touted to be near an inflection point, which is expected to recount a
story similar to China (Exhibit-57) (CY04) with a huge domestic demand
outburst. The increasing degree of affordability (Exhibit 57) of popular cars
is an early signal of structural demand growth. As in case of China, where
this affordability degree grew by ~2% between CY03-06, volumes grew
exponentially. India is being considered at a similar growth curve as its
affordability has increased ~2% over the last five years and could see the
start of a structural growth in demand leading to similar volume uptrend as
witnessed by China (32.5% CAGR growth in PV sales CY04-10).
Exhibit 56: Car sales to per capita GDP trend Exhibit 57: Affordability on the rise
250 800
20 13 15
700 11
200 9
600 15 11 10
150 500 7
10
(%)
19 5
400 15 5
100 300 5 11 9 10 8
200 0 0
50
100
CY03
CY06
CY10
0 0
CY01
CY02
CY03
CY04
CY05
CY06
CY07
CY08
CY09
CY10
Price/per capita China-Jetta Price/per capita India-Alto

Affordability degree -China Affordability degree-India
India China (RHS)
Source: Bloomberg, World bank, ICICIdirect.com Research Source: Bloomberg, World bank, ICICIdirect.com, Research. The index has been created
The numbers have been rebased to 100 with base as CY00 considering prevalent prices of popular cars and the pre capita income ; the higher
percentage of affordability reflects increasing affordability of automobiles for a nation
Exhibit 58: Consumption trend of cement

Brazil Russia India China
Population 190 m 142 m 1.1 bn 1.3 bn
GDP per capita $9,500 $14,400 $2,700 $5,400
Though the second fastest growing economy in BRIC, Urbanisation levels (%) 81 73 28 44
India has the lowest per capita cement consumption Cement Consumption per capita 290 kg 350 kg 180 kg 1,100 kg
and is only 0.16x the per capita consumption of China. Cement Consumption 55 mt ~50 mt ~210 mt ~1450 mt
Cement demand has a very strong correlation with GDP Source: FL Smidth, ICICIdirect.com Research
growth and grows at 1.1-1.2x of the same. As the
national policy makers are targeting Indian GDP growth
at 8-9%, such growth should translate into cement Exhibit 59: Cement production growth trend
demand growth rate of double digits annually
30
25
20
15
10
(%)
5
0
-5
-10
-15
FY00
FY01
FY02
FY03
FY04
FY05
FY06
FY07
FY08
FY09
Brazil Russia India* China
Source: US Geological Survey, *CMA, ICICIdirect.com Research

Page 23
Infrastructure execution pick-up essential to maintain >8% GDP growth

The Planning commission has envisaged mega plans pertaining to
spending in infrastructure related sectors so as to maintain and gradually
move to double-digit GDP growth. We believe the execution in the Eleventh
Plan has not kept pace with perception because of the global crisis in 2008
and various micro issues pertaining to the power and road sector as they
form a significant portion of infra-based spending. Going into CY11, we
believe execution in the power sector will pick up pace (though target
capacity will be missed but the achievement rate of 61.3% on a high base
rate is a good indicator for things to pick up from here on). Also, ordering in
the road sector is expected to pick up post clarity in the administrative
roadblock. We believe the real kicker for infra spending will come in
H2FY11. In H2FY11, the economy will be less exposed to the current issues
of tight liquidity and rising borrowing cost and regulatory hurdles.
Exhibit 60: Humungous opportunity in infrastructure sector
Mid-term Review XI Plan XII th Plan
Sector % Share % Share
(US$ bn)* (US$bn)
Electricity (incl. NCE) 164.7 32.1 328.6 31.5
Roads and Bridges 69.7 13.6 156.4 15.0
Telecommunications 86.3 16.8 172.2 16.5
Railways (incl. MRTS) 50.2 9.8 100.2 9.6
Irrigation (incl. WD) 61.6 12.0 122.8 11.8
Water Supply and Sanitation 27.9 5.4 55.7 5.3
Ports 10.2 2.0 20.3 1.9
Airports 9.0 1.8 18.0 1.7
Storage 2.2 0.4 4.5 0.4
Oil & Gas Pipelines 31.8 6.2 63.5 6.1
Total 513.6 100.0 1042.19 100.0
Source: Planning Commission of India, ICICIdirect.com Research
From a government dominated capex in last few decades the infrastructure

sector has been opened up to private participation, has catapulted the
contribution of infrastructure sector to GDP from 4.5% in FY05 to 7.9% in
FY11E. This we believe will inch up to 9% in FY13, given that a lot of power
capacity and road projects will be added by the private players in the next
Increasing share of private infra expenditure 3-5 years time.
Exhibit 61: Infrastructure expenditure as % of GDP to inch up to 9% by CY13E
% X Plan FY08 FY09 FY10P FY11E
Govt. share 75 66 66 65 63 650000 10
Pvt. share 25 34 34 35 37 550000

8
The total share of private investment in infrastructure is 450000
(| crore)
expected to increase from 25% in X Plan to ~36% in XI Plan

(%)
350000 6
(~30% in the original estimates) led by higher than
anticipated private expenditure in power and telecom sector 250000
4
in the first half of XI Plan. 150000
50000 2
FY05
FY06
FY07
FY08
FY09
FY11E
FY12E
FY13E
FY10P
GCF in infrastructure Contribution to GDP (RHS)
Source: Planning Commission of India, ICICIdirect.com Research

Page 24
Exhibit 62: Share of credit to infrastructure funding on the rise
80000 80
60000 62 60
(|crore)
Bank credit to infrastructure as a % of total credit to 43
40000 40
(%)
industry has grown up considerably over the last decade 38 36
32 35
from ~22% in FY01 to ~43% in FY10 indicating the 27
20000 22 21 20
growing emphasis on infrastructure development. We 17
expect infrastructure lending to grow strongly over the
6
next few years, fuelled by the aggressive project rollout 0 0
by the public and private sectors
FY00
FY01
FY02
FY03
FY04
FY05
FY06
FY07
FY08
FY09
FY10
Infrastructure % of Industry (RHS)
Exhibit 63: However medium term challenges persists

9500 8
8500 Set to miss targets
7500 6
6500
Award of road contract by NHAI is expected to pick up in 5500
(km)
(km)
CY11 post clarity on appointment of chairman. 4500
3500
2500 2
1500
500 -
FY01
FY02
FY03
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11E
FY11YTD
Completed Awarded Completed/day (RHS)
Source: NHAI, ICICIdirect.com Research
Exhibit 64: Power capacity addition rising can still be better….

90000 120
80000
96.2 100
70000
60000 61.3 80
72.3
MW
Though India will miss its capacity addition targets for 50000 53.8 47.2 51.5
60
(%)
11th Plan, total capacity added will be highest ever in the 40000
30000 40
plan period history. Even going into 12th plan we believe
20000
that robust capacity addition will be added in FY13 as all 20
10000
the slipped capacities of 11th plan will get commissioned
0 0
VI Plan
VII Plan
VIII Plan
IX Plan
X Plan
XI Plan
Target Achievement Target achieved (RHS)
Source: Planning Commission, ICICIdirect.com Research

Page 25
No concern over government finance

Revenue receipts for April-September 2010 have grown 63% YoY and
achieved almost the 58% target for FY11. This was led by higher non-tax
revenues from 3G and BWA auction (| 106,000 crore) while tax revenues
have grown by only 26% for the same period and achieved only the 44%
target for FY11.
Out of the targeted capital receipts of | 45,000 crore, | 40,000 crore is to be
generated through disinvestment. With two mega FPOs of SAIL (FPO size:
~| 15,000 crore) and ONGC (FPO size: ~| 14000 crore) to come on stream
by March 2011. We expect the government to meet the disinvestments
target for FY11.
Exhibit 65: India’s fiscal position

Particulars BE Actuals (Apr-Sep) As % of 2010-
(| crore) 2010-11 2009-10 2010-11 11 BE YoY (%)
Revenue Receipts 682,212 244,471 398,234 58.4 62.9
Gross Tax revenue 746,651 258,880 324,397 43.4 25.3
Less: NCCF 3,560 NA NA
States share 208,997 73,211 90,982
Centre's net tax revenue 534,094 185,669 233,415 43.7 25.7
Non-Tax Revenue (note 1) 148,118 58,802 164,819 111.3 180.3
Capital Receipts
Non-Debt Capital Receipts 45,129 6,602 6,491 14.4 -1.7
Recovery of Loans 5,129 2,302 4,256
Other Receipts (note 2) 40,000 4,300 2,235
Borrowings & Other Liabilities 381,408 197,775 133,252 34.9 -32.6
Total Receipts 1,108,749 448,848 537,977 48.5 19.9
Non-Plan Expenditure 735,657 322,070 368,270 50.1 14.3

Revenue Account 643,599 301,291 328,308
Interest payments 248,664 86,669 102,779
Major Subsidies (note 3) 53,089 NA NA
Capital Account 92,058 20,779 39,962
Plan Expenditure 373,092 126,778 169,707 45.5 33.9
Revenue Account 315,125 108,163 144,847
Capital Account 57,967 18,615 24,860
Total Expenditure 1,108,749 448,848 537,977 48.5 19.9
Revenue Expenditure 958,724 409,454 473,155
Fiscal deficit for the year is estimated at | 381408 crore Capital Expenditure (note 4) 150,025 39,394 64,822
Revenue Deficit 276,512 164,983 74,921 27.1 -54.6
i.e. 5.5% of GDP
Fiscal Deficit 381,408 197,775 133,252 34.9 -32.6
Primary Deficit 132,744 111,106 30,473 23.0 -72.6
Note 1: Non tax revenue for Apr-Sep 11 includes revenue from 3G and BWA of over |106,000 cr
Note 2: Disinvestment proceeds till Sep 10 are |2,023 crore as against |4,300 crore last year
Note 3: Major subsidies planned for FY11 include fertilizer subsidy of |49,981 cr (LY |52,980 cr) and Petro Subsidy
of |3,108 cr (LY |14,954 cr)
Note 4: |64,822 cr includes one time expenditure on recapitalisation of PSUs |9,680 cr (approx)
Source: Ministry of Finance, ICICIdirect.com Research
With prevailing trends in the receipts and expenditure there would not be
any slippage on the deficit side in FY11. However, it is to be kept in mind
that more focus has been put on non-tax revenues (3G auction,
disinvestments) compared to tax revenues to keep the deficit at the
desirable level of 5.5% this year.

Page 26
We may see other big disinvestment plans of IOC and Hindustan Copper
getting postponed to next year in order to keep the balance on fiscal
position for this year and next year. We foresee a substantial reduction in
non-tax revenues next fiscal as this year’s non tax revenue included
revenue generated through the 3G and BWA auction.
We may see other big disinvestment plans of IOC and
Hindustan Copper get postponed to next year in order to Exhibit 66: Government’s disinvestment agenda
keep the balance on fiscal position for this year and next Issue Size (| Amt raised by Govt
Company Month of Issue
year cr.) (| cr.)
SJVN May-10 1,063 1,063
Engineers India Jul-10 960 960
Total Raised till Sep-10 [A] 2,023
Coal India Oct-10 15,199 15,199
PowerGrid Nov-10 3,721 3,721
MOIL Dec-10 1,237 1,237
SCI Nov-10 1,164 580
Total Raised till Dec-10 [B] 20,737
SAIL Jan-11E 15,000 7,500
ONGC Mar-11E 14,000 14,000
Hindustan Copper NA 4,000 4,000
IOC NA 18,000 9,200

Further tobe raised in FY11E [C] 34,700
Total estimated amount for FY11 [A+B+C] 57,460

Planned by Govt 40,000
Source: Department of Disinvestment, ICICIdirect.com Research

Page 27
Global GDP growth: Asia to lead western laggards

The International Monetary Fund (IMF) has forecasted the global GDP
growth of 4.2% in 2011 mainly backed by developing Asian economies and
other emerging countries.
For advanced economies, aggregate GDP growth is expected at 2.2% in
2011 mainly contributed by newly industrialised Asian economies like Hong
Kong, Korea, Singapore and Taiwan. Major advanced nations (G7) and the
Euro area are estimated to grow at 2% and 1.5%, respectively, in 2011 as
against respective growth estimates of 2.5% and 1.7% in 2010. For the US
and UK, IMF has forecasted growth of 2.3% and 2% as against respective
likely growth rates of 2.6% and 1.7% in 2010. Even after the recent recovery
post the credit crisis, developed nations like the US and Euro area will
continue to face headwinds on the back of concerns like high
unemployment and household debt hangover. For Japan, growth is
expected at 1.5% in 2011 as against the estimate of 2.8% in 2010.
Exhibit 67: GDP growth – A study

Real GDP growth (% YoY) CY05 CY06 CY07 CY08 CY09 CY10 CY11E CY12E CY13E CY14E CY15E
Advanced Economies
United States 3.1 2.7 1.9 0.0 -2.6 2.6 2.3 3.0 2.9 2.8 2.6
United Kingdom 2.2 2.8 2.7 -0.1 -4.9 1.7 2.0 2.3 2.4 2.5 2.6
Eurozone 1.7 3.1 2.8 0.4 -4.1 1.7 1.5 1.8 1.8 1.8 1.7
Japan 1.9 2.0 2.4 -1.2 -5.2 2.8 1.5 2.0 1.9 1.8 1.7
Emerging Economies
Brazil 3.2 4.0 6.1 5.1 -0.2 7.5 4.1 4.1 4.1 4.1 4.1
Russia 6.4 8.2 8.5 5.2 -7.9 4.0 4.3 4.4 4.2 4.1 4.0
India 9.2 9.7 9.9 6.4 5.7 9.7 8.4 8.0 8.2 8.1 8.1
China 11.3 12.7 14.2 9.6 9.1 10.5 9.6 9.5 9.5 9.5 9.5
For the emerging and developing economies, growth is expected at an

aggregate rate of 6.4% in 2011 backed by developing Asian economies like
India and China. Aggregate GDP growth of developing Asia is estimated at
8.4%. For India and China, GDP growth is expected at 8.4% and 9.6%
respectively, in 2011 as against their respective growth estimates of 9.7%
and 10.5% in 2010. For Brazil and Russia, IMF has forecasted respective
growth rates of 4.1% and 4.3% in 2011 as against 7.5% and 4% in 2010.
With the growth estimates so strong for emerging economies, the GDP
contribution of the same to the World GDP is also going to increase. The
emerging and developing economies contributed 31% to the total World
GDP in 2008 and this is expected to increase to 35% in 2011 and 36% in
2012.

Page 28
Exhibit 68: Contribution to world GDP, emerging markets to be clear winner
80
68.9 68.9 66.5
70 65.2 64.1
60
50
33.5 34.8 35.9
40
(%)
31.1 31.1
30
20
10
0
CY08
CY09
CY10E
CY11E
CY12E
Advanced economies Emerging and developing economies
Also, the GDP contribution of India and China to the total GDP of emerging
and developing economies is estimated to increase. India and China
contributed 6.6% and 23.8% to the total GDP of emerging and developing
economies, respectively, in 2008 while the contributions are estimated to
increase to 7% and 28.3%, respectively, in 2011 and further to 7.1% and
28.9%, respectively, in 2012.
Exhibit 69: Contribution to GDP of emerging economies
35
27.8 27.7 28.3 28.9
30
23.8
25
20
(%)
15
10 6.6 6.9 6.9 7.0 7.1
0
CY08
CY09
CY10E
CY11E
CY12E
India China
Â Debt: Sovereign defaults to haunt us in 2011

Exhibit 70: Government gross debt to GDP
High debt/GDP ratios of peripheral EU countries will create
250
bouts of volatility in global equity markets in CY11 as $940
billion worth of government debt in the EU zone will come 200
up for rollover/refinancing
150
(%)
100
50
0
US
UK
Eurozone
Brazil
China
Japan
Russia
India
CY08 CY09 CY10E CY11E

Page 29
Exhibit 71: External debt to GDP for CY09
180 161.2
160
140
120
97.5
100
(%)
80 64.0
60 41.2 37.9
40
17.6 19.3
20 7.6
0
US
UK
Eurozone
Brazil
Russia
India
China
Japan
Source: CIA world fact book, ICICIdirect.com Research

Page 30
Show stoppers - Domestic

India’s growth fortunes appear to be well balanced and rounded compared
to its peers like Brazil and Russia, which are underpinned by commodity
prices or China, whose growth hinges on global recovery since it is a net
exporter. Indian equity markets may be well anchored to the domestic
consumption story with sustainable long-term structural positives.
However, dwindling of risk appetite can seep across asset classes and
markets and India is no exception to it.
Deterioration in risk appetite could also arise from other drivers of
economic growth viz. interest rates, foreign liquidity, exchange rates, spike
in commodities including crude, geopolitical tension and world trade
turning negative among others.
Inflation is one of the persistent fears and is ready to rub us off on the
negative side and puncture India’s consumption appetite. Statistically,
inflation may come down to the RBI’s comfort zone of 5.5-6% as a high
base begins playing out from mid-January to June. However, structurally
inflation would remain in the system. Also, a higher-than-anticipated spike
in crude prices (up 22% in 6M to US$93.5 bbl) and target policy response
may pose concerns in terms of higher interest rates (repo likely to increase
100 bps to 7.25% from 6.25%) and, consequently, higher borrowing cost
Currency is another factor, which has a significant for corporates (likely to inch up by 100 bps). Also, earnings of midcaps and
bearing on the health of segments like the oil import bill of small caps are more susceptible to inflation and interest rates due to limited
| 2744 billion in FY10, IT (sector derived ~90% of bargaining power and difficulty in tapping funds at an efficient cost.
revenues in CY10 from exports), textile and apparel
(exports of US$26 billion, 33% to total FY10E revenues) Concerns on other commodities such as coal (up 31%), copper (up 33%)
and pharma (exports constituted 48% of total revenues of and iron ore (up 55%) may evolve on higher-than-expected tightening by
| 105000 crore) among others China or stronger dollar weighing on dollar denominated commodities. We
expect crude among commodities to pose the biggest risk in terms of
under-recoveries to shoot up to | 118500 crore (at $100 bbl). This will
disturb the fiscal deficit (extra burden of 0.4% of GDP of FY12E) and may
also derail the PSU disinvestment pipeline of | 51,000 crore (ONGC and IOC
contributing 63% to the pie).
In addition, there are geopolitical issues between South Korea - North

Another addition to the worry for Indian equities is recent Korea, Iran – Israel, border disputes with China or Chinese progressive
corporate governance issues, which could shake investor stance on diversion of Brahmaputra river by building dams (Arunachal
sentiment in the near to medium term. Government policy Pradesh river water flow to dip by 40%), engaging in a low level military
responses to these would be pertinent as widespread conflict with Pakistan in response to terrorist attacks like Mumbai as against
corruption may not receive the usually comfortable the earlier policy of handing it through dialogue and Maoists posing a threat
stance of being a part & parcel of investing in India to internal security or investments in areas under their influence (West
Bengal, Andhra Pradesh, Chhattisgarh, Jharkhand and Orissa hold more
than 40% of the mineral wealth and investments of ~ | 230,255 crore are
under various stages of investment and planning).
The extended Parliament deadlock in the wake of persistent opposition or

an unfavourable response to the UPA in forthcoming state elections in CY11
and consequent delay in passing of the Union Budget and key reforms are a
recent set of worries for the equity markets. FDI in sectors like retail,
insurance, GST implementation, a further probe in telecom in the wake of a
notional loss of | 1.78 lakh crore, mining policy, environment concerns, etc
are awaiting government action. All these events have the potential to take
the sheen off India's image as an attractive investment destination.

Page 31
Inflation: getting structural in nature
Exhibit 72: Inflation showing early signs of cooling down
25
20
15
10
Inflation may statistically come down to the RBI’s comfort 5
(%)
zone of 5.5-6% as a high base begins playing out from mid 0
January to June. However, structurally inflation would -5
remain in the system -10
-15
Apr-05
Oct-05
Apr-06
Oct-06
Apr-07
Oct-07
Apr-08
Oct-08
Apr-09
Oct-09
Apr-10
Oct-10
WPI YOY Fuel YoY Primary Articles YoY Mfg YoY
Inflation from primary articles has started cooling off. However, within the
same, non-food articles are showing inflationary expectations firming up
with a rise from 14.3% six months back to 23.2% in November 2010.
Food inflation is expected to stay around 9.5-10% by March 2011. However,
post that we may see 7-8% food inflation considering the base effect.
Â Higher crude prices may lead to fiscal situation deterioration

Crude oil forms a significant part of India’s total import bill. Over the last
few years (FY06-FY09), increase in crude oil prices has led to higher import
bill. The net import value of petroleum products has increased from |
1530.66 billion in FY06 to | 3010.19 billion in FY09 (CAGR of 25%). During
the same period, average crude oil prices (Indian basket) have increased
from US$55.72 per barrel in FY06 to US$83.57 per barrel in FY09. However,
in FY10, on account of cooling off of crude prices to US$69.79 per barrel (a
fall of 16% YoY), the net value of imports has declined by 9% to | 2744.38
billion. The import bill is expected to remain high as crude oil prices are
expected to sustain at higher levels (our estimates US$80-85).
Higher crude oil prices impact India’s current account Exhibit 73: Rising crude prices may hurt fiscal balances
deficit. India imported nearly 75% of the domestic crude
oil requirement in FY10. Going ahead, with high GDP 90 83.57 3500
79.25
growth and rising crude, prices are set to go up in CY11 80
69.79 3000
unless crude changes its course
70 62.46 2500
55.72
(| billion)
($/barrel)
60
2000
50
1500
40
30 1000
20 500
FY06
FY07
FY08
FY09
FY10
Crude Net Import Value of Petroleum products (RHS)
Source: PPAC, ICICIdirect.com Research

Page 32
Exhibit 74: Copper reaching higher levels Exhibit 75: Crude rises above $90
9000 86
8500
82
($/tonne)
($/barrel)
8000
78
7500
7000 74
Q1
Q2
Q3
Q4
Q1
Q2
Q3
Q4
CY10 CY10
Source: Company, ICICIdirect.com Research Source: Company, ICICIdirect.com Research

Average of whole quarter is considered Average of whole quarter is considered
High energy prices to worsen trade balance

Exhibit 76: India’s BOP – Higher capital inflows cushion widening current account deficit
FY11 FY10 FY09 FY08
USD million Q1 Q4 Q3 Q2 Q1 Q4 Q3 Q2 Q1 Q4 Q3 Q2 Q1
GDP Nominal 351150 360800 336030 291410 281690 268430 284850 268490 289750 311090 304960 262340 257460
Exports 53726 52419 47062 43518 39164 39820 39436 53630 57454 52549 40985 38273 34356
Imports 87920 83911 78135 72646 64799 54418 73484 92752 82731 74895 67038 59510 56346
Trade Balance -34194 -31492 -31073 -29128 -25635 -14598 -34048 -39122 -25277 -22346 -26053 -21237 -21990
Current Account Deficit -13732 -12998 -12187 -8773 -4454 4747 -11668 -12580 -3270 -1526 -4531 -4300 -6680
Capital Account Balance 18385 16088 14694 18798 4019 1408 -6114 7099 4853 26516 31017 33533 17880
FDI 3150 3193 3921 6495 6121 3185 446 4903 8967 6350 2041 2808 2658
FII 4605 8765 5685 9677 8268 -2693 -5820 -1311 -4211 -3735 14851 10876 7458
Net Capital Inflows 16049 15253 14077 18299 3923 631 -5122 6581 4502 25676 30452 33065 17639
Overall BOP 3741 2141 1767 9418 115 300 -17881 -4734 2235 24990 26738 29236 11200
Trade Balance/GDP -9.7 -8.7 -9.2 -10.0 -9.1 -5.4 -12.0 -14.6 -8.7 -7.2 -8.5 -8.1 -8.5
CAD/GDP -3.9 -3.6 -3.6 -3.0 -1.6 1.8 -4.1 -4.7 -1.1 -0.5 -1.5 -1.6 -2.6
Net Capital Flows/GDP 5.2 4.5 4.4 6.5 1.4 0.5 -2.1 2.6 1.7 8.5 10.2 12.8 6.9
Growth: Exports YoY 31.6 19.3 -18.9 -31.8 -24.2 -3.8 40.1 67.2 47.2 32.5 20.2 15.8 16.7
Growth: Imports YoY 54.2 6.3 -21.7 -21.7 -27.3 9.6 55.9 46.8 54.2 41.3 22.5 20.9 14.7
Source: Bloomberg, ICICIdirect.com, Research
Higher capital account surplus helped by FII inflows are compensating for
the higher and sustained current account deficit (3.6% of GDP).
Deterioration in FII will pose problems for the rupee as higher outflows will
lead to rupee depreciation while domestic liquidity could get tighter.
Exhibit 77: Increasing imports worsen trade balance- especially rising crude prices
100000
80000
60000
40000
USD million
20000
0
-20000
-40000
-60000
Q1
Q2
Q3
Q4
Q1
Q2
Q3
Q4
Q1
Q2
Q3
Q4
Q1
Q2
Q3
Q4
Q1
Q2
Q3
Q4
Q1
Q2
Q3
Q4
Q1
Q2
Q3
Q4
Q1
FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11

Exports Imports Trade Balance

Page 33
Currency : Situation getting perplexing
Currency volatility to impact IT, pharma, oil & Exhibit 78: Movement of various currencies
gas and metals
30
India’s share of exports in GDP has risen to 14.7% in FY10
from 9.4% in FY02. Further, share of software exports in 20
overall exports has also risen to 27.27% in FY10 vs.
15.97% in FY01-02. An appreciating rupee makes Indian 10
exports expensive while material volatility of the Indian
(%)
rupee against a basket of currencies (US dollar, British 0
pound, euro and yen) could affect the operating
performance of information technology, pharma, oil & gas -10
and metal companies
-20
CY99
CY00
CY01
CY02
CY03
CY04
CY05
CY06
CY07
CY08
CY09
CY10
INR EUR JPY CNY GBP
Investment in red zone

States and companies Investment (| crore) Geo-political concern
Orrisa
Sterlite Industries 3419 Maoist- Investment in Naxal area
Tata Steel 27000 The Naxalite problem is biggest internal security threat for the country.
Chhattisgarh Naxalites are active across ~220 districts in 20 states of India. One of the
Sterlite 1194 major reasons for this movement is rich mineral reserves in the Red
SAIL 5384 Corridor. In Chhattisgarh and Jharkhand alone, more than US$1 trillion of
Tata Steel 22500 proven reserves await extraction.
Jharkhand The Naxal problem could be one of the biggest for fresh and existing
SAIL 1758 investments by metal and mining companies operational in these states.
Tata Steel 54000 Investments of ~| 1,30,000 crore by the metal industry are lined up in the
West Bengal next five or six years. Simultaneously, investment by power utilities under
JSW 15000 ultra mega power projects (UMPPs), which would be worth ~ | 1,20,000
Total 130255 crore, could face delays due to increasing militarisation of Naxalites.
Exhibit 79: Maoist insurgency to impact mineral rich regions in the country
Source: Wikipedia, ICICIdirect.com Research

Page 34
State elections in CY11

Forthcoming election India will be facing elections in four major states in India – Tamil Nadu, West
West Bengal May-June 2010 Bengal, Assam, Kerala and one Union Territory of Puducherry. These
Kerla May-June 2010 elections will not only be a referendum on the respective state governments
TamilNadu May-June 2010 but also on the policies and governance of the central government.
Pondicherry May-June 2010 We believe unfavourable result in Tamil Nadu and West Bengal for the
Assam May-June 2010
Congress and allies could adversely impact the aggressive disinvestment
policy and reformist policies (decontrol on oil prices and other measures) in
future. Any deadlock with the DMK and Trinamool Congress after the
election could weaken the numbers of the government in the Lok Sabha,
which could create a possible new equation between UPA and Left Parties.
This would bring populist measures and, thereby, could haunt growth.
Parliament stalemate
The only bill passed in the winter session of Parliament was for additional
spending of about US$9.8 billion to ensure the functioning of government,
including interest payments on government debt and subsidies on food and
fuel. Important bills like Direct Taxes Code Bill, Foreign Educational
Institutions (Regulation of Entry and Operations) Bill, Companies Bill, Life
Insurance Corporation (Amendment) Bill, introduction of goods and
services tax and much-awaited National Biotechnology Regulatory
Authority of India Bill (NBRA Bill) could not make it to Parliament for its final
approval. Parliament ended its winter session without doing any work.
We believe a stalemate between the treasury and opposition benches over
the 2G corruption row would continue to extend till Budget session and
important bills would remain unattended.
Exhibit 80: Current Lok Sabha composition Exhibit 81: Fallback plan of UPA
UPA NDA Other parties UPA NDA Other parties
INC 206 BJP 116 Left Parties 24 INC 206 BJP 116 Left Parties 24
DMK 18 JD(U) 20 SP 23 NCP 9 JD(U) 20 SP 23
AITC 19 AGP 1 BJD 14 RJD 4 AGP 1 BJD 14
NCP 9 JMM 2 AIADMK 9 JKNC 3 JMM 2 TDP 6
RJD 4 SAD 4 TDP 6 JD(S) 3 SAD 4 KEC(M) 1
JKNC 3 SS 11 KEC(M) 1 BSP 21 SS 11 MDMK 1
JD(S) 3 TRP 2 MDMK 1 Left Parties 24 TRP 2 ML 1
BSP 21 ML 1 AIADMK 9 NPF 1
NPF 1 SDF 1
SDF 1 AUDF 1
AUDF 1 INDP 21
INDP 21 DMK 18
Total 283 Total 156 Total 103 AITC 19
Source: Election commission of India, ICICIdirect.com Research Total 279 Total 156 Total 131
Source: Election commission of India, ICICIdirect.com Research
Political unrest
The political situation in Andhra Pradesh is also creating jitters for the
central government where agitation for Telangana has gathered
momentum. The Sri Krishna committee on Telangana (whether or not a
separate Telangana state should be carved out of Andhra Pradesh) set to
submit its report to the central government by December 31, 2010. If the
agitation continues then it could haunt the economic activity in the states
for months. We believe industries present in the state like infrastructure,
construction and pharma could get negatively affected by the political
unrest in the state.

Page 35
Performance based incumbency

In the last 10 years, we have witnessed performance based electoral results.
Those governments, which have performed and focused on development,
have come back to power with an even better mandate. Bihar Assembly
election results in 2010 are the best example of the same. In Bihar, more
than 6,800 km of roads have been re-laid and 1,600 bridges and culverts
constructed in the last four years. Despite three years of floods followed by
a year of drought, 'backward and benighted' Bihar reported a miraculous
figure of ~11% GDP growth, second only to Gujarat. Automobile sales in
the state grew 45% in 2009, at a time when sales had dipped 20-25% in
several other states during the economic slowdown. Cement inflow to the
Between 2004 and 2009 most laggard states have state went up 18% to 51 lakh tonnes in 2008-09. this is an indicator of the
clocked 6-12% growth. We believe continuous faster construction boom.
pace of growth in these states would ensure India’s GDP Exhibit 82: Bihar Election results Exhibit 83: Average GDP growth
growth is not only consistent at 8-9% but also to remain Party CY05 CY10 Gain/Loss (%) 2000 -2004 2004 -2009
inclusive JDU 88 115 27 Bihar 4.5 12.4
BJP 55 91 36 Chhattisgarh 6.1 9.7
RJD 54 22 -32 Jharkhand 1.9 8.5
LJP 10 3 -7 Madhya Pradesh 1.9 6.6
Congress 9 4 -5 Orissa 4.8 10.2
Others 27 8 -19 Uttar Pradesh 3.3 6.7
Source: ECI, ICICIdirect.com Research Source: CSO, ICICIdirect.com Research
Brahmaputra river – Dispute between India and China

The Indo-China water resources problem remained a consistent issue of
tension between the two countries. Any effort by the Chinese government
to divert water resources of the Brahmaputra River away from India could
worsen the situation for the North Eastern States in India. According to
National Technical Research Organization (NTRO), China started 24 new
Hydro Power Projects in Arunachal Pradesh
MW
projects along the Brahmaputra River in 2010 as against six a year ago.
Potential 48000 China has only 8% of the world’s fresh water to meet 22% of the world’s
Project Under Process 4412 people and scattered water resources can get further compounded.
Niare 800 Terrorist attack - Low level conflict
Nalo 360 Any major terrorist attack in India could probably result in a more
Naba & Oju-II 1000
aggressive military response from India as against the cold response we
Dengser 552
have seen earlier. India’s plans to build 100 warships in the next decade or
Oju-I 700
Others 1000
the Indo-US defence deal (US$3.5 billion) for 10 C-17 Globe master
transport aircraft can be seen as its preparedness for any low-level conflict
Government Awarded 5600
NHPC 2000 Delay in policy reforms
KSK Energy 2000
Jindal+HDPC 1600 IFRS
Phased IFRS convergence implementation will be rolled out from April 2011
through 2014 with the first phase in April 2011 covering the Nifty and
It is estimated that the Brahmaputra’s hydro power
Sensex companies and all Indian companies listed outside India or having a
potential is at 48,000 MW. This constitutes as much as
networth greater than |10 billion. A possible delay is expected due to
30% of the total hydropower reserves of India and less
implementation hurdles.
than 3% of this has yet to be harnessed. We believe
China’s plans to divert water resources could adversely FDI in multi-brand retail
affect ongoing power projects in Arunachal Pradesh The issue still remains unanswered despite the DIPP releasing a discussion
paper seeking feedback and setting up a panel on the same.
Insurance
The IRDA will be coming out with health insurance guidelines shortly in
order to regulate the segment, thus making the process more transparent.
GST
A lack of consensus will lead to a delay in GST roll out missing out on the
deadline of April 1, 2011.

Page 36
Show stoppers - Global

Year 2010 has been a year of uneven pain across countries with the US and
Euro region maintaining accommodative liquidity and ultra low policy rates
(0-0.25%) to revive their economies. Emerging economies, on the other
hand, maintained strong growth but policymakers here faced challenges in
terms of unabated inflation and capital inflows induced by liquidity
threatening fiscal stability. In CY10, good economic growth and ample
liquidity yielded modest returns across various classes.
In CY11, equity and other asset classes globally may have surprises in store
The more inclusive U6 unemployment figures stand at in terms of gauging liquidity. The consensus went wrong in terms of
17% in November 2010 compared to 17.2% in expected tightening in H2CY10. Now the consensus is formed that
November 2009 indicating that workers are forced to tightening is unlikely to happen in CY11. Any surprise on this front poses
take lower paying part-time jobs due to unavailability of the biggest risk to various asset classes.
full-time jobs
US QE1 (US Fed B/S expanded to $1.7 trillion from $500 billion) achieved
the intended objective of soothing the markets after liquidity choked
markets including the US housing sector. The US QE2 (Fed B/S increasing
by another $600 billion to $2.3 trillion) is yet to achieve its intended effect of
revival of capex spending by US corporates, consumption revival and lower
unemployment in US among others. We are still witnessing a little
hesitation in embracing a full fledged capex cycle as US corporates are still
sitting on cash and short-term investments of US$1.4 trillion as on Q3CY10.
The more inclusive U6 unemployment figures stand at 17% in Nov ‘10
compared to 17.2% in Nov ‘09 indicating that workers are forced to take
lower paying part-time jobs due to unavailability of full-time jobs.
The EU peripheral economies continued to suffer from sovereign debt

issues and are the key risks to global recovery. Already, Greece and Ireland
have received bailouts in CY10. Portugal and Spain are likely to be next on
Crude, owing to restricted supply, higher OI build up at the block for potential bailouts while opinion is still divided on the fortunes
1.4 million contracts vs. life time high of 1.5 million and of Italy and Belgium. It is estimated that $920 billion will be required by the
increased demand from OECD regions like China & India total Euro zone for refinance or repayment in CY11. Out of these, countries
and loose liquidity can derail the global economic growth like Spain, Greece, Belgium, Portugal and Italy face redemption pressure to
momentum. In addition, gold (up 26% YoY) is eyed upon the tune of $209 billion, $68 billion, $103 billion, $43.3 billion and $409
as an indispensable asset in the portfolio due to erosion billion, respectively. We believe Japan with its high debt/GDP ratio of
of confidence in paper assets and also considering its 225.9% in October 2010 as per IMF and an ageing population may emerge
safe haven status. Gold is unlikely to lose its best ever as a medium-term problem. This would pan out as its economy continues
gains as demand is largely investment driven now rather to limp and higher dependent population eats into its own savings forcing
than actual fabrication the government to replace domestic debt with external debt. This would be
a costly affair.
China, a global growth champion, is struggling with 28-month high inflation

of 5.1% in November 2010 and is adopting aggressive policy measures
(lending rates hiked 5.81%, further 50 bps consensus increase built in) to
tame growth and prevent the economy from overheating. This is causing
jitters for global markets as Chinese growth could taper off due to sluggish
global demand and an uncertain domestic outlook.
Besides debates over Yuan revaluation would have its own
repercussions on the ongoing US–China trade imbalances, Changes in commodity prices and a higher interest and inflation rates are
commodities and high-yielding currencies other potential risks for the global economy. We believe crude and gold
could be potential sweet spots for bubble creation. Crude, owing to
restricted supply, higher OI build up (OI at 1.4 million contracts) and
increased demand from OECD regions like China and India and loose
liquidity can derail the global economic growth momentum. In addition,
gold (up 26% YoY) is eyed upon as an indispensable asset in the portfolio
due to erosion of confidence in paper assets and also considering its safe
haven status. Gold is unlikely to lose its best ever gains as demand is
largely investment driven now rather than actual fabrication.

Page 37
USA- Employment trend to remain weak in CY11

US unemployment at 9.8% continues to remain high through November
2010 due to lack of meaningful acceleration in economic activity. Average
weekly hours worked have remain unchanged at 34.3 while annual wage
growth halved to 1.6% vs. 3.2% in April 2009. This implies huge spare
capacities in the labour markets. Noticeably, American companies continue
to employ temporary workers, a reflection captured by the U6 measure,
which continues to linger around 17% (November 2010) vs. 8.5%
(November 2007) and 12.8% in November 2008.
Exhibit 84: US unemployment including U6

20
15
10
(%)
0
Feb
Mar
Apr
May
Sep
Nov
Feb
Mar
Apr
May
Sep
Nov
Feb
Mar
Apr
May
Sep
Nov
Dec
Dec
Oct
Jan
Jun
Jul
Jan
Jun
Jul
Oct
Oct
Jan
Jun
Jul
Aug
Aug
Aug
CY08 CY09 CY10
U1-Percent of civilian labor force unemployed 15 weeks and over
U2-Unemployment Rate - Job Losers
U3-Umemployment rate
U4-All of U3 plus discouraged workers
U5-All of U4 plus all other marginally attached workers
U6-All of U5 plus total employed part time for economic reasons
American companies continue to employ Source: Bureaus of Labour statistics ,ICICIdirect.com Research
temporary workers, a reflection captured by
the U6 measure, which continues to linger
Exhibit 85: Average hourly earnings and hours worked (USA)
around 17%. The annual wage growth has
declined by half 4
0
(%)
-2
-4
Feb
Nov
Mar
Apr
May
Sep
Nov
Feb
Mar
Apr
May
Sep
Feb
Mar
Apr
May
Sep
Nov
Dec
Dec
Jan
Jun
Jul
Oct
Jan
Jun
Jul
Oct
Jan
Jun
Jul
Oct
Aug
Aug
Aug
CY08 CY09 CY10
Avg hourly earnings MoM change Avg hourly earnings YoY change
Weekly Hours Worked MoM change Weekly Hours Worked YoY change
Source: Bureaus of Labour statistics ,ICICIdirect.com Research
Since the beginning of the recession, the US Fed infused ~US$1.8 trillion
either through bailouts or asset purchases, resulting in one of the costliest
economic bailouts. However, this bloated the Fed’s balance sheet to
~US$2.3 trillion from US$0.9 trillion in September 2008. Also note, the Fed
carries ~US$1 trillion of mortgaged backed securities (MBS). A lack of
revival in the US economy could see the Fed carrying MBS assets for
longer periods. Further, a lack of economic revival could lead to higher
expectations of subsequent quantitative easing.

Page 38
Exhibit 86: Increasing Fed’s balance sheet on the back of stimulus packages
2500
2000
USD billion
1500
Loose monetary polices and expanding balance sheet of
the Fed poses huge upside risks to inflationary 1000
pressures in emerging economies as the excess liquidity
coupled with low interest rates will flow into risky 500
emerging market assets
0
Jan-06
Jul-06
Jan-07
Jul-07
Jan-08
Jul-08
Jan-09
Jul-09
Jan-10
Jul-10
Federal Debt securities Mortgage Backer Securities U.S Treasury Securities
Source: Federal Reserve ICICIdirect.com Research
Exhibit 87: Housing prices still a concern for the revival of US housing economy
Case Shiller price index (YoY)
The latest reading of -0.8% YoY decline in the Case & 20

Shiller Index still suggests that the US housing markets are 15
10
still lingering
5
0
(%)
-5
-10
-15
-20
-25
Jan-01
Jul-01
Jan-02
Jul-02
Jan-03
Jul-03
Jan-04
Jul-04
Jan-05
Jul-05
Jan-06
Jul-06
Jan-07
Jul-07
Jan-08
Jul-08
Jan-09
Jul-09
Jan-10
Jul-10
Source: National Association of home builders, ICICIdirect.com Research
EU peripheral: Negative news can surprise any moment

The EU region has witnessed a couple of sovereign debt issues from PIIGS
economies in CY10, which had a dampening impact on global equities. The
risk of a European slowdown was dragged mainly by another major
sovereign event emanating from other peripherals like Spain, Italy,
Hungary, etc. which have very high debt levels (Exhibit-88-89). This can
cause volatility to persist across risky asset classes. Even interest rates
spread and debt maturity profiles (Exhibit 91) present a grim picture for the
troubled economies of the EU region and raise doubts whether the various
austerity drives will be successful in bringing down the fiscal deficit.
It is estimated that $920 billion (bn) will be required by the total Euro zone
for refinance or repayment in 2011. Out of these, CY11 may see countries
like Spain, Greece, Belgium, Portugal and Italy face redemption pressure to
the tune of $209 bn, $68 bn, $103 bn, $43.3 bn and $409 bn, respectively.
This we believe will be a huge task for these economies going into CY11.
Also, efforts to bring down fiscal deficits in an orderly manner are still hazy
at this point in time but the silver lining stems from the fact that some of
these economies have at least started the process for getting back to fiscal
targets. For example, Spain has taken steps to reduce its budget deficit to
6% of GDP by 2011. Portugal opted for €2 bn in pay cuts and tax increases
on May 13, 2010.

Page 39
Exhibit 88: Going into CY11, most PIIGS and other peripheral economies face huge
redemption/refinance pressure on their sovereign debts
(Bn $) Portugal Italy Ireland Greece Spain Hungary Belgium
CY11
Principal 36.6 382.8 14.1 51.0 181.8 31.8 88.4
Interest 6.6 66.7 5.6 16.7 27.4 3.5 15.0
Total 43.3 449.4 19.7 67.7 209.2 35.4 103.4
CY12
Principal 12.4 251.7 7.8 41.7 97.7 6.2 40.8
Interest 6.1 60.4 5.3 14.8 23.9 3.1 13.6
Total 18.6 312.1 13.0 56.5 121.6 9.3 54.4
CY13
Principal 12.8 165.6 8.0 36.5 90.3 10.0 37.4
Interest 5.6 54.2 5.0 12.8 20.9 2.8 11.6
Total 18.3 219.9 13.0 49.4 111.2 12.8 49.0
Post-CY13
Total Obligation 151 1707 132 384 567 75 314
Almost all peripherals in the EU region have debt/GDP Exhibit 89: Euro region debt/GDP
levels above the 100% mark. This suggest that this is a 200 180
long drawn process requiring bouts of bailout and rescue
packages in the interim to tackle the crisis 160
135
125
120 101
(%)
71 76 75
80 64
54
40
0
Ireland
Italy
Hungary
UK
Germany
Greece
France
Spain
Portugal
Source: Bloomberg, ICICIdirect.com Research * All data for CY10
Â Germany : The bright star in the EU pack
Exhibit 90: Share of German GDP to Euro region

31
Increasing post
30 recession
The German economy is gaining share in the overall GDP 29

(%)
of the Euro region. It is relatively less indebted compared

to other EU countries. Currently, the debt/GDP ratio 28
stands at a healthy 54%
27
26
CY01
CY02
CY03
CY04
CY05
CY06
CY07
CY08
CY09
CY10

Page 40
Â Debt maturity profile: Short-term debt to be an overhang
Exhibit 91: Debt maturity profile of leading nations

9 16
8 14
7
Uncertainty over the EU problem and spike in CDS spreads 12
6
taking into account the short maturity profile of 10
(Years)
5
(%)
government debt of troubled European economies can 4 8
cause huge bouts of volatility in global financial assets 3
6
2
1 4
0 2
Germany
UK
Hungary
Italy
Ireland
France
Greece
Brazil
India
China
Japan
Malaysia
Spain
Russia
Portugal
USA
Asia Europe ROW
Coupon rate Weighted Avg debt maturity period
Exhibit 92: Global interest rate to remain low for “an extended period”
10
Low interest rates in the western economies for a longer
period of time would result in too much liquidity following 8
too few assets. This increase the probability of an asset
bubble in emerging market asset classes 6
(%)
2
Q1
Q2
Q3
Q4
Q1
Q2
Q3
Q4
Q1
Q2
Q3
Q4
Q1
Q2
Q3
Q4
CY07 CY08 CY09 CY10
USA Germany Italy India China
Source: Bloomberg,,ICICIdirect.com Research

Page 41
China to slow down : Still the debate is not clear

We have witnessed a slowdown in the Chinese economy in the last few
quarters due to the measures taken by the Chinese government to prevent
overheating of the economy. The Chinese government has hiked the
reserve requirement ratios, which has led to a reduction in Chinese credit
and fixed asset investment growth. China has been the growth engine for
The Chinese government hike of the reserve requirement
the global economy and its slowdown would have an impact on global
ratios has led to a reduction in China’s credit and fixed
stability. The actions by the Chinese government like reduction in the
asset investment growth
lending quotas and tightening of its economy may turn out to be harmful
for global growth.
Exhibit 93: China fixed asset investment growth Exhibit 94: China domestic credit growth
36
36
32
32
28
(%)
28
(%)
24
20
24
16
20 12
Feb
Nov
Mar
Apr
May
Sep
Feb
Mar
Apr
May
Sep
Dec
Jan
Jun
Jul
Oct
Jan
Jun
Jul
Aug
Aug
Q1
Q2
Q3
Q4
Q1
Q2
Q3
Q4
Q1
Q2
FY09 FY10 FY11

CY09 CY10
China’s steel consumption, as a percentage of global Exhibit 95: China steel consumption
steel consumption, has declined to 42.8% in October 150 46 47
2010 as compared to 48.4 % in CY09. A further slowdown 46 45
46 45 46
in China’s steel consumption would lead to excessive 120 45 46
45 45
million tonnes
supply, which could disturb the global demand-supply

90 44
equilibrium
(%)
43
43 43
60
42
30
41
0 40
Feb
Mar
Apr
May
Sep
Oct
Jan
Jun
Jul
Aug
CY10
China Consumption World Consumption China's proportion to world consumption (RHS)
Source: World Steel, ICICIdirect.com Research
China’s proportion in world crude oil consumption has Exhibit 96: China crude oil consumption
increased to 10.5% in CY10E. The slowdown in the
Chinese economy could have an impact on global crude 100 11
10
million barrels per day
oil demand in CY11E 80 10

10
9
60 9
9
(%)
9
40
20 8
0 7
CY06
CY07
CY08
CY09
CY10E
World consumption China consumption China proportion to world consumption (RHS)
Source: EIA, ICICIdirect.com Research

Page 42
Â Debate over revaluation for Yuan: A key monitorable
Exhibit 97: Trend in Chinese currency reserves Exhibit 98: China US treasury purchases gradually declining
3000 250
2500
200
(Amount in USD billion)

2000
150
1500
100
1000
500 50
0
0
CY94
CY95
CY96
CY97
CY98
CY99
CY00
CY01
CY02
CY03
CY04
CY05
CY06
CY07
CY08
CY09
CY10
CY94
CY95
CY96
CY97
CY98
CY99
CY00
CY01
CY02
CY03
CY04
CY05
CY06
CY07
CY08
CY09
CY10
CNY-USD trend post peg relaxation The US and China continue to remain the largest importers and exporters of
the world whose trade gap widening has led to an increased clamour from
the US for increased convertibility of the Chinese Yuan.
6.9
6.8 The Chinese counterparts have known that Yuan would become a hot
6.7 property in global forex markets if let loose when uncertainty looms over
the US dollar and euro stability. Hence, they have been cautious about
6.6
steep strengthening of its currency.
6.5
Q1
Q2
Q3
Q4
Q1
Q2
Q3
Q4
The offshore Yuan trading, which has been allowed since mid-June when
CY09 CY10 China relaxed its peg has seen it appreciate 2.4% with daily trading of
~$400 million reflecting the strong demand. China has undertaken the
strategy of trade in Yuan with its partners from Africa and South East Asia,
which sell commodities and procure goods from China. This would in the
The US has been wary of China’s plans to tinker longer term prove decisive in reducing commodity denominations in US
with its global hegemony as a reserve currency. This dollar and would smoothen the entry of yuan towards complete
could in time to come prove a decisive factor in the convertibility.
global currency dominance game
Exhibit 99: US-China trade balance
0
-5
-10
-15
-20
-25
-30
CY94
CY95
CY96
CY97
CY98
CY99
CY00
CY01
CY02
CY03
CY04
CY05
CY06
CY07
CY08
CY09
CY10
Source:: Bloomberg, ICICIdirect.com Research

Page 43
Is Japan the next big problem
For more than a decade now, Japan’s economy has virtually stagnated.
Adding to the country’s woes, there has been a steady increase in its aging
population and a notably higher debt to GDP ratio. In spite of a higher debt
to GDP ratio, the only positive part is that a majority of Japan’s debt is
internal debt, which has provided cushion to the country, till date. A major
part of the Japanese population falls in the age bracket of 0-14 and >65
(dependent population), which is exerting serious pressure on the working
class. Going forward, it is projected that the dependent population is
expected to swell further, which may further lead to eating up of savings
and could lead to an increase in its external debt. This could lead to a
medium-term problem for the Japanese economy.
Exhibit 100: Japan’s rising debt levels

200
190
192.9
Debt as a % of GDP
180
177.6
170 172.1
170.0
160
158.0
150
CY05
CY06
CY07
CY08
CY09
Exhibit 101: Japan’s projected demographics

Japan is a country with an ageing population. A majority
of Japan’s population comes under dependent population
(age bracket of 0-14 and >65). Going forward, it is
projected that the percentage of ageing population will
rise further as life expectancy is one of the highest in the
world
Source: Japan Statistics Bureau , ICICIdirect.com Research

Page 44
Exhibit 102: Appreciating Yen to be a key issue for Japanese GDP growth
100
95
Index od currency movement

A sharp appreciation of the Japanese currency against 90
the US dollar has impacted its export competitiveness 85
compared to the European and other Asian counter parts. 80
Japan, primarily an export driven economy, would face 75
an adverse impact on its growth prospects on any further 70
appreciation of its currency
65
60
CY07
CY08
CY09
CY10
Japanese Yen Chinese Yuan Korean Won
North Korea Vs. South Korea: Uncertain & Futile

With a revival in the unrest in the Korean Peninsula, markets across the
globe could experience some jitters as both countries there enjoy the
patronage of the great powers of China and the USA. The continuous
agitation caused by North Korea (NK) since 1968, with the latest in
November, 2010 portrays the belligerence of NK to cooperate with South
Korea (SK). Also, the silence of SK clearly depicts that the hostility is
counter productive with Seoul located within the shooting range of the NK
artillery. The only rational solution is negotiation with Chinese participation
as it is the only international voice that can persuade the NK. Also, the
plausible conclusions for the attacks seem to be
⇒ NK’s attempt to get attention from the US and put pressure on SK to

renew the Six-Party talks over Pyongyang’s nuclear programme
⇒ The fight for power in Pyongyang (NK) by Kim Jung-Un, the youngest
son of the current ailing leader, Kim Jong-il
⇒ Also, NK’s attempt to weaken the government in SK by dividing the
public opinion there knowing that SK is bound not to react due to its
adherence to UN sanctions
Also, the building up of the nuclear base by NK with help from Iran could
create a new threat to the US. Therefore, these geopolitical tensions could
impact the sentiments of all risky asset classes. The volatility would be
short lived as it has been observed historically that the impact of these
attacks on the markets has been receding over the years. However, with
KOSPI being the largest derivative market, a slight impact is inevitable.

Page 45
Asset bubbles: Bullion and crude may be potential targets

Crude oil prices have witnessed a positive break out from their range of
$75-85/barrel. The current open interest (OI) levels in the commodity have
seen a sharp rise with a significant increase in speculative positions in
recent times. The proportion of speculative long positions in total open
interest is at highest levels in more than three years. The sharp surge in
crude oil OI on the Nymex indicates a buoyant outlook for crude in the
medium-term.
Exhibit 103: Sharp surge in open interest seen in crude oil
15 150
Sharp surge in open interest 140
10
130
5 120
0 110
100
(%)
-5 90
-10 80
70
-15
60
-20 50
Sep-07
Sep-08
Sep-09
Sep-10
Jun-07
Dec-07
Mar-08
Jun-08
Dec-08
Mar-09
Jun-09
Dec-09
Mar-10
Jun-10
Dec-10
Speculative longs Hedged shorts Spot (RHS)
Crude oil demand is expected to outpace supply in CY11 Exhibit 104: Crude oil demand supply scenario
mainly on account of increased demand from the non- 88 50
OECD region like China and India. Also, increased global
liquidity may fuel a bubble in global crude oil prices 43

86
36
29
84
22
82 15
CY06
CY07
CY08
CY09
CY10E
CY11E
Supply (LHS) Demand (LHS) OECD Supply (RHS)

OECD Demand (RHS) OPEC Supply (RHS) Non- OECD Demand (RHS)
Source: EIA,ICICIdirect.com Research

Page 46
Exhibit 105: Gold demand supply scenario
5000 80
4000 60
(in tonnes)
3000
40
(%)
2000
1000 20
0 0
Q1
Q2
Q3
The gold supply has increased with higher prices over the
CY08 CY09 CY10
last few years. The increased demand for gold has largely
been investment led rather than the actual fabrication
Supply Fabrication Demand Investment Demand
demand
Fabrication demand RHS Investment Demand RHS
Source: World Gold Council, ICICIdirect.com Research
Historically, in CY08 and CY09, gold has delivered returns to the tune of
78% and 25%, respectively. In CY10, it has gained more than 28%. Despite
lower industrial demand, the commodity has seen close to 30% hedged
short positions in the commercial space. At the same time, speculative long
positions were also seen around 30% of the total open interest in the
commodity. The nominal difference between the open interest of
speculative net long positions and commercial short positions are almost
offsetting each other and has failed to provide any directional bias.
However, lower speculative long positions in the commodity indicate lower
chances of profit booking.
Post the credit crisis of 2008, gold being considered as a Exhibit 106: SPDR gold ETF holding at record levels
safe haven investment has attracted a good amount of 1400
inflows in global markets. Also, increased liquidity
through fiscal stimulus measures has led to higher 1300
investment demand for gold
1200
Tonnes
1100
1000
900
800
Feb
Mar
Apr
May
Sep
Nov
Feb
Mar
Apr
May
Sep
Nov
Dec
Dec
Jan
Jun
Jul
Oct
Jan
Jun
Jul
Oct
Aug
Aug
CY09 CY10
Source: www.exchangetradedgold.com, ICICIdirect.com Research

Page 47
2011- ICICIdirect.com Research desk view

Outlook
In 2011, we expect strong earnings growth to take precedence over

multiple expansions. With Indian markets already trading at rich valuations,
multiple augmentations may be minimal while robust earnings growth is
more likely to lead equity performances. Accordingly, we are banking on
sectors that have clear visibility and are likely to exhibit vivid earnings
growth, superior to the broader markets.
Though valuations appear to be rich and may remain so in 2011, sectors

with 20–25% expected earning growth provide enough cushions for
outperformance in any untoward incident inducing a dip in sentiments.
These sectors would still continue to generate higher returns than the
broader market. Thus, we prefer large caps to mid caps, given their
enhanced ability to endure negative undercurrents if any.
We are positive on sectors like banking (strong economic growth

culminating into higher business growth that makes for rich valuations),
information technology (discretionary spending on uptrend emanating
clear visibility in earnings growth), capital goods (led by strong order inflow
for Tier I companies, capex to expand), pharma (to continue
outperformance exhibited in 2010, led by strong domestic outlook, huge
opportunity arising out of drugs worth ~US$25-30 billion losing patents in
2011 and greater access to US$80 billion Japanese pharma market) and
sugar (front ended growth with prices at 30-year high due to global supply
constraints).
We are neutral on sectors like auto (positive structural shift in demand

expected but validation awaited and risk of subdued margins due to firming
up commodity prices), infrastructure (robust order book but execution
missing coupled with tightening of interest rates poses a threat), oil & gas
(high crude prices, to mute margins), aviation (capacity rationalisation led
higher peak load to continue albeit sensitivity to crude remains high) and
metals (hazy revival in global demand and high raw material prices).
We recommend rotation/shift to our neutral sectors like auto, infra and oil &
gas, which seem to depict positive outlook but validation is awaited
towards the latter half of CY11.
We expect certain sectors to underperform the broader markets led by

deteriorating fundamentals, a structural change in demand or regulatory
concerns. We remain negative on sectors like telecom (though the worst
may be behind us, overcapacity led competition and regulatory concerns
will remain an overhang), real estate (unabated property prices resulting in
increasing un-affordability and moderated demand and limiting bank credit
following recent scams), cement (supply overhang to remain longer as
demand is still elusive and large caps lack valuation comfort) and shipping
(ongoing slowdown to continue in light of new vessel addition, slow
demand pick up and low freight rates).

Page 48
Â Auto (awaiting validation of structural demand , input cost

Topline & profitability (OEM universe) pressures) Neutral
The Indian automobile sector has seen strong demand across segments
160000 16 resulting in 29.2% YTD volume growth. The market faces a dilemma as to
140000 14 whether the industry is at an inflection point or is pent up demand getting
120000 12
100000 10
liberated now. Our expectation of robust volume growth in coming months,
(| crore)
80000 140076 8 if authenticated, would lend strong support to our assumption. The
(%)
121793
60000 6 structural demand shift could lead to a market re-rating but pressures from
97955
70196
40000 4 higher input costs remain an overhang.

20000 2
0 0 ⇒ OEMs remain upbeat on the demand scenario and have plans to raise
FY09
FY10
FY11E
FY12E
capacity by ~40% by FY12-13, from existing ~2.8 million per annum.

We expect the base effect to kick in with industry posting volume
Top Line EBTIDA Margin PAT Margin (RHS) growth of ~17-20% YoY in FY12. Ancillary suppliers, which have been
handicapped by capacity shortages due to unexpected demand
*Standalone outburst, also have additional capacity coming online in FY12. We
expect them to clock ~20-23% YoY volume growth in FY12E
Topline & profitability (Ancillary universe) ⇒ The Indian automobile sector in CY10 is at a point similar to China in
2003-04. In CY04, China’s GDP per capita (PPP basis) stood at $3614
while PV sales stood at 23 lakh per annum, post which the auto sales
40000 16
took off exponentially. In CY10, India’s GDP per capita is $3291 while
35000 14
30000 12
PV sales stand at ~21 lakh per annum. If we were to take China’s
25000 10 performance as an indicator, India seems to be at an inflection point,
(| crore)
which could lead to a structural change in demand

36114
20000 8
(%)
31466
15000 6
25586
22035
10000 4 ⇒ While we remain positive on the volume growth in the sector, in the
5000 2 near term a persistent rise in commodity prices like CRC steel (avg
0 0 ~10% YoY), aluminium (avg ~12% YoY) and rubber (avg ~48% YoY)
could dampen earnings growth to ~12-15% YoY. On the demand side,
FY09
FY10
FY11E
FY12E
any steep increase in interest rates would defer probable sales

Top Line EBTIDA Margin PAT Margin (RHS) ⇒ Historically, the BSE Auto Index has traded between 10x and 18x one
year forward and is currently trading in the mid range of 13-14x.
*Standalone Though rising interest rates and raw material prices may remain an
overhang, if we witness a structural shift in demand, the sector may
Top picks of sector get re-rated. Till then, we are neutral on the sector. The pure play PV
and two-wheeler segment could face increased competitive pressures
Company Code CMP TP from international players. We expect stocks that have exposure to
Mahindra & Mahindra MAHMAH 773 852 infra-linked CV segments and agri-related tractor segments, like M&M,
Escorts and Tata Motors, to outperform. On the ancillary side, we
Valuation Ratios FY10 FY11E FY12E suggest a selective play on companies with diversified businesses and
P/E (x) 21.0 17.5 16.7 higher operating leverage like Exide Industries and Bharat Forge.
EV/EBITDA (x) 15.3 13.0 11.5 Exhibit 107: Indian auto sales on the brink of inflection
RoE (%) 31.9 27.9 23.3
8000 PV sales-India-21lakhs(CY10),PV sales-China-23 lakhs(CY04) 140
RoCE (%) 25.8 26.8 26.0
7000 Per capita-India-$3291(CY10), Per capita-China-$3614(CY04) 120
6000 100
India on cusp of inflexion 6 years behind China
Company Code CMP TP 5000
80
(in US$)
(in lakh)
China CAGR-(04-10) 32.5%

Escorts ESCORT 167 230 4000 3291
3614 60
3000
Valuation Ratios FY10E FY11E FY12E 2000 21 40
23 20
P/E (x) 12.6 10.1 7.2 1000
EV/EBITDA (x) 9.1 6.8 5.1 0 0
CY01
CY02
CY03
CY04
CY05
CY06
CY07
CY08
CY09
CY10
RoE (%) 7.7 9.1 11.5

RoCE (%) 9.5 12.0 15.4
India GDP per capita China GDP per capita China PV(RHS) India PV (RHS)
Source: Bloomberg, ICICIdirect.com Research PV- passenger vehicles, CV- Commercial vehicles

Page 49
Â Banking (Tier I fundamental strong, to make for rich

NII (Coverage universe) valuations) Positive
140000 The banking sector, a heavyweight in the BSE Sensex with a 17% share,
has emerged stronger in CY10 with the Bankex delivering 30% YoY returns
till date. We continue our positive stance on the sector even for FY12E
124771
buoyed by stable economic growth, leading to 20-21% credit growth (on a
100000
higher base) and 18% deposit growth in the system, thus supporting the NII
100209
(| Crore)
growth trend. Near term pressure on NIM persists but the effect of base rate
and BPLR hikes will come into play and FY12E NIM should not see any
78564
60000 further erosion. We do not foresee any risk to banks on the treasury side
67153
since yields are expected to remain in the range of 7.5-8% for a major part
of next year.
20000 The short-term outlook is overshadowed by corporate governance issues
post the bribery for loans scam but the recent price correction offers good
FY09
FY10
FY11E
FY12E
investment prospects.
PPP and PAT ⇒ NIM dip by 10-15 bps factored in, further erosion unlikely
Near term pressure on NIM persists but the effect of base rate and BPLR
120000
hikes will come into play and FY12E NIM should not see any further
100000
erosion. NIM reached its peak for most banks in Q2FY11 ranging
between 3% and 4%. We expect the RBI to tighten policy rates further
100594
80000 (50-100 bps) to tame inflationary expectations.

(| Crore)
81400
⇒ Easing pressure on asset quality to keep NPA provisions in check

49873
60000
64247
We expect asset quality to remain stable with a step-up in recoveries.

39085
56230
31288
28890
40000 Moreover, since most of the banks have reached the RBI mandated
70% PCR (provision coverage) and NPA scenario is comfortable, we do
20000 not expect high provisions in FY12E like those in FY10 and FY11 on
account of agriculture and restructured assets to dent profits.
FY09
FY10
FY11E
FY12E
C/D ratio of banks reached 71% in FY06 after two decades in the 55% to
Top picks of sector 65% range, depicting credit growth rather than dependency on treasury
portfolio that also led to the BSE Bankex discount to Sensex narrowing
Company Code CMP TP
from 55% to 20% on a P/BV basis. We believe the same will continue.
Axis Bank UTIBAN 1315 1520
Exhibit 108: Bankex P/BV vs. Senses P/BV Exhibit 109: Raising the C/D ratio
Valuation Ratios FY10 FY11E FY12E
0 45 90
EPS (|) 62.1 72.0 91.5
P/E (x) 21.2 18.3 14.4 -10 35 70
P/ABV (x) 3.4 3.1 2.6 -20 25 50
(%)
(%)
(%)
RoA (%) 1.7 1.3 1.3 -30

15 30
RoE (%) 19.2 17.5 19.1
-40
5 10
-50
FY00
FY02
FY04
FY06
FY08
FY10
Company Code CMP TP -60

Deposits Growth YoY
Dec-03
Dec-04
Dec-05
Dec-06
Dec-07
Dec-08
Dec-09
Dec-10
DCB DCB 55 72
Credit Growth YoY
CD Ratio (RHS)
EPS (|) NM 0.5 2.4 Source: Capitaline, ICICIdirect.com Research Source: Capitaline, ICICIdirect.com Research
P/E (x) NM 118 23
P/ABV (x) 2.5 2.0 1.8
Overall, we expect the NII and PAT to grow at 26% CAGR over FY10-12E for
RoA (%) NM 0.2 0.7
the I-direct coverage universe. This is after achieving 18% and 26% CAGR
RoE (%) NM 1.7 7.4
in NII and PAT, respectively, in FY06-10. We prefer banks with higher CASA
ratio and stable asset quality available at reasonable valuations like HDFC
Bank, Axis Bank. We also like certain large PSU banks that have corrected
like Bank of Baroda and SBI. Among mid-caps, we recommend DCB on
account of a sharp correction and growth expected on a lower base after
three years of losses and consolidation.

Page 50
Â Capital Goods (Tier I Co’s order inflow robust, capex to

Overall performance (Coverage universe) broaden) Positive
Moving into CY11/FY12, all eyes would be on rate of order inflows (for Bhel
70000 19 inflows are up 20% YoY in H1FY11) for capital goods companies. Given the
60000 17 buoyant consumption demand in the economy and with the same expected
66076
50000 15 to remain strong going into CY11, this will require corporates to invest. This
54098
will create opportunities for the capital goods sector. CY10 witnessed
(| crore)
40000 13
42904
(%)
30000 11 robust order flows from the power generation segment whereas order
34716
20000 9 inflows from segments like power transmission and process sectors were
10000 7 tepid. They will pick up in CY11.
0 5 ⇒ Project announcements (projects worth | 9,50,000 crore have been
FY09 FY10 FY11E FY12E announced in H1FY11), better utilisation levels (robust asset turnover
ratios are showing signs of a capex pick-up) and increasing end
Top Line EBTIDA Margin PAT Margin product prices will encourage corporates (rising prices of commodities
like copper, coal and crude will call for capex from metals and process
New project announcements sectors) to invest in capacity creation. This, in turn, will lead to order
flows for capital goods sector.
10000 25000 We expect the industrial segment, power transmission (PowerGrid

about to announce 40% of its committed capex for the Eleventh Plan
8000 20000
in FY11 and FY12) and the power generation equipment (~35% of
(| billion)
6000 15000 Twelfth Plan ordering) segment to contribute to order flows

(Index)
4000 10000
⇒ Rising commodity prices (especially copper and steel) are going to
2000 5000 impact the operating margins. Companies relying significantly on
0 0 working capital may have to deal with high cost of borrowings due to
tight liquidity in the system. This, we believe, will be more crucial for
Mar-07
Sep-07
Mar-08
Sep-08
Mar-09
Sep-09
Mar-10
Sep-10
midcap companies as most big players command a better working

capital cycle. We expect a 60-70 bps fall in the EBITDA margin for our
New project announcement Capital goods index coverage universe in FY12E
GFCF vs. BSE Capital Goods index ⇒ On the valuations front, large caps are trading at a discount to their
historical average multiples (Bhel is trading at 17.5x its FY12E EPS vs.
20 200 its historical one year forward multiple of 21x) and can be looked upon
150 on declines. On the other hand, midcaps (Hindustan Dorr Oliver) are
15
100 trading at relatively low multiples with respect to large caps and their
own historical averages. A rise in order flows will be a key trigger for
(%)
10 50
(%)
0 multiple expansion of the entire sector. Also, what can be a trigger for
5
-50 power generation manufacturers is the levy on import of foreign
0 -100 equipment, which will provide a level playing field and increase the
size of the opportunity. The key beneficiaries would be Bhel, L&T and
FY06
FY07
FY08
FY09
FY10
Thermax
GFCF BSE Captial Goods perfromance Exhibit 110: IIP though volatile showing early signs of capex recovery
70
Top pick of sector
60
BHEL BHEL 2300 2600
40
30
20
P/E (x) 25.9 20.7 17.5
EV/EBITDA (x) 17.1 13.2 11.2 10
RoE (%) 29.9 30.4 29.0 0
Nov-00
Nov-07
Apr-00
Jun-01
Jan-02
Aug-02
Oct-03
Mar-03
May-04
Dec-04
Jul-05
Feb-06
Sep-06
Apr-07
Jun-08
Jan-09
Aug-09
Oct-10
Mar-10
RoCE (%) 37.5 39.4 37.3 -10

-20
IIP Index IIP Capital Goods

Page 51
Topline & Profitability (Coverage universe) Â Cement (Supply overhang elongated, large cap lack
valuation comfort ) Negative
60000 30
Cement dispatches have been subdued during the current financial year as
50000 25
they registered 5.4% growth in YTDFY11. This was on account of a
51288
40000 20
41641 prolonged monsoon, delay in infrastructure activities and political turmoil in
(| crore)
30000 15
35930
the major cement consuming state of Andhra Pradesh. We expect demand
(%)
31650
20000 10 growth of ~7% for FY11E against our previous expectation of ~10%.
10000 5 Moreover, huge effective capacity addition of ~40 MTPA has been
0 0 witnessed in YTDFY11 as the majority of capacities commissioned in FY10
and FY11 have stabilised during this year. Cement prices have been
FY09
FY10
FY11E
FY12E
showing weakness. It declined by | 10-15 per bag in December after an

Top Line EBTIDA Margin PAT Margin (RHS artificial hike in prices by cement players in October by taking production
cuts. We believe prices will remain under pressure in the medium term on
account of the unfavourable demand supply situation.
Monthly cement dispatches
⇒ For FY11E, the capacity utilisation rate is expected to decline to 78%
from 87% in FY10 as we expect ~44 MTPA of effective capacity
25 20
addition during the year against ~14 MTPA of incremental demand.
20 15 However, utilisation rates are expected to improve to 82% in FY12E as
( Lakh tonnes)
15 10 the pace of incremental capacity addition (~13 MTPA) would slow

down as compared to incremental demand (~21 MTPA). Further, the
(%)
10 5
utilisation rate is expected to increase to 85% in FY13E
5 0
⇒ Increase in fuel and freight cost coupled with a decline in realisations
0 -5 have squeezed margins in Q1FY11 and Q2FY11. We expect margins to
Apr-09
Jul-09
Oct-09
Jan-10
Apr-10
Jul-10
Oct-10
remain under pressure in FY11E and FY12E on account of increasing

input costs coupled with subdued realisations
Cement dispatches YoY growth ⇒ We believe the valuations of frontline cement companies are not
attractive as they are trading at a 5-10% premium to the replacement
All India demand supply scenario cost of $125 per tonne. The high valuations of these companies seem
unjustified considering the margin pressure and deteriorating return
50 90 ratios
88
40
87 ⇒ However, there is a selective buying opportunity in the cement space
86
85
84
considering the companies that have a better market mix and cheap
82
30
82 valuations. Regional cement players like JK Cement, JK Lakshmi and
78 80 Mangalam Cement are trading at a 40-50% discount to the
20
78 replacement cost. This seems unjustified as these companies had been
10 76 enjoying valuations near their replacement cost in the last down cycles
74 despite having better return ratios in the current cycle compared to the
0 72
FY10 FY11E FY12E FY13E
last down cycle.
Effective capacity addition (LHS) mtpa
Exhibit 111: EV/tonne for cement companies compared to replacement cost
Incremental demand (LHS) mtpa
Utilisation (RHS) % 300
250
Top pick of sector 200
$
JK Lakshmi JKCORP 55 70
100
Valuation Ratios FY10 FY11E FY12E 50

P/E (x) 2.8 10.5 3.9 0
EV/EBITDA (x) 2.1 5.8 3.4
FY00
FY01
FY02
FY03
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
RoE (%) 23.6 6.1 14.5

RoCE (%) 17.7 5.4 11.8 Avg (ACC & Ambuja) Replacement cost Avg (Regional players)
Source: Company, ICICIdirect.com Research

Page 52
Topline & profitability (Coverage universe) Â Infrastructure (Robust order book, execution is missing)
Neutral
35000 14
The construction sector underperformed the broader markets in CY10
33530
30000 12 despite a bulging order book (adjusted order book to bill ratio of 2.3-3x
25000 26468 10 providing revenues visibility over a couple of years). This was led by factors
(| crore)
such as execution delays due to political uncertainty at the major region of

23010
20000 8
(%)
AP (exposure of 0-20% in current order book), delay in financial closure at
15000 6
client specific and captive BOT orders, prolonged monsoons etc. Going
16435
10000 4 ahead, while we expect the execution rate to pick up, tightening liquidity
5000 2 leading to rising interest rates could restrict earnings growth in H1CY11.
FY09 FY10 FY11E FY12E Significant earning growth can only be seen in H2CY11 with a benign
interest rate scenario. Hence, we remain selectively positive on the sector.
Top Line EBTIDA Margin PAT Margin We believe players with a diversified order book, comfortable liquidity
position and low exposure to slow moving AP orders and less equity
commitment towards subsidiaries will emerge as preferred bets in CY11.
Top Picks
Exhibit 112: Operating metrics of construction players at the end of H1FY11
Company Code CMP TP
HCC IVRCL NCC SIL PEL
Nagarjuna Construction NAGCON 140 199
Order Book (| crore) 19735 24000 16075 12964 10500
Order book to bill (on TTM basis) 5.1 4.6 3.2 2.9 3.2
Adj. book to bill (on TTM basis)* 2.8 2.9 3.0 2.7 2.3
P/E (x) 15.4 15.3 11.3
Order book composition (%)
Adjusted P/E(x) 9.8 9.7 7.2 Building & Housing - 15 32 21 -
RoE (%) 11.8 10.0 12.3 Industrial - - 6 17 -
RoCE (%) 12.9 12.0 13.4 Transportation 24 30 6 16 12
Water 20 49 23 3 38
Power 43 6 10 25 50
Company Code CMP TP Others 13 - 23 18 -
Simplex Infrastructure SIMCON 411 549
Exposure in AP region (%) 19 15 7 0 18
Working Capital (days) 274 197 197 117 339
Net Debt to Equity (x) 1.8 1.1 0.8 1.3 1.3
P/E (x) 16.7 14.2 10.6
Adjusted P/E(x) 16.4 14.0 10.4 *Adjusted for captive & contentious orders PEL- Patel engineering
RoE (%) 13.1 13.9 16.1
Theme/key monitorable for CY11

⇒ Execution rate
Given the slower than expected revenue growth despite bulging order
book, the execution rate is a focal point in CY11 compared to the
momentum of order inflow. Players with better execution capabilities
would command better multiples than others. To monitor this, we
prefer players with shorter duration of orders, lesser exposure to the
slow moving AP region and geographical diversity in the order book.
We prefer NCC (Nagarjuna construction) and SIL (Simplex infra) on this
parameter. In the infrastructure space, execution delay is due to
regulatory hurdles and a delay in monetization of assets. However,
with the fund raising activity through private equity and WIP, we
believe infrastructure players will be better funded and, hence,
execution should pick up in H2CY11.
⇒ Working capital management
Given the fact that WC accounts for 30-50% of the topline for leading
construction companies, players with efficient working capital
management would command a premium in their valuation compared
to other players. To gauge this, we prefer players who have a shorter
duration of the order book, higher exposure to private players in the
order book and lesser exposure to the slow moving AP region and
captive orders. We again prefer NCC and SIL on these parameters.

Page 53
⇒ Funding requirement at subsidiary level

We prefer players whose subsidiaries in different business verticals
have lower funding requirement. To fund their requirement, the parent
company may have to stretch its balance sheet. Among all, SIL is
particularly differentiated on this parameter. We also like NCC on this
parameter. However, any revival plan on the Sompeta power plant
could put pressure on the balance sheet over the next one or two
years
⇒ Liquidity & interest rate movement
With the anticipated tightening liquidity condition, interest rates are
expected to remain firm in the first half of CY11. The rising interest rate
coupled with tight liquidity condition could provide a negative surprise
in the first half of CY11. Nonetheless, the liquidity condition and
interest rate is expected to remain benign in H2CY11 and would
provide respite to construction companies. To tackle this situation, we
believe players with lower debt to equity position will be best placed in
H1CY11. NCC and IVRCL have lower net debt to equity level vis-à-vis
their peers.
Given the multiple headwinds in CY10, the valuation of construction
companies has become compelling (adjusted P/E of 7-11x for leading mid-
cap construction companies). Though the valuation has been compelling,
we remain selectively positive on the sector. In our view, players with short
duration and diversified order book, comfortable liquidity position, lesser
exposure to the slow moving AP region and captive BOT projects and
lesser equity requirement at the subsidiary level putting lesser funding
pressure on the balance sheet of the parent would see better earning
growth and command better valuation than its peers. We like SIL and NCC
on these parameters.
Exhibit 113: Underperformance of construction companies in CY10
Among infrastructure players, we like Jaiprakash
associates at the current levels as the company is well 130.0 130.0
poised to show aggressive growth across the business 120.0 120.0
Prices and Index*
Prices and Index*

division over the next two three years. Also, the current 110.0 110.0
valuation is reasonable. 100.0 100.0
90.0 90.0
80.0 80.0
70.0 70.0
60.0 60.0
Nov-10
Dec-09
Jan-10
Oct-10
Feb-10
Mar-10
Apr-10
Aug-10
May-10
Jun-10
Jul-10
Sep-10
Sensex HCC IVRCL NCC PEL SIL
Source: Bloomberg, ICICIdirect.com Research * prices and index rebased to 100

Page 54
Topline & Profitability (Coverage universe) Â FMCG (Stable, rich valuations at 80% premium to Sensex)
Neutral
25000 20
The FMCG sector witnessed a spate of new launches and acquisitions in
20000 16 2010 contributing to the sector’s phenomenal topline growth of ~15% led
15000 12 largely by volumes. Robust GDP growth estimated at ~8.75% in FY11,
(| crore)
increased income in rural areas, growing urbanisation and changing
(%)
10000 19486 8 lifestyle of consumers would be key growth drivers for companies. With
16912
12883
demand shifting from need based to want based we believe personal care
10839
5000 4
and home care categories would lead the growth momentum with ~20%
0 0 and ~15% growth, respectively, in CY11.
FY09
FY10
FY11E
FY12E
⇒ Increasing commodity prices such as crude (from $74/bl in May 2010

Top Line EBTIDA Margin PAT Margin to $90/bl in December 2010), copra (| 3450/qtl in January 2010 to |
5600/qtl in December 2010) and sugar (| 24 per kg in May 2010 to | 31
per kg) that constitute key raw materials for FMCG and paint
Raw Material & Crude (Coverage universe) companies would bring down the margins to ~17% in FY11E from
Impact on Raw material costs
~20% in FY10. The impact in H1CY11 could be considerably less as
54 90
with volatility in crdue prices the price increase taken by companies would help. However, H2CY11E
53 affected by a lag of 6 months 86 could be considerably impacted. Also, the increase in advertisement
costs by 150-200 bps in FY11E on the back of increasing competition
52 82
($/barrel)
would pressurise margins further

(%)
51 78
⇒ Rural demand constituting ~35% of sector sales (FY10) is expected to
50 74 increase its pie to ~45% in FY11E. The growth in rural market sales in
49 70 FY10 stood at ~18% outpacing the urban market sales growth of 12%.
Hence, with the increase in minimum support prices for agri-
Q1FY10
Q2FY10
Q3FY10
Q4FY10
Q1FY11
Q2FY11
commodities and good monsoons in CY10, we believe the contribution

RM as % of Sales (RHS) Crude Prices (LHS)
from rural consumers would continue to lead the growth momentum
for the companies
Top pick of sector ⇒ Currently, the BSE FMCG index is trading at 32.7x with YTD upside of
26.7%. Hence, with the FMCG P/E of 1.8x to that of the Sensex P/E, the
Company Code CMP TP
valuation for the sector seems to be expensive with the sector’s
Dabur DABIND 100 106
historical premium being ~0.4-1.2x. Though we believe revenue
growth will continue its uptrend in CY11, margin pressure and high
Valuation Ratios FY10 FY11E FY12E valuations could keep the premium capped. Hence, we remain neutral
P/E (x) 17.3 30.5 26.1 on the performance of the sector. However, we recommend selective
EV/EBITDA (x) 26.4 23.5 20.1 stocks that have higher growth potential (Dabur, ITC) and relatively
RoE (%) 54.6 48.6 46.9 attractive valuation (Marico) to be the preferred picks.
RoCE (%) 51.6 49.9 51.4
Exhibit 114: Performance of FMCG index with respect to Sensex
In spite of the markets
4000 plunging the FMCG Index 25000
maintained its valuation
multiples 20000
3000
15000
2000 With the recovery in the
markets the FMCG Index 10000
1000 continues to outperform
5000
0 0
Jul-06
Jan-07
Jul-07
Jan-08
Jul-08
Jan-09
Jul-09
Jan-10
Jul-10
BSE FMCG Index Sensex (RHS)

Page 55
Â Hotels (In a recovery stage, occupancy to drive growth)

Topline & profitability (Coverage universe) Neutral
After witnessing a severe contraction in the past two years, the hotel sector
7000 30
is set to witness an improvement in its revenues (FY10-12E CAGR of 21%)
6653
6000 25
on an improved GDP outlook and lower-than-expected growth in room
5000 20
5546
supplies. The growth in revenues would mainly come from a rise in

4950
(| crore)
4000 15 occupancy by 16% to 74% from 64% in CY10 while ARRs are expected to
4541
(%)
3000 10 rise by 6% to | 8,400 during the same period. We believe moderate hotel
2000 5 room supply and compelling valuations of the hotel sector would draw
1000 0 attention of investors into this sector in 2011.
0 -5
⇒ Business destinations to outperform leisure destinations
FY09
FY10
FY11E
FY12E
For CY10, the majority of demand came in from domestic travellers on

Top Line EBTIDA Margin PAT margin(RHS) faster economic growth while demand from international travellers
(FTAs) remained muted in H1CY10 due to lower pace of economic
FTA arrivals in India recovery in developed nations like US and UK, both contributing over
30% of foreign tourist arrivals (FTAs) in India. With the improved
7000 FTA's to grow by 9.3%in CY11E domestic business sentiment and higher consumer spending, we
6000 believe business destinations would continue to witness higher
demand compared to leisure destinations in CY11. Of late, we have
5000 also seen an improvement in FTAs data. We believe any improvement
4000 in the environment of developed countries would provide a positive
In '000
surprise for leisure destinations in India.

6185
3000
5378
5189
5039
4949
4447
⇒ Compelling valuations, moderate supply to draw attention to sector

3919
2000
3457
2726
2645
2542
2384
1000 We believe the moderate hotel room supply and compelling

valuations of the hotel sector (trading at average 2.0x one year
0
CY11E 0
forward book value (BV) as against five years historical one year
CY00
CY01
CY02
CY03
CY04
CY05
CY06
CY07
CY08
CY09
CY10
forward average BV of 3.0x) would draw the attention of investors into

this sector. The overall hotel room supply in this segment is expected
to grow at ~11.7%. We believe this would easily be absorbed.
Growth in FTAs vs. GDP of US and UK However, an oversupply situation scenario would be witnessed in
8 25
some regions like Hyderabad and Chennai. Our preferred pick in this
sector would be Indian Hotels, which has a balanced room portfolio
6 20
across various price points in both business and leisure destinations.
15 With an improved outlook for the industry and a strong brand image
4
GDP growth (%)
FTA growth (%)
2
10 of the company, we expect IHCL to remain an outperformer of the
5 sector in CY11. It is currently available at a 22% discounts to its peers.
0
0
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010E
2011E
-2 Exhibit 115: Hotel room supply forecast Exhibit 116: Hotels P/BV v/s Sensex
-5
-4 Rooms to grow by 11% in CY11 8 1.00
-10
40000
-6 -15 6 0.75
30000
no of rooms
US (LHS) UK (LHS) FTAs (RHS) 4 0.50

P/BV
20000
2 0.25
0 0.00
Company Code CMP TP
Mar-06
Mar-07
Mar-08
Mar-09
Mar-10
0
Indian Hotels INDHOT 94 118
CY06
CY07
CY08
CY09
CY10
CY11E
Hotels (LHS) Sensex (LHS)

Premium segment hotel rooms Hotels/Sensex (RHS)
P/E (x) NA 24.7 20.2 Source: Bloomberg, ICICIdirect.com Research
Source: Crisil, ICICIdirect.com Research
EV/EBITDA (x) 27.1 16.6 12.9
RoE (%) -7.8 6.0 11.6
RoCE (%) 2.8 6.4 10.0

Page 56
Topline & profitability (Coverage universe) Â IT (Global growth, revival in discretionary spending reaping
benefits, rich valuations) Positive
164000 30
The IT sector had a favourable year led in part by strong volume growth as
clients across continents continued to spend top dollars on driving
144556
124000 25
efficiencies through IT. Business spending revived adequately but wage
(| crore)
84000 20
100547
inflation and attrition worries continue. Negotiations for upward price

93785
(%)
92125
44000 15 revision bode well and could tame wage inflation. Discussions with Tier-I
vendors suggest CY11 budgets could have a positive bias towards
4000 10 discretionary spending and off shoring within outsourcing. Consequently,
FY09
FY10
FY11E
FY12E
we believe, CY11 could be a year of discretionary spends led earnings

upgrade. We expect Tier-I companies to outperform Tier-II ones as they are
Top Line EBTIDA Margin PAT Margin better positioned to manage operational headwinds such as currency,
attrition and wage inflation. Thus, TCS and HCL Tech remain our top picks.
Top pick of sector ⇒ Save to spend.
Company Code CMP TP We analysed Corporate America’s health between CY04-CY10.

Tata Consultancy Services TCS 1141 1210 Noticeably, cash and liquid assets of S&P 500 constituents are at its
peak while capex as a percentage of these assets is near its trough.
Valuation Ratios FY10 FY11E FY12E This suggests efficiency could drive productivity gains given the bleak
P/E (x) 32.5 26.8 20.0 outlook on new capacity additions, which bodes well for IT spending
EV/EBITDA (x) 25.7 79.9 15.2 Exhibit 117: Superior health of Corporate America good for IT spending
RoE (%) 37.4 34.5 30.7
RoCE (%) 42.2 40.4 36.2 120
1.7 1.6
100 1.6
110
1.6 1.7
102
80
91
Company Code CMP TP
(USD trillion)
1.4
81
HCL Technologies HCLTEC 457 477
97
1.2 1.3
73
60 1.1
66
(%)
P/E (x) 24.2 19.5 14.4 0.9
20
EV/EBITDA (x) 12.1 11.9 9.6
RoE (%) 20.2 21.5 23.9 0 0.5
RoCE (%) 15.6 13.8 16.1
CY04
CY05
CY06
CY07
CY08
CY09
CY10
S&P 500 Cash & Liquid assets S&P 500 Capex as a % of Cash & Liquid assets (RHS)
Source: Reuters, Company, ICICIdirect.com Research
⇒ M&A integration induced discretionary spending could persist

Analysing M&A transaction volumes since CY98 suggests transaction
volume peak-trough cycle endures for an average of 10 quarters.
Evidently, in FY05-FY10, Accenture’s (ACN) consulting bookings
growth declined significantly in FY09, the same year when M&A
transaction volume bottomed. Further, note that consulting bookings
typically have long conversion cycles compared to outsourcing
bookings. Appreciating that M&A integration led discretionary
spending accelerated in FY10, a favourable consulting bookings
growth guidance for FY11 by ACN augurs well for Indian vendors
considering their revenue contribution from these services continues
to rise.
⇒ Consulting/system integration revenue contribution on the rise
Tier-I Indian IT vendors who have historically relied on the linear model
for volume growth continue to see a jump in revenue contribution
from system integration and consulting services

Page 57
Global M&A deal volume trends ⇒ Valuation qualms: Historical analogy may allay concerns
We analysed historical revenue and EBITDA margin out-performance
10000 1600 of Tier-I Indian IT vendors (TCS, Infosys, Wipro and Cognizant) vs.
8000
Sensex companies coupled with the average P/E premium. Tier-I IT
1200
companies have traded at a premium to the Sensex due to their
USD billions
6000
800 superior revenue and EBITDA growth. Peak P/E premium was 52% in
4000
400 FY07 while lowest was 3.1% in FY09. We expect this out-performance
2000
to continue in FY11 and FY12 leading to a widening of the P/E gap.
0 0
Exhibit 118: Discretionary spending revenue contribution on the rise
Dec-98
Jun-00
Dec-01
Jun-03
Dec-04
Jun-06
Dec-07
Jun-09
Dec-10
Service offerings as a percentage of revenue (%) Q2FY10 Q3FY10 Q4FY10 Q1FY11 Q2FY11
Infosys
Volume quarterly,RHS Deal Count Application development 18.1 17.8 16.8 16.9 15.6
Consulting 23.8 23.3 26 24.9 25.8
Infrastructure Management 7.8 7.1 7.2 6.9 6.2
Product Engineering Services 2.3 2.4 1.8 2.1 2.5
ACN’s consulting booking trends System Integration 4.4 4.1 4.5 4.2 5.7
Product revenues 4.1 3.9 5 4.7 4.2
30
TCS
19
19
17
16
20
14
Enterprise Solutions 10.3 10.5 10.1 9.8 10.3

9
9
10
8
6
4
Assurance Services 4.8 5.1 5.8 6.4 6.6

0
(%)
0
-10 Infrastructure Services 8 7.9 8.3 8.7 9.4
-8
-20 Global Consulting 1.6 2.1 2.5 2.1 2.1

-13
-30 Asset Leveraged Solutions 3.2 3.2 4 3.7 3.4

Wipro
FY05
FY06
FY07
FY08
FY09
FY10
FY11E
package implementation 13.3 12.8 12.7 13.5 13.6

Accenture Revenue growth Product engineering 3.9 4.1 4.1 4.7 5.2
Consulting Bookings Growth Consulting 2.3 2.3 2.7 2.6 2.9
Cognizant
Source: Company filings, ICICIdirect.com, Research
Application Development 45.0 44.0 44.0 45.0 48.0
HCL Tech
Enterprise Application Services 21.9 22.4 21.4 22.2 21.7
Custom Application 30.7 30.5 29.9 29.6 31.3
Infrastructure Services 19.4 20.3 22.2 22.4 22.3
Exhibit 119: Average P/E premium of Tier-I IT vs. Sensex

(%) FY06 FY07 FY08 FY09 FY10
Revenue growth (sensex companies) 19.8 31.6 18.8 17.8 13.8
Revenue growth (Tier I IT companies) 51.1 42.5 29.6 28.2 7.2
EBIDTA growth (sensex companies) 18.5 30.2 23.7 12.5 9.8
EBIDTA growth (Tier I IT companies) 46.1 39.5 19.7 23.1 22.3
Average PE premium of Tier 1 IT companies vs. Sensex NA 52.4 4.4 3.1 5.8
Source: Bloomberg, Company, ICICIdirect.com Research, Tier 1 include TCS, Infosys, Wipro and Cognizant
Exhibit 120: Historical forward P/E comparison

Jan 06 onwards Tier 1 IT vs. Sensex Tier 1 IT vs. Tier 2 IT Tier 2 IT vs. Sensex
Historical forward PE premium/discount 21.1 50.6 -19.6
Current forward PE premium/discount 33.7 70.4 -21.5
Source: Bloomberg, Company, ICICIdirect.com Research

Page 58
Topline & profitability (Coverage universe) Â Media (Healthy ad growth to continue) Positive
14000 40
Post economic turmoil in FY09, the media sector has registered a healthy
35
growth in H1FY11. The trend is expected to continue in FY12 as well. Major
12000
corporate have augmented their advertisement budget to keep pace with
11714
10000 30
10335
25
higher economic growth. National level advertisers, which had seen
8000 negative/stagnant ad growth, are expected to join the growth bandwagon
(| crore)
20
8149
(%)
along with regional players this year. Margins across the sector are
7227
6000
15
4000 expected to improve slightly with operating leverage coming into play.
10
2000 5 ⇒ National level advertisers are expected to catch up partly due to a
0 0 reduced base. However, regional players would continue to
outperform with 14.5% ad revenue growth (I-Direct universe coverage)
FY09
FY10
FY11E
FY12E
as against their national counterparts (10.6% ad revenue growth) in

Top Line EBTIDA Margin PAT Margin (RHS)
FY12 with consumption increasing in smaller towns and cities
Dish TV statistics ⇒ We expect to see heightened competitive activity in the Hindi print
media with the launch by DB Corp in Jharkhand and expected launch
in Bihar in this year. The impact of firming newsprint prices
14
173
175 ($664/tonne in Q3FY11 as compared to $643/tonne) and higher
12 170 competition should be set off by the expanding advertisement pie. We
12.8
164
10 165 expect print companies to maintain stable margins in FY12
In Millionn
9.8
8 160
⇒ With the government’s push, the digital cable distribution industry has
|
6 155
6.9
155 154
seen unprecedented growth (~26 million in December 2010 from 17
4 150
5.1
million in December 2009). We expect the pace to get augmented this

2 145
year. With increasing DTH penetration, we expect Dish TV to be the
0 140
frontrunner among beneficiaries. Broadcasters are also likely to benefit
FY09
FY10
FY11E
FY12E
by plugging subscription revenue leakages from undeclared

subscribers
Subscribers ARPU (RHS)
⇒ Growth in multiplexes would be volume driven with total number of
properties under operation (I-Direct universe) increasing from 88
Top picks of sector currently to ~110 by FY12, mostly in Tier-II cities. However, occupancy
levels are expected to remain stable at ~29-30%
Company Code CMP TP
Jagran Prakashan JAGPRA 128 153 ⇒ Print companies like Jagran Prakashan and HT Media with regional
exposure and relatively subdued valuation (trading at 14.5–16.5x one
year forward multiple as against four year average of ~21x) and Dish
TV with government led digitisation thrust, would stand out in the I-
P/E (x) 21.9 19.0 15.9
direct media universe
EV/EBITDA (x) 12.3 10.0 8.1
RoE (%) 28.7 27.2 26.3 Exhibit 121: Advertisement revenue (coverage universe)
RoCE (%) 31.5 33.7 33.4 6,000 18
16
5,520
5,000
14
4,858
Company Code CMP TP 4,000 12

4,211
(| crore)
10
3,743
Dish TV DISHTV 65 70 3,000

(%)
8
2,000 6
4
P/E (x) NA NA NA 1,000
2
EV/EBITDA (x) 89.0 37.1 18.8 0 0
RoE (%) -17.2 -9.8 -0.5
FY09
FY10
FY11E
FY12E
RoCE (%) -9.0 -5.3 0.7
Total Ad revenue (Rs Crore) - LHS Growth (RHS)

Page 59
Â Metals & Mining (Global demand revival, higher raw

Topline & profitability (Ferrous Metals) materials) Neutral
2500 25 In CY10, (YTD Nov ’10), world steel production stood at 1278 million tonnes
(MT), up 17% as compared to the similar period last year. Steel prices
2288
2000 20 globally have increased by 21% to $680 and are currently hovering in the
2192
1959
range of $650-700. Despite an increase in steel prices most steel companies
1763
1500 15
(| billion)
have witnessed margin pressures mainly on the back of higher prices of key
(%)
1000 10 raw materials like iron ore, which was up ~55% to $170 (spot CFR price for
500 5 China import 62% FE grade) and coking coal prices, which were up 7% to
$298 (spot CFR price for China first grade coking coal). The global steel
0 0 demand scenario is hazy as the European construction sector is yet to pick
FY09
FY10
FY11E
FY12E
up and there was a softening of steel demand in China on the back of a

slowdown in investments in real estate. Domestic steel demand is expected
Top Line EBTIDA Margin PAT Margin (RHS) to be healthy but domestic steel companies are likely to face margin
x
pressures due to rising raw material prices.
Topline & profitability (Non Ferrous) ⇒ China has a significant impact on global steel demand. The Chinese
government has introduced various monetary tightening measures
500 40 in order to curb the growing inflation. Under these measures, the
35 government is discouraging investment in real estate in order to
400
30 bring property prices under control. This has led to a slowdown in
300 25
demand for steel in China, which will impact overall production and
(| billion)
20
469
(%)
demand for steel

324
268
343
200 15
10 ⇒ Aluminium demand has recovered strongly since the global
100
5 recession faded out. This has given significant support to price.
0 0 Aluminium prices have increased by 8% YoY whereas inventories
have declined by 8%YoY. At the current level, inventories on the
FY09
FY10
FY11E
FY12E
LME are still at the higher end. We believe that despite a revival in
Top Line EBTIDA Margin PAT Margin (RHS) demand, prices are expected to remain in the range of ~$2300-
2500/tonne. Similarly, lead prices have increased by 5% YoY to
Topline & profitability (Pipes universe) $2400/t whereas zinc prices have declined by 7% YoY to $2200/t.
Inventories on LME for both metals have increased by ~45%
230 20 ⇒ Copper prices of have increased by 33% YoY (from ~$7000/t in Dec
220 ‘09 to ~$9400/t in Dec ‘10) whereas copper inventory has declined
15 24%. Copper is expected to remain in deficit next year also. This can
217
210
212
lead to a further up move in prices. On the back of increasing copper

(| billion)
200
10
(%)
190 prices, the TC/RC margins are expected to improve

192
180 5 Currently, Indian steel players are trading at FY11E EV/EBITDA of 6.6x,
182
170 ~35% discount compared to global peers, which are trading at an average
160 0 EV/EBITDA of 10.5x. Similarly, domestic non-ferrous players are trading at
FY11E EV/EBITDA of 7.5x, ~50% discount to global peers, which are
FY09
FY10
FY11E
FY12E
trading at EV/EBITDA of 15.3x. However, historically Indian companies have

Top Line EBTIDA Margin PAT Margin (RHS) traded at similar discounts to its global counterparts. Hence, we believe that
currently metals stocks are trading at their fair valuations. However, if
positive clarity on global demand and supply gets valued, expect the metal
Top pick of sector sector to put up a better show in CY11.
Company Code CMP TP Exhibit 122: Movement in steel prices vs. iron ore prices
Hindustan Zinc HINZIN 1272 1360 1200 250
1000 200
800 150
600
P/E (x) 13.9 13.6 10.6 400 100
200 50
EV/EBITDA (x) 8.5 8.1 5.4
0 0
RoE (%) 24.9 20.5 21.6
Jan-07
Apr-07
Jul-07
Oct-07
Jan-08
Apr-08
Jul-08
Oct-08
Jan-09
Apr-09
Jul-09
Oct-09
Jan-10
Apr-10
Jul-10
Oct-10
RoCE (%) 27.4 22.0 24.0
HRC Iron Ore

Page 60
Â Oil & Gas (Awaiting further regulatory reforms, but high oil
Topline & profitability (Coverage universe) prices a dampener) Neutral
PSU upstream and gas utility companies are our preferred bets in the oil &
60000 50
gas space for CY11. On the valuation front, the BSE oil & gas index, has
50000 40 most of the times traded in the P/E range of 12-18x and is hovering at a P/E
49280
40000 of ~14x over the last couple of quarters. Based on FY10 numbers, OMCs
(| crore)
30
are currently trading at P/BV multiples of 1.2 to 1.9x. Upstream PSU
36474
30000
(%)
20
20000 companies are currently trading at a P/E of 10-10.2x FY12E EPS.
25101
20793
10000 10
⇒ We believe the government would implement regulatory reforms
0 0 ahead of the upcoming FPOs of ONGC and IOC. We expect the
FY09
FY10
FY11E
FY12E
clarity on the subsidy sharing mechanism to augur well for PSU

companies. We prefer to play reforms in the oil & gas sector through
Top Line EBTIDA Margin PAT Margin (RHS) upstream companies (Oil India and ONGC) on account of better risk
reward trade-off, reasonable valuations and possible exploratory
upside
Brent crude oil prices
⇒ We expect crude oil prices to remain at ~US$ 80-85 per barrel in
100 CY11 on the back of increased demand from emerging countries,
90 stable global outlook and higher liquidity in the system
US$ per barrel
80 ⇒ Hence, we expect private upstream and refining companies (Cairn

70 and Reliance Industries) to report improved profitability compared to
60 last year. We believe the Singapore gross refining margins (GRMs) to
50
remain stable at current levels of US$4-5 per barrel in the next year
on increased heavy-light crude oil spreads
Dec-09
Feb-10
Apr-10
Jun-10
Aug-10
Oct-10
Dec-10
⇒ We remain cautious on oil marketing companies (OMCs – HPCL,

BPCL and IOC) if crude oil prices sustain above $90 per barrel. At
Singapore Gross refining margins higher oil prices, the implementation of reforms could become
politically sensitive and would lead to an increase in oil under
10 recoveries. We expect under recoveries at ~| 70,500 crore at oil
GRMs (US$ per barrel)
8 prices of US$85 per barrel in FY12E. The under recoveries would

6 reduce by ~| 18,000 crore to ~| 52,500 crore if the government
decides to increase diesel and LPG prices by | 2 per litre and | 50
4
per cylinder, respectively (HPCL would be major beneficiary). We
2 assume subsidy sharing for upstream companies at 33.3%,
0 government at 50% & OMCs at 16.7%
Dec-09
Feb-10
Apr-10
Jun-10
Aug-10
Oct-10
Dec-10
⇒ We prefer gas utility companies (GAIL, GSPL & Petronet LNG) as

defensive bets in the oil & gas sector on the back of a stable increase
in gas supply volumes. Expansion of the national gas grid and city
Top pick of sector gas distribution (CGD) network (capex of | 69,000 crore over the next
Company Code CMP TP four or five years) would help to report good profit growth.
Oil India OILIND 1400 1610 Exhibit 123: Under recoveries scenario at various crude oil prices
140,000
120,000 118,500
P/E (x) 12.9 10.8 10.0 103,292
100,000
EV/EBITDA (x) 6.5 5.4 5.0 86,500
(| Crore)
80,000 65,000
RoE (%) 19.0 19.7 18.7 77,123 46,051
60,000 54,500
RoCE (%) 22.6 23.7 22.0 40,000 49,387
40,000 22,500
20,000
FY06
FY07
FY08
FY09
FY10
FY11E
FY12E
GAIL (India) GAIL 505 NA
Valuation Ratios FY08 FY09 FY10 $70 $80 $90 $100

P/E (x) 24.6 22.8 20.4
EV/EBITDA (x) 15.4 14.6 12.8 Source: PPAC, ICICIdirect.com Research
RoE (%) 20.0 19.0 18.7
RoCE (%) 23.7 23.0 23.1

Page 61
Topline & profitability (Coverage universe) Â Pharma (US Generics business to drive growth) Positive
In CY10, the BSE Healthcare Index gave ~35% returns vis-à-vis Sensex
30000 30
returns of 13% (as on November 30). We believe the outperformance was
25000 25 on account of a strong show by pharma companies both in domestic
25957
20000 21808 20 formulations and exports especially the US Generics, buoyant sentiment on
(| crore)
15000 15 account of passage of the US Healthcare bill, mega deals such as Abbott-
(%)
17488
15456
10000 10 Piramal and Pfizer-Biocon, scores of inbound and outbound deals and lastly
5000 5 some major first to file monetisations. We believe this trend will continue in
0 0
2011 as well although the margin of outperformance may not be as high as
2010.
FY09
FY10
FY11E
FY12E
⇒ We expect major pharma players to clock ~18-20% kind of growth in

Top Line EBTIDA Margin PAT Margin (RHS) domestic formulations driven by strong growth in chronic therapies
such as anti-diabetics, cardiovascular (CVS), central nervous system
(CNS) and oncology. These therapies account for ~20-25% of overall
Top pick of sector domestic formulations. However, in case of major companies that
Company Code CMP TP are part of the BSE Healthcare Index the percentage is slightly higher
Lupin LUPIN 450 546
i.e. ~40-45%. Rapid urbanisation, changing lifestyles, demographic
transition and growing health insurance coverage are some of the
obvious factors that will drive the chronic growth. For acute
therapies, we see 12-13% growth mainly emanating from an
P/E (x) 28.6 23.0 18.2
increase in field force and rural forays
EV/EBITDA (x) 24.1 18.6 14.4
RoE (%) 27.3 28.3 25.8 ⇒ In 2010, almost all domestic players increased their field force. This
RoCE (%) 22.4 25.8 25.4
will start yielding a positive effect from the second half of CY11
onwards. This incremental field force will complement the added
capacities since 2009. Similarly, it will also strengthen the
established brand as ~90% of domestic formulations are branded
Company Code CMP TP
formulations. With ~65% of the Indian population still out of reach of
Aurobindo Pharma AURPHA 1300 1606 basic medication, domestic formulations will continue to have a
steady growth trajectory for a sizable future
P/E (x) 15.0 13.8 9.7
⇒ On the exports front, we see a continuance of the three pronged
strategy of risk mitigation adopted by major generic players- 1) to
EV/EBITDA (x) 11.7 9.3 6.9
increase the presence in regulated markets of the US, Japan and EU
RoE (%) 26.0 22.0 26.0
by aggressive product filing and making their facilities regulatory
RoCE (%) 17.0 16.0 24.0
compliant and 2) expanding their presence in the so called
pharmerging countries (BRIC nations ex-India, Mexico, Turkey and
ANDA approvals from USFDA South Korea) via marketing and distribution agreements with the
pharma MNCs and 3) forming alliances for licensing and distribution
180 with leading pharma MNCs as per their requirements
154
160 ⇒ US, by far, will remain the most important market for Indian
141
140 128 companies, thanks to the sheer size of the market and the generic
opportunities on account of the impending patent cliff. Between 2011
Number of Approvals
120
and 2016 drugs worth ~US$110 billion will lose marketing
100
exclusivity worldwide. Of this, ~US$90 billion is in the US alone.
80 Although price erosion and increase in competition will be a matter
60 of concern, we believe Indian players, on account of their vertically
integrated model and proven capabilities and capacities, are best
40
poised to fathom the price erosions among others. With close to 120
20 USFDA approved facilities (second only to the US) Indian generic
0 players will be the major beneficiaries of the so-called impending
patent cliff
CY08
CY09
CY10
Source: USFDA ⇒ In fact, CY11 will be a year of major turmoil when drugs worth
~US$25-30 billion will lose patents in that year itself. We believe
Indian generic players have already smelled the opportunity and we
could see the expediting of ANDA filings in spite of delays for getting
approvals from the USFDA. From big players like Ranbaxy, Sun to
smaller players like Natco, all are preparing themselves for this

Page 62
opportunity. We also see increasing first to file challenges by leading

ADNA Pipeline with USFDA generic players over and above the normal Para IV filing, which will
Company Filed Approved Pending lead to growing out of court settlements given the high success ratio
Sun Pharmaceuticals Industries * 363 217 146
of Indian players (~70%).
Aurobindo Pharma 185 126 59 ⇒ We see good traction coming from the pharmerging markets as
Dr Reddy's Laboratories 167 93 74 these markets are expected to grow more or less at the same pace
Strides Arcolab*** 140 52 88 as India and with similar demographic and lifestyle changes
Lupin 132 45 87
⇒ Another important aspect will be the trade agreement between the
Cadila Health. 115 58 57 Indian and Japanese government. This includes giving greater
Glenmark Pharmaceuticals 110 71 39 access to Indian generic players in the US$80 billion Japanese
Cipla 102 57 45 pharma market (second largest in the world). According to this,
Other companies 290 108 102 Indian companies will be treated at par with their Japanese
Total 1808 965 763 counterparts to facilitate the government’s thrust to encourage
*includes ANDA filings of Caraco and Taro; generic drugs
** Filings as on Dec 31 2009; *** includes filings of JVs
Source: USFDA, ICICIdirect.com Research
We do not see significant headwinds from either currency or crude based
derivatives that may suppress the EBITDA margins of the companies. We
Impending Patent cliff expect companies with a strong domestic presence, robust US franchise
complemented by a good number of FTFs and Para IVs (like Sun
Pharmaceuticals, Dr Reddy’s Laboratories and Ranbaxy Laboratories) to
30 28 28 27 trade in the range of ~23-25x forward multiple. Also, companies with a
25 good domestic presence, reasonable US presence and also substantial
20 20 presence in other emerging markets (like Lupin, Cadila Healthcare,
20 Glenmark Pharmaceuticals and Biocon) will trade in the range of ~18-22x
($ billion)
15
forward multiple. CRAMS players are expected to remain laggards albeit
with modest to reasonable recovery in off-takes at the client’s end
10
Exhibit 124: Key drugs going off patent in 2011
5
Drug Therapeutic Approx sales in US market (US$ billion)
0 Actos Anti-diabetic 3.4
Alimta Anti-cancer 0.9
CY08
CY09
CY10
CY11
CY12
Femara Anti-cancer 0.6

Source: Glenmark, ICICIdirect.com Research Keppra Anti-convulsant 1.2
Levaquin Anti-infective 1.6
Lipitor Anti-cholesterol 7.5
Plavix Anti-clotting 0.2
Seroquel Anti-schizophrenial 4.2
Sifrol Anti-parkinson 0.5
Xalatan Eye care 1.4
Zyprexa Anti-schizophrenial 2.3
Total 23.8
Source: Company Annual reports, ICICIdirect.com Research

Page 63
Overall performance (Coverage universe) Â Power (Sluggish Capacity addition, premium valuations)
Neutral
120000 35
The power sector in CY10 was marred by sluggish capacity addition. We
100000 30
expect capacity to gather steam in CY11 especially from private players. We
98891
80000 25
estimate ~ 14000 MW of capacity addition in CY11/FY12. India is likely to
(| crore)
80250 20
(%)
miss even the revised capacity addition of 62000 MW in the Eleventh Five
74173
60000
15
61852
40000 Year Plan. We estimate the same will be at ~48000 MW for the Eleventh
10
20000
Plan. Going ahead, companies with robust execution capability, financial
5
closure in place and secured fuel linkages will outperform the sector. We
0 0
are positive on companies that have an integrated business model over
FY09
FY10
FY11E
FY12E
regulated and merchant plays.
Top Line EBTIDA Margin PAT Margin (RHS) ⇒ Rate of growth in capacity addition is likely to miss targets. However,
this will be highly crucial for regulated entities, especially NTPC, as it
has underperformed in terms of capacity addition in the past. We
Trend in Bilateral rates
expect big private players like NTPC to add 2000 MW and 3500 MW
capacity in FY11E and FY12E, respectively, which will be lower than
8 the earlier targets. Overall, we estimate ~14000 MW of capacity
7 addition in FY12. Out of these, about 50-60% will come from private
sector players
(|/kWhr)
6
5 ⇒ Increase in coal prices (Mccloskey Coal Index at 115, up 40% YoY)
will pose significant headwind for power utilities. This will mainly
4
impact private sector players who rely on imported coal. The impact
3 of the same on regulated central/state utilities will be minimal. Under
our coverage universe, Lanco Infra would be exposed to high coal
Jan-09
Apr-09
Jul-09
Oct-09
Jan-10
Apr-10
Jul-10
Oct-10
prices but the damage will be relatively less than players like JSW
Power and Adani Power. Though coal price rise will be a pass
through for companies under the regulated model, the availability of
Movement in Coal prices
coal will be a critical issue to watch out.
3800 120 ⇒ Merchant rates are expected to remain at | 3.8 – 4.5/kwhr in FY12E
3300 110
2800 100 However, elections in some states may drive prices higher, albeit for
USD / tonne
2300 90 a short period

1800 80
1300 70 ⇒ Valuations for regulated entities (NTPC trading at 2x FY12E BV) and
800 60 merchant plays appear fairly priced at this point in time. Therefore,
300 50
we prefer integrated companies (Lanco Infra- high RoEs of 22% and
Dec-08
Oct-09
Oct-10
Feb-09
May-09
Jul-09
Dec-09
Mar-10
May-10
Jul-10
Dec-10
P/E multiple of 17x FY12E EPS) – i.e. the ones with robust capacity
addition plans, fuel linkages, stable power trading, distribution and
BSE Power Index Mccloskey coal 6700 kcal
transmission business
Exhibit 125: Capacity additions will miss Eleventh Plan targets
Top pick of sector
90000 100
Company Code CMP TP 80000 90
Lanco Infra LANINF 62 73 70000 80
60000 70
60
MW
50
(%)
P/E (x) 36.9 25.9 17.7 40000

40
30000 30
EV/EBITDA (x) 15.3 8.8 5.7
20000 20
RoE (%) 16.9 18.1 22.2
10000 10
RoCE (%) 6.4 9.0 11.9
0 0
FY08
FY09
FY10
FY11E
FY12E
XI th plan
estmates
Achievement Target % acheivement (RHS)
Source: CEA, ICICIdirect.com Research

Page 64
Topline & profitability (Coverage universe) Â Real estate (Rising unaffordability) Negative
Property prices in Mumbai and the NCR region have again reached peak
700 50 levels. Given the rise in prices, sales volume has moderated, particularly in
693
600 45 Mumbai. Furthermore, the lukewarm response towards real estate IPOs has
500 40 weakened the sentiments towards the sector. Additionally, the recent
(| crore)
526
35
487
400 bribery scam and the recent RBI action (increased risk weighting) could
30
(%)
300 potentially limit bank borrowing towards the sector. In such a scenario,
25
sales collection through new project launches and monetisation of non-core
284
200 20
assets would be key funding avenues for the sector in CY11.
100 15
0 10 Property prices at peak levels: Property prices in the two key residential
markets (Mumbai and NCR) region have again reached the peak level.
FY09
FY10
FY11E
FY12E
Given the rise in the property market, the affordability (tracked through
Top Line EBTIDA Margin PAT Margin (RHS) monthly income/EMI – higher the ratio, better it is) has declined in 2010.
With the anticipated increase in mortgage rates, the affordability would
decline further in CY11.
Exhibit 126: Residential property to income & monthly income /EMI in Mumbai suburbs
5.2 5.1 5.1 2.7

5.0 5.0
5.0 2.5
4.8 4.7 4.7
4.6 2.3
4.6 4.5
2.1
(x)
(x)
4.4 4.3
1.9
4.2
4.0 1.7
3.8 1.5
CY02
CY03
CY04
CY05
CY06
CY07
CY08
CY09
CY10
Property to Income Monthly income/EMI (RHS)
Source: HDFC, ICICIdirect.com Research
Raised ~| 8000 crore in CY10: Real estate companies have raised ~| 8000
crore in CY10 through IPO and QIP. Furthermore, new real estate
companies are looking to raise ~| 10,000 crore in CY11. These issues could
further weaken sentiments towards the sector.
Exhibit 127: Funds raised in CY10 Exhibit 128: Forthcoming IPOs
Date Company Issue size* IPO/QIP Forthcoming IPO | crore
Jan-10 D B Realty Ltd 1,500 IPO Emaar MGF 1,600
Apr-10 Jaypee Infratech 2,262 IPO BPTP 1,500
Apr-10 Nitesh Estates 405 IPO Ambience 1,300
Sep-10 HDIL 1,157 QIP EWDPL 600
Oct-10 Oberai Reality 1,029 IPO Neptune Developers 400
Oct-10 Prestige Estate 1,200 IPO Lavasa 2,000
Oct-10 Ansal API 231 QIP Kumar Developer 300
Oct-10 Parsvnath 270 QIP Lodha Developers 2,500
Total 8,054 Total 10,200
Source: BSE,, ICICIdirect.com, Research *in | crore Source: Media reports, ICICIdirect.com Research
Sales volume through project launches – theme for 2011: The recent
bribery scam and recent RBI action (increased risk weighting) could
potentially limit bank borrowing towards the sector. Furthermore, the Street
response towards real estate IPOs was lukewarm. Hence, the only option
available to developers to fund its projects is collection through sales
volume and new project launches. Players with healthy project launches at
better price point would be better placed than their peers.

Page 65
Â Shipping (Subdued earnings, valuations compelling)

Topline & Profitability (Coverage universe) Negative
30000 50 ⇒ China has hiked its interest rates for the second time in the last two
25000 40 months and the trend is expected to continue in CY11. This would
24257
20000
(| crore)
30 lead to a moderation in growth and a resultant drop in demand for

21782
20394
19691
15000
(%)
10000
20 commodities. As China is the main driver of dry bulk trade, a drop in
5000 10 commodity demand from China would lead to subdued demand for
0 0 dry bulk carriers
FY09
FY10
FY11E
FY12E
⇒ US and Europe are the main drivers of crude and refined oil products
demand. As the recovery in both countries is likely to be modest, the
Top Line EBTIDA Margin PAT Margin (RHS) demand for crude/product carriers is also likely to be subdued
⇒ Global dry bulk fleet capacity is 464 million dwt and an additional 285
Dry bulk indices million dwt i.e. 61.4% of the existing fleet is likely to be added over
the next two years. Global crude and product carrier capacity is 382
10000 million dwt and an additional 170 million dwt i.e. 44.5% of the
8000 existing fleet is likely to be added over the same period. Hence, there
will be a substantial overhang from the large fleet addition over the
6000
Index
next couple of years

4000
2000 ⇒ Freight rates are expected to be under constant pressure on account
of demand moderation and supply overhang. Hence, the operating
0
performance of shipping companies is expected to be subdued.
Dec-09
Mar-10
Jun-10
Sep-10
Dec-10
Companies with high debt could also report a negative bottomline

BDI BCI BPI ⇒ However, the offshore shipping segment offers the best play in the
entire shipping space on account of firmness in crude oil prices.
Tanker indices Utilisation levels have inched up with semi-sub and jack up utilisation
levels at 85% and 75%, respectively. Vessel day rates are also
1400 expected to rise in the near to medium term
1200
1000 ⇒ Our preferred picks are Mercator Lines on account of diversified
800 earnings stream, Great Offshore on account of improvement in
Index
600
operating performance and Bharati Shipyard on account of benefits
400
200 from the acquisition of Great Offshore
0 Exhibit 129: Offshore segment best placed in entire shipping space
Dec-09
Mar-10
Jun-10
Sep-10
Dec-10
100
85 87 87 85 84 85
90 80
75 76 77 78 76 76 75
Baltic clean tanker index Baltic dirty tanker index 80 74 72 74 71
70
% utilisation
60
40
Company Code CMP TP
30
Mercator Lines MERLIN 53 72
20
10
P/E (x) 23.9 8.9 5.2
Nov-10
Jul-10
Aug-10
Oct-10
Sep-10
Dec-10
EV/EBITDA (x) 5.4 5.0 3.0

RoE (%) 2.5 6.3 9.7 Drillship Semisub Jack up
RoCE (%) 5.5 6.1 8.0

Page 66
Â Sugar (Sugar prices to remain firm, Bottomline back to

Topline & Profitability (Coverage universe) black) Positive
The sugar sector is expected to witness an improvement in fundamentals
15000 30 led by 30-year high global prices increasing to 34c/lb and firming domestic
14689
12000 prices at | 31/kg from | 24/kg in June, 2010. Also, the higher availability of
13613
13305
20 sugarcane is expected to pass on bargaining power in the hands of millers

9000
(| crore)
(%)
and keep their costs low at | 22/kg of cane in comparison to | 28/kg paid in
6000
7158
10 SY10. We remain positive on Shree Renuka Sugars on the back of positive

3000 earning outlook from Brazilian operations. We are also positive on
0 0 Balrampur Chini and Dhampur Sugar as valuations are at the lower end of
the replacement cost band.
SY09
SY10
SY11E
SY12E
⇒ The outlook for global sugar surplus has been cut to 2.3 million
Top Line (LHS) in | Cr EBTIDA Margin (%) tonnes (MT) from 3 MT earlier for CY11 on lower than expected
production in major sugar producing countries (Brazil and India).
Simultaneously, Thailand, China, Russia and Pakistan turning net
Replacement cost band (Balrampur Chini) importers due to erratic weather conditions has aggravated the
situation further driving up global sugar prices to 34c/lb. Hence, we
200 Trough made at the believe mismatch in demand-supply will persist until March/April
replacement cost 2011(start of crushing in Brazil), keeping global prices firm. Also, until
150 exact production for India is out by March (end of crushing in India),
100
even domestic sugar prices would remain firm at around | 31/kg
⇒ Further, the export of 1.5 MT (1 MT under advance licence scheme
50
Post lehman and 0.5 MT under open licence scheme) allowed by the Indian
0 government has resulted in sugar prices firming up to | 31/kg in
India. As announced by the government a further 1.5 MT of sugar
Sep-05
Sep-06
Sep-07
Sep-08
Sep-09
Sep-10
exports could be allowed once total production, after crushing is

over, is known. We believe this could result in a subsequent increase
Share Price (|) Replacement Cost/share
in domestic sugar prices in the second half of the year as the
inventory level remains at ~4 MT (two months of consumption) only
Top picks of the sector ⇒ Shree Renuka Sugars remains our top pick considering strong
earnings from its Brazilian operations. Earnings growth of 22%
Company Code CMP TP (CAGR) from SY09-SY12E and higher cash flows would result in a
Shree renuka sugars RENSUG 98 105 reduction of debt and higher valuation multiple. We are also positive
on Balrampur Chini as the stock is trading at the lower end of its
Valuation Ratios SY10 SY11E SY12E valuation multiple. Currently, Balrampur Chini and Dhampur Sugar
P/E (x) 8.9 7.6 7.4 are trading at a discount of ~4% and 56%, respectively, to their
EV/EBITDA (x) 7.5 4.5 3.8 replacement cost. However, we continue to remain bearish on Bajaj
RoE (%) 31.6 27.1 21.8 Hindustan due to high interest cost on the huge debt (| 4059 crore)
RoCE (%) 20.8 18.1 16.8
on the books
Exhibit 130: Global raw sugar prices and domestic white sugar prices
Company Code CMP TP 40.0 12.0
Balrampur Chini BALCHI 86 105 35.0 10.0
30.0 8.0
Valuation Ratios SY10 SY11E SY12E 11.0 6.0
25.0
4.0
P/E (x) 80.2 13.1 12.4 20.0
2.8 2.0
EV/EBITDA (x) 12.3 7.3 7.5 15.0 1.7 0.0
RoE (%) 1.8 10.9 11.1 10.0 -3.5 -2.0
RoCE (%) 5.9 12.7 12.5 5.0 -4.0
0.0 -6.0
Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4
SY08 SY09 SY10 SY11E
World Sugar Surplus / Deficit Raw sugar (cents per lb) Delhi sugar (| per kg)

Page 67
Topline & profitability (Coverage universe) Â Telecom (Tepid growth, regulatory uncertainty) Negative
The telecom sector is reeling under overcapacity leading to stagnant
140000 40 revenue, high operating cost and huge debt resulting in dwindling earnings
120000 35
and regulatory uncertainty led contracting multiples. While subscribers
30
117725
100000 have grown at 10.1% CQGR, revenue has grown by a mere 0.4% CQGR
(| crore)
100401 25
80000 over Q1FY10-Q2FY11. Impending 3G launch and MNP introduction may be
(%)
20
78561
73989
60000 an immediate impetus. With an abating rate of decline in key metrics,

15
40000 10 telecom companies are expected to fare better in FY12E than in FY11E.
20000 5 Companies with exposure in foreign markets, like Bharti Airtel and
0 0 OnMobile Global may see higher growth than the industry. Telecom stocks
may remain subdued during most of FY12 while towards the end of FY12E
FY09
FY10
FY11E
FY12E
we may see a narrowing of discounts to the broader markets once

Top Line EBTIDA Margin PAT Margin (RHS) regulatory concerns are put to rest.
⇒ Rate of decline in key metrics will taper down with ARPU declining
Revenue and Subscriber growth by average 3-4% in FY12E as against 12-14% in FY11E and ARPM
declining 1-2% to | 0.42 – 0.43 in FY12E as against 13-15% in FY11E
Volume CAGR (FY08-12E) - 31.3%
2,000 300
Revenue CAGR (FY08-12E) - 14.8% ⇒ Growth in total minutes on network will shrink with drying of free
250 minutes and rationality returning to the sector. We expect total
1,500 275
228
200 minutes to grow 12.4% YoY in FY12 to reach 1763 billion (universe
1,000 150 coverage) against 26.9% in FY11
175
150 146 100
500 ⇒ The PAT of telecom service providers is expected to decline by 41%
50 YoY in FY11E. However, with rationality returning to pricing and
0 0 partial turnaround of Zain, we expect PAT to grow 25% YoY in FY12
FY08
FY09
FY10
FY11E
FY12E
⇒ Corrective measures related to 2G scam may be harsh on new

licensees. Airtel, Idea may have to pay for additional spectrum held
Total Minutes Revenue ARPU (RHS) while RCom faces government probe. The overall exercise may yield
a positive operating environment for the industry
Telecom service providers’ ARPU (|)
⇒ Value-added player OnMobile Global may stand out in the telecom
pack with continual deployment of VAS solutions with global
400 Vodafone entities and Telefonica across LATAM
350
300 ⇒ Telecom stocks historically trading at a 10-15% premium to the
250 Sensex now trade at about 20% discount. Though earnings may
200
(|)
recover in comparison to FY11, regulatory uncertainty and

150
100
competitive pressures would remain an overhang on stocks. We may
50 see narrowing of discounts to broader markets towards the end of
0 FY12E once regulatory concerns are put to rest
FY08
FY09
FY10
FY11E
FY12E
Exhibit 131: Telecom operators’ P/E comparison to Sensex
Airtel Idea Rcom TTML 55 Discount to Sensex

Premium to Sensex
50 Idea and Rcom (intermitantly) are at
45 premium on M&A rumors
35
Company Code CMP TP
P/E (x)
30
OnMobile Global ONMGLO 281 374 25
20
10
P/E (x) 38.4 17.1 13.4
5
EV/EBITDA (x) 23.8 13.6 10.4
Nov-07
Nov-08
Nov-09
Nov-10
Mar-07
Jul-07
Mar-08
Jul-08
Mar-09
Jul-09
Mar-10
Jul-10
RoE (%) 5.8 11.5 12.8

RoCE (%) 5.2 9.8 11.5
Bharti RCOM Idea Sensex
Source: Reuters,, ICICIdirect.com Research

Page 68
Topline & profitability (Coverage universe) Â Aviation (Rising fuel cost remains a concern) Neutral
30000 15 With the shift of domestic airlines sector towards low cost services and
10
strong capacity rationalizations, major players have reported high load
25000
5
factors (in the range of 76-80% for FSCs and 85-89% for LFCs) in H1FY11.
20000 We believe domestic demand will remain buoyant driven by strong
(| crore)
(%)
macroeconomic growth and limited supply of aircraft. In our view, a higher
27970
15000
23782
-5
20007
load factor will drive earnings growth in the sector as major capacity
19125
10000
-10
5000
additions have already been deferred by big players for the next 15-18
-15
months due to huge debt overhang.
0 -20
⇒ Rising fuel cost remains a concern for the sector
FY09
FY10
FY11E
FY12E
Rising crude oil prices may pose a threat for airline companies, as it
accounts for nearly 35-40% of total operating costs. Our working
shows that if fuel cost increases by 5% then it has a negative impact
of ~150 bps in the EBITDA margin of airline companies.
Top pick of sector Exhibit 132: Trends in passenger growth Exhibit 133: Trends in OPM (%) vs. ATF prices
Company Code CMP TP 150 40 15 50

30 10
Spicejet MODLUF 80 102 125 20 48
10 5
in lacs
100
Valuation Ratios FY10 FY11E FY12E 0 0 46
| per ltr
-10
FY08
FY09
FY10
FY11E
FY12E
(%)
P/E (x) 30.5 22.4 17.2 75 -5
-20 44
EV/EBITDA (x) 65.2 23.5 11.1 -10
50 -30
-15
Q1FY09
Q3FY09
Q1FY10
Q3FY10
Q1FY11
RoE (%) NA NA 46.2 Q3FY11E 42

RoCE (%) 30.6 41.4 45.3 -20
-25 40
Pax traffic - LHS Growth (%) - RHS Fuel costs - RHS OPM
Source: Company, ICICIdirect.com, Research Source: Company, ICICIdirect.com, Research
Â Logistics (Container volumes to outpace port volumes)

12000 25
In the logistics space, we would prefer players focusing on container freight
stations (CFS) as container volumes have outperformed the overall port
10000 20 volumes. We expect this trend to continue. For the current fiscal (till date),
8000 overall port volumes have been flat while container volumes have reported
(| crore)
15
double digit growth. Even though players are expected to report an
(%)
6000
10 improvement in CFS volumes, realisations are expected to remain flat.
4000
10966
9709
8411
8174
5
2000 ⇒ Overall volumes at 12 major ports during April-November 2010 have
0 0 registered a 0.8% YoY increase at 365.9 million tonnes (MT) while
container volumes have increased by 12.3% to 4.99 million TEUs. On
FY09
FY10
FY11E
FY12E
the back of an expected increase in containerisation levels, the trend

Top Line EBTIDA Margin PAT Margin (RHS) of outperformance of container volumes is expected to continue. In
the CFS segment, players with a presence in ports like Chennai and
JNPT have benefited during the current year. During April-November
Top pick of sector
2010, container volumes at Chennai port increased at a brisk pace of
Company Code CMP TP 29% YoY while JNPT port volumes increased 8% YoY
Gateway Distriparks GATDIS 108 129
⇒ We prefer Gateway Distriparks (GDL) in the logistics segment. GDL
has chalked out capacity expansion plans in its CFS segment, which
Valuation Ratios FY10 FY11E FY12E would result in volume led growth. Within the rail segment, the
P/E (x) 14.7 15.1 12.1 management is planning to increase its focus on the more profitable
EV/EBITDA (x) 9.9 9.4 7.9 Exim segment, which augurs well for the future
RoE (%) 11.6 11.8 13.5
RoCE (%) 10.3 11.9 13.5

Page 69
Â Retail (Increased consumption, SSSG to drive growth)

Year 2010 saw retailers closing down unviable stores and undertaking cost
14000 12
rationalisation efforts to enhance profitability. Domestic demand started
12000 10 picking up during H2FY10. Next year, we expect growing domestic
12474
10000 8 consumption, higher organised retail penetration (that stands at 4-5%) and
10006
8000
(| crore)
8926
6 growth from metros and mini-metros to fuel growth in the retail sector.
(%)
6000
Strong Indian demographics (rising per capita income & young median age)
6342
4000 4
will also aid spending growth.
2000 2
⇒ Increasing same store sales growth: From the second half of FY10
0 0
we have seen that major retailers have posted a double digit
FY09
FY10
FY11E
FY12E
increase in same store sales (SSSG). This along with store additions
will drive revenue growth for retail companies
⇒ Catalyst: Opening up of the sector to FDI
⇒ Need of the hour: Equity funded growth (considering high debt),
Top pick of sector efficient inventory management and investment in backend infra
Exhibit 134: Pantaloon SSSG Exhibit 135: Shoppers’ Stop SSSG
Company Code CMP TP
70 25
Pantaloon Retail PANRET 363 510 60
50 20
40
Valuation Ratios FY10 FY11E FY12E 30 15
(%)
20
(%)
P/E (x) 32.5 27.0 20.5 10 10
EV/EBITDA (x) 14.6 10.5 8.9 0
-10 5
RoE (%) 7.0 8.6 10.2 -20
0
Q1
Q2
Q3
Q4
RoCE (%) 10.7 11.8 12.8 Q1
Q1
Q2
Q3
Q4
Q1
Q2
FY10 FY11 -5
FY10 FY11
-10
Value Lifestyle Home
Source: Company, ICICIdirect.com Research, YE-June Source: Company, ICICIdirect.com Research
Topline & profitability (Coverage universe) Â Textiles (Synthetic fabric manufacturers to gain) Neutral
In 2010 we saw cotton prices touch a lifetime high (~| 125/kg) on the back
16000 25 of increased domestic & global demand. Consequently, cotton yarn prices
14000
also rose and textile manufacturers resorted to blending cotton with man-
14828
20
12000
13255
10000 made fibres to protect margins. In 2011, we expect demand for cotton yarn
(| crore)
15
11042
to grow at a slower pace due to substitution. We expect margins for

(%)
8000
8774
6000 10 synthetic yarn manufacturers to grow in the coming year.

4000 ⇒ Increased price differential: The ratio of cotton yarn price and
5
2000
polyester filament yarn (PFY) price has been in the range of 1.4-1.6x
0 0
during 2002-09. The same has gone up to a historical high of 2.3x in
FY09
FY10
FY11E
FY12E
September 2010. Consequently, demand for blended yarn will

continue to increase leading to robust demand for polyester
Exhibit 136: Price differential between polyester and cotton yarn
160 135
Top pick of sector 140 121 115 120
103 109 110
100
(|/kg)
JBF Industries JBFIND 181 228 80

60
70 74 70 75 75 71 70
20
P/E (x) 5.9 4.3 3.6 0
EV/EBITDA (x) 5.1 3.9 3.7
CS-04
CS-05
CS-06
CS-07
CS-08
CS-09
CS-10
RoE (%) 23.7 28.8 26.6

RoCE (%) 18.7 23.8 19.6 PFY Prices Cotton Yarn Prices
Source: Industry, ICICIdirect.com Research

Page 70
Topline & profitability (Coverage universe) Â Tea (Uptrend in prices to continue) Positive
With the total tea production in the country estimated to be ~965 million kg
2500 30 in CY11 (lower by ~20 million kg compared to CY10), we believe tea prices
2000 25 will remain firm during the year with volumes taking a setback. Also, a
20 higher production of ~100 million kg in Kenya and Sri Lanka would
1500 adversely impact the exports. However, companies like McLeod Russel and
(| crore)
15
(%)
Jayshree Tea would witness volume growth led by their acquisitions in
2475
1000
1845
1756
2156
10
Africa and Asia.
500 5
0 0
⇒ Led by the dip in production in North India (accounting for 75% of total
tea production of the country) prices in North India have already risen
SY09
SY10
SY11E
SY12E
by ~| 15 per kg. Also, with consumption in India increasing by 3.5%

annually and FY11 beginning with a shortage of 50 million kg, we
believe prices will remain firm during CY11 also
⇒ In spite of higher production in Kenya and Sri Lanka, we believe prices
Tea Production in India (in million kg)
in the international market will remain firm at ~$3.8-$4 per kg as
Month North India South India higher tea production in 2010 may not sustain in 2011
2010 2009 2010 2009
⇒ In our coverage universe, McLeod Russel remains our top pick with
Jan 9 10 18 11 sales and earning growth expected at 19% and 20%, respectively, in
Feb 2 3 16 12 FY12E. At CMP, the stock looks attractive as it trades at only 8x its
Mar 30 27 19 18 FY12E EPS of | 27.3
Apr 48 40 20 23
Exhibit 137: North India & South India tea prices
May 47 50 25 21
128
Jun 77 92 27 26 130
117
Jul 103 106 20 21
Aug 108 114 15 20 110
Sep 90 79 18 23
(| per Kg)
91
Falling production in North leading to steep rise in prices
Oct 99 112 21 21
90
Total 612 634 202 196 73
67 63
70
Top pick of sector
Mar-10
Jun-10
Sep-10
Mcleod Russel MCLRUS 213 272
North India South India

Valuation Ratios SY10 SY11E SY12E
P/E (x) 10.1 9.3 7.8 Source: Tea Board of India, ICICIdirect.com Research
EV/EBITDA (x) 7.1 6.9 5.4
RoE (%) 16.4 15.3 15.7
RoCE (%) 18.9 17.6 18.9

Page 71
Top picks for 2011

¾ Aurobindo Pharma
The company has changed it self from a pure plain-vanilla Active
Pharmaceuticals Ingredients (APIs) supplier to a niche formulations player.
This transformation is still on and that has improved the EBITDA margin of
the company, recently. Henceforth, the next big growth drivers will be huge
capacity optimisation and monetisation of the huge US Abbreviated New
Drug Application (ANDA) pipeline. Recent deals with MNCs have given the
company a new identity. Aurobindo on account of its proven capabilities
and huge capacities is well equipped to cater to their incremental
requirements.
¾ Axis Bank
Axis Bank’s performance is characterised by the consistent profitability
growth of above 30% YoY for the past 24 quarters, one of the best records
industry wide. Healthy CASA ratio of 42% provides a respite to cost of
funds, thus comforting NIM. RoA of above 1.4%, RoE of above 17% and
healthy asset quality (NNPA ratio at 0.3%) warrant a higher multiple at 3x
FY12E ABV. Moreover, the recent price correction offers comfort to
valuation. Currently, it is available at 2.6x FY12E ABV, thus making the stock
attractive.
¾ Balrampur Chini
The higher availability of sugarcane would increase the sugar sales volume
of the company by 40% in SY11. With domestic sugar prices crossing | 30
per kg and sugarcane cost at | 22 per kg, the margins for the company
would improve considerably. Simultaneously, an increase in ethanol prices
to | 27 per litre would also add to the margins. We believe the stock is
trading at the lower end of the replacement cost band and looks attractively
valued.
¾ Escorts
Escorts, the third largest player in the tractor segment, is expected to gain
market share as tractor sales will move northwards due to newer product
launches in the popular Powertrac and Farmtrac variants. We expect the
growth momentum of agri-GDP led by increasing demand to inject further
steam towards farm mechanisation as labour migration towards urban
areas continue. The construction business has also turned EPS accretive
and is expected to gain further traction due to improvement in
infrastructure offtake in FY12. On the financial perspective, the company
has de-leveraged its balance sheet significantly having brought down its
debt/equity to a comfortable 0.2x from 1.0x in the last couple of years. We
expect the net sales and PAT to grow at a CAGR of 18.7% and 31.9%,
respectively, for FY10-12E.
¾ GAIL
GAIL is India's flagship natural gas company, operating in various business
segments including exploration & production, LPG production,
petrochemicals, transmission, distribution and marketing of natural gas.
GAIL plans to double its gas transmission and petrochemicals capacity in
the next few years. The stock is trading at a P/E of 17.9x TTM EPS of | 28.2.
With the current capital expenditure plans in place, GAIL offers a lot of
safety and visibility of earnings growth to investors over the next few years.
¾ TCS
TCS, the largest IT company both in revenue (FY11E ~| 37 billion) and
employees (174417) terms, is expected to report broad based volume
growth leading to US dollar revenue growth of 23% CAGR in FY10-FY12E.
Further, we expect ~17% CAGR earnings growth during the same period.
After almost five quarters of relative out-performance compared to Infosys,
we believe the P/E discount rationale would subside.

Page 72
¾ HCL Technologies
HCL Technologies is a leading IT services company with revenues of ~| 15
billion (FY11E) and 46,540 professionals. HCL Technologies is well
positioned to participate in incremental demand with low utilisation,
superior lateral gross hires coupled with operating levers, which could help
sustain operating margins. We expect revenue and earnings to grow at ~
17% & ~ 29% CAGR during FY10-FY12E period.
¾ Hindustan Zinc
Hindustan Zinc is engaged in production of Zinc and lead ingots. It is the
world largest integrated player and one of the lowest cost producers of zinc
and lead. It is a debt free company having huge cash and cash equivalent of
~Rs 13000 crores. Going forward any improvement in the zinc prices will
lead to margin expansion for the company. We continue to maintain our
positive outlook on stock, at current market price stock is trading at
EV/EBITDA of 8.1x FY11E and 5.4x FY12E.
¾ Larsen & Toubro
L&T has witnessed a strong order inflow in the past few years. At present,
its order backlog is at a historical high. We expect this momentum to
continue in the next few years as capex activity in L&T’s core end-markets
returns on a strong note and as the company diversifies into power
(generation equipment and nuclear energy) and defence (that are
characterised by large, high-value add orders). The management has
guided for 25% growth in order inflows for FY11E. Going ahead, we believe
value unlocking by divesting a stake in its core subsidiaries like L&T Finance
Holdings, L&T InfoTech and L&T IDPL will lead to huge value creation for
L&T’s shareholders. On the valuation front, the stock is trading at 28x and
21x its FY11E and FY12E standalone earnings. This is accompanied by huge
hidden value in the company’s subsidiaries. L&T is expected to deliver a
19% CAGR in earnings over FY10-FY12E.
¾ Lupin
With sustained growth for the last many quarters, a strong foothold in
developed markets through a combination of branded and generic
generics, a foray into niche segments such as Oral Contraceptives (OCs) in
the US, good growth in domestic branded formulations and a strong
balance sheet with ever reducing working capital cycle, we believe the
company has achieved the critical mass to warrant a higher multiple.
¾ Natco Pharma
With around three Para IV filings (including two FTFs), the company is
taking a calculated risk in order to penetrate the US generic space. Although
most of them are risky ventures, the company has cautiously tied up with
leading marketing players to mitigate litigation risk. One successful product
launch will change the prospects drastically. Being a niche player in the
oncology segment, Natco Pharma should fare well in domestic
formulations.
¾ Oil India
Oil India is engaged in exploration, development, production and
transportation of crude oil and natural gas. Going ahead, we believe Oil
India’s large reserve base and new discoveries would create value for
investors. Oil India is trading at 10.7x FY11E and 9.9x FY12E EPS of | 129.7
and | 140.6, respectively.

Page 73
2010 Flashback-The year that went by

Â Market wrap
¾ Broader indices performance- in line with our expectations

Technology and consumer discretionary stocks outperformed while
historical favourites like infrastructure, telecom and oil & gas
underperformed throughout the year. Financials picked up pace in Q3CY10
before correcting again in Q4. Performance of healthcare gathered
momentum in Q4CY10. Sectoral rotation, as a theme, was the flavour for
the year.
Despite being in a bull phase our markets ignored the sector leaders while
the second biggest company stole the show. Hindalco outperformed Tata
Steel, Idea was the top bet from telecom ahead of Bharti, Bajaj Auto and
Tata Motors were on the fast track compared to Hero Honda and Maruti,
Lupin overshadowed Sun Pharma and so on. This was the major reason for
moderate returns for indices.
On the midcap front, at one stage ~29% of BSE 200 constituents were
close to their yearly highs. However, due to a sharp correction at the end of
the year, the number fell to 8%.
The Sensex delivered ~15% returns in CY10 and is expected to close the
year at 20000+levels. This was in line with our anticipation where we had at
the beginning of the year set a target for CY10 at 19760 levels for the
Sensex.
FY10 was a year full of macroeconomic transformation. There were fairly

sharp and extreme moves like upward revision in GDP to over 8.5% (up 100
bps), hike in policy rate by 200 bps, inflation spiking to 13% before
moderating in H2CY10 and fiscal deficit dropping by ~150bps.
¾ 2010- Year full of records

FII flows hit record highs with an unprecedented flow for a single calendar
year. On the other hand, domestic fund managers had a forgettable year
with high volatility in fixed income flow and consistent redemption
pressures from equity AUM. Domestic mutual funds were net sellers in 10
out of 12 months — the highest ever in history. Trading volumes were tilted
towards the derivate segment, which again were at record levels. Scams
spooked investor confidence and the IPO market sucked liquidity at
elevated levels. Though off markets, Sachin signed off the year with his
50th test ton.
Global equities posted a positive return for 2010 despite European debt
woes, which brought in volatility periodically, monetary tightening by China
and geopolitical concerns over North and South Korea. On the domestic
front, corporate and political ethics were questioned pressurising the
market performance. Quantitative easing did flush in liquidity across the
globe. However, due to a combination of tight monetary policy, seasonally
light government spending as well as strong credit and some big-ticket IPO,
our markets are witnessing a liquidity crunch.
¾ Bid adieu 2010

The year full of action is about to close with positive returns, paving the
way for consolidation after a sharp run up from the early lows of 2009.
Going into 2011, macro indicators reinforce the structural strength of the
economy. However, the key villain in the form of rising commodity prices in
the short-term may play spoilsport. We thus “Welcome 2011”.

Page 74
Â Indian Indices : Returned 15% but better than other indices
Exhibit 138: Global index performance for CY10
20 16
15
15 12 13
8 8
10 7
5
(%)
0
-5 -3
-4
-10
-10
-15
MSCI EM
MSCI World
Germany
US
UK
India
Russia
China
Japan
Brazil
Source: Bloomberg, ICICIdirect.com Research Data as on 24TH December 2010
Â Sectoral : Banking and automobiles ruled 2010

Consumer discretionary outperformed and historical
favourites like infrastructure, telecom and oil & gas Exhibit 139: Sector index performance for CY10
underperformed throughout the year 250 214
192
200
150 123
91 93
78 74
(%)
100 60 68 68 67 59
32 33 29 40 29
50 27
8 2
0
-3 -3 -9 -28
-50
IT
Power
Auto
FMCG
Real estate
Oil
Helathcare
PSU
Metals
Banking
Capital Goods
Consumer Durables
CY10 CY09
Exhibit 140: Best and worst performers in BSE 200 universe for CY2010
Major Gainers - BSE 200 Major Lossers - BSE 200
Stocks Gain (%) Stocks Loss (%)
United Breweries 152.9 Bajaj Hindusthan 53.1
Titan Inds. 140.4 Punj Lloyd 49.8
M & M Financial 107.2 HDIL 48.2
UCO Bank 102.0 Suzlon Energy 47.5
IndusInd Bank 79.6 Aban Offshore 46.8
Vijaya Bank 79.1 Balrampur Chini 44.2
Cummins India 77.9 MMTC 41.0
Petronet LNG 73.2 NMDC 40.6
Cadila Health. 72.2 Indbull.RealEst. 39.3
Federal Bank 71.8 Welspun Corp 39.0
Source: Capitaline, ICICIdirect.com Research Data as on- 20-12-2010

Page 75
Â Annual performance
In CY10, Gold outperformed all other asset classes. Demand picked up on
account of flight-to-quality flows associated with the financial crisis and the
measures put in place to remedy it (namely, quantitative easing from the
world’s central banks), increase in gold holding by central banks and
currency wars. All this has led to gold making successive new highs in
CY10.
In equities, emerging markets have outpaced their developed counterparts
indicating the growing importance of developing economies as a preferred
Over a decade, gold has outperformed all asset classes.
investment destination. Emerging economies are poised to record strong
Gold prices have been driven by the investment demand for
growth, going ahead, that can be attributed as the major reason for this
gold. Indian equities have also out performed other asset
being the preferred investment destination last year. CY10 saw decade high
classes for the decade, albeit with higher volatility
inflows into Indian equity markets, which pulled the market back to its
previous highs made in the bull run of 2004-2007.
Commodities, as represented by Reuters/Jefferies CRB Index, have
performed well in phases but huge volatility makes them less attractive vis-
à-vis equities over a long period of time.
Exhibit 141: From a decade’s perspective Sensex and gold have delivered Exhibit 142: Post the global crisis, gold has out-performed Sensex from 1
same set of returns and outperformed other asset classes and 3 year perspective
500 406 407 80 66
400 60
300 238 224 40 26
167 15 14 9 14
200 113 20 8
%
100 59 46 40 0
1 4
0 -20 -1
-10 -11 -11
-2 -19
-100 -40
MSCI EM
MSCI EM
World
Gold
World
Gold
Crude
Crude
Sensex
Sensex
Index
Index
MSCI
MSCI
CRB
CRB
BSE
BSE
5 year 10 Year 1 Year 3 Year

Absolute returns as on 24th Dec 2010 Absolute returns as on 24th Dec 2010
In currency, the greenback has depreciated against all major currencies,

especially against the Japanese yen for the decade.
Exhibit 143: Performance of dollar against other currencies
USD INR USD GBP USD CNY USD JPY USD EUR
1 year -4 3 -3 -9 8
3 year 14 28 -10 -27 9
5 year 0 13 -18 -28 -9
10 year -6 -7 -20 -36 -32

Page 76
Â Sensex components
Sensex companies revenues have grown continuously Exhibit 144: Sensex companies revenues have grown at a CAGR of 25% over FY06-FY10
over the past five years, albeit, the pace has slowed
down in the last two years 1200000 50
46.4 45
1000000 40
800000 35
32.9
30
(| crore)
600000 25
(%)
23.5
19.0 20
400000 15
200000 10
7.1
5
0 0
FY06
FY07
FY08
FY09
FY10
Revenues Revenue growth (RHS)
Source: Capitaline, ICICIdirect.com Research For Banks- Revenues is NII
Over the last five years, Sensex companies have shown a Exhibit 145: Sensex companies net profit CAGR of 18% over FY06-FY10
positive growth for four years with the exception of FY09
when profitability growth was negative. FY10 has seen a 160000 40
35.3 36.3
revival in profit growth with a 17% growth in net profit 140000
30
143049
133739
120000 23.5
122452
20
100000 16.8
(| crore)
98133
80000 10
(%)
72546
60000
0
40000
-8.4 -10
20000
0 -20
FY06
FY07
FY08
FY09
FY10
Net Profit Net profit growth (RHS)
Source: Capitaline, ICICIdirect.com Research
The EBITDA margin has declined during FY06-FY09 while Exhibit 146: Sensex companies (ex-bank) EBITDA & EBITDA margin (%) trend
FY10 has shown signs of a revival with a 140 bps YoY
improvement 200000 25
180000 22.9 23.3
160000 20.7 20
140000 18.0
16.6
120000 15
(| crore)
182115
100000
(%)
164653
156889
80000 10
125647
60000
91602
40000 5
20000
0 0
FY06
FY07
FY08
FY09
FY10
EBITDA EBITDA margin (RHS)
Source: Capitaline, ICICIdirect.com Research

Page 77
Â Government flip flop

¾ Hits
Government collection receipts from 3G
Collection from 3G spectrum
Spectrum The government has collected | 67,719 crore from 3G spectrum sale over
the budgeted target of | 30,000 crore. Simultaneously, the government’s
(| crore)
collection from Broadband Wireless Access (BWA) has been | 38543 crore,
Total License fee for Pan-India Spectrum 16751
which is higher than the expected ~| 17000 crore.
Total Government Collection 67719
Disinvestment
The government has already collected | 20737 crore from disinvestment in
SJVN, Engineers India, Coal India and PowerGrid. Further disinvestment
from SAIL, ONGC, Hindustan Copper and IOC, which are lined up before
April 2011, would result in collection of | 34,700 crore. This is higher than
the budgeted estimate of | 40,000 crore.
Exhibit 147: Disinvestment proceeds (| crore)
Amt raised by
Company Month of Issue Issue Size Govt
REC Feb-10 3,530 875
NMDC Mar-10 9,930 9,930
SJVN May-10 1,063 1,063
Engineers India Jul-10 960 960
Coal India Oct-10 15,199 15,199
Power Grid Nov-10 3,721 3,721
MOIL Dec-10 1,237 1,237
SCI Nov-10 1,164 580
Total Raised till Dec-10 41,465
Source: Ministry of disinvestment, ICICIdirect.com Research
Government reforms in petroleum prices

Deregulating petrol prices is a progressive decision that the government
has taken towards oil reforms. The government took a one-time increase in
petroleum product prices and also intends to deregulate diesel prices in
future. This would help them reduce the subsidy sharing burden. As per
FY10 numbers, petrol under recovery was | 5151 crore, which forms
approximately 11% of total under recoveries of sensitive petroleum
products.
¾ Misses
Roads
NHAI's awarding activity has been sluggish in the second half of CY10 due
to administrative delays, lack of clarity about NHAI chairman's appointment
and bottlenecks associated with land acquisition. After an impressive start
to the year when ~3000 km were awarded till July 2010, the awarding
activity has slowed down considerably and ~4000 km has been awarded till
date as against 11000 km target for FY11. The road construction activity has
also been disappointing so far in FY11 and only ~860 km has been built till
October 2010 as against the target of 2500 km for FY11. Considering the
present rate of construction of 4.7 km/day, the achievement of the
ambitious target of 20 km/day seems a long way off.
Exhibit 148: Road project - A miss definitely
FY09 FY10 FY11YTD
Completed (km) 2,205.0 2,450.0 860.0
Awarded (km) 643.0 3,165.0 4,019.0
Completed (km per day) 6.0 7.4 4.1
Source: NHAI, ICICIdirect.com Research

Page 78
Power
In FY11, the total capacity addition target stood at 16970 MW, of which only
6674 MW has been achieved till November 2010. We believe only 8000 MW
of plans will be commissioned in the next four months due to
environmental clearances and delay in supply of equipment. The
government has revised its 11th Five Year Plan target from 78700 MW to
62000 MW due to the delay in capacity addition by PSUs. However, we
expect only ~48000 MW to be commissioned in the stipulated time. In
December 2010, the central transmission utility PowerGrid Corp has
lowered its capital expenditure estimate to | 11900 crore (down by | 1000
crore) for the current fiscal, mainly due to a delay in commissioning of
NHPC's Subhansiri hydroelectric power project in Assam. However, with
capacity addition targets being missed by a margin, a further pruning in the
total capex cannot be ruled out.
Slow action in corporate governance

The government’s slow response towards many scams in CY10 is certainly
a miss. Many scams (2G Spectrum, Commonwealth Games, PSU home
loan scam and many other land scams) have surfaced.

Page 79
Â Sectoral hits and misses
Exhibit 149: CY10

Hits Misses
Banking Shipping
Base rate implementation bring transparency to Delay in disbursement of existing subsidies &
pricing system announcement of new subsidy scheme for Indian
shipbuilding companies
Oil & Gas Retail
Increase in APM gas prices and deregulation of Delay in easing of FDI norms to permit FDI in multi-
petrol prices brand retail
Sugar Power
Revised ethanol sale prices for OMCs at | 27/litre Environmental issues and objections by the
from | 21.5/litre previously ministry of environment in acquisition of land and
mining in no go areas have been barriers to
augmentation of power capacity generation
Compulsory 5% blending of ethanol with petrol from
October 1, 2010
Allowed sugar exports of 1.5 million tonnes to be

exported until March, 2011 (1 million tonne under
ALS Scheme and 0.5 million tonnes under OGL)
Telecom Mining
Successful bidding and allocation of 3G and BWA No clarity on implementation of proposed mining
was a big hit for the telecom sector bill, which seeks 26% profit sharing with local
people
Capital Goods
No clarity and delay on implementation of import
duty on purchase of foreign power equipment
Construction
Slower road awarding activity by NHAI in H2CY10
due to administrative bottlenecks led to a
slowdown in road segment order inflow
Slowdown in Andhra Pradesh's construction

activity due to Telangana issue led to slower
execution by construction players having exposure
in the state
Textiles
Suspension of technology upgradation funds
scheme (TUFS)
Shipping
Delay in disbursement of existing subsidies &
announcement of new subsidy scheme for Indian
shipbuilding companies

Page 80
Â How to play equities in 2011? – The SIP way…

The year 2011 may not be as smooth a sailing for markets as it was in 2009
and 2010. Volatility is expected to increase and with valuation on the higher
side, the best investment approach should be to buy systematically in a
staggered manner without bothering about the market levels.
Timing is important in equity markets but nobody can time it. So, what is
the best way to approach the market?
If fundamentally market valuations are looking cheap/reasonable (like lower
historical average P/E ratios/high dividend yield as compared to bond
market/lower market cap to GDP ratio etc.), then investors should put in
lump sum without bothering about recovery. However, if markets are
trading at above average valuation multiples (current scenario), then
investments should be staggered and continued despite market volatility.
Over a period of time, investment, using this strategy, would reap better
benefits.
As we have seen in the last three years, if somebody had invested lump
sum in the end of CY07 or early CY08 (fundamentally higher valuation
multiples), he would have hardly got any returns till date. However, if the
same investment would have been staggered over 2007, he would have got
9% annualised returns in the last three years while if he had invested in a
staggered way in CY08, he would have got annualised returns of 17% in the
last two years. If he had started staggered investment from CY07 itself
considering valuations on the higher side, he would have got around 15%
annualised returns till date.
Exhibit 150: Annualised return if invested at highest, average or lowest levels of respective
calendar year
150
130
Annualised return (%)
110
90
70
50
30
10
-10
CY01
CY02
CY03
CY04
CY05
CY06
CY07
CY08
CY09
Worst Returns Avg returns Higest return
Exhibit 151: Value of |1 lakh invested in last 10 years at respective market levels
Value of | 100000 invested at each calendars peak level 4000000 3924096
in the last 10 year (Cost: | 1000000): | 2375317 3500000
3030794
Amount in |
3000000
Value of |. 100000 invested in a staggered manner during 2375317
2500000
the whole calendars year in the last 10 years (Cost: |
1000000): | 3030794 2000000
1500000
Value of |. 100000 invested at each calendars lowest 1000000
level in the last 10 year (Cost: | 1000000): | 3924096
Peak level
Staggered
Lowest
level

Page 81
Pankaj Pandey Head – Research pankaj.pandey@icicisecurities.com
ICICIdirect.com Research Desk,

ICICI Securities Limited,
7th Floor, Akruti Centre Point,
MIDC Main Road, Marol Naka
Andheri (East)
Mumbai – 400 093
research@icicidirect.com
Disclaimer
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transmitted to, copied or distributed, in part or in whole, to any other person or to the media or reproduced in any form, without prior written
consent of ICICI Securities Ltd (I-Sec). The author of the report does not hold any investment in any of the companies mentioned in this report. I-
Sec may be holding a small number of shares/position in the above-referred companies as on date of release of this report. This report is based on
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document or solicitation of offer to buy or sell or subscribe for securities or other financial instruments. Nothing in this report constitutes
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ICICI Securities Limited

ICICIdirect.com | Equity Research

We expect the CY11 Indian equity performance to be growth induced and

We do not expect a de-rating in global confidence on India. Hence, we

We have a negative bias on real estate (increasingly unaffordable), telecom

In commodities, we believe crude (restricted supply, 39% demand drivers

ICICIdirect.com | Equity Research

Â Built in 16% upside for CY11- in our base case

Sensex EPS 1414 1,363 1,209

Among sectors, banking, IT and oil & gas constitute 54%

900 826 158 172

Source: Bloomberg, ICICIdirect.com Research

Oil & Gas

Source: Bloomberg, ICICIdirect.com Research Source: Bloomberg, ICICIdirect.com Research

ICICIdirect.com | Equity Research

India - Likely to retain premium

ICICIdirect.com | Equity Research

Valuation- Earnings growth the key prerogative

Developed Markets Brazil Russia (RHS) China (RHS)

Source: Bloomberg, ICICIdirect.com Research

Consistency getting rewarded

Exhibit 6: Higher visibility, better the premium multiple

Trailing PE 1yr fwd P/E 2yrs fwd P/E

Source: Bloomberg, ICICIdirect.com Research

ICICIdirect.com | Equity Research

Â …and so are other valuation parameters

Exhibit 9: India vis-à-vis other markets in terms of PEG ratio

0.49 0.45 0.43 0.42

Source: Bloomberg, ICICIdirect.com Research

ICICIdirect.com | Equity Research

Valuation at higher end does not mean euphoria:

2.0 Exhibit 10: Market capitalisation to GDP ratio

Ratio > 1.15 Significantly Overvalued

Â Sensex vs. G-sec yields indicate equity valued fairly in short

CY06 CY07 CY08 CY09 CY10

Source: Bloomberg, ICICIdirect.com Research

ICICIdirect.com | Equity Research

Â Large/small/mid cap PE divergence

Mid-caps to take time to recover but are turning attractive

Exhibit 12: Midcap discount hovering around its historical averages

Source: Bloomberg, ICICIdirect.com Research

Source: Bloomberg, ICICIdirect.com, Research Source: Bloomberg, ICICIdirect.com, Research

ICICIdirect.com | Equity Research

Fund managers survey

ICICIdirect.com | Equity Research

Majority of them believe India may continue to outperform 40

ICICIdirect.com | Equity Research

Oil and Gas

ICICIdirect.com | Equity Research

Liquidity- So far so good

FII DII Nifty (RHS)

Source: Bloomberg,, ICICIdirect.com Research

Â Institutional holding pattern

CY08 CY09 CY10 CY08 CY09 CY10

Source: Capitaline, ICICIdirect.com Research Source: Capitaline, ICICIdirect.com Research

ICICIdirect.com | Equity Research

Source: Capitaline, ICICIdirect.com Research Source: Capitaline, ICICIdirect.com Research

Domestic insurance companies holding pattern in Indian stocks

Source: Capitaline, ICICIdirect.com Research Source: Capitaline, ICICIdirect.com Research

CY08 CY09 CY10 CY08 CY09 CY10

Insurance holding BSE Midcap (RHS) Insurance holding BSE Smallcap(RHS)

Source: Capitaline, ICICIdirect.com Research Source: Capitaline, ICICIdirect.com Research

FII flows in equity markets expected to be strong