Looking forward to 2012

Editors Note

t was one of Murphys laws at work in the Indian economy in 2011: everything that could go wrong, did. Inflation, high interest rates, costly fuel, falling industrial output, serial scams, weak rupee, government indecision, the list could just go on.

Some of these problemsweak rupee, high commodity prices, foreign fund outflowswere a fallout of global events, but most others were self created. Only to be expected, these developments hurt stock market sentiment and shattered the myth that a relatively strong rate of economic growth alone was good enough to attract foreign investments. Benchmark indices are down over 20% for the year, and India ranks among the worst performing markets. Understandably, there is an air of gloom as investors get ready to welcome the New Year. Most investors feel things could get worse before they hopefully start improving by the middle of next year. Such despair need not necessarily be a bad thing; more damage is done by an unduly positive outlook. As legendary investor Sir John Templeton once remarked: bull markets are born in pessimism, grow on skepticism, mature on optimism, and die of euphoria. It may be premature to talk about a bull market as investors are yet figuring out the bottom. Already, many companies have paid the price for their excesses in the previous boom, and many more are likely to, in the coming days as economic conditions get tougher. But therein may lay the opportunity. If as widely predicted, things do worsen in the short term; there will be many good companies available at distress valuations to choose from. Among the basic rules of the stock market is that your returns depend on the money you are willing to risk. Global eventsmainly those in the Eurozonewill decisively influence the course of our market in 2012. Markets across the globe, including India, are likely to be volatile for some more time. There are no easy returns to be made for now, as the problemsboth local and globalcall for painful and longer term solutions. But just as one shouldnt be hoping for miracles, there is no reason to be too depressed either. India has been in similar or even worse situations in the past, and emerged from it honorably. But the government and the industry have to get their act together, starting with fixing their respective balance sheets. Calendar 2012 could well turn out to be a year of consolidation, as government and the industry try to regain their credibility, and figure out a more meaningful and sustainable growth model.

Events that moved the market

in 2011

1. Market sways to jail house rock 1. The arrests of former Union Telecom Minister A Raja, DMK leader Kanimozhi, corporate executives and bureaucrats in the 2G spectrum scam unnerved the stock market. Ideally, the move should have brought cheer, as it underscored the rule of law in the country. However, investors were worried that too many skeletons tumbling out of the cupboard would do more harm than

victory in Kolkata and the wins in Kerala and Assam raised hopes that the UPA would be able to pursue reforms more aggressively. However, Mamata now seems to have taken over from Karunandhi in throwing tantrums. 4. Flight to safety: Gold keeps hitting new highs With global equity markets faltering, investors

good to sentiment.

worldwide shied away from risky assets and parked funds in the yellow metal, considered as 2. Union Budget 2011-12 - High hopes Mr a safe haven against devaluing currencies. This Mukherjee! pushed the gold prices to an all-time high of Rs 29433, per 10 gm, turning out to be the best asset The market was enthused by Finance Minister class for investors with an annual return of over Pranab Mukherjees commitment to restrict fis- 40%. cal deficit to 4.6% of GDP in 2011-12. For that, Mukherjee would have had to take some tough 5. RBIs answer to inflation: A continuous decisions on subsidies. Thanks to a combina- dose of rate hikes tion of adverse global events and some damaging populist measures like the Food Security Bill, Inflation made headlines throughout the year, there is no way the target can be achieved. with soaring prices of food and essential commodities threatening a social unrest. To tackle 3. Assembly elections- the rise of Didi and the problem, RBI hiked rates by a total of 300 Amma basis points, in phases. Unfortunately, the rate hikes did little to quell inflation. Market cheered the defeat of Karunandhi-led DMK in Tamil Nadu, as it meant less bargain- 6. Standard & Poors downgrades Ameriing power for the meddlesome ally in the UPA cas sovereign debt government. Also, the Mamata-led Trinamools

Credit rating agency, Standard & Poors for the first time downgraded US AAA credit rating by one notch to AA plus. According to S&P, American governments fiscal consolidation plan wouldnt suffice to stabilize the governments medium-term debt. The move rattled markets across the world. 7. Eurozone crisis-Will Greece default or not? Midway through the year, the focus shifted from USs worsening public finances to the debt problems of Eurozone members. The trouble started with Greece and then spread to Italy, Ireland, Portugal, and Spain. Technically, Greece has averted defaulting on its bonds, but the Euro Debt Crisis as the regions problem has come to be know as, is far from over. 8. The Mining Bill and the mining scams The Mining Bill triggered a sell-off in metal and mining stocks, as these companies would now have to share a portion of the profits with the local population. But this was not as bad as the mining scams that came to light in Karnataka and later on, in Goa. The Karnataka mining scam resulted in Supreme Court restrictions, which impacted raw material supplies besides tarnishing the reputations of a few leading companies. 9. Rupee hits a record low to the dollar

Wealth Creators Amtek India Alfa Laval UTV Software Gujarat Fluorochemicals VST Industries Wealth Destroyers GTL KGN Industries Kiri Indus. Jai Balaji Inds. ICSA (India)
*BSE 500 stocks / *Prices as on Dec-23

%Gain 169 82 77 74 73 %Loss 91 90 89 88 87

11. Pledged shares sell-off sends stocks crashing Promoters of many mid-sized companies, who had raised money by pledging a big chunk of their shares found themselves in trouble because of the market downturn. As share prices weakened, the lenders with whom the shares were pledged, asked promoters to deposit additional collateral. Failure to do so in many cases prompted lenders to sell the shares, sending the stock prices crashing. 12. Policy paralysis-government on the backfoot The government tried to break free of the policy deadlock, by pushing through Foreign Direct Investment in retail. The market cheered the move, viewing it as a precursor or many more such reforms. But the celebrations were short-lived, as the government had to backtrack on its retail policy in the face of stiff resistance from the opposition parties.

The Indian rupee touched a life time low of 54.2 to the dollar. A key driver was the strengthening of the dollar against most currencies, as panicky investors switched from the Euro to the dollar. But the RBI aggravated the slide in the rupee Global Markets YTD Returns when it publicly said that it would not defend the currency. European Markets US Markets Nasdaq -3% CAC -20% 10. IIP falls as high interest rates bite: S&P 500 -1% DAX -16% Dow 5% FTSE -8% Rising interest rates may not have been able to tame inflation, but they certainly affected investments into capital intensive sectors. And that Asian Markets showed in the steadily dropping index of indusNifty -23% -23% trial production. The figure for October was by Sensex Nikkei -19% -23% far the worst, declining to a negative 5.1%--the Shanghai Straits Times -17% Taiwan -21% first decline in more than two years Kospi -10% Hang Seng -21% Compiled by: Harsha Jethmalani

India Inc

Events that made headlines in

Karnataka/Goa mining scam The Lokayukta report, filed by Justice Santosh Hegde, unveiled an illegal mining operation in Karnataka, costing chief minister B S Yeddyurappa and mining minister Janardhana Reddy their jobs. The loss to the exchequer was estimated at Rs 16,000 crore, and companies like Adani Enterprises and JSW Steel were accused of bribery and unethical corporate behaviour. The Supreme Court banned mining in Bellary and its surrounding areas, starving metal and mining companies of crucial raw materials. However, it was not the end of mining scams in India as the Shah Commission found irregularities pertaining to the mining industry in Goa as well. Corporate executives in 2G scam The controversy came to light last year with the infamous Nira Radia tapes, and India Inc is still feeling the tremors of the 2G scam. Executives from DB Realty, Unitech and Reliance Communications were arrested for alleged complicity in the scam and denied bail for many months. Cyrus Mistry named successor to Ratan Tata Ratan Tata had for years said that he wanted someone young, ideally in his/ her early-to-mid 40s to take his place at the helm of the Tata group, and eventually Cyrus Mistry, heir to the Shapoorji Pallonji empire, was considered worthy of the baton. The announcement came late November, taking the corporate world by surprise. The otherwise reclusive Mistry became a household name, with everyone trying to find out more about the man who pipped Noel Tata to the post.

FCCB Friend or foe? Companies which issued foreign currency convertible bonds or FCCBs during the boom years are now faced with the dreaded prospect of having to redeem the bonds when they mature. The current market price is way below the conversion, making it unprofitable for the bondholders to convert their bonds into equity. Apart from a battered stock market, the sharp depreciation in the rupee has resulted in companies having to shell out a higher amount to redeem these bonds. The rupee has fallen over 18% since July due to a worsening debt crisis in the eurozone, high inflation in the country and other weak macro fundamentals. BP buys 30% in RIL gas blocks In the biggest FDI deal in the country, BP paid $7.2 bilion for a 30% stake in 21 oil & gas blocks of Reliance Industries. However, the deal was the only bright spot in what otherwise was a tough year for Reliance Industries. The company has been accused of inflating the development cost of the blocks, which would lower the governments share of profits. Cairn Vedanta deal finally gets the green light Cairn Energy Plc would have never anticipated the ordeal it would have to face in selling its stake in Cairn India to Vedanta. After a series of regulatory hurdles, the USD 6 billion deal was finally cleared, almost a year after the deal was signed. The main point of contention was related to royalty payments for Cairn Indias Rajasthan oilfields, where ONGC holds 30%. Rising NPAs Banks worst nightmare With 13 consecutive rate hikes amounting to 300 basis points, banks were bound to feel the pressure sooner than later. Rising interest costs burdened companies, but banks bore the brunt as their non-performing assets rose at an alarming rate, causing them to set aside more money to meet potential defaults. Analysts tracking the banking sector reckon that non-performing assets (NPAs) of banks could rise further in the coming months. End of good times for aviation Its been a turbulent time for the countrys aviation sector. The age of Rs 0 tickets seems to be

over, as airlines grappled with expensive aviation turbine fuel, huge debts and price wars. Among private carriers, the flamboyant Vijay Mallyas Kingfisher Airlines had the worst time. The rise of black gold Oil marketing companies let the country know they were taking matters in their own hands right in the beginning when they hiked petrol prices by close to Rs 3 in January. But after that, OMCs were missing in the picture despite international crude prices hitting its lifetime high. However, they did come with a bang mid-May, hiking petrol by a whopping Rs 5. Over the year, the price of petrol has risen by almost Rs 20, but the under recovery woes of OMCs continue. Not only that, the hot topic of petrol deregulation continues to be a sore point between UPA allies the Congress Party and Mamata Banerjee led Trinamool congress, the latter going to extent of threatening to quit the alliance. Labour strike at Maruti Production at Maruti Suzukis Manesar plant was repeatedly disrupted throughout the year due to labour unrest. It started early June when a few workers called an illegal strike to demand the formation of a separate union for the

Manesar plant employees. Things quickly went downhill from there and though the strike has been resolved, their demand of separate union remains unfulfilled. In a phase of slow growth, Indias largest auto maker has faced severe production cuts and loss in turnover due to this strike. Savings rate deregulation D Subbarao gave the Indians a diwali gift this year - freeing up interest rates for savings deposits across the country. This means that banks can individually set rates according to the market situation. This move allowed many of the newer private sector banks to attract new customers by offering them much better savings account rates than is being offered by the larger players. New Takeover Code The much awaited overhaul of the Sebi Takeover Code finally came through this year. Among the key features, the minimum threshold level for making an open offer was raised to 25% from 15%.

Compiled by: Anisha Mappat

the wrong reasons

Stocks that made headlines in 2011 for

Calendar 2011 would easily rank among the terrible years for equity investors in the Indian stock market. Things were already bad enough due a combination of local and global problems. And a few companies compounded their shareholders misery by getting embroiled in controversies--mostly self-created and partly due to a tough business environment. Here is a list of stocks that made headlines in 2011, but for all the wrong reasons. Mphasis: The software services firm did not disclose that a portion of revenues from parent HP in an earlier quarter was a one-off income. Incensed investors dumped the stock, and many equity analysts downgraded it, citing poor corporate governance as one of the key triggers. One broking firm even accused the company of deliberately wrecking the stock price so as to delist on the cheap in the coming months. SKS Microfinance: Hailed as a blue-chip in the making when it listed in August last year, the microfinance lender turned out to be a riches-to-rags story for its shareholders. The Andhra Pradesh governments curbs on the microfinance industry wrecked SKSs bottomline, since that state was its largest market. Complicating matters for SKS was the power struggle within the board which eventually culminated in the ouster of founder and chairman Vikram Akula. GTL, GTL Infra: Nobody knows what triggered the collapse in the share prices of GTL and group company GTL Infra in June. The companys weakening fundamentals was the starting point. But that alone could not have brought down the GTL stock by 62% in a single trading. It is very likely that the promoters would have pledged a big chunk of shares outside of what was officially disclosed to the stock exchanges. Both companies balance sheets look as though they were in a train collision. Negotiations with lenders are on. Crompton Greaves: The engineering majors first quarter earnings fell short of market expectations by a huge margin. But what angered investors even more was that former managing director and now non executive-chairman SM Trehan selling his entire holdings just a few weeks before the disappointing numbers. The

stock crashed amid murmurs of insider trading. Then there was also the issue of the corporate jet purchased using shareholder funds. Promoters tried to restore confidence by buying shares at lower levels, but the damage had already been done. State Bank of India: Indias largest lender stumped investors in May when its fourth quarter net profit plunged due to a steep increase in provisioning for bad loans. Analysts accused the bank of shoring up its profits in the earlier quarters by not making adequate provisions when it should have, and then providing everything at one go so as to meet the RBIs September 2010 deadline for bad loan cover. Adding to the banks woes, the government has been dragging its feet on infusing capital in the bank through a rights issue. This prompted talk in the market that the government was deliberately delaying funds to SBI so that private players could benefit. Pipavav Defence(formerly Pipavav Shipyard): The company issued 1.05 preferential warrants to high-profile proprietary investor Rakesh Jhunjhunwala just a few days before announcing a joint venture with state-owned Mazgaon Dock for building warships and submarines. Pipavavs business rivals shot off a letter to the Defence Ministry questioning Pipavavs track record and execution skills. Stock market players alleged that Pipavav had roped in Jhunjhunwala to improve the stocks perception among the investor community and boost its valuation. Reliance Industries: The company is accused of inflating its expenses for developing the KGD6 block, something that would delay the governments payoff from the block as it is entitled to its share of profits only after Reliance recovers the development costs. Already, output at the gas block has plunged and RILs rivals allege that the company is waiting for global gas prices to move up before ramping up production. The RIL stock has also been weighed down by the ongoing probe into alleged insider trading in Reliance Petroleum shares. Everonn Education: The companys managing director P Kishore was arrested for allegedly

Dhanlaxmi Bank: One of the labour unions of the bank raised questions about the banks DB Realty, Unitech Reliance Communica- financial health and alleged mismanagement by tions: All three stocks fell following the arrest the top brass. The management strongly refuted of key company executives for alleged involvethe allegations, but the stock price is yet to fully ment in the 2G telecom scam. recover from that bout of panic selling. So far in 2011, the stock is down 58%. Sun TV: Allegations that the company had benefitted from Dayanadhi Marans largesse Kingfisher Airlines: It has been a bad year when he was telecom minister (Dayanidhi is for aviation companies in general, because of the brother of Sun group promoter Kalanithi high crude oil prices and fierce competition. Maran) triggered a sell-off in the stock. Sun TV UB group chairman Vijay Mallya claims the is alleged to have uploaded data using illegally media exaggerated the provided ISD connections. To make matters probworse for Sun, the AIADMKarch rival of DMK of which Dayanidhi Maran is a member-- came to powlems er in the state. This unwith his airdermined the Sun groups hold on liner, but the fact is Kingfisher has suffered the film industry and also its near monopolistic more than its private sector peers. It is strugposition in the cable TV business. gling to pay its daily fuel bills, has lost many pilots and has cut down on the number of flights. Reliance Infra: The company was barred by Sebi from the stock market till 2012. The case Maruti Suzuki: Maruti made the maximum related to the routing of fund raised abroad to headlines this year, thanks to persistent labour buy shares of companies belonging to the Anil problems at its Manesar plant. The periodic Ambani group. strikes hit production in a year when car sales were anyway slowing down because of high inAdani Enterprises, JSW Steel: The entire terest rates and costly fuel. The company finally steel sector was hit by the Supreme Court orresolved the issue but it could be a while before der banning iron ore mining in Karnataka. But sentiment for the stock improves. Maruti shares Adani Enterprises and JSW Steel fared worse are down 34% this year so far. compared to peers, having to put up with repuCompiled by: Santosh Nair

attempting to bribe an Income Tax official after having understated taxable income. The stock nosedived as institutional investors fled. The Dubai-based Varkey Group later bought a strategic stake in the company at a huge premium to market price..

tation loss in addition to financial loss. The Lokayukta Panel alleged that the two companies paid bribes and engaged in unethical corporate behaviour to get around Mining regulations.

PEOPLE WHO WERE IN THE HEADLINES

IN 2011

A Raja, former telecommunications minister: The long arm of the law finally caught up with the lawyer-turned-minister, who is among the main accused in the 2G telecom spectrum. He is yet to get bail. MK Kanimozhi, DMK leader and Rajya Sabha MP: Her Oh-I-am-a-woman-and-amother argument for bail failed to cut ice with the Delhi High Court judge. One of the accused in the 2G spectrum scam, she had to spend six months in Tihar jail before getting out on bail. Shahid Balwa and Vinod Goenka, promoters of DB Group Companies, Sanjay Chandra, MD Unitech Wireless: Had to spend seven months in jail for alleged involvement in the 2G spectrum scam. Cyrus Mistry, Tata Group chairman-inwaiting: Mistry who? was the first question that everyone asked when the younger son of Pallonji Mistry, an Irish-Parsi construction tycoon, was named successor to the Tata empire. The 43-year old chairman of the board of Shapoorji Pallonji Group and Afcons Infrastructure had always maintained a low-profile while on the board of Tata Sons despite being the majority stakeholder. Vikram Akula, founder, SKS Microfinance: Was ousted from the board of SKS Microfinance, the company that he founded. Maybe he can take solace and inspiration from the fact that the late Steve Jobs too suffered a similar ignominy in his career. Vijay Mallya, chairman, Kingfisher Airlines and UB Group: It is almost turning to be a case of riches-to-rags for the flamboyant liquor-baron as he struggles to keep Kingfisher Airlines(KFA) airborne. Weighed down by huge debt, KFA has reduced its staff, cut down on flights and is trying to get banks to recast its loans. UK Sinha, chairman, Sebi: It has been a not-so-memorable first year in office for the soft-spoken Sinha who succeeded outgoing Sebi

chairman CB Bhave. Former Sebi-board member KM Abraham accused Sinha of trying to influence him in some high-profile cases being investigated by the regulator. D Subbarao, governor, Reserve Bank of India: He would have had little choice given the problems facing the economy, but Subbarao ended taking much of the criticism for RBIs unpopular decisions, namely rate hikes. Anil Ambani, chairman, Reliance Group: The year started on a low note for the flamboyant Ambani sibling, having to pay a penalty in his personal capacity under a consent settlement with Sebi. It ended on an even lower note, with UKs Financial Services Authority alleging that Anil Ambani was aware of the investment vehicle set up overseas to illegally route money into his companies. NR Narayana Murthy: The man who started it all - IT outsourcing, offshoring et all, finally stepped down as the head of Infosys this year. His name will go down in theannals of corporate history in India as a rare combination of visionary and able administrator rolled into one. More than everything else, Murthy will be remembered for fostering the culture of companies sharing their wealth with employees through stock options. TV Mohandas Pai: The then HR Head at Infosys, who was considered as a front runner for a top job amid a leadership reshuffle earlier this year, quit abruptly in April, even questioning the CEO selection process at the tech bellwether. Pai said he was not interested in the CEOs position, but claimed that Narayana Murthy had offered him the post. Murthy denied such an offer, thereby unwittingly exposing the power struggle at the top level. Although he himself denied later that he was interested in being the CEO, he probably lost out in the internal power struggle and was left with no choice but to step down. Compiled by: Padma Venkatraman

Top brokerages crystal gaze what 2012 may hold for the Indian

market/economy

Goldman Sachs: Inflation to come off in 2012, allowing a significant easing of monetary policy. We build in 150 bp of rate cuts in 2012. On the Rupee, we see risks of further depreciation in the near term given the contagion from the Eurozone, but some valuation support over a 12-month horizon. Our 3, 6 and 12-month USD/INR forecasts are now at 53.0, 50.7 and 49.0 respectively. Citi: The upsides are likely to remain front-loaded. Sensex year-end target at 18400; 5520 on Nifty. Top picks for 2012 include Axis Bank, SBI, Tata Motors, Jindal Steel & Power and Dr Reddy. Macquarie: We expect the index to drift to 14,000, a level that builds in: Slower economic growth of 6.9 per cent in FY13, A blended 12-month forward earnings growth of 8 per cent Continued cost pressures from higher power, railway freight and wage costs A weak investment cycle and outlook for demand which would likely put pressure on corporate earnings, which the market is yet to build in Continued political stalemate on the domestic front and ongoing problems in Europe, which look far from being resolved, would keep investor sentiment subdued. CLSA

Governance a drag but several negatives now built-in. Consumer demand slowing Weights lowered in consumer discretionary (autos) and banks; added to IT services. Top picks are ITC, Dr Reddys, M&M and ICICI Bank. ITC and Dr Reddys appear good on earnings visibility. M&Ms volume sales have been robust so far and we expect similar trend to continue. Bank of America Merrill We expect FY13 GDP to slow to 6.8% and consensus to cut GDP forecasts over the next few months. GDP growth in the next few quarters is likely to come even lower at around 6.5%. We continue to expect earnings downgrades, led by slowing sales and sustained margin pressure from rising labor and interest costs. We expect the bottom-up Sensex EPS of Rs1,275 to be downgraded to Rs1,200 Kotak Securities: GDP growth likely to disappoint without proper corrective steps Current account deficit could come under pressure given inexplicable exports Valuations are inexpensive but mask wide disparity across sectors Still hedging our bets given low clarity but taking a more positive view

Compiled by: Sagar Salvi

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