Research Speak Week Ended – 10th July, 2010

Market Commentary
Q1FY11E: earnings may come out with a mixed bag in most of the sectors

From this week onwards, first quarter results of FY11 are likely to kick in. This quarter results may carry a mix bag
in terms of performance vis-à-vis valuations. Let us take into account this fact that historically, first quarter
results have been unable to live up to consensus expectations in most of the cases. First, not only in India but
across the world it has been observed that after the year end performance in Q4, some element of complacency
sets in sales and marketing department as Q4 always witness hectic effort on everybody’s part to meet year end
targets. After meeting them either by genuine revenue booking or aggressive accounting policies, it becomes
slightly difficult to exceed them on sequential terms. Hence compared to Q4, Q1 results are generally less
exciting. Secondly, in India’s case, base effect is going to play a very big role in Q1 lackluster performance.
Q1FY10 was an exceptionally good quarter due to base effect. But to expect the same performance compared to
Q1FY10 would be a little difficult. Secondly, India’s benchmark index Sensex or Nifty has a sizeable contribution
from metals, cement, IT. These sectors are likely to report a less impressive set of numbers. Energy companies
are likely to report good set of numbers. But most of this upside is already captured in valuations. Even IT
companies are trading at higher than comfortable kind of valuation range. Among frontline sectors, capital goods
and infrastructure sectors are likely to post good set of numbers. Additionally valuations are also not very
excessive. But overall weightage of construction and infrastructure is roughly 13%. Pharma is a sector which is
again going to post good set of numbers. But overall weight age in Sense or Nifty is negligible.

Hence there may be a correction in broader indices in coming days as more and more frontline companies
announce their numbers. But there will be silver line among all these as many midcap companies are likely to
post very good set of numbers both on sequential and yearly basis. These companies are likely to reap rich
benefits of operating leverage. Most of them have reduced their debt substantially in recent times. Many of them
benefit directly or indirectly from huge improvement in consumer’s purchasing power. These companies are
likely to resume their northbound journey and impending correction may provide a very good opportunities.

Hence investors are advised to keep track of our delivery based stock recommendations in recent times.

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Stock and Sector Update

TV-18 and Network-18 restructuring

On the 7th of July Network18 Group declared its restructuring plan. The plan was introduced to simplify the
structure of the business, to remove cross holdings, provide synergy benefits in terms of ads and subscription.
This resulted in emergence of two focused entities.
The group currently has five listed entities; the plan is to eventually bring that down to two. The New TV 18
business will have the broadcasting business. All future TV channel launches will be done by this entity. The New
Network 18 will include all the other businesses including the Web and publishing business. Earlier this week, the
board of group company Viacom18 announced a voluntary offer to buy back shares of the AIM listed The Indian
Film Company from shareholders. Once bought back, Network18 will sell its stake in The Indian Film Company to
Viacom18, to its joint venture with Viacom.

OLD STRUCTURE

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 NEW STRUCTURE

The companies Swap Ratio has been summarized below in Table 1

Table1: SWAP RATIO

COMPANY NEW SHARES

1 share of TV18 0.68 share of new TV18 + 0.13 share of

Network18
1 share of Retain 1 share of Infomedia18 + 0.14
Infomedia18 share of Network18

After the announcement the share prices of TV18 fell as the market was expecting a better swap ratio. However
the shareholders of Infomedia 18 stand to benefit as they get to retain a share in their core business and get 0.14
share of the holding company, Network 18 for every share held. The combined broadcasting business will give a
better chance to the company to demand higher distribution and advertisement revenues. Now several
combined branding and promotional activities can be taken for broadcasting business, which would help

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rationalise costs as well. The re -organisation would help the investor community value the companies in an
independent manner where similar businesses are clubbed under one single entity.
However, we should remember that besides its major broadcasting assets, most of the other businesses are not
significantly profit generating as of now. Hence, nothing much fundamentally changes in the group as a whole,
except for the fact that now there are distinct entities having similar businesses, and the holding structure is
much simpler.

Infrastructure
Unity Infraprojects Limited

Unity Infra has been a leading player in the engineering and construction space for nearly three decades. It
undertakes both government and private sector contracts, and has set high standards in meeting the special
needs and demands of every project. The company has extensive experience in the delivery of publicly funded
projects for local, state, and central governments.

Order Book
Order backlog as on Mar 31, 2010 was Rs 3477.5 crore, representing 2.3 times FY2010 sales. Order intake during
2009-10 was more than Rs 2150 crore and L1 order as of now amounts Rs 1010 crore. In addition the company
has put in bids for order worth more than Rs 3500 crore which are in various stages of decision. Out of the
current order book about 69% pertains to government and 31% to private sector. On vertical front the irrigation/
water supply accounts for 55% of the order book, civil work accounts for 35%, and balance 9% is roads &
transportation sector. In terms of geographical spread about 78% of the order book is in West India, 12% in
North, 5% in South, 15 in East and 4% is overseas.

Telecom subsidiary
Sales for FY10 was Rs 37 crore. The growth is not as initially expected due to the current situation of telecom
sector and its impact on the tower rollout and expansion plans of industry players. The order book of telecom
subsidiary was about Rs 50-60 crore. The order book of telecom subsidiary is not part of the Rs 3500 crore order
book of the company.

Consolidated Results FY2010:

Consolidated sales were Rs 1538 crore (up 30%) and the EBITDA was up 27% to Rs 210 crore with the EBITDA
margin being 13.7% (down from 14%). Finally the PAT was up by 22.4% to Rs 85.99 crore. Revenue mix - 48%
from civil, 28% from water and rest from transportation and others. AP accounts for very small percentage of
current order backlog of the company. In-terms of value it will be about Rs 50 crore of the uncompleted portion.

Cash as end of March 2010 was Rs 161 crore and the debt is Rs 686 crore. Debtors' days are at 139 days and
creditor's days are 99 days. The working capital cycle is 40 days.

Revenue guidance from the management

The company expects 25% growth in revenue for FY11 and 30% plus growth in order book. Existing order book
gives a current year revenue visibility of Rs 1400 Cr.

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Valuation and Recommendation

The stock is currently trading at Rs 112, which is 9.65 times its FY10 EPS. The company has an order book of 2.3
times its FY10 sales. The execution hurdles in construction space are showing some signs of improvement. With
healthy order book and timely execution, we expect the growth in earnings to reflect in stock price as well. Hence
we find the stock attractive at current valuation. We recommend a BUY to the stock with a target of Rs 134.

Stock Recommendation

Stock CMP Target Recommendation

IRB Infra 265 313 BUY
IVRCL Infra 192 215 BUY
NCC 186 210 BUY
Gayatri Project 414 509 BUY
Unity Infra 112 134 BUY

Commodities Outlook
Steel

The global steel market has taken a nosedive over the last few days, very much as per market expectations as the
world is struggling with a situation of oversupply and lack of demand in some crucial markets, including India,
where demand, particularly in the long products segment, is expected to go down during the monsoons. The
overall price movement has been negative across the globe.

Flat Products

Weakness prevailed in the flat products market as demand remained sluggish and buying got delayed in
anticipation of further price falls. As several regions struggled with oversupply situations, production cuts
happened, primarily in the US region. Meanwhile, the removal of export tax rebate in China affected material
movement in the country to a certain extent. In addition to this, poor demand failed to generate interest in
imports.

The South East Asian market was quiet as the market awaited impact of the Chinese rebate impact. Spot prices
fell in tandem with the bearish sentiment and slow demand. Buyers are hesitant to make purchases because of
falling steel prices and uncertain global economic outlook due to the European financial crises.

The Indian market was slow as the price of hot rolled sheet remained weak in absence of firm demand in the
Kanpur market. The demand was low on expectation that prices may slide further in the near term. Demand may
continue to be weak for some more time, market sources felt. Given the pessimistic market sentiment, Chinese

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domestic hot rolled coil prices continued to drop. The downward trend will continue for the next few weeks given
the weak demand.

Long Products

Poor demand and softness in scrap prices coupled with some overcapacity situation in certain markets kept the
long product prices low. The buying sentiment was weak which resulted in low imports. Meanwhile, a number of
maintenance shutdowns were announced by mills in China.

In India, the market continued to be weak on back of poor demand. Though prices improved by around Rs 400 to
Rs 500 per ton in the beginning of the week, it weakened again as the week progressed. As the monsoons are
traditionally a period of weak demand, owing to sluggish construction activities, the demand for TMT is poor.
However, some demand is seen in the medium structural market owing to certain construction projects. The
scenario is unlikely to improve in the short term. Only if the government announces any new project will the
market situation improve.

Iron Ore

The iron ore spot market in China slipped further in the week gone by. On July 2, which marked the end of the
week, prices of imported ore in the Chinese spot market recorded a drop of 7% in one week alone. The slide was
more rapid during last week as compared to the previous week. This is being attributed to the pessimism shown
by the Indian miners since steel prices dropped further in China. There were very few offers made till Friday and
only those buyers who are in urgent need for imported iron ore would make fresh purchases.
With limited number of buyers and a cold steel market, it is likely that Indian miners may have to cut their offer
prices further. Chinese steel mills have begun sourcing from domestic iron ore mines as well since the prices are
much cheaper than imported ore. The downward trend in Indian steel prices continues. India’s largest iron ore
producer, NMDC, has decided to offer its customers an additional 5% discount for the first two quarters.
According to the chairman and managing director, NMDC, Rana Som, the decision was taken keeping in mind the
volatility in the steel market and as an incentive to steel producers.

As per reports, leading miners BHP Billiton and Rio Tinto are now offering Chinese steel mills iron ore based on
monthly contracts. As per analysts, the move from quarterly to monthly contracts on a larger scale is expected to
take place soon. According to The Steel Index report, pri ces for 62% Fe content fines have been falling
continuously ever since they reached a peak in late April this year. However, the rate of decline has not been as
high as it had been during the month
of May.

Our View

As last week we maintain the same stance for the sector as a whole, the demand for steel is likely to remain low
as it has traditionally been during the monsoon months. However, at least in the domestic market, the demand is
going to improve post September and October. In the intermediate term we expect that the prices are going to
remain soft. The impact of the withdrawal of export tax rebate by China is already causing the export from the

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country to come down as importing countries are showing less interest on the back of the rise in the lande d cost
and are waiting for the prices of steel to come down further.

We continue to be cautiously optimistic about JSW Steel and SAIL, and would urge investor to accumulate
these stocks at lower levels in small quantities in their long term portfolio. The weight of steel stocks should
not exceed 2-3% of the total portfolio size. However, we maintain our AVOID rating on Sesa Goa and Tata
Steel.

DISCLAIMER:
This report is for information purposes only and does not construe to be any investment, legal or taxation advice. It is not intended as an offer or
solicitation for the purchase and sale of any financial instrument. Any action taken by you on the basis of the information contained herein is your
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inadvertent error in the information contained in this publication. The recipients of this report should rely on their own investigations. ESSBSL
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Analyst Team

Analyst Name Sectors E-mail Contact Number

Samudrajit Gohain Oil & Gas, Engineering samudrajit@eurekasecurities.com +91- 9748860335
Kinshuk Acharya Steel, Agriculture kinshuk@eurekasecurities.com +91- 9681478735
Md. Riazuddin, FRM Banking, Economy, Power riazuddin@eurekasecurities.com +91- 9903062346
Rajiv Agarwal Auto, Tea, Sugar rajiv.ag@eurekasecurities.com +91- 9903076345
Ankit Kanodia Infrastructure ankit_kanodia@eurekasecurities.com +91- 9163278562

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