Research Speak

Market Commentary

Week Ended – 2nd April, 2010

We have just finished the last quarter of fiscal year FY10 which proved to be a remarkable year for the Indian equity market in hindsight. While Nifty and Sensex gained about 87% in FY10, many individual companies gained about 400%. This kind of returns are very uncommon and history says that whenever a mega panic episode like what happened during last 7-8 months of FY09 occur, markets have a tendency to bounce back at almost same ferocity if not better. The collapse of USA stock markets in 1973-74 and then again in 1987 proved to be gold mine of generations for bargain hunters. But it is much easier said than practice. The stock markets generally have a tendency to test both greed and fear in its extreme. Having said that, it is interesting to take a lesson from history regarding what happens in subsequent years after such mega bounce. It has been observed that markets generally become sober or trade in a range thereby consolidating before making the next decisive up move. In that context, we may see tiring times in major indices for FY11 and possibly extending to early part of FY12.Hence investors are advised to be patient and choose their stocks very carefully in coming days. Not all boats are going to ride in same pace in FY11 compared to FY10. Earnings season are about to start in next one or two week. We believe that most of the sectors are likely to post impressive results. But maybe most of these are already priced in. Hence management guidance is likely to be key rather than actual Q4FY10 numbers to justify or otherwise high multiples attached with the stocks. Hence do not be surprised to see individual stocks to fall despite strong Q4FY10 numbers. On the other hand, some stocks may advance despite unimpressive Q4FY10 numbers. All in all, coming few months has all the potential to paint a picture of contradictions.

Economy
After dipping to a four-month low at 16.22 per cent in the previous week, food inflation inched up yet again to 16.35 per cent for the week ended March 20 mainly on account of higher prices of milk and various pulses. With the upward movement of food inflation coupled with the hike in fuel prices sending out clear signals of its cascading impact on the manufacturing sector and overall headline inflation, further m easures to contain the price rise now appear a certainty when the Reserve Bank of India (RBI) unveils its credit and monetary policy on April 20. Already, the Wholesale Price Index-based headline inflation, which includes manufactured goods and all other non-food item groups, is pegged at 9.89 per cent for February and, going by the current rising trend, it may well cross the double -digit mark to settle at 10.5-11.0 per cent in March.

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Last month, the RBI had hiked its key short term lending and borrowing (repo and reverse repo) rates by 25 basis points each to five per cent and 3.5 per cent, respectively, as a measure to contain inflation and check its spread to the manufacturing sector. However, with the overall inflation already exceeding the RBI projection of 8.5 per cent for the fiscal year, economic analysts expect the apex bank to go in for another round of hike in key policy rates — Cash Reserve Ratio, repo and reverse repo — by at least 25 basis points each. Recently, Governor D Subbarao had also indicated that the RBI would gradually exit from its “soft and accommodative” monetary policy to check inflation and ensure sustainable growth. In the near term, even as food inflation is expected to soften with the arrival of fresh crops, the increased cost of fuel is also expected to put pressure on prices. As for prices of food items on a year-on-year basis, pulses were dearer by 31.55 per cent, milk prices by 18.74 per cent and wheat by 13.5 per cent. On a weekly basis, the index for food articles went up b 0.6 per cent owing to y higher prices of pulses (moong, urad and arhar), barley, milk, and condiments and spices.

Sector and Stock Updates
Hyderabad Industries
Hyderabad Industrial Limited is engaged in the production and distribution of Fibre Cement Sheets, Aerocon Panels, AAC Blocks, Material Handling and Processing Plant and Equipment and Thermal Insulation Products (Refractories). Hyderabad Industries Limited is a flagship Company of the C.K.Birla group of Companies, incorporated on 17 June 1946. The company also provides Aerocool roof blocks for cool indoors to the residential, commercial, and industrial buildings; and flex-O-boards for false ceiling, partitions, paneling, sign boards, return air boxing, air cooling ducts, table tops, and sandwich panels applications, as well as for partition walls, toilets, panel doors, cabinet shelves, and half-height partitions. In addition, the company offers thermal insulation products, such as calcium silicate blocks and pipe-coverings for boilers, blast furnace shafts, annealing furnaces, preheater cyclones, and steam pipelines to the cement, power, petrochemical, and fertilizer plants; and flat products, autoclaved aerated concrete blocks, and material handling and processing plant and equipment. There has been lots of misconception about asbestos cement sheet business as it is decried as environmentally harmful product. But what is interesting is that there are two varieties of asbestos. One is harmful amphibole type and another is harmless crysolite type. All over the world including USA and Canada, crysolite type has been used in construction purposes without any proven harmful effect. Hyderabad industries is into crysolite type asbestos cement sheets which contributes about 15% to its topline. Its installed asbestos cement capacity as on FY09 end was 764500 MT and company was running at almost 88% research@eurekasecurities.com 2

capacity utilisation. Sales realisation for FY09 was around Rs7000/MT which is an uptrend for last couple of years. Due to its far superior properties to conventional corrugated galvanised sheets, it is gaining popularity in government and low cost housing. But the immediate trigger for the company is going to be autoclaved aerated concrete (AAC) blocks which are gaining popularity compared to conventional clay bricks. Compared to clay bricks, AAC blocks are one third lighter. Moreover usage of AAC blocks reduces ambience heat inside the building in a great manner.Cement and rod requirement comes down almost 20% apart from reduction in AC requirement. Construction is also much faster. Hence though AAC blocks cost Rs3200/cubic meter, it leads to much saving in overall construction cost. Hyderabad Industries is the only listed player as of now which is producing at 88% capacity utilisation rate. The company is likely to commence production from its two newly built AAC units in Q1FY11. The annual demand for AAC blocks is estimated at around 3-4% of total clay brick demand and it is fast gaining popularity among big builders. There is another type of AAC blocks which is used over the roof to keep the inside temperature much comfortable. This Aerocool product is a patented product of Hyderabad Industries and it is witnessing almost 100% capacity utilisation of late. Moreover in coming days company is likely to benefit a lot from subdued ordinary Portland cement (OPC) prices which form a substantial part of its raw material cost. The company has been able to increase its operating profit margin from 8% in FY08 to about 14% in FY09 due to very well performance of AAC division. The FY09 ROCE was 32% and ROE was about 27%. The company is a dividend paying company. Its dividend yield recently has been in excess of 8%.It paid 100% dividend on a face value of Rs10 in FY09. As on today, the market cap is only 63% of its FY09 sales and incl ding Rs27Cr term loan, it is only about 67% of u FY09 sales number. Moreover company is operationally cash flow positive and trading at TTM PE of about 6 and P/BV of about 2.4. But FY10 and FY11 results are likely to be much better compared to FY09 numbers. Thus we feel that there is lots of upside in the stock for long term duration and very limited downside risk. We recommend “BUY” with a one year investment horizon and a price target of about Rs900.

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BHEL
BHEL, has come out with provisional results for FY10. Performance was excellent, with the company recording the highest ever turnover of Rs 34,050 crore with PBT and PAT growing by 31%and 37% respectively. Result highlights Particulars Net sales PBT Net profit EPS FY09 28033 4849 3138 64.11 FY10(prov) 34050 6353 4287 87.6 % chg 21 31 37 37

Robust order inflows and high order book backlog provides good long term revenue and earnings visibility. BHEL, at the end of FY10, has an all –time high order book backlog 1, 43,800 crores which is 4xFY10 revenue s providing good long term earnings visibility. During FY10 order inflows was of the order of Rs 59,913 crores more than estimates of Rs 55,000 crore. Consistent growth in order book (Rs crores)
160,000 140,000 120,000 100,000 80,000 60,000 40,000 20,000 0 FY05 FY06 FY07 FY08 FY09 FY10 18,230 18,938 35,643 50,270 59,678

143,800

Order-inflow breakup in FY10 (Rs crores) Power 41976 Industrial 14366 International 3571 59913 Total research@eurekasecurities.com 4

In the Power Sector business segment, BHEL secured orders worth Rs.41, 976 crore during the year. In terms of power plant equipment, the orders amounted to 16,489 MW. The company received highest-ever orders from the private sector and all-time high order booking in a year for hydro equipment. During the year it got orders from private sector customers like Abhijit, ACC, Adhunik, Avantha, Hindalco, Indiabulls, Jaypee Group, Jindal Power, Sterlite, Tatas and Videocon. The major highlight was the first order in the super-critical segment 3x660 MW from the Jaypee group. Order wins from the industrial sector amounted to Rs 14,366 crore, a growth of over 40% from the previous year. Major orders in the segment came from IOCL, Hindalco, JSPL and Monnet Ispat. In International business it received orders worth Rs 3571 crore, a growth of 10% YoY. We have a positive view on the stock owing to robust order inflows and consistently growing order book. This would ensure robust topline and earnings momentum for the next 2-3 years. The company getting its first order in the super-critical segment is a major positive. We expect order execution to improve in FY11 owing to capacity expansion to 15,000 MW from 10,000 MW and further to 20,000 MW by the end of FY11. BHEL , owing to its leading position in the power equipment space, is expected to win major orders in the NTPC bulk tenders in FY11 which would be a major trigger for the stock. We advise long term investors to buy the stock at around Rs 2000-2100 level with a one year price target Rs 2800.

Road Construction & Infrastructure
Hike in Toll Rates- No reason to worry for users Last week we discussed on the changes in NHAI policies favouring concessionaires, this week the changes in toll rates became the news. NHAI in the last week made an announcement of hiking the toll rates of government run toll plazas. The rate hike will have two components- a fixed 3% and a flexible 40% of WPI (Wholesale Price Index). Look at the table below: Single Rs)* 85-555 70-425 55-350 55-355 50-315 Journey (In Return Rs)* 130-835 105-640 80-530 80-530 75-475 journey (In

Stretch NH7 (368 Km 471 Km stretch) NH76 (Chittorgarh-Bichhore) NH7 (AP/Karnataka borderDevanhalli) NH8A (Barambore-Garmore) NH15 (Adesar-Samakhayali) *Fee depends upon nature of vehicle Source: Financial Express, April1, 2010

The headline in some news supported by the table basically blows the effect of hike out of proportion. We believe it is more important to understand this hike from the following arguments: research@eurekasecurities.com 5

1) The hike is made only on 24 publicly-funded toll plazas of the country which are government operated. BOT based tolls still continue to have the pre-existing rates. 2) Moreover, government operated plaza forms only 12 % of the total highway network of 70548 Km. 3) It is specified by NHAI that hike in rates of privately operated tolls in future cannot be more than the rate given in this formula. 4) Local personal vehicles have the option of making a concessional pass at Rs175 per month. For other users the same pass would be available So in a way, the rate effect would not be too much of a worry for the companies in road BOT space as the regular commuters would have the option of concessional rates and these regular commuters will drive the traffic growth. Non regular commuters may opt for alternative routes, but this rate is expected to be applicable for all highways by September 2010. This news, in effect, is positive for companies like IRB Infra, IVRCL, HCC, GMR Infra and the newly listed ITNL which are working in the same space. Amendments in MAT provisions - Concern for Infra companies As proposed in the last year’s budget (2009), a new item of the profit & loss account is to be added back in arriving at the book profits of companies which pay MAT. This item is the diminution in the value of assets. In some companies diminution in value of assets appears in expenses side of the profit &loss account as provision for unascertained liability. The other way of treating this is by reducing their asset values as per the prevailing industry average and asset class, rather than actual usage of the assets. The new provision has come into effect from 1st April, 2010 retrospectively from the year 2006-07. Hence IT departments are soon going to reopen the cases where they find any possibility of increase in tax liability. Infrastructure developers typically work on a large asset base. So they fall into the ambit of the new amendment as well.

Commodities Outlook Steel
Flat product As per our expectation that we stated in the last week’s edition, the flat products market remained strong this week primarily on back of rising raw material costs. Although the demand remained sluggish, imports witnessed some movement. However,they failed to arouse any interest in the European region due to depreciation in Euro. Meanwhile, in Asia, and in primarily the Indian market, there were some Chinese and some Korean imports coming in. The buying activities happened mostly to fulfill immediate requirements. However, at times purchases were pushed back as the market expects prices to fall soon.

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The Indian market remaind on the stronger side last week as a number of steel majors like SAIL and Essar Steel announced price hikes as per expectations. However, there were concerns over the price hike as some steel makers were stocking HR sheets and coils to be sold probably in April. This might result in some drop in the market which is already poor on the demand front. Domestic traders are apprehensive about selling material priced very highly as there is also the threat of cheap imports from China. All these factors resulted in buyers slowing down the buying activities. Buying activities are also traditionally slow at this time due to year closing. Expectation It is expected that flat steel prices will continue to rise till raw material prices do not settle down. However, as the demand is not strong enough to support the hikes, the prices may start softening in the medium term. However, in the short term, the US prices might see some slowdown in the rise rate. In Europe, for the next few months, the market seems unpredictable. The surge in strip import prices is being pushed by raw materials. Traders are likely to look forward to the local producers, in part due to shorter and more secure lead times. In the Middle East region, the price rises are likely to remain in tandem with the increasing iron ore prices. But, with the low demand in the market, it is hard to predict if the rise will continue for long. Most market players might refrain from making bookings because of a fear of a price fall. In India, the sentiments will be similar. This price rise will not sustain in the long run as they will be forced to bring down prices after the initial hike due to lack of demand, some rise in the stock level at the traders front and cheap imports. Long Products The long products market was also strong on the back of high scrap prices. The demand was still sluggish. However, there were some imports from the Middle East region, which was largely consumed in the Middle East region itself. The European markets still ignored imports as it was less competitive. However, some restocking activities were seen in this region. research@eurekasecurities.com 7

The Indian market remained strong this week as prices continued to rise despite poor demand. The market is, however, uncertain of the reason behind the price hike. Some attributed the rise to the rising raw materials cost. Meanwhile, others said the speculation in the market that prices will improve as prime steel producers increase their prices in April beginning or March end, resulted in higher prices. Meanwhile, as the demand remained sluggish, the purchasing activities were also low. "The drop in demand is mainly due to the month end, which is also the end of the current fiscal. Thus, the buyers are witnessing a money crunch as well," noted a local trader in India. The buyers were buying as per the requirement which at times resulted in price fluctuations.

Expectation The week ahead is likely to see firm prices of long products however the firmness will largely depend on the movement of scrap prices. In Europe, in the coming weeks, a further rise is possible. In April, prices will rise further as scrap prices increase and also as a result of a small increase in demand due to restocking. In Turkey, the prices will continue to be strong till summer, but producers are concerned that prices may crash after that. However, as far as India and China are concerned the outlook remains a bit as the price rise is mainly cost driven and demand is not likey to be extremenly supportive.

Iron Ore
The iron ore spot market gained further strength in the week gone by, in line with our expectations. Prices rose thrice between March 19 and 26. The week was also marked with a few other developments which reflected the willingness of Chinese mills to adopt a more flexible pricing system as opposed to the current annual contracts which have been prevalent for the last 40 years. There are reports which suggest that China’s leading steel producer Baosteel is warming up to the idea of a change in the pricing system for iron ore. Brazil based mining company Vale has been advocating for a quarterly price settlement and in a recent statement, Baosteel was seen in agreement with the mining giant over a change. This stand of the steel company led to speculations in the market on the signing up of quarterly contracts between Baosteel and Vale, last week.

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In the meantime, supplies from India were further curtailed with six major iron ore mines in Andhra Pradesh and Karnataka being ordered to halt production, since the mines are located in areas where mining is illegal. Despatch of cargoes from the miens has also been stalled. Indian miners who in any case are in no hurry to sell and are waiting for prices to move up further, have raised their offer prices for 63.5% iron ore fines to $160 per ton cfr. Positive outlook for the market is making Indian suppliers insist on higher prices. A report quoting Alan Heap, commodity head, Cit i Investment Research states that if the 80% hike in iron ore prices is accepted, then steel companies will be required to raise prices by 20% to offset the effect. In addition to this with the hike in coking coal prices, already achieved by BHP Billiton-Mitsubishi Alliance, steel producers will have to further raise the prices by 10% to absorb the increased cost. In order to maintain profit margins despite the hike in raw material prices, steel companies will have to raise prices by 30%. According to the r eport, the inventory levels at the Chinese mills are building up with steel mills trying hard to safeguard themselves against the future hike in prices of iron ore. As per Umetal.com total iron ore stocks at major Chinese ports stood at 71.58 million tons as on March 22, 2010, which marks a 0.73 million ton rise as compared to the previous week. European Steelmakers’ Association, EUROFER which had earlier demanded an immediate EU antitrust probe on Vale to assess whether the mining giant was abusing its dominant position in the global iron ore market, said last week that it needs more time to start the investigation. Expectation There is little respite on the horizon for steel makers looking at settling iron ore prices. While on one hand the hike demanded by miners is being regarded as way too steep by the buyers, the prolonged period for iron ore price settlements will keep making the prices in the spot market rise. However, the inventory build up at the mills need to be kept in mind too. Clarity on the price settlement front will make the spot market stabilize a bit.

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Coke
Spot price of low ash metallurgical coke (met coke) is currently being quoted at anywhere between $250 and $300 a ton. There has been a declaration of force majeure by BHP last week and subsequent cancellation of contracts signed for delivery of coking coal at $200 per ton in the first quarter citing disturbances in mining due to adverse weather conditions, there has been a spurt in prices in the spot market following this news. Some miners have quoted $300 a ton for spot delivery, while others have quoted $250 a ton for delivery in the second quarter. All these uncertainties have created a crisis like situation as far as coking coal availability is concerned.

Stock Recommendation at current market price
Stock Name SAIL JSW Steel JSPL Bhushan Steel Sesa Goa NMDC Gujarat NRE Coke Welspun Guj. Jindal Saw

Recommendation Hold Hold Hold Hold Hold Buy Hold Hold Reduce

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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 responsibility alone and Eureka Stock & Share Broking Services Ltd [hereinafter refereed as ESSBSL] and its subsidiaries or its employees or directors, associates will not be liable in any manner for the consequences of such action taken by you. We have exercised due diligence in checking the correctness and authenticity of the information contained herein, but do not represent that it is accurate or complete. ESSBSL or any of its subsidiaries or associates or employees shall not be in any way responsible for any loss or damage that may arise to any person from any inadvertent error in the information contained in this publication. The recipients of this report should rely on their own investigations. ESSBSL and/or directors, employees or associates may have interests or positions, financial or otherwise in the securities mentioned in this report.

Analyst Team Analyst Name
Samudrajit Gohain Kinshuk Acharya Md. Riazuddin, FRM Rajiv Agarwal Ankit Kanodia

Sectors
Oil & Gas, Engineering Steel, Agriculture Banking, Economy, Power Auto, Tea, Sugar Infrastructure

E-mail
samudrajit@eurekasecurities.com kinshuk@eurekasecurities.com riazuddin@eurekasecurities.com rajiv.ag@eurekasecurities.com ankit_kanodia@eurekasecurities.com

Contact Number
+91- 9748860335 +91- 9681478735 +91- 9903062346 +91- 9903076345 +91- 9163278562

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