My Thesis

INDIAN INSTITUTE OF PLANNING AND MANAGEMENT MUMBAI

THESIS ON “CORPORATE FINANCING AND CORPORATE VALUATION OF INDIAN COMPANIES”

SUBMITTED BY APURVA PRASAD

FINANCE BATCH - PGP/FW/06-08 REF. ID – IIPM/ FW/ 06-08/ MUM/ FIN/ 043

1.1

Abstract

Indian economy has positioned itself on the growth curve which is signified by indicators such as 8-9 percent annual growth, rising foreign exchange reserves, rapidly growing FDI, second fastest growing emerging market and an active capital market. The strong banking system and a prudent regulatory environment enable capital formation due to increased economic activity. However, 2008 has witnessed concerns in the economy which are characterized by increase in inflation, rise in commodity price, increase in interest rates, tightening liquidity, slow down in demand and capital expenditure. There has been a global financial contagion arising out of credit markets which have impacted almost all industries directly or indirectly. This has led to implementation of various structural changes in the industry such as change in the business model/ revenue model or a change in the finance mix in order to adapt with the dynamism of the economy.

Study of corporate financing and corporate valuations therefore commands importance and become an interesting study. The research tool used applied in the thesis is in the form of financial modeling and analysis of 50 companies that constitute S&P CNX NIFTY index with an effort to understand the dynamics of Indian companies operating in the current business environment. The thesis attempts to forecast the economic & business environment with the help of valuation based tools.

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1.2 i)

Certificate

Scanned Copy

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1.2 ii)

BONAFIDE CERTIFICATE

This is to certify that the Thesis titled “Corporate Financing & Corporate Valuation of Indian Companies” is the original work and has been successfully carried out by Mr.Apurva Prasad (IIPM/ FW/ 06-08/ MUM/ FIN/ 043). Mr.Apurva Prasad has initiated the study and completed as per my expectations and under my guidance.

The final output is acceptable to me and is hereby finally approved.

Mr.Manoj Agarwal

Date:

Head, Retail Clients, Inventure Growth & Securities Ltd.

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1.3

Thesis Topic Approval

i) Dear Apurva,

I have received your synopsis as well as the confirmation of your external guide you through the thesis. This letter is a formal approval to the topic proposed by you

Please go ahead with the thesis. Make it a comprehensive thesis by using empirical data as the basis of the research.

Your ref. id number is IIPM/FW/06-08/MUM/FIN/043

Furthermore, you are required to send me a total of at least 6 thesis guidance response sheets at equal intervals before the coalescence of the thesis. Please find below the format for the response sheet.

Best of Luck.

Sonal Pandey

From To

Sonal Pandey [email protected]

Apurva Prasad

Date:

Wed, Apr 23, 2008 at 2:59 PM

5

1.3 ii)

Scanned Copy

6

1.3 iii)

Scanned Copy

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1.4

Acknowledgement

This thesis has given me immense insights in the area of corporate finance and equity research. This research has not just helped me to understand the fundamentals but also the finer nuances of valuation and fundamental research. It has helped me to bridge the theoretical and practical aspects of the research topic while providing me with deeper insights and acquaintance.

Firstly, I would like to thank my internal guide Prof.Sonal Pandey and the institute for approving the thesis topic and providing a learning platform. I am highly obligated and would like to thank my external guide Prof R.C.M Pendyala and Mr.Manoj Agarwal for providing me direction and guidance.

I wish to express my deepest appreciation to all the respondents for their valuable time and their insights on the research topic. I thank my family and friends who have supported me during the course of my research.

APURVA PRASAD

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1.5

Table of Content

SR.NO. 1 1.1 1.2 1.3 1.4

PARTICULARS PREFATORY ITEMS Abstract Signatory Page/ Certificate Topic Approval Acknowledgement

1.5 1.6

Table of Contents List of Charts

9 10

1.7

List of Tables INTRODUCTION

12 13-14

2.1 3

Introduction LITERATURE REVIEW

14 15-20

4 5

RESEARCH METHODOLOGY RESEARCH ANALYSIS

21-22 23-104

2

PAGE NO. 2-12 2 3 5 8

5.1

Macroeconomic Analysis

24

5.2

Industry/ Sector Analysis

37

5.3

7.1

Company Analysis CONCLUSION Conclusion Bibliography APPENDICES Thesis Synopsis

7.2 7.3

Response Sheets Questionnaire

6 6.1 6.2 7

65 105-108 106 108 109-117 110 112 117

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1.5

List of Charts Page No.

Fig. 1 - Index of Industrial Production

24

Fig.2 - Production in Infrastructure Industries

25

Fig.3 – Performance of Basic Infrastructure Industries

25

Fig.4 – Money supply data

26

Fig.5 – Credit/ Deposit growth

26

Fig.6 – CRR trend

27

Fig.7 – Repo Rate trend

27

Fig.8 – G-Sec yield

28

Fig.9 - Foreign Trade growth

28

Fig.10 - Forex Reserve (Excluding Gold & SDRs)

29

Fig.11 - Inflation (WPI) trend

29

Fig.12 – WPI trend

30

Fig.13 - Crude Oil prices

30

Fig.14 – Crude Oil chart

31

Fig.15 – Commodity price trend

32

Fig.16 – NIFTY Chart

33

Fig.17 Weakness/ Threats Indicators

34

Fig.18 – Opportunities Indicator (i)

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Fig.19 – Opportunities Indicator (ii)

36

Fig.20 – Opportunities Indicator (iii)

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Fig.21 – Deposit Growth trend

38

Fig.22 – Credit Growth trend

39

Fig.23 – Repo Rate changes

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Fig.24 – CRR changes

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Fig.25 – G-Sec yield curve

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Fig.26 - Sectoral Credit Growth

42

Fig.27 - Assets of Scheduled Commercial Banks (% change over

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previous year)

10

Page No. Fig.28 - Assets of Scheduled Commercial Banks (Rs.crore)

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Fig.29 - Liabilities with Scheduled Commercial Banks (%

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change over previous year) Fig.30 - Assets of Scheduled Commercial Banks (Rs.crore)

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Fig.31 – Cement consumption growth

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Fig.32 – Cement supply trend

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Fig.33 – Cement demand / price trend

46

Fig.34 – Cement capacity utilization trend

47

Fig.35 – Cement Price Trend

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Fig.36 - Cement Statistics: Production, Consumption & Prices

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Fig.37 – Subscriber growth trend

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Fig.38 - GSM Cellular Service

52

Fig.39 – Subscribers growth

52

Fig.40 - Textile Statistics

57

Fig.41 – Power demand/ supply scenario

58

Fig.42 - Power Generation Statistics

60

Fig.43 – Steel production growth

61

Fig.44 – Coke price trend

62

Fig.45 – Global Inventory & price trend

62

Fig.46 – NIFTY P/E & P/BV trend

106

Fig.47 – Sector Beta

107

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1.6

List of Tables Page No.

Table 1 – Auto sector

37

Table 2 – Cement sector

44

Table 3 – Telecom sector

50

Table 4 – Pharma sector

53

Table 5 – IT sector

54

Table 6 – Oil & Gas sector

55

Table 7 – Power sector

58

Table 8 – Metals sector

61

Table 9 – Company Valuations consolidated

107

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INTRODUCTION

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2.1

Introduction

Importance/ Background for the Research The role of financial system in mobilizing and allocating the resources for capital formation has been well established by many studies. In this paper, an attempt has been made to understand the financing pattern of Indian companies represented Nifty-50. Corporate valuations play a major role in determining long term growth of an economy; therefore the thesis also intends to focus on corporate valuation aspects of the Indian companies.

The combined market capitalization of the 50 companies that constitute the index is in excess of $600 billion which comprises ~ 60% of the total market capitalization of the total 6000 listed companies in India.

Objective To study & analyze Corporate Financing and Corporate Valuation of Indian firms represented by companies that constitutes the S&P CNX NIFTY index.

Scope of study Corporate Financing – Financing Mix Corporate Valuation – Relative valuation multiplier Financial Statement Analysis – Ratio Analysis EIC Analysis – Macroeconomic/ Sector/ Company

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LITERATURE REVIEW

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Corporate Finance includes the following principles:•

Invest in projects that yield a return (cash flows) greater than the minimum acceptable hurdle rate (financing mix).

•

Choose a financing mix that maximizes the value of the firm and matches the assets being financed.

Corporate Finance Principles The Investment Principle: The investment principle states simply that firms should invest in assets only when they are expected to earn a return greater than a minimum acceptable return. This minimum return, which we term a hurdle rate should reflect whether the money is raised from debt or equity, and what returns those investing the money should have made elsewhere on similar investments.

The Financing Principle:

The financing principle states that the mix of debt and

equity chosen to finance investments should maximize the value of investments made. In the context of the hurdle rate specified in the investment principle, choosing a mix of debt and equity that minimizes this hurdle rate allows the firm to take more new investments and increase the value of existing investments.

The Dividend Principle:

Firms sometimes cannot find investments that earn their

minimum required return or hurdle rate. If this shortfall persists, firms have to return any cash they generate to the owners.

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Tools of Corporate Finance 1. The first of these tools is the time value of money, which allows us to compare cash received or paid at different points in time and to weight them based on when they occur.

2. The second tool is financial statement analysis since much of the information that we get in finance comes from these statements.

3. The third tool is an understanding of how to value an asset or valuation

Financial Statement Analysis Financial statements serve important functions: a) They provide information on how the firm has performed in the past and what is its current position. b) They are a convenient device for the stakeholders (shareholders, creditors, regulators, and others) to set performance norms and impose restrictions on the management of the firm. c) They provide useful templates for financial forecasting and planning.

Financial ratio analysis is a study of ratios between various items or groups of items in financial statements. Financial ratios have can be classified into Liquidity ratios, Leverage ratios, Turnover ratios, Profitability ratios, Valuation ratios.

Liquidity Ratio Liquidity refers to the ability of a firm to meet its obligation in the short run, usually one year. Liquidity is generally based on the relationship between the current assets (the surces for meeting short-term obligations) and current liabilities. The important liquidity ratios are current ratio, acid-test ratio and cash ratio.

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Leverage Ratio Financial leverage refers to the use of debt finance. Leverage ratios help in assessing the risk arising from the use of debt capital. The important ratios (Structural & Coverage) are Debt-Equity ratio and Interest Coverage ratio.

Turnover Ratio Turnover ratios, also referred to as activity ratios or asset management ratios, measure how efficiently the assets are employed by a firm. These ratios are based on the relationship between the level of activity, representaed by sales or net profit and levels of various assets. The important turnover ratios are: Inventory turnover ratio, Debtor days, etc.

Profitability Ratio Profitability reflects the final result of business operations. There are two types of profitability ratios: profit margin ratios and rate of return ratios. The important ratios are Net profit margin, Operating margin, etc.

Valuation Ratio Valuation ratios indicate of the equity stock of the company is assessed in the capital market. Since the market value of equity reflects the combined influence of risk and return, valuation ratios are the most comprehensive measures of a firm’s performance. The important valuation ratios are price-earnings ratio, EV-EBITDA, Price-book value, etc.

Value maximization is the central theme in financial management and owners of corporate securities hold management responsible for value enhancement. There are two general approaches to the valuation process: 1) the top-down, three-step approach or 2) the bottom-up, stock valuation, stockpicking approach. Both of these approaches can be implemented by either fundamentalists or technicians. The difference between the two approaches is the perceived importance of the economy and a firm’s industry on the valuation of a firm and its stock. Although we know that the value of a security is

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determined by its quality and profit potential, the economic environment and the performance of a firm’s industry influence the value of a security and its rate of return.

General Economic Influence Monetary and fiscal policy measures enacted by various agencies of national governments influence the aggregate economies of those countries. The resulting economic conditions influence all industries and companies within the economies. Fiscal policy initiatives, such as tax credits or tax cuts, can encourage spending. In addition government spending has a strong multiplier effect. Monetary policy produces similar economic changes. A restrictive monetary policy that targets interest rates would raise the market interest rates and therefore firms’ cost. Monetary policy therefore affects all segments of an economy and that economy’s relationship with other economies. It is therefore difficult to conceive of any industry or company that can avoid the impact of macroeconomic developments that affect the total economy.

Industry Influence The second step in valuation process is to identify global industries that will prosper or suffer in the long run or during the expected near-term economic environment. Industries react to economic changes at different points in the business cycle. For example, firms typically increase capital expenditure when they are at full capacity at the peak of the economic cycle. In contrast, non-cyclical industries such as retail food would not experience a significant decline during a recession but also would not experience a strong increase during economic expansion.

Company Analysis After determining that an industry’s outlook is good, an investor can analyze and compare individual firms’ performance within the entire industry using financial ratios and cash flow values.

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Relative Valuation Relative valuation techniques implicitly contend that it is possible to determine the value of an economic entity by comparing it to similar entities on the basis of several relative ratios that compare its stock price to relevant variables that affect a stock’s value, such as earnings, cash flow, book value, and sales.

______________________________________________________________________ 1. 2. 3. 4.

Corporate Finance 2e – Aswath Damodaran Investment Analysis & Portfolio Managemen 8e – Reilly/ Brown Financial Management 7e – Prasanna Chandra Grahan and Dodd’s Security Analysis 5e – Cottle/ Murray/ Block

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RESEARCH METHODOLOGY

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Primary Research Data Mining Financial modeling on excel was used for the analysis of Profit & Loss statement and the Balance Sheet of 50 companies. Analysis includes the following:•

Financial Ratios such as ROE, ROCE, Liquidity ratio, Turnover Ratios (inventory, debtor).

•

Margin Analysis: - Raw Material cost, Operating Margin, Tax Rate.

•

Year on Year Analysis, Unit Analysis, CAGR.

•

Financing mix – Leverage ratios (structural & coverage).

•

Valuation – P/E, P/BV, P/CEPS

The market capitalization data is as on 31/07/2008 and the Promoter stake is as on June 2008. Multex Global in icicidirect.com is the source for forward EPS data and quarterly results of the companies. The multiple assigned to the stock is on the basis of EIC analysis and it’s used to project a target price. Company Annual Reports & moneycontrol.com is the source of the financial data which was used for financial modeling.

Interview (qualitative) The questionnaire covered areas of macroeconomic environment and industry view as these factors determine the behaviour of the stock to a large extent. The views that were taken from the respondents included factors such as GDP growth, Foreign exchange rate, Inflation, Crude Oil, Earnings growth & Sector view. The performance of a stock and thereby its valuation is a function of the economy and the industry that surrounds the company. Following is the analysis of the views taken from the respondents. The respondents whose views were analysed are Mr.Abhay Kumar, Unit Head, ICICI Direct; Mr.Mukesh Gupta, MD, Scope Commodeal; Mr.Rahul Khandelwal, Research Analyst, ABN AMRO, Mr.Abhishek Raichura, Manager, Motilal Oswal Securities Ltd.; Mr.Jignesh Patel, Advisor, Motilal Oswal Securities Ltd. 22

RESEARCH ANALYSIS

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5.1

Macroeconomic Analysis

Fig. 1 - Index of Industrial Production

Source: Ministry of Finance

The revised annual growth achieved by the mining, manufacturing and electricity sectors during April-June, 2008-09 was 4.7 %, 5.6 % and 2.0 % respectively as compared to 2.7 recent, 11.1 % and 8.3 % during the corresponding period of last year.

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Fig.2 - Production in Infrastructure Industries

Source: Ministry of Finance

Fig.3 – Performance of Basic Infrastructure Industries

Source: Ministry of Finance

During April-June 2008-09, six core infrastructure industries registered a growth of 3.5 % (provisional) as against 6.4 % during the corresponding period of the previous year.

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Fig.4 – Money supply data

Source: Ministry of Finance

During the current financial year 2007-08, broad money stock (M3) (up to July 18, 2008) increased by 3.5 per cent as compared to 4.3 per cent during the corresponding period of the last year. The year-on-year growth, as on July 18, 2008, was 20.0 per cent as compared to 21.9 per cent of the corresponding date of last year

Fig.5 – Credit/ Deposit growth

Source: Ministry of Finance

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During the current financial year (up to July 18, 2008) gross bank credit increased by 1.9 per cent as compared to the decline of 0.9 per cent during the same period of the previous year. The Non-Food credit during the financial year (up to July 18, 2008), increased by 1.7 per cent as compared to the decline of 0.6 per cent during the same period of the last year. The year-on-year growth of time deposits with SCBs as on July 18, 2008 was 22.1 per cent as compared to 25.3 per cent on the corresponding date of last year.

Fig.6 – CRR trend

An upward trend has been witnessed in the CRR which has increased from 4.75 % in September 2004 to 8.75 % in July 2008 indicating efforts to tighten the money supply.

Fig.7 – Repo Rate trend

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The Repo rates have also increased from 6.00 % in March 2004 to 8.50 % in July 2008 suggesting a monetary tightening of the money supply. The current (as on 25th September 2008) Repo rate is at 9.00 % and its has increased 150 bps over the last year and a half. The CRR rate and the Repo rate has been increased in CY2008 in order to arrest inflationary pressures.

Fig.8 – G-Sec yield

G-sec yield bottomed out in July 2004 and has almost doubled to 9.10 % in the last 4 years.

Fig.9 - Foreign Trade growth

Source: Ministry of Finance

Exports, in dollar terms, during April-June, 2008 increased by 22.3 percent. Imports increased by 29.7 percent. Oil imports increased by 50.2 percent and Non-oil imports increased by 20.9 per cent. 28

Fig.10 - Forex Reserve (Excluding Gold & SDRs)

Source: Ministry of Finance

Fig.11 - Inflation (WPI) trend

29

Fig.12 – WPI trend

Source: Ministry of Finance

The annual rate of inflation based on Wholesale Price Index (WPI) stood at 12.01 per cent for week ended July 26, 2008 compared with 4.70 per cent a year ago. This rate was contributed by an increase of 10.32 per cent in Primary Articles, 7.12 per cent increase in Fuel, Power, Lights and Lubricants and -10.75 per cent increase in Manufactured Products as against an increase of 10.47 per cent, -1.74 per cent and 5.08 per cent respectively on the corresponding date of last year. Inflation for the week ended September 3, 2008 stood at 12.34 % which has been showing signs of stabilization after it fell 29 bps over the last two weeks from its 13 year highs.

Fig.13 - Crude Oil prices

30

Fig.14 – Crude Oil chart

Source: http://www.wtrg.com/daily/crudeoilprice.html

Crude Oil spiked to $147/ bbl, its highest of all-time before declining to $107/ bbl as on 4th September, 2008. This slump in oil price was helped by Opec increasing production by 350,000 bpd and non-Opec producers adding 550,000 bpd. With global economic growth also looking less robust, oil prices have slumped from $140 levels.

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Fig.15 – Commodity price trend

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Fig.16 – NIFTY Chart

Source: www.nseindia.com

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Weakness/ Threats Indicators Fig.17 - Weakness/ Threats Indicators

The recent turmoil in the global financial and credit markets have wiped out billions of dollars from the balance sheet of the affected companies. This has produced a contagion of spike in crude oil & commodity prices and a sharp increase in credit spreads. The weakness & threats are evident in our economy caused by redemption pressure of the portfolio investments of the FII and the dollar outflow. SENSEX & NIFTY have shed ~ 40 % from its all time highs in January while capital market public issues have reduced drastically. The valuations on the indices have come down and the open interest in the derivative futures have also reduced substantially. The slowdown in economic growth due to inflationary pressures and the interest rate scenario is the major threat to the economy.

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Opportunities Indicators Fig.18 – Opportunities Indicator (i)

Source: India Strategy Report

The opportunity for growth of the economy is largely a function of the growth of domestic demand/ consumption, rising income (savings & investments) and changing demographics. Factors such as growth in disposable income rise and consumption increase illustrate the opportunity for Indian companies and capital markets. Capital market growth opportunity is evident as there is a lot of scope for growth in equity and debt market.

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Fig.19 – Opportunities Indicator (ii)

Source: India Strategy Report

Fig.20 – Opportunities Indicator (iii)

Source: India Strategy Report

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5.2

Industry/ Sector Analysis

Automobiles The automobile sector contributes ~ 2% to the total market capitalization of NIFTY. The ROE and the ROCE of the sector is 29.34% and 23.96% respectively with Hero Honda recording the highest ROE of 32.79%. The Debt/ Equity of the sector is 0.35 with Tata Motors having the highest leverage of 0.8 and Hero Honda having the lowest leverage of 0.07. The Operating Margin and the PAT Margin of the sector stands at 11.85% and 8.62% respectively. Current Ratio for the sector is 1.06 with Maruti having the highest liquidity of 1.42 and Hero Honda having the lowest liquidity of 0.57. Dividend payout for the sector is 25.35% and Ploughback ratio of the sector is 74.65%. Hero Honda retained the least with the highest Dividend Payout of 39.72%.

Table 1 – Auto sector Operating Margin %

PAT Margin %

Current Ratio X

0.46

11.62

8.16

1.37

46.15

26.58

0.09

12.14

9.74

1.42

60.21

7.17

17.77

0.8

10.58

7.2

0.9

53.68

27.95

32.79

0.07

13.06

9.37

0.57

48.47

39.72

Security Symbol

Beta

ROE %

ROCE %

M&M

0.74

29.89

21.13

0.7

26.47

24.15

TATAMOTORS

0.78

26.4

HEROHONDA

0.46

34.6

MARUTI

Debt/ Equity

EPS Rs.

Dividend Payout %

The auto sector continues to face challenging times, as the pressures of FY08 have further intensified in FY09. Higher oil prices and interest rates remain key threats to volume growth. The sharp rise in input prices would pose a challenge for margins. On the volumes front, companies are banking on higher disposable income, led by strong economic growth, favorable changes in personal income tax slabs, and new model launches. However, financing constraints still need to be addressed, as banks have significantly reduced their retail lendings. Large auto majors have now tied up with cooperatives and NBFCs to provide financing to buyers. On the margins front, benefits from productivity improvement and cost reduction programs undertaken by companies

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would continue to partially offset the pressures from rising input prices. Commencement/ramping up of operations in tax-free zones like Uttaranchal would help counter cost pressures through lower tax burden. Valuations of the auto majors have become very attractive, with the long-term growth outlook still quite positive.

Banking The Banking sector contributes ~ 8.5% to the total market capitalization of NIFTY. The ROE for the sector recorded 17.6% for FY08.

Higher inflation, rising interest rates, regulatory actions to tighten liquidity coupled with rising fiscal deficit are creating a challenging macro scenario for banks. While loan growth would moderate around 20% growth, currently growing at 25%, marginally lower margins for most banks (despite banks having shown their willingness to raise rates) can be expected. Having a low cost liability base (CASA) would be a key differentiator for the banking industry. Banks like HDFC Bank, Axis Bank, SBI, and PNB, which have high CASA ratios are at an advantage.

Fig.21 – Deposit Growth trend

Deposits grew ~23% YoY and 2% QoQ (as on 6 June 2008) to Rs.32,570 billion. Strong growth in deposits came on the back of higher interest rates offered by the banks.

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Fig.22 – Credit Growth trend

Credit grew 26% YoY (as on 6 June 2008) versus 22% in FY08. On a QoQ basis loans grew by 1.4% compared to 2.1% QoQ in 1QFY08. In 1QFY09, the credit to deposit ratio was 73.1%, which is lower than 73.6% recorded in FY08.

Fig.23 – Repo Rate changes

Fig.24 – CRR changes

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In 1QFY09, the RBI has raised the repo rate by 75bps to 8.5% and CRR by 125bps to 8.75% (50bps to be effective in July 2008). CRR increase of 125bp would amount to liquidity outflow from the system of Rs.45,000 crores.

Fig.25 – G-Sec yield curve

While the G-sec yields remained flat in FY08 on a YoY basis, they shot up significantly in the last two months, as the high inflation numbers meant that interest rates would rise. While one-year G-sec yield has increased by 168bp QoQ, 2-3 year yields increased 164bp and the 10 year G-sec yield increased by 74bp. On a YoY basis however, yields are higher by 70-175bp across maturities

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Data available till 18 July 2008 indicates that credit growth continues to outpace deposit growth in the current financial year. Bank credit is growing at well over 25 per cent while deposit growth slowed to 21 per cent by the third week of July 2008. Growth in deposits, both demand as well as term, is showing signs of slowing. Slowdown in demand deposit growth is sharper. Demand deposit growth slowed from a high of 25.1 per cent as at the end of May 2008 to 14.2 per cent by the first week of July 2008. Additional data for the week ended 25 July 2008 indicates that demand deposit growth plummeted to 5.9 per cent. The robust 25 per cent plus robust growth in credit is expected to marginally slow down due the sharp increase in interest rates brought about by the RBI during June–July 2008. Retail credit is expected to particularly slow down further. In the broader context, however, demand for credit will remain healthy unless the RBI seeks to further harden interest rates. It is possible that with elections around the corner and inflation remaining in double digit figures the monetary authority may well attempt to further clamp down on liquidity to dampen demand and therefore credit growth. We expect credit growth to be around 22–23 per cent for 2008–09 as a whole. According the disaggregated data available till 23 May 2008, growth in credit to industry accelerated further to 26.9 per cent from 26.4 per cent a year ago. Growth in credit to small scale industries accelerated sharply from 29.5 per cent to 52.1 per cent during this period. However, the continuous rise in interest rates over the past one year did take its toll on personal loans. Growth in personal loans slowed from 23.9 per cent a year ago to 15.9 per cent as on 23 May 2008. The consumer durables segment was the worst affected and witnessed a decline of six per cent.

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Fig.26 - Sectoral Credit Growth

Fig.27 - Assets of Scheduled Commercial Banks (% change over previous year)

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Fig.28 - Assets of Scheduled Commercial Banks (Rs.crore)

Fig.29 - Liabilities with Scheduled Commercial Banks (% change over previous year)

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Fig.30 - Assets of Scheduled Commercial Banks (Rs.crore)

Cement The Cement sector contributes ~ 2% to the total market capitalization of NIFTY. The promoter holding for the sector is 38.23% as on June 2008. The ROE and the ROCE of the sector is 23.98% and 25.17% respectively. The Operating margin and PAT margin of the sector is 29.78% and 23.96% respectively with Ambuja Cements recording the highest Operating margin of 36.3%. The dividend payout of the sector is 24.58% while retaining ~ 75% of the profit. The liquidity measure of the sector is 1.02 X.

Table 2 – Cement sector Security Symbol

Equity

ACC AMBUJACEM GRASIM

1,876,511,140 3,045,095,596 916,742,280

Market Capitalisation 10,948 12,401 16,567

Weightage 0.42% 0.47% 0.63%

Beta 0.73 0.48 0.71

Promoter% 43.00 46.50 25.20

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While volume growth is likely to remain stable, new capacities (~32MT in FY09) would result in excess supply. However, these new capacities would impact demand-supply equilibrium only in 2QCY09. In the interim, prices would remain under check on account of high inflation and government monitoring. As a result, margins would remain under pressure, with stable pricing and severe cost push. Excess supply situation is expected to continue at least till FY11, curtailing pricing power for the industry. Valuations for the industry are attractive – asset valuations for all cement companies are below replacement cost of US$120/ton. However, the upside appears limited, especially with impending excess supply situation and pressure on margins.

Fig.31 – Cement consumption growth

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Fig.32 – Cement supply trend

In FY08, total capacity addition for the industry was 30MT, taking the total capacity to 198MT. Further, at least another 45MT of capacity is scheduled to commission in FY09. As a result, FY09 is expected to witness excess supply based on capacity additions of FY08 and FY09. While incremental demand would be around 16MT, incremental supply would be at least 45MT.

Fig.33 – Cement demand / price trend

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Fig.34 – Cement capacity utilization trend

Capacity utilization for 1QFY09 declined to 89% (v/s 100% in 1QFY08) on the back of 30MT of capacity addition in FY08. Cement industry’s capacity utilization for 1QFY09 is expected to decline on YoY basis for the first time in the last five years. Capacity utilization for the industry is expected to ease off from optimum level of ~95% to ~88% in FY09 and 75% in FY10 on the back of significant capacity addition over the next two to three years.

Fig.35 – Cement Price Trend

Cement prices are expected to remain stable with 1.6% QoQ increase. Given high inflation, the cement companies were under pressure to maintain prices. Part of the price

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increase is on account of increase in freight and higher excise. Further, ban on exports also resulted in flush of supply in Western and Northern markets, which also helped in controlling cement prices. Cement prices in eastern region are expected to recover by 6.6% QoQ (~5.4% YoY) in line with strong demand growth in the region.

The cement production was up by about seven per cent to 14.7 million tonnes in June 2008. Production remained flat in the Western region. The Eastern and Central regions reported a production rise of 4–5 per cent. Southern region, the largest cement producing zone recorded a robust production growth of 13.4 per cent, lifting the overall production growth during the month. The industry enhanced its annual installed capacity by 30 million tonnes to 198 million tonnes in 2007–08. As of June 2008 the total capacity stands at about 202 million tonnes. During the June 2007 quarter, the industry had operated nearly at peak levels. However, the utilisation dipped to 89 per cent in the June 2008 quarter. While this is partly due to a substantial increase in industry’s capacity, this dip is also attributed to a slow down in May 2008. As a result, cumulative production growth decelerated to six per cent during the quarter against a production rise of 7.4 per cent in the year ago quarter. While we expect the same to pick up post monsoon, the slow down in the June 2008 quarter is expected to lower the annual production growth for 2008–09. We expect the average capacity utilisation level to remain around 89 per cent during the year. We, therefore, revise our annual production growth forecast, for the year 2008–09, to 10.5 per cent against the earlier forecast of 11.5 per cent. Cement prices in Delhi inched up by Re.1 to Rs.229 per 50 kg bag in July 2008. Prices in Calcutta increased by Rs.4 per to Rs.249, recording a price rise in four out of last five months. The prices in Chennai inched up by Rs.3 to Rs.263 per 50 kg bag. The same in Mumbai remained unchanged at Rs.253. Cement companies continue to reel under cost pressure. Despite this, we expect cement prices in the North region to remain subdued considering the impact of significant capacity additions made in the region in 2007–08. Prices in other parts of the country are expected to remain stable in the near term.

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Fig.36 - Cement Statistics: Production, Consumption & Prices

Construction Macro environment for construction companies would be challenging over the medium term, given the following:(1) Higher commodity prices and increased wage inflation would restrict EBITDA margin expansion (2) Volatile capital markets could impact business momentum for cash contractors and infrastructure developers. Most of the companies have negative operating cash flows, requiring frequent access to capital markets (3) Project awards could possibly get delayed due to the forthcoming elections, both at the center and in several states

Engineering Macro environment for capital goods companies would be challenging over the medium term, given the following:(1) Execution constraints, resulting in delayed revenue growth: The key issues are: (1) availability of skilled manpower, (2) lack of reliable vendor base (limited availability of

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critical components and poor quality of subcontractor base in India), (3) bureaucracy, which includes issues like delays in land acquisition, rehabilitation, environmental/forest clearances. (2) Higher input costs: Rising commodity prices would be the single largest risk on the earnings of the capital goods companies during FY09.

Telecom Telecom sector contributes ~ 12% to the market capitalization of NIFTY in which Bharti Airtel & Reliance Communications contribute ~ 6% & ~ 4% in NIFTY. Bharti Airtel leads the sector with the highest Operating margin of 41.35% and EPS CAGR of 55 %. Promoter holding for the sector stands high at 66.63%.

Table 3 – Telecom sector Security Symbol BHARTIARTL IDEA TATACOMM

ROE 30.82 22.53 5.25

ROCE 25.82 12.51 5.07

Debt/Equity 0.32 1.95 0.12

Operating Margin 41.35 33.54 19.23

PAT Margin 24.45 15.54 10.47

EPS 32.87 3.96 12.07

Promoter% 66.50 57.70 76.20

Fig.37 – Subscriber growth trend

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Subscriber net additions remained strong during 1QFY09. We expect the industry to add ~25m subscribers in 1QFY09 v/s ~27m subscribers added in 4QFY08. QoQ decline primarily reflects higher base due to year-end adjustments in some operators, especially BSNL. Sustained subscriber momentum would support 11-14% quarterly average subscriber growth for Bharti, RCOM, and Idea.

Momentum in subscriber additions continues to be strong, primarily driven by higher coverage and attractive tariffs. News flow on international expansion/industry consolidation could be further triggers while adverse regulatory environment and increase in competitive activity pose key risks. Valuations of majors at 9-9.5x FY09E EV/EBITDA and ~7x FY10E EV/EBITDA are attractive. Current valuations factor tough regulatory environment and growth headwinds for incumbents resulting from entry of potential new competition.

In June 2008, telecommunication sector added a total of 8.8 million subscribers taking the total outstanding subscribers to 325.8 million subscribers. Total outstanding subscribers grew by 44.8 per cent over the year–ago month. Wireless subscribers added a total of 8.9 million subscribers taking the subscribers base to 286.9 million subscribers. Wireline subscribers declined by 1.4 lakh subscribers to 38.9 million during the month. Teledensity for the month increased to 28.3 per cent. The total outstanding cellular subscribers witnessed a healthy growth of 56.5 per cent to 212.5 million subscribers. Metros witnessed a decline in the GSM cellular subscribers addition for the second consecutive month. In June 2008, GSM subscribers addition declined by 1.7 per cent to seven lakh subscribers. Circle C witnessed a robust growth of 99.2 per cent cellular subscribers addition. Outstanding mobile WLL subscribers grew by 51.3 per cent to 74.4 million subscribers. Uttar Pradesh (E) witnessed the highest subscriber addition of 7.7 lakh wireless subscribers. Andhra Pradesh made an addition of 7.1 lakh subscribers. Wireless segment witnessed an addition of 7.3 lakh subscribers whereas, the wireline segment declined by 0.2 lakh subscribers in June 2008. BSNL and MTNL’s wireline subscribers declined by 2.1 lakh and 0.2 lakh subscribers whereas, their wireless subscribers increased by 3.8 lakh and 0.9 lakh subscribers, respectively.

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Fig.38 - GSM Cellular Service

Source: CMIE

Fig.39 – Subscribers growth

Source: CMIE

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Real Estate In FY08, the focus was on the real estate (RE) sector as a ‘theme’, with all RE stocks moving in tandem. In FY09, the focus is likely to shift to specific companies within the RE sector. We expect FY09 to be a year of consolidation for the RE industry, in which the industry leaders would get differentiated from peers. Developers with staying power would utilize this consolidation phase to emerge stronger and position themselves better to capitalize on the growth phase post consolidation. Key differentiating factors for RE companies would be: (1) financial soundness, (2) monetization visibility over the next 34 years, and (3) execution capability. Our top picks are DLF and Indiabulls Real Estate.

Pharmaceuticals Pharmaceutical sector contributes ~ 3% to the total market capitalization of NIFTY. The average beta of the sector is 0.46 which corroborates the defensive nature of the sector. The ROE and the ROCE of the sector is 23.8% and 20.10% respectively. The Operating margin and PAT margin of the sector is 12.91% and 21.5% respectively. The current ratio of the sector is 2.5 X and Dr.Reddy’s Laboratories has the highest current ratio of 3.21 X. The retention ratio of the sector is ~ 75% while the lowest ploughback is of Ranbaxy Laboratories at 46.4%.

Table 4 – Pharma sector Security Symbol CIPLA DRREDDY RANBAXY SUNPHARMA

Beta 0.48 0.42 0.57 0.36

ROE 21.59 26.61 23.31 23.69

ROCE 21.07 25.69 10.41 23.24

Operating Margin

PAT Margin

Current Ratio

20.1 15.2 8.71 7.65

16.57 14.39 12.96 42.08

2.69 3.21 1.53 2.63

Dividend Payout % 22.75 5.41 53.6 21.82

Ploughback % 77.25 94.59 46.4 78.18

While the past three years have witnessed significant underperformance by pharmaceutical stocks (led by deteriorating business fundamentals, especially in the US), the past few months have witnessed increased investor interest led by positive news flows related to patent challenge/settlement upsides and the stake sale by Ranbaxy promoters to a Japanese innovator company. Investor interest is also building up due to relative defensive nature of pharmaceutical earnings (given current market conditions) and the 53

recent depreciation of the Indian rupee against the US dollar and the euro. Geographical diversification of revenues is gradually reducing Indian Pharma’s dependence on the fiercely competitive US market, thus reducing the sensitivity to US profits. The key success factors for pharma companies would be: (1) pragmatic mix of niche/FTF and normal products, (2) geographically diversified revenue base, (3) vertical integration, and (4) strong balance sheets to fund inorganic growth.

Information Technology The IT sector contributes nearly 11% to the total market capitalization of NIFTY and has a sector beta of 0.72. The sector ROE and ROCE stands at 31.15% and 30.14% respectively. The sector Operating Margin and PAT margin stands at 25.17% and 23.45% respectively. Infosys recorded the highest Operating and PAT margin whereas TCS recorded the highest ROE & ROA. The sector liquidity ratio is high at 3.03 X and the Dividend payout for the sector is ~ 38% and the sectoral promoter holding stood at ~ 50% as on June 2008.

Table 5 – IT sector

Security Symbol HCLTECH INFOSYSTCH SATYAMCOMP TCS WIPRO

ROE % 32.17 33.14 24.58 40.97 24.9

ROCE % 32.35 33.14 24.64 41.27 19.3

Debt/Equity

Operating Margin %

0.01 0 0 0 0.33

24.35 31.72 22.47 27.12 20.17

PAT Margin % 26.65 28.57 21.08 24.53 16.44

EPS Rs. 17.82 78.15 25.59 46.07 19.68

Promoter% 67.50 16.50 8.60 76.40 79.40

The quarter began on a positive note, with better than expected guidance by Infosys and Satyam for FY09. The rupee depreciated 4.7% against the dollar during 1QFY09, giving further fillip to the IT sector. After months of uncertainty in US credit markets, there is some pick-up in IT spend by few US-based BFS (banking and financial services) clients. Risk of back-ended growth remains for FY09. IT companies having (a) wider service

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span; (b) faster scalability; (c) better bargaining power; (d) higher European share of revenues; and (e) financial strength would be on better footing.

Oil & Gas Oil & Gas sector contributes ~ 27% to the market capitalization of S&P CNX NIFTY with Reliance Industries & ONGC contributing 12% & 8% respectively. The average promoter holding % stands at ~ 64%.

Table 6 – Oil & Gas sector Security Symbol

Equity

BPCL RELIANCE RPL CAIRN ONGC GAIL

3,615,421,240 14,536,486,010 45,000,000,000 18,944,297,380 21,388,725,300 8,456,516,000

Market Capitalisation

Weightage

11,855 320,893 74,138 45,807 213,085 31,763

0.45% 12.26% 2.83% 1.75% 8.14% 1.21%

Beta 0.79 1.1 1.26 0.79 1.01 0.96

Promoter% 64.30 51.40 75.40 64.80 74.10 57.40

Performance of PSU oil companies (ONGC, GAIL, HPCL, BPCL and IOC) continued to be determined by the sharing of under-recoveries rather than business fundamentals. With controlled retail fuel prices and increasing oil prices, under-recoveries continued to burgeon. ONGC looks positive, following the recent price correction and large E&P potential. However, possible increase in its subsidy sharing remains a concern. GAIL would witness large volume upsides (136mmscmd by FY10 – 29% CAGR), as RIL’s KG-D6 gas supply begins (RIL’s gas would be directed towards priority sectors, which are on GAIL’s current network). Subsidy sharing (partly moderated by higher LPG realization, with increasing oil prices) and likely petchem downturn remains a concern. RIL would see near-term upsides from (1) marketing tie-ups with potential gas buyers, (2) oil and gas production start at its KG-D6 block (2HFY09), (3) start of its RPL refinery (expected to be online ahead of scheduled December 2008), and (4) progress on

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retail business. The key issue to watch, in our view, would be the ongoing litigation with RNRL.

Textiles FY09 began on a promising note for the textile industry, with (a) the rupee depreciating, and (b) supply side correcting due to capacities closing down in China. However, the positives were overshadowed by (i) sharp increase in raw material (cotton price up 60%) and fuel costs, and (ii) slowdown in demand in the key western markets. As a result, despite several near-term macro fundamentals turning positive and valuations appearing inexpensive, the textile industry is expected to be under pressure over the next six months.

The cotton textiles production index growth is witnessing a slowdown during the last four months. On the contrary, the textiles products production index has been reporting a healthy growth for the last two months. Spun yarn production growth continued its sluggish trend even in the year 2008–09. Cotton yarn is the predominant yarn in spun yarn and forms 74 per cent of total spun yarn production. Thus, spun yarn production largely mirrors the growth in cotton yarn output. Cotton yarn production grew by 1.6 per cent during May 2008. Consequently, spun yarn production grew by just 1.5 per cent, compared to a growth of five per cent during May 2007. Blended yarn production grew by a mere 0.3 per cent during the month of May, whereas synthetic yarn production witnessed a growth of three per cent. For the year 2008–09, cotton yarn production is expected to grow by around 5.8 per cent. Consequently, spun yarn production is expected to grow by six per cent to 4,242 thousand tonnes. Fabrics production grew by a decent five per cent during May 2008, compared to a growth of 6.5 per cent in May 2007. Cotton fabrics production grew by 2.6 per cent, whereas blended fabrics production grew by a meager 0.7 per cent during the month. Synthetic fabrics production which accounts for 41 per cent of the total fabrics production grew by 8.1 per cent during May 2008. During the year 2007–08, yarns, fabrics and made- ups exports grew by a healthy 13.1 per cent, compared to a growth of 8.2 per cent in 2006–07. Readymade garments exports

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grew by a decent 6.9 per cent during 2007–08, as against a growth of 3.1 per cent in 2006–07. This was despite the strengthening rupee.

Fig.40 - Textile Statistics

Source: CMIE

Media The media sector has witnessed the entry of a large number of players in FY08. Each of the media companies has been diversifying into new media verticals to become a media conglomerate. The entry of new players has fragmented the advertising market, thereby impacting the incumbent players. While channel launches (broadcasters) and entry into new markets (newspapers) were driving stock valuations in FY08, the focus would shift to earnings growth and cash flows in FY09. Companies with earnings visibility, strong growth momentum and strong operating cash flows will be better placed. Print media companies have strong cash flows and the likely ease off in newsprint prices by 4QFY09 could boost earnings. The key differentiating factors for media companies would be (1) execution capabilities; (2) earnings visibility and growth momentum; and (3) strong positioning.

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Power Power sector accounts for ~ 9% of the total market capitalization of NIFTY. The sector ROE and ROCE stands at 11.51% and 7.78% respectively. The sector Operating Margin and PAT Margin stands at 34.41% and 20.19% respectively. NTPC has recorded the highest margin and ROE & ROCE in the power sector. The dividend payout of the sector is 27.41%. The sector Debt/ Equity is 0.88 X where Power Grid has the highest leverage at 1.76 X.

Table 7 – Power sector

Security Symbol

Beta

NTPC POWERGRID RELINFRA TATAPOWER

1.11 1.15 1.82 1.26

ROE 14.15 11.21 8.9 11.77

ROCE 11.27 6.78 5.82 7.27

Debt/Equity

Operating Margin

0.52 1.76 0.63 0.61

30.29 83.24 7.85 16.27

PAT Margin 20.01 30.36 15.7 14.7

Dividend Payout % 38.38 30 14.57 26.69

Fig.41 – Power demand/ supply scenario

The capacity addition for YTM May 2008 stood at 435MW v/s target capacity addition of 645MW - a shortfall of 210MW. Also, the generation for the period till May 2008 stood at 120Bus (target of 124Bus) - an achievement of 97%. The base load deficit (all- India) for first two months of FY09 stood at 10.8%, while peak load deficit stood at 14.4%. The base load deficit in the Western region, however, stood at 17.3% and peak load deficit was recorded at 25.7%.

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The outlook for power utilities is challenging due to: (1) higher interest cost; (2) execution constraints; and (3) volatile capital markets impacting fund raising plans for several private sector projects. Besides, there have been delays in terms of land acquisition, environmental clearances, tight demand-supply for main plant equipment, etc which have further increased challenges for the sector.

Capacity addition below target, plant shutdown for maintenance and lower reservoir levels resulted in a moderate 2.5 per cent increase in total power generation during April– July 2008. Shortage of lignite and gas together with increase in time lag between syncronisation of plant and commercial operation date also supported slower growth. However, completion of plant maintenance and higher availability of dry coal post monsoon together with expectation of a good monsoon is expected to result in a 6.3 per cent growth in power generation during 2008–09. While thermal power generation reported a 4.8 per cent increase, hydro power output dipped by 5.4 per cent during April– July 2008. Decline in water levels at major reservoirs in India led to lower hydel power. As on 7 August 2008, water levels recorded a sharp 35.3 per cent decline vis–a–vis year ago levels. However, the situation improved considerably compared to the previous week. A good rainfall in the coming months will result in higher hydel output. Under the Indo–US civilian nuclear agreement, India has agreed to place its civil nuclear facilities under International Atomic Energy Agency safeguards and, in exchange, the United States agreed to work towards full civil nuclear cooperation with India. This agreement will enable India meet its goal of adding 25,000 mw of nuclear power capacity through imports of nuclear reactors and fuel by 2020. On signing the agreement, supply of raw materials to existing nuclear power plants is likely to increase resulting in higher nuclear power output. In line with expectation, average power deficit recorded a decline to 8.4 per cent in June 2008 compared to the previous month. Yet, states across India continued to face acute power cuts. This may either hamper industrial production or may push up the fuel cost involved in running captive power on account of rise in diesel prices.

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Fig.42 - Power Generation Statistics

Source: CMIE

FMCG The FMCG sector could be impacted by rising inflationary pressure. Recent price hikes by the companies could soften demand growth and trigger down-trading. Strong pricing power and high switching cost would be the key differentiator, as it would ensure stability in margins and sustain volume growth. A selective approach, with preference for companies in packed foods, decorative paints, cigarettes, detergents, IMFL and skin care is preferred. Key differentiating factors for FMCG companies: (1) high pricing power; (2) high consumer switching cost; and (3) product innovation.

Retail Existing retailers would continue to grow topline and attract footfalls, though same-store sales growth could slow down. Rising competition and entry of new players would continue to offer bargains to consumers and retain the attraction of organized retail.

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EBITDA margins are unlikely to expand due to rising lease rentals and manpower costs. We expect specialty stores to flourish due to committed customers and strong brand recall. The key differentiating factors for retail companies would be: (1) scale of operations, and (2) cost control initiatives.

Metals Metal sector contributes ~ 6% of the total market capitalization of NIFTY. Tata Steel recorded the highest Operating & PAT Margin in the metal sector whereas Sterlite Industries recorded the highest Dividend payout in the sector. The Debt/ Equity of the metal sector stood at 0.51 X where Tata Steel has the highest leverage of 0.66 X.

Table 8 – Metals sector Security Symbol STER SAIL TATASTEEL

Market Capitalisation

Beta

ROE %

44,929 58,094 47,873

1.11 1.38 1.1

9.54 34.07 17.03

ROCE % 7.68 28.76 11.61

Debt/ Equity 0.63 0.24 0.66

PAT Margin % 7.93 17.96 23.65

Current Ratio 2.47 1.59 3.92

EPS Rs. 13.43 18.24 63.62

Fig.43 – Steel production growth

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Global crude steel output increased 3.9% to 554m tons during January-May 2008, driven by 9.7% growth in China, 13.5% in India and 2.9% in the rest of the world (RoW). China’s moving average total (MAT) growth rate has slowed from 21.5% in May 2007 to 11.2% in May 2008 due to slower capacity addition and closing of ~30m tons of inefficient capacity, while India’s MAT growth rate has climbed steeply from 9.1% in May 2007 to 16% in May 2008. China is still the largest contributor to growth and accounted for 61% of the incremental crude steel production during January-May 2008.

Fig.44 – Coke price trend

Fig.45 – Global Inventory & price trend

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Aluminium prices on LME are expected to average US$3,000/ton during FY09. Recent hike in electricity rate in China will increase the cost of production of aluminium there. Rising energy costs will ensure that aluminium remains firm. Aluminum prices have increased 7% QoQ to US$2,991/ ton and 7% YoY.

Shortage of raw material – coking coal, iron ore and steel scrap – has shifted the cost curve of the steel industry upwards and has constrained the global production of crude steel, resulting in doubling of steel prices in a short span of six months. Integrated steel producers like Tata Steel and JSPL are the key beneficiaries of this trend. While the costs of steel producers using the blast furnace route have increased significantly, after 3x increase in coking coal prices in 2008, the costs of sponge iron based mini steel mills has not increased in a similar fashion due to use of domestically available coal. Mini mills like Godawari, Raipur Alloy, Monnet Ispat, Tata Sponge, and Adhunik Metaliks are the key beneficiaries of this trend.

Steel prices cool off in July Backed by measures taken by primary steel producers to restrain prices at the dealer level, average steel prices took a breather in July. On sequential basis, the benchmark hot rolled coils recorded a 4.5 per cent fall to Rs.45,200 per tonne during the month. Prices of other flat products like cold rolled coils and galvanised sheets recorded modest declines of 0.6 per cent and 1.5 per cent, respectively. Rio Tinto, the second largest iron exporter, reached an agreement with all of its customers in Asia for iron ore deliveries, with price increases of a whopping 97 per cent. In tandem with global prices, domestic mining major, NMDC, is pitching in for a substantial price hike in the range of 70–80 per cent for its ore contracts in 2008–09. The three–month moratorium for holding steel prices came to end in July 2008. While steel prices would remain stable in the near term, these are expected to fur- ther firm up in phases in 2008–09 on account of mounting cost pressures. Healthy cash flows accruing from the buoyancy in steel prices would enable the industry to service high cost of debt on existing term loans and working capital loans. The share of big steel companies in total outstanding investments amount to a significant 61 per cent.

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Most of the steel majors would be able to leverage their strong financial profile to fund their ongoing projects and secure financial closure for their new projects. We thus do not perceive rising interest rates as a major concern, which could stall or delay expansions in the steel industry. Steel demand continued to remain upbeat in 2008–09, with consumption of finished steel growing by a decent 6.8 per cent during April–May 2008. However, production of finished steel continued to rise at a tepid pace. Aggregate production growth during April–May stood at a modest 5.1 per cent.

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5.3

Company/ Stock Analysis

ABB Ltd.

ABB intends to invest $ 100 million towards capex expenditure in CY08-CY09. It plans to increase the transformer capacity to 22500 MVA from the current 15000 MVA.

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ACC Ltd.

The Operating Margin has decreased by 315 bps YoY for April-June quarter 2008 due to increase in raw material cost and lower realization.

The ROE has increased from 20.77% in FY04 to 34.47% in FY07. The Inventory turnover has also increased from 6.05x to 6.79 times from FY04 to FY07. The short term liquidity of the company has remained in the range of 0.80x to 0.95x over the past 4 years. The leverage of the company has reduced significantly and the interest coverage has increased over the past 4 years. The Dividend % has increased to 200% and the retention has remained between 62-74% over the past 4 years.

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Bharti Airtel Ltd.

Revenue grew by 40.65% while PAT grew by 45% YoY for Q1FY09. The revenue has increased largely on subscriber addition as ARPU has declined.

The ROE for FY08 stood at 31% and the short term liquidity of the company has remained below 0.60x. The company has not distributed any dividends and thereby retained its entire earnings with the business. The Financial leverage of the company is calculated to be 1.06

The company has been assigned the multiple of 22 and based on its FY10E EPS of Rs.54.60 the price target is Rs.1201.

CMP: Rs.812 EPS (Rs.) FY08 FY09E FY10E

35.31 44.60 54.60

P/E 23.00 18.21 14.87

Price Multiple Target (x) (Rs.) 22 22

981 1,201

Potential Upside %

47.93

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BHEL

Revenue of the company has increased by 32% while PAT recorded a growth of 33% YoY for Q1FY09. The Net Profit margin recorded 8.17% for Q1FY09.

The ROE of the company has increased significantly from 13% to 25% from FY04 to FY07. The dividend per share has increased from Rs.6 to Rs.24.50 over the past 4 years.

The order book for the company stood at Rs.85200 crores as on March 2008. During 1QFY09, BHEL bagged orders worth more than Rs100b, including key order of 500MW at Korba West and two units of 500MW each at Marwa thermal power project worth Rs33.7b (3*500MW), Gas Turbine based Combined Cycle Power Plant of 1,371MW for Pragati III worth Rs35.9b, 153MW captive power plant for Bhatinda refinery worth Rs11.5b and Bokaro TPS of 500MW worth Rs18.4b for Damodar Valley Corporation (DVC).

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BPCL

The debt equity of the company has increased from 0.46x to 1.05x in FY07. The dividend payout of the company has been in the range of 30 to 40% in the last 4 years. The Raw Material cost stood at 92% of the revenue in FY07 and has gone higher due to sharp increase in crude oil prices.

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Cairn India Ltd.

Cipla Ltd.

The EBITDA margin for FY08 stood at 23.06% and the Net Profit margin stood at 16.57%. The Interest coverage of the company has increased from 31x to 73x. P/E stands

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at 25.53 while P/CEPS is 21.46. Revenue grew 30% while PAT growth has been 16% YoY for Q1FY09.

CMP: Rs.230 EPS (Rs.) FY08 FY09E FY10E

9.01 10.20 11.60

P/E 25.53 22.55 19.83

Price Multiple Target (x) (Rs.) 22 22

224 255

Potential Upside %

10.96

The company has been assigned a multiple of 22x and based on FY10E EPS of Rs.11.60 price target is Rs.255.

DLF Ltd.

The Operating Margin for the company stood at 55.69% and the net profit margin stood at 46.82% for FY08. The Interest coverage has increased to 8x in FY08 from 6.12x in FY04. The stock is trading 38.63x its current EPS of 15.19.

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Dr.Reddy’s Laboratories Ltd.

Revenue YoY growth and PAT YoY growth for Q1FY09 stood at 48 % and 44 % respectively. Operating Margin increased by 586 bps YoY and the Net profit margin stoof at 19.07 % for Q1FY09. Other Income contributed ~ 7% to the sales of the company for FY08.

CMP: Rs.567 EPS (Rs.) FY08 FY09E FY10E

28.26 29.65 38.94

P/E 20.08 19.14 14.58

Price Multiple Target (x) (Rs.) 22 22

652 857

Potential Upside %

50.93

The company has been assigned a multiple of 22x and based on FY10E EPS of Rs.38.94, price target of Rs.857 has been set or a 50.93% upside from the CMP of Rs.567.

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GAIL

Revenue YoY growth and PAT YoY growth for Q1FY09 stood at 34.98 % and 30.89 % respectively. The Operating Margin & Net Profit Margin for Q1FY09 was 24.42 % and 15.65 % respectively. The interest coverage has increased from 23x to 50x in the last four years for the company.

CMP: Rs.429 EPS (Rs.) FY08 FY09E FY10E

30.76 32.70

P/E 13.97 13.14

Price Multiple Target (x) (Rs.) 14

458

Potential Upside % 6.56

The company has been assigned a multiple of 14 and based on the FY09E EPS of Rs.32.70, target of Rs.458 is set or an upside of 6.56% from the CMP of Rs.429.

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Grasim Industries Ltd.

The Viscose Staple Fibre installed capacity has been increased by 24 % in FY08 to 333,975 TPA. The Grey Cement capacity installed capacity has been increased by 28% to 16.75 MnTPA

CMP: Rs.2045 EPS (Rs.) FY08 FY09E FY10E

289.44 296.58 295.15

Price Multiple Target (x) (Rs.)

P/E 7.07 6.90 6.93

7 7

2,076 2,066

Potential Upside %

1.01

The company has been assigned a multiple of 7 and based on the FY10E EPS of Rs.295.15, target of Rs.2,066 is set or an upside of 1.01% from the CMP of Rs.2,045.

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HCL Technologies Ltd.

HCL booked a forex loss of US$ 71.3million, out of which US$31 million was primarily due to the cancellation of forex hedges worth US$540 million. The company still holds forex cover of US$ 2 billion spread over the next seven quarters. The forex losses booked by HCL are the highest in the industry due to which its net profit has declined sharply by 58.8 % (Q-o-Q) standing at Rs.141 crore. Taking out the effect of hedging losses, the company has shown strong growth of 19.0% (Q-o-Q) in bottomline. Thus, the company had a good operational performance but hedging losses overshadowed it.

HCL reported EBIT margins at 19.5% with expansion of 123 bps (Q-o-Q). The factors that contributed to this were higher utilization rate, rupee depreciation, higher realization and better realization in one of the BPO deals adding 85 bps, 191 bps, 14 bps and 43 bps, respectively, to margins. However, this was compensated by the dip caused by higher selling, general & administration cost (SGA), hedging losses, depreciation and shift to onsite dragging margins by 108 bps, 82 bps, 10 bps and 10 bps, respectively.

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HDFC Ltd.

The Revenue & PAT YoY growth during Q1FY09 has been at 26.63 % and 25.56 % respectively. The BV of the company stands at Rs.282.31 per share and the P/BV is 8.32x.

HDFC Bank Ltd.

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YoY Income growth & PAT growth for Q1FY09 was at 70.36 % and 44.55 % respectively. The BV of the company is Rs.272.42 per share and is currently trading at 4.56x P/BV.

Hero Honda

The Sales YoY growth and PAT YoY growth stood at -0.60% and 43.74% respectively. The sales realization reduced YoY due to slowing unit sales as the interest rate have increased significantly in the past quarter which affected the 2-wheeler demand.

CMP: Rs.837 EPS (Rs.) FY08 FY09E FY10E

48.47 53.70 60.10

P/E 17.27 15.59 13.93

Price Multiple Target (x) (Rs.) 13 13

698 781

Potential Upside %

-6.65

Multiple of 13x has been assigned and on the basis of FY10E EPS of Rs.60.10 a price target of Rs.781 has been set or a downside of 6.65% from the CMP of Rs.837.

77

Hindalco Industries Ltd.

Sales realization has shown a negative growth of 0.65% YoY during Q1FY09 whereas PAT growth is due to the growth in Other Income of 72.28%

CMP: Rs.124 EPS (Rs.) FY08 FY09E FY10E

24.38 18.95 18.08

Price Multiple Target (x) (Rs.)

P/E 5.12 6.58 6.90

6 6

114 108

Potential Upside %

-13.04

Multiple of 6x has been assigned and based on the FY10E EPS of Rs.18.08, price target of Rs.108 has been set or a downside of 13.04% from the CMP of Rs.124.

78

Hindustan Unilever Ltd.

Sales YoY growth & PAT YoY growth for Q1FY09 have been at 21.09 % and 13.20 % respectively. The other income component decreased by 21.10 % YoY during Q1FY09. The ROE of the company has increased from 60.88% to 122.52% from FY04 to FY07. The dividend per share has also increased from Rs.5 to Rs.9.08 from FY04 to FY07.

ICICI Bank Ltd.

79

Idea Cellular Ltd.

The company incurred capex of 5,120 crores during FY08 and the subscriber addition was up by 71 % to 24 million during FY08. The revenue for the company has grown at 139.17 % and PAT growth has been at 39.43 % during Q1FY09.

Infosys Technologies Ltd.

Revenue growth and PAT growth YoY has increased during Q1FY09 by 27.18 % and 22.76 % respectively. The company is completely debt free and therefore the cost of

80

capital is equal to the cost of debt. The BV is Rs.235.84 per share and the P/BV is 7.46x. Employee expense is equal to 49.66 % of the Net Sales during FY08.

CMP: Rs.1759 EPS (Rs.) FY08 FY09E FY10E

81.26 95.10 104.70

P/E 21.65 18.50 16.80

Price Multiple Target (x) (Rs.) 20 20

Potential Upside %

1,902 2,094

19.04

Multiple of 20x has been assigned and on the basis of FY10E EPS of Rs.104.70, price target is Rs.2,094 or a 19.04 % upside from the CMP Rs.1,759.

ITC Ltd.

Revenue grew 17.28 % during Q1FY09 but the PAT grew a negative of 4.37 % YoY for Q1FY09. The ROE has been above 20 % for the past 4 years. The Dividend payout has increased from 36.64 % in FY04 to 48.67 % in FY07.

81

CMP: Rs.195 EPS (Rs.) FY08 FY09E FY10E

8.28 9.70

P/E 23.56 20.11

Price Multiple Target (x) (Rs.) 21

Potential Upside %

204 4.61

Multiple of 21x has been assigned and on the basis of FY09E EPS of Rs.9.70, price target is Rs.204 or an upside of 4.61 % from the CMP of Rs.195.

Larsen & Toubro Ltd.

Revenue growth & PAT growth YoY during Q1FY09 has been at 52.88 % and 33.33 % respectively. The PAT margin for Q1FY09 was recorded at 7.18 %. The BV is Rs.270.78 per share and the P/BV is 9.99 at CMP of the stock and the Tax rate for FY08 was 32.01% L&T maintained its guidance of 30-35 % revenue growth and 30 % growth in order inflow for FY09 despite evidence of slowdown in products business and slower order inflow from mature businesses. A pick up in order inflow is likely in the domestic oil & gas segment and from projects in the Middle East.

82

Mahindra & Mahindra

PAT YoY recorded a negative growth of 16.67 % in Q1FY09. The Operating profit margin reduced by 192 bps to 7.50 % and the Net Profit margin reduced by 166 bps to 4.83 % during Q1FY09. The Ploughback ratio or retained earnings has increased from 68 % to 74 % in FY07.

Maruti Suzuki India Ltd.

83

The company’s domestic sale volume grew lightly more than the industry at 12 %. The company increased its market share in passenger cars from 51 % to 51.40 %. The company’s share in A2 segment remains above 58 % and 21.90 % in the A3 segment while the total market share in the 4=wheeler segment stands at 46 %.

Sales increased 2.91 % YoY while PAT registered a negative growth of 6.76 % during Q1FY09.

CMP: Rs.695 EPS (Rs.) FY08 FY09E FY10E

59.91 67.35 78.00

P/E 11.61 10.33 8.92

Price Multiple Target (x) (Rs.) 10 10

674 780

Potential Upside %

12.12

Multiple of 10x has been assigned and on the basis of FY10E EPS of Rs.78, price target is Rs.780 or an upside of 12.12 % from the CMP of Rs.12.12 %.

National Alumunium Company Ltd.

84

Revenue growth was 24.81 % while PAT grew 17.61 % YoY for Q1FY09. The Operating profit margin reduced by 202 bps to 45.87 % during Q1FY09. The CEPS of the company is Rs.29.56 and the P/CEPS is 13.29 at CMP of Rs.393. The dividend yield of the company was 1.91 % and the P/BV is 2.72x.

CMP: Rs.393 EPS (Rs.) FY08 FY09E FY10E

25.22 27.50 33.30

P/E 15.61 14.32 11.83

Price Multiple Target (x) (Rs.) 14 14

385 466

Potential Upside %

18.38

Multiple of 14x has been assigned and on the basis of FY10E EPS of Rs.33.30, the price target is Rs.433 or an upside of 18.38 % from the CMP of Rs.393.

NTPC

Q1FY09 recorded a growth of 6.35 % in revenue and a negative growth in PAT YoY. The Operating profit margin reduced by 465 bps to 25.39 % YoY and the net profit margin reduced by 833 bps to 18.09 % YoY during Q1FY09. The Dividend per share has increased from Rs.1.39 to Rs.3.20 from FY04 to FY07 and the Debt Equity of the company has been in the range of 0.42 to 0.52 in the last 4 years.

85

The topline increase saw more contribution from higher realizations, which were at Rs.1.94 per unit for Q1FY09 and Rs.1.84 in Q1FY08. The coal and gas plants have run at a plant load factor (PLF) of 92.19% and 67.20% as compared to 94.00% and 77.98%, respectively for the corresponding quarter. The consumption of coal was also marginally down to 28.71 million tonnes (MT) against 29.45 MT for the corresponding quarter. PAT for the quarter excluding previous period sales, forex revaluation, incentives and wage revision effect has grown by 5.28%. During the first quarter, NTPC has been able to commission its two plants, one at Sipat with a capacity of 500 MW and other at Bhilai (JV) of 250 MW. The Kahalgaon plant with a capacity of 500 MW has also become operational from August 1 2008. In addition to these, NTPC further plans to add 2000 MW of own capacity and 500 MW of JV capacities during the current year itself.

CMP: Rs.178 EPS (Rs.) FY08 FY09E FY10E

8.99 10.19 11.03

P/E 19.81 17.48 16.15

Price Multiple Target (x) (Rs.) 20 20

204 221

Potential Upside %

23.86

Multiple of 20 has been assigned and on the basis of FY10E EPS of Rs.11.03, price target is Rs.221 or an upside of 23.86 % from the CMP of Rs.178.

86

ONGC

Revenue of ONGC grew at 46.59 % and PAT grew 43.94 % YoY during Q1FY09. The operating margin improved to 58.42 % and the Net Profit margin stood at 32.97 % during Q1FY09. The interest coverage has increased from 2.76x in FY04 to 6.70x in FY08. Power & Fuel cost has been above 60 % of the revenue for the last 4 years. The CEPS stood at Rs.11.59 and the P/CEPS stood at 13.91x and the dividend yield stood at 2 %. The P/BV is 2.37x at CMP.

Punjab National Bank

87

Punjab National Bank (PNB) reported its Q1FY09 results, which were in line with our expectations. The company reported a PAT of Rs 512.4 crore in Q1FY09 against Rs 425.05 crore in Q1FY08 (jump of 21% Y-o-Y). On the core business front, the bank reported a modest growth of 20% and 21.4% on the advances and deposits, respectively. The NIMs, on a Y-o-Y basis, have declined by 32 bps to 3.27% due to higher cost of funds and higher CRR prescription. There was also a significant improvement on the asset quality front as NNPAs have come down to 0.63% in Q1FY09 from 0.98% in Q1FY08.

88

Power Grid Corporation

The ROE of the company has improved from 8.77 % to 11.21 % from FY04 to FY07 while the current ratio reduced from 1.05x to 0.54x during the same period. The retention ratio has stayed above 70 % from during FY04 to FY07. For Q1FY09, revenue grew at 32.66 % while PAT declined by 32.31 % primarily due to increase in interest expense. The Operating profit margin remains high at 82.54 % while PAT margin is at 23.66 % for Q1FY09.

Ranbaxy Laboratories

89

Sales increased 18.45 % and PAT growth was recorded at 18.45 % and -91.85 % respectively during Q1FY09. Multiple of 22x has been assigned and based on the FY10E EPS of Rs.22.70, price target of Rs.499 has been set or a 8.71% upside from the CMP of Rs.459

CMP: 459 EPS (Rs.) FY08 FY09E FY10E

15.86 18.77 22.70

P/E 28.97 24.48 20.24

Price Multiple Target (x) (Rs.) 22 22

413 499

Potential Upside %

8.71

Reliance Industries Ltd.

Multiple of 19x has been assigned and based on the FY10E EPS of Rs.165.20, price target of Rs.3,139 has been set or a 50.71% upside from the CMP of Rs.2,082.

90

CMP: Rs.2082 EPS (Rs.) FY08 FY09E FY10E

105.40 113.60 165.20

P/E

Price Multiple Target (x) (Rs.)

19.76 18.33 12.61

19 19

2,158 3,139

Potential Upside %

50.71

Reliance Communications Ltd.

RCom’s broadband business grew by 56 % in FY08 whereas ARPU sharply declined as compared to peers. Rcom had 5.26 crore subscribers as on July 2008 and 30295 towers by end-June 2008. Multiple of 15x has been assigned and based on the FY10E EPS of Rs.37.35, price target of Rs.560 has been set or a 40.41% upside from the CMP of Rs.399. CMP: Rs.399 EPS (Rs.) FY08 FY09E FY10E

24.97 30.27 37.35

P/E 15.98 13.18 10.68

Price Multiple Target (x) (Rs.) 15 15

454 560

Potential Upside %

40.41

91

Reliance Infrastructure Ltd.

Multiple of 22x has been assigned and based on the FY10E EPS of Rs.47, price target of Rs.1,034 has been set or a 1.48% upside from the CMP of Rs.1,018.

CMP: Rs.1018 EPS (Rs.) FY08 FY09E FY10E

45.68 47.50 47.00

P/E 22.31 21.45 21.68

Price Multiple Target (x) (Rs.) 22 22

1,045 1,034

Potential Upside %

1.48

92

SAIL

Multiple of 7x has been assigned and based on the FY09E EPS of Rs.20.60, price target of Rs.144 has been set or a 4.92% upside from the CMP of Rs.137.

CMP: Rs.137 EPS (Rs.) FY08 FY09E FY10E

18.24 20.60

Price Multiple Target (x) (Rs.)

P/E 7.52 6.66

7

144

Potential Upside % 4.92

93

Satyam Computers Ltd.

Satyam Computers delivered an 8.5% Q-o-Q growth in topline at Rs.2621 crore, in line with our estimate of Rs.2620 crore. EBITDA margins at 24.12% improved 133 bps ahead of our expectation of 60 bps improvement. The big surprise was the company’s net profit performance, which grew by 17% Q-o-Q to Rs 548 crore. The business mix of the company safeguards the company, relative to its peers, from the impending financial crises in the US (Satyam has the least exposure to the BFSI segment compared to TCS and Infosys). The company has also had some significant deal wins this quarter, which further re-iterate our confidence as one of the best picks in the sector.

94

Multiple of 15x has been assigned and based on the FY10E EPS of Rs.33.12, price target of Rs.497 has been set or a 17.98% upside from the CMP of Rs.421. CMP: Rs.421 EPS (Rs.) FY08 FY09E FY10E

24.71 30.40 33.12

P/E 17.04 13.85 12.71

Price Multiple Target (x) (Rs.) 15 15

456 497

Potential Upside %

17.98

State Bank of India

95

Siemens Ltd.

Sterlite Industries Ltd.

Recent restructuring of the existing business of Sterlite in power, zinc, copper and alumunium is value-neutral as the arrangement requires that for every four shares held in Sterlite, seven shares of MALCO (Madras Alumunium) will be given. Acquisition of

96

Konkola mines in Zambia and American Smelting and Refining company (ASARCO) will result in value creation. CMP: Rs.514 EPS (Rs.) FY08 FY09E FY10E

Price Multiple Target (x) (Rs.)

P/E

66.00 61.90 71.69

7.80 8.32 7.18

7 7

433 502

Potential Upside %

-2.50

Sun Pharmaceuticals Ltd.

Multiple of 25x has been assigned and based on the FY09E EPS of Rs.66.70, price target of Rs.1,688 has been set or a 10.12% upside from the CMP of Rs.1,513.

CMP: Rs.1513 EPS (Rs.) FY08 FY09E FY10E

48.12 66.70

P/E 31.44 22.68

Price Multiple Target (x) (Rs.) 25

1,668

Potential Upside % 10.12

97

Suzlon Energy Ltd.

Multiple of 20x has been assigned and based on the FY09E EPS of Rs.12.35, price target of Rs.247 has been set or a 5.22% upside from the CMP of Rs.234.

CMP: Rs.234.75 EPS (Rs.) FY08 FY09E FY10E

7.43 12.35

P/E 31.59 19.01

Price Multiple Target (x) (Rs.) 20

247

Potential Upside % 5.22

98

Tata Communications

Tata Motors

99

Tata Power Company Ltd.

Tata Steel Ltd.

Coking coal prices and iron ore prices have increased by 100 % and 60 % respectively which is pushing the increase in prices. Corus is expected to produce 21 mt in FY09 while Tata Steel’s domestic production will increase by 0.8 mt to 5.7 mt in FY09.

100

Tata Consultancy Services Ltd.

Tata Consultancy Services once again delivered muted growth of 5.9% (q-o-q) as compared to our expectation of 6.64% (q-o-q). Bottom line registered a de-growth of 0.9% compared to our expectation of flattish growth. The revenues for the quarter stood at Rs 6411 crore and bottomline was at Rs 1243 crore. The muted performance was attributable to certain client specific issues faced by the company. EBDITA margins at 23.89% saw a drop of 113 bps compared to our expectation of 61 bps drop. The performance, we believe re-iterates our view of short-term concerns regarding client spend and delays in project ramp-ups. On the positive side however, the company closed 12 large deals this quarter out of which 3 deals were in the range of $75 -$100 million. We are confident of the delivery capability of the company, a healthy deal pipeline also provides comfort regarding future growth visibility.

Multiple of 16x has been assigned and based on the FY09E EPS of Rs.65.10, price target of Rs.1,042 has been set or a 22.41% upside from the CMP of Rs.850.

101

CMP: Rs.850 EPS (Rs.) FY08 FY09E FY10E

51.36 59.10 65.10

P/E 16.57 14.40 13.07

Price Multiple Target (x) (Rs.) 16 16

946 1,042

Potential Upside %

22.41

Unitech Ltd.

102

Wipro Ltd.

Multiple of 16x has been assigned and based on the FY09E EPS of Rs.29.90, price target of Rs.478 has been set or a 10.77% upside from the CMP of Rs.431.

CMP: Rs.431 EPS (Rs.) FY08 FY09E FY10E

22.15 26.73 29.90

P/E 19.50 16.16 14.44

Price Multiple Target (x) (Rs.) 16 16

428 478

Potential Upside %

10.77

103

Zee Entertainment Ltd.

Multiple of 20x has been assigned and based on the FY09E EPS of Rs.13.55, price target of Rs.271 has been set or a 19.88% upside from the CMP of Rs.226.

CMP: 226.05 EPS (Rs.) FY08 FY09E FY10E

8.77 10.69 13.55

P/E 25.78 21.15 16.68

Price Multiple Target (x) (Rs.) 20 20

214 271

Potential Upside %

19.88

104

CONCLUSION

105

6.1

Conclusion

The GDP growth for 2008-09 is seen between 7.50 % - 8.00 %. The US$/ Rs. Foreign exchange rate for CY2009 is estimated to be around Rs.43 to a dollar. 60 % of the respondents view inflation returning to single digit by January 2009. Crude oil is expected to consolidate in the range of $100 - $120/ bbl during CY2009. The historical average of NIFTY P/E is 17.4 and the current P/E of NIFTY stands at 18.43 as on 29August 2008. The macroeconomic factors suggest NIFTY P/E to remain above the historic average of 17.4x for CY2009. Current NIFTY P/BV of 3.83 x as on 29-August 2008 is below the historical average of 3.89 x. Among the sectors, banking sector looks most positive followed by Oil & Gas and Capital goods sector. The β of banking sector is 1.1 which is relatively lower than the β of 1.3 of the Power sector and higher than β of 0.45 of the Pharma sector. Sugar sector & Fertilizer sector appears weak over a horizon of more than 1 year. The stock upside is seen in Reliance Industries (50.93%), Bharti Airtel (47.93%) and NTPC (23.86%) over the next 12-18 months from September 2008.

Fig.46 – NIFTY P/E & P/BV trend NIFTY P/E & P/B 30 25 20 P/E P/B

15 10 5 0 Ja J Ja J Ja J Ja J Ja J Ja J Ja J n- ul- n- ul- n- ul- n- ul- n- ul- n- ul- n- ul02 02 03 03 04 04 05 05 06 06 07 07 08 08

106

Table – Company Valuations consolidated CMP Rs.

Company Bharti Airtel Cipla Dr.Reddy's Laboratories GAIL Ltd. Grasim Industries Hero Honda Hindalco Industries Infosys Technologies ITC Ltd. Maruti Suzuki India Ltd. NALCO NTPC Ranbaxy Laboratories Reliance Industries Reliance Communications Reliance Infrastructure SAIL Satyam Computers Sterlite Industries Sun Pharmaceuticals Suzlon Energy TCS Wipro Zee Entertainment

812 230 567 429 2,045 837 124 1,759 195 695 393 178 459 2,082 399 1,018 137 421 514 1,513 234 850 431 226

FY09E EPS

FY10E EPS

44.60 10.20 29.65 32.70 296.58 53.70 18.95 95.10 9.70 67.35 27.50 10.19 18.77 113.60 30.27 47.50 20.60 30.40 61.90 66.70 12.35 59.10 26.73 10.69

54.60 11.60 38.94 295.15 60.10 18.08 104.70 78.00 33.30 11.03 22.70 165.20 37.35 47.00 33.12 71.69

65.10 29.90 13.55

Multiple x 22 22 22 14 7 13 6 20 21 10 14 20 22 19 15 22 7 15 7 25 20 16 16 20

Target Rs. 1,201 255 857 458 2,066 781 108 2,094 204 780 466 221 499 3,139 560 1,034 144 497 502 1,668 247 1,042 478 271

Upside 47.93% 10.96% 50.93% 6.56% 1.01% -7.00% -13.04% 19.04% 4.61% 12.12% 18.38% 23.86% 8.71% 50.71% 40.41% 1.48% 4.92% 17.98% -2.50% 10.12% 5.22% 22.41% 10.77% 19.88%

Based on the fundamental analysis, the potential upside has been projected as seen in the table. The valuations are subject to market risks and other systematic & unsystematic risk. Fig.47 – Sector Beta SECTOR BETA 1.6 Cons truction 1.4

Power

1.2 Banking 1 0.8 0.6 0.4

Auto

IT FMCG Pharm a

0.2 0

107

6.2

Bibliography

1. Corporate Finance 2e – Aswath Damodaran 2. Investment Analysis & Portfolio Managemen 8e – Reilly/ Brown 3. Financial Management 7e – Prasanna Chandra 4. Grahan and Dodd’s Security Analysis 5e – Cottle/ Murray/ Block 5. Financial Management – Khan & Jain 6. India Strategy – Enam Research 7. India Strategy – Motilal Oswal Research 8. Research reports – ICICI direct 9. www.icicidirect.com 10. www.moneycontrol.com 11. www.myiris.com 12. www.nseindia.com 13. finmin.nic.in 14. www.cmie.com 15. www.wrtg.com

108

APPENDICES

109

7.1 •

Thesis Synopsis Student details: Name:

APURVA PRASAD

Batch:

PGP/06-08/FW

Specialization: Finance & Marketing Phone No.: E-mail:

+91-9967293901 [email protected]

•

Area of Research:

Corporate Finance

•

Title of the Thesis:

“To study & analyze Corporate Financing and Corporate Valuation of Indian firms”

•

Premise:

S&P CNX-500/ Nifty-50

•

Literature:

Financial Management – Prasanna Chandra Financial Management – M.Y.Khan & P.K.Jain

•

Scope of thesis: o Corporate Financing & Leverage of S&P CNX-500/ Nifty (Internal, External). o Capital Structure analysis of S&P CNX-500/ Nifty (EBIT-EPS/ ROI-ROE analysis). o Corporate Valuation & Risk/ Return of S&P CNX-500/ Nifty (valuation models).

•

Research Methodology: o Primary Research: Data mining, Interview (Qualitative)

110

o Desk Research: Published Texts, documents, Internet.

•

Relevance/ Importance of selected Research topic: The role of financial system in mobilizing and allocating the resources for capital formation has been well established by many studies. In this paper, an attempt has been made to understand the financing pattern of Indian companies represented by S&P CNX-500/ Nifty-50. Corporate valuations play a major role in determining long term growth of an economy; therefore the thesis also intends to focus on corporate valuation aspects of the Indian companies.

An empirical study on S&P CNX-500/ Nifty-50 with postulation that it qualifies to infer on Indian companies since S&P CNX-500 stands for >90% market capitalization of all listed companies in India; Nifty-50 contributes ~ 60% market capitalization of all listed companies in India. •

Details of the External Guides
Guide-1 o Name:

Prof. R.C.M.Pendyala

o Designation: Visiting Faculty, IIPM Mumbai o Qualification: MBA, AICWA o Contact no:

+91-9820356445


Guide-2 o Name:

Mr.Manoj Agarwal

o Designation: Head, Retail Clients, Inventure Growth & Securities Ltd. o Contact no:

+91-9820719589

111

7.2

Response Sheets RESPONSE SHEET # 1

Name:

APURVA PRASAD

ID No.:

IIPM/ FW/ 06-08/ MUM/ FIN/ 043

Progress of Thesis: I have prepared the financial modeling format in excel which includes ratio analysis, margin analysis and valuations for Nifty 50.

I have also been referring to Literature on Financial Analysis & Financial Management

Reference: •

Security Analysis – Graham & Dodd

•

Financial Management – Prasanna Chandra

•

Investment Analysis & Portfolio Management – Reilly Brown

•

NSE Research Papers

P.S. Excel Fin Model attached with mail.

112

RESPONSE SHEET # 2

Name:

APURVA PRASAD

ID No.:

IIPM/ FW/ 06-08/ MUM/ FIN/ 043

Progress of Thesis:

I have secured data and analyzed it using the financial model prepared by me.

I have prepared the financial modeling format in excel which includes ratio analysis, margin analysis and valuations for Nifty 50.

I have also been referring to Literature on Financial Analysis & Financial Management

Reference: •

Corporate Finance – Aswath Damodaran

•

Security Analysis – Graham & Dodd

•

Financial Management – Prasanna Chandra

•

Investment Analysis & Portfolio Management – Reilly Brown

•

NSE Research Papers

P.S. Updated Excel Fin Model attached with mail.

113

RESPONSE SHEET # 3

Name:

APURVA PRASAD

ID No.:

IIPM/ FW/ 06-08/ MUM/ FIN/ 043

Progress of Thesis: •

I’ve completed financial data mining for NIFTY-50 companies using excel modeling.

•

I’ve also identified important macroeconomic triggers and I’m working on analysis of macroeconomic triggers viz Monetary measures, Inflation & Fiscal structure, Forex & Debt market, Capital movement & Global economy.

•

I have also been referring to Literature on Financial Analysis & Financial Management.

Reference: •

Corporate Finance – Aswath Damodaran

•

Security Analysis – Graham & Dodd

•

Financial Management – Prasanna Chandra

•

Investment Analysis & Portfolio Management – Reilly Brown

•

NSE Research Papers

P.S. Consol financials & Updated Excel Fin Model attached with mail.

114

RESPONSE SHEET # 4

Name:

APURVA PRASAD

ID No.:

IIPM/ FW/ 06-08/ MUM/ FIN/ 043

Progress of Thesis: •

I’ve prepared the draft & financial valuation of the NIFTY companies.

•

I will frame the questionnaire and conduct the qualitative interview next.

Reference: •

Corporate Finance – Aswath Damodaran

•

Security Analysis – Graham & Dodd

•

Financial Management – Prasanna Chandra

•

Investment Analysis & Portfolio Management – Reilly Brown

•

NSE Research Papers

P.S. draft thesis attached

115

RESPONSE SHEET # 6

Name:

APURVA PRASAD

ID No.:

IIPM/ FW/ 06-08/ MUM/ FIN/ 043

Date when Guide was consulted:

20-09-2008

Progress of Thesis: •

Received approval of thesis draft from guide as well as structural & contextual approval.

•

Formatting of the content

Reference: •

Corporate Finance – Aswath Damodaran

•

Security Analysis – Graham & Dodd

•

Financial Management – Prasanna Chandra

•

Investment Analysis & Portfolio Management – Reilly Brown

•

NSE Research Papers

116

7.3

Thesis Questionnaire

1.

Indian GDP will grow at _____ % during 2008-09. a) < 7 %

b) 7-7.50 %

c) 7.50-8.00 %

d) > 8%

2.

$ / Rs. will sustain _______ for CY2009.

( 37

___

3.

Inflation will reach single digits by ___________.

___

40

a) November 2008

4.

___

___

___

b) January 2009

45

___

c) March 2009

___

48 )

d) May 2009

Crude oil will sustain _______ levels for CY2009. a) < $ 80/bbl

5.

___

b) $ 80-100/ bbl

c) $100-120/bbl

d) >$120/bbl

Corporate earnings of the index companies are expected to grow at _____% for

FY09. a) <15%

6.

b) 15-17%

c) 17-19%

d) >19%

My view on the following sectors for investment horizon of 1- 2years:-

(0- Underweight; 10- Overweight)

Pharma & Healthcare: Information Technology: Automobile: Banking: Real Estate: Capital Goods: Power: Cement: Fertilizer: Sugar: Shipping: Oil & Gas: Media & Entertainment:

0 __ 0 __ 0 __ 0 __ 0 __ 0 __ 0 __ 0 __ 0 __ 0 __ 0 __ 0 __ 0 __

__ __ __ __ __ __ __ __ __ __ __ __ __

__ __ __ __ __ __ __ __ __ __ __ __ __

__ __ __ __ __ __ __ __ __ __ __ __ __

5 5 5 5 5 5 5 5 5 5 5 5 5

__ __ __ __ __ __ __ __ __ __ __ __ __

__ __ __ __ __ __ __ __ __ __ __ __ __

__ __ __ __ __ __ __ __ __ __ __ __ __

__ __ __ __ __ __ __ __ __ __ __ __ __

10 10 10 10 10 10 10 10 10 10 10 10 10

Name: Designation/ Dept.: Organization: Contact No.:

117