India: Across the Board: 2QFY12E earnings preview ::Goldman Sachs,

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Across the Board: 2QFY12E earnings preview
2QFY12E earnings preview: India coverage
In this note, we aggregate data for our coverage
in India (133 stocks across 14 sectors) to quantify
expectations for 2QFY12E.
Revenue slowdown and high interest cost to
weigh on earnings
We expect a deceleration in revenue growth in
2QFY12E at 19% vs. 25% in 1Q on a slowdown in
domestic demand, along with high interest
expenses, to lead to net income growth of 9% (vs.
11%/16% in 1Q/4Q). We expect 9 out of 14 sectors
to witness yoy margin contraction in 2Q, led by IT,
Auto, and Industrials. While we expect EBIT to
expand for most sectors in 2Q due to top-line
growth, we expect Autos to report a yoy EBIT
decline as cost pressures weigh on profits.
Our top Buys to deliver 25% EBIT growth
and 12% net income growth this quarter
We believe our top ‘Buys’ will outperform our
broader coverage in FY12E and deliver aggregate
24% top-line growth and 25% growth in EBIT. Our
top picks are currently trading at a 9% discount to
MSCI India’s 12-month fwd P/E.
Analyzing the impact of forex fluctuation on
our coverage
We analyze the impact of the recent depreciation
of the Indian Rupee vs. US dollar on our coverage.
We arrive at the following conclusions: (1)
Companies, which have foreign debt or significant
imports and no natural hedge in the form of
export revenue could have significant negative
impact such as JAIA.BO, PWFC.BO and ICMN.BO
(all Neutral), among other stocks, and in turn have
negative P&L impact. (2) We also highlight
companies, which have a natural hedge to a high
proportion of foreign debt, like state utilities
NTPC.BO (Neutral) and PGRD.BO (Sell), where
tariffs are linked to input costs. (3) We believe the
IT sector is the biggest beneficiary of INR
depreciation as a significant portion of revenues
comes from exports, and the sector has minimal
exposure to foreign debt. We highlight INFY.BO
(Buy) and HCLT.BO (CL-Buy). Upstream oil
companies such as CAIL.BO (Buy) are likely to
benefit, while RELI.BO (Neutral) is likely to benefit
due to its higher proportion of export sales.

Telecom: 2QFY12E - seasonality/forex to hit sequential comps ::Kotak Sec,

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Telecom
India
2QFY12E – seasonality/forex to hit sequential comps. We expect a weak Sep 2011
quarter for the Indian wireless players. September is typically a weak quarter for wireless
volume growth and Sep 2011 is unlikely to be any different. In addition, sharp Rupee
depreciation during the quarter is likely to result in substantial forex losses, especially for
Bharti. It is too early to assess the impact of recent tariff hikes, though we expect RPM
to trend up marginally. Remain constructive on Bharti and Idea. Cautious on RCOM.


Seasonality + forex losses = weak quarter
Exhibits 1, 2 and 3 give our Sep 2011 quarter earnings estimates for Bharti, RCOM, and Idea,
respectively. We expect a weak quarter across the board on sequential comps. Operational
performance is likely to be subdued on account of the seasonal deceleration in wireless volume
growth in India – potential volume decline for one or more players is also possible, even as we do
not forecast such a scenario. We expect RPMs to trend up marginally. We do note that it is a tad
early to assess the impact of recent tariff hikes on volume or realization given (1) the hike was
implemented for new subs to begin with; extant subs will move to revised base tariffs gradually,
and (2) Sep quarter seasonality will make separation of volume impact of tariff revisions difficult.
Forex impact of the sharp depreciation in Rupee versus the US$ in the September quarter will
exacerbate the impact of weak operational results, driving sharp decline in net income for both
Bharti and Idea. Forex impact on RCOM is particularly difficult to forecast – we make no attempt
to do so and assume zero forex gains/losses for the company.
Bharti – expect robust EBITDA growth; net income likely to decline
We expect Bharti to report a strong 5.8% qoq growth in consolidated EBITDA to Rs60.4 bn on
revenues of Rs175 bn, +3% qoq. Our numbers build in a consolidated EBITDA margin expansion
of 90 bps qoq to 34.5%. Strong expected EBITDA growth in Africa and passive infra segment and
likely sharp reduction in ‘others’ segment losses drive our robust consolidated EBITDA growth
forecast even as we expect India wireless EBITDA growth to be a tad muted. We build in 2.6%
qoq growth in India wireless EBITDA – driven by 1.6% qoq revenue growth and 30 bps qoq
margin expansion. Our net income forecast of Rs10.3 bn (down 16% qoq, 38% yoy) builds in
forex loss of Rs8 bn versus Rs1.7 bn in the previous quarter.
RCOM – full impact of 3G amortization to drive sequential EBIT decline
We expect 2% and 3.7% qoq growth in consolidated revenues and EBITDA to Rs50.4 bn and
Rs16.6 bn, respectively. We build in a sharp increase in depreciation to factor in full impact of 3G
amortization and expect a 6.4% qoq and 17% yoy decline in consolidated EBIT to Rs5.9 bn. For
the India wireless business we forecast a 0.9% qoq volume growth, data (EVDO, not 3G)-led RPM
improvement of 0.7% qoq, revenue growth of 1.6% and EBITDA growth of 1.2% (modest OPM
decline). As discussed earlier, we find forecasting RCOM’s forex gains/(losses) particularly difficult
and hence do not build in any. Our net income forecast is of Rs1.8 bn, a decline of 60% yoy.
Idea – India wireless volume/revenue growth leadership likely to sustain
We estimate consolidated revenues to come in at Rs46.4 bn (+2.7% qoq) and EBITDA to come in
flat qoq at Rs12.1 bn, implying an OPM decline of 60 bps qoq to 26%. Expect a modest 2.5%
wireless minutes growth and 0.5% RPM uptick qoq. Our PAT estimate of Rs1.26 bn (decline of
29% qoq and 30% yoy) builds in incremental forex losses of Rs400 mn qoq.
Bharti is likely to report on November 4, Idea between October 21 and 25, and RCOM in the
November second week.

IT Services, 2QFY12 results preview :CLSA

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2QFY12 results preview
With a spate of consensus EPS downgrades last month and continued
adverse macro news-flow, Indian IT stocks head into the October results
with low expectations. While FY12 EPS could see upsides with the
currency tailwind, we argue that the investment thesis has already
shifted to FY13, where we see downside risks to street revenue growth
estimates and consequently stock valuations. We see the up-coming
results season as a mere hiatus leading to the uncertainty of the 2012
budgeting season. Upcoming months should see fresh lows in stocks, as
current areas of optimism in currency depreciation, cheap valuations and
“this is not 2008” give way to a sobering reality. We retain our NEGATIVE
stance on the sector and have no positive ratings.
2QFY12 results: Do not expect any major surprises
q Infosys should beat the upper end of its US$ revenue guidance of 5%QQ growth.
We expect 5.6%QQ growth to US$1,765m despite a 30bpsQQ adverse impact of
cross-currency on guided growth. Margins should be up ~175bpsQQ with tailwinds
from a weaker currency and absence of wage hikes.
q Wipro should be near the middle end of its constant currency guidance. We expect
Wipro to report 3.5%QQ growth in US$ revenues aided by full quarter consolidation
of SAIC acquisition. We expect Dec-11 revenue growth guidance of 2-4%QQ. We
expect margins to go down 100bpsQQ driven by adverse impact of wage hikes.
q TCS should report a 6.4%QQ growth in revenues to US$2,566m, at the higher end
of peer comparables. Cross currency moves can impact reported $-growth by upto
110bpsQQ. Margins should move up ~150bpsQQ with a benign currency
environment balancing adverse impact of promotion costs.
q HCLT’s 5.8%QQ US$ revenue growth should be near the top end of Tier-1 peers.
Higher exposure to GBP/EUR (28%) could impact reported revenues growth by upto
80bpsQQ. With HCLT splitting wage hikes across 2 quarters and benefit of a weaker
currency, margins should be down 130bpsQQ c.f. earlier expectation of 250bpsQQ.
q Among mid-caps, Mindtree should report the best result with a 6.2%QQ $-revenue
growth and ~100bps of margin improvement.
Expect no answers in 2Q results to the questions that matter
q We find some vendors still optimistic on growth in Europe, financial services, and
on stability of pricing. These three variables are headed southward, in our view, as
the next budgeting season reveals the full extent of the slowdown. We expect more
uncertainty in the Jan-Apr12 timeframe.
q We expect Infosys to reduce the upper end of its FY12 $-revenue growth guidance
range by 1ppt. The new revenue growth guidance will likely be 18-19%YY. A
weaker currency assumption for 2HFY12 should also push FY12 EPS guidance up to
Rs138 at the higher end from Rs130 currently.
A downgrade cycle has started but a long way to go ahead
q A spate of earnings cuts across consensus are now reflecting a weaker second half
in FY12, and 5-8ppts lower YY US$ revenue growth in FY13.
q We believe that on-going revenue cuts will need more downgrades ahead. In our
view, consensus is never able to capture discontinuity in the revenue growth
trajectory and one such is at hand right now.
q While current currency assumptions Rs49/$ can somewhat buffer the EPS risks
ahead, valuation multiples remain slaves of $-revenue growth and the key
downside risk to stocks remains multiple de-rating.
No positive ratings in CLSA’s Indian IT coverage
q We find no fundamental catalysts for the sector yet.
q A few valuation anomalies do exist within the sector, but a correction of these gaps
will likely follow rather than precede proof of improved financials.

The wisdom of (analyst) crowds ::Macquarie Research,

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The wisdom of (analyst) crowds
Event
 With Warren Buffett saying a US recession is unlikely, while the Economic
Cycle Research Institute confidently predicts one, we begin a series of notes
looking at indicators that predict GDP growth. In the first we look at earnings
revisions, the equity risk premium and the change in the S&P500 index.

Impact
 Historical relationships between GDP growth and analyst earnings
revisions, the equity risk premium and the change in the S&P 500 index
suggest the US economy is not in recession and is likely to see positive
but turtle-like growth up to at least June 2012. That said, while there has
been some better-than-expected economic data recently, the trend in all
three indicators so far this month remains negative. Given the high
equity risk premium and other indicators it is highly unlikely that US
economic growth will be strong over the next 12 months.
 While analyst estimates and the equity risk premium are useful leading and
coincident indicators, respectively, of US GDP growth, the change in the S&P
500 index is a more accurate predictor than the former two if you lag the 6
month change in the S&P 500 by 9 months. Using a simple linear regression
of these two variables, and based on the change in the S&P 500 to
September, US GDP growth would be 1.0% in the year to June 2012.

Outlook
 While our analysis suggests the US economy will stave off recession,
we continue to believe that there needs to be a sell-off in US 10 year
Treasury bonds in the order of 50 to 100 basis points before there is
sustained upward momentum in global equities markets. A resolution
to the crisis in Europe would be a catalyst for such an asset allocation
switch, but the seasonal improvement in economic data in coming
months could also prompt a rally that lasts 3 to 4 months.
 With the S&P 500 equity risk premium at its highest level since 1973, at just
over 3 standard deviations above the long term average, equities are cheap
relative to bonds. Long term investors should therefore be looking to invest
more in equities, and with a slightly less defensive strategy to position for the
seasonal winds that typically lift equity returns between November and April.
 With the equity risk premium at such elevated levels, we would expect growth
to outperform value. This reflects the fact that many apparently cheap stocks
are value traps in weakening economic conditions.
 With the revisions ratio for Europe already close to recessionary lows, due to
slowing growth and the ongoing sovereign debt crisis, we see buying
opportunities in stocks leveraged to growth in emerging markets. We also
highlight the conviction buy ideas in our European MarQuee. The list
includes defensive stocks like Tesco (TSCO LN) and Vodafone (VOD LN)
plus cyclical plays like BP (BP/ LN) listed in the UK, which is a favoured
country in the Macquarie Country Alpha model.

Utilities Pre-Result Buys in Sector: JP Power :: 2QFY12 Preview: BofA Merrill Lynch

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Utilities
Pre-Result Buys in Sector: JP Power
Pre-Result Underperform: Adani Power, Neyveli, NTPC
In the Utility sector, markets would be focused on extent of fall in merchant power
rates and progress on future plans such as expansion in generation capacity,
update on new IPP projects, impact of coal on PLFs and AT&C loss reduction in
New Delhi JVs of Reliance and Tata Power.


We expect the Indian Utility Sector, represented by Adani Power (APL), NTPC,
Reliance Infra, Tata Power, Neyveli, GIPCL and JP Power to report sales growth
of 20%YoY, EBITDA growth of +31%YoY and PAT growth of 22%YoY mainly led
by APL, GIPCL, JP Power and Tata Power – key driver coal not power.
􀂄 Adani Power: We expect APL to report +56%YoY (flat QoQ) growth in
2QFY12 Rec. PAT led by 120%YoY (+3%QoQ) growth in generation on 2x
capacity (1.98GW vs 990MW). However, APL may disappoint markets on shutdown
in its 6th unit of 660MW (33% of capacity) in 2Q on commercial dispute
with GUVNL on its ability to sell merchant power ahead of PPA start date.
􀂄 We expect NTPC’s 2QFY12 to report 15%YoY growth in rec. PAT on grossup
of tax at peak-rate v/s MAT last year and addition RoE on 2GW of
additional capacity. However, the generation fell by 2% during 2Q on
problems in plants like Kaniha, back-down by clients, fuel shortages and
annual maintenance shut downs. Fuel cost savings remain on-track in 2Q but
the sales from its high margin spot market may slow due to cap on realization
from UI market.
􀂄 Reliance Infra: We expect a 12% growth in 2Q12 rec. PAT led by pick-up in
E&C business and higher treasury income of Rs589mn vs Rs42mn in 2Q10.
We expect 21%YoY growth in sales led by impact of new tariff offset by lower
electricity volume, high cost of power purchased and 60%YoY growth in E&C
revenues and flat EBITDA.
􀂄 Tata Power: We expect Tata Power to witness recurring PAT (consol.)
growth of 40%YoY led by 10% higher coal volume and ASP growth of
30%YoY despite higher interest and depreciation.
􀂄 Neyveli: Expect 2Q12 rec PAT to be flat on muted generation +2%YoY
despite capacity +5% on start of 2x125MW Barsingsar station.
􀂄 GIPCL: We expect GIPCL to report 9x growth in Rec PAT led by incremental
RoE of commissioning of 2x125MW units of Surat Lignite II, which had
impacted profits last year due to technical faults.
􀂄 JP Power: We expect JP Power to report 108%YoY growth in rec PAT on
84% growth in 2Q generation led by start of 4x300MW of Karcham Wangtoo
hydro project.
􀂄 Reliance Infra remain our preferred pick in the sector based on inexpensive
valuations, expansion in its development portfolio & generating capacity,
distribution franchise and reduction in T&D losses at its Delhi JVs. Maintain
buy on JP Power, as the stock yet to factor-in improving execution of its
12GW pipeline and UPF on Neyveli and NTPC on continued delay in capex
& coal mines. Neutral on Tata Power and GIPCL.

Infra Developer --Pre-Result Buys in Sector: MSEZ :: 2QFY12 Preview: BofA Merrill Lynch

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Infra Developer
Pre-Result Buys in Sector: MSEZ
Pre-Result Underperform: ADE
􀂄 JPA: JPA likely to report 19%YoY fall in 2QFY12 rec PAT on weak E&C
execution, realty sale and higher fixed costs of cement expansion offset by
20%YoY growth in cement dispatch to 4.1mmt vs 3.4mmt. We expect E&C
revenue to fall by 15%YoY on farmers’ agitation on Yamuna Expressway,
higher base led by execution at Karcham HEP and slower realty build-out for
JP Infra. We expect 2%YoY growth in revenue, 2%YoY growth in EBITDA
while Rec. PAT would be fell by 19%YoY.
􀂄 Adani Enterprises to report a Rs6.8bn of Cons. Rec. PAT +58%YoY on
start of 1.98GW (vs 990MW) of Power plant at Mundra and a strong growth
of 60%YoY in coal trading volume.
􀂄 Mundra Port and SEZ to have 15%YoY growth in 2QFY12 Rec PAT on
higher depreciation, lower treasury income and higher tax on applicability of
MAT on SEZ. While sales to grow by 34%YoY on +24%YoY port traffic led
by coal and container. However, MSEZ may report a higher PAT if it
assumes MAT credit, which we have not yet factored-in.

Industrials : Pre-Result Buys in Sector: Suzlon :: 2QFY12 Preview: BofA Merrill Lynch

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Industrials
Pre-Result Buys in Sector: Suzlon
Pre-Result Underperform: ABB, L&T, IVRC, NJCC
E&C
�� We expect a 48%YoY growth in rec. PAT of Indian Engineering &
Construction (E&C) majors mainly led by turnaround at Suzlon and improved
execution (L&T) despite a) weak margin - IVRC, L&T, NJCC, and b) higher
fixed costs (interest and depreciation) – ABB, IVRC, L&T, NJCC. We expect
Suzlon to report rec. profit of Rs220mn (vs Rs3.8bn of loss in 2Q11) on
rebound in domestic wind markets and that represents 26% of the YoY swing
required to report PAT of Rs5.2bn for FY12E.
�� We expect double digit growth in order backlog for most E&C companies.
The key issues to watch-out for in the E&C sector is likely improved
execution and impact of on-ground execution challenges such as land
acquisition.
�� We expect the Indian E&C Sector, represented by L&T, Suzlon, ABB, IVRCL
and NJCC to report sales growth of 17%YoY, EBITDA growth of 26%YoY
and Recurring PAT growth of 48%YoY.
�� L&T: In 2QFY12, L&T’s has announced orders of Rs79bn down 14% vs orders
announced in 2Q11 on lack of captive order, which were 23% of inflows last
year. Key order wins in 2Q a) big ticket international project wins in electrical
and oil & gas domains from customers such as ADMA-OPCO (Rs20bn), Qatar
General Electricity & Water Corp (Rs12bn), Abu Dhabi Gas Industries

(Rs8.4bn) Petroleum Development Oman (Rs7bn), and b) balance Rs32bn
order in building & factories. We expect L&T to post one of the better financials
with rebound in sales growth (18%YoY) and PAT (15%YoY) in our universe.
Markets would also be more focused on any change in the guidance for new
orders in FY12E, which could be key reason for disappointment.
�� ABB: Meanwhile, in 3QCY11 ABB could report rec. PAT of Rs569mn vs loss
of Rs204mn in 3QCY10 on a) exit costs on rural electrification business last
year, and b) 25%YoY sales growth on a low base 3Q10 (-8%YoY). However,
the deteriorating visibility and rich valuation drive our Underperform rating.
�� Suzlon – turnaround story: With early turnaround in 1Q12, we expect Suzlon
to maintain momentum in 2QFY12 by reporting consolidated rec. profit of
Rs220mn vs rec loss of Rs3.8bn on +30%YoY domestic sales volumes. Mix
change in favor of India should drive 241%YoY growth EBITDA.
�� IVRC: We expect IVRCL to report a weak 2Q12 with rec. PAT -80%YoY and
a flat EBITDA on slow execution sales +8%YoY accompanied by high
depreciation and interest costs. It has announced Rs22.3bn of orders
including Rs14.9bn Nechipu-Hoj Annuity based road project won by IVRCL
Assets and Sushee Infra consortium (26:74).
�� Expect NJCC’s to report a slow growth in sales at 6%YoY and flat EBITDA in
2QFY12. This along with high depreciation and interest would lead to a
37%YoY fall in rec. PAT.

Telecom - Result Outperformers: Idea Cellular:: 2QFY12 Preview: BofA Merrill Lynch

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Telecom
Potential Result Outperformers: Idea Cellular
Potential Result Underperformers: Reliance Com
Result Expectations – Key Highlights
All eyes on margins post tariff hikes: We expect investors to focus on strength
in 2Q FY12 margins as a key indicator for future potential. We expect 20-30bps
QoQ uptick in wireless margins led by lower distribution expenses and ~1% QoQ
improvement in voice-revenue per minute, but dragged by higher diesel prices.
Seasonal weakness and slower net adds to drag topline growth: Against an
improving price environment, the telecom majors have witnessed sharply slower
subscriber growth. This coupled with seasonally slower traffic patterns in 2Q
implies that topline growth (~2-3% QoQ) in 2Q FY12 will be slower than 1Q FY12
(~3-4%).
MTM forex losses likely for Bharti & RCom: The rupee has depreciated ~9.5%
versus the USD over the last quarter. Consequently, we expect MTM losses for
Bharti (~Rs5bn; 19% of 2Q EBIT) and RCom (~Rs8bn; ~120% of 2Q EBIT).
Bharti’s total forex loan exposure is ~US$12bn but MTM hit on loans for the Africa
acquisition will be routed via the balance sheet.
Idea seems well placed but regulatory risk is a swing factor: Operationally,
Idea seems well-placed and its single-country operations offer better visibility. A
key swing factor could be the new telecom policy NTP -2011 that is expected in
October. Potential changes in spectrum pricing and roaming in this policy could
hurt Idea’s market-capitalisation more than Bharti’s.

Real Estate - Result Outperformers: Sobha :: 2QFY12 Preview: BofA Merrill Lynch

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Real Estate
Potential Result Outperformers: Sobha
Potential Result Underperformers: DLF
Result Expectations – Key Highlights
We expect muted performance in 2Q from most of the real estate developers
given the monsoon months and limited launches in Mumbai and NCR. We expect
the volume to be strong for the South India players given slew of launches since
June 2011. The debt levels are expected to remain flat given the benefits of non
core asset sales (DLF and HDIL) likely to flow in from 3Q while for other muted
volumes is unlikely to help deleveraging. Since the festive season starts from 3Q,
we expect to see host of launches in October which should set the tone for rest of
the fiscal.
DLF - We expect DLF to report muted pre sales at ~2mn sq ft given lack of new
launches in this quarter. But we do expect the volume to pick pace in the festive
season as it prepares for new launches in North India. Therefore for 2Q we
expect revenue to drop by 10% QoQ to Rs22bn. The EBIDTA margin is expected
to inch up further to 47% given the focus on plotted development. The drop in
revenue and high interest and taxes will lead to drop in earnings to Rs3.4bn.
Unitech –Unitech continued on its aggressive launch strategy in 2Q as well
and we expect it to manage another ~2mn sq ft of bookings. But we expect the
earnings to remains muted given execution challenges. But we do expect the
margin to improve from the subdued 20% in 1Q to normalized levels of 28%. This
should lead to sharp jump in earnings to Rs1.37bn from Rs983mn in 1Q.
HDIL –HDIL earnings will be substantially dependent on the FSI sale. Our
estimate of Rs6bn of sales includes Rs4.5n from FSI sale in Goregaon project
and Virar while the remaining from TDR sales. The revenue from the
development projects are expected to kick in from 2HFY12.
Sobha –We expect strong volume performance from Sobha given strong pace
of new launches including Gurgaon. Sobha launched its north Bangalore project
in late June while the Gurgaon project was launched in July. Also due to its
increased stake in one of the Bangalore residential project we expect the revenue
to increase by 20% QoQ to Rs3.8bn leading to 34% increase in earnings. But we
expect the debt levels to remain flat in 2Q given dividend payout and continued
investment in new launches.

Pharmaceuticals- Result Outperformers: Divis, Glenmark :: 2QFY12 Preview: BofA Merrill Lynch

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Pharmaceuticals
Potential Result Outperformers: Divis, Glenmark
Potential Result Underperformers: Ranbaxy, Aurobindo
Weak domestic business, MTM hits to hurt profitability
We expect 2Q results to be weak for most companies under our coverage as
MTM hits pertaining to forex fluctuation is likely to hurt profit growth. Moreover,
slower domestic formulations business (especially acute therapy segments) is
likely to affect companies with higher exposure to acute therapies. However,
presence/lack of some limited competition products may affect some companies
US business (DRL, Sun Pharma), affecting comparison.
Since much of currency movement happened towards late September, operating
profits for companies are unlikely to be affected significantly. However, uncovered
forex loans (Aurobindo, IPCA, Cadila) could result in high MTM losses. Also,
interest costs may see a rise due to depreciated rupee value. Overall for the
sector, we expect average adjusted profit growth (ex-MTM losses) to be restricted
at 1% even as we expect sales growth of 12%, EBITDA growth of 10% YoY,
mainly on higher depreciation and taxation compared to last year.
Result Expectations – Key Highlights
Dr. Reddy’s
Impact of Allegra OTC launches and generic Fondaparinux would help strong
growth in US generics (up 35%). Russian business to sustain strong growth
driven by increased push in prescription sales. Domestic formulations growth
would still lag industry averages, hence a drag. Base margins launch to sustain at
last quarter levels, despite weak domestic business due to stronger US sales.
Sun Pharma
Consolidation of Taro during 2Q would hinder YoY comparability. However, we
expect Sun’s base business to remain strong on the back of recent new launches
in the domestic market. Lack of limited competition product Eloxatin sales would
however result in lower profitability, somewhat salvaged by launch of generic
Taxotere. We expect Taro’s financials to reflect improvement in margins post
Sun’s takeover, in line with last two quarters.
Lupin
We expect strong US generic business aided by recent approvals and RoW
markets to sustain strong march. Pick up in Antara sales would be critical for
revival in US branded business. Stable domestic formulations growth would help

modest increase in margins QoQ . We do not expect impact of forex fluctuations
to affect Lupin’s 2Q results as most of it is actively covered through hedges. We
expect EBITDA to grow by 11%, behind sales growth of 15% due to unabsorbed
costs at Indore SEZ.
Divis
We expect strong momentum in topline growth to continue in 2Q, reflecting robust
order book. Moreover, commercialisation of Vizag SEZ in 1Q and gradual pick-up
over time would further improve revenue visibility. We expect EBITDA margins to
sustain at 38-40% levels. We expect Divis to report strong 2Q results with profits
growing 54% YoY, thanks to 40% growth in topline, thanks to higher margins (on
YoY comparison).
Cadila
We expect Cadila to post robust 18% growth in topline, largely driven by strong
domestic formulations growth (16%+) as well as US generics business. Zydus
Wellness would continue to grow at ~20% while the JV’s scale-up would continue
to add positively to profitability. However, reported profits would be suppressed
due to ~Rs400mn MTM losses due to forex fluctuation.
Glenmark
We expect commercialisation of ANDAs approved over last 3 quarters to show
traction in US generic sales. While domestic formulations would continue to
outpace industry growth, RoW/Latam market sustaining healthy growth would be
critical for overall growth. Impact of Sanofi’s licensing income of US$25mn would
mask the MTM losses on forex denominated loans (to the tune of Rs350mn).
However, we expect reduction in gross debt to be marginal, but improving
operating cashflows would help reduce D/E gradually.
Ranbaxy
Lack of niche product (Aricept) in US as well as few new products would limit
growth in US markets. Moreover, with sluggish improvement in RoW markets, we
expect improvement in base business profitability to be gradual. While Project
Viraat would help improve growth in domestic market, impact on profitability
would come with a lag. Ranbaxy has over US$750mn outstanding derivative
contracts along with ~US$400mn forex loans which would result in MTM losses
(Rs2.5bn est). Expectations of forex losses due to rupee depreciation this year
(vs forex gain last year) would further affect comparison on reported profits..
Aurobindo
Impact of ongoing issues with USFDA on Unit VI would continue to put strain on
profitability. While we would see improvement in margins QoQ at 14.4% on better
product mix (lower ARV sales), it would still be short of last year’s margins of
17.7%. We expect 25% decline in EBITDA, despite expectations of 12% growth in
sales as a result of weaker margins. Moreover, MTM losses (Rs1200mn est.) on
forex loans (~US$300mn) would result in marginal profits at reported levels.

Oil & Gas:: :: 2QFY12 Preview: BofA Merrill Lynch

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Oil & Gas, Petrochemicals
Sector Highlights
􀂄 Brent at US$112/bbl and Indian market crude Bonny light at US$115/bbl:
Brent price at US$112.4/bbl is up 47% YoY but down 4% QoQ in 2Q FY12.
In 2Q FY12 Bonny Light, which is marker crude for several Indian oil
producers, at US$115.3/bbl is up 48% YoY (US$78.1/bbl in 2Q FY11) but
down 4% QoQ (US$119.7/bbl in 1Q FY12).
􀂄 Singapore complex GRM at US$9.2bbl highest in 17 quarters: 2Q FY12
Reuters’ Singapore complex GRM is up 116% YoY and 7% QoQ at
US$9.2/bbl. Singapore GRM was US$8.5/bbl in 1Q FY12 and US$4.2/bbl in
2Q FY11. Singapore GRM in 2Q FY12 is at the highest level in 17 quarters.
􀂄 Rupee stronger 2%YoY but 2% weaker QoQ: The rupee at Rs45.8 in 2Q
FY12 has appreciated by 2% YoY from Rs46.5 in 2Q FY11 but is 2% QoQ
weaker from Rs44.7 in 1Q FY12. A stronger rupee means lower refining and
petrochemical margin in rupee terms, and vice versa. Also, weaker rupee
means higher subsidy and a strong rupee implies lower subsidy.
􀂄 2Q subsidy estimated at Rs236bn (up 109% YoY but down 46% QoQ):
We estimate 2Q FY12 subsidy on diesel, LPG and kerosene, which is shared
by the government, upstream and R&M companies at Rs236bn. 2Q subsidy
is up 109% YoY. 2Q subsidy is down 46% QoQ despite oil price being just
2% QoQ down in rupee terms (Brent down 4% QoQ but rupee up 2% QoQ).
The QoQ decline is mainly due to price hikes and duty cuts made in June
2011, which cut subsidy. We estimate 2Q diesel subsidy at Rs106bn and
LPG and kerosene subsidy at Rs131bn.
􀂄 Sharing assumed at government 42%, upstream 44% & R&M 14%:
Upstream companies had to bear 38.7% of FY11 subsidy. We have assumed
that upstream companies would bear 33% not just of 2Q subsidy but also
33% of subsidy cut due to excise and import duty cut on diesel. This would
mean upstream bears Rs104bn, which is 44% of 2Q subsidy. We have
assumed that the government would contribute Rs100bn to R&M companies
as compensation, implying 42% share in 2Q subsidy. Thus R&M companies
are assumed to bear 14% of diesel, LPG and kerosene subsidy (Rs32bn) in
2Q FY12. They will also bear the entire petrol subsidy, estimated at Rs3bn.

Metals - Result Outperformers: JSPL :: 2QFY12 Preview: BofA Merrill Lynch

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Metals
Potential Result Outperformers: JSPL
Potential Result Underperformers: JSW Steel, Tata Steel
In the September Q on a QoQ basis, we expect aggregate profit to decline 23%;
EBITDA to decline 19% and sales to decline 4%. On a YoY basis, we expect
profits to grow 17% and EBITDA to grow 20% on YoY basis. In Sept Q, base
metal prices were flat QoQ for Zinc, Cu and lead, but Al LME was down 7%QoQ.
Weaker INR should support higher realizations. In steels, we expect marginal
improvement in volumes and flat ASP on a QoQ basis. But domestic margins for
most steel cos will likely be lower due to full impact of higher coking coal prices.
􀂄 Sterlite – We forecast PAT to decline 3%QoQ to Rs14.8bn. Zinc LME was
flat QoQ in September Q but INR was marginally weaker (-1.5%QoQ). We
forecast refined zinc volumes of 192.4kt (flat QoQ) and Al volumes of 60.7kt
(flat QoQ) in Sept Q. We estimate Sterlite Energy to contribute Rs802mn to
2QFY12 EBITDA.
􀂄 Hindalco – We forecast profits to decline 10%QoQ to Rs5.3bn and EBITDA
to decline 6%QoQ. We forecast Al volumes to increase 4%QoQ and Cu
volumes to be flat QoQ. We expect full impact of higher coal costs to kick in
this quarter.
􀂄 Nalco – We expect profits to decline by 10%QoQ to Rs3.4bn. We expect Al
LME to decline 7%QoQ. Also full impact of coal price revision in June Q will
start coming thru Sept Q onwards in our view. We forecast alumina volumes
to increase 2%QoQ and aluminum volumes to decline 14%QoQ.
􀂄 Tata Steel – We forecast consol. PAT to decline 29%QoQ to Rs10.4bn in
September Q led by lower margins at TSE (Corus, -US$34/t QoQ). We
expect TSE margins to decline QoQ led by lagged impact of higher input
costs. We expect TSE volumes to decline 2%QoQ led by softer demand in
Europe owing to macro headwinds. In India, we expect EBITDA to be flat as
we expect 7%QoQ increase in volumes to be negated by lower margins
owing to higher coking coal costs. We forecast standalone PAT of Rs18bn
(+3%QoQ) in India.
􀂄 SAIL – We expect profits to increase 7%QoQ to Rs9.0bn mainly led by 9%
increase in volumes. We expect margins to decline by US$3/t to US$103/t
led by higher coking coal costs, though this will be partly cushioned by
absence of Rs2.3bn LTA related charges taken in 1Q FY12.
􀂄 Jindal Steel and Power – We expect consolidated PAT to increase 4%QoQ
to Rs9.7bn in 2Q. We forecast steel volumes to increase 8%QoQ and ASP to
increase 6%QoQ. We expect blended power tariff of Rs3.80/kwh (+1%QoQ).
However we expect power sales volumes to decline 3%QoQ due to
announced maintenance shutdowns at two of the power units. Our
standalone PAT forecast for JSPL is Rs5.9bn, up 26% QoQ.
􀂄 JSW Steel – We forecast profits (standalone) to decline 39%QoQ to Rs3.5bn
in 2Q. We expect realizations to be marginally lower in 2Q. Also costs are
likely to increase as impact of higher coking coal costs starts coming thru. In
addition impact of Karnataka mining ban will partially come thru in Sept Q.
We expect EBITDA/t to decline to US$137/t in 2QFY12 from US$181/t in 1Q
FY12.


􀂄 Coal India: We forecast PAT of Rs27.4bn, down 34%QoQ (+61%YoY). We
forecast dispatches to decline 6%YoY to 94mt due to disruptions led by rains
and logistic bottlenecks. However, we expect ASP to be flat QoQ at
Rs1365/t.We assume CIL starts providing for wage cost hikes Sept Q
onwards. We expect employee costs to increase by 9%QoQ in Sept Q.
􀂄 Sesa Goa – We expect profits to increase 9%YoY (decline 55%QoQ) to
Rs3.8bn. Given strong seasonality in iron ore volumes, YoY comparison is
more meaningful. This is led by 9%YoY increase in ASP due to higher iron
ore spot prices. We expect volumes to decline 59%QoQ and 2% on a YoY
basis led by closure of Orissa mines, export restrictions and mining ban in
Karnataka.

Media - Result Outperformers: Sun TV :: 2QFY12 Preview: BofA Merrill Lynch

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Media
Potential Result Outperformers: Sun TV
Potential Result Underperformers: Zee TV, DB Corp
Result Expectations – Key Highlights
Check with media planners indicate muted ad spends for months of July, August
and pick up in September. Consequently we believe 2Q likely to be another
muted quarter. Expect strong ad growth from DB Corp in Print and Sun TV in
broadcasting space. Ad growth likely to challenging for zee, could report yoy
declines. Margins likely to be under pressure for print driven by new launches
and circulation increases.
We now see downside risk to our estimates for the sector. However, contrary to
expectations we believe demand for 3Q is robust. We expect muted performance
from all key players except Sun TV.
􀂄 Zee: Forecast decline of 6% yoy in ad revenue during the quarter, led by
lower revenues from sports. Revenues ex sports likely to be flattish. EBITDA
margins likely to remain muted at ~23% down 400bps yoy. Forecast flattish
growth yoy in net profits for the quarter.
􀂄 Sun TV: Forecast 5% yoy growth in ad revenues. Pricing hikes implemented
during the year and higher ad growth on two key channels – Surya
(Malayalam GEC) and Kiran (Malayalam Movies) should help drive strong
top line growth. Expect margins to be stable. PAT likely to grow 12% yoy.
􀂄 DB Corp: Forecast 16% yoy growth in ad revenues led by 15% growth in
print and 25% growth in radio business. EBITDA margins likely to be
impacted by higher newsprint cost and recent launches in Nashik (July 2011)
and Jalgaon (Sept 2011) we forecast EBITDA margins of 25% vs. 32% last
year. PAT likely down ~14% yoy driven by lower margins and forex losses
from MTM of creditors (imported new print costs).
􀂄 Jagran Prakashan. Forecast 10% yoy growth in ad revenues. EBITDA
margins at 26% down 600bps, impacted by higher newsprint cost and
increase in circulation for Dainik Jagran/ recent launch of Punjabi Jagran..
PAT likely down 16% yoy.

Strategy: Eleven consecutive weeks of outflows as allocations drop::Kotak Sec,

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Strategy
Foreign fund-flow tracker
Eleven consecutive weeks of outflows as allocations drop. KIE’s foreign fund-flow
tracker gives us a comprehensive view of market flow activity in India and among its
emerging market peers. Using a top-down approach, we analyze country flows and the
underlying factors which affect them, such as fund flows and country allocations for
different fund types.


Country flows: ETFs have contributed ~23% of total outflows in the past three months
India has witnessed outflows worth US$463 mn in the last month taking the three month tally to
~US$2 bn. Of this, ETFs have contributed to ~23% of the total outflows (US$487 mn) with the
likes of WisdomTree India Earnings Fund and Lyxor MSCI India ETF being the biggest contributors.
On a proportional basis (country flows as a % of total estimated assets), Indian outflows were the
second highest in our EM universe in the past three months. During the same period, Russia and
China have seen outflows worth US$3.8 bn and US$3.2 bn, respectively. The re-emergence of the
European sovereign debt crisis during the month has brought down net asset allocations by 10-
15% in our EM universe. Interesting to note—the fall in ETF net asset allocations exceeded the
total fall in allocations.
Country allocations: India allocations in Asia ex-Japan down to 10.3% as cash balance rises
Asia ex-Japan and BRIC funds saw cash balances rise to 3.1% and 2.5%, respectively, in August.
Within Asia ex-Japan funds, allocations to India fell further to 10.3% from 10.5% in July even as
valuations trended lower. BRIC funds saw a significant reduction in allocations to China (down
2.2% in three months), while Asia ex-Japan funds reduced allocations to Taiwan by 0.8% during
the same period.
Fund flows: Vanguard MSCI EM ETF continues to be the preferred EM-dedicated ETF
Vanguard MSCI EM ETF saw another inflow of US$1.6 bn in the past month even as five out of
the 10 largest outflows witnessed in the EM universe in the last month were from ETFs. On the
back of SFC’s modifications of collateral requirements for Hong Kong-based synthetic ETFs,
synthetic ETFs like iShares FTSE China 25 Index saw among of the largest outflows in the Asia
ex-Japan universe of funds. The fund saw an outflow of US$327 mn which was equivalent to
~5.4% of the total fund size (US$5.2 bn). Another interesting observation in the ETF space was
the large inflows into Direxion Daily Emerging Markets Bull 3x in the past 12 weeks, indicating the
use of leveraged ETFs by speculators in order to play volatile emerging markets.

IT - Outperformers: Infosys, Hexaware :: 2QFY12 Preview: BofA Merrill Lynch

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IT
Potential Result Outperformers: Infosys, Hexaware
Potential Result Underperformers: Persistent
Result Expectations – Key Highlights
We expect a reasonably strong 5-6%qoq USD rev growth in 2Q for IT majors, net
of 0.5-1% cross-currency impact. Depreciation of INR vs. USD to help Infy, TCS
post op. margin expansion while Wipro, HCLT, TechM, Persistent and Rolta are
likely to show qoq margin decline on account of wage hikes. Hedging loss is likely
to lower other income for vendors this qtr, especially TCS.
Commentary on demand outlook is likely to be cautious (on account of macro health)
but optimistic as customers continue to spend on optimizing business. While Infy
could narrow full-yr US$ rev guidance towards lower end of range, EPS guidance
could be raised by 5%. We see heightened risks to guidance for Persistent.
􀂄 Infy: Expect strong rev growth from Infy (5.6%qoq in US$), with some large
ramps in telecom. We believe Infy could maintain or narrow the FY12 USD
terms revenue guidance of 18 to 20% toward the lower end, if it wants to be
cautious. However, this is already factored into consensus. On the other
hand, it should raise FY12 EPS guidance by at least 5%, even if it reinvests
part Rupee gain in the business and could push consensus up by 2-3%.
􀂄 TCS: We forecast strongest rev growth led by all round volume growth and
positive outlook commentary. However, while margins would expand led by
Rupee, this could be overshadowed by a significant loss on account of forex
hedging through options.
􀂄 HCLT: Co will have a relatively muted quarter given its their wage hike
quarter. However, margin hit of ~150bps qoq likely lower than guided since
wage hike for senior employees pushed to Dec qrt and given Rupee
depreciation. Key to watch rev trends in enterprise solutions, which has more
consulting work in case of HCLT & hence is more cyclical. Annuity streams
like IT infra mngmnt services should do well. Deal pipeline likely robust.
􀂄 Wipro: Wipro’s margins also likely to be hit by ~250bps on 2months impact
of wage hike given in June & limited upside from Rupee depreciation, given
they account revs at realized rate and had a higher realized rate vs peers in
1Q. While deal funnel has likely improved, we are still cautious given recent
management churn, greater proportion of tech clients in mix & limited upside
from Rupee given higher hedging.
􀂄 Mid-tier vendors: Expect strong revenue growth and commentary from
Hexaware. Commentary on demand outlook is likely to be weak for
Persistent along with risks to its annual guidance given deal closures for the

company has been seeing delays. Tech Mahindra likely to report
disappointing quarter led by decline in BT revenues and margin impact from
salary hikes. Satyam likely steady quarter with stable margins. A steady
quarter with margin expansion is expected for Firstsource, coming off a low
base in the previous qtr.

India Financials- Outperformers: ICICI Bk :: 2QFY12 Preview: BofA Merrill Lynch

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India Financials
Potential Result Outperformers: ICICI Bk
Potential Result Underperformers: Union Bk, BOB
Result Expectations – Key Highlights
Growth intact, but margins/asset quality could see pressure
Banks loan growth will likely still notch +19-20% yoy, but we do expect to see
margins remaining under pressure as past deposit rate hikes catch-up. While loan
growth, per se, could well be over +19-20% for banks, incremental LDRs have
cooled-off from 84% in 1HFY11 to 56% in 1HFY12. Moreover, on the asset
quality front, we expect to see asset quality remaining under pressure for most
govt. banks owing to final quarter of system based NPL recognition. Private
banks should see asset quality trends remaining status quo qoq.
2Q12 PAT: Most Govt. banks on weak foot on topline / NPLs
Most govt. banks (ex SBI) may show decline in net profit owing to a) weaker
topline growth driven by margin pressure and b) higher provisions due to last leg
of system based NPL recognition. SBI net profit growth est. at ~10% yoy.
Operating earnings for most to range in a decline of 8% to a modest growth of
15% yoy. Contrary to street expectations, SBI is the only bank that is expected to
show operating profit growth, of ~19-20% yoy. Union Bank is set to show net
profit growth of +34% largely on base effect (higher provisions and tax rate), but
PPOP earnings are estimated to be <2-3% yoy.
Private Bk: Growth (profit) at +16-22%, ex HDFC BK (30%)
Private banks, barring HDFC Bk that will continue to show +30% net profit growth,
should see net profit growth at +16-22%. ICICI Bk net profit growth expected at
+16% partly owing to fee pressure. Axis Bk and Kotak Bk to see net profit growth
of ~22%. Amongst smaller names, Yes Bk likely to report +16% yoy growth.
Federal Bank is the only bank that should see net profit growth of ~5-6% yoy on
<3-4% yoy NII growth and non-int. income weakness.
Topline growth under pressure, as margins under pressure
We estimate govt. banks to report topline (NII) growth of -5 to15%. The weakness
in topline would be a function of margin pressure as deposit rate hikes of the past
catch-up and lower incremental LDRs. We still expect loan growth to sustain at
+18-20% for most govt. banks. ICICI Bk and HDFC Bk stand out with +17-18%
yoy topline growth. Axis Bk should deliver >14-15% yoy topline growth, as
margins will likely decline by +25bps yoy, although qoq they could be up +5-7bps.
NPLs: ‘key to watch’; credit cost high
NPL slippage likely to remain elevated in 2QFY12, partly due to the residual
impact of online NPL recognition (~10-20% of loans not yet covered for most
govt. banks). ICICI Bk and HDFC Bk to still have best asset quality (though may
also see qoq NPL rise).


NBFCs: volume growth strong, but margins under pressure
We expect most NBFCs to show +20-30% yoy volume growth. But margins may
be down +20-30bps on rise in costs. HDFC Ltd. likely to maintain 2.3% spread,
but STFC may see a margin decline of +10bps qoq. LIC Hsg. will likely see
margin decline of +5-10bps qoq. Power Finco’s will likely see MTM on forex
borrowings due to +7-8% depreciation of INR vs. USD during the quarter (+30%
of PFC 2Q PPOP earnings; ~10% of REC’s PPOP earnings).

Consumer - Outperformer: ITC :: 2QFY12 Preview: BofA Merrill Lynch

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Consumer
Potential Result Outperformer: ITC
Result Expectations – Key Highlights
We expect strong volume growth for the consumer companies under coverage.
While ITC’s growth will be led by robust volume growth in cigarettes, HUL will see
its personal care business mainly contributing to growth.
ITC - We expect ITC to report over 7% volume growth in cigarettes. Backed by
this and by already effected price hike of ~5% on blended basis we see margins
expanding 115bp yoy. See revenue growing 18%yoy due to robust performance
in cigarettes and FMCG. Expect 20% growth in recurring PAT as losses in FMCG
decline.


HUL –We expect HUL post another quarter of robust volume growth at ~10%.
Led by ~4% growth in blended pricing we see revenue growth at 14%. Revenue
growth will mainly be led by personal care segment but impacted negatively by
soaps & detergents. As raw material prices remain high yoy, expect margins to
decline 20bp. Led by this we see PAT growth at 10%.

Cement -Result Outperformers: UltraTech, India Cements :: 2QFY12 Preview: BofA Merrill Lynch

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Cement
Potential Result Outperformers: UltraTech, India Cements
Potential Result Underperformers: Ambuja, Shree
Result Expectations – Key Highlights
􀂄 Margins to drop QoQ, but stay better YoY: For Jul-Sep ’11 (2Q FY12), we
expect sector EBITDA to rise YoY helped primarily by south-India. Cement
prices in south India stayed flat QoQ implying 41% YoY price rise. This
contrasts with an average 8-13% QoQ price drop in most regions. On a pan-
India basis, cement prices fell ~7% QoQ but were up 8% YoY.
􀂄 Volume growth recovers in 2Q but big regional disparities: For the
industry as a whole, cement demand in Jul-Aug ’11 grew ~9% YoY. Growth
was largely driven by north and west India that grew over 20% YoY. South
and east India remained weak with +/-3% volume growth. Volume growth for
sector majors in our coverage was ~6.8% YoY, tad lower than industry
􀂄 Costs likely to be stable or lower: Recent downward bias in energy prices
has brought some respite to the inflation pressure on input costs. Our
industry feedback indicates partial pass-through of the 9% hike in
administered prices of diesel implemented in Jun ’11. A key upside risk is
potential seasonal spike in overheads during 2Q due to maintenance
shutdowns etc.
􀂄 UltraTech, India Cements to outperform; Ambuja to underperform:
Among pure cement majors, companies like UltraTech and India Cements
with relatively large exposure to south India will likely post both YoY & QoQ
EBITDA growth as cement prices in south are up strongly YoY & stable QoQ.
Ambuja, that has high volume exposure to north & east India (regions with
steep QoQ price drops), is likely to be a relative underperformer.

Autos - Potential Result Underperformers: Maruti Suzuki :: 2QFY12 Preview: BofA Merrill Lynch

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Autos
Potential Result Underperformers: Maruti Suzuki
�� We expect double digit YoY growth in sales for the sector, driven by strong
growth in two wheelers. However on a sequential basis, sales are expected
to be flat, despite seasonally strong quarter due to decline in passenger cars
as well as production issues at Maruti. Also, we expect profit to decline due
to inflationary cost pressures impacting margins as well as higher interest
and depreciation charges.
�� Two wheeler companies will likely register the strongest yoy growth rates
followed by tractors/commercial vehicle majors. Car industry, mainly Maruti
will be impacted by production loss.
�� We expect Tata Motors’ consolidated sales to grow 18% YoY, driven by 26%
increase in JLR sales. However, standalone sales would be a drag, up just
8% yoy. EBITDA growth at 7% to Rs. 44.9bn to be restricted by 130bps yoy
decline in margins at 13.2%. Standalone margins are expected to register
80bps decline at 8.9% due to losses in small car business. JLR margins
would largely be flat qoq as favourable currency movement counters weaker
mix. We expect consolidated profit to decline 6% at Rs19.7bn, reflecting 10%
decline in standalone operations due to high depreciation expenses.
�� Amongst other commercial vehicle companies, we expect Ashok Leyland’s
EBITDA to increase by just 1% yoy, despite 8% growth in sales due to
margin contraction on lower volumes. Net profit is expected to decline 22%
yoy on negative operating leverage. On the other hand, we expect Eicher
Motor to register 84% increase in EBITDA due to higher sales and improved
efficiencies in both the two-wheeler business and the commercial vehicle
business post-integration with Volvo, leading to margin recovery of 330 bps
yoy. Profit will grow similar 85% to Rs718mn.
�� We expect Maruti’s sales to decline by 10% qoq (16% yoy), due to similar
decline in volumes on labour unrest at Manesar plant. Margins are expected
to decline 145bps yoy and 50bps qoq due to higher input costs, discounts
and negative operating leverage. We therefore expect EBITDA to decline by
28% yoy and net profit by similar 28% yoy to Rs.4.3bn.
�� We expect M&M to register 33% yoy growth in sales, driven by 30% increase
in volumes. EBITDA to grow 14% yoy (8% qoq) due to 230bps decline in
margins on worsening mix, higher input costs and vat drawback. We expect
profit to grow 8% yoy to Rs.7.7bn, restricted by increase in depreciation and
tax expense. On a sequential basis profit are expected to grow 27%, due to
seasonally high other income of Rs.2.0bn as compared to Rs.0.25bn in
Q1FY12.
�� In two wheelers, despite strong sales for both Hero MotoCorp and Bajaj
Auto, EBITDA growth will be slower due to yoy margin comparison. On a
sequential basis, we expect slight improvement due to top line. TVS Motor
should be the strongest performer with 24% EBITDA growth, also due to
lower comparable base. Profit should grow by 28% yoy due to lower lower
interest expense.

􀂄 Apollo Tyres standalone operations to benefit from price hikes and ramp up
at Chennai radial plant. Therefore, we estimate profit to grow 10% yoy to
Rs 411mn, albeit lower than EBITDA growth of 26% yoy, due to higher
depreciation and interest charges. On a consolidated basis, we expect sales
to grow 26% yoy to Rs 24.6bn, EBITDA at Rs 2.3bn (up 25%) and profit at
Rs 588mn (up 10% yoy).

India Strategy 2QFY12 Preview: Weak earnings; Downgrades continue �� BofA Merrill Lynch

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India Strategy
2QFY12 Preview: Weak
earnings; Downgrades continue
�� Different quarter same story; Results expected to be weak
The Sensex companies are expected to mirror the previous quarter with weak
headline profit growth of 10.8% on a consolidated basis and 14.6% on a
standalone basis. This is the weakest forecast in the last 8 quarters. Second,
even the sales growth at 16.9% is expected to be the slowest in the last 8
quarters. Third, margins on an aggregate basis are expected to continue
declining. Lastly, we continue to expect downgrades to our Sensex EPS from
1140 currently to 1100-20 levels. We see bigger risk to FY13 estimates of Rs1340
(our expectation is Rs1250).
Margin pressure continues; Energy, IT & Autos worst hit
Aggregate Sensex EBITDA margins are expected to show a drop of 90bp. This is
largely led by Energy (-210bp YoY), Software (-200bp YoY) & Auto (-130bp YoY).
While input cost pressures are likely to ease off, we think slowing topline growth
will continue to drag earnings growth.
Energy, Pvt banks lead growth; Autos, Telecom & Tisco drag
Among Sensex cos, Energy (RIL), Pvt. Banks (ICICI & HDFC Bk), Sterlite & ITC
are expected to be key contributors of growth. On the other hand Autos (Maruti,
Tata Motors), Telecom (Bharti) & TISCO are expected to drag down growth.
Rupee depreciation could cause earnings volatility
The depreciation of the rupee will likely cause volatility in earnings. On the
positive side, rupee EPS for IT companies (Infosys) should be upgraded. On the
negative side companies like Ranbaxy, Power Finance, Sintex are likely to report
losses on forex borrowings (most companies don’t route this through the P&L).
Strong Results: Ultratech, Suzlon, Eicher Motors
Weak Results: Tata Steel, Ranbaxy, L&T (guidance cut)

Macquarie Agri-view Long liquidation adds downside risk, but also opportunities

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Macquarie Agri-view
Long liquidation adds downside risk,
but also opportunities
Feature article
 Funds are taking risk off the table. We look at which soft commodities have
suffered most from long liquidation in the current macro uncertainty and which
ones remain vulnerable to a further bout of selling. The liquidation to date is
still nothing compared with what we saw in 2008. While macro fears are
certainly spooking investors, at some point individual market fundamentals will
reassert themselves and some commodities will be seen as good value.
Latest market update
 Sugar: Carrying the burden of having a large non-commercial net length,
sugar futures are suffering from long liquidation. Following the October expiry,
the forward curve has flattened, with the May contract likely to reflect exports
from the bumper crops that will soon start getting harvested in India and
Thailand. Indian mills are lobbying the government to let them export up to
4mt in order to avoid domestic prices from collapsing due to the surplus;
however, crushing may be delayed due to cane price negotiations. Lower
prices should attract some Chinese buying, as they seek to rebuild depleted
inventories and control runaway cash prices. Also, as prices head toward the
low 20’s c/lb, questions will start emerging on whether Brazil will switch
toward ethanol production, which is still very tight in the domestic market.
 Coffee: NY Arabica suffered immensely from a stronger US dollar and risk
aversion. It has now completed a 50% retracement of this year’s 11-month
rally, which may lead to a technical bounce. With little origin selling and funds
net short again, it may spur a short covering rally. London Robusta was the
worst performing commodity within the Ag space, falling 22% in 3Q in
anticipation of a record Vietnamese crop due to be harvested from next
month. Rains finally arrived in Brazil, providing relief to the recent drought and
in time for flowering of the next bumper crop due mid-2012. Until then,
however, we still expect a physical shortage in arabica, with Brazil’s coffee
exports in September down 9.8% year-on-year and certified stocks down to
1.43m bags.
 Cotton: Having withstood the sharp sell-off that other commodities suffered,
cotton futures remain stable. Mill and commercial buying appears every time
prices dip below 98c/lb. In the next WASDE we expect US output to be
revised lower, although demand estimates will stay weak. The US harvest is
18% underway, with 80% of bolls now open (compared to 75% last year).
Less than 30% of the crop is considered good/excellent, compared with 59%
last year. Chinese cotton cloth output in the year-so-far is down 5.8% YoY.
 Cocoa: With large net short positions in both London and NY, funds are
clearly bearish this market. Departing from initial suggestions by pod counters
that the West African crops would be worse than last year, latest views point
to a crop setting that is similar to last year’s. Favourable weather, perhaps
due to La Niña, suggests that this could lead to a possible repeat of bumper
yields – and this is weighing on prices. The Ivory Coast has announced
reforms to the cocoa sector for 2012/13, involving fixed prices that will help
farmers re-invest in plantations in the coming years.

Hindalco: Project upside still far away ::CLSA

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Project upside still far away
We cut Hindalco’s FY12-14 EPS estimates by 8-12% factoring in CLSA’s
revised base metal and currency forecasts. FY13 will be a weak year as the
Mahan smelter is unlikely to add to PBT without captive alumina and coal.
Profitability should start improving in FY14 assuming Utkal gets
commissioned on time and approval for the Mahan coal block comes through
soon but the full benefit will show in earnings only in FY15 – too early to
factor in. We see further downside to earnings if current aluminium prices
sustain and believe that valuations at 0.7x FY12 P/B are not cheap enough in
the context of single-digit ROEs. We maintain U-PF.
Mahan smelter not likely to add to PBT in FY13
Hindalco’s new Mahan smelter (commissioning by end-FY12) will have to operate
using external alumina and coal in FY13 and we don’t see any accretion to PBT
from this project in FY13. Mahan will have to procure ~50% of its alumina needs
externally while getting the balance 50% from the surplus alumina from existing
refineries. Hindalco is hoping to get a tapering linkage from Coal India, but given
the latter’s production woes, we see Mahan depending on e-auction/imported coal
as well. We don’t expect Hindalco to delay Mahan’s commissioning and ramp-up in
FY13 given the high visibility of Utkal refinery coming online by FY14.
Benefits of Utkal & captive coal will fully reflect in earnings only by FY15
Utkal Alumina will get commissioned by early-FY14 and should boost Mahan’s
margins but any delay in ramp-up will mean that Mahan will have to depend on
external alumina even in FY14 and will be alumina self-sufficient only by FY15.
There is some chance of the Mahan coal block getting approval in the Oct-9
government meeting but the 15month mine development period will mean that
captive coal will be available partially in FY14 and fully only by FY15. We see risk
of further delays in the Utkal refinery and a longer mine development period for
the Mahan coal block and hence believe that it is too early to factor in FY15.
Cutting FY12-14 EPS by 8-12%; maintain U-PF
We cut FY12-14 EPS by 8-12% factoring in 2-12% lower aluminium prices, 6-8%
weaker rupee forecasts and 25% lower production in Mahan (in FY13). If current
spot LME aluminium prices and INR/USD rate sustains, our FY13 EPS will drop a
further 7%. Stock has come off sharply but we see downside risk to aluminium
prices and don’t believe that valuations at 0.7x FY12 P/B are at trough levels yet
(stock bottomed at 0.4x P/B in mid-2009). Global aluminium peers with similar
ROEs are trading at ~0.6x CY12 P/B. There could be meaningful upside on a 2-
year view, but there could be meaningful downside before attention moves to a 2-
year view. We maintain U-PF.

News headlines:: Oct 9, 2011: RBS,

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News headlines
Oil & Gas
􀀟 RIL withdraws notice to suspend gas supply to UP plants (Economic Times)
􀀟 Andhra Pradesh to be allocated KG-D6 gas on priority (Economic Times)
􀀟 Gas discovery in Mozambique holds at least 10 trillion cubic feet (Economic Times)
􀀟 Evidence of falling oil imports from China and India: UAE (Economic Times)
􀀟 RIL to suspend gas supply to 4 fertiliser plants from tomorrow (Economic Times)
􀀟 Hiranandani, GAIL plan LNG terminals in Bengal (Business Standard)
Banks
􀀟 SBI to be fully capitalised: Finance Ministry (Economic Times)
􀀟 SBI to cut government bond holdings, insure credit to conserve capital (Economic Times)
􀀟 SBI downgrade to impact Indian banking sector: Ficci (Economic Times)
􀀟 SBI says hike in lending rates unlikely (Economic Times)
􀀟 Moody's reaffirms rating of ICICI Bank (Economic Times)
􀀟 SBI expects up to $2bn in government funds in FY12 (Economic Times)
Commodity
􀀟 Government to review 236 MoUs for setting up steel plants including those of ArcelorMittal,
JSW Steel (Economic Times)
􀀟 SAIL's Visvesvaraya steel plant to get captive iron ore mine (Economic Times)
􀀟 SAIL seeks gas for power plant in Jagdishpur (Business Standard)
􀀟 NMDC lines up Rs 24.5bn capex (Business Standard)
􀀟 CIL chief`s selection to be delayed further (Business Standard)
IT & Telecom
􀀟 RCom raises capacity of undersea cable (Business Standard)
Power, engineering & infrastructure
􀀟 Tata aiming for power supply from Mundra UMPP in four months (Economic Times)
􀀟 Coal Ministry asks NTPC for status report on de-allocated blocks (Business Standard)
Automobiles
􀀟 Maruti Suzuki racing ahead to clock 40% higher output this month (Economic Times)
􀀟 Indian car sales struggle in SA market (Business Standard)

October 10, 2011 :: Forthcoming Results

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October 10, 2011
Company
Chemfab Alk


Indag Rubber-$


Sintex Inds


SRM Ener

9 Oct: Economy News and Corporate News: Kotak Securities

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Economy News
4 The Planning Commission has decided to again review the two main, and
opposed, models of road contracts, namely, build-operate transfer or
annuity model, and the item-rate one (BS).
4 Unsatisfied with the progress of proposed steel projects, entailing an
estimated investment of Rs11 trillion, the government will review
hundreds of MoUs signed by companies in the past five-six years (ET).
Corporate News
4 Maruti is racing ahead to clock its highest production figures during this
fiscal in October. The company has fixed production targets at 30-40 %
higher, compared to September when it produced 73,000 cars (ET).
4 NMDC Ltd, the public sector mining major, has lined up capex of Rs 24.5
bn for various mining projects. The proposed investments will take
NMDC's capacity to 50 million tonnes per annum (mtpa). The company
also initiated a dialogue with a US-based company, to procure technology,
to produce coke-equivalent in India from thermal coal (BS).
4 The Walt Disney Company has acquired all the equity in UTV's
Indiagames for an estimated USD80-100 million. Indiagames is a leading
developer and publisher of mobile and online games (BS).
4 Citigroup Venture Capital International and Standard Chartered Private
Equity are looking at acquiring stake in Dewan Housing Finance Corp.
The Wadhawan family controlled DHFL is looking to dilute less than 15%
stake for roughly Rs 5 bn (ET).
4 Two companies, Hiranandani Group and Gas Authority of India (GAIL)
are looking to set up liquefied natural gas (LNG) terminals in the state,
eyeing the market in the Haldia industrial belt (BS).
4 Weeks after the Central Vigilance Commission (CVC) referred to the
Cabinet Committee for the cancellation of the selection of two
shortlisted candidates for Coal India's Chairman Position, a top coal
ministry official has said that if the government clears the CVC suggestion
the selection process would restart within a month (BL).
4 Reliance Communications' (RCom) subsidiary, Reliance Globalcom has
upgraded capacity of its undersea cable to over 500 Gigabytes per
second. Capacities of two cables, Flag Europe Asia (FEA) and FALCON
Cable Systems, were upgraded on Wednesday (BL).
4 Suzlon Energy Limited has announced its third consecutive order from
GAIL. The order comprises of 17 units of Suzlon's S82 - 1.5 MW wind
turbines, to be commissioned in Karnataka in 2012 (BS).
4 Mundra Port and Special Economic Zone, India's largest private port,
has emerged as the sole bidder for Chennai port's Rs 36.8bn mega
container terminal project (BS).

Director’s Cut - Woodstock for commodity gurus ::Macquarie Research,

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Director’s Cut
Woodstock for commodity gurus
LME Week is an important event in the global metals industry calendar. Colin
Hamilton says the mood this year is one of caution, with price expectations
unsurprisingly pared back compared to last year’s summit.
Coming into LME Week last year, the mood was similar to that in 2009, with
prices showing upward momentum as the global economy continued to recover.
In contrast, Colin says this year feels more like 2008, with prices heading for, or
already into the marginal cost curve. That said, there is also a general feeling
that current metals prices were oversold, with macroeconomic fear currently
overweighing the still robust fundamentals for mining. >> Read Report
In the team’s second note on LME Week, Hayden Atkins’s poll results show the
dire situation in the Eurozone was seen as the biggest downside risk to metals,
with any resolution potential a positive catalyst. A slowdown in China was seen
as less of a concern, particularly in light of the perceived upside risks should
policy makers start to loosen monetary policy or implement stimulus.
As our China Economist, Paul Cavey explained at LME Week, we should only
be seriously worried about a persistent slowdown in Chinese activity if we
believe policy makers are willing to tolerate weak growth below 8% a year. Paul
believes this is unlikely and thus opens the way for stimulus in China to ensure
that a loss of growth momentum is not too persistent. Hayden says this view is
supported by his poll, which shows that the biggest upside factor for metals
markets is China stimulus or easing of credit. >> Read Report
Given the current focus on China and metals, Dan McCormack’s latest strategy
note outlining his positive view on European materials looks timely. While
China’s growth is slowing, he agrees that China has the capacity to stimulate if
needed. In the current environment, he prefers the large diversifieds, BHP
Billiton and Rio Tinto. That said, his quant research also suggests that stocks
that have performed well over the last 3 months and have low forecast growth,
such as Linde (LIN GR), could also be a good buy

BUY Bharti Airtel - Time for Waka Waka! - Macquarie Research,

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Bharti Airtel
Time for Waka Waka!
Event
 We hosted our South Africa telecom analyst, Martin Dullaart, for a conference
call with investors, to help gain his perspective on Bharti‟s African business.
Martin shared his experience from having covered major African stocks (such
as MTN Group (MTN SJ, R135.32, Outperform, TP: R170.00)) and key
highlights from his recent management interactions and visits to individual
micro-markets. Separately today, we are also adding Bharti Airtel to the Asia
MarQuee Buy list, highlighted in a separately published note.
Impact
 Strong growth potential in Africa. Martin expects blended penetration in 2G
voice in Africa to rise from around 60% currently to 85% by 2015. He seems
excited about prospects for data/3G penetration. In Nigeria for instance, he
expects contribution of data to revenues for MTN to rise from 4% to 8%.
 Nigeria holds the key: Within Bharti‟s African business, he believes that
Nigeria is „the‟ most lucrative and, hence, an important market for Bharti – with
population of 150m, ~55% penetration and US$8–9 ARPU. Bharti holds the #3
position (18% share) – behind MTN (46%) and Globacom (21%). Etisalat is the
#4 (and fast-growing) player (9.5%). While there are eight operators, Martin
does not see this as a concern. This is because four players hold CDMA (not
GSM) licenses. Given the high cost of CDMA handsets, he thinks consolidation
is likely to lead to the eventual emergence of only one player.
 East Africa ‘price war’ unlikely to spill over to the west: Martin highlighted
the lack of excess network capacity in Nigeria – and west Africa in general.
He believes this would drive rational pricing trends – unlike some east African
countries like Kenya, Tanzania and Uganda. In Kenya specifically, he believes
that Bharti‟s price cuts are unsustainable due to high interconnect rates.
 Positive surprise on capex likely … but won’t be sustained: Martin noted
MTN‟s capex deployment in Africa has been slow in the last few months due to
supply chain issues at a vendor (Ericsson). He believes this may also impact
Bharti, leading to lower-than-expected capex this year. This would, however,
revert to a (normalised) higher level next year. Martin also expects that Bharti
will take the lead in tower sharing in Nigeria and that MTN‟s reluctance will
eventually be overcome. This could help lower costs for all players.
Earnings and target price revision
 No change.
Price catalyst
 12-month price target: Rs483.00 based on a Sum of Parts methodology.
 Catalyst: News on operating metrics (ARPM/ tariffs/ 3G), new telecom policy.
Action and recommendation
 We maintain an Outperform rating on Bharti, one of our top global sector
picks and we think a good defensive play. Africa remains one of our key
concerns. Individual line items may remain volatile, but the overall trend from
the physical market and quarterly results remains one of „steady progress.‟

India real estate sector Innocuous clause- serious implication ::Macquarie Research,

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India real estate sector
Innocuous clause- serious implication
Event
 The foreign investment policy update was released last week by the Indian
government. An innocuous clause in the document changes the classification
of any investment with an option from FDI (Foreign Direct Investment) to ECB
(External Commercial Borrowing). This has far-reaching implications for the
Indian real estate sector since ECBs are not allowed in real estate in India
and most foreign equity investments have built-in options.
Impact
 Clause reflecting the revised FDI policy stance: The clause in the policy
document says that “Only equity shares, fully, compulsorily and mandatorily
convertible debentures/ preference shares, with no in-built options of any
type, would qualify as eligible instruments for FDI. Equity instruments having
in-built options or supported by options sold by third parties would lose their
equity character and such instruments would have to comply with ECB
guidelines”. We present the implications of this move.
 Future flows would get impacted: ECBs are not permitted in Indian real
estate. Put options in private equity or compulsorily convertible bonds are the
norm while investing in real estate projects as they offer some protection and
an exit avenue. We think many investors would re-consider investing or
change their return expectations if these options are not offered.
 Policy has been a moving target: This move is the latest in a series of
changes which has started to frustrate foreign private equity investors. Last
week we attended a real estate industry conference. The encouraging aspect
was that a few funds have un-deployed capital. However they are finding it
tough to invest due to an “elevated risk profile”. Two private equity fund
managers mentioned that this is due to the fluid scenario of regulations and
their interpretation. They mentioned that the consistent news flow on the anticorruption
protests and “policy inaction” had led to their foreign investors
starting to re-consider their intention of deploying money in India. (See our
series of notes from 30 September to 3 October 2011).
 Typically, a private equity investor would be very active in the prevailing
stress. But the environment is making it tough for them to pull the trigger.
 Will past deals get impacted? Importantly, it is not clear whether this reclassification
will be applicable with retrospective effect. If that is the case, barring
very few exceptions, all private equity deals done in the real estate sector since
2005 would be affected. Some examples of developers who have received FDI
are DLF, Ansal, Parsvnath, Nitesh, Prestige, Ackruti and Godrej Properties. This
would also involve many unlisted developers. While we think this will get resolved
eventually, there may be near term concerns/ overhang regarding change in the
structure of deals or pressure from private equity investors to exit.
Outlook
 This latest change leads to further stress and uncertainty for the Indian real
estate sector, in our view. We would avoid players with high leverage and
weak cash flow yields

Automobiles: Festive season off to a strong start:Kotak Sec,

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Automobiles
India
Festive season off to a strong start: Auto volumes for September 2011 bettered our
expectations for all manufacturers. Passenger car volumes remained subdued in
September while two wheeler and commercial vehicle volumes remained buoyant.
Maruti Suzuki volumes are expected to decline in 2HFY12E due to a strong base effect
while two wheeler and commercial vehicle volume growth is also likely to moderate, in
our view. We advise investors to remain selective in the sector.


Scooters and export volumes boosted TVS Motor volumes
TVS Motors reported 17% yoy growth in volumes in Sep 2011. Scooter and export volumes
increased by 30% and 35% yoy, respectively, which masked the low single digit growth in the
domestic motorcycle segment for TVS Motors. Suzuki Motorcycles (+29% yoy), Honda
Motorcycles (+44% yoy) and Yamaha (35% yoy) also reported a strong growth in volumes in
September. Hero Motocorp and Bajaj Auto have not reported numbers thus far but we expect
strong volume growth from them as well.
Maruti reported a 17% yoy decline in domestic volumes
Maruti Suzuki reported a 17% yoy decline in domestic volumes while export volumes were also
impacted by the strike at the Manesar plant. We estimate Maruti lost close to 18,000-20,000 units
in production volumes in September 2011 due to the strike at the Manesar plant. The strike has
ended as workers have agreed to sign the “good conduct bond” and production is expected to
normalize in the next two days. Passenger car industry volumes are expected to report flat volume
growth in September, in our view, after a 10% yoy decline in volumes in August 2011 boosted by
a strong show from Hyundai, Toyota, Volkswagen and recovery in volumes of Tata Motors.
Mahindra and Tata Motors surprise on the upside
Mahindra and Mahindra posted 31% yoy growth in volumes, boosted by strong growth of
Maxximo + Gio (+42% yoy) and tractor volumes (+41% yoy). Passenger UVs (including pick ups)
volume growth moderated to 7% yoy due to a strong base effect. We expect M&M’s volume
growth to moderate in 2HFY12E due to the base effect.
Tata Motors also beat expectations (+23% yoy growth) in September 2011 driven by strong
growth in LCV and utility vehicle volumes. Domestic MHCV volumes reported a 9% yoy growth
while domestic LCV volumes (+47% yoy) continued to post strong numbers. Passenger vehicle
volumes grew by 10% yoy boosted by 60% yoy growth in utility vehicle volumes and 64% yoy
growth in Indica volumes (aided by launch of the new Indica Vista). Nano volumes continue to
remain a drag, posting a 47% yoy decline in September 2011. Indigo volumes also declined by
11% yoy.
We expect a 5% decline in Maruti Suzuki volumes in 2HFY12E due to strong base effect, while we
expect M&M and Tata Motors to report 11% and 6% yoy growth in volumes in 2HFY12E.
We maintain our positive view on M&M, Tata Motors and Maruti Suzuki
We believe passenger car volume growth is likely to remain muted over 2HFY12E while we expect
two wheeler and commercial vehicle volume growth to moderate as well in 2HFY12E. We expect
raw material costs to decline in 2HFY12E which is likely to boost operating margins for auto
companies. We maintain our positive view on M&M, Tata Motors and Maruti Suzuki due to
attractive valuations.

State Bank of India: Moody's downgrade :CLSA

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Moody's downgrade
Moody’s has downgraded SBI’s standalone credit rating from C- to D+
that also leads to downgrade in rating on the hybrids; overall ratings are
stable at Baa2, a notch above sovereign rating. Rating has been lowered
due to SBI’s low Tier I CAR and high stressed assets. This may increase
cost of raising fresh hybrids and indirectly be priced into SBI’s fresh MTN
and deposit raising. Rise in CDS spreads may increase cost of re-financing
wholesale debt and impact profitability of overseas business, but rise in
corporate spreads can help to cushion the impact on earnings. We don’t
expect downgrade to get extended to many other banks as most of them
are well capitalised and have stronger asset quality. Maintain U-PF.
Moody’s downgrades standalone rating of SBI
Moody’s has downgraded SBI’s Bank Financial Strength Rating (BFSR or stand
alone rating) from C- to D+. The revised rating maps to downgrade in the (1)
baseline credit assessment (BCA) from Baa2 to Baa3 and (2) fall in hybrid
debt rating from Ba3 to Ba2. This downgrade reflects on agency’s concerns on
banks’ capital situation and deteriorating asset quality. Moody’s has stated
that in a scenario of rising rates and slower economic growth, SBI may report
asset quality pressures and its tier 1 CAR of 7.6% provides insufficient
cushion to support growth and absorb potentially higher credit costs.
Does it lead to downgrade of other banks?
Currently, Moody’s has stable outlook on most Indian banks; among covered
banks it holds a negative outlook on OBC. We believe the SBI downgrade may
not necessarily trigger downgrade of all other Indian banks and this would
primarily depend on individual bank’s tier 1 ratio and asset quality. Private
banks are much better placed due to higher tier 1 CAR and lower proportion
of stressed loans (figure 3). Downgrade and rise in overseas funding costs
would impact banks with sizable overseas operations more than others (see
figure 4). Management believes that capital infusion, through rights issue, is
likely in 3Q/4Q FY12 and should help to restore credit ratings.
What will be the earnings impact?
SBI could see rise in cost of its overseas funding due to downgrade in ratings
of hybrids and indirect impact of cut in standalone ratings. Over past few
months, SBI and ICICI have seen expansion in spreads on CDS by 200-
270bps reflecting global risk aversion, however the sharp rise in corporate
spreads (lending) should help to defend pressure on profitability. We maintain
our U-PF rating on SBI on the back of asset quality concerns and see better
risk-reward balance for banks with higher ROA, well capitalised balance
sheets and stronger asset quality.