Buy Abbott: Target Price 1808.00: First Call

Abbott India Ltd is a development,
manufacture and marketing of
pharmaceutical, diagnostic, nutritional &
hospital products in India.
Abbott India has received CE Mark for
XIENCE (Xpedition™ Everolimus Eluting
Coronary Stent System) & the company is
launching the product immediately in CE
Mark countries.
Abbott India has signed an agreement to
collaborate with Astellas Pharma Global
Development in a Phase 3 clinical trial for
TransVax™.
Abbott's Omnilink Elite® Vascular
Balloon-Expandable Stent System
receives FDA approval for Treatment of
Iliac Artery Disease.
Abbott India receives FDA Approval for
Healon EndoCoat Protective Gel for
Cataract Surgery.
During the quarter, the robust growth of
Net Profit is increased by 72.63% to Rs.
295.20 million.
Abbott India has declared a quarterly
dividend of 51 cents per share. The cash
dividend is payable on Nov. 15, 2012, to
shareholders.
Net Sales and PAT of the company are
expected to grow at a CAGR of 26% and
42% over 2010 to 2013E respectively.

buy Abbott:: First call research

Buy Hawkins Cookers; target Rs 1681: Firstcall Research

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Hawkins Cookers Limited is a
company in India which manufactures
domestic pressure cookers and
cookware.
The company has three
manufacturing plants at Wagle estate
Thane, Hoshiarpur and Jaunpur. It
manufactures under different brand
names of Hawkins, Futura, Contura
and Ventura.
The company is the largest cookware
manufacturer in India and exports its
products to more than 60 countries.
The company continued its efforts on
product development with more
emphasis on research and
development activity.
The Top line of the company is
expected to grow at a CAGR of 14%
over 2010 to 2013E respectively.
During the quarter, the company has
reported Net Profit increased to
Rs.93.27million from Rs.80.39 million
in previous year same quarter.

Buy Jindal Poly Films (JPFL) Target Price: Rs. 486.00: First Call

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Jindal Poly Films (JPFL) is India’s
leading producer of flexible packaging
films.
Jindal Poly Films Ltd is a part of Rs
30 Billion B C Jindal Group, A 50-
Year Old Industrial Group Offering a
Wide Range of Products.
During the quarter the company has
incorporated three wholly owned
subsidiaries.
Jindal Poly Subsidiary Awarded Coal
Block in Mozambique.
Jindal Metal and Mining Limited have
entered into a joint venture
agreement for prospecting,
exploration and mining of coal.
Net Sales and PAT of the company
are expected to grow at a CAGR of
31% and 88% over 2009 to 2012E
respectively.

Edelweiss - December, 28 2010-ETR

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Edelweiss Technical Reflection (ETR)

§  Nifty retreated below the 6000 mark after making a high of 6045 in the first half of the trading session. It continues to face supply from the 50 DMA which needs to be breached on a closing basis for bullish activity to pick up. The index continues to trade with lackluster momentum and low participation owing to the year-end holiday lull. Oscillators on the daily chart are showing mixed readings thus indicating a range trade. Hourly MACD has triggered a sell which could drag the index lower towards supports in coming session. Market breadth turned in favour of declines towards the end of the session. Nifty 50 stocks A/D ratio was marginally weak at 1:1.3. Nifty is likely to find support at the 21-DEMA and upward trending channel at 5960 where traders are likely to find buying interest. Overall the market is expected to be constricted to a range 5920-6050 for the derivatives expiry week.

§  Most sectoral indices ended down on selling pressure but for the defensives Pharma and IT shares that bucked the trend. Leading the market down were Metals, Realty and PSU shares. We continue to maintain a cautious to negative stance on Autos sector. The short-term bullish stance is likely to be positive on Bank Nifty as long as 11,400 is held. Bullish Setups: BRCH, SHRS, PLNG, SESA, DIVI, CIPLA Bearish Setups: BJAUT, KMBH, DRRD

§  Movement across currency markets has become range bound, and is likely to pick up direction in the New Year. Crude has given a break past the $91, well on its course towards $97-100. Gold is consolidating between $1390-1370, before it resumes the uptrend back towards the all-time high prices. Sugar is expected to stretch gains towards 37.50 cents in the coming weeks.

Edelweiss - December, 28 2010-Stock in news

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Stocks in News

§  Promoters hike stake in Unitech to 48.57% (ET)

§  KEC International bags 1,018-crore orders (ET)

§  Apollo Tubes issues pref warrants to promoters (ET)

§  iGate set to buy Patni for $1 b,no-compete pact clears way (ET)

§  Lanco Infra to hive off power biz into separate entity,list co in 2012 (ET)

§  ONGC to raise Pawan Hans stake to 49% (ET)

§  Dishman seals $50-m deal with European co (ET)

§  NTPC, Gridco sign power purchase deal (Mint)

§  Ambuja Cement, Holcim raises stake in ACC (DNA)

§  Aventis sells Chiron stake (DNA) 

First Call - December, 27 2010-Banking

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Post RBI’s proposal during the November monetary policy to make norms on housing
loans a bit stringent, the central bank has issued a circular stating:
• LTV on housing loans is capped at 80% to avoid excessive leveraging. However,
LTV on loans up to INR 2 mn (classified as PSL) will be capped at 90%.
• Risk weights on housing loans above INR 7.5 mn (irrespective of LTV) are
increased to 125%.
• Standard asset provisioning for banks on teaser loans is increased to 2% (from
0.4%). It has clarified in the circular that provisioning has to be on outstanding
loans, while banks were proposing to make it prospective on incremental loans.
RBI has maintained the definition of teaser loans as loans where a
comparatively lower rate of interest is charged in the first few years, after which it is
reset at a higher rate. It has also provided a relief that standard asset
provisioning will be reverted to 0.4% after one year from the date on which
the rates are reset at higher rates if the account continues to remain ‘standard’.
􀂄 Our view
• As far as banks are concerned, impact of the raised standard provisioning
from 0.4% to 2% will be marginal on credit cost (less than 5bps).
• ICICI Bank: ~INR 40 bn of housing loans are under special schemes
(8% of housing loans translating into ~2% of overall loan book).
• State Bank of India: For SBI, as well, home loans under special
schemes are <2% of advances. As per media reports, SBI will have to
provide INR 3.5 bn towards standard asset provisioning on teaser loans.
• After RBI having clearly signaled banks to discontinue teaser schemes in its
November monetary policy, HDFC and ICICI Bank have withdrawn their
special schemes. Punjab National Bank (PNB) has proposed to withdraw it
from January 1, while SBI will review the same by December end.
• We believe withdrawal of special schemes will lead to some moderation in
demand. Moreover, players were competing on LTV apart from rates which
will also be capped now.
• RBI is also bringing back focus on affordable housing by increasing risk
weight on loans above INR 7.5 mn.
• We believe competition amongst players will now be more a function of
funding cost than LTV and teaser schemes.
Though the norms are not applicable to HFCs (as they are governed by NHB and
not RBI), we believe NHB will follow them with a lag. In that case, impact on
HFCs will be relatively higher with respect to credit cost and competitive
advantage.
• HDFC - 27% of its individual loan book is under the dual rate scheme
• LIC Housing Finance - loans provided at LTV >80% will be much less
than 3%; proportion of loans above INR 7.5 mn is <1%. Currently, INR
10 bn (27% of individual loan book) is under Fix-O-Floaty scheme and
INR 2-3 bn (5-6% of loan book) is under Advantage 5 scheme.

First Call - December, 27 2010-Bond Vector

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Government securities
 The Ten year benchmark bond closed 4 bps lower at 7.90% while 8.13% GOI 2022
bond closed the same as yesterday at 8.01%. Volume in the ten year benchmark
was significantly lower than previous few days at INR 2.15bn.
 The Finance minister made a statement that the government was expecting GDP
growth in the current and next quarter to be as encouraging if not better than the
previous recorded quarter. However he said that India would also have to tackle
barriers to ensure double digit level growth. RBI said that even though there is
increasing liquidity in the system, this should not be inferred as a turnaround of its
tighter monitory policy.
 Government of India raised INR 60 Billion selling bonds maturing in 2015, 2022
and 2040 with coupons of 7.17%, 8.08% and 8.30% respectively.
 The one year and the five year OIS closed higher than the previous day. 1 Year
OIS was at 7.06% while the 5 year OIS closed at 7.71%.
Non-SLR market
 Dena Bank raised 3 months, Bank of Maharashtra raised 4 months and State Bank
of Patiala raised 1 year CD at 9.18%, 9.65% and 9.65% respectively. IDBI placed
12 months CD at 9.80%.
Money markets
 Call rates ended at 6.88% as against 6.98% yesterday. CBLO closed at 6.29%.LAF
Borrowing was at 1.50 trn compared to 1.55 trn yesterday.

First Call - December, 27 2010-Dish TV

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Subscriber addition has accelerated for entire industry
Dish TV added 1.4 mn subscribers in H1FY11 and is likely to add 1.8 mn in
H2FY11. The entire industry added 1.4 mn in October and 1.9 mn in November
and is likely to add 1-1.1 mn subscribers in December and 3.3-3.5 mn in
Q4FY11. Dish TV expects ~12 mn subscriber addition in FY11 and ~ 11 mn in
FY12 for overall industry. Management stated the company is striving to corner
~28-30% share of this in a six-player market. Dish TV now has 9.2 mn gross
and 7.3 mn net subscribers and expects the momentum in subscriber addition to
continue till industry touches 55 mn subscriber base (from the current 30 mn).

􀂃 Rural and smaller towns growing at a faster clip
As per IRS, ~76% of DTH subscribers are from smaller towns and rural areas.
This augurs well for Dish TV in light of its strategy of focusing more on smaller
towns and rural areas. In top cities, cable players are more aggressive and
charge only for one connection in multi-TV homes cable companies, rendering
DTH more expensive.

􀂃 Cut in entry price has been positive
Packages are now available at below INR 1,000 (INR 1,690 earlier), which has
led to significant impact on consumer psyche. However, there is no significant
negative impact on Dish TV as now only one month free content is provided
instead of three months earlier.

􀂃 Premiumisation underway
Dish TV expects an exit ARPU of INR 150-155 in FY11E. Q3FY11 is likely to see
some improvement Q-o-Q with subscribers uptrading to higher value packages.
􀂃 Outlook and valuations: Attractive; maintain ‘BUY’

We are bullish on the Indian pay TV market. Dish TV is at an inflection point with
expected higher growth on back of low penetration, favourable regulatory
environment, increasing margins, and strong balance sheet. Hence, we maintain
‘BUY/Sector Performer’ recommendation/rating on the stock.

First Call - December, 24 2010-THE PHOENIX MILLS

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􀂃 Quality retail/hospitality asset play on Indian consumption story
The Phoenix Mills (PML), with its successful High Street Phoenix (HSP) property
in Mumbai and upcoming Market City projects in Tier I cities across India, offers
a unique play on the Indian consumption story. Moreover, it enjoys strong track
record of project execution and established tenant relationships. With these, it is
poised to benefit from demand revival for retail space, driven by rise in
discretionary spending and recovery in retailers’ expansion plans.

􀂃 Rental income to rise from INR 0.8 bn to INR 2.7 bn in FY12E
With ~4.4 msf space of Market City projects (PML’s share: 1.64 msf) becoming
operational by FY12, we estimate PML’s rental income to grow from INR 0.8 bn
in FY10 to INR 2.7 bn in FY12E and INR 3.5 bn in FY13E.

􀂃 High Street Phoenix, a cash cow; valued at INR 142/share
PML’s HSP property at Lower Parel, Mumbai offers a mix of retail, office and hotel
space at a single location and generated ~INR 0.8 bn of rentals across ~0.9 msf
in FY10 (ex-service charges). With ~0.15 msf of anchor space up for
renegotiation in CY11 and Palladium luxury mall (~0.3 msf) to earn full year
rentals from FY11 we expect 34% CAGR rental growth over FY10-13E to ~INR
1.85 bn). We value this project at GAV of ~INR 20.6 bn (INR 142/share).

􀂃 Market Cities to drive rentals, valued at INR 89/share
With retail assets of ~4.4 msf (~1.6 msf PML’s economic interest) becoming
operational by FY12E, we estimate gross rentals of ~INR 4 bn by FY13E on the
back of robust pre-leasing activity. Further, PML’s strategy of front-ending cash
flows through sale of development assets in commercial/residential space
provides comfort on the liquidity front. We value the Market City assets at INR
12.9 bn (INR 89/share), adjusted for associate level debt.

􀂃 Outlook and valuations: Poised for growth; initiate coverage with ‘BUY’
Our FY12 GAV of INR 294/share includes INR 231 for HSP/Market City projects,
INR 29 for 53% economic interest in HSP Shangri-La Hotel and INR 34 for other
investments. Adjusting for FY12E net debt of INR 31/share (ex-Shangri-La CDs),
we arrive at FY12 NAV of 263/share, which implies 17% discount to NAV. Hence,
we initiate coverage with ‘BUY/Sector Performer’.

First Call - December, 24 2010-ETR

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Edelweiss Technical Reflection (ETR)

§  Nifty closed on a flat note after a listless session throughout the day. Today’s session suggests that the bulls to overcome in the previous couple of weeks lack conviction to take the market higher above 6000 in which case it could get restricted within a trading range. Hourly MACD has rolled triggered a bearish crossover, although it is trading above the zero line. Daily oscillators are giving mixed readings thus indicating a range bound market. Market breadth declined to close in negative territory at approximately 3:4 ratio. Last 2 session suggest that going forward, unless the Nifty closes above the 50DMA, the uptrend would get arrested and the move would  get restricted to a range trade between 5855-6030 in the short-term. However bulls have the slight edge as the Nifty is trading in a steep rising trend channel, and is making a higher high with a potential to test 6090.

§  IT & Healthcare stocks rallied marginally while Metal names retreated after advance witnessed in previous few sessions. Sectorally, the Auto space remains in distribution mode while the banks are now getting confined within a trading range . Bullish Setups: BRCH, DIVI, SHRS, PLNG, SESA, ABAN, BHARTI Bearish Setups: BJAUT, KMBH, DRRD, HH, MSIL

§  USD-INR (futs) is making a ‘bearish flag’ pattern on the daily chart, with the momentum oscillator triggering a sell signal. A break 45.05 would confirm the same for a target of 44.25. DXY is on course to test the 200 DMA at 81.75 that could keep risk assets in a constant state of flux in the immediate short-term.

First Call - December, 24 2010-HCL Technologies

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Reduced derivative exposure may positively impact profitability
􀂄 HCL Technologies (HCL Tech) uses hedge accounting principles for accounting of
derivatives. Opening balance of derivative losses was at INR 7.8 bn, of which, INR 4.8
bn has been recognised in P&L during FY10, which is 32.5% of PBT (FY09: INR 2.4 bn;
15.2% of PBT). INR appreciation has led to MTM gains of INR 2 bn during FY10, while
derivative losses of INR 1.0 bn (FY09: INR 7.8 bn) have been carried forward in
reserves.
􀂄 HCL Tech has reduced its derivative exposure from INR 38.9 bn as at FY09 end to INR
20.6 bn as at FY10 end.
􀂄 Net un-hedged foreign currency exposure is INR 24.4 bn as at FY10 end (FY09 end: INR
20.7 bn).
Acquisitions at premium to fair value lead to substantial addition of goodwill
􀂄 Goodwill stands at INR 35.2 bn as at FY10 end (FY09: INR 37.3 bn), at 56.0% (FY09:
75.5%) of net worth.
􀂄 Goodwill and intangible assets for various acquisitions is higher than net consideration
paid for acquisition, implying negative net tangible assets of the target companies (refer
table on page 2 for details).
Healthy operating cash flow on the back of reduced working capital requirements
􀂄 During FY10, HCL Tech reported strong operating cash flows of INR 17.9 bn (FY09: INR
11.2 bn) on account of reduced working capital requirements. This is despite reduction
in PBT from INR 16.0 bn in FY09 to INR 14.7 bn in FY10.
􀂄 Working capital investment has reduced from INR 5.8 bn in FY09 to INR (1.7) bn in
FY10, primarily on account of increase in deferred revenue by INR 3.7 bn. Unbilled
revenue stands at INR 5.3 bn as at FY10 end (FY09: INR 5.5 bn).
􀂄 Creditors stand at INR 17.9 bn as at FY10 end (FY09: INR 20.1 bn). Average payable
days at 85 days (FY09: 84 days), in our view, are high considering major operating
expenses are in the form of employee expenses (51.5% of FY10 revenue).
Tax implications may affect profitability
􀂄 HCL Tech’s effective tax rate has reduced to 14.8% in FY10 (FY09: 16.4%), primarily on
account of reversal of income tax provision relating to SEZs of INR 0.3 bn and abolition
of fringe benefit tax. This has resulted in increase in PAT by INR 0.6 bn (~4.6% of PAT).
􀂄 The company may incur additional tax burden from 2012 due to expiry of the tax
holiday period.
Accounting policy highlights
􀂄 The company had issued ESOPs to its employees, which have been accounted on the
intrinsic value basis. Had the company accounted the same on fair value, profit for the
year would have been lower by INR 337 mn, ~2.3% of PBT.

First Call - December, 24 2010-Bond Vector

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Government securities
 India’s Government bonds declined driving yields up during the day due to cash
crunch at local banks, however at the end of the day yields fell again. The ten year
bench mark bond closed 1 bp lower at 7.93% while 8.13% GOI 2022 bond closed
at 8.02%. Volume in the ten year benchmark was INR 3.5bn.

 Food inflation rose up again crossing double digits at 12.13% for the week ended
December 11. Sudden increase in food inflation could prompt the Reserve Bank to
hike key rates in its next policy review. RBI Governor Subir Gokarn had already
suggested yesterday that more tightening policies could be taken to bring the
inflation under further control.

 Underwriting Auctions were conducted where the underwriting cutoff rate for
7.17 % Government Stock 2015, 8.08 % Government Stock 2022 and 8.30 %
Government Stock 2040 was 0.38 paise, 0.42 paise and 0.51 paise per INR 100
respectively.

 The one year OIS closed 3 bps higher at 6.97% while the 5 year OIS closed the
same at 7.64% vs. the previous day.

Non-SLR market
 State Bank of India raised INR 11.5bn, Andhra Bank raised INR 5bn and ING
Vysya Bank raised INR 3.5bn in the form of 3 month CDs at 8.97%, 9.08% and
9.35% respectively. State Bank of Travancore placed INR 2.35bn of 4 month CDs
at 9.5%.

Money markets
 Call rates ended flat again at 6.98% as there continued pressure on liquidity in
the reporting week. CBLO closed at 6.27%.

First Call - December, 24 2010-stock in news

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Adani Power awaits environ min nod for Bhadreshwar plant (Dna)
Glenmark gets USFDA nod (Dna)
Uniphos rights issue (Dna)
Spanco gets Rs85cr order (Dna)
Reliance mediaworks, Russian studio in pact (Dna)
NIIT Tech acquires ‘Preferr’ platform in US (Dna)
Titan revamps Sonata, seeks to double volume (Dna)
Strides Arcolab to buy out Ascent Pharma (ET)
Bhel gets Rs78cr order(Dna)
Temasek picks up 3% in Max (ET)
Reliance said to shut 2 gas wells (BS)

Edelweiss Research - December, 23 2010- Bond Vector

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Government securities
 Sovereign bonds were flat today as good response from the OMO countered
concerns over reserve bank rate action and the current liquidity situation. The 10
Yr benchmark bond closed 1bp higher at 7.94%, while 8.13% GOI 2022 bond
closed 1bp lower at 8.01% and the 8.08% GOI 2022 bond closed at
8.06%.Volumes in the benchmark bond were INR 5.90bn.
 The Reserve Bank bought today INR 80.57bn in the OMO as against the INR 120bn
notified by it. It bought INR 48.43bn of 7.80% GS 2020 at 7.91%. This was well
below the yield traded in the benchmark bond at that time, causing a rally in the
bond.

 Today the reserve bank’s Deputy Governor Gokarn commented that inflation was
not coming down as fast as the central bank would like it to. This caused negative
sentiment in bonds during the day as it increased the probability of a rate hike in
the next policy.

 The swap curve steepened today with a upward shift as there was interest
payment across tenures. RBI deputy governor Gokarn’s concerns on inflation,
liquidity concern and disappointment over the choice of securities for the auction
were also among the causes. Traders now fear that these securities may not elicit
a strong response during the OMO. The 1 year OIS closed 8bps higher at 6.94%
while the 5 year OIS closed 12bps higher at 7.64%.

Non-SLR market
 Union Bank raised INR 10bn of 3 month CDs at 9.03%. Canara Bank placed INR
9bn of 1 yr CDs at 9.65%. PNB and Andhra Bank raised INR 8.5bn and INR 7bn
respectively of 3 month CDs at 9.05%. Corporation Bank placed INR 5.75bn of 2
month CDs at 9.05%.

Money markets
 Call rates ended flat at 6.97% as there was continued pressure on liquidity. CBLO
closed flat at 6.27%. The liquidity easing measures announced by the RBI did not
manifest itself in lower call rates. The RBI deputy governor Gokarn said today that
signs of instabillty in rates will be watched. LAF borrowing stepped up to INR 1.71
trn today compared to INR 1.59 trn yesterday.

Edelweiss Research - December, 23 2010- Oil & Gas - impact of rising crude on OMCs

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Increasing FY12E under-recoveries with crude estimate at USD 90/bbl
We recently revised up our FY12 & FY13 crude price estimates to USD 90/bbl
(USD 85/bbl) & USD 95/bbl (USD 90/bbl) respectively (refer to our report Outlook
on crude remains buoyant, dated December 20, 2010). The revision was to factor
in our view of rising crude prices due to reducing spare capacity, robust growth in
demand in emerging economies like China, and increased speculative activity.
However, we retained our FY11 crude price estimate of USD 80/bbl and long-term
crude price assumption at USD 90/bbl. We also revised our USD/INR assumptions
for FY11/FY12 to 45.5 / 45.0, respectively (45.75 and 44.0 earlier), to adjust for
recent INR fluctuations.

These revisions have consequently led to a change in our under-recovery
assumptions to INR 507 bn in FY11 and INR 730 bn in FY12 assuming status
quo is maintained in prices of diesel, LPG, and kerosene, while petrol continues to
be pegged to market prices of crude. We are maintaining our under-recovery
sharing assumption at 50% by the government, 33.3% by upstream companies,
and the balance by OMCs, thus pegging OMCs’ net share of under-recovery
at INR 122 bn for FY12E.

􀂄 Re-iterating our positive view on crude
We re-iterate our positive stand on crude as we expect crude prices to reflect
increased volatility H2CY11 onwards as spare capacity starts dipping from
Q1CY12. Rise in crude prices will also be amplified by the impact of increased
speculation in crude (currently at all-time high). We do not rule out crude price
averaging >USD 100/bbl in Q3CY11 as well.

􀂄 EGoM meeting on December 30 to mull diesel price hike
The Empowered Group of Ministers (EGoM) headed by the Finance Minister is
likely to meet on December 30, 2010, to consider raising prices of diesel and
domestic LPG. Recent media reports suggest that EGOM may be considering a INR
2/lt hike in diesel prices and INR 100/cyl increase in LPG prices to bridge the
humungous gap in under-recoveries. We estimate diesel and LPG underrecoveries
at crude price of USD 85/bbl and current product spreads at INR 4.8/lt
and INR 335/cyl, respectively. We continue to believe that any hike in diesel
prices is difficult due to rising inflation and upcoming elections in certain key
states like West Bengal and Tamil Nadu in May 2010. However, we have done a
sensitivity analysis of under-recoveries in case EGoM hikes diesel price by INR
2/ltr. In this scenario, OMCs may provide a short-term trading opportunity. SOTP
for OMCs will increase 5-14% with HPCL displaying the highest sensitivity to the
event, if any (refer table 6).

􀂄 Outlook and valuations: Downward revision in SOTP of OMCs
Post the change in our under-recovery assumptions, we have revised down
earnings estimates for IOCL, BPCL, and HPCL and have consequently revised
down their SOTP (March 2012) 4%, 2%, and 6%, respectively. Our revised fair
value SOTP of IOCL at INR 426 offers 16% upside from the current level, while
BPCL seems to be fairly priced with a SOTP of INR 693. On the contrary, HPCL
offers a marginal downside from the current level considering its revised fair value
SOTP of INR 407. Consequently, we maintain our ‘HOLD/SP’
recommendation/rating on IOCL and ‘REDUCE/SU’ recommendation/rating on
BPCL and HPCL.

Edelweiss Research - December, 23 2010- RURAL ELECTRIFICATION CORPORATION

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􀂃 Modest disbursement growth
In H1FY11, REC’s growth momentum slowed down relative to its past five years’
historical average and also compared to its peer Power Finance Corporation
(PFC). Our interactions with market participants indicate that a few banks (viz.,
SBI, PNB, Syndicate etc.,) are getting more competitive on pricing in the power
financing space. While we were building in pick up in disbursements in H2FY11,
REC management indicated that the modest pace continues in Q3FY11 (till date)
as well. Ergo, we are revising down our disbursement growth estimate in the
near term to 18% for FY11-12 (27% earlier) and our loan growth estimate to
23% CAGR over FY10-12 (27% earlier). However, power project disbursements
are chunky in nature and pose a risk to our downward revision in disbursements.

􀂃 Margins to witness limited compression
Despite a sharp spike in wholesale cost (by 250bps in past six months),
management sounded confident on maintaining NIMs at around 4.3% and
indicated that compression in margins will be marginal. We believe IFC status is
mitigating the wholesale funded risk (widening the window in the international
market). REC plans to raise another USD 500 mn of ECBs in January, over and
above USD 400 mn raised in September. Even the ALM profile is favorable
wherein it will benefit from upward re-pricing (by 50bps) of loans amounting to
INR 100 bn (15% of current book), while on the liability side, only INR 30 bn is
due for re-pricing. We are building in margins of 4.3% for FY11-12E.

􀂃 Outlook and valuations: growth modest, NIMs stable; maintain ‘BUY’
In light of the modest pace of disbursements in FY11 and increasing competition,
we are revising down our loan growth estimates. We are, however, maintaining
our NIM assumption of 4.3% over FY10-12 and expect REC to deliver EPS
growth of 20% and RoEs of 20% over FY11-12E. The company is trading at 2.1x
FY12E book and 10.7x earnings. We maintain ‘BUY/Sector Outperformer’
recommendation/rating on the stock. However, at this stage, we prefer PFC over
REC considering: (1) growth trends are diverging in favor of PFC; (2) margin
differential between REC and PFC will narrow down with implementation of DTC
and both having similar access to borrowings under IFC status; and

First Call - December, 23 2010-Edelweiss Technical Reflection (ETR)

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Edelweiss Technical Reflection (ETR)

§  Nifty dropped in the later part of the session undoing earlier gains, and even closing below the psychologically important 6000 mark. Today’s session suggests that the bulls to overcome in the previous couple of weeks lack conviction to take the market higher above 6000 in which case it could get restricted within a trading range. Hourly MACD has rolled triggered a bearish crossover, although it is trading above the zero line. Daily oscillators are giving mixed readings thus indicating a range bound market. Market breadth was reduced to marginally in favour of advances. Nifty 50 stocks A/D ratio was balanced at 1:1. Yesterday’s trade suggests that going forward, unless the index closes above the 50DMA that has been acting as a strong barrier in the past couple of weeks, it get restricted to a range trade between 5855-6030 in the short-term. However bulls have the slight edge as the Nifty is trading in a steep rising trend channel, and is making a higher high with a potential to test 6090.

§  Metals, PSU and FMCG shares were among the gainers; selling activity was seen in Oil & Gas, Cap Goods and Banking shares. Despite moving down after triggering a breakout above 11615, the Bank Nifty continues to make a higher high and higher low along with a buy signal in short-term oscillators. Bullish Setups:TATA, SHRS, PLNG, SESA, ABAN, AXSB, BHARTI Bearish Setups: BJAUT, KMBH, DRRD, HH.

§  USD-INR (futs) is making a ‘bearish flag’ pattern on the daily chart, with the momentum oscillator triggering a sell signal. A break 45.05 would confirm the same for a target of 44.25. DXY is on course to test the 200 DMA at 81.75 that could keep risk assets in a constant state of flux in the immediate short-term.

First Call - December, 23 2010-Sales Traders

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Sales Traders Commentary

§  On Wednesday, benchmark indices reversed initial gains to hit fresh intraday lows in the mid-afternoon trade, tracking weak opening for European stocks. Sectorially, capital goods and consumer durables stocks fell, while metal and FMCG stocks rose.

§  Sensex was down 48.87 points, closing at 20,011.45; Nifty went down by 18 points, closing at 5,982.65.

§  Gainers were were Bharti Airtel (3.12%), Hindalco Industries (1.80%), Jindal Steel & Power (1.56%), Tata Motors (0.92%), Sterlite Industries (India) (0.91%), and Reliance Communications (0.79%).

§  Losers were Maruti Suzuki India (2.45%), Reliance Energy (2.10%), Hero Honda Motors (1.98%), HDFC Bank (1.39%), Wipro (1.33%), and Reliance Industries (1.21%).

§  The Consumer Durables space was down 0.77%. Major losers were Gitanjali Gems (3.75%), Videocon Industries (2.12%), Rajesh Exports (1.02%), Titan Industries (1.01%), and V I P Industries (0.15%).

§  Capital Goods was down 0.68%. Major losers were Gammon India (2.65%), Crompton Greaves (1.67%), Alstom Projects India (1.38%), BGR Energy Systems (0.26%), and BEML (0.21%).

§  The Oil & Gas index was down 0.66%. Major losers were Petronet LNG (1.59%), Reliance Industries (1.21%), Cairn India (0.79%), and Oil India (0.57%)

§  Globally, Asian markets ended in the green, while Europe was trading weak.

Edelweiss Research - December, 23 2010- Annual Report Analysis - C&C Constructions

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Re-classification of JV as integral; led to higher profitability
􀂄 During FY10, C&C Constructions (C&C) reclassified its JV operations in Afghanistan from
non-integral to integral. This led to PAT for the year being higher by INR 68.6 mn (11%
of PAT).

WIP forms significant portion of working capital; includes unrealised profits
􀂄 WIP is valued on net realisable value basis (NRV); hence, the carrying value includes
the unrealised profit. WIP increased sharply by 3.4x, from INR 2.1 bn in FY09 to INR 7.2
bn in FY10.

􀂄 C&C follows percentage of completion method for recognising the contract revenues.
However, the company does not specify any threshold stage for commencement of
recognition of revenues.

Revenue and EBIDTA growth robust; operating cash flow subdued on increase in WC
􀂄 C&C’s FY10 revenue jumped 56.6% to INR 11.6 bn (FY09 INR 7.4 bn) and EBIDTA
catapulted 75% to INR 2.1 bn (FY09 INR 1.2 bn).

􀂄 Despite reported FY10 PBT of INR 1.0 bn (FY09: INR 0.5 bn), cash from operating
activity (post interest) remained subdued at INR (0.6) bn [FY09: INR (13.0) bn], mainly
due to higher working capital requirement.

􀂄 Cash conversion cycle deteriorated from 181 days in FY09 to 215 days in FY10,
primarily owing to rise in inventory days from 177 in FY09 to 251 in FY10. It was,
however, partially compensated by decrease in receivable days from 109 in FY09 to 69
in FY10.

Capex augmented by mix of debt and equity; D/E improves on new issuances
􀂄 C&C’s net block increased from INR 4.7 bn in FY09 to INR 6.3 bn in FY10. This was
primarily on account of pursuing BOT projects represented by CWIP that increased from
INR 1.5 bn in FY09 to INR 2.6 bn in FY10.

􀂄 During FY10, C&C raised INR 0.8 bn through QIP and INR 0.5 bn through preferential
allotment of equity shares to promoter group on conversion of warrants.

􀂄 Loan book increased from INR 6.7 bn in FY09 to INR 8.3 bn in FY10. D/E improved
marginally, from 1.9x in FY09 to 1.6x in FY10.

􀂄 Average borrowing cost charged to P&L (excl. interest capitalised) was 10.3% in FY10.
The company capitalises the interest cost to carrying cost of CWIP/inventory. Details on
interest capitalised has not been disclosed separately.

Revenue mix to undergo a rejig as company ventures into new businesses
􀂄 C&C intends to expand its presence across infrastructure segments; besides developing
roads, it is also undertaking projects for buildings, railways and water & sewerage
projects.

􀂄 The company’s order book, as at FY10 end, stood at INR 26.1 bn (FY09 INR 34.2 bn); of
this, INR 13.8 bn (FY09 22.5 bn) comprises roads and the balance other new ventures.