Rating: Positive

In 3Q 2010, our coverage universe reported positive growth in Net interest income (NII) with decent growth in advances except ICICI Bank. Net interest margins has grown up on back of falling cost of deposit as banks have bolstered their CASA base. We continue to have bullish view on sector since IIP (Index of Industrial production) can surprise on upside which will ignite private capital expenditure cycle. Banking credit growth stands at 13% YTD 2010 compared to 24% in 2005-09. We believe revival in private capital expenditure will fuel credit growth resulting in sector re rating. We expect our coverage universe to report credit growth of 19-23% over next two years.

Top pick: Axis bank remains our top pick with target price Rs 1241 (2.6 PBV times FY 11 BV of Rs 477).

IT Sector

Rating: Positive

We believe IT Software exports will grow by at least 10-12% in FY 2010-11(last estimated at 4% in Market Outlook dated Nov 2009) on the back of rise in discretionary IT Spending in US. In 3Q 2010 most of leading IT Players appears to be sanguine on US IT spending outlook as evidenced by rising geographical contribution by US (Infosys & Wipro have observed rising sequential revenues growth from US). We believe with restoration of macro environment global IT budget will be flat to marginally positive. IT vendors continues to report client addition suggesting decent revenue visibility on stable Re (we estimate INR/USD at Rs 44 for FY 2011). Our coverage universe reported rise in employee utilization which will be margin accretive in near future.

Top pick: TCS remains our top pick with target price of Rs 850 (22 times PER FY 11 EPS.

Engineering

Rating: Positive

The power T&D business in energy segment is witnessing increased competition from domestic players & Chinese/Korean imports resulting in pressure on margins for the engineering firms such as Larsen & Toubro and Siemens. On the other hand, there are still not clear signs of sustained recovery in corporate capex which affects the industry segment. The country has embarked on a confident growth path. The growth is likely to be fuelled by increased capacity creation to meet the huge shortage of power and need for building India’s infrastructure. The recovery and firming up of oil prices also makes us positive on the prospects for oil and gas business. Though the inflationary pressures in the economy may lead to tightening of liquidity in the system, Government’s resolve to target a 7-8% growth rate should present many exciting business opportunities.

Top pick: BHEL remains our top pick with target price of Rs 2850 (30 times PER FY 11 EPS of Rs 95).

Metals

Rating: Positive

During 3Q FY 2010, the ferrous metal results were in line with our expectations. The stellar profitability y-o-y growth reported during 3Q FY 2010 was due to the low base effect. Tata Steel (standalone), Steel Authority of India Limited, JSW Steel Limited and Sesa Goa Limited reported robust earnings growth. Amongst, non-ferrous metals, Sterlite Industries reported lower-than-expected profitability due to rising costs. In light of sharp run-up in stock prices and our analysis of 3Q FY 2010 results, we downgrade our sector view from positive to neutral. Nevertheless, we continue to remain bullish on Sesa Goa, while we have downgraded JSW Steel from to a HOLD after it achieved our target price.

Power

Rating: Positive

During 3Q 10 the result of the power companies were as per our expectations. The net realizations of the power unit have increased during the quarter due to merchant power sale. Some companies like Torrent power; CESC has shown robust growth visibility more than the big players like NTPC, Tata Power etc. In Power Transmission segment the market leader power grid has shown a good performance and we are bullish on it as we believe that it will remain be market leader in transmission segment in coming years. It is estimated that 47,488 MW of capacity addition will take place during the Eleventh plan. We believe that in order to maintain the current growth, the country will require faster capacity additions in the Eleventh plan. Further, additions to generation capacity will require high capacity additions in transmission and distribution (T&D) as well. A total investment of around Rs 3 trillion in the power sector in the eleventh plan is estimated. Of this, a major chunk of Rs 2.1 trillion is expected to be towards power generation and the rest towards T&D segment.

Top pick: Power grid remains our top pick-The Company has reported growth of 24% CAGR in revenue over FY06 to FY09. It is currently trading at 22 x FY10E EPS, 17 times FY11E of EPS. We believe that the company will continue to earn minimum RoE of 12% and an EPS growth rate of 34%. We re-rate the stock and recommend a “BUY” rating with a target price of Rs. 137 at 20 x FY11E EPS of Rs 6.9.

Media

Rating: Positive

We have upgraded advertising industry growth estimate from 2-4% to 10% over 2010-12. In 3Q 2010, broadcasters like SUNTV, Zee Entertainment reported positive revenues growth with improvement in margins. The regional GEC market would grow 20-25% compared to television advertising industry growth of 10% over next two years. Print advertising players have disappointed in terms of advertising growth with falling margins thanks to stable newsprint prices.

Top pick: SUNTV remains our top pick with target price of Rs 450 (25 times PER FY 11 EPS of 18).

Cement

Rating: Positive

As India’s GDP is expected to move on 8% plus path and consequently we believe that the cement consumption too would grow with multiplier co-efficient of 1.2 to 1.3 over GDP that is about 10%. During 3Q FY 2010, most of the cement companies have shown a growth in its revenues despite any demand from housing segment. Production between April-January 2009 has moved up 4.77% to 26 MT from 25 MT in the same period last year. Dispatches grew 4.74% to 26 MT (25 MT). The dispatches in December were the largest so far in the current financial year at 17.74 million tones. With this the industry has recorded the highest sequential growth rate at 12.78%, whereas on the year-on-year (y-o-y) basis, after a gap of three months since August last year, the growth was in double digits at 10%. Though fresh capacities will increase supply but we believe capacity utilization will remain stand at 80%

Top pick: Dalmia Cements remain our top pick with target price of Rs 301 on S.O.T.P basis where in standalone valuation stands at Rs 280 (i.e. 8 PER times FY 11 E EPS of Rs 35.1) and OCL is valued at Rs 21 per share on basis of its market capitalization.

Oil & Gas

Rating: Positive

Oil prices are hovering around $70-$75 a barrel. If we follow the pattern of the past 15 years, then Jan-Feb has typically been the months, in which, the seasonal oil price starts moving up again as markets prepare for the summer driving season.

We downgraded our rating on downstream companies to ?Sell? but the much awaited Mr. Kirit S. Parikh? panel report on retail fuel prices is out. This report supports market-determined pricing for petrol and diesel, Rs.100/cylinder hike in LPG and Rs. 6/liter hike in kerosene. Though the Oil ministry has to give its final words, as it has to ensure the consumer interest as well as the financial health of PSU fuel retailers, but still this report, focusing on minimizing under recoveries and subsidies, provides positive undertone to the earnings of OMCs. So, we remain Neutral to OMCs.

Considering the huge demand-supply gap, huge growth potential market, potential upside in transmission volumes on account of additional gas availability from RIL?s KG Basin gas, PLL?s RLNG and ONGC?s marginal fields in FY10-FY11, we are positive on gas transmission companies like GAIL (India) Ltd. and Indraprastha Gas Ltd.

Top pick:?? Indraprastha Gas Ltd. remains our top pick with target price of Rs 280, valued at 14x FY11E EPS of Rs. 20 with a target of one year.

Telecom

Rating: Neutral

In 3Q 2010, our coverage universe continues to report decline in its KPI like RPM, MOU & ARPU due to increase in competition plus greater share of rural areas in net incremental addition. In 3Q 2010, coverage universe observed steep fall in RPM which resulted in sequential degrowth in revenues along with falling margins. We believe telecom industry will indeed consolidate but that is still 12-18 months away as the new entrants would not be able to be profitable in long term and the prevailing price war will shake out the sector and eventually work the overcapacity out and probably only the incumbents will emerge as winners.

Infrastructure

Rating: Neutral

Our discussions with companies suggest that funding constraints could increase the near-term risk of execution on Andhra Pradesh irrigation projects. Payments to contractors are getting delayed, engineering and construction companies are going slowly on execution of these projects given lack of funding clarity, and future order inflows could also be at risk if the funding situation doesn’t improve.

Auto

Rating: Neutral

Auto sector continues to report robust volume growth on back of domestic consumption plus renewed exports orders. In 3Q 2010, two wheeler major Hero Honda?s volume registered 30% growth (YoY) whereas Maruti?s volume grew by 48% on YoY basis. Auto players continued to enhance their margin due to falling commodity prices like steel, aluminum & copper. But going forward excise rollback, monetary tightening & rising commodity prices will certainly limit earning growth. Auto stocks are trading at 20 PER times FY 11 EPS which are at premium to historical Price Earning Ratio (PER) band of 15 PER.

Top pick: M&M remain our top pick with target price of Rs 1450 on S.O.T.P basis where in standalone valuation stands at Rs 1050 (15 PER times FY11 EPS of 70) and subsidiaries are valued at Rs 400.

Automobiles

During the fourth quarter, the automobile sector is expected to do well on the back of strong sequential volume gains as compared to the sluggish previous quarter, particularly in the passenger car and two-wheeler segments. Generally, in the fourth quarter, sales pick up because of the year-end demand and attractive discounts being offered by the automakers to clear the stock. In addition to this, the sales volumes were mainly driven by the positive impact of the implementation of the sixth pay commission and robust agricultural income. Moreover, major public sector banks also contributed to the growth by easing finance availability and lending at lower rates. The announcement of various stimulus packages by the government also provided some remedy for the automobile sector especially the commercial vehicle segment that has been hit hard by the slowing demand. Margins are also expected to go up because of the softening prices of key raw materials like steel, aluminum and rubber. Hero Honda and Maruti Suzuki will do good as these two giants have been least impacted by the slowdown and have gained as consumers shifted to value-for-money, tried and tested products in difficult times. Tata Motors is likely to remain on the edge due to continued shrinkage in the commercial vehicle market.

Banking

Banking sector is likely to remain subdued as there was fall in advances and deposits on the back of people shifting from savings and current account to FDs, which increased the cost of funds for the companies. Thus banking sector will face contraction in net interest margin. Moreover, during the quarter, margins were hit by increase in NPA also. As the prices of the government securities are indirectly proportional to yields, banks are expected to suffer losses on the available for sale portion of their g-sec portfolios. The g-sec gains were one of the most important reasons for the good performance of banks in Q308. The numbers would therefore be even worse on a quarter-on-quarter basis.

Capital Goods

Capital goods sector is on the road to recovery. The margins are expected to improve on account of decrease in raw material prices of steel, copper, aluminum etc. Moreover, the capital good majors has a strong order book of 2-5 times of their sales as government infrastructure activities are still going on even in recession.

Cement

On the back of strong dispatch growth and better price realizations, cement sector is expected to release good results in Q4’09. Companies like Ultratech Cements and Ambuja Cements are expected to benefit from softening of the coal prices in the international market as these companies import one third of their coal requirements. Due to the sluggish prices in the central and eastern markets, ACC is expected to book some loss. Grasim, again, is expected to report slow performance because of the difficult operating environment in its fibre and pulp business.

FMCG

FMCG sector is likely to pull off a healthy performance in the coming quarter. Along with the growth in volumes, value growth will be the primary driver of revenues. The easing raw material prices have reduced the pressure on margins. FMCG companies enjoy a strong pricing power, which is evident from the fact that in case of rising input costs, companies either increase the product prices or reduce the pack sizes to sell their products. But currently, when the raw materials are easing out, the companies do not reduce the product prices till the time they witness any slowdown in demand. Sector saw strong demand coming from rural market due to gains from sharp increase in crop prices, farm loan waiver and also higher spends on national rural employment guarantee schemes.

Information Technology

We expect IT companies to report decline in revenues on account of drop in volumes, declining realizations, several project cancellations, delays in order intake and adverse cross currency fluctuations. However, the weaker rupee will support the top line when expressed in rupees.

Media

In broadcasting and print businesses, revenues are mainly driven by the two segments- advertisement and subscription. The revenues of the advertisement segment is likely to be hit badly because of the corporate earnings slowdown as companies are spending less on advertising due to the economic slowdown.

Metals

There was a slight revival in demand because of the factors like better seasonal demand, destocking at the user end, lesser imports and pre-election activities. The demand from steel consumers is usually high during year-end time as companies attempt to complete maximum portion of their projects. The non-ferrous metal producers are likely to be hit badly due to a sharp y-o-y decline in base metal prices. Though the rupee depreciation would offset the loss to some extent, the overall impact on topline would be negative.

Oil and Gas

The Oil and Gas sector is likely to report better numbers because of the stable oil prices and improving margins. Therefore, the refining business will not experience any inventory losses. RMCs would be reporting significant profits due to issuance of oil bonds. BPCL is likely to post healthy profits as compared to the last Qtr. Reliance Industries had a planned refinery shutdown in January, which will bring down the company’s top line and bottom line, although its margins may be better. ONGC results will be impacted because of the decline in production and lower crude oil prices. Even if we assume no subsidy burden during the quarter, the high cost structure and annual extraordinary write-offs are likely to bring down the net profits for ONGC. GAIL is expected to throw good numbers on the back of its growth in natural gas transmission segment.

Pharmaceuticals

As Pharmaceutical sector is supposed to be a recession proof sector, this sector is expected to report a modest performance in this quarter. The rupee’s depreciation to the level of Rs. 52 is positive for the export-oriented sector but companies did not see any major demand on export front so the key driver for the growth will be the domestic formulations business. Most of the companies faced delays in obtaining approvals on ANDAs filing from USFDA because of the increased stringent compliance. Sun Pharma is expected to report lower PAT in this quarter, because of the fact that it enjoyed drug exclusivity in the last quarter of FY08. Though Cipla’s export volumes have declined but still the company can post a positive earning figure.

Power

Power sector is supposed to post a decent growth because of higher plant load factor, lower fuel cost, higher tariffs due to increased fuel cost and higher other income. The outlook for the sector remains robust in the light of easing of finances, which would lead to faster financial closure for upcoming projects. Moreover, the fuel cost is expected to remain on the lower side because the coal prices have come down internationally.

Real Estate

The real estate sector is expected to take a beating like never before during the March’ 09 quarter. Sales will continue to remain subdued till the sentiment turns positive. Sales are expected to be down by more than a half of what they were in the March ‘08 quarter. Real estate companies are facing slow sales because of the unsold inventory, absence of new launches, and increasing interest costs. Some companies entered into affordable housing vertical also, which ultimately would bring low margins, high interest coat and depreciation.

Telecom

The telecom sector has seen robust subscriber additions during March ‘09 quarter. While top line story is likely to remain good but margins can be impacted because of the entry of operators and upfront costs. In the first two months of the March ‘09 quarter, telecom giants like Rcom, Idea and Tata Tele reported substantial acceleration in subscriber additions. Bharti, as a most consistent player in the industry, is likely to report a good growth in top line and bottom line. Idea Cellular is likely to register fastest growth among the listed telecom companies and Tata Communications will see an increased other income as it sold 1% stake in one of its subsidiaries.