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.

Finance Minister is expected to provide guidelines for the introduction of the direct and indirect tax reforms i.e. the direct tax code (DTC) and the Goods & Services Tax (GST).

FM may increase excise duties to decrease the fiscal stimulus measures and may raise the service tax also from 10%. We expect FM to project a lower fiscal deficit for coming financial year on account of higher revenue projections. Another prime focus would be on reforms to reduce the subsidy burden by decontrolling the petrol and diesel prices and price rise on kerosene and LPG cylinder.

Among the financial sector reforms, issue of raising the FDI cap in private sector insurance companies from 26% to 49% is expected to remain on top. We expect that focus area for expenditure would remain the same i.e. agriculture, water, infrastructure, rural and social schemes and power.

Downstream Co: Neutral

Gas Co: Positive

Q3 FY10 review: almost in line with our expectations

The Q3 FY10 results were broadly in line with our expectations. The upstream companies posted good profits during the quarter on account of higher average crude oil prices on YoY basis and higher GRMs. Commencement of Rajasthan field (Cairn India) and increased production in KG-D6 were the key contributors to the top line.

The downstream (OMCs) results were below our expectations, mainly due to the significant under-recoveries, not yet compensated by GoI. Government has committed an Rs 120 bn cash subsidy against the estimated under recovery of about Rs 300 bn for the current financial year.

The gas players did well on the back of higher gas transmission volume, except Petronet LNG.

Outlook

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. Thus, this gives a Positive pitch to RIL and Cairn India.

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.

Does management have a tremendous track record?
The most important thing for an investor is to find out the management track record of a company or not. It is upon the value, skill and visualization of the management that the future of company rests. A good and competent management can make a company grow. There are numerous success stories, of prosperity that resulted due to the foresight and vision of management. Chairman YC Deveshwar diversified ITC into hotels (the WelcomGroup chain); his successor diversified into agro based industries.

Investor needs to make opinion about a company by analyzing its past record and performance. So it is always a good habit to know about the past performance of a company.

Is the business a superb business?
It is not just about investing in the company, the nature of business is again an important factor; one can avoid high tech companies, which bring new technology rapidly, as they are comparatively unpredictable in long run. Such businesses bring the fab but suddenly fade after sometime. It would be reasonably safer to invest in the “Low-Tech” business that has absence of change like Paints, shaving blades, rugs etc.

If you are good at calculations, search the difference between the value of a business and the price of that business in the market. This is the key to value investing.

And sometimes when market is fearful for a business, become greedy to get that stock and vice versa. Buy when people are selling and sell when people are buying…it works.

As investor should always look at large company rather than in a small cap company of the same sector because theoretically and practically it is observed that the stock of large companies recovers earlier. Market capitalization is also a good indicator to know which one is big and which one is small company. On the contrary small cap companies stock takes time to realize their full value in the market. Moreover, investor must look for under valued stock rather than a overvalued stock, and should be interested in non-asset intensive businesses with high returns on equity, little or no debt, operating in non-commodity type industries without fixed cost structures.

 
The success of a company is of major significance for an investor. Profitability ratios support an investor in shaping how well a particular company is doing in relation to other companies within the similar industry, and with reference to its own performance in earlier years. With the help of profitability ratio, an investor can calculate the company’s efficiency on the basis of the returns generated on sales and investments.

Is the problem temporary or long-term?
The focus here is to enquire that weather the companies stock is trading lower on factors other then related to company’s financial or strength like because of some panic in stock market or else weather the stock is beaten down due to some of the bad development in the company which has short term impact & which is going to change as far fundamentals are concerned in the long term of the company.
Before Investing in any stock, an investor must have to know the overall performance of the company. The choice to make the stock market endeavor succeed lies upon the investor. A wise investor would only investigate into stock market investment upon being apprised with the necessary and crucial information.

Sometime problems come from the result of one-time mistakes on the part of management. If there is long-term problem in the stocks then investor must have to change the direction of his/ her investment as investment is made to earn profit. Build stock market research and decide which stock is profitable one, which company can grow in future and which one is likely to get trap.  Accordingly plan your stock investment. The market is always random in the short-run, but in long-term markets do better than those who inclined to buy stock in rising markets. It is a basic mathematics. Those with the lowest average cost will always win the wealth accumulation game.

Is investor financial capable to wait out the problem?
It purely means being patience and disciplined; investor should able to attach the emotions and think for himself. He must know when to sell or to buy. The big question is that is investor financially able to wait out the company’s difficulty? If you have the patience then you must invest the money in good companies because the market will definitely recognize them. In short term the undervalued stocks may fall for below than buying price. But in the long run patience will definitely bring fruit full return and a smile on face.

To conclude, it is important that at all times investors should ensure that their portfolios are well diversified, taking into account their needs and aspirations.. Whether it is a bull run or a bear hug, the market throws up opportunities for those who look out for them, and for those who invest wisely. Not only a single system has consistently outperformed the market. All systems require thought and some assumptions. However, of all the systems that I have experimented with and tried, the one I am most comfortable with is fundamental analysis as it is the most logical and the most meaningful. There is much feeling attach to money and there is no avoidance of any fact. You can minimize the pressure by using this investment decision strategy. In single sentence it is advised do your homework well. While choosing a stock, discipline is the key. Keep an eye on the changing economy, because the fundamentals of a company are dynamic and change with the overall economy.

McLeod Russel India Ltd. (MRIL), the world’s largest tea plantation company, is engaged in cultivation, production and marketing of tea. The company produces over 70 million kilos of tea from 53 tea estates in 34,000 hectares land spread across Assam and West Bengal. The company operates in India and outside India and accounts for approximately 7.7% of the total tea production in India and approximately 2% of the global tea production.

 
Investment Rationale

• Indian tea prices are expected to rise 15-20 percent in 2009-10 due to absence of winter showers in the growing regions and a crop shortage from Kenya due to a drought and political unrest. Domestic consumption, which is rising at an annual rate of 3-3.5 percent, and firm export demand despite the global recession, are expected to boost prices further.

• The company has increased its exposure in the Middle East, especially Iran, which is predominantly the market for orthodox teas and that is also helping company’s exports. The company is also expected to benefit from its increased presence in the orthodox tea market, as price realisation is 20-25 rupees per kg higher than CTC (crush, tear, curl) variety of tea. McLeod will export over 30 million kgs in 2009, an 11 percent rise from 27 million kgs last year, as overseas demand turns to India in the wake of a shortfall in main rival Kenya.

• McLeod Russel, which recently forayed into Vietnam with purchase of 100% stake in Phu Ben Co., is now looking at Africa for further acquisitions. The company’s aim is to have 15-20 mn kgs of production from overseas over the next 5-10 years. The company has a capex plan of 200-250 million rupees for FY2010.

• The company has asked the Vietnamese Government for an additional 1,000 hectares to step up its production. At present, its production in Vietnam is about 4.5 million kg annually, spread over 1,000 hectares and the company is likely to double its production in Vietnam over the next five years. 

• In 2008-09, McLeod Russel’s total production jumped to 81.5 million kg, including 4.5 million kg from Vietnam. According to company’s management, the figure should be around 84 million kg in 2009-10. 

• Riding on the tea price boom, MRIL clocked a 61.48% rise in its net profit for the quarter ended December 31, 2008. The net profit soared to Rs 48.59 crore for the Q3 of FY09 as compared to Rs 30.09 crore in the corresponding period of the previous year.

Investment Rationale
· The company is planning to invest around Rs 1,800 crore over the next two years for building new hospitals. The hospital would fund the expansion plan through debt and equity. The hospital is planning to add 2000 beds over the next two years with an investment of Rs 1,500 to Rs 1,600 crore. The rest of Rs. 200 crore will be invested through Western Hospital Corporation, a joint venture between Apollo Hospitals and One Equity Partners, the private equity arm of the J P Morgan, in different projects across Mumbai. The JV partners are planning to build 600 bed hospital in Navi Mumbai and Thane.

· Apollo Hospitals has entered into a partnership with Quintiles Transnational Corp, a service provider in drug development, to open a trial unit in Hyderabad. The unit would allow customers additional options to complete integrated Phase-I programmes across multiple geographies at this pivotal stage in medical research. Scheduled to open in the first quarter of 2010, the new unit would evaluate compounds developed both in India and in other countries.

· Apollo Hospitals has entered into an agreement with US-based Anthem Well Point through its subsidiaries for treating patients recommended by the insurance company. As per the agreement, Anthem Well Point will initially send the employees of Serigraph Inc, a corporate client of Anthem Well Point, to Apollo Hospitals in India. Apollo will cover 700 members of the US-based group and their dependents.

· The Apollo Hospitals in Bangalore and Delhi, have been accepted into Companion Global Healthcare’s network of international hospitals, meaning Companion Global Healthcare will arrange travel, set appointments and provide other services to its individual clients and U.S. employer group members who choose treatment at either facility. Both hospitals are part of India’s Apollo Hospitals Group.