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.

CG’s business operations consist of 22 manufacturing divisions spread across in Gujarat, Maharashtra, Goa, Madhya Pradesh and Karnataka, supported by well knitted marketing and service network through 14 branches in various states under overall management of four regional sales offices located in Delhi, Kolkata, Mumbai and Chennai. Its products include power & industrial transformers, HT circuit breakers, LT & HT motors, DC motors, traction motors, alternators/ generators, railway signaling equipments, lighting products, fans, pumps and public switching, transmission and access products. The company is in quality range by having many certifications in the ISO 9000/9001:2000/14001 series.

Investment Rationale

· It has completed the acquisition of French firm “Societe Nouvelle de Maintenance Transformateurs” (Sonomatra) for about Euro 1.30 million. This acquisition would enhance the firm’s capabilities in the services segment of its transmission and distribution business.

· Its Transformer Group has bagged a contract for supply of 13 nos 25 MVA, 400kV single phase and 10 nos 32 MVA, 220kV single phase Generator Transformers for another Hydel projects, valued at Rs 72 Crores.

· Crompton Greaves is working on a business plan to improve the performance of three power distribution divisions in Nagpur bagged from the Maharashtra State Electricity Distribution Company in September 2007. These attempts are being made to bring down the transmission and distribution losses, currently at 45 per cent, over the next few years.

· CG’s acquisitions (Pauwel, Ganz and Microsol) have given it the much-required brand recognition in the overseas market, access to superior technology and entry into automation products, thus providing unique synergies to become a global solutions-oriented T&D player. Today, it is one of the few manufacturers in the country to have access to 765-KV transformer technologies. Hence, CG has the capability to compete with large companies such as ABB and Areva for a share of incremental investment in T&D sector, which will come largely in high-voltage products.

· Company, through its wholly owned subsidiary- CG International BV, Netherlands, has acquired additional 40% voting share capital in PT Pauwels Trafo Asia, Indonesia, for a sum of USD 10.70 million. With the acquisition of these shares, the Company, through its subsidiaries now owns 100% of the voting share capital of the above Indonesian Company.

· Crompton Greaves is on the lookout for an acquisition in the industrial systems space.