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.

Bharat Forge, a steel forging and general engineering company, posted good results in Q3 FY10. The net sales rose 14% and the net profit was up at Rs.38 cr. as against Rs.4.3 cr. on YoY basis.

Bharat Forge operates in auto and non-auto sector. In the non-auto sector, the company has received some good orders from the energy sector and going forward, the management expects to achieve the target of 40% of its sales from non-auto sector by 2012.

The company has also signed deals with Alsthom and Areva. These deals are expected to start generating revenues from 2012. The management is very positive on the growth prospect of domestic automotive sector and the export business from North America and China.

Technically, the stock had a very good really from its lows near 70 in Jan 2009. It took a one way really to make a high of near 307 and since last 4 months, the stock is in a sideways-consolidation zone. The stock has multiple support between the levels of 220-230 where one can buy the stock, with a stop loss of closing below 220 from the next higher targets of 340+.

1. Indian economy growing @ 8 to 9 %, is one of the fastest growing economies in the world.

2. Industrial prodn. showing encouraging trends. Index of industrial production for Capital goods is growing @ 8.4% CAGR and growth in index for consumer durables was @10.5% CAGR during 2005-06.

3. The 10th plan investment in infrastructure has been envisaged at around Rs.880,550 crores.

4. The major sector wise anticipated investment is likely to be Rs.292000 crores in Power, Rs.145000 crores in Roads & Bridges, irrigation Rs. 111000 crores.

5. During 11th plan (2007-08 to 2011-12), the projected investment towards infrastructure is likely to be Rs. 2027000 crores, an increase of 180% over 10th plan.

6. Per capita steel consumption at 35 kg low as compared to world average of 150 kg. and 300kg for china.

7. National Steel Policy, as formulated by Indian Ministry of Steel envisages the following -
i.Crude steel production of 110 million tones by 2019-20 at CAGR of 7.1% from 2004-05.

ii.The demand of steel by 2020 is likely to be 90 million tones at CAGR of 6.9% from 04-05.

iii.Steel exports by 2020 are likely to grow at CAGR of 13.3% from 04-05 to 26 million tones.

iv. Steel imports to the country by 2020 shall grow at CAGR of 7.1% from 04-05 to 6 million tones.

8. Lot of steel projects both brownfield and Greenfield likely to come up and are in various stage of execution.

9. As per the newspaper reports (Eco. Times dt.14-11-07), Steel Minister has projected India’s steel production to be around 124 million tones by 2012 and a capacity of around 275 million tones by 2019-20.

10. During the year 06-07, India produced around 49 million tones of finished steel, which was higher by 11 % over 05-06.

11. Imports at 4.1 million tones during 06-07 were higher by 6.5%. Exports at 4.7 million tones grew by 6.1% during 06-07.

12. During 05-06 Iron ore exports at 84 million tones was almost at the previous year’s level of 87 million tones.

13. During April – Sept.’07 following has been the performance-
i. Crude steel prodn. at 25.7 million tones, exhibited a growth of 5 % over corresponding period last year.

ii. Exports at 2.6 million tones shows an increase by around 8% over the same period of last year.

iii. Imports were around 3.2 million tones, which was an increase by 63% over April-Sept’06.

14. Due to infrastructure focus, production of long products is gradually increasing and ratio of flat to long products is narrowing.

15. During Ap-Sept’07 non-flat steel produced at 12.4 million tones showed an increase of around 9% over April-Sept’06.

16. In case of flat products prodn. during April-Sept’07 at 12.2 million tones was almost at same level of last year.

17. Apparent Consumption of steel during April-Sept’07 was 22 million tones, which was an increase by 11 % over April-Sept’06. While long products (excl. semis) at 12.3 million tones registered a growth of 9%, the flat products consumption at 12.5 million tones indicated an increase of 12%.

18. With due focus on infrastructure development and strong economic indicators, the demand for steel in India shall continue to remain robust.

Industry Structure

The Indian steel industry can be divided into two distinct producer groups:

Major producers
Also known as Integrated Steel Producers (ISPs), this group includes large steel producers with high levels of backward integration and capacities of over 1 MT. Steel Authority of India Limited (SAIL), Tata Steel, Rashtriya Ispat Nigam Limited (RINL), Jindal Vijayanagar Steel Limited (JVSL), Essar Steel and Ispat Industries form this group.

SAIL, TISCO and RINL produce steel using the blast furnace/basic oxygen furnace (BF/BOF) route that uses iron ore, coal/coke as the basic input mix for producing finished steel.
Other major producers such as Essar Steel, Ispat Industries and JVSL use routes other than BF/BOF for producing steel. While Essar Steel and Ispat Industries employ Electric Arc Furnace (EAF) route that uses sponge iron, melting scrap or a mix of both as input, JVSL uses COREX, a revolutionary technology for making steel using basically iron-ore and coal.

Other producers
This group consists of smaller stand-alone steel plants that include producers and processors of steel.

o Processors/Rerollers: Units producing small quantities of steel (flat/long products) from materials procured from the market or through their own backward integration system.

o Stand alone units making pig iron and sponge iron.

o Small producers using scrap-sponge iron-pig iron combination produce steel ingots (for long products) using Electric Arc Furnace (EAF) or Induction Arc Furnace (IAF) route.

The Major producers are strategic in nature and account for most of the mild steel production in the country. The group produces most of the flat steel products in the country including Hot Rolled, Cold Rolled and Galvanized steel. The majors also produce a small proportion of Long products and other special steel being produced in the country.

Other producers account for a majority of long products being produced in the country and some of the value added flat steel products like cold rolled steel and galvanized steel.

Way forward for the Indian Steel Industry

The Government envisions India becoming a developed nation by 2020 with a per capita GDP of $1540. For a nation that is economically strong, free of the problems of underdevelopment and plays a meaningful role in the world as befits a nation of over one billion people, the groundwork would have to begin right now. The Indian Steel Industry will be required and is willing to play a critical role in achieving this target.

With abundant iron ore resources and well-established base for steel production in the country, steel is poised for growth in the coming decades. Production has increased from 17 MT in 1990 to 36 MT in 2003 and 66 MT is targeted for 2011. While steel will continue to have a stronghold in traditional sectors such as construction, housing, ground transportation, special steels will be increasingly used in hi-tech engineering industries such as power generation, petrochemicals, fertilisers etc. Steel will continue to be the most popular, versatile and dominant material for wide ranging applications. While India may not become a leader in world steel market, it can become a powerful force.

To help the Indian Steel Industry achieve its potential and play a meaningful role in India’s development some steps need to be taken.

Steel is yet to touch the lives of millions of people in India. Per capita consumption of steel in India is only 29 kg and has to go a long way to reach consumption levels of around 400 kg in developed countries like USA and world average of 140 kg.

There is a need to continue the current thrust on infrastructure related activities and extend them to rural India. Rural Indian today presents a challenge for development of the country and the opportunity to increase usage of steel in these areas through projects such as rural housing etc.

Current shortage of inputs has pushed up the costs for the steel industry. Government should ensure that quality raw material such iron-ore and coke are available to the industry. With Ministry of Steel targeting an output of 100 MT of steel by 2020 there is an urgent need to develop raw material resources for inputs like iron-ore and coal within or outside the country. Countries like Japan have already taken similar steps to safeguard their industries.

Adequate enabling infrastructure such as power, ports, roads, rail transport is pre-requisite for the Indian steel industry to remain competitive.

Government should not regulate prices and free market forces should prevail. Intervention by the Government is only a short-term solution to the issue of steel prices in the country. Once left alone, market dynamics will automatically ensure price corrections and determine the optimum price of steel.

The Indian steel Industry is amongst the least protected in the world. While developed countries have put numerous tariff and non-tariff barriers on steel exports from the country, the domestic industry is exposed to cheaper imports from competing nations. As in case of other important industries, the Government should give reasonable levels of protection to the domestic steel industry, which is just starting to get back on its feet.

Industry should be allowed to have a fair return on investment and contribute to the overall health of the Indian manufacturing segment. The steel industry has invested a capital of over Rs 90, 000 crores. CRISIL in a recent study has concluded that given the large exposure that banks and financial institutions have to the steel industry, a healthy steel sector is in the interest of the economy. Steel industry still continues to be unattractive for investors and a recent study by CRIS INFAC suggests that any new projects with target price below $270/MT will be economically unattractive.

Today, Indian producers employ world-class standards of technology. Steel from Indian finds growing acceptability in international markets. But despite this India’s share in world trade steel is a miniscule 2%. Given the capabilities of the Indian steel industry there is tremendous scope to increase this share further. While the steel industry will continue servicing the domestic demand there is a lot of untapped export potential with the industry. The Government, in line with EXIM policy 2002-07, should take steps to make Indian exports more competitive.

China’s soaring demand (over the past five years China’s demand for flat steel has risen at 17 percent as compared with just 2 percent for the rest of the world: the growth rate in China’s demand for steel is expected to come down to 8 percent during 2003 through 2010) which had revived the long term suffering industry will eventually be satisfied by additional domestic capacity-hardly a long term solution to the fundamental problem of worldwide capacity. The basis for such a conclusion is the estimated lower cost of construction of steel mills in China by some 30 to 50 percent than comparable facilities in the developed world and the fact that currently the global flat steel industry has at least 100 million tons of overcapacity. Add to this the worry of economists of slower economic growth in China and the fact that the country can become a net exporter with telling effects on future international prices. Adequate steps must be taken right now to make the Indian steel industry more competitive in order to meet these challenges. The Indian steel industry may not be able to afford another crisis similar to he one between 1997-2001.

Steel Industry – A Global Perspective

1. During 2006, the world crude steel production reached a level of 1244 Million Tonnes.

2. It shows a growth of 9.0% over 2005 crude steel production level at 1142 Million Tonnes.

3. China retained it’s no. 1.position by producing around 422 Million tonnes, followed by Japan with production of 116 Million Tonnes and USA with production at around 98 Million Tonnes.

4. India with production of 44 Million Tonnes ranked 7th amongst world steel producing countries.

5. China accounted for 34% of world crude steel production where as contributions from rest of the world were at EU 16%, NAFTA 10.5%, CIS 9.6%, JAPAN 9.3% and other ASIA 10.5%.

6. If we look at crude steel equivalent consumption figures during the year 2006 it will be seen that China accounted for 31%, EU 17%, NAFTA 14.5%, CIS 4.7%, JAPAN 6.7% and other ASIA 14% towards crude steel consumption for the world.

7. Apparent finished steel consumption during the year 2006 was around 1113 Million Tonnes as against 1026 Million tonnes during 2005.

8. During the year 2005, total world trade was around 364 million tones.

9. During the year 2005, USA ranked no.1 as net importer country at 20.8 million tones followed by Thailand at 10.8 million tones and Iran at 6.9 million tones.

10. During the year 2005, Japan lead the world steel trade as a net exporter at 26.8 million tones followed closely by CIS and Russia at 26.3 Million tones.

11. During 2007, crude steel production till Sept’07 (Jan-Sept’07) has been around 980 million tones representing an increase of around 7.7% over same period last year (910 million tones).

12. The ocean freight due to high demand for carrying iron ore has increased substantially in the recent period.