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.

India’s commodity futures exchange MCX (Multi Commodity Exchange of India Ltd), has launched futures trading in “Electricity” whereby electricity will be available for futures trading. This is the first time in India when electricity will be available for futures trading. MCX received the approval from market regulator Forward Markets Commission for launching weekly and monthly electricity contracts on 09 Jan 2009. The exchange will launch eight weekly contracts and four monthly contracts. The first trade was executed in the March monthly contract at Rs 7,300 per Megawatt hour (MWh).

Globally, Nordpool in Sweden, Norway, Finland, Denmark, Inter Continental Exchange in UK, Power next SA in France, European Energy Exchange in Germany, PLM in the US and Australian Securities Exchange in Australia offer electricity futures trading platform.

The contract-trading unit will be 1MWx24 hours with tick size as Rs 1 per mwh. The delivery will be optional for both buyers and sellers and due date rate will be the average of daily system prices of day-ahead market of Indian Energy Exchange (IEX) for delivery during the contract week/month.

It will trade through Monday to Saturday between 10 a.m. and 11.55 p.m., except Saturdays which will be from 10 a.m. to 2 p.m. At any point of time 8 weekly contracts and 4 calendar month contracts will be available for trading.

The total annual market size (electricity generation) in 2007-08 is Rs 2,00,000 crores (for 665 million mwh @ Rs 3000 / mwh), about 665 billion units. The present short term market per year is around 4% to 5% of the total market. Rs 13500 crores (30 million MWh @ 4500 per mwh) which is equivalent to about 30 billion units.

Trading in electricity futures will be helpful as power prices are volatile. Those who buy or sell power in the spot market will be benefited directly from this. Apart dealings via an exchange are always safe as its clearinghouse provides a system of guarantee that mitigates counter party credit risk. Electricity futures will attract huge market participation. Introduction of this facility will help get the true price in the market and will also rationalize the use of electricity. It will increase the depth of the market, where all sellers and buyers can come on one platform and trade.

Well, results are not expected to be good in most of the sectors. But there are some sectors, which have shown a positive trend and would post a good performance, providing the balance.

Among all sectors, the worst performance is expected to come from the Auto sector, which has been facing the toughest time ever. With huge inventory pile-ups and lack of demand, also with the added burden of closure of plants to cut down inventory and some companies even resorting to cutting down production, naturally, the outlook is not too good.

The major worry for the sector is the slump in the sale of new vehicles. For instance, both Maruti and Hero Honda have reported 10% drop in their latest data for the month of December. Also, for the whole quarter, truck manufacturers have seen as much as 50% volume drop in some cases.

Same with Auto components sector and Tyre makers, both will show a downfall in the earnings.

Realty is another sector, which will show a poor result. There were fall in demand and lack of liquidity in the quarter. Big time realty companies might show a drop in performance but they will not go down as in the quarter they somehow managed to stay afloat by selling land or by stalling projects. But it is actually a question of survival for midcap and small cap segment.

Infrastructure companies might post a mixed bag of performance because companies whose projects got postponed would have a negative impact while companies which managed to carry on with the projects, though at a slower pace, would still manage to reflect a positive earnings. Moreover, with the fiscal and monetary stimulus package, this is one sector, which is expected to get benefited substantially in the coming months.

Banking is one sector, which is expected to have a good Q3. PSU banks are estimated to post a reasonably good performance. Private sector banks with lower forex exposures would also do better. But this is the sector, one need to keep a close watch because the sector is on a strong rebound with the interest rates coming down and with RBI injecting liquidity into the system. So this sector looks promising.

Cement would show disappointing earnings because of the slowdown in the realty, construction and infrastructure sector. Prices have come down and unless there is enough demand, there isn’t much hopes in the second half too.

Telecom is one sector that is poised to do very well. The sector has been growing exponentially, irrespective of the slowdown. Those who provide telecom services and those who provide equipments to the sector are expected to report in a robust performance, though companies with high MTM forex losses might pull down the earnings.

Then comes IT sector. With the US economy, the largest customer base of the Indian IT industries is also rolling under a slowdown; most of the IT companies are expected to show a fall in the performance.

Power is again one sector that will do well. There is no slowdown here as it is domestic driven sector. India has always been a power deficient country.

Another such sector is the Education sector. Companies providing education tools or developing education materials – be it software or books, are doing well. Education is not limited to books only. Not only the existing players expected to expand horizontally, many private and international players are also getting into the Indian education sector.

Textiles sector is again victims of slowdown, mainly those companies which are indulged in exports as their exports have literally halved for the moment. A sharp rise in bankruptcies among US retailers has affected the companies. Textile co. are cutting their production and manpower. US is the single largest export destination for Indian exporters accounting around 13% of total Indian exports. Since September, the average cut in production by the industry is as high as 15%.

Aviation, Hospitality, Tourism are all going to reflect the slowdown.

The Logistics sector too might get affected as shipments have dropped because of the falling exports. The falling crude oil and the cut in production by OPEC also means fall in business for this sector.

FMCG would post a good performance, as consumption growth is always steady than the investment growth. Also, companies are now selling their product more in rural India, where the impact of the slowdown is lower, so FMCG companies are expected to come out with flying colors.

So we can say that sectors like Auto, Realty, Cement, and Textile have really hit the bottom of the pits. Power, Banks, FMCG, Telecom might post good results. The first half would remain tough for India Inc but once the US and the other economy show signs of recovery, India too will propel this growth. The low crude prices, the cut on fuel rates and interest rates cut are all signs of not allowing the economy to slow down.

The glass should always be half full. If Q3 results are better-than-market-expectations, then, we will see major obstacle for the markets going away.

The terrible 2008 has gone and once we bid adieu to the previous year, the coming of New Year holds a bag of new hopes, ambitions and challenges.

Right now when trading volumes have collapsed and investor visits have reduced, it is difficult to raise new money. Although the probability of the Bull Run is relatively less and market is more towards sideways rather than an upside but history reveals that stock markets always test the previous low before a new bull market gets under way. Let us look at the factors, which foresee 2009 as a year of “Great Hopes”:

First of all, the upcoming elections will bring new government (or existing government again) with new economic reforms. So, chances of meaningful decision-making and policy action are bright. In the first-year of governance, hopefully, Government with a slow GDP and global recessionary pressures, will take some measures like reducing subsidies or divestment, which can be a positive catalyst.

Secondly, in 2008, commodity prices saw typical parabolic moves, especially in oil. It is expected that the three factors will drive the commodity market- Demand because as soon the global recovery starts, the demand will outpace supply, the US Dollar, which is artificially up as European currencies are down and as the dollar depreciate, commodity will accelerate and Money Supply, because of the interest rate cut.

Thirdly, In March 2009, as soon the RIL and Cairn oil and gas fields start functioning; it will give self-reliance to Indian Oil Industry, irrespective of international oil prices. By 2010-2011, Oil imports will obviously drop, which will help in improving balance of payments and lowering the subsidies. Moreover, both will earn large revenues to the GoI through taxes and profit oil.

Fourthly, the market indicators! Today, Market is trading at 10x-9.4x P/E of FY09 earnings and Sensex is trading in the range of 10-30 times since 1991. I keep my high expectation as market is offering very lucrative buying levels and investors will do buying, as stocks would not be really expensive. Moreover, with the historical lows of 2-2.4, today, Book Value of Sensex is around 2.3 and whenever the P/BV ratio had floated around 2, it had been witnessed a strong pullback. Beside this, mathematically, we would also have had an 18-month correction by mid 2009, enough time for corporate India to catch its earnings base.

Fifthly, The downfall since January 2008 has changed the weightage of the prominent stocks in Nifty. Low Beta stocks like Pharmaceutical and FMCG, which have made Nifty less volatile, now, have replaced the interest rate sensitive stocks like Banking and Auto. Lesser the beta, lesser will be the volatility in prices and thus it will be reasonably safer to invest in these stocks.

The last but not the least, Mr. Obama’s comments on H1B visa and outsourcing would not affect Indian IT and BPO sectors because outsourcing is done to benefit US and improve the corporate profit so the shareholders can be happy. Moreover, the US government’s role is limited in US businesses so it will not affect the US business here. To stay in business, US IT companies are shipping jobs overseas to cut costs and remain competitive. Mr. Obama has placed a vision for “reforming the US healthcare system in a way that protects the quality of care while making it affordable and accessible to all” which is likely to promote increased use of generics in Government-funded programmes and should boost Indian generic drugs, which accounts for one fifth of the global production. Mr Obama will also allow for the reimportation of drugs, which would provide Indian manufacturers with greatly expanded access to the profitable US market. In addition to this, there is no pathway for regulatory approval for biogenerics in the US, Obama’s vision will benefit Indian companies like Biocon and Dr Reddy’s who are already in Biosimilars.
The current slowdown in India is more of a cyclical slowdown, which is not a fundamental breakdown and somewhat it is necessary to remind people of cyclicality, overheated growth plans and risk management. Markets are leading indicators of economy. There are strong possibilities of the RBI easing the interest rates that can lead the economy and earnings bottoming out.

Now the questions arises will Corporate India seize the moment? History has seen the fact that adverse times of economic turmoil have been an “opportunity” to the companies to move into position of a leader from a laggard position. Like in the year 1998-99 when cement industry was going through the rough phase, at that time India’s fifth-largest cement selling co. Gujarat Ambuja acquired the sick Modi Cement Ltd, taking advantage of the target’s low valuation. Today, Ambuja Cements is India’s second largest cement company. So calculated financial risks can be opportunity to your business.

Although, one cannot rule out a further downside risk to earnings, still I see large potential in some sectors:

Banking: With the strong banking regulatory system, RBI has already outlined the roadmap for foreign players to grow with “a two-track and gradualist approach” where the first track is for consolidation of public and private banks and the second track is for the “gradual enhancement of the presence of foreign banks in a synchronised manner”. In the light of a sharp decline in yields of government securities to 6 per cent by March 2009, banking sector, especially state-run banks are promising.

Power: With a target to electrify 1,20,000 villages in the current Five Year Plan (2007-12), i.e. ‘electricity for all’ by the year 2012, Government is providing 90 percent subsidy for electricity distribution infrastructure and 100 per cent subsidy for providing power connections to the rural household. Moreover, the government is likely to open up the nuclear sector for private players once it completes bilateral civil nuclear cooperation pacts.

Communication: India’s current mobile telephone penetration rate is just about 20 percent. Market liberalisation policies, tremendous growth in India’s rural and semi-urban areas and forthcoming services such as 3G and WiMax are likely to offer ‘great potential’ for the growth of telecom companies in India.

Consumer Goods: Consumption growth typically shows steady patterns as compared to investment growth in slowdown and there is a huge consumption growth in India. Moreover, it is not an interest rate sensitive industry.

Pharmaceuticals: Consumer spending on healthcare is increasingly on the rise in India. India offers a combination of low-cost and world-class quality drugs, which makes India as the global hub for contract research and manufacturing services. India is second (after China) most attractive destination for clinical trials.

To conclude, it is quite right to say that, for long-term investors, this may be a golden opening to 2009 as Indian growth story is likely to continue for the next few decades. I think, it is just a bear phase for Indian market, within a long-term bull run. India has a healthy capital market and infrastructure backed by a strong structural liquidity and just need global stability, better relative valuations and a good election result to ensure significant policy actions.

Happy Investing!!

INVESTMENT RATIONALE

§ Co. plans to put 3,000 MW capacities on commercial generation during the year. Out of this, 1,000 MW capacity has already been put on commercial generation at Sipat (500 MW) and Kahalgaon (500 MW). The remaining 2,000 MW to be put under commercial operation will include 2 units of 250 MW each at Bhilai, one unit of 500 MW at Sipat and 2 units of 500 MW each at Kahalgaon.

§ Capacity utilization (PLF) of coal based power plants reached 92.24 per cent in 2007-08 compared to the national PLF of 78.61 per cent.

§ NTPC has been on a rapid expansion spree over the past few years, during which, it invested around Rs 23,000 crore in fixed assets. Since it also generated cash of Rs 24,000 crore from operations, it did not have to raise extra cash from other sources. The company plans to invest nearly Rs 13,600 crore during FY09, over and above an investment of Rs 8,200 crore in FY08. Currently, a capacity of 16,180 mw is under construction, including 3,750 mw in JV companies, which will be completed by FY12. Of this, 2,800 mw will be completed in FY09, which can add about Rs 700 crore to the bottomline.

§ The company is developing three hydel power plants, totalling 2,000 mw, as a diversification move.

§ An important element of its operations is that it is selling power at Rs 1.84 per unit, as per the rules laid down by the power regulator, which is much lower than the spot price. As the market is freed up over a period of time, the company stands to gain the most.

§ While its expansions may require high leveraging, NTPC looks well-placed with a reasonable debt-equity ratio of 0.52. This contrasts with a debt-equity ratio of 2.3, which is allowed for a generation company. This leaves enough room for the company to raise debt, if required.

§ NTPC is planning to use inland waterways to transport imported coal from seaports to its power stations in an effort to limit the transportation costs, for which it has joined hands with Inland Waterways Authority of India.

§ Co. is participating in the entire value chain of power development to contribute to the Government’s commitment of providing power for all by 2012.

§ NTPC has formed a JV with BHEL, incorporated as ‘NTPC BHEL Power Projects Private Limited’ for manufacturing balance-of-plant (BoP) equipments and main-plant equipments. This JV will also operate in the EPC space.

§ Company has another JV incorporated as “BF NTPC Energy Systems Limited” with Bharat Forge. This will also help in meeting requirement of balance of plant equipment.

§ NTPC has formed a JV with Bihar State Electricity Board under the name Nabinagar Power Generating Company on Sept.’08 for setting-up of a coal based power project having capacity of 1980 MW (3 X 660 MW) and operation & maintenance thereof at Nabinagar in district Aurangabad of State of Bihar.