Beyond Markets

Bloomberg UTV
New Delhi
19th June 2010
 L&T Mutual Fund

Views on Markets and

Sectors
Global Equity Markets Performance – at glance
Emerging Markets YTD 1 month 3 month 6 month 12 month

India -0.3% 2.5% 1.4% 3.2% 17.1%

Russia -3.3% -3.1% -7.8% 0.0% 29.7%

Brazil -6.0% 1.6% -6.6% -7.0% 23.8%

Hong Kong -8.3% -0.4% -4.8% -8.0% 8.5%

Taiwan -9.0% -4.1% -2.4% -4.5% 19.7%

China -21.6% -4.7% -13.7% -21.5% -7.9%

Developed Markets YTD 1 month 3 month 6 month 12 month

Germany 3.7% 2.0% 4.6% 6.3% 26.3%

Korea 0.4% -0.3% 2.5% 1.5% 19.7%

US -0.2% -2.0% -2.2% -0.5% 20.8%

UK -3.6% -0.9% -6.7% -1.3% 20.6%

Japan -6.2% -5.5% -8.0% -1.9% -1.5%

France -7.0% 2.8% -5.9% -4.5% 13.7%

Source: Bloomberg Notre: Prices used for reference are at the end of 15th June 2010
 Indian Markets Performance – at glance
Broader Markets YTD 1 month 3 month 6 month 12 month
BSE 200 1.2% 2.1% 2.5% 4.6% 22.0%

S&P CNX Nifty 0.4% 2.5% 1.8% 3.8% 16.5%

BSE Sensex -0.3% 2.5% 1.4% 3.2% 17.1%

CNX 500 -0.3% 1.8% 1.9% 3.4% 20.0%

Midcap & Small cap Indices YTD 1 month 3 month 6 month 12 month

CNX Midcap 7.2% 0.7% 6.6% 11.3% 45.4%

BSE Small cap 5.6% 0.2% 5.5% 12.8% 49.9%

Sectoral Indices YTD 1 month 3 month 6 month 12 month

Consumer durables 17.6% -4.3% 8.0% 28.6% 51.0%
Healthcare 11.4% 4.1% 10.7% 13.0% 53.7%
FMCG 11.3% 7.7% 10.4% 10.9% 37.3%
Bank 8.2% 0.1% 6.1% 12.0% 35.4%
Auto 7.7% 2.8% 6.5% 12.5% 67.0%
IT 2.6% 1.5% -1.6% 7.5% 64.2%
Capital Goods 0.7% 7.5% 4.3% 3.1% 13.6%
Teck -0.5% 2.3% -2.0% 3.6% 23.5%
Oil& Gas -1.6% 4.4% 5.1% 0.9% 2.7%
PSU -2.8% 3.7% 3.6% 0.7% 11.8%
Metals -14.4% -6.3% -13.6% -8.0% 26.8%
Real Estate -20.3% -6.6% -8.6% -20.8% -13.3%
Source: Bloomberg Notre: Prices used for reference are at the end of 15th June 2010
 Auto - Positive
Reasons for Outperformance in last couple of quarters Relative Performance

Strong volume growth Period YTD 1mth 3 mths 6 mths 12 mths

BSE Auto
Margin Expansion Index 7.7% 2.76% 6.51% 12.54% 67.01%

Nifty 0.4% 2.53% 1.82% 3.76% 16.47%

We have a positive outlook on the Sector
Sensex -0.3% 2.46% 1.44% 3.17% 17.06%
Source: Bloomberg
Return of pricing power

Wealth effect in semi urban and rural India

Strong momentum in industrial activity

Risk to our view

Rise in Interest rates in India

Increase in Raw material prices

Monsoon not as per expectations

 Banking - Positive
Banking Sector has outperformed the broader market in
past and due to its weight in indices has been Relative Performance
significant contributors to the broad market returns Period YTD 1mth 3 mths 6 mths 12 mths
With economy recovering from slowdown, the threat of BSE
8.2% 0.1% 6.1% 12.0% 35.4%
Bankex
large NPAs that was looming over the sector is waning.
Nifty 0.4% 2.5% 1.8% 3.8% 16.5%
Lower funding cost enabled the sector to report better Sensex -0.3% 2.5% 1.4% 3.2% 17.1%
Net Interest Margins (NIMs). Source: Bloomberg

Credit growth momentum has gained traction in last couple of quarters.

Outperformance of the sector to continue
Negative NPA cycle has already peaked and we expect lower accretion of NPAs going forward.
Credit growth expected to be robust as requirements of funds for 3G and BWA auction coupled with return of
capex cycle would fuel demand.
Though NIMs would be under pressure as we expect deposit cost to rise in 2nd Half, we believe higher credit
growth coupled with partial pass on of higher interest cost would enable the bank’s to post relatively better
growth in core income.
On macro front, India’s growth projections are superlative compared to other regions globally. Banking sector
would continue to play crucial role for enabling the economy to grow at the higher rate.

Risk to our view

Negative global events that would dilute the recovery process that is underway risking global trade. This may
lead to slowdown in rate of growth. It may also impact the Investments planned by the private sector.
 Capital Goods - Positive
Capital Goods sector has performed largely in line with Relative Performance
markets
Period YTD 1mth 3 mths 6 mths 12 mths
While power sector continued to be intact,
announcements of new industrial capex has been BSE Capital
0.7% 7.5% 4.3% 3.1% 13.6%
Goods Index
largely subdued.
Nifty 0.4% 2.5% 1.8% 3.8% 16.5%
Stocks exposed to power sector capex have fared
Sensex -0.3% 2.5% 1.4% 3.2% 17.1%
better in terms of performance in last couple of
quarters. Source: Bloomberg

Expect the sector to outperform with the return of capex cycle

We believe the capex cycle, which peaked in FY2007 would return for upswing from FY2011-12
onwards

While we expect power capex to remain strong, we believe industrial capex cycle would return in next
3-6 months as strong economic growth would lead to capacity constraints. Companies would start
planning in advance to prepare themselves to meet the demand.

Risk to our view

Though there are no major domestic problems, global events could only play the spoil sports as it may
curtail funds flows to the country. In the past it has been seen that Investment cycle has high
correlation with the flow of foreign capital.
 FMCG - Positive
Reasons of outperformance

Play on Indian consumer

Relative Performance
Sector has been consistent outperformer on back of pick up in
consumption demand especially in rural/semi urban
Period YTD 1mth 3 mths 6 mths 12 mths
household.
BSE FMCG
Double digit volume growth has been aided by higher rural Index 11.3% 7.70% 10.39% 10.90% 37.34%
income through NREGA, rural infrastructure development and Nifty 0.4% 2.53% 1.82% 3.76% 16.47%
higher farm produce prices.
Sensex -0.3% 2.46% 1.44% 3.17% 17.06%
Urban demand pick has lagged in traditional segments such Source: Bloomberg
as soap, detergents, but robust pick up seen in paints,
nutrition/wellness segments
Out Performance to continue

We remain positive on the sector as robust GDP growth of more than 8% will continue to boost income levels
and thus demand for FMCG products

Risks to our View

Sharp up move in raw material prices such as crude and other derivative products can lead to higher price and
thus lower demand.

Consumer price inflation also poses challenge to Industry as food inflation may impact consumer discretionary
spend
 Metals - Positive
Reasons for Underperformance in last couple of
quarters Relative Performance
Period YTD 1mth 3 mths 6 mths 12 mths
Concerns related to Global recovery
BSE Metal
Index -14.4% -6.30% -13.65% -8.03% 26.75%
Overheating of economy in China
Nifty 0.4% 2.53% 1.82% 3.76% 16.47%
Unwinding of Metal blocked in financing deals
Sensex -0.3% 2.46% 1.44% 3.17% 17.06%
Source: Bloomberg
We have a positive outlook on the Sector

From next year onwards we expect global

focus to shift from crisis management to growth
.
Demand to remain at elevated level as India
and China continues to create Infrastructure

Risk to our view

Delay in Global Recovery

Globally rise in Interest rates

 Oil and Gas - Positive
Mixed Bag
Sectoral Index has under performed in medium term owning to
under performance of Reliance. Despite increasing refining Relative Performance
capacity by nearly 100%, sharp fall in refining margins (40%)
Period YTD 1mth 3 mths 6 mths 12 mths
subdued the profitability. BSE Oil
& Gas -1.6% 4.40% 5.05% 0.91% 2.69%
While, increase in Natural Gas production from KG basin has
diversified its revenue stream and has catapulted pipeline Nifty 0.4% 2.53% 1.82% 3.76% 16.47%
transmission volumes and benefited companies such as Guj State
Petronet, GAIL etc. Sensex -0.3% 2.46% 1.44% 3.17% 17.06%
Source: Bloomberg
Government recent policy decisions such as market pricing of
APM gas has benefitted ONGC earnings. Further Govt is
contemplating freeing auto fuel prices and partially de-regulate
cooking fuels bode well for oil marketing companies .

Sector will Out Perform

We remain positive on the sector as we believe Govt pro reform measures will re-rate the sector.
Quality of refining throughput and efficiency can make the larger players survive the downturn in refining sector.
Key Risks
Sharp downturn in world economy and demand for petroleum fuels.
Lack of pro-reform measures such as de-regulating auto fuels.
 Pharmaceuticals - Positive
Reasons for Outperformance in last couple of quarters
Relative Performance
Strong momentum in core formulations business. Period YTD 1mth 3 mths 6 mths 12 mths
Domestic formulations business as a whole grew at BSE
Healthcare 11.4% 4.14% 10.75% 12.99% 53.69%
~15% with midcap companies exhibiting growth in
excess of 18-20% in this segment. Nifty 0.4% 2.53% 1.82% 3.76% 16.47%

Sensex -0.3% 2.46% 1.44% 3.17% 17.06%

M&A activity has picked up with MNC companies trying Source: Bloomberg
to acquire companies which have a strong domestic
formulations business. Abott’s acquisition of the domestic
formulations business of Piramal healthcare at 9 X
EV/Sales in an example to interest expressed by MNC
companies.
Abundant company specific events such as

o New product approvals for companies such as Dr.Reddy, Lupin, Sun Pharma, Glenmark, etc.
o Tie ups with MNC companies for supply arrangements such as the ones entered into by
Aurobindo with Pfizer, Cadila with Abott, Dr Reddy with Glaxo, Biocon with numerous
companies for Tacrolimus, etc.
o Balance sheet restructuring in companies such as Jubilant Organosys, Aurobindo, etc.
o Milestone based payments received by Glenmark, Biocon, etc.

Midcap pharma companies continue to remain attractive on valuations parameters

We remain Positive on the sector on account of
Momentum in core business continues to remain strong. Domestic formulations continues to grow at
~15% with midcap companies growing in excess of 18-20% in this segment. US FDA Approvals for new
products is expected to aid growth for generic companies focused on the US geography.
Supply arrangement expected to provide the base for growth for some companies.
Milestone payments and new product approvals for some companies to chart a new growth path for
some companies.
Expectation of M&A activity in companies with strong products in domestic market to maintain the
momentum in stock prices in these stocks.
Opening up of new geographies such as Japan for generic medicine to provide new growth
opportunities for stocks such as Lupin, Cadila and Ranbaxy which have established their presence in
Japan.
Clearance by USFDA for plants under inspection to pave way for revenue growth and better profitability
for some companies.
Risk to our view

Expectation of site clearance by USFDA not coming through could hurt stocks such as Ranbaxy and
Sun Pharma.
Weaker Euro could impact the business of companies in the Euro region such as Ranbaxy, Dr Reddy,
etc.
Adverse judgment on products under litigation to hurt companies involved in the same.
 Real Estate – Positive
Reasons for underperformance in last couple of Relative Performance
quarters
Period YTD 1mth 3 mths 6 mths 12 mths
Companies continue to reel under the debt burden, BSE Realty
though a lot of companies have managed to repay Index -20.3% -6.64% -8.62% -20.76% -13.26%
and reduce debt through issuance of equity. Nifty 0.4% 2.53% 1.82% 3.76% 16.47%

Steep price hikes have resulted in lesser volume of Sensex -0.3% 2.46% 1.44% 3.17% 17.06%
Source: Bloomberg
units sold over the last 2 quarters. Current prices are
unsustainable since affordability is low.

Company specific issues such as Unitech’s

cancellation of JV with Omkara, DLF’s merger of DAL
with itself at premium to market expectation, Anantraj
facing problem with respect to its Hauz Khas project,
etc. are resulting in stocks not performing.

Pace of execution of projects has not picked up as

per expectation.

Investors who had subscribed to the equity issuance

booking profits generated by the strong performance
in stocks during the first half of CY09.
We are Positive on the sector on account of

Improvement in balance sheets of companies achieved through equity issuance and asset sales

Bankruptcy no longer remains a threat

Volume pickup is slowing but margins remain good

We expect execution to pick up going forward resulting in better numbers

Holding power of builders is strong

City centric locations are being priced higher than ever with strong demand as well

Risk to our view

Real estate stocks being high beta will suffer with a fall in equity markets globally

We believe that the current prices are not sustainable and fall in prices will impact the profitability of
companies

Slow rate of execution to impact earnings

 Software - Positive
Reasons for Outperformance in last couple of quarters Relative Performance
Period YTD 1mth 3 mths 6 mths 12 mths
Business momentum has picked with new order inflows.
BSE IT
BFSI vertical which was a laggard during FY09 turned Index 2.6% 1.46% -1.64% 7.47% 64.21%
out to be a strong business growth driver during the
Nifty 0.4% 2.53% 1.82% 3.76% 16.47%
previous 2-3 quarters. Along with BFSI other verticals
such as Energy, Utilities, and manufacturing also picked Sensex -0.3% 2.46% 1.44% 3.17% 17.06%
up momentum resulting in strong 5% CQGR in volumes Source: Bloomberg

over the last 2-3 quarters.

Good cost management helped Companies maintain or

even improve margins consistently during the periods of
slow growth.

Strong US Dollar helped margins of companies during

the whole of FY10.
We remain Positive on the sector on account of
Continued momentum in business over the next few quarters. We expect volume growth to continue in
the 5% CQGR range over the next 4-6 quarters.

We expect the pent up demand to result in larger orders coming through further. Announcement of
transformation orders which comprises of moving the work offshore is picking momentum with the higher
acceptance of offshoring work with the idea of cutting costs.
The ongoing shift from high cost locations to offshore locations to continue benefitting Indian companies.
The branding (quality perception, service standards) of Indian companies continues to improve which is a
result of Indian companies winning prestigious and mission critical projects.
Service lines such as Remote Infrastructure services, BPO, Package implementation, etc. are picking up
momentum.
We expect M&A activity to pickup in midcap companies with strong quality standards.
Strong employee additions announced by companies is a sign of strong business wins expectation by
companies.

Risk to our view

If the Euro continues to remain weak, then it could impact the margins of companies with high exposure
to the Euro region.
Attrition and in turn Wage inflation to impact margins going forward.
Valuations for the tier 1 IT companies is no longer cheap and disappointment on numbers would result in
underperformance.
Telecom- Negative
Reasons of underperformance

High Intensity competition Relative Performance

Sector has under performed severely in 6-12 months Period YTD 1mth 3 mths 6 mths 12 mths
horizon because of sharp fall in tariffs initiated by new
Telecom -12.2% 4.40% 5.05% 0.91% 2.69%
players such as Rcom, Tata Docomo etc . This has
resulted in earnings downgrade across the sector. Nifty 0.4% 2.53% 1.82% 3.76% 16.47%

High intensity competition also resulted in mind Sensex -0.3% 2.46% 1.44% 3.17% 17.06%
boggling bidding for 3G spectrum resulting in putting Source: Bloomberg

further strain on profitability in terms of higher debt and

interest burden.

Under Performance to continue

We believe the competitive intensity in terms of

pressure on ARPU may come down, but there is
nothing which make us believe that the sector is back
on growth path in terms of profitability.

Key Risks

Consolidation among players can lead to faster than

expected stability in the sector.
Thank You
 Disclaimers & Risk Factors
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