Research Speak Week Ended – 17th July, 2010

Market Commentary
Q1FY11 Results season has kicked in with most companies so far reporting earnings as per expectations.
Financial sector companies particularly HDFC, Axis Bank as well as some of the mid cap companies like Exide,
Indusind Bank, BASF have reported good numbers. Infosys results were below expectations; while TCS reported
better than expected numbers. We believe the Q1 results to be a mixed bag. Results of companies in sectors
like metals, cement and telecom will be disappointing. Automobile companies are likely to report better
numbers on the back of record sales; though there may be some pressure on margins. Few Infrastructure,
capital goods and FMCG companies like IRB infrastructure , Nagarjuna construction, BHEL and ITC are likely to
post good results.

We expect profit booking in broader indices as valuations of some large cap stocks/sectors are fairly high; the
case in the point is the FMCG sector, which is trading at 22-26(x) one year forward earnings. The progress of the
monsoon also needs to be watched as some parts of the country have reported deficient rainfall and weak
monsoon outlook would be a spoilsport as far as the markets are concerned.

World Indices
Apr-09

Aug-09

Oct-09

Dec-09

Apr-10
Mar-09

May-09

Jun-09

Jul-09

Sep-09

Nov-09

Jan-10

Feb-10
Mar-10

May-10

Jun-10

Jul-10

Dow Jones S&P 500 Shanghai Nifty Bovespa Brazil

If we measure the performance of India and other emerging markets with developed markets, we observe, from
the chart above, that Nifty has clearly outperformed all of them. China, which is supposed to be the biggest
growth story, has been underperforming even the US and European markets since the beginning of this calendar

research@eurekasecurities.com 1
year. The only close competitor was Bovespa of Brazil. However, with China’s immediate growth being
questioned, the commodities have cracked and so did the commodity heavy Brazillian index. Hence, investors
into the Indian markets have been rewarded for the resilient growth, buoyant financial system and political
stability in the country.

P/B Up from 52 Down from 52

PE ratio Ratio Week Low Week High
DOW JONES INDUS. AVG 14.20 2.56 16% 11%
S&P 500 INDEX 15.05 2.03 14% 15%
NASDAQ COMPOSITE INDEX 27.40 2.55 16% 16%
BRAZIL BOVESPA INDEX 13.37 1.79 20% 15%
FTSE 100 INDEX 15.34 1.69 18% 13%
CAC 40 INDEX 12.89 1.22 9% 17%
NIKKEI 225 33.49 1.23 4% 21%
HANG SENG INDEX 15.53 1.76 10% 14%
SHANGHAI SE COMPOSITE 18.03 2.38 5% 43%
NSE S&P CNX NIFTY INDEX 18.93 3.22 28% 1%
Average 18.42 2.04 14% 17%

A similar picture is painted by the table above. We can see that NIFTY has been trading at ~19 times its trailing
twelve month(TTM) EPS. However, looking at global average of 18.43, this clearly seems to on slightly higher
side. P/B ratio is good 50% higher than the world average. Even higher than 2.38 times of Shanghai and 1.76
times Hangseng. Hence, the outperformance and relative overvaluation of NIFTY is more or less established. If f
we consider the movement of the indices from their 52 week high/low, we see that India is 28% off its 52 week
low, the highest in our sample and double than that of average 14%. And moreover this has come after almost
90-100% bounce back in the year before. The recent correction has wiped of significant chunks from world
indices, on an average retracement of 17%. However, Nifty has only retraced 1% from its 52 week high. This
again reemphasises the point that NIFTY has been significantly outperformer and most of its story of high
earnings and high ROE is already discounted in the prices of stocks, at least from the large cap universe.

By saying all these, we do not mean that the rise and outperformance of India is not justified. But the point that
we want to convey is that the outperformance has taken the index and several stock into overbought zone
where making significant returns seems to be difficult keeping in mind their fundamentals. Hence, the market
going forward would be stock pickers market. The time has come for “alpha hunting” as “beta grazing” would
give no significant returns. FIIs have already pumped in $8.4 Bn in the Indian markets in 2010. Hence, few
billions of dollars pulling out is not ruled out and that would give decent correction in the markets.

research@eurekasecurities.com 2
 Global factors have suddenly turned quite negative. With fed turning cautious about the outlook of US recovery,
we saw the DOW cracking on Friday. The stress test on European banks are likely to throw up more trouble.
Hence, we will see markets correcting in next couple of weeks after a long uptrend. The reasons for the
corrections would be majorly internal with higher valuations, but the triggers will be global. We expect the
markets to go down, but our recommended universe will correct modestly and might just throw up very good
buying opportunities.

We advise investors to move out of large cap stocks trading at premium valuations to quality mid cap stocks
with lower valuations and good fundamentals and prospects once we see them correct in next week. Our recent
recommendations like Voltas, BlueStar, Gayatri Projects, Bank of Baroda, TTK Prestige and EKC can be
considered for medium term once they correct from current levels.

Stock and Sector Update

AXIS Bank – Result Update

AXIS bank came out with better than expected Q1FY11 earnings. Following are the result highlights:

? Net Interest Incomes grew by 45% YoY. NIM stood at 3.71% compared to 3.34% last year but lower than 4.09%
in Q4FY10
? Operating profit for the quarter stood at Rs. 1450 crs, 23.27% higher than previous year. If we exclude the de-
growth in trading income, the core operating profit grew by good 47%
? Net profit grew by 32% to Rs. 741 crs. EPS however grew by only 15.81% to Rs. 17.95 due to dilution as the
company issued 4.768 cr shares. Shareholder’s funds increased by 56.61% from previous year
? Fees income grew by 19% YoY. Trading profits however slipped 40% YoY owing to the rise in yields and loss on
the bond portfolio
? Demand deposits on a daily average basis grew by 38.51% and constituted 40% of aggregate daily average
deposits during Q1FY11. The bank has been able to maintain the ratio compared to last year. The growth in the
CASA has been due to the massive addition of 215 branches from March 2009 onwards and addition of 879
ATMs in the same period
? GNPA of the bank stood at Rs. 1341 crs, slightly higher than RS. 1318 crs in previous quarter. GNPA as a
percentage of customer assets stood at 1.13% compared to 1.01% last year. Provisioning coverage for the bank
was however comfortable at 76.62% including prudential write-offs (89.59% before accumulated write – offs),
leading to a Net NPA of 0.35% compared to 0.41%
? Capital Adequacy Ratio for the bank stood at 14.54% compared to 15.28% last year. The bank has been very
judicious as far as utilizing its capital. Hence now, when the NIMs are healthy with good demand for funds
without much fear of asset quality, the can expand its book with simultaneous improvement in ROE. ROA for the
bank is quite healthy at 1.63%. This has translated into an ROE of 18.8%, slated to expand keeping in mind the
significantly high CAR.

research@eurekasecurities.com 3
? Book Value per share has expanded to Rs. 414.52 compared to Rs. 395 in FY10 and Rs. 284 in FY09.

We have always been very positive in AXIS bank owing to its expansion plan and asset quality. Given the base,
which happens to lower than ICICI and HDFC Bank, the growth will be more pronounced. The bank has been
expanding its branch network by 25% every year from March 2005. The bank intends to open 300 more
branches in near future and take its ATM network to 4350 from 4000 at present. The dposit franchise that the
bank has created would help it contain its cost of funds as better reach, better penetration helps the CASA and
hence lower base rate and lower cost of funds. This will ensure competiveness and good margins for the bank
going forward. At current price of Rs. 1359, the bank is trading at 3.27 times it’s book. However, P/B ratio would
be close to 2.7 times if we consider FY11 book. It seems to be rightly valued as of now, and we would
recommend investors to ‘Hold’ the stock for long term appreciations and fresh entry would be advisable at
lower levels for better returns.

Sugar Decontrol
Sugar sector has been abuzz with news of decontrol or removal of government regulations regarding
distribution of sugar in the country. Sugar companies through its industry bodies Indian Sugar Mills' Association
(ISMA) and the National Federation of Cooperative Sugar Factories Ltd (NFCSFL) has demanded a complete
lifting of output controls.

These include dismantling the ‘release mechanism' (where the Government decides how much sugar each mill
can sell in a particular month), levy procurement (where a certain percentage of their production is
requisitioned at below market prices for the public distribution system or PDS) and stock holding limits on
traders and bulk consumers.

Sugar industry has called for removal of sugar from the “ Essential Commodities Act”. According to the industry,
sugar for the PDS should be sourced by the Centre entirely through competitive open market tendering and not
by levy obligation on mills. Considering that households account for just 26 per cent of the country's
consumption, with the remaining 74 per cent being bought by bulk consumers such as beverage, biscuit and
sweet-meat makers, there is no need to view it as an ‘essential commodity'.

The industry has also sought a minimal role for the Government (both Centre and States) in fixing cane prices.
Sugar companies have suggested their own cane pricing formula, wherein mills would pay 62 per cent of their
total realisation from the sale of sugar and direct by-products (molasses, bagasse and press-mud) to growers
and keep the rest with them.

Agriculture minister Sharad Pawar has suggested the government would consider removing distribution controls
before the next season begins after assessing the area on which the cane has been planted this year.

Our View: We believe abolition of these two controls would bring significant relief to sugar mills which then
can operate in a marketing environment free from government interference. The government is receptive to
removal of distribution controls but it is not keen on restricting the government’s role in cane pricing as well as

research@eurekasecurities.com 4
its role in controlling import and export of sugar. It is widely known that cane ouput in the country depends
upon the pricing policy of the government and it is imperative that the cyclical swings in cane output are
smothered. Little attention is currently being paid to this aspect. Seasons of large surpluses and shortages can
lead to wild swings in prices. Therefore, import and export trade in sugar should be freed too, and the tariff
should be the only instrument in the hands of the government. The legal validity of State Advised Price has been
upheld by the Supreme Court. In order to ensure that SAP is not abused by State governments, the Centre
should bring forward appropriate legislative amendments to make cane pricing uniform across the country.

Infrastructure
NCC slides from recent high, Opportunity to buy:

Nagarjuna Construction Company Ltd (NCC) made a press release on July 15, 2010. The excerpts of the same are
as here.

NCC has informed BSE that NCC Power Projects Ltd (NCCPPL), a subsidiary of NCC is developing a 1320 MW
Power Plant at Sompeta, near Gollagandi Village, Srikakulam District. For this purpose NCCPPL has acquired 972
acres of land allotted by the Government of Andhra Pradesh and 573 acres of land purchased from private
owners specifically for the purpose of setting up of the above Thermal Power Plant at Sompeta. There was no
rehabilitation issue as Government has not acquired any private land for the project. NCCPPL was planning
putting up Boundary Stones on the land acquired by it and as the previous attempts met with resistance from
local population, the company sought police protection for carrying out the work. Earlier in the month of March,
2010, NCCPPL has intimated District Collector, Pollution Control Board and the Police that they do not plan to
undertake any project work in the project site until consent for Establishment is received from the Pollution
Control Board. It is not true to say that NCCPPL has planned for laying of foundation stone today. It is also not
true to say that anti social elements were engaged to counter obstruction of the work.

Our View

We believe that the recent slide of the stock has more to do with sentiments rather than fundamentals. As we
have said in our earlier report we continue to remain bullish on the stock. The company is well diversified in
different sectors (see order book below) hence going forward an uptick in corporate earnings shall reflect in
stock price as well. Due to volatility in the broader market, we may see some sentimental dip in the near term
but every dip in the stock price creates an opportunity to buy. At the price of Rs 182 the stock is trading at 15.75
times P/E (FY10) and forward P/E of 12 (FY11E). This makes it an attractive buy at current levels.

research@eurekasecurities.com 5
 Order Mix
Order Book Summary Order Mix (In Cr) Order Mix (In Cr) Order Mix (%) (%)
Sectors 2009 2010 2009 2010
Building 2561 3689 21% 24%
Transportation 976 1178 8% 8%
Water & Environment 2439 2421 20% 16%
Electrical 610 710 5% 5%
Irrigation 610 1576 5% 10%
Metals 732 495 6% 3%
Power 732 1063 6% 7%
International 2561 3292 21% 21%
Others 976 946 8% 6%
Total 12197 15370 100% 100%

Stock Recommendation

Stock CMP Target Recommendation

IRB Infra 277 313 BUY
IVRCL Infra 189 215 BUY
NCC 182 210 BUY
Gayatri Project 405 509 BUY
Unity Infra 116 134 BUY

Commodities Outlook
Steel

The global steel market continued with its free fall during the past week. This was duly as per market
expectations as oversupply and lack of demand continued to prevail in some crucial markets, including India.
The overall price movement has been negative across the globe. This weakness can be attributed to a number of
factors such as poor demand from the end-user segment, anticipationamong the buyers, stockists and traders
that prices would continue their downward correction and a drop in scrap prices. All these resulted in delay in
purchases. Moreover, the purchases were immediate and need-based which resulted intransaction activities
being poor.

Flat Products

research@eurekasecurities.com 6
There was a general weakness in the flat product segment due to a number of factors such as poor demand,
drop in scrap prices and some anticipation among the buyers that the prices would see a further downward
correction. Meanwhile, the removal of 9% export duty has further weakened the market sentiments in China
and as a result, a number of shut downs have been reported owing to maintenance factors.

Overcapacity situation was also a bothering point in Europe and US markets. The Indian market also failed to
generate any optimism, thanks to the high inventory level on the domestic front. Flat steel product prices
witnessed bearish trends in the domestic market based on lower demand and excessive import of hot rolled
coils from international markets. The prices have dropped by around Rs 200 to Rs 400 per ton for flat products
over the last week. Weak demand, excess inventory and rainy season are the major factors which have resulted
in a modest decline in prices.

Amidst the sluggishness in the domestic market, the Indian mills plan to roll over domestic ex-works prices for
strip mill products from June this month. They expect China’s removal of 9% export rebate on HRC effective July
15, 2010 to ease the pressure of cheap imports on the Indian market.

Long Products

The long product market was sluggish this week with buyers deferring their purchases as prices moved further
down. The demand remained weak and any improvement is unlikely in the immediate short term. The
overcapacity situation as well as high stock levels at certain market pockets, kept market sentiments weak.
Meanwhile, immediate and needbased purchases resulted in weak transaction activities. Weak demand
continued to depress steel prices in the Indian market. The local producers and traders are presently struggling
with huge stocks and are unable to sell as buying activity in the market is almost nil.

Iron Ore

Iron ore spot prices fell sharply this week as the demand remained weak coupled with average weekly freight
rates. The negative sentiments in Chinese domestic iron ore continued into the beginning of July. Traders were
pessimistic about the future of the market. Many small steel mills have closed down because of Beijing’s policies
of reducing environmental pollution and closing outdated iron and steel capacity. Demand for Chinese domestic
iron ore is expected to stay weak until larger mills increase their production output. Moreover as around 90% of
the traders have stopped selling ore and both the sellers and buyers were unwilling to participate, the market
sentiment was sluggish. In case of forward prices for iron ore swaps, they fell drastically last week amid concerns
over Chinese steel demand and wider uncertainty over the global economy.

Iron ore swap prices for July and August published by the Iron Ore and Steel Derivatives Association (IOSDA)
finished last week at $116.88 per ton and $116.13 per ton respectively, down by $18.12 per ton and $18.87 per
ton week-onweek. The market has been really bearish lately, as per IOSDA, further pointing to Chinese real
estate worries and uncertainties over the sustainability of quarterly iron ore pricing. A number of Chinese mills
have idled their furnaces and financial market concerns over the euro-area debt crisis are also weighing on
sentiment.

research@eurekasecurities.com 7
Our View

Compared to the earlier weeks the demand for steel has come down significantly globally as well as in India.
Traders has been waiting the prices to correct even further from here a key raw materials prices like iron ore
and ferrous scrap has been on a secular downward trend. The production in China as well as in America and
western Europe has also been cut down on account of lower demand situation. With China slowing down and
the effect of stimulus phasing out, the world once again seems to be heading towards another round of
pessimism. Even the US Fed is contemplating another stimulus package. Under this kind of condition the prices
of steel along with other commodities would head even l ower from the current level.

Keeping in view the current global and local scenario we maintain our cautious stance on the sector. However,
steel companies catering to domestic demand is still likely to see demand improving post monsoon which is post
September-October. We expect stock prices to correct significantly from the current level. However, at lower
level we remain bullish on counters like JSW Steel and would advise investors to average out. Price of Rs. 800-
850 cannot be ruled out in this counter. Similar would be the case with SAIL. However, the weight of steel stock
should not exceed 2-3% of the total portfolio size. As last week we maintain our AVOID rating in Sesa Goa and
Tata Steel.

DISCLAIMER:
This report is for information purposes only and does not construe to be any investment, legal or taxation advice. It is not intended as an offer or
solicitation for the purchase and sale of any financial instrument. Any action taken by you on the basis of the information contained herein is your
responsibility alone and Eureka Stock & Share Broking Services Ltd [hereinafter refereed as ESSBSL] and its subsidiaries or it s employees or
directors, associates will not be liable in any manner for the consequences of such action taken by you. We have exercised due diligence in
checking the correctness and authenticity of the information contained herein, but do not represent that it is accurate or complete. ESSBSL or any
of its subsidiaries or associates or employees shall not be in any way responsible for any loss or damage that may arise to any person from any
inadvertent error in the information contained in this publication. The recipients of this report should rely on their own investigations. ESSBSL
and/or directors, employees or associates may have interests or positions, financial or otherwise in the securities mentioned in this report.

Analyst Team

Analyst Name Sectors E-mail Contact Number

Samudrajit Gohain Oil & Gas, Engineering samudrajit@eurekasecurities.com +91- 9748860335
Kinshuk Acharya Steel, Agriculture kinshuk@eurekasecurities.com +91- 9681478735
Md. Riazuddin, Banking, Economy,
FRM Power riazuddin@eurekasecurities.com +91- 9903062346
Rajiv Agarwal Auto, Tea, Sugar rajiv.ag@eurekasecurities.com +91- 9903076345
Ankit Kanodia Infrastructure ankit_kanodia@eurekasecurities.com +91- 9163278562
Sakshi Malhotra Media

Research Desk: Registered Office:

9B, Wood Street 7 Lyons Range,
1st Floor. 2nd Floor,
Kolkata- 700016 Room No. 1.

research@eurekasecurities.com 8
Ph. No. – 033- 39180386/87 Kolkata – 700001

Corporate office : Mumbai Office:

B3/4, Gillander House, 909 Raheja Chamber,
8 N S Road, 3rd Floor. 213 Nariman Point.
Kolkata - 700001 Mumbai-400021
Ph. : 2210 7500 / 01 / 02 Fax: 2210 5184 Ph.: (022) 2202 5941 / 5942 Fax: (022) 2288 8168
e-mail: helpdesk@eurekasecurities.com e-mail: mumbai@eurekasecurities.com

research@eurekasecurities.com 9