icicidirect_strategy2011_product

8/7/2019 ICICIdirect_Strategy2011_Product

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Market Strategy 2011

ICICI Securities Limited

ICICIdirect.com Equity Research


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ICICIdirect.com|Equity ResearchPage 2


Index

House View...................................................................... 3

India- Likely to retain premium ..................................................5

Valuation-Earnings growth the key prerogative .......................6Liquidity- So far, So good .........................................................13

Obvious positives........................................................... 19

India GDP growth- strong and robust .......................................20

Demographics favour India .......................................................22

No concern over government finance.......................................26

Global GDP growth- Asia will lead western laggards................28

Show stoppers- Domestic.............................................. 30

Inflation- getting structural in nature.........................................31

Higher crude prices will deteriorate fiscal situation..................32

Currency- situation getting perplexing ......................................33

Geopolitical concerns ...............................................................33

Delay in policy reforms.............................................................35

Show stoppers- Global ................................................... 36

US- Employment trend to remain weak in CY11.......................37EU peripheral- Negative news can surprise any moment .........38

China to slow down- Debate not clear yet ................................41

Is Japan the next big problem ..................................................43

North Korea vs. South Korea - uncertain and futile ...................44

Asset bubbles- bullion and crude can be potential targets .......45

Outlook 2011- The year ahead .......................................47

Sectoral view ...........................................................................48

Top picks ..................................................................................71

Flashback 2010- The year that went by .........................73

ICICIdirect.com


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House ViewThe year CY10 is best characterised as a progressive recovery indeveloping countries and just a recovery in the developed world. CY11should again see a stronger but lopsided economic growth. The divergenceis likely to be quite marked this year as well in terms of economic growthrates, policy responses, interest rates, inflation and other challenges all of

which are likely to get transmitted into the performances of equity indicesacross countries as it did in CY10. We believe it is quite unlikely that wemay see a reversal in divergences in performance of economic and variousasset classes reverting anytime soon. The US and Europe region wouldcontinue liquidity induced revival hopes with BRIC brigade trying to attain afine balance between maintaining healthy growth amid liquidity andcommodity influenced issues such as inflation, currency volatility, etc.We expect the CY11 Indian equity performance to be growth induced andwould mirror the trajectory of economic and corporate growth. We expectsectors levered to the consumption theme to continue finding favour andinfra/capex related participation likely to be back-ended as elevated interest

rates, inflation, commodity prices and tight liquidity would mute theconfidence during the first half of CY11 despite compelling arguments interms of need for infrastructure creation and valuations.We do not expect a de-rating in global confidence on India. Hence, weexpect the Sensex to grow in line with earnings CAGR of 21% over FY10-12E EPS to 23165 levels (17x weighted average of FY12-13 EPS of 1363,16% upside). In our bear case, we expect the Sensex to find comfort at16924 levels (14x FY12E EPS of 1209, 15% downside), which couldemanate from events such as fading of the US growth outlook, no respiteon Euro zone worries, spike in commodities and geopolitical tensions.Also, persistent domestic corporate governance issues may take thesheen off India's image as an investment destination in the near term.We do not expect sector rotation/preference to undergo much change onthe likely levers of higher growth even though valuation multiples appear tobe rich. We continue to maintain our positive stance on sectors like IT(reaping the benefits of global growth, revival of discretionary spending,rich valuations), banks (strong base growth to make up for rich valuation),pharma (strong domestic and US led growth, M&A opportunity, richvaluations), capital goods (strong Tier-I led growth, yet to be broad-based)and sugar (global supply getting restricted, earnings volatility).We are neutral on auto (awaiting confirmation on structural demand, spikein commodity prices), oil & gas (pronounced government reforms, high

crude prices), infra (robust order book, valuations compelling, pick-up inexecution missing), metals (global demand revival, higher raw material),FMCG (stable growth, rich valuation at 80% premium to Sensex), aviation(strong passenger traffic growth, high crude prices a dampener) andhospitality (demand revival and asset heavy business).We have a negative bias on real estate (increasingly unaffordable), telecom(tepid growth, competition intensity diminishing, regulatory overhang),cement (supply overhang getting longer, large caps lacking valuationcomfort) and shipping (growth missing and valuation compelling).In commodities, we believe crude (restricted supply, 39% demand drivers

comprising US and Euro zone underperforming) and precious metalsespecially gold (emerging as an indispensable asset in portfolio, crisis ofconfidence in paper assets, safe haven status) could be potential targets forbubble creation.

We believe investors should continue sticking with their

winning sectors and stocks bets in H1CY11 and look for

sector rotation in H2CY11 on revisiting the growth outlook

in some of our neutral sectors. The best course for

approaching the markets would be through laddering

ones investments as we are not in a clear up trending

market

Axis Bank, TCS, GAIL, Oil India, HCL Tech, L&T and, Lupin

among large caps and Aurobindo Pharma, Balrampur

Chini, Hindustan Zinc, Natco Pharma and Escorts among

midcaps are our preferred picks for 2011


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Built in 16% upside for CY11- in our base case

Exhibit 1:Sensex targetKey Parameters Bull Case Base Case Bear Case

Global Factors

Economic Data flow Robust Moderate Worsening

Geopolitical Tension Low Low HighCommodity Prices Low Moderate High

Domestic Growth

Inflation Low Moderate High

Earnings Growth >20% 15%-20%


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India - Likely to retain premium

Growth the only selling point

Progressive economic growth (GDP growth expanded to 8.9% in H1FY11compared to 7.5% FY10 growth) next only to China coupled with prospectsof 17% CAGR FY10-13E in corporate earnings launched India as an

investment magnet with record FII inflows of $28.4 billion (| 1.30 trillion) inCY10. We believe that strong economic and corporate growth along withgenerous monetary policies by the developed world would help India toretain the premium and aid Indian equities in delivering a modest return of16% in CY11.

Indian markets have historically traded at a 17% premium over developedmarkets (US & UK) and had traded at a discount of 25-30% to its peer China.The impairment to Chinese multiple is primarily attributed to lower Chinesegrowth rather than India catching up with Chinese multiples. We feel thatother valuation parameters, such as P/BV (TTM 3.4x), market cap to GDP (at1.1 as against historical range of 0.9 -1.78x), PEG (1.08) are quite apt givensustainable RoE of 16.7%in FY12E (historically ranged between 15%

and21%).

Our bull case scenario assumes robust FII inflows and Sensex gettingpriced for perfection (18x FY13E EPS of 1414). This would lead to anoutperformance to the tune of 27% at 25451 (bull case scenario) levels onSensex in CY11. However, we prefer to err on the side of caution in termsof earnings and PE multiples and expect returns of 16% in CY11 to 23165levels, in our base case scenario. We have derived our confidence fromSensex companies CAGR growth of 17% in FY10-FY13E (in line with fiveyear CAGR of 13%) and premium multiples of 17x (in line with five yearsrange of 14-16x, excluding outliers).

In our bear case, we have built in dwindling of risk appetite emanating fromglobal factors and local factors. We believe the Sensex could witness apullback of 15% from current levels to 16924 (14x FY12E EPS of 1209). Thiswould happen in the event that a loose monetary policy approach in thedeveloped world and tight monetary policy in developing economiesbackfires and does not produce the intended objectives of reviving growthin the former and inflation and capital inflows threaten financial stability inthe latter. In addition, geopolitical problems such as South KoreaNorthKorea, IranIsrael, Sino-Indian dispute over Brahmaputra River, freshterrorist attack disturbing Indo-Pak relations, Maoists impacting investmentin mineral rich estates and domestic political issues (Parliament stalemate)are potential worries for the market.

A spike in crucial commodities like (up 22% in 6M to US $ 93.5 bbl), coal(up 40% CY10) and iron ore (up 55% CY10) are adding fuel to the currentconcerns with commodity levered countries like Russia and Brazil likely tofind favour as FII inflow destinations. At the same time, this would createproblems for India in terms of fiscal pressure on the government in terms ofadditional subsidy burden, disinvestment getting derailed and magnifyinginflation challenges. Further, on the domestic front, the Parliamentstalemate may impede or delay the passing of various reform oriented &legislative bills that can also affect the stability of the government.

On the global liquidity front, we believe India is unlikely to see any majorimpairment in FII inflows as the western world is unlikely to commence ratetightening in CY11 in a hurry. India stocks continue to sparkle in the eyes ofFIIs as their holding in indices like the Nifty, Sensex and BSE midcap is

currently at peak levels of 17.9%, 15.9% and 13.6%, respectively. Inaddition, healthy participation in disinvestment programme of | 49865 croreduring CY10 and likely strong pipeline of | 51000 crore would keep FIIinterest alive for Indian equities.


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Valuation- Earnings growth the key prerogative

PE multiple premium, in line with historical averages

Indian historical premium/discount to global peersAs compared to the developed world (US, UK), India has historically tradedat a 17% premium over the past seven years. Currently, we are trading at18% premium to developed market and in line with historical trend.Going ahead, we believe that strong earnings CAGR of 17% over FY10-13Ewill lead the Sensex higher as P/E multiples are unlikely to expand as Indiais already considered an expensive investment destination.Exhibit 5:Indias PE multiple (premium/discount)

-40

-20

0

20

40

60

80

Q1

Q2

Q3

Q4

Q1

Q2

Q3

Q4

Q1

Q2

Q3

Q4

Q1

Q2

Q3

Q4

Q1

Q2

Q3

Q4

CY06 CY07 CY08 CY09 CY10

(%)

-120

-80

-40

0

40

80

120

160

(%)

Developed Markets Brazil Russia (RHS) China (RHS)

Source: Bloomberg, ICICIdirect.com Research

Consistency getting rewarded

With consistent nominal GDP growth coupled with in excess of 15%corporate earnings, has helped India command a premium in terms of PEmultiple. Going ahead we believe that corporate India will clock 17%earnings CAGR over FY10-13E, which is consistent with previous growthtrajectory. The above point is reiterated by the fact that sectors such asBanking, IT and Oil & Gas have consistently delivered ~55% to total indexearnings over FY08-10. Hence, in the event of global impairment, Sensexearnings are relatively less vulnerable to earnings of its counterparts likeChina, Brazil and Russia (earnings mainly driven by exports and commodityoriented). Hence, the premium multiple for India appears comfortable.Exhibit 6:Higher visibility, better the premium multiple

0

4

8

12

16

20

Nikkei

Nifty

Shanghai

FTSE

DAX

DowJones

Bovespa

CAC

MICEX

(x)

Trailing PE 1yr fwd P/E 2yrs fwd P/E Source: Bloomberg, ICICIdirect.com Research

India has historically traded at a 25-30% discount to

China. However, due to slowdown fears, the Chinese

equity market has significantly underperformed other

global equity markets including India in the last year. As a

result, Chinese premium has vanished and currently

trades on par with India


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and so are other valuation parameters

Exhibit 7:India 3.4x P/BV multiple justified on the back of robust return ratios

3.4

2.7 2.6

2.01.8

1.61.3 1.3

-

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

Sensex

DowJones

Shanghai

FTSE

Bovespa

DAX

CAC

MICEX

(x)


Exhibit 8:Trend in RoE of Sensex companies

16.5

15.1

15.6

16.7

14

15

15

16

16

17

17

FY09

FY10

FY11E

FY12E

(%)

Source: ICICIdirect.com Research

Exhibit 9:India vis--vis other markets in terms of PEG ratio

1.08

0.89

0.77

0.49 0.45 0.43 0.420.33

0.25

-

0.2

0.4

0.6

0.8

1.0

1.2

India

USA

Japan

China

France

Germany

Brazil

Russia

UK

(x)


Structural and sustainable RoEs of 15-17% over FY10-

FY12E augur well for Indian markets. This enables it to

command premium valuations across the emerging

market basket in terms of P/BV and PEG ratio


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9/82



Large/small/mid cap PE divergence

Mid-caps to take time to recover but are turning attractiveThe midcap P/E discount to the Nifty is now around 21%, in line with thehistorical average. This is given that midcaps are usually more vulnerable topressures on economic fundamentals. We expect midcaps to consolidate inH1CY11 in an environment that is plagued with inflationary pressures, tightliquidity and rising interest rate.Also, from a market psyche perspective, risk aversion while buying midcapswill be in force on the back of the recent spate of negative news flowsrelating to corporate governance practices in midcap companies. This willsuppress the investment multiples for these companies till further clarityemerges.

Exhibit 12:Midcap discount hovering around its historical averages

-10

0

10

20

30

40

50

Jan Fe

bMar

Apr

May

Jun J

ul

Aug

Sep O

ct

Nov

Dec

Jan Fe

bMar

Apr

May

Jun J

ul

Aug

Sep O

ct

Nov

Dec

Jan Fe

bMar

Apr

May

Jun J

ul

Aug

Sep O

ct

Nov

Dec

Jan Fe

bMar

Apr

May

Jun J

ul

Aug

Sep O

ct

Nov

Dec

Jan F

ebMar

Apr

May

Jun J

ul

Aug

Sep O

ct

Nov

Dec

FY06 CY07 CY08 CY09 CY10

(%)


Exhibit 13:Inflation impacts midcaps profitability with a lag

-40

-20

0

20

40

H1F

Y08

H2F

Y08

H1F

Y09

H2F

Y09

H1F

Y10

H2F

Y10

H1F

Y11

(%)

02

46

810

12

(%)

Net Sales Growth YoY PAT Growth YoY

Net profit Margin (YoY) WPI YoY (RHS)

Source: Bloomberg, ICICIdirect.com, Research

Exhibit 14:Impact of inflationary trend on midcap performance

-2

0

2

4

6

8

10

12

Apr-05

Oct-05

Apr-06

Oct-06

Apr-07

Oct-07

Apr-08

Oct-08

Apr-09

Oct-09

Apr-10

Oct-10

(%)

-100

-50

0

50

100

150

(%)

WPI YoY BSE Midcap 1 Yr Return (RHS)


.

Indian markets discount inflationary expectations with

midcap stocks suffering the most

From the profitability perspective, midcaps have seen

sharp margin erosion during higher inflation periods due

to their inability to pass on increased cost burden


10/82



Fund managers survey

We have done a mutual fund mangers survey of 11 major AMCs fundmanagers to gauge the overall view for the market in 2011. Based on theirfeedback, the compiled views are as follows:Exhibit 15:Broader Indian equity market on avaluation scale

0

9

55

36

00

20

40

60

Grossly

Undervalued

Slightly

Undervalued

FairlyValued

Slightly

Overvalued

Grossly

Overvalued

(%)

Exhibit 16:Medium term (3 months) viewabout the broader market

0

18

64

18

00

20

40

60

80

Very

bullish

Bullish

Neutral

Bearish

Very

B

earish

(%)

Exhibit 17:Asset allocation strategy to beadopted

0

27

64

9

00

20

40

60

80

A B C D E

(%)

Exhibit 18:Year end BSE Sensex target

9

64

27

0 0

0

20

40

60

80

>20000

22000-

24000

18000-

22000

16000-

18000

20%

(%)

Exhibit 22:Corporate earnings growth expectedfor FY12-13

9

27

55

00

20

40

60

Lessthan

10%

10-15%

15-20%

>20%

(%)

Exhibit 23:Preference towards large caps ormidcaps?

82

18

0

20

40

60

80

100

Largecaps

Midcaps

(%)

Exhibit 24:Will Indian equity marketsunderperform other emerging markets in 2011?

18

82

0

20

40

60

80

100

Yes

No

(%)

Exhibit 25:Which global equity market areexpected to outperform in 2011?

73

18

9

00

20

40

60

80

US

Brazil

China

Eu

ropean

co

untries

(%)

Exhibit 26:Benchmark 10 year G-Sec yieldsrange expected in the next 3 months?

27

45

27

00

20

40

60

A

bove

8.20%

8-8.20%

7.75-8%

Below

7.75%

(%)

Most of the fund managers are confident of 15-20% growth

over the next two years

Majority of the fund managers believe large-caps will

outperform in 2011 as midcaps may take time to recover

Majority of them believe India may continue to outperform

among its emerging market peers

Consensus believes that among other global market, US

equity markets are likely to outperform in CY11

Total 70% of fund managers believe Indian benchmark 10

year G-Sec yields will remain below 8.2%


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Exhibit 27:Over 6 months horizon, whichsegment of the debt market is expect to deliverbetter returns?

9 9

45

27

0

20

40

60

G-Sec

Fund

Income

Funds

Shortterm

Funds

Ultrashort

termfunds

(%)

Asset class to outperform in 2011?

18 18 189

55

0

20

40

60

Indianequity

Globalequity

IndianDebt

Gold

Agro

commodities

(%)

Exhibit 28:Sector preference

Pharma IT

BFSI

Metals

FMCG

Auto

Telecom

Capital

Goods

Cement

OilandGas

Media

C

onstruction

Aviation

Most of the fund managers believe short-term and ultra

short-term funds will outperform in the next six months.

However, a majority of them believe that opportunityalso exist in longer duration funds

Opinion seems divided over outperformance among

Indian equity, global equity, Indian debt market and gold

in 2011

Pharma and IT are the most preferred sectors among fund

managers while cement, capital goods, construction,

media and aviation are least preferred. But they expectfurther price erosion to be a buying opportunity in the

above mentioned sectors


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Liquidity- So far so good

Fund flow in Indian markets and FII dominanceThe Indian economy remained relatively insulated from the globaleconomic meltdown mostly on account of the domestic consumption story,thrust on infrastructure development and a strong banking system. The

resilience of the Indian economy has re-affirmed the faith of FII investorswho have been frantic buyers of Indian stocks. After pulling out | 53052crore in CY08, investors have put in | 85368 crore in CY09 and | 130167crore in CY10 till date. FIIs have been key market drivers while domesticinstitutions have played a minor role as is evident from the accompanyingchart. Going ahead also we believe, FIIs will continue to have a dominantpresence in Indian markets.

Exhibit 29:FII, DII inflow and its impact on index movement

-30000

-20000

-10000

0

1000020000

30000

40000

50000

60000

Q2

Q3

Q4

Q1

Q2

Q3

Q4

Q1

Q2

Q3

Q4

Q1

Q2

Q3

Q4

CY07 CY08 CY09 CY10

(|cror

e)

0

1000

2000

30004000

5000

6000

7000

FII DII Nifty (RHS)

Source: Bloomberg,, ICICIdirect.com Research

Institutional holding pattern

FII holding pattern in Indian stocksFII holding in Nifty, Sensex and BSE mid-cap stocks is currently at peaklevels at 17.9%, 15.9% and 13.6% and is significantly above 13.8%, 12.1%and 9.8% holding in March 2009 at the peak of the global economic crisisre-affirming their faith in Indian equities. However, BSE small cap is notfinding favour as their participation is relatively low vis--vis their peakholding at 6.7% in September 2008. Another important point worth notingis that their participation has increased only in the later stages of the rallyand their current holding of 4.8% is still below their peak holding levelsindicating their risk aversion strategy.

Exhibit 30:FII holding in Nifty components

2000

3000

4000

5000

6000

7000

Q3

Q4

Q1

Q2

Q3

Q4

Q1

Q2

Q3

CY08 CY09 CY10

10

12

14

16

18

20

(%)

FII holding (RHS) Nifty (RHS)

Source: Capitaline, ICICIdirect.com Research

Exhibit 31:FII holding in Sensex components

0

5000

10000

15000

20000

25000

Q3

Q4

Q1

Q2

Q3

Q4

Q1

Q2

Q3

CY08 CY09 CY10

10

12

14

16

18

20

(%)

FII holding (RHS) Sensex (RHS)


Unlike 2008, FII holding has risen in the main indices and

midcaps whereas their holdings in small cap is yet to find

favour as their current holding at 4.8% is below the record

level of 6.7% (September 2008)


14/82



Exhibit 32:FII holding in BSE midcap stocks

0

2000

4000

6000

8000

10000

Q3

Q4

Q1

Q2

Q3

Q4

Q1

Q2

Q3

CY08 CY09 CY10

0

3

6

9

12

15

(%)

FII holding (RHS) BSE Midcap (RHS)


Exhibit 33:FII holding in small cap stocks

0

2000

4000

6000

8000

10000

12000

Q3

Q4

Q1

Q2

Q3

Q4

Q1

Q2

Q3

CY08 CY09 CY10

0

2

4

6

8

(%)

FII holding(RHS) BSE Smallcap(RHS)


Domestic insurance companies holding pattern in Indian stocks

Exhibit 34:Holdings in Nifty

2000

3000

4000

5000

6000

7000

Q3

Q4

Q1

Q2

Q3

Q4

Q1

Q2

Q3

CY08 CY09 CY10

5.0

5.5

6.0

6.5

7.0

7.5

8.0

(%)

Insurance holding (RHS) Nifty (RHS)


Exhibit 35:Holdings in Sensex

0

5000

10000

15000

20000

25000

Q3

Q4

Q1

Q2

Q3

Q4

Q1

Q2

Q3

CY08 CY09 CY10

6

7

7

8

8

9

9

(%)

Insurance holding (RHS) Sensex (RHS)


Exhibit 36:Holdings in BSE mid-cap index

0

2000

4000

6000

8000

10000

Q3

Q4

Q1

Q2

Q3

Q4

Q1

Q2

Q3

CY08 CY09 CY10

2.50

2.75

3.00

3.25

3.50

(%)

Insurance holding BSE Midcap (RHS)


Exhibit 37:Holdings in small cap index

0

2000

4000

6000

8000

10000

12000

Q3

Q4

Q1

Q2

Q3

Q4

Q1

Q2

Q3

CY08 CY09 CY10

0.5

0.8

1.0

1.3

1.5

(%)

Insurance holding BSE Smallcap(RHS)


FII flows in equity markets expected to be strongLow interest rates in US, to drive liquidity flows to IndiaUS economic recovery is still at a nascent stage with capacity utilisation at75.2% which is significantly below its historical average of 80.6%.Unemployment also remains at historically high levels at 9.8%, againsignificantly higher than its historical average of 6.3%. This would compel

the Fed to continue with its loose monetary policy for an extended period oftime to stimulate growth and ensure unemployment rates drop to morereasonable levels. Low interest rate in the US would lead to larger capitalinflows towards emerging markets like India.

Insurance companies holding in Nifty, Sensexand BSEmidcap stocks is currently at peak levels at 7.0%, 8.0%

and 3.0% while they have pared their holdings in BSE

small cap stocks, which clearly indicate their preference

towards large cap and fundamentally strong companies

with good corporate governance and paring of holding in

small cap stocks. Another important observation is that

during the peak of economic crisis when FIIs were major

sellers with a sharp drop in their holding levels, insurance

holding was almost constant. This provided much needed

support to the market


15/82



Exhibit 38:Loose monetary policy likely to continue and encourage carry trades

0.0

1.0

2.0

3.0

4.0

5.0

6.0

Q1

Q2

Q3

Q4

Q1

Q2

Q3

Q4

Q1

Q2

Q3

Q4

Q1

Q2

Q3

Q4

CY07 CY08 CY09 CY10

(%)

Source: US Fed,, ICICIdirect.com Research

Higher GDP growth to attract global capital flowsExhibit 39:Foreign portfolio flows into BRIC economies over CY05-09

6 8

26

-8

37

1210

33

-15

2120

43

19

9

28

0

6

19

-15

3

-20

-10

0

10

20

30

40

50

CY05

CY06

CY07

CY08

CY09

(bn$)

Brazil India China Russian Federation

Source: World Bank, ICICIdirect.com Research

Exhibit 40:Portfolio flows relatively high in economies with robust GDP growth trends

Foreign portfolio flows as % of GDP

-1.5

-1.0

-0.5

0.0

0.5

1.0

1.5

2.0

2.5

3.0

CY05

CY06

CY07

CY08

CY09

(%)

Brazil India China Russian Federation


The movement of FII inflow largely depends on the

strength of domestic economy, interest rate differential

and currency movements. Emerging markets like India

would continue to attract FII investments on account of

its strong GDP growth. We expect FII flows to be

robust, going ahead, as they would increase their

exposure to India mainly led by the Indian growth story

and the sluggish growth and resultant lack of

opportunities in their domestic markets


16/82



Further, India has no restrictive capital control measures

Countries such as Brazil have increased the tax on capital inflows to 6%while Thailand has levied 15% withholding tax on capital gains and interestpayments on foreign holdings of government and state-owned companybonds. India has no such restriction on capital inflows, which is an added

advantage for domestic markets.

Caveat: Flight of capital to US in short term possible but long-term trend intact

Strength in the US dollar, combined with expectations of better thanexpected growth in US markets, could lead to a temporary flight of capitalfrom Indian markets to the US. Jobless claims in the US are declining whilecorporate earnings are showing signs of traction. Further, the valuationlevel of US equities is also lower compared to emerging markets such asIndia, which is trading at comparatively higher valuations. This could lead toa temporary pullback of capital from Indian markets. However, thephenomenon is likely to be short-lived as the long-term India growth storyremains intact.


17/82



DII flows: Offers cushion on downsideInsurance: Flows into equities to remain robust on IPO offeringsIn CY10, insurance companies were net buyers of equities worth | 10419crore. Life insurance premium has grown at 19.7% in FY10. Of this, ~33%was invested in equity markets. LIC, the market leader in the life insurancesector with a share of 70.1%, has been gradually increasing its exposure in

equities from 22% in FY09 to 33% in FY10.

Exhibit 41:Insurance industrys equity investment to remain robust over FY10-12E

20000

70000

120000

170000

220000

270000

320000

370000

FY09

FY10

FY11E

FY12E

(|crore)

Total premium collections Total equity investments

Source: IRDA, ICICIdirect.com Research

Mutual funds: Struggling with regulatory changes, inflows to be mutedAssets under management of domestic mutual fund houses have beensteadily rising over the last few years. This was except FY09, whichreported a 17.4% reduction in AUM. Recently, with the change in regulationw.r.t. entry load, we have seen significant outflows from the MF industry.Going ahead, we expect inflows to be muted as the industry is stilltransiting over to new regulations.

Exhibit 42:AUM of domestic fund housesTotal AUM (%) growth

(| crores) (%) (| crores) (%) (| crores) in AUM

FY04 111478 79.8 28138 20.2 139616 -

FY05 107709 72.0 41891 28.0 149600 7.2

FY06 127161 54.8 104701 45.2 231862 55.0

FY07 196414 60.2 129974 39.8 326388 40.8

FY08 321012 63.5 184140 36.5 505152 54.8

FY09 307630 73.7 109670 26.3 417300 -17.4

FY10 424458 69.1 189521 30.9 613979 47.1

Nov-10 470500 70.7 194782 29.3 665282 8.4

Debt Equity

Source: AMFI India, ICICIdirect.com Research

Exhibit 43:Domestic savings growth can be a potential for equity flowsFY08 FY09 FY10 FY11E FY12E

GDP (| crore) 4540987 5228650 5868332 6748582 7760869

Rate of Gross Domestic Savings (%) 36.4 32.5 34.0 34.0 34.0

Savings (| crore) 1652919 1699311 1995233 2294518 2638695

(%) of Savings invested in equity markets 3.00 3.00 3.25 3.25 3.50

Savings available for equity investment (| crore) 49588 50979 64845 74572 92354Source: RBI, ICICIdirect.com Research

Redemption pressure from existing investors combined

with a drop in new fund inflows because of Sebi

regulation to remove entry load resulted in mutual fund

being net sellers to the tune of | 27981 crore in CY10.

However, any significant corrections will attract

outflows that have happened in CY10.

India has a very healthy savings rate of 33%. Out of the

total savings, ~ 3.5% is invested in equity markets,

which results in a sum of | 74572 crore. A rise in

domestic savings and enhanced risk taking ability would

result in a substantial re-allocation of funds towards

equity


18/82



Primary/secondary market inflow

IPO/FPO offerings to remain robust in CY11, backed by disinvestmentsPSU offerings raised a sum of | 49865 crore from primary markets, whichconstituted 67% of the total primary market offering of | 73938 crore. Somekey FPOs lined up in CY11 are ONGC, IOC, SAIL and Hindustan Copper,

which are expected to raise sum of ~| 51000 crore from the primary marketin CY11. This is likely to keep the domestic markets buoyant with significantparticipation from FII, DII and retail investors.

Exhibit 44:Primary market activityYear Total IPO FPO PSU Private

CY01 459 459 - 135 324

CY02 1986 1986 - 937 1049

CY03 2013 2013 - 720 1293

CY04 26964 26964 - 19008 7956

CY05 20997 11419 9579 5915 15082

CY06 24926 21561 3365 2771 22155CY07 48329 38483 9846 4764 43565

CY08 19436 19151 286 1639 17797

CY09 15899 15869 30 8816 7083

CY10 73938 42314 31624 49865 24074

CY11E 51000 - 51000 51000 -

Amount raised (| crore)

Big ticket FPO in pipeline

Company Expected Amount (| crore)

ONGC Feb-11 14000

SAIL Feb-11 15000

Hindustan Copper Feb-11 4000

IOC May-11 18000

Total 51000Source: Capitaline ,Media reports, ICICIdirect.com Research

India rating upgrade by rating agencies may lead to flush of fundsIndia currently has a BBB- rating from Fitch, which is similar to the rating ofBrazil but a notch lower than the BBB rating enjoyed by Russia and muchlower than the AA- rating enjoyed by China. India has a fairly good chanceof getting re-rated on account of strong GDP growth combined with theadherence to fiscal deficit targets. Re-rating of India would lead to strong FIIinflows.

FII Inflow- Post India rating upgrade in June

Month Net FII Inflows (| crore)

Nov-10 18,520

Oct-10 24,771

Sep-10 29,196

Aug-10 11,185

Jul-10 17,121

Jun-10 10,245

May-10 -8,630

Apr-10 9,765

Mar-10 18,834

Feb-10 2,114

Jan-10 -303


19/82



Obvious positives

The India Shining story is become well anchored even now as GDP, whichhas grown at an average of 8% per annum for the last five years, remainedresilient within the 6.5-7.5% range even in tough times of FY09 and FY10.The growth trajectory made its sharp move upwards to as high as 8.9% in

Q2FY11. This is against the world GDP, which has not moved beyond the4% to 5.3% range in the last seven years. The countrys savings rate at 33-35% in the last five years lends economy adequate strength to faceturbulent conditions and bounce back sharply too. Robust IIP over 7% inthe last four or five years, except in a recessionary environment, hasresulted in industrial GDP contribution at 20-30% of overall GDP during thesame period. Sustained credit growth at over 20% CAGR along with ITservices maintaining their momentum led to services GDP contribution inthe 50-60% range of total GDP. The Indian economy has inherent strengthto sustain GDP growth at 8.5-9% for the next few years.

India, the worlds second highest populated country, has been able toattract global players and extract benefits from its domestic consumption

boom. Its demographic profile remains the sole largest driver of itsconsumption story. Already, India has doubled its passenger vehicle salesfrom 10.2 lakh in CY05 to 21.2 lakh in YTD CY10. Cement sales have grownat 9.2% CAGR while in power it added 34079 MW between FY06-10. Evenafter the stellar performance of the last several years, Indian positives keepcontinuing

Total 49% of the dependant Indian population is in the age bracket of


20/82



India GDP growth: Strong and robust

Exhibit 45:Components of GDP : Services sector the key contributor to GDP growthFY05 FY06 FY07 FY08 FY09 FY10 Q1FY11 Q2FY11

GDP Growth 7.5 9.5 9.7 9.2 6.7 7.4 8.9 8.9

Agri, forestry and fishing 18.9 18.1 17.2 16.4 15.7 14.6 14.0 11.3

Industry 28.0 27.9 28.7 28.8 28.0 28.5 29.2 29.1

a Mining 2.9 2.6 2.6 2.5 2.4 2.4 2.4 2.3

b Manufacturing 15.3 15.3 16.0 16.2 15.6 16.1 16.3 16.7

c Electricity Gas Water supply 2.1 2.0 2.0 2.0 2.0 2.0 2.0 2.0

d Construction 7.7 8.0 8.0 8.1 8.0 7.9 8.5 8.2

Services 53.1 53.9 54.2 54.8 56.4 56.9 56.7 59.5

a Trade, Hotels, Transport & Communication 24.5 25.1 25.6 25.9 26.1 26.5 26.7 27.6

b Financing, Insurance, real est and business services 14.7 15.1 15.8 16.4 16.9 17.2 17.8 17.8

c Community Social 13.9 13.7 12.8 12.5 13.4 13.1 12.3 14.2Source: Ministry of Finance, ICICIdirect.com Research

The growth in GDP has seen its contributors taking a sharp move with shareof agriculture declining from 18.9% in FY05 to 14.6% in FY10 and that ofServices has grown from 53.1% to 56.9% over the same period.Agricultural activities, though form a larger proportion of economy hasgrown at a much lower pace of 2-4% over the years as against overall GDPgrowth of nearly 8% on an average. Within the industrial sectorcomponents, construction activity has picked up pace whereas mining haslagged behind. Strong IIP numbers are an indication of manufacturinggrowth momentum continuity. We believe, Indian economy has its inherentstrength to continue to grow at 8.5%-9% for next few years. As globaleconomic growth is expected to flourish from emerging economiesdevelopment, India a strong play in BRIC nations is expected to continueenjoying preference on account of robust GDP growth and favourable

demographics.Exhibit 46:Contribution to BRICs GDP

0

4

8

12

16

20

CY05

CY06

CY07

CY08

CY09

CY10

CY11E

CY12E

CY13E

CY14E

CY15E

(%)

45

50

55

60

(%)

India Russia Brazil China (RHS)

Source: IMF, ICICIdirect.com Research

Exhibit 47:Share of emerging economies rising in global output77 77 77 77 76 74

71 69 67 6764 63 62 61 59

8 8 8 9 910

12 1315 16

17 1819 20

21

40

50

60

70

80

CY00

CY01

CY02

CY03

CY04

CY05

CY06

CY07

CY08

CY09

CY10

CY11E

CY12E

CY13E

CY14E

CY15E

(%)

4

8

12

16

20

24

(%)

Developed as to total world BRICS as total World (RHS)


As global economic growth is expected to flourish from

emerging economies development, India a strong play in

BRIC nations is expected to continue enjoying

preference on account of robust GDP growth and

favourable demographics


21/82


22/82



Demographics favour IndiaIndia is at a critical juncture, in terms of global growth with the Indiandomestic consumption being driven by one of the youngest populations(37.2 years- median age) coupled with increasing disposable incomes andincreasing per capita income . Another important fact that would support

the domestic consumption growth would be a relatively less the dependantpopulation where majority of them is young (49% of the total 57%). Goingforward, this would further exponentially magnify consumption fromexisting levels.

Exhibit 50:Dependency ratio on working population

8

28

39

27

1925

34

49

23 21

30

21182026

26

0

10

20

30

40

50

60

India

China

Brazil

Euro

Area

Russia

USA U

K

Japan

(%)

Age dependancy ratio (Old) Age dependancy ratio (Young)


Exhibit 51:Median age of leading countries

30

34

38

42

46

50

54

58

62

US

Japan

China

India

Malaysia

South

Thailand

Indonesia H

K

Malaysia

Germany

UK

France

Italy

Russia

Spain

Hungary

Ireland

Portugal

Greece

Brazil

Australia S

A

Asia Europe ROW

(%)


Exhibit 52:GDP per capita trend (on PPP basis)

43

2

30

4

2932

46

3

33

7

3134

55

5

40

12

3641

0

10

20

30

40

50

60

USA

India

Japan

China

EuroArea

UK

in'000

$

CY05 CY09 CY15E


Exhibit 53:GDP per capita growth (on PPP basis)

-6

-3

0

3

69

12

15

18

CY02

CY03

CY04

CY05

CY06

CY07

CY08

CY09

CY10E

CY11E

CY12E

CY13E

CY14E

CY15E

(%)

USA India Japan

China Euro Area UK


Robust leading indicators- Structural consumption growth

Exhibit 54:India-China PV sales trend

0

5

10

15

20

25

CY01

CY02

CY03

CY04

CY05

CY06

CY07

CY08

CY09

CY10

(inlakhs)

0

20

40

60

80

100

120

140

(inlakhs)

India PV China PV(RHS)

Source: Bloomberg, SIAM, ICICIdirect.com Research

PV- Passenger Vehicles

Exhibit 55:India-China CV sales trend

0

2

4

6

8

10

CY01

CY02

CY03

CY04

CY05

CY06

CY07

CY08

CY09

CY10

(inlakhs)

5

10

15

20

25

30

35

40

(inlakhs)

India CV China CV(RHS)

Source: Bloomberg, SIAM, ICICIdirect.com Research

CV Commercial Vehicles


23/82



The automobile industry generally acts as a leading indicator in the path ofeconomic growth. Post recession and global slowdown, India has seen astrong rebound in the domestic market. The Indian automobile industry isbeing touted to be near an inflection point, which is expected to recount astory similar to China (Exhibit-57) (CY04) with a huge domestic demandoutburst. The increasing degree of affordability (Exhibit 57) of popular cars

is an early signal of structural demand growth. As in case of China, wherethis affordability degree grew by ~2% between CY03-06, volumes grewexponentially. India is being considered at a similar growth curve as itsaffordability has increased ~2% over the last five years and could see thestart of a structural growth in demand leading to similar volume uptrend aswitnessed by China (32.5% CAGR growth in PV sales CY04-10).

Exhibit 56:Car sales to per capita GDP trend

0

50

100

150

200

250

CY01

CY02

CY03

CY04

CY05

CY06

CY07

CY08

CY09

CY10

0

100

200300

400

500

600

700

800

India China (RHS)

Source: Bloomberg, World bank, ICICIdirect.com Research

The numbers have been rebased to 100 with base as CY00

Exhibit 57:Affordability on the rise

1915

1011

9 8

57

11911

13

0

5

10

15

20

CY03

CY06

CY10

0

5

10

15

(%)

Price/per capita China-Jetta Price/per capita India-Alto

Affordability degree -China Affordability degree-India

Source: Bloomberg, World bank, ICICIdirect.com, Research. The index has been created

considering prevalent prices of popular cars and the pre capita income ; the higher

percentage of affordability reflects increasing affordability of automobiles for a nation

Exhibit 58:Consumption trend of cement

Brazil Russia India China

Population 190 m 142 m 1.1 bn 1.3 bn

GDP per capita $9,500 $14,400 $2,700 $5,400

Urbanisation levels (%) 81 73 28 44

Cement Consumption per capita 290 kg 350 kg 180 kg 1,100 kg

Cement Consumption 55 mt ~50 mt ~210 mt ~1450 mtSource: FL Smidth, ICICIdirect.com Research

Exhibit 59:Cement production growth trend

-15

-10

-5

0

5

1015

20

25

30

FY00

FY01

FY02

FY03

FY04

FY05

FY06

FY07

FY08

FY09

(%)

Brazil Russia India* China

Source: US Geological Survey, *CMA, ICICIdirect.com Research

Though the second fastest growing economy in BRIC,

India has the lowest per capita cement consumption

and is only 0.16x the per capita consumption of China.

Cement demand has a very strong correlation with GDP

growth and grows at 1.1-1.2x of the same. As the

national policy makers are targeting Indian GDP growth

at 8-9%, such growth should translate into cement

demand growth rate of double digits annually


24/82



Infrastructure execution pick-up essential to maintain >8% GDP growth

The Planning commission has envisaged mega plans pertaining tospending in infrastructure related sectors so as to maintain and graduallymove to double-digit GDP growth. We believe the execution in the EleventhPlan has not kept pace with perception because of the global crisis in 2008and various micro issues pertaining to the power and road sector as theyform a significant portion of infra-based spending. Going into CY11, webelieve execution in the power sector will pick up pace (though targetcapacity will be missed but the achievement rate of 61.3% on a high baserate is a good indicator for things to pick up from here on). Also, ordering inthe road sector is expected to pick up post clarity in the administrativeroadblock. We believe the real kicker for infra spending will come inH2FY11. In H2FY11, the economy will be less exposed to the current issuesof tight liquidity and rising borrowing cost and regulatory hurdles.

Exhibit 60:Humungous opportunity in infrastructure sectorSector

Mid-term Review XI Plan

(US$ bn)*% Share

XII th Plan

(US$bn)% Share

Electricity (incl. NCE) 164.7 32.1 328.6 31.5

Roads and Bridges 69.7 13.6 156.4 15.0

Telecommunications 86.3 16.8 172.2 16.5

Railways (incl. MRTS) 50.2 9.8 100.2 9.6

Irrigation (incl. WD) 61.6 12.0 122.8 11.8

Water Supply and Sanitation 27.9 5.4 55.7 5.3

Ports 10.2 2.0 20.3 1.9

Airports 9.0 1.8 18.0 1.7

Storage 2.2 0.4 4.5 0.4

Oil & Gas Pipelines 31.8 6.2 63.5 6.1

Total 513.6 100.0 1042.19 100.0Source: Planning Commission of India, ICICIdirect.com Research

From a government dominated capex in last few decades the infrastructuresector has been opened up to private participation, has catapulted thecontribution of infrastructure sector to GDP from 4.5% in FY05 to 7.9% inFY11E. This we believe will inch up to 9% in FY13, given that a lot of powercapacity and road projects will be added by the private players in the next3-5 years time.Exhibit 61:Infrastructure expenditure as % of GDP to inch up to 9% by CY13E

50000

150000

250000

350000

450000

550000

650000

FY05

FY06

FY07

FY08

FY09

FY10P

FY11E

FY12E

FY13E

(|crore)

2

4

6

8

10

(%)

GCF in infrastructure Contribution to GDP (RHS)

Source: Planning Commission of India, ICICIdirect.com Research

ncreasing share of private infra expenditure

% X Plan FY08 FY09 FY10P FY11E

Govt. share 75 66 66 65 63

Pvt. share 25 34 34 35 37

The total share of private investment in infrastructure isexpected to increase from 25% in X Plan to ~36% in XI Plan

~30% in the original estimates) led by higher than

anticipated private expenditure in power and telecom sector

n the first half of XI Plan.


25/82



Exhibit 62:Share of credit to infrastructure funding on the rise

6

22

32

17

62

38

2721

36 35

43

0

20000

40000

60000

80000

FY00

FY01

FY02

FY03

FY04

FY05

FY06

FY07

FY08

FY09

FY10

(|cro

re)

0

20

40

60

80

(%

)

Infrastructure % of Industry (RHS)

Source: RBI, ICICIdirect.com Research

Exhibit 63:However medium term challenges persists

500

1500

2500

3500

4500

5500

6500

7500

8500

9500

FY01

FY02

FY03

FY04

FY05

FY06

FY07

FY08

FY09

FY10

FY

11YTD

FY11E

(km)

-

2

4

6

8

(km)

Completed Awarded Completed/day (RHS)

Set to miss targets

Source: NHAI, ICICIdirect.com Research

Exhibit 64:Power capacity addition rising can still be better.

72.3

96.2

47.253.8 51.561.3

0

10000

2000030000

40000

50000

60000

70000

80000

90000

VIPlan

VIIPlan

VIIIPlan

IXPlan

XPlan

XIPlan

MW

0

20

40

60

80

100

120

(%)

Target Achievement Target achieved (RHS)

Source: Planning Commission, ICICIdirect.com Research

Bank credit to infrastructure as a % of total credit to

industry has grown up considerably over the last decade

from ~22% in FY01 to ~43% in FY10 indicating the

growing emphasis on infrastructure development. We

expect infrastructure lending to grow strongly over the

next few years, fuelled by the aggressive project rollout

by the public and private sectors

Award of road contract by NHAI is expected to pick up in

CY11 post clarity on appointment of chairman.

Though India will miss its capacity addition targets for

11th Plan, total capacity added will be highest ever in the

plan period history. Even going into 12th plan we believe

that robust capacity addition will be added in FY13 as all

the slipped capacities of 11th plan will get commissioned


26/82



No concern over government finance

Revenue receipts for April-September 2010 have grown 63% YoY andachieved almost the 58% target for FY11. This was led by higher non-taxrevenues from 3G and BWA auction (| 106,000 crore) while tax revenueshave grown by only 26% for the same period and achieved only the 44%

target for FY11.Out of the targeted capital receipts of | 45,000 crore, | 40,000 crore is to begenerated through disinvestment. With two mega FPOs of SAIL (FPO size:~| 15,000 crore) and ONGC (FPO size: ~| 14000 crore) to come on streamby March 2011. We expect the government to meet the disinvestmentstarget for FY11.

Exhibit 65:Indias fiscal positionParticulars BE

(| crore) 2010-11 2009-10 2010-11 YoY (%)

Revenue Receipts 682,212 244,471 398,234 58.4 62.9

Gross Tax revenue 746,651 258,880 324,397 43.4 25.3

Less: NCCF 3,560 NA NA

States share 208,997 73,211 90,982

Centre's net tax revenue 534,094 185,669 233,415 43.7 25.7

Non-Tax Revenue (note 1) 148,118 58,802 164,819 111.3 180.3

Capital Receipts

Non-Debt Capital Receipts 45,129 6,602 6,491 14.4 -1.7

Recovery of Loans 5,129 2,302 4,256

Other Receipts (note 2) 40,000 4,300 2,235

Borrowings & Other Liabilities 381,408 197,775 133,252 34.9 -32.6

Total Receipts 1,108,749 448,848 537,977 48.5 19.9

Non-Plan Expenditure 735,657 322,070 368,270 50.1 14.3

Revenue Account 643,599 301,291 328,308

Interest payments 248,664 86,669 102,779

Major Subsidies (note 3) 53,089 NA NACapital Account 92,058 20,779 39,962

Plan Expenditure 373,092 126,778 169,707 45.5 33.9

Revenue Account 315,125 108,163 144,847

Capital Account 57,967 18,615 24,860

Total Expenditure 1,108,749 448,848 537,977 48.5 19.9

Revenue Expenditure 958,724 409,454 473,155

Capital Expenditure (note 4) 150,025 39,394 64,822

Revenue Deficit 276,512 164,983 74,921 27.1 -54.6

Fiscal Deficit 381,408 197,775 133,252 34.9 -32.6

Primary Deficit 132,744 111,106 30,473 23.0 -72.6

Note 1: Non tax revenue for Apr-Sep 11 includes revenue from 3G and BWA of over |106,000 cr

Note 2: Disinvestment proceeds till Sep 10 are|2,023 crore as against |4,300 crore last year

Note 4: |64,822 cr includes one time expenditure on recapitalisation of PSUs |9,680 cr (approx)

Actuals (Apr-Sep) As % of 2010-

11 BE

Note 3: Major subsidies planned for FY11 include fertilizer subsidy of |49,981 cr (LY |52,980 cr) and Petro Subsidyof |3,108 cr (LY |14,954 cr)

Source: Ministry of Finance, ICICIdirect.com Research

With prevailing trends in the receipts and expenditure there would not beany slippage on the deficit side in FY11. However, it is to be kept in mindthat more focus has been put on non-tax revenues (3G auction,disinvestments) compared to tax revenues to keep the deficit at thedesirable level of 5.5% this year.

Fiscal deficit for the year is estimated at | 381408 crore

i.e. 5.5% of GDP


27/82



We may see other big disinvestment plans of IOC and Hindustan Coppergetting postponed to next year in order to keep the balance on fiscalposition for this year and next year. We foresee a substantial reduction innon-tax revenues next fiscal as this years non tax revenue includedrevenue generated through the 3G and BWA auction.

Exhibit 66:Governments disinvestment agendaCompany Month of Issue

Issue Size (|

cr.)

Amt raised by Govt

(| cr.)

SJVN May-10 1,063 1,063

Engineers India Jul-10 960 960

Total Raised till Sep-10 [A] 2,023

Coal India Oct-10 15,199 15,199

PowerGrid Nov-10 3,721 3,721

MOIL Dec-10 1,237 1,237

SCI Nov-10 1,164 580

Total Raised till Dec-10 [B] 20,737

SAIL Jan-11E 15,000 7,500

ONGC Mar-11E 14,000 14,000Hindustan Copper NA 4,000 4,000

IOC NA 18,000 9,200

Further tobe raised in FY11E [C] 34,700

Total estimated amount for FY11 [A+B+C] 57,460

Planned by Govt 40,000

Source: Department of Disinvestment, ICICIdirect.com Research

We may see other big disinvestment plans of IOC and

Hindustan Copper get postponed to next year in order to

keep the balance on fiscal position for this year and next

year


28/82



Global GDP growth: Asia to lead western laggardsThe International Monetary Fund (IMF) has forecasted the global GDPgrowth of 4.2% in 2011 mainly backed by developing Asian economies andother emerging countries.For advanced economies, aggregate GDP growth is expected at 2.2% in

2011 mainly contributed by newly industrialised Asian economies like HongKong, Korea, Singapore and Taiwan. Major advanced nations (G7) and theEuro area are estimated to grow at 2% and 1.5%, respectively, in 2011 asagainst respective growth estimates of 2.5% and 1.7% in 2010. For the USand UK, IMF has forecasted growth of 2.3% and 2% as against respectivelikely growth rates of 2.6% and 1.7% in 2010. Even after the recent recoverypost the credit crisis, developed nations like the US and Euro area willcontinue to face headwinds on the back of concerns like highunemployment and household debt hangover. For Japan, growth isexpected at 1.5% in 2011 as against the estimate of 2.8% in 2010.Exhibit 67:GDP growth A studyReal GDP growth (% YoY) CY05 CY06 CY07 CY08 CY09 CY10 CY11E CY12E CY13E CY14E CY15E

Advanced Economies

United States 3.1 2.7 1.9 0.0 -2.6 2.6 2.3 3.0 2.9 2.8 2.6

United Kingdom 2.2 2.8 2.7 -0.1 -4.9 1.7 2.0 2.3 2.4 2.5 2.6

Eurozone 1.7 3.1 2.8 0.4 -4.1 1.7 1.5 1.8 1.8 1.8 1.7

Japan 1.9 2.0 2.4 -1.2 -5.2 2.8 1.5 2.0 1.9 1.8 1.7

Emerging Economies

Brazil 3.2 4.0 6.1 5.1 -0.2 7.5 4.1 4.1 4.1 4.1 4.1

Russia 6.4 8.2 8.5 5.2 -7.9 4.0 4.3 4.4 4.2 4.1 4.0

India 9.2 9.7 9.9 6.4 5.7 9.7 8.4 8.0 8.2 8.1 8.1

China 11.3 12.7 14.2 9.6 9.1 10.5 9.6 9.5 9.5 9.5 9.5Source: IMF, ICICIdirect.com Research

For the emerging and developing economies, growth is expected at anaggregate rate of 6.4% in 2011 backed by developing Asian economies likeIndia and China. Aggregate GDP growth of developing Asia is estimated at8.4%. For India and China, GDP growth is expected at 8.4% and 9.6%respectively, in 2011 as against their respective growth estimates of 9.7%and 10.5% in 2010. For Brazil and Russia, IMF has forecasted respectivegrowth rates of 4.1% and 4.3% in 2011 as against 7.5% and 4% in 2010.With the growth estimates so strong for emerging economies, the GDPcontribution of the same to the World GDP is also going to increase. Theemerging and developing economies contributed 31% to the total WorldGDP in 2008 and this is expected to increase to 35% in 2011 and 36% in

2012.


29/82



Exhibit 68:Contribution to world GDP, emerging markets to be clear winner68.9 68.9 66.5 65.2 64.1

31.1 31.1 33.5 34.8 35.9

0

10

20

30

40

50

60

70

80

CY08

CY09

CY10E

CY11E

CY12E

(%)

Advanced economies Emerging and developing economies


Also, the GDP contribution of India and China to the total GDP of emerging

and developing economies is estimated to increase. India and Chinacontributed 6.6% and 23.8% to the total GDP of emerging and developingeconomies, respectively, in 2008 while the contributions are estimated toincrease to 7% and 28.3%, respectively, in 2011 and further to 7.1% and28.9%, respectively, in 2012.

Exhibit 69:Contribution to GDP of emerging economies

6.6 6.9 6.9 7.0 7.1

23.8

27.8 27.7 28.328.9

0

5

1015

20

25

30

35

CY08

CY09

CY10E

CY11E

CY12E

(%)

India China


Debt: Sovereign defaults to haunt us in 2011

Exhibit 70:Government gross debt to GDP

0

50

100

150

200

250

US

UK

Eurozone

Japan

Brazil

Russia

India

China

(%)

CY08 CY09 CY10E CY11E Source: IMF, ICICIdirect.com Research

High debt/GDP ratios of peripheral EU countries will create

bouts of volatility in global equity markets in CY11 as $940

billion worth of government debt in the EU zone will come

up for rollover/refinancing


30/82



Exhibit 71:External debt to GDP for CY09

97.5

64.0

161.2

41.2

17.6

37.9

19.37.6

0

20

40

60

80100

120

140

160

180

US

UK

Eurozone

Japan

Brazil

Russia

India

China

(%)

Source: CIA world fact book, ICICIdirect.com Research


31/82



Show stoppers - DomesticIndias growth fortunes appear to be well balanced and rounded comparedto its peers like Brazil and Russia, which are underpinned by commodityprices or China, whose growth hinges on global recovery since it is a netexporter. Indian equity markets may be well anchored to the domesticconsumption story with sustainable long-term structural positives.However, dwindling of risk appetite can seep across asset classes andmarkets and India is no exception to it.Deterioration in risk appetite could also arise from other drivers ofeconomic growth viz. interest rates, foreign liquidity, exchange rates, spikein commodities including crude, geopolitical tension and world tradeturning negative among others.Inflation is one of the persistent fears and is ready to rub us off on thenegative side and puncture Indias consumption appetite. Statistically,inflation may come down to the RBIs comfort zone of 5.5-6% as a highbase begins playing out from mid-January to June. However, structurallyinflation would remain in the system. Also, a higher-than-anticipated spike

in crude prices (up 22% in 6M to US$93.5 bbl) and target policy responsemay pose concerns in terms of higher interest rates (repo likely to increase100 bps to 7.25% from 6.25%) and, consequently, higher borrowing costfor corporates (likely to inch up by 100 bps). Also, earnings of midcaps andsmall caps are more susceptible to inflation and interest rates due to limitedbargaining power and difficulty in tapping funds at an efficient cost.

Concerns on other commodities such as coal (up 31%), copper (up 33%)and iron ore (up 55%) may evolve on higher-than-expected tightening byChina or stronger dollar weighing on dollar denominated commodities. Weexpect crude among commodities to pose the biggest risk in terms ofunder-recoveries to shoot up to | 118500 crore (at $100 bbl). This will

disturb the fiscal deficit (extra burden of 0.4% of GDP of FY12E) and mayalso derail the PSU disinvestment pipeline of | 51,000 crore (ONGC and IOCcontributing 63% to the pie).

In addition, there are geopolitical issues between South Korea - NorthKorea, Iran Israel, border disputes with China or Chinese progressivestance on diversion of Brahmaputra river by building dams (ArunachalPradesh river water flow to dip by 40%), engaging in a low level militaryconflict with Pakistan in response to terrorist attacks like Mumbai as againstthe earlier policy of handing it through dialogue and Maoists posing a threatto internal security or investments in areas under their influence (WestBengal, Andhra Pradesh, Chhattisgarh, Jharkhand and Orissa hold morethan 40% of the mineral wealth and investments of ~ | 230,255 crore are

under various stages of investment and planning).The extended Parliament deadlock in the wake of persistent opposition oran unfavourable response to the UPA in forthcoming state elections in CY11and consequent delay in passing of the Union Budget and key reforms are arecent set of worries for the equity markets. FDI in sectors like retail,insurance, GST implementation, a further probe in telecom in the wake of anotional loss of | 1.78 lakh crore, mining policy, environment concerns, etcare awaiting government action. All these events have the potential to takethe sheen off India's image as an attractive investment destination.

Currency is another factor, which has a significant

bearing on the health of segments like the oil import bill of

| 2744 billion in FY10, IT (sector derived ~90% of

revenues in CY10 from exports), textile and apparel

(exports of US$26 billion, 33% to total FY10E revenues)

and pharma (exports constituted 48% of total revenues of

| 105000 crore) among others

Another addition to the worry for Indian equities is recent

corporate governance issues, which could shake investor

sentiment in the near to medium term. Government policy

responses to these would be pertinent as widespread

corruption may not receive the usually comfortable

stance of being a part & parcel of investing in India


32/82



Inflation: getting structural in natureExhibit 72:Inflation showing early signs of cooling down

-15

-10

-5

0

5

10

15

20

25

Apr-05

Oct-05

Apr-06

Oct-06

Apr-07

Oct-07

Apr-08

Oct-08

Apr-09

Oct-09

Apr-10

Oct-10

(%)

WPI YOY Fuel YoY Primary Articles YoY Mfg YoY


Inflation from primary articles has started cooling off. However, within thesame, non-food articles are showing inflationary expectations firming upwith a rise from 14.3% six months back to 23.2% in November 2010.Food inflation is expected to stay around 9.5-10% by March 2011. However,post that we may see 7-8% food inflation considering the base effect.

Higher crude prices may lead to fiscal situation deterioration

Crude oil forms a significant part of Indias total import bill. Over the lastfew years (FY06-FY09), increase in crude oil prices has led to higher importbill. The net import value of petroleum products has increased from |

1530.66 billion in FY06 to | 3010.19 billion in FY09 (CAGR of 25%). Duringthe same period, average crude oil prices (Indian basket) have increasedfrom US$55.72 per barrel in FY06 to US$83.57 per barrel in FY09. However,in FY10, on account of cooling off of crude prices to US$69.79 per barrel (afall of 16% YoY), the net value of imports has declined by 9% to | 2744.38billion. The import bill is expected to remain high as crude oil prices areexpected to sustain at higher levels (our estimates US$80-85).Exhibit 73:Rising crude prices may hurt fiscal balances

55.7262.46

79.2583.57

69.79

20

30

40

50

60

70

80

90

FY06

FY07

FY08

FY09

FY10

($/barrel)

500

1000

1500

2000

2500

3000

3500

(|billion)

Crude Net Import Value of Petroleum products (RHS)

Source: PPAC, ICICIdirect.com Research

Inflation may statistically come down to the RBIs comfort

zone of 5.5-6% as a high base begins playing out from mid

January to June. However, structurally inflation would

remain in the system

Higher crude oil prices impact Indias current account

deficit. India imported nearly 75% of the domestic crude

oil requirement in FY10. Going ahead, with high GDP

growth and rising crude, prices are set to go up in CY11

unless crude changes its course


33/82



Exhibit 74:Copper reaching higher levels

7000

7500

8000

8500

9000

Q1

Q2

Q3

Q4

CY10

($/tonne)

Source: Company, ICICIdirect.com Research

Average of whole quarter is considered

Exhibit 75:Crude rises above $90

74

78

82

86

Q1

Q2

Q3

Q4

CY10

($/

barrel)

Source: Company, ICICIdirect.com Research

Average of whole quarter is considered

High energy prices to worsen trade balance

Exhibit 76:Indias BOP Higher capital inflows cushion widening current account deficitFY11

Q1 Q4 Q3 Q2 Q1 Q4 Q3 Q2 Q1 Q4 Q3 Q2 Q1

GDP Nominal 351150 360800 336030 291410 281690 268430 284850 268490 289750 311090 304960 262340 257460

Exports 53726 52419 47062 43518 39164 39820 39436 53630 57454 52549 40985 38273 34356

Imports 87920 83911 78135 72646 64799 54418 73484 92752 82731 74895 67038 59510 56346

Trade Balance -34194 -31492 -31073 -29128 -25635 -14598 -34048 -39122 -25277 -22346 -26053 -21237 -21990

Current Account Deficit -13732 -12998 -12187 -8773 -4454 4747 -11668 -12580 -3270 -1526 -4531 -4300 -6680

Capital Account Balance 18385 16088 14694 18798 4019 1408 -6114 7099 4853 26516 31017 33533 17880

FDI 3150 3193 3921 6495 6121 3185 446 4903 8967 6350 2041 2808 2658

FII 4605 8765 5685 9677 8268 -2693 -5820 -1311 -4211 -3735 14851 10876 7458

Net Capital Inflows 16049 15253 14077 18299 3923 631 -5122 6581 4502 25676 30452 33065 17639

Overall BOP 3741 2141 1767 9418 115 300 -17881 -4734 2235 24990 26738 29236 11200

Trade Balance/GDP -9.7 -8.7 -9.2 -10.0 -9.1 -5.4 -12.0 -14.6 -8.7 -7.2 -8.5 -8.1 -8.5

CAD/GDP -3.9 -3.6 -3.6 -3.0 -1.6 1.8 -4.1 -4.7 -1.1 -0.5 -1.5 -1.6 -2.6

Net Capital Flows/GDP 5.2 4.5 4.4 6.5 1.4 0.5 -2.1 2.6 1.7 8.5 10.2 12.8 6.9

Growth: Exports YoY 31.6 19.3 -18.9 -31.8 -24.2 -3.8 40.1 67.2 47.2 32.5 20.2 15.8 16.7

Growth: Imports YoY 54.2 6.3 -21.7 -21.7 -27.3 9.6 55.9 46.8 54.2 41.3 22.5 20.9 14.7

USD million

FY10 FY09 FY08


Higher capital account surplus helped by FII inflows are compensating forthe higher and sustained current account deficit (3.6% of GDP).Deterioration in FII will pose problems for the rupee as higher outflows willlead to rupee depreciation while domestic liquidity could get tighter.

Exhibit 77:Increasing imports worsen trade balance- especially rising crude prices

-60000

-40000

-20000

0

20000

40000

60000

80000

100000

Q1

Q2

Q3

Q4

Q1

Q2

Q3

Q4

Q1

Q2

Q3

Q4

Q1

Q2

Q3

Q4

Q1

Q2

Q3

Q4

Q1

Q2

Q3

Q4

Q1

Q2

Q3

Q4

Q1

FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11

USDmillion

Exports Imports Trade Balance



34/82



Currency : Situation getting perplexingExhibit 78:Movement of various currencies

-20

-10

0

10

20

30

CY99

CY00

CY01

CY02

CY03

CY04

CY05

CY06

CY07

CY08

CY09

CY10

(%)

INR EUR JPY CNY GBP


Geo-political concern

Maoist- Investment in Naxal areaThe Naxalite problem is biggest internal security threat for the country.Naxalites are active across ~220 districts in 20 states of India. One of themajor reasons for this movement is rich mineral reserves in the RedCorridor. In Chhattisgarh and Jharkhand alone, more than US$1 trillion ofproven reserves await extraction.The Naxal problem could be one of the biggest for fresh and existinginvestments by metal and mining companies operational in these states.

Investments of ~| 1,30,000 crore by the metal industry are lined up in thenext five or six years. Simultaneously, investment by power utilities underultra mega power projects (UMPPs), which would be worth ~ | 1,20,000crore, could face delays due to increasing militarisation of Naxalites.Exhibit 79:Maoist insurgency to impact mineral rich regions in the country

Source: Wikipedia, ICICIdirect.com Research

Currency volatility to impact IT, pharma, oil &gas and metals

Indias share of exports in GDP has risen to 14.7% in FY10

from 9.4% in FY02. Further, share of software exports in

overall exports has also risen to 27.27% in FY10 vs.

15.97% in FY01-02. An appreciating rupee makes Indian

exports expensive while material volatility of the Indian

rupee against a basket of currencies (US dollar, British

pound, euro and yen) could affect the operating

performance of information technology, pharma, oil & gas

and metal companies

Investment in red zone

States and companies Investment (| crore)

Orrisa

Sterlite Industries 3419

Tata Steel 27000

Chhattisgarh

Sterlite 1194

SAIL 5384

Tata Steel 22500

Jharkhand

SAIL 1758

Tata Steel 54000

West Bengal

JSW 15000

Total 130255


35/82



State elections in CY11India will be facing elections in four major states in India Tamil Nadu, WestBengal, Assam, Kerala and one Union Territory of Puducherry. Theseelections will not only be a referendum on the respective state governmentsbut also on the policies and governance of the central government.We believe unfavourable result in Tamil Nadu and West Bengal for the

Congress and allies could adversely impact the aggressive disinvestmentpolicy and reformist policies (decontrol on oil prices and other measures) infuture. Any deadlock with the DMK and Trinamool Congress after theelection could weaken the numbers of the government in the Lok Sabha,which could create a possible new equation between UPA and Left Parties.This would bring populist measures and, thereby, could haunt growth.

Parliament stalemateThe only bill passed in the winter session of Parliament was for additionalspending of about US$9.8 billion to ensure the functioning of government,including interest payments on government debt and subsidies on food andfuel. Important bills like Direct Taxes Code Bill, Foreign Educational

Institutions (Regulation of Entry and Operations) Bill, Companies Bill, LifeInsurance Corporation (Amendment) Bill, introduction of goods andservices tax and much-awaited National Biotechnology RegulatoryAuthority of India Bill (NBRA Bill) could not make it to Parliament for its finalapproval. Parliament ended its winter session without doing any work.We believe a stalemate between the treasury and opposition benches overthe 2G corruption row would continue to extend till Budget session andimportant bills would remain unattended.

Exhibit 80:Current Lok Sabha compositionUPA NDA Other parties

INC 206 BJP 116 Left Parties 24

DMK 18 JD(U) 20 SP 23AITC 19 AGP 1 BJD 14

NCP 9 JMM 2 AIADMK 9

RJD 4 SAD 4 TDP 6

JKNC 3 SS 11 KEC(M) 1

JD(S) 3 TRP 2 MDMK 1

BSP 21 ML 1

NPF 1

SDF 1

AUDF 1

INDP 21

Total 283 Total 156 Total 103

Source: Election commission of India, ICICIdirect.com Research

Exhibit 81:Fallback plan of UPAUPA NDA Other parties

INC 206 BJP 116 Left Parties 24

NCP 9 JD(U) 20 SP 23RJD 4 AGP 1 BJD 14

JKNC 3 JMM 2 TDP 6

JD(S) 3 SAD 4 KEC(M) 1

BSP 21 SS 11 MDMK 1

Left Parties 24 TRP 2 ML 1

AIADMK 9 NPF 1

SDF 1

AUDF 1

INDP 21

DMK 18

AITC 19

Total 279 Total 156 Total 131 Source: Election commission of India, ICICIdirect.com Research

Political unrestThe political situation in Andhra Pradesh is also creating jitters for thecentral government where agitation for Telangana has gatheredmomentum. The Sri Krishna committee on Telangana (whether or not aseparate Telangana state should be carved out of Andhra Pradesh) set tosubmit its report to the central government by December 31, 2010. If theagitation continues then it could haunt the economic activity in the statesfor months. We believe industries present in the state like infrastructure,

construction and pharma could get negatively affected by the politicalunrest in the state.

Forthcoming election

West Bengal May-June 2010

Kerla May-June 2010

TamilNadu May-June 2010

Pondicherry May-June 2010

Assam May-June 2010


36/82



Performance based incumbencyIn the last 10 years, we have witnessed performance based electoral results.Those governments, which have performed and focused on development,have come back to power with an even better mandate. Bihar Assemblyelection results in 2010 are the best example of the same. In Bihar, morethan 6,800 km of roads have been re-laid and 1,600 bridges and culverts

constructed in the last four years. Despite three years of floods followed bya year of drought, 'backward and benighted' Bihar reported a miraculousfigure of ~11% GDP growth, second only to Gujarat. Automobile sales inthe state grew 45% in 2009, at a time when sales had dipped 20-25% inseveral other states during the economic slowdown. Cement inflow to thestate went up 18% to 51 lakh tonnes in 2008-09. this is an indicator of theconstruction boom.

Exhibit 82:Bihar Election resultsParty CY05 CY10 Gain/Loss

JDU 88 115 27

BJP 55 91 36

RJD 54 22 -32

LJP 10 3 -7

Congress 9 4 -5

Others 27 8 -19Source: ECI, ICICIdirect.com Research

Exhibit 83:Average GDP growth(%) 2000 -2004 2004 -2009

Bihar 4.5 12.4

Chhattisgarh 6.1 9.7

Jharkhand 1.9 8.5

Madhya Pradesh 1.9 6.6

Orissa 4.8 10.2

Uttar Pradesh 3.3 6.7

Source: CSO, ICICIdirect.com Research

Brahmaputra river Dispute between India and ChinaThe Indo-China water resources problem remained a consistent issue oftension between the two countries. Any effort by the Chinese governmentto divert water resources of the Brahmaputra River away from India couldworsen the situation for the North Eastern States in India. According toNational Technical Research Organization (NTRO), China started 24 new

projects along the Brahmaputra River in 2010 as against six a year ago.China has only 8% of the worlds fresh water to meet 22% of the worldspeople and scattered water resources can get further compounded.

Terrorist attack - Low level conflictAny major terrorist attack in India could probably result in a moreaggressive military response from India as against the cold response wehave seen earlier. Indias plans to build 100 warships in the next decade orthe Indo-US defence deal (US$3.5 billion) for 10 C-17 Globe mastertransport aircraft can be seen as its preparedness for any low-level conflict

Delay in policy reforms

IFRSPhased IFRS convergence implementation will be rolled out from April 2011through 2014 with the first phase in April 2011 covering the Nifty andSensex companies and all Indian companies listed outside India or having anetworth greater than |10 billion. A possible delay is expected due toimplementation hurdles.

FDI in multi-brand retailThe issue still remains unanswered despite the DIPP releasing a discussionpaper seeking feedback and setting up a panel on the same.

InsuranceThe IRDA will be coming out with health insurance guidelines shortly inorder to regulate the segment, thus making the process more transparent.

GSTA lack of consensus will lead to a delay in GST roll out missing out on the

deadline of April 1, 2011.

Between 2004 and 2009 most laggard states have

clocked 6-12% growth. We believe continuous faster

pace of growth in these states would ensure Indias GDP

growth is not only consistent at 8-9% but also to remain

inclusive

Hydro Power Projects in Arunachal Pradesh

MW

Potential 48000

Project Under Process 4412

Niare 800

Nalo 360

Naba & Oju-II 1000

Dengser 552

Oju-I 700

Others 1000

Government Awarded 5600

NHPC 2000

KSK Energy 2000

Jindal+HDPC 1600It is estimated that the Brahmaputras hydro power

potential is at 48,000 MW. This constitutes as much as

30% of the total hydropower reserves of India and less

than 3% of this has yet to be harnessed. We believe

Chinas plans to divert water resources could adversely

affect ongoing power projects in Arunachal Pradesh


37/82



Show stoppers - GlobalYear 2010 has been a year of uneven pain across countries with the US andEuro region maintaining accommodative liquidity and ultra low policy rates(0-0.25%) to revive their economies. Emerging economies, on the otherhand, maintained strong growth but policymakers here faced challenges interms of unabated inflation and capital inflows induced by liquidity

threatening fiscal stability. In CY10, good economic growth and ampleliquidity yielded modest returns across various classes.In CY11, equity and other asset classes globally may have surprises in storein terms of gauging liquidity. The consensus went wrong in terms ofexpected tightening in H2CY10. Now the consensus is formed thattightening is unlikely to happen in CY11. Any surprise on this front posesthe biggest risk to various asset classes.US QE1 (US Fed B/S expanded to $1.7 trillion from $500 billion) achievedthe intended objective of soothing the markets after liquidity chokedmarkets including the US housing sector. The US QE2 (Fed B/S increasingby another $600 billion to $2.3 trillion) is yet to achieve its intended effect of

revival of capex spending by US corporates, consumption revival and lowerunemployment in US among others. We are still witnessing a littlehesitation in embracing a full fledged capex cycle as US corporates are stillsitting on cash and short-term investments of US$1.4 trillion as on Q3CY10.The more inclusive U6 unemployment figures stand at 17% in Nov 10compared to 17.2% in Nov 09 indicating that workers are forced to takelower paying part-time jobs due to unavailability of full-time jobs.

The EU peripheral economies continued to suffer from sovereign debtissues and are the key risks to global recovery. Already, Greece and Irelandhave received bailouts in CY10. Portugal and Spain are likely to be next onthe block for potential bailouts while opinion is still divided on the fortunes

of Italy and Belgium. It is estimated that $920 billion will be required by thetotal Euro zone for refinance or repayment in CY11. Out of these, countrieslike Spain, Greece, Belgium, Portugal and Italy face redemption pressure tothe tune of $209 billion, $68 billion, $103 billion, $43.3 billion and $409billion, respectively. We believe Japan with its high debt/GDP ratio of225.9% in October 2010 as per IMF and an ageing population may emergeas a medium-term problem. This would pan out as its economy continuesto limp and higher dependent population eats into its own savings forcingthe government to replace domestic debt with external debt. This would bea costly affair.

China, a global growth champion, is struggling with 28-month high inflationof 5.1% in November 2010 and is adopting aggressive policy measures(lending rates hiked 5.81%, further 50 bps consensus increase built in) totame growth and prevent the economy from overheating. This is causingjitters for global markets as Chinese growth could taper off due to sluggishglobal demand and an uncertain domestic outlook.

Changes in commodity prices and a higher interest and inflation rates areother potential risks for the global economy. We believe crude and goldcould be potential sweet spots for bubble creation. Crude, owing torestricted supply, higher OI build up (OI at 1.4 million contracts) andincreased demand from OECD regions like China and India and looseliquidity can derail the global economic growth momentum. In addition,gold (up 26% YoY) is eyed upon as an indispensable asset in the portfolio

due to erosion of confidence in paper a

icicidirect_strategy2011_product

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