India Outlook - Nomura

ANCHOR REPORT
India outlook 2012

EQUITY RESEARCH
Rolling back the clouds
January 13, 2012 Research analysts India Strategy Prabhat Awasthi - NFASL prabhat.awasthi@nomura.com +91 22 4037 4180 Nipun Prem - NSFSPL nipun.prem@nomura.com +91 22 4037 5030 Sanjay Kadam - NFASL sanjay.kadam@nomura.com +91 22 4037 4187 And the India Research Team
Macro risks near term but largely discounted, see much improved second half
We expect growth in India to stay slow, inflation to slowly ease, the rupee to be weak near term and rate cuts to happen with a lag. In this environment, we prefer banks and exporters such as IT and pharma to capital goods and autos. We are also underweight the consumer sector. We would play the investment cycle through cement rather than infrastructure. Our top picks are SBI and Axis Bank on a more benign rate environment, and exporters like Infosys and Lupin on the weak rupee. We like Power Grids regulated return profile. Key analysis in this anchor report includes:
Outlook for economic growth and the investment cycle Why we expect the rate-cutting cycle to be back-ended in 2012 if
further rupee pressure disrupts the fall in inflation momentum capital flows and Europe through the year
A look at the near-term currency headwinds due to concerns about How valuations stack up historically. We see 15-20% market upside
See Appendix A-1 for analyst certification, important disclosures and the status of non-US analysts.
India outlook 2012

EQUITY STRATEGY
EQ U I T Y R E S E A R C H
ANCHOR REPORT: Rolling back the clouds
January 13, 2012
Macro risks near term but largely discounted, see much improved second half
Macro risks near term, but largely discounted; we see a much improved 2H Taking stock of Indias macroeconomic variables today makes for depressing reading. Policy inaction, rising rates and an adverse global environment have taken a toll on growth. A fragile external account has caused the rupee much distress, particularly against a backdrop of volatile global risk sentiment. Politics and policy continue to disappoint and populism has elevated the fiscal deficit. Anchor themes The backdrop for equities in 1H12 would be slowing growth, gradually falling inflation, a weak rupee and an improving rate environment. Our key stock picks are the rate cyclicals, SBIN and AXSB, and exporters, INFO and LPC. We also like PWGR as a defensive regulated utility.
Research analysts India Strategy Prabhat Awasthi - NFASL prabhat.awasthi@nomura.com +91 22 4037 4180 Nipun Prem - NSFSPL nipun.prem@nomura.com +91 22 4037 5030 Sanjay Kadam - NFASL sanjay.kadam@nomura.com +91 22 4037 4187 And the India Research Team
We start 2012 against this backdrop. The bad news is that not much
is likely to change in the 1H of this year. The sharp depreciation of the rupee on global cues has hijacked inflation. India has to fund its high current account deficit; there are also large debt repayments to contend with. This is likely to create growth and currency headwinds as capital inflows are constrained by the ongoing European crisis.
The good news is that these headwinds are temporary and are
likely to dissipate in 2H12. Capital constraints should ease as slower growth and a weaker rupee rein-in the current account and debt repayments run their course. Cooler growth and range-bound global commodity prices are likely to accelerate the downtrend of inflation. The rupee could well appreciate on these cues. Growth may well remain subpar as the impact of rate cuts lifts the economy with a lag. However, we believe India will continue to enjoy high growth differentials. With the market earnings multiple at a 23% discount to its 5-year average, market valuations are fairly pricing in the negative scenario, in our view. Growth plays and domestic cyclicals have been punished, while strong cash flows and consumer-facing companies have been rewarded. There could be some risk to earnings, but no more than 5%, we think. We acknowledge that the positive dynamics could well take about six months to kick in. However, we could well move towards a more benign rate environment in this period. The backdrop for equities in the 1H12 is likely to be slowing growth, gradually falling inflation, weak rupee and a peaking rates cycle. We prefer banks and exporters (IT and pharma). We are underweight capital goods, infra & construction, autos and global cyclicals.
Fig. 1: Stocks for Action
Stock State bank of India (SBIN IN) Axis Bank (AXSB IN) Infosys Technologies (INFO IN) Lupin (LPC IN) Power Grid (PWGR IN)
Source: Nomura research; pricing as of 6 Jan
Rating Buy Buy Buy Buy Buy
Price 1,672.8 853.5 2,832.2 442.9 99.8
TP 2,400 1,400 3,300 576 120
Upside/Downside (%) 43 64 17 30 20
Nomura | India outlook 2012
January 13, 2012
Contents
4
Executive summary Sector strategy

7
Growth has been a casualty; we expect a couple of quarters of tepid growth before recovery Digging deeper into investments
12
17
The rupee: capital flows and eurozone concerns
23
Inflation: Less of a risk this year provided the rupee does not weaken further Rates cuts to likely be back-loaded if further rupee pressure disrupts fall in inflation momentum Valuations not demanding and are pricing in a significant cut to earnings, but waiting for triggers Earnings expect some downside to FY13F earnings
28
29
31
34
Policy and political economy a clouded picture
36
Key themes
38
Long-only basket APPENDIX Economics

45
39
45
Policy holds the key
47
Sector outlooks
49
Autos & auto parts
Also see our Anchor Report: Asia Pacific outlook 2012 So the world doesn't end after all (5 December, 2011)
51
Banks
53
Cement
55
Coal
57
Consumer
59
Infrastructure
61
IT services
January 13, 2012
64
Metals & mining
66
Oil & gas/chemicals
68
Pharmaceuticals
70
Power & utilities
72
Property
74
Telecoms
77
Company profiles
79
Axis Bank
83
Infosys
86
Lupin
90
Power Grid Corp of India
93
State Bank of India
99
Appendix A-1
January 13, 2012
Executive summary
India today finds itself smack in the middle of a whirlpool of pessimism. Taking stock of Indias macroeconomic variables makes for depressing reading. Policy inaction, rising rates and a difficult global environment have taken a toll on growth. Meanwhile, a fragile external account has caused the rupee much distress in the backdrop of volatile global risk sentiment. Politics and policy continue to disappoint and populism has elevated fiscal deficit concerns. Its against this backdrop that we enter into 2012. The bad news is that not much is likely to change in the first half of this year. The good news is that these headwinds are temporary and would dissipate in the second half of the year. The incremental deterioration in Indias macro fundamentals was triggered by the sudden global risk flare-up late last year following the sovereign downgrade of the US and rising deleveraging fears for eurozone banks. The resulting sharp depreciation of the rupee has hijacked inflation and arrested its otherwise declining momentum. This has pushed back the rate-cutting cycle, which we think would be back-loaded in 2012. The RBI would find it difficult to justify a rate cut unless inflation is reined in to more comfortable levels, probably closer to 7%. However, inflation should be less of a concern for markets this year, in our view. As the economy slows down, pressure on labour markets should recede and wage increases should slow. A strong US dollar and a slow-moving global economy are likely to keep global commodity prices in check. This should aid the decline of inflation further. Gradually declining inflation and continuing growth concerns would likely keep bond yields in benign territory in the first-half of the year. India has to fund its high current account deficit, which has been made worse by a switch in allocation of household savings into valuables. Unlike the last crisis in 2008, there are also large debt repayments to contend with on account of private borrowings raised in 2006-07. This is likely to create growth and currency headwinds as capital inflows are constrained by the ongoing European crisis. After its sharp underperformance, we reckon the rupee is probably undervalued at current levels. This should gradually improve India's current account with a lag while concerns on debt repayments diminish through the year. We see this happening in 2H12. Growth would continue to face headwinds. The lagged effects of past tightening and tight liquidity are likely to continue to play out in 1H12. Private consumption is starting to slow, government spending power is muted and investment cycle is adjusting to slower growth amidst uncertainties on external demand. Market sentiment is likely to take its cue from weakness in industrial production growth in 1HCY11F. However, India should continue to enjoy its high growth differentials vs. developed economies in a weak global growth scenario expected this year. However, market valuations are no longer expensive at current levels and are pricing in a significant cut in earnings and further downside to economic growth. The market earnings multiple would start to look more attractive as inflation eases and bond yields fall. We expect FY13F Sensex earnings growth of c.10-12%. We believe the trajectory for earnings through the year would likely slow. Earnings could see some more risk as the economy feels the lagged impact of the rate tightening cycle. Margin pressures could persist in first-half from lagged effects of rate tightening and high commodity prices. However, a weak outlook for global commodity prices would subsequently be a tailwind for corporate margins provided the rupee does not depreciate further from here. As well, base effect tailwinds will come into play in the second half of the year. So how do we play this? The backdrop for equities in the first-half of the year would be slowing growth, gradually falling inflation, weak rupee and peaking rates cycle. We prefer banks and exporters (IT and pharma). Given concerns on the capex cycle, are underweight domestic cyclicals capital goods and infra & construction. We would play Indias investment cycle through the cement sector rather than capital goods. Slowing growth would lead to weak government finances which would mean that its ability to
January 13, 2012
spend incrementally would be compromised. In our opinion, the consumer cannot expect too many freebies from the government from here on in. We see little hope for big-bang reforms during the tenure of the present government. However, the outcome of the upcoming state elections in the first-half could shape policy expectations and could very well lead to a positive surprise. We expect the market to rise 15-20% from here and take cues from the likely improvement in the macroeconomic environment in the second half of the year. Further deterioration in Europe poses a key risk. Exaggerated declines in the market could provide a good buying opportunity.
Fig. 2: Key themes
Key theme Growth Comments We expect continuing headwinds to growth. Tight systemic liquidity and adverse base effects are likely to lead to weak industrial growth numbers in 1H12. Private consumption is starting to slow, government spending power is muted and investment cycle is adjusting to slower growth and uncertainties on external demand. Market sentiment is likely to take its cue from weakness in IIP growth in 1HCY11F. However, India should continue to enjoy its high growth differentials vs. developed economies in a weak global growth scenario expected this year.
Inflation
While inflation momentum has come off its highs, the rupee's depreciation would mean that the fall of inflation momentum would be slower. As the economy slows down pressure on labour markets should recede and wage increases should slow. We expect more tapering off in 2HCY12F on base effects. Inflation should become less of risk to markets this year. As well, a strong US dollar and a slow-moving global economy are likely to keep global commodity prices in check this year. A prospective improvement in the current account would be a tailwind for the rupee. We expect FY13F Sensex earnings growth of c.10-12%. We believe the trajectory for earnings in 2012 would likely be slow. Earnings could see some more risk as the economy feels the lagged impact of the rate tightening cycle. We see margin pressures in 1H12 from lagged effects of rate tightening and high commodity prices. Weak outlook for global commodity prices in 2012 would subsequently be a tailwind for corporate margins, provided the rupee does not depreciate further from here. In addition, base effect tailwinds are likely to come into play in 2H12. We expect some disappointment in the short- to medium term. We see several obstacles to the capex cycle, despite strength in demand. With a few large sectors driving organised manufacturing capex, the investment outlook for these key capex-driving sectors remains muted next year. Meanwhile, the unorganised manufacturing sectors suffers the most in an environment of very tight liquidity and high rates. We believe that new order inflows would remain poor as the economy adjusts to a lower growth path and government spending power remains limited due to poor finances. We expect monetary policy to start easing, albeit slowly. The downward trajectory of inflation momentum has been pushed back by rupee depreciation. The external environment remains a key determinant of the RBI's ability to respond to slower growth. We expect rate cuts to be back-loaded this year. Key risks are further rupee weakness arising from eurozone deleveraging concerns; a cost-push shock (higher oil prices on geopolitical risks); and fiscal profligacy. We do not expect positive developments on reforms to be a catalyst for the market next year. However, the outcome in the upcoming state elections could prove important in shaping policy. We expect liquidity to remain tight in the near term, particulary due to external account pressures. Funding costs for corporates are likely to remain high in the next six months before starting to come off. Bank NIMs may continue to do fine due to lack of overseas funding and sigificant forex debt repayments which would likely be funded by India banks. Rate cuts are likely to be back-loaded this year: While inflation should be on the decline, its fall has been tempered by the weakness in rupee. Hence, it would take much longer for the RBI to be comfortable enough with inflation numbers before going in for a rate cut even as growth slows down further. We reckon that a fall in inflation below 7% or so could trigger policy actionunlikely to be reached in 1H12, we reckonunless the RBI deems growth headwinds to have intensified enough to warrant a cut with inflation at 6-7%. Significant rate cuts are also unlikely in 1H12 because external sector pressures and concerns on capital flows would be elevated. A cut would reduce Indias rate differentials at a time when the RBI is taking several measures to attract capital inflows.
Earnings
Investment cycle/capex
Policy
Liquidity
Rates
Rupee
The rupee is likely to remain under some pressure over six months on account of large debt repayments on capital account and lack of external funding on account of the European situation. The rupee is probably undervalued at current levels and this should gradually improve India's current account while concerns on debt repayments diminish through the year. Falling inflation should also help support India's high rate differentials. This should lead to a rally in the currency later in the year. Key risks to this view are from oil prices and disorderly defaults in the European economy. Valuations are no longer expensive and are pricing in a significant cut in earnings, further downside to economic growth and an elevated rate cycle. The market earnings multiple would start to look more attractive as inflation eases and bond yields fall. We see limited downside to the markets. However, there is also limited visibility the in near-term; the 2H of the year looks better. We do note that the market would continue to lack short-term triggers.
Valuation
Source: Nomura Research
January 13, 2012
Sector strategy
Fig. 3: Sector strategy
Relative weighting for asset allocation (*) UNDERWEIGHT
Sector Autos
Headwinds Expect lower volume growth due to slowdown in economic growth and lower customer demand. We expect the growth to decline substantailly for two wheelers and commercial vehicles, while cars may recover after a flat year. Margins will come under pressure due to fight for market share in low growth environment. 1) Rising incremental delinquencies and credit costs; 2) lower-than-anticipated loan growth for FY13F; 3) domestic & global macro uncertainty; 4) delayed onset of interest rate cuts Low activity in the infra and real estate space continuing to impact demand for cement. High level of capacities leading to low level of capacity utilization and need to maintain production discipline One of the big headwinds for the consumer sector is likely to be the depreciating rupee. This will take a toll on profitability of companies like Asian Paints (APNT IN), Hindustan Unilever (HUVR IN), Nestle (NEST IN) and GCPL (GCPL IN). Another big headwind is likely to be slow down in discretionary spends and is likely to impact companies like Titan (TTAN IN). Margin pressure from rising foreign and domestic competition and higher raw material and wage costs; shortages of labour; weak recovery in industrial capex Weakness in investment cycle; land acquisition, environmental and policy issues; labour shortages Moderation in demand led by client decision making inertia and macro economic uncertainty.
Tailwinds Fall in raw material costs could lead to margin support. Decline in interest rates will be a minor positive as well.
Strategy comments Slow growth, rising competition
Banks
1) accelerated interest rate cuts 2) lower than forecasted delinquencies 3) decreasing global risk aversion
OVERWEIGHT
NIMs protected, rate cycle peaked, valuations cheap, possible benefits from refinaning of foreign debt payments Strong cash flows, pricing discipline
Cement
Cement producers are able to maintain pricing at levels where they are seeing reasonable profitability and mid-cycle returns. Easing political situation in key southern states could improve demand growth Most companies are now focusing on expanding rural footprint through enhanced distribution which could boost growth. Slowing food inflation will also be beneficial for consumer companies.
OVERWEIGHT
Consumer
UNDERWEIGHT
Consumer slowdown, expensive valuations
Electrical Equipment
Power-related capex upside; T&D equipment makers to likely witness pickup in orders
UNDERWEIGHT
Slowing investment cycle, fuel shortages
Infra & Construction IT Services
Roads and power sector order flow; Interest rate cuts Rupee depreciation benefits to margin and EPS (Tier-1 IT have EPS sensitivity of 1.4-2.3% for every 1% INR depreciation). Long term trends of consolidation, offshore penetration, productisation and pervasiveness of technology favourable for tier 1 IT which will aid them to gain market share against MNCs. Domestic demand beginning to improve, weak INR, volume-led earnings growth led by completion of expansion plan - Indian demand seems to be improving and net imports have begun to rise which is good news for expansions expected in the near term. Oil price downside; New LNG capacity coming onstream; positive govt actions to bring reforms Depreciation of INR against the export currencies particularly against the USD is a net positive for the sector. Also the sector shall present unprecedented product opportunities in the US market, which can present upsides to current forecasts. [1] Recent policy diktats on retail tariff revision to improve SEB financials (albeit in the medium term), in turn provide pricing flexibilty of domestic coal, [2] 2012 policy offings to boost longer-term fuel security: coal block auctions, policy on sale of captive coal Likely reduction in mortgage rates and improvement in the approvals situation could lead to improving volumes while any price correction could boost volumes further Revenue and margin Impact of recent voice price hikes; data upside
UNDERWEIGHT
Slowing investment cycle, government finances weak Exporter, US strength
OVERWEIGHT
Metals & Mining
Global macro concerns: European debt worries, China slowdown - these fears have kept restocking slow despite low inventory levels and hence metal prices have not recovered which is usual during fourth quarter. High oil price; Continued policy paralysis and continued impasse on key contentious issues Imposition of new pricing control regime in India as proposed in the draft policy. The move shall be negative particularly for MNCs.
UNDERWEIGHT
Global growth concerns
Oil & Gas Pharma
UNDERWEIGHT OVERWEIGHT
Global growth concerns, policy issues Exporter, patent expiries in the US
Power
Power: [1] Intensifying fuel risk (sourcing & pricing) leading to project delays / low PLF, [2] SEB financials remain precarious, payment timelines lengthening. Coal: Delays in project clearances, ambiguity over price revision Unaffordable pricing leading to lower volumes. Low volumes and execution issues are leading to cash flow problems for developers who are leveraged Regulations; volatile competition; questions over data economics (substitution impact)
OVERWEIGHT
Regulated return
Real Estate
OVERWEIGHT
Rate cyclical, likely household switch back into real estate Strong cash flows, reasonable valuations
Telcos
OVERWEIGHT
Note: Relative weightings for sector allocation given here are different from absolute sector ratings given in the sector sections of this report (*) Relative to BSE100 index Source: Nomura research
January 13, 2012
Growth has been a casualty; we expect a couple of quarters of tepid growth before recovery
Growth pessimism: India today finds itself smack in the middle of a whirlpool of pessimism. And this overwhelmingly negative sentiment is not without reason growth has come off, inflation and interest rates remain high amidst tight liquidity, corporate earnings have taken a knock, fiscal concerns are high, government decision making has been stymied and the legislature remains hamstrung; the reforms process has largely disappointed and the rupee has lost significant ground. Slowdown in growth momentum has occurred due to a combination of endogenous and exogenous factors: (1) aggressive tightening by the RBI (intentional and endogenous) and tight systemic liquidity in the face of high inflation; (2) weak global growth and poor global risk appetite (exogenous) and (3) supply-side disruptions in key factors of production problems related to land acquisition, environmental clearances, coalsupply linkages and mining bans arising out of delays in government decision-making and policy (endogenous). Indias growth differentials are stabilising at just below pre-crisis levels: Before we discuss further, it is vital that the ongoing slowdown in India is juxtaposed with that in other global economies. The two exhibits below show for the pre-and post crisis periods the evolution of absolute GDP growth for major economies and Indias relative growth differentials. Two key conclusions stand out: (1) at an aggregate level, the growth experience of these economies has broadly been similar to Indias growth rates dropped post crisis, recovered after a few quarters (strong base effects) and have been gently falling over the past year-and-a-half.
Fig. 4: Despite the pessimism surrounding Indias growth, the economy still enjoys high absolute growth rates in a weak global growth environment
(%) 20 15 10 5 0 (5) (10) (15) (20) India Russia Germany GDP growth rates China US UK Brazil Japan EU
Growth pessimism is at a peak
Growth has taken a hit on tight monetary conditions, weak global macro, ineffectual policy and supply-side disruptions
However, Indias growth differentials remain high and are stabilising just short of pre-crisis levels
Source: Bloomberg, Nomura research
(2) Indias growth differentials rose in the period following the crisis until mid-2009 as Indias economic performance was supported by strong momentum in domestic consumption; differentials declined subsequently until mid-2010 (stronger base effects boosted growth rates of regions that were hit harder during the crisis) and have since stabilised at just slightly below pre-crisis levels.
Jun-04 Sep-04 Dec-04 Mar-05 Jun-05 Sep-05 Dec-05 Mar-06 Jun-06 Sep-06 Dec-06 Mar-07 Jun-07 Sep-07 Dec-07 Mar-08 Jun-08 Sep-08 Dec-08 Mar-09 Jun-09 Sep-09 Dec-09 Mar-10 Jun-10 Sep-10 Dec-10 Mar-11 Jun-11 Sep-11
January 13, 2012
Fig. 5: Indias growth differentials have since stabilized at just slightly below pre-crisis levels
(%) 25 20 15 10 5 0 -5 Average Russia Germany China US UK Brazil Japan EU
The growth slowdown has caused market multiples to contract: While growth (and its expectations) have fallen globally, the significant underperformance of Indian equities over the past year reflects investor concerns on endogenous reasons for Indias growth slowdown excessive tightening of policy rates in the face of high inflation (although, Indias WPI basket is largely driven by global commodity prices), supply-side disruptions in key factors of production, and overall negative sentiment resulting from high-profile cases of graft that have afflicted the government and the policy paralysis that ensued. As the Exhibit below shows, the loss of confidence in Indias growth story has been reflected in the contraction of the markets earnings multiple.
Fig. 6: The decline in growth has been reflected in the de-rating of the market multiple
(y-y %) 20 15 10 5 0 (5) IIP (LHS) Sensex 12-m fwd P/E change (RHS) (y-y %) 100 80 60 40 20 (20) (40) (60) (80)
Jun-04 Sep-04 Dec-04 Mar-05 Jun-05 Sep-05 Dec-05 Mar-06 Jun-06 Sep-06 Dec-06 Mar-07 Jun-07 Sep-07 Dec-07 Mar-08 Jun-08 Sep-08 Dec-08 Mar-09 Jun-09 Sep-09 Dec-09 Mar-10 Jun-10 Sep-10 Dec-10 Mar-11 Jun-11 Sep-11
-10
The market has de-rated on growth concerns
As the exhibit below shows, the combination of growth concerns, elevated inflation, subpar political governance, and a much-depreciated rupee have driven the significant underperformance of Indian equities compared to regional peers last year.
Jan-00 May-00 Sep-00 Jan-01 May-01 Sep-01 Jan-02 May-02 Sep-02 Jan-03 May-03 Sep-03 Jan-04 May-04 Sep-04 Jan-05 May-05 Sep-05 Jan-06 May-06 Sep-06 Jan-07 May-07 Sep-07 Jan-08 May-08 Sep-08 Jan-09 May-09 Sep-09 Jan-10 May-10 Sep-10 Jan-11 May-11 Sep-11
(10)
Indias market underperformance relative to major peers was stark in 2011
January 13, 2012
Fig. 7: Slowing growth, high inflation and a much weaker rupee have caused significant underperformance of Indian equities compared to regional peers
(Base 31 Dec'10=100) 130 120 110 100 90 80 70 60 50
US CHINA SING
EUR TAIWAN INDO
HK KOREA
JAPAN INDIA
Source: Bloomberg, Nomura research Note: All equity market indices are USD-denominated
Understanding the slowdown - business cycle decomposition: One way to assess the nature of the ongoing slowdown is to tease out the cyclical components of time series of GDP by expenditure, to understand how consumption and investments have fared, and by output, to understand how sectors have fared. The aim of the exercise is two-fold: 1) to identify sectors that are leading the slowdown, and 2) to determine the extent to which Indias long-term trend growth rate has declined post-crisis. Aggregate economic time series are viewed as fluctuating around a longerterm trend and deviations from trend are caused by seasonal and cyclical factors. The cyclical fluctuations are caused by business cycle conditions, in turn determined by key macroeconomic variables such as interest rates, inflation and exchange rate. We worked with 50 quarters of GDP data, both from output and expenditure sides. For each output series, we first deseasonalised the raw data and then used an HP-filter to obtain the underlying trend and cycle components of the underlying seasonally adjusted series. The Hodrick-Prescott filter is an empirical technique commonly used in macroeconomics to decompose economic time series into trend and cyclical components. Trend growth rate of GDP has come off the pre-crisis highs: Trend growth rates peaked around 2007 and have been on the decline since for most sectors, except for agriculture (Exhibit below). This is not surprising for two reasons: (1) outright contractions in economic activity and weak growth have plagued most countries post crisis, and (2) Indias is a supply-constrained economy and the declining trend growth rates are reflective these constraints. Within sectors, the relative resilience of services stands out in contrast to the decline in industry. The slowdown in industry has largely been driven by manufacturing and construction; the decline in trend growth rates of electricity and mining output have been relatively less pronounced. Agriculture has seen its trend growth rise since 2002. This has been driven by: a fall in the volatility of farm output; rising area under irrigation; rise in ancillary activities and income on the back of spill-over effects of higher overall economic activity, wealth effects of rising land prices and higher farm support prices.
Dec-10 Jan-11 Jan-11 Feb-11 Mar-11 Mar-11 Mar-11 Apr-11 Apr-11 May-11 May-11 Jun-11 Jun-11 Jul-11 Jul-11 Jul-11 Aug-11 Aug-11 Aug-11 Sep-11 Sep-11 Sep-11 Oct-11 Oct-11 Oct-11 Oct-11 Nov-11 Nov-11 Nov-11 Dec-11 Dec-11 Dec-11
We employ business cycle decomposition techniques to understand the extent of the fall in trend growth rate of output
Regarding trend growth rates, the relative resilience of services stands in contrast to the decline for industry
January 13, 2012
Fig. 8: Trend growth rates have declined across output series, except agriculture. Industry has declined the most, while services have been more resilient
(%) 11 10 9 8 7 6 5 4 Industry (LHS) GDP (LHS) Agri (RHS) Services (LHS) Non-agri GDP (LHS) (%) 3.5 3.0 2.5 2.0 1.5
Jun-00
Jun-01
Jun-02
Jun-03
Jun-04
Jun-05
Jun-06
Jun-07
Jun-08
Jun-09
Jun-10
Dec-00
Dec-01
Dec-02
Dec-03
Dec-04
Dec-05
Dec-06
Dec-07
Dec-08
Dec-09
Source: Business Beacon, Nomura research Note: The trend growth rates have been extracted from seasonally adjusted series using an HP-filter
As things stand now, we estimate the longer-term trend growth for agriculture at 3.25%, industry at 6.25%, services at 8.5%, non-agri GDP at 7.75% and overall GDP at 7.1%. The trend growth for aggregate GDP has decline from 8.7% in Dec-06 to 7.1% in Sep-11. Resilience of services: Structurally, Indias GDP on the output side is dominated by services which account for about 58%; industry comes in second at about 28% while agriculture accounts for about 14%. The resilience of services growth and its large share in national output have to a large extent underwritten Indias growth post-crisis. The Exhibit below shows the percentage-points contribution of agri, industry and services in Indias annual GDP growth over time. The contribution of services has remained high and has averaged at about 5% over the last 10 years; industry contributed 2.2% on average, while agriculture contributed 0.6% (with high rainfall induced volatility). Just to be clear, this means that if GDP growth averaged 7.8% in a typical year, then 5% was from growth in services, 2.2% from industry and 0.6% from agriculture. It is noteworthy that in FY09 (the crisis year), GDP growth came in at 6.8%; services accounted for a resilient 5.5%, industry accounted for 1.3% while agriculture was flat.
Fig. 9: Contribution of agri, industry and services to Indias aggregate GDP growth
(%) 8 6 4 2 0 (2) (4) (6)
Percentage points share in India 's total GDP growth
Dec-10
Jun-11
1.0
We arrive at the trend growth rate estimate for GDP at 7.1% vs. 8.7% in Dec-06
Agri
Industry
Services
FY75
FY77
FY79
FY81
FY83
FY85
FY87
FY89
FY91
FY93
FY95
FY97
FY99
FY01
FY03
FY05
FY07
FY09
Source: Business Beacon, Nomura research
A couple of quarters of weak growth numbers still to go: Earlier on in this report we had noted three main reasons for the slowdown in growth - high interest rates and tight liquidity, a weak global macro environment and sentiment, and government-related policy paralysis and limbo in decision-making.
FY11
10
January 13, 2012
Given the extent of tightening that we have witnessed in the past year it is fair to assume that there is still more downside to growth from here. Based on the historical relationship between non-agri GDP growth and interest rates we use the prime lending rate as a proxy for system-wide interest rates we reckon that growth numbers would likely continue to fall over the next two quarters, largely based on lagged effects of past tightening. This can be seen in the Exhibit below which shows that non-agri GDP growth lags interest rates with a 2-quarter lag.
Fig. 10: With an end to the rate hiking cycle in view, GDP growth likely has two more quarters of downside still
(yy%) 12 10 8 6 4 2 Non-Agri GDP,2 qtr lag (LHS) SBI Prime rate, inverted scale (RHS) (%) 9 10 11 12 13 14 15
We see a couple of more quarters of weakness in GDP growth as lagged effects of past rate hikes play out
Jun-00
Jun-01
Jun-02
Jun-03 Dec-03
Jun-04
Jun-05
Jun-06
Jun-07
Jun-08
Jun-09
Dec-09 Jun-10
Dec-00
Dec-01
Dec-02
Dec-04
Dec-05
Dec-06
Dec-07
Dec-08
Dec-10
Jun-11
Source: Business Beacon, Bloomberg, Nomura research
Fixed income markets suggest that growth in the near term would likely remain tepid; the swap yield curve remains inverted: We find that, on average, the slope of the swap yield curve appears to have a reasonably strong directional relationship with growth in industrial production, as can be seen in the figure below. However, the slope seems to lead IIP by not more than a couple of months at most. The yield curve has remained inverted for seven months now, underpinning a rather dim view on growth by participants in the rates market. Over the past 10 years, we have seen only three episodes of slope inversion (on a monthly average basis); and in two of those instances, the inversion was driven by a falling long-end rate leading up to the crisis in December 2007-February 2008, and then at the peak of the crisis during August 2008-October 2008.
Fig. 11: Slope of the swap yield curve is a reasonable near-term barometer of industrial production and leads IIP by about 2 months on average; the curve has been inverted for eight months now
Dec-11
16
Yield curve inversion has entered its seventh month, suggesting near-term growth weakness
(%)
18 16 14 12 10 8 6 4 2 0
IIP, 3mma (2m lag) (LHS)
Swap yield curve, 3mma (RHS)
(%)
2.5 2.0 1.5 1.0 0.5 0.0 (0.5)
Mar-02 Jul-02 Nov-02 Mar-03 Jul-03 Nov-03 Mar-04 Jul-04 Nov-04 Mar-05 Jul-05 Nov-05 Mar-06 Jul-06 Nov-06 Mar-07 Jul-07 Nov-07 Mar-08 Jul-08 Nov-08 Mar-09 Jul-09 Nov-09 Mar-10 Jul-10 Nov-10 Mar-11 Jul-11 Nov-11
(1.0)
11
January 13, 2012
The investment cycle has been a casualty of elevated cost of capital: Much as elevated interest rates have taken their toll on overall GDP growth, the investment cycle too has become a casualty of higher cost of capital and tight liquidity this past year (the government has done its fair bit too, but more on that later). The exhibit below shows that interest rates today strongly influence investment growth six months from now. The relationship looks much like the one between non-agri GDP growth and interest rates given that investments are about 34% of GDP.
Fig. 12: Growth in investments is strongly influenced by interest rates, with a lag of about six months, similar to the lag observed between GDP growth and interest rates
(yy %) 25 20 15 10 5 (5) Fixed investment ,2-qtr lag (LHS) Prime lending rate, inverted scale (RHS) (%) 9 10 11 12 13 14 15
The investment cycle has been a casualty of high rates and slowdown in government-led investment
Source: Business Beacon, Bloomberg, Nomura research
Digging deeper into investments

The outlook on the investment cycle depends on how its different subcomponents are expected to behave this year. National income data are not very useful here, in our view, because segment-wise details are only available with a lag. The latest figures for capital formation by the corporate sector, government and households are available for up to FY10. So the best we can do is to consider alternative data to piece together a coherent picture of what has happened in each of these segments. Divergent signals: This deep dive is also necessary to reconcile diverging signals in the economy. The current slowdown has been characterised by slowing GDP growth and expanding current account deficit. Another interesting dichotomy has been between industrial growth and commercial vehicle sales. Despite poor growth numbers and very high interest rates, commercial vehicle sales are growing steadily and have shown some recent signs of strengthening. We believe that the answer lies in how interest rates are affecting the economy. We think that the corporate capex cycle has not yet slowed down meaningfully (even though new project plans are getting shelved/delayed). Instead, the impact on rates has largely been on household savings behaviour. This would explain a worsening of the current account deficit in face of slowing growth. High inflation and interest rates have caused a shift from housing construction to gold: High inflation has in our view caused the erosion of domestic purchasing power of the rupee and prompted a switch to alternative avenues like gold. High interest rates and elevated property prices have reduced the affordability of housing. Importantly, expectations have been increasing of an imminent fall in property prices amidst weakening domestic sentiment arising from a growth slowdown. This has resulted in weak cement demand and strong demand for gold imports, thereby depressing housing construction activitymore than half of cement demand comes from private housing in the unorganised sector; slowdown in government-led infrastructure would also be an important reason for slowdown in cement demandand worsening Indias current account deficit. This hypothesis finds resonance in cement despatch and gold imports data over the past two years which have been characterised by high inflation and interest rates.
High interest rates and low affordability of housing has caused a decline in housing construction and lowered cement demand. The switch of household savings to gold has widened the current account deficit. The current slowdown has coincided with a widening of current account deficit and strong commercial vehicle sales
Jun-00 Dec-00 Jun-01 Dec-01 Jun-02 Dec-02 Jun-03 Dec-03 Jun-04 Dec-04 Jun-05 Dec-05 Jun-06 Dec-06 Jun-07 Dec-07 Jun-08 Dec-08 Jun-09 Dec-09 Jun-10 Dec-10 Jun-11 Dec-11
(10)
16
12
January 13, 2012
Fig. 13: High interest rates and inflation have caused a switch in household portfolios away from housing into gold. The encircled portion in the chart illustrates this.
(USDmn) 8,000 6,000 4,000 2,000 0 (2,000) Gold & silver imports (y-y chg), 2qma (LHS) Cement despatches (y-y %), 2qma (RHS) (%) 14 12 10 8 6 4 2
Jun-03
Jun-04
Jun-05
Jun-06
Jun-07
Jun-08
Jun-09
Jun-10
Dec-02
Dec-03
Dec-04
Dec-05
Dec-06
Dec-07
Dec-08
Dec-09
Bank credit data provides further evidence of the slowdown in housing construction which explains the fall in cement demand. This can be seen in the Exhibit below - the share of housing in total non-food credit outstanding is at its lowest post crisis. In addition, credit data also show that FY12 has seen the lowest growth in housing credit YTD, which is again consistent with slow cement demand growth.
Fig. 14: The share of housing in non-food credit outstanding has declined in line with the slowdown in housing construction activity and decline in cement demand
(%) 11.5 11.0 10.5 10.0 9.5 9.0 Housing credit outstanding as % of total non-food credit
Dec-10
Jun-11
(4,000)
Credit expansion to the housing sector in FY12 fell to its lowest in five years
Fig. 15: This is also visible in the slower expansion of credit to the housing sector, which has declined in FY12
(INRbn) 450 400 350 300 250 200 150 100 50
Credit expansion (Apr-Oct) (LHS) % increase (Apr-Oct) (RHS)
(%) 8 7 6 5 4 3 2 1 0
Jan-
Mar
Feb
Jan-
Nov
Nov
Sep
Dec
Sep
Nov
Mar
Aug
Oct-11
Jul-10
8.5
0 FY08 FY09 FY10 FY11 FY12
Source: RBI, Nomura research
Source: RBI, Nomura research
The corollary of this hypothesis is that as inflation shows signs of easing from here on, and interest rates start coming off, households would reallocate their portfolios towards housing away from gold. The fall in gold imports has already started happening, aided by the sharp depreciation of the rupee; an acceleration of this trend would be a significant positive for the current account deficit. Momentum of execution in government-led projects has come off: Hamstrung government decision-making has taken a toll on infrastructure projects owned and sponsored by the government. We believe the outlook on this front is likely to remain weak in the near term, given the fragile state of government finances. We discuss government policy later in a separate section. Corporate capex has not yet fallen meaningfully: We have reasons to believe that corporate capex activity has not declined meaningfully yet and the slowdown would be a gradual process. Evidence for our view comes from the following data:
13
January 13, 2012
Commercial vehicle sales are still strong: The strength in commercial vehicle sales belies a significant weakening of corporate capex. Sales came off sharply in the period immediately during the crisis period in late 2008. However, CV sales on an annual basis have been inching upwards and came in at above 42% y-y in November. There are no base effects at play either.
Fig. 16: The strength in commercial vehicle sales belies a significant weakening of corporate capex. Annual growth rate of CV sales has been rising and came in above 42% y-y in November
(y-y %) 250 200 150 100 50 0 (50) CV (s.a.)
The strength in CV sales belies a significant weakening of corporate capex
Sep-11
Nov-08
Nov-09
Nov-10
May-08
May-09
May-10
Source: SIAM, Nomura research
Capital goods imports have been surprisingly resilient: Another reason to suspect that capex activity has not yet weakened meaningfully is that capital goods imports still look elevated. On a monthly basis, imports peaked in May-11 and have started to come off a bit. We expect imports to fall further from these levels to reflect the ongoing slowdown in growth and weakening order inflows. This would be positive for the current account deficit.
Fig. 17: Capital goods imports still look elevated and should fall from current levels to reflect the slowdown in growth
(USDmn) 6,000 5,000 4,000 3,000 2,000 1,000
May-11
Nov-11
Sep-08
Sep-09
Sep-10
Jan-08
Jul-08
Jan-09
Jul-09
Jan-10
Jul-10
Jan-11
Mar-08
Mar-09
Mar-10
Mar-11
Jul-11
(100)
Capital goods imports are still elevated and should fall from here
Sales growth of capital goods companies have held up well: The Exhibits below shows sales growth of three categories of companies in the BSE500 index: a) Capital goods (a proxy for the corporate capex cycle); b) real estate (proxy for housing); and c) construction ex L&T (proxy for government-related capex spends). As the exhibits below show, capital goods companies sales growth has remained surprisingly resilient while both real estate and construction companies have seen a significant fall off in their growth trajectories. This supports the supposition that the
Jan-04 Apr-04 Jul-04 Oct-04 Jan-05 Apr-05 Jul-05 Oct-05 Jan-06 Apr-06 Jul-06 Oct-06 Jan-07 Apr-07 Jul-07 Oct-07 Jan-08 Apr-08 Jul-08 Oct-08 Jan-09 Apr-09 Jul-09 Oct-09 Jan-10 Apr-10 Jul-10 Oct-10 Jan-11 Apr-11 Jul-11
Sales growth of cap goods companies is still resilient. Meanwhile, it has come off for real estate and construction (exL&T) companies
14
January 13, 2012
slowdown in investment cycle is largely a function of slowdown in government spends and household switching from physical assets to valuables for investments.
Fig. 18: Sales growth for capital goods companies are still resilient
(y-y %) 30 25 20 15 10 5
Fig. 19: Meanwhile, growth trajectories for construction (exL&T) and real estate companies have come off significantly
(y-y %) 250 200 150 100 50 0 (50) Real Estate (RHS) Construction ex L&T (LHS) 70 60 50 40 30 20 10
Jun-08
Jun-09
Jun-10
Mar-08
Mar-09
Mar-10
Dec-08
Dec-09
Dec-10
Sep-08
Sep-09
Sep-10
Mar-11
Jun-11
Sep-11
Jun-08
Jun-09
Jun-10
Mar-08
Mar-09
Mar-10
Dec-08
Dec-09
Dec-10
Sep-08
Sep-09
Sep-10
Mar-11
Jun-11
Source: Ace Equity, Nomura research
Future imperfect? Past momentum is no guarantee for the future: Forecasting the trend of investments is made difficult by several important considerations: Policy changes can reaccelerate the capex cycle: One big issue dogging new investments is government policy. Environmental issues, land acquisition-related uncertainties and general political and bureaucratic decision-making slowdown is leading to slowdown in large ticket investments. While the current political environment still remains poor, any changes on the positive side can lead to a pick up. Nevertheless, looking at the current environment, we believe it is safe to say that 2012 would be a very slow year for new projects. A reversal in monetary policy should reaccelerate household investments in real estate: As the monetary policy eases, we expect households to start allocating capital away from valuables into physical and financial assets. However, significant easing is required before this switch starts to happen. Given that RBI would have a lagged response to fall in inflation, this phenomenon would take at least 9-12 months to fully materialise. Government finances would remain poor: Given the fiscal deficit overshoot, the ability of the government to divert more resources into capital formation remains extremely limited. Government was a big driver of capex cycle in the last five to six years both at the state (roads, irrigation etc) and central level. Corporate sector has money but needs better policy: On an overall basis, two basic preconditions for a strong capex cycle: (1) unfulfilled demand (as evidenced by trade deficit and shortages), and (2) financial ability to invest (as evidenced by aggregate balance sheet strength of corporates) are not the constraining factor on capex. The policy environmentmonetary, fiscal and pace of decision makingare the main constraints. These may continue to remain unfavourable for some more time. Global uncertainty adds to capex cycle slowdown: The chart below shows the latest breakdown of capex of BSE500 companies by sectors. Telecom, oil & gas, metals & mining and power are the four largest contributing sectors in overall capex. All of these face some headwinds in terms of policy or the global environment. This means that new projects in these sectors would remain quite slow. We note that the current momentum in the capex cycle is driven by projects planned earlier and as the new pipeline weakens, the capex cycle would continue to weaken prospectively.
New capex activity would be slow on policy issues, slow government decision-making, poor public finances adverse political environment
Corporate balance sheets appear strong and demand is not an issue
New activity in big capex-driving sectors face global uncertainties and policy headwinds
Sep-11
(100)
15
January 13, 2012
Fig. 20: Capex in oil & gas, telecom, power and metals & mining sectors constituted close to three-fourths of total capex by BSE500 group of companies in FY11
Misc, 4.88% Transport , 3.91% Telecom , 17.85% Autos , 3.86% Oil & gas , 22.71%
Infra & cap goods , 5.36% Metals & mining , 15.86% Cement, 2.48% Consumer, 2.63% Pharma, 2.23% Power, 15.13%
IT, 3.10%
Fig. 21: Reasons for slowdown in incremental capex activity in the four big capex sectors
Sector Oil and gas Metals Telecom Power Reasons for slowdown in new capex activity Slow decision making. Adverse policy environment Environment clearances, ban on mining and global slowdown would mean new project activity would be slow Significant policy uncertainty. Saturation of voice market Fuel unavailability
Source: Nomura research
Bottom-line on capex only expect a lagged recovery: From the perspective of the next twelve months, we believe that the following factors would weigh heavily on the capex cycle: Rates: Interest rates have risen significantly and we believe an easing of the cycle is sometime away. Decisions on investments in new projects would clearly remain slow till the time rates reduce to lower levels from here. This would mean that 2012 would be weak for new orders. Policy: Uncertainty on account of pending policy decisionsland acquisition bill, FDI in retail, fuel-related policy etcwould continue to cast a shadow on investment decisions. Additionally, the uncertain political environment also means that the bureaucratic machinery would remain slow, slowing down fresh approvals. Global environment: Till the time the European crisis does not abate, capital availability would remain an overhang on the capex cycle. The capex slowdown would manifest as: 1) slow new order momentum and 2) gradually reducing sales growth of capital goods companies. As can be seen below, new order inflows for a group of five companies that we cover (LT IN, IVRC IN, NJCC IN, HCC IN and PUNJ IN) were down y-y in 2QFY12. This situation is likely to continue for some more time.
Expect only a lagged recovery in capex
16
January 13, 2012
Fig. 22: New order inflows for infra & construction companies under our coverage were down y-y in the Sep-qtr. The slowdown in new orders is expected to continue
(Base 1QFY09 = 100) 220 200 180 160 140 120 100 80
Order inf lows for infra & construction companies
1Q FY09
2Q FY09
3Q FY09
4Q FY09
1Q FY10
2Q FY10
3Q FY10
4Q FY10
1Q FY11
2Q FY11
3Q FY11
4Q FY11
1Q FY12
The rupee: capital flows and eurozone concerns

The unexpected weakening of the rupee has presented fresh challenges for the economy in form of 1) higher deficit on account of oil subsidies; 2) inflation stickiness; 3) strain on servicing foreign loans; and 4) dilution of investor returns in dollar terms. We believe that Indias rupee weakness, which in the first phase has been attributed to its large current account deficit and European crisis, would persist for some time. Even though we believe that the current account would improve from here, it would be the capital account which would pose significant challenges to the rupee. These challenges are likely to continue for the most part of 2012, following which rupee should start to rally, in our view. The unexpected appreciation of the dollar following the US sovereign downgrade jolted the rupee initially: The rupees decline in began in August last year and coincided with the unexpected flight-to-safety-induced appreciation of the USD following the S&Ps sovereign downgrade of the US. We suspect the first leg of rupees fall was prompted by a rush to cover unhedged short USD positions and was not driven by FII selling FIIs had bought net USD305mn in equities and sold net USD15mn in bonds in September and October, even as the rupee had moved from INR46.1 to INR48.7 through these two months . The rupees decline was not in isolation and was joined by other high-beta Asian currenciesIndonesian rupiah (IDR) and Korean won (KRW)as can be seen in the Exhibit below.
The capital account would be a cause for concern this year while the current account concerns would likely improve
2Q FY12
The unexpected appreciation of the USD following the US sovereign downgrade in August jolted high-beta Asian currencies; the INR underperformed significantly
17
January 13, 2012
Fig. 23: The global risk event triggered by the US sovereign downgrade brought highbeta Asian currencies under pressure; however, the rupees underperformance has been stark
(Base 100=1 Aug'11) 125 120 115 110 105 100 INRUSD IDRUSD KRWUSD
Twin deficits, high inflation and lack of RBI support: However, once the flood gates had opened and the rupee breached established trading ranges, the rupee found itself under severe and unrelenting pressure as market expectations of continued rupee weakness were getting increasingly broad-based. The rupee underperformed the KRW and IDR in the following period and two factors accelerated its underperformance: (1) Indias economic fundamentals were distinctly poorer, underpinned by its twin current account and fiscal deficits (Exhibit below) and high inflation that had led to severe erosion of the rupees domestic purchasing power, and (2) the RBI did not publicly state its intention to support the rupee; how successful the RBI would have been in defending the rupee, had it chosen to do so, is another matter.
Fig. 24: The rupees weakness was underpinned by Indias high current account deficit
(%) 3 2 1 0 (1) (2) (3) (4) CY2011E
Source: Nomura Global economics
Nov-11
Aug-11
Sep-11
Jan-12
Oct-11
95
The INR underperformed its peers given its high current account deficit and inflation problem
Fig. 25: and a high fiscal deficit
India
Korea
Indonesia
(%) 1 0 (1) (2) (3) (4) (5) (6) CY2011E
India
Korea
Indonesia
CY2012E
CY2013E
CY2012E
CY2013E
Source: Nomura Global economics
The rupees sharp decline and expectations of further weakness, amidst heightened risk aversion on account of the eurozone debt crisis, induced aggressive forward covers by hedgers, accompanied by fair bit of speculation, we reckon. The sharp appreciation of the USD in off-shore forwards across maturities has reflected the rise in forward premiums in the on-shore forward market and depreciation of the rupee in the spot market. Uncertainty regarding the rupee is near an all-time high: We are all too aware of the hazards of making point forecasts of exchange rates and make no attempt to do so here,
Currency options markets are suggesting a high sense of uncertainty about where the rupee will find support
18
January 13, 2012
especially during these times of high global uncertainty. The implied volatility of the rupee, based on at-the-money USDINR currency options, is closet to all-time highs and makes it difficult to say with any degree of certainty about where the rupee would find support in the near term (Exhibit below). A quick back-of-the-envelope calculation based on the current implied volatility of at-the-money currency options suggests that there is a 90% chance that the rupee could be trading between 42 and 63 by the end of the year a very wide range, indeed.
Fig. 26: The average implied volatility of the rupee based on currency option contracts is close to its highs, reflecting the overall sense of uncertainty regarding the rupees trajectory
(%) 16 14 12 10 8 6
USDINR 1m Imp Vol USDINR 6m Imp Vol
USDINR 3m Imp Vol USDINR 1yr Imp Vol
Aug-11
Sep-11
Oct-11
Nov-11
In our view, the rupees near-term fate is contingent on how severe deleveraging concerns on eurozone banks become: The outlook for the rupee in the near term would be conditioned by how the European debt crisis evolves. It is fair to say that the rupee would struggle to stabilize to pre-August levels so long as the eurozone is under strain, global risk aversion is high and concerns on capital flows to India persist. It can be seen from the relationship between CDS spreads for European banks and INR/USD rate that the rupees depreciation since August has much to do with the risk flare-up in eurozone banks. Europe is largely an exogenous parameter, but one that will have a significant bearing on the rupee in the coming months. Our working assumption for the near term is one in which European banks would most likely remain under deleveraging pressure and shore up their capital positions in the face of funding pressures from debts maturing this year and more stringent Basel III norms coming into effect next year. As the global reserve currency, the excess demand for dollars that would arise should deleveraging concerns in the eurozone exacerbate in the coming months is the key risk to the rupees performance, we think. The RBI, in its December Financial Stability Report estimated the consolidated claims of European banks on India at 8.6% of Indias nominal GDP.
Dec-11
Deleveraging concerns in Europe are an overhang on the rupee in the short-term
19
January 13, 2012
Fig. 27: The rupees sharp decline since August has been driven by deleveraging risks facing eurozone banks
(bps) 600 500 400 300 200 100 Euro banks 5yr CDS (LHS) INRUSD (RHS) 56 54 52 50 48 46 44 42 40
Refinancing and redemption pressures: While developments in Europe would set the risk appetite for global capital, the rupee, in addition, would have two key overhangs to contend with as we make our way into 2012. A big chunk of the large external commercial borrowings (ECBs) by Indias corporate sector during 2006-07 is coming up for redemption this year. The figure below plots gross inflows of ECBs against gross outflows lagged by 5 years (this conforms to the 37 year maturity of an average ECB loan). We estimate that about USD30bn worth of ECB loans would have to be dealt with by corporates they would have to either be repaid or rolled over. If the risk backdrop is mild then most of these loans would have a good chance of being repaid or refinanced, albeit at higher interest rates. Anecdotal evidence suggests that about 30% of ECB payments are hedged; this figure would likely have increased in light of the recent sharp depreciation of the rupee. If this were the case, then downward pressure on the rupee would likely be contained to the extent corporates have already immunised themselves by taking adequate forward covers. To the extent that this is not the case, the excess demand for dollars would imply further rupee weakness. In either case, this uncertainty in itself would likely keep the rupees outlook volatile.
May-09 Jun-09 Jul-09 Jul-09 Aug-09 Oct-09 Nov-09 Dec-09 Dec-09 Jan-10 Feb-10 Mar-10 Apr-10 May-10 Jun-10 Jul-10 Aug-10 Sep-10 Oct-10 Nov-10 Dec-10 Jan-11 Feb-11 Mar-11 Apr-11 May-11 Jun-11 Jul-11 Aug-11 Sep-11 Oct-11 Nov-11 Dec-11
Close to USD40bn of ECBs and FCCBs need to be refinanced or redeemed in 2012
20
January 13, 2012
Fig. 28: Large external commercial borrowings taken on by the Indian corporate sector five years ago are going to come up for redemption this year
(USDmn) 9,000 8,000 7,000 6,000 5,000 4,000 3,000 2,000 1,000
Jun-90 Mar-91 Dec-91 Sep-92 Jun-93 Mar-94 Dec-94 Sep-95 Jun-96 Mar-97 Dec-97 Sep-98 Jun-99 Mar-00 Dec-00 Sep-01 Jun-02 Mar-03 Dec-03 Sep-04 Jun-05 Mar-06 Dec-06 Sep-07 Jun-08 Mar-09 Dec-09 Sep-10 Jun-11
ECB gross inflows ECB gross outflows (lagged 5 years)
Another source of concern for the rupee and sentiment, although not as large in terms of absolute numbers as ECBs, is redemptions of FCCBs (foreign currency convertible bonds). With current stock prices much below conversion prices, near-certain redemptions of FCCBs are another overhang on the rupee. The exhibit below breaks down the amounts outstanding by year 2012, with about USD7bn (mostly in the first nine months of the year) would be when most of these bonds would have to be redeemed.
Fig. 29: Upcoming FCCB redemptions peak in 2012 and then taper off after that
(USDmn) 8,000 7,000 6,000 5,000 4,000 3,000 2,000 1,000 0 CY2012
CY2013
CY2014
CY2015
Fundamentally speaking, inflation differentials are on the way down: Even as risk aversion and concerns on capital flows are likely prevent a quick reversal of the rupee in the near term, the rupees outlook over the year is supported by improving fundamentals rate differentials are likely to stay high, and the sharp depreciation of the rupee so far would likely begin to show up as a contraction of the current account deficit. A country with an inflation problem is most likely to see its currency depreciate. High relative inflation reduces real rate differentials, while the erosion of domestic purchasing power of its currency spills causes an erosion of its purchasing power externally. The Exhibits below show that this has largely been the case for the INR/USD exchange rate. Seen in this context, the rupees decline is not altogether surprising.
Falling inflation differentials and contraction in current account deficit should emerge as fundamental tailwinds for the rupee later this year
21
January 13, 2012
Fig. 30: Inflation differential between India and the US is an important determinant of the INRUSD exchange rate
Fig. 31: In addition to relative purchasing power, real rate differentials are also key. The sharp diversion between real rates and INRUSD is notable
(bps) 400 200 0 (200) (400) (600)
Jan-02 Jul-02 Jan-03 Jul-03 Jan-04 Jul-04 Jan-05 Jul-05 Jan-06 Jul-06 Jan-07 Jul-07 Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11
INRUSD (LHS) 54 52 50 48 46 44 42 40
Feb-00 Sep-00 Apr-01 Nov-01 Jun-02 Jan-03 Aug-03 Mar-04 Oct-04 May-05 Dec-05 Jul-06 Feb-07 Sep-07 Apr-08 Nov-08 Jun-09 Jan-10 Aug-10 Mar-11 Oct-11
(%) 9 7 5 3 1 (1) (3) (5)
India Inflation less US Inflation (LHS)
US LESS IND REAL RATE (Bps, 3MMA) (LHS) INR - USD (3MMA) (RHS)
(INR/USD)
53 51 49 47 45 43 41 39 37 35
38
(800)
However, the rupees decline appears to be disproportionately large compared to inflation and real rate differentials, which, on fundamentals, seems to be pricing in a far more negative outcome for inflation than we expect. This anomaly might persist in the first half of this year amidst uncertainty on capital flows, and is likely to correct after the majority of short-term debt redemptions and refinancing have been sorted out. and current account concerns are likely to mitigate: One key reason for the rupees dubious distinction of being a high-beta currency is Indias persistent current account deficit problem. The 20% fall in the rupee over the past five months would go some ways in alleviating current account deficit concerns at the margin. We estimate that it typically takes about six months before the contractionary impact from rupee depreciation begins to show up in non-oil imports. The figure below shows that the recent over-sized depreciation of the REER should be followed by a significant decline in non-oil imports; we expect this to start showing up in data in the next few months.
Fig. 32: The contraction in non-oil import demand from rupee depreciation usually happens with a lag of about 6 months
(USDmn) 12,000 10,000 8,000 6,000 4,000 2,000 0 (2,000) (4,000) (6,000) (8,000) Chg Non-oil imports y-y, 6m lag (LHS) Chg REER (RHS) (y-y %) 20 15 10 5 0 (5) (10)
The rupees fall looks disproportionate compared to inflation and rate differentials
Capital account issues would dominate in the next 6 months even if current account concerns mitigate: As we mentioned, India has large capital repayment obligations over the next 12 months towards maturing debt which were taken in the 2006-2007 period. The European crisis and move towards Basel III is causing a paucity of capital which is leading to fresh inflows dwindling even as repayments are beginning
Jan-01 Jun-01 Nov-01 Apr-02 Sep-02 Feb-03 Jul-03 Dec-03 May-04 Oct-04 Mar-05 Aug-05 Jan-06 Jun-06 Nov-06 Apr-07 Sep-07 Feb-08 Jul-08 Dec-08 May-09 Oct-09 Mar-10 Aug-10 Jan-11 Jun-11
(15)
Capital account issues are likely to dominate in the next couple of quarters
22
January 13, 2012
to rise (Exhibit below). If the European crisis continues, it would be extremely difficult to raise the funds required for refinancing, let alone raise fresh funds for projects. Even though we believe that the current account would slowly strengthen, it would still likely remain in deficit. Funding large repayments and the current account would essentially mean that rupee may remain under pressure for at least another 6-9 months. Significant improvement in the rupee should follow towards the end of 2012F: Funds raised through the debt route dried up in 2008 and 2009 following the global financial crisis. This means that there is little by way of repayment of loans in 2013 and 2014. We expect a significant reduction in pressures on the capital account towards the latter part of 2012. This would likely coincide with an improvement in the current account deficit. As the rupee has moved into a fundamentally undervalued zone based on the real effective exchange rate, we expect that it should start to appreciate at that time (Exhibit below).
Fig. 33: External commercial borrowings are starting to dwindle amidst funding concerns in Europe
(USDmn) 6,000 5,000 4,000 3,000 2,000 1,000 ECB inflows
The rupee appears to no longer to be fundamentally overvalued in light of the sharp depreciation of the REER
Fig. 34: The rupee has moved in fundamentally undervalued zone following its sharp depreciation
Real effective exchange rate
104 102 100 98 96 94 92
Aug-11
Sep-11
Jun-11
Oct-11
Apr-11
Nov-11
Inflation: Less of a risk this year provided the rupee does not weaken further
Inflation has been the core problem last year: Much of the deterioration in Indias macroeconomic fundamentals over the past year can be traced to persistently high inflation continuing tightening of policy rates and tight systemic liquidity and lagged effect on growth; the shrinkage in supply of loanable funds; the significant weakness in the rupee, and exacerbation of the trade deficit. Headline inflation and its components primary articles, driven by food inflation; fuel and power, driven by oil prices; manufactured products inflation, driven by global commodity prices have flattened out at high levels after stabilising in the period following the crisis (see figure below).
Much of the deterioration in Indias macroeconomic situation can be traced back to high inflation
Feb-10 Mar-10 Apr-10 May-10 Jun-10 Jul-10 Aug-10 Sep-10 Oct-10 Nov-10 Dec-10 Jan-11 Feb-11 Mar-11 Apr-11 May-11 Jun-11 Jul-11 Aug-11 Sep-11 Oct-11 Nov-11
23
Feb-11
Mar-11
May-11
Jul-11
90
January 13, 2012
Fig. 35: Headline inflation and its subcomponents have stabilised at unacceptably high levels post crisis
(%) 25 20 15 10 5 0 (5) (10) (15) WPI Mfg prods Prim articles Fuel & power
Downward sticky inflation is anathema to any central bank because it sets the stage for inflation expectations to be high too given that expectations of future inflation are formed adaptively individuals base their investment, savings and consumption decisions based on past inflation. The RBIs natural response has been to progressively raise policy rates and, in conjunction with its aggressive anti-inflationary stance, keep systemic liquidity at tight levels (see figure below).
Fig. 36: Rising inflation has resulted in significant tightening of policy rates and tight systemic liquidity
(%) 14 12 10 8 6 4 2 0 (1,000) (2) (1,500) 500 0 (500) Net LAF balance (RHS) Repo rate (LHS) WPI (y-y) (LHS) (INRbn) 1,500 1,000
Source: Bloomberg, Business Beacon, Nomura research
High interest rates and an anti-inflationary policy stance, amidst weakening economic activity, have kept liquidity tight and led to fall in growth rate of the monetary base: Progressively higher interest rates since mid-2010 have caused the opportunity cost of money to rise. This has resulted in a switch from currency holdings and demand deposits to higher-yielding term deposits, causing the rates of growth of M1 and M3 to sharply diverge (see figures below). The extent of the fall in the transactionary demand for money suggests a much reduced amount of economic activity. The growth rate of the monetary base has come off significantly on the back of the fall in currency-incirculation and because the RBI did not inject meaningful primary liquidity into the economy by way of open market operationsOMOs (open market operations) have picked up since end of Nov-11in keeping with its anti-inflation stance.
Feb-02 Jun-02 Oct-02 Feb-03 Jun-03 Oct-03 Feb-04 Jun-04 Oct-04 Feb-05 Jun-05 Oct-05 Feb-06 Jun-06 Oct-06 Feb-07 Jun-07 Oct-07 Feb-08 Jun-08 Oct-08 Feb-09 Jun-09 Oct-09 Feb-10 Jun-10 Oct-10 Feb-11 Jun-11 Oct-11
May-05 Aug-05 Nov-05 Feb-06 May-06 Aug-06 Nov-06 Feb-07 May-07 Aug-07 Nov-07 Feb-08 May-08 Aug-08 Nov-08 Feb-09 May-09 Aug-09 Nov-09 Feb-10 May-10 Aug-10 Nov-10 Feb-11 May-11 Aug-11 Nov-11
Weakening economic activity and high inflation have reduced transactionary demand for money and caused a shift to higher-yielding term deposits and gold
24
January 13, 2012
Fig. 37: High inflation has been met by rising interest rates. The higher opportunity cost of money has caused a sharp divergence between M1 and M3 rates of growth
(y-y %) 30 25 20 15 10 5 M1 M3
Fig. 38: which has been driven by a switch from currency in circulation and demand deposits to higher yielding time deposits
(y-y %)
50 40 30 20 10 0 (10) (20)
Currency Demand deposits Time deposits
High gold imports have worsened Indias external position and put pressure on the rupee: In addition to prompting a reallocation of household savings towards higheryielding term deposits, the erosion of the rupees domestic purchasing power has also caused a shift towards physical forms of savings, i.e. gold. The resulting fall in the supply of loanable funds in the economy has put incremental pressure on interest rates. This switch to gold has come at the expense of housing construction activity and has caused a notable divergence between cement demand, which has been weak, and gold imports, which touched record levels earlier this year. The figure below shows the relationship between Indias gold & silver imports and WPI inflation. Indias WPI basket is commodity-heavy and changes in global commodity prices could drive the mutual relationship between gold prices (and hence nominal imports) and inflation. To account for this, we plot real gold imports (by deflating nominal gold imports by gold prices) against inflation, and find that the relationship holds up well on average. This increase in gold imports has put considerable pressure on the rupee through the trade route. This has happened in the backdrop of a fragile global risk environment and elevated concerns on capital flows. Also, the fall in real rate differentials because of rising inflation differentials has further weakened the rupees case. However, after adjusting for valuables in both merchandise imports and exports data, we find that trade and current account deficits would have appeared much more manageable.
Fig. 39: Gold provides a hedge against high inflation
Fig. 40: Strong gold imports have worsened Indias external position. Trade and current account deficits appear less alarming after adjusting for valuables
(%) (As % of GDP) 5 0 (5) (10) (15) (20) 13 11 9 7 5 3 1 Trade balance CAB Trade balance ex-valuables CAB ex-valuables
(Base 100=Apr'05) 140 120 100 80 60 40

Jun-05 Oct-05 Feb-06 Jun-06 Oct-06 Feb-07 Jun-07 Oct-07 Feb-08 Jun-08 Oct-08 Feb-09 Jun-09 Oct-09 Feb-10 Jun-10 Oct-10 Feb-11 Jun-11 Oct-11
Real gold imports index, 3mma (LHS) WPI, 3mma (RHS)
Source: Bloomberg, Business Beacon, Nomura research
Mar-07 Jun-07 Sep-07 Dec-07 Mar-08 Jun-08 Sep-08 Dec-08 Mar-09 Jun-09 Sep-09 Dec-09 Mar-10 Jun-10 Sep-10 Dec-10 Mar-11 Jun-11
25
20
(1)
Jan-04 May-04 Oct-04 Mar-05 Aug-05 Jan-06 Jun-06 Nov-06 Apr-07 Sep-07 Feb-08 Jul-08 Dec-08 May-09 Oct-09 Mar-10 Aug-10 Jan-11 Jul-11 Dec-11
The strong pick-up in gold imports has put pressure on the external position and the rupee
Oct-00 Mar-01 Sep-01 Mar-02 Sep-02 Feb-03 Aug-03 Feb-04 Jul-04 Jan-05 Jul-05 Jan-06 Jul-06 Jan-07 Jun-07 Dec-07 Jun-08 Dec-08 Jun-09 Dec-09 Jun-10 Dec-10 Jun-11 Dec-11
January 13, 2012
The rupee has hijacked inflation: Inflation momentumas measured by the 3m-3m annualised % change of underlying seasonally adjusted seriespeaked in the early part of 2011 and was on the decline since. However, the 20% depreciation of the rupee since the beginning of August has arrested its downward trajectory and drove a considerable wedge between rupee and dollar-denominated prices of global commodities (Exhibits below).
Fig. 41: The declining trajectory of inflation momentum has been arrested by the sharp depreciation of the rupee Fig. 42: The 20% depreciation of the rupee has driven a considerable wedge between USD and INR-denominated prices of global commodities
(Base 100 = 1 Aug'11) 117 112 107 102 97 92 87
Sep-04 Jan-05 May-05 Sep-05 Jan-06 May-06 Sep-06 Jan-07 May-07 Sep-07 Jan-08 May-08 Sep-08 Jan-09 May-09 Sep-09 Jan-10 May-10 Sep-10 Jan-11 May-11 Sep-11
Aug-11 Aug-11 Aug-11 Aug-11 Aug-11 Sep-11 Sep-11 Sep-11 Sep-11 Oct-11 Oct-11 Oct-11 Oct-11 Oct-11 Nov-11 Nov-11 Nov-11 Nov-11 Dec-11 Dec-11 Dec-11 Dec-11 Jan-12
(%) 40 30 20 10 0 (10) (20) (30)
WPI Fuel & power
Prim art Mfg prod
CRB (USD)
CRB (INR)
82
Source: Business Beacon, Nomura research Note: Inflation momentum is measured by the 3m-3m annualised % change of underlying seasonally adjusted series
The rupee would remain under pressure, but dollar strength and slow global growth would keep global commodity prices in check: We expect the rupee to remain under some pressure in the first half of the year on account of large debt repayments on capital account and lack of external funding because of concerns in the eurozone. This would mean that the fall in inflation might get pushed back However, the flip-side of this would be that high global risk aversion would mean that the dollar would likely be strong, which in turn would be a headwind for global commodity prices (Exhibit below). Further, global growth headwinds and prospects of a eurozone recession would also help keep commodity prices in check this year. Even though rupee weakness has pushed back the decline in INR-denominated commodity prices, if global prices were to remain range-bound from here then we could see considerable tailwinds to inflation, given that manufactured products inflation (about 65% of the overall WPI index) bears a strong relationship with global commodity prices with a lag of 3 months (Exhibit below).
A strong dollar and a slowmoving global economy would likely keep global commodity prices in check this year
This would be a major positive for manufactured products inflation
26
January 13, 2012
Fig. 43: A strong dollar amidst the ongoing concerns in Europe would keep global commodity prices in check
Fig. 44: This would be a significant positive for manufactured products inflation, which reacts to global commodity prices with a lag of about 3 months
(INR) 60 50 40 30 20 10 0 (10) (20) (30) (40) (50) CRB index (LHS) Mfg WPI 3m lag (RHS) (y-y %) 14 12 10 8 6 4 2 0 (2)
CRB index (LHS) 500 450 400 350 300 250 200 150 100 50 0
DXY index (RHS) 60 70 80 90 100 110 120
Jan-01 Sep-01 May-02 Jan-03 Sep-03 May-04 Jan-05 Sep-05 May-06
Jan-00 Aug-00 Mar-01 Oct-01 May-02 Dec-02 Jul-03 Feb-04 Sep-04 Apr-05 Nov-05 Jun-06 Jan-07 Aug-07 Mar-08 Oct-08 May-09 Dec-09 Jul-10 Feb-11 Sep-11
Source: Bloomberg, Nomura consensus
The slowing rate of expansion of aggregate demand would keep inflation in check: The slowdown in the expansion of aggregate demand as the economy settles down to a lower-growth equilibrium would also help in bringing down the pace of expansion of economy-wide prices, so long as we do not see a large cost-push shock. While this view is grounded in sound economic reasoning, we attempt to see if historical data bears this hypothesis out. The Exhibit below plots the growth in industrial output against inflation, with a lag of four quarters. There are surely more rigorous ways of testing this hypothesis out, but this straightforward chart does suggest that there is some merit to this point. While on average, falling industrial output does lead to falling inflation after a year, during 2004-06 this relationship became contemporaneous.
Fig. 45: The ongoing slowdown in growth momentum should be accompanied by lower inflation, provided we do not see a large cosh-push shock
(y-y %) 18 16 14 12 10 8 6 4 2 0 (2) IIP WPI,4qtr lag
The ongoing slowdown should keep inflation in check
The market is typically short-sighted about inflation: We find that market momentum (as measured by 3m-3m % change in monthly averages of the market index) typically responds contemporaneously to the inflation print and turns negative when inflation rises quickly above the 8% threshold (Exhibit below). Momentum has stayed negative for most of last year as inflation remained above 9% per year. If inflation falls from here below 8% in the next few months then we could very well see market momentum quickly turn around.
Jun-95 Dec-95 Jun-96 Dec-96 Jun-97 Dec-97 Jun-98 Dec-98 Jun-99 Dec-99 Jun-00 Dec-00 Jun-01 Dec-01 Jun-02 Dec-02 Jun-03 Dec-03 Jun-04 Dec-04 Jun-05 Dec-05 Jun-06 Dec-06 Jun-07 Dec-07 Jun-08 Dec-08 Jun-09 Dec-09 Jun-10 Dec-10 Jun-11 Dec-11
The market is typically shortsighted about inflation. Market momentum could quickly turn around if inflation falls below 8% in the coming months
Jan-07 Sep-07 May-08 Jan-09 Sep-09 May-10 Jan-11 Sep-11
130
27
January 13, 2012
Fig. 46: Market momentum turns negative when inflation rises quickly above the 8% threshold
(%) 50 40 30 20 10 0 (10) (20) (30) (40) Sensex 3m-3m (LHS) WPI (RHS) (y-y %) 14 12 10 8 6 4 2 0 (2)
Circles highlight episodes with WPI > 8% and mkt momentum turning negative
Source: Bloomberg, Nomura research Note: We measure market momentum as the 3m-3m % change in monthly averages of the market index
Rates cuts to likely be back-loaded if further rupee pressure disrupts fall in inflation momentum
A tough spot to be in: The outlook on policy rates this year is not clear-cut and there are the conflicting considerations of inflation, growth, rupee and capital flow concerns amidst the on-going eurozone debt crisis. When the RBI met at its credit policy review in Dec-11, it emphasized growth concerns while remaining comfortable with the evolving trajectory of inflation which it said was in line with its projected 7% by Mar-12. High inflation remained a concern for the RBI, especially given rupee weakness, but concerns were mitigating in light of the on-going slowdown in growth momentum and quickly moderating food inflation. Rate cuts will likely be back-loaded this year: In our base-case scenario, while inflation would be on the decline this year, its fall would be tempered by the fall in the rupee. This means that it would take that much longer for the RBI to be comfortable enough with inflation numbers before going in for a rate cut. We reckon that a fall in inflation below 7% or so could trigger policy action, unless the RBI deems growth headwinds to have intensified enough to warrant a cut with inflation above 7%; which would be unlikely, in our view, given the strong anti-inflation stance the RBI has taken in the past year. Significant rate cuts are also unlikely in the first half because external sector pressures and concerns on capital flows would be elevated. A cut would reduce Indias rate differentials at a time when the RBI is taking several measures to attract capital inflows. The macro environment would look much better in the second half of the year, in our view as, the transmission process of previous rate hikes would have had that much more time to play out; current account concerns would also have eased as import demand would have contracted in line with the growth slowdown and weaker rupee; and the worst of capital account concerns would likely be behind us. Key risks for interest rates here are: (1) any further rupee weakness arising from eurozone deleveraging, (2) a cost-push shock such as a spike in the price of oil on geopolitical risks; (3) continued fiscal profligacy
Rate cuts will likely be backloaded this year if continued rupee pressure hijacks fall in inflation momentum
Jun-00 Nov-00 Apr-01 Sep-01 Feb-02 Jul-02 Dec-02 May-03 Oct-03 Mar-04 Aug-04 Jan-05 Jun-05 Nov-05 Apr-06 Sep-06 Feb-07 Jul-07 Dec-07 May-08 Oct-08 Mar-09 Aug-09 Jan-10 Jun-10 Nov-10 Apr-11 Sep-11
28
January 13, 2012
Valuations not demanding and are pricing in a significant cut to earnings, but waiting for triggers
What has gone wrong with the Indian market in the last few months?: When we became more constructive on the market in June-end last year, our view was driven by slowing inflation momentum and a consequent lagged drop in interest rates, which would have led to firming up of markets. Subsequently, the European situation flared up starting August, which in more ways than one has delayed market recovery. First, the weakening of external demand has delayed the recovery of the current account. Second, the rupee has underperformed significantly in the last five months as capital flows have turned weaker. Third, this has pushed back the anticipated fall in inflation. Fourth, the fall in the rupee has exacerbated the fiscal situation and has led to higher oil and fertiliser subsidies. As we take a fresh view on the market this year, we think that a likely continuation of the European situation means that the Indian economy would have to contend with adjusting its growth downwards in order to deal with the weaker global situation. This is especially true in view of Indias capital account which is going to remain under pressure for another twelve months. We think a significant recovery is Indias external situation is a near certainty over this period as a slowing economy would lead to a current account recovery and debt repayments would whittle down to more manageable levels. In our view, the markets are not discounting this recovery market multiples are now discounting the rate cycle to remain elevated for a significantly longer period. However, between then and now, the path of the market is less clear. The market is trading at a reasonable discount to its long-range average: At current levels, the market is trading at 12.0x 12-month consensus-based forward earnings, which translates to a 23% discount to its five-year average. At these levels valuations appear to be discounting a significant cut to earnings and further downside to economic growth.
Fig. 47: The market is trading at a reasonable discount to its 5-yr average
34 29 24 19 14 9
Oct-98 Apr-97 Sep-01 Dec-05 Jun-07 Nov-08 May-10 Feb-03 Mar-00 Oct-11
Our change in view on the market in end-June was hijacked by the global risk flare up and the ensuing rupee weakness
Market multiples are pricing in a significant cut to earnings, further downside to economic growth and an elevated rate cycle
Sensex 12-m fwd P/E
5-year average = 15.5x
and could get cheaper with respect to bonds if inflation comes off: Additionally, with respect to bonds, we think equity valuations are beginning to look a lot more attractive, as can be seen in the Exhibit below, which plots the Sensex earnings yield vs. the 10- year government bond yield. Bond yields have come off from their highs of Nov-11 on the back of growth concerns and expectations of the next move by the RBI to be a cut in rates; OMO support by the RBI also aided the decline in bond yields. Although inflation has in a way been hijacked by the sharp depreciation of the rupee, food inflation has started to decline, leading to tempering of inflation expectations. Manufactured products inflation should begin to react to the ongoing slowdown in growth and a tepid outlook for global commodity prices in the face of slow global growth expected in 2012 and a likely stronger dollar amidst elevated risk aversion emanating from ongoing eurozone debt problems. Any major downside surprise in inflation could easily push equities into relatively cheap territory quite quickly, in our view.
Jul-04
Valuations would start looking more attractive as inflation eases and bond yields fall
29
January 13, 2012
Fig. 48: The markets earnings yield is looking attractive with respect to the risk-free rate
(%) 13 9 5 1 (3) (7) Overvaluation territory Sensex earnings yield less 10-yr govt bond yield
Undervaluation territory
Oct-01
Aug-04
Dec-98
Jan-06
May-00
Dec-08
The market multiple is already pricing in significant risk to earnings: As we mentioned, compared with its long-range trading average, the market is currently trading at a 23% discount. This, we believe, provides sufficient room for some correction in earnings were it to happen.
Fig. 49: Market valuations are pricing in a significant cut to earnings
At 5% cut to earnings 12.6 -19% At 10% cut to earnings 13.2 -15%
May-10
Mar-03
Oct-11
Jul-07
The market multiple is pricing in significant risk to earnings
Currently Sensex P/E multiple Discount to 5-year avera

12.0 -23%
The shape of things to come: In our view, the market would be driven by the evolution of key macroeconomic variable in the coming months. This is what we expect from here: Interest rates and inflation: while the rate cycle has peaked, a cut in policy rates could be slow because the time required for inflation to fall to levels comfortable for the RBI to cut aggressively has been pushed back because of the weaker rupee. Also, Indias external position is likely to remain stretched over the next 6-12 months due to reasons mentioned earlier in the report. A large cut in rates would reduce Indias rate differentials at a time when the RBI is taking several measures to attract capital inflows. The rate cycle therefore would ease significantly only towards the second half of the year. However, government bond yields could fall further on growth concerns and falling inflation. This would make market earnings yield look increasingly attractive. An increase in concerns on the fiscal situation is a risk here. External situation: would remain weak till the time the European situation is resolved one way or the other. A significant deterioration could actually put further pressure on the currency in the short term. The focus would be on the capital account while current account concerns would mitigate. Government policy: structural reforms and fiscal prudence are needed to bolster risk flows and create room for rate cuts. On the fiscal side, the primary issue is that of subsidies. Till the time the government moves decisively to cut subsidies, it is not very likely to comfort the markets on fiscal deficit concerns. Structural reforms would depend on the political equations post the impending state elections in February. Growth: as we discussed in detail in an earlier section, the short-term visibility of growth is not strong. A recovery is contingent on the rate cycle which would start declining only with a lag.
The market would take cues from how key macro data evolve from here in the backdrop of continuing concerns on Europe
30
January 13, 2012
Clouded first half, better second half: Of the four macro variables mentioned above, there is little visibility of improvement in the immediate future. Market multiples have already adjusted downwards to account for lower growth and high interest rates. To that extent, we believe that the downside to the markets is limited as interest rates should start to come down, albeit with a delay. The path to recovery would be rather clouded as the news flow would improve only with a lag.
There is limited visibility the in near-term. The second-half of the year looks better
Earnings expect some downside to FY13F earnings

Earnings have been cut by 10-12% over the past 12 months: In Dec-10, we had argued that prospects for corporate profitability in 2011 would be shaped by a tough macroeconomic environment and saw downside risk to consensus earnings growth expectations of 20% for FY12F. The Exhibit below shows the evolution of FY12F and FY13F consensus earnings for the Sensex over the past 12 months. Given the reasonably strong economic environment through FY10, consensus earnings expectations were stable until the early part of 2011. Since then we have seen consistent consensus earnings downgrades. Earnings have been cut by 10% for FY12F and by 12% for FY13F, much in line with our expectations and consistent with the deterioration in the macroeconomic environment in the latter part of 2011.
Fig. 50: Consensus earnings have fallen significantly over the past year
(Base 100 = Dec'10) 102 98 94 90 86
Dec-10
Consensus earnings have been cut 10-12% over the past year
SENSEX Earnings Index FY12 SENSEX Earnings Index FY13
May-11
Nov-11
Feb-11
Mar-11
Jun-11
Aug-11
Sep-11
with a tough macro backdrop for earnings: At the beginning of 2011, the prospect for earnings for the year appeared subpar to us signs of increasing tightening of liquidity, sticky inflation, an inflation-focussed RBI (policy rates were hiked by 225 bps in 2011) and rising cost pressures from global commodities portended a tough macroeconomic backdrop for corporates in the year ahead. It was after the sovereign risk flare-up in the later part of 2011 that prompted serious downgrades of earnings by consensus, aided by policy-led slowdown in the investment cycle. The sharply depreciating rupee in the last quarter and the all-around growth-pessimism prompted yet another round of downgrades after Oct-11. Readings on industrial production, which had been hovering around an average of 7.5% in the 1HCY11, took a decided turn for the worst in the second half of the year and added further pressure on FY12F and FY13F earnings estimates. Expect FY13F Sensex earnings growth of around 10-12%: We think the trajectory for earnings in 2012 would likely slow. Earnings could see some more risk as the economy feels the lagged impact of the rate tightening cycle; the Exhibit below shows the leverage of corporate earnings to growth. We reckon another couple of quarters of growth slowdown as the effect of tight credit plays out with a lag. This would likely translate into weakening earnings growth in the first half of the year. We also note that there are headwinds to earnings growth from adverse base effects in the first half of FY13F as earnings slowdown worsened in the second half of FY12.
Dec-11
The macro environment turned decidedly tough for earnings in 2H11
See downside risk to earnings growth in 1H of this year. As well, there are adverse base effects to contend with. Pressures should subside in later part of the year
31
January 13, 2012
Expect a better second half of 2012: We think the second half of 2012 should be favourable for corporate profitability the lagged effects of rate tightening would have largely played out; we would likely be in the middle of a rate-cutting scenario; rupee headwinds would have largely receded; commodity prices would likely be range bound on weak global growth, and earnings growth would have the tailwind of strong base effects. as interest cost pressures subside: The significant rise in interest rates through last year has caused corresponding margin pressures on corporates through higher interest costs. The Exhibit below plots Interest/EBIT ratio against the interest rate and suggests that there we are most probably going to see interest costs rise further from here for the next six months or so before they stabilise, and fall when the rate cycle turns.
Fig. 51: In addition, the lagged impact of monetary tightening will likely keep margins under pressure for two more quarters
(%) 45 40 35 30 25 20 15 10 5
Sep-00 Sep-02 Sep-04 Sep-06 Sep-07 Sep-08 Sep-09 Sep-11 Sep-01 Sep-03 Sep-05 Sep-10
Expect FY13F Sensex earnings growth of 10-12%
See margin pressures in first half from lagged effects of rate tightening and high commodity prices. Weak outlook for global commodity prices in 2012 would subsequently be a tailwind for earnings
Interest/EBIT,1qtr lag (LHS)
Prime lending rate (RHS)
(%) 16 15 14 13 12 11 10 9
0
Mar-00
Mar-01
Mar-02
Mar-03
Mar-04
Mar-05
Mar-06
Mar-07
Mar-08
Mar-09
Mar-10
Source: Ace Equity, Bloomberg, Nomura research Note: BSE100 ex-oil & gas and banks
and commodity price pressures recede: Yet another source of margin pressure for corporates would be from higher commodity prices which typically lead input costs by about a quarter (Exhibit below). In this regard, the sharp depreciation of the rupee in Dec-11 quarter has undone the beneficial effect from the correction in USD-denominated global commodity prices. While commodity prices in Dec-11 quarter (as proxied by the CRB raw material index) were flat in USD terms, they were up 14% in INR terms. On the positive side, commodity prices are expected to be weak in 2012 as global growth slows down and the dollar remains strong amidst elevated global risk aversion. We expect input cost pressures for corporates to begin to subside in the next 3-6 months.
Mar-11
32
January 13, 2012
Fig. 52: Margin pressures on account of higher commodity prices might persist for another 3-6 months. The benevolent effect of weakening global commodity prices was offset by the sharp depreciation of the rupee
(y-y %) 60 50 40 30 20 10 0
Sep-02 Sep-04 Sep-06 Sep-08 Sep-10 Sep-03 Sep-05 Sep-07 Sep-09 Sep-11
COGS1qtr lag (LHS)
CRB (RHS)
(y-y %) 50 40 30 20 10 0 (10) (20) (30) (40)
(10)
Mar-02
Mar-03
Mar-04
Mar-05
Mar-06
Mar-07
Mar-08
Mar-09
Mar-10
Revenue growth has benefited amidst high inflation and strong pricing power of corporates: Revenue growth has surprised positively this past year. Corporate top-lines have been resilient even as profits have been weak. One explanation for this could that firms have enjoyed strong pricing power on an overall basis and have been able to pass along rising input costs. This is not entirely surprising given that Indias is a supplyconstrained economy and is probably characterised by excess demand at a given price level. Another reason for the strength in net sales growth is that manufactured product prices still remain high because the global commodity complex and aggregate demand have not collapsed like they did during the crisis period.
Fig. 53: Revenue growth bears a close relationship with inflation on average, suggesting that corporates have reasonably strong pricing power
(y-y %) 60 50 40 30 20 10 0 (10)
Mar-02 Mar-03 Mar-04 Mar-05 Mar-06 Mar-07 Mar-08 Mar-09 Mar-10 Sep-03 Sep-05 Sep-07 Sep-08 Sep-09 Mar-11 Sep-11 Sep-02 Sep-04 Sep-06 Sep-10
Mar-11
Expect FY13F Sensex earnings growth of 10-12%
Net sales (LHS)
WPI (RHS)
(y-y %) 14 12 10 8 6 4 2 0 (2)
Overall, we expect 10-12% earnings growth in FY13F: Based on assumptions on domestic and global growth, inflation and global commodity prices, we estimate FY13F Sensex earnings growth of 10-12%.
33
January 13, 2012
Policy and political economy a clouded picture

A tough year for the government: 2011 was a tough year for the economy from the policy environment point of view. The aftermath of the 2G scandal put the incumbent government in a relatively weaker position. Parliament sessions have been largely dysfunctional; attempts at pushing through reforms, such as pension bill and FDI in retail have been blocked by allies of the ruling coalition. The anti-graft movement has slowed down decision-making across government levels. We do not have high hopes from the government on an overall basis for the rest of its term. UPA, in general, is not a reformist government: We do note that the reform process under the present government has always been weak lack of reforms has been an old issue, not a new one (please see Appendix). Why has the perception on policy making plunged to new depths then? First, it is due to the policy paralysis and weakness set into motion as corruption scandals unfolded over the course of the past year. Second, in part it is due to the governments inability to control its finances, which is keeping interest rates at high levels. Third, the RBIs tightening, which has slowed down the economy, is also getting blamed on governments policy actions as the necessity of raising rates is considered, to some extent, as cleanup action post fiscal mess of government finances. We think there are two fundamental issues that are impacting the policy environment in India: Fragmentation of mandate: Post the 1991 Mandal Commission (reservations), caste dynamics became a very important driver of Indian politics. This essentially led to fragmentation of politics at state levels. The result of this has been constant marginalization of national parties at the expense of local parties. Additionally, since the agenda at state levels tends to be more populistas recently seen in TMCs opposition to the governments moves to hike fuel prices, raise retail FDI and pass pension reformthe national agenda tends to get diluted.
Fig. 54: Fragmentation of Indian politics
Top 2 parties/total seats 73% 83% 73% 79% 64% 68% 40% 59% 55% 52% 59% JD formed the party with outside suppport of INC Bhartiya Lok Dal - transitory party which won power as a result of emeregency related pushback (Janta Dal) Janata Dal declined and Congress came back to power
We see little hope for big-bang reforms during the tenure of the present government
Year 1971 1977 1980 1984 1989 1991 1996 1998 1999 2004 2009
Dominant party INC BLD INC INC INC INC JD BJP BJP INC INC
No. of seats 352 295 353 404 197 232 46 182 182 145 206
2nd biggest party CPM INC JNP (S) BJP JD BJP BJP INC INC BJP BJP
No of seats 25 154 41 2 143 120 161 141 114 138 116
Top party/total seats 68% 54% 65% 79% 37% 45% 9% 34% 34% 27% 38%
Remarks
Governance and politics: The second issue with the present government is the split nature of power sharing at the center. UPA-I saw creation of the National Advisory Council (NAC) which advises the prime minister on policy. NAC is headed by the President of the Congress party, Ms. Sonia Gandhi, and its other members usually consist of several social activists. NAC is largely responsible for populist schemes such as National Rural Employment Guarantee Act (NREGA) and is now pushing for the Food Security Bill. NACs suggestions have led to a significant increase in social spending, which has led to a structural increase in the fiscal deficit. Another issue is about authority of the prime minister. In all governments formed earlier, prime ministers are typically politicians who are also de facto leader of political parties. Thus there has been a separation of governance from politics which by nature of
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January 13, 2012
politics would mean that political compulsions would win the day. Additionally, there is lack of coherence of policy between ministries in absence of a strong political leader in the PMs chair. This has meant that internal consensus is very tough to garner. A good example of this would be UIDAI (Unique Identification Authority of India), which has been opposed by the Home Ministry even though the initiative is widely considered as the key solution to control subsidies. Finally, the Congress does not have requisite numbers in the upper house of the Parliament to get key bills through. The opposition, sensing the governments weakness is likely to stall most of the bills in the upper house. In conclusion, we believe that the above two factors would continue to shape governance at the centre, which essentially means that there is little hope for big bang reforms in the tenure of the current government. What has changed now? The fact remains that the functioning of the government was presumed fine till the corruption scandals broke out. What has changed to make the perception worse? We believe that five basic factors have changed the way investors perceive the governments functioning: Surprises on fiscal deficit/current account: Instead of the promised fiscal tightening, the governments unwillingness to burden the population with higher cost of energy prices and take cognizance of fiscal pressures and start cutting down on subsidies have changed the perception of fiscal management. That the government continues to pursue the Food Security Bill despite the worsened fiscal situation makes the fiscal perception worse than expected. Inflation persistence and tightening cycle: Over the past one year, the RBIs persistence with tightening measures even as growth was starting to soften has spooked the markets. The persistence of inflation is largely blamed on the government 1) on its inability to raise supplies quickly, and 2) on its populist policies which keep the demand-side stoked. As the economy slows down, the current environment has started to shape long-term fears on Indias growth. Rupee depreciation: The unexpected depreciation of the rupee has possibly been the main reason for the disenchantment of investors as, on a common USD-basis, the Indian market has been amongst the worst performers in 2011. Given Indias current account deficit and the governments clear preference for populism, the pessimism on rupee has grown, making investors more wary about the market. Increasing inability of the government to take decisions: Finally, the recent evidence of the government not being able to push significant reform agenda and reversal of measures such as FDI in retail have dashed hopes of an upturn in the policy environment. More populism in the offing? The other issue is whether the weakened political problem would lead to a continuation of policy logjam at the center and whether the government would become more populist at the expense of crowding out the investment cycle in order to regain its popularity. Is further policy action contingent on elections? The Exhibit below shows the schedule for upcoming state-level elections in India. February 2012 would see completion of a large number of state elections. Many of the unpopular decision such as fuel price hikes have been stuck because of these elections. The most important election of these is that in the Indian state of Uttar Pradesh (UP), a state where regional parties have held sway for a long period of time. Loss of UP to regional parties has had significant impact on national politics on account of large number of seat the state accounts for in the Parliament. If the Congress party could improve its tally in the UP elections, it could be expected that the policy environment would improve from then on.
The outcome of the UP state elections would be important in shaping future policy Investor confidence in the government has taken a hit
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Fig. 55: Upcoming state-level elections in India
6
Uttarakhand UP Punjab Manipur Goa 1HCY12
5 Tripura Nagaland Meghalaya
Rajasthan Mizoram MP J&K Delhi Chhattisgarh 2HCY13 3 Sikkim Orissa AP 1HCY14 4 Maharashtra Jharkhand Haryana Ar P 2HCY14 0 1HCY15 1 Bihar 2HCY15
5 WB TN Puducherry Kerala Assam 1HCY16
1
Gujarat 2HCY12
Karnataka HP 1HCY13
Note: We have assumed that state governments will complete its five year tenure in office Source: Election Commission of India, Nomura India power & utilities report SEBs Policy diktats potent, adherence crucial
Key themes
Portfolio construction conflicting considerations: The challenge in portfolio construction for the year ahead is conditioned by conflicting considerations. Many of the factors which are headwinds for the markets in the first half of the year would likely begin to turn around in the second half. However, given the uncertain global environment it is not easy to time this. In essence, we believe that the flare up of European crisis has delayed the recovery of markets by about 6-9 months. Key considerations: Our sector views are underpinned by the following factors: We are of the view that the European crisis is causing a readjustment in Indias growth trajectory as a shortage of capital causes shrinkage in capital-use through credit channels. However, the short term inflexibility in the current account due to past investment momentum and significant switch of household savings to gold have caused the rupee to depreciate more than other Asian currencies. We expect the current account to improve going forward, but this will possibly happen gradually. The currency weakness is compounded by significant debt repayments lined up over 2012. We note that debt repayments will not be an issue beyond 2012, and therefore, as the year progresses, the headwinds of rates would start turning into a tailwind. In the short term, however, managing the currency and money supply is likely to be a headache for RBI as a lot of this would be driven by external factors. Rates have peaked and the rates cycle should start turning softer. As we said earlier, the short term issue is more about managing liquidity and currency. In face of that, rate cycle may move down slowly. The shortage of external capital should mean a substitution to domestic banks which should keep pricing power of banks reasonably high with positive implications for NIMs. The risk is on non performing assets, which we note have played out in valuations. We also note that while Indias inflation is high and its descent has been tempered by rupee depreciation, we do think that inflation would continue to moderate and this would eventually reflect in rates. The rupee would continue to be weak in the next 6-9 months period. Despite the fact that it is possibly undervalued at current levels, the rupee would be driven by capital account and European debt concerns. Finally, we believe that growth will be slow in the coming months. The drivers of the slowdown may change as corporate investment cycle slows with a lag. Household investments may shift back to physical and financial assets from valuables as inflation starts to head down and rate cycle moderates. Hence, we would play Indias investment
36
January 13, 2012
cycle through cement sector rather than capital goods. We also note that slowing growth would lead to weak government finances which would mean that its ability to spend incrementally would be compromised. The consumer cannot expect too many freebies from the government from here on, in our view. The way to play the market therefore would be through a portfolio which reflects a weak currency and possible peaking of inflation and interest rates. We think that as the investment cycle turns down the market would not take very kindly to capital goods companies. Given the paucity of cash flows, we like companies with strong cash flows, at least in the short term.
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Long-only basket
Fig. 56: Recommended long-only basket
Bloomberg Ticker MM IN SBIN IN ICICIBC IN AXSB IN SRCM IN GRASIM IN MSEZ IN VOLT IN GCPL IN JUBI IN TATA IN STLT IN CAIR IN PLNG IN LPC IN GNP IN DRRD IN DLFU IN INFO IN HCLT IN BHARTI IN NATP IN PWGR IN COAL IN Current Price 655.6 1,672.8 751.7 853.5 2,135.3 2,418.5 127.7 76.3 382.3 752.6 363.7 94.9 339.1 160.0 442.9 291.4 1,600.6 174.6 2,832.2 417.6 330.6 157.0 99.8 318.1 Target Price 896 2,400 1,050 1,400 2,933 3,014 180 150 524 1,100 568 169 350 220 576 414 1,911 270 3,300 530 390 206 120 433
Sector Automobiles Banks
Sector Stance Underweight Overweight
Cement
Overweight
Stocks Mahindra & Mahindra State bank of India ICICI Bank Axis Bank Shree Cement Grasim Industries Mundra Port Voltas Godrej Consumer Products Jubilant Foodworks Tata Steel Sterlite Industries Cairn India Petronet LNG Lupin Glenmark Pharma Dr. Reddys Laborotories DLF Infosys Technologies HCL Technologies Bharti Airtel NTPC Power Grid Corp Coal India
Rating BUY BUY BUY BUY BUY BUY BUY BUY BUY BUY BUY BUY BUY BUY BUY BUY BUY BUY BUY BUY NEUTRAL BUY BUY BUY
Infra & Construction Electrical Equipment FMCG Metals Oil and gas Pharmaceuticals
Underweight Underweight Underweight Underweight Underweight Overweight
Property IT services Telecoms Utiltities
Overweight Overweight Overweight Overweight
Note: Relative weightings for sector allocation given here are different from absolute sector ratings given in the sector sections of this report; pricing as of 6 Jan Source: Bloomberg, Nomura research estimates
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APPENDIX
Fig. 57: India's reforms over the years
FY1999 Delicensing of coal, lignite, petroleum, bulk drugs and sugar Coal, lignite and mineral oils removed from sole purview of public sector Announcment of disinvestment of IOC, GAIL, CONCOR, VNSL Buybacks by corporates permitted Automatic route FDI limits enhanced 100 per cent foreign equity permitted in electricity generation, transmission and distribution 100 per cent foreign equity permitted in construction & maintenance of roads, highways, bridges, ports and harbours No prior approval of RBI for FDI/NRI/OCB after FIPB/Govt approval Electricity Act of 1948 amended for private investment in power transmission Setting up of central electricity regulatory commission, provisions for state ERCs Additional tax at the rate of one rupee per litre on petrol imposed. To generate Rs.790 crore in a year and the proceeds to be utilised to augment the corpus of the National Highways Authority of India (NHAI) A National Integrated Highway Project merging the golden quadrilateral connecting Delhi, Mumbai, Chennai and Calcutta with the East-West (Silchar to Saurashtra) and North-South (Kashmir to Kanya Kumari) corridors launched The Government announces that five cities will be identified for developing world class international airports IDFC on par with other All India Public Financial Institutions regarding fiscal incentives and the fund raising benefits extended to these institutions The repeal of the Urban Land (ceiling and regulation) Act, 1976 FY2000 RBI introduceS an Interim Liquidity Adjustment Facility (ILAF) in place of the General Refinance Facility with effect from April 21,1999 Relaxation of listing requirement in respect of securities in the IT sector by reducing the stipulated minimum offering of securities from 25 per cent to 10 per cent The passing by Parliament of the Securities Laws (Amendment) Bill, 1999, incorporating derivative instruments in the definition of securities in the Securities Contract (Regulation) Act, 1956 Introduction of rolling settlement for 10 select scrips with effect from January 10, 2000 Insurance Regulatory and Development Authority (IRDA) Bill passed by the Parliament in December, 1999 which, inter alia, gives statutory status to the interim Insurance Regulatory Authority, opens up the insurance sector to private providers, allows foreign equity in domestic insurance companies subject to a maximum of 26 per cent of the total paid-up capital Reduction of long-term capital gains tax from 20 per cent to 10 per cent for resident Indians Reduction in the existing 7 major ad valorem rates of customs to 5 basic rates and rationalisation of both import duty and excise duty structures Free Trade Zones (FTZ) to replace export processing zones and to be treated as outside the countrys customs territory Far-reaching rationalisation of the excise duty structure by reducing the existing eleven rates to only three Tax incentives for facilitating industrial restructuring through mergers and amalgamations Extension of infrastructure sector tax holiday to power transmission The scope of the automatic approval scheme of the RBI significantly expanded FDI up to 74 per cent, under the automatic route, in bulk drugs and pharmaceuticals Restructuring the US 64 scheme of UTI (Unit Trust of India), a favourable tax treatment of incomes earned through mutual funds A new Department of Disinvestment created for expediting disinvestments in PSEs Uniform tax holiday of 15 years for all infrastructure sector projects Mega Power Project policy announced Accelerated Power Development and Reforms Programme (APDRP) introduced Restructuring of SEBs to be encouraged; new transmission and distribution systems to get fiscal benefits given to infrastructure sector Domestic long distance calls to be opened up Department of Telecom Services (DTS) to be corporatised by 2001 DTS/MTNL to enter as third cellular operators TRAI (Telecom Regulatory Authority of India) reconstituted through an ordinance Existing licence holders of basic and value added services allowed to switch over to a revenue sharing agreement A new cess of Re.1 per litre on HSD (High Speed Diesel) imposed to generate funds to be transferred to Central Road Fund. Most of it to be used for development and maintenance of State Roads and National Highways Model Concession Agreement for BOT (Build Operate Transfer) for road project of more than Rs. 100 crore and less than Rs. 100 crore fi li d Indian Railway Catering & Tourism Corporation (IRTC) Ltd. incorporated as a government company with the objective of upgrading and managing rail catering and hospitality Ministry of Petroleum and Natural Gas crafts the New Exploration License Policy (NELP) in 2000, which permits foreign companies to hold 100% equity possession in oil and natural gas projects. To date, only a handful of oil fields controlled by foreign firms
Comments Major Major Major Minor Minor Major Major Minor Minor Major Minor Major Major Minor Major
Minor Minor Major Minor Major
Minor Minor Minor Minor Minor Major Minor Minor Minor Major Major Major Major Major Major Major Minor Major Major Major Major Minor Major
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Fig. 58: India's reforms over the years (continued)

FY2001 A new programme called Sarva Siksha Abhiyan announced to enable all children to enroll by 2003 and expand the coverage of District Primary Education Programme To fulfill critical needs of the rural people, a new scheme, Pradhan Mantri Gramodya Yojna launched with an outlay of Rs.5000 crore The system of central excise drastically overhauled with the introduction of a single Central Value Added Tax (CENVAT) of 16 per cent ad valorem on all manufactured goods with a few exceptions States/Union Territories encouraged to implement their agreed programme for converting their sales taxes into VAT by 1.4.2002 The peak rate of import duty scaled down further from 40 per cent to 35 per cent The Budget proposed to bring out an institutional mechanism embodied in the Fiscal Resposibility Act. Accordingly, the Fiscal Responsibility and Budget Management Bill (FRBM), 2000 introduced in Lok Sabha in December, 2000. The Bill provides for elimination of revenue deficit and reduction of the fiscal deficit to not more than 2 per cent of gross domestic product within a period of five financial years Transition to a full-fledged Liquidity Adjustment Facility (LAF) involving injection and absorption of liquidity via variable rate reverse Repo auctions and variable rate Repo auctions respectively Legislative initiative to reduce the proportion of Government holding in the equity of nationalised banks Permission to raise FII equity limit to 40 per cent through a special resolution by shareholders Removal of cap on investment in the power sector 100 per cent FDI permitted in oil refining 100 per cent FDI allowed in Special Economic Zones (SEZs) for all manufacturing activities 100 per cent FDI allowed in Telecom Sector for certain activities with some conditions The States of Orissa, Harayana, Andhra Pradesh, Uttar Pradesh, Karnataka, Delhi and Rajasthan enact their Electricity Reforms Acts. Madhya Pradesh Legislative Assembly passes Electricity Reforms Bill. Gujarat also drafts Reforms Bill A fourth cellular operator in all the circles permitted Limited mobility to fixed service providers in the form of Wireless In local loop (WILL) 20 BOT road projects awarded FY2002 The coverage of service tax at the rate of 5 per cent on the value of taxable service expanded to include fifteen new services Decision taken that all States and Union Territories will implement VAT from April, 2003 Level playing field to private insurers accorded by allowing similar benefits to them and their clients as are available to LIC, GIC and their clients Government of India draws up a scheme called the States' Fiscal Reforms Facility (2000-01 to 2004-05). Incentive Fund of Rs.10,607 crore earmarked over a period of five years to encourage States to implement monitorable fiscal reforms. Three areas emphasized - Fiscal consolidation, PSE Reforms and Power sector reforms Income tax at source made deductible at the rate of 10 per cent Freedom for banks to lend at interest rates below their respective PLRs (Prime Lending Rates) to exporters and other creditworthy borrowers (including public enterprises) VRS (Voluntary Retirement Scheme) implemented by 26 out of 27 public sector banks in 2000-2001 Clearing Corporation of India Limited (CCIL) set up Negotiated Dealing System (NDS) introduced in phases to supplement or replace the current telephone mode used in trading on the fixed income market Rolling settlement extended to all stocks and all exchanges. Cycle shortened to T+3 Peak level of customs duties to decline marginally from 38.5 per cent to 35 per cent Extension of the concessions available for infrastructure by way of 10-year tax holiday to the developers of Special Economic Zones (SEZs) on the same lines as developers of industrial parks Futher impetus on SEZ Quantitative restrictions on exports of agricultural items like wheat, wheat products, coarse grains, butter and non-basmati rice and packaging restrictions on exports of pulses were in February, 2002 Ten-Year tax holiday for the core sector of infrastructure, namely, roads, highways, water-ways, water supply, sanitation and solid waste management systems, which may be availed of during the initial twenty years In the case of airports, ports, inland ports, industrial parks and generation and distribution of power, which also become commercially viable only in the long run, a tax holiday of ten years allowed to be availed of during the initial fifteen years Tax incentives have been provided for the investors providing long-term finance or investing in the equity capital of the enterprises engaged in infrastructure facility. Any income by way of interest, dividends or long-term capital gains from such investments fully exempt Electricity Bill 2001 introduced in Parliament Central Government to accelerate the program of reforms for State Electricity Boards (SEBs) anchored in Centre-State partnership on the following: 1) A time bound program for installation of 100 percent metering; 2) Energy audit at all levels; 3) Commercialization of distribution; 4) SEB restructuring Competition introduced in all service segments of telecoms The total outlay for the road sector enhanced Rs 2,500 crore assistance out of Pradhan Mantri Gram Sadak Yojana (PMGSY) to provide connectivity of every village with a population of over 1000 persons through good all weather roads by year 2003 and those with a population of upto 500 persons by 2007 Pradhan Mantri Gramin Yojna (PMGY) extended to cover rural electrification Continued dereservation for small scale industry Follow up Follow up Follow up Follow up Major Major Major Major Minor Major
Minor Major Minor Major Major Major Minor Follow up Follow up Follow up Major
Major Minor Follow up Minor Minor Follow up Follow up Minor Follow up Follow up Follow up Minor Minor
Major Major
Major Follow up Major Major Follow up
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FY2003 To reduce the interest burden of States, a debt swap scheme enabling States to swap their high cost Central Government loans bearing a coupon rate of 13 per cent and above with relatively low cost market borrowings and loans from NSSF, put in place Enactment of "Securitisation, Reconstruction of Financial Assets and Enforcement of Security Interest Act 2002. Act enabled setting up of ARCs (Asset Restructuring Companies). Enabled debt recovery by taking possession of assets. Paved the way for enhanced power of banks in default situations Further enhancement of SEBI's power Corporate disclures made widely available through Electronic Data Information Filing and Retrieval Further concession given to SEZs in terms of procurement of duty free equipment, raw materials and components Continued dereservation from small scale industry Reduction in peak import duty from 35 per cent to 30 per cent Significant reduction in ECB usage restrictions 100 per cent FDI premitted in advertising, film, tea, township development including housing, commercial premises, hotels, resorts and regional urban infrastructure, in manufcturing of SEZs 26 per cent FDI alllowed in print media Disinvestment od Hindustan Zinc, Maruti, IPCL, Modern Foods and eleven government-owned hotels Infrastructure Equity Fund set up for providing equity investment in infra projects IDFC to act as coordinating agency for coordinated debt syndication for infrastructure 20 state government sign MOUs (Memorandum of Understanding) with center for timebound reforms State level electricity regulatory commissions start to function SEB (State Electricity Board) debundling starts APDRP (Accelerated Power Development and Reform Programme) given further thrust Airport modernisation started Mass rapid transport thrust introduced. Urban Delhi Metro project slated for completion in 2005 Monitoring of government project strengthened to reduce delay. Starts to show results Electricity distribution privatised in Delhi in July 2002 The Ministry of Agriculture circulates a model Agriculture Produce Marketing Committee (APMC) Act, 2003, and suggests amendments to the State APMC Acts so as to promote investment in marketing infrastructure, motivating corporate sector to undertake direct marketing and to facilitate a national integrated market FY2004 - change of the government takes place to UPA late in FY2004 Fiscal Responsibity and Budget Management (FRBM) bill 2003 introduced and made into an Act in August 2003. Specified revenue and fiscal deficit targets. Borrowing from RBI not allowed for bridging deficit. RBI not to subscribe to primary issuances of government paper from FY07. Review of fiscal policy every year. Quarterly review of fiscal situation. Shift from contribution pension system to defined pension benefit for central government employees Introduction of risk based supervision in the banking sector Issuance of guidelines for "Securitisation, Reconstruction of Financial Assets and Enforcement of Security Interest Act FDI in banking increased to 74% from 49%. Foreign banks allowed to operate in India through 1) branches, 2) wholly owned subsidiary, and 3) a subsidiary with aggregate foreign investment upto a maximum of 74 per cent in a private bank Commodity futures trading allowed. Recognition granted to various commodity exchanges including MCX, NCDEX etc New regulator for pension sector - PFRDA (Pension Fund Regulatory and Development Authority) created with intent to efficiently manage pension funds and expected to develop a new class of institutional investors ECB policy liberalised further. All sectors except banks and financial institutions allowed in the ECB market 5 states enact fiscal responsibility legislations Disinvetmtnment in Maruti, Jessop, HZL, ICIL, IBP, IPCL, CMC, DCIL, GAIL, ONGC Electricity act notified in June 2003 28 States sign the tripartite agreement for onetime settlement of the dues of State Electricity Boards (SEBs) to Central Public Sector Undertakings (CPSUs), and, after securitizing the dues, 27 states issued bonds amounting to Rs. 28,983.85 crore, August 2003 onwards. Unified Access Service License regime introduced in October 2003 Pradhan Mantri Bharat Jodo Project for development of 10,000 kms of roads connecting state capitals with National Highways launched in January 2004. Rail Vikas Nigam set up in January 2003
Major
Major
Follow up Follow up Follow up Follow up Follow up Follow up Follow up Follow up Major Major Minor Follow up Follow up Follow up Follow up Major Minor Minor Follow up Major (not completed)
Major
Major Minor Follow up Follow up Major Major Follow up Follow up Follow up Follow up Major Follow up Follow up Major
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FY2005 Disinvestment agenda largely scuttled FRBM effective from July 2005 with the following targets -1) Reduction of revenue deficit by an amount equivalent of 0.5 per cent or more of the GDP at the end of each financial year, beginning with 2004-05. 2) Reduction of fiscal deficit by an amount equivalent of 0.3 per cent or more of the GDP at the end of each financial year, beginning with 2004-05. 3) No assumption of additional liabilities (including external debt at current exchange rate) in excess of 9 per cent of GDP for the financial year 2004-05 and progressive reduction of this limit by at least one percentage point of GDP in each subsequent year. 4) No guarantees in excess of 0.5 per cent of GDP in any financial year, beginning with 2004-05. 5) Specifies four fiscal indicators to be projected in the medium term fiscal policy statement. These are, revenue deficit as a percentage of GDP, fiscal deficit as a percentage of GDP, tax revenue as percentage of GDP and total outstanding liabilities as percentage of GDP. The universally accepted formula of exempt exempt tax (EET) adopted, that is, the contributions will be excluded from income for tax purposes; the accruals will also be exempt from tax; and only the terminal benefits will be taxed at the applicable rate in the year of receipt 3 more states likely to enact fiscal responsibility legislations States entered into debt swap to reduce the cost of debt. Process complete for 20 states Agreement to implement State level VAT from April 1, 2005 Development of mechanism for debt restructuring for medium enterprises on the lines of corporate debt restructuring Resident individuals already permitted to remit freely up to US$ 25,000 per calendar year for any current or capital account transaction Abolition of long term capital gains tax. Reduction in short term capital gains tax from 30 per cent to 10 per cent. Introduction of STT (Securities Transactions Tax) Indian corporates and partnership firms allowed to invest overseas up to 100 per cent of their net worth. Banks to draw a road map for moving towards Basel II by December 31, 2004. Increase in the FDI limits in Air Transport Services (Domestic Airlines) up to 49 per cent through automatic route and up to 100 per cent by non-resident Indians (NRIs) through automatic routes. (No direct or indirect equity participation by foreign airlines allowed). Foreign investment in the banking sector further liberalised by raising FDI limit in private sector banks to 74 per cent under the automatic route including investment by FIIs. The aggregate foreign investment in a private bank from all sources a maximum of 74 per cent of the paid up capital of the bank and at all times, at least 26 per cent of the paid up capital held by residents except in regard to a wholly owned subsidiary of a private bank. Further, the foreign banks permitted to either have branches or subsidiaries, not both. Foreign banks regulated by a banking supervisory authority in the home country and meeting Reserve Banks licence criteria will be allowed to hold 100 per cent paid up capital to enable them to set up wholly-owned subsidiary in India FDI ceiling in telecom sector in certain services (such as basic, public mobile radio trunked services (PMRTS), global mobile personal communication service (GMPCS) and other value added services), increased from 49 per cent to 74 percent, in February 2005. The total composite foreign holding 160 Economic Survey 2004-2005 including but not limited to investment by FIIs, NRI/OCB, FCCB, ADRs, GDRs, convertible preference shares, proportionate foreign investment in Indian promoters/investment companies including their holding companies etc., not to exceed 74 per cent. Generally, profit-making companies not to be privatised. NHDP (National Highway Development Project) Phase IV, a new initiative proposed with a view to providing balanced and equitable distribution of improved/widening highway network throughout the country by upgrading 21,000 kilometer of single - lane roads to 2-lane roads with paved shoulders, and for strengthening of 17,000 kilometer of the existing 2-lane highways and construction of paved shoulders FY2006 The corporate income tax rate for domestic companies and firms reduced from 35 per cent to 30 per cent. However, a surcharge of 10 per cent applies Service tax rate increased from 8 per cent to 10 per cent Rural Electricity Infrastructure and Household Electrification introduced in April, 2005 National Rural employement Guarantee bill passed in August 2005 Viability gap funding schemes introduced on generalised basis Peak rate of customs duty for non-agricultural products reduced from 20 per cent to 15 per cent. The emphasis on infrastructure development continued with the decision to set up a special purpose vehicle (SPV) for large infrastructure projects The Special Economic Zone (SEZ) Bill passed by Parliament in June 2005 Five sites including three coastal sites, one each in Karnataka, Gujarat and Maharashtra identified for development of Ultra-Mega Power plants (UMPP) with capacity of 4,000 MW each An All-India power grid, also called the National Grid, envisaged to be developed in a phased manner first by integrating a cluster of regions, and subsequently all the regions by the year 2012 NHDP (National Highway Development Project) Phase V, VI and VII proposed. All future phases to be taken up on a PPP (Public Private Partnership) basis
Retrograde Follow up
Minor
Follow up Follow up Follow up Follow up Follow up Major Minor Minor Follow up Follow up
Follow up
Retrograde Follow up
Follow up Minor Rural thrust Rural thrust Major Follow up Follow up Follow up Major Major Follow up
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FY2007 The peak rate of duty on non-agricultural products reduced from 15 per cent to 12.5 per cent. Ambit of service tax to include several new categories Union Budget for 2006-07 announced interest rate relief at two percentage points on the principal amount up to Rs. 1 lakh on crop loans availed of by the farmers for Kharif and Rabi seasons 2005-06 PAN has been made mandatory with effect from January 1, 2007 for operating a Beneficiary Owner account and for trading in the cash segment The application process of FII investment simplified and new categories of investment (insurance and reinsurance companies, foreign central banks, investment managers, international organizations) were included under FII UMPP numbers expaned to 9 in total For encouraging competition in development of transmission projects, Ministry of Power notified Tariff-Based Competitive Bidding Guidelines for Transmission Service under Section 63 of the Electricity Act, 2003 The Ministry of Power issuance on approach and guidelines on development of merchant power plants (MPPs). Unlike traditional utilities, MPPs compete for customers and absorb the full market risk On August 23, 2006, Government notified Rural Electrification Policy under section 4 & 5 of the Electricity Act, 2003 FY2008 The peak rate of customs duty on non-agricultural products reduced from 12.5% in 2006-07 to 10% in 2007-08, with a few exceptions Further increase in services eligible for service tax De-tariffing of the general insurance industry Appointment by PFRDA (Pension Fund Regulatory and Development Authority) of three sponsors for pension funds for managing the corpus under the New Pension System for the Government employees after due consideration. These were the State Bank of India, UTI Asset Management Company Private Limited and Life Insurance Corporation of India 3 UMPPs (Ultra Mega Power Plants) awarded FY2009 and interim budget for FY10 Additional plan expenditure up to Rs. 20,000 crore for social sector schemes during financial year 2008-09 An amount of Rs. 85,942 crore authorized by way of bonds in 2008-09 for FCI, oil and fertilizer units Across the board cut of 4 percentage points in ad valorem CENVAT rate except for petroleum products Farm loan waiver (0.3 per cent of GDP) Significant customs duty exemptions announced to address the slowdown Implementation of the Sixth Pay Commission award (0.65 per cent of GDP) Higher levels of food and fertilizer subsidy (1.03 per cent of GDP) 49 per cent FDI in credit information companies allowed FDI up to 26 per cent and FII up to 23 per cent in commodity exchanges, subject to no single investor holding more than 5 per cent allowed FDI up to 100 per cent under the automatic route allowed both in setting up and in established industrial parks FDI cap in the civil aviation sector, which includes 74 per cent FDI in non-scheduled airlines, chartered airlines and cargo airlines, relaxed. 100 per cent FDI in maintenance and repair organizations, flying training institutes, technical training institutions, and helicopter services/seaplane services allowed FDI up to 100 per cent (with prior government approval) in mining and mineral separation of titanium-bearing minerals and ores, its value addition, and integrated activities allowed One more UMPP awarded Under NELP-VII, the award of 44 blocks has been approved Draft guidelines for 3G/BWA auctions announced No cap on service providers in any telecom area Restructuring of APDRP
Follow up Rural Thrust Minor Minor Follow up Follow up Major Rural Thrust
Follow up Follow up Follow up Follow up
Follow up
Populist Populist Response to crisis Populist Response to crisis Populist Populist Follow up Follow up Follow up Follow up
Follow up Follow up Follow up Follow up Retrograde Follow up
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FY2010 Budget mentioned direct fertiliser subsidies and introduction of nutrient-based subsidies Budget mentioned petrol and diesel pricing decontrol Not done yet Petrol prices deconotroled, but polticial will required for full deregulation Populist Populist Stuck now Follow up Major; stuck now and finally diluted Major; stuck Follow up
NREGA outlay hiked significantly by 140% National food security act talked about in the budget for the first time UIDAI talked about in the budget NELP VIII launched Discussion started on Direct Tax Code Discussion paper on GST introduced 1 more UMPP awarded FY2011 Fiscal consolidation highlighted as a major theme DTC to be implemented from April 2011 Nutrient-based fertiliser subsidy introduced Petroleum product pricing mechanism to be made automatic First round on NELP launched with 34 blocks on offer FY2012 DTC to be effectuve from April 1, 2012 Amendment proposed to banking regulation act INR60bn to be provided during 2011-12 to enable public sector banks to maintain a minimum of Tier I CRAR of 8 per cent Share of manufacturing in GDP expected to grow from about 16 per cent to 25 per cent over a period of 10 years. Government will come out with a manufacturing policy More financial assistance for metro projects Black money to be dealt with more firmly Food security bill to be introduced in the parliament in the year Social sector allocation increased by 17% MNREGA wages linked to inflation Government to move towards direct transfer of cash subsidy to people living below poverty line in a phased manner for better delivery of kerosene, LPG and fertilisers. Task force set up to work out the modalities for the proposed system Discussions underway to further liberalise the FDI policy. FDI in retail introduced
Budget helped by 3G auction Did not happen Not effective in reducing subsidy Major; not implemented Follow up
Follow up Stuck in parliament Not done yet, follow up Major, implementation is key Follow up Not done yet Populist Populist Populist Not done Retracted for the time being due to political opposition Set-back to reform momentum
Parliament largely dysfunctional through the year

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January 13, 2012
Economics
Tomo Kinoshita Aman Mohunta
Policy holds the key

With weak growth and abating inflation we expect a 50bp cut in policy rates in Q2 2012, which, along with structural reforms, should support an economic recovery from H2 2012. Activity: Real GDP growth is likely to remain weak at 7.2% y-y in 2012 as we expect domestic demand to remain subdued until Q2 2012, due largely to the lagged effect of monetary tightening and a delay in key policy reforms. Meanwhile, external demand is likely to weaken further as the euro area falls into recession. Indian growth is likely to pick up in H2 2012 on a rebound in domestic investment, assuming that key policy reforms are implemented and the Reserve Bank of India (RBI) eases monetary policy. Key factors behind our expectation of plus-7% growth in 2012 are the strength in private consumption due to a growing middle-income population and an increase in rural income, which has been supported by government programs. In 2013, we expect growth to recover to 8.1%, driven by a pick-up in private capital expenditure, construction activity and exports. Inflation: We expect headline WPI inflation to drop sharply in Q1 2012 and remain in a 67% range through 2012. Core inflation should moderate as we expect a substantial moderation in global commodity prices, which should more than offset the effects of a weak INR. On the other hand, we expect domestic food price inflation to remain high at around 9-10% in 2012 as consumption is likely to grow while supply remains constrained due to bottleneck problems. An unfavourable monsoon season in June-September is a key upside risk to our food inflation forecast. CPI inflation is likely to be higher, at around 8% in 2012, reflecting the large weight of food items in the CPI basket. For 2013, we expect headline WPI inflation to remain around 6%. Policy: Weak growth and moderating inflation should prompt the RBI to shift its focus from controlling inflation to augmenting growth, in our view. We expect the RBI to cut policy rates by 50bp in Q2 2012, only after inflation eases considerably. We then expect the RBI to stay on hold throughout our forecast horizon, with the real interest rate at around 2%. On the fiscal side, we expect the food security bill to add a further subsidy burden, although the fuel subsidy should lessen on lower international oil prices. We expect a fiscal deficit of 5.1% of GDP in FY13 (year ending March 2013) and 4.6% in FY14, leaving little room for fiscal stimulus should the external conditions worsen. Risk: A surge in commodity prices, further INR depreciation and a worsening of the situation in the eurozone are key downside risks. Earlier-than-expected rate cuts are the key upside risk.
45
January 13, 2012
Fig. 63: Details of the forecast

% y-y growth unless otherwise stated Real GDP (sa, % q-o-q, annualized) Real GDP Private consumption Government consumption Fixed investment Exports (goods & services) Imports (goods & services) Contributions to GDP (% points) Domestic final sales Inventories Net trade Wholesale price index Consumer price index Current account balance (% GDP) Fiscal balance (% GDP) Repo rate (%) Reverse repo rate (%) Cash reserve ratio (%) 10-year bond yield (%) Exchange rate (INR/USD) 8.3 7.3 6.0 8.4 48.9 8.5 7.5 6.0 8.6 53.1 8.5 7.5 6.0 8.4 53.0 8.0 7.0 5.0 8.2 52.2 8.0 7.0 5.0 8.1 51.5 8.0 7.0 5.0 8.0 50.5 8.0 7.0 5.0 8.0 49.9 8.0 7.0 5.0 8.0 49.3 3Q11 5.3 6.9 5.9 4.0 (0.6) 27.4 10.9 4.1 0.1 2.7 9.6 9.2 4Q11 6.9 6.7 6.1 3.0 1.0 15.2 14.1 6.9 0.1 (0.3) 8.7 8.8 1Q12 7.1 6.7 6.2 3.9 2.5 5.9 2.8 6.0 0.1 0.6 7.3 8.1 2Q12 8.3 6.9 6.4 4.4 5.4 7.5 (1.5) 3.8 0.8 2.3 7.1 8.4 3Q12 7.8 7.6 7.4 3.9 9.7 7.4 16.0 9.6 1.0 (2.9) 6.4 8.2 4Q12 8.1 7.7 8.0 3.2 10.8 7.4 15.9 9.4 0.9 (2.6) 6.3 8.0 1Q13 8.1 8.1 8.6 4.6 9.6 17.7 16.2 7.3 0.9 (0.1) 6.1 7.9 2Q13 8.1 8.0 7.6 4.6 7.9 15.2 13.9 8.0 0.5 (0.5) 6.1 7.8 2011 7.3 6.6 3.5 2.0 22.7 14.7 6.4 0.1 0.8 9.4 9.0 (3.0) (5.7) 8.5 7.5 6.0 8.6 53.1 2012 7.2 7.0 3.8 7.0 7.0 8.1 7.2 0.7 (0.7) 6.8 8.1 (2.5) (5.1) 8.0 7.0 5.0 8.0 50.5 2013 8.1 7.5 3.7 10.3 16.1 14.1 7.8 0.6 (0.3) 6.1 7.6 (2.8) (4.6) 8.0 7.0 5.0 8.0 48.0
Notes: Numbers in bold are actual values; others forecast. Interest rate and currency forecasts are end of period; other measures are period average. CPI is for industrial workers. Fiscal deficit is for the central government and for fiscal year, eg, 2011 is for year ending March 2012. Table reflects data available as of 6 January 2011. Source: CEIC and Nomura Global Economics.
46
January 13, 2012
Sector outlooks
47
January 13, 2012
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48
Autos & auto parts

AUTOS & AUTO PARTS
2012 outlook
January 13, 2012
Running on flat tyres
Slow economy to impact commercial vehicles in FY13 The Indian commercial vehicle industry has recorded surprisingly strong growth even in the wake of a rate tightening cycle and slowdown in IIP. We believe these factors will affect CV growth with a lag and lead to flat growth in FY13F. Low growth and increased competition to impact two-wheelers After recording strong growth over the past three years, two-wheeler volumes witnessed some slowdown in Dec-11. Our channel checks suggest that retail demand has slowed considerably over the past month. We estimate the Indian two-wheeler industry to grow only 6% in FY13F. Furthermore, given Hondas aggressive expansion plans and new model launches by Suzuki and Yamaha, competition is set to increase significantly, which may put margins under pressure, in our view. Passenger cars to grow 15% in FY13F on a low base Passenger car volumes thus far in FY12 have been severely impacted by higher interest rates, high petrol prices, insufficient capacity for diesel cars and the labour strike at Maruti. We expect car volumes will remain flat in FY12F, but will grow 15% in FY13F on declining interest rates and the benefit of a lower base. Reaffirm Buy on MM; prefer BJAUT over HMCL We prefer to stick with companies which are likely to report volume growth. Despite increased competition, we believe M&M fits the bill given its successful recent launches and planned further new launches in the SUV space. We also expect BJAUT will be able to report volume growth, given the strong performance of its exports portfolio. Its margins should be supported by a weak INR, thus providing cushion against increased domestic competition. We prefer Bajaj (BJAUT IN, Neutral, INR1,456.75) over Hero MotoCorp (HMCL IN, Neutral, INR1,735.00).
Fig. 64: Stocks for Action
Current Company Mahindra & Mahindra
Note: Pricing as on 6th Jan, 2012 Source: Bloomberg, Nomura research
Anchor themes A slowdown in GDP growth and recent interest rate hikes will impact growth of the Indian auto sector in 2012F. In some segments like two-wheelers, increased competition can impact margins as well. We expect material costs to remain flattish. Nomura vs consensus We are more bearish on twowheeler and commercial vehicle volumes in FY13F than consensus.
Research analysts India Autos & Auto Parts Kapil Singh - NFASL kapil.singh@nomura.com +91 22 4037 4199 Nishit Jalan - NSFSPL nishit.jalan@nomura.com +91 22 4037 4362
Target Price (INR) 896.0
Upside (%) 36.7%
Ticker MM IN
Rating Buy
Price (INR) 655.6
Nomura | Autos & auto parts
January 13, 2012
Fig. 65: India auto industry demand forecasts

Volume growth In 2-wheelers and CVs to slow down significantly in FY13F
('000 units) Total domestic sales Passenger vehicle Cars Utility Vehicles Commercial vehicle Heavy Light Two wheelers YoY (%) Change Total auto sales Passenger vehicle Cars Utility Vehicles Commercial vehicle Heavy Light Two wheelers
Source: Company data, SIAM, Nomura estimates
FY07 9,727 1,380 1,077 303 468 276 192 7,879
FY08 9,284 1,536 1,202 334 498 271 227 7,250
FY09 9,370 1,524 1,219 305 409 182 227 7,437
FY10 11,834 1,901 1,527 374 585 245 340 9,349
FY11 14,979 2,465 1,983 483 724 323 401 11,790
FY12F 16,946 2,494 1,983 512 893 352 542 13,559
FY13F 18,184 2,853 2,280 573 958 352 607 14,372
FY14F 19,899 3,304 2645 659 1,073 394 679 15,522
13.8 20.8 22.0 16.5 33.4 33.6 33.0 11.7
(4.6) 11.3 11.7 10.0 6.4 (1.8) 18.1 (8.0)
0.9 (0.7) 1.5 (8.6) (17.8) (32.9) 0.1 2.6
26.3 24.7 25.2 22.7 42.9 34.4 49.7 25.7
26.6 29.7 29.9 29.1 23.8 31.9 17.9 20.0
13.1 1.2 0.0 6.0 23.4 9.0 35.0 15.0
7.3 14.4 15.0 12.0 7.3 0.0 12.0 6.0
9.4 15.8 16.0 15.0 12.0 12.0 12.0 8.0
Note: Fiscal Year ending March; e.g. FY12F = Year ending Mar-12
50
Banks
FINANCIALS
2012 outlook
January 13, 2012
An opportunity in the face of uncertainty

Fear of the unknown weighing on the market We are 'bullish' on the sector as we believe the 'fear of the unknown' (concerns over bad loans) has taken the sector valuations to deep value territory. We believe the key driver for the banking sectors price performance in CY12 will be loan loss provisions. While the banking sector is likely to see a substantial increase in bad loans over the next few quarters on account of high interest rates and macro uncertainties surrounding key sectors such as power, we believe the price action in the market has been excessive. We attribute the price action to the market trying to price in the fear of the unknown. We have analyzed over 90% of the expected capacity additions for risks arising out of inadequate fuel linkages and demand agreements. Based on our analysis and other general deterioration due to the economic slowdown in India, we expect LLPs to increase to 120bps in this cycle from the current 70 bps, an increase of 71%. In our view, even after factoring in these aggressive LLPs, the current valuations offer good value across our coverage universe. We also benchmark our LLPs with the stress case loan assumptions outlined by Moody's recently and, in our view, the LLPs built into our estimates are quite conservative. We recommend SBI, Axis Bank and ICICI Bank at the current levels. Rate cycle turn A positive to look for We expect interest rates to decline gradually through the year. This should help boost loan growth that is currently held back due to high interest rates. We have seen ECB financing dampening YTD domestic credit accretion; we expect some reversal to that trend going forward. We are currently factoring in loan growth of 18% for FY13F for our coverage universe, flat-to-marginally declining margins and a fee income growth of around 21%. Key risks Persistent global macro uncertainty, lack of resolution on key policy bottlenecks and higher-than-anticipated loan delinquencies are key risks to our thesis. For investors willing to ride out the near-term volatility, we believe current valuations offer attractive opportunities.
Fig. 66: Stocks for action
Trading at minus 1 SD from the five-year average
B lo o m berg tick e r A XSB IN ICICIB C IN SB IN IN R at i ng Buy Buy Buy P ric e t a rget 1 ,400 1 ,050 2,400 C urre nt pric e 854 745 1 ,673 Ups ide / D o wnside % 64.0 40.8 43.5 P /ABV (X) 13F 1 .5 1 .1 1 .0 P/E (X ) 13 F 8.6 1 0.2 6.2
Anchor themes Indian banks are well leveraged to benefit from an expansion in financial inclusion, deepening credit relationships, resilient domestic consumption and a structurally expanding investment cycle. Nomura vs consensus We think consensus numbers have to adjust down to catch up with our higher LLP (our FY13F PAT is 10% below consensus), but find the current valuations as very attractive as the market has already moved.
Research analysts India Financials Vijay Sarathi - NFASL vijay.sarathi@nomura.com +91 22 4037 4457 Abhishek Bhattacharya - NFASL abhishek.bhattacharya@nomura.com +91 22 4037 4034 Amit Nanavati - NSFSPL amit.nanavati@nomura.com +91 22 4037 4361
C o m pa ny na m e A xis B a nk IC IC I B a nk S t at e B a nk o f India
Source: Company data, Bloomberg, Nomura estimates. Prices as on 6th January 2012
Nomura | Banks
January 13, 2012
Fig. 67: Loan growth vs. credit cost SBI

We expect credit cost to stabilize at 120-140bps over FY12-FY13
Fig. 68: Loan growth vs. credit cost Axis Bank

Factoring in stress-case scenario for LLPs
Credit cost (LHS) 2.0% 1.8% 1.6% 1.4% 1.2% 1.0% 0.8% 0.6% 0.4% 0.2% 0.0% Loan growth (RHS) 23% 22% 21% 20% 19% 18% 17% 16% 15%
3.0% 2.5% 2.0% 1.5% 1.0% 0.5%
Credit Cost (LHS) Loan Growth (RHS)
Source: Company data, Nomura estimates
1QFY10 2QFY10 3QFY10 4QFY10 1QFY11 2QFY11 3QFY11 4QFY11 1QFY12 2QFY12F 3QFY12F 4QFY12F 1QFY13F 2QFY13F 3QFY13F 4QFY13F
Source: Company Data, Nomura estimates
Fig. 69: P/ABV Axis Bank

Currently trading at close to 2sd below the five-year mean
Fig. 70: P/ABV - SBI

Currently trades one std dev below the five-year mean
(x) 5.0 4.5 4.0 3.5 3.0 2.5 2.0 1.5 1.0 0.5
P/BV -2Sdev
Mean +1Sdev
-1Sdev +2Sdev
(x) 3.0 2.5 2.0 1.5 1.0 0.5
0.0 Apr-05 Apr-06 Apr-07 Apr-08 Apr-09 Apr-10 Apr-11

0.0 Apr-05 Apr-06 Apr-07 Apr-08 Apr-09 Apr-10 Apr-11

Source: Bloomberg, company data, Nomura estimates
Fig. 71: Moodys loan classification - SBI

Our LLPs are more conservative than Moody's adverse case loan loss assumptions
Moody's loan classification Corporate & commercial Export oriented Construction & real estate SME Residential mortgage Personal Credit cards Rural
2Q12 loan Book (INRmn) 3,388,980.0 432,070.0 178,610.0 1,260,410.0 923,830.0 763,780.0 958,330.0
Loss % Adverse 2% 4% 7% 5% 1% 5% 18% 4%
1QFY09 2QFY09 3QFY09 4QFY09 1QFY10 2QFY10 3QFY10 4QFY10 1QFY11 2QFY11 3QFY11 4QFY11 1QFY12 2QFY12 3QFY12F 4QFY12F 1QFY13F 2QFY13F 3QFY13F 4QFY13F
P/BV -2Sdev Mean +1Sdev
Loss % - Extremely adverse 4% 8% 14% 11% 2% 11% 38% 7% Loss Adverse 67,779.6 17,282.8 12,859.9 63,020.5 8,314.5 36,661.4 38,333.2 244,251.9
0.0%
60% 55% 50% 45% 40% 35% 30% 25% 20% 15% 10%
-1Sdev +2Sdev
Loss - Extremely Adverse 135,559.2 33,701.5 25,005.4 136,124.3 18,476.6 80,196.9 67,083.1 496,146.9 344,144.7
Provisions factored in - (INRmn)

Source: Moodys, Nomura estimates
52
Cement
MATERIALS
2012 outlook
January 13, 2012
Production discipline should keep pricing high and lift stocks to mid-cycle valuation
Expect strong performance as production discipline continues Unlike the Street view, which is currently extrapolating a fall in cement prices due to low capacity utilisation, we expect the strong performance of cement stocks to continue thanks to pricing discipline in the sector. Cement producers already have displayed discipline in terms of supply matching demand and are taking price hikes through; we believe this discipline will continue as they favour profitability over market share gains. Demand at trough levels now; we expect only to see upside Cement demand growth was less than 5% in FY11 and is likely to record another year of below 5% growth in FY12F, in our view. We believe this is a cyclical slowdown in terms of growth driven by decreased government spending on housing and infrastructure in the past two years, and demand growth is unlikely to fall from these levels. Underpinned by stable growth in unorganised housing, we expect the demand scenario will only get better as investment in infrastructure improves and construction of real estate projects picks up as approvals come through after a one-year hiatus. Stocks to trade at mid-cycle multiple We believe that 1) the continuation of production discipline amongst cement producers and 2) the improvement in demand from current trough levels will lead to improvement in profitability in terms of EBITDA/ton towards up-cycle levels and return ratios in terms of ROCEs at mid-cycle levels (given lower capacity utilisation) over the next two years. In our view, this should allow cement stocks to trade at mid-cycle asset-based valuation multiples. Maintain our positive stance; ACEM, SRCM and GRASIM top Buys We maintain our positive stance on the sector, with Ambuja Cement, Shree Cement and Grasim as our top Buys. We prefer Ambuja Cement and Shree Cement, as they do not have exposure to Southern India, which faces large and persistent overcapacity. We like Grasim, as it provides a good way to get exposure to UltraTech (UTCEM IN, INR1,150, Neutral; ~60% owned by Grasim) at a less expensive valuation. At Grasims CMP, UltraTech is available at a 45% discount to our fair value of INR1,259/share.
Fig. 72: Stock for action
Target Price 186 2,933 3,014 Upside (%) 16% 38% 23%
Anchor themes We believe production discipline in the sector is likely to continue, enabling companies to increase pricing and maintain mid-cycle ROCE while moving towards upcycle profitability. Demand should bounce back in FY14F, while capacity utilization should bottom out in FY13F. Nomura vs consensus We are largely in line with consensus on earnings, but consensus is ascribing the down-cycle rather than the midcycle multiple.
Research analysts India Construction Materials Aatash Shah - NFASL aatash.shah@nomura.com +91 22 4037 4194 Vineet Verma - NSFSPL vineet.verma@nomura.com +91 22 4037 4487
Company Ambuja Cement Shree Cement Grasim
Tickers ACEM IN Equity SRCM IN Equity GRASIM IN Equity
Price 155 2,150 2,455
Rating Buy Buy Buy
Source: Nomura estimates; Pricing date as of 6 January 2012
Nomura | Cement
January 13, 2012
Fig. 73: Production discipline should allow price increase

(INR / 50 kg bag) 350 300 250 200 150 100 Average cement price
Fig. 74: More than 50% market share held by top 6 players
Capacity market share Despatch market share
57% 56% 55% 54% 53% 52% 51%
May-95 May-96 May-97 May-98 May-99 May-00 May-01 May-02 May-03 May-04 May-05 May-06 May-07 May-08 May-09 May-10 May-11 May-12
50%
FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11
Source: CMA, Company data, Nomura research
Source: CMIE, Nomura research
Fig. 75: Cement demand growth should improve from current trough level
16% 14% 12% 10% 8% 6% 4% 2% 0% -2% (y-y)% growth in cement demand
Fig. 76: Trend in capacity addition and utilisation
(mn tonne) 50 45 40 35 30 25 20 15 10 5 0
Capacity addition (LHS) Capacity utilisation (RHS)
120% 100% 80% 60% 40% 20% 0%
FY93 FY94 FY95 FY96 FY97 FY98 FY99 FY00 FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12F FY13F FY14F
Source: CMA, Company data, Nomura estimates
Source: CMA, Company data, Nomura estimates
Fig. 77: Profitability (EBITDA/ tonne) expected to improve

(INR) 4,000 3,500 3,000 2,500 2,000 1,500 1,000 500 0
9% 11% 8% 9% 14% 14%
Fig. 78: Companies should generate mid-cycle ROCE

(%) 40 35 30 25 20 15 10 5 0 Average ROCE (%)
ROCE (RHS) EBITDA

28% 31%
Cost per tonne 35% 30%

24% 24% 18% 18% 18%
25% 20% 15% 10% 5%
FY12E
FY13E
FY14E
0%
FY02
FY03
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY02
FY03
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12F
FY13F
FY95 FY96 FY97 FY98 FY99 FY00 FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12F FY13F FY14F
FY14F
54
Coal
COAL
2012 outlook
January 13, 2012
Policy measures to set the tone for private participation, supply growth; we stay bullish on CIL
Landmark policy / regulatory developments in the offing In our view, major policy developments lined up in 2012 will set the pace for private participation in the coal sector and augmentation of domestic coal supply in the medium term. Focus measures 1) definitive policy on sale/use of captive coal and commercial sale of coal, 2) auctioning of new coal blocks, 3) directives on allocated, but non-producing coal blocks, 4) revised coal distribution policy, 5) appointment of a coal regulator and 6) shape of laws relating to land acquisition, rehabilitation and mining tax. Walk the talk on SEB reforms critical for sourcing / pricing flexibility The implementation of recent diktats to address the financial health of SEBs is a critical variable to assess flexibility of domestic coal pricing and quantum of coal imports. Throughout 2011, our periodic interaction with power-sector policymakers and participants suggested that a nominal hike in domestic (regulated) coal prices in 2012 is fairly acceptable. CIL's structural growth prospects remain intact CILs compelling growth outlook is based on 1) Indias yawning thermal coal supply deficit; 2) blended realization at ~65% below GCV-adjusted seaborne thermal coal prices, implying ample room for price hikes and low earnings volatility; and 3) 10.6bn tons of proven reserves with favourable geological features to help sustain low production costs. overhangs largely priced in; realizations may surprise in FY13 In our view, as the magnitude of wage revision, mining tax and production slippage is now reasonably predictable, their overhang is largely priced into earnings/valuations. An eventual hike in notified coal prices, likely expedition of project clearances and price discovery of resources (courtesy coal block auctions) augur well for stock price performance in 2012. Further, we believe that there is a reasonable probability of CIL declaring a special dividend in 1QCY12 at the insistence of the Government.
Current Company Coal India Ticker COAL IN Rating Buy Price (INR) 318.1 Target Price (INR) 433.0 Upside (%) 36.1%
Anchor themes A yawning coal supply deficit in India, ample headroom for price escalation and cost leadership make Coal India a compelling structural growth story. Nomura vs consensus Our FY12/13F EPS forecast is ~13% below consensus, as we capture the impact of the potential 26% net profit sharing diktat in our earnings forecast.
Research analysts India Power & Utilities Anirudh Gangahar - NFASL anirudh.gangahar@nomura.com +91 22 4037 4516 Ivan Lee, CFA - NIHK ivan.lee@nomura.com +852 2252 6213 Ankit Kumar - NSFSPL ankit.kumar@nomura.com +91 22 4037 4008
Source: Prices from Bloomberg as on 6 January 2012, Nomura research
Nomura | Coal
January 13, 2012
Fig. 80: Thermal coal demand supply scenario in India A yawning deficit
FY11-15F demand to post a 12% CAGR, domestic supply to post a 8.4% CAGR
(mn tons) Coal fired capacity (MW) COAL DEMAND Power (Utilities) Power (Captive) Others Total - [A] y-y COAL SUPPLY Domestic Supply build-up Coal India Ltd. (CIL) Singareni Collieries Co. (SCCL) Others (Primarily from captive mines) Total supply (Thermal & Coking) y-y Domestic supply breakdown (%) Thermal (%) Coking (%) Domestic thermal coal supply - [B] y-y Thermal coal Imports Reqd. [A-B] Imports @20% higher GCV
FY07 71,121 307.9 28.1 92.7 428.7
FY08 76,049 332.4 29.3 103.6 465.3 8.5%
FY09 77,649 362.9 32.7 115.7 511.4 9.9%
FY10 84,198 371.7 39.1 130.9 541.6 5.9%
FY11F 93,918 406.0 44.0 140.7 590.7 9.1%
FY12F 109,675 458.4 47.0 151.3 656.7 11.2%
FY13F 122,414 516.3 50.5 162.6 729.4 11.1%
FY14F 143,564 585.1 54.3 174.8 814.2 11.6%
FY15F 170,919 683.6 58.4 187.9 929.9 14.2%
351.1 37.6 32.0 420.8
375.3 42.0 37.1 454.4 8.0%
401.4 44.5 44.0 490.0 7.8% 96.6 3.4 473.4 8.2% 37.9
416.0 49.4 49.3 514.6 5.0% 96.7 3.3 497.4 5.1% 44.3
424.5 51.3 49.4 525.2 2.1% 96.6 3.4 507.2 2.0% 83.5 66.8
440.0 48.0 51.5 539.5 2.7% 96.7 3.3 521.5 2.8% 135.2 108.1
478.4 53.0 55.6 587.0 8.8% 96.8 3.2 568.0 8.9% 161.4 129.1
496.1 54.0 71.9 622.0 6.0% 96.6 3.4 601.0 5.8% 213.2 170.6
512.5 55.0 106.6 674.2 8.4% 96.6 3.4 651.2 8.3% 278.8 223.0
95.9 4.1 403.5 25.2
96.3 3.7 437.5 8.4% 27.8
Note: (1) Imports at higher GCV shown to reflect the typical higher quality of imported coal; (2) Our supply forecast for CIL and SCCL is under review Source: Annual Plan 2010-11,MInisitry of Coal, Company data, Nomura estimates
Fig. 81: CIL Blended ASP at steep discount to global prices

Adjusted for calorific value, CIL's ASP is 65-70% below global coal indices
Fig. 82: CIL Key operating stats and earnings sensitivity

Earnings are more sensitive to ASP and offtake growth
($/ton) 33 31 29 27 25 23 21 19 17 15 FY08
CIL- ASP (LHS) Disc to Richards Bay index (RHS) 70% 65% 60% 55% 50% 45% 40% FY09 FY10 FY11 FY12F FY13F FY14F
COAL India FY11 Key Operating Stats Coal production (mn tons) 431.3 Coal offtake (mn tons) 424.5 ASP (INR/ton of dispatch) 1,187 EBITDA reported (Rs/ton) 318 EBITDA normalized (Rs/ton) 380 EPS reported (Rs) 17.2 EPS normalized (Rs) 21.4 Sensitivity to EPS from 1% change in Volumes Offtake Blended ASP E-auction coal (% of raw coal sold) Employee cost Realization of e-auction coal
FY12F 447.5 452.8 1,377 346 407 20.3 24.7 1.6% 2.9% 3.3% 2.4% -1.1% 0.5%
FY13F 468.8 477.5 1,424 355 413 22.7 27.1 1.7% 2.5% 2.8% 2.3% -1.0% 0.5%
FY14F 489.8 496.0 1,501 399 455 26.9 31.3 1.7% 2.5% 2.8% 2.4% -1.0% 0.5%
Note: Calculations are based on FOB prices (Richards Bay), ex-royalty prices for CIL Source: Company data, Bloomberg, Nomura estimates
Notes: (1) Reported EBITDA/EPS is prior to OB removal provisioning, but after assuming 26% profit sharing (mining tax); (2) Our operating and earnings estimates for CIL are under review Source: Company data, Nomura estimates
Fig. 83: CIL Coal despatch by mode of transport

Rail transport has not kept pace with overall offtake growth
Fig. 84: CIL Coal offtake by sector

Power sector accounts for more than 70% of CIL's total offtake
% of total despatch Rail MGR Road Others

Source: Company data, Nomura research
FY10 46.7% 20.9% 29.4% 3.0%
FY11 47.2% 19.7% 30.1% 3.0%
1HFY12 48.1% 18.0% 30.9% 3.0%
% of total offtake Power Steel Cement Fertilizer Others

FY10 71.7% 2.1% 2.3% 0.6% 23.3%
FY11 71.7% 2.2% 2.4% 0.6% 23.2%
1HFY12 70.5% 1.9% 2.7% 0.7% 24.3%
56
Consumer
CONSUMER RELATED
2012 outlook
January 13, 2012
Headwinds coming: expensive valuations, slowing growth & commodities add to the woes
India consumer remains an attractive long-term opportunity We believe that, on a long-term perspective, the India consumer sector remains a very attractive opportunity. We think that deep underpenetration and relatively low consumption should fuel structural growth. Rising incomes, steadily rising urbanisation, favourable demographics and consumer aspirations are likely to be the key facilitators. Among the various sub-sectors, we remain bullish on the food sector and see it as the classic lifestyle play. With an extremely low share of 9%, we think organised players are set to reap the benefits of this boom. Within the HPC space, we believe that emerging categories such as hair care, skin care and personal grooming will be strong over the next few years. We also remain bullish on tobacco and liquor companies. However, the sector faces some strong near-term challenges While the longer-term picture remains attractive, we believe there are some strong near-term headwinds. Rising competition (which would push up advertising costs) and rising commodity costs could put pressure on margins. Furthermore, consumer companies, particularly discretionary names, have already started reporting slowing consumption. This, we believe, will add to the sectors woes. We continue to prefer food names over HPC We continue to prefer food names to HPC companies. Food, we believe, is a structural story and is likely to play out steadily over the next few years. HPC companies, on the other hand, are already facing near saturation in the larger categories, and the only way to grow appears to be through expanding distribution and through acquisitions. Jubilant Foodworks and Asian Paints are our key Buy ideas In the small- to mid-cap consumer space, we continue to like Asian Paints and Jubilant Foodworks. In the large-cap space, ITC is our key Buy idea.
Fig. 85: Stocks for action (INR)
Upside/ downside (%) 46% 32% 37%
Anchor themes The India consumer space remains an attractive opportunity over the long term, given under-penetration, rising incomes & urbanisation, and lower consumption. We remain positive on the sector on a longterm perspective, near-term challenges notwithstanding. Nomura vs consensus Unlike the street, we continue to prefer the food companies over HPC names. We believe the sector is on the cusp of growth.
Research analysts India Consumer Related Manish Jain - NFASL manish.jain@nomura.com +91 22 4037 4186 Anup Sudhendranath - NSFSPL anup.sudhendranath@nomura.com +91 22 4037 5406
Bloomberg Company Jubilant Foodworks Asian Paints GCPL

Note: Pricing as of January 6, 2012 Source: Bloomberg, Nomura Research
Nomura rating BUY BUY BUY
Stock price 753 2,661 382
Target price 1,100 3,500 524
ticker JUBI IN APNT IN GCPL IN
Nomura | Consumer
January 13, 2012
Fig. 86: Linear alkaline benzene

(INR/Te) 130,000 120,000 110,000 100,000 90,000 80,000 70,000 60,000 50,000 40,000
Fig. 87: Domestic milk prices

Price Index 200 180 160 140 120 100
May-02 Oct-02 Mar-03 Aug-03 Jan-04 Jun-04 Nov-04 Apr-05 Sep-05 Feb-06 Jul-06 Dec-06 May-07 Oct-07 Mar-08 Aug-08 Jan-09 Jun-09 Nov-09 Apr-10 Sep-10 Feb-11 Jul-11 Dec-11
Oct-06
Aug-07
Nov-08
Sep-09
Dec-05
May-06
Dec-10
Jan-08
Jun-08
Source: Bloomberg
Source: Bloomberg
Fig. 88: Titanium dioxide

Price Index 300 280 260 240 220 200 180 160 140 120
Fig. 89: Domestic sugar prices

(INR/Quintal) 4,500 4,000 3,500 3,000 2,500 2,000 1,500
May-08 Jul-08 Sep-08 Nov-08 Jan-09 Mar-09 May-09 Jul-09 Sep-09 Nov-09 Jan-10 Mar-10 May-10 Jul-10 Sep-10 Nov-10 Jan-11 Mar-11 May-11 Jul-11 Sep-11 Nov-11
Source: Bloomberg
Source: Bloomberg
Fig. 90: Valuation table

Still looking expensive
Price Company ITC Hindustan Unilever Nestle * Asian Paints Dabur Titan Industries Colgate Palmolive Godrej Consumer GSK Consumer * Marico United Spirits Jubilant Foodworks Ticker ITC IN HUVR IN NEST IN APNT IN DABUR IN TTAN IN CLGT IN GCPL IN SKB IN MRCO IN UNSP IN JUBI IN Rating Buy Reduce Neutral Buy Buy Buy Reduce Buy Buy Reduce Neutral Buy (INR) 200 408 4,099 2,652 101 180 991 383 2,527 146 512 754
Price target (INR) 229 296 4,345 3,500 116 264 825 524 2,875 126 850 1,100
Note: *December year ending companies. CY12=FY13; Pricing as of January 6, 2011; United Spirits TP is under review. Source: Bloomberg, Nomura Research estimates
Oct-05 Jan-06 Apr-06 Jul-06 Oct-06 Jan-07 Apr-07 Jul-07 Oct-07 Jan-08 Apr-08 Jul-08 Oct-08 Jan-09 Apr-09 Jul-09 Oct-09 Jan-10 Apr-10 Jul-10 Oct-10 Jan-11 Apr-11 Jul-11 Oct-11
EPS growth FY13F % 16% 13% 24% 25% 18% 26% 14% 28% 20% 19% 20% 54% FY13E P/E 23.0x 30.7x 31.0x 20.2x 21.9x 19.6x 26.4x 16.4x 24.2x 23.1x 10.1x 28.5x Market cap (USDmn) 29,422 17,121 7,600 4,889 3,375 3,073 2,592 2,383 2,046 1,711 1,237 936
1,000
May-11
Mar-07
Feb-05
Feb-10
Oct-11
58
Apr-09
80
Jul-05
Jul-10
Infrastructure
INDUSTRIALS
2012 outlook
January 13, 2012
Incrementally positive newsflow & valuation the only hopes in an otherwise avoidable sector
Investment cycle slowing due to a mix of structural and cyclical woes Indias investment cycle has suddenly and substantially slowed on the back of several macro headwinds such as policy logjams, rising interest rates and commodity prices. While policy logjams on infrastructure-related capex and even on some large-ticket industrial projects are structural issues that are unlikely to be resolved in a hurry, minor positives could emerge from peaking interest rates, commodity prices and one-off reforms such as the restructuring of SEBs financial health. Indias infrastructure need and opportunity clearly exist, but things could get worse before getting better Our economists expect inflation to fall to 6.8% by March 2012, and hence the RBI will take a pause in the rate hike cycle. Coupled with the fact that India is chronically underinvested in infrastructure, we maintain our longterm positive outlook on the sector. However, a nervous global market implies a worsening of the situation before it turns for the better. Sectors/stocks that can withstand impending shocks are preferred relative picks in an otherwise avoidable sector for the time being We prefer companies that can survive or even emerge stronger from the current impasse and further weigh their merits in the context of current valuations vs. historical cyclical trough valuations as well as the risk of further cutback in consensus earnings. Sustainable level of cash flow generation even in a worst-case scenario and balance sheet strength are further overriding factors that determine our choice of stocks for 2012. BHEL, MSEZ and VOLT are our top picks in the sector We pick BHEL and Voltas on attractive valuations despite near-term pains as these stocks are already pricing in significant potential worsening of the investment cycle, in our view. Mundra Port & SEZ both remain a fundamentally strong story and we believe the recent correction provides investors with an attractive entry point. We also like L&T and IRB Infrastructure, although these stocks are still at modest risk of near-term pains from continued negative news flow on order flows and margins, even as the long-term story remains intact. ABB India remains our top Reduce call on expensive valuations.
Company ABB India BHEL IRB Infrastructure Developers Mundra Port and SEZ Larsen and Toubro Voltas Bloomberg Ticker ABB IN BHEL IN IRB IN MSEZ IN LT IN VOLT IN Nomura Rating REDUCE BUY BUY BUY BUY BUY Stock Price 594 255 127 127 1,088 77 Target Price 525 332 212 180 1,691 150 Upside/ Downside (%) -12% 30% 67% 42% 55% 95%
Anchor themes India's investment cycle has disappointed on the back of various external and internal issues. While we are constructive from a long-term perspective, worsening macro conditions and no immediate strong policy action could drive further risks before things get better. Nomura vs consensus We have an out-of-consensus Buy call on BHEL on attractive valuation.
Research analysts India Capital Goods Amar Kedia - NFASL amar.kedia@nomura.com +91 22 4037 4182 Indrajit Yadav - NSFSPL indrajit.yadav@nomura.com +91 22 4037 4992
Source: Nomura estimates, Stock price as on 6 January 2012
Nomura | Infrastructure
January 13, 2012
Sector valuation summary

Fig. 92: Sector valuation comps
Nomura Rating Capital Goods BHEL ABB India Cummins India Crompton Greaves Thermax Larsen & Toubro Voltas Transport Infrastructure Mundra Port and SEZ Container Corporation IRB Infrastructure Construction HCC IVRCL Infra. Nagarjuna Constructions Punj Lloyd Limited Ramky Infrastructure
Pricing as of 6 January, 2012. ABB India FY11/12/13 correspond with CY10/11/12 estimates L&T P/E, ROE and EPS adjusted for subsidiary valuation and earnings Source: Bloomberg, Nomura estimates
P/E (x) Price 255 594 345 131 419 1,088 77 127 828 127 18 31 34 41 195 FY11 11.6 90.0 16.5 9.1 13.1 10.8 8.0 25.7 12.4 9.3 15.4 5.4 5.3 (27.5) 6.4 FY12F 9.6 40.5 17.0 10.7 12.1 8.9 9.4 22.9 11.0 11.0 19.8 7.2 6.7 13.0 5.3 FY13F 8.8 27.3 14.9 8.2 12.8 7.5 7.9 15.6 9.9 7.1 14.5 6.1 7.3 6.6 4.4 FY11 3.1 5.2 5.3 2.6 3.8 1.6 1.8 5.9 2.1 1.7 0.7 0.4 0.4 0.5 1.3
P/BV (x) FY12F 2.5 4.7 4.6 2.2 3.1 1.5 1.5 4.7 1.9 1.5 0.7 0.4 0.4 0.5 1.1 FY13F 2.1 4.1 4.1 1.8 2.7 1.3 1.3 3.6 1.7 1.3 0.7 0.4 0.3 0.4 0.9
EPS CAGR FY09-11 FY11-13F 12% -49% 18% 29% 15% 15% 12% 43% 5% 60% -47% -16% 3% 20% 15% 81% 5% -7% 1% 20% 1% 28% 12% 14% 3% -6% -15% 20%
ROE (%) FY11 FY12F FY13F 33.3 2.6 35.1 32.1 31.9 19.7 29.2 25.3 18.5 20.3 4.7 8.2 7.1 (1.7) 23.9 29.1 12.1 31.2 18.7 28.2 19.6 21.7 27.6 18.1 14.8 3.5 5.8 5.4 3.6 18.1 26.1 15.9 29.2 19.3 22.4 19.8 18.4 31.7 17.6 19.7 4.6 6.5 4.7 6.7 18.6
BUY REDUCE NEUTRAL BUY NEUTRAL BUY BUY BUY BUY BUY BUY BUY BUY REDUCE BUY
Fig. 93: Sector performance and rating comparison

Nomura Rating BHEL ABB India Cummins India Crompton Greaves Thermax Larsen & Toubro Voltas Mundra Port and SEZ IRB Infrastructure HCC IVRCL Infra. Nagarjuna Constructions Punj Lloyd Limited Ramky Infrastructure Container Corporation
Note: pricing as of 6 January, 2012. Source: Bloomberg, Nomura research
# of Recommendations Buy 20 0 13 16 12 37 13 25 43 4 29 28 2 4 7 Sell 11 33 7 16 10 4 11 2 2 11 3 5 17 1 6 Hold 15 5 5 13 16 6 7 4 1 11 6 6 4 0 6
Stock price performance over 1m (7.0) (2.9) 2.2 (1.1) 5.4 (15.1) (10.5) (4.7) (14.5) (18.9) (10.9) (8.4) (12.0) (2.2) (12.0) 3m (21.4) (12.4) (13.4) (10.4) 9.4 (20.1) (23.4) (16.7) (18.0) (35.4) (9.3) (35.8) (19.5) (1.6) (10.9) 6m (38.1) (30.6) (28.6) (51.6) (23.9) (40.2) (51.7) (23.6) (27.0) (47.7) (56.0) (57.9) (45.2) (25.4) (26.0) 12m (45.6) (26.3) (36.5) (58.2) (35.2) (45.8) (64.6) (17.3) (43.0) (63.0) (75.8) (75.8) (63.8) (36.7) (33.9)
BUY REDUCE NEUTRAL BUY NEUTRAL BUY BUY BUY BUY BUY BUY BUY REDUCE BUY BUY
60
IT services
TECHNOLOGY
2012 outlook
January 13, 2012
Demand moderation likely in FY13F, but not falling off the cliff; expect 2HFY13F rebound
Demand moderation likely in FY13F, but not falling off the cliff We see revenue growth in FY13F moderating to low-teen levels from our estimated 22% in FY12F for Tier-1 IT companies, largely on decisionmaking inertia rather than structural impairment of demand. We believe our estimates are likely to be met even in a scenario of flattish growth in Europe, with ROW and US contributing. Better-than-expected growth in European revenues remains the key upside risk to our estimates. Cost moderation & rupee depreciation to more than offset slowdown Cost moderation from: 1) likely reduction in wage inflation to ~7-8% (vs double-digit levels historically) in FY13F; and 2) hiring/utilisation/variable compensation rationalization will follow growth moderation, in our view. This, coupled with rupee depreciation, will likely lead to EPS growth of ~15-20%, ahead of revenue growth in FY13F, on our estimates. Regulation and CTB spending to drive rebound in 2HFY13F We see BFSI and package implementation as being impacted the earliest across services and verticals, but expect improvement in both towards 2H FY13F as regulatory and discretionary work kickstarts in BFSI and reinvestment of savings on cost initiatives gets ploughed back into changethe-business (CTB) initiatives. Retail, energy and utilities among verticals and IMS, BPO and application maintenance among service lines are likely to remain resilient, in our view. We expect revenue growth for Tier-1 IT companies to rebound to ~18% levels in FY14F (near trend-line growth). Action: Buy HCLT/CTSH/INFO; iGATE: top Tier-2 pick We believe that buying into perceived risk and/or high pessimism (INFO, HCLT, CTSH) will generate higher returns than buying into consensus favourites (TCS, WPRO). We see HCLT gaining market share in a consolidating/under-penetrated environment, and benefiting from the resumption of productization spending. We reiterate our Buy on CTSH as we expect it to benefit from consolidation/increased regulation spending trends on higher reinvestments and client connect. INFO appears wellpositioned for a rebound when productization and pervasiveness of technology (BFSI regulation spending) resume from 2HFY13F. At Wipro, we think the turnaround pace is likely to disappoint investors. Meanwhile, TCS, despite continuing to outperform peers, will likely see limited upside due to premium valuations, in our view.
Company HCLT Cognizant Infosys iGATE TCS Wipro Ticker HCLT IN CTSH US INFO IN IGTE US TCS IN WPRO IN Rating Buy Buy Buy Buy Neutral Neutral Price (LC) 418 66 2,832 16 1,169 406 Target price (LC) 530 82 3,300 20 1,230 390
Anchor themes Shift in IT spend allocations and and simple economics should help power Tier-1 IT grow closer to the trend line. Within Tier-1, we favour companies better equipped for a rebound scenario and those that have greater street pessimism built in. Nomura vs consensus We prefer HCLT/CTSH/INFO over the consensus favourites TCS/WPRO.
Research analysts India Technology/Services & Software Ashwin Mehta - NFASL ashwin.mehta@nomura.com +91 22 4037 4465 Pinku Pappan - NSFSPL pinku.pappan@nomura.com +91 22 4037 4360
Source: Pricing as of 6 January 2012; Price and TP in local currency. Source: Nomura estimates
Nomura | IT services
January 13, 2012
Demand moderation likely in FY13F, but not falling off the cliff
Given the economic uncertainties, we see a slowdown in demand in FY13F; our estimates factor in that potential slowdown with low-teen growth estimates compared to ~22% growth expected in FY12F for Tier-1 IT companies. However, we believe this will be a temporary blip in a continuing growth story. We expect growth for Tier-1 IT companies to rebound to ~18% levels in FY14F, as decision-making velocity improves.
Fig. 95: USD revenue growth expectations for Tier-1 IT companies
Moderation likely in FY13F, but growth could rebound closer to the trend line in FY14F
Company Cognizant HCL Tech. Infosys TCS Wipro Tier 1 IT

Source: Nomura estimates
FY11 40% 31% 26% 29% 19% 28%
FY12F 34% 19% 17% 25% 14% 22%
FY13F 22% 16% 13% 15% 10% 15%
FY14F 21% 18% 18% 17% 15% 18%
What gives us comfort in our low-teen-percentage growth expectations?

Our expectation of low-teen-percentage growth in FY13F is built on: The assumption of relative price stability in FY13F as 1) pricing is lower than pre-2008 peak levels and the scenario is different and 2) we believe pricing discipline will be maintained by the cartel of Tier 1 + global MNCs. Preliminary indication from companies/ National Association of Software and Services Companies (NASSCOM) suggests a low-teen-percentage growth outlook. Comfort that our low-teen-percentage growth estimates are likely to be met even in a scenario of flattish growth from Europe, with only the rest of the world (ROW) and the US contributing. ROW should contribute at least 4-5% y-y growth in FY13F, even if the growth rate halves from the current levels of ~40% (LTM y-y), while the US should record double-digit-percentage growth, in our view, and contribute at least 7-8% y-y to overall growth in FY13F. Thus our estimates essentially imply European growth showing a sharp deceleration from ~30% levels on an LTM basis to flat. Better-thanexpected growth remains a key upside trigger to our estimates. We expect BFSI and package implementation to be impacted earliest across services and verticals, but expect an improvement in both towards 2HFY13F as regulatory or discretionary work kickstarts in BFSI and reinvestment of savings on cost initiatives get ploughed back into change-the-business (CTB) initiatives. Stock picks in order of preference HCL Tech: HCL Tech remains our top pick in Tier-1 IT names, as it: 1) straddles both market-share gains in RTB on strengths in IMS and potential upside from a CTB revival given its large engineering services practice and strong SAP consulting capabilities; 2) its market-share gain focus against MNC players and historical-high deal pipeline in the Dec-11 quarter provide comfort on near-term growth; and 3) on our estimates, we find greater comfort in its margin stability and inexpensive valuations in light of its best-inclass earnings growth across Tier-1 universe. Reaffirm Buy. Cognizant: We believe Cognizant will continue to outperform its Tier-1 IT peers in revenue growth, driven by its 1) recession-proof healthcare business and closer client connect in BFSI and 2) gains from consolidation trends given its higher reinvestment focus. The stocks valuation has corrected from 26x to 19x 1-yr forward earnings in 2011, despite better-than-peer group performance. Given the expected growth
HCL Tech, followed by Cognizant and Infosys, are our top picks in Tier-1 IT, iGATE is our top Tier-2 IT pick
62
Nomura | IT services
January 13, 2012
outperformance vs peers on our estimates, we find the current valuation of 10% premium over Infosys (vs historical premium of ~20%) attractive. Reaffirm Buy. Infosys: We believe Infosys is best positioned for a rebound as productization spend and a shift in client spending patterns towards change the business/regulation spend start playing out from 2HFY13F onwards. Contrary to consensus, we believe that Infosys troubles are not structural but more environment-led. In the near term, too, we believe Infosys would post par growth alongside peers such as TCS (much more upbeat on commentary). This coupled with bigger potential gains from rupee depreciation and low expectations built into valuations makes us positive on the stock. Reaffirm Buy. iGATE: Remains our top Tier-2 IT pick on account of our expectations of high operating leverage, leading to potential improvement in margins over the next two years. Moreover, with revenue synergies of Patni acquisition not yet built into estimates, this could provide upside. iGates best-in-class earnings growth potential and mitigation of debt overhangs over the next two years makes us positive on the stock. Reaffirm Buy. TCS: While we like TCS for its potential to drive market-share gains in view of its widest vertical, service line and geographical presence across Tier-1 IT companies and recent momentum, we believe disappointments are likely in the interim on any moderation in commentary, given high expectations built into its current valuations. We would await such disappointments to play out before revisiting our call. Maintain Neutral. Wipro: We believe the stock price rise over the past three months has been driven by hopes of a speedy revenue growth revival. There could be disappointments in store on this count with the lag in revenue and earnings growth continuing and valuations staying depressed as balance sheet improvements might not be forthcoming, in our view. We maintain Neutral and reiterate our lowest preference for Wipro among Tier-1 IT stocks. Our estimates are based on USD-INR rates of 48 for FY13F, which could see upside of 10-20% across companies if currency rates were to continue at current levels.
Fig. 96: Valuation summary
P/E (x) Company Indian IT TCS Infosys Cognizant Wipro HCL Tech. Tech Mahindra Mphasis Patni iGATE Tier-1 IT average MNC IT Accenture IBM HP Cap Gemini Group average ACN US IBM US HPQ US CAP FP NOT RATED NOT RATED NOT RATED NOT RATED 13.7 13.6 5.5 10.4 10.8 12.3 12.3 6.3 9.8 10.2 7.4 9.0 4.1 4.2 6.2 6.9 8.5 4.6 4.1 6.0 12.3 16.9 6.0 12.6 11.9 10.8 10.8 -13.2 7.1 3.9 TCS IN INFO IN CTSH US WPRO IN HCLT IN TECHM IN MPHL IN PATNI IN IGTE US NEUTRAL BUY BUY NEUTRAL BUY REDUCE NEUTRAL NEUTRAL BUY 21.7 18.8 22.6 17.9 13.3 10.1 8.6 17.4 21.2 18.8 18.7 16.5 18.7 16.0 11.4 10.4 8.4 15.7 12.7 16.3 15.3 13.2 13.6 13.6 8.4 9.4 7.0 10.8 11.3 12.8 13.6 11.3 10.7 11.7 7.3 9.2 5.7 8.1 5.5 10.9 22.0 23.1 19.8 6.3 36.9 64.0 -29.4 -39.8 -16.8 21.6 15.9 13.8 20.9 11.6 16.3 -3.1 2.6 11.4 67.0 15.7 Ticker Rating FY12F FY13F EV/EBITDA (x) FY12F FY13F EPS growth (%) FY12F FY13F
Note: FY12F corresponds to Dec-11 for CTSH, PATNI, IGTE, IBM and CAP, while it corresponds to Aug-12 for ACN, Jun-12 for HCLT and Mar-12 for others. Tier-1 IT includes TCS, Infosys, Cognizant, Wipro and HCL Tech. Source: Bloomberg for not rated companies, Nomura estimates for others. Pricing as of 6 January, 2012.
63
Metals & mining

MATERIALS
2012 outlook
January 13, 2012
Global weakness a concern, but India stocks discounting a distress scenario

Global uncertainty, coupled with domestic issues, has led to a steep stock price correction Globally, steel stocks have been under pressure owing to the debt crisis in Europe and concerns over China demand softening, in our view. Global steel prices have corrected by close to 15% over the past two months. Even raw material prices have corrected iron ore prices to USD135/t (from USD170/t last quarter) and coking coal prices to USD235/t (from USD285/t last quarter). There have also been internal issues such as shortages of iron ore due to the ban on mining in Karnataka. India steel companies appear to have structural advantages, which are not reflected in stock performance We believe the key problem faced by global steel producers is they have been unable to take advantage even of a good demand scenario, as any increase in steel prices has been followed by raw material price increases, especially iron ore. Since iron ore prices remain high and coking coal prices have come off, it is an ideal scenario for Indian steel companies, we think, as they have captive iron ore and import coking coal. However, we believe India steel stocks have not been treated any differently than their global peers and India steel stock prices have corrected more than their global peers. Stocks building in a distress scenario India steel stocks are building in a distress case scenario, in our view. We believe TATA Steel and SAIL look attractive, even if benchmark steel prices fall to USD550/t (from USD630/t now) at this price close to 50% of the global steel capacity is likely to be unprofitable, even if iron ore prices fall to USD120/t (from USD135/t now) and coking coal prices to USD220/t (from USD235/t now), according to World Steel Dynamics. A weaker INR, though resulted in forex losses in Q2FY12, should help operating performance going forward All India metal companies have foreign currency liabilities for imported raw material and debt and, thus, have incurred forex losses due to a depreciating INR. However, we believe an operationally weaker INR is good for India companies as metal prices are decided on an import parity basis.
TP Upside P/E EV/EBITDA Ticker Rating Price (Local) (Local) (%) (FY13F) (FY13F) Comments TATA Steel SAIL TATA IN SAIL IN Buy Buy 364 84 568 56.3% 120 42.3% 5.8 8.7 2.9 mtpa a trigger, weak European outlook a concern Earnings improvement with 7.4 normalized operations the key 4.6 Impending decision of the Supreme 4.5 Court on resumption of mining in Karnataka a key trigger Sale of stake in Balco & HZ and 3.1 allotment of bauxite mine the key
Anchor themes India steel companies have better earning visibility compared to global peers due to captive iron ore and better utilization. Their leverage at less than 1 also reflects strong balance sheets. Nomura vs consensus Our earnings estimates are 1015% below consensus on lower steel price estimates. However our TPs are 5-10% higher, meaning consensus is advocating much lower multiples, with which we disagree.
Research analysts India Metals & Mining Alok Kumar Nemani - NFASL alokkumar.nemani@nomura.com +91 22 4037 4193
JSW Steel Sterlite Industries
JSTL IN
Buy
565
739 30.9%
6.5
STLT IN
Buy
95
169 78.1%
5.1
Source: Bloomberg, Nomura estimates, prices as of Jan 6, 2012
Nomura | Metals & mining
January 13, 2012
India steel demand has been weak thus far in FY12 supplyside issues have kept market balance
According to the Joint Plant Committee, India steel demand has grown just 3.9% so far in FY12, while production has increased by 7.9%. This has resulted in net imports falling from 3mt in FY11 to just 1.2mt so far in FY12. To date, weaker demand has not impacted utilisation of domestic steelmakers as imports have been replaced by domestic production and supply-side issues have also helped in preventing a surplus scenario. However, if the demand scenario does not improve, we could see a surplus which may erode the premium enjoyed by domestic prices over landed cost of imports (3-5%). However, even 5-6% demand growth would be enough to maintain demand-supply balance in the Indian steel industry, in our view.
Fig. 98: India steel stocks have underperformed global peers
115 105 95 85 75 65 55
Jan-12 Oct-11 Nov-11 Dec-11 Aug-11 Sep-11
Fig. 99: India steel market should remain in balance

(KTonnes) 90,000 80,000 70,000 60,000 50,000 40,000
FY06 FY07 FY08 FY09 FY10 FY11 FY12F FY13F FY14F
TATA Steel JSW Steel Bao Steel Arcelor Mittal
SAIL Posco Nippon
Crude steel production (LHS) Consumption (LHS) Net imports (RHS)
(KTonnes) 5,000 4,000 3,000 2,000 1,000 0 -1,000
45
Jul-11
Source: Joint Plant Committee, Nomura estimates
Environment not conducive for independent miners/exporters

We do not believe that the political environment is conducive for iron ore exporters in India, as exemplified by: 1) an increase in the export duty from 5% last year to 30%, thus eroding margins for companies such as SESA Goa (SESA IN, Neutral); 2) blanket export bans in the state of Karnataka, and; 3) the new Mining Bill (yet to be implemented) would further increase the royalty burden for iron ore miners.
Fig. 100: Steel prices vs. raw material prices
(USD) 340 310 280 250 220 190 160 130 700 600
Chinese spot iron oreprices (LHS) Iron ore contract price (LHS) Coking coal contracts (LHS) HR coil Europe (RHS)
Fig. 101: INR depreciation vs. major currencies

(USD) 1,000 900 800
120 110 100 90 80

8/1/2011
INR
CNY
AUD
RUBLE
11/7/2011
10/10/2011
10/24/2011
11/21/2011
12/5/2011
8/15/2011
8/29/2011
9/12/2011
9/26/2011
Nov-10
Jan-11
May-10
May-11
Nov-11
Jul-10
Sep-10
Mar-11
Jul-11
Sep-11
100
500
Source: Bloomberg, Crisil, Nomura research
12/19/2011
1/2/2012
65
Oil & gas/chemicals

MATERIALS
2012 outlook
January 13, 2012
Waiting for positive govt action; Cairns govt concerns in the past; still bullish on gas plays
Waiting for current government / regulatory paralysis to end We expected significant government action in 2011 (please refer to our note, All eyes on government action, 15 December, 2010), but the year saw inaction / indecision on most issues, and on the most contentious issues the impasse continued and was exacerbated. Despite a sharp decline in KG-D6 volumes, no alignment is emerging on arresting decline and on new investments. Even for Cairns Rajasthan block, where contentious issues have been resolved and the ownership change is complete, bureaucracy is delaying ramp-up. Any hopes of oil-product pricing reforms have gone and the situation on subsidies has worsened. Govt. is now not letting the prices of officially de-regulated petrol increase. With the election process under way in five states till March 2012, we expect no changes soon, though we hope (and assume) that things will change for better later in the year. We like Cairn India; govt. concerns largely behind us Despite delays in approval for production increases in Mangala and concerns about production commencement at Bhagyam, we believe the main concerns are largely behind us. In our view, the delays are only bureaucratic and that necessary approvals should be coming soon. Cairn India, the only pure oil play, in our view, is a key beneficiary of high oil prices and the weaker rupee. We remain positive on gas names; we like PLNG, IGL and GAIL Though continued decline in KG-D6 gas production is a concern, we continue to believe that LNG brings a respite and will be a key source of new gas in the medium term. PLNG remains our top pick in the gas space. We continue to like secular CGD play IGL, and see domestic volume declines in no way affecting its growth trajectory. As Indias key longdistance gas transporter, we like GAIL for medium- to long-term gas upsides, but in the near term domestic gas volume declines and government decision-making are concerns. We remain positive on GUJS as well.
Price (INR/sh) 339 160 386 381 74 Market Cap (USDbn) 12.2 2.3 1.0 9.2 0.8 PT (INR/sh) 350 220 550 565 135 Upside % 3 38 42 48 83
Anchor themes We believe that lack of positive government decision-making has been a key concern and overhang. We remain positive on Cairn India and gas names such as PLNG, IGL, and GAIL. Nomura vs consensus We are more bullish on the India gas story and on gas names.
Research analysts India Oil & Gas/Chemicals Anil Sharma - NFASL anil.sharma.1@nomura.com +91 22 4037 4338 Ravi Adukia, CFA - NSFSPL ravikumar.adukia@nomura.com +91 22 4037 4232
Company Cairn India * Petronet LNG Indraprastha Gas GAIL Gujarat State Petronet
Ticker CAIR IN PLNG IN IGL IN GAIL IN GUJS IN
Rating Buy Buy Buy Buy Buy
Note: Pricing as of 6 January 2012. * Target price under review. Source: Bloomberg, Nomura estimates
Nomura | Oil & gas/chemicals
January 13, 2012
Fig. 103: Firmed-up crude-oil prices

(USD/bbl) 150 125 100 75 50 25
Fig. 104: Sharply weakened INR

(INR/USD) 55 52 49 46 43 40
Jun-08
Jun-09
Jun-10
Jan-09
Jan-10
Jan-11
Mar-09
Mar-10
Dec-08
Dec-09
Dec-10
Mar-11
Jun-11
Source: Bloomberg, Nomura Research
Source: Bloomberg, Nomura Research
Fig. 105: Under-recoveries could be a USD28bn problem if oil stays firm at USD110/bbl and rupee remains weak at INR50/USD
FY10 69.7 47.5 61 83 175 141 461 10 FY11 86.7 45.6 22 344 196 220 782 17 FY12F 112.4 47.8 739 270 292 1,300 27 FY13F 110 50.0 718 286 397 1,401 28
For each USD increase in oil prices, under-recoveries increase by INR37bn.
Brent price (US$/bbl) Exchange rate (INR/US$) Gross under-recoveries (INRbn) Petrol Diesel PDS Kerosene Domestic LPG Total Gross under-recoveries (US$bn)
110 48.0 592 269 370 1,230 26
110 52.0 845 303 424 1,572 30
For each rupee depreciation, under-recoveries increase by INR85bn.
Source: Petroleum planning & analysis cell, Nomura estimates
Fig. 106: Domestic volumes continue to decline RLNG provides some respite
(mmscmd) 180 160 140 120 100 80 60 40 20 0 Sharp growth in FY10 Domestic (Ex KG-D6) RLNG KG-D6 CBM
Stagnant gas availability
Source: Petroleum planning & analysis cell, Nomura estimates
3QFY12F
FY09
1QFY10
2QFY10
3QFY10
4QFY10
1QFY11
2QFY11
3QFY11
4QFY11
1QFY12
2QFY12
Dec-11
67
Sep-08
Sep-09
Sep-10
Sep-11
Oct-08
Oct-09
Oct-10
Oct-11
Apr-08
Apr-09
Apr-10
Apr-11
Jul-08
Jul-09
Jul-10
Jul-11
Pharmaceuticals
HEALTH CARE & PHARMACEUTICALS
2012 outlook
January 13, 2012
US remains the dominant growth theme; remain selective

Remain selective on sector outperformance, relatively high valuation The BSE Healthcare Index has outperformed the broader market by 8.9% over the past 12 months. Most frontline generic companies are now trading at 16-21x one-year forward earnings. Our coverage universe is at a 96% premium to global generic peers (global peer set includes Teva, Mylan and Watson Pharma). Rupee depreciation and US generic opportunity are strong tailwinds for the sector, but this may not be sustained from a longerterm perspective. There are headwinds of expanded pricing control in India and regulatory changes across various markets. We are selective with Lupin and Glenmark our top picks over the next 12 months. US patent expiry most dominant theme; earnings surprise likely to attract lower multiple We believe that US patent expiries over the next two years will be a significant growth driver for Indian companies. Most of these opportunities are discovered and built into stock prices, in our view. However, given the substantial increase in opportunity, some product-specific upside cant be ruled out. This upside may not be sustained over the long term and hence may attract lower P/E multiples. IPM+EM volume growth trend is in place; but what about profitability? We believe under-penetration and relatively strong economic growth present long-term growth potential in volumes in India and various EMs. In India, penetration levels of chronic therapies are just 30-50%, we believe. Indian pharmaceutical companies have invested substantially across these markets in terms of field force, product portfolio and alliances and partnerships. In markets such as India and Russia, which enjoy high profitability, there are potential downside risks. The risks emanate from increased competition and regulatory changes. For instance in India, the proposed national pharma pricing policy 2011 (NPPP 2011) poses a threat to margins. EBITDA could be adversely impacted by as much as 15-20% in certain cases, on our estimates. We have witnessed aggressive pricing by MNCs in branded generics and bonus rates consistently rising over the past three years in the Indian pharmaceutical market (IPM).
Stock Ticker CMP Rating INR /sh TP Upside/ INR /sh Downside P/E P/E FY12F FY13F Comments Expecting earnings growth momentum to 16.8 accelerate Expect discount to front13.0 line peers to narrow
Anchor themes The Indian healthcare sector is a play on four themes: 1) US patent expiries, 2) secular domestic market growth, 3) participation in other emerging market opportunities and 4) R&D and manufacturing outsourcing. Opportunity in US is largely discovered and slipups in execution could negatively surprise. Nomura vs consensus Our target prices on DRRD, LPC, GNP and JOL are 7-14% higher than consensus.
Research analysts India Pharmaceuticals Saion Mukherjee - NFASL saion.mukherjee@nomura.com +91 22 4037 4184 Aditya Khemka - NSFSPL aditya.khemka@nomura.com +91 22 4037 4197
Lupin
LPC IN BUY
443
576
30%
19.7
Glenmark
GNP IN BUY
287
414
44%
14.8
Source: Bloomberg, Nomura estimates
Nomura | Pharmaceuticals
January 13, 2012
Fig. 108: Valuation multiples for our coverage universe

Company Sun Pharma Cipla Ranbaxy Dr. Reddy's GlaxoSmithKline Lupin Glenmark Cadila Healthcare Jubilant Organosys Ticker SUNP IN CIPLA IN RBXY IN DRRD IN GLXO IN LPC IN GNP IN CDH IN JOL IN Recommendation NEUTRAL NEUTRAL REDUCE BUY NEUTRAL BUY BUY BUY BUY Market Cap (INR mn) 514,902 271,749 185,047 271,238 165,277 197,798 78,787 141,522 27,556 Current trading multiples - Actual CMP P/E (INR/share)* FY11F FY12F 495 28.2 24.5 321 26.6 22.3 413 11.7 11.3 1,570 24.0 17.3 1,982 30.0 26.2 443 23.0 19.7 287 16.9 14.8 706 21.7 17.7 180 6.6 12.0 Base business valuation (A) 508 313 373 1,831 2,292 576 384 937 290 Target price Others (=A+B) (B) (INR/share) 5 513 313 108 480 80 1,911 2,292 576 30 414 937 290 FY13F 21.3 19.2 9.5 16.1 23.1 16.8 13.0 14.4 10.6 EV/EBITDA FY11F FY12F 25.2 20.0 19.8 15.5 8.1 8.4 16.6 11.3 19.1 16.9 17.0 13.6 16.2 9.1 15.2 12.7 8.4 10.5 FY13F 17.1 13.3 3.8 10.2 14.7 11.3 10.1 10.4 7.9 FY11F 8.7 4.2 2.0 3.7 6.8 3.6 3.3 3.5 1.5 EV/Sales FY12F 6.5 3.6 1.8 2.9 6.0 3.0 2.4 2.9 1.7 FY13F 5.4 3.1 1.2 2.5 5.2 2.4 2.2 2.4 1.5
Target price and recommendations
Company Sun Pharma Cipla Ranbaxy Dr. Reddy's GlaxoSmithKline Lupin Glenmark Cadila Healthcare Jubilant Organosys
Ticker SUNP IN CIPLA IN RBXY IN DRRD IN GLXO IN LPC IN GNP IN CDH IN JOL IN
Recommendation NEUTRAL NEUTRAL REDUCE BUY NEUTRAL BUY BUY BUY BUY
Market cap (US$ bn) 10.9 5.7 3.9 5.7 3.5 4.2 1.7 3.1 0.6
CMP 495 321 413 1,570 1,982 443 287 706 180
% upside 4% -2% 16% 22% 16% 30% 44% 33% 61%
Note: Pricing as of 6th January 2012; Adjusted CMP is adjusted for one off income and expenses and innovation R&D value Source: Bloomberg, Nomura estimates
Fig. 109: Market share of Indian generics in US generic market

Indian generics continue to gain market share in the US market
Fig. 110: US pharma patent expiry schedule (USDbn)

Patent expiries are built in to stock prices in our view
21.0% 19.0% 17.0% 15.0% 13.0% 11.0% 9.0% 7.0% 5.0% 11.1%
19.8%
Aug-08
Aug-09
Aug-10
Nov-07
Nov-08
Nov-09
Nov-10
Aug-11
May-08
May-09
May-10
May-11
Nov-11
Feb-08
Feb-09
Feb-10
Feb-11
(USDbn) 50 45 $38 40 35 30 25 20 15 10 5 0 CY12
US Pharma Patent Expiry Schedule $43
$18
$21 $15
CY13
CY14
CY15
CY16 & beyond
Generic Entry Estimate

Source: IMS, Nomura research
Source: IMS, Nomura research
Fig. 111: IPM growth, Real GDP growth and PDI growth
IPM has grown slower than personal disposable income
Fig. 112: Rising bonus rates in IPM

Bonus rates have risen over the past years signalling higher competition
25% 20% 15% 10% 5% 0%
IPM growth Real GDP growth PDI growth
4.5% 4.0% 3.5% 3.0% 2.5% 2.0% 1.5% 1.0% 0.5% 0.0% 2.4% 2.8% 3.9% 3.3%
3.9%
Bonus rate
FY08
FY09
FY10
FY11
FY02
FY03
FY04
FY05
FY06
FY07
FY08
FY09
FY10
Source: AIOCD, rbi.org.in, Nomura research
FY11
Source: AIOCD, Nomura research
FY12YTD
69
Power & utilities

POWER & UTILITIES
2012 outlook
January 13, 2012
Policy reforms, fuel security to remain centrestage; continue to prefer defensive plays
Will the system facilitate execution, walk the talk on SEB reforms? In our view, government impetus on pushing through the much-needed coordinated policy action across ministries and state machinery to facilitate project execution (particularly relating to augmentation of coal/gas supply), together with discipline in implementation of recent diktats to address the financial health of SEBs, will be critical in renewing investor confidence in the power utilities space in 2012. Regulations/policy: Whats in the pipeline? As the government outlines its Twelfth Plan targets, we look forward to revised standard bidding documents, definitive policy relating to sale/use of captive coal, laws relating to land acquisition and mining tax, directives for allocated non-producing coal blocks, auctioning of new coal blocks and policies regarding the rationing of domestic coal supply. Fuel security, near-term capacity pipeline will set apart IPPs We believe there is no quick fix to address the fuel security (sourcing and pricing) risk, hence, the near-term capacity pipeline (unless backed by captive, low-priced fuel) is now viewed as a negative for IPPs. In this context, retail tariff hikes, fuel pass-through provisions and financial health of the beneficiary (counterpart SEB) will increasingly differentiate the valuations for IPPs, in our view. Private IPPs Specific variables/events to monitor in 2012 Adani Power (ADANI IN): coal specs (availability, pricing) for the Tiroda and Mundra projects; JSW Energy (JSW IN): long-term imported coal supply contracts (quantum and pricing); Lanco Infra (LANCI IN): Udupi project start-up, Perdaman court case resolution and potential equity funding; Reliance Power (RPWR IN): Supreme Court verdict on the usage of coal from the Sasan-linked mines for the Chitrangi project, status on Krishapatnam UMPP. IPPs look beaten down, but we still prefer defensives (PWGR, NTPC) Although private IPPs sharply underperformed defensives in 2011 and valuations appear relatively inexpensive, until earnings visibility improves (primarily a factor of fuel security), we continue to prefer PWGR (a relatively hedged play on generation capacity pipeline, 16% FY12F-17F EPS growth) and NTPC (pick-up in capacity addition with reasonable fuel security, 11% FY12F-17F EPS growth).
We continue to prefer defensives; fuel security will be the key differentiator amongst private IPPs
Anchor themes Recent policy directives are potent to improve SEBs' financial health; expect gradual adoption, as retail tariff hikes are a sensitive issue. We believe IPPs with existing operating capacity, credible execution capability, high fuel security (sourcing, pricing) and a healthy offtake mix are likely long-term winners. Nomura vs consensus Our preference for defensives is in line with consensus. PWGR remains our top pick.
Current Company Power Grid NTPC Ticker PWGR IN NTPC IN Rating Buy Buy price (INR) 99.8 157.0
Target price (INR) 120.0 206.0 Upside (%) 20.3% 31.3%
Note: Prices as on 6 January 2012. Source: Nomura research
Nomura | Power & utilities
January 13, 2012
Fig. 114: India Power: Restricted electricity demand vs supply

Demand-supply gap appears to be heading towards parity over the next 5 years; utilisation levels, latent demand & purchasing power of SEBs hold the key.
YE March 31 Supply Installed Capacity (MW) Capacity Addition (MW) y-y % Demand Requirement (bn kWh) y-y % Availablity (bn kWh) y-y % Deficit (bn kWh) Base deficit (%) Peak Demand (MW) y-y % Peak Capacity [Demand Met] y-y % Peak Deficit (MW) Reserve Margin
Source: CEA, Nomura research
FY06 124,287
FY07 132,329 8,042 6.5% 690.6 9.3% 624.5 7.9% (66.1) -9.6% 100,715 8.0% 86,818 6.1% (13,897) -13.8%
FY08 143,061 10,732 8.1% 739.3 7.1% 666.0 6.6% (73.3) -9.9% 108,866 8.1% 90,793 4.6% (18,073) -16.6%
FY09 147,965 4,904 3.4% 774.3 4.7% 689.0 3.5% (85.3) -11.0% 109,809 0.9% 96,785 6.6% (13,024) -11.9%
FY10 159,398 11,433 7.7% 830.3 7.2% 746.5 8.3% (83.8) -10.1% 119,166 8.5% 104,009 7.5% (15,157) -12.7%
FY11F 173,626 14,228 8.9% 861.6 3.8% 788.4 5.6% (73.2) -8.5% 122,287 2.6% 110,256 6.0% (12,031) -9.8%
FY12F 196,339 22,713 13.1% 927.9 7.7% 847.8 7.5% (80.1) -8.6% 130,761 6.9% 117,581 6.6% (13,181) -10.1%
FY13F 220,287 23,948 12.2% 1,001.2 7.9% 931.6 9.9% (69.7) -7.0% 140,059 7.1% 129,486 10.1% (10,572) -7.5%
FY14F 246,777 26,491 12.0% 1,081.3 8.0% 1,027.9 10.3% (53.4) -4.9% 150,703 7.6% 146,476 13.1% (4,227) -2.8%
FY15F 280,386 33,609 13.6% 1,167.8 8.0% 1,186.8 15.5% 18.9 1.6% 162,157 7.6% 167,127 14.1% 4,971 3.1%
631.6 6.1% 578.8 6.1% (52.7) -8.4% 93,255 6.1% 81,792 (11,463) -12.3%
Fig. 115: India Power: Short-term vs long-term regulated tariff

Merchant tariffs reaching a floor level; premium over PPA tariffs narrows.
Fig. 116: India Power: Generation capacity addition & PLF

Installed capacity to grow by >10% during FY12-15F, but PLF to drop.
(INR/kWh) 9 8 7 6 5 4 3 2 1 0 5.6 7.2 6.9
Long-term PPA 7.8 7.1 6.6 5.7 4.8 4.8 4.9 4.5 3.5 4.4 4.1 4.0 3.8 Short-term / Traded
300 250 200 150 100 50
Coal Hydro Renewables
Gas Nuclear PLF (RHS)
58% 57% 56% 55% 54% 53% 52% 51% 50%
4Q11*
1Q08
2Q08
3Q08
4Q08
1Q09
2Q09
3Q09
4Q09
1Q10
2Q10
3Q10
4Q10
1Q11
2Q11
3Q11
0 FY10 FY11 FY12F FY13F FY14F

Note: Year ending is March 31 Source: CEA, Nomura research
Note: 1) NTPCs tariff realization used as a proxy for LT PPA tariffs, 2) short term/traded tariffs exclude UI transactions, 3) Quarters are based on calendar year. Note (*) Data for 4Q11 corresponds to Oct11 only Source: CERC, Nomura research
Fig. 117: India Power: Fuel constraints is the biggest sector risk; rationing underway
Domestic coal/gas is scarce, imported coal/gas is expensive; we expect coal demand from the power sector to record 13.3% CAGR during FY11-15F.
YE March 31 Coal fired capacity (MW) Demand (mt) Power (Utilities) Power (Captive) Others Total y-y
FY07 71,121 307.9 28.1 92.7 428.7
FY08 76,049 332.4 29.3 103.6 465.3 8.5%
FY09 77,649 362.9 32.7 115.7 511.4 9.9%
FY10 84,198 371.7 39.1 130.9 541.6 5.9%
FY11F 93,918 406.0 44.0 140.7 590.7 9.1%
FY12F 109,675 458.4 47.0 151.3 656.7 11.2%
FY13F 122,414 516.3 50.5 162.6 729.4 11.1%
FY14F 143,564 585.1 54.3 174.8 814.2 11.6%
FY15F 170,919 683.6 58.4 187.9 929.9 14.2%
Source: Annual Plan, 2010-11, Ministry of Coal, Company data, Nomura estimates
71
Property
PROPERTY
2012 outlook
January 13, 2012
A recovery rather than the end
Residential Price correction to herald volume recovery in 2H CY12F The residential segment witnessed a poor period in CY11, with volumes in Mumbai falling 30% YoY, while remaining flat at best in most other cities, driven by the lack of affordability. In CY12, with supply increasing due to approvals for new launches in Mumbai, we expect prices in the city to correct by 15% in the next 6-9 months. This price correction and also a possible decline in interest rates could renew buying interest and boost volumes in 2HCY12. NCR could witness increased investor interest if interest rates fall, while Bangalore and Chennai are likely to witness steady volumes with an increased focus on mid-income housing. On the whole, we expect 2HCY12 to show growth in sale volumes. Office space No demand growth expected; rentals can increase CY11 was a very good year for the office market with demand at ~35.5mn sq ft, outstripping fresh supply, driven primarily by Bangalore. In CY12, we expect leasing demand to remain flat at best, as slower growth in the economy reduces the need for office space expansion. Supply at ~30mn sq ft in CY11 is likely to continue moderating as developers strapped for cash avoid investing in office developments. We expect to see rentals growing in Bangalore and Chennai, and remaining flat in other cities. Developers to focus on asset sales and deleveraging With cash flow from regular sales not enough to make even a dent in developers leverage over the past two years, the focus is shifting towards selling assets and land as the pressure to repay debt increases. With too many sellers and not enough buyers in the market, we fear that developers may have to sell asset at lower valuations in CY12F. What to do with the sector and stocks? Stocks in the sector are trading at a 35-70% discount to NAV, as concerns on slowing volumes, leveraged balance sheets, high interest rates and corporate governance continue. We expect the stocks to bottom at current levels as we believe the interest rate cycle has peaked, volumes can bounce back in six months time while asset sales can reduce leverage. We remain positive on DLF (a deleveraging play), Prestige Estates (a play on Bangalores steady volumes and rental increases) and Oberoi Realty (Mumbai recovery and good corporate governance).
Upside (%) 55% 69% 36%
Anchor themes With inflation fears subsiding, declines in interest rates, coupled with some correction in home prices due to higher incoming supply, will push volume up. Higher volume should help to improve the current tight liquidity situation of the developers. Nomura vs consensus In terms of our sector view, we are largely in line with consensus. DLF is our top pick, while the street is generally Neutral on the stock.
Research analysts India Property Aatash Shah - NFASL aatash.shah@nomura.com +91 22 4037 4194 Vineet Verma - NSFSPL vineet.verma@nomura.com +91 22 4037 4487
Company DLF Prestige Estates Oberoi Realty
Tickers DLFU IN PEPL IN OBER IN

th
Price 175 72 209
Rating Target Price Buy Buy Buy 270 122 284
Source: Bloomberg, Nomura estimates, Pricing date as of 6 January 2011
Nomura | Property
January 13, 2012
Fig. 119: Affordability index Mumbai

(INRmn) 9 8 7 6 5 4 3 2 1 0
Property cost (LHS) Affordability (%) (RHS) Average annual income (INR'000) (RHS)
Fig. 120: Affordability index NCR

(INRmn) 9 8 7 6 5 4 3 2 1 0 54 56 57 68 86 108 121 98 82 80 79 87
Property cost (LHS) Affordability (%) (RHS) Average annual income (INR'000) (RHS)
1,000 900 800 700 600 500 350 400 272 300 173123 10280 81 200 107 92 98 84 74 66 60 55 64 89 100 78 100 0
800 700 600 500 400 300 200 100 0
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011F 2012F 2013F
2011F
2012F
Note: Affordability index defined as EMI/monthly average income; lower the number better the affordability Source: HDFC, ICICI Bank, Nomura research
Source: HDFC, ICICI Bank, Nomura research
Fig. 121: Price to NAV chart Valuations have collapsed; likely close to bottom
Unitech 90%
Premium/discount to rolling NAV
DLF
Puravankara
HDIL
Godrej
70% 50% 30% 10% -10% -30% -50%

Aug-07 Oct-07 Dec-07 Feb-08 Apr-08 Jun-08 Aug-08 Oct-08 Dec-08 Feb-09 Apr-09 Jun-09 Aug-09 Oct-09 Dec-09 Feb-10 Apr-10 Jun-10 Aug-10 Oct-10 Dec-10 Feb-11 Apr-11 Jun-11 Aug-11
-70%
Source: Bloomberg, Nomura estimates
Fig. 122: Office demand supply trend

(mn sq ft) 70 60 50 40 30 20 10 0 CY08 CY09 CY10 CY11F CY12F
Source: Cushman & Wakefield, JLL, Nomura research
Fresh supply
Total demand
2013F
2002
2003
2004
2005
2006
2007
2008
2009
2010
73
Telecoms
TELECOMS
2012 outlook
January 13, 2012
Telco sentiment is as choppy as the Indian cricket team

Not enough clarity to turn positive yet Investors sentiment towards India telcos appears more volatile than it is towards some of the other regional telcos we find, while fundamentals are slower to change. In 2011, investors appeared bearish on regulations and competition, but turned more positive in the middle of the year, and then finished the year with negative views once again. In our view, 2012 could be more of the same, unless and until we have clarity on regulations, and as data gains more traction. We maintain Neutral ratings on all three telcos, with a negative bias, but, relatively, prefer Bharti > IDEA > RCOM. Regulations difficult to gauge In our view, regulations are very difficult to gauge at this stage spectrum license payment is one concern, but another would be the mechanics and timing of implementation. As we have seen in other jurisdictions, it usually isnt the pricing terms that make or break the economics; generally the non-price terms (physical implementation or legal challenges) are more critical. Our concern now is that this could be a prolonged debate even if the Minister finalizes the much-anticipated NTP-11, telcos wont give in that easily, and appeals and revisions are likely even then. As long as this continues, we believe the regulatory overhang will remain and stock prices will remain volatile and we disagree with views that it is in the price. Bharti some value emerging, but there are still concerns Bhartis shares have dropped 12% in the last two months (vs a 9% decline in the market index), but we still find it difficult to become excited about the stock. We don't deny that value is emerging now, which may appeal to long-term investors, but our near-term concerns are: 1) downside risk to consensus earnings for FY12 and FY13 from FX and operational trends; 2) the regulatory process is still in disarray; and 3) the wireless operating environment could remain volatile for the rest of the year for voice as data take-up improves. We maintain our Neutral rating and INR390 TP. IDEA going well operationally, while RCOMs gearing is an issue There is no reason to believe that IDEAs strong execution wont continue into 2012 and that it will win/ retain revenue share, which is captured in our forecasts. Our concern is more around valuation and regulations. For RCOM, 2012 could be a memorable year if it can monetize any of its assets, which could help its 5x (Net debt to EBITDA) geared balance sheet, and could be a key share-price catalyst. Until then, we think the stock will remain unloved.
Stock Bharti Airtel Idea Cellular RCOM Code BHARTI IN IDEA IN RCOM IN Rating Neutral Neutral Neutral Price (INR) 331 82 78 PT (INR) 390 88 90 Upside/Downside 18% 7% 16%
Anchor themes The subscriber growth cycle is by no means over and stable competition bodes well. 3G/data should offer further growth opportunities. Nomura vs consensus We are 14% below consensus on IDEA and 12% below consensus on Bharti on target price.
Research analysts India Telecoms Sachin Gupta, CFA - NSL sachin.gupta@nomura.com +65 6433 6968 Neeraja Natarajan - NSL neeraja.natarajan@nomura.com +65 6433 6961 Pankaj Suri - NSFSPL pankaj.suri@nomura.com +91 22 4053 3724 Gopakumar Pullaikodi - NSFSPL gopakumar.pullaikodi@nomura.com +91 22 4053 3733
Source: Bloomberg, Nomura research. Prices as on Jan 4, 2012
Nomura | Telecoms
January 13, 2012
Fig. 124: Price performance of 3 telcos vs. SENSEX in 2011

60% 40% 20% 0% -20% -40% -60%
6-Jan 20-Jan 3-Feb 17-Feb 3-Mar 17-Mar 31-Mar 14-Apr 28-Apr 12-May 26-May 9-Jun 23-Jun 7-Jul 21-Jul 4-Aug 18-Aug 1-Sep 15-Sep 29-Sep 13-Oct 27-Oct 10-Nov 24-Nov 8-Dec 22-Dec
Bharti
RCOM
IDEA
Sensex
-80%
Fig. 125: Pricing trends

(INR) 0.70 0.65 0.60 0.55 0.50 0.45 0.40 0.35 Bharti RCOM Idea
Fig. 126: EBITDA margin trends

45% 40% 35% 30% 25% 20%
1Q10 2Q10 3Q10 4Q10 1Q11 2Q11 3Q11 4Q11 1Q12 2Q12
75
Bharti
RCOM
Idea
1Q09
2Q09
3Q09
4Q09
1Q10
2Q10
3Q10
4Q10
1Q11
2Q11
3Q11
4Q11
1Q12
2Q12
3Q11 14% 13% 12% 12.8%
Fig. 127: Data as a % of revenues

Data as % of revenues Bharti Idea Vodafone Average 3Q10 11% 11% 9% 10.4% 4Q10 12% 12% 9% 11.2% 1Q11 12% 13% 10% 11.4% 2Q11 13% 13% 11% 12.1% 4Q11 15% 12% 12% 13.0% 1Q12 14.6% 12.1% 12.8% 13.2% 2Q12 14.5% 13.2% 12.9% 13.5%
January 13, 2012
76
January 13, 2012
Company profiles
77
January 13, 2012
78
Axis Bank
BANKS
AXBK.NS AXSB IN
Buy for high beta
January 13, 2012 Rating Remains Target price Remains Closing price January 6, 2012 Potential upside
Attractive risk-reward
Buy
INR 1400 INR 853.50 +64.0%
Action: Reaffirm Buy with a TP of INR1400 We reaffirm our Buy recommendation on AXSBs robust funding franchise and attractive current valuations, for which we have already factored in stress-case loan losses. In our view, AXSB is best leveraged to a turn in the rate cycle in India. Factoring in stress-case LLPs for bad loans to the power sector We build in LLPs of 71bps/104bps for FY12F/FY13F, respectively, for possible loan losses related to AXSB's power-sector exposure. Our forecasts factor in incremental slippages of 200bps through FY13F, while management guides for 100bps. Street estimates have yet to factor in LLPs, but we believe valuations already reflect this. We benchmark our LLPs with the stress-case assumptions outlined by Moody's in its recent outlook for Indian banks. In our view, our LLPs are fairly conservative. We expect strong loan growth, high CASA per branch to sustain RoE We expect AXSB to clock loan-book growth of 23.5% for FY12F and 22.3% for FY13F, versus system loan-book growth of 16-18% for FY12F. Given current CASA momentum, we expect a CASA CAGR of 22.5% through FY13F, which should help to maintain NIM in the 3.4-3.5% range. We expect a 22% CAGR in core fee income through FY13F. Valuation AXSB shares trade at 1.5x FY13F adjusted book value and 8.6x FY13F EPS. Our INR1,400 target price implies FY13F P/ABV of 2.4x and P/E of 14.1x, for an ROA of 1.3% and ROE of 18.4%. Catalysts: Lower-than-expected credit costs
31 Mar Currency (INR) FY11 Actual Old FY12F New Old FY13F New Old FY14F New
Anchor themes Indian banks are well leveraged to benefit from an expansion in financial inclusion, deepening credit relationships, resilient domestic consumption and a structurally expanding investment cycle. Nomura vs consensus Our PAT is 11% below consensus for FY13F on our higher loan-loss provision assumptions. We build in LLP of 1%.
Research analysts India Banks Vijay Sarathi - NFASL vijay.sarathi@nomura.com +91 22 4037 4457 Abhishek Bhattacharya - NFASL abhishek.bhattacharya@nomura.com +91 22 4037 4034 Amit Nanavati - NSFSPL amit.nanavati@nomura.com +91 22 4037 4361
PPOP (mn) Reported net profit (mn) Normalised net profit (mn) Normalised EPS Norm. EPS growth (%) Norm. P/E (x) Price/adj. book (x) Price/book (x) Dividend yield (%) ROE (%) ROA (%)
64,157 33,885 33,885 81.61 26.9 10.5 1.9 1.8 1.6 19.3 1.6
75,073 37,961 37,961 89.80 10.0 N/A N/A N/A N/A 18.3 1.4
75,073 37,961 37,961 89.80 10.0 9.5 1.7 1.6 1.9 18.3 1.4
94,122 42,800 42,800 99.62 10.9 N/A N/A N/A N/A 17.8 1.3
94,122 109,407 109,407 42,800 42,800 99.62 10.9 8.6 1.5 1.4 2.4 17.8 1.3 48,541 48,541 112.98 13.4 N/A N/A N/A N/A 17.6 1.2 48,541 48,541 112.98 13.4 7.6 1.3 1.2 2.7 17.6 1.2
Key company data: See page 2 for company data and detailed price/index chart.
Nomura | Axis Bank
January 13, 2012
Key data on Axis Bank

ProfitandLoss(INRmn)
Year-end 31 Mar Interest income Interest expense Net interest income Net fees and commissions Trading related profits Other operating revenue Non-interest income Operating income Depreciation Amortisation Operating expenses Employee share expense Op. profit before provisions Provisions for bad debt Other provision charges Operating profit Other non-operating income Associates & JCEs Pre-tax profit Income tax Net profit after tax Minority interests Other items Preferred dividends Normalised NPAT Extraordinary items Reported NPAT Dividends Transfer to reserves Valuation and ratio analysis FD normalised P/E (x) FD normalised P/E at price target (x) Reported P/E (x) Dividend yield (%) Price/book (x) Price/adjusted book (x) Net interest margin (%) Yield on interest earning assets (%) Cost of interest bearing liabilities (%) Net interest spread (%) Non-interest/operating income (%) Cost to income (%) Effective tax rate (%) Dividend payout (%) ROE (%) ROA (%) Operating ROE (%) Operating ROA (%) Growth (%) Net interest income Non-interest income Non-interest expenses Pre-provision earnings Net profit Normalised EPS Normalised FDEPS
Relative performance chart (one year)

FY10 116,380 -66,335 50,045 29,270 8,290 1,898 39,458 89,503 0 -24,539 -12,558 52,406 -13,570 -322 38,514 FY11 151,548 -85,918 65,630 37,430 4,967 3,924 46,321 111,951 0 -31,655 -16,139 64,157 -9,551 -3,249 51,357 FY12F 219,812 -137,708 82,104 46,080 2,883 3,269 52,231 134,335 0 -39,009 -20,253 75,073 -13,029 -4,772 57,273 FY13F 282,542 -180,311 102,231 55,779 3,462 3,781 63,022 165,253 0 -48,883 -22,249 94,122 -19,246 -9,030 65,846 FY14F 344,224 -222,748 121,476 66,524 4,027 3,713 74,264 195,740 0 -60,681 -25,652 109,407 -21,627 -13,102 74,678
(INR) 1600 1400 1200 1000 800 600 Feb 1 1 M ay 1 1 M ar 1 1 O ct 11 A pr 1 1 J un 1 1 J ul 1 1 N ov 1 1 D ec 1 1 A ug 1 1 S ep 1 1 J an 1 2 Price Rel MSCI India 115 110 105 100 95 90 85 80 75
Source: ThomsonReuters, Nomura research

(%) Absolute (INR) Absolute (USD) Relative to index Market cap (USDmn) Estimated free float (%) 1M 3M 12M
-17.3 -10.3 -34.6 -19.5 -16.1 -43.9 -11.6 6,676.9 90.3 1460.55/784 51.41 -9.9 -11.4
38,514 -13,368 25,145 0
51,357 -17,472 33,885 0
57,273 -19,311 37,961 0
65,846 -23,046 42,800 0
74,678 -26,137 48,541 0
52-week range (INR) 3-mth avg daily turnover (USDmn) Major shareholders (%) UTI AMC
23.6
Source: Thomson Reuters, Nomura research
25,145 0 25,145 -4,875 20,270
33,885 0 33,885 -5,719 28,166
37,961 0 37,961 -6,833 31,128
42,800 0 42,800 -8,560 34,240
48,541 0 48,541 -9,708 38,833
Notes
13.3 21.8 13.3 1.4 2.2 2.2 3.34 7.77 4.57 3.20 44.1 41.4 34.7 19.4 19.2 1.53 29.3 2.35
10.5 17.2 10.5 1.6 1.8 1.9 3.38 7.81 4.61 3.21 41.4 42.7 34.0 16.9 19.3 1.60 29.3 2.43
9.5 15.6 9.5 1.9 1.6 1.7 3.32 8.90 5.76 3.14 38.9 44.1 33.7 18.0 18.3 1.41 27.7 2.13
8.6 14.1 8.6 2.4 1.4 1.5 3.38 9.34 6.12 3.22 38.1 43.0 35.0 20.0 17.8 1.30 27.4 1.99
7.6 12.4 7.6 2.7 1.2 1.3 3.30 9.34 6.13 3.21 37.9 44.1 35.0 20.0 17.6 1.20 27.1 1.85
Building in conservative increases in loan-loss provisions to factor in higher exposure to the power sector
35.8 36.2 29.8 40.7 38.5 30.0 27.9
31.1 17.4 29.0 22.4 34.8 26.9 26.9
25.1 12.8 23.2 17.0 12.0 10.0 10.0
24.5 20.7 25.3 25.4 12.7 10.9 10.9
18.8 17.8 24.1 16.2 13.4 13.4 13.4
80
Nomura | Axis Bank
January 13, 2012
BalanceSheet(INRmn)
As at 31 Mar Cash and equivalents Inter-bank lending Deposits with central bank Total securities Other interest earning assets Gross loans Less provisions Net loans Long-term investments Fixed assets Goodwill Other intangible assets Other non IEAs Total assets Customer deposits Bank deposits, CDs, debentures Other interest bearing liabilities Total interest bearing liabilities Non interest bearing liabilities Total liabilities Minority interest Common stock Preferred stock Retained earnings Reserves for credit losses Proposed dividends Other equity Shareholders' equity Total liabilities and equity Non-performing assets (INR) Balance sheet ratios (%) Loans to deposits Equity to assets Asset quality & capital NPAs/gross loans (%) Bad debt charge/gross loans (%) Loss reserves/assets (%) Loss reserves/NPAs (%) Tier 1 capital ratio (%) Total capital ratio (%) Growth (%) Loan growth Interest earning assets Interest bearing liabilities Asset growth Deposit growth Per share Reported EPS (INR) Norm EPS (INR) Fully diluted norm EPS (INR) DPS (INR) PPOP PS (INR) BVPS (INR) ABVPS (INR) NTAPS (INR)
FY10 94,739 57,326 559,748 1,052,421 -8,990 1,043,431 12,224
FY11 138,862 75,225 719,916 1,435,969 -11,891 1,424,078 22,731
FY12F 145,380 25,232 937,159 1,775,020 -16,157 1,758,864 24,937
FY13F 209,179 30,481 1,147,681 2,175,972 -25,239 2,150,734 28,937
FY14F 274,950 36,871 1,392,116 2,645,282 -33,815 2,611,468 32,937
Notes
Strong loan-book CAGR of 23% over FY11-13F to drive NII CAGR of 25% over the same period
39,011 1,806,478 1,413,002 100,137 67,353 1,580,492 65,540 1,646,032 4,053 156,393
46,321 2,427,134 1,892,378 192,746 65,741 2,150,865 86,280 2,237,145 4,105 185,883
65,735 2,957,307 2,317,421 212,014 100,741 2,630,176 103,157 2,733,332 4,261 219,713
77,711 3,644,722 2,911,464 212,014 140,741 3,264,219 123,744 3,387,962 4,261 252,498
92,291 4,440,632 3,600,126 212,014 185,741 3,997,882 148,809 4,146,691 4,261 289,680
160,446 1,806,479 13,180
189,988 2,427,134 15,994
223,974 2,957,307 23,897
256,759 3,644,722 34,200
293,942 4,440,632 44,125
74.5 8.9
75.9 7.8
76.6 7.6
74.7 7.0
73.5 6.6
1.3 1.29 0.50 68.2 11.2 15.8
1.1 0.67 0.49 74.3 9.4 12.7
1.3 0.73 0.55 67.6 8.5 12.1
1.6 0.88 0.69 73.8 7.9 12.0
1.7 0.82 0.76 76.6 7.4 11.9
27.9 24.4 19.3 22.3 20.4
36.5 33.6 36.1 34.4 33.9
23.5 22.6 22.3 21.8 22.5
22.3 22.3 24.1 23.2 25.6
21.4 21.4 22.5 21.8 23.7
64.31 64.31 64.31 12.06 134.03 396.88 381.96 396.88
81.61 81.61 81.61 13.95 154.52 463.50 443.88 463.50
89.80 89.80 89.80 16.04 177.59 525.63 506.75 525.63
99.62 99.62 99.62 20.09 219.07 602.57 583.69 602.57
112.98 112.98 112.98 22.78 254.64 689.83 670.95 689.83
81
Nomura | Axis Bank
January 13, 2012
Valuation Methodology We arrive at our target price of INR1,400 using a three-stage residual-income valuation methodology that assumes the following: 1) interest-earning assets CAGR of 21.9% over FY11-14F, 12.9% over FY13-20F and a terminal growth rate of 4% beyond that; 2) average ROE of 18.8% over FY12-20F and an 18.3% terminal value ROE; and 3) discount rates of 14.85% (current cost of equity) for FY11-14F, 12.25% for FY14-20F and a 10% terminal rate. Our TP of INR1,400 implies FY13F P/ABV of 2.4x. Our book value estimates also factor in 3.5% dilution towards the Enam acquisition. Risks that may impede the achievement of the target price Accelerated monetary policy easing, policy intervention to resolve power-sector bottlenecks, such as fuel availability and SEB (state electricity board) financial health, are key upside catalysts. RBI persisting with a tight money policy, policy inaction with respect to power-sector bottlenecks and continued global macro uncertainty are potential downside risks.
82
Infosys
INFY.NS INFO IN
SOFTWARE & SERVICES
Near-term safety with rebound possibilities
No near-term lag vs. peers; a better rebound candidate and low expectations in valuations
Action: Better positioned for a rebound, troubles not structural; Buy We believe Infosys is best positioned for a rebound as a productisation revival, a shift in client spending towards change-the-business and regulation-related spending start to play out from 2HFY13F onwards. Contrary to consensus, we believe Infosys troubles are not structural, but more environment-led. In the near term, too, we believe Infosys will post on-par growth compared to peers such as TCS (which have been more upbeat on commentary). This, coupled with bigger potential gains from rupee depreciation and low expectations built into valuations, makes us positive on the stock. We reaffirm Buy. Catalysts: Pricing stability; revival in package implementation We like the longer-term strategy of sustaining margins/multiples We believe Infosys strategy of deriving two-thirds of its revenue from high realization/high margin/non-linear services is the right approach to counter wage-cost increases, competitive pressure and longer-term deterioration in valuation multiples. Infosys has the highest exposure to such services (~40% of revenue) and is the best placed in tier-1 IT to succeed with this strategy, in our view. Valuations already build in concerns; Buy with TP of INR3,300 We reiterate our Buy on Infosys on: 1) better positioning for a rebound, 2) near-term upside triggers from bigger INR depreciation benefits, and 3) valuation discount of 10% to TCS and its own historical average, pricing in managements cautious demand commentary.
Buy
INR 3300 INR 2832 +16.3%
Anchor themes Shift in IT spend allocations and and simple economics should help power tier-1 IT growth closer to the trend line. Within tier-1, we favour companies better equipped for a rebound scenario and those that have greater street pessimism built in. Nomura vs consensus Our target price is 10% ahead of Bloomberg consensus on higher margin expectations.
Research analysts India Technology/Services & Software Ashwin Mehta - NFASL ashwin.mehta@nomura.com +91 22 4037 4465 Pinku Pappan - NSFSPL pinku.pappan@nomura.com +91 22 4037 4360
31 Mar Currency (INR)
FY11 Actual Old
FY12F New Old
FY13F New Old
FY14F New
Revenue (mn) Reported net profit (mn) Normalised net profit (mn) Normalised EPS Norm. EPS growth (%) Norm. P/E (x) EV/EBITDA (x) Price/book (x) Dividend yield (%) ROE (%) Net debt/equity (%)
275,010 340,691 340,691 385,667 385,667 435,279 435,279 68,230 68,230 119.45 11.1 23.7 16.3 5.9 2.1 27.1 84,010 84,010 147.09 23.1 N/A 13.2 N/A N/A 28.4 84,010 84,010 147.09 23.1 19.3 13.2 5.1 1.4 28.4 95,646 95,646 167.43 13.8 N/A 11.3 N/A N/A 27.2 95,646 106,630 106,630 95,646 106,630 106,630 167.43 13.8 16.9 11.3 4.2 1.5 27.2 186.64 11.5 N/A 9.8 N/A N/A 25.2 186.64 11.5 15.2 9.8 3.5 2.0 25.2
net cash net cash net cash net cash net cash net cash net cash
Nomura | Infosys
January 13, 2012
Key data on Infosys

Incomestatement(INRmn)
Year-end 31 Mar Revenue Cost of goods sold Gross profit SG&A Employee share expense Operating profit EBITDA Depreciation Amortisation EBIT Net interest expense Associates & JCEs Other income Earnings before tax Income tax Net profit after tax Minority interests Other items Preferred dividends Normalised NPAT Extraordinary items Reported NPAT Dividends Transfer to reserves Valuation and ratio analysis FD normalised P/E (x) FD normalised P/E at price target (x) Reported P/E (x) Dividend yield (%) Price/cashflow (x) Price/book (x) EV/EBITDA (x) EV/EBIT (x) Gross margin (%) EBITDA margin (%) EBIT margin (%) Net margin (%) Effective tax rate (%) Dividend payout (%) Capex to sales (%) Capex to depreciation (x) ROE (%) ROA (pretax %) Growth (%) Revenue EBITDA EBIT Normalised EPS Normalised FDEPS Per share Reported EPS (INR) Norm EPS (INR) Fully diluted norm EPS (INR) Book value per share (INR) DPS (INR)

FY10 227,420 -128,855 98,565 -29,005 69,560 78,610 -9,050 69,560 FY11 275,010 -158,298 116,712 -35,692 81,020 89,640 -8,620 81,020 FY12F 340,691 -197,059 143,632 -44,822 98,810 108,333 -9,522 98,810 FY13F 385,667 -223,535 162,131 -50,888 111,244 121,604 -10,360 111,244 FY14F 435,279 -255,690 179,589 -56,548 123,041 133,772 -10,731 123,041
(INR) 3400 3200 3000 2800 2600 2400 2200 2000 Feb 1 1 M ay 1 1 M ar 1 1 O ct 11 A pr 1 1 J un 1 1 J ul 1 1 N ov 1 1 D ec 1 1 A ug 1 1 S ep 1 1 J an 1 2 Price Rel MSCI India 110 105 100 95 90 85 80 75

(%) 1M 2.1 30,853.0 3495/2161.5 76.08 3M 12M 8.4 -30.1 4.7
9,430 78,990 -17,650 61,340 0
12,110 93,130 -24,900 68,230 0
18,111 116,921 -32,912 84,010 0
19,311 130,555 -34,909 95,646 0
21,053 144,094 -37,465 106,630 0
Absolute (INR) Absolute (USD) Relative to index Market cap (USDmn) Estimated free float (%) 52-week range (INR) 3-mth avg daily turnover (USDmn) Major shareholders (%) N R Narayana Murthy Nandan M Nilekani
4.8 15.7 -18.6 10.6 16.2
61,340 1,320 62,660 -16,724 45,936
68,230 0 68,230 -40,096 28,134
84,010 0 84,010 -26,738 57,271
95,646 0 95,646 -28,075 67,570
106,630 0 106,630 -32,086 74,544
4.5 3.4
26.4 26.1 25.8 0.9 26.9 7.0 19.3 21.9 43.3 34.6 30.6 27.6 22.3 26.7 4.0 1.0 30.3 47.4
23.7 23.4 23.7 2.1 31.4 5.9 16.3 18.0 42.4 32.6 29.5 24.8 26.7 58.8 4.5 1.4 27.1 51.4
19.3 19.0 19.3 1.4 23.2 5.1 13.2 14.4 42.2 31.8 29.0 24.7 28.1 31.8 4.5 1.6 28.4 62.7
16.9 16.7 16.9 1.5 21.0 4.2 11.3 12.3 42.0 31.5 28.8 24.8 26.7 29.4 3.1 1.2 27.2 62.8
15.2 15.0 15.2 2.0 19.4 3.5 9.8 10.7 41.3 30.7 28.3 24.5 26.0 30.1 3.2 1.3 25.2 62.8
Notes
We expect USD revenue growth of 17.4%/13.3% in FY12/13F
4.8 9.3 8.1 4.7 4.7
20.9 14.0 16.5 11.1 11.2
23.9 20.9 22.0 23.1 23.1
13.2 12.3 12.6 13.8 13.8
12.9 10.0 10.6 11.5 11.5
109.84 107.52 107.40 404.03 25.06
119.45 119.45 119.42 478.01 60.00
147.09 147.09 147.04 556.04 40.02
167.43 167.43 167.39 674.21 42.01
186.64 186.64 186.64 804.62 56.16
84
Nomura | Infosys
January 13, 2012
Cashflow(INRmn)
Year-end 31 Mar EBITDA Change in working capital Other operating cashflow Cashflow from operations Capital expenditure Free cashflow Reduction in investments Net acquisitions Reduction in other LT assets Addition in other LT liabilities Adjustments Cashflow after investing acts Cash dividends Equity issue Debt issue Convertible debt issue Others Cashflow from financial acts Net cashflow Beginning cash Ending cash Ending net debt
FY10 78,610 -1,470 -17,070 60,070 -9,060 51,010 -37,120 FY11 89,640 -11,490 -26,680 51,470 -12,240 39,230 35,450 FY12F 108,333 -5,512 -33,192 69,629 -15,200 54,429 890 FY13F 121,604 -9,562 -34,909 77,133 -12,000 65,133 0 0 0 0 65,133 -28,075 0 FY14F 133,772 -12,861 -37,465 83,446 -14,000 69,446 0 0 0 69,446 -32,086 0
Notes
Strong cash-flow generation to continue
0 90 13,980 -16,724 2,014
0 0 74,680 -40,096 14,406
0 0 55,319 -26,738 -12,730
9,340 -5,370 8,610 96,950 105,560 -105,560
12,110 -13,580 61,100 105,560 166,660 -166,660
18,111 -21,357 33,961 166,660 200,621 -200,621
19,311 -8,765 56,368 200,621 256,990 -256,990
21,053 -11,033 58,413 256,990 315,403 -315,403
Balancesheet(INRmn)
As at 31 Mar Cash & equivalents Marketable securities Accounts receivable Inventories Other current assets Total current assets LT investments Fixed assets Goodwill Other intangible assets Other LT assets Total assets Short-term debt Accounts payable Other current liabilities Total current liabilities Long-term debt Convertible debt Other LT liabilities Total liabilities Minority interest Preferred stock Common stock Retained earnings Proposed dividends Other equity and reserves Total shareholders' equity Total equity & liabilities Liquidity (x) Current ratio Interest cover Leverage Net debt/EBITDA (x) Net debt/equity (%) Activity (days) Days receivable Days inventory Days payable Cash cycle
FY10 105,560 37,120 34,940 0 41,870 219,490 0 53,550
FY11 166,660 1,670 58,960 0 24,390 251,680 0 57,170
FY12F 200,621 780 74,672 0 26,994 303,067 0 62,848
FY13F 256,990 780 84,530 0 30,811 373,111 0 64,487
FY14F 315,403 780 95,404 0 39,073 450,660 0 67,756
Notes
Cash and equivalents continue to rise
2,000 275,040 23,430 21,120 44,550
3,780 312,630 18,600 21,000 39,600
4,060 369,974 25,464 26,939 52,403
4,060 441,658 28,938 27,578 56,517
4,060 522,476 33,042 29,749 62,791
0 44,550 0 0 2,860 227,630
0 39,600 0 0 2,860 270,170
0 52,403 0 0 2,860 314,711
0 56,517 0 0 2,860 382,282
0 62,791 0 0 2,860 456,825
230,490 275,040
273,030 312,630
317,571 369,974
385,142 441,658
459,685 522,476
4.93 na
6.36 na
5.78 na
6.60 na
7.18 na
net cash net cash
net cash net cash
net cash net cash
net cash net cash
net cash net cash
57.5 0.0 61.6 -4.1
62.3 0.0 48.5 13.9
71.8 0.0 40.9 30.9
75.3 0.0 44.4 30.9
75.4 0.0 44.2 31.2
85
Lupin
LUPN.NS LPC IN
HEALTH CARE & PHARMACEUTICALS
Strong execution track record
Expecting earnings growth momentum to accelerate

Action: Buy as earnings momentum picks up Lupin in our view has one of the best execution track records amongst generic pharma companies and it has ramped up its US and India business over the past five years. In India the company has transformed itself into a leading chronic segment payer with leadership positions in the fast-growing anti-diabetes and cardiovascular segments. Lupin is the largest Indian company operating in the US. With 30% of its FY12F US revenue from branded products, we understand the company has the largest branded presence in the US among Indian companies in terms of prescriptions. Further, LPC believes that it is the largest Indian player in Japan, a market that in our view holds long-term potential. We expect earnings momentum to pick up in FY13F. The earnings upgrade is likely to be driven by the US business. With the commencement of approvals (from FY12) for oral contraceptives (OCs), we expect launch momentum in US to accelerate. We expect growth in India to remain ahead of the overall market. Overall, we estimate revenue and earnings CAGRs at 20% and 22.5% (ex-licensing inc), over FY12-14F. Catalysts US product approvals, earnings surprises on higher revenue, margin in the US portfolio and value accretive acquisitions are in our view catalysts. Valuation Our 12-month target price of INR576 is based on 20x one-year forward earnings, in line with its current trading multiple. The key risks to our call are a) generic competition in Suprax; b) substantial fall in sales of key products such as Simvastatin in the US; and c) regulatory changes.
31 Mar Currency (INR) FY11 Actual Old FY12F New Old FY13F New Old FY14F New
Buy
INR 576 INR 443 +30%
Anchor themes LPC is a play on: 1) the generic opportunity in the US, where it is pursuing niche and limited competition opportunities; 2) the rise in medicine consumption in India; and 3) the potential rise in the generic opportunity in Japan. LPC is the largest Indian company in Japan. Nomura vs consensus Our target price is ~10% ahead of consensus, as we expect a sharper ramp-up in the US portfolio, led by OC launches.
Research analysts India Pharmaceuticals Saion Mukherjee - NFASL saion.mukherjee@nomura.com +91 22 4037 4184 Aditya Khemka - NSFSPL aditya.khemka@nomura.com +91 22 4037 4197
58,320 8,625 8,625 19.23 25.2 23.0 17.2 6.0 0.7 29.5 22.6
69,109 10,058 10,058 22.43 16.6 N/A 14.5 N/A N/A 27.1 13.0
69,109 10,058 10,058 22.43 16.6 19.7 13.8 4.8 0.7 27.1 13.0
84,774 11,674 11,674 26.31 17.3 N/A 12.1 N/A N/A 25.1 8.0
84,774 11,674 11,674 26.31 17.3 16.8 11.5 3.9 0.8 25.1
97,698 13,882 13,882 30.95 17.7 N/A 10.0 N/A N/A 24.0
97,698 13,882 13,882 30.95 17.7 14.3 9.5 3.1 0.8 24.0
8.0 net cash net cash
Nomura | Lupin
January 13, 2012
Key data on Lupin


FY10 48,708 -20,933 27,775 -19,175 8,600 9,839 -1,239 8,600 -385 142 8,357 -1,360 6,997 -180 FY11 58,320 -24,091 34,229 -24,030 10,199 11,911 -1,712 10,199 -325 89 9,963 -1,169 8,794 -168 FY12F 69,109 -27,644 41,465 -28,867 12,598 14,708 -2,111 12,598 -465 240 12,373 -2,134 10,238 -180 FY13F 84,774 -34,618 50,156 -35,150 15,006 17,599 -2,593 15,006 -465 310 14,851 -2,970 11,881 -207 FY14F 97,698 -39,627 58,071 -40,376 17,695 20,717 -3,022 17,695 -465 420 17,650 -3,530 14,120 -238
(INR) 500 480 460 440 420 400 380 360 Feb 1 1 M ay 1 1 M ar 1 1 O ct 11 A pr 1 1 J un 1 1 J ul 1 1 N ov 1 1 D ec 1 1 A ug 1 1 S ep 1 1 J an 1 2 Price Rel MSCI India 130 120 110 100 90 80

(%) Absolute (INR) Absolute (USD) Relative to index Market cap (USDmn) Estimated free float (%) 52-week range (INR) 495/363 7.63 3-mth avg daily turnover (USDmn) Major shareholders (%) Promoter 1M -5.0 0.7 3,746.9 3M 12M -5.7 -9.5
-7.5 -11.7 -22.3 -5.2 13.7
6,816 6,816 -1,483 5,333
8,625 8,625 -1,432 7,193
10,058 10,058 -1,466 8,592
11,674 11,674 -1,504 10,169
13,882 13,882 -1,557 12,325
47.2
Notes 28.8 37.1 28.8 0.8 29.1 7.7 21.0 24.1 57.0 20.2 17.7 14.0 16.3 21.8 13.7 5.4 34.1 19.3 23.0 29.6 23.0 0.7 24.9 6.0 17.2 20.1 58.7 20.4 17.5 14.8 11.7 16.6 7.1 2.4 29.5 19.3 19.7 25.4 19.7 0.7 25.5 4.8 13.8 16.1 60.0 21.3 18.2 14.6 17.2 14.6 5.3 1.7 27.1 20.5 16.8 21.7 16.8 0.8 21.0 3.9 11.5 13.4 59.2 20.8 17.7 13.8 20.0 12.9 7.1 2.3 25.1 20.9 14.3 18.4 14.3 0.8 15.5 3.1 9.5 11.1 59.4 21.2 18.1 14.2 20.0 11.2 6.1 2.0 24.0 21.4
We expect revenue growth of 20% over FY12-FY14F
27.2 35.2 34.4 35.9 35.9
19.7 21.1 18.6 25.2 25.2
18.5 23.5 23.5 16.6 16.6
22.7 19.7 19.1 17.3 17.3
15.2 17.7 17.9 17.7 17.7
15.36 15.36 15.36 57.87 3.34
19.23 19.23 19.23 73.94 3.23
22.43 22.43 22.43 92.31 3.27
26.31 26.31 26.31 114.98 3.35
30.95 30.95 30.95 144.00 3.51
87
Nomura | Lupin
January 13, 2012
Cashflow(INRmn)
FY10 9,839 -4,673 1,598 6,764 -6,692 72 -49 0 466 -525 -35 -1,081 2,973 -618 1,273 1,238 778 2,016 9,383 FY11 11,911 -2,587 -1,355 7,969 -4,119 3,850 233 0 161 -433 3,812 -1,227 1 -400 -1,626 2,186 2,015 4,201 7,423 FY12F 14,708 -4,372 -2,546 7,791 -3,671 4,119 0 0 -48 48 4,119 -1,227 0 -838 -2,065 2,054 4,201 6,255 5,369 FY13F 17,599 -4,713 -3,533 9,354 -6,000 3,354 0 0 -67 67 3,354 -1,227 0 -884 -2,111 1,242 6,255 7,498 4,126 FY14F 20,717 -3,626 -4,257 12,834 -6,000 6,834 0 0 -80 80 6,834 -1,227 0 -949 -2,176 4,658 7,498 12,156 -531
Notes
We factor in a capex of INR6bn for each of FY13 and FY14 in our estimates
Balancesheet(INRmn)
FY10 2,015 0 11,266 9,715 4,954 27,950 264 19,444 3,197 0 0 50,855 9,649 2,243 11,893 11,399 1,630 24,921 255 0 889 10,522 14,267 25,678 50,855
FY11 4,201 0 12,558 12,000 6,589 35,348 32 22,626 3,255 0 0 61,260 11,800 2,718 14,518 11,624 1,792 27,934 515 0 892 15,946 15,972 32,811 61,260
FY12F 6,255 0 15,668 14,746 7,589 44,258 32 24,755 3,255 0 0 72,300 14,272 2,730 17,002 11,624 1,743 30,370 527 0 892 22,770 17,741 41,403 72,300
FY13F 7,498 0 19,575 18,424 7,588 53,085 32 28,929 3,255 0 0 85,300 17,124 2,750 19,874 11,624 1,676 33,174 554 0 892 31,170 19,510 51,573 85,300
FY14F 12,156 0 22,602 21,272 7,589 63,618 32 32,922 3,255 0 0 99,826 19,334 2,790 22,123 11,624 1,596 35,343 585 0 892 41,726 21,279 63,898 99,826
Notes
A strong balance sheet lends strategic capability for Lupin on the inorganic front
2.35 22.3
2.43 31.4
2.60 27.1
2.67 32.3
2.88 38.1
0.95 36.5
0.62 22.6
0.37 13.0
0.23 8.0
net cash net cash
81.0 168.1 184.4 64.7
74.6 164.5 162.5 76.6
74.7 177.1 172.6 79.2
75.9 174.9 165.5 85.2
78.8 182.8 167.9 93.7
88
Nomura | Lupin
January 13, 2012
Valuation Methodology: Our TP of INR576 is based on 20x one-year forward earnings. Our valuation multiple is in line with the current trading multiple. Risks that may impede the achievement of the target price: a) generic competition in Suprax; b) a substantial fall in the sales of key products in the US such as Simvastatin (on generic atorvastatin approval) and c) regulatory changes including price control in key markets such as India and Japan. We have built in some of the risks in our estimates and take comfort from the fact that any further downside could be compensated from the potential upside from new launches.
89
Power Grid Corp of India

POWER & UTILITIES
PGRD.NS PWGR IN
Defensive growth story remains intact
Hedged play on Indias capacity addition pipeline; highly visible mid-teen EPS growth
Outlook on pick-up in capitalisation, earnings growth remains upbeat In our view, long-term sustainability of capitalisation rate at 30-40% (16% in 1HFY12 vs. 36% in FY11 and 22% in FY10), together with progressively higher capex, low risk profile relative to IPPs and high earnings growth visibility (we peg FY12F-17F EPS CAGR at 16%) will drive stock price performance. Capitalisation in FY12 and FY13 could well surprise positively Even as April-Oct 2011 capitalisation was INR51bn (translating into a capitalisation rate of ~20%), management maintains a base capitalisation target of INR100bn for FY12F (15% above our estimate) and higher capitalisation in FY13F (we have built in capitalisation of INR94bn). contribution from telecom, open access provide set to rise We expect earnings from the telecom business to grow progressively on the back of revenue from tower leasing and the governments NKN / NOFN connectivity projects. As inter-state power trading volumes rise, open access revenue would augment PWGRs regulated earnings growth, on our reading. Valuation multiples are reasonable, prefer PWGR over NTPC Our TP is based on a Residual Income (RI) model (12.5% CoE, 17% terminal RoE, 3% terminal growth). At the 9 January close, the FY13F 13.3x P/E and 1.8x P/Book are 10-15% below long-term averages even as earnings prospects remain intact. While PWGR outperformed NTPC in CY11 and trades at a premium on forward multiples, we continue to prefer PWGR over NTPC (fuel security risk and lower earnings growth profile).
Buy
INR 120 INR 100 +20%
Anchor themes India's generation capacity pipeline up to FY17 translates into a USD17-25bn investment opportunity in the transmission space. Competitive intensity is set to rise gradually, but the Central Transmission Utility (CTU) should continue to undertake the largest share of this investment capex. Nomura vs consensus Our FY12F/13F EPS forecasts are largely in line with consensus.
FY10 Actual Old
FY11F New Old
FY12F New Old
FY13F New
71,275 20,409 21,372 5.08 21.4 19.0 12.9 2.6 1.8 13.4 195.4
81,828 26,969 25,365 5.83 14.9 N/A 12.0 N/A N/A 14.5 174.1
81,828 103,844 103,844 123,586 123,586 26,969 25,365 5.83 14.9 16.6 12.0 2.1 2.1 14.5 174.1 30,002 30,002 6.48 11.1 N/A 10.4 N/A N/A 13.5 196.7 30,002 30,002 6.48 11.1 14.9 10.4 1.9 2.5 13.5 196.7 35,429 35,429 7.65 18.1 N/A 9.5 N/A N/A 14.6 210.6 35,429 35,429 7.65 18.1 12.6 9.5 1.8 3.0 14.6 210.6
Nomura | Power Grid Corp of India
January 13, 2012
Key data on Power Grid Corp of India


FY09 56,900 -1,976 54,924 -13,560 -6,439 34,925 45,865 -10,940 0 34,925 -13,326 1,390 22,989 -5,380 17,610 FY10 71,275 -2,371 68,904 -22,737 -7,267 38,899 58,696 -19,797 0 38,899 -12,476 803 27,226 -5,854 21,372 FY11F 81,828 -2,699 79,129 -25,210 -7,459 46,460 68,454 -21,994 0 46,460 -13,571 3,343 36,232 -10,867 25,365 FY12F 103,844 -3,046 100,798 -31,219 -8,790 60,789 86,930 -26,142 0 60,789 -19,515 474 41,748 -11,746 30,002 FY13F 123,586 -3,639 119,947 -36,556 -10,030 73,361 103,943 -30,582 0 73,361 -25,301 763 48,823 -13,394 35,429
(INR) 115 110 105 100 95 90 Feb 1 1 M ay 1 1 M ar 1 1 O ct 11 A pr 1 1 J un 1 1 J ul 1 1 N ov 1 1 D ec 1 1 A ug 1 1 S ep 1 1 J an 1 2 Price Rel MSCI India 135 130 125 120 115 110 105 100 95

(%) Absolute (INR) Absolute (USD) Relative to index Market cap (USDmn) Estimated free float (%) 52-week range (INR) 3-mth avg daily turnover (USDmn) Major shareholders (%) Government of India 1M 3M 12M -8.7
-0.8 -10.8 -6.2 9,117.9 30.5 113.8/91.8 11.17
-6.7 -18.1 -16.2 -0.3 10.7
17,610 -704 16,906 -5,909 10,997
21,372 -963 20,409 -7,370 13,039
25,365 1,604 26,969 -9,448 17,521
30,002 0 30,002 -11,337 18,664
35,429 0 35,429 -13,497 21,933
69.5
Notes 23.1 28.7 24.1 1.5 10.9 2.8 15.4 20.3 96.5 80.6 61.4 29.7 23.4 35.0 165.1 8.6 na na 19.0 23.6 19.9 1.8 7.4 2.6 12.9 19.5 96.7 82.4 54.6 28.6 21.5 36.1 141.0 5.1 13.4 6.9 16.6 20.6 15.6 2.1 8.8 2.1 12.0 17.6 96.7 83.7 56.8 33.0 30.0 35.0 165.8 6.2 14.5 7.0 14.9 18.5 14.9 2.5 5.5 1.9 10.4 14.9 97.1 83.7 58.5 28.9 28.1 37.8 149.3 5.9 13.5 7.8 12.6 15.7 12.6 3.0 5.3 1.8 9.5 13.4 97.1 84.1 59.4 28.7 27.4 38.1 121.0 4.9 14.6 8.1
We expect a 15% EPS CAGR over FY11-13F
25.3 28.0 11.4 21.4 21.4
14.8 16.6 19.4 14.9 14.9
26.9 27.0 30.8 11.1 11.1
19.0 19.6 20.7 18.1 18.1
4.02 4.18 4.18 34.73 1.40
4.85 5.08 5.08 37.87 1.75
6.20 5.83 5.83 46.15 2.04
6.48 6.48 6.48 50.18 2.45
7.65 7.65 7.65 54.92 2.92
91
Nomura | Power Grid Corp of India
January 13, 2012
Cashflow(INRmn)
FY09 45,865 9,154 -17,555 37,464 -93,951 -56,487 1,434 FY10 58,696 13,141 -16,821 55,016 -100,487 -45,471 1,396 0 1,925 -1,925 -44,075 -7,370 0 59,514 419 52,562 8,488 24,289 32,776 311,392 FY11F 68,454 -5,910 -15,047 47,497 -135,645 -88,149 882 0 3,782 -3,782 -87,267 -9,448 37,212 64,660 -1,133 91,291 4,024 32,776 36,801 372,027 FY12F 86,930 21,753 -27,073 81,611 -155,083 -73,472 1,625 0 2,048 -2,048 -71,847 -11,337 0 91,028 -1,655 78,036 6,188 36,801 42,989 456,866 FY13F 103,943 14,296 -34,023 84,216 -149,506 -65,290 1,923 0 2,256 -2,256 -63,367 -13,497 0 67,416 -1,641 52,278 -11,089 42,989 31,900 535,371
Notes
Working capital cycle to remain negative, augment cash flows
-55,053 -5,909 0 62,020 4,576 60,686 5,633 18,656 24,289
Balancesheet(INRmn)
FY09 24,289 0 13,736 2,976 42,129 83,129 15,928 444,144 0 0 543,202 0 10,729 72,403 83,132 284,654 29,235 397,021 0 42,088 104,093
FY10 32,776 0 22,149 3,449 37,336 95,710 14,532 524,834 0 0 635,076 0 10,606 89,759 100,365 344,168 31,160 475,693 0 42,088 117,295
FY11F 36,801 0 31,621 3,815 32,935 105,171 13,651 638,486 0 0 757,308 0 20,808 79,085 99,893 408,828 34,941 543,662 0 46,297 167,349
FY12F 42,989 0 21,338 4,945 35,257 104,529 12,025 767,428 0 0 883,982 0 21,827 92,988 114,815 499,856 36,989 651,660 0 46,297 186,025
FY13F 31,900 0 24,125 5,885 36,768 98,678 10,102 886,352 0 0 995,132 0 27,644 106,706 134,350 567,271 39,246 740,866 0 46,297 207,969
Notes
Leverage (D/E) should remain within the threshold of 2.33x
146,181 543,202
159,383 635,076
213,646 757,308
232,322 883,982
254,266 995,132
1.00 2.6
0.95 3.1
1.05 3.4
0.91 3.1
0.73 2.9
net cash net cash
5.31 195.4
5.43 174.1
5.26 196.7
5.15 210.6
0.0
91.9 494.5 1,642.2 -1,055.8
119.9 491.3 2,124.5 -1,513.3
93.3 526.3 2,561.3 -1,941.7
67.1 543.1 2,481.0 -1,870.7
92
State Bank of India

BANKS
SBI.NS SBIN IN
The worst behind it
The proverbial phoenix
Buy
INR 2400 INR 1673 +43.5%
Rising loan losses priced in; best positioned for the rate cycle ride SBI is Indias largest bank, with a loan market share of 19% and a deposit market share of 20%, backed by a network of 13,829 branches. The stock has underperformed the broader index by 16% YTD in 2011. The markets overriding concerns on SBI are increasing NPL formation and low capital base. We are bullish on SBI as despite factoring in aggressive LLPs for the next two years, the stock is trading close to historical low valuations. SBI is the most attractive lever for playing the rate cycle turn, in our view. Factoring in stress case LLPs of 150bps per quarter through FY13F We expect loan losses to increase due to the prevailing high interest rate regime and the slowing economy. We forecast quarterly LLPs of 150 bps for the next six quarters (through FY13F), compared to six-year average of 66 bps) to account for possible NPL formation from power sector exposure and a general deterioration in asset quality. We believe these are fairly conservative LLPs and we have also stress tested these with the adverse scenarios outlined by Moodys in its recent outlook. Focused on capital optimisation SBIs Tier-1 ratio at the end of FY2Q12 was 7.5%. Management is confident on the government infusing INR50bn of capital before the end of FY12. The bank is taking a number of steps to optimise capital use like transferring export portfolio to an export credit guarantee scheme and SME portfolio to SIDBI's CGTS scheme to release 20-25 bps of Tier-1 capital. The bank is also aggressively pruning unused credit lines and rationalizing term loan schedules and expects to clock 9% by Mar'12.
Anchor themes India banks appear well leveraged to benefit from an expansion in financial inclusion, deepening credit relationships, resilient domestic consumption and a structurally expanding investment cycle. Nomura vs consensus Our PAT is 3% below consensus for FY13F on higher loan loss provisions. We are building in LLPs of 1.4% for FY13F.
Research analysts India Banks Vijay Sarathi - NFASL vijay.sarathi@nomura.com +91 22 4037 4457 Abhishek Bhattacharya - NFASL abhishek.bhattacharya@nomura.com +91 22 4037 4034 Amit Nanavati - NSFSPL amit.nanavati@nomura.com +91 22 4037 4361
FY11 Actual Old
FY12F New Old
FY13F New Old
FY14F New
PPOP (mn) Reported net profit (mn) Normalised net profit (mn) Normalised EPS Norm. EPS growth (%) Norm. P/E (x) Price/adj. book (x) Price/book (x) Dividend yield (%) ROE (%) ROA (%)
253,356 294,955 294,955 362,944 362,944 440,574 440,574 82,645 82,645 130.16 -9.8 12.9 1.6 1.6 2.0 12.6 0.7 93,471 93,471 145.29 11.6 N/A N/A N/A N/A 13.2 0.7 93,471 138,695 138,695 177,345 177,345 93,471 138,695 138,695 177,345 177,345 145.29 11.6 11.5 1.5 1.4 2.4 13.2 0.7 209.67 44.3 N/A N/A N/A N/A 17.0 0.9 209.67 44.3 8.0 1.3 1.3 3.7 17.0 0.9 268.10 27.9 N/A N/A N/A N/A 19.1 1.0 268.10 27.9 6.2 1.1 1.1 5.1 19.1 1.0
Nomura | State Bank of India
January 13, 2012
Key data on State Bank of India

ProfitandLoss(INRmn)
Year-end 31 Mar Interest income Interest expense Net interest income Net fees and commissions Trading related profits Other operating revenue Non-interest income Operating income Depreciation Amortisation Operating expenses Employee share expense Op. profit before provisions Provisions for bad debt Other provision charges Operating profit Other non-operating income Associates & JCEs Pre-tax profit Income tax Net profit after tax Minority interests Other items Preferred dividends Normalised NPAT Extraordinary items Reported NPAT Dividends Transfer to reserves Valuation and ratio analysis FD normalised P/E (x) FD normalised P/E at price target (x) Reported P/E (x) Dividend yield (%) Price/book (x) Price/adjusted book (x) Net interest margin (%) Yield on interest earning assets (%) Cost of interest bearing liabilities (%) Net interest spread (%) Non-interest/operating income (%) Cost to income (%) Effective tax rate (%) Dividend payout (%) ROE (%) ROA (%) Operating ROE (%) Operating ROA (%) Growth (%) Net interest income Non-interest income Non-interest expenses Pre-provision earnings Net profit Normalised EPS Normalised FDEPS

FY10 709,939 -473,225 236,714 96,409 21,168 32,105 149,682 386,396 0 -75,640 -127,546 183,209 -46,223 2,275 139,261 FY11 813,944 -488,680 325,264 115,631 9,260 33,356 158,246 483,510 0 -85,353 -144,802 253,356 -84,155 -19,659 149,542 FY12F 1,014,804 -617,794 397,010 134,154 4,139 25,247 163,540 560,550 0 -99,818 -165,778 294,955 -118,779 -25,881 150,295 FY13F 1,187,099 -710,307 476,792 161,176 3,684 33,350 198,210 675,002 0 -121,500 -190,557 362,944 -123,546 -26,022 213,376 FY14F 1,403,928 -836,112 567,815 192,764 4,414 38,984 236,162 803,978 0 -144,716 -218,688 440,574 -136,970 -30,765 272,839
(INR) 3000 2800 2600 2400 2200 2000 1800 1600 1400 Feb 1 1 M ay 1 1 M ar 1 1 O ct 11 A pr 1 1 J un 1 1 J ul 1 1 N ov 1 1 D ec 1 1 A ug 1 1 S ep 1 1 J an 1 2 Price Rel MSCI India 120 110 100 90 80 70

(%) Absolute (INR) Absolute (USD) Relative to index Market cap (USDmn) Estimated free float (%) 1M -12.5 -14.8 -6.8 20,152.6 31.9 2960.05/1571. 1 138.26 3M 12M -2.7 -36.2 -8.9 -45.2 -2.2 -13.0
139,261 -47,600 91,660
149,542 -66,897 82,645
150,295 -56,824 93,471
213,376 -74,682 138,695
272,839 -95,494 177,345
52-week range (INR) 3-mth avg daily turnover (USDmn) Major shareholders (%) Govt of India
59.4 Source: Thomson Reuters, Nomura research
91,660 0 91,660 -21,414 70,246
82,645 0 82,645 -21,515 61,130
93,471 0 93,471 -26,247 67,225
138,695 0 138,695 -40,568 98,126
177,345 0 177,345 -56,023 121,322
Notes
We expect lower opex going forward and marginally better NIMs
11.6 16.6 11.6 2.0 1.6 1.6 2.60 7.80 5.46 2.34 38.7 52.6 34.2 23.4 14.8 0.91 22.5 1.38
12.9 18.4 12.9 2.0 1.6 1.6 3.20 8.01 4.98 3.02 32.7 47.6 44.7 26.0 12.6 0.73 22.8 1.31
11.5 16.5 11.5 2.4 1.4 1.5 3.41 8.72 5.54 3.17 29.2 47.4 37.8 28.1 13.2 0.72 21.2 1.16
8.0 11.4 8.0 3.7 1.3 1.3 3.52 8.77 5.56 3.20 29.4 46.2 35.0 29.3 17.0 0.93 26.1 1.43
6.2 9.0 6.2 5.1 1.1 1.1 3.57 8.82 5.57 3.26 29.4 45.2 35.0 31.6 19.1 1.01 29.5 1.55
13.4 17.9 29.8 2.3 0.5 0.4 0.4
37.4 5.7 12.8 38.3 -9.8 -9.8 -9.8
22.1 3.3 16.9 16.4 13.1 11.6 11.6
20.1 21.2 21.7 23.1 48.4 44.3 44.3
19.1 19.1 19.1 21.4 27.9 27.9 27.9
94
January 13, 2012
BalanceSheet(INRmn)
As at 31 Mar Cash and equivalents Inter-bank lending Deposits with central bank Total securities Other interest earning assets Gross loans Less provisions Net loans Long-term investments Fixed assets Goodwill Other intangible assets Other non IEAs Total assets Customer deposits Bank deposits, CDs, debentures Other interest bearing liabilities Total interest bearing liabilities Non interest bearing liabilities Total liabilities Minority interest Common stock Preferred stock Retained earnings Reserves for credit losses Proposed dividends Other equity Shareholders' equity Total liabilities and equity Non-performing assets (INR) Balance sheet ratios (%) Loans to deposits Equity to assets Asset quality & capital NPAs/gross loans (%) Bad debt charge/gross loans (%) Loss reserves/assets (%) Loss reserves/NPAs (%) Tier 1 capital ratio (%) Total capital ratio (%) Growth (%) Loan growth Interest earning assets Interest bearing liabilities Asset growth Deposit growth Per share Reported EPS (INR) Norm EPS (INR) Fully diluted norm EPS (INR) DPS (INR) PPOP PS (INR) BVPS (INR) ABVPS (INR) NTAPS (INR)
FY10 612,909 348,930 2,857,901 6,405,789 -86,647 6,319,142 44,129
FY11 943,955 284,786 2,956,006 7,696,988 -129,794 7,567,194 47,642
FY12F 732,023 339,385 3,344,327
FY13F 856,602 397,210 3,850,995
FY14F 1,032,221 472,408 4,527,763
Notes
We have built in INR50bn of capital raising in 4QFY12F
9,012,169 10,683,009 12,616,371 -224,643 -315,407 -408,639 8,787,526 10,367,602 12,207,733 50,393 53,893 57,393
351,128 437,778 519,470 605,989 718,503 10,534,137 12,237,362 13,773,124 16,132,291 19,016,021 8,041,162 9,339,328 10,433,571 12,320,301 14,635,182 710,312 848,976 938,976 1,058,976 1,178,976 319,804 346,714 376,714 406,714 446,714 9,071,278 10,535,018 11,749,261 13,785,991 16,260,872 803,367 1,052,484 1,256,428 1,480,738 1,768,266 9,874,645 11,587,502 13,005,689 15,266,729 18,029,137 6,349 653,143 6,350 643,510 6,615 760,820 6,615 858,947 6,615 980,268
659,492 649,860 767,435 865,562 986,883 10,534,137 12,237,362 13,773,124 16,132,291 19,016,021 195,349 253,263 358,468 494,864 636,187
79.7 6.3
82.4 5.3
86.4 5.6
86.7 5.4
86.2 5.2
3.0 0.72 0.82 44.4 8.8 13.0
3.3 1.09 1.06 51.2 7.9 12.1
4.0 1.32 1.63 62.7 8.1 11.9
4.6 1.16 1.96 63.7 7.7 11.3
5.0 1.09 2.15 64.2 7.5 10.9
16.5 9.8 9.8 9.2 8.4
19.8 13.5 16.1 16.2 16.1
16.1 15.4 11.5 12.5 11.7
18.0 17.2 17.3 17.1 18.1
17.7 17.7 18.0 17.9 18.8
144.37 144.37 144.37 33.73 288.57 1,038.77 1,021.28 1,038.77
130.16 130.16 130.16 33.88 399.01 1,023.40 1,013.82 1,023.40
145.29 145.29 145.29 39.68 458.48 1,160.15 1,150.94 1,160.15
209.67 209.67 209.67 61.33 548.67 1,308.49 1,299.28 1,308.49
268.10 268.10 268.10 84.69 666.02 1,491.89 1,482.69 1,491.89
95
January 13, 2012
Valuation Methodology SBI currently trades at 1x FY13F ABV, one standard deviation below its historical mean of 1.7x one-year forward ABV and very close to the March 2009 trough of 0.7x one-year forward ABV. We arrive at our target price of INR2,400 by calculating a subsidiary value of INR375 per share and adding INR2025 per share for the core bank business based on a three-stage residual-income valuation method. Our TP for the standalone bank implies 1.55x FY13F ABV of INR1,299 for an FY13F ROE of 17.1%. Risks that may impede the achievement of the target price RBI persisting with a tight monetary policy, policy logjam with respect to power sector bottlenecks and continued global macro uncertainty.
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Appendix A-1
Analyst Certification
We, Prabhat Awasthi and Nipun Prem, hereby certify (1) that the views expressed in this Research report accurately reflect our personal views about any or all of the subject securities or issuers referred to in this Research report, (2) no part of our compensation was, is or will be directly or indirectly related to the specific recommendations or views expressed in this Research report and (3) no part of our compensation is tied to any specific investment banking transactions performed by Nomura Securities International, Inc., Nomura International plc or any other Nomura Group company.
Issuer Specific Regulatory Disclosures

Mentioned companies
Issuer name Axis Bank Infosys Lupin Power Grid Corp of India State Bank of India Ticker AXSB IN INFO IN LPC IN PWGR IN SBIN IN Price INR 933 INR 2826 INR 434 INR 100 INR 1726 Price date 11-Jan-2012 11-Jan-2012 11-Jan-2012 11-Jan-2012 11-Jan-2012 Stock rating Buy Buy Buy Buy Buy Sector rating Not rated Not rated Not rated Not rated Not rated Disclosures 49 123
Disclosures required in the U.S.

49 Possible IB related compensation in the next 3 months Nomura Securities International, Inc. and/or its affiliates expects to receive or intends to seek compensation for investment banking services from the company in the next three months.
123 Market Maker - NSI Nomura Securities International Inc. makes a market in securities of the company.
Previous Rating
Issuer name Axis Bank Infosys Lupin Power Grid Corp of India State Bank of India Previous Rating Not Rated Neutral Not Rated Reduce Not Rated Date of change 31-Oct-2011 21-Jan-2011 30-Jan-2009 01-Dec-2010 31-Oct-2011
State Bank of India (SBIN IN)

Rating and target price chart (three year history)
INR 1726 (11-Jan-2012) Buy (Sector rating: Not rated)

Date 31-Oct-11 31-Oct-11 17-Oct-11 21-Jan-11 28-Sep-10 08-Oct-09 08-Oct-09 03-Sep-09 03-Sep-09 14-Jul-09 14-Jul-09 Rating Buy Target price Closing price 1,906.30 2,400.00 1,906.30 Not Rated 1,891.70 Suspended 2,596.90 3,765.00 3,190.70 Buy 2,115.95 2,590.00 2,115.95 Neutral 1,747.00 2,140.00 1,747.00 Reduce 1,582.60 830.00 1,582.60
For explanation of ratings refer to the stock rating keys located after chart(s)
99
January 13, 2012
Valuation Methodology We arrive at our target price of INR2,400 by calculating a subsidiary value of INR375 per share and adding INR2025 per share for the core bank business based on a three-stage residual-income valuation method. Our TP for the standalone bank implies 1.55x FY13F ABV of INR1,299 for an FY13F ROE of 17.1%. Risks that may impede the achievement of the target price RBI persisting with a tight monetary policy, policy logjam with respect to power sector bottlenecks and continued global macro uncertainty.
Axis Bank (AXSB IN)
Rating and target price chart (three year history) Date 31-Oct-11 31-Oct-11 17-Oct-11 21-Jan-11 18-Oct-10 18-Oct-10 25-Feb-10 09-Oct-09 24-Jun-09 21-Apr-09 21-Apr-09 Rating Buy Not Rated Suspended Neutral 1,675.00 1,345.00 1,185.00 935.00 Buy 400.00 Target price 1,400.00 Closing price 1,159.35 1,159.35 1,121.85 1,287.05 1,481.95 1,481.95 1,096.25 996.45 768.85 493.95 493.95
Valuation Methodology We arrive at our TP of INR1,400 using a three-stage residual-income valuation methodology that assumes the following: 1) interest-earning assets CAGR of 21.9% over FY11-14F, 12.9% over FY13-20F and a terminal growth rate of 4% beyond that; 2) average ROE of 18.8% over FY12-20F and an 18.3% terminal value ROE; and 3) discount rates of 14.85% (current cost of equity) for FY11-14F, 12.25% for FY14-20F and a 10% terminal rate. Our TP of INR1,400 implies FY13F P/ABV of 2.4x. Our book value estimates also factor in 3.5% dilution towards the Enam acquisition. Risks that may impede the achievement of the target price Accelerated monetary policy easing, policy intervention to resolve power sector bottlenecks, such as fuel availability and SEB (state electricity board) financial health, are key upside catalysts. RBI persisting with a tight money policy, policy inaction with respect to power sector bottlenecks and continued global macro uncertainty are potential downside risks.
Infosys (INFO IN)
Rating and target price chart (three year history) Date 03-Jan-12 12-Oct-11 04-Oct-11 05-Sep-11 12-Jul-11 17-Apr-11 21-Jan-11 21-Jan-11 05-Jan-11 18-Oct-10 14-Jul-10 06-Jul-10 25-Mar-10 12-Jan-10 09-Dec-09 09-Oct-09 10-Sep-09 10-Sep-09 10-Jul-09 17-Jun-09 15-Apr-09 13-Jan-09

Rating Target price 3,300.00 3,100.00 2,900.00 2,800.00 3,400.00 3,450.00 3,800.00 3,580.00 3,200.00 3,040.00 3,000.00 2,780.00 2,740.00 2,600.00 2,300.00 Neutral 2,271.00 1,598.00 1,458.00 1,283.00 1,049.00 Closing price 2,864.30 2,679.35 2,438.50 2,265.10 2,791.55 2,989.50 3,243.85 3,243.85 3,459.60 3,107.05 2,742.90 2,785.10 2,813.95 2,586.95 2,456.55 2,177.60 2,240.30 2,240.30 1,721.15 1,711.45 1,370.60 1,228.15
Buy
100
January 13, 2012
Valuation Methodology We value Infosys at 18x 1-yr forward earnings of INR183, which is at a 10% discount to its long-term average valuation. We believe the discount is justified on heightened economic uncertainties, increased risk aversion and an impending slowdown. Our target price is INR3,300. Risks that may impede the achievement of the target price The key risks are: 1) worse-than-expected slowdown and breakage of pricing discipline in the industry; 2) client-specific issues; and 3) an adverse ruling in its pending B1 visa violation case in the US.
Lupin (LPC IN)
Rating and target price chart (three year history) Date 29-Nov-11 11-Jan-11 27-Aug-10 28-May-10 01-Feb-10 16-Oct-09 23-Sep-09 02-Jun-09 30-Jan-09 30-Jan-09 Rating Target price 576.00 570.00 417.00 2,087.00 1,707.00 1,506.00 1,251.00 1,028.00 Buy 919.00 Closing price 466.30 451.90 373.10 365.31 314.56 255.90 212.19 163.07 113.95 113.95
Valuation Methodology Our TP of INR576 is based on 20x one-year forward earnings. Our valuation multiple is in line with the current trading multiple. Risks that may impede the achievement of the target price Key risks to our call are: a) generic competition in Suprax; b) a substantial fall in the sales of key products in the US such as Simvastatin (on generic atorvastatin approval) and c) regulatory changes including price control in key markets such as India and Japan. We have built in some of the risks in our estimates and take comfort from the fact that any further downside could be compensated from the potential upside from new launches.
Power Grid Corp of India (PWGR IN)
Rating and target price chart (three year history) Date 26-May-11 01-Dec-10 01-Dec-10 09-Dec-09 08-Jun-09 08-Jun-09 Rating Buy 128.00 89.00 Reduce 78.00 Target price 120.00 Closing price 95.55 96.85 96.85 104.00 120.95 120.95
Valuation Methodology We use a residual income model to arrive at our target price of INR120. Key assumptions of our model are 1) Cost of equity - 12.5%; 2) Terminal RoE - 17%; and 3) Terminal growth rate - 3%.
101
January 13, 2012
Risks that may impede the achievement of the target price 1) lower-than-expected capitalization of transmission assets due to execution delays (scalability, vendor ramp-up, turnkey workforce) and/or impediments in securing Right-of-Way (RoW) / forest clearance; 2) sharp push-back in generation-capacity addition delaying capitalization of related transmission assets; and 3) overhang of a potential equity dilution in FY2014/15 in case annual capex exceeds our forecast by 15-20%.
Other Material Conflicts

I, Amar Kedia, research analyst of Nomura Financial Advisory & Securities (India) Private Limited beneficially owns 75 shares of Mundra Port and Special Economic Zone Limited as of the date of this report
Important Disclosures
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Nomura research is available on www.nomuranow.com, Bloomberg, Capital IQ, Factset, MarkitHub, Reuters and ThomsonOne. Important disclosures may be read at http://go.nomuranow.com/research/globalresearchportal/pages/disclosures/disclosures.aspx/ or requested from Nomura Securities International, Inc., on 1-877-865-5752. If you have any difficulties with the website, please email grpsupport-eu@nomura.com for help. The analysts responsible for preparing this report have received compensation based upon various factors including the firm's total revenues, a portion of which is generated by Investment Banking activities. Unless otherwise noted, the non-US analysts listed at the front of this report are not registered/qualified as research analysts under FINRA/NYSE rules, may not be associated persons of NSI, and may not be subject to FINRA Rule 2711 and NYSE Rule 472 restrictions on communications with covered companies, public appearances, and trading securities held by a research analyst account. Industry Specialists identified in some Nomura International plc research reports are employees within the Firm who are responsible for the sales and trading effort in the sector for which they have coverage. Industry Specialists do not contribute in any manner to the content of research reports in which their names appear. Marketing Analysts identified in some Nomura research reports are research analysts employed by Nomura International plc who are primarily responsible for marketing Nomuras Equity Research product in the sector for which they have coverage. Marketing Analysts may also contribute to research reports in which their names appear and publish research on their sector.
Distribution of ratings (US)

The distribution of all ratings published by Nomura US Equity Research is as follows: 35% have been assigned a Buy rating which, for purposes of mandatory disclosures, are classified as a Buy rating; 11% of companies with this rating are investment banking clients of the Nomura Group*. 59% have been assigned a Neutral rating which, for purposes of mandatory disclosures, is classified as a Hold rating; 2% of companies with this rating are investment banking clients of the Nomura Group*. 6% have been assigned a Reduce rating which, for purposes of mandatory disclosures, are classified as a Sell rating; 0% of companies with this rating are investment banking clients of the Nomura Group*. As at 31 December 2011. *The Nomura Group as defined in the Disclaimer section at the end of this report.
Distribution of ratings (Global)

The distribution of all ratings published by Nomura Global Equity Research is as follows: 47% have been assigned a Buy rating which, for purposes of mandatory disclosures, are classified as a Buy rating; 40% of companies with this rating are investment banking clients of the Nomura Group*. 43% have been assigned a Neutral rating which, for purposes of mandatory disclosures, is classified as a Hold rating; 45% of companies with this rating are investment banking clients of the Nomura Group*. 10% have been assigned a Reduce rating which, for purposes of mandatory disclosures, are classified as a Sell rating; 21% of companies with this rating are investment banking clients of the Nomura Group*. As at 31 December 2011. *The Nomura Group as defined in the Disclaimer section at the end of this report.
Explanation of Nomura's equity research rating system in Europe, Middle East and Africa, US and Latin America
The rating system is a relative system indicating expected performance against a specific benchmark identified for each individual stock. Analysts may also indicate absolute upside to target price defined as (fair value - current price)/current price, subject to limited management discretion. In most cases, the fair value will equal the analyst's assessment of the current intrinsic fair value of the stock using an appropriate valuation methodology such as discounted cash flow or multiple analysis, etc. STOCKS A rating of 'Buy', indicates that the analyst expects the stock to outperform the Benchmark over the next 12 months. A rating of 'Neutral', indicates that the analyst expects the stock to perform in line with the Benchmark over the next 12 months. A rating of 'Reduce', indicates that the analyst expects the stock to underperform the Benchmark over the next 12 months. A rating of 'Suspended', indicates that the rating, target price and estimates have been suspended temporarily to comply with applicable regulations and/or firm policies in certain circumstances including, but not limited to, when Nomura is acting in an advisory capacity in a merger or strategic transaction involving the company. Benchmarks are as follows: United States/Europe: Please see valuation methodologies for explanations of relevant benchmarks for stocks (accessible through the left hand side of the Nomura Disclosure web page: http://go.nomuranow.com/research/globalresearchportal);Global Emerging Markets (ex-Asia): MSCI Emerging Markets ex-Asia, unless otherwise stated in the valuation methodology. SECTORS A 'Bullish' stance, indicates that the analyst expects the sector to outperform the Benchmark during the next 12 months. A 'Neutral' stance, indicates that the analyst expects the sector to perform in line with the Benchmark during the next 12 months. A 'Bearish' stance, indicates that the analyst expects the sector to underperform the Benchmark during the next 12 months. Benchmarks are as follows: United States: S&P 500; Europe: Dow Jones STOXX 600; Global Emerging Markets (ex-Asia): MSCI Emerging Markets ex-Asia.
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January 13, 2012
Explanation of Nomura's equity research rating system for Asian companies under coverage ex Japan published from 30 October 2008 and in Japan from 6 January 2009
STOCKS Stock recommendations are based on absolute valuation upside (downside), which is defined as (Target Price - Current Price) / Current Price, subject to limited management discretion. In most cases, the Target Price will equal the analyst's 12-month intrinsic valuation of the stock, based on an appropriate valuation methodology such as discounted cash flow, multiple analysis, etc. A 'Buy' recommendation indicates that potential upside is 15% or more. A 'Neutral' recommendation indicates that potential upside is less than 15% or downside is less than 5%. A 'Reduce' recommendation indicates that potential downside is 5% or more. A rating of 'Suspended' indicates that the rating and target price have been suspended temporarily to comply with applicable regulations and/or firm policies in certain circumstances including when Nomura is acting in an advisory capacity in a merger or strategic transaction involving the subject company. Securities and/or companies that are labelled as 'Not rated' or shown as 'No rating' are not in regular research coverage of the Nomura entity identified in the top banner. Investors should not expect continuing or additional information from Nomura relating to such securities and/or companies. SECTORS A 'Bullish' rating means most stocks in the sector have (or the weighted average recommendation of the stocks under coverage is) a positive absolute recommendation. A 'Neutral' rating means most stocks in the sector have (or the weighted average recommendation of the stocks under coverage is) a neutral absolute recommendation. A 'Bearish' rating means most stocks in the sector have (or the weighted average recommendation of the stocks under coverage is) a negative absolute recommendation.
Explanation of Nomura's equity research rating system in Japan published prior to 6 January 2009
STOCKS A rating of '1' or 'Strong buy', indicates that the analyst expects the stock to outperform the Benchmark by 15% or more over the next six months. A rating of '2' or 'Buy', indicates that the analyst expects the stock to outperform the Benchmark by 5% or more but less than 15% over the next six months. A rating of '3' or 'Neutral', indicates that the analyst expects the stock to either outperform or underperform the Benchmark by less than 5% over the next six months. A rating of '4' or 'Reduce', indicates that the analyst expects the stock to underperform the Benchmark by 5% or more but less than 15% over the next six months. A rating of '5' or 'Sell', indicates that the analyst expects the stock to underperform the Benchmark by 15% or more over the next six months. Stocks labeled 'Not rated' or shown as 'No rating' are not in Nomura's regular research coverage. Nomura might not publish additional research reports concerning this company, and it undertakes no obligation to update the analysis, estimates, projections, conclusions or other information contained herein. SECTORS A 'Bullish' stance, indicates that the analyst expects the sector to outperform the Benchmark during the next six months. A 'Neutral' stance, indicates that the analyst expects the sector to perform in line with the Benchmark during the next six months. A 'Bearish' stance, indicates that the analyst expects the sector to underperform the Benchmark during the next six months. Benchmarks are as follows: Japan: TOPIX; United States: S&P 500, MSCI World Technology Hardware & Equipment; Europe, by sector Hardware/Semiconductors: FTSE W Europe IT Hardware; Telecoms: FTSE W Europe Business Services; Business Services: FTSE W Europe; Auto & Components: FTSE W Europe Auto & Parts; Communications equipment: FTSE W Europe IT Hardware; Ecology Focus: Bloomberg World Energy Alternate Sources; Global Emerging Markets: MSCI Emerging Markets ex-Asia.
Target Price
A Target Price, if discussed, reflect in part the analyst's estimates for the company's earnings. The achievement of any target price may be impeded by general market and macroeconomic trends, and by other risks related to the company or the market, and may not occur if the company's earnings differ from estimates.
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India Outlook - Nomura

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ANCHOR REPORT

India outlook 2012

Rolling back the clouds

India outlook 2012

ANCHOR REPORT: Rolling back the clouds

January 13, 2012

Rating Buy Buy Buy Buy Buy

Price 1,672.8 853.5 2,832.2 442.9 99.8

TP 2,400 1,400 3,300 576 120

Nomura | India outlook 2012

January 13, 2012

Executive summary Sector strategy

The rupee: capital flows and eurozone concerns

Policy and political economy a clouded picture

Long-only basket APPENDIX Economics

Policy holds the key

Autos & auto parts

Nomura | India outlook 2012

January 13, 2012

Metals & mining

Oil & gas/chemicals

Power & utilities

Power Grid Corp of India

State Bank of India

Nomura | India outlook 2012

January 13, 2012

Nomura | India outlook 2012

January 13, 2012

Source: Nomura Research

Nomura | India outlook 2012

January 13, 2012

Strategy comments Slow growth, rising competition

Consumer slowdown, expensive valuations

Slowing investment cycle, fuel shortages

Infra & Construction IT Services

Slowing investment cycle, government finances weak Exporter, US strength

Metals & Mining

Global growth concerns

Oil & Gas Pharma

Global growth concerns, policy issues Exporter, patent expiries in the US

Nomura | India outlook 2012

January 13, 2012

Growth pessimism is at a peak

Source: Bloomberg, Nomura research

Nomura | India outlook 2012

January 13, 2012

Source: Bloomberg, Nomura research

The market has de-rated on growth concerns

Source: Bloomberg, Nomura research

Indias market underperformance relative to major peers was stark in 2011

Nomura | India outlook 2012

January 13, 2012

(Base 31 Dec'10=100) 130 120 110 100 90 80 70 60 50

EUR TAIWAN INDO

Nomura | India outlook 2012

January 13, 2012

Source: Business Beacon, Nomura research

Nomura | India outlook 2012

January 13, 2012

Source: Business Beacon, Bloomberg, Nomura research

IIP, 3mma (2m lag) (LHS)

Swap yield curve, 3mma (RHS)

Source: Bloomberg, Nomura research