28 September 2005

India Strategy

The BSE Sensex has delivered 14% return in 2QFY06 after an 11% return in 1QFY06…

…driven by strong inflows from both foreign as well as domestic investors

Our 1-year Sensex target has been achieved in just one quarter

Nevertheless, we believe that there are still plenty of investment opportunities

RESULTS PREVIEW

Quarter ending September 2005 Prices as of Friday, 23 September 2005 Still plenty of opportunities

Research Team ([email protected])

© Motilal Oswal Securities Ltd., 81-82, Bajaj Bhawan, Nariman Point, Mumbai 400 021 Tel: +91 22 56575200 Fax: 2281 6161 Contents

India Strategy 3-40

1. Automobiles 41-58 Siemens 104 GAIL 165 Ashok Leyland 49 Thermax 105 HPCL 166 Bajaj Auto 50 IOC 167 Bharat Forge 51 5. Fertilizers 106-109 IPCL 168 Eicher Motors 52 Coromandel Fertilizers 108 ONGC 169 Hero Honda 53 Tata Chemicals 109 Reliance 170 Mahindra & Mahindra 54 Maruti Udyog 55 6. FMCG 110-123 11. Pharmaceuticals 171-187 Punjab Tractors 56 Asian Paints 113 Aurobindo Pharma 174 Swaraj Mazda 57 Britannia Industries 114 Aventis Pharma 175 Tata Motors 58 Colgate Palmolive 115 Biocon 176 Dabur India 116 Cipla 177 2. Banking 59-81 GSK Consumer 117 Dr Reddy’s Labs. 178 Andhra Bank 64 Godrej Consumer Products 118 GSK Pharma 179 Bank of Baroda 65 Hindustan Lever 119 Jubilant Organosys 180 Bank of India 66 ITC 120 Lupin 181 Canara Bank 67 Marico Industries 121 Matrix Laboratories 182 Corporation Bank 68 Nestle India 122 Nicholas Piramal 183 Pfizer 184 HDFC 69 Tata Tea 123 HDFC Bank 70 Ranbaxy Labs. 185 ICICI Bank 71 7. Information Technology124-140 Sun Pharmaceuticals 186 Indian Overseas Bank 72 Wockhardt 187 Datamatics Technologies 130 J&K Bank 73 Karnataka Bank 74 Geometric Software 131 12. Telecom 188-192 HCL Technologies 132 Oriental Bank 75 Bharti Tele-Ventures 192 Punjab National Bank 76 Hexaware Technologies 133 State Bank 77 i-flex solutions 134 13. Textiles 193-205 Infosys 135 Syndicate Bank 78 Alok Industries 199 MphasiS BFL 136 Union Bank 79 Arvind Mills 200 UTI Bank 80 Patni Computer 137 Satyam Computer 138 Gokaldas Exports 201 Vijaya Bank 81 TCS 139 Himatsingka Seide 202 Wipro 140 Raymond 203 3. Cement 82-92 Vardhman Textiles 204 ACC 87 8. Media 141-142 Welspun India 205 Birla Corporation 88 Zee Telefilms 142 Grasim Industries 89 14. Utilities 206-216 Gujarat Ambuja 90 9. Metals 143-152 CESC 210 Shree Cement 91 Jaiprakash Hydro-Power 211 Hindalco 148 Ultratech Cement 92 Jindal Steel 149 NTPC 212 Neyveli Lignite 213 4. Engineering 93-105 Nalco 150 SAIL 151 PTC India 214 ABB 98 Reliance Energy 215 Tisco 152 Alstom Projects 99 Tata Power 216 BHEL 100 10. Oil & Gas 153-170 Crompton Greaves 101 15. Others 217-218 Bongaigaon Refinery 162 Cummins India 102 Concor 217 Larsen & Toubro 103 BPCL 163 Chennai Petroleum 164 United Phosphorus 218

23 September 2005 2 Results Preview

QUARTER ENDING SEPTEMBER 2005

India Strategy

BSE Sensex: 8,223 S&P CNX: 2,478 23 September 2005

Still plenty of opportunities 2QFY06 has been a quarter of landmarks for the Indian capital markets. The BSE Sensex has delivered a return of 14% (as of 23 September 2005), closing at 8,223 after touching a high of 8,522 during the quarter. This comes on the back of an 11% return in 1QFY06. Our 1-year Sensex target of 8,281, which we had set in our Strategy Report dated 6 July 2005, has been achieved within a quarter. In our view, the most important driver for the market index has been record inflows from both foreign and domestic investors.

On the earnings front, we have lowered our Sensex EPS estimate for FY06 by 2%. This revision is primarily driven by downgrades in our earnings estimates for Hindustan Lever, ITC, Tata Steel, Wipro, Hindalco, SBI (consolidated). However, our Sensex EPS estimate for FY07 remains unchanged at Rs637. As we get greater visibility on this count over the next couple of quarters, we would consider reviewing our 1-year Sensex target. Nevertheless, we believe that there are still plenty of investment opportunities from an 18- month perspective.

BSE Sensex delivers double-digit returns for the second consecutive quarter The BSE Sensex has 2QFY06 has been one of the best quarters for the markets in recent times. The BSE delivered 14% return in Sensex has delivered 14% return in 2QFY06 on top of an 11% return in 1QFY06. The 2QFY06 after an 11% rally was broad-based, with almost every sector participating. While the leaders of this return in 1QFY06… rally were ICICI Bank, Reliance, ITC, Bharti and SBI, the stocks with negative contribution were Ranbaxy, Wipro, ONGC and Reliance Energy.

STOCK-WISE CONTRIBUTION TO THE CHANGE IN THE SENSEX DURING 2QFY06

COMPANY CONTRIBUTION TO RISE COMPANY CONTRIBUTION TO RISE IN SENSEX (POINTS) IN SENSEX (POINTS) ICICI Bank 169 A C C 23 Reliance Industries 120 Hero Honda Motors 18 ITC 111 Gujarat Ambuja Cement 16 Bharti Tele-Venture 94 HDFC Bank 14 State Bank of India 73 Tata Power Co. 11 Infosys Technologies 66 Maruti Udyog 11 Larsen & Toubro 45 Hindustan Lever 10 HDFC 40 TCS 9 Tisco 38 Cipla 9 Tata Motors 37 Satyam Computer 7 NTPC 35 Dr Reddy’s Laboratories 2 Grasim Industries 30 Reliance Energy -7 BHEL 30 ONGC -10 Hindalco Industries 27 Wipro -10 Bajaj Auto 25 Ranbaxy Labs. -12

Source: Motilal Oswal Securities

Navin Agarwal ([email protected])/Rajat Rajgarhia ([email protected]) 23 September 2005 3 India Strategy

Historically, the Sensex has delivered negative to sub-par returns in the quarter following two strong quarters. While we do not have a view on the Sensex for the immediate quarter, our longer-term view remains positive and we recommend investing at declines.

SENSEX RETURNS OVER THE PAST 42 QUARTERS

40 30 20 10 0 -10 -20 -30 Jun-95 Jun-96 Jun-97 Jun-98 Jun-99 Jun-00 Jun-01 Jun-02 Jun-03 Jun-04 Jun-05 Dec-95 Dec-96 Dec-97 Dec-98 Dec-99 Dec-00 Dec-01 Dec-02 Dec-03 Dec-04

Source: Motilal Oswal Securities

Foreign inflows at a record US$4b+ in 2QFY06 …driven by strong inflows Foreign investors have made net investments of almost US$4b in 2QFY06. Total foreign from both foreign… investments made YTD are about US$8.5b (Rs373b). As the third quarter is usually a quarter of strong inflows, we could witness the highest-ever foreign inflows in CY05 (CY04 – Rs385b).

FOREIGN INFLOWS OVER THE LAST 23 QUARTERS (RS B)

190

150

110

70

30

-10 Jun-00 Jun-01 Jun-02 Jun-03 Jun-04 Jun-05 Mar-00 Mar-01 Mar-02 Mar-03 Mar-04 Mar-05 Sep-00 Dec-00 Sep-01 Dec-01 Sep-02 Dec-02 Sep-03 Dec-03 Sep-04 Dec-04 Sep-05

Source: Motilal Oswal Securities

23 September 2005 4 India Strategy

Domestic funds too make the biggest investments ever (US$1.2b) …as well as domestic 2QFY06 also witnessed the biggest ever investments (Rs53b or US$1.2b) in equities by investors domestic mutual funds. Interestingly, domestic mutual funds had withdrawn a total of Rs125b from equities over the five-year period ended December 2004 while they invested Rs105b YTD CY05. We believe that the key to a further re-rating of Indian equities would be continued flows from domestic investors.

INVESTMENTS BY DOMESTIC FUNDS OVER THE LAST 23 QUARTERS (RS B)

60

45

30

15

0

-15

-30 Jun-00 Jun-01 Jun-02 Jun-03 Jun-04 Jun-05 Mar-00 Mar-01 Mar-02 Mar-03 Mar-04 Mar-05 Sep-00 Dec-00 Sep-01 Dec-01 Sep-02 Dec-02 Sep-03 Dec-03 Sep-04 Dec-04 Sep-05

Source: Motilal Oswal Securities

Maintain our 1-year Sensex target of 8,281 Our 1-year Sensex target In our Strategy Report dated 6 July 2005, we had raised our 1-year Sensex target to has been achieved in just 8,281. This has been achieved in just one quarter. On the earnings front, while we have one quarter lowered our Sensex EPS estimate for FY06 by 2%, our Sensex EPS estimate for FY07 remains unchanged at Rs637. As we get greater visibility on this count over the next couple of quarters, we would consider reviewing our 1-year Sensex target.

Nevertheless, we believe that Nevertheless, we believe that there are still plenty of investment opportunities from an there are still plenty of 18-month perspective. In the following pages, we present our top-10 picks both among investment opportunities large-cap and mid-cap stocks.

23 September 2005 5 Top-10 Picks Large Cap Stocks

Reliance Industries

STOCK INFO. BLOOMBERG BSE Sensex: 8,223 RIL IN 23 September 2005 Buy REUTERS CODE S&P CNX: 2,478 RELI.BO Previous Recommendation: Buy Rs748

Equity Shares (m) 1,396.4 YEAR NET SALES PAT EPS EPS P/E P/BV ROE ROCE EV/ EV/ END (RS M) (RS M) (RS) GROWTH (%) (X) (X) (%) (%) SALES EBITDA 52-Week Range 785/472 3/05A 660,510 75,720 54.3 47.0 13.8 2.6 20.2 16.4 1.9 9.5 1,6,12 Rel. Perf. (%) 1/8/1 M.Cap. (Rs b) 1,044.9 3/06E 724,476 92,228 66.2 21.8 11.3 2.1 20.7 19.3 1.7 7.9

M.Cap. (US$ b) 23.8 3/07E 693,623 90,402 64.9 -2.0 11.5 1.9 17.3 18.2 1.8 7.5

Investment arguments Earnings trend ? Core businesses – refining and petrochemicals – are ? Net profits grew 26.3% in FY04 and 47% in FY05. riding the margin upswing. Refining margins, in ? We have upgraded our FY06 net profit estimate by particular, have shot up to US$12–14/bbl on account over 18% since initiating coverage in September of capacity outages in the US due to the two 2004. Street estimates, though lower than ours, have hurricanes. Margins are likely to remain strong for kept pace. another 2-3 months. ? Stronger-than-expected refining margins could trigger upward revision. Potential petrochemical margin ? The company has planned significant capacity weakness could throw up a negative surprise. additions. It intends to raise refining capacity to 60m tpa at an investment of about Rs250b by FY09. It Catalysts also plans large petrochemical capacity expansion at ? Value unlocking of investments and potential upgrades a capex of Rs250b over the next three years. to KG basin reserves could be near-term catalysts

for stock performance. ? The KG basin is scheduled to produce gas in CY08. ? Gas production at KG basin and completion of the The business has the potential to add Rs35-52b to large capacity expansions planned could be the the company's annual profits (a growth of 40-55% medium-term catalysts. over the FY06 estimate).

? New gas finds in the Mahanadhi basin (2.3tcf) and Target price (upside / downside) CBM (3.75tcf) have been certified. Another 7tcf in ? We recommend Buy with an SOTP-based target the KG basin is under assessment. We value these price of Rs903. three reserves at Rs79/share. ? Potential downside from earnings downgrade on account of petrochemical margin surprise. ? Retail outlet rollout is on track, with over 700 stations ? New gas discoveries or upward revision of gas operational. Reliance targets a market share reserve estimates could provide upside. proportionate to its current refining capacity, which would mean ~27% or 13m ton of product sale through own outlets.

For 2QFY06 results preview, see page 170

23 September 2005 6 Top-10 Picks Large Cap Stocks

Infosys Technologies

STOCK INFO. BLOOMBERG BSE Sensex: 8,223 INFO IN 23 September 2005 Buy REUTERS CODE S&P CNX: 2,478 INFY.BO Previous Recommendation: Buy Rs2,400

Equity Shares (m) 268.8 YEAR NET SALES PAT EPS EPS P/E P/BV ROE ROCE EV/ EV/ END (RS M) (RS M) (RS) GROWTH (%) (X) (X) (%) (%) SALES EBITDA 52-Week Range 2,520/1,607 3/05A 71,296 18,464 69.0 46.7 34.8 12.3 43.6 50.2 8.7 26.4 1,6,12 Rel. Perf. (%) -3/-16/-1 M.Cap. (Rs b) 645.1 3/06E 96,092 25,819 94.6 37.1 25.4 9.1 41.6 47.4 6.3 18.6

M.Cap. (US$ b) 14.7 3/07E 128,765 33,069 118.7 25.6 20.2 6.9 39.2 45.6 4.5 13.7

Investment arguments Earnings trend ? Despite muted volume growth in the last two quarters ? Earnings have grown at 38% CAGR over the past (2-5%), we believe that the next few quarters would two years. exhibit robust volume growth (10% average) in core ? We expect the company to report 31% CAGR in IT services, enhanced by strong performance from earnings over the next two years. However, lower newer service lines and the impact of higher billing than expected volume growth and slowdown in top rates for new deals. clients could warrant a change in our estimates.

? The newer service lines – enterprise solutions, testing services, infrastructure management and systems Catalysts integration – would grow at a faster pace and offset ? Near term – award of large sized contracts such as the slowdown in top clients, helping the company to the ABN Amro deal to help growth in volume. compete for a higher share of wallet. ? Long term – new service lines (consulting, enterprise solutions, infrastructure management, etc.) to enable ? The company signed a landmark deal with ABN Amro client mining and faster revenue growth. during the quarter to provide application support and maintenance estimated at US$150m. This is an indication of the company's ability to source more Target price (upside / downside) such deals, competing with the large multinationals. ? We have set a target price of Rs2,967 for the stock based on a P/E of 25x FY07E. ? Infosys continues to invest heavily (expect US$180- ? We expect the downside to be limited to Rs2,300 200m in FY06) in its subsidiaries, Infosys Consulting (20x FY07E EPS). and Infosys China, the success of which would propel growth to higher levels.

? Infosys Consulting, with a targeted employee base of 500 by March 2007, is exhibiting promising signs with increased acceptance ratios (50%) and greater delivery of value to clients (120% of originally promised value). Going forward, consulting would drive greater business for the core IT services.

For 2QFY06 results preview, see page 135

23 September 2005 7 Top-10 Picks Large Cap Stocks

Bharti Tele-Ventures

STOCK INFO. BLOOMBERG BSE Sensex: 8,223 BHARTI IN 23 September 2005 Buy REUTERS CODE S&P CNX: 2,478 BRTI.BO Previous Recommendation: Buy Rs339

Equity Shares (m) 1,873.5 YEAR NET SALES PAT EPS EPS P/E P/BV ROE ROCE EV/ EV/ END (RS M) (RS M) (RS) GROWTH (%) (X) (X) (%) (%) SALES EBITDA 52-Week Range 367/140 3/05E 80,348 14,393 7.7 N.A. 44.1 9.3 24.3 17.1 8.4 22.5 1,6,12 Rel. Perf. (%) 4/31/80 M.Cap. (Rs b) 635.1 3/06E 113,798 25,461 13.6 76.9 24.9 6.8 31.8 23.6 5.8 15.2

M.Cap. (US$ b) 14.5 3/07E 151,583 37,846 20.2 48.6 16.8 4.9 34.2 30.0 4.2 10.6

Investment arguments Earnings trend ? Bharti Tele-Ventures is the largest cellular service ? Bharti has shown 184% CAGR in earnings over provider in India, with a subscriber base in excess of FY03-05. 13m and a market share of over 21%. Bharti also ? Our estimates are ahead of the consensus. remains the only cellular operator to have a pan-India ? Substantial deviations in actual subscriber additions presence, with its operations rolled out in all 23 circles. from our expectations could affect our estimates.

? Subscriber additions have grown exponentially since the launch of the lower denomination micro prepaid Catalysts recharge coupon of Rs200/month in May 2005. ? The stock price in the near term is likely to follow Average monthly subscriber additions for June- the trends in subscriber additions by the company. August 2005 have shown a growth of 36% and 71% ? Long term stock price would be dictated by market over the additions in January-May 2005 and June- share, EBITDA margin improvements and regulatory August 2004, respectively. developments in the industry.

? Bharti has lined up an aggressive capex plan, with an estimated outlay of US$1b for FY06. The Target price (upside / downside) company had 2,700 towns under coverage as at June ? We have valued Bharti at 20x FY07E EPS of Rs20.2, 2005 and is likely to increase coverage to 5,000 towns resulting in a target price of Rs404. by the end of FY06. ? We expect the downside for Bharti to be limited to Rs300 (15x FY07E EPS). ? Bharti continues to enjoy higher ARPU than the industry average despite aggressive expansion in B and C circles, where ARPU is lower than Metros and A circle. Only Hutch enjoyed higher ARPU than Bharti, among GSM operators, for the quarter ended June 2005 (Source: COAI).

? Bharti’s operations in the new circles (where operations started after June 2004) turned EBITDA positive in the quarter ended June 2005.

For 2QFY06 results preview, see page 192

23 September 2005 8 Top-10 Picks Large Cap Stocks

State Bank of India

STOCK INFO. BLOOMBERG BSE Sensex: 8,223 SBIN IN 23 September 2005 Buy REUTERS CODE S&P CNX: 2,478 SBI.BO Previous Recommendation: Buy Rs890

Equity Shares (m) 526.3 YEAR NET INCOME PAT EPS EPS P/E P/BV CAR ROAE ROAA P/ABV END (RS B) (RS B) (RS) GROWTH (%) (X) (X) (%) (%) (%) RATIO 52-Week Range 926/436 3/05A 210.6 43.0 81.8 17.0 10.9 1.9 12.5 19.4 1.0 2.3 1,6,12 Rel. Perf. (%) 6/8/36 M.Cap. (Rs b) 468.3 3/06E 228.8 51.1 97.1 18.6 9.2 1.6 12.0 19.5 1.0 1.8

M.Cap. (US$ b) 10.7 3/07E 257.0 60.9 115.8 19.3 7.7 1.4 11.5 19.6 1.1 1.5

Investment arguments Earnings trend ? Largest bank in India, reaping benefits of deposit ? Earnings over the last three years have witnessed a repricing, growing retail assets to leverage its strong CAGR of 18.2%, despite decline in bond gains and franchise of 13,000 branches and 120m customers. provisions on wage arrears and HTM transfers. ? Over the next couple of years, we expect earnings ? Net NPAs down to 2.5% and expected to fall further to witness a 19% CAGR, driven by higher business as accounts like Dabhol are upgraded. Would be a growth and stable margins. There could be upsides big beneficiary of strong recoveries, as the economic to our consolidated earnings estimates. upcycle continues. This could provide significant upsides to our estimates. Catalysts ? Upgradation of problem loans such as Dabhol could ? Strong earnings growth in FY06 on the back of lower be a catalyst in the near future. wage arrear provision, no VRS charges and an ? Pick-up in loan yields will be another earnings improvement in margins post IMD redemption from catalyst, followed by stock re-rating. 4QFY06 onwards. ? Any decision on the merger of group companies with SBI will be viewed as a positive. ? Has transferred almost 50% of bonds to HTM, providing more stability to bond portfolio. The bank has cushion of 50bp on the AFS portfolio. Target price (upside / downside) ? Given a consistent RoE of 19%, we value SBI at ? Has a workforce of over 0.2m and is expected to 1.4x FY07E consolidated book value. Our 12-month witness significant attrition over the next few years. target price is Rs1,200. We believe that a further re- This would lower cost to income ratio, leading to rating is possible on any relaxation in the FII limit. higher earnings and RoE. ? We expect the downside to be limited to Rs800 (based on 0.9x FY07E consolidated book). ? Valuations at 5.6x FY07E consolidated EPS and 1.05x FY07E consolidated book value remain attractive. We recommend Buy with a target of Rs1,200.

For 2QFY06 results preview, see page 77

23 September 2005 9 Top-10 Picks Large Cap Stocks

HDFC

STOCK INFO. BLOOMBERG 23 September 2005 BSE Sensex: 8,223 HDFC IN Buy REUTERS CODE S&P CNX: 2,478 HDFC.BO Previous Recommendation: Buy Rs956

Equity Shares (m) 244.4 YEAR NET INCOME PAT EPS EPS P/E P/BV CAR ROAE ROAA P/ABV END (RS M) (RS M) (RS) GROWTH (%) (X) (X) (%) (%) (%) RATIO 52-Week Range 1,080/600 3/05A 14,510 10,366 41.6 20.5 23.0 6.1 13.4 28.5 2.9 6.2 1,6,12 Rel. Perf. (%) -3/7/5 M.Cap. (Rs b) 233.6 3/06E 17,698 12,649 50.8 22.0 18.8 5.1 13.2 29.6 2.8 5.2

M.Cap. (US$ b) 5.3 3/07E 21,473 15,443 62.0 22.1 15.4 4.2 13.0 30.0 2.8 4.3

Investment arguments Earnings trend ? Value of subsidiaries growing fast. Currently, four of ? Business growth has been consistent at 28-30% over its subsidiaries (HDFC Bank, HDFC Standard Life the last couple of fiscals. Earnings growth has been Insurance, Intelenet, HDFC AMC) add in excess of maintained at over 20% CAGR. Rs312 per share. This value is set to rise significantly ? We expect earnings growth to be maintained at 20- as these companies are growing at 30-100%. 22% over the next couple of years. Our estimates are marginally higher than consensus. ? Mortgage disbursements will continue to grow at 28- ? Any margin pressure or slowdown in mortgages could 30% for the next couple of years. Stable margins, lead to downsides to our earnings, while monetisation along with decline in cost to income ratio, will result of its investment could lead to significant upsides. in a 22% CAGR in earnings over FY05-07.

Catalysts ? RoE has been expanding at at least 100bp every year ? Any hike in FDI in insurance will enable the company and currently stands at 28.5%. We expect this to to sell a part of stake to Standard Life, resulting in move up to 30% by end FY06. The company has a significant cash flows. payout ratio of 45%, which would mean a dividend ? Ability to increase its RoE further and maintain an of Rs20 in FY06. earnings growth of 20% will result in a further re- rating. ? Recently completed a zero coupon FCCB issue of US$500m. The conversion price is Rs1,399 and will likely lead to a 6.5% dilution. However, this issue Target price (upside / downside) will result in margin expansion and significant book ? Valued at 15x FY07E EPS for core business earnings. accretion at the time of conversion. Adding the current value of investments gives us our target price of Rs1,250. ? Stripping the value of subsidiaries, the core business ? Downside likely to be restricted to Rs900 (10x FY07E is available for Rs650, valuing the core business at EPS + value of investments). just 10.5x FY07E EPS and 2.8x FY07E BV. We recommend Buy with a target of Rs1,250.

For 2QFY06 results preview, see page 69

23 September 2005 10 Top-10 Picks Large Cap Stocks

Larsen & Toubro

STOCK INFO. BLOOMBERG BSE Sensex: 8,223 LT IN 23 September 2005 Buy REUTERS CODE S&P CNX: 2,478 LART.BO Previous Recommendation: Buy Rs1,372

Equity Shares (m) 129.9 YEAR NET SALES PAT * EPS * EPS * P/E * P/BV ROE ROCE EV/ EV/ END (RS M) (RS M) (RS) GROWTH (%) (X) (X) (%) (%) SALES EBITDA 52-Week Range 1,425/792 3/05A 134,363 6,408 49.3 3.8 27.8 5.4 19.2 19.2 1.4 20.8 1,6,12 Rel. Perf. (%) -1/12/11 M.Cap. (Rs b) 178.2 3/06E 155,562 9,999 70.6 43.2 19.4 4.7 22.6 21.9 1.2 15.7

M.Cap. (US$ b) 4.1 3/07E 186,122 12,964 91.6 29.7 15.0 4.0 26.0 26.2 1.0 12.5

* Consolidated

Investment arguments Earnings trend ? Strong growth in the order inflows (order backlog is ? Earnings growth has remained muted (10-12%) for over Rs200b), led by higher infrastructure spending the past two years mainly because of margin pressures and pick-up in industrial capex. We expect FY06/ arising due to a steep hike in raw-material costs and FY07 order inflows to be higher by 46% compared the presence of low-yielding international orders. to FY04/FY05. ? We expect the consolidated and fully-diluted earnings to grow by 43% in FY06 and 30% in FY07. Buoyant ? Strong case for margin expansion: (a) completion of and sustained order inflow for the E&C business low margin orders during FY06 – these orders were coupled with strong growth in key subsidiaries (L&T bagged during FY04/1HFY05 amidst intense Infotech and L&T Finance) provide significant upside. competition and then impacted by increased commodity prices; (b) improving margins on Catalysts infrastructure projects, given higher average ticket ? Announcements of large and niche order intake, and size; and (c) change in order mix towards process improvement in margins would be the key catalysts industries and heavy engineering (hydrocarbons, in the near term. minerals, metals, power, etc.)

? L&T is the largest player in the BOT / Annuity Target price (upside / downside) segment in India. The recent trend of project ? Our target price of Rs1,600 is based on SOTP financing on Public Private Partnership is beneficial valuation. to companies like L&T, which have strong balance ? We expect the downside to be limited at Rs1,300 sheets and formidable free cash flows. (14x FY07E earnings).

? Contribution of subsidiaries to profitability is rising. We expect the profit contribution from the subsidiaries to standalone earnings to increase from Rs597m in FY05 to Rs3.4b in FY08 (Rs24 per share).

For 2QFY06 results preview, see page 103

23 September 2005 11 Top-10 Picks Large Cap Stocks

Bajaj Auto

BLOOMBERG STOCK INFO. 23 September 2005 BSE Sensex: 8,223 BJA IN Buy REUTERS CODE S&P CNX: 2,478 BJAT.BO Previous Recommendation: Buy Rs1,611

Equity Shares (m) 101.2 YEAR NET SALES PAT EPS EPS P/E P/BV ROE ROCE EV/ EV/ END (RS M) (RS M) (RS) GROWTH (%) (X) (X) (%) (%) SALES EBITDA 52-Week Range 1,687/918 3/05A 59,271 7,668 75.8 4.8 21.3 3.9 18.5 20.7 2.2 14.1 1,6,12 Rel. Perf. (%) 11/28/18 M.Cap. (Rs b) 163.0 3/06E 70,406 9,191 90.8 19.9 17.7 3.5 19.6 22.4 1.8 11.2

M.Cap. (US$ b) 3.7 3/07E 81,268 10,884 107.6 18.4 15.0 3.1 20.4 24.3 1.5 9.2

Investment arguments Earnings trend ? With a share of 30% in motorcycles, Bajaj Auto has ? Sales and net profit registered a growth of 17% and been consistently gaining share in a market which is 19% CAGR over FY03-05. a virtual duopoly. Moreover, its new launches have ? We expect 15% CAGR in net sales over FY05-08, met with a strong response. There is a waiting period with growth primarily driven by motorcycles (16% for its relatively high margin models – Pulsar, Avenger CAGR over FY05-08) and total exports (16% CAGR and Discover. Success of its newly launched Wave over FY05-08). We expect overall volumes to grow is also improving ungeared scooter sales. at a CAGR of 14% over FY05-08. ? A key positive for Bajaj Auto would be a revival in its ? We expect EPS to improve from Rs78.5 in FY05 to three-wheeler sales (high-margin segment). This is Rs107.6 in FY07 (a CAGR of 19%). mainly on account of demand generated from Gujarat, which moved to CNG powered three-wheelers. Cities Catalysts like Chennai and Calcutta are also expected to move ? Positive news flow on international sales. to cleaner fuels for three-wheelers. ? Expanding domestic market share in motorcycles, ? Bajaj is all set to play a bigger role in the global leading to earnings upgrades. motorcycle market. Its exports have increased nearly four fold over the last three years, with most of the growth coming from SAARC countries and a few Target price (upside / downside) Latin American markets. Its entry into bigger and ? We recommend Buy, with a target price of Rs1,960 challenging markets should help Bajaj post 16% export based on SOTP valuation (core business at 14x FY07E growth over FY05-08. EPS; cash at Rs551/share; Insurance and Bajaj Auto ? Bajaj Auto’s financial position continues to improve Finance at Rs205/share). though the investment portfolio underperforms. It has ? We expect the downside to be limited to Rs1,610 a strong balance sheet, with Rs50b in cash and liquid (10x FY07E core earnings plus cash and subsidiary investments (Rs500 per share in FY06E). valuation of Rs756/share). ? Contribution from subsidiaries (insurance business joint ventures and Bajaj Auto Finance) would result in its consolidated PAT improving (FY05 contribution at 5%, which is expected to improve to 9% by FY07).

For 2QFY06 results preview, see page 50

23 September 2005 12 Top-10 Picks Large Cap Stocks

Hero Honda

STOCK INFO. BLOOMBERG 23 September 2005 BSE Sensex: 8,223 HH IN Buy REUTERS CODE S&P CNX: 2,478 HROH.BO Previous Recommendation: Buy Rs700

Equity Shares (m) 199.7 YEAR NET SALES PAT EPS EPS P/E P/BV ROE ROCE EV/ EV/ END (RS M) (RS M) (RS) GROWTH (%) (X) (X) (%) (%) SALES EBITDA 52-Week Range 721/412 3/05A 74,217 8,105 40.6 11.3 17.2 9.4 54.3 67.7 1.6 10.4 1,6,12 Rel. Perf. (%) -5/1/9 M.Cap. (Rs b) 139.8 3/06E 87,149 9,513 47.6 17.4 14.7 7.2 49.0 63.0 1.4 9.1

M.Cap. (US$ b) 3.2 3/07E 99,422 10,924 54.7 14.8 12.8 5.7 44.9 60.0 1.2 7.6

Investment arguments Earnings trend ? Hero Honda would be one of the major beneficiaries ? Volumes have grown by an average 25% over FY03- of the strong growth in two-wheeler demand over 05. Sales and profits have registered a growth of the next couple of years. It has recently launched 21% and 16% CAGR over FY03-05. two products – Super Splendor and Glamour – in ? Volume growth would remain strong at 16% in FY06 the 125cc segment. and 14% in FY07. Overall, we expect Hero Honda’s ? We expect Hero Honda to be the winner in the 125cc profits to grow by 16% CAGR over FY05-07. Our segment, based on its strong brand equity in rural estimates are higher than the consensus by 10% and market and initial feedback from dealers on both the we believe that with strong volumes, consensus above launches. Hero Honda is also planning to re- earnings will be upgraded. launch Ambition – a 135cc motorcycle – in FY06, which would further strengthen its product portfolio. Catalysts ? EBITDA margins at 14.8% in 1QFY06 were the ? Strong volume growth in festive season. lowest in the last 13 quarters. With steel prices ? Positive news flow relating to the new plant (expected softening, we believe that EBITDA margins would within the next few weeks) would remove concerns be stable at 15%. on capacity constraints and give visibility of strong ? A good response to the recently launched motorcycles volume growth beyond FY06. will support the growth momentum in the executive segment and take away the fear of deteriorating product mix. Hero Honda is also working on the entire Target price (upside / downside) value chain, including vendors’ vendors, to cut costs. ? We recommend Buy with a target price of Rs824 ? Current capacity of the existing plants is 3.2m bikes (15x FY07E EPS of Rs55). per year, which will be hiked to 3.35m bikes. Further, ? We expect the downside to be limited to Rs655 (12x the company would announce its new plant details in FY07E EPS). the next few weeks. This would have an initial capacity of 250,000 bikes, which would be scaled up to 1m bikes depending on the demand. ? The stock is attractive with significant cash on the balance sheet (Rs100 per share) and attractive dividend yield (>3%).

For 2QFY06 results preview, see page 53

23 September 2005 13 Top-10 Picks Large Cap Stocks

Punjab National Bank

STOCK INFO. BLOOMBERG BSE Sensex: 8,223 PNB IN 23 September 2005 Buy REUTERS CODE S&P CNX: 2,478 PNB.BO Previous Recommendation: Buy Rs428

Equity Shares (m) 315.3 YEAR NET INCOME PAT EPS EPS P/E P/BV CAR ROAE ROAA P/ABV END (RS M) (RS M) (RS) GROWTH (%) (X) (X) (%) (%) (%) RATIO 52-Week Range 521/241 3/05A 56,824 14,101 44.7 7.0 9.6 1.7 14.8 21.4 1.2 1.7 1,6, 12 Rel. Perf. (%) 0/-24/10 M.Cap. (Rs b) 134.9 3/06E 60,952 16,861 53.5 19.6 8.0 1.4 14.8 19.0 1.2 1.5

M.Cap. (US$ b) 3.1 3/07E 69,057 19,892 63.1 18.0 6.8 1.2 14.4 19.0 1.3 1.2

Investment arguments Earnings trend ? Punjab National Bank (PNB) has been amongst the ? Over the last three years, earnings have grown at a most consistent performers on almost all the CAGR of 35%, despite no growth in bond gains. parameters in the last few years. Has continued to ? Over the next couple of years, we expect earnings grow its earnings at over 25% despite a sharp decline growth of 19%. There could be upsides to our in bond gains. Being the second largest state-owned estimate in case of recoveries of bad loans. bank, PNB is an excellent play on the strong economic upcycle. Catalysts ? Fee income has been growing at over 20%. We ? Strong economic momentum, stable interest rates will expect this growth to be maintained, as the bank is lead to a re-rating of large banks such as PNB. ahead of its competitors on the technology platform. ? Any relaxation in the FII limit of 20% will further re- rate the stock. ? Net NPAs are only 0.2% with gross NPAs still at 6%. This could result in significant recoveries, all of which would be book accretive. Target price (upside / downside) ? We expect PNB to trade at 1.6x book value, as the ? The bank will also benefit from a decline in wage bank has been consistent in earnings growth and has bill, as VRS charges will be nil and wage arrears will excellent asset quality. Based on a book value of be low. Moreover, PNB has a large workforce, which Rs350 in FY07E, our target price stands at Rs561. would reduce over the next few years due to natural ? We expect the downside to be limited to Rs385 (1.1x attrition.We expect a decline in cost to income ratio. FY07E book value). ? As the bank had already raised capital and has Tier- 1 capital of 9.5%, we do not expect any dilution over the next 18 months. We expect RoE to be at 20-22% on a sustainable basis.

? The stock trades at a P/E of 6.8x and P/ABV of 1.2x FY07E. We maintain Buy with a price target of Rs561 (valuing the bank at 1.6x FY07E BV).

For 2QFY06 results preview, see page 76

23 September 2005 14 Top-10 Picks Large Cap Stocks

Mahindra & Mahindra

STOCK INFO. BLOOMBERG 23 September 2005 BSE Sensex: 8,223 MM IN Buy REUTERS CODE S&P CNX: 2,478 MAHM.BO Previous Recommendation: Buy Rs351

Equity Shares (m) 232.0 YEAR NET SALES PAT* ADJ. EPS* EPS P/E P/BV ROE ROCE EV/ EV/ END (RS M) (RS M) (RS) GROWTH (%) (X) (X) (%) (%) SALES EBITDA 52-Week Range 380/205 3/05A 65,238 5,040 21.0 52.0 16.7 3.8 23.7 20.6 1.1 10.4 1,6,12 Rel. Perf. (%) -6/15/8 M.Cap. (Rs b) 81.4 3/06E 75,574 5,919 24.2 17.4 14.5 3.4 24.7 23.1 0.9 7.7

M.Cap. (US$ b) 1.9 3/07E 84,296 6,573 26.9 11.1 13.0 3.0 24.3 23.8 0.8 6.7

Standalone; pre-exceptionals

Investment arguments Earnings trend ? M&M continues to dominate the market for UVs ? Total income and net earnings registered a growth and tractors, despite increasing competition. Business of 33% and 109% CAGR over FY03-05. outlook for the company remains positive, given the ? The company would register 13% sales CAGR and government's focus on the development of the rural 14% earnings CAGR (standalone) over the next two economy. We expect M&M, with its rural centric years. We expect consolidated EPS to grow by 33% product line, to capitalize on these trends. to Rs25.4 in FY06 and by 44% to Rs36.3 in FY07.

? We expect the automotive and farm equipment division to continue its steady growth, with double- Catalysts digit growth rates for both passenger vehicles and ? Strong volume growth due to good monsoons. tractors for next two years (total volume CAGR of ? Acquisition in auto-parts space and successful bidding 12% over FY05-07). for Romanian Tractors. ? Announcement of concrete plans on subsidiary IPOs ? Exports contributed 4% to M&M’s volumes in FY05. (MFSL, MBT and MSAT). The company is aggressively moving to new geographies and we expect the contribution of exports Target price (upside / downside) to double in next three years. ? We recommend Buy with a target price of Rs432, ? M&M’s entry into the auto-parts business (MSAT) based on SOTP valuation (core business at 12x FY07E is a strategic initiative. In FY05, MSAT posted earnings + Rs120/share value of subsidiaries). revenues of Rs11b, which it aims to increase to Rs45b ? We expect the downside to be limited at Rs325 (core over next five years. Its recently proposed JVs to business at 9x FY07E earnings + Rs100/share value manufacture passenger cars and commercial vehicles of subsidiaries). would start contributing post-CY08.

? We expect consolidated earnings to grow by 33% in FY06 and by 44% in FY07. While MBT and MFSL would continue to grow at 15-20% over the next two years, smaller business like Mahindra Gesco and Mahindra Holidays would also register robust growth.

For 2QFY06 results preview, see page 54

23 September 2005 15 Top-10 Picks Mid Cap Stocks

IPCL

STOCK INFO. BLOOMBERG BSE Sensex: 8,223 IPCL IN 23 September 2005 Buy REUTERS CODE S&P CNX: 2,478 IPCL.BO Previous Recommendation: Neutral Rs207

Equity Shares (m) 249.1 YEAR NET SALES PAT EPS EPS P/E P/BV ROE ROCE EV/ EV/ END (RS M) (RS M) (RS) GROWTH (%) (X) (X) (%) (%) SALES EBITDA 52-Week Range 229/156 1,6,12 Rel. Perf. (%) 5/-4/-48 3/05A 81,991 7,859 31.6 187.3 6.6 1.8 30.3 26.0 0.7 3.7 M.Cap. (Rs b) 51.5 3/06E 84,160 8,282 33.3 5.4 6.2 1.4 25.2 29.6 0.6 3.2

M.Cap. (US$ b) 1.2 3/07E 79,656 9,046 36.3 9.2 5.7 1.1 22.2 30.0 0.5 2.3

Investment arguments Earnings trend ? Key concerns on IPCL have disappeared – potential ? Profits grew at a CAGR at 74% over the last two merger with RIL has been put off, while gas price years. deregulation has been effectively neutralized by higher ? We have upgraded FY06 estimates marginally since product prices and lower interest outgo. The company initiating coverage in October 2004. The street has will be debt free in FY06, as compared to a net debt actually downgraded estimates on account of gas of Rs17b in FY04 and Rs39b in FY02. price increase. ? IPCL is a major beneficiary of improved gas ? Negative surprises could be from weak availability. It eliminates the key growth bottleneck, petrochemical prices and margins. as feedstock availability was the constraint. With large cashflows of Rs15b per year, we believe a large Catalysts capacity expansion announcement is round the corner. ? Street yet to be convinced on the sustainability of ? The new domestic gas supply from PMT would strong margins over the next few quarters. Positive replace high cost imported propane, leading to a saving surprises and upgrades to street estimates would be of over Rs4.9b in feedstock costs. the key catalyst. ? With the resolution of the feedstock issues, IPCL’s ? Announcement of large expansion or greenfield gas cracker economics would turn superior to naphtha project. crackers across Asia. ? Petrochemical prices and margins are expected to remain strong. We expect the petrochemical cycle Target price (upside / downside) peak in 18-24 months from now. Near term regional ? Target price of Rs291 based on 8x FY07E estimate, capacity additions not a significant threat. the multiple being the the historic peak multiple ahead ? IPCL valuation discount to Sensex has increased of last petrochemical cycle peak in FY05. steadily over the last six quarters because of the ? We expect the downside to be limited to Rs181 (based concerns mentioned above. With these two concerns on P/E of 5x FY07E earnings). now disappearing, we believe, stock performance should improve.

For 2QFY06 results preview, see page 168

23 September 2005 16 Top-10 Picks Mid Cap Stocks

Tata Tea

STOCK INFO. BLOOMBERG BSE Sensex: 8,223 TT IN 23 September 2005 Buy REUTERS CODE S&P CNX: 2,478 TTTE.BO Previous Recommendation: Buy Rs846

Equity Shares (m) 56.2 YEAR NET SALES PAT* EPS* EPS P/E P/BV ROE ROCE EV/ EV/ END (RS M) (RS M) (RS) GROWTH (%) (X) (X) (%) (%) SALES EBITDA 52-Week Range 879/381 3/05A 30,591 2,565 45.6 32.4 18.5 3.2 17.2 14.8 1.9 10.8 1,6,12 Rel. Perf. (%) -3/37/44 M.Cap. (Rs b) 47.5 3/06E 30,894 3,019 53.7 17.7 15.7 2.7 17.4 16.7 1.8 9.3

M.Cap. (US$ b) 1.1 3/07E 31,506 3,458 61.5 14.5 13.7 2.4 17.3 18.1 1.6 8.2

* Pre-exceptionals Investment arguments Earnings trend ? Tata Tea is in the process of hiving off its plantation ? Tata Tea has shown a 59% CAGR in EPS over business and becoming a pure play brand player, which FY03-05. would help cut costs. The plantation business entails ? We forecast an EPS growth of 17.7% in FY06 and huge costs, especially on manpower. 14.5% in FY07. ? We would revise our earnings estimates upwards if ? The company has been witnessing strong growth in growth in Tetley picks up or the cost savings are the domestic market, with 16% YoY growth in ahead of our expectations. 1QFY06. The growth in the domestic markets has ? Earnings estimates would be revised downwards if been driven by product innovation, which has enabled the growth in the domestic market slows down. Tata Tea to improve market share.

Catalysts ? Tetley had undertaken significant debt restructuring ? Near term catalyst for Tata Tea is a possible in FY05, resulting in net debt reducing to £136m in acquisition in the North American markets. June 2005 from £160m at the end of FY04. Tetley ? In the long term, the stock is likely to be impacted by has also refinanced this debt, which is expected to the growth prospects of Tetley. lower interest costs by £2.5m. We expect the savings in interest costs due to this debt restructuring to be the main earnings driver. Target price (upside / downside) ? Our target price of Rs1,046 values the company at ? Tata Tea is actively scouting for acquisitions in the 17x FY07E EPS of Rs61.5. North American markets, particularly in herbal tea ? We expect the downside to be limited to Rs750 (12x markets, to increase its market share. Any such FY07E EPS). acquisition is expected to boost Tetley's sales, which have been stagnant for a while.

For 2QFY06 results preview, see page 123

23 September 2005 17 Top-10 Picks Mid Cap Stocks

Tata Chemicals

STOCK INFO. BLOOMBERG BSE Sensex: 8,223 TTCH IN 23 September 2005 Buy REUTERS CODE S&P CNX: 2,478 TTCH.BO Previous Recommendation: Buy Rs187

Equity Shares (m) 243.4 YEAR NET SALES PAT* EPS* EPS P/E P/BV ROE ROCE EV/ EV/ END (RS M) (RS M) (RS) GROWTH (%) (X) (X) (%) (%) SALES EBITDA 52-Week Range 211/124 03/05A 30,081 3,083 12.7 37.8 14.7 2.3 15.4 12.1 1.4 8.1 1,6,12 Rel. Perf. (%) -6/-2/2 M.Cap. (Rs b) 45.5 03/06E 33,089 3,883 16.0 25.7 11.7 2.1 17.5 14.9 1.2 6.6

M.Cap. (US$ b) 1.0 03/07E 35,594 4,533 18.6 16.8 10.0 1.8 18.3 16.1 1.1 5.6

Pre-exceptionals Investment arguments Earnings trend ? Strong demand from glass and detergent industries ? Tata Chemicals has shown a 43%CAGR in earnings along with lower Chinese production would keep Soda over FY03-05. Ash prices firm over the medium term. Fertilizer, ? We estimate 25.7% EPS growth in FY06 and 16.8% especially urea, is a steady cash flow business. EPS growth in FY07. ? We have not accounted for jump in salt volumes from ? The government has re-imposed a ban on uniodized uniodized salt ban or firming up of soda ash price, or salt with effect from 15 August 2005. Tata Chemicals any other inorganic initiative. Any of these would is the largest branded salt player, with 40% market positively impact earnings. share. Salt is a high margin business and shift from unbranded salt to branded salt would positively impact Catalysts earnings. ? Near term – soda ash price trend, acquisition

? Long term – change in fertilizer policy, inorganic/ ? The company is aggressively scouting for inorganic organic growth, unlocking of investment value. growth opportunities, both in soda ash and fertilizers. It aims to double its fertilizer capacity and almost triple its soda ash capacity – primarily through the Target price (upside / downside) inorganic route. ? Our SOTP valuation yields a fair value of Rs258 per share, after taking a 35% discount on investment ? The company has approximately Rs7b in net cash value. (after assuming FCCB conversion), which is ? Our downside price target is Rs167 (9x FY07E EPS). equivalent to Rs32 per share. Further, the company has significant investments in Tata group companies, which works out to approximately Rs120 per share.

? We forecast EPS CAGR of 21% over FY05-07 without incorporating any inorganic growth. The stock is trading at 10x FY07E EPS. Dividend yield is 3.6% (FY06E).

For 2QFY06 results preview, see page 109

23 September 2005 18 Top-10 Picks Mid Cap Stocks

Syndicate Bank

STOCK INFO. BLOOMBERG BSE Sensex: 8,223 SNDB IN 23 September 2005 Buy REUTERS CODE S&P CNX: 2,478 SBNK.BO Previous Recommendation: Buy Rs82

Equity Shares (m) 522.0 YEAR NET INCOME PAT EPS EPS P/E P/BV CAR ROAE ROAA P/ABV END (RS M) (RS M) (RS) GROWTH (%) (X) (X) (%) (%) (%) RATIO 52-Week Range 88/35 3/05A 22,584 4,029 8.5 -7.2 9.6 1.9 10.7 19.6 0.8 2.3 1,6,12 Rel. Perf. (%) 8/25/60 M.Cap. (Rs b) 42.9 3/06E 25,381 6,361 12.2 42.8 6.7 1.5 11.2 24.6 1.1 1.6

M.Cap. (US$ b) 1.0 3/07E 28,390 7,606 14.6 19.6 5.6 1.3 10.4 23.2 1.1 1.3

Investment arguments Earnings trend ? Syndicate Bank is a mid-sized state-owned bank, with ? Earnings over the last three years have grown at a an asset base of Rs521b, having a dominance in the CAGR of 16%. In FY05, profits had declined by 7% southern and western parts of India. It has a clear due to a huge drop in bond gains and significant focus on the SME and the retail segment. provisions on HTM transfer. ? We expect a CAGR of 32% over the next three years ? Loan book expansion will be driven by strong growth on the back of strong NII growth and low provisions. in retail, agriculture and SME credit. We expect the ? Higher than expected loan growth / treasury profits loan book to expand by 20% in FY06 and 18% in could lead to further upsides to our estimates. FY07. This would drive very strong growth in NII (expect growth of 20% in FY06 and 16% in FY07, Catalysts FY08). ? There could be upsides to our estimates in FY06, FY07. This would result in a further stock re-rating. ? High and increasing share of CASA deposits (38% - ? As the FII ownership is low at 8%, we believe that FY05), should help the bank to maintain its current Syndicate Bank could benefit on account of positive margins of 3.6% going forward. sentiment in the banking sector.

? Net NPAs are at 1.2% and are expected to decline to 1% by March 2006 and to 0.7% by March 2007. Target price (upside / downside) This would result in lower provisioning requirements. ? Given a 24% RoE in FY07, we value the bank at 2x FY07E BV, resulting in a target price of Rs130. ? Investment book is well cushioned with 70% of the ? Any downside is likely to be limited at Rs70 (1.1x book in HTM. On the AFS front, the bank has a FY07E BV). duration of 2 years, with cushion of interest rate rise upto 100bp.

? Valuations at 5.6x FY07E EPS and 1.3x FY07E book value are attractive compared to its peers. We recommend Buy with a target of Rs130.

For 2QFY06 results preview, see page 78

23 September 2005 19 Top-10 Picks Mid Cap Stocks

Jindal Steel & Power

STOCK INFO. BLOOMBERG BSE Sensex: 8,223 JSP IN 23 September 2005 Buy REUTERS CODE S&P CNX: 2,478 JNSP.BO Previous Recommendation: Buy Rs1,363

Equity Shares (m) 30.8 YEAR NET SALES PAT EPS EPS P/E P/BV ROE ROCE EV/ EV/ END (RS M) (RS M) (RS) GROWTH (%) (X) (X) (%) (%) SALES EBITDA 52-Week Range 1,430/590 3/05A 22,536 5,157 167 58.2 8.1 3.1 38.6 26.4 2.4 6.1 1,6,12 Rel. Perf. (%) 14/5/76 M.Cap. (Rs b) 42.0 3/06E 28,570 6,671 217 29.4 6.3 2.1 33.9 24.9 1.8 4.4

M.Cap. (US$ b) 1.0 3/07E 36,000 7,379 240 10.6 5.7 1.6 27.6 20.3 1.6 4.1

Investment arguments Earnings trend ? JSPL is an emerging power company available at ? PAT has grown at 65% CAGR from Rs1.9b in FY03 the valuations of a steel company. Post the completion to Rs5.1b in FY05. of its 1,000MW power project, JSPL’s power ? We expect earnings to grow at 20% CAGR from generation capacity will increase to 1,440MW by the Rs5.1b in FY05 to Rs7.4b in FY07 (EPS Rs240). end of FY09. This will make company the fourth largest utility under our coverage in terms of installed Catalysts capacity. ? Divergence in financial performance of JSPL vis-a- vis non-integrated players on account of backward ? Captive coal and iron ore mines of JSPL give it integration and high volume growth. sustainable competitive advantage over its peers. Due ? Commissioning of 1,000MW power plant will result to its captive mines, JSPL is lowest cost sponge iron in higher revenues and earnings from power segment, producer in the world. which will drive a re-rating. ? Firming up of capex plans on the Orissa project. ? JSPL has recently revised contract with Orissa government to increase capacity of its proposed steel plant to 6m ton from earlier planned 2m ton. Besides, Target price (upside / downside) the company intends to set up a 900MW captive ? Considering JSPL’s diversified revenue stream (steel power project. JSPL already has coal mines in Orissa and power), we expect it to get a multiple of 8x FY07E with reserves of ~200m tons. earnings which gives us a target price of Rs1,917 - upside of 40%. ? JSPL is taking advantage of its captive mines and ? If JSPL continues to get a steel sector multiple then strong operating cash flows and scaling up operations our price target would be Rs1,198 (13% downside). significantly. Strong growth in steel volumes and higher earnings from power division will ensure impressive profit growth even in steel cycle downturn.

? Company is quoting at 5.7x P/E and EV/EBITDA of 4.1x FY07E. We expect significant re-rating with rising contribution to revenues/profits from power.

For 2QFY06 results preview, see page 149

23 September 2005 20 Top-10 Picks Mid Cap Stocks

United Phosphorus

STOCK INFO. BLOOMBERG BSE Sensex: 8,223 UNTP IN 23 September 2005 Buy REUTERS CODE S&P CNX: 2,478 UNPO.BO Previous Recommendation: Buy Rs191

Equity Shares (m) 165.6 YEAR NET SALES PAT EPS EPS P/E P/BV ROE ROCE EV/ EV/ END (RS M) (RS M) (RS) GROWTH (%) (X) (X) (%) (%) SALES EBITDA 52-Week Range 200/121 3/05A 14,226 1,572 9.3 67.5 20.5 4.0 23.2 19.1 2.5 10.2 1,6,12 Rel. Perf. (%) -9/7/3 M.Cap. (Rs b) 31.6 3/06E 17,738 2,203 12.7 36.8 15.0 3.2 22.7 20.3 2.0 7.9

M.Cap. (US$ b) 0.7 3/07E 21,198 2,833 16.4 28.6 11.7 2.5 23.3 22.3 1.5 6.0

Investment arguments Earnings trend ? United Phosphorus (UPL) is the only Indian company ? Recent acquisitions (Surflan, Blazer) helped UPL that has taken steps to build a direct presence in the scale up by adding US$30-35m to sales. AgValue global generics market for agrochemicals. Its expected to add another US$20m, whereas Cequisa advantage of being a low cost producer and superior would add US$23m to revenues. skills will help garner significant share of the global ? Improving market mix as International revenues agrochem market. This is also complemented by its expected to increase to 76% in FY07 from 68% of ability to build strong relations with distributors. revenues (FY04). ? Expect superior financial performance with 22% and ? It is among the largest and most competitive generic 33% CAGR in revenues and adjusted earnings (fully agrochem players in the world with growth strategy diluted) over FY05-07. built around a mix of own registrations and acquiring tail-end brands of global majors. Catalysts ? Acquisitions of brands/companies in overseas market ? Enhanced global presence, with operations in over would accelerate growth initiatives in global markets 30 countries, reduces exposure to the erratic domestic market. It operates across seven manufacturing sites - six in India and one in Europe. Target price (upside / downside) ? Our target price of Rs230 is based on three stage ? Focus on scaling up registrations and seeking DCF model with a base discount rate of 12.5%. acquisition opportunities in the regulated market would ? Our base case price is Rs198 (~12x FY07E fully drive share of regulated markets of US and Europe diluted EPS). to 50% in FY07 from 43% in FY04. FCCB and improving cash flows would increase pace of acquisitions as well as own product registrations.

For 2QFY06 results preview, see page 218

23 September 2005 21 Top-10 Picks Mid Cap Stocks

Crompton Greaves

STOCK INFO. BLOOMBERG BSE Sensex: 8,223 CRG IN 23 September 2005 Buy REUTERS CODE S&P CNX: 2,478 CROM.BO Previous Recommendation: Buy Rs586

Equity Shares (m) 52.4 YEAR NET SALES PAT* EPS* EPS* P/E* P/BV ROE ROCE EV/ EV/ END (RS M) (RS M) (RS) GROWTH (%) (X) (X) (%) (%) SALES EBITDA 52-Week Range 652/203 3/05A 19,725 1,447 27.6 106.4 21.2 7.8 38.9 21.6 1.7 18.8 1,6,12 Rel. Perf. (%) -10/16/123 M.Cap. (Rs b) 30.6 3/06E 23,006 2,111 40.3 45.8 14.5 6.0 37.7 29.3 1.4 13.9

M.Cap. (US$ b) 0.7 3/07E 27,065 2,655 50.7 25.8 11.5 4.7 35.3 32.3 1.2 10.9

* Consolidated Investment arguments Earnings trend ? Revenue growth is expected to be robust on the back ? Standalone earnings have grown by 62% in FY04 and of capacity expansions in the user industries and 97% in FY05, despite the pressure on margins. The increasing momentum in power segment. Order intake consolidated PAT grew by 106% in FY05. had gone up by 21% in FY05. Revenue growth of ? Strong business momentum, benefits from the acquisition over 15% along with margin expansion would lead to of Pauwels and expansion of margins would drive a compounded earnings growth of over 35% over consolidated earnings growth of 46% in FY06 and 26% the next couple of years. in FY07. ? EBITDA margins are expected to increase by more ? Change in the direction of power sector reforms and than 100bp in FY06, driven largely by stable APDRP investments, downturn in investment cycle, commodity prices. The company has been able to intensifying competition and difficulty in the integration improve its margins for the last few quarters, despite of Pauwels could lead to downsides. higher input prices. Debt repayment will also lead to significant reduction in interest costs. Catalysts ? Crompton has emerged as an Indian MNC after the ? Turnaround of Pauwels, retention of the leadership in acquisition of Pauwels Contracting NV in May 2005. market share and liquidity of the stock would be the Pauwels has revenues of €244m, and is expected to key catalysts. grow at 5-8%, thus indicating that the billion dollar revenue is now in sight for Crompton. The company paid €32.1m for the deal. The deal will become Target price (upside / downside) earnings accretive by the end of FY06 itself. Post ? Our target price of Rs760 is based on 15x FY07E EPS this acquisition, Crompton has emerged as one of the of Rs50.7. top 10 transformer manufacturers in the world. ? On the downside, we expect the stock to trade at 11x ? Crompton has an opportunity to grow inorganically, FY07E EPS, yielding a price of Rs558. unlike it’s MNC peers like ABB and Siemens. It is amongst the least expensive stocks in our engineering universe, trading at 11.6x FY07E consolidated earnings.

For 2QFY06 results preview, see page 101

23 September 2005 22 Top-10 Picks Mid Cap Stocks

Amtek Auto

STOCK INFO. BLOOMBERG BSE Sensex: 8,223 AMTK IN 23 September 2005 Buy REUTERS CODE S&P CNX: 2,478 AMTK.BO Previous Recommendation: Buy Rs279

Equity Shares (m) 101.1 YEAR NET SALES PAT EPS EPS P/E P/BV ROE ROCE EV/ EV/ END (RS M) (RS M) (RS) GROWTH (%) (X) (X) (%) (%) SALES EBITDA 52-Week Range 334/108 3/05A 18,364 1,464 14.5 60.5 19.3 3.5 18.3 12.5 1.7 10.4 1,6,12 Rel. Perf. (%) 27/47/83 M.Cap. (Rs b) 28.2 3/06E 28,139 2,204 16.6 14.9 16.8 3.7 21.9 19.6 1.4 8.8

M.Cap. (US$ b) 0.6 3/07E 32,811 2,658 20.1 20.6 13.9 3.1 22.3 22.5 1.2 7.2

Investment arguments Earnings trend ? Amtek Auto is the only player in India with a strong ? Revenues witnessed 132% growth in FY05 with presence in both castings and forgings, along with consolidated sales of Rs18.4b. We estimate 34% machining capacity to supply finished components to CAGR in consolidated revenues over FY05-07. global OEMs. International revenues would contribute almost 65% of overall revenues in FY06 and FY07. ? It has adopted an acquisition- led strategy to transform ? Higher revenue and EBITDA growth would lead to itself into a global player. It has recently acquired a 35% CAGR in net profit over FY05-07. We expect overseas companies like GWK, Sigma Cast and Zelter, Amtek Auto to register an EPS of Rs16.6 in FY06 which gives a ready market and access to prestigious and Rs20.1 in FY07 (after minority interest) on fully global clients. These acquisitions have also created diluted equity. an internal offshoring opportunity for its ? Post consolidation with other group companies, the manufacturing facilities in India. fully consolidated EPS would be Rs21.4 in FY06 and Rs27.2 in FY07. ? While its acquisitions have helped Amtek Auto to multiply in size, they have also given it access to Catalysts experienced personnel. Amtek is leveraging the ? Possible acquisition in US and Europe in near term. experience of key personnel at GWK and Sigma Cast ? Consolidation of other group companies in near term to establish itself as a truly global player. (Benda Amtek over next one month).

? Amtek is currently screening a few more companies in the US and Europe for possible acquisition. Having Target price (upside / downside) recently raised US$280m, it is well funded to do so. ? We recommend Buy with a target price of Rs380 (14x FY07E fully consolidated earnings). ? The company intends to invest US$75m to enhance ? We expect the downside to be limited at Rs270 (10x capacities. Capacity enhancement is important both FY07E earnings). from the perspective of meeting captive demand from the overseas companies that it has acquired as well as to cater to rising external demand.

23 September 2005 23 Top-10 Picks Mid Cap Stocks

Raymond

STOCK INFO. BLOOMBERG BSE Sensex: 8,223 RW IN 23 September 2005 Buy REUTERS CODE S&P CNX: 2,478 RYMD.BO Previous Recommendation: Buy Rs388

Equity Shares (m) 61.4 YEAR NET SALES PAT EPS EPS P/E P/BV ROE ROCE EV/ EV/ END (RS M) (RS M) (RS) GROWTH (%) (X) (X) (%) (%) SALES EBITDA 52-Week Range 424/218 3/05A 14,401 882 14.9 -33.5 24.5 1.7 7.8 7.8 1.4 8.2 1,6,12 Rel. Perf. (%) 1/0/21 M.Cap. (Rs b) 23.8 3/06E 17,744 1,497 23.7 58.8 15.4 1.6 11.4 10.9 1.2 6.7

M.Cap. (US$ b) 0.5 3/07E 21,204 1,989 32.4 36.8 11.3 1.4 13.9 13.3 1.0 5.4

Investment arguments Earnings trend ? Raymond’s worsted fabric division is expected to ? We expect Raymond’s EBITDA margins to expand report double digit growth in its top line over FY05- from 11% in FY05 to 16% in FY07, while its earnings 07. This would be led by improved product mix and are likely to register a CAGR (FY05-07) of 47% to increase in capacity by 12%. With the turnaround in Rs1.9b. the worsted fabric segment, Raymond is poised for a ? This would be driven by lower raw material costs, re-rating. better product mix, capacity expansion and increased ? Raymond has a sustainable competitive advantage in contribution from the branded apparel business. the worsted fabric segment. Strong brand image and ? Earnings in FY05 were depressed due to a Rs250m distribution network is critical. Hence, competition is one time charge on account of VRS expense. limited in the domestic worsted fabric market. ? Raymond is a strong play on the booming branded Catalysts apparel and retail industry in India. It enjoys ? The management is contemplating divesting its tremendous brand recall and retail franchise in the engineering business and the loss making Plug-in domestic market. It owns some of the oldest and most subsidiary in the near future. respected brands in India such as Raymond’s, Color ? It is aggressively on the lookout for acquisitions. Plus, Park Avenue, Parx and Mazoni. ? We believe Raymond would be able to leverage its strong understanding of service logistics across the Target price (upside / downside) chain. The share of branded apparel and new ? We have valued Raymond at 15x FY07E earnings, businesses will increase from Rs2.7b, accounting for which gives us a one-year price target of Rs486, an 19% of revenues in FY05, to Rs5.8b accounting for upside of 25%. 27% in FY07. ? We expect the downside to be limited at Rs325 (10x ? Raymond is amongst the few domestic textile FY07E earnings). companies to boast of a strong balance sheet. It has a comfortable leverage of 0.5x. It also holds close to Rs6b in cash (Rs99/share) and has significant real estate at its Thane plant (160 acres).

For 2QFY06 results preview, see page 203

23 September 2005 24 Top-10 Picks Mid Cap Stocks

Kesoram Industries

STOCK INFO. BLOOMBERG 23 September 2005 BSE Sensex: 8,223 KSI IN Buy REUTERS CODE S&P CNX: 2,478 KSRM.BO Previous Recommendation: Buy Rs163

Equity Shares (m) 45.7 YEAR NET SALES PAT EPS EPS P/E P/BV ROE ROCE EV/ EV/ END (RS M) (RS M) (RS) GROWTH (%) (X) (X) (%) (%) SALES EBITDA 52-Week Range 186/90 6/05E 14,024 335 7.3 -46.8 22.3 2.0 9.2 8.5 0.9 21.9 1,6,12 Rel. Perf. (%) 3/4/11 M.Cap. (Rs b) 7.5 6/06E 15,385 377 8.2 12.4 19.8 1.9 9.7 9.5 0.8 12.6

M.Cap. (US$ b) 0.2 6/07E 17,048 669 14.6 77.7 11.1 1.7 15.9 12.3 0.9 9.2

Investment arguments Earnings trend ? Cement business’ profitability would improve ? Sharp erosion in tyre business margins and losses in significantly, on strong volume growth (post capacity other non-core business restricted earnings growth to expansion of 1.65m ton to 4.6m ton by end of FY07), 9% CAGR between FY03-05. robust prices and implementation of VAT. We expect ? However, with buoyancy in its key businesses of cement this to be the key driver for both earnings and and tyres, earnings are expected to grow at 41% CAGR valuations of the company. (FY05-07). ? Key businesses (cement and tyre) are highly sensitive ? Tyre business would benefit from improving industry to realizations and energy prices, which could result in fundamentals. Being among top-5 players in Indian volatile earnings. tyre industry, it would benefit from robust demand growth and lack of major capacity addition, resulting Catalysts in return of pricing power to producers. ? Improving profitability for cement and tyre business

would result in re-rating for both the businesses. ? Significant value hidden in investments, in other group ? Unlocking value of investments in associate companies companies and AV Birla companies, with market value could act as catalyst for re-rating of the stock. of investments of Rs2.1b (v/s book value of Rs257m). The ongoing restructuring in the AV Birla group and untangling of crossholdings in group companies could Target price (upside / downside) act as a trigger for unlocking the value of investments. ? Our target price of Rs260 is based on SOTP valuation (valuing cement business at US$70/ton, tyres business ? Given the buoyancy in its key businesses and at 0.5x EV/Sales and other businesses at 0.4x EV/ significant value unlocking potential, SOTP valuations Sales). at US$45/ton for cement assets are at significant ? We expect downside to be limited at Rs129 (cement discount to replacement cost (US$70-75/ton) and valued at US$45/ton, tyres at 0.35x EV/Sales, other peers (US$105/ton for our cement universe). businesses at 0.3x EV/Sales and investments at 0.3x market value).

23 September 2005 25 Model Portfolio

MOST MODEL PORTFOLIO SECTOR WEIGHT / BSE-100 MOST WEIGHT RELATIVE EFFECTIVE SECTOR PORTFOLIO PICKS WEIGHT TO BSE-100 STANCE Banks 19.9 20.00 0.13 Overweight HDFC 3.2 7.00 3.95 Buy State Bank of India 3.1 6.00 5.13 Buy Punjab National Bank 0.9 4.00 3.13 Buy Syndicate Bank 0.0 3.00 3.00 Buy Information Technology 14.8 15.00 0.23 Overweight Infosys Technologies 7.9 8.00 0.14 Buy Satyam Computer 2.2 4.00 1.84 Buy Wipro 1.4 3.00 1.55 Buy Auto 7.4 11.00 3.63 Overweight M & M 0.9 3.00 2.05 Buy Hero Honda Motors 1.0 3.00 2.00 Buy Bajaj Auto 1.6 3.00 1.39 Buy Amtek Auto 0.0 2.00 2.00 Buy Petrochemicals 8.9 11.00 2.13 Overweight Reliance Industries 8.4 8.00 -0.45 Buy IPCL 0.4 3.00 2.57 Buy Oil & Gas 7.1 8.00 0.93 Overweight ONGC 3.2 5.00 1.85 Buy BPCL 0.6 3.00 2.40 Buy Engineering 5.7 7.00 1.33 Overweight L & T 2.4 5.00 2.59 Buy Crompton Greaves 0.0 2.00 2.00 Buy Telecom 4.3 7.00 2.72 Overweight Bharti Tele-Ventures 3.1 7.00 3.88 Buy Metals 5.4 6.00 0.62 Overweight Tisco 2.4 4.00 1.61 Buy JSPL 0.2 2.00 1.76 Buy FMCG 9.5 5.00 -4.49 Underweight Tata Tea 0.5 3.00 2.50 Buy Eveready Industries 0.0 2.00 2.00 Buy Cement 3.6 4.00 0.45 Neutral Birla Corporation 0.0 2.00 2.00 Buy Kesoram Industries 0.0 2.00 2.00 Buy Pharmaceuticals 5.9 4.00 -1.88 Underweight Dr Reddy’s Laboratories 0.6 2.00 1.36 Buy Matrix Laboratories 0.1 2.00 1.87 Buy Others 3.5 2.00 -1.51 Underweight Tata Chemicals 0.4 2.00 1.59 Buy Utilities 3.7 0.00 -3.71 Underweight Media 0.6 0.00 -0.57 Underweight Cash 0.0 0.00 Total 100.0 100.0

Top picks

23 September 2005 26 India Strategy

ANNUAL PERFORMANCE - MOST UNIVERSE (RS BILLION) SECTOR SALES EBITDA NET PROFIT Y/E MARCH FY05A FY06E FY07E CH. (%)* FY05A FY06E FY07E CH. (%)* FY05A FY06E FY07E CH. (%)* Auto (10) 569 657 739 15.4 75 88 99 16.5 47 56 65 19.1 Banks (18) 470 543 636 15.5 NM NM NM NM 160 203 249 27.2 Cement (6) 186 211 236 13.2 37 46 56 23.6 21 25 32 23.4 Engineering (8) 332 402 500 20.9 35 46 60 29.9 23 33 44 44.7 FMCG (11) 313 349 385 11.4 64 76 88 18.7 44 53 62 20.7 IT (11) 361 465 595 28.8 98 126 162 28.2 79 99 126 25.7 Media (1) 14 17 19 18.8 4 5 5 6.9 3 3 4 6.9 Metals (5) 595 651 623 9.4 218 213 162 -2.1 134 127 96 -5.4 Oil Gas & Petchem (9) 4,311 5,525 4,895 28.2 628 760 847 21.0 340 431 479 26.6 Pharma (14) 211 248 287 17.4 40 50 63 26.0 29 37 47 27.4 Telecom (1) 80 114 152 41.6 30 44 61 45.7 14 25 38 76.9 Fertilizers (2) 45 49 53 8.6 6 8 8 18.3 4 5 5 25.8 Textiles (7) 89 106 125 19.0 13 18 22 37.6 5 7 9 41.2 Utilities (7) 382 419 473 9.6 125 133 147 6.2 70 77 87 10.7 Others (2) 34 41 48 18.8 10 11 13 16.3 6 7 9 22.9 MOSt (112) 7,994 9,796 9,764 22.5 NM NM NM NM 979 1,190 1,352 21.6 MOSt Excl. Banks (94) 7,524 9,253 9,128 23.0 1,384 1,623 1,795 17.2 819 987 1,103 20.5 MOSt Excl.Oil & Gas (103) 3,683 4,271 4,869 16.0 756 863 948 14.1 638 759 873 18.9 MOSt Excl. Banks & Oil (85) 3,213 3,728 4,232 16.0 NM NM NM NM 479 556 624 16.2 NM - Not Meaningful; * Growth FY06 over FY05

VALUATIONS - MOST UNIVERSE SECTOR P/E EV/EBITDA P/BV ROE DIV. EARN. (X) (X) (X) (%) YLD (%) CAGR (NO. OF COMPANIES) FY05A FY06E FY07E FY05A FY06E FY07E FY05A FY06E FY05A FY06E FY07E FY06E (FY07-05) Auto (10) 17.9 15.0 13.1 9.8 8.0 6.9 4.5 3.8 25.4 25.2 24.5 2.4 16.7 Banks (18) 13.3 10.5 8.6 0.0 0.0 0.0 2.6 2.1 19.3 19.9 20.6 1.9 24.7 Cement (6) 19.6 15.9 12.4 11.4 9.0 6.8 4.0 3.5 20.6 21.8 23.6 1.7 25.8 Engineering (8) 30.1 20.8 15.7 18.5 14.0 10.4 5.9 5.0 19.4 24.2 27.3 1.3 38.5 FMCG (11) 28.0 23.2 19.8 18.3 15.1 12.6 8.8 7.7 31.3 33.1 33.2 2.2 19.0 IT (11) 29.2 23.2 18.2 22.5 17.1 13.0 9.7 7.3 38.4 36.0 34.1 1.0 26.5 Media (1) 25.0 23.4 20.8 19.0 17.7 15.4 5.8 4.8 23.1 20.4 19.3 0.6 9.7 Metals (5) 14.9 15.7 20.7 9.4 9.2 11.8 6.6 5.1 44.7 32.2 20.8 10.5 -15.4 Oil Gas & Petchem (9) 10.3 8.1 7.3 6.3 5.0 4.1 2.4 2.0 24.8 26.2 24.2 3.5 18.6 Pharma (14) 29.4 23.1 18.0 21.4 16.7 13.0 6.8 5.5 23.0 23.7 25.1 1.2 27.9 Telecom (1) 44.1 24.9 16.8 22.6 15.2 10.7 9.4 6.8 24.3 31.8 34.2 0.0 62.2 Fertilizers (2) 14.2 11.3 9.7 7.7 6.2 5.3 2.2 2.0 15.2 17.3 18.1 3.9 21.3 Textiles (7) 20.8 14.7 12.7 11.9 8.8 6.8 2.3 1.8 10.9 12.1 12.6 1.7 28.1 Utilities (7) 17.6 15.9 14.0 9.0 8.4 7.7 2.1 1.9 12.2 11.9 12.3 2.2 11.9 Others (2) 19.8 16.1 13.6 11.7 9.7 7.9 5.2 4.1 26.5 25.2 24.3 1.0 20.7 MOSt (112) 16.5 13.6 12.0 N.M. N.M. N.M. 3.8 3.1 22.9 22.9 21.9 3.1 17.5 MOSt Excl. Banks (94) 17.1 14.2 12.7 10.3 8.5 7.4 4.1 3.4 23.8 23.6 22.2 3.3 16.1 MOSt Excl.Oil & Gas (103) 19.8 16.7 14.5 N.M. N.M. N.M. 4.5 3.7 22.9 22.4 21.7 3.0 16.9 MOSt Excl. Banks & Oil (85) 22.0 18.9 16.9 13.6 11.6 10.3 5.4 4.4 24.5 23.4 22.1 3.2 14.2 NM - Not Meaningful Source: Motilal Oswal Securities

23 September 2005 27 MOSt Universe

2QFY06: a mixed quarter

In 2QFY06, we expect the growth momentum in corporate performance to sustain. We forecast sales growth at 23.2% YoY for our MOSt Universe of 112 companies. EBITDA would grow at 3.7% YoY with a margin drop of 330bp - primarily in Oil & Gas. Net profit growth for our Universe would be 5.7%. While the profit growth in 1HFY06 is expected to be only 6%, the implied growth in 2HFY06 is 33%. This deviation is on account of HPCL, BPCL, IOC which are expected to book profits in 2HFY06, as the government's share of subsidy losses will be paid in 2HFY06 in form of oil bonds. Excluding these stocks, our universe would have grown by 24% in 1HFY06 and by 25% in 2HFY06.

QUARTER-WISE SALES GROWTH QUARTER-WISE NET PROFIT GROWTH

36% 36% 30.3% 29.2% 25.7% 26.8% 27% 23.2% 27%

16.2% 18% 18%

7.1% 9% 9% 5.7%

0% 0% Dec-04 Mar-05 June-05 Sep- 05 Dec-04 Mar-05 June-05 Sep- 05

Source: Motilal Oswal Securities

QUARTERLY PERFORMANCE - MOST UNIVERSE (RS MILLION) SECTOR SALES EBITDA NET PROFIT (NO. OF COMPANIES) SEP.04 SEP.05 CHG. (%) SEP.04 SEP.05 CHG. (%) SEP.04 SEP.05 CHG. (%) Auto (10) 135,983 155,154 14.1 18,097 20,634 14.0 11,184 13,289 18.8 Banks (18) 107,958 124,915 15.7 84,545 92,723 9.7 39,670 47,448 19.6 Cement (6) 40,135 44,025 9.7 8,683 8,936 2.9 4,203 4,432 5.4 Engineering (8) 69,886 82,580 18.2 5,218 7,000 34.1 3,984 4,960 24.5 FMCG (11) 76,940 86,287 12.1 16,199 19,374 19.6 11,372 13,766 21.1 IT (11) 88,572 111,100 25.4 24,081 29,980 24.5 19,198 23,495 22.4 Media (1) 3,479 3,942 13.3 1,031 1,045 1.4 677 752 11.1 Metals (5) 140,530 155,522 10.7 48,847 49,333 1.0 31,308 28,915 -7.6 Oil Gas & Petchem (9) 1,031,977 1,334,443 29.3 142,466 126,549 -11.2 78,739 70,056 -11.0 Pharma (14) 53,944 63,336 17.4 12,210 13,634 11.7 8,519 10,053 18.0 Telecom (1) 18,598 27,074 45.6 7,012 10,315 47.1 3,337 5,746 72.2 Fertilizers (2) 12,139 13,960 15.0 1,856 2,237 20.5 1,060 1,403 32.4 Textiles (7) 8,385 10,556 25.9 1,848 2,482 34.3 598 1,009 68.7 Utilities (7) 89,153 100,101 12.3 23,814 26,024 9.3 16,752 18,167 8.4 Others (2) 8,649 10,101 16.8 2,507 2,929 16.8 1,440 1,866 29.6 MOSt (112) 1,886,328 2,323,098 23.2 398,413 413,195 3.7 232,039 245,357 5.7 MOSt Excl. Banks (94) 1,778,370 2,198,183 23.6 313,869 320,472 2.1 192,369 197,909 2.9 MOSt Excl.Oil & Gas (103) 854,351 988,655 15.7 255,947 286,646 12.0 153,300 175,301 14.4 MOSt Excl. Banks & Oil (85) 746,393 863,740 15.7 171,402 193,923 13.1 113,630 127,852 12.5 MOSt Excl Metals & Oil (108) 713,821 833,133 16.7 207,100 237,313 14.6 121,991 146,385 20.0 Source: Motilal Oswal Securities

23 September 2005 28 MOSt Universe

Sales jump by 23% ? MOSt Universe of 112 companies will show sales jump of 23% YoY in 2QFY06. Sales growth will be higher than 16% recorded in 1QFY06 and will be robust across sectors.

Telecom would be the fastest ? Telecom, as always, will be the fastest growing sector with growth of 46%. Bharti will growing sector, followed by continue its strong growth momentum driven by continued buoyancy in subscriber Oil & Gas and Textiles additions.

? IT will continue its momentum and YoY sales growth will be a high 25% - driven primarily by high volumes. Oil & Gas will show a 29% jump in topline primarily due to a QoQ jump in crude prices. Even marketing companies will report 30% revenue growth due to higher prices of deregulated products.

? The strong momentum in textile sales will continue with a 26% YoY sales growth, though some company results are not comparable due to consolidation this year. Pharma sales will grow 17% YoY with 15-20% growth in all companies except DRL.

Auto sales growth would ? Auto sales growth will pick up again after a lean 1QFY06 and is pegged at 13% this pick up after a lean 1QFY06 quarter. Bajaj Auto and Hero Honda are likely to report sales growth of 20%, while Bharat Forge will maintain its growth momentum estimated at 30% this quarter. Tata Motors, M&M and Maruti will report around 10% revenue growth.

? For Banks, revenue growth is estimated at 16% — the leaders again being private sector banks with growth of c.30%. FMCG growth will improve to 12.1% as volumes pick up and prices are hiked in a few product categories. Cement will be a slight laggard with monsoon season affecting growth (9.7% YoY).

SECTORAL SALES GROWTH - QUARTER ENDED SEPTEMBER 2005 (%)

50 40

30 Inquire Universe Sales Growth = 23.2% 20 10 0 IT Auto Media FMCG Banks Metals Utilities Pharma Others Cement Textiles Telecom Petchem Oil Gas & Fertilizers Engineering

Source: Motilal Oswal Securities

23 September 2005 29 MOSt Universe

EBITDA margins will drop by 330bp ? We expect overall EBITDA margins to drop by 330bp, with Oil & Gas and Banks contributing to a significant part of the decline. Other sectors to witness a margin decline would be Cement, Media, Metals, Pharma and Utilities. Margins would be stagnant in IT, Auto and Telecom. Excluding Banks, EBITDA margins for the MOSt Universe would fall by 310bp. If one excludes Oil & Gas also, EBITDA margins would drop only 50bp. Metals would also drag margins, as we forecast SAIL’s EBITDA to drop by 18% YoY. Excluding Metals and Oil & Gas, EBITDA would grow by 20%. Banks would report sharply ? Banks will report sharply lower margins due to lower bond gains. Though interest lower margins due to lower rates have been stable in 2QFY06, they are 100bp higher than the same period last bond gains year, resulting in significantly lower treasury gains. The main banks affected would be BoB, PNB and Corporation Bank (EBITDA decline of 9%, 10% and 8%, respectively). UTI Bank would report 5x jump in EBITDA on a depressed base of 2QFY05 (due to transfer of portfolio to HTM). Telecom and Engineering ? Telecom and Engineering will show highest EBITDA jump of 47% and 34%, respectively. would show the highest Engineering will be driven by BHEL (almost half of total sector EBITDA), which is EBITDA jump likely to report a 40% jump in EBITDA. ? Textiles EBITDA will jump by 34% due to the low base of last year and also operating leverage playing out in Arvind Mills and Alok. ? IT EBITDA will grow by 25% YoY, with stagnant margins as salary hikes eat into profitability. Cement will show EBITDA growth of 3%, with margin decline of 130bp. ? Oil & Gas margins would dip by 430bp on higher subsidy losses, and EBITDA is likely to drop by 11%. BPCL will report operating losses while HPCL would show a marginally positive EBITDA, as its larger refinery operations recoup some marketing losses. FMCG margins would ? Margins in FMCG will improve on a YoY basis and EBITDA will grow by 20% YoY as improve and EBITDA would the lower base of last year and pricing improvement of this year comes into play. Auto grow by 20% will have stagnant margins while Pharma will see a 100bp decline in margins.

SECTORAL EBITDA GROWTH - QUARTER ENDED SEPTEMBER 2005 (%)

50

40

30

20 Inquire Universe EBITDA Growth = 3.7% 10

0 IT Auto Media FMCG Banks Metals Utilities Others Pharma Cement Textiles Telecom Petchem Oil Gas & Fertilizers Engineering

Source: Motilal Oswal Securities

23 September 2005 30 MOSt Universe

Net profit to grow at 6% ? We forecast 2QFY06 net profit to grow 6% YoY — the lowest in the last four quarters. Excluding Metals and Oil & Gas (the two worst performing sectors), PAT growth would be a robust 20%. Telecom would witness the ? The strongest growth will be in Telecom, where PAT will jump by 72% YoY. Textiles fastest net profit growth in will also report 68% YoY growth, but many numbers are not comparable in this sector. our universe Fertilizers will also report a 32% PAT jump, as demand from a lean 1QFY06 spills over into 2QFY06. ? Engineering will continue its strong showing with 25% net profit jump. L&T will be the major contributor with PAT growth of 32% YoY. PAT for IT will grow by 22% YoY and 14% QoQ. Auto will recover from a lean period to grow net profit at 18%, with Hero Honda and Maruti accounting for almost half of the net profit increase. ? Banks will show a significantly improved performance with 19% jump in PAT, though on a lower base. FMCG will see a revival by increasing PAT growth to almost 21%. ? Pharma PAT will grow at 18% YoY, with all companies showing good growth except DRL, Biocon and Matrix. Net profit for Metals will drop by 8% - driven by SAIL, which will witness a 34% YoY decline. Excluding SAIL, metals profit would grow by 18% YoY, with Hindalco reporting a 34% jump. ? Oil & Gas would continue its poor run with 11% decline in profits. HPCL and BPCL will report net losses while IOC would report a 70% decline. Refiners will however, enjoy the benefits of higher refining margins, with Chennai Petro expected to double its net profit.

SECTORAL NET PROFIT GROWTH - QUARTER ENDED SEPTEMBER 2005 (%)

100

75

50 Inquire Universe Net Profit Growth = 5.7% 25

0

-25 IT Auto Media FMCG Banks Metals Utilities Others Pharma Cement Textiles Telecom Fertilizers Engineering Oil Gas & Petchem

Source: Motilal Oswal Securities

23 September 2005 31 MOSt Universe

QUARTERLY PERFORMANCE - MOST UNIVERSE SECTOR EBITDA MARGIN (%) NET PROFIT MARGIN (%) (NO. OF COMPANIES) SEP.04 SEP.05 CHG. (%) SEP.04 SEP.05 CHG. (%) Auto (10) 13.3 13.3 0.0 8.2 8.6 0.3 Banks (18) 78.3 74.2 -4.1 36.7 38.0 1.2 Cement (6) 21.6 20.3 -1.3 10.5 10.1 -0.4 Engineering (8) 7.5 8.5 1.0 5.7 6.0 0.3 FMCG (11) 21.1 22.5 1.4 14.8 16.0 1.2 IT (11) 27.2 27.0 -0.2 21.7 21.1 -0.5 Media (1) 29.6 26.5 -3.1 19.4 19.1 -0.4 Metals (5) 34.8 31.7 -3.0 22.3 18.6 -3.7 Oil Gas & Petchem (9) 13.8 9.5 -4.3 7.6 5.2 -2.4 Pharma (14) 22.6 21.5 -1.1 15.8 15.9 0.1 Telecom (1) 37.7 38.1 0.4 17.9 21.2 3.3 Fertilizers (2) 15.3 16.0 0.7 8.7 10.1 1.3 Textiles (7) 22.0 23.5 1.5 7.1 9.6 2.4 Utilities (7) 26.7 26.0 -0.7 18.8 18.1 -0.6 Others (2) 29.0 29.0 0.0 16.6 18.5 1.8 MOSt (112) 21.1 17.8 -3.3 12.3 10.6 -1.7 MOSt Excl. Banks (94) 17.6 14.6 -3.1 10.8 9.0 -1.8 MOSt Excl.Oil & Gas (103) 30.0 29.0 -1.0 17.9 17.7 -0.2 MOSt Excl. Banks & Oil (85) 23.0 22.5 -0.5 15.2 14.8 -0.4 MOSt Excl Metals & Oil (108) 29.0 28.5 -0.5 17.1 17.6 0.5 Source: Motilal Oswal Securities EBITDA MARGIN GROWTH - QUARTER ENDED SEPTEMBER 2005 (%) NET PROFIT MARGIN GROWTH - QUARTER ENDED SEPTEMBER 2005 (%)

10% 10%

Inquire Universe EBITDA Margin Growth = -330bp Inquire Universe Net Profit Margin Growth = -170bp 5% 5%

0% 0%

-5% -5% IT IT Auto Auto Media Media FMCG FMCG Banks Banks Metals Metals Utilities Utilities Oil Gas Oil Gas Others Pharma Cement Others Pharma Cement Textiles Textiles Telecom Telecom Fertilizers Fertilizers Engineering Engineering

Source: Motilal Oswal Securities

SECTORAL CONTRIBUTION TO GROWTH IN SALES, EBITDA AND NET PROFIT (%) SECTOR CONTRIBUTION SECTOR CONTRIBUTION SECTOR CONTRIBUTION TO SALES GR. TO EBITDA GR. TO NP GR. Oil Gas & Petchem (9) 69.3 Banks (18) 55.3 Banks (18) 58.4 IT (11) 5.2 IT (11) 39.9 IT (11) 32.3 Auto (10) 4.4 Telecom (1) 22.3 Telecom (1) 18.1 Banks (18) 3.9 FMCG (11) 21.5 FMCG (11) 18.0 Metals (5) 3.4 Auto (10) 17.2 Auto (10) 15.8 Engineering (8) 2.9 Utilities (7) 14.9 Pharma (14) 11.5 Utilities (7) 2.5 Engineering (8) 12.1 Utilities (7) 10.6 Pharma (14) 2.2 Pharma (14) 9.6 Engineering (8) 7.3 FMCG (11) 2.1 Textiles (7) 4.3 Others (2) 3.2 Telecom (1) 1.9 Metals (5) 3.3 Textiles (7) 3.1 Cement (6) 0.9 Others (2) 2.9 Fertilizers (2) 2.6 Textiles (7) 0.5 Fertilizers (2) 2.6 Cement (6) 1.7 Fertilizers (2) 0.4 Cement (6) 1.7 Media (1) 0.6 Others (2) 0.3 Media (1) 0.1 Metals (5) -18.0 Media (1) 0.1 Oil Gas & Petchem (9) -107.7 Oil Gas & Petchem (9) -65.2 Source: Motilal Oswal Securities

23 September 2005 32 MOSt Universe

Scoreboard (quarter ended September 2005)

TOP 10 BY SALES GROWTH (%) WORST 10 BY SALES GROWTH (%)

100% 10%

75% 0%

50% -10%

25% -20%

0% -30% BoI IOC JHPL ABB CESC BPCL Tata Tea PTC India Siemens UTI Bank Thermax Kar. Bank Birla Corp. ICICI Bank Tata Power Vijaya Bank Bharti Tele. Welspun Ind Chennai Pet. Eicher Motors

TOP 10 BY EBITDA GROWTH (%) WORST 10 BY EBITDA GROWTH (%)

480% 0% -50% 360% -100% 240% -150% 120% -200%

0% -250% IOC i-flex Lupin Pfizer SAIL BPCL HPCL Bank Eicher Motors Grasim Andhra UTI Bank PTC India Aurobindo Birla Corp. Datamatics Dr Reddy ’ s Welspun Ind Chennai Pet. Pun.Tractors Bongaigaon

TOP 10 BY NET PROFIT GROWTH (%) WORST 10 BY NET PROFIT GROWTH (%)

800% 0%

600% -75%

400% -150%

200% -225%

0% -300% BoI IOC i-flex SAIL Bank Corp. Lupin Mills Bank BPCL HPCL Tata Pet. Union Matrix Bank Arvind Power Grasim Soft. Oriental Chennai UTI Bank J&K Bank Syn. Bank Aurobindo Geometric

Source: Motilal Oswal Securities

23 September 2005 33 THIS SPACE IS INTENTIONALLY LEFT BLANK

Note: In our quarterly performance tables, our four-quarter numbers may not always add up to the full-year numbers. This is because of differences in classification of account heads in the company’s quarterly and annual results or because of differences in the way we classify account heads as opposed to the company.

23 September 2005 34 MOSt Universe

Ready reckoner: valuations

CMP (RS) RECO EPS (RS) P/E (X) EV/EBITDA ROE (%) 23.9.05 FY05A FY06E FY07E FY05A FY06E FY07E FY05A FY06E FY07E FY05A FY06E FY07E Automobiles Ashok Leyland 27 Neutral 1.9 2.2 2.5 14.1 12.5 10.7 7.3 6.3 5.4 21.8 21.2 23.1 Bajaj Auto 1,611 Buy 75.8 90.8 107.6 21.3 17.7 15.0 14.1 11.2 9.2 18.5 19.6 20.4 Bharat Forge 322 Buy 8.2 11.3 14.8 39.4 28.4 21.8 20.6 14.4 11.0 36.5 35.4 32.4 Eicher Motors 282 UR 21.0 24.1 30.6 13.4 11.7 9.2 7.3 5.0 4.1 22.1 18.1 19.9 Hero Honda 700 Buy 40.6 47.6 54.7 17.2 14.7 12.8 10.4 8.9 7.6 54.3 48.8 45.0 Mahindra & Mahindra 351 Buy 21.0 24.2 26.9 16.7 14.5 13.0 10.4 7.7 6.7 23.7 24.7 24.3 Maruti Udyog 550 Buy 29.5 37.4 41.6 18.6 14.7 13.2 8.8 7.8 6.9 19.5 20.1 18.7 Punjab Tractors 192 Neutral 10.3 14.6 17.8 18.5 13.1 10.8 10.2 5.6 4.9 12.4 15.0 17.0 Swaraj Mazda 365 Buy 23.1 28.5 33.3 15.8 12.8 11.0 8.5 7.0 6.1 43.1 40.3 35.8 Tata Motors 511 Neutral 32.2 36.6 40.5 15.9 14.0 12.6 7.4 6.1 5.4 30.3 28.2 26.3 Sector Aggregate 17.9 15.0 13.1 9.8 8.0 6.9 25.4 25.2 24.5 Cement ACC 463 Neutral 20.3 27.7 33.8 22.8 16.7 13.7 16.2 10.9 8.5 24.0 25.5 26.1 Birla Corporation 240 Buy 11.3 17.3 28.0 21.3 13.9 8.6 15.4 8.1 4.8 27.8 31.7 36.4 Grasim Industries 1,339 Neutral 105.3 102.1 125.4 12.7 13.1 10.7 6.9 7.0 5.8 22.2 18.3 19.3 Gujarat Ambuja 69 Buy 3.5 5.0 6.1 20.1 14.0 11.3 12.1 8.9 6.8 22.4 28.5 29.8 Shree Cement 452 Buy 29.0 42.8 48.5 15.6 10.6 9.3 10.5 8.3 6.1 37.4 42.1 34.2 UltraTech Cemco 463 Neutral 4.6 17.0 30.5 100.2 27.1 15.2 18.7 11.0 7.5 5.8 20.4 29.7 Sector Aggregate 19.6 15.9 12.4 11.4 9.0 6.8 20.6 21.8 23.6 Engineering ABB 1,711 Neutral 35.8 49.1 67.5 47.7 34.8 25.3 31.6 23.3 16.2 22.9 25.7 28.3 Alstom Projects 190 Neutral 5.2 7.0 8.8 36.3 27.0 21.5 31.2 24.2 17.2 12.5 16.4 19.7 BHEL 1,101 Buy 39.4 53.3 72.1 27.9 20.6 15.3 14.3 11.2 8.0 17.1 19.9 22.7 Crompton Greaves 586 Buy 27.6 40.3 50.7 21.2 14.5 11.6 18.8 13.9 10.9 38.9 37.7 35.3 Cummins India 141 Neutral 6.7 8.1 9.8 20.9 17.3 14.4 17.8 11.2 9.4 17.9 20.4 22.6 Larsen & Toubro 1,372 Buy 49.3 70.6 91.6 27.8 19.4 15.0 20.8 15.7 12.5 19.2 22.6 26.0 Siemens 2,410 Buy 47.1 84.1 112.8 51.2 28.7 21.4 27.2 17.7 12.9 24.6 36.4 39.6 Thermax 800 Buy 28.2 46.0 67.8 28.4 17.4 11.8 14.9 11.3 7.1 15.4 22.9 29.6 Sector Aggregate 30.1 20.8 15.7 18.5 14.0 10.4 19.4 24.2 27.3 Fertilizers Coromondal 239 Buy 21.3 26.5 31.3 11.2 9.0 7.6 5.9 4.6 3.7 14.0 15.9 16.9 Tata Chemicals 187 Buy 12.7 16.0 18.6 14.7 11.7 10.0 8.1 6.6 5.6 15.4 17.5 18.3 Sector Aggregate 14.2 11.3 9.7 7.7 6.2 5.3 15.2 17.3 18.1 FMCG Asian Paints 482 Buy 18.4 22.1 26.3 26.2 21.8 18.3 15.1 12.9 10.8 30.8 32.2 33.0 Britannia 1,200 Buy 71.4 66.1 76.2 16.8 18.2 15.8 13.7 11.2 9.3 38.5 27.8 25.6 Colgate 240 Buy 8.9 11.0 13.8 27.1 21.8 17.4 17.5 14.2 11.8 46.7 54.0 61.6 Dabur 151 Buy 5.4 7.5 8.3 27.7 20.1 18.2 20.2 15.7 14.2 42.8 43.1 36.4 Godrej Consumer 445 Buy 14.7 19.2 22.9 30.4 23.4 19.6 25.1 19.4 16.4 166.4 266.4 213.4 GSK 476 Buy 16.1 24.6 29.0 27.5 19.3 16.4 12.8 10.4 8.3 13.8 26.7 24.1 HLL 170 Neutral 5.4 6.0 6.9 31.6 28.6 24.5 25.0 23.4 20.0 56.6 61.0 66.6 ITC 138 Buy 4.9 6.2 7.3 28.1 22.3 18.9 16.9 13.1 10.7 23.8 25.3 25.4 Marico Industries 282 Buy 11.9 14.8 20.1 23.4 18.9 14.0 17.8 14.2 10.4 31.7 32.3 34.7 Nestle 870 Neutral 29.1 38.0 43.6 29.8 22.9 20.0 18.2 14.2 12.3 88.0 97.2 96.3 Tata Tea 846 Buy 45.6 53.7 61.5 18.5 15.7 13.7 10.8 9.3 8.2 17.2 17.4 17.3 Sector Aggregate 28.0 23.2 19.8 18.3 15.1 12.6 31.3 33.1 33.2

PULL OUT

23 September 2005 35 MOSt Universe

Ready reckoner: valuations

CMP (RS) RECO EPS (RS) P/E (X) EV/EBITDA ROE (%) 23.9.05 FY05A FY06E FY07E FY05A FY06E FY07E FY05A FY06E FY07E FY05A FY06E FY07E Information Technology Datamatics Technolgies 100 Buy 6.1 7.1 11.8 16.4 14.1 8.5 13.7 9.0 4.5 21.5 16.7 25.0 Geometric Software 115 Buy 4.9 6.5 9.4 20.6 14.5 10.1 13.8 10.3 6.3 29.5 33.3 36.9 HCL Technologies 447 Buy 19.3 25.0 30.1 23.1 18.1 14.1 15.9 11.9 9.3 17.8 19.9 23.8 Hexaware 103 Sell 5.3 7.1 7.6 19.3 13.8 12.3 14.8 9.7 7.8 26.3 28.6 24.4 i flex solutions 940 Buy 26.5 29.4 46.7 36.2 32.0 20.1 24.4 20.4 15.3 21.9 21.7 27.9 Infosys 2,400 Buy 69.0 94.6 118.7 34.9 25.0 19.5 26.4 18.6 13.7 53.2 50.0 41.8 Mphasis BFL 243 Buy 16.4 19.6 23.8 15.3 12.1 10.0 12.9 8.6 5.9 39.4 39.9 31.4 Patni Computer 416 Buy 20.6 25.6 31.8 19.9 16.2 13.1 12.9 10.2 8.7 25.0 22.1 22.6 Satyam Computer 521 Buy 23.7 29.8 37.9 22.2 17.3 13.5 16.1 11.5 8.8 26.4 27.3 28.2 TCS 1,411 Buy 49.2 57.2 69.4 28.7 24.4 20.1 23.6 19.0 15.3 82.8 59.0 47.4 Wipro 357 Buy 11.3 13.6 17.3 31.5 26.1 19.9 24.3 19.3 13.8 30.9 28.9 28.5 Sector Aggregate 29.2 23.2 18.2 22.5 17.1 13.0 38.4 36.0 34.1 Media Zee Telefilms 180 Neutral 7.2 7.7 8.6 25.0 23.4 20.8 19.0 17.7 15.4 23.1 20.4 19.3 Metals Hindalco 146 Buy 13.8 17.2 17.9 10.5 8.5 8.2 7.3 6.0 5.7 17.6 19.4 18.0 Jindal Steel & Power 1,363 Buy 167.4 216.7 239.9 8.1 6.3 5.7 6.1 4.4 4.1 38.6 33.9 27.6 Nalco 168 Buy 19.0 19.6 20.1 8.9 8.5 8.4 4.8 4.4 4.0 27.8 25.9 22.6 SAIL 62 Neutral 16.7 11.4 6.1 3.7 5.5 10.1 2.5 2.8 4.3 66.9 34.0 16.1 Tisco 403 Buy 63.8 79.9 60.3 6.3 5.0 6.7 4.1 2.9 3.9 51.6 42.7 26.2 Sector Aggregate 14.9 15.7 20.7 9.4 9.2 11.8 44.7 32.2 20.8 Oil & Gas Bongaigaon 78 Neutral 23.9 32.8 31.3 3.3 2.4 2.5 5.8 2.7 1.1 69.5 62.4 42.0 BPCL 399 Buy 51.4 46.6 64.5 7.8 8.6 6.2 4.5 4.5 3.1 21.6 17.2 21.4 Chennai Petroleum 243 Buy 40.1 61.7 50.3 6.1 3.9 4.8 4.6 2.6 2.4 33.0 39.3 25.7 GAIL 250 UR 23.0 21.9 20.4 10.8 11.4 12.2 5.9 6.5 6.0 23.9 19.9 16.6 HPCL 307 Buy 37.7 37.3 52.0 8.1 8.2 5.9 5.5 4.6 2.9 15.8 14.4 18.3 IOC 440 Buy 46.8 53.6 72.1 9.4 8.2 6.1 6.6 5.5 3.8 20.5 19.2 21.1 IPCL 207 Buy 31.6 33.3 36.3 6.6 6.2 5.7 3.7 3.2 2.3 30.3 25.2 22.2 ONGC 990 Buy 100.6 144.9 159.1 9.8 6.8 6.2 5.0 3.7 3.4 32.4 38.3 33.6 Reliance 748 Buy 54.3 66.2 64.9 13.8 11.3 11.5 9.4 7.9 7.5 20.2 20.7 17.3 Sector Aggregate 10.3 8.1 7.3 6.3 5.0 4.1 24.8 26.2 24.2 Pharmaceuticals Aurobindo Pharma 346 Sell 2.1 13.1 26.0 164.7 26.3 13.3 22.7 11.3 7.9 1.4 8.1 13.8 Aventis Pharma 1,343 Buy 62.5 73.3 85.2 21.5 18.3 15.8 13.7 11.5 9.4 35.6 33.1 30.3 Biocon 458 Buy 19.8 22.6 28.6 23.2 20.3 16.0 19.7 16.2 12.3 26.7 24.7 25.1 Cipla 347 Neutral 13.7 16.2 18.2 25.4 21.5 19.0 21.0 16.7 14.4 26.5 25.6 23.9 Dr Reddy’ s Labs 780 Buy 2.6 24.6 31.4 298.2 31.7 24.9 112.0 26.3 20.6 0.9 8.2 9.6 GSK Pharma 844 Buy 30.5 35.8 42.9 27.7 23.6 19.7 17.0 15.3 12.4 28.8 29.0 29.0 Jubiliant Organosys 998 Buy 41.1 51.0 77.2 24.3 19.6 12.9 13.4 10.7 7.5 28.0 23.5 28.2 Lupin 754 Buy 22.9 50.5 61.0 32.9 14.9 12.4 25.8 11.9 9.8 20.0 35.8 33.2 Matrix 183 Buy 8.4 8.4 11.7 21.7 21.7 15.7 15.1 11.8 8.3 30.6 17.7 20.2 Nicholas Piramal 284 Buy 4.9 10.6 19.1 58.3 26.8 14.8 32.2 17.1 11.5 20.4 30.6 37.1 Pfizer 780 Neutral 19.2 32.0 42.7 40.7 24.4 18.2 23.9 14.1 10.4 16.7 24.5 28.1 Ranbaxy Labs 494 Sell 19.6 16.4 21.1 25.2 30.1 23.4 19.4 20.5 16.1 29.1 21.5 24.0 Sun Pharma 643 Buy 22.0 27.0 32.6 29.2 23.8 19.7 25.8 21.4 17.1 40.6 39.6 36.1 Wockhardt 488 Buy 20.5 22.6 26.8 23.8 21.5 18.2 19.5 15.6 12.5 41.5 37.8 34.1 Sector Aggregate 29.4 23.1 18.0 21.4 16.7 13.0 23.0 23.7 25.1

PULL OUT

23 September 2005 36 MOSt Universe

Ready reckoner: valuations

CMP (RS) RECO EPS (RS) P/E (X) EV/EBITDA ROE (%) 23.9.05 FY05A FY06E FY07E FY05A FY06E FY07E FY05A FY06E FY07E FY05A FY06E FY07E Telecom Bharti Tele-Ventures 339 Buy 7.8 13.6 20.2 44.1 24.9 16.8 22.6 15.2 10.7 24.3 31.8 34.2 Textiles Alok Ind 76 Neutral 6.8 5.4 9.6 11.2 14.1 7.9 11.3 8.7 5.5 12.9 9.6 15.4 Arvind Mills 132 Buy 6.1 10.4 11.4 21.6 12.6 11.6 11.6 8.4 7.1 9.8 13.4 13.2 Gokaldas Exports 502 Buy 28.3 31.6 42.2 17.7 15.9 11.9 15.9 11.3 8.9 27.8 19.4 0.8 Himatsingka Seide 536 Neutral 23.3 27.9 32.7 22.9 19.2 16.4 15.7 13.0 10.4 14.9 16.3 17.2 Raymond 388 Buy 14.9 23.7 32.4 26.0 16.4 12.0 14.5 9.5 7.4 7.8 11.4 13.9 Vardhman Textiles 290 Buy 31.4 28.3 32.6 9.3 10.3 8.9 8.0 6.9 6.1 15.3 16.2 16.5 Welspun Ind 126 Neutral 4.7 7.7 13.2 26.6 16.4 9.5 17.4 10.3 7.4 0.0 1.2 1.2 Sector Aggregate 20.8 14.7 12.7 11.9 8.8 6.8 10.9 12.1 12.6 Utilities CESC 220 Buy 17.0 17.6 18.2 12.9 12.5 12.1 5.6 5.0 4.6 9.1 7.9 7.5 JHPL 30 Neutral 1.0 1.5 1.5 29.3 20.5 19.7 9.0 8.3 8.7 9.7 13.3 12.9 Neyveli Lignite Corp 80 Buy 5.8 5.9 6.4 13.7 13.5 12.5 7.5 6.0 5.6 13.5 12.5 12.4 NTPC 102 Neutral 5.8 6.4 7.3 17.6 16.1 14.1 8.9 8.4 7.8 12.4 12.1 12.8 PTC India 46 Buy 1.6 2.1 2.4 28.5 22.0 18.9 19.0 21.1 13.9 11.5 13.7 14.4 Reliance Energy 543 Buy 27.7 29.7 34.4 19.6 18.3 15.8 14.9 12.0 9.3 11.1 10.0 8.9 Tata Power 430 Buy 19.8 26.0 29.2 21.7 16.6 14.7 10.8 12.9 9.8 8.1 9.8 10.4 Sector Aggregate 17.6 15.9 14.0 9.0 8.4 7.7 12.2 11.9 12.3 Others Concor 1,298 Buy 66.0 76.9 87.7 19.7 16.9 14.8 12.6 10.8 9.2 27.9 26.5 24.9 United Phosphorous 191 Buy 9.3 12.7 16.4 20.5 15.0 11.7 10.2 7.9 6.0 23.2 22.7 23.3 Sector Aggregate 19.8 16.1 13.6 11.7 9.7 7.9 26.5 25.2 24.3

CMP (RS) RECO EPS (RS) P/E (X) P/BV (X) ROE (%) 23.9.05 FY05A FY06E FY07E FY05A FY06E FY07E FY05A FY06E FY07E FY05A FY06E FY07E Banks Andhra Bank 97 Buy 13.0 14.3 16.2 7.5 6.7 6.0 2.1 1.7 1.4 31.6 28.2 25.8 Bank of Baroda 225 Buy 23.0 28.6 35.7 9.8 7.9 6.3 1.2 1.1 1.0 12.6 14.3 16.6 Bank of India 114 Buy 7.0 16.2 19.0 16.4 7.0 6.0 1.3 1.1 1.0 8.0 16.6 16.9 Canara Bank 229 Buy -17.1 26.5 21.0 8.5 6.7 5.5 1.6 1.3 1.1 19.5 21.0 21.4 Corporation Bank 392 Sell 28.0 39.3 45.6 14.0 10.0 8.6 1.8 1.6 1.4 13.8 17.2 17.3 HDFC 956 Buy 41.6 50.8 62.0 23.0 18.8 15.4 6.1 5.1 4.2 28.5 29.6 30.0 HDFC Bank 670 Neutral 21.5 28.5 37.7 31.2 23.5 17.8 4.6 4.0 3.3 18.5 18.1 20.3 ICICI Bank 576 Neutral 27.2 33.3 40.5 21.2 17.3 14.2 3.4 2.9 2.5 19.5 18.1 19.1 Indian Overseas Bank 87 Buy 12.0 14.1 16.2 7.3 6.2 5.4 1.9 1.6 1.3 28.0 26.7 24.9 J&K Bank 437 Buy 23.7 58.8 74.0 18.4 7.4 5.9 1.3 1.1 1.0 7.1 16.7 17.2 Karnataka Bank 112 Buy 12.1 14.7 17.8 9.2 7.6 6.3 1.4 1.2 1.1 17.6 17.0 18.0 Oriental Bank 259 Buy 39.5 30.8 41.0 6.6 8.4 6.3 1.5 1.3 1.1 25.3 25.4 24.5 Punjab National Bank 428 Buy 44.7 53.5 63.1 9.6 8.0 6.8 1.7 1.4 1.2 21.4 19.0 19.0 State Bank 890 Buy 81.8 97.1 115.8 10.9 9.2 7.7 1.9 1.6 1.4 19.4 19.5 19.6 Syndicate Bank 82 Buy 8.5 12.2 14.6 9.6 6.7 5.6 1.9 1.5 1.3 18.3 21.4 21.1 Union Bank 126 Buy 15.6 18.5 23.7 8.1 6.2 4.2 1.8 1.4 1.2 21.5 21.8 25.4 UTI Bank 266 Buy 12.0 16.5 20.6 22.1 16.1 12.9 3.1 2.7 2.3 18.9 17.7 19.0 Vijaya Bank 60 Buy 8.8 9.1 12.4 6.9 6.6 4.9 1.6 1.4 1.2 26.0 23.0 26.1 Sector Aggregate 13.3 10.5 8.6 2.6 2.1 1.8 19.3 19.9 20.6

PULL OUT

23 September 2005 37 MOSt Universe

Ready reckoner: quarterly performance

CMP (RS) RECO SALES EBITDA NET PROFIT 23.9.05 SEP.04 SEP.05 CHG. (%) SEP.04 SEP.05 CHG. (%) SEP.04 SEP.05 CHG. (%) Automobiles Ashok Leyland 27 Neutral 9,147 11,122 21.6 748 1,112 48.7 454 615 35.4 Bajaj Auto 1,611 Buy 14,483 17,230 19.0 2,435 2,705 11.1 2,130 2,256 5.9 Bharat Forge 322 Buy 2,902 3,745 29.1 810 1,032 27.3 378 528 39.6 Eicher Motors 282 UR 4,460 4,166 -6.6 307 271 -11.8 103 146 41.8 Hero Honda 700 Buy 17,572 21,402 21.8 2,749 3,253 18.3 1,944 2,347 20.7 Mahindra & Mahindra 351 Buy 15,544 16,976 9.2 1,875 1,969 5.0 1,252 1,224 -2.2 Maruti Udyog 550 Buy 27,117 29,853 10.1 3,678 4,237 15.2 1,836 2,597 41.4 Punjab Tractors 192 Neutral 1,897 2,233 17.7 180 301 67.5 108 166 53.4 Swaraj Mazda 365 Buy 1,392 1,475 6.0 115 119 3.9 65 66 1.7 Tata Motors 511 Neutral 41,471 46,953 13.2 5,200 5,634 8.4 2,913 3,344 14.8 Sector Aggregate 135,983 155,154 14.1 18,097 20,634 14.0 11,184 13,289 18.8 Cement ACC 463 Neutral 8,812 9,957 13.0 1,499 1,736 15.8 606 815 34.5 Birla Corporation 240 Buy 2,769 2,688 -2.9 208 345 65.9 134 166 23.8 Grasim Industries 1,339 Neutral 15,282 16,538 8.2 3,970 3,467 -12.7 2,164 1,802 -16.7 Gujarat Ambuja 69 Buy 5,994 6,487 8.2 1,672 1,870 11.9 905 1,149 27.0 Shree Cement 452 Buy 1,401 1,568 12.0 392 492 25.5 227 277 21.8 UltraTech Cemco 463 Neutral 5,878 6,788 15.5 943 1,026 8.8 167 224 33.7 Sector Aggregate 40,135 44,025 9.7 8,683 8,936 2.9 4,203 4,432 5.4 Engineering ABB 1,711 Neutral 5,595 7,273 30.0 401 557 39.0 335 435 30.1 Alstom Projects 190 Neutral 1,899 2,203 16.0 53 85 60.4 63 78 24.3 BHEL 1,101 Buy 17,293 19,887 15.0 2,223 3,109 39.9 1,583 1,853 17.1 Crompton Greaves 586 Buy 4,530 5,074 12.0 395 493 24.8 249 334 33.9 Cummins India 141 Neutral 2,968 3,502 18.0 339 387 14.0 295 340 15.2 Larsen & Toubro 1,372 Buy 29,643 33,351 12.5 980 1,191 21.6 757 996 31.5 Siemens 2,410 Buy 5,761 8,324 44.5 633 912 44.2 572 744 30.0 Thermax 800 Buy 2,198 2,967 35.0 196 267 36.2 129 179 38.6 Sector Aggregate 69,886 82,580 18.2 5,218 7,000 34.1 3,984 4,960 24.5 Fertilizers Coromondal 239 Buy 4,849 5,431 12.0 452 489 8.1 183 275 50.3 Tata Chemicals 187 Buy 7,290 8,530 17.0 1,404 1,749 24.5 877 1,129 28.7 Sector Aggregate 12,139 13,960 15.0 1,856 2,237 20.5 1,060 1,403 32.4 FMCG Asian Paints 482 Buy 5,344 5,932 11.0 810 902 11.3 492 566 15.1 Britannia 1,200 Buy 4,271 4,399 3.0 555 594 7.0 519 451 -13.0 Colgate 240 Buy 2,457 2,703 10.0 442 513 16.1 270 351 30.2 Dabur 151 Buy 3,710 4,489 21.0 599 741 23.7 444 585 31.8 Godrej Consumer 445 Buy 1,342 1,530 14.0 217 277 27.9 174 227 30.4 GSK 476 Buy 2,349 2,631 12.0 420 474 12.8 225 279 24.2 HLL 170 Neutral 24,011 26,892 12.0 3,386 4,034 19.1 2,824 3,401 20.4 ITC 138 Buy 17,379 20,680 19.0 6,979 8,686 24.4 4,857 5,939 22.3 Marico Industries 282 Buy 2,555 2,836 11.0 210 250 19.0 163 207 27.4 Nestle 870 Neutral 5,962 6,558 10.0 1,131 1,377 21.8 643 876 36.2 Tata Tea 846 Buy 7,561 7,636 1.0 1,450 1,527 5.3 761 884 16.1 Sector Aggregate 76,940 86,287 12.1 16,199 19,374 19.6 11,372 13,766 21.1

PULL OUT

23 September 2005 38 MOSt Universe

Ready reckoner: quarterly performance

CMP (RS) RECO SALES EBITDA NET PROFIT 23.9.05 SEP.04 SEP.05 CHG. (%) SEP.04 SEP.05 CHG. (%) SEP.04 SEP.05 CHG. (%) Media Zee Telefilms 180 Neutral 3,479 3,942 13.3 1,031 1,045 1.4 677 752 11.1 Metals Hindalco 146 Buy 20,460 26,135 27.7 4,409 6,120 38.8 2,629 3,749 42.6 Jindal Steel & Power 1,363 Buy 5,877 6,857 16.7 2,034 2,606 28.1 1,332 1,447 8.6 Nalco 168 Buy 9,769 11,254 15.2 5,112 5,601 9.6 2,755 3,066 11.3 SAIL 62 Neutral 67,041 69,635 3.9 21,004 17,275 -17.8 15,132 9,980 -34.0 Tisco 403 Buy 37,383 41,641 11.4 16,289 17,731 8.9 9,460 10,673 12.8 Sector Aggregate 140,530 155,522 10.7 48,847 49,333 1.0 31,308 28,915 -7.6 Oil & Gas Bongaigaon 78 Neutral 12,593 14,185 12.6 2,376 1,425 -40.0 1,609 2,272 41.2 BPCL 399 Buy 147,764 219,453 48.5 4,706 -4,483 -195.3 3,214 -5,593 -274.0 Chennai Petroleum 243 Buy 32,585 63,525 95.0 2,881 4,843 68.1 1,278 2,737 114.2 GAIL 250 UR 35,244 37,191 5.5 8,780 8,100 -7.7 4,562 5,231 14.7 HPCL 307 Buy 150,954 195,029 29.2 6,129 378 -93.8 2,943 -1,072 -136.4 IOC 440 Buy 354,846 465,799 31.3 18,616 8,415 -54.8 12,395 3,767 -69.6 IPCL 207 Buy 18,190 21,080 15.9 3,690 3,850 4.3 1,380 1,975 43.1 ONGC 990 Buy 118,162 123,882 4.8 63,587 65,621 3.2 33,839 36,840 8.9 Reliance 748 Buy 161,640 194,300 20.2 31,700 38,400 21.1 17,520 23,901 36.4 Sector Aggregate 1,031,977 1,334,443 29.3 142,466 126,549 -11.2 78,739 70,056 -11.0 Pharmaceuticals Aurobindo Pharma 346 Sell 2,693 3,157 17.2 247 474 91.8 34 162 369.2 Aventis Pharma 1,343 Buy 1,875 2,103 12.2 618 719 16.4 425 501 17.9 Biocon 458 Buy 1,861 2,271 22.0 616 668 8.5 562 556 -1.2 Cipla 347 Neutral 5,814 6,636 14.1 1,319 1,446 9.6 959 1,126 17.5 Dr Reddy’ s Labs 780 Buy 5,400 5,646 4.6 604 531 -12.1 516 510 -1.1 GSK Pharma 844 Buy 3,736 4,246 13.6 1,180 1,264 7.1 791 935 18.2 Jubiliant Organosys 998 Buy 2,919 3,680 26.1 587 580 -1.2 311 332 6.8 Lupin 754 Buy 3,164 3,496 10.5 325 758 133.6 175 551 215.0 Matrix 183 Buy 1,625 1,945 19.7 531 479 -9.9 420 261 -37.9 Nicholas Piramal 284 Buy 3,791 4,440 17.1 857 1,184 38.1 580 788 35.8 Pfizer 780 Neutral 1,470 1,695 15.3 234 461 97.1 155 291 87.4 Ranbaxy Labs 494 Sell 13,614 16,771 23.2 3,125 3,012 -3.6 2,001 2,080 3.9 Sun Pharma 643 Buy 2,807 3,469 23.6 1,167 1,130 -3.2 1,031 1,222 18.5 Wockhardt 488 Buy 3,175 3,780 19.0 800 929 16.1 558 739 32.4 Sector Aggregate 53,944 63,336 17.4 12,210 13,634 11.7 8,519 10,053 18.0 Telecom Bharti Tele-Ventures 339 Buy 18,598 27,074 45.6 7,012 10,315 47.1 3,337 5,746 72.2 Textiles Alok Ind 76 Neutral 2,804 3,468 23.7 536 712 32.7 206 262 27.4 Arvind Mills 132 Buy 4,238 4,855 14.6 914 1,226 34.1 202 501 148.0 Gokaldas Exports 502 Buy - 2,464 - - 208 - - 149 - Himatsingka Seide 536 Neutral 346 362 4.6 153 150 -2.1 107 117 9.2 Raymond 388 Buy - 4,259 - - 651 - - 371 - Vardhman Textiles 290 Buy - 4,158 - - 764 - - 269 - Welspun Ind 126 Neutral 996 1,871 87.8 244 394 61.4 84 130 54.5 Sector Aggregate 8,385 10,556 25.9 1,848 2,482 34.3 598 1,009 68.7

PULL OUT

23 September 2005 39 MOSt Universe

Ready reckoner: quarterly performance

CMP (RS) RECO SALES EBITDA NET PROFIT 23.9.05 SEP.04 SEP.05 CHG. (%) SEP.04 SEP.05 CHG. (%) SEP.04 SEP.05 CHG. (%) Utilities CESC 220 Buy 5,810 5,870 1.0 1,680 1,644 -2.2 520 529 1.7 JHPL 30 Neutral 0 1,449 0.0 0 1,315 0.0 0 465 0.0 Neyveli Lignite Corporation 80 Buy 7,591 7,952 4.8 4,402 4,612 4.8 2,541 2,559 0.7 NTPC 102 Neutral 52,497 63,154 20.3 13,807 15,534 12.5 10,940 12,317 12.6 PTC India 46 Buy 5,934 4,500 -24.2 93 72 -22.9 54 59 9.4 Reliance Energy 543 Buy 7,917 9,125 15.3 1,626 1,912 17.6 1,282 1,623 26.6 Tata Power 430 Buy 9,404 9,500 1.0 2,206 2,250 2.0 1,415 1,080 -23.7 Sector Aggregate 89,153 100,101 12.3 23,814 26,024 9.3 16,752 18,167 8.4 Others Concor 1,298 Buy 4,908 5,644 15.0 1,643 1,772 7.9 1,127 1,279 13.5 United Phosphorous 191 Buy 3,742 4,457 19.1 864 1,157 33.9 312 586 87.7 Sector Aggregate 8,649 10,101 16.8 2,507 2,929 16.8 1,440 1,866 29.6

CMP (RS) RECO SALES EBITDA NET PROFIT 23.9.05 JUN.05 SEP.05 CHG. (%) JUN.05 SEP.05 CHG. (%) JUN.05 SEP.05 CHG. (%) Information Technology Datamatics Technolgies 100 Buy 333 398 19.6 31 56 81.5 32 59 84.2 Geometric Software 115 Buy 486 543 11.7 83 110 32.5 78 54 -30.7 HCL Technologies 447 Buy 9,276 9,840 6.1 2,111 2,298 8.9 1,620 1,763 8.8 Hexaware 103 Sell 1,650 1,754 6.3 248 303 22.3 195 245 25.9 i flex solutions 940 Buy 2,701 3,222 19.3 135 701 418.9 59 487 730.4 Infosys 2,400 Buy 20,716 22,829 10.2 6,638 7,453 12.3 5,321 5,908 11.0 Mphasis BFL 243 Buy 2,197 2,274 3.5 391 441 12.7 337 410 21.7 Patni Computer 416 Buy 4,730 4,970 5.1 816 1,146 40.5 621 885 42.5 Satyam Computer 521 Buy 10,587 11,116 5.0 2,407 2,745 14.0 1,902 2,230 17.2 TCS 1,411 Buy 27,094 29,006 7.1 7,958 8,545 7.4 6,187 6,709 8.4 Wipro 357 Buy 22,865 25,148 10.0 5,451 6,181 13.4 4,268 4,745 11.2 Sector Aggregate 102,635 111,100 8.2 26,269 29,980 14.1 20,619 23,495 13.9

CMP (RS) RECO NET INT INCOME OPERATING PROFIT NET PROFIT 23.9.05 SEP.04 SEP.05 CHG. (%) SEP.04 SEP.05 CHG. (%) SEP.04 SEP.05 CHG. (%) Banks Andhra Bank 97 Buy 2,733 2,860 4.6 3,402 2,210 -35.1 1,093 1,310 19.8 Bank of Baroda 225 Buy 6,883 7,743 12.5 5,499 4,993 -9.2 2,133 2,443 14.5 Bank of India 114 Buy 5,957 6,044 1.5 3,912 4,150 6.1 495 1,650 233.0 Canara Bank 229 Buy 7,292 8,587 17.8 5,748 6,087 5.9 3,968 3,987 0.5 Corporation Bank 392 Sell 2,879 3,050 6.0 2,407 2,209 -8.2 274 1,109 304.7 HDFC 956 Buy 3,579 4,271 19.3 3,152 3,755 19.2 2,481 3,035 22.3 HDFC Bank 670 Neutral 4,256 5,479 28.7 3,010 4,194 39.3 1,523 2,003 31.5 ICICI Bank 576 Neutral 6,852 8,992 31.2 7,518 10,092 34.2 4,421 5,394 22.0 Indian Overseas Bank 87 Buy 4,653 5,034 8.2 3,180 3,734 17.4 1,583 1,884 19.0 J&K Bank 437 Buy 1,545 1,625 5.2 760 1,075 41.4 252 675 168.4 Karnataka Bank 112 Buy 947 954 0.8 783 774 -1.2 313 424 35.5 Oriental Bank of Commerce 259 Buy 3,862 4,313 11.7 2,865 3,063 6.9 2,149 1,563 -27.3 Punjab National Bank 428 Buy 9,696 11,330 16.8 8,349 7,530 -9.8 4,127 4,391 6.4 State Bank 890 Buy 33,798 39,133 15.8 26,049 28,183 8.2 10,819 12,783 18.2 Syndicate Bank 82 Buy 4,215 4,950 17.4 2,558 2,950 15.3 756 1,450 91.8 Union Bank 126 Buy 4,568 5,600 22.6 3,085 3,870 25.4 2,107 1,170 -44.5 UTI Bank 266 Buy 1,807 2,451 35.6 384 1,951 408.1 462 1,054 128.1 Vijaya Bank 60 Buy 2,437 2,499 2.5 1,883 1,904 1.2 714 1,124 57.5 Sector Aggregate 107,958 124,915 15.7 84,545 92,723 9.7 39,670 47,448 19.6

PULL OUT

23 September 2005 40 Results Preview

QUARTER ENDING SEPTEMBER 2005

Automobiles

BSE Sensex: 8,223 S&P CNX: 2,478 23 September 2005

COMPANY NAME PG. The auto sector is likely to witness a mixed performance in 2QFY06. Two wheelers are Ashok Leyland 49 expected to witness 11% YoY volume growth, while passenger vehicles will grow by 6% YoY. We expect commercial vehicle (CV) volumes for the quarter to grow by 13%, led Bajaj Auto 50 by strong LCV sales.

Bharat Forge 51 We expect two wheelers to continue the strong growth momentum and believe that four wheelers would slow down markedly in FY06. We continue to remain positive on the Eicher Motors 52 growth drivers across various segments and maintain our overweight stance on the automobile sector. Hero Honda 53

Mahindra & Mahindra 54 Two-wheelers: Gearing for the festive season The two-wheeler industry, after a strong 1QFY06 growth of 19%, is expected to witness Maruti Udyog 55 a slower 2QFY06 growth at 11%. Motorcycles will continue to be the key growth driver with a 16% growth in volumes. Scooter sales would be negative due to the strike at Punjab Tractors 56 HMSI in the month of July and moped sales would remain flat.

Swaraj Mazda 57 2QFY06 will be affected by supply chain issues and heavy floods in Western India in the month of July. Both Hero Honda and Bajaj Auto, which had been affected due to supply Tata Motors 58 shortages in July 2005, have been able to remove production bottlenecks and increase production for the festive season ahead. Hence, we expect a strong 3QFY06 ahead as the festive months are expected to witness strong demand. We expect two wheelers to witness a growth of 12% YoY in FY06, with motorcycles growing at 18% YoY.

EXPECTED QUARTERLY PERFORMANCE SUMMARY (RS MILLION) RECO SALES EBITDA NET PROFIT

SEP.05 CHG. (%) SEP.05 CHG. (%) SEP.05 CHG. (%) Automobiles Ashok Leyland Neutral 11,122 21.6 1,112 48.7 615 35.4 Bajaj Auto Buy 17,230 19.0 2,705 11.1 2,256 5.9 Bharat Forge Buy 3,745 29.1 1,032 27.3 528 39.6 Eicher Motors Under Review 4,166 -6.6 271 -11.8 146 41.8 Hero Honda Buy 21,402 21.8 3,253 18.3 2,347 20.7 Mahindra & Mahindra Buy 16,976 9.2 1,969 5.0 1,224 -2.2 Maruti Udyog Buy 29,853 10.1 4,237 15.2 2,597 41.4 Punjab Tractors Neutral 2,233 17.7 301 67.5 166 53.4 Swaraj Mazda Buy 1,475 6.0 119 3.9 66 1.7 Tata Motors Neutral 46,953 13.2 5,634 8.4 3,344 14.8 Sector Aggregate 155,154 14.1 20,634 14.0 13,289 18.8

Amit Kasat ([email protected]);Tel:+91 22 56575328/Aditya S Makharia([email protected]);Tel:+91 22 56575319

23 September 2005 41 Automobiles

Two-wheelers view: Positive In two wheelers, we expect earnings growth to be driven by higher volumes, despite margin pressure. Stocks are reasonably valued with significant cash on the balance sheet and attractive dividend yields. We continue to maintain a positive view on Bajaj Auto and Hero Honda.

Passenger vehicles: muted performance Passenger Cars are likely to grow at 6% and UVs at 8%, in turn, leading to a 6% volume growth for the passenger vehicle segment.

After a muted 1QFY06 for the passenger segment, which witnessed a 9% YoY growth, 2QFY06 saw passenger vehicles fail to increase volumes, with growth expected at 6% YoY. Growth once again will be led by UVs, which grew at 18% in 1QFY06 and are expected to grow at 8% in 2QFY06.

Cars had witnessed a slower 8% growth in 1QFY06 and this is expected to fall to 6% in 2QFY06. Once again, July was marred with floods, which resulted in poor sales. However, August sales were stronger.

Exports are growing faster than the domestic market and hence have sustained the growth. Domestic growth has been poor at 2-3%. Despite Maruti and Ford not contributing to export growth, Hyundai has increased exports while Tata Motors is expected to export more units than Ford in the current quarter.

The quarter witnessed the price of the Getz being dropped to compete with the fast- growing Swift and Alto and Indigo being given upgrades with new interiors.

We expect volumes to improve in 2HFY06, as the monsoons have been favourable and fundamental growth drivers such as low penetration and demographics remain intact.

In the UV segment, growth has been at 8% YoY after a strong growth of 18% in 1QFY06. General Motors continues to grow faster than the industry due to its low base effect, while Toyota’s Innova has been receiving strong response. However, M&M the market leader continues to witness poor sales due to slowdown in its rural market portfolio (which accounts for more than 50% of its volumes) and is responsible for the slowdown in the segment. Tata Motors launched Safari with a new CDRe engine to upgrade the product to the latest standards.

23 September 2005 42 Automobiles

Passenger vehicles view: Positive We remain positive on the long-term growth prospects of the segment given the low penetration levels, increased affordability and changing demographics. However, hike in interest rates and rising fuel prices could raise concerns in the near term.

The business prospects for M&M look promising with strong growth in the Automotive and Farm Equipment division. The recent foray into passenger cars, commercial vehicles and auto components would add value, going forward.

We expect MUL to maintain its market leadership due to its strengths in small cars, a large distribution network and low cost base. Accelerated depreciation policy will further enhance future profitability for MUL. Also, the Finance Ministry is working on reducing the excise duty on small cars to make India the manufacturing hub of small cars. In our view, MUL would be the biggest beneficiary of this move. Also, MUL’s addressable market could increase after the launch of diesel cars in CY07.

We continue to maintain a positive view on M&M and MUL.

CV industry: LCVs showing the way The CV industry is expected to grow at 13% YoY in 2QFY06. Growth will be led by LCVs, which are expected to witness 33% YoY growth while HCVs will grow only by 2% YoY.

The current quarter has witnessed robust volume growth in LCVs, primarily led by Tata Motors. Tata Motors newly launched Ace is driving volumes in the small goods (less than 3.5 ton) category. Exports have been extremely strong once again driven by Tata Motors, which has seen its pick up trucks driving volumes in overseas markets.

However, M&HCV sales continue to suffer due to several reasons, with growth expected to be at 2% YoY. Sales have been affected due to the high base of last year, component availability problems due to migration to Euro II norms as well as floods in Western India in July.

CV industry view: Neutral Strong economic outlook, renewed infrastructure impetus and continued industrial capex along with significant improvement in road infrastructure are multiple structural factors that will drive a continued expansion in CV volumes. We expect domestic M&HCV volumes to rise 7% over FY05-07 and LCV volumes to grow at a faster clip of 25% CAGR over FY05-07. Our assumptions are based on the rapidly changing dynamics of

23 September 2005 43 Automobiles

the Indian freight industry due to development of highway infrastructure projects and drop in replacement demand, higher vehicle prices, slower freight rate growth and continued pressure of fuel price increase.

We continue to maintain a Neutral view on Tata Motors and Ashok Leyland.

Three-wheelers: hub and spoke model will spur growth The hub and spoke model is rapidly changing the dynamics of the Indian freight market. The emergence of the model is likely to result in another strong year for goods three wheelers. The growth in three wheelers is expected to be 16% YoY in 2QFY06, which will result in a 12% YTD growth.

Tractors: correction in industry inventory to support growth going forward We expect tractors to register a 10-12% growth in FY06. Increased farm credit offtake, focus on agri-driven growth and low farm mechanization levels are potential demand drivers for tractors going forward.

Valuation and view: volume growth to drive earnings High base created last year would slow down the growth rates in the auto sector across segments in FY06. But structural demand drivers should drive growth in four wheelers and two wheelers. Strong volume growth will drive earnings, despite margin pressure. Hence, we expect the sector to register a year of moderate performance after being in a high-growth phase for the last three years.

Despite the recent run up in stock prices, valuations continue to be in a comfortable zone for the sector. We reiterate our Overweight stance on the sector. Our top picks, M&M, Hero Honda and Bajaj Auto are dominant players in highly consolidated segments, where the top-two players command more than 50% market share.

23 September 2005 44 Automobiles

PERFORMANCE OF MAJOR PLAYERS IN THE INDUSTRY MOTORCYCLE SALES (VOLUMES - UNITS)

300,000 Hero Honda Bajaj Auto TVS Motors

225,000

150,000

75,000

0 Jul-04 Jul-05 Jun-04 Oct-04 Jan-05 Jun-05 Apr-04 Feb-05 Mar-05 Apr-05 Sep-04 Nov-04 Dec-04 May-04 Aug-04 May-05 Aug-05

PASSENGER CAR SALES (VOLUME - UNITS)

60,000 Maruti Udyog Tata Motors Hyundai Motors

45,000

30,000

15,000

0 Jul-04 Jul-05 Jun-04 Oct-04 Jan-05 Jun-05 Apr-04 Feb-05 Mar-05 Apr-05 Sep-04 Nov-04 Dec-04 May-04 Aug-04 May-05 Aug-05

COMMERCIAL VEHICLE SALES (VOLUME - UNITS)

36,000 Ashok Leyland Tata Motors Eicher Motors

27,000

18,000

9,000

0 Jul-04 Jul-05 Jun-04 Oct-04 Jan-05 Jun-05 Apr-04 Feb-05 Mar-05 Apr-05 Sep-04 Nov-04 Dec-04 May-04 Aug-04 May-05 Aug-05

Source: SIAM/MOSt

23 September 2005 45 Automobiles

HERO HONDA: MONTHLY MARKET SHARE MOVEMENT *

300,000 Hero Honda Hero Honda Marketshare (%) 62

225,000 59

150,000 56 (%)

Volume (units) 75,000 53

0 50 Jul-04 Jul-05 Jun-04 Oct-04 Jan-05 Jun-05 Feb-05 Mar-05 Apr-05 Sep-04 Nov-04 Dec-04 Aug-04 May-05 Aug-05

BAJAJ AUTO: MONTHLY MARKET SHARE MOVEMENT *

200,000 Bajaj Auto Bajaj Marketshare (%) 37

150,000 34

100,000 31 (%)

Volume (units) 50,000 28

0 25 Jul-04 Jul-05 Jun-04 Oct-04 Jan-05 Jun-05 Feb-05 Mar-05 Apr-05 Sep-04 Nov-04 Dec-04 May-04 Aug-04 May-05 Aug-05

TVS MOTORS: MONTHLY MARKET SHARE MOVEMENT *

90,000 TVS Motors TVS Marketshare (%) 17

60,000 15 (%) 30,000 13 Volume (units)

0 11 Jul-04 Jul-05 Jun-04 Oct-04 Jan-05 Jun-05 Feb-05 Mar-05 Apr-05 Sep-04 Nov-04 Dec-04 May-04 Aug-04 May-05 Aug-05

* Market share calculation based on top-3 players Source: SIAM/MOSt

23 September 2005 46 Automobiles

MUL/TATA MOTORS/HYUNDAI: MONTHLY MARKET SHARE MOVEMENT

Maruti Udyog Tata Motors Hyundai Motors 100%

80%

60%

40%

(Marketshare) 20%

0% Jul-04 Jul-05 Jun-04 Oct-04 Jan-05 Jun-05 Apr-04 Feb-05 Mar-05 Apr-05 Sep-04 Nov-04 Dec-04 May-04 Aug-04 May-05 Aug-05

TATA MOTORS: MONTHLY MARKET SHARE MOVEMENT *

16,000 M&HCV Tata Motors Marketshare 85

80 13,000

75 10,000 70 (%)

Volume (units) 7,000 65

4,000 60 Jul-04 Jul-05 Jun-04 Oct-04 Jan-05 Jun-05 Apr-04 Feb-05 Mar-05 Apr-05 Sep-04 Nov-04 Dec-04 May-04 Aug-04 May-05 Aug-05

ASHOK LEYLAND: MONTHLY MARKET SHARE MOVEMENT *

8,000 M&HCV ALL Marketshare 40

6,000 35

4,000 30 (%)

Volume (units) 2,000 25

0 20 Jul-04 Jul-05 Jun-04 Oct-04 Jan-05 Jun-05 Apr-04 Feb-05 Mar-05 Apr-05 Sep-04 Nov-04 Dec-04 May-04 Aug-04 May-05 Aug-05

* Market share calculation based on top-2 players Source: SIAM/MOSt

23 September 2005 47 Automobiles

Stock performance and valuations

STOCK PERFORMANCE (%) ABSOLUTE PERF REL PERF TO SENSEX REL PERF TO SECTOR 3 M 1 YEAR 3 M 1 YEAR 3 M 1 YEAR Automobiles Ashok Leyland 14 45 -1 -3 -6 -7 Bajaj Auto 23 66 7 18 3 13 Bharat Forge 12 105 -3 57 -8 52 Eicher Motors -8 41 -24 -8 -28 -12 Hero Honda Motor 21 57 5 9 1 4 M & M 20 57 5 8 0 4 Maruti Udyog 18 51 3 3 -2 -1 Punjab Tractors 8 5 -8 -43 -12 -47 Swaraj Mazda 3 25 -12 -23 -17 -28 Tata Motors 20 25 5 -24 0 -28

RELATIVE PERFORMANCE - 3 MONTH (%) RELATIVE PERFORMANCE - 1 YEAR (%)

Sensex MOSt Automobiles Index MOSt Automobiles Index Sensex 130 160

120 140

110 120

100 100

90 80 Jun-05 Jul-05 Aug-05 Sep-05 Sep-04 Dec-04 Mar-05 Jun-05 Sep-05

CMP (RS) RECO EPS (RS) P/E (X) EV/EBITDA ROE (%) 23.9.05 FY05A FY06E FY07E FY05A FY06E FY07E FY05A FY06E FY07E FY05A FY06E FY07E Automobiles Ashok Leyland 27 Neutral 1.9 2.2 2.5 14.1 12.5 10.7 7.3 6.3 5.4 21.8 21.2 23.1 Bajaj Auto 1,611 Buy 75.8 90.8 107.6 21.3 17.7 15.0 14.1 11.2 9.2 18.5 19.6 20.4 Bharat Forge 322 Buy 8.2 11.3 14.8 39.4 28.4 21.8 20.6 14.4 11.0 36.5 35.4 32.4 Eicher Motors 282 UR 21.0 24.1 30.6 13.4 11.7 9.2 7.3 5.0 4.1 22.1 18.1 19.9 Hero Honda 700 Buy 40.6 47.6 54.7 17.2 14.7 12.8 10.4 8.9 7.6 54.3 48.8 45.0 Mahindra & Mahindra 351 Buy 21.0 24.2 26.9 16.7 14.5 13.0 10.4 7.7 6.7 23.7 24.7 24.3 Maruti Udyog 550 Buy 29.5 37.4 41.6 18.6 14.7 13.2 8.8 7.8 6.9 19.5 20.1 18.7 Punjab Tractors 192 Neutral 10.3 14.6 17.8 18.5 13.1 10.8 10.2 5.6 4.9 12.4 15.0 17.0 Swaraj Mazda 365 Buy 23.1 28.5 33.3 15.8 12.8 11.0 8.5 7.0 6.1 43.1 40.3 35.8 Tata Motors 511 Neutral 32.2 36.6 40.5 15.9 14.0 12.6 7.4 6.1 5.4 30.3 28.2 26.3 Sector Aggregate 17.9 15.0 13.1 9.8 8.0 6.9 25.4 25.2 24.5

23 September 2005 48 Results Preview SECTOR: AUTOMOBILES

Ashok Leyland

STOCK INFO. BLOOMBERG BSE Sensex: 8,223 AL IN 23 September 2005 REUTERS CODE Neutral S&P CNX: 2,478 ASOK.BO Previous Recommendation: Neutral Rs27

Equity Shares (m) 1,189.3 YEAR NET SALES PAT* ADJ.EPS* EPS* P/E P/BV ROE ROCE EV/ EV/ END (RS M) (RS M) (RS) GROWTH (%) (X) (X) (%) (%) SALES EBITDA 52-Week Range 32/18 3/05A 41,824 2,550 1.9 14.9 14.1 2.8 21.8 16.6 0.7 7.3 1,6,12 Rel. Perf. (%) -7/4/-3 M.Cap. (Rs b) 32.3 3/06E 48,370 2,869 2.2 12.3 12.5 2.7 21.2 19.3 0.7 6.3

M.Cap. (US$ b) 0.7 3/07E 52,613 3,360 2.5 17.1 10.7 2.5 23.1 22.0 0.6 5.4

Pre-exceptionals

? Ashok Leyland is likely to report a 12% growth in vehicle sales in 2QFY06 against 2% growth in M&HCVs for the industry. ALL has increased its market share by 600bp YoY in FY06. ? Ashok Leyland is likely to post a 22% growth in net sales in 2QFY06 on the back of a 12% volume growth and a 9% increase in realizations on account of better product mix in the M&HCV segment. ? We expect improvement in EBITDA margins mainly on account of initiatives, which the company has taken over the last one year, leading to a 49% growth in EBITDA for 2QFY06. ? In FY06, we expect ALL to report 14% volume growth, resulting in sales growth of 16%. Volumes are expected to surpass 62,000 units, resulting in sales of Rs48.4b. We expect an improvement of 60bp in EBITDA margins and a 13% growth in PAT at Rs2.9b. ? The diluted EPS for FY06 is Rs2.2. The stock trades at 12.5x FY06E EPS. We maintain a Neutral rating on the stock.

QUARTERLY PERFORMANCE (RS MILLION) Y/E MARCH FY05 FY06 FY05 FY06E 1Q 2Q 3Q 4Q 1Q 2QE 3QE 4QE No of Vehicles 11,101 12,479 12,831 18,329 13,320 13,920 14,500 20,664 54,740 62,404 Net Sales 8,212 9,147 9,871 14,593 10,632 11,122 11,155 15,460 41,823 48,370 Change (%) 40.5 11.0 16.7 30.5 29.5 21.6 13.0 5.9 23.2 15.7 Total Cost 7,462 8,399 8,852 12,882 9,742 10,010 9,962 13,505 37,595 43,218 Operating Profit 750 748 1,020 1,711 890 1,112 1,194 1,955 4,228 5,151 OPM (%) 9.1 8.2 10.3 11.7 8.4 10.0 10.7 12.6 10.1 10.7 Change (%) 44.0 -29.0 21.1 11.8 18.7 48.7 17.1 14.3 7.1 21.8 Non-Operating Income 30 119 62 67 34 45 65 278 278 421 Extraordinary Income 260 302 248 260 550 Extraordinary Expense 23 24 24 25 25 95 25 Interest 30 -9 18 -11 -12 30 55 335 28 409 Gross Profit 726 853 1,040 2,023 1,212 1,127 1,204 2,145 4,642 5,689 Less: Depreciation 240 258 255 339 297 285 291 315 1,092 1,188 PBT 486 594 785 1,685 915 842 912 1,831 3,550 4,500 Tax 167 164 248 257 271 227 219 389 836 1,106 Effective Tax Rate (%) 34.3 27.6 31.6 15.3 29.6 27.0 24.0 21.2 23.5 24.6 PAT 319 430 537 1,428 644 615 693 1,442 2,714 3,394 Adj. PAT 343 454 561 1,192 422 615 693 1,244 2,550 2,869 Change (%) 125.7 -16.0 43.2 31.3 23.2 35.4 23.7 4.3 40.7 12.5 E: MOSt Estimates

Amit Kasat ([email protected]);Tel:+91 22 56575328/Aditya S Makharia([email protected]);Tel:+91 22 56575319

23 September 2005 49 Results Preview SECTOR: AUTOMOBILES

Bajaj Auto

BLOOMBERG STOCK INFO. 23 September 2005 BSE Sensex: 8,223 BJA IN Buy REUTERS CODE S&P CNX: 2,478 BJAT.BO Previous Recommendation: Buy Rs1,611

Equity Shares (m) 101.2 YEAR NET SALES PAT EPS EPS P/E P/BV ROE ROCE EV/ EV/ END (RS M) (RS M) (RS) GROWTH (%) (X) (X) (%) (%) SALES EBITDA 52-Week Range 1,687/918 3/05A 59,271 7,668 75.8 4.8 21.3 3.9 18.5 20.7 2.2 14.1 1,6,12 Rel. Perf. (%) 11/28/18 M.Cap. (Rs b) 163.0 3/06E 70,406 9,191 90.8 19.9 17.7 3.5 19.6 22.4 1.8 11.2

M.Cap. (US$ b) 3.7 3/07E 81,268 10,884 107.6 18.4 15.0 3.1 20.4 24.3 1.5 9.2

? Total volumes are likely to grow by 19% in 2QFY06, with motorcycles being the key contributor, making up for the decline in other two-wheeler segments. Also, the three wheeler segment is expected to show positive growth of 2% in 2QFY06.

? Bajaj Auto has maintained its market share in the domestic motorbike segment above 30% for the second consecutive quarter. With the ‘CT100’ being launched in May 2004, we expect to see another quarter of strong growth by Bajaj, before the base-effect kicks in.

? We expect sales to grow by 19% YoY in 2QFY06 in line with volume growth. We expect EBITDA margins in 2QFY06 to decline by 110bp YoY as a result of falling share of three wheelers in the overall product mix.

? In FY06, we expect a 19% growth in net sales to Rs70.4b on the back of 17% growth in overall volumes resulting in a PAT growth of 12% at Rs9.2b.This translates into an EPS of Rs90.8. The stock trades at 17.7x FY06E EPS. We recommend Buy.

QUARTERLY PERFORMANCE (RS MILLION) Y/E MARCH FY05 FY06 FY05 FY06E 1Q 2Q 3Q 4Q 1Q 2QE 3QE 4QE Total Volumes (nos) 372,912 445,192 526,983 479,612 505,524 530,710 575,000 531,687 1,824,699 2,142,921 Net Sales 12,261 14,483 16,057 16,470 16,342 17,230 18,221 18,614 59,271 70,406 Change (%) 14.2 16.0 22.6 28.3 33.3 19.0 13.5 13.0 20.5 18.8 Total Expenses 10,417 12,048 13,645 13,987 13,766 14,525 15,378 15,723 50,137 59,443 Operating Profit 1,845 2,435 2,412 2,483 2,575 2,705 2,842 2,891 9,134 10,964 Change (%) 24.8 7.2 -4.3 9.9 39.6 11.1 17.9 16.4 7.1 20.0 As % of Sales 15.0 16.8 15.0 15.1 15.8 15.7 15.6 15.5 15.4 15.6 Other Income 1,064 882 869 1,266 928 938 1,072 1,139 4,081 4,076 Interest 2 -1 3 2 1 2 2 3 7 7 Depreciation 462 464 468 460 462 466 478 497 1,854 1,903 Extraordinary Expenses 45 163 170 171 0 0 0 0 490 0 Extraordinary Income 0 -5 0 0 0 0 0 0 0 0 PBT 2,401 2,650 2,641 3,116 3,040 3,178 3,439 3,536 10,864 13,131 Tax 800 850 820 1,046 950 922 1,066 1,002 3,196 3,939 Effective Tax Rate (%) 33.3 32.1 31.1 33.6 31.3 29.0 31.0 28.3 32.8 30.0 PAT 1,646 1,963 1,990 2,070 2,090 2,256 2,373 2,534 7,668 9,191 Adj. PAT 1,691 2,130 2,160 2,241 2,090 2,256 2,373 2,534 8,221 9,191 Change (%) 5.2 -1.7 15.0 5.2 23.6 5.9 9.9 13.1 0.1 11.8 E: MOSt Estimates

Amit Kasat ([email protected]);Tel:+91 22 56575328/Aditya S Makharia([email protected]);Tel:+91 22 56575319

23 September 2005 50 Results Preview SECTOR: AUTOMOBILES

Bharat Forge

BLOOMBERG STOCK INFO. 23 September 2005 BSE Sensex: 8,223 BHFC IN Buy REUTERS CODE S&P CNX: 2,478 BFRG.BO Previous Recommendation: Buy Rs322

Equity Shares (m) 197.8 YEAR NET SALES PAT EPS EPS P/E P/BV ROE ROCE EV/ EV/ END (RS M) (RS M) (RS) GROWTH (%) (X) (X) (%) (%) SALES EBITDA 52-Week Range 350/150 3/05A 12,191 1,616 8.2 29.4 39.4 14.4 36.5 30.0 5.5 20.6 1,6,12 Rel. Perf. (%) 2/-9/57 M.Cap. (Rs b) 63.7 3/06E 15,969 2,242 11.3 38.7 28.4 10.0 35.4 28.7 3.9 14.4 M.Cap. (US$ b) 1.5 3/07E 20,252 2,924 14.8 30.4 21.8 7.1 32.4 29.8 3.0 11.0

Standalone

? Moderate domestic commercial vehicle sales, coupled with the ramp up in exports would enable Bharat Forge to post 29% sales growth in 2QFY06.

? Expect domestic revenues to register growth of 6% to Rs1.9b and export revenues to register 66% growth to Rs1.9b in 2QFY06.

? Margins would decline by 30bp YoY, despite increase in turnover, due to increase in raw material prices.

? We expect combined sales of Rs26.6b in FY06, with a net profit of Rs2.8b. We estimate a consolidated EPS of Rs14.2. The stock is currently trading at 22.7x FY06E consolidated earnings. We believe that the management’s clear vision and strategy, and the company’s superior performance would help sustain its rich valuations. We maintain Buy.

QUARTERLY PERFORMANCE (STANDALONE) (RS MILLION) Y/E MARCH FY05 FY06 FY05 FY06E 1Q 2Q 3Q 4Q 1Q 2QE 3QE 4QE Net Sales 2,568 2,902 3,109 3,613 3,635 3,745 3,822 4,767 12,191 15,969 Change (%) 38.0 42.4 46.6 56.9 41.6 29.1 22.9 32.0 46.5 31.0 Total Expenses 1,878 2,091 2,233 2,715 2,750 2,713 2,759 3,417 8,917 11,640 Operating Profit 690 810 875 898 885 1,032 1,063 1,350 3,274 4,329 Change (%) 26.7 38.0 32.1 48.0 28.2 27.3 21.4 50.3 36.3 32.2 As % of Sales 26.9 27.9 28.2 24.9 24.4 27.6 27.8 28.3 26.9 27.1 Other Income 42 7 4 21 112 18 20 -61 74 89 Interest 79 83 90 91 112 93 103 73 342 380 Depreciation 123 132 136 135 149 172 179 216 526 716 PBT 530 603 654 693 736 785 801 1,000 2,480 3,322 Tax 190 225 240 210 247 257 248 328 865 1,080 Effective Tax Rate (%) 35.9 37.2 36.7 30.3 33.5 32.7 31.0 32.8 34.9 32.5 PAT 340 378 414 483 489 528 553 672 1,616 2,242 Adj. PAT 340 378 414 483 489 528 553 672 1,616 2,242 Change (%) 29.4 28.9 25.4 33.4 43.9 39.6 33.5 39.1 29.4 38.8 E: MOSt Estimates

Amit Kasat ([email protected]);Tel:+91 22 56575328/Aditya S Makharia([email protected]);Tel:+91 22 56575319

23 September 2005 51 Results Preview SECTOR: AUTOMOBILES

Eicher Motors

STOCK INFO. BLOOMBERG 23 September 2005 BSE Sensex: 8,223 EIM IN Under Review REUTERS CODE S&P CNX: 2,478 EICH.BO Previous Recommendation: Under Review Rs282

Equity Shares (m) 28.0 YEAR NET SALES PAT* EPS* EPS P/E P/BV ROE ROCE EV/ EV/ END (RS M) (RS M) (RS) GROWTH (%) (X) (X) (%) (%) SALES EBITDA 52-Week Range 396/189 3/05A 19,826 588 21.0 42.6 13.4 3.0 22.1 21.6 0.5 7.3 1,6,12 Rel. Perf. (%) -12/-34/-8 M.Cap. (Rs b) 7.9 3/06E 17,360 675 24.1 14.7 11.7 2.1 18.1 26.4 0.4 5.0

M.Cap. (US$ b) 0.2 3/07E 18,129 857 30.6 27.0 9.2 1.8 19.9 25.7 0.3 4.1

* Pre-exceptionals

? After witnessing sustained growth over the last three years, the high base effect will result in flat CV growth for the quarter.

? After hiving off its tractor business to TAFE, 2QFY06 numbers will be without tractor numbers; hence the results will not be comparable.

? In the current quarter, we expect sales of Rs4.2b and an EBITDA of Rs271m. This will result in an EBITDA margin of 6.5 %. The net profit is expected to be Rs146m. Since the tractor division has been sold off, the financial performance is not comparable with prior results.

? In FY06, we expect sales of Rs17.4b and EBITDA of Rs1.2b. PAT would grow to Rs675m, translating to an EPS of Rs24.1. The stock trades at 11.7x FY06E earnings.

? We are concerned about the EBITDA margins of Eicher Motors. Our recommendation is Under Review.

QUARTERLY PERFORMANCE (RS MILLION) Y/E MARCH FY05 FY06 FY05 FY06E 1Q 2Q 3Q 4Q 1Q 2QE 3QE 4QE Net Sales 3,459 4,460 5,337 6,570 3,875 4,166 4,514 4,805 19,826 17,360 Change (%) 35.6 59.8 45.8 41.5 12.0 -6.6 -15.4 -26.9 45.3 -12.4 Total Cost 3,242 4,152 4,922 6,250 3,778 3,896 4,107 4,338 18,566 16,119 Operating Profit 217 307 415 320 98 271 406 467 1,259 1,241 OPM (%) 6.3 6.9 7.8 4.9 2.5 6.5 9.0 9.7 6.4 7.2 Change (%) 56.5 39.5 26.7 -26.2 -55.0 -11.8 -2.1 45.7 4.9 -1.4 Non-Operating Income 20 22 32 109 70 26 23 1 183 120 Extraordinary Income 1,821 1,821 Interest 49 62 62 50 41 2 1 5 223 49 Gross Profit 188 268 384 380 1,948 295 428 463 1,219 3,133 Less: Depreciation 109 123 121 131 116 70 71 28 484 286 PBT 79 145 263 248 1,832 225 357 434 735 2,848 Tax 23 42 60 23 7 79 125 160 147 370 Effective Tax Rate (%) 28.7 28.7 22.6 9.1 0.4 35.0 35.0 36.7 19.9 13.0 PAT 57 103 203 226 1,825 146 232 275 589 2,477 Adjusted PAT 57 103 203 226 4 146 232 275 589 675 Change (%) - 124.8 95.0 23.6 -93.6 41.8 13.9 21.7 42.8 14.5 E: MOSt Estimates

Amit Kasat ([email protected]);Tel:+91 22 56575328/Aditya S Makharia([email protected]);Tel:+91 22 56575319

23 September 2005 52 Results Preview SECTOR: AUTOMOBILES

Hero Honda

STOCK INFO. BLOOMBERG 23 September 2005 BSE Sensex: 8,223 HH IN Buy REUTERS CODE S&P CNX: 2,478 HROH.BO Previous Recommendation: Buy Rs700

Equity Shares (m) 199.7 YEAR NET SALES PAT EPS EPS P/E P/BV ROE ROCE EV/ EV/ END (RS M) (RS M) (RS) GROWTH (%) (X) (X) (%) (%) SALES EBITDA 52-Week Range 721/412 3/05A 74,217 8,105 40.6 11.3 17.2 9.4 54.3 67.7 1.6 10.4 1,6,12 Rel. Perf. (%) -5/1/9 M.Cap. (Rs b) 139.8 3/06E 87,149 9,513 47.6 17.4 14.7 7.2 49.0 63.0 1.4 9.1

M.Cap. (US$ b) 3.2 3/07E 99,422 10,924 54.7 14.8 12.8 5.7 44.9 60.0 1.2 7.6

? We expect volumes to grow by 21% YoY resulting in a sales growth of 22% at Rs21.4b in 2QFY06.

? The company’s recently launched 125cc bike – the “Super Splendor” and “Glamour” have witnessed favorable response in the market with volumes crossing 40,000 units a month.

? Hero Honda has almost finalized its third plant. The plant will have an initial capacity of 250,000 bikes, which can be scaled up to 1m bikes in the future. We expect the plant to be operational by August 2006. Hence, the problems relating to capacity constraints are now taken care of for the next 4-5 years.

? We expect EBITDA margins to fall by 40bp; resulting in 18% growth in EBITDA in 2QFY06.

? We estimate 16% volume growth in FY06; resulting in sales growth of 17% to Rs87.2b. EBITDA margins would drop by 30bp YoY to 15.4%, while net profit will grow by 17.4% to Rs9.5b. This will translate in an EPS of Rs47.6 in FY06. The stock is currently trading at 14.7x FY06E earnings. We maintain Buy.

QUARTERLY PERFORMANCE (RS MILLION) Y/E MARCH FY05 FY06 FY05 FY06E 1Q 2Q 3Q 4Q 1Q 2QE 3QE 4QE Volumes (nos.) 609,123 614,796 712,062 685,419 687,567 746,554 821,300 785,403 2,621,400 3,040,824 Change (%) 32.0 37.7 24.4 15.6 12.9 21.4 15.3 14.6 26.5 16.0 Net Sales 17,223 17,572 20,019 19,403 19,771 21,402 23,309 22,668 74,217 87,149 Change (%) 30.1 39.3 26.6 15.5 14.8 21.8 16.4 16.8 27.3 17.4 Total Expenses 14,369 14,823 16,910 16,471 16,848 18,149 19,696 19,061 62,572 73,754 Operating Profit 2,855 2,749 3,109 2,932 2,923 3,253 3,613 3,606 11,645 13,395 Change (%) 33.8 32.1 15.3 2.7 2.4 18.3 16.2 23.0 18.9 15.0 As % of Sales 16.6 15.6 15.5 15.1 14.8 15.2 15.5 15.9 15.7 15.4 Other Income 229 411 413 358 306 452 470 580 1,411 1,808 Interest -2 -3 -2 -4 3 3 3 3 -11 12 Depreciation 205 208 217 264 250 251 288 279 894 1,068 PBT 2,881 2,955 3,307 3,031 2,975 3,451 3,791 3,905 12,173 14,123 Tax 980 1,011 1,118 960 937 1,104 1,289 1279 4,068 4,610 Tax/PBT (%) 34.0 34.2 33.8 31.7 31.5 32.0 34.0 32.8 33.4 32.6 Adj. PAT 1,901 1,944 2,189 2,070 2,039 2,347 2,502 2,624 8,105 9,513 Change (%) 20.5 24.2 8.0 -2.0 7.2 20.7 14.3 26.8 11.3 17.4 E: MOSt Estimates

Amit Kasat ([email protected]);Tel:+91 22 56575328/Aditya S Makharia([email protected]);Tel:+91 22 56575319

23 September 2005 53 Results Preview SECTOR: AUTOMOBILES

Mahindra & Mahindra

STOCK INFO. BLOOMBERG 23 September 2005 BSE Sensex: 8,223 MM IN Buy REUTERS CODE S&P CNX: 2,478 MAHM.BO Previous Recommendation: Buy Rs351

Equity Shares (m) 232.0 YEAR NET SALES PAT* ADJ. EPS* EPS P/E P/BV ROE ROCE EV/ EV/ END (RS M) (RS M) (RS) GROWTH (%) (X) (X) (%) (%) SALES EBITDA 52-Week Range 380/205 3/05A 65,238 5,040 21.0 52.0 16.7 3.8 23.7 20.6 1.1 10.4 1,6,12 Rel. Perf. (%) -6/15/8 M.Cap. (Rs b) 81.4 3/06E 75,574 5,919 24.2 17.4 14.5 3.4 24.7 23.1 0.9 7.7

M.Cap. (US$ b) 1.9 3/07E 84,296 6,573 26.9 11.1 13.0 3.0 24.3 23.8 0.8 6.7

Standalone; pre-exceptionals

? M&M is expected to report a volume growth of 13% led by 36% YoY growth in tractors. The automotive division is likely to report flat growth due to poor offtake of LCVs, traditional UVs and three wheelers.

? Net sales should grow by 9% YoY to Rs17b on the back of 13% volume growth.

? We expect margins to decline by 50bp YoY; resulting in 5% growth in EBITDA.

? In FY06, we expect M&M to deliver 15% sales growth at Rs75.6b with a corresponding net profit growth of 17% at Rs5.9b. We estimate an EPS of Rs24.2 for M&M standalone on fully diluted equity after adjusting for a 1:1 bonus. Consolidated EPS would be higher at Rs30.

? The stock trades at 12x FY06E consolidated earnings. It remains our top pick in the 4-wheeler segment. We maintain Buy.

QUARTERLY PERFORMANCE (RS MILLION) Y/E MARCH FY05 FY06 FY05 FY06E 1Q 2Q 3Q 4Q 1Q 2QE 3QE 4QE Total Vehicles 46,274 47,142 54,737 59,822 52,442 53,352 62,000 70,444 210,401 238,238 Total Income 14,232 15,544 17,723 19,107 18,119 16,976 19,773 20,706 65,238 75,574 Change (%) 43.3 39.0 33.5 27.3 27.3 9.2 11.6 8.4 34.0 15.8 Total Cost 12,623 13,669 15,606 16,998 16,190 15,007 17,262 18,627 58,896 67,086 Operating Profit 1,609 1,875 2,116 2,108 1,929 1,969 2,511 2,844 7,709 9,253 Change (%) 79.0 70.3 25.2 22.8 19.9 5.0 18.7 34.9 42.2 20.0 OPM (%) 11.3 12.1 11.9 11.0 10.6 11.6 12.7 13.7 11.6 12.2 Non-Operating Income 83 373 222 406 204 225 202 249 1,085 880 Extraordinary Income 204 0 0 136 0 Extraordinary Expense 0 -17 15 39 15 3 15 Interest 18 17 -89 1 -54 16 18 100 -56 80 Gross Profit 1,878 2,249 2,413 2,475 2,171 2,178 2,696 2,992 8,982 10,038 Less: Depreciation 427 440 455 518 466 454 463 507 1,840 1,890 PBT 1,451 1,809 1,958 1,957 1,705 1,725 2,233 2,485 7,142 8,148 Tax 412 545 626 432 253 500 715 778 2,015 2,245 Effective Tax Rate (%) 28.4 30.1 32.0 22.1 14.8 29.0 32.0 31.3 28.2 27.6 PAT 1,039 1,264 1,332 1,525 1,453 1,224 1,518 1,707 5,127 5,903 Adj PAT 909 1,252 1,346 1,563 1,468 1,224 1,518 1,708 5,041 5,918 Change (%) 94.8 97.7 40.2 31.6 61.5 -2.2 12.8 9.2 52.0 17.4 E: MOSt Estimates

Amit Kasat ([email protected]);Tel:+91 22 56575328/Aditya S Makharia([email protected]);Tel:+91 22 56575319

23 September 2005 54 Results Preview SECTOR: AUTOMOBILES

Maruti Udyog

STOCK INFO. BLOOMBERG 23 September 2005 BSE Sensex: 8,223 MUL IN Buy REUTERS CODE S&P CNX: 2,478 MRTI.BO Previous Recommendation: Buy Rs550

Equity Shares (m) 289.0 YEAR NET SALES PAT EPS EPS P/E P/BV ROE ROCE EV/ EV/ END (RS M) (RS M) (RS) GROWTH (%) (X) (X) (%) (%) SALES EBITDA 52-Week Range 598/338 3/05A 109,624 8,537 29.5 38.4 18.6 3.6 19.5 27.0 1.2 8.8 1,6/12 Rel. Perf. (%) 9/6/3 M.Cap. (Rs b) 158.9 3/06E 126,249 10,806 37.4 26.6 14.7 3.0 20.1 27.6 1.1 7.8

M.Cap. (US$ b) 3.6 3/07E 141,412 12,019 41.6 11.2 13.2 2.5 18.7 25.9 1.0 6.9

? We expect volumes to grow by 9% YoY resulting in a sales growth of 10.1% to Rs29.9b in 2QFY06.

? The company’s recently launched model, “Swift”, has witnessed favorable response in the market with volumes crossing 5,000 units a month.

? We expect operating margins to improve by 40bp mainly on account of cost cutting initiatives taken by company and improved product mix; resulting in 15% growth in EBITDA in 2QFY06.

? In FY06, we expect a volume growth of 12% resulting in sales of Rs126.2b (15.2% YoY growth). We expect EBITDA margins to remain stable around 14%, resulting in a PAT growth of 27% to Rs10.8b.

? The stock trades at 14.7x FY06E earnings of Rs37.4. We maintain Buy.

QUARTERLY PERFORMANCE (RS MILLION) Y/E MARCH FY05 FY06 FY05 FY06E 1Q 2Q 3Q 4Q 1Q 2QE 3QE 4QE No of Vehicles 123,624 129,848 136,069 146,760 121,866 141,534 160,561 176,312 536,301 600,273 Net Sales 24,793 27,117 28,890 30,452 26,271 29,853 33,834 36,291 109,624 126,249 Change (%) 31.3 25.3 27.3 9.3 6.0 10.1 17.1 19.2 20.3 15.2 Other Operating Income 74 410 443 404 491 410 443 297 1,368 1,642 Total Cost 21,726 23,848 25,317 26,297 23,024 26,026 29,513 31,783 95,561 110,345 Operating Profit 3,141 3,678 4,015 4,559 3,739 4,237 4,765 4,805 15,431 17,545 OPM (%) 12.7 13.6 13.9 15.0 14.2 14.0 13.9 13.2 14.1 13.9 Change (%) 79.6 36.3 27.1 41.1 19.0 15.2 18.7 5.4 33.4 13.7 Non-Operating Income 750 371 832 565 491 635 740 778 2,547 2,644 Interest 91 95 75 100 91 96 100 112 360 400 Gross Profit 3,800 3,955 4,773 5,025 4,139 4,775 5,405 5,470 17,617 19,789 Less: Depreciation 1,193 1,201 1,052 1,122 783 956 945 1,096 4,568 3,780 PBT 2,607 2,754 3,721 3,902 3,356 3,819 4,460 4,375 13,049 16,009 Tax 963 918 1,324 1,308 1,091 1,222 1,418 1,471 4,513 5,203 Effective Tax Rate (%) 36.9 33.3 35.6 33.5 32.5 32.0 31.8 33.6 34.6 32.5 PAT 1,644 1,836 2,397 2,595 2,265 2,597 3,042 2,903 8,536 10,806 Change (%) 68.3 67.4 46.1 65.0 37.7 41.4 26.9 11.9 38.4 26.6 E: MOSt Estimates

Amit Kasat ([email protected]);Tel:+91 22 56575328/Aditya S Makharia([email protected]);Tel:+91 22 56575319

23 September 2005 55 Results Preview SECTOR: AUTOMOBILES

Punjab Tractors

STOCK INFO. BLOOMBERG BSE Sensex: 8,223 PJT IN 23 September 2005 Neutral REUTERS CODE S&P CNX: 2,478 PTRA.BO Previous Recommendation: Neutral Rs192

Equity Shares (m) 60.8 YEAR NET SALES PAT* EPS* EPS P/E P/BV ROE ROCE EV/ EV/ END (RS M) (RS M) (RS) GROWTH (%) (X) (X) (%) (%) SALES EBITDA 52-Week Range 215/156 3/05A 8,580 628 10.3 49.3 18.5 2.3 12.4 17.6 1.4 10.2 1,6,12 Rel. Perf. (%) 0/-12/-43 M.Cap. (Rs b) 11.6 3/06E 10,024 887 14.6 41.3 13.1 2.0 15.0 20.6 0.8 5.6

M.Cap. (US$ b) 0.3 3/07E 11,258 1,082 17.8 22.0 10.8 1.8 17.0 23.2 0.7 4.9

* Pre-exceptionals

? Punjab Tractors is expected to post a volume growth of 19% in 2QFY06.

? On a YoY basis, EBITDA margin is expected to improve by 400bp due to improving operating leverage.

? In FY06, we expect 15% volume growth resulting in 17% growth in sales to Rs10b. Net profit is likely to see a growth of 41% at Rs887m, resulting in an EPS of Rs14.6.

? The stock is currently trading at 13.1x FY06E earnings. We maintain our Neutral recommendation.

QUARTERLY PERFORMANCE (RS MILLION) Y/E MARCH FY05 FY06 FY05 FY06E 1Q 2Q 3Q 4Q 1Q 2QE 3QE 4QE Tractors 7,419 6,511 8,400 8,000 7,800 7,780 9,687 9,613 30,330 34,880 Net Sales 1,820 1,897 2,510 2,353 2,380 2,233 2,858 2,554 8,580 10,024 Change (%) 52.4 48.7 50.8 28.0 30.8 17.7 13.9 8.5 43.6 16.8 Operating Profit 212 180 377 370 255 301 472 454 1,139 1,444 OPM (%) 11.6 9.5 15.0 15.7 10.7 13.5 16.5 17.8 13.3 14.4 Change (%) 44.2 48.8 53.9 51.7 20.3 67.5 25.1 22.6 50.5 26.8 Non-Operating Income 0 43 0 7 0 0 0 60 50 60 Extraordinary Income 613 613 Interest 20 18 14 6 15 14 11 5 58 45 Gross Profit 192 205 363 371 853 288 460 508 1,131 2,072 Less: Depreciation 40 40 40 40 40 39 40 37 160 155 PBT 152 165 323 332 813 249 421 471 972 1,917 Tax 52 57 113 121 106 83 177 247 343 614 PAT 100 108 210 211 707 166 244 224 629 1,304 Adj PAT 100 108 210 211 138 166 244 224 629 887 Change (%) 75.4 68.8 55.6 26.1 38.0 53.4 16.2 6.3 49.6 41.0 E: MOSt Estimates; (1QFY05 numbers are not regrouped after the exemption of tractors from excise duty with effect from 9th July, 2004. After regrouping numbers EBITDA margins for 1QFY05 will change to 10.6% as compared to 11.6% reported by the company

Amit Kasat ([email protected]);Tel:+91 22 56575328/Aditya S Makharia([email protected]);Tel:+91 22 56575319

23 September 2005 56 Results Preview SECTOR: AUTOMOBILES

Swaraj Mazda

STOCK INFO. BLOOMBERG BSE Sensex: 8,223 SM IN 23 September 2005 Buy REUTERS CODE S&P CNX: 2,478 SWRJ.BO Previous Recommendation: Buy Rs365

Equity Shares (m) 10.5 YEAR NET SALES PAT EPS EPS P/E P/BV ROE ROCE EV/ EV/ END (RS M) (RS M) (RS) GROWTH (%) (X) (X) (%) (%) SALES EBITDA 52-Week Range 460/255 3/05A 5,899 243 23.1 15.6 15.8 6.8 43.1 72.0 0.6 8.5 1,6,12 Rel. Perf. (%) -14/-14/-23 M.Cap. (Rs b) 3.8 3/06E 6,623 300 28.5 23.4 12.8 5.1 40.3 64.6 0.6 7.0

M.Cap. (US$ b) 0.1 3/07E 7,285 349 33.3 16.6 11.0 3.9 35.8 54.0 0.5 6.1

? Swaraj is expected to report a 6% growth in sales at Rs1.5b in 2QFY06, driven by 3% volume growth at 3,010 units. ? The EBITDA margin will be at 8.1%, resulting in an EBITDA of Rs119m. This will result in a net profit of Rs66m, a 2% YoY growth. ? Mazda Corporation has sold its 15.6% holding in Swaraj to Sumitomo Corporation. With this transfer, Sumitomo’s shareholding has increased to 41%. ? The company is scouting for a technical partner as its current arrangement with Mazda has come to an end. The likely contender is expected to be Isuzu of Japan. ? In FY06, Swaraj will benefit from lower royalty payout to Mazda, as its collaboration with the Japanese partner has ended. This will result in improved operating performance. ? In FY06, we expect 9% YoY growth in volumes, leading to 12% growth in sales to Rs6.6b. EBITDA margins are expected to increase by 50bp to 8%, with EBITDA estimated at Rs528m. Profit after tax would grow by 23% to Rs300m, translating into an EPS of Rs28.5. The stock trades at 12.8x FY06E earnings. We maintain Buy.

QUARTERLY PERFORMANCE (RS MILLION) Y/E MARCH FY05 FY06 FY05E FY06E 1Q 2Q 3Q 4Q 1Q 2QE 3QE 4QE Volumes 2,929 2,934 2,919 3,559 3,004 3,010 3,451 3,987 12,341 13,452 Net Sales 1,343 1,392 1,383 1,781 1,477 1,475 1,691 1,980 5,899 6,623 Change (%) 39.8 33.5 19.9 9.4 10.0 6.0 22.3 11.2 23.3 12.3 Operating Profit 100 115 109 119 121 119 130 158 443 528 Change (%) 39.3 43.8 21.1 0.7 20.6 3.9 19.5 32.6 22.7 19.2 OPM (%) 7.5 8.3 7.9 6.7 8.2 8.1 7.7 8.0 7.5 8.0 Interest 3 8 11 18 13 10 12 10 40 45 Gross Profit 97 107 98 101 108 110 119 147 404 483 Depreciation 6 6 6 7 7 10 9 10 25 36 PBT 91 101 92 94 101 99 109 138 378 447 Tax 34 36 34 32 34 33 36 44 136 148 Tax Rate (%) 37.2 35.6 37.0 33.5 33.7 33.5 33.1 32.1 35.8 33.0 PAT 57 65 58 63 67 66 73 93 243 300 Adj. PAT 57 65 58 63 67 66 73 93 243 300 Change (%) 39.8 41.3 7.4 -9.4 16.9 1.7 25.8 49.6 15.6 23.4 E: MOSt Estimates

Amit Kasat ([email protected]);Tel:+91 22 56575328/Aditya S Makharia([email protected]);Tel:+91 22 56575319

23 September 2005 57 Results Preview SECTOR: AUTOMOBILES

Tata Motors

STOCK INFO. BLOOMBERG BSE Sensex: 8,223 TTMT IN 23 September 2005 Neutral REUTERS CODE S&P CNX: 2,478 TAMO.BO Previous Recommendation: Neutral Rs511

Equity Shares (m) 361.8 YEAR NET SALES PAT* EPS* EPS P/E P/BV ROE ROCE EV/ EV/ END (RS M) (RS M) (RS) GROWTH (%) (X) (X) (%) (%) SALES EBITDA 52-Week Range 537/388 3/05A 174,191 12,460 32.2 47.9 15.9 4.5 30.3 28.6 0.9 7.4 1,6,12 Rel. Perf. (%) -1/-6/-24 M.Cap. (Rs b) 184.9 3/06E 201,210 14,145 36.6 13.5 14.0 3.7 28.2 28.3 0.7 6.1

M.Cap. (US$ b) 4.2 3/07E 225,084 15,674 40.5 10.8 12.6 3.1 26.3 29.2 0.6 5.4

* Pre-exceptionals ? Tata Motors should post 11% volume growth, led by strong LCV sales and passenger vehicles sales – resulting in a sales growth of 13.2% to Rs47b in 2QFY06. ? Due to lower sales of high margin M&HCVs, we expect EBITDA margins to decline by 50bp, YoY in 2QFY06. EBITDA growth is expected at 8.4% YoY to Rs5.6b, lower than revenue growth due to change in product-mix. ? Net profit should register a growth of 8.1% YoY to Rs 3.3b in 2QFY06. ? Tata Motors should deliver earnings growth of 14% in FY06 on the back of 15% volume growth. We expect net sales of Rs201.2b,a growth of 15.5% YoY with a corresponding net profit of Rs14.1b, a growth of 13.5% YoY. We estimate a standalone diluted EPS of Rs36.6 and a consolidated EPS of Rs40.2. ? While Tata Motors has a robust product portfolio, we believe the slowdown in high margin M&HCV sales and rising sales of low-realization LCVs would bring down EBITDA margin by 40b in FY06. The stock currently trades at 12.7x FY06 consolidated earnings. We maintain Neutral.

QUARTERLY PERFORMANCE (RS MILLION) Y/E MARCH FY05 FY06 FY05 FY06E 1Q 2Q 3Q 4Q 1Q 2QE 3QE 4QE Volume 84,918 95,576 98,662 120,410 87,492 106,089 118,394 147,333 399,565 459,308 Total Income 35,741 41,471 43,649 53,388 38,781 46,953 51,855 63,621 174,191 201,210 Change (%) 42.8 30.5 28.4 28.8 8.5 13.2 18.8 19.2 31.7 15.5 Total Cost 31,446 36,271 37,838 46,983 33,903 41,319 45,633 55,919 152,480 176,773 Operating Profit 4,294 5,200 5,811 6,405 4,878 5,634 6,223 7,703 21,711 24,437 OPM (%) 12.0 12.5 13.3 12.0 12.6 12.0 12.0 12.1 12.5 12.1 Change (%) 29.5 18.5 18.6 3.1 13.6 8.4 7.1 20.3 15.4 12.6 Non-Operating Income 412 420 247 296 583 558 436 167 1,661 1,744 Extraordinary Expense 11 10 10 108 10 139 0 Interest 416 398 414 313 510 324 417 293 1,542 1,545 Gross Profit 4,280 5,498 5,633 6,280 4,940 5,868 6,241 7,576 21,692 24,636 Less: Depreciation 983 1,068 1,008 1,442 1,267 1,133 1,166 1,155 4,502 4,721 Amortisation 266 158 62 185 74 216 144 366 671 800 PBT 3,031 4,272 4,563 4,652 3,600 4,519 4,931 6,054 16,519 19,115 Tax 797 1,180 1,401 771 873 1,175 1,257 1,664 4,150 4,970 Effective Tax Rate (%) 26.3 27.6 30.7 16.6 24.3 26.0 25.5 27.5 25.1 26.0 PAT 2,234 3,092 3,162 3,881 2,727 3,344 3,674 4,390 12,370 14,145 Adj PAT 2,241 2,913 3,172 3,989 2,737 3,344 3,674 4,390 12,460 14,145 Change (%) 97.6 39.7 49.2 28.6 22.1 8.1 16.2 13.1 47.5 13.5 E: MOSt Estimates

Amit Kasat ([email protected]);Tel:+91 22 56575328/Aditya S Makharia([email protected]);Tel:+91 22 56575319

23 September 2005 58 Results Preview

QUARTER ENDING SEPTEMBER 2005

Banking

BSE Sensex: 8,223 S&P CNX: 2,478 23 September 2005

COMPANY NAME PG. The July-September quarter was marked by stable interest rates compared to the last Andhra Bank 64 few quarters wherein volatility was high. The benchmark 10-year G-Sec hovered in the Bank of Baroda 65 range of 6.9-7.2%, before settling down at near 7.1%. Core business momentum continued Bank of India 66 to remain strong with robust growth in non-food credit. Credit growth at 30% YoY is Canara Bank 67 amongst the highest witnessed over the last nine years.

Corporation Bank 68

HDFC 69 Stocks in our universe are likely to report an average growth of 16% in NII and 20% in net profit for 2QFY06. While margins are likely to decline marginally on a YoY basis, HDFC Bank 70 strong loan growth, lower growth in operating expenses and lower provisioning will drive ICICI Bank 71 profit growth for banks. Indian Overseas Bank 72 J&K Bank 73 The key highlights of 2QFY06 are likely to be: Karnataka Bank 74 ? Steady growth in NII on the back of moderate margins and strong loan growth over Oriental Bank of Commerce 75 the last four quarters Punjab National Bank 76 ? Treasury gains to remain low for most banks. For banks like ICICI Bank, IOB and

State Bank of India 77 UTI Bank, treasury gains are likely to be driven by equity

Syndicate Bank 78 ? Cost savings on account of nil / low VRS charges for state-owned banks ? Lower provisioning for NPA, in line with lower treasury gains Union Bank 79 ? No HTM transfer hit / negligible wage arrear provisions UTI Bank 80 ? Overall, steady core earnings growth, but PAT growth likely to be driven by lower Vijaya Bank 81 provisions and nil HTM transfer hits.

EXPECTED QUARTERLY PERFORMANCE SUMMARY (RS MILLION)

RECO NET INTEREST INCOME OPERATING PROFIT NET PROFIT SEP.05 CHG. (%) SEP.05 CHG. (%) SEP.05 CHG. (%) Banks Andhra Bank Buy 2,860 4.6 2,210 -35.1 1,310 19.8 Bank of Baroda Buy 7,743 12.5 4,993 -9.2 2,443 14.5 Bank of India Buy 6,044 1.5 4,150 6.1 1,650 233.0 Canara Bank Buy 8,587 17.8 6,087 5.9 3,987 0.5 Corporation Bank Sell 3,050 6.0 2,209 -8.2 1,109 304.7 HDFC Buy 4,271 19.3 3,755 19.2 3,035 22.3 HDFC Bank Neutral 5,479 28.7 4,194 39.3 2,003 31.5 ICICI Bank Neutral 8,992 31.2 10,092 34.2 5,394 22.0 Indian Overseas Bank Buy 5,034 8.2 3,734 17.4 1,884 19.0 J&K Bank Buy 1,625 5.2 1,075 41.4 675 168.4 Karnataka Bank Buy 954 0.8 774 -1.2 424 35.5 Oriental Bank Buy 4,313 11.7 3,063 6.9 1,563 -27.3 Punjab National Bank Buy 11,330 16.8 7,530 -9.8 4,391 6.4 State Bank Buy 39,133 15.8 28,183 8.2 12,783 18.2 Syndicate Bank Buy 4,950 17.4 2,950 15.3 1,450 91.8 Union Bank Buy 5,600 22.6 3,870 25.4 1,170 -44.5 UTI Bank Buy 2,451 35.6 1,951 408.1 1,054 128.1 Vijaya Bank Buy 2,499 2.5 1,904 1.2 1,124 57.5 Sector Aggregate 124,915 15.7 92,723 9.7 47,448 19.6

Rajat Rajgarhia([email protected];Tel:+91 22 56575320) / Manish Karwa([email protected];Tel:+91 22 56575318) 23 September 2005 59 Banking

Loan growth continues to remain strong Deposits have grown by 16% YoY in 2QFY06 (as of 2 September 2005). Non-food credit growth has continued to remain strong at 30% YoY. This is the highest credit growth in the system in the last nine years. An outstanding feature this time around is that loan growth has been widespread. Earlier, loan growth was driven by only one or two segments (retail has been driving growth over the last couple of fiscals). Another distinguishing factor this time around is that loan growth has continued to remain robust even during the first half. Usually, credit always remains sluggish in the first half of the financial year and starts picking up from the third quarter. While, we expect loan growth to remain strong for FY06, growth rates might slow down owing to the higher base of 2HFY05. Nevertheless, we expect to end the fiscal with a loan growth in the range of 23-25%.

Interest rates have been stable The July-Sept quarter saw stable interest rates in the range of 6.9-7.2% (10-year G-Sec yield). This band was maintained despite concerns relating to global inflation due to surging oil prices. Even the low inflation (3-3.5%) on the domestic front due to a high base effect did not have much effect on interest rates.

With comfortable liquidity in the system, we expect interest rates to remain stable in the short term within a price band of 7.0-7.25%. Almost all the banks have insulated themselves to a great extent from the volatility in interest rates.

STABLE INTEREST RATES DURING THE QUARTER

10-year G-Sec Yield (%) 7.4

7.1

6.8

6.5 Jul-05 Aug-05 Sep-05

Source: Company/Motilal Oswal Securities

23 September 2005 60 Banking

Operating expenses to be lower in the absence of VRS charges The trend witnessed in 1QFY06 will continue with the larger banks having a huge leverage on account of flat operating expenses. With FY05 being the last year for amortizing VRS expenses, most state-owned banks are witnessing savings in their employee expenses to the tune of 5-8% (3-6% of operating expenses). Even as other operating expenses are increasing, the overall increase in operating expenses is low. This should continue to benefit banks on the operating front.

Maintain our positive stance on banking The Indian banking sector is set to benefit from a multitude of factors. We expect core income to be driven by strong loan growth (from both corporate as well as retail) aided by steady margins. Fee income is also set to emerge as a strong growth driver for private and aggressive state owned banks. At the same time, state owned banks (mainly larger banks – trend already visible in 1QFY06) will benefit from lower growth in operating expenses, as FY05 was the last year for VRS provisions and hereon they will only witness natural attrition. In fact, from FY06 onwards, they will not need to make any wage arrear provisions. Further, as most of the banks have cleaned up their books and have lower incremental delinquencies, we expect lower provisioning going forward.

We believe that the core fundamentals for the banking sector are intact (we expect loan growth in excess of 23-25% in FY06). Valuations (at 1-1.3x FY07E book value and a near 20% RoE) continue to be attractive.

23 September 2005 61 Banking

Key trends

GROWTH IN NON-FOOD CREDIT

1,000 NFC (Rs b) - LHS Chg YoY (%) - RHS 35

29 750

23 500 17

250 11

0 5 2QFY03 3QFY03 4QFY03 1QFY04 2QFY04 3QFY04 4QFY04 1QFY05 2QFY05 3QFY05 4QFY05 1QFY06 2QFY06

GROWTH IN DEPOSITS

Deposits (Rs b) - LHS Chg YoY (%) - RHS 1,000 18

750 16

500 14

250 12

0 10 2QFY03 3QFY03 4QFY03 1QFY04 2QFY04 3QFY04 4QFY04 1QFY05 2QFY05 3QFY05 4QFY05 1QFY06 2QFY06

10-YEAR G-SEC YIELD CURVE (%)

13.0 11.6 11.5 10.9 9.8 10.0 9.4 9.2 8.0 8.5 7.4 7.6 7.2 6.9 7.1 6.2 6.6 6.7 7.0 6.1 6.1 5.8 5.8 5.2 5.1 5.5 5.3

4.0 Jun-01 Jun-02 Jun-03 Jun-04 Jun-05 Mar-01 Mar-02 Mar-03 Mar-04 Mar-05 Sep-00 Dec-00 Sep-01 Dec-01 Sep-02 Dec-02 Sep-03 Dec-03 Sep-04 Dec-04 Sep-05

23 September 2005 62 Banking

Stock performance and valuations

STOCK PERFORMANCE (%) ABSOLUTE PERF REL PERF TO SENSEX REL PERF TO SECTOR 3 M 1 YEAR 3 M 1 YEAR 3 M 1 YEAR Banking Andhra Bank -2 91 -18 42 -22 13 Bank of Baroda 10 24 -5 -24 -10 -53 Bank of India 12 114 -3 66 -8 37 Canara Bank 7 48 -9 -1 -13 -30 Corporation Bank 9 50 -7 2 -11 -27 H D F C 12 53 -4 5 -8 -24 HDFC Bank 16 64 0 15 -4 -14 ICICI Bank 38 100 22 51 18 22 Indian Overseas 14 74 -2 26 -6 -3 J & K Bank 24 64 8 15 4 -14 Karnataka Bank 19 159 3 110 -1 82 Oriental Bank -1 5 -17 -43 -22 -72 Pun. Natl. Bank 10 58 -6 10 -10 -19 State Bank of India 30 84 15 36 10 7 Syndicate Bank 45 108 29 60 25 31 Union Bank (I) 17 73 2 24 -3 -5 UTI Bank 11 105 -5 57 -9 28 Vijaya Bank -1 28 -16 -20 -21 -49

RELATIVE PERFORMANCE - 3 MONTH (%) RELATIVE PERFORMANCE - 1 YEAR (%)

Sensex MOSt Banking Index MOSt Banking Index Sensex 135 175 120 150 105 125 90 100 75 75 Jun-05 Jul-05 Aug-05 Sep-05 Sep-04 Dec-04 Mar-05 Jun-05 Sep-05

CMP (RS) RECO EPS (RS) P/E (X) P/BV (X) ROE (%) 23.9.05 FY05A FY06E FY07E FY05A FY06E FY07E FY05A FY06E FY07E FY05A FY06E FY07E Banks Andhra Bank 97 Buy 13.0 14.3 16.2 7.5 6.8 6.0 2.1 1.7 1.4 31.6 27.9 25.7 Bank of Baroda 225 Buy 23.0 28.6 35.7 9.8 7.9 6.3 1.2 1.1 1.0 12.6 13.8 15.7 Bank of India 114 Buy 7.0 16.2 19.0 16.4 7.0 6.0 1.3 1.1 1.0 8.0 16.6 16.9 Canara Bank 229 Buy -17.1 26.5 21.0 8.5 6.7 5.5 1.6 1.3 1.1 19.5 21.0 21.4 Corporation Bank 392 Sell 28.0 39.3 45.6 14.0 10.0 8.6 1.8 1.6 1.4 13.8 17.2 17.3 HDFC 956 Buy 41.6 50.8 62.0 23.0 18.8 15.4 6.1 5.1 4.2 28.5 29.6 30.0 HDFC Bank 670 Neutral 21.5 28.5 37.7 31.2 23.5 17.8 4.6 4.0 3.3 18.5 18.1 20.3 ICICI Bank 576 Neutral 27.2 33.3 40.5 21.2 17.3 14.2 3.4 2.9 2.5 19.5 18.2 19.1 Indian Overseas Bank 87 Buy 12.0 14.1 16.2 7.3 6.2 5.4 1.9 1.6 1.3 28.0 26.7 24.9 J&K Bank 437 Buy 23.7 58.8 74.0 18.4 7.4 5.9 1.3 1.1 1.0 7.1 16.0 17.7 Karnataka Bank 112 Buy 12.1 14.7 17.8 9.2 7.6 6.3 1.4 1.2 1.1 17.6 17.0 18.0 Oriental Bank 259 Buy 39.5 30.8 41.0 6.6 8.4 6.3 1.5 1.3 1.1 25.3 18.3 18.9 Punjab National Bank 428 Buy 44.7 53.5 63.1 9.6 8.0 6.8 1.7 1.4 1.2 21.4 19.0 19.0 State Bank 890 Buy 81.8 97.1 115.8 10.9 9.2 7.7 1.9 1.6 1.4 19.4 19.5 19.6 Syndicate Bank 82 Buy 8.5 12.2 14.6 9.6 6.7 5.6 1.9 1.5 1.3 18.3 21.4 21.1 Union Bank 126 Buy 15.6 18.5 23.7 8.1 6.2 4.8 1.8 1.4 1.2 21.5 21.8 22.1 UTI Bank 266 Buy 12.0 16.5 20.6 22.1 16.1 12.9 3.1 2.7 2.3 18.9 17.7 19.0 Vijaya Bank 60 Buy 8.8 9.1 12.4 6.9 6.6 4.9 1.6 1.4 1.2 26.0 23.0 26.1 Sector Aggregate 13.3 10.6 8.8 2.6 2.1 1.8 19.3 19.6 20.1

23 September 2005 63 Results Preview SECTOR: BANKING

Andhra Bank

STOCK INFO. BLOOMBERG BSE Sensex: 8,223 ANDB IN 23 September 2005 Buy REUTERS CODE S&P CNX: 2,478 ADBK.BO Previous Recommendation: Buy Rs97

Equity Shares (m) 400.0 YEAR NET INCOME PAT EPS EPS P/E P/BV CAR ROAE ROAA P/ABV END (RS M) (RS M) (RS) GROWTH (%) (X) (X) (%) (%) (%) RATIO 52-Week Range 123/46 3/05A 18,224 5,201 13.0 12.2 7.5 2.1 12.1 31.6 1.7 2.1 1,6,12 Rel. Perf. (%) -6/-36/42 M.Cap. (Rs b) 38.8 3/06E 17,383 5,736 14.3 10.3 6.8 1.7 12.5 27.9 1.6 1.8

M.Cap. (US$ b) 0.9 3/07E 19,405 6,478 16.2 12.9 6.0 1.4 12.5 25.7 1.6 1.5

? The pressure witnessed on the margin front in 1QFY06 is likely to continue in 2QFY06 as well. We expect NII to grow by 5% to Rs2.9b. However, on account of a lower base, NII growth will be higher in the next couple of quarters.

? Loan growth is likely to remain strong at >30% YoY. Deposit accretion is expected to be steady at 16%.

? Non-fund based income will decline sharply YoY on the back of a sharp fall in treasury income.

? With net NPAs at 0.4%, incremental provisioning will continue to remain low for Andhra Bank.

? The bank is a play on strong growth, clean books and relatively high RoE. At CMP, the stock is trading at 6.8x FY06E EPS and 1.8x FY06 adjusted BV. We maintain Buy.

QUARTERLY PERFORMANCE (RS MILLION) Y/E MARCH FY05 FY06 FY05 FY06E 1Q 2Q 3Q 4Q 1Q 2QE 3QE 4QE Interest Income 5,605 5,676 5,597 5,856 6,172 6,244 6,493 6,739 22,735 25,648 Interest Expense 2,926 2,943 2,979 3,196 3,429 3,384 3,456 3,515 12,044 13,784 Net Interest Income 2,679 2,733 2,618 2,660 2,743 2,860 3,037 3,225 10,690 11,864 % Change (Y-o-Y) 43.2 14.5 10.7 14.5 2.4 4.6 16.0 21.2 17.4 11.0 Other Income 1,948 2,612 1,463 1,511 772 1,300 1,500 1,946 7,534 5,518 Net Income 4,627 5,345 4,081 4,171 3,515 4,160 4,537 5,171 18,224 17,383 % Change (Y-o-Y) 20.1 19.7 17.2 5.8 -13.9 -22.2 11.2 24.0 14.7 -4.6 Operating Expenses 1,982 1,943 2,064 2,306 1,914 1,950 2,000 2,075 8,295 7,939 Operating Profit 2,645 3,402 2,017 1,865 1,601 2,210 2,537 3,096 9,930 9,444 Other Provisions 368 1,949 274 -91 449 300 250 251 2,501 1,250 Profit before Tax 2,277 1,453 1,744 1,955 1,152 1,910 2,287 2,846 7,429 8,194 Tax Provisions 775 360 525 568 300 600 650 908 2,228 2,458 Net Profit 1,502 1,093 1,219 1,388 852 1,310 1,637 1,938 5,201 5,736 % Change (Y-o-Y) 29.3 -20.2 30.3 21.4 -43.3 19.8 34.3 39.6 12.2 10.3 Cost to Income Ratio (%) 42.8 36.3 50.6 55.3 54.5 46.9 44.1 52.2 45.5 45.7 Interest Exp./Interest Income (%) 52.2 51.8 53.2 54.6 55.6 54.2 53.2 37.6 53.0 53.7 Other Income/Net Income (%) 42.1 48.9 35.9 36.2 22.0 31.3 33.1 37.6 41.3 31.7 E: MOSt Estimates

Rajat Rajgarhia([email protected];Tel:+91 22 56575320) / Manish Karwa([email protected];Tel:+91 22 56575318) 23 September 2005 64 Results Preview SECTOR: BANKING

Bank of Baroda

STOCK INFO. BLOOMBERG BSE Sensex: 8,223 BOB IN 23 September 2005 Buy REUTERS CODE S&P CNX: 2,478 BOB.BO Previous Recommendation: Buy Rs225

Equity Shares (m) 294.3 YEAR NET INCOME PAT EPS EPS P/E P/BV CAR ROAE ROAA P/ABV END (RS M) (RS M) (RS) GROWTH (%) (X) (X) (%) (%) (%) RATIO 52-Week Range 274/151 3/05A 42,841 6,768 23.0 -30.0 9.8 1.2 12.6 12.6 0.8 1.3 1,6,12 Rel. Perf. (%) -18/-16/-24 M.Cap. (Rs b) 66.3 3/06E 40,831 8,230 28.6 24.3 7.9 1.1 11.0 14.1 0.8 1.2

M.Cap. (US$ b) 1.5 3/07E 44,833 10,515 35.7 25.0 6.3 1.0 10.0 15.7 0.9 1.0

? NII is expected to grow by 12.5% in 2QFY06, on the back of a growing loan book which has picked up over the last three quarters.

? We expect a sharp decline in bond gains YoY for 2QFY06. As against Rs1.6b of bond gains, we expect negligible gains in the current quarter. As a result, non-interest income is likely to decline sharply.

? With no VRS charges, HTM hit and wage arrears, BoB is likely to witness a PAT growth of 15% YoY in 2QFY06. PAT growth in the following quarters is likely to be higher on account of low base.

? The bank’s board has approved raising capital through issue of 71m shares which will bring down the government stake to around 51%.

? At 1.2x FY06E adjusted BV, valuations look attractive. However, we believe that the core earnings needs to be improved to warrant any re-rating. We maintain Buy.

QUARTERLY PERFORMANCE (RS MILLION) Y/E MARCH FY05 FY06 FY05 FY06E 1Q 2Q 3Q 4Q 1Q 2QE 3QE 4QE Interest Income 15,284 15,481 15,924 17,625 16,732 17,029 17,994 18,316 64,314 70,072 Interest Expense 8,454 8,598 8,641 8,829 9,145 9,286 10,024 10,226 34,521 38,681 Net Interest Income 6,830 6,883 7,283 8,796 7,587 7,743 7,970 8,090 29,793 31,391 % Change (YoY) 2.8 9.5 12.0 40.0 11.1 12.5 9.4 -8.0 15.9 5.4 Other Income 3,946 3,594 2,843 2,665 2,087 2,200 2,600 2,553 13,048 9,440 Net Income 10,776 10,477 10,126 11,462 9,674 9,943 10,570 10,643 42,841 40,831 % Change (YoY) 23.2 -8.9 -7.9 -1.7 -10.2 -5.1 4.4 -7.1 -0.2 -4.7 Operating Expenses 4,811 4,978 4,920 5,112 5,118 4,950 5,200 5,143 19,822 20,411 Operating Profit 5,965 5,499 5,206 6,349 4,556 4,993 5,370 5,501 23,019 20,420 Provision & Contingencies 1,622 2,457 5,008 5,302 2,571 1,600 2,100 2,729 14,388 9,000 PBT 4,343 3,042 198 1,048 1,985 3,393 3,270 2,772 8,631 11,420 Tax Provisions 1,414 909 -498 38 415 950 916 909 1,863 3,190 Net Profit 2,930 2,133 695 1,010 1,570 2,443 2,355 1,863 6,768 8,230 % Change (YoY) 19.9 -17.8 -77.3 -35.2 -46.4 14.5 238.6 84.4 -30.0 21.6 Cost to Income Ratio (%) 44.6 47.5 48.6 44.6 52.9 49.8 49.2 48.3 46.3 50.0 Int Exp/ Int Earned (%) 55.3 55.5 54.3 50.1 54.7 54.5 55.7 55.8 53.7 55.2 Other Income / Net Income (%) 36.6 34.3 28.1 23.3 21.6 22.1 24.6 24.0 30.5 23.1 E: MOSt Estimates

Rajat Rajgarhia([email protected];Tel:+91 22 56575320) / Manish Karwa([email protected];Tel:+91 22 56575318) 23 September 2005 65 Results Preview SECTOR: BANKING

Bank of India

STOCK INFO. BLOOMBERG BSE Sensex: 8,223 BOI IN 23 September 2005 Buy REUTERS CODE S&P CNX: 2,478 BOI.BO Previous Recommendation: Buy Rs114

Equity Shares (m) 488.1 YEAR NET INCOME PAT EPS EPS P/E P/BV CAR ROAE ROAA P/ABV END (RS M) (RS M) (RS) GROWTH (%) (X) (X) (%) (%) (%) RATIO 52-Week Range 148/46 3/05A 33,927 3,401 7.0 -66.3 16.4 1.3 11.5 8.0 0.4 1.7 1,6,12 Rel. Perf. (%) -12/-21/66 M.Cap. (Rs b) 55.6 3/06E 37,432 7,926 16.2 133.1 7.0 1.1 13.0 16.6 0.8 1.3

M.Cap. (US$ b) 1.3 3/07E 43,413 9,287 19.0 17.2 6.0 1.0 12.0 16.9 0.8 1.1

? We expect NII to grow by just 1.5% on a reported basis, as the bank will report approximately Rs600m of HTM amortization as a part of interest expenses. Excluding this, core NII is expected to grow by 12% YoY.

? We expect lower treasury gains of Rs200m in 2QFY06, as against Rs310m in 2QFY05, while core fee income is expected to grow by 15% YoY.

? Employee expenses are expected to decline YoY as VRS provisioning will not be there in the current quarter.

? Overall, we expect PAT to grow by 233% YoY, as 2QFY05 had higher provisions relating to HTM transfer.

? At CMP, the stock is trading at 7x FY06E EPS and 1.3x FY06 adjusted BV. We maintain Buy.

QUARTERLY PERFORMANCE (RS MILLION) Y/E MARCH FY05 FY06 FY05 FY06E 1Q 2Q 3Q 4Q 1Q 2QE 3QE 4QE Interest Income 14,087 15,220 15,099 15,910 15,645 16,444 17,683 18,181 60,315 67,953 Interest Expense 8,702 9,263 8,908 11,074 10,056 10,400 11,100 11,240 37,946 42,795 Net Interest Income 5,384 5,957 6,191 4,837 5,590 6,044 6,583 6,941 22,369 25,157 % Change (Y-o-Y) 0.8 18.5 3.9 -15.0 3.8 1.5 6.3 43.5 1.6 12.5 Other Income 2,750 2,598 2,334 3,876 2,944 2,831 2,763 3,738 11,558 12,275 Net Income 8,134 8,555 8,525 8,713 8,533 8,875 9,346 10,679 33,927 37,432 % Change (Y-o-Y) -6.3 -13.9 -12.5 -24.7 4.9 3.7 9.6 22.6 -15.0 10.3 Operating Expenses 4,528 4,643 4,717 5,436 4,867 4,725 5,100 4,561 19,323 19,253 Operating Profit 3,607 3,912 3,808 3,277 3,666 4,150 4,246 6,117 14,604 18,179 Other Provisions 1,332 3,138 2,684 2,840 1,392 2,000 1,700 2,659 9,993 7,750 Profit before Tax 2,274 774 1,124 437 2,275 2,150 2,546 3,459 4,610 10,429 Tax Provisions 648 279 374 -91 557 500 600 846 1,210 2,503 Net Profit 1,627 495 750 528 1,717 1,650 1,946 2,613 3,401 7,926 % Change (Y-o-Y) -20.2 -78.2 -67.2 -84.9 5.6 233.0 159.3 395.0 -66.3 133.1 Cost to Income Ratio (%) 55.7 54.3 55.3 62.4 57.0 53.2 54.6 42.7 57.0 51.4 Interest Exp./Interest Income (%) 61.8 60.9 59.0 69.6 64.3 63.2 62.8 61.8 62.9 63.0 Other Income/Net Income (%) 33.8 30.4 27.4 44.5 34.5 31.9 29.6 35.0 34.1 32.8 E: MOSt Estimates

Rajat Rajgarhia([email protected];Tel:+91 22 56575320) / Manish Karwa([email protected];Tel:+91 22 56575318) 23 September 2005 66 Results Preview SECTOR: BANKING

Canara Bank

STOCK INFO. BLOOMBERG BSE Sensex: 8,223 CBK IN 23 September 2005 Buy REUTERS CODE S&P CNX: 2,478 CNBK.BO Previous Recommendation: Buy Rs229

Equity Shares (m) 410.0 YEAR NET INCOME PAT EPS EPS P/E P/BV CAR ROAE ROAA P/ABV END (RS M) (RS M) (RS) GROWTH (%) (X) (X) (%) (%) (%) RATIO 52-Week Range 258/136 3/05A 46,943 11,095 27.1 -17.1 8.5 1.6 12.8 19.5 1.1 1.8 1,6,12 Rel. Perf. (%) -5/-9/-1 M.Cap. (Rs b) 93.8 3/06E 48,053 14,030 34.2 26.5 6.7 1.3 13.0 21.0 1.2 1.4

M.Cap. (US$ b) 2.1 3/07E 53,327 16,970 41.4 21.0 5.5 1.1 13.3 21.4 1.2 1.2

? On the back of a lower base of 2QFY05, we expect NII for the bank to grow by 17.8% to Rs8.6b.

? With lower other income on the back of low bond gains and flat operating expenses (on account of nil VRS charges), operating profit is likely to increase by 6% to Rs6.1b.

? Canara Bank had done huge provisioning in 4QFY05 to bring down its net NPAs. During 1QFY06, the bank took a hit due to transfer of securities to HTM. During 2QFY06, we expect provisioning requirement to come down. Nevertheless, provisioning will be higher compared to 2QFY05. As a result, we expect flat net profit growth.

? Any recovery from Dabhol will be a strong upside as this asset has been treated as an NPA and the bank has already been making provisions for the same.

? At CMP, the stock is trading at 6.7x FY06E EPS and 1.4x FY06E adjusted BV. We maintain Buy.

QUARTERLY PERFORMANCE (RS MILLION) Y/E MARCH FY05 FY06 FY05 FY06E 1Q 2Q 3Q 4Q 1Q 2QE 3QE 4QE Interest Earned 18,191 18,397 18,803 20,329 19,795 20,604 22,000 23,777 75,720 86,176 Interest Expended 10,731 11,105 11,237 11,142 11,467 12,017 13,037 14,000 44,215 50,521 Net Interest Income 7,460 7,292 7,566 9,187 8,328 8,587 8,963 9,777 31,505 35,655 % Change (YoY) 23.6 13.0 7.4 26.0 11.6 17.8 18.5 6.4 17.5 13.2 Non Interest Income 3,666 3,665 3,503 4,604 2,591 2,600 3,450 3,757 15,438 12,398 Net Income 11,126 10,956 11,069 13,791 10,919 11,187 12,413 13,534 46,943 48,053 Operating Expenses 4,680 5,208 4,969 6,232 5,316 5,100 5,250 5,399 21,090 21,065 Operating Profit 6,446 5,748 6,100 7,558 5,603 6,087 7,163 8,135 25,853 26,987 % Change (YoY) 29.7 -42.4 -11.0 11.5 -13.1 5.9 17.4 7.6 -9.6 4.4 Other Provisions & Contingencies 1,782 731 3,570 6,976 3,034 1,300 1,900 2,766 13,058 9,000 PBT 4,664 5,018 2,530 583 2,569 4,787 5,263 5,369 12,795 17,987 Provision for Taxes 1,300 1,050 -210 -440 700 800 1,100 1,357 1,700 3,957 Net Profit 3,364 3,968 2,740 1,023 1,869 3,987 4,163 4,012 11,095 14,030 % Change (YoY) 31.5 22.0 -26.5 -73.4 -44.4 0.5 51.9 292.3 -17.1 26.5 Cost / Income 42.1 47.5 44.9 45.2 48.7 45.6 42.3 39.9 44.9 43.8 Int Exp / Int Income 59.0 60.4 59.8 54.8 57.9 58.3 59.3 58.9 58.4 58.6 Other Income / Net Income 33.0 33.4 31.6 33.4 23.7 23.2 27.8 27.8 32.9 25.8 E: MOSt Estimates

Rajat Rajgarhia([email protected];Tel:+91 22 56575320) / Manish Karwa([email protected];Tel:+91 22 56575318) 23 September 2005 67 Results Preview SECTOR: BANKING

Corporation Bank

STOCK INFO. BLOOMBERG BSE Sensex: 8,223 CRPBK IN 23 September 2005 Sell REUTERS CODE S&P CNX: 2,478 CRBK.BO Previous Recommendation: Sell Rs392

Equity Shares (m) 143.4 YEAR NET INCOME PAT EPS EPS P/E P/BV CAR ROAE ROAA P/ABV END (RS M) (RS M) (RS) GROWTH (%) (X) (X) (%) (%) (%) RATIO 52-Week Range 508/244 3/05A 16,939 4,022 28.0 -20.2 14.0 1.8 16.2 13.8 1.3 1.9 1,6,12 Rel. Perf. (%) -15/-14/2 M.Cap. (Rs b) 56.2 3/06E 17,209 5,632 39.3 40.1 10.0 1.6 15.0 17.2 1.6 1.6

M.Cap. (US$ b) 1.3 3/07E 19,823 6,534 45.6 16.0 8.6 1.4 14.0 17.3 1.6 1.4

? Corporation Bank’s earnings are expected to see a sharp increase on the back of a low base of 2QFY06, wherein it had transferred securities to HTM.

? However, on account of declining margins, NII is expected to grow by 6% to Rs3.05b.

? We expect non-fund based income to decline in 2QFY06, as treasury income at Rs200m is expected to be lower.

? The bank already has a major part of its investment book in the HTM category and no transfer hits are expected in 2QFY06.

? Corporation Bank is one of the most expensive stocks among state-owned banks, with a visible slowdown in core earnings. Also, its RoE is one of the lowest in the sector. At CMP, the stock trades at 10x FY06E EPS and 1.6x FY06 adj BV. We maintain Sell.

QUARTERLY PERFORMANCE (RS MILLION) Y/E MARCH FY05 FY06 FY05 FY06E 1Q 2Q 3Q 4Q 1Q 2QE 3QE 4QE Interest Income 5,527 5,642 5,563 5,767 5,968 6,175 6,300 6,690 22,498 25,133 Interest Expense 2,736 2,763 2,804 2,900 3,159 3,125 3,150 3,403 11,204 12,837 Net Interest Income 2,790 2,879 2,759 2,866 2,809 3,050 3,150 3,287 11,294 12,296 % Change (Y-o-Y) 37.3 16.5 3.0 16.6 0.7 6.0 14.2 14.7 17.2 8.9 Other Income 1,001 1,216 2,162 1,266 1,696 1,100 1,050 1,067 5,646 4,913 Net Income 3,792 4,095 4,921 4,132 4,505 4,150 4,200 4,354 16,939 17,209 % Change (Y-o-Y) 15.3 -4.9 29.6 21.1 18.8 1.3 -14.6 5.4 14.4 1.6 Operating Expenses 1,513 1,688 1,635 1,533 1,735 1,941 1,880 1,907 6,370 7,463 Operating Profit 2,279 2,407 3,286 2,599 2,770 2,209 2,320 2,448 10,570 9,746 % Change (Y-o-Y) 12.4 -16.4 39.5 43.8 21.6 -8.2 -29.4 -5.8 16.5 -7.8 Other Provisions 688 2,137 762 937 813 400 250 237 4,524 1,700 PBT 1,590 270 2,523 1,662 1,957 1,809 2,070 2,211 6,046 8,046 Tax Provisions 535 -4 907 587 722 700 400 592 2,024 2,414 Net Profit 1,055 274 1,617 1,076 1,235 1,109 1,670 1,619 4,022 5,632 % Change (Y-o-Y) -16.5 -81.1 42.7 -10.0 17.1 304.7 3.3 50.5 -20.2 40.1 Cost to Income Ratio (%) 39.9 41.2 33.2 37.1 38.5 46.8 44.8 43.8 37.6 43.4 Interest Exp./Interest Income (%) 49.5 49.0 50.4 50.3 52.9 50.6 50.0 50.9 49.8 51.1 Other Income/Net Income (%) 26.4 29.7 43.9 30.6 37.6 26.5 25.0 24.5 33.3 28.6 E: MOSt Estimates

Rajat Rajgarhia([email protected];Tel:+91 22 56575320) / Manish Karwa([email protected];Tel:+91 22 56575318) 23 September 2005 68 Results Preview SECTOR: BANKING

HDFC

STOCK INFO. BLOOMBERG 23 September 2005 BSE Sensex: 8,223 HDFC IN Buy REUTERS CODE S&P CNX: 2,478 HDFC.BO Previous Recommendation: Buy Rs956

Equity Shares (m) 244.4 YEAR NET INCOME PAT EPS EPS P/E P/BV CAR ROAE ROAA P/ABV END (RS M) (RS M) (RS) GROWTH (%) (X) (X) (%) (%) (%) RATIO 52-Week Range 1,080/600 3/05A 14,510 10,366 41.6 20.5 23.0 6.1 13.4 28.5 2.9 6.2 1,6,12 Rel. Perf. (%) -3/7/5 M.Cap. (Rs b) 233.6 3/06E 17,698 12,649 50.8 22.0 18.8 5.1 13.2 29.6 2.8 5.2

M.Cap. (US$ b) 5.3 3/07E 21,473 15,443 62.0 22.1 15.4 4.2 13.0 30.0 2.8 4.3

? We expect HDFC’s income to grow by 18% in 2QFY06, driven by stable margins and business growth of 30%.

? HDFC’s margins are expected to be stable at 2.1%. Though rising interest rates might put pressure on HDFC’s cost of borrowing, HDFC has also over the last couple of quarters increased its lending rates in order to maintain its margins.The recently concluded FCCB of US$500m is likely to help HDFC in some margin expansion in 2HFY06.

? We expect HDFC to post a 22% earnings growth in 2QFY06. HDFC continues to be one of the most consistent performers in the sector and we expect the stock to sustain its outperformance in future as well.

? Adjusting for the value of its subsidiaries, HDFC is available at 10x FY07E EPS. With mortgage growth likely to remain strong, we are extremely optimistic over the future growth prospects of HDFC. We maintain Buy.

QUARTERLY PERFORMANCE (RS MILLION) Y/E MARCH FY05 FY06 FY05 FY06E 1Q 2Q 3Q 4Q 1Q 2QE 3QE 4QE Income from Operations 7,612 8,403 8,469 9,523 9,326 9,915 9,993 11,588 34,006 40,822 Other Income 19 33 11 35 22 24 25 29 98 100 Total Income 7,631 8,435 8,480 9,558 9,348 9,939 10,018 11,616 34,105 40,922 YoY Change (%) 4.9 8.7 13.5 15.5 22.5 17.8 18.1 21.5 10.8 20.0 Interest and Other Charges 4,645 4,824 5,086 5,040 5,669 5,644 5,900 6,011 19,594 23,224 Other Expenses 462 460 498 335 561 540 546 433 1,755 2,080 Total Expenses 5,107 5,284 5,584 5,375 6,229 6,184 6,446 6,445 21,350 25,304 PBDT 2,524 3,152 2,896 4,183 3,118 3,775 3,572 5,172 12,755 15,618 YoY Change (%) 20.1 23.7 27.7 16.6 23.5 19.2 23.3 23.6 21.4 22.4 Depreciation 47 46 41 53 42 54 56 78 187 230 PBT 2,477 3,106 2,855 4,130 3,076 3,701 3,516 5,094 12,568 15,388 Provision for Tax 431 625 495 652 604 666 633 836 2,202 2,739 PAT 2,046 2,481 2,361 3,478 2,473 3,035 2,883 4,257 10,366 12,649 YoY Change (%) 22.0 22.1 29.1 16.7 20.8 22.3 22.1 22.4 21.7 22.0 E: MOSt Estimates

Rajat Rajgarhia([email protected];Tel:+91 22 56575320) / Manish Karwa([email protected];Tel:+91 22 56575318) 23 September 2005 69 Results Preview SECTOR: BANKING

HDFC Bank

STOCK INFO. BLOOMBERG 23 September 2005 BSE Sensex: 8,223 HDFCB IN Neutral REUTERS CODE S&P CNX: 2,478 HDBK.BO Previous Recommendation: Neutral Rs670

Equity Shares (m) 309.9 YEAR NET INCOME PAT EPS EPS P/E P/BV CAR ROAE ROAA P/ABV END (RS M) (RS M) (RS) GROWTH (%) (X) (X) (%) (%) (%) RATIO 52-Week Range 737/388 3/05A 24,293 6,656 21.5 20.1 31.2 4.6 12.2 18.5 1.4 4.6 1,6,12 Rel. Perf. (%) -4/-1/15 M.Cap. (Rs b) 207.7 3/06E 33,540 8,840 28.5 32.8 23.5 4.0 14.0 18.1 1.5 4.0 M.Cap. (US$ b) 4.7 3/07E 42,357 11,696 37.7 32.3 17.8 3.3 13.0 20.3 1.6 3.4

? HDFC Bank is expected to maintain its trend of consistent PAT growth of 30-32%. We expect PAT to increase by 32% in 2QFY06 backed by strong growth in NII and fee-based income.

? We expect NII to increase by a robust 29% to Rs5.5b on the back of strong growth in higher yielding retail assets. Its loan book is expected to remain buoyant.

? Margins are expected to remain stable at 3.8%.

? Fee income will continue to grow fast as the proportion of fees from retail products have been increasing sharply.

? While, we expect the bank to maintain strong growth going forward, the current valuations at 23.5x FY06E EPS and 4x FY06 adjusted BV already capture this growth. We maintain our Neutral rating.

QUARTERLY PERFORMANCE (RS MILLION) Y/E MARCH FY05 FY06 FY05 FY06E 1Q 2Q 3Q 4Q 1Q 2QE 3QE 4QE Interest Income 7,026 7,447 7,790 8,672 8,941 9,532 10,361 10,858 30,935 39,692 Interest Expense 3,038 3,191 3,390 3,536 3,704 4,053 4,475 4,326 13,156 16,558 Net Interest Income 3,988 4,256 4,400 5,136 5,237 5,479 5,886 6,532 17,779 23,134 Growth (%) 39.9 26.0 24.2 42.4 31.3 28.7 33.8 27.2 32.9 30.1 Other Income 1,080 1,227 2,005 2,201 2,636 2,300 2,607 2,864 6,513 10,406 Net Income 5,068 5,483 6,405 7,336 7,872 7,779 8,492 9,396 24,293 33,540 Growth (%) 21.3 29.3 34.7 46.4 55.3 41.9 32.6 28.1 33.6 38.1 Operating Expenses 2,308 2,473 2,786 3,287 3,580 3,585 4,040 4,508 10,854 15,713 Operating Profit 2,760 3,010 3,619 4,049 4,292 4,194 4,453 4,888 13,439 17,827 Provisions and Contingencies 690 758 1,131 1,071 1,659 1,450 1,300 1,142 3,649 5,550 Profit before Tax 2,070 2,253 2,488 2,979 2,634 2,744 3,153 3,747 9,790 12,277 Provision for Taxes 670 730 779 955 799 741 851 1,047 3,134 3,438 Net Profit 1,400 1,523 1,709 2,024 1,835 2,003 2,301 2,700 6,656 8,840 Growth (%) 30.5 30.0 31.1 30.8 31.1 31.5 34.7 33.4 30.7 32.8 Cost to Income Ratio (%) 45.5 45.1 43.5 44.8 45.5 46.1 47.6 48.0 44.7 46.8 Interest Exp./Interest Income (%) 43.2 42.9 43.5 40.8 41.4 42.5 43.2 39.8 42.5 41.7 Other Income/Total Income (%) 21.3 22.4 31.3 30.0 33.5 29.6 30.7 30.5 26.8 31.0 E: MOSt Estimates

Rajat Rajgarhia([email protected];Tel:+91 22 56575320) / Manish Karwa([email protected];Tel:+91 22 56575318) 23 September 2005 70 Results Preview SECTOR: BANKING

ICICI Bank

STOCK INFO. BLOOMBERG 23 September 2005 BSE Sensex: 8,223 ICICIBC IN Neutral REUTERS CODE S&P CNX: 2,478 ICBK.BO Previous Recommendation: Under Review Rs576

Equity Shares (m) 736.8 YEAR NET INCOME PAT EPS EPS P/E P/BV CAR ROAE ROAA P/ABV END (RS M) (RS M) (RS) GROWTH (%) (X) (X) (%) (%) (%) RATIO 52-Week Range 590/275 3/05A 62,552 20,052 27.2 2.5 21.2 3.4 11.8 19.5 1.4 3.7 1,6,12 Rel. Perf. (%) 12/20/51 M.Cap. (Rs b) 424.1 3/06E 82,860 24,533 33.3 22.3 17.3 2.9 11.0 18.2 1.3 3.2

M.Cap. (US$ b) 9.7 3/07E 100,486 29,827 40.5 21.6 14.2 2.5 10.5 19.1 1.2 2.8

? We expect earnings to grow by 22% YoY for ICICI Bank in 2QFY06, driven by a strong growth in core income – NII and fee-based income. For FY05, we expect NII to grow by 31% to Rs9b.

? Treasury profits are likely to be driven by profit out of the equity portfolio. Fee income is likely to witness strong growth of over 40% YoY in 2QFY06.

? Tax rates are likely to increase in FY06, as the deferred tax asset created at the time of the merger has been used up. Thus, PAT growth will be slower than PBT growth.

? At CMP, the stock trades at 17.3x FY06E EPS and 3.2x FY06 adjusted BV. In our earlier coverage, we had put the stock Under Review. However, since then the stock has appreciated by 37% over the last 3 months. At current valuations, we are Neutral on the stock.

QUARTERLY PERFORMANCE (RS MILLION) Y/E MARCH FY05 FY06 FY05 FY06E 1Q 2Q 3Q 4Q 1Q 2QE 3QE 4QE Interest Income 21,958 22,305 23,784 26,052 29,978 30,781 32,108 35,419 94,099 128,286 Interest Expense 15,652 15,453 16,452 18,151 21,465 21,789 22,375 24,411 65,709 90,040 Net Interest Income 6,306 6,852 7,332 7,901 8,512 8,992 9,733 11,008 28,390 38,245 Growth (%) 38.7 45.1 42.8 44.4 35.0 31.2 32.8 39.3 42.9 34.7 Other Income 6,577 8,354 8,907 10,323 10,905 11,200 10,500 12,010 34,161 44,615 Net Income 12,883 15,206 16,239 18,224 19,417 20,192 20,233 23,018 62,552 82,860 Operating Expenses 7,324 7,688 8,527 9,452 9,710 10,100 10,300 11,471 32,991 41,581 Operating Profit 5,558 7,518 7,712 8,772 9,708 10,092 9,933 11,547 29,560 41,280 Growth (%) 10.2 8.5 13.2 45.6 74.7 34.2 28.8 31.6 19.1 39.6 Provisions and Contingencies 458 1,947 1,082 800 2,979 2,900 1,800 1,321 4,288 9,000 Profit before Tax 5,100 5,571 6,630 7,971 6,729 7,192 8,133 10,226 25,272 32,280 Provision for Taxes 793 1,150 1,453 1,824 1,429 1,798 1,871 2,650 5,220 7,747 Net Profit 4,307 4,421 5,177 6,147 5,300 5,394 6,262 7,576 20,052 24,533 Growth (%) 26.6 10.1 17.6 35.0 23.0 22.0 21.0 23.2 22.5 22.3 Interest Exp./Interest Income (%) 71.3 69.3 69.2 69.7 71.6 70.8 69.7 68.9 69.8 70.2 Other Income/Net Income (%) 51.1 54.9 54.9 56.6 56.2 55.5 51.9 52.2 54.6 53.8 Cost /Income (%) 56.9 50.6 52.5 51.9 50.0 50.0 50.9 49.8 52.7 50.2 E: MOSt Estimates

Rajat Rajgarhia([email protected];Tel:+91 22 56575320) / Manish Karwa([email protected];Tel:+91 22 56575318) 23 September 2005 71 Results Preview SECTOR: BANKING

Indian Overseas Bank

STOCK INFO. BLOOMBERG BSE Sensex: 8,223 IOB IN 23 September 2005 Buy REUTERS CODE S&P CNX: 2,478 IOBK.BO Previous Recommendation: Buy Rs87

Equity Shares (m) 544.8 YEAR NET INCOME PAT EPS EPS P/E P/BV CAR ROAE ROAA P/ABV END (RS M) (RS M) (RS) GROWTH (%) (X) (X) (%) (%) (%) RATIO 52-Week Range 99/41 3/05A 24,953 6,514 12.0 27.0 7.3 1.9 14.2 28.0 1.3 2.1 1,6, 12 Rel. Perf. (%) -4/-5/26 M.Cap. (Rs b) 47.4 3/06E 26,133 7,686 14.1 18.0 6.2 1.6 13.3 26.7 1.4 1.7

M.Cap. (US$ b) 1.1 3/07E 28,543 8,842 16.2 15.0 5.4 1.3 12.5 24.9 1.4 1.3

? IOB is likely to report steady core earnings growth in 2QFY06. We expect a NII growth of 8% in 2QFY06.

? However, we expect higher YoY treasury gains in 2QFY06, driven by both treasury and debt. Overall, we expect non-interest income to increase to Rs1.6b compared to Rs1.18b in 2QFY05.

? As a result of a steady increase in operating expenses and provisioning, PAT growth for 2QFY06 is likely to be 19% YoY.

? Provisioning requirements are likely to be lower going forward, as net NPAs have already declined to near 1%.

? The bank might require capital in FY07, in order to support its strong loan growth and meet BASEL II requirements.

? At CMP, the stock is trading at 6.2x FY06E EPS and 1.7x FY06 adjusted BV. We maintain Buy.

QUARTERLY PERFORMANCE (RS MILLION) Y/E MARCH FY05 FY06 FY05 FY06E 1Q 2Q 3Q 4Q 1Q 2QE 3QE 4QE Interest Income 9,707 9,823 10,068 9,913 10,254 10,568 10,853 11,187 39,510 42,861 Interest Expense 5,336 5,170 5,321 5,128 5,423 5,533 5,635 5,609 20,955 22,200 Net Interest Income 4,371 4,653 4,747 4,785 4,831 5,034 5,218 5,577 18,555 20,661 % Change (Y-o-Y) 19.6 20.2 13.8 11.2 10.5 8.2 9.9 16.6 16.0 11.3 Other Income 2,329 1,178 1,404 1,488 1,814 1,600 1,200 857 6,398 5,472 Net Income 6,700 5,830 6,150 6,273 6,646 6,634 6,418 6,435 24,953 26,133 % Change (Y-o-Y) 32.5 -1.6 2.5 -2.3 -0.8 13.8 4.4 2.6 6.6 4.7 Operating Expenses 3,177 2,650 2,879 2,879 2,913 2,900 2,900 2,995 11,585 11,708 Operating Profit 3,523 3,180 3,271 3,394 3,732 3,734 3,518 3,440 13,368 14,425 Other Provisions 875 775 779 1,070 1,415 950 800 585 3,498 3,750 Tax Provisions 902 822 880 752 485 900 800 804 3,356 2,989 Net Profit 1,746 1,583 1,612 1,572 1,832 1,884 1,918 2,051 6,514 7,686 % Change (Y-o-Y) 25.8 2.4 13.5 103.2 4.9 19.0 19.0 30.5 27.0 18.0 Cost to Income Ratio (%) 47.4 45.5 46.8 45.9 43.8 43.7 45.2 46.5 46.4 44.8 Interest Exp./Interest Income (%) 55.0 52.6 52.9 51.7 52.9 52.4 51.9 50.1 53.0 51.8 Other Income/Net Income (%) 34.8 20.2 22.8 23.7 27.3 24.1 18.7 13.3 25.6 20.9 E: MOSt Estimates

Rajat Rajgarhia([email protected];Tel:+91 22 56575320) / Manish Karwa([email protected];Tel:+91 22 56575318) 23 September 2005 72 Results Preview SECTOR: BANKING

Jammu & Kashmir Bank

STOCK INFO. BLOOMBERG BSE Sensex: 8,223 JKBK IN 23 September 2005 Buy REUTERS CODE S&P CNX: 2,478 JKBK.BO Previous Recommendation: Buy Rs438

Equity Shares (m) 48.5 YEAR NET INCOME PAT EPS EPS P/E P/BV CAR ROAE ROAA P/ABV END (RS M) (RS M) (RS) GROWTH (%) (X) (X) (%) (%) (%) RATIO 52-Week Range 519/239 3/05A 6,783 1,151 23.7 -71.7 18.4 1.3 15.2 7.1 0.5 1.4 1,6,12 Rel. Perf. (%) -8/-6/15 M.Cap. (Rs b) 21.2 3/06E 7,733 2,833 58.8 146.2 7.4 1.1 14.8 16.0 1.1 1.2

M.Cap. (US$ b) 0.5 3/07E 9,081 3,563 74.0 25.8 5.9 1.0 13.1 17.7 1.2 1.0

? Despite a steady loan growth of >20%, declining margins will result in a moderage NII growth of 5% YoY.

? 2QFY05 was marked with treasury losses and HTM transfers (part of which was provided through reserves). As a result, non-fund based income and provisions are not exactly comparable on a YoY basis.

? With prospects for the J&K state improving, we expect a strong growth in the bank’s loan book at 22% in FY06.

? The bank has witnessed losses on the treasury front over the last few quarters. With interest rates being benign in 2QFY06, we do not expect any losses.

? The stock currently trades at 7.4x FY06E EPS and 1.2x FY06E ABV. We maintain Buy.

QUARTERLY PERFORMANCE (RS MILLION) Y/E MARCH FY05 FY06 FY05 FY06E 1Q 2Q 3Q 4Q 1Q 2QE 3QE 4QE Interest Income 3,892 3,861 3,893 3,867 4,278 4,420 4,716 4,508 15,492 17,922 Interest Expenses 2,470 2,317 2,280 2,471 2,773 2,795 2,877 2,786 9,530 11,232 Net Interest Income 1,422 1,545 1,613 1,397 1,505 1,625 1,839 1,721 5,962 6,690 % Change (Y-o-Y) -9.7 -6.0 -4.7 8.3 5.8 5.2 14.0 23.2 -3.8 12.2 Other Income 448 2 24 336 225 250 275 293 820 1,043 Net Income 1,870 1,547 1,637 1,732 1,730 1,875 2,114 2,014 6,783 7,733 Operating Expenses 718 787 710 1,001 767 800 850 886 3,228 3,303 Operating Profit 1,152 760 927 731 962 1,075 1,264 1,128 3,555 4,430 % Change (Y-o-Y) -30.9 -54.1 -48.7 -36.5 -16.5 41.4 36.3 54.4 -43.4 24.6 Prov. & Contingencies 410 549 195 293 311 200 200 39 2,195 750 Profit before Tax 742 212 733 437 651 875 1,064 1,090 1,359 3,680 Provision for Taxes 270 -40 0 -21 167 200 225 254 209 846 Net Profit 472 252 733 459 484 675 839 835 1,151 2,833 % Change (Y-o-Y) -51.7 -75.1 -33.3 -53.2 2.6 168.4 14.5 82.0 -71.7 146.2 Cost to Income 38.4 50.9 43.4 57.8 44.4 42.7 40.2 44.0 47.6 42.7 Int.Expense/Int. Earned 63.5 60.0 58.6 63.9 64.8 63.2 61.0 61.8 61.5 62.7 Cost to Net Int.Income 50.5 50.9 44.0 71.7 51.0 49.2 46.2 51.5 54.1 49.4 E: MOSt Estimates

Rajat Rajgarhia([email protected];Tel:+91 22 56575320) / Manish Karwa([email protected];Tel:+91 22 56575318) 23 September 2005 73 Results Preview SECTOR: BANKING

Karnataka Bank

STOCK INFO. BLOOMBERG BSE Sensex: 8,223 KBL IN 23 September 2005 Buy REUTERS CODE S&P CNX: 2,478 KNBK.BO Previous Recommendation: Buy Rs112

Equity Shares (m) 121.3 YEAR NET INCOME PAT EPS EPS P/E P/BV CAR ROAE ROAA P/ABV END (RS M) (RS M) (RS) GROWTH (%) (X) (X) (%) (%) (%) RATIO 52-Week Range 137/41 3/05A 5,380 1,471 12.1 -63.2 9.2 1.4 14.2 17.6 1.3 1.5 1,6,12 Rel. Perf. (%) -13/19/110 M.Cap. (Rs b) 13.5 3/06E 5,310 1,786 14.7 21.4 7.6 1.2 13.0 17.0 1.3 1.3

M.Cap. (US$ b) 0.3 3/07E 6,121 2,162 17.8 21.0 6.3 1.1 11.4 18.0 1.3 1.1

? On the back of a higher base and steady margins, NII for the bank is expected to be flat at Rs954m in 2QFY06.

? Non-interest income is also expected to remain flat YoY at Rs300m.

? However, on account of lower provisioning and lower taxes, we expect PAT to increase by 29% YoY to Rs404m.

? The bank has done well to reduce its net NPAs sharply in FY05. Net NPAs have declined from 5% to 2.3%. Incremental provisioning is expected to be lower.

? Karnataka Bank is a play on improving asset quality, consolidation and attractive valuations.

? At CMP, the stock trades at 7.6x FY06E EPS and 1.3x FY06E adjusted BV. We maintain Buy.

QUARTERLY PERFORMANCE (RS MILLION) Y/E MARCH FY05 FY06 FY05 FY06E 1Q 2Q 3Q 4Q 1Q 2QE 3QE 4QE Interest Income 2,077 2,121 2,134 2,067 2,406 2,439 2,454 2,484 8,399 9,784 Interest Expense 1,537 1,174 1,289 1,231 1,499 1,485 1,525 1,540 5,230 6,048 Net Interest Income 541 947 845 836 908 954 929 945 3,169 3,736 % Change (Y-o-Y) 32.9 74.5 36.6 47.7 67.9 0.8 9.9 13.0 48.3 17.9 Other Income 1,049 311 467 385 477 320 325 452 2,211 1,574 Net Income 1,589 1,258 1,312 1,222 1,385 1,274 1,254 1,396 5,380 5,310 % Change (Y-o-Y) 6.3 4.5 10.8 27.9 -12.8 1.3 -4.4 14.3 11.2 -1.3 Operating Expenses 417 474 562 520 506 500 500 477 1,973 1,983 Operating Profit 1,172 783 750 701 879 774 754 919 3,407 3,327 Other Provisions 661 224 168 -48 230 150 150 245 1,005 775 Tax Provisions 124 247 213 347 233 200 105 228 931 766 Net Profit 387 313 369 403 417 424 499 446 1,471 1,786 % Change (Y-o-Y) 12.3 -9.1 1.2 47.2 7.6 35.5 35.4 10.8 10.5 21.4 Cost to Income Ratio (%) 26.2 37.7 42.8 42.6 36.5 39.3 39.9 34.2 36.7 37.3 Interest Exp./Interest Income (%) 74.0 55.4 60.4 59.5 62.3 60.9 62.1 62.0 62.3 61.8 Other Income/Net Income (%) 66.0 24.7 35.6 31.5 34.5 25.1 25.9 32.3 41.1 29.6 E: MOSt Estimates

Rajat Rajgarhia([email protected];Tel:+91 22 56575320) / Manish Karwa([email protected];Tel:+91 22 56575318) 23 September 2005 74 Results Preview SECTOR: BANKING

Oriental Bank of Commerce

STOCK INFO. BLOOMBERG BSE Sensex: 8,223 OBC IN 23 September 2005 Buy REUTERS CODE S&P CNX: 2,478 ORBC.BO Previous Recommendation: Buy Rs259

Equity Shares (m) 250.5 YEAR NET INCOME PAT EPS EPS P/E P/BV CAR ROAE ROAA P/ABV END (RS M) (RS M) (RS) GROWTH (%) (X) (X) (%) (%) (%) RATIO 52-Week Range 382/228 3/05A 20,289 7,608 39.5 10.9 6.6 1.5 9.2 25.3 1.6 1.6 1,6,12 Rel. Perf. (%) -7/-45/-43 M.Cap. (Rs b) 65.0 3/06E 22,515 7,729 30.8 -21.9 8.4 1.3 13.0 18.3 1.3 1.3

M.Cap. (US$ b) 1.5 3/07E 26,515 10,270 41.0 32.9 6.3 1.1 12.0 18.9 1.5 1.1

? OBC’s 2QFY06 results are not comparable YoY (on a reported basis) on account of the GTB merger which was effected from 3QFY05.

? We expect a 12% YoY growth in NII to Rs4.3b in 2QFY06. This is likely to be driven by improving asset quality of eGTB, faster loan growth and deposit re-pricing of eGTB.

? While fee-based income is expected to increase YoY, even provisioning requirement will be higher, as a result of HTM amortization coupled with NPA provisioning.

? The bank has raised capital in 1QFY06 by issuing 58m shares at Rs250 per share.

? At CMP, the stock trades at 8.4x FY06E EPS and 1.3x FY06 adjusted BV. We maintain Buy.

QUARTERLY PERFORMANCE (RS MILLION) Y/E MARCH FY05 FY06 FY05 FY06E 1Q 2Q 3Q 4Q 1Q 2QE 3QE 4QE Interest Income 8,652 8,526 9,102 9,439 9,876 10,062 10,707 11,671 35,719 42,316 Interest Expense 4,880 4,664 5,356 5,583 5,846 5,749 6,121 6,368 20,482 24,083 Net Interest Income 3,772 3,862 3,746 3,857 4,030 4,313 4,586 5,303 15,237 18,233 % Change (YoY) 17.1 7.2 -1.3 -2.3 6.8 11.7 22.4 37.5 4.7 19.7 Other Income 998 660 1,525 1,869 955 900 1,050 1,377 5,052 4,283 Net Income 4,770 4,522 5,271 5,726 4,986 5,213 5,636 6,681 20,289 22,515 % Change (YoY) -3.9 -22.8 -1.6 2.3 4.5 15.3 6.9 16.7 -6.8 11.0 Operating Expenses 1,631 1,657 2,370 2,300 2,136 2,150 2,150 2,075 7,957 8,510 Operating Profit 3,139 2,865 2,902 3,426 2,850 3,063 3,486 4,606 12,332 14,005 Provision & Contingencies 222 226 2,072 1,482 1,028 900 900 873 4,002 3,700 PBT 2,917 2,639 830 1,944 1,822 2,163 2,586 3,733 8,330 10,305 Tax Provisions 1,111 490 -452 -428 775 600 600 602 722 2,576 Net Profit 1,806 2,149 1,282 2,372 1,048 1,563 1,986 3,132 7,608 7,729 % Change (YoY) 26.8 32.0 -15.9 3.7 -42.0 -27.3 55.0 32.1 10.9 1.6 Cost to Income Ratio (%) 34.2 36.6 45.0 40.2 42.8 41.2 38.1 31.1 39.2 37.8 Int Exp/ Int Earned (%) 56.4 54.7 58.8 59.1 59.2 57.1 57.2 54.6 57.3 56.9 Other Income / Net Income (%) 20.9 14.6 28.9 32.6 19.2 17.3 18.6 20.6 24.9 19.0 E: MOSt Estimates

Rajat Rajgarhia([email protected];Tel:+91 22 56575320) / Manish Karwa([email protected];Tel:+91 22 56575318) 23 September 2005 75 Results Preview SECTOR: BANKING

Punjab National Bank

STOCK INFO. BLOOMBERG BSE Sensex: 8,223 PNB IN 23 September 2005 Buy REUTERS CODE S&P CNX: 2,478 PNB.BO Previous Recommendation: Buy Rs428

Equity Shares (m) 315.3 YEAR NET INCOME PAT EPS EPS P/E P/BV CAR ROAE ROAA P/ABV END (RS M) (RS M) (RS) GROWTH (%) (X) (X) (%) (%) (%) RATIO 52-Week Range 521/241 3/05A 56,824 14,101 44.7 7.0 9.6 1.7 14.8 21.4 1.2 1.7 1,6, 12 Rel. Perf. (%) 0/-24/10 M.Cap. (Rs b) 134.9 3/06E 60,952 16,861 53.5 19.6 8.0 1.4 14.8 19.0 1.2 1.5

M.Cap. (US$ b) 3.1 3/07E 69,057 19,892 63.1 18.0 6.8 1.2 14.4 19.0 1.3 1.2

? On the back of steady business growth, we expect PNB to report steady performance in 2QFY06. We expect NII to increase by 17% to Rs11.3b.

? Non-interest income is expected to decline sharply on the back of a very high base of 2QFY05 (one-off credit of Rs3.9b).

? PNB has successfully raised capital during 4QFY05. It has issued 80m shares at Rs390 per share out of which 30m shares were returned to the government. In all, the bank raised Rs19.5b through this issue, thereby increasing its Tier I ratio to around 10%. This should help the bank to improve its NII on a YoY basis and also its margins.

? The bank is benefiting from lower operating expenses on the back of no VRS provision from FY06 onwards.

? At CMP, the stock trades at 8x FY06E EPS and 1.5x FY06E adjusted BV. We maintain Buy.

QUARTERLY PERFORMANCE (RS MILLION) Y/E MARCH FY05 FY06 FY05 FY06E 1Q 2Q 3Q 4Q 1Q 2QE 3QE 4QE Interest Income 20,447 20,984 21,321 21,847 22,899 23,298 24,423 25,900 84,599 96,520 Interest Expense 11,091 11,288 11,026 11,126 12,016 11,968 12,245 12,970 44,531 49,199 Net Interest Income 9,356 9,696 10,295 10,720 10,883 11,330 12,178 12,930 40,067 47,321 % Change (YoY) 13.1 7.3 17.4 5.4 16.3 16.8 18.3 20.6 10.5 18.1 Other Income 4,498 6,005 2,480 3,774 2,528 3,200 3,600 4,303 16,757 13,631 Net Income 13,854 15,701 12,775 14,494 13,411 14,530 15,778 17,233 56,824 60,952 % Change (YoY) 24.8 -6.0 -2.1 3.0 -3.2 -7.5 23.5 18.9 3.5 7.3 Operating Expenses 6,705 7,352 7,330 8,366 6,966 7,000 7,200 7,268 29,752 28,434 Operating Profit 7,150 8,349 5,445 6,128 6,445 7,530 8,578 9,965 27,072 32,518 Provision & Contingencies 2,424 2,890 1,324 1,379 1,162 1,900 2,500 3,538 8,016 9,100 PBT 4,726 5,459 4,121 4,750 5,283 5,630 6,078 6,427 19,056 23,418 Tax Provisions 1,499 1,332 979 1,145 1,701 1,239 1,823 1,794 4,955 6,557 Net Profit 3,227 4,127 3,143 3,605 3,582 4,391 4,255 4,633 14,101 16,861 % Change (YoY) 28.2 37.7 21.0 21.2 11.0 6.4 35.4 28.5 27.2 19.6 Cost to Income Ratio (%) 48.4 46.8 57.4 57.7 51.9 48.2 45.6 42.2 52.4 46.6 Int Exp/ Int Earned (%) 54.2 53.8 51.7 50.9 52.5 51.4 50.1 50.1 52.6 51.0 Other Income / Net Income (%) 32.5 38.2 19.4 26.0 18.9 22.0 22.8 25.0 29.5 22.4 E: MOSt Estimates

Rajat Rajgarhia([email protected];Tel:+91 22 56575320) / Manish Karwa([email protected];Tel:+91 22 56575318) 23 September 2005 76 Results Preview SECTOR: BANKING

State Bank of India

STOCK INFO. BLOOMBERG BSE Sensex: 8,223 SBIN IN 23 September 2005 Buy REUTERS CODE S&P CNX: 2,478 SBI.BO Previous Recommendation: Buy Rs890

Equity Shares (m) 526.3 YEAR NET INCOME PAT EPS EPS P/E P/BV CAR ROAE ROAA P/ABV END (RS B) (RS B) (RS) GROWTH (%) (X) (X) (%) (%) (%) RATIO 52-Week Range 926/436 3/05A 210.6 43.0 81.8 17.0 10.9 1.9 12.5 19.4 1.0 2.3 1,6,12 Rel. Perf. (%) 6/8/36 M.Cap. (Rs b) 468.3 3/06E 228.8 51.1 97.1 18.6 9.2 1.6 12.0 19.5 1.0 1.8

M.Cap. (US$ b) 10.7 3/07E 257.0 60.9 115.8 19.3 7.7 1.4 11.5 19.6 1.1 1.5

? SBI is likely to report another quarter of strong growth in core earnings. We expect a 16% growth in NII in 2QFY06, driven by strong loan growth over the last four quarters.

? We expect lower bond gains of Rs1.3b during the quarter, as against Rs4.7b during 2QFY05. As a result, non-fund based income is expected to remain flat.

? Provisioning requirement will be lower and we expect flat provisioning in 2QFY06. Even this provisioning is likely to be for NPAs, due to which we expect a further decline in net NPAs for the bank.

? At CMP, the stock trades at 6.8x FY06E EPS and 1.2x FY06E BV Consolidated Earnings. Despite the strong outperformance over the last three months, SBI continues to be our top sector pick. We maintain Buy.

QUARTERLY PERFORMANCE (RS MILLION) Y/E MARCH FY05 FY06 FY05 FY06E 1Q 2Q 3Q 4Q 1Q 2QE 3QE 4QE Interest Income 76,666 80,848 80,291 86,476 91,663 91,358 91,933 93,524 324,280 368,478 Interest Expenses 47,125 47,050 43,690 46,969 49,131 52,226 51,554 52,000 184,834 204,910 Net Interest Income 29,541 33,798 36,601 39,507 42,532 39,133 40,379 41,524 139,446 163,568 % Change (Y-o-Y) 10.0 40.0 32.0 19.2 44.0 15.8 10.3 5.1 24.7 17.3 Other Income 15,387 16,525 22,380 16,907 15,766 15,800 16,400 17,251 71,199 65,217 Bond Gains 1,499 4,679 9,476 2,098 1,307 1300 1,200 1,193 17,753 5,000 Net Income 44,928 50,323 58,981 56,414 58,298 54,933 56,779 58,775 210,645 228,785 % Change (Y-o-Y) 1.2 -0.7 51.4 4.5 29.8 9.2 -3.7 4.2 12.1 8.6 Operating Expenses 24,214 24,274 25,081 27,173 23,903 26,750 29,250 32,413 100,742 112,316 Operating Profit 20,714 26,049 33,900 29,241 34,395 28,183 27,529 26,363 109,904 116,469 % Change (Y-o-Y) -18.0 -8.9 88.3 23.6 66.0 8.2 -18.8 -9.8 15.0 6.0 Other Provisions 3,287 7,574 17,105 16,722 17,666 8,000 8,500 9,335 44,688 43,500 Provision for Taxes 6,843 7,656 5,801 1,866 4,501 7,400 5,801 4,189 22,166 21,891 Net Profit 10,584 10,819 10,994 10,653 12,228 12,783 13,228 12,839 43,050 51,078 % Change (Y-o-Y) 17.6 9.4 19.5 22.1 15.5 18.2 20.3 20.5 17.0 18.6 Cost to Income Ratio 53.9 48.2 42.5 48.2 41.0 48.7 51.5 55.1 47.8 49.1 Interest Exp / Interest Earned 61.5 58.2 54.4 54.3 53.6 57.2 56.1 55.6 57.0 55.6 Other Income / Net Income 34.2 32.8 37.9 30.0 27.0 28.8 28.9 29.4 33.8 28.5 E: MOSt Estimates

Rajat Rajgarhia([email protected];Tel:+91 22 56575320) / Manish Karwa([email protected];Tel:+91 22 56575318) 23 September 2005 77 Results Preview SECTOR: BANKING

Syndicate Bank

STOCK INFO. BLOOMBERG BSE Sensex: 8,223 SNDB IN 23 September 2005 Buy REUTERS CODE S&P CNX: 2,478 SBNK.BO Previous Recommendation: Buy Rs82

Equity Shares (m) 522.0 YEAR NET INCOME PAT EPS EPS P/E P/BV CAR ROAE ROAA P/ABV END (RS M) (RS M) (RS) GROWTH (%) (X) (X) (%) (%) (%) RATIO 52-Week Range 88/35 3/05A 22,584 4,029 8.5 -7.2 9.6 1.9 10.7 19.6 0.8 2.3 1,6,12 Rel. Perf. (%) 8/25/60 M.Cap. (Rs b) 42.9 3/06E 25,381 6,361 12.2 42.8 6.7 1.5 11.2 24.6 1.1 1.6

M.Cap. (US$ b) 1.0 3/07E 28,390 7,606 14.6 19.6 5.6 1.3 10.4 23.2 1.1 1.3

? On the back of steady loan growth and improved margins, we expect NII to increase by 17% YoY to Rs4.95b in 2QFY06.

? We expect flat non-interest expenses as the decline in treasury income is likely to be compensated by rising fee- based income.

? On the back of lower provisions and steady increase in operating expenses, we expect strong growth in net earnings for Syndicate Bank, albeit from a lower base.

? Net profit is expected to increase by 92% YoY to Rs1.45b.

? At CMP, the stock is trading at 6.7x FY06E EPS and 1.6x FY06 adjusted BV. We maintain Buy.

QUARTERLY PERFORMANCE (RS MILLION) Y/E MARCH FY05 FY06 FY05 FY06E 1Q 2Q 3Q 4Q 1Q 2QE 3QE 4QE Interest Income 8,804 9,273 9,647 9,853 9,534 10,100 10,901 12,390 37,576 42,926 Interest Expense 5,375 5,058 5,702 4,503 4,810 5,150 5,800 6,831 20,638 22,591 Net Interest Income 3,429 4,215 3,945 5,349 4,724 4,950 5,101 5,560 16,938 20,335 % Change (Y-o-Y) 23.4 11.6 20.8 19.6 37.8 17.4 29.3 3.9 18.5 20.1 Other Income 1,952 1,151 1,169 1,374 1,322 1,050 1,225 1,449 5,646 5,046 Net Income 5,381 5,366 5,114 6,723 6,046 6,000 6,326 7,009 22,584 25,381 % Change (Y-o-Y) 23.7 -6.3 0.9 -2.7 12.4 11.8 23.7 4.3 2.4 12.4 Operating Expenses 2,851 2,808 2,842 4,141 3,242 3,050 3,100 3,154 12,642 12,546 Operating Profit 2,530 2,558 2,272 2,582 2,803 2,950 3,226 3,855 9,942 12,835 Other Provisions 553 1,352 3,626 76 729 900 1,100 1,271 5,608 4,000 Tax Provisions 725 450 -574 -297 444 600 600 830 305 2,474 Net Profit 1,252 756 -781 2,802 1,631 1,450 1,526 1,753 4,029 6,361 % Change (Y-o-Y) 23.0 -34.0 -187.8 117.7 30.2 91.8 n.a. -37.4 -7.2 57.9 Cost to Income Ratio (%) 53.0 52.3 55.6 61.6 53.6 50.8 49.0 45.0 56.0 49.4 Interest Exp./Interest Income (%) 61.1 54.5 59.1 45.7 50.5 51.0 53.2 55.1 54.9 52.6 Other Income/Net Income (%) 36.3 21.5 22.9 20.4 21.9 17.5 19.4 20.7 25.0 19.9 E: MOSt Estimates

Rajat Rajgarhia([email protected];Tel:+91 22 56575320) / Manish Karwa([email protected];Tel:+91 22 56575318) 23 September 2005 78 Results Preview SECTOR: BANKING

Union Bank of India

STOCK INFO. BLOOMBERG BSE Sensex: 8,223 UNBK IN 23 September 2005 Buy REUTERS CODE S&P CNX: 2,478 UNBK.BO Previous Recommendation: Buy Rs126

Equity Shares (m) 460.1 YEAR NET INCOME PAT EPS EPS P/E P/BV CAR ROAE ROAA P/ABV END (RS M) (RS M) (RS) GROWTH (%) (X) (X) (%) (%) (%) RATIO 52-Week Range 143/69 3/05A 28,307 7,191 15.6 1.0 8.1 1.8 12.1 21.5 1.1 2.4 1,6,12 Rel. Perf. (%) -8/-5/24 M.Cap. (Rs b) 58.0 3/06E 30,550 9,327 18.5 18.2 6.8 1.4 11.3 21.8 1.2 1.6

M.Cap. (US$ b) 1.3 3/07E 35,298 11,974 23.7 28.4 5.3 1.2 10.5 22.1 1.3 1.2

? On the back of a strong growth in the loan book post 2QFY05, we expect strong NII growth of 22% in 2QFY06 to Rs5.6b.

? Non-interest income is expected to remain flat as the decline in trading gains is likely to be compensated by the growth in fee income. Core fee income is expected to grow by 15% YoY.

? The bank has shifted securities worth Rs72b from AFS to HTM during 2QFY06, and has taken a hit of Rs2.4b. This completely insulates the treasury book from any upward movement in interest rates.

? Union Bank has been the most aggressive amongst state-owned banks in terms of loan growth (34% growth in FY05). The bank is likely to raise capital by the end of FY06.

? At CMP, the stock is trading at 6.8x FY06E EPS and 1.6x FY06 adjusted BV. We maintain Buy.

QUARTERLY PERFORMANCE (RS MILLION) Y/E MARCH FY05 FY06 FY05 FY06E 1Q 2Q 3Q 4Q 1Q 2QE 3QE 4QE Interest Income 11,658 11,931 12,888 13,221 13,578 13,900 14,900 15,811 49,698 58,189 Interest Expense 6,992 7,363 7,092 7,606 8,230 8,300 8,550 9,175 29,052 34,255 Net Interest Income 4,667 4,568 5,796 5,615 5,347 5,600 6,350 6,636 20,646 23,934 % Change (Y-o-Y) 6.4 8.2 28.0 32.9 14.6 22.6 9.6 18.2 18.9 15.9 Other Income 2,348 1,611 1,914 1,788 1,337 1,620 1,700 1,959 7,661 6,616 Net Income 7,015 6,179 7,709 7,403 6,684 7,220 8,050 8,596 28,307 30,550 % Change (Y-o-Y) 27.1 -1.1 22.1 -2.5 -4.7 16.8 4.4 16.1 10.2 7.9 Operating Expenses 3,085 3,094 3,774 2,622 3,153 3,350 3,450 3,673 12,575 13,626 Operating Profit 3,930 3,085 3,936 4,781 3,531 3,870 4,600 4,923 15,732 16,924 Other Provisions 1,006 658 4,145 3,806 647 2,600 1,400 903 9,616 5,550 Tax Provisions 820 320 -800 -1,415 480 100 600 867 -1,075 2,047 Net Profit 2,104 2,107 591 2,389 2,404 1,170 2,600 3,153 7,191 9,327 % Change (Y-o-Y) 35.0 24.0 -60.6 1.1 14.3 -44.5 340.2 32.0 1.0 29.7 Cost to Income Ratio (%) 44.0 50.1 49.0 35.4 47.2 46.4 42.9 42.7 44.4 44.6 Interest Exp./Interest Income (%) 60.0 61.7 55.0 57.5 60.6 59.7 57.4 58.0 58.5 58.9 Other Income/Net Income (%) 33.5 26.1 24.8 24.2 20.0 22.4 21.1 22.8 27.1 21.7 E: MOSt Estimates

Rajat Rajgarhia([email protected];Tel:+91 22 56575320) / Manish Karwa([email protected];Tel:+91 22 56575318) 23 September 2005 79 Results Preview SECTOR: BANKING

UTI Bank

STOCK INFO. BLOOMBERG BSE Sensex: 8,223 UTIB IN 23 September 2005 Buy REUTERS CODE S&P CNX: 2,478 UTBK.BO Previous Recommendation: Buy Rs266

Equity Shares (m) 278.1 YEAR NET INCOME PAT EPS EPS P/E P/BV CAR ROAE ROAA P/ABV END (RS M) (RS M) (RS) GROWTH (%) (X) (X) (%) (%) (%) RATIO 52-Week Range 291/126 3/05A 11,470 3,346 12.0 0.1 22.1 3.1 12.7 18.9 1.1 3.3 1,6,12 Rel. Perf. (%) -2/-15/57 M.Cap. (Rs b) 74.0 3/06E 16,077 4,591 16.5 37.2 16.1 2.7 12.2 17.7 1.1 2.8

M.Cap. (US$ b) 1.7 3/07E 20,087 5,717 20.6 24.5 12.9 2.3 11.6 19.0 1.2 2.4

? We expect NII to post a strong growth of 36% to Rs2.45b, on the back of strong loan growth in FY06, capital raising effected in 4QFY05 and improved margins (compared to the last couple of quarters).

? Another key driver for UTI Bank has been sustained growth in its fee-based income. We expect its core fee income to increase by 40% in 2QFY06.

? UTI Bank had raised Rs11.9b through the GDR route in 4QFY05. This would help the bank witness strong growth in its loan book and also to expand its margins. Retail loans will continue to be the key growth driver for the bank.

? UTI Bank is amongst the best plays in the private banks in our universe. We believe that the key to any further rerating would be margin expansion and improvement in RoE. The stock currently trades at 16.1x FY06E EPS and 2.8x FY06E adjusted BV. We maintain Buy.

QUARTERLY PERFORMANCE (RS MILLION) Y/E MARCH FY05 FY06 FY05 FY06E 1Q 2Q 3Q 4Q 1Q 2QE 3QE 4QE Interest Income 4,254 4,493 4,913 5,561 6,218 6,464 6,546 6,894 19,242 26,122 Interest Expense 2,604 2,686 3,042 3,598 3,994 4,014 4,035 4,247 11,930 16,289 Net Interest Income 1,650 1,807 1,870 1,963 2,225 2,451 2,511 2,647 7,312 9,833 Y-o-Y Growth (%) 37.3 31.0 27.9 19.6 34.8 35.6 34.3 34.8 29.4 34.5 Other Income 1,101 -36 1,430 1,664 1,500 1,250 1,550 1,943 4,158 6,243 Net Income 2,751 1,771 3,300 3,627 3,725 3,701 4,061 4,590 11,470 16,077 Operating Expenses 1,293 1,387 1,505 1,627 1,690 1,750 1,900 2,336 5,814 7,676 Operating Profit 1,458 384 1,795 2,000 2,035 1,951 2,161 2,254 5,656 8,401 Y-o-Y Growth (%) -22.8 -78.8 0.8 41.2 39.6 408.1 20.4 12.7 -17.6 48.5 Provision & Contingencies 386 -348 317 243 635 400 250 365 619 1,650 Profit before Tax 1,072 732 1,477 1,757 1,399 1,551 1,911 1,890 5,037 6,751 Tax Provisions 365 270 466 592 473 496 612 579 1,691 2,160 Net Profit 707 462 1,012 1,165 926 1,054 1,299 1,310 3,346 4,591 Y-o-Y Growth (%) 35.5 -28.0 35.0 33.8 31.0 128.1 28.5 12.4 20.2 37.2 Int Exp/ Int Earned (%) 61.2 59.8 61.9 64.7 64.2 62.1 61.6 61.6 62.0 62.4 Other Income / Net Income (%) 40.0 -2.0 43.3 45.9 40.3 33.8 38.2 42.3 36.3 38.8 Cost to Income Ratio (%) 47.0 78.3 45.6 44.9 45.4 47.3 46.8 50.9 50.7 47.7 E: MOSt Estimates

Rajat Rajgarhia([email protected];Tel:+91 22 56575320) / Manish Karwa([email protected];Tel:+91 22 56575318) 23 September 2005 80 Results Preview SECTOR: BANKING

Vijaya Bank

STOCK INFO. BLOOMBERG BSE Sensex: 8,223 VJYBK IN 23 September 2005 Buy REUTERS CODE S&P CNX: 2,478 VJBK.BO Previous Recommendation: Buy Rs60

Equity Shares (m) 433.5 YEAR NET INCOME PAT EPS EPS P/E P/BV CAR ROAE ROAA P/ABV END (RS M) (RS M) (RS) GROWTH (%) (X) (X) (%) (%) (%) RATIO 52-Week Range 76/45 3/05A 13,383 3,807 8.8 -7.4 6.9 1.6 12.9 26.0 1.4 1.7 1,6,12 Rel. Perf. (%) -13/-29/-20 M.Cap. (Rs b) 26.2 3/06E 13,650 3,957 9.1 3.9 6.6 1.4 12.4 23.0 1.2 1.4

M.Cap. (US$ b) 0.6 3/07E 15,419 5,366 12.4 35.6 4.9 1.2 11.9 26.1 1.4 1.2

? We expect the bank to post a modest 2.5% YoY growth in its NII to Rs2.5b, despite higher loans, as the bank is facing margin pressure.

? On the back of lower bond gains, we expect non-interest income to decline in 2QFY06.

? Provisions are lower during 2QFY06 YoY as 2QFY05 had provisions relating to HTM transfer (Rs1.3b provided during 2QFY05).

? As a result, earnings growth will be strong on a lower base. Net profit is expected to increase by 48% to Rs1.06b.

? With net NPAs already at 0.9%, we do not envisage any major NPA provisioning in 2QFY06.

? Vijaya Bank is a play on loan growth and strong asset quality. While near-term concerns on its margins remain, we continue to be positive on the long-term prospects.

? At CMP, the stock trades at 6.6x FY06E EPS and 1.4x FY06E adjusted BV. We maintain Buy.

QUARTERLY PERFORMANCE (RS MILLION) Y/E MARCH FY05 FY06 FY05 FY06E 1Q 2Q 3Q 4Q 1Q 2QE 3QE 4QE Interest Income 4,962 5,094 5,429 5,459 5,550 5,708 6,058 6,364 20,943 23,680 Interest Expense 2,624 2,656 2,923 2,894 3,178 3,209 3,375 3,468 11,098 13,230 Net Interest Income 2,337 2,437 2,506 2,565 2,372 2,499 2,682 2,896 9,845 10,449 % Change (Y-o-Y) 39.0 28.4 6.4 5.0 1.5 2.5 7.0 12.9 17.5 6.1 Other Income 1,144 834 688 870 1,027 800 700 674 3,538 3,201 Net Income 3,481 3,271 3,194 3,435 3,399 3,299 3,382 3,570 13,383 13,650 % Change (Y-o-Y) 7.1 -6.4 -7.9 0.3 -2.3 0.9 5.9 3.9 -1.8 2.0 Operating Expenses 1,308 1,389 1,352 1,443 1,376 1,395 1,388 1,415 5,492 5,574 Operating Profit 2,173 1,883 1,842 1,992 2,023 1,904 1,994 2,155 7,891 8,077 Other Provisions 737 1,449 1,076 900 1,944 500 450 207 4,162 3,100 Tax Provisions 460 -279 209 -468 -196 281 309 390 -78 1,020 Net Profit 976 714 556 1,559 275 1,124 1,235 1,559 3,807 3,957 % Change (Y-o-Y) 20.6 -25.6 -49.5 25.3 -71.8 57.5 122.1 0.0 -7.4 3.9 Cost to Income Ratio (%) 37.6 42.4 42.3 42.0 40.5 42.3 41.0 39.6 41.0 40.8 Interest Exp./Interest Income (%) 52.9 52.1 53.8 53.0 57.3 56.2 55.7 54.5 53.0 55.9 Other Income/Net Income (%) 32.9 25.5 21.5 25.3 30.2 24.2 20.7 18.9 26.4 23.4 E: MOSt Estimates

Rajat Rajgarhia([email protected];Tel:+91 22 56575320) / Manish Karwa([email protected];Tel:+91 22 56575318) 23 September 2005 81 Results Preview

QUARTER ENDING SEPTEMBER 2005

Cement

BSE Sensex: 8,223 S&P CNX: 2,478 23 September 2005

2QFY06: Highlights COMPANY NAME PG.

ACC 87 YoY Comparative (v/s 2QFY05) ? Volumes expected to be higher by 9.5% Birla Corporation 88 ? Prices expected to be higher by 2.2%

Grasim Industries 89 QoQ Comparative (v/s 1QFY06) Gujarat Ambuja 90 ? Volumes to decline by 10.1% ? Prices to decline by 2 % Shree Cement 91

UltraTech Cement 92 CEMENT INDUSTRY DYNAMICS: DEMAND AND PRICE

National Despatches (LHS) Average Price (RHS) 13,000 165

11,500 155

10,000 145 Rs./bag '000 ton 8,500 135

7,000 125 Jun-02 Oct-02 Jun-03 Oct-03 Jun-04 Oct-04 Jun-05 Apr-02 Feb-03 Apr-03 Feb-04 Apr-04 Feb-05 Apr-05 Dec-02 Dec-03 Dec-04 Aug-02 Aug-03 Aug-04 Aug-05

Source: CMA/MOSt

INQUIRE CEMENT UNIVERSE: 2QFY06 PERFORMANCE AT A GLANCE

VOLUME (M TON) REALIZATION Despatches (m ton) - LHS Growth (%) - RHS 2QFY06 2QFY05 GR. (%) YOY (%) 36 16% ACC 4.0 3.7 8.0 4.7 33 12% Grasim 3.3 3.0 8.2 5.0 30 8% Guj. Ambuja * 3.1 2.9 4.0 4.1 27 4% Ultratech Cemco 3.3 3.2 3.3 11.8 24 0% Birla Corp 1.2 1.2 2.3 -5.5 Shree Cement 0.8 0.8 6.0 5.6 Industry 31.6 28.8 9.5 2.2 Source: CMA, MOSt * June year-end 1QFY04 2QFY04 3QFY04 4QFY04 1QFY05 2QFY05 3QFY05 4QFY05 1QFY06 2QFY06

EXPECTED QUARTERLY PERFORMANCE SUMMARY (RS MILLION) RECO SALES EBITDA NET PROFIT SEP.05 CHG. (%) SEP.05 CHG. (%) SEP.05 CHG. (%) Cement ACC Neutral 9,957 13.0 1,736 15.8 815 34.5 Birla Corporation Buy 2,688 -2.9 345 65.9 166 23.8 Grasim Industries Neutral 16,538 8.2 3,467 -12.7 1,802 -16.7 Gujarat Ambuja Buy 6,487 8.2 1,870 11.9 1,149 27.0 Shree Cement Buy 1,568 12.0 492 25.5 277 21.8 UltraTech Cemco Neutral 6,788 15.5 1,026 8.8 224 33.7 Sector Aggregate 44,025 9.7 8,936 2.9 4,432 5.4

Nirbhay Mahawar ([email protected]); Tel: +91 22 56575315/Jinesh K Gandhi ([email protected]); Tel: +91 22 56575304

23 September 2005 82 Cement

Pricing: Prices firm but upward trend is not visible

2QFY06 Highlights ? YoY Comparative: to be higher by 2.2% ? QoQ Comparative: declined by only 2%

2QFY06: SUMMARY PRICING TREND (%) PRICE TREND – NORTH (RS/BAG) YOY QOQ 170 North 2.2 1.5 East 0.8 -6.2 155 West 3.5 0.0 South 0.3 -4.1 140 Central 4.9 -0.5 National Average 2.2 -2.0 125 Source: Industry/MOSt 110 Feb-03 Feb-04 Feb-05 Nov-02 Nov-03 Nov-04 Aug-02 May-03 Aug-03 May-04 Aug-04 May-05 Aug-05

PRICE TREND – EAST (RS/BAG) PRICE TREND – WEST (RS/BAG)

180 170

165 155

150 140

135 125

120 110 Feb-03 Feb-04 Feb-05 Feb-03 Feb-04 Feb-05 Nov-02 Nov-03 Nov-04 Nov-02 Nov-03 Nov-04 Aug-02 May-03 Aug-03 May-04 Aug-04 May-05 Aug-05 Aug-02 May-03 Aug-03 May-04 Aug-04 May-05 Aug-05

PRICE TREND – SOUTH (RS/BAG) PRICE TREND – CENTRAL (RS/BAG)

170 170

155 155

140 140

125 125

110 110 Feb-03 Feb-04 Feb-05 Feb-03 Feb-04 Feb-05 Nov-02 Nov-03 Nov-04 Nov-02 Nov-03 Nov-04 Aug-02 May-03 Aug-03 May-04 Aug-04 May-05 Aug-05 Aug-02 May-03 Aug-03 May-04 Aug-04 May-05 Aug-05

23 September 2005 83 Cement

2QFY06: Firm cement prices despite monsoon Cement prices remained firm despite lower sequential demand on account of monsoon. Cement volumes moved up by 9.5% YoY but declined 10.1% sequentially. High YoY volume growth also translated in 2.2% increase in realization. Sequentially, realization declined only by 2%, which reflects the pricing power the industry is enjoying on account of tight demand supply dynamics.

TREND IN CEMENT PRICES (NATIONAL AVERAGE, RS/BAG)

180

165

150

135

120 Apr-02 Oct-02 Apr-03 Oct-03 Apr-04 Oct-04 Apr-05 Jun-02 Jun-03 Jun-04 Jun-05 Aug-02 Feb-03 Aug-03 Feb-04 Aug-04 Feb-05 Aug-05 Dec-02 Dec-03 Dec-04

Source: CMA, MOSt

Rising capacity utilization: High growth in demand and limited capacity utilization has resulted in continuously higher capacity utilization for the industry. The cement industry’s capacity utilization for 2QFY06 reached 82.6% against 77.3% in 2QFY05. YoY industry capacity utilization will continue to improve in FY06, as incremental capacity addition in the near term (next one year) is expected to be less than incremental supply.

TREND IN CAPACITY UTILIZATION (%)

95% Industry wide capacity utilization for 2Q is at the peak level in last 20 quaters 82.6%

85% 77.3% 74.3% 75.0%

75% 70.6% 70.9%

65% Q2FY01 Q4FY01 Q2FY02 Q4FY02 Q2FY03 Q4FY03 Q2FY04 Q4FY04 Q2FY05 Q4FY05 Q2FY06

Source: CMA, MOSt

23 September 2005 84 Cement

Prices likely to remain strong Cement prices are likely to remain strong in most of the markets on the back of improved pricing power in the industry. The industry’s pricing power is expected to improve in FY06 and 1HFY07 on the back of high capacity utilization and limited capacity addition in the industry. We expect prices to improve by Rs7.5 per bag in FY06 and Rs5 per bag in FY07. The northern, central and eastern region, which are operating at high capacity utilization, will see a sustainable upturn in cement prices for the next one year. In the southern and western region, average realization for producers will improve but prices will be a function of pricing discipline among producers and will remain volatile. However, post FY07 we may see some weakening in cement prices on account of supply pressure from new capacities which most of the producers have started planning.

Strong cash flow may lead to series of capacity expansion On the back of an upturn in cement prices, most of the cement producers are generating strong cash flows from operations. Strong cash flows, comfortable gearing and positive outlook about the demand growth, driven by strong momentum in construction activities, may enthuse producers to go for capacity additions. Due to large number of producers having sufficient funds for capex, we will see a series of capacity expansion plan announcements in the next six to nine months. These capacities will take around 18-24 months to become operational.

Outlook High volume growth and limited capacity addition has improved demand-supply scenario for the industry significantly and as a result, the industry is going through a cyclical upturn which is likely to continue for one more year. However, post that we expect new capacity addition in the industry to jeopardize the tight demand supply dynamics. We expect cement prices to start softening in 2HFY07 on account of supply-side concerns (Huge capacity addition and softening in exports). We maintain our neutral view on sector on account of stretched valuation (earning as well as asset) and supply-side concerns. We advice investors to take exposure to companies with reasonable asset/earning valuation and in line with this maintain our positive view on Gujarat Ambuja, Shree Cement, Birla Corporation and Kesoram Industries.

23 September 2005 85 Cement

Stock performance and valuations

STOCK PERFORMANCE (%) ABSOLUTE PERF REL PERF TO SENSEX REL PERF TO SECTOR 3 M 1 YEAR 3 M 1 YEAR 3 M 1 YEAR Cement A C C 20 70 4 22 -1 22 Birla Corp. 37 94 21 46 16 46 Grasim Inds. 22 17 7 -31 1 -31 Guj. Ambuja Cem 8 52 -8 3 -13 3 Shree Cement 35 129 19 80 14 80 UltraTech Cem. 36 72 21 23 15 23

RELATIVE PERFORMANCE - 3 MONTH (%) RELATIVE PERFORMANCE - 1 YEAR (%)

Sensex MOSt Cement Index MOSt Cement Index Sensex 205 130

180 120 155 110 130

100 105

90 80 Jun-05 Jul-05 Aug-05 Sep-05 Sep-04 Dec-04 Mar-05 Jun-05 Sep-05

CMP (RS) RECO EPS (RS) P/E (X) EV/EBITDA ROE (%) 23.9.05 FY05A FY06E FY07E FY05A FY06E FY07E FY05A FY06E FY07E FY05A FY06E FY07E Cement ACC 463 Neutral 20.3 27.7 33.8 22.8 16.7 13.7 16.2 10.9 8.5 24.0 25.5 26.1 Birla Corporation 240 Buy 11.3 17.3 28.0 21.3 13.9 8.6 15.4 8.1 4.8 27.8 31.7 36.4 Grasim Industries 1,339 Neutral 105.3 102.1 125.4 12.7 13.1 10.7 6.9 7.0 5.8 22.2 18.3 19.3 Gujarat Ambuja 69 Buy 3.5 5.0 6.1 20.1 14.0 11.3 12.1 8.9 6.8 22.4 28.5 29.8 Shree Cement 452 Buy 29.0 42.8 48.5 15.6 10.6 9.3 10.5 8.3 6.1 37.4 42.1 34.2 UltraTech Cemco 463 Neutral 4.6 17.0 30.5 100.2 27.1 15.2 18.7 11.0 7.5 5.8 20.4 29.7 Sector Aggregate 19.6 15.9 12.4 11.4 9.0 6.8 20.6 21.8 23.6

23 September 2005 86 Results Preview SECTOR: CEMENT

ACC

STOCK INFO. BLOOMBERG 23 September 2005 BSE Sensex: 8,223 ACC IN Neutral REUTERS CODE S&P CNX: 2,478 ACC.BO Previous Recommendation: Neutral Rs463

Equity Shares (m) 186.5 YEAR NET SALES PAT EPS* EPS P/E P/BV ROE ROCE EV/ EV/ 52-Week Range 488/247 END (RS M) (RS M) (RS) GROWTH (%) (X) (X) (%) (%) SALES EBITDA 1,6,12 Rel. Perf. (%) -8/3/22 3/05A 38,874 3,788 20.3 73.5 22.8 5.5 24.0 15.8 2.6 16.2

M.Cap. (Rs b) 86.4 3/06E 44,705 5,164 27.7 36.3 16.7 4.3 25.5 21.5 2.2 10.9 M.Cap. (US$ b) 2.0 3/07E 50,283 6,309 33.8 22.2 13.7 3.6 26.1 24.9 1.9 8.5 * Fully Diluted EPS; pre-exceptionals

? Dispatches during 2QFY06 are expected to grow at 8% to 4.03m ton. Average realizations are expected to be higher by 4.7% YoY to Rs2,165/ton. Sequentially, realization has declined by 2.7%.

? Net sales expected to grow by 13% YoY to Rs10b. Due to cost push even with higher realizations EBITDA margins are likely expand by 40bp only to 17.4%. EBITDA is likely to move up 16% YoY to Rs1.7b.

? Lower other income (down by 44% YoY) would restrict adjusted PAT growth to 34.5% resulting in PAT of Rs8b.

? The stock currently trades at 16.7x FY06E EPS and 10.9x FY06E EV/EBITDA. Considering its stretched valuations, we re-iterate Neutral.

QUARTERLY PERFORMANCE (STANDALONE) (RS MILLION) Y/E MARCH FY05 FY06 FY05 FY06E 1Q 2Q 3Q 4Q 1Q 2QE 3QE 4QE Cement Sales (m ton) 3.89 3.73 4.18 4.49 4.41 4.03 4.46 4.70 16.29 17.59 YoY Change (%) 0.9 0.2 15.0 11.2 13.5 8.0 6.5 4.6 6.8 8.0 Cement Realization 2,174 2,067 1,985 2,186 2,225 2,165 2,245 2,366 2,104 2,254 YoY Change (%) 14.0 16.3 7.6 2.6 2.4 4.7 13.1 8.2 9.3 7.1 QoQ Change (%) 2.1 -4.9 -4.0 10.1 1.8 -2.7 3.7 5.4 Net Sales 9,413 8,812 9,533 11,106 11,073 9,957 11,320 12,356 38,874 44,705 YoY Change (%) 17.0 17.4 25.6 15.5 17.6 13.0 18.7 11.3 18.7 15.0 Total Expenditure 7,538 7,314 8,329 9,455 8,940 8,220 9,117 9,456 32,635 35,733 EBITDA 1,875 1,499 1,204 1,651 2,133 1,736 2,203 2,900 6,239 8,972 Margins (%) 19.9 17.0 12.6 14.9 19.3 17.4 19.5 23.5 16.0 20.1 Depreciation 439 444 512 473 480 505 530 538 1,869 2,053 Interest 209 197 273 204 219 215 230 170 882 834 Other Income -108 157 323 417 415 70 165 237 958 800 PBT before EO Item 1,119 1,015 742 1,391 1,849 1,086 1,608 2,430 4,446 6,885 EO Income/(Expense) 0 0 -5 0 0 0 0 0 -5 0 PBT after EO Item 1,119 1,015 737 1,391 1,849 1,086 1,608 2,430 4,441 6,885 Tax 306 409 206 -264 456 272 402 607 657 1,721 Rate (%) 27.4 40.3 27.9 -19.0 24.6 25.0 25.0 25.0 14.8 25.0 Reported PAT 812 606 531 1,655 1,394 815 1,206 1,822 3,784 5,164 Adjusted PAT 812 606 535 1,655 1,394 815 1,206 1,822 3,788 5,164 Margins (%) 8.6 6.9 5.6 14.9 12.6 8.2 10.7 14.7 9.7 11.6 YoY Change (%) 52.4 377.1 139.6 58.6 71.6 34.5 125.5 10.1 81.7 36.3 E: MOSt Estimates Nirbhay Mahawar ([email protected]); Tel: +91 22 56575315/Jinesh K Gandhi ([email protected]); Tel: +91 22 56575304

23 September 2005 87 Results Preview SECTOR: CEMENT

Birla Corporation

STOCK INFO. BLOOMBERG 23 September 2005 BSE Sensex: 8,223 BJUT IN Buy REUTERS CODE S&P CNX: 2,478 BRLC.BO Previous Recommendation: Buy Rs240

Equity Shares (m) 77.0 YEAR NET SALES PAT EPS EPS P/E P/BV ROE ROCE EV/ EV/ 52-Week Range 271/122 END (RS M) (RS M) (RS) GROWTH (%) (X) (X) (%) (%) SALES EBITDA 1,6,12 Rel. Perf. (%) 6/11/46 3/05A 11,387 869 11.3 182.9 21.3 6.0 27.8 19.8 1.7 15.4

M.Cap. (Rs b) 18.5 3/06E 13,027 1,331 17.3 53.2 13.9 4.5 31.7 28.7 1.5 8.1 M.Cap. (US$ b) 0.4 3/07E 14,605 2,156 28.0 62.0 8.6 3.2 36.4 46.4 1.2 4.8

? During 2QFY06, Birla Corp is expected to show a decline in revenues by 2.9% YoY to Rs2.7b. Capacity constraint would restrict dispatches growth in 2QFY06 at 2.3% YoY to 1.23m ton.

? Better cost management will result in 534bp YoY increase in EBITDA margin at 12.8%. EBITDA is likely to grow by 66% to Rs345m.

? Higher tax provision (up to 33.1% v/s 4.3% of PBT in 2QFY05) to result in muted PAT growth of 23.8% YoY to Rs166m, despite 78% growth at the PBT level.

? With a presence in the structurally sound markets of north and central regions, timely capacity expansion and expected power cost savings from captive power plant, it is one of the best plays to ride the demand-excess scenario in the cement sector. The stock is trading at 13.9x FY06E earnings and at an EV/ton of US$70/ton (FY07E) of expanded capacity. We re-iterate Buy.

QUARTERLY PERFORMANCE (RS MILLION) Y/E MARCH FY05 FY06 FY05 FY06E 1Q 2Q 3Q 4Q 1Q 2QE 3QE 4QE Cement Sales (m ton) 1.33 1.20 1.22 1.26 1.27 1.23 1.37 1.57 5.01 5.45 YoY Change (%) 8.7 5.8 5.7 1.4 -4.5 2.3 12.5 24.6 5.4 8.6 Cement Realization 1,897 2,051 1,985 2,080 1,987 1,937 2,187 2,441 2,001 2,157 YoY Change (%) 5.7 17.8 16.0 -1.1 4.8 -5.5 10.2 17.3 8.5 7.8 QoQ Change (%) -9.8 8.1 -3.2 4.8 -4.5 -2.5 12.9 11.6 Net Sales 2,780 2,769 2,722 3,441 2,788 2,688 3,322 4,230 11,387 13,027 YoY Change (%) 12.5 20.0 17.5 10.7 0.3 -2.9 22.0 22.9 11.6 14.4 Total Expenditure 2,358 2,561 2,552 2,970 2,355 2,343 2,717 3,134 10,117 10,549 EBITDA 422 208 170 471 433 345 605 1,096 1,270 2,479 Margins (%) 15.2 7.5 6.2 13.7 15.5 12.8 18.2 25.9 11.2 19.0 Depreciation 71 73 81 74 73 82 95 109 298 358 Interest 50 49 44 75 30 55 56 71 217 211 Other Income 18 53 19 92 35 40 30 -25 182 80 Profit before Tax 319 140 64 415 366 248 484 892 937 1,989 Tax 24 6 5 33 133 82 160 122 68 658 Rate (%) 7.6 4.3 7.5 8.0 36.4 33.1 33.1 13.7 7.3 33.1 Adjusted PAT 295 134 60 381 232 166 324 770 869 1,331 Margins (%) 10.6 4.8 2.2 11.1 8.3 6.2 9.7 18.2 7.6 10.2 YoY Change (%) 179.5 - - 17.8 -21.2 23.8 444.2 101.9 183.4 53.2 E: MOSt Estimates

Nirbhay Mahawar ([email protected]); Tel: +91 22 56575315/Jinesh K Gandhi ([email protected]); Tel: +91 22 56575304

23 September 2005 88 Results Preview SECTOR: CEMENT

Grasim Industries

STOCK INFO. BLOOMBERG BSE Sensex: 8,223 GRASIM IN 23 September 2005 Neutral REUTERS CODE S&P CNX: 2,478 GRAS.BO Previous Recommendation: Neutral Rs1,339

Equity Shares (m) 91.7 YEAR NET SALES PAT EPS EPS P/E P/BV ROE ROCE EV/ EV/ END* (RS M) (RS M) (RS) GROWTH (%) (X) (X) (%) (%) SALES EBITDA 52-Week Range 1,410/1,029 3/05A 90,230 9,659 105.3 27.1 12.7 2.8 22.2 21.4 1.8 6.9 1,6,12 Rel. Perf. (%) -4/-17/-30 M.Cap. (Rs b) 122.7 3/06E 100,366 9,365 102.1 -3.0 13.1 2.4 18.3 22.6 1.6 7.0

M.Cap. (US$ b) 2.8 3/07E 111,309 11,501 125.4 22.8 10.7 2.1 19.3 31.0 1.3 5.8

* Consolidated

? Grasim is expected to post sales growth of 8% YoY to Rs16.5b in 2QFY06. Continuing pressure on VSF and sponge iron realization and cost push would impact EBITDA margins by 500bp to 21%, resulting in 16.7% decline in PAT to Rs1.8b. ? Cement volumes are expected to grow by 8.2% YoY to 3.3m ton and realizations to improve by 5% YoY to Rs1,959/ ton. However, high cost push would hit cement margins by 260bp to 17.4%. ? VSF volumes are likely to increase by 9.6% YoY. However, on account of pressure from competing fibers VSF realization will decline by 8.3% to Rs73,000/ton. Falling realization will result in a 940bp VSF margin decline to 25.6%. ? The sponge iron division’s 2.2% YoY higher realizations were more than negated by 24% YoY higher cost, resulting in a 14.1% YoY decline in margins to 18.4%. ? With two segments (VSF and sponge iron) likely to experience significant margin pressure and cement moving towards its peak, current valuations at 13.1x FY06E and 10.7x FY07E earnings are reflecting the fair value of the business. We re-iterate Neutral.

QUARTERLY PERFORMANCE (STANDALONE) (RS MILLION) Y/E MARCH FY05 FY06 FY05 FY06E 1Q 2Q 3Q 4Q 1Q 2QE 3QE 4QE Net Sales 15,171 15,282 15,597 16,422 15,533 16,538 16,685 18,081 62,471 66,837 YoY Change (%) 30.4 29.0 17.1 5.7 2.4 8.2 7.0 10.1 19.8 7.0 Total Expenditure 10,870 11,312 11,670 12,466 11,789 13,071 12,974 13,951 46,318 51,785 EBITDA 4,301 3,970 3,927 3,956 3,744 3,467 3,711 4,130 16,153 15,052 Margins (%) 28.4 26.0 25.2 24.1 24.1 21.0 22.2 22.8 25.9 22.5 Depreciation 698 706 717 725 705 740 744 756 2,846 2,945 Interest 329 367 352 339 265 292 283 310 1,388 1,151 Other Income 163 276 215 825 201 279 223 637 1,694 1,341 PBT before EO Items 3,437 3,172 3,072 3,717 2,975 2,714 2,908 3,701 13,614 12,297 Extraordinary Inc/(Exp) 0 52 164 -577 454 0 0 0 331 454 PBT after EO items 3,437 3,224 3,236 3,140 3,429 2,714 2,908 3,701 13,945 12,751 Tax 1,245 1,025 1,065 845 919 912 977 1,379 4,180 4,187 Rate (%) 36.2 31.8 32.9 26.9 26.8 33.6 33.6 37.3 30.0 32.8 Reported PAT 2,192 2,199 2,171 2,295 2,510 1,802 1,931 2,322 9,765 8,564 Adj. PAT 2,192 2,164 2,061 2,717 2,056 1,802 1,931 2,322 9,533 8,110 YoY Change (%) 68.0 20.2 25.9 -3.7 -6.2 -16.7 -6.3 -14.5 25.7 -14.9 E: MOSt Estimates

Nirbhay Mahawar ([email protected]); Tel: +91 22 56575315/Jinesh K Gandhi ([email protected]); Tel: +91 22 56575304

23 September 2005 89 Results Preview SECTOR: CEMENT

Gujarat Ambuja

STOCK INFO. BLOOMBERG 23 September 2005 BSE Sensex: 8,223 GAMB IN Buy REUTERS CODE S&P CNX: 2,478 GACM.BO Previous Recommendation: Buy Rs69

Equity Shares (m) 1,352.1 YEAR NET SALES PAT EPS EPS P/E P/BV ROE ROCE EV/ EV/ END (RS M) (RS M) (RS) GROWTH (%) (X) (X) (%) (%) SALES EBITDA 52-Week Range 75/44 6/05E 26,058 4,682 3.5 54.4 20.1 4.3 22.4 18.3 3.4 12.1 1,6,12 Rel. Perf. (%) 0/-1/3 M.Cap. (Rs b) 93.9 6/06E 30,343 6,712 5.0 43.4 14.0 3.7 28.5 24.9 2.8 8.9

M.Cap. (US$ b) 2.1 6/07E 34,310 8,306 6.1 23.7 11.3 3.1 29.8 31.1 2.3 6.8

? Gujarat Ambuja’s 1QFY06 sales are expected to grow by 8.2% YoY to Rs6.5b. Dispatches are expected to grow by 4% YoY to 3.06m ton, whereas average realizations would be higher by 4.1% YoY to Rs2,122/ton.

? Despite cost-push, better realization from domestic as well as export market will result in margin improvement of 90bp to 28.8%. EBITDA is likely to move up by 12% YoY to Rs1.9b.

? PBT before extraordinary items is likely to move up by 21% to Rs1.3b. On account of low tax rates of 12%, PAT is likely to move up by 27% to Rs1.1b.

? Being the market leader in its key markets of North and West, GACL would be one of the biggest beneficiaries of any uptrend in prices in these regions due to reducing demand-supply gap. The stock is trading at attractive valuations of 14x FY06E earnings and 8.9x FY06E EV/EBITDA. We re-iterate Buy.

QUARTERLY PERFORMANCE (STANDALONE) (RS MILLION) Y/E JUNE FY05 FY06E FY05 FY06E 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q Sales Volume (m ton) 2.94 3.34 3.18 3.28 3.06 3.61 3.46 3.63 12.74 13.75 YoY Change (%) 31.3 31.1 14.8 13.5 4.0 8.0 8.7 10.7 22.0 7.9 Realization (Rs/ton) 2,039 1,856 2,099 2,197 2,122 2,192 2,262 2,239 2,046 2,206 YoY Change (%) 20.7 8.5 3.9 6.7 4.1 18.1 7.8 1.9 8.3 7.8 Net Sales 5,994 6,198 6,674 7,205 6,487 7,906 7,816 8,133 26,071 30,343 YoY Change (%) 58.5 42.3 19.3 21.1 8.2 27.5 17.1 12.9 32.5 16.4 EBITDA 1,672 1,360 1,991 2,219 1,870 2,495 2,603 2,610 7,241 9,578 Margins (%) 27.9 21.9 29.8 30.8 28.8 31.6 33.3 32.1 27.8 31.6 Depreciation -503 -493 -492 -466 -465 -462 -500 -503 -1,954 -1,930 Interest -210 -203 -208 -226 -210 -195 -175 -116 -848 -696 Other Income 122 408 85 131 110 260 110 195 746 675 PBT 1,081 1,072 1,376 1,657 1,305 2,098 2,038 2,186 5,186 7,627 Tax 176 177 -56 206 157 252 245 262 503 915 Rate (%) 16.3 16.5 -4.0 12.4 12.0 12.0 12.0 12.0 9.7 12.0 Reported Profit 905 895 1,431 1,452 1,149 1,846 1,794 1,924 4,683 6,712 Adj PAT 905 895 1,431 1,452 1,149 1,846 1,794 1,924 4,683 6,712 YoY Change (%) 863.8 158.2 -1.6 22.4 27.0 106.1 25.3 32.5 61.4 248.9 E: MOSt Estimates; Quarterly results don’t add up with full year results due to restating of past quarter results

Nirbhay Mahawar ([email protected]); Tel: +91 22 56575315/Jinesh K Gandhi ([email protected]); Tel: +91 22 56575304

23 September 2005 90 Results Preview SECTOR: CEMENT

Shree Cement

STOCK INFO. BLOOMBERG BSE Sensex: 8,223 SRCM IN 23 September 2005 Buy REUTERS CODE S&P CNX: 2,478 SHCM.BO Previous Recommendation: Buy Rs452

Equity Shares (m) 34.8 YEAR NET SALES PAT EPS EPS P/E P/BV ROE ROCE EV/ EV/ END (RS M) (RS M) (RS) GROWTH (%) (X) (X) (%) (%) SALES EBITDA 52-Week Range 514/187 3/05A 5,821 1,010 29.0 240.3 15.6 4.5 37.4 21.6 3.2 10.5 1,6,12 Rel. Perf. (%) 0/17/80 M.Cap. (Rs b) 15.7 3/06E 7,210 1,490 42.8 47.5 10.6 3.3 42.1 24.3 2.8 8.3

M.Cap. (US$ b) 0.4 3/07E 8,467 1,688 48.5 13.3 9.3 2.8 34.2 24.7 2.1 6.1

? Sales in 2QFY06 are expected to grow by 12% YoY to Rs1.6b driven by volume and realization growth. ? After the first quarter’s lower sales volume, due to a shutdown, volumes in 2QFY06 are back to normal. We expect volumes to grow by 6%YoY to 0.8m ton. ? Realizations at Rs1,962/ton, were up by 5.6% YoY on a high base of 2QFY05. ? Higher realization is likely to translate in EBITDA margin expansion of 340bp to31.4%. EBITDA is likely to move up by 25.5% to Rs492m. ? Improved operating performance will translate into 27% increase in PBT to Rs314m. Adjusted PAT is likely to improve by 22% to Rs277m. ? Given its favorable location (North) and potential volume growth, supported by its new greenfield capacity to be operational by end-3QFY06, the stock is quoting at very attractive valuations of 10.6x FY06E EPS and 8.3x FY06E EBITDA. We maintain Buy.

QUARTERLY PERFORMANCE (RS MILLION) Y/E MARCH FY05 FY06 FY05 FY06E 1Q 2Q 3Q 4Q 1Q 2QE 3QE 4QE Sales Dispatches (m ton) 0.72 0.75 0.72 0.87 0.73 0.80 0.79 1.18 3.07 3.50 YoY Change (%) 6.3 4.7 7.7 11.9 1.0 6.0 9.0 35.8 8.1 14.0 Realization (Rs/ton) 1,974 1,858 1,854 1,880 1,952 1,962 2,062 2,191 1,895 2,060 YoY Change (%) 15.3 14.9 13.2 2.6 -1.1 5.6 11.2 16.6 13.8 8.7 Net Sales 1,427 1,401 1,344 1,634 1,425 1,568 1,629 2,587 5,821 7,210 YoY Change (%) 22.6 20.3 21.9 14.8 -0.1 12.0 21.2 58.3 23.0 23.9 Total Expenditure 923 1,009 949 1,158 982 1,076 1,062 1,649 4,055 4,771 EBITDA 504 392 395 476 443 492 567 938 1,766 2,439 Margins (%) 35.3 28.0 29.4 29.1 31.1 31.4 34.8 36.2 30.3 34% Depreciation 111 111 111 131 123 139 162 178 526 601 Interest 57 47 47 47 39 49 47 45 198 180 Other Income 8 13 4 15 3 10 8 9 41 30 PBT before EO Exp 344 247 241 312 284 314 366 724 1,082 1,688 Extra-Ord Expense 62 62 62 130 0 0 0 0 771 0 PBT after EO Exp 281 184 179 182 284 314 366 724 311 1,688 Tax 22 14 14 -26 24 23 27 50 24 124 Deferred Tax 0 0 0 0 0 14 16 44 -4 74 Rate (%) 7.8 7.8 7.8 -14.3 8.4 11.7 11.7 13.0 6.6 8.7 Reported PAT 259 170 165 208 260 277 323 630 291 1,490 Adj PAT 317 227 222 357 260 277 323 630 1,010 1,542 YoY Change (%) 139.7 422.9 84.5 82.3 -18.0 21.8 45.3 76.5 240.3 52.6 E: MOSt Estimates; Note: Quarterly results doesn’t add up with full year results as the company has a policy of providing deferred tax at year end Nirbhay Mahawar ([email protected]); Tel: +91 22 56575315/Jinesh K Gandhi ([email protected]); Tel: +91 22 56575304

23 September 2005 91 Results Preview SECTOR: CEMENT

UltraTech Cement

STOCK INFO. BLOOMBERG BSE Sensex: 8,223 UTCEM IN 23 September 2005 Neutral REUTERS CODE S&P CNX: 2,478 ULTC.BO Previous Recommendation: Neutral Rs463

Equity Shares (m) 124.4 YEAR NET SALES PAT EPS EPS P/E P/BV ROE ROCE EV/ EV/ END * (RS M) (RS M) (RS) GROWTH (%) (X) (X) (%) (%) SALES EBITDA 52-Week Range 495/263 3/05A 27,759 575 4.6 235.0 100.2 6.0 5.8 6.9 2.6 18.7 1,6,12 Rel. Perf. (%) 6/1/23 M.Cap. (Rs b) 57.5 3/06E 33,530 2,120 17.0 269.1 27.1 5.1 20.4 17.4 2.0 11.0

M.Cap. (US$ b) 1.3 3/07E 38,117 3,796 30.5 79.0 15.2 4.0 29.7 28.5 1.7 7.5

* Consolidated results; pre-exceptiionals

? Net sales expected to grow by 15.5% YoY to Rs6.8b driven by 11.8% YoY higher realizations to Rs2,057/ton and 3.3% YoY volume growth to 3.3m ton (including clinker).

? Higher realization is primarily a reflection of improving product mix, with clinker export being converted into cement export. This shift is driven by higher margin in cement export in comparison to clinker export.

? EBITDA is likely to grow by 8.8% to Rs1b. In spite of higher realization, EBITDA margin is likely to decline by 90bp to 15.1% on account of high cost push.

? Adjusted PAT is expected to be higher by 33% YoY at Rs224m.

? At 27.1x FY06E consolidated earnings and 11x FY06E EBITDA, the stock looks fairly priced. We maintain Neutral.

QUARTERLY PERFORMANCE (STANDALONE) (RS MILLION) Y/E MARCH FY05 FY06 FY05 FY06E 1Q 2Q 3Q 4Q 1Q 2QE 3QE 4QE Sales (m ton) 3.68 3.20 3.93 3.56 3.85 3.30 4.52 3.85 14.37 15.52 YoY Change (%) - 4.5 3.3 15.0 8.1 4.6 8.0 Realization (Rs/ton) 1,845 1,839 1,750 2,037 2,117 2,057 2,157 2,266 1,865 2,153 YoY Change (%) 14.7 11.8 23.3 11.3 13.9 15.4 Net Sales 6,797 5,878 6,877 7,258 8,150 6,788 9,751 8,734 26,811 33,422 YoY Change (%) 19.9 15.5 41.8 20.3 19.1 24.7 EBITDA 1,033 943 656 1,208 1,492 1,026 1,994 1,560 3,747 6,072 Margins (%) 15.2 16.0 9.5 16.6 18.3 15.1 20.4 17.9 14.0 18.2 Depreciation 542 466 518 509 509 524 522 645 2,034 2,200 Interest 284 269 254 263 221 210 195 235 1,069 860 Other Income -15 49 46 49 111 45 40 34 223 230 PBT before EO Expense 192 258 -69 485 874 337 1,317 715 866 3,242 Extra-Ord Expense 0 183 125 893 0 0 0 0 1,202 0 PBT after EO Expense 192 74 -194 -409 874 337 1,317 715 -336 3,242 Tax 80 98 -84 -458 273 113 442 260 -365 1,089 Rate (%) 41.6 38.1 43.3 112.1 31.3 33.6 33.6 36.4 108.5 33.6 Reported PAT 112 -24 -110 49 600 224 874 454 29 2,153 Adj PAT 112 167 -45 315 600 224 874 454 563 2,153 YoY Change (%) 434.5 33.7 - 44.2 44.7 282.6 E: MOSt Estimates

Nirbhay Mahawar ([email protected]); Tel: +91 22 56575315/Jinesh K Gandhi ([email protected]); Tel: +91 22 56575304

23 September 2005 92 Results Preview

QUARTER ENDING SEPTEMBER 2005

Engineering

BSE Sensex: 8,223 S&P CNX: 2,478 23 September 2005

COMPANY NAME PG. The IIP Index continued its buoyant growth trend with 10.3% increase in the first three months of FY06, the highest since FY96. The production of capital goods also witnessed ABB 98 the maximum increase of 14.6%. We expect this buoyant growth to sustain momentum Alstom Projects 99 because of continued thrust on infrastructure spending and higher capacity addition plans of user industries. BHEL 100

CAPITAL GOODS – SUSTAINING MOMENTUM

Crompton Greaves 101 Y/E MARCH 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 3M2006 IIP (% Change) 9.1 13.1 6.1 6.6 4.1 6.6 5.1 2.6 5.8 7.0 8.4 10.3 Cummins India 102 Cap Goods Index (% Ch) 9.2 5.4 11.4 5.8 12.6 7.0 1.7 -3.4 10.5 13.6 13.9 14.6

Larsen & Toubro 103 % CHANGE IN CAPITAL GOODS INDEX

Siemens 104 32

Thermax 105 25

18

11

4 Jun'2003 Sep'2003 Dec'2003 Mar'2004 Jun'2004 Sep'2004 Dec'2004 Mar'2005 Jun'2005

Source: CMIE

EXPECTED QUARTERLY PERFORMANCE SUMMARY (RS MILLION) RECO SALES EBITDA NET PROFIT SEP.05 CHG. (%) SEP.05 CHG. (%) SEP.05 CHG. (%) Engineering ABB Neutral 7,273 30.0 557 39.0 435 30.1 Alstom Projects Neutral 2,203 16.0 85 60.4 78 24.3 BHEL Buy 19,887 15.0 3,109 39.9 1,853 17.1 Crompton Greaves Buy 5,074 12.0 493 24.8 334 33.9 Cummins India Neutral 3,502 18.0 387 14.0 340 15.2 Larsen & Toubro Buy 33,351 12.5 1,191 21.6 996 31.5 Siemens Buy 8,324 44.5 912 44.2 744 30.0 Thermax Buy 2,967 35.0 267 36.2 179 38.6 Sector Aggregate 82,580 18.2 7,000 34.1 4,960 24.5

Satyam Agarwal ([email protected]); Tel: +91 22 5657 5353/Anjali Shah Vora ([email protected]); Tel: +91 22 5657 5305 23 September 2005 93 Engineering

Order booking continues to remain buoyant Our optimism on the engineering sector stems primarily from the buoyant trend in order booking, which improves the visibility on future growth. With robust order booking, the order backlogs of most of the companies in the capital goods segment have recorded healthy growth rates, despite the fact that the execution cycles are trimming down and robust revenues are being booked. Companies like BHEL have posted a 36% YoY growth and Thermax has posted a 66% YoY growth in order backlog in FY05. Most of these company’s order books are over 1.5-2x their revenues for FY05, and hence assure continued revenue growth.

ORDER BACKLOG: NEAR ALL TIME HIGH (RS M)

ABB BHEL

19,000 330,000

16,000 285,000

13,000 240,000

10,000 195,000

7,000 150,000 Jun-04 Jun-05 Jun-04 Jun-05 Mar-04 Mar-05 Mar-04 Mar-05 Sep-04 Dec-04 Sep-04 Dec-04

L&T (E&C DIVISION) THERMAX

180,000 12,000

10,000 170,000 8,000 160,000 6,000

150,000 4,000 Jun-04 Jun-05 Jun-04 Jun-05 Mar-04 Mar-05 Mar-04 Mar-05 Sep-04 Dec-04 Sep-04 Dec-04

Source: Company/Inquire

Increasing investments in the manufacturing sector, infrastructure thrust and continuation of power reforms continue to be the key demand drivers in the domestic market. The exports market has also started opening up, with some MNCs (viz. ABB, Cummins, Siemens) being developed as exclusive sourcing bases for their parents’ global / regional requirements. With most of them also planning to set up R&D centers in India, this seems to be a sustainable trend. At the same time, the capital goods manufacturers themselves have firmed up robust capex plans to expand capacities and meet the growing demand. BHEL has announced plans to increase capacity from 6,000 MW to 10,000 MW by FY07 at a capex of Rs10b.

23 September 2005 94 Engineering

We remain positive on the order-booking trend in FY06, which would translate into robust top-line growth. The following factors will drive demand growth in the sector: ? Capacity expansions: With the growth in the economy, all industry players are operating at close to or above optimum capacity utilization, thus requiring fresh investments. ? Strong commodity prices: Resultant increase in profitability and cash flows would lead to players going in for major capex programs. ? Lower interest costs: Lower cost of funds makes projects more attractive, thus driving investment. ? Fast growing exports: India’s cost efficiency and innovative skills is fuelling exports to the developed nations (often to global parent). ? Infrastructure spending: Government spending on infrastructure development is having a multiplier effect on the economy and attracting public and private investments. ? Investments in Hydrocarbon sector: It has emerged as a big demand generator for capital goods. ? Power sector reforms in place: The government’s ambitious strategy to add generating capacity and curtail transmission and distribution losses is another demand driver.

EBITDA margins seem to have finally bottomed out Despite the improvement in demand growth, order booking and revenues, most capital goods companies have witnessed severe pressure on margins over the last few quarters. Rising prices of key inputs like metals and fuel, along with the inability to take price hikes owing to existing long-term agreements and competitive pressures, were the main factors putting stress on EBIDTA margins. We believe that the companies have been able to manage costs by placing long-term orders with suppliers and raw-material prices have almost topped. Thus, the downside to margins from current levels is limited.

MARGINS APPEAR TO BE BOTTOMING OUT (%)

16 EBITDA Margin (LHS) Net Profit Margin (RHS) 12

9 12

6

8 3

4 0 Dec-02 Mar-03 Jun-03 Sep-03 Dec-03 Mar-04 June-04 Sep- 04 Dec-04 Mar-05 Jun-05

The above chart depicts the movement of the EBITDA margins and the Net Profit margins for the engineering companies under our coverage. Source: Motilal Oswal Securities

23 September 2005 95 Engineering

With demand picking up, most companies have been able to take some price hikes and incorporate price escalation clauses into new contracts. The improving financial health of customers in most sectors also makes it easier to take price hikes. We believe that as more projects are completed / near completion, the quantum of low-margin business for capital goods companies would decline rapidly, and margins would start improving as new contracts drive future growth. We, thus, expect margins for capital goods majors to start picking up over the next few quarters. Buoyant revenue growth and improving margins, would result in high earnings growth.

We remain positive on the sector We remain positive on the Capital Goods sector. Earnings visibility is high for most of the companies in this sector as they are maintaining order backlogs at almost 1.5x-2x annual sales. Stocks have been performing very well and we believe that outperformance will continue on the back of consistent earnings and positive news flows. Our best bets in the sector are BHEL, L&T and Crompton Greaves.

23 September 2005 96 Engineering

Stock performance and valuations

STOCK PERFORMANCE (%) ABSOLUTE PERF REL PERF TO SENSEX REL PERF TO SECTOR 3 M 1 YEAR 3 M 1 YEAR 3 M 1 YEAR Engineering A B B 31 122 15 74 5 38 Alstom Projects -8 36 -23 -12 -33 -48 B H E L 30 88 14 39 4 4 Crompton Greaves 32 172 16 124 7 88 Cummins India 5 17 -11 -32 -20 -68 Larsen & Toubro 23 60 7 11 -2 -24 Siemens 23 106 7 58 -2 22 Thermax 32 87 16 39 6 3

RELATIVE PERFORMANCE - 3 MONTH (%) RELATIVE PERFORMANCE - 1 YEAR (%)

Sensex MOSt Engineering Index MOSt Engineering Index Sensex 190 130

160 120

130 110

100 100

90 70 Jun-05 Jul-05 Aug-05 Sep-05 Sep-04 Dec-04 Mar-05 Jun-05 Sep-05

COMPARATIVE VALUATION CMP (RS) RECO EPS (RS) P/E (X) EV/EBITDA ROE (%) 23.9.05 FY05A FY06E FY07E FY05A FY06E FY07E FY05A FY06E FY07E FY05A FY06E FY07E Engineering ABB 1,711 Neutral 35.8 49.1 67.5 47.7 34.8 25.3 31.6 23.3 16.2 22.9 25.7 28.3 Alstom Projects 190 Neutral 5.2 7.0 8.8 36.3 27.0 21.5 31.2 24.2 17.2 12.5 16.4 19.7 BHEL 1,101 Buy 39.4 53.3 72.1 27.9 20.6 15.3 14.3 11.2 8.0 17.1 19.9 22.7 Crompton Greaves 586 Buy 27.6 40.3 50.7 21.2 14.5 11.6 18.8 13.9 10.9 38.9 37.7 35.3 Cummins India 141 Neutral 6.7 8.1 9.8 20.9 17.3 14.4 17.8 11.2 9.4 17.9 20.4 22.6 Larsen & Toubro 1,372 Buy 49.3 70.6 91.6 27.8 19.4 15.0 20.8 15.7 12.5 19.2 22.6 26.0 Siemens 2,410 Buy 47.1 84.1 112.8 51.2 28.7 21.4 27.2 17.7 12.9 24.6 36.4 39.6 Thermax 800 Buy 28.2 46.0 67.8 28.4 17.4 11.8 14.9 11.3 7.1 15.4 22.9 29.6 Sector Aggregate 30.1 20.8 15.7 18.5 14.0 10.4 19.4 24.2 27.3

23 September 2005 97 Results Preview SECTOR: ENGINEERING

ABB

STOCK INFO. BLOOMBERG BSE Sensex: 8,223 ABB IN 23 September 2005 Neutral REUTERS CODE S&P CNX: 2,478 ABB.BO Previous Recommendation: Neutral Rs1,711

Equity Shares (m) 42.4 YEAR NET SALES PAT EPS EPS P/E P/BV ROE ROCE EV/ EV/ END (RS M) (RS M) (RS) GROWTH (%) (X) (X) (%) (%) SALES EBITDA 52-Week Range 1,873/700 12/04A 22,602 1,519 35.8 40.9 47.7 10.0 22.9 34.8 3.0 31.6 1,6,12 Rel. Perf. (%) 6/18/74 M.Cap. (Rs b) 72.5 12/05E 29,477 2,081 49.1 37.0 34.8 8.1 25.7 38.5 2.3 23.3

M.Cap. (US$ b) 1.7 12/06E 40,949 2,862 67.5 37.5 25.3 6.4 28.3 42.5 1.6 16.2 Pre-exceptionals ? ABB began 3QCY05 with an order backlog of Rs18.6b, 39% higher YoY. ? The trend of buoyant order intake should continue in CY05 and CY06, with increased orders from power utilities and industrial customers due to pick up in domestic industrial capex, increased investments in power transmission and distribution infrastructure, higher export potential, new product innovations and deeper market penetration. ? We expect revenues to grow by 30%, EBITDA by 39% and profits by 30% in 3QCY05 on the back of sustained order booking momentum, rapid conversion of the order backlog and increased share of standard products and services. EBITDA margins are expected to scale up YoY due to increase in operational productivity, efficient management of working capital and positive contribution from newly-launched products. ? With an emphasis on improved business execution and a broader approach to value creation, a new strategy to meet the targets of the company over 2005-09 has been designed. The two core divisions of the business will be replaced by five business areas - Power Products, Power Systems, Automation Products, Process Automation and Robotics. In addition, eight regions will be created to manage business lines and functional roles effectively over geographies and hence, maximize synergies. ? ABB India has set up an engineering and operations center at Bangalore, which will serve as a vital resource base for all the ABB units worldwide. ABB India will manufacture its new range of ACS 550 drives in this center. ? At 34.8x CY05E and 25.3x CY06E earnings, ABB trades at rich valuations. Though we are bullish on ABB’s revenue and earnings prospects, we remain Neutral on the stock. QUARTERLY PERFORMANCE (RS MILLION) Y/E DECEMBER CY04 CY05 CY04 CY05E 1Q 2Q 3Q 4Q 1Q 2Q 3QE 4QE Sales 4,414 5,174 5,595 7,456 6,077 6,589 7,273 9,538 22,602 29,477 Change (%) 55.6 56.6 65.9 44.2 37.7 27.3 30.0 27.9 53.9 30.4 EBITDA 236 440 401 1,006 371 604 557 1,325 2,129 2,858 Change (%) 111.5 48.4 49.5 43.8 57.2 37.3 39.0 31.7 54.7 34.2 As % of Sales 5.4 8.5 7.2 13.5 6.1 9.2 7.7 13.9 9.4 9.7 Depreciation 48 50 51 54 55 56 57 59 204 227 Interest 5 4 4 1 3 17 3 2 13 25 Other Income 76 98 160 166 119 141 160 114 453 534 Extra-ordinary Income 0 0 38 0 0 0 0 0 38 0 PBT 259 483 544 1,117 433 672 657 1,377 2,403 3,139 Tax 90 177 184 409 158 236 221 443 860 1,058 Effective Tax Rate (%) 34.7 36.6 33.8 36.6 36.5 35.1 33.7 32.1 35.8 33.7 Repoted PAT 169 306 360 708 275 436 435 935 1,543 2,081 Adj. PAT 169 306 335 708 275 436 435 935 1,519 2,081 Change (%) 93.5 15.9 60.7 43.6 62.7 42.4 30.1 32.0 40.9 37.0 E: MOSt Estimates

Satyam Agarwal ([email protected]); Tel: +91 22 5657 5353/Anjali Shah Vora ([email protected]); Tel: +91 22 5657 5305 23 September 2005 98 Results Preview SECTOR: ENGINEERING

Alstom Projects

STOCK INFO. BLOOMBERG BSE Sensex: 8,223 ABBAP IN 23 September 2005 Neutral REUTERS CODE S&P CNX: 2,478 ABBP.BO Previous Recommendation: Neutral Rs190

Equity Shares (m) 67.0 YEAR NET SALES PAT* EPS* EPS P/E P/BV ROE ROCE EV/ EV/ END (RS M) (RS M) (RS) GROWTH (%) (X) (X) (%) (%) SALES EBITDA 52-Week Range 250/127 3/05A 8,290 350 5.2 34.7 36.3 4.5 12.5 12.8 1.3 31.2 1,6,12 Rel. Perf. (%) -11/-10/-12 M.Cap. (Rs b) 12.7 3/06E 10,247 470 7.0 34.3 27.0 4.4 16.4 18.8 1.1 24.2

M.Cap. (US$ b) 0.3 3/07E 12,455 591 8.8 25.5 21.5 4.1 19.7 21.9 0.9 17.2

Pre-exceptionals ? Alstom Projects’ (APIL’s) sales are expected to grow by 16% to Rs2.2b, EBITDA by 60% to Rs85m and the net profit by 24% to Rs78m in 2QFY06.

? The company began FY06 with a healthy order backlog of Rs9.22b, translating into 14 month equivalent revenues. The total order backlog further increased to Rs16b during 1QFY05, as the company bagged Rs7.45b order from NHPC for the supply of electro-mechanical equipment for the 2,000 MW Subansiri Lower Hydro Electric Project in consortium with Alstom Power Hydralique (France). The total value of this order is Rs15.5b. We expect order intake to remain buoyant on the back of expansion in generating capacities in India, especially of hydro-power plants.

? APIL has chalked out an investment plan of Rs570m for its Gujarat plant to tap the hydro-power potential in India over the next 18 months.

? The global management has identified India as a global operations hub, and has thus decided to set up its R&D activities center here. Also, Alstom’s Vadodara factory will be a global engineering and manufacturing center for hydropower and rotating machines.

? Given its strong order position and healthy cash balance, we remain positive on Alstom’s long-term business prospects. However, the stock trades at a premium to the sector and hence we maintain a Neutral rating.

QUARTERLY PERFORMANCE (RS MILLION) Y/E MARCH FY05 FY06 FY05 FY06E 1Q 2Q 3Q 4Q 1Q 2QE 3QE 4QE Sales 1,269 1,899 1,890 3,227 1,795 2,203 2,164 4,085 8,285 10,247 Change (%) 35.5 45.3 19.4 55.7 41.4 16.0 14.5 26.6 40.5 23.7 EBITDA 64 53 89 150 41 85 116 241 355 483 Change (%) 0.9 25.6 226.0 76.5 -35.9 60.4 30.5 60.7 62.9 36.1 As of % Sales 5.0 2.8 4.7 4.6 2.3 3.9 5.4 5.9 4.3 4.7 Depreciation 36 33 34 33 33 38 44 45 136 160 Interest 1 0 0 1 0 0 0 0 2 0 Other Income 34 26 21 42 67 40 35 58 123 200 Extra-ordinary income 128 0 0 0 0 0 0 0 128 0 PBT 61 46 76 158 75 87 107 254 468 523 Tax 15 -17 8 -17 8 9 11 25 -11 52 Effective Tax Rate (%) 24.6 -37.0 10.5 -10.8 10.7 10.0 10.0 9.8 -2.4 10.0 Reported PAT 174 63 68 175 67 78 96 229 479 470 Adj PAT 56 63 68 175 67 78 96 229 348 470 Change (%) -22.1 6.2 79.5 3.8 19.3 24.3 41.8 30.7 14.4 35.2 E: MOSt Estimates

Satyam Agarwal ([email protected]); Tel: +91 22 5657 5353/Anjali Shah Vora ([email protected]); Tel: +91 22 5657 5305 23 September 2005 99 Results Preview SECTOR: ENGINEERING

BHEL

STOCK INFO. BLOOMBERG BSE Sensex: 8,223 BHEL IN 23 September 2005 Buy REUTERS CODE S&P CNX: 2,478 BHEL.BO Previous Recommendation: Buy Rs1,101

Equity Shares (m) 244.8 YEAR NET SALES PAT EPS EPS P/E P/BV ROE ROCE EV/ EV/ END (RS M) (RS M) (RS) GROWTH (%) (X) (X) (%) (%) SALES EBITDA 52-Week Range 1,170/563 3/05A 97,326 9,655 39.4 17.5 27.9 4.5 17.1 29.6 2.5 14.3 1,6,12 Rel. Perf. (%) 0/15/42 M.Cap. (Rs b) 269.4 3/06E 116,320 13,051 53.3 35.2 20.6 3.7 19.9 30.7 2.0 11.2

M.Cap. (US$ b) 6.1 3/07E 146,774 17,638 72.1 35.1 15.3 3.1 22.7 33.8 1.5 8.0

? We expect BHEL to record growth of 15% in revenues, 40% in EBITDA and 17% in net profit in 2QFY06. EBITDA margins are expected to improve to 15.6%, because of robust volume growth and effective working capital management.

? BHEL’s order intake remains buoyant due to order inflows for projects during the Eleventh five-year plan and the services sector. The total order book stands at Rs306b at the end of 1QFY06, 9% higher YoY. This is equivalent to the company’s capacity to execute projects for three years.

? In order to gear up and benefit from the country’s plan to add 60,000 MW of power generation capacity in the Eleventh five-year plan, BHEL has chalked out an investment plan to enhance its annual capacity from 6,000 MW to 10,000 MW at a cost of Rs10b, to be executed over a period of three years.

? As BHEL rapidly executes its orders, effectively manages its costs, and benefits from its operating leverage, we expect an earnings growth of 35% CAGR during FY05-FY07. The stock trades at a P/E of 15.3x FY07E. Given its dominant position in the country’s power generation equipment market, we maintain Buy.

QUARTERLY PERFORMANCE (RS MILLION) Y/E MARCH FY05 FY06 FY05 FY06E 1Q 2Q 3Q 4Q 1Q 2QE 3QE 4QE Sales 11,705 17,293 22,866 44,666 19,365 19,887 25,839 51,229 97,326 116,320 Change (%) 12.7 13.7 27.6 25.4 65.4 15.0 13.0 14.7 19.5 19.5 EBITDA 397 2,223 3,530 8,720 1,715 3,109 4,300 11,654 16,982 20,779 Change (%) 1,005.8 15.5 32.7 32.7 332.0 39.9 21.8 33.7 25.6 22.4 As a % Sales 3.4 12.9 15.4 19.5 8.9 15.6 16.6 22.7 17.4 17.9 Depreciation 509 516 544 604 576 594 615 637 2,189 2,422 Interest 125 172 129 352 123 165 133 350 814 771 Other Income 786 935 999 1,628 931 500 525 537 2,037 2,493 Net Extra-ordinary Expenses 179 0 0 0 0 0 0 0 179 0 PBT 370 2,470 3,855 9,391 1,947 2,850 4,077 11,204 15,838 20,079 Tax 135 888 1,481 3,545 668 998 1,427 3,935 6,282 7,028 Effective Tax Rate (%) 36.5 35.9 38.4 37.7 34.3 35.0 35.0 35.1 39.7 35.0 Reported PAT 235 1,583 2,374 5,846 1,279 1,853 2,650 7,269 9,534 13,051 Change (%) NA 56.7 78.5 34.3 444.3 17.1 11.6 24.3 44.9 36.9 Adj. PAT 349 1,583 2,374 5,846 1,279 1,853 2,650 7,269 9,663 13,051 Change (%) NA 12.4 29.8 21.7 266.8 17.1 11.6 24.3 17.6 35.1 E: MOSt Estimates

Satyam Agarwal ([email protected]); Tel: +91 22 5657 5353/Anjali Shah Vora ([email protected]); Tel: +91 22 5657 5305 23 September 2005 100 Results Preview SECTOR: ENGINEERING

Crompton Greaves

STOCK INFO. BLOOMBERG BSE Sensex: 8,223 CRG IN 23 September 2005 Buy REUTERS CODE S&P CNX: 2,478 CROM.BO Previous Recommendation: Buy Rs586

Equity Shares (m) 52.4 YEAR NET SALES PAT* EPS* EPS* P/E* P/BV ROE ROCE EV/ EV/ END (RS M) (RS M) (RS) GROWTH (%) (X) (X) (%) (%) SALES EBITDA 52-Week Range 652/203 3/05A 19,725 1,447 27.6 106.4 21.2 7.8 38.9 21.6 1.7 18.8 1,6,12 Rel. Perf. (%) -10/16/123 M.Cap. (Rs b) 30.6 3/06E 23,006 2,111 40.3 45.8 14.5 6.0 37.7 29.3 1.4 13.9

M.Cap. (US$ b) 0.7 3/07E 27,065 2,655 50.7 25.8 11.6 4.7 35.3 32.3 1.2 10.9

* Consolidated

? We expect revenues to increase by 12%, EBITDA by 25% and net profit by 34% in 2QFY06.

? While the capacity expansion plans of the user industries will continue bolstering industrial segment top-line, the power segment will continue benefiting from growing T&D investments, thrust on rural electrification, plans to expand power generation capacity in the country and larger thrust on exports.

? We expect margins to improve to 9.7% from 8.7% in 2QFY06, as the company has been able to pass on the raw- material price hike to its customers and book new orders on revised prices in the industrial division. Also, the share of low-margin projects in the power division has declined.

? Crompton Greaves (CG) has acquired the transformer business (revenues of Eur244m and loss of Eur2m in the year ended December 2004) of the Belguim-based Pauwels Group for a consideration of Eur32.1m. With this acquisition, CG will have access to manufacturing facilities in Belgium, Ireland, US, Canada and Indonesia and 20 sales offices spread across the globe. CG will further invest an additional Eur7.5m to strengthen the businesses of this acquisition.

? We expect the consolidated earnings to grow by 46% in FY06 and 26% in FY07. The stock trades at 14.5x FY06E and 11.6x FY07E earnings. We re-iterate Buy.

QUARTERLY PERFORMANCE (STANDALONE) (RS MILLION) Y/E MARCH FY05 FY06 FY05 FY06E 1Q 2Q 3Q 4Q 1Q 2QE 3QE 4QE Sales 4,232 4,530 4,719 6,245 5,198 5,074 5,403 7,331 19,725 23,006 Change (%) 13.9 10.9 18.8 17.0 22.8 12.0 14.5 17.4 15.3 16.6 EBITDA 282 395 472 486 455 493 586 806 1,635 2,339 Change (%) 9.9 -0.8 33.6 7.0 61.1 24.8 24.1 65.8 3.8 43.1 As of % Sales 6.7 8.7 10.0 7.8 8.7 9.7 10.9 11.0 8.3 10.2 Depreciation 104 103 103 111 105 112 115 132 421 464 Interest 60 52 71 48 75 47 55 37 231 214 Other Income 57 36 58 119 77 55 80 105 269 317 Exceptional Items (reported) 0 0 0 -4 0 0 0 0 -4 0 PBT 175 276 357 441 352 388 496 742 1,248 1,978 Tax -1 27 41 33 39 54 69 114 100 277 Effective Tax Rate (%) -0.3 9.6 11.5 7.6 11.1 14.0 14.0 15.4 8.0 14.0 Reported PAT 175 249 316 407 313 334 427 628 1,148 1,701 Adj PAT 175 249 316 411 313 334 427 628 1,152 1,701 Change (%) 460.2 9.8 83.5 43.0 78.3 33.9 35.1 52.7 30.2 47.7 E: MOSt Estimates

Satyam Agarwal ([email protected]); Tel: +91 22 5657 5353/Anjali Shah Vora ([email protected]); Tel: +91 22 5657 5305 23 September 2005 101 Results Preview SECTOR: ENGINEERING

Cummins India

STOCK INFO. BLOOMBERG BSE Sensex: 8,223 KKC IN 23 September 2005 Neutral REUTERS CODE S&P CNX: 2,478 CUMM.BO Previous Recommendation: Neutral Rs141

Equity Shares (m) 198.0 YEAR NET SALES PAT EPS EPS P/E P/BV ROE ROCE EV/ EV/ END (RS M) (RS M) (RS) GROWTH (%) (X) (X) (%) (%) SALES EBITDA 52-Week Range 163/105 3/05A 14,711 1,334 6.7 38.0 20.9 3.6 17.9 20.5 1.8 17.8 1,6,12 Rel. Perf. (%) -11/2/-32 M.Cap. (Rs b) 27.9 3/06E 17,474 1,613 8.1 20.9 17.3 3.4 20.4 28.2 1.4 11.2

M.Cap. (US$ b) 0.6 3/07E 20,841 1,933 9.8 19.8 14.4 3.1 22.6 32.3 1.2 9.4

Consolidated ? We expect sales growth of 18% to Rs3.5b, EBITDA growth of 14% to Rs387m and net profit growth of 15% to Rs340m in 2QFY06. ? Domestic revenues are expected to remain buoyant backed by strong demand in the power generation segment and launch of a series of new products. Its exports, especially for K38 and K50 engines in the power segment have been rising, mainly under the US$60m contract signed for five years with Cummins Engines Company (CECL) UK. ? The EBITDA margins are expected to marginally decline to 11.1% in 2QFY06 from 11.4% in 2QFY05, because of higher commodity prices, exchange losses and lower level of indigenization. The company’s plans to reduce costs, enhance productivity and increase indigenization in several categories of engines, especially C and N14 series of engines, will ease the pressure to some extent. However, there are no plans yet to raise prices of products that it exports to its parent. ? A new unit costing Rs150m is planned to be set up near Pune to assemble low horse-power engines and generator sets. ? The tax rates will be high as the exemptions on VRS, Daman Facility and exports have reduced. ? The board has approved the de-merger of the services business of Cummins Auto Services Ltd. (CASL) with Cummins Diesel Sales and Services (India) Ltd (CDS&S), a 100% subsidiary of the company. ? The stock currently trades at 14.4x FY07E consolidated earnings. We remain Neutral on the stock.

QUARTERLY PERFORMANCE (STANDALONE) (RS MILLION) Y/E MARCH FY05 FY06 FY05 FY06E 1Q 2Q 3Q 4Q 1Q 2QE 3QE 4QE Sales 2,815 2,968 2,968 3,168 3,280 3,502 3,591 3,803 11,918 14,175 Change (%) 32.5 30.7 32.2 16.2 16.5 18.0 21.0 20.0 27.8 18.9 EBITDA 381 339 263 464 439 387 317 542 1,448 1,685 Change (%) 34.9 18.3 28.7 80.3 15.3 14.0 20.2 16.9 32.8 16.4 As of % Sales 13.5 11.4 8.9 14.6 13.4 11.1 8.8 14.3 12.1 11.9 Depreciation 90 96 84 87 83 89 95 109 357 375 Interest 2 1 2 7 2 3 3 4 12 12 Other Income 135 189 273 200 161 191 300 198 797 850 Extra-ordinary Items 14 7 0 0 0 0 0 0 21 0 PBT 409 425 450 569 516 486 518 628 1,853 2,148 Tax 120 134 121 105 162 146 155 95 481 558 Effective Tax Rate (%) 29.3 31.6 27.0 18.5 31.4 30.0 30.0 15.1 26.0 26.0 Reported PAT 289 291 329 464 354 340 363 533 1,372 1,589 Adj PAT 299 295 329 464 354 340 363 533 1,388 1,589 Change (%) 0.8 -3.5 21.2 56.9 18.2 15.2 10.4 14.8 12.9 14.5 E: MOSt Estimates

Satyam Agarwal ([email protected]); Tel: +91 22 5657 5353/Anjali Shah Vora ([email protected]); Tel: +91 22 5657 5305 23 September 2005 102 Results Preview SECTOR: ENGINEERING

Larsen & Toubro

STOCK INFO. BLOOMBERG BSE Sensex: 8,223 LT IN 23 September 2005 Buy REUTERS CODE S&P CNX: 2,478 LART.BO Previous Recommendation: Buy Rs1,372

Equity Shares (m) 129.9 YEAR NET SALES PAT * EPS * EPS * P/E * P/BV ROE ROCE EV/ EV/ END (RS M) (RS M) (RS) GROWTH (%) (X) (X) (%) (%) SALES EBITDA 52-Week Range 1,425/792 3/05A 134,363 6,408 49.3 3.8 27.8 5.4 19.2 19.2 1.4 20.8 1,6,12 Rel. Perf. (%) -1/12/11 M.Cap. (Rs b) 178.2 3/06E 155,562 9,999 70.6 43.2 19.4 4.7 22.6 21.9 1.2 15.7

M.Cap. (US$ b) 4.1 3/07E 186,122 12,964 91.6 29.7 15.0 4.0 26.0 26.2 1.0 12.5

* Consolidated ? L&T’s order backlog at the end of 1QFY06 was Rs183.2b, 8% higher YoY. The order intake has been buoyant in 2QFY06 as well, with large orders being booked from the oil and gas, infrastructure, process and power sectors. ? We expect revenues to grow 13% to Rs33.4b, EBITDA by 22% to Rs1.2b and profit by 32% to Rs996m in 2QFY06. ? EBITDA margins are expected to expand in 2QFY06 because of factors like lower project execution cycle, concentration on niche and highly technical projects enabling larger proportion of high margin projects in the total revenue mix and booking of higher margin orders in the international markets. ? The recent orders bagged by L&T include, Rs10b for Tata Steel’s 2.4m ton expansion project in Jamshedpur, Rs4.7b in Gulf for the construction of major water supply projects, high rise buildings and luxurious condominiums, Rs5b for the Hyderabad International Airport, Rs3.3b from ONGC to restore the latter’s Bombay High output, etc. ? L&T has signed a US$3.6b deal with Dubal to set up an integrated bauxite mine, alumina refinery and smelter project in Orissa. L&T will have a 26% stake in the project and the potential value of order is Rs30b. ? In line with its strategy to exit non-core businesses, L&T has exited from its tractor business by divesting 50% of its stake in its JV company, L&T-John Deere. ? The consolidated earnings are expected to grow by 43% in FY06 and 30% in FY07. The stock is trading at 15x FY07E consolidated earnings. We maintain Buy.

QUARTERLY PERFORMANCE (STANDALONE) (RS MILLION) Y/E MARCH FY05 FY06 FY05 FY06E 1Q 2Q 3Q 4Q 1Q 2QE 3QE 4QE Net Sales 26,397 29,643 31,671 42,908 31,111 33,351 37,145 49,408 130,918 151,014 Change (%) 64.6 44.1 33.4 20.5 17.9 12.5 17.3 15.1 36.9 15.4 EBITDA 830 980 736 4,332 1,258 1,191 1,908 4,661 7,182 9,018 Change (%) 115.6 2,029.3 -39.5 37.9 51.5 21.6 159.2 7.6 61.5 25.6 As of % Sales 3.1 3.3 2.3 10.1 4.0 3.6 5.1 9.4 5.5 6.0 Depreciation 207 220 215 299 294 247 248 320 942 1,108 Interest 99 134 141 162 98 127 130 176 536 531 Other Income 533 742 1,039 972 727 684 1,008 1,402 3,023 3,821 Extraordinary Income 0 3,620 0 0 382 0 0 0 3,533 382 PBT 1,056 4,988 1,418 4,844 1,975 1,502 2,538 5,568 16,394 11,582 Tax 359 611 547 1,507 545 506 855 1,221 3,023 3,127 Effective Tax Rate (%) 34.0 12.2 38.6 31.1 27.6 33.7 33.7 21.9 18.4 27.0 Reported Profit 802 4,377 1,324 3,337 1,430 996 1,683 4,347 9,838 8,455 Adjusted PAT 802 757 1,324 3,337 1,048 996 1,683 4,347 6,305 8,073 Change (%) 26.2 -6.8 30.1 16.6 30.7 31.5 27.1 30.3 18.4 28.0 E: MOSt Estimates

Satyam Agarwal ([email protected]); Tel: +91 22 5657 5353/Anjali Shah Vora ([email protected]); Tel: +91 22 5657 5305 23 September 2005 103 Results Preview SECTOR: ENGINEERING

Siemens

STOCK INFO. BLOOMBERG BSE Sensex: 8,223 SIEM IN 23 September 2005 Buy REUTERS CODE S&P CNX: 2,478 SIEM.BO Previous Recommendation: Buy Rs2,410

Equity Shares (m) 33.1 YEAR NET SALES PAT EPS EPS P/E P/BV ROE ROCE EV/ EV/ END (RS M) (RS M) (RS) GROWTH (%) (X) (X) (%) (%) SALES EBITDA 52-Week Range 2,580/1,031 9/04A 22,739 1,561 47.1 17.8 51.2 11.4 24.6 39.8 3.2 27.2 1,6,12 Rel. Perf. (%) 1/24/61 M.Cap. (Rs b) 79.9 9/05E 33,826 2,787 84.1 78.5 28.7 9.6 36.4 53.6 2.2 17.7

M.Cap. (US$ b) 1.8 9/06E 44,273 3,737 112.8 34.1 21.4 7.6 39.6 60.9 1.7 12.9

Consolidated ? Siemens India achieved an all-time high order backlog of Rs34.5b, 79% higher YoY in 3QFY05. New orders booked were 257% higher at Rs14.4b, with the main contributors being the Industrial Solutions and Services, Power Generation and Transportation businesses. ? We expect the sales to grow by 45% and earnings by 30% in 4QFY05. EBITDA margins are likely to remain constant at 11%, backed by increased volumes, higher asset productivity and favorable cost position. ? Siemens has acquired a 100% stake in Siemens Public Communications Network from its parent Siemens AG and a majority stake of 51% in the Bangalore-based shared services arm Siemens Shared Services from Siemens Shared Services LLC USA and Siemens AG. ? Since the cash generated from operations has more than doubled to Rs2.5b in FY04, Siemens stands at an advantageous position to fund its strategic investment plans through internal accruals. It has recently firmed up plans to invest US$500m in India over the next 3-4 years for expanding its production capacities and hiring more software professionals, in order to take advantage of the upturn in the domestic capex cycle, increased investments in the power sector and expand the role of Siemens India in the global operations of the parent. ? Given its diversified exposure to the Indian manufacturing industry, power, transport, healthcare, communication and IT segments, we believe Siemens will report steady growth in the coming years. On a consolidated basis, we expect earnings growth of 79% in FY05 and 34% in FY06. The stock currently trades at a P/E of 21.4x FY06E. We maintain Buy.

QUARTERLY PERFORMANCE (STANDALONE) (RS MILLION) Y/E SEPTEMBER FY04 FY05 FY04 FY05E 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4QE Total Revenues 3,271 4,675 4,572 5,761 5,307 7,191 6,126 8,324 18,142 26,948 Change (%) 7.9 17.0 49.6 27.4 62.3 53.8 34.0 44.5 25.6 48.5 EBITDA 266 460 445 633 449 901 550 912 1,667 2,811 Change (%) 26.9 7.7 94.8 35.7 68.7 95.7 23.6 44.2 4.0 68.6 As % of Revenues 8.1 9.8 9.7 11.0 8.5 12.5 9.0 11.0 9.2 10.4 Depreciation 54 59 55 61 58 62 78 73 228 270 Interest Income 24 34 35 38 50 51 82 27 132 210 Other Income 1 307 5 213 4 255 33 261 526 553 Extra-ordinary Items 0 0 66 0 0 0 0 0 203 0 PBT 237 743 496 823 445 1,145 586 1,128 2,299 3,304 Tax 71 323 140 251 132 351 190 384 785 1,057 Effective Tax Rate (%) 30.1 43.4 28.3 30.5 29.5 30.7 32.5 34.0 34.2 32.0 Reported PAT 165 420 356 572 314 794 395 744 1,514 2,247 Adjusted PAT 165 420 308 572 314 794 395 744 1,380 2,247 Change (%) -4.0 40.7 98.6 13.3 89.6 89.0 28.2 30.0 32.6 62.8 E: MOSt Estimates

Satyam Agarwal ([email protected]); Tel: +91 22 5657 5353/Anjali Shah Vora ([email protected]); Tel: +91 22 5657 5305 23 September 2005 104 Results Preview SECTOR: ENGINEERING

Thermax

STOCK INFO. BLOOMBERG BSE Sensex: 8,223 TMX IN 23 September 2005 Buy REUTERS CODE S&P CNX: 2,478 THMX.BO Previous Recommendation: Buy Rs800

Equity Shares (m) 23.8 YEAR NET SALES PAT EPS EPS P/E P/BV ROE ROCE EV/ EV/ END (RS M) (RS M) (RS) GROWTH (%) (X) (X) (%) (%) SALES EBITDA 52-Week Range 828/415 3/05A 12,696 672 28.2 -4.2 28.4 4.7 15.4 22.8 1.2 14.9 1,6,12 Rel. Perf. (%) 3/14/39 M.Cap. (Rs b) 19.1 3/06E 16,061 1,097 46.0 63.3 17.4 4.2 22.9 30.8 1.0 11.3

M.Cap. (US$ b) 0.4 3/07E 21,071 1,616 67.8 47.3 11.8 3.5 29.6 40.5 0.7 7.1

Consolidated ? Thermax began 2QFY06 with a high order backlog of Rs8.1b, 33% higher YoY. On a consolidated basis, the orders in hand were Rs11.5b. Along with the boiler business, the power, absorption chiller, water treatment solutions and the co-generation divisions are also witnessing robust order intake. ? We expect sales to grow by 35%, EBITDA by 36% and adjusted net profit by 39% in 2QFY06. EBITDA margins are expected to be higher YoY at 9%. Buoyant demand, successful implementation of cost-cutting initiatives, gains from the transformation process and long-term price contracts to mitigate the impact of raw-material price rise will lead to this expansion. ? Thermax has recently bagged an order worth Rs800m to set-up a 20MW captive generation facility to be executed within the tight schedule of 18 months. ? Given the very high order backlog and the requirement of faster delivery to its international customers, the company is working on improving capacities for its boiler and heater businesses. It has firmed up an investment plan of Rs1b, to enhance the manufacturing base. ? The company has appointed Mckinsey as its consultant and is working on doubling revenues and tripling profits in the next three years. ? At the end of FY05, Thermax had cash and cash equivalents of Rs3.4b (Rs145 per share). This, along with strong growth rates and improving profitability, will lead to high payouts going forward. The stock trades at a P/E of 11.8x FY07E. We maintain Buy. QUARTERLY PERFORMANCE (STANDALONE) (RS MILLION) Y/E MARCH FY05 FY06 FY05* FY06E* 1Q 2Q 3Q 4Q 1Q 2QE 3QE 4QE Sales 1,261 2,198 2,400 3,449 2,265 2,967 3,239 4,755 9,306 13,226 Change (%) 58.7 54.4 66.9 52.2 79.7 35.0 35.0 37.9 57.2 42.1 EBITDA 69 196 215 437 225 267 292 570 917 1,353 Change (%) 103.5 40.3 68.8 16.3 225.1 36.2 35.6 30.5 35.5 0.0 As of % Sales 5.5 8.9 9.0 12.7 9.9 9.0 9.0 12.0 9.9 10.2 Depreciation 21 26 22 23 25 25 22 26 92 98 Interest 2 1 1 2 1 1 1 1 7 5 Other Income 26 26 28 26 30 30 34 46 106 139 Extra-ordinary Items 0 -32 -33 -29 -26 0 0 0 -94 -26 PBT 73 163 187 408 203 270 302 588 830 1,363 Tax 17 55 60 146 70 91 102 206 277 468 Effective Tax Rate (%) 23.3 33.5 32.0 35.8 34.4 33.7 33.7 34.9 33.4 34.3 Reported PAT 56 108 127 262 133 179 200 383 553 895 Change (%) -18.9 -22.1 20.4 19.8 137.1 65.5 57.9 46.1 2.2 61.8 Adj PAT 56 129 149 280 150 179 200 383 615 912 E: MOSt Estimates

Satyam Agarwal ([email protected]); Tel: +91 22 5657 5353/Anjali Shah Vora ([email protected]); Tel: +91 22 5657 5305 23 September 2005 105 Results Preview

QUARTER ENDING SEPTEMBER 2005

Fertilizers

BSE Sensex: 8,223 S&P CNX: 2,478 23 September 2005

COMPANY NAME PG. Fertilizer offtake towards the end of 1QFY06 was affected by slow onset of monsoon, particularly in the eastern and southern regions. Monsoons have however picked up Coromandel Fertilizers 108 towards the second quarter, and are expected to be only 2% below the long period Tata Chemicals 109 average. Gross sown area in Kharif also increased by 1% YoY, and agricultural growth is estimated (by CMIE) to be 3% for FY06, compared to 1.1% for FY05. With better monsoons and higher gross sown area, fertilizer offtake is expected to show good growth during 2QFY06.

Indo Gulf Fertilizer to be merged with Indian Rayon The Aditya Birla Group has announced the merger of Indo Gulf Fertilizers and Birla Global Finance with Indian Rayon. The swap ratio is one share of Indian Rayon for three shares of Indo Gulf Fertilizers / Birla Global Finance. The swap ratio has been beneficial to the shareholders with the company valued at approximately Rs206 per share. The management’s strategic intention for the merger was to use the surplus cash to the tune of Rs4.5b for funding Indian Rayon’s expansion plans. We believe that the premium paid to the shareholders of Indo Gulf indicates that the markets are undervaluing efficient fertilizer companies.

International fertilizer prices rising International fertilizer prices have been rising on a YoY basis. Urea prices have been higher on a YoY basis during 2QFY06, primarily due to higher demand growth especially from China. However, we have seen prices cooling off in June and July compared to 1HCY05, primarily due to the build up of huge inventories. International DAP prices continue to remain firm on the back of good demand from India and Pakistan. We expect fertilizer producers like Tata Chemicals to record good volume growth in complex fertilizer as they have assured supply of phosphate rock.

We continue to remain positive on fertilizer stocks with volume growth and improving profitability. Tata Chemicals (currently trading at 11.7x FY06E and 10x FY07E) and Coromandel Fertilizers (currently trading at 9x FY06E and 7.6x FY07E) remain our top picks in the sector.

EXPECTED QUARTERLY PERFORMANCE SUMMARY (RS MILLION) RECO SALES EBITDA NET PROFIT SEP.05 CHG. (%) SEP.05 CHG. (%) SEP.05 CHG. (%) Fertilizers Coromondal Buy 5,431 12.0 489 8.1 275 50.3 Tata Chemicals Buy 8,530 17.0 1,749 24.5 1,129 28.7 Sector Aggregate 13,960 15.0 2,237 20.5 1,403 32.4

Atul Rastogi ([email protected]); Tel: +91 22 56575316/Sidharth Shah ([email protected]); Tel: +91 22 56575145 23 September 2005 106 Fertilizers

Stock performance and valuations

STOCK PERFORMANCE (%) ABSOLUTE PERF REL PERF TO SENSEX REL PERF TO SECTOR 3 M 1 YEAR 3 M 1 YEAR 3 M 1 YEAR Fertilizers Coromandel Fert. 19 59 4 10 9 8 Tata Chemicals 9 50 -7 2 -1 -1

RELATIVE PERFORMANCE - 3 MONTH (%) RELATIVE PERFORMANCE - 1 YEAR (%)

Sensex MOSt Fertilizer Index MOSt Fertilizer Index Sensex 120 190

110 160

100 130

90 100

80 70 Jun-05 Jul-05 Aug-05 Sep-05 Sep-04 Dec-04 Mar-05 Jun-05 Sep-05

COMPARATIVE VALUATION CMP (RS) RECO EPS (RS) P/E (X) EV/EBITDA ROE (%) 23.9.05 FY05A FY06E FY07E FY05A FY06E FY07E FY05A FY06E FY07E FY05A FY06E FY07E Fertilizers Coromondal 239 Buy 21.3 26.5 31.3 11.2 9.0 7.6 5.9 4.6 3.7 14.0 15.9 16.9 Tata Chemicals 187 Buy 12.7 16.0 18.6 14.7 11.7 10.0 8.1 6.6 5.6 15.4 17.5 18.3 Sector Aggregate 14.2 11.3 9.7 7.7 6.2 5.3 15.2 17.3 18.1

23 September 2005 107 Results Preview SECTOR: FERTILIZERS

Coromandel Fertilizers

STOCK INFO. BLOOMBERG BSE Sensex: 8,223 CRFT IN 23 September 2005 Buy REUTERS CODE S&P CNX: 2,478 CORF.BO Previous Recommendation: Buy Rs239

Equity Shares (m) 25.4 YEAR NET SALES PAT EPS EPS P/E P/BV ROE ROCE EV/ EV/ END (RS M) (RS M) (RS) GROWTH (%) (X) (X) (%) (%) SALES EBITDA 52-Week Range 278/138 03/05A 15,251 541 21.3 25.7 11.2 1.6 14.0 14.5 0.4 5.6 1,6,12 Rel. Perf. (%) -7/-12/11 M.Cap. (Rs b) 6.1 03/06E 16,127 674 26.5 24.6 9.0 1.4 15.9 17.1 0.4 4.6

M.Cap. (US$ b) 0.1 03/07E 17,326 794 31.3 17.8 7.6 1.3 16.9 20.0 0.3 3.6

? We expect sales to grow 12% YoY this quarter to Rs5.4b on the back of increased volume offtake with the monsoon picking up in the southern and eastern parts of the country in 2QFY06.

? EBITDA margins are expected to fall 30bp YoY to 9% in 2QFY06.

? Interest expense is likely to reduce to Rs36m in 2QFY06 from Rs53m in 2QFY05 entailing savings of Rs17m. PAT for 2QFY06 is expected at Rs275m, a growth of 50.3% YoY on high revenue growth, lower interest expense and lower tax provision.

? For the full year (FY06), we expect CFL to report sales of Rs16.1b (5.7% growth), EBITDA of Rs1.3b (10.3% growth) with EBITDA margins of 8.1% (up 30bp). PAT at Rs674m would witness a 24.6% YoY growth.

? The stock is currently trading 9x FY06E and 7.6x FY07E earnings. We recommend a Buy.

QUARTERLY PERFORMANCE (RS MILLION) Y/E MARCH FY05 FY06 FY05 FY06E 1Q 2Q 3Q 4Q 1Q 2QE 3QE 4QE Net Sales 1,924 4,849 4,407 4,071 1,259 5,431 4,715 4,722 15,251 16,127 YoY Change (%) 123.7 7.2 25.8 26.0 -34.6 12.0 7.0 16.0 25.9 5.7 Total Exp 1,762 4,397 4,093 3,810 1,071 4,942 4,385 4,417 14,062 14,816 EBITDA 162 452 314 261 188 489 330 305 1,189 1,312 YoY Change (%) 33.4 -8.0 -7.0 0.0 15.7 8.1 5.2 16.9 -1.8 10.3 Margins (%) 8.4 9.3 7.1 6.4 14.9 9.0 7.0 6.5 7.8 8.1 Depreciation -83 -86 -85 -97 -85 -88 -88 -91 -351 -352 Interest -52 -53 -42 -40 -53 -36 -36 -20 -187 -145 Other Income 18 19 72 19 18 34 34 50 127 135 PBT 45 332 258 143 68 398 240 244 778 950 Tax 55 -149 -114 -30 31 -123 -74 -109 -237 -275 Rate (%) 44.9 44.0 20.6 31.0 31.0 44.5 30.4 29.0 PAT 100 183 145 114 99 275 165 135 541 674 YoY Change (%) -32.4 40.5 -0.8 -1.2 50.3 14.3 18.9 25.6 24.6 Extraordinary Inc/(Exp) 110 55 -14 0 0 0 0 151 0 Reported PAT 210 183 199 100 99 275 165 135 692 674 E: MOSt Estimates

Atul Rastogi ([email protected]); Tel: +91 22 56575316/Sidharth Shah ([email protected]); Tel: +91 22 56575145 23 September 2005 108 Results Preview SECTOR: FERTILIZERS

Tata Chemicals

STOCK INFO. BLOOMBERG BSE Sensex: 8,223 TTCH IN 23 September 2005 Buy REUTERS CODE S&P CNX: 2,478 TTCH.BO Previous Recommendation: Buy Rs187

Equity Shares (m) 243.4 YEAR NET SALES PAT* EPS* EPS P/E P/BV ROE ROCE EV/ EV/ END (RS M) (RS M) (RS) GROWTH (%) (X) (X) (%) (%) SALES EBITDA 52-Week Range 211/124 03/05A 30,081 3,083 12.7 37.8 14.7 2.3 15.4 12.1 1.4 8.1 1,6,12 Rel. Perf. (%) -6/-2/2 M.Cap. (Rs b) 45.5 03/06E 33,089 3,883 16.0 25.7 11.7 2.1 17.5 14.9 1.2 6.6

M.Cap. (US$ b) 1.0 03/07E 35,594 4,533 18.6 16.8 10.0 1.8 18.3 16.1 1.1 5.6

Pre-exceptionals ? We expect Tata Chemicals to reports sales of Rs8.5b, a growth of 17% YoY on the back of strong fertilizer offtake as rains which were delayed in 1QFY06 in the eastern parts of the country have picked up in 2QFY06. We expect growth to be strong on a YoY basis as a result of low base, as 2QFY05 was impacted by low volumes in fertilizer and soda ash business due to lack of raw materials (phosphoric acid) and truckers strike.

? EBITDA margins are expected to expand 120bp in 2QFY06 on a YoY basis on improved margins in the company’s chemical business. Margins expansion is expected due to the hike in salt prices by the company in May ’05 and increased proportion of high margin dense soda ash in total soda ash production.

? PAT is expected at Rs1.1b, a growth of 28.7% YoY on strong growth in revenues and expanded margins.

? For FY06, we expect Tata Chemicals to report sales of Rs33.1b (10% growth), operating profits of Rs6.2b (20.1% growth), operating margins of 18.7% (up 160bp) culminating into PAT of Rs3.9b (24.6% growth).

? The stock is currently trading at 11.7x FY06E and 10x FY07E earnings. We maintain a Buy on the stock.

QUARTERLY PERFORMANCE (RS MILLION) Y/E MARCH FY05 FY06 FY05 FY06E 1Q 2Q 3Q 4Q 1Q 2QE 3QE 4QE Net Sales 5,204 7,290 10,391 7,196 5,100 8,530 11,431 8,029 30,081 33,089 YoY Change (%) 25.5 -9.9 37.7 27.3 -2.0 17.0 10.0 11.6 18.2 10.0 Total Exp 4,091 5,886 9,088 5,862 3,882 6,781 9,945 6,288 24,926 26,895 EBITDA 1,113 1,404 1,304 1,334 1,218 1,749 1,486 1,741 5,155 6,194 YoY Change (%) -4.8 -5.0 8.0 79.4 9.4 24.5 14.0 30.5 12.1 20.1 Margins (%) 21.4 19.3 12.5 18.5 23.9 20.5 13.0 21.7 17.1 18.7 Depreciation -344 -341 -340 -352 -342 -356 -356 -370 -1,377 -1,425 Interest -72 -59 -62 -53 -19 -80 -80 -63 -246 -242 Other Income 32 272 252 116 106 300 280 334 709 1,020 PBT 729 1,276 1,154 1,045 963 1,612 1,330 1,642 4,241 5,547 Tax -268 -399 -448 -9 -306 -484 -399 -476 -1,124 -1,664 Rate (%) 36.7 31.3 38.8 0.9 31.7 30.0 30.0 29.0 26.5 30.0 PAT 461 877 706 1,036 657 1,129 931 1,166 3,117 3,883 YoY Change (%) -11.9 1.2 12.5 327.4 42.5 28.7 31.8 12.6 57.4 24.6 Extraordinary Inc/(Exp) -5 -5 260 75 -8 0 0 0 322 0 Reported PAT 456 872 966 1,111 649 1,129 931 1,166 3,439 3,883 E: MOSt Estimates

Atul Rastogi ([email protected]); Tel: +91 22 56575316/Sidharth Shah ([email protected]); Tel: +91 22 56575145 23 September 2005 109 Results Preview

QUARTER ENDING SEPTEMBER 2005

FMCG

BSE Sensex: 8,223 S&P CNX: 2,478 23 September 2005

COMPANY NAME PG. Volume growth remains buoyant Our interaction with companies and trade sources indicates that volume growth continues Asian Paints 113 its buoyant trend. This has happened despite the price hikes in key categories like toothpaste, Britannia Industries 114 detergents, etc. in the last two quarters. Last quarter results indicated that the higher

Colgate Palmolive 115 priced segments are growing faster than the lower end segments, driven by faster growth in urban markets and possible uptrading by consumers. Dabur India 116

GSK Consumer 117 Monsoons picked up in this quarter Godrej Consumer Products 118 There were some concerns at the beginning of the quarter about delayed monsoons. However, rains picked up in the second quarter and overall rainfall is expected to be only Hindustan Lever 119 5-6% below long period average compared to 10% lower, last year. Gross sown area in ITC 120 Kharif also increased by 1% YoY, and agricultural growth is estimated (by CMIE) to be Marico Industries 121 3% for FY06, compared to 1.1% for FY05. Including this year, we would have three continuous years of growth in the agricultural sector, which augurs well for consumption Nestle India 122 demand in rural areas. Tata Tea 123

Cost pressures continue to remain high Even as volumes picked up over the last year, the industry continues to grapple with high cost pressure. Though most input prices were in check in April-June quarter, we expect cost pressure to increase going forward, given the sharp increase in crude prices over

EXPECTED QUARTERLY PERFORMANCE SUMMARY (RS MILLION) RECO SALES EBITDA NET PROFIT SEP.05 CHG. (%) SEP.05 CHG. (%) SEP.05 CHG. (%) FMCG Asian Paints Buy 5,932 11.0 902 11.3 566 15.1 Britannia Buy 4,399 3.0 594 7.0 451 -13.0 Colgate Buy 2,703 10.0 513 16.1 351 30.2 Dabur Buy 4,489 21.0 741 23.7 585 31.8 Godrej Consumer Buy 1,530 14.0 277 27.9 227 30.4 GSK Consumer Buy 2,631 12.0 474 12.8 279 24.2 HLL Neutral 26,892 12.0 4,034 19.1 3,401 20.4 ITC Buy 20,680 19.0 8,686 24.4 5,939 22.3 Marico Industries Buy 2,836 11.0 250 19.0 207 27.4 Nestle Neutral 6,558 10.0 1,377 21.8 876 36.2 Tata Tea Buy 7,636 1.0 1,527 5.3 884 16.1 Sector Aggregate 86,287 12.1 19,374 19.6 13,766 21.1

Atul Rastogi ([email protected]); Tel: +91 22 56575316/Sidharth Shah ([email protected]); Tel: +91 22 56575145 23 September 2005 110 FMCG

the last three months. Also, hike in diesel prices will increase freight costs by 7-10% over the next few months. Companies like Nestle and GSK Consumer are witnessing some relief as milk prices have cooled off from their highs in the first half of CY05.

Stocks have outperformed – be selective The FMCG sector has outperformed the BSE index by approximately 8%. The outperformance has been driven by good quarterly results by heavyweights like HLL and ITC. Valuations are no longer as attractive, especially given the impending cost pressures. Our top picks in the sector are Tata Tea and Marico Industries.

23 September 2005 111 FMCG

Stock performance and valuations

STOCK PERFORMANCE (%) ABSOLUTE PERF REL PERF TO SENSEX REL PERF TO SECTOR 3 M 1 YEAR 3 M 1 YEAR 3 M 1 YEAR FMCG Asian Paints 20 54 4 5 -2 -11 Britannia Inds. 33 76 17 28 11 11 Colgate Palmoliv 5 62 -11 14 -17 -3 Dabur India 15 103 0 54 -6 38 GlaxoSmith C H L 25 85 10 37 3 21 Godrej Consumer 36 117 21 69 15 52 Hind. Lever 10 41 -6 -7 -12 -24 ITC 31 78 16 29 9 13 Marico 18 104 2 56 -4 39 Nestle India 23 61 8 13 1 -4 Tata Tea 43 93 27 44 21 28

RELATIVE PERFORMANCE - 3 MONTH (%) RELATIVE PERFORMANCE - 1 YEAR (%)

Sensex MOSt FMCG Index MOSt FMCG Index Sensex 120 170

110 145

100 120

90 95

80 70 Jun-05 Jul-05 Aug-05 Sep-05 Sep-04 Dec-04 Mar-05 Jun-05 Sep-05

COMPARATIVE VALUATION CMP (RS) RECO EPS (RS) P/E (X) EV/EBITDA ROE (%) 23.9.05 FY05A FY06E FY07E FY05A FY06E FY07E FY05A FY06E FY07E FY05A FY06E FY07E FMCG Asian Paints 482 Buy 18.4 22.1 26.3 26.2 21.8 18.3 15.1 12.9 10.8 30.8 32.2 33.0 Britannia 1,200 Buy 71.4 66.1 76.2 16.8 18.2 15.8 13.7 11.2 9.3 38.5 27.8 25.6 Colgate 240 Buy 8.9 11.0 13.8 27.1 21.8 17.4 17.5 14.2 11.8 46.7 54.0 61.6 Dabur 151 Buy 5.4 7.5 8.3 27.7 20.1 18.2 20.2 15.7 14.2 42.8 43.1 36.4 Godrej Consumer 445 Buy 14.7 19.2 22.9 30.4 23.4 19.6 25.1 19.4 16.4 166.4 266.4 213.4 GSK Consumer 476 Buy 16.1 24.6 29.0 27.5 19.3 16.4 12.8 10.4 8.3 13.8 26.7 24.1 HLL 170 Neutral 5.4 6.0 6.9 31.6 28.6 24.5 25.0 23.4 20.0 56.6 61.0 66.6 ITC 138 Buy 4.9 6.2 7.3 28.1 22.3 18.9 16.9 13.1 10.7 23.8 25.3 25.4 Marico Industries 282 Buy 11.9 14.8 20.1 23.4 18.9 14.0 17.8 14.2 10.4 31.7 32.3 34.7 Nestle 870 Neutral 29.1 38.0 43.6 29.8 22.9 20.0 18.2 14.2 12.3 88.0 97.2 96.3 Tata Tea 846 Buy 45.6 53.7 61.5 18.5 15.7 13.7 10.8 9.3 8.2 17.2 17.4 17.3 Sector Aggregate 28.0 23.2 19.8 18.3 15.1 12.6 31.3 33.1 33.2

23 September 2005 112 Results Preview SECTOR: FMCG-PAINTS

Asian Paints

STOCK INFO. BLOOMBERG BSE Sensex: 8,223 APNT IN 23 September 2005 Buy REUTERS CODE S&P CNX: 2,478 ASPN.BO Previous Recommendation: Buy Rs482

Equity Shares (m) 95.9 YEAR NET SALES PAT* EPS* EPS P/E P/BV ROE ROCE EV/ EV/ END (RS M) (RS M) (RS) GROWTH (%) (X) (X) (%) (%) SALES EBITDA 52-Week Range 515/289 3/05A 19,415 1,764 18.4 16.1 26.2 8.1 30.8 42.2 2.3 15.1 1,6,12 Rel. Perf. (%) -6/-4/5 M.Cap. (Rs b) 46.2 3/06E 22,327 2,124 22.1 20.4 21.8 7.0 32.2 43.6 1.9 12.9

M.Cap. (US$ b) 1.1 3/07E 25,453 2,520 26.3 18.6 18.3 6.1 33.0 45.2 1.7 10.8

* Pre-exceptionals ? We expect Asian Paints to register an 11% YoY growth to Rs5.9b in 1QFY06 on the back of increased volumes and better price realizations as a result of price hikes undertaken by the company towards the end of FY05.

? EBITDA margins are expected to be flat at 15.2% in 2QFY06 as the benefits of higher sales is expected to be offset by higher cost of raw materials due to higher oil prices.

? PAT at Rs566m would show a 15.1% YoY growth as benefits from sales growth would be aided by lower provision for tax.

? For the full year FY06, we expect Asian Paints to report sales of Rs22.3b (15% growth), operating profits of Rs3.4b (15% growth), operating margins of 14.6% (up 560bp) resulting in PAT of Rs2.1b (19.4% growth) over FY05.

? The stock is currently trading at 21.8x FY06E earnings and 18.3x FY07E earnings. We recommend Buy.

QUARTERLY PERFORMANCE (RS MILLION) Y/E MARCH FY05 FY06 FY05 FY06E 1Q 2Q 3Q 4Q 1Q 2QE 3QE 4QE Net Sales 4,152 5,344 5,960 4,425 5,106 5,932 6,555 4,734 19,415 22,327 Change (%) 9.6 8.1 32.4 8.8 23.0 11.0 10.0 7.0 14.4 15.0 Total Expenditure 3,536 4,534 5,057 3,816 4,378 5,030 5,559 3,992 16,477 18,959 EBITDA 616 810 902 609 728 902 996 742 2,938 3,368 Margin (%) 14.8 15.2 15.1 13.8 14.3 15.2 15.2 15.7 15.1 15.1 Change (%) 15.6 0.2 23.0 3.9 18.1 11.3 10.4 21.8 9.0 14.6 Interest 7 6 8 6 5 5 8 7 28 25 Depreciation 120 122 122 112 111 127 128 149 476 515 Other Income 41 95 88 91 60 75 75 65 316 275 Operational PBT 530 777 861 582 672 845 936 650 2,749 3,103 Non Recurring Items 0 0 -43 0 0 0 0 0 -43 0 PBT 530 777 818 582 672 845 936 650 2,706 3,103 Tax 194 285 296 215 229 279 290 226 988 1,024 Deferred Tax 2 0 20 -42 1 0 0 -46 -18 -45 Effective Tax Rate (%) 36.9 36.7 38.7 29.7 34.3 33.0 31.0 27.6 35.9 31.5 PAT 334 492 501 409 442 566 646 471 1,736 2,124 Adjusted PAT 334 492 544 409 442 566 646 471 1,779 2,124 Change (%) 16.1 5.1 31.2 17.0 32.1 15.1 18.7 15.0 17.1 19.4 E: MOSt Estimates

Atul Rastogi ([email protected]); Tel: +91 22 56575316/Sidharth Shah ([email protected]); Tel: +91 22 56575145 23 September 2005 113 Results Preview SECTOR: FMCG

Britannia Industries

STOCK INFO. BLOOMBERG BSE Sensex: 8,223 BRIT IN 23 September 2005 Buy REUTERS CODE S&P CNX: 2,478 BRIT.BO Previous Recommendation: Buy Rs1,200

Equity Shares (m) 23.9 YEAR NET SALES PAT* EPS* EPS P/E P/BV ROE ROCE EV/ EV/ END (RS M) (RS M) (RS) GROWTH (%) (X) (X) (%) (%) SALES EBITDA 52-Week Range 1,248/620 3/05A 15,876 1,706 71.4 37.1 16.8 6.5 38.5 53.0 1.6 13.7 1,6,12 Rel. Perf. (%) 6/14/28 M.Cap. (Rs b) 28.7 3/06E 16,678 1,579 66.1 -7.4 18.2 5.0 27.8 38.2 1.5 11.2

M.Cap. (US$ b) 0.7 3/07E 17,799 1,820 76.2 15.2 15.8 4.0 25.6 35.5 1.3 9.3

* Pre-exceptionals

? Britannia has lagged the industry growth and has been consistently losing market share to competitors like Sunfeast of ITC. We expect Britannia to post revenues of Rs4.4b, a modest growth of 3% YoY as the company struggles to put in place a plan to stop the fall in market share.

? Slow growth in revenues over the last four quarters and falling market share has been putting pressure on the company’s margins. Britannia posted margins of 14.3% in 1QFY06 on low sales growth due to savings in materials and employee cost. We expect margins to expand 50bp YoY to 13.5% in 2QFY06.

? Other income is expected to be lower at Rs100m in 2QFY06 against Rs227m in 2QFY05.

? PAT at Rs451m is expected to be down 13% YoY primarily as a result of lower other income.

? We expect Britannia to end FY06 with sales of Rs16.7b (5.1% growth YoY), EBITDA of Rs2.1b (EBITDA margin of 12.9%) and PAT of Rs1.6b (7.4% decline YoY).

? The stock is currently trading at 18.2x FY06E earnings and 15.8x FY07E earnings. We recommend Buy.

QUARTERLY PERFORMANCE (RS MILLION) Y/E MARCH FY05 FY06 FY05 FY06E 1Q 2Q 3Q 4Q 1Q 2QE 3QE 4QE Net Sales 3,947 4,271 3,828 3,829 4,054 4,399 4,077 4,148 15,876 16,678 YoY Change (%) 17.2 12.6 6.1 5.6 2.7 3.0 6.5 8.3 10.3 5.1 Total Exp 3,466 3,716 3,311 3,537 3,474 3,805 3,547 3,696 14,036 14,522 EBITDA 481 555 517 292 580 594 530 453 1,839 2,156 Margins (%) 12.2 13.0 13.5 7.6 14.3 13.5 13.0 10.9 11.6 12.9 Depreciation -48 -48 -47 -47 -53 -54 -54 -55 -190 -216 Interest -5 -5 -6 -4 -8 -4 -4 -4 -21 -20 Other Income 373 227 30 125 24 100 100 95 792 319 PBT 801 729 494 366 543 636 572 489 2,421 2,240 Tax -157 -210 -165 -144 -186 -184 -166 -124 -715 -660 Rate (%) -19.6 -28.8 -33.4 -39.3 34.3 29.0 29.0 25.4 29.5 29.5 PAT 644 519 329 222 357 451 406 365 1,706 1,579 YoY Change (%) 125.2 52.2 13.8 -43.3 -44.6 -13.0 23.4 64.4 30.5 -7.4 Extraordinary Expenses -38 -33 -32 -115 34 0 0 0 -218 34 Reported PAT 606 486 297 107 391 451 406 365 1,488 1,613 E: MOSt Estimates

Atul Rastogi ([email protected]); Tel: +91 22 56575316/Sidharth Shah ([email protected]); Tel: +91 22 56575145 23 September 2005 114 Results Preview SECTOR: FMCG

Colgate Palmolive

STOCK INFO. BLOOMBERG BSE Sensex: 8,223 CLGT IN 23 September 2005 Buy REUTERS CODE S&P CNX: 2,478 COLG.BO Previous Recommendation: Buy Rs240

Equity Shares (m) 136.0 YEAR NET SALES PAT* EPS* EPS P/E P/BV ROE ROCE EV/ EV/ END (RS M) (RS M) (RS) GROWTH (%) (X) (X) (%) (%) SALES EBITDA 52-Week Range 263/143 3/05A 9,642 1,204 8.9 11.5 27.1 12.7 46.7 73.1 3.2 17.5 1,6,12 Rel. Perf. (%) -15/12/14 M.Cap. (Rs b) 32.6 3/06E 10,778 1,500 11.0 24.6 21.8 11.8 54.0 79.9 2.8 14.2

M.Cap. (US$ b) 0.7 3/07E 12,150 1,872 13.8 24.8 17.4 10.7 61.6 86.5 2.5 11.8

* Pre-exceptionals

? We expect Colgate to deliver a 10% YoY growth in sales in 2QFY06 primarily due to higher realizations as a result of price hikes undertaken by the company in 1QFY06.

? EBITDA margins to expand 100bp YoY in 2QFY06 as major portion of the benefits of higher sales are likely to be offset by high cost of material consumed.

? Commercial production at the company’s Baddi plant has commenced in April 2005 leading to tax savings for the company.

? PAT is expected to be Rs351m a 30.2% increase from 1QFY05, primarily as a result of higher sales, margin expansion and tax savings as a result of commercial production from its Baddi plant.

? Colgate managed to maintain its market share in the toothpaste category even as it increased prices in 1QFY06. We expect the company to post full year FY06 revenues of Rs10.8b (growth of 11.8% YoY), EBITDA of Rs2.1b (growth of 22% YoY) at margins of 19.6% (expanding 160bp YoY) and a PAT of Rs1.5b (growth of 24.6% YoY).

? The stock is currently trading at 21.8x FY06E earnings and 17.4x FY07E earnings. We maintain Buy.

QUARTERLY PERFORMANCE (RS MILLION) Y/E MARCH FY05 FY06 FY05 FY06E 1Q 2Q 3Q 4Q 1Q 2QE 3QE 4QE Net Sales 2,427 2,457 2,358 2,400 2,583 2,703 2,712 2,781 9,642 10,778 YoY Change (%) 6.8 6.5 -5.8 3.8 6.4 10.0 15.0 15.8 2.7 11.8 Total Exp -2,023 -2,015 -1,906 -1,962 -2,167 -2,189 -2,156 -2,149 -7,906 -8,662 EBITDA 404 442 452 438 416 513 556 631 1,736 2,117 Margins (%) 16.6 18.0 19.2 18.3 16.1 19.0 20.5 22.7 18.0 19.6 Depreciation -46 -48 -45 -58 -26 -60 -60 -93 -197 -239 Interest -3 -3 -4 -2 -2 -3 -3 -3 -12 -12 Other Income 56 54 107 126 106 80 90 64 342 340 PBT 411 446 510 504 494 530 583 599 1,870 2,206 Tax -156 -176 -164 -170 -140 -179 -187 -200 -666 -706 Rate (%) 38.0 39.5 32.2 33.7 28.2 33.8 32.1 33.4 35.6 32.0 PAT 255 270 345 335 355 351 396 399 1,204 1,500 YoY Change (%) 23.1 16.4 25.8 -8.8 39.2 30.2 14.6 19.4 11.5 24.6 Extraordinary Expenses 0 0 -60 -11 -75 0 0 0 -71 0 Reported PAT 255 270 285 323 280 351 396 399 1,133 1,500 E: MOSt Estimates

Atul Rastogi ([email protected]); Tel: +91 22 56575316/Sidharth Shah ([email protected]); Tel: +91 22 56575145 23 September 2005 115 Results Preview SECTOR: FMCG

Dabur India

STOCK INFO. BLOOMBERG BSE Sensex: 8,223 DABUR IN 23 September 2005 Buy REUTERS CODE S&P CNX: 2,478 DABU.BO Previous Recommendation: Buy Rs151

Equity Shares (m) 286.4 YEAR NET SALES PAT EPS EPS P/E P/BV ROE ROCE EV/ EV/ END (RS M) (RS M) (RS) GROWTH (%) (X) (X) (%) (%) SALES EBITDA 52-Week Range 170/70 3/05A 14,941 1,570 5.4 44.2 27.9 11.9 43.1 35.6 2.8 20.2 1,6,12 Rel. Perf. (%) -3/8/54 M.Cap. (Rs b) 43.2 3/06E 18,434 2,162 7.5 37.7 20.2 8.7 43.4 38.2 2.4 15.8

M.Cap. (US$ b) 1.0 3/07E 20,620 2,388 8.3 10.5 18.2 6.7 36.6 33.5 2.1 14.3

? Dabur is expected to report sales of Rs4.5b in 2QFY06, a growth of 21% YoY. Balsara has been consolidated since April ’05 and is expected to account for major proportion of the growth.

? EBITDA margins are expected to expand 40bp YoY in 2QFY06, as the company has managed to significantly reduce the cost of integration of Balsara.

? PAT is expected to be Rs585m, a 31.8% growth YoY in 2QFY06 as the company reaps the benefits of successful integration of Balsara.

? We are revising our EPS estimates upwards to Rs7.5 and Rs8.3 for FY06E and FY07E as the company has done a good job in integrating Balsara and is taking advantage of economies to scale from the merger earlier than anticipated. For full year FY06, we expect Dabur to report sales of Rs18.4b (19.9% growth), EBITDA of Rs2.8b (15.1% growth), operating margins of 15.1% (up 150bp) resulting in a PAT of Rs2.2b (37.7% growth).

? The stock is currently trading at 20.2x FY06E earnings and 18.2x FY07E earnings. We maintain Buy.

QUARTERLY PERFORMANCE (RS MILLION) Y/E MARCH FY05 FY06 FY05 FY06E 1Q 2Q 3Q 4Q 1Q 2QE 3QE 4QE Net Sales 3,444 3,710 4,266 3,950 4,147 4,489 5,098 4,700 15,370 18,434 YoY Change (%) 21.9 16.3 10.8 15.1 20.4 21.0 19.5 19.0 15.6 19.9 Total Exp 3,113 3,111 3,675 3,373 3,655 3,748 4,293 3,961 13,272 15,656 EBITDA 331 599 591 577 492 741 805 752 2,098 2,778 Margins (%) 9.6 16.1 13.8 14.6 11.9 16.5 15.8 16.0 13.6 15.1 Depreciation -65 -86 -57 -97 -76 -81 -81 -87 -305 -325 Interest -30 -34 -35 -26 -40 -33 -33 -30 -125 -130 Other Income 18 21 21 32 18 23 23 28 92 92 PBT 255 500 520 486 394 650 715 663 1,761 2,415 Tax -34 -56 -48 -53 -50 -65 -71 -66 -191 -253 Rate (%) 13.3 11.2 9.2 10.9 12.6 10.0 10.0 10.0 10.8 10.5 PAT 221 444 472 433 345 585 643 597 1,570 2,162 YoY Change (%) 98.7 19.0 40.7 58.3 55.6 31.8 36.3 38.0 43.6 37.7 Minority Interest 4 Reported PAT 221 444 472 433 349 585 643 597 1,570 2,162 E: MOSt Estimates

Atul Rastogi ([email protected]); Tel: +91 22 56575316/Sidharth Shah ([email protected]); Tel: +91 22 56575145 23 September 2005 116 Results Preview SECTOR: FMCG

GlaxoSmithKline Consumer

STOCK INFO. BLOOMBERG BSE Sensex: 8,223 SKB IN 23 September 2005 Buy REUTERS CODE S&P CNX: 2,478 GLSM.BO Previous Recommendation: Buy Rs476

Equity Shares (m) 45.4 YEAR NET SALES PAT EPS EPS P/E P/BV ROE ROCE EV/ EV/ END (RS M) (RS M) (RS) GROWTH (%) (X) (X) (%) (%) SALES EBITDA 52-Week Range 500/248 12/04A 8,622 730 16.1 -7.1 29.6 4.1 13.8 22.8 2.2 13.9 1,6,12 Rel. Perf. (%) 2/12/37 M.Cap. (Rs b) 21.6 12/05E 9,578 1,038 24.6 42.1 19.3 5.2 26.7 41.4 1.9 10.4

M.Cap. (US$ b) 0.5 12/06E 10,512 1,223 29.0 17.8 16.4 4.0 24.1 37.0 1.6 8.3

? We expect GSK Consumer to register sales of Rs2.6b in 3QCY05 against Rs2.3b in 3QCY04, a growth of 12% YoY.

? EBITDA margins are expected to remain flat at 18% in 3QCY05 against 17.9% in 3QCY04.

? GSK is expected to report PAT of Rs279m in 3QCY05 against Rs225m in 3QCY04, a growth of 24% YoY, primarily due to higher sales and other income.

? The company is expected to end the year with sales of Rs9.6b (growth of 11.1% YoY), EBITDA of Rs1.8b (margins of 18.4%) and PAT of Rs1b (growth of 42.5% YoY).

? The stock is currently trading at 19.3x CY05E earnings and 16.4x CY06E earnings. We recommend Buy.

QUARTERLY PERFORMANCE (RS MILLION) Y/E DECEMBER CY04 CY05 CY04 CY05E 1Q 2Q 3Q 4Q 1Q 2Q 3QE 4QE Net Sales 2,101 2,102 2,349 2,114 2,230 2,428 2,631 2,283 8,622 9,578 YoY Change (%) 15.6 6.4 3.0 10.2 6.2 15.5 12.0 8.0 7.9 11.1 Total Exp 1,751 1,759 1,929 1,878 1,801 1,936 2,157 1,924 7,254 7,818 EBITDA 350 343 420 236 429 492 474 365 1,367 1,760 Margins (%) 16.7 16.3 17.9 11.1 19.2 20.3 18.0 16.0 15.9 18.4 Depreciation -89 -89 -90 -100 -91 -101 -101 -101 -415 -395 Interest -8 9 3 -11 -10 -11 -12 -12 37 -45 Other Income 40 33 30 72 60 60 60 60 165 240 PBT 293 296 363 196 387 441 420 312 1,155 1,560 Tax -106 -110 -138 -71 -124 -149 -141 -109 -427 -523 Rate (%) -36.2 -37.1 -38.0 -36.3 -31.9 -33.9 33.5 34.9 36.9 33.5 PAT 187 186 225 125 264 291 279 203 728 1,038 YoY Change (%) 2.9 -16.4 36.6 18.1 41.0 56.4 24.2 62.8 -7.3 42.5 Reported PAT 187 186 225 125 264 291 279 203 728 1,038 E: MOSt Estimates

Atul Rastogi ([email protected]); Tel: +91 22 56575316/Sidharth Shah ([email protected]); Tel: +91 22 56575145 23 September 2005 117 Results Preview SECTOR: FMCG

Godrej Consumer Products

STOCK INFO. BLOOMBERG BSE Sensex: 8,223 GCPL IN 23 September 2005 Buy REUTERS CODE S&P CNX: 2,478 GOCP.BO Previous Recommendation: Buy Rs445

Equity Shares (m) 56.6 YEAR NET SALES PAT EPS EPS P/E P/BV ROE ROCE EV/ EV/ END (RS M) (RS M) (RS) GROWTH (%) (X) (X) (%) (%) SALES EBITDA 52-Week Range 501/201 3/05A 5,627 830 14.7 28.0 30.4 50.5 166.4 145.7 4.5 25.0 1,6,12 Rel. Perf. (%) -11/23/69 M.Cap. (Rs b) 25.2 3/06E 6,616 1,078 19.2 30.9 23.2 62.3 266.4 224.7 3.8 19.2

M.Cap. (US$ b) 0.6 3/07E 7,480 1,283 22.9 19.1 19.5 41.9 213.4 194.3 3.3 16.3

? GCPL is expected to record sales of Rs1.5b in 2QFY06 against Rs1.3b in 2QFY05, a growth of 14% YoY as the company continues to perform strongly in the hair dye and the toilet soaps categories.

? EBITDA margins are expected to be 18.1% in 2QFY06, expansion of 200bp YoY, driven by a hike in price of its hair dye sachet by Re1 (14%) after 10 years in April 2005 which improved realizations without affecting overall volumes.

? We expect the company to report PAT of Rs227m, a growth of 30.4% YoY primarily as a result of good sales growth and expansion in margins.

? The company is expected to end the year with sales of Rs6.6b (17.6% growth YoY), EBITDA of Rs1.3b (growth of 28.8% YoY) with margins of 19% (170bp expansion YoY) and a PAT of Rs1.1b (growth of 29.9% YoY).

? The stock is currently trading at 23.2x FY06E earnings and 19.5x FY07E earnings. We maintain Buy.

QUARTERLY PERFORMANCE (RS MILLION) Y/E MARCH FY05 FY06 FY05 FY06E 1Q 2Q 3Q 4Q 1Q 2QE 3QE 4QE Net Sales 1,366 1,342 1,535 1,384 1,677 1,530 1,796 1,614 5,627 6,616 YoY Change (%) 14.8 9.7 19.7 13.5 22.8 14.0 17.0 16.6 14.5 17.6 Total Exp 1,142 1,126 1,211 1,143 1,346 1,253 1,433 1,291 4,622 5,322 EBITDA 223 217 324 241 331 277 363 324 1,005 1,294 Margins (%) 16.4 16.1 21.1 17.4 19.7 18.1 20.2 20.1 17.9 19.6 Depreciation -25 -26 -28 -26 -27 -29 -29 -31 -106 -115 Interest -7 -8 -9 -1 -9 -6 -6 -3 -25 -25 Other Income 1 10 3 19 3 5 5 7 33 20 PBT 192 192 290 233 298 247 333 297 907 1,175 Tax -19 -18 -30 -11 -27 -20 -32 -19 -77 -97 Rate (%) 9.7 9.2 10.3 4.6 9.0 8.0 9.5 6.3 8.5 8.3 PAT 173 174 260 222 271 227 301 278 830 1,078 YoY Change (%) 25.3 25.8 45.0 15.5 56.6 30.4 15.8 25.2 28.0 29.9 Reported PAT 173 174 260 222 271 227 301 278 830 1,078 E: MOSt Estimates

Atul Rastogi ([email protected]); Tel: +91 22 56575316/Sidharth Shah ([email protected]); Tel: +91 22 56575145 23 September 2005 118 Results Preview SECTOR: FMCG

Hindustan Lever

STOCK INFO. BLOOMBERG BSE Sensex: 8,223 HLVR IN 23 September 2005 Neutral REUTERS CODE S&P CNX: 2,478 HLL.BO Previous Recommendation: Neutral Rs170

Equity Shares (m) 2,201.2 YEAR NET SALES PAT* EPS* EPS P/E P/BV ROE ROCE EV/ EV/ END (RS M) (RS M) (RS) GROWTH (%) (X) (X) (%) (%) SALES EBITDA 52-Week Range 180/119 12/04A 99,269 11,973 5.4 -32.6 31.6 17.9 56.6 45.9 3.6 25.0 1,6,12 Rel. Perf. (%) -5/0/-7 M.Cap. (Rs b) 374.1 12/05E 108,188 13,099 6.0 10.6 28.6 17.4 61.0 72.6 3.3 23.4

M.Cap. (US$ b) 8.5 12/06E 117,551 15,244 6.9 16.4 24.5 16.3 66.6 78.6 3.0 20.0

* Pre-exceptionals ? HLL has displayed strong momentum in revenue growth over the last two quarters led by personal care and detergents categories. We expect the company to continue the strong business momentum and post a 12% YoY growth in revenues for 3QCY05. ? EBITDA margins have bounced back from their historic lows in 1QCY05 as the company reaped the benefits of sales growth and cost saving initiatives. We expect EBITDA margins to expand 90bp YoY for 3QCY05 as the benefits of high sales will be offset by cost inflation in raw material due to high crude prices. ? We expect margin expansion in soaps and detergents while margins in personal products would be flattish. The combined impact of price increase in toothpaste (done in 2QCY05) and price cuts in shampoos in 4QCY04 will play on the personal product portfolio. ? Interest costs for the quarter are expected to be Rs40m, down from Rs341m in 3QCY04, as the company redeemed bonus debentures. ? PAT at Rs3.4b is expected to grow 20.4% YoY primarily on account of lower interest costs. ? We are revising our EPS estimates downwards to Rs6 and Rs6.9 for CY05E and CY06E, in light of pressure on margins due to higher cost inflation. We expect full year revenues to be Rs108b (growth of 9% YoY); EBITDA margin of 14.1% (down 40bp) and PAT of Rs13.1b (growth of 10.6% YoY). ? The stock is currently trading at 28.6x CY05E earnings and 24.5x CY06E earnings. We retain our Neutral rating. QUARTERLY PERFORMANCE (RS MILLION) Y/E DECEMBER CY04 CY05 CY04 CY05E 1Q 2Q 3Q 4Q 1Q 2Q 3QE 4QE Net Sales (incl service inc) 23,533 25,716 24,011 26,008 25,064 28,363 26,892 27,869 99,269 108,188 YoY Change (%) -0.6 -4.5 -3.3 0.7 6.5 10.3 12.0 16.1 -2.1 9.0 Total Expenditure 19,934 22,528 20,625 21,809 22,629 24,906 22,858 22,576 84,896 92,970 EBITDA 3,599 3,189 3,386 4,199 2,435 3,457 4,034 5,292 14,374 15,218 YoY Change (%) -7.9 -37.0 -28.9 -31.2 -32.4 8.4 19.1 26.0 -27.3 5.9 Margins (%) 15.3 12.4 14.1 16.1 9.7 12.2 15.0 19.0 14.5 14.1 Depreciation -291 -286 -301 -331 -310 -318 -318 -332 -1,209 -1,278 Interest -318 -318 -341 -323 -46 -56 -40 -40 -1,300 -181 Other Income 714 703 857 916 746 794 600 601 3,188 2,741 PBT 3,704 3,288 3,601 4,461 2,826 3,877 4,276 5,522 15,053 16,500 Tax -832 -724 -776 -875 -606 -872 -875 -1,048 -3,207 -3,402 Rate (%) 22.5 22.0 21.6 19.6 21.4 22.5 20.5 19.0 21.3 20.6 PAT 2,872 2,564 2,824 3,586 2,220 3,005 3,401 4,474 11,846 13,099 YoY Change (%) -25.0 -43.1 -30.8 -30.3 -22.7 17.2 20.4 24.8 -32.6 10.6 Extraordinary Inc/(Exp) 157 -119 418 -249 368 -188 0 188 128 0 Reported Profit 3,029 2,445 3,242 3,337 2,587 2,817 3,401 4,662 11,973 13,099 E: MOSt Estimates

Atul Rastogi ([email protected]); Tel: +91 22 56575316/Sidharth Shah ([email protected]); Tel: +91 22 56575145 23 September 2005 119 Results Preview SECTOR: FMCG

ITC

STOCK INFO. BLOOMBERG BSE Sensex: 8,223 ITC IN 23 September 2005 Buy REUTERS CODE S&P CNX: 2,478 ITC.BO Previous Recommendation: Buy Rs138

Equity Shares (m) 3,741.5 YEAR NET SALES PAT* EPS* EPS P/E P/BV ROE ROCE EV/ EV/ END (RS M) (RS M) (RS) GROWTH (%) (X) (X) (%) (%) SALES EBITDA 52-Week Range 149/69 3/05A 76,395 18,370 4.9 15.3 28.1 6.7 23.8 34.1 6.2 16.9 1,6,12 Rel. Perf. (%) 14/33/29 M.Cap. (Rs b) 515.4 3/06E 89,059 23,085 6.2 25.7 22.3 5.7 25.3 36.6 5.1 13.1

M.Cap. (US$ b) 11.8 3/07E 102,499 27,273 7.3 18.1 18.9 4.8 25.4 36.8 4.2 10.7

* Pre-exceptionals

? We expect ITC to deliver a 19% YoY growth in revenues in 2QFY06, with strong growth in cigarette revenues (both volumes and realizations) will be aided by continued momentum in the FMCG and Hotel business.

? EBITDA margins are expected to expand 180bp YoY to 42% in 2QFY06 as improved realizations in the cigarette business and improving profitability in the FMCG business is driving margins.

? Other income is expected to increase to Rs850m in 2QFY06 from Rs699m, as short term investments have swelled to Rs35.2b in FY05 from Rs21.8b in FY04.

? All businesses of ITC have been showing good growth, with the FMCG and the hotel business showing the fastest growth. However, given the increased investments in other FMCG businesses and other additional cost pressures, we are downgrading EPS estimates by 6-7% for FY06 and FY07. We now forecast a post split, post bonus EPS of Rs6.2 for FY06 and Rs7.3 for FY07.

? The stock is currently trading at 22.3x FY06E earnings and 18.9x FY07E earnings. We recommend Buy.

QUARTERLY PERFORMANCE (RS MILLION) Y/E MARCH FY05 FY06 FY05 FY06E 1Q 2Q 3Q 4Q 1Q 2QE 3QE 4QE Net Sales 18,172 17,379 17,952 21,771 22,669 20,680 20,824 24,885 76,395 89,059 YoY Change (%) 27.2 13.1 10.6 15.7 24.7 19.0 16.0 14.3 18.5 16.6 Total Exp 11,080 10,399 11,196 15,139 14,401 11,995 12,078 15,835 48,469 54,309 EBITDA 7,092 6,979 6,756 6,632 8,268 8,686 8,746 9,050 27,926 34,750 Margins (%) 39.0 40.2 37.6 30.5 36.5 42.0 42.0 36.4 36.6 39.0 Depreciation -728 -703 -699 -897 -801 -897 -897 -897 -3,129 -3,492 Interest -129 -100 -182 -13 -11 -32 -32 -32 -424 -107 Other Income 581 699 512 593 845 850 750 446 2,358 2,891 PBT 6,816 6,875 6,387 6,315 8,301 8,607 8,567 8,567 26,731 34,042 Tax -2,167 -2,019 -1,898 -2,141 -2,718 -2,668 -2,827 -2,743 -8,360 -10,957 Rate (%) -31.8 -29.4 -29.7 -33.9 -32.7 31.0 33.0 32.0 31.3 32.2 PAT 4,649 4,857 4,489 4,174 5,583 5,939 5,740 5,824 18,371 23,085 YoY Change (%) 17.0 13.5 17.9 7.8 20.1 22.3 27.9 39.5 15.4 25.7 Extraordinary Inc/(Exp) 0 0 0 3,543 0 0 0 0 3,543 0 Reported PAT 4,649 4,857 4,489 7,718 5,583 5,939 5,740 5,824 21,914 23,085 E: MOSt Estimates

Atul Rastogi ([email protected]); Tel: +91 22 56575316/Sidharth Shah ([email protected]); Tel: +91 22 56575145 23 September 2005 120 Results Preview SECTOR: FMCG

Marico Industries

STOCK INFO. BLOOMBERG BSE Sensex: 8,223 MRCO IN 23 September 2005 Buy REUTERS CODE S&P CNX: 2,478 MRCO.BO Previous Recommendation: Buy Rs282

Equity Shares (m) 58.0 YEAR NET SALES PAT EPS EPS P/E P/BV ROE ROCE EV/ EV/ END (RS M) (RS M) (RS) GROWTH (%) (X) (X) (%) (%) SALES EBITDA 52-Week Range 300/133 3/05A 10,130 690 11.9 20.6 23.7 7.4 31.3 32.1 1.5 17.8 1,6,12 Rel. Perf. (%) -6/-10/56 M.Cap. (Rs b) 16.4 3/06E 11,296 861 14.8 24.8 18.9 6.1 32.1 34.5 1.3 14.2

M.Cap. (US$ b) 0.4 3/07E 12,967 1,168 20.1 35.7 14.0 4.9 34.6 37.3 1.1 10.4

? We expect Marico to report sales of Rs2.8b in 2QFY06 against Rs2.6b in 2QFY05, a growth of 11% YoY.

? EBITDA margins are likely to be 8.8% for 2QFY06 against 8.2% in 1QFY05. The company is focused on improving the share of high margin products in total revenues which enables it to expand margins.

? PAT is expected to be Rs206m in 2QFY06 against Rs156m in 2QFY05, a growth of 32.1% YoY.

? The company is expected to end the year with sales of Rs11.3b (11.5% growth YoY), EBITDA of Rs1.1b (margin of 9.4%) and PAT of Rs866m (25% growth YoY).

? The stock is currently trading at 18.9x FY06E earnings and 14x FY07E earnings. We maintain Buy.

QUARTERLY PERFORMANCE (RS MILLION) Y/E MARCH FY05 FY06 FY05 FY06E 1Q 2Q 3Q 4Q 1Q 2QE 3QE 4QE Net Sales 2,439 2,555 2,596 2,540 2,729 2,836 2,908 2,824 10,130 11,296 YoY Change (%) 16.6 14.9 12.0 12.7 11.9 11.0 12.0 11.2 14.8 11.5 Total Exp 2,218 2,345 2,369 2,318 2,433 2,586 2,646 2,570 9,250 10,235 EBITDA 221 210 227 222 296 250 262 254 880 1,061 Margins (%) 9.1 8.2 8.7 8.8 10.8 8.8 9.0 9.0 8.7 9.4 Depreciation -31 -31 -35 -53 -65 -25 -20 -21 -150 -131 Interest -4 -6 -5 -5 -8 -4 -4 -2 -20 -18 Other Income 3 4 10 3 18 6 6 10 20 40 PBT 189 177 197 167 241 227 244 241 730 952 Tax -26 -21 -16 23 -34 -20 -19 -17 -40 -91 Rate (%) 13.8 11.7 8.1 -13.6 14.2 9.0 8.0 6.9 5.5 9.5 PAT 163 156 181 190 207 206 224 224 690 861 YoY Change (%) 19.0 18.7 26.4 18.2 26.7 32.1 24.0 18.0 20.6 24.8 Minority Interest 6 7 -4 2 0 1 1 3 10 5 Reported PAT 169 163 176 192 207 207 225 227 700 866 E: MOSt Estimates

Atul Rastogi ([email protected]); Tel: +91 22 56575316/Sidharth Shah ([email protected]); Tel: +91 22 56575145 23 September 2005 121 Results Preview SECTOR: FMCG

Nestle India

STOCK INFO. BLOOMBERG BSE Sensex: 8,223 NEST IN 23 September 2005 Neutral REUTERS CODE S&P CNX: 2,478 NEST.BO Previous Recommendation: Neutral Rs870

Equity Shares (m) 96.4 YEAR NET SALES PAT EPS EPS P/E P/BV ROE ROCE EV/ EV/ END (RS M) (RS M) (RS) GROWTH (%) (X) (X) (%) (%) SALES EBITDA 52-Week Range 920/525 12/04A 22,276 2,810 29.1 -0.1 29.9 26.3 88.0 127.2 3.7 18.3 1,6,12 Rel. Perf. (%) -8/6/13 M.Cap. (Rs b) 83.9 12/05E 24,681 3,665 38.0 30.4 22.9 22.2 97.2 143.5 3.3 14.2

M.Cap. (US$ b) 1.9 12/06E 26,609 4,203 43.6 14.7 20.0 19.2 96.3 144.3 3.0 12.3

* excluding extraordinary items and provisions

? Nestle is expected to report revenue growth of 10% YoY with domestic and export revenues expected to report 10% YoY growth. ? EBITDA at Rs1.4b would grow 22% YoY with margins at 21%, up 200bp on a YoY basis. Milk prices which form approximately 45% of Nestle’s raw material costs have eased appreciably since 1QCY05, leading to the expansion in the margins. ? Other income is expected to grow 155% to Rs80m on the back of increase in cash and marketable investments. ? We are revising our EPS estimates upwards to Rs38 and Rs43.6 for CY05E and CY06E primarily as a result higher sales and lower milk prices resulting in improvement in margins. For full year CY05, we expect Nestle to report sales of Rs26.3b (10.8% growth), EBITDA of Rs5.7b (27.5% growth), EBITDA margin of 21.9% (up 170bp) resulting in PAT of Rs3.5b (40% growth). ? The stock is currently trading 22.9x CY05E earnings and 20x CY06E earnings. We maintain Neutral.

QUARTERLY PERFORMANCE (RS MILLION) Y/E DECEMBER CY04 CY05 CY04 CY05E 1Q 2Q 3Q 4Q 1Q 2Q 3QE 4QE Domestic Sales 5,617 4,853 5,306 5,517 5,906 5,745 5,837 5,998 21,293 23,485 YoY Change (%) 5.5 3.1 4.4 7.9 7.5 18.4 10.0 8.7 5.3 10.3 Exports 584 591 656 605 648 781 722 654 2,435 2,804 YoY Change (%) -11.3 -21.4 7.5 9.7 6.0 32.2 10.0 8.1 -5.3 15.2 Gross Sales incl. Excise 6,201 5,444 5,962 6,122 6,554 6,526 6,558 6,652 23,728 26,290 YoY Change (%) 3.7 -0.3 4.8 8.0 5.7 19.9 10.0 8.7 4.1 10.8 Total Exp with Exc. -4,991 -4,608 -4,831 -4,788 -5,167 -5,146 -5,181 -5,051 -19,218 -20,545 EBITDA 1,209 836 1,131 1,333 1,387 1,380 1,377 1,601 4,510 5,745 Margins (%) 19.5 15.4 19.0 21.8 21.2 21.1 21.0 22.5 20.2 21.9 Depreciation -122 -121 -122 -126 -126 -149 -149 -149 -491 -572 Interest -7 -1 -1 1 -1 0 -1 -1 -8 -3 Other income 35 30 31 49 69 80 80 80 145 309 PBT 1,116 744 1,039 1,257 1,329 1,311 1,307 1,531 4,156 5,479 Tax -339 -255 -395 -351 -476 -428 -431 -479 -1,346 -1,814 Rate (%) 30.3 34.3 38.1 27.9 35.8 32.6 33.0 31.3 32.4 33.1 PAT 778 488 643 906 853 883 876 1,053 2,810 3,665 YoY Change (%) -10.3 -35.1 -15.4 49.8 9.7 80.8 36.2 16.1 -2.5 30.4 Extraordinary Inc/(Exp) -134 54 45 -142 -73 -55 0 0 -290 -128 Reported PAT 644 542 688 765 781 828 876 1,053 2,520 3,537 E: MOSt Estimates

Atul Rastogi ([email protected]); Tel: +91 22 56575316/Sidharth Shah ([email protected]); Tel: +91 22 56575145 23 September 2005 122 Results Preview SECTOR: FMCG

Tata Tea

STOCK INFO. BLOOMBERG BSE Sensex: 8,223 TT IN 23 September 2005 Buy REUTERS CODE S&P CNX: 2,478 TTTE.BO Previous Recommendation: Buy Rs846

Equity Shares (m) 56.2 YEAR NET SALES PAT* EPS* EPS P/E P/BV ROE ROCE EV/ EV/ END (RS M) (RS M) (RS) GROWTH (%) (X) (X) (%) (%) SALES EBITDA 52-Week Range 879/381 3/05A 30,591 2,565 45.6 32.4 18.5 3.2 17.2 14.8 1.9 10.8 1,6,12 Rel. Perf. (%) -3/37/44 M.Cap. (Rs b) 47.5 3/06E 30,894 3,019 53.7 17.7 15.7 2.7 17.4 16.7 1.8 9.3

M.Cap. (US$ b) 1.1 3/07E 31,506 3,458 61.5 14.5 13.7 2.4 17.3 18.1 1.6 8.2

* Pre-exceptionals

? Tata Tea is expected to report sales of Rs7.6b in 2QFY06, a growth of 1% YoY as Tetley continues to struggle in important markets like UK and USA. ? EBITDA margins are expected to expand 80bp to 20% in 2QFY06 driven by cost savings in Tetley business and effect of plantation hive offs. ? We expect the company’s interest expense to be lower at Rs250m in 2QFY06 against Rs334m in 2QFY05, as savings accrue from the debt restructuring undertaken by the company in FY05. ? PAT is expected to be Rs884m in 2QFY06 against Rs761m in 2QFY05, a growth of 16.1% YoY largely resulting from savings in interest costs. ? The company is expected to end the year with sales of Rs30.9b (growth of 1% YoY), EBITDA of Rs5.8b (margins of 18.8%) and PAT of Rs3.0b (growth of 17.7% YoY). ? The company is trying to kickstart growth in UK and USA through the launch of several new products. The company is looking at inorganic means to capture market share in USA and UK (critical markets for Tetley). ? The stock is currently trading at 15.7x FY06E earnings and 13.7x FY07E earnings. We recommend Buy.

QUARTERLY PERFORMANCE (RS MILLION) Y/E MARCH FY05 FY06 FY05 FY06E 1Q 2Q 3Q 4Q 1Q 2QE 3QE 4QE Net Sales 7,059 7,561 8,061 7,910 7,167 7,636 8,142 7,949 30,591 30,894 YoY Change (%) 3.9 7.9 -0.1 7.8 1.5 1.0 1.0 0.5 4.7 1.0 Total Exp 5,742 6,110 6,461 6,881 5,785 6,109 6,473 6,731 25,194 25,098 EBITDA 1,317 1,450 1,601 1,029 1,382 1,527 1,669 1,218 5,397 5,797 Margins (%) 18.7 19.2 19.9 13.0 19.3 20.0 20.5 15.3 17.6 18.8 Depreciation -189 -196 -199 -195 -178 -186 -186 -195 -779 -745 Interest -312 -334 -300 -282 -260 -250 -235 -222 -1,228 -968 Other Income 6 126 10 33 26 140 10 16 174 192 PBT 822 1,047 1,112 584 970 1,231 1,258 817 3,565 4,276 Tax -266 -313 -303 -57 -326 -332 -365 -174 -939 -1,197 Rate (%) 32.3 29.9 27.2 9.7 33.6 27.0 29.0 21.3 26.3 28.0 PAT 556 734 809 528 645 899 893 642 2,627 3,079 YoY Change (%) 2.4 29.6 29.2 107.0 15.8 22.5 10.4 21.7 32.0 17.2 Minority Int./ Share of Associate -11 28 -69 -10 -20 -15 -15 -11 -62 -60 Adj. PAT 545 761 740 518 625 884 878 632 2,565 3,019 YoY Change (%) 3.9 55.2 22.6 62.7 14.6 16.1 18.7 22.0 32.4 17.7 Extraordinary Gains 4 0 84 -498 239 0 0 0 -410 239 Reported PAT 549 761 824 20 864 884 878 632 2,155 3,258 E: MOSt Estimates

Atul Rastogi ([email protected]); Tel: +91 22 56575316/Sidharth Shah ([email protected]); Tel: +91 22 56575145 23 September 2005 123 Results Preview

QUARTER ENDING SEPTEMBER 2005

Information Technology

BSE Sensex: 8,223 S&P CNX: 2,478 23 September 2005

COMPANY NAME PG. After a comparatively lacklustre first quarter, we expect volume growth to pick up in 2QFY06 on the back of IT spends that would start kicking in, faster growth in the newer Datamatics Technologies 130 service lines and continued offshore momentum. The top players have been hinting at Geometric Software 131 strong growth in the quarter, and events such as the ABN Amro deal are good indicators

HCL Technologies 132 of increasing acceptance of the offshore model among relatively conservative geographies. During the quarter, the Rupee has depreciated against the USD, the Euro and the British Hexaware Technologies 133 Pound. Given that 1% depreciation in the Rupee effectively translates into 1.2-1.3% i-flex solutions 134 increase in margins for the top players, we expect that margin pressure, due to rising cost of revenue, would be mitigated to that extent. Hence, we believe that the undertone Infosys 135 continues to be positive. MphasiS BFL 136

Patni Computer 137 The demand for offshoring continues to be strong and we expect revenue to grow by 8.2% QoQ and net profit to grow by 14.1% QoQ, with Tier 1 companies leading the Satyam Computer 138 growth. While the overall increase in billing rates would not be significant, billing rates for Tata Consultancy Services 139 new deals signed during the quarter have risen by 2-3% across the board. Client additions continue to be robust, with a significant number of IT contracts expected to be coming up Wipro 140 for re-negotiation over the next few quarters. While MNCs continue to ramp up their offshore capabilities, we believe that the threat is still low, since for every US$1 that an MNC firm competes against an Indian IT vendor, the Indian vendor competes for US$25 against the MNC vendor.

EXPECTED QUARTERLY PERFORMANCE SUMMARY (YOY) (RS MILLION) RECO SALES EBITDA NET PROFIT SEP.05 CHG. (%) SEP.05 CHG. (%) SEP.05 CHG. (%) Information Technology Datamatics Technolgies Buy 398 19.6 56 81.5 59 84.2 Geometric Software Buy 543 11.7 110 32.5 54 -30.7 HCL Technologies Buy 9,840 6.1 2,298 8.9 1,763 8.8 Hexaware Sell 1,754 6.3 303 22.3 245 25.9 i-flex solutions Buy 3,222 19.3 701 418.9 487 730.4 Infosys Buy 22,829 10.2 7,453 12.3 5,908 11.0 Mphasis BFL Buy 2,274 3.5 441 12.7 410 21.7 Patni Computer Buy 4,970 5.1 1,146 40.5 885 42.5 Satyam Computer Buy 11,116 5.0 2,745 14.0 2,230 17.2 TCS Buy 29,006 7.1 8,545 7.4 6,709 8.4 Wipro Buy 25,148 10.0 6,181 13.4 4,745 11.2 Sector Aggregate 111,100 8.2 29,980 14.1 23,495 13.9

Diviya Nagarajan ([email protected]); Tel: +91 22 56575322/Sidharth Shah ([email protected]); Tel: +91 22 56575145

23 September 2005 124 Information Technology

Additionally, Indian vendors are expanding their global footprint significantly and setting up near shore facilities and expanding into new service areas such as consulting, infrastructure management and enterprise solutions in order to effectively compete for a larger share of the IT outsourcing basket. While the first quarter raised concerns of slow growth among the top clients, we expect that the September quarter would see these clients picking up speed again. However, we believe that the churn amongst the top clients is likely to be faster going forward as mature clients start tapering off and new clients ramp up faster.

Infosys continues to exhibit strong growth on the strength of volume growth combined with higher pricing from its newer businesses and new deal signings. We expect the growth momentum to continue, with Infosys leading the Tier-I companies in terms of volume growth and quality of earnings. Infosys remains our top pick among Tier I companies. Among the mid-sized companies, we expect Geometric Software to deliver robust growth on the back of a booming PLM market, despite the downward revision in the company’s guidance and our earnings forecast. Geometric Software would therefore be the top pick among Tier-II players in our coverage universe.

Strong volume growth to boost investor confidence The June quarter saw companies across the board reporting slower volume growth, with some of the top clients slowing down during the quarter. Additionally, investment in subsidiaries and new service lines, especially among the Tier-I companies, coupled with hikes in salaries, led to a fall in margins over the quarter. The slowdown in revenue growth, combined with the fall in margins, depressed investor confidence in the sector.

However, concerns of slower growth were mitigated to a certain extent by new deal announcements by top players; with the landmark ABN Amro deal signalling the beginning of increased confidence on Indian IT vendors in hitherto difficult geographies such as Europe, and raising expectations of more such deals, of similar magnitude and scope, for Indian IT vendors, placing them at par with the hitherto incumbent multinationals.

23 September 2005 125 Information Technology

Rupee depreciates against major currencies The Rupee depreciated by 0.7% quarter-to-date vis-à-vis the US dollar, while it depreciated by 1.5% and 1.8% against the Euro and British Pound, respectively.

CURRENCY MOVEMENT: RUPEE VS US$ 44.4

44.1

43.8

43.5

43.2

42.9 1/7/2005 5/7/2005 2/8/2005 8/8/2005 5/9/2005 9/9/2005 10/7/2005 12/8/2005 15/07/2005 20/07/2005 24/07/2005 28/07/2005 16/08/2005 22/08/2005 26/08/2005 30/08/2005 13/09/2005 17/09/2005

Source: OANDA

CURRENCY MOVEMENT: RUPEE VS EURO & POUND

56 82 Rs/Euro - LHS Rs/Pound - RHS 55 80

54 78 53 76 52 74

51 72 50 70 1/7/2005 6/7/2005 4/8/2005 2/9/2005 9/9/2005 13/7/2005 11/8/2005 19/07/2005 24/07/2005 29/07/2005 16/08/2005 23/08/2005 28/08/2005 14/09/2005 19/09/2005

Source: OANDA Infosys and TCS derive 85-87% of revenue in US dollars, while Wipro and Satyam derive 80% and 90%, respectively, in US dollars. For Hexaware and i-flex, the US dollar denominated revenue would be about 80% of total revenue. For Tier I companies, a 1% depreciation in the US dollar would improve margins by 1-1.8%, whereas the impact would be higher for Tier-II companies, in the range of 3-4%. We expect that Rupee depreciation would boost margins for Tier-I companies by 100-130bp and for Tier-II companies by 200-250bp. However, the overall expansion in margins would be lower due to the impact of higher employee costs this quarter, and continued investments in newer business lines and subsidiaries.

23 September 2005 126 Information Technology

Revenue growth to regain momentum After the concerns witnessed on volume growth across the industry in the last quarter, the September quarter promises to deliver strong volume growth. We believe that all the growth drivers are in place: (a) IT budgets have started kicking off on the back of increased corporate profitability; (b) There is greater acceptance of Indian IT vendors by a wider universe of clients; (c) Expansion into new service offerings would help mitigate the slowdown in top client growth; (d) Strategic shift of Indian vendors towards segments hitherto controlled by multinationals, would help them gain a greater share of the customer’s wallet.

Tier-I companies including Infosys and TCS have emphasised on higher growth in this quarter, consequent to increased business traction caused by higher IT spending that is typical in the second half of the calendar year. The optimism in the industry is considerable and broad based, which is evident from the employee addition and capex plans chalked out by industry majors. While billing rates have been largely stable, companies across the board are witnessing marginal hikes in rates for new deals. While large multi-million dollar deals would boost topline, they are likely to put pressure on margins. A depreciating Rupee therefore would be icing on the cake as companies struggle to maintain margins even as they continue to invest heavily in expanding their service offerings and establishing near- shore centres.

We continue to remain positive on the sector, which we believe would continue to exhibit strong growth in the coming quarters. The sector has by and large underperformed the Sensex during the last quarter amidst concerns of slower volume growth from clients. However, we believe that the sector would catch up, with volume growth picking up during the September quarter and the later half of the year. Infosys and Satyam remains our top picks in the sector.

23 September 2005 127 Information Technology

KEY INDUSTRY METRICS 1QFY05 2QFY05 3QFY05 4QFY05 1QFY06 2QFY06E Revenue (INR m) TCS 21,335 24,307 25,784 25,846 27,094 29,006 Wipro 12,075 13,333 14,097 14,569 15,489 16,636 Infosys 15,174 17,493 18,756 19,873 20,716 22,829 Satyam 7,715 8,481 8,913 9,715 10,587 11,116 HCL Technologies* 7,386 7,822 8,014 8,582 9,276 9,840 Net Profit (INR m) TCS 4,807 3,433 6,834 5,448 6,187 6,709 Wipro 3,254 3,835 4,271 4,473 4,213 4,781 Infosys 3,883 4,474 4,970 5,135 5,321 5,908 Satyam 1,739 1,889 1,748 2,237 1,932 2,230 HCL Technologies 1,998 1,620 1,292 1,572 1,620 1,763 EBITDA Margin (%) TCS 29.6 29.3 30.0 28.3 29.4 29.5 Wipro 30.4 30.0 29.2 29.2 27.9 29.3 Infosys 32.2 32.1 32.9 33.5 32.0 32.6 Satyam 25.8 26.0 25.4 26.0 22.7 24.7 HCL Technologies 21.9 23.2 23.0 22.8 22.8 23.4 Volumes Growth (%) Wipro 6.9 7.3 7.1 8.5 6.1 8.7 Infosys 12.9 13.8 13.8 6.9 5.9 7.5 Satyam 7.8 7.5 10.1 8.7 8.9 5.9 Recruitment Wipro 1,191 1,881 947 1,187 1,854 2,980 Infosys 2,572 1,216 5,516 3,924 2,729 2,184 Satyam 1,599 1,241 793 1,499 1,341 1,489 Utilization Rates (%) Wipro 75.2 73.2 70.7 72.8 72.3 70.5 Infosys 73.4 71.4 71.4 73.2 72.5 72.5 Satyam 72.8 72.3 76.4 76.8 78.5 77.3 Billing Rates (US$/employee p.a) Onsite Wipro 128,696 132,390 133,668 130,884 132,684 133,347 Infosys 128,544 130,668 129,996 131,664 129,492 130,139 Satyam 104,645 104,718 104,760 104,854 104,991 104,991 Billing Rates (US$/employee p.a) Offshore Wipro 50,860 50,625 51,144 50,688 51,780 52,039 Infosys 54,000 54,384 54,384 54,852 54,672 54,945 Satyam 42,886 42,903 42,912 42,963 43,058 43,058 Billing Rates Onsite Change (%) Wipro 0.7 2.9 1.0 -2.1 1.4 0.5 Infosys -0.9 1.7 -0.5 1.3 -1.6 0.5 Satyam 0.0 0.1 0.0 0.1 0.1 0.0 Billing Rate (Offshore) Change (%) Wipro 2.8 -0.5 1.0 -0.9 2.2 0.5 Infosys 0.0 0.7 0.0 0.9 -0.3 0.5 Satyam 0.0 0.0 0.0 0.1 0.2 0.0 Note: Recruitment figures are for core IT services only ; *HCL Tech’s year end is June

23 September 2005 128 Information Technology

Stock performance and valuations

STOCK PERFORMANCE (%) ABSOLUTE PERF REL PERF TO SENSEX REL PERF TO SECTOR 3 M 1 YEAR 3 M 1 YEAR 3 M 1 YEAR Information Technology Datamatics Tech. -7 -32 -22 -80 -11 -68 Geometric Soft. 9 66 -6 18 5 30 HCL Technologies 15 27 0 -21 11 -9 Hexaware -25 7 -41 -41 -29 -29 I-Flex Solutions 23 45 8 -3 19 9 Infosys Tech. 2 47 -13 -1 -1 11 MPhasis BFL -16 -20 -32 -68 -20 -56 Patni Computer 17 32 2 -16 13 -4 Satyam Computer 2 40 -13 -9 -1 4 TCS 8 37 -7 -11 4 1 Wipro -5 21 -21 -28 -9 -16

RELATIVE PERFORMANCE - 3 MONTH (%) RELATIVE PERFORMANCE - 1 YEAR (%)

Sensex MOSt IT Index MOSt IT Index Sensex 115 270

110 220

105 170 100

95 120

90 70 Jun-05 Jul-05 Aug-05 Sep-05 Sep-04 Dec-04 Mar-05 Jun-05 Sep-05

COMPARATIVE VALUATION CMP (RS) RECO EPS (RS) P/E (X) EV/EBITDA ROE (%) 23.9.05 FY05A FY06E FY07E FY05A FY06E FY07E FY05A FY06E FY07E FY05A FY06E FY07E Information Technology Datamatics Technolgies 100 Buy 6.1 7.1 11.8 16.4 14.1 8.5 13.7 9.0 4.5 21.5 16.7 25.0 Geometric Software 115 Buy 4.9 6.5 9.4 20.6 14.5 10.1 13.8 10.3 6.3 29.5 33.3 36.9 HCL Technologies 447 Buy 19.3 25.0 30.1 23.1 18.1 14.1 15.9 11.9 9.3 17.8 19.9 23.8 Hexaware 103 Sell 5.3 7.1 7.6 19.3 13.8 12.3 14.8 9.7 7.8 26.3 28.6 24.4 i flex solutions 940 Buy 26.5 29.4 46.7 36.2 32.0 20.1 24.4 20.4 15.3 21.9 21.7 27.9 Infosys 2,400 Buy 69.0 94.6 118.7 34.9 25.0 19.5 26.4 18.6 13.7 53.2 50.0 41.8 Mphasis BFL 243 Buy 16.4 19.6 23.8 15.3 12.1 10.0 12.9 8.6 5.9 39.4 39.9 31.4 Patni Computer 416 Buy 20.6 25.6 31.8 19.9 16.2 13.1 12.9 10.2 8.7 25.0 22.1 22.6 Satyam Computer 521 Buy 23.7 29.8 37.9 22.2 17.3 13.5 16.1 11.5 8.8 26.4 27.3 28.2 TCS 1,411 Buy 49.2 57.2 69.4 28.7 24.4 20.1 23.6 19.0 15.3 82.8 59.0 47.4 Wipro 357 Buy 11.3 13.6 17.3 31.5 26.1 19.9 24.3 19.3 13.8 30.9 28.9 28.5 Sector Aggregate 29.2 23.2 18.2 22.5 17.1 13.0 38.4 36.0 34.1

23 September 2005 129 Results Preview SECTOR: INFORMATION TECHNOLOGY

Datamatics Technologies

STOCK INFO. BLOOMBERG BSE Sensex: 8,223 DATA IN 23 September 2005 Buy REUTERS CODE S&P CNX: 2,478 DATC.BO Previous Recommendation: Buy Rs100

Equity Shares (m) 40.6 YEAR NET SALES PAT EPS EPS P/E P/BV ROE ROCE EV/ EV/ END (RS M) (RS M) (RS) GROWTH (%) (X) (X) (%) (%) SALES EBITDA 52-Week Range 157/87 3/05A 1,498 246 6.1 -12.9 16.6 2.5 21.5 21.3 2.0 13.7 1,6,12 Rel. Perf. (%) -7/-25/-80 M.Cap. (Rs b) 4.1 3/06E 1,784 289 7.1 17.3 14.1 2.3 16.7 18.2 1.5 9.5

M.Cap. (US$ b) 0.1 3/07E 2,587 481 11.8 66.6 8.5 2.0 25.0 26.3 1.0 5.0

? We expect Datamatics Technologies to report topline growth of 19.6% QoQ in the September quarter after lacklustre performance in the previous quarter as the back office processing business starts picking up towards the end of the quarter. We also expect to see growth in the content management business, which had declined during the last quarter.

? EBITDA margins, which had dropped to 9.2% last quarter because of higher employee costs due to additions to the employee base in anticipation of new business and salary hikes, is expected to improve to 14% as topline growth revives during the quarter.

? Additionally, Corpay, the company’s US subsidiary, which broke even at the operating level last quarter, would start adding to margins from this quarter onwards.

? Though the topline growth for the year is expected to pick up as the year progresses, we believe the company is unlikely to match past growth rates in FY06. We have therefore downgraded earnings estimates from Rs11.4 and Rs15.9 to Rs7.1 and Rs11.8 in FY06E and FY07E, respectively.

? The stock currently trades at 14.1x FY06E and 8.5x FY07E earnings, respectively. Maintain Buy.

? Key issues to focus on: Topline growth and client ramp up.

QUARTERLY PERFORMANCE (RS MILLION) Y/E MARCH FY05 FY06 FY05 FY06E 1Q 2Q 3Q 4Q 1Q 2QE 3QE 4QE Revenues 321 369 379 430 333 398 496 557 1,498 1,784 Q-o-Q Change (%) -4.5 15.0 2.7 13.6 -22.6 19.6 24.7 12.2 45.3 19.1 Direct Expenses 168 183 180 221 202 218 258 303 751 981 Sales, General & Admin. Expenses 104 124 150 149 100 124 145 147 526 517 Operating Profit 48 62 49 60 31 56 93 108 221 286 Margins (%) 15.0 16.8 13.0 13.9 9.2 14.0 18.7 19.3 14.8 16.0 Other Income 20 13 15 23 13 20 20 22 71 75 Depreciation 8 8 8 9 9 10 13 14 34 46 PBT bef. Extra-ordinary 60 66 56 73 34 65 100 116 258 315 Provision for Tax 4 2 2 0 2 6 8 10 6 26 Rate (%) 6.7 3.3 3.9 0.0 4.8 9.2 8.0 8.5 2.5 8.3 Share of Profit of Associates 1 0 2 -1 0 0 0 0 3 0 Net Income bef. Extra-ordinary 55 64 52 74 32 59 92 106 249 289 Q-o-Q Change (%) NA 17.2 -19.8 43.0 -56.5 84.2 55.4 15.2 -11.7 16.0 E: MOSt Estimates

Diviya Nagarajan ([email protected]); Tel: +91 22 56575322

23 September 2005 130 Results Preview SECTOR: INFORMATION TECHNOLOGY

Geometric Software

STOCK INFO. BLOOMBERG BSE Sensex: 8,223 GMSS IN 23 September 2005 Buy REUTERS CODE S&P CNX: 2,478 GEOM.BO Previous Recommendation: Buy Rs115

Equity Shares (m) 57.1 YEAR NET SALES PAT EPS EPS P/E P/BV ROE ROCE EV/ EV/ END (RS M) (RS M) (RS) GROWTH (%) (X) (X) (%) (%) SALES EBITDA 52-Week Range 132/60 3/05A 1,682 275 4.9 28.1 23.5 5.4 24.6 34.6 3.7 13.3 1,6,12 Rel. Perf. (%) -3/-6/18 M.Cap. (Rs b) 6.6 3/06E 2,374 372 6.5 32.8 17.7 4.3 26.0 37.5 2.5 10.1

M.Cap. (US$ b) 0.1 3/07E 3,264 551 9.4 44.2 12.3 3.4 29.7 40.8 1.7 6.5

? We expect Geometric to post 11.7% QoQ growth in revenue in 2QFY06, with revenue for the CAD/PDM product kicking in towards the end of the quarter and increased traction in engineering services, which reported flat performance in 1QFY06.

? EBITDA margins are expected to improve by 320bp due to strong topline growth during the quarter and improvement in utilisation rates for the company.

? The last quarter saw a spike in other income due to a change in the method of valuation of the company’s forward contracts wherein it moved to mark-to-market valuation of outstanding forward contract, which resulted in an incremental forex gain of Rs40m and boosted net margins by 820bp for the quarter. Other income is expected to be significantly lower this quarter and we expect net margin to be lower in 2QFY06.

? The stock is currently trading at 17.7x FY06E and 12.3x FY07E earnings. We maintain Buy.

? Key issues to focus on: Revenue contribution from CAD/PDM and ramp ups in engineering services.

QUARTERLY PERFORMANCE (RS MILLION) Y/E MARCH FY05 FY06 FY05 FY06E 1Q 2Q 3Q 4Q 1Q 2QE 3QE 4QE Revenues 349 399 435 499 486 543 625 720 1,682 2,374 Q-o-Q Change (%) 13.0 14.1 9.1 14.7 -2.6 11.7 15.1 15.3 58.6 41.1 Direct Expenses 226 239 246 292 298 318 338 363 1,003 1,317 Sales, General & Admin. Expenses 42 49 46 76 105 115 125 135 213 478 Operating Profit 81 111 143 131 83 110 162 222 466 578 Margins (%) 23.3 27.8 33.0 26.2 17.2 20.3 26.0 30.9 27.7 24.4 Other Income 21 10 -5 26 71 15 15 15 51 116 Depreciation 29 30 32 37 37 38 40 42 128 157 PBT bef. Extra-ordinary 73 90 106 120 118 87 137 195 389 538 Provision for Tax 13 17 17 25 20 13 21 29 70 83 Rate (%) 17.2 18.3 15.7 20.6 17.4 15.0 15.0 15.0 18.1 15.5 Minority Interest 9 11 10 14 19 20 21 22 44 83 Net Income bef. Extra-ordinary 51 63 80 82 78 54 95 144 275 372 Q-o-Q Change (%) -5.4 24.0 25.7 2.6 -4.3 -30.7 76.2 50.8 31.8 34.9 E: MOSt Estimates

Diviya Nagarajan ([email protected]); Tel: +91 22 56575322

23 September 2005 131 Results Preview SECTOR: INFORMATION TECHNOLOGY

HCL Technologies

STOCK INFO. BLOOMBERG 23 September 2005 BSE Sensex: 8,223 HCLT IN Buy REUTERS CODE S&P CNX: 2,478 HCLT.BO Previous Recommendation: Buy Rs447

Equity Shares (m) 316.1 YEAR NET SALES PAT EPS EPS P/E P/BV ROE ROCE EV/ EV/ END (RS M) (RS M) (RS) GROWTH (%) (X) (X) (%) (%) SALES EBITDA 52-Week Range 484/295 6/05A 33,694 6,104 19.3 12.1 23.1 3.7 17.8 20.0 3.4 14.7 1,6,12 Rel. Perf. (%) -6/1/-21 M.Cap. (Rs b) 141.2 6/06E 44,010 7,898 25.0 29.5 17.9 3.5 20.1 21.9 2.5 11.0

M.Cap. (US$ b) 3.2 6/07E 56,390 10,001 30.1 20.6 14.8 3.4 23.8 25.7 2.0 8.6

? We expect HCL Technologies to post 6.1% QoQ growth in revenue due to good traction in the BPO business, which had disappointed during the last quarter. We also expect that the growth in IT services, which had picked up in the last quarter, would continue to fuel growth for the company.

? While we expect BPO to continue to grow at a good pace despite hiccups during the last quarter, we believe that margins would come under pressure due to cost inflation and pricing pressure.

? We expect EBITDA margins to remain flat as the increase in margins due to expansion in the IT business is offset by margin pressure from the BPO business.

? The stock trades at 17.9x FY06E and 14.8x FY07E earnings. Maintain Buy.

? Key issues to focus on: BPO margins.

QUARTERLY PERFORMANCE (RS MILLION) Y/E JUNE FY05 FY06E FY05 FY06E 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q Revenues 7,822 8,014 8,582 9,276 9,840 10,647 11,375 12,148 33,694 44,010 Q-o-Q Change (%) 6.1 2.4 7.1 8.1 6.1 8.2 6.8 6.8 31.2 30.6 Direct Expenses 4,939 5,032 5,433 5,757 6,264 6,799 7,265 7,819 21,162 28,147 Sales, General & Admin. Expenses 1,070 1,137 1,196 1,407 1,278 1,375 1,468 1,567 4,810 5,688 Operating Profit 1,813 1,845 1,953 2,111 2,298 2,473 2,643 2,762 7,722 10,176 Margins (%) 23.2 23.0 22.8 22.8 23.4 23.2 23.2 22.7 22.9 23.1 Other Income 573 206 162 139 134 155 163 158 1,079 610 Depreciation 316 364 412 463 422 455 486 521 1,555 1,884 PBT bef. Extra-ordinary 2,070 1,687 1,703 1,787 2,010 2,173 2,319 2,399 7,247 8,901 Provision for Tax 211 136 187 140 161 174 186 192 674 712 Rate (%) 10.2 8.1 11.0 7.8 8.0 8.0 8.0 8.0 9.3 8.0 Share of Income from Eq. Investees -46 -6 36 -11 -25 -15 -10 -15 -27 -65 Minority Interest 193 253 -21 16 61 75 40 50 442 226 PAT bef. Extra-ordinary 1,620 1,292 1,572 1,620 1,763 1,909 2,084 2,142 6,104 7,898 Q-o-Q Change (%) -18.9 -20.3 21.7 3.0 12.1 17.8 9.1 2.8 20.0 29.4 E: MOSt Estimates

Diviya Nagarajan ([email protected]); Tel: +91 22 56575322

23 September 2005 132 Results Preview SECTOR: INFORMATION TECHNOLOGY

Hexaware Technologies

STOCK INFO. BLOOMBERG 23 September 2005 BSE Sensex: 8,223 APTH IN Sell REUTERS CODE S&P CNX: 2,478 HEXT.BO Previous Recommendation: Sell Rs103

Equity Shares (m) 121.5 YEAR NET SALES PAT EPS EPS P/E P/BV ROE ROCE EV/ EV/ END (RS M) (RS M) (RS) GROWTH (%) (X) (X) (%) (%) SALES EBITDA 52-Week Range 165/84 12/04A 5,459 637 5.3 257.3 19.3 5.2 26.3 29.4 2.4 16.7 1,6,12 Rel. Perf. (%) -2/-57/-41 M.Cap. (Rs b) 12.5 12/05E 6,704 895 7.1 32.8 14.6 3.9 28.6 30.7 1.8 11.0

M.Cap. (US$ b) 0.3 12/06E 7,479 999 7.6 7.6 13.5 3.0 24.4 26.5 1.5 9.0

? We expect Hexaware to report 6.3% QoQ growth in revenue for the quarter ended September 2005, with good ramp up in offshore revenue at 12% QoQ.

? Utilisation levels, which dropped to 67% last quarter, are likely to languish since the expected ramp up in one of its large clients is not likely to occur till the end of 3QCY05.

? EBITDA margins are likely to expand by 230bp due to greater offshore growth and lower SG&A expenses.

? The stock is currently trading at 14.6x CY05E and 13.5x CY06E earnings. Given the anticipated slowdown in growth towards the end of CY05 with the buyout of the PeopleSoft centre, we maintain a Sell on the stock.

? Key issues to focus on: Growth from the non-PeopleSoft business and ability to capture big deals.

QUARTERLY PERFORMANCE (RS MILLION) Y/E DECEMBER CY04 CY05 CY04 CY05E 1Q 2Q 3Q 4Q 1Q 2Q 3QE 4QE Revenues 1,144 1,283 1,462 1,570 1,641 1,650 1,754 1,659 5,459 6,704 Q-o-Q Change (%) 1.7 12.2 13.9 7.4 4.5 0.6 6.3 -5.4 36.4 22.8 Direct Expenses 719 810 914 950 1,002 1,032 1,082 1,012 3,392 4,128 Sales, General & Admin. Expenses 293 309 314 364 361 371 368 365 1,280 1,465 Operating Profit 132 165 234 256 278 248 303 282 787 1,111 Margins (%) 11.5 12.8 16.0 16.3 16.9 15.0 17.3 17.0 14.4 16.6 Other Income 29 35 14 19 27 18 18 18 98 81 Depreciation 29 34 48 50 54 53 58 50 161 214 PBT bef. Extra-ordinary 132 166 201 225 251 213 263 250 724 977 Provision for Tax 17 24 35 11 19 18 18 27 86 82 Rate (%) 12.6 14.2 17.6 4.8 7.5 8.6 7.0 10.8 11.9 8.4 PAT bef. Extra-ordinary 115 142 166 215 232 195 245 223 637 895 Share of Profit in Associate Cos. 10.3 20.2 126.9 0.0 0.0 0.0 0.0 0.0 157.3 0.0 Net Income 126 162 292 215 232 195 245 223 795 895 Q-o-Q Change (%) -90.2 29.2 80.3 -26.6 8.3 -16.3 25.9 -9.0 47.3 40.4 E: MOSt Estimates

Diviya Nagarajan ([email protected]); Tel: +91 22 56575322

23 September 2005 133 Results Preview SECTOR: INFORMATION TECHNOLOGY

i-flex solutions

STOCK INFO. BLOOMBERG BSE Sensex: 8,223 IFLEX IN 23 September 2005 Buy REUTERS CODE S&P CNX: 2,478 IFLX.BO Previous Recommendation: Buy Rs940

Equity Shares (m) 78.2 YEAR NET SALES PAT EPS EPS P/E P/BV ROE ROCE EV/ EV/ END (RS M) (RS M) (RS) GROWTH (%) (X) (X) (%) (%) SALES EBITDA 52-Week Range 1,066/525 3/05A 11,404 2,031 26.5 16.2 35.5 7.7 21.9 28.6 5.6 23.2 1,6,12 Rel. Perf. (%) -9/30/-3 M.Cap. (Rs b) 73.5 3/06E 13,752 2,300 29.4 11.0 32.0 6.4 21.7 27.3 4.5 19.4

M.Cap. (US$ b) 1.7 3/07E 18,583 3,657 46.7 59.0 20.1 5.0 27.9 33.0 3.1 11.8

? We expect i-flex solutions to report 19.3% QoQ growth in revenue driven by strong growth in the products segment, on the back of license revenue growth which encountered hiccups during the last quarter. Additionally, the company had deferred revenue of US$7m in the product business, some of which would be recognised during the quarter.

? We expect the services business to grow by 7.5% QoQ, with some of the US$3m revenue deferred during the first quarter flowing in during this quarter.

? EBITDA margins are expected to be near normal levels as revenue growth picks up, coupled with improvement in margins due to better utilisation rates in the service business, absence of higher visa costs and Rupee depreciation.

? Consequent to the low net profit in 1QFY06 at Rs59m, we have revised our EPS estimates for FY06E and FY07E downwards by 24.9% and 4.5%, to Rs29.4 and Rs46.7, respectively. However, we remain convinced about the long term growth prospects of the company. The stock trades at 32x and 20.1x FY06E and FY07E earnings. We maintain Buy.

? Key issues to focus on: License revenue growth.

QUARTERLY PERFORMANCE (RS MILLION) Y/E MARCH FY05 FY06 FY05 FY06E 1Q 2Q 3Q 4Q 1Q 2QE 3QE 4QE Revenues 2,262 2,606 3,052 3,484 2,701 3,222 3,739 4,091 11,404 13,752 Q-o-Q Change (%) 5.6 15.2 17.1 14.2 -22.5 19.3 16.1 9.4 41.6 20.6 Direct Expenses 1,195 1,462 1,665 1,627 1,743 1,772 1,861 1,929 5,948 7,305 Sales, General & Admin. Expenses 580 584 757 765 822 748 805 866 2,686 3,226 Operating Profit 487 560 631 1,093 135 701 1,073 1,296 2,770 3,221 Margins (%) 21.5 21.5 20.7 31.4 5.0 21.8 28.7 31.7 24.3 23.4 Other Income 148 70 -80 89 70 25 25 25 227 145 Depreciation 62 80 86 109 113 114 116 118 337 460 Share of Associate Company Loss 0 0 1 1 3 4 5 6 1 17 PBT 573 549 464 1,072 90 609 977 1,198 2,658 2,888 Provision for Tax 147 121 107 252 31 122 195 240 627 588 Rate (%) 25.6 22.0 23.1 23.5 34.5 20.0 20.0 20.0 23.6 20.3 PAT 426 429 357 820 59 487 781 958 2,031 2,301 Q-o-Q Change (%) -11.9 0.6 -16.8 130.0 -92.8 730.4 60.5 22.6 19.2 13.2 E: MOSt Estimates

Diviya Nagarajan ([email protected]); Tel: +91 22 56575322

23 September 2005 134 Results Preview SECTOR: INFORMATION TECHNOLOGY

Infosys

STOCK INFO. BLOOMBERG BSE Sensex: 8,223 INFO IN 23 September 2005 Buy REUTERS CODE S&P CNX: 2,478 INFY.BO Previous Recommendation: Buy Rs2,400

Equity Shares (m) 268.8 YEAR NET SALES PAT EPS EPS P/E P/BV ROE ROCE EV/ EV/ END (RS M) (RS M) (RS) GROWTH (%) (X) (X) (%) (%) SALES EBITDA 52-Week Range 2,520/1,607 3/05A 71,296 18,464 69.0 46.7 34.8 12.3 43.6 50.2 8.7 26.4 1,6,12 Rel. Perf. (%) -3/-16/-1 M.Cap. (Rs b) 645.1 3/06E 96,092 25,819 94.6 37.1 25.4 9.1 41.6 47.4 6.3 18.6

M.Cap. (US$ b) 14.7 3/07E 128,765 33,069 118.7 25.6 20.2 6.9 39.2 45.6 4.5 13.7

? After a modest performance in terms of volume growth and slowdown in a few top clients during the previous quarter, we expect Infosys to bounce back with good volume growth in core IT services, enhanced by strong performance from newer service lines and the impact of higher billing rates for the new deals signed in the last two quarters. We expect the company to report 10.2% QoQ growth in the September quarter.

? The company signed a landmark deal with ABN Amro to provide application support and maintenance estimated at US$150m, which is expected to start flowing in during the quarter.

? EBITDA margins are expected to stay more or less flat, since the company continues to invest heavily into its new service lines. Investment in subsidiaries is expected to be US$180-200m in FY06.

? The stock currently trades at 25.4x FY06E and 20.2xFY07E earnings. We maintain Buy.

? Key issues to focus on: Growth from top clients.

QUARTERLY PERFORMANCE (RS MILLION) Y/E MARCH FY05 FY06 FY05 FY06E 1Q 2Q 3Q 4Q 1Q 2QE 3QE 4QE Revenues 15,174 17,493 18,756 19,873 20,716 22,829 25,198 27,349 71,296 96,092 Q-o-Q Change (%) 15.9 15.3 7.2 6.0 4.2 10.2 10.4 8.5 49.8 34.8 Direct Expenses 8,052 9,267 9,915 10,413 11,044 12,157 12,964 13,975 37,647 50,140 Sales, General & Admin. Expenses 2,229 2,616 2,662 2,793 3,033 3,219 3,477 3,829 10,300 13,559 Operating Profit 4,893 5,610 6,180 6,667 6,638 7,453 8,757 9,546 23,350 32,394 Margins (%) 32.2 32.1 32.9 33.5 32.0 32.6 34.8 34.9 32.8 33.7 Other Income 157 296 463 323 286 290 318 348 1,239 1,242 Depreciation 525 606 739 998 801 913 1,008 1,094 2,869 3,816 PBT bef. Extra-ordinary 4,524 5,300 5,904 5,992 6,123 6,830 8,066 8,800 21,720 29,819 Provision for Tax 641 826 934 855 802 922 1,089 1,188 3,256 4,001 Rate (%) 14.2 15.6 15.8 14.3 13.1 13.5 13.5 13.5 15.0 13.4 PAT bef. Extra-ordinary 3,883 4,474 4,970 5,137 5,321 5,908 6,977 7,612 18,464 25,819 Q-o-Q Change (%) 14.9 15.2 11.1 3.4 3.6 11.0 18.1 9.1 47.4 39.8 E: MOSt Estimates

Diviya Nagarajan ([email protected]); Tel: +91 22 56575322

23 September 2005 135 Results Preview SECTOR: INFORMATION TECHNOLOGY

MphasiS BFL

STOCK INFO. BLOOMBERG BSE Sensex: 8,223 BFL IN 23 September 2005 Buy REUTERS CODE S&P CNX: 2,478 MBFL.BO Previous Recommendation: Buy Rs243

Equity Shares (m) 78.6 YEAR NET SALES PAT EPS EPS P/E P/BV ROE ROCE EV/ EV/ END (RS M) (RS M) (RS) GROWTH (%) (X) (X) (%) (%) SALES EBITDA 52-Week Range 330/211 3/05A 7,656 1,246 16.4 18.0 14.8 6.4 39.4 33.4 2.4 12.9 1,6,12 Rel. Perf. (%) -13/-21/-68 M.Cap. (Rs b) 19.1 3/06E 9,514 1,575 19.6 19.6 12.4 3.8 39.9 39.3 1.7 8.6

M.Cap. (US$ b) 0.4 3/07E 11,976 1,912 23.8 21.4 10.2 2.7 31.3 32.8 1.2 5.9

? We expect MphasiS to report lacklustre performance during the September quarter, with revenue growing by 3.5% QoQ.

? Though the company is expected to grow its offshore business, the BPO business, which has been struggling for the last two quarters, would continue to be sluggish as the company continues to suffer in the aftermath of the credit card fraud episode that occurred in 4QFY05.

? Margins are likely to pick up this quarter due to greater offshore transition in its business from Eldorado and Princeton Consulting and leverages on SG&A expenses. However, transition to domestic BPO business would offset the expansion in margins.

? The cancellation of the sale of stake plans by Barings has removed the premium associated with the stock on expectations of the sale. The stock is currently trading at 12.4x FY06E and 10.2x FY07E earnings. We maintain Buy.

? Key issues to focus on: Offshore volume growth, BPO margins.

QUARTERLY PERFORMANCE (RS MILLION) Y/E MARCH FY05 FY06 FY05 FY06E 1Q 2Q 3Q 4Q 1Q 2QE 3QE 4QE Revenues 1,758 1,930 1,918 2,051 2,197 2,274 2,431 2,612 7,657 9,514 Q-o-Q Change (%) 10.7 9.8 -0.6 6.9 7.1 3.5 6.9 7.5 31.9 24.3 Direct Expenses 1,140 1,207 1,255 1,352 1,468 1,486 1,593 1,661 4,954 6,208 Sales, General & Admin. Expenses 296 332 334 325 338 348 367 389 1,288 1,443 Operating Profit 321 390 329 374 391 441 471 562 1,414 1,864 Margins (%) 18.3 20.2 17.1 18.2 17.8 19.4 19.4 21.5 18.5 19.6 Other Income 88 -9 4 30 58 78 38 4 113 179 Depreciation 62 73 73 78 118 114 122 131 287 483 Provisions 0 0 2 3 0 0 0 0 0 0 PBT bef. Extra-ordinary 321 286 229 294 332 405 387 435 1,129 1,559 Provision for Tax -32 -29 -40 -16 -5 -5 -4 -2 -117 -15 Rate (%) -10.0 -10.3 -17.3 -5.3 -1.6 -1.1 -0.9 -0.5 -10.4 -1.0 PAT bef. Extra-ordinary 353 315 269 309 337 410 391 437 1,246 1,575 Q-o-Q Change (%) 40.3 -10.7 -14.8 15.1 8.9 21.7 -4.7 11.9 26.4 26.3 E: MOSt Estimates

Diviya Nagarajan ([email protected]); Tel: +91 22 56575322

23 September 2005 136 Results Preview SECTOR: INFORMATION TECHNOLOGY

Patni Computer Systems

STOCK INFO. BLOOMBERG BSE Sensex: 8,223 PATNI IN 23 September 2005 Buy REUTERS CODE S&P CNX: 2,478 PTNI.BO Previous Recommendation: Buy Rs416

Equity Shares (m) 124.8 YEAR NET SALES PAT EPS EPS P/E P/BV ROE ROCE EV/ EV/ END (RS M) (RS M) (RS) GROWTH (%) (X) (X) (%) (%) SALES EBITDA 52-Week Range 510/310 12/04A 14,574 2,612 20.6 31.6 20.2 4.0 25.0 28.9 3.1 12.9 1,6,12 Rel. Perf. (%) 2/-19/-16 M.Cap. (Rs b) 51.9 12/05E 19,205 3,200 25.6 24.7 16.2 3.3 22.1 26.2 2.2 10.2

M.Cap. (US$ b) 1.2 12/06E 23,886 3,968 31.8 24.0 13.1 2.7 22.6 26.4 1.7 7.8

? We expect revenue to grow by 5.1% QoQ as the growth from top clients continues to remain sluggish during the quarter. However, we expect the momentum in client additions to continue and expect faster churn in top clients, as non top 10 clients continue to grow at a faster pace.

? However, telecom, product engineering and ISV practices, which have been showing strong QoQ growth, would continue to drive faster revenue growth. The company has also invested in the expansion of service offerings and geographies, which is likely to start paying off.

? We expect EBITDA margins to rise to 23.1% this quarter from 17.2% in the first quarter due to absence of visa costs, lower SG&A expenses and currency depreciation.

? The stock trades at 16.2x CY05E and 13.1x CY06E earnings. We maintain Buy.

? Key issues to focus on: Revenue growth among the top-10 clients.

QUARTERLY PERFORMANCE (RS MILLION) Y/E DECEMBER CY04 CY05 CY04 CY05E 1Q 2Q 3Q 4Q 1Q 2Q 3QE 4QE Revenues 3,127 3,668 3,767 4,012 4,337 4,730 4,970 5,168 14,574 19,205 Q-o-Q Change (%) -2.7 17.3 2.7 6.5 8.1 9.1 5.1 4.0 25.6 31.8 Direct Expenses 1,726 2,128 2,161 2,380 2,516 3,007 2,934 3,042 8,395 11,498 Sales, General & Admin. Expenses 646 657 676 710 846 908 890 828 2,688 3,471 Operating Profit 755 883 929 923 976 816 1,146 1,298 3,491 4,236 Margins (%) 24.1 24.1 24.7 23.0 22.5 17.2 23.1 25.1 24.0 22.1 Other Income 25 -29 -1 52 40 68 52 51 48 210 Depreciation 103 118 142 142 145 160 169 176 505 650 PBT bef. Extra-ordinary 678 736 787 834 872 723 1,029 1,173 3,034 3,796 Provision for Tax 102 118 93 109 189 102 144 160 423 596 Rate (%) 15.1 16.1 11.8 13.1 21.7 14.1 14.0 13.7 13.9 15.7 Net Income bef. Extra-ordinary 575 618 694 724 682 621 885 1,013 2,612 3,200 Q-o-Q Change (%) -8.7 7.4 12.2 4.4 -5.8 -9.0 42.5 14.4 34.0 22.5 E: MOSt Estimates

Diviya Nagarajan ([email protected]); Tel: +91 22 56575322

23 September 2005 137 Results Preview SECTOR: INFORMATION TECHNOLOGY

Satyam Computer

STOCK INFO. BLOOMBERG BSE Sensex: 8,223 SCS IN 23 September 2005 Buy REUTERS CODE S&P CNX: 2,478 SATY.BO Previous Recommendation: Buy Rs521

Equity Shares (m) 325.9 YEAR NET SALES PAT EPS EPS P/E P/BV ROE ROCE EV/ EV/ END (RS M) (RS M) (RS) GROWTH (%) (X) (X) (%) (%) SALES EBITDA 52-Week Range 562/349 3/05A 34,824 7,654 23.7 38.1 22.0 5.2 26.4 30.3 4.1 15.7 1,6,12 Rel. Perf. (%) -4/6/-9 M.Cap. (Rs b) 169.7 3/06E 46,760 9,824 29.8 25.6 17.5 4.3 27.3 32.5 2.9 11.2

M.Cap. (US$ b) 3.9 3/07E 57,603 12,569 37.9 27.4 13.7 2.3 28.2 33.1 2.3 8.6

? We expect Satyam to report a 5% QoQ growth in 2QFY06 on the back of higher growth in its non-top 10 customers and good volume growth in the TIMES, BFSI and Manufacturing verticals. We believe that Satyam would continue to gain market share due to its strategic focus, coupled with improvement in processes and quality through its ORBIT-5 initiative.

? CitiSoft, which incurred losses of US$0.14m in 1QFY06, is expected to become profitable this quarter and earn net margins of around 10%.

? Margins are expected to expand by 200bp as CitiSoft, which incurred losses of US$0.14m in 1QFY06, is expected to become profitable this quarter. Faster growth from consulting and enterprise business would also have a positive impact on margins.

? The stock is currently trading at 17.5x FY06E and 13.7x FY07E earnings. We maintain Buy.

? Key issues to focus on: Growth in non-top 10 clients, CitiSoft’s turnaround.

QUARTERLY PERFORMANCE (RS MILLION) Y/E MARCH FY05 FY06 FY05 FY06E 1Q 2Q 3Q 4Q 1Q 2QE 3QE 4QE Revenues 7,799 8,621 9,074 9,715 10,587 11,116 12,033 13,023 35,208 46,760 Q-o-Q Change (%) 8.2 10.5 5.3 7.1 9.0 5.0 8.2 8.2 38.5 32.8 Direct Expenses 4,397 4,955 5,269 5,640 6,391 6,509 6,822 7,189 20,261 26,911 Sales, General & Admin. Expenses 1,460 1,538 1,575 1,692 1,789 1,862 1,982 2,111 6,266 7,744 Operating Profit 1,941 2,128 2,230 2,383 2,407 2,745 3,230 3,723 8,682 12,105 Margins (%) 24.9 24.7 24.6 24.5 22.7 24.7 26.8 28.6 24.7 25.9 Other Income 309 240 22 298 234 297 317 337 868 1,187 Depreciation 271 280 282 300 313 367 409 456 1,133 1,545 Interest 25 2 3 1 5 5 5 5 30 9 PBT bef. Extra-ordinary 1,954 2,085 1,968 2,380 2,323 2,671 3,133 3,600 8,387 11,738 Provision for Tax 301 304 289 283 392 441 501 569 1,176 1,885 Rate (%) 15.4 14.6 14.7 11.9 16.9 16.5 16.0 15.8 14.0 16.1 Share of Loss in Associate Cos. 16 13 29 36 29 0 0 0 94 29 PAT bef. Extra-ordinary 1,637 1,769 1,649 2,062 1,902 2,230 2,632 3,031 7,117 9,824 Q-o-Q Change (%) 16.3 8.0 -6.8 25.0 -7.7 17.2 18.0 15.2 31.4 38.0 E: MOSt Estimates

Diviya Nagarajan ([email protected]); Tel: +91 22 56575322

23 September 2005 138 Results Preview SECTOR: INFORMATION TECHNOLOGY

Tata Consultancy Services

STOCK INFO. BLOOMBERG BSE Sensex: 8,223 TCS IN 23 September 2005 Buy REUTERS CODE S&P CNX: 2,478 TCS.BO Previous Recommendation: Buy Rs1,411

Equity Shares (m) 480.1 YEAR NET SALES PAT EPS EPS P/E P/BV ROE ROCE EV/ EV/ END (RS M) (RS M) (RS) GROWTH (%) (X) (X) (%) (%) SALES EBITDA 28-Week Range 1,482/1,003 3/05A 97,272 20,521 49.2 46.0 28.7 18.6 71.9 84.8 6.9 23.7 1,6,12 Rel. Perf. (%) -1/-28/-11 M.Cap. (Rs b) 677.6 3/06E 119,320 27,456 57.2 16.2 24.7 11.8 58.2 69.8 5.6 19.0

M.Cap. (US$ b) 15.5 3/07E 149,202 33,308 69.4 21.3 20.3 8.0 46.8 55.6 4.4 15.3

? After a disappointing first quarter with poor volume growth, we believe TCS would report stronger numbers in 2QFY06 with 7.1% QoQ growth in its topline due to increased spending on the part of customers and scheduled start of projects in 2QFY06.

? The company won a 5-year, Eur200m deal with ABN Amro during the quarter, which would contribute marginally to revenues this quarter. The company has also signed a US$100m deal with a BFSI client last quarter, which would also start contributing marginally to revenues during the September quarter.

? The company’s target of bringing down onsite revenue contribution to 55% would be delayed to the end of the financial year as opposed to the end of 2QFY06.

? We expect margins to remain flat owing to margin erosion resulting from the alignment of onsite salaries in the US and Australia, which would be compensated by greater volume growth, lower SG&A costs, and growth in consulting, technology services and asset-based offerings.

? The stock trades at 24.7x FY06E and 20.3x FY07E earnings. We maintain Buy.

? Key issues to focus on: Pick up in volume growth, margins.

QUARTERLY PERFORMANCE (RS MILLION) Y/E MARCH FY05 FY06 FY05 FY06E 1Q 2Q 3Q 4Q 1Q 2QE 3QE 4QE Revenues 21,335 24,307 25,784 25,846 27,094 29,006 30,578 32,641 97,272 119,320 Q-o-Q Change (%) 4.7 13.9 6.1 0.2 4.8 7.1 5.4 6.7 36.6 22.7 Direct Expenses 11,345 13,160 13,276 13,324 13,621 14,474 15,226 16,336 51,105 59,657 Sales, General & Admin. Expenses 3,673 4,017 4,768 5,203 5,515 5,987 6,248 6,884 17,662 24,635 Operating Profit 6,317 7,129 7,740 7,318 7,958 8,545 9,104 9,421 28,505 35,028 Margins (%) 29.6 29.3 30.0 28.3 29.4 29.5 29.8 28.9 29.3 29.4 Other Income 138 -8 1,041 -414 98 151 151 204 757 606 Depreciation 329 357 382 509 540 580 642 718 1,577 2,480 PBT bef. Extra-ordinary 6,126 6,764 8,398 6,396 7,517 8,116 8,613 8,907 27,685 33,154 Provision for Tax 1,002 946 1,283 834 1,247 1,323 1,378 1,416 4,065 5,364 Rate (%) 16.4 14.0 15.3 13.0 16.6 16.3 16.0 15.9 14.7 16.2 Minority Interest 78 50 49 -116 83 84 84 83 61 334 Net Income bef. Extra-ordinary 5,047 5,769 7,066 5,677 6,187 6,709 7,151 7,408 23,559 27,456 Q-o-Q Change (%) 7.4 14.3 22.5 -19.7 9.0 8.4 6.6 3.6 46.1 16.5 PAT bef. Extra-ordinary 4,807 3,433 6,834 5,448 6,187 6,709 7,151 7,408 20,521 27,456 E: MOSt Estimates

Diviya Nagarajan ([email protected]); Tel: +91 22 56575322

23 September 2005 139 Results Preview SECTOR: INFORMATION TECHNOLOGY

Wipro

STOCK INFO. BLOOMBERG BSE Sensex: 8,223 WPRO IN 23 September 2005 Buy REUTERS CODE S&P CNX: 2,478 WIPR.BO Previous Recommendation: Buy Rs357

Equity Shares (m) 1,404.2 YEAR NET SALES PAT EPS EPS P/E P/BV ROE ROCE EV/ EV/ END (RS M) (RS M) (RS) GROWTH (%) (X) (X) (%) (%) SALES EBITDA 52-Week Range 390/284 3/05A 81,353 15,834 11.3 -21.0 31.6 8.8 30.7 35.3 5.8 23.2 1,6,12 Rel. Perf. (%) -8/-19/-28 M.Cap. (Rs b) 501.9 3/06E 105,261 19,166 13.5 19.8 26.4 6.6 28.9 32.8 4.4 18.3

M.Cap. (US$ b) 11.4 3/07E 134,763 24,997 17.3 27.9 20.6 5.0 28.3 32.9 3.3 13.1

? We expect Wipro’s revenue to grow by 6.4% QoQ due to improvement in growth rates of top clients, restructuring of business in Spectramind, and improvement in offshore volume growth.

? The company has invested heavily in its sales and marketing team during the last quarter, adding about 32 people to the team. We expect the increased focus on sales and marketing to result in greater client mining, which would translate into faster growth from top clients.

? While Wipro was the worst impacted among Tier-I companies due to the appreciation of the Rupee against the Euro and the British Pound, the depreciation of the Rupee against these currencies is likely to give some respite to margins during the quarter.

? We expect EBITDA margins to improve marginally by 70bp due to Rupee depreciation, higher utilization rates, lower SG&A expenses and improvement in offshore composition of revenue.

? The stock is currently trading at 26.4x FY06E and 20.6x FY07E earnings. We maintain Buy.

? Key issues to focus on: Growth in Top-10 clients and growth in Spectramind.

QUARTERLY PERFORMANCE (RS MILLION) Y/E MARCH FY05 FY06 FY05 FY06E 1Q 2Q 3Q 4Q 1Q 2QE 3QE 4QE Global IT Services incl Spectramind 13,538 14,915 15,789 16,471 17,430 18,549 19,957 21,506 60,713 77,442 Other Businesses 4,158 4,882 5,112 6,487 5,435 6,599 6,968 8,817 20,639 27,819 Revenues 17,696 19,797 20,902 22,958 22,865 25,148 26,925 30,323 81,353 105,261 Q-o-Q Change (%) - Global IT 7.9 10.2 5.9 4.3 5.8 6.4 7.6 7.8 39.7 27.6 Total Expenses 13,089 14,684 15,649 17,478 17,414 18,967 20,678 23,223 60,900 80,282 EBITDA- Global IT Services 4,121 4,478 4,613 4,806 4,859 5,415 5,372 6,051 18,017 21,697 Margins (%) 30.4 30.0 29.2 29.2 27.9 29.2 26.9 28.1 29.7 28.0 EBITDA 4,607 5,113 5,253 5,480 5,451 6,181 6,247 7,099 20,452 24,979 Margins (%) 26.0 25.8 25.1 23.9 23.8 24.6 23.2 23.4 25.1 23.7 Depreciation 514 570 656 697 722 835 903 961 2,438 3,420 EBIT 4,093 4,542 4,597 4,783 4,729 5,346 5,345 6,139 18,014 21,559 Margins (%) 23.1 22.9 22.0 20.8 20.7 21.3 19.9 20.2 22.1 20.5 Other Income -199 206 345 420 70 95 127 154 771 446 PBT 3,894 4,748 4,942 5,203 4,799 5,441 5,472 6,293 18,786 22,005 Rate (%) 15.4 14.3 14.0 13.9 12.2 12.5 13.0 13.2 14.3 12.8 Net Income * 3,254 3,835 4,271 4,473 4,268 4,745 4,744 5,447 15,834 19,203 Q-o-Q Change (%) 0.0 17.8 11.4 4.7 -4.6 11.2 0.0 14.8 58.5 21.3 E: MOSt Estimates; * after minority interest and share in earnings from affiliates

Diviya Nagarajan ([email protected]); Tel: +91 22 56575322

23 September 2005 140 Results Preview

QUARTER ENDING SEPTEMBER 2005

Media

BSE Sensex: 8,223 S&P CNX: 2,478 23 September 2005

Stock performance and valuations

STOCK PERFORMANCE (%) ABSOLUTE PERF REL PERF TO SENSEX REL PERF TO SECTOR 3 M 1 YEAR 3 M 1 YEAR 3 M 1 YEAR Media Zee Telefilms 20 18 5 -30 - -

RELATIVE PERFORMANCE - 3 MONTH (%) RELATIVE PERFORMANCE - 1 YEAR (%)

Sensex MOSt Media Index MOSt Media Index Sensex 130 160

120 140

110 120

100 100

90 80 Jun-05 Jul-05 Aug-05 Sep-05 Sep-04 Dec-04 Mar-05 Jun-05 Sep-05

COMPARATIVE VALUATION CMP (RS) RECO EPS (RS) P/E (X) EV/EBITDA ROE (%) 23.9.05 FY05A FY06E FY07E FY05A FY06E FY07E FY05A FY06E FY07E FY05A FY06E FY07E Media Zee Telefilms 180 Neutral 7.2 7.7 8.6 25.0 23.4 20.8 19.0 17.7 15.4 23.1 20.4 19.3

EXPECTED QUARTERLY PERFORMANCE SUMMARY (RS MILLION)

RECO SALES EBITDA NET PROFIT SEP.05 CHG. (%) SEP.05 CHG. (%) SEP.05 CHG. (%) Media Zee Telefilms Neutral 3,942 13.3 1,045 1.4 752 11.1

Atul Rastogi ([email protected]); Tel: +91 22 56575316/Sidharth Shah ([email protected]); Tel: +91 22 56575145 23 September 2005 141 Results Preview SECTOR: MEDIA

Zee Telefilms

STOCK INFO. BLOOMBERG BSE Sensex: 8,223 Z IN 23 September 2005 Neutral REUTERS CODE S&P CNX: 2,478 ZEE.BO Previous Recommendation: Neutral Rs180

Equity Shares (m) 435.8 YEAR NET SALES PAT EPS EPS P/E P/BV ROE ROCE EV/ EV/ END (RS M) (RS M) (RS) GROWTH (%) (X) (X) (%) (%) SALES EBITDA 52-Week Range 206/128 3/05E 13,954 3,134 7.2 6.6 25.0 5.8 25.6 22.8 5.9 19.0 1,6,12 Rel. Perf. (%) 0/11/-30 M.Cap. (Rs b) 78.5 3/06E 16,571 3,350 7.7 6.9 23.4 4.8 22.4 21.5 5.0 17.7

M.Cap. (US$ b) 1.8 3/07E 18,549 3,769 8.6 12.5 20.8 4.0 21.0 22.8 4.3 15.4

? We expect total revenues for 2QFY06 to grow by 13.3% YoY, with subscription and advertising revenues expected to grow by 15% YoY and 11% YoY, respectively. Zee’s advertising revenues bounced back in 1QFY06 after a couple of quarters of low growth.

? EBITDA margins are expected to decline by 310bp to 26.5% as Zee has stepped up spends on its programming and new channel launch in an increasingly competitive industry environment.

? Net interest income (other income less interest) would increase to Rs80m in 2QFY06 from Rs10m primarily as a result of higher other income and lower interest costs due to low interest cost FCCB issued in July 2004.

? PAT at Rs752m would be higher by Rs75m in 2QFY06, a growth of 11% YoY.

? For full year (FY06), we expect Zee to report sales of Rs16.6b (18.8% growth), EBITDA of Rs4.7b (6.9% growth), EBITDA margins of 28.1% (down 310bp) and PAT of Rs3.4b (7% growth).

? The stock is currently trading at 23.4x FY06E and 20.8x FY07E EPS. We maintain our Neutral rating.

QUARTERLY PERFORMANCE (RS MILLION) Y/E MARCH FY05 FY06 FY05 FY06E 1Q 2Q 3Q 4Q 1Q 2QE 3QE 4QE Advertising Revenue 1,126 1,537 1,796 2,220 1,315 1,706 1,975 2,527 6,679 7,523 Subscription Revenue 1,530 1,606 1,624 1,742 1,734 1,847 1,868 2,008 6,503 7,457 Other Sales and Services 130 337 -30 336 422 390 390 390 772 1,591 Net Sales 2,787 3,479 3,390 4,298 3,471 3,942 4,233 4,925 13,954 16,571 YoY Change (%) -3.7 7.7 -9.5 12.3 24.5 13.3 24.9 14.6 1.8 18.8 Total Expenses 1,807 2,449 2,370 2,967 2,473 2,898 3,090 3,446 9,593 11,907 EBITDA 980 1,031 1,021 1,330 998 1,045 1,143 1,479 4,361 4,664 Margin (%) 35.2 29.6 30.1 31.0 28.7 26.5 27.0 30.0 31.3 28.1 YoY Change (%) 8.7 1.6 -19.6 4.4 1.8 1.4 12.0 11.2 1.2 6.9 Other Income 155 87 167 128 113 145 160 169 536 587 Net Interest 74 77 77 39 25 65 54 71 267 215 Depreciation 77 76 70 110 97 98 98 99 333 392 PBT 983 965 1,040 1,310 989 1,027 1,151 1,477 4,297 4,644 Tax 292 273 216 273 210 267 299 477 1,075 1,254 Tax Rate (%) 29.7 28.3 20.8 20.8 21.3 26.0 26.0 32.3 25.0 27.0 PAT 691 692 824 1,037 779 760 852 1,000 3,222 3,390 Minority Interest 20 15 -19 25 19 8 8 5 40 40 Adjusted PAT 672 677 843 965 760 752 844 994 3,135 3,350 YoY Change (%) 16.7 3.1 -3.8 18.5 13.2 11.1 0.1 3.1 6.6 6.9 E: MOSt Estimates

Atul Rastogi ([email protected]); Tel: +91 22 56575316/Sidharth Shah ([email protected]); Tel: +91 22 56575145 23 September 2005 142 Results Preview

QUARTER ENDING SEPTEMBER 2005

Metals

BSE Sensex: 8,223 S&P CNX: 2,478 23 September 2005

COMPANY NAME PG. Steel After a sharp decline in the end of 1QFY06, steel prices have stabilized at lower levels Hindalco 148 in 2QFY06. The sharp fall in steel prices was largely driven by significant inventory Jindal Steel & Power 149 accumulation in the domestic as well as the global market. In 2QFY06, a pick up in demand as well as large scale production cut taken by global steel majors resulted in de- Nalco 150 stocking and eased the supply pressure on steel prices. Shortage of raw material (primarily

SAIL 151 iron ore and coal) resulted in keeping prices of these inputs firm and inflated the cost structure for non-integrated players further. Tisco 152 International scenario High growth in steel production continued: Global steel output increased by 6.9% to 729m ton during January -August 2005. China continued to drive production and consumption growth with crude steel production growing by 28.2% to 224.8m ton. The rest of the world’s output declined by 0.5% to 504.1m ton. Production cut implemented by European and American steel producers helped in matching demand with supply and resulted in significant de-stocking of inventory in the last two months. Increase in offtake and production cut has eased supply pressure and in the last one month steel prices in global as well domestic markets have started improving.

CHINA DRIVES GLOBAL CRUDE STEEL PRODUCTION (M TON)

2001 2002 2003 2004 2005 100

90

80

70

60 Jul Jan Jun Oct Feb Mar Apr Sep Nov Dec May Aug

Source: IISI

EXPECTED QUARTERLY PERFORMANCE SUMMARY (RS MILLION) RECO SALES EBITDA NET PROFIT SEP.05 CHG. (%) SEP.05 CHG. (%) SEP.05 CHG. (%) Metals Hindalco Buy 26,135 27.7 6,120 38.8 3,749 42.6 Jindal Steel & Power Buy 6,857 16.7 2,606 28.1 1,447 8.6 Nalco Buy 11,254 15.2 5,601 9.6 3,066 11.3 SAIL Neutral 69,635 3.9 17,275 -17.8 9,980 -34.0 Tisco Buy 41,641 11.4 17,731 8.9 10,673 12.8 Sector Aggregate 155,522 10.7 49,333 1.0 28,915 -7.6

Nirbhay Mahawar ([email protected]); Tel: +91 22 56575315/Satyam Agarwal ([email protected]); Tel: + 91 22 56575353

23 September 2005 143 Metals

Steel prices stabilizing after sharp fall: After a sharp fall in steel prices (US$150 to US$200 per ton of HRC in the spot market) in June and July, steel prices stabilized in August in the domestic as well as the international market. Post this correction, with a pick up in demand and large-scale production cuts announced by European and US producers, supply pressure eased and prices started recovering in September. In the last one month, prices in all major markets market have either stabilized or improved by US$50-60 per ton. On account of buoyant demand in the domestic market, significant amount of de-stocking has taken place and inventory levels in the system are now manageable. In line with this, prices in the domestic market have also started inching up and have increased by Rs600- 1,000 per ton. However, average quarterly realization for steel companies have fallen by at least Rs4,000 per ton which will result in significant squeeze in EBITDA margins.

HOT ROLLED PRICES FELL SHARPLY IN THE LAST TWO MONTHS (US$/TON)

US$/ton China US Domestic 800

625

450

275

100 Jun-02 Oct-02 Jun-03 Oct-03 Jun-04 Oct-04 Jun-05 Apr-02 Feb-03 Apr-03 Feb-04 Apr-04 Feb-05 Apr-05 Dec-02 Dec-03 Dec-04 Aug-02 Aug-03 Aug-04 Aug-05

Source: Company/Inquire

Firm input prices will act as floor to steel prices: High growth in steel production in China has resulted in tight demand-supply scenario for critical input materials – iron ore and coal. After a correction in June and July, iron ore prices have again firmed up and are quoting at US$70-72 per ton. Coal prices have also remained firm and are causing significant cost-push to non-integrated players. We believe that shortage of raw material will keep raw material prices firm and will prolong the upturn in the steel cycle.

A quarter of diverge performance: We believe that 2QFY06 will be a quarter of divergent performance in which we will see a huge difference in operating performance of integrated players like Tata Steel and JSPL versus non-integrated players like Ispat and Essar Industries. Although EBITDA margins for the sector will decline sequentially for all producers, the fall in margins will be much lower for integrated players in comparison to non-integrated players. Also, high volume growth for integrated players like Tata Steel will help them offset the impact of sequential decline in realization. Low margins of non- integrated players will also indicate that there is very little scope for further fall in steel prices.

23 September 2005 144 Metals

We maintain our positive view on integrated players: We believe that companies like Tata Steel and JSPL will continue to show strong operating performance on account of their captive raw material, high volume growth and controlled cost structure. Considering the high volume growth, strong operating cash flow generation (even in the event of a downturn in the steel cycle) and attractive valuations we maintain our positive view on Tata Steel and JSPL.

Non-ferrous metals During 2QY06, Copper and Aluminium prices remained firm with Copper prices moving up 10.6% QoQ and Aluminium prices moving up by 2% QoQ. Considering the impressive margins, industry majors have started implementing capacity expansion which will result in increased production for alumina and copper. We believe this could ease the tight demand supply scenario and may result in softening in prices. Also, another key issue for the industry that needs to be monitored closely is the increasing cost. Initially, the major impact on cost was exchange rate driven, and then in the last six months, costs were impacted by ballooning raw materials and energy prices. Integrated players stand to benefit the most as a sharp increase in input costs have resulted in higher cost curve for custom smelters.

Aluminium prices firmed by 2% QoQ: Aluminium prices have firmed up by 2% QoQ during 2QFY06. We believe China’s increasing exports due to capacity expansions is one of the key factors for the change in dynamics in the aluminium market. However, we believe that demand growth could start to improve from 2HCY05, with the end of the de- stocking cycle in China, Europe and USA.

TREND IN ALUMINIUM PRICES (US$/TON)

2,200

1,950

1,700

1,450

1,200 Jun-02 Oct-02 Jun-03 Oct-03 Jun-04 Oct-04 Jun-05 Apr-02 Feb-03 Apr-03 Feb-04 Apr-04 Feb-05 Apr-05 Dec-02 Dec-03 Dec-04 Aug-02 Aug-03 Aug-04 Aug-05

Source: Company/MOSt

23 September 2005 145 Metals

Copper prices near all time highs: Copper prices have continued to rise since March 2003 and reached an all-time high level of US$3,835/ton in August 2005. Low inventory of copper is driving this rally in copper prices. With surplus copper concentrate capacity, TCRC margins have moved up significantly, which will result in margin expansion for Hindalco and Sterlite.

TREND IN COPPER PRICES (US$/TON)

4,000

3,250

2,500

1,750

1,000 Jun-02 Oct-02 Jun-03 Oct-03 Jun-04 Oct-04 Jun-05 Apr-02 Feb-03 Apr-03 Feb-04 Apr-04 Feb-05 Apr-05 Dec-02 Dec-03 Dec-04 Aug-02 Aug-03 Aug-04 Aug-05

Source: Company/MOSt

23 September 2005 146 Metals

Stock performance and valuations

STOCK PERFORMANCE (%) ABSOLUTE PERF REL PERF TO SENSEX REL PERF TO SECTOR 3 M 1 YEAR 3 M 1 YEAR 3 M 1 YEAR Metals Hindalco Inds. 22 16 7 -32 4 -15 Jindal Steel 48 125 33 76 30 94 Natl. Aluminium 17 2 1 -46 -1 -29 S A I L 19 40 4 -8 2 9 Tata Iron & Steel Co. 10 40 -5 -8 -8 9

RELATIVE PERFORMANCE - 3 MONTH (%) RELATIVE PERFORMANCE - 1 YEAR (%)

Sensex MOSt Metals Index MOSt Metals Index Sensex 130 160

120 140

110 120 100

100 90

80 80 Jun-05 Jul-05 Aug-05 Sep-05 Sep-04 Dec-04 Mar-05 Jun-05 Sep-05

COMPARATIVE VALUATION CMP (RS) RECO EPS (RS) P/E (X) EV/EBITDA ROE (%) 23.9.05 FY05A FY06E FY07E FY05A FY06E FY07E FY05A FY06E FY07E FY05A FY06E FY07E Metals Hindalco 146 Buy 13.8 17.2 17.9 10.5 8.5 8.2 7.3 6.0 5.7 17.6 19.4 18.0 Jindal Steel & Power 1,363 Buy 167.4 216.7 239.9 8.1 6.3 5.7 6.1 4.4 4.1 38.6 33.9 27.6 Nalco 168 Buy 19.0 19.6 20.1 8.9 8.5 8.4 4.8 4.4 4.0 27.8 25.9 22.6 SAIL 62 Neutral 16.7 11.4 6.1 3.7 5.5 10.1 2.5 2.8 4.3 66.9 34.0 16.1 Tisco 403 Buy 63.8 79.9 60.3 6.3 5.0 6.7 4.1 2.9 3.9 51.6 42.7 26.2 Sector Aggregate 14.9 15.7 20.7 9.4 9.2 11.8 44.7 32.2 20.8

23 September 2005 147 Results Preview SECTOR: METALS

Hindalco

STOCK INFO. BLOOMBERG BSE Sensex: 8,223 HNDL IN 23 September 2005 Buy REUTERS CODE S&P CNX: 2,478 HALC.BO Previous Recommendation: Buy Rs146

Equity Shares (m) 927.8 YEAR NET SALES PAT EPS EPS P/E P/BV ROE ROCE EV/ EV/ END (RS M) (RS M) (RS) GROWTH (%) (X) (X) (%) (%) SALES EBITDA 52-Week Range 165/107 3/05A 101,055 12,954 13.8 28.9 10.5 1.8 14.6 18.4 1.7 7.0 1,6,12 Rel. Perf. (%) -2/-17/-32 M.Cap. (Rs b) 135.5 3/06E 115,530 16,088 17.2 24.5 8.5 1.6 14.7 19.5 1.4 6.0

M.Cap. (US$ b) 3.1 3/07E 126,365 16,705 17.9 3.8 8.2 1.5 19.5 18.1 1.2 5.7

* Consolidated Numbers, including Indal and Copper Mining Operations

? During 2QFY06, we expect Hindalco to report a net profit of Rs3.7b, largely driven by YoY improvement in aluminium prices. The 2QFY05 reported number of Rs2.7b is not comparable as it does not include consolidation with Indal. ? On a consolidated basis, we expect Hindalco to report a net profit of Rs16.0b in FY06, YoY growth of 25%. This is being largely driven by the copper business – improvement in TC/RC margins and commencement of production from own mines from August 2004. Capacity of copper smelter will double to 500,000 ton by December 2005. ? W.e.f August 2005, Mount Nifty copper mines commenced production at 60,000 ton. Thus, concentrate production would increase from 30,000 ton in FY05 to 80,000 ton in FY06 and 110,000 ton in FY07. The captive mines will enable Hindalco to meet 25% of its concentrate requirements. We note that the profitability per ton for the mining division is six times that of the smelting division. ? The company has just announced a rights issue in the ratio of 1:4, for raising Rs25b and has already announced projects of Rs120b. ? We re-iterate Buy.

QUARTERLY PERFORMANCE (RS MILLION) Y/E MARCH FY05 FY06 * FY05* FY06E* 1Q 2Q 3Q 4Q 1Q 2QE 3QE 4QE Net Sales 16,733 20,460 20,449 25,157 23,152 26,135 27,449 28,952 95,233 105,688 YoY Change (%) 44.3 38.2 23.0 33.3 38.4 27.7 34.2 15.1 53.8 11.0 Total Expenditure 13,003 16,051 15,496 18,872 17,005 20,015 20,975 21,310 72,467 79,305 EBITDA 3,730 4,409 4,953 6,285 6,147 6,120 6,474 7,642 22,766 26,383 Margins (%) 22.3 21.5 24.2 25.0 26.6 23.4 23.6 26.4 23.9 25.0 Depreciation 866 893 898 1,396 951 1,125 1,395 1,498 4,633 4,969 Interest 398 398 414 380 315 452 548 838 1,700 2,153 Other Income 459 1,032 364 750 545 854 415 1,282 2,700 3,096 PBT before EO Expense 2,925 4,150 4,005 5,259 5,426 5,397 4,946 6,588 19,133 22,357 Extra-Ord Expense 0 199 0 91 0 0 0 0 91 0 PBT after EO Expense 2,925 3,951 4,005 5,168 5,426 5,397 4,946 6,588 19,042 22,357 Tax 709 1,207 1,069 1,690 1,100 1,407 1,152 1,139 5,705 4,798 Deferred Tax 263 241 287 -1,007 463 241 375 753 43 1,832 Rate (%) 33.2 36.6 33.9 13.2 28.8 30.5 30.9 28.7 30.2 29.7 Reported PAT 1,953 2,503 2,649 4,485 3,863 3,749 3,419 4,696 13,294 15,727 PAT 1,953 2,629 2,649 3,661 3,863 3,749 3,419 4,696 12,669 15,727 YoY Change (%) 1.2 15.5 35.2 64.8 97.8 42.6 29.1 28.3 51.0 24.1 Margins (%) 11.7 12.8 13.0 14.6 16.7 14.3 12.5 16.2 13.3 14.9 E: MOSt Estimates; *numbers are consolidated with Indal; FY05 first three quarterly numbers are on standalone basis

Satyam Agarwal ([email protected]); Tel: + 91 22 56575353/Nirbhay Mahawar ([email protected]); Tel: +91 22 56575315

23 September 2005 148 Results Preview SECTOR: METALS

Jindal Steel & Power

STOCK INFO. BLOOMBERG BSE Sensex: 8,223 JSP IN 23 September 2005 Buy REUTERS CODE S&P CNX: 2,478 JNSP.BO Previous Recommendation: Buy Rs1,363

Equity Shares (m) 30.8 YEAR NET SALES PAT EPS EPS P/E P/BV ROE ROCE EV/ EV/ END (RS M) (RS M) (RS) GROWTH (%) (X) (X) (%) (%) SALES EBITDA 52-Week Range 1,430/590 3/05A 22,536 5,157 167 58.2 8.1 3.1 38.6 26.4 2.4 6.1 1,6,12 Rel. Perf. (%) 14/5/76 M.Cap. (Rs b) 42.0 3/06E 28,570 6,671 217 29.4 6.3 2.1 33.9 24.9 1.8 4.4

M.Cap. (US$ b) 1.0 3/07E 36,000 7,379 240 10.6 5.7 1.6 27.6 20.3 1.6 4.1

? We expect net sales to grow by 17% to Rs6.9b in 2QFY06, largely driven by volume growth. Sequential drop in realization is likely to be compensated by higher volumes.

? EBITDA is likely to move up by 28% to Rs2.6b. EBITDA margin would increase by 340bp to 38%. Post tax adjusted profit is likely to move up by 8.6% to reach Rs1.4b.

? It is likely to add a sinter plant (2.5m ton) and a coke oven plant (800,000 ton) by the end of March 2006. It will also add a blast furnace of 1.25m ton by September 2006. The company has also made significant progress in its 1,000 MW power plant and placed around 85% of hard asset orders for the plant.

? We expect JSPL to essentially benefit from volume growth. Higher capacities in sponge iron, along with power plant expansion, will result in higher earnings. We expect profits to grow by 29% in FY06 to Rs6.7b. Valuations looks fairly attractive at a P/E of 6.3x and EV/EBITDA of 4.4x FY06E. Considering the re-rating potential of the company, driven by higher revenues and profit from the power segment, we maintain a Buy on the stock.

QUARTERLY PERFORMANCE (RS MILLION) Y/E MARCH FY05 FY06 FY05* FY06E* 1Q 2Q 3Q 4Q* 1Q 2QE 3QE 4QE Net Sales 5,542 5,877 6,429 6,286 6,296 6,857 7,428 7,999 22,536 28,570 YoY Change (%) 84.4 104.9 83.6 45.1 13.6 16.7 15.5 27.3 78.6 108.4 Total Expenditure 3,539 3,843 4,266 3,483 3,627 4,251 4,308 4,480 13,533 16,656 EBITDA 2,003 2,034 2,163 2,804 2,669 2,606 3,120 3,520 9,004 11,914 As % of Net Sales 36.1 34.6 33.6 44.6 42.4 38.0 42.0 44.0 40.0 41.7 Interest 182 160 228 209 241 264 334 344 875 1,175 Depreciation 313 318 333 561 439 410 420 570 1,525 1,800 Other Income 34 39 71 31 27 50 50 50 174.3 200.0 PBT 1,543 1,595 1,673 2,064 2,017 1,982 2,416 2,656 6,778 9,138 Tax 328 263 433 597 545 535 652 717 1,620.6 2,467.4 PAT bef. EO Items 1,215 1,332 1,240 1,467 1,472 1,447 1,764 1,939 5,157 6,671 Effective Tax Rate(%) 21.2 16.5 25.9 28.9 27.0 27.0 27.0 27.0 23.9 27.0 Profit after Tax 1,215 1,332 1,240 1,467 1,472 1,447 1,764 1,939 5,157 6,671 YoY Change (%) 141.5 128.7 54.8 25.6 21.2 8.6 42.2 32.2 71.6 118.4 E: Inquire Estimates; 1QFY05, 1QFY06, FY05 and FY06E numbers are net of inter divisional sales

Nirbhay Mahawar ([email protected]); Tel: +91 22 56575315

23 September 2005 149 Results Preview SECTOR: METALS

Nalco

STOCK INFO. BLOOMBERG BSE Sensex: 8,223 NTAC IN 23 September 2005 Buy REUTERS CODE S&P CNX: 2,478 NALU.BO Previous Recommendation: Buy Rs168

Equity Shares (m) 644.3 YEAR NET SALES PAT EPS EPS P/E P/BV ROE ROCE EV/ EV/ END (RS M) (RS M) (RS) GROWTH (%) (X) (X) (%) (%) SALES EBITDA 52-Week Range 209/135 3/05A 43,006 12,224 19.0 66.2 8.9 2.4 27.8 39.3 2.4 4.8 1,6,12 Rel. Perf. (%) -7/-29/-46 M.Cap. (Rs b) 108.2 3/06E 44,084 12,658 19.6 3.6 8.6 2.0 25.9 35.0 2.2 4.4

M.Cap. (US$ b) 2.5 3/07E 44,766 12,930 20.1 2.1 8.4 1.8 22.6 33.0 2.0 4.0

? During 2QFY06, we expect Nalco to report a net profit of Rs3b, a 10% YoY growth. This is being driven by higher volumes and higher prices for alumina (both spot and contract) and aluminium.

? Nalco benefits from higher alumina contract prices. A large portion of Nalco’s alumina sales (85-90%) are tied to long-term contracts, which provides the company with a hedge against any short-term volatility in prices. The yearly contract prices are linked to six-month average LME aluminium prices. The aluminium realization is, however, fully exposed to LME price movements.

? During FY06, we expect Nalco to report a net profit of Rs12.7b (YoY growth 3.6%). Nalco’s volume growth is limited until the next phase of expansion gets completed. Thus, we believe that the medium term earnings of the company have peaked.

? Nearly 60% of Nalco’s turnover comes from exports and thus it enjoys a marginal tariff protection. We maintain Buy.

QUARTERLY PERFORMANCE (RS MILLION) Y/E MARCH FY05 FY06 FY05 FY06E 1Q 2Q 3Q 4Q 1Q 2QE 3QE 4QE Net Sales 8,223 9,769 10,901 12,331 10,717 11,254 11,152 10,961 41,223 44,084 YoY Change (%) 32.6 21.0 53.2 26.4 30.3 15.2 2.3 -11.1 32.4 6.9 Total Expenditure 3,787 4,657 4,980 6,314 5,672 5,553 5,412 5,424 19,790 22,061 EBITDA 4,436 5,112 5,921 6,017 5,045 5,701 5,740 5,538 21,433 22,024 Margins (%) 54.0 52.3 54.3 48.8 47.1 50.7 51.5 50.5 52.0 50.0 Depreciation 1,131 1,135 1,179 1,198 983 1,202 1,208 1,403 4,642 4,796 Interest 225 173 151 109 0 55 45 98 605 198 Other Income 417 589 408 1,019 406 90 108 110 2,432 714 PBT after EO Expense 3,498 4,393 4,999 5,729 4,469 4,534 4,595 4,147 18,619 17,744 Tax 1,117 1,485 1,694 1,859 1,514 1,365 1,225 332 6,154 4,436 Rate (%) 37.4 37.3 38.8 26.4 37.2 33.5 29.8 12.9 34.3 28.7 PAT 2,190 2,755 3,061 4,218 2,805 3,016 3,225 3,612 12,224 12,658 YoY Change (%) 85.1 47.2 83.2 60.4 28.1 9.5 5.4 -14.4 66.2 3.6 E: MOSt Estimates; Quarterly numbers are on standalone basis

Satyam Agarwal ([email protected]); Tel: + 91 22 56575353/Nirbhay Mahawar ([email protected]); Tel: +91 22 56575315

23 September 2005 150 Results Preview SECTOR: METALS

Steel Authority of India

STOCK INFO. BLOOMBERG BSE Sensex: 8,223 SAIL IN 23 September 2005 Neutral REUTERS CODE S&P CNX: 2,478 SAIL.BO Previous Recommendation: Neutral Rs62

Equity Shares (m) 4,130.4 YEAR NET SALES PAT EPS EPS P/E P/BV ROE ROCE EV/ EV/ END (RS M) (RS M) (RS) GROWTH (%) (X) (X) (%) (%) SALES EBITDA 52-Week Range 70/39 3/05A 283,449 67,730 16.7 173.4 3.8 2.5 66.9 54.9 0.9 2.5 1,6,12 Rel. Perf. (%) -6/-30/-8 M.Cap. (Rs b) 257.7 3/06E 284,817 46,948 11.4 -31.9 5.5 1.9 34.0 37.6 0.8 2.9 M.Cap. (US$ b) 5.9 3/07E 254,769 25,397 6.1 -45.9 10.1 1.7 16.1 19.7 0.7 4.3

? We expect net sales to grow by 4% YoY to Rs69.6b in 2QFY06. Revenue growth would be driven by 9% increase in YoY volumes. Realization will decline by 5% YoY and 14% sequentially.

? EBITDA margins for the quarter are likely to decline by 6.5% to 24.8%, largely driven by lower realizations and cost push due to increase in coking coal prices.

? Post-tax adjusted profit is likely to decline by 34% to Rs10b.

? For FY06, we expect a post tax profit of Rs46.9b (YoY decline of 31.1%). We are projecting an EPS of Rs11.4.

? The stock trades at 5.5x FY06E EPS and 2.9x FY06E EV/EBITDA. We maintain Neutral.

QUARTERLY PERFORMANCE (RS MILLION) Y/E MARCH FY05 FY06 FY05 FY06E 1Q 2Q 3Q 4Q 1Q 2QE 3QE 4QE Sales (‘000 ton) 1,950,000 2,560,000 2,880,000 3,330,000 1,870,000 2,800,000 3,200,000 3,300,000 10,720,000 11,170,000 Change (%) -13.3 1.6 -1.4 21.5 -4.1 9.4 11.1 -0.9 2.8 4.2 Net Sales 52,709 67,041 77,691 93,703 53,986 69,635 79,583 81,613 291,144 284,817 Change (%) 23.9 32.2 31.9 38.2 2.4 3.9 2.4 -12.9 36.7 -2.2 Total Expenditure 36,560 46,037 46,603 68,782 34,074 52,360 58,560 60,060 183,043 205,054 As a % of Net Sales 69.4 68.7 60.0 73.4 63.1 75.2 73.6 73.6 62.9 72.0 EBITDA 16,149 21,004 31,089 24,921 19,912 17,275 21,023 21,553 108,101 79,763 Change (%) 108.7 110.9 149.7 66.1 23.3 -17.8 -32.4 -13.5 167.7 -26.2 As % of Net Sales 30.6 31.3 40.0 26.6 36.9 24.8 26.4 26.4 37.1 28.0 Interest 1,868 852 1,755 1,574 1,297 858 830 830 6,050 3,815 Depreciation 2,789 2,773 2,868 2,839 2,839 2,990 2,990 3,000 11,270 11,200 Other Income 562 853 642 816 1,239 1,250 1,250 1,380 2,872 4,500 PBT 12,053 18,231 27,107 21,324 17,015 14,677 18,453 19,103 93,653 69,248 Total Tax 937 3,100 11,964 9,483 5,731 4,697 5,905 6,113 25,484 22,298 % Tax 7.8 17.0 44.1 44.5 33.7 32.0 32.0 32.0 27.2 32.2 Reported PAT 11,116 15,132 15,143 11,841 11,283 9,980 12,548 12,990 68,169 46,950 E: MOSt Estimates; Quarterly results don’t add up with full year results due to restating of past quarter results.

Nirbhay Mahawar ([email protected]); Tel: +91 22 56575315

23 September 2005 151 Results Preview SECTOR: METALS

Tisco

STOCK INFO. BLOOMBERG BSE Sensex: 8,223 TISCO IN 23 September 2005 Buy REUTERS CODE S&P CNX: 2,478 TISC.BO Previous Recommendation: Buy Rs403

Equity Shares (m) 553.7 YEAR NET SALES PAT EPS EPS P/E P/BV ROE ROCE EV/ EV/ END (RS M) (RS M) (RS) GROWTH (%) (X) (X) (%) (%) SALES EBITDA 52-Week Range 447/273 3/05A 144,989 35,336 63.8 95.5 6.3 3.3 51.6 46.7 1.7 4.1 1,6,12 Rel. Perf. (%) -3/-29/-8 M.Cap. (Rs b) 223.2 3/06E 167,441 44,243 79.9 25.2 5.0 2.2 42.7 47.2 1.3 3.1 M.Cap. (US$ b) 5.1 3/07E 154,256 33,404 60.3 -24.5 6.7 1.8 26.2 30.1 1.4 3.8

* Adjusted for 1:2 bonus shares issue

? We expect net sales to grow by 11.4% to Rs41.6b in 2QFY06. Revenue growth would be driven by a 17.3% increase in sales volume. Realization is likely to decline by 3.1% YoY and 11.3% QoQ.

? EBITDA margins for the quarter are likely to decline by 100bp to 42.6%, largely on account of a decline in realization.

? The company has completed the first phase of expansion and its 0.6m ton rebar mill facility has been commissioned in September 2005.

? Post-tax adjusted profit is likely to move up by 13% YoY to Rs10.7b. For the full year, FY06, we expect a post-tax profit of Rs44.2b (24.4% growth), which translates into an EPS of Rs79.9.

? The stock trades at 5x FY06E EPS and an EV of 3.1x FY06E EBITDA. We re-iterate Buy.

QUARTERLY PERFORMANCE (RS MILLION) Y/E MARCH FY05 FY06 FY05 FY06E 1Q 2Q 3Q 4Q 1Q 2QE 3QE 4QE Sales (ton) 882,750 1,022,845 997,592 1,010,336 854,238 1,200,000 1,250,000 1,400,000 3,913,372 4,704,238 Change (%) 0.3 -2.1 1.5 -3.9 -3.2 17.3 25.3 38.6 -1.2 20.2 Net Sales 31,647 37,383 37,313 38,647 34,645 41,641 43,216 47,939 144,989 167,441 Change (%) 40.2 43.1 41.8 20.8 9.5 11.4 15.8 24.0 35.5 47.2 EBITDA 14,020 16,289 15,716 14,429 15,882 17,731 18,441 20,469 60,455 72,523 As % of Net Sales 44.3 43.6 42.1 37.3 45.8 42.6 42.7 42.7 41.7 43.3 Interest 490 475 809 94 342 342 342 342 1,868 1,584 Depreciation 1,576 1,595 1,495 1,522 1,706 1,706 1,706 1,706 6,188 6,788 Other Income 275 570 338 297 303 303 303 303 1,480 1,850 Extra-ordinary Exp. 243 258 22 383 296 296 296 296 905 1,183 PBT 11,986 14,532 13,727 12,728 13,842 15,691 16,401 18,429 52,974 64,819 Tax 4,531 5,237 4,822 3,642 4,601 5,215 5,445 6,118 18,231 21,368 Effective Tax Rate (%) 37.8 36.0 35.1 28.6 33.2 33.2 33.2 33.2 34.4 33.0 PAT 7,455 9,296 8,905 9,086 9,241 10,476 10,956 12,310 34,742 43,450 Change (%) 179.2 130.6 99.2 44.5 24.0 12.7 23.0 35.5 99.0 24.3 Adjusted PAT 7,606 9,460 8,920 9,359 9,439 10,673 11,153 12,508 35,336 44,243 Change (%) 142.0 134.1 96.2 47.3 24.1 12.8 25.0 33.6 95.5 24.4 E: MOSt Estimates

Nirbhay Mahawar ([email protected]); Tel: +91 22 56575315

23 September 2005 152 Results Preview

QUARTER ENDING SEPTEMBER 2005

Oil & Gas

BSE Sensex: 8,223 S&P CNX: 2,478 23 September 2005

COMPANY NAME PG. Refining thrives, oil marketing subdued YoY Comparative (v/s 2QFY05) Bongaigaon Refinery 162 ? Benchmark Singapore refining complex margins increase by 16% at US$7.67/bbl

BPCL 163 ? Brent average up 48% at US$61.5/bbl v/s US$41.5/bbl ? Lowest ever auto fuel marketing margins Chennai Petroleum 164 ? Margins -ve Rs3/litre and -ve Rs1.8/litre for diesel and petrol, respectively, as against Rs0.2/litre and Rs1.1/litre, respectively GAIL (India) 165 ? LPG/kerosene losses up 24.7% at Rs52.4b HPCL 166 ? Inventory gains of Rs18b as against Rs14.2b last year ? Petrochemical margin (ethylene cracker) down 30% at Rs44/kg IOC 167

IPCL 168 QoQ Comparative (V/s 1QFY06) ? Benchmark refining margins up 7% ONGC 169 ? Brent average up 19% ? Auto fuel marketing margins at their worst ever Reliance Industries 170 ? Margins -ve Rs3/litre and -ve Rs1.8/litre for diesel and petrol as against –ve Rs1.8/ litre and Rs0.9/litre, respectively ? LPG/kerosene losses up 10.3%; Petrol / diesel loss up 21% ? Inventory gains of Rs18b as against Rs2b last quarter ? Petrochemical margin (ethylene cracker) down 10%

Factors to watch out for ? Government announcement on new loss sharing formula not accounted for in our 2QFY06 estimates, pending parliament clearance on budgetary support. Potential for positive surprise.

EXPECTED QUARTERLY PERFORMANCE SUMMARY (RS MILLION)

RECO SALES EBITDA NET PROFIT SEP.05 CHG. (%) SEP.05 CHG. (%) SEP.05 CHG. (%) Oil & Gas Bongaigaon Neutral 14,185 12.6 1,425 -40.0 2,272 41.2 BPCL Buy 219,453 48.5 -4,483 -195.3 -5,593 -274.0 Chennai Petroleum Buy 63,525 95.0 4,843 68.1 2,737 114.2 GAIL Under Review 37,191 5.5 8,100 -7.7 5,231 14.7 HPCL Buy 195,029 29.2 378 -93.8 -1,072 -136.4 IOC Buy 465,799 31.3 8,415 -54.8 3,767 -69.6 IPCL Buy 21,080 15.9 3,850 4.3 1,975 43.1 ONGC Buy 123,882 4.8 65,621 3.2 36,840 8.9 Reliance Buy 194,300 20.2 38,400 21.1 23,901 36.4 Sector Aggregate 1,334,443 29.3 126,549 -11.2 70,056 -11.0

Varatharajan S ([email protected]); Tel: +91 22 56575317

23 September 2005 153 Oil & Gas

Price and margin trends

Refining margins: Hurricanes push up September margins to new high 2QFY06: highlights ? Up 16% YoY at US$7.67/bbl (v/s US$6.61/bbl in 2QFY05) ? Up 7% QoQ (v/s US$7.17/bbl in 1QFY06)

Singapore margins hit a new monthly high of US$10.3/bbl in September, thanks to hurricanes Katarina and Rita. The average for 2QFY05 was US$7.67/bbl, bettering US$7.17/bbl in 1QFY06. The hurricanes boosted margins to a new high just when some fatigue appeared to be setting in, attempting to squeeze margins. Gasoline spreads, recorded a new high of over US30/bbl, while other distillates too strengthened significantly, thanks to over 2.2m bpd of refining capacity rendered inoperative by the hurricane. Refining margins are likely to remain strong for 45–60 days more as the capacities re-start normal operations.

This spike is set to push the annual average well over US$8/bbl this fiscal as against US$6.8/bbl in FY05. Standalone refiners Reliance, Chennai Petro and BRPL are key beneficiaries apart from the refining operations of oil marketing companies.

SINGAPORE REFINING MARGIN: BACK ON TOP

US$/bbl Monthly Quarterly 12

9

6

3

0 Jun-03 Oct-03 Jun-04 Oct-04 Jun-05 Apr-03 Feb-04 Apr-04 Feb-05 Apr-05 Dec-03 Dec-04 Aug-03 Aug-04 Aug-05

Source: IEA/MOSt

Crude prices: New high every time ? Up 48% YoY at US$61.5/bbl (vs. 41.5 US$/bbl in 2QFY05) ? Up 19% QoQ (vs. 51.6 US$/bbl in 1QFY06)

Crude prices once again created a new peak, on the back of the hurricane threat and lack of refining capacity. Global demand growth for 2005 is now estimated at 83.5 bpd, up 1.35m bpd YoY (IEA, September 2005, Oil Market Report). Given the continued strength in prices, we have revised our Brent prices for FY06 up to US$56/bbl from US$48/bbl. We expect prices to pull back significantly post winter stocking late in November 2005. However, a repeat of last year’s performance, when prices bounced back in the new year is not ruled out.

23 September 2005 154 Oil & Gas

BRENT CRUDE PRICE: NEW HIGH EVERY TIME (US$/BBL)

70

60

50

40

30

20 Jun-03 Sep-03 Dec-03 Mar-04 Jun-04 Sep-04 Dec-04 Mar-05 Jun-05 Sep-05

Source: Bloomberg/MOSt

Marketing margins: Déjà Vu 2QFY06: highlights ? Diesel margins at -ve Rs1.90/litre as against -ve Rs0.8/litre last year, petrol margins -ve Rs0.80/litre as against Rs Nil/litre last year ? Previous quarter margins were: Diesel Rs1.8/litre, petrol Rs1.8/litre

Marketing margins hit a new low as the ‘by now familiar’ phenomenon of high global prices, but sluggish domestic prices, pushed margin down. Benchmark Asian prices for diesel were up 17% sequentially, while petrol was up 27% during the quarter. However, the government allowed a measly Rs2.5/litre and Rs2/litre increase in retail prices of petrol and diesel, respectively, late in the quarter.

Nevertheless, there is some good news as huge losses on petrol/diesel forced the government to share 1/3rd of the losses. So the new formula of 1/3rd upstream, 1/3rd government (along with some price discount from standalone refiners) and 1/3rd oil marketing companies replaces the existing system, which required oil marketing companies to bear 2/3rd of the losses.

However, the policy has not spelt what would happen if international prices come down significantly, thus pushing marketing margins into positive territory. However, what is clear is that, if prices remain at the same level as that in the second fortnight of August 2005, no further retail price increase would be permitted. This would push petrol and diesel margins deep in the red, with losses for FY06 amounting to over Rs20b. However, we currently expect marketing margins to turn positive in 3QFY06.

23 September 2005 155 Oil & Gas

LPG/kerosene losses: a new high 2QFY06: highlights ? Up 35% YoY at Rs55.1b (v/s Rs40.9b in 2QFY05) ? Up 16% QoQ (v/s Rs47.5b in 1QFY06)

LPG/kerosene losses were up 17% YoY, thanks to historic high crude prices. However, a cut in import as well as excise duties to zero, effected in the last budget, has reduced the leverage, thus softening the blow significantly. The new loss sharing formula brings in the government, which would share 1/3rd losses, reducing burden on oil marketing companies from 2/3rd to 1/3rd. This is a huge relief for oil marketing companies.

LPG/KEROSENE: LOSSES: LOSSES CONTINUE TO MOUNT (RS B)

60 52.3 55.1 46.7 47.5 40.9 45 37.5 33.9

30 18.2 16 15 15

0 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2QE

FY04 FY05 FY06

Sources: Company/MOSt

Inventory gains/(losses): spike in crude delivers gains A sharp spike in international crude prices early in the quarter is set to deliver gains for oil companies. However, the relatively low inventory levels maintained by oil marketing companies, thanks to the working capital squeeze on account of high prices as well as considerable volatility, would limit the gains.

INVENTORY GAINS ESTIMATES (RS M)

1QFY05 2QFY05 3QFY05 4QFY05 FY05 1QFY06 2QFY06 IOC 3,000 6,060 3,360 10,000 22,420 1,380 8,000 HPCL 1,700 4,000 0 6,500 12,200 300 4,500 BPCL 1,700 3,800 -1,000 2,500 7,000 300 5,000 IBP 150 350 -150 450 800 - 400 Industry Total 6,550 14,210 2,210 22,950 45,920 1,980 17,900 Source: Company/MOSt

23 September 2005 156 Oil & Gas

Petrochemical margins – on recovery path Ethylene cracker margins, proxy for petrochemical margins, were down YoY, but flat sequentially. After significant weakness between May–July 2005, prices and margins picked up responding to seasonal demand.

While large ethylene capacity addition in CY06 appears to be creating some doubt about the prospects for the petrochemical cycle, demand growth appears to be sticking. Large Iranian capacity additions (over 4m ton of the 7m ton of expected addition) are expected to be delayed into CY07, which currently has just about 2m ton of scheduled capacity addition. This, we believe, would even out the demand-supply growth mismatch during that period. We believe, petrochemical margins are set to improve from current levels, though it remains to be seen if the CY04 highs would be bettered.

Polyester stand-alone margins turned weak again after a brief period of promise, as expected. However, integrated polyester margins are better off, with PSF margins falling 11% YoY and 18% sequentially. Large polyester overcapacity in China continues to hurt the market. We expect higher textile trade to remove the polyester glut, driving margin improvement over the next 18-24 months.

ETHYLENE CRACKER MARGINS: RECOVERING FROM RECENT LOWS (RS/KG)

80 Monthly Quarterly

65

50

35

20 Jun-03 Sep-03 Dec-03 Mar-04 Jun-04 Sep-04 Dec-04 Mar-05 Jun-05 Sep-05

Sources: Industry, Asian Chemical News, MOSt

23 September 2005 157 Oil & Gas

Factors to watch out for ? The government has announced a new loss sharing formula bringing in budgetary support in the form of a 1/3rd sharing by the government, which would include about Rs15b of product price discounts from standalone refiners. However, we have not accounted for the same in our 2QFY06 estimates, since the scheme requires Parliament approval. Possible announcement before declaration of 2QFY06 results would be a positive surprise in the case of oil marketing companies.

Valuation and view Reliance is our top pick in the Oil & Gas / Petrochemical space. Refining margins have hit a new high, thanks to the hurricane in the US, which put almost 2.2m bpd of capacity out of action. Over 1.1m bpd of capacity is expected to take more than two months to restart operations, which is likely to keep refining margins strong during that period. Petrochemical margins have recovered significantly, from the lows of May–June 2005. We believe the petrochemical cycle peak is still 18–24 months away, despite over 7m ton of additional ethylene capacity scheduled to be added in 2006. We believe, delays in project implementation would sustain the current demand-supply balance. Value unlocking of Reliance’s investment is likely to be the near-term catalyst for stock performance. We re-iterate our Buy recommendation with an SOTP-based target price of Rs903/share, an upside of 21%. We believe, the stock price is yet to reflect the new gas discoveries at Mahanadhi basin, CBM and additional discoveries in KG basin. We value the new reserves at Rs79/share. However, this is not built into our target price.

We have upgraded IPCL to a Buy from Neutral, with a target price of Rs291/share, an upside of 41% from current levels. We believe additional domestic gas supply from PMT (Panna Mukta Tapti) would replace expensive propane providing significant earnings upside, more than offsetting the gas price increase impact. Gas supply constraint was also a critical growth constraint, which is now removed. Our analysis shows that IPCL’s gas cracker economics would remain superior to naphtha crackers, in the medium to long term as gas prices in the country are not likely to reach parity with crude at least for the next 5– 7 years. We have revised the EPS estimates up 64% to account for the savings from additional domestic gas supply in FY07.

The new loss sharing formula announced by the government is a huge positive for ONGC. The spectre of possible increase in ONGC’s share in losses, if losses continue to mount, was a key concern. However, with the latest announcement, this concern is reduced significantly. According to the new formula, the government would bear 1/3rd of the losses, which were hitherto being borne by oil marketing companies. This reduces the burden on oil marketing companies significantly and in turn reduces the possibility of additional burden being passed on to ONGC.

23 September 2005 158 Oil & Gas

We have revised our estimates up by 9% in FY07, due to the revision of our crude price assumptions and to reflect the new loss sharing formula. While we have assumed a Brent price of US$56/bbl, we have built in a highly conservative loss share of Rs115b, which reflects losses corresponding to a crude price of US$65/bbl.

OVL has acquired 30% stake in highly prospective Cuban fields. This is in line with our investment argument. OVL has emerged as the key growth driver for ONGC. We re- iterate our Buy recommendation, with a DCF based SOTP target price of Rs1,255/share, an upside of 26% from current levels.

Oil marketing companies remain significant underperformers in the sector, thanks to a very sticky retail autofuel pricing regime and historic high crude prices. We expect the oil marketing companies to book losses in 2QFY06 too, as the additional budgetary support to fuel losses is not likely to be sanctioned before the results. The decision requires parliamentary approval. However, the announcement improves the comfort level significantly, as the loss burden is reduced by half. Further spike in crude prices continue to remain the key risk. However, we believe the downside to stock price from the current level is limited as all the bad news is already in the prices. On the other hand, significant upside is possible if crude prices settle lower, in a repeat of 4QFY05 phenomenon. We maintain our Buy recommendation on BPCL, HPCL and IOC.

We are revising down the EPS estimates of BPCL, HPCL and IOC to reflect the losses in the first two quarters of the year, while accounting for the government contribution towards loss sharing flowing in from 3QFY06. However, our estimate of LPG/kerosene and MS/ HSP losses is lower at Rs300b as against government estimate of over Rs400b for FY06. We have assumed 1/3rd loss sharing by the government covering the product price discount offered by standalone refiners.

Refining margins hit a new monthly high in September, with Singapore margins piercing the earlier peak of US$10.2/bbl mark, on the back of hurricane hit capacity shutdowns in the US. We expect margins to remain strong till US capacities restart in 45–60 days time. Standalone refiners Chennai Petro and BRPL along with Reliance are well placed to ride the refining margin cycle. The loss sharing burden on refiners has been limited to Rs15– 27b, to be passed on as discounts on product prices. This is lower than expected and a significant positive. Merger announcement continues to be the key overhang on the stocks. We are downgrading BRPL to Neutral following the merger announcement, while we maintain our Buy recommendation on Chennai Petro.

GAIL’s long-term growth prospects remain bright. Implementation of Dahej-Uran pipeline should provide near-term earnings growth. Change in depreciation policy is a positive as it is more in tune with reality, while reduction in loss sharing burden is set to boost profits. Gas price increase has affected petrochemical and LPG business profitability to some

23 September 2005 159 Oil & Gas

extent. However, possible pipeline transmission tariff cut of 45% could pull earnings down by about 25%. While reduction of LPG / kerosene loss sharing burden could provide some earnings upside, it would not be in a position to compensate fully for the transmission tariff losses. Our rating for GAIL is under review.

REVISED ESTIMATES (RS B) FY06 ESTIMATES FY07 ESTIMATES OLD NEW CH. (%) OLD NEW CH. (%) Bongaigaon Sales 43.2 50.8 18.0 33.7 34.1 1.0 Net Profit 6.1 6.6 7.0 5.9 6.2 6.6 EPS (Rs) 30.8 32.8 29.3 31.3 BPCL Sales 788.4 765.5 -2.9 600.3 588.6 -1.9 Net Profit 17.4 14.0 -19.8 22.9 19.4 -15.6 EPS (Rs) 58.1 46.6 76.4 64.5 Chennai Petro Sales 191.6 236.5 23.0 177.1 183.2 3.4 Net Profit 7.6 9.2 20.0 7.5 7.5 0.0 EPS (Rs) 51.2 61.7 50.3 50.3 GAIL Sales 146.7 146.7 0.0 146.7 146.7 0.0 Net Profit 16.2 18.5 14.4 14.2 17.3 21.9 EPS (Rs) 19.1 21.9 16.8 20.4 HPCL Sales 757.4 748.6 -1.2 690.7 683.2 -1.1 Net Profit 15.0 12.7 -15.9 18.5 17.6 -4.7 EPS (Rs) 44.4 37.3 54.6 52.0 IOC Sales 2,007.0 2,014.9 0.4 1,686.8 1,689.6 0.2 Net Profit 63.9 62.6 -2.1 85.6 84.2 -1.6 EPS (Rs) 54.7 53.6 73.3 72.1 IPCL Sales 83.8 84.2 0.4 79.6 79.7 0.0 Net Profit 7.3 8.3 13.7 5.5 9.0 63.6 EPS (Rs) 29.3 33.3 22.2 36.3 ONGC Sales 744.2 753.4 1.2 759.9 796.7 4.8 Net Profit 206.0 206.6 0.3 208.1 226.8 9.0 EPS (Rs) 144.5 144.9 145.9 159.1 Source: Motilal Oswal Securities

23 September 2005 160 Oil & Gas

Stock performance and valuations

STOCK PERFORMANCE (%)

ABSOLUTE PERF REL PERF TO SENSEX REL PERF TO SECTOR 3 M 1 YEAR 3 M 1 YEAR 3 M 1 YEAR Oil & Gas B P C L 9 14 -6 -35 2 -15 Bongaigaon Ref. -17 12 -33 -37 -25 -17 Chennai Petroleu 27 40 11 -9 19 11 GAIL (India) 13 30 -2 -18 6 2 H P C L -3 -4 -19 -52 -11 -32 I P C L 24 0 8 -48 16 -28 Indian Oil 2 1 -13 -47 -5 -28 O N G C 4 34 -12 -14 -4 6 Reliance Inds. 15 50 0 1 7 21

RELATIVE PERFORMACE - 3 MONTHS (%) RELATIVE PERFORMANCE - 1 YEAR (%)

Sensex MOSt Oil & Gas Index MOSt Oil & Gas Index Sensex 120 160

110 130

100

100 90

80 70 Jun-05 Jul-05 Aug-05 Sep-05 Sep-04 Dec-04 Mar-05 Jun-05 Sep-05

COMPARATIVE VALUATION CMP (RS) RECO EPS (RS) P/E (X) EV/EBITDA ROE (%) 23.9.05 FY05A FY06E FY07E FY05A FY06E FY07E FY05A FY06E FY07E FY05A FY06E FY07E Oil & Gas Bongaigaon 78 Neutral 23.9 32.8 31.3 3.3 2.4 2.5 5.8 2.7 1.1 69.5 62.4 42.0 BPCL 399 Buy 51.4 46.6 64.5 7.8 8.6 6.2 4.5 4.5 3.1 21.6 17.2 21.4 Chennai Petroleum 243 Buy 40.1 61.7 50.3 6.1 3.9 4.8 4.6 2.6 2.4 33.0 39.3 25.7 GAIL 250 UR 23.0 21.9 20.4 10.8 11.4 12.2 5.9 6.5 6.0 23.9 19.9 16.6 HPCL 307 Buy 37.7 37.3 52.0 8.1 8.2 5.9 5.5 4.6 2.9 15.8 14.4 18.3 IOC 440 Buy 46.8 53.6 72.1 9.4 8.2 6.1 6.6 5.5 3.8 20.5 19.2 21.1 IPCL 207 Buy 31.6 33.3 36.3 6.6 6.2 5.7 3.7 3.2 2.3 30.3 25.2 22.2 ONGC 990 Buy 100.6 144.9 159.1 9.8 6.8 6.2 5.0 3.7 3.4 32.4 38.3 33.6 Reliance 748 Buy 54.3 66.2 64.9 13.8 11.3 11.5 9.4 7.9 7.5 20.2 20.7 17.3 Sector Aggregate 10.3 8.1 7.3 6.3 5.0 4.1 24.8 26.2 24.2

23 September 2005 161 Results Preview SECTOR: OIL & GAS

Bongaigaon Refinery & Petrochemicals

STOCK INFO. BLOOMBERG BSE Sensex: 8,223 BRPL IN 23 September 2005 Neutral REUTERS CODE S&P CNX: 2,478 BNGR.BO Previous Recommendation: Buy Rs78

Equity Shares (m) 199.8 YEAR NET SALES PAT EPS EPS P/E P/BV ROE ROCE EV/ EV/ END (RS M) (RS M) (RS) GROWTH (%) (X) (X) (%) (%) SALES EBITDA 52-Week Range 107/68 3/05A 41,149 4,783 23.9 57.5 3.3 1.9 69.5 25.0 0.4 5.8 1,6,12 Rel. Perf. (%) -9/-37/-37 M.Cap. (Rs b) 15.6 3/06E 50,805 6,555 32.8 37.1 2.4 1.2 62.4 28.9 0.2 2.7

M.Cap. (US$ b) 0.4 3/07E 34,066 6,247 31.3 -4.7 2.5 0.9 42.0 21.8 0.1 1.1

? We expect BRPL to post a net profit of Rs2.3b, up 41% YoY, driven by strong refining margins, higher crude prices and higher excise duty benefits.

? We estimate BRPL’s 2QFY06 gross refining margin (GRM) at US$12/bbl.

? We estimate BRPL’s share in LPG / kerosene loss sharing at Rs0.5b. There could be another Rs0.4b of discounts on petrol and diesel. However, these together are still well below expectations and hence positive.

? The stock trades at 2.4x FY06E earnings. However, the swap ratio of merger with IOC is not likely to favor BRPL. We are downgrading the stock to Neutral. Cheap valuation and dividend yield are downside risks.

QUARTERLY PERFORMANCE (RS MILLION) Y/E MARCH FY05 FY06 FY05 FY06E 1Q 2Q 3Q 4Q 1Q 2QE 3QE 4QE Gross Sales 10,640 12,593 12,995 13,675 14,876 14,185 11,908 11,472 49,903 52,442 Change (%) 83.8 59.2 61.6 50.7 39.8 12.6 -8.4 -16.1 61.9 5.1 Raw Material Consumed 7,156 8,628 9,424 9,510 11,333 11,553 9,833 9,492 34,718 42,211 Staff Cost 199 213 217 415 256 210 210 306 1,044 982 Other Exp (incl Stock Adj) 1,314 1,375 1,434 3,140 2,220 997 630 661 7,263 4,507 EBITDA 1,972 2,376 1,920 610 1,067 1,425 1,235 1,014 6,878 4,741 % of Net Sales 18.5 18.9 14.8 4.5 7.2 10.0 10.4 8.8 13.8 9.0 Change (%) 329.9 98.4 34.6 48.6 -45.9 -40.0 -35.7 66.2 96.9 -31.1 Depreciation 81 99 79 82 82 125 124 121 342 452 Interest 15 5 15 2 16 15 15 15 36 61 Other Income 50 55 59 108 60 2,011 1,796 1,446 273 5,314 PBT 1,925 2,328 1,885 634 1,030 3,297 2,892 2,324 6,772 9,543 Tax 603 719 549 118 337 1,025 901 725 1,989 2,988 Rate (%) 31.3 30.9 29.1 18.6 32.7 31.1 31.1 31.2 29.4 31.3 PAT 1,323 1,609 1,336 516 693 2,272 1,992 1,599 4,783 6,555 Change (%) 54.0 53.2 40.4 191.3 -47.6 41.2 49.1 210.0 57.5 37.1 E: MOSt Estimates

Varatharajan S ([email protected]); Tel: +91 22 56575317

23 September 2005 162 Results Preview SECTOR: OIL & GAS

BPCL

STOCK INFO. BLOOMBERG BSE Sensex: 8,223 BPCL IN 23 September 2005 Buy REUTERS CODE S&P CNX: 2,478 BPCL.BO Previous Recommendation: Buy Rs399

Equity Shares (m) 300.0 YEAR NET SALES PAT EPS EPS P/E P/BV ROE ROCE EV/ EV/ END * (RS M) (RS M) (RS) GROWTH (%) (X) (X) (%) (%) SALES EBITDA 52-Week Range 475/336 3/05A 644,268 15,411 51.4 -24.2 7.8 1.5 21.6 29.2 0.4 4.5 1,6,12 Rel. Perf. (%) 3/-21/-35 M.Cap. (Rs b) 119.6 3/06E 765,490 13,979 46.6 -9.3 8.6 1.4 17.2 24.7 0.3 4.5

M.Cap. (US$ b) 2.7 3/07E 588,609 19,362 64.5 38.5 6.2 1.3 21.4 32.5 0.4 3.1

* Consolidated

? We forecast a net loss of Rs5.6b in 1QFY06, driven by negative marketing margins on petrol and diesel together with significant LPG / kerosene losses.

? BPCL would not be in a good position to leverage the refining margin spike during the quarter on account of the shutdown of secondary processing units and lower throughput as it commissioned its 3m ton refinery expansion and modernization.

? We estimate inventory gains of Rs5b, despite low inventories, thanks to a sharp spike in crude price.

? GrossLPG/kerosene losses at Rs13.1b, up 64% YoY.

? On a consolidated basis, the stock quotes at 8.6x FY06E earnings and 1.4x FY06E book value. It offers a dividend yield of 3.5%. We maintain Buy.

QUARTERLY PERFORMANCE (STANDALONE) (RS MILLION) Y/E MARCH FY05 FY06 FY05 FY06E 1Q 2Q 3Q 4Q 1Q 2QE 3QE 4QE Gross Sales 145,639 147,764 173,795 171,372 171,185 219,453 190,807 174,936 638,570 756,380 Change (%) 18.2 22.7 26.3 11.8 -1.5 28.1 -60.7 -67.3 19.5 18.4 Raw Material Consumed 27,493 34,732 36,964 38,339 35,794 52,641 39,780 38,177 137,528 166,393 Staff Cost 1,871 1,601 1,443 2,632 1,818 1,800 1,800 2,159 7,932 7,577 Fininshed Goods Purchase 90,886 95,663 108,623 112,255 109,992 155,480 117,263 111,700 407,427 494,435 Other Exp (incl Stock Adj) 21,540 11,062 23,461 13,283 21,245 19,553 16,111 17,219 69,346 74,129 EBITDA 3,849 4,706 3,304 4,863 -3,203 -4,483 15,852 5,680 16,337 13,846 Change (%) -29.9 -37.1 -60.5 -30.7 -183.2 -195.3 379.8 16.8 -42.4 -15.2 % of Net Sales 2.6 3.2 1.9 2.8 -1.9 -2.0 8.3 3.2 2.6 1.8 Depreciation 1,536 1,625 1,387 1,412 1,525 1,460 1,460 1,517 5,960 5,962 Interest 226 377 379 416 404 450 450 429 1,398 1,733 Other Income 548 2,007 602 1,427 826 800 1,774 584 4,584 3,984 PBT 2,635 4,711 2,140 4,462 -4,306 -5,593 15,716 4,318 13,563 10,135 Tax 777 1,497 683 948 -17 0 2,474 697 3,905 3,154 Rate (%) 29.5 31.8 31.9 21.2 0.4 0.0 15.7 16.1 28.8 31.1 PAT 1,858 3,214 1,457 3,514 -4,289 -5,593 13,242 3,621 9,658 6,981 Change (%) -41.8 -32.6 -69.9 -15.1 -330.8 -259.2 5.9 -78.6 -43.0 -27.7 E: MOSt Estimates

Varatharajan S ([email protected]); Tel: +91 22 56575317

23 September 2005 163 Results Preview SECTOR: OIL & GAS

Chennai Petroleum Corporation

STOCK INFO. BLOOMBERG BSE Sensex: 8,223 MRL IN 23 September 2005 Buy REUTERS CODE S&P CNX: 2,478 CHPC.BO Previous Recommendation: Buy Rs243

Equity Shares (m) 149.0 YEAR NET SALES PAT EPS EPS P/E P/BV ROE ROCE EV/ EV/ END (RS M) (RS M) (RS) GROWTH (%) (X) (X) (%) (%) SALES EBITDA 52-Week Range 272/161 3/05A 162,959 5,970 40.1 49.2 6.1 1.8 33.0 22.6 0.3 4.6 1,6,12 Rel. Perf. (%) 12/-14/-9 M.Cap. (Rs b) 36.2 3/06E 236,503 9,193 61.7 54.0 3.9 1.4 39.3 32.0 0.2 2.6

M.Cap. (US$ b) 0.8 3/07E 183,199 7,488 50.3 -18.5 4.8 1.1 25.7 26.0 0.2 2.4

? We expect a net profit of Rs2.6b in 2QFY06, up % YoY, driven by volume growth and refining margin improvement.

? Gross refining margins are estimated at US$7.25/bbl as against US$6.5/bbl last year, thanks to the sharp spike in Singapore refining margins.

? Crude throughput is likely to rise to 2.65m ton, up 33% YoY, on account of the new capacity.

? Product price discount on LPG / kerosene and potential discount burden on petrol and diesel are well below expectation and hence positive for Chennai Petro.

? The stock trades at 3.9x FY06E earnings. We recommend Buy.

QUARTERLY PERFORMANCE (RS MILLION) Y/E MARCH FY05 FY06 FY05 FY06E 1Q 2Q 3Q 4Q 1Q 2QE 3QE 4QE Gross Sales 30,240 32,585 47,374 52,760 56,749 63,525 59,605 56,625 162,959 236,503 Change (%) 38.7 58.6 98.5 121.0 87.7 95.0 25.8 7.3 71.3 45.1 Raw Materials Cons 24,473 28,367 37,531 37,682 42,832 46,252 45,288 43,361 128,054 177,733 Employee Costs 194 211 241 290 221 300 300 327 936 1,148 Other Exp (incl Stock Adj) 2,309 1,126 7,343 10,955 9,372 12,131 10,032 9,646 21,733 41,180 EBITDA 3,264 2,881 2,259 3,833 4,323 4,843 3,985 3,291 12,237 16,442 % of Net Sales 10.8 8.8 4.8 7.3 7.6 7.6 6.7 5.8 7.5 7.0 Change (%) 250.3 165.3 31.0 15.5 50.1 114.4 4.0 -53.4 73.3 34.4 Depreciation 456 572 568 498 586 590 594 594 2,094 2,364 Interest 262 324 395 586 371 350 300 255 1,567 1,276 Other Income 76 62 154 468 171 70 70 339 760 650 PBT 2,623 2,046 1,450 3,217 3,538 3,973 3,161 2,781 9,336 13,452 Tax 990 769 567 1,041 1,198 1,236 996 830 3,367 4,259 Rate (%) 37.7 37.6 39.1 32.4 33.9 31.1 31.5 29.8 36.1 31.7 PAT 1,633 1,278 883 2,176 2,340 2,737 2,165 1,951 5,970 9,193 Change (%) 488.3 174.3 -16.1 -1.3 43.3 114.2 145.3 -10.3 49.2 54.0 E: MOSt Estimates

Varatharajan S ([email protected]); Tel: +91 22 56575317

23 September 2005 164 Results Preview SECTOR: OIL & GAS

GAIL (India)

STOCK INFO. BLOOMBERG BSE Sensex: 8,223 GAIL IN 23 September 2005 Under Review REUTERS CODE S&P CNX: 2,478 GAIL.BO Previous Recommendation: Neutral Rs250

Equity Shares (m) 845.7 YEAR NET SALES PAT EPS EPS P/E P/BV ROE ROCE EV/ EV/ END (RS M) (RS M) (RS) GROWTH (%) (X) (X) (%) (%) SALES EBITDA 52-Week Range 268/183 3/05A 138,522 19,469 23.0 4.1 10.8 2.4 23.9 33.3 1.6 5.9 1,6,12 Rel. Perf. (%) 0/-12/-18 M.Cap. (Rs b) 211.0 3/06E 146,712 18,508 21.9 -4.9 11.4 2.1 19.8 27.6 1.5 6.5

M.Cap. (US$ b) 4.8 3/07E 146,650 17,288 20.4 -6.6 12.2 1.9 16.3 26.1 1.3 6.0

? We expect GAIL to report a net profit of Rs5.2b in 1QFY06, up 15% YoY on the back of higher gas throughput and lower LPG / kerosene loss sharing.

? LPG and PE prices are largely flat YoY.

? Gas transmission volumes are set to cross 80mmscmd as against 63.3mmscmd last year, as DVPL ramped up over the last six months.

? GAIL trades at 9.5x FY06E earnings, adjusted for the value of its ONGC stake. Our recommendation is Under Review.

QUARTERLY PERFORMANCE (RS MILLION) Y/E MARCH FY05 FY06 FY05 FY06E 1Q 2Q 3Q 4Q 1Q 2QE 3QE 4QE Net Sales 32,426 35,244 34,751 36,101 36,242 37,191 36,771 36,508 138,522 146,712 Change (%) -4.2 8.7 -1.4 3.9 11.8 5.5 5.8 1.1 11.6 5.9 Finished Gds Purchase 18,950 20,085 20,072 19,431 21,439 21,750 21,546 21,500 78,537 86,235 Raw Materials Cons 1,935 2,319 2,253 2,464 2,485 4,450 4,500 4,627 8,971 16,062 Employee Costs 442 425 481 629 534 500 510 515 1,976 2,059 Other Exp (incl Stock Adj) 3,464 3,636 1,702 3,236 2,304 2,391 2,505 2,523 12,037 9,723 EBITDA 7,636 8,780 10,243 10,341 9,480 8,100 7,710 7,342 37,001 32,632 % of Net Sales 23.6 24.9 29.5 28.6 26.2 21.8 21.0 20.1 26.7 -77.8 Change (%) 3.7 8.9 37.6 -4.8 24.1 -7.7 -24.7 -29.0 9.7 -11.8 Depreciation 2,324 2,353 2,416 2,306 2,391 1,631 1,631 1,625 9,399 7,276 Interest 410 308 307 314 297 303 325 332 1,339 1,257 Other Income 356 989 1,395 490 499 1,700 950 625 3,229 3,775 PBT 5,258 7,108 8,914 8,211 7,292 7,867 6,704 6,011 29,492 27,873 Tax 1,869 2,547 2,562 3,047 2,457 2,636 2,253 2,020 10,024 9,366 Rate (%) 35.5 35.8 28.7 37.1 33.7 33.5 33.6 33.6 137.2 33.6 PAT 3,389 4,562 6,353 5,164 4,835 5,231 4,452 3,991 19,468 18,508 Change (%) -7.2 -6.4 64.1 -19.2 42.6 14.7 -29.9 -22.7 3.6 -4.9 E: MOSt Estimates

Varatharajan S ([email protected]); Tel: +91 22 56575317

23 September 2005 165 Results Preview SECTOR: OIL & GAS

HPCL

STOCK INFO. BLOOMBERG BSE Sensex: 8,223 HPCL IN 23 September 2005 Buy REUTERS CODE S&P CNX: 2,478 HPCL.BO Previous Recommendation: Buy Rs307

Equity Shares (m) 338.8 YEAR NET SALES PAT EPS EPS P/E P/BV ROE ROCE EV/ EV/ END (RS M) (RS M) (RS) GROWTH (%) (X) (X) (%) (%) SALES EBITDA 52-Week Range 417/283 1,6,12 Rel. Perf. (%) -3/-30/-52 3/05A 652,183 12,773 37.7 -32.9 8.1 1.2 15.8 16.8 0.2 5.5 M.Cap. (Rs b) 104.0 3/06E 748,577 12,653 37.3 -0.9 8.2 1.1 14.4 19.1 0.2 4.6

M.Cap. (US$ b) 2.4 3/07E 683,220 17,625 52.0 39.3 5.9 1.0 18.3 26.6 0.1 2.9

? HPCL is likely to post a net loss of Rs1.1b, on the back of negative marketing margins on petrol and diesel along with significant LPG / kerosene losses.

? Refining margins are likely to cushion the losses to some extent, thanks to the global spike in refining margins. We estimate refining margin for the quarter at US$7/bbl as against US$5.26/bbl in 2QFY05.

? We estimate inventory gains at Rs4.5b

? Gross LPG/kerosene losses at Rs13.1b, up 41% YoY, would be a new high.

? The stock quotes at 8.2x FY06E earnings and 1.1x FY06E book value. It offers a dividend yield of 4.9%. We maintain Buy.

QUARTERLY PERFORMANCE (RS MILLION) Y/E MARCH FY05 FY06 FY05 FY06E 1Q 2Q 3Q 4Q 1Q 2QE 3QE 4QE Sales 150,238 150,954 175,812 175,180 163,621 195,029 200,828 189,100 652,183 748,577 Change (%) 9.0 14.1 23.3 7.9 8.9 29.2 14.2 7.9 13.4 14.8 Raw Material Consumed 38,504 58,283 60,225 48,750 48,826 68,334 67,035 65,140 205,762 249,335 Staff Cost 1,621 1,583 1,506 2,414 1,590 1,625 1,659 2,748 7,124 7,622 Fininshed Goods Purchase 81,516 78,008 80,864 96,383 100,141 99,378 93,774 89,783 336,771 383,075 Other Exp (incl Stock Adj) 23,414 6,950 28,571 23,069 16,997 25,314 21,346 20,620 82,004 84,277 EBITDA 5,183 6,129 4,647 4,564 -3,934 378 17,015 10,809 20,523 24,268 % of Net Sales 3.4 4.1 2.6 2.6 -2.4 0.2 8.5 5.7 3.1 -96.8 Change (%) 47.5 -22.5 -65.2 -47.2 -175.9 -93.8 266.2 136.8 -38.6 18.2 Depreciation 1,580 1,515 1,623 1,878 1,663 1,550 1,500 1,615 6,596 6,328 Interest 117 214 319 166 142 150 162 163 816 617 Other Income 415 700 1,012 1,169 682 250 350 478 3,295 1,760 PBT 3,900 5,100 3,717 3,689 -5,056 -1,072 15,703 9,509 16,406 19,084 Tax 1,427 2,157 1,357 -1,309 23 0 4,006 2,403 3,633 6,431 Rate (%) 36.6 42.3 36.5 -35.5 -0.4 0.0 25.5 25.3 22.1 33.7 PAT 2,473 2,943 2,359 4,998 -5,079 -1,072 11,697 7,106 12,773 12,652 Change (%) 57.2 -33.7 -69.6 -5.2 -201.6 -113.5 -23.9 -62.7 -32.9 -0.9 E: MOSt Estimates

Varatharajan S ([email protected]); Tel: +91 22 56575317

23 September 2005 166 Results Preview SECTOR: OIL & GAS

Indian Oil Corporation

STOCK INFO. BLOOMBERG BSE Sensex: 8,223 IOC IN 23 September 2005 Buy REUTERS CODE S&P CNX: 2,478 IOC.BO Previous Recommendation: Buy Rs440

Equity Shares (m) 1,168.0 YEAR NET SALES PAT EPS EPS P/E P/BV ROE ROCE EV/ EV/ END (RS M) (RS M) (RS) GROWTH (%) (X) (X) (%) (%) SALES EBITDA 52-Week Range 546/390 1,6,12 Rel. Perf. (%) -4/-27/-47 3/05A 1,334,072 54,692 46.8 -27.0 9.4 1.7 20.5 18.4 0.5 6.6 M.Cap. (Rs b) 513.6 3/06E 2,014,916 62,591 53.6 14.4 8.2 1.4 19.2 19.2 0.3 5.5

M.Cap. (US$ b) 7.8 3/07E 1,689,618 84,247 72.1 34.6 6.1 1.2 21.1 23.5 0.3 3.8

* Consolidated

? We expect IOC to post a profit of Rs3.8b, despite negative marketing margins on petrol and diesel along with significant LPG / kerosene losses.

? Refining margins and pipeline earnings are likely to more than set off the losses. We estimate refining margin for the quarter at US$7/bbl as against US$7.42/bbl in 2QFY05.

? We estimate inventory gains at Rs8b.

? Gross LPG/kerosene losses at Rs28.9b, up 22% YoY.

? The stock quotes at 6.4x FY06E earnings and 1.4x FY06E book value. It offers a dividend yield of 3.4%. We maintain Buy.

QUARTERLY PERFORMANCE (STANDALONE) (RS MILLION) Y/E MARCH FY05 FY06 FY05 FY06E 1Q 2Q 3Q 4Q 1Q 2QE 3QE 4QE Net Sales 359,845 354,846 398,767 409,303 386,235 465,799 501,809 470,383 1,522,760 1,824,226 Change (%) 13.2 16.8 12.8 14.5 7.3 31.3 25.8 14.9 14.3 19.8 Raw Material Consumed 123,849 112,832 129,029 128,976 138,141 183,382 189,770 182,236 494,685 1,188,213 Staff Cost 4,047 3,876 4,412 6,506 4,355 4,750 4,750 6,043 18,841 38,739 Fininshed Goods Purchase 144,524 170,127 190,929 221,123 221,652 206,271 201,973 195,187 726,702 1,551,785 Other Exp (incl Stock Adj) 60,784 49,394 62,351 38,082 17,427 62,982 59,324 58,227 210,611 408,572 EBITDA 26,641 18,616 12,047 14,616 4,661 8,415 45,992 28,690 71,921 87,758 % of Net Sales 7.4 5.2 3.0 3.6 1.2 1.8 9.2 6.1 4.7 4.8 Change (%) 58.6 -21.1 -67.0 -43.2 -82.5 -54.8 281.8 96.3 -29.9 22.0 Depreciation 4,826 6,164 5,178 5,666 5,439 6,561 7,150 7,503 21,834 26,653 Interest 1,266 1,281 1,526 1,759 1,684 1,017 450 452 5,831 3,603 Other Income 1,295 4,552 6,544 2,905 2,115 3,885 3,000 2,217 15,296 11,217 PBT 21,846 15,723 11,887 10,097 -347 4,722 41,392 22,952 59,552 68,720 Tax 7,124 3,328 -981 1,167 196 955 8,370 4,375 10,638 13,895 Rate (%) 32.6 21.2 -8.3 11.6 -56.5 20.2 20.2 19.1 17.9 20.2 PAT 14,722 12,395 12,868 8,929 -542 3,767 33,023 18,577 48,914 54,825 Change (%) 55.8 -31.4 -46.5 -51.7 -103.7 -69.6 156.6 108.1 -30.2 12.1 E: MOSt Estimates

Varatharajan S ([email protected]); Tel: +91 22 56575317

23 September 2005 167 Results Preview SECTOR: OIL & GAS

IPCL

STOCK INFO. BLOOMBERG BSE Sensex: 8,223 IPCL IN 23 September 2005 Buy REUTERS CODE S&P CNX: 2,478 IPCL.BO Previous Recommendation: Neutral Rs207

Equity Shares (m) 249.1 YEAR NET SALES PAT EPS EPS P/E P/BV ROE ROCE EV/ EV/ END (RS M) (RS M) (RS) GROWTH (%) (X) (X) (%) (%) SALES EBITDA 52-Week Range 229/156 1,6,12 Rel. Perf. (%) 5/-4/-48 3/05A 81,991 7,859 31.6 187.3 6.6 1.8 30.3 26.0 0.7 3.7 M.Cap. (Rs b) 51.5 3/06E 84,160 8,282 33.3 5.4 6.2 1.4 25.2 29.6 0.6 3.2

M.Cap. (US$ b) 1.2 3/07E 79,656 9,046 36.3 9.2 5.7 1.1 22.2 30.0 0.5 2.3

? We expect net profit to grow 43% YoY to Rs2b, driven by higher cracker and polymer margins.

? However, profits would be down sequentially, on account of an increase in gas prices effective 1 July 2005.

? Polymer margins too were strong. Polyethylene (PE) margins were up 10% YoY, while Polypropylene (PP) margins were up 22% YoY. However, PVC prices were down 13.7% YoY, while MEG margins were down 22.7% YoY, setting off part of the gains.

? Petrochemical margins are bouncing back, after a bout of weakness over the last few months and we expect the cycle to achieve a 10-year peak over the next 18–24 months. IPCL is the only large cap pure petrochemical play in India.

? The stock is trading at 6.2x FY06E earnings. We have upgraded the stock to Buy, with a target price of Rs291/share, an upside of 41% from current levels.

QUARTERLY PERFORMANCE (RS MILLION) Y/E MARCH FY05 FY06 FY05 FY06E 1Q 2Q 3Q 4Q 1Q 2QE 3QE 4QE Net Sales 18,100 18,190 19,270 26,430 19,830 21,080 21,009 22,241 81,990 84,160 Change (%) 33.6 35.2 -30.6 0.9 9.6 15.9 9.0 -15.8 1.2 2.6 Change in Stocks -210 -1,880 -2,270 4,330 -280 280 0 0 -30 0 Raw Material Consumed 8,390 9,050 10,100 9,930 8,990 9,900 9,995 10,187 37,470 39,072 Staff Cost 1,040 1,080 1,140 1,340 910 1,300 1,350 1,664 4,600 5,224 Other Expenses 5,570 6,250 6,360 5,530 5,990 5,750 6,014 6,250 23,710 24,004 EBITDA 3,310 3,690 3,940 5,300 4,220 3,850 3,650 4,140 16,240 15,860 % of Net Sales 18.3 20.3 20.4 20.1 21.3 18.3 17.4 18.6 19.8 18.8 Change (%) 47.8 22.2 25.1 71.5 27.5 4.3 -7.4 -21.9 55.2 -2.3 Depreciation 1,120 1,130 1,150 1,660 1,160 1,210 1,225 1,279 5,060 4,874 Interest 470 520 340 290 290 150 100 96 1,620 636 Other Income (Net of EO) 230 330 370 -230 400 375 350 357 700 1,482 PBT 1,950 2,370 2,820 3,120 3,170 2,865 2,675 3,122 10,260 11,832 Tax 720 990 930 -240 920 891 803 937 2,400 3,550 Rate (%) 36.9 41.8 33.0 -7.7 29.0 31.1 30.0 30.0 23.4 30.0 Adjusted PAT 1,230 1,380 1,890 3,360 2,250 1,975 1,873 2,186 7,860 8,283 Change (%) 215.4 155.6 133.3 239.4 82.9 43.1 -0.9 -35.0 187.9 5.4 E: MOSt Estimates

Varatharajan S ([email protected]); Tel: +91 22 56575317

23 September 2005 168 Results Preview SECTOR: OIL & GAS

ONGC

STOCK INFO. BLOOMBERG BSE Sensex: 8,223 ONGC IN 23 September 2005 Buy REUTERS CODE S&P CNX: 2,478 ONGC.BO Previous Recommendation: Buy Rs990

Equity Shares (m) 1,425.9 YEAR NET SALES PAT EPS EPS P/E P/BV ROE ROCE EV/ EV/ END (RS B) (RS B) (RS) GROWTH (%) (X) (X) (%) (%) SALES EBITDA 52-Week Range 1,048/714 3/05A 597.5 143.4 100.6 52.9 9.8 3.0 32.4 35.4 2.4 5.0 1,6,12 Rel. Perf. (%) -6/-13/-14 M.Cap. (Rs b) 1,411.2 3/06E 753.4 206.6 144.9 44.1 6.8 2.3 38.3 43.8 1.9 3.7

M.Cap. (US$ b) 32.2 3/07E 796.7 226.8 159.1 9.8 6.2 1.9 33.6 40.2 1.8 3.4 * Consolidated

? We estimate ONGC’s net profit for 2QFY06 at Rs23.9b, up 36% YoY, driven by a sharp spike in crude prices.

? Bonnylight prices for the quarter were up 52% YoY.

? However, higher loss sharing at Rs29.3b is likely to set off a large part of the gains. We estimate that ONGC would provide a discount of US$19/bbl towards loss sharing.

? Crude throughput too is likely to be lower by about 0.5m ton on account of BHN fire.

? The stock trades at 6.6x FY06E earnings, adjusted for the value of investments. We re-iterate Buy. With government announcement of new loss sharing formula, risk of an increase in loss sharing for ONGC has reduced.

QUARTERLY PERFORMANCE (STANDALONE) (RS BILLION) Y/E MARCH FY05 FY06 FY05 FY06E 1Q 2Q 3Q 4Q 1Q 2QE 3QE 4QE Net Sales 102.9 118.2 121.0 121.5 108.7 123.9 158.3 165.5 463.6 556.4 Change (%) 30.9 36.4 67.5 46.0 5.6 4.8 30.8 36.2 44.5 20.0 Raw material and Purchases 13.6 12.1 14.8 12.4 9.7 13.6 14.9 15.7 52.9 53.9 Statutory Levies 23.2 25.5 25.9 25.3 25.0 29.3 32.0 32.9 99.8 119.2 Employee Costs 3.2 2.8 2.1 1.9 2.8 2.7 2.8 3.5 10.0 11.8 Other Exp (incl Stock Adj) 11.5 14.2 15.3 18.2 10.2 12.8 12.6 15.0 59.2 50.5 EBITDA 51.5 63.6 62.9 63.8 61.1 65.6 95.9 98.5 241.8 321.0 % of Net Sales 50.1 53.8 51.9 52.5 56.2 53.0 60.6 59.5 52.1 57.7 Change (%) 14.8 30.2 66.6 40.4 18.5 3.2 52.5 54.4 32.8 Depreciation 16.2 15.3 12.9 17.6 13.5 17.5 17.8 18.1 62.0 66.9 Interest 0.1 0.0 0.2 0.1 0.0 0.1 0.2 0.3 0.4 0.6 Other Income 3.0 4.7 4.6 4.9 3.0 6.0 4.0 4.5 17.3 17.5 PBT 38.2 53.0 54.4 51.0 50.5 54.1 81.9 84.6 196.7 271.0 Tax 15.2 19.1 19.5 13.0 17.3 17.2 28.1 28.7 66.8 91.3 Rate (%) 39.6 36.1 35.8 25.6 34.3 31.9 34.3 33.9 137.1 349.3 PAT 23.1 33.8 34.9 38.0 33.2 36.8 53.8 55.9 129.8 179.7 Change (%) 8.1 19.8 103.3 91.2 43.8 8.9 53.9 47.2 49.8 38.4 E: MOSt Estimates

Varatharajan S ([email protected]); Tel: +91 22 56575317

23 September 2005 169 Results Preview SECTOR: OIL & GAS

Reliance Industries

STOCK INFO. BLOOMBERG BSE Sensex: 8,223 RIL IN 23 September 2005 Buy REUTERS CODE S&P CNX: 2,478 RELI.BO Previous Recommendation: Buy Rs748

Equity Shares (m) 1,396.4 YEAR NET SALES PAT EPS EPS P/E P/BV ROE ROCE EV/ EV/ END (RS M) (RS M) (RS) GROWTH (%) (X) (X) (%) (%) SALES EBITDA 52-Week Range 785/472 3/05A 660,510 75,720 54.3 47.0 13.8 2.6 20.2 16.4 1.9 9.5 1,6,12 Rel. Perf. (%) 1/8/1 M.Cap. (Rs b) 1,044.9 3/06E 724,476 92,228 66.2 21.8 11.3 2.1 20.7 19.3 1.7 7.9

M.Cap. (US$ b) 23.8 3/07E 693,623 90,402 64.9 -2.0 11.5 1.9 17.3 18.2 1.8 7.5

? We expect a net profit of Rs23.9b, up 36% YoY, driven by strong refining as well as petrochemical margins.

? The company would post refining margin of US$12.5/bbl, as against US$8.2/bbl, last year. Refinery throughput is expected to be flat.

? Petrochemical margins were a mixed bag. Cracker margins were down 30% YoY, while polyester integrated margins were up YoY. Polyxylene (PX) spread over naphtha was down 22% YoY. PE and PP margins too were up between 10-28%.

? The stock trades at 9.5x FY06E earnings, adjusting for the value of gas reserves, and an EV/EBITDA of 7.9x FY06E. Reliance is well positioned to leverage the refining and petrochemical cycle upswing. We recommend Buy with an SOTP-based target price of Rs903, an upside of 21% from current levels.

QUARTERLY PERFORMANCE (RS BILLION) Y/E MARCH FY05 FY06 FY05 FY06E 1Q 2Q 3Q 4Q 1Q 2QE 3QE 4QE Net Sales 142,800 161,640 177,680 178,390 177,840 194,300 176,250 176,087 660,510 724,477 Change (%) 14.2 27.3 42.1 26.4 24.5 20.2 -0.8 -1.3 27.5 9.7 Inc/Dec in Stock -7,940 7,060 1,650 4,480 -14,900 0 7,000 7,900 5,250 0 RM - External Purchases 105,040 106,570 126,870 120,830 135,400 138,000 117,000 115,052 459,310 505,452 Staff Cost 1,780 1,850 2,140 2,690 2,530 2,400 2,300 2,584 8,460 9,814 Other Expenditure 15,870 14,460 14,120 14,930 19,150 15,500 14,500 14,073 59,380 63,223 EBITDA 28,050 31,700 32,900 35,460 35,660 38,400 35,450 36,478 128,110 145,988 % of Net Sales 19.6 19.6 18.5 19.9 20.1 19.8 20.1 20.7 19.4 20.2 Change (%) 22.6 28.8 27.1 34.0 27.1 21.1 7.8 2.9 28.3 14.0 Depreciation 9,160 9,140 9,120 9,810 7,910 8,200 8,300 8,343 37,230 32,753 Interest 4,680 4,340 2,050 3,620 2,370 3,000 2,910 3,000 14,690 11,280 Other Income 3,470 2,960 3,310 4,760 1,940 1,700 1,650 2,550 14,500 7,840 PBT 17,680 21,180 25,040 26,790 27,320 28,900 25,890 27,685 90,690 109,795 Tax 3,310 3,660 4,130 3,870 4,220 4,999 3,681 4,666 14,970 17,567 Rate (%) 18.7 17.3 16.5 14.4 15.4 17.3 14.2 16.9 16.5 16.0 PAT (before Pref. Dividend) 14,370 17,520 20,910 22,920 23,100 23,901 22,209 23,018 75,720 92,228 Change (%) 30.2 38.7 52.2 61.5 60.8 36.4 6.2 0.4 46.7 21.8 E: MOSt Estimates

Varatharajan S ([email protected]); Tel: +91 22 56575317

23 September 2005 170 Results Preview

QUARTER ENDING SEPTEMBER 2005

Pharmaceuticals

BSE Sensex: 8,223 S&P CNX: 2,478 23 September 2005

COMPANY NAME PG. Revenue growth, coupled with stable margins, lead to earnings growth With a 13.8% growth in revenues in 1QFY06, companies in the MOSt pharmaceutical Aurobindo Pharma 174 universe are expected to continue on their growth path with 17.4% YoY growth in Aventis Pharma 175 revenues driven primarily by steady growth in the domestic and international market.

Biocon 176 The domestic markets are expected to report strong growth, as Indian markets are Cipla 177 essentially an antibiotics/anti-infective market. Water-borne diseases result in higher Dr Reddy's Laboratories 178 sales for the domestic Pharma industry. Accordingly, the Pharma industry records peak sales in the July-September quarter every year. We expect the same trend to be witnessed Glaxo-SmithKline Pharma 179 in the current year also. This is reflected in 13.6% YoY growth in revenues for our Jubilant Organosys 180 MNC Pharma segment. Lupin 181 Sales from international markets are also expected to record growth, based on low base Matrix Lab 182 of 2QFY05. 2QFY05 was impacted by various factors like lower Pen-G realizations, Nicholas Piramal 183 sluggish US generics market etc, resulting in only 12.6% revenue growth in 2QFY05 for

Pfizer 184 the Big-3 pharma companies. However, on a low base, we expect the Big-3 to report a 17% YoY revenue growth driven by increasing sales to Europe and other geographies. Ranbaxy Laboratories 185 Improving dynamics of Pen-G based business has positively impacted companies like Sun Pharmaceuticals 186 Aurobindo and Lupin, which is reflected in 19.1% YoY revenue growth in Other Pharma

Wockhardt 187 companies under the MOSt Pharma Universe.

EXPECTED QUARTERLY PERFORMANCE SUMMARY (RS MILLION) RECO SALES EBITDA NET PROFIT SEP.05 CHG. (%) SEP.05 CHG. (%) SEP.05 CHG. (%) Pharmaceuticals Aurobindo Pharma Sell 3,157 17.2 474 91.8 162 369.2 Aventis Pharma Buy 2,103 12.2 719 16.4 501 17.9 Biocon Buy 2,271 22.0 668 8.5 556 -1.2 Cipla Neutral 6,636 14.1 1,446 9.6 1,126 17.5 Dr Reddy’ s Labs Buy 5,646 4.6 531 -12.1 510 -1.1 GSK Pharma Buy 4,246 13.6 1,264 7.1 935 18.2 Jubiliant Organosys Buy 3,680 26.1 580 -1.2 332 6.8 Lupin Buy 3,496 10.5 758 133.6 551 215.0 Matrix Buy 1,945 19.7 479 -9.9 261 -37.9 Nicholas Piramal Buy 4,440 17.1 1,184 38.1 788 35.8 Pfizer Neutral 1,695 15.3 461 97.1 291 87.4 Ranbaxy Labs Sell 16,771 23.2 3,012 -3.6 2,080 3.9 Sun Pharma Buy 3,469 23.6 1,130 -3.2 1,222 18.5 Wockhardt Buy 3,780 19.0 929 16.1 739 32.4 Sector Aggregate 63,336 17.4 13,634 11.7 10,053 18.0

Jinesh K Gandhi ([email protected]); Tel: +91 22 56575 304

23 September 2005 171 Pharmaceuticals

TREND IN GROWTH / PROFITABILITY OF DIFFERENT SEGMENTS OF THE INDUSTRY (JULY-SEPTEMBER QUARTER) INQUIRE PHARMA UNIVERSE YOY GROWTH (%) EBITDA MARGIN NET PROFIT MARGIN AGGREGATES SALES EBITDA ADJ PAT SEP’05 SEP’04 CHG (BP) SEP’05 SEP’04 CHG (BP) MNC Pharma (Aventis, GSK Pharma, Pfizer) 13.6 20.3 25.9 30.4 28.7 169 21.5 19.4 210 Indian Big-3 (Cipla, DRL, Ranbaxy) * 17.0 -1.2 6.9 17.2 20.3 -316 12.8 14.0 -121 Other Indian Pharma 19.1 20.9 25.6 23.6 23.3 35 17.6 16.7 91 Sector Aggregate 17.4 11.7 18.0 21.5 22.6 -111 15.9 15.8 8 * ranked according to revenues Source: MOSt

We expect Pharma MNCs to outperform their Indian counterparts in the September quarter as well. While both MNCs and Indian companies would witness significant growth in revenues during the quarter, Indian companies would continue to face some pressure on profitability owing to the mounting costs of R&D and initiatives to tap regulated markets. This is reflected in only 6.9% YoY growth in net profit for the Big-3 as against 25.9% YoY growth in net profits for their MNC counterparts during the quarter.

Valuation and view We remain favorably inclined towards MNC Pharma stocks. In our view, the current risk- reward equation is stacked in favor of MNC stocks. Leading Pharma MNCs are geared to gain from the opportunities arising in the stronger patent regime post 2005. We expect these companies to record steady 15-20% CAGR in earnings over the next couple of years, without any upside from product patents. In our view, this along with steady dividend payouts and healthy return ratios is enough to support current valuations. The potential upside from product patents would create ‘option value’ in these stocks over the longer term. Our top picks among MNCs are Aventis and GSK Pharma.

On the other hand, Indian Pharma stocks remain aggressively valued, leaving very little room for further re-rating. While flawless execution would be required to sustain current valuations, the visibility on this front is limited, given the increasingly competitive scenario and uncertain regulatory framework. We advocate remaining very selective. Our top picks include Dr Reddy’s and Matrix Laboratories. We also remain cautious on second and third tier companies that have moved up on the back of interesting business models and exciting announcements, but very little visibility on the actual potential of the plans and the companies’ execution ability.

23 September 2005 172 Pharmaceuticals

Stock performance and valuations

STOCK PERFORMANCE (%) ABSOLUTE PERF REL PERF TO SENSEX REL PERF TO SECTOR 3 M 1 YEAR 3 M 1 YEAR 3 M 1 YEAR Pharmaceuticals Aurobindo Pharma 9 1 -6 -48 3 -19 Aventis Pharma 5 57 -11 8 -1 37 Biocon 9 -14 -6 -63 3 -34 Cipla 12 23 -4 -25 5 3 Dr Reddy’s Labs. 7 4 -9 -44 0 -16 Glaxosmithkline 8 30 -7 -19 2 10 Jubilant Organ. 9 43 -6 -6 3 23 Lupin 8 9 -8 -40 1 -11 Matrix Labs. -5 28 -21 -21 -12 8 Nicholas Piramal 23 73 8 25 17 53 Pfizer 6 48 -9 0 0 28 Ranbaxy Labs. -10 -11 -26 -59 -16 -31 Sun Pharma. 14 57 -2 8 7 37 Wockhardt 29 51 13 2 23 31

RELATIVE PERFORMACE - 3 MONTHS (%) RELATIVE PERFORMANCE - 1 YEAR (%)

Sensex MOSt Pharmaceuticals Index MOSt Pharmaceuticals Index Sensex 160 120 140 110

100 120

90 100

80 80 Jun-05 Jul-05 Aug-05 Sep-05 Sep-04 Dec-04 Mar-05 Jun-05 Sep-05

COMPARATIVE VALUATION CMP (RS) RECO EPS (RS) P/E (X) EV/EBITDA ROE (%) 23.9.05 FY05A FY06E FY07E FY05A FY06E FY07E FY05A FY06E FY07E FY05A FY06E FY07E Pharmaceuticals Aurobindo Pharma 346 Sell 2.1 13.1 26.0 164.7 26.3 13.3 22.7 11.3 7.9 1.4 8.1 13.8 Aventis Pharma 1,343 Buy 62.5 73.3 85.2 21.5 18.3 15.8 13.7 11.5 9.4 35.6 33.1 30.3 Biocon 458 Buy 19.8 22.6 28.6 23.2 20.3 16.0 19.7 16.2 12.3 26.7 24.7 25.1 Cipla 347 Neutral 13.7 16.2 18.2 25.4 21.5 19.0 21.0 16.7 14.4 26.5 25.6 23.9 Dr Reddy’ s Labs 780 Buy 2.6 24.6 31.4 298.2 31.7 24.9 112.0 26.3 20.6 0.9 8.2 9.6 GSK Pharma 844 Buy 30.5 35.8 42.9 27.7 23.6 19.7 17.0 15.3 12.4 28.8 29.0 29.0 Jubiliant Organosys 998 Buy 41.1 51.0 77.2 24.3 19.6 12.9 13.4 10.7 7.5 28.0 23.5 28.2 Lupin 754 Buy 22.9 50.5 61.0 32.9 14.9 12.4 25.8 11.9 9.8 20.0 35.8 33.2 Matrix 183 Buy 8.4 8.4 11.7 21.7 21.7 15.7 15.1 11.8 8.3 30.6 17.7 20.2 Nicholas Piramal 284 Buy 4.9 10.6 19.1 58.3 26.8 14.8 32.2 17.1 11.5 20.4 30.6 37.1 Pfizer 780 Neutral 19.2 32.0 42.7 40.7 24.4 18.2 23.9 14.1 10.4 16.7 24.5 28.1 Ranbaxy Labs 494 Sell 19.6 16.4 21.1 25.2 30.1 23.4 19.4 20.5 16.1 29.1 21.5 24.0 Sun Pharma 643 Buy 22.0 27.0 32.6 29.2 23.8 19.7 25.8 21.4 17.1 40.6 39.6 36.1 Wockhardt 488 Buy 20.5 22.6 26.8 23.8 21.5 18.2 19.5 15.6 12.5 41.5 37.8 34.1 Sector Aggregate 29.4 23.1 18.0 21.4 16.7 13.0 23.0 23.7 25.1

23 September 2005 173 Results Preview SECTOR: PHARMACEUTICALS

Aurobindo Pharma

STOCK INFO. BLOOMBERG BSE Sensex: 8,223 ARBP IN 23 September 2005 Sell REUTERS CODE S&P CNX: 2,478 ARBN.BO Previous Recommendation: Sell Rs346

Equity Shares (m) 50.8 YEAR NET SALES# PAT# EPS EPS P/E P/BV ROE ROCE EV/ EV/ END * (RS M) (RS M) (RS) GROWTH (%) (X) (X) (%) (%) SALES EBITDA 52-Week Range 386/261 3/05A 13,223 107 2.1 -90.0 164.7 2.5 1.4 4.1 2.1 22.7 1,6,12 Rel. Perf. (%) -9/-1/-48 M.Cap. (Rs b) 17.6 3/06E 15,682 701 13.1 525.3 26.3 2.1 8.1 9.0 1.7 11.3

M.Cap. (US$ b) 0.4 3/07E 19,046 1,384 26.0 97.5 13.3 1.8 13.8 13.4 1.3 7.9 * Consolidated results

? Aurobindo does not declare quarterly consolidated results. Our quarterly estimates are standalone, while annual estimates are on a consolidated basis. ? Sales are expected to be at Rs3.2b, growth of 17.2% YoY, driven by slight recovery in Pen-G prices and on a low base of 2QFY05 where Pen-G prices had fallen considerably. ? Margins are expected to expand by 580bp to 15% on account of higher realization for Pen-G based products and better cost management ? Interest (up 43% YoY) and depreciation (up 14% YoY) would stabilize at current levels as it is at the end of capex cycle. ? Expansion in margin would translate in adjusted PAT growth of 369% YoY to Rs162m. ? Two of its Anti-retroviral’s (Zidovudine and Lamivudine) are included in WHO’s pre-qualification list. ? Despite the progress on regulated market initiatives and recovery of Pen G prices, earnings visibility is very poor. Although valuations appear reasonable at 13.3xFY07E earnings, the pressure on near-term profitability, high leverage and the company’s inability to scale up its regulated markets business would limit upside. We re-iterate Sell.

QUARTERLY PERFORMANCE (STANDALONE) (RS MILLION) Y/E MARCH FY05 FY06 FY05 FY06E 1Q 2Q 3Q 4Q 1Q 2QE 3QE 4QE Net Sales 2,849 2,693 3,193 2,856 2,807 3,157 3,896 3,575 11,592 13,435 YoY Change (%) -6.8 -22.8 -1.2 -21.3 -1.5 17.2 22.0 25.2 -13.6 15.9 Total Expenditure 2,453 2,446 2,872 2,753 2,576 2,684 3,234 2,899 10,523 11,393 EBITDA 397 247 321 103 231 474 662 676 1,068 2,042 Margins (%) 13.9 9.2 10.1 3.6 8.2 15.0 17.0 18.9 9.2 15.2 Depreciation 110 122 126 47 119 139 141 107 405 506 Interest 74 102 104 120 134 146 144 175 400 600 Other Income 24 27 40 75 36 43 60 43 166 182 PBT 237 49 131 11 13 232 437 436 429 1,118 Tax 18 7 10 5 2 70 132 142 40 337 Deferred Tax 39 8 23 -31 -9 0 0 0 39 -9 Rate (%) 24.0 30.2 25.0 -224.8 -52.3 30.1 30.1 32.6 18.4 29.3 PAT 180 26 106 39 20 162 306 294 351 791 Adjusted PAT 180 34 99 37 20 162 306 294 350 782 YoY Change (%) -21.8 -89.3 -72.3 -89.9 -88.8 369.2 210.4 701.1 -72.4 123.2 Margins (%) 6.3 1.3 3.1 1.3 0.7 5.1 7.8 8.2 3.0 5.8 E: MOSt Estimates

Jinesh K Gandhi ([email protected]); Tel: +91 22 56575 304

23 September 2005 174 Results Preview SECTOR: PHARMACEUTICALS

Aventis Pharma

STOCK INFO. BLOOMBERG BSE Sensex: 8,223 HOEC IN 23 September 2005 Buy REUTERS CODE S&P CNX: 2,478 HOEC.BO Previous Recommendation: Buy Rs1,343

Equity Shares (m) 23.0 YEAR NET SALES PAT EPS EPS P/E P/BV ROE ROCE EV/ EV/ END* (RS M) (RS M) (RS) GROWTH (%) (X) (X) (%) (%) SALES EBITDA 52-Week Range 1,650/792 12/04A 7,307 1,440 62.5 53.5 21.5 7.7 35.6 49.8 4.0 13.7 1,6,12 Rel. Perf. (%) -15/-15/8 M.Cap. (Rs b) 30.9 12/05E 8,032 1,688 73.3 17.2 18.3 6.1 33.1 47.9 3.5 11.5

M.Cap. (US$ b) 0.7 12/06E 8,829 1,962 85.2 16.3 15.8 4.8 30.3 44.7 3.0 9.4

* Standalone results

? Aventis continues to be on a steady growth path, with 12.2% and 17.9% growth YoY in revenues and adjusted net profit during 3QCY05.

? Sales growth of 12.2%YoY is driven by 11% growth in domestic market (to Rs1.6b) and 15% growth in export sales (to Rs540m) to Russia/CIS and higher outsourcing by parent.

? Improved product mix and tight control on fixed overheads would translate into 120bp expansion in EBITDA margins to 34.2%. This would result in 17.9% growth in profit to Rs501m.

? Aventis is the best prepared pharmaceutical MNC to leverage the opportunities arising from introduction of product patents, given its excellent brand equity, strong parental support and focus on power brands. Valuations at 15.8x CY06E are at a discount to peers and attractive. We maintain our Buy rating.

QUARTERLY PERFORMANCE (STANDALONE) (RS MILLION) Y/E DECEMBER CY04 CY05 CY04 CY05E 1Q 2Q 3Q 4Q 1Q 2Q 3QE 4QE Net Sales 1,637 1,823 1,875 1,972 1,725 2,134 2,103 2,070 7,307 8,032 YoY Change (%) 16.3 5.2 15.2 12.4 5.4 17.1 12.2 5.0 12.0 9.9 Total Expenditure 1,235 1,305 1,257 1,365 1,294 1,510 1,384 1,388 5,162 5,612 EBITDA 402 518 618 607 431 624 719 682 2,145 2,420 Margins (%) 24.6 28.4 33.0 30.8 25.0 29.2 34.2 32.9 29.4 30.1 Depreciation 42 42 42 42 44 43 41 43 168 172 Interest 0 0 0 1 0 0 0 0 1 0 Other Income 34 42 82 60 74 61 75 62 218 271 PBT before EO Items 394 518 658 624 461 642 753 700 2,194 2,520 Extra-Ord Expense -68 0 0 0 67 83 0 0 -68 150 PBT after EO Items 462 518 658 624 394 559 753 700 2,262 2,370 Tax 142 184 233 218 158 217 252 166 777 793 Effective tax Rate (%) 30.7 35.5 35.4 34.9 37.2 38.8 33.5 23.7 34.3 33.0 Reported PAT 320 334 425 406 236 342 501 534 1,485 1,577 Adj PAT 273 334 425 406 290 393 501 534 1,440 1,688 YoY Change (%) 92.7 43.3 62.8 33.6 6.1 17.6 17.9 31.5 53.5 17.2 Margins (%) 16.7 18.3 22.7 20.6 16.8 18.4 23.8 25.8 19.7 21.0 E: MOSt Estimates

Jinesh K Gandhi ([email protected]); Tel: +91 22 56575 304

23 September 2005 175 Results Preview SECTOR: PHARMACEUTICALS

Biocon

STOCK INFO. BLOOMBERG BSE Sensex: 8,223 BIOS IN 23 September 2005 Buy REUTERS CODE S&P CNX: 2,478 BION.BO Previous Recommendation: Buy Rs458

Equity Shares (m) 100.0 YEAR NET SALES PAT EPS EPS P/E P/BV ROE ROCE EV/ EV/ END (RS M) (RS M) (RS) GROWTH (%) (X) (X) (%) (%) SALES EBITDA 52-Week Range 565/392 3/05A 7,126 1,976 19.8 42.5 23.2 6.2 26.7 25.8 6.2 19.7 1,6,12 Rel. Perf. (%) -3/-20/-63 M.Cap. (Rs b) 45.8 3/06E 9,167 2,258 22.6 14.3 20.3 5.0 24.7 25.0 4.9 16.2

M.Cap. (US$ b) 1.0 3/07E 11,257 2,858 28.6 26.6 16.0 4.0 25.1 25.3 3.8 12.3

? Biocon’s 2QFY06 sales are expected to grow by 22%YoY to Rs2.3b driven by pravastatin sales to Europe. Contract research service is expected to grow by 54% to Rs231m.

? However, EBITDA margins would decline 3,700bp YoY to 29.4%, due to lower statin prices.

? Higher depreciation (up 101% YoY) due to commencement of new statin capacity would result in marginal decline in net profit by 1.2% YoY to Rs556m.

? FY07 is expected to be a year of opportunity for Biocon, with the unlocking of the Simvastatin and Pravastatin generic opportunities in the US in CY06. However, the outlook on statins pricing remains cloudy and would have a strong bearing on Biocon’s ability to achieve our estimates for FY06 and FY07.

? At 16x FY07E earnings the stock trades at a discount to the sector. Although concerns exist over statins prices and the company’s ability to achieve growth in FY06, the downside is limited from current levels. We maintain Buy.

QUARTERLY PERFORMANCE (CONSOLIDATED) (RS MILLION) Y/E MARCH FY05 FY06 FY05 FY06E 1Q 2Q 3Q 4Q 1Q 2QE 3QE 4QE Net Sales 1,742 1,861 1,777 1,746 1,740 2,271 2,307 2,849 7,126 9,167 YoY Change (%) 62.2 24.0 27.9 20.8 -0.1 22.0 29.8 63.2 31.8 303.6 Total Expenditure 1,206 1,245 1,181 1,255 1,235 1,603 1,603 1,964 4,887 6,404 EBITDA 536 616 596 490 505 668 704 885 2,239 2,762 Margins (%) 30.8 33.1 33.6 28.1 29.0 29.4 30.5 31.1 31.4 30.1 Depreciation 46 47 62 69 71 95 105 124 223 395 Interest 7 6 5 2 3 4 3 4 20 13 Other Income 37 34 48 37 18 34 37 46 156 135 PBT 520 597 578 456 449 604 633 802 2,151 2,488 Tax 34 39 75 34 66 48 51 65 186 230 Rate (%) 6.5 6.5 13.0 7.4 14.8 8.0 8.0 8.1 8.6 9.3 Minority Interest 0 -4 0 -1 -5 0 0 0 -10 -5 PAT 486 562 503 424 387 556 583 738 1,975 2,263 YoY Change (%) 112.2 50.4 43.7 -2.3 -20.3 -1.2 15.8 74.1 42.5 307.3 Margins (%) 27.9 30.2 28.3 24.3 22.3 24.5 25.2 25.9 27.7 24.7 E: MOSt Estimates

Jinesh K Gandhi ([email protected]); Tel: +91 22 56575 304

23 September 2005 176 Results Preview SECTOR: PHARMACEUTICALS

Cipla

STOCK INFO. BLOOMBERG BSE Sensex: 8,223 CIPLA IN 23 September 2005 Neutral REUTERS CODE S&P CNX: 2,478 CIPL.BO Previous Recommendation: Neutral Rs347

Equity Shares (m) 299.9 YEAR NET SALES PAT EPS EPS P/E P/BV ROE ROCE EV/ EV/ 52-Week Range 374/226 END (RS M) (RS M) (RS) GROWTH (%) (X) (X) (%) (%) SALES EBITDA 1,6,12 Rel. Perf. (%) -8/6/-25 03/05A 22,545 4,096 13.7 24.9 25.4 6.7 26.5 31.5 4.6 21.0 M.Cap. (Rs b) 104.1 03/06E 27,079 4,843 16.2 18.1 21.5 5.5 25.6 30.2 3.8 16.7

M.Cap. (US$ b) 2.4 03/07E 30,942 5,467 18.2 12.7 19.0 4.6 23.9 28.6 3.2 14.4

? Cipla’s 2QFY06 revenues are expected to grow by 14.1% YoY to Rs6.6b, based on 10.8% growth in domestic sales and export sales growing steadily at 20%.

? EBITDA margins are expected to decline marginally by 90bp to 21.8%. We believe Cipla had some high margin exports sales in 2QFY05, which led to the higher margins – this would get normalized during the year.

? However, lower interest (by 62% YoY), higher other income (up by 37% YoY) and lower tax (18.4% of PBT v/s 22% in 2QFY05) resulted in profit growth of 17.5% YoY to Rs1.1b.

? Our estimates do not factor any significant gains from the company’s tie with major US players due to lack of adequate information on this front.

? While Cipla would continue to report steady growth going forward, at 21.5x FY06E and 19x FY07E earnings, its valuations are a fair reflection of its growth prospects. We maintain our Neutral rating on the stock.

QUARTERLY PERFORMANCE (RS MILLION) Y/E MARCH FY05 FY06 FY05 FY06E 1Q 2Q 3Q 4Q 1Q 2QE 3QE 4QE Gross Sales 5,335 5,814 5,961 5,350 6,628 6,636 7,321 6,494 22,545 27,079 YoY Change (%) 17.4 20.2 24.0 -6.1 24.2 14.1 22.8 21.4 9.7 20.1 Total Expenditure 4,267 4,495 4,757 3,981 5,129 5,191 5,617 4,987 17,592 20,924 EBITDA 1,067 1,319 1,205 1,369 1,499 1,446 1,703 1,507 4,953 6,155 Margins (%) 20.0 22.7 20.2 25.6 22.6 21.8 23.3 23.2 22.0 22.7 Depreciation 130 125 128 148 135 152 151 164 551 602 Interest 14 40 12 10 14 15 14 17 76 60 Other Income 119 74 412 155 84 102 133 124 820 443 Profit before Tax 1,043 1,229 1,477 1,366 1,434 1,380 1,671 1,450 5,146 5,936 Tax 250 270 220 310 320 254 308 211 1,050 1,092 Rate (%) 24.0 22.0 14.9 22.7 22.3 18.4 18.4 14.5 20.4 18.4 Reported PAT 793 959 1,257 1,056 1,114 1,126 1,364 1,239 4,096 4,843 YoY Change (%) 17.9 37.9 66.8 3.8 40.6 17.5 8.5 17.4 25.1 18.2 Margins (%) 14.9 16.5 21.1 19.7 16.8 17.0 18.6 19.1 18.2 17.9 E: MOSt Estimates; FY05 quarterly numbers don’t add up to full year numbers due to restatement

Jinesh K Gandhi ([email protected]); Tel: +91 22 56575 304

23 September 2005 177 Results Preview SECTOR: PHARMACEUTICALS

Dr Reddy's Laboratories

STOCK INFO. BLOOMBERG BSE Sensex: 8,223 DR IN 23 September 2005 Buy REUTERS CODE S&P CNX: 2,478 REDY.BO Previous Recommendation: Buy Rs780

Equity Shares (m) 76.5 YEAR NET SALES PAT EPS EPS P/E P/BV ROE ROCE EV/ EV/ END (RS M) (RS M) (RS) GROWTH (%) (X) (X) (%) (%) SALES EBITDA 52-Week Range 890/613 1,6,12 Rel. Perf. (%) -12/-24/-44 03/05A 19,183 200 2.6 -93.1 298.2 2.8 0.9 0.4 2.7 112.0 M.Cap. (Rs b) 59.7 03/06E 21,622 1,883 24.6 840.7 31.7 2.6 8.2 9.4 2.4 26.3

M.Cap. (US$ b) 1.4 03/07E 24,817 2,400 31.4 27.4 24.9 2.4 9.6 10.8 2.0 20.6

? Dr Reddy’s 2QFY06 sales are expected to grow by 4.6% YoY to Rs5.6b, driven by 9.5% growth in branded formulations sales. ? EBITDA margins are expected to decline by 180bp YoY to 9.4%, due to higher SG&A cost on account of increased focus on retailing in the domestic market. Margin decline was curtailed by savings in R&D cost (8.9% of sales v/s 11.6% in 2QFY05) following the partnership deal with ICICI Ventures. We have factored in inflow of US$16m (Rs696m) in FY06 from this partnership, which is evenly spread across quarters. Actual numbers may vary depending on the nature and timing of accounting treatment. ? Higher other income (up by 86% YoY) propped up adjusted net profit to Rs510m, resulting in a marginal decline of 1.1% YoY. ? We continue to monitor the progress made by Dr Reddy’s in its efforts to broad base its generics portfolio and for indications of any fresh deal on the research front (especially NCE research). ? DRL trades at EV/Sales of 2.4x FY06E and 2x FY07E. We believe this factors in the worst, providing an excellent risk-reward equation. We re-iterate Buy.

GLOBAL QUARTERLY PERFORMANCE (US GAAP) (RS MILLION) Y/E MARCH FY05 FY06 FY05 FY06E 1Q 2Q 3Q 4Q 1Q 2QE 3QE 4QE Gross Sales 4,856 5,400 4,644 4,283 5,574 5,646 5,388 5,014 19,183 21,622 YoY Change (%) 0.9 0.4 -9.6 -9.9 14.8 4.6 16.0 17.1 -4.5 12.7 Total Expenditure 4,652 4,796 4,665 4,609 5,134 5,115 4,819 4,604 18,722 19,672 EBITDA 204 604 -21 -326 440 531 569 410 461 1,950 Margins (%) 4.2 11.2 -0.5 -7.6 7.9 9.4 10.6 8.2 2.4 9.0 Depreciation 89 87 88 86 95 78 79 66 350 318 Other Income -207 79 68 45 87 147 146 204 -15 584 PBT before EO Expense -92 596 -41 -367 432 600 635 548 96 2,216 Extra-Ord Expense -236 0 -53 278 0 0 0 0 -11 0 PBT after EO Expenses 144 596 12 -645 432 600 635 548 107 2,216 Tax -24 85 -27 -128 73 90 95 74 -94 332 Rate (%) -16.7 14.3 -233.8 19.8 16.9 15.0 15.0 13.5 -88.0 15.0 Adj PAT -68 511 -14 -239 359 510 540 474 190 1,883 Minority Interest -5 -5 -2 2 0 0 0 0 -10 0 Adj PAT after Minority Interest -63 516 -12 -241 359 510 540 474 200 1,883 YoY Change (%) -108.0 -44.5 -102.1 -144.2 - -1.1 - - -93.0 840.7 Margins (%) -1.3 9.6 -0.3 -5.6 6.4 9.0 10.0 9.5 1.0 8.7 EO Exp/(Inc) -236 0 -53 278 0 0 0 0 -11 0 Reported PAT 173 516 41 -519 359 510 540 474 211 1,883 E: MOSt Estimates; * Quarterly results don’t add up due to recasting

Jinesh K Gandhi ([email protected]); Tel: +91 22 56575 304

23 September 2005 178 Results Preview SECTOR: PHARMACEUTICALS

GlaxoSmithKline Pharmaceuticals

STOCK INFO. BLOOMBERG BSE Sensex: 8,223 GLXO IN 23 September 2005 Buy REUTERS CODE S&P CNX: 2,478 GLAX.BO Previous Recommendation: Buy Rs844

Equity Shares (m) 87.3 YEAR NET SALES PAT EPS EPS P/E P/BV ROE ROCE EV/ EV/ END (RS M) (RS M) (RS) GROWTH (%) (X) (X) (%) (%) SALES EBITDA 52-Week Range 990/621 1,6,12 Rel. Perf. (%) -12/-7/-19 12/04A 13,759 2,661 30.5 24.8 27.7 8.0 28.8 45.1 4.7 17.0 M.Cap. (Rs b) 73.7 12/05E 14,898 3,123 35.8 17.4 23.6 6.8 29.0 44.3 4.3 15.3

M.Cap. (US$ b) 1.7 12/06E 16,388 3,744 42.9 19.9 19.7 5.7 29.0 43.5 3.8 12.4

? GSK Pharma’s net sales are expected to grow by 13.6% YoY and adjusted net profit expected to grow by 18.2% YoY in 3QCY05.

? EBITDA margins are expected to decline marginally by 180bp YoY to 29.8%, on account of increase in fixed overheads. The transition to an MRP-based excise regime would however put a cap on margin expansion in the current fiscal going forward.

? Adjusted net profit growth of 18.2% was boosted by other income of Rs212m (~39% higher YoY)

? GSK Pharma has entered into an agreement to sell its property at Mulund to Oberoi Constructions for Rs2.2b. We have not factored in profit on sale of land in our estimates. Hence, profit for the current quarter can be much higher than our estimate if the deal is accounted for in the current quarter.

? GSK Pharma is one of the best plays on the IPR regime. Valuations of 23.6x CY05E and 19.7x CY06E earnings are sustainable and set to improve, given the robust growth rates and profitability and option value created by the IPR opportunity. We re-iterate Buy.

QUARTERLY PERFORMANCE (CONSOLIDATED) (RS MILLION) Y/E DECEMBER CY04 CY05 CY04 CY05E 1Q 2Q 3Q 4Q 1Q 2Q 3QE 4QE Net Sales 3,594 4,021 3,736 2,825 2,762 4,649 4,246 3,241 13,759 14,898 YoY Change (%) 21.4 13.7 1.4 10.0 -23.1 15.6 13.6 14.7 7.9 8.3 Total Expenditure 2,582 2,801 2,556 2,172 2,053 3,076 2,982 2,574 9,911 10,685 EBITDA 1,012 1,219 1,180 653 710 1,573 1,264 667 3,848 4,213 Margins (%) 28.1 30.3 31.6 23.1 25.7 33.8 29.8 20.6 28.0 28.3 Depreciation 41 42 42 51 37 38 44 64 175 183 Other Income 124 152 113 117 137 140 212 268 509 756 PBT before EO Expense 1,094 1,330 1,252 719 810 1,675 1,432 871 4,182 4,787 Tax 390 422 431 206 254 549 497 284 1,396 1,663 Deferred Tax 6 38 30 73 8 72 0 0 126 0 Rate (%) 36.2 34.6 36.8 38.9 32.4 37.1 34.7 32.6 36.4 34.7 Adjusted PAT 699 870 791 439 548 1,054 935 587 2,661 3,123 YoY Change (%) 62.1 27.0 6.8 -0.6 -21.6 21.1 18.2 33.7 12.1 17.4 Margins (%) 19.4 21.6 21.2 15.5 19.8 22.7 22.0 18.1 19.3 21.0 Extra-Ord Expense 59 2 -934 203 78 19 0 0 -670 98 Reported PAT 640 868 1725 236 469 1,035 935 587 3,331 3,026 E: MOSt Estimates

Jinesh K Gandhi ([email protected]); Tel: +91 22 56575 304

23 September 2005 179 Results Preview SECTOR: PHARMACEUTICALS

Jubilant Organosys

STOCK INFO. BLOOMBERG BSE Sensex: 8,223 VAM IN 23 September 2005 Buy REUTERS CODE S&P CNX: 2,478 JUBO.BO Previous Recommendation: Buy Rs998

Equity Shares (m) 25.9 YEAR NET SALES PAT EPS EPS P/E P/BV ROE ROCE EV/ EV/ 52-Week Range 1,054/683 END (RS M) (RS M) (RS) GROWTH (%) (X) (X) (%) (%) SALES EBITDA 1,6,12 Rel. Perf. (%) -7/-11/-5 03/05A 11,703 1,126 41.1 23.2 24.3 4.3 28.0 22.0 2.4 13.4 M.Cap. (Rs b) 25.9 03/06E 14,574 1,564 51.0 24.1 19.6 3.5 23.5 19.1 2.0 10.7

M.Cap. (US$ b) 0.6 03/07E 17,712 2,375 77.2 51.3 12.9 2.7 28.2 21.9 1.5 7.5

? Jubilant is expected to have a subdued 2QFY06, due to the high base effect of the industrial chemicals business in 1QFY05 and losses in newly formed subsidiaries. Our estimate doesn’t factor in results of Trinity Labs Inc, which it acquired during the quarter. ? Revenues growth is expected to be robust, driven by the removal of capacity constraints in the CRAMS business. This would help offset the high base effect of the industrial chemical business. Revenue growth of 26.1% to Rs3.7b will be driven by 55.8% growth in its pharmaceutical business. ? EBITDA margins would be lower by 430bp to 15.8% owing to higher molasses costs and initial losses in recently formed research subsidiaries (Clinsys and Chemsys) and would also take a toll on profitability. However, net profit is expected to grow by 6.8% to Rs332m. ? We expect a recovery in profitability in 2HFY06, as molasses prices normalize and revenues continue to grow – leading to 38.9% growth in net profit in FY06. ? Valuations of 19.6x FY06E and 12.9x FY07E earnings do not reflect excellent growth potential (37% CAGR in fully diluted earnings over FY05-07E). We re-iterate Buy.

QUARTERLY PERFORMANCE (CONSOLIDATED) (RS MILLION) Y/E MARCH FY05 FY06 FY05 FY06E 1Q 2Q 3Q 4Q 1Q 2QE 3QE 4QE Net Sales 2,661 2,919 2,874 3,215 3,267 3,680 3,616 4,011 11,703 14,574 YoY Change (%) 46.9 39.0 26.8 33.7 22.8 26.1 25.8 24.8 36.2 24.5 Total Expenditure 2,085 2,332 2,374 2,802 2,873 3,100 2,850 3,099 9,627 11,922 EBITDA 576 587 500 413 394 580 766 912 2,076 2,652 Margins (%) 21.6 20.1 17.4 12.8 12.1 15.8 21.2 22.7 17.7 18.2 Depreciation 94 97 96 94 111 111 125 124 381 471 Interest 67 56 49 48 49 43 41 33 220 165 Other Income 10 29 17 21 31 33 40 38 77 142 PBT after EO Expense 425 463 372 381 265 459 640 793 1,641 2,157 Tax 66 147 90 41 55 49 69 58 188 231 Deferred Tax 77 6 4 0 0 71 99 164 243 334 Rate (%) 33.6 33.0 25.3 10.8 20.8 26.2 26.2 28.0 26.3 26.2 Minority Interest 13 -1 9 -3 -3 7 8 17 18 28 Reported PAT 269 311 269 343 213 332 465 554 1,192 1,564 Adjusted PAT 269 311 269 277 213 332 465 554 1,126 1,564 YoY Change (%) 96.4 79.8 20.1 11.4 -20.8 6.8 72.8 99.9 44.0 38.9 Margins (%) 10.1 10.7 9.4 8.6 6.5 9.0 12.9 13.8 9.6 10.7 E: MOSt Estimates

Jinesh K Gandhi ([email protected]); Tel: +91 22 56575 304

23 September 2005 180 Results Preview SECTOR: PHARMACEUTICALS

Lupin

STOCK INFO. BLOOMBERG BSE Sensex: 8,223 LPC IN 23 September 2005 Buy REUTERS CODE S&P CNX: 2,478 LUPN.BO Previous Recommendation: Buy Rs754

Equity Shares (m) 40.1 YEAR NET SALES PAT EPS EPS P/E P/BV ROE ROCE EV/ EV/ 52-Week Range 824/484 END* (RS M) (RS M) (RS) GROWTH (%) (X) (X) (%) (%) SALES EBITDA 1,6,12 Rel. Perf. (%) -9/8/-40 03/05A 12,611 918 22.9 -31.5 32.9 6.2 20.0 14.1 2.7 25.8 M.Cap. (Rs b) 30.2 03/06E 15,779 2,028 50.5 120.9 14.9 4.7 35.8 28.9 2.1 11.9

M.Cap. (US$ b) 0.7 03/07E 17,711 2,447 61.0 20.7 12.4 3.6 33.2 33.2 1.8 9.8 * Consolidated results

? Lupin’s quarterly results are standalone, while annual numbers are consolidated.

? Lupin’s 2QFY06 revenue is expected to grow by 10.5% YoY to Rs3.5b, driven by scaling up of ceftriaxone sales in the US market and slight improvement in Pen-G based business. Revenue growth would be restricted due to the pressure on its unregulated markets business and pricing pressure in APIs.

? EBITDA margins are expected to improve by 11.4ppt YoY to 21.7%, owing to ceftriaxone sales, higher sales of Suprax and marginal improvement in Pen G realizations. Margin expansion would result in net profit growth of 215% YoY to Rs551m.

? Despite a gradual improvement in the underlying fundamentals (bottoming out of Pen-G business, pick up in Suprax prescription share, some recovery in regulated market API sales), Lupin's valuations at 14.9x FY06E and 12.4x FY07E earnings, continues to be a discount to its peers. We re-iterate Buy with a target of Rs750.

QUARTERLY PERFORMANCE (STANDALONE) (RS MILLION) Y/E MARCH FY05 FY06 FY05 FY06E 1Q 2Q 3Q 4Q 1Q 2QE 3QE 4QE Net Sales 2,903 3,164 2,796 2,893 3,521 3,496 3,227 3,203 11,611 13,448 YoY Change (%) 9.8 -8.5 9.9 7.2 21.3 10.5 15.4 10.7 3.7 15.8 Total Expenditure 2,530 2,839 2,416 2,699 2,903 2,738 2,579 2,519 10,341 10,739 EBITDA 373 325 379 193 618 758 648 684 1,270 2,708 Margins (%) 12.8 10.3 13.6 6.7 17.5 21.7 20.1 21.4 10.9 20.1 Depreciation 79 81 82 90 91 95 97 104 332 387 Interest 71 62 71 69 65 60 60 52 273 237 Other Income 39 12 35 102 130 45 55 61 188 291 PBT 262 193 261 137 591 648 546 589 853 2,374 Tax 55 18 16 -81 160 97 82 89 9 427 Rate (%) 21.2 9.3 6.2 -58.8 27.0 15.0 15.0 15.0 1.1 18.0 Profit after Tax 206 175 245 217 432 551 464 500 844 1,947 YoY Change (%) -26.4 -66.2 -38.8 -27.0 109.1 215.0 89.5 130.2 -43.6 130.8 Margins (%) 7.1 5.5 8.8 7.5 12.3 15.8 14.4 15.6 7.3 14.5 E: MOSt Estimates

Jinesh K Gandhi ([email protected]); Tel: +91 22 56575 304

23 September 2005 181 Results Preview SECTOR: PHARMACEUTICALS

Matrix Laboratories

STOCK INFO. BLOOMBERG BSE Sensex: 8,223 HDPH IN 23 September 2005 Buy REUTERS CODE S&P CNX: 2,478 MAXL.BO Previous Recommendation: Buy Rs183

Equity Shares (m) 149.7 YEAR NET SALES PAT EPS EPS P/E P/BV ROE ROCE EV/ EV/ 52-Week Range 257/139 END (RS M) (RS M) (RS) GROWTH (%) (X) (X) (%) (%) SALES EBITDA 1,6,12 Rel. Perf. (%) -9/-11/-21 03/05A 6,375 1,259 8.4 -14.1 21.7 4.2 30.6 31.9 4.1 15.1 M.Cap. (Rs b) 27.4 03/06E 8,259 1,261 8.4 0.1 21.7 3.5 17.7 17.4 3.1 11.8

M.Cap. (US$ b) 0.6 03/07E 10,251 1,748 11.7 38.6 15.7 2.9 20.2 16.1 2.4 8.3

? Our Matrix estimates are standalone and do not incorporate the impact of the Docpharma acquisition. ? Matrix would have its fourth rough quarter in terms of profitability in 2QFY06E – with 37.9% decline in adjusted net profit, despite 19.7% growth in revenues. Revenues are expected to be robust, growing by 19.7% YoY to Rs1.9b, driven by higher ARV sales. ? EBITDA margins are expected to decline 810bp YoY to 24.6% due to higher raw material cost (50% of sales v/s 47.3% in 2QFY05). Margins would, however, recover over FY06, as the company shifts to a lower cost process in citalopram and full benefits from new products like clarithromycin start coming in. ? Adjusted net profit is expected to decline 37.9% YoY to Rs261m, due to higher interest cost at Rs142m (v/s Rs16m in 2QFY05) on account of debt taken for DocPharma acquisition. This does not include the non-compete fee that Matrix is expected to receive from an innovator company. We estimate this to be around Rs100m during the quarter and expect it to prop up reported net profit to Rs351m. ? On consolidating for DocPharma, Proforma earnings for FY06E and FY07E will be Rs11.3 and Rs16.4, respectively. At 16.2x FY06E and 11.2x FY07E consolidated earnings, the stock looks attractive. We re-iterate Buy.

QUARTERLY PERFORMANCE (STANDALONE) (RS MILLION) Y/E MARCH FY05 FY06 FY05 FY06E 1Q 2Q 3Q 4Q 1Q 2QE 3QE 4QE Net Sales 1,540 1,625 1,661 1,546 1,543 1,945 2,267 2,504 6,375 8,259 YoY Change (%) 28.2 20.5 21.1 9.9 0.2 19.7 36.5 62.0 20.3 29.6 Total Expenditure 1,072 1,094 1,286 1,200 1,373 1,467 1,621 1,614 4,631 6,074 EBITDA 468 531 375 346 170 479 646 890 1,744 2,185 Margins (%) 30.4 32.7 22.6 22.4 11.0 24.6 28.5 35.5 27.3 26.5 Depreciation 34 40 48 58 54 53 51 54 191 212 Interest 12 16 9 8 11 142 139 135 63 427 Other Income 26 42 37 46 111 5 8 -94 109 30 PBT before EO Income 447 518 355 326 217 289 464 606 1,599 1,576 EO Income 0 0 0 38 67 100 100 100 38 367 PBT after EO Income 447 518 355 364 284 389 564 706 1,637 1,943 Tax 30 39 47 312 11 19 36 128 429 194 Deferred Tax 10 59 52 -234 20 19 36 119 -112 194 Rate (%) 8.9 18.9 28.1 21.4 10.9 9.7 12.9 35.0 19.4 20.0 Reported PAT 407 420 256 286 253 351 491 459 1,320 1,554 Adj PAT 407 420 256 256 193 261 404 394 1,289 1,261 YoY Change (%) 32.7 30.8 -23.5 -33.3 -52.5 -37.9 58.1 53.9 3.4 -2.2 Margins (%) 26.5 25.8 15.4 16.6 12.5 13.4 17.8 15.7 20.2 15.3 E: MOSt Estimates; FY05 quarterly numbers don’t add up to full year numbers due to restatement

Jinesh K Gandhi ([email protected]); Tel: +91 22 56575 304

23 September 2005 182 Results Preview SECTOR: PHARMACEUTICALS

Nicholas Piramal

STOCK INFO. BLOOMBERG BSE Sensex: 8,223 NP IN 23 September 2005 Buy REUTERS CODE S&P CNX: 2,478 NICH.BO Previous Recommendation: Buy Rs284

Equity Shares (m) 209.0 YEAR NET SALES PAT EPS EPS P/E P/BV ROE ROCE EV/ EV/ END (RS M) (RS M) (RS) GROWTH (%) (X) (X) (%) (%) SALES EBITDA 52-Week Range 311/159 03/05A 13,342 924 4.9 -58.9 58.3 10.8 20.4 16.5 4.7 32.2 1,6,12 Rel. Perf. (%) -1/2/25 M.Cap. (Rs b) 59.3 03/06E 16,858 2,214 10.6 117.8 26.8 6.3 30.6 25.2 3.6 17.1 M.Cap. (US$ b) 1.4 03/07E 20,207 3,997 19.1 80.6 14.8 4.9 37.1 32.7 2.9 11.5

? NPIL is expected to report a 17% growth in revenues in 2QFY06, driven by commencement of AMO contract during the quarter.

? EBITDA margins are expected to expand by 410bp to 26.7%. Improvement in margin is driven by AMO contract.

? Adjusted net profit grew by 35.8% to Rs788m as a result of significant margin expansion. We expect growth momentum to continue going forward as NPIL executes AMO contract.

? The stock trades at 26.8x FY06E and 14.8x FY07E earnings. FY07 would be the first year in which the company’s success in the custom manufacturing business would reflect materially in its financials. NPIL remains one of our most preferred plays on the global outsourcing opportunity. We re-iterate Buy.

QUARTERLY PERFORMANCE (CONSOLIDATED) (RS MILLION) Y/E MARCH FY05 FY06 FY05 FY06E 1Q 2Q 3Q 4Q 1Q 2QE 3QE 4QE Net Sales 3,618 3,791 3,469 2,464 3,983 4,440 4,255 4,180 13,077 16,858 YoY Change (%) -4.9 1.9 9.0 -27.7 10.1 17.1 22.7 69.6 -7.3 28.9 EBITDA 685 857 574 -158 755 1,184 914 1,186 1,689 3,510 Margins (%) 18.9 22.6 16.6 -6.4 18.9 26.7 21.5 28.4 12.9 20.8 Depreciation 113 121 118 178 151 167 169 189 524 676 Interest 23 49 44 76 48 40 39 40 192 167 Other Income 8 30 4 32 18 35 55 69 75 177 PBT before EO expense 557 718 417 -379 574 1,012 761 1,026 1,047 2,844 Extra-Ord expense 0 23 -523 -296 5 0 0 0 -796 5 PBT after EO expense 557 695 940 -83 569 1,012 761 1,026 1,844 2,839 Tax 70 73 83 17 73 119 89 52 248 333 Deferred Tax 45 62 77 33 -6 104 78 116 217 292 Rate (%) 20.7 19.4 17.0 -61.1 11.7 22.0 22.0 16.4 25.2 22.0 PAT 442 560 780 -133 503 789 593 857 1,379 2,214 Less: Minority Interest 1 0 0 1 1 1 1 1 3 4 Reported PAT 440 560 780 -134 502 788 592 856 1,376 2,210 Adj PAT 440 580 309 -401 506 788 592 856 659 2,214 YoY Change (%) 23.3 5.2 -21.7 -141.2 15.0 35.8 91.6 - -70.7 235.9 E: MOSt Estimates; Quarterly numbers don’t add up to full year numbers due to restatement

Jinesh K Gandhi ([email protected]); Tel: +91 22 56575 304

23 September 2005 183 Results Preview SECTOR: PHARMACEUTICALS

Pfizer

STOCK INFO. BLOOMBERG BSE Sensex: 8,223 PFIZ IN 23 September 2005 Neutral REUTERS CODE S&P CNX: 2,478 PFIZ.BO Previous Recommendation: Neutral Rs780

Equity Shares (m) 29.8 YEAR NET SALES PAT EPS EPS P/E P/BV ROE ROCE EV/ EV/ END (RS M) (RS M) (RS) GROWTH (%) (X) (X) (%) (%) SALES EBITDA 52-Week Range 891/485 1,6,12 Rel. Perf. (%) -10/-14/0 11/04A 5,829 572 19.2 47.5 40.7 6.8 16.7 27.2 3.7 23.9 M.Cap. (Rs b) 23.3 11/05E 6,238 964 32.0 66.7 24.4 6.0 24.5 39.4 3.4 14.1

M.Cap. (US$ b) 0.5 11/06E 6,986 1,273 42.7 32.1 18.3 5.1 28.1 44.9 2.9 10.4

? Pfizer’s revenues for 4QFY05E are expected to grow by 12.9% to Rs1.7b. For FY05E, net revenues are expected to grow by 7% to Rs6.2b.

? We expect margins to expand significantly by 820bp YoY to 26.1%, reflecting benefits of its cost cutting efforts.

? Higher other income at Rs39m (up by 30% YoY) and lower tax provisioning (at 31.1% of PBT v/s 39.9% in 4QFY04) would result in 89.8% YoY increase in adjusted net profit to Rs311m. For the full year (FY05), we expect adjusted net profit growth of 68.4% to Rs964m, reflecting the benefits of the restructuring exercise undertaken by the company.

? Earnings growth is not an issue for Pfizer over the next two years, as it is coming off a very low base. Restructuring benefits along with steady topline growth would drive a healthy 48% CAGR in adjusted PAT over FY04-06E. At current valuations of 24.4x FY05E and 18.3x FY06E earnings, the stock appears fairly valued. Any further re-rating would be driven by clear signals on the parent’s intent to drive growth in the listed subsidiary. We maintain Neutral.

QUARTERLY PERFORMANCE (INFLUDING PHARMACIA) (RS MILLION) Y/E NOVEMBER FY04 FY05 FY04 FY05E 1Q 2Q 3Q^ 4Q^ 1Q 2Q 3Q 4QE Net Revenues 1,416 1,403 1,470 1,540 1,383 1,421 1,695 1,739 5,830 6,238 YoY Change (%) 33.4 19.9 4.0 10.3 -2.4 1.2 15.3 12.9 15.6 7.0 Total Expenditure 1,199 1,220 1,236 1,264 1,101 1,104 1,235 1,286 4,919 4,725 EBITDA 218 183 234 276 282 317 461 453 911 1,512 Margins (%) 15.4 13.1 15.9 17.9 20.4 22.3 27.2 26.1 15.6 24.2 Depreciation 19 28 25 31 29 37 32 40 103 139 Interest 2 3 2 3 2 0 0 0 8 2 Other Income 35 46 31 30 34 31 34 39 141 137 PBT before EO Items 231 199 238 273 285 311 462 451 941 1,509 EO Expense/(Income) 52 70 32 39 58 58 115 59 192 291 PBT after EO Items 179 130 207 234 226 252 347 392 748 1,218 Tax 76 52 72 93 92 98 129 122 293 440 Rate (%) 42.3 40.2 34.9 39.9 40.5 38.7 37.2 31.1 39.2 36.1 Reported PAT 103 77 134 141 135 155 218 270 455 778 PAT adj. for Excep Items 133 119 155 164 169 191 291 311 572 964 YoY Change (%) 34.7 445.7 4.9 70.9 27.0 60.0 87.4 89.8 52.8 68.4 Margins (%) 9.4 8.5 10.5 10.6 12.2 13.4 17.1 17.9 9.8 15.4 E: MOSt Estimates; ^ Doesn’t include results of Pharmacia & hence doesn’t add-up to full years results

Jinesh K Gandhi ([email protected]); Tel: +91 22 56575 304

23 September 2005 184 Results Preview SECTOR: PHARMACEUTICALS

Ranbaxy Laboratories

STOCK INFO. BLOOMBERG BSE Sensex: 8,223 RBXY IN 23 September 2005 Sell REUTERS CODE S&P CNX: 2,478 RANB.BO Previous Recommendation: Sell Rs494

Equity Shares (m) 371.1 YEAR NET SALES PAT EPS EPS P/E P/BV ROE ROCE EV/ EV/ END (RS M) (RS M) (RS) GROWTH (%) (X) (X) (%) (%) SALES EBITDA 52-Week Range 650/438 12/04A 54,220 7,279 19.6 -0.9 25.2 7.3 29.1 27.7 3.5 19.4 1,6,12 Rel. Perf. (%) -12/-36/-59 M.Cap. (Rs b) 183.1 12/05E 60,194 6,100 16.4 -16.2 30.1 6.5 21.5 21.8 3.1 20.5

M.Cap. (US$ b) 4.2 12/06E 68,319 7,837 21.1 28.5 23.4 5.6 24.0 25.2 2.8 16.1

? Ranbaxy is expected to report a 23.2% growth in revenues to Rs16.8b (including other operating income), largely driven by the launch of a couple of products in the US market.

? EBITDA margins would however remain depressed due to continued pricing pressure, especially in the US markets. We expect a 500bp decline YoY to 18%. The pressure on profitability would recede towards the latter part of the year, driven by cost savings arising from scaling back the US branded business.

? Lower tax provisioning (18% of PBT v/s 24.5% in 3QCY04) would result in marginal profit growth of 3.9% to Rs2.1b, reflecting pressure on margins.

? Ranbaxy has one of the best business models among Indian pharma companies. However, profitability would be under duress over the next year, as pricing pressure mounts in the US and the company scales up its spend on R&D and on the legal front. At 30.1x CY05E and 23.4x CY06E earnings, the stock trades at a significant premium to its peers. Risk-reward equation is unfavorable. Re-iterate Sell.

QUARTERLY PERFORMANCE (INDIAN GAAP - CONSOLIDATED) (RS MILLION) Y/E DECEMBER CY04 CY05 CY04 CY05E 1Q 2Q 3Q 4Q 1Q 2Q 3QE 4QE Net Income 13,470 12,992 13,614 14,341 11,835 13,642 16,771 17,946 54,291 60,194 YoY Change (%) 17.0 8.5 13.9 18.6 -12.1 5.0 23.2 25.1 21.9 10.9 EBITDA 3,047 2,927 3,125 2,206 1,275 1,722 3,012 3,226 9,814 9,235 Margins (%) 22.6 22.5 23.0 15.4 10.8 12.6 18.0 18.0 18.1 15.3 Depreciation 401 415 410 310 326 374 402 388 1,215 1,490 Interest 107 126 127 104 138 170 142 119 335 570 Other Income 55 275 66 34 31 85 75 97 1,000 288 PBT before EO Expense 2,594 2,661 2,654 1,826 842 1,263 2,542 2,816 9,264 7,463 Extra-Ord Expense* 0 0 0 0 0 0 0 0 372 0 PBT after EO Expense 2,594 2,661 2,654 1,826 842 1,263 2,542 2,816 8,892 7,463 Tax 615 624 520 224 131 247 458 508 1,574 1,343 Deferred Tax 70 76 130 31 0 0 0 0 307 0 Rate (%) 26.4 26.3 24.5 14.0 15.6 19.6 18.0 18.0 21.2 18.0 Reported PAT 1,909 1,961 2,004 1,571 711 1,016 2,084 2,308 7,011 6,119 Minority Interest 3 3 3 6 3 3 5 8 25 19 Adj PAT after minority interest 1,906 1,958 2,001 1,565 708 1,013 2,080 2,300 7,279 6,100 YoY Change (%) 15.3 -3.0 12.0 -3.8 -62.9 -48.3 3.9 46.9 1.7 -16.2 Margins (%) 14.1 15.1 14.7 10.9 6.0 7.4 12.4 12.8 13.4 10.1 E: MOSt Estimates; * Audited CY04 numbers are different from earlier announced figures; hence quarterly numbers do not add up

Jinesh K Gandhi ([email protected]); Tel: +91 22 56575 304

23 September 2005 185 Results Preview SECTOR: PHARMACEUTICALS

Sun Pharmaceuticals Industries

STOCK INFO. BLOOMBERG BSE Sensex: 8,223 SUNP IN 23 September 2005 Buy REUTERS CODE S&P CNX: 2,478 SUN.BO Previous Recommendation: Buy Rs643

Equity Shares (m) 185.5 YEAR NET SALES PAT EPS EPS P/E P/BV ROE ROCE EV/ EV/ END* (RS M) (RS M) (RS) GROWTH (%) (X) (X) (%) (%) SALES EBITDA 52-Week Range 687/396 1,6,12 Rel. Perf. (%) -2/8/8 03/05A 11,703 4,198 22.0 16.4 29.2 10.0 40.6 22.4 9.9 25.8 M.Cap. (Rs b) 119.2 03/06E 14,853 5,601 27.0 22.9 23.8 7.4 39.6 19.8 7.7 21.4

M.Cap. (US$ b) 2.7 03/07E 17,455 6,754 32.6 20.6 19.7 5.7 36.1 21.0 6.3 17.1 * Consolidated

? Sun Pharma is likely to report 23.6% YoY growth in revenues, partly driven by 13.2% growth in the domestic market and 33.3% growth in international markets. Growth in domestic market is partly inflated due to change in distribution system, which would result in 10-15% growth in sales, but no increase in EBITDA. ? EBITDA margins are expected to decline by 900bp YoY to 32.6%, due to growing pressure on Caraco’s realizations and higher R&D spend. Actually, a decline in margins would be in the range of 550-600bp, adjusting for change in distribution system in the domestic market. ? Other income is expected to be sharply higher (Rs290 v/s Rs20m), driven by income from idle FCCB proceeds. Sun has indicated that it is unlikely to make any acquisitions in the near term, given the high valuations in the US market. Other income is thus expected to remain high in the current fiscal. ? Higher depreciation (up by 42%) and higher tax provisioning (at 5.8% of PBT v/s 2.8% in 2QFY05) would dilute impact of higher other income, resulting in 18.5% YoY increase in profit to Rs1.2b. ? Valuations at 23.8x FY06E and 19.7x FY07E earnings, does not fully factor in the value that Sun could add by using its strong cash chest (US$440m) for acquisitions and ramping up its overseas business. Maintain Buy.

QUARTERLY PERFORMANCE (CONSOLIDATED) (RS MILLION) Y/E MARCH FY05 FY06 FY05 FY06E 1Q 2Q 3Q 4Q 1Q 2QE 3QE 4QE Net Revenues 2,790 2,807 3,303 2,911 3,859 3,469 3,881 3,644 11,703 14,853 YoY Change (%) 23.0 11.0 33.9 24.9 38.3 23.6 17.5 25.1 22.6 26.9 EBITDA 1,016 1,167 1,441 1,036 1,353 1,130 1,438 1,414 4,508 5,335 Margins (%) 36.4 41.6 43.6 35.6 35.0 32.6 37.0 38.8 38.5 35.9 Depreciation 78 86 91 120 116 123 120 122 368 481 Net Other Income 37 20 -31.8 258 209 290 302 430 271 1,184 PBT before EO Exp 975 1,101 1,318 1,174 1,446 1,297 1,620 1,722 4,410 6,038 EO Exp/(Inc) 0 0 158 0 0 0 0 0 0 0 PBT after EO Exp 975 1,101 1,161 1,174 1,446 1,297 1,620 1,722 4,410 6,038 Tax 38 31 48 53 33 75 94 148 169 349 Rate (%) 3.8 2.8 4.1 4.5 2.3 5.8 5.8 8.6 3.8 5.8 Profit after Tax 938 1,070 1,113 1,121 1,413 1,222 1,526 1,574 4,242 5,689 Share of Minority Partner 54 39 14 -62 50 0 0 0 44 88 Reported PAT 884 1,031 1,100 1,183 1,363 1,222 1,526 1,574 4,198 5,601 Adj Net Profit 884 1,031 1,251 1,183 1,363 1,222 1,526 1,574 4,198 5,601 YoY Change (%) 136.3 47.0 25.6 1.2 54.2 18.5 38.8 33.1 19.8 33.4 Margins (%) 31.7 36.7 33.3 40.6 35.3 35.2 39.3 43.2 35.9 37.7 E: MOSt Estimates; * Quaterly results have been recasted and hence do not tally with full year results

Jinesh K Gandhi ([email protected]); Tel: +91 22 56575 304

23 September 2005 186 Results Preview SECTOR: PHARMACEUTICALS

Wockhardt

STOCK INFO. BLOOMBERG BSE Sensex: 8,223 WOCK IN 23 September 2005 Buy REUTERS CODE S&P CNX: 2,478 WCKH.BO Previous Recommendation: Buy Rs488

Equity Shares (m) 109.0 YEAR NET SALES PAT EPS EPS P/E P/BV ROE ROCE EV/ EV/ END (RS M) (RS M) (RS) GROWTH (%) (X) (X) (%) (%) SALES EBITDA 52-Week Range 557/316 1,6,12 Rel. Perf. (%) -8/7/2 12/04A 12,389 2,231 20.5 8.5 23.8 8.7 41.5 24.1 4.4 19.5 M.Cap. (Rs b) 53.2 12/05E 14,768 2,703 22.6 10.6 21.5 6.5 37.8 21.7 3.6 15.6

M.Cap. (US$ b) 1.2 12/06E 16,835 3,194 26.8 18.2 18.2 5.0 34.1 25.5 3.0 12.5 * Fully diluted EPS

? Wockhardt’s 3QCY05 revenue is expected to grow by 19% YoY to Rs3.8b. The primary growth driver has been international sales growth of 26%, driven by supplies of Exenatide to Amylin. The domestic business is expected to report steady growth of 9.5%.

? EBITDA margins are expected to decline marginally by 60bp YoY to 24.6%, as the company invests more in R&D. EBITDA margin going forward should improve as the company gradually shifts production for the domestic market to Baddi, which enjoys excise benefits.

? Higher other income (Rs61m v/s nil in 3QCY04) and lower interest cost (by 35% YoY) would more than neutralize the impact of higher depreciation (by 20% YoY), translating into profit growth of 32.4% YoY to Rs739m.

? Although Wockhardt needs to display the ability to fully leverage its assets and scale up substantially in regulated markets for a further re-rating, valuations of 18.2x CY06E consolidated earnings leave room for upside. We re-iterate Buy.

QUARTERLY PERFORMANCE (CONSOLIDATED ) (RS MILLION) Y/E DECEMBER CY04 CY05 CY04 CY05E 1Q 2Q 3Q 4Q 1Q 2Q 3QE 4QE Gross Sales 2,908 2,928 3,175 3,438 3,097 3,771 3,780 4,121 12,389 14,768 YoY Change (%) 79.6 38.8 11.3 21.1 6.5 28.8 19.0 19.9 31.5 19.2 Total Expenditure 2,329 2,236 2,375 2,697 2,497 2,812 2,851 3,211 9,577 11,372 EBITDA 579 692 800 741 600 959 929 909 2,812 3,397 Margins (%) 19.9 23.6 25.2 21.6 19.4 25.4 24.6 22.1 22.7 23.0 Depreciation 88 88 94 99 103 107 113 130 368 453 Interest -7 38 71 -119 58 46 46 42 -17 192 Other Income 3 3 0 152 91 33 61 135 158 320 PBT before EO Items 501 569 635 913 530 839 830 872 2,619 3,071 EO Income 0 0 0 -113 0 0 0 0 -113 0 PBT after EO Items 501 569 635 800 530 839 830 872 2,506 3,071 Tax 51 61 56 46 68 95 58 66 215 287 Deferred Tax 6 7 21 122 44 -31 33 35 156 81 Rate (%) 11.4 12.0 12.1 21.0 21.1 7.6 11.0 11.6 14.8 12.0 Reported PAT 444 501 558 632 418 775 739 771 2,135 2,703 Adjusted PAT 444 501 558 721 418 775 739 771 2,231 2,703 YoY Change (%) 441.5 43.1 13.6 43.4 -5.9 54.7 32.4 6.9 56.5 21.1 Margins (%) 15.3 17.1 17.6 18.4 13.5 20.6 19.5 18.7 17.2 18.3 E: MOSt Estimates; Quarterly numbers don’t match with annual report numbers due to re-classification of few items

Jinesh K Gandhi ([email protected]); Tel: +91 22 56575 304

23 September 2005 187 Results Preview

QUARTER ENDING SEPTEMBER 2005

Telecom

BSE Sensex: 8,223 S&P CNX: 2,478 23 September 2005

COMPANY NAME PG. Subscriber additions in overdrive The cellular industry is expected to add 7.7m subscribers in the quarter ended September Bharti Tele-Ventures 192 2005 compared to 5.2m subscribers in the quarter ended June 2005. The average monthly subscriber additions have been robust over the last three months with the industry adding 7.2m subscribers between June-August 2005 compared to 7.3m subscribers between January-May 2005. This exponential growth in subscriber additions can be attributed to the following reasons: ? Launch of lower denomination Micro Prepaid Recharge Coupons: The wireless industry launched the lower denomination Rs200/month micro prepaid recharge coupon for prepaid subscribers at the end of May 2005, increasing affordability. The lower denomination micro prepaid recharge coupon has reduced the cost of connectivity by approximately 33%, thereby making cellular connections affordable to a larger section of the population. ? Aggressive expansion by the operators: Cellular operators have been rapidly scaling up their network and expanding into new towns to increase market share and gain economies of scale. Bharti increased its coverage to 2,700 towns in June 2005 from 2,300 towns in March 2005 and has plans to cover 5,000 towns by March 2006. BSNL has also expanded its coverage and is expected to float a tender for US$5b for installing an additional 60m lines. Aggressive expansion by the operators has increased cellular density and driven subscriber additions. ? Lower cost of handsets: The cost of handsets have been reducing as the equipment providers are keen to tap the opportunities in developing countries like India and China with low cellular density. One of the biggest reasons for the low cellular density in the country has been the high cost of handsets which has made a cellular connection non affordable to a large strata of population. The cost of mobile handsets has already dropped to approximately US$60, with equipment providers committed to provide a sub US$25 handset by 2006. This, we believe, would further reduce the cost of connectivity and increase subscriber additions.

EXPECTED QUARTERLY PERFORMANCE SUMMARY (RS MILLION) RECO SALES EBITDA NET PROFIT SEP.05 CHG. (%) SEP.05 CHG. (%) SEP.05 CHG. (%) Telecom Bharti Tele-Ventures Buy 27,074 45.6 10,315 47.1 5,746 72.2

Sidharth Shah ([email protected]); Tel: +91 22 56575145

23 September 2005 188 Telecom

QUARTERLY SUBSCRIBER TRENDS

3,000,000 Average Monthly Sub Adds (Nos) - LHS QoQ Growth (%) - RHS 60

2,600,000 45 30 2,200,000 15 1,800,000 0

1,400,000 -15

1,000,000 -30 3QFY04 4QFY04 1QFY05 2QFY05 3QFY05 4QFY05 1QFY06 2QFY06E

Source: COAI, AUSPI

Non-voice share in total revenues rising Telecom operators have been gradually increasing the share of non-voice services in overall mobile revenues. The share of non-voice revenues (including SMS revenues) for Bharti went up from 10.5% in the quarter ended June 2004 to 17% during the quarter ended June 2005. All major telecom operators are trying to increase the non-voice share in total mobile revenues by increasing the value added services provided to subscribers. Usage of value added services has increased with the increase in penetration of EDGE and GPRS enabled handsets, thereby resulting in higher non-voice revenues.

Operators are also associating themselves with interactive television shows which enable subscribers to participate via SMS. The operators charge a premium on these services which is often 4 to 6 times the tariffs on a local SMS. Other value added services like downloading tunes and games are also at a premium to normal SMS services. Growth in the share of revenues from such value-added services will enable the operators to slow the decline in blended ARPUs.

Regulatory developments key to continued growth TRAI is currently examining a proposal to move to a hybrid ADC regime whereby ADC and termination charges on incoming international calls will be retained at Rs3.25 and Rs1 per minute and ADC on domestic calls will be calculated on a revenue share basis. Any changes in the ADC and interconnection charges are likely to have an impact on the growth of the wireless industry. The Department of Telecom (DoT) is currently reviewing the spectrum policy and has a freeze on fresh allocation of radio frequency till the spectrum policy is finalized. With most operators having utilized the spectrum allocated to them, particularly in the metros, any delay in allocation of spectrum could affect the expansion plans of the operators. The government has not yet notified the increase in the FDI limits from 49% to 74% in the telecom sector. Notification of the increase in the FDI limits is expected to give further fillip to the sector.

23 September 2005 189 Telecom

Valuation and view We believe that the wireless industry has reached an inflection point in terms of subscriber additions with the introduction of the lower denomination micro prepaid recharge coupon. We expect the industry to maintain the average monthly subscriber additions of approximately 2.5m in the medium term. We continue to be impressed by Bharti’s performance as it has managed to not only maintain leadership in an intensely competitive sector, but has also improved market share, albeit by a small margin. Bharti continues to be best positioned to take advantage of the buoyancy in the sector, with an aggressive expansion plan and a pan India presence. We are raising our FY06E and FY07E EPS estimates for Bharti to Rs13.6 and Rs20.2 respectively. The stock trades at 24.9x FY06E and 16.8x FY07E earnings. We maintain Buy with a target price of Rs375.

CHANGE IN FORECASTS (RS M)

FY06E FY07E OLD NEW VAR (%) OLD NEW VAR (%) Revenues 112,110 113,798 1.5 144,714 151,583 4.7 Growth (%) 39.5 41.6 29.1 33.2 EBITDA Margin (%) 38.5 38.5 40.0 40.0 Net Profit 24,853 25,461 2.4 35,308 37,846 7.2 Growth (%) 72.7 76.9 42.1 48.6 EPS (Rs) 13.3 13.6 2.4 18.8 20.2 7.2 Growth (%) 70.8 75.0 42.1 48.6 Source: MOSt

23 September 2005 190 Telecom

Stock performance and valuations

STOCK PERFORMANCE (%) ABSOLUTE PERF REL PERF TO SENSEX REL PERF TO SECTOR 3 M 1 YEAR 3 M 1 YEAR 3 M 1 YEAR Telecom Bharti Tele-Ventures 42 129 27 80 0 -3

RELATIVE PERFORMANCE - 3 MONTH (%) RELATIVE PERFORMANCE - 1 YEAR (%)

Sensex MOSt Telecom Index MOSt Telecom Index Sensex 150 240

135 200

120 160

105 120

90 80 Jun-05 Jul-05 Aug-05 Sep-05 Sep-04 Dec-04 Mar-05 Jun-05 Sep-05

COMPARATIVE VALUATION CMP (RS) RECO EPS (RS) P/E (X) EV/EBITDA ROE (%) 23.9.05 FY05A FY06E FY07E FY05A FY06E FY07E FY05A FY06E FY07E FY05A FY06E FY07E Telecommunication Bharti Tele-Ventures 339 Buy 7.8 13.6 20.2 44.1 24.9 16.8 22.6 15.2 10.7 24.3 31.8 34.2

23 September 2005 191 Results Preview SECTOR: TELECOM

Bharti Tele-Ventures

STOCK INFO. BLOOMBERG BSE Sensex: 8,223 BHARTI IN 23 September 2005 Buy REUTERS CODE S&P CNX: 2,478 BRTI.BO Previous Recommendation: Buy Rs339

Equity Shares (m) 1,873.5 YEAR NET SALES PAT EPS EPS P/E P/BV ROE ROCE EV/ EV/ END (RS M) (RS M) (RS) GROWTH (%) (X) (X) (%) (%) SALES EBITDA 52-Week Range 367/140 3/05E 80,348 14,393 7.7 N.A. 44.1 9.3 24.3 17.1 8.4 22.5 1,6,12 Rel. Perf. (%) 4/31/80 M.Cap. (Rs b) 635.1 3/06E 113,798 25,461 13.6 76.9 24.9 6.8 31.8 23.6 5.8 15.2

M.Cap. (US$ b) 14.5 3/07E 151,583 37,846 20.2 48.6 16.8 4.9 34.2 30.0 4.2 10.6

? We expect Bharti to add 1.7m subscribers for 2QFY06 against 1.27m subscribers in 1QFY06, a growth of 34% QoQ.

? We expect EBITDA margins for mobile telephony business to expand 130bp QoQ as the company reaps benefits of operating leverage on the higher subscriber adds during the quarter. The company has also added a larger proportion of its subscribers in the high-margin existing circles which will lead to expansion in margins.

? We expect the revenues from fixed-line business to grow 12.7% QoQ on the back of strong subscriber additions.

? Overall EBITDA margins will expand by 80bp on back of the margin expansion in mobile telephony business.

? The stock is currently trading at 24.9x FY06E and 16.8x FY07E earnings. We believe Bharti remains the most attractive play in the buoyant telecom sector which is exhibited by its continued market leadership and superior execution skills. We maintain Buy with a target price of Rs375.

? Key issues to focus on: Blended ARPUs and margins in the mobile telephony business.

QUARTERLY PERFORMANCE (CONSOLIDATED) (RS MILLION) Y/E MARCH FY05 FY06 FY05 FY06E 1Q 2Q 3Q 4Q 1Q 2QE 3QE 4QE Gross Revenue 17,047 18,598 21,530 23,173 25,249 27,074 29,460 32,015 80,348 113,797 YoY Growth (%) 92.3 74.0 49.8 48.2 48.1 45.6 36.8 38.2 159.9 41.6 QoQ Growth (%) -1.2 9.1 15.8 7.6 9.0 7.2 8.8 8.7 Access & Interconnect Charges 3,924 3,791 4,605 4,462 4,850 5,198 5,627 6,083 16,782 21,758 Net Revenue 13,123 14,807 16,925 18,711 20,399 21,876 23,833 25,932 63,566 92,040 Total Operating Expenses 6,920 7,795 9,123 9,659 10,986 11,561 12,403 13,286 33,497 48,235 EBITDA 6,203 7,012 7,802 9,052 9,413 10,315 11,430 12,646 30,069 43,804 Margin (%) 36.4 37.7 36.2 39.1 37.3 38.1 38.8 39.5 37.4 38.5 Net Finance Costs 794 404 191 860 199 338 344 350 2,249 1,231 Cash Profit from Operations 5,408 6,608 7,611 8,192 9,214 9,977 11,086 12,296 27,819 42,574 Depreciation & Amortisation 2,296 2,494 3,031 3,365 3,364 3,670 3,658 3,848 11,186 14,540 Profit before Tax 3,079 3,959 4,545 4,840 5,977 6,440 7,568 8,595 16,423 28,581 Income Tax Expense / (Income) 115 622 768 384 868 615 605 688 1,889 2,776 Net Profit / (Loss) 2,962 3,337 3,726 4,368 5,040 5,746 6,872 7,803 14,393 25,460 QoQ Growth (%) - 12.7 11.7 17.2 15.4 14.0 19.6 13.6 NA 76.9 E: MOSt Estimates

Sidharth Shah ([email protected]); Tel: +91 22 56575145

23 September 2005 192 Results Preview

QUARTER ENDING SEPTEMBER 2005

Textiles

BSE Sensex: 8,223 S&P CNX: 2,478 23 September 2005

COMPANY NAME PG. The quarter ended September 2005 further strengthened India’s position as one of the most preferred textile outsourcing destinations for major global retailers. During January- Alok Industries 199 May 2005, exports to the US registered a 31% YoY volume growth and a 37% YoY Arvind Mills 200 value growth. Exports to the EU also registered an 18% YoY growth in volumes and a 16% YoY growth in value terms. India, along with China, Bangladesh and Sri Lanka, Gokuldas Exports 201 emerged a winner in the post-quota period.

Himatsingka Seide 202 ? Indian textile exports hit a high growth trajectory Raymond 203 Indian textile and apparel exports have hit the high growth trajectory in the post quota period. Not only US & EU import figures, but also the upbeat mood in the industry, the Vardhman Textiles 204 busy working schedules at factories and the movements at ports suggest high growth Welspun India 205 trends. During April-July 2005, according to latest data from Texprocil, exports of textiles witnessed a 38% YoY growth in value terms, while cotton textiles registered a 57% YoY growth in value terms.

EXPORTS OF TEXTILES (APRIL-JULY 2005) - (US$M)

PARTICULARS 2004-05 2005-06 % CHANGE Exports of all Textiles 1,663 2,301 38 Cotton Yarn/Fabrics/Made-ups 404 632 57 Source: TEXPROCIL

EXPECTED QUARTERLY PERFORMANCE SUMMARY (RS MILLION)

RECO SALES EBITDA NET PROFIT SEP.05 CHG. (%) SEP.05 CHG. (%) SEP.05 CHG. (%) Textiles Alok Ind Neutral 3,468 23.7 712 32.7 262 27.4 Arvind Mills Buy 4,855 14.6 1,226 34.1 501 148.0 Gokaldas Exports Buy 2,464 - 208 - 149 - Himatsingka Seide Neutral 362 4.6 150 -2.1 117 9.2 Raymond Buy 4,259 - 651 - 371 - Vardhman Textiles Buy 4,158 - 764 - 269 - Welspun Ind Neutral 1,871 87.8 394 61.4 130 54.5 Sector Aggregate 10,556 25.9 2,482 34.3 1,009 68.7

Siddharth Bothra ([email protected]); Tel: +91 22 5657 5360 23 September 2005 193 Textiles

? Exports growth driven by robust performance from home-textiles India’s exports during April-July 2005, was boosted by robust shipments of home textiles, which recorded a 325% YoY growth in value terms. Cotton textile exports were up 71% to US$631m, while total textile and clothing exports increased by 38% to US$2.3b. Sales of cotton terry towels surged by 262% in volume terms to 18.8m kg. Exports of bed linen also increased by 681% in volume terms. Indian bed-linen exporters are taking advantage of Pakistan’s loss of a duty-free entry into the EU market. In addition to no more benefits from tariff cuts under EUs GSP, Pakistani bed linen are imposed an anti-dumping duty of 13.1% on exports to the European market. During April - July 2005, the share of made- ups to total cotton textile exports increased to 59%, compared to 24% during the corresponding period last year.

EXPORTS BREAK-UP OF COTTON TEXTILES (US$M) DETAILS YARNS FABRICS MADE-UPS TOTAL 2005-06 2004-05 2005-06 2004-05 2005-06 2004-05 2005-06 2004-05 Quantity (m kg) 83 57 137 113 192 82 412 252 Value (US$m) 136 152 121 129 374 88 631 370 UVR (US$/kg) 1.6 2.7 0.9 1.1 1.9 1.1 1.5 1.5 % Growth -11 -6 325 71 % Share of Total 22 41 19 35 59 24 Source: TEXPROCIL

? India emerges winner in value added categories... The post quota era has witnessed India emerging very strong in product categories requiring high product development skills and design capabilities. The Indian apparel products that have shown high positive growth in the US market during January-May 2005 in comparison to January - May 2004 are W/G cotton skirts, W/G knitted cotton shirts, M/B knitted cotton shirts, W/G cotton trousers, W/G woven MMF blouses and cotton underwear. India has captured 27%, 20%, 16% and 13% share of the US market for ladies cotton blouses, skirts, dresses and men’s shirts categories.

? ... which is reflected in higher UVRs India has managed to increase its unit value realizations (UVR) in the post quota era, due to better product mix. During January - May 2005, India’s UVR registered a 5.7% YoY increase to US$3.7, as against US$3.5 in the corresponding period last year. This is despite the overall unit value in the case of US apparel imports registering a decline of 2.5% from US$3.17 to US$3.1 per sq. meter, during January-May 2005.

23 September 2005 194 Textiles

PERFORMANCE OF SELECT CATEGORIES TO US (JANUARY 2005-MAY 2005) RANK (US$ M) W/G Cotton Coats 1 China 163 2 India 30 3 Indonesia 28 7 Bangladesh 22 10 Sri Lanka 17 20 Pakistan 4 World 518 W/G Cotton Dresses 1 China 56 2 India 45 3 Vietnam 25 6 Bangladesh 11 7 Sri Lanka 11 10 Pakistan 6 World 260 M/B Knitted Shirts 1 Honduras 286 3 Pakistan 178 4 India 165 6 China 131 14 Sri Lanka 42 15 Bangladesh 41 World 2,178 W/G Woven MMF Blouses 1 China 72 2 Indonesia 71 3 India 37 5 Sri Lanka 16 6 Bangladesh 12 21 Pakistan 2 World 321 W/G MMF Dresses 1 China 133 2 Indonesia 28 3 India 24 7 Sri Lanka 14 16 Bangladesh 4 22 Pakistan 1 World 338 * Source: US Department of Commerce

23 September 2005 195 Textiles

? China and EU finalize agreement The trade dispute between China and EU was successfully resolved during September 2005, with the EU freeing blocked Chinese apparel products and allowing them to go into circulation. It is estimated that almost 87m apparel pieces were detained at various EU ports post quota exhaustion in select categories. The agreement involved transfer of quotas and would be under force till end 2007. With this agreement in place, Chinese exports would be limited to around 8-12% growth rates across most categories till 2007.

REVISED EU QUOTA LIMITS FOR EXPORTS FROM CHINA

CATEGORY CATEGORY UNIT QUOTA QUOTA QUOTA GROWTH 2005* 2006 2007 RATE 2 Cotton Fabrics Ton 20,212 61,948 69,692 12.5 4 T-Shirts 1,000 units 161,255 540,204 594,225 10.0 5 Pulovers 1,000 units 118,783 189,719 219,674 15.8 6 Men’s Trousers 1,000 units 124,194 338,923 382,880 13.0 7 Blouses 1,000 units 26,398 80,493 88,543 10.0 20 Bed-Linen Ton 6,451 15,795 17,770 12.5 26 Dresses 1,000 units 8,096 27,001 29,701 10.0 31 Brassieries 1,000 units 108,896 219,882 248,261 12.9 39 Table/Kitchen Linen Ton 5,521 12,349 13,892 12.5 115 Flax Yarn Ton 2,096 4,740 5,214 10.0 Source: EU’s Commission (11th June to 31st December’05)

? Cotton textile industry to enjoy another year of favorable raw material scenario Domestic cotton production estimate for Cotton Year 2005-06 is expected to be 4.2% YoY higher at 4.3m ton. We believe this would allow the Indian textile industry to enjoy another year of favorable raw material scenario.

World cotton consumption is expected to rise 3.8% YoY in CY05-06, to a record 112.2m bales. World production is expected to reach 111.5m bales, a fall of 7% YoY. World ending stocks are expected to increase to around 600,000 bales in CY05-06, to 51.2m bales. Global ending stocks are expected to equal 34% of total use, a relatively low level compared with the 39% average in the last decade.

COTTON STATISTICS (USDA) - (* IN 1,000 US BALES) PRODUCTION IMPORTS MILL USE ENDING STOCKS STOCKS-TO-USE RATIO (%) 2001/02 98.5 29.4 94.5 46.9 49.6 2002/03 88.3 30.2 98.5 38.1 38.7 2003/04 Sep Estimate 95.1 33.9 98.2 40.2 40.9 2004/05 Sep Estimate 120.2 33.1 108.2 50.6 46.8 2005/06 Sep Estimate 111.5 39.2 112.2 51.2 45.6 Change from 04/05 (%) -7.2 18.5 3.7 1.1 -2.5 Source : US Department of Agriculture (USDA)

23 September 2005 196 Textiles

COTTON PRICE MOVEMENT (CENTS/POUND)

90

80

70

60

50

40 Jul-04 Jul-05 Jan-04 Jan-05 Mar-04 Mar-05 Sep-03 Nov-03 Sep-04 Nov-04 Sep-05 May-04 May-05

Source: Cotlook

? Valuation and view We believe that the Indian textile industry is moving into a sweet spot. It occupies a unique niche in the global market since it parallels China’s strengths. Moreover, it is witnessing a fundamental shift, driven by a multitude of global and domestic factors. We have a positive view on the sector. Investors have recognized the fundamental shift taking place in the textile industry. As a result, textile stocks have significantly outperformed the broader indices during FY05. Going forward, the textile players’ performance will depend on their ability to cope with the industry’s changing dynamics. We are positive on textile companies that have the capability to become complete vendor suppliers and have strengths in product development.

We like Vardhman Textiles, Raymond and Gokaldas Exports in the textile industry. Vardhman Textiles stands to gain substantially from the strong increase in demand from the domestic downstream sector and the export market. Raymond is set to witness a re- rating in its valuations, as it transforms itself from a cash rich strong domestic brand company into an internationally recognized fully integrated premium end textile company. Gokaldas, in our opinion, is one of the best proxies for the textiles quota outsourcing story.

23 September 2005 197 Textiles

Stock performance and valuations

STOCK PERFORMANCE (%) ABSOLUTE PERF REL PERF TO SENSEX REL PERF TO SECTOR 3 M 1 YEAR 3 M 1 YEAR 3 M 1 YEAR Textiles Alok Inds. 23 27 7 -22 11 -73 Arvind Mills 0 63 -15 15 -12 -36 Gokaldas Exports -17 -33 - -29 - Himatsingka Seide 41 52 26 4 29 -47 Mahavir Spinning 7 108 -8 59 -4 8 Raymond 11 69 -4 21 -1 -30 Welspun India 13 23 -2 -25 1 -76

RELATIVE PERFORMANCE - 3 MONTH (%) RELATIVE PERFORMANCE - 1 YEAR (%)

Sensex MOSt Textiles Index MOSt Textiles Index Sensex 125 300

115 240

105 180

95 120

85 60 Jun-05 Jul-05 Aug-05 Sep-05 Sep-04 Dec-04 Mar-05 Jun-05 Sep-05

COMPARATIVE VALUATION CMP (RS) RECO EPS (RS) P/E (X) EV/EBITDA ROE (%) 23.9.05 FY05A FY06E FY07E FY05A FY06E FY07E FY05A FY06E FY07E FY05A FY06E FY07E Textiles Alok Ind 76 Neutral 6.8 5.4 9.6 11.2 14.1 7.9 11.3 8.7 5.5 12.9 9.6 15.4 Arvind Mills 132 Buy 6.1 10.4 11.4 21.6 12.6 11.6 11.6 8.4 7.1 9.8 13.4 13.2 Gokaldas Exports 502 Buy 28.3 31.6 42.2 17.7 15.9 11.9 15.9 11.3 8.9 27.8 19.4 0.8 Himatsingka Seide 536 Neutral 23.3 27.9 32.7 22.9 19.2 16.4 15.7 13.0 10.4 14.9 16.3 17.2 Raymond 388 Buy 14.9 23.7 32.4 26.0 16.4 12.0 14.5 9.5 7.4 7.8 11.4 13.9 Vardhman Textiles 290 Buy 31.4 28.3 32.6 9.3 10.3 8.9 8.0 6.9 6.1 15.3 16.2 16.5 Welspun Ind 126 Neutral 4.7 7.7 13.2 26.6 16.4 9.5 17.4 10.3 7.4 0.0 1.2 1.2 Sector Aggregate 20.8 14.7 12.7 11.9 8.8 6.8 10.9 12.1 12.6

23 September 2005 198 Results Preview SECTOR: TEXTILES

Alok Industries

STOCK INFO. BLOOMBERG BSE Sensex: 8,223 ALOK IN 23 September 2005 Neutral REUTERS CODE S&P CNX: 2,478 ALOK.BO Previous Recommendation: Neutral Rs76

Equity Shares (m) 199.1 YEAR NET SALES PAT EPS EPS P/E P/BV ROE ROCE EV/ EV/ END (RS M) (RS M) (RS) GROWTH (%) (X) (X) (%) (%) SALES EBITDA 52-Week Range 86/51 3/05A 12,217 910 4.6 28.1 16.6 1.6 19.2 10.9 2.2 11.3 1,6,12 Rel. Perf. (%) 1/-2/-22 M.Cap. (Rs b) 15.1 3/06E 16,149 1,069 5.4 17.4 14.1 1.4 12.5 9.3 1.7 8.7

M.Cap. (US$ b) 0.3 3/07E 23,417 1,913 9.6 79.0 7.9 1.2 16.4 13.1 1.2 5.5

*Fully Diluted EPS

? We expect Alok’s revenue in 2QFY06 to register a 24% YoY increase to Rs3.5b, while net profit is likely to increase by 27% to Rs262m.

? We expect EBITDA margins to improve by around 140bp on the back of lower raw material costs and improved product mix. EBITDA margins are likely to increase to 20.5% in 2QFY06, compared to 19.1% in 2QFY05.

? During 2QFY06, Alok completed majority of its ongoing capacity expansions, we believe this is likely to result in robust volume growth from 3QFY06 onwards.

? We expect Alok’s home textile sales to post a CAGR of 99% over FY05-07, with revenues increasing from Rs2.25b in FY05 to around Rs9b by FY07. Revenues from home textiles as a percentage of total revenues are likely to increase from 18% in FY05 to around 38% in FY07.

? We expect the company’s net profit to increase at a CAGR of 45% during FY05-07. Margins are likely to expand from 19.5% in FY05 to 21.9% in FY07. The stock currently trades at 14.1x FY06E and 7.9x FY07E earnings.

QUARTERLY PERFORMANCE (RS MILLION) Y/E MARCH FY05 FY06 FY05 FY06E 1Q 2Q 3Q 4Q 1Q 2QE 3QE 4QE Sales 2,322 2,804 3,309 3,782 2,992 3,468 4,845 4,845 12,217 16,149 Change (%) 10.3 10.9 18.9 16.7 28.8 23.7 46.4 28.1 34.0 32.2 EBITDA 464 536 615 756 588 712 886 977 2,370 3,163 Change (%) 11.8 19.6 20.0 22.5 26.9 32.7 44.1 29.3 39.1 33.5 As % of Sales 20.0 19.1 18.6 20.0 19.7 20.5 18.3 20.2 19.4 19.6 Depreciation 127 131 143 151 160 187 285 351 551 983 Interest 155 154 158 164 166 165 159 159 632 649 Other Income 2 2 32 4 23 8 6 4 39 40 PBT 183 253 346 445 284 368 447 472 1,227 1,572 Tax 37 47 97 135 79 106 163 155 316 503 Effective Tax Rate (%) 20.2 18.7 28.1 30.3 27.7 28.7 36.5 32.9 25.8 32.0 Repoted PAT 146 206 249 310 206 262 284 316 910 1,069 Adj. PAT 146 206 249 310 206 262 284 316 910 1,069 Change (%) 9.8 29.0 71.3 63.9 40.6 27.4 14.2 2.0 28.1 17.4 E: MOSt Estimates

Siddharth Bothra ([email protected]); Tel: +91 22 5657 5360 23 September 2005 199 Results Preview SECTOR: TEXTILES

Arvind Mills

STOCK INFO. BLOOMBERG BSE Sensex: 8,223 ARVND IN 23 September 2005 Buy REUTERS CODE S&P CNX: 2,478 ARMI.BO Previous Recommendation: Buy Rs132

Equity Shares (m) 208.9 YEAR NET SALES PAT EPS EPS P/E P/BV ROE ROCE EV/ EV/ END (RS M) (RS M) (RS) GROWTH (%) (X) (X) (%) (%) SALES EBITDA 52-Week Range 144/78 3/05A 16,789 1,273 6.1 31.3 21.6 2.1 10.8 12.0 2.7 11.6 1,6,12 Rel. Perf. (%) -5/-6/15 M.Cap. (Rs b) 27.5 3/06E 20,230 2,180 10.4 71.2 12.6 1.8 15.5 13.5 2.1 8.4

M.Cap. (US$ b) 0.6 3/07E 22,398 2,381 11.4 9.2 11.6 1.6 14.3 18.5 1.8 7.1

? We expect Arvind Mills to post a robust revenue and net profit growth of 14.6% YoY and 148% YoY, respectively in 2QFY06. This would be driven by strong performance from the denim division, lower cotton prices, increased contribution from the garment business and savings in fuel cost (due to the shift from naptha to low cost gas). ? During 2QFY06, the company’s revenue would be boosted by its 4m jeans capacity in Bangalore and the augmented denim capacity of 15m meters due to de-bottlenecking and shifting of its 7m meter Mauritius plant to India. ? Arvind Mills is facilitating the establishment of a fabric plant at its Santej facility at an estimated cost of Rs2b. This is estimated to allow it fabric outsourcing capacity of 22m meters during 2QFY06. ? We expect denim prices to remain stable in FY06, which would sharply improve the company’s profitability, as it is covered for its main raw material, cotton, till June 2006. Arvind’s denim realizations are 5-10% higher compared to the other competitors in the domestic industry. ? We expect Arvind Mills’ profits to witness a CAGR of 37% over FY05-07. Its RoE is likely to increase from around 10.8% in FY05 to 14.3% in FY07. The stock trades at 12.6x FY06E and 11.6x FY07E earnings. Buy with a price target of Rs158.

QUARTERLY PERFORMANCE (RS MILLION) Y/E MARCH FY05 FY06 FY05 FY06E 1Q 2Q 3Q 4Q 1Q 2QE 3QE 4QE Sales 3,924 4,238 4,140 4,450 4,204 4,855 5,159 6,012 16,789 20,230 Change (%) 6.2 15.1 18.5 27.8 7.1 14.6 24.6 35.1 17.0 20.5 EBITDA 891 914 968 1,120 1,149 1,226 1,303 1,430 3,886 5,109 Change (%) 2.4 18.9 28.0 10.3 29.1 34.1 34.6 27.7 10.2 31.5 As % of Sales 22.7 21.6 23.4 25.2 27.3 25.3 25.3 23.8 23.1 25.3 Depreciation 367 372 370 380 385 391 391 396 1,491 1,562 Interest 336 350 176 320 335 244 244 239 1,179 1,060 Other Income 1 18 7 50 67 13 13 16 76 109 PBT 189 210 429 470 497 605 681 812 1,293 2,595 Tax 7 8 65 -60 46 104 108 158 20 415 Effective Tax Rate (%) 3.7 3.8 15.0 -12.8 9.2 17.2 15.8 19.4 1.5 16.0 Repoted PAT 182 202 365 530 451 501 573 654 1,273 2,180 Adj. PAT 182 202 365 530 451 501 573 654 1,273 2,180 Change (%) -16.2 90.8 108.7 32.3 147.9 148 57.3 23.5 31.8 71.2 E: MOSt Estimates

Siddharth Bothra ([email protected]); Tel: +91 22 5657 5360 23 September 2005 200 Results Preview SECTOR: TEXTILES

Gokaldas Exports

STOCK INFO. BLOOMBERG BSE Sensex: 8,223 GOKL IN 23 September 2005 Buy REUTERS CODE S&P CNX: 2,478 GOKL.BO Previous Recommendation: Buy Rs502

Equity Shares (m) 17.2 YEAR NET SALES PAT EPS EPS P/E P/BV ROE ROCE EV/ EV/ END (RS M) (RS M) (RS) GROWTH (%) (X) (X) (%) (%) SALES EBITDA 52-Week Range 714/485 3/05A 7,241 398 28.3 2.8 17.6 3.6 23.7 14.6 1.4 16.8 1,6,12 Rel. Perf. (%) -13/NA/NA M.Cap. (Rs b) 8.6 3/06E 8,644 542 31.6 11.5 15.8 2.3 19.1 14.0 1.0 11.1

M.Cap. (US$ b) 0.2 3/07E 10,511 725 42.2 33.8 11.8 2.0 17.9 15.2 0.8 8.8

? We do not have comparable quarterly numbers for Gokaldas. Hence, comparisons are for the entire financial year FY06.

? We expect Gokaldas to post revenues of Rs2.7b and net profit of Rs183m, during 2QFY06.

? During FY05, the company successfully established four new factories and expanded capacities in two of its existing units, which increased its total capacity by 21% to 270 lines. The company has further increased its capacity to 294 lines in 1QFY06, which would be reflected in revenue growth from 2QFY06.

? The company’s FY05 margins were depressed due to high one-time costs and quota rents of Rs60m, as it took orders from new customers to build relationships with them for the ensuing non-quota regime.

? Going forward, we expect Gokaldas’ EBITDA margins to improve to 8.9% and 9.3% in FY06 and FY07, respectively, led by productivity gains and zero quota costs.

? We expect the company to register revenue CAGR of 20.5% and profit CAGR of 35% over FY05-07. The stock trades at 15.8x FY06E and 11.8x FY07E earnings. We re-iterate Buy.

QUARTERLY PERFORMANCE (RS MILLION) Y/E MARCH FY06 FY05 FY06E 1Q 2QE 3QE 4QE Sales 1,790 2,766 2,014 2,075 7,240 8,644 Change (%) na na na na 35.1 19.4 EBITDA 179 241 175 183 583 776.7 Change (%) na na na na 33.2 As % of Sales 10.0 8.7 8.7 8.8 8.1 9.0 Depreciation 34 47 51 52 129 184 Interest 33 14 14 14 119 75 Other Income 8 23 25 29 105 85 PBT 120 202 134 146 439 602 Tax 4 19 16 20 41 60 Effective Tax Rate (%) 2.9 9.5 12.1 14.0 9.4 10.0 Repoted PAT 116 183 118 125 398 542 Adj. PAT 116 183 118 125 398 542 Change (%) na na na na 6.6 36.2 E: MOSt Estimates

23 September 2005 201 Results Preview SECTOR: TEXTILES

Himatsingka Seide

STOCK INFO. BLOOMBERG BSE Sensex: 8,223 HSS IN 23 September 2005 Neutral REUTERS CODE S&P CNX: 2,478 HMSD.BO Previous Recommendation: Neutral Rs536

Equity Shares (m) 19.1 YEAR NET SALES PAT EPS * EPS P/E P/BV ROE ROCE EV/ EV/ END (RS M) (RS M) (RS) GROWTH (%) (X) (X) (%) (%) SALES EBITDA 52-Week Range 674/345 3/05A 1,498 455 23.8 -10.0 24.6 2.5 15.2 15.8 4.0 17.0 1,6,12 Rel. Perf. (%) 4/10/4 M.Cap. (Rs b) 10.2 3/06E 1,775 533 27.9 17.2 20.6 2.3 16.3 17.0 3.4 14.1

M.Cap. (US$ b) 0.2 3/07E 2,172 624 32.7 17.2 17.6 2.0 17.2 18.6 2.7 11.3

Consolidated

? We expect Himatsingka to report revenue growth of 4.6% YoY to Rs362m and net profit growth of 9.2% YoY to Rs117m.

? During 2QFY06, the company announced a new project for the production of bed linen fabrics at an investment of Rs4b. The new unit would have a capacity of 20m meters. The plant will be located at the Hassan SEZ, Karnataka. The company has been allotted 110 acres of land within the Hassan SEZ for this project.

? During the quarter, the company also announced a stock split and a bonus issue. It has also indicated plans to raise close to US$60m through the GDR route around November 2005.

? We expect the company to post an EPS of Rs27.9 for FY06 and Rs32.7 for FY07. The stock is trading at 20.6x FY06E and 17.6x FY07E earnings. It enjoys an EV/EBITDA of 14.1x FY06E and 11.3x FY07E.

QUARTERLY PERFORMANCE (STANDALONE) (RS MILLION) Y/E MARCH FY05 FY06 FY05 FY06E 1Q 2Q 3Q 4Q 1Q 2QE 3QE 4QE Sales 311 346 392 330 342 362 399 473 1,380 1,575 Change (%) 5.8 -1.8 7.4 -4.0 9.8 4.6 1.6 43.3 1.8 14.2 EBITDA 131 153 153 121 132 150 170 200 559 653 Change (%) 4.8 9.0 6.7 -19.8 0.6 -2.1 10.8 66.0 -0.2 16.8 As % of Sales 42.2 44.3 39.1 36.6 38.7 41.5 42.6 42.4 40.5 41.5 Depreciation 39 39 36 10 35 39 40 44 125 159 Interest 3 2 2 5 5 2 2 2 12 11 Other Income 18 11 14 22 32 20 18 18 65 88 Extra-ordinary Income 0 0 0 -8 0 0 0 0 -8 0 PBT 107 123 129 128 124 129 146 172 496 572 Tax 6 16 12 -3 12 13 12 16 32 53 Effective Tax Rate (%) 5.6 13.2 9.3 -2.0 9.3 9.9 8.0 9.6 6.4 9.3 Reported PAT 101 107 117 130 113 117 134 155 464 519 Adj. PAT 101 107 117 130 113 117 134 155 464 519 Change (%) -10.9 -18.0 -12.8 2.6 11.4 9.2 14.2 19.0 -8.1 11.8 E: MOSt Estimates; Quarterly numbers are standalone, while annual numbers include its retail subsidiary.

Siddharth Bothra ([email protected]); Tel: +91 22 5657 5360 23 September 2005 202 Results Preview SECTOR: TEXTILES

Raymond

STOCK INFO. BLOOMBERG BSE Sensex: 8,223 RW IN 23 September 2005 Buy REUTERS CODE S&P CNX: 2,478 RYMD.BO Previous Recommendation: Buy Rs388

Equity Shares (m) 61.4 YEAR NET SALES PAT EPS EPS P/E P/BV ROE ROCE EV/ EV/ END (RS M) (RS M) (RS) GROWTH (%) (X) (X) (%) (%) SALES EBITDA 52-Week Range 424/218 3/05A 14,401 882 14.9 -33.5 24.5 1.7 7.8 7.8 1.4 8.2 1,6,12 Rel. Perf. (%) 1/0/21 M.Cap. (Rs b) 23.8 3/06E 17,744 1,497 23.7 58.8 15.4 1.6 11.4 10.9 1.2 6.7

M.Cap. (US$ b) 0.5 3/07E 21,204 1,989 32.4 36.8 11.3 1.4 13.9 13.3 1.0 5.4

? We expect Raymond to post consolidated revenues of Rs4.2b and net profit of Rs370m for the quarter. The prior period numbers are standalone, and hence, not comparable. EBITDA margins are likely to expand to 15% in 2QFY06 from 11% in FY05.

? During the quarter Raymond consolidated its branded apparel business under its 100% subsidiary Raymond Apparels by transferring its 74% investments in Color Plus. With this, Raymond has now consolidated its branded apparel business under one umbrella. We estimate its branded apparel business to register a 17% CAGR over FY05-07.

? During FY06, Raymond is likely to witness a sharp improvement in fortunes due to better performance from the steel files division, benefits of lower raw material prices, increased volumes and profitability from the denim division and contribution from its garment division.

? The 2QFY06 results include contribution from Raymond’s new expanded denim capacity (by 10m meters).

? We believe Raymond is a strong proxy to play the quota outsourcing and the booming domestic market story. The stock trades at 15.4x FY06E and 11.3x FY07E earnings. It enjoys an EV/EBITDA of 6.7x FY06E and 5.4x FY07E. We have a Buy rating on the stock with a price target of Rs486.

QUARTERLY PERFORMANCE (RS MILLION) Y/E MARCH FY05 FY06 FY05 FY06E 1Q 2Q 3Q 4Q 1Q 2QE 3QE 4QE Sales 1,876 3,390 2,992 3,187 2,500 4,256 4,433 5,674 14,401 17,733 Change (%) 8.3 13.7 16.1 8.1 33.3 25.6 48.2 78.0 17.2 23.1 EBITDA 107 405 386 421 318 650 772 968 1,630 2,707 Change (%) -54.7 -29.1 12.0 97.6 197.9 60.6 99.7 130.1 39.0 66.1 As % of Sales 5.7 11.9 12.9 13.2 12.7 15.3 17.4 17.1 11.3 15.3 Depreciation 133 140 165 200 166 213 245 265 707 890 Interest 22 50 49 21 46 79 97 138 307 360 Other Income 100 150 159 180 163 144 143 150 844 600 Extra-ordinary Income 0 -6 0 219 -42 0 0 0 -250 -42 PBT 51 370 331 162 227 501 573 715 1,159 2,016 Tax 20 50 80 -68 39 131 168 186 277 524 Effective Tax Rate (%) 38.9 13.4 24.3 -41.9 17.2 26.2 29.3 26.0 23.9 26.0 Repoted PAT 31 320 251 229 188 370 405 529 882 1,492 Adj. PAT 31 327 251 449 188 370 405 529 1,131 1,450 Change (%) -85.0 -18.9 -17.9 -44.6 499.0 13.3 61.4 18.0 -33.5 28.2 E: MOSt Estimates; FY05 numbers are standalone, while FY06 numbers are consolidated

Siddharth Bothra ([email protected]); Tel: +91 22 5657 5360 23 September 2005 203 Results Preview SECTOR: TEXTILES

Vardhman Textiles

STOCK INFO. BLOOMBERG BSE Sensex: 8,223 MSM IN 23 September 2005 Buy REUTERS CODE S&P CNX: 2,478 MHSP.BO Previous Recommendation: Buy Rs290

Equity Shares (m) 38.5 YEAR NET SALES PAT EPS EPS P/E P/BV ROE ROCE EV/ EV/ END (RS M) (RS M) (RS) GROWTH (%) (X) (X) (%) (%) SALES EBITDA 52-Week Range 327/137 3/05A 18,509 1,208 31.4 32.3 9.2 1.4 16.2 11.2 1.2 8.0 1,6,12 Rel. Perf. (%) -2/38/59 M.Cap. (Rs b) 12.6 3/06E 20,790 1,452 28.3 20.0 * 10.3 1.7 17.2 12.8 1.2 6.9

M.Cap. (US$ b) 0.3 3/07E 22,529 1,672 32.6 15.1 8.9 1.5 17.5 12.6 1.0 6.1

* Vardhman Textiles has issued a bonus of 1:2

? Vardhman Textile’s 2QFY06 financials are post merger of Mahavir Spinning and Vardhman Spinning, and hence, not comparable with the earlier quarters of FY05. Post merger, the entity is one of the largest textile companies in India with the biggest spinning capacity and second-largest sewing thread capacity.

? We expect Vardhman Textiles to report revenues of Rs4.2b for 2QFY06 and a net profit of Rs269m. The company is expanding its fabric capacity from 25m meters in FY05 to 42m meters in FY06. The fabric expansion is likely to be completed by 3QFY06.

? The company’s FY05 numbers were boosted by strong performance from the steel division. Going forward, we expect EBITDA in the steel business to decline to 20% in FY06 and 17% in FY07. However, it would be made up by a strong improvement in margins in the textile business. We expect Vardhman’s margins to expand from 15.6% in FY05 to 16.7% in FY06.

? We expect Vardhman Textiles’ sales and earnings to witness a CAGR of 10% and 38%, respectively, over FY05-07. The stock trades at 11.6x FY06E and 10x FY07E earnings. Buy with a price target of Rs336.

QUARTERLY PERFORMANCE (RS MILLION) Y/E MARCH FY05 FY06 * FY05 FY06E 1Q 2Q 3Q 4Q 1Q 2QE 3QE 4QE Sales 4,130 5,128 5,131 4,761 4,221 4,158 5,863 6,549 18,509 20,790 Change (%) 16.6 25.6 11.6 - 2.0 na na 37.6 7.7 12.3 EBITDA 674 715 733 764 783 764 903 1,024 2,885 3,473.5 Change (%) 11.4 23.9 -0.3 - 16.0 na na 34.1 9.9 20.4 As % of Sales 16.3 13.9 14.3 16.0 18.5 18.4 15.4 15.6 16 17 Depreciation 251 248 248 224 251 260 272 304 970 1,086.6 Interest 172 181 123 116 112 162 163 187 591 624.6 Other Income 42 105 70 102 12 42 68 78 273 200.0 PBT 294 391 433 526 431 384 537 610 1,597 1,962.3 Tax 115 100 120 54 142 115 120 134 389 510.2 Effective Tax Rate (%) 39.2 25.6 27.7 10.3 33 30.0 22.3 21.9 24.4 26.0 Repoted PAT 179 291 313 472 290 269 417 477 1,208 1,452 Adj. PAT 179 291 313 472 290 269 417 477 1,208 1,452 Change (%) 23.3 70.6 5.5 - 62.0 na na 1.0 31.2 20.2 E: MOSt Estimates; FY05 numbers are standalone Mahavir Spinning, while FY06 numbers are for the merged entities which includes Vardhman Spinning and Mahavir Spinning

Siddharth Bothra ([email protected]); Tel: +91 22 5657 5360 23 September 2005 204 Results Preview SECTOR: TEXTILES

Welspun India

STOCK INFO. BLOOMBERG BSE Sensex: 8,223 WLSP IN 23 September 2005 Neutral REUTERS CODE S&P CNX: 2,478 WLSP.BO Previous Recommendation: Neutral Rs126

Equity Shares (m) 76.8 YEAR NET SALES PAT EPS EPS P/E P/BV ROE ROCE EV/ EV/ END (RS M) (RS M) (RS) GROWTH (%) (X) (X) (%) (%) SALES EBITDA 52-Week Range 155/97 3/05A 4,515 363 4.7 0.5 26.6 2.0 13.0 12.1 3.3 17.4 1,6,12 Rel. Perf. (%) 3/-23/-25 M.Cap. (Rs b) 9.7 3/06E 7,962 590 7.7 62.6 16.4 1.8 13.5 11.0 2.2 10.3

M.Cap. (US$ b) 0.2 3/07E 11,764 1,015 13.2 72.0 9.5 1.6 17.5 13.8 1.6 6.9

? Welspun’s numbers for 1QFY06 are post merger with its subsidiary, Glofame Industries, and hence, not comparable with the earlier quarters of FY05.

? We expect Welspun to report revenues of Rs1.9b in 2QFY06 and net profit of Rs130m. EBITDA margins are likely to be around 21.1%.

? During 2QFY05, the company also began commercial production at its new 35m meter bed-linen plant at Anjar.

? During 2QFY06, Welspun announced expansion plans of Rs6.5b to tap the strong demand in the post-quota era. The capex plans entail a major expansion for both its terry towel and bed-linen segment. Post expansion, terry towel capacity is slated to expand by 43%, weaving capacity by 250%, processing capacity by 20% and spindle capacity by 100%.

? We estimate revenues for FY07 to increase by 17% to Rs11.5b and FY07E earnings to increase by 18.5% to Rs960m, due to the new capacity additions.

? We expect Welspun’s revenues and earnings to see a 61% and 67% CAGR (FY05-07), respectively. Welspun trades at 16.4x FY06E and 9.5x FY07E earnings. We maintain Neutral.

QUARTERLY PERFORMANCE (RS MILLION) Y/E MARCH FY05 FY06 FY05 FY06E 1Q* 2Q 3Q 4Q 1Q* 2QE 3QE 4QE Sales 956 996 942 1,476 1,441 1,871 2,150 2,501 4,515 7,962 Change (%) 30.0 17.1 3.1 26.5 50.7 87.8 128.2 69.4 16.2 76.3 EBITDA 198 244 198 261 314 394 463 544 852 1,715 Change (%) 10.8 34.9 4.5 30.1 58.7 61.4 133.9 108.3 13.1 101.3 As % of Sales 20.7 24.5 21.0 17.7 21.8 21.1 21.5 21.7 18.9 21.5 Depreciation 62 39 39 73 102 140 171 186 263 599 Interest 70 63 31 81 74 100 105 108 272 387 Other Income 30 0 12 64 23 41 45 52 100 161 PBT 96 143 140 171 161 196 233 302 649 890 Tax 53 59 62 69 53 66 78 103 286 299 Effective Tax Rate (%) 55.9 41.2 44.3 40.4 32.9 33.7 33.4 34.2 44.1 33.6 Adj. PAT 42 84 78 102 108 130 155 199 363 590 Change (%) -29.4 10.0 -7.4 27.5 156.3 54.5 98.7 94.7 0.5 62.6 E: MOSt Estimates; Other income for 1QFY06 are restated; 1QFY05 are restated numbers reflecting the merged entity; * merged numbers

Siddharth Bothra ([email protected]); Tel: +91 22 5657 5360 23 September 2005 205 Results Preview

QUARTER ENDING SEPTEMBER 2005

Utilities

BSE Sensex: 8,223 S&P CNX: 2,478 23 September 2005

COMPANY NAME PG. Given India’s precarious power scenario, we believe that substantial efforts would be

CESC 210 made towards adding generation and T&D capacity. The various parameters that we use to monitor the health of the Indian power sector indicate that after initial Jaiprakash Hydro-Power 211 disappointments, reforms are back on track. The provisions in the Electricity Act pertaining to open access to inter-state transmission, open access to bulk consumers, multiple licenses National Thermal Power 212 in distribution, setting up of captive power plants through co-operatives, etc. indicate that Neyveli Lignite 213 SEBs have limited choice but to shape up. In the emerging scenario, we believe that the incumbents enjoy considerable growth optionality, which will not be equity dilutive. PTC India 214

Evidence to suggest that reforms are back on track Reliance Energy 215 ? Parallel distribution licences being granted: Reliance Energy received permission to set up a parallel network in New Delhi Muncipal Council area of supply and is also vying for Tata Power 216 Meerut, Ghaziabad and NOIDA in Uttar Pradesh. NTPC intends to set up a parallel distribution network in Chattisgarh (Korba). Tata Power is examining setting up of a parallel distribution network in certain cities in Jharkhand and also in Adityapur and Mango, near Jamshedpur. ? Opening up of inter-state transmission: NTPC has received permission to set up associated transmission networks for its projects. The government has directed the company to identify projects for investments up to Rs20-30b. CERC has also asked PowerGrid to award construction of Sets B and C for the Western Region Grid Strengthening on 100% equity participation to private sector companies. Thus, this is tantamount to bringing an end to the monopoly of PowerGrid over the inter-state transmission networks. ? Generation capacity on Competitive Based Tariffs: CERC has issued further guidelines, including the inflation rate for coal, gas and other inputs, the discount rate, etc to be used for bids under CBT. The tariffs determined by the competitive bidding process would be outside the regulatory purview. ? Generation capacity on Merchant-based power projects: Tata Power is setting up the 120 MW Jojobera expansion on merchant basis. Jindal Steel and Power is also setting up a 1,000 MW power project in Chattisgarh on merchant basis. NTPC has signed an agreement with NTPC Vidyut Vyapar Nigam for sale of 945 MW (Unchahar: 30 MW, Kahalgaon: 225 MW,

EXPECTED QUARTERLY PERFORMANCE SUMMARY (RS MILLION) RECO SALES EBITDA NET PROFIT SEP.05 CHG. (%) SEP.05 CHG. (%) SEP.05 CHG. (%) Utilities CESC Buy 5,870 1.0 1,644 -2.2 529 1.7 JHPL Neutral 1,449 0.0 1,315 0.0 465 0.0 Neyveli Lignite Corp. Buy 7,952 4.8 4,612 4.8 2,559 0.7 NTPC Neutral 63,154 20.3 15,534 12.5 12,317 12.6 PTC India Buy 4,500 -24.2 72 -22.9 59 9.4 Reliance Energy Buy 9,125 15.3 1,912 17.6 1,623 26.6 Tata Power Buy 9,500 1.0 2,250 2.0 1,080 -23.7 Sector Aggregate 100,101 12.3 26,024 9.3 18,167 8.4

Satyam Agarwal ([email protected]); Tel: +91 22 5657 5353/Anjali Shah Vora ([email protected]); Tel: +91 22 5657 5305 23 September 2005 206 Utilities

Sipat-II: 45 MW, Gandhar-II: 195 MW, Kawas-II: 195 MW and Sipat-I: 255 MW) power from its upcoming stations in the open market. Also, as per the National Electricity Policy, all power generation projects could retain 15% of the capacity on merchant basis. ? Power plants through co-operative societies: Maharashtra Industrial Development Corporation has mandated Reliance Energy to set up a 100 MW power project each in Thane- Belapur and Butibori-Hingna industrial park for its industrial customers. Thus, these industrial consumers would then move away from the Maharashtra SEB to Reliance Energy. Gujarat Gas also intends to set up a Special Purpose Vehicle for construction of a 100 MW gas-based power plant in Gujarat.

Free Power in Punjab: a retrograde step towards reforms Punjab Government has decided to provide free power to farmers w.e.f. Sept 1, 2005. The decision is clearly a retrogative step towards reforms and aimed at gaining political mileage ahead of the state elections.

However, the revenue shortfall would be met by the Punjab Mandi Board and Rural Development Fund and not Punjab State Electricity Board. This is in line with the provisions of the Act, which states that subsidies have to be borne by the state government directly and not through the SEBs. Also, since the health of the power sector due to this decision is not being impacted, the World Bank has given a commitment that it would not stop funding for new projects. It may be recalled that in 1997, when the government announced free power for farmers, the World Bank had stopped funding for all new projects.

Maharashtra experience indicates tremendous urgency towards reforms The recent experience of Maharashtra indicates that the country could soon be in a serious power crisis scenario if adequate private sector investments are not channeled into generation. Lack of adequate investments in generation and increasing electricity consumption led to the Maharashtra crisis. Soon after this, we had a power crisis in several other states like Rajasthan, Gujarat, etc.

On a nationwide wide level, FY05 peak deficit stood at 11.7%. Electricity consumption growth of ~5.5% p.a. over the last few years has been largely met through improvement in capacity utilization (industry PLF increased from 64% in FY99 to 75% in FY05). In view of the fact that electricity consumption in India continues to grow at ~6% p.a., average capacity utilization cannot be increased beyond 80-82% and it takes three years to commission a new project, we sense a tremendous urgency towards accelerating the pace of reforms in the sector.

23 September 2005 207 Utilities

Capacity addition during the Tenth Plan is estimated at 87% of target As per the recent study conducted by the Ministry of Power, the capacity addition during the Tenth Plan is estimated at 35,724 MW, which represents 87% of the targeted levels.

MINISTRY OF POWER’S REVISED ESTIMATE FOR THE TENTH PLAN ORIGINAL COMMI- UNDER TO BE REVISED TARGET SSIONED EXECUTION AWARDED TARGET Central 22,832 7,685 9,790 1,450 18,925 State 11,157 3,496 8,405 0 11,901 Private 7,121 768 4,131 0 4,899 Total 41,110 11,948 22,326 1,450 35,724 Source: Company/Inquire

Attracting power sector investments in generation remains the key challenge We observe that CPSUs like NTPC and Neyveli Lignite are going ahead with the capex addition programme in generation, driven by improved cash flows and payment security mechanism. Private players have outlined a series of projects, but they continue to remain on the drawing board as the companies are waiting for mining allocations and access to distribution. We believe that attracting private sector investments remains one of the biggest challenges for the government.

INCREASE IN GENERATION CAPACITY BASED ON FIRMED UP CAPEX (FY05 TO FY12)

500% CPSU’s have firmed up capacity addn 443% plans; Private cos are waiting for CBT Similarly to JSPL, due to 400% / Merchant Plant guidelines to be the low base, growth firmed up and access to distribution 300% option for private before committing generation capex players could be in 200% multiples of current size 94% 90% 100% 6% 0% 15% 0% 0% 0% NTPC Tata CESC AEC Power Lignite Neyveli Torrent Jindal Energy Power Hydro Reliance Steel and Jaiprakash

* NTPC: targets as per the Tenth and Eleventh Plan; NLC – projects being firmed up; private players – projects which have achieved financial closure Source: Company/Inquire

23 September 2005 208 Utilities

Stock performance and valuations

STOCK PERFORMANCE (%) ABSOLUTE PERF REL PERF TO SENSEX REL PERF TO SECTOR 3 M 1 YEAR 3 M 1 YEAR 3 M 1 YEAR Utilities CESC 12 96 -4 47 -4 -223 Jaiprakash Hydro 7 - -9 - -9 - N T P C 21 - 6 - 6 - Neyveli Lignite 12 46 -4 -3 -4 -273 PTC India 9 -17 -6 -66 -6 -336 Reliance Energy -16 -15 -31 -63 -31 -334 Tata Power Co. 14 38 -1 -10 -1 -280

RELATIVE PERFORMANCE - 3 MONTH (%) RELATIVE PERFORMANCE - 1 YEAR (%)

Sensex MOSt Utilities Index MOSt Utilities Index Sensex 115 150

110 130

105 110 100

90 95

90 70 Jun-05 Jul-05 Aug-05 Sep-05 Sep-04 Dec-04 Mar-05 Jun-05 Sep-05

COMPARATIVE VALUATION CMP (RS) RECO EPS (RS) P/E (X) EV/EBITDA ROE (%) 23.9.05 FY05A FY06E FY07E FY05A FY06E FY07E FY05A FY06E FY07E FY05A FY06E FY07E Utilities CESC 220 Buy 17.0 17.6 18.2 12.9 12.5 12.1 5.6 5.0 4.6 9.1 7.9 7.5 JHPL 30 Neutral 1.0 1.5 1.5 29.3 20.5 19.7 9.0 8.3 8.7 9.7 13.3 12.9 Neyveli Lignite Corp. 80 Buy 5.8 5.9 6.4 13.7 13.5 12.5 7.5 6.0 5.6 13.5 12.5 12.4 NTPC 102 Neutral 5.8 6.4 7.3 17.6 16.1 14.1 8.9 8.4 7.8 12.4 12.1 12.8 PTC India 46 Buy 1.6 2.1 2.4 28.5 22.0 18.9 19.0 21.1 13.9 11.5 13.7 14.4 Reliance Energy 543 Buy 27.7 29.7 34.4 19.6 18.3 15.8 14.9 12.0 9.3 11.1 10.0 8.9 Tata Power 430 Buy 19.8 26.0 29.2 21.7 16.6 14.7 10.8 12.9 9.8 8.1 9.8 10.4 Sector Aggregate 17.6 15.9 14.0 9.0 8.4 7.7 12.2 11.9 12.3

23 September 2005 209 Results Preview SECTOR: UTILITIES

CESC

STOCK INFO. BLOOMBERG BSE Sensex: 8,223 CESC IN 23 September 2005 Buy REUTERS CODE S&P CNX: 2,478 CESC.BO Previous Recommendation: Buy Rs220

Equity Shares (m) 74.4 YEAR NET SALES PAT EPS* EPS P/E P/BV ROE ROCE EV/ EV/ END (RS M) (RS M) (RS) GROWTH (%) (X) (X) (%) (%) SALES EBITDA 52-Week Range 249/110 3/05A 23,212 1,509 17.0 82.3 13.0 1.1 8.3 9.9 1.6 5.6 1,6,12 Rel. Perf. (%) -5/-8/48 M.Cap. (Rs b) 16.4 3/06E 23,078 1,549 17.6 3.4 12.6 1.0 7.9 9.0 1.3 5.0

M.Cap. (US$ b) 0.4 3/07E 22,652 1,596 18.2 3.6 12.1 0.9 7.5 8.5 1.2 4.6

* Excl impact of Budge Budge plant capital account adjustment

? We expect CESC to report a net profit of Rs529m during 2QFY06, up 1.7% YoY on a reported basis. ? The regulatory uncertainty such as recovery of arrears due to non-finalization of tariff orders and disallowance of capital costs on Budge Budge expansion are now a thing of the past. A firm mechanism has been put in place that enables CESC to earn the permitted regulatory returns. The FY06 Tariff Order had already been approved by the regulator. ? FY06 Tariff Order has reduced CESC’s tariffs to Rs3.81 per unit from Rs4.15 per unit in FY04. This has been possible due to cost reduction and improvement in operational parameters. ? The RPG group intends to transform from a regional player to a national player in the Indian power sector. Accordingly, it has drawn up growth plans for CESC through the SPV route. To begin with, it intends to set up a 1,000 MW pithead-based power plant, which will be linked to captive mine acquisition. The group also intends to acquire distribution circles and participate in the SEB privatization process. ? CESC intends to raise US$60m in the form of equity, bonds or warrants from the domestic and international market. This would be utilized to finance the equity portion of 250 MW Budge Budge expansion project. Within the Kolkata area, CESC plans to increase generation capacity at Budge Budge from 500 MW to 750 MW by end FY09. ? We recommend Buy.

QUARTERLY PERFORMANCE (RS MILLION) Y/E MARCH FY05 FY06 FY05 FY06E 1Q 2Q 3Q 4Q 1Q 2QE 3QE 4QE Sales 6,360 5,810 5,390 5,630 6,740 5,870 5,500 4,968 23,212 23,078 Change (%) -0.6 -11.8 1.1 7.4 6.0 1.0 2.0 -11.8 -1.2 -0.6 EBITDA 1,830 1,680 1,470 1,440 1,510 1,644 1,403 1,524 6,454 6,080 Change (%) -2.7 -8.7 -6.4 -4.6 -17.5 -2.2 -4.6 5.9 -3.6 -5.8 As of % Sales 28.8 28.9 27.3 25.6 22.4 28.0 25.5 30.7 27.8 26.3 Depreciation 750 750 710 710 640 745 800 915 2,915 3,100 Interest 850 600 590 530 560 490 440 435 2,560 1,925 Other Income 140 190 150 190 140 175 150 191 659 656 Extraordinary Income/(Expense) 0 0 0 0 0 0 0 0 37 0 PBT 370 520 320 390 450 584 313 365 1,601 1,711 Tax 0 0 0 0 40 55 29 38 129 162 Effective Tax Rate (%) 0.0 0.0 0.0 0.0 8.9 9.4 9.4 10.4 8.0 9.5 Reported PAT 370 520 320 390 410 529 283 327 1,472 1,549 Adjusted PAT 370 520 320 390 410 529 283 327 1,472 1,549 Change (%) 146.7 126.1 113.3 129.4 10.8 1.7 -11.5 -16.1 78.7 5.2 E: MOSt Estimates

Satyam Agarwal ([email protected]); Tel: +91 22 5657 5353/Anjali Shah Vora ([email protected]); Tel: +91 22 5657 5305 23 September 2005 210 Results Preview SECTOR: UTILITIES

Jaiprakash Hydro-Power

STOCK INFO. BLOOMBERG BSE Sensex: 8,223 JHPL IN 23 September 2005 Neutral REUTERS CODE S&P CNX: 2,478 JHPL.BO Previous Recommendation: Neutral Rs30

Equity Shares (m) 491.0 YEAR NET SALES PAT EPS EPS P/E P/BV ROE ROCE EV/ EV/ END (RS M) (RS M) (RS) GROWTH (%) (X) (X) (%) (%) SALES EBITDA 52-Week Range 38/27 3/05A 2,995 511 1.0 -11.8 29.3 2.9 9.7 12.4 8.5 9.0 1,6,12 Rel. Perf. (%) -12/-/- M.Cap. (Rs b) 15.0 3/06E 2,957 730 1.5 42.8 20.5 2.6 13.3 12.3 7.7 8.3

M.Cap. (US$ b) 0.3 3/07E 2,718 759 1.5 4.1 19.7 2.5 12.9 11.5 7.9 8.7

? During 2QFY06, we expect JHPL to report a net profit of Rs424m. During FY06, we expect the company to report a net profit of Rs752m, up 2% on a YoY basis.

? For JHPL, the monthly design energy schedule indicates that 2Q would account for 47% of the yearly generation volumes – H1 profitability is around 75-80% of full year numbers.

? JHPL’s PPA with Himachal Pradesh SEB is valid for 40 years and guarantees a post tax RoE of 16% with scope to earn incentives. We expect the actual RoE from core business operations to range between 21% and 23%.

? JHPL generates large amount of free cash flows, as post initial capex, the maintenance capex is limited. In the absence of any announced reinvestment plans, our earnings model assumes an interest rate of 5% on the cash balance, resulting in a 3% net profit CAGR during FY05-07.

? We believe that reinvestment of surplus cash into core assets will be the re-rating trigger. The company has already received approval for initiatives in Transmission and Distribution and for setting up Thermal Power, Combined Cycle and Wind Projects. We recommend Neutral.

QUARTERLY PERFORMANCE (RS MILLION) Y/E MARCH FY05 FY06 FY05 FY06E 1Q 2Q 3Q 4Q 1Q 2QE 3QE 4QE Sales na na na na 771 1,449 444 293 2,995 2,957 Change (%) na na na na na -1.3 EBITDA na na na na 676 1,315 411 338 2,808 2,739 Change (%) na na na na na -2.5 As of % Sales 87.6 90.7 92.6 115.2 93.8 92.6 Depreciation na na na na 209 402 128 116 836 855 Interest na na na na 286 457 146 84 1,273 972 Other Income na na na na 2 15 15 27 18 58 Extraordinary Income/(Expense) na na na na 0 41 41 82 163 163 PBT na na na na 184 471 151 165 555 808 Tax na na na na 16 47 15 0 44 78 Effective Tax Rate (%) 8.5 10.0 10.0 0.3 7.9 9.7 Reported PAT na na na na 168 424 136 164 511 730 Adjusted PAT* na na na na 168 465 177 246 674 893 Change (%) na na na na -11.8 42.8 E: MOSt Estimates; Adjusted for write off of debt restructuring expenses over 3 years

Satyam Agarwal ([email protected]); Tel: +91 22 5657 5353/Anjali Shah Vora ([email protected]); Tel: +91 22 5657 5305 23 September 2005 211 Results Preview SECTOR: UTILITIES

National Thermal Power Corporation

STOCK INFO. BLOOMBERG BSE Sensex: 8,223 NTPC IN 23 September 2005 Neutral REUTERS CODE S&P CNX: 2,478 NTPC.BO Previous Recommendation: Neutral Rs102

Equity Shares (m) 8,245.5 YEAR NET SALES PAT EPS EPS P/E P/BV ROE ROCE EV/ EV/ END* (RS M) (RS M) (RS) GROWTH (%) (X) (X) (%) (%) SALES EBITDA 52-Week Range 109/68 3/05A 221,990 47,952 5.8 14.0 17.6 2.0 12.4 17.0 3.2 8.9 1,6,12 Rel. Perf. (%) -2/-5/- M.Cap. (Rs b) 843.9 3/06E 266,847 52,433 6.4 9.3 16.1 1.9 12.1 14.9 2.8 8.3

M.Cap. (US$ b) 19.3 3/07E 307,915 59,898 7.3 14.2 14.1 1.7 12.8 15.8 2.6 7.8

* Pre-exceptional earnings; FY05 reported net profit Rs58.1b

? During 2QFY06, we expect NTPC to report a net profit of Rs12.3b, up 13% YoY. This would be driven by increased electricity sales, improved PLF, etc. ? CERC’s order notifying that for power capacity installed prior to FY05, tariffs would be based on the approved DER and not standardized 70:30 norms was finalized in October 2005. Thus, the performance of 2QFY05 was depressed to the extent of Rs600-700m. ? During 1QFY06, NTPC has commissioned the 500 MW unit in Rihand, which increased installed capacity to 23,435 MW. During 2HFFY06, we expect NTPC to add 710 MW generation capacity. We believe FY07 would be the big year of growth – over 3,000 MW of capacity additions are to be commissioned in FY07. ? NTPC has been recovering 100% of its dues. The company intends to commence production of 10m ton of coal by Dec ’07 and has targeted 50m ton by FY10. NTPC also intends to set up a parallel distribution network in Chhatisgarh (Korba) and participate in privatization of the SEB network. ? NTPC has earmarked part of the capacity from upcoming projects on a merchant basis – it has signed a PPA with NTPC Vidyut Vyapar Nigam for sale of 945 MW (Unchahar: 30 MW, Kahalgaon: 225 MW, Sipat-II: 45 MW, Gandhar-II: 195 MW, Kawas-II: 195 MW, Sipat-I: 255 MW) power in the spot market. ? We maintain Neutral.

QUARTERLY PERFORMANCE (RS MILLION) Y/E MARCH FY05 FY06 FY05 FY06E 1Q 2Q 3Q 4Q 1Q 2QE 3QE 4QE Sales 51,916 52,497 56,982 64,269 60,567 63,154 68,253 74,873 225,650 266,847 Change (%) 8.4 50.7 6.3 22.8 16.7 20.3 19.8 16.5 19.6 18.3 EBITDA 13,277 13,807 15,724 17,904 15,426 15,534 16,953 19,424 60,698 67,337 Change (%) -13.0 -213.2 10.1 452.4 16.2 12.5 7.8 8.5 194.9 10.9 As of % Sales 25.6 26.3 27.6 27.9 25.5 24.6 24.8 25.9 26.9 25.2 Depreciation 4,785 4,866 4,981 4,952 4,873 5,726 6,232 7,653 19,584 24,484 Interest 2,764 2,713 2,401 2,264 2,357 2,851 3,541 3,986 10,142 12,735 Other Income 5,380 5,278 5,724 13,414 5,528 6,135 7,150 7,088 29,810 25,901 Extraordinary Income/(Expense) 1 2 0 0 0 0 0 0 0 0 PBT 11,108 11,506 14,066 24,102 13,724 13,092 14,330 14,873 60,782 56,019 Tax 567 566 411 1,168 637 775 987 1,186 2,712 3,585 Effective Tax Rate (%) 5.1 4.9 2.9 4.8 4.6 5.9 6.9 8.0 4.5 6.4 Reported PAT 10,541 10,940 13,655 22,934 13,087 12,317 13,343 13,686 58,070 52,433 Adj. PAT (Pre Exceptional) 11,197 10,940 12,343 13,472 12,587 12,317 13,343 13,686 47,952 52,433 Change (%) 23.9 18.4 50.7 0.6 12.4 12.6 8.1 1.6 10.4 9.3 E: MOSt Estimates

Satyam Agarwal ([email protected]); Tel: +91 22 5657 5353/Anjali Shah Vora ([email protected]); Tel: +91 22 5657 5305 23 September 2005 212 Results Preview SECTOR: UTILITIES

Neyveli Lignite Corporation

STOCK INFO. BLOOMBERG BSE Sensex: 8,223 NLC IN 23 September 2005 Buy REUTERS CODE S&P CNX: 2,478 NELG.BO Previous Recommendation: Buy Rs80

Equity Shares (m) 1,677.7 YEAR NET SALES PAT EPS EPS P/E P/BV ROE ROCE EV/ EV/ END * (RS M) (RS M) (RS) GROWTH (%) (X) (X) (%) (%) SALES EBITDA 52-Week Range 90/50 3/05A 30,220 9,801 # 5.8 -14.3 13.7 1.8 13.5 19.7 4.2 7.5 1,6,12 Rel. Perf. (%) -14/-1/-3 M.Cap. (Rs b) 134.7 3/06E 31,005 9,953 5.9 1.5 13.5 1.6 12.4 15.7 3.7 6.0

M.Cap. (US$ b) 3.1 3/07E 29,226 10,763 6.4 8.1 12.5 1.5 12.3 13.7 3.7 5.6

* Pre-exceptional earnings; # FY05 reported net profit Rs12.2b

? We expect Neyveli Lignite to post a net profit of Rs2.6b in 2QFY06, up 0.7% on YoY basis. ? CERC has finalized the Tariff Order for TPS I for FY02-04, based on a two-part tariff structure. Based on this, the company has written back the contingency reserve provision of Rs1.4b in 4QFY05. Thus, the regulatory uncertainty is now a thing of the past. ? Neyveli Lignite has firmed up expansion plans within and outside Tamil Nadu to emerge as a national player. It also intends to diversify its fuel mix. ? Post current ongoing projects, the company’s lignite mining capacity will increase from 24m ton to 30.6m ton and power generation capacity will increase from 2,490 MW to 3,240 MW by FY10. The company has already announced projects to triple its existing capacity to 7,732 MW by end FY15. ? Neyveli Lignite’s investments in OTSS bonds and liquid cash as at March 2005 stood at Rs46b, representing 47% of capital employed. ? We believe that the incumbents have a growth option to capture the opportunities being presented by the Indian power segment. Maintain Buy.

QUARTERLY PERFORMANCE (RS MILLION) Y/E MARCH FY05 FY06 FY05 FY06E 1Q 2Q 3Q 4Q 1Q 2QE 3QE 4QE Sales 6,564 7,591 5,470 10,395 8,460 7,952 5,685 8,908 30,019 31,005 Change (%) 3.0 24.5 -5.0 5.6 28.9 4.8 3.9 -14.3 6.9 3.3 EBITDA 3,231 4,402 2,659 6,719 5,000 4,612 2,558 7,059 17,012 19,230 Change (%) -5.6 22.3 -6.6 7.7 54.7 4.8 -3.8 5.1 5.6 13.0 As of % Sales 49.2 58.0 48.6 64.6 59.1 58.0 45.0 79.2 56.7 62.0 Depreciation 1,237 1,325 1,293 1,308 1,300 1,295 1,310 1,270 5,163 5,175 Interest 178 160 172 151 140 162 162 212 661 676 Other Income 881 1,022 2,291 2,254 2,030 500 500 142 6,448 2,202 PBT 2,697 3,939 3,485 7,514 5,590 3,655 1,586 5,720 17,636 16,551 Tax 718 1,179 1,004 2,513 1,640 1,097 476 1,446 5,417 4,658 Effective Tax Rate (%) 26.6 29.9 28.8 33.4 29.3 30.0 30.0 25.3 30.7 28.1 Reported PAT 1,979 2,797 2,369 5,009 3,950 2,559 1,110 4,274 12,150 10,923 Adj. PAT (Pre Exceptionals) 2,109 2,541 1,141 4,083 2,980 2,559 1,110 4,274 9,801 9,953 Change (%) 41.3 0.7 -2.6 4.7 1.4 E: MOSt Estimates

Satyam Agarwal ([email protected]); Tel: +91 22 5657 5353/Anjali Shah Vora ([email protected]); Tel: +91 22 5657 5305 23 September 2005 213 Results Preview SECTOR: UTILITIES

PTC India

STOCK INFO. BLOOMBERG BSE Sensex: 8,223 PWTC IN 23 September 2005 Buy REUTERS CODE S&P CNX: 2,478 PTCI.BO Previous Recommendation: Buy Rs46

Equity Shares (m) 150.0 YEAR NET SALES PAT EPS EPS P/E P/BV ROE ROCE EV/ EV/ END (RS M) (RS M) (RS) GROWTH (%) (X) (X) (%) (%) SALES EBITDA 52-Week Range 63/38 3/05E 19,525 244 1.6 -21.7 28.5 3.2 11.5 16.6 0.3 19.0 1,6,12 Rel. Perf. (%) -12/-31/-66 M.Cap. (Rs b) 6.9 3/06E 19,915 316 2.1 29.5 22.0 2.9 13.7 19.6 0.3 21.1

M.Cap. (US$ b) 0.2 3/07E 28,143 367 2.4 16.0 18.9 2.6 14.4 21.9 0.2 13.9

* Pre-exceptional

? During 2QFY06, we expect PTC to report a net profit of Rs59m, up 9.4% YoY. This is largely due to improved tradable surplus in the Eastern region.

? PTC is witnessing a substantial change in business model – short-term trading, which accounts for 80% of the traded volumes, will now decline to 35% in FY08. Long-term contracts are typically for 10-35 years and also mitigate the threat on margins.

? FY08 would be the inflexion point in terms of volumes and earnings. PTC’s FY05 traded volumes of 8.9b units is expected to increase to 30b units+ by FY08. This would be driven by the commissioning of the Tala project, Bhutan (1,020 MW) and greenfield projects where PTC has signed LT PPAs (2,406 MW).

? Apart from the LT PPAs for 2,406 MW, PTC has also signed MoUs for ~14,000 MW. It intends to take 10-11% equity stake in power projects for 100% assured off take. The Government of India has notified PTC as the nodal agency to trade power with Bhutan and Nepal. We recommend Buy.

QUARTERLY PERFORMANCE (RS MILLION) Y/E MARCH FY05 FY06 FY05 FY06E 1Q 2Q 3Q 4Q 1Q 2QE 3QE 4QE Power Traded (MUs) 2,144 2,780 2,632 1,331 1,523 2,500 2,600 2,296 8,887 8,919 Sales 4,943 5,934 6,043 3,400 4,373 4,500 5,720 5,322 19,525 19,915 Change (%) -11.5 10.8 -15.9 -46.4 -11.5 -24.2 -5.3 56.5 -13.9 2.0 EBITDA 112 93 102 50 81 72 69 105 350 327 Change (%) -27.3 4.4 -36.7 -57.0 -27.3 -22.9 -32.4 112.1 -22.6 -6.5 As of % Sales 2.3 1.6 1.7 1.5 1.9 1.6 1.2 2.0 1.8 1.6 Depreciation 8 8 8 10 8 8 8 9 33 33 Interest 1 2 4 0 1 2 2 1 0 5 Other Income 15 10 10 18 67 30 36 47 52 180 Extraordinary Income/(Expense) 0 0 0 1 0 0 0 0 0 0 PBT 118 93 100 57 139 93 95 143 369 469 Tax 37 39 33 19 26 34 35 59 125 153 Effective Tax Rate (%) 31.1 41.9 33.0 32.8 18.5 36.5 36.5 41.2 33.8 32.6 Reported PAT 81 54 67 39 113 59 60 84 244 316 Adjusted PAT 81 54 68 39 63 59 60 84 244 266 Change (%) 62.4 -18.2 -38.9 -53.2 -22.5 9.4 -10.6 113.9 -21.7 9.0 E: MOSt Estimates

Satyam Agarwal ([email protected]); Tel: +91 22 5657 5353/Anjali Shah Vora ([email protected]); Tel: +91 22 5657 5305 23 September 2005 214 Results Preview SECTOR: UTILITIES

Reliance Energy

STOCK INFO. BLOOMBERG BSE Sensex: 8,223 BSES IN 23 September 2005 Buy REUTERS CODE S&P CNX: 2,478 RLEN.BO Previous Recommendation: Buy Rs543

Equity Shares (m) 226.0 YEAR NET SALES PAT EPS EPS P/E P/BV ROE ROCE EV/ EV/ END (RS M) (RS M) (RS) GROWTH (%) (X) (X) (%) (%) SALES EBITDA 52-Week Range 706/456 3/05A 41,398 5,665 30.5 12.0 17.8 2.0 11.1 10.1 2.5 14.9 1,6,12 Rel. Perf. (%) -12/-26/-63 M.Cap. (Rs b) 122.7 3/06E 38,741 6,995 31.0 1.5 17.5 1.6 10.0 8.5 2.2 12.0

M.Cap. (US$ b) 2.8 3/07E 43,386 8,089 35.8 15.6 15.2 1.4 8.9 8.3 1.6 9.3

* Consolidated

? During 2QFY05, we expect Reliance Energy to report a net profit of Rs1.6b, up 27% YoY on a reported basis.

? The company has outlined various projects to take advantage of the opportunities being presented by the Indian power sector. It has announced plans to set up large generation capacities, bid for distribution privatization, set up parallel networks, interstate transmission, etc.

? As at March 2005, cash and investments on the balance sheet stood at Rs67b, representing 70% of the capital employed. Post the preferential allotment of Rs15b to Anil Dhirubhai Ambani Enterprises and institutional investors, the liquid cash would further increase.

? Natural gas for the 3,740 MW Dadri project will be available from Reliance Industries. The project is expected to go on stream in FY09. The company also intends to set up the Northern region transmission network to evacuate power from this project at a cost of Rs25b.

? We believe that the stock is largely a play on the future growth opportunities rather than on existing assured return businesses. Maintain Buy.

QUARTERLY PERFORMANCE (RS MILLION) Y/E MARCH FY05 FY06 FY05 FY06E 1Q 2Q 3Q 4Q 1Q 2QE 3QE 4QE Sales 9,428 7,917 9,291 14,670 9,497 9,125 9,135 10,984 41,398 38,741 Change (%) 22.7 3.8 8.2 78.1 0.7 15.3 -1.7 -25.1 21.5 -6.4 EBITDA 1,473 1,626 596 1,891 1,615 1,912 1,725 1,896 7,023 7,148 Change (%) 15.9 29.1 -36.5 22.0 9.6 17.6 189.2 0.3 -5.4 1.8 As of % Sales 15.6 20.5 6.4 12.9 17.0 21.0 18.9 17.3 17.0 18.5 Depreciation 811 838 841 976 817 898 904 941 3,464 3,560 Interest 306 247 356 439 433 355 295 212 1,348 1,295 Other Income 769 868 2,056 1,229 1,348 1,125 1,215 1,662 4,527 5,350 Extraordinary Income/(Expense) -570 -310 127 -150 0 0 0 0 -903 0 PBT 1,126 1,409 1,456 1,705 1,712 1,784 1,741 2,406 6,738 7,643 Tax (incl contingencies) 97 127 108 226 146 161 157 713 1,536 1,176 Effective Tax Rate (%) 8.6 9.0 7.4 13.2 8.5 9.0 9.0 29.7 7.3 11.5 Reported PAT 1,029 1,282 1,348 1,479 1,567 1,623 1,584 1,692 5,201 6,467 Change (%) 9.4 n.a. 32.0 62.0 52.3 26.6 17.5 14.4 51.5 24.3 E: MOSt Estimates

Satyam Agarwal ([email protected]); Tel: +91 22 5657 5353/Anjali Shah Vora ([email protected]); Tel: +91 22 5657 5305 23 September 2005 215 Results Preview SECTOR: UTILITIES

Tata Power

STOCK INFO. BLOOMBERG BSE Sensex: 8,223 TPWR IN 23 September 2005 Buy REUTERS CODE S&P CNX: 2,478 TTPW.BO Previous Recommendation: Buy Rs430

Equity Shares (m) 197.9 YEAR NET SALES PAT* EPS* EPS P/E P/BV ROE ROCE EV/ EV/ END (RS M) (RS M) (RS) GROWTH (%) (X) (X) (%) (%) SALES EBITDA 52-Week Range 476/287 3/05A 39,304 4,214 19.8 -23.4 21.7 1.9 8.1 8.0 2.6 10.8 1,6,12 Rel. Perf. (%) -7/-2/-10 M.Cap. (Rs b) 85.1 3/06E 39,247 5,517 26.0 30.9 16.6 1.7 9.8 5.1 2.6 12.9

M.Cap. (US$ b) 1.9 3/07E 41,802 6,212 29.2 12.6 14.7 1.6 10.4 7.4 2.3 9.8

* Consolidated , pre-exceptionals, fully diluted

? Tata Power is expected to report a net profit of Rs1.1b, down 24% YoY. 2QFY05 reported numbers include Rs507m as profit on sale of investments. Adjusted for this, we expect 2QFY06 numbers to be stagnant. ? Maharashtra Electricity Regulatory Commission (MERC) is yet to come out with a Tariff Order for FY06. We believe that MERC could move to a RoE-based regime, in line with the Central Electricity Regulatory Commission. ? As at March 2005, cash and liquid investments stands at Rs20b. The company raised US$200m through an FCCB issue in Feb ’05, convertible at Rs591 per share carrying a coupon of 1%, and also raised Rs6b in domestic market through private placement of debentures. ? During FY05, the company disposed off its investments in Tata Petrodyne, Tata Honeywell, Tata Ceramics, Haldia Petrochem and Tata Telecom (Avaya). The management has reiterated its commitment to exit from non-core businesses. ? We expect Tata Power’s core business (Mumbai license area) to generate assured annual cash flows of Rs2.5-3.0b pa. North Delhi Pvt. Ltd. has been a significant outperformer and reduced AT&C losses to 34% in FY05 v/s the targeted levels of 40.85%. This made NDPL the only company to be eligible for incentives in FY05. ? Tata Power has outlined a series of initiatives to expand its presence across the entire spectrum from power generation to transmission and distribution. We recommend Buy.

QUARTERLY PERFORMANCE (RS MILLION) Y/E MARCH FY05 FY06 FY05 FY06E 1Q 2Q 3Q 4Q 1Q 2QE 3QE 4QE Units Generated 3,529 3,203 3,241 3,310 3,751 3,200 3,150 3,161 13,283 13,262 Total Operating Income 10,869 9,404 9,409 9,623 10,988 9,500 9,400 9,115 39,304 39,003 Change (%) 1.1 -11.4 -10.9 -7.7 1.1 1.0 -0.1 -5.3 -7.2 -0.8 EBITDA 3,523 2,206 2,237 1,569 2,410 2,250 2,275 2,152 9,227 9,088 Change (%) 21.7 -27.8 -38.3 -44.3 -31.6 2.0 1.7 37.2 -25.5 -1.5 As of % Sales 32.4 23.5 23.8 16.3 21.9 23.7 24.2 23.6 23.5 23.3 Depreciation 1,209 751 608 1,029 656 915 975 1,039 3,596 3,585 Interest 597 487 429 401 379 395 405 494 1,914 1,673 Other Income 175 474 236 1,921 315 500 650 713 3,871 2,178 PBT 1,892 1,948 1,989 1,760 1,691 1,440 1,545 1,331 7,588 6,007 Tax 875 532 616 55 507 360 464 322 1,697 1,652 Effective Tax Rate (%) 46.3 27.3 31.0 3.1 30.0 25.0 30.0 24.2 22.4 27.5 Reported PAT 1,016 1,415 1,373 1,706 1,184 1,080 1,082 1,010 5,891 4,355 Change (%) 2.2 -17.1 -25.6 213.8 16.5 -23.7 -21.2 -40.8 15.7 -26.1 E: MOSt Estimates

Satyam Agarwal ([email protected]); Tel: +91 22 5657 5353/Anjali Shah Vora ([email protected]); Tel: +91 22 5657 5305 23 September 2005 216 Results Preview SECTOR: TRANSPORT

Container Corporation of India

STOCK INFO. BLOOMBERG BSE Sensex: 8,223 CCRI IN 23 September 2005 Buy REUTERS CODE S&P CNX: 2,478 CCRI.BO Previous Recommendation: Buy Rs1,298

Equity Shares (m) 65.0 YEAR NET SALES PAT EPS EPS P/E P/BV ROE ROCE EV/ EV/ END (RS M) (RS M) (RS) GROWTH (%) (X) (X) (%) (%) SALES EBITDA 52-Week Range 1,380/631 3/05A 20,035 4,289 66.0 20.4 19.7 5.0 27.9 36.4 3.9 12.6 1,6,12 Rel. Perf. (%) 9/34/40 M.Cap. (Rs b) 84.3 3/06E 22,966 4,997 76.9 16.5 16.9 4.1 26.5 33.9 3.3 10.8

M.Cap. (US$ b) 1.9 3/07E 26,365 5,700 87.7 14.1 14.8 3.4 24.9 32.5 2.8 9.2

? We expect revenue growth of 15%, EBITDA growth of 8% and earnings growth of 14% in 2QFY06. ? EBITDA margins would decline to 31.4% in 2QFY06 from 33.5% in 2QFY05. This is because the railways have raised the railway haulage charges by 13% w.e.f. 7 April 2005. However, Concor has raised freight rates by 4% with a lag effect. Concor’s ability to pass on this hike to the customers has improved, given the fact that the cost of transportation by road has become expensive with an increase of 10% in crude prices. ? Wagon addition has been satisfactory for Concor since 2HFY05. This has eased its supply constraint and has enabled the company to concentrate on the domestic business. The management has already placed orders for procuring 1,300 wagons in FY06 and expects to incur a capex Rs3b for the same. ? The CFS built by Concor with an investment of Rs100m in Vishakhapatnam is expected to start operations by the end of September 2005. Concor plans to provide value-added services through this CFS and targets to earn Rs50m of revenues exclusively from this in FY06. Also, Concor has been roped in as a 15% strategic partner with Dubai Ports International to build the international container transshipment terminal at Vallarpadam. ? The government has opened up the container movement sector by allowing private sector participation, thus ending Concor’s monopoly. However, since any operator would require a minimum period of 18 months to kick-start its operations, we do not foresee any near-term threat to the earnings of Concor. ? The company has attractive business prospects on the back of increase in containerization in the country. The stock is attractively valued at 14.8x FY07E earnings. We recommend Buy.

QUARTERLY PERFORMANCE (RS MILLION) Y/E MARCH FY05 FY06 FY05 FY06E 1Q 2Q 3Q 4Q 1Q 2QE 3QE 4QE Sales 4,505 4,908 5,094 5,464 5,388 5,644 5,679 6,255 20,035 22,966 Change (%) 14.0 15.3 12.0 16.1 19.6 15.0 11.5 14.5 13.5 14.6 EBITDA 1,416 1,643 1,515 1,613 1,553 1,772 1,733 1,930 6,283 6,988 Change (%) 20.1 42.3 6.2 22.8 9.7 7.9 14.4 19.7 22.9 11.2 OPM (%) 31.4 33.5 29.7 29.5 28.8 31.4 30.5 30.9 31.4 30.4 Depreciation 165 150 171 170 192 168 214 249 666 822 Interest 1 1 1 1 1 1 1 1 3 3 Other Income 138 125 117 100 104 137 129 266 482 637 Extra-ordinary items 1 0 0 1 0 0 0 0 0 0 PBT 1,388 1,617 1,460 1,542 1,464 1,740 1,648 1,946 6,096 6,799 Tax 414 490 443 262 390 461 437 514 1,807 1,802 Effective Tax Rate (%) 29.9 30.3 30.3 17.0 26.6 26.5 26.5 26.4 29.6 26.5 Reported PAT 972 1,127 1,018 1,279 1,075 1,279 1,211 1,432 4,289 4,997 Adjusted PAT 973 1,127 1,018 1,280 1,075 1,279 1,211 1,432 4,289 4,997 Change (%) 30.8 53.7 -1.1 42.4 10.5 13.5 19.0 11.9 20.4 16.5 E: MOSt Estimates

Satyam Agarwal ([email protected]); Tel: +91 22 5657 5353/Anjali Shah Vora ([email protected]); Tel: +91 22 5657 5305 23 September 2005 217 Results Preview SECTOR: AGROCHEMICALS

United Phosphorus

STOCK INFO. BLOOMBERG BSE Sensex: 8,223 UNTP IN 23 September 2005 Buy REUTERS CODE S&P CNX: 2,478 UNPO.BO Previous Recommendation: Buy Rs191

Equity Shares (m) 165.6 YEAR NET SALES PAT EPS EPS P/E P/BV ROE ROCE EV/ EV/ END (RS M) (RS M) (RS) GROWTH (%) (X) (X) (%) (%) SALES EBITDA 52-Week Range 200/121 3/05A 14,226 1,572 9.3 67.5 20.5 4.0 23.2 19.1 2.5 10.2 1,6,12 Rel. Perf. (%) -9/7/3 M.Cap. (Rs b) 31.6 3/06E 17,738 2,203 12.7 36.8 15.0 3.2 22.7 20.3 2.0 7.9

M.Cap. (US$ b) 0.7 3/07E 21,198 2,833 16.4 28.6 11.7 2.5 23.3 22.3 1.5 6.0

? United Phosphorus is expected to report a 19.1% YoY growth in consolidated revenues, driven primarily by the Cequisa acquisition in 1QFY06.

? EBITDA margins are expected to expand by 290bp to 26%, with the rapid growth in revenues, driven by tight control over fixed overheads.

? Lower interest cost (down 30% YoY) would further add to the bottom line, leading to the 87.7% growth in net profit to Rs586m.

? UPL has made considerable progress in global markets, emerging as a leading global player in crop protection. Its ability to drive strong revenue growth would translate into healthy 34% CAGR earnings over FY05-07E. Valuations of 11.7x FY07E earnings and 1.5x FY07E EV/Sales do not reflect the strong business fundamentals and earnings visibility. We maintain Buy.

QUARTERLY PERFORMANCE (CONSOLIDATED) (RS MILLION) Y/E MARCH FY05 FY06 FY05 FY06E 1Q 2Q 3Q 4Q 1Q 2QE 3QE 4QE Gross Revenues 3,358 3,742 3,230 4,151 4,075 4,457 3,932 5,274 14,226 17,738 YoY Change (%) 27.1 22.4 24.0 38.1 21.3 19.1 21.7 27.1 28.3 24.7 Total Expenditure 2,545 2,878 2,622 2,877 3,055 3,300 3,100 3,821 10,667 13,276 EBITDA 814 864 608 1,273 1,020 1,157 832 1,453 3,559 4,462 Margins (%) 24.2 23.1 18.8 30.7 25.0 26.0 21.2 27.5 25.0 25.2 Depreciation 253 249 240 237 326 276 277 224 978 1,104 Interest 281 242 120 196 230 170 168 120 839 688 PBT 280 373 249 841 464 711 387 1,108 1,742 2,670 Tax 18 9 33 30 24 124 68 177 89 467 Deferred Tax 46 52 65 -82 75 0 0 0 81 75 Rate (%) 23.1 16.2 39.4 -6.3 21.2 17.5 17.5 15.9 9.8 20.3 Reported PAT 215 312 151 894 365 586 320 932 1,572 2,128 PAT 215 312 151 894 365 586 320 932 1,572 2,128 YoY Change (%) 75.5 51.7 111.2 14.5 69.8 87.7 112.2 4.2 34.7 35.4 Margins (%) 6.4 8.3 4.7 21.5 9.0 13.2 8.1 17.7 11.0 12.0 E: MOSt Estimates

Jinesh K Gandhi ([email protected]); Tel: +91 22 56575 304

23 September 2005 218 NOTES

23 September 2005 219 For more copies or other information, contact Institutional: Navin Agarwal. Retail: Manish Shah, Mihir Kothari Phone: (91-22) 56575200 Fax: (91-22) 22885038. E-mail: [email protected]

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The report is based upon information that we consider reliable, but we do not represent that it is accurate or complete, and it should not be relied upon such. MOSt or any of its affiliates or employees shall not be in any way responsible for any loss or damage that may arise to any person from any inadvertent error in the information contained in this report. MOSt or any of its affiliates or employees do not provide, at any time, any express or implied warranty of any kind, regarding any matter pertaining to this report, including without limitation the implied warranties of merchantability, fitness for a particular purpose, and non-infringement. The recipients of this report should rely on their own investigations.

MOSt and/or its affiliates and/or employees may have interests/ positions, financial or otherwise in the securities mentioned in this report. To enhance transparency, MOSt has incorporated a Disclosure of Interest Statement in this document. This should, however, not be treated as endorsement of the views expressed in the report.

Disclosure of Interest Statement

The MOSt group and its Directors own shares in the following companies covered in this report: Aventis Pharma, Bharti Tele-Ventures, Birla Corporation, GlaxoSmithkline Pharma, Hero Honda Motors, IDFC, Indian Oil Corporation, Indian Overseas Bank, IPCL, Pfizer, Siemens, State Bank of India, Tata Motors and Union Bank of India

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