UPA or NDA? – Doesn’t matter. We say Maruti, ICICI, Infosys, Bharti and Idea

Will the government survive? We do not engage in speculation, certainly not in Indian politics, but our proprietary analysis reveals investment ideas that present very attractive entry points for investors, irrespective of tomorrow’s political outcome. Our scenario analysis identified Maruti Suzuki, ICICI Bank, Infosys, Bharti Airtel and Idea Cellular as being immune to a change in power. All have earnings risk priced in and are available at near distressed valuations. Maruti Suzuki India Maruti is currently trading at 9.4x our FY09 EPS estimate, significantly below its FY04-07 historical trading range of 11-17x. We recommend buying the stock with a 12-month horizon, maintaining our stance of a strong 2H FY09. (Buy, TP: INR840, Upside: 35%). ICICI Bank After accounting for 35% increase in NPAs, 35bp contraction in NIMs, another 50bp of rate tightening, USD350m of MTM losses and zero value to its subsidiaries, we still believe ICICI represents at least an 11% upside under the worst case scenario outlined above. (Buy, TP: INR950, Upside: 54%). Infosys Technologies Taking into account concerns over demand, we have taken in a negative pricing growth, a 100bp fall in EBIT margins and a cut our earlier growth estimates to arrive at a bear case valuation of INR1,467; the current price is INR1,548. (Buy, TP: INR2,050, Upside: 32%). Bharti Airtel Our bear case valuation for Bharti takes an extreme scenario of a fall in market share, negative NPV on 3G deployment and a 200bp drop in margin from our current estimates. The stock is currently trading close to its bear case multiple of 16.7x. (Buy, TP: INR2050, Upside: 34%). Idea Cellular Telecom Malaysia has provided a benchmark, by valuing the stock at twice the CMP. Our bear case valuations assume a fall in market share, delays in the circle launches and the tower JV to arrive at a valuation of 18.4x FY09E earnings while it is currently trading below its liquidation value at an FY09 multiple of 17.5x. (Buy, TP: INR1075, Upside: 56%).

Scenario analysis synopsis

Variance to current 1-yr Upside/(Downside)

——— fwd P/E ——— to CMP Bear Bull Bear Bull

variance variance case case (%) (%) (%) (%) ICICI Bank 13.4 11.3 11.2 24.6 Bharti 75.8 3.2 (0.6) 86.0 Infosys Tech 66.5 (3.2) (7.3) 78.7 Maruti Suzuki 21.1 54.4 13.5 66.0 Idea Cellular 87.4 8.8 2.6 119.5

Sensex

(index) 22,000 20,000 18,000 16,000 14,000 12,000 10,000 Jul-07 Nov-07 Mar-08 Jul-08

BNPP bull-bear scenario analysis model (Exhibit4) Detailed explanation of the BNPP bull-bear scenario analysis model and tips on how to use the model:

Bear case EPS variance – Calculated assuming recessionary macro environment and its impact on demand, rising raw material costs and shrinking margins. The variance to our current EPS estimate is represented as the bear case EPS variance.

Example: (3.6%) bear case EPS variance for Bharti indicates that our current EPS estimate is 3.6% higher than the absolute worst case FY09 EPS.

Bull case EPS variance – Calculated assuming a U shaped recovery of the economy in the second half. Variance to our current EPS is then calculated.

Example: 3.9% bull case EPS variance for Bharti indicates the most optimistic FY09 EPS for Bharti is 3.9% higher than our current estimates.

Spread – Spread between bull case and bear case. Larger the spread, greater the expected earnings volatility.

Example: 7.6% EPS variance spread for Bharti indicates that investors can expect a nearly 8% swing in FY09 earnings in the worst and best case scenarios. This is a fairly low spread compared to say a RCOM spread of 20% EPS volatility.

Bear case P/E variance – Difference between current P/E and bear market P/E multiples awarded by the market.

Example: 3.2% bear case P/E variance for Bharti indicates current forward P/E multiple is 3.2% lower than the bear market forward P/E multiple.

Bull case P/E variance – Difference between current P/E and bull market P/E multiples.

Example: 79% bull case P/E variance for Bharti indicates current forward P/E multiple is 79% lower than the bull market forward P/E multiple.

Spread – Difference between bear market multiples and bull market multiples. Example: 75.8% P/E variance spread for Bharti indicates that there is a 76% multiple volatility between bear market multiples and bull market multiples.

Bear case TP – Bear case target price variance to current market price (as of 18 July closing prices)

Example: (0.6%) for Bharti implies current market price is 0.6% higher than our absolute bear case target price which indicates the market is pricing in a near worst case scenario already. However, for ICICI, an 11.2% number indicates current market price is 11% lower than the absolute bear-case target price, implying a very attractive entry point.

Bull case TP – Bull case target price variance to current market price (as of 18th July closing prices)

Example: 86% for Bharti implies current market price is 86% lower than our bull case target price which indicates the potential upside to a blue-sky scenario.

Value picks Top picks that have minimum earnings and multiple contraction risk:

ICICI Bank, Bharti Airtel, Idea Cellular

Minimum earnings risk Minimum multiple contraction risk ICICI Bank Maruti Suzuki IDFC Reliance Communication Bharti Airtel ICICI Bank Aban Offshore Idea Cellular Infosys Tata Steel Idea Cellular Bharti Airtel

Note: For minimum earnings risk companies ranked in descending order of bear case EPS variance For minimum multiple contraction companies ranked in descending order of bear case P/E variance Source: BNP Paribas estimates

Optimistic picks Top picks with maximum potential upside to earnings and multiple expansion opportunity:

Lanco Infratech, Suzlon Maximum possible upside to earnings Maximum potential multiple expansion Lanco Aban Offshore ONGC Reliance Communication Tata Power Idea Cellular IVRCL Suzlon Suzlon Lanco Shiv Vani Bharti Airtel

Note: For maximum potential upside to earnings companies ranked in descending order of bull case EPS variance For maximum potential multiple expansion companies ranked in descending order of bull case P/E variance Source: BNP Paribas estimates

Trader picks Top picks with maximum earnings and multiple volatility:

Lanco Infratech, Suzlon Maximum earnings volatility Maximum multiple volatility ONGC Aban Offshore Lanco Lanco Tata Power Reliance Communication Shiv Vani Suzlon Suzlon Idea Cellular Tata Steel Bharti Airtel

Note: For maximum earnings volatility companies ranked in descending order of EPS variance spread For maximum multiple volatility companies ranked in descending order of P/E variance spread Source: BNP Paribas estimates

Bull-Bear Scenario Analysis Variance of base FY09 EPS to bear & bull — Variance of base 1-yr fwd P/E to bear & bull — Upside/(Downside) —————— case EPS ——————— —————— case P/E ——————— ——— to CMP ——— Spread Bear variance Bull variance Spread Bear variance Bull variance Bear Bull (%) (%) (%) (%) (%) (%) (%) (%) ICICI Bank 0.0 (0.1) (0.1) 13.4 11.3 24.7 11.2 24.6 IDFC 7.4 (96.8) 0.6 31.6 (5.1) 26.6 (14.1) na Bharti 7.6 (3.6) 3.9 75.8 3.2 79.0 (0.6) 86.0 Aban Offshore 13.0 0.0 13.0 148.3 (18.2) 130.1 (18.2) 160.1 Infosys Tech 13.6 (4.2) 9.4 66.5 (3.2) 63.3 (7.3) 78.7 Maruti Suzuki 13.8 (6.3) 7.5 33.4 21.1 54.4 13.5 66.0 Satyam 16.7 (5.9) 10.8 65.7 (1.1) 64.5 (6.9) 82.3 Idea Cellular 17.5 (5.7) 11.8 87.4 8.8 96.2 2.6 119.5 Reliance Comm 19.7 (9.6) 10.2 89.8 11.5 101.3 0.8 121.7 JSW Steel 20.0 (10.0) 10.0 72.7 (27.3) 45.3 (34.6) 59.9 BHEL 20.4 (18.0) 2.3 41.3 0.0 41.3 (18.0) 44.6 L&T 22.4 (18.0) 4.4 50.4 (34.0) 16.4 (45.9) 21.5 IVRCL 29.6 (14.2) 15.4 36.5 (12.4) 24.1 (24.8) 43.3 Tata Steel 30.0 (17.7) 12.3 64.2 7.0 71.2 (11.9) 92.3 Suzlon 31.0 (17.1) 14.0 89.7 (1.4) 88.3 (18.2) 114.6 Shiv Vani 44.5 (31.4) 13.1 65.3 (2.1) 63.1 (32.8) 84.5 Tata Power 50.6 (33.9) 16.8 26.9 (7.4) 19.5 (38.8) 39.5 Lanco 52.9 (22.6) 30.3 92.6 (7.4) 85.3 (28.3) 141.3 DLF 64.6 (43.6) 21.0 157.6 (21.2) 136.5 (21.1) 136.4 ONGC 86.4 (58.8) 27.6 na na na (24.1) 41.7 Cairn India 0.0 0.0 0.0 na na na (3.1) 83.2

Note: FY10 numbers used for DLF. NAV used instead of EPS. Standalone EPS and PE for L&T and IVRCL CY08 numbers for Cairn IDFC numbers do not factor in 1QFY09 results Source: BNP Paribas estimates

Our top picks

Maruti Suzuki India (MSIL IN; BUY; CMP: INR624; TP: INR840) What has kept the stock beaten down

Fuel price hike: Our analysis shows that a 10% hike in petrol price would increase payouts by only 2.5% for passenger cars. Higher reliance on alternative fuels like diesel, CNG and LPG will help Maruti push sales.

Input price inflation: 30-35% y-y increase in steel cost, which accounts for only 8% of revenues, will be largely offset by two price increases taken in 2008, amounting to 2.5%.

Financial institutions cutting exposure to auto loans: Our channel checks with dealers confirm availability of finance although documentation has become slightly stricter.

High interest rates: This factor has high significance on the demand. Our sensitivity analysis shows that a 1% increase in interest rates affects growth by 300bp.

Positive triggers: ƒ Cut in income tax rates will lead to 10% increase in disposable income of passenger car target customers. Expected playout – 2HFY09. ƒ Payout of three years arrear pay and 30% increase in salaries of 19m government employees on implementation of Sixth Pay Commission recommendations. Expected playout – 2HFY09. ƒ 15-18% capacity expansion at Manesar to help monetise latent demand for Swift and Dzire and reduce current long waiting periods. Expected playout – 2HFY09. ƒ Launch of two news products in the compact car segment (A-Star in October 2008 and Splash in April 2009) would help stem loss of market share to Hyundai i10. ƒ Commencement of exports to Europe. Expected playout – 4QFY09. Valuation: Maruti is currently trading at 8.6x our FY09 EPS estimate, significantly below the four-year (FY04-07) historical trading range of 11-17x. We recommend buying the stock with a 12-month time horizon, maintaining our stance of a strong 2HFY 09. We believe Maruti is the best play in the Indian auto space, with the domestic passenger-car demand well complemented by export growth. Our TP of INR840 is based on 12.7x FY10 EPS of INR66. Our bear case valuation is INR680 – based on 11x FY09 bear case EPS of INR62 (assuming 0% domestic volume growth in July 2008-March 2009 and 100bp y-y EBITDA margin decline in FY09). Maruti Suzuki India – Share Price Daily vs MSCI

Maruti Suzuki India (LHS) MSCI India - price index (RHS) (index) 1,200 900

1,100 800 1,000

900 700

800 600 700 500 600

500 400 Jul-07 Sep-07 Nov-07 Jan-08 Mar-08 May-08 Jul-08

Source: Datastream

ICICI Bank (ICICI IN; BUY; CMP: INR618, TP: INR950) The UPA (current government) and the NDA (previous government) are both on the same page when it comes to economic and infrastructure growth. We do not think that either of them in power will be detrimental to the growth in the financial services.

We believe the stock presents a compelling investment case, even after accounting for a bear case scenario as detailed below.

ƒ Our proprietary analysis reveals USD75b of corporate capex implying 12% blended loan growth for ICICI Bank over the next two years, despite the expected monetary tightening. ƒ We are modeling for a further 50bp of interest rate tightening, we expect NIMs to contract by 34bp over FY08-10. We are not giving any benefit for the increase in low cost deposit base accruing from the expansion of the branch network in FY09 (approximately 400 branches) ƒ We are accounting for a 34% y-y increase in NPLs for FY09 based on our proprietary channel checks. ƒ We are accounting for USD350m in MTM losses for FY09 (this roughly translates into another 300bp expansion in credit spreads in FY09) ƒ Even assuming ZERO value for the embedded franchise in life insurance, asset management, venture funds and equity brokerage, our bear caseTP of INR685 represents a 11% upside from the current market levels. ƒ If the embedded value is accounted for (subsidiary fair value: INR265), then the core bank trades at 0.75x our FY09E BV. Without any embedded value, the bank trades at 1.3x our FY09 BV.

ICICI Bank – Share Price Daily vs MSCI (index) ICICI Bank (LHS) MSCI India - price index (RHS) 1,600 1,000

1,400 900 800 1,200 700 1,000 600 800 500 600 400

400 300

200 200 Jul-07 Aug-07 Sep-07 Nov-07 Dec-07 Jan-08 Mar-08 Apr-08 Jun-08

Source: Datastream

Infosys Technologies (INFO IN; BUY; CMP: INR1,548; TP: INR2,050) The IT industry is the flag bearer for India inching closer to the league of developed nations. Since the 1990s the segment has received many sops from the government for its proliferation. Besides most large companies in the space are relatively apolitical hence will not be impacted much by whichever party comes to power.

What is plaguing the stock price

ƒ Fears of a fall in demand from US: The worsening macro conditions in the US are the biggest overhang on the stock as approximately 60% of the revenues come from the US. As a result, we expect a muted 1HFY09 for all Indian IT services companies. However, territories like Europe and Middle East have started opening up and we expect these under penetrated areas to compensate for growth going forward. ƒ Aggressive street estimates: The recent fall in the stock price has been mainly as the 1QFY09 results came below market expectations. We do not believe that this is indicative of a deteriorating demand scenario, however we remain cautious. Infosys management has always been conservative at guiding on growth prospects; this time too their guidance was guarded to build in any slowdown in the demand in the interim period. Our estimates were in line with the results and we expect the street estimates to get tempered down to factor in the demand side risks. ƒ Most insulated from domestic macro disturbances: The IT sector will face the least backlash from interest rate fluctuations and a slowdown in domestic demand due to their high exposure to global markets and low capex requirement. Valuations: Even at a very conservative assumption of 20% revenue growth in FY09 we expect the earnings to grow at 16%. we have taken in a negative pricing growth, a 100bp fall in EBIT margins and a cut in our earlier growth estimates to arrive at a bear case valuation of INR1,467. We think this is a far cry from the actual demand scenario for a steady and a sure performer. Currently the stock is trading at 16.2x FY09 earnings.

Inofsys – Share Price Daily vs MSCI

MSCI India (LHS) INFO IN (RHS) 1,000 2,200

900 2,000 800 1,800 700

600 1,600

500 1,400 400 1,200 300

200 1,000 Jul-07 Aug-07 Oct-07 Nov-07 Jan-08 Feb-08 Apr-08 May-08 Jul-08

Source: Datastream

Bharti Airtel (BHARTI IN; BUY; CMP: INR802; TP: INR1,075 ) The growth in the telecom sector has been aided by a strong political will. It has become a cash cow for the government; no ruling party would want to jeopardize the steady stream of revenues from such a high growth sector by bringing out regulations that hamper the growth.

What makes Bharti attractive now

ƒ Robust balance sheet, insulated from fluctuating interest rates: Even while operating in a capex heavy industry, Bharti is a debt free company, we even expect the company to achieve positive free cash flows this year. Also here is no requirement for external funding in the next two years hence they will not face any effects of interest rate fluctuations. ƒ Well positioned to benefit from 3G spectrum: Bharti would be able to use 3G spectrum to decongest its voice network due to its pan-India network. Bharti's strong balance sheet and positive free cash flow would support its 3G plans. Even a negative NPV on 3G deployments does not warrant the low multiples that markets are assigning to the stock. ƒ Concerns over competition unjustified: We believe in the current market the new entrants business case has become extremely weak due to reducing revenue per minute, rising credit costs, risk averseness, currency depreciation (GSM equipment is imported) unwillingness of foreign operators to partner new entrants, their dependence on existing operators for infrastructure. ƒ Diversified business portfolio: Bharti has diversified revenue streams with 30% contribution from non wireless businesses which consist of Broadband, Enterprise services and passive infrastructure leasing. The company will be launching DTH and Sri lanka operations during FY09. Valuation methodology: We are using valuing Bharti based on consolidated DCF including core business and tower business. We retain BUY rating and target price of INR1,075, which translates into a FY09 P/E multiple of 23x. Our bear case valuation for Bharti is INR745 which is 16.7x FY09 EPS.

Bharti Airtel – Share Price Daily vs MSCI

MSCI (LHS) Bharti (RHS) 1,000 1,200

1,100 900 1,000 800 900

700 800

700 600 600 500 500

400 400 Jul-07 Aug-07 Oct-07 Nov-07 Dec-07 Feb-08 Mar-08 Apr-08 Jun-08

Source: Datastream

Idea Cellular (IDEA IN; BUY; CMP: INR80; TP: INR125) Our top pick in the telecom space

ƒ Spice acquisition to give it much needed reach: Idea has transformed into a pan India operator on Spice acquisition. Spice operates in the circles of Karnataka and Punjab and the buyout will help Idea in increasing its presence from 11 circles to 13 and many further launches are planned. Idea has had one of the most rapid expansion plans with the coverage of towns increasing 5x over the past six quarters. ƒ Stable capital structure: The deal with Telekom Malaysia has made the Idea balance sheet stronger by USD1b reducing their debt levels to negligible. This deal put Idea on a very high benchmark valuation at more than 100% of its CMP. ƒ Positive triggers in the near term: Strong 1QFY09 earnings, Launch of operations in Mumbai and Bihar in next 2-3 months Valuation: Idea is well positioned to improve market share on new launches and improve margins as it gains economies of scale. 22% of our TP is accrued from the Indus Tower JV. Our bear case valuation at INR79 is at an FY09 P/E of 18.4x while the stock is currently trading at a base case valuation of 17.5x. Idea Cellular – Share Price Daily vs MSCI

Idea (LHS) MSCI India (RHS) 180 1,000

160 900

800 140 700 120 600 100 500

80 400

60 300 Jul-07 Aug-07 Oct-07 Nov-07 Dec-07 Feb-08 Mar-08 Apr-08 Jun-08

Source: Datastream