Market Outlook

India Research
April 11, 2012

Dealers Diary
The Indian markets are expected to open in red tracking negative opening in most of the Asian markets. Asian markets ended mixed yesterday, as no additional stimulus from the Bank of Japan, mixed views about China's trade data and renewed concerns that the U.S. labor market recovery is still slow, prompted investors to adopt a cautious stance. The US markets moved sharply lower yesterday and had their worst day of the year on anxiety leading up to earnings season and as government bond yields for Spain and Italy surged. A sharply lower close by the major European markets also contributed to the pullback by the U.S. stocks, as traders worried about the global economic impact of a recession in Europe. The Indian benchmark indices ended on a flat note yesterday, as caution prevailed ahead of industrial output and inflation data. The uncertainty before the RBI's upcoming rate-setting meeting on April 17 also prompted investors to remain on the sidelines. The markets will now closely watch out for IIP data for February 2012 (Bloomberg estimate 6.7%) due to be released tomorrow.

Domestic Indices BSE Sensex Nifty MID CAP SMALL CAP BSE HC BSE PSU BANKEX AUTO METAL OIL & GAS BSE IT Global Indices Dow Jones NASDAQ FTSE Nikkei Hang Seng Straits Times Shanghai Com

Chg (%)

(Pts)

(Close)

0.1 0.2 (0.3) (0.1) (0.1) (0.6) 0.5 0.9 (0.9) (0.6) (0.9)
Chg (%)

21.7 17,244 9.2 (16.3) (8.3) (3.0) (42.7) 5,244 6,370 6,792 6,588 7,267

56.7 11,766 85.0 10,036 (98.4) 10,867 (50.4) (56.9)

(Pts)

7,969 5,981
(Close)

(1.7) (213.7) 12,716 (1.8) (0.1) 0.8 0.9

Chg (%)

(55.9) (8.2) 22.3 20.1

(Pts)

2,991 5,596 9,538 2,982 2,306

(Close)

Markets Today
The trend deciding level for the day is 17,218 / 5,237 levels. If NIFTY trades above this level during the first half-an-hour of trade then we may witness a further rally up to 17,300 17,357 / 5,262 5,281 levels. However, if NIFTY trades below 17,218 / 5,237 levels for the first half-an-hour of trade then it may correct up to 17,162 17,079 / 5,218 5,193 levels.
Indices SENSEX NIFTY S2 17,079 5,193 S1 17,162 5,218 PIVOT 17,218 5,237 R1 17,300 5,262 R2 17,357 5,281

(2.2) (128.1)

(1.2) (236.8) 20,356

Indian ADRs

INFY WIT IBN HDB

Advances / Declines Advances Declines Unchanged

(0.9) (0.7) (2.0) (1.6)

(0.5) (0.1) (0.7) (0.5)

BSE

$56.2 $10.6 $33.4 $33.1

NSE

News Analysis
Coal India new FSA analysis Cairn India reports production numbers for 4QFY2012 Sterlite Industries reports production and sales numbers for 4QFY2012 Sesa Goa reports production and sales numbers for 4QFY2012
Refer detailed news analysis on the following page

1,342 1,451 142

630 776 89

Net Inflows (April 9, 2012)

` cr FII MFs Purch 1,085 194 Sales 1,338 401 Net (253) (207) MTD 252 (234) YTD 45,578 (5,807)

Volumes (` cr) BSE NSE

2,298 10,496

FII Derivatives (April 10, 2012)

` cr
Index Futures Stock Futures

Purch 982 1,160

Sales 1,669 914

Net (687) 246

Open Interest 8,916 22,402

Gainers / Losers
Gainers Company
Godrej Industries Dena Bank Nestle India Uco Bank Tata Power

Losers Company
Indraprastha Gas Gujarat State Pet IVRCL Ltd India Cements Wockhardt

Price (`)
281 95 4,783 82 104

chg (%)
6.1 5.4 4.5 4.3 3.8

Price (`)
230 71 69 105 639

chg (%)
(33.7) (7.5) (4.0) (3.6) (3.4)

Please refer to important disclosures at the end of this report

Sebi Registration No: INB 010996539

Market Outlook | India Research

Coal India new FSA analysis

Presidential directive mandates CIL to sign FSAs: On April 3, 2012, the government issued a presidential directive to Coal India (CIL) to sign Fuel Supply Agreements (FSA) to commit supply of at least 80% of the quantity of coal required to new power plants. However, the directive gave the company freedom to relax the penalty payable in case of a shortfall. Given the muted production and offtake growth, we believe it will be challenging for CIL to supply the required coal for the upcoming FSAs. Nevertheless, we analyzed various scenarios on how CIL could potentially meet its commitments. In our view, the likely path for CIL to meet the new FSA requirements could be a combination of (a) reducing supply to existing FSAs, (b) reducing/stopping e-auction sales, (c) raising production, (d) importing the shortfall and (e) raising the blended prices of coal. Our analysis points out that CIL will have to increase blended FSA prices by 1517% over FY2013-15 to fully offset the impact of high-price imports. However, political compulsions could dilute CILs pricing power and, hence, there is a risk that some portion of losses due to the high-price imported coal will have to be absorbed by CIL. Hence, we are currently Neutral on the stock.

Assumptions
1.

CIL

lowers

supply

to

NTPC

by

5%

and

stops

coal

supplies

to

non-power companies (such as steel, aluminum and cement) under FSA terms.
2. 3.

CILs sales volumes are expected to grow at a CAGR of 4.8% over FY201215. There are some delays in capacity additions by upcoming power plants. We assume NTPC and private power producers to meet only 60% and 80% of their targeted capacity addition plans during FY2013-15, respectively.

Exhibit 1: Power capacity addition (MW)

FY12E NTPC Other power companies Total cumulative capacity
Source: Ministry of Power, Angel Research

FY13E 4200 28240 32,440

FY14E 7500 34080 41,580

FY15E 11100 40000 51,100

2000 19600 21,600

Exhibit 2: Coal shortfall to rise gradually (mn tonnes)

FY13E Raw coal E-auction Existing linkage coal Beneficiated coal Coal sales for new FSAs (A) CIL sales volumes Coal required for new FSAs (B) Shortfall @ 3,500 kcal (B - A) Imports required @ 6,500 kcal
Source: Coal India, Angel Research

FY14E 52 313 19 95 479 166 71 36

FY15E 52 313 19 117 501 204 87 44

52 313 19 73 456 130 57 29

April 11, 2012

Market Outlook | India Research

Exhibit 3: Import parity in coal pricing

Price of 6,500kcal coal (US$/tonne) Sea freight (US$/tonne) Handling and CIF charges (US$/tonne) Landed cost (US$/tonne) Landed cost @ INR 50/US$ (`/tonne) (A) CIL coal price (6,500 kcal) (`/tonne) (B) Loss to CIL on imported coal (`/tonne) (A B)
Source: Company, Angel Research

105 15 8 128 6,400 4,100 2,300

Scenario 1: Import the shortfall in coal and raise prices

Based on the capacity addition plans of most power producers (Exhibit 1), we have calculated the quantity of coal required to be supplied by CIL to meet its FSA norms. The shortfall will be imported by CIL at market prices and supplied to power producers at domestic FSA prices. However, we assume that CIL would raise its blended average realizations to offset the losses on account of high-price imported coal. Our analysis points out that CIL will be required to raise blended average prices to all power producers by 17% over FY2013-15.

Exhibit 4: Scenario 1 analysis

FY13E Landed cost of imports (`/tonne) CIL coal price (6500 kcal) (`/tonne) Loss to CIL (`/tonne) (A) Shortfall @ 3,500 kcal Imports @ 6,500 kcal (B) Total loss (` cr) ( A * B) Total CILs sales volumes (mn tonnes) FY2012 blended realization (`/tonne) Price increase reqd. from FY2012 levels Required blended realization (`/tonne) Incremental price hike reqd./year
Source: Angel Research

FY14E 6,400 4,100 (2,300) 71 36 (8,218) 479 1,175 15% 1,347 2%

FY15E 6,400 4,100 (2,300) 87 44 (10,061) 517 1,175 17% 1,370 2%

6,400 4,100 (2,300) 57 29 (6,574) 443 1,175 13% 1,324 13%

Scenario 2: Stop e-auctions, import the deficit and raise prices In scenario 2, we assume CIL would stop e-auctions of coal to meet new FSA requirements, import the shortfall and take price hikes. Price hikes would offset the impact of loss in profitability, which the company would face on account of stoppage of e-auctions and coal imports. In this case, we estimate CIL would be required to raise blended average realizations to all power producers by 15% over FY2013-15.

April 11, 2012

Market Outlook | India Research

Exhibit 5: Scenario 2 analysis

FY13E Total shortfall (3,500 kcal) (mn tonnes) e-auction (3,500 kcal) (mn tonnes) Import quantity (6,500 kcal) (mn tonnes) Premium on e-auction (`/tonne) Loss due to stoppage of e-auction (` cr) loss due to imports (` cr) Total loss (` cr) FY2012 blended realization (`/tonne) Price increase reqd. from FY2012 levels Required blended realization (`/tonne) Incremental price hike reqd./year
Source: Angel Research

FY14E 71 52 10 1,000 (5,200) (2,238) (7,438) 1,175 13% 1,330 2%

FY15E 87 52 18 1,000 (5,200) (4,081) (9,281) 1,175 15% 1,354 2%

57 52 3 1,000 (5,200) (594) (5,794) 1,175 11% 1,306 11%

CIL has a free hand to decide penalties

In case CIL does not meet its 80% FSA targets, it can face penalties. Presidential directive gives a free hand to CIL to decide on the terms of penalties; however, we believe penalties could mirror its penalty provisions in the previously signed FSAs.

Exhibit 6: Penalties for FSAs signed before March 2009

85-90% 80-85% <80%
Source: Coal India, Angel Research

10% of price of shortfall quantity below 90% 20% of price of shortfall quantity below 85% 30% of price of shortfall quantity below 80%

Exhibit 7: Penalties for FSAs signed after March 2009

<50%
Source: Coal India, Angel Research

10% of price of shortfall quantity below 90%

Paying penalties instead of importing could lower losses for CIL

In case CIL is unable to raise the price, it can lower its losses by paying penalties instead of importing coal to meet its new FSA requirements. Although there is no clarity on how CIL will pay the penalty, we analyze two possible scenarios for penalties: 1) CIL would pay 10% of price of shortfall quantity below 80% and 2) CIL would pay 30% of price of shortfall quantity below 80%. Even if CIL faces penalty of 30% of price of shortfall quantity below 80% levels, the loss by paying penalties would be significantly lower as compared to importing high-price coal.

April 11, 2012

Market Outlook | India Research

Exhibit 8: Imports vs. Penalties

10% of price of shortfall quantity below 80% 2,300 118 30% of price of shortfall quantity below 80% 2,300 353

Loss to CIL in case of imports (`/tonne ) Loss due to penalty (`/tonne )

Source: Angel Research

Cairn India reports production numbers for 4QFY2012

Cairn India reported robust production numbers for 4QFY012, which were in-line with our expectations. The companys gross oil production from operating units was 167,663bopd (+13.1% yoy) and 160,635bopd (+18.3% yoy) during 4QFY2012 and FY2012, respectively. Gross production from the Mangala field stood at 124,081bopd and 124,749bopd during 4QFY2012 and FY2012, respectively. Cairn India commenced production from Bhagyam field during January 2012 and produced 13,247bopd on a gross basis during the quarter. We maintain our Neutral view on the stock.

Sterlite Industries reports production and sales numbers for 4QFY2012

Sterlite Industries reported its production and sales volumes numbers for 4QFY2012, which were broadly in-line with our expectations. The companys mined zinc-lead metals decreased by 3.0% yoy to 223kt in 4QFY2012. Silver production grew by 77.0% yoy to 88 tonnes. Power sales stood at 2.2bn units in 4QFY2012 compared to 1.0bn units in 4QFY2011. Aluminium production was flat yoy to 62,000 tonnes in 4QFY2012. The /company continued to work towards the second stage forest clearance for the BALCO coal block, following the Environment Appraisal Committee's approval received in November 2011. We maintain our Buy rating on the stock with a target price of `139.

Sesa Goa reports production and sales numbers for 4QFY2012

Sesa Goa reported its production and sales volumes numbers for 4QFY2012, which were in-line with our expectations. The companys iron ore sales stood at 5.2mn tonnes in 4QFY2012 compared to 6.6mn tonnes in 4QFY2011. The decline in sales volumes was due to mining ban in Karnataka and logistical constraints in Goa. Production also declined by 11.0% yoy to 4.9mn tonnes in 4QFY2012 as a result of mining ban in Karnataka. We maintain our Accumulate rating on the stock with a target price of `206.

April 11, 2012

Market Outlook | India Research

Quarterly Bloomberg Brokers Consensus Estimates

Infosys Ltd Consolidated (13/04/2012)
Particulars (` cr) Net sales Net profit 4QFY12E 9,204 2,314 4QFY11 y-o-y (%) 7,250 1,818 27 27 3QFY12 q-o-q (%) 9,298 2,372 -1 -2

Economic and Political News

February industrial output may slow slightly: Poll Car sales rise 20% in March, up 2.2% in FY2012 Government plans US$30bn investment to develop airports

Corporate News
AI, KFA jointly owe about `525cr to GMR airports Bharti Airtel launches 4G in Kolkata, Bangalore next RCom may launch `7,500cr IPO of Flag Telecom this quarter Tech Mahindra, Satyam may hire 10,000 new staff
Source: Economic Times, Business Standard, Business Line, Financial Express, Mint

Results Calendar
13/04/2012 16/04/2012 18/04/2012

Infosys Crisil, MindTree HDFC Bank, HCL Tech, Infotech Enterprises

April 11, 2012

Market Outlook | India Research

Research Team Tel: 022 - 39357800

Source: Economic Times, Business Standard, Business Line, Financial Express, Mint

E-mail: research@angelbroking.com

Website: www.angelbroking.com

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April 11, 2012