Pre Market Report 17th July, 2012

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1 Pre Market Report 17th July, 2012 Inflation numbers marginally below street estimates, domestic bourses to remain under pressure amidst domestic and global factors On Monday, the markets lost all the early gains in the afternoon and closed negative. IT, metal, realty and power were the worst performers in yesterday s session and auto and capital goods, too, lost significantly. Healthcare, consumer durables and oil & gas closed positive. The Sensex closed at 17103, down 110 points from its previous close, and the Nifty shut shop at 5197, down 30 points. The CNX Midcap index was down 0.6% while the BSE Smallcap index also lost 0.6% in yesterday's trade. The market breadth was negative with advances at 507 against declines of 936 on the NSE. Domestically, inflation numbers were announced. Wholesale price index (WPI) rose a lower-than-expected 7.25% in June from a year earlier, mainly driven by higher food prices. Analysts on average had expected an annual rise of 7.62%, a Reuters poll showed. Wholesale prices provisionally rose 7.55% in May. The annual reading for April was upwardly revised to 7.5% from 7.23%. The following are the key figures: Manufactured products at 5% vs 5.02% (MoM) Manufactured products index up 0.3% (MoM) Primary articles at 10.26% vs 10.88% (MoM) Primary articles index up 0.1% (MoM) Food articles at 10.81% vs 10.74% (MoM) Food articles index up 1.4% (MoM) Fuel group at 10.27% vs 11.53% (MoM) Non-food aricles index down 2.6% (MoM) Fuel Group index down 0.4% (MoM) Minerals group index down 2.6% (MoM) At the current level of , the Sensex trades at a PE of 16x FY12E street earnings. Today all eyes would be on Axis Bank results after robust performance witnessed by HDFC Bank in the private banking space. Traders are eyeing the Presidential election scheduled for July 19, as investors hope the poll will mark the start of policy reforms, including a potential hike in diesel prices and reforms in foreign investment for aviation and retail. April-June earnings will also be closely eyed. Axis Bank reports its results on Tuesday, followed by Bajaj Auto on Wednesday. Kotak Mahindra Bank, Hero MotoCorp and Dr. Reddy's Laboratories will report fiscal first quarter earnings on Thursday. Energy conglomerate Reliance Industries and Asian Paints will announce April-June earnings on Friday. Going ahead, markets would take a cue from the crop output from the present monsoon season, changes in rupee levels, behavior of crude oil prices, ongoing Q1FY13 earnings season and RBI Policy meet. Investors having short term horizon, can consider booking partial profits in fairly valued stocks which were recommended in the past weeks in the Pre- Market report like State Bank of India, ICICI Bank, Larsen and Toubro, Shriram Transport Finance, IDFC, BHEL and Mahindra and Mahindra. Long term investors horizon of 1-2 years should remain stock specific and can consider accumulating stocks like Dr. Reddy s, Nestle, State Bank of Bikaner and Jaipur, Engineers India,

2 Opto Circuits, Axis Bank, HDFC Bank, Mercator Lines, Karur Vysya Bank, Swaraj Engines, Jyothy Labs and ICRA. Top Fundamental Picks 1) Axis Bank, Accumulate a) The Bank expects asset quality to remain robust in FY13 with slippages/restructuring remaining inline with FY12 levels and limited risk from growing Infra book in the near term. Retail focus will help mitigate some growth pressures but fee income would moderate. b) It is increasing its thrust to improve the retail share to 30% from 22% currently. Liability customers constitute ~45-50% of incremental sourcing which street believes is a credit positive. Management is seeing significant pricing competition in mortgages but believes competitive landscape is relatively better in auto lending. Delinquency/restructuring in expected to remain in line with FY12 levels v/s consensus expectations of a pick up in slippages/credit costs. Axis does not expect any material near term pressure on Infra portfolio with very limited exposure to imported coal and gas projects. Power portfolio remains unseasoned (at currently 25% project commissioned) but management expects ~45% of their portfolio to be commissioned by FY14. c) With due consideration to factors like a) recent corporate asset quality performance, b) stable asset quality trends, we believe that market has ignored it and valuations at 1.6x FY13 book is reasonable. One can Accumulate this stock as there is a potential upside. 2) Karur Vysya Bank Accumulate a) Net Interest Income has seen a YoY increase of 23.49% to touch Rs. 261 crs whereas for FY12 the growth stood at 19.59% to Rs. 917 crs. b) Operating Revenue witnessed YoY growth of 35.57%. For FY12, it stood at 22.9%. c) Operating Profit grew by 20.83% to Rs. 726 crores in FY12. For the quarter, Operating profit registered a YoY growth of 46.03% to Rs. 213 crores. d) Q4FY12 Net Profit increased by 27.3% to Rs. 147 crores. Net Profit jumped by 20.72% to Rs. 502 in FY12. e) NIM stood at 3.04%, Cost of Funds stood at 8.35% (against 7.12% in Q4FY11 and 8.16% in Q3FY12), ROA stood at 1.63% and Return on Networth stood at 21.64% in Q4FY12. f) For the whole year, NIM stood at 3.08%, ROA stood at 1.56% and Return on Networth stood at 18.53%. g) The Company s Cost to Income(C/I) stood at 42.85% in Q4FY12. For the whole year, C/I stood at 42.73%. While margins during FY12 dipped by 28bps on higher cost of funds, however the earnings continued their growth on account of cushion from high PCR of earlier years. During FY12, this came off to 75% as the bank derived advantage of high provisions made in previous years 3) Opto Circuits Accumulate a) Opto's growth is likely to be driven by the non-invasive segment in the near to medium term. This shall be led by new product launches (low cost monitors in particular) and scale up in revenues from AED

3 segment in Japan. On the invasive side, increased penetration in Emerging Markets (EMs) and new launches shall aid revenue growth. b) The company s net working capital saw a reduction from 255 days in FY11 to 145 days in FY12. The working capital cycle of the company has immensely improved c) Opto Circuits subsidiary and global leader in automated external defibrillators (AED), Cardiac Science Corporation, recently announced the European launch of its CE-certified Powerheart G5, the nextgeneration AED to help save lives from sudden cardiac arrest (SCA). Each year, as many as 700,000 lives are lost to SCA in Europe. The Powerheart G5, which enters a global AED market valued at $550M as of 2011, is designed to enable both professional rescuers and first-time users to swiftly provide effective, life-saving therapy to aid a person who has suffered SCA. It is the first AED to combine realtime CPR guidance for the rescuer, customized patient therapy, and fast shock times, providing significant differentiation and greatly expanded features vis-a-vis competition. The management expects the new G5 AED to help us secure a top global market-share position. The Powerheart G5 s combination of life-saving features and intuitive controls will appeal to current and new customers in work places, public spaces and emergency services. 4) Jyothy Labs Hold and Accumulate on decline a) Jyothy Labs (JLL) Q4FY12 standalone results were better than street expectations. The Company s topline witnessed YoY growth 0f 37.5% whereas the operating profit margin improved by 614bps on YoY basis to touch 16.6%. JLL s PAT registered growth of 25.7% on YoY basis to Rs. 28 crores. b) Its acquired company Henkel India (HIL) also reported a strong performance. Revenues grew by healthy 30.8% on qoq basis to Rs. 101 crores and operating margin of 4.4%, an improvement of 130bp on qoq basis. Street expects JLL s consolidated revenue to post a CAGR of 31.0% to Rs. 1,568cr with an operating margin of 11.1% and profit to post a CAGR of 40.2% to Rs. 88cr over FY E. Key indices Index July 16, 2012 July 13, 2012 % change Sensex (0.68) Nifty (0.58) Nasdaq* (0.40) Dow Jones Ind. Avg.* (0.39) FTSE (0.07) Straits Times Hang Seng SSE Composite Index (Shanghai) (1.74) Source: Moneycontrol, Ajcon Research Key Commodity prices Index July 16, 2012 July 13, 2012 % change Brent Crude Oil US$103.6 US$ Gold (Rs.) 29,282 29,272 (July 14, 2012) 0.05 Silver (Rs.) 52,745 52,776 (July 14, 2012) (0.04) Source: Moneycontrol, Ajcon Research Top Nifty gainers

4 Bharti Airtel Maruti Dr. Reddy s Axis Bank Bank of Baroda Source: National Stock Exchange (NSE), Ajcon Research Top 5 Group A gainers Bharti Airtel Muthoot Finance Lupin Cadila Healthcare Godrej Industries Source: BSE, Ajcon Research Top 5 Group A losers Jaypee Infratech 56.1 (5.0) Adani Enterprises (4.6) Tata Steel (3.95) United Breweries (3.88) Century Textiles (3.60) Source: NSE, Ajcon Research Top 5 Nifty losers Tata Steel (4.26) TCS (3.69) Tata Motors (3.03) Jindal Steel (2.91) Reliance Infrastructure (2.84) Source: NSE, Ajcon Research Institutional Fund Movements (Net Inflows Rs. bn) - Monthly Trends Period FIIs Mutual Funds As on June 28, (8.39) May, 2012 (15.22) April 2012 (11.09) (3.9) March (18.99) February (22.2) Source: Securities Exchange Board of India (SEBI), Moneycontrol, Ajcon Research

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