>Stocks with 35-50%+ potential

Midcap monitor is a new product from the Religare Strategy team where we
would analyze and provide updates on midcap stocks. In our first edition, we
provide 10 midcap picks (market cap of US$500mn-US$2bn) that we believe
have 35-50% upside by Dec-11. To build a diversified portfolio, we have
chosen stocks across the entire spectrum of Indian growth story – consumption
(Ashok Leyland, Educomp, Glenmark Pharmaceuticals), investment (Voltas,
Sobha Developers, Shree Cement, KEC Intl), Energy (Petronet LNG), diversified
(Sintex), financials (M&M financial Services). We recommend investors to take
significant position in these stocks for alpha performance.

Large caps are not cheap: Indian markets have risen 14% this year, 9% of it in
this month alone, and with Sensex at 19x 12m forward earnings, valuations are
not cheap for most of the large caps. While we continue to be bullish on India’s
long-term fundamentals, we do accept that near-term upside is limited in large
caps. As such, we find most investors are looking for mid-caps that still offer
significant share price upside either due to higher earnings trajectory or
possibility of multiple re-rating or a combination of both. This is our effort to
provide names of some of the midcaps with such upside potential.

Historical performance supports mid-caps: In the Indian markets’ near one-way
trajectory since 2003, small and mid-caps have outperformed large-caps by a fair
margin in 4/6 years. This year too, the BSE Midcap and Small-cap indices have
outperformed the Sensex by 15 and 22% YTD. While past performance is no
guarantee for future returns, we believe there’s sufficient growth potential in each
of our picks to become a large/mega-cap tomorrow. In this context we also
expect hitherto low foreign participation (13% in midcaps, 7% in small-caps vs.
25% in Sensex) to become more broad-based going forward.

Show me the money: Most investors believe that the higher risk of buying
midcaps needs to be justified by higher returns. Hence while screening the
midcap space for value and growth potential; we have shortlisted picks that we
believe will generate 35-50% returns by Dec’11.

To read the full report: POTENTIAL STOCKS

>JSW ENERGY LIMITED

■ Capacity to increase ~2x by FY12
JSW Energy (JSWEL) plans to more than double its capacity to 3.1GW by FY12 from 1.4GW currently. It plans to sell ~56% of its expanded capacity in the short-term market, which would increase its earnings sensitivity. If we consider the 270MW Raj West extension, the share of merchant capacity increases further to ~60%.

■ Exposed to the spot market for 46% of total coal requirement
JSWEL has entered into long term coal supply contract with PT Sungai Belati and its South African company (South African Coal Mining Holding Ltd), which will together supply ~4mtpa. We believe
this will meet only ~54% of its total coal requirement of ~7mtpa in FY13, thus keeping it exposed to the spot market (on a steady state basis) for ~3.2mtpa. This dependence would be higher in
FY12E at ~4.8mn tons, as the company operates a part of its Rajasthan unit on imported coal.

■ Expect 13% downside; Initiate with SELL recommendation
Although, JSWEL is one of the fastest-growing power companies, we believe its high exposure to spot market only increases earnings sensitivity. Robust 66% earnings CAGR over FY10-12E, due to higher operational capacity, should allow the stock to trade at a premium in the near future. We expect the premium to contract as: 1) capacity addition slows; 2) short-term rates soften; and 3) fuel prices increase. Decline in profitability and higher interest outgo will contract its RoE going forward. Hence, further upside for the stock seems limited, in our view. We value the company on FCFE to arrive at our target price of Rs117, implying potential downside of 13%. We initiate coverage with a SELL recommendation.

To read the full report: JSW ENERGY LIMITED

>CLARIANT CHEMICALS: Capitalising on consumption boom

Supplier of specialty chemicals for value addition in host of consumption categories

Clariant Chemicals (India) (CCIL), a 63.4% subsidiary of Clariant AG, Switzerland, is a
leading specialty chemicals companies. India is witnessing one of the best growth rates ever
seen in consumption in various sectors including automobiles, paints, personal care, food
and beverages or textiles. With demand growing at a fast clip, CCIL is ideally placed to
capitalise on this favourable trend as it caters to most of the consumption categories.

Most of CCIL’s portfolio consists of specialty of products enjoying strong brand
and tremendous customer loyalty due to superior quality and technology. As the
consumption boom gathers steam, demand for value-added and well-finished products
will expand at a faster rate than the category growth. Hence, the company’s products
will enjoy faster growth.

The textile business of CCIL enhances the properties of apparel and other textiles in
applications as diverse as high fashion, home textiles, and special technical textiles. The
company is also a leading manufacturer and supplier of pigments and its preparations for
manufacturing paints, plastics, printing inks, cosmetics, detergents or special applications
like latex, and viscose. Its high performance pigments meet the exacting demands of the
automotive, coil and coating industries.

To read the full report: CCIL

>TELECOMMUNICATION SECTOR: The next round gets tougher

We maintain our medium-term cautious view on the telecom sector and downgrade Bharti
Airtel (Bharti) to ‘HOLD’ and Reliance Communications (Rcom) to ’REDUCE’. We maintain
‘HOLD’ on Idea Cellular (Idea) and ‘BUY’ on Tulip Telecom (TTSL). We anticipate tariff wars
to re-emerge with the implementation of Mobile Number Portability (MNP) and launch of 3G services. We believe, Bharti’s dominance in revenue market share and margins will be challenged by Idea, Aircel, and Tata Docomo. The entry of MVNOs will further make the market competitive. Over the longer term, we believe, the sector will witness de-leveraging of balance sheets and sustenance of healthy cash flows. But, at current valuations the street is in for a disappointment.

■ Resurgence of competitive intensity likely
In the past 10 months, headline tariffs have been stable, but revenue per minute (RPM)
has declined 22%. With implementation of MNP and launch of 3G services, we anticipate
re-emergence of tariff wars. In our view, Idea, Aircel and Tata Docomo will utilise the
MNP opportunity to target Bharti’s and Vodafone’s high usage customers. As per media
reports, the government is planning to allow entry of MVNOs, which will make the
market more competitive. Thus, Bharti’s dominance, with 32% revenue market share will
be severely challenged.

■ Margins to remain under pressure
MNP implementation and launch of 3G services will lead to escalation in costs. We
believe, the entry of MVNOs will lead to further pressure on business for incumbents.
While on one hand tariffs will be under pressure, on the other, we expect network
operating costs and customer acquisition/retention costs to escalate. This, combined with
expensing of interest cost and amortisation of 3G licence fee will lead to lower
profitability. In our estimate, Bharti will have to generate incremental ARPU of INR 622
per month from 3G services in Mumbai to breakeven and INR 800 to defend current
margins.

■ No meaningful consolidation expected
Street is expecting consolidation in the sector. We believe, a shake-out is imminent in
the new operator segment. Post-consolidation we expect the current top 7 operators,
who control 98% of industry revenues to continue. Thus, consolidation will not be
meaningful.

■ Tower and handset businesses offer attractive alternate options
The tower industry is fairly consolidated with five players mostly fulfilling infrastructure
requirements of telecom operators. We expect the tower industry to generate revenue of
INR 191 bn and EBITDA of INR 112 bn in FY12E. The handset industry, riding on
significant growth in subscribers, is expected to sell 295 mn handsets and report
revenues of INR 286 bn in FY12E.

■ Valuations and view: Await a better entry point
Bharti and Idea stock price has risen 40% in the past three months due to investor
optimism on stable tariff environment and as the stocks have under performed the broad
indices over the past two years. We don’t believe tariff wars have ended. Bharti is
trading at similar valuations as it did when its stock price peaked in February 2008
despite higher competitive intensity in business and inferior financials. We downgrade
Bharti to ‘HOLD’ and RCOM to ‘REDUCE’. Maintain ‘HOLD’ on Idea and ‘BUY’ on Tulip
Telecom.

To read the full report: TELECOM SECTOR