>INDIA RETAIL: A step back for government; a set‐back for sector!!

Government has suspended 51% FDI in Multi‐Brand Retail till a consensus is

reached amongst all stakeholders (Political parties, State governments etc).

Proposal has faced widespread political (government allies, opposition parties) as

well as trader’s opposition ever since it was announced in a cabinet meeting. We

don’t expect government to explicitly rollback the proposal given that it will

reinforce the perception of “policy paralysis” and will be seen as giving in to political

pressure. However, given the perceived political cost attached to the proposal and

impending state government elections, primarily UP (most populous state which

accounts for ~15% of Loksabha members) we believe it will be a while before

government ventures to bring this reform back as it lacks the requisite numbers as

its key allies (DMK, TMC) are opposed to the Retail FDI reforms. While there exists a

remote possibility of some give and take/ appeasement of allies, watering down of

proposal (26% instead of 51%, starting with top 10 metros instead of 1mn plus

towns etc) we believe evolving a consensus amongst all stakeholders is a

cumbersome process and will take its own time and will be a drag on the sector.

Going by the fate of several other policy proposals, we will be positively surprised if

the proposal goes through during the term of this government.

■ A step back for the government; a set‐back for the sector: After much flip-flop

and endless debate (DIPP had floated discussion paper in July’10), Government

had cleared the politically sensitive reform, only to suspend it now till wider

consensus is reached amongst stakeholders. Proposal had faced widespread

opposition from political parties (opposition as well as government allies),

trader’s lobbies and had stalled the working of Indian Parliament for 10 days

since the proposal was announced. The announcement had created positive

sentiments around the sector with the assumption of inflow of capital and

foreign expertise post the clearance of FDI. We don’t expect the government to

revive this legislation anytime soon given the lack of numbers and impending

state government elections in next 12 months. We expect the proposal to

remain in cold storage and meet the same fate which several other government

proposals have met (Urea policy, GST, DTC, Land Acquisition etc). We will be

positively surprised if it goes through during the tenure of current government.

■ Media speculation on Future Cap stake sell: As per media report (Economic

times dated 7th Dec’11), Pantaloon is about to announce the Future Capital

stake sell to Deccan Chronicle for ~Rs6-7bn. We spoke to management and it

has denied this transaction. Media report also mentions “Industrial Investment

Trust (IITL) has purchased Pantaloon's 26% stake in its insurance joint venture

Future Generali Life for Rs 250‐300 crore”. If both these deals indeed fructify, PF

will be able to raise ~10bn and mitigate the strain on debt and cash flow. Core

retail debt stands at ~Rs45bn. We estimate an interest cost saving of ~Rs500mn

for FY12e, potentially resulting in ~30% upgrade to our FY12e EPS (Rs8.5)

■ Maintain ACCUMULATE on PF: While the FDI proposal is now being put in

abeyance, we anyways didn’t expect it to immediately solve the current

challenges of high leverage, high inventory and lack of FCF generation for PF.

While fundamental concerns of slowing same store growth and high leverage

putting pressure on cash flows remain, we believe current price discount the

same. Any stake sell announcement on non-retail subs will be key trigger.

To read the full report: INDIA RETAIL

RISH TRADER

>ROADS SECTOR: NHAI's improved financial maneuverability, reduced competitive intensity augur well

■ NHAI has awarded ~3,685km in YTD FY12: NHAI targets to award 7,300km of road projects in FY12 and has already awarded ~3,685km till date. The pace is encouraging and we believe that the target is achievable, with ~1,700km of projects under bid evaluation/submission stages. We expect the momentum in project awards to continue, as there exists a ready bank of ~15,000km, where critical milestones are being achieved. Unlike other Infrastructure segments

like Airports, Power, etc, that are facing regulatory, systemic and resource issues, the Roads segment continues to enjoy high visibility of investment activity. A large opportunity canvas coupled with established regulatory framework and peaking out of the interest rate cycle bodes well for several incumbents in the segment.

■ Key initiatives help expedite project awards: NHAI carried out an exercise to pre-qualify bidders on an annual basis, rather than carrying it out on project-to-project. This along with past initiatives like setting up land acquisition cell have started showing results, helping NHAI expedite project awards.

■ Increased premium collections to partially aid funding: The total premium quoted by developers for projects awarded in YTD FY12 stands at INR20b, up from just INR4b each in FY10 and FY11. Given the escalation of ~5% and possibility of continued premium on further bids, we believe premium collection has emerged as an important source of annuity funds for NHAI.

■ NHAI's financial maneuverability has improved: Raising incremental resources through bonds would be a very important strategy for NHAI. During FY12, it intends to raise INR100b through tax-free bonds; the quantum is likely to increase substantially, going forward. This compares with cumulative market borrowings of just INR130b-150b over the past decade. NHAI's revenues in FY11, comprising of cess and tolls, stood at ~INR110b. Market borrowings coupled with increased premiums have improved NHAI's financial maneuverability.

■ Competitive intensity easing in past few awards: In the past few project awards, the number of bidders has been significantly lower. The Road sectos has gone through bouts of excessive aggressiveness in bidding, and at times complete apathy in bidding for the projects. With the kind of capital that has got committed from various players in the sector, we now believe that there is only limited appetite that would be available for future projects to come up and as such we expect the bidding aggressiveness to reduce. Players like IRB have, in fact, raised the internal threshold for return to 18% (v/s 15% earlier).

To read the full report: ROADS SECTOR

RISH TRADER

>INVESTMENT STRATEGY | INDIA (MERRILL LYNCH)

A year marked by dwindling hope and sense of resignation

2011 began with the hope of “muddle through” and is ending with a resignation to

“it’s so bad, it’s almost good”.

The year though will be remembered as a watershed year for many reasons:

■The wide spread social unrest that will likely leave some indelible marks on

the global canvass. Many countries, e.g., Tunisia, Egypt, Libya, Syria,

Yemen, etc. witnessed strong demand for a change in the extant political

structures; whereas many other in the west saw people coming to street

seeking significant structural changes in the functioning of financial markets.

India also witnessed a popular public moment against corruption and

accountability gap.

■The public debt crisis in EU assumed threatening proportions that could

impact the global fiscal policy framework in the decades to come.

■ A major nuclear accident in Japan triggered a debate on desirability of

nuclear energy in the global energy mix.

■ Enduring Japanese earthquake, US credit rating downgrade, a full blown

European sovereign debt crisis, and unrest in MENA, the asset class returns

in 2011 have been surprisingly resilient. Bond returns up 5%, commodities

flat, and global equities have lost only 6%.

■ Underperformance of BRIC markets. One of the most notable features of

global equities in 2011 was stark underperformance of BRIC, especially India

and China, still the two fastest growing economies.

■ Emerging markets underperformed the developed markets and US.

■The big story of 2011 was the de-rating of equity multiples, making equity

valuations cheap as compared to the historical averages.

Indian equities: down and out of favor

Led by deteriorating macro, slipping growth and consequent earnings downgrade

and negative publicity generated due to frequent scams and revelation of

accountability gaps in many instances, Indian equities find place amongst the

worst performers globally.

Domestic consumption largely saved the day for the economy, as the investment

cycle descended sharply. The trend was reflected in the sector performance

where consumers substantially outperformed.

To read the full report: INVESTMENT STRATEGY

RISH TRADER

>NON FERROUS MINING: Lowering estimates for metal price changes

■ Lowering estimates on metal price changes

Our Metals Strategist has cut metal price forecasts due to the global slowdown and MTM. Our global team has cut FY13e price forecasts for Al by 11%, Cu by 7% and Zn by 3%. We also factor in a weaker INR, which cushions the impact. We have cut our FY13e EPS by 6-16% and our POs by 4-11% across our base metal companies. We remain cautious due to macro concerns. Valuations appear reasonable, but downside risks to est. exist and upside triggers are lacking, in our view. We prefer Sterlite, as it offers deep value and the risk/reward appears positive. In HNDL, triggers are absent, as project issues are unresolved.

■ Zn: lower surplus; Al: tight physical mkts., but deficit lower

We expect zinc prices to be capped, as zinc markets are well supplied. But zinc prices should be supported near current levels as we expect concentrate markets to tighten through CY12 and eventually push refined markets into deficit in CY13. In aluminum, despite structural excess capacity, we believe financing deals should support Al prices in CY12. However, we expect physical markets to be less undersupplied due to slowing demand growth. Our FY12/FY13e LME price forecast for zinc is US$2029/t/US$2150/t and for Al, it is US$2247/t/US$2313/t.

■ Sterlite (STLT): Offers deep value, favorable risk reward

We have cut our FY12-13e EPS by 2-7% due to lower metal price forecasts. Downside risk to Zn prices appears low and the medium-term outlook appears positive. Saleable silver (Ag) volume is likely to increase post the expected commissioning of a 350tpa silver refinery in Dec Q. We expect Ag vols. to grow at a CAGR of 26% over next 3 years and should contribute to 8% of FY13e EBITDA. Coal supply issues should persist at SEL, but availability should improve

incrementally in 2HFY12, as CIL output improves post monsoon. Valuation, at 3.0x FY13e EBITDA, appears attractive and concerns around SEL and VAL assets appear to be already priced in.

■ Hindalco: Reasonable valuations, but catalysts absent

We have cut FY13e EPS by 6% due to the lower Al price est. We have also cut Novelis FY12-13e EBITDA by 2-5% (in US$ terms) due to softer demand, but the impact on group EBITDA is offset due to the weaker INR est. Govt. approval w.r.t. Mahan coal block is still pending. Govt. decision to scrap Go/No Go classification of coal blocks offers some hope, but production from new coal blocks could take over 12-15 months, even after approval is obtained. Thus, EPS impact will not be meaningful near term, in our view. Valuation, at 0.8x BV, offers downside support.

■ NALCO – cost pressures persist, valuation not compelling

Our FY12-13 EPS declines by 2-16% due to the lower AL LME forecast. We expect cost pressures to persist due to coal supply issues. The valuation, at 6 .6xFY12e EBIDTA, is not yet compelling, in our view. Hence, Underperform.

To read the full report: NON FERROUS MINING

RISH TRADER