Research Speak Week Ended – 16th April, 2010

Market Commentary
As we have witnessed in the last week, the market has been in a corrective mode. The main reason
attributed to the fall can be the Goldman episode. We do not actually know how big this event will snow
ball into. It is a classic case where people enjoy the upside risk and try to find the culprit for the downside
risk. However, the regulators have woken up pretty late to discover that there has been inadequate and
inappropriate opaque distribution of risk and return in the system. Let’s discuss the two extreme
outcomes of the event and the affect of the same on our fundamentals.

The first outcome can be where the Goldman Sachs continues with its business as usual after pleasing the
‘people who matter’, as it has been doing for years. This means that the current knee jerk reaction would
throw up good buying opportunities in markets like India.

The second grave outcome can be where several other countries as well allege and hold Goldman
responsible for the speculative trades it made them enter and incur ‘unexpected’ losses. In that case we
might again see funds flow freezing for some time. However, it would be far too imaginary to expect
something of Lehman’s magnitude and the after effects. Firstly, these kind of transactions are no more
creating the liquidity that are driving the equity markets. Hence, after period of lull, the central bank
created money will chase higher yields and growth, and would certainly find some streams coming down
to India, through intermediaries that can include or exclude Goldman Sachs.

The RBI credit policy is very much discounted by the market. The rate hike is given. The CRR would
hurt the liquidity, and if the Goldman fear materializes, we would see foreign funds drying in the short
term. Hence, short term spike in yields and sharp correction in markets could be expected, but the long
term fundamentals of Indian markets remain strong. Yes we might again face project delays, problem in
govt.’s borrowing programme, and further skepticism in private capex as an outcome of tighter liquidity.
But again that would be temporary and would throw up buying opportunities like it did in 2008 yearend.
Hence we would advice caution in the immediate term for the investors, and ask them to hold only
fundamentally strong, cheaply valued companies. Growth companies trading at richer valuation can be
avoided as of now.

As we mentioned before, we believe that FY11 and FY12 is going to be stock picker’s market and we
expect that bottom up approach is going to be the winning strategy going forward. Thus, we would
recommend that investors to use every dip as a buying opportunity for fundamentally strong counters. A

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few sectors that we are bullish on are Construction & Infrastructure, Cooling Solutions, Power
Equipments, Pharma and Banks.

Economy
Growth……Inflation……Monetary Policy

The Indian capital creation and investment cycle continued to re- inforce its existence through the release
of IIP growth for the month of February, 2010. The general index grew by 15.1% over its level in Feb
2009. The cumulative growth for April- Feb 2009-10 has been 10.1%.

Index of Industrial Production (IIP)

360
340
320
300
280
260
240
220
200
Apr-08

Jul-08

Sep-08

Feb-09
Mar-09
Apr-09

Jul-09

Sep-09

Feb-10
May-08
Jun-08

Aug-08

Oct-08
Nov-08
Dec-08
Jan-09

May-09
Jun-09

Aug-09

Oct-09
Nov-09
Dec-09
Jan-10

Source: MOSPI

The index normally drops early in the calendar year as December marks the end of a festive season. That
is why we have seen a sequential dip in IPP, which is quite normal if seen historically. However what we
should expect in March is slightly lower growth as the base had increased significantly in March 09.
However we are like to maintain around 14% IIP growth.

Manufacturing sector has been an outperformer growing by 16% YoY, followed by mining 12.2% and
Electricity 6.7%. The industry group ‘Metal Products and Parts, except Machinery and Equipment’ have
shown the highest growth of 57.0%, followed by 40.4% in ‘Machinery and Equipment other than
Transport Equipment’ and 36.4% in ‘Transport Equipment and Parts’. Capital Goods in all grew by
44%. These augers tremendously well for capital goods companies like L&T, BHEL, Crompton Greaves
etc. who are expected to quote fabulous topline growth. Hence looking at these growth figures we are still
convinced that a lot of steam is still left in the capital creation story of India and the fact that they are

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actually getting transformed from plans to action. Hence, soon we would find infrastructure companies
booking significant part of their order books as the purchase of capital goods indicates execution of
projects leading to revenue recognition.

If we look at consumption side of the story, consumer durables grew by 29.9%. The growth in consumer
durables has always been an indicator of confidence consumers have on their earning and spending
capacities. We are extremely bullish on the consumer durables segment, which are a direct offshoot of
growing production and salary levels.

The growth has helped the inflation figure to touch the 9.9% level, much greater than 5.5% that the RBI
targets for the whole year. Due to lack of monsoon and inadequate infrastructure food articles
experienced supply side inflation. This time however, the manufactured products also saw a phenomenal
increase clocking a YoY growth of 7.3%. This figure along with rising IIP figures give a sense that the
capacities are moving towards peak production lead by demand from both public and state. Hence, the
need for loose monetary may not be advocated for long. We might see a rise in repo, reverse repo as well
as CRR hike in April 20th meeting of RBI. The advances growth has also picked up to touch 16.7%, not
very far from the target of 18%. Hence, we will see a better percolation of the policy down to the real
economy. As more projects achieve financial closures, as they are expected, the excess liquidity will soon
get utilized. However the fear that the higher interest rate would attract higher funds to India is real, but
unavoidable and inevitable. The govt.’s record borrowing of Rs. 4.57 trillion to finance the huge fiscal
deficit cannot be possibly funded by domestic savings. It has to be supported by foreign funds. The
interest rate hike will follow greater foreign funds flow. Giving the intention of RBI to curb inflation and
restrict money supply growth, we might not see the RBI coming to rescue dollar, as any attempt to do so
would further fuel inflation. Hence, tough times for exporters are inevitable. However, India as a whole
being an importer would benefit on its import bill.

Banking Stocks

The rise in rates and yield are definitely going to impact the investment book of the banks and might
result in mark to market for its trading and AFS book. However, the losses will be more than made up if
the advance book grows significantly, the signs of which are quite evident. This would lead to better
capital utilization and boost the NIMs as well as margins for the banking industry. Valuation wise, we
still see PSU banks quite reasonably priced, and would be a good sector to ride in the next bull run and
economic expansion. We prefer well ma naged PSU banks and banks having significantly under-utilized
capital. We also like large banks having exposure to all aspects of financial services like capital markets,
insurance etc. Our top picks in the industry would be PNB, Bank of Baroda, Federal Bank and ICICI
Bank. HDFC and HDFC Bank are also good, but they are always available at a premium. Any correction
in these stocks should be used as an entry opportunity for long term investors.

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IVRCL Asset & Holdings Ltd (Previously IVR Prime) declares bonus issue of 1:2

IVRCL Assets & Holdings Ltd at its board meeting held on April 14, 2010 has considered the following:

? Declared Bonus shares in the ratio of one free Bonus Share for every two shares held to the equity
shareholders of the Company, however, subject to the approval of the Members of the Company.
? Approved raising of equity funds to the extent of Rs 1000 Cr by way of Qualified Institutional
Placement (QIP) in one or more tranches.

IVRAHL was established as an urban development arm of IVRCL. Traditionally it used to venture into
all segment of real estate development including housing: commercial and retail. IVRCL has undertaken
a corporate restructuring exercise with IVRAHL on 1st April, 2010 with an objective of transferring all
the water BOT and road BOT projects from IVRCL to IVRAHL. For the same exercise IVR Prime has
allotted 59463572 shares to IVRCL. Consequent to this plan the shareholding of IVRCL in IVRAHL has
increased from 62.35% to 80.46%.

IVRAHL is currently a zero debt company. With the BOT assets coming into the company’s portfolio it
would only have debt of these BOT projects in the books of its subsidiaries holding them. During the last
quarter of FY10, we have seen IVRCL bagging lot of road projects, construction of which is expected to
commence in the first quarter of FY11 only. Hence, the enabling provision of fund raising through QIP in
a phased manner would help the company to minimize hassles due to paucity of funds and speed up the
execution cycle. Moreover, with a comfortable debt equity ratio, the company would be able to bid for
newer BOT projects more aggressively.

Since IVRCL holds 80% of the share of the company we see a potential upside in the stock price going
forward. We maintain our recommendation of “BUY” to the stock.

Commodities Outlook
Steel

Flat Products

The flat products market was strong this week, thanks to the surging raw material prices. However, the
demand scenario has not improved much. Although some demand was seen in parts of Middle East, Asia
and Europe, it was primarily due to re-stocking activities. Import offers have gone up, making them
uncompetitive in most regions. Only China has managed higher exports, but mainly in the Asian region.

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Consumption in China continued to be strong. But the shift to quarterly contracts might push up the iron
ore prices further. Shorter-term contracts will cause hedging mechanisms to be used to minimise the risk
on iron ore deals. This might have a negative effect on steel- using industries such as shipbuilding and
automotive which need to be able to predict the cost of their steel over the longer term.

The trend was mixed in the Indian market. On one hand, some of the prime steel producers raised their
prices as per expectations and on the other, the secondary market saw a weakness in the market, mainly
during the weekend. The flat products market, primarily the secondary market, was sluggish as the
demand slumped against market expectations. This resulted in weakening of market sentiments and a fall
in the prices. “The demand was slow this week. There were hardly any buying activities in the market.
The buyers adopted a wait and watch attitude as they are confused about the market direction for the
coming weeks,” noted a trader. The market attributed this weakness to the speculative buying last week,
when most traders bought high priced materials resulting in accumulation of stock. Now with the current
skepticism in the market, they cannot liquidate their stock. However, the market has mixed expectations
for the coming weeks. Some feel that the market will pick up next week, as the new fiscal has begun.
Meanwhile, others feel that the prices are likely to remain weak for some more time. Last week the prices
were exceptionally high, and thus saw considerable slump this week.

In the interim, as per market expectations, some of the steel majors hiked their prices. Essar Steel
hypermart increased CR sheet price by Rs 500 per ton, which was the second hike in the current month.
The company also raised the price of HR sheet by Rs 500 per ton. SAIL has also hiked the MRRP price
of galvanized corrugated sheet of both their Rourkela and Bokaro plants by 6 percent in April over their
last month price. The steel majors attributed the raw materials pricing uncertainty as the reason for the
hike. Moreover, this is making forecasting future steel price trends difficult. The rush to increase prices
follows the decision of state-owned SAIL to raise prices of flats by Rs 4000 per ton and longs by Rs 2000
per ton effective from April 1. Meanwhile, the warehouse stock of finished product of SAIL dropped by

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56% at March end, compared to the closing stock of last month on the back of strong demand from the
market. According to a senior official of SAIL, total inventory of four regional warehouses, which was
4.15 lakh tons in February 2010 end, fell to 1.82 lakh tons in March 2010. Stock of total finished product
in regional warehouses was around 5 lakh tons at the end of December 2009, he said. The upward trend
in the Chinese steel prices continued but the users fretted about rising steel input costs, resulting in price
hikes. The auto firms are considering measures to cope with an increase in Baosteel’s steel prices. The
eastern China steel giant decided to keep its cold rolled sheet ex-works prices unchanged for April but
chose to raise its April hot rolled coil prices by RMB 200-300 per ton ($29-44 per ton).

Long Products

The long products market remained firm supported by rising raw material prices. The demand was
however, slow. The transaction levels were also low barring certain pockets in the Middle East region.
There is an air of skepticism in the market as the prices are unlikely to see a drop soon. Meanwhile,
restocking activities was seen in certain market sections primarily by traders and stockists as the prices
are unlikely to cool down in the short term.

The Indian long products market softened this week despite a number of price hikes announced by the
prime steel producers of the country. The high inventory level was the major factor for the drop in
sentiments. Although the transaction level in the market was at an average level, the sales of the prime
steel producers in the region did not see a pick- up in the new fiscal.

Thus, it is understood that this resulted in a rise in inventory level primarily at the traders’ front.
However, the good news is that these stocks are liquidating, indicative of the fact that the demand has not
died out of the market. However, the situation in the secondary producers’ front was bit different.
Speculative buying in past few days has dampened the general buying interest. The majo r hit thus, came
to the re-rollers. Meanwhile, with a series of price hike announced by the major players, the market
sentiment has also seen a dip. The traders complained that these hikes have kept the buyers out of market.

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Thus, to liquidate their stocks they had no option but to pull the prices down. In this situation, the traders
struggling with high inventory levels are pushing their product into the market at a much lower level.
This resulted in a drop in prices of around Rs 1000 per ton. In addition to this, the market is also
witnessing some liquidity crunch as a considerable amount of cash went in stock building and holding.

However, as the unlocking of the budget allocated for the infrastructure projects is likely to begin, the
project will witness a head start, resulting in a demand growth. Thus, the market is optimistic that there
should be a pickup in demand from April 20, 2010.

However, the secondary producers segment feels that although the infrastructure projects are likely to
begin, these orders would go to the prime steel producers. Thus, the secondary market is unlikely to
witness any upsurge soon. If the trend continues they have to go for a production cut to save the mselves
from squeezing margins.

Meanwhile, with a number of price hikes announced by the prime steel producers in past few days, the
buyers are now taking time to accept these new prices. RINL has raised the price of certain long products.
A similar move was taken up by SAIL, citing rising raw material input costs.

In the interim, the Chinese market saw an uptrend. The balance between steel supply and demand could
be endangered if traders and stockists hold material off the market in the hope of selling it for higher
prices in the coming weeks and months. China’s domestic wire rod prices climbed upwards this week, in
part related to expectations of further price increases. However, the transactions have apparently
weakened, and probably related to softening futures prices on the Shanghai Futures Exchange. But big
correctio ns will occur in the physical market in the short term as further price increases from mills are
expected.

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Iron Ore

The iron ore market has been fast moving upwards and every step taken by the Chinese is only making
the prices move up further. In a bid to combat the monopolistic scenario created by the three leading
miners of the world, China banned its traders from importing iron ore characterized by Fe content less
than 60%. The notification was verbally conveyed by the China Chamber of Commerce of Metals,
Minerals & Chemicals Importers & Exporters (CCCMC), last week. Another reason being attributed to
this is China’s attempt to promote the domestic iron ore industry. The ban does not apply to state owned
mills and they can continue to import lower grade ore.

As expected, the ban has resulted in the prices for higher grade ore going up. This is because most
privately owned mills will have to depend on only high grade ore to carry on with production.

The news of the ban has added further pressure on the spot market which is already reeling under the
effect of a tight supply situation. It has been reported that iron ore stocks at the various major Chinese
ports have gone down by 9,20,000 tons in the last one week and currently stands at 68.62 million tons
(mt). Traders are unclear on their step forward and are planning to seek clarification from the CCCMC on
what are they to do with the material which has already been booked.

The Goan iron ore industry in India produces mainly low grade ore, a large portion of which is shipped
across to China. Though the annual ore exports from one of the main Goan ports registered a hike this
year, the imposition of the ban, depending on how long it remains valid, is likely to curtail the export of
Goan origin ore from India to China. In fact, producers of iron ore from Goa have expressed their
concern over the ban and fear the fate of their cargoes and hence, loading activities have slowed down.
Only the material which has already been transacted for is being loaded for shipment to China because
they are worried whether their ore laden ships will be permitted to unload at the Chinese ports.

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Annual iron ore exports from Goa witnessed a hike and the Mormugao Port Trust, which is responsible
for almost 35 percent of the total iron ore exports made by India released data as per which a total of 40
mt was exported during 2009-10 as against 33 mt exported during the previous year by Goa. Out of this
total volume 36 mt was directed towards China whereas 2.4 mt was shipped out to Japan. In another
development, Australian mining company BHP Billiton has settled quarterly iron ore price contracts with
its Asian clients at prices which are 99.7% higher. The mining company, based on this settlement, will be
selling iron ore fines characterized by 62% Fe content at $120.08 per ton fob, Australia. These prices will
be valid for the April-June quarter and are $15 per ton higher at the fob cost, as compared to the prices
fixed by Brazilian mining company Vale for the same period with Japa nese steel mills.

BHP Billiton has also managed to achieve an 88% hike in the prices for lumps, which have been fixed at
$135 per ton for the quarter. Following this Rio Tinto too has confirmed its decision of shifting to
quarterly pricing for iron ore. The mining company has said that it is negotiating with its clients to settle
prices on a quarterly basis. Once Rio Tinto succeeds in signing a contract based on the terms suggested
by it, the shift from benchmark pricing will get sealed with three of the leading names – Vale, BHP
Billiton and Rio Tinto – signing quarterly deals.

In the meantime, the China Iron & Steel Association (CISA) has made it clear that so far none of its
members, which includes as many as 200 Chinese steel mills, have signed price contracts with either
Vale, BHP Billiton or Rio Tinto. The claim made by Vale that it has settled price contracts with 97% of
its client base gave rise to speculation that even Chinese mills have agreed to the terms laid down by Vale
since a major portion of the mining company’s client base comprises Chinese steel mills. Market sources
have clarified that the confusion could have arisen owing to the inclusion of provisional agreements.
Prices of Indian iron ore fines characterized by 63.5% Fe content have gone up in the week gone by and
range between $170 and $173 per ton cfr in the Chinese spot market, up from the previous week’s prices
which ranged between $162 and $165 per ton cfr.

Ministry of Mines in India Proposes for Stake in Companies for the Land Lo sers

In the context of the recent developments, the government of India is considering a proposal to make it
mandatory for companies like Vedanta Resources and Arcelor Mittal to offer shares to those displaced by
their future mining projects. But the move is being opposed by the industry.

Mining body, the Federation of Indian Mineral Industry (Fimi), described the proposal as a “death knell”
for the sector, as it would cut into profits by escalating the cost of mining. In the proposal, which is part
of the draft Mines and Minerals Development and Regulation (MMDR) Act, the mines ministry has
sought shareholding for land- losers in new mining projects of the companies. The proposal says a
company getting a new mining lease will have to offer shares equivalent to 26 per cent of the company
for free, through the promoter’s quota, to people losing land.

The company, which will allot shares to the land - losers, would be a subsidiary of the parent company
undertaking the mining project. In case the mining lease was in the name of the parent company or
the mining right has been granted to an individual, it had been proposed that the companies share

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26 per cent of the annual profit from the mining project with the landowners for 30 years. Thus the
new regulation is going to give the land losers an option to choose between taking 26% stake in the
company or share 26% of the profit generated by the company for the next 30 years. Besides giving
shares, there was also a separate proposal to offer jobs to the displaced in the mining project.
In response to this proposal by the government the Industry body Fimi has expressed a view that the
proposal is a “death-knell” for the mining industry as allotment of 26 per cent share or 26 per cent of
profit after tax and employment and other assistance will be beyond the capacity of any entrepreneur in a
volatile mineral and metals market. The body opined that this move will lead to more illegal mining and
in its view CSR is suppose to be voluntary and not forced through law. Compensation should only be
considered where there is a physical irreparable damage to some portion of the land generating revenue
such as agricultural land.

To summerise, Fimi views the draft MMDR Act (31 March, 2010 version) as bad both economically as
well as fiscally and would lower the incentive for investment in mining, which is “risky and capital-
intensive”.

Our View on the Issue

We are of the opinion that this proposal if it sees the light of the day, then it will have significantly
positive ramification for the economy as a whole which we shall elucidate in the following paragraph.

? First of all, any kind of natural resources is a national treasure, thus any kind of commercial
utilisation of these precious and scarse resources should mean that the state should benefit first.
Till recent times, most of the mining companies were giving fixed royalty to the government, for
example for iron ore the royalty has been restricted to Rs. 25-27/ton. In places like Chiria,
Biladilla etc., iron ore actually occures on the surface with minimal overburden. Which means
mining costs are miniscule. Compared with this, the sale price of iron ore of say 63.5% Fe content
has been in the range of $100-120 per ton converting it into Indian rupee taking say Rs. 47/USD
as the exchange rate the average realization comes to say Rs. 5640/ton. Thus far the mining
companies have been reaping the benefit of this which is reflected in their profitability with most
of the companies quoting EBITDA margin in the range of 50% to 75%. This is an abnormally
high profitability by any standard benchmarked against any other industry. Thus, draft act would
certainly normalize that to some extent and we do not see any reason for any mining company
should be complaining about it. Take the instance of Sesa Goa Ltd. in FY2009, (aftermath of the
Credit crisis) the company earned a PAT margin of 39%, now presuming 26% of the PAT is to be
distributed among the land losers, its PAT margin comes down to 28.28%. Which is still better
than any other indus try one can conceive of.

? Rampant mining is a threat to the ecosystem of the surrounding area. Thus paying compensation
for the land acquired alone means the company is getting the right to destroy the surrounding
ecosystem around it along with the damage caused to the health and environment of the
indigenous inhabitants. Thus we feel there should be some social cost associated with it and
companies cannot absolve themselves from this responsibility.

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 ? Most of the mines are located in the tribal areas which are tremendously backward socio -
economically. This act would definitely empower these groups of people and lead to an all
inclusive growth. This will be achieved with higher household income, higher education, higher
awareness, higher consumption, higher investment, higher capital formation and hence higher
growth for the economy as a whole. If we are to attain 10% real GDP growth rate on sustainable
basis, I this act if implemented would go a long way in achieving it.

? If land losers feel adequately compensated it is good for the industry as a whole, we feel in the
aftermath of the Act instances like the Arcelor Mittal and Posco projects that virtually got
scrapped on account of the land acquisition problem, would have very low probability of
recurring and new projects would be able to take off smoothly and expeditiously without much
friction.

Stock Recommendation at current market price

Stock Name Recommendation

SAIL Hold
JSW Steel Hold
JSPL Hold
Bhushan Steel Hold
Sesa Goa Sell
NMDC Buy
Gujarat NRE Coke Hold
Welspun Guj. Hold
Jindal Saw Reduce
IRB Infra Buy
IVRCL Buy
Federal Bank Buy
Bank of Baroda Buy
PNB Hold
ICICI Hold
Hyderabad Inds Buy
ONGC Buy
IGL Hold
Cairn India Hold
Shree Cement Hold
GSPL Hold
Persistent System Buy
Jain Irrigation Hold
BHEL Buy

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DISCLAIMER:
This report is for information purposes only and does not construe to be any investment, legal or taxation advice. It is not
intended as an offer or solicitation for the purchase and sale of any financial instrument. Any action taken by you on the basis
of the information contained herein is your responsibility alone and Eureka Stock & Share Broking Services Ltd [hereinafter
refereed as ESSBSL] and its subsidiaries or its employees or directors, associates will not be liable in any manner for the
consequences of such action taken by you. We have exercised due diligence in checking the correctness and authenticity of the
information contained herein, but do not represent that it is accurate or complete. ESSBSL or any of its subsidiaries or
associates or employees shall not be in any way responsible for any loss or damage that may arise to any person from any
inadvertent error in the information contained in this publication. The recipients of this report should rely on their own
investigations. ESSBSL and/or directors, employees or associates may have interests or positions, financial or otherwise in the
securities mentioned in this report.

Analyst Team

Analyst Name Sectors E-mail Contact Number

Samudrajit Gohain Oil & Gas, Engineering samudrajit@eurekasecurities.com +91 - 9748860335
Kinshuk Acharya Steel, Agriculture kinshuk@eurekasecurities.com +91 - 9681478735
Md. Riazuddin, FRM Banking, Economy, Power riazuddin@eurekasecurities.com +91 - 9903062346
Rajiv Agarwal Auto, Tea, Sugar rajiv.ag@eurekasecurities.com +91 - 9903076345
Ankit Kanodia Infrastructure ankit_kanodia@eurekasecurities.com +91 - 9163278562

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