Weekly Wrap

Investment idea July 30, 2010

BUY BUY
HCL Tech CMP Rs392 Mahindra & Mahindra CMP Rs662

Double-digit constant currency dollar revenue growth;
second quarter of industry outperformance
Constant currency dollar revenues of IT services grew by 10.7%
qoq; a combination of 10.2% growth in infrastructure services and
~11% growth in core software services. The exceptionally strong
growth in core software services was mainly volume-led (10.5%
qoq) as pricing in constant currency was nearly stable. The Q4 F6/
10 volume growth was the highest witnessed by HCL Tech in the
past many years and has come on the back of strong 7% volume
increase in Q4 F6/10. Overall, company revenues grew by robust
9.1% qoq.
Revenues increase on back of improvement in volumes
Mahindra & Mahindra (M&M) reported a net sales growth of 21.6%
yoy driven by 26% yoy growth in overall volumes. Passenger segment
volumes were higher by 39% yoy, while tractor sales (inclusive of
Punjab tractors) rose by 10% yoy. In the passenger segment, UV
sales were higher by 11% yoy on account of success of Xylo and
new models of Scorpio and Bolero. Realizations for the passenger
vehicle segment were lower by 8% yoy, while that of the tractor
segment rose by 5% yoy. On a qoq basis, volumes for automotive
segment were lower by 9% yoy while farm equipment segment
witnessed 2% higher sales.

Higher-than-expected margin decline; PAT declines 1%
HCL Tech’s operating margin declined by 110bps qoq to 18.6%,
more than 70bps contraction expected by us. In core software
services, margin declined by 160bps to 21.2% mainly on sharp
330bps correction in utilization, investment in sales & marketing
and adverse cross currency movements. Operating loss in BPO
business increased to 11.4% from 4.4% in the previous quarter as
company continued investing in platforms for replanting the business.
IMS margin improved marginally to 18.8%. Higher forex loss due
to significant rupee depreciation on quarter-end basis led to a
sequential net profit fall of 1%.
Benefits of operating leverage offset by higher raw
material costs
With average prices of metals substantially higher in Q1 FY11 when
compared to Q1 FY10, M&M reported 345bps increase in its material
costs as a percentage of sales. However, higher volumes translated
into benefits of operating leverage resulting in 119bps yoy decline in
staff costs and 294bps fall in overheads as a percentage of sales.
Further, synergies on account of merger with Punjab Tractors
provided additional fillip to margins. Sequentially, OPM was lower
by 50bps as impact of lower overheads was offset by higher raw
material costs and staff costs as a percentage of sales.

Highest-ever quarterly addition in headcount indicates
continuation of growth
During the quarter, HCL Tech added net 6,428 employees, highest-
ever in the company’s history. A bulk of the addition was in core
software services and a majority of it was laterals to serve immediate
growth requirements. Surprisingly, company also added significant
employees in BPO which till last quarter witnessed headcount
reduction due to restructuring. This only indicates that revenue
growth in BPO may resume much earlier than expected.
A confidence boosting quarter; upgrade estimates and
recommendation to BUY
Post the delivery of industry-best volume growth for two consecutive
quarters, we believe HCL Tech is set to register one of the best
dollar revenue CAGR over FY10-12 in the sector. Consistent large
deal wins and highest exposure to discretionary spends should
enable company to beat peers. Margin could be sacrificed to an
extent with management intending to continuously make business
investments. Q1 F6/FY11 margin could decline sharply qoq on
implementation of wage hike for majority of employees . Upgrade
HCL Tech to BUY with a target price of Rs442 (valued at 14.5x
March-adjusted FY12 earnings).
Superior operational performance and lower tax rate
drives 40% growth in APAT
For Q1 FY11, M&M reported a PAT growth of 40% yoy led by superior
operational performance and 350bps yoy decline in effective tax rate.
Furthermore, the company reported a net interest income of
Rs227mn v/s an expense of Rs60mn in Q1 FY10.
Upgrade to BUY considering strong volume traction
We value M&M at Rs712/share, which includes Rs511 for its
automotive business (8x EV/EBIDTA for FY12E) and Rs201 for its
subsidiaries. We believe, M&M’s automotive business is highly
dependent on rural India, which is currently witnessing strong
consumer sentiment. This is backed by expectations of close to
normal monsoons vis-à-vis a drought last year. Although margins
are expected to decline on account of higher raw material prices,
company’s cost cutting initiatives are likely to restrict the fall. We
upgrade our rating from Market Performer to BUY.

Financials Financials
Y/e 31 Mar (Rs m) F6/09 F6/10E F6/11E F6/12E Y/e 31 Mar (Rs m) FY09 FY10 FY11E FY12E
Revenues 106,084 125,650 158,955 196,566 Revenues 130,937 186,021 216,978 260,325
yoy growth (%) 38.9 18.4 26.5 23.7 yoy growth (%) 13.5 42.1 16.6 20.0
Operating profit 23,238 25,730 29,177 36,767 Operating profit 10,926 29,552 31,896 35,925
OPM (%) 21.9 20.5 18.4 18.7 OPM (%) 8.3 15.9 14.7 13.8
Reported PAT 11,977 12,142 15,585 20,954 Reported PAT 8,368 20,878 22,103 24,503
yoy growth (%) 15.6 1.4 28.4 34.4 yoy growth (%) (24.2) 149.5 5.9 10.9
EPS (Rs) 18.9 19.3 24.5 32.4 EPS (Rs) 14.8 34.3 38.0 42.1
P/E (x) 20.1 19.7 15.5 11.7 P/E (x) 43.2 18.6 16.9 15.2
Source: Company, India Infoline Research Source: Company, India Infoline Research

1
 India Infoline Weekly Wrap
Market review

The bulls seem to have given up their chase as the key indices struggled FII & MF activity (Rs cr)
this week and failed to build on last few weeks rally. Volatility on account
FII MF
of F&O expiry and mixed corporate results prevented the Nifty from
Date Net Investment Net Investment
piercing 5,500. In fact, it closed below 5,400. Meanwhile, targeting to
check the double digit inflation, RBI hiked its short-term lending and 22-Jul 188 (298)
borrowing rate by 0.25% and 0.50% respectively. Finally, the Nifty closed 23-Jul 845 (140)
the week lower by 1.5%. 26-Jul 473 (550)
27-Jul 82 (50)
28-Jul 653 (578)
S&P CNX NIFTY
Total 2010 42,424 (11,722)
5,431
5,419
5,409
5,398 BSE Sensex & BSE 200 Top Five Gainers
5,368 BSE Sensex BSE 200
CMP % CMP %
Company (Rs) Chg Company (Rs) Chg
26-Jul 27-Jul 28-Jul 29-Jul 30-Jul M&M 662 5.4 Maruti Suzuki In 1,199 (11.8)
Hdfc Bank Ltd 2,127 4.3 Jaiprakash Assoc 118 (8.2)
Itc Ltd 309 2.4 Larsen & Toubro 1,794 (7.4)
Earnings pressure weighed down the Oil & Gas stocks as Reliance
Industries failed to beat market estimates and ONGC announced Hindalco Inds 160 1.4 Hero Honda Motor 1,815 (7.0)
poor Q1 numbers. Less than expected performance from L&T and Acc Ltd 831 1.3 Dlf Ltd 301 (6.5)
Jaiprakash Associates dragged the Capital Goods stocks down. Mixed
quarterly numbers and the latest rate hike by the RBI pulled the Real
Estate stocks lower. BSE Sensex & BSE 200 Top Five Losers
BSE Sensex BSE 200
BSE Bank 0.4% CMP % CMP %
Sectoral Indices
BSE FMCG 0.4%
Company (Rs) Chg Company (Rs) Chg
BSE Auto 0.1% IRB Infra 293 12.5 Tanla Solutions 31 (10.9)
BSE IT 0.0% OBC 403 10.8 Indian Bank 224 (10.8)
BSE Pharma -0.6% Lic Housing 1,136 9.8 Patni Computer 469 (9.4)
BSE Metal Bajaj Auto 2,688 8.9 JP Assoc 118 (8.0)
-0.7%
BSE Small-Cap -1.0% Exide Indus 145 8.5 India Infoline 91 (7.7)
BSE-200 -1.0%
BSE Power -1.8%
BSE Realty -3.2% Bulk deals
BSE Oil & Gas -3.5% Date Institution Scrip name B/S Qty (lacs) Price
BSE Cap Goods -4.8% 26-Jul Citigroup VC KS Oil S 186.7 50
-6% -4% -2% 0% 2% 27-Jul HSBC Global ING Vysya Bank B 25.0 333
28-Jul HDFC Eq Fund Emami Infra S 4.0 113
Global markets were choppy amid a deluge of earnings and a spate 28-Jul T. Rowe Price Emami Infra S 2.5 138
of economic reports. Sentiment was cautious ahead of the 28-Jul V-Guard Indus Sundaram BNP B 1.6 134
announcement of the second-quarter GDP number in the US.
Japanese shares were hit hard following downbeat economic data
and a stronger yen. Book closures and record dates
Company Date Purpose

3.0 (%) Setco Auto 5-Aug-10 Bonus

Global Indices 2.5
MRF 6-Aug-10 Dividend
2.0
1.4 Tata Motors 10-Aug-10 Dividend
1.0 1.1
1.0
0.3
0.0
Insider Trades
(1.0) Company Name B/S Qty (‘000)
(1.4) (1.5) MindTree Ashwani Kathuria S 2.6
(2.0)
Sensex Nifty Dow Nasdaq* Hang Nikkei Shanghai Gitanjali Gems Mehul C. Choksi B 50.0
Jones* Seng HDFC Bank Mandeep Maitra S 25.7
*As per previous close

2
 India Infoline Weekly Wrap
Technical ideas

BUY BUY
Kingfisher Airlines CMP Rs53 BASF India CMP Rs471
80 Kingfisher Airlines 600 BASF India
70
500
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400
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40 300

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100
10

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7/10/09

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11/7/09

12/7/09

KFA has signaled a breakout from Inverted Head & Shoulders pattern BASF has confirmed a breakout on weekly chart after prices
after it successfully managed to close above Rs52 with impressive managed to close above Rs456 for second consecutive week.
volumes. Appearance of the above mentioned pattern acts as a Currently stock price is trading near to its all time peak and continue
trend reversal and in this case we can expect stock to rally 10-12% to honor it bullish momentum, despite prevailing volatility in equity
in near term. markets.

The moving averages also confirms positive trend with the stock On daily chart RSI has been consistently trading above 50 mark
closing above its 200-DMA and immediate resistance is seen near which also exhibit strength in the counter accompanied with
Rs60 levels. The neckline of Inverted Head & Shoulder corresponds expansion of volumes during the price rise. We expect decent upside
at Rs52 and amplitude of the pattern comes to Rs12, hence of 7 to 8% from current levels providing better risk reward ratio.
amplitude projection on stock price can be derived at Rs64.
On downside we believe earlier breakout levels to get converted
However, on weekly chart, a stiff hurdle is seen around Rs56-57 into support levels and as long stock is able to sustain above the
levels which were the peak levels in March 2010. Any move above 356, positive momentum in the short term is likely to remain upbeat.
these levels would confirm a break out for the long term. Based on We advise buying stock in the range of Rs368-374 with stop
above evidences, we recommend traders to buy the stock in the loss of Rs356 for target of Rs400.
range between Rs51-53 with stop loss of Rs48 for target of Rs60
and Rs62.

Positive open interest build-up Negative open interest build-up

Company Price % chg OI % chg Vol % chg Company Price % chg OI % chg Vol % chg
Alstom Projects 2.2 18.7 (75.6) Chennai Petro (3.6) 34.3 (86.4)
CESC 3.3 15.2 (69.3) GAIL (2.6) 19.7 46.6
HCC 4.9 21.2 33.0 Indian Hotel (1.0) 14.6 (70.4)
SBI 0.9 21.1 97.7 Adani Ent (0.4) 13.7 (39.7)
Dena Bank 1.0 19.4 15.5 Siemens (2.6) 12.9 123.6

Technically strong Technically weak

10 days Total 10 days 10 days Total 10 days
Moving Traded Average Moving Traded Average
CMP Average Qty Traded Qty CMP Average Qty Traded Qty
Company (Rs) (Rs) (lacs) (lacs) Company (Rs) (Rs) (lacs) (lacs)
Alstom Project 703 665 5.6 3.3 ONGC 1,241 1,261 13.2 9.8
Vijaya Bank 73 69 89.1 49.0 GDL 110 113 5.1 2.4
HCC 134 132 139.9 24.9 GNFC 115 116 1.2 1.0
Hindalco 160 156 81.6 75.9 Nagarjuna Con 172 181 9.0 6.8
IOB 115 114 18.8 14.8 Jindal Saw 195 202 7.4 5.8

3
 India Infoline Weekly Wrap
Mutual fund round-up
India Infoline picks
Mutual Funds Assets NAV Absolute return (%) as on July 29, 2010
(Rs Cr) (Rs) 1wk 1mth 3mth 6mth 1yr 2yr 3yr 5yr
HDFC Top 200 (G) 8,020 200.0 (0.1) 2.8 6.5 15.0 29.7 61.9 60.1 228.4
ICICI Pru Dynamic Plan (G) 2,282 101.5 (0.1) 1.9 4.9 12.2 36.1 47.8 39.8 204.2
Reliance Growth Fund (G) 7,495 465.8 (0.9) 1.6 1.7 10.8 33.9 46.9 45.7 209.1
HDFC Tax Saver (G) 2,588 224.3 (0.6) 2.7 7.2 15.1 39.6 65.4 39.9 153.3
Reliance RSF - Balanced (G) 563 21.8 (0.2) 2.8 3.5 15.8 28.6 67.6 72.2 117.0

Fund this week: ICICI Pru Dynamic Fund

Fund snapshot Asset allocation (%)
Fund Manager Sankaran Naren Equity 77.4
Latest NAV Rs101.5 Debt 0.0
NAV 52 high/low Rs101/66 Cash/call 22.6
Latest AUM (cr) Rs2,282 Top 5 holdings (%)
Type Open-ended Reliance Inds. 7.8
Class Equity - diversified ICICI Bank 4.4
Options Growth & dividend Infosys Tech 4.2
Min investment Rs5,000 BHEL 4.2
Benchmark S&P Nifty TCS 4.2
No. of stocks 55 Top 3 sectors (%)
No. of sectors 24 IT - Software 13.9
Expense ratio 1.9% Pharma 7.7
Exit load 1% Bank - Private 7.5

NFO update Dividend update

Fund Name Close Type Class Mutual Fund Dividend % Record date Class
UTI-FTI - Sr VIII - Plan V 366D 3-Aug CE Debt - FMP Reliance FHF - IX Series 10 14.0 2-Aug Debt - FMP
IDFC CPOF - Series III 11-Aug OE Hybrid Kotak Quarterly Interval Fund 100.0 2-Aug Debt - Invt
ICICI Pru FMP - Sr53 - 3Yrs Pl A 24-Aug CE Debt – FMP Birla SL Cap Pro Orntd (3Y) 14.1 3-Aug Hybrid

Commodity, debt and currency graphs

Currency 1,450 Gold $/OZ 160
55 Crude (US$/bbl)
53 1,250 130
51
100
49 1,050
47 70
45 850
40
43
41 650 10
May-08 Feb-09 Nov-09 Jul-10 May-08 Feb-09 Nov-09 Jul-10 May-08 Feb-09 Nov-09 Jul-10

10.5 10yr G-Sec Yield (%) 10,000 Copper (US$/ton) 3,600 Aluminium (US$/ton)
9.5 3,100
8,000
8.5
2,600
7.5 6,000
2,100
6.5
4,000 1,600
5.5
4.5 2,000 1,100
May-08 Feb-09 Nov-09 Jul-10 May-08 Feb-09 Nov-09 Jul-10 May-08 Feb-09 Nov-09 Jul-10
* As per previous close

IIFL, IIFL Centre, Kamala City, Senapati Bapat Marg, Lower Parel (W), Mumbai 400 013
The information in this newsletter is generally provided from the press reports, electronic media, research, websites and other media. The information also includes information from interviews conducted,
analysis, views expressed by our research team. Investors should not rely solely on the information contained in this publication and must make their own investment decisions based on their specific
investment objectives and financial position and using such independent advisors as they believe necessary. The materials and information provided by this newsletter are not, and should not be construed
as an advice to buy or sell any of the securities named in this newsletter. India Infoline may or may not hold positions in any of the securities named in this newsletter as a part of its business. Past performance
is not necessarily an indication of future performance. India Infoline does not assure for accuracy or correctness of information or reports in the newsletter.