Editors Note

Looking forward to 2012

I
t was one of Murphys laws at work in the Indian economy in 2011: everything that
could go wrong, did. Inflation, high interest rates, costly fuel, falling industrial output,
serial scams, weak rupee, government indecision, the list could just go on.

Some of these problemsweak rupee, high commodity prices, foreign fund outflowswere a fall-
out of global events, but most others were self created.

Only to be expected, these developments hurt stock market sentiment and shattered the myth that
a relatively strong rate of economic growth alone was good enough to attract foreign investments.
Benchmark indices are down over 20% for the year, and India ranks among the worst performing
markets.

Understandably, there is an air of gloom as investors get ready to welcome the New Year. Most
investors feel things could get worse before they hopefully start improving by the middle of next
year. Such despair need not necessarily be a bad thing; more damage is done by an unduly positive
outlook.

As legendary investor Sir John Templeton once remarked: bull markets are born in pessimism,
grow on skepticism, mature on optimism, and die of euphoria.

It may be premature to talk about a bull market as investors are yet figuring out the bottom. Al-
ready, many companies have paid the price for their excesses in the previous boom, and many
more are likely to, in the coming days as economic conditions get tougher. But therein may lay the
opportunity. If as widely predicted, things do worsen in the short term; there will be many good
companies available at distress valuations to choose from. Among the basic rules of the stock mar-
ket is that your returns depend on the money you are willing to risk.

Global eventsmainly those in the Eurozonewill decisively influence the course of our market in
2012. Markets across the globe, including India, are likely to be volatile for some more time. There
are no easy returns to be made for now, as the problemsboth local and globalcall for painful
and longer term solutions. But just as one shouldnt be hoping for miracles, there is no reason to be
too depressed either. India has been in similar or even worse situations in the past, and emerged
from it honorably. But the government and the industry have to get their act together, starting with
fixing their respective balance sheets. Calendar 2012 could well turn out to be a year of consolida-
tion, as government and the industry try to regain their credibility, and figure out a more meaning-
ful and sustainable growth model.
 Events that
moved the market

in 2011
1. Market sways to jail house rock
1. The arrests of former Union Telecom Minister
A Raja, DMK leader Kanimozhi, corporate exec-
utives and bureaucrats in the 2G spectrum scam
unnerved the stock market. Ideally, the move
should have brought cheer, as it underscored the
rule of law in the country. However, investors
were worried that too many skeletons tumbling
out of the cupboard would do more harm than
victory in Kolkata and the wins in Kerala and
Assam raised hopes that the UPA would be able
to pursue reforms more aggressively. However,
Mamata now seems to have taken over from
Karunandhi in throwing tantrums.
4. Flight to safety: Gold keeps hitting new
highs
With global equity markets faltering, investors

good to sentiment. worldwide shied away from risky assets and

parked funds in the yellow metal, considered as
2. Union Budget 2011-12 - High hopes Mr a safe haven against devaluing currencies. This
Mukherjee! pushed the gold prices to an all-time high of Rs
29433, per 10 gm, turning out to be the best asset
The market was enthused by Finance Minister class for investors with an annual return of over
Pranab Mukherjees commitment to restrict fis- 40%.
cal deficit to 4.6% of GDP in 2011-12. For that,
Mukherjee would have had to take some tough 5. RBIs answer to inflation: A continuous
decisions on subsidies. Thanks to a combina- dose of rate hikes
tion of adverse global events and some damag-
ing populist measures like the Food Security Bill, Inflation made headlines throughout the year,
there is no way the target can be achieved. with soaring prices of food and essential com-
modities threatening a social unrest. To tackle
3. Assembly elections- the rise of Didi and the problem, RBI hiked rates by a total of 300
Amma basis points, in phases. Unfortunately, the rate
hikes did little to quell inflation.
Market cheered the defeat of Karunandhi-led
DMK in Tamil Nadu, as it meant less bargain- 6. Standard & Poors downgrades Ameri-
ing power for the meddlesome ally in the UPA cas sovereign debt
government. Also, the Mamata-led Trinamools
Credit rating agency, Standard & Poors for Wealth Creators %Gain
the first time downgraded US AAA credit rat- Amtek India 169
ing by one notch to AA plus. According to S&P, Alfa Laval 82
American governments fiscal consolidation plan UTV Software 77
Gujarat Fluorochemicals 74
wouldnt suffice to stabilize the governments
VST Industries 73
medium-term debt. The move rattled markets
across the world. Wealth Destroyers %Loss
GTL 91
7. Eurozone crisis-Will Greece default or KGN Industries 90
not? Kiri Indus. 89
Jai Balaji Inds. 88
Midway through the year, the focus shifted from ICSA (India) 87
USs worsening public finances to the debt prob- *BSE 500 stocks / *Prices as on Dec-23
lems of Eurozone members. The trouble started 11. Pledged shares sell-off sends stocks
with Greece and then spread to Italy, Ireland, crashing
Portugal, and Spain. Technically, Greece has
averted defaulting on its bonds, but the Euro Promoters of many mid-sized companies, who
Debt Crisis as the regions problem has come to had raised money by pledging a big chunk of their
be know as, is far from over. shares found themselves in trouble because of
the market downturn. As share prices weakened,
8. The Mining Bill and the mining scams the lenders with whom the shares were pledged,
asked promoters to deposit additional collateral.
The Mining Bill triggered a sell-off in metal and Failure to do so in many cases prompted lenders
mining stocks, as these companies would now to sell the shares, sending the stock prices crash-
have to share a portion of the profits with the ing.
local population. But this was not as bad as the
mining scams that came to light in Karnataka 12. Policy paralysis-government on the
and later on, in Goa. The Karnataka mining scam backfoot
resulted in Supreme Court restrictions, which
impacted raw material supplies besides tarnish- The government tried to break free of the policy
ing the reputations of a few leading companies. deadlock, by pushing through Foreign Direct In-
vestment in retail. The market cheered the move,
9. Rupee hits a record low to the dollar viewing it as a precursor or many more such re-
forms. But the celebrations were short-lived, as
The Indian rupee touched a life time low of 54.2 the government had to backtrack on its retail
to the dollar. A key driver was the strengthening policy in the face of stiff resistance from the op-
of the dollar against most currencies, as panicky position parties.
investors switched from the Euro to the dollar.
But the RBI aggravated the slide in the rupee Global Markets YTD Returns
when it publicly said that it would not defend the
currency.
US Markets European Markets
10. IIP falls as high interest rates bite: Nasdaq -3% CAC -20%
S&P 500 -1% DAX -16%
Rising interest rates may not have been able to Dow 5% FTSE -8%
tame inflation, but they certainly affected invest-
ments into capital intensive sectors. And that
Asian Markets
showed in the steadily dropping index of indus-
trial production. The figure for October was by Sensex -23% Nifty -23%
far the worst, declining to a negative 5.1%--the Shanghai -23% Nikkei -19%
first decline in more than two years Taiwan -21% Straits Times -17%
Hang Seng -21% Kospi -10%

Compiled by: Harsha Jethmalani

 Events that
made headlines in
India Inc
Karnataka/Goa mining scam
The Lokayukta report, filed by Justice Santosh
Hegde, unveiled an illegal mining operation in
Karnataka, costing chief minister B S Yeddy-
urappa and mining minister Janardhana Reddy
their jobs. The loss to the exchequer was esti-
mated at Rs 16,000 crore, and companies like
Adani Enterprises and JSW Steel were accused
of bribery and unethical corporate behaviour.
The Supreme Court banned mining in Bellary
and its surrounding areas, starving metal and
mining companies of crucial raw materials.
However, it was not the end of mining scams in
India as the Shah Commission found irregulari-
ties pertaining to the mining industry in Goa as
well.
Corporate executives in 2G scam
The controversy came to light last year with
the infamous Nira Radia tapes, and India
Inc is still feeling the tremors of the 2G scam.
Executives from DB Realty, Unitech and Reli-
ance Communications were arrested for alleged
complicity in the scam and denied bail for many
months.
Cyrus Mistry
named succes-
sor to Ratan
Tata
Ratan Tata had
for years said
that he wanted
someone young,
ideally in his/
her early-to-mid
40s to take
his place
at the
helm
of the
Tata
group, and eventually Cyrus Mistry, heir to
the Shapoorji Pallonji empire, was considered
worthy of the baton. The announcement came
late November, taking the corporate world by
surprise. The otherwise reclusive Mistry became
a household name, with everyone trying to find
out more about the man who pipped Noel Tata
to the post.
FCCB Friend or foe?
Companies which issued foreign currency con-
vertible bonds or FCCBs during the boom years
are now faced with the dreaded prospect of hav-
ing to redeem the bonds when they mature. The
current market price is way below the conver-
sion, making it unprofitable for the bondholders
to convert their bonds into equity. Apart from
a battered stock market, the sharp depreciation
in the rupee has resulted in companies having
to shell out a higher amount to redeem these
bonds. The rupee has fallen over 18% since July
due to a worsening debt crisis in the eurozone,
high inflation in the country and other weak
macro fundamentals.
BP buys 30% in RIL gas blocks
In the biggest FDI deal in the country, BP paid
$7.2 bilion for a 30% stake in 21 oil & gas blocks
of Reliance Industries. However, the deal was
the only bright spot in what otherwise was a
tough year for Reliance Industries. The com-
pany has been accused of inflating the develop-
ment cost of the blocks, which would lower the
governments share of profits.
Cairn Vedanta deal finally gets the green
light
Cairn Energy Plc would have never anticipated
the ordeal it would have to face in selling its
stake in Cairn India to Vedanta. After a series of
regulatory hurdles, the USD 6 billion deal was
finally cleared, almost a year after the deal was
signed. The main point of contention was relat-
ed to royalty payments for Cairn Indias Rajas-
than oilfields, where ONGC holds 30%.
Rising NPAs Banks worst nightmare
With 13 consecutive rate hikes amounting to
300 basis points, banks were bound to feel the
pressure sooner than later. Rising interest costs
burdened companies, but banks bore the brunt
as their non-performing assets rose at an alarm-
ing rate, causing them to set aside more money
to meet potential defaults. Analysts tracking
the banking sector reckon that non-performing
assets (NPAs) of banks could rise further in the
coming months.
End of good times for aviation
Its been a turbulent time for the countrys avia-
tion sector. The age of Rs 0 tickets seems to be
over, as airlines grappled with expensive avia-
tion turbine fuel, huge debts and price wars.
Among private carriers, the flamboyant Vijay
Mallyas Kingfisher Airlines had the worst time.
The rise of black gold
Oil marketing companies let the country know
they were taking matters in their own hands
right in the beginning when they hiked petrol
prices by close to Rs 3 in January. But after that,
OMCs were missing in the picture despite inter-
national crude prices hitting its lifetime high.
However, they did come with a bang mid-May,
hiking petrol by a whopping Rs 5. Over the year,
the price of petrol has risen by almost Rs 20,
but the under recovery woes of OMCs continue.
Not only that, the hot topic of petrol deregula-
tion continues to be a sore point between UPA
allies the Congress Party and Mamata Banerjee
led Trinamool congress, the latter going to ex-
tent of threatening to quit the alliance.
Labour strike at Maruti
Production at Maruti Suzukis Manesar plant
was repeatedly disrupted throughout the year
due to labour unrest. It started early June when
a few workers called an illegal strike to de-
mand the formation of a separate union for the
Manesar plant employees. Things quickly went
downhill from there and though the strike has
been resolved, their demand of separate union
remains unfulfilled. In a phase of slow growth,
Indias largest auto maker has faced severe
production cuts and loss in turnover due to this
strike.
Savings rate deregulation
D Subbarao gave the Indians a diwali gift this
year - freeing up interest rates for savings de-
posits across the country. This means that
banks can individually set rates according to
the market situation. This move allowed many
of the newer private sector banks to attract new
customers by offering them much better savings
account rates than is being offered by the larger
players.
New Takeover Code
The much awaited overhaul of the Sebi Takeo-
ver Code finally came through this year. Among
the key features, the minimum threshold level
for making an open offer was raised to 25%
from 15%.
Compiled by: Anisha Mappat
Stocks that made
headlines in 2011
for
the wrong reasons
Calendar 2011 would easily rank among the
terrible years for equity investors in the Indian
stock market. Things were already bad enough
due a combination of local and global problems.
And a few companies compounded their share-
holders misery by getting embroiled in contro-
versies--mostly self-created and partly due to
a tough business environment. Here is a list of
stocks that made headlines in 2011, but for all
the wrong reasons.
Mphasis: The software services firm did not
disclose that a portion of revenues from parent
HP in an earlier quarter was a one-off income.
Incensed investors dumped the stock, and
many equity analysts downgraded it, citing poor
corporate governance as one of the key triggers.
One broking firm even accused the company of
deliberately wrecking the stock price so as to
delist on the cheap in the coming months.
SKS Microfinance: Hailed as a blue-chip in
the making when it listed in August last year,
the microfinance lender turned out to be a rich-
es-to-rags story for its shareholders. The And-
hra Pradesh governments curbs on the microfi-
nance industry wrecked SKSs bottomline, since
that state was its largest market. Complicating
matters for SKS was the power struggle within
the board which eventually culminated in the
ouster of founder and chairman Vikram Akula.
GTL, GTL Infra: Nobody knows what trig-
gered the collapse in the share prices of GTL
and group company GTL Infra in June. The
companys weakening fundamentals was the
starting point. But that alone could not have
brought down the GTL stock by 62% in a sin-
gle trading. It is very likely that the promoters
would have pledged a big chunk of shares out-
side of what was officially disclosed to the stock
exchanges. Both companies balance sheets look
as though they were in a train collision. Nego-
tiations with lenders are on.
Crompton Greaves: The engineering majors
first quarter earnings fell short of market ex-
pectations by a huge margin. But what angered
investors even more was that former managing
director and now non executive-chairman SM
Trehan selling his entire holdings just a few
weeks before the disappointing numbers. The
stock crashed amid murmurs of insider trading.
Then there was also the issue of the corporate
jet purchased using shareholder funds. Promot-
ers tried to restore confidence by buying shares
at lower levels, but the damage had already
been done.
State Bank of India: Indias largest lender
stumped investors in May when its fourth quar-
ter net profit plunged due to a steep increase in
provisioning for bad loans. Analysts accused the
bank of shoring up its profits in the earlier quar-
ters by not making adequate provisions when
it should have, and then providing everything
at one go so as to meet the RBIs September
2010 deadline for bad loan cover. Adding to the
banks woes, the government has been dragging
its feet on infusing capital in the bank through
a rights issue. This prompted talk in the market
that the government was deliberately delaying
funds to SBI so that private players could ben-
efit.
Pipavav Defence(formerly Pipavav Ship-
yard): The company issued 1.05 preferential
warrants to high-profile proprietary investor
Rakesh Jhunjhunwala just a few days before an-
nouncing a joint venture with state-owned Maz-
gaon Dock for building warships and subma-
rines. Pipavavs business rivals shot off a letter
to the Defence Ministry questioning Pipavavs
track record and execution skills. Stock mar-
ket players alleged that Pipavav had roped in
Jhunjhunwala to improve the stocks perception
among the investor community and boost its
valuation.
Reliance Industries: The company is ac-
cused of inflating its expenses for developing
the KGD6 block, something that would delay
the governments payoff from the block as it is
entitled to its share of profits only after Reliance
recovers the development costs. Already, output
at the gas block has plunged and RILs rivals
allege that the company is waiting for global gas
prices to move up before ramping up produc-
tion. The RIL stock has also been weighed down
by the ongoing probe into alleged insider trad-
ing in Reliance Petroleum shares.
Everonn Education: The companys manag-
ing director P Kishore was arrested for allegedly
attempting to bribe an Income Tax official after
having understated taxable income. The stock
nosedived as institutional investors fled. The
Dubai-based Varkey Group later bought a stra-
tegic stake in the company at a huge premium
to market price..
DB Realty, Unitech Reliance Communica- financial health and alleged mismanagement by
tions: All three stocks fell following the arrest the top brass. The management strongly refuted
of key company executives for alleged involve-
ment in the 2G telecom scam.
Sun TV: Allegations that the company had
benefitted from Dayanadhi Marans largesse
when he was telecom minister (Dayanidhi is
the brother of Sun group promoter Kalanithi
Maran) triggered a sell-off in the stock. Sun TV
is alleged to have uploaded data using illegally
provided ISD connections. To make matters
worse for Sun, the AIADMKarch rival of DMK
of which Dayanidhi Maran is a mem-
ber-- came
to pow-
er in the state. This un-
dermined the Sun groups hold on
the film industry and also its near monopolistic more than its private sector peers. It is strug-
position in the cable TV business.
Reliance Infra: The company was barred by
Sebi from the stock market till 2012. The case
related to the routing of fund raised abroad to
buy shares of companies belonging to the Anil
Ambani group.
Adani Enterprises, JSW Steel: The entire
steel sector was hit by the Supreme Court or-
der banning iron ore mining in Karnataka. But
Adani Enterprises and JSW Steel fared worse
compared to peers, having to put up with repu-
tation loss in addition to financial loss. The
Lokayukta Panel alleged that the two companies
paid bribes and engaged in unethical corporate
behaviour to get around Mining regulations.
Dhanlaxmi Bank: One of the labour unions
of the bank raised questions about the banks
the allegations, but the stock price is yet to fully
recover from that bout of panic selling. So far in
2011, the stock is down 58%.
Kingfisher Airlines: It has been a bad year
for aviation companies in general, because of
high crude oil prices and fierce competition.
UB group chairman Vijay Mallya claims the
media exagger- ated the
prob-
lems
with his air-
liner, but the fact is Kingfisher has suffered
gling to pay its daily fuel bills, has lost many pi-
lots and has cut down on the number of flights.
Maruti Suzuki: Maruti made the maximum
headlines this year, thanks to persistent labour
problems at its Manesar plant. The periodic
strikes hit production in a year when car sales
were anyway slowing down because of high in-
terest rates and costly fuel. The company finally
resolved the issue but it could be a while before
sentiment for the stock improves. Maruti shares
are down 34% this year so far.
Compiled by: Santosh Nair
PEOPLE WHO WERE
IN THE HEADLINES

IN 2011
A Raja, former telecommunications min-
ister: The long arm of the law finally caught up
with the lawyer-turned-minister, who is among
the main accused in the 2G telecom spectrum.
He is yet to get bail.
MK Kanimozhi, DMK leader and Rajya
Sabha MP: Her Oh-I-am-a-woman-and-a-
mother argument for bail failed to cut ice with
the Delhi High Court judge. One of the accused
in the 2G spectrum scam, she had to spend six
months in Tihar jail before getting out on bail.
Shahid Balwa and Vinod Goenka, pro-
moters of DB Group Companies, Sanjay
Chandra, MD Unitech Wireless: Had to
spend seven months in jail for alleged involve-
ment in the 2G spectrum scam.
Cyrus Mistry, Tata Group chairman-in-
waiting: Mistry who? was the first question
that everyone asked when the younger son of
Pallonji Mistry, an Irish-Parsi construction
tycoon, was named successor to the Tata em-
pire. The 43-year old chairman of the board of
Shapoorji Pallonji Group and Afcons Infrastruc-
ture had always maintained a low-profile while
on the board of Tata Sons despite being the
majority stakeholder.
Vikram Akula, founder, SKS Microfi-
nance: Was ousted from the board of SKS
Microfinance, the company that he founded.
Maybe he can take solace and inspiration from
the fact that the late Steve Jobs too suffered a
similar ignominy in his career.
Vijay Mallya, chairman, Kingfisher Air-
lines and UB Group: It is almost turning to
be a case of riches-to-rags for the flamboyant
liquor-baron as he struggles to keep Kingfisher
Airlines(KFA) airborne. Weighed down by huge
debt, KFA has reduced its staff, cut down on
flights and is trying to get banks to recast its
loans.
UK Sinha, chairman, Sebi: It has been a
not-so-memorable first year in office for the
soft-spoken Sinha who succeeded outgoing Sebi
chairman CB Bhave. Former Sebi-board mem-
ber KM Abraham accused Sinha of trying to
influence him in some high-profile cases being
investigated by the regulator.
D Subbarao, governor, Reserve Bank of
India: He would have had little choice given
the problems facing the economy, but Subbarao
ended taking much of the criticism for RBIs
unpopular decisions, namely rate hikes.
Anil Ambani, chairman, Reliance Group:
The year started on a low note for the flamboy-
ant Ambani sibling, having to pay a penalty in
his personal capacity under a consent settle-
ment with Sebi. It ended on an even lower note,
with UKs Financial Services Authority alleging
that Anil Ambani was aware of the investment
vehicle set up overseas to illegally route money
into his companies.
NR Narayana Murthy: The man who started
it all - IT outsourcing, offshoring et all, finally
stepped down as the head of Infosys this year.
His name will go down in theannals of corpo-
rate history in India as a rare combination of
visionary and able administrator rolled into
one. More than everything else, Murthy will be
remembered for fostering the culture of com-
panies sharing their wealth with employees
through stock options.
TV Mohandas Pai: The then HR Head at
Infosys, who was considered as a front runner
for a top job amid a leadership reshuffle earlier
this year, quit abruptly in April, even ques-
tioning the CEO selection process at the tech
bellwether. Pai said he was not interested in
the CEOs position, but claimed that Narayana
Murthy had offered him the post. Murthy de-
nied such an offer, thereby unwittingly exposing
the power struggle at the top level.
Although he himself denied later that he was in-
terested in being the CEO, he probably lost out
in the internal power struggle and was left with
no choice but to step down.
Compiled by: Padma Venkatraman
 Top brokerages
crystal gaze
what 2012 may hold for
the Indian
market/economy
Goldman Sachs:
Inflation to come off in 2012, allowing a signifi-
cant easing of monetary policy. We build in 150
bp of rate cuts in 2012.
On the Rupee, we see risks of further deprecia-
tion in the near term given the contagion from
the Eurozone, but some valuation support over
a 12-month horizon. Our 3, 6 and 12-month
USD/INR forecasts are now at 53.0, 50.7 and
49.0 respectively.
Citi:
The upsides are likely to remain front-loaded.
Sensex year-end target at 18400; 5520 on Nifty.
Top picks for 2012 include Axis Bank, SBI, Tata
Motors, Jindal Steel & Power and Dr Reddy.
Macquarie:
We expect the index to drift to 14,000, a level
that builds in:
Slower economic growth of 6.9 per cent in FY13,
A blended 12-month forward earnings growth
of 8 per cent
Continued cost pressures from higher power,
railway freight and wage costs
A weak investment cycle and outlook for de-
mand which would likely put pressure on corpo-
rate earnings, which the market is yet to build in
Continued political stalemate on the domestic
front and ongoing problems in Europe, which
look far from being resolved, would keep inves-
tor sentiment subdued.
CLSA
Governance a drag but several negatives now
built-in. Consumer demand slowing
Weights lowered in consumer discretionary
(autos) and banks; added to IT services.
Top picks are ITC, Dr Reddys, M&M and
ICICI Bank. ITC and Dr Reddys appear good
on earnings visibility. M&Ms volume sales have
been robust so far and we expect similar trend
to continue.
Bank of America Merrill
We expect FY13 GDP to slow to 6.8% and con-
sensus to cut GDP forecasts over the next few
months. GDP growth in the next few quarters is
likely to come even lower at around 6.5%.
We continue to expect earnings downgrades, led
by slowing sales and sustained margin pressure
from rising labor and interest costs. We expect
the bottom-up Sensex EPS of Rs1,275 to be
downgraded to Rs1,200
Kotak Securities:
GDP growth likely to disappoint without proper
corrective steps
Current account deficit could come under pres-
sure given inexplicable exports
Valuations are inexpensive but mask wide dis-
parity across sectors
Still hedging our bets given low clarity but tak-
ing a more positive view
Compiled by: Sagar Salvi
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