india daily: updates - kotak securitiesioc (iocl in), bpcl (bpcl in) and hpcl (hpcl in) are...

For Private Circulation Only. FOR IMPORTANT INFORMATION ABOUT KOTAK SECURITIES’ RATING SYSTEM AND OTHER DISCLOSURES. REFER TO THE END OF THIS MATERIAL.

INDIA DAILYAugust 30, 2011 India 29-Aug 1-day1-mo 3-mo

Sensex 16,416 3.6 (9.8) (10.0)

Nifty 4,920 3.6 (10.3) (10.1)

Global/Regional indices

Dow Jones 11,539 2.3 (5.0) (7.3)

Nasdaq Composite 2,562 3.3 (7.0) (8.4)

FTSE 5,130 (0.0) (11.8) (13.6)

Nikkie 8,986 1.5 (8.6) (5.5)

Hang Seng 20,237 1.9 (9.8) (12.7)

KOSPI 1,847 0.9 (13.4) (11.8)

Value traded – India

Cash (NSE+BSE) 112 137 134

Derivatives (NSE) 901 998 775

Deri. open interest 1,030 1,520 1,567

Forex/money market

Change, basis points

29-Aug 1-day 1-mo 3-mo

Rs/US$ 46.1 1 201 98

10yr govt bond, % 8.3 2 (14) (12)

Net investment (US$mn)

26-Aug MTD CYTD

FIIs (21) (2,360) (199)

MFs (11) 484 (282)

Top movers -3mo basis

Change, %

Best performers 29-Aug 1-day 1-mo 3-mo

IDEA IN Equity 96.1 0.3 1.9 40.8

BJAUT IN Equity 1573.6 4.6 7.1 18.5

GNP IN Equity 327.5 1.9 (0.9) 10.9

MM IN Equity 733.3 4.1 1.7 10.7

NEST IN Equity 4402.8 0.5 1.0 9.5

Worst performers

EDSL IN Equity 199.4 0.1 (42.3) (58.1)

IVRC IN Equity 35.0 9.2 (43.7) (50.2)

CRG IN Equity 143.1 4.5 (15.6) (43.5)

HDIL IN Equity 100.2 4.5 (29.8) (38.5)

ESOIL IN Equity 85.0 6.7 (27.2) (33.8)

Contents

Daily Alerts

Company

Coal India: Vagaries of labor negotiations

Reliance Industries: Its a BUY

Reliance Communications: FY2011 annual report analysis, more thoughts

Zee Entertainment Enterprises: FY2011 annual report analysis

Phoenix Mills: Execution focus

Sector

Automobiles: Changing the pecking order after the recent run-up in share prices

Banks/Financial Institutions: New bank licenses: A longer wait

NBFCs: Resetting expectations at attractive valuations

Telecom: The weak shall not inherit the earth; upgrade Bharti/Idea

News Round-up

RBI is slowly opening the doors for corporates wanting to set up banks, but with caution & caveats. As per draft guidelines laid down by the banking regulator, promoter groups with "sound credentials & integrity" & a 10-year old record of successfully running their businesses can set up banks. Such banks should have a minimum paid-up capital of USD 108.70 mn, should run 25% of their branches in rural unbanked regions, list within 2 years & be owned by a separate holding co. that cannot borrow money to float the bank. (ECNT)

The RBI has proposed to relax the foreign investment norms for new private banks, has proposed to keep the aggregate foreign investment at 49% for five years in the new banks that will be licensed. After five years, the foreign shareholding can go up to 74% - in line with the existing policy on foreign investment in Indian banks. (FNLE)

The borrowings of oil marketing companies (OMCs) would touch a record high over the next three months, despite a rise in fuel prices and rejig in duty structure in June. IOC (IOCL IN), BPCL (BPCL IN) and HPCL (HPCL IN) are incurring a daily loss of USD 51 mn but have not received any cash subsidy from the government for the current year. (BSTD)

The US Energy Information Administration has decided to slash the estimate of undiscovered Marcellus Shale natural gas in the US by 80% to 84 trillion cubic feet, a move that will impact Reliance Ind. (RIL IN), the biggest investor in US shale gas ventures & other energy firms which were planning to invest in the US. (TTOI)

Reliance Industries' (RIL IN) production from eastern offshore KG-D6 block has dipped below 45 million standard cubic metres per day (mscmd) this month.Reliance produced about 44.8 mscmd of natural gas during the week ending August 14. (FNLE)

Source: ECNT= Economic Times, BSTD = Business Standard, FNLE = Financial Express, THBL = Business Line.

For private Circulation Only. FOR IMPORTANT INFORMATION ABOUT KOTAK SECURITIES’ RATING SYSTEM AND OTHER DISCLOSURES, REFER TO THE END OF THIS MATERIAL.

Demand for wage increase should be seen in conjunction of neutralized dearness allowance

Recent media articles indicate that various trade unions of CIL, in their initial demands, have asked for increase of 100-500% in the basic wage—which translates into a less exaggerated 32% increase in non-executive wages (excluding gratuity and other benefits). We note that the demand for revision in basic wages should be seen in conjunction with the reset of inflation-linked dearness allowance which currently stands at ~50% of basic wages. We further highlight that since the revision is restricted to non-executive category (accounting for ~75% of total employee cost ), the overall impact would be further muted.

We currently factor a 25% yoy increase in overall employee wages in FY2012E against management guidance of 20-30%, though believe that provisions for wage increase in FY2012E could be more muted with an eventual settlement likely some time away. We discuss the wage structure and revision process in detail in a subsequent section.

BCCL mines continue to be operational

As per media reports, Jharkhand State Pollution Control Board (JSPCB) has ordered closure of 22 mines of BCCL, a subsidiary of CIL, on grounds that these mines have been operating without mandatory environmental clearances. CIL management has indicated that these 22 mines produce ~15 mtpa (3.3% of CIL’s estimated production in FY2012E) and complete closure could impact FY2012E EPS by 7.6% (given that BCCL’s realizations are significantly higher than any other subsidiary. We, however, note that management has indicated that BCCL has received no such notice of closure yet from JSPCB and these mines continue to be operational.

Maintain BUY with a target price of Rs470/share

We maintain our BUY rating with target price of Rs470/share. Our target price is based on 13X FY2013E EPS adjusted for overburden removal and interest income and implies an EV/EBITDA of 9X on FY2013E EBITDA (adjusted for overburden removal). CIL currently trades at 10X FY2013E EPS (adjusted) and 7X FY2013E EBITDA (adjusted). We note that uncertainty and news flows over impact of wage revisions and applicability of mining tax could weigh on stock performance in the near term.

Coal India (COAL)

Metals & Mining

Vagaries of labor negotiations. Coal India’s management has initiated the process of negotiating wages under the National Coal Wage Agreement IX. Initial reports of demands for revision in wages from 100-500% were met with skepticism, though we note that the revision in basic wages by 100% implies revision in overall remuneration by ~32% due to offset of variable dearness allowance that will likely be reset to zero. We reiterate our BUY rating while maintaining our target price of Rs470/share.

Coal IndiaStock data Forecasts/Valuations 2011 2012E 2013E

52-week range (Rs) (high,low) EPS (Rs) 17.3 25.5 29.4Market Cap. (Rs bn) 2,332.9 EPS growth (%) 13.6 47.6 15.1

Shareholding pattern (%) P/E (X) 21.3 14.5 12.6Promoters 90.0 Sales (Rs bn) 552.2 658.5 712.4FIIs 6.4 Net profits (Rs bn) 109.3 161.3 185.6MFs 1.1 EBITDA (Rs bn) 162.8 214.7 235.1

Price performance (%) 1M 3M 12M EV/EBITDA (X) 11.5 8.2 7.0Absolute (4.9) (4.8) 0.0 ROE (%) 35.1 40.3 36.4Rel. to BSE-30 5.5 5.9 0.0 Div. Yield (%) 1.4 2.1 2.4

Company data and valuation summary

422-245

BUY

AUGUST 30, 2011

UPDATE

Coverage view: Attractive

Price (Rs): 369

Target price (Rs): 470

BSE-30: 16,416

Coal India Metals & Mining

KOTAK INSTITUTIONAL EQUITIES RESEARCH 3

Understanding the nuances of wage structure and revision process

We illustrate the process of wage revision through the impact of the past two wage agreements effective in FY2001 (NCWA VII) and FY2006 (NCWA VIII)—wherein the basic wages were revised by 68% and 50%, respectively; however, the overall impact of wage revision was restricted to 24% after considering neutralization of variable dearness allowance (inflation-linked). Neutralization of variable dearness allowance essentially implies accruing the same to the basic wages. At the end of NCWA-VIII, the VDA stands at ~50% of basic wages, which essentially means that a 50% hike in basic wages will imply no change in employee cost.

We note that employee wages comprise the following five components—(1) basic wage, (2) attendance bonus (fixed at 10% of basic), (3) special DA (17.95% of attendance bonus or 1.795% of basic wage), (4) variable DA (linked to inflation – AICPI) and (5) minimum guaranteed benefit (MGB).

Exhibit 1: Effective wage revision was 24% during last revision Wage revision detail for minimum wage category, NCWA VII & VIII

Pre-revised Revised Pre-revised Revised Pre-revised Revised Pre-revised RevisedBasic wage 127 213 3,300 5,550 213 322 5,550 8,360 Attendance bonus (10% of basic) 13 21 330 555 21 32 555 836 Special DA (1.795% of basic) 2 4 59 100 4 6 100 150 Variable DA 51 — 1,330 — 51 — 1,332 — Total 193 239 5,019 6,205 290 359 7,537 9,346 Minumum guranteed benefit 46 — 1,185 — 70 — 1,809 — Total 239 239 6,205 6,205 359 359 9,345 9,346

Daily (Rs/day) Monthly (Rs/month)NCWA VII (Wage revision of 2001) NCWA VIII (Wage revision of 2006)

Daily (Rs/day) Monthly (Rs/month)

Source: Company

100% hike in basic wage would imply an effective revision of 32%

Media reports indicate that trade unions have demanded 100-500% hike in basic salary which currently stands at Rs8,360/month (minimum wage). As discussed in previous section (and highlighted below in Exhibit 2), a 100% increase in basic is tantamount to effective hike of 32%. We estimate the extant minimum wage to be Rs13,969/month (based on the movement in variable DA as per CPI for industrial workers) as of June 2011. Hence, a 100% hike in current basic from Rs8,360/month to Rs16,720/month would imply an MGB of Rs4,453/month or an effective hike of 32%.

We further highlight that the wage revision is due only for non-executive category which comprises 75% of overall wage bill of CIL, thus muting the overall impact on CIL to that extent. Thus a 32% effective revision would imply an overall impact of ~24%. We note that our assessment of wages highlighted in Exhibit 2 excludes the contributions to provident fund/pension schemes and other defined benefit schemes such as gratuity and leave travel assistance that would be linked to the revised basic wages.

Metals & Mining Coal India

4 KOTAK INSTITUTIONAL EQUITIES RESEARCH

Exhibit 2: 100% hike in basic would imply an effective revision of 32% Estimate for extant minimum wage and likely impact of hike in basic salary

Estimatedcurrent wage Pre-revised Revised Pre-revised Revised

Basic wage 8,360 8,360 16,720 8,360 25,080 Attendance bonus (10% of basic) 836 836 1,672 836 2,508 Special DA 150 150 30 150 45 Variable DA 4,623 4,623 — 4,623 — Total 13,969 13,969 18,422 13,969 27,633 Minumum guranteed benefit — 4,453 — 13,664 — Total 13,969 18,422 18,422 27,633 27,633 Effective revision (%) 32 98

Note:Our estimate for variable DA is based on CPI for Industrial Workers (base 2001)

Estimate of effective wage revision200% of basic100% of basic

Source: Company, Kotak Institutional Equities estimates

Exhibit 3: History shows that wage negotiations have taken up to 4 years to settle Details of past wage agreements

Effective period ExecutionFrom To Years Date Delay

NCWA I 1-Jan-75 31-Dec-78 4 11-Dec-74NCWA II 1-Jan-79 31-Dec-82 4 11-Aug-79 8 monthsNCWA III 1-Jan-83 31-Dec-86 4 11-Nov-83 11 monthsNCWA IV 1-Jan-87 30-Jun-91 4.5 27-Jul-89 2 1/2 yearsNCWA V 1-Jul-91 30-Jun-96 5 19-Jan-96 4 1/2 yearsNCWA VI 1-Jul-96 30-Jun-01 5 23-Dec-00 4 1/2 yearsNCWA VII 1-Jul-01 30-Jun-06 5 15-Jul-05 4 yearsNCWA VIII 1-Jul-06 30-Jun-11 5 24-Jan-09 2 1/2 years

Source: NCWA VIII, Kotak Institutional Equities

Exhibit 4: 40% wage inflation could impact our fair value by 10% Sensitivity of fair value estimate to wage inflation in FY2012E and volumes in FY2013E

424 447 470 494 518-10% -5% Base +5% +10%

15 418 456 496 536 57820 403 441 481 521 56324 391 429 470 510 55230 373 411 452 491 53340 343 381 422 461 503

Target priceVolumes in FY2013E (mn tons)

Wag

e in

flat

ion

FY

2012

E (%

)

Source: Kotak Institutional Equities estimates

Coal India Metals & Mining


Exhibit 5: Our target price is based on 13X FY2012E adjusted EPS Target price calculation of CIL

EBITDA (Rs bn) 218OBR (Rs bn) 29Adjusted EBITDA (Rs bn) 247Interest income (Rs bn) 44PAT (Rs bn) 186Adjusted PAT (Rs bn) 174EPS (Rs/share) 29Adjusted EPS (Rs/share) 28P/E on FY2013E adjusted PAT (X) 13.0 Value of coal business (Rs bn) 2,267Cash (Rs bn) 698Market Cap (Rs bn) 2,966Target price 470

Notes.(1) Adjusted EBITDA is calculated after removing the effect OBR adjustment.(2) Adjusted PAT is calculating after removing the effect ofOBR adjustment and interest income net of taxes.


Metals & Mining Coal India


Exhibit 6: Profit model, balance sheet, cash model of CIL, March fiscal year-ends, 2009-15E (Rs mn)

2009 2010 2011 2012E 2013E 2014E 2015EProfit modelNet sales 387,888 446,153 502,336 614,543 662,529 722,246 779,749 Coal issued for other purpose 20,220 20,690 24,250 30,015 33,618 36,535 39,521 Transport and loading recovery 14,698 12,260 13,089 13,628 14,160 14,798 15,344 Total income 424,142 485,774 552,208 658,462 712,449 775,319 835,549 EBITDA 39,309 114,735 147,880 197,207 217,676 248,927 276,418 Interest income 28,447 26,940 19,925 32,551 44,464 57,387 72,511 Other Income (ex transport, interest) 8,051 13,209 14,948 17,447 17,447 17,447 17,447 Interest expense (1,789) (1,560) (791) (1,293) (1,193) (1,134) (1,118) Depreciation (16,909) (13,138) (16,729) (17,437) (19,159) (20,523) (21,537) Pretax profits 57,110 140,186 165,234 228,476 259,234 302,104 343,720 Tax (36,336) (43,996) (55,959) (67,210) (73,682) (92,958) (108,388) Net income 20,774 96,190 109,275 161,265 185,552 209,146 235,331 Extraordinary items 13 35 (602) — — — — Reported profit 20,787 96,224 108,674 161,265 185,552 209,146 235,331 Earnings per share (Rs) 3 15 17 26 29 33 37 Balance sheetPaid-up common stock 63,164 63,164 63,164 63,164 63,164 63,164 63,164Total shareholders' equity 191,651 257,952 333,172 431,544 544,731 672,310 815,862Minority interest 19 236 326 326 326 326 326Total borrowings 21,485 20,869 15,536 15,469 13,148 12,540 12,140Shifting and rehab fund 12,238 14,774 16,214 19,528 24,448 30,107 36,486Total liabilities and equity 225,393 293,831 365,247 466,867 582,652 715,283 864,814Net fixed assets 110,212 120,354 115,252 145,597 163,862 172,265 169,803Capital work-in progress 19,195 22,107 35,357 52,601 52,477 48,958 45,430Investments 15,052 12,823 10,637 10,637 10,637 10,637 10,637Cash 296,950 390,778 458,623 570,449 698,301 859,959 1,052,772Current assets (excl. cash) 174,009 152,466 185,337 203,338 218,576 237,222 254,542Current liabilities and provisions 399,293 414,316 448,725 523,937 568,979 620,644 674,698Deferred tax asset 9,268 9,604 8,732 8,182 7,778 6,884 6,328Misc. expenditure — 15 34 — — — — Total assets 225,393 293,831 365,248 466,867 582,652 715,283 864,814Free cash flowOperating cash flow, excl. working capital 39,616 106,073 125,248 179,253 205,115 230,563 257,424Working capital changes 77,708 22,856 1,538 57,211 29,804 33,018 36,735Capital expenditure (18,758) (19,804) (24,878) (65,025) (37,299) (25,408) (15,547)Free cash flow 98,567 109,125 101,908 171,439 197,619 238,174 278,613Ratios Net debt/equity (%) (143.7) (143.4) (133.0) (128.6) (125.8) (126.0) (127.5) Return on equity (%) 11 43 37 42 38 34 32 Book value per share (Rs) 30 41 53 68 86 106 129ROCE (%) 11 43 38 44 40 36 33



Upgrade to BUY given attractive valuations; concerns overdone

We upgrade the RIL stock to BUY from ADD previously given a favorable risk-reward balance post the recent sharp correction in its stock price. We note that the stock has corrected 20% over the past three months (see Exhibit 1) reflecting investor concerns about (1) likely tough operating conditions for RIL’s refining and chemical businesses, (2) limited visibility on E&P business, (3) potential negative implications from a CAG audit report and (4) lack of clarity over possible utilization of cash. However, current valuations are discounting a rather pessimistic scenario. The stock is currently trading at 11.2X FY2012E EPS and 10.1X FY2013E EPS.

Stock price is implying nil value to RIL’s E&P segment and lower multiples for key businesses

Exhibit 2 gives our SOTP-based fair valuation of RIL. We value the RIL stock without its E&P segment at `856 with (1) the refining and petchem segments contributing `612/share and (2) cash and investments (including loans and advances) at `244/share. This implies that the market is not ascribing any value to RIL’s E&P business, which seems to be an overly pessimistic assumption. We admit that the market may be ascribing lower multiples to RIL’s refining and chemical segments given a bleak global economic outlook. However, we believe that cyclicality of a business should not change its value over time and the multiples should be adjusted appropriately to reflect the earnings cycle.

Reverse valuation implies 4.5X EV/EBITDA multiple to RIL’s refining and petchem segments

Our reverse valuation exercise (see Exhibit 3) shows that the stock price is implying 4.5X EV/EBITDA to RIL’s refining and petchem businesses based on FY2012E estimates. We use DCF-based valuation for RIL’s E&P segment which implies fair value of ~US$17 bn for its key E&P blocks including KG D-6, KG D-3, KG D-9, NEC-25 and MN D-4. This is significantly lower than BP’s implied valuation of US$24 bn assuming no performance payout from BP and negligible value from RIL’s other blocks.

18% potential upside to our trough-case valuation of RIL at `890

We compute trough-case value of RIL at `890 (see Exhibit 4), assuming (1) lower multiples for refining and petchem segments at 5.5X FY2013E EV/EBITDA, (2) peak production of KG D-6 block at 50 mcm/d, (3) no tax exemption on gas production from KG D-6 block and (4) nil value from the upstream blocks under development/appraisal.

Reliance Industries (RIL)

Energy

It’s a BUY. We upgrade the RIL stock to BUY from ADD (upgraded on July 25, 2011 from REDUCE) on valuations and 38% potential upside to our SOTP-based target price of `1,045. Our reverse valuation exercise reflects that the market is not ascribing any value to its E&P business. Our trough-case valuation is `890. However, a significant re-rating will depend on (1) improved corporate governance and (2) prudent use of cash; we would suggest dividends/buy-backs in the absence of meaningful planned capex.

Reliance IndustriesStock data Forecasts/Valuations 2011 2012E 2013E

52-week range (Rs) (high,low) EPS (Rs) 62.0 67.4 74.9Market Cap. (Rs bn) 2,250.8 EPS growth (%) 24.8 8.8 11.0

Shareholding pattern (%) P/E (X) 12.2 11.2 10.1Promoters 41.0 Sales (Rs bn) 2,481.7 3,413.9 3,217.3FIIs 21.2 Net profits (Rs bn) 202.9 220.7 245.1MFs 2.5 EBITDA (Rs bn) 384.8 361.9 386.7

Price performance (%) 1M 3M 12M EV/EBITDA (X) 6.7 5.9 5.0Absolute (8.8) (20.1) (20.5) ROE (%) 13.0 12.7 12.6Rel. to BSE-30 1.1 (11.1) (12.8) Div. Yield (%) 1.0 1.1 1.2


1,187-712

BUY

AUGUST 29, 2011

UPDATE

Coverage view: Neutral

Price (Rs): 755

Target price (Rs): 1,045

BSE-30: 16,416

QUICK NUMBERS

• Stock trading at 9.2X FY2013E EPS adjusted for treasury shares

• 38% potential upside to our target price from current levels

• 18% upside to our trough-case value from current levels

Energy Reliance Industries


RIL stock has corrected by over 20% in the past three months Stock performance of Reliance Industries versus BSE-30 Index over the past three months (%)

70

75

80

85

90

95

100

105

110

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Reliance Industries Sensex

(%)

Source: Bloomberg, Kotak Institutional Equities

SOTP valuation of Reliance is `1,045 per share on FY2013E estimates Sum-of-the-parts valuation of Reliance Industries, FY2013E basis (`)

Valuation base (Rs bn) Multiple (X) EV ValuationOther EBITDA Multiple EV/EBITDA (Rs bn) (Rs/share)

Chemicals 114 6.5 738 248Refining & Marketing 174 6.3 1,087 365Oil and gas—producing (PMT and Yemen) 22 4.0 90 30Gas—producing and developing (DCF-based) (a) 430 430 144 KG D-6 292 292 98 NEC-25 35 35 12 KG D-3 53 53 18 KG D-9 38 38 13 MN D-4 12 12 4Oil—KG-DWN-98/3 (b) 38 38 13Investments other than valued separately 289 289 97Loans & advances to affiliates 71 71 24Retailing 52 80% 42 14SEZ development 35 80% 28 9Capital WIP (book value) 65 100% 65 22Total enterprise value 2,878 966Net debt (232) (78)Implied equity value 3,110 1,043

Notes:(a) We value KG D-6, NEC-25, CBM, KG D-3, KG D-9 and MN D-4 blocks on DCF.(b) 140 mn bbls of recoverable reserves based on gross OOIP of 0.35 bn bbls.(c) Capital WIP includes capex on new petrochemical units.(d) We use 2.981 bn shares (excluding treasury shares) for per share computations.


Reliance Industries Energy


The market is ascribing 4.5X EV/EBITDA multiple to RIL's chemical and refining business Implied EV/EBITDA for RIL's chemical and refining business on FY2012E basis (` bn)

EBITDA for chemical segment 111EBITDA for refining segment 158Total EBITDA for chemical and refining segments 269Market capitalization 2,251Net debt as on March 31, 2012 (24)Total enterprise value (EV) 2,227EV for E&P business 570EV of other businesses (investments, SEZ, retailing) 430Capital WIP (book value) 22EV for chemical and refining business 1,204Implied EV/EBITDA for RIL's chemical and refining business (X) 4.5


Trough-case valuation of Reliance is `890 per share Sum-of-the-parts valuation of Reliance Industries, FY2013E basis (`)

Valuation base (Rs bn) Multiple (X) EV ValuationOther EBITDA Multiple EV/EBITDA (Rs bn) (Rs/share)

Chemicals 114 5.5 624 209Refining & Marketing 174 5.5 956 321Oil and gas—producing (PMT and Yemen) 22 4.0 90 30Gas—KG-DWN-98/3 (a) 227 227 76Oil—KG-DWN-98/3 (b) 38 38 13Investments other than valued separately 289 289 97Loans & advances to affiliates 71 71 24Retailing 52 80% 42 14SEZ development 35 80% 28 9Capital WIP (book value) 65 100% 65 22Total enterprise value 2,431 815Net debt (226) (76)Implied equity value 2,657 891

Notes:(a) We value KG D-6 block based on DCF assuming peak production of 50 mcm/d and no tax exemption.(b) 140 mn bbls of recoverable reserves based on gross OOIP of 0.35 bn bbls.(c) Capital WIP includes capex on new petrochemical units.(d) We use 2.981 bn shares (excluding treasury shares) for per share computations.


Possible triggers in the short term

We discuss possible corporate actions that RIL can pursue in the short term (next 3-6 months) to improve investment sentiment for the stock. Most of these pertain to improved corporate governance. RIL can do little about chemical and refining margins given the global nature of these businesses and a generally weak global economic outlook. Also, the E&P segment is unlikely to provide any positive triggers over this period given that RIL does not have any deep-water drilling rigs currently. KG D-6 gas production will likely continue to languish at around 45-47 mcm/d for the next 12-15 months.



Clarity on use of cash. We would suggest RIL actively look at increasing dividends and/or buying back its shares as a way to shore up investment sentiment for the stock. RIL does not have any meaningful planned capex for now and acquisitions are rarely inexpensive or value-accretive. As we had discussed in our June 14, 2011 report titled The size and success trap, use of cash would be critical for the RIL stock in the medium term. We had discussed four options and the relative merits and de-merits of the options—(1) capex in extant business, (2) capex in new areas, (3) acquisitions and (4) dividends/buy-backs. We model RIL to generate `740 bn of free cash flow in FY2012-14E.

Cancel treasury shares. This would optically increase RIL’s EPS by 9.8% (3,273 outstanding shares versus 2,981 shares without treasury shares). More important, it would remove a potential source of overhang (RIL did sell treasury shares in 2009 and 2010) and remove an unnecessary complexity. RIL does not need to raise shares in the short term (or it would appear for a long time) given its likely large cash free flows.

Simplify company structure. In our view, RIL can simplify its structure by (1) merging several investment subsidiaries with itself, (2) cancelling outstanding treasury shares (discussed above), (3) merging entities of the major shareholder, which are in the same line of business, with RIL and (4) reducing the number of subsidiaries in new segments. We understand the need for subsidiaries in some cases, especially for overseas operations and new businesses. However, several layers of subsidiaries and cross-holdings unnecessarily create confusion in the minds of investors (see Exhibit 5). Also, RIL has interactions with several companies of the major shareholder (see Exhibit 6). RIL does not share the basis of transactions with these entities but discloses the transactions (purchases, sales, investments, loans) as per standard reporting practice. In our view, it would be best to merge these entities with RIL at book value.

Organization structure of Reliance Industries as of March 31, 2011 (%)

Reliance Industries

Gujarat Chemicals Port TerminalReliance Industrial Infrastructure

LimitedReliance Industrial Investments

and Holdings Limited

41.8% 45.4%100%

Mukesh Dhirubhai Ambani Group (MDAG)

0.01%

Treasury shares held by Petroleum Trust

3.7%

Treasury shares held by Reliance Chemicals Limited 1.9% Reliance Polyolefins Pvt. Limited 1.9% Reliance Aromatics and Petrochemicals Pvt. Limited 0.9% Reliance Universal Enterprises Ltd 0.5% Reliance Energy and Project Development Pvt. Limited 0.1%

5.3%

41.1%

Reliance Commercial Dealers Private Limited

50%

RIL's key retail subsidiariesReliance Retail 91% Reliance Fresh 91%Retail Concepts & Services 91%Reliance Dairy Foods Limited 91%Reliance Digital Retail Limited 91%Reliance Hypermart Limited 91%Reliance Wellness Limited 91%Reliance Supply Chain Solutions 91%

RIL's SEZ subsidiariesReliance Jamnagar Infrastructure Limited 100%Reliance Haryana SEZ 93%Reliance Exploration & Production

DMCC

100%

Reliance Ports and Terminals Limited

Reliance Utilities and Power Limited

Reliance Gas Transportation Infrastructure Limited

SEZ private companiesNavi Mumbai SEZ 53%Maha Mumbai SEZ 90%

100%

100%

100%

Source: Company, Kotak Institutional Equities



RIL has large transactions with private companies of the major shareholder Reliance Industries' related-party transactions, March fiscal year-ends, 2007-11 (` bn)

2007 2008 2009 2010 2011Payments madeReliance Gas Transportation Infrastructure Limited — — 0 3 7 Reliance Ports and Terminals Limited 10 12 13 27 26 Reliance Utilities and Power Limited 3 3 3 3 3 Reliance Utilities Private Limited — — 4 7 6 Others 1 1 2 1 1 Total payments 15 17 21 41 43 Loans and advances givenReliance Gas Transportation Infrastructure Limited 20 — — — —Reliance Ports and Terminals Limited 2 — — — —Reliance Utilities and Power Limited — 2 — — —Others — 2 1 1 0 Total loans and advances given 22 3 1 1 0 Loans and advances balancesReliance Gas Transportation Infrastructure Limited 20 20 20 20 20 Reliance Ports and Terminals Limited 11 11 11 11 11 Reliance Utilities and Power Limited 2 2 2 2 2 Others 2 2 2 2 2 Total loans and advances 34 35 34 34 35


Better and consistent disclosures. We have discussed this issue several times in the past and our suggestions are not new.

Disclosures on sales volumes, realizations and margins. We believe the Street would welcome additional disclosures on sales volumes, realizations and margins of key products. RIL does not currently disclose sales volumes of key products; it has never done so historically. It shares production volumes, which is useful, but not as useful as sales volumes given inventory adjustments. Finally, breakdown of revenues by key products (not just by segments, which it mandatorily discloses in line with reporting standards in India) would be more useful in understanding trends and assessing future earnings.

Consistent disclosures on capex. We do not find current information on capex relevant or adequate and would welcome additional disclosures on capex in the ‘normal’ manner. We note that RIL has stopped disclosing quarterly breakdown of capex since 4QFY08. Also, in the FY2011 annual report it has not given breakdown of capex by various segments that it used to provide in the past. Finally, it has started disclosing net capex from 1QFY09 as opposed to actual capex; this has little significance since movement in foreign currency loans arising from fluctuations in the currencies of foreign loans versus the reporting currency is adjusted against the gross block. RIL has reported ‘negative’ capex in certain quarters (see Exhibit 7 that shows volatility in reported quarterly capex).



Volatility in disclosures norms for capex makes the information quite meaningless Disclosed net capex, March fiscal year-ends, 2010-12YTD (` bn)

Notes:(a) Definition of capex is net of forex-related movement and payment of cash to creditors.

4038

0

15

36

(3)

8

20

12

(10)

-

10

20

30

40

50

1QFY10 2QFY10 3QFY10 4QFY10 1QFY11 2QFY11 3QFY11 4QFY11 1QFY12

RIL reported capex

(Rs bn)


More conservative accounting policies. We would advocate adoption of Successful Efforts Method of Accounting for the E&P segment compared to the current Full Cost Method of Accounting. Almost all global E&P companies follow the former. RIL does not have an extensive drilling program currently. Thus, it would be the best time to switch over to SEM, in our view, and align its accounting policies with the prevalent standard. Also, RIL can adopt the standard IAS 21 versus its current practice of recognizing any income or expense arising from exchange difference either on settlement or on translation in the P&L except in the case of FC borrowings used for acquisition of fixed assets, where the amount is adjusted in the carrying cost of such assets.



RIL: Profit model, balance sheet, cash model, March fiscal year-ends, 2007-2014E (` mn)

2007 2008 2009 2010 2011 2012E 2013E 2014EProfit model (Rs mn)Net sales 1,114,927 1,334,430 1,418,475 1,924,610 2,481,700 3,413,935 3,217,268 3,066,170EBITDA 198,462 233,056 233,139 305,807 381,257 358,299 383,120 409,943Other income 4,783 8,953 20,599 24,605 30,517 42,373 47,687 51,238Interest (11,889) (10,774) (17,452) (19,972) (23,276) (24,743) (15,167) (6,692)Depreciation & depletion (48,152) (48,471) (51,953) (104,965) (136,076) (86,558) (90,921) (102,698)Pretax profits 143,205 182,764 184,332 205,474 252,422 289,371 324,719 351,791Extraordinary items 2,000 47,335 — — — — — —Tax (16,574) (26,520) (12,634) (31,118) (43,204) (57,316) (75,993) (84,141)Deferred taxation (9,196) (8,999) (18,605) (12,000) (6,355) (11,342) (3,676) (4,599)Net profits 119,434 194,580 153,093 162,357 202,863 220,714 245,050 263,051Adjusted net profits 117,789 152,605 153,093 162,357 202,863 220,714 245,050 263,051Earnings per share (Rs) 40.5 52.5 50.6 49.6 62.0 67.4 74.9 80.4

Balance sheet (Rs mn)Total equity 673,037 847,853 1,263,730 1,371,706 1,515,403 1,704,932 1,915,331 2,140,267Deferred taxation liability 69,820 78,725 97,263 109,263 115,618 126,960 130,636 135,235Minority interest 33,622 33,622 — — — — — —Total borrowings 332,927 493,072 739,045 624,947 673,967 452,052 231,210 104,891Currrent liabilities 192,305 251,427 357,019 404,148 542,206 558,524 523,312 494,465Total liabilities and equity 1,301,712 1,704,700 2,457,057 2,510,064 2,847,194 2,842,467 2,800,489 2,874,857Cash 18,449 42,823 221,765 134,627 271,349 476,283 462,906 570,986Current assets 286,566 402,720 325,357 489,165 644,070 787,063 745,601 712,534Total fixed assets 899,403 1,081,638 1,693,869 1,653,987 1,555,260 1,202,606 1,215,467 1,214,822Investments 97,294 177,519 216,065 232,286 376,515 376,515 376,515 376,515Deferred expenditure — — — — — — — —Total assets 1,301,712 1,704,700 2,457,057 2,510,064 2,847,194 2,842,467 2,800,489 2,874,858

Free cash flow (Rs mn)Operating cash flow, excl. working capital 164,285 180,718 174,508 222,605 304,310 272,475 288,368 316,248Working capital (13,075) (31,071) (37,983) (53,015) 695 (36,635) 6,250 4,219Capital expenditure (247,274) (239,691) (247,128) (219,427) (123,661) (54,853) (94,887) (104,346)Investments (105,760) (78,953) (10,392) 14,206 (195,439) — — —Other income 4,143 6,132 16,195 22,043 23,316 42,373 47,687 51,238Free cash flow (197,681) (162,865) (104,800) (13,587) 9,220 223,359 247,418 267,359

Ratios (%)Debt/equity 44.8 53.2 54.3 42.2 41.3 24.7 11.3 4.6 Net debt/equity 42.3 48.6 38.0 33.1 24.7 (1.3) (11.3) (20.5) RoAE 20.3 18.9 13.6 11.8 13.1 12.7 12.6 12.1 RoACE 13.9 12.7 10.0 8.6 10.1 10.4 11.2 11.5 Adjusted ROACE 18.8 21.7 17.3 12.3 12.5 14.8 17.9 19.0



Multi-year performance deterioration continues

RCOM’s FY2011 consolidated revenues of Rs224 bn were just 19% higher than FY2008 levels, a 3-year CAGR of just 6% despite the company rolling out its pan-India GSM network and making a few acquisitions on the non-wireless side in the interim. EBITDA in the same timeframe has grown at a CAGR of <2%, that too aided by the IRU accounting change in FY2011. Annualized 1QFY12 EBITDA is almost 20% lower than FY2008 levels. GSM investments and acquisitions have of course impacted the company’s EBIT – FY2011 EBIT was 64% lower than FY2008 levels despite the company having adopted aggressive depreciation policies since. Pre-tax ROCE in FY2011 was just 2%, down from 8% in FY2008.

Net debt continues to go up

RCOM’s net debt at end-FY2011 stood at Rs336 bn, up from Rs247 bn at end-FY2010 and Rs25 bn at end-FY2007. We note that the net debt as per the annual report is higher than the Rs319 bn reported in the company’s 4QFY11 disclosures. This is likely on account of reclassification of buyer’s credit into debt – this is classified as current liability in quarterly reports. Gross debt at end-FY2011 stood at Rs391 bn, of which Rs120 bn was Re-denominated and the balance in foreign currency. We also note that Rs27 bn of capex credit is not included in these debt figures and is classified as current liabilities. Even as capex credit is a normal industry practice, we highlight this as the company has now guided for a low-capex phase – this would mean additional cash flow burden going forward as capex credit declines.

Weak competitive positioning + stretched balance sheet. SELL

We reiterate our SELL rating on RCOM despite the sharp correction in the stock. Low capex (guided FY2012E capex is just 6.7% of estimated revenues), and potential corporate actions to shore up the balance sheet (parent equity dilution, stake sale in subsidiaries) are necessary, but may not be value-accretive. P&L improvement remains critical to long-term balance sheet health – RCOM’s weak competitive positioning across business lines makes this a difficult challenge, in our view. Valuations at 5.6X FY2013E EV/EBITDA is not inexpensive, either.

Reliance Communications (RCOM)

Telecom

FY2011 annual report analysis, more thoughts. RCOM remains fundamentally challenged with a balance sheet saddled with high debt and a P&L that continues to deteriorate despite the company’s aggressive cost-rationalization efforts. Net debt has expanded 3X since FY2008, while EBIT is down 45% - primarily a result of the company’s GSM rollout, which is yet to yield desired revenue/EBITDA upside. We cut our EPS estimates for FY2012-14E by 15-24% and lower our end-FY2013E DCF-based target price to Rs80/share (Rs95 earlier). Reiterate SELL.

Reliance CommunicationsStock data Forecasts/Valuations 2011 2012E 2013E

52-week range (Rs) (high,low) EPS (Rs) 6.3 2.6 5.2Market Cap. (Rs bn) 163.8 EPS growth (%) (71.1) (59.4) 103.2


Price performance (%) 1M 3M 12M EV/EBITDA (X) 6.0 6.4 5.5Absolute (24.4) (9.7) (52.1) ROE (%) 3.2 1.3 2.7Rel. to BSE-30 (16.2) 0.5 (47.5) Div. Yield (%) 0.0 0.0 0.0


189-72

SELL

AUGUST 29, 2011

UPDATE

Coverage view: Cautious

Price (Rs): 77


BSE-30: 16,416

Reliance Communications Telecom


FY2011 annual report – some observations

Accounting changes continued – two key ones –

Change in revenue accounting for long distance IRU sales – the company has now moved to upfront revenue booking versus amortizing sales over the period of the contract earlier. This change had a Rs25.45 bn positive impact on revenues and Rs25.3 bn positive change on EBITDA, while being broadly neutral at the EBIT level. We are surprised that the incremental depreciation on account of this accounting change was equal to (in fact a tad higher than) incremental revenues – one likely inference is that pricing on the company’s LD IRU contracts was not even covering capex recovery charges.

Depreciation policy – RCOM changed the useful life estimate of network assets again, this time increasing it to 18 years. This change had a positive impact of Rs9.5 bn at the PBT level. Adjusted for this, the company’s net income would have been lower by ~30% versus the reported Rs13.5 bn.

Low effective interest cost continues to perplex

Including capitalized interest, RCOM’s net interest expense (excluding forex-related items) in FY2011 was Rs13.7 bn, lower in absolute terms versus FY2010 as well as FY2009 despite the sharp increase in net debt since. Effective interest cost (on ex-FCCB debt) was 4.9%, down from 5.6% in FY2010. In fact, if one were to take out the 11.2% secured non-convertible debentures and associated interest from the equation, the effective interest cost on the remainder of the debt works out to an even lower 4.2%.

Aggressive cost rationalization fails to propel profits

RCOM rationalized costs aggressively in FY2011 – all cost-line items, with the exception of interconnect charges (which are partially regulated), were down in absolute terms yoy. Sharpest decline was in network opex (down 9% yoy), and G&A expenses (again down 9% yoy). Nonetheless, despite the cost rationalization, the company saw a 45% yoy dip in EBIT and 71% yoy dip in PBT.

Tax rates (effective as well as cash) continue to be low

RCOM’s effective tax rate for FY2011 was a low 1% of PBT, aided by current tax write-back. The company received an income tax refund of Rs5.2 bn during the year.

CWIP remained high at Rs182 bn, up from Rs117 bn at end-FY2010. Even excluding the RS86 bn 3G spectrum investments, CWIP would have come down by only Rs21 bn to Rs96 bn

Reliance Infratel financials

Reported revenues of Rs66.7 bn showed a 6% yoy uptick, substantially lower than other towercos. EBITDA margins expanded 530 bps qoq to 66.6%. We note the RITL’s reported EBITDA margins are higher than average industry levels and likely reflect higher-than-market pricing in RITL’s MSA with RCOM. RITL’s net income declined 9% yoy despite the 15%+ yoy growth in EBITDA.

Cut estimates and target price

We cut our FY2012E, FY2013E and FY2014E EPS estimate to Rs2.6 (from Rs3.4), Rs5.2 (from Rs6.4) and Rs8.2 (from Rs9.7), respectively. We note that our estimates, which call for a 13.4% 3-year consol EBITDA CAGR through FY2014E may not be conservative. We in fact see downside risks to our revenue/EBITDA estimates. We also reduce our end-FY2013E DCF-based target price on the company to Rs80/share (from Rs95 earlier), implying 5.8X FY2013E EV/EBITDA (again not conservative).

Telecom Reliance Communications


Exhibit 1: Key changes to RCOM earnings model, FY2012-14E, March fiscal year-ends

FY2012E FY2013E FY2014E FY2012E FY2013E FY2014E FY2012E FY2013E FY2014EConsolidatedRevenues (Rs mn) 223,850 249,707 274,999 223,850 249,707 274,999 - - - EBITDA (Rs mn) 74,295 84,125 95,437 74,295 84,125 95,437 - - - EBIT (Rs mn) 25,394 32,187 40,029 25,511 32,443 40,410 (0.5) (0.8) (0.9) EPS (Rs/share) 2.56 5.20 8.20 3.35 6.38 9.66 (23.5) (18.5) (15.2)

EBITDA margin (%) 33.2 33.7 34.7 33.2 33.7 34.7 0 bps 0 bps 0 bpsCapex (Rs bn) 16 45 52 16 45 52 - - -

Wireless metricsRevenues (Rs mn) 182,400 204,733 227,235 182,400 204,733 227,235 - - - EBITDA (Rs mn) 49,868 57,088 65,574 49,868 57,088 65,574 - - - EBITDA margin (%) 27.3 27.9 28.9 27.3 27.9 28.9 Subs (mn) 163 184 200 163 184 200 - - - Volumes (bn min) 408 443 487 408 443 487 - - - RPM (paise/min) 0.447 0.462 0.467 0.447 0.462 0.467 - - - ARPU (Rs/sub/month) 102 98 98 102 98 98 - - - MOU (min/sub/month) 227 213 211 227 213 211 - - -

Revised Earlier Change (%)


Exhibit 2: Our March 2013 DCF-based forward value for RCOM is Rs80/share

2010 2011 2012E 2013E 2014E 2015E 2016E 2017E 2018E 2019E 2020E 2021E EBITDA 71,852 84,042 74,295 84,125 95,437 105,734 115,737 125,622 137,003 146,474 155,952 165,638 Tax (2,945) (3,011) (1,487) (2,701) (4,148) (5,991) (7,878) (9,912) (12,419) (14,702) (17,123) (19,691) Change in working capital (7,642) (35,330) (22,324) (2,607) (4,455) (3,736) (4,512) (3,959) (3,511) (3,077) (2,846) (2,731) Post-tax operating cash flow 61,265 45,702 50,484 78,816 86,834 96,007 103,346 111,752 121,073 128,695 135,982 143,216 Capex (41,621) (128,441) (11,271) (45,315) (52,431) (58,303) (58,102) (58,377) (59,346) (60,938) (62,919) (65,214) Free cash flow 19,644 (82,740) 39,213 33,501 34,403 37,704 45,245 53,375 61,727 67,756 73,064 78,002

Mar-13 WACC and terminal year assumptionsPV of cash flows 265,009 Terminal growth (%) 3.0 PV of terminal value 218,698 WACC (%) 15.0 EV 483,708 Net debt 313,986 Equity value (Rs mn) 169,722 Equity value (US$ mn) 3,536RCL shares (mn) 2,133 Equity value (Rs/share) 80 Exit FCF multiple (X) 8.6 Exit EBITDA multiple (X) 4.0

Key assumptions (%) 2010 2011 2012E 2013E 2014E 2015E 2016E 2017E 2018E 2019E 2020E 2021E Revenue growth (3.4) 4.3 (0.2) 11.6 10.1 8.3 7.1 6.3 5.6 5.1 4.9 4.7 EBITDA growth (16.5) 17.0 (11.6) 13.2 13.4 10.8 9.5 8.5 9.1 6.9 6.5 6.2 EBITDA margin 33.4 37.5 33.2 33.7 34.7 35.5 36.3 37.1 38.3 38.9 39.5 40.1 Capex/sales 19.4 57.3 5.0 18.1 19.1 19.6 18.2 17.2 16.6 16.2 15.9 15.8 Effective tax rate 8.5 0.8 5.0 6.0 8.0 10.0 12.0 14.0 16.0 18.0 20.0 22.0 ROCE (%) 4.2 3.0 3.4 4.3 5.4 6.4 7.4 8.5 9.7 10.8 11.9 13.0




Exhibit 3: RCOM income statement analysis, March fiscal-year ends, 2008-2011 (Rs mn)

Rs mn FY2008 FY2009 FY2010 FY2011 yoy (%)Revenues 188,274 222,505 214,964 224,304 4 ExpensesInterconnect expenses 28,197 23,817 21,377 26,476 24 License fees 12,386 11,865 11,451 11,572 1 Network costs 22,008 44,163 59,955 54,716 (9) Employee costs 11,875 16,728 15,007 14,757 (2) Selling expenses 22,598 21,208 22,499 21,041 (6) Of which

Commision 4,099 3,503 6,699 7,047 5 Cost of sale of telecom terminals 5,092 2,853 5,033 3,246 (36)

G&A expenses 11,461 18,655 12,830 11,699 (9) Total expenses 108,525 136,435 143,118 140,261 (2) EBITDA 79,749 86,070 71,846 84,043 17 Depreciation and amortization 28,053 36,077 37,465 65,038 74 EBIT 51,696 49,993 34,381 19,005 (45) Financial charges 6,458 10,711 (10,932) 11,328 (204) Financial income 10,455 15,781 932 605 (35) Of which

Income from investments and int income 10,455 2,394 932 605 (35) other financial income - 13,387 - -

Other income 2,404 6,979 6,359 6,773 7 Of which

Profit on sale of investments 1,695 3,278 2,095 3,886 85 Miscallenous income 438 3,536 4,264 2,887 (32)

PBT 58,097 62,042 52,603 15,055 (71) Provision for taxes 2,836 (518) 4,454 118 (97) Of which

Current tax 1,981 328 3,725 (2,804) (175) PAT before exceptional items 55,261 62,560 48,149 14,937 (69) Exceptional items (12,666) 75 375 (121) (132) Minority interest 13,901 2,052 1,193 1,503 26 Share of profit/(loss) of associates 15 (16) 32 99 210 Reported PAT 54,011 60,449 46,550 13,457 (71)


Telecom Reliance Communications


Exhibit 4: Reliance Communication's balance sheet, March fiscal-year ends, 2007-2011 (Rs mn)

FY2007 FY2008 FY2009 FY2010 FY2011FY2011 reported in 4QFY11 disclosures

EquityShare capital 10,223 10,320 10,320 10,320 10,320 10,320 Reserves and surprlus 219,083 279,943 412,483 423,286 394,672 347,198 Equity 229,307 290,263 422,803 433,606 404,992 357,518 Minority interest 56 24,309 6,549 6,584 8,245 8,245 Debt 174,383 258,217 391,623 297,154 390,714 373,757 Deferred tax liability 26 1,028 281 991 3,668 - Current liabilities 114,334 156,213 159,718 147,085 106,018 126,860 Provisions 47,149 44,564 41,096 40,267 33,591 24,901 Total capital 565,254 774,593 1,022,070 925,686 947,227 891,281 AssetsCash 72,006 8,782 16,829 8,185 48,663 53,272 Inventories 4,821 4,059 5,428 5,446 5,172 5,172 Debtors 18,316 27,224 39,618 33,117 39,840 40,017 Other current assets 13,884 23,058 17,714 20,726 20,110 11,460 Loans and advances 22,103 42,695 67,557 54,098 50,863 50,863 Gross block 349,442 463,388 755,101 786,653 820,902 820,902 Less: Depreciation 55,926 89,561 141,144 190,671 273,406 273,406 Net block 293,516 373,826 613,957 595,982 547,496 547,496 Capital work in progress 36,907 149,299 113,096 116,557 181,912 181,912 Goodwill 26,588 35,654 52,215 49,976 47,473 Investments 77,114 109,996 95,656 41,599 5,698 1,089 Total assets 565,254 774,593 1,022,070 925,686 947,227 891,281

Net debt 25,263 139,439 279,138 247,370 336,353 319,396 Net working capital (ex-cash) (102,358) (103,741) (70,497) (73,964) (23,624) (44,249) Capex creditors 21,608 27,287 Net debt + capex creditors 268,978 363,640


Exhibit 5: Sharp decline in cost of debt continues to surprise

Rs mn FY2007 FY2008 FY2009 FY2010 FY2011Foreign currency debt 127,144 174,117 243,075 236,197 270,470

FCCB 66,304 54,932 70,835 64,596 66,965 ex-FCCB FC debt 60,840 119,185 172,240 171,602 203,505

Rupee debt 47,240 84,100 148,547 60,957 120,244 Total debt 174,383 258,217 391,623 297,154 390,714 Ex-FCCB total debt 108,079 203,285 320,787 232,559 323,749 Interest expense (a) 10,327 12,118 15,519 10,163 Interest capitalied 599 3,376 — 3,551 Adjusted interest 10,926 15,494 15,519 13,714 Implied interest rate (%) 7.0 5.9 5.6 4.9

Note:(a) Excluding Fx gains/losses.




Exhibit 6: Reliance Infratel financials

Rs mn FY2008 FY2009 FY2010 FY2011 Change (yoy)Revenues 14,576 49,340 62,767 66,738 6.3 Operating costs (7,821) (15,538) (24,275) (22,306) (8.1) EBITDA 6,756 33,802 38,492 44,432 15.4 EBITDA margin (%) 46.3 68.5 61.3 66.6

Net profit/(loss) 3,206 16,857 9,056 8,263 (8.8) Total assets 117,205 191,981 164,875 192,906 Shareholder's equity 51,107 40,368 51,642 72,462 # of towers 30,295 48,000 49,300 50,000


Exhibit 7: RCOM's condensed financial statements, March year-ends, 2010-2017E

2010 2011 2012E 2013E 2014E 2015E 2016E 2017EProfit model (Rs mn)Revenue 214,964 224,304 223,850 249,707 274,999 297,782 318,962 338,966EBITDA 71,852 84,042 74,295 84,125 95,437 105,734 115,737 125,622EBIT 34,387 19,004 25,394 32,187 40,029 47,900 55,507 63,227Net interest income / (expense) 18,222 (3,950) (17,961) (18,680) (19,291) (17,943) (16,117) (13,668)Tax (4,454) (118) (372) (810) (1,659) (2,996) (4,727) (6,938)Net profit 46,899 13,335 5,459 11,095 17,477 25,359 33,061 41,019Fully diluted EPS 21.8 6.3 2.6 5.2 8.2 11.9 15.5 19.2 Balance sheet (Rs mn)Cash 8,185 48,663 46,030 37,742 30,343 23,099 15,378 18,058Other current assets 113,388 115,984 115,791 126,843 137,653 147,391 156,444 164,995Fixed assets 712,539 729,409 691,779 685,157 682,180 682,649 680,521 676,503Other current liabilities 187,351 139,608 117,091 125,536 131,891 137,894 142,434 147,026Shareholders funds (incl. minorities) 440,190 413,236 420,297 432,994 452,073 479,034 513,697 556,318Net (debt)/ cash (288,969) (342,050) (319,684) (302,972) (285,371) (262,614) (230,336) (187,656)Free cash flow (Rs mn)EBITDA 71,852 84,042 74,295 84,125 95,437 105,734 115,737 125,622 Change in working capital (7,642) (35,330) (22,324) (2,607) (4,455) (3,736) (4,512) (3,959)Cash tax (paid) (3,725) (118) (372) (810) (1,659) (2,996) (4,727) (6,938)Capex on PP&E and intangibles (41,621) (128,441) (11,271) (45,315) (52,431) (58,303) (58,102) (58,377)Free cash flow 29,422 (93,350) 19,526 14,199 15,558 21,154 31,124 41,677 Ratios (%)EBITDA margin 33.4 37.5 33.2 33.7 34.7 35.5 36.3 37.1 RoAE 11.0 3.2 1.3 2.7 4.1 5.6 6.9 7.9ROAE (excl. cash and int. income) 9.6 1.6 0.8 2.3 3.9 5.6 6.9 8.0 RoACE 5.0 4.0 3.5 4.4 5.4 6.4 7.4 8.4ROACE (excl. cash and int. income) 4.2 3.0 3.4 4.3 5.4 6.4 7.4 8.5 Net debt/EBITDA (X) 4.0 4.1 4.3 3.6 3.0 2.5 2.0 1.5Net debt/equity (X) 0.7 0.8 0.8 0.7 0.6 0.5 0.4 0.3



Advertising cyclicality and ratings volatility play spoilsport in the near term

The Zee stock has corrected lately (13% decline in the past 1 month, 3% underperformance versus the BSE-30 Index) largely on account of two factors: (1) Weak advertising revenue market in India currently (FMCG advertising) and (2) weak ratings in the flagship Hindi GE channel, Zee TV. The former is a characteristic feature of advertising spends (cyclicality) led by rising interest rate and likely weak economy in FY2012E and expected to reverse in FY2013E. The latter is driven by inter-segment competition led by Sony TV (volatility); weak ratings performance will hurt but Zee may also revamp its underperforming content. Our revised FY2012E-13E EPS estimates at Rs6.2 (Rs6.7 previously) and Rs7.7 (Rs8.2) factor in ~3% advertising growth in FY2012E.

Industry and operational drivers remain intact; valuations remain attractive

Zee continues to benefit from robust long-term industry and operational drivers: (1) Advertising growth prospects (high competitive intensity in upstream advertising categories such as FMCG, Auto and BFSI; robust growth in SME advertising), (2) structural impact of advertising overhangs (Colors, IPL) behind us, (3) continued robust growth in DTH segment in India incrementally adding to subscription revenues of large Zee bouquet and (4) Zee-Star channel distribution JV likely to deliver improved subscription revenues from cable. The acquisition of regional channels has reduced Zee Network’s dependence on Zee TV channel. Finally, mandatory digitization envisaged by the government of India (timing and implementation are uncertain) could be significantly value-accretive. Reiterate BUY with FY2013E TP of Rs160 (Rs180 previously).

FY2011 annual report provides comfort on cash flows; other clarifications

Exhibit 15 presents the summary of Zee’s FY2011 annual report. We highlight robust free cash flow generation of Rs4.8 bn (Rs4.9/share) in FY2011 (including acquisition of incremental 45% stake in Ten Sports), which is a characteristic feature of a large, well-diversified broadcasting bouquet (such as Zee). With the reduction in ICDs to sister companies such as Dish TV and WWIL between FY2009 and FY2011, the net cash balance at end-FY2011 stood at Rs12.7 bn (Rs3.9 bn cash and equivalents + Rs6.3 bn liquid investments + Rs2.5 bn loans to third parties), to be partly deployed in dividend payout (Rs2.3 bn) and share buyback (Rs7.0 bn) in FY2012E. The Zee stock is trading at 15X FY2013E EPS for 20% earnings CAGR between FY2012E and FY2014E.

Zee Entertainment Enterprises (Z)

Media

FY2011 annual report analysis . The Zee stock has corrected lately on account of (1) weak advertising revenue market in India (cyclicality) and (2) weak ratings in flagship channel, Zee TV (volatility led by uptick in Sony TV). Our investment rational is driven by robust free cash flow generation (Rs4.8 bn and Rs4.9/share in FY2011, net cash of Rs12.7 bn and Rs13.0/share) in the large, well-diversified Zee bouquet. The Zee stock trades at 15X FY2013E EPS for 20% earnings CAGR between FY2012E and FY2014E (20X FY2011 EV/FCFF). Reiterate BUY with FY2013E DCF-based TP of Rs160 (Rs180 previously).

Zee Entertainment EnterprisesStock data Forecasts/Valuations 2011 2012E 2013E

52-week range (Rs) (high,low) EPS (Rs) 5.8 6.2 7.7Market Cap. (Rs bn) 112.3 EPS growth (%) 10.0 6.4 23.3


Price performance (%) 1M 3M 12M EV/EBITDA (X) 13.1 12.0 9.5Absolute (12.8) (17.3) (21.8) ROE (%) 14.2 14.3 16.9Rel. to BSE-30 (3.3) (7.9) (14.3) Div. Yield (%) 1.2 1.1 1.4


155-106

BUY

AUGUST 30, 2011

UPDATE

Coverage view: Neutral

Price (Rs): 115


BSE-30: 16,416

Zee Entertainment Enterprises Media


Summary financials and valuations of Zee and Sun TV, March fiscal year-ends

Financials (Rs bn) Valuations (X)2010 2011 2012E 2013E 2010 2011 2012E 2013E

Zee consolidatedRevenues 22.0 29.5 29.4 34.4 EBITDA 6.1 7.6 8.2 10.3 16.3 13.2 12.2 9.7 EPS (Rs/share) 5.3 5.8 6.2 7.7 21.8 19.8 18.5 15.0 Sports businessRevenues 3.2 4.4 2.6 3.2 EBITDA (0.6) (2.1) (1.1) (0.8) R-GECs businessRevenues 1.1 5.3 5.8 6.8 EBITDA 0.3 1.8 1.8 2.3 Hindi-rest businessRevenues 17.8 19.8 21.0 24.3 EBITDA 6.4 7.9 7.5 8.8 Zee core businessRevenues 18.8 25.1 26.8 31.2 EBITDA 6.7 9.7 9.3 11.1 14.9 10.3 10.7 9.0 EPS (Rs/share) 5.8 7.4 7.1 8.2 19.9 15.5 16.2 14.0 Sun TV consolidatedRevenues 14.5 20.1 21.4 25.1 EBIT 7.7 11.0 12.1 14.2 14.4 10.1 9.2 7.8 EPS (Rs/share) 13.2 19.6 21.6 25.4 22.8 15.3 14.0 11.8

Notes:(a) Zee's FY2010 financials include only one quarter (4QFY10) of R-GEC financials.

Source: Company data, Kotak Institutional Equities estimates

12-month forward P/E trading band for Zee TV stock (X)

5

15

25

35

45

Aug-01 Aug-02 Aug-03 Aug-04 Aug-05 Aug-06 Aug-07 Aug-08 Aug-09 Aug-10 Aug-11

Source: Factset consensus, Kotak Institutional Equities

Near-term ratings volatility

Contrary to our expectation of sustained 220-230 GRPs post-IPL (1QFY12), Zee TV ratings performance has been quite volatile (~200 GRPs in 2QFY12). The sharp uptick in ratings of Sony TV led first by (1) improved performance of its fiction slate after a gap of 4 years and thereafter by (2) robust performance of Season 5 of the Indian edition of ‘Who wants to be a Millionaire’. Sony TV has been successful in transitioning its IPL viewership (on its sister channel SET MAX) to its slate of fiction and non-fiction programs, becoming the runners-up channel (ahead of Colors and Zee TV). This has capped gains for other Hindi GE channels post-IPL, including Zee TV; additionally, Zee TV’s fiction content in some slots (6.30-7.30PM, 10.30-11PM) has been underperforming (<1.0 TRPs). However, the robust performance of Zee regional channels may help negate the impact somewhat.

Media Zee Entertainment Enterprises


Primetime GRPs of key Hindi GE channels (%)

2QFY11 3QFY11 4QFY11 1QFY12 2QFY12 chg (%)Colors 167 169 163 132 149 (11) Imagine TV 42 51 45 36 43 2 SAB 59 64 72 61 62 5 Sony TV 89 114 86 63 103 16 Star Plus 182 211 176 150 164 (10) Zee TV 154 131 150 123 122 (20) Total 694 740 691 565 643 (7)

Source: TAM Media Research, Kotak Institutional Equities

24-hour GRPs of key Hindi GE channels (%)

2QFY11 3QFY11 4QFY11 1QFY12 2QFY12 chg (%)Colors 286 274 257 240 256 (11) Imagine TV 83 94 80 71 79 (5) SAB 111 127 140 136 128 15 Sony TV 182 196 160 151 194 6 Star Plus 358 370 322 299 310 (13) Zee TV 240 200 220 198 198 (17) Total 1,260 1,261 1,181 1,095 1,165 (8)


24-hour GRPs of key Marathi GE channels (%)

2QFY11 3QFY11 4QFY11 1QFY12 2QFY12 chg (%)DD Marathi 31 26 25 21 28 (13) ETV Marathi 161 161 167 179 214 33 Mi Marathi 39 35 40 32 48 24 Star Pravah 103 112 129 160 219 113 Zee Marathi 228 210 221 192 192 (16) Zee Talkies 61 70 77 76 80 31 Total 622 614 659 659 780 25


24-hour GRPs of key Bengali GE channels (%)

2QFY11 3QFY11 4QFY11 1QFY12 2QFY12 chg (%)Akash Bangla 61 52 41 35 35 (42) ETV Bangla 174 181 173 143 155 (11) Rupashi Bangla 88 75 60 57 61 (30) Sony Aath 56 63 55 48 61 9 Star Jalsha 436 430 452 427 410 (6) Zee Bangla 263 381 372 314 370 41 Total 1,078 1,182 1,153 1,025 1,093 1




24-hour GRPs of key Telugu GE channels (%)

2QFY11 3QFY11 4QFY11 1QFY12 2QFY12 chg (%)Eenadu TV 353 380 366 357 378 7 Gemini Movies 386 367 329 298 277 (28) Gemini TV 799 853 794 758 771 (4) Maa Movies - - 70 124 132 Maa Telugu 343 336 301 387 412 20 Zee Telugu 311 346 344 326 342 10 Total 2,192 2,281 2,204 2,250 2,312 5


24-hour GRPs of key Kannada GE channels (%)

2QFY11 3QFY11 4QFY11 1QFY12 2QFY12 chg (%)ETV Kannada 214 205 209 212 215 1 Kasturi 93 111 100 91 97 5 Suvarna 291 314 266 250 306 5 Udaya Movies 239 228 230 215 203 (15) Udaya TV 535 534 537 582 607 14 Zee Kannada 157 174 222 221 253 61 Total 1,529 1,566 1,564 1,571 1,681 10


Advertising revenues generated by IPL across various seasons

2008 2009 2010 2011E CommentsNumber of matches (#) 59 59 60 74 Increase of two teams in Season 4 (CY2011E)Inventory per match (secs) 2,000 2,400 2,400 2,400 Increase due to extra breaks in Season 2 (CY2009)Total inventory ('000 spots) 11.8 14.2 14.4 17.8 One slot is equivalent to 10 secondsPre-sold inventory (%) 90 85 85 85 IPL was an unknown property in Season 1 (CY2008)Pre-sold ad rate (Rs '000/spot) 150 300 350 375 Moderate increase in Season 4 (CY2011E)Spot-buy inventory (%) 10 15 15 15 Spot inventory premium (X) 4.0 3.0 3.0 2.4 IPL was an unknown property in Season 1 (CY2008)Spot-buy ad rate (Rs '000/spot) 600 900 1,050 900 Advertising revenue (Rs bn) 2.3 5.5 6.6 8.1 C&S advertising spend (Rs bn) 83 88 103 118 FICCI-KPMG 2010-11 reportsIPL/C&S advertising (%) 2.8 6.3 6.4 6.8

Source: Industry data, Kotak Institutional Equities estimates

Trend in average all-India ratings of IPL matches (%)

4.7

4.04.5

3.4

-

2.0

4.0

6.0

Season1 Season 2 Season 3 Season 4


Trend in cumulative all-India ratings of IPL matches (%)

271

231

272248

-

100

200

300

Season1 Season 2 Season 3 Season 4




Trend of subscribers across distribution platforms, calendar year-ends, 2008-2015E (mn)

70 69 68 67 66 64 60 56

2 4 5 7 9 14 20 2910 16 28 38 48 56 6471

-

50

100

150

200

2008 2009 2010 2011E 2012E 2013E 2014E 2015E

Analog cable Digital cable Direct-to-Home (DTH)

Source: FICCI-KPMG 2010-11 reports, Kotak Institutional Equities

Estimated benefit of JV for Zee, March fiscal year-ends (Rs mn)

2013E Sensitivity (%)2011 2012E 2013E Subs (mn) ARPU (Rs) +5% +10% +15%

Subscription revenuesDomestic DTH 3.3 4.6 6.0 26.0 19.2 4.6 4.6 4.6 Domestic cable 3.9 4.0 4.4 40.5 8.2 4.6 4.8 5.1 Overseas 4.1 4.1 4.1 4.1 4.1 4.1 Total subscription 11.3 12.7 14.5 13.3 13.5 13.8 Carriage costsBusiness promotion (1.5) (1.5) (1.5) (1.5) (1.5) (1.5) FinancialsEBITDA 7.6 8.2 10.3 10.5 10.7 11.0 Upside (%) 2.1 4.3 6.4


Breakdown of Zee's subscription revenues, March fiscal year-ends, 2011-15E (mn)

2015E2011 Base Potential

Analog cableSubscription revenues 3,880 5,819 - Subscriber base (mn) 40 40 - Revenue per sub (Rs) 8 12 NAAddressable digital - cable or DTHSubscription revenues (Rs m 3,302 8,139 17,440 Subscriber base (mn) 14 35 75 Revenue per sub (Rs) 20 19 19

Total subsciption revenues 7,182 13,958 17,440

Digital/analog (X) 2.4 1.6 1.6 Potential upside (%) 25

Notes:(a) Assuming 50% of subscribers take Zee's bouquet of channels.

Source: Industry, Kotak Institutional Equities estimates



FY2011 annual report analysis

Annual report analysis of Zee, March fiscal year-ends, 2009-11 (Rs mn)

2009 2010 2011 CommentsIncome statement Advertising 10,593 10,670 17,010 Subscription 9,038 9,869 11,259 Other operating 2,143 1,459 1,166 Education business demerger effective FY2011Total revenues 21,773 21,998 29,436 Zee News regional GECs merger effective 4QFY10 Operational (9,810) (9,452) (14,369) Employees (2,031) (1,963) (2,738) Overheads (4,452) (4,448) (4,762) Total expenses (16,293) (15,863) (21,870) EBITDA 5,480 6,135 7,566 Interest (net) 683 889 748 Foreign exchange losses in FY2009 D&A expenses (310) (285) (289) Extraordinaries 949 1,638 1,039 Acquisition of 9X channel in FY2010, One-off sports income in FY2011 Taxation (1,633) (2,210) (2,813) Minority interest (98) 179 118 Reported PAT 5,072 6,344 6,370 Adjusted PAT 4,387 5,244 5,695 EPS (Rs/share) 5.0 5.8 5.8 Equity dilution on Zee News regional GECs merger

Balance sheet Share capital 434 489 978 Equity dilution on Zee News regional GECs merger Reserves and surplus 33,561 37,811 29,970 Total equity 33,995 38,300 30,948 Total debt 5,757 1,195 17 Sundry creditors 3,250 4,376 4,435 Other liabilities 2,553 3,465 3,366 Current liabilities 5,803 7,840 7,801 Total liabilities 45,555 47,335 38,765 Cash equivalents 1,926 5,865 3,858 Inventory 4,576 4,713 5,396 Sundry debtors 6,437 7,488 8,955 Zee News regional GECs merger effective 4QFY10 Other assets 14,087 6,325 4,818 Large loans and advances to sister companies in FY2009Current assets 27,026 24,390 23,026 Goodwill 15,183 16,379 6,039 Amalgamation of subsidiaries in FY2011Net fixed assets 2,240 2,100 2,026 Capital WIP 669 1,109 400 Investments 1,271 3,203 6,964 Cash accumulation over FY2009-11Deferred tax assets 113 133 192 Minority interest (948) 22 119 Total assets 45,555 47,335 38,765

Cash flow statementProfits before tax and exceptional items 5,403 6,738 8,922 D&A expenses 310 285 289 Interest (net) (863) (793) (658) Extraordinaries 1,745 (1,251) (1,234) Including provisions for doubtful debts and advances Tax paid (757) (1,355) (2,478) Working capital changes (4,837) 3,443 886 Reduction in ICDs given to sister companies, others in FY2010-11Operating cash flow 1,002 7,067 5,727 Capital expenditure (594) (629) (389) Large capex in FY2009-10 precludes another cycle for 3-4 years Sale/(Acquisition) of assets (976) (1,356) (563) Acquisition of incremental 45% stake in Ten Sports in FY2010-11Free cash flow (569) 5,083 4,774 FCF (Rs/share) (0.7) 5.7 4.9 FCF and EPS similar as capex cycle is largely completedFCF/EPS (%) 97 84

Source: Company data, Kotak Institutional Equities



Zee has acquired the Zee Tamil channel. We await clarity from the company on the timing and consideration for the same. Though the acquisition is not material (<1% contribution to revenues and EBITDA, in our estimate), the lack of disclosure is an area of concern. We have previously discussed the drag on Zee stock given varied governance concerns (see out note “Two divergent views on ZEEL” dated May 14, 2009).

However, Zee has also begun an effort to rationalize its complex holding structure and consolidate businesses carried out by its overseas subsidiaries (sports and overseas distribution of Zee channels), which is more material in our view. Zee has reduced its number of subsidiaries to 19 from 25 in FY2011 and the company expects the process to continue. The existence of the overseas subsidiaries was on account of legacy issues with up-linking channels from India, which have been resolved.

ZES Mauritius and ZES Entertainment Studios amalgamated with ZES Holdings, their 100% holding company. ZES Mauritius divested its entire stake in Zee Motion Pictures, its Indian subsidiary. Finally, ZES Holdings was merged with Zee standalone. We note that these entities were part of the film production and distribution venture of Zee, which did not take off.

Asia Business Broadcasting (ABBML) is amalgamated with its holding company Asia Today Limited (ATL). Finally, Zee Multimedia Worldwide (ZMWL) has been amalgamated with Zee standalone. The amalgamation of ZES, ZMWL and ABBNL has resulted in adjustment of Rs10.9 bn of goodwill arising on consolidation being adjusted against the reserves (non-cash transaction).

In addition, Zee has in-principle approved acquisition of the balance 5% shareholding in Taj TV Mauritius from the original promoters, thus making Taj TV business (Ten Sports) a 100% (step-down) subsidiary of the company.

The company has also clarified Rs5.7 bn of sports inventories (cricket rights over next 2-3 years) in Zee standalone (result of amalgamation of ZES and ZMWL). The company has bought the rights from its subsidiaries for Ten Cricket channel, which was launched in Zee standalone. We note that there are no cash payment at the consolidated level for sports rights (some amount in bank guarantee; the cash payment is made just before the tournament begins).

The instances of related party transactions have declined in general, nearly completing the process that began in FY2010. The sundry debtors, sundry creditors and loans and advances decline. Corporate guarantees for sister companies Dish TV and WWIL remain (declined to Rs4.1 bn from Rs4.5 bn in FY2010).

The working capital metrics were largely under control: (1) Sundry debtors increased to 110 days (FY2011 revenues adjusted for Rs700 mn of one-off sports revenue) from 108 days (FY2010 revenues adjusted for 3 quarters of regional GEC operation). (2) However, content inventories declined to 89 days from 95 days. (3) Other current assets (net of Rs2.5 bn of liquid loans and advances) declined to Rs2.3 bn from Rs5bn. (4) Sundry creditors remained unchanged at Rs4.4 bn.

The company has also clarified on the variance in audited and unaudited financials (sundry debtors declined to Rs9.0 bn from Rs9.8 bn, loans and advances to Rs4.8 bn from Rs5.2 bn, liabilities to Rs5.3 bn from Rs6.1 bn and cash increased to Rs3.9 bn from Rs3.2 bn): (1) Consolidation of subsidiaries and (2) re-grouping in certain lines items (in-transit checks from debtors to cash).



Estimated consolidated financials of ZEEL + ZEEN R-GECs, March fiscal year-ends, 2009-20E (Rs mn)

Actuals KIE estimates2009 2010 2011 2012E 2013E 2014E 2015E 2016E 2017E 2018E 2019E 2020E

ZEEL + ZEEN R-GECsTotal revenues 21,773 21,998 29,510 29,416 34,405 39,660 44,664 49,481 54,896 60,364 66,405 73,102 --Advertising revenues 10,593 10,670 17,081 15,959 19,007 22,337 25,609 29,005 32,900 37,253 42,190 47,794 --Subscription revenues 9,038 9,869 11,361 12,737 14,530 16,392 18,058 19,428 20,895 21,956 23,003 24,036 Operating income 5,480 6,135 7,604 8,203 10,342 12,956 14,828 16,661 19,003 21,196 23,666 26,150 Margin (%) 25.2 27.9 25.8 27.9 30.1 32.7 33.2 33.7 34.6 35.1 35.6 35.8 --Other income 1,572 1,220 836 1,092 1,129 1,077 1,119 1,183 1,218 1,186 1,089 921 --Interest expense (889) (331) (102) (47) (47) (47) (47) (47) (47) (47) (47) (47) --Depreciation (310) (285) (264) (284) (324) (333) (351) (347) (341) (328) (357) (387) Profit before tax 5,853 6,738 8,074 8,964 11,100 13,653 15,549 17,450 19,832 22,006 24,350 26,638 --Tax expense (1,633) (2,210) (2,825) (2,878) (3,569) (4,393) (5,007) (5,606) (6,365) (7,042) (7,802) (8,531) --Minority interest (98) 195 116 (3) (28) (53) (70) (72) (87) (85) (92) (87) --Extraordinary items 949 1,637 1,004 — — — — — — — — —Net income 5,072 6,361 6,369 6,083 7,503 9,207 10,471 11,772 13,381 14,880 16,456 18,020 Adj. net income 4,351 5,249 5,677 6,083 7,503 9,207 10,471 11,772 13,381 14,880 16,456 18,020 Adj. EPS (Rs) 5.0 5.9 5.8 6.2 7.7 9.4 10.7 12.0 13.7 15.2 16.8 18.4



Consolidated D/E at 0.4X; close to peak for existing properties under construction

Phoenix’s consolidated debt has increased to Rs7.4 bn from Rs3.5 bn as of end-FY2010 led by drawing down of debt in under-construction projects – Pune market city, Shangri La, and Phoenix United, Lucknow (as part of BARE). Consolidated D/E has increased to 0.4X from 0.2X yoy and we expect it to be close to peak as Shangri La is the only significant project for which Phoenix would still need to draw down debt. At the parent company level, PHNX has repaid Rs1 bn of term loans and is now net cash.

Execution, though with delays, was the highlight of FY2011

In FY2011, PHNX has (1) increased equity stakes in the Bangalore and Pune market cities, (2) launched Phoenix United, Lucknow (0.36 mn sq. ft mall) and (3) launched commercial property for sale in Kurla and Pune market cities. We find launch of market cities delayed by an average of 2-3 quarters and expect the launch of the Kurla and Bangalore market cities in FY2012 post the Pune launch in 1QFY12.

HSP and Palladium remain the key revenue-generating assets

FY2011 was the first full year of operations for Palladium and annual footfalls increased 53% yoy to 15.1 bn while trade volumes are up 80% to Rs7.8 bn even as per sq. ft average trade increased 12% yoy in FY2011. Standalone revenues increased 52% yoy and, though have come down as a % of consolidated revenues from 94% to 84%, still remain the pre-dominant revenue driver.

We retain our BUY rating; other market cities openings and residential launches are key triggers

We believe (1) reducing execution risk and revenue visibility as the three malls get operational over the next two quarters and (2) potential residential launches (Bangalore and Chennai over FY2012) of at least 0.5 mn sq. ft could act as potential triggers. The company has soft launched some residential areas in its Chennai market city and initial response has been encouraging. Key risks include further delays in launches and an increase in cap rates with increase in interest rates.

Phoenix Mills (PHNX)

Property

Execution focus. PHNX’s annual report analysis reveals (1) consolidated debt draw down close to peak with D/E at 0.4X and (2) focus on execution (Pune launch, property sales at Mumbai, Pune and Chennai) with minimal addition to planned development. Key to monitor would be (1) performance of the recently launched Pune market city and (2) launch plans for Bangalore and Chennai. We tweak estimates and retain our BUY rating with a target price of Rs300 (unchanged) at par with our March 2013 NAV.

Phoenix MillsStock data Forecasts/Valuations 2011 2012E 2013E

52-week range (Rs) (high,low) EPS (Rs) 6.3 7.4 10.7Market Cap. (Rs bn) 29.4 EPS growth (%) 53.0 17.2 44.1


Price performance (%) 1M 3M 12M EV/EBITDA (X) 23.7 19.8 14.8Absolute (4.3) 10.2 (14.9) ROE (%) 5.8 6.6 8.9Rel. to BSE-30 6.1 22.6 (6.7) Div. Yield (%) 0.9 1.0 1.0


270-160

BUY

AUGUST 30, 2011

UPDATE

Coverage view: Cautious

Price (Rs): 203


BSE-30: 16,416

QUICK NUMBERS

• Annual footfalls of 15.1 bn at HSP and Palladium

• Consolidated D/E increases to 0.4 at end-FY2011 from 0.2 at end-FY2010

Phoenix Mills Property


Consolidated debt drawdown now close to peak

Phoenix’s consolidated debt has increased to Rs7.4 bn from Rs3.5 bn as of end-FY2010 led by drawing down of debt in under-construction projects – Pune market city, Shangri La, and Phoenix United, Lucknow (as part of BARE). Consolidated D/E has increased to 0.4X from 0.2X. However, debt for projects where Phoenix is not a majority holder (Kurla market city, Bangalore East and Chennai projects) is not included in the above as these entities are not consolidated – including these total debt would be in the range of Rs20 bn as Shangri La is the only significant project for which Phoenix would still need to draw down debt.

At the parent company level, PHNX has repaid Rs1 bn of term loans and is now net cash.

Consolidated net debt of Rs7.4 bn at end-FY2011 Standalone and consolidated net-debt, FY2007-FY2011 (Rs mn)

(4,000)

(2,000)

-

2,000

4,000

6,000

8,000

FY2007 FY2008 FY2009 FY2010 FY2011

Standalone Consolidated


Consolidated net-D/E of 0.4X at end-FY2011 Standalone and consolidated net-D/E, FY2008-FY2011

(0.20)

(0.10)

-

0.10

0.20

0.30

0.40

0.50

FY2008 FY2009 FY2010 FY2011

Net-D/E (standalone) Net-D/E (consolidated) Net-D/E (consolidated) (excl. Minority Interest)


Pune Market City launch signifies first step in portfolio expansion

The 1.2 mn sq. ft has had over 110 stores already opened out of a total of 220; the mall saw footfalls of 90,000 in July 2011 post its soft-launch on June 28, 2011.

PHNX also launched commercial property of 0.26 mn sq. ft (Rs1,500 mn potential value) for sale in September 2010 with 70% already sold and Rs170 mn has been recognized as revenues.

PHNX has 2.1 mn sq. ft of operational assets Operational assets, as of end-FY2011

Ownership Area Occupancy/Leased

(%) (mn sq. ft) (%) Licenses

High Street Phoenix Mumbai 100 0.6 90 125

Palladium Mumbai 100 0.3 95 90

Market City Pune Pune 59 1.2 85 220


Property Phoenix Mills


Three properties launched by PHNX for sale till date For sale properties launched, as of end-1QFY12

Area Sold (end-1QFY12) Expected revenue

For sale properties (mn sq. ft) (%) (Rs mn)

Kurla Market City - Ph 1 Commercial 0.25 70 2,350

Pune Market City Commercial and Retail 0.26 70 1,500

Chennai, Velachery - Ph 1 Residential 0.25 25 1,750

Total 5,600


Launch of market city has been delayed by 2-3 quarters Indicated launch dates in FY2010 and FY2011 annual reports versus KIE estimates

FY2010 AR FY2011 AR KIE estimate

Market cities

Kurla Market City 4QFY11 3QFY12 3QFY12

Bengaluru Market City 4QFY11 Sep-11 3QFY12

Bengaluru Residential (part of Market City) FY2012 FY2012 FY2012-13

Chennai Market City 1QFY12 4QFY12 4QFY12

Chennai Residential (part of Market City) FY2012 FY2012 FY2012-13

Residentail projects other than those in market cities

Chennai Residential in Velachery FY2012 FY2012 FY2012-13

Bengaluru Residential in Malleswaram FY2012 FY2012 FY2012-13

Hospitality

Shangri-la 1QFY12 3QFY12 3QFY12

Marriott, Mumbai FY2013 FY2013-14 FY2014

Courtyard by Marriott, Agra FY2013 FY2013-14 FY2014

Pune Hotel FY2013 FY2013-14 FY2014

Chennai Hotel FY2013 FY2013-14 FY2014

Indicated launch dates


FY2011 marked an increase in stakes across market city projects

In FY2011, PHNX has increased stakes in (1) Pune Market City to 58.5% from 50.6% (consideration Rs250 mn), and (2) Bangalore Market City to 46.5% from 28.1% by extra subscription of rights issue (Rs190 mn) and a stake purchase (Rs250 mn) from another shareholder in 1QFY12.



PHNX increased stakes in Pune and Bengaluru Market Cities Stake changes in Market Cities and residential projects

SPV FY2010 FY2011 Comments

Market cities

Kurla Market City Offbeat Developers 24.3 24.3

Pune Market City Vamona Developers 50.6 58.5 Purchase of shares from Butala Farm Lands Pvt. Ltd

Bengaluru Market City Island Star 28.1 46.5 Purchase of shares from another shareholder + rights issue

Bengaluru Residential (part of Market City) Island Star 28.1 46.5 Purchase of shares from another shareholder + rights issue

Chennai Market City Classic Mall 31.1 31.1

Chennai Residential (part of Market City) Classic Mall 31.1 31.1

Residentail projects other than those in market cities

Chennai Residential in Velachery Classic Mall 34.0 34.0

Bengaluru Residential in Malleswaram Palladium/Platinum construction 63.0 70.0

PHNX stake (%)


HSP and Palladium remain the key revenue-generating assets

FY2011 was the first full year of operations for Palladium and annual footfalls increased 53% yoy to 15.1 bn while trade volumes are up 80% to Rs7.8 bn even as per sq. ft average trade increased 12% yoy in FY2011. Standalone revenues increased 52% yoy and, though have come down as a % of consolidated revenues from 94% to 84%, still remain the pre-dominant revenue driver.

Footfalls grew 53% in HSP and Palladium (FY2011/FY2010) Footfalls in HSP and Palladium, April 2009 – March 2011

-

200

400

600

800

1,000

1,200

1,400

1,600

Apr

-09

May

-09

Jun-

09

Jul-0

9

Aug

-09

Sep-

09

Oct

-09

Nov

-09

Dec

-09

Jan-

10

Feb-

10

Mar

-10

Apr

-10

May

-10

Jun-

10

Jul-1

0

Aug

-10

Sep-

10

Oct

-10

Nov

-10

Dec

-10

Jan-

11

Feb-

11

Mar

-11

Footfall in ('000s) - HSP and Palladium


Fixed asset addition driven by Shangri La, Lucknow and Pune projects

While increase in gross block was driven largely by launch of the Lucknow Mall (as part of BARE), CWIP increased to Rs11.2 bn due to the Pune project (which was launched post FY2011 and hence will move to gross block in FY2012) and Shangri La which combined would be Rs8-8.5 bn.



Gross block increase in FY2011 led by Lucknow mall getting commercially launched Gross block, CWIP and fixed assets, 2007-2011, March fiscal year-ends (Rs mn)

2007 2008 2009 2010 2011

Standalone

Gross block 1,575 1,629 1,997 5,059 5,253

CWIP 970 1,782 3,161 882 817

Gross fixed assets 2,544 3,411 5,158 5,941 6,071

Consolidated

Gross block 1,575 3,689 4,881 7,955 8,880

CWIP 1,074 5,006 9,004 9,137 11,245

Gross fixed assets 2,649 8,695 13,885 17,092 20,125


Interest cost has increased to 11.5% (assuming average of FY2010-FY2011 debt) though we would assume it would likely be higher given (1) increase in interest rates in 2HFY11 and (2) likely higher draw downs in 2HFY11.

Average interest cost of 11.5% in FY2011 Interest expensed, interest paid and interest cost, 2009-2011, March fiscal year-ends

2009 2010 2011

Interest expensed in P&L (Rs mn)

Standalone 49 86 86

Consolidated 55 86 228

Interest paid (Rs mn)

Standalone 228 188 86

Consolidated 630 599 934

Average interest cost (%)

Standalone 12.3 12.3 9.4

Consolidated 14.8 9.9 11.5


Consolidated net profit 8% lower than standalone

Margins ex-HSP and Palladium (consolidated – standalone) are 45% versus 71% for the standalone entity.

While EBITDA growth at 81% was higher in consolidated accounts versus 68% for the standalone entity, net profit growth was only 36% (versus 58%) due to higher interest and depreciation expenses due to the launch of the Lucknow mall.



Consolidated net profit is 8% lower than standalone in FY2011 Key items in standalone and consolidated P&L, 2007-2011, March fiscal year-ends (Rs mn)

FY2007 FY2008 FY2009 FY2010 FY2011 FY2007 FY2008 FY2009 FY2010 FY2011

Sales and services 2,228 2,036 901 1,158 1,765 989 821 996 1,230 2,102

Operating costs (272) (285) (299) (411) (512) (273) (320) (394) (455) (696)

EBITDA 1,956 1,751 602 746 1,253 716 501 602 775 1,406

Interest (38) (42) (49) (86) (86) (38) (45) (55) (86) (228)

Depreciation (73) (73) (84) (160) (277) (73) (76) (93) (172) (314)

PBT 1,861 1,877 968 740 1,214 622 620 957 759 1,151

Tax (219) (190) (186) (142) (297) (220) (192) (190) (147) (321)

PAT 1,642 1,687 782 599 917 402 428 767 612 830

Reported PAT 1,642 1,687 782 599 917 402 428 768 620 842



Standalone balance sheet shrinks, consolidated expands

Phoenix has paid off around Rs1 bn of term loans and is now virtually debt free at the parent company level. With Palladium getting constructed and operational in FY2010, there has been no major asset addition in FY2011.

Consolidated fixed assets (including CWIP) increased to Rs19.2 bn as construction of new malls (Lucknow, Pune) and Shangri La (hospitality project) progressed in FY2011.

Standalone balance sheet shrinks and consolidated balance sheet expands in FY2011 Key items in standalone and consolidated balance sheet, 2007-2011, March fiscal year-ends (Rs mn)

2007 2008 2009 2010 2011 2007 2008 2009 2010 2011

Sources of funds

Shareholders funds 2,096 14,386 14,998 15,393 16,005 875 13,658 17,266 18,239 18,665

Loan funds 3,506 2,049 1,652 1,422 400 3,541 3,048 5,452 6,608 9,626

Total sources of funds 5,602 16,436 16,650 16,814 16,405 4,416 16,706 22,718 24,847 28,291

Uses of funds

Fixed assets 2,221 3,047 4,712 5,336 5,189 2,326 8,326 13,423 16,458 19,178

Net current assets (excl. cash) 3,091 7,627 5,051 5,377 5,949 1,872 2,007 2,849 2,093 3,297

Cash 99 20 1,544 204 78 107 22 1,910 671 1,021

Liquid investments - 3,736 1,107 1,617 363 - 4,211 1,543 2,389 1,176

Investments 187 1,996 4,223 4,257 4,814 107 2,128 2,982 3,212 3,610

Others 3 10 13 23 13 4 11 11 24 9

Total uses of funds 5,602 16,436 16,650 16,814 16,405 4,416 16,706 22,718 24,847 28,291





Marginal change to estimates New versus old estimates, Phoenix Mills, 2012E-14E, March fiscal year-ends (Rs mn)

FY2012E FY2012E FY2014E FY2012E FY2012E FY2014E FY2012E FY2012E FY2014E

Revenues 2,125 2,682 2,803 2,125 2,682 2,803 - - -

EBITDA 1,503 1,989 2,029 1,506 1,992 2,032 (0.2) (0.2) (0.2)

PAT 1,074 1,548 1,670 1,082 1,555 1,675 (0.7) (0.5) (0.3)

Old % changeNew


Our estimate of Phoenix Mills’ NAV is Rs305 /share NAV-based valuation, Phoenix Mills, March fiscal year-ends (Rs bn)

0% 3% 5% 10%Valuation (Rs bn) 26.7 27.8 29.4 30.2 Value of investments 14.4 14.4 14.4 14.4 Net cash, March 31, 2013 0.3 0.3 0.3 0.3 NAV (Rs bn) 41.4 42.5 44.1 44.9 Total no. of shares (mn) 144.8 NAV/share (Rs) 305 Target price @ NAV (Rs) 300

March '13 based NAV

Growth rate in selling prices




Profit model of Phoenix Mills March fiscal year-ends, 2009-2014E (Rs mn)

2008 2009 2010 2011 2012E 2013E 2014ETotal revenues 743 885 1,158 1,765 2,125 2,682 2,803 Operating costs (25) (29) (6) (9) (39) (42) (45) Employee costs (34) (41) (39) (56.16) (92) (112) (135) SG&A costs (183) (193) (366) (446.28) (491) (540) (594) EBITDA 500 622 746 1,253 1,503 1,989 2,029 Other income 235 410 240 323.26 224 351 487 Interest (48) (44) (86) (85.52) (21) (24) (48) Depreciation (73) (92) (160) (277.26) (328) (330) (332) Pretax profits 615 896 740 1,213.89 1,378 1,986 2,136 Current tax (197) (181) (152) (288) (325) (465) (498) Deferred tax 7 5 10 (9.87) 22 27 32 Net income 430 719 599 917 1,074 1,548 1,670 Adjusted net income 427 719 599 917 1,074 1,548 1,670

EPS (Rs)Primary 4.6 5.2 4.1 6.3 7.4 10.7 11.5 Fully diluted 3.1 5.0 4.1 6.3 7.4 10.7 11.5 Shares outstanding (mn)Year end 136 145 145 145 145 145 145 Primary 93 138 145 145 145 145 145 Fully diluted 136 145 145 145 145 145 145 Cash flow per share (Rs)Primary 16 3 4 8 8 10 10 Fully diluted 11 3 4 8 8 10 10 Growth (%)Net income (adjusted) 8 69 (17) 53 17 44 8 EPS (adjusted) (51) 58 (17) 53 17 44 8 DCF/share 74 (80) 35 79 2 30 (1) Cash tax rate (%) 32 20 20 24 24 23 23 Effective tax rate (%) 31 20 19 24 22 22 22 DPS 1.0 1.0 1.2 1.8 2.0 2.0 2.0 Dividend pay-out (%) 31.80 20.13 29.02 28.45 26.98 18.72 17.35




Balance Model of Phoenix Mills March fiscal year-ends, 2009-2014E (Rs mn)

2009 2010 2011 2012E 2013E 2014EEquityShare capital 290 290 290 290 290 290 Reserves/surplus 14,708 15,103 15,715 16,453 17,663 18,996 Total equity 14,998 15,393 16,005 16,742 17,953 19,286 Deferred tax liability/(asset) (13) (23) (13) (34) (61) (93) LiabilitiesSecured loans 1,652 1,422 400 500 500 500 Unsecured loans - - - - - - Total borrowings 1,652 1,422 400 500 500 500 Currrent liabilities & provisions 1,134 1,333 1,853 2,065 2,356 2,472 Total capital 17,770 18,124 18,246 19,273 20,748 22,164 AssetsCash 1,544 204 78 123 406 1,209 Current assets 7,292 8,327 8,165 9,423 10,891 11,807 Gross block 1,997 5,059 5,253 5,283 5,313 5,343 Less: accumulated depreciation 447 605 881 1,209 1,540 1,872 Net fixed assets 1,551 4,454 4,372 4,074 3,773 3,471 Capital work-in-progress 3,161 882 817 839 863 863 Total fixed assets 4,712 5,336 5,189 4,913 4,636 4,334 Investments 4,223 4,257 4,814 4,814 4,814 4,814 Total assets 17,770 18,124 18,246 19,273 20,748 22,164

Key ratios (%)Debt/equity 11.0 9.2 2.5 3.0 2.8 2.6 Debt/capitalization 9.9 8.5 2.4 2.9 2.7 2.5 Net debt/equity 0.7 7.9 2.0 2.3 0.5 (3.7) Net debt/capitalization 0.7 7.3 2.0 2.2 0.5 (3.8) RoAE 4.9 3.9 5.8 6.6 8.9 9.0 RoACE 4.5 3.9 6.0 6.4 8.6 8.8 Adjusted ROACE 1.4 1.5 2.1 2.7 3.6 3.4




Cash Model of Phoenix Mills March fiscal year-ends, 2009-2014E (Rs mn)

2009 2010 2011 2012E 2013E 2014EOperatingPre-tax profits before extraordinary items 968 740 1,214 1,378 1,986 2,136 Depreciation 84 160 277 328 330 332 Taxes paid (186) (172) (273) (325) (465) (498) Other income (371) (59) (17) (224) (351) (487) Interest expenses 49 86 86 21 24 48 Interest paid (98) (122) (151) (21) (24) (48) Working capital changes (a) 195 (37) (145) (1,047) (1,177) (800) Total operating 642 597 991 110 323 683 Operating, excl. working capital (b) 446 634 1,137 1,156 1,500 1,484 InvestingCapital expenditure (1,750) (685) (132) (51) (54) (30) (Purchase)/Sale of assets 0 2 0 - - - (Purchase)/Sale of investments 717 (520) 700 - - - Interest/dividend received /Others 2,529 (148) (375) 224 351 487 Total investing (c) 1,497 (1,351) 193 173 297 457 FinancingProceeds from issue of share capital - - - - Proceeds from borrowings (447) (418) (1,107) 100 - - Dividends paid (d) (167) (167) (204) (337) (337) (337) Total financing (615) (586) (1,311) (237) (337) (337)

Net increase in cash and cash equivalents 1,524 (1,340) (126) 46 283 803 Beginning cash 20 1,544 204 78 123 406 Ending cash 1,544 204 78 123 406 1,209

Gross cash flow (b) 446 634 1,137 1,156 1,500 1,484 Free cash flow (b) + (a) + (c) 2,138 (754) 1,185 283 620 1,140 Excess cash flow (b) +(a) + (c) + (d) 1,971 (922) 981 (54) 283 803



Downgrade two-wheelers to SELL due to expensive valuations

We downgrade Hero Honda and Bajaj Auto to SELL (from REDUCE and ADD earlier) as both stocks trade at expensive valuations. Bajaj Auto trades at 14X PE multiple while Hero Honda trades at 15.5X PE multiple on our FY2013E EPS estimate, which adequately factors in the strong volume growth of 13-15% over the next two years. We see limited scope for two-wheeler companies to report higher than 13-15% growth in volumes over the next two years and believe operating margins could be at risk due to a shift towards lower margin bikes and rising competitive intensity in the sector as players shift towards volume segment to gain market share.

We believe Honda Motorcycles and Yamaha will aggressively target both premium and executive motorcycle segments as their capacities increase. We believe Bajaj Auto and Hero Honda are likely to lose market share in the premium motorcycle segment over the next two years while we expect Bajaj Auto to gain 50 bps market share in the domestic executive motorcycle in FY2012E after the launch of new Boxer in 2QFY12E. Bajaj Auto has lost 140 bps market share in the domestic motorcycle industry between April and July 2011, but we expect it to regain its lost market share with the launch on new Boxer in 2QFY12E and new Pulsar in 4QFY12E.

We have increased our earnings estimates by 3-4% for Bajaj Auto over FY2012-13E factoring in revival in market share in 2HFY12E driven by new launches (Boxer 150cc and new Pulsar).

Downgrade M&M to ADD (from BUY) and upgrade Tata Motors to ADD (from REDUCE)

We downgrade M&M to ADD (from BUY) after a sharp rally while we upgrade Tata Motors to ADD (from REDUCE) as we believe new Evoque will aid volume growth in JLR in 2HFY12E. We have kept our earnings estimates unchanged for M&M but added the value of Ssangyong Motors at Rs34/share (based on the investment of US$463 mn made by M&M in the firm).

We have reduced consolidated earnings estimates of Tata Motors by 3-5% over FY2012-13E as we cut our EBITDA margin estimates of JLR by 40 bps over the next two years as we factor in higher-than-expected increase in incentives and further deterioration of product mix towards lower priced models (small Jaguar XF and Land Rover Evoque).

We believe Tata Motors is attractively valued at 4.9X EV/EBITDA on our FY2013E estimates (after factoring in R&D capitalization of GBP450 mn in our reported EBITDA) and we expect excessive pessimism on volume growth at JLR is not warranted as JLR realigns its product portfolio to lower end higher volume models. While we expect EBITDA margins to decline by 130 bps from 1QFY12 levels, we think the key trigger to the stock price would be recovery in volume growth in JLR.

Automobiles India

Changing the pecking order after the recent run-up in share prices. We change our pecking order in the sector after the sharp run-up in share prices. We downgrade Hero Honda, Bajaj Auto and M&M due to expensive valuations and upgrade Tata Motors to ADD (from REDUCE) as we expect new Evoque to aid volume growth for JLR. We change our pecking order to – (1) Maruti Suzuki, (2) Tata Motors and (3) Mahindra and Mahindra. Hero Honda remains our top SELL idea in the sector.

CAUTIOUS

AUGUST 29, 2011

UPDATE

BSE-30: 16,416

Automobiles India


Changes to earnings estimates and target prices for auto companies

Target price Rating Target FY2013E PE2012 2013 2012 2013 2012 2013 2012 2013 (Rs/share) (X)

Bajaj AutoNew 196,163 224,463 37,694 40,523 19.2 18.1 102.5 113.5 1,590 SELL 14.0Old 193,095 220,541 37,134 39,563 19.2 17.9 99.8 109.6 1,550 ADD 14.0change 1.6 1.8 1.5 2.4 2.7 3.6 2.6 Hero HondaNew 229,121 262,978 25,896 31,031 11.3 11.8 111.3 128.2 1,795 SELL 14.0Old 229,121 261,181 25,896 30,959 11.3 11.9 111.3 127.9 1,730 REDUCE 13.5change - 0.7 - 0.2 - 0.2 3.8 M&MNew 287,580 328,359 40,545 43,877 14.1 13.4 46.8 50.4 830 ADD SOTP basedOld 287,580 328,359 40,545 43,877 14.1 13.4 46.8 50.4 800 BUY SOTP basedchange - - - - - - 3.8 Tata MotorsNew 1,285,103 1,398,802 152,271 160,543 11.8 11.5 115.5 119.6 885 ADD SOTP basedOld 1,288,581 1,407,165 155,459 165,442 12.1 11.8 119.6 126.0 930 REDUCE SOTP basedchange (0.3) (0.6) (2.1) (3.0) (3.4) (5.1) (4.8)

Revenues EBITDA EBITDA margin (%) EPS (Rs/share)


M&M sum-of-the-parts valuation table

EPS MultipleValue per

share(Rs/share) (X) (Rs) Comment

M&M standalone business 48.1 13.0 625 Based on 13X FY2013E EPS less dividend income from subsSubsidiaries 202 Tech Mahindra 47 Based on KIE target price of Rs 600/shareMahindra Holidays 33 Based on current price of Rs362/shareM&M Financial Services Ltd 63 Based on KIE target price of Rs825/shareMahindra Lifespace Developers Ltd 13 Based on KIE target price of Rs470/shareMahindra Forgings 4 Based on current price of Rs66/shareMahindra Navistar Automotive 5 Based on FY2011 book value at 51% stakeMahindra two wheelers 2 Based on FY2011 book valueSsangyong Motors 34 Based on investment made by M&M in the firm of 463 mn dollarsSOTP-based value 828 Target price 830


Tata Motors sum-of-the-parts valuation table

EBITDA Multiple ValueValue per

share(Rs mn) (X) (Rs mn) (Rs) Comments

Tata Motors standalone EV 49,976 6.5 324,843 509 based on 6.5X FY2013E EBITDA

JLR standalone EV 78,167 4.0 312,669 490

based on 4X FY2013E EBITDA, deducting 450 mn pounds of R&D expense from reported EBITDA

Less: Net debt - consol 141,880 222 ex vehicle financing debtTotal standalone + JLR 495,631 777 Value of subsidiaries 107 SOTP-based value 884 Target price 885


India Automobiles


Bajaj Auto profit and loss, balance sheet and cash flow model March fiscal year-ends, 2009-14E (Rs mn)

2009 2010 2011 2012E 2013E 2014EProfit model (Rs mn)Net sales 84,369 115,085 159,981 189,871 218,730 249,329 EBITDA 12,097 26,175 34,168 37,694 40,523 44,172 Other income 1,043 976 3,339 4,361 5,981 7,600 Interest (210) (60) (17) - - - Depreciation (1,298) (1,365) (1,228) (1,401) (1,491) (1,502) Profit before tax 11,632 25,726 36,262 40,654 45,012 50,270 Extra-ordinary items (2,071) (1,624) 7,246 - - - Taxes (3,016) (7,075) (10,110) (10,977) (12,153) (13,573) Net profit 6,545 17,027 33,397 29,677 32,859 36,697 Adjusted net profit 7,963 18,171 26,152 29,677 32,859 36,697 Adjusted earnings per share (Rs) 27.5 62.8 90.4 102.5 113.5 126.8 Balance sheet (Rs mn)Equity 18,697 29,283 49,102 65,236 84,552 107,705 Deferred tax liability 42 17 297 297 297 297 Total borrowings 15,700 13,386 3,016 1,803 1,803 1,803 Current liabilities 24,376 42,750 63,759 69,160 73,248 77,831 Total liabilities 58,814 85,436 116,175 136,497 159,899 187,636 Net fixed assets 15,481 15,211 15,483 16,496 17,430 18,178 Investments 18,085 40,215 47,952 65,952 83,952 101,952 Cash 1,369 1,014 5,565 4,493 6,845 13,603 Other current assets 21,884 28,995 47,132 49,462 51,579 53,860 Miscellaneous expenditure 1,996 - 43 94 93 43 Deferred tax assets - - - - - - Total assets 58,814 85,436 116,175 136,497 159,899 187,636 Free cash flow (Rs mn)Operating cash flow excl. working capital 8,870 18,874 38,032 24,622 28,442 31,851 Working capital changes (4,744) 8,498 4,706 3,072 1,970 2,302 Capital expenditure (3,861) (1,078) (400) (2,250) (2,250) (2,250) Free cash flow 265 26,293 42,338 25,444 28,162 31,903 RatiosEBITDA margin (%) 13.7 21.9 20.5 19.2 18.1 17.3 PAT margin (%) 7.4 14.3 20.1 15.1 14.6 14.4 Debt/equity (X) 0.8 0.5 0.1 0.0 0.0 0.0 Net debt/equity (X) 0.2 (0.7) (0.9) (0.9) (0.9) (1.0) Book Value (Rs/share) 64.8 101.2 170.7 226.4 293.2 373.2 RoAE (%) 37.7 70.9 84.9 51.6 43.7 38.1 RoACE (%) 18.7 42.5 64.9 44.2 37.0 31.7


Automobiles India


Hero Honda profit and loss, balance sheet and cash flow model March fiscal year-ends, 2009-14E (Rs mn)

2009 2010 2011 2012E 2013E 2014EProfit model (Rs mn)Net sales 123,583 158,605 194,011 229,121 262,978 301,734 EBITDA 17,489 27,643 24,468 25,896 31,031 35,780 Other income 1,830 2,383 2,681 3,392 3,733 4,044 Interest 317 206 19 19 19 19 Depreciation (1,807) (1,915) (2,324) (2,520) (2,787) (2,987) Profit before tax 17,828 28,317 24,844 26,787 31,995 36,856 Current tax (4,806) (5,916) (4,768) (4,554) (6,399) (7,371) Deferred tax (191) (83) - - - - Net profit 12,831 22,318 19,278 22,233 25,596 29,485 Earnings per share (Rs) 64.3 111.8 99.3 111.3 128.2 147.6 Balance sheet (Rs mn)Equity 38,008 34,650 29,561 35,438 44,679 57,809 Deferred tax liability 1,444 1,528 2,468 2,468 2,468 2,468 Deferred payment credits 14,585 7,505 425 - Total Borrowings 785 660 327 327 327 327 Current liabilities 20,528 48,314 61,447 70,045 72,707 75,658 Total liabilities 60,765 85,152 108,387 115,783 120,606 136,261 Net fixed assets 16,943 17,069 42,054 41,454 35,587 34,615 Investments 33,688 39,257 51,288 57,288 62,288 67,288 Cash 2,196 19,072 715 63 3,245 12,016 Other current assets 7,939 9,754 14,331 16,979 19,487 22,343 Miscellaneous expenditure - - - - - - Total assets 60,765 85,152 108,387 115,783 120,606 136,261 Free cash flow (Rs mn)Operating cash flow excl. working capital 12,619 22,210 18,902 21,342 24,632 28,409 Working capital changes 985 4,846 11,424 5,950 154 94 Capital expenditure (3,135) (2,101) (4,024) (9,000) (4,000) (2,440) Free cash flow 10,469 24,955 26,303 18,292 20,786 26,063 RatiosEBITDA margin (%) 14.2 17.4 12.6 11.3 11.8 11.9 PAT margin (%) 10.4 14.1 9.9 9.7 9.7 9.8 Debt/equity (X) 0.0 0.0 0.0 0.0 0.0 0.0 Net debt/equity (X) (0.9) (1.6) (1.6) (1.5) (1.4) (1.3) Book Value (Rs/share) 197.6 181.2 160.4 189.8 236.1 301.8 RoAE (%) 36.4 59.0 56.5 63.6 60.2 54.9 RoACE (%) 34.8 57.5 55.7 62.9 59.7 54.5


India Automobiles


M&M profit and loss, balance sheet and cash flow model March fiscal year-ends, 2009-14E (Rs mn)

2009 2010 2011 2012E 2013E 2014EProfit model (Rs mn)Net sales 130,937 186,021 234,937 287,580 328,359 374,856 EBITDA 10,926 29,552 34,655 40,545 43,877 48,534 Other income 2,703 1,994 3,095 1,792 1,942 2,092 Interest (453) (278) 503 530 737 1,326 Depreciation (2,915) (3,708) (4,139) (4,575) (5,298) (6,024) Profit before tax 10,262 27,560 34,114 38,292 41,259 45,929 Current tax (585) (7,493) (7,617) (9,573) (10,315) (11,482) Deferred tax (1,412) (97) (958) — — —Net profit 8,368 20,878 26,714 28,719 30,944 34,447 Adjusted net profit 8,368 20,878 25,619 28,719 30,944 34,447 Adjusted earnings per share (Rs) 14.0 33.9 41.7 46.8 50.4 56.1 Adjusted earnings per share ex subs dividends (Rs) 11.8 32.5 39.7 44.7 48.1 53.6 Balance sheet (Rs mn)Equity 52,621 80,671 106,678 128,766 153,080 180,896 Total Borrowings 40,528 28,802 24,053 18,293 18,293 18,293 Current liabilities 47,978 52,000 67,676 78,350 87,118 97,260 Total liabilities 141,126 161,473 198,406 225,410 258,491 296,449 Net fixed assets 32,143 37,027 43,719 52,144 59,846 64,821 Investments 57,864 63,980 93,253 100,753 108,253 115,753 Cash 15,744 17,432 6,146 3,164 11,087 25,182 Other current assets 35,249 42,992 55,288 69,349 79,306 90,693 Miscellaneous expenditure 126 41 — — — —Total assets 141,126 161,473 198,406 225,410 258,491 296,449 Free cash flow (Rs mn)Operating cash flow excl. working capital 10,395 23,409 27,724 30,971 33,563 37,052 Working capital changes 5,918 (45) 2,074 (1,990) (1,189) (1,245) Capital expenditure (9,152) (9,607) (12,070) (13,000) (13,000) (11,000) Free cash flow 7,161 13,758 17,728 15,981 19,374 24,807 RatiosEBITDA margin (%) 8.3 15.9 14.8 14.1 13.4 12.9 PAT margin (%) 6.4 11.2 11.4 10.0 9.4 9.2 Debt/equity (X) 0.8 0.4 0.2 0.1 0.1 0.1 Net debt/equity (X) 0.5 0.1 0.2 0.1 0.0 (0.0) Book Value (Rs/share) 89.1 135.4 173.7 209.7 249.3 294.6 RoAE (%) 17.1 30.0 27.3 24.4 22.0 20.6 RoACE (%) 10.6 19.9 21.0 20.4 19.1 18.1


Automobiles India


Tata Motors standalone profit and loss, balance sheet and cash flow model March fiscal year-ends, 2009-14E (Rs mn)

2009 2010 2011 2012E 2013E 2014EProfit model (Rs mn)Net sales 253,541 353,738 478,074 522,589 593,626 692,370 EBITDA 13,293 37,454 42,873 43,003 49,976 65,128 Other income 7,144 2,710 4,140 4,536 4,970 5,446 Interest (6,737) (11,038) (11,440) (12,780) (12,240) (11,520) Depreciaton (8,745) (10,339) (13,608) (15,433) (17,845) (18,511) Profit before tax 4,956 18,787 21,965 19,326 24,860 40,542 Extra ordinary income/(expenses) 5,183 9,509 - - - - Current tax (150) - (84) (1,256) (1,616) (2,635) Deferred tax 25 (5,895) (3,763) (2,802) (3,605) (5,879) Net profit 10,013 22,401 18,118 15,268 19,640 32,028 Adjusted net profit 4,831 12,892 18,118 15,268 19,640 32,028 Adjusted Diluted EPS (Rs) 10.0 22.8 27.2 23.0 29.5 48.2 Balance sheet (Rs mn)Equity 5,141 5,706 6,377 6,377 6,377 6,377 Reserves and Surplus 117,161 143,949 193,756 197,832 206,281 227,118

Deferred tax liability 8,658 15,086 20,232 23,034 26,639 32,517 Total borrowings 131,656 166,259 158,988 152,988 140,988 128,988 Current liabilities 108,355 173,726 162,552 165,727 174,229 186,023 Foreign currency translation difference 1,641

Total liabilities 372,612 504,726 541,905 545,958 554,513 581,023 Net fixed assets 145,993 164,360 174,756 189,323 201,478 212,966 Investments 129,681 223,369 226,242 223,369 203,369 183,369

Cash 11,418 17,533 24,289 (5,324) (7,707) 1,466 Other current assets 85,499 97,847 116,617 138,590 157,373 183,222 Miscellaneous expenditure 20 1,617 - - - -

Total assets 372,612 504,726 541,905 545,958 554,513 581,023 Free cash flow (Rs mn)Operating cash flow excl. working capital 2,789 23,165 28,543 28,967 36,120 50,973 Working capital changes (950) 27,506 (26,463) (18,799) (10,281) (14,054)

Capital expenditure (40,113) (23,102) (23,817) (30,000) (30,000) (30,000)

Free cash flow (38,274) 27,569 (21,737) (19,831) (4,161) 6,918 RatiosEBITDA margin (%) 5.2 10.6 9.0 8.2 8.4 9.4 Debt/equity (X) 1.1 1.1 0.8 0.7 0.7 0.6 Net debt/equity (X) 1.0 1.0 0.7 0.8 0.7 0.5 RoAE (%) 4.8 9.5 10.4 7.6 9.4 14.4

Book value/share (X) 253.7 256.1 301.0 307.1 319.8 351.1


India Automobiles


Tata Motors consolidated profit and loss, balance sheet and cash flow model March fiscal year-ends, 2009-14E (Rs mn)

2009 2010 2011 2012E 2013E 2014EProfit model (Rs mn)Net sales 709,389 925,193 1,231,333 1,285,103 1,398,802 1,584,325

EBITDA 18,488 81,160 168,175 152,271 160,543 190,701 Other income 7,990 416 2,310 7,776 8,426 9,190 Interest (19,309) (22,397) (20,454) (16,020) (14,760) (13,896) Depreciaton (25,068) (38,871) (46,555) (54,745) (61,261) (64,087)

Profit before tax (17,900) 20,307 102,062 89,282 92,948 121,907 Extra ordinary income/(expenses) (3,393) 14,919 2,310 - - - Tax (3,358) (10,058) (12,164) (12,453) (13,391) (18,278) Minority Interest (403) 542 528 - - -

Net profit (25,053) 25,711 92,736 76,829 79,556 103,630 Adjusted net profit (21,660) 10,791 90,426 76,829 79,556 103,630 Adjusted Diluted EPS (Rs) (44.9) 18.5 136.0 115.5 119.6 155.8 Balance sheet (Rs mn)Equity 5,141 5,706 6,377 6,377 6,377 6,377 Reserves and Surplus 54,266 76,359 185,338 250,975 319,340 411,779 Deferred tax liability 6,802 15,796 20,961 20,961 20,961 20,961 Total borrowings 349,739 351,924 327,914 312,644 296,596 260,881 Current liabilities 311,618 417,208 469,838 457,708 490,539 546,918

Total liabilities 731,595 731,596 731,597 731,598 731,599 731,600 Net fixed assets 357,333 385,063 434,931 517,660 584,679 648,871 Goodwill 37,187 34,229 35,848 35,848 35,848 35,848 Investments 12,574 22,191 25,443 25,443 25,443 25,443 Cash 41,213 87,433 109,479 72,981 55,715 47,391 Other current assets 276,062 337,863 400,870 392,877 428,271 485,506 Miscellaneous expenditure 7,226 2,348 6,324 6,324 6,324 6,324

Total assets 731,595 731,596 731,597 731,598 731,599 731,600 Free cash flow (Rs mn)Operating cash flow excl. working capital 20,939 67,261 152,885 131,704 147,152 172,424 Working capital changes (13,441) 26,009 (40,484) (4,137) (2,564) (855) Capital expenditure (207,360) (84,754) (81,128) (129,360) (128,280) (128,280)

Free cash flow (223,728) (20,039) 6,583 (17,813) 1,548 29,392 RatiosEBITDA margin (%) 2.6 8.8 13.7 11.8 11.5 12.0 Debt/equity (X) 5.9 4.3 1.7 1.2 0.9 0.6 Net debt/equity (X) 5.2 3.2 1.1 0.9 0.7 0.5 Book value (Rs per share) 108 78 225 324 426 565 ROAE (%) (36.5) 15.3 66.1 34.2 27.3 27.9



A longer wait for new banks

RBI has clarified that the government will need to make amendments to the Banking Regulation Act before inviting applications for new branch licenses; the revised bill will be shortly placed in the Parliament. Post this, RBI would set up a team which would be involved in a transparent selection process of the new applicants. The due diligence of the promoters would be fairly stringent (looking at promoter groups with strong backgrounds and that have successfully run 10 years of their respective businesses). We believe this would result in a longer wait for new bank licenses issuances.

On the positive side, RBI continues to look at companies (NBFCs or otherwise) that can focus on financial inclusion and have reasonably strong promoters, at least in the initial stages of the bank. Thus, asset finance companies like Shriram Transport Finance, Mahindra Finance and L&T Finance stand a good chance.

Key highlights from the draft guidelines of issuing new bank licenses

Changes to regulation. RBI is unlikely to issue new licenses unless the following amendments are made to the Banking Regulation Act. These include (1) removal of restriction of voting rights and empowering RBI to approve the acquisition of shares and/or voting rights of 5% or more in a bank to persons who are ‘fit and proper’. (2) empowering RBI to supersede the Board of Directors of a bank so as to protect depositors’ interests; (3) facilitating consolidated supervision.

Exclusion of certain entities. Entities or groups that have significant (10% or more) income or assets or both from/in activities (real estates and capital market activities, primarily broking activities) taken together in the last three years, shall not be eligible to promote banks.

Rural focus on branch expansion and financial inclusion. The bank shall open at least 25% of its branches in unbanked rural centers and submit a detailed business model focusing on financial inclusion.

Stringent restrictions on inter-group transactions. Banking relationships with promoter group entities, business associates, and the suppliers/customers are expected to be done at ‘arm’s length’ - exposure shall not exceed 10% (single entity in the promoter group) and shall not exceed 20% (aggregate exposure to all the entities) of net worth. However, in case of promoter groups having 40% or more assets/income from non financial businesses, banks would need to maintain a minimum tangible security cover of 150%. The bank will have to file a certified return on a quarterly basis of all exposures for amounts in excess of Rs10 mn.

Banks/Financial Institutions India

New bank licenses: A longer wait. RBI has clarified that the government will need to make a couple of amendments to the Banking Regulation Act before inviting applications for new branch licenses; the revised bill will be shortly placed in the Parliament. Thus, we would likely need to wait longer for new bank licenses issuances. In the draft guidelines, RBI continues to look at companies (NBFCs or otherwise) that can focus on financial inclusion and have reasonably strong promoters, at least in the initial stages of the bank. Thus, asset finance companies like Shriram Transport Finance, Mahindra Finance and L&T Finance stand a good chance.

ATTRACTIVE

AUGUST 30, 2011

UPDATE

BSE-30: 16,416

India Banks/Financial Institutions


Holding company structure to facilitate regulation; promoter dilution in time

The bank will be a wholly-owned Non-Operative Holding Company (NOHC regulated by RBI) which will hold the bank as well as all the other financial services companies regulated by RBI or other financial sector regulators. Existing businesses can be merged or a separate bank would be created depending on the underlying businesses of the promoter. We believe that a transfer of assets would require some dispensation for compliance with CRR and SLR requirements.

Ownership by the NOHC on the bank would be reduced in various stages from the date of licensing.

Upto five years: A minimum 40% of the paid-up capital. Any excess over 40% would be reduced to 40% within two years. The bank will need to list within two years of the date of licensing. The NOHC would need to participate on the enlarged capital, if any, during this period to maintain at 40% levels. Aggregate foreign shareholding (FDI, NRI, FII) shall not exceed 49% for the first five years.

End of 10th year. 20% of the paid-up capital. Foreign shareholding will be allowed upto a ceiling of 74% of the paid-up capital.

End of 12th year. 15% of the paid-up capital

CAR of 12% in first three years

The bank would need an initial minimum paid-up capital for a new bank to be Rs5 bn. The bank shall be required to maintain a minimum capital adequacy ratio of 12% for a minimum period of three years after the commencement of its operations.


RBI NBFC report: Lower leverage, higher provisions, silent on securitization guidelines

We believe that the report by RBI’s working group on NBFCs, if implemented, will increase the provisioning cost for most NBFCs. With negligible gross NPLs and large excess provisions, IDFC is best placed in this scenario. We find about 2-3% medium-term EPS impact on infrastructure NBFCs (PFC and REC) and about 7-10% on asset finance companies (Shriram Transport and Mahindra Finance) due to higher provisions, if the guidelines are implemented.

The RBI report has proposed a minimum Tier I capital adequacy ratio (CAR) to 12% from 10% earlier. In order to maintain a high investment grade credit rating, NBFCs generally maintain about 12-14% Tier I CAR. However, we find more pressure on leverage if RBI imposes restrictions on loans sold by NBFCs to banks. Notably, the guideline on priority sector recognition for loan sold by NBFCs to banks will be reviewed by another committee of bankers.

Bank licenses: A longer wait

RBI has clarified that the Government will need to make a couple of amendments to the Banking Regulation Act before inviting applications for new branch licenses; the revised bill will shortly placed in the Parliament. Thus, we would likely need to wait longer for new bank license issuances. In the draft guidelines, RBI continues to look at companies (NBFCs or otherwise) who can focus on financial inclusion and have reasonably strong promoters. Thus, asset finance companies like Shriram Transport Finance, Mahindra Finance and L&T Finance stand a good chance.

Infrastructure NBFCs provide attractive risk-return trade-off

We are upgrading our rating on IDFC to BUY from ADD retain target price of Rs150). We upgrade our rating on PFC to BUY from ADD with a revised price target price of Rs225 from Rs240 earlier and on REC to BUY from ADD retain target price of Rs240). All three infrastructure NBFCs (PFC, IDFC and REC) are trading close to historic low valuation multiples after a 40-50% correction in the recent past. Asset quality remains a risk though we believe that the price already factors in a stress scenario and likely impact of the working group committee recommendations. Notably, IDFC and PFC have demonstrated a track record of maintaining low NPLs across business cycles, a trend that appears to be ignored by the street.

We believe Shriram Transport Finance is one of the best candidates for procuring new bank licenses. However, macro headwinds in the CV industry, coupled with likely regulatory issues (more stringent NPL recognition norms, change in regulations for priority sector recognition of loans sold by NBFCs to banks) will likely pressure stock price performance. We retain our REDUCE rating with a price target of Rs675 (down from Rs700 earlier).

NBFCs India

Resetting expectations at attractive valuations. We believe that the recommendations of RBI’s working group on NBFCs, if implemented, will pose the next set of challenges for asset finance and infrastructure NBFCs. After the recent price correction, we believe infrastructure NBFCs already factor in the impact of regulatory changes and stress-case business scenario. We remain selective in the asset finance segment; we believe that issuance of new bank licenses will likely be a long-drawn process; even as asset finance companies (Shriram Transport and Mahindra Finance) are better placed to procure the same. Upgrade IDFC, PFC and REC to BUY from ADD.

ATTRACTIVE

AUGUST 30, 2011

UPDATE

BSE-30: 16,416

India NBFCs


RBI NBFC report: Higher provisions, lower leverage

Higher provisions. We believe the report by RBI’s working group on NBFCs, if implemented, will increase provisioning cost for most NBFCs. The committee has recommended that the NPL provisioning guidelines for NBFCs should be in line with those of banks. Currently, banks follow the NPL recognition norm of 90 days-past-due, while NBFCs follow a 180-day norm. Thus, NPLs of NBFCs will likely increase considerably in case NBFCs follow the banking rule. Banks are required to have a higher standard and specific NPL provisions (exhibit 1). With negligible gross NPLs and large excess provisions (Rs6.5 bn), IDFC is best placed in this scenario. We find about 2-3% medium-term EPS impact on infrastructure NBFC and about 7-10% on asset finance companies (stress case in Exhibits 2-6).

Infrastructure NBFCs (REC and PFC) will likely have a higher impact due to standard asset provisions. In our scenario analysis, we have modeled the impact from the first year (2012E) even as RBI will likely provide leeway of a couple of quarters to comply with the guideline. In the second scenario, outlined in Exhibits 2 and 3, we have stressed earnings to lower loan growth and higher NPL provisions. Even in a stressed case, valuations appear attractive, close to book value. Earnings are likely to be volatile if 10% provisions have to be made in one quarter, especially given that these are large ticket loans.

Asset finance companies have a higher gross NPL ratio and hence the impact on specific NPL provisions in case of migration to 90 days from 180 will likely be higher. In Exhibits 4 and 5, we estimate the impact of increase in gross NPLs to 4.5% from 2.7% for Shriram Transport Finance and 6.5% from 5% for Mahindra Finance. Notably, Shriram Transport Finance follows the norm of 180-days-past due dates for NPLs while Mahindra Finance follows the 120-day norm. More aggressive recoveries or a change in provision coverage ratio can provide significant sensitivity to our estimates in the stress scenario.

Lower leverage. The RBI report has increased the minimum Tier I capital adequacy ratio (CAR) to 12% from 10% earlier. The proposed ratio is significantly higher than about 6% for banks; we are not very clear about the reason for increase in CAR.

In order to maintain a high investment grade credit rating, NBFCs generally maintain about 12-14% Tier I CAR. Most NBFCs currently have about 18% Tier I and may not have any immediate need to raise capital. However, a higher regulatory CAR will reduce the leeway of these companies if rating agencies increase comfort on leverage. We find more pressure on leverage if RBI imposes restrictions on loans sold by NBFCs to banks.

We expect some medium-term capital pressure on all asset finance companies:

Shriram Transport. Adjusted for first and second loss provisions on loans securitized to banks, Tier I CAR was 14.5% as of March 2011

Muthoot Finance. High gold prices will likely buoy loan growth; Tier I CAR will decline to 8% by March 2012E (13.4% in base case) in case all gold loans are retained in the books of the NBFCs

Mahindra Finance. We are modeling 25% yoy loan growth in 2012E despite 12% qoq loan growth in 1QFY12. If the pace of growth remains higher than expected, the company will need to raise equity.

Await guidelines on loan securitization. Last week, RBI constituted a committee of bankers to comprehensively review the guidelines of priority sector loans. The committee will discuss issues relating to priority sector classification for loans sold by NBFCs to banks.

NBFCs India


Other proposals

Government-owned NBFCs. The committee has highlighted that prudential guidelines for NBFCs should be applicable to Government-owned NBFCs as well. In this backdrop, we would like to highlight that PFC and REC would find it challenging to comply with single party exposure norms of other NBFCs (maximum single party exposure at 15% of net owned funds) due to their large exposures to state utilities.

Capital market linked lending. The committee proposes higher risk weights on equity market linked loans and commercial real estate.

Private placement of NCDs. The committee has also expressed concerns regarding private placement of NCDs by non-deposit accepting NBFCs; this will likely impact the gold loan NBFCs.

We find infrastructure NBFCs attractive at this price

PFC, IDFC and REC are trading close to historic low valuations after 40-50% correction in the recent past (Exhibits 7-9). While the risk of asset quality performance remains a concern, a stress scenario (as highlighted above) is already factored in the price.

REC’s current stock price offers attractive dividend yield of 5.9% for FY2012E, PFC is trading at dividend yield of 3.6% for FY2012E and IDFC at 2%.

Is the market ignoring the positives of infrastructure NBFCs?

Macro challenges in the power sector pose significant risks to the asset quality performance of the lenders, a key reason for the decline in infrastructure NBFC stocks. In this backdrop, we would like to highlight the following:

Buffers on IDFC’s balance sheet. IDFC has maintained reported gross NPL in the range of 0.2% and 1.1% since 2002 (Exhibit 10). As of June 2011, only about 30% of IDFC loan book (about Rs110 bn) was exposed to project completion risk. The company has followed an aggressive provisioning policy and currently has a buffer of Rs6.5 bn on its balance sheet. If we assume a 10% loss given the default on NPLs, the current excess provisions can absorb impact of about 50% NPLs in its non-operating assets.

PFC’s strong asset quality performance track record. PFC has reported gross NPLs in the range of 0.02-1% between FY2003 and FY2011, Notably, NPLs have been low even at the nadir of the previous crises. In 2003, SEBs restructured their dues to power/fuel suppliers (like NTPC); loans for capex to PFC continued to be current. Key reasons:

PFC was a nodal agency for several schemes operated by the central Government. The company has been working closely with the Ministry of Power

Default to PFC may be construed as default to Central Government by the auditors of the state Government. PFC offers a discount for timely payment and hence interest rates move up by 25 bps in case of delinquencies

Low exposure to private sector is a positive. We believe the lack of adequate fuel supply arrangements will affect the prospects of private power producers. PFC has just 8% exposure to private sector. Generation remains a large contributor at 85% of overall loan book as of March 2011

India NBFCs


REC’s has reported high NPLs in FY2003, i.e., in the previous downturn. The company primarily focused on rural electrification projects and did not fund generation projects (primary focus segment of PFC) in the past. REC has improved its asset protection mechanism; the company offers a small rebate (25 bps) for timely repayment of loans (like PFC) and secures its cash flows from escrow mechanism. The management has highlighted that it has an exclusive escrow charge on select distribution circles and other lenders (banks and State Governments) may not have access to such a facility. Exposure to the private sector is only 10% of overall loans.

Exhibit 1: Banks have higher provisions as compared to NBFCs A comparison of provisions required by banks and NBFCs (% of assets)

Banks NBFCsStandard assets 0.4 0.25Substandard assets 15.0 10Doubtful assets

Up to one year 25.0 20One to three years 40.0 30More than three years 100.0 50

Loss assets 100.0 100

Source: RBI

Exhibit 2: PFC trades below book value even in stress scenarios Base and stress case scenarios on PFC's earnings, March fiscal year-ends, 2012-2013E

2012E 2013E 2012E 2013E 2012E 2013EBase Case Stress case Stress case 2EPS (Rs) 23.4 28.3 20.6 27.7 23.4 26.8Stress verus base case (%) (11.9) (2.2) 0 (5)BVPS (Rs) 159.1 180.8 157.0 178.2 159.1 179.7Stress verus base case (%) (1.3) (1.4) 0 (1)ABVPS (X) 153.1 174.5 153.5 174.9 154.0 166.0PER (X) 6.0 4.9 6.8 5.1 6.0 5.2PBR(X) 0.9 0.8 0.9 0.8 0.9 0.8APBR(X) 0.9 0.8 0.9 0.8 0.9 0.8NIM (%) 3.9 4.0 3.9 4.0 3.9 4.2Gross NPL (%) 1.0 1.0 1.0 1.0 1.0 2.5Coverage (%) 12.6 21.9 12.6 21.9 13.1 16.1RoA(%) 2.7 2.8 2.4 2.7 2.8 2.9RoE (%) 17.0 16.7 15.1 16.6 17.1 15.9

Notes.

Stress case 2

We are assuming loan growth of 12-13%Spreads are almost stable Private sector exposure is currently at Rs80 bn,assume about 40% of this becomes NPL till 2013E Provisioning coverage is 10-15%


NBFCs India


Exhibit 3: REC trades at book value in stress scenarios Base and stress case scenarios on REC's earnings, March fiscal year-ends, 2012-2013E

Base Case Stress case 1 Stress case 2EPS (Rs) 29.0 32.5 25.9 31.8 27.7 29.1Stress verus base case (%) (10.5) (2.2) (4) (11)BVPS (Rs) 148.6 170.3 146.6 167.8 147.8 167.2Stress verus base case (%) (1.4) (1.5) (1) (2)ABVPS (X) 139.8 160.7 141.8 163.0 135.0 139.8PER (X) 5.9 5.3 6.6 5.4 6.2 5.9PBR(X) 1.2 1.0 1.2 1.0 1.2 1.0APBR(X) 1.2 1.1 1.2 1.1 1.3 1.2NIM (%) 4.1 3.8 4.1 3.8 4.1 4.0RoA(%) 3.0 2.8 2.7 2.7 2.7 2.5RoE (%) 20.8 20.4 18.8 20.2 17.7 16.8

Notes.

Stress case 2

We are assuming loan growth of 12-13%Spreads moderate to 2.5% from 3.2% in 2011; by 2015E spreads are almost equal to PFCPrivate sector exposure is currently at Rs92 bn,assume about 30% of this becomes NPL till 2013EProvisioning coverage is 10-15%


Exhibit 4: About 7-8% earnings decline for Shriram Transport in stress case Base and stress case scenarios on STFC's earnings, March fiscal year-ends, 2012-2013E

2012E 2013E 2012E 2013E 2012E 2013E

Base Case Stress case % change

EPS (Rs) 66 75 EPS (Rs) 60 69 (8.5) (7.9)

BVPS (Rs) 270 328 BVPS (Rs) 266 319 (1.6) (2.7)

ABVPS (X) 254 304 ABVPS (X) 240 280

PER (X) 9.4 8.2 PER (X) 10.2 8.9

PBR(X) 2.3 1.9 PBR(X) 2.3 1.9

APBR(X) 2.4 2.0 APBR(X) 2.6 2.2

NIM (%) 9.2 9.1 NIM (%) 9.2 9.0

Gross NPL (%) 2.7 2.7 Gross NPL (%) 4.5 4.5

Coverage (%) 47.0 40.5 Coverage (%) 48.6 41.1

RoA(%) 3.7 3.6 RoA(%) 3.4 3.3

RoE (%) 27 25 RoE (%) 25 24


India NBFCs


Exhibit 5: About 10% earnings decline for Mahindra Finance in stress case Base and stress case scenarios on Mahindra Finance's earnings, March fiscal year-ends, 2012-2013E

2012E 2013E 2012E 2013E 2012E 2013E


EPS (Rs) 56 69 EPS (Rs) 46 62 (17.8) (9.8)

BVPS (Rs) 285 336 BVPS (Rs) 277 324 (2.6) (3.7)

ABVPS (X) 277 324 ABVPS (X) 266 309

PER (X) 10.8 8.8 PER (X) 13.1 9.7

PBR(X) 2.1 1.8 PBR(X) 2.2 1.9

APBR(X) 2.2 1.9 APBR(X) 2.3 2.0

NIM (%) 24.3 27.8 NIM (%) 24.0 27.5

Gross NPL (%) 5.0 5.0 Gross NPL (%) 6.5 6.5

Coverage (%) 67.2 62.3 Coverage (%) 64.5 64.6

RoA(%) 3.8 3.7 RoA(%) 3.1 3.4

RoE (%) 21 22 RoE (%) 18 21


Exhibit 6: About 4% earnings decline for Muthoot Finance in stress case Base and stress case earnings for Muthoot Finance

2012E 2013E 2012E 2013E 2012E 2013E


EPS (Rs) 19 24 EPS (Rs) 18 24 (4.2) (3.6)

BVPS (Rs) 79 104 BVPS (Rs) 78 102 (1.0) (1.6)

ABVPS (X) 79 104 ABVPS (X) 75 97

PER (X) 9.0 7.0 PER (X) 9.4 7.2

PBR(X) 2.2 1.6 PBR(X) 2.2 1.7

APBR(X) 2.2 1.6 APBR(X) 2.3 1.8

NIM (%) 9.3 9.1 NIM (%) 9.3 9.0

RoA(%) 3.2 3.1 RoA(%) 3.1 3.0

RoE (%) 10 9 RoE (%) 10 9


NBFCs India


Exhibit 7: IDFC- Rolling PER and PBR (X)

-

9

18

27

36

45

Aug

-05

Feb-

06

Aug

-06

Feb-

07

Aug

-07

Feb-

08

Aug

-08

Feb-

09

Aug

-09

Feb-

10

Aug

-10

Feb-

11

Aug

-11

0

2

4

6Rolling PER (X) (LHS) Rolling PBR (X) (RHS)

Source: Bloomberg, Company, Kotak Institutional Equities estimates

Exhibit 8: REC- Rolling PER and PBR (X)

-

3

6

9

12

15

Mar

-08

Jul-0

8

Nov

-08

Mar

-09

Jul-0

9

Nov

-09

Mar

-10

Jul-1

0

Nov

-10

Mar

-11

Jul-1

1

0.3

0.9

1.5

2.1

2.7

Rolling PER (X) (LHS) Rolling PBR (X) (RHS)

Source: Bloomberg, Company, Kotak Institutional Equities estimates

India NBFCs


Exhibit 9: PFC- Rolling PER and PBR (X)

4

8

12

16

20

24

Feb-

07

Jun-

07

Oct

-07

Feb-

08

Jun-

08

Oct

-08

Feb-

09

Jun-

09

Oct

-09

Feb-

10

Jun-

10

Oct

-10

Feb-

11

Jun-

11

0.5

1.0

1.5

2.0

2.5

3.0

Rolling PER (X) (LHS) Rolling PBR (X) (RHS)


Exhibit 10: PFC and IDFC have maintained low NPL levels Gross NPL ratio, March fiscal year-ends, 2003-2011 (%)

-

1.0

2.0

2003 2004 2005 2006 2007 2008 2009 2010 2011E

(%)

Source: Company

NBFCs India


Exhibit 11: While REC reported higher NPLS Gross NPL ratio, March fiscal year-ends, 2003-2011 (%)

-

5.0

10.0

15.0

20.0

2003 2004 2005 2006 2007 2008 2009 2010 2011E

(%)

Source: Company

Exhibit 12: IDFC : Sum-of-the parts based valuation

Valuation Value per share Comments

(Rs mn) (Rs)

IDFC (core) 169,090 112Based on residual growth model- implies 1.8X core PBR for medium term RoE of 16-17%

IDFC (Private equity) 6,862 5 10% of FY2013E AUM - US$1.8 bn

IDFC (Project equity) 7,500 5 10% of FY2013E AUM - US$1.4 bn

IDFC MF 10,143 7 3.5% of FY2013E AUMs

IDFC Capital 6,117 4 10X FY2013E PAT

IDFC's investment in NSE 10,200 7 12X FY2013E PER

Value of market investments 14,437 10 At book value

Total 210,625 149

Source: Kotak Institutional Equities

Exhibit 13: Valuations of key financial companies, March fiscal year-ends

Traget price Price

(Rs) (Rs) Market cap. EPS (Rs) PER (X) PBR (X) RoE (%)Reco. 29-Aug-11 US$ bn 2011 2012E 2013E 2011 2012E 2013E 2011 2012E 2013E 2011 2012E 2013E

Non-banksHDFC REDUCE 730 645 645 20.6 24.1 27.9 31.8 26.8 23.1 20.3 5.5 4.8 3.8 22 22 21

HDFC core - 375 12.0 20.1 23.8 27.5 18.6 15.8 13.6 6.5 5.2 3.5 39 37 31IDFC BUY 150 113 113 3.5 8.8 9.9 12.0 12.9 11.4 9.4 1.6 1.4 1.2 15 13 14LIC Hsg Fin ADD 270 207 207 2.1 20.5 22.1 27.7 10.1 9.4 7.5 2.4 2.0 1.7 26 23 24Mahindra Finance BUY 825 608 608 1.4 45.2 56.5 67.1 13.4 10.8 9.1 2.5 2.1 1.8 22 21 22Power Finance Corporation BUY 225 140 140 4.0 22.8 23.4 28.3 6.1 6.0 4.9 1.0 0.9 0.8 18 17 17Shriram Transport REDUCE 700 614 614 3.0 55.1 65.5 77.2 11.1 9.4 7.9 2.8 2.3 1.9 28 27 26

Reliance Capital REDUCE 470 377 377 2.0 9.3 16.5 24.8 40.5 22.9 15.2 1.3 1.3 1.2 3 6 8

Rural Electrification Corp. BUY 240 172 172 3.7 26.0 29.0 32.5 6.6 5.9 5.3 1.3 1.2 1.0 22 21 20

Muthoot Finance BUY 220 171 171 1.4 15.7 19.0 24.5 10.8 9.0 7.0 4.0 2.2 1.6 52 33 27

CMP (Rs)

Source: estimates


System over-capacity exists, but needs capital infusion to be disruptive

Recent tariff hikes in the industry, started by Bharti and subsequently selectively followed by other operators, do not mean the industry is out of the over-capacity phase. However, lack of balance sheet muscle post massive 3G payouts and non-availability of incremental 2G spectrum has made push for volume market share a difficult proposition for GSM challengers like RCOM, TTSL, and Aircel. In the absence of potential equity infusion, the lure of short-term financial relief has driven the challengers’ defensive (in our view) stance – they have all started participating in tariff hikes along with the leaders. Even as we believe this is a sub-optimal long-term strategy for challengers (versus a push for volume market share, we detail our thoughts on this later), lack of resources (funding and quality spectrum) appears to have forced their hand. Advantage incumbents, clearly.

Calibrated tariff hikes can continue

We believe the incumbents, backed by superior networks and stronger customer loyalty compared to the challengers, can continue to tweak tariff upwards, in a calibrated manner. Volume market share loss risk is low given the defensive stance adopted by the challengers. Risk to volumes (negative elasticity) exists but will be minimal as long as tariff revisions are well-calibrated and paced out – in any case, price-led revenue growth is EBITDA and FCF accretive even if it turns out to be marginally negative for volumes and is only marginally revenue accretive. We have accordingly increased our RPM estimates for Bharti and Idea further marginally after having revised them upwards post 1QFY12 earnings.

Upgrade Bharti and Idea to ADD (from REDUCE)

We upgrade Bharti to ADD (from REDUCE) and revise our end-FY2013E DCF-based TP on the stock to Rs460/share (from Rs390). We also rate Idea an ADD (from REDUCE) with a revised TP of Rs115/share (from Rs95). Changes to our estimates and target prices are driven solely by upward revision in India wireless estimates – hence, higher revisions for Idea, which is a pure India wireless play. Our relative preference between the two stocks would be Idea, given (1) higher operating leverage compared to Bharti, which runs the most optimal network in the country, (2) pure India wireless positioning – Bharti has other parts with slower forecast growth (fixed-line, enterprise) and/or higher risks (Africa), and (3) lower foreign currency exposure compared to Bharti.

Risks to our call – regulatory (high probability but known), competitive (low in the near-term)

Adverse regulatory developments, especially on the spectrum pricing front, remain a risk – however, the event is known with timing and quantum the uncertain variables. Street, hence, may not react negatively to such a development. We do note that impact of a negative regulatory development is higher on Idea as compared to Bharti. Return of tariff competition is a risk that would always loom given system over-capacity. However, this risk is unlikely to play out unless there is massive equity infusion into one of the challengers.

Telecom India

The weak shall not inherit the earth; upgrade Bharti/Idea. We turn constructive on the GSM incumbents Bharti and Idea, upgrading both to ADD (from REDUCE earlier). Challengers’ defensive stance to the recently announced tariff hikes by the incumbents, perhaps driven by their stretched balance sheets, is likely to play into the hands of the leaders with stronger balance sheets and networks. Sector’s domestic consumption positioning in an uncertain global macro environment helps further. On a relative basis, Idea as a leveraged pure Indian wireless play scores over Bharti.

CAUTIOUS

AUGUST 29, 2011

UPDATE

BSE-30: 16,416

Telecom India


Key reason for our upgrade – change in view on near-term competitive intensity in the sector

Our change in view on competitive intensity in the Indian wireless sector is driven by the defensive response adopted by the challengers to the incumbents’ price hike move. Reeling under severe balance sheet stress and under pressure to meet near-term operational and financial targets set by lenders and strategic investors, challengers have taken a short-term approach to tariffs. This could remain the situation over the near to medium term implying low risk of price competition.

However, industry over-capacity situation remains (there are more networks out there than viable businesses) and tariff hikes are unlikely to bring the industry to a sustained long-term equilibrium unless some of the excess capacity gets consolidated or moves out of the system. This could lead to some tension in the system and potential price competition down the line; however, the near to medium term risk on this front is low. Even in the longer run, it would be difficult for the challengers to wrest back the consumer mind share lost on account of their recent move to hike tariffs despite networks vastly inferior to incumbents on coverage.

We discuss our views on the long-term industry structure and the challengers’ challenge in detail later in the note.

Estimate revisions

Bharti

Exhibit 1 depicts the key changes to our FY2012-14E estimates for Bharti. We have taken our India wireless RPM estimates upwards, consistent with our revised thesis on the stock. Exhibit 2 gives the sensitivity of earnings and fair value to price/volume estimates.

Exhibit 1: Key changes to Bharti earnings model, FY2012-14E, March fiscal year-ends

FY2012E FY2013E FY2014E FY2012E FY2013E FY2014E FY2012E FY2013E FY2014EConsolidatedRevenues (Rs mn) 725,284 842,251 947,366 723,434 835,997 935,686 0.3 0.7 1.2 EBITDA (Rs mn) 253,953 320,715 369,183 252,554 315,999 360,366 0.6 1.5 2.4 EBIT (Rs mn) 122,575 175,994 211,867 121,175 171,278 203,050 1.2 2.8 4.3 EPS (Rs/share) 18.2 28.0 35.1 17.9 27.1 33.3 1.6 3.5 5.4

EBITDA margin (%) 35.0 38.1 39.0 34.9 37.8 38.5 10 bps 27 bps 45 bps

India/SA wirelessRevenues (Rs mn) 418,276 491,922 557,600 416,222 484,980 544,636 0.5 1.4 2.4 EBITDA margin (%) 35.0 37.1 38.1 34.8 36.6 37.4 16 bps 45 bps 72 bpsEBITDA (Rs mn) 146,439 182,322 212,481 145,024 177,556 203,575 1.0 2.7 4.4 Subs (mn) 190 212 229 190 212 229 - - - Volumes (bn min) 931 1,052 1,151 931 1,052 1,151 - - - RPM (paise/min) 43.24 44.97 46.54 43.02 44.31 45.42 0.5 1.5 2.5 ARPU (Rs/sub/month) 190 196 202 189 193 197 0.5 1.5 2.5 MOU (min/sub/month) 440 436 435 440 436 435 - - - Capex (Rs mn) 59,200 58,735 60,842 59,200 58,735 60,842 - - -

Africa wirelessRevenues (US$ mn) 4,166 4,957 5,701 4,166 4,957 5,701 - - - EBITDA (US$ mn) 1,175 1,591 1,870 1,175 1,591 1,870 - - - EBITDA margin (%) 28.2 32.1 32.8 28.2 32.1 32.8 0 bps -1 bps 0 bpsCapex (US$ mn) 1,250 1,214 1,197 1,250 1,214 1,197 - - -



India Telecom


Exhibit 2: EBITDA/EPS and fair value estimates under various RPM and volume scenarios

RPM sensitivityFY2013E FY2014E FY2013E FY2014E FY2013E FY2014E FY2013E FY2014E FY2013E FY2014E

RPM (Rs/min) 0.440 0.455 0.445 0.460 0.450 0.465 0.455 0.470 0.460 0.475 Volumes (bn min) 1,052 1,151 1,052 1,151 1,052 1,151 1,052 1,151 1,052 1,151 Wireless revenues (Rs bn) 463 524 468 530 473 536 479 542 484 547 Consol Revenues (Rs bn) 832 936 837 942 842 947 848 953 853 959 EBITDA (Rs bn) 312 359 316 364 321 369 325 374 330 379 EBITDA margin (%) 37.5 38.4 37.8 38.7 38.1 39.0 38.4 39.2 38.7 39.5 EPS (Rs/share) 26.1 33.0 27.1 34.0 28.0 35.1 29.0 36.1 29.9 37.2 Fair value (Rs/share) 434 447 460 473 486

Change from base case (%)RPM (2.2) (2.1) (1.1) (1.1) 1.1 1.1 2.2 2.1 Revenues (1.2) (1.2) (0.6) (0.6) 0.6 0.6 1.2 1.2 EBITDA (2.8) (2.7) (1.4) (1.3) 1.4 1.3 2.8 2.7 EBITDA margin (bps) (59) (57) (29) (28) 29 28 58 55 EPS (6.8) (5.9) (3.4) (3.0) 3.4 3.0 6.8 5.9 Fair value (5.6) (2.8) 2.8 5.6

Volume sensitivityFY2013E FY2014E FY2013E FY2014E FY2013E FY2014E FY2013E FY2014E FY2013E FY2014E

RPM (Rs/min) 0.450 0.465 0.450 0.465 0.450 0.465 0.450 0.465 0.450 0.465 Volumes (bn min) 1,000 1,094 1,026 1,123 1,052 1,151 1,079 1,180 1,105 1,209 Wireless revenues (Rs bn) 450 509 461 523 473 536 485 549 497 563 Consol Revenues (Rs bn) 819 921 830 934 842 947 854 961 866 974 EBITDA (Rs bn) 304 350 312 360 321 369 329 379 337 388 EBITDA margin (%) 37.2 38.1 37.6 38.5 38.1 39.0 38.5 39.4 39.0 39.8 EPS (Rs/share) 24.5 31.1 26.3 33.1 28.0 35.1 29.8 37.1 31.5 39.1 Fair value (Rs/share) 412 436 460 484 508

Change from base case (%)RPM - - - - - - - - Revenues (2.8) (2.8) (1.4) (1.4) 1.4 1.4 2.8 2.8 EBITDA (5.2) (5.1) (2.6) (2.5) 2.6 2.5 5.2 5.1 EBITDA margin (bps) (92) (90) (45) (45) 44 43 87 85 EPS (12.5) (11.3) (6.3) (5.7) 6.3 5.7 12.5 11.3 Fair value (10.3) (5.2) 5.2 10.3

+5%

+1 paiseBase case-1 paise -0.5 paise +0.5 paise

-5% -2.5% Base case +2.5%


Idea

Exhibit 3 depicts the key changes to our FY2012-14E estimates for Idea. Again, all changes flow from increase in India wireless RPM estimates. Exhibit 4 gives the sensitivity of earnings and fair value to price/volume estimates.

Telecom India


Exhibit 3: Key changes to Idea earnings model, FY2012-14E, March fiscal year-ends

FY2012E FY2013E FY2014E FY2012E FY2013E FY2014E FY2012E FY2013E FY2014EConsolidatedRevenues (Rs mn) 196,150 241,798 277,265 196,150 238,982 274,132 - 1.2 1.1 EBITDA (Rs mn) 52,145 68,417 81,355 52,145 67,255 80,048 - 1.7 1.6 EBIT (Rs mn) 21,754 33,523 43,381 21,754 32,341 42,010 - 3.7 3.3 EPS (Rs/share) 2.68 5.08 7.33 2.68 4.77 6.97 - 6.3 5.3

EBITDA margin (%) 26.6 28.3 29.3 26.6 28.1 29.2 0 bps 15 bps 14 bpsCapex (Rs bn) 50 47 41 50 47 41 - (1.0) (1.3)

Wireless metricsSubs (mn) 111 129 142 111 129 142 - - - Volumes (bn min) 469 560 623 469 560 623 - - - RPM (paise/min) 0.414 0.431 0.446 0.414 0.426 0.441 - 1.2 1.1 ARPU (Rs/sub/month) 165 171 174 165 169 172 - 1.2 1.1 MOU (min/sub/month) 389 388 384 389 388 384 - - -



Exhibit 4: EBITDA/EPS and fair value estimates under various RPM and volume scenarios

RPM sensitivityFY2013E FY2014E FY2013E FY2014E FY2013E FY2014E FY2013E FY2014E FY2013E FY2014E

RPM (Rs/min) 0.421 0.436 0.426 0.441 0.431 0.446 0.436 0.451 0.441 0.456 Volumes (bn min) 560 623 560 623 560 623 560 623 560 623 Wireless revenues (Rs bn) 236 272 239 275 241 278 244 281 247 284 Consol Revenues (Rs bn) 236 271 239 274 242 277 245 280 247 283 EBITDA (Rs bn) 64 76 66 79 68 81 71 84 73 87 EBITDA margin (%) 27.0 28.1 27.6 28.7 28.3 29.3 28.9 30.0 29.6 30.6 EPS (Rs/share) 4.1 6.2 4.6 6.8 5.1 7.3 5.6 7.9 6.1 8.5 Fair value (Rs/share) 99 107 115 123 131

Change from base case (%)RPM (2.3) (2.2) (1.2) (1.1) 1.2 1.1 2.3 2.2 Revenues (2.3) (2.2) (1.2) (1.1) 1.2 1.1 2.3 2.2 EBITDA (7.0) (6.5) (3.5) (3.3) 3.5 3.3 7.0 6.5 EBITDA margin (bps) (134) (128) (66) (63) 65 62 128 122 EPS (19.9) (15.3) (9.9) (7.7) 9.9 7.7 19.9 15.3 Fair value (13.9) (7.0) 7.0 13.9

Volume sensitivityFY2013E FY2014E FY2013E FY2014E FY2013E FY2014E FY2013E FY2014E FY2013E FY2014E

RPM (Rs/min) 0.431 0.446 0.431 0.446 0.431 0.446 0.431 0.446 0.431 0.446 Volumes (bn min) 532 592 546 608 560 623 574 639 588 654 Wireless revenues (Rs bn) 229 264 235 271 241 278 247 285 253 292 Consol Revenues (Rs bn) 230 263 236 270 242 277 248 284 254 291 EBITDA (Rs bn) 60 72 64 76 68 81 73 86 77 91 EBITDA margin (%) 26.1 27.2 27.2 28.3 28.3 29.3 29.3 30.3 30.3 31.3 EPS (Rs/share) 3.3 5.3 4.2 6.3 5.1 7.3 6.0 8.4 6.9 9.4 Fair value (Rs/share) 87 101 115 129 143

Change from base case (%)RPM - - - - - - - - Revenues (5.0) (5.0) (2.5) (2.5) 2.5 2.5 5.0 5.0 EBITDA (12.3) (12.0) (6.2) (6.0) 6.2 6.0 12.3 12.0 EBITDA margin (bps) (219) (215) (107) (105) 102 99 198 194 EPS (35.3) (28.2) (17.6) (14.1) 17.6 14.1 35.3 28.2 Fair value (24.7) (12.3) 12.3 24.7

+5%

+1 paiseBase case-1 paise -0.5 paise +0.5 paise

-5% -2.5% Base case +2.5%


India Telecom


Valuations – on the richer side but defensive domestic consumption stories likely to get a premium in current market environment

We continue to find the valuations of Bharti and Idea, at 6.7X and 6.5X FY2013E EV/EBITDA, respectively, to be on the richer side as compared to global and EM telco valuations. Nevertheless, these stocks, as defensive domestic consumption plays, and now with pricing power, can sustain rich valuations, in our view.

Some thoughts on long-term industry structure and the challengers’ challenge

We present our thoughts on why we believe tariff hikes are not a long-term solution for the challengers. Volume market share gain remains a more viable (and probably the only) long-term organic survival strategy for the challengers in the market. Two key issues with the challengers adopting the tariff hike strategy –

Volume market share gains stop – in fact, pricing services at par with the incumbents exposes challengers to a potential decline in volume market share given that they do not (in most circles) have a quality network to back. Overall price * volumes = revenues equation has a risk of turning revenue neutral or only marginally revenue accretive at best, for the challengers.

Modest price hikes do not take challengers anywhere close to FCF or even EBITDA break-even levels.

The point we are making is that participating in price hikes started by the incumbents exposes challengers to

Serious risks of consumer mind-share loss (network strength lowers this risk for the incumbents raising tariffs), not the best long-term strategy, in our view

Risk of getting into sustained network quality differential versus incumbents by making more cash flows available to the incumbents – part of these cash flows are likely to be deployed into the leaders’ networks.

There is little beyond some short-term P&L relief that these price hikes offer to the challengers. And even this P&L relief, as we mentioned earlier, may not be good enough – it does not make the challengers cash or EBITDA positive implying they remain dependent on funding (hopefully slightly lower than earlier) to sustain operations.

To illustrate the point above, we present EBITDA breakeven and cash break-even (defined as opex + maintenance capex + interest payment) RPM for different categories of operators at different volume market share levels. We define operator categories (based on spectrum assets, current scale of operations, and cost structures) as

1, for best-in-class operators - we place Bharti and Vodafone in this category

1.5, for Idea – slightly inferior to Bharti and Vodafone on each of the three parameters

3 – for BSNL, RCOM, and TTSL. BSNL gets placed here despite superior spectrum assets on account of its bloated cost structure

4 – for Aircel

Telecom India


Exhibit 5 below depicts the EBITDA break-even RPM for each of the above four operator categories while Exhibit 6 looks at cash break-even RPMs.

Exhibit 5: EBITDA break-even RPM for various operator categories (defined earlier in the note) at various VMS levels

0.27 5.0 10.0 15.0 20.0 25.0 30.0 1.0 0.305 0.297 0.290 0.282 0.273 0.265 1.5 0.327 0.319 0.310 0.300 0.291 0.282 3.0 0.422 0.408 0.392 0.376 0.361 0.346 4.0 0.524 0.500 0.475 0.451 0.428 0.407

Minutes market share (%)

Category


Exhibit 6: Cash break-even RPM for various operator categories (defined earlier in the note) at various VMS levels

0.34 5.0 10.0 15.0 20.0 25.0 30.0 1.0 0.435 0.392 0.370 0.353 0.339 0.327 1.5 0.457 0.415 0.393 0.375 0.359 0.345 3.0 0.558 0.515 0.486 0.462 0.439 0.419 4.0 0.672 0.622 0.583 0.548 0.517 0.489


Category


We note that even with a 15% volume market share (VMS), the cash break-even RPM for operators in category 3 is roughly 48.6 paise/min. Now, even as the tariff hikes announced so far and some more can take RPM up to these levels, it is difficult to see any of these operators getting to a 15% VMS raising prices in tandem with larger incumbents. A lower VMS (say 10%) on the other hand increases the cash break-even threshold RPM by 3 paise to 51.5 paise/min.

In essence, longer-term viability of challengers (operators in categories 3 and 4) can not come with price hikes. It will depend on several factors, key ones (in order of importance) being – (1) more spectrum – to aid network quality and take them to the next category level; this would lower the EBITDA/cash break-even table, and (2) increase in volume market share – this would involve network investments and ability to sustain operations at prices lower than incumbents (despite a higher cost structure) – possibly requiring another round or two of equity infusion.

Taking our framework a little further to assess the longer-tem RPM evolution in the industry, we look at the ROCE different categories of operators can generate at different combinations of market share and RPM. This is illustrated in Exhibit 7. Each of the series in the Exhibit represents the ROCE of a (category, market share) combination at various RPM levels.

India Telecom


Exhibit 7: ROCE of various operator category, market share combinations at various RPM levels

Category VMS (%)1.0 25.0

1.0 20.0 1.5 20.0

1.5 15.0

3.0 15.0

3.0 10.0

3.0 5.0

4.0 10.0 4.0 7.5 4.0 5.0

(15)

(10)

(5)

-

5

10

15

20

25

30

35

40

45

50

55

0.40

0.42

0.44

0.46

0.48

0.50

0.52

0.54

0.56

0.58

0.60

0.62

0.64

0.66

0.68

0.70

0.72

0.74

0.76

0.78

RPM (Rs/min)

RO

CE

(%)

1,20 1,25 1.5,15 1.5,20 3,5 3,10

3,15 4,5 4,7.5 4,10 12% ROCE

At an RPM of 48.5 paise/min, category 1.5 operator makes an ROCE of about 12 with 15% volume market share


For example, a category 1 operator with 25% volume market share – a (1, 25) combination generates an ROCE > cost of capital (we have taken 12% for the purpose of this exercise) even at a 40 paise RPM while the same return break-even point for a category 1.5 operator with a 15% market share is around 48.5 paise. The 48.5 paise mark is important to note as this can be seen as the RPM level at which all the top 3 operators in the country (Bharti, Vodafone, and Idea) would be earning positive economic returns. We also note that operator categories 3 or 4 do not achieve 12% ROCE even at an RPM of 60 paise/min. This takes us back to what we mentioned earlier – moving up the category levels through more spectrum is critical. It must be mentioned though that some of the new capital that has come into the industry over the past two to three years may not have a 12% ROCE target, in any case.

To conclude, even as we expect price hikes to sustain and benefit incumbents in the near to medium term, it is not a long-term solution to industry’s over-capacity issues as modest price hikes do not make the least efficient capacity in the system viable, even in the longer run. This would mean continued tension in the system till some of the inefficient capacity consolidates or moves out of the system. This can happen in many ways (in-sector consolidation, a challenger being bought by a new player with deeper pockets, a challenger or more shutting shop, etc.) – not all of these would be good for the incumbents and this remains one of the risks to our revised thesis. Nonetheless, we see low probability of a negative development on this front anytime soon.

Exhibits 8 and 9 illustrate our operator category, RPM required for different return scenarios framework further.

Telecom India


Exhibit 8: Critical RPM levels for different operator categories under various market share scenarios

EBITDA break-even

Cash break-even

ROCE break-even 6% ROCE 8% ROCE 10% ROCE 12% ROCE

Category Minutes market

share (%) 15.0 0.290 0.370 0.314 0.383 0.406 0.429 0.453 17.5 0.286 0.361 0.307 0.371 0.392 0.413 0.435

20.0 0.282 0.353 0.300 0.360 0.379 0.399 0.419 22.5 0.277 0.346 0.293 0.350 0.368 0.387 0.406 25.0 0.273 0.339 0.287 0.340 0.358 0.376 0.394 27.5 0.269 0.333 0.281 0.332 0.349 0.366 0.383 30.0 0.265 0.327 0.275 0.324 0.340 0.357 0.373

10.0 0.319 0.415 0.363 0.450 0.480 0.509 0.538

12.5 0.314 0.403 0.351 0.430 0.456 0.482 0.508 15.0 0.310 0.393 0.342 0.413 0.437 0.461 0.485 17.5 0.305 0.383 0.333 0.399 0.422 0.444 0.466 20.0 0.300 0.375 0.325 0.387 0.408 0.429 0.449 22.5 0.296 0.367 0.317 0.376 0.396 0.415 0.435 25.0 0.291 0.359 0.310 0.366 0.384 0.403 0.421

5.0 0.422 0.558 0.554 0.695 0.742 0.789 0.836

7.5 0.415 0.533 0.525 0.642 0.680 0.719 0.758 10.0 0.408 0.515 0.503 0.605 0.639 0.673 0.707 12.5 0.400 0.500 0.483 0.575 0.606 0.637 0.668 15.0 0.392 0.486 0.466 0.550 0.579 0.607 0.635 17.5 0.384 0.474 0.450 0.528 0.554 0.581 0.607 20.0 0.376 0.462 0.435 0.508 0.533 0.557 0.582

5.0 0.524 0.672 0.772 0.940 0.996 1.052 1.108 7.5 0.512 0.644 0.722 0.863 0.910 0.957 1.004

10.0 0.500 0.622 0.681 0.805 0.846 0.887 0.929 12.5 0.487 0.601 0.645 0.757 0.794 0.831 0.868 15.0 0.475 0.583 0.613 0.715 0.749 0.783 0.817 17.5 0.463 0.565 0.585 0.679 0.710 0.741 0.773 20.0 0.451 0.548 0.559 0.646 0.675 0.704 0.733

4

Required RPM (Rs/min)

1

1.5

3


India Telecom


Exhibit 9: Probable long-term industry structure - volume market share gain the only viable long-term strategy for challengers

EBITDA break-even

Cash break-even

ROCE break-even 6% ROCE 8% ROCE 10% ROCE 12% ROCE


25.0 0.273 0.339 0.287 0.340 0.358 0.376 0.394

20.0 0.282 0.353 0.300 0.360 0.379 0.399 0.419 15.0 0.310 0.393 0.342 0.413 0.437 0.461 0.485

12.5 0.400 0.500 0.483 0.575 0.606 0.637 0.668 10.0 0.408 0.515 0.503 0.605 0.639 0.673 0.707 7.5 0.415 0.533 0.525 0.642 0.680 0.719 0.758

4 5.0 0.524 0.672 0.772 0.940 0.996 1.052 1.108

EBITDA break-even RPM ROCE break-even RPM 8% ROCE RPMTop-3 0.310 Top-3 0.342 Top-3 0.437 Top-5 0.408 Top-5 0.503 Top-5 0.639 Top-6 0.415 Top-6 0.525 Top-6 0.680 All 0.524 All 0.772 All 0.996

Cash break-even RPM 6% ROCE RPM 12% ROCE RPMTop-3 0.393 Top-3 0.413 Top-3 0.485 Top-5 0.515 Top-5 0.605 Top-5 0.707 Top-6 0.533 Top-6 0.642 Top-6 0.758 All 0.672 All 0.940 All 1.108

3

Required RPM (Rs/min)

1

1.5


Exhibit 10: Bharti - key assumptions driving our model, IFRS, March fiscal year-ends (Rs mn)

2010 2011 2012E 2013E 2014E 2015E 2016E 2017EIndia wirelessEnd-period subs ('000) 127,619 162,203 190,277 212,291 229,098 242,575 253,390 262,069 Total traffic (bn min) 610 792 931 1,052 1,151 1,225 1,286 1,336 RPM (Rs/min) 0.529 0.441 0.432 0.450 0.465 0.477 0.487 0.496 ARPU (Rs/sub/month) 243 201 190 196 202 207 210 214 MOU (Rs/sub/month) 459 456 440 436 435 433 432 432 EBITDA margin (%) 38.7 34.7 35.0 37.1 38.1 38.8 39.6 40.2 Africa wirelessEnd-period subs ('000) 36,000 44,206 53,806 62,806 71,206 79,006 86,206 92,806 ARPU (US$/sub/month) 7.7 7.4 7.1 7.1 7.1 7.1 7.2 7.3 MOU (min/sub/month) 96 128 151 164 176 187 197 RPM (US$ cents/min) 7.7 5.5 4.7 4.3 4.1 3.9 3.7 EBITDA margin (%) 29.0 24.0 28.2 32.1 32.8 33.2 33.5 33.9


Telecom India


Exhibit 11: Impact of various potential regulatory negatives on Bharti (Rs/share)

Per share impactNegativesOne time excess spectrum charge (10) Charges on spectrum renewal (NPV of the impact) (24) Spectrum refarming (37) Total negatives (70)


Exhibit 12: Impact of various potential positives and negatives on Idea (Rs/share)

Per share impactNegativesOne time excess spectrum charge (4) Charges on spectrum renewal (NPV of the impact) (22) Spectrum refarming (15) Total negatives (42)

PositivesReduction in license fees 10 Total positives 10

Net impact (Rs/share) (31)

Note:(1) Impact computation based on latest available TRAI recommendation.


India Telecom


Exhibit 13: Our end-March 2013E DCF-based price target for Bharti Airtel is Rs460/share

2011 2012E 2013E 2014E 2015E 2016E 2017E 2018E 2019E 2020E 2021EEBITDA 199,664 253,953 320,715 369,183 409,521 446,702 481,694 514,329 545,709 574,545 602,455 Depreciation (102,066) (131,379) (144,722) (157,315) (169,195) (180,453) (191,165) (201,317) (210,932) (219,861) (228,159) EBIT 97,598 122,575 175,994 211,867 240,326 266,249 290,529 313,012 334,778 354,684 374,296 Capex (142,190) (160,180) (157,132) (157,763) (155,329) (157,857) (157,124) (159,484) (159,369) (158,347) (159,466) Taxes (17,790) (27,121) (45,151) (60,051) (73,667) (84,786) (96,316) (107,800) (119,510) (131,069) (142,883) Change in working capital 97,624 (11,240) (8,426) (9,337) (9,191) (3,295) (5,882) (8,384) (10,305) (12,130) (13,748) Free cash flow 137,308 55,412 110,006 142,031 171,334 200,764 222,371 238,660 256,526 272,999 286,358 FCF growth (%) (59.6) 98.5 29.1 20.6 17.2 10.8 7.3 7.5 6.4 4.9 Discounted FCF 55,412 110,006 126,250 135,375 141,003 138,825 132,439 126,536 119,700 111,606

Terminal growth (%) 3.0 WACC (%) 12.5 Exit FCF multiple (X) 10.8 Exit EBITDA multiple (X) 5.2 End-FY2013E DCFPV of explicit cash flows 1,141,741 49%PV of terminal value 1,210,049 51%EV 2,351,791 Net debt 599,559 Equity value 1,752,232 # of shares outstanding 3,798 Equity value per share (Rs/share) 461 Key assumptions (%)Revenue growth 42.1 22.0 16.1 12.5 9.3 7.7 6.7 5.6 5.1 4.6 4.2 EBITDA growth 19.1 27.2 26.3 15.1 10.9 9.1 7.8 6.8 6.1 5.3 4.9 EBITDA margin 33.6 35.0 38.1 39.0 39.5 40.0 40.5 40.9 41.3 41.6 41.9 Capex/sales 23.9 22.1 18.7 16.7 15.0 14.1 13.2 12.7 12.1 11.5 11.1 Return on avg. capital employed 9.4 8.2 10.8 12.6 14.1 15.7 17.5 19.4 21.4 23.7 26.3


Exhibit 14: Our March-13E DCF-based target price for Idea is Rs115/share

2009 2010 2011 2012E 2013E 2014E 2015E 2016E 2017E EBITDA 28,353 34,072 37,907 52,145 68,417 81,355 89,938 95,900 100,575 Tax (135) (403) (615) (4,447) (6,567) (8,497) (9,778) (10,599) (11,276) Change in working capital 3,673 (21,912) 17,496 (9,141) (4,143) (1,677) (1,968) (2,760) (2,026) Post-tax operating cash flow 31,892 11,757 54,787 38,556 57,707 71,181 78,192 82,541 87,274 Capex (61,402) (33,024) (92,080) (49,812) (46,986) (40,780) (37,004) (37,033) (37,398) Free cash flow (29,511) (21,267) (37,293) (11,256) 10,721 30,401 41,188 45,508 49,876

WACC and growth in perpetuity assumptionsPV of cash flows 232,247 Terminal growth - g (%) 4.5 PV of terminal value 269,967 WACC (%) 13.0 EV 502,214 Net debt 123,951 Equity value (Rs mn) 378,263 Equity value (US$ mn) 8,135Shares outstanding (mn) 3,303 Equity value (Rs/Idea share) 115 Exit FCF multiple (X) 12.3 Exit EBITDA multiple (X) 6.3

Key assumptions (%) 2009 2010 2011 2012E 2013E 2014E 2015E 2016E 2017ERevenue growth 51.0 22.7 24.6 26.5 23.3 14.7 9.2 5.8 4.3 EBITDA growth 25.9 20.2 11.3 37.6 31.2 18.9 10.6 6.6 4.9 EBITDA margin 27.9 27.4 24.5 26.6 28.3 29.3 29.7 30.0 30.1 Capex/sales 60.5 26.5 59.4 25.4 19.4 14.7 12.2 11.6 11.2 Cash tax rate 0.9 2.8 4.2 19.6 19.1 18.9 18.8 18.7 18.7 Effective tax rate 3.9 11.9 9.8 29.2 28.5 29.2 29.5 30.1 30.7 ROCE 10.4 7.6 6.5 7.2 10.2 12.7 14.5 15.7 16.8


Telecom India


Exhibit 15: Bharti valuation - sum of the parts

India business valuation FY2013ECore business (ex-towers, ex-Africa)Enterprise value (Rs mn) - end-March 1,555,204 EBITDA (ex-Bharti Infratel) (Rs mn) 199,385 EV/EBITDA (X) 7.80 Towerco valuationBlended tower base (86.75% Bharti Infratel + 36.44% Indus) 72,894 EV/tower (US$) 95,000 EV (Rs mn) 311,624 India EV (Rs mn) 1,866,828 Net debt (Rs mn) - 92,315 Equity value - India business (Rs mn) 1,774,513 Equity value - India business (Rs/share) 467

Africa business valuationEnterprise value (Rs mn) - end-March 379,379 EBITDA (Rs mn) 57,921 EV/EBITDA (X) 6.55 Net debt - (including acquisition debt) (Rs mn) 401,947 Equity value - Africa (Rs mn) (22,567) Equity value - Africa (Rs/share) (6) Total equity value = a + b (Rs/share) 461


India Telecom


Exhibit 16: Bharti - condensed financials, IFRS, March fiscal year-ends (Rs mn)

2010 2011 2012E 2013E 2014EProfit and loss statementRevenues 418,472 594,672 725,284 842,251 947,366 EBITDA 167,633 199,664 253,953 320,715 369,183 EBIT 104,798 97,598 122,575 175,994 211,867 PBT 105,136 76,839 95,163 155,694 200,171 Recurring PAT 89,765 60,467 69,210 106,382 133,227 Recurring EPS (Rs/share) 23.6 15.9 18.2 28.0 35.1

Balance sheetTotal Equity 447,225 516,231 584,272 694,815 819,348 Borrowings 101,898 616,708 596,708 546,708 451,708 Other liabilities 161,817 332,125 343,224 364,062 379,881 Total equity and liabilities 710,940 1,465,064 1,524,205 1,605,585 1,650,937 Net fixed assets 482,629 651,426 710,296 752,775 783,292 Net intangibles 59,890 637,317 607,249 577,180 547,112 Cash and equivalents 25,323 9,575 17,575 57,281 77,030 Other assets 143,098 166,746 189,085 218,348 243,504 Total assets 710,940 1,465,064 1,524,205 1,605,585 1,650,937

Cash flow statementOperating cash flow 191,538 283,473 215,592 267,139 299,794 Capex (130,582) (142,190) (160,180) (157,132) (157,763) Free cash flow 60,955 141,283 55,412 110,006 142,031 Acquisitions (75,675) (706,100) — — —Borrowings (16,903) 514,810 (20,000) (50,000) (95,000) Others 45,801 34,259 (27,412) (20,300) (27,283) Total change in cash balances 14,178 (15,748) 8,000 39,706 19,748

Ratios (%)Sales growth 13.2 42.1 22.0 16.1 12.5 EBITDA growth 10.6 19.1 27.2 26.3 15.1 EPS growth 5.8 (32.6) 14.5 53.7 25.2 FCF growth 131.8 (60.8) 98.5 29.1 EBITDA margin 40.1 33.6 35.0 38.1 39.0 Net margin 21.5 10.2 9.5 12.6 14.1 FCF margin 14.6 23.8 7.6 13.1 15.0 RoAE 12.6 12.6 16.6 17.6 RoACE 9.2 7.7 10.8 12.6

Net debt/EBITDA (X) 0.5 3.0 2.3 1.5 1.0 Net debt/equity (X) 0.2 1.2 1.0 0.7 0.5 Total debt/capital (X) 0.2 0.5 0.5 0.4 0.4


Telecom India


Exhibit 17: Idea Cellular's condensed financial statements, March year-ends, 2009-2013E

2010 2011 2012E 2013E 2014EProfit model (Rs mn)Revenue 124,471 155,034 196,150 238,982 341,524EBITDA 34,072 37,907 52,145 67,255 103,254EBIT 13,922 13,934 21,754 32,341 55,440Net interest income / (expense) (3,689) (3,965) (9,242) (10,087) 979Tax (1,214) (982) (3,650) (6,483) (17,536)Recurring Net profit 9,019 8,988 8,862 15,771 38,883Extraordinaries 520 - - - - Adjusted net profit 9,539 8,988 8,862 15,771 38,883 Fully diluted EPS 2.73 2.72 2.68 4.77 11.77

Balance sheet (Rs mn)Cash 14,201 14,777 11,276 18,189 118,397Other current assets 25,080 30,119 43,285 52,413 65,982Fixed assets 171,382 186,544 213,636 230,294 233,024Other long term assets 15,823 74,833 71,645 67,537 47,633Short tem debt 8,846 8,846 8,846 8,846 8,846Other current liabilities 32,029 59,947 69,424 75,043 79,468Long term debt 69,747 111,382 126,382 131,382 48,382Other long term liabilities 2,142 3,099 3,329 5,529 32,429Shareholders funds (incl. minorities) 113,722 122,999 131,861 147,632 295,911Net (debt)/ cash (64,392) (105,451) (123,951) (122,039) 61,170

Free cash flow (Rs mn)EBITDA 34,072 37,907 52,145 67,255 103,254 Change in working capital 17,496 (9,141) (3,509) (1,683) (1,258)Cash tax (paid) (364) (416) (2,450) (4,283) (10,636)Cash interest (paid) (4,005) (4,772) (10,201) (10,868) (4,638)Capex on PP&E and intangibles (33,024) (92,080) (49,812) (47,463) (40,641)Miscallenous (39,407) 26,637 (5,632) (1,826) 98Free cash flow (25,233) (41,866) (19,460) 1,130 46,178

Ratios (%)Sales growth 22.7 24.6 26.5 21.8 (1,532.4)EBITDA growth 20.2 11.3 37.6 29.0 (833.9)EPS growth (5.8) (0.5) (1.4) 78.0 9.5FCF growth NM NM NM NM NMEBITDA margin 27.4 24.5 26.6 28.1 30.2 Net margin 7.2 5.8 4.5 6.6 11.4FCF margin (20.3) (27.0) (9.9) 0.5 13.5RoAE 7.6 7.6 7.0 11.3 13.9ROAE (excl. cash and int. income) 9.2 7.7 6.8 11.6 17.2 RoACE 6.5 6.4 7.1 9.5 13.2ROACE (excl. cash and int. income) 7.6 6.5 7.2 9.8 16.9

Net debt/EBITDA (X) 1.9 2.8 2.4 1.8 (0.6)Net debt/equity (X) 0.6 0.9 0.9 0.8 (0.2)Total debt/capital (X) 0.4 0.5 0.5 0.5 0.2


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Kotak Institutional Equities: Valuation summary of key Indian companies

29-Aug-11 Mkt cap.O/S

shares EPS (Rs) EPS growth (%) PER (X) EV/EBITDA (X) RoE (%)Target price Upside ADVT-3mo

Company Price (Rs) Rating (Rs mn) (US$ mn) (mn) 2011E 2012E 2013E 2011E 2012E 2013E 2011E 2012E 2013E 2011E 2012E 2013E 2011E 2012E 2013E 2011E 2012E 2013E 2011E 2012E 2013E (Rs) (%) (US$ mn)

Automobiles

Ashok Leyland 25 SELL 66,517 1,444 2,661 2.4 2.1 2.4 68.1 (11.9) 12.8 10.5 12.0 10.6 7.4 7.8 7.0 1.5 1.4 1.3 4.0 4.0 4.0 21.8 17.4 18.2 26 4.0 4.7

Bajaj Auto 1,574 SELL 455,385 9,887 289 90.4 102.5 113.5 43.9 13.5 10.7 17.4 15.3 13.9 13.3 12.0 11.1 9.2 6.9 5.4 2.5 2.5 2.5 84.9 51.6 43.7 1,590 1.0 12.9

Bharat Forge 272 ADD 64,498 1,400 237 12.5 16.4 20.3 1,402.1 30.8 23.5 21.7 16.6 13.4 10.2 8.3 7.0 2.9 2.5 2.1 1.3 — — 8.2 14.1 15.2 320 17.7 3.1

Exide Industries 149 REDUCE 126,608 2,749 850 7.5 8.1 10.0 18.0 9.2 22.9 20.0 18.3 14.9 14.4 13.3 10.9 4.6 3.8 3.1 1.0 0.9 0.9 25.5 22.9 23.2 160 7.4 5.7

Hero Honda 1,972 SELL 393,868 8,551 200 99.3 111.3 128.2 (11.1) 12.1 15.1 19.9 17.7 15.4 14.0 13.0 10.6 8.4 8.7 8.3 5.3 3.5 3.5 56.5 63.6 60.2 1,800 (8.7) 18.2

Mahindra & Mahindra 733 ADD 450,246 9,775 614 41.7 46.8 50.4 22.7 12.1 7.7 17.6 15.7 14.6 13.5 11.5 10.4 4.2 3.5 2.9 1.6 1.3 1.3 27.3 24.4 22.0 830 13.2 30.5

Maruti Suzuki 1,079 BUY 311,839 6,770 289 79.2 79.9 100.3 (8.4) 0.9 25.5 13.6 13.5 10.8 8.3 7.9 5.9 2.2 1.9 1.7 0.7 0.7 0.7 17.6 15.4 16.7 1,475 36.6 11.3

Tata Motors 731 ADD 485,882 10,549 665 136.0 115.5 119.6 737.9 (15.0) 3.6 5.4 6.3 6.1 4.2 4.8 4.5 2.5 1.9 1.5 2.6 2.0 2.0 66.1 34.2 27.3 885 21.1 59.3

Automobiles Cautious 2,354,844 51,126 88.4 (1.8) 10.5 11.7 12.0 10.8 7.8 7.9 7.1 3.7 3.1 2.6 2.5 2.0 2.0 31.7 25.7 23.6

Banks/Financial Institutions

Andhra Bank 127 BUY 71,067 1,543 560 22.6 24.2 27.5 5.0 6.9 13.5 5.6 5.2 4.6 — — — 1.1 1.0 0.8 4.3 4.6 5.3 23.2 19.4 19.2 190 49.6 1.9

Axis Bank 1,039 BUY 426,742 9,265 411 82.5 98.9 119.7 33.0 19.8 21.1 12.6 10.5 8.7 — — — 2.2 1.9 1.6 1.3 1.6 2.0 19.3 19.7 20.3 1,700 63.5 46.9

Bank of Baroda 731 BUY 287,064 6,232 393 108.0 109.5 129.1 29.1 1.4 17.9 6.8 6.7 5.7 — — — 1.5 1.3 1.1 2.6 2.7 3.1 25.9 20.4 20.5 1,250 71.0 7.3

Bank of India 313 ADD 171,280 3,719 547 45.5 54.0 70.7 37.4 18.7 30.9 6.9 5.8 4.4 — — — 1.1 0.9 0.8 2.6 3.1 4.0 17.3 17.2 19.5 470 50.2 8.0

Canara Bank 423 ADD 187,168 4,064 443 90.9 86.3 108.7 23.3 (5.0) 25.9 4.6 4.9 3.9 — — — 1.0 0.9 0.7 2.6 2.8 2.8 23.2 17.7 19.0 600 42.0 8.1

Corporation Bank 427 ADD 63,207 1,372 148 95.4 93.4 114.1 16.3 (2.1) 22.2 4.5 4.6 3.7 — — — #REF! #REF! #REF! 4.7 4.6 5.6 21.9 18.1 19.2 630 47.6 0.9

Federal Bank 351 BUY 59,986 1,302 171 34.3 44.5 56.2 26.3 29.8 26.1 10.2 7.9 6.2 — — — 1.2 1.1 1.0 2.4 3.1 4.0 12.0 14.2 16.0 500 42.6 5.0

HDFC 645 REDUCE 946,444 20,548 1,467 24.1 27.8 31.9 22.4 15.6 14.6 26.8 23.2 20.2 — — — 5.5 4.8 3.7 1.4 1.6 1.9 21.7 22.1 21.5 730 13.1 39.0

HDFC Bank 456 REDUCE 1,061,761 23,052 2,326 16.9 22.0 28.0 31.0 30.2 27.5 27.0 20.8 16.3 — — — 4.2 3.6 3.1 0.7 0.9 1.2 16.7 18.7 20.5 560 22.7 36.0

ICICI Bank 858 BUY 988,319 21,457 1,152 44.7 58.0 63.1 23.9 29.7 8.8 19.2 14.8 13.6 — — — 1.8 1.7 1.5 1.6 2.0 2.2 9.7 11.7 11.8 1,100 28.2 79.0

IDFC 111 BUY 167,237 3,631 1,509 8.8 9.9 12.0 4.6 12.8 21.6 12.6 11.2 9.2 — — — 1.6 1.4 1.2 1.9 1.8 2.2 14.7 13.1 13.9 150 35.3 25.8

India Infoline 74 SELL 24,305 528 327 7.4 4.8 6.5 (9.3) (34.5) 33.8 10.1 15.4 11.5 — — — 1.5 1.2 1.1 4.1 1.3 1.9 12.9 8.7 10.3 70 (5.9) 1.6

Indian Bank 198 BUY 85,266 1,851 430 38.8 42.0 50.9 10.5 8.2 21.2 5.1 4.7 3.9 — — — 1.1 0.9 0.8 3.8 4.0 4.8 22.3 20.4 21.0 300 51.2 1.7

Indian Overseas Bank 108 BUY 66,918 1,453 619 17.3 21.1 30.8 33.6 22.0 45.4 6.2 5.1 3.5 — — — 0.8 0.7 0.6 4.6 3.9 4.3 12.7 13.3 17.0 190 75.7 1.7

IndusInd Bank 240 BUY 111,972 2,431 466 12.4 15.2 18.2 45.2 22.6 19.9 19.4 15.8 13.2 — — — 3.1 2.7 2.3 0.8 1.0 1.2 20.8 17.7 17.9 325 35.2 3.8

J&K Bank 767 ADD 37,201 808 48 126.9 141.8 152.8 20.1 11.8 7.7 6.0 5.4 5.0 — — — 1.1 0.9 0.8 3.4 3.8 4.1 19.0 18.4 17.3 950 23.8 0.7

LIC Housing Finance 207 ADD 98,148 2,131 475 20.5 22.9 27.5 47.2 11.4 20.4 10.1 9.0 7.5 — — — 2.5 2.1 1.7 2.1 2.4 2.9 25.8 23.7 23.9 260 25.8 23.7

Mahindra & Mahindra Financial 608 BUY 62,255 1,352 102 45.2 56.4 69.2 26.1 24.8 22.7 13.4 10.8 8.8 — — — 2.5 2.2 1.9 1.7 2.0 2.5 22.0 21.4 22.3 825 35.8 1.4

Muthoot Finance 169 BUY 62,899 1,366 371 15.7 19.0 24.5 108.4 20.5 29.0 10.8 8.9 6.9 — — — 4.7 2.1 1.6 — — — 51.5 33.0 26.8 220 29.9 —

Oriental Bank of Commerce 315 BUY 91,934 1,996 292 51.5 55.6 65.4 13.7 8.0 17.6 6.1 5.7 4.8 — — — 0.9 0.8 0.7 3.3 3.6 4.2 15.5 13.9 14.7 430 36.5 3.8

PFC 140 BUY 184,527 4,006 1,320 22.8 23.4 28.3 11.1 2.4 21.3 6.1 6.0 4.9 — — — 1.2 0.9 0.8 2.8 3.3 4.1 18.4 17.0 16.7 225 60.9 17.3

Punjab National Bank 925 BUY 293,067 6,363 317 140.0 163.0 201.5 13.0 16.5 23.6 6.6 5.7 4.6 — — — 1.5 1.2 1.0 2.4 3.6 4.4 24.4 23.5 24.2 1,500 62.2 6.2

Reliance Capital 377 REDUCE 92,864 2,016 246 9.3 16.5 24.8 (25.3) 77.0 50.4 40.5 22.9 15.2 — — — 1.3 1.3 1.2 1.0 1.7 2.6 3.3 5.7 8.3 470 24.6 19.3

Rural Electrification Corp. 172 BUY 169,634 3,683 987 26.0 29.0 32.5 28.1 11.5 12.3 6.6 5.9 5.3 — — — 1.3 1.2 1.0 4.4 4.8 5.4 21.5 20.8 20.4 240 39.7 12.9

Shriram Transport 614 REDUCE 136,930 2,973 223 55.1 65.6 75.3 40.8 19.0 14.8 11.1 9.4 8.2 — — — 2.8 2.4 2.0 1.1 2.1 2.5 28.1 26.8 25.2 700 14.1 11.7

SKS Microfinance 209 SELL 15,357 333 74 15.7 (39.1) 3.9 (41.8) (349.4) (109.9) 13.3 (5.3) 53.8 — — — 0.9 1.0 1.0 — — — 8.3 (17.4) 1.9 350 67.9 9.5

State Bank of India 1,939 BUY 1,231,009 26,726 635 130.2 195.6 256.1 (9.9) 50.3 30.9 14.9 9.9 7.6 — — — 1.9 1.6 1.4 1.7 1.9 2.0 12.6 17.8 20.0 2,750 41.9 106.5

Union Bank 239 BUY 125,106 2,716 524 39.5 50.2 60.4 (3.9) 27.1 20.5 6.0 4.8 3.9 — — — 1.1 1.0 0.8 3.9 4.9 5.9 20.9 21.9 22.5 425 78.1 4.6

Yes Bank 271 BUY 94,164 2,044 347 21.5 26.2 32.3 43.2 22.1 23.3 12.6 10.3 8.4 — — — 2.5 2.1 1.7 0.9 1.1 1.4 21.7 21.7 22.2 420 54.8 16.5

Banks/Financial Institutions Attractive 7,413,829 160,960 20.1 19.9 23.1 12.1 10.1 8.2 — — — #REF! #REF! #REF! 1.8 2.1 2.5 #REF! #REF! #REF!

Cement

ACC 1,003 REDUCE 188,350 4,089 188 55.6 60.1 72.7 (33.2) 8.2 20.9 18.0 16.7 13.8 11.0 9.2 7.2 2.8 2.5 2.2 3.5 2.3 2.3 17.5 17.3 18.1 980 (2.2) 5.4

Ambuja Cements 133 SELL 202,704 4,401 1,522 7.9 7.8 9.8 (1.5) (0.5) 25.5 16.9 17.0 13.5 10.2 9.3 7.1 2.6 2.4 2.1 1.5 1.7 1.8 16.6 14.8 16.9 135 1.4 5.6

Grasim Industries 2,149 BUY 197,077 4,279 92 233.3 259.5 289.3 (22.5) 11.2 11.5 9.2 8.3 7.4 6.0 5.1 4.2 1.4 1.2 1.0 1.6 1.6 1.6 15.8 15.3 15.0 2,900 34.9 3.3

India Cements 65 REDUCE 19,951 433 307 1.9 8.3 9.2 (81.2) 339.0 10.4 34.4 7.8 7.1 13.5 5.4 4.8 0.5 0.4 0.4 2.4 4.9 4.9 1.4 6.2 6.5 82 26.3 1.3

Shree Cement 1,645 REDUCE 57,297 1,244 35 57.2 83.1 132.9 (72.5) 45.5 59.8 28.8 19.8 12.4 6.4 6.0 4.2 3.0 2.8 2.4 0.6 0.6 0.6 10.7 14.5 20.7 1,730 5.2 1.1

UltraTech Cement 1,067 BUY 292,510 6,351 274 44.9 73.1 85.9 (49.2) 63.0 17.5 23.8 14.6 12.4 11.6 7.7 6.4 2.4 2.0 1.8 0.5 0.5 0.5 16.7 17.3 17.3 1,220 14.3 3.3

Cement Neutral 957,889 20,797 (23.5) 23.6 18.8 16.3 13.2 11.1 8.7 6.9 5.6 2.0 1.8 1.6 1.6 1.4 1.5 12.3 13.5 14.2

Price/BV (X) Dividend yield (%)

Source: Company, Bloomberg, Kotak Institutional Equities estimates

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shares EPS (Rs) EPS growth (%) PER (X) EV/EBITDA (X) Price/BV (X) RoE (%)Target price Upside ADVT-3mo


Consumer products

Asian Paints 3,297 REDUCE 316,228 6,866 96 80.8 94.6 111.4 13.0 17.1 17.7 40.8 34.8 29.6 27.3 22.2 18.2 15.4 11.9 9.6 1.0 0.8 1.1 43.9 40.0 36.8 2,900 (12.0) 8.6

Colgate-Palmolive (India) 947 SELL 128,806 2,796 136 29.6 34.1 38.8 (4.9) 15.0 14.1 32.0 27.8 24.4 27.8 24.3 20.3 33.5 34.1 27.2 2.3 3.1 2.9 113.4 121.6 124.2 900 (5.0) 2.2

Dabur India 110 REDUCE 190,832 4,143 1,740 3.3 3.7 4.4 12.8 14.1 18.8 33.6 29.4 24.8 27.0 22.3 18.7 14.5 11.3 8.9 1.0 1.2 1.4 51.2 43.8 40.6 110 0.3 4.2

GlaxoSmithkline Consumer (a) 2,337 ADD 98,271 2,134 42 71.3 82.6 101.9 28.8 15.8 23.4 32.8 28.3 22.9 23.5 20.1 16.8 10.5 8.6 7.0 2.1 1.1 1.4 32.2 32.5 32.8 2,700 15.5 0.7

Godrej Consumer Products 419 BUY 135,600 2,944 324 14.9 18.4 22.7 31.3 23.4 23.8 28.2 22.8 18.4 24.0 16.8 12.8 7.9 5.6 4.5 1.2 0.8 0.8 35.9 28.7 27.0 510 21.7 3.0

Hindustan Unilever 320 ADD 691,020 15,003 2,159 9.9 11.3 13.3 4.8 14.1 17.7 32.4 28.4 24.1 27.4 24.0 19.6 26.2 22.7 19.6 2.4 2.9 3.5 66.3 85.9 87.5 340 6.3 17.4

ITC 202 ADD 1,551,112 33,676 7,681 6.4 8.0 9.1 20.7 24.9 13.1 31.5 25.2 22.3 20.9 17.0 14.8 9.3 7.9 6.9 2.2 1.9 2.2 33.2 35.5 34.4 230 13.9 33.9

Jubilant Foodworks 940 SELL 61,474 1,335 65 11.2 16.5 22.2 99.6 47.0 34.8 83.9 57.1 42.3 51.2 31.7 23.8 32.1 20.5 13.8 — — — 46.6 43.9 39.0 650 (30.8) 30.4

Jyothy Laboratories 170 REDUCE 13,703 298 81 10.5 11.7 13.3 (5.0) 11.4 14.2 16.2 14.6 12.7 13.6 9.9 8.0 2.0 1.9 1.7 3.4 2.8 3.4 12.3 13.3 14.0 240 41.2 0.5

Marico 148 ADD 90,694 1,969 612 4.2 5.4 7.1 10.9 27.3 32.6 35.1 27.6 20.8 23.4 18.9 14.4 9.7 7.6 5.9 0.5 0.6 0.8 32.8 31.3 32.2 185 24.7 1.2

Nestle India (a) 4,403 REDUCE 424,499 9,216 96 86.8 103.6 123.2 16.7 19.3 18.9 50.7 42.5 35.7 33.8 27.7 22.8 49.6 36.1 27.2 1.1 1.4 1.6 116.5 98.3 86.8 3,500 (20.5) 2.3

Tata Global Beverages 93 ADD 57,728 1,253 618 4.0 6.0 6.8 (34.6) 52.6 13.0 23.6 15.5 13.7 9.2 7.8 6.8 1.2 1.1 1.1 2.1 3.3 3.7 6.5 9.6 10.4 110 17.8 5.1

Titan Industries 206 REDUCE 182,573 3,964 888 4.9 7.4 8.8 71.7 51.5 17.8 41.8 27.6 23.4 30.5 19.2 15.7 16.8 11.9 9.1 0.6 1.1 1.5 47.8 50.5 44.0 240 16.7 32.5

United Spirits 879 ADD 110,403 2,397 126 29.5 39.2 50.6 8.3 32.8 29.0 29.8 22.4 17.4 15.5 11.9 10.2 2.5 2.3 2.0 0.4 0.3 0.4 9.1 10.7 12.5 1,300 47.9 5.6

Consumer products Cautious 4,052,945 87,993 16.3 22.0 16.9 33.9 27.8 23.8 23.6 19.1 16.1 10.4 8.8 7.6 1.8 1.8 2.1 30.8 31.9 31.9

Constructions

IVRCL 35 BUY 9,345 203 267 5.9 5.7 6.6 (25.2) (4.1) 15.6 5.9 6.2 5.3 5.6 5.4 5.2 0.5 0.4 0.4 1.1 1.1 1.1 8.2 7.3 7.9 75 114.3 5.1

Nagarjuna Construction Co. 54 BUY 13,753 299 257 6.4 5.9 7.7 (29.7) (7.8) 30.8 8.4 9.1 7.0 7.6 7.2 6.7 0.6 0.6 0.5 3.7 3.7 3.7 7.1 6.3 7.8 100 86.6 1.2

Punj Lloyd 57 REDUCE 19,475 423 340 (1.5) 5.5 7.4 (56.6) (467.8) 34.9 (38.6) 10.5 7.8 12.8 5.7 5.0 0.7 0.6 0.6 (0.1) 0.8 1.1 (1.7) 6.1 7.7 65 13.3 12.0

Sadbhav Engineering 131 BUY 19,643 426 150 8.0 9.8 10.9 55.1 23.5 10.4 16.4 13.3 12.0 10.1 8.4 7.4 3.1 2.5 2.1 0.5 0.5 0.5 18.6 19.0 17.5 180 37.5 0.3

Construction Attractive 62,216 1,351 (0.3) 62.7 23.6 15.9 9.8 7.9 8.6 6.3 5.8 0.8 0.7 0.7 1.1 1.4 1.5 4.9 7.5 8.6

Energy

Aban Offshore 362 BUY 15,742 342 44 116.2 95.3 107.2 9.0 (18.0) 12.4 3.1 3.8 3.4 6.7 6.6 6.3 0.7 0.7 0.6 1.0 1.1 1.2 29.2 19.4 18.0 700 93.5 9.8

Bharat Petroleum 679 ADD 245,359 5,327 362 45.7 58.9 58.9 (20.7) 28.9 0.1 14.9 11.5 11.5 10.3 7.0 6.8 1.6 1.5 1.4 2.1 2.8 2.8 10.8 12.8 11.8 800 17.9 8.3

Cairn india 267 REDUCE 508,002 11,029 1,902 33.3 45.8 49.7 501.1 37.4 8.6 8.0 5.8 5.4 5.8 4.2 3.3 1.2 1.1 1.0 — 1.9 5.6 16.9 19.8 19.2 295 10.4 14.8

Castrol India (a) 518 SELL 128,202 2,783 247 19.8 21.9 22.3 28.5 10.8 1.6 26.2 23.6 23.3 16.8 15.8 15.4 24.8 22.6 21.5 2.9 3.3 3.5 100.2 100.2 94.7 425 (18.0) 2.0

GAIL (India) 417 ADD 528,893 11,483 1,268 28.1 36.6 39.2 13.4 30.3 7.1 14.9 11.4 10.6 9.1 8.4 7.4 2.5 2.2 1.9 1.8 2.4 2.6 17.4 19.6 17.9 560 34.3 9.3

GSPL 97 REDUCE 54,655 1,187 563 9.0 8.5 8.4 23.1 (6.1) (0.1) 10.8 11.5 11.5 6.9 6.8 6.5 2.4 2.0 1.8 1.0 1.7 2.6 25.5 19.1 16.4 92 (5.3) 5.2

Hindustan Petroleum 377 ADD 127,807 2,775 339 45.7 26.3 39.3 (11.4) (42.4) 49.5 8.3 14.3 9.6 3.3 3.9 3.2 0.8 0.8 0.7 3.7 2.2 3.2 10.1 5.3 7.4 460 22.0 8.3

Indian Oil Corporation 309 ADD 750,844 16,301 2,428 31.8 33.1 35.7 (35.4) 4.4 7.6 9.7 9.3 8.7 7.8 6.9 5.8 1.3 1.2 1.1 3.1 3.3 3.5 12.9 12.5 12.4 420 35.8 4.7

Oil India 1,300 BUY 312,501 6,785 240 120.0 171.7 190.1 4.2 43.1 10.7 10.8 7.6 6.8 5.4 3.0 2.5 1.8 1.6 1.4 2.9 4.2 4.6 16.2 20.1 19.4 1,750 34.7 1.8

Oil & Natural Gas Corporation 275 BUY 2,352,340 51,071 8,556 24.7 37.2 40.8 7.4 50.8 9.7 11.2 7.4 6.7 4.2 3.1 2.5 1.6 1.4 1.2 3.2 4.4 5.1 14.3 19.1 18.3 380 38.2 26.0

Petronet LNG 171 SELL 128,213 2,784 750 8.1 11.5 11.4 50.3 41.3 (0.7) 21.1 14.9 15.0 12.1 9.7 9.9 4.2 3.5 2.9 1.2 1.8 1.8 20.9 24.6 20.2 125 (26.9) 10.6

Reliance Industries 755 BUY 2,250,804 48,867 2,981 62.0 67.4 74.9 24.8 8.8 11.0 12.2 11.2 10.1 6.7 6.0 5.0 1.4 1.2 1.1 1.1 1.2 1.3 13.0 12.7 12.6 1,045 38.4 83.5

Energy Neutral 7,403,360 160,733 11.8 26.1 9.6 11.0 8.7 8.0 6.0 4.8 4.1 1.5 1.3 1.2 2.1 2.8 3.4 13.8 15.4 15.1

Industrials

ABB 824 SELL 174,708 3,793 212 3.0 21.1 27.3 (82.2) 606.1 29.6 276.3 39.1 30.2 201.4 26.4 19.8 7.2 6.3 5.3 0.2 0.4 0.4 2.6 17.1 19.1 700 (15.1) 1.6

BGR Energy Systems 312 REDUCE 22,480 488 72 44.8 41.1 41.7 60.0 (8.3) 1.5 7.0 7.6 7.5 4.6 4.9 4.2 2.4 1.9 1.6 2.9 2.6 2.7 39.0 27.8 23.2 410 31.6 4.4

Bharat Electronics 1,563 ADD 125,036 2,715 80 102.9 120.8 133.9 7.0 17.4 10.8 15.2 12.9 11.7 9.0 6.6 5.6 2.5 2.1 1.9 1.6 1.6 1.6 17.2 17.7 17.2 1,850 18.4 1.5

Bharat Heavy Electricals 1,769 REDUCE 865,863 18,799 490 122.8 134.8 145.4 39.7 9.8 7.9 14.4 13.1 12.2 9.5 8.7 7.6 4.3 3.4 2.8 1.5 1.6 1.8 33.3 29.2 25.6 2,000 13.1 31.6

Crompton Greaves 143 BUY 91,799 1,993 642 14.3 10.6 13.5 11.5 (25.8) 26.7 10.0 13.5 10.6 6.5 7.4 5.5 2.8 2.4 2.0 1.7 1.1 1.3 31.7 19.1 20.5 210 46.8 17.5

Larsen & Toubro 1,614 REDUCE 982,836 21,338 609 67.7 79.6 98.2 18.1 17.5 23.4 23.8 20.3 16.4 16.6 12.5 10.7 3.7 3.1 2.6 0.9 0.9 0.9 17.0 16.6 17.2 1,800 11.5 58.7

Maharashtra Seamless 351 BUY 24,728 537 71 46.1 41.6 46.7 19.3 (9.7) 12.3 7.6 8.4 7.5 4.0 4.0 3.3 1.0 0.9 0.8 2.4 2.4 2.7 13.3 11.1 11.5 460 31.2 0.1

Siemens 868 SELL 292,486 6,350 337 22.4 28.9 32.5 39.5 28.8 12.3 38.7 30.0 26.7 22.9 19.2 16.8 9.0 7.3 6.1 0.6 0.7 0.8 25.2 26.9 24.8 830 (4.3) 3.3

Suzlon Energy 36 REDUCE 62,141 1,349 1,746 (5.4) 0.7 2.6 (14.7) (112.5) 290.1 (6.6) 53.1 13.6 25.1 8.1 6.6 0.9 0.9 0.9 0.6 0.6 0.6 (14.0) 1.7 6.6 40 12.4 20.5

Tecpro Systems 244 ADD 12,336 268 50 27.0 29.4 32.7 24.2 8.9 11.4 9.1 8.3 7.5 5.7 5.8 5.1 1.9 1.6 1.4 — — — 26.8 20.5 19.6 300 22.7 0.3

Thermax 494 REDUCE 58,801 1,277 119 31.6 33.0 35.1 44.3 4.4 6.3 15.6 14.9 14.1 10.4 9.4 8.7 4.5 3.7 3.2 1.8 2.0 2.0 31.5 27.2 24.3 550 11.4 1.8

Voltas 114 BUY 37,622 817 331 9.8 9.7 10.5 (14.3) (1.1) 8.8 11.6 11.8 10.8 6.9 6.6 5.5 2.7 2.4 2.0 1.8 2.6 (0.0) 26.1 21.6 19.9 150 31.9 3.8

Industrials Cautious 2,750,835 59,723 26.2 21.5 16.4 20.8 17.1 14.7 13.3 10.7 9.2 3.7 3.1 2.7 1.1 1.2 1.2 17.8 18.2 18.1

Infrastructure

Container Corporation 935 ADD 121,505 2,638 130 63.5 70.0 77.9 4.9 10.3 11.2 14.7 13.4 12.0 9.6 8.4 7.3 2.4 2.1 1.9 1.6 1.7 1.9 17.6 16.9 16.6 1,150 23.0 0.7

GMR Infrastructure 27 RS 99,020 2,150 3,667 (0.0) (0.4) 0.5 (102.0) 3,980.8 (243.5) (3,115.0) (76.3) 53.2 12.6 10.9 8.8 0.9 0.9 0.9 — — — (0.0) (2.0) 2.8 — — 2.5

Gujarat Pipavav Port 67 ADD 28,251 613 424 (1.2) 1.2 2.6 (65.8) (201.6) 115.2 (55.5) 54.6 25.4 28.5 16.8 11.3 3.8 3.6 3.1 — — — (9.1) 9.4 13.6 78 16.9 0.7

GVK Power & Infrastructure 17 RS 26,215 569 1,579 1.0 1.0 0.3 (0.6) 1.6 (73.4) 16.9 16.6 62.6 17.9 16.5 19.5 0.8 0.7 0.8 — 1.8 2.1 4.7 4.6 1.2 — — 3.5

IRB Infrastructure 147 ADD 48,708 1,057 332 13.1 11.7 13.4 12.9 (10.4) 14.0 11.2 12.5 11.0 7.4 7.1 6.2 1.7 1.4 1.1 — — — 17.6 12.4 11.5 220 50.1 6.6

Mundra Port and SEZ 145 BUY 293,236 6,366 2,017 4.6 6.8 10.5 36.3 50.3 53.2 31.9 21.2 13.9 25.9 17.3 12.3 6.7 5.3 4.1 — — — 23.2 28.0 33.5 175 20.4 7.0

Infrastructure Cautious 616,936 13,394 11.2 21.1 41.7 27.1 22.4 15.8 14.8 12.1 9.8 2.3 2.1 1.9 0.3 0.4 0.5 8.4 9.3 11.8

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Media

DB Corp 238 BUY 43,602 947 183 14.1 14.2 17.1 32.7 0.6 20.3 16.9 16.8 13.9 10.9 9.9 8.2 5.3 4.5 4.1 1.7 2.5 4.2 35.0 29.1 31.0 350 47.1 0.8

DishTV 77 ADD 81,410 1,767 1,062 (1.8) 0.0 1.3 (27.5) (101.9) 3,944.0 (42.8) 2,314.2 57.2 38.0 17.5 11.8 38.7 38.1 22.9 — — — (62.3) 1.7 49.9 100 30.5 8.5

Eros International 204 BUY 19,805 430 97 11.8 15.8 19.9 19.0 34.0 25.9 17.3 12.9 10.3 12.0 9.1 6.6 2.9 2.4 1.9 — — — 24.9 20.2 20.5 250 22.4 2.0

Hindustan Media Ventures 145 BUY 10,655 231 73 7.3 9.0 12.1 198.7 22.8 35.0 19.8 16.1 12.0 9.7 8.4 6.1 2.6 2.3 2.0 — — 2.1 22.3 15.1 17.7 220 51.5 0.2

HT Media 147 ADD 34,557 750 235 7.7 8.9 11.0 26.3 15.3 23.6 19.1 16.5 13.4 9.0 7.6 5.8 2.5 2.3 2.2 1.4 2.7 4.1 15.0 14.4 16.6 190 29.2 0.5

Jagran Prakashan 103 BUY 32,563 707 316 6.8 7.0 8.4 17.2 1.7 20.5 15.0 14.8 12.3 9.0 8.4 6.9 4.7 4.2 3.8 3.2 3.9 4.9 31.5 30.0 32.7 160 55.4 0.5

Sun TV Network 301 ADD 118,618 2,575 394 19.6 21.6 25.4 48.6 10.0 17.9 15.3 14.0 11.8 9.1 8.2 6.9 4.9 4.4 4.0 2.9 4.0 5.3 36.6 34.7 36.6 440 46.2 26.7

Zee Entertainment Enterprises 115 BUY 112,316 2,438 978 5.8 6.2 7.7 10.0 6.4 23.3 19.6 18.5 15.0 13.1 12.0 9.5 2.7 2.6 2.4 1.2 1.1 1.4 14.2 14.3 16.9 160 39.4 6.7

Media Neutral 453,526 9,846 50.5 20.4 27.1 23.0 19.1 15.1 12.3 10.3 8.2 4.2 3.8 3.5 1.5 2.1 2.8 18.1 20.0 23.1

Metals & Mining

Coal India 369 BUY 2,332,949 50,650 6,316 17.3 25.5 29.4 13.6 47.6 15.1 21.3 14.5 12.6 12.7 9.0 7.5 6.7 5.2 4.1 1.4 2.1 2.4 35.1 40.3 36.4 470 27.3 35.5

Hindalco Industries 144 ADD 275,937 5,991 1,915 12.8 18.3 17.6 (36.0) 43.3 (4.0) 11.3 7.9 8.2 6.1 5.9 6.2 1.0 0.9 0.8 1.0 1.0 1.0 9.7 11.4 10.0 175 21.4 28.6

Hindustan Zinc 123 BUY 519,464 11,278 4,225 11.6 13.1 14.7 21.8 12.7 11.8 10.6 9.4 8.4 6.7 5.1 3.7 2.3 1.9 1.6 0.8 0.8 0.8 24.3 22.2 20.4 160 30.1 3.0

Jindal Steel and Power 494 REDUCE 461,404 10,017 934 40.2 45.2 55.2 5.1 12.4 22.2 12.3 10.9 9.0 9.3 8.8 7.5 3.3 2.5 2.0 0.4 0.4 0.4 30.8 26.3 25.0 650 31.6 17.3

JSW Steel 649 REDUCE 146,685 3,185 226 78.6 75.6 111.7 (2.2) (3.9) 47.9 8.3 8.6 5.8 5.8 5.5 4.7 0.9 0.8 0.7 1.9 1.9 1.9 13.6 9.9 13.3 650 0.1 31.0

National Aluminium Co. 63 SELL 161,593 3,508 2,577 4.1 5.0 4.8 36.3 20.5 (4.1) 15.1 12.5 13.1 7.0 5.5 5.3 1.4 1.3 1.3 2.4 2.4 2.4 9.9 11.1 10.0 65 3.7 0.6

Sesa Goa 213 REDUCE 190,302 4,132 895 47.0 40.1 41.6 59.8 (14.6) 3.7 4.5 5.3 5.1 3.7 4.0 3.1 1.5 1.2 0.9 1.9 1.9 1.9 36.8 22.1 17.9 230 8.1 14.7

Sterlite Industries 127 BUY 425,528 9,239 3,361 15.2 17.0 19.0 26.2 12.0 11.5 8.3 7.5 6.7 5.2 3.9 3.3 1.0 0.9 0.8 0.9 0.9 0.9 13.0 13.0 12.8 185 46.1 16.4

Tata Steel 447 BUY 434,609 9,436 971 75.3 68.7 76.9 (2,258.1) (8.8) 12.0 5.9 6.5 5.8 5.8 6.0 5.1 1.2 1.0 0.9 2.6 1.8 1.8 24.7 15.5 15.7 625 39.7 48.1

Metals & Mining Attractive 4,948,471 107,435 39.1 16.8 12.9 11.9 10.2 9.1 7.5 6.4 5.5 2.3 1.9 1.6 1.3 1.6 1.7 19.0 18.6 17.9

Pharmaceutical

Apollo Hospitals 531 BUY 73,774 1,602 139 13.2 17.8 21.4 21.0 34.5 19.9 40.1 29.8 24.9 18.3 13.9 11.5 3.8 2.9 2.6 — — — 9.8 10.7 10.5 565 6.4 1.1

Biocon 331 BUY 66,100 1,435 200 18.4 19.4 21.4 23.9 5.6 10.3 18.0 17.0 15.4 10.3 9.8 8.9 3.2 2.9 2.5 — — — 19.4 17.9 17.4 445 34.6 3.6

Cipla 279 REDUCE 224,095 4,865 803 12.3 14.5 16.5 (10.0) 17.5 13.7 22.6 19.3 16.9 19.6 14.0 11.5 3.4 3.0 2.6 1.0 1.1 1.3 15.4 16.0 — 325 16.4 8.9

Cadila Healthcare 835 ADD 171,026 3,713 205 34.7 39.6 48.4 40.6 14.0 22.3 24.1 21.1 17.2 20.8 17.2 13.2 7.9 6.1 4.8 0.7 0.9 1.2 37.5 32.7 31.3 1,065 27.5 2.6

Dishman Pharma & chemicals 69 SELL 5,584 121 81 9.8 8.0 9.4 (31.8) (18.7) 17.2 7.0 8.6 7.3 8.5 6.5 5.8 0.6 0.6 0.6 — — — 9.6 7.2 7.9 95 38.4 0.3

Divi's Laboratories 709 BUY 94,048 2,042 133 32.4 36.7 45.0 25.7 13.5 22.4 21.9 19.3 15.8 18.0 13.8 11.3 5.2 4.5 3.8 — — — 25.9 25.0 26.2 880 24.1 3.4

GlaxoSmithkline Pharmaceuticals (a) 2,108 REDUCE 178,588 3,877 85 68.3 78.2 88.6 15.5 14.6 13.3 30.9 27.0 23.8 20.5 18.2 15.7 9.2 8.4 7.7 1.9 2.4 2.7 30.9 32.6 33.9 2,220 5.3 1.4

Glenmark Pharmaceuticals 328 ADD 88,575 1,923 270 17.0 26.2 23.5 33.6 54.5 (10.3) 19.3 12.5 13.9 21.3 14.3 12.2 4.3 3.3 2.7 — — — 20.6 29.8 21.2 395 20.6 4.8

Jubilant Life Sciences 179 REDUCE 28,435 617 159 14.4 16.5 22.7 (45.6) 14.5 37.6 12.4 10.8 7.9 10.4 8.4 7.1 1.3 1.2 1.0 1.1 1.1 1.7 12.3 11.7 14.2 225 26.1 1.0

Lupin 460 ADD 205,967 4,472 448 19.2 20.1 24.6 25.6 4.4 22.5 23.9 22.9 18.7 20.0 17.7 13.6 6.2 5.1 4.2 0.6 0.8 1.0 29.5 24.7 24.9 500 8.8 9.9

Ranbaxy Laboratories 454 SELL 192,177 4,172 423 40.6 16.9 20.8 475.0 (58.3) 22.7 11.2 26.8 21.9 13.7 23.2 18.0 3.4 3.0 2.6 — — — 34.5 11.9 12.8 435 (4.2) 8.2

Sun Pharmaceuticals 466 ADD 482,745 10,481 1,036 17.5 20.4 24.4 34.4 16.3 19.6 26.6 22.9 19.1 22.5 18.1 14.4 4.7 3.9 3.3 0.8 0.9 1.1 21.0 20.4 20.7 560 20.1 10.3

Pharmaceuticals Cautious 2,134,676 46,346 26.0 7.1 2.8 23.0 21.5 20.9 17.4 14.4 13.7 3.6 3.1 2.9 0.7 0.8 0.9 15.5 14.3 13.9

Property

DLF 184 ADD 316,167 6,864 1,715 9.1 11.9 15.7 (14.5) 31.3 31.8 20.3 15.5 11.7 14.5 11.4 8.7 1.2 1.1 1.1 1.1 1.3 1.6 5.4 7.5 9.2 270 46.4 36.3

Housing Development & Infrastructure 100 ADD 44,567 968 445 19.8 28.7 34.3 24.0 44.8 19.7 5.1 3.5 2.9 5.2 3.6 3.1 0.5 0.4 0.3 — 1.0 1.5 10.0 12.3 12.7 150 49.8 20.3

Indiabulls Real Estate 82 RS 33,145 720 402 4.0 8.5 15.4 (1,095.5) 114.1 81.5 20.7 9.7 5.3 14.3 11.5 5.0 0.3 0.3 0.3 — 0.6 0.8 1.4 2.9 5.0 — — 8.6

Mahindra Life Space Developer 309 ADD 12,592 273 41 24.9 30.8 37.5 30.2 23.7 21.6 12.4 10.0 8.2 9.4 6.8 5.0 1.2 1.1 1.0 1.6 1.5 1.6 10.4 11.6 12.7 450 45.8 0.3

Oberoi Realty 220 BUY 72,529 1,575 330 15.7 20.0 28.0 14.8 27.6 39.7 14.0 11.0 7.9 10.1 7.0 4.3 2.2 1.9 1.5 0.5 0.7 1.1 19.9 18.2 21.3 315 43.2 0.3

Phoenix Mills 203 BUY 29,404 638 145 6.3 7.4 10.7 53.0 17.2 44.1 32.1 27.4 19.0 23.7 19.8 14.8 1.8 1.8 1.6 0.9 1.0 1.0 5.8 6.6 8.9 300 47.8 0.3

Puravankara Projects 67 REDUCE 14,353 312 213 5.5 9.0 10.9 (18.9) 62.8 21.5 12.2 7.5 6.2 17.2 9.4 8.0 0.9 0.9 0.8 1.5 2.2 3.0 8.0 12.0 13.1 80 19.0 0.1

Sobha Developers 217 BUY 21,265 462 98 18.8 20.6 27.2 33.8 9.2 32.2 11.5 10.6 8.0 10.6 9.5 6.7 1.1 1.0 0.9 1.4 1.6 1.8 10.2 10.3 12.4 370 70.6 1.0

Unitech 27 RS 69,594 1,511 2,616 2.3 2.6 2.7 (23.4) 12.8 4.9 11.5 10.2 9.7 13.4 10.9 8.9 0.6 0.6 0.5 — 0.8 1.1 5.4 5.7 5.4 — — 17.5

Property Cautious 644,502 13,993 5.3 44.3 29.6 15.0 10.4 8.0 12.4 8.9 6.7 0.9 0.8 0.8 0.8 1.2 1.5 6.1 8.1 9.5

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Sugar

Bajaj Hindustan 54 REDUCE 12,391 269 228 1.9 3.7 1.6 (28.7) 90.5 (57.3) 28.1 14.8 34.5 17.7 6.0 5.8 0.4 0.4 0.4 1.1 1.1 1.1 1.7 2.7 1.1 65 19.8 1.5

Balrampur Chini Mills 54 BUY 13,384 291 247 6.7 4.0 7.7 111.0 (40.5) 94.0 8.1 13.6 7.0 11.2 8.9 6.0 0.9 0.9 0.8 1.4 1.4 1.4 11.6 6.5 11.9 80 47.6 1.6

Shree Renuka Sugars 57 BUY 37,910 823 670 10.5 6.4 5.0 214.7 (39.4) (21.0) 5.4 8.9 11.3 8.3 6.5 5.3 1.5 1.3 1.2 1.8 1.8 1.8 34.4 16.1 11.4 75 32.6 9.6

Sugar Cautious 63,685 1,383 122.4 (24.7) (7.4) 7.9 10.5 11.3 10.8 6.6 5.6 0.9 0.8 0.8 1.6 1.6 1.6 11.6 8.1 7.0

Technology

HCL Technologies 390 REDUCE 275,267 5,976 705 22.9 29.5 32.8 30.4 28.9 11.3 17.1 13.3 11.9 10.4 8.0 7.1 3.3 2.8 2.4 1.9 2.0 2.1 21.0 22.6 21.7 375 (4.0) 9.1

Hexaware Technologies 72 ADD 20,996 456 290 3.0 7.5 7.3 (36.8) 154.4 (3.4) 24.5 9.6 10.0 17.9 8.1 6.9 2.2 1.9 1.8 2.1 4.1 4.5 9.3 21.3 18.6 80 10.7 2.9

Infosys Technologies 2,296 BUY 1,318,048 28,616 574 119.7 134.3 160.3 10.5 12.1 19.4 19.2 17.1 14.3 12.8 11.3 9.2 5.1 4.3 3.6 2.6 1.8 2.2 28.0 27.1 27.2 2,900 26.3 76.8

Mahindra Satyam 65 REDUCE 76,969 1,671 1,176 4.2 6.7 7.0 68.9 58.4 4.7 15.6 9.8 9.4 10.9 5.5 4.2 4.5 3.1 2.3 — — — 27.6 37.1 28.2 70 7.0 13.5

Mindtree 341 ADD 14,044 305 41 24.7 35.2 37.2 (52.7) 42.4 5.8 13.8 9.7 9.2 7.7 5.9 4.7 1.8 1.6 1.4 0.7 1.0 3.3 14.4 17.2 16.1 375 9.9 2.3

Mphasis BFL 358 SELL 75,523 1,640 211 51.8 38.6 30.0 18.8 (25.5) (22.2) 6.9 9.3 12.0 5.9 7.0 7.6 2.3 1.9 1.7 1.1 1.3 1.4 38.6 22.3 14.8 300 (16.3) 3.7

Patni Computer Systems 283 ADD 37,643 817 133 42.6 25.9 27.2 16.5 (39.3) 5.2 6.6 10.9 10.4 3.5 3.7 2.5 1.2 1.1 1.0 23.4 1.8 1.9 18.4 8.2 10.2 300 6.2 2.1

Polaris Software Lab 130 SELL 12,961 281 100 19.3 18.8 19.0 25.7 (2.6) 0.7 6.7 6.9 6.9 3.7 2.8 2.4 1.3 1.1 1.0 2.8 3.0 3.2 20.2 16.8 14.8 130 - 2.2

TCS 1,020 BUY 1,995,561 43,325 1,957 44.5 52.8 61.1 26.8 18.6 15.6 22.9 19.3 16.7 17.3 14.1 11.8 7.9 6.5 5.4 1.7 2.1 2.4 37.8 36.9 35.2 1,160 13.8 43.7

Tech Mahindra 636 REDUCE 80,098 1,739 126 48.8 72.1 75.5 (25.2) 47.8 4.7 13.0 8.8 8.4 8.9 9.0 7.9 2.4 2.1 1.8 0.6 0.6 1.6 20.5 26.0 23.8 600 (5.6) 3.9

Wipro 329 ADD 807,121 17,523 2,454 21.6 22.4 24.5 14.5 3.9 9.1 15.2 14.7 13.4 11.1 9.9 8.7 3.4 2.9 2.5 1.3 1.4 1.6 24.3 21.1 19.7 370 12.5 11.2

Technology Attractive 4,714,231 102,350 17.1 13.1 13.0 18.3 16.2 14.4 13.1 11.2 9.5 4.8 4.0 3.4 2.0 1.8 2.1 26.2 24.9 23.8

Telecom

Bharti Airtel 405 REDUCE 1,538,218 33,396 3,798 15.9 17.9 27.1 (32.6) 12.7 50.8 25.4 22.6 15.0 10.7 8.4 6.4 3.2 2.8 2.3 — — — 13.3 13.1 16.9 390 (3.7) 49.4

IDEA 96 REDUCE 317,447 6,892 3,303 2.7 2.7 4.8 (0.5) (1.4) 78.0 35.3 35.8 20.1 11.2 8.5 6.6 2.6 2.4 2.2 — — — 7.6 7.0 11.3 95 (1.1) 17.8

MTNL 36 SELL 22,491 488 630 (10.4) (9.1) (8.4) (33.7) (11.9) (8.1) (3.4) (3.9) (4.2) 0.5 0.7 0.9 0.2 0.2 0.2 — — — (6.1) (5.7) (5.5) 35 (2.0) 0.8

Reliance Communications 77 SELL 163,778 3,556 2,133 6.3 2.6 5.2 (71.1) (59.4) 103.2 12.2 30.0 14.8 6.0 6.4 5.5 0.4 0.4 0.4 — — — 3.2 1.3 2.7 80 4.2 18.6

Tata Communications 201 REDUCE 57,143 1,241 285 15.2 15.7 15.9 8.2 3.5 1.5 13.2 12.8 12.6 6.1 5.8 5.5 0.8 0.8 0.7 3.7 4.2 4.5 5.5 5.5 5.4 205 2.2 1.6

Telecom Cautious 2,099,076 45,573 (42.4) 0.7 58.7 26.1 25.9 16.3 9.6 8.1 6.3 1.8 1.7 1.5 0.1 0.1 0.1 6.8 6.4 9.2

Utilities

Adani Power 90 REDUCE 214,191 4,650 2,393 2.4 11.0 15.0 200.7 368.5 35.8 38.0 8.1 6.0 37.1 7.7 5.0 3.4 2.3 1.6 — — — 8.5 33.5 31.8 100 11.7 3.7

CESC 292 BUY 36,525 793 125 37.7 42.5 51.3 9.1 12.7 20.8 7.8 6.9 5.7 5.6 5.9 5.6 0.8 0.7 0.6 1.7 1.8 2.1 10.5 10.7 11.5 440 50.5 2.1

JSW Energy 54 SELL 88,150 1,914 1,640 5.1 6.1 5.1 12.9 19.8 (17.3) 10.5 8.7 10.6 11.7 6.6 5.5 1.6 1.3 1.2 (1.9) — — 16.1 16.3 11.7 70 30.2 1.8

Lanco Infratech 16 BUY 35,790 777 2,223 2.0 3.0 3.4 (5.8) 47.2 16.6 8.0 5.4 4.7 8.4 7.8 7.4 0.9 0.7 0.6 — — — 12.2 15.0 14.6 45 179.5 9.3

NHPC 24 BUY 298,293 6,476 12,301 1.3 1.8 2.1 (27.2) 36.0 16.3 18.0 13.2 11.4 13.2 10.0 8.0 1.1 1.0 1.0 1.7 2.0 2.4 6.3 8.0 8.8 30 23.7 2.4

NTPC 169 REDUCE 1,394,308 30,272 8,245 11.0 11.9 12.7 5.3 7.4 6.8 15.3 14.3 13.4 12.7 11.7 11.0 2.0 1.9 1.7 2.2 2.1 2.2 13.7 13.5 13.3 200 18.3 11.0

Reliance Infrastructure 437 BUY 115,941 2,517 265 58.0 64.1 76.3 (6.5) 10.5 19.0 7.5 6.8 5.7 7.4 3.9 2.8 0.5 0.5 0.4 2.1 2.4 2.6 6.4 11.2 12.2 920 110.5 16.7

Reliance Power 83 SELL 234,084 5,082 2,805 2.7 2.9 2.9 (5.0) 7.6 (0.5) 30.8 28.6 28.7 164.4 70.2 14.7 1.4 1.4 1.3 — — — 4.9 4.9 4.7 88 5.5 6.0

Tata Power 1,045 BUY 257,905 5,599 247 76.5 75.9 87.6 21.5 (0.7) 15.4 13.7 13.8 11.9 10.8 8.9 8.3 1.8 1.6 1.5 1.3 1.4 1.6 13.8 12.3 12.9 1,350 29.2 7.1

Utilities Cautious 2,675,187 58,080 5.1 23.3 12.4 15.5 12.6 11.2 14.0 10.3 8.5 1.6 1.4 1.3 1.5 1.6 1.7 10.1 11.3 11.5

Others

Carborundum Universal 293 BUY 27,415 595 93 18.3 18.9 21.0 67.7 3.7 10.6 16.1 15.5 14.0 11.6 9.9 8.7 3.2 2.8 2.4 1.3 1.4 1.5 20.7 18.4 17.8 290 (1.1) 0.2

Havells India 324 REDUCE 40,446 878 125 24.5 25.8 28.8 334.1 5.1 11.5 13.2 12.6 11.3 8.9 8.2 7.1 5.7 4.0 3.1 0.8 0.8 0.9 53.9 37.6 30.9 370 14.1 4.6

Jaiprakash Associates 58 BUY 123,972 2,692 2,126 6.0 6.3 7.2 230.2 3.9 15.6 9.7 9.3 8.1 11.2 9.7 9.3 1.2 1.0 0.9 — — — 13.3 11.7 12.3 115 97.3 19.2

Jet Airways 272 BUY 23,460 509 86 (10.1) (43.4) 16.9 (91.0) 331 (139.0) (27.0) (6.3) 16.1 9.4 10.0 7.0 1.4 1.8 1.7 — — — (5.0) (11.7) 10.9 650 139.2 11.5

SpiceJet 23 BUY 9,370 203 403 2.2 2.1 4.3 (12.4) (4.3) 101.0 10.4 10.9 5.4 8.9 13.1 7.5 3.1 2.4 1.7 — — — (466) 24.8 36.2 65 179.6 3.2

Tata Chemicals 332 REDUCE 84,579 1,836 255 26.2 32.9 38.8 (0.7) 25.4 17.9 12.6 10.1 8.6 7.6 5.3 4.5 1.6 1.4 1.2 3.0 3.6 4.5 16.9 18.6 19.5 385 16.0 3.2

United Phosphorus 140 BUY 64,514 1,401 462 12.3 15.9 19.8 3.9 28.8 24.3 11.3 8.8 7.1 6.9 4.8 4.0 1.7 1.5 1.3 1.4 2.1 2.5 18.0 18.5 19.8 220 57.5 3.8

Others 373,756 8,115 232.5 10.1 38.5 13.2 12.0 8.7 9.7 8.3 7.4 1.6 1.4 1.3 1.1 1.4 1.7 12.0 12.0 14.5

KS universe (b) 43,719,962 949,196 18.1 18.5 16.1 14.9 12.6 10.8 9.7 8.0 6.8 #REF! #REF! #REF! 1.6 1.8 2.1 #REF! #REF! #REF!

KS universe (b) ex-Energy 36,316,602 788,463 20.1 16.2 18.3 16.0 13.8 11.7 11.3 9.5 8.0 #REF! #REF! #REF! 1.5 1.6 1.8 #REF! #REF! #REF!

KS universe (d) ex-Energy & ex-Commodities 30,410,242 660,231 18.6 15.9 19.5 17.0 14.6 12.2 12.8 10.6 8.9 #REF! #REF! #REF! 1.5 1.6 1.8 #REF! #REF! #REF!

Notes:

(a) For banks we have used adjusted book values.

(b) 2010 means calendar year 2009, similarly for 2011 and 2012 for these particular companies.

(c) EV/Sales & EV/EBITDA for KS universe excludes Banking Sector.

(d) Rupee-US Dollar exchange rate (Rs/US$)= 46.06

Dividend yield (%)



Disclosures

Kotak Institutional Equities Research coverage universeDistribution of ratings/investment banking relationships

Source: Kotak Institutional Equities As of June 30, 2011

* The above categories are defined as follows: Buy = We expect this stock to outperform the BSE Sensex by 10% over the next 12 months; Add = We expect this stock to outperform the BSE Sensex by 0-10% over the next 12 months; Reduce = We expect this stock to underperform the BSE Sensex by 0-10% over the next 12 months; Sell = We expect this stock to underperform the BSE Sensex by more then 10% over the next 12 months. These ratings are used illustratively to comply with applicable regulations. As of 30/06/2011 Kotak Institutional Equities Investment Research had investment ratings on 166 equity securities.

Percentage of companies covered by Kotak Institutional Equities, within the specified category.

Percentage of companies within each category for which Kotak Institutional Equities and or its affiliates has provided investment banking services within the previous 12 months.

11.4%

34.3%

27.1% 27.1%

4.8%1.8%

3.6%0.0%

0%

10%

20%

30%

40%

50%

60%

70%

BUY ADD REDUCE SELL

Ratings and other definitions/identifiers

Definitions of ratings

BUY. We expect this stock to outperform the BSE Sensex by 10% over the next 12 months.

ADD. We expect this stock to outperform the BSE Sensex by 0-10% over the next 12 months.

REDUCE. We expect this stock to underperform the BSE Sensex by 0-10% over the next 12 months.

SELL. We expect this stock to underperform the BSE Sensex by more than 10% over the next 12 months.

Our target price are also on 12-month horizon basis.

Other definitions

Coverage view. The coverage view represents each analyst’s overall fundamental outlook on the Sector. The coverage view will consist of one of the following designations: Attractive, Neutral, Cautious.

Other ratings/identifiers

NR = Not Rated. The investment rating and target price, if any, have been suspended temporarily. Such suspension is in compliance with applicable regulation(s) and/or Kotak Securities policies in circumstances when Kotak Securities or its affiliates is acting in an advisory capacity in a merger or strategic transaction involving this company and in certain other circumstances.

CS = Coverage Suspended. Kotak Securities has suspended coverage of this company.

NC = Not Covered. Kotak Securities does not cover this company.

RS = Rating Suspended. Kotak Securities Research has suspended the investment rating and price target, if any, for this stock, because there is not a sufficient fundamental basis for determining an investment rating or target. The previous investment rating and price target, if any, are no longer in effect for this stock and should not be relied upon.

NA = Not Available or Not Applicable. The information is not available for display or is not applicable.

NM = Not Meaningful. The information is not meaningful and is therefore excluded.

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