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Strategy

INDIA

Reforms to accelerate, returns to moderate. We expect the government to accelerate

reforms in 2015 with focus on land, labor and power sector reforms. Interest rates will

likely decline led by further improvement in India’s fiscal position and lower inflation.

However, returns may moderate to 15-20% given expensive valuations (FY2016 basis) after

a large re-rating in 2014. Investment options seem to be between expensive stocks with

strong visibility on earnings and stocks with relatively lower visibility on earnings.

Reforms: Expect reforms process to continue at both central and state levels with some hiccups

We expect the central and progressive state governments to implement more meaningful reforms in

2015. Fiscal reforms are underway with the government focusing on implementation of GST and

direct cash transfer schemes. Investment reforms such as labor, land and power reforms may take

longer and may be implemented by progressive states if the central government is unable to do so

because of its minority position in the upper house of the parliament.

Rates: Fiscal consolidation, lower inflation and ongoing reforms to result in lower interest rates

India’s macroeconomic parameters will likely improve further in 2015 with FY2016 GFD/GDP and

inflation declining from 2014/FY2015 levels. We expect FY2016 GDP growth at 6.1%, up from

FY2015’s 5.5%. GDP growth will likely recover slowly as the investment cycle will take time to mend

given extant funding and investment challenges. We expect the RBI to reduce policy rates by 50-75

bps through 2015 with the first rate cut (25 bps) in March 2015.

Risks: (1) Legislative challenges and (2) allocation, not availability, of funds

We see two risks to India’s solid medium-term growth story. (1) The government’s ability to

implement reforms may be constrained by its minority status in the upper house of parliament and its

limited influence over states. It is important for the government to ‘sell’ its economic vision for India

to the opposition-ruled states. (2) Financial investors may be reluctant to provide funding to the

critical investment-related sectors. Indian banks already have too much exposure to several weak

infrastructure companies. The government may have to look at FDI and innovative alternatives to

address the ‘funding’ gap.

Returns: Expect more moderate returns in 2015 versus in 2014 (29% CYTD)

We expect about 15-20% return for the Indian market in 2015. Valuations are reasonable for the

Indian market with the BSE-30 Index trading at 15X FY2016E ‘EPS’ (15.6X FY2016 free-float ‘EPS’).

We model 18.3% growth in net profits for the BSE-30 Index in FY2016 (16.8% for the Nifty-50

Index) but note risks to our earnings estimates from the cement, industrials, metal and power

sectors. A large chunk (60%) of India’s earnings is also linked to global GDP growth, commodity

cycles and government policies.

INDIA

DECEMBER 12, 2014

BSE-30: 27,351

INSIDE

Expect 15-20%

return for the BSE-30

Index in CY2015

.................. pg3

FY2016 GDP growth

at 6.1%, GFD/GDP at

3.6%, CAD/GDP at

0.5% ......... pg24

Expect 18.3%

growth in net profits

of the BSE-30 Index

in FY2016 .. pg57

Sanjeev Prasad [email protected]

Mumbai: +91-22-4336-0830

Akhilesh Tilotia, CFA [email protected]

Mumbai: +91-22-4336-0897

Suvodeep Rakshit [email protected]

Mumbai: +91-22-4336-0898

Sunita Baldawa [email protected]

Mumbai: +91-22-4336-0896

Kotak Institutional Equities

Research

Important disclosures appear

at the back

2 KOTAK INSTITUTIONAL EQUITIES RESEARCH

India Strategy

TABLE OF CONTENTS

Overview: Reforms, rates, risks and returns ............................................ 3

Reforms: To accelarate further in 2015 ................................................... 7

Rates: To decline in 2015 led by lower fiscal deficit and inflation .......... 24

Risks: Political ability and funding ......................................................... 35

Returns: Expect more moderate returns in 2015 versus in 2014 ........... 57

The prices in this report are based on the market close of December 12, 2014.

KOTAK INSTITUTIONAL EQUITIES RESEARCH 3

Strategy India

OVERVIEW: REFORMS, RATES, RISKS AND RETURNS

We expect about 15-20% return for the Indian market in CY2015, substantially lower than the 29% CYTD

return in 2014. The valuations of the Indian market have become quite expensive and reflect the market’s

high expectation of reforms from the government as also further improvement in India’s macroeconomic

position. We do not rule out minor disappointments on reforms but would use any correction to buy quality

growth stocks to participate in India’s strong medium-term story.

2015: Delivery versus expectations

We see 2015 as a crucial year in India’s path to economic development and better

governance. We expect the government to implement several reforms in the areas of fiscal,

governance and investment, which will set the stage for inclusive and sustainable economic

growth for the next several years. This will likely support investment sentiment despite

expensive valuations, which reflects the Street’s high expectations from the Indian

government on reforms and from the market with respect to returns.

The extent of market returns in 2015 will depend on (1) the type of economic reforms that

the government is able to implement in 2015; this will increase the confidence of investors

in not only short-term earnings but more important, in long-term growth prospects of India

and earnings of the market and (2) the degree of improvement in India’s macroeconomic

position in general and decline in inflation and interest rates in particular.

We expect about 15-20% return for the market in line with earnings growth of 16% on a

12-month forward basis (blended average of FY2016E and FY2017E earnings growth). From

a portfolio standpoint, the choice appears to be between (1) expensive stocks with strong

visibility on earnings and (2) stocks with relatively lower visibility on earnings. We have a

judicious mix of the two but avoid stocks with weak balance sheets and risks to earnings.

Exhibit 1 is our recommended Model Portfolio.

Quality stocks comprise our Model Portfolio Exhibit 1:KIE Model Portfolio

Price (Rs) KIE weight Price (Rs) KIE weight

Company 12-Dec-14 Rating (%) 12-Dec-14 Rating (%)

Automobiles GAIL (India) 424 ADD 2.0

Apollo Tyres 222 BUY 2.0 Oil India 547 BUY 2.0

Hero Motocorp 3,125 BUY 4.0 Reliance Industries 882 ADD 3.0

Maruti Suzuki 3,379 BUY 4.0 Energy 9.0

Tata Motors 500 BUY 6.0 Industrials/Construction

Automobiles 16.0 Crompton Greaves 172 BUY 2.0

Pvt. Banking/Financing Larsen & Toubro 1,511 ADD 4.0

Axis Bank 483 ADD 4.0 Industrials/Construction 6.0

HDFC 1,070 ADD 7.0 Pharmaceuticals

HDFC Bank 932 ADD 9.0 Cipla 641 BUY 3.0

Federal Bank 142 BUY 2.0 Lupin 1,450 BUY 2.0

ICICI Bank 346 BUY 10.0 Pharmaceuticals 5.0

LIC Housing F inance 437 ADD 2.0 Technology

Pvt. Banking/Financing 34.0 Infosys 1,939 ADD 9.0

Consumers TCS 2,451 ADD 4.0

Britannia Industries 1,800 BUY 2.0 Tech Mahindra 2,589 ADD 2.0

Dabur India 235 ADD 2.0 Wipro 543 ADD 4.0

Marico 323 BUY 3.0 Technology 19.0

United Spirits 2,847 BUY 2.0 Telecom

Consumers 9.0 Idea 143 BUY 2.0

Energy Telecom 2.0

Bharat Petroleum 668 ADD 2.0 BSE-30 100.0

Source: Companies, Kotak Institutional Equities estimates


India Strategy

The scope for re-rating appears to be limited given the high multiples of the market and very

expensive multiples of the ‘growth’ part of the market. We note that the Indian market has

got re-rated significantly during 2014 with the market now trading at 16.6X 12-month

forward P/E for the BSE-30 Index; it was 14.7X on December 31, 2013. Exhibit 2 shows the

returns in any given fiscal year on earnings growth and change in multiple. However, the

scope for de-rating may also be limited as we expect the government to implement reforms

and macroeconomic parameters to improve.

BSE-30 Index P/E has expanded significantly in CY2014 Exhibit 2:Earnings growth and multiple expansion for BSE-30 Index, calendar year-ends, 1999-2014 (%)

64

(21) (18)

4

73

13

42 47 47

(52)

81

17

(25)

26

9

29

(60)

(40)

(20)

0

20

40

60

80

1001999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

Earnings growth Multiple expansion Sensex return

Notes: (a) Returns are based on calendar year. For 2014, returns are on CYTD basis.

Source: Kotak Institutional Equities estimates

We do not rule out potential hiccups during the year on disappointments in reforms in the

crucial areas such as labor, land and power. However, we would use any correction to buy

quality growth stocks that play on the themes of consumption and investment. We would

note that the government clearly has the willingness to implement reforms but its ability to

implement reforms may be affected by its minority position in the upper house of the

parliament.

Other than reforms, earnings growth will become increasingly important over a period of

time. The market has so far ignored earnings disappointments in FY2015, focusing on

medium-term earnings growth. However, valuations are a function of earnings growth and

valuations are expensive even on our 18% growth for FY2016E and 15% growth for

FY2017E (BSE-30 Index basis) in net profits.

Investors may argue about potential for higher earnings growth but we would note that

about 60% of Indian market’s net profits (as represented by the BSE-30 Index or Nifty-50

Index) comes from sectors with nil or low direct linkage to India’s GDP growth. We compute

that (1) about 25% of the net profits of Nifty-50 Index for FY2016 comes from sectors and

companies (IT, pharmaceuticals, TTMT) with overseas revenues and profits, (2) about 15%

comes from sectors and companies (BPCL, Cairn, metals and RIL) with profits linked to

global commodity cycles and (3) about 25% of net profits from companies (Coal India, GAIL,

ONGC, regulated utilities) with ‘controlled’ or regulated profits. Some of these companies

may not be in a position to grow earnings beyond a certain ‘normalized’ level.


Strategy India

Beyond 2015: A long long-term journey

A nation is not built in a year (and neither is real wealth!) but the actions of the citizens and

the government in any year may determine the nation’s future for the next few years. We

view 2015 in that context and would not be overly perturbed about the returns that the

market may deliver in 2015 alone. The more crucial issue is the nature of economic and

governance reforms that the government may implement in 2015 (and the next 1-2 years)

that will address India’s deep-seated social and structural challenges. We see India as a long-

term story, which can deliver strong economic growth and earnings growth for the next 10-

20 years if the current and future governments stick to the two basic principles of

development and governance.

The government has made a good beginning by demonstrating a strong commitment to

economic development, transparency and better governance. Many of the economic

reforms are currently work-in-progress and the country will see the benefits of the same as

and when they are implemented. We have little doubts about the willingness of the

government to implement reforms although politics may cramp its ability in the short term.

More important, we have even stronger faith in Indian citizens to choose the right economic

model and vote for political parties that demonstrate their adherence to the basic principles

of (1) economic and social development and (2) good governance. It is time for the

government to convert the faith of the citizens into ‘action’ even if some reforms may be

painful in the short term (higher prices for certain utilities, for example). We do not think

consumers will mind paying the right price for any good or service as long as they are

assured of its proper delivery and quality.

However, there are two issues that worry us about India realizing its long-term potential.

Education. The low quality of education at the primary and secondary levels is a cause

for concern. India will undoubtedly grow for the next few years simply driven by brute

demographic force and enhancement in productivity with investment in hard infrastructure.

However, sustenance of the demographic dividend story will require significant

improvement in labor productivity, which will require huge investment in education and

skilling. Exhibit 3 shows the low (and deteriorating) quality of education in India. Also,

there are grim signs within the demographic dividend story given the poor quality of soft

infrastructure (education, health, sanitation) in states with the right demographics.

A large portion of India’s young population (see Exhibit 4) resides in states with the worst

socioeconomic parameters (see Exhibit 5).

Learning outcomes in government schools falling rapidly Exhibit 3:Proportion of children in Std III and V at different reading and mathematical abilities by school type, 2009-13 (%)

Govt Pvt. Govt & Pvt. (a) Govt Pvt. Govt & Pvt. (a) Govt Pvt. Govt & Pvt. (a) Govt Pvt. Govt & Pvt. (a)

2009 43.8 58.2 46.6 50.3 63.1 52.9 36.5 49.7 39.1 36.1 46.2 38.1

2010 42.5 57.6 45.7 50.7 64.2 53.7 33.2 47.8 36.3 33.9 44.2 36.2

2011 35.2 56.3 40.4 43.8 62.7 48.3 25.2 44.6 30.0 24.5 37.7 27.6

2012 32.4 55.3 38.8 41.7 61.2 46.9 19.8 43.4 26.4 20.3 37.8 24.9

2013 32.6 59.6 40.2 41.1 63.3 47.0 18.9 44.6 26.1 20.8 38.9 25.6

Notes:

(a) Weighted average of government and private schools.

Year

% of children in Std III who

can read at least Std I level text

% of children in Std V who can

read Std II level text

% of children in Std III who

can do at least subtraction

% of children in Std V who can

do division

Source: ASER 2013 survey, Kotak Institutional Equities


India Strategy

A large portion of India’s young population resides in less-developed states Exhibit 4:Comparing the age distributions across states in India, Census year-end, 2011 (mn)

Dependency ratios (%)

0-14 15-59 59+ Total Young Old

Bihar 42 54 8 104 77 15 52

Chhattisgarh 8 15 2 26 53 13 60

Jharkhand 12 19 2 33 64 13 56

Madhya Pradesh 24 43 6 73 57 14 59

Rajasthan 24 39 5 69 60 14 58

Uttar Pradesh 71 111 17 200 64 15 56

Uttarakhand 3 6 1 10 52 15 60

West Bengal 25 59 8 91 42 13 64

India 372 730 108 1,211 51 15 60

Working pop/

total pop (%)

Source: Census of India - 2011, Kotak Institutional Equities

Many less-developed states have the right demographics but the worst socioeconomic parameters Exhibit 5:Comparison of states based on social and economic factors, March fiscal year-ends, 1981-2011

Infant mortality rate Life expectancy rate

GDP per capita (Rs) Literacy rate (%) (Deaths per 1,000) (years)

1981 1991 2001 2011 1981 1991 2001 2011 1981 1991 2001 2011 1981 1991 2001 2011

Andhra Pradesh 1,827 6,217 20,395 67,441 36 44 60 68 55 73 66 43 63 65 68 68

Bihar 1,182 3,444 7,703 19,697 32 37 47 64 75 69 62 44 58 63 67 68

Delhi 5,547 14,839 46,813 156,074 72 75 82 86 54 32 29 28

Gujarat 2,691 8,369 24,251 87,843 45 61 69 79 78 69 60 41 63 65 69 70

Haryana 3,262 10,310 30,022 103,740 37 56 68 77 52 68 69 44 66 67 70 70

Karnataka 2,017 6,248 22,208 67,184 46 56 67 76 74 77 68 35 64 67 69 69

Kerala 2,336 6,720 26,003 80,710 79 90 91 94 42 17 16 12 70 73 73 74

Madhya Pradesh 1,902 5,848 13,385 35,841 39 45 64 71 133 122 97 59 58 61 65 66

Maharashtra 3,054 9,411 27,533 92,112 57 65 77 83 74 60 49 25 65 68 70 71

Punjab 3,196 9,943 29,702 81,650 43 59 70 77 74 53 54 30 67 70 72 71

Rajasthan 1,809 6,289 16,167 49,819 30 39 60 67 87 77 83 52 59 64 69 70

Tamil Nadu 2,148 7,217 26,210 81,079 54 63 73 80 54 57 53 22 61 66 69 70

Uttar Pradesh 1,657 4,709 11,525 30,071 33 41 56 70 99 93 85 57 58 62 66 66

West Bengal 2,062 5,560 17,594 50,602 49 58 69 77 62 70 53 32 62 66 70 70

Notes:

(a) Life expectancy rate for 1981, 1991, 2001 and 2011 are for 1981-85, 19991-95, 2001-05 and 2006-10.

Source: Economic and Political Weekly, Census of India, Planning Commission, Ministry of Finance, CEIC, Kotak Institutional Equities

Equality. Economic growth will benefit all sections of India’s population and society.

However, India runs the risk of creating an unequal society with the top 30-40% of the

population benefiting hugely from India’s economic growth over the next two decades

and the rest being relatively unable or unsuited to participate due to various constraints—

lack of access to quality education and healthcare. It is important that the government

(and citizens who can make a difference) make the effort to bridge the gap between the

fortunate and the less fortunate. Everybody in a country will not be equal economically

(equal outcomes are impossible) but it is imperative that every Indian child gets the ‘same’

opportunity to do well. Otherwise, the ‘hidden’ cost of economic development may be

still quite high two decades out.


Strategy India

REFORMS: TO ACCELARATE FURTHER IN 2015

We expect the central and progressive state governments to implement more meaningful reforms in 2015.

Fiscal reforms are well underway with broad political consensus to implement GST and direct cash transfer

schemes. Investment reforms such as labor, land and power reforms may take longer and may be

implemented by progressive states even if the central government is unable to do so because of its minority

position in the upper house of the parliament.

Reforms: Expect more over the next few years

Exhibit 6 illustrates reforms that we expect the government to implement over the next 1-2

years and the linkages between them. We note that the government has already started

work on several of the reforms and we expect the same to be implemented over the next 1-

2 years. These reforms are logical extensions of the economic agenda of the new

government (see Exhibit 7), which it has articulated on a few occasions.

Several inter-connected decisions are required for India to regain its growth momentum Exhibit 6:Inter-linkages in the various decisions that need to be taken to move India’s economy ahead

Inter-connected path for India to achieve sustainable 7-9% growth

Fiscal

1 Final structure and implementation of GST

2 Direct benefit transfer (DBT) schemes

3 Divestment program and improved management of PSUs

4 LPG price increase

5 Fertilizer subsidies rationalization

Governance Investment

1 Reducing bureaucracy 1 Market pricing of energy (oil & gas) and other resources

2 Dealing with corruption/black money 2 Auction of coal blocks and private sector commercial mining

3 Reforms in the judiciary 3 Power tariff rationalization by states

4 Creation of new regulators, sector super-regulators 4 Labor reforms

5 Land reforms

6 Deemed approval system

Banking sector

1 Financial inclusion

2 Reduction in SLR over a period of time

3 Dealing with the NPL situation

4 Restructuring of PSU banks

A contained fiscal deficit will help to reduce borrowings, which will lead to a fall in interest

rates and aid the investment cycle

Revival of the investment cycle will improve credit offtake from the banking sector bringing in credit

growth and reducing the proportion of NPAs

Reducing leakages in public delivery can curtail fiscal expenditure. Facilitating

ease of doing business will add to tax buoyancy

Tightening credit culture via the banking system can bring about a significant

change in the governance system in corporate India

Transparent and efficient assignment of resources

can kick-start the investment cycle

The banking sector can either be a sink of capital or a large source of it through lowr

SLR if the government can manage its finances better

Source: Kotak Institutional Equities


India Strategy

Development through good governance—highlights of the President’s address to the parliament Exhibit 7:Highlights of economic issues, President’s address to the Indian parliament on June 9, 2014

Agriculture Energy

Increase investment in agriculture, both public and private, especially in agri-infrastructureComprehensive National Energy Policy and focus on development of energy-related infrastructure, human resource and

technology

Convert farming into a profitable venture through scientific practices and agro-technology Substantially augment electricity generation capacity through judicious mix of conventional and non-conventional sources

Address issues pertaining to pricing and procurement of agricultural produce, crop insurance and post-harvest

managementExpand the national solar mission and connect households and industries with gas grids

Incentivize the setting up of food-processing industries Reforms in the coal sector will be pursued with urgency to attract private investment in a transparent manner

Adopt a National Land Use Policy, which will facilitate scientific identification of non-cultivable land and its strategic

development

International civil nuclear agreements will be operationalized and nuclear power projects for civilian purposes will be

developed

Complete long-pending irrigation projects Food inflation

Corruption Emphasis on improving the supply side of various agricultural and agro-based products

Lok Pal is important to curb corruption and government will endeavor to formulate rules in conformity with the Act Effective steps to prevent hoarding and black marketeering

Build the confidence and morale of our bureaucracy, enabling it with the freedom to work and welcoming innovative

ideasReform the Public Distribution System incorporating best practices from the states

Stress on putting in place transparent systems and time-bound delivery of government services Governance

Eliminate obsolete laws, regulations, administrative structures and practices Create a policy environment that is predictable, transparent and fair

Already constituted an SIT to unearth black money stashed abroadRationalization and simplification of the tax regime to make it non-adversarial and conducive to investment, enterprise and

growth

Formulate clear and transparent policies on allocation of critical natural resources, such as coal, minerals and spectrum Make every effort to introduce GST while addressing the concerns of states

Defense Follow a policy of encouraging investments, including through FDI in sectors that help to create jobs and assets

A policy of zero-tolerance of terrorism, extremism, riots and crime will be pursued Health

Modernizing police infrastructure and equipment to tackle new forms of terrorism, including narcoterrorism and

cyber threatsFormulate a New Health Policy and roll out a National Health Assurance Mission

Equip security forces with the latest technology and improve their working conditions Address the shortfall of health care professionals by transforming health education and training

Encourage domestic industry, including the private sector, to have a larger share in design and production of

defense equipment

To ensure hygiene, efficient waste management and sanitation across the nation, Swachh Bharat Mission will be

launched

Introduce policies to strengthen technology transfer, including through liberalized FDI in defense production Infrastructure

Education Chalk out an ambitious infrastructure development program to be implemented over the next 10 years

Set up Massive Open Online Courses (MOOC) and virtual classrooms Fast-track, investment friendly and predictable PPP mechanism to be put in place

Formulate a National Education Policy aimed at meeting challenges posed by lack of quality, research and innovation Modernization and revamping of the railways: launch a Diamond Quadrilateral project of high-speed trains

Set up IITs and IIMs in every state Encourage R&D and high-level local manufacturing for railway systems

A national e-library will be established Fast, time-bound and well-monitored program for execution of the National Highways program

With the goal of Skilled India, the government will launch a National Multi-skill Mission Low-cost airports will be developed to promote air connectivity

Facilitate development and promotion of Indian sports, particularly rural sports Modernization of existing ports on one hand and development of new, world class ports on the other

e-governance Government will build 100 cities focused on specialized domains, equipped with world class amenities

Government records will be digitized to improve accessibility Every family will have a pucca house with water connections, toilet facilities and 24x7 electricity supply

IT will be used to drive re-engineering of government processes to improve service delivery and program

implementationJudiciary reforms

Strive to provide Wi-Fi zones in critical public areas over the next five years Modernize the courts to improve their operational efficiency

Rollout a broadband highway to reach every village and make all schools e-enabled in a phased manner Start reform of the criminal justice system to make dispensation of justice simpler, quicker and more effective

Emerging technologies like social media will be used as a tool for participative governanceMission mode project for filling vacancies in the judiciary; doubling the number of courts and judges in the subordinate

judiciary

Employment Special emphasis on development of Alternative Dispute Resolution mechanisms

Strategically promote labor-intensive manufacturing, tourism and agro-based industries

Set up world class investment and industrial regions, particularly along the Dedicated Freight Corridors and Industrial

Corridors

Strive to move towards a single-window system of clearances at the Centre and state levels

Source: Parliament of India, Kotak Institutional Equities

The agenda of reforms in India has remained broadly the same over the past few years but

the pace has changed and it may accelerate further: (1) Fiscal consolidation after the

stimulus that the government provided in FY2009-10 to counteract the impact of the global

financial crisis, (2) investment reforms, which seek to align the various distortions in the

factor market (land, labor, resources) and in output markets to market-linked pricing and (3)

governance reforms to bring about agility and transparency in government decision-making

and interactions with businesses and citizens. We break down the details of the specific

reforms under these headings in Exhibit 8 and discuss the same below.


Strategy India

Multifaceted reforms required to bring India back on track, some progress in a few areas Exhibit 8:Actionable reforms and methodology of reform

Executive Legislative

(A) Governance reforms: decisive leadership to overcome policy paralysis of the past several years

1 Reducing excessive bureaucracy by streamlining decision making; single-window clearances required √

2 Addressing endemic corruption through specific oversight legislations like Lokpal √

3 Executive and legislative arms of the government need to work: present and approve bills in parliament √

4 Strong regulators required across many sectors (energy, coal, real estate) with appropriate penal powers √ √

5 Institutions like CAG and judiciary to be strengthened √

(B) Fiscal reforms: tighter fiscal management to bring down interest rates in the economy

1 Important for government to signal fiscal prudence and for the RBI to reciprocate on monetary policy: FRBM Act √

2 Enact a new Fiscal Responsibility and Budget Management (FRBM) Act with medium-term fiscal targets √

3 Taxation reforms: GST implementation critical; practical timelines should be announced and adhered to √ √

4 Subsidy reforms: capping subsidies on fuels (diesel, kerosene and LPG) and market-linked pricing for fertilizer √

5 Implementing direct cash transfer schemes across India to cover various subsidies, support systems √

6 Increasing the price of power to sustainable rates for SEBs to return to health √

7 Follow a more pragmatic approach to privatization of public assets; sale to normal investors √ √

(C) Investment reforms: better investment climate to increase potential GDP growth

1 Improve center-state relations through a 'carrot-and-stick' approach to align economic agenda √

2 Creation of a proper institutional framework for awarding, approving and monitoring infrastructure projects √ √

3 Identifying new avenues of infrastructure creation; facilitating that with land acquisition and environment approvals √

4 Clear, transparent policies on auction of natural resources such as coal, minerals and spectrum √

5 Simplified procedure for land acquisition; amendment of the Land Acquisition Act, 2013 √

6 Amend complex labor laws, which are in the domain of central government. States can implement their own labor laws √

7 Implement market-linked pricing for all resources to facilitate higher investment, especially in the energy sector √

8 Integrated approach to address the problems of the power sector; coal, environment, power, railway ministries to work together √

9 Incentivize coal production through production-linked bonus for employees, profit-share mechanism for private contractors √ √

10 Strengthen distribution and supply systems to reduce leakages, eliminate rent-seeking √


Fiscal reforms. We expect the government to continue with the several fiscal reforms

initiated by the previous government and implement some of its own. We note the

government has agreed to the roadmap of fiscal consolidation (3% GFD/GDP target by

FY2017) put out by the previous government. As part of its long-term path to fiscal

improvement, the government has started several taxation (revenue) and expenditure

(subsidy) reforms, including the setting up of an Expenditure Reforms Commission. This

will help improve India’s fiscal position over the next 1-2 years and reduce GFD/GDP

(central government) to around 3% in FY2017.

Revenue reforms. On the revenue side, the key areas of focus are (1) GST

implementation from April 1, 2016 and (2) disinvestment. The implementation of GST

is very critical for India’s fiscal position given India’s low tax-to-GDP ratio (see Exhibit 9)

and muted growth in tax revenues in FY2015; April-October 2014 gross tax revenues

(taxes collected by the central government only) have grown only 5.9% versus the

government’s target of 20%. The impact of GST on India’s taxation revenues and fiscal

position will depend on the GST rates (central GST and state GST rates). However, we

can safely assume that the implementation of GST will result in better tax compliance

over a period of time and a pick-up in India’s taxation revenues.


India Strategy

India’s tax-to-GDP ratio (based on central taxes) has languished around 10% for the past Exhibit 9:

few years India’s tax-to-GDP ratio, March fiscal year-ends, 1998-2015E (%)

8.9 8.0

8.5 8.7 8.0

8.6 9.0

9.4 9.9

11.0 11.9

10.8

9.7 10.3

9.9 10.2 10.0 10.6

10.2

0

2

4

6

8

10

12

14

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014P

2015BE

2015E

Tax/GDP (%)

Source: CEIC, Kotak Institutional Equities

The government as usual will target `650 bn of divestment in FY2016 too to bridge

the gap between its revenues and expenditure. It has lined up large follow-on stake

sales in 1QCY15 to meet with its `634 bn target for FY2015, which will also possibly

be followed by the sale of various holdings of the government (for example, with SUTTI

or HZL). However, the government needs to reconsider the issue of divestment as is

followed currently and weigh the several merits of privatization of government-owned

companies that could enhance their competitive position and market value against

doing periodic stake sales to meet certain fiscal deficit targets.

Expenditure reforms. On the expenditure side, the key areas of focus will be

(1) implementation of direct benefit transfer (DBT) schemes, which will result in

transfer of cash subsidies directly to households and reduce leakages in subsidies in the

current public distribution system for food and kerosene, (2) reducing LPG subsidies

and (3) rationalization of government expenditure. The deregulation of diesel and

gasoline prices has helped the government trim a part of the fiscal expenditure. We

note that the diesel and gasoline subsidies cost India `4.3 tn in FY2005-14 when oil

prices ruled firm. In fact, diesel subsidy alone in FY2013 (at `921 bn) was the

equivalent of 1.6% of India’s GDP.

We expect the new government to implement a small increase in minimum support

prices (MSP) for agricultural produce in FY2016 in order to manage food subsidies and

inflation. We note that the government has implemented small increases in MSPs for

the past two years up to FY2015 compared with significantly higher price increases in

previous years (see Exhibit 10). We expect the focus of subsidy reforms to shift to

fertilizer subsidies once the government rationalizes food and kerosene subsidies

through DBT schemes.


Strategy India

Modest increase in minimum support prices of agricultural produce compared to large increases in FY2007-13 Exhibit 10:Minimum support prices for crop year, March fiscal year-ends, 2004-15 (Rs/quintal)

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Kharif

Paddy (Common) 550 560 570 620 745 900 1,000 1,000 1,080 1,250 1,310 1,360

Paddy (Gr. A) 580 590 600 650 775 930 1,030 1,030 1,110 1,280 1,345 1,400

Jowar 505 515 525 540 600 840 840 880 980 1,500 1,500 1,530

Maize 505 525 540 540 620 840 840 880 980 1,175 1,310 1,310

Urad 1,370 1,410 1,520 1,520 1,740 2,520 2,520 2,900 3,300 4,300 4,300 4,350

Moong 1,370 1,410 1,520 1,520 1,740 2,520 2,760 3,170 3,500 4,400 4,500 4,600

Cotton (F-414/H-777/J34) 1,725 1,760 1,760 1,770 1,800 2,500 2,500 2,500 2,800 3,600 3,700 3,750

Groundnut in shell 1,400 1,500 1,520 1,520 1,550 2,100 2,100 2,300 2,700 3,700 4,000 4,000

Soyabean (Black) 840 900 900 900 910 1,350 1,350 1,400 1,650 2,200 2,500 2,500

Soyabean (Yellow) 930 1,000 1,010 1,020 1,050 1,390 1,390 1,440 1,690 2,240 2,560 2,560

Rabi

Wheat 640 650 750 750 1,000 1,080 1,100 1,170 1,285 1,350 1,400 1,450

Gram 1,425 1,435 1,445 1,445 1,600 1,730 1,760 2,100 2,800 3,000 3,100 3,175

Masur (Lentil) 1,525 1,535 1,545 1,545 1,700 1,870 1,870 2,250 2,800 2,900 2,950 3,075

Rapseed/mustard 1,700 1,715 1,715 1,715 1,800 1,830 1,830 1,850 2,500 3,000 3,050 3,100

Barley 540 550 565 565 650 680 750 780 980 980 1,100 1,150

Sugarcane 75 80 80 81 81 130 139 145 170 210 220

Source: Ministry of Agriculture, Kotak Institutional Equities

Investment reforms. We expect the government to focus on the following major areas

of reforms to improve the investment climate and kick-start India’s flagging investment

cycle. India ranks quite low on almost all parameters related to investment on various

global indices (see Exhibit 11).

India ranks quite low on almost all parameters related to investment Exhibit 11:India’s score in World Bank’s ‘Ease of Doing Business’ index

Ease of doing business in India 142

Starting a business 158

Dealing with construction permits 184

Getting electricity 137

Registering property 121

Getting credit 36

Protecting minority investors 7

Paying taxes 156

Trading across borders 126

Enforcing contracts 186

Resolving insolvency 137

Notes:

(a) Ranking pertains to 189 countries. The higher the rank, the difficult the scenario.

Source: Doing Business 2015 data, World Bank, Kotak Institutional Equities

Approvals (or government-to-business interactions). We expect the government to

focus on more speed and transparency in government approvals for projects. The

government has already made a good beginning in the case of environment and forest

approvals. It has launched a portal (http://forestsclearance.nic.in), which allows for

online filing and tracking of clearances from the Ministry of Environments and Forests.

In our view, the government should eventually move towards a system of ‘deemed’

approvals under which an approval would be deemed to be granted by a government

body if it did not give approval within a stipulated time-frame. This would result in

greater accountability in government agencies and transparency for applicants thereby

reducing the scope for delays. A corollary of a transparent system would be lower

corruption.


India Strategy

Deregulation of all input markets. The government is in the process of allocating

natural resources such as coal (and eventually, all mineral resources, in our view)

through transparent auctions. The auction process is already in vogue for the past

several years for oil & gas blocks and telecom spectrum. The new process for allocation

of coal mines that were cancelled by the Supreme Court will be finalized and put into

action in 1QCY15; a credibly run process can bring in transparency in allocation and

revenues for the government. Also, the government is keen to open up the coal sector

for private sector commercial mining.

The government will eventually need to make the land acquisition process less tedious

for potential investors while respecting the rights of the land-owners and the

indigenous communities. A difficult, long-drawn and expensive land-acquisition

process has been highlighted as a key reason for the various delayed projects. Similarly,

changes are required to be made to the labor laws to make them more flexible in

terms of hiring and retrenchment, lesser compliance formalities and fewer inspections,

among other issues (see Exhibit 12 for more details).


Strategy India

India needs to revisit its labor laws to improve labor flexibility conditions Exhibit 12:Summary of key labor laws in India

Industrial relations

Industrial Disputes Act, 1947 Regulates how employers may address industrial disputes such as lockouts, layoffs and retrenchments. Contains conditions

employers must comply with before terminating services or laying off an employee who has been in continuous service with

the employer for more than a year. The employer is required to give notice of termination to the employee, send a copy of it

to the appropriate government office seeking permission and wait for one month before the employment can be lawfully

terminated. The employer may pay full compensation of a month in lieu of notice. An employer must pay 15 days' average pay

for each completed year of continuous service.

Industrial Employment Act, 1946 Employers in industrial establishments need to define and post conditions of employment by issuing standing orders that

must be approved by the government. It aims to remove flexibility for the employer in terms of job, hours, timing, granting

leave and productivity measures.

Trade Unions Act, 1926 Deals with registration of trade unions, their rights, liabilities and responsibilities and ensures their funds are used properly.

Gives legal and corporate status to registered trade unions and seeks to protect them from civil or criminal prosecution so

that they can carry on their legitimate activities for the benefit of the working class. It is applicable to workers' unions and

employees' associations.

Payment of wages

Equal Remuneration Act, 1976 No employer shall pay to any worker employed, remuneration payable in cash or in kind at rates less favorable than those

paid to workers of the opposite sex in such an establishment or employment. The Act provides that no discrimination should

be made against women at the time of recruitment.

Minimum Wages Act, 1948 Prescribes minimum wages in all enterprises, and in some cases, those working at home. Central and state governments can

revise minimum wages at their discretion. The minimum wage is classified by the nature of work, location and other factors at

the discretion of the government. State governments have their own minimum-wage schedules.

Payment of Bonus Act, 1965 Applies to an enterprise employing 20 or more persons. It requires an employer to pay a bonus to persons on the basis of

profits or on the basis of production or productivity. The Act was modified to require companies to pay a minimum bonus

even if the employer suffered losses during the year.

Payment of Wages Act, 1936 The Act regulates when wages shall be distributed to employees. It provides tax withholdings an employer must deduct and

pay to the Central or state government before distributing wages.

Social security

Payment of Gratuity, 1972 Applies to all establishments employing 10 or more workers. Gratuity is payable to an employee if he or she resigns or retires.

The Act mandates payment to be at the rate of 15 days' salary of the employee for each completed year of service, subject to

a maximum of Rs1.0 mn.

Employees' Provident Fund and

Miscellaneous Provisions Act, 1952

It ensures financial security of employees of an establishment by providing a system of compulsory savings. The Act provides

for establishments to have a contributory Provident Fund scheme, in which employees’ contribution shall be at least equal to

the contribution by the employer. Minimum contribution by an employee shall be 10-12% of wages. This amount is payable to

the employee after retirement and could also be withdrawn partly for certain specified purposes.

Employees State Insurance Act, 1948 It provides for health care and cash benefit payments in case of sickness, maternity and employment injury. Applies to all non-

seasonal factories, run with power and employing 10 or more persons, and to factories that run without power and employ

20 or more persons. Cash benefits are administered by the Central Government through the Employees State Insurance

Corp. (ESIC) State governments and UTs administer medical care.

Working conditions and social welfare

The Inter-State Migrant Workmen Act,

1979

Regulates the employment of inter-state migrant workers and their conditions of service and other related matters. Applies to

establishments or contractors that employ five or more inter-state migrant workers. A migrant worker is defined as a person

who is recruited by or through a contractor in one state under an agreement for employment in an establishment in another

state.

The Contract Labor Act, 1970 Aims at regulating employment of contract labor so as to place it at par with labor employed directly with regard to working

conditions and other benefits. The Act applies to every establishment/contractor that employs 20 or more workmen on any

day of the preceding 12 months as contract labor. Contract workers are protected in terms of wages, hours of work,

welfare, health and social security. Amenities to be provided to contract labor include canteen, rest rooms, first-aid facilities

and other basic necessities at the work place. Liability to ensure payment of wages and other benefits is primarily that of the

contractor, and in case of default, that of the principal employer. Implemented by both center and state governments.

Maternity Benefit Act, 1961 Regulates employment of women and maternity benefits mandated by law. Any woman employee who worked in any

establishment for at least 80 days during the 12 months immediately preceding the date of her expected delivery is entitled to

receive maternity benefits under the Act. The employer is required to pay maternity benefits, medical allowance, maternity

leave and nursing breaks.

Factories Act, 1948 Aims to protect labor from long hours of work and to maintain healthy, sanitary work conditions and safety of workers.

Stipulates maintenance of industrial machines to avoid accidents and for industrial inspectors to regularly visit industrial sites

to oversee health and safety regulations.

Workmen’s Compensation Act, 1936 Lays down compensation for workers who suffered injury in the course of employment or for dependents in case of death.

The Act provides the rate at which compensation shall be paid to an employee.



India Strategy

Deregulation of all output prices. In our view, market pricing for various products

(oil & gas, natural resources, power, etc.) will result in larger investment and proper

exploitation of India’s limited natural resources. Private investors are understandably

reluctant to invest in certain sectors where the government controls the final output

prices. Government companies have continued to invest irrespective of declining

economics for investment in certain sectors (especially, the Indian oil & gas sector).

However, India’s energy position has deteriorated over the past few years (see Exhibit

13) and we would attribute the rising energy deficit partly to the government’s policy

of controlling output prices.

India’s dependence on energy imports is expected to near-double by 2020 Exhibit 13:Energy deficit, March fiscal year-ends, 2008-20E (mtoe)

2008 2009 2010 2011 2012 2013 2014 2015E 2016E 2017E 2018E 2019E 2020E

Energy demand

Coal (mn tons) 507 549 588 593 639 713 730 770 832 897 969 1,037 1,109

Natural gas (bcm) 44 43 59 65 65 59 54 56 60 66 78 85 88

Petroleum products (mn tons) 129 134 138 142 148 155 158 163 168 177 185 193 200

Electricity (hydro+nuclear) (bn kWh) 140 127 126 140 163 147 169 176 187 205 222 233 250

Total demand (mtoe) 432 456 494 506 537 573 582 609 648 695 751 798 846

Energy supply

Coal (mn tons) 454 490 515 523 536 567 567 587 606 633 660 690 723

Natural gas (bcm) 32 32 47 52 47 40 35 35 37 39 45 49 50

Crude oil (mn tons) 34 34 34 38 38 38 38 38 39 40 39 39 39

Electricity (hydro+nuclear) (bn kWh) 140 127 126 140 163 147 169 176 187 205 222 233 250

Total supply (mtoe) 291 306 331 344 349 356 354 364 375 392 411 430 447

Total energy shortfall (mtoe) 142 150 163 162 188 217 228 246 273 303 340 368 398

Notes:

(a) We assume that natural gas demand will be constrained by supply. We do not assume any incremental demand for gas from the power sector.


In our view, the deregulation of the power sector is critical to address the problems in

the power sector and by extension, the banking sector; the power sector accounts for

9% of the banking system’s loans. Artificial controls on prices of power by many state-

owned distribution companies has resulted in (1) underutilization of generation

capacities with coal and gas-based power plants running at suboptimal PLFs (see

Exhibits 14-15) and (2) power shortages. This is quite a travesty as most households

would be happy to pay the ‘right’ or the market price of power in order to get 24X7

power. Thus, increasing power tariffs or reducing AT&C losses remain the key to

improving the frail state of the state electricity boards (SEBs), which will enable them to

buy power at the market price rather than to resort to blackouts.

The oil & gas sector has similarly suffered from excessive government control of output

prices. The government has deregulated the prices of diesel and gasoline but continues

to set the retail prices of kerosene and LPG. This is less of a problem now given the

sharp decline in crude oil prices. However, the government needs to revisit the pricing

of natural gas in India so as to balance the needs of the users (who are currently

starved of gas) and the needs of the E&P companies (who do not find the current fixed

prices remunerative for further exploration or production). Similarly, the pricing

formula for oil (nominated blocks of government companies) needs to be finalized to

incentivize domestic production and strengthen the balance sheets of the government

companies.


Strategy India

PLF of coal-based power plants has declined to below 70% Exhibit 14:Sector-wise PLF of coal capacity, March fiscal year-ends, 2009-14 (%)

60

65

70

75

80

85

90

Central State Private IPPs Private Utilities Overall

2009 2010 2011 2012 2013 2014

Source: CEA, Kotak Institutional Equities

PLF of gas-based power plant has declined to 25%, leaving huge unutilized capacity Exhibit 15:Sector-wise PLF of gas capacity, March fiscal year-ends, 2009-14 (%)

15

25

35

45

55

65

75

Central State Private Overall

2009 2010 2011 2012 2013 2014

Source: CEA, Kotak Institutional Equities

Banking sector reforms. We see banking sector reforms as critical to support the

government’s financial-inclusion objective and also fund India’s long-term growth

ambitions. Bank funding is by far the most important source of funds for Indian

companies. We also note that several reforms in the banking sector would flow from the

government’s medium-term plan to reduce India’s fiscal deficit (fiscal reforms).

Financial inclusion. The government’s thrust on financial inclusion through its ‘Jana

Dhana Yoajana’ will result in access to the formal financial system for 800 mn

individuals. As per various estimates, only 400 mn individuals hold bank accounts

currently. This is important as it will also facilitate transfer of various ‘rights’ of citizens

(cash subsidies, pension, salaries and scholarships) directly to the bank accounts of

target individuals and households. This will reduce the cost of transactions

meaningfully over a period of time, improve productivity and also reduce subsidies.


India Strategy

Reduction in SLRs. Any improvement in the government’s fiscal position due to the

aforementioned fiscal reforms will allow the RBI to reduce the SLR for banks further.

The RBI has already reduced SLR by 200 bps to 22% currently over the past two years.

This will allow the banks to lend more to the productive parts of the economy rather

than to the government.

Restructuring of PSU banks. The restructuring of PSU banks to make them more

efficient will be an important part of the government’s agenda since PSU banks

account for a large portion of total credit and deposits despite the erosion in market

share in recent years (see Exhibit 16). The situation on non-performing loans (NPAs)

and restructured loans continues to be grim (see Exhibit 17); public banks continue to

report a significantly higher proportion of impaired loans compared to their private-

sector counterparts. Also, the capital adequacy ratio of several PSU banks has slipped

to critically low levels, which coupled with high impaired assets, may be acting as an

impediment for credit growth. Credit growth has slipped to multi-year lows (see Exhibit

18). We expect credit growth at 14% yoy for CY2015/FY2016 but note that a quick

revival of the credit growth is also predicated on banks’ ability to lend as and when the

investment cycle picks up.

PSU banks account for a large portion of total credit and deposits Exhibit 16:Public banks, private banks and foreign banks’ market share in credit and deposits, March fiscal year-ends, 2000-13 (%)

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

Market share in credit (%)

Public banks 79.8 78.8 74.4 74.2 73.2 74.2 72.9 72.7 72.6 75.3 77.2 76.9 76.4 76.1

Private banks 12.6 12.9 18.0 18.8 19.8 19.2 20.6 20.9 20.9 19.2 18.1 18.6 19.0 19.4

Foreign banks 7.6 8.3 7.6 7.1 7.0 6.5 6.4 6.4 6.5 5.5 4.7 4.5 4.5 4.5

Market share in deposits (%)

Public banks 81.9 81.4 80.5 79.6 77.9 78.2 75.0 73.9 73.9 76.6 77.7 77.9 77.5 77.3

Private banks 12.6 12.9 14.1 15.3 17.0 17.1 19.8 20.5 20.3 18.1 17.3 17.9 18.2 18.8

Foreign banks 5.5 5.6 5.4 5.1 5.1 4.7 5.3 5.6 5.8 5.3 5.0 4.3 4.3 3.9

Source: RBI, Kotak Institutional Equities


Strategy India

Restructured loans remain high Exhibit 17:Trend in restructured loans, 2QFY14- 2QFY15

2QFY14 3QFY14 4QFY14 1QFY15 2QFY15 2QFY14 3QFY14 4QFY14 1QFY15 2QFY15 2QFY14 3QFY14 4QFY14 1QFY15 2QFY15

Public banks

Allahabad Bank 136 126 109 119 122 10.6 9.4 7.9 8.4 8.8 14.4 13.6 12.1 12.3 12.3

Andhra Bank 104 101 108 109 110 10.3 9.8 9.7 9.5 9.6 13.9 13.5 12.9 13.4 13.4

Bank of Baroda 269 264 265 228 224 7.9 7.5 6.7 6.0 5.8 9.8 9.4 8.2 7.6 7.6

Bank of India 175 164 136 106 117 5.2 4.6 3.6 2.8 2.9 7.0 6.3 5.6 4.9 5.3

Canara Bank 206 217 232 240 246 7.3 7.6 7.7 7.9 7.9 9.6 9.9 9.7 10.0 10.2

Corporation Bank 70 66 68 89 95 5.8 5.4 5.0 6.5 7.0 8.0 7.5 7.3 9.2 9.9

Indian Overseas Bank 120 123 123 128 143 6.8 7.1 6.8 7.2 7.9 9.7 10.3 10.0 11.1 13.0

Oriental Bank of Commerce 94 97 107 107 108 7.3 7.2 7.6 7.8 7.7 9.9 10.1 10.4 10.9 11.0

Punjab National Bank 348 313 355 340 364 11.1 9.6 10.2 9.8 10.2 14.2 12.4 13.0 12.8 13.4

State Bank of India 392 394 431 422 440 3.5 3.4 3.6 3.5 3.6 6.5 6.7 6.1 6.2 6.4

Union Bank 109 110 124 120 126 4.9 4.8 5.3 5.0 5.2 7.1 7.1 7.6 7.5 7.9

Old private banks

City Union Bank 2 3 3 3 3 1.4 1.9 1.7 1.6 1.5 2.2 2.8 2.9 2.9 2.8

DCB Bank — — — — — — — — — — 0.9 0.8 0.9 1.0 1.1

Federal Bank 22 23 23 25 24 5.2 5.5 5.3 5.5 5.0 6.2 6.3 6.1 6.2 5.7

Karur Vysya Bank 16 12 14 15 16 4.9 3.6 4.1 4.3 4.5 5.4 4.1 4.5 4.8 5.1

J&K Bank 15 14 16 14 13 3.6 3.3 3.4 3.0 2.8 3.8 3.5 3.6 5.2 5.3

New private banks

Axis Bank 48 49 61 63 67 2.1 2.1 2.4 2.5 2.5 2.5 2.5 2.8 2.9 2.9

HDFC Bank 5 5 6 6 6 0.2 0.2 0.2 0.2 0.1 0.5 0.5 0.5 0.5 0.4

ICICI Bank 68 86 106 113 110 2.1 2.6 3.1 3.2 3.0 3.0 3.5 4.1 4.2 4.1

IndusInd Bank 2 2 2 2 3 0.3 0.3 0.3 0.4 0.5 0.5 0.6 0.7 0.7 0.9

Yes Bank 1 1 1 1 1 0.3 0.2 0.2 0.2 0.2 0.3 0.3 0.2 0.3 0.3

Total 2,207 2,176 2,294 2,255 2,343 5.1 4.8 4.8 4.7 4.8 7.2 7.0 6.8 6.9 7.1

Public banks 2,024 1,976 2,057 2,009 2,094 6.2 5.9 5.7 5.6 5.8 8.8 8.6 8.2 8.2 8.6

Private banks 183 201 237 246 249 1.7 1.8 2.0 2.1 2.0 2.2 2.3 2.6 2.7 2.7

Restructured loans (Rs bn) Restructured loans (%) Restructured loans + Net NPLs (%)

Source: Companies, Kotak Institutional Equities

Loan growth has come off significantly in the recent months Exhibit 18:Yoy growth in advances, March fiscal year-ends, 2011-15 (%)

5

10

15

20

25

30

Apr

May Jun Jul

Aug Se

p

Oct

Nov

Dec Jan

Feb

Mar

2011 2012 2013 2014 2015


In our view, the government may want to debate the basic issue of ownership of the

public sector banks. The government does not have any plan to privatize the PSU

banks but is actively looking at options to improve their efficiency. It has changed the

selection process for senior positions in PSU banks. The PJ Nayak Committee had made

several suggestions to improve the governance at public sector banks.


India Strategy

Governance reforms. This will probably take the longest amount of time and political

acumen, direction and political will. India needs to bring about significant changes in the

way it is governed and how the government interacts with its citizens. The current

government has worked on the premise that it is important to (1) enhance the quality of

interaction between the government and its citizens by making exchanges simple and

transparent, (2) empower the bureaucracy to take the right decisions and (3) eliminate

corruption in government-to-citizen (G2C) and government-to-business (G2B) exchanges.

Many of the aforesaid initiatives in the areas of fiscal (for example, direct benefit transfer

schemes) and investment (online approval systems) reforms will contribute to better

governance.

We also see judicial reforms as a key part of the government’s broader objective to

provide better governance to its citizens. The pendency in the Indian judicial system is

quite high (see Exhibit 19). This issue will take time to fix given the challenges but the

government is aware of the importance of judicial reforms to establish the primacy of the

‘rule of law’. Also, better relations between the executive and judiciary will be important

for investors. The judiciary has reprimanded the executive on many occasions and

rescinded the decisions of the executive (for example, cancellation of 2G telecom

spectrum in 2010 and more recently, 214 coal blocks allocated since 1993).

The backlog of cases keeps increasing year on year Exhibit 19:Backlog of cases at various courts, March fiscal year-ends, 2008-12

2008 2009 2010 2011 2012

Supreme Court 45,887 50,163 54,864 54,612 59,816

High courts 3,778,715 3,955,224 4,108,555 4,298,591 4,340,867

Lower courts 25,617,828 26,752,193 27,374,908 27,548,070 26,851,766

Total 29,442,430 30,757,580 31,538,327 31,901,273 31,252,449

Source: Supreme Court of India, Kotak Institutional Equities

Simplification of laws (for example, acting on the Financial Sector Legislative Reforms

Commission’s report or redacting old and inapplicable laws) and creation of regulators (in

sectors such as coal, real estate, etc.) will also be important. We believe enactment of

new laws that guarantee the rights of citizens to receive goods and services from

government bodies in a time-bound manner will go a long way in improving the

governance in the country. Two bills in this regard (The Electronic Delivery of Service Bill,

2011 and The Rights of Citizens for Time Bound Delivery of Goods and Services and

Redressal of Grievances Bill, 2011) are pending in the parliament.

Good progress on reforms so far

The pace of economic reform has gathered steam over the past 15-18 months (see

Exhibit 20). The currency shock received by India in 2HCY13 created the urgency and the

immediacy for reforms in the country. The formation of a new government in May 2014

with a stable majority in the lower house of parliament and more important, pro-growth

and pro-development economic ideology has resulted in more reforms over the past few

months and continuation of reforms started by the previous government.

On the fiscal side, the government (1) has deregulated diesel prices, (2) is moving ahead

with direct benefit transfer schemes and (3) is working on implementation of GST. We note

that gasoline prices had been deregulated earlier in May 2013. Kerosene and liquefied

petroleum gas (LPG) are still price-controlled. On LPG, the government is mulling regular

price increases and reducing the entitlement of subsidized cylinder per household; on

kerosene, the benefits of the subsidy will be transferred directly to the beneficiaries. The UID

program has enrolled more than 700 mn people to date (see Exhibit 21).


Strategy India

The pace of economic reforms has gathered momentum over the past 15 months but more needs to be done Exhibit 20:Summary of economic reforms in the past 15-18 months

Type of reforms Status Comments/Implications

Fiscal

Taxation

Implementation of GST Center and states in negotiations on the scope of GST Could increase tax-to-GDP ratio by 50-100 bps

Likely to be implemented by April 1, 2016 India's tax-to-GDP is low at 10% (FY2014; central)

Subsidy

1. Fuels (diesel) Diesel deregulation Monthly diesel price increase of Rs0.5/liter since January 2013; Diesel price deregulated on October 18, 2014

FY2015 diesel subsidy at ~Rs115 bn versus FY2014 diesel Diesel subsidy at 0.6% of GDP in FY2014 (including

subsidy of Rs628 bn share of government companies)

2. Direct Benefit Schemes (DBT) Direct transfer of cash to 700 mn Aadhar IDs issued, which will form the basis Leakage at 40% in food and 50-60% in kerosene

target households of DBT schemes for cash transfer to target households under the current Public Distribution System (PDS)

Government to start DBT for LPG from January 1, 2015 as per various government estimates

Governance

Executive

E-Governance initiatives Increasing G2C electronic interaction to increase Land records digitized and easily accessible in several states This will reduce petty corruption and expedite

transparency and reduce bureaucracy Online filing of income tax; quicker processing and refunds approvals

Focus on G2B electronic interaction to increase Online portal for application and approvals related to This will expedite approvals for new and ongoing projects and

transparency and reduce bureaucracy environment and forests clearances reduce corruption

Legislative

1. The Lokpal and Lokayuktas Act, Better governance Creation of Lokpal pending; states have been slow to create Act of corruption of public servants to be investigated

2013 Lokayuktas in their respective states by the central Lokpal and state Lokayuktas

2. New bills such as (1) The Electronic Cleaner governance Pending before parliament The new bills will empower citizens and result in

Delivery of Services Bill, 2011 and better delivery of public goods and services to citizens

(2) The Rights of Citizens for Time Every public authority will publish a list of services to be

Bound Delivery of Goods and Services delivered electronically

and Redressal of Grievances Bill, 2011 The bill confers rights on every citizen to time-bound

delivery of goods and services from a public authority

Investment

1. Auction of natural resources Transparent, rule-based auction Oil & gas blocks and telecom spectrum already auctioned This will reduce corruption in G2B interactions; under-

process for allocation of natural Coal blocks to be auctioned under a new mechanism soon pricing of natural resources and opaque transfer of

resources Government to cancel 214 coal blocks awarded since 1993 natural resources by the government to private

due to illegality in awarding of the blocks. The blocks will be companies has been a major area of corruption

re-auctioned at a later date

No decision yet on allocation of mineral ores

2. Energy Rationalization of energy prices to global levels Natural gas price increased to US$5.05/mn BTU (GCV basis) from Higher gas price to improve economics of gas production in the

to incentivize E&P activity and higher domestic US$3.8/mn BTU previously country; however, quantum of gas price increase may not be

oil & gas production adequate for meaningful investment in the upstream sector

3. FDI Increase in FDI in several sectors Already implemented by the central government Investment by foreign airline companies in Indian

such as airlines, cable, defense, DTH, insurance airline companies

multi-brand retailing, railway infra and telecom Some states have not allowed FDI in multi-brand retailing

4. Government approvals Faster approvals for projects Environmental approvals given for several projects in the past Several mining projects and downstream metal

few months projects for lack of mineral ores

Project Monitoring Group (PMG) has expedited approvals Several power projects operating at low PLF due to

for several projects, which had been delayed earlier paucity of coal and gas

5. Labor reforms Lesser complexity in labor laws to facilitate Rajasthan, a BJP-ruled state has already changed several More states may follow if states compete among themselves

investment labor laws for more investments

Central government announced certain reforms in October 2014 Small but important reforms

6. Power sector reforms Tariff increases by states Ongoing but inadequate SEB losses are quite high at Rs1 tn in FY2015

Tariff increases for select power Approved by CERC and government-appointed committee but Financials of two large power projects (~8 GW) to

projects stay order issued by the Supreme Court improve; higher power availability

Financial restructuring package Already implemented with several state governments having Improvement in the financial condition of State

for states participated in the same Electricity Boards (SEBs)

7. Railways Hike in railways passenger fares and freight Implemented with immediate effect (June 25, 2014) Government increased railway passenger fare by 14.2% and

charges freight charges by 6.5%. This will generate additional

revenues of Rs80 bn


Over 700 mn people enrolled for UID Exhibit 21:Enrolments in the UID program

-

100

200

300

400

500

600

700

800

0

5

10

15

20

25

30

35

40

Nov-

12

Dec

-12

Jan-1

3

Feb-1

3

Mar-

13

Apr-

13

May-

13

Jun-1

3

Jul-13

Aug-1

3

Sep-1

3

Oct

-13

Nov-

13

Dec

-13

Jan-1

4

Feb-1

4

Mar-

14

Apr-

14

May-

14

Jun-1

4

Jul-14

Aug-1

4

Sep-1

4

Oct

-14

Nov-

14

Dec

-14

No. of Aadhars (LHS) Cumulative Aadhars (RHS)

Source: UID portal, Kotak Institutional Equities


India Strategy

The goods and services tax bill is in the final stages of preparation with the central

government working with state governments in identifying the (1) tax-neutral rates, (2)

inclusion and exclusion of various goods and services, (3) scope of GST in terms of the cut-

off limit for including an entity in the GST system and (4) compensation mechanism for

states; the states want the compensation mechanism to be included in the GST

constitutional amendment bill. The current rollout date remains April 1, 2016.

On the governance side, the government is pushing ahead with significant digitization of its

interactions with the citizens. For both interactions, portals have been created to ease both

G2B and G2C interactions with the government. For example, the government has put

together a comprehensive labor portal, which facilitates the filing of online returns by

companies/employers. Similar portals have been created for project monitoring groups and

for environmental and forest clearances. We expect to see further digitization initiatives in

government interaction: for example, in land records digitization, tax assessments, online

registering of new businesses, etc.

The government has set in process a mechanism of auction such that the process of

allocation of natural resources is more transparent and is not decided by committees with

discretionary powers. The government is opening up large sectors to further foreign direct

investment (cases in point being defense and railways) and also increasing the stake that

foreigners can own in a business (cases in point being DTH, insurance and telecom). Market

price-linked reforms in power, energy (gas) and railways have been initiated although a lot

more remains to be done to achieve market-parity pricing. The government’s decision to not

appeal to the Supreme Court on the tax rulings that went against it in the high courts (Shell

capital gains on investment and Vodafone transfer pricing case) will partly help restore

investor confidence on government policies. Retrospective and aggressive taxation were

often blamed for a deteriorating investment climate.

Potential challenges in the reform path

This government lacks a majority in the upper house of parliament (or the Rajya Sabha),

which makes large-scale legislative changes difficult to execute. For example, the

government may not be able to change certain land and labor laws that investors currently

find as impediments for investment unless the government is able to convince the

opposition parties of the merits of such changes.

One key reason for many of the initiatives being implemented in phases is the federal nature

of India that gives a lot of authority to states over several matters. Thus, it is imperative that

the central government work jointly with the state governments for any major reforms on

concurrent subjects (both central and state governments have the power to legislate on such

subjects).

We discuss these points in detail in the chapter on risks.

The impact of the reforms

We discuss the potential impact of the abovementioned reforms on various sectors.

Banks. We expect the banking sector to eventually benefit from investment reforms

through pick-up in credit growth. More important, (1) overall economic recovery, (2)

lower interest rates and (3) power sector reforms discussed in the same section earlier

may address the burgeoning NPLs in the banking sector. It remains to be seen how the

government, the regulator and the banks address the problems in certain sectors.

In our view, banks may need to address the NPL issue aggressively by forcing solutions on

to companies by exercising their powers as the ‘virtual’ owners of the companies (net

debt would be 90-95% of EV in many cases) and suppliers of capital. These could include

(1) extracting the right economic behavior from the borrowers such as bankrupt SEBs or

(2) a downward adjustment to the value of equity (zero) and debt (whatever level may be

suitable) to make the projects viable and a concomitant change in the management of

the ‘restructured’ companies.


Strategy India

Consumer companies—staples and discretionary. We expect fiscal consolidation to

have a moderately negative impact on consumption over the next 1-2 years. (1) Lower

increase in MSPs and (2) a possible pull-back from MG-NREGS to restrict it to 200 districts

in the country (looks unlikely, in our view) and (3) a small but consistent increase in prices

of LPG and power may reduce disposable income elsewhere.

However, the sharp decline in crude oil prices and consequent reduction in retail prices of

diesel and gasoline may moderate the impact on demand for automobiles. Also, a decline

in interest rates over the next 1-2 years (of the order of 100-150 bps) may reduce the

total cost of ownership of vehicles and spur demand.

More important, economic reforms may kick-start the virtuous cycle of investment, job

creation and consumption on a more sustainable basis over the next few years.

Consumption demand was unsustainably high over the FY2007-13 period and propelled

by ‘fiscal’ support from various government policies and social welfare schemes that

boosted consumption artificially at the expense of fiscal deterioration and high inflation.

Energy companies. We see the energy sector (government-owned companies) as a

major beneficiary of fuel reforms. The government may finally be in a position to reduce

its control over pricing in the energy sector, which may restore the financial health of the

companies and enable more investment in the downstream and upstream energy sectors.

Lower crude prices will accelerate the process of deregulation in the sector. We expect

global crude prices to remain soft over the next 1-2 years due to a favorable supply-

demand outlook. Incremental global supply of 3 mn b/d in 2015-16 will offset

incremental global oil demand (2.4 mn b/d). Exhibit 22 shows the IEA’s projections for

global crude oil supply-demand balance over the next few years.

Softer crude oil prices led by a comfortable global supply-demand balance Exhibit 22:Estimated global crude demand, supply and prices, calendar year-ends, 2008-16E

2008 2009 2010 2011 2012 2013 2014 2015E 2016E

Demand (mn b/d)

Total demand 86.5 85.6 88.7 89.5 90.6 91.8 92.4 93.5 94.9

Yoy growth (0.6) (0.9) 3.1 0.8 1.1 1.2 0.7 1.1 1.3

Supply (mn b/d)

Non-OPEC 50.6 51.4 52.7 52.9 53.3 54.6 56.3 57.5 58.7

Yoy growth (0.1) 0.8 1.3 0.2 0.4 1.3 1.7 1.3 1.2

OPEC

Crude 31.6 29.1 29.2 29.9 31.3 30.5 29.7 29.3 29.3

NGLs 4.5 5.1 5.5 5.9 6.3 6.3 6.4 6.7 6.9

Total OPEC 36.1 34.2 34.7 35.8 37.6 36.7 36.1 36.0 36.1

Total supply 86.7 85.6 87.4 88.7 90.9 91.3 92.4 93.5 94.9

Total stock change 0.2 0.0 (1.3) (0.9) 0.2 (0.4)

OPEC crude capacity 34.2 34.9 35.7 34.2 35.0 35.0 34.4 35.0 35.5

Implied OPEC spare capacity 2.7 5.7 5.3 3.4 3.9 4.1 4.6 5.7 6.2

Demand growth (yoy, %) (0.7) (1.0) 3.6 0.9 1.2 1.3 0.7 1.2 1.4

Supply growth (yoy, %)

Non-OPEC (0.3) 1.6 2.5 0.4 0.8 2.5 3.1 2.2 2.0

OPEC 3.4 (5.3) 1.4 3.2 4.9 (2.2) (1.7) (0.4) 0.4

Total 1.2 (1.3) 2.1 1.5 2.4 0.5 1.2 1.2 1.4

Dated Brent (US$/bbl) 102 62 80 111 112 109 100 79 84

World GDP growth (%) 2.8 (0.6) 5.3 3.9 3.2 3.0 3.3 3.8 4.0

Source: IEA, Kotak Institutional Equities estimates


India Strategy

The steep fall in the prices of crude at the end of CY2014 will result in normal marketing

margins for the downstream companies and a reduction in the absolute quantum of

subsidies that are borne by the upstream companies. The government can fully exempt

them from bearing any under-recoveries. Exhibit 23 shows our estimates of under-

recoveries in FY2016 for kerosene and LPG; we note that there will be nil under-

recoveries in diesel and gasoline as their prices have now been decontrolled. Also, the

government can do away with the current fixed subsidy-sharing formula and fix a system

that results in a more equitable sharing of subsidies. We expect changes in the way

upstream companies pay for subsidies as we note that their net realization (after subsidies,

royalty and cess) is quite untenable at current crude prices (see Exhibit 24).

Lower government compensation for fuel subsidies over FY2015-17E Exhibit 23:Share of under-recoveries for various participants, March fiscal year-ends, 2009-17E (Rs bn)

2009 2010 2011 2012 2013 2014 2015E 2016E 2017E

Macro-assumptions

Dated Brent crude oil price (US$/bbl) 89 67 84 113 112 108 92 80 85

Exchange rate (Rs/US$) 46 47 46 48 54 60 61 63 65

Subsidy burden

Petrol 52 52 22 49 11 — — — —

Diesel 523 93 344 812 921 628 108 — —

LPG 176 143 220 300 396 465 415 289 363

Kerosene 282 174 196 274 294 306 251 216 234

Subsidy burden 1,033 461 782 1,434 1,621 1,399 774 505 597

Subsidy sharing

Payment by government (oil bonds/cash) 713 260 410 835 1,000 708 324 303 329

Net under-recovery of oil companies 320 201 372 599 621 691 450 202 269

Receipt from upstream companies 329 144 303 550 600 670 426 202 269

Share of ONGC 282 116 249 445 494 564 360 175 234

Share of GAIL 18 13 21 32 27 19 10 — —

Share of Oil India 29 15 33 74 79 87 56 27 35

Net under-recovery of OMCs (9) 56 69 49 21 21 24 — —

Source: Company, PPAC, Kotak Institutional Equities estimates

Sharp reduction in ONGC’s profitability on crude based on provisional subsidy discount Exhibit 24:Net crude realizations for ONGC, March fiscal year-ends, 2014-15YTD (US$/bbl)

FY2014 1HFY15 Current realizations

Onshore Offshore Onshore Offshore Onshore Offshore

Gross realizations 106.7 106.7 105.7 105.7 70.0 70.0

Subsidy discount 65.8 65.8 61.5 61.5 61.5 61.5

Net realizations (post subsidy) 41.0 41.0 44.2 44.2 8.5 8.5

Royalty 6.8 3.7 7.4 4.0 1.4 0.8

Cess 10.2 10.2 10.2 10.2 10.0 10.0

Net realizations (post duties) 24.0 27.1 26.7 30.0 (2.9) (2.3)


Industrials and infrastructure. We expect the industrials and infrastructure sectors to

benefit from investment reforms in the medium term. However, fresh investment may be

2-4 quarters away and is contingent on the government fixing some of the issues that

have plagued investment in the past 3-4 years. We expect a gradual recovery and are

enthused by the recent pick-up in ordering activity in the country. The order booking of

industrial companies appears to have picked up of late (see Exhibit 25) but we would

caution that there is an element of lumpiness (in the case of BHEL) and exports orders (in

the case of L&T).


Strategy India

Industrial stocks reported a sharp improvement in order booking in 2QFY15 Exhibit 25:Order inflows for key industrials and construction companies, 2QFY13-2QFY15 (Rs bn)

2QFY13 3QFY13 4QFY13 1QFY14 2QFY14 3QFY14 4QFY14 1QFY15 2QFY15 2QFY13 3QFY13 4QFY13 1QFY14 2QFY14 3QFY14 4QFY14 1QFY15 2QFY15

ABB 17 16 15 17 17 18 20 20 14 (33) (28) (6) (15) 3 11 30 16 (18)

BHEL 32 14 208 15 30 68 163 11 123 (78) 45 205 (74) (5) 369 (22) (23) 311

Crompton (domestic) 6 6 4 9 3 6 10 7 6 NA NA (36) 95 (51) 14 151 (21) 103

Larsen & Toubro (domestic) 145 137 223 216 151 105 159 130 269 NA NA 36 31 4 (23) (29) (40) 78

Siemens 29 20 28 26 26 20 26 27 30 5 (30) 56 (3) (8) 1 (7) 5 13

Thermax 12 13 12 21 8 14 11 7 11 5 118 43 69 (34) 6 (1) (69) 33

Voltas 3 9 4 8 12 2 3 8 4 (29) (40) (17) 86 252 (72) (14) (1) (65)

Total 244 214 493 312 248 233 392 210 457 15 165 73 8 2 9 (20) (33) 84

Notes:

(a) We have used domestic order inflows for Crompton and L&T, for the rest of the companies, we have used total order inflows.

(b) We have adjusted LT's order inflows by removing the order booking pertaining to the hydrocarbons segment for FY2012 and FY2013. Order inflows still contain positive bias (on lack of standalone data).

Order inflows (Rs bn) yoy growth (%)


Metal and mining companies. We expect transparent auction processes to replace the

current committee-based system of allocation of resources (coal, minerals). This should

help restart several projects, which have been stalled because of non-availability of

resources. However, the economics of the projects may be negatively impacted if the

process of price discovery results in high upfront or recurring payments (as royalty on

revenues or share of profits) for the resources. We have seen a similar evolution in the

Indian wireless telecom sector. The difference perhaps may be that the metals and power

companies do not have the balance sheets to bid aggressively. However, we will reserve

judgment on this until we see the outcome of the first auctions for coal blocks due in the

next 2-3 months.


India Strategy

RATES: TO DECLINE IN 2015 LED BY LOWER FISCAL DEFICIT AND INFLATION

India’s macroeconomic parameters will likely improve further in 2015 with FY2016 GFD/GDP and inflation

declining from 2014/FY2015 levels. We expect FY2016 GDP growth at 6.1%, up from FY2015’s 5.5%. GDP

growth will likely recover slowly as the investment cycle will take time to mend given extant funding and

investment challenges. We expect the RBI to reduce policy rates by 50-75 bps through 2015 with the first rate

cut (25 bps) in March 2015.

2015: Stepping-stone for structural improvement in the medium term

We expect India’s macroeconomic parameters to improve further in 2015 and see economic

reforms in India setting the stage for higher GDP growth and lower interest rates over the

next 2-3 years. India will likely experience two important macroeconomic reversals in 2015

versus in 2014: (1) Lower inflation due to lower global commodity prices and some

disinflationary impulses and (2) lower interest rate as a confluence of lower inflation,

prudent fiscal management and steady foreign flows. Lower commodity prices would also

imply that the trade deficit remains in check, which bodes well for the overall balance of

payment.

However, even as the cyclical reversals will help India get back on track, sustainability of

recovery would crucially depend on the continuation of reforms. The growth slowdown over

the past few years has been a combination of external factors as well as domestic policies.

The domestic factors have clearly led to a deterioration of economic efficiencies (or total

factor productivity in economic parlance). To get back the efficiencies in the medium to long

term, government and monetary policies have to support each other to enhance the supply-

side of the economy.

Lower inflation and interest rates

We expect CPI inflation to trend lower (see Exhibit 26) in 2015 and believe the RBI will have

room to reduce policy rates by 50-75 bps through 2015. We expect the RBI to implement

the first rate cut (1) in February depending on inflation data for January and disinflationary

trends or (2) post the union budget presentation in early March once it has a better handle

on the fiscal position and fiscal consolidation efforts of the government.

CPI inflation likely to remain around 6% for most of FY2016 Exhibit 26:Trend and estimates of headline and core CPI inflation (%)

4

5

6

7

8

9

10

11

12

Jan-1

2

Mar-

12

May-

12

Jul-12

Sep-1

2

Nov-

12

Jan-1

3

Mar-

13

May-

13

Jul-13

Sep-1

3

Nov-

13

Jan-1

4

Mar-

14

May-

14

Jul-14

Sep-1

4

Nov-

14

Jan-1

5

Mar-

15

May-

15

Jul-15

Sep-1

5

Nov-

15

Jan-1

6

Mar-

16

Headline CPI inflation Core CPI inflation

March 2016: 6.2

March 2016: 5.8

Source: CEIC, Kotak Institutional Equities estimates


Strategy India

We expect average inflation to be lower by ~100 bps at 6.3% in 2015 compared to 7.3% in

2014. While the debate may continue as to the comfort zone of the RBI, there are likely to

be phases when inflation (either due to base effects or continued disinflationary impulses)

may be lower or close to 6%. On a subjective basis, this should indicate that the RBI’s target

should be achieved though, as a central bank, the RBI would focus largely on durability

through fiscal policies rather than on the present transient/cyclical effects.

We expect two key factors to determine the inflation trajectory for 2015.

Prudent fiscal policies. We expect the efforts of the government to moderate the

increase in minimum support prices (MSPs) over the past two years to contribute to lower

inflation by providing a ceiling to the food (at least cereals and pulses) inflation. Food has

a large weight (45%) in CPI inflation and thus, government policies on pricing and

subsidy on food will be important to curb food inflation. High inflation in food prices has

historically contributed to the structural nature of India’s inflation. Additionally, a decline

in disposable rural incomes due to (1) lower subsidies on diesel and (2) better

productivity-linked income generation would also help cap demand pressures.

We also expect the government to attempt to curb prices through policies to reduce non-

economic frictions in inflation such as hoarding, logistics and storage issues. This would

effectively imply that the government will target to reduce the role of the middlemen and

provide a pan-India market for agricultural produce. While this can be achieved through

reforms in the APMC Acts in various states, it should aim at establishing a transparent

and efficient marketplace for producers and consumers, which will remove some of the

price distortions in the market.

Benign commodity prices. Commodity prices in general, and in particular, crude prices

will play a meaningful role in inflation for 2015. Although the role of commodity prices in

retail inflation is limited with crude prices directly affecting ~5-6% of the CPI basket (see

Exhibit 27 for key categories of CPI and weights), there are secondary benefits of lower

commodity prices in retail inflation. Crude prices have corrected by 40% from its peak in

mid-2014 and metal price indices have remained benign. We expect crude oil and metal

prices to remain subdued. However, global commodity prices can at best contribute to a

cyclical fall in inflation and hence, government policy needs to complement monetary

policy.


India Strategy

Direct impact of crude prices is limited for CPI inflation Exhibit 27:Estimated weights of various components in CPI (%)

Food, beverages and intoxicants 49.7

Cereals and products 14.6

Wheat and products 5.4

Rice 5.2

Others 4.0

Pulses and products 2.7

Milk and milk products 7.7

Oils and fats 3.9

Groundnut oil 1.9

Edible oil 1.8

Others 0.2

Meat, fish and egg 2.9

Vegetables 5.4

Fruits 1.9

Sugar and products 1.9

Other food, beverages and intoxicants 8.7

Fuel and light 9.5

Electricity 4.7

LPG 3.1

Others 1.6

Clothing and bedding 4.1

Footwear 0.7

Housing 9.8

Education 3.4

Medical care 5.7

Recreation and amusement 1.4

Transport and communication 7.6

Telephone charges 2.7

Petrol 1.7

Bus/tram fare 1.2

Railway fare 0.9

Others 1.1

Personal care and effects 2.9

Household requisites 4.3

Others 1.1

Source: MOSPI, Kotak Institutional Equities

Lower interests likely but government reforms more important

The growth-inflation dynamics will likely be favorable for the RBI to lower the repo rate as

inflation will remain close to RBI’s comfort level and growth pick-up is likely to be slow.

Market interest rates have already declined over the past two months (see Exhibit 28). They

will likely continue to fall led by expectations of (1) easing inflation, (2) better fiscal dynamics

with expenditure rationalization and minimal fiscal slippages and (3) relatively easy rupee

liquidity due to comfortable overall balance of payments. We expect 10-year G-Sec yields to

be in a range of 7.25-8.00% over 2015 with the lower bound being approached with

incremental policy rate outlook.


Strategy India

10-year G-Sec yields have dropped sharply over the past two months Exhibit 28:10-year benchmark government security yield in India (%)

7.6

7.8

8.0

8.2

8.4

8.6

8.8

9.0

9.2

Dec

-13

Jan-1

4

Feb-1

4

Mar-

14

Apr-

14

May-

14

Jun-1

4

Jul-14

Aug-1

4

Sep-1

4

Oct

-14

Nov-

14

Dec

-14

10-year Gsec yield

Source: Bloomberg, Kotak Institutional Equities

However, we would caution that lower interest rates alone may not be sufficient to kick-

start the investment cycle. Lower interest rates can lead to a higher-growth scenario only in

conjunction with other equally important factors such as improved business confidence. We

note that much of the slowdown in growth can be traced to (1) decline in investment

growth and (2) fall in total factor productivity (see Exhibits 29 and 30). In fact, growth

recovery in the medium term even now crucially hinges on investment cycle recovery rather

than on consumption growth. This is essential so as to ensure that growth recovery does not

lead to price distortions once again. Empirical studies indicate that business confidence and

policy uncertainty affect investments along with real interest rates.

Private sector GFCF has trended down over the past few years Exhibit 29:Private sector gross capital formation as a % of GDP, March fiscal year-ends, 2000-13 (%)

6.25.4 5.4 5.3

6.0

9.1

11.812.5

14.3

10.3 10.2 10.49.4

8.5

0

2

4

6

8

10

12

14

16

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013



India Strategy

India needs to bring in productivity gains over the long term Exhibit 30:Estimated path of total factor productivity growth in India, March fiscal year-ends (%, 5-year moving average)

0

1

2

3

4

5

6

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

TFP growth (5-yr MA)


While the inflation trajectory over the next year or so will likely provide opportunity for the

RBI to ease policy rates, the RBI will be mindful of long-term gains through sustained lower

inflation even at the cost of short-term gains in growth. Since India is likely to be in a much

better macroeconomic position in 2015 compared to in the past few years, it will provide

the ideal opportunity to correct its fundamental savings-investment dynamics.

If policies are aimed at increasing the gross savings rate, there will be a natural tendency for

real interest rates in the economy to remain low, which can be exploited to finance higher

investments in a non-inflationary manner. Hence, while lower interest rates are welcome,

they should not come at the cost of (1) loss of credibility of the RBI in a new monetary policy

framework and (2) no significant improvement in macroeconomic foundations (savings-

investment dynamics, twin deficit, etc.).

Global factors to lead to a better twin-deficit scenario in FY2016

Fiscal consolidation to continue

We expect further improvement in India’s fiscal position in FY2016 led by lower subsidies

and moderate increase in tax revenues. However, the real improvement in India’s fiscal

position may come in FY2017 when the government implements GST and rolls out DBT

schemes to cover more products such as food and kerosene. The extent of fiscal

improvement in FY2016 will largely depend on the improvement in India’s tax revenues with

a moderate pick-up in economic growth. We have repeatedly highlighted the importance of

fiscal consolidation through higher revenues rather than lower expenditure, especially capital

expenditure. The past few years have seen expenditure contraction in tandem with lower-

than-expected revenue collections. We estimate GFD/GDP at 3.6% in FY2016. Exhibit 31

highlights our key fiscal estimates.


Strategy India

GFD/GDP likely at 3.6% in FY2016 Exhibit 31:Major central government budgetary items, March fiscal year-ends, 2013-16E (Rs bn)

Change (%)

2014P/ 2015BE/ 2015E/ 2016E/

2013 2014P 2015BE 2015E 2016E 2013 2014P 2014P 2015E

Receipts

1. Revenue receipts (2d + 3) 8,776 10,153 11,898 11,184 12,759 16 17 10 14

2. Gross tax revenue (a + b ) 10,362 11,388 13,645 12,635 14,535 10 20 11 15

2.a. Direct taxes 5,624 6,426 7,396 7,112 8,171 14 15 11 15

2.a.1. Corporation tax 3,563 3,947 4,510 4,263 4,817 11 14 8 13

2.a.2. Income tax 1,965 2,378 2,843 2,806 3,311 21 20 18 18

2.b. Indirect taxes 4,738 4,962 6,249 5,523 6,364 5 26 11 15

2.b.1. Customs duty 1,653 1,721 2,018 1,842 1,934 4 17 7 5

2.b.2. Excise duty 1,758 1,695 2,071 1,856 2,240 (4) 22 10 21

2.b.3. Service tax 1,326 1,546 2,160 1,825 2,190 17 40 18 20

2.c Transfers to states, UTs and national funds 2,960 3,228 3,873 3,576 4,113 9 20 11 15

2.d Net tax revenue 7,403 8,160 9,773 9,059 10,421 10 20 11 15

3. Non-tax revenue 1,374 1,992 2,125 2,125 2,338 45 7 7 10

4. Non-debt capital receipts (a + b) 422 401 740 740 755 (5) 85 85 2

4.a Recovery of loans 163 125 105 105 105 (23) (16) (16) 0

4.b Other receipts (disinvestments) 259 276 634 634 650 6 130 130 2

5. Total receipts (1 + 4) 9,198 10,553 12,637 11,924 13,514 15 20 13 13

Expenditures

6. Non-plan expenditure 9,967 11,104 12,199 11,996 12,526 11 10 8 4

6.a. Interest payments 3,132 3,775 4,270 4,270 4,407 21 13 13 3

6.b. Subsidies 2,571 2,555 2,607 2,553 2,430 (1) 2 (0) (5)

6.b.1. Food 850 920 1,150 1,150 1,200 8 25 25 4

6.b.2. Fertilizer 656 680 730 730 750 4 7 7 3

6.b.3. Oil 969 855 634 581 380 (12) (26) (32) (35)

6.b.3. Other subsidies 96 101 92 92 100 5 (8) (8) 8

6.c. Others 4,265 4,774 5,322 5,172 5,689 12 11 8 10

7. Plan expenditure 4,136 4,531 5,750 5,210 6,148 10 27 15 18

8. Total expenditure (6 + 7) 14,104 15,635 17,949 17,206 18,675 11 15 10 9

Deficit

Primary deficit (PD) 1,774 1,306 1,042 1,012 754 (26) (20) (23) (26)

Gross fiscal deficit (GFD) 4,906 5,081 5,312 5,282 5,161 4 5 4 (2)

Gross borrowings 5,580 5,639 6,009 5,963 6,247 1 7 6 5

Net market borrowing (dated securities) 4,674 4,689 4,612 4,566 4,491 0 (2) (3) (2)

Debt buyback/switch — 500 500 500 500

Short-term borrowing (TBills) 534 227 346 346 350

Nominal GDP at market prices 101,133 113,551 128,767 127,745 143,713 12.3 13.4 12.5 12.5

PD/GDP (%) 1.8 1.2 0.8 0.8 0.5

GFD/GDP (%) 4.9 4.5 4.1 4.1 3.6

Source: Ministry of Finance, Kotak Institutional Equities estimates

Expenditure. We expect overall FY2016 fuel subsidy burden to be lower by `270 bn

compared to FY2015 based on our assumptions of (1) lower average crude prices at

US$80/bbl in FY2016 compared to US$92/bbl in FY2015 and (2) nil diesel subsidies

compared to `108 bn in FY2015. Our fiscal model indicates aggregate subsidy bill of

`2.43 tn in FY2016. We assume plan expenditure growth of 18% (FY2015E at 15%) and

expect overall expenditure to grow 9% (to `18.7 tn)—slightly lower than 10% growth in

FY2015 (`17.2 tn).

Revenues. We do not expect a sharp upturn in gross tax given a modest economic

recovery and expect tax revenues to grow at 15%, in line with our assumed nominal GDP

growth of ~12.5% in FY2016. Direct taxes will likely grow 15% and indirect taxes 15%

without change in excise and service tax rates. However, we factor in higher excise

collections due to recent increase in excise duty in petrol and diesel, which will contribute

`320 bn on an annualized basis. The next uptick in tax revenue growth is likely to come

only after implementation of GST from a possible higher tax base and stricter compliance.

We expect overall receipts of `13.5 tn in FY2016.


India Strategy

CAD to be comfortable

We expect India’s CAD and BOP position to remain comfortable in 2015/FY2016 due to

lower crude oil prices and subdued capital goods imports. Exhibit 32 highlights our BoP

estimates. The key variables in our BoP math are (1) crude oil prices and (2) non-oil, non-

gold imports. We model US$80/bbl crude price (Dated Brent basis) for FY2016 and we have

some buffers in our estimates. Non-oil, non-gold imports will also pick up if economic

growth and in particular, investment demand picks up in FY2016. Historically (and

intuitively), non-oil, non-gold imports have moved in tandem with economic growth (see

Exhibit 33).

CAD/GDP unlikely to be a concern over the next few years if commodity prices remain low Exhibit 32:India's balance of payments, March fiscal year-ends, 2013-16E (US$ bn)

2013 2014 Oil@82 Oil@92 Oil@70 Oil@80

Current account (88.2) (32.4) (8.6) (19.1) 0.0 (10.8)

GDP 1,859 1,878 2,094 2,094 2,281 2,281

CAD/GDP (%) (4.7) (1.7) (0.4) (0.9) 0.0 (0.5)

Trade balance (195.7) (147.6) (125.9) (136.4) (122.1) (133.0)

Trade balance/GDP (%) (10.5) (7.9) (6.0) (6.5) (5.4) (5.8)

- Exports 307 319 320 325 331 336

- Imports 502 466 446 461 453 469

- oil imports 170 168 133 148 120 136

- non-oil imports 332 298 313 313 333 333

Invisibles (net) 107 115 117 117 122 122

- Services 65 73 78 78 84 84

- software 64 67 73 73 79 79

- non-software 1.4 6.0 5.0 5.0 5.0 5.0

- Transfers 64 65 66 66 68 68

- Income (net) (21.5) (23.0) (27.0) (27.0) (30.0) (30.0)

Capital account 89.4 48.8 67.0 67.0 51.0 51.0

Percentage of GDP 4.8 2.6 3.2 3.2 2.2 2.2

Foreign investment 46.7 26.4 60.0 60.0 40.0 40.0

- FDI 19.8 21.6 25.0 25.0 20.0 20.0

- FPI 26.9 4.8 35.0 35.0 20.0 20.0

- Equities 23.3 13.5 — — — —

- Debt 4.3 (8.5) — — — —

Banking capital 16.6 25.4 8.0 8.0 10.0 10.0

- NRI deposits 14.8 38.9 10.0 10.0 12.0 12.0

Short-term credit 21.7 (5.0) — — — —

ECBs 8.5 11.8 8.0 8.0 10.0 10.0

External assistance 1.0 1.0 1.0 1.0 1.0 1.0

Other capital account items (5.0) (10.8) (10.0) (10.0) (10.0) (10.0)

E&O 2.7 (0.9) — — — —

Overall balance 3.9 15.6 58.4 47.9 51.0 40.2

Memo items

Average USD/INR 54.41 60.45 61.00 61.00 63.00 63.00

Average crude (US$/bbl) 108.2 107.6 82.0 92.0 70.0 80.0

2015E 2016E

Source: RBI, Kotak Institutional Equities estimates


Strategy India

Non-oil, non-gold imports growth will take time to pick up as GDP growth remains muted Exhibit 33:Trend in non-oil, non-gold import growth and real GDP growth (%)

2

4

6

8

10

12

(40)

(20)

0

20

40

60

Sep-0

5

Mar-

06

Sep-0

6

Mar-

07

Sep-0

7

Mar-

08

Sep-0

8

Mar-

09

Sep-0

9

Mar-

10

Sep-1

0

Mar-

11

Sep-1

1

Mar-

12

Sep-1

2

Mar-

13

Sep-1

3

Mar-

14

Sep-1

4

Non-oil non-gold import growth (LHS) Real GDP growth (RHS)

Source: CEIC, Kotak Economic Research

We believe that India’s CAD may still be comfortable even if non-oil, non-gold imports were

to pick up, provided the global commodity prices continue to be subdued. Assuming that

investment leads the growth story in India, the initial import demand would reflect in import

of capital goods. In value terms, capital goods form 20% of total imports. We assume non-

oil, non-gold imports to grow ~7% in FY2016. Overall, we expect ~4% increase in exports

and ~2% increase in imports, which imply a trade deficit of US$133 bn in FY2016 and CAD

of US$11 bn. This compares with our trade deficit estimate of US$136 bn in FY2015 and

CAD of US$19 bn.

We expect capital flows to continue being robust at US$51 bn (FY2015E at US$67 bn) with

FDI and FII flows continuing to be healthy at US$40 bn (FY2015E at US$60 bn). The capital

account flows will ensure that the RBI has enough opportunity to further build on its

reserves. In the case of an unsterilized intervention, this would lead to adequate rupee

liquidity such that interest rates benefit from it.

Moderate growth prospects but be wary of the known unknowns

We pencil in a moderate uptick in FY2016 GDP growth at 6.1% from our estimated 5.5% in

FY2015 (see Exhibit 34). Most of the uptick in our projection is due to our expectation of a

modest pick-up in the industrial sector, reflecting (1) better utilization of capacity in the

metals and power sectors built over the past few years, (2) some of the projects approved by

the Project Monitoring Group (PMG) being commissioned and (3) favorable base effect from

FY2015. More important, there are encouraging signs that the investment slowdown is

bottoming out and investment-related ordering picking up.


India Strategy

We expect FY2016 GDP growth at 6.1% Exhibit 34:Real GDP at factor cost and components, March fiscal-year ends, 2011-16E (%)

Sector 2011 2012 2013 2014 2015E 2016E

Agriculture and allied activities 8.6 5.0 1.4 4.7 2.8 2.9

Industry 7.6 7.8 1.0 0.4 3.0 5.0

Mining and quarrying 6.5 0.1 (2.2) (1.4) 3.0 3.8

Manufacturing 8.9 7.4 1.1 (0.7) 1.4 4.4

Electricity, gas and water supply 5.3 8.4 2.3 5.9 9.5 7.8

Construction 5.7 10.8 1.1 1.6 4.5 5.6

Services 9.7 6.6 7.0 6.8 7.2 7.2

Trade, hotels, transport, storage and communication 12.2 4.3 5.1 3.0 3.9 5.7

Financing, insurance, real estate and business services 10.0 11.3 10.9 12.9 10.1 10.0

Community, social and personal services 4.2 4.9 5.3 5.6 9.2 5.7

Real GDP at factor cost 8.9 6.7 4.5 4.7 5.5 6.1

Source: CEIC, Kotak Institutional Equities estimates

The two key trends we discussed earlier, (1) lower inflation and (2) lower interest rates, are

likely to be positive for growth in FY2016. However, it is unlikely that these two factors

alone can push growth towards a potential growth of 7.0-7.5%. At best, these two trends

can lend some support to the flagging consumption demand and provide minimal impetus

to the investment cycle. International trade is unlikely to be a big contributor to the growth

story as the trade deficit remains muted (comparable to FY2015).

An economic recovery may take time as the drivers of growth appear soft currently.

Government spending will remain weak given fiscal challenges. Industrial activity is still

subdued and in fact, if 2QFY16 GDP growth is any indication, there is a slowdown in the

industrial sector. Growth held up at 5.3% in 2QFY15 (1QFY16 at 5.7%) on the back of

agriculture activity and community, personal and social services sector. The latter is unlikely

to hold up as the government continues to consolidate its fiscal and in the absence of

revenue buoyancy, may be forced to contract further. A sustained growth recovery needs to

be seen in the industrial sector, which continues to hinge on investment cycle, for us to take

a more positive view on growth.

Risks from known unknowns: geopolitical disturbances and unexpected brakes on

easy money

Even as the global picture bodes well for India, we highlight potential risks to India’s GDP

growth and capital flows.

Political risks. The government may be unable to implement reforms in the crucial areas

of labor, land and power due to either the lack of a majority of the current ruling

coalition in the upper house of the parliament or antagonistic center-state relations. We

discuss this in detail in the next section.

Geopolitical tensions. Geopolitical risks will likely continue to be relevant. The

contentious issues of Ukraine-Russia-Western economies and Middle-East tensions (ISIS

etc.) may escalate leading to lower risk appetite among global investors. However, it is

unlikely that global central banks will tighten policies if global geopolitical tensions

escalate.

Tighter global liquidity. We see this as unlikely as the persistent economic weakness in

the larger economies of Eurozone and Japan and a possible slowdown in China will keep

global demand under pressure. Also, India’s external position is quite strong now

compared to in 2013 to withstand small tightening by one or two global central banks.

The US Fed will probably raise interest rates albeit gradually from 2HCY15. However, we

expect the ECB and Bank of Japan to continue with their respective methods of injecting

liquidity, which will cushion the effect of tightening by the US Fed.


Strategy India

We highlighted in our Economy/Strategy report dated October 29 (SS India to sail the

‘seas of QEs’) that global liquidity is likely to remain adequate with certain central banks

(ECB and BoJ) continuing to inject liquidity. This is likely to allow global investors to hunt

for ‘carry’ in strong EMs. In this context, India stands to gain relative to the other EMs

given its superior CAD and external debt position (see Exhibits 35-36). However, two key

assumptions in this scenario may prove crucial in the medium term—(1) ECB and BoJ

maintain/increase their respective quantum of easy money and (2) India continues with its

reforms to ease structural impediments and aims at increasing the potential growth rate.

Exhibit 37 gives our estimates for the size of the balance sheets of the central banks of

four major economic zones (Eurozone, Japan, UK and US) over the next two years.

Meaningful improvement in India’s CAD/GDP ratio Exhibit 35:CAD/GDP ratio of major countries, calendar year-ends, 2006-16E (%)

Country 2006 2007 2008 2009 2010 2011 2012 2013 2014E 2015E 2016E

Brazil 1.3 0.1 (1.7) (1.5) (2.2) (2.1) (2.4) (3.6) (3.6) (3.7) (3.6)

China 8.5 10.1 9.3 4.9 4.0 1.9 2.3 2.1 2.2 2.4 2.6

Greece (11.4) (14.6) (14.9) (11.2) (10.1) (9.9) (2.4) 0.7 0.9 0.3 0.4

India (1.0) (1.3) (2.3) (2.8) (2.7) (4.2) (4.7) (2.0) (2.4) (2.5) (2.6)

Indonesia 2.6 1.6 0.0 2.0 0.7 0.2 (2.8) (3.3) (3.0) (2.7) (2.7)

Italy (1.5) (1.3) (2.9) (2.0) (3.5) (3.1) (0.4) 0.8 1.1 1.1 0.7

Korea 1.5 2.1 0.3 3.9 2.9 2.3 4.3 5.8 4.4 3.5 3.4

Malaysia 16.1 15.4 17.1 15.5 10.9 11.6 6.1 3.8 4.1 4.0 4.1

Mexico (0.8) (1.4) (1.8) (0.9) (0.3) (1.1) (1.2) (1.8) (1.9) (2.0) (2.0)

Philippines 4.4 4.8 2.1 5.6 4.5 3.2 2.9 3.5 3.2 2.6 2.0

Portugal (10.7) (10.1) (12.6) (10.9) (10.6) (7.0) (2.0) 0.5 0.8 1.2 1.4

South Africa (5.3) (7.0) (7.2) (4.0) (2.0) (2.3) (5.2) (5.8) (5.4) (5.3) (4.9)

Spain (9.0) (10.0) (9.6) (4.8) (4.5) (3.8) (1.1) 0.7 0.8 1.4 1.8

Thailand 1.1 6.3 0.8 8.3 3.1 1.2 (0.4) (0.7) 0.2 0.3 0.2

Turkey (6.0) (5.8) (5.5) (2.0) (6.2) (9.7) (6.2) (7.9) (6.3) (6.0) (5.9)

Source: IMF, Kotak Institutional Equities

India’s external debt position superior to other EM countries Exhibit 36:External debt/GDP of various countries, calendar year-end, 2012 (%)

0

50

100

150

200

250

300

Port

ugal

Gre

ece

Spain

Ital

y

Turk

ey

Kor

ea

Thaila

nd

South

Afr

ica

Mala

ysia

Mexi

co

Phili

ppin

es

India

Bra

zil

Chin

a

Source: World Bank, Kotak Institutional Equities


India Strategy

Global liquidity will likely be benign over the next two years Exhibit 37:Estimate of balance sheet of G-4 central banks over the next two years, calendar year-ends, 2014-16E (US$ tn)

0

2

4

6

8

10

12

14

Current End-2015E End-2016E

US ECB BoJ BoE

Source: Bloomberg, Kotak Institutional Equities estimates


Strategy India

RISKS: POLITICAL ABILITY AND FUNDING

We see two risks to India’s reforms agenda. (1) The government may have to contend with a recalcitrant

opposition in implementing important legislative changes that would require approval of both the houses of

the parliament or convincing the opposition-ruled states to implement reforms that can only be done by

states (rationalizing power tariffs, for example). (2) Funding may be another issue as investors may not want

to give money to leveraged banks and infrastructure companies with weak financials.

Political ability: Political management and center-state relations

We highlight potential risks to the government’s ambitious reforms agenda from

potential opposition by opposition political parties. The ruling NDA coalition

government does not have a majority in the upper house of the parliament and it also has

limited sway over opposition-ruled states. Exhibit 38 shows the break-up of the seats of the

upper house of the parliament by political parties and the election cycle over the next few

years. Exhibit 39 gives the political map of India and election cycle for states.

The NDA does not have a majority in the Rajya Sabha (upper house of parliament) Exhibit 38:Retirement of current members across party lines over the next few years

Party 2014 2015 2016 2017 2018 2019 2020 Grand total

INC 2 4 23 3 19 2 15 68

BJP 2 13 2 16 10 43

BSP 6 6 2 14

AITC 4 4 4 12

JD (U) 2 4 6 12

AIADMK 2 4 5 11

Nominated 2 3 4 1 10

SP 1 2 6 1 10

CPI (M) 1 3 1 2 2 9

Independent 2 3 2 2 9

BJD 2 2 3 7

NCP 2 2 2 6

TDP 2 2 2 6

DMK 3 1 4

SAD 3 3

SS 1 1 1 3

CPI 1 1 2

INLD 1 1 2

NC 2 2

BPF 1 1

JMM 1 1

KC (M) 1 1

JD (S) 1 1

NPF 1 1

RJD 1 1

RPI (A) 1 1

SDF 1 1

TRS 1 1

Total 13 10 72 10 69 8 60 242

Source: Rajya Sabha, Kotak Institutional Equities


India Strategy

The BJP and its allies now govern several states in north and west India Exhibit 39:Leading party and election cycle for Indian states


Legislative challenges. The government’s minority position in the upper house of the

parliament may stymie its reforms thrust if the opposition parties do not provide support

to amend extant laws or introduce new laws. For example, the government may not be

able to change certain land and labor laws that companies currently see as impediments

for investment. We note that the government may not have a majority in the upper house

of the parliament until early 2018 and that will also be contingent on the NDA winning

more state elections over the next three years. The NDA currently has only 57 seats in the

upper house of parliament. We note that 20 seats will come up for re-election in 2016,

the next round of elections. The ruling NDA-coalition will have to live with a minority

position in the upper house of the parliament for some time.

In our view, the government may have to focus on political management to win the

opposition’s support for certain important legislations. This may have to take the form of

(1) ‘give-and-take’ on important issues and (2) improving center-state relations, with

opposition-ruled states seeing palpable benefits (financial and investment) from a

common economic agenda.


Strategy India

The government can explore the option of joint sessions of the parliament to implement

legislation as a way to overcome its minority status in the upper house of the parliament.

The NDA has 391 seats in the two houses of the parliament (almost at the 50% mark)

and its tally in the upper house will increase as and when the seats come up for re-

election. However, we would note that joint sessions are extremely rare and we would

not set much store by this method of legislation. Convention demands that the ‘wishes’

of both the houses of the parliament be respected and differences sorted through

committees comprising members of parliament across party lines.

Center-state relations. The NDA has a limited but growing presence in states with nine

states out of 29 now under its control. This rules out a central government-driven

economic agenda for the entire country unless the states see tangible benefits from the

same or the NDA gains control over more states over the next few years. Even in the

latter scenario, states will follow an economic and social agenda that best suits the

requirements of that state and which may be different from that of the central

government. Also, the federal nature of India divides executive and legislative powers

between the central and state governments (see Exhibit 40 for a comprehensive list of

subjects on which central government, states and/or both can legislate).


India Strategy

While the center can decide on many issues, states can legislate on some critical issues Exhibit 40:Excerpts of items on the various lists – where the power to legislate rests

List I—Union List List II—State List List III—Concurrent List

Airways; aircraft and air navigation Agriculture Acquisition and requisitioning of property

Any other matter not enumerated in List II or List III including any tax

not mentioned in either of those ListsCapitation taxes Bankruptcy and insolvency

Atomic energy and mineral resources necessary for its production Communications, that is to say, roads, etc.

Contracts, including partnership, agency, contracts of

carriage, and other special forms of contracts, but not

including contracts relating to agricultural land

Banking Land revenue Criminal law

Central Bureau of Intelligence and Investigation Land, that is to say, rights in or over land Criminal procedure

Corporation taxConstitution and powers of municipal corporations, mining

settlement authorities and other local authorities

Education, including technical education, medical

education and universities

Currency, coinage and legal tender; foreign exchange Police Electricity

Defense of India Public health and sanitation; hospitals and dispensaries Factories

Duties in respect of succession to property other than agricultural

landPublic order Legal, medical and other professions

Duties of customs including export duties Rates of stamp duty in respect of documents Newspapers, books and printing presses

Duties of excise on tobacco and other goods manufactured or

produced in India except alcohol and opium

Regulation of mines and mineral development subject to

the provisions of List I with respect to regulation and

development under the control of the Union

Price control

Estate duty in respect of property other than agricultural land Taxes on agricultural incomeSocial security and social insurance; employment and

unemployment

Foreign affairs Taxes on lands and buildings Trade unions; industrial and labor disputes

Highways declared by or under law made by Parliament to be

national highways

Taxes on mineral rights subject to any limitations imposed

by Parliament by law relating to mineral development

Transfer of property other than agricultural land;

registration of deeds and documents

Industries, the control of which by the Union is declared by

Parliament by law to be expedient in the public interest Taxes on professions, trades, callings and employments

Vital statistics including registration of births and

deaths

Insurance Taxes on the consumption or sale of electricity

Welfare of labor including conditions of work,

provident funds, employers’ liability, workmen’s

compensation, invalidity and old age pensions and

maternity benefits

Inter-State trade and commerceTaxes on the entry of goods into a local area for

consumption, use or sale therein

Ports declared by or under law made by Parliament or existing law to

be major ports

Taxes on the sale or purchase of goods other than

newspapers

Posts and telegraphs; telephones, wireless, broadcasting and other

similar forms of communication Tolls

Public debt of the Union Trade and commerce within the state

Railways Water

Regulation and development of oilfields and mineral oil resources;

petroleum and petroleum products

Regulation of labor and safety in mines and oilfields

Regulation of mines and mineral development

Reserve Bank of India

Shipping and navigation on inland waterways

Stock exchanges and futures markets

Taxes on income other than agricultural income

Taxes on services

Taxes on the capital value of the assets, exclusive of agricultural land,

of individuals and companies; taxes on the capital of companies

Taxes other than stamp duties on transactions in stock exchanges

and futures markets

Trade and commerce with foreign countries; import and export

across customs frontiers; definition of customs frontiers

Source: Excerpts from the Constitution of India

Thus, it is imperative that the central government work jointly with the state governments

for any major reforms on concurrent subjects (both central and state governments have

the power to legislate on such subjects). For example, both the central and state

governments have executive and legislative powers in the power sector, which has deep

links with the economy and the banking system. The state governments have full powers

to decide on power tariffs in their respective states. The reluctance of several state

governments to increase power tariffs has resulted in a peculiar situation of supply-

demand mismatch—underutilized power generation capacity on the one side and power

shortages on the other.


Strategy India

India’s federal structure makes it imperative that all constituents (central and states)

contribute to India’s economic and social growth. However, we are reasonably confident

that more and more states and political parties will focus on economic development and

governance as their basic political strategy. It is quite apparent that Indian citizens are

increasingly dissatisfied with politics that merely focuses on entitlements and social

identity.

In our view, states may be in a better position to implement economic reforms more

aggressively compared to the central government. States have more control over their

destiny with a single political party in power for a term (five years) or even longer. Certain

progressive states could take the lead in implementing economic policies that will result in

more investment in those states.

We note that the Rajasthan government has already changed certain labor laws (see

Exhibit 41 for details), which have received the approval of the President of India. It is

now working on enacting a more practical land-acquisition policy. More states could

follow Rajasthan’s example and implement changes to the extant labor and land laws or

implement new laws that may be more favorable for investment. Also, healthy

competition among states (other than fiscal incentives) for investment may lead to states

relaxing their economic policies to make them more attractive for investment.

Rajasthan has taken the lead in amending certain labor laws Exhibit 41:Proposed changes to labor laws by the Rajasthan government and the central government

Changes proposed to labor laws Current provisions/comments

Rajasthan

Apprenticeship Act, 1961

Appointment of apprentices to be voluntary and companies to offer courses

based on their requirements

Currently it is obligatory for 254 industries to appoint apprentices

Removing the provision for a license for every apprentice Current act specifies specific duration, location and trade for apprentices

Contract Labor (Regulation and Abolition) Act

Act will apply to companies with more than 50 workers The act currently applies to companies with more than 20 workers

Factories Act, 1948

The act will apply to premises with power and 40 workers The current limit is 20 workers

The act will apply to premises without power and 20 workers The current limit is 10 workers

Industrial Disputes Act, 1947

No government permission for retrenchment of up to 300 workers The act currently allows retrenchment of up to 100 workers

Objection has to be raised within three months in cases of retrenchment No time limit currently

Percentage of workers needed for registration to form a trade union raised to

30%

The current limit is 15%

Central government

Apprenticeship Act, 1961

Removal of clause relating to arrest of employers for not implementing the act Rs500 per shortfall of apprenticeship month

Addition of 500 new trades to the list; new trades can be added without

central government's approval

Factories Act, 1948

Relaxation on restriction of women working in night shifts in factories Not permitted currently

Increase limit of overtime to 100 hours per quarter Restricted to 50 hours currently

Better health and safety standards for workers in hazardous industries

Canteen facilities in factories with 200 workers Earlier limit was 250 workers

Labor Laws (Exemption from furnishing returns and maintaining of registers by certain establishments), 1988

Exemption to small firms up to 40 workers from filing compliance reports Earlier limit was 10 workers



India Strategy

Funding: Allocation, not availability, may be the issue

We see inadequate funding for indebted companies in the infrastructure and

related sectors as a potential risk to India’s economic growth. The conventional sources

of funds for the infrastructure companies such as bank loans and equity may not be

available to several such companies given (1) Indian banks’ already high exposure to such

companies and (2) low interest among equity investors for leveraged companies at present.

The Indian equity market, in particular, has been very discerning in capital allocation over the

past few years. This can be seen in the divergent performance of sectors and stocks over the

past few years (see Exhibit 42) and limited capital issuances by highly leveraged companies

over this period. The sharp decline in stock prices of some of the infrastructure companies

that raised equity capital post the 2014 national elections (see Exhibit 43) and limited

improvement in the underlying fundamentals of the companies suggest that such companies

will struggle to raise additional capital from the equity markets despite the overall bullish

sentiment for Indian equities.

Capital goods, metals, oil & gas and realty sectors have underperformed the broader market over the past few years Exhibit 42:Performance of sectoral indices since August 31, 2007 (base=100)

0

100

200

300

400

500

Aug-0

7

Apr-

08

Dec

-08

Aug-0

9

Apr-

10

Dec

-10

Aug-1

1

Apr-

12

Dec

-12

Aug-1

3

Apr-

14

Dec

-14

Auto Capital goods Healthcare Metal O&G

Banks Realty IT FMCG Sensex



Strategy India

Many highly leveraged companies have raised capital from the market Exhibit 43:Recent equity issuances by Indian companies and their price performance

Issue

Company type Month

Suven Lifesciences QIP 2,000 191 219 14 Nov-14

CEAT QIP 4,000 890 826 (7) Nov-14

Cox & Kings QIP 10,000 305 265 (13) Nov-14

Texmaco QIP 3,000 107 121 13 Nov-14

CESC QIP 4,908 644 656 2 Oct-14

Sarla Peformance QIP 467 334 400 20 Oct-14

Sadbhav Engineering QIP 2,500 216 237 10 Oct-14

Dynamatic Technologies QIP 540 1,800 2,050 14 Oct-14

DCB Bank QIP 2,500 82 107 30 Sep-14

Jyoti Structure QIP 1,002 43 40 (7) Sep-14

IDFC QIP 10,001 137 156 14 Sep-14

Info Edge QIP 7,500 740 893 21 Sep-14

Gammon Infra QIP 2,589 13 15 14 Sep-14

ITD Cementation QIP 1,440 360 478 33 Aug-14

Karur Vysya Bank QIP 6,250 466 547 17 Aug-14

Prestige Estate Projects QIP 6,125 245 238 (3) Aug-14

J Kumar Infraprojects QIP 1,372 310 444 43 Jul-14

City Union Bank QIP 3,500 75 91 21 Jul-14

GMR Infrastructure QIP 12,000 33 18 (46) Jul-14

Jaiprakash Associates QIP 14,994 70 26 (63) Jul-14

Aban Offshore QIP 7,500 696 447 (36) Jun-14

Ashok Leyland QIP 6,667 36 49 36 Jun-14

Reliance Communications QIP 48,084 142 90 (37) Jun-14

L&T Finance Holdings Ltd OFS 2,103 76 70 (8) Jun-14

Idea Cellular QIP 30,000 134 143 6 Jun-14

Hubtown OFS 964 177 109 (38) Jun-14

Shree Global Tradefin OFS 397 31 20 (35) Jun-14

KSK Energy Ventures QIP 4,000 99 72 (27) Jun-14

Yes Bank QIP 29,421 550 699 27 May-14

NTPC OFS 482 138 133 (4) May-14

Orient Green Power Co. Ltd OFS 89 12 17 45 May-14

SKS Microfinance QIP 4,000 225 378 68 May-14

National Aluminium Co. OFS 125 38 51 35 May-14

Wonderla Holiday IPO 1,813 125 272 117 May-14

Perf.

(%)

Amount

(Rs mn)

Issue price

(Rs)

Current price

(Rs)

Source: Bloomberg, Prime Database, Kotak Institutional Equities

Banks have been less discerning with a result that they are now sitting on large amounts of

stressed assets (see Exhibit 44 for trends in NPLs and restructured loans for the Indian

banking system). With the central bank proposing stricter standards for lending and recovery,

it is doubtful that Indian banks will be as willing to lend as aggressively as they have in the

past.

In other words, India faces a peculiar situation of investors willing to invest in certain sectors

(automobiles, consumer staples, pharmaceuticals, technology) that do not require capital

(companies generate large FCF and have typically large net cash on their balance sheets) at

very high valuations and at the same time being unwilling to invest in companies that

require capital at ‘any’ valuations.


India Strategy

NPLs and restructured loans have increased over the past few years Exhibit 44:Trend in gross NPLs, net NPLs and restructured loans of the banking sector, March fiscal year-ends, 1998-2014 (%)

14.4 14.7

12.7

11.410.4

8.8

7.2

5.2

3.32.5 2.3 2.3 2.4 2.5

3.13.6 4.0

7.3 7.66.8

6.25.5

4.4

2.92.0

1.2 1.1 1.0 1.1 1.1 1.1 1.4 1.72.2

0

3

6

9

12

15

18

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

Gross NPLs (%) Net NPLs (%) Restructured loans

Source: RBI, Kotak Institutional Equities estimates

Several Indian companies require capital but they may not get it. Exhibit 45 gives

our computation for the amount of funds that certain infrastructure companies may

require to raise if their underlying financials (operating cash flow or EBITDA) do not

improve from FY2014 levels. In this purely hypothetical exercise, we compute the amount

of equity capital that a company may require to bring down its net debt-to-EBITDA below

3X by FY2016.

Several Indian companies may require capital Exhibit 45:Computation of equity capital that a company may require to bring down its net debt-to-EBITDA below 3X (Rs bn)

Optimum

EBITDA Net debt net debt Excess debt

KIE coverage companies

2016E

Aban Offshore 24 123 73 50

Adani Power 58 412 175 237

DLF 32 179 97 82

Hindalco Industries 128 506 385 121

Jaiprakash Associates 79 678 238 440

JSW Energy 35 42 105 (62)

Reliance Communications 83 310 250 61

Reliance Power 50 368 150 218

Sesa Sterlite 287 684 860 (177)

Tata Power 80 317 241 75

Tata Steel 188 757 564 193

Uncovered companies

2014

Bhushan Steel 27 351 81 271

Electrosteel Steel (1) 83 — 83

Electrotherm (India) (2) 32 — 32

GMR Infrastructure 26 417 77 341

GVK Power & Infrastructure 10 206 30 176

Jet Airways (26) 94 — 94

Lanco Infratech 13 361 38 323

Madhucon Projects 4 58 11 48

MTNL (11) 140 — 140

Suzlon Energy (7) 146 — 146

Visa Steel 1 27 2 25

Notes:

(a) We calculate optimum net debt as being equal to three times EBITDA.

(b) We have used 2014 data for uncovered stocks.

(c) We note that FY2016 EBITDA for certain uncovered companies will be higher versus



Strategy India

We note that many of India’s leveraged entities have very high net debt-to-EBITDA, which

raises questions about the repayment capacity of these companies. Our base-case

estimates suggest some improvement in the EBITDA of such companies. However, the

increase in EBITDA will still not be sufficient for these companies to be in a position to

repay and reduce debt. We also note the low market capitalization of several

infrastructure companies relative to net debt (see Exhibit 46), which would suggest large

dilution for shareholders to ‘correct’ the current skewed capital structure of such

companies.

For many Indian companies, market capitalization is quite small compared to the net debt of the companies Exhibit 46:Net debt and market capitalization of Indian companies, March fiscal year-ends, 2008-14 (Rs bn)

Company Sector 2008 2009 2010 2011 2012 2013 2014 2008 2009 2010 2011 2012 2013 2014 Current

Amtek Auto Automobiles 19 31 30 50 77 134 NA 33 17 36 38 24 14 35 45

Jet Airways Aviation 117 154 136 120 127 105 94 48 15 41 39 28 45 28 46

Kingfisher Airlines Aviation 7 55 77 68 85 94 NA 17 9 12 20 10 6 2 1

Aban Offshore Energy 124 161 139 125 134 135 144 114 15 51 27 19 11 23 25

Gammon India Construction 13 37 47 66 84 98 109 34 5 30 16 6 3 2 4

Gayatri Projects Construction 4 9 14 21 42 61 13 4 1 4 3 3 2 2 4

Hindustan Construction Co. Construction 24 38 51 67 78 87 99 34 10 41 22 16 8 10 19

IVRCL Construction 11 22 31 41 59 64 82 54 16 44 22 18 6 4 5

Madhucon Projects Construction 1 2 19 32 45 54 58 18 2 12 7 4 2 1 3

Nagarjuna Construction Construction 12 25 28 43 51 37 38 49 14 42 26 14 9 9 43

Punj Lloyd Construction 9 27 38 27 46 59 62 95 28 59 21 18 18 9 12

Suzlon Energy Industrials 30 118 98 96 114 132 146 395 64 112 79 45 24 28 41

Adani Port and SEZ Infrastructure 12 16 28 34 164 108 125 232 129 317 273 259 278 388 574

GMR Infrastructure Infrastructure 71 100 195 180 318 372 417 271 173 230 158 121 84 85 79

GVK Power & Infrastructure Infrastructure 11 28 44 52 125 165 206 56 33 71 41 27 14 17 15

Jaiprakash Associates Infrastructure 91 156 270 374 503 603 704 265 100 318 197 174 145 119 64

Bhushan Steel Metals & Mining 57 79 113 165 211 284 351 28 17 71 93 88 104 103 22

Electrotherm (India) Metals & Mining 8 12 13 24 31 32 32 5 1 4 2 1 0 0 0

Electrosteel Steel Metals & Mining (0) 17 24 40 61 71 83 — — — 17 13 11 9 12

Hindalco Industries Metals & Mining 306 261 218 269 377 532 597 202 88 348 399 248 175 293 317

JSW Steel Metals & Mining 117 160 159 144 169 197 341 153 43 231 204 161 150 250 267

Monnet Ispat Metals & Mining 8 11 15 23 48 78 106 23 7 22 33 30 15 6 4

Sesa Sterlite Metals & Mining (0) (0) (4) 1 36 48 729 123 79 391 252 169 135 557 776

Tata Steel Metals & Mining 494 538 463 497 491 587 730 506 151 561 595 457 303 383 391

Visa Steel Metals & Mining 6 8 10 13 15 23 27 5 2 5 5 6 5 2 2

DLF Real estate 101 151 207 227 236 230 199 1,102 284 524 454 342 399 315 271

HDIL Real estate 28 41 33 41 39 38 33 141 23 103 73 36 19 24 29

GTL Infrastructure Telecom 11 22 40 109 118 49 49 32 24 40 36 9 6 3 6

MTNL Telecom (34) (48) (49) 73 95 117 140 61 44 46 29 17 12 10 17

Reliance Communications Telecom 249 375 289 342 378 408 415 1,049 360 352 222 173 114 266 215

Tata Communications Telecom 31 58 70 77 108 114 120 146 147 80 68 64 67 87 123

Adani Power Utilities 8 44 94 235 354 401 433 — — 253 246 149 97 140 125

JSW Energy Utilities 20 58 73 87 93 100 95 — — 183 118 100 90 97 151

Lanco Infratech Utilities 24 46 74 154 298 334 361 86 32 126 95 44 25 17 15

Reliance Infrastructure Utilities 58 96 81 110 169 215 236 296 117 244 184 154 85 114 139

Reliance Power Utilities 0 13 21 57 137 226 274 718 246 358 364 328 173 197 177

Net debt Market capitalization

Source: Companies, Capitaline, Kotak Institutional Equities

Several Indian banks will also need to raise capital. Exhibit 47 shows the amount of

new capital that Indian banks may need to raise to comply with more stringent capital

adequacy norms. The RBI has tightened and proposes to tighten the capital adequacy

norms further over the next few years (see Exhibit 48 for details). Also, we note that

several banks’ balance sheets are quite weak with high slippages and impaired assets (see

Exhibit 49).

Thus, several banks may have to raise additional capital to shore up their capital adequacy

ratios if they have to write down a portion of net NPLs and restructured loans. Exhibit 50

shows a hypothetical exercise for banks under our coverage for the amount of capital

they would have to raise in case (1) 30% of their current restructured loans were to slip

into NPLs and (2) net NPLs were to be completely written off as losses. We do this

exercise on FY2017 basis.


India Strategy

We estimate PSU banks will need about Rs1 tn of fresh capital Exhibit 47:Capital required by banks to meet Basel-3 guidelines, March fiscal year-ends, 2015-18E

Asset growth RWA growth Average RoE Target tier-1 capital

(CAGR 2015-18E %) (CAGR 2015-18E %) (2015-18E %) (%) 2015E 2016E 2017E 2018E 2015-18E

Public banks

Allahabad Bank 12.0 13.0 14.2 9.0 25 3 1 1 29

Andhra Bank 14.1 13.7 11.9 9.0 14 5 5 6 30

BoB 12.8 14.0 15.9 9.0 — — — — —

BoI 14.7 15.0 15.4 9.0 65 16 9 3 93

BoMH 13.8 13.3 13.9 9.0 15 2 4 4 26

Canara Bank 10.4 11.7 11.5 9.0 42 4 4 12 62

CBoI 11.9 13.3 4.6 9.0 43 17 21 23 104

Corporation Bank 12.3 12.0 10.9 9.0 15 6 5 5 31

Dena Bank 14.8 13.3 11.6 9.0 15 3 4 5 27

IDBI 11.2 13.3 8.5 9.0 39 16 19 22 97

Indian Bank 13.7 13.3 11.2 9.0 — — — — —

IOB 14.0 13.3 9.9 9.0 37 7 11 13 69

OBC 13.3 13.7 12.6 9.0 8 6 7 7 28

PNB 13.1 13.7 14.7 9.0 — — — — —

Punjab & Sind Bank 15.9 13.3 8.6 9.0 11 3 5 5 23

SBI 14.0 14.0 12.8 9.0 — 19 38 62 119

Syndicate Bank 12.0 13.7 16.9 9.0 5 — 1 2 8

UCO Bank 13.4 13.3 17.0 9.0 6 3 7 8 24

Union Bank 12.6 14.0 12.7 9.0 42 11 13 11 77

United Bank 11.5 12.0 7.1 9.0 18 4 3 3 27

Vijaya Bank 13.3 13.3 13.4 9.0 7 1 2 3 13

Private banks

Axis Bank 15.9 16.7 16.9 9.0 — — — — —

HDFC Bank 16.7 18.2 22.2 9.0 — — — — —

ICICI Bank 14.0 13.0 15.0 9.0 — — — — —

IndusInd Bank 20.0 21.0 17.4 9.0 — — — — —

Yes Bank 20.0 20.0 15.8 9.0 — — — 8 8

Total 407 126 159 203 895

Notes:

(a) We have assumed that banks would need minimum tier-1 ratio of 9%. Incremental capital to be raised in the form of core equity.

(b) Changes to dividend policy ratios, RoEs and loan growth can have a disproportionate impact on capital raised.

(c) Explicit forecasts of estimates are used for banks under KIE coverage until FY2015 and estimates were made based on expected growth trends, RoEs and payout

ratios for banks not under KIE coverage.

(d) Tier-2 capital would broadly grow in line with the growth of risk-weighted assets.

Assumptions

Capital required (Rs bn)


RBI has steadily tightened capital requirements for banks Exhibit 48:Capital adequacy norms for banks, March fiscal year-ends, 2000-19E

Pre-FY2000 2000 2001-08 2009-12 2013 2014 2015E 2016E 2017E 2018E 2019E

Minimum common equity capital NA NA NA NA 4.5 5.0 5.5 5.5 5.5 5.5 5.5

Capital conservation buffer (CCB) NA NA NA NA — — — 0.6 1.3 1.9 2.5

Minimum Tier-1 6 6 4.5 6 6.0 6.5 7.0 7.0 7.0 7.0 7.0

Minimum capital adequacy 8.0 9.0 9.0 9.0 9.0 9.0 9.0 9.0 9.0 9.0 9.0

Minimum capital adequacy + CCB 8.0 9.0 9.0 9.0 9.0 9.0 9.0 9.6 10.3 10.9 11.5

Maximum Tier-2Less than

tier-1 capital

Less than

tier-1 capital

2% on CAR

of 9%

2% on CAR

of 9%

2% on CAR

of 9%

2% on CAR

of 9%

2% on CAR

of 9%

2% on CAR

of 9%

2% on CAR

of 9%

Maximum innovative Tier-1 15% of tier

1 capital1.50% 1.50% 1.50% 1.50% 1.50% 1.50% 1.50%

Notes:

(a) Transition to Basel-2 started in FY2009.

(b) Transition to Basel-3 started in FY2013.



Strategy India

Slippages continue to be high for many banks under our coverage Exhibit 49:Trend in gross NPLs, net NPLs and slippages, 2QFY14-2QFY15

2QFY14 3QFY14 4QFY14 1QFY15 2QFY15 2QFY14 3QFY14 4QFY14 1QFY15 2QFY15 2QFY14 3QFY14 4QFY14 1QFY15 2QFY15

Public banks

Allahabad Bank 4.9 5.5 5.7 5.5 5.4 3.8 4.2 4.2 3.9 3.5 3.7 4.4 4.9 3.5 3.8

Andhra Bank 5.2 5.6 5.3 6.0 6.0 3.5 3.7 3.1 3.9 3.9 2.9 2.8 2.0 7.8 3.4

Bank of Baroda 3.2 3.3 2.9 3.1 3.3 1.9 1.9 1.5 1.6 1.7 2.5 1.8 1.5 2.0 1.9

Bank of India 2.9 2.8 3.2 3.3 3.5 1.9 1.8 2.0 2.1 2.3 1.9 2.1 4.0 4.0 3.1

Canara Bank 2.6 2.8 2.5 2.7 2.9 2.3 2.4 2.0 2.0 2.3 2.4 3.0 3.0 3.4 4.2

Corporation Bank 3.2 3.1 3.4 4.0 4.5 2.2 2.2 2.3 2.7 2.9 4.1 1.2 3.7 3.8 2.3

India Overseas Bank 4.7 5.3 5.0 5.8 7.4 2.8 3.2 3.2 3.9 5.2 3.1 3.7 5.2 5.9 10.2

Oriental Bank of Commerce 3.8 3.9 4.0 4.3 4.7 2.7 2.9 2.8 3.1 3.3 3.2 3.2 3.6 4.1 2.8

Punjab National Bank 5.1 5.0 5.3 5.5 5.7 3.1 2.8 2.9 3.0 3.3 4.0 1.9 5.5 3.4 4.6

State Bank of India 5.6 5.7 5.0 4.9 4.9 2.9 3.2 2.6 2.7 2.7 3.2 4.1 2.8 3.3 2.6

Union Bank 3.6 3.9 4.1 4.3 4.7 2.2 2.3 2.3 2.5 2.7 3.3 2.1 2.1 2.2 3.3

Old private banks

City Union Bank 1.7 1.7 1.8 1.9 2.0 0.8 0.9 1.2 1.3 1.3 3.9 2.3 4.5 9.2 2.1

DCB Bank 3.4 2.8 1.7 1.8 1.9 0.9 0.8 0.9 1.0 1.1 — — — — —

Federal Bank 3.4 2.8 2.5 2.2 2.1 1.0 0.9 0.7 0.7 0.7 1.5 1.4 1.9 2.1 1.6

Karur Vysya Bank 1.6 1.5 0.8 1.3 1.4 0.5 0.5 0.4 0.5 0.6 1.4 0.4 0.9 2.4 1.4

J&K Bank 1.7 1.7 1.7 4.2 4.7 0.2 0.2 0.2 2.2 2.5 1.2 1.4 0.6 10.0 3.3

New private banks

Axis Bank 1.2 1.3 1.2 1.3 1.3 0.4 0.4 0.4 0.4 0.4 1.2 1.2 0.6 1.1 1.6

HDFC Bank 1.1 1.0 1.0 1.1 1.0 0.3 0.3 0.3 0.3 0.3 — — — — —

ICICI Bank 3.2 3.1 3.1 3.2 3.2 0.9 0.9 1.0 1.0 1.1 1.5 1.5 1.5 1.4 1.9

IndusInd Bank 1.1 1.2 1.1 1.1 1.1 0.2 0.3 0.3 0.3 0.3 0.8 0.9 0.6 0.8 0.0

Yes Bank 0.3 0.4 0.3 0.3 0.4 0.0 0.1 0.1 0.1 0.1 — — — — —

Total 3.8 3.8 3.6 3.8 3.9 2.1 2.1 1.9 2.1 2.2

Public banks 4.4 4.5 4.3 4.4 4.6 2.6 2.7 2.4 2.6 2.7

Private banks 1.9 1.8 1.7 1.9 1.9 0.5 0.5 0.5 0.6 0.6

Gross NPLs (%) Net NPLs (%) Slippages (%)



India Strategy

We estimate PSU banks will need about Rs1.8 tn of fresh capital if net NPLs were to be completely written off Exhibit 50:Hypothetical exercise for capital required in case (1) 30% of their current restructured loans were to slip into NPLs and (2) net NPLs were to be completely written off as losses

Total Total Total

2015E 2016E 2017E 2018E 2015-18E 2015E 2016E 2017E 2018E 2015-18E 2015E 2016E 2017E 2018E 2015-18E

Public Banks

Allahabad 24.8 3.0 0.9 0.7 29.3 24.8 3.0 14.0 2.3 44.1 24.8 3.0 30.1 4.4 62.3

Andhra 14.4 4.9 5.2 5.9 30.4 14.4 4.9 16.1 7.0 42.4 14.4 4.9 26.8 8.1 54.2

BoB — — — — — — — 19.3 1.7 21.1 — — 41.2 4.9 46.0

BoI 64.9 15.9 9.2 2.8 92.8 64.9 15.9 17.8 4.1 102.7 64.9 15.9 54.0 9.5 144.4

BoMH 15.4 2.2 3.8 4.4 25.8 15.4 2.2 12.2 5.3 35.1 15.4 2.2 6.4 4.6 28.6

Canara 41.9 3.8 4.3 12.3 62.3 41.9 3.8 31.4 14.7 91.8 41.9 3.8 67.8 18.0 131.5

CBoI 42.8 16.7 21.4 22.7 103.6 42.8 16.7 50.2 24.1 133.9 42.8 16.7 55.2 24.4 139.1

Corporation 15.1 6.1 4.6 4.9 30.7 15.1 6.1 14.1 5.8 41.1 15.1 6.1 27.0 7.0 55.3

Dena 15.3 3.3 4.0 4.6 27.1 15.3 3.3 12.2 5.4 36.1 15.3 3.3 9.7 5.1 33.3

IDBI 39.0 15.8 19.4 22.4 96.6 39.0 15.8 37.7 23.8 116.3 39.0 15.8 47.1 24.5 126.4

Indian — — — — — — — — 6.2 6.2 — — 10.9 7.6 18.4

IOB 37.1 7.3 11.2 13.0 68.6 37.1 7.3 26.0 14.4 84.8 37.1 7.3 41.2 15.8 101.3

OBC 7.6 5.8 7.0 7.3 27.7 7.6 5.8 17.5 8.4 39.3 7.6 5.8 34.0 10.2 57.6

PNB — — — — — — — 28.5 8.8 37.3 — — 60.2 12.9 73.2

Punjab & Sind 10.9 2.7 4.6 5.3 23.5 10.9 2.7 11.6 5.8 31.0 10.9 2.7 17.2 6.2 37.0

SBI — 19.2 38.4 61.6 119.2 — 19.2 87.0 67.1 173.3 — 19.2 252.5 85.8 357.4

Syndicate 5.5 — 1.1 1.7 8.3 5.5 — 11.4 3.1 19.9 5.5 — 36.7 6.4 48.6

UCO 6.1 3.1 6.8 8.0 24.0 6.1 3.1 16.1 8.9 34.2 6.1 3.1 18.5 9.1 36.9

Union 41.7 11.0 12.7 11.5 76.8 41.7 11.0 22.8 12.6 88.0 41.7 11.0 45.8 15.1 113.6

United 17.6 3.7 2.8 3.1 27.2 17.6 3.7 10.9 3.7 35.9 17.6 3.7 9.4 3.6 34.3

Vijaya 7.0 1.1 2.2 2.6 12.8 7.0 1.1 6.7 3.1 17.8 7.0 1.1 8.6 3.3 20.0

Private Banks

Axis — — — — — — — — — — — — — — —

HDFC Bank — — — — — — — — — — — — — — —

ICICI — — — — — — — — — — — — — — —

IndusInd — — — — — — — — — — — — — — —

Yes — — — 8.2 8.2 — — 4.3 9.3 13.6 — — 5.8 9.5 15.3

Total 407 126 159 203 895 407 126 468 245 1,246 407 126 906 296 1,735

Notes:

(a) Scenario I assumes 30% of restructured loans as of FY2015E slip into NPLs in FY2017E. We have assumed 60% provision coverage and 30% tax rate for all banks to evaluate the impact on PAT and net worth.

(b) Scenario II assumes all the net NPLs as of FY2017E are 100% written off. We have assumed 30% tax rate for all banks to evaluate the impact on PAT and net worth.

(c) We have assumed that banks would need minimum tier-1 ratio of 9%. Incremental capital raised in the form of core equity.

(d) Changes to dividend policy ratios, RoEs and loan growth can have a disproportionate impact on capital raised.

(e) Explicit forecasts of estimates are used for banks under KIE coverage until FY2017 and an on expected growth trends, RoEs and payout ratios for banks not under KIE coverage.

(f) Tier-2 capital would broadly grow in line with the growth of risk-weighted assets.

Base case Scenario I: 30% of current restructured loans slip into NPL Scenario II: Net NPLs completely written off


More important, we note that public banks face a dilemma while raising new capital since

many of them trade well below their reported book values (see Exhibit 51) and issuance

at current prices will result in significant dilution for extant shareholders, including the

Indian government. Also, there is very low confidence on the quality of the book given

the large amounts of restructured loans, which are still treated as standard assets. PSU

banks may have very little option but to raise capital at below book value. The other

option for them is to cut dividends in order to conserve capital.

Some PSU banks are trading below book value Exhibit 51:Price to book value for major PSU banks, March fiscal year-ends, 2014-16E

Price

(Rs) 2014 2015E 2016E 2014 2015E 2016E 2014 2015E 2016E 2014 2015E 2016E

Bank of Baroda 1,060 811 896 998 720 783 892 1.3 1.2 1.1 1.5 1.4 1.2

Bank of India 284 407 458 514 332 362 419 0.7 0.6 0.6 0.9 0.8 0.7

Oriental Bank of Commerce 306 426 459 498 342 356 385 0.7 0.7 0.6 0.9 0.9 0.8

Punjab National Bank 1,096 954 1,064 1,193 768 824 981 1.1 1.0 0.9 1.4 1.3 1.1

State Bank of India 311 150 165 183 122 135 152 1.7 1.6 1.4 2.1 1.9 1.7

Notes:

(a) SBI valuations are for core banking business.

Book value adj. for net

Book value (Rs) net NPLs (Rs) PBR (X) PBR adj. for net NPLs (X)



Strategy India

Alternatives to bank and equity funding

Long-term funding (bonds, insurance and pension funds).

Long-term corporate bonds. We see long-term corporate bonds as an important

source of funds for the infrastructure sector. Government-owned infrastructure

companies are quite active in this area (see Exhibit 52 for details of bonds raised by

government companies) but private companies are largely absent from this market.

Large bond issuances by government-owned infrastructure companies Exhibit 52:Amount raised through debt private placement, March fiscal year-ends, 2011-14 (Rs bn)

Company 2011 2012 2013 2014

IDFC 115 105 113 74

Indian Railways Finance Corp. 60 51 22 30

National Highway Authority of India 9 25 29 42

Natioinal Hydro Power Corp. — 13 14 —

NTPC 6 6 15 13

Power Finance Corp. 138 286 303 246

Power Grid Corp. of India 64 97 88 90

Rural Electricity Corp. 132 229 218 242

Total 523 392 802 736

Source: Prime Database, Kotak Institutional Equities

The RBI’s July 15, 2014 guidelines on long-term financing of infrastructure and

affordable housing will help deepen the nascent Indian corporate bond market. Banks

can raise long-term bonds (>7 years maturity) without any regulatory costs related to

CRR, PSL (priority sector loans) and SLR, which will incentivize them to raise such bonds

more aggressively and more important, fund infrastructure financing. We expect this

progressive development to increase the number of bond issuances and liquidity of the

corporate bond market.

Insurance and pension funds. The Indian government may want to explore the

option of a larger portion of the insurance and pension funds’ corpus being made

available for funding infrastructure projects. Exhibit 53 shows our estimates of total

corpus of Indian insurance and pension (government-run provident fund) funds while

Exhibit 54 gives our estimates of long-term annual inflows. These funds largely invest

in bonds of central and state governments or bonds of quasi-government bodies.

Current regulations allow life and general insurance funds to invest a portion of their

corpus in infrastructure and housing. Exhibit 55 gives details of the norms for

investment prescribed by the Insurance Regulatory and Development Authority (IRDA).


India Strategy

Significant outstanding corpus of insurance and provident funds Exhibit 53:Outstanding investment assets of insurance and pension funds, March fiscal year-ends, 2011-15E (Rs tn)

2011 2012 2013 2014 2015E

Life insurance

Traditional policies 8.7 12.1 14.0 16.8 21.0

Central government securities 3.6 4.7 5.1

State government and other securities 1.4 2.1 2.7

Housing and infrastructure 0.9 1.0 1.2

Approved investments 2.6 3.9 4.6

Other investments 0.3 0.5 0.5

ULIPs 3.4 3.7 3.4 3.8 4.1

Life insurance 12.1 15.8 17.4 20.6 25.2

Non-life insurance

Central government securities 0.2 0.3

State government and other securities 0.1 0.1

Housing and loans to state government for housing 0.1 0.1

Infrastructure investments 0.2 0.2

Approved investments 0.4 0.4

Other investments 0.0 0.1

Non-life insurance 1.0 1.2 1.5 1.9

Insurance 12.1 16.8 18.7 22.1 27.1

Pension and provident funds

NPS 0.1 0.2 0.3 0.5 0.7

EPFO 4.7 5.4 4.7 5.2 5.7

PF 4.7 3.7 2.8

Pension fund 1.6 1.8

Insurance fund 0.1 0.1

Pension + provident fund 4.7 5.6 5.0 5.7 6.4

Total 16.8 22.4 23.7 27.8 33.5

Yoy (%)

Insurance 39 11 18 22

Life insurance 31 10 18 22

Traditional policies 39 16 20 25

ULIPs 9 (7) 10 10

Non-life insurance 24 25 25

Pension + provident fund 18 (10) 13 13

NPS 88 93 66 50

EPFO 17 (13) 10 10

Total 32.9 5.8 17.4 20.6

Source: IRDA, RPFO, PFRDA, Kotak Institutional Equities estimates

We expect huge inflows in insurance and pension funds over the next 2-3 decades Exhibit 54:Annual saving inflows into life insurance and pension funds, March fiscal year-ends, 2010-25E (US$ bn)

0

100

200

300

400

2010

2011

2012

2013

2014

2015E

2016E

2017E

2018E

2019E

2020E

2021E

2022E

2023E

2024E

2025E

Insurance funds Pension funds



Strategy India

Traditional insurance policies need to make large investments in government securities Exhibit 55:Minimum investment limits as prescribed in the investment policies for various insurance products (%)

Pension and

general annuity Other traditional General insurance

policies life policies policies

Government securities and other approved securities (a) (%) 40 50 30

of which government securities (%) 20 25 20

Investment in housing and infrastructure finance (%) 5 15 Housing: 5%

Infrastructure : 10%

Notes:

(a) Approved investments should have minimum rating of AA or P1, at least 75% of the debt should have AAA rating.

(b) Equity shares should not be thinly traded (as defined by SEBI) to qualify to be approved investments.

(c) The Board of Directors should prescribe limits for fixed deposits.

(d) In case of unit-linked policies, at least 75% investments should comply with the mandate of the fund.

(e) Approved and other investments comprise the balance.

(f) Investment in housing and infrastructure finance includes bonds of HUDCO, NHB and housing finance companies with AAA or AA rating.

Source: IRDA, Kotak Institutional Equities

FDI. We expect ‘government’ FDI (bilateral loans for projects) to be a large source of

potential investment in the future. The Indian government has focused on attracting

investments from China, Japan and Singapore in those countries’ areas of expertise—

special economic zones, high-speed trains and smart cities. We believe such long-

gestation and basic infrastructure projects will proceed faster with the active involvement

of the Indian government as an equity owner and financial participation of various other

governments or quasi-government agencies of other countries. However, we believe a

more transparent and favorable investment process will allow private foreign companies

to invest more aggressively.

The limited presence of FDI in the infrastructure sector suggests that foreign companies

are quite hesitant to invest in this space for various reasons; this could be due to financial,

policy, regulatory or taxation factors or some combination of the aforesaid factors. India’s

reputation as a difficult place for doing business may have stymied FDI investments in the

past. However, this could change with the government adopting more transparent

processes for award of projects and approvals and a pragmatic approach to taxation.

We note that India’s ambitious infrastructure plans and funding requirements can

theoretically absorb large amounts of FDI. We believe India’s high-speed railway, smart

city and urban transportation projects are ideal for FDI investment. However, FDI in the

infrastructure sector has been quite limited barring in the telecom sector historically and

in dedicated railway freight corridors recently. The road and power sectors have seen

virtually no FDI. Exhibit 56 gives a list of infrastructure companies with foreign

participation.


India Strategy

The Indian telecom sector has seen large foreign investment while the power sector has hardly seen any such investment Exhibit 56:List of major projects with foreign investments

Deal value

Year Target company Bidder company (US$ mn)

2007 Vodafone India (67% stake) Vodafone International Holdings B.V. 13,665

2010 Cairn India Vedanta Resources Plc 9,177

2011 Reliance Industries BP Plc 7,200

2011 Vodafone India (33% stake) Vodafone Group Plc 5,460

2008 Tata Teleservices (26% stake) NTT DoCoMo Inc 2,653

2008 Idea Cellular (14.99% stake) TMI Mauritius 1,707

2014 Vodafone India (10.97% stake) Vodafone Group Plc 1,477

2011 Siemens Siemens AG 1,355

2013 Bharti Airtel (5% stake) Qatar Foundation Endowment 1,271

2008 Telewings Communications Services Private (67.25% stake) Telenor ASA 1,230

2009 Vodafone India Vodafone Group Plc 1,128

2005 Aircel Maxis Communications Berhad; Maxis Communications Berhad / Reddy Family 1,092

2007 Bharti Infratel (10% stake)Goldman Sachs; Citi; Macquarie Group ; Temasek Holdings Pte ; Ardian; AIF Capital ; Indian

Equity Partner; Investment Corporation of Dubai 1,000

2006 Cairn India (11.88% stake) Petroliam Nasional Berhad; Videocon Industries 829

2005 Bharti Airtel (6% stake) Vodafone Group Plc 827

2008 Etisalat DB Telecom India Pvt. Ltd (44.73% stake) Emirates Telecommunications Corp. 685

2005 Bharti Enterprises Vodafone Group Plc 648

2008 Aditya Birla Telecom (20% stake) Providence Equity Partners LLC 640

2006 Idea Cellular (20% stake) Providence Equity Partners LLC; Citi Venture Capital International 623

2009 Sistema Shyam TeleServices [SSTL] (17.14% stake) Government of the Russian Federation 578

2007 Jorf Lasfar Energy Company (50% stake); ABB Limited (Neyveli Project) (50% stake) Abu Dhabi National Energy Company PJSC 490

2006 Vodafone India Limited (5.11% stake) Hutchison Telecommunications International Limited 450

2010 Alstom T&D India (20% stake) Consortium of Alstom Holdings and Schneider Electric 439

2013 Meenakshi Energy and Infrastructure Holdings Pvt. Ltd (74% stake) GDF Suez SA 436

2009 Bharti Airtel Limited (1.52% stake) SingTel 385

2011 Luminous Power Technologies Pvt. Ltd. (74% stake) Schneider Electric SA 364

2008 Cairn India Limited (3.35% stake) Petroliam Nasional Berhad 348

2013 Bharti Airtel Limited (1.58% stake) SingTel 303

2006 Reliance Petroleum Ltd. (5% stake) Chevron Corporation 300

2006 Tata Teleservices (Maharashtra) Limited (9.9% stake) Aranda Investments (Mauritius) Ltd 300

2008 Cairn India Limited (2.62% stake) Orient Global Tamarind Fund Pte Ltd 273

2010 GVK Energy (21.1% stake) 3i India Infrastructure Fund GP 270

2005 Bharti Telecom Limited (6% stake) Pastel Limited 252

2008 Bharti Infratel Limited (2% stake) Kohlberg Kravis Roberts & Co. L.P. 250

2009 Cairn India Limited (2.3% stake) Petroliam Nasional Berhad 240

2010 Spectrum Power Generation Ltd Cellcap Securities Limited 235

2012 Alstom T&D India (26% stake) Alstom Holdings SA 216

2011 KSK Energy Ventures Limited (20% stake) KSK Power Ventur plc. 207

2014 Vodafone India Limited (12.57% stake) Vodafone Group Plc 206

2009 DLF Wind Power Private Limited GDF Suez SA 203

2011 ReNew Wind Power (Majority Interest) Goldman Sachs 202

2013 Vijai Electricals Ltd (electricity transmission and distribution business) Toshiba Corporation 200

2010 GMR Energy Limited Claymore Investments (Mauritius) Pte Ltd 200

2008 Tata Teleservices (Maharashtra) Limited (20% stake) NTT DoCoMo Inc. 194

Source: Merger Markets, Kotak Institutional Equities

As of now, we are seeing limited interest among foreign companies to acquire

infrastructure assets in India. In fact, some of the extant foreign investors in the telecom

sector have already expressed their intentions to exit their Indian operations. In our view,

FDI by foreign companies in extant power and steel projects will be possible only if Indian

companies and banks are willing to sell the assets at ‘lower’ valuations after appropriate

hair-cuts on equity and debt by equity and debt holders.

We note that domestic companies have acquired assets of distressed companies in the

recent sale of assets in the cement and power sectors. They have perhaps been swifter to

seize the opportunities but we note that they have been willing to pay ‘full’ price for the

assets, which may have been more acceptable to the sellers and the banks. Exhibit 57

gives details of the recent transactions in the Indian cement and power sectors.


Strategy India

Cement and power sectors have seen a slew of asset sale, fund infusion to help capitalize stressed balance sheets Exhibit 57:Details of recent transactions in the cement and power sectors

Announcement Deal value EV

date Target company Bidder company (US$ mn) (US$ mn)

Nov-14 JSW Energy 1,571 1,571

Aug-14 Shree Cement 59 59

Aug-14 Adani Power 984 984

Mar-14 Atria Group NA NA

Mar-14 Dalmia Cement (Bharat) 150 190

Mar-14 Chettinad Cement Corporation 48 52

Feb-14 Tejassarnika Hydro Energies Private 104 104

Nov-13 Jindal Steel & Power 16 18

Oct-13 Tata Power Renewable Energy NA NA

Sep-13 UltraTech Cement 600 600

Aug-13 My Home Industries 230 230

Jul-13 Ambuja Cements 2,433 4,968

Feb-13 Indraprastha Gas 13 26

Jan-13 Bharat Light and Power Private 61 61 DLF (Wind power assets)

Central U. P. Gas (50% Stake)

ACC (50.01% Stake)

Sree Jayajothi Cements

Jaypee Cement Corporation (Gujarat Cement Unit)

AES Saurashtra Windfarms Pvt. Ltd

Camina SA (90% Stake)

Lanco Budhil Hydro Power Project

Anjani Portland Cement (66.08% Stake)

Betul Wind Farms

Bokaro Jaypee Cement (74% Stake)

Jaiprakash Associates (1.50 MTPA cement grinding unit)

Udupi Power Corporation (Lanco Infratech)

Himachal Baspa Power Company (Jaiprakash Associates)

Source: Merger Markets, Kotak Institutional Equities

Government funding. The central and state governments can look at channeling a

portion of divestment proceeds or imposing special taxes to fund basic infrastructure

projects in the urban transportation and railway sectors.

Divestment proceeds. The Government of India can theoretically raise huge sums of

money for a long time by selling its stakes in PSU companies. Exhibit 58 shows our

hypothetical calculation for the amount of funds that the government can raise by

selling stakes (up to 51% or its entire holding) in listed central PSUs. It can mandate a

part of the divestment proceeds being used for funding infrastructure projects where

the private sector may be reluctant to invest in.


India Strategy

The government can raise around US$220 bn if it sells entire holding in listed PSUs Exhibit 58:List of PSUs with more than 51% government holding (sorted on stake sale)

Entire Up to 51%

Company (Rs bn) (US$ bn) stake sale stake sale

Coal India 89.7 2,301 38 2,063 889

Oil & Natural Gas Corp. 68.9 2,884 48 1,988 517

NTPC 75.0 1,096 18 822 263

Indian Oil Corp. 68.6 828 14 568 145

NMDC 80.0 551 9 441 160

Power Grid Corp. 57.9 705 12 408 49

Bharat Heavy Electricals 63.1 605 10 382 73

GAIL (India) 56.1 538 9 302 28

BPCL 54.9 483 8 265 19

SAIL 75.0 325 5 244 78

Oil India 67.6 329 5 222 55

NHPC 86.0 210 4 181 74

Bharat Electronics 75.0 224 4 168 54

Container Corporation 61.8 253 4 157 27

Neyveli Lignite Corp. 90.0 137 2 123 53

National Aluminum Co. 80.9 132 2 107 39

SJVN 90.0 99 2 89 39

NBCC 90.0 98 2 88 38

Hindustan Copper 90.0 67 1 60 26

Engineers India 69.4 77 1 54 14

MMTC 89.9 55 1 49 21

MOIL 80.0 50 1 40 14

HMT 90.0 39 1 35 15

Rashtriya Chemicals & Fertilizers 80.0 37 1 30 11

Shipping Corporation of India 63.8 27 0 17 3

BEML 54.0 31 1 17 1

National Fertilizer 89.7 18 0 16 7

ITDC 87.0 13 0 11 5

Fertilizers & Chemicals Travancore 90.0 11 0 10 4

State Trading Corporation of India 90.0 11 0 10 4

MTNL 56.3 17 0 9 1

Dredging Corporation of India 78.6 11 0 9 3

Andrew Yule & Co. 90.0 9 0 8 4

ITI 90.0 9 0 8 3

Scooters India 93.7 1 0 1 1

Bharat Immunological & Biological Corp. 59.3 2 0 1 0

Hindustan Organic Chemicals 58.8 1 0 1 0

Punjab Communications 71.2 1 0 1 0

Mysore Paper Mills 64.7 1 0 0 0

Banks/Finance institutions

State Bank of India 58.6 2,324 39 1,362 177

Power Finance Corp. 72.8 366 6 266 80

Bank of Baroda 56.3 455 8 256 24

Punjab National Bank 58.9 397 7 234 31

Rural Electrification Corp. 65.6 311 5 204 46

Canara Bank 69.0 192 3 133 35

Bank of India 66.7 182 3 122 29

Central Bank of India 84.2 115 2 97 38

IDBI Bank 76.5 111 2 85 28

Union Bank of India 60.5 137 2 83 13

Indian Bank 81.5 87 1 71 26

UCO Bank 77.2 82 1 63 21

Indian Overseas Bank 73.8 75 1 55 17

Oriental Bank of Commerce 59.1 92 2 54 7

Syndicate Bank 67.4 80 1 54 13

Allahabad Bank 58.9 68 1 40 5

Bank of Maharashtra 79.8 45 1 36 13

IFCI 55.5 62 1 34 3

Corporation Bank 63.3 54 1 34 7

Andhra Bank 60.1 52 1 31 5

Vijaya Bank 74.1 42 1 31 10

United Bank of India 88.0 29 0 25 11

State Bank of Mysore 90.0 26 0 23 10

Punjab & Sind Bank 79.6 24 0 19 7

Dena Bank 58.0 32 1 18 2

Balmer Lawrie Investment 59.7 6 0 4 1

Total 12,439 3,396

Market Cap.

Amount (Rs bn)Government

holding

(%)

Source: Capitaline, Kotak Institutional Equities


Strategy India

In our view, better financials and operations of some of the PSU companies can help

address India’s energy and infrastructure deficit. For example, the last-mile network of

the government-owned telecom networks can be used for scaling up India’s

broadband coverage dramatically. Private operators are building new cable and fiber

networks to provide broadband services, which is tantamount to duplication of assets.

This has probably contributed to the slow uptake of broadband services in the country.

The government should consider privatizing all PSUs through stake sales to financial

investors (individual and institutional). This will also help in improving the long-term

financial prospects of the PSUs, many of whom have suffered under government

control.

Special taxes (pay-as-you-use). This type of funding can work well for local projects

where the benefits of the project are palpably visible to the users. It is already in vogue

for toll roads and bridges. In our view, various governments (central, state and local)

need to extend this concept to fully cover the costs of all forms of utilities—power,

sanitation and water. Many local and state governments subsidize the consumption of

public utility services, which result in weak financial position of the government bodies

tasked for delivery of such services, which in turn results in poor delivery of services

due to the financial limitations of the public utility bodies to offer quality services.

An increase in tariffs charged by state-owned utilities can increase the funds available

for investment sharply. This can lead to further investment in distribution with up-

gradation of utility networks. The power sector is a case in point. Large ATC&C losses,

continued large losses of state-owned distribution companies and the need for new

investment (smart grids, digital meters) make it imperative for state governments to

rationalize power tariffs. Exhibit 59 shows the average loss on power sold in India over

a period of time.

Revenue gap (costs less tariffs) in the power sector is quite high over the past few years Exhibit 59:Revenue gap on subsidy booked, received and aggregate basis, March fiscal year-ends, 2008-15 (Rs/kWh)

0.54

0.79 0.86 0.88

1.00

1.18 1.15

1.03

0.23

0.35 0.38

0.64 0.70

0.77 0.70

0.53

0.28

0.55 0.59 0.67

0.76

0.83

0.76

0.61

0.0

0.3

0.6

0.9

1.2

1.5

2008 2009 2010 2011 2012 2013E 2014E 2015E

Revenue gap (Aggregate) Revenue gap (Subsidy booked) Revenue gap (Subsidy received)

Source: PFC, Kotak Institutional Equities estimates

We note that special cess (tax) on diesel and gasoline has partly funded India’s highway

development program for the last decade (see Exhibit 60 for the funds raised through

this special levy). The government currently imposes a cess of `2/liter on diesel and

gasoline to fund development of rural roads, development and maintenance of

national highways and other uses as per a specified formula (see Exhibit 61).


India Strategy

Special taxes on diesel and gasoline fund India's highway development and maintenance Exhibit 60:Allocation of funds under Central Road Fund (CRF) and national highways, March fiscal year-ends, 2007-14 (Rs bn)

126 128 142

167 153

185 194 194

64 65 70 86

78 94 99 99

0

50

100

150

200

250

2007 2008 2009 2010 2011 2012 2013 2014

CRF National Highways

Source: Ministry of Road Transport and Highways, Kotak Institutional Equities

Cess on diesel and gasoline funds India’s ambitious highway projects Exhibit 61:Method of distribution of cess

Rs2/liter cess on high-speed diesel

Rs1.5 is allocated in the following manner

(a) 50% of the cess for development of rural roads

(b) 50% of the remaining cess is allocated thus:

57.5% towards the development and maintenance of national highways

12.5% for construction of road under- or over-bridges and safety work at unmanned railway crossings

30% on development and maintenance of state roads

The remaining cess of Rs0.50 per liter is allocated to development and maintenance of national highways

Rs2/liter cess on gasoline

57.5% towards the development and maintenance of national highways

12.5% for construction of road under- or over-bridges and safety work at unmanned railway crossings

30% on development and maintenance of state roads

Source: Ministry of Road Transport and Highways, Kotak Institutional Equities

Tax on gold, silver and jewelry. The Government of India can impose a domestic tax

on gold, silver and jewelry (median rate of excise duty) to raise additional funds. This

will achieve several purposes—(1) raise additional revenues for the government that

can be used for more productive economic and social uses, (2) discourage

consumption of gold, which hurts India’s CAD and savings, and (3) partly address the

issue of unaccounted money being used to purchase gold (store of black money).

Exhibit 62 shows our hypothetical computation of tax revenues at various levels of tax

on gold, silver and jewelry. Exhibit 63 shows the imports of gold over the past few

years and our estimates of domestic consumption after adjustment for re-exports of

diamonds and finished jewelry.


Strategy India

A consumption tax on the jewelry market can fetch the government between Rs100 bn Exhibit 62:

and Rs200 bn of incremental tax revenues Estimating the tax collection of a consumption tax on gold, March fiscal year-end, 2014

Local gold demand (tons) 599

Average price of gold (Rs/10 gms) 29,058

Price of gold (Rs bn/ton) 3

Value of the gold demand (Rs bn) [A] 1,740

Value addition (making charges, profits, etc.) [B=20% * A] 348

Gold jewelry market (Rs bn) [C=A+B] 2,088

Estimate of studded diamond, silver jewelry (Rs bn) [D=C/3] 696

Total jewelry market in India (Rs bn) [E=C+D] 2,784

Tax collection at various tax rates (Rs bn)

- 2% of E 56

- 5% of E 139

- 10% of E 278

Source: World Gold Council, Kotak Institutional Equities estimates

India's gold demand has hovered around the 900 tons mark over the past three years Exhibit 63:India supply and demand estimates for gold, March fiscal year-ends, 2010-15 (tons)

Imports Local demand

Net imports Recycled gold Other sources Total supply Jewelry Other investment Total

2010 726 71 5 802 588 227 815

2011 990 80 7 1,077 661 373 1,034

2012 891 72 11 974 598 366 963

2013 846 113 9 968 534 314 847

2014 676 101 9 786 599 196 795

1HFY15 406 34 6 446 337 92 429

1HFY14 443 63 4 510 303 196 499

Notes:

(a) Supply excludes domestic supply from local mine production, recovery from imported copper concentrates and disinvestment.

This supply can be consumed across three sectors - jewelry, investment and technology.

Consequently, the total supply figure in the table will not add to jewelry plus investment demand in India.

Source: World Gold Council, Kotak Institutional Equities

Promoter funding and M&A. This is emerging as a new way of funding for

infrastructure projects—majority shareholders are selling their stakes in other group

companies in order to raise funds to finance the group’s investments in infrastructure

projects. We have already seen a few cases in the power sector (see Exhibit 64). We see

this opportunity being limited to groups that have strong (with ‘large’ market

capitalization) and weak companies (low market capitalization but high debt). The group

can sell a part of its stakes in some of the stronger companies in order to fund

investments in the weaker companies.


India Strategy

Majority shareholders are selling their stakes to finance group companies Exhibit 64:Stake sale by promoters over the past few months

Closing

Shares price Amount

Month Company Name of seller (mn) (Rs) (Rs mn)

Nov-14 Crompton Greaves Avantha Holdings 52 192 9,968

Nov-14 Bajaj Corp. Bajaj Resources 29 311 9,070

Sep-14 Gammon Infrastructure Projects Gammon India 528 13 6,838

Nov-14 Bajaj Corp. SKB Roop Commercial LLP 12 273 3,281

Sep-14 Jaiprakash Associates Jaypee Infra Ventures 13 45 607



Nov-14 Jindal Steel & Power Pentel Holding Ltd 2 156 335

Jul-14 Gateway Distriparks Windmill International 1 237 284

Nov-14 Jindal Steel & Power Pentel Holding 2 156 281

Source: BSE, Kotak Institutional Equities

We can debate the efficacy of this strategy but groups may have run out of other options

as we had discussed earlier on the issue of lack of conventional funding (debt or equity)

for several infrastructure companies. At least such groups have the option of selling

‘good’ assets to fund ‘bad’ assets. Several other companies do not have that option also.

They will be forced to sell assets to deleverage and many are already in the process of

doing so.


Strategy India

RETURNS: EXPECT MORE MODERATE RETURNS IN 2015 VERSUS IN 2014

The extent of returns in 2015 will largely depend on (1) the progress on economic reforms, particularly

related to labor, land and power, (2) the extent of decline in interest rates and (3) earnings growth. We

believe the global macro-environment and India’s economic and political backdrop are strong enough to

sustain the market’s valuations even if they may appear to be on the higher side. Although we do have some

qualms about earnings growth, we would venture returns in 2015 to be in line with earnings growth.

Valuations are high but they may sustain

The valuations of the Indian market have expanded sharply over the past year and the

market is now trading at the upper end of its historical trading band (see Exhibit 65).

Exhibits 66-69 give the key valuation parameters and earnings growth for the BSE-30 and

Nifty-50 Indices. However, valuations may sustain at high levels given (1) a reasonably

favorable global macroeconomic environment, (2) improving domestic macroeconomic

parameters driven by ongoing economic reforms and lower global crude oil prices, which

will result in lower interest rates and cost of equity over a period of time and (3) economic

reforms, which may result in higher earnings growth.

Market is trading at the upper end of its historical trading band Exhibit 65:1-year rolling forward P/E, P/B, ROE, EV/EBITDA and M3 growth rate adjusted valuations for BSE-30 Index

4

8

12

16

20

24

Dec

-04

Dec

-05

Dec

-06

Dec

-07

Dec

-08

Dec

-09

Dec

-10

Dec

-11

Dec

-12

Dec

-13

Dec

-14

12 months rolling forward P/E (X)

10

15

20

25

0

1

2

3

4

5

Dec

-04

Dec

-05

Dec

-06

Dec

-07

Dec

-08

Dec

-09

Dec

-10

Dec

-11

Dec

-12

Dec

-13

Dec

-14

P/B (X) RoE (%) (RHS)

3

6

9

12

15

18

Dec

-04

Dec

-05

Dec

-06

Dec

-07

Dec

-08

Dec

-09

Dec

-10

Dec

-11

Dec

-12

Dec

-13

Dec

-14

EV/EBITDA (X)

0

5,000

10,000

15,000

20,000

25,000

30,000

35,000

Dec

-04

Dec

-05

Dec

-06

Dec

-07

Dec

-08

Dec

-09

Dec

-10

Dec

-11

Dec

-12

Dec

-13

Dec

-14

Sensex 10X 12X

15X 18X

0.0

0.2

0.4

0.6

0.8

1.0

1.2

1.4

1.6

0

5,000

10,000

15,000

20,000

25,000

30,000

35,000

Nov-

04

Nov-

05

Nov-

06

Nov-

07

Nov-

08

Nov-

09

Nov-

10

Nov-

11

Nov-

12

Nov-

13

Nov-

14

Sensex M3 adj. P/E (X, RHS)

Poly. (M3 adj. P/E (X, RHS))

Source: BSE, RBI, Kotak Institutional Equities estimates


India Strategy

We expect earnings of the BSE-30 Index to grow 18.3% in FY2016 and 15.8% in FY2017 Exhibit 66:Valuation summary of BSE-30 sectors (full-float basis), March fiscal year-ends, 2015-17E

Mcap. Adj. mcap.

(US$ bn) (US$ bn) 2015E 2016E 2017E 2015E 2016E 2017E 2015E 2016E 2017E 2015E 2016E 2017E 2015E 2016E 2017E 2015E 2016E 2017E

Automobiles 74.8 46.0 9.8 32.8 18.5 15.7 11.9 10.0 8.6 7.0 6.0 3.3 2.7 2.2 0.9 1.2 1.5 20.9 22.7 22.2

Banking 150.9 118.6 19.9 16.9 18.3 19.2 16.4 13.9 — — — 2.8 2.5 2.2 1.2 1.4 1.6 14.7 15.3 15.9

Consumers 78.4 45.2 15.3 15.6 15.5 34.9 30.2 26.2 24.1 20.4 17.4 14.7 13.0 11.5 1.8 2.0 2.4 42.2 43.1 43.9

Energy 96.5 37.9 6.4 15.1 16.8 10.7 9.3 8.0 6.4 5.4 4.3 1.4 1.3 1.1 2.3 2.9 3.3 12.8 13.5 14.2

Industrials 32.2 24.2 (17.0) 32.7 27.6 30.4 22.9 17.9 18.3 14.1 12.0 2.7 2.5 2.3 (0.3) (0.3) (0.5) 9.0 11.0 12.7

Metals & Mining 58.6 17.3 7.3 12.4 (1.9) 12.9 11.5 11.7 7.0 6.2 5.7 1.7 1.6 1.4 2.5 3.0 2.7 13.1 13.6 12.3

Pharmaceuticals 45.5 23.5 7.8 14.7 15.1 28.5 24.8 21.6 18.6 15.4 13.1 6.1 5.0 4.2 0.7 0.9 1.0 21.4 20.2 19.5

Technology 134.3 59.9 11.6 16.0 17.9 19.8 17.1 14.5 14.2 11.8 9.7 5.4 4.5 3.8 2.2 2.0 2.3 27.2 26.6 26.4

Telecom 22.3 7.8 85.8 10.2 24.0 22.5 20.4 16.5 6.8 5.9 5.2 2.1 2.0 1.9 0.6 1.0 1.5 9.5 9.8 11.3

Utilities 21.2 7.8 (16.8) 30.2 15.0 14.4 11.0 9.6 10.0 7.8 6.6 1.3 1.2 1.1 2.2 2.7 3.0 8.7 10.6 11.3

BSE-30 Index 715 388 9.9 18.3 15.8 17.7 15.0 13.0 9.9 8.3 7.1 2.8 2.5 2.2 1.6 1.8 2.0 15.6 16.5 16.9

BSE-30 Index (ex-energy) 618 350 11.0 19.2 15.5 19.8 16.6 14.4 11.2 9.4 8.1 3.3 2.9 2.6 1.5 1.7 1.8 16.7 17.6 17.9

RoE (%)EPS growth (%) PER (X) EV/EBITDA (X) Price/BV (X) Div. yield (%)


The BSE-30 Index trades at 15.6X FY2016E ‘EPS’ and 13.3X FY2017E ‘EPS’ (free-float basis) Exhibit 67:Valuation summary of BSE-30 sectors (free-float basis), March fiscal year-ends, 2015-17E

Mcap. Adj. mcap.

(Rs bn) (Rs bn) 2015E 2016E 2017E 2015E 2016E 2017E

Automobiles 4,661 2,869 192 253 298 14.9 11.3 9.6

Banking 9,403 7,389 374 438 515 19.7 16.9 14.4

Consumers 4,886 2,816 83 97 112 33.7 29.1 25.1

Energy 6,014 2,362 218 243 290 10.8 9.7 8.1

Industrials 2,009 1,505 45 62 81 33.2 24.2 18.5

Metals & Mining 3,650 1,081 97 105 114 11.1 10.3 9.5

Pharmaceuticals 2,836 1,465 51 59 69 28.6 24.7 21.3

Technology 8,368 3,735 194 225 265 19.2 16.6 14.1

Telecom 1,391 487 22 24 30 22.5 20.4 16.5

Utilities 1,324 488 29 41 48 16.6 11.9 10.2

BSE-30 Index 44,542 24,197 1,307 1,547 1,822 18.5 15.6 13.3

BSE-30 Index (ex-energy) 38,527 21,835 1,089 1,304 1,532 20.0 16.7 14.3

Adjusted net profit (Rs bn) Adjusted P/E (X)


We expect earnings of the Nifty-50 Index to grow 16.8% in FY2016 and 15.4% in FY2017 Exhibit 68:Valuation summary of Nifty-50 sectors (full-float basis), March fiscal year-ends, 2015-17E

Mcap. Adj. mcap.

(US$ bn) (US$ bn) 2015E 2016E 2017E 2015E 2016E 2017E 2015E 2016E 2017E 2015E 2016E 2017E 2015E 2016E 2017E 2015E 2016E 2017E

Automobiles 74.8 46.0 9.8 32.8 18.5 15.7 11.9 10.0 8.6 7.0 6.0 3.3 2.7 2.2 0.9 1.2 1.5 20.9 22.7 22.2

Banking 175.1 133.7 18.7 16.6 19.0 17.7 15.2 12.8 — — — 2.5 2.2 2.0 1.2 1.4 1.6 14.0 14.5 15.3

Cement 25.9 12.9 9.2 28.4 33.1 25.1 19.5 14.7 12.0 8.9 6.5 2.6 2.4 2.1 1.0 1.0 1.0 10.5 12.2 14.3

Consumers 90.3 51.2 16.5 17.4 15.3 36.2 30.8 26.7 24.7 20.6 17.6 14.8 12.9 11.3 1.7 1.9 2.2 40.9 41.9 42.2

Energy 111.5 43.5 (0.7) 10.3 12.6 10.1 9.2 8.1 6.2 5.3 4.3 1.3 1.2 1.1 2.5 3.0 3.4 13.2 13.3 13.6

Industrials 32.2 24.2 (17.0) 32.7 27.6 30.4 22.9 17.9 18.3 14.1 12.0 2.7 2.5 2.3 (0.3) (0.3) (0.5) 9.0 11.0 12.7

Media 5.6 3.3 (6.8) 19.2 22.3 42.2 35.4 29.0 24.7 21.1 17.7 6.6 6.0 5.4 0.8 1.1 1.4 15.7 17.0 18.7

Metals & Mining 69.5 19.9 7.1 11.0 (1.6) 11.7 10.5 10.7 6.8 6.0 5.5 1.6 1.5 1.4 3.0 3.4 3.1 13.7 14.0 12.7

Pharmaceuticals 56.0 29.2 11.8 14.2 15.8 28.2 24.7 21.3 18.1 15.2 12.8 6.3 5.1 4.3 0.7 0.8 1.0 22.3 20.9 20.0

Real Estate 4.3 1.3 (21.0) 43.4 48.5 53.0 37.0 24.9 16.1 14.0 9.9 0.9 0.9 0.9 1.3 1.3 1.3 1.8 2.5 3.6

Technology 161.1 73.1 11.7 15.1 17.1 19.2 16.7 14.2 13.7 11.4 9.4 5.2 4.4 3.6 2.0 2.0 2.2 27.2 26.2 25.6

Telecom 22.3 7.8 85.8 10.2 24.0 22.5 20.4 16.5 6.8 5.9 5.2 2.1 2.0 1.9 0.6 1.0 1.5 9.5 9.8 11.3

Utilities 32.6 12.9 (7.9) 28.8 18.8 14.1 11.0 9.2 10.1 8.3 7.1 1.4 1.3 1.2 2.2 2.7 3.2 10.0 11.9 12.9

Nifty-50 Index 861 459 8.3 16.8 15.4 17.2 14.7 12.8 9.9 8.4 7.1 2.6 2.4 2.1 1.6 1.8 2.0 15.3 16.0 16.4

Nifty-50 Index (ex-energy) 750 416 11.1 18.7 16.1 19.2 16.2 13.9 11.2 9.4 8.1 3.1 2.7 2.4 1.5 1.7 1.8 16.1 16.9 17.3

RoE (%)EPS growth (%) PER (X) EV/EBITDA (X) Price/BV (X) Div. yield (%)



Strategy India

The Nifty-50 Index trades at 15.5X FY2016E ‘EPS’ and 13.1X FY2017E ‘EPS’ (free-float basis) Exhibit 69:Valuation summary of Nifty-50 sectors (free-float basis), March fiscal year-ends, 2015-17E

Mcap. Adj. mcap.

(Rs bn) (Rs bn) 2015E 2016E 2017E 2015E 2016E 2017E

Automobiles 4,661 2,869 192 253 298 14.9 11.3 9.6

Banking 10,914 8,332 445 518 612 18.7 16.1 13.6

Cement 1,616 801 34 43 58 23.7 18.5 13.9

Consumers 5,629 3,188 91 107 124 34.9 29.7 25.6

Energy 6,951 2,714 264 285 327 10.3 9.5 8.3

Industrials 2,009 1,505 45 62 81 33.2 24.2 18.5

Media 347 208 5 6 7 42.2 35.4 29.0

Metals & Mining 4,330 1,243 118 127 137 10.6 9.8 9.1

Pharmaceuticals 3,488 1,823 65 74 86 28.2 24.5 21.1

Real Estate 271 81 2 2 3 53.0 37.0 24.9

Technology 10,039 4,556 242 279 327 18.8 16.3 13.9

Telecom 1,391 487 22 24 30 22.5 20.4 16.5

Utilities 2,029 806 53 70 85 15.3 11.5 9.5

Nifty Index 53,674 28,613 1,577 1,852 2,176 18.1 15.5 13.1

Nifty-50 Index (ex-energy) 46,723 25,899 1,313 1,567 1,849 19.7 16.5 14.0

Adjusted net profit (Rs bn) Adjusted P/E (X)


Reasonably favorable global environment. Despite concerns of a possible increase in

the US Fed rates in 2015 (2HCY15 more likely), we expect global liquidity to be

sufficiently benign. We had discussed this issue in detail in our October 29 report titled SS

India to sail the ‘seas of QE’. In our view, the ongoing ‘QE’ programs of the BoJ and the

ECB may result in adequate liquidity in global markets. Also, India is relatively well-

prepared to absorb the negative impact of higher US Fed rates given its low CAD-to-GDP

ratio and likely strong capital inflows.

Improving domestic macroeconomic parameters. We have already discussed it in one

of the previous sections of the report. From a market perspective, the critical issue is the

extent of rate cuts through 2015. We expect a 50 bps cut in policy rate in 1HCY15,

which will support investment sentiment.

Economic reforms. As discussed in a previous section of the report, we expect the

central and state governments to implement further reforms over the next 1-2 years. The

government has ample scope to implement reforms through executive and policy

decisions even it is unable to amend certain laws related to labor and land acquisition

given its lack of majority in the upper house of the parliament. Continuation of fiscal,

governance and investment reforms will increase confidence of investors about India’s

medium-term growth story. Finally, we expect several progressive state governments to

adopt more pragmatic policies as they increasingly appreciate the merits of economic

development and governance as a ‘winning’ political strategy.

Earnings growth—18.3% for FY2016E

We expect net profits of the BSE-30 Index to grow 18.3% in FY2016 and 15.8% in FY2017.

For the Nifty-50 Index we expect 16.8% and 15.4% for the same years. We discuss the

earnings drivers of the major sectors and areas of potential earnings surprise and

downgrades for FY2016 later in the section. Exhibits 70-71 give the breakdown of net

profits of the BSE-30 Index and the Nifty-50 Index for FY2014-17E.


India Strategy

About 60% of the net profits of the BSE-30 Index comes from global and government-regulated sectors Exhibit 70:Break-up of net profits of BSE-30 Index across sectors, March fiscal year-ends, 2014-17E

Contribution (%) 2016E 2017E

2014 2015E 2016E 2017E 2014 2015E 2016E 2017E (Rs bn) (%) (Rs bn) (%)

Automobiles 270 296 393 466 12 12 13 14 97 21 73 16

Banking 408 490 572 677 18 20 19 20 83 18 105 22

Consumers 121 140 162 187 5 6 5 5 22 5 25 5

Energy 527 560 645 754 23 22 22 22 85 18 109 23

ONGC 266 281 351 388 12 11 12 11 70 15 37 8

Reliance Industries 220 241 253 314 10 10 9 9 12 3 61 13

Industrials 80 66 88 112 3 3 3 3 22 5 24 5

Metals & Mining 263 282 317 311 12 11 11 9 35 8 (6) (1)

Coal India 151 142 177 150 7 6 6 4 35 8 (27) (6)

Pharmaceuticals 92 100 114 132 4 4 4 4 15 3 17 4

Technology 378 422 489 577 17 17 16 17 68 15 87 19

Telecom 33 62 68 85 1 2 2 2 6 1 16 3

Utilities 111 92 120 138 5 4 4 4 28 6 18 4

BSE-30 Index 2,283 2,510 2,969 3,438 100 100 100 100 459 100 469 100

BSE-30 change (%) 8.0 9.9 18.3 15.8

BSE-30 ex-energy change (%) 9.3 11.0 19.2 15.5

BSE-30 EPS (FF) 1,331 1,478 1,749 2,060

Incremental profits

Net profit (Rs bn)

Source: Kotak Institutional Equities estimate

About 60% of the net profits of the Nifty-50 Index comes from global and government-regulated sectors Exhibit 71:Break-up of net profits of Nifty-50 Index across sectors, March fiscal year-ends, 2014-17E

Contribution (%) 2016E 2017E

2014 2015E 2016E 2017E 2014 2015E 2016E 2017E (Rs bn) (%) (Rs bn) (%)

Automobiles 270 296 393 466 9 9 11 11 97 18 73 13

Banking 520 617 719 856 18 20 20 20 102 19 137 24

Cement 59 64 83 110 2 2 2 3 18 3 27 5

Consumers 134 156 183 211 5 5 5 5 27 5 28 5

Energy 692 687 758 853 24 22 21 20 71 13 95 17

ONGC 266 281 351 388 9 9 10 9 70 13 37 7

Reliance Industries 220 241 253 314 8 8 7 7 12 2 61 11

Industrials 80 66 88 112 3 2 2 3 22 4 24 4

Media 9 8 10 12 0 0 0 0 2 0 2 0

Metals & Mining 346 370 411 404 12 12 11 10 41 8 (6) (1)

Coal India 151 142 177 150 5 5 5 4 35 7 (27) (5)

Pharmaceuticals 111 124 141 164 4 4 4 4 18 3 22 4

Real Estate 6 5 7 11 0 0 0 0 2 0 4 1

Technology 468 523 602 705 16 17 17 17 79 15 103 18

Telecom 33 62 68 85 1 2 2 2 6 1 16 3

Utilities 156 144 185 220 5 5 5 5 41 8 35 6

Nifty-50 Index 2,883 3,122 3,647 4,207 100 100 100 100 526 100 560 100

Nifty-50 change (%) 6.6 8.3 16.8 15.4

Nifty-50 ex-energy change (%) 6.8 11.1 18.7 16.1

Nifty-50 EPS (FF) 409 453 532 626

Incremental profits

Net profit (Rs bn)

Source: Kotak Institutional Equities estimate

Exhibit 72 is our revised Model Portfolio. We follow two broad themes to derive our Model

Portfolio—(1) recovery in economic activity due to ongoing economic reforms and (2)

decline in interest rates. We have followed the same broad logic for some time, which

explains our large positions in the automobile and banking sectors. However, we have

reduced the positions somewhat in the two sectors to make way for some other companies

that have underperformed significantly over the past six months. We have also discarded the

fiscal consolidation theme, which we had played through the government-owned energy

names in 1HCY15, as the stocks are largely discounting a steep recovery in their earnings

from lower subsidies and there is limited clarity on the subsidy-sharing formula as of now.

Given expensive valuations across the board, the choice for investors appears to be between

(1) expensive stocks with good visibility on earnings and (2) stocks with relatively low

visibility on earnings. We have a judicious mix of the two and avoid stocks with large risks to

their earnings and/or weak balance sheets.


Strategy India

We make the following changes to our Model Portfolio. We have added Crompton Greaves

(CRG) with a weight of 200 bps and also included RIL with a weight of 300 bps (nil earlier).

We have also increased the weight on LT by 200 bps to 400 bps and on Infosys by 100 bps

to 900 bps. To fund the same, we have removed ITC from the Model Portfolio (200 bps

earlier) and reduced 100 bps each from Axis Bank (AXSB), GAIL, HDFCB, Idea, Lupin and

Maruti Suzuki.

Quality stocks comprise our Model Portfolio Exhibit 72:KIE Model Portfolio

Price (Rs) KIE weight Price (Rs) KIE weight

Company 12-Dec-14 Rating (%) 12-Dec-14 Rating (%)

Automobiles GAIL (India) 424 ADD 2.0

Apollo Tyres 222 BUY 2.0 Oil India 547 BUY 2.0

Hero Motocorp 3,125 BUY 4.0 Reliance Industries 882 ADD 3.0

Maruti Suzuki 3,379 BUY 4.0 Energy 9.0

Tata Motors 500 BUY 6.0 Industrials/Construction

Automobiles 16.0 Crompton Greaves 172 BUY 2.0

Pvt. Banking/Financing Larsen & Toubro 1,511 ADD 4.0

Axis Bank 483 ADD 4.0 Industrials/Construction 6.0

HDFC 1,070 ADD 7.0 Pharmaceuticals

HDFC Bank 932 ADD 9.0 Cipla 641 BUY 3.0

Federal Bank 142 BUY 2.0 Lupin 1,450 BUY 2.0

ICICI Bank 346 BUY 10.0 Pharmaceuticals 5.0

LIC Housing F inance 437 ADD 2.0 Technology

Pvt. Banking/Financing 34.0 Infosys 1,939 ADD 9.0

Consumers TCS 2,451 ADD 4.0

Britannia Industries 1,800 BUY 2.0 Tech Mahindra 2,589 ADD 2.0

Dabur India 235 ADD 2.0 Wipro 543 ADD 4.0

Marico 323 BUY 3.0 Technology 19.0

United Spirits 2,847 BUY 2.0 Telecom

Consumers 9.0 Idea 143 BUY 2.0

Energy Telecom 2.0

Bharat Petroleum 668 ADD 2.0 BSE-30 100.0


We discuss our investment thesis for the key sectors and stocks below.

Automobiles. We like the automobile sector as a good play on India’s economic recovery

and decline in interest rates. Lower fuel prices and interest rates and resultant monthly

running costs of vehicle ownership may sustain volume recovery. Exhibits 73-74 show the

cost of ownership of 2-W and 4-W for three scenarios—end-FY2014 fuel prices and

interest rates, current fuel prices and interest rates and current fuel prices and 100 bps

lower interest rate.


India Strategy

Lower fuel prices and interest rates may sustain volume recovery in two-wheelers Exhibit 73:Cost of ownership of Hero Splendor (Rs)

Mar-14 Current Current

Petrol price (Rs/liter) 73.2 63.3 63.3

Interest rate (%) 12.2 12.0 11.0

Fuel efficiency (km/liter) 60.0 60.0 60.0

Fuel cost (Rs/km) 1.2 1.1 1.1

Purchase price (Rs) 43,000 43,000 43,000

Registration and road taxes (Rs) 4,300 4,300 4,300

Insurance cost (Rs) 1,290 1,290 1,290

Interest cost (Rs) 8,394 8,256 7,568

Fuel cost (Rs) 73,200 63,300 63,300

Maintenance cost (Rs) 10,000 10,000 10,000

Resale value (Rs) 27,950 27,950 27,950

Total cost of ownership (Rs) 112,234 102,196 101,508

% decline from March 2014 levels (8.9) (9.6)

Notes:

(a) We have assumed a motorcycle runs for 60,000 kms in five years and resale

value is 65% of initial two wheeler value. We have assumed financing is done for


Lower fuel prices and interest rates may sustain volume recovery in passenger cars Exhibit 74:Cost of ownership of Maruti Suzuki Swift Lxi petrol (Rs)

Mar-14 Current Current

Petrol price (Rs/liter) 73.2 63.3 63.3

Interest rate (%) 12.2 12.0 11.0

Fuel efficiency (km/liter) 12.0 12.0 12.0

Fuel cost (Rs/km) 6.1 5.3 5.3

Purchase price (Rs) 465,000 465,000 465,000

Registration and road taxes (Rs) 46,500 46,500 46,500

Insurance cost (Rs) 57,126 57,126 57,126

Interest cost (Rs) 121,735 119,580 108,883

Fuel cost (Rs) 366,000 316,500 316,500

Maintenance cost (Rs) 50,000 50,000 50,000

Resale value (Rs) 302,250 302,250 302,250

Total cost of ownership (Rs) 804,111 752,456 741,759

% decline from March 2014 levels (6.4) (7.8)

Notes:

(a) We have assumed a car runs for 60,000 kms in five years and resale value is

65% of initial car value.


We note that a sustained recovery in investment activity and creation of new jobs are

important for a sustained pick-up in demand for consumer discretionary items. We model

a moderate recovery in volumes and EBITDA margin (see Exhibit 75 for volume and

margin assumptions for FY2010-17E) based on economic recovery and softer commodity

prices and operating leverage. However, we see modest downside risks to our earnings

estimates from lower-than-expected volumes.


Strategy India

We model a moderate recovery in volumes and EBITDA margin of automobile companies Exhibit 75:Margin history and estimates for automobile companies, March fiscal year-ends, 2010-17E (%)

2010 2011 2012 2013 2014 2015E 2016E 2017E

Volume (% yoy)

2-wheelers

Bajaj Auto 30.8 34.0 13.7 (2.6) (8.7) 8.3 11.2 11.4

Hero Honda 23.6 17.4 15.4 (2.6) 2.8 11.8 14.0 9.7

Passenger vehicles

Mahindra & Mahindra 46.2 24.7 23.7 9.5 (1.6) (3.6) 10.6 13.3

Maruti Suzuki 28.6 24.8 (10.8) 3.3 (1.4) 11.6 15.0 15.9

CVs

Ashok Leyland 17.4 47.4 8.9 11.7 (23.5) 11.4 17.4 13.0

Tata Motors 37.7 23.8 17.7 (0.7) (27.5) 0.7 16.4 14.0

EBITDA margin (%)

2-wheelers

Bajaj Auto 21.9 20.5 20.3 20.1 21.8 18.9 19.2 19.2

Hero Honda 17.4 12.6 11.9 10.1 10.7 13.3 15.1 15.3

Passenger vehicles

Mahindra & Mahindra (standalone) 15.9 14.8 13.3 13.9 13.5 12.5 11.9 12.7

Maruti Suzuki 13.3 10.0 7.3 9.8 11.9 12.4 14.1 15.0

CVs

Ashok Leyland 10.5 10.9 9.8 7.0 1.7 7.2 8.6 9.0

Tata Motors (standalone) 10.6 9.5 7.7 3.8 (2.7) (2.7) 4.9 8.3

Source: Company reports, Kotak Institutional Equities estimates

Banking. We like private banks as a safer play on India’s economic growth, which will

result in a pick-up in credit growth from current low levels. Valuations are expensive (see

Exhibit 76 for 12-month P/B multiples of the private banks for the past 10 years) but may

sustain on expectations of (1) likely recovery in credit growth in the near term, (2) strong

medium-term credit growth ahead of nominal GDP growth, (3) better positioning of

private banks relative to public banks and (4) potential lower credit costs.

Significant re-rating for certain banks over the past 12 months Exhibit 76:

12-month rolling-forward P/B for banks and NBFCs under our coverage (X)

0

1

2

3

4

5

6

7

8

Jan-0

7

Jan-0

8

Jan-0

9

Jan-1

0

Jan-1

1

Jan-1

2

Jan-1

3

Jan-1

4

AXSB BOB HDFC HDFCB ICICI IndusInd SBI

Source: FactSet, Kotak Institutional Equities


India Strategy

Although we assume stable loan-loss provisions for FY2016-17E (see Exhibit 77), we note

the potential risks from higher NPLs in certain sectors such as power and steel. The

government has made little progress in addressing the underlying challenges of the

power sector and we do not rule out further NPLs due to (1) continued shortages of coal

and gas and (2) inability or unwillingness of the state-owned distribution entities to raise

tariffs. We expect an increase in NPLs in the steel sector since we do not see any respite

due to a weak global steel cycle and continued uncertainty on availability of raw materials;

many of the mid-tier steel companies have already restructured their loans.

We assume stable loan-loss provisions for FY2016-17E Exhibit 77:LLP as a percentage of average loans, March fiscal year-ends, 2011-17E (%)

2011 2012 2013 2014 2015E 2016E 2017E

Public banks

BOB 0.6 0.9 1.2 1.0 1.0 1.0 1.0

BOI 0.7 1.1 1.6 1.4 1.2 1.2 1.2

Canara Bank 0.6 0.7 1.1 1.0 1.2 1.2 1.2

OBC 1.1 1.2 1.4 1.4 1.5 1.4 1.4

PNB 1.1 1.2 1.4 1.8 1.7 1.4 1.2

SBI 1.4 1.5 1.3 1.4 1.3 1.3 1.1

Union Bank 1.0 1.4 1.0 1.2 1.2 1.2 1.2

Old private banks

City Union Bank 0.9 0.8 0.9 1.1 0.9 0.9 0.9

DCB 1.3 0.6 0.3 0.5 0.7 0.4 0.4

Federal Bank 1.7 0.9 0.7 0.4 0.5 0.5 0.6

Karur Vysya Bank 0.1 0.2 0.6 0.7 0.8 0.6 0.6

J&K Bank 0.6 0.5 0.6 0.3 1.2 1.0 1.0

New private banks

Axis Bank 0.9 0.7 1.0 1.0 1.0 0.9 0.8

HDFC Bank 1.0 1.1 0.8 0.7 0.6 0.6 0.6

ICICI Bank 1.0 0.4 0.6 0.8 1.0 0.9 0.8

Yes Bank 0.3 0.1 0.5 0.5 0.8 1.0 1.0

IndusInd Bank 0.8 0.6 0.6 0.8 0.6 0.7 0.8


Among NBFCs, we like the housing finance companies as a good proxy for the housing

theme. We are quite positive on the long-term demand for housing in India (see Exhibit

78), which in turn will lead to strong demand for housing mortgages for the next several

years. We find the valuations of the CV NBFCs as quite full in the context of their high

gross NPLs. We do not like the power infrastructure NBFCs as we are not sure about the

long-term business models of these companies—their yields, NIMs, RoAs and RoEs look

too fantastic for us given the problems in the power sector (see Exhibit 79). If the

problems of the power sector get resolved gradually, we doubt PFC and REC can earn

such high spreads from financially stronger companies. If the problems do not get

resolved, then the power finance companies will face much higher NPLs than is reported

currently.


Strategy India

India would require an additional 60-80 mn housing units by 2022 Exhibit 78:Construction cost, value and shortage of housing units in India in 2007 and 2012 and requirement by 2022 (various scenarios)

2007 2012 KIE (I) KIE (II) GOI

Shortage and requirement (mn)

EWS 21.8 10.6 25.2 33.6 45.0

LIG 2.9 7.4 30.0 44.0 50.0

MIG and above 0.0 0.8 4.8 6.4 5.0

Total 24.7 18.8 60.0 80.0 100.0

Value of units, LTV to be financed by HFCs, SCBs (Rs tn)

EWS 10.9 5.3 19 25 34

LIG 2.9 7.4 60 88 100

MIG and above 0.2 4.1 38 51 40

Total 14.0 16.8 117 164 174

Total (US$ tn) 0.2 0.3 2.0 2.7 2.9

Construction costs (Rs tn)

EWS 10.9 5.3 20 27 36

LIG 2.2 5.6 45 55 63

MIG and above 0.1 1.6 14 19 15

Total 13.1 12.5 80 101 114

Total (US$ tn) 0.2 0.2 1.3 1.7 1.9

Notes:

(a) Scenario KIE (I) is low-growth scenario for housing demand.

(b) Scenario KIE (II) is high-growth scenario for housing demand.

2022 estimates

Source: Planning Commission, Kotak Institutional Equities estimates

NIMs and RoAs of PFC and REC exceed those of the best banks and NBFCs in India Exhibit 79:NIM, RoA and RoE of key banks and NBFCs, March fiscal year-ends, 2011-14 (%)

2011 2012 2013 2014 2011 2012 2013 2014 2011 2012 2013 2014

Axis Bank 3.2 3.1 3.2 3.4 1.6 1.6 1.7 1.7 19.3 20.3 18.5 17.4

HDFC Bank 4.0 3.9 3.8 3.7 2.8 2.7 2.7 2.6 21.7 22.7 22.1 20.6

HDFC 4.4 4.5 4.6 4.4 1.6 1.7 1.8 1.9 16.7 18.7 20.3 21.3

ICICI Bank 2.6 2.7 3.0 3.2 1.3 1.4 1.6 1.7 9.7 11.2 13.1 14.0

IndusInd Bank 3.6 3.4 3.5 3.8 1.4 1.6 1.6 1.8 20.8 20.1 18.3 18.0

Kotak Mahindra Bank 5.4 4.5 4.5 4.5 1.9 1.9 1.8 1.8 14.5 14.7 15.6 13.8

LIC Housing Finance 3.1 2.5 2.2 2.3 2.1 1.5 1.4 1.5 25.8 18.6 16.8 18.8

PFC 3.9 3.8 4.2 4.8 2.8 2.5 2.9 3.0 18.3 16.8 19.7 21.0

REC 4.4 4.3 4.7 5.1 3.3 2.9 3.2 3.3 21.5 20.5 23.7 24.6

NIM ROA ROE


Cement. We find valuations of cement stocks quite expensive even with our aggressive

earnings assumptions over the next two years (see Exhibit 80 for valuations and

profitability assumptions). We model a strong improvement in the profitability of cement

companies. Our earnings and profitability assumptions may be at risk given that the

Indian cement market will likely continue to be oversupplied even with reasonably

aggressive growth assumptions on cement demand (see Exhibit 81).


India Strategy

We find valuations of cement stocks quite expensive Exhibit 80:Valuation summary of cement stocks under KIE coverage, March fiscal year-ends, 2014-17E

EPS (Rs) P/E (X) EV/EBITDA (X) EV/ton of production (US$) EV/ton of capacity (US$)

Company 2014 2015E 2016E 2017E 2014 2015E 2016E 2017E 2014 2015E 2016E 2017E 2014 2015E 2016E 2017E 2014 2015E 2016E 2017E

ACC 46 50 69 91 31.1 28.4 20.8 15.8 17.8 16.0 11.1 8.2 167 157 144 131 131 127 109 103

Ambuja Cements 7 9 12 14 33.4 24.7 19.6 15.8 19.3 14.5 11.4 8.8 237 222 206 185 181 157 147 141

Grasim Industries 212 204 260 354 15.9 16.5 12.9 9.5 10.0 8.4 6.3 4.5 NA NA NA NA NA NA NA NA

India Cements (2) 3 6 8 (34.7) 28.5 12.6 9.2 10.0 7.7 6.3 4.7 99 95 86 72 63 63 61 54

Jaiprakash Associates (6) 1 5 5 (4.7) 23.5 5.8 5.8 12.9 12.9 10.0 9.7 NA NA NA NA NA NA NA NA

Shree Cement 236 255 374 480 37.4 34.5 23.5 18.3 21.9 17.3 13.0 10.7 317 301 273 235 290 194 191 188

UltraTech Cement 75 82 104 142 33.6 30.7 24.3 17.7 18.9 16.5 12.1 9.5 270 258 231 211 202 181 169 166


We estimate capacity utilization of the cement sector to remain at below 75% through FY2016-17 Exhibit 81:Cement demand supply balance, March fiscal year-ends, 2010-17E (mn tons)

2010 2011 2012 2013 2014 2015E 2016E 2017E

Closing installed capacity (mtpa) 272 297 318 350 364 393 414 419

Incremental installed capacity (mtpa) 60 25 21 32 14 29 21 5

Effective capacity (mtpa) 235 278 308 335 356 372 407 417

Incremental effective capacity (mtpa) 30 44 30 27 20 17 34 11

Capacity growth (%) 14.6 18.6 10.6 8.9 6.1 4.7 9.2 2.6

Cement consumption (mn tons) 196 207 223 234 241 258 276 300

Incremental consumption (mn tons) 18 11 16 11 6 17 19 24

Consumption growth (%) 10.4 5.7 7.7 4.9 2.8 6.9 7.3 8.5

Cement production (mn tons) 200 209 224 235 241 259 279 305

Incremental production (mn tons) 19 9 15 11 7 17 20 26

Growth (%) 10.5 4.3 7.1 4.8 2.9 7.2 7.8 9.4

Capacity utilization (%) 85 75 73 70 68 69 69 73

GDP Growth rate (%) 8.6 8.9 6.7 4.5 4.7 5.5 6.1 6.5

Elasticity to GDP growth (X) 1.2 0.6 1.2 1.1 0.6 1.3 1.2 1.3

Region-wise utilization

North 92 82 80 77 74 77 74 77

Central 99 91 86 82 78 72 66 67

East 79 56 59 59 61 60 60 60

West 87 80 78 80 82 90 95 98

South 76 68 64 60 57 60 62 71

All India 85 75 73 70 68 69 69 73

Source: CMA, Kotak Institutional Equities estimates

Consumer staples. We have reasonable confidence in our earnings estimates for the

consumer staple companies. In fact, we could see earnings upside if raw material (crude

oil derivatives) prices were to sustain at current low levels or prices of certain agriculture

commodities such as copra were to correct from unnaturally high levels. However,

valuations are quite expensive across the board (see Exhibit 82) and to some extent, the

stocks are discounting a recovery in volume growth, strong medium-term growth

prospects and low input prices.


Strategy India

Valuations are quite expensive across the board for consumer staple stocks Exhibit 82:Valuation of consumer stocks under KIE coverage, March fiscal year-ends, 2015-17E

EPS (Rs) EPS growth (%) PER (X)

Company 2015E 2016E 2017E 2015E 2016E 2017E 2015E 2016E 2017E 2015E 2016E 2017E

Asian Paints 16.4 21.9 24.9 27.7 33.7 13.9 47.3 35.4 31.1 35.3 38.4 35.5

Bajaj Corp. 14.3 16.8 19.0 19.2 17.3 12.9 23.7 20.2 17.9 42.1 48.4 48.6

Britannia Industries 47.7 57.2 67.8 44.5 20.0 18.6 37.8 31.5 26.5 55.0 46.2 42.1

Colgate-Palmolive (India) 41.3 48.3 57.4 14.4 17.1 18.8 43.7 37.3 31.4 90.6 99.3 109.8

Dabur India 6.1 7.3 8.4 17.2 20.0 15.4 38.5 32.1 27.8 35.7 35.0 33.4

GlaxoSmithKline Consumer 138.1 156.2 180.9 (14.0) 13.2 15.8 41.7 36.9 31.8 29.3 28.3 28.2

Godrej Consumer Products 25.3 30.2 35.2 13.3 19.3 16.7 36.2 30.4 26.0 21.1 21.7 22.0

Hindustan Unilever 19.0 21.4 24.2 15.6 12.8 13.0 42.0 37.2 32.9 113.8 107.4 102.6

ITC 12.2 14.1 16.3 14.1 15.6 15.3 32.5 28.1 24.3 31.8 33.0 36.3

Jubilant Foodworks 18.0 25.8 36.2 17.4 43.2 40.3 75.3 52.6 37.5 19.5 22.6 25.2

Jyothy Laboratories 9.5 11.2 14.5 102.4 18.1 29.1 26.6 22.5 17.4 22.7 24.4 29.2

Marico 9.2 11.5 13.3 16.2 25.7 15.7 35.2 28.0 24.2 37.8 37.0 34.0

Nestle India 122.4 145.2 177.0 6.9 18.7 21.9 51.3 43.3 35.5 46.2 43.7 43.1

Page Industries 180.6 223.2 273.6 31.0 23.6 22.6 59.8 48.4 39.4 59.2 54.0 48.6

Pidilite Industries 11.1 13.7 16.7 24.5 24.0 21.3 43.2 34.9 28.7 26.7 28.2 29.0

Speciality Restaurants 2.6 4.0 6.3 (34.8) 53.6 55.8 68.7 44.7 28.7 4.0 5.8 8.4

Tata Global Beverages 6.4 7.5 8.7 16.2 18.2 14.8 24.0 20.3 17.7 6.7 7.6 8.4

Titan Company 9.8 11.1 13.0 15.8 13.2 17.2 38.3 33.8 28.8 30.8 29.0 28.9

United Breweries 10.1 13.6 17.4 18.1 34.0 28.7 78.9 58.9 45.8 15.0 17.9 19.7

United Spirits 24.7 67.3 83.6 375.8 172.3 24.3 115.2 42.3 34.1 11.7 27.5 26.9

RoE (%)


Apart from a few companies that offer the usual combination of volume growth and

price-mix increase at ‘reasonable’ valuations, we focus on companies with potential

earnings surprises from lower-than-estimated raw material prices (Marico). We rule out

de-rating of multiples in such cases as the market will likely focus on the large potential of

the Indian consumer market given ongoing reforms, likely economic recovery and possible

earnings upgrades.

Energy (oil & gas). We believe the re-rating story has largely played out in the energy

sector with the stocks being re-rated significantly over the past 12-15 months on

expectations of lower subsidies and higher earnings. There is still no clarity on the

subsidy-sharing mechanism between the government and the government-owned

companies but we expect the government to announce one over the next few weeks.

We keep a few positions in energy space in the portfolio—(1) GAIL where we see strong

medium-term growth potential in the key gas transmission business at low capex; the

business has high operating leverage and GAIL’s gas pipelines’ capacity utilization has

fallen below 50% and (2) OIL, which offers cheap exposure to a ‘sensible’ subsidy-sharing

formula.

Industrials & infrastructure. We find valuations of all industrial and infrastructure

companies quite expensive despite building a steep increase in revenues, EBITDA and net

profits. We do not doubt the size of the opportunity given India’s poor infrastructure and

are positive on an eventual recovery in the investment cycle. However, it remains to be

seen if the recovery is strong enough to warrant such high multiples for stocks. In our

view, the chances of earnings upgrades are quite low and the risk of disappointment

reasonably high, at least in the short term. Exhibit 83 shows the key financial and

valuation parameters of the key industrial and infrastructure stocks under our coverage.


India Strategy

Valuation of industrial and infrastructure stocks are quite stiff even after factoring a significant recovery in their earnings Exhibit 83:Valuation summary of industrials stocks under KIE coverage, March fiscal year-ends, 2015-17E

EPS (Rs) EPS growth (%) PER (X) EV/EBITDA (X)

Company 2015E 2016E 2017E 2015E 2016E 2017E 2015E 2016E 2017E 2015E 2016E 2017E 2015E 2016E 2017E 2015E 2016E 2017E

ABB 11.8 24.1 32.2 41.9 103.5 33.6 101.6 49.9 37.4 55.6 31.6 24.9 14.0 12.2 10.3 9.1 16.7 19.1

Adani Port and SEZ 12.2 16.5 21.2 45.6 35.7 28.7 22.8 16.8 13.1 14.7 11.3 9.0 4.9 3.9 3.1 24.5 25.9 26.7

Bharat Heavy Electricals 11.6 13.7 15.9 (18.1) 18.0 16.6 21.4 18.1 15.5 13.7 10.3 7.4 1.7 1.6 1.5 8.3 9.2 10.0

Container Corporation 48.9 55.4 70.4 (3.1) 13.2 27.0 26.6 23.5 18.5 18.0 15.2 11.6 3.3 3.0 2.7 13.0 13.4 15.3

Crompton Greaves 5.5 10.6 15.4 41.9 91.6 45.7 31.2 16.3 11.2 15.0 10.2 7.9 2.8 2.5 2.1 9.2 16.0 20.2

Cummins India 26.7 32.6 43.7 25.3 21.9 34.2 32.7 26.9 20.0 29.8 21.3 15.6 8.2 7.0 5.9 26.7 28.1 32.0

Gujarat Pipavav Port 6.9 9.4 12.2 90.9 35.9 29.2 24.5 18.1 14.0 20.0 15.2 11.6 4.7 3.7 2.9 21.2 22.9 23.2

IRB Infrastructure 13.8 14.8 20.5 (0.1) 7.6 37.8 17.7 16.5 12.0 8.7 7.8 7.6 2.1 1.9 1.7 12.4 12.2 15.2

Kalpataru Power Transmission 9.9 8.7 11.6 24.3 (12.4) 33.3 20.2 23.0 17.3 8.3 7.0 6.2 1.4 1.3 1.2 7.0 5.8 7.4

KEC International 4.5 8.5 12.1 36.5 89.1 41.8 21.6 11.4 8.1 8.2 6.4 5.1 1.7 1.6 1.4 8.8 14.5 18.2

Larsen & Toubro 40.8 58.6 78.8 (16.2) 43.7 34.4 37.0 25.8 19.2 19.7 15.1 13.0 3.7 3.3 2.9 10.4 13.5 16.2

Sadbhav Engineering 8.3 9.4 11.1 24.1 14.4 17.8 28.7 25.1 21.3 14.8 12.1 10.6 2.6 2.3 2.1 12.1 10.9 11.6

Siemens 17.8 24.3 29.9 104.7 36.2 23.1 49.7 36.5 29.6 28.1 21.4 17.3 7.0 6.2 5.5 14.3 18.0 19.6

Thermax 22.7 33.5 45.9 10.1 47.5 36.8 44.6 30.3 22.1 31.1 20.0 14.2 5.5 4.9 4.3 12.8 17.2 20.8

Voltas 8.7 12.0 14.2 16.9 38.4 18.6 30.0 21.7 18.3 24.7 16.1 13.3 4.3 3.8 3.3 14.9 18.5 19.4

Price/BV (X) RoE (%)


Metals & mining. We see potential risks to earnings of metals and mining companies in

the medium term from higher royalties on mineral ores and coal. We note that the high

profitability of India’s metal companies and high returns of upstream producers increase

the risks to earnings of the metals & mining companies if and when the Indian

government or state governments increase their share of ‘value’ of mineral ores or fuels.

Exhibit 84 compares the profitability of a few Indian metal companies with global

companies and also shows the RoAE, RoACE and CRoCI of a few upstream mining

companies.


Strategy India

India’s upstream mining companies enjoy superior profitability due to lower state levies Exhibit 84:EBITDA margin, RoAE, RoACE and CRoCI of Indian metal companies along with that of global companies (%)

2010 2011 2012 2013 2014

EBITDA/ton (US$)

Steel

Tata Steel - India 307 387 363 273 249

Tata Steel - Europe (6) 52 7 10 36

Arcelor Mittal - Europe 89 75 58 49 42

Aluminum

Hindalco - Primary aluminum 715 834 699 334 280

Alcoa - Primary aluminum (159) 320 301 148 134

Rio Tinto - Primary aluminum 133 351 323 237 442

Iron ore

NMDC - India iron ore 39 72 68 53 42

Fortescue Metals - Iron ore 32 69 50 44 45

Zinc

Hindustan Zinc - Refined zinc 1,178 1,290 1,186 986 983

RoAE (%)

Coal India 42.8 37.0 39.8 39.0 33.3

Hindustan Zinc 22.3 21.8 20.6 21.4 18.6

NMDC 24.2 33.8 30.0 23.6 21.1

Tata Steel - India 13.6 14.6 12.8 9.2 10.5

RoACE (%)

Coal India 43.2 36.3 38.7 39.7 35.2

Hindustan Zinc 25.1 24.3 22.6 23.5 20.1

NMDC 26.7 38.9 33.3 24.5 22.3

Tata Steel - India 12.3 12.9 11.5 10.2 10.9

CRoCI (%)

Coal India 103.9 88.3 126.1 164.7 78.3

Hindustan Zinc 54.6 50.5 43.1 41.9 39.1

NMDC 135.3 272.6 198.1 125.5 88.3

Tata Steel - India 28.4 29.4 27.9 23.8 23.7

Notes:

(a) Fortescue Metals is June year-end company and Rio Tinto & Alcoa are December year-end companies.

(b) For Fortescue Metlas, mineral resource rent tax of 22.5% is clubbed with income tax.

(c) Provisions for OBR adjustments have not been considered for CRoCI calculation of Coal India.


We expect the government to capture a larger portion of the value of coal and mineral

ores as it increasingly resorts to auctions to allocate coal and mineral ores. We note that

the Government of India captures a large share of the ‘value’ in the case of oil & gas and

telecom sectors through (1) share of revenues as cess, royalty and subsidies in the case of

government-owned companies and share of revenues as royalty and share of profits as

share of profit petroleum in the case of private companies operating under a production-

sharing contract and (2) one-time payment for telecom spectrum and recurring payments

for license fees and spectrum usage charges in the telecom sector. Exhibit 85 shows the

different rates and types of payments that Indian companies make on natural resources

and the different regimes for various natural resources.


India Strategy

Indian government’s collection of ‘value’ is lower in the metals and minerals sector Exhibit 85:

compared to telecom and energy sectors Different rates and types of payments that Indian companies make on natural resources and the different regimes for various natural resources

Metals and minerals

Metals and minerals Royalty Computation

Bauxite 0.50 Percentage of the LME prices

Coal 14.00 Percentage of sales value

Copper 4.62 Percentage of the LME prices

Iron ore 15.00 Percentage of sales value

Lead 14.50 Percentage of the LME prices

Silver 7.00 Percentage of the LME prices

Zinc 9.50 Percentage of the LME prices

Telecom

Levy Scope Rate

License fees All licensees

Spectrum usage charges All wireless licensees

Upfront spectrum charges Wireless licensees

Microwave spectrum charges Wireless licensees

Crude oil

Royalty (%) Nomination Pre-NELP (b) (c) NELP

Onshore 20.0 20.0 12.5

Offshore 10.0 10.0 10.0

Deepwater 5% for 7 years 5% for 7 years 5% for 7 years

Cess (Rs/ton) 4,500 4,500 NA

Subsidy burden (a) Ad-hoc mechanism NA NA

Profit petroleum (a) NA As per PSC As per PSC

Natural gas

Royalty (%) Nomination Pre-NELP (b) (c) NELP

Onshore 10.0 10.0 10.0

Offshore 10.0 10.0 10.0

Deepwater 5% for 7 years 5% for 7 years 5% for 7 years

Profit petroleum NA As per PSC As per PSC

Notes:

(b) Specific royalty rate of Rs481-528/ton for pre-NELP discovered offshore blocks, as

stipulated in the PSC.

(c) Cess on crude production from 26 discovered pre-NELP blocks restricted to Rs900/ton

by the government.

8% of adjusted gross revenues (AGR) (a)

Between 1-8% of AGR depending on

the band and quantum of spectrum held

Sold via auctions on a per MHz basis;

different price discovery for different

bands in different circles in different

auctions

Varies across circles; depends on

quantum of backhaul spectrum

(a) AGR = adjusted gross revenues = gross revenues less interconnect costs and other

exemptions.

Source: DOT, Ministry of Petroleum and Natural Gas, TRAI, Kotak Institutional Equities

Pharmaceuticals. We find the valuations of the Indian pharmaceutical companies quite

expensive despite our reasonably aggressive earnings growth assumptions over the next

two years (see Exhibit 86). Thus, we recommend exposure to companies where we see

scope for value creation such as Cipla (global respiratory opportunity) and where we have

very high degree of confidence in the earnings growth (Lupin).


Strategy India

Valuations are quite full for pharmaceutical stocks under our coverage Exhibit 86:Valuation of pharmaceutical stocks under KIE coverage, March fiscal year-ends, 2015-17E

EPS (Rs) EPS growth (%) PER (X)

Company 2015E 2016E 2017E 2015E 2016E 2017E 2015E 2016E 2017E 2015E 2016E 2017E 2015E 2016E 2017E

Biocon 21.3 23.1 24.0 3.0 8.6 3.8 21.3 19.6 18.9 2.9 2.6 2.4 13.6 13.9 13.2

Cipla 17.7 24.5 32.0 2.1 38.9 30.5 36.3 26.1 20.0 4.6 4.0 3.5 13.3 16.4 18.7

Dr Reddy's Laboratories 132.5 147.2 163.2 5.3 11.1 10.9 25.5 23.0 20.7 5.2 4.4 3.7 22.4 20.7 19.4

Lupin 53.8 60.2 71.3 31.7 12.0 18.4 27.0 24.1 20.3 7.2 5.7 4.6 30.1 26.6 25.2

Sun Pharmaceuticals 30.4 33.6 37.7 10.1 10.5 12.3 27.7 25.1 22.4 7.2 5.7 4.7 29.4 25.3 23.0

Price/BV (X) RoE (%)


Technology. We find valuations of technology companies reasonable and they also offer

a good hedge against a potential depreciation in the INR against the US dollar. We see

upside risks to our earnings estimates from a weaker-than-expected currency. We model

moderate growth in volumes and revenues for the IT companies under our coverage (see

Exhibit 87).

We model moderate growth in volumes and revenues for the IT companies under our coverage Exhibit 87:Assumptions built into our models for the Tier-1 Indian IT companies, March fiscal year-ends, 2013-17E

2013 2014 2015E 2016E 2017E 2013 2014 2015E 2016E 2017E

Infosys TCS

US$ revenue growth yoy (%) 5.8 11.5 7.1 11.9 13.0 US$ revenue growth yoy (%) 13.8 16.2 17.0 14.2 14.6

Volume growth yoy (%) 8.1 9.9 7.5 13.7 13.3 Volume growth yoy (%) 14.6 19.3 19.1 16.3 14.7

Pricing change (%) Pricing change (%)

Onsite (1.6) 2.1 2.9 (0.5) — Onsite (1.5) 2.0 (1.3) (2.5) (0.5)

Offshore (4.8) (0.4) (0.1) (1.2) — Offshore (0.1) (3.3) (3.7) (2.3) (0.5)

Blended (2.8) 1.3 (0.5) (1.6) (0.2) Blended 0.2 (1.2) (1.5) (2.0) 0.2

Directs costs (as % of revenues) 59.8 61.4 59.4 58.1 57.8 Directs costs (as % of revenues) 53.8 52.6 55.2 55.2 55.5

SG&A expenses (as % of revenues) 11.5 11.4 12.4 13.0 13.2 SG&A expenses (as % of revenues) 18.5 17.7 17.3 17.1 16.8

Re/US$ rate (average) 54.5 60.8 61.1 63.0 65.0 Re/US$ rate (average) 54.4 60.9 61.1 63.0 65.0

End-period # of clients 798 890 End-period # of clients 1,065

2013 2014 2015E 2016E 2017E 2013 2014 2015E 2016E 2017E

Wipro HCL Tech

US$ revenue growth yoy (%) 5.0 6.4 8.0 9.3 12.5 US$ revenue growth yoy (%) 12.9 14.4 10.5 11.4 10.4

Volume growth yoy (%) 4.2 5.5 6.6 11.7 15.4 Volume growth yoy (%) 15.2 13.8 11.3 11.4 10.7

Pricing change (%) Pricing change (%)

Onsite 3.0 1.1 (0.6) (1.4) — Onsite (1.3) 2.0 (0.3) (0.1) (0.5)

Offshore 1.5 0.6 (1.4) (1.4) — Offshore 1.1 2.0 (0.5) (0.1) (0.5)

Blended 1.8 1.0 (2.4) (2.4) (1.9) Blended (2.0) 0.5 (0.7) 0.0 (0.3)

Directs costs (as % of revenues) 63.9 62.5 63.1 63.1 62.7 Directs costs (as % of revenues) 64.0 61.4 63.7 64.6 65.3

SG&A expenses (as % of revenues) 12.6 12.2 12.1 11.7 11.6 SG&A expenses (as % of revenues) 13.3 12.3 11.9 12.4 12.3

Re/US$ rate (average) 54.4 60.4 61.5 63.0 65.0 Re/US$ rate (average) 54.9 61.4 61.7 63.0 65.0

End-period # of clients 978 986 End-period # of clients 549


Telecom. We expect continued improvement in wireless metrics to drive earnings of the

Indian wireless sector. In our view, the telecom industry would likely consolidate over the

next few quarters. The market is understandably nervous about the impending entry of

Reliance Jio Infocomm. However, we do not think RJIL can afford to be an irrational

competitor given (1) the large investment in the telecom business (US$8 bn currently,

which will likely increase to US$12-14 bn by the time it achieves breakeven) and

(2) presumably its desire to earn a decent return on its large investment.

Utilities. We find little value in the power utilities. The regulated utilities appear to be

reasonably valued while the unregulated utilities have several issues, including (1) lack of

resources (coal or gas), (2) weak financial condition of state-owned distribution entities

and (3) unviable PPAs with several state governments, which states are reluctant to

change despite a decision of the regulator. Companies such as Adani Power continue to

lose money despite booking compensatory tariffs; their financial position is unlikely to

change without a big increase in tariffs.

72

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Secto

r Kotak Institutional Equities: Valuation summary of KIE Universe stocks

Target O/S

Price (Rs) price Upside Mkt cap. shares EPS (Rs) EPS growth (%) PER (X) EV/EBITDA (X) ADVT-3mo

Company Rating 12-Dec-14 (Rs) (%) (Rs mn) (US$ mn) (mn) 2015E 2016E 2017E 2015E 2016E 2017E 2015E 2016E 2017E 2015E 2016E 2017E 2015E 2016E 2017E 2015E 2016E 2017E 2015E 2016E 2017E (US$ mn)

Automobiles

Amara Raja Batteries SELL 759 550 (27.5) 129,664 2,081 171 24.4 29.9 35.4 13.6 22.5 18.4 31.1 25.4 21.4 18.8 15.6 13.5 7.7 6.3 5.1 0.6 0.8 0.9 27.4 27.2 26.3 3.9

Apollo Tyres BUY 222 250 12.5 113,105 1,815 509 22.1 23.6 24.8 4.2 6.4 5.4 10.0 9.4 9.0 5.6 5.8 5.6 2.0 1.7 1.4 0.4 0.4 0.4 22.0 19.3 17.1 18.7

Ashok Leyland SELL 49 40 (18.5) 139,590 2,240 2,848 0.4 1.9 2.7 121.2 401.7 42.0 129.0 25.7 18.1 19.3 12.2 9.9 2.6 2.5 2.4 — 1.8 2.5 2.2 10.0 13.5 13.9

Bajaj Auto ADD 2,521 2,800 11.1 729,596 11,708 289 108.2 134.2 154.0 (3.4) 24.0 14.8 23.3 18.8 16.4 16.9 14.8 13.2 6.5 5.5 4.6 1.7 2.1 2.4 30.0 31.6 30.7 12.5

Bharat Forge SELL 921 630 (31.6) 214,369 3,440 237 29.5 35.9 42.2 40.5 21.7 17.3 31.2 25.6 21.8 16.2 13.9 12.1 6.8 5.6 4.7 0.6 0.7 0.9 23.7 23.9 23.4 16.9

Eicher Motors SELL 14,037 9,000 (35.9) 380,464 6,105 27 238.0 380.8 483.2 63.3 60.0 26.9 59.0 36.9 29.0 33.1 21.4 17.0 14.5 10.7 8.0 0.2 0.2 0.2 27.5 33.4 31.4 14.0

Exide Industries REDUCE 171 160 (6.2) 145,010 2,327 850 7.1 8.9 10.3 24.2 24.9 15.9 24.0 19.2 16.6 15.0 12.3 10.8 3.6 3.2 2.8 1.5 1.5 1.5 15.5 17.4 17.9 7.8

Hero Motocorp BUY 3,125 3,650 16.8 624,023 10,014 200 146.2 195.5 230.6 38.4 33.8 18.0 21.4 16.0 13.5 16.6 12.4 10.9 9.2 7.5 6.1 2.3 3.1 3.7 47.0 51.6 49.7 34.1

Mahindra & Mahindra REDUCE 1,251 1,275 1.9 777,235 12,472 562 58.7 63.4 88.2 (14.3) 7.9 39.3 21.3 19.8 14.2 16.8 15.8 12.9 3.9 3.7 3.3 0.5 0.7 1.4 18.9 19.3 24.7 22.4

Maruti Suzuki BUY 3,379 4,000 18.4 1,020,819 16,381 302 117.2 189.4 249.5 27.2 61.6 31.7 28.8 17.8 13.5 16.7 11.3 8.7 4.3 3.7 3.1 0.9 1.4 1.8 15.9 22.4 25.0 16.2

Motherson Sumi Systems REDUCE 415 370 (10.8) 365,645 5,867 882 9.7 15.5 22.6 (4.2) 59.2 45.7 42.6 26.8 18.4 13.9 10.1 7.4 9.7 7.2 5.1 0.6 1.1 1.6 25.6 30.9 32.6 20.0

Tata Motors BUY 500 680 36.0 1,509,251 24,219 3,218 51.9 69.1 77.8 11.6 33.1 12.5 9.6 7.2 6.4 4.7 3.9 3.4 2.0 1.5 1.2 — — — 22.6 23.8 21.4 42.8

WABCO India ADD 4,375 4,900 12.0 82,983 1,332 19 72.7 130.4 159.9 25.3 79.5 22.6 60.2 33.5 27.4 36.8 21.3 17.3 9.6 8.0 6.6 0.2 0.7 0.9 17.0 25.9 26.3 0.6

Automobiles Attractive 6,231,755 100,000 12.8 34.0 19.4 18.2 13.6 11.4 9.7 7.8 6.7 3.7 3.0 2.5 0.8 1.1 1.4 20.2 22.3 22.0 224.0

Banks/Financial Institutions

Axis Bank ADD 483 525 8.6 1,141,778 18,322 2,349 29.4 35.0 39.8 11.2 19.1 13.5 16.4 13.8 12.2 — — — 2.6 2.3 2.0 1.0 1.2 1.4 16.9 17.5 17.3 28.4

Bajaj Finserv ADD 1,290 1,380 7.0 205,287 3,294 159 102.5 113.9 128.7 6.4 11.0 13.0 12.6 11.3 10.0 — — — 2.1 1.7 1.5 1.1 1.1 1.1 17.0 16.7 16.1 1.9

Bank of Baroda ADD 1,060 1,050 (0.9) 455,030 7,302 431 111.0 133.9 167.4 5.3 20.7 25.0 9.5 7.9 6.3 — — — 1.2 1.0 0.9 2.1 2.6 3.2 13.0 14.1 15.8 20.0

Bank of India ADD 284 305 7.3 182,499 2,929 643 58.6 65.7 89.9 38.0 12.1 36.8 4.9 4.3 3.2 — — — 0.6 0.5 0.4 2.4 2.7 3.7 13.5 13.5 16.2 17.2

Cholamandalam ADD 463 500 8.1 66,419 1,066 143 27.3 36.2 44.0 6.6 32.6 21.6 16.9 12.8 10.5 — — — 2.1 1.9 1.6 0.9 1.2 1.5 15.8 16.8 17.8 0.2

City Union Bank ADD 91 105 15.7 53,948 866 543 7.1 7.9 9.0 10.7 11.9 13.4 12.8 11.5 10.1 — — — 1.8 1.6 1.4 1.2 1.4 1.5 17.6 16.1 16.0 1.2

DCB Bank BUY 107 120 11.9 30,172 484 250 6.6 7.7 9.0 9.4 16.8 17.1 16.2 13.9 11.8 — — — 1.7 1.5 1.3 — — — 14.1 13.2 13.5 1.9

Federal Bank BUY 142 145 2.0 121,645 1,952 855 12.0 14.0 15.9 22.5 16.5 13.7 11.8 10.2 8.9 — — — 1.6 1.4 1.3 1.7 2.0 2.3 14.0 14.6 14.8 10.1

HDFC ADD 1,070 1,210 13.1 1,680,754 26,971 1,561 41.3 48.1 56.9 18.4 16.4 18.4 25.9 22.2 18.8 — — — 5.8 5.2 4.6 1.6 1.9 2.2 21.8 22.6 23.7 41.2

HDFC Bank ADD 932 1,000 7.4 2,250,650 36,116 2,399 43.1 51.7 60.4 22.0 19.8 16.9 21.6 18.0 15.4 — — — 4.3 3.7 3.1 0.9 1.1 1.3 21.8 22.0 21.7 29.8

ICICI Bank BUY 346 400 15.5 2,004,965 32,173 5,775 19.4 22.4 25.9 14.4 15.3 15.5 17.8 15.5 13.4 — — — 2.5 2.2 2.0 1.7 1.9 2.2 14.6 15.3 15.9 64.0

IDFC BUY 156 200 28.4 247,834 3,977 1,512 10.1 9.1 11.9 (16.0) (10.3) 31.8 15.4 17.2 13.1 — — — 1.4 1.3 1.2 1.2 0.5 0.6 10.0 8.1 9.8 17.1

IIFL Holdings BUY 175 175 0.1 53,400 857 296 14.0 16.5 19.2 49.3 17.5 16.7 12.5 10.6 9.1 — — — 2.1 1.8 1.6 2.1 2.4 2.8 18.5 19.1 19.6 0.6

IndusInd Bank ADD 779 800 2.7 411,478 6,603 526 33.7 39.4 46.2 25.9 16.9 17.1 23.1 19.7 16.9 — — — 3.9 3.3 2.9 0.6 0.7 0.8 19.1 18.8 18.8 10.8

J&K Bank REDUCE 148 135 (8.6) 71,626 1,149 485 17.9 20.6 22.1 (26.7) 15.2 7.5 8.3 7.2 6.7 — — — 1.1 1.0 0.9 2.5 2.9 3.1 14.3 14.8 14.2 2.0

Karur Vysya Bank BUY 547 620 13.3 66,148 1,061 107 48.0 65.0 77.1 19.8 35.4 18.6 11.4 8.4 7.1 — — — 1.3 1.2 1.1 2.2 3.0 3.5 15.1 16.9 17.7 1.4

L&T Finance Holdings ADD 70 80 14.0 120,706 1,937 1,718 4.9 5.6 6.9 42.9 13.6 22.1 14.2 12.5 10.2 — — — 1.9 1.7 1.5 2.1 1.2 1.2 13.9 14.2 15.3 5.6

LIC Housing Finance ADD 437 450 3.0 220,487 3,538 505 30.8 36.3 43.1 17.9 17.9 18.9 14.2 12.0 10.1 — — — 2.7 2.3 2.0 1.2 1.4 1.7 19.1 19.3 19.6 18.7

Magma Fincorp ADD 105 135 28.1 20,066 322 190 9.5 12.0 13.5 32.3 26.5 13.0 11.1 8.8 7.8 — — — 1.2 1.1 1.0 1.4 1.8 2.0 11.2 13.3 13.8 0.2

Mahindra & Mahindra Financial SELL 300 260 (13.4) 170,829 2,741 564 17.2 20.0 25.2 9.2 16.6 25.6 17.5 15.0 11.9 — — — 2.9 2.6 2.2 1.3 1.6 2.0 17.8 18.2 19.9 6.8

Max India ADD 386 450 16.7 102,733 1,649 266 7.8 10.5 13.9 48.1 35.9 31.9 49.7 36.5 27.7 — — — 2.9 2.5 2.1 1.4 1.9 2.5 6.3 7.3 8.2 2.6

Muthoot Finance BUY 195 235 20.7 77,308 1,241 372 18.3 22.5 27.7 (12.9) 23.1 23.2 10.7 8.7 7.0 — — — 1.4 1.3 1.1 2.8 3.5 4.3 15.4 16.4 18.1 0.8

Oriental Bank of Commerce ADD 306 300 (1.8) 91,604 1,470 300 42.5 51.4 61.5 11.8 20.9 19.8 7.2 5.9 5.0 — — — 0.6 0.6 0.5 2.8 3.4 4.0 9.2 10.3 11.4 10.3

PFC ADD 277 330 19.2 365,519 5,865 1,319 45.2 43.4 45.4 10.2 (4.1) 4.6 6.1 6.4 6.1 — — — 1.1 1.0 0.9 3.6 3.4 3.6 20.2 16.9 15.6 14.5

Punjab National Bank REDUCE 1,096 900 (17.9) 396,883 6,369 362 125.5 148.0 174.0 36.0 17.9 17.5 8.7 7.4 6.3 — — — 1.0 0.9 0.8 1.2 1.5 1.7 12.4 13.1 13.7 19.9

Rural Electrification Corp. ADD 315 350 11.1 311,148 4,993 987 55.1 54.0 55.4 16.1 (2.0) 2.6 5.7 5.8 5.7 — — — 1.2 1.1 0.9 3.4 3.7 3.8 23.7 19.6 17.5 14.8

Shriram City Union Finance REDUCE 1,715 1,550 (9.6) 113,027 1,814 59 89.7 113.9 131.8 4.1 26.9 15.8 19.1 15.1 13.0 — — — 2.4 2.1 1.8 0.6 0.7 0.9 16.6 16.5 16.6 0.7

Shriram Transport ADD 1,123 1,000 (11.0) 254,857 4,090 223 69.2 85.8 101.4 22.1 24.1 18.2 16.2 13.1 11.1 — — — 2.6 2.2 1.9 0.9 1.1 1.3 17.3 18.5 18.7 13.0

SKS Microfinance ADD 378 400 5.8 47,681 765 108 16.4 20.2 27.4 154.2 23.0 35.3 23.0 18.7 13.8 — — — 3.8 3.1 2.5 — — — 27.2 21.4 23.1 12.6

State Bank of India ADD 311 330 6.0 2,324,455 37,300 7,466 18.8 21.6 26.9 28.8 15.2 24.1 16.6 14.4 11.6 — — — 1.8 1.6 1.5 1.0 1.1 1.1 11.3 11.9 13.3 92.6

Union Bank NR 215 - (100.0) 136,883 2,197 630 40.5 46.1 52.8 51.6 13.6 14.7 5.3 4.7 4.1 — — — 0.7 0.6 0.5 2.8 3.2 3.6 14.1 14.2 14.5 17.6

YES Bank ADD 699 680 (2.7) 291,497 4,678 361 44.4 47.6 56.3 (1.1) 7.3 18.3 15.8 14.7 12.4 — — — 2.2 1.9 1.7 1.1 1.2 1.4 19.7 16.0 16.6 27.1

Banks/Financial Institutions Attractive 14,281,664 229,176 18.7 14.4 18.1 14.5 12.6 10.7 2.1 1.8 1.6 1.4 1.6 1.9 14.2 14.5 15.2 521.1

Price/BV (X) Dividend yield (%) RoE (%)

Source: Company, Bloomberg, Kotak Institutional Equities estimates

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Target O/S



Cement

ACC SELL 1,430 1,280 (10.5) 268,466 4,308 188 50.4 68.8 90.5 7.6 36.6 31.5 28.4 20.8 15.8 16.0 11.1 8.2 3.2 2.9 2.5 1.6 1.6 1.6 11.6 14.6 17.1 7.7

Ambuja Cements SELL 226 205 (9.2) 349,821 5,614 1,522 9.1 11.5 14.3 35.2 26.3 23.5 24.7 19.6 15.8 15.6 12.4 9.6 3.2 3.0 2.6 1.4 1.5 1.7 13.3 15.7 17.4 6.6

Grasim Industries ADD 3,361 3,590 6.8 308,667 4,953 92 203.9 260.2 355.0 (4.0) 27.6 36.4 16.5 12.9 9.5 5.7 4.0 2.6 1.3 1.2 1.1 1.2 1.2 1.2 8.4 9.9 12.2 4.2

India Cements REDUCE 78 100 27.6 24,083 386 307 2.8 6.2 12.8 224.0 126.9 104.4 28.5 12.6 6.1 7.6 6.2 5.0 0.6 0.6 0.6 3.4 3.4 3.4 2.2 5.0 9.8 5.1

Shree Cement SELL 8,811 6,400 (27.4) 306,954 4,926 35 255.1 374.3 480.5 8.1 46.7 28.4 34.5 23.5 18.3 17.3 13.0 10.4 5.8 4.7 3.8 0.2 0.2 0.2 18.0 22.1 23.1 1.9

UltraTech Cement SELL 2,512 2,000 (20.4) 689,164 11,059 274 81.6 103.4 141.7 9.2 26.7 37.1 30.8 24.3 17.7 16.6 12.2 9.2 3.6 3.2 2.7 0.4 0.4 0.4 12.4 14.0 16.6 9.6

Cement Cautious 1,947,155 31,246 11.4 31.7 33.9 26.2 19.9 14.9 12.4 9.2 6.9 2.8 2.5 2.2 0.9 0.9 0.9 10.5 12.5 14.6 35.2

Consumer products

Asian Paints SELL 774 725 (6.4) 742,707 11,918 959 16.4 21.9 24.9 27.7 33.7 13.9 47.3 35.4 31.1 30.0 22.1 19.5 15.3 12.2 10.0 0.8 1.0 1.2 35.3 38.4 35.5 17.7

Bajaj Corp. BUY 340 340 (0.1) 50,187 805 148 14.3 16.8 19.0 19.2 17.3 12.9 23.7 20.2 17.9 21.0 17.1 14.3 10.3 9.3 8.2 3.4 2.5 3.2 42.1 48.4 48.6 2.0

Britannia Industries BUY 1,800 1,875 4.2 215,866 3,464 120 47.7 57.2 67.8 44.5 20.0 18.6 37.8 31.5 26.5 24.2 20.0 16.8 16.9 12.8 9.9 0.8 1.1 1.3 55.0 46.2 42.1 3.5

Colgate-Palmolive (India) ADD 1,803 1,800 (0.2) 245,236 3,935 136 41.3 48.3 57.4 14.4 17.1 18.8 43.7 37.3 31.4 29.8 24.8 20.3 38.4 35.8 33.2 1.8 2.1 2.5 90.6 99.3 109.8 5.5

Dabur India ADD 235 245 4.4 412,218 6,615 1,744 6.1 7.3 8.4 17.2 20.0 15.4 38.5 32.1 27.8 30.4 25.3 21.6 12.4 10.2 8.5 1.0 1.2 1.4 35.7 35.0 33.4 5.6

GlaxoSmithKline Consumer REDUCE 5,758 5,300 (8.0) 242,173 3,886 42 138.1 156.2 180.9 (14.0) 13.2 15.8 41.7 36.9 31.8 30.8 26.4 22.0 11.3 9.7 8.4 0.9 1.0 1.3 29.3 28.3 28.2 1.2

Godrej Consumer Products REDUCE 917 880 (4.0) 312,221 5,010 340 25.3 30.2 35.2 13.3 19.3 16.7 36.2 30.4 26.0 24.4 20.2 16.9 7.1 6.2 5.3 0.7 0.8 1.0 21.1 21.7 22.0 2.6

Hindustan Unilever REDUCE 798 730 (8.5) 1,725,693 27,692 2,163 19.0 21.4 24.2 15.6 12.8 13.0 42.0 37.2 32.9 31.3 26.5 23.0 43.7 36.8 31.3 1.8 1.9 2.1 113.8 107.4 102.6 11.9

ITC ADD 396 395 (0.2) 3,160,367 50,714 8,016 12.2 14.1 16.3 14.1 15.6 15.3 32.5 28.1 24.3 21.4 18.1 15.3 10.9 9.7 8.6 1.9 2.1 2.4 31.8 33.0 36.3 41.3

Jubilant Foodworks SELL 1,356 1,050 (22.6) 88,871 1,426 66 18.0 25.8 36.2 17.4 43.2 40.3 75.3 52.6 37.5 34.3 24.6 17.8 13.3 10.6 8.3 — — 0.1 19.5 22.6 25.2 5.9

Jyothy Laboratories REDUCE 253 220 (13.1) 45,844 736 181 9.5 11.2 14.5 102.4 18.1 29.1 26.6 22.5 17.4 25.0 18.3 15.8 5.9 5.2 5.0 1.2 1.4 1.6 22.7 24.4 29.2 1.3

Marico BUY 323 350 8.5 207,981 3,337 645 9.2 11.5 13.3 16.2 25.7 15.7 35.2 28.0 24.2 23.3 18.4 15.6 11.8 9.2 7.4 0.8 1.0 1.2 37.8 37.0 34.0 3.4

Nestle India SELL 6,282 5,300 (15.6) 605,717 9,720 96 122.4 145.2 177.0 6.9 18.7 21.9 51.3 43.3 35.5 28.8 24.8 21.3 20.2 16.4 13.4 0.8 1.0 1.2 46.2 43.7 43.1 2.4

Page Industries SELL 10,790 7,500 (30.5) 120,355 1,931 11 180.6 223.2 273.6 31.0 23.6 22.6 59.8 48.4 39.4 37.4 30.4 24.8 30.7 22.7 16.6 0.7 0.8 0.8 59.2 54.0 48.6 1.9

Pidilite Industries BUY 479 455 (5.1) 245,668 3,942 513 11.1 13.7 16.7 24.5 24.0 21.3 43.2 34.9 28.7 29.3 23.0 18.6 10.7 9.1 7.7 0.7 1.0 1.3 26.7 28.2 29.0 2.7

Speciality Restaurants SELL 180 175 (2.9) 8,459 136 47 2.6 4.0 6.3 (34.8) 53.6 55.8 68.7 44.7 28.7 23.3 15.9 11.0 2.7 2.5 2.3 0.6 0.6 0.7 4.0 5.8 8.4 0.3

Tata Global Beverages REDUCE 153 155 1.3 94,584 1,518 618 6.4 7.5 8.7 16.2 18.2 14.8 24.0 20.3 17.7 12.3 10.8 9.4 1.6 1.5 1.4 1.5 1.6 2.0 6.7 7.6 8.4 7.7

Titan Company SELL 374 340 (9.1) 331,943 5,327 888 9.8 11.1 13.0 15.8 13.2 17.2 38.3 33.8 28.8 26.1 21.6 18.4 10.7 9.0 7.7 0.7 1.1 1.3 30.8 29.0 28.9 7.6

United Breweries SELL 798 650 (18.6) 211,114 3,388 264 10.1 13.6 17.4 18.1 34.0 28.7 78.9 58.9 45.8 32.5 27.0 22.6 11.4 9.8 8.3 0.2 0.3 0.3 15.0 17.9 19.7 2.8

United Spirits BUY 2,847 3,200 12.4 413,683 6,638 145 24.7 67.3 83.6 375.8 172.3 24.3 115.2 42.3 34.1 40.2 23.8 20.4 13.2 10.4 8.2 0.1 0.2 0.3 11.7 27.5 26.9 13.1

Consumer products Neutral 9,480,888 152,138 18.4 20.5 16.8 39.2 32.5 27.8 26.0 21.3 18.1 12.9 11.1 9.6 1.3 1.5 1.8 32.9 34.1 34.4 140.4

Energy

Aban Offshore RS 447 — — 25,413 408 57 99.6 106.8 110.5 18.8 7.2 3.5 4.5 4.2 4.0 6.5 6.1 5.8 0.5 0.4 0.4 1.6 1.3 1.3 12.3 11.4 10.7 14.3

Bharat Petroleum ADD 668 840 25.8 482,731 7,746 723 51.0 56.4 56.7 (9.1) 10.5 0.5 13.1 11.8 11.8 7.0 6.1 6.0 2.2 2.0 1.8 2.3 2.5 2.6 17.9 17.6 15.9 19.8

Cairn India REDUCE 242 275 13.6 453,897 7,284 1,875 47.9 38.5 31.3 (26.4) (19.8) (18.6) 5.0 6.3 7.7 3.6 4.1 3.9 0.7 0.7 0.7 5.0 5.0 5.0 15.2 11.4 8.8 11.6

Castrol India SELL 496 300 (39.5) 245,055 3,932 495 10.0 11.4 12.6 (0.2) 14.3 10.5 49.7 43.5 39.4 33.1 28.8 26.0 45.7 43.3 41.2 1.6 1.8 2.0 76.5 102.1 107.3 3.5

GAIL (India) ADD 424 500 17.8 538,215 8,637 1,268 30.2 32.2 40.4 (7.5) 6.6 25.5 14.1 13.2 10.5 10.1 8.7 6.8 1.8 1.7 1.6 2.1 2.6 3.5 13.6 13.4 15.5 12.3

GSPL ADD 107 105 (1.8) 60,166 965 563 7.5 8.7 10.0 0.9 15.5 15.3 14.2 12.3 10.7 6.7 5.8 5.0 1.6 1.5 1.4 1.4 2.4 3.7 12.1 12.7 13.6 2.5

Hindustan Petroleum REDUCE 562 540 (3.9) 190,376 3,055 339 49.6 57.5 58.6 (2.9) 15.8 2.0 11.3 9.8 9.6 10.0 7.7 6.7 1.2 1.1 1.0 2.7 3.1 3.2 10.8 11.7 11.1 19.4

Indian Oil Corporation ADD 341 400 17.3 827,932 13,286 2,428 25.2 34.4 37.8 4.3 36.3 10.0 13.5 9.9 9.0 8.9 6.1 5.0 1.2 1.1 1.0 2.6 3.4 3.7 9.0 11.3 11.5 9.0

Oil & Natural Gas Corporation ADD 337 420 24.6 2,884,056 46,280 8,556 32.8 41.0 45.4 5.8 24.9 10.7 10.3 8.2 7.4 4.6 3.6 3.2 1.5 1.4 1.3 3.4 4.4 4.9 15.5 17.6 17.7 31.9

Oil India BUY 547 700 28.0 328,851 5,277 601 55.5 70.0 74.9 12.0 26.0 7.0 9.8 7.8 7.3 6.4 4.9 4.5 1.5 1.3 1.2 4.0 5.1 5.5 15.5 17.9 17.4 4.0

Petronet LNG REDUCE 189 190 0.6 141,675 2,273 750 10.9 12.5 15.4 14.8 14.9 23.0 17.3 15.1 12.3 9.6 8.9 7.4 2.5 2.3 2.0 1.2 1.7 2.4 15.4 15.9 17.4 6.8

Reliance Industries ADD 882 1,100 24.7 2,592,124 41,595 3,232 74.5 78.3 97.1 9.6 5.1 24.0 11.8 11.3 9.1 9.2 8.6 5.6 1.3 1.2 1.1 1.1 1.1 1.4 11.6 11.1 12.5 53.0

Energy Cautious 8,770,491 140,739 0.5 13.1 11.9 10.7 9.4 8.4 6.7 5.6 4.6 1.4 1.2 1.1 2.5 3.1 3.4 12.8 13.2 13.5 188.2



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Target O/S



Industrials

ABB SELL 1,204 700 (41.9) 255,191 4,095 331 11.8 24.1 32.2 41.9 103.5 33.6 101.6 49.9 37.4 55.6 31.6 24.9 14.0 12.2 10.3 0.3 0.3 0.3 9.1 16.7 19.1 2.4

Bharat Heavy Electricals SELL 247 200 (19.1) 605,414 9,715 2,448 11.6 13.7 15.9 (18.1) 18.0 16.6 21.4 18.1 15.5 13.7 10.3 7.4 1.7 1.6 1.5 1.0 1.2 1.4 8.3 9.2 10.0 22.8

Crompton Greaves BUY 172 210 21.8 108,020 1,733 627 5.5 10.6 15.4 41.9 91.6 45.7 31.2 16.3 11.2 15.0 10.2 7.9 2.8 2.5 2.1 0.9 1.2 1.4 9.2 16.0 20.2 20.8

Cummins India REDUCE 874 720 (17.7) 242,398 3,890 277 26.7 32.6 43.7 25.3 21.9 34.2 32.7 26.9 20.0 29.8 21.3 15.6 8.2 7.0 5.9 1.3 1.5 2.0 26.7 28.1 32.0 2.8

Kalpataru Power Transmission ADD 200 200 0.3 30,615 491 153 9.9 8.7 11.6 24.3 (12.4) 33.3 20.2 23.0 17.3 8.3 7.0 6.2 1.4 1.3 1.2 0.8 0.8 0.8 7.0 5.8 7.4 1.1

KEC International ADD 97 115 18.0 25,053 402 257 4.5 8.5 12.1 36.5 89.1 41.8 21.6 11.4 8.1 8.2 6.4 5.1 1.7 1.6 1.4 1.1 2.0 2.9 8.8 14.5 18.2 0.7

Larsen & Toubro ADD 1,511 1,725 14.2 1,403,445 22,521 927 40.8 58.6 78.8 (16.2) 43.7 34.4 37.0 25.8 19.2 19.7 15.1 13.0 3.7 3.3 2.9 -1— -1— -1— 10.4 13.5 16.2 42.9

Siemens SELL 886 600 (32.2) 315,362 5,061 356 17.8 24.3 29.9 104.7 36.2 23.1 49.7 36.5 29.6 28.1 21.4 17.3 7.0 6.2 5.5 0.6 0.8 1.0 14.3 18.0 19.6 5.2

Thermax REDUCE 1,015 850 (16.2) 120,914 1,940 119 22.7 33.5 45.9 10.1 47.5 36.8 44.6 30.3 22.1 31.1 20.0 14.2 5.5 4.9 4.3 0.8 1.1 1.4 12.8 17.2 20.8 1.1

Voltas REDUCE 261 260 (0.3) 86,295 1,385 331 8.7 12.0 14.2 16.9 38.4 18.6 30.0 21.7 18.3 24.7 16.1 13.3 4.3 3.8 3.3 0.8 1.4 1.6 14.9 18.5 19.4 12.3

Industrials Cautious 3,192,706 51,233 (5.8) 36.7 29.3 33.9 24.8 19.2 19.7 14.9 12.4 3.3 3.0 2.7 0.1 0.2 0.1 9.8 12.3 14.2 112.1

Infrastructure

Adani Port and SEZ REDUCE 277 300 8.1 574,336 9,216 2,084 12.2 16.5 21.2 45.6 35.7 28.7 22.8 16.8 13.1 14.7 11.3 9.0 4.9 3.9 3.1 0.7 0.9 1.0 24.5 25.9 26.7 12.7

Container Corporation REDUCE 1,300 1,330 2.3 253,398 4,066 195 48.9 55.4 70.4 (3.1) 13.2 27.0 26.6 23.5 18.5 18.0 15.2 11.6 3.3 3.0 2.7 0.9 1.0 1.2 13.0 13.4 15.3 2.9

Gujarat Pipavav Port REDUCE 170 160 (5.9) 82,161 1,318 483 6.9 9.4 12.2 90.9 35.9 29.2 24.5 18.1 14.0 20.0 15.2 11.6 4.7 3.7 2.9 — — — 21.2 22.9 23.2 2.9

IRB Infrastructure REDUCE 245 210 (14.2) 81,329 1,305 332 13.8 14.8 20.5 (0.1) 7.6 37.8 17.7 16.5 12.0 8.7 7.8 7.6 2.1 1.9 1.7 1.6 1.6 1.6 12.4 12.2 15.2 13.4

Sadbhav Engineering buy 237 275 15.9 40,700 653 151 8.3 9.4 11.1 24.1 14.4 17.8 28.7 25.1 21.3 14.8 12.1 10.6 2.6 2.3 2.1 — — — 12.1 10.9 11.6 1.2

Infrastructure Attractive 1,031,924 16,559 27.8 27.3 28.9 23.3 18.3 14.2 13.9 11.1 9.3 3.9 3.3 2.8 0.7 0.8 1.0 16.6 18.1 19.5 33.1

Infrastructure

Info Edge ADD 893 1,070 19.9 107,293 1,722 109 9.9 15.4 25.3 20.8 54.8 64.6 90.0 58.1 35.3 81.4 45.2 24.7 6.5 6.2 5.6 0.4 0.6 1.0 10.9 11.9 18.3 2.2

Just Dial ADD 1,296 1,700 31.2 91,233 1,464 70 20.7 32.6 51.8 20.3 57.6 59.0 62.6 39.8 25.0 48.4 28.4 16.0 14.7 12.0 9.4 0.6 0.9 1.4 25.1 33.3 42.2 7.5

Internet Attractive 198,526 3,186 25.6 56.3 61.5 75.2 48.1 29.8 61.6 35.4 19.7 9.3 8.5 7.3 0.5 0.7 1.2 12.4 17.7 24.7 9.7

Media

DB Corp. ADD 383 375 (2.0) 70,243 1,127 183 18.7 23.3 27.1 12.1 24.5 16.1 20.4 16.4 14.1 11.7 9.5 8.1 5.4 4.7 4.1 2.4 2.9 3.7 28.1 30.7 31.2 0.4

DishTV ADD 65 70 8.5 68,690 1,102 1,065 (0.1) 1.4 3.2 93.5 1,516.7 135.4 (675.1) 47.7 20.2 10.8 8.7 6.7 4.1 4.1 4.1 — — — (0.6) 8.7 20.4 4.0

Jagran Prakashan ADD 146 135 (7.4) 47,664 765 311 7.7 9.7 11.5 2.6 26.1 18.5 18.9 15.0 12.7 10.4 8.7 7.4 4.3 3.8 3.4 2.7 3.4 4.1 23.8 27.1 28.7 0.7

Sun TV Network ADD 345 385 11.7 135,841 2,180 394 20.2 22.7 26.5 6.2 12.7 16.6 17.1 15.2 13.0 10.8 9.4 7.8 4.0 3.6 3.3 3.0 3.6 4.1 24.4 25.0 26.4 5.1

Zee Entertainment Enterprises ADD 361 385 6.5 347,058 5,569 960 8.6 10.2 12.5 (6.8) 19.2 22.3 42.2 35.4 29.0 24.7 21.1 17.7 6.6 6.0 5.4 1.2 1.5 1.8 16.5 17.9 19.7 20.5

Media Neutral 669,496 10,743 8.8 25.6 25.0 30.6 24.4 19.5 15.2 12.9 10.7 5.3 4.8 4.4 1.5 1.8 2.2 17.3 19.9 22.6 30.7

Metals & Mining

Coal India ADD 364 360 (1.2) 2,301,367 36,930 6,316 22.5 28.1 23.7 (5.9) 24.7 (15.5) 16.2 13.0 15.4 9.7 8.4 9.2 4.6 4.0 3.6 3.2 3.9 3.3 29.8 32.8 24.6 18.6

Hindalco Industries REDUCE 154 165 7.5 317,075 5,088 2,065 16.3 16.6 20.4 31.0 1.9 22.5 9.4 9.2 7.5 7.9 6.4 5.5 0.7 0.7 0.6 0.9 0.9 0.9 8.0 7.6 8.7 25.9

Hindustan Zinc ADD 164 190 16.1 691,473 11,096 4,225 16.9 18.3 19.3 2.7 8.1 5.8 9.7 9.0 8.5 5.7 4.4 3.4 1.6 1.4 1.3 2.1 2.1 2.1 17.8 16.8 15.7 3.6

Jindal Steel and Power REDUCE 141 160 13.9 128,544 2,063 915 15.9 21.6 25.6 (23.8) 35.9 18.6 8.8 6.5 5.5 7.9 6.0 5.5 0.6 0.6 0.5 1.3 1.3 1.3 6.6 8.9 9.7 20.5

JSW Steel BUY 1,107 1,490 34.6 267,490 4,292 242 111.0 140.2 160.0 67.8 26.3 14.1 10.0 7.9 6.9 5.8 5.2 4.6 1.1 1.0 0.9 1.1 1.1 1.1 11.6 13.1 13.3 11.2

National Aluminium Co. SELL 51 56 9.4 131,955 2,117 2,577 5.0 5.1 5.4 88.9 2.4 6.7 10.3 10.1 9.4 4.3 4.0 3.5 1.0 1.0 0.9 2.9 2.9 2.0 10.2 9.8 9.7 2.0

NMDC ADD 139 185 33.0 551,492 8,850 3,965 18.4 18.5 17.5 15.3 0.5 (5.6) 7.6 7.5 8.0 4.0 4.2 4.2 1.7 1.5 1.4 6.1 6.1 6.1 23.1 21.0 18.2 7.9

Sesa Sterlite REDUCE 216 275 27.4 640,076 10,271 2,965 23.2 20.8 21.9 37.1 (10.6) 5.6 9.3 10.4 9.9 5.3 4.6 4.0 0.8 0.8 0.7 1.5 1.5 1.5 9.2 7.7 7.7 22.6

Tata Steel REDUCE 403 495 22.9 391,108 6,276 971 38.9 45.6 56.2 4.4 17.0 23.4 10.3 8.8 7.2 6.4 6.1 5.5 0.9 0.8 0.8 2.0 2.0 2.0 8.9 9.7 11.0 39.8

Metals & Mining Cautious 5,420,581 86,983 9.8 11.2 0.7 11.3 10.1 10.1 6.6 5.8 5.2 1.6 1.4 1.3 2.8 3.1 2.8 13.8 13.9 12.8 152.1

Pharmaceutical

Biocon SELL 454 360 (20.7) 90,740 1,456 200 21.3 23.1 24.0 3.0 8.6 3.8 21.3 19.6 18.9 13.4 12.0 11.1 2.9 2.6 2.4 1.6 1.8 1.9 13.6 13.9 13.2 7.6

Cipla BUY 641 680 6.1 514,592 8,258 803 17.7 24.5 32.0 2.1 38.9 30.5 36.3 26.1 20.0 21.3 16.4 12.4 4.6 4.0 3.5 0.6 0.8 1.0 13.3 16.4 18.7 22.6

Dr Reddy's Laboratories ADD 3,378 3,130 (7.3) 575,210 9,230 170 132.5 147.2 163.2 5.3 11.1 10.9 25.5 23.0 20.7 16.7 14.4 12.6 5.2 4.4 3.7 0.6 0.7 0.7 22.4 20.7 19.4 17.7

Lupin BUY 1,450 1,600 10.4 651,139 10,449 450 53.8 60.2 71.3 31.7 12.0 18.4 27.0 24.1 20.3 16.4 14.2 11.7 7.2 5.7 4.6 0.6 0.6 0.7 30.1 26.6 25.2 13.2

Sun Pharmaceuticals SELL 843 790 (6.3) 1,746,666 28,028 2,072 30.4 33.6 37.7 10.1 10.5 12.3 27.7 25.1 22.4 18.5 15.5 13.6 7.2 5.7 4.7 0.8 1.0 1.1 29.4 25.3 23.0 39.3

Pharmaceuticals Neutral 3,578,346 57,421 11.5 14.0 15.4 27.9 24.5 21.2 17.9 15.0 12.8 6.1 5.0 4.2 0.7 0.9 1.0 21.8 20.5 19.7 100.4



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Kotak Institutional Equities: Valuation summary of KIE Universe stocks

Target O/S



Real Estate

DLF BUY 152 210 38.1 270,942 4,348 1,781 2.9 4.1 6.0 (21.0) 42.0 48.5 53.0 37.3 25.1 16.1 14.0 9.9 0.9 0.9 0.9 1.9 1.3 1.3 1.8 2.5 3.6 36.3

Godrej Properties REDUCE 256 225 (12.1) 51,053 819 198 9.7 11.5 15.5 20.5 19.1 34.6 26.4 22.2 16.5 20.8 13.2 9.4 2.6 2.4 2.2 0.8 1.0 1.0 10.3 11.3 13.8 1.2

Oberoi Realty BUY 257 325 26.5 84,356 1,354 328 16.7 25.9 42.3 76.0 55.4 63.3 15.4 9.9 6.1 7.8 4.0 3.0 1.7 1.5 1.2 0.8 0.8 0.8 11.8 16.2 22.1 1.3

Prestige Estates Projects REDUCE 238 240 0.7 89,400 1,435 350 11.2 15.8 14.8 8.5 40.3 (6.1) 21.2 15.1 16.1 12.4 9.6 9.0 2.1 1.9 1.7 0.5 0.5 0.5 12.1 14.0 11.7 1.2

Sobha Developers ADD 485 540 11.3 47,585 764 98 23.6 38.7 65.7 (1.7) 64.1 69.9 20.6 12.6 7.4 10.0 7.4 5.0 1.9 1.7 1.4 1.4 1.4 1.4 9.8 14.6 21.3 1.8

Sunteck Realty ADD 286 410 43.3 18,015 289 60 10.7 81.2 88.8 (57.4) 656.7 9.3 26.7 3.5 3.2 25.2 2.9 1.6 2.5 1.5 1.0 3.8 3.8 — 9.7 52.7 37.5 0.3

Real Estate Attractive 561,351 9,008 5.5 66.2 38.2 28.5 17.2 12.4 13.7 9.3 7.1 1.3 1.2 1.1 1.1 1.2 1.0 4.6 7.2 9.1 42.1

Technology

HCL Technologies REDUCE 1,513 1,575 4.1 1,061,459 17,033 706 101.8 108.1 120.2 12.9 6.2 11.1 14.9 14.0 12.6 10.4 9.2 7.7 4.1 3.4 2.8 1.6 1.9 2.0 31.1 26.6 24.2 27.1

Hexaware Technologies SELL 210 195 (7.2) 63,224 1,015 302 11.1 13.4 15.6 (12.4) 20.7 16.9 19.0 15.7 13.4 12.7 10.8 9.2 6.6 5.9 5.3 4.2 3.8 4.5 31.0 39.8 41.5 10.1

Infosys ADD 1,939 2,350 21.2 2,226,486 35,728 1,143 107.7 124.4 146.4 13.3 15.5 17.7 18.0 15.6 13.2 12.6 10.3 8.5 4.3 3.6 3.1 1.9 2.1 2.4 25.5 25.2 25.3 109.1

Mindtree ADD 1,195 1,275 6.7 100,016 1,605 84 63.3 73.2 86.4 18.0 15.6 18.0 18.9 16.3 13.8 13.1 10.8 8.7 5.0 4.1 3.4 1.3 1.5 1.8 29.1 27.5 26.8 4.2

Mphasis SELL 378 400 5.8 79,465 1,275 210 33.0 34.4 37.9 124.5 4.2 10.2 11.4 11.0 10.0 6.2 5.7 5.0 1.5 1.4 1.3 4.4 4.5 5.0 13.2 13.0 13.6 0.7

TCS ADD 2,451 2,800 14.3 4,800,255 77,029 1,959 108.6 127.4 149.5 11.2 17.4 17.3 22.6 19.2 16.4 16.8 13.9 11.5 7.7 6.4 5.3 2.4 2.1 2.4 36.1 36.1 35.2 49.9

Tech Mahindra ADD 2,589 3,000 15.9 609,851 9,786 209 136.6 168.6 199.0 6.7 23.4 18.0 18.9 15.4 13.0 13.1 10.6 8.7 4.7 3.8 3.0 1.0 1.2 0.8 28.4 28.0 26.4 26.1

Wipro ADD 543 675 24.3 1,340,814 21,516 2,463 34.8 39.6 47.3 10.1 13.6 19.6 15.6 13.7 11.5 10.3 8.6 6.8 3.3 2.8 2.4 1.7 1.8 1.8 22.9 22.1 22.4 19.1

Technology Attractive 10,281,570 164,987 12.3 15.0 17.0 19.1 16.6 14.2 13.5 11.3 9.3 5.1 4.3 3.6 2.1 2.0 2.2 26.8 25.9 25.4 246.4

Telecom

Bharti Airtel ADD 348 430 23.6 1,390,895 22,319 3,997 15.5 17.1 21.1 85.8 10.2 24.0 22.5 20.4 16.5 6.8 5.9 5.2 2.1 2.0 1.9 0.6 1.0 1.5 9.9 10.1 11.7 29.0

Bharti Infratel REDUCE 341 270 (20.7) 643,913 10,333 1,889 11.2 13.0 15.7 38.9 16.3 20.7 30.5 26.2 21.7 12.7 11.2 9.7 3.6 3.6 3.5 3.3 2.9 3.5 11.8 13.8 16.3 7.1

IDEA BUY 143 192 34.6 512,953 8,231 3,320 8.4 9.5 9.4 41.3 13.5 (0.7) 17.0 15.0 15.1 8.0 6.6 5.8 2.1 1.8 1.6 0.5 0.6 0.7 15.2 13.9 12.3 13.6

Reliance Communications SELL 90 90 0.6 215,007 3,450 2,467 3.5 5.3 8.8 8.8 50.0 66.8 25.4 16.9 10.1 6.7 6.3 5.4 0.6 0.6 0.6 — — — 2.8 3.8 6.0 11.5

Tata Communications ADD 431 435 0.8 122,949 1,973 285 3.4 7.5 12.6 171.9 122.3 69.3 128.5 57.8 34.1 7.4 6.7 6.0 8.2 7.1 5.8 1.0 1.3 1.5 8.3 13.2 18.8 4.3

Telecom Attractive 2,885,717 46,307 63.4 15.8 22.1 23.5 20.3 16.6 7.5 6.6 5.8 2.0 1.9 1.8 1.1 1.2 1.6 8.7 9.4 10.7 65.5

Utilities

Adani Power SELL 44 36 (17.5) 125,359 2,012 2,872 (6.9) (4.2) (4.3) (577.9) 38.3 (0.6) (6.4) (10.3) (10.3) 10.6 9.2 9.6 2.7 3.7 5.9 — — — (35.4) (30.6) (44.5) 3.6

JSW Energy SELL 92 73 (20.5) 150,557 2,416 1,640 9.5 9.2 8.0 37.8 (3.8) (12.4) 9.6 10.0 11.4 6.1 5.5 5.6 1.9 1.6 1.4 — — — 21.2 16.9 12.8 4.2

NHPC REDUCE 19 22 15.8 210,343 3,375 11,071 1.6 1.9 2.0 (1.1) 21.4 2.2 12.1 9.9 9.7 8.7 7.5 7.6 0.7 0.7 0.6 2.2 2.6 2.7 6.0 7.0 6.8 2.1

NTPC REDUCE 133 140 5.3 1,096,234 17,591 8,245 10.7 13.1 14.8 (16.7) 22.5 13.6 12.5 10.2 9.0 10.8 8.3 6.8 1.2 1.1 1.0 2.4 2.9 3.3 9.9 11.3 11.9 13.2

Power Grid BUY 135 160 18.7 705,218 11,317 5,232 9.8 12.4 15.6 14.0 26.4 25.8 13.7 10.8 8.6 10.2 9.1 7.7 1.9 1.7 1.5 2.2 2.8 3.5 14.3 16.3 18.4 11.5

Reliance Power SELL 63 62 (1.6) 176,723 2,836 2,805 3.7 4.1 6.2 (11.9) 11.5 50.5 17.0 15.3 10.1 21.4 10.9 8.2 0.9 0.8 0.8 — — — 5.2 5.5 7.7 8.7

Tata Power ADD 84 96 13.9 228,000 3,659 2,468 1.5 4.4 5.6 (28.3) 187.7 27.7 54.9 19.1 14.9 8.3 6.8 6.1 1.5 1.4 1.3 1.4 1.4 1.4 3.2 8.5 10.1 6.2

Utilities Cautious 2,779,412 44,601 (12.2) 31.6 17.1 15.9 12.1 10.3 10.2 8.3 7.3 1.3 1.2 1.1 1.8 2.2 2.6 8.1 10.0 10.8 55.6

Others

Carborundum Universal ADD 172 200 16.2 32,350 519 187 5.9 11.3 14.4 20.6 92.6 27.4 29.3 15.2 11.9 12.8 8.5 6.8 2.7 2.4 2.1 0.9 1.3 1.7 9.6 16.8 18.7 0.5

Coromandel International SELL 320 210 (34.4) 91,496 1,468 283 16.5 18.6 21.6 36.7 13.1 16.0 19.4 17.2 14.8 10.9 9.9 8.7 3.5 3.0 2.6 1.4 1.4 1.4 19.1 18.8 18.9 1.5

Godrej Industries ADD 276 345 24.9 92,636 1,487 331 14.6 18.0 20.2 48.6 22.7 12.2 18.9 15.4 13.7 16.9 12.0 8.4 2.9 2.5 2.1 0.6 0.6 0.6 16.5 17.4 16.8 2.7

Havells India ADD 266 310 16.6 165,989 2,664 624 9.0 11.2 13.2 12.8 24.5 17.7 29.5 23.7 20.1 18.1 14.5 12.2 8.6 7.2 6.1 1.2 1.6 2.0 31.2 33.1 32.8 9.0

Jaiprakash Associates RS 26 — — 63,609 1,021 2,219 1.1 4.5 4.5 120.0 306.6 (0.1) 23.5 5.8 5.8 12.2 9.3 9.0 0.5 0.5 0.4 0.0 0.0 0.0 2.5 9.0 8.5 22.2

Rallis India BUY 212 230 8.5 41,218 661 194 9.1 11.5 14.5 16.7 26.1 25.8 23.3 18.4 14.7 13.7 10.7 8.4 4.9 4.1 3.4 1.2 1.2 1.3 22.8 24.3 25.3 1.2

Tata Chemicals BUY 413 520 25.8 105,278 1,689 255 32.0 41.0 46.7 110.1 28.0 13.9 12.9 10.1 8.9 7.1 5.9 5.0 1.7 1.6 1.4 2.4 2.4 2.4 14.1 16.3 16.5 4.6

UPL ADD 309 370 19.8 132,417 2,125 429 27.7 32.9 37.5 13.7 19.1 13.7 11.2 9.4 8.2 6.7 5.9 5.1 2.1 1.8 1.5 1.5 1.6 1.8 20.7 20.9 20.2 8.8

Others 724,992 11,634 153.7 42.8 12.6 17.8 12.5 11.1 11.1 8.9 7.9 2.2 1.9 1.7 1.3 1.4 1.5 12.1 15.3 15.3 50.6

KIE universe 72,036,576 1,155,961 11.1 18.1 15.8 17.4 14.7 12.7 10.4 8.7 7.4 2.5 2.3 2.0 1.6 1.8 2.0 14.6 15.4 15.9

KIE universe (ex-energy) 63,266,085 1,015,222 14.1 19.4 16.7 19.1 16.0 13.7 11.6 9.7 8.3 2.9 2.6 2.3 1.4 1.6 1.8 15.2 16.1 16.6

Notes:

(a) We have used adjusted book values for banking companies.

(b) 2015 means calendar year 2014, similarly for 2016 and 2017 for these particular companies.

(c) Exchange rate (Rs/US$)= 62.32

Price/BV (X) RoE (%)Dividend yield (%)



India Strategy

"I, Sanjeev Prasad, hereby certify that all of the views expressed in this report accurately reflect my personal views about the subject company or companies and its or their securities. I also certify that no part of my compensation was, is or will be, directly or indirectly, related to the specific recommendations or views expressed in this report."


Strategy India

Kota k Insti tutiona l Equi tie s Re se a rch cove ra ge unive rse

Distribution of ratings/investment banking relationships

Source: Kotak Institutional Equities As of September 30, 2014

Percentage of companies covered by Kotak Institutional

Equities, w ithin the specified category.

Percentage of companies w ithin each category for which

Kotak Institutional Equities and or its affiliates has provided

investment banking serv ices w ithin the previous 12 months.

* The above categories are defined as follows: Buy = We

expect this stock to deliver more than 15% returns over the

next 12 months; Add = We expect this stock to deliver 5-

15% returns over the next 12 months; Reduce = We expect

this stock to deliver -5-+5% returns over the next 12 months;

Sell = We expect this stock to deliver less than -5% returns

over the next 12 months. Our target prices are also on a 12-

month horizon basis. These ratings are used illustratively to

comply w ith applicable regulations. As of 30/09/2014 Kotak

Institutional Equities Investment Research had investment

ratings on 154 equity securities.

22.1%

36.4%

22.1%19.5%

4.5% 4.5%1.9% 0.6%

0%

10%

20%

30%

40%

50%

60%

70%

BUY ADD REDUCE SELL

Disclosures


Ratings and other definitions/identifiers

Definitions of ratings

BUY. We expect this stock to deliver more than 15% returns over the next 12 months.

ADD. We expect this stock to deliver 5-15% returns over the next 12 months.

REDUCE. We expect this stock to deliver -5-+5% returns over the next 12 months.

SELL. We expect this stock to deliver <-5% returns over the next 12 months.

Our target prices are also on a 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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Kotak Securities Ltd.

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Tel: +44-20-7977-6900

Kotak Mahindra Inc

50 Main Street, Ste. 890

Westchester Financial Centre

White Plains, New York 10606

Tel:+1-914-997-6120

Copyright 2014 Kotak Institutional Equities (Kotak Securities Limited). All rights reserved.

1. Note that the research analysts contributing to this report may not be registered/qualified as research analysts with FINRA; and

2. Such research analysts may not be associated persons of Kotak Mahindra Inc and therefore, may not be subject to NASD Rule 2711 restrictions on

communications with a subject company, public appearances and trading securities held by a research analyst account.

3. Any U.S. recipients of the research who wish to effect transactions in any security covered by the report should do so with or through Kotak Mahindra Inc

and (ii) any transactions in the securities covered by the research by U.S. recipients must be effected only through Kotak Mahindra Inc at

[email protected].

Kotak Securities Limited and its affiliates are a full-service, integrated investment banking, investment management, brokerage and financing group. We along with our affiliates are leading underwriter of securities and participants in virtually all securities trading markets in India. We and our affiliates have investment banking and other business relationships with a significant percentage of the companies covered by our Investment Research Department. Our research professionals provide important input into our investment banking and other business selection processes. Investors should assume that Kotak Securities Limited and/or its affiliates are seeking or will seek investment banking or other business from the company or companies that are the subject of this material and that the research professionals who were involved in preparing this material may participate in the solicitation of such business. Our research professionals are paid in part based on the profitability of Kotak Securities Limited, which include earnings from investment banking and other business. Kotak Securities Limited generally prohibits its analysts, persons reporting to analysts, and members of their households from maintaining a financial interest in the securities or derivatives of any companies that the analysts cover. Additionally, Kotak Securities Limited generally prohibits its analysts and persons reporting to analysts from serving as an officer, director, or advisory board member of any companies that the analysts cover. Our salespeople, traders, and other professionals may provide oral or written market commentary or trading strategies to our clients that reflect opinions that are contrary to the opinions expressed herein, and our proprietary trading and investing businesses may make investment decisions that are inconsistent with the recommendations expressed herein. In reviewing these materials, you should be aware that any or all of the foregoing, among other things, may give rise to real or potential conflicts of interest. Additionally, other important information regarding our relationships with the company or companies that are the subject of this material is provided herein.

This material should not be construed as an offer to sell or the solicitation of an offer to buy any security in any jurisdiction where such an offer or solicitation would be illegal. We are not soliciting any action based on this material. It is for the general information of clients of Kotak Securities Limited. It does not constitute a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual clients. Before acting on any advice or recommendation in this material, clients should consider whether it is suitable for their particular circumstances and, if necessary, seek professional advice. The price and value of the investments referred to in this material and the income from them may go down as well as up, and investors may realize losses on any investments. Past performance is not a guide for future performance, future returns are not guaranteed and a loss of original capital may occur. Kotak Securities Limited does not provide tax advise to its clients, and all investors are strongly advised to consult with their tax advisers regarding any potential investment.

Certain transactions -including those involving futures, options, and other derivatives as well as non-investment-grade securities - give rise to substantial risk and are not suitable for all investors. The material is based on information that we consider reliable, but we do not represent that it is accurate or complete, and it should not be relied on as such. Opinions expressed are our current opinions as of the date appearing on this material only. We endeavor to update on a reasonable basis the information discussed in this material, but regulatory, compliance, or other reasons may prevent us from doing so. We and our affiliates, officers, directors, and employees, including persons involved in the preparation or issuance of this material, may from time to time have “long” or “short” positions in, act as principal in, and buy or sell the securities or derivatives thereof of companies mentioned herein. For the purpose of calculating whether Kotak Securities Limited and its affiliates holds beneficially owns or controls, including the right to vote for directors, 1% of more of the equity shares of the subject issuer of a research report, the holdings does not include accounts managed by Kotak Mahindra Mutual Fund. Kotak Securities Limited and its non US affiliates may, to the extent permissible under applicable laws, have acted on or used this research to the extent that it relates to non US issuers, prior to or immediately following its publication. Foreign currency denominated securities are subject to fluctuations in exchange rates that could have an adverse effect on the value or price of or income derived from the investment. In addition, investors in securities such as ADRs, the value of which are influenced by foreign currencies affectively assume currency risk. In addition options involve risks and are not suitable for all investors. Please ensure that you have read and understood the current derivatives risk disclosure document before entering into any derivative transactions.

Kotak Securities Limited established in 1994, is a subsidiary of Kotak Mahindra Bank Limited. Kotak Securities is one of India’s largest brokerage and distribution house.

Kotak Securities Limited is a corporate trading and clearing member of Bombay Stock Exchange Limited (BSE), National Stock Exchange of India Limited (NSE), MCX Stock Exchange Limited (MCX-SX), United Stock Exchange of India Limited (USEIL) and a dealer of the OTC Exchange of India (OTCEI). Our businesses include stock broking, services rendered in connection with distribution of primary market issues and financial products like mutual funds and fixed deposits, depository services and Portfolio Management.

Kotak Securities Limited is also a depository participant with National Securities Depository Limited (NSDL) and Central Depository Services (India) Limited (CDSL).Kotak Securities Limited is also registered with Insurance Regulatory and Development Authority as Corporate Agent for Kotak Mahindra Old Mutual Life Insurance Limited and is also a Mutual Fund Advisor registered with Association of Mutual Funds in India (AMFI)

We hereby declare that our activities were neither suspended nor we have defaulted with any stock exchange authority with whom we are registered in last five years. However SEBI, Exchanges and Depositories have conducted the routine inspection and based on their observations have issued advise letters or levied minor penalty on KSL for certain operational deviations. We have not been debarred from doing business by any Stock Exchange / SEBI or any other authorities; nor has our certificate of registration been cancelled by SEBI at any point of time.

We offer our research services to primarily institutional investors and their employees, directors, fund managers, advisors who are registered with us

Details of Associates are available on our website ie www.kotak.com

Research Analyst has not served as an officer, director or employee of Subject Company

We or our associates may have received compensation from the subject company in the past 12 months. We or our associates may have managed or co-managed public offering of securities for the subject company in the past 12 months. We or our associates may have received compensation for investment banking or merchant banking or brokerage services from the subject company in the past 12 months. We or our associates may have received any compensation for products or services other than investment banking or merchant banking or brokerage services from the subject company in the past 12 months. We or our associates may have received any compensation or other benefits from the subject company or third party in connection with the research report.

Research Analyst or his/her relative’s may have financial interest in the subject company. Kotak Securities Limited or its associates may have financial interest in the subject company. Research Analyst or his/her relatives does not have actual/beneficial ownership of 1% or more securities of the subject company at the end of the month immediately preceding the date of publication of Research Report: Kotak Securities Limited or its associates may have actual/beneficial ownership of 1% or more securities of the subject company at the end of the month immediately preceding the date of publication of Research Report. Subject Company may have been client during twelve months preceding the date of distribution of the research report.

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