high ftf sales lead to outperformance - kotak securities · ` employment regime has issues—93%...

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

INDIA DAILYFebruary 6, 2012 India 3-Feb 1-day 1-mo 3-mo

Sensex 17,605 1.0 10.4 0.7

Nifty 5,326 1.1 11.8 1.1

Global/Regional indices

Dow Jones 12,705 (0.1) 2.5 5.5

Nasdaq Composite 2,860 0.4 8.0 6.0

FTSE 5,824 0.5 2.2 5.0

Nikkie 8,832 (0.5) 4.5 2.2

Hang Seng 20,757 0.1 10.0 7.9

KOSPI 1,972 (0.6) 5.2 5.5

Value traded – India

Cash (NSE+BSE) 173 141 51

Derivatives (NSE) 1,208 644 995

Deri. open interest 1,154 876 1,177

Forex/money market

Change, basis points

3-Feb 1-day 1-mo 3-mo

Rs/US$ 48.7 (36) (443) (46)

10yr govt bond, % 8.3 (3) (8) (59)

Net investment (US$mn)

1-Feb MTD CYTD

FIIs 422 422 2,606

MFs 38 36 (282)

Top movers -3mo basis

Change, %

Best performers 3-Feb 1-day 1-mo 3-mo

IVRC IN Equity 57.5 0.6 80.0 49.0

ABB IN Equity 890.1 3.5 50.0 32.3

TGBL IN Equity 119.8 8.9 26.7 32.0

MMTC IN Equity 861.2 (2.4) 39.0 31.3

TTMT IN Equity 247.7 0.5 27.7 31.2

Worst performers

ESOIL IN Equity 62.5 0.0 17.3 (26.1)

NMDC IN Equity 182.7 (1.0) 10.5 (20.3)

BHEL IN Equity 264.8 2.4 6.7 (19.6)

SUEL IN Equity 29.5 (0.3) 56.2 (19.2)

HDIL IN Equity 81.8 1.7 45.0 (16.7)

Contents

Special Reports

Strategy

Strategy: Day 3 takeaways from Chasing Growth 2012

Daily Alerts

Results

PFC: State sector drives growth

Muthoot Finance: Strong results, retain BUY

Corporation Bank: NIM expansion cushions credit costs

Thermax: Weak order inflows affect visibility

Andhra Bank: An improved performance

Hexaware Technologies: Solid CY2011 exit, robust guidance for CY2012; reiterate ADD

Carborundum Universal: Electro-minerals spoil the day

Results, Change in Reco

Dr Reddy's Laboratories: High FTF sales lead to outperformance

Sector

Energy: So far, so good

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

Day 3 – Feb 3 companies at KIE’s Chasing Growth conference.

Strategy.dot

Strategy

Day 3 takeaways from Chasing Growth 2012. The final leg of our annual global investor conference saw six more speakers enthrall our audience. They included NC Jha, Manish Sabharwal, Anurag Viswanath, Dr. Anand Deshpande, Varad Pande and Tarun Tejpal who closed the speaker sessions by sharing a devil's advocate view of the idea of India. During the day, 28 companies meet investors in meetings that took the total number of meetings to over 4,000 interactions (in line with last year's score). KIE's Launch Pod also generated a great deal of interest during the conference - showcasing several new and renewed proprietary products, including Whizdom and KIE research on the IPAD. Do log into KINSITE for archived webcasts of our speaker sessions.

INDIA

FEBRUARY 3, 2012

NEW RELEASE

BSE-30: 17,605

QUICK NUMBERS

DAY 3

• 6 Expert Speakers

• 28 Companies

1. CESC

2. Credit Analysis & Research

3. Dish TV India

4. Essar Ports

5. Financial Technologies (India)

6. Future Capital Holdings

7. Gateway Distriparks

8. HDFC

9. HDFC Bank

10. Hexaware Technologies

11. IDBI Bank

12. Jet Airways India

13. Jindal Steel and Power

14. JSW Energy

15. Kotak Finance

16. Max India

17. Oil India

18. Persistent Systems

19. Petronet LNG

20. Praj Industries

21. Prestige Estates Projects

22. Reliance Power

23. Rural Electrification Corporation

24. Sadbhav Engineering

25. Sobha Developers

26. Tata Power

27. Tecpro Systems

28. Yes Bank

Strategy India

KOTAK INSTITUTIONAL EQUITIES RESEARCH 3

SPEAKER SESSIONS: GOLCONDA, TRIDENT 1. NC JHA: Coal supply-demand dynamics

Key takeaways

India is the third-largest coal producing country after China and US. It contributes 52% of commercial energy consumption as compared to the 27% world average. Domestic production is not sufficient to meet domestic demand. As per New Coal Distribution Policy (NCDP), Coal India is required to meet coal requirement of the country, even through imports if required.

India’s supply of coal at 545 mn tons in FY2012E will fall short of demand of 650 mn tons. By FY2017E, the supply of 795 mn tons will fall short of demand of 980 mn tons leading to imports of 185 mn tons. The power sector will be the biggest driver of demand with demand rising to 682 mn tons in FY2017E from 415 mn tons in FY2012E. By FY2022E, India’s demand of coal will rise to 1.4 bn tons at a CAGR of 7.3%.

India has about 114 bn tons of proved coal resources and 286 bn tons including indicated and inferred resources. About 89 mn tons of provide coal resources are in the depth of 0-300 meters and another 9 mn tons are in the 300-600 meters depth. Most of the coal can be mined through open-cast mining.

Coal India has 66 bn tons of resources with 44 bn tons having been allocated for captive use by the Government to other companies. Another 96 bn tons of coal resources are available but needs to be allocated. Some of this may be given to Coal India through nomination while some may be given through a competitive bidding process.

Coal India targets to produce 615 mn tons per annum by FY2017E (optimistic case) from 440 mn tons in FY2012E and 464 mn tons in FY2013E. Total coal production in India could rise to 795 mn tons by FY2017E from 555 mn tons in FY2012E and 595 mn tons in FY2013E.

Coal inventory with Coal India has increased to 69 mn tons by end-FY2011 from 33 mn tons at end-FY2006 due to insufficient infrastructure to move coal from the pitheads to consumption centers.

There is very little doubt that the country needs more coal. The Prime Minister’s Office is coordinating efforts to increase coal production and it is expected that all impediments that have resulted in lower-than-required production will be removed.

Coal expert;

Ex-Chairman,

Coal India

India Strategy

4 KOTAK INSTITUTIONAL EQUITIES RESEARCH

2. MANISH SABHARWAL: Creating employability

Key takeaways

12 mn people will require a job in India every year. Teamlease has hired somebody every five minutes but it hires only 5% of the people that come to it for a job. There is a problem of employability. India needs institutions, processes and resources at three levels—(1) mismatch/employability, (2) pipeline/education (fix schools rather than vocationalize) and (3) policy/employment.

Employability regime has issues—unemployability (58% are not employable), repair different from prepare, not self-healing (certification code mismatch), entry gate/exit gate, central regulation versus states delivery and market failure.

Education regime has issues—high school dropout, low returns on education, low GER, regulatory issues (focus on accreditations but not on outcome), 10+2+3 system has challenges, students are not work ready and inclusiveness.

Employment regime has issues—93% informality, 58% of people are employed in agriculture (productivity is an issue), 12% people in manufacturing (missing middle), 50% self-employment (not out of entrepreneurship but due to non-availability of jobs), employment contract, trade unions (minority rule), labor laws (enforceability is an issue), geography of work, migration (people to jobs), nature of employment is different (long-term versus short-term), inability to afford social security and it is a concurrent subject.

Chairman,

TeamLease

Strategy India


3. ANURAG VISWANATH: The China enigma through its own prism

Key takeaways

India-China relationship has been very rocky over the past several decades. However, it depends on the prism through which the relationship is viewed. For example, China’s ‘string of pearls’ strategy can be viewed as a strategy to hedge India or to protect its commercial interests.

How China sees itself and us? China has historically viewed itself as a center of the world. India has never taken the position. China has a feeling of being historically wronged (opium wars, subsequent humiliation and semi-colonization and Sino-Japan war).

Legacy of communism. Mao’s policy resulted in equality for everybody and an egalitarian society. It reconstituted land reforms and focused on basic needs strategy—food, literacy and healthcare. However, 20 mn people died as a result of famine in 1958-60 and several more in the Cultural Revolution in 1966-76. Deng Xiaoping started the policy of reforms in 1978 and changed the program of communism to the supremacy of the market (glorious to be rich, smashing the iron bowl, pay as you go).

China’s internal pressures and fissures. China faces ethnic issues surrounding the majority Han (92%) and the minority Buddhist and Muslim people. There are 55 different minorities with a total population of 120 mn people. These include Mongols, Uigyurs, Tibetans, Manchus and Miao. The one-child policy does not apply to the minorities. A Han can change how he/she identifies if he/she is one-fourth minority. The Huis live in the West of China and are descendents of the Arab traders who came to China in the 8th century AD. China has followed a policy of ‘Mixing Sands’ to increase the number of ethnic Hans in Xinjiang. Tibet is another restive area.

One country, two societies. Wealth disparity in China is quite high even among the majority Han population. 0.4% of population controls 70% of wealth. China is the second-largest market for luxury goods. China has 5% cadres, 15% urban workers, 20% migrant labors and 50% peasants. Also, regional disparity is quite high. Hukou is a system under which a person is confined to his/her region. China has relaxed the Hukou system that has unleashed a mass internal migration in China, from rural to urban areas. This floating population constitutes the bedrock of cheap labor. They can be classified as the new consumer class or the new underclass.

China’s demographics do not look good. TFR is below 1.7 and the number of workers to retirees could change to 2:1 in 2050 from 10:1 currently. China’s internal security budget is more than its defense budget.

India-China relationship in the future could involve conflict (Arunachal Pradesh), complementarity and collaboration.

Sinologist, Columnist

India Strategy


4. DR. ANAND DESHPANDE: Consumerization of technology: Inverting the innovation pyramid

Key takeaways

Mobile devices are getting main stream in enterprises. Enterprises are opening up to ‘bring your own device’ culture. Tablet is becoming the ‘device of choice’ among enterprises. HTML5 is the de facto environment.

Proliferation and wide deployment of 4G networks will lead to the Internet of things. Gesture-based activity will become the norm (Kinect Technology). The computer as we know it is history.

Social networking in the enterprise is still quite minimal currently. Consumer social networking has started driving commerce.

Cloud computing is the platform for the next generation of IT innovation. However, vendors and the eco-system to migrate to the cloud are not entirely ready. The cost of migrating/running legacy systems is not accurately factored in and will be a big impediment. The speed of movement will depend on the peer group.

Enterprise data is large, unstructured and real-time. Relational databases business is a US$100 bn industry but this deals with structured data only. However, this does not cover a bigger unstructured data sources, public data sources. Enterprise data stacks manage only data in enterprise and data from public data sources. Internet companies have to deal with large amounts of unstructured, real-time data. Thus, these entities built their own systems. They have also open-sourced the source code they created for their own use.

Chairman, MD & CEO,

Persistent Systems

Strategy India


5. VARAD PANDE: Unleashing the potential of rural India

Key takeaways

Major rural development programs. (1) Social safety nets—MNREGA (Rs400 bn), NSAP; (2) Rural infrastructure (housing, water, roads (Rs180 bn), sanitation) and (3) Skill development and livelihoods. Total funds available for rural development is Rs940 bn. However, this amount is only Rs1,200 per capita.

MGNREGA is based on a legal guarantee to provide 100 days of employment per year. It is not an executive decision but a legal one based on the MNREGA Act. It is a demand-driven program. It is also a bottom-up program in that the work is chosen by the local body and the focus is on creating community assets. Key positive include—(1) agricultural wages have gone up, (2) distress migration has come down, (3) visible evidence of community assets and (4) sense or empowerment. On the negative side, (1) employment is patchy (only 55 days on average), payments are delayed, (2) funds-tracking is weak and fraudulent transactions do take place, (3) quality of assets is often poor with too much emphasis on kuccha roads and (4) weak capacity of local bodies to conceptualize and implement projects. The Government is working to resolve these weaknesses.

PMGSY (rural roads scheme). On the positive side, the money is spent; about Rs920 bn has been spent over the past 10 years. About 200,000 kms of roads have been created. 90 national quality monitors have been put in place. Monitoring of inputs and output parameters is being done. On the negative side, DPR quality is weak, quality monitoring is not very comprehensive.

IAY (housing scheme). There is shortage of 55 mn houses in rural India. IAY gives a subsidy of Rs45,000 for a BPL household.

Recent innovations. (1) National rural livelihood mission (NRLM) focuses on providing livelihood on a sustained basis. The aim is to reach 70 mn HHs and engage with them until they come out of poverty. The goal is social mobilization, financial inclusion and portfolio of sustainable livelihood. (2) Provision of urban amenities in rural areas (PURA) focuses on a PPP model between a private-sector company and a gram panchayat to create infrastructure and provide livelihoods. Eight pilot projects have been launched. Prime Minister’s Rural Development Fellows Program (PMRDFP) has been started in 78 districts to counter anti-Naxalite influence through development by employing local people in the Government. The objective is to provide 2-3 young professionals from a rural area to support the District Collector.

OSD to Minister of

Rural Development &

Minister of Drinking

Water and Sanitation

India Strategy


6. TARUN TEJPAL: Investing in social equity

Key takeaways

The biggest challenge facing India is inequality, not corruption. The richest Indians are among the richest in the world. At the other end, there are 500-700 mn poor people. Injustice is another big challenge. Bigotry is another.

The founding fathers did several right things—(1) universal adult franchise, (2) affirmative action (reservation) through legislation, (3) revocation of feudal system; this has created a vibrant middle class and (4) removal of ‘fault’ lines in the country through a secular stamp.

Social contract is important—the more privileged one is, the more important it is to pursue the idea of the greater good. The founding fathers of India understood this very well and gave up their privileges to support the cause of India’s independence or of the poor and oppressed people.

Unfortunately, fault lines have been reopened once again in India recently. Politics is a reason for opening up of fault lines in the society on the lines of caste, creed, language and religion. Indian society is at war with itself on several counts—(1) Maoism is widespread in one-third of India although the focus has finally and rightly shifted to development, (2) Religious; there is deep-seated prejudice against Muslims and (3) State versus people on issues of land, mining in several states.

It is important for politicians to speak the ‘language of India’. There is no master narrative in India. However, there are a few positives. (1) We have a great Constitution and implementation of the same would help in binding the country stronger and (2) electoral democracy is a positive; however, the focus should shift to democracy and its tenets rather than just the electoral process. India needs a ‘New Deal’. The level of distrust among political parties, people has to disappear. Indians have to agree on a national agenda.

Writer, Publisher

Strategy India


HDFC STANDARD LIFE, FEBRUARY 1, 2012

Key takeaways

HDFC Standard Life has been recently rebranded as HDFC Life. About 75% of its premium is driven by HDFC Bank and 25% is the direct channel. IRDA has restricted insurance companies from making payments (besides commissions) to the bank/distributor. This has likely reduced HDFC SL’s visibility within HDFC Bank as the insurance company was earlier hiring prime advertising space from the bank.

Traditional policies are currently about 40% of the business. HDFC SL proposes to bring down this ratio to 25% as it believes the banking channel is best placed to sell ULIPs. In case of ULIPs, commissions are lower (at about 5-7%) against 25-30% in case of traditional policies.

HDFC SL has reported margins (MCEV) of 15% and expects a stable outlook in the near term.

ICICI PRUDENTIAL LIFE, FEBRUARY 1, 2012

Key takeaways

ICICI Prudential Life is the largest private sector life insurer in India with 7% share in APE in 3QFY12. As on December 2011, the company had 13.5 mn policies and Rs632 bn of assets under management (almost flat qoq).

The product has changed sharply in the new regime with higher focus on traditional policies. Management however believes the banking channel is well placed to sell ULIPs and hence expects the contribution of ULIPs to increase. For distributors, the margins in traditional products are significantly higher than ULIPs.

With a change in business mix and low margins policies launched in the new regime, ICICI Prudential reported 16% NBAP margin in 9MFY12.

Driven by income from core business and surrender income, the company reported profits of Rs10.6 bn for 9MFY12. The company paid its maiden dividend last quarter. The company expects dividend payment to be regular as it is well capitalized and well placed to generate strong earnings.

Its expense ratio (16% of premium) is amongst the lowest in the industry.

IRDA recently proposed a regulation allowing multiple bancassurance partners for a bank. This is likely to benefit smaller players that don’t have a banking partner though they will likely have to pay high upfront fees to the bank.

India Strategy


IDFC, FEBRUARY 1, 2012

Key takeaways

IDFC expects to grow its loan book by 15-20% yoy in the medium term (up from 15% guidance earlier). The roads and power sectors remain the key growth drivers. Increase in road projects allotted over the past nine months is a positive, which increases overall demand and reduces competitive intensity in the industry.

IDFC has reported very low (Rs700 mn) NPLs so far. In light of the challenges in the current environment, NPLs will likely increase over the next few quarters. The company has a buffer of excess provisions of about Rs7 bn (compared with total loan book of Rs350 bn). About 20% of its exposure is to the telecom sector. Most exposure is to larger players and hence the recent cancellation of 2G licenses is unlikely to affect IDFC significantly.

The company has maintained margin over the past two quarters (1HFY12). Outlook on NIM is positive as (1) decline in bulk borrowings rate will boost NIM (2) IDFC is the key beneficiary of the opening up of the domestic bond markets to FIIs: IDFC has raised funds in this market at 25-40 bps below its domestic borrowings cost;. These are Rupee borrowings and not vulnerable to volatility in the movement of the Rupee.

Strategy India


MAHINDRA & MAHINDRA FINANCIAL SERVICES, FEBRUARY 1, 2012

Key takeaways

Mahindra Finance reported loan growth of 9% qoq and 47% yoy in 3QFY12; disbursements were up 39% yoy. The company continued to finance about 10,000 Maruti cars in 3QFY12; MMFSL has tied up with Tata and Hyundai though Maruti continues to drive about 80% of its car finance volumes. MMFSL recently increased its market share in Swaraj tractors, the business acquired from Punjab tractors; as such, MMFSL’s growth in tractors appears to be higher than its parent (M&M reported 4% decline in tractors in November 2011). The share of CVs increased to 11% to disbursements from 6% last year likely due to Mahindra Navistar.

Management believes loan growth will remain strong (over 20% yoy) in the medium term. The decline reported by M&M is a cause for concern, but MMFSL remains in a sweet spot and gains market share. A high base effect is likely the only reason for lower growth of auto companies; MMFSL’s recoveries remain robust, which likely implies that earnings buoyancy in rural India remains strong. Thus, MMFSL’s asset quality continues to be far superior to public banks that operate in rural India.

MMFSL reported lower NIM in 3QFY12. MMFSL raised its lending rates for new loans in June 2011. This boosted interest yield over the past two quarters. However, a sharper rise in borrowing costs pulled down NIM in 3QFY12. NIM will likely improve in FY2013 as interest rates in the system decline; notably, all auto loans carry a fixed rate. Thus, lower interest rates on loan assets will be applicable only on disbursements.

The company sold down loans of Rs6.6 bn in 3QFY12. Loans under management increased by 45% yoy. Notably, income on loans sold to banks will now be deferred over the tenure of the loans, unlike the earlier policy of upfront recognition.

RBI has set up a committee of bankers to review the priority sector framework for the banking system. NBFCs await the report of this committee and the final reports on the revised draft securitization guidelines. We believe MMFS is well placed to manage the transition due to its lower dependence on loan securitization/sell-down; securitization income and provision write-back was 13% of PBT in FY2011. From FY2012, the company revised its accounting policy to defer income on loan sell down over the tenure of the assets, unlike upfront recognition earlier. We are not modeling higher spreads on such transactions.

India Strategy


BAJAJ FINANCE, FEBRUARY 2, 2012

Key takeaways

The company focuses on mass, affluent and small businesses.

Consumer durables business. Its consumer durables business contributes 12% of the loan book. Bajaj Finance has about 9% market share in this segment; about 30% of the transactions are made through the credit card and others are largely in cash. These loans have a short tenure of six months and the entire income is booked upfront.

Auto finance business. The auto finance business contributes to about 20% of loan book. This mainly comprises two wheeler and three wheeler loans for Bajaj Auto vehicles.

Mortgages. Mortgages comprise about 30% of the loan book though the contribution to earnings is lower due to lower profitability of the business.

Long-term guidance. Management has guided for 18-20% ROE as compared to 23% RoE expected in FY2012E. The retail lending space has seen very limited competition and management expects competition to increase over time. This will pull down its margins. Hence, the company has focused on multiple segments and cross-selling products to its customers. Focus on multiple segments will help the company to shift between businesses. Ability to cross sell will reduce the cost of servicing the customer. Currently, cross selling accounts for about 9% of the business and the management expects this to increase to 20%.

MUTHOOT FINANCE, FEBRUARY 2, 2012

Key takeaways

Muthoot is the largest gold loan NBFC in India with a loan book of over Rs220 bn.

Its major sources of funding are bank borrowings (41%) and secured non-convertible debentures (27%).

Muthoot has added over 700 branches over the past nine months and plans to add 200 more this quarter. The company added 800 branches last year.

NPLs have increased over the past two quarters though this is not a matter of concern, according to the management. Since all the gold loans are well collateralized, Muthoot ideally has no bad debts as it can sell the gold and recover the principal. Provisioning only comes from the fact that Muthoot does not mind extending the term of the loans by a few days, as it has nothing to lose. With the increase in the value of gold Muthoot has become more lenient with loan collection and term extensions.

Muthoot has capital adequacy ratio of 18% and a tier-1 of 13.4%. There have been concerns about the financial flexibility of gold loan NBFCs. Muthoot has not faced any significant pressure yet. The company has been selling down loans to banks (without PSL benefits) over the past few months. Loans outside the balance sheet were Rs24 bn against Rs26 bn in September 2011 and Rs34 bn in December 2010. If the regulator bans loan sell downs, the company is likely to need to raise capital.

Strategy India


SHRIRAM CITY UNION, FEBRUARY 2, 2012

Key takeaways

SCUF is dominant in Tamil Naidu and Andhra Pradesh (has 80% of its branches in the two states).

The management expects 40-45% growth yoy. We do not expect a slow down because of its focus on the lower end of the value chain. Even if urban India goes through a slowdown, interior India (and the lower end of the market) will continue to do well.

SCUF proposes to raise capital in 2013. Its capital adequacy ratio is 15% with tier-I of 13.5%.

Gold loan business forms 33% of the total loan book. Other major lines of business include auto loans (33%) and loans to micro SMEs (27% of the portfolio). SCUF earns a yield of 18-19% on gold loans and a yield of about 20-24% on business loans. Business loans are primarily collateralized, with an average ticket size of Rs0.5-1 mn.

SCUF has close to 1,000 branches for its gold loans business. Business per branch is improving sharply due to expansion in the market by its competitors Muthoot and Manapurram. SCUF has no plans to increase the number of branches.

SCUF expects the gold loan business to grow at a healthy rate going forward due to (1) a changing mindset and.(2) a shift to the organized market from the unorganized market.

Average ticket size is Rs30,000-40,000 with an LTV ratio of 60-80%.

Key risks to the gold loan business. (1) Margins might come off as competition increases. It is currently lending at a 18% while some of its competitors like South Indian Bank are offering rates of 13%. (2) Inferior quality gold getting into the market. There are instances of gold coming from China through the Nepal route. (3) Employee risk – there could be integrity issues.

India Strategy


SHRIRAM TRANSPORT, FEBRUARY 2, 2012

Key takeaways

Moderate growth guidance. Shriram Transport Finance (STFC) has guided for 10-14% loan growth in the medium term. In light of challenges in the CV transport industry, STFC has reduced its loan to value ratio and tightened its loan appraisal.

Comfort on NIM. With likely moderation in bulk borrowings rates, STFC is well placed on its margins. While RBI’s concerns on loan sell down from NBFCs to banks had raised concerns last year, such transaction have resumed this year since RBI has not yet taken any concrete view on the same. RBI has formed a committee of bankers to review the entire priority sector framework; the report of this committee is awaited.

Business environment cautious. STFC has cautious view on asset quality performance. The company has reported large losses in 2QFY12 due to write-off from business in Goa, Karnataka and AP. With challenges for CV transporters, asset quality performance will likely remain under check.

Higher NPLs if proposed NBFC regulations are implemented. STFC’s NPLs will increase considerably incase RBI increases NPL recognition from 180 days past due basis to 90 days. In this scenario, STFC will tighten its collection mechanism. Over the last few years, the company has made a transformation from 360 days past due basis to 180 days past due basis. NPL may be higher initially.

Strategy India


CESC: FEBRUARY 3, 2012

Key takeaways

CESC has current operational portfolio of 1,225 MW all of which caters to its Kolkata distribution business. CESC plans to add another 4,400 MW by end-FY2016 which includes 600 MW at Dhariwal 600, MW at Haldia and 1,320 MW in Orissa. Out of 4,400 MW, 1,200 MW at Haldia and Dhariwal have tied up all the necessary inputs and have commenced construction.

Status of the power projects

Dhariwal (600 MW) – construction is in progress and management has indicated likely commissioning by FY2013E. Dhariwal has already tied up 220 MW at a levelized tariff of Rs3.3/kwh and plans to tie up another 220 MW. Depending on the status of merchant tariffs, CESC will sell the balance 220 MW on merchant basis.

Haldia (600 MW) – project is awaiting final regulatory approvals. Management has indicated for commissioning by FY2014E. Haldia will sell 450 MW to CESC’s Kolkata distribution arm while balance will be free for merchant sale.

Orissa (1,320 MW) – project has entire land in possession and environmental TOR has been approved. Project is awaiting long-term coal linkage from Coal India. Management expects commissioning by FY2015E.

Balagarh (1,320 MW) - project has entire land in possession and environmental TOR has been approved. Project is awaiting long-term coal linkage from Coal India. Management expects commissioning by FY2016E.

Jharkhand (600 MW) - project has been awarded a captive mine. Management expects commissioning by FY2016E.

CESC continues to make corporate-level losses in its retail business though the retail business had moved into positive store level EBITDA in 2HFY11. However, it will take another two years for CESC to break into corporate-level profitability.

Management has indicated that to move into corporate-level profitability, CESC needs to achieve scale and add on to its current store area of 0.9 mn sq. ft. Long-term plans are to achieve operational efficiencies through scaling up of business, to be funded through private equity placement.

India Strategy


DISH TV INDIA: FEBRUARY 3, 2012

Key takeaways

Dish TV estimates ~7 mn analog households and ~8 mn TV sets (including dual-TV households) in the four metros will be converted to digital in Phase-I of mandatory digitization. Dish TV expects DTH to capture ~50% (~4 mn) share during the conversion with the company maintaining its ~25% incremental share (~1 mn). Thus, Dish TV estimates 2.5-3.0 mn gross adds from core, legacy markets (non-metro) in FY2013E and 3.5-4.0 mn including the four metros.

Dish TV is preparing to capture the set targets by scaling up installation and service delivery platforms. Dish TV is training personnel to support installation capacity already available at the dealer level. Dish TV is also prepared to scale up marketing to Rs1.0-1.1 bn from current Rs0.8-0.9 bn. Dish TV will prefer buyers credit for financing but for strong traction in HD/gross adds.

The key difference between DTH and cable in Phase-I would not be technology but service. DTH has an established B2C business model whereas cable will have to improve its customer service parameters. While the MSOs are conversant with the digital model, they would need to grapple with scalability since digitizing 10 mn subs (phase-II) is going to be much more challenging than digitization 1 mn subs (CAS). However, cable will have natural advantage in high-rise buildings.

Value-added Services (VAS, such as HD and PVR – just launched) would be a key focus area for Dish TV in Phase-I given profile of consumers in the four metros. Though the investment required in an HD is higher (2X), the payback is faster and the returns are higher. Dish TV is currently the only operator with ~40 HD-channel capacity (true HD) and the constraint so far has been availability of content.

Dish TV expects monthly churn rate to stabilize at 1.0-1.2%. The market dynamics also worked against DTH post IPL; DTH has a lot of event-based consumers, which come for cricket and then go back to always-on analog cable. Mandatory digitization would also remove the always-on analog cable from the system.

Dish TV believes it is possible to take a modest ~5% increase in ARPUs in the basic package in a normal macro-environment (stable cable pricing); anything more may result in unacceptable levels of churn. Dish TV expected ARPU growth to also be driven by consumer upgrades (from basic to mid-tier packages); however, consumer downgrades (from top-tier to mid-tier) have resulted in nil mix benefit.

Strategy India


ESSAR PORTS: FEBRUARY 3, 2012

Key takeaways

Strong 45% revenue growth on higher average realizations. Essar Ports recorded strong revenue growth of 45% in 3QFY12 to Rs2.7 bn with volumes of 9.94 MMT. The revenue growth was primarily led by higher average realizations. Average realizations increased to Rs237 per ton in FY2012E from Rs185 per ton in FY2011, up 28% yoy.

Sequential decline in volumes/ revenues in 3QFY12 was led by shutdown by Essar Oil to expand its refinery to 18 MMTPA capacity.

Expects 25% port volumes from third party cargo by FY2015E. The management cited that while majority of the volumes (75%) would be captive to Essar group, the company expects about 25% of volumes in FY2015E to be driven by third party cargo. Currently only about 2% volumes are from third party.

Expanding capacities to 158 mn tons (from 88 mn tons). Essar Ports is in the process of expanding its existing capacity of 88 mn tons to 158 mn tons by 2013 – most of these capacities are tied up with long-term take-or-pay contracts with Essar group entities. Vadinar and Hazira ports are likely to be the key drivers of volumes, revenues and EBITDA for the company over the next few years. Key capacity expansion/ new developments:

Salaya – new 20 mn tons dry bulk terminal at Salaya. Take-or-pay contract signed with Essar Power (developing a 3.3 GW import coal-based power plant at Salaya). The project is 39% completed with estimated CoD in 4QFY14. The company has already received environmental and CRZ clearance for the project and is awaiting forest clearance for part of the project.

Paradip-I – 16 mn tons iron order terminal. Take-or-pay signed with Essar Steel. The project is 79% completed with estimates CoD in 1QFY13.

Paradip-II – 14 mn tons coal terminal. Merchant port with estimated CoD in 1QCY14.

India Strategy


FUTURE CAPITAL HOLDINGS, FEBRUARY 3, 2012

Key takeaways

FCH proposes to tap India’s consumption potential. The focus is on products with high yields. Asset backed securities (mortgages) form a major part of the loan book. Other kinds of loans include gold loans, two-wheeler/auto loans, home loans and CD loans. Other lines of businesses like wealth management and brokerage are also present.

Source of funding is largely banks (74%), besides NCDs and short-term borrowings like commercial paper.

Branch network grew to 173 from 30 over the past 12 months. The company aims to add 100-150 branches.

Mortgage business. Loan book growth has been strong. FCH reported loan book of Rs20 bn in March 2011 against Rs15 bn in March 2010. The management expects the loan book to grow to Rs47 bn by FY2012 and Rs70 bn by FY2013. This will largely comprise loans to SMEs against their property. Lending rate is close to 13.5% against cost of funds of about 11%. FCH approved Rs1.5 bn of loans every month in this segment.

Corporate book. Loan book is almost Rs20 bn, of which Rs11 bn was given to construction businesses like Rustamjee and Kalpataru and Rs6 bn was loan against property.

Gold loans. Average loan size is Rs0.1 mn (higher than Rs40,000 for Muthoot and Manappuram). Loan book has grown to Rs2.50 bn in the first year to Rs12.5 bn in the second year.

FCH’s CAR ratio was 17-18%, pre-tax ROA was 4% and post-tax ROA was 2.8%. Net worth will reach Rs8.5 bn by the end of this year.

Strategy India


HDFC, FEBRUARY 3, 2012

Key takeaways

Retail lending business grew well in Nov 2011 despite a high base effect. The company has not changed lending rates since August as cost of funds remained stable (borrowed through the bond market which had already priced in the up move). HDFC expects demand for loans to increase if property prices go down in Mumbai. The NCR is the biggest market and forms 15% of the loans. Mumbai (up to Panvel) forms 10% of the market.

Corporate book. The company took a conscious decision not to grow the corporate book over the past six months. Owing to the challenging environment, the company has been cautious about whom it is lending to, though a lot of demand has been coming from developers who have already picked up loans in the market..

Positive outlook on NIM. HDFC has Rs200 bn of loans which will be re-priced at a higher rate from April 2011. This will provide comfort on NIM.

Funding. Over the last few quarters, HDFC has mainly raised retail deposits and NCDs. Currently cost of borrowing from the bond market is 9.5%, and 10.5% through bank loans. Cost on retail deposits falls between the two. The company has also benefitted from FII participation in debt markets.

Education business. HDFC is targeting the education business. It is: (1) managing schools and funding the developers; (2) starting graduate employment programs. HDFC proposes to offer six-month parallel graduate programs which would qualify participants for clerical and other jobs. For example, banking and IT-related professional training in the final year of under-graduation. The company is not planning high capital investment in the education business: Rs1 bn has been allocated as of now, of out of which it is looking to draw only Rs300-400 mn.

Standard asset provision: As per new regulations, HDFC will have to provide 100 bps standard asset provisions on the corporate real estate book from 40 bps provided currently. Factoring in additional 60 bps provision on Rs300 bn book, lending rates to commercial real estate might go up by another 25 bps (13-15% lending rate).

India Strategy


HDFC BANK, FEBRUARY 3, 2012

Key takeaways

Loan growth to remain broadly ahead of industry average. Growth in semi-urban and rural region continues to remain buoyant. In retail, strong growth in light commercial vehicles is expected to boost vehicle loan growth. Passenger vehicles are expected to grow in line with the industry average. The bank has selectively started gold loans (1% of loans currently) and is focusing on expanding branches that would lend loans against gold.

NIM will be broadly stable between 3.9-4.3%. However, credit costs in most retail products are well below initial expectations, which could put some pressure on pricing, going forward. Competition has been extremely rational on pricing compared with the previous cycle.

CASA ratio. The bank is not looking at increasing savings rate as the cost of operations of such accounts are about 7% levels. HDFC Bank did acknowledge that competition has increased post the de-regulation. However, new accounts being opened has not changed materially in recent months.

Asset quality and provisions. Most retail products are showing delinquency levels well below expectations, including unsecured products. Buoyancy in income levels and better underwriting post FY2009 could be primary factors. The bank is not worried on corporate NPLs as their exposure is mainly working capital in nature.

Strategy India


HEXAWARE: FEBRUARY 3, 2012

Key takeaways

Hexaware highlighted its revamped approach to sales-account management. It indicated a new go-to-market strategy since 2009 with increased focus on strength areas. Every account hunting team is partnered with an account manager (usually with a delivery background) for improved account mining as the relationship matures. Client partners have been appointed for large accounts and Strategic Account Units have been put in place combining personnel from delivery and sales teams to service the clients.

The results of these initiatives have been evident in six large deals signed with existing clients over the last six quarters. It also indicated more than 50 F-500 accounts were being mined for more business.

The US$177 mn deal signed in the BFSI space was a case of vendor consolidation, with Hexaware being one of the incumbents (third in terms of absolute business from the client).

Hexaware is chasing about five deals in the US$25 mn+ category, with two of them being new clients.

Infrastructure management services (IMS) makes up about 25% of the US$110 mn deal signed, and the addition of employees from the customer has helped improve the expertise level of the IMS practice.

Hexaware guidance indicated at least 4% revenue growth in US Dollar terms. 4QCY11 was aided by additional US$1.4 million onsite revenue from faster ramping up of certain projects. The management, however, indicated that the extent of offshoring would continue to grow.

There has also been an increased focus on fixed price projects, as it helps lock in revenue and improves revenue predictability.

SG&A, at levels comparable to tier-I players, will continue to be a lever to margin expansion. The key lever will be utilization, which at 69% is fairly low. Other levers at the disposal of the management are higher fresher hiring and increased off-shoring.

New ‘insurance and healthcare’ vertical has been launched and has seen strong revenue traction in recent quarters. It added a couple of accounts in North America, one of those against a bigger competitor.

Certain BFS clients facing pressure will not see any billing rate cuts. Increased offshoring has been proposed.

APAC has seen five new clients in the recent quarters, while Europe has been doing well despite macro economic pressures.

India Strategy


IDBI BANK

Key takeaways

Restructured loans are about 6% of loans. Fresh proposals for restructuring have been low for the next few quarters based on the proposals that are currently with the CDR. Internal proposals are low too.

Committed exposure to power projects is higher at `197 bn (13% of loans) but current exposure outstanding is substantially lower at `129 bn (8% of loans). Exposure is only towards private power projects and the bank has no exposure to any SEB. Of the overall exposure – exposure to gas based projects is relatively higher primarily due to the bank’s exposure to Dabhol – where the bank is witnessing repayments coming regularly – selectively witnessing pre-payments too. Not so worried on the balance exposure as they have been primarily to large groups and underlying risks are low.

Focusing on diversifying the loan growth from industry segment. Segments like retail are witnessing lower delinquencies. Outstanding NPLs in retail is at 1%.

Tier-1 ratio is 7.5% and the bank is likely to place a preferential allotment to GoI in FY2012. Quantum of infusion has not been ascertained.

JET AIRWAYS: FEBRUARY 3, 2012

Key takeaways

The company is expecting consolidation in the sector soon as players with stretched balance sheets would reduce their fleet size further. Companies which can sustain/expand their operations in the current environment would gain from this consolidation.

Yields in January 2012 have been stronger month-on-month versus the trend observed in the past year as last year Air India had started pricing its fares at much lower levels versus the competition in January 2011.

One of the reasons international business of the company reported sequential decline in margins (EBITDAR) in 3QFY12 was the company had taken forward bookings for 3QFY12 when USD was at ~Rs48 levels and when actual cost was incurred for those bookings in USD was ~Rs50 which led to lower margins as incremental costs due to depreciation of Rupee had to be borne. In the current quarter this should reverse and EBITDAR margins should improve qoq.

As per the company, capacity of the industry would increase by anywhere between -5% and +5% in FY2013E. Hence, the company expects higher PLF for the industry in FY2013E versus FY2012E.

The company expects to manage the drain on cash flows (on account of losses in the last few quarters) by doing sale and lease-back transactions which should bring cash inflows to the tune of ~US$150 mn for close to 20 aircraft. Also, some of these aircraft have been financed with higher cost Rupee debt (at 11% interest p.a.) which would also be retired during the course of these transactions.

Strategy India


JINDAL STEEL AND POWER: FEBRUARY 3, 2012

Key takeaways

JSPL commissioned three units (two in Raigarh and one in Angul) of its 1,350 MW (10 X 135 MW) captive power plant in January, thus taking the total number of commissioned units to six (810 MW). The company is confident of commissioning the balance units over the next couple of quarters. The three units commissioned in the earlier quarters have now stabilized after some teething trouble, especially in the Raigarh.

The company said it would remain tactical and choose the more profitable route of either margin benefit of selling finished steel products in India produced by importing HBI from Shadeed or that of direct sales of HBI by Shadeed to third parties and reiterated its efforts to achieve a steel production target of about 3mn tonnes in FY2013.

The company continues to search for coal assets overseas to secure coal for its existing and planned steel and power projects. It expects its Indonesia mine to commence mining operations in six months with an initial mining capacity of 1mtpa, which would ramp up to 5mtpa in around three years. The company has received all clearances with respect to this mine. Production at its South African coal mine is underway and it expects the mine to produce about 1 mn tonnes of coal in FY2013.

The company holds a steel inventory of about Rs15 bn against Rs10 bn in 2QFY12. Inventory levels increased primarily due to some sluggishness in demand for structurals,, plates and bars and other logistical issues. However the company is confident of selling the excess inventory, taking into account a seasonal pick-up in demand in the last quarter of the fiscal and expects inventory to return to normal levels in a couple of quarters.

India Strategy


JSW ENERGY: FEBRUARY 3, 2012

Key takeaways

JSW Energy has a current operating capacity of 2,600 MW and another 540 MW under construction. Further, JSW Energy has a development portfolio of 8.2 GW.

Bulk of JSW Energy’s extant capacity is dependant on imported coal (65%) while 1,080 MW at Barmer will run on captive lignite. Further, imported coal is mostly purchased from spot markets with current mix at ~60% low-grade Indonesian coal and 40% South African coal. Coal produced from SACMH is not imported to India but sold directly into the market.

JSW Energy is largely dependent on short-term market for sale of power with short-term sale comprising nearly 56% of extant capacity.

Management remains confident that the current under recovery of fixed cost at Barmer will likely be offset once the final tariff order has been released by the Rajasthan Electricity Regulatory Commission (RERC). We note that the provisional tariff order by Rajasthan regulator has fixed the tariff for first two units at Rs3.1/kwh allowing just 70% of fixed cost recovery. Variable charge is based on a transfer price of Rs1,108/ton for lignite (Rs991/ton of transfer price + Rs65/ton of royalty + Rs53/ton of VAT) and transfer price allowed by RERC is (for the interim) 60% of transfer price (before VAT and royalty) claimed by JSW Energy i.e. 60% of Rs1,651/ton which works out to Rs990.6/ton. Further, Barmer project has faced significant cost overruns owing to delays in commissioning and revised cost of project at Rs68.6 bn (Rs64mn/MW) implies a fixed cost recovery of Rs2.45/kwh.

Management has indicated that fuel continues to be the biggest challenge for the company and JSW Energy continues to scout for coal resources.

KOTAK AUTO FINANCE: FEBRUARY 3, 2012

Key takeaways

We hosted heads of Kotak car, commercial vehicle and tractor finance at our conference to share their outlook of automobile vehicle growth in FY2013E and the trends they are seeing on the ground.

Car finance head expects industry to grow by 8-10% yoy in FY2013E. He expects 8% yoy growth in 1HFY13E and double-digit growth in 2HFY13E. He indicated discounts on petrol models are still at 3QFY12 levels and are unlikely to come down over the near term. However, asset quality is one of the best in the history.

Commercial vehicle finance head indicated that demand has been supported by high discounts. He expects a single-digit growth for MHCVs for FY2013E. He also suggested that large fleet operators have been buying vehicles. Cement, FMCG, automobile and export-import sectors have been growing at a strong pace which is holding demand for MHCVs.

Tractor finance head indicated that tractor volumes will likely grow at 8-10% yoy in FY2013E. However, he indicated EBITDA margins of tractor players are likely to come down as players get aggressive in capturing market share with new product launches in the small horsepower segment. He indicated shortage of farm labor is big problem and this would support tractor demand for the next couple of years.

Strategy India


MAX INDIA, FEBRUARY 3, 2012

Key takeaways

Healthcare Business. Max has doubled its bed capacity this year and is looking at 2013 to consolidate growth and will look to invest further capital in the business in FY2014. Capital invested is Rs16 bn, and with revenue to capex ratio of 1.1, expect revenue to reach Rs18 bn by FY2014. Revenue in FY2012 was Rs9 bn, and it is expected to reach Rs11 bn in FY2013. The management expects EBITDA to reach Rs1 bn by Mach 2013.

Insurance business. ROEV target is 15-18%. ROEV is currently around 15%. The business gained 250 bps market share over the past year and is at its peak market share position currently. The company has Rs13 bn of capital surplus, and plans to pay dividends this year. The company has made several changes after the regulatory changes in Sept 2010. It (1) optimized distribution channel mix: More focus on bank insurance and moved from a sales model to a service model. The distribution mix changed from 65% agency type before to 40% this year. Cutting down on lot of agency networks and targeting to keep the agency share below 45-46%. Bank insurance business increased from 5% to 45%. The remaining 15% comes for third party insurances. Max Life has the best non-bank owned channel. 2. Rebalancing product portfolio. Focus is more on high tenure products and assured return products: 83% of incremental business. 3. Criteria of recruitment made more stringent which has helped the company to hold on to the ticket sizes.

OIL INDIA: FEBRUARY 3, 2012

Key takeaways

Volume growth to drive earnings. OIL management has guided for (1) increase in oil production to 3.9 mn tons by FY2013E and (2) increase in gas production to 2.9 bcm by FY2013E. The targeted oil production is expected to be achieved through implementation of EOR/IOR techniques on its existing producing fields.

Uncertainty on subsidy burden. OIL highlighted that the company is in discussion with the Government to work out the final subsidy burden on upstream companies for FY2012E. The subsidy losses for upstream companies have been restricted to one-third of gross under-recoveries in 1HFY12. However, the same is expected to increase in 2HFY12 given (1) expected large under-recoveries in FY2012E and (2) fiscal constraints of the Government.

Huge investments in E&P sector. OIL management highlighted its focus on (1) undertaking significant exploration and development work on its existing acreage and (2) looking for opportunities for inorganic growth. OIL plans to spend `33.8 bn on E&P activities and acquisition of overseas acreage in FY2013E.

Large reserves and high R/P ratio. OIL has 505 mn boe of 1P reserves, 944 mn boe of 2P reserves and 1,372 mn boe of 3P reserves as of March 2011. OIL’s R/P ratio has been impressive at 1.7X over the past six years.

India Strategy


PERSISTENT SYSTEMS: FEBRUARY 3, 2012

Key takeaways

On the demand scenario, Persistent noted that the commentary from its clients was neutral or slightly positive. Client performance and budgets are likely to be marginally lower, but Persistent expects offshoring to be higher. It also noted that the outlook for its clients had improved over January 2012.

IBM, a key client, had finalized its budget and some amount of business (about 70% of the US$26-27 mn business) has been locked in. IBM’s acquisition of some of Persistent’s clients has seen additional business coming in. Some clients indicated flat budgets, while some clients indicated having a visibility of IT spending for the coming two quarters at this point in time. It also indicated that the Wells Fargo account would need to be watched, with the integration project reaching completion soon. Other key clients like Microsoft, Yahoo, Agilent and Intuit were healthy and doing well.

Products business spending is currently impacted by macro events and has been a challenge for all players in the segment. However, confidence on demand emanates from leading indicators like VC investments in product business start-ups and acquisitions of products companies.

Persistent completed the acquisition of Openwave’s location business on Feb 1, 2012. It helped add IP for mobility and location-based services to Persistent’s portfolio of IPs.

Persistent reduced its employee base in 3QFY12, but believes the bench strength is adequate for the current order book and projects in the pipeline.

Persistent’s sales team has seen some churn recently, with certain sales people from the US geography moving to competitors. The management indicated that it would look to make investments and add to its sales force. The changes and restructuring in the sales team will take place in the coming quarters.

350-400 fresh graduates are expected to be added in 1QFY13, while laterals addition will be entirely need based.

FCF generation has been poor largely due to high capex in FY2012. The capital raised during the IPO is being spent according to the timeline outlined in the prospectus. The management indicated it had the infrastructure to add 2,000 more employees.

Capex is likely to be lower in the coming years and revenue growth will be faster than capex growth. FCF generation will also improve, as a consequence.

Strategy India


PETRONET LNG: FEBRUARY 3, 2012

Key takeaways

Optimistic on the LNG story in India. The management of PLNG expects robust growth in demand for LNG imports in India in the long term led by (1) large unmet demand of natural gas, (2) replacement demand from industrial units based on naphtha and fuel oil given competitiveness of LNG and (3) uncertainty on supply of domestic gas. The company is well-placed to benefit from the same.

Commissioning of Kochi terminal by end-2012. The LNG terminal at Kochi is expected to operate commercially by 4QCY12. The operating rates are expected to be lower in FY2014-15E given absence of long-term contracted LNG in the initial years. The management expects operating rates to improve with the start of 1.5 mtpa of long-term LNG imports from Gorgon project in 2015. The company has incurred `29 bn of capex till end-2011.

Second jetty at Dahej by end-2013. The second jetty is expected to be completed by 4QCY13 and is estimated to cost `9 bn. PLNG can handle a maximum of 11-11.5 mtpa of imported cargo till the completion of the second jetty and will be able to handle an additional ~2 mtpa post the completion of the same.

Expansion of Dahej terminal by 5 mtpa. PLNG has completed detailed feasibility study for expansion of capacity at its Dahej terminal by 5 mtpa. The management expects to award the EPC contract in 3-4 months and complete the expansion project by 2015. The cost of the brownfield expansion is estimated at US$550 mn. PLNG has agreed to enter into a take-or-pay contract for 20 years with GAIL for 50% of expanded capacity (2.5 mtpa) and GSPC for 25% (1.25 mtpa). The company is planning to fund its equity in the project through interest-free advances from GAIL and GSPC in lieu of the contracted capacity.

Proposed LNG terminal at Gangavaram. The Board of PLNG has given consent to carry out a detailed feasibility study for 5 mtpa LNG re-gasification terminal at Gangavaram in east coast of India. The company expects a detailed feasibility report to be ready by April 2012. PLNG has entered into an MoU with HPCL for 1.5 mtpa of LNG re-gasification capacity. The company expects to spend `45 bn for the new LNG terminal.

India Strategy


PRAJ INDUSTRIES: FEBRUARY 3, 2012

Key takeaways

Entering waste water business, but on the industrial side. Praj intends to enter waste water management business. This business would be built around technology edge rather than the contracting end. For example, the company is not intending to build the business in a municipal sewage treatment area.

Cellulosic ethanol is scientifically proven; would have field demonstration plant soon. Science of cellulosic ethanol is already proven and it has to be optimized for commercial use in terms of energy and water consumptions as well as yield. Praj plans to build a field demonstration plant which is in between a pilot and a sully commercial plant and is looking for site, partner and off-take agreement for that.

Plans to reduce ethanol business to about 65% of the total business. Praj intends to reduce the ethanol (including fuel, edible and industrial) to about 65% and increase the non-ethanol business to about 35% of the business by growing other components of business.

Envisaging that bio-refinery as a concept would start to coexist with fossil refineries. Bio-refineries can be used to produce bio-fuels as well as bio-chemicals. Current usage of bio-waste, i.e. agricultural residue/forest residue is primarily to burn and generate some power. This is relatively a basic way and incrementally these bio-resources can be used in a better way through a bio-refinery.

Strategy India


RELIANCE POWER: FEBRUARY 3, 2012

Key takeaways

Status of Reliance Power (RPWR) portfolio of projects

600 MW of operational projects at Rosa phase I. The project had faced some issued relating to availability of linked coal but regulator approved blending of imported coal and the plant has been operating at above 90% PLFs since then. RPW has also synchronized first unit of Rosa phase II and is likely to declare the entire 600 MW commercial by end FY2012E. The project has linkage from CCL (E grade coal). The plant will sell entire 600 MW to UPPCL at regulated rates.

Butibori (600 MW) - the project has achieved all necessary milestone and construction is in progress (boiler drum lifting as been completed). The project has linkage from WCL (D grade coal). Management has guided for commissioning by July 2012.

Sasan UMPP (3,960 MW) – all necessary clearances and approvals in place and construction has commenced. Management has indicated that production from Sasan coal block is likely to commence by 2012. Peak production is likely to be 25 mtpa. A part of the coal will be used for Chitrangi project. Management has guided for commissioning of first unit by January 2013 and commissioning of entire project by June 2014.

Krishnapatnam UMPP (3,960 MW) - all necessary clearances and approvals in place. RPWR has acquired 3 coal mines in Indonesia for the project. Management has indicated that production from Indonesian mines will commence by mid-2013. Management has indicated that they are currently in process of evaluating the development with regards to Indonesian regulation and are not committing any capex until further clarity emerges on the same.

Tilaiya UMPP (3,960 MW) – the project is yet to achieve financial closure. Management has indicated that production from Tilaiya coal block will likely commence by 2013. Peak production from the project will be 40 mtpa, part of which will be used to fuel expansion at Tilaiya. Mining plan for the coal block has been approved.

Chitrangi (3,960 MW) – project is yet to achieve financial closure and acquire the entire land for the plant. Project will use excess coal from captive coal blocks allocated for Sasan UMPP. Management has guided for commissioning of first unit by June 2014 and full commissioning by September 2015. Currently, the issue of diversion of Sasan coal to Chitrangi has been referred to Auditor General of India by Ministry of Power.

Sale mix – RPWR has 89% of total proposed capacity addition tied up through long-term PPA of which 66% is through case II bids (UMPPs), 8% is cost plus and balance is through case I bids.

India Strategy


RURAL ELECTRIFICATION CORPORATION, FEBRUARY 3, 2012

Key takeaways

REC reported 25% yoy and 5% qoq loan growth in 3QFY12. We expect loan growth traction to remain stable over the next few quarters. In light of challenges in the sector, power finance companies have adopted more stringent disbursement pre-conditions for projects approved from 2011 (lfirm fuel supply agreement, power purchase agreement). We believe it will be challenging to promoters to meet some of these conditions at the current juncture. REC (and PFC) will continue/resume disbursements to SEBs that raised tariffs, publish financials and follow norms laid down by the Joint Committee of Chief Ministers. Loan growth will moderate to 10-15% in FY2014 if approvals remain weak.

The decline in bulk borrowing rates will augur well for REC’s NIM over the medium term. Lower competition from banks in lending to SEBs and (refinancing loans to private power players) has improved the negotiating power of REC (and PFC) with its borrowers.

REC’s gross NPLs increased to 0.5% from 0.3% qoq. A loan to AP-based power plant slipped into the non-performing category during the quarter. The company made provision of Rs240 mn (10% of total exposure of Rs2.4 bn). Notably, this is the second private project that slipped into the NPL category in FY2012. In 1QFY12, a loan of Rs2.5 bn to an MP-based hydel project slipped into the NPL category during the quarter.

SADBHAV ENGINEERING: FEBRUARY 3, 2012

Key takeaways

May go for investments in renewable energy though primarily to substitute for captive usage. The company may invest into about 20 MW (about Rs1.2 bn) of renewable power to capture benefits of (1) accelerated depreciation, (2) low-cost foreign funding (based on company’s rating) and (3) a substitute source of long-term power at cheaper rates for the Maharashtra projects (Dhule and Border check post).

Aims for another Rs11-13 bn of orders from recently bid projects in roads and irrigation. Thee management has bid for about Rs87 bn of cash contracts in roads of which it expects to win about Rs8-10 bn of awards. It has also bid for about Rs8 bn of irrigation projects and expects to win about Rs2-3 bn. It therefore intends to end the year with about Rs16-18 bn of order inflows.

Present backlog has about Rs16 bn of BOT work remaining. The company’s present backlog of Rs59 bn is made up of (1) Rs11 bn of roads projects, (2) Rs10 bn from mining, (3) Rs21 bn of cash road contracts and (4) Rs16 bn of BOT road contracts. This compares to roads BOT contributing Rs52 bn or 75% of the total backlog of Rs72 bn a year ago.

Balance sheet strength to help win next leg of BOT projects. The company highlighted balance sheet strength based on (1) lower debt projections (freeing up of receivables, contingency reserve) and (2) sufficient internal resources (accruals, cash) for pending equity needs. It expects very low levels of leverage post FY2013E.

Strategy India


SOBHA DEVELOPERS: FEBRUARY 3, 2012

Key takeaways

New locations have boosted sales: Sobha has now sold 2.4 mn sq. ft in 9MFY12 and is now on track to exceed 3 mn sq. ft in FY2012E if its qoq sales trend continues. This performance has been due to contribution from the new locations of Gurgaon and Mysore. The company is now looking at launching two projects in Chennai in 4QFY12E of 0.9 mn sq. ft and this will likely boost its sales further. The company also has land in Hosur and Kochi though launches there would not happen before one year. Though sales have been strong, Sobha is not looking at increasing prices.

Sales mix: Sobha’s sales mix for 3QFY12 in terms of units sold was – 29% in the Rs5-7.5 mn band, 45% in the Rs7.5-10 mn band, 18% in the Rs10-20 mn band and 8% in the >Rs20 mn band, so Sobha’s demand is mostly in the Rs7.5-10 mn band. In terms of the customer profile, 51% of customers self-fund their purchases (data from Oct 2010 – Sept 2011) and about 40% of its customers are IT professionals.

Commercial plans: Sobha has plans to launch three commercial projects in Bengaluru and one in Thrissur. So far Sobha had avoided getting into commercial since this locks up capital and increases leverage. Sobha is confident of reducing D/E to 0.5X (by 4QFY12E/1QFY13E) through increased execution and new launches which will bring in cash and this will be used to fund the commercial projects. In terms of budgeted spends on commercial construction, Sobha does not intend to spend much in FY2013E (only start-up costs) and major spends will happen in FY2014E.

TATA POWER: FEBRUARY 3, 2012

Key takeaways

Tata Power (TPWR) has a current operational capacity of 3.8 GW and plans to add another 4 GW (Mundra UMPP) over the next two years. Bulk of the extant operational capacity (51%) caters to the Mumbai distribution business. Business portfolio of Tata Power includes (1) distribution business in Mumbai and Delhi, (2) standalone IPPs/CPPs and (3) 30% ownership in coal mines in Indonesia.

Mundra UMPP – exploring options to address losses and assure lenders

Management reiterated that Tata Power continues to be fully hedged against rising coal prices and Mundra UMPP will likely operate at a PLF ranging from 72-78% while maintaining an availability of 80% thus minimizing losses on fuel cost while maximizing recovery of capacity charge. Management has indicated that generation from first unit is likely to commence by March 2012.

Management has indicated that they are in process of exploring other options to minimize/offset losses at Mundra including (1) talks with beneficiaries and (2) usage of low grade coal at Mundra.

TPWR proposes to transfer part-ownership (~75%) in the coal mining assets to Coastal Gujarat Power Ltd (Mundra UMPP), thereby lending comfort to lenders of the project on debt servicing and preventing impairment of investment made by TPWR (Rs42 bn).

Management has guided for capacity for Bumi ramping up to 75 mtpa by end-CY2012E with full volume impact by CY2013E.

Apart from near-term capacity addition of 5 GW (Mundra and Maithon), TWPR also has another 4.4 GW under advanced stages of planning and development. These include 1,980 MW Tiruldih IPP/CPP (to be partly fueled by Tubed coal block) and 660 MW Naraj Marthapur IPP (fueled by Mandakini coal block).

India Strategy


TECPRO SYSTEMS: FEBRUARY 3, 2012

Key takeaways

Balance sheet remains stretched with high debt and working capital levels. The management cited that balance has not improved since end-1HFY12 with debt levels remaining high at about Rs10 bn and working capital of about Rs13-15 bn.

Maintains strong FY2012E revenue growth guidance. Maintains strong revenue growth guidance of about 35-40% to Rs28 bn for FY2012E primarily on the back of execution of the existing large order backlog of Rs44 bn.

Unlikely to meet order inflow growth guidance of 30% in FY2012E; has booked only about Rs16-18 bn so far. The management reported an order backlog of about Rs48 bn at end-3QFY12 and order inflows to the tune of Rs16-18 bn in 9MFY12 (with about Rs4-5 bn of L1 orders). We believe that it may be difficult for Tecpro to meet its order inflow growth guidance of 30% in FY2012E implying very strong inflows of about Rs50-55 bn.

All BoP orders in backlog have clearances/linkages in place. The management does not expect any major delays in execution of the existing BoP orders. All the three projects have all clearances (related to land acquisition, environmental clearance etc.) as well as linkages (coal, water etc.) in place. Furthermore, the projects have already achieved financial closure (REC has already sanctioned loans of Rs21.7 bn for Kakatiya project and PFC has sanctioned loans of Rs24.23 bn for Rayalseema project of APGENCO).

YES BANK

Key takeaways

Exposure to telecom was 5.1% as of 3QFY12. However, the bank indicated that it had no exposure to the new telecom players. Hence, there would be no impact from the current regulation.

Limited concern on asset quality but the bank is carefully monitoring its portfolio especially through its various credit screens.

New initiatives in retail are part of the second stage of growth for the bank. Focus in the medium term would be to improve the liability franchise – recent initiative on increasing savings account rate to 6% (7% for above Rs1 mn) is already generating better-than-expected response.

Tier-1 ratio was 9.2% as of 3QFY12 and the bank is not looking at diluting immediately as the scope for improvement in capital utilization (through internal ratings) remains high.

Fee income trends to see shift in the nature of contribution. The management expects transaction banking and retail fees to start dominating the overall fee income from current contributors of financial markets and advisory. In the near term, debt related activities would continue to drive income from financial advisory.


Core earnings growth at 13%

Power Finance Corporation (PFC) reported core earnings (PBT before forex losses) growth of 13% yoy in 3QFY12 – almost flat qoq. NII was up 18% on (1) 28% loan growth and (2) yoy and qoq decline in NIM. Earnings were largely distorted by recognition of forex gains of Rs4.2 bn (due to the changes in accounting policy). PAT was up 69% yoy, significantly higher than our estimates due to difference in estimate of tax rates of the forex income; PBT was up 64% yoy (3% above estimates).

Valuation inexpensive, PFC remains a play on recovery in the sector

We expect PFC to deliver13% EPS CAGR between FY2011 and FY2014 and medium-term RoE of 17-18%. We expect PFC to deliver loan growth of 21% in FY2013 and 15% in FY2014 and almost stable spreads of 2.5%. A likely decline in interest rates in the system and lower competitive intensity provides us comfort on margins over the medium term. At our price target of Rs225 (20% upside), PFC will trade at 7.7X PER and 1.2X PBR (1.5XAPBR) FY2013E.

PFC is currently trading at 6.3XPER and 1X PBR FY2013E. This works out of 1.1X FY2014E adjusted PBR, if we build in NPLs of 3%. This (adjustment) effectively implies that 45% of the private sector loan book (as on December 2011) is written-off.

We are relatively more comfortable on the asset quality performance of state (and central) sector loans (90% of loan book for PFC as on December 2011) given the positive developments at state electricity boards (SEB) over the last few months. While recently proposed tariff hikes may not, in themselves, drive a turnaround at SEBs, but a more disciplined approach by SEBs and regulators will likely reduce their credit risk in the medium-term.

We however believe that stress in the private sector loan book will likely be reflected over the next few quarters. We believe that early resolution of macro issues in the sector (availability and supply of coal, (likely) renegotiation of power purchase agreements) will affect the fortunes for these projects and hence drive stock performance for PFC (and REC).

PFC (POWF)

Banks/Financial Institutions

State sector drives growth. PFC accelerated its loan growth to 28% (up from 25% in 2QFY12) due to higher lending to state power entities largely for pre-approved generation projects. Core earnings were almost flat qoq, up 13% yoy (5% above estimates) on subdued spreads and stable operating expenses. Other highlights: (1) A gas-based power plant in AP (exposure of Rs3.9 bn) slipped into NPL and (2) PFC booked forex gain of Rs4.2 bn following the change in accounting policy. We revise estimates by 1-4%, retain ADD with price target of Rs225 (from Rs215).

PFCStock data Forecasts/Valuations 2012 2013E 2014E

52-week range (Rs) (high,low) EPS (Rs) 22.7 29.3 33.2Market Cap. (Rs bn) 246.5 EPS growth (%) (0.5) 29.0 13.3

Shareholding pattern (%) P/E (X) 8.2 6.4 5.6Promoters 73.7 NII (Rs bn) 44.3 55.0 63.5FIIs 6.5 Net profits (Rs bn) 30.0 38.7 43.8MFs 6.7 BVPS 152.2 166.9 173.0

Price performance (%) 1M 3M 12M P/B (X) 1.2 1.1 1.1Absolute 30.5 13.2 (28.6) ROE (%) 16.7 17.4 17.2Rel. to BSE-30 18.2 12.4 (25.2) Div. Yield (%) 2.4 3.1 3.6

Company data and valuation summary

282-130

BUY

FEBRUARY 03, 2012

RESULT

Coverage view: Attractive

Price (Rs): 187

Target price (Rs): 225

BSE-30: 17,605

Banks/Financial Institutions PFC


Key highlights of 3QFY12 performance

Loan growth accelerates

PFC reported 28% yoy and 7% qoq loan growth. The pace of growth is clearly increasing - qoq loan growth increased to 7% qoq in 3QFY12 from 6% qoq in 2QFY12 and 4% qoq in 1QFY12. Disbursements increased by 35% yoy. State sector was responsible for 52% of loan book accretion; generation projects have driven 83% of incremental loan growth. Lending to ‘others’ (short term etc) has increased to Rs47 bn from Rs31 bn in 2QFY12; management has highlighted that they are more comfortable in lending to SEBs that raise tariff and follow most conditions decided at a state ministers conference; all incremental short term loans have a guarantee from the State Government.

NIM declines moderately

PFC’s NIM (KS –calc) declined to 3.9% from 4% in 2QFY12 and 4.1% in 3QFY11. NIM would increase marginally, if we adjust for the reversal of income for the NPL (Rs190 mn) recognized during the quarter.

NPLs increase during the quarter

PFC’s gross NPLs increased to 0.5% from 0.2% qoq. A loan to AP-based power plant slipped into the non-performing category during the quarter. The company made provision of Rs390 mn (10% of total exposure of Rs3.9 bn). Notably, loan to an MP-based hydel project will likely be classified as an NPL in case the power company is unable to raise equity in FY2012; PFC has an funded exposure of Rs7 bn and non-fund based exposure of Rs4 bn to this project.

Large MTM gains on forex account

Earnings were largely distorted by forex gains. Following the change in account policy, PFC booked gains of Rs4.2 bn in the forex account reflecting the reversal of losses booked in 1HFY12 (Rs5.8 bn in 1HFY12). The foreign currency translation account had a debit balance of Rs8.5 bn as on December 2011.

PFC Banks/Financial Institutions


PFC - Quarterly data 1QFY11-3QFY12 (Rs mn)

1Q11 2Q11 1Q12 2Q12 3Q12 YoY (%) 3Q12EActual vs

KS (%)Profit and Loss statementNet interest income 8,580 8,960 9,900 10,800 10,970 18 11,000 (0) Loan loss provisions 1 2 70 - 390 550 700 (44) Net interest income (after provisions) 8,579 8,958 9,830 10,800 10,580 15 10,300 3 Other operating income- incl. fees 650 548 350 80 240 (37) 100 140 Net operating income 9,229 9,506 10,180 10,880 10,820 13 10,400 4 Other income (620) 510 (750) (5,040) 4,210 (1,604) 4,300 (2)

Forex gains (620) 510 (750) (5,040) 4,210 (1,604) 4,300 (2) Total income 8,609 10,016 9,430 5,840 15,030 62 14,700 2 Total income (after provisioning) 8,609 10,016 9,430 5,840 15,030 62 14,700 2 Operating expenses 15 370 270 325 290 (0) 330 (12) PBT 8,585 9,631 9,160 5,515 14,740 64 14,370 3 Tax 2,069 2,623 2,300 1,320 3,660 51 5,736 (36) PAT (reported) 6,516 7,008 6,860 4,195 11,080 69 8,634 28 PBT - forex gains and extraordinaries 8,676 9,121 9,910 10,555 10,530 13 10,070 5

Other details Loan assets (Rs bn) 856 879 1,040 1,104 1,179 28 1,142 3 Yield on Assets-KS (%) 11.2 11.3 11.2 11.5 11.3Cost of funds-KS (%) 8.4 8.5 8.6 9.0 8.9Spreads (%) 2.8 2.7 2.6 2.5 2.4Net interest margins- KS calc (%) 4.15 4.13 3.89 4.03 3.84 3.92

Balance Sheet (Rs mn)Fixed Assets (Net) 770 781 760 754 750 Loan Assets 855,970 879,064 1,040,500 1,104,212 1,179,950 Investments 300 306 540 540 580 Current Assets, Loans & Advances 52,270 54,373 57,190 41,247 58,250 Total Assets 909,310 934,525 1,098,990 1,146,754 1,247,960Loans and borrowings 716,300 735,628 865,000 910,630 999,200 Total Current Liabilities 45,670 46,329 36,090 34,234 36,100 Deferred tax liability 440 427 810 783 660 Interest Subsidy Fund from GOI 6,290 5,994 4,290 4,089 3,910 Total liabilities 770,180 788,378 906,190 949,736 1,039,870Total equity 139,130 146,147 192,780 197,017 208,100

Source: Company, Kotak Institutional Equities estimates



PFC- Other quarterly data 1QFY11- 3QFY12 (Rs mn)

1Q11 2Q11 3Q11 4Q11 1Q12 2Q12 3Q12Disbursements Generation 46,980 41,480 55,730 79,700 47,810 59,840 73,640 Transmission 4,300 611 9,250 11,989 5,420 7,120 7,950 Distribution 3,090 3,500 3,910 7,750 4,140 2,520 4,180 R APDRP (A) 170 - 280 1,720 190 860 830 R APDRP (B) 1,950 6,250 1,330 10,870 1,020 4,430 6,170 Others 24,780 6,060 7,510 12,000 3,620 11,860 13,150 Total 81,280 63,400 78,020 118,510 62,200 86,630 105,920

State 43,310 48,870 54,310 80,070 41,550 57,250 66,590 Central 17,020 4,510 12,650 25,260 4,590 7,940 15,000

Joint 3,850 3,180 3,830 6,890 4,290 3,560 4,290 Private 17,110 6,840 7,220 6,290 11,760 17,880 20,040

Loan assets Generation 705,560 732,940 778,330 842,940 879,870 928,900 991,730 Transmission 64,700 63,930 71,390 75,960 79,450 83,080 89,160 Distribution 35,830 38,200 40,720 47,010 49,400 50,280 52,720 Others 49,850 43,990 29,960 30,100 32,090 41,510 46,300 Total 855,940 879,060 920,410 996,010 1,040,820 1,103,770 1,179,910

State 564,870 580,320 601,070 645,090 671,950 709,110 748,980 Central 165,520 168,380 179,390 203,000 205,950 211,880 224,720 Joint 68,660 70,730 74,120 79,910 83,770 86,220 90,080 Private 56,900 59,630 65,820 68,010 79,160 96,550 116,120

Borrowings profile 716,300 735,630 764,460 885,990 865,000 910,630 999,200 Bonds 530,790 542,370 562,690 599,500 617,230 695,030 752,640

Term loans 182,040 190,890 192,060 223,580 211,420 200,360 203,480 Short term loans 3,470 2,370 9,710 62,910 36,350 15,240 43,080

Source: Company

PFC, old and new estimates March fiscal years 2012-2014E (Rs mn)

Old estimates New estimates Old vs New (%)2012E 2013E 2014E 2012E 2013E 2014E 2012E 2013E 2014E

Net interest income 43,629 52,855 61,054 44,280 55,039 63,474 1 4 4 Loan growth (%) 23 18 16 25 21 15 - - - NIM (%) 3.9 3.9 3.9 3.9 4.0 3.9 - - -

NPL provisions 1,111 2,676 3,910 1,400 2,740 4,021 26 2 3 Other operational income (incl forex gains/losses) - 1,000 1,000 - 1,000 1,000 - - -

Forex gains (11,000) - - - - - Operating expenses 1,272 1,659 1,937 1,282 1,699 1,993 1 2 3

Employee 692 796 916 692 796 916 - (0) - PBT 30,203 49,477 56,164 39,976 51,557 58,417 32 4 4 Tax 7,702 12,617 14,322 9,994 12,889 14,604 30 2 2 PAT 22,501 36,860 41,842 29,982 38,668 43,813 33 5 5 PBT-forex 41,203 49,477 56,164 41,556 51,557 58,417 1 4 4

Source: Kotak Institutional Equities estimates

PFC Banks/Financial Institutions


PFC- Rolling PER and PBR February 2007-February 2012 (X)

4

8

12

16

20

24

Mar

-07

Jul-0

7

Nov

-07

Mar

-08

Jul-0

8

Nov

-08

Mar

-09

Jul-0

9

Nov

-09

Mar

-10

Jul-1

0

Nov

-10

Mar

-11

Jul-1

1

Nov

-11

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

Source: Company, Bloomberg, Kotak Institutional Equities estimates

PFC : Key ratios, March fiscal year-ends, 2009-2014E (%) 2009 2010 2011 2012E 2013E 2014E

Growth rates (%)Net interest income 32.5 26.2 18.8 24.7 24.3 15.3Loan loss provisions (135.0) (115.6) (5,666.7) 341.2 95.7 46.8Other income (71.2) (21.5) 794.8 (100.0) 0.0 0.0Operating expense 66.0 (21.3) (12.4) 38.4 32.6 17.3PBT 11.3 51.4 17.6 12.8 29.0 13.3PAT 63.3 19.7 11.1 14.5 29.0 13.3PBT- forex gains 26 29 22 17 24 13 Net loans 25 24 25 25 21 15Disbursements 30 24 30 29 19 7Unsecurued loans (liabilities) 28 29 27 21 22 15Net worth 23 15 14 37 14 14Yield measures (%)Yield on earnings assets 10.4 10.3 10.3 11.0 11.2 11.3Yield on loans 11.0 10.9 10.9 11.5 11.5 11.6Cost of funds 8.8 8.3 8.5 9.0 9.0 9.2Spread 2.2 2.6 2.4 2.5 2.5 2.5Net interest margin 4.0 4.1 3.9 3.9 4.0 3.9Total provisions/net loans (EoY) 0.01 — 0.03 0.11 0.18 0.23 Tax rate 1 22 26 25 25 25 Dividend payout ratio 23 22 20 20 20 20 Profitability measures (%)Interest income/total income 111.0 95.8 96.7 103.7 98.2 98.4 Other operating income/total income 0.8 0.4 3.3 - 1.8 1.6 Other income / total income (11.8) 3.8 - (3.7) - - Operating expenses/total income 6.3 3.4 2.5 3.0 3.0 3.1 Payout ratio 23.3 21.9 20.0 20.0 20.0 20.0 LT Debt- Equity Ratio (X) 4.5 5.1 5.6 5.0 5.3 5.4 CAR (%) 17.9 16.6 15.2 16.8 15.9 15.8 Loan loss provisions/ ave loan assets 0.01 — 0.01 0.10 0.20 0.25 ROA decomposition - % of avg. assetsNet interest income 3.9 3.9 3.8 3.8 3.9 3.8 Interest restructuring premium — — — — — —Loan loss provisions — — — 0.1 0.2 0.2 Adj. Net interest income 3.8 3.9 3.7 3.7 3.7 3.6 Net other operating income — 0.0 0.1 - 0.1 0.1 Other income (0.4) 0.2 — — — —Operating expenses 0.2 0.1 0.1 0.1 0.1 0.1 Other expenses & extraordinaries — — — — — —(1- tax rate) 99.0 78.2 73.9 75.0 75.0 75.0 ROA 3.2 3.1 2.8 2.6 2.7 2.6 Average assets/average equity 5.9 6.2 6.7 6.5 6.4 6.5 ROE 18.9 19.0 18.4 16.7 17.4 17.2 RoE (incl def tax) 13.8 19.0 18.3 16.6 17.3 17.2




PFC : Income statement and balance sheet, March fiscal year-ends, 2009-2014E (Rs mn)

2009 2010 2011 2012E 2013E 2014EIncome statement (Rsmn)Total interest income 64,534 79,214 100,389 129,258 159,016 188,291

Adj. interest (after rebate for timely 63,965 78,634 97,605 128,258 158,016 187,291 Other interest income 569 580 2,784 1,000 1,000 1,000

Total interest expense 40,859 49,324 64,870 84,978 103,977 124,817 Net interest income 23,675 29,890 35,519 44,280 55,039 63,474 Loan loss provisions 37 (6) 317 1,400 2,740 4,021 Other operating income 173 136 1,217 - 1,000 1,000 Other income (2,525) 1,184 - (1,580) - - Net total income 21,323 31,209 36,736 42,700 56,039 64,474 Operating expenses 1344 1058 926 1282 1699 1993Depreciation 38 34 43 43 43 43 PBT 19,905 30,134 35,443 39,976 51,557 58,417 Tax 205 6,562 9,250 9,994 12,889 14,604 PAT 19,699 23,573 26,193 29,982 38,668 43,813 PAT (incl def tax/normalised) 15,310 23,573 26,193 29,982 38,668 43,813 PBT + provisions-interest on restruction premium

19,941 29,983 35,760 41,376 54,297 62,439

EPS (Rs) 17.2 20.5 22.8 22.7 29.3 33.2 % growth 63.3 19.7 11.1 (0.5) 29.0 13.3 DPS(Rs) 4.0 4.5 4.6 4.5 5.9 6.6 BPS (Rs) 100.3 115.5 132.3 157.6 180.0 205.5 EPS (incl def tax Rs) 13 21 23 23 29 33BPS (incl def tax Rs) 101 116 133 158 181 206ABVPS (Rs) 96 110 130 152 166 172ABVPS (incl def tax Rs) 96 110 131 152 167 173

Balance sheet (Rs mn)AssetsFixed Assets (Net) 752 745 767 741 742 742 Total Loan Assets 644,290 798,558 995,707 1,241,821 1,498,229 1,718,923 Total Current Assets, Loans & Advances 36,686 48,155 49,327 41,598 48,699 53,937 Total Assets 682,086 847,771 1,046,340 1,284,160 1,547,670 1,773,602 Unsecured Loans 521,602 671,084 853,632 1,035,848 1,267,803 1,458,036Total current liabilities 18,606 21,245 30,215 31,426 32,699 34,035Deferred tax liability 555 469 830 830 830 830Interest Subsidy Fund from GOI 9,089 6,635 4,519 4,519 4,519 4,519Total liabilities 567,007 715,164 894,518 1,076,137 1,310,024 1,502,391 Paid up capital 11,478 11,478 11,478 13,200 13,200 13,200 Reserves & surplus 103,601 121,130 140,347 194,823 224,446 258,012 Total equity 115,078 132,608 151,825 208,023 237,646 271,211



Strong loan growth continues

Muthoot Finance reported a loan book (including loans sold down) of Rs229 bn, up 66% yoy. On a qoq basis the company added Rs19 bn; this is lower than Rs29 bn added in 2QFY12 but in line with 1QFY12 (likely a seasonal, trend). We continue to model Rs22 bn loan book addition in 4QFY12. We continue to model 58%, 25% and 13% loan growth in FY2012, FY2013 and FY2014 respectively, against over 100% growth over the past two years. If Muthoot’s growth traction remains strong and the regulatory proposals are finalized (as discussed later), the company is likely to need to raise capital.

NIM moderate in 3QFY12

Muthoot reported NIM of 10.8% in 3QFY12 against 11.4% in 2QFY12 and 11.2% in 1QFY12 and 10.4% in 3QFY11. This was higher than 10% expected by us. Cost of borrowings increased further to 11.6% from 11.2% in 2QFY12. The company had raised lending rates in 3QFY11 offsetting 290 bps rise in borrowings cost in the last four quarters.

In light of likely moderation in bulk borrowings rates and better-than-expected margin performance, we are revising up our NIM estimates for next two years by 50 bps.

The removal of agriculture priority sector status for gold loan NBFCs has raised concerns on financial flexibility of gold loan NBFCs. Muthoot has not faced any significant pressure as yet. The company has been selling down loans to banks (without PSL benefits) over the last few months. Loans outside balance sheet were Rs24 bn as compared to Rs26 bn in September 2011 and Rs34 bn as on December 2010. We however believe the company will find it challenging to sell-down loans if the proposed revised draft securitization guidelines are implanted by RBI; the regulator proposes to ban loan sell-down for assets that have bullet repayment and increase minimum holding period for loans sold down by NBFCs to banks.

Retain BUY rating

We retain our BUY rating on Muthoot with price target of Rs240 (33% upside). At our target price, Muthoot will trade at 8.7X PER and 2.2XPBR FY2013E for 26% EPS CAGR between FY2011 and FY2014E and 28-30% RoE.

Muthoot Finance (MUTH)


Strong results, retain BUY. Muthoot Finance reported PAT of Rs2.5 bn, up 77% yoy and 2% above estimates. Strong (66% yoy) growth in loan book, somewhat lower NIM and operating expenses were key drivers. We revise estimates to factor higher margins; retain BUY will price target of Rs240 (Rs230 earlier). Sharp decline in gold prices provides a risk to growth and earnings.

Muthoot FinanceStock data Forecasts/Valuations 2012 2013E 2014E

52-week range (Rs) (high,low) EPS (Rs) 23.1 27.5 31.7Market Cap. (Rs bn) 67.5 EPS growth (%) 46.4 19.3 15.0

Shareholding pattern (%) P/E (X) 7.9 6.6 5.7Promoters 80.1 NII (Rs bn) 22.2 27.0 31.5FIIs 7.9 Net profits (Rs bn) 8.6 10.2 11.8MFs 2.0 BVPS 83 111 142

Price performance (%) 1M 3M 12M P/B (X) 2.2 1.6 1.3Absolute 17.3 3.1 0.0 ROE (%) 38.7 28.4 25.0Rel. to BSE-30 6.2 2.4 0.0 Div. Yield (%) 0.0 0.0 0.0


218-144

BUY

FEBRUARY 03, 2012

RESULT


Price (Rs): 182


BSE-30: 17,605

Banks/Financial Institutions Muthoot Finance


Other highlights of the quarter

Gross NPLs were stable qoq at 0.57% in December against 0.59% in September 2011 but higher than 0.30% in December 2010. While the rise in NPLs over last two quarters is concerning, the overall NPL levels remain low.

Operating expenses ratio declined to 3.9% of average assets from 4.6% in 2QFY12. The company set up 747 branches over the past nine months and higher expenses of these branches affected the ratio for the quarters.

As on September 2011, capital adequacy was 18.33% up from 18.24% in September 2011. In case annual growth exceeds 60-70%, the company will need to approach the capital markets over next 4-6 quarters.

Muthoot Finance : Quarterly sheet 1QFY11- 3QFY12 (Rs mn)

1Q11 2Q11 1Q12 2Q12 3Q12 YoY (%) 3Q12EActual vs

KS (%)Interest income 3,791 5,223 9,141 10,984 12,261 Interest expenses 1,721 2,412 4,407 5,452 6,341 Net interest income 2,070 2,811 4,734 5,532 5,920 79 6,000 (1) Provisions (including standard assets) - 22 104 166 57 - 100 (43) NII post provisions 2,070 2,789 4,630 5,366 5,863 77 5,900 (1) Other income 36 50 56 65 46 31 50 (8) Operating expenses 836 1,120 1,786 2,249 2,163 81 2,285 (5)

Admin expenses 386 530 911 1,190 943 34 1,200 (21) Employee expenses 416 569 815 985 1,134 152 1,000 13 Depreciation 34 43 60 74 86 116 85 1

PBT 1,270 1,719 2,900 3,182 3,746 74 3,665 2 Tax 422 586 995 1,027 1,235 69 1,209 2 PAT 848 1,133 1,905 2,155 2,511 77 2,456 2

Loan book 68,853 90,914 155,490 183,530 204,236 98 - - Networth 6,679 10,383 23,960 26,115 28,629 - - - Key highlightsLoans outside balance sheet (Rs mn) 22,507 24,587 24,000 25,875 24,615 - Total loans under management (Rs mn) 91,360 115,500 179,490 209,405 228,851 66 230,000 - Average loans under management (Rs mn) 83,030 103,430 169,436 194,448 219,128 Borrowings +loans sold down (Rs mn) 91,552 110,324 168,597 198,440 208,953

Yield on loans (%) 18.3 20.2 21.6 22.6 22.4 Cost of borrowings (%) 8.4 9.6 10.4 11.2 11.6 Spread (%) 9.9 10.6 11.1 11.4 10.8 NIM (KS- calc %) 10.0 10.9 11.2 11.4 10.8 - 10.9 - Opex/ average assets (%) 4.0 4.3 4.2 4.6 3.9 RoA (%) 4.1 4.4 4.5 4.4 4.6

RoE (%) 54.2 53.1 40.9 34.4 36.7 Gross NPLs (%) 0.42 0.41 0.31 0.59 0.57

Capital adequacy (%) - 14.77 19.19 18.24 18.33

Branches (#) 1,763.0 2,038.0 2,997.0 3,274.0 3,480.0 - - - Gold (weight in tons) 76 90 120 130 132 - - - Value of gold (Rs mn) 135,170 16,230 247,350 340,000 387,816 - - - Gold price (Rs/ gm) 1,765 1,799 2,060 2,625 2,938 - - - Value of gold/borrower (assuming 25/ gms per loan) 44,125 44,975 51,500 65,625 73,450 - - -


Muthoot Finance Banks/Financial Institutions


Muthoot Finance- Change in estimates Old vs New estimates, March fiscal year-ends, 2012E-2014E (Rs mn)

New estimates Old estimates New vs old (%)2012E 2013E 2014E 2012E 2013E 2014E 2012E 2013E 2014E

Loans under management 251,221 313,178 352,860 251,221 313,178 352,860 - - - NIM (%) 10.8 9.6 9.5 9.8 9.0 8.9 - - -

Interest income 45,090 57,851 67,436 43,040 56,440 65,771 5 2 3 Interest expenses 22,900 30,886 35,917 22,931 30,965 36,030 (0) (0) (0) Net Interest income 22,189 26,965 31,520 20,109 25,475 29,742 10 6 6 Provisions 496 343 402 496 343 402 - - - Operating expenses 8,404 10,751 12,862 7,186 9,741 11,550 17 10 11 Extraordinary items - - - - - - - - - Profit before tax 13,077 15,603 17,950 12,240 15,138 17,498 7 3 3 Tax 4,511 5,383 6,193 4,223 5,222 6,037 7 3 3 Profit after tax 8,565 10,220 11,758 8,017 9,915 11,461 7 3 3 EPS (Rs) 23 28 32 22 27 31 7 3 3 BVPS (Rs) 83 111 142 82 108 139 2 2 2


Gold price remains high in INR terms 1QCY04- 4QCY12

0

700

1,400

2,100

2,800

3,500

1QC

Y04

3QC

Y04

1QC

Y05

3QC

Y05

1QC

Y06

3QC

Y06

1QC

Y07

3QC

Y07

1QC

Y08

3QC

Y08

1QC

Y09

3QC

Y09

1QC

Y10

3QC

Y10

1QC

Y11

3QC

Y11

Gold price (Rs / gm)

Source: Bloomberg

Banks/Financial Institutions Muthoot Finance


Muthoot Finance : Key ratios March fiscal year-ends, 2010-2014E (%)

2010 2011 2012E 2013E 2014EGrowth in key parameters (%)Profit and loss statement - yoy (%)Interest income 78 113 96 28 17Interest costs 53 118 122 35 16Net interest income 104 110 75 22 17Net total income 98 108 74 21 17Provisioning expenses 297 1089 54 -31 17Net income (post provisions) 98 104 75 23 17

Operating expneses 65 83 72 28 20Staff expenses 78 89 80 41 30Other operating expenses 58 85 66 17 8Depreciation expenses 49 21 48 17 13

PBT post extraordinaries 133 120 72 19 15Tax 134 126 69 19 15PAT 133 117 73 19 15Balance sheet - yoy (%)

Gold loans 112 115 94 25 13Gold loans (incl sell down) 121 113 58 25 13Fixed assets 19 53 28 17 13Other current assets -22 141 47 27 11Total assets 71 117 85 25 13Borrowings 67 126 83 24 10Current liabilities 151 -14 114 20 20Total liabilities 72 116 80 24 10Share capital 514 6 16 0 0Reserves and surplus -10 258 168 38 31Shareholders funds 61 128 131 33 29

Key ratios (%)Interest yield (incl loans sold down) 19.9 19.7 22.0 20.5 20.3 Interest cost (incl loan sold down) 8.4 8.8 11.3 11.3 11.3 Spreads 11.5 10.9 10.7 9.2 9.0 NII/ loans under management 11.2 10.9 10.8 9.6 9.5 Operating costs/ net income (post provisions 43.6 39.1 38.4 40.1 41.0 Cash/ total assets + loan sold down 6.8 7.6 5.8 6.0 5.9

Tax rate 34.1 35.1 34.5 34.5 34.5

Debt/ equity (X) 9.0 8.9 7.1 6.6 5.6 Du Pont analysis (% of average assets including loans sold down)Net interest income 9.3 9.5 9.5 8.5 8.4 Other income 0.2 0.1 0.1 0.1 0.1 Credit costs 0.0 0.2 0.2 0.1 0.1 Operating expenses 4.1 3.7 3.6 3.4 3.4 PBT post extraordinaries 5.3 5.7 5.6 4.9 4.8 1-tax rate 0.7 0.6 0.7 0.7 0.7 RoA 3.5 3.7 3.7 3.2 3.1 Average assets / average equity (X) 13.8 13.9 10.5 8.9 8.0 RoE 48.1 51.5 38.7 28.4 25.0


Muthoot Finance Banks/Financial Institutions


Muthoot Finance : Profit and loss and Balance sheet March fiscal year-ends, 2010-2014E (Rs mn)

2010 2011 2012E 2013E 2014EIncome statement (Rs mn)Interest income 10,774 22,983 45,090 57,851 67,436 Interest costs 4,737 10,326 22,900 30,886 35,917 Net interest income 6,037 12,657 22,189 26,965 31,520 Other income 119 175 192 214 250 Net total income 6,156 12,832 22,381 27,180 31,770 Provisioning expenses 27 323 496 343 402 Net income (post provisions) 6,129 12,509 21,885 26,836 31,367 Operating expneses 2,674 4,896 8,404 10,751 12,862

Staff expenses 1,169 2,209 3,971 5,586 7,252 Other operating expenses 1,355 2,508 4,166 4,854 5,260 Depreciation expenses 149 180 267 311 351

PBT post extraordinaries 3,455 7,612 13,077 15,603 17,950 Tax 1,180 2,670 4,511 5,383 6,193

PAT 2,275 4,942 8,565 10,220 11,758 No of shares (mn) 301 314 371 371 371 EPS - adjusted for bonus (Rs) 7.6 15.7 23.1 27.5 31.7 BVPS - adjusted for bonus (Rs) 19.4 42.5 83.1 110.6 142.3

Balance sheet (Rs mn)Assets Gold loans 54,298 116,821 226,099 281,860 317,574 Other loans 319 697 - - - Investments 75 75 75 75 75 Fixed assets 1,533 2,341 3,000 3,495 3,945 Current assets 8,202 19,729 28,930 36,869 41,017

Cash and bank balances 5,760 13,755 16,368 21,210 23,374 Cash for securitised transactions 1,037 2,162 1,297 1,617 1,822 Other cash balance 4,723 11,593 15,071 19,593 21,552

Other current assets 2,442 5,974 12,561 15,659 17,643 Total assets 64,427 139,662 258,103 322,298 362,611 LiabilitiesBorrowings 52,805 119,385 218,945 271,262 297,827

Retail NCDs 27,193 39,832 - - - Bank borrowings 20,828 60,529 - - - Loans from directors/ inter corpotrate loa 587 821 821 821 821 Subordinated debt 3,247 7,106 14,747 23,247 23,247

Current liabilities 4,524 3,878 8,291 9,950 11,939 Provisions 1,230 3,031 - - - Deferred tax liability 25 25 - - - Total liabilities 58,584 126,319 227,236 281,211 309,766 Share capital 3,010 3,202 3,714 3,714 3,714 Reserves and surplus 2,832 10,140 27,153 37,373 49,131 Shareholders funds 5,842 13,342 30,867 41,087 52,845 Aggregate loan book (incl sell down)Loan on books 54,298 116,821 226,099 281,860 317,574 Loans outside books 20,083 41,863 25,122 31,318 35,286 Loans under management 74,381 158,684 251,221 313,178 352,860 Loans outside books./ total loans (%) 27 26 10 10 10 Total assets under management 84,509 181,525 283,225 353,616 397,897



Margin nears normalized levels; gives comfort for higher provisions

Over the past two quarters Corporation Bank has been addressing the revenue side quite well. NII was flat yoy but improved 16% qoq due to 23 bps NIM expansion qoq. A combination of reduction in low-yielding wholesale loans and improving lending yields resulted in margins reaching closer to normalized levels. We believe the bank should be able to maintain/improve NIMs from these levels as funding costs improve.

Slippages, restructured loans and credit costs are likely to remain volatile in nature as the bank has one of the highest shares of wholesale loans: large industry comprises nearly 45% of the overall loans. Exposure to power is nearly 10% of loans. We are revising our FY2013-14 estimates downwards primarily to factor higher credit costs. We are building loan-loss provisions to increase to 110-120 bps of loans for FY2013-14. At 0.7X book and 4X FY2012E EPS, valuations are attractive, given that the underlying business generates RoE of about 18%. We maintain BUY.

Margins expand 23 bps qoq to 2.7%; over 50 bps improvement in over the past two quarters

NIMs expanded 23 bps qoq to 2.7% due to better loan re-pricing and reduction in select low yielding wholesale loans. We believe the bank is now well positioned from a margin perspective (50 bps improvement in the past two quarters) especially with cost of funds peaking at current levels. Higher margins can also support higher-than-expected credit costs without impairing RoE from current levels. For the quarter, yield on loans improved 16 bps qoq while cost of deposits increased by 8 bps qoq.

Loan growth primarily driven by large corporate segment; low costs deposits still low

Loan growth for the quarter was at 28% yoy (13% qoq) primarily driven by large corporate segment (45% of advances, 51% yoy). Loans to SME segment grew 60% yoy while retail loans grew 23% yoy. Loans to agriculture grew 16% yoy. Infrastructure comprises 16% of loans with power 9% and telecom 3% of loans. We expect the bank to deliver 15% CAGR over FY2012-14. Deposits grew faster at 29% yoy (5% qoq). CASA ratio was extremely low at 21.1%.

Corporation Bank (CRPBK)


NIM expansion cushions credit costs. Strong NIM expansion qoq (23 bps) enabled the bank to provide for higher credit costs for the quarter. Reduction in wholesale funds should comfort NIMs at current levels and provide for higher-than-expected credit costs. Slippages for the quarter declined to 1.8% and driven by one large corporate segment. Valuations are attractive at 0.7X book and 4X FY2012 EPS delivering RoEs of 17-18% and EPS growth of 6% CAGR over FY2012-14E. Maintain BUY.

Corporation BankStock data Forecasts/Valuations 2012 2013E 2014E

52-week range (Rs) (high,low) EPS (Rs) 107.5 107.5 120.0Market Cap. (Rs bn) 63.5 EPS growth (%) 12.7 (0.0) 11.7


Price performance (%) 1M 3M 12M P/B (X) 0.8 0.7 0.6Absolute 22.1 (0.3) (22.1) ROE (%) 20.6 17.8 17.4Rel. to BSE-30 10.6 (1.0) (18.3) Div. Yield (%) 5.3 5.3 5.9


658-335

BUY

FEBRUARY 06, 2012

RESULT


Price (Rs): 428


BSE-30: 17,605

QUICK NUMBERS

• NII up 16% qoq; NIMs expand 23 bps qoq

• Slippages at 1.8%; restructured loans at 5% of loans

• Maintain BUY with TP of `600 (unchanged)

Banks/Financial Institutions Corporation Bank


Slippages at 1.8% in the quarter; restructured loans at 5%

Gross NPLs increased 16% qoq but this was primarily due to lower recovery as slippages for the quarter declined to 1.8% against 2.6% in 2QFY12. Slippages in the quarter were primarily from a single corporate segment – about 70 bps of loans – from the aviation segment. Gross NPLs in the quarter were `12.4 bn (1.4% of loans) while net NPLs increased 19% qoq to `8.9 bn (1% of loans). Loan loss provisions were high at 0.9% despite lower slippages due to NPV provisions for restructured loans. Provision coverage (including write-off) were stable qoq at 63%.

Restructured loans were higher at 5% (30 bps qoq increase) of loans primarily due to one large restructuring from the telecom vertical.

Other operational highlights for the quarter

Cost-income ratio for the quarter was at 37% as compared to 39% in September 2011. Operating expenses grew 29% yoy primarily on the back of higher employee costs.

Non-interest income grew sharply by 67% yoy to `4.4 bn on the back of strong treasury gains and forex income. Core fee income grew 28% yoy. Treasury gains were strong at `1.1 bn. Forex income grew 74% yoy to `561 mn. Income from written-off accounts more than doubled yoy.

Total CAR was at 12.8% with tier-1 capital at 7.9%.

We maintain our estimates for factoring the current performance Old and new estimates, March fiscal year-ends, 2012-14E (` mn)

New estimates Old estimates % change2012E 2013E 2014E 2012E 2013E 2014E 2012E 2013E 2014E

Net interest income 32,130 37,038 44,340 31,327 38,601 46,578 2.6 (4.0) (4.8) NIM (%) 2.1 2.0 2.1 2.0 2.1 2.2 Loan growth 14.0 13.9 15.8 17.2 18.0 18.9 Loan loss provisions 6,971 11,122 14,000 6,601 9,429 12,490 5.6 18.0 12.1 Other income 15,966 16,867 18,015 14,793 14,835 16,740 7.9 13.7 7.6

Fee income 3,286 3,549 3,903 3,250 3,738 4,299 1.1 (5.1) (9.2) Treasury income 4,300 5,000 5,500 3,000 1,500 1,500 43.3 233.3 266.7

Operating expenses 18,530 21,346 24,539 17,973 20,717 23,858 3.1 3.0 2.9 Employee expenses 9,742 11,096 12,623 9,185 10,462 11,902 6.1 6.1 6.1

Investment dep/amortization 1,500 650 650 1,600 750 750 (6.3) (13.3) (13.3) PBT 20,395 20,387 22,765 19,446 22,141 25,820 4.9 (7.9) (11.8) Net profit 15,926 15,920 17,777 14,213 16,182 18,871 12.1 (1.6) (5.8) PBT - treasury 17,595 16,037 17,915 18,046 21,391 25,070 (2.5) (25.0) (28.5) PBT - treasury + NPL provisions 24,566 27,159 31,915 24,647 30,819 37,560 (0.3) (11.9) (15.0)


Corporation Bank Banks/Financial Institutions


Corporation Bank quarterly results March fiscal year-ends, 3QFY11-3QFY12 (` mn)

3QFY11 4QFY11 1QFY12 2QFY12 3QFY12 % chg 3QFY12E Actual Vs KS

Interest income 24,713 25,554 29,783 30,907 33,628 36 33,018 2 Advances 17,214 18,823 22,042 22,104 24,574 43 23,535 4 Investments 6,309 5,909 6,595 7,895 8,163 29 8,575 (5) Others 1,190 822 1,146 908 892 (25) 908 (2)

Interest expenses 16,289 17,936 22,708 23,471 25,010 54 25,275 (1) Net interest income 8,425 7,618 7,076 7,436 8,618 2 7,743 11 Non-interest income 2,645 4,904 2,897 3,987 4,417 67 4,631 (5)

Fee income and others 1,729 2,725 1,945 1,179 2,189 27 Invesment gains 324 819 343 1,576 1,115 244 Forex income 322 359 212 505 561 74 Dividend on shares 27 74 8 8 5 (81) Bad debt recovery 243 928 389 719 546 125 Other income excluding treasury 2,321 4,086 2,554 2,411 3,301 42

Total income 11,069 12,522 9,973 11,423 13,035 18 12,374 5 Operating expenses 3,699 5,056 4,208 4,421 4,775 29 4,603 4

Employee cost 1,830 2,996 2,151 2,347 2,473 35 2,416 2 Other cost 1,869 2,060 2,057 2,074 2,302 23 2,187 5

Pre-tax and pre-provision profit 7,370 7,466 5,764 7,002 8,259 12 7,771 6 Provisions 2,500 2,695 1,673 2,048 3,015 21 2,494 21

NPLs 1,534 1,873 901 1,727 1,769 15 1,994 (11) Invt. depreciation 86 545 706 192 504 484 300 68

PBT 4,870 4,771 4,092 4,954 5,244 8 5,277 (1) Tax 1,045 1,318 577 943 1,222 17 1,420 (14) Net profit 3,825 3,453 3,515 4,011 4,022 5 3,857 4 Tax rate (%) 21 28 14 19 23 PBT-treasury profits 4,632 4,497 4,455 3,570 4,634 0 PBT- treasury profits + NPL provisions 6,166 6,371 5,356 5,297 6,402 4

Balance sheet (Rs bn)Capital 1.4 1.5 1.5 1.5 1.5Reserves and surplus 56.3 69.9 69.9 77.4 81.4Deposits 985.3 1167.5 1177.8 1206.1 1266.1 29

CASA Ratio (%) 24.3 26.0 21.0 21.8 21.1Borrowings 110.8 159.7 89.5 91.3 121.8Other liabilities and provisions 50.1 36.6 51.6 38.5 54.5P and L account balance 10.7 0.0 3.5 0.0 0.0Total Liabilities 1214.5 1435.1 1393.8 1414.8 1525.3

Cash and balances with RBI 55.8 80.0 85.1 79.5 84.7Bal (banks), money at call/short notice 14.3 23.9 1.6 5.2 5.8Investments 391.1 434.5 490.9 482.8 478.3 22 Advances 719.3 868.5 789.0 816.3 923.8 28

Retail 139.9 156.7 151.9 160.7 171.4Fixed assets 3.2 3.3 3.4 3.5 3.6Other assets 30.8 24.8 23.8 27.6 29.0Total assets 1214.5 1435.1 1393.8 1414.8 1525.3




Corporation Bank- key operational parameters March fiscal year-ends,3QFY11-3QFY12

3QFY11 4QFY11 1QFY12 2QFY12 3QFY12

Asset quality detailsGross NPLs (Rs mn) 9,138 7,902 8,482 10,799 12,492 Gross NPLs (%) 1.3 0.9 1.1 1.3 1.4 Net NPLs (Rs mn) 4,135 3,977 4,115 7,450 8,853 Net NPLs (%) 0.6 0.5 0.5 0.9 1.0 Provision coverage (%) 54.7 49.7 51.5 31.0 29.1 Provision coverage (inc w/o) (%) 72.8 75.0 74.9 64.7 62.9 Slippages (Rs mn) 1,120 2,705 968 2,790 2,042 Slippages ratio (%) 1.6 0.8 0.7 2.6 1.8 Restructured loans (gross, Rs mn) 30,361 31,439 32,191 37,979 45,394 Restructured loans to loans (%) 4.2 3.6 4.1 4.7 4.9 Slippages of restructured loans (Rs mn) 2,290.0 2,290 2,290 2,290 4,670 Slippages to restructured book (%) 7.5 7.3 7.1 6.0 10.3

Break-up of NPLsAgriculture 5.5 3.9 3.5 3.8 3.4 SME 2.6 1.0 1.1 1.5 1.9 Other priority 1.8 1.7 1.0 2.1 2.1 Large industry 0.3 0.4 0.5 0.6 0.8 Wholesale trade 0.4 0.9 0.8 0.4 0.2 Others 1.2 0.6 1.4 2.0 0.6 Total 1.3 0.9 1.1 1.3 1.4

Yield management measures (%)Yield on advances 10.1 10.5 11.2 11.8 11.9 Yield on investments 7.3 - 7.7 7.8 7.8 Cost of deposits 5.7 6.4 7.3 7.6 7.6 NIM 2.7 2.5 2.1 2.4 2.7 Calulated Figures (Quarterly)Yield on advances 9.7 9.5 10.6 11.0 11.3 Yield on investments 6.5 5.7 5.7 6.5 6.8 Yield on funds 8.4 7.9 8.6 9.0 9.4 Cost of funds 5.9 5.9 7.0 7.3 7.5 Spreads 2.5 2.0 1.6 1.7 1.9 NIM 2.9 2.4 2.0 2.2 2.4

Capital adequacy details (%)CAR 14.3 14.1 14.1 13.3 12.8

Tier I 8.1 8.7 8.3 8.2 7.9 Tier II 6.1 5.4 5.7 5.1 5.0




Corporation Bank: Rolling PBR and PER February 1999-February 2012

0

3

6

10

13

16

Feb-

00

Nov

-00

Aug

-01

May

-02

Feb-

03

Nov

-03

Aug

-04

May

-05

Feb-

06

Nov

-06

Aug

-07

May

-08

Feb-

09

Nov

-09

Aug

-10

May

-11

Feb-

12

0.0

0.5

1.0

1.4

1.9

2.4Rolling PER (X) (LHS) Rolling PBR (X) (RHS)

Source: Kotak Institutional Equities



Corporation Bank key ratios and growth rates March fiscal year-ends, 2009-2014E (%)

2009 2010 2011 2012E 2013E 2014EGrowth rates (%)Net loan 23.8 30.3 37.4 14.0 13.9 15.8 Customer assets 23.2 29.6 36.8 13.9 13.8 15.7 Cash and bank balance 18.2 2.4 (3.7) 15.9 14.1 11.2 Total Asset 30.5 28.5 28.5 19.1 16.6 13.2 Deposits 33.5 25.3 25.9 21.3 18.0 13.8 Net interest income 11.0 30.7 33.0 9.3 15.3 19.7 Loan loss provisions (4.6) 114.9 61.2 12.4 59.6 25.9 Total other income 58.1 7.2 11.6 20.6 5.6 6.8 Net fee income 22.6 14.1 16.9 (7.0) 8.0 10.0 Net capital gainsNet exchange gains 90.2 19.0 15.3 40.0 (5.0) 10.0 Operating expenses 12.3 25.8 30.3 12.9 15.2 15.0 Employee expenses 9.4 35.0 41.7 8.9 13.9 13.8 Key ratios (%)Yield on average earning assets 8.2 7.6 7.4 8.5 8.2 8.2 Yield on average loans 10.0 8.9 8.6 10.3 9.9 9.8 Yield on average investments 7.4 7.1 6.0 6.4 6.5 6.6 Average cost of funds 6.3 5.6 5.3 6.8 6.4 6.4 Interest on deposits 6.3 5.5 5.1 6.7 6.4 6.4 Difference 1.8 2.0 2.1 1.8 1.7 1.8 Net interest income/earning assets 2.3 2.3 2.4 2.1 2.0 2.1 Spreads on lending business 3.7 3.3 3.4 3.5 3.5 3.5 Spreads on lending business (incl. Fees) 4.3 3.8 3.8 3.9 3.8 3.8 New provisions/average net loans 0.4 0.7 0.8 0.8 1.1 1.2 Total provisions/gross loans 0.8 0.7 0.6 1.2 2.0 2.8 Interest income/total income 60.4 65.1 68.9 66.8 68.7 71.1 Other income / total income 39.6 34.9 31.1 33.2 31.3 28.9 Fee income to total income 9.5 8.9 8.3 6.8 6.6 6.3 Fee income to advances 0.6 0.5 0.5 0.4 0.3 0.3 Fees income to PBT 19.1 18.1 18.3 16.1 17.4 17.1 Net trading income to PBT 20.7 14.8 6.7 13.7 21.3 21.3 Exchange inc./PBT 5.7 5.6 5.6 7.4 7.0 6.9 Operating expenses/total income 35.8 37.1 38.5 38.5 39.6 39.4 Operating expenses/assets 1.3 1.3 1.3 1.2 1.2 1.2 Operating profit /AWF 1.3 1.4 1.4 1.0 0.8 0.8 Tax rate 35.6 29.5 26.9 21.9 21.9 21.9 Dividend payout ratio 20.1 20.1 21.0 21.0 21.0 21.0 Share of deposits Current 17.8 14.5 12.1 12.1 12.1 12.1 Fixed 68.6 71.4 74.0 75.0 75.0 75.0 Savings 13.6 14.0 13.9 12.9 12.9 12.9 Loans-to-deposit ratio 65.6 68.2 74.4 69.9 67.5 68.7 Equity/assets (EoY) 5.6 5.2 5.0 4.9 4.8 4.8 Asset quality measures (%)Gross NPL 1.1 1.0 0.9 1.4 1.8 2.0 Net NPL 0.3 0.3 0.5 1.0 1.2 1.3 Slippages 0.6 1.0 1.3 1.6 1.7 1.8 Provision coverage 75.3 69.7 49.7 32.8 35.0 37.1 Dupont analysis (%)Net interest income 2.2 2.2 2.3 2.0 2.0 2.1 Loan loss provisions 0.2 0.4 0.5 0.4 0.6 0.7 Net other income 2.2 2.2 2.3 2.0 2.0 2.1 Operating expenses 1.4 1.3 1.3 1.2 1.2 1.2 (1- tax rate) 64.4 70.5 73.1 78.1 78.1 78.1 ROA 1.2 1.2 1.1 1.0 0.9 0.8 Average assets/average equity 16.8 18.6 19.8 20.3 20.7 20.8 ROE 19.6 22.0 21.9 20.6 17.8 17.4




Corporation Bank P&L and balance sheet March fiscal year-ends, 2009-2014E (` mn)

2009 2010 2011 2012E 2013E 2014E

Total interest income 60,674 72,946 91,352 131,190 148,309 171,179 Total interest expense 43,764 50,843 61,955 99,060 111,271 126,839 Net interest income 16,910 22,103 29,397 32,130 37,038 44,340 Loan loss provisions 1,790 3,848 6,203 6,971 11,122 14,000 Net interest income (after prov.) 15,120 18,255 23,194 25,159 25,916 30,339 Other income 11,072 11,864 13,244 15,966 16,867 18,015 Net fee income 2,648 3,023 3,533 3,286 3,549 3,903 Net capital gains 4,416 3,088 2,095 4,300 5,000 5,500 Net exchange gains 784 934 1,076 1,507 1,431 1,574 Operating expenses 10,016 12,600 16,417 18,530 21,346 24,539 Employee expenses 4,680 6,317 8,949 9,742 11,096 12,623 Depreciation on investments 1,545 619 797 1,500 650 650 Other Provisions 769 218 (113) 700 400 400 Pretax income 13,862 16,683 19,336 20,395 20,387 22,765 Tax provisions 4,935 4,921 5,204 4,469 4,467 4,988 Net Profit 8,928 11,762 14,133 15,926 15,920 17,777 % growth 21.5 31.8 20.2 12.7 (0.0) 11.7 PBT+provision-treasury gains 13,550 18,279 24,129 25,266 27,559 32,315 % growth 21.4 34.9 32.0 4.7 9.1 17.3

Balance sheet (Rs mn)Cash and bank balance 105,397 107,919 103,925 120,494 137,522 152,895 Net value of investments 249,378 345,226 434,527 570,334 699,255 767,827 Govt. and other securities 175,524 247,917 280,901 421,116 550,038 618,610 Shares 1,255 3,546 4,397 4,397 4,397 4,397 Debentures and bonds 11,191 12,665 13,129 7,660 7,660 7,660 Net loans and advances 485,122 632,026 868,504 990,452 1,128,104 1,306,717 Fixed assets 2,989 2,893 3,310 3,374 3,405 3,401 Other assets 26,173 28,609 24,819 24,819 24,819 24,819 Total assets 869,058 1,116,673 1,435,086 1,709,473 1,993,106 2,255,660

Deposits 739,839 927,337 1,167,475 1,416,127 1,671,592 1,901,679 Borrowings and bills payable 50,139 96,605 165,841 176,516 189,326 204,698 Other liabilities 30,115 34,983 30,392 33,431 36,774 40,451 Total liabilities 820,093 1,058,924 1,363,708 1,626,074 1,897,693 2,146,829 Paid-up capital 1,434 1,434 1,481 1,481 1,481 1,481 Reserves & surplus 47,531 56,314 69,897 81,917 93,932 107,350 Total shareholders' equity 48,965 57,749 71,378 83,398 95,414 108,831



Backlog declines significantly leading to guidance of declining topline and potential margin fall

Sedate 3QFY12 inflows of Rs5.9 bn versus quarterly run-rate of Rs12-14 bn led to backlog declining to Rs51 bn (Rs58 bn at end-Sep ’11, Rs64 bn at end-Dec ’10). TMX may lower margin requirement if inflows continue to remain sedate. Standalone sales were Rs12.7 bn in 3Q, (6% miss, up 2% yoy). EBITDA margin declined by 110 bps yoy to10.7% on higher other expenses.

Outlook: Steel, cement to lead pick-up expected only in 2HFY13E; power pick-up delay to FY2014E

Thermax expects project ordering to pick up with steel and cement ordering starting from 2HFY13E with the first half being very challenging in inflows. Improvement in power sector may be delayed till FY2014E on resolution of key issues (tariffs, fuel security, interest rates and land acquisition). In the near term, Thermax is expecting better business from exports (based on enquires) versus domestic. Sharp decline in backlog led to guidance decline in FY2013E revenues. It aims to maintain FY2013E margin at current levels (10%) although highlighted openness to compromise on margin (sedate inflows, retaining existing customer) but not on commercial terms.

Other takeaways: Receivables led increase in working capital; B&W JV progressing as per plan

Working capital has increased to Rs1.7 bn from Rs455 mn at end Sep 2011 (Rs500 mn increase in receivables, Rs1 bn lower advances) although still low in absolute terms at 12 days of sales. Its supercritical JV with Babcock Wilcox is on track for completion by Sep’12 though ramp-up appears to be slower than expected (130 recruitment versus initial projections of about 250 by this time).

Revise estimates; retain REDUCE on back of weak inflows, competition and margin pressure

We have revised EPS estimates to Rs33.3 and Rs33.1 from Rs32.8 and Rs31.4 for FY2012E and FY2013E with marginal changes to order inflows (Rs45 bn for FY2012E with Rs32 bn in 9MYF11 and Rs49.5 bn in FY2013E) and margins (for both standalone as well as the Rs8.5 bn subsidiaries business). We revise our target price to Rs500 (15XFY2013E from 13XFY2013E). We retain REDUCE (downgraded in last sector note on Jan 18 on sharp run-up) on back of (1) weak inflows on back of slow capex environment, (2) strong competition potentially leading to margin pressure as well and (3) valuations that do not leave much upside as stock trades at about 15X FY2013E.

Thermax (TMX)

Industrials

Weak order inflows affect visibility. Thermax reported sharp fall in backlog to Rs51 bn leading to guidance of decline in FY2013E revenues. The company may lower margin requirement if inflows continue to remain sedate. It expects domestic business to be challenging in 1HFY13E with steel and cement supporting recovery in 2HFY13E and power recovering only in FY2014E. Supercritical JV on track for Sep 2012 completion. Retain REDUCE on back of weak inflows, competition and margin pressure.

ThermaxStock data Forecasts/Valuations 2012 2013E 2014E


Shareholding pattern (%) P/E (X) 15.9 16.6 15.5Promoters 62.0 Sales (Rs bn) 60.5 58.8 60.7FIIs 10.6 Net profits (Rs bn) 3.9 3.7 4.0MFs 7.4 EBITDA (Rs bn) 5.9 5.7 6.0

Price performance (%) 1M 3M 12M EV/EBITDA (X) 9.2 9.0 8.0Absolute 27.9 5.4 (20.0) ROE (%) 27.0 21.9 20.2Rel. to BSE-30 15.8 4.7 (16.1) Div. Yield (%) 1.8 1.7 1.8


720-381

REDUCE

FEBRUARY 06, 2012

RESULT

Coverage view: Cautious

Price (Rs): 521


BSE-30: 17,605

QUICK NUMBERS

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Thermax Industrials


Backlog decline leading to guidance for declining sales and potential margin fall

Thermax reported order inflows of Rs5.9 bn versus quarterly run-rate of Rs12-14 bn over last ten quarters. 3Q order intake was supported by Rs2 bn of orders from environment segment and Rs3.9 bn of orders from the energy segment. The decline in inflows was across key segments including power, cement and steel. The company highlighted only one large power order that came for negotiation in 3QFY12 which it rejected on price.

Order inflows and backlog break-up, March fiscal year-ends, 2008-3QFY12

Order backlogOrder inflows

0

5,000

10,000

15,000

20,000

25,000

1QFY

08

3QFY

08

1QFY

09

3QFY

09

1QFY

10

3QFY

10

1QFY

11

3QFY

11

1QFY

12

3QFY

12

Energy Environment

0

10,000

20,000

30,000

40,000

50,000

60,000

70,000

1QFY

08

3QFY

08

1QFY

09

3QFY

09

1QFY

10

3QFY

10

1QFY

11

3QFY

11

1QFY

12

3QFY

12

Energy Environment

Source: Company, Kotak Institutional Equities

FY2013E topline expected to decline; margin may get compromised

The company reported standalone backlog of Rs51 bn declining significantly from Rs58 bn at end-2QFY12 and Rs64 bn in 3QFY11. It expects the sharp reduction in backlog (yoy decline equals a quarter of sales) would lead to a decline in FY2013E revenues. The backlog at Rs51 bn provides a year of future visibility on one year forward of revenues.

Order backlog provides visibility of 1 year based on forward four quarter revenues Order booking, Order backlog & visibility trend for Thermax at end-Dec ’11

1.0

-

10

20

30

40

50

60

70

1QFY

07

2QFY

07

3QFY

07

4QFY

07

1QFY

08

2QFY

08

3QFY

08

4QFY

08

1QFY

09

2QFY

09

3QFY

09

4QFY

09

1QFY

10

2QFY

10

3QFY

10

4QFY

10

1QFY

11

2QFY

11

3QFY

11

4QFY

11

1QFY

12

2QFY

12

3QFY

12

(Rs bn)

-

0.5

1.0

1.5

2.0

(# of years)Order booking (Rs bn, LHS)

Order backlog (Rs bn, LHS)

Years of visibility (RHS)


Industrials Thermax


The company highlighted its intention to maintain profitability in FY2013E at FY2012E levels of about 10%. But if it’s a question of losing market share or an existing customer then the company may take some hit on margins. The aim is not to take margin hit for higher revenue growth but more to protect against the fixed cost of business and maintaining existing relationships. Despite compromising in margin in event of sedate inflows continuing, the company cited that it would not compromise on commercial terms.

Of the Rs51 bn backlog, the company expects to complete the Bajaj Hindustan order within this financial year with some part of the SAIL order and Rs5.8 bn OMPL order extending into FY2013E. The Rs4 bn Grasim order is progressing well although would have a greater contribution in FY2013E. The BTG order from Vishakhapatnam steel plant is still in the design stage with major contribution coming in FY2013E (to be closed in mid-FY2014E). The company highlighted execution of most projects on track with expectations apart from Rs1.5 bn of slow-moving orders.

Steel, cement to lead pick-up expected in 2HFY13E; power pick-up delay to FY2014E

The company expects project ordering to pick up with steel sector order finalizations starting from 2HFY13E accompanied by cement ordering. Power sector may take more time to pick up. It also expects pick-up in oil and gas sector with refinery expanding on increased demand of automobiles. All these improvements would happen in 2QFY13E with the first half being very challenging in inflows.

The company highlighted four key issues needed to be resolved for power investments to increase including (1) power pricing in tune with global energy prices (increase in tariffs of at least 30-40%), (2) availability of coal – fuel security, (3) interest rates weakening – high interest rates making projects unfeasible and (4) land acquisition act. The company expects a time period of about 18 months for the above concerns to be taken care of.

Exports business doing better in terms of enquiries

Thermax is currently active in Middle East (ME), South-east Asia and Africa (to some extent). The company has seen some increase in enquiries in the previous quarter versus almost nil enquiries from the domestic market. Competition has also increased, especially from Japanese players. Of its three portfolios, it expects the chemicals segment to grow at about 10%. Water business may grow at 10-15% if the urban infrastructure plans continue at current pace. Air pollution being an industrials sector would suffer from slowdown in capex.

International business in US, Danstoker doing well; China to break even in FY2014E

Thermax’s international business is doing well with the foreign subsidiaries improving on order backlog, execution and profit on a yoy basis. In the quarter, the company booked profits in the US and Danstoker with its Chinese business reporting a loss (expects to get break even on cash profit next year). On a consolidated basis, the company reported 25% increase in 9MFY12 revenues to Rs42 bn on consolidated of the Danstoker acquisition (Nov 2010). PAT at Rs2.9 bn was up 9% on a yoy basis.

Working capital deteriorates on lower advances; still at low absolute levels

The company reported Rs1.7 bn of positive working capital, partially deteriorating on lower advances (Rs1 bn reduction on lower inflows). The company maintained its inventory levels with Rs500-600 mn of deterioration in account receivables. Debt has reduced to about Rs800 mn versus Rs902 mn at end-Sep ’11 (Rs480 mn at end-FY2011).

Thermax Industrials


Supercritical JV proceeding as per schedule although ramp-up may be slow

The company expects the supercritical JV with Babcock Wilcox to complete by its scheduled deadline Sep-12. Construction is proceeding as per plan with most of the important equipment having already imported into India. A significant part of the overall cost of Rs8.2 bn (debt: equity at 1:1) has been invested. Ramp-up in the JV may be slower than initially expected evident from about 130 people having been recruited versus initial projections of about 250 recruitments by this time.

Results: Flat revenues below estimates with margin decline along expected lines

Weaker than expected revenues on flat power business. Thermax reported standalone sales of Rs12.7 bn in 3QFY12, 6% below our estimate of Rs13.5 bn and up 2% yoy. Energy segment reported flat revenues of Rs9.9 bn with energy segment growing marginally by 3% to Rs3 bn. For the 9MFY12, revenues have increased 16% on a yoy basis to Rs36 bn.

EBITDA margin declines yoy in line with expectations. EBITDA margin declined 110 bps on a yoy basis to 10.7% (10.5% estimate) on led by higher other expenses (200 bps impact). We note improvement in contribution margin to 31.5% versus 30.3% in 3QFY11 (30% in 2QFY12). Margin declined across both business segments on a yoy basis (energy - 130 bps decline, environment 60 bps decline). For 9MFY12, EBITDA margin has declined by 110 bps to 10.8%.

Higher other income and marginally lower tax rate lead to marginal PAT beat. Higher-than-expected other income of Rs157 mn (25% ahead of estimates, up 34 % yoy) and lower tax rate of 31% (33% expected) led to net PAT of Rs955 mn. Reported PAT was marginally ahead of our estimate of Rs944 mn.

Industrials Thermax


Thermax (standalone) - 3QFY12 - key numbers (Rs mn)

% change3QFY12 3QFY12E 3QFY11 2QFY12 vs est. yoy qoq 9MFY12 9MFY11 % change FY2012E FY2011% change

Total income 12,693 13,526 12,412 13,025 (6.2) 2.3 (2.5) 36,162 31,226 15.8 52,024 48,832 6.5Expenses (11,339) (12,106) (10,947) (11,620) (6.3) 3.6 (2.4) (32,266) (27,516) 17.3 (46,552) (43,171) 7.8 Raw material (8,737) (8,656) (9,137) 0.9 (4.4) (25,220) (21,396) 17.9 (36,532) (34,221) 6.8 Employee (1,042) (975) (985) 6.9 5.7 (2,932) (2,717) 7.9 (4,065) (3,686) 10.3 Other expenses (1,608) (1,327) (1,514) 21.2 6.2 (4,243) (3,471) 22.2 (5,955) (5,327) 11.8EBITDA 1,354 1,420 1,464 1,405 (4.7) (7.5) (3.6) 3,896 3,710 5.0 5,472 5,661 (3.3)Other income 157 125 117 208 25.1 34.1 (24.7) 512 390 31.3 543 523 4.0PBDIT 1,511 1,545 1,581 1,613 (2.2) (4.4) (6.3) 4,408 4,100 7.5 6,015 6,183 (2.7)Interest (7) (21) (2) (11) (66.5) 243.3 (36.9) (22) (12) 79.0 (98) (22) 349.7Depreciation (120) (115) (106) (117) 4.1 13.5 2.1 (348) (316) 9.9 (458) (432) 6.1PBT 1,384 1,410 1,473 1,484 (1.8) (6.1) (6.8) 4,038 3,771 7.1 5,458 5,730 (4.7)Tax (429) (465) (471) (468) (7.7) (8.9) (8.2) (1,268) (1,212) 4.6 (1,812) (1,906) (4.9)Net profit 955 944 1,002 1,017 1.1 (4.7) (6.1) 2,771 2,559 8.3 3,646 3,824 (4.7)

Order detailsOrder booking 5,900 13,198 14,440 (55.3) (59.1) 26,320 30,508 (13.7) 47,626 53,170 (10.4)Order backlog 51,040 66,020 58,890 (22.7) (13.3) 57,700 66,020 (12.6) 50,173 56,060 (10.5)

Key ratios (%)Raw material /sales 68.5 69.7 70.0 69.4 68.3 70.2 70.0Contribution margin 31.5 30.3 30.0 30.6 31.7 29.8 30.0Employee exp./sales 8.2 7.9 7.6 8.1 8.7 7.8 7.5Other expenses/sales 12.7 10.7 11.6 11.7 11.1 11.4 10.9EBITDA margin 10.7 10.5 11.8 10.8 10.8 11.9 10.5 11.6PBT margin 10.9 10.4 11.9 11.4 11.2 12.1 10.5 11.7Tax rate 31.0 33.0 32.0 31.5 31.4 32.1 33.2 33.3PAT margin 7.5 7.0 8.1 7.8 7.7 8.2 7.0 7.8EPS (Rs) 8.0 7.9 8.4 8.5 23.3 21.5 30.6 32.1


Segmental revenues and margins of Thermax for 3QFY12 (Rs mn)

3QFY12 3QFY11 2QFY12 yoy qoq 9MFY12 9MFY11 % change FY2012E FY2011 % changeRevenuesEnergy 9,931 9,904 10,348 0.3 (4.0) 28,303 24,879 62.5 40,417 39,072 3.4Environment 3,024 2,943 2,968 2.8 1.9 8,640 7,646 61.7 12,366 11,472 7.8Less Intersegment (262) (436) (282) (40.0) (7.3) (771) (1,300) (41.6) (759) (1,711) (55.6)Total 12,693 12,412 13,035 2.3 (2.6) 36,172 31,226 66.6 52,024 48,832 6.5PBITEnergy 947 1,073 1,102 (11.8) (14.1) 2,859 2,666 51.6 4,042 4,160 (2.8)Environment 393 399 320 (1.7) 22.8 1,025 976 55.1 1,515 1,476 2.6Net unallocable income 51 3 73 (30.2) 176 141 (100.0) — 116 (100.0)Total PBIT 1,384 1,474 1,484 (6.1) (6.8) 4,038 3,771 44.7 5,458 5,730 (4.7)Revenue mix (%)Energy 76.7 77.1 77.7 76.6 76.5 76.6 77.3Environment 23.3 22.9 22.3 23.4 23.5 23.4 22.7EBIT margin (%)Energy 9.5 10.8 10.7 10.1 10.7 10.0 10.6Environment 13.0 13.6 10.8 11.9 12.8 12.3 12.9Total PBIT 10.9 11.9 11.4 11.2 12.1 10.5 11.7

% change


Thermax Industrials


Sedate inflows of about Rs6 bn implies about Rs12-13 bn of requirement in 4Q

Order backlog for the group at Rs58 bn declined significantly from Rs71.5 bn last year and Rs65 bn and end-2QFY12. This implies about Rs6 bn of inflows in the quarter in comparison to run-rate of about Rs13 bn over the last ten quarters and a 4Q requirement of Rs12-13 bn to reach our estimate of Rs45 bn for FY2012E.

Thermax (standalone) - 4QFY12 - implied numbers (Rs mn)

9MFY12 9MFY11 % change 4QFY12-imp 4QFY11 % change FY2012E FY2011 % changeTotal income 36,162 31,226 15.8 14,992 17,607 (14.9) 51,154 48,832 4.8Expenses (32,266) (27,516) 17.3 (13,380) (15,655) (14.5) (45,646) (43,171) 5.7 Raw material (25,220) (21,396) 17.9 (10,574) (12,824) (17.6) (35,794) (34,221) 4.6 Employee (2,932) (2,717) 7.9 (1,065) (969) 9.9 (3,997) (3,686) 8.4 Other expenses (4,243) (3,471) 22.2 (1,613) (1,856) (13.1) (5,855) (5,327) 9.9EBITDA 3,896 3,710 5.0 1,612 1,951 (17.4) 5,508 5,661 (2.7)Other income 512 390 31.3 47 133 (64.6) 559 523 7.0PBDIT 4,408 4,100 7.5 1,659 2,084 (20.4) 6,066 6,183 (1.9)Interest (22) (12) 79.0 (26) (10) 172.7 (48) (22) 120.4Depreciation (348) (316) 9.9 (118) (116) 2.2 (466) (432) 7.9PBT 4,038 3,771 7.1 1,514 1,959 (22.7) 5,552 5,730 (3.1)Tax (1,268) (1,212) 4.6 (576) (694) (17.0) (1,843) (1,906) (3.3)Net profit 2,771 2,559 8.3 938 1,265 (25.8) 3,709 3,824 (3.0)

Order detailsOrder booking 32,220 30,508 5.6 12,747 26,320 (51.6) 44,967 53,170 (15.4)Order backlog 51,040 66,020 (22.7) 48,411 57,700 (16.1) 48,411 56,060 (13.6)

Key ratios (%)Raw material /sales 69.4 68.3 71.4 72.9 70.0 70.0Contribution margin 30.6 31.7 28.6 27.1 30.0 30.0Employee exp./sales 8.1 8.7 7.1 5.5 7.8 7.5Other expenses/sales 11.7 11.1 10.8 10.5 11.4 10.9EBITDA margin 10.8 11.9 10.8 11.1 10.8 11.6PBT margin 11.2 12.1 10.1 11.1 10.9 11.7Tax rate 31.4 32.1 38.0 35.4 33.2 33.3PAT margin 7.7 8.2 6.3 7.2 7.3 7.8EPS (Rs) 23.3 21.5 7.9 10.6 31.1 32.1


Revise estimates; retain REDUCE on weak inflows, competition and margin pressure

We have revised EPS estimates to Rs33.3 and Rs33.1 from Rs32.8 and Rs31.4 for FY2012E and FY2013E with marginal changes to order inflows (Rs45 bn FY2012E with Rs32 bn in 9MYF11 and Rs49.5 bn in FY2013E) and margins (for both standalone as well as subsidiaries). We reduce standalone margin by 30 bps for FY2012E and FY2013E with the subsidiaries margin declining by 160 bps to 5% in FY2013E. We revise our target price to Rs500 (15X FY2013 EPS from 13XFY2013 EPS). We retain REDUCE (downgraded in last sector note on Jan 18 on back of sharp run-up) on back of (1) weak inflows on back of slow capex environment, (2) strong competition potentially leading to margin pressure as well and (3) valuations that do not leave much upside as stock trades at about15X FY2013E.

Industrials Thermax


Change in estimates for Thermax, March fiscal year-ends, 2012E-13E (Rs mn)

`FY2012E FY2013E FY2012E FY2013E FY2012E FY2013E

Order inflows (standalone) 44,967 49,464 47,626 48,264 (5.6) 2.5Revenues 59,627 57,993 60,497 58,773 (1.4) (1.3)

Standalone 51,154 48,533 52,024 49,314 (1.7) (1.6)Subsidiaries 8,473 9,460 8,473 9,460 0.0 0.0

EBITDA 5,933 5,895 5,897 5,690 0.6 3.6EBITDA margin (%) 9.9 10.2 9.7 9.7

Standalone 10.8 10.9 10.5 10.6

Subsidiaries 5.0 6.6 5.0 5.0PAT 3,972 3,943 3,909 3,743 1.6 5.4EPS (Rs) 33.3 33.1 32.8 31.4 1.6 5.4

Growth (%)Revenues 11.7 (2.7) 13.4 (2.8)EBITDA 3.4 (0.6) 2.8 (3.5)PAT 5.4 (0.7) 3.7 (4.3)

Revision (%)Old estimatesNew estimates


Thermax Industrials


Standalone balance sheet, profit model and cash flow statement of Thermax, March fiscal year-ends, 2007-13E (Rs mn)

2007 2008 2009 2010 2011 2012E 2013EBalance sheetShareholders funds 5,792 7,361 9,619 10,508 12,923 15,339 17,630Loan funds — — — — 480 480 480Total sources of funds 5,989 7,672 9,981 10,944 13,872 16,288 18,579Net block 1,579 2,786 4,399 4,939 4,866 4,967 5,088CWIP 117 476 177 112 297 377 357Net fixed assets 1,696 3,262 4,576 5,050 5,163 5,345 5,445Investments 5,776 5,797 1,765 3,782 4,044 4,794 5,544 Cash balances 625 279 3,408 6,056 6,566 4,480 5,993Net current assets excluding cash (2,202) (1,826) 51 (4,207) (2,168) 1,403 1,331Total application of funds 5,989 7,672 9,981 10,944 13,872 16,288 18,579Profit modelTotal operating income 21,730 32,042 32,644 31,855 48,832 51,154 48,533Total operating costs (18,940) (27,946) (28,499) (28,013) (43,172) (45,646) (43,264)EBITDA 2,791 4,096 4,144 3,841 5,661 5,508 5,269Other income 370 418 388 498 523 559 549PBDIT 3,161 4,514 4,532 4,339 6,183 6,066 5,818Financial charges (13) (13) (33) (15) (22) (48) (48)Depreciation (188) (218) (321) (404) (432) (466) (503)Pre-tax profit 2,960 4,283 4,178 3,920 5,730 5,552 5,266Taxation (1,027) (1,496) (1,319) (1,356) (1,906) (1,843) (1,748)Adjusted PAT 1,933 2,787 2,859 2,563 3,824 3,709 3,518Extraordinary items, net of tax (55) 21 14 (1,149) — — —Reported PAT 1,878 2,808 2,873 1,415 3,824 3,709 3,518Cash flow statementCashflow from operating activitiesOperating profit before working capital changes 2,131 3,061 3,210 2,959 4,285 4,175 4,021Change in working capital / other adjustments 1,119 (498) (1,796) 4,428 (2,040) (3,571) 72Net cashflow from operating activites 3,250 2,563 1,414 7,387 2,246 604 4,093Fixed Assets (506) (1,783) (1,635) (879) (545) (647) (603)Investments (1,601) (21) 4,033 (2,017) (262) (750) (750)Cash (used) / realised in investing activities (2,107) (1,805) 2,398 (2,896) (807) (1,397) (1,353)Dividend paid (824) (1,115) (697) (695) (1,246) (1,293) (1,227)Cash (used) /realised in financing activities (824) (1,115) (697) (695) (766) (1,293) (1,227)Cash generated /utilised 264 (346) 3,129 2,648 510 (2,086) 1,513Net cash at begn of year 361 625 279 3,408 6,056 6,566 4,480Net cash at end of year 625 279 3,408 6,056 6,566 4,480 5,993Margins for standalone business (%)Raw material / sales 65.8 68.0 64.3 64.6 70.0 70.0 69.1Other expenses / sales 12.6 11.6 15.2 14.1 10.9 11.4 11.4Employee expense / sales 8.8 7.5 7.8 9.2 7.5 7.8 8.6EBITDA magin 12.8 12.8 12.7 12.1 11.6 10.8 10.9PAT margin 8.9 8.7 8.8 8.0 7.8 7.3 7.2RoE 36.9 43.1 33.0 25.2 31.9 27.4 22.9RoCE 36.8 43.2 33.2 25.2 30.2 25.1 21.3EPS (standalone) (Rs) 16.2 23.4 24.0 21.5 32.1 31.1 29.5



Earnings pressure due to higher provisions; improved performance on slippages

Andhra Bank’s earnings declined 8% qoq primarily due to higher provisions – 80% yoy growth. Loan-loss provisions were higher at 1.5% for the quarter mainly due to NPV provisions for restructured loans. Restructured loans increased sharply qoq (31% qoq) primarily from one account-telecom. However, a few key positives from the result were: (1) slippages for the quarter declined to 2% from 5.8% in September, 2011. Gross NPLs declined qoq despite lower write-offs during the quarter; (2) exposure to sectors like construction has declined sharply qoq; (3) NIMs have been maintained at 3.8% qoq; (4) provision coverage improved 370 bps qoq to 65%.

We are marginally revising our estimates downwards by 5-8% qoq due to higher provisions for FY2013-14. Valuations are inexpensive at 0.8x book and 5x FY2012E EPS for RoEs are about 17% and 5% EPS CAGR over FY2012-14E. Maintain BUY with TP of `150 (from `170 earlier). Higher exposure in the power sector – 22% of loans remains a key risk.

Slippages decline to 2% from 6% levels; restructuring higher due to one corporate exposure

Andhra Bank reported a much improved asset quality performance during the quarter with lower slippages and gross NPLs declining qoq. Slippages for the quarter declined to 2% from 6% levels. Gross NPLs declined 5% qoq to `19 bn (2.4 of loans) while net NPLs declined 13% qoq to `9.4 bn (1.2 of loans). The quarter saw negligible write-offs as compared to the previous quarter (90 bps). Management indicated that strong focus on recovery through bilateral settlement and recovery camps at various locations drove this performance. Outstanding restructured loans increased 80 bps qoq to 4.6% of loans primarily due to restructuring in one corporate portfolio resulting in higher NPV provisions for the quarter. High exposure to the power vertical is likely to keep restructured loans higher over the next two years.

We are factoring loan-loss provisions at 1.3% for FY2013-14E primarily to factor the possible restructuring exercise we expect over the next two years in the bank’s power portfolio (22% of loans). We are factoring slippages at 2.2-2.5% for FY2013-14 but expect coverage ratios to decline marginally as earnings pressure would remain high.

Andhra Bank (ANDB)


An improved performance. Andhra Bank reported a strong quarter with slippages declining to 2% from 6% in 2QFY12 and gross NPLs declining qoq despite lower write-offs. Outstanding restructured loans increased 80 bps qoq to 5% of loans due to one corporate exposure. We expect credit costs to remain high due to high exposure in the power portfolio. Attractive valuations, healthy NIMs, strong cost-structures and conservative credit costs were primary factors behind retention of our BUY rating.

Andhra BankStock data Forecasts/Valuations 2012 2013E 2014E



Price performance (%) 1M 3M 12M P/B (X) 0.8 0.7 0.7Absolute 31.7 (6.8) (20.2) ROE (%) 19.0 16.3 16.2Rel. to BSE-30 19.2 (7.5) (16.4) Div. Yield (%) 5.2 5.0 5.6


159-77

BUY

FEBRUARY 03, 2012

RESULT


Price (Rs): 111


BSE-30: 17,605

QUICK NUMBERS

• NII up 17% yoy; NIM stable qoq at 3.8%

• Slippages at 2%; restructured loans at 5%

• Maintain BUY with TP of `150 (from `170 earlier)

Andhra Bank Banks/Financial Institutions


Loan growth ahead of industry at 21%; growth in large corporate and SME

Andhra Bank’s loan book grew 21% yoy to `792 bn (6% qoq, 10% YTD) due to higher growth in large corporate and SME segment. Large corporate segment, which contributes to over 55% of loans, grew by 37% yoy (9% qoq) and SME grew by 29% yoy (3% qoq). Agriculture and retail loans grew by 18% yoy respectively.

We note that exposure in power portfolio has been maintained at 22% levels but the bank has reduced its exposure to construction companies to below 5% levels (from over 9% in March 2011).

We are factoring loan growth at 14% CAGR for FY2012-14E; moderation from current levels given the limited scope to expand (reaching internal limits) in segments like infrastructure which has been their primary driver of growth in the past few years and the focus of the bank towards improving asset quality.

NIMs stable qoq; CASA ratio improves 50 bps qoq

NIMs were stable qoq at 3.8% as the bank continues to benefit from loan re-pricing. NII grew by 17% yoy (3% qoq) to `9.8 bn. Yield on advances improved 21 bps qoq partly due to lower de-recognition of income qoq. Cost of deposits has increased by 13 bps qoq to 7.6% while yield on investments were broadly stable qoq at 7.8%. CD ratio improved 100 bps qoq to 80%.

CASA ratio improved 50 bps qoq to 27%. Overall deposits grew by 20% yoy. As compared to other banks, we do understand that NIMs are relatively high despite a weak liability profile. NIMs are currently supported by high lending yields. A large share of loans in power, where projects are under construction, indicates a possibility of sharper-than-expected decline as slippages could be lumpy in nature. However, peak deposit rates offer some cushion against sharp slippage. We are factoring a 25-35 bps decline in NIM for FY2013-14.

Other highlights for the quarter

Non interest income increased 18% yoy to `2.4 bn mainly due to higher contribution from forex income (92% yoy) and treasury income (63% yoy). Core fee income declined 7% yoy.

Overall capital adequacy is currently at 12.6% with tier-1 capital at 8.2%

Operating expenses grew 9% yoy as staff expenses increased 10% yoy. Cost-income ratio was at 37%

.

Banks/Financial Institutions Andhra Bank


Change in financial metrics March fiscal year-ends, 2012-2014E

New estimates Old estimates2012E 2013E 2014E 2012E 2013E 2014E 2012E 2013E 2014E

Net interest income 38,277 40,495 45,484 38,073 40,875 46,964 0.5 (0.9) (3.2) Loan growth (%) 15 14 15 15 16 17 Spread (%) 3.0 2.8 2.7 3.0 2.8 2.8

Loan loss provisions 9,587 11,384 13,502 8,437 9,747 11,898 13.6 16.8 13.5 Other income 8,647 9,319 9,981 8,627 9,384 10,002 0.2 (0.7) (0.2)

Fee income 2,614 2,745 2,882 2,506 2,642 2,786 4.3 3.9 3.5 Treasury income 1,200 1,300 1,300 1,100 1,200 1,100 9.1 8.3 18.2

Operating expenses 17,982 19,741 21,472 18,091 19,952 22,070 (0.6) (1.1) (2.7) Employee expenses 11,390 12,441 13,584 11,390 12,441 13,584 - - -

Net profit 13,224 12,852 14,333 13,429 14,033 15,430 (1.5) (8.4) (7.1) PBT-treasury+provisions 27,741 28,773 32,693 27,509 29,106 33,796 0.8 (1.1) (3.3)

% Change


Bank has relatively higher exposure in certain high risk segments Break-up of exposure to loan book, March fiscal year-ends, 2010-12

SectorExposure

limitCurrent

exposure% of loans

Permissible exposure

Current exposure

% of loans

Current exposure

% of loans

Incremental growth

9MFY2012(%) (Rs bn) (Rs bn) (%) (Rs bn) (%) (%)

Power 25.0 178 22.5 164 155 21.7 71 12.7 29.8

Iron and steel 10.0 59 7.5 66 52 7.3 39 7.0 9.7

Housing loans 15.0 55 7.0 98 55 7.7 36 6.4 0.8

NBFC 10.0 55 7.0 66 50 7.1 27 4.7 6.3

Construction and contractors 10.0 38 4.8 66 64 9.0 40 7.2 (33.7)

Commercial real estate 7.0 32 4.0 46 35 4.9 24 4.2 (4.4)

Textles 9.0 43 5.5 59 35 4.9 25 4.4 10.7

Engineering (heavy and light) 5.0 28 3.5 33 23 3.2 15 2.6 6.8

Rice mills 6.0 17 2.2 39 16 2.3 16 2.9 1.1

Drugs and pharmaceuticals 5.0 17 2.1 33 14 2.0 10 1.9 3.3

Petroleum products 10.0 14 1.7 66 11 1.5 18 3.2 3.6

Sugar 5.0 12 1.5 33 13 1.9 13 2.3 (1.8)

Gems and Jewellery 5.0 11 1.4 33 12 1.7 8 1.5 (1.3)

Hotels 3.0 11 1.4 20 10 1.5 6 1.1 1.4

Cement and cement products 5.0 8 1.1 33 8 1.2 8 1.4 0.2

Education institutions 2.0 8 1.0 13 6 0.8 9 1.7 2.4

Tobacco 2.0 7 0.8 13 6 0.8 6 1.0 1.1

Hospitals 3.0 6 0.7 20 3 0.4 3 0.6 3.6

Distilleries 1.0 2 0.2 7 2 0.2 1 0.2 (0.0)

Software 1.5 3 0.3 10 1 0.1 1 0.1 2.1

Others 186 23.5 141 19.7 185 32.9 58.3

Total 792 714 561

20102011Dec-12




Break-up of restructured loans shows sharp increase in large corporate segment March fiscal year-ends, 4QFY10-3QFY12 (%)

4QFY10 1QFY11 2QFY11 3QFY11 4QFY11 1QFY12 2QFY12 3QFY12Agriculture 0.0 0.5 1.1 1.1 - 1.3 1.8 1.5

MSME 0.9 4.2 2.2 2.1 - 2.3 2.2 6.0 Housing loans 2.6 2.7 2.7 2.6 - 2.7 2.2 2.7 Corporate/industries 18.8 19.4 17.9 18.7 - 20.6 20.8 26.0

Others like retail trade 7.3 3.6 0.9 0.8 - 0.7 1.1 0.6

Total 29.7 30.4 24.8 25.3 25.0 27.6 28.1 36.8 % of loans 5.3 5.3 4.1 3.9 3.5 3.6 3.8 4.6


Andhra Bank – Rolling PBR and PER August 2004-February 2012 (X)

-

2

5

7

10

12

Aug

-04

May

-05

Feb-

06

Nov

-06

Aug

-07

May

-08

Feb-

09

Nov

-09

Aug

-10

May

-11

Feb-

12

-

0.4

0.8

1.2

1.6

2.0Rolling PER (X) (LHS) Rolling PBR (X) (RHS)

Source: Kotak Institutional Equities



Andhra Bank quarter results March fiscal year-ends, 3QFY11-3QFY12 (` mn)

3QFY11 4QFY11 1QFY12 2QFY12 3QFY12 3QFY12E Interest Earned 21,216 23,635 26,342 27,823 29,230 37.8 28,605 2.2

Interest on advances 17,122 19,178 21,649 22,928 23,906 39.6 23,374 2.3 Interest on investments 4,007 4,088 4,526 4,769 4,986 24.5 5,061 (1.5) Interest on bal. with RBI & other inter ban 88 370 50 126 338 285.8 150 125.1 Other interest - - 118 - - 20

Interest expense 12,817 15,020 17,239 18,313 19,392 51.3 19,065 1.7 Net interest income 8,399 8,615 9,104 9,510 9,839 17.1 9,540 3.1 Other income 1,986 2,990 2,169 1,778 2,353 18.4 2,017 16.6

Treasury 100 650 594 222 163 62.6 201 (19.1) Income excl treasury 1,886 2,340 1,575 1,557 2,190 16.1 1,816 20.6

Total income 10,386 11,605 11,272 11,288 12,191 17.4 11,558 5.5 Operating expenses 4,119 4,490 4,277 4,422 4,515 9.6 4,659 (3.1)

Payments to / Provisions for employees 2,595 2,976 2,731 2,736 2,847 9.7 2,906 (2.0) Other operating expenses 1,524 1,514 1,546 1,686 1,668 9.4 1,753 (4.8)

Operating profit before prov. & cont. 6,266 7,115 6,996 6,867 7,676 22.5 6,898 11.3 Provisions & Contingencies 1,717 3,027 1,770 2,607 3,094 80.2 3,186 (2.9)

Loan loss provisions 1,693 2,284 1,501 2,509 2,880 70.1 3,011 (4.3) Investment depreciation (2) - 259 29 (50)

Profit before tax 4,549 4,088 5,226 4,260 4,582 0.7 3,712 23.4 Provision for taxes 1,240 960 1,370 1,100 1,550 25.0 1,013 53.0 Net profit 3,309 3,128 3,856 3,160 3,032 (8.4) 2,699 12.3 Tax rate 27 23 26 26 34 PBT - treasury + investment dep. 4,448 3,438 4,891 4,068 4,369 (1.8) 3,611 21.0 PBT - treasury + investment dep. + loan loss 6,141 5,722 6,392 6,577 7,250 18.1 6,622 9.5

Key balance sheet items (Rs bn)Deposits 821 922 909 944 987 20.2

CASA 234 268 253 247 263 12.1 CASA (%) 28.5 29.1 27.8 26.1 26.6

Advances 656 722 757 745 792 20.7 Priority sector 216 231 237 239 242 12.1 Agriculture 101 104 105 106 114 13.0 Retail 100 105 109 110 109 9.1 SME 98 111 116 115 119 20.6

Asset quality detailsGross NPL (Rs mn) 8,723 9,956 11,764 19,871 18,841 116.0 Gross NPL (%) 1.3 1.4 1.6 2.6 2.4 Net NPL (Rs mn) 3,081 2,738 3,374 10,867 9,433 206.1 Net NPL (%) 0.5 0.4 0.5 1.5 1.2 Slippages (%) 1.3 1.2 1.3 5.8 2.0 Provision coverage (inc write-off) 80.4 83.9 82.0 61.7 65.4 Restructured loans (%, net) 3.9 3.5 3.6 3.8 4.6

Yield management measures (%)Yield on advances 11.1 11.6 12.2 12.5 12.8 Cost of deposits 5.8 6.5 7.0 7.5 7.6 Yield on investments 7.3 7.4 7.7 7.8 7.8 NIM 3.9 3.7 3.8 3.8 3.8

Capital adeuqacy detailsCAR (%) 12.0 14.4 13.2 13.1 12.6

Tier I (%) 7.1 9.8 8.9 8.8 8.2 Tier II (%) 5.0 4.6 4.3 4.3 4.3

% chg yoyActual Vs

KS




Andhra Bank key growth rates and Du pont analysis March fiscal year-ends, 2009-2014E (%)

2009 2010 2011 2012E 2013E 2014EGrowth rates (%)Net loan 28.9 27.1 27.3 14.7 13.7 14.7 Customer assets 28.5 25.6 27.0 14.6 13.6 14.6 Investments excld. CPs and debentures 15.3 29.1 15.5 9.4 23.9 20.3 Total Asset 21.0 31.9 20.5 12.6 15.1 15.3 Deposits 20.1 30.8 18.6 13.7 16.7 16.7 Net interest income 14.6 34.9 46.8 18.8 5.8 12.3 Loan loss provisions 74.3 88.0 64.7 51.4 18.7 18.6 Total other income 22.2 26.1 (7.0) (3.6) 7.8 7.1 Operating expenses 21.5 22.2 26.3 5.5 9.8 8.8

Employee expenses 22.5 32.0 34.0 3.1 9.2 9.2 Key ratios (%)Yield on average earning assets 8.9 8.3 8.6 10.1 9.7 9.6 Yield on average loans 10.8 10.3 10.5 12.1 11.6 11.5 Yield on average investments 7.0 6.4 6.9 7.8 7.7 7.6 Average cost of funds 6.5 5.6 5.5 7.0 6.9 6.9 Interest on deposits 6.4 5.5 5.4 6.6 6.4 6.3 Difference 2.4 2.6 3.1 3.0 2.8 2.7 Net interest income/earning assets 2.7 2.8 3.3 3.4 3.1 3.1 Spreads on lending business 4.3 4.7 5.0 5.1 4.7 4.6 Spreads on lending business (incl. Fees) 4.8 5.1 5.4 5.4 5.0 4.9 New provisions/average net loans 0.5 0.8 1.0 1.3 1.3 1.4 Total provisions/gross loans 0.7 0.7 1.2 2.2 3.1 3.9 Interest income/total income 68.0 69.5 78.2 81.6 81.3 82.0 Other income / total income 32.0 30.5 21.8 18.4 18.7 18.0 Fee income to total income 8.2 7.1 5.8 5.6 5.5 5.2 Fee income to advances 0.5 0.4 0.4 0.3 0.3 0.3 Fees income to PBT 21.7 15.7 13.4 14.2 15.5 14.7 Net trading income to PBT 4.3 25.5 7.9 4.9 5.1 5.1 Exchange income to PBT 5.8 4.0 5.3 4.4 4.8 4.7 Operating expenses/total income 46.2 42.7 41.4 38.3 39.6 38.7 Operating expenses/assets 1.8 1.7 1.7 1.6 1.5 1.4 Operating profit /AWF 1.1 1.4 1.7 1.5 1.3 1.2 Tax rate 27.3 27.2 28.3 28.3 27.3 26.8 Dividend payout ratio 33.4 23.2 24.3 24.3 24.3 24.3 Share of deposits

Current 22.6 20.7 21.3 21.0 20.8 20.5 Fixed 68.6 70.6 70.9 71.2 71.4 71.7 Savings 22.6 20.7 21.3 21.0 20.8 20.5

Loans-to-deposit ratio 74.3 72.2 77.5 78.2 76.2 74.8 Equity/assets (EoY) 5.3 4.9 6.0 6.1 5.9 5.8 Asset quality (%)Gross NPL 0.8 0.9 1.4 2.3 2.5 2.6 Net NPL 0.2 0.2 0.4 1.2 1.3 1.5 Slippages 0.6 0.9 1.4 2.9 2.2 2.5 Provision coverage 78.5 80.4 72.5 51.4 48.1 44.3 Dupont analysis (%)Net interest income 2.6 2.8 3.2 3.3 3.1 3.0 Loan loss provisions 0.3 0.5 0.6 0.8 0.9 0.9 Net other income 1.2 1.2 0.9 0.7 0.7 0.7 Operating expenses 1.8 1.7 1.7 1.6 1.5 1.5 Invt. depreciation 0.3 (0.1) 0.0 0.0 0.0 0.0 (1- tax rate) 72.7 72.8 71.7 71.7 72.7 73.2 ROA 1.0 1.3 1.3 1.1 1.0 0.9 Average assets/average equity 18.1 19.7 18.3 16.6 16.7 17.1 ROE 18.9 26.0 23.2 19.0 16.3 16.2




Andhra Bank P&L and balance sheet March fiscal year-ends, 2009-2014E (` mn)

2009 2010 2011 2012E 2013E 2014EIncome statementTotal interest income 53,746 63,729 82,913 113,420 125,072 142,292

Loans 42,151 51,613 66,892 93,127 101,841 114,614 Investments 10,990 11,883 15,396 19,419 22,269 26,606 Cash and deposits 606 233 625 874 962 1,073

Total interest expense 37,477 41,781 50,703 75,143 84,578 96,809 Deposits from customers 34,871 38,014 45,656 64,887 72,515 82,868

Net interest income 16,269 21,947 32,210 38,277 40,495 45,484 Loan loss provisions 2,045 3,844 6,333 9,587 11,384 13,502 Net interest income (after prov.) 14,224 18,103 25,877 28,690 29,111 31,981 Other income 7,650 9,646 8,970 8,647 9,319 9,981

Net fee income 1,951 2,254 2,377 2,614 2,745 2,882 Net capital gains 2,208 3,253 1,408 1,200 1,300 1,300 Net exchange gains 525 580 944 802 842 927

Operating expenses 11,043 13,495 17,049 17,982 19,741 21,472 Employee expenses 6,241 8,241 11,042 11,390 12,441 13,584

Depreciation on investments 1,820 (413) 5 300 400 300 Other Provisions 35 309 122 612 612 612 Pretax income 8,980 14,359 17,671 18,443 17,677 19,579 Tax provisions 2,450 3,900 5,000 5,218 4,825 5,246 Net Profit 6,530 10,459 12,671 13,224 12,852 14,333 % growth 13.5 60.1 21.2 4.4 (2.8) 11.5 PBT - Treasury + Provisions 10,673 14,845 22,723 27,741 28,773 32,693 % growth 13.8 39.2 53.1 22.1 3.7 13.6

Balance sheetCash and bank balance 52,875 111,677 104,590 113,815 126,616 141,536

Cash 4,359 4,300 4,579 4,579 4,579 4,579 Balance with RBI 44,174 62,687 67,265 76,491 89,292 104,211 Balance with banks 1,947 3,338 6,157 6,157 6,157 6,157

Net value of investments 169,111 208,810 242,040 263,662 323,919 387,473 Govt. and other securities 152,150 197,435 227,196 249,053 309,310 372,865 Shares 1,655 1,065 1,964 1,964 1,964 1,964 Debentures and bonds 9,894 5,816 5,860 5,860 5,860 5,860

Net loans and advances 441,393 561,135 714,354 819,585 931,785 1,068,566

Fixed assets 3,353 3,557 3,175 3,949 4,306 4,810 Net Owned assets 3,353 3,557 3,175 3,949 4,306 4,810

Other assets 17,960 18,246 24,849 24,849 24,849 24,849 Total assets 684,692 903,424 1,089,007 1,225,860 1,411,475 1,627,235

Deposits 593,900 776,882 921,563 1,047,961 1,223,338 1,427,749 Borrowings and bills payable 41,988 67,611 82,761 82,761 82,761 82,761 Other liabilities 12,334 14,830 19,759 20,747 21,784 22,874 Total liabilities 648,222 859,324 1,024,083 1,151,470 1,327,884 1,533,384 Paid-up capital 4,850 4,850 5,596 5,596 5,596 5,596 Reserves & surplus 31,620 39,250 59,328 68,795 77,995 88,255 Total shareholders' equity 36,470 44,100 64,924 74,391 83,590 93,850

Source: Kotak Institutional Equities, Company


4QCY11 results: solid on all parameters

Sustaining the operational momentum it has gained over the past few quarters, Hexaware reported industry-leading sequential revenue growth of 6.7% qoq (in US Dollar terms; +7.8% qoq in constant currency), beating its guidance of 4-4.7% and our 4.6% estimate. EBITDA margins expanded 430 bps qoq to 23% versus our estimated 21.5%. EBITDA margin expansion was led mainly by benefits from a sharp Rupee depreciation during the quarter. Net income of Rs882 mn (+37% qoq, +123% yoy) came in substantially ahead of expectations due to EBITDA beat as well as lower-than-expected effective tax rate for the quarter.

CY2012E revenue guidance and margin outlook inspire confidence

Hexaware’s guidance indicated revenue growth of ‘at least 20% yoy’ for CY2012 and indicated confidence about delivering 17-18% EBIT margins on a constant currency basis (the company reported 16.5% EBIT margin in CY2011 on average INR/USD realization of just a tad over 47). The company’s ‘at least 20%’ revenue growth guidance for CY2012, which implies CQGR of 3.7% qoq from 2Q-4QCY12E assuming the company just about meets its 1Q guidance of ‘at least 4% qoq growth’, may appear a tad aggressive against the backdrop of a challenging macro environment. However, we note that the fortunes of mid-sized Indian IT services companies depend more on the momentum they have in their top relationships as opposed to the general spending environment. To that extent, Hexaware’s success in signing large deals with some of the top accounts over the past few quarters reflects more in the guidance as opposed to macro worries. We would not be surprised if Hexaware meets or beats the 20% growth guidance; nonetheless, we build in 18% growth for CY2012, to be a bit conservative.

Raise estimates; maintain ADD

We have raised our CY2012/13 EPS estimates by 21/22% to Rs10.7/11.7, respectively. EPS revision is a combination of modest revision in revenue estimates and a sharp revision in margin assumptions (partially currency-led). We raise our target price on the stock to Rs110 (from Rs100 earlier), maintaining our target PE multiple of roughly 11X CY2012E earnings. Reiterate our ADD rating on the stock. Slowdown in revenue momentum remains the key risk to our call.

Hexaware Technologies (HEXW)

Technology

Solid CY2011 exit, robust guidance for CY2012; reiterate ADD. Hexaware reported solid 6.7% qoq revenue growth and 430 bps qoq OPM expansion for the Dec 2011 quarter, beating our and Street estimates handsomely. More importantly, the company’s ‘at least 20%’ US Dollar revenue growth guidance for CY2012 inspires confidence against a challenging macro backdrop. We raise CY2012/13 EPS estimates to Rs10.7/11.7 (increase partly currency-driven) and TP to Rs110 (Rs100 earlier). ADD.

Hexaware TechnologiesStock data Forecasts/Valuations 2012 2013E 2014E



Price performance (%) 1M 3M 12M EV/EBITDA (X) 9.1 6.1 5.2Absolute 28.5 10.5 81.8 ROE (%) 26.9 28.0 25.8Rel. to BSE-30 14.4 10.7 88.6 Div. Yield (%) 3.1 3.3 3.6


100-46

ADD

FEBRUARY 03, 2012

RESULT


Price (Rs): 99


BSE-30: 17,605

Technology Hexaware Technologies


Other result and earnings call highlights

Hexaware plans to hire 1,500 employees over CY2012, 650 of which will be freshers.

Attrition was down to 13.9% from 14.7% in 3QCY11.

DSO was up from 57 days in the previous quarter to 62 days.

The total outstanding hedges at the end of CY2011 were US$181 mn and EUR9.4 mn. Of the US$181 mn hedges, about US$110 mn mature in CY2012.

Cumulative capex for CY2011 was Rs630 mn, and the company indicated CY2012 capex to be around Rs700 mn.

The management expected tax rate for CY2012 to be around 20%.

Exhibit 1: Key changes in CY2011-13E estimates

CY2012 CY2013 CY2012 CY2013 CY2012 CY2013Revenues (US$ mn) 365 434 360 436 1.4 (0.4) EBITDA Margin (%) 21.3 20.2 19.7 18.8 Recurring EPS (Rs/ share) 10.7 11.7 9.5 11.0 11.9 6.3 Re/ US$ rate 50.5 49.5 49.5 48.8 1.9 1.4

OldNew Change (%)


Exhibit 2: Hexaware - Consolidated quarterly results 4QCY11, fiscal year ends Dec (Rs mn)

Kotak % deviation4QCY10 3QCY11 4QCY11 qoq yoy estimates

Revenue (US$ mn) 66.6 78.8 84.1 6.7 26.3 82.4 2.0 Revenues 2,996 3,660 4,319 18.0 44.2 4,231 2.1 Software Development Costs (1,962) (2,262) (2,562) 13.3 30.6 (2,509) 2.1 Gross profit 1,034 1,398 1,757 25.7 69.9 1,723 2.0 Total SG&A Expenses (689) (712) (762) 7.0 10.6 (813) (6.2) EBITDA 345 686 995 45.0 188.4 910 9.4 Depreciation (66) (64) (63) (1.6) (4.5) (72) (12.7) EBIT 279 622 932 49.8 234 838 11.3 Other Income 172 160 62 (61) (64) (19) (428) Profit Before Tax 451 782 994 27.1 120.4 819 21.4 Provision for Tax (55) (136) (111) (18.4) 101.8 (146) (24.1) Net Profit 396 646 883 36.7 123.0 672 31.3 Extraordinary items - - - - Net Profit- Reported 396 646 883 36.7 123.0 672 31.3

Recurring EPS (Rs/share) 1.4 2.2 3.0 36.7 118.3 # 2.3 29.9 No of shares outstanding (mn) 287.3 293.5 293.5 290.4

As % of revenuesGross Margin (%) 34.5 38.2 40.7 40.7 EBITDA Margin 11.5 18.7 23.0 21.5 SG&A Expenses (%) 23.0 19.5 17.6 19.2

Billing Rates (US$/manhour)Onsite 71.2 72.5 73.0 0.7 2.5 Offshore 21.9 23.0 23.0 - 5.2 Revenue Mix (%)Onsite 60.4 53.7 55.1 Offshore 39.6 46.3 44.9

Hexaware has guided for at least US$ 370 mn revenues for CY2012, an increase of 20.1% yoy.

% chg.


Hexaware Technologies Technology


Exhibit 3: Hexaware: key operational metrics

Dec-10 Mar-11 Jun-11 Sep-11 Dec-11Revenues (US$ mn) 66.6 70.4 74.8 78.8 84.1 qoq growth (%) 9.0 5.7 6.2 5.3 6.7 Revenues (Rs mn) 2,996 3,185 3,341 3,660 4,319 Exchange rate 44.98 45.24 44.67 46.45 51.36 Vertical split of revenues (%)Banking & capital markets 29.9 28.6 27.4 28.6 28.5 Healthcare & Insurance 12.7 12.0 13.0 13.6 16.4 Travel & transportation 23.6 24.8 24.6 23.2 20.7 Emerging segments 33.8 34.6 35.0 34.6 34.4 Service line split of revenues (%)ADM 41.7 38.9 39.2 40.5 39.7 EAS 29.4 31.6 31.3 30.5 29.8 Testing / BTO 9.3 9.3 9.4 9.2 10.8 Business intelligence & analytics 9.2 9.9 9.9 9.6 10.5 BPO 5.9 5.7 5.7 5.7 5.1 Others 4.5 4.6 4.5 4.5 4.1 Geographical split of revenues (%)Americas 69.9 66.0 66.4 64.7 64.4 Europe 24.4 27.9 27.2 28.4 28.7 Rest of the world 5.7 6.1 6.4 6.9 6.9 Onsite-Offshore mix (%)Onsite 60.4 59.2 56.7 53.7 55.1 Offshore 39.6 40.8 43.3 46.3 44.9 Client metricsRepeat business (%) 94.1 93.2 92.5 93.5 94.1 Clients billed 174 180 190 194 192 Clients added 11 10 14 12 15 Revenue concentration (%)Top 1 client 9.7 11.6 12.5 13.6 13.9 Top 5 clients 38.1 37.7 38.3 38.3 38.9 Top 10 clients 49.9 49.5 51.8 52.5 52.6 Client size (ttm)> US$1 mn 50 49 50 51 52 Between US$1 mn - US$5 mn 39 39 40 39 40 Between US$5 mn - US$10 mn 7 6 6 8 7 > US$10 mn 4 4 4 4 5 Billing rates (US$/hr)Onsite 71.2 72.0 72.0 72.5 73.0 Offshore 21.9 22.2 22.5 23.0 23.0 Employee metricsTotal employees (consolidated) 6,511 6,664 7,419 8,164 8,317 Billable personnel (%)Onsite (%) 20.1 20.0 19.6 18.7 18.8 Offshore (%) 70.5 70.9 71.9 73.0 72.9 Marketing (incl sales support - %) 2.1 2.0 2.0 1.8 1.8 Others (incl tech support - %) 7.3 7.1 6.5 6.5 6.5

Utilization (%) 69.4 72.7 71.4 70.6 69.7 Attrition rate (%) annualized 19.6 19.6 18.0 14.7 13.9 DSO 59 63 55 57 62

Source: Company

Technology Hexaware Technologies


Exhibit 4: Consolidated financials for Hexaware, December year-ends (Rs mn), 2010-2013E

2010 2011E 2012E 2013EProfit model Total income 10,546 14,505 18,439 21,483

EBITDA 938 2,646 3,924 4,330 Depreciation and ammortisation (247) (247) (303) (362) Other income 249 677 272 399

Pretax profits 941 3,077 3,894 4,368 Tax (92) (407) (764) (933)

Profit after tax 849 2,670 3,130 3,435 Diluted recurring EPS (Rs/share) 3.0 9.1 10.7 11.7 Balance sheetTotal equity 9,655 10,161 12,174 14,406 Deferred taxation liability (169) (162) (162) (162)

Current liabilities 2,785 4,331 3,299 3,632

Total liabilities and equity 12,382 14,330 15,311 17,876 Cash 4,356 4,209 4,333 5,593 Other current assets 3,551 4,939 5,176 5,821 Tangible fixed assets 4,078 4,785 5,405 6,065

Total assets 12,382 14,330 15,311 17,876 Free cash flowOperating cash flow, excl. WC 1,084 1,274 3,253 3,536 Working capital changes (836) 159 (1,269) (312) Capital expenditure (340) (884) (923) (1,022)

Free cash flow (92) 548 1,061 2,202 Ratios (%)EBITDA margin 8.9 18.2 21.3 20.2 ROE 9.3 26.9 28.0 25.8 ROCE 7.5 24.1 32.4 29.9



EBITDA margins drop qoq

CUMI reported 3QFY12 consolidated revenue of Rs5 bn (+19% yoy;-4% qoq) which was 6% lower than our estimates. Reported consolidated EBITDA of Rs896 mn (+20.6% yoy;-24.4% qoq) was 20% lower than our estimates. Reported PAT (consol) of Rs474 mn (+29% yoy;-28% qoq) was much lower than our estimates. Reason: EBITDA margins (consol) at 17.8% in 3QFY12 (+20 bps yoy;-480 bps qoq) fell to levels observed in FY2010. 3QFY12 marked a break from the trend of increasing margins over the past four quarters.

Electro-mineral margins decline significantly: highlights commodity nature of the business

PBIT margins (consol) in the EM division declined significantly from 23.9% in 2QFY12 (adj. for forex gains; reported margins at 28.9%) to17.5% in 3QFY12 (+180 bps yoy). The volatility in margins highlights the commodity nature of bulk of the business (EMs) which we have been highlighting. Some of the reasons could be a decline in crude Sic prices, which we have highlighted in our note dated January 9, 2012 and also increased competition in the European market post scrapping of anti-dumping duties on Chinese players. Standalone PBIT margins in the EM business at 16.2% were the lowest since FY2009 even as standalone business represents the value added part of the EM business.

PBIT margins (consol) in the ceramics business at 19.1% (+220 bps yoy) declined sequentially 380 bps qoq. Standalone ceramics business reported PBIT at 19.3% (+470 bps yoy;+130 bps qoq)

Does 3QFY12 indicate a downward shift in margins profile going forward into FY2013E?

We are looking forward to the conference call, scheduled on February 6, to get clues from the management so as to determine sustainable margins for the company going into FY2013. In case lower margins in 3QFY12 become base case for FY2013, it would mean a substantial cut in the Street’s earnings estimates for FY2013 and FY2014. We had always doubted sustainability of EBITDA margins which were at all-time highs and modeled margins at 21.5% in FY2012 and 19.3% in FY2013 and FY2014. We maintain our REDUCE rating with TP of Rs150 (12X FY2013E EPS).

Carborundum Universal (CU)

Others

Electro-minerals spoil the day. CUMI’s 3QFY12 results were lower than estimates led by sharp qoq decline in margins in the electro-minerals (EMs) business. We have long highlighted the unsustainable margins and commodity nature of the EMs business: 3QFY12 brought that to the fore. The management inputs in its post-results call should help in deciding whether 3QFY12 margins should form the base case for the future, which would mean a significant cut in the Street’s earning estimates. Maintain REDUCE.

Carborundum UniversalStock data Forecasts/Valuations 2012 2013E 2014E



Price performance (%) 1M 3M 12M EV/EBITDA (X) 7.7 7.0 6.1Absolute 13.6 0.3 29.4 ROE (%) 25.9 23.4 22.2Rel. to BSE-30 2.8 (0.4) 35.6 Div. Yield (%) 1.6 1.7 1.9


175-108

REDUCE

FEBRUARY 03, 2012

RESULT

Coverage view:

Price (Rs): 155


BSE-30: 17,605

Others Carborundum Universal


Below estimates- led by lower margins – EM business disappoints Interim results for CUMI, consolidated, March fiscal year-ends (Rs mn)

3QFY12 3QFY12E 3QFY11 2QFY12 KIE est yoy qoq FY2012 FY2011 Chng. (%)Total Income 5,021 5,366 4,215 5,247 -6.4 19.1 -4.3 15,048 12,098 24.4Total Expenditure (4,125) (4,249) (3,473) (4,062) -2.9 18.8 1.6 (11,972) (9,898) 21.0Raw materials (1,556) (1,342) (1,646) (4,813) (3,955)Employee expense (555) (487) (549) (1,608) (1,393)Power and fuel (614) (575) (647) (1,879) (1,657)Other expenditure (1,399) (1,070) (1,221) (3,672) (2,894)EBITDA 896 1,117 743 1,185 -19.8 20.6 -24.4 3,076 2,200 39.8EBITDA (%) 17.8 20.8 17.6 22.6 20.4 18.2Depreciation (145) (145) (132) (144) (429) (384)Interest (63) (65) (68) (63) (192) (198)EBIT 688 907 542 978 -24.1 26.9 -29.6 2,455 1,619 51.7EBIT (%) 13.7 16.9 12.9 18.6 16.3 13.4Other income 26 13 12 13 52 26PBT 714 920 555 991 -22.4 28.7 -28.0 2,507 1,644 52.5Exceptional items 18 0 0 0 18 235Tax expense (230) (264) (161) (284) (761) (567)PAT 501 656 394 707 1,764 1,312Add: Share of profits from associate 0 3 (8) 3 11 (20)Less: Minority interest 27 50 18 54 122 78PAT 474 609 368 656 -22.2 28.8 -27.7 1,653 1,214 36.2Margins (%)RM/sales 31.0 31.8 31.4 32.0 32.7Employee cost/sales 11.1 11.5 10.5 10.7 11.5Power and fuel/sales 12.2 13.6 12.3 12.5 13.7

Change (%) 9 months


Margins declined sequentially led by lower margins in the EM business Trend in EBITDA margins for CUMI, consolidated, March fiscal year-ends (%)

14.7

16.6

15.016.2

17.618.9 18.7

17.316.7

19.6

17.6

20.4 20.8

22.6

17.8

10

12

14

16

18

20

22

24

Q1FY09

Q2FY09

Q3FY09

Q4FY09

Q1FY10

Q2FY10

Q3FY10

Q4FY10

Q1FY11

Q2FY11

Q3FY11

4QFY

11

1QFY

12

2QFY

12

3QFY

12

EBITDA (%)


Carborundum Universal Others


Both EMs and ceramics reported sequential decline in EBITDA margins Segmental results of CUMI, consolidated, March fiscal year-ends (Rs mn)

4QFY10 1QFY11 2QFY11 3QFY11 4QFY11 1QFY12 2QFY12 3QFY12Segment revenuesAbrasives 1,602 1,482 1,800 1,855 1,853 1,979 2,076 2,086Ceramics 635 793 862 853 969 1,010 1,172 1,213Electro-minerals 1,194 1,327 1,526 1,449 1,677 1,763 1,905 1,696Others 65 60 60 73 74 75 79 80Less: intersegment (186) (144) (164) (153) (242) (174) (182) (140)Total revenues 3,310 3,517 4,084 4,076 4,330 4,653 5,050 4,936Segment EBITAbrasives 128 171 245 286 256 320 302 302Ceramics 108 155 149 144 164 223 269 232Electro-minerals 251 207 358 227 310 357 551 297Others 18 12 6 21 14 24 20 22EBIT 505 544 758 678 744 924 1,142 853EBIT (%)Abrasives 8.0 11.5 13.6 15.4 13.8 16.2 14.6 14.5Ceramics 16.9 19.5 17.3 16.9 16.9 22.0 22.9 19.1Electro-minerals 21.0 15.6 23.4 15.7 18.5 20.3 28.9 17.5Others 28.3 19.2 9.3 28.7 18.9 31.6 26.0 28.2


Standalone business reported sequential decline in margins – led by the electro-mineral business Interim results of CUMI, standalone, March fiscal year-ends (Rs mn)

Q4FY10 Q1FY11 Q2FY11 Q3FY11 Q4FY11 1QFY12 2QFY12 3QFY12Total Income 2,081 1,961 2,382 2,430 2,590 2,633 2,838 2,858Total Expenditure (1,758) (1,632) (1,906) (1,955) (2,054) (2,060) (2,235) (2,323)Raw materials (875) (801) (970) (994) (1,014) (1,069) (1,126) (1,173)Employee cost (190) (232) (243) (235) (237) (240) (271) (270)Power and fuel (191) (193) (202) (220) (242) (244) (243) (273)Other expenditure (503) (407) (491) (505) (561) (507) (594) (607)EBITDA 323 329 475 476 537 573 603 535EBITDA (%) 15.5 16.8 19.9 19.6 20.7 21.8 21.3 18.7Depreciation (80) (99) (101) (103) (96) (107) (111) (110)Interest (52) (52) (47) (50) (55) (47) (45) (42)EBIT 191 177 327 323 386 419 448 383EBIT (%) 9.2 9.0 13.7 13.3 14.9 15.9 15.8 13.4Other income 13 306 53 0 69 59 27 1PBT 204 483 380 323 455 478 475 385Exceptional items 0 0 0 0 2 0 0 252Tax expense (59) (126) (112) (87) (76) (128) (128) (130)PAT 145 357 269 236 380 350 347 506Margins (% of net sales)RM 42.0 40.8 40.7 40.9 39.2 40.6 39.7 41.1Employee cost 9.1 11.8 10.2 9.7 9.1 9.1 9.6 9.4Power and fuel 9.2 9.9 8.5 9.0 9.3 9.3 8.6 9.6Other expenditure 24.1 20.7 20.6 20.8 21.6 19.3 20.9 21.2


Others Carborundum Universal


Decline in standalone PBIT margins in EMs surprising

We are surprised by the extent of sequential decline in PBIT margins in the standalone EMs business as it represents the value-added part of the business and hence should have stable margins. EMs PBIT margins in 3QFY12 at 16.2% were the lowest since FY2009. We would look for management inputs in the post-results conference call to determine the reasons.

EMs business reported 3QFY12 PBIT margins (standalone) were the lowest since FY2009 Segmental results for CUMI, standalone, March fiscal year-ends (Rs mn)

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

Segment revenues

Abrasives 1,162 1,071 1,343 1,375 1,366 1,439 1,538 1,522

Ceramics 574 530 620 624 695 698 791 871

Electro-minerals 394 465 510 536 589 608 623 552

Less: intersegment (116) (124) (131) (119) (153) (139) (142) (106)

Total revenues 2,014 1,941 2,342 2,417 2,496 2,605 2,810 2,840

Segment EBIT

Abrasives 102 133 216 223 201 252 275 245

Ceramics 91 81 98 91 97 124 143 168

Electro-minerals 77 86 113 114 129 150 151 90

EBIT 271 300 428 427 427 526 569 503

EBIT (%)

Abrasives 8.8 12.4 16.1 16.2 14.7 17.5 17.9 16.1

Ceramics 15.9 15.3 15.9 14.6 13.9 17.8 18.0 19.3

Electro-minerals 19.6 18.5 22.2 21.2 22.0 24.6 24.2 16.2


Carborundum Universal Others


Summary financials: Carborundum Universal Profit and loss account, balance sheet and cash flow statement for CUMI, consolidated, March fiscal year-ends (Rs mn)

2007 2008 2009 2010 2011 2012E 2013E 2014EProfit model (Rs mn)Net Sales 6,298 9,277 12,219 13,121 16,452 19,803 22,732 24,943EBITDA 1,301 1,589 1,949 2,438 3,091 4,250 4,395 4,800Other income 89 641 332 22 29 32 3 28Interest (76) (189) (329) (308) (271) (291) (289) (272)Depreciation (195) (301) (351) (445) (504) (586) (672) (737)Profit before tax 1,119 1,739 1,601 1,707 2,345 3,405 3,437 3,819Exceptional items 0 0 0 7 235 0 0 0Tax expense (365) (543) (551) (560) (742) (1,073) (1,083) (1,203)Add: share of profits from associates 48 54 95 3 (2) 30 30 30Less: Minority interest (51) (64) (108) (140) (129) (200) (200) (200)PAT 751 1,188 1,037 1,017 1,708 2,162 2,184 2,446EPS 4 6 6 5 9 12 12 13Balance sheet (Rs mn)Equity 3,420 4,468 5,039 5,929 7,455 9,086 10,734 12,579Total borrowings 1,954 3,822 5,150 4,391 4,085 4,235 4,035 3,735Minority interest 186 379 486 490 594 794 994 1,194Deferred tax liability 228 331 411 449 477 477 477 477Current liabilities 1,229 1,716 2,074 1,915 2,275 3,285 3,775 4,158Total liabilites 7,016 10,716 13,160 13,173 14,886 17,877 20,015 22,145Net fixed assets 3,063 4,349 5,173 5,316 5,525 6,489 7,167 7,380Goodwill 344 823 1,036 849 832 832 832 832Investments 428 564 610 779 749 749 749 749Cash 499 476 604 469 698 583 679 1,566Other current assets 2,682 4,503 5,737 5,761 7,082 9,223 10,588 11,618Total assets 7,016 10,716 13,160 13,173 14,886 17,877 20,015 22,145Free cash flow (Rs mn)Operating cash flow 999 1,123 1,124 1,701 2,293 2,916 3,053 3,355Working capital changes (260) (664) (872) 65 (509) (1,132) (873) (646)Caital expenditure (956) (472) (884) (590) (771) (1,550) (1,350) (950)Free cash flow RatiosEBITDA margin (%) 20.7 17.1 15.9 18.6 18.8 21.5 19.3 19.2Net debt/equity (X) 43 75 90 66 45 40 31 17Book value (Rs/share) 18 24 27 32 40 49 57 67ROAE (%) 20 19 17 18 25 26 22 21ROACE (%) 13 12 10 12 15 18 17 16



Sales at Rs27.7 bn was up 46% yoy, 3% higher than our estimates due to higher FTF sales

Reported sales grew 46% yoy to Rs27.7 bn, 3% higher than our estimates with generics segment sales beating our estimates due to higher FTF sales in US while the PSAI segment was 9% lower than our estimates. The main beat came due to US revenues on account of higher FTF sales of US$99 mn, versus our estimate of US$35 mn; however, base business revenues in US were flat qoq at US$137 mn, lower than our estimates as we had built in a sequential increase of US$8 mn. Excluding these FTF sales, sales growth was at 22.5%, lower than our estimate of 30% due to poor sales growth in US and Russia. (1) India finished dosage grew poorly for the fourth quarter in a row, although sales growth has been picking up qoq from single-digit, reaching 11% this quarter, in line with our estimates, (2) Russia disappointed as it was down US$10 mn qoq in what is seasonally a strong quarter, to US$54 mn, flat yoy due to (a) late onset of winter and (b) pullback of sales in order to protect receivables. However, 4QFY12E sales growth is expected to remain strong, (3) Germany grew yoy in Rupee terms for the first time in FY2012; however, was flat yoy in Euro terms while (4) RoW sales grew 34% yoy, 7% higher than our estimates, due to strong sales in South Africa and Venezuela (main RoW market).

EBITDA margin at 32%, versus our estimate of 26%

EBITDA excluding forex income and other income was at Rs8.8 bn or 32% of sales, 28% higher than our estimates due to higher proportion of high-margin sales from FTF product - Olanzapine in US. Excluding this sales, we estimate base business EBITDA margin at 22.8%, up 100 bps qoq and 70 bps higher than our estimates due to only 4% sequential increase in R&D costs. However, base business gross margin was flat qoq due to lower proportion of sales from high-margin Russia. SG&A costs excluding depreciation/amortization were up 20% yoy, in line with our estimates. Lower interest costs, down qoq, and forex income of Rs285 mn resulted in PBT being 44% higher than our estimates. However, tax rate at 34% was much higher than our estimate of 20% due to higher sales form US resulting in reported PAT being 19% higher than our estimates.

Dr Reddy's Laboratories (DRRD)

Pharmaceuticals

High FTF sales lead to outperformance. Higher FTF sales led to outperformance in this quarter; however, base business performance was disappointing due to no qoq pick-up in US, flat sales in Russia yoy and significant increase in SG&A costs, in line with base business sales growth. We expect muted base business EPS growth in FY2012E due to (1) flat margin, (2) pick-up in tax rate and (3) higher interest costs. However, we expect core EPS growth at 25% in FY2013E. We value DRL at (1) 20X base business EPS of Rs86 (down 4% due to higher tax rate) and (2) Rs21 from limited competition in US launches. Downgrade to REDUCE (was ADD), TP at Rs1,740 (was Rs1,800).

Dr Reddy's LaboratoriesStock data Forecasts/Valuations 2012 2013E 2014E



Price performance (%) 1M 3M 12M EV/EBITDA (X) 12.0 10.0 9.4Absolute 4.0 1.9 4.4 ROE (%) 29.3 27.1 22.6Rel. to BSE-30 (5.8) 1.1 9.4 Div. Yield (%) 0.8 0.8 0.9


1,718-1,386

REDUCE

FEBRUARY 03, 2012

RESULT, CHANGE IN RECO.

Coverage view: Neutral

Price (Rs): 1,671

Target price (Rs): 1,740

BSE-30: 17,605

QUICK NUMBERS

• Excluding FTF sales, sales growth was at 22.5%, lower than our expectations

• Base business EBITDA margin at 22.8%, 70 bps higher than our estimates due to limited increase in R&D costs

• FY2013E PAT remains unchanged although base business EPS down 4% due to higher tax

Dr Reddy's Laboratories Pharmaceuticals


We increase our FY2012E PAT by 10% due to higher FTF sales in 3QFY12, FY2013E PAT remains unchanged

We factor in base business sales growth of 21% in FY2012E, same as that reported in 9MFY12. We estimate base business margin at 22.3% in FY2012E versus 21.8% reported in 9MFY12. While reported PAT is up 40% in 9MFY12, excluding FTF sales in 3QFY12, PAT is up 4% in 9MFY12; we accordingly factor a 5% increase in base business EPS in FY2012E. However, excluding forex gain of Rs594 mn in 9MFY12 and forex loss of Rs319 mn in 9MFY11, PAT is down 8% yoy in 9MFY12.

Key takeaways from conference call

Gross margin in generics business was at 66% versus 63% in 2QFY12 despite presence of FTF sales this quarter as proportion of high-margin sales from Russia fell to 10% from 12-13% in 1HFY12.

Despite limited pick-up in R&D costs in 9MFY12, DRL expects R&D costs at 7-7.5% in FY2013E.

Market share in Arixtra is at 18% (overall market) although DRL is participating only in retail market currently. Production bottlenecks remain and are expected to be sorted out in another three months post which DRL will launch it in the hospital market which accounts for majority of Arixtra sales.

DRL expects US$100 mn in sales from its biosimilars portfolio in emerging markets including India in 3-4 years from now from US$30 mn currently. DRL is in the process of registering Rituximab in several EMs currently.

US OTC sales are US$100 mn in 9MFY12, with Allegra D 24 OTC contributing insignificantly. By 4QFY13E, it expects to clock an annualized sales run-rate of US$200 mn implying it expects quarterly run-rate to shoot up to US$50 mn from US$33 mn currently. We estimate OTC sales at US$170 mn in FY2013E from US$133 mn in FY2012E.

SG&A spend excluding amortization/depreciation was up 20% yoy in 3QFY12 and up 26% yoy in 9MFY12 compared to base business sales growth of around 20%. However, in percentage terms, SG&A cost is expected to come down slightly as sales from Russia and India pick up.

DRL has cash flow hedges over the next 18 months in the form of derivatives and loans to the tune of US$638 mn, largely hedged in the range of 47-48. In addition, it has balance sheet hedges of US$425 mn. The MTM losses on account of cash flow hedges in balance sheet are US$85 mn on December 31, 2011; the corresponding amount at end-Jan 2012 is much lower at US$29 mn.

Pharmaceuticals Dr Reddy's Laboratories


Interim results- Dr Reddy’s, March fiscal year-ends (Rs mn)

3QFY12 3QFY12E 3QFY11 2QFY12 3QFY12E 3QFY11 2QFY12Net sales 27,692 26,765 18,985 22,679 3 46 22Cost of revenues 11,117 12,044 8,571 10,473 (8) 30 6R&D 1,514 1,800 1,306 1,459 (16) 16 4SG&A 6,372 6,200 5,309 5,948 3 20 7Other operating expe (165) (220) (199) (215) NM NM NMEBITDA 8,854 6,941 3,998 5,014 28 121 77EBITDA, % 32.0 25.9 21.1 22.1 6.0 10.9 9.9Amortization 408 400 307 389 2 33 5Depreciation 899 900 758 879 (0) 19 2EBIT 7,547 5,641 2,933 3,746 34 157 101EBIT, % 27.3 21.1 15.5 16.5 6.2 11.8 10.7Profit in affiliate/forex 355 4 50 189 8775 610 88Net Finance Income/ (155) (250) (98) (225) NM NM NMPBT 7,747 5,395 2,885 3,710 44 168 109Tax (2,616) (1,079) (152) (631) NM NM NMPAT 5,131 4,316 2,733 3,079 19 88 67

PSAI 5,563 6,137 4,980 5,933 (9) 12 (6) India 862 684 622 752 26 39 15 North America 1,170 1,018 770 1,068 15 52 10 Europe 1,651 2,398 1,830 2,303 (31) (10) (28) Others 1,880 2,036 1,758 1,810 (8) 7 4Generics 21,287 20,029 13,589 16,136 6 57 32 India 3,333 3,308 3,007 3,459 1 11 (4) Russia & CIS 3,317 3,980 2,875 3,380 (17) 15 (2) North America 11,114 9,164 4,765 6,287 21 133 77 Europe 2,426 2,554 2,123 2,117 (5) 14 15 RoW 1,097 1,023 819 893 7 34 23Others 842 600 417 610 40 102 38Total 27,692 26,765 18,986 22,679 3 46 22

% change

Source: Kotak Institutional Equities estimates, Company

Break-up of profits (Rs mn)

2011 2012E 2013E 2014E 2011 2012E 2013E 2014ENet sales (Rs mn) PAT (Rs mn)Base 74,692 90,147 109,420 128,898 Base 11,039 11,616 14,627 18,607Exclusivity — 6,345 7,988 551 Exclusivity — 3,807 3,535 162Total 74,692 96,492 117,409 129,450 Total 11,039 15,423 18,163 18,769

EBITDA adding back one-off exp. (Rs mn) EPS before excep. (Rs)Base 16,814 20,096 25,201 30,065 Base 64.9 68.3 86.1 109.5Exclusivity — 5,076 4,285 248 Exclusivity — 22.4 20.8 1.0

Total 16,814 25,172 29,486 30,313 Total 64.9 90.7 106.9 110.4

EBITDA ,% P/E (X) Base 22.5 22.3 23.0 23.3 Base 25.7 24.4 19.4 15.3Exclusivity — 80.0 53.6 45.0 Total 25.7 18.4 15.6 15.1Total 22.5 26.1 25.1 23.4

Source: Kotak Institutional Equities estimates, Company



Quarterly EBITDA margin profile

Jun-09 Sep-09 Dec-09 Mar-10 Jun-10 Sep-10 Dec-10 Mar-11 Jun-11 Sep-11 Dec-11Sales 18,190 18,369 17,297 16,424 16,832 18,704 18,985 20,173 19,784 22,679 27,692Reported operating income 3,296 2,546 (5,945) 2,114 2,626 3,225 2,933 3,845 2,789 3,746 7,547Reported EBIT margin 18 14 (34) 13 16 17 15 19 14 17 27

Non recurring charges 496 0 8,603 409 0 0 404 0 136 (94) 0Depreciation 550 600 799 732 685 731 758 787 828 879 899Amortisation 507 329 374 269 288 317 307 274 405 389 408Charges (Pencillin facility)

EBITDA excl one-time 4,849 3,475 3,831 3,524 3,599 4,273 4,402 4,906 4,158 4,920 8,854Adjusted EBITDA margin 26.7 18.9 22.1 21.5 21.4 22.8 23.2 24.3 21.0 21.7 32.0

Company defined adj. EBITDA 3,815 3,636 3,507 3,417 4,273 4,000 4,700 4,300 4,300 9,200Company defined adj. EBITDA, % 20.8 21.0 21.4 20.3 22.8 21.1 23.3 21.7 19.0 33.2


Profit and loss statement, March fiscal year-ends, 2009-14E

2009 2010 2011 2012E 2013E 2014ENet sales 69,440 70,276 74,692 96,492 117,409 129,450Operating expensesMaterials (32,941) (33,937) (34,430) (42,165) (54,571) (62,018)Selling (17,206) (17,147) (19,138) (24,101) (27,716) (30,488)R& D (4,037) (3,793) (5,060) (5,770) (6,636) (7,631)Others (14,277) (9,232) 711 674 1,000 1,000Total expenditure (68,461) (64,109) (57,917) (71,362) (87,923) (99,136)EBITDA 979 6,167 16,775 25,130 29,486 30,313Depreciation/amortisati (3,814) (4,160) (4,147) (5,108) (5,500) (5,950)EBIT (2,835) 2,007 12,628 20,022 23,986 24,363Net finance cost (1,034) (372) (305) (900) (800) (400)Other income (128) 417 119 827 100 100PBT (3,997) 2,052 12,442 19,949 23,286 24,063Current tax (1,172) (985) (1,403) (4,526) (5,123) (5,294)PAT (5,169) 1,067 11,039 15,423 18,163 18,769


Pharmaceuticals Dr Reddy's Laboratories


Balance sheet statement, March fiscal year-ends, 2009-14E

2009 2010 2011 2012E 2013E 2014EEquityShare capital 842 844 846 846 846 846Share premium 20,204 20,429 20,683 20,683 20,683 20,683Other reserves 20,999 21,642 24,461 37,684 53,478 69,710Net worth 42,045 42,915 45,990 59,213 75,007 91,239Short term loans 5,892 5,604 18,289 20,889 12,327 6,886Long term loans 13,633 9,091 5,283 5,283 5,283 256Debt 19,525 14,695 23,572 26,172 17,610 7,142Trade creditors 5,987 9,322 8,480 9,000 10,000 10,000Provisions 3,110 2,565 2,586 2,586 2,586 2,586Other current liabilities 8,455 8,113 12,355 12,355 12,355 12,355Current liabilities 17,552 20,000 23,421 23,941 24,941 24,941Defeered tax liabilities 3,411 1,438 87 87 87 87Total sources of funds 82,533 79,048 93,070 109,413 117,646 123,409

AssetsInventories 13,226 13,371 16,059 23,158 25,830 29,773Sundry debtors 14,592 11,960 17,615 22,193 27,004 29,773Other debtors 5,066 6,548 8,157 8,157 8,157 8,157Cash/cash equivalents 6,126 10,184 5,762 8,533 8,033 8,033Current assets 39,010 42,063 47,593 62,041 69,024 75,737Gross block 26,491 29,679 38,359 47,159 53,909 58,909Less: Accumulated deprecia 9,888 12,087 14,714 18,220 22,020 26,220Net fixed assets 16,603 17,592 23,645 28,939 31,889 32,689Intangible assets incl gwill 22,179 13,973 15,246 15,844 14,144 12,394Capital -WIP 4,279 4,867 5,997 2,000 2,000 2,000Other non current assets 462 553 589 589 589 589Total uses of funds 82,533 79,048 93,070 109,413 117,646 123,409

Free cash flow Operating cash flow, excl. working capit 3,725 14,165 18,985 22,509 23,203Working capital 3,554 (6,948) (11,157) (6,483) (6,713)Capital expenditure (3,776) (9,810) (4,803) (6,750) (5,000)InvestmentsFree cash flow 3,503 (2,593) 3,025 9,276 11,490




Change in estimates (Rs mn)

2011E 2012E 2012E 2013E 2011E 2012ENet sales 96,492 117,409 96,108 117,442 0 (0)Operating expensesMaterials 42,165 54,571 43,888 55,345 (4) (1)Selling and administration 24,101 27,716 23,829 27,403 1 1R& D 5,770 6,636 6,656 7,322 (13) (9)Others (674) (1,000) (829) (1,000)Total expenditure 71,362 87,923 73,544 89,070 (3) (1)EBITDA 25,130 29,486 22,564 28,371 11 4Depreciation and amortisation 5,108 5,500 5,101 5,500 0 0EBIT 20,022 23,986 17,463 22,871 15 5Net finance cost 800 700 1,000 700 (20) 0Other income 727 0 376 0 93 NMPretax profits before extra-ordinaries 19,949 23,286 16,839 22,171 18 5Current tax 4,526 5,123 2,848 3,769 59 36Reported net profit 15,423 18,163 13,991 18,402 10 (1)

New estimates Old estimates % change



Subsidy burden on upstream companies increased to 37.91% in 9MFY12

We are not surprised by the Government’s decision to increase subsidy burden on upstream companies to 37.91% of gross under-recoveries in 9MFY12 versus 33.33% in 1HFY12. We have already modeled 45% subsidy burden on upstream companies for FY2012E versus 38.7% in FY2011 noting (1) large estimated gross under-recoveries of `1.4 tn, (2) lower profitability of downstream oil companies in a tough operating environment and (3) fiscal constraints of the Government. The upstream oil companies will bear subsidy of `369 bn in 9MFY12 out of the total gross under-recoveries of `973 bn with the share of ONGC at `303 bn (82.1%), OIL at `44.8 bn (12.1%) and GAIL at `21.2 bn (5.7%).

Lower profitability for upstream and lower losses for downstream in 3QFY12E

We now estimate 3QFY12E net income of ONGC (standalone) at `53.2 bn (`6.2 EPS) and of OIL at `8.8 bn post the Government’s aforementioned decision. GAIL has already reported 3QFY12 net income of `10.9 bn with a provisional subsidy burden of `5.4 bn; actual subsidy losses are higher at `8.7 bn and will be adjusted in 4QFY12E results. We compute lower losses for downstream companies (BPCL, HPCL and IOCL) in 3QFY12E given lower estimated net under-recoveries due to higher-than-expected compensation from their upstream counterparts. We now estimate net income for BPCL at –`11.8 bn, HPCL at –`14 bn and IOCL at –`29 bn in 3QFY12E.

Significant upgrades to earnings of upstream companies if subsidy burden remains at 37.91%

We compute FY2012E EPS of `37 for ONGC versus `34, assuming 37.91% (similar to FY2011) share of under-recoveries for upstream companies versus our assumed 45%. We compute net crude price realization of US$53.8/bbl for ONGC’s nominated fields in FY2012E, which is same as in FY2011 and significantly higher than our estimate of US$44.8/bbl. Similarly, our FY2012E EPS estimate for OIL and GAIL will increase to `174 and `33 versus `155 and `30 currently.

Maintain our positive view on upstream companies

We maintain our BUY rating on ONGC/OIL/GAIL stocks given large potential upside of 26% to our 12-month target price of `355 for ONGC, 37% to our 12-month target price of `1,720 for OIL and 24% to our 12-month target price of `485 for GAIL. We highlight that current stock prices of ONGC and OIL are discounting a bleak scenario in terms of subsidy burden to be borne by upstream companies. However, we estimate ONGC’s 9MFY12E standalone EPS at `21 to exceed ONGC’s FY2011 standalone EPS of `20 (adjusted). It is unlikely that ONGC will report a loss in 4QFY12E. At 38% share of gross under-recoveries for upstream companies in 4QFY12E, ONGC’s standalone 4QFY12E EPS should logically exceed 3QFY12E EPS of `6.2 based on 47.1% share in 3QFY12E assuming other parameters remain the same.

Energy India

So far, so good. The Government’s decision to increase the share of the upstream oil companies of gross under-recoveries to 37.91% in 9MFY12 versus 33.33% in 1HFY12 is largely on expected lines and should partly allay investment concerns about abnormal subsidy burden for the Government-owned upstream oil companies in FY2012E. We see meaningful upside to our FY2012E EPS estimates for ONGC, OIL and GAIL if the Government was to cap FY2012E subsidy burden at ~38% (similar to FY2011). We have BUY ratings on all the three stocks with 24-37% potential upside to our FY2013E-based fair valuations.

ATTRACTIVE

FEBRUARY 06, 2012

UPDATE

BSE-30: 17,605

QUICK NUMBERS

• Standalone EPS of `21 for ONGC in 9MFY12E

• Consolidated EPS of `37 for ONGC in FY2012E assuming lower subsidy burden at 38%

• 24-37% potential upside to our fair valuations for upstream companies

Energy India


We compute 9MFY12E EPS for ONGC at `21 and OIL at `119 Subsidy burden and EPS of upstream companies, March fiscal year-end, 2012 (` bn)

1QFY12 2QFY12 3QFY12E 9MFY12EGross under-recovery 435.3 213.7 324.1 973.1 Subsidy sharing by upstream companies (%) 33.3 33.3 47.1 37.9 Subsidy burden on upstream companies 145.1 71.2 152.6 368.9 ONGC 120.5 57.1 125.4 303.0 OIL 17.8 8.4 18.5 44.8 GAIL 6.8 5.7 8.7 21.2 Net incomeONGC (standalone) 40.9 86.4 53.2 180.6 OIL 8.5 11.4 8.8 28.7 GAIL (a) 9.8 10.9 10.9 31.7 EPS (Rs)ONGC (standalone) 4.8 10.1 6.2 21.1 OIL 35.3 47.3 36.5 119.2 GAIL (a) 7.8 8.6 8.6 25.0

Notes:(a) GAIL has reported 3QFY12 results with provisional subsidy burden of Rs5.4 bn.


Fair value of ONGC (`/share)

FY2013E EPS 38 Less: income from investments valued separately 0 Adjusted EPS for FY2013E 38 P/E (X) 9 Valuation 340 Investments 12 Indian Oil Corp. 7 GAIL 4 Petronet LNG 1

Fair value 353


Fair value of OIL (`/share)

FY2013E EPS 187 P/E (X) 9 Valuation 1,682 Investments 41 Numaligarh Refinery Limited 24 Other investments 17

Fair value 1,723


India Energy


Sum-of-the-parts valuation of GAIL, FY2013E basis (` bn)

EV (Rs bn)Valuation base (Rs bn) Multiples (X) EBITDA EV

Other EBITDA Other EV/EBITDA Other basis (Rs/share)Natural gas transportationHVJ pipeline 41 41 32 DV pipeline 32 32 25 DUPD pipeline 30 30 24 DBN pipeline 38 38 30 CGJH pipeline 19 19 15 DV GREP pipeline 154 154 122 DB pipeline 68 68 54 KBM pipeline 46 46 36 Short distance pipelines 5.5 5.0 27 22 Total natural gas transportation 359 Other businessesLPG transportation 3.7 6.0 22 18 LPG production 9.6 5.0 48 38 Petrochemicals 14.0 5.0 70 55 Natural gas trading 8.5 3.0 25 20 Total other business segments 131 InvestmentsONGC shares 73 0.8 58 46 Others 45 0.8 36 29 Investments 118 0.8 95 75 Total 193 565 Net debt/(cash) 101 101 80 Implied value of share (Rs/share) 485


Energy India


Consolidated profit model, balance sheet, cash model of ONGC, March fiscal year-ends, 2007-14E (` mn)

2007 2008 2009 2010 2011 2012E 2013E 2014EProfit model (Rs mn)Net sales 966,542 1,091,644 1,200,176 1,070,520 1,232,000 1,520,205 1,721,860 1,728,959EBITDA 357,906 408,423 419,955 445,845 493,944 602,921 701,150 708,525Other income 45,378 53,565 50,721 50,409 42,048 41,307 48,473 63,104Interest 394 (12,027) (5,966) (3,019) (4,011) (4,772) (9,068) (8,086)Depreciation and depletion (119,550) (138,624) (153,985) (186,838) (205,853) (209,803) (246,183) (256,317)Pretax profits 284,127 311,338 310,725 306,397 326,128 429,653 494,371 507,226Tax (88,986) (102,908) (111,333) (95,580) (110,328) (128,933) (148,635) (155,297)Deferred tax (9,264) (6,471) (3,495) (11,457) (8,842) (15,303) (16,321) (13,523)Net profits 178,318 203,710 201,719 199,951 228,376 300,488 329,415 338,406Adjusted net profits after minority interests 181,700 198,959 194,624 196,409 210,963 288,572 327,000 334,618Adjusted EPS (Rs) 21.2 23.3 22.7 23.0 24.7 33.7 38.2 39.1

Balance sheet (Rs mn)Total equity 670,137 786,657 929,353 1,024,615 1,166,139 1,355,934 1,559,243 1,765,611Deferred tax liability 80,976 87,227 92,076 102,669 111,328 126,631 142,952 156,475Liability for abandonment cost 151,857 129,325 171,451 174,590 198,504 198,504 198,504 198,504Total borrowings 21,826 22,039 73,633 61,274 48,691 139,691 117,747 95,747Currrent liabilities 187,051 251,797 293,499 306,532 390,543 352,795 373,304 379,542Total liabilities and equity 1,111,847 1,277,045 1,560,013 1,669,680 1,915,205 2,173,555 2,391,750 2,595,879Cash 206,262 249,807 224,671 222,348 285,722 363,025 521,709 711,123Current assets 192,652 257,384 309,514 306,619 331,746 346,771 370,848 371,934Total fixed assets 643,219 695,227 871,287 986,293 1,168,907 1,334,929 1,370,363 1,383,992Goodwill 27,686 22,847 111,108 92,455 86,998 86,998 86,998 86,998Investments 36,888 45,041 36,926 53,551 33,871 33,871 33,871 33,871Deferred expenditure 5,141 6,739 6,506 8,413 7,960 7,960 7,960 7,960Total assets 1,111,848 1,277,045 1,560,013 1,669,680 1,915,205 2,173,554 2,391,749 2,595,878

Free cash flow (Rs mn)Operating cash flow, excl. working capital 252,772 284,517 274,321 302,059 343,505 381,203 429,491 422,168Working capital changes (4,990) (24,929) (109,306) (29,693) 68,489 (2,772) 76,432 47,937Capital expenditure (135,049) (166,427) (208,137) (207,849) (267,547) (272,742) (167,662) (146,972)Investments 53,822 (7,348) (92,159) (11,021) 15,288 — — —Other income 20,422 22,822 31,612 22,154 21,385 41,307 48,473 63,104Free cash flow 186,976 108,636 (103,668) 75,650 181,120 146,996 386,734 386,237

Ratios (%)Debt/equity 3.3 2.8 7.9 6.0 4.2 10.3 7.6 5.4Net debt/equity (27.5) (29.0) (16.3) (15.7) (20.3) (16.5) (25.9) (34.9)RoAE 25.5 24.9 21.2 18.6 19.0 22.0 20.8 18.7RoACE 21.8 22.1 18.4 16.2 15.6 18.6 18.7 17.1

Key assumptionsRs/dollar rate 45.3 40.3 45.8 47.4 45.6 48.7 52.5 51.0 Crude fob price (US$/bbl) 64.8 78.9 83.0 67.1 84.0 110.0 100.0 95.0 Ceiling/actual natural gas price (Rs/'000 cm) 3,200 3,200 3,200 3,200 6,783 7,654 8,251 8,015 Subsidy loss (Rs bn) 170.2 220.0 282.3 115.5 248.9 469.7 380.6 293.6


India Energy


Profit model, balance sheet, cash model of OIL, March fiscal year-ends, 2007-14E (` mn)

2007 2008 2009 2010 2011 2012E 2013E 2014EProfit model (Rs mn)Net sales 53,892 60,819 72,414 79,056 83,034 106,583 120,719 125,273EBITDA 22,280 23,812 28,400 34,486 36,160 57,183 66,280 67,395Other income 5,335 6,770 9,372 9,371 11,851 14,365 14,570 16,010Interest (140) (344) (87) (37) (139) (237) (2) —Depreciation and depletion (2,595) (3,093) (3,768) (4,811) (4,781) (15,790) (14,312) (15,072)Pretax profits 24,881 27,145 33,916 39,010 43,091 55,521 66,536 68,334Tax (7,406) (8,538) (11,910) (11,598) (12,973) (18,058) (21,612) (22,193)Deferred tax (1,020) (707) (343) (1,211) (1,282) 44 24 22Adjusted net profits 16,436 17,897 21,646 26,169 28,850 37,156 44,949 46,163Earnings per share (Rs) 76.8 83.6 101.1 115.2 120.0 154.5 186.9 192.0

Balance sheet (Rs mn)Total equity 68,491 79,330 93,310 137,638 156,019 179,310 208,329 237,725Deferred tax liability 8,033 8,655 8,998 10,209 11,491 11,446 11,422 11,399Liability for abandonment cost 11 11 15 19 1,645 1,645 1,645 1,645Total borrowings 8,140 1,749 565 375 10,268 50 — —Currrent liabilities 10,320 17,541 30,914 32,693 33,216 33,567 34,980 35,583Total liabilities and equity 94,995 107,286 133,801 180,934 212,638 226,018 256,376 286,352Cash 32,757 42,808 60,700 85,429 117,693 119,920 138,559 156,113Current assets 22,350 18,957 22,853 37,266 30,318 30,135 31,667 32,160Total fixed assets 35,813 40,633 45,361 49,460 55,723 67,058 77,246 89,174Investments 4,075 4,887 4,887 8,594 8,904 8,904 8,904 8,904Deferred expenditure — — — 184 — — — —Total assets 94,995 107,286 133,801 180,934 212,638 226,017 256,375 286,352

Free cash flow (Rs mn)Operating cash flow, excl. working capital 18,357 20,104 27,246 23,621 26,353 27,557 37,416 38,202Working capital changes (8,696) 7,435 2,368 (9,113) 4,034 533 (118) 110Capital expenditure (9,370) (9,492) (8,496) (11,485) (9,518) (16,874) (17,250) (20,000)Investments 226 (811) — (3,201) (310) — — —Other income 2,892 4,214 5,470 7,268 6,343 14,365 14,570 16,010Free cash flow 3,409 21,450 26,587 7,091 26,902 25,580 34,617 34,322

Ratios (%)Debt/equity 11.9 2.2 0.6 0.3 6.6 — — —Net debt/equity (32.8) (31.9) (31.9) (38.3) (54.1) (48.2) (49.7) (50.7)RoAE 23.1 21.8 22.8 20.9 18.3 20.7 21.9 19.7RoACE 23.0 21.5 22.7 20.9 18.1 20.5 21.7 19.6

Key assumptionsRs/dollar rate 45.3 40.3 45.8 47.4 45.6 48.7 52.5 51.0 Crude fob price (US$/bbl) 64.8 78.9 83.0 67.1 84.0 110.0 100.0 95.0 Ceiling/actual natural gas price (Rs/'000 cm) 3,200 3,200 3,200 3,200 6,783 7,654 8,251 8,015 Subsidy loss (Rs bn) 19.9 23.1 30.2 15.5 32.9 68.9 55.6 42.8


Energy India


Profit model, balance sheet, cash model of GAIL, March fiscal year-ends, 2007-14E (` mn)

2007 2008 2009 2010 2011 2012E 2013E 2014EProfit model (Rs mn)Net sales 160,472 180,082 237,760 249,964 324,586 390,449 479,777 575,849EBITDA 30,649 39,275 40,647 46,688 54,718 60,491 67,808 77,049Other income 5,450 5,564 7,966 5,411 5,186 3,774 3,586 3,721Interest (1,071) (796) (870) (700) (829) (939) (3,393) (5,970)Depreciation (5,754) (5,710) (5,599) (5,618) (6,503) (7,832) (11,459) (13,829)Pretax profits 29,274 38,333 42,144 45,781 52,572 55,494 56,542 60,970Tax (7,941) (12,525) (13,941) (13,750) (14,352) (13,132) (10,799) (12,552)Deferred taxation (190) (10) (62) (636) (2,437) (4,210) (6,381) (6,282)Net profits 24,619 26,015 28,037 31,398 35,611 38,152 39,362 42,137Earnings per share (Rs) 19.4 20.5 22.1 24.8 28.1 30.1 31.0 33.2

Balance sheet (Rs mn)Total equity 113,929 130,049 147,696 167,990 192,533 218,891 245,722 273,854Deferred taxation liability 13,187 13,197 13,259 13,896 16,332 20,542 26,923 33,205Total borrowings 13,379 12,659 12,001 14,804 23,100 88,400 120,700 99,500Current liabilities 45,512 60,604 81,548 103,784 88,149 79,883 90,093 100,862Total liabilities and equity 186,007 216,509 254,505 300,473 320,115 407,717 483,439 507,421Cash 26,604 44,730 34,562 41,715 21,314 12,277 13,207 12,997Other current assets 50,851 59,370 87,804 95,412 90,148 103,656 115,334 122,894Total fixed assets 93,913 97,500 114,767 142,616 182,827 265,959 329,072 345,704Investments 14,638 14,909 17,373 20,730 25,825 25,825 25,825 25,825Total assets 186,007 216,509 254,505 300,473 320,115 407,717 483,439 507,421

Free cash flow (Rs mn)Operating cash flow, excl. working capital 23,920 33,692 30,456 33,480 42,110 42,665 48,526 55,968Working capital changes (10,151) (388) (5,573) 12,454 (12,420) (21,773) (1,468) 3,209Capital expenditure (20,449) (12,419) (25,535) (35,702) (46,322) (87,208) (69,483) (27,902)Investments (205) (270) (2,464) (3,358) (5,095) — — —Other income 3,884 4,042 5,243 4,705 4,090 3,774 3,586 3,721Free cash flow (3,002) 24,658 2,127 11,580 (17,637) (62,542) (18,839) 34,996

Ratios (%)Debt/equity 10.5 8.8 7.5 8.1 11.1 36.9 44.3 32.4Net debt/equity (10.4) (22.4) (14.0) (14.8) 0.9 31.8 39.4 28.2ROAE (%) 20.5 19.2 18.4 18.3 18.2 17.0 15.4 14.5ROACE (%) 16.1 17.8 17.5 17.2 16.9 13.9 11.6 11.6

Key assumptionsGas transmission volumes (mcm/d) 77 82 83 107 118 118 125 135Petrochemical sales volumes (000 tons) 347 391 423 410 420 440 445 480LPG sales volumes (000 tons) 1,037 1,039 1,092 1,101 1,073 1,135 1,165 1,165LPG transmission volumes (000 tons) 2,490 2,754 2,744 3,160 3,337 3,350 3,350 3,350Subsidy losses (Rs mn) 14,880 13,137 17,812 13,267 21,112 35,406 34,348 29,224


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December 2011: Results calendar

Mon Tue Wed Thu Fri Sat6-Feb 7-Feb 8-Feb 9-Feb 10-Feb 11-FebAdani Port & SEZ AIA Engineering Bharat Forge ACC Apollo Hospital Enterprises Bajaj HindustanAdani Power Bajaj Corp Bharti Airtel Ambuja Cement Aurobindo Pharma Oil IndiaBGR Energy Systems Cadila Healthcare Essar Shipping Anant Raj Industries BPCLDena Bank Career Point Power Grid Apollo Tyres Essar OilGlaxosmithkline Consumers GMR Infra Tech Mahindra Dishman Pharmaceuticals Gammon InfraHindustan Unilever IL&FS Transporation Fortis Healthcare GE ShippingJubilant Life Sciences JM Financial Gammon India Hotel Leela VenturesMOIL Mahindra & Mahindra Hindalco Industries JSW SteelNALCO HPCL Keynote Corporate ServicesNCC Indiabulls Securities MTNL

Jindal Saw Pantaloon RetailJindal Stainless Reliance CapitalMRF Reliance CommunicationsTata Steel Religare EnterprisesVA Tech Wabag Shriram Transport

Tata ChemicalsTata PowerTV Today Network

13-Feb 14-Feb 15-Feb 16-FebCastrol India Alok Industries Glaxosmithkline PharmaCoal India Educomp SolutionsEngineers India Great OffshoreGujarat NRE Coke GVKPILLanco Infratech IVRCLSAIL Max IndiaShree Renuka Sugar Shipping Corp of IndiaSun Pharma Tecpro Systems

Voltas

Source: BSE, NSE, Kotak Institutional Equities

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Kotak Institutional Equities: Valuation summary of KIE Universe stocks

3-Feb-12 Mkt cap.O/S

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

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

Automobiles

Apollo Tyres 70 BUY 35,463 728 504 8.7 6.8 9.2 (26.1) (22.0) 34.6 8.0 10.3 7.7 6.0 5.8 4.4 1.3 1.2 1.0 0.7 0.6 0.7 20.1 13.4 15.7 80 13.7 3.1

Ashok Leyland 26 ADD 69,976 1,437 2,661 2.4 1.9 2.3 68.1 (19.7) 22.5 11.1 13.8 11.3 7.7 8.4 7.3 1.6 1.5 1.4 3.8 3.8 3.8 21.8 15.9 18.2 26 (1.1) 2.9

Bajaj Auto 1,612 ADD 466,469 9,581 289 90.4 106.8 122.3 43.9 18.1 14.6 17.8 15.1 13.2 13.6 11.3 10.1 9.4 6.8 5.2 2.5 2.5 2.5 84.9 52.5 44.7 1,715 6.4 20.9

Bharat Forge 305 ADD 72,365 1,486 237 12.5 16.7 19.8 1,402.1 32.8 18.7 24.3 18.3 15.4 11.2 9.1 7.8 3.2 2.8 2.4 1.1 — — 8.2 14.3 15.2 315 3.3 2.0

Exide Industries 137 SELL 116,365 2,390 850 7.5 5.1 6.5 18.0 (32.1) 28.4 18.4 27.0 21.1 13.2 17.5 14.0 4.2 3.8 3.4 1.1 0.9 0.9 25.5 14.9 17.0 105 (23.3) 4.0

Hero Motocorp 1,953 SELL 389,994 8,010 200 99.3 118.0 129.5 (11.1) 18.8 9.7 19.7 16.6 15.1 12.9 11.9 10.3 8.4 7.2 6.2 5.4 3.6 3.6 56.5 66.1 58.8 1,815 (7.1) 26.6

Mahindra & Mahindra 711 BUY 436,431 8,964 614 41.7 43.9 49.0 22.7 5.3 11.6 17.0 16.2 14.5 13.1 12.3 10.7 4.1 3.4 2.9 1.6 1.3 1.3 27.3 23.1 21.7 840 18.2 36.1

Maruti Suzuki 1,241 ADD 358,482 7,363 289 79.2 52.3 90.0 (8.4) (33.9) 72.0 15.7 23.7 13.8 9.9 16.1 8.4 2.6 2.3 2.0 0.6 0.6 0.6 17.6 10.3 15.8 1,250 0.7 18.4

Tata Motors 248 SELL 823,436 16,913 3,325 27.2 27.8 32.5 737.9 2.1 17.2 9.1 8.9 7.6 6.2 5.7 4.9 4.2 3.1 2.2 1.5 1.2 1.2 66.1 39.5 34.3 225 (9.1) 71.5

Automobiles Cautious 2,768,981 56,873 82.8 0.3 20.0 13.5 13.5 11.2 8.9 8.5 7.1 4.2 3.4 2.8 2.1 1.7 1.7 31.1 25.5 24.8


Andhra Bank 111 BUY 61,946 1,272 560 22.6 23.6 23.0 5.0 4.4 (2.8) 4.9 4.7 4.8 — — — 1.0 0.8 0.7 5.0 5.2 5.0 23.2 19.0 16.3 150 35.5 1.4

Axis Bank 1,099 BUY 466,485 9,581 424 82.5 95.5 102.8 33.0 15.7 7.6 13.3 11.5 10.7 — — — 2.5 2.1 1.8 1.2 1.5 1.6 19.3 19.6 18.2 1,350 22.8 56.3

Bajaj Finserv 494 ADD 71,508 1,469 145 78.2 63.2 62.9 102.3 (19.2) (0.4) 6.3 7.8 7.9 — — — 2.0 1.5 1.2 2.5 2.5 2.5 37.2 21.9 16.8 650 31.5 0.8

Bank of Baroda 762 BUY 299,398 6,149 393 108.0 115.6 121.2 29.1 7.1 4.9 7.1 6.6 6.3 — — — 1.5 1.3 1.1 2.5 2.7 2.8 25.9 21.5 19.2 1,050 37.8 8.9

Bank of India 348 BUY 190,624 3,915 547 45.5 46.7 62.0 37.4 2.7 32.8 7.7 7.5 5.6 — — — 1.2 1.1 0.9 2.3 2.4 3.2 17.3 15.1 17.6 450 29.2 5.6

Canara Bank 484 BUY 214,390 4,403 443 90.9 74.8 93.2 23.3 (17.7) 24.6 5.3 6.5 5.2 — — — 1.2 1.0 0.9 2.3 2.5 2.5 23.2 15.5 16.9 550 13.6 7.9

Corporation Bank 428 BUY 63,467 1,304 148 95.4 107.5 107.5 16.3 12.7 (0.0) 4.5 4.0 4.0 — — — 0.9 0.8 0.7 4.7 5.3 5.3 21.9 20.6 17.8 600 40.0 0.6

Federal Bank 404 BUY 69,043 1,418 171 34.3 42.4 49.7 26.3 23.5 17.3 11.8 9.5 8.1 — — — 1.4 1.3 1.1 2.1 2.6 3.1 12.0 13.5 14.3 500 23.9 3.8

HDFC 697 REDUCE 1,021,916 20,989 1,467 24.1 27.7 31.8 22.4 14.9 14.7 28.9 25.2 21.9 — — — 5.9 5.2 4.0 1.3 1.5 1.8 21.7 22.0 21.4 725 4.1 35.2

HDFC Bank 506 ADD 1,177,603 24,187 2,326 16.9 22.1 28.1 31.0 30.9 27.2 30.0 22.9 18.0 — — — 4.6 4.0 3.4 0.7 0.9 1.1 16.7 18.8 20.5 560 10.6 31.7

ICICI Bank 916 BUY 1,055,413 21,677 1,152 44.7 53.2 56.7 23.9 19.0 6.5 20.5 17.2 16.2 — — — 1.9 1.8 1.7 1.5 1.7 1.9 9.7 10.7 10.7 1,100 20.0 105.4

IDFC 138 ADD 208,650 4,285 1,509 8.8 10.3 12.1 4.6 17.1 18.2 15.8 13.5 11.4 — — — 2.0 1.7 1.5 1.6 1.5 1.8 14.7 13.6 13.9 150 8.5 21.5

India Infoline 57 SELL 18,715 384 327 7.4 3.5 5.0 (9.3) (52.3) 41.1 7.8 16.3 11.5 — — — 1.1 1.0 0.9 5.4 1.3 1.9 12.9 6.4 8.1 70 22.3 0.5

Indian Bank 234 BUY 100,459 2,063 430 38.8 41.9 46.6 10.5 8.0 11.2 6.0 5.6 5.0 — — — 1.3 1.1 0.9 3.2 3.4 3.7 22.3 20.4 19.4 300 28.3 1.6

Indian Overseas Bank 88 BUY 54,357 1,116 619 17.3 14.4 27.8 33.6 (17.2) 93.6 5.1 6.1 3.2 — — — 0.7 0.6 0.5 5.7 2.2 4.4 12.7 9.1 15.9 140 59.4 1.2

IndusInd Bank 298 BUY 139,044 2,856 466 12.4 16.8 17.7 45.2 35.2 5.4 24.1 17.8 16.9 — — — 3.8 3.3 2.9 0.7 0.9 1.0 20.8 19.3 17.2 325 8.9 3.5

J&K Bank 814 ADD 39,473 811 48 126.9 155.4 160.6 20.1 22.5 3.4 6.4 5.2 5.1 — — — 1.1 1.0 0.9 3.2 3.9 4.0 19.0 20.0 17.9 950 16.7 0.3

LIC Housing Finance 261 ADD 124,152 2,550 475 20.5 19.3 29.5 47.2 (5.8) 52.7 12.7 13.5 8.9 — — — 3.2 2.7 2.3 1.7 1.6 2.4 25.8 20.3 26.0 270 3.3 12.9

Mahindra & Mahindra Financial 699 BUY 71,578 1,470 102 45.2 55.6 71.9 26.1 23.0 29.3 15.5 12.6 9.7 — — — 2.9 2.6 2.2 1.5 1.8 2.3 22.0 21.1 23.1 825 18.1 1.8

Muthoot Finance 182 BUY 67,467 1,386 371 15.7 23.1 27.5 108.4 46.4 19.3 11.5 7.9 6.6 — — — 5.1 2.2 1.6 — — — 51.5 38.7 28.4 240 32.1 —

Oriental Bank of Commerce 288 BUY 83,969 1,725 292 51.5 43.0 57.9 13.7 (16.5) 34.7 5.6 6.7 5.0 — — — 0.8 0.8 0.7 3.6 3.0 4.1 15.5 10.9 13.4 370 28.6 2.9

PFC 187 BUY 246,504 5,063 1,320 22.8 22.7 29.3 11.1 (0.5) 29.0 8.2 8.2 6.4 — — — 1.6 1.2 1.1 2.1 2.4 3.1 18.4 16.7 17.4 225 20.5 14.4

Punjab National Bank 963 BUY 305,027 6,265 317 140.0 152.0 166.5 13.0 8.6 9.5 6.9 6.3 5.8 — — — 1.5 1.3 1.1 2.3 3.2 3.5 24.4 22.0 20.5 1,270 31.9 8.9

Reliance Capital 374 ADD 92,039 1,890 246 9.3 12.6 24.2 (25.3) 35.8 91.7 40.2 29.6 15.4 — — — 1.3 1.3 1.2 1.0 1.4 2.6 3.3 4.4 8.1 470 25.7 24.2

Rural Electrification Corp. 205 BUY 202,267 4,154 987 26.0 28.7 33.7 28.1 10.5 17.2 7.9 7.1 6.1 — — — 1.6 1.4 1.2 3.7 4.0 4.7 21.5 20.7 21.1 230 12.3 11.0

SKS Microfinance 90 RS 6,592 135 74 15.7 (89.1) (27.5) (41.8) (667.7) (69.1) 5.7 (1.0) (3.2) — — — 0.4 0.6 0.7 — — — 8.3 (44.7) (19.3) — — 1.7

State Bank of India 2,103 BUY 1,335,498 27,430 635 130.2 172.6 216.5 (9.9) 32.6 25.4 16.2 12.2 9.7 — — — 2.1 1.8 1.6 1.6 1.7 1.8 12.6 15.9 17.5 2,300 9.4 140.9

Union Bank 230 BUY 123,038 2,527 536 39.5 31.6 44.0 (3.9) (19.8) 39.0 5.8 7.3 5.2 — — — 1.1 1.0 0.9 3.4 2.8 3.9 20.9 14.4 17.5 340 48.1 4.8

Yes Bank 345 BUY 119,679 2,458 347 20.9 26.4 31.6 39.6 25.9 19.9 16.5 13.1 10.9 — — — 3.2 2.6 2.2 0.7 0.9 1.1 21.1 21.9 21.7 375 8.8 17.5

Banks/Financial Institutions Attractive 8,164,875 167,700 20.0 11.4 20.4 13.3 12.0 10.0 — — — 2.1 1.9 1.6 1.6 1.8 2.1 16.0 15.5 16.3

Cement

ACC 1,267 SELL 238,091 4,890 188 55.6 57.3 69.0 (33.2) 3.1 20.4 22.8 22.1 18.4 14.2 12.8 9.9 3.5 3.2 2.8 2.8 1.8 1.8 17.5 16.5 17.4 980 (22.7) 7.0

Ambuja Cements 173 SELL 262,610 5,394 1,522 7.9 7.9 9.8 (1.5) (0.2) 24.8 21.9 21.9 17.6 13.5 12.4 9.7 3.3 3.1 2.8 1.2 1.3 1.4 16.6 14.8 16.8 135 (21.7) 7.1

Grasim Industries 2,759 BUY 253,055 5,198 92 232.0 275.8 281.7 (22.9) 18.9 2.2 11.9 10.0 9.8 7.0 5.8 5.1 1.7 1.5 1.3 0.7 1.2 1.2 15.7 16.2 14.5 2,900 5.1 3.6

India Cements 94 ADD 28,829 592 307 1.9 9.9 10.1 (81.2) 424.3 1.8 49.7 9.5 9.3 16.2 5.6 5.1 0.7 0.6 0.6 1.7 3.4 3.4 1.4 7.3 7.0 90 (4.1) 1.3

Shree Cement 2,270 REDUCE 79,080 1,624 35 57.2 80.2 119.4 (72.5) 40.3 48.9 39.7 28.3 19.0 9.3 7.1 6.2 4.1 3.7 3.3 0.6 0.7 0.9 10.7 13.9 18.4 2,085 (8.1) 0.5

UltraTech Cement 1,276 REDUCE 349,620 7,181 274 44.9 79.7 89.4 (49.2) 77.7 12.2 28.4 16.0 14.3 13.9 9.1 7.9 2.8 2.4 2.1 0.4 0.5 0.6 16.7 18.7 17.7 1,220 (4.4) 4.0

Cement Neutral 1,211,285 24,879 (23.7) 29.2 12.9 20.7 16.0 14.2 10.9 8.4 7.1 2.5 2.2 2.0 1.1 1.2 1.2 12.2 14.0 14.0

Price/BV (X) Dividend yield (%)


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


Consumer products

Asian Paints 2,950 SELL 282,992 5,812 96 80.8 94.4 106.9 13.0 16.8 13.3 36.5 31.3 27.6 24.3 21.2 17.1 13.8 10.6 8.7 1.1 0.9 1.2 43.9 39.9 35.6 2,500 (15.3) 4.8

Colgate-Palmolive (India) 1,000 SELL 135,993 2,793 136 29.6 32.5 39.1 (4.9) 9.9 20.3 33.8 30.7 25.6 29.4 26.4 21.3 35.4 36.0 28.7 2.2 2.8 2.7 113.4 116.1 124.9 900 (10.0) 2.0

Dabur India 98 ADD 170,383 3,500 1,740 3.3 3.7 4.4 12.8 12.1 19.2 30.0 26.7 22.4 24.2 20.5 17.5 13.0 10.1 8.0 1.2 1.3 1.6 51.2 43.2 40.2 105 7.3 2.9

GlaxoSmithkline Consumer (a) 2,643 ADD 111,165 2,283 42 71.3 85.0 104.1 28.8 19.2 22.5 37.1 31.1 25.4 26.9 24.3 19.8 11.9 10.1 8.5 1.9 1.4 1.7 32.2 34.2 35.4 2,900 9.7 1.4

Godrej Consumer Products 441 ADD 142,719 2,931 324 14.9 16.8 21.8 31.3 13.1 29.8 29.6 26.2 20.2 25.1 20.0 14.9 8.3 6.2 5.0 1.1 0.7 0.7 35.9 27.6 28.9 460 4.3 1.7

Hindustan Unilever 401 REDUCE 866,798 17,803 2,159 9.9 11.8 14.2 4.8 19.7 19.7 40.6 33.9 28.4 34.9 27.9 22.3 32.9 28.3 24.3 1.9 2.5 2.9 66.3 89.8 92.4 420 4.6 24.3

ITC 201 ADD 1,541,127 31,653 7,681 6.4 7.9 9.0 20.7 22.5 14.1 31.3 25.5 22.4 20.7 17.4 15.0 9.2 7.9 6.9 2.2 1.9 2.2 33.2 34.9 34.3 230 14.6 29.3

Jubilant Foodworks 978 SELL 64,127 1,317 66 11.2 16.1 23.6 99.6 43.8 46.5 87.3 60.7 41.4 53.4 33.5 23.2 33.5 21.6 14.2 — — — 46.6 43.2 41.3 750 (23.3) 21.8

Jyothy Laboratories 171 ADD 13,232 272 78 10.3 8.4 10.8 (6.2) (18.8) 28.0 16.5 20.3 15.9 12.9 31.1 23.2 2.0 1.9 1.8 3.5 2.7 3.4 12.3 9.7 11.7 190 11.4 0.3

Marico 164 BUY 100,680 2,068 615 3.9 5.0 6.5 (12.8) 28.1 30.2 42.2 32.9 25.3 25.9 23.1 17.8 10.7 8.5 6.6 0.4 0.4 0.6 30.3 29.2 29.7 175 7.0 0.9

Nestle India (a) 4,238 SELL 408,648 8,393 96 86.8 106.6 125.0 16.7 22.8 17.3 48.8 39.8 33.9 32.5 26.3 21.9 47.8 33.9 25.3 1.1 1.4 1.7 116.5 99.7 85.4 3,600 (15.1) 2.8

Tata Global Beverages 120 BUY 74,053 1,521 618 4.0 5.3 6.6 (34.6) 35.1 23.0 30.2 22.4 18.2 12.5 12.2 9.9 1.4 1.4 1.3 1.7 1.5 1.8 6.4 8.2 9.5 110 (8.1) 3.7

Titan Industries 197 ADD 174,628 3,587 888 4.9 6.5 7.9 71.7 32.5 20.7 40.0 30.2 25.0 27.9 21.1 16.9 16.8 12.7 9.8 0.6 1.1 1.5 49.2 48.0 44.4 210 6.8 18.3

United Spirits 713 BUY 89,586 1,840 126 35.3 36.6 42.7 29.5 3.5 16.9 20.2 19.5 16.7 14.1 11.9 10.9 2.1 1.9 1.8 0.4 0.3 0.4 11.2 10.5 11.1 900 26.2 16.5

Consumer products Attractive 4,176,132 85,774 16.3 19.4 17.8 34.7 29.1 24.7 24.4 20.4 17.0 10.8 9.2 7.9 1.7 1.7 2.0 31.0 31.6 32.1

Constructions

IVRCL 58 BUY 15,353 315 267 5.9 4.2 5.0 (25.2) (28.5) 18.5 9.7 13.6 11.5 6.8 7.9 7.0 0.8 0.7 0.7 1.1 0.7 0.7 8.2 5.5 6.2 59 2.6 6.4

Nagarjuna Construction Co. 62 BUY 15,870 326 257 6.4 4.1 5.5 (29.7) (35.5) 32.7 9.7 15.1 11.3 8.1 8.4 7.5 0.7 0.7 0.6 1.7 3.2 3.2 7.1 4.4 5.7 85 37.4 1.0

Punj Lloyd 56 REDUCE 18,966 390 340 (1.5) 3.4 6.5 (56.6) (328.7) 90.7 (37.6) 16.4 8.6 12.7 7.0 5.9 0.6 0.6 0.6 (0.1) 0.5 1.0 (1.7) 3.8 6.9 60 7.4 4.3

Sadbhav Engineering 141 BUY 21,133 434 150 7.8 10.0 10.0 51.0 28.5 0.5 18.2 14.1 14.1 10.7 8.7 8.4 3.3 2.7 2.3 0.4 0.4 0.4 18.1 19.2 16.3 180 27.7 0.4

Construction Attractive 71,321 1,465 (1.1) 24.7 33.3 18.4 14.8 11.1 9.2 7.7 6.8 0.9 0.9 0.8 0.7 1.1 1.3 4.8 5.8 7.2

Energy

Aban Offshore 550 BUY 23,927 491 44 134.2 71.5 92.4 25.9 (46.7) 29.1 4.1 7.7 6.0 6.8 7.8 6.9 1.1 1.4 1.2 0.7 0.7 0.8 33.3 20.8 21.4 615 11.9 9.4

Bharat Petroleum 576 RS 208,193 4,276 362 38.9 30.6 45.8 (32.5) (21.3) 49.5 14.8 18.8 12.6 9.9 9.7 8.5 1.4 1.3 1.2 2.4 1.7 2.6 9.2 6.8 9.6 — — 6.9

Cairn india 344 REDUCE 654,907 13,451 1,903 33.3 45.7 62.7 501.1 37.2 37.1 10.3 7.5 5.5 7.6 5.8 3.7 1.6 1.4 1.2 — - 4.4 16.9 19.7 23.5 355 3.2 17.5

Castrol India (a) 494 REDUCE 122,193 2,510 247 19.8 19.7 21.6 28.5 (0.6) 9.9 25.0 25.1 22.8 16.0 17.1 15.3 23.7 22.1 20.5 3.0 3.1 3.4 100.2 91.0 93.0 410 (17.0) 0.7

GAIL (India) 391 BUY 496,546 10,199 1,268 28.2 30.1 31.0 13.8 6.8 3.2 13.9 13.0 12.6 8.8 9.1 8.6 2.4 2.1 1.8 1.9 2.0 2.2 17.5 16.3 14.7 485 23.9 11.0

GSPL 88 REDUCE 49,254 1,012 563 8.9 9.1 8.6 21.7 2.1 (5.2) 9.8 9.6 10.2 6.4 5.9 5.9 2.2 1.8 1.6 1.1 2.1 3.0 25.2 20.4 16.6 93 6.2 1.9

Hindustan Petroleum 286 RS 97,109 1,995 339 40.8 14.4 23.7 (20.8) (64.8) 64.9 7.0 19.9 12.1 3.2 4.5 4.1 0.6 0.6 0.6 4.9 1.5 2.6 9.0 2.9 4.6 — — 4.3

Indian Oil Corporation 272 RS 660,402 13,564 2,428 32.4 14.5 32.3 (34.0) (55.2) 122.2 8.4 18.7 8.4 8.2 9.4 6.3 1.1 1.1 1.0 3.5 1.8 3.6 13.3 5.6 11.7 — — 2.8

Oil India 1,259 BUY 302,835 6,220 240 120.0 154.5 186.9 4.2 28.8 21.0 10.5 8.2 6.7 5.2 3.0 2.3 1.8 1.6 1.4 3.0 3.7 4.5 16.2 18.4 19.3 1,720 36.6 2.0

Oil & Natural Gas Corporation 282 BUY 2,409,662 49,492 8,556 24.7 33.7 38.2 7.4 36.8 13.3 11.4 8.4 7.4 4.3 3.6 2.8 1.6 1.4 1.3 3.1 3.9 4.4 14.3 17.3 17.3 355 26.0 14.6

Petronet LNG 165 SELL 123,750 2,542 750 8.1 14.9 13.6 50.3 83.4 (8.2) 20.4 11.1 12.1 11.7 7.8 8.5 4.1 3.2 2.6 1.2 1.8 1.8 20.9 31.1 22.5 140 (15.2) 6.3

Reliance Industries 838 BUY 2,498,972 51,327 2,981 62.0 63.9 67.9 24.8 3.1 6.3 13.5 13.1 12.3 7.4 6.6 6.1 1.5 1.4 1.2 1.0 1.1 1.2 13.0 12.2 11.6 925 10.3 85.9

Energy Attractive 7,647,751 157,078 11.6 9.8 19.5 11.4 10.4 8.7 6.3 5.6 4.5 1.6 1.4 1.3 2.0 2.2 3.0 13.8 13.6 14.6

Industrials

ABB 890 SELL 188,609 3,874 212 3.0 11.7 22.7 (82.2) 291.5 94.5 298.3 76.2 39.2 218.0 50.6 25.5 7.8 7.3 6.3 0.2 0.4 0.4 2.6 9.9 17.3 515 (42.1) 1.7

BGR Energy Systems 242 REDUCE 17,442 358 72 44.8 32.5 20.3 60.0 (27.3) (37.6) 5.4 7.4 11.9 3.8 4.8 4.6 1.8 1.5 1.4 4.1 2.7 1.7 39.0 22.5 12.3 200 (17.3) 4.0

Bharat Electronics 1,430 ADD 114,412 2,350 80 107.3 115.8 132.8 11.6 8.0 14.7 13.3 12.3 10.8 5.5 6.0 4.0 2.2 2.0 1.7 1.5 1.7 1.7 18.2 16.8 16.9 1,650 15.4 1.1

Bharat Heavy Electricals 265 REDUCE 648,002 13,309 2,448 24.6 27.5 23.3 39.7 12.0 (15.4) 10.8 9.6 11.4 6.9 6.9 7.5 3.2 2.6 2.2 2.4 2.2 1.9 33.3 29.7 20.9 230 (13.1) 27.5

Crompton Greaves 143 ADD 91,959 1,889 642 14.3 6.4 10.3 11.5 (55.2) 60.0 10.0 22.3 14.0 6.5 10.9 7.7 2.8 2.6 2.2 1.7 1.0 1.1 31.7 12.0 17.0 155 8.1 6.4

KEC International 59 BUY 15,245 313 257 8.0 6.7 8.1 4.1 (16.5) 21.6 7.4 8.9 7.3 6.0 6.4 5.6 1.5 1.4 1.2 2.0 2.2 2.1 22.5 16.2 17.2 65 9.6 0.4

Larsen & Toubro 1,355 REDUCE 824,748 16,940 609 67.7 80.7 87.0 18.1 19.2 7.8 20.0 16.8 15.6 14.5 11.3 10.3 3.1 2.6 2.2 1.1 1.0 1.0 17.0 16.8 15.4 1,325 (2.2) 74.8

Maharashtra Seamless 360 BUY 25,391 522 71 48.2 42.1 46.8 24.8 (12.6) 11.0 7.5 8.5 7.7 4.8 4.7 4.0 1.0 0.9 0.9 2.3 2.3 2.6 13.8 11.1 11.5 460 27.8 0.2

Siemens 750 SELL 255,204 5,242 340 25.5 22.3 27.9 13.6 (12.7) 25.5 29.4 33.7 26.9 20.3 21.4 16.9 6.6 5.7 4.9 0.8 0.6 0.7 24.4 18.2 19.7 550 (26.7) 3.4

Suzlon Energy 29 REDUCE 52,343 1,075 1,777 (6.0) 2.0 3.5 (4.6) (133.6) 72.0 (4.9) 14.6 8.5 18.1 6.8 5.8 0.8 0.7 0.6 — 0.7 0.7 (15.8) 4.8 7.5 40 35.8 15.2

Tecpro Systems 177 BUY 8,934 183 50 27.0 28.8 24.8 24.2 6.9 (14.1) 6.6 6.1 7.1 4.5 5.0 5.0 1.3 1.1 1.0 — — — 26.8 20.2 15.2 200 13.0 0.1

Thermax 521 REDUCE 62,107 1,276 119 31.6 32.8 31.4 44.3 3.7 (4.3) 16.5 15.9 16.6 11.1 10.7 10.8 4.7 3.9 3.4 1.7 1.8 1.7 31.5 27.0 21.9 440 (15.6) 1.0

Voltas 94 REDUCE 30,924 635 331 9.8 6.4 7.6 (14.3) (34.4) 17.6 9.6 14.6 12.4 5.4 9.6 7.5 2.2 2.1 1.9 2.1 2.1 2.5 26.1 14.8 15.9 90 (3.7) 3.0

Industrials Cautious 2,335,322 47,966 23.9 17.1 2.5 17.3 14.8 14.4 11.2 9.9 9.2 3.1 2.6 2.3 1.4 1.4 1.3 17.8 17.4 15.6

Infrastructure

Adani Port and SEZ 150 ADD 303,122 6,226 2,017 4.6 5.4 7.6 36.3 19.0 40.5 33.0 27.7 19.8 26.6 19.8 14.5 7.1 5.9 4.8 0.6 0.6 1.0 23.4 23.3 26.9 160 6.5 4.5

Container Corporation 958 ADD 124,547 2,558 130 67.6 71.7 77.9 11.7 6.1 8.7 14.2 13.4 12.3 10.1 8.9 7.8 2.5 2.2 1.9 1.6 1.7 1.9 18.9 17.5 16.8 1,150 20.0 1.1

GMR Infrastructure 30 RS 115,604 2,374 3,892 (0.3) (0.8) (0.2) (178.0) 131.2 (77.8) (88.2) (38.2) (171.6) 18.9 13.8 11.4 1.2 1.0 1.0 — — — (1.8) (4.0) (0.9) — — 3.3

Gujarat Pipavav Port 59 ADD 24,990 513 424 (1.2) 1.2 2.3 (65.8) (195.8) 100.8 (49.1) 51.2 25.5 25.7 17.1 13.2 3.4 3.2 2.8 — — — (9.1) 8.9 12.1 63 6.8 0.3

GVK Power & Infrastructure 17 RS 26,452 543 1,579 1.0 1.0 0.3 (0.6) 1.6 (73.4) 17.1 16.8 63.1 18.0 16.5 19.5 0.8 0.8 0.8 — 1.8 2.1 4.7 4.6 1.2 — — 4.3

IRB Infrastructure 174 ADD 57,981 1,191 332 13.6 11.9 15.2 30.4 (12.9) 27.9 12.8 14.7 11.5 8.4 8.8 7.4 2.3 1.7 1.4 0.9 — — 19.3 13.1 13.0 190 8.9 4.4

Infrastructure Cautious 652,696 13,406 10.5 4.5 34.6 29.4 28.1 20.9 17.1 14.3 11.7 2.6 2.2 2.0 0.7 0.7 0.9 8.7 7.8 9.5

Dividend yield (%)


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Media

DB Corp 195 BUY 35,740 734 183 14.1 11.2 13.5 32.7 (20.7) 20.6 13.8 17.4 14.5 9.0 10.2 8.4 4.3 3.8 3.3 2.0 2.0 3.1 35.0 23.0 24.5 300 53.8 0.1

DishTV 64 BUY 68,404 1,405 1,063 (1.8) (0.7) 0.6 (27.7) (62.1) (192.8) (36.1) (95.2) 102.6 31.8 14.8 11.1 109.0 (749.9) 118.8 — — — (81.9) (268.1) 275.3 80 24.3 6.0

Eros International 217 BUY 21,046 432 97 11.8 15.6 19.6 19.0 32.7 25.6 18.4 13.9 11.1 12.8 9.8 7.0 3.1 2.5 2.0 — — — 24.9 20.1 20.4 270 24.4 1.2

Hindustan Media Ventures 125 BUY 9,141 188 73 7.3 9.0 10.6 198.0 23.3 17.8 17.1 13.8 11.7 8.0 7.6 5.8 2.4 2.1 1.8 0.8 0.8 1.6 23.3 16.1 16.5 190 52.5 0.0

HT Media 137 ADD 32,316 664 235 7.7 7.5 9.2 31.0 (3.1) 23.3 17.9 18.4 14.9 8.4 9.2 6.8 2.3 2.1 1.9 0.3 1.5 2.9 14.9 11.8 13.4 160 16.4 0.1

Jagran Prakashan 102 BUY 32,115 660 316 6.8 6.5 7.8 16.7 (5.3) 21.6 14.9 15.7 12.9 8.9 8.5 7.4 4.6 4.1 3.7 3.4 3.4 3.9 32.8 27.6 30.0 150 47.7 0.2

Sun TV Network 308 BUY 121,436 2,494 394 19.5 20.0 23.8 48.1 2.5 18.9 15.8 15.4 12.9 9.5 9.1 7.7 5.0 4.4 4.0 2.8 3.2 4.5 36.5 32.1 33.8 400 29.8 6.3

Zee Entertainment Enterprises 133 BUY 129,682 2,664 978 5.8 6.2 7.7 10.0 6.4 23.3 22.7 21.3 17.3 15.4 14.1 11.2 3.1 2.9 2.8 1.0 1.0 1.2 14.2 14.3 16.9 160 20.7 3.4

Media Neutral 449,880 9,240 51.6 7.8 28.6 22.8 21.1 16.4 12.2 10.9 8.8 4.2 3.8 3.5 1.5 1.7 2.3 18.4 18.2 21.3

Metals & Mining

Coal India 327 ADD 2,067,662 42,468 6,316 17.3 22.9 27.4 13.6 32.1 20.0 18.9 14.3 11.9 11.0 8.3 7.0 5.9 4.7 3.8 1.2 2.1 2.5 35.1 36.5 34.9 380 16.1 28.6

Hindalco Industries 153 ADD 292,309 6,004 1,915 12.8 15.4 16.0 (36.0) 20.6 4.1 11.9 9.9 9.5 6.3 7.2 6.7 1.0 0.9 0.8 1.0 1.0 1.0 9.7 9.7 9.3 150 (1.7) 26.9

Hindustan Zinc 142 ADD 601,006 12,344 4,225 11.6 12.7 14.7 21.8 8.8 16.0 12.2 11.2 9.7 8.2 7.1 5.1 2.7 2.3 1.9 0.7 1.8 1.8 24.3 21.8 21.4 150 5.4 1.8

Jindal Steel and Power 556 REDUCE 519,331 10,667 934 40.2 40.9 46.1 5.1 1.7 12.7 13.8 13.6 12.1 10.2 9.9 9.1 3.7 2.9 2.4 0.3 0.3 0.3 30.9 24.1 21.8 530 (4.7) 20.6

JSW Steel 709 REDUCE 160,223 3,291 226 78.6 63.3 74.9 (2.2) (19.4) 18.2 9.0 11.2 9.5 6.6 5.9 6.3 1.0 0.9 0.8 1.7 1.4 1.4 13.6 14.1 9.2 610 (14.0) 39.9

National Aluminium Co. 64 SELL 164,299 3,375 2,577 4.2 3.5 3.9 36.4 (16.7) 13.1 15.3 18.4 16.3 7.1 8.4 7.0 1.5 1.4 1.4 2.4 2.4 2.4 9.9 7.8 8.5 55 (13.7) 0.5

Sesa Goa 231 REDUCE 206,362 4,239 895 48.6 32.7 46.8 65.3 (32.7) 43.1 4.7 7.1 4.9 4.0 6.1 6.5 1.6 1.3 1.0 1.7 1.7 1.7 36.8 17.2 22.1 190 (17.6) 13.7

Sterlite Industries 123 BUY 413,260 8,488 3,361 15.2 13.5 15.2 26.2 (11.0) 12.4 8.1 9.1 8.1 5.1 4.3 3.5 1.0 0.9 0.8 0.9 1.6 1.6 13.0 10.5 10.8 150 22.0 16.6

Tata Steel 468 BUY 454,134 9,328 971 75.3 42.4 56.2 (2,258.1) (43.7) 32.6 6.2 11.0 8.3 5.9 7.5 6.0 1.3 1.1 1.0 2.5 2.5 2.5 24.7 9.2 12.7 490 4.8 57.2

Metals & Mining Cautious 4,878,586 100,202 39.1 0.2 16.2 11.8 11.7 10.1 7.4 7.3 6.2 2.2 1.9 1.7 1.2 1.8 1.9 19.0 16.5 16.7

Pharmaceutical

Apollo Hospitals 603 BUY 83,692 1,719 139 13.2 17.1 21.2 21.0 29.3 24.0 45.5 35.2 28.4 20.6 15.4 13.2 4.4 3.3 2.9 — — — 9.8 10.3 10.5 650 7.9 5.3

Biocon 279 BUY 55,810 1,146 200 18.4 16.8 20.7 23.9 (8.7) 23.2 15.2 16.6 13.5 8.5 9.3 7.4 2.7 2.5 2.2 — — — 19.4 15.7 17.2 380 36.2 2.9

Cipla 345 SELL 277,128 5,692 803 12.3 15.6 18.4 (10.0) 26.2 18.0 28.0 22.2 18.8 24.3 16.7 13.3 4.2 3.6 3.2 0.8 0.9 1.0 15.4 17.2 18.0 330 (4.4) 9.7

Cadila Healthcare 679 REDUCE 139,004 2,855 205 34.7 32.5 45.4 40.6 (6.5) 39.8 19.5 20.9 15.0 17.1 14.9 11.6 6.4 5.2 4.1 0.9 1.0 1.3 37.5 27.4 30.7 765 12.7 1.4

Dishman Pharma & chemicals 55 REDUCE 4,510 93 81 9.8 (0.9) 11.0 (31.8) (109.1) (1,325.4) 5.6 (62.0) 5.1 7.9 11.1 6.4 0.5 0.5 0.5 — — — 9.6 (0.8) 9.9 40 (27.9) 0.2

Divi's Laboratories 782 ADD 103,687 2,130 133 32.4 37.4 46.4 25.7 15.6 24.1 24.1 20.9 16.8 20.0 16.3 11.9 5.8 4.9 4.2 — — — 25.9 25.4 26.8 935 19.6 2.5

Dr Reddy's Laboratories 1,671 REDUCE 283,969 5,832 170 64.9 90.7 106.9 932.5 39.7 17.8 25.7 18.4 15.6 18.0 12.0 10.0 6.2 4.8 3.8 0.7 0.8 0.8 24.8 29.3 27.1 1,740 4.1 11.9

GlaxoSmithkline Pharmaceuticals (a) 1,960 SELL 166,014 3,410 85 68.3 75.5 83.3 15.5 10.6 10.3 28.7 26.0 23.5 18.9 18.1 15.7 8.5 8.7 8.1 2.0 2.6 2.9 30.9 33.2 35.7 1,930 (1.5) 0.9

Glenmark Pharmaceuticals 295 REDUCE 79,880 1,641 270 17.0 19.9 22.4 33.6 17.6 12.2 17.4 14.8 13.2 19.6 18.3 10.8 3.9 3.1 2.6 — — — 20.6 23.6 21.5 340 15.1 3.8

Jubilant Life Sciences 175 REDUCE 27,862 572 159 14.4 11.6 34.9 (45.6) (19.8) 201.6 12.1 15.1 5.0 10.3 6.6 5.9 1.3 1.2 1.0 1.1 1.1 1.7 12.3 19.8 18.8 180 2.9 0.5

Lupin 479 ADD 214,617 4,408 448 19.2 21.1 26.5 25.6 9.7 25.3 24.9 22.7 18.1 20.8 18.0 13.4 6.4 5.2 4.2 0.6 0.7 0.9 29.5 25.8 26.2 520 8.6 7.7

Ranbaxy Laboratories 455 SELL 192,304 3,950 423 40.6 19.0 42.8 474.9 (53.3) 125.7 11.2 23.9 10.6 13.8 14.3 8.6 3.4 3.2 2.4 — — — 34.5 14.0 26.4 400 (12.0) 10.8

Sun Pharmaceuticals 556 ADD 576,104 11,833 1,036 17.5 21.7 28.3 34.4 23.5 30.5 31.7 25.7 19.7 27.3 19.1 14.9 5.6 4.6 3.8 0.6 0.7 0.9 21.0 21.6 23.4 625 12.3 9.5

Pharmaceuticals Neutral 2,204,581 45,280 43.1 8.2 32.0 23.1 21.3 16.2 18.7 14.5 11.0 3.7 3.2 2.7 0.7 0.8 0.9 16.0 14.9 16.6

Property

DLF 231 ADD 395,809 8,130 1,715 9.1 11.9 15.7 (14.5) 31.3 31.8 25.4 19.4 14.7 16.6 13.1 9.9 1.5 1.4 1.3 0.9 1.1 1.3 5.4 7.5 9.2 270 17.0 37.9

Housing Development & Infrastructure 82 BUY 36,074 741 441 19.8 24.8 32.7 24.2 25.0 32.1 4.1 3.3 2.5 4.7 5.8 3.9 0.4 0.3 0.3 — 1.2 1.8 10.0 10.7 12.4 150 83.4 19.0

Indiabulls Real Estate 70 RS 27,956 574 402 4.0 8.5 15.4 (1,095.5) 114.1 81.5 17.5 8.2 4.5 12.7 10.1 4.4 0.2 0.2 0.2 0.4 0.7 1.0 1.4 2.9 5.0 — — 10.0

Mahindra Life Space Developer 302 BUY 12,339 253 41 24.9 26.7 32.2 30.2 6.9 20.8 12.1 11.3 9.4 9.2 7.6 5.9 1.2 1.1 1.0 1.7 1.5 1.7 10.4 10.2 11.2 405 34.0 0.3

Oberoi Realty 260 BUY 85,600 1,758 330 15.7 14.9 26.4 14.8 (5.0) 77.3 16.5 17.4 9.8 12.4 12.7 6.1 2.6 2.3 1.9 0.4 0.6 1.0 19.9 13.9 21.1 300 15.5 0.2

Phoenix Mills 175 BUY 25,377 521 145 6.3 7.4 10.7 53.0 17.2 44.1 27.7 23.6 16.4 20.5 17.1 12.8 1.6 1.5 1.4 1.0 1.1 1.1 5.8 6.6 8.9 300 71.2 0.1

Puravankara Projects 64 REDUCE 13,734 282 213 5.5 9.0 10.9 (18.9) 62.8 21.5 11.6 7.2 5.9 16.8 9.2 7.8 0.9 0.8 0.7 1.6 2.3 3.1 8.0 12.0 13.1 80 24.3 0.0

Sobha Developers 280 BUY 27,453 564 98 18.8 15.6 25.7 33.8 (17.2) 65.3 14.9 18.0 10.9 12.5 13.6 8.5 1.5 1.4 1.2 1.1 1.3 1.4 10.2 7.9 12.0 340 21.5 0.7

Unitech 26 RS 68,024 1,397 2,616 2.3 2.3 2.3 (23.4) 0.2 (3.0) 11.2 11.2 11.5 13.2 11.2 9.4 0.6 0.5 0.5 0.4 0.8 1.2 5.4 5.0 4.4 — — 11.2

Property Cautious 727,151 14,935 5.3 32.7 35.6 17.0 12.8 9.4 13.4 10.9 7.8 1.0 1.0 0.9 0.7 1.0 1.3 6.1 7.5 9.2

Dividend yield (%)


KO

TAK INSTITUTIO

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UITIES RESEARCH 92

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Ind

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mm

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Technology

HCL Technologies 451 REDUCE 317,603 6,523 705 22.9 33.8 39.9 30.4 47.9 18.0 19.7 13.3 11.3 11.9 7.8 6.7 3.8 2.8 2.3 1.7 1.8 1.8 21.0 22.8 22.3 460 2.1 10.9

Hexaware Technologies 99 ADD 29,130 598 294 3.0 9.1 10.7 (36.8) 207.9 17.3 33.6 10.9 9.3 26.5 9.4 6.3 3.0 2.9 2.4 1.5 3.0 3.3 9.3 26.9 28.0 110 10.8 2.5

Infosys 2,783 BUY 1,597,586 32,813 574 119.7 147.5 178.1 10.5 23.2 20.8 23.2 18.9 15.6 15.9 12.5 10.0 6.2 5.1 4.2 2.2 1.7 2.0 28.0 29.6 29.6 3,100 11.4 74.4

Mahindra Satyam 74 REDUCE 87,024 1,787 1,176 4.2 8.7 8.1 68.9 106.3 (6.5) 17.6 8.5 9.1 13.1 6.0 4.7 5.0 3.2 2.4 — — — 27.6 45.7 29.7 80 8.1 6.5

Mindtree 450 ADD 18,522 380 41 24.7 50.5 53.9 (52.7) 104.5 6.8 18.2 8.9 8.3 10.2 6.0 4.6 2.4 1.9 1.7 0.5 1.1 3.6 14.4 23.9 21.5 540 20.0 0.6

Mphasis 375 SELL 78,916 1,621 211 51.8 39.0 34.6 18.8 (24.6) (11.4) 7.2 9.6 10.8 6.1 8.0 7.2 2.4 2.0 1.8 1.1 1.2 1.3 38.6 22.8 17.3 310 (17.2) 2.1

Polaris Financial Technology 148 REDUCE 14,731 303 100 19.3 21.7 24.0 25.7 12.5 10.4 7.6 6.8 6.2 4.5 2.8 2.1 1.4 1.2 1.0 2.5 2.6 2.8 20.2 19.2 18.2 145 (1.9) 1.2

TCS 1,172 BUY 2,292,958 47,095 1,957 44.5 55.2 67.5 26.8 24.1 22.1 26.3 21.2 17.4 19.9 14.9 12.2 9.1 7.4 6.0 1.5 1.9 2.3 37.8 38.5 38.3 1,250 6.7 38.2

Tech Mahindra 653 SELL 82,328 1,691 126 48.0 75.2 80.0 (26.3) 56.5 6.5 13.6 8.7 8.2 9.2 9.9 8.1 2.5 2.1 1.9 0.6 0.6 1.5 20.2 27.2 25.3 600 (8.2) 2.2

Wipro 427 ADD 1,048,962 21,545 2,454 21.6 23.2 28.2 14.5 7.4 21.7 19.8 18.4 15.2 14.7 12.6 10.0 4.4 3.7 3.1 1.0 1.1 1.5 24.3 21.7 22.2 460 7.6 15.2

Technology Attractive 5,629,610 115,627 17.0 21.8 18.8 21.9 18.0 15.2 15.9 12.4 10.1 5.7 4.7 3.9 1.7 1.6 2.0 26.2 26.2 25.8

Telecom

Bharti Airtel 388 ADD 1,471,950 30,233 3,798 15.9 14.4 25.2 (32.6) (9.4) 75.0 24.3 26.9 15.4 10.4 8.7 6.5 3.0 3.2 2.6 — — — 13.3 11.5 18.8 405 4.5 51.0

IDEA 94 ADD 309,519 6,357 3,303 2.7 2.1 4.6 (0.5) (22.2) 118.5 34.4 44.3 20.3 11.0 8.6 6.5 2.5 2.5 2.2 — — — 7.6 5.7 11.6 100 6.7 14.3

MTNL 30 RS 18,774 386 630 (10.4) (9.1) (8.4) (33.7) (11.9) (8.1) (2.9) (3.3) (3.5) 1.0 1.4 1.7 0.2 0.2 0.2 — — — (6.1) (5.7) (5.5) — — 0.5

Reliance Communications 94 SELL 193,397 3,972 2,064 6.5 3.5 2.6 (71.1) (46.9) (24.9) 14.4 27.1 36.1 6.3 8.3 7.0 0.5 0.5 0.5 — — — 3.2 1.7 1.3 60 (36.0) 18.7

Tata Communications 229 REDUCE 65,322 1,342 285 (24.9) (27.0) (26.6) (13.0) 8.4 (1.4) (9.2) (8.5) (8.6) 11.6 8.7 7.8 1.8 2.6 4.2 — — — (17.5) (25.1) (37.0) 215 (6.2) 0.9

Telecom Cautious 2,058,962 42,289 (45.8) (19.8) 86.8 29.8 37.1 19.9 9.7 8.7 6.7 1.8 1.8 1.7 — — — 6.0 4.9 8.5

Utilities

Adani Power 80 REDUCE 192,533 3,954 2,393 2.4 5.3 10.1 200.7 126.4 90.2 34.1 15.1 7.9 35.3 15.1 6.3 3.1 2.4 1.8 — — — 8.5 17.7 26.0 74 (8.0) 2.6

CESC 270 BUY 33,751 693 125 39.1 37.8 41.4 13.1 (3.4) 9.5 6.9 7.2 6.5 4.7 6.1 6.3 0.7 0.7 0.6 1.5 1.8 1.8 10.8 9.6 9.6 400 48.1 1.4

JSW Energy 54 REDUCE 89,216 1,832 1,640 5.1 1.6 2.3 12.9 (69.5) 44.8 10.6 34.8 24.0 11.7 17.6 8.1 1.6 1.6 1.5 (1.8) — — 16.1 4.5 6.3 43 (21.0) 1.5

Lanco Infratech 16 BUY 35,901 737 2,223 1.6 1.9 2.6 (22.6) 14.7 36.9 9.8 8.5 6.2 10.3 10.5 7.4 0.8 0.7 0.6 — — — 9.2 8.4 10.3 39 141.5 4.5

NHPC 21 BUY 258,316 5,306 12,301 1.3 2.0 2.2 (27.2) 49.2 7.2 15.6 10.4 9.7 11.5 10.7 7.7 1.0 0.9 0.9 2.9 2.6 2.8 6.4 9.0 9.1 29 38.1 2.8

NTPC 177 REDUCE 1,457,798 29,942 8,245 10.9 11.4 12.2 4.2 4.1 7.6 16.2 15.5 14.4 12.3 13.7 11.7 2.1 1.9 1.8 2.2 1.9 2.1 13.6 13.0 12.9 175 (1.0) 9.1

Reliance Infrastructure 557 BUY 147,741 3,034 265 58.0 57.2 75.6 (6.5) (1.4) 32.2 9.6 9.7 7.4 12.5 8.1 7.8 0.6 0.6 0.6 1.3 1.8 2.0 6.8 10.3 9.0 890 59.8 20.1

Reliance Power 100 SELL 281,635 5,785 2,805 2.7 2.7 2.9 (0.2) (2.0) 7.7 37.0 37.8 35.1 146.6 51.6 23.6 1.7 1.6 1.5 — — — 4.9 4.3 4.5 76 (24.3) 8.8

Tata Power 113 BUY 278,182 5,714 2,468 7.6 7.1 8.2 21.5 (6.5) 14.1 14.7 15.8 13.8 11.2 8.9 9.2 1.9 1.8 1.6 1.2 1.3 1.5 13.8 11.6 12.1 125 10.9 7.3

Utilities Cautious 2,775,073 56,998 4.3 7.2 17.2 16.2 15.2 12.9 13.6 12.6 9.7 1.6 1.5 1.4 1.6 1.5 1.6 9.9 9.9 10.6

Others

Carborundum Universal 155 REDUCE 29,023 596 187 9.1 11.6 11.7 67.7 26.6 1.0 17.0 13.4 13.3 10.5 7.7 7.4 3.4 2.8 2.4 1.2 1.6 1.6 25.2 25.9 22.0 150 (3.4) 0.1

Havells India 492 ADD 61,364 1,260 125 24.5 29.7 33.0 334.1 21.1 11.0 20.0 16.6 14.9 12.7 10.6 9.2 8.6 6.1 4.5 0.5 0.6 0.6 53.9 43.3 34.7 500 1.7 3.6

Jaiprakash Associates 76 BUY 162,035 3,328 2,126 6.0 6.4 6.9 230.2 5.9 7.6 12.7 12.0 11.1 12.0 8.9 7.9 1.5 1.4 1.2 — — — 13.3 12.0 11.7 105 37.8 24.8

Jet Airways 280 BUY 24,172 496 86 (10.1) (233.8) (24.3) (91.0) 2,225 (89.6) (27.8) (1.2) (11.5) 9.8 (160.6) 9.7 1.5 (5.7) (3.8) — — — (5.0) — — 320 14.3 10.9

SpiceJet 25 BUY 10,901 224 441 2.5 (5.4) 3.0 (1.8) (317.9) (154.4) 9.9 (4.5) 8.4 14.6 (9.7) 10.1 3.4 7.4 3.9 — — — (961) (102.5) 61.4 50 102.4 1.3

Tata Chemicals 345 REDUCE 87,891 1,805 255 26.2 32.9 38.8 (0.7) 25.4 17.9 13.1 10.5 8.9 7.8 5.5 4.7 1.6 1.4 1.3 2.9 3.5 4.3 16.9 18.6 19.5 365 5.8 2.2

United Phosphorus 147 ADD 67,978 1,396 462 12.3 14.4 21.0 3.9 16.7 45.6 11.9 10.2 7.0 7.3 5.0 4.1 1.8 1.6 1.4 1.4 2.0 2.4 18.0 17.3 21.3 170 15.5 3.1

Others 443,365 9,106 233.8 (58.1) 233.7 15.6 37.3 11.2 10.5 9.8 7.2 1.9 1.8 1.6 0.9 1.2 1.4 12.1 4.9 14.5

KS universe (b) 46,221,882 949,358 18.4 8.6 21.0 15.8 14.5 12.0 10.1 9.0 7.4 2.4 2.2 1.9 1.5 1.6 1.9 15.4 14.9 15.9

KS universe (b) ex-Energy 38,574,131 792,280 20.6 8.3 21.5 17.1 15.7 13.0 11.8 10.5 8.6 2.7 2.4 2.1 1.4 1.5 1.7 16.0 15.3 16.3

KS universe (d) ex-Energy & ex-Commodities 32,484,260 667,199 19.2 9.5 22.9 18.2 16.6 13.5 13.3 11.6 9.3 2.8 2.5 2.2 1.5 1.5 1.7 15.6 15.1 16.3

Notes:

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

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

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

(d) Rupee-US Dollar exchange rate (Rs/US$)= 48.69

Dividend yield (%)



Disclosures

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

Source: Kotak Institutional Equities As of December 31, 2011

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

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

* The above categories are defined as follows: Buy = We expect this stock to deliver more than 17.5% returns over the next 12 months; Add = We expect this stock to deliver 7.5-17.5% returns over the next 12 months; Reduce = We expect this stock to deliver 0-7.5% returns over the next 12 months; Sell = We expect this stock to deliver less than 0% returns over the next 12 months. Our target prices are also on a 12-month horizon basis. These ratings are used illustratively to comply with applicable regulations. As of 31/12/2011 Kotak Institutional Equities Investment Research had investment ratings on 167 equity securities.

13.2%

42.5%

26.9%

17.4%

6.6%4.2%

2.4% 3.0%

0%

10%

20%

30%

40%

50%

60%

70%

BUY ADD REDUCE SELL

Ratings and other definitions/identifiers

Definitions of ratings

BUY. We expect this stock to deliver more than 17.5% returns over the next 12 months.

ADD. We expect this stock to deliver 7.5-17.5% returns over the next 12 months.

REDUCE. We expect this stock to deliver 0-7.5% returns over the next 12 months.

SELL. We expect this stock to deliver less than 0% 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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