morning insight 29 apr 2013 global drug markets for harmful side-effects. (et) according to the...

APRIL 29, 2013

Economy News The first round of coal block auction under new rules will be delayed. The

deadline for this round was April 30. (BL)

The Andhra Pradesh Government has decided to withdraw Value AddedTax (VAT) on textiles. (BL)

The government plans to provide subsidy to 14 crore LPG subscribersdirectly in their bank accounts from October 1, using the Aadhaarpayment platform.(ET)

India plans to suspend sale of medicines that are banned in one of the sixmajor global drug markets for harmful side-effects. (ET)

According to the Indian Metereological Department, the year 2013 islikely to witness 96% to 104% long average rainfall over July toSeptember. The long period average rainfall during the season isestimated at 89 cm throughout the country. (ET)

The government will change the withdrawal rules and provide more taxincentive to make National Pension Scheme (NPS), its flagship retirementsavings scheme, more attractive for small savers.(ET)

Government has raised the tariff value of gold to $472 per 10 grams onaccount of a volatile price trend in global markets. (Mint)

Corporate News DLF, India's largest realty developer by revenues, plans to raise Rs 2,000

crore through the institutional placement programme (IPP) route. (BS)

JSW Steel has put on hold plans to set up a 10 million tonnes steel plantin West Bengal as it has not been able to secure long-term iron oresupplies for the Rs 350 bn project. (Mint)

Tata Steel has reportedly warned the British government that it plans toshut down two research and development facilities in the country andshift them overseas including to India, resulting in 300-400 job cuts in theUK. (ET)

Biocon plans to launch in July its novel biologic drug Itolizumab brandedas 'Alzumab' to be used for the treatment of chronic plaque psoriasis inthe country. (ET)

Leading developers such as Lodha Group and Indiabulls Real Estateseem to have kick-started the most awaited exercise of easing in propertyprices with around 10-15% lower price tags. (ET)

GMR is in talks with several investment bankers to sell 20% in highwayarm via IPO to bring down the groups debt. (ET)

REpower, the German subsidiary of Suzlon Energy, would cut as many as750 jobs over the coming year or a little over a fifth of its personnelstrength of around 3,300 employees. (BS)

India's biggest copper smelter belonging to Sterlite Industries inTuticorin should get a favourable ruling from a court on Monday or soonafter and could restart within a couple of weeks. (ET)

Equity% Chg

25 Apr 13 1 Day 1 Mth 3 Mths

Indian IndicesSENSEX Index 19,287 (0.6) 2.4 (3.5)NIFTY Index 5,871 (0.8) 3.3 (2.9)BANKEX Index 14,343 (1.4) 10.1 (1.7)BSET Index 5,615 (1.5) (18.5) (12.4)BSETCG INDEX 9,757 0.3 8.2 (8.3)BSEOIL INDEX 8,692 (1.6) 4.4 (6.5)CNXMcap Index 7,715 (0.8) 4.2 (7.3)BSESMCAP INDEX 6,024 (0.5) 3.8 (15.1)

World IndicesDow Jones 14,713 0.1 0.9 5.4Nasdaq 3,279 (0.3) 0.4 4.0FTSE 6,426 (0.3) 0.2 1.4NIKKEI 13,926 0.6 12.0 27.8HANGSENG 22,548 0.7 1.1 (4.7)

Value traded (Rs cr)25 Apr 13 % Chg - Day

Cash BSE 1,979 (13.5)Cash NSE 11,570 (25.9)Derivatives 82,110 (74.1)

Net inflows (Rs cr)23 Apr 13 % Chg MTD YTD

FII 1,546 240.8 4,450 59,201Mutual Fund (254) 24.0 (894) (8,062)

FII open interest (Rs cr)23 Apr 13 % Chg

FII Index Futures 9,779 10.0FII Index Options 40,554 2.3FII Stock Futures 22,544 1.9FII Stock Options 1,065 915.2

Advances / Declines (BSE)25 Apr 13 A B T Total % total

Advances 69 714 149 932 39Declines 133 1,048 168 1,349 56Unchanged 1 110 21 132 5

Commodity % Chg

25 Apr 13 1 Day 1 Mth 3 Mths

Crude (NYMEX) (US$/BBL) 92.7 (0.3) (4.7) (5.0)Gold (US$/OZ) 1,453.0 (0.3) (8.1) (11.6)Silver (US$/OZ) 23.9 (0.9) (15.0) (22.4)

Debt / forex market25 Apr 13 1 Day 1 Mth 3 Mths

10 yr G-Sec yield % 7.8 7.8 8.1 8.0Re/US$ 54.4 54.2 54.4 53.9

Sensex

Source: ET = Economic Times, BS = Business Standard, FE = Financial Express,BL = Business Line, ToI: Times of India, BSE = Bombay Stock Exchange

15,000

16,500

18,000

19,500

21,000

Apr-12 Jul-12 Oct-12 Jan-13 Apr-13

Kotak Securities - Private Client Research Please see the disclaimer on the last page For Private Circulation 2

MORNING INSIGHT April 29, 2013

Kotak Securities Limited has two independent equity research groups: Institutional Equities and Private Client Group. This report has been pre-pared by the Private Client Group. The views and opinions expressed in this document may or may not match or may be contrary with the views,estimates, rating, target price of the Institutional Equities Research Group of Kotak Securities Limited.

RESULT UPDATE

Ruchir [email protected]+91 22 6621 6448

SIEMENS INDIA LTD

PRICE: RS.503 RECOMMENDATION: ACCUMULATETARGET PRICE: RS.540 CY14E P/E: 25.5X

Siemens reported Q2FY13 results below our estimates on profitabilityfront due to 1) charges against revised estimates of revenues, costs andprovisions 2) inadequate pickup in energy segment. We believe that theT&D sector is getting negatively affected due to delays in the commis-sioning of power projects.

We reduce FY13 earnings estimate to factor in slower execution in theenergy segment. In view of recent correction in the stock price (down25% in last three months) and upside to our target price from currentlevels, we change our recommendation to 'ACCUMULATE' from 'Reduce'earlier with DCF based revised target price of Rs 540 (Rs 635 earlier) .

Financial performance

(Rs mn) Q2FY13 Q2FY12 YoY (%) Q1FY13 QoQ (%)

Sales 29556 40171 (26.4) 24856 18.9

Other Income 125 89 40.0 84 49.3

(Inc)/dec in stock in trade 1528 1702 (10.2) -1133

Raw materials 21018 27557 (23.7) 18977 10.8

Employee cost 3289 2770 18.7 3408 (3.5)

other expenditure 2968 2698 10.0 1989 49.2

Total Expenses 28802 34726 (17.1) 23240 23.9

EBITDA 754 5445 (86.2) 1616 (53.4)

Depreciation 610 487 25.3 561 8.8

EBIT 269 5047 (94.7) 1139 (76.4)

Finance cost 84 76 9.4 47 76.5

PBT 185 4971 (96.3) 1092 (83.1)

Exceptional Item

tax (115) 1444 361

PAT 300 3527 731

EPS 0.9 9.0 2.2

Raw materials/sales 71.1 68.6 76.3

EBITDA (%) 2.6 13.6 6.5

Tax Rate (%) (62.2) 29.1 33.0

Source: Company

Q2FY13 result highlights Revenue growth for the quarter de-grew by 26% YoY at Rs 29 bn mainly due to

sluggish execution in energy and industrial segment. Management has statedthat the activity in the T&D space continues to remain sluggish.

The industrial division reported 14% YoY revenue de-growth at Rs 9.7 bn inQ2FY13. We highlight that the Industry division has been getting negatively af-fected by sluggish industrial capex.

In Q2FY13, Energy division has reported revenues at Rs.10.2 bn vis-à-vis Rs 18.8bn in Q2FY12. Segment has been getting negatively impacted by subdued activ-ity in T&D segment. For Q2FY13, company has reported EBIT loss of Rs 160 mnin the segment.

Company has been positive on the outlook for healthcare segment in the coun-try. It has established meaningful market share over a period of years. Segmentreported revenues at Rs 2.0 bn in the quarter.

Summary table

(Rs mn) F12 F13E F14E

Sales 129199 130893 141365Growth (%) 6.7 1.3 8.0EBITDA 8913 10471 12723EBITDA margin (%) 6.9 8.0 9.0PBT 5209 8459 10531Net profit 4831 5583 6950EPS (Rs) 13.7 15.9 19.7Growth (%) -44.9 15.6 24.5CEPS (Rs) 19.4 22.6 27.0B V (Rs/share) 112.6 121.8 135.0Dividend / share (Rs) 6.0 5.7 5.7ROE (%) 7.2 11.2 12.9ROCE (%) 13.3 12.7 14.5Net cash (debt) 9768 8568 11580NW Capital (Days) 47.5 49.9 44.1EV/Sales (x) 1.3 1.3 1.2EV/EBITDA (x) 18.8 16.1 13.0P/E (x) 36.6 31.7 25.5P/Cash Earnings 25.9 22.3 18.6P/BV (x) 4.5 4.1 3.7

Source: Company, Kotak Securities - PrivateClient Research



Segment Revenue


Infrastructure and cities 8577 9034 (5.1) 6249 37.3

Energy 10257 18850 (45.6) 9264 10.7

Industry 9763 11352 (14.0) 8481 15.1

Healthcare 2887 2906 (0.6) 2244 28.7

Source: Company

EBITDA margins stood at 2.6% in the quarter compared to 13.6% in Q2 FY12.Margin contraction is largely explained by a charge of Rs 900 mn in Q2FY13 onaccount of revised estimates of project related revenue, cost and provisions vis-à-vis credit of Rs 2.6 bn in Q2FY12 In absence of this charge, company would havereported EBITDA margin of 5.6% still implying contraction (normalized EBITDAmargin for FY12 at 7.1%).

Segment EBIT


Infrastructure and cities 284 708 (59.9) -1.73 -

Energy (160) 3317 - 385.9 -

Industry (179) 532 - 446.7 -

Healthcare 10 (127) - 103.3 -

Source: Company

Order booking in the quarter remained strong registering a 52% YoY growth atRs 28 bn. Some of the major orders won by the company in Q2FY13 include Rs3.5 bn order of supplying traction motors for Diesel locomotive works and Rs 1bn GIS order from Bangladesh.

Business Outlook: Execution in domestic market remained sub-dued in 1HFY13; reduce FY13 earnings estimate to factor in slug-gish execution in energy segment We cut our FY13 revenue estimate to factor in elusive growth in Energy segment

and delays in order book execution. In our projected financials, we build mutedYoY revenue growth in FY13E.

We believe that in FY13, the company would experience margin expansion vis-à-vis FY12 however they are expected to remain lower than the historical levels ofnearly 12%.

Change in Estimates In our projected financials and DCF, we have effected changes to factor in slug-

gish growth in domestic power business due to delayed execution in keyprojects. We believe that margins would remain under pressure and expect it tobe around 8% in FY13E against earlier estimate of 9.6%.



Change in target price We have arrived at a one year DCF based price target of Rs 540 (Rs 635 earlier)

on company's stock.

Change in earnings estimate FY13

(Rs mn) New Old Change %

Revenue 130893 139789 -6.4

EBITDA 10471 13420 -22.0

PAT 5583 7670 -27.2

EPS (Rs) 15.9 22 -27.1

Source: Kotak Securities - Private Client Research

Valuation & RecommendationIn view of recent correction in the stock price (down 25% in last three months) andupside to our target price from current levels, we change our recommendation to'ACCUMULATE' from 'Reduce' earlier with DCF based revised target price of Rs 540(Rs 635 earlier) .

We recommend ACCUMULATEon Siemens India with a price

target of Rs.540




RESULT UPDATE

Arun [email protected]

+91 22 6621 6143

MARUTI SUZUKI INDIA LIMITED (MSIL)PRICE: RS.1673 RECOMMENDATION: ACCUMULATETARGET PRICE: RS.1844 FY14E P/E: 14.5X

MSIL reported very strong set of 4QFY13 numbers with net profit coming inway above our and street expectation. Revenues (pre SPIL merger) atRs125,699mn came in line with our estimates but net profit (pre SPILmerger) was ahead of our expectation at Rs11,475mn. During the quarter thecompany gave effect to Suzuki Powertrain India Limited (SPIL) merger. In4QFY13, the company benefitted from yen depreciation, increasedlocalization and higher other income. Going ahead, we believe that currentfavorable currency situation along with continuation of localizationprogram presents MSIL with margin expansion opportunities. We revise ourFY14 net profit estimate upward and raise our target price on the stock toRs1,844 (earlier Rs1,639) with a 9 month perspective. We remain positive onthe stock and retain our ACCUMULATE rating.

Result highlights (Pre SPIL merger)

Quarterly performance (Pre SPIL merger)

(Rs mn) 4QFY13 4QFY12 YoY (%) 3QFY13 QoQ (%)

Net sales 125,666 114,864 9.4 109,570 14.7

EBITDA 13,283 8,585 54.7 8,912 49.0

PAT 11,475 6,398 79.3 5,013 128.9

Source: Company

Net sales in 4QFY13 stood at Rs125,666mn and was in line with our estimates.Net sales grew by 9.4% YoY despite volume de-growth of 4.6%. Sales duringthe quarter received boost from improved product mix, higher share of biggermodels and CKD exports of Ertiga.

Raw material cost as a % of sales witnessed a 335bps decline YoY on the backof improved product mix, increased localization content and JPY depreciation. In4QFY13, MSIL had hedged its exposure at JPY/USD rate of ~90.

Employee cost remained largely flat YoY and other expenses were up by ~11%YoY. Royalty cost during the quarter stood at Rs6,050mn (~4.8% of net sales).

Lower material cost translated into significant EBITDA margin improvement.Margins rose from 7.3% in 4QFY12 and 8% in 3QFY13 to ~10.4% for the quar-ter under review.

Other income during the quarter was on the higher side on account of capitalgains on FMP investments.

Strong operating performance and higher other income led to net profit comingin well above expectation. MSIL reported PAT of Rs11,475mn, 79% and 129%higher YoY and QoQ respectively.

Summary table

(Rs mn) FY12 FY13 FY14E

Sales 355,871 435,879 493,359Growth (%) (3.7) 22.5 13.2EBITDA 25,287 42,297 58,267EBITDA margin (%) 7.1 9.7 11.8PBT 21,462 29,911 44,628Net profit 16,352 23,921 34,810EPS (Rs) 56.6 79.2 115.2Growth (%) (28.6) 39.9 45.5CEPS (Rs) 96.0 140.8 182.2BV (Rs/share) 525.7 615.0 717.9Dividend per share (Rs) 7.5 8.0 8.0ROE (%) 11.3 14.2 17.3ROCE (%) 14.2 17.1 21.5Net cash (debt) 67,132 46,156 71,287NW Capital (Days) (7.4) (7.8) (5.0)P/E (x) 29.6 21.1 14.5P/BV (x) 3.2 2.7 2.3EV/Sales (x) 1.2 1.1 0.9EV/EBITDA (x) 16.5 10.9 7.5




Result Highlights (Post merger with SPIL)

Quarterly performance

(Rs mn) 4QFY13 * 4QFY12 YoY (%) 3QFY13 QoQ (%)

Total Revenues 133,040 117,270 13.4 112,003 18.8

Total expenditure 113,044 108,685 4.0 103,091 9.7

RM consumed 87,295 93,328 (6.5) 87,842 (0.6)

Employee cost 3,875 2,560 51.4 2,412 60.6

Other expenses 21,874 12,797 70.9 12,837 70.4

EBITDA 19,996 8,585 132.9 8,912 124.4

EBITDA margin (%) 15.0 7.3 - 8.0 -

Depreciation 8,159 3,306 146.8 3,583 127.7

Interest cost 726 208 249 459 58

Other Income 3,990 2,969 34.4 1,886 111.5

PBT 15,101 8,040 87.8 6,756 123.5

PBT margins (%) 11.4 6.9 6.0

Tax 2,705 1,642 64.8 1,743 55.1

Tax rate (%) 17.9 20.4 - 25.8 -

Reported PAT 12,396 6,398 93.7 5,013 147.3

PAT margins (%) 9.3 5.5 - 4.5 -

Reported EPS (Rs) 42.9 22.1 93.7 17.3 147.3

Volume data

Domestic 308,871 321,424 (3.9) 268,957 14.8

Exports 34,838 38,910 (10.5) 32,496 7.2

Total Volumes 343,709 360,334 (4.6) 301,453 14.0

Net Realization (Rs) 379,864 318,770 19.2 363,471 4.5

RM cost per vehicle (Rs) 253,980 259,004 (1.9) 291,395 (12.8)

* includes SPIL merged figures

During the quarter, MSIL merged SPIL and accordingly the reported 4QFY13standalone result is strictly not comparable. Reported 4QFY13 results show fullyear impact of SPIL in MSIL's 4QFY13 results.

Post SPIL merger, revenues during the quarter stood at Rs133,040mn. EBITDAmargin came in at 15% due to strong operating performance coupled with ben-efit from SPIL merger. MSIL reported PAT of Rs12,396mn, substantially higherYoY and QoQ.

SPIL merger SPIL was merged with MSIL through a share swap ratio of 1:70 with no outflow

of cash from MSIL.

MSIL made a fresh issue of 13.17mn shares to SMC, Japan, in lieu of its 70%holding in SPIL.

Necessary board approvals, regulatory and legal requirements were completedand the books of accounts were merged with effect from April 1, 2012.

Single management control on diesel engine operations will result in bettersourcing, localization, production planning and cost reduction.

Conference Call Highlights MSIL gained marginal market share in FY13 through strong performance of some

of its models. Company expects the industry to grow by ~5-6% in FY14.

FY13 was the second consecutive year for decline in petrol car sales. At the in-dustry level, FY13 petrol car sales declined by 17% and diesel car sales grew by23%. Accordingly, share of diesel car sales for the industry improved to 58% inFY13 from 48% in FY12.



Small car sales have been impacted the most due to high interest rates and lowincome growth. Management said that they have still not witnessed significantrecovery in petrol car demand.

On the exports side, the company has lowered its exposure to Europe from 75%export volumes (3 years back) to 25% currently. On the other hand, MSIL isenhancing its presence in Africa, Latin America and the ASEAN region.

Management indicated that the localization program is on schedule and thecompany has been able to lower its import exposure from ~25-26% of sales toaround 20%. Company targets to further reduce the same to 8-10% over thenext 3 years.

For FY14, the company has hedged 30% of its expected JPY exposure at JPY/USD rate of 95.

Discounts during the quarter stood at ~Rs10,500. Discounts on petrol cars con-tinue to remain on the higher side.

Additional car and diesel engine manufacturing capacity will come on stream in2HFY14. Capex incurred during FY13 stood at Rs27bn and is for FY14 capex isexpected to be around Rs30bn.

Outlook and View MSIL expects the car industry in FY14 to grow in the range of 5-6%. Rate cuts by

the RBI and expected pick-up in demand sentiment should help the car industryfare better in FY14.

We expect MSIL to outperform the industry in FY14 on account of 1.Expectedpick-up in petrol car demand 2.Additional diesel engine capacity and 3.Lowerbase effect (volume loss in FY13 due to strike).

MSIL margins in FY14 is expected to improve on the back of relatively bettervolume growth, benefits accruing from favorable currency, continued focus onlocalization and SPIL merger benefit.

MSIL's high exposure to JPY has kept the company's earnings volatile in thepast. Efforts towards lowering its JPY exposure by focusing on localization willbring more stability to the company's earnings in the longer term.

For FY14, we have revised our estimates. We have lowered our volume growthestimates downward as we expect that the recovery in demand will largely hap-pen in 2HFY14 as against our earlier expectation of 1HFY14. However, givenfavorable forex movement and strong 4QFY13 performance, we revise ourEBITDA margin assumption upwards. Accordingly, our revised FY14 net profitestimates stands higher by 12.5%.

Change in estimates (FY14)

(Rs mn) Old New % change

Volumes (mn units) 1.4 1.3 (8.2)

Revenues 527,119 493,359 (6.4)

EBITDA margin 9.9 11.8

PAT 30,938 34,810 12.5


As demand is yet to pick-up, we believe that the near term stock performancewill track JPY movement to a certain extent. Over the medium term though,demand pick-up will play critical role in determining the company's earnings andstock performance.

We raise our price target on the stock to Rs1,844 (earlier Rs1,639) with a 9month perspective and continue to rate the stock as ACCUMULATE.

We recommend ACCUMULATEon Maruti Suzuki India Ltd with

a price target of Rs.1844




ICICI BANK

PRICE: RS.1144 RECOMMENDATION: BUYTARGET PRICE: RS.1329 FY14E P/E: 13.0X, P/ABV: 1.8X

Q4FY13 results: Earnings largely in-line with our expectations,asset quality remained stableNII grew 22.5% during Q4FY13, mainly aided by margin expansion while netincome growth (21.2%) came largely on back of healthy core performance,lower employee expense as well as credit costs. During Q4FY13, CASA shareremained healthy and improved further by 100bps QoQ to 41.9%. We likethe quality of liability franchise build-up in recent years, which is key to theimprovement in its NIM.

Asset quality largely remained stable - net NPA grew 2.2% QoQ in absoluteterms and stands at 0.64% at the end of Q4FY13. Credit cost came at ~73bpsin Q4FY13, largely within the management's guidance (~70bps for FY13).Restructured book rose sharply to Rs.53.2 bn (1.8% of advances) duringQ4FY13 largely due to change in RBI's guidelines. We opine thatmanagement focus on stable growth with improving structural profitabilitycontinues which reinforces our existing positive outlook on the stock. Wereiterate BUY on the stock with revised TP of Rs.1329 (Rs.1308 earlier) usingSOTP method, where the banking business is valued at Rs.1122 (1.8x FY14EABV) while subsidiaries are valued at Rs.208.

Quarterly Performance

(Rs mn) Q4FY13 Q4FY12 % Change

Int. on advances 69707 61282 13.7

Int. on investments 28204 26155 7.8

Int. on RBI/Other balances 1343 1279 5.0

Other Interest 4400 3031 45.2

Total Interest earned 103653 91746 13.0

Interest expenses 65621 60699 8.1

Net interest income 38032 31048 22.5

Other income 22082 22285 -0.9

Net Revenue (NII + Other income) 60114 53332 12.7

Total operating expense 24073 22216 8.4

Employee cost 9997 11031 -9.4

Other operating exp 14076 11185 25.8

Operating profit 36041 31116 15.8

Provisions 4600 4693 -2.0

Provision for Taxes 8424 6291 33.9

Deferred tax -24 1115 -102.1

Net profit 23041 19018 21.2

EPS (Rs.) 19.97 16.50 21.0

Source: Company

NII grew 22.5% during Q4FY13, mainly aided by margin expan-sion; net income growth (21.2%) came largely on back of healthycore performance, lower employee expense as well as creditcosts.NII came at Rs.38.03 bn (22.5% YoY), in line with our expectations, on back of32bps improvement in NIM along with healthy loan growth (14.4% YoY). Net profitsaw growth of 21.2% YoY (Rs.23.04 bn), largely on back of healthy core perfor-mance, lower employee expense

RESULT UPDATE

Saday [email protected]+91 22 6621 6312



Non-interest income remained almost flat (decline of 0.9% YoY) on back of sub-dued commission & fees (2.7% YoY) and lower trading gains (decline of 41.1%YoY). Fee income growth remained weak on back of subdued performance of cor-porate fees (lending linked fees in down YoY) despite retail fees growing at somerespectable pace.

CASA mix remained healthy at 41.9%; we are modeling NIM tocome at 3.15% during FY14E as compared to 3.11% achieved dur-ing FY13.Improvement in the liability franchise has helped ICICI bank over the years to reduceits funding costs. During Q4FY13, CASA share remained healthy and improved fur-ther by 100bps QoQ to 41.9%. Till only few years back, its CASA mix used to be inmid-20's (FY09). However, we like the quality of liability franchise build-up in recentyears, which is key to the improvement in its NIM. Average core CASA witnessedmarginal improvement from 37.4% during Q3FY13 to 38.1% during Q4FY13.

Trend in Deposit growth

Q1 FY12 Q2 FY12 Q3 FY12 Q4 FY12 Q1 FY13 Q2 FY13 Q3 FY13 Q4 FY13

Deposits (bn) 2,306.8 2,450.9 2,605.9 2,555.0 2,677.9 2,814.4 2,864.2 2,926.1

Saving deposits 668.6 701.5 735.0 760.5 779.2 806.2 814.6 856.5

Current deposits 297.8 330.0 400.4 349.7 307.5 338.0 356.7 369.3

CASA 966.4 1,031.5 1,135.4 1,110.2 1,086.8 1,144.2 1,171.4 1,225.8

Term deposits 1,340.4 1,419.5 1,470.5 1,444.8 1,591.2 1,670.2 1,692.8 1,700.4

CASA (%) 41.9% 42.1% 43.6% 43.5% 40.6% 40.7% 40.9% 41.9%

Source: Company

NIM has remained above 3.0% mark for the fifth consecutive quarter. DuringQ4FY13, NIM came at 3.33%, an improvement of 32bps YoY (26bps QoQ). For thefull year, NIM improved from 2.73% in FY12 to 3.11% in FY13. Management hasguided NIM to improve by 10bps YoY to ~3.2% during FY14, while we are model-ing NIM to come at 3.15% during FY14E.

Moderation is visible in overall loan book growth; however, re-tail piece continues to do well.Overall loan book grew 14.4% during Q4FY13, which is lower than the growth ratewitnessed during previous three quarters. However, domestic book (18% YoY) espe-cially retail segment continues to do well. Retail loan book grew 25.6% YoY, ex-cluding the impact of bought out portfolio maturities and lower fresh buyouts. Simi-larly, its retail disbursement has been robust - mortgage and auto loan disburse-ments increasing by ~66% and ~22% YoY, respectively.

Advances (%)

(New Classification) Q4 FY12 Q3 FY13 Q4 FY13

Retail Business 38.0% 34.9% 37.0%

Domestic Corporate 28.6% 34.2% 32.5%

SME 6.0% 5.2% 5.2%

Overseas Branches 27.4% 25.7% 25.3%

Source: Company



Asset quality largely remained stable; we expect credit costs toremain within the management's guidance of ~75bps.Asset quality largely remained stable - net NPA grew 2.2% QoQ in absolute termsand stands at 0.64% at the end of Q4FY13.

Gross slippage came at Rs.7.8 bn (1.2%) similar to the run-rate of Rs.8.0-9.0 bnseen during many previous quarters. Slippage is likely to originate from the SMEsegments; however, its impact has been limited due to lower exposure to SME seg-ments (~5% of loan book).

Credit cost came at ~73bps in Q4FY13, largely within the management's guidance(~70bps for FY13); coverage ratio also stands at healthy level - 76.8% at the end ofQ4FY13, providing cushion to its future earnings with any unforeseen deterioration inits asset quality.

Restructured book rose sharply to Rs.53.2 bn (1.8% of advances) during Q4FY13largely due to change in RBI's guidelines. ICICI bank is now reporting these numberson the borrower wise rather than facility wise and hence after restatement of earliernumbers, this rise could be moderate. Cumulative restructured book rose ~16.7%/16.5% YoY/QoQ during Q4FY13. During Q4FY13, it added Rs.7.8 bn worth of loansto restructured book while Rs.17.0 bn was added to the restructured book duringFY13.

Valuation and RecommendationAt CMP of Rs.1144, the stock is trading reasonable at 13.0x its FY14E earnings and1.8x its FY14E ABV (10.6x and 1.5x, respectively, after stripping the value for subsid-iaries). We have tweaked earnings estimate upward FY14E and now expect earn-ings to grow 25.5% CAGR during FY12-14E. We also expect bank to continue focus-ing on liability franchise (CASA mix) and profitability (RoE is likely to improve furtherwith increase in leverage in next 2 years); loan growth target is likely to track thedeposit mobilization with CASA share being maintained at 40%+ levels.

Sum of Parts Valuation

Basis Multiple Year Value / Share

Core Banking Business (standalone) ABV 1.80 FY14 1,122

Overseas Banking Subsidiaries ABV 1.50 FY14 58

Life Insurance Business EV + NBAP 12 FY14 135

ICICI Securities PAT 12 FY14 13

ICICI PD Business PAT 10 FY14 9

Asset Management AUM 5% FY14 23

Private Equity AUM 10% FY14 17

Non Life Insurance PAT 12 FY14 5

Total Value of subsidiaries 260

20% discounted value 208

Total Value 1,329


We opine that management focus on stable growth with improving structural profit-ability continues which reinforces our existing positive outlook on the stock. We reit-erate BUY on the stock with revised TP of Rs.1329 (Rs.1308 earlier) using SOTPmethod, where the value of its standalone business comes to Rs.1122 (1.8x FY14EABV) and the value of subsidiaries at Rs.208 (holding company discount: 20% to thefair value of its subsidiaries at Rs.260).

We recommend BUY on ICICIBank with a price target of

Rs.1329



Key data

(Rs. bn) FY11 FY12 FY13E FY14E

Interest income 259.74 335.43 400.76 458.06

Interest expense 169.57 228.08 262.09 291.50

Net interest income 90.17 107.34 138.66 166.56

Growth (%) 11.1% 19.0% 29.2% 20.1%

Other income 66.48 75.03 83.46 94.77

Gross profit 90.48 103.86 131.99 158.01

Net profit 51.53 64.66 84.09 101.78

Growth (%) 28.0% 25.5% 30.0% 21.0%

Gross NPA (%) 4.6 3.7 3.6 3.4

Net NPA (%) 1.1 0.7 0.8 0.8

Net interest margin (%) 2.7 2.7 3.0 3.2

CAR (%) 19.5 18.5 19.2 18.0

RoE (%) 9.7 11.2 13.1 14.4

RoA (%) 1.3 1.5 1.7 1.8

Dividend per share (Rs.) 14.0 16.5 20.0 20.0

EPS (Rs) 45.5 56.1 72.2 88.3

Adjusted BVPS (Rs) 457.4 507.8 556.4 623.1

P/E (x) 25.2 20.4 15.8 13.0

P/ABV (x) 2.5 2.3 2.1 1.8





RESULT UPDATE

Sumit [email protected]+91 22 6621 6313

CASTROL INDIA LTD. (CIL)PRICE: RS.323 RECOMMENDATION: REDUCETARGET PRICE: RS.290 CY14E P/E: 26.1X

Castrol India Ltd. (CIL) has shown marginally better than expected perfor-mance in Q1CY13.

CIL has reported a PAT growth of 1.14% YoY and 5.4% QoQ to Rs.1.243Bn mainly on account of 1). Lower raw material cost, 2). Lower advertise-ment expenditure and 3). Lower carriage, freight & insurance cost. Netprofit has grown despite lower other income (OI) by 26.9% YoY toRs.245 Mn (OI).

On 26th April 2013, the board of directors has proposed for a "scheme ofreduction of share capital" u/s 100 of the Companies Act, 1956 of India i.eto reduce the face value of the Company's equity shares from Rs 10 pershare to Rs 5 per share and return the same to the shareholders. The re-duction in capital is subject to approval of the Shareholders, the Statu-tory Authorities and the Bombay High Court.

Non-Automotive / Industrial and Building & Construction segment hasseen pressure for the fourth straight quarter. Automotive segment hasseen marginal growth. In 2013, the Company expects the two-wheelerlubricants segment to continue on its growth path, given that OEMs areall geared up to tap two key opportunity areas - rural and scooters. Theemergence of women scooter owners/riders presents a new segmentopportunity for differentiated products.

Castrol's management has indicated that slowdown in industrial demandcoupled with higher input cost will impact the profitability.

Outlook and valuation: Our revised earnings estimate with an EPS of Rs. 10.8 for CY13E and Rs.12.4 for

CY14E and cash EPS of Rs.11.3 for CY13E and Rs.13.0 for CY14E. This is afterconsidering lower raw material cost as crude price has fallen off late.

On the basis of our estimates, the stock at current market price of Rs.323 is ex-pensively valued at 20.5x EV/EBIDTA, 30.0x P/E and 25.7x P/BV on the basis ofCY13E earnings.

Based on our DCF valuation model, the target price of Castrol is Rs. 290. Webelieve the current price discounts most of the positives and hence we maintainREDUCE. Castrol's management has also guided that the next few quarters arelikely to be challenging. Competition has been growing aggressively with com-petitors lowering prices and doing higher sales promotion to gain market share.

Key developments: The company is focusing on driving volume growth through increasing distribu-

tion reach and strengthening advocacy amongst key stakeholders.

The Indian rupee remains volatile and crude prices have strengthened again, re-cently. This can continue to put Castrol's margins under pressure. Additionally,the sluggish economy, and slow automotive and industrial growth will continueto dampen lubricant demand growth.

Key risk remains in terms of: The Company's management has indicated the lubricant market growth has

been slower due to the economic slowdown and inflationary pressures. This hasbeen compounded by continuing input cost pressure and rupee depreciationwhich have impacted margins.

Any significant fall in the crude oil price will lower the base-oil price (with a lagof six months) which can improve its margins.

Any significant rupee appreciation will impact the raw material cost.

Summary table

(Rs mn) CY12 CY13E CY14E

Sales 31,114 37,131 42,179Growth (%) 4.3 19.3 13.6EBITDA 6,347 7,477 8,632EBITDA Margin 20.4 20.1 20.5PBT 6,663 7,837 8,984Net Profit 4,474 5,327 6,118EPS (Rs.) 8.7 10.8 12.4Growth (%) -7.7 24.3 14.9CEPS 9.2 11.3 13.0Book Value (Rs/Share) 13.1 12.6 11.9DPS (Rs.) 7.0 9.7 11.1ROE (%) 51.8 58.2 66.0ROCE (%) 51.6 57.8 66.0Net Debt / (Cash) (5,629) (6,145) (6,275)NW Capital (Days) 16.9 17.8 17.7P/E (X) 37.3 30.0 26.1P/BV (X) 24.6 25.7 27.1EV/Sales (X) 5.0 4.1 3.6EV/EBITDA (X) 24.3 20.5 17.8




Quarterly Result Analysis - Q1CY13

Castrol Results Mar-13 Mar-12 YoY (%) QoQ (%)

Domestic Revenues 9,048 9,008 0.4 3.1

Excise Duty 1,234 1,191 3.6 3.5

Net Sales/Income from ops 7,814 7,817 (0.04) 3.1

Incr/(Decr) in stock 82 339 (75.8) (212.3)

VoP 7,896 8,156 (3.19) 5.18

Total Expenditure 6,212 6,588 (5.7) 6.3

EBIDTA 1,684 1,568 7.4 1.1

Depreciation 71 60 18.3 (11.3)

EBIT 1,613 1,508 7.0 1.8

Other income 245 335 (26.9) 35.4

Interest-net 5.0 7.0 (28.6) (50.0)

PBT 1,853 1,836 0.9 6

Tax 610 607 0.5 5.7

PAT 1,243 1,229 1.14 5.4

Basic EPS 2.51 2.49 1.1 5.4

Source: Company

Profitability Analysis

(%) Mar-13 Mar-12 YoY (%) QoQ (%)

EBITDA Margin 21.6 20.1 1.5 (0.4)

EBIT Margin 20.6 19.3 1.4 (0.3)

Adj PAT Margin 15.9 15.7 0.2 0.4

Other Income/PBT 13.2 18.2 (5.0) 2.9

Tax/PBT 32.9 33.1 (0.1) 0.1

Excise/net dom sales 13.6 13.2 0.4 0.0

Depreciation/ Avrg. Capital employed (%) 1.00 0.90 0.10 0.80

Source: Company

NOTE: The lubricant business is a seasonal business and volume gets affected due tovarious seasonal factors. Hence, quarter-on-quarter result comparison will not givethe correct picture. We have observed that for Castrol Quarter 2 (April- June) andQuarter 4 (Oct-Dec) of the calendar year are generally the best quarters.

Operational Parameters

Mar-13 Mar-12 YoY (%) QoQ (%)

Raw Materials 4,193 4,577 (8.4) 7.1

Staff costs 335 265 26.4 (9.5)

Purchase of Finished Goods 318 352 (9.7) (10.9)

Advertisement Exp. 545 591 (7.8) 44.6

Carriage, Freight & Insurance (CIF) 230 237 (3.0) 1.8

Other Expenses 591 566 4.4 (1.0)

Total 6,212 6,588 (5.7) 6.3

Source: Company



Cost Ratio Analysis (% of (Net sales + Inventory)

Mar-13 Mar-12 YoY (%) QoQ (%)

RM & Service cost 53.10 56.12 (3.0) 1.0

Staff cost 4.24 3.25 1.0 (0.7)

Purchase of FG 4.03 4.32 (0.3) (0.7)

Advertisement Exp. (Net Sales) 7.0 7.6 (0.6) 2.0

Carriage, Freight & Insurance 2.9 2.9 0.0 (0.1)

Other Expenses 7.48 6.94 0.5 (0.5)

Source: Company

Quarterly Result Analysis - In Q1CY13, the net revenue has flat YoY and marginally up by 3.1% QoQ to Rs.

7.8 Bn mainly on account improved sales mix and pricing actions under taken bythe Company.

Raw material cost: In Q1CY13, raw material cost has decreased by 8.4% YoYbut was up by 7.1% QoQ to Rs.4.2 Bn. Lube oil is a derivative of crude oil andBrent crude prices has decreased in Q1CY13 however the benefit was partly off-set by weak rupee. Raw material cost to sales ratio has decreased by 30 bps YoYbut up by 10 bps QoQ to 53.10%.

Trading activity - purchase of finished goods: In Q1CY13, finished goodspurchased by the Company has fallen by 9.7% YoY and by 10.9% QoQ toRs.318 Mn.

Carriage, Freight & Insurance (CIF): CIF is dependent on imports of raw mate-rial. The raw material cost has decreased in Q1CY13 and as a result its CIF costhas also decreased. In Q1CY13, carriage, freight & insurance cost has decreasedby 3.0% QoQ but up by 1.8% YoY to Rs.230 Mn.

Advertisement Expenses: In Q1CY13, advertisement expense has decreasedby 7.8% YoY but was significantly up by 44.6% QoQ (base effect) to Rs. 545Mn. In Q1CY13 and Q4CY12, the Company has taken out less marketing cam-paigns. Advertisement expense to sales ratio has decreased by 60 bps YoY butup by 20 bps QoQ to 7.0%.

Employee Cost: Staff cost has increased significantly by 26.4% YoY but downby 9.5% QoQ to Rs.335 Mn partly due to base effect.

Other Expenses: In Q1CY13, other expense has increased by 4.4% YoY butdown by 1.0% QoQ to Rs.591 Mn.

Operating margin: Overall operating margin increased by 150 bps YoY butfallen by 40 bps QoQ to 21.6% in Q1CY13. Its margin is up mainly due to fall inraw material cost (Lube oil prices), CIF and advertisement expenses.

Depreciation: In Q1CY13, depreciation cost has increased by 18.0% YoY butdown by 11.3% QoQ to Rs. 71 Mn due to increased capital employed. Totalcapital employed by Castrol has increased by 6.4% YoY and by 19.1% QoQ toRs. 7.74 Bn.

Major increase in other income: In Q1CY13, other income has fallen substan-tially by 26.9% YoY to Rs.181 Mn.

Finance/Bank charges has decreased to Rs. 5 Mn from Rs. 7 Mn on YoY. As on31st March'13, Castrol is a zero debt company.

Castrol's PAT margin has increased by 20 bps YoY and by 40 bps QoQ to 15.9%in Q1CY13 mainly due to lower expenditure.

The Company's profit after tax (PAT) has increased by 5.4% QoQ and 1.14%YoY to Rs. 1.24 Bn mainly on account of 1). Lower overall expenditure and 2).Lower depreciation charge.



Operating performance is dependent on raw material cost


Segment-wise performance

Segment Revenue (Net Sales) Mar-13 Mar-12 YoY (%) QoQ (%)

Automotive 6,968 6,744 3.32 4.59

Non-Automotive/Industrial and Building & Construction 879 1,073 (18.08) (7.18)

Total 7,847 7,817 0.38 3.13

Segment Revenue Contribution (%)

Automotive 88.8 86.3 2.52 1.2

Non-Automotive/Industrial and Building & Construction 11.2 13.7 (2.52) (1.2)

Segment EBIT (Adj for exceptional)

Automotive 1,563 1,461 7.0 0.1

Non-Automotive/Industrial and Building & Construction 168 243 (30.9) 55.6

Total 1,731 1,704 1.6 3.7

Unallocated Exp/Corporate Exp. 127 196 (35.2) 49.4

% of VoP 1.6% 2.4% (33.1) (98.6)

EBIT Margin %

Automotive 22.4 21.7 0.77 (1.0)

Non-Automotive/Industrial and Building & Construction 19.1 22.6 (3.53) 7.7

Segment EBIT Contribution (%)

Automotive 90.3 85.7 4.56 (3.2)


Capital Employed (Rs. Mn)

Automotive 2,361 2,595 -9.0 91.8

Non-Automotive/Industrial and Building & Construction 994 1,164 -14.6 13.2

Unallocable 4,380 3,513 24.7 (0.1)

Total 7,735 7,272 6.4 19.1

EBIT/CE (%)

Automotive 264.8 225.2 17.6 (47.8)


Total 89.5 93.7 (4.5) (13.0)

Source: Company



Automotive Segment - YoY improved performanceIn Q1CY13, Castrol India has shown net revenue growth of 3.3% YoY and of 4.59%QoQ to Rs. 6.97 Bn, growth mainly coming from the two wheeler lubricant market.In 2013, the Company expects the two-wheeler lubricants segment to continue onits growth path, given that OEMs are all geared up to tap two key opportunity areas- rural and scooters. Automotive segment had contributed ~88.8% of the revenue,up by 2.5% YoY and by 1.2% QoQ. Further, operating profit has increased signifi-cantly by 7.0% YoY basis and by 0.1% on sequential basis. EBIDTA margin hasimproved by 77 bps YoY but was down by 100 bps QoQ to 22.4%, EBIDTA for thequarter stand at Rs.1.56 Bn, up by 7.0% YoY.

Industrial and Building & Construction SegmentIn Q1CY13, Castrol India booked a revenue de-growth of 18.08% YoY and 7.18%QoQ to Rs.879 Mn. Industrial segment contributed ~11.2% of the total revenuedown by 2.5% YoY and by 1.2% QoQ. It terms of operating profit, this segment hascontributed 9.7% of the total operating profit. EBIDTA margin has fallen by 35 bpsYoY but up by 77 bps QoQ to 19.1%, EBIDTA for the quarter stand at Rs.168 Mn.

Industrial growth led to increase in lubricant consumption inmanufacturing unitsOrganisation for Economic Co-operation and Development (OECD) composite lead-ing indicators (CLIs) is pointing slowdown in economy OECD composite leading indi-cators (CLIs) is designed to anticipate turning points in economic activity relative totrend, which point to an increasing pace of economic activity. Based on this, webelieve India is a slowdown phase as the OECD (India) is at 96.78. We believe thiswill impact the industrial demand of lubricants in CY13.

OECD composite leading indicator

Source: Bloomberg

Growth cycle phases of the CLI are defined as follows: expansion (increase above100), downturn (decrease above 100), slowdown (decrease below 100), recovery(increase below 100). CLI data is of 29 OECD member countries and 6 OECD non-member economies.

Comments: The horizontal line 100 shows the long-term trend in industrial produc-tion (the reference series). Expansion denotes a CLI increasing above 100. Downturna CLI decreasing but still above 100 Slowdown a CLI decreasing below 100; recov-ery a CLI increasing but below 100



Outlook and valuation: Our revised earnings estimate with an EPS of Rs. 10.8 CY13E and Rs.12.4 CY14E

and cash EPS of Rs.11.3 CY13E and Rs.13.0 CY14E.

On the basis of our estimates, the stock at current market price of Rs.323 is ex-pensively valued at 20.5x EV/EBIDTA, 30.0x P/E and 25.7x P/BV on the basis ofCY13E earnings.

Based on our DCF valuation model, the target price of Castrol is Rs. 290. Webelieve the current price discounts most of the positives and hence we maintainREDUCE. Castrol's management has also guided that the next few quarters arelikely to be challenging.

We recommend REDUCE onCastrol India with a price target

of Rs.290




HINDUSTAN ZINC

PRICE: RS.118 RECOMMENDATION: BUYTARGET PRICE: RS.146 FY14E P/E: 7.6X; EV/EBITDA: 3.7X

Excellent operational turnaround - Need to wait for revival inmetal prices for upward rerating. Retain BUYRecord quarterly production of mined metal and integrated refined silveralong with clearance of earlier accumulated MIC inventory meant record PAT

HZL delivered highest ever quarterly mined metal production, up 16% Y/Y and11.6% Q/Q to 260Kt.

Refined integrated silver production was up 20% Y/Y and 61.2% Q/Q to 100t.

In addition there was surplus Zinc concentrate sale of c61kt equivalent to MICinventory at the end of Q3.

Operational record volumes helped it deliver highest ever quarterly net profits, up53% Y/Y and 34.3% Q/Q to Rs21.66bn.

Quarterly Comparative

(Rs mn) Q4FY13 Q3FY13 %Q/Q 4QFY12 %Y/Y

Net Sales 38502.9 31404.3 22.6% 30935.3 24.5%

Other Operating Income 583.6 375.9 55.3% 414.7 40.7%

Total Sales 39086.5 31780.2 23.0% 31350 24.7%

Total expenditure 17926.8 16,840 6.5% 14,760 21.5%

Changes in stock in trade/ WIP 1220.4 -544.3 -324.2% 160.7 659.4%

Consumption of raw materials 1182.1 3099.4 -61.9% 832.1 42.1%

Stores & spares 3159.9 2993 5.6% 2788.3 13.3%

Power & Fuel 2763.3 2608.4 5.9% 3224.5 -14.3%

Staff cost 1768.3 1692.4 4.5% 1444.8 22.4%

Mining Royalty 2439.5 2687.9 -9.2% 2291.4 6.5%

Mining & Manufacturing Exp 3351.4 3268.3 2.5% 2728.1 22.8%

Admin.& Other expenditure 2041.9 1035 97.3% 1289.8 58.3%

EBITDA 21159.7 14,940 41.6% 16,590 27.5%

EBITDA Margin 55.0% 47.6% 740bps 53.6% 140bps

Other Income 4118.2 5062.7 -18.7% 3810.6 8.1%

Depreciation 1218.8 1772.1 -31.2% 1670.6 -27.0%

Interest 108.3 74.8 44.8% 24 351.3%

PBT 23950.8 18,155.9 31.9% 18,706.3 28.0%

Tax 2117.4 2030.5 4.3% 4493.7 -52.9%

PAT 21658.1 16,041.2 35.0% 14,128.4 53.3%

Tax rate 8.8% 11.2% (230bps) 24.0% (1520bps)

EPS (Rs) 5.13 3.80 35.0% 2.97 72.4%

Metal Production (t)

Refined zinc 182000 171000 6.4% 190000 -4.2%

Refined zinc (Integrated) 181000 168000 7.7% 189000 -4.2%

Refined lead 35000 32000 9.4% 37000 -5.4%

Refined lead (Integrated) 32000 22000 45.5% 31000 3.2%

Refined Silver (Kg) 117000 117000 0.0% 88000 33.0%

Refined Silver (Kg) (Integrated) 100000 62000 61.3% 83000 20.5%

Source: Company

Summary table

(Rs mn) FY12 FY13e FY14e

Sales (Rs. mn) 114053 127089 133837Growth (%) 13.6 11.4 5.3EBITDA (Rs. mn) 60,695 64,907 65,856EBITDA Margins (%) 53.2 51.1 49.2PBT 69,877 78,467 77,990Net Profit (Rs. mn) 55260 69061 65701EPS (Rs.) 13.08 16.34 15.55Growth (%) 12.8 25.0 -4.9CEPS (Rs.) 14.2 17.7 17.0BV (Rs./share) 63.6 76.4 88.5Dividend / share (Rs.) 2.4 3.1 3.0ROE (%) 20.7 21.5 17.6ROCE (%) 61.0 54.2 49.0Net Cash (debt) 179,300 214,749 254,532NW Capital (Days) 211 216 275EV/Sales (x) 2.8 2.2 1.8EV/ EBITDA (x) 5.3 4.4 3.7P/E (x) 9.0 7.2 7.6P/B (x) 1.9 1.5 1.3


RESULT UPDATE

Saurabh [email protected]

+91 22 6621 6309



Q4 results and conference call highlights Record high financials - Q4 Sales was up 23% Q/Q and 24.7% Y/Y to

Rs39.1bn, EBITDA was up massive 41.6% Q/Q and 27.5% Y/Y to Rs21.16bnwhile PAT was up 35% Q/Q and 53.3% Y/Y to Rs21.66bn. Q4 EPS stood atRs5.13. Q4 PAT is highest ever with a good margin.

Integrated operational volumes lead margin expansion - refined zinc inte-grated production was up 7.7% Q/Q to 181Kt, refined lead integrated productionwas up massive 45.5% Q/Q to 32Kt and refined silver integrated production wasup even more by 61.3% Q/Q to 100t. In addition there was surplus Zinc concen-trate sale of c61kt equivalent to MIC inventory at the end of Q3. Integrated re-fining margins are as of now much higher than custom refining margins for met-als and this was key reason for 740bps Q/Q improvement in EBITDA margins to55% in Q4.

MTM loss impacted other income - HZL has incurred MTM loss of c.Rs740mnin Q4FY13 vs. cRs410mn gain in Q3FY13, both of which have been adjusted inother income. Management has indicated other income expected run rate ofRs4.5 to Rs5bn/qtr.

Low tax rates to continue - Tax rate for Q4FY13 was remarkably low at mere8.8%. Management has attributed this to increased contribution of tax benefitsof refining facilities at Uttrahakhand along with standard tax benefits on windmills and tax-free investment income. Tax rate for FY13 works out to 11.7% andmanagement has indicated tax-rate to be in mid-teens for FY14e. We have mod-eled tax-rate of 15.5% for our earning estimates.

Mined metal growth guidance - Management has guided for mined metalproduction to rise 15% in FY14 to 1mtpa. This would be driven by start of com-mercial production of Rampura Agucha underground mine and Kayar mine andrestart of optimal operations at Zawar mines. In addition, it is expected that thegrade ore at Rampura Agucha mine would remain stable at present levels. Also,the production profile is expected to be equally spread over quarters in FY14unlike FY13 wherein H2 was much better than H1.

Integrated silver production guidance - Refined integrated silver productionwas up 20% Y/Y and 61.2% Q/Q to 100t. Management has guided for 360t ofintegrated refined silver production for FY14 vs. 322t in FY13. Please note thatoperating margins in integrated refined silver production are >90% while customrefined silver production margins are very marginal.

Onetime benefit in depreciation - Depreciation for Q4FY13 had fallen sharplydue to onetime adjustment of c.Rs560mn from sale of few assets at inoperativevizag facility.

Zinc CoP was stable but has potential for fall - Zinc CoP without royalty wasup 8%Q/Q but flattish Q/Q to c.Rs45000/t ($829/t). Management has guided thatthe Zinc CoP would remain at similar levels for FY14e. We note that earliermanagement used to guide about remarkable fall of CoP in H2FY13 but failed todeliver on that front. We believe this is one key cost parameter which has somepotential to surprise on positive side in coming quarters. However, we have mod-eled for stable CoP as we would wait for the company to positively surprise onthis front.

Sustainable fall in mining royalty - Mining royalty fell 9.2% Q/Q despite in-crease in production volumes as HZL benefited from the recent Supreme Courtjudgment that royalty is payable only on the metal content extracted (and not onthe entire quantity excavated). The benefit of this ruling would accrue in futureas well and we have accordingly moderated the mining royalty costs in our esti-mates.

Capex guidance - Management has indicated that annual project capex of$250-300mn and additional sustenance capex of Rs2.5bn/annum can be as-sumed for next few years.



Soaring mine life - HZL reported a gross addition of 24.6mt to reserves and re-sources (R&R) in FY13, prior to a depletion of 8.6mt in FY13. Total R&R of348.3mt as on 31st Mar'13 contains 35.1mt of Zinc-lead metal and 910mnounces of Silver representing a mine life of >25 years. Rampura Agucha under-ground mine and Kayar mine is expected to announce commercial production in1HFY14. Zawar mines production would be back to 1.2mtpa. HZL would be longzinc and lead concentrate with these mine expansions, and would contribute toearnings through sales of MIC. We expect HZL to add commensurate smeltingcapacities over 3-4years.

Record dividend - HZL declared a final dividend of Rs 1.50/ share taking thetotal dividend for FY13 to Rs 3.10/share (highest ever), an increase of 29.4%over FY12. (it works out to 2.6% dividend yield on current market price). The FY2013 payout ratio is 22% as compared to 21% in FY 2012, inclusive of dividenddistribution tax.

High cash levels - As on 31st Mar'13, HZL had cash and cash equivalents ofRs215bn (Rs51/share; 43% of market capitalization), out of which Rs122.76bnwas invested in debt mutual funds, Rs21.5bn in bonds and Rs68.93bn were infixed deposits with banks and Rs1.59bn in others. Book value as on 31st Mar'13stood at Rs76.4/share.

Zinc & Lead LME price (US$/t)

Source: Bloomberg

MCX Silver price (Rs/kg)

Source: Bloomberg

800

1500

2200

2900

3600 Zinc LME Price (US$/t) Lead LME Price (US$/t)

15000

30000

45000

60000

75000



We reiterate BUY on HindustanZinc with a price target of Rs.146

Valuation HZL has reported record PAT levels driven by robust operational resurgence, still

given the concerns in industry macro and low metal prices, investors need to bepatient for revival in metal prices which historically have been volatile and cycli-cal. Given the massive monetary stimulus doled out by Japan (c.$70-75bn/month) and likely fiscal/monetary support by other regions like South Korea, Rus-sia and EU, we are hopeful that we are unlikely to see sharp sell in relevantmetal prices from these levels.

We have to moderately cut our earnings estimate for FY14 by 3.3% to Rs15.55(vs. Rs16.08 earlier) as higher confidence in improved sales volumes is negatedby correction in LME base metal prices for zinc and lead along with sharp sell-offseen in silver prices over last two months. At present price, stock is trading atattractive valuation multiple of 7.6x P/E and 3.7x EV/EBITDA for FY14e. We con-tinue to value HZL at 5.5x FY14 EV/ EBITDA and assign a fair value of Rs146/share (vs. Rs150 earlier) and reiterate BUY as our target price offers 23% upsidefrom present levels.

HZL Valuation - TP based on FY14e earnings

EBITDA Multiple Valuation Value(Rs. mn) (x) (Rs. mn) (Rs./Share)

Enterprise Value 65856 5.50 362207 85.7

Less: Net Debt (at end of FY14) -254532 -60.2

Target Market Capitalization 616739 146.0

Target Price 146


RisksFortnight back, there was very sharp correction seen in gold, silver and brent crudeprices. We note that similar sell off was also seen in mid-July 2008, exactly twomonths prior to Lehman collapse and followed up global liquidity crisis. We don'tknow if the last sell-off is pre-cursor to some unexpected large global liquidity crisisevent or not but investors need to be watchful for any warning signals over next 2-3 months timeframe as it can potentially adversely impact our earnings estimate andrecommendation.



Gainers & Losers Nifty Gainers & LosersPrice (Rs) chg (%) Index points Volume (mn)

Gainers

Bharti Airtel 318 4.8 5.4 7.1

HDFC 873 1.1 4.7 2.6

L&T 1,541 1.4 3.6 1.3

Losers

Reliance Ind 792 (3.3) (13.9) 4.8

ICICI Bank 1,145 (2.8) (11.8) 7.1

TCS 1,369 (2.4) (5.2) 2.4

Source: Bloomberg

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Fundamental Research TeamDipen [email protected]+91 22 6621 6301

Sanjeev ZarbadeCapital Goods, [email protected]+91 22 6621 6305

Teena VirmaniConstruction, [email protected]+91 22 6621 6302

Saurabh AgrawalMetals, [email protected]+91 22 6621 6309

Saday SinhaBanking, NBFC, [email protected]+91 22 6621 6312

Arun AgarwalAuto & Auto [email protected]+91 22 6621 6143

Ruchir KhareCapital Goods, [email protected]+91 22 6621 6448

Ritwik RaiFMCG, [email protected]+91 22 6621 6310

Sumit PokharnaOil and [email protected]+91 22 6621 6313

Amit AgarwalLogistics, [email protected]+91 22 6621 6222

Jayesh [email protected]+91 22 6652 9172

K. [email protected]+91 22 6621 6311

Technical Research Team

Shrikant [email protected]+91 22 6621 6360

Amol [email protected]+91 20 6620 3350

Premshankar [email protected]+91 22 6621 6261

Derivatives Research TeamSahaj [email protected]+91 79 6607 2231

Rahul [email protected]+91 22 6621 6198

Malay [email protected]+91 22 6621 6350

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