INDIA DAILY

July 30, 2009 India 29-Jul 1-day1-mo 3-mo Sensex 15,173 (1.0) 2.6 33.1

Nifty 4,514 (1.1) 2.8 29.9 Contents Global/Regional indices

Dow Jones 9,071 (0.3) 6.3 10.8 Results Nasdaq Composite 1,968 (0.4) 6.7 14.9

Sterlite Industries: On expected lines FTSE 4,548 0.4 5.9 8.5 Jindal Steel and Power: Power storm Nikkie 10,083 (0.3) 1.3 14.2 Hang Seng 20,136 (2.4) 9.6 29.7 Cairn India: The real story starts now KOSPI 1,520 (0.3) 9.3 11.0 Tata Steel: Results below expectations Value traded - India Cash (NSE+BSE) 307.6 236.1 260.2 Hero Honda: Quarter not good enough for 11X EV/EBITDA Derivatives (NSE) 1,165.1 475.9 801

Punjab National Bank: Well managed on core front, but restructured assets are high Deri. open interest 982.6 587 987

Cipla: In line results

Sesa Goa: Weak realizations Forex/money market Sun TV Network: In-line 1QFY10 results; valuations limit upside potential Change, basis points 29-Jul 1-day 1-mo 3-mo Lanco Infratech: Healthy growth in execution led by construction division Rs/US$ 48.4 18 30 (176) 10yr govt bond, % 7.1 - 13 89 Housing Development & Infrastructure: Reinitiate with ADD as financial strain eases Net investment (US$mn) 24-Jul MTD CYTD IRB Infrastructure Developers: Results boosted by construction business FIIs 153 1,500 6,470 Corporation Bank: Reports strong operational performance, retain BUY . MFs 27 326 843

IVRCL Infrastructures: Revenue disappoints - attributed to state elections Top movers -3mo basis Change, % Sobha Developers: In line quarter, maintain ADD Best performers 29-Jul 1-day 1-mo 3-mo ABAN IN Equity 1015.9 5.2 13.5 149.6 Hexaware Technologies: 2QCY09 results - massive outperformance, driven by massive WGS IN Equity 225.3 (0.9) 16.9 123.9 cost control SCS IN Equity 101.6 (2.0) 43.0 117.0 PSL: Strong performance SESA IN Equity 239.2 (2.5) 31.0 113.8 PUNJ IN Equity 242.8 1.2 15.8 109.6 Update Worst performers TCOM IN Equity 490.9 0.5 3.3 (10.5) Industrials: Power demand resilient; however, pricing may take a hit SUNP IN Equity 1187.5 (5.4) 8.9 (7.1) ESOIL IN Equity 142.2 0.4 (6.8) (1.4) RIL IN Equity 1930.4 1.2 (4.6) 6.9 RPET IN Equity 119.8 1.1 (4.5) 7.2 News Round-up

• ABG bought 5.3% stake in Great Offshore through a series of block deals taking its stake to 7.3%. Rival Bharati owns 19.5% of Great Offshore and is expected to increase its price from Rs 405 to exceed ABG's offer. However, there are no indications about when it will do that. The two companies have time till August 24 to change their offer price (ET). • Anil Ambani said RNRL would approach the Supreme Court on Thursday, seeking a final hearing on the two-year-old dispute over gas pricing and supply on September 1, 2009 (BS). • A day after the RBI pegged economic growth at 6% for 2009-10, FM Pranab Mukherjee on Wednesday told the Rajya Sabha that he expects growth to remain at 6.7% level recorded in 2008-09 (FE). • The deficiency in the cumulative rainfall from the beginning of the monsoon season on June 1 in the country has gradually shrunk from 43 per cent on July 2 to 34 per cent on July 9, 24 per cent on July 16 and 18 per cent on July 23 (BS).

Source: ET= Economic Times, BS = Business Standard, FE = Financial Express, BL = Business Line.

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

. REDUCE Sterlite Industries (STLT)

Metals JULY 30, 2009 RESULT Coverage view: Neutral

On expected lines. Consolidated net earnings at Rs6.73 bn (-42% yoy and +12% qoq) Price (Rs): 622 were ahead of expectations. EBITDA at Rs102 bn (-44% yoy and +22% yoy) was in line. Target price (Rs): 550 However, recent declines in commodity prices, zinc and yield on treasury now BSE-30: 15,173 contribute 80% of PBIT compared to 62% yoy. Expansions are on track in the energy, aluminium and zinc businesses. We maintain our estimates and maintain our REDUCE rating on the stock.

Company data and valuation summary Sterlite Industries Stock data Forecasts/Valuations 2009 2010E 2011E 52-week range (Rs) (high,low)740-165 EPS (Rs) 49.2 29.8 38.0 Market Cap. (Rs bn) 522.8 EPS growth (%) (23.6) (39.3) 27.2 QUICK NUMBERS Shareholding pattern (%) P/E (X) 12.6 20.8 16.4 Promoters 61.2 Sales (Rs bn) 214.5 203.8 223.1 • Net income at FIIs 19.3 Net profits (Rs bn) 34.8 25.1 31.9 Rs6.73 bn down MFs 3.5 EBITDA (Rs bn) 50.1 42.1 54.3 42% yoy and up Price performance (%) 1M 3M 12M EV/EBITDA (X) 9.0 8.7 6.5 Absolute 2.5 51.7 (0.2) ROE (%) 14.3 8.1 8.4 12% qoq Rel. to BSE-30 (0.1) 14.0 (9.3) Div. Yield (%) 0.0 0.0 0.0 • Expansion on track

Segmental performance

` Aluminium business: Aluminium business volumes at 72,000 tons were down 19% yoy due to shut down of BALCO I. Management has indicated that it does not intend to restart BALCO I unless aluminium rises substantially. PBIT at Rs750 mn was lower by 81% yoy and a loss of Rs495 mn qoq was higher than expected.

` Copper business: Copper volumes at 78,000 were lower by 10% qoq following operational issues. PBIT at Rs940mn was lower 63% yoy and 78% qoq and below expectations. PBIT margins were at 4.3%. Earnings continue to remain weak despite an increase in Tc/Rc margins due to weak prices of by-products such as sulphuric acid etc.

` Zinc business: Zinc volumes at 162,000 tons were higher 17% yoy and lower by 7% qoq. PBIT at Rs7.01 bn was lower by 23% yoy and higher by 38% qoq.

` Power business: Sterlite has for the first time reported earnings from the power segment which comprises of 123MW wind generators at HZL and 270MW power plant at BALCO. It sold 287MU of power during the quarter as compared to 74MU yoy. It reported a PBIT of Rs1.02 bn up 4.4X yoy.

Expansions galore

Aluminium: BALCO and Vedanta Aluminium (VAL) are expanding their aluminium businesses.

` BALCO (51% subsidiary) would expand capacity by setting up a new smelter of 325KT and

1,200MW captive power plant scheduled for commissioning by October 2010.

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

Sterlite Industries Metals

` VAL’s (29.5% associate company) current capacity at 250,000 tons would increase to 500,000 ton by end FY2010. The second phase of expansion to 1.75 mn tons would be commissioned in phases by March 2010. Alumina refining at Lanjigarh is being expanded to 5mn tons in phases and would be scheduled for completion by mid-2010.

` Power business: Expansion on 2400MW power plant is on track and would be scheduled for commissioning in phases by December 2009.

` Zinc business: Expansion at Rajpura Dariba is on track to increase capacity to 1.06 mn tons and would be commissioned by mid-2010.

Maintain estimates; reiterate REDUCE rating

We maintain our FY2010 and FY2011 EPS estimates at Rs29.8 and Rs38 respectively. We value Sterlite on an SOTP basis to arrive at a target price of Rs550 and maintain our REDUCE rating. We view the following uncertainties as impediments to valuation upside: (1) Commissioning of Niyamgiri mines in crucial for VAL as sustaining operations of 5mn tons of alumina production; (2) More allotments of linkage coal for the 2400MW captive cum merchant power plant; (3) Favorable settlement of ASARCO bankruptcy litigation as loss would open possibility of potential litigation.

Interim results of Sterlite Industries , March fiscal year-ends (Rs mn)

(% chg.) 1QFY10 1QFY10E 1QFY09 4QFY09 1QFY10E 1QFY09 4QFY09 Net sales 45,789 47,827 57,701 44,060 (4.3) (20.6) 3.9 Total expenditure (35,580) (37,973) (39,435) (35,669) (6.3) (9.8) (0.2) Inc/(Dec) in stock 3,351 - 1,154 513 190.5 553.9 Raw materials (24,507) - (26,008) (22,702) (5.8) 8.0 Staff cost (1,731) - (1,831) (1,791) (5.5) (3.4) Other expenditure (12,694) - (12,750) (11,688) (0.4) 8.6 EBITDA 10,209 9,854 18,266 8,392 3.6 (44.1) 21.7 OPM (%) 22.3 20.6 31.7 19.0 Other income 3,783 4,255 4,025 3,940 (11.1) (6.0) (4.0) Interest (712) (1,312) (874) (1,312) (45.7) (18.5) (45.7) Depreciation (1,736) (2,235) (1,655) (2,032) (22.3) 4.9 (14.5) Pretax profits 11,544 10,562 19,761 8,988 9.3 (41.6) 28.4 Extraordinaries/sales tax benefit - - - 799 Tax (2,305) (1,162) (3,808) (664) 98.4 (39.5) 247.0 Net income before minority interest 9,239 9,400 15,954 9,122 (1.7) (42.1) 1.3 Minority interest (3,219) (2,185) (4,470) (2,057) 47.3 (28.0) 56.5 Share of associates 707 (1,082) 27 (1,082) (165.3) 2,548.7 (165.3) PAT after minority interest 6,727 6,133 11,511 5,983 9.7 (41.6) 12.4 Income tax rate (%) 20.0 11.0 19.3 6.8

Ratios EBITDA margin (%) 22.3 20.6 31.7 19.0 ETR (%) 20.0 11.0 19.3 6.8 EPS (Rs) 9.5 8.7 16.3 8.4 Volume details ('000 tons) Copper mined metal content 7 8 7 8 (12.5) - (12.5) Copper cathode 78 88 68 88 (11.4) 14.7 (11.4) Aluminium ingots 72 85 89 85 (15.3) (19.1) (15.3) Zinc mined metal content 162 175 138 175 (7.4) 17.4 (7.4) Zinc cathode 139 151 128 151 (7.9) 8.6 (7.9) Earnings drivers (US$/ton) Average INR:USD 48.7 48.0 41.6 49.8 1.4 16.9 (2.2) Average Zinc prices 1,523.0 - 2,146.0 1,209.0 (29.0) 26.0 Average Aluminium prices 1,541.0 - 3,004.0 1,410.0 (48.7) 9.3

Source: Company, Kotak Institutional Equities

KOTAK INSTITUTIONAL EQUITIES RESEARCH 3 Metals Sterlite Industries

SOTP-based target price of Sterlite Industries is Rs550/share SOTP-based target price of Sterlite, March fiscal year-ends, 2011E basis (Rs mn)

EBITDA Multiple EV Sterlite's stake Attributable EV EV (Rs bn) (X) (Rs bn) (%) (Rs bn) (Rs/ share) Aluminium business BALCO 8 6.0 50 51.0 25 24 Vedanta Aluminium (VAL) 21 Copper business Copper smelting business 10 6.0 58 100.0 58 69 Copper mining 2 Zinc business Hindustan Zinc 36 6.0 218 64.9 141 135 Power business Sterlite Energy (a) 57 Total enterprise value 225 308 Less: net debt (206) (245) Attibutable market capitalization 431 553 Target price (Rs/share) 550

Notes: (a) We have valued investments in the power business (Sterlite Energy) on DCF-to-equity implying a P/BV of 2X (b) We have applied 20% holding company discount in case of stakes in Hindustan Zinc, BALCO, Sterlite Energy and CMT.

Source: Company, Kotak Institutional Equities estimates

Sterlite Industries, Key assumptions, March fiscal year-ends, 2007-11E

2007 2008 2009E 2010E 2011E Prices (US$/ton) Aluminium 2,548 2,675 2,200 1,700 1,900 Zinc 3,580 2,900 1,550 1,400 1,500 Copper 6,861 6,695 5,800 5,000 5,000 Lead 1,426 2,700 1,500 1,300 1,300

Volumes (tons) Aluminium 315,002 358,328 343,000 297,500 346,500 Zinc 349,615 425,532 651,272 696,600 791,100 Copper 133,402 112,411 143,550 151,710 151,710 Lead 50,187 63,566 83,886 114,400 154,400

Source: Company, Kotak Institutional Equities estimates

4 KOTAK INSTITUTIONAL EQUITIES RESEARCH Sterlite Industries Metals

Sterlite Industries (consolidated), Profit model, balance sheet and cash flow model, March fiscal year-ends, 2006-2011E (Rs mn)

2006 2007 2008 2009E 2010E 2011E Profit model (Rs mn) Net sales 131,272 243,868 247,054 214,484 203,779 223,138 EBITDA 36,899 94,589 78,682 50,083 42,133 54,341 Other income 3,343 6,817 15,661 18,501 17,603 20,222 Interest (2,353) (3,791) (3,186) (3,973) (4,700) (4,238) Depreciaiton (5,269) (8,039) (5,950) (7,007) (9,498) (10,885) Profit before tax 32,518 88,004 84,679 58,158 45,538 59,441 Taxes (10,165) (24,118) (21,027) (8,550) (6,728) (9,490) Less: Minority interest (5,568) (19,045) (18,591) (12,671) (8,101) (12,419) Add: share in associates (4) - - (1,536) (5,623) (5,623) Net profit 16,781 44,842 45,061 35,400 25,086 31,908 Earnings per share (Rs) 60.1 80.3 63.6 50.0 29.8 38.0

Balance sheet (Rs mn) Equity 60,530 99,815 223,024 246,210 349,920 380,775 Deferred tax liability 7,511 9,174 13,537 12,540 13,917 15,807 Total Borrowings 68,822 82,365 106,981 134,212 145,382 161,084 Current liabilities 34,113 48,636 50,401 31,859 31,131 31,697 Total liabilities 170,976 239,990 393,942 424,821 540,350 589,362 Net fixed assets 85,497 97,176 124,367 132,044 156,995 173,860 Investments 24,952 52,219 162,941 170,758 275,758 315,758 Cash 11,153 11,134 24,536 34,865 23,995 13,552 Other current assets 49,269 79,460 82,099 87,155 83,603 86,193 Miscellaneous expenditure 105 0 0 - - - Total assets 170,976 239,990 393,942 424,821 540,350 589,362

Cash flow model (Rs mn) Operating cash flow excl. working capital 28,131 75,568 61,736 53,343 48,368 61,144 Working capital changes (8,339) (18,647) 2,032 4,266 4,325 (1,974) Capital expenditure (11,783) (20,871) (30,119) (23,975) (32,950) (27,700) Free cash flow 8,009 36,049 33,648 33,634 19,742 31,470

Ratios Debt/equity (X) 1.0 0.8 0.5 0.5 0.4 0.4 Net debt/equity (X) 0.2 (0.2) (0.6) (0.5) (0.6) (0.6) RoAE (%) 28.9 50.7 26.1 14.3 8.1 8.4 RoACE (%) 14.7 29.0 17.7 10.5 6.4 6.6

Source: Company, Kotak Institutional Equities estimates

KOTAK INSTITUTIONAL EQUITIES RESEARCH 5

.dot SELL Jindal Steel and Power (JSP)

Metals JULY 30, 2009 RESULT, CHANGE IN RECO. Coverage view: Neutral

Power storm. JSP reported 1QFY09 consolidated net earnings at Rs9.9 bn up 116% Price (Rs): 3,119 yoy. Consolidated EBITDA at Rs15.97 bn was higher by 70% yoy. Earnings were largely Target price (Rs): 2,150 driven by the newly commissioned 1000 MW power plant which is now running at a BSE-30: 15,173 PLF of 96%. We revise our FY2010 and FY2011 consolidated EPS estimates higher from Rs172.4 and Rs196.2 to Rs247.1 and Rs236.4, respectively. We downgrade the stock from REDUCE to SELL on valuations.

Company data and valuation summary Jindal Steel and Power Stock data Forecasts/Valuations 2009 2010E 2011E 52-week range (Rs) (high,low)3,238-517 EPS (Rs) 198.0 247.1 236.4 Market Cap. (Rs bn) 480.1 EPS growth (%) 139.3 24.8 (4.3) QUICK NUMBERS Shareholding pattern (%) P/E (X) 15.8 12.6 13.2 Promoters 58.8 Sales (Rs bn) 108.5 119.5 122.1 • Cons. net earnings FIIs 18.6 Net profits (Rs bn) 30.5 38.0 36.4 up 116% yoy MFs 5.2 EBITDA (Rs bn) 51.7 62.7 61.4 Price performance (%) 1M 3M 12M EV/EBITDA (X) 10.3 8.2 7.9 • Power plant Absolute 25.2 91.3 50.0 ROE (%) 51.9 40.3 27.6 running at 96% PLF Rel. to BSE-30 22.0 43.8 36.4 Div. Yield (%) 0.2 0.2 0.2

Steel business—In line

Steel business net income at Rs3 bn was lower by 25.4% yoy and 16.4% qoq and above our estimates of Rs2.8 bn. EBITDA at Rs5.6 bn was lower by 20.8% yoy and higher by 29.% yoy and higher than our estimates of Rs5 bn. During the quarter, steel products reported increase in sales volumes of 29.9%. We have left our FY2010 and FY2011 steel business earnings estimates unchanged.

Running at full steam

Jindal Power Limited (JPL), a 100% subsidiary of Jindal Steel and Power, reported turnover of Rs12.1 bn and PAT of Rs7 bn during 1QFY10 compared to turnover of Rs2.9 bn and PAT of Rs0.4 bn during 1QFY09 as the 1,000 MW power project is running at full steam now. JPL achieved a PLF of 96% during 1QFY10 implying a tariff realization of ~Rs6/unit and PAT of Rs3.6/unit. JPL has improved upon its PAT of Rs6.5 bn during 4QFY09, in which the 1,000 MW power project became fully operational. Revising estimates to factor in details available

We have revised our earnings estimates to factor in higher utilization rate and higher merchant tariffs in the near term. Our net profit estimates for JPL have been revised to Rs27.4 bn (Rs15.9 bn previously) and Rs22.9 bn (Rs16.7 bn previously) for FY2010E and FY2011E, respectively. We have revised our earnings model for JPL based on the detailed cost structure implied from the consolidated financials reported by JSPL for 1QFY10. JSPL has published the detailed consolidated results for the first time along with the standalone results. We highlight the key assumptions changed in our model: (1) PLF increased to 92% from 85% previously as the plant has stabilized and operated at a PLF of 96% during 1QFY10; (2) we assume 1,000 MW power is being sold on merchant basis as against the assumption of 800 MW being sold on a merchant basis and 200 MW being sold to CSEB /Industrial estate; (3) a merchant tariff assumption of Rs6/unit for FY2010E compared to Rs5/unit previously; and (4) we maintain average merchant realization of Rs5/unit for FY2011-13E and Rs3/unit after FY2013E.

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

Jindal Steel and Power Metals

Power business valued at Rs1,320/share

We value the power business of JSPL at Rs1,320/share (Rs1,170/share previously) comprising (1) Rs955/share (Rs805/share previously) for the 1,000 MW operating power plant on DCF-equity (implied Price/invested book of 16X and P/E of 6.4X on FY2011E); (2) Rs130/share as the DCF-equity value of sale of 30% surplus power from the 1,350 MW captive power projects (CPPs) currently under construction and (3) Rs234/share for the 2,400 MW power project being implemented at Raigarh (at P/B of 2X implying 1X value enhancement). Higher surplus available from CPPs being developed could provide an upside to our earnings and valuation.

Raise target price and estimates, downgrade to SELL

Following increase in our valuation for the subsidiary power business by Rs150/share we raise our target price to Rs2,150 (Rs2,000 earlier). We have raised our consolidated FY2010 and FY2011 EPS estimates from Rs172.4 and Rs196.2 to Rs247 and Rs236, respectively. However, we believe that the current stock price factors the revised earnings and downgrade the stock to SELL from REDUCE earlier on valuations.

Interim results of Jindal Steel & Power (standalone), March fiscal year-ends (Rs mn)

(% chg.) 1QFY10 1QFY10E 1QFY09 4QFY09 1QFY10E 1QFY09 4QFY09 Net sales 15,761 18,311 18,953 17,607 (13.9) (16.8) (10.5) Total expenditure (10,174) (13,300) (11,898) (13,300) (14.5) (23.5) Inc/(Dec) in stock (146) - 1,203 129 (112.2) (213.1) Raw materials (4,738) - (5,518) (9,021) (14.2) (47.5) Stores and spares consumed (1,827) - (1,884) (2,224) (3.1) (17.9) Power & Fuel (1,514) - (1,349) (1,224) 12.2 23.7 Staff cost (486) - (387) (462) 25.5 5.2 Other expenditure (1,464) - (3,961) (499) (63.0) 193.6 EBITDA 5,587 5,011 7,056 4,307 11.5 (20.8) 29.7 OPM (%) 35.4 27.4 37.2 24.5 Other income 165 150 74 1,135 10.0 122.1 (85.5) Interest (328) (344) (475) (259) (4.8) (31.0) 26.5 Depreciation (1,229) (1,087) (1,057) (1,087) 13.0 16.3 13.0 Pretax profits 4,196 3,730 5,598 4,095 12.5 (25.1) 2.4 Extraordinaries - - - - Tax (1,195) (932) (1,575) (505) 28.2 (24.1) 136.6 Net income 3,000 2,797 4,023 3,590 7.3 (25.4) (16.4) Income tax rate (%) 28.5 25.0 28.1 12.3

Ratios EBITDA margin (%) 35.4 27.4 37.2 24.5 ETR (%) 28.5 25.0 28.1 12.3 EPS (Rs) 19.5 18.2 26.1 23.3

Segmental revenue Iron & Steel 15,068 - 18,361 17,803 (17.9) (15.4) Power 2,437 - 1,557 2,895 56.5 (15.8) Others 101 - 115 159 (12.5) (36.6) Segmental PBIT Iron & Steel 3,739 - 6,884 257 (45.7) 1,357.2 Power 1,157 - 699 2,412 65.5 (52.0) Others 24 - 12 24 95.9 0.8 Segmental PBIT (%) Iron & Steel 24.8 - 37.5 1.4 Power 47.5 - 44.9 83.3 Others 23.8 - 10.6 14.9

Source: Kotak Institutional Equities

KOTAK INSTITUTIONAL EQUITIES RESEARCH 7 Metals Jindal Steel and Power

Interim results of Jindal Steel & Power (consolidated), March fiscal year-ends (Rs mn)

(% chg.) 1QFY10 1QFY09 1QFY09 Net sales 27,486 21,705 26.6 Total expenditure (11,512) (12,281) (6.3) Inc/(Dec) in stock (146) 1,203 (112.2) Raw materials (4,738) (5,518) (14.2) Stores and spares consumed (1,835) (1,901) (3.5) Power & Fuel (2,086) (1,454) 43.5 Staff cost (598) (428) 39.6 Other expenditure (2,110) (4,182) (49.6) EBITDA 15,973 9,424 69.5 OPM (%) 58.1 43.4 Other income 377 99 281.5 Interest (1,188) (998) 19.1 Depreciation (2,411) (2,460) (2.0) Pretax profits 12,752 6,065 110.3 Extraordinaries - - Tax (2,867) (1,628) 76.1 Net income 9,885 4,437 122.8 Share of profit from associates 67 161 Minority Interest (6) (0) PAT 9,946 4,597

Ratios EBITDA margin (%) 58.1 43.4 ETR (%) 22.5 26.8 EPS (Rs) 64.2 28.8

Segmental revenue Iron & Steel 15,068 18,361 (17.9) Power 14,161 4,309 228.6 Others 100 115 (12.6) Segmental PBIT Iron & Steel 3,739 6,884 (45.7) Power 10,596 1,686 528.4 Others 24 15 61.5 Segmental PBIT (%) Iron & Steel 24.8 37.5 Power 74.8 39.1 Others 23.8 12.9

Source: Kotak Institutional Equities

8 KOTAK INSTITUTIONAL EQUITIES RESEARCH Jindal Steel and Power Metals

Jindal Steel and Power, SOTP-based valuation, March 2011E (Rs mn)

EBITDA Multiple Enterprise value (Rs mn) (X) (Rs mn) (Rs/share) Comments Steel business 124,943 812 Steel business (extant business) 29,108 6.0 174,648 1,134 Less: Net debt of steel business 49,705 323 FY2011E net debt, adjusted for cash Power business 202,866 1,318 1-yr forward DCF-to-equity basis, including 800 MW 954 Jindal Power (100% subsidiary) -1000 MW sale on merchant basis Incremental 2,400 MW 234 Valued at P/B of 2X (value enhancement of 1X)

Sale of surplus power (~30%) from 1,350 MW Valued at P/B of ~4X (value enhancement of 3X) under construction at Raigarh and Angul 130 Arrived market capitalization 2,129

Target price (Rs/share) 2,130

Source: Kotak Institutional Equities

Jindal Steel and Power, Key assumptions, March fiscal year-ends, 2007-11E

2007 2008 2009E 2010E 2011E Sales volume (tons) Sponge iron 698,907 405,446 170,000 470,000 260,000 Mild Steel 753,725 1,126,527 1,900,000 1,900,000 2,200,000 Hot metal/pig iron 128,982 347,261 27,781 2,222 178 Plate - 178,816 600,000 800,000 900,000 Sales realization (Rs/ton) Sponge iron 11,368 14,237 15,237 13,237 13,987 Mild Steel 26,205 30,326 30,826 26,326 26,826 Hot metal/pig iron 16,976 19,427 19,927 15,427 16,427 Plate - 31,814 32,314 27,314 29,814

Average realisation (Rs/ton) 24,783 29,793 32,435 26,478 28,348 Average realisaiton (US$/ton) 550 701 705 552 594

Source: Kotak Institutional Equities

KOTAK INSTITUTIONAL EQUITIES RESEARCH 9 Metals Jindal Steel and Power

Jindal Steel & Power (standalone), Profit model, balance sheet and cash flow model, March fiscal year-ends, 2007-2011E (Rs mn) 2007 2008 2009E 2010E 2011E Profit model (Rs mn) Net sales 35,198 54,108 76,532 74,755 84,777 EBITDA 13,955 22,788 24,927 22,826 29,108 Other income 290 491 1,462 400 400 Interest (1,503) (2,086) (2,040) (2,843) (3,757) Depreciaiton (3,365) (4,515) (4,330) (6,553) (8,021) Profit before tax 9,448 18,332 20,020 13,829 17,730 Current tax (1,071) (1,859) (3,003) (2,074) (2,659) Deferred tax (1,348) (796) (1,651) (1,521) (1,950) Net profit 7,030 15,677 15,366 10,234 13,120 Earnings per share (Rs) 46.0 71.5 99.8 66.5 85.2

Balance sheet (Rs mn) Equity 24,784 37,253 51,627 60,871 73,000 Deferred tax liability 4,150 4,947 6,598 8,119 10,069 Total Borrowings 35,077 38,634 48,634 58,634 60,634 Current liabilities 11,804 16,208 25,609 25,247 27,289 Total liabilities 75,998 97,352 132,779 153,181 171,303 Net fixed assets 50,851 53,963 75,298 102,977 112,761 Investments 7,098 10,362 10,362 10,362 10,362 Cash 530 5,779 11,617 4,826 10,423 Other current assets 17,487 27,217 35,470 34,984 37,726 Miscellaneous expenditure 32 31 31 31 31 Total assets 75,998 97,352 132,779 153,181 171,303

Free cash flow (Rs mn) Operating cash flow excl. working capital 12,067 18,118 21,347 18,309 23,092 Working capital changes (497) (4,000) 1,147 124 (699) Capital expenditure (15,208) (9,298) (25,666) (34,232) (17,805) Free cash flow (3,638) 4,820 (3,172) (15,800) 4,588

Ratios Debt/equity 1.2 0.9 0.8 0.8 0.7 Net debt/equity 1.2 0.8 0.6 0.8 0.6 RoAE (%) 27.9 43.8 30.4 16.0 17.2 RoACE (%) 14.4 24.0 18.0 10.5 11.7

Source: Kotak Institutional Equities

Jindal Power Limited , Income statement March fiscal-year ends, 2009-13E (Rs mn)

2009 2010E 2011E 2012E 2013E Net revenues 32,575 44,729 37,274 37,274 37,274 Variable costs (3,567) (3,674) (3,784) (3,898) O&M expenses (1,248) (1,298) (1,350) (1,404) Operating profit 39,914 32,302 32,140 31,972 Other income 1,530 2,786 3,888 4,992 Interest (3,578) (3,290) (3,002) (2,715) Depreciation (4,816) (4,238) (3,730) (3,282) Profit before tax 33,049 27,559 29,296 30,967 Tax (5,617) (4,684) (4,979) (5,263) Deferred tax (29) (9) 7 18 Profit after tax 15,891 27,404 22,867 24,324 25,723

Source: Kotak Institutional Equities

10 KOTAK INSTITUTIONAL EQUITIES RESEARCH Jindal Steel and Power Metals

Jindal Steel & Power (consolidated), Profit model, balance sheet and cash flow model, March fiscal year-ends, 2007-2011E (Rs mn)

2007 2008 2009E 2010E 2011E Profit model (Rs mn) Net sales 35,198 54,890 108,510 119,483 122,050 EBITDA 13,989 22,032 51,695 62,739 61,410 Other income 290 498 624 1,930 3,186 Interest (1,504) (2,545) (4,567) (6,421) (7,047) Depreciaiton (3,366) (4,793) (9,641) (11,370) (12,259) Profit before tax 9,409 15,193 38,111 46,879 45,289 Taxes (2,419) (2,681) (8,040) (9,242) (9,302) Net profit 6,991 12,512 30,072 37,637 35,987 Share in profit/(loss) of associates 62 225 396 396 396 Minority interest 7 4 10 10 10 Profit after tax and minority interest 7,060 12,740 30,478 38,043 36,393 Earnings per share (Rs) 45.8 82.7 198.0 247.1 236.4

Balance sheet (Rs mn) Equity 25,591 38,558 68,017 104,653 139,639 Deferred tax liability 4,150 4,947 7,463 9,013 10,973 Total Borrowings 54,360 69,961 81,634 88,884 88,134 Current liabilities 16,009 19,584 25,609 25,247 27,289 Minority interest 54 62 66 76 87 Total liabilities 100,164 133,112 182,788 227,873 266,121 Net fixed assets 79,058 94,637 115,433 138,295 143,841 Goodwill 57 247 247 247 247 Investments 1,087 2,709 1,362 1,362 1,362 Cash 986 6,207 27,943 50,613 80,566 Other current assets 18,942 28,344 37,772 37,324 40,074 Miscellaneous expenditure 32 969 31 31 31 Total assets 100,164 133,112 182,788 227,873 266,121

Free cash flow (Rs mn) Operating cash flow excl. working capital 11,995 18,604 42,752 50,557 50,205 Working capital changes 2,876 (5,137) (3,404) 86 (707) Capital expenditure (35,885) (20,371) (29,663) (34,232) (17,805) Free cash flow (21,014) (6,904) 9,685 16,411 31,693

Ratios Debt/equity 1.8 1.7 1.1 0.8 0.6 Net debt/equity 1.8 1.4 0.7 0.3 0.0 RoAE (%) 23.8 35.4 51.9 40.3 27.6 RoACE (%) 9.7 15.1 25.3 24.0 19.0

Source: Kotak Institutional Equities

KOTAK INSTITUTIONAL EQUITIES RESEARCH 11

.dot REDUCE Cairn India (CAIR)

Energy JULY 30, 2009 RESULT Coverage view: Cautious

The real story starts now. Cairn India reported 1QFY10 EBITDA at Rs1.3 bn (+66% Price (Rs): 235 qoq and -51% yoy) versus our estimate of Rs1.4 bn. Production from Cairn’s Rajasthan Target price (Rs): 225 block is expected to commence from August 2009 and the pricing has been finalized BSE-30: 15,173 with a discount of 10-15% to Dated Brent. However, we find the valuations expensive with the stock discounting US$76/bbl in perpetuity. We maintain REDUCE rating with 12-month DCF-based target price of Rs225.

Company data and valuation summary Cairn India Stock data Forecasts/Valuations 2009 2010E 2011E 52-week range (Rs) (high,low)274-88 EPS (Rs) 4.3 8.8 30.8 Market Cap. (Rs bn) 445.2 EPS growth (%) (3,703.1) 104.9 249.9 QUICK NUMBERS Shareholding pattern (%) P/E (X) 54.7 26.7 7.6 Promoters 64.7 Sales (Rs bn) 22.0 44.6 101.6 • 1QFY10 net income FIIs 8.8 Net profits (Rs bn) 1.6 18.3 58.4 declined 67% yoy MFs 1.7 EBITDA (Rs bn) 12.2 34.2 86.4 Price performance (%) 1M 3M 12M EV/EBITDA (X) 38.5 13.4 5.3 • Stock discounting Absolute 0.9 26.4 (0.2) ROE (%) 2.5 4.9 16.2 US$76/bbl in Rel. to BSE-30 (1.7) (5.0) (9.3) Div. Yield (%) 0.0 0.0 8.5 perpetuity

Key to stock price is valuation of Rajasthan block and related issues • Pricing for Rajasthan block We note that the current results are not material and we would focus more on issues pertaining to corresponds to 10- production of crude from Cairn’s Rajasthan block where the bulk of Cairn’s valuation resides. The 15% discount to development in Rajasthan is on track with the first train (30,000 b/d) complete and ready to start Dated Brent production from August 2009. The pricing of crude for Cairn’s Rajasthan block has also been finalized; the price is benchmarked to Bonny Light and the discount computation corresponds to 10-15% discount to Dated Brent, which is in line with our expectations. However, cess and local taxation issues remain to be resolved.

Stronger 1QFY10 results qoq due to higher realizations

Cairn India reported 1QFY10 consolidated net revenues at Rs2 bn (+12.8% qoq and -49.2 %yoy) and EBITDA at Rs1.3 bn (+66% qoq and -51% yoy) versus our estimate of Rs1.4 bn. The qoq increase in EBITDA was due to (1) significantly higher crude price realization at US$60.2/bbl (US$47/bbl in 5QFY09) and (2) moderately higher production at 15,917 boe/d (+1% qoq). Maintain REDUCE with 12-month DCF-based target price of Rs225

We maintain our REDUCE rating on the stock with a 12-month DCF based target price of Rs225

(see Exhibit 1). We highlight that the current stock price is discounting US$76/bbl in perpetuity based on gross production of 1.15 bn bbls from the Rajasthan block and long-term exchange rate of Rs47/US$. We do not see meaningful upside to the stock without (1) announcement of new discoveries and/or (2) upgrade of reserves. Also, we see potential downside risks to our fair valuation in case of unfavorable developments on pricing, cess and local taxation.

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

Cairn India Energy

We value Cairn India stock at Rs225 EV and equity value of Cairn (US$ mn)

Now + 1-year + 2-years RJ-ON-90/1 8,573 9,348 9,328 CB-OS-2 67 46 29 Ravva 293 247 204 Upside potential (KG-DWN-98/2) 100 112 125 Total 9,032 9,752 9,687 Net debt 595 267 342 Equity value 8,438 9,485 9,345 Equity shares (mn) 1,897 1,897 1,897 Equity value per share (Rs/share) 184 223 237

Source: Kotak Institutional Equities estimates

Update on key pertinent issues

Commencement of production. Cairn management stated that the first train with a production capacity of 30,000 b/d is complete with the start of production from the fields in August 2009. The subsequent second, third and fourth trains with capacities of 50,000 b/d, 50,000 b/d and 75,000 b/d will start in 4QCY09, 1HCY10 and CY2011 with transportation of crude by a pipeline.

Cess. In a recent development, Cairn has decided to pay cess at the prevailing rates on its share of production and then go to the appropriate dispute resolution mechanism. We believe that the company has taken this stand to avoid delays in commencement of production. Nonetheless, we see significant downside risk from the cess issue. We currently assume that Cairn will not bear any cess on the portion of crude oil (70%) produced by it from the Rajasthan block. Our 12-month fair value of Cairn stock drops by Rs11/share if we assume that Cairn will have to bear cess at Rs927/ton and it drops by Rs31/share if we assume cess at Rs2,575/ton (Exhibit 2).

Cairn's fair valuation has moderate leverage to crude prices Enterprise value sensitivity of Cairn to key variables (US$ bn)

Sensitivity of current valuation Sensitivity of +1-year valuation Enterprise value Equity value Change from base case Enterprise value Equity value Change from base case (US$ bn) (Rs/share) (%) (US$ bn) (Rs/share) (%) Average crude prices (2013 and beyond) Dated Brent price (US$100/bbl) 10.9 236 28 11.8 281 26 Dated Brent price (US$90/bbl) 10.1 217 18 10.9 260 17 Dated Brent price (US$80/bbl) 9.0 193 5 9.8 233 4 Dated Brent price (US$75/bbl) 8.6 184 9.3 223 Dated Brent price (US$60/bbl) 6.9 146 (20) 7.6 181 (19) Dated Brent price (US$50/bbl) 6.0 127 (31) 6.7 160 (28) Dated Brent price (US$40/bbl) 4.9 103 (44) 5.5 132 (41) Dated Brent price (US$30/bbl) 3.7 75 (59) 4.3 101 (55)

Cess, royalty Royalty (Rs0/ton), Cess (Rs0/ton) 8.6 184 9.3 223 Royalty (Rs0/ton), Cess (Rs927/ton) 8.1 174 (5) 8.9 212 (5) Royalty (Rs0/ton), Cess (Rs2,575/ton) 7.3 156 (15) 8.1 192 (14)

Source: Kotak Institutional Equities estimates

Pricing of crude. The company has concluded the pricing negotiations with IOCL and MRPL. The crude from Rajasthan block will be benchmarked to Bonny Light with a discount of 10-15% to Dated Brent. This is in line with our current assumption of US$8/bbl discount to dated Brent. However, we highlight pending issues of Rajasthan government’s proposals to (1) impose VAT on crude oil and (2) levy a land tax or surface rent on oil companies operating in the state.

KOTAK INSTITUTIONAL EQUITIES RESEARCH 13 Energy Cairn India

Details of 1QFY10 results

In-line EBITDA; increase in revenues qoq due to higher crude realization. Cairn India reported consolidated net revenues for the quarter ended June 30, 2009 at Rs2 bn (+13% qoq and -49% yoy) and EBITDA at Rs1.3 bn (+66% qoq and -51% yoy). The qoq increase in EBITDA reflects (1) higher crude price realization at US$60.2/bbl (US$47/bbl in 5QFY09), (2) higher production at 15,917 boe/d (+1% qoq) and (3) lower other expenditure at Rs228 mn (-50% qoq). Revenues, EBITDA and net income all declined sharply yoy due to sharply lower crude oil price realization, US$60.2/bbl in 1QFY10 versus US$125.9/bbl in 2QCY08. Other highlights of 1QFY10 results are below.

` Production. Cairn’s 1QFY10 production was at 15,917 boe/d (working interest-basis) versus 15,811 boe/d in 5QFY09. At CB-OS-2, gas production declined 9% qoq but oil production increased 25% qoq. Gas production has declined significantly due to the declining phase of the fields past plateau production. At Ravva, oil production declined by 4% qoq and gas production declined by 11% qoq.

` Taxation. Cairn has not given effect to the taxation amendments announced in the Union Budget FY2010. These include (1) change in definition of the term ’undertaking’ u/s 80 IB (9) (-ve impact of Rs0.2 bn), (2) non-availability of tax holiday on production of natural gas (-ve impact of Rs2.2 bn) and (3) removal of fringe benefit tax (+ve impact of Rs0.2 bn)

` Foreign exchange gain. Cairn accounted for a net forex charge of Rs718 mn which includes (1) cost arising on account of options settled or marked-to-market as on June 30th, 2009 and (2) translation gain on US Dollar-denominated deposits held by foreign subsidiaries for use for future capital imports due to depreciation in the rupee versus the US Dollar in 1QFY10.

` Extraordinary item. The company provided for Rs1.6 bn of extraordinary provision for the ongoing dispute relating to ‘ONGC carry’ issue for calculation of government’s share of profit petroleum produced from Ravva oil field. We highlight that the company has provided a contingent liability of Rs4.8 bn in its FY2009 annual report in case of any unfavorable development on this issue.

14 KOTAK INSTITUTIONAL EQUITIES RESEARCH Cairn India Energy

Interim results of Cairn India (Rs mn)

(% chg) 1QFY10 1QFY10E 2QCY08 4QFY09 1QFY10E 2QCY08 4QFY09 Income from operations 2,050 2,571 4,036 1,818 (20.3) (49.2) 12.8 Total expenditure (728) (1,175) (1,315) (1,024) (38.0) (44.6) (28.9) Inc/(Dec) in stock 155 (180) (40) Operating expenses (440) (450) (501) (356) (2.2) (12.2) 23.7 Staff cost (215) (275) (292) (170) (21.7) (26.3) 26.3 Government taxes/share of profit — ——— Other expenditure (228) (450) (341) (458) (49.3) (33.2) (50.2) EBITDA 1,321 1,396 2,721 794 (5.3) (51.5) 66.4 Other income 1,290 475 325 862 171.5 296.8 49.6 Interest (7) (25) (29) (21) (70.8) (74.6) (65.7) Exploration costs written off (309) (400) (428) (627) (22.8) (27.8) (50.7) DD&A (413) (650) (647) (443) (36.4) (36.1) (6.7) Pretax profits 1,882 796 1,943 565 136.4 (3.2) 233.0 Extraordinaries/sales tax benefit (1,637) — 253 — Tax (208) (270) (342) (638) (23.0) (39.1) (67.3) Deferred taxation 418 — (468) 259 Net income 454 525 1,386 187 (13.5) (67.2) 143.3 Minority interest — ——— Net income after minority interest 454 525 1,386 187 (13.5) (67.2) 143.3 Income tax rate (%) (85.9) 34.0 36.9 66.9

Production, selling price data Production volume, gross ('000 boepd) 59.5 71.1 60.2 (16.3) (1.3) Production volume, net ('000 boepd) 15.9 18.8 15.8 (15.2) 0.7 CB-OS-2 5.8 6.3 5.2 (8.4) 12.3 Oil 4.0 3.0 3.2 31.1 24.7 Gas (mn cf/d) 10.9 19.8 12.0 (44.7) (8.8) Ravva 10.1 12.4 10.6 (18.6) (5.0) Oil 8.2 9.7 8.6 (15.1) (3.9) Gas (mn cf/d) 11.3 16.5 12.7 (31.2) (10.9) Selling price, oil (US$/bbl) 60.2 125.9 47.0 (52.2) 28.1 Selling price, gas (US$/mcf) 4.0 4.3 4.0 (7.0) (0.5) Exchange rate (Rs/US$) 48.7 41.6 49.1 17.0 (0.8)

Source: Company, Kotak Institutional Equities estimates

Earnings revision

We have fine-tuned our FY2010E, FY2011E and FY2012E EPS to Rs8.8, Rs30.8 and Rs34.7 from Rs9.2, Rs31.2 and Rs35.6 to reflect (1) FY2009 annual report details, (2) higher MAT rate at 17% and (3) other minor changes. We retain our crude price assumptions of US$60/bbl for FY2010E, US$65/bbl for FY2011E and US$70/bbl for FY2012E. We also retain our long-term crude assumption of US$75/bbl.

KOTAK INSTITUTIONAL EQUITIES RESEARCH 15 Energy Cairn India

Cairn's earnings are highly leveraged to crude prices Earnings sensitivity of Cairn to key variables

2010E 2011E 2012E Downside Base case Upside Downside Base case Upside Downside Base case Upside Average crude prices Crude price (US$/bbl) 58.0 60.0 62.0 63.0 65.0 67.0 68.0 70.0 72.0 Net profits (Rs mn) 15,597 16,692 17,787 55,733 58,408 61,083 63,989 65,781 67,574 Earnings per share (Rs) 8.2 8.8 9.4 29.4 30.8 32.2 33.7 34.7 35.6 % upside/(downside) (6.6) 6.6 (4.6) 4.6 (2.7) 2.7

Exchange rate Rs/US$ 47.0 48.0 49.0 46.8 47.8 48.8 46.5 47.5 48.5 Net profits (Rs mn) 16,111 16,692 17,272 56,878 58,408 59,938 64,374 65,781 67,189 Earnings per share (Rs) 8.5 8.8 9.1 30.0 30.8 31.6 33.9 34.7 35.4 % upside/(downside) (3.5) 3.5 (2.6) 2.6 (2.1) 2.1

Source: Kotak Institutional Equities estimates

Crude price discounted at various levels of stock price of Cairn

Stock price Crude price discounted (Rs/share) (US$/bbl) 275 87 260 83 245 79 230 75 215 70 200 67 185 63 170 58

Note: (1) Crude price discounted from FY2010E in perpetuity. (2) Long-term exchange rate assumption (FY2013E onwards) is Rs47/US$. (3) Exchange-rate assumtions for FY2010-12E are Rs48/US$, Rs47.8/US$ and Rs47.5/US$.

Source: Company, Kotak Institutional Equities estimates

16 KOTAK INSTITUTIONAL EQUITIES RESEARCH Cairn India Energy

Profit model, balance sheet, cash model of Cairn, calendar year-ends 2006-07, March fiscal year-ends 2009-14E (Rs mn)

2006 2007 2009 (a) 2010E 2011E 2012E 2013E 2014E Profit model (Rs mn) Net sales 18,417 16,561 25,156 44,604 101,560 125,936 168,337 164,340 EBITDA 7,435 6,705 8,663 31,819 86,339 97,052 116,010 99,571 Other income 1,100 1,324 5,945 2,367 81 100 120 333 Interest (201) (27) (64) (892) (1,650) (2,525) (2,100) (525) Depreciation (497) (4,589) (4,382) (7,205) (9,725) (11,480) (13,281) (13,161) Pretax profits 7,837 3,413 10,162 26,089 75,045 83,147 100,749 86,218 Extraordinary items — (2,120) (283) (1,637) — — — — Tax (2,273) (740) (1,221) (6,233) (15,284) (16,691) (19,656) (16,817) Deferred taxation (22) (764) (623) (1,527) (1,353) (675) (146) 191 Net profits 5,543 (212) 8,035 16,692 58,408 65,781 80,947 69,592 Earnings per share (Rs) 3.1 (0.1) 4.3 8.8 30.8 34.7 42.7 36.7

Balance sheet (Rs mn) Total equity 292,804 294,358 328,023 344,715 358,743 369,049 381,731 392,634 Deferred tax liability 4,258 4,916 5,540 7,067 8,420 9,095 9,242 9,051 Total borrowings 5,122 3,124 43,564 14,000 19,000 31,500 10,500 — Currrent liabilities 39,716 8,372 16,132 1,674 2,069 4,132 7,667 9,545 Total liabilities and equity 341,900 310,771 393,259 367,456 388,232 413,776 409,140 411,230 Cash 61,348 1,504 18,968 2,083 2,580 3,147 3,717 15,341 Current assets 6,470 19,029 53,712 4,277 9,739 12,076 16,142 15,759 Total fixed assets 17,609 25,157 62,660 76,828 28,962 25,969 22,872 19,837 Net producing properties 2,354 4,390 3,014 29,363 92,045 117,679 111,504 105,388 Investments 4 7,129 1,713 1,713 1,713 1,713 1,713 1,713 Goodwill 254,115 253,193 253,193 253,193 253,193 253,193 253,193 253,193 Deferred expenditure — 370 — — — — — — Total assets 341,900 310,771 393,259 367,456 388,232 413,776 409,140 411,230

Free cash flow (Rs mn) Operating cash flow, excl. working capital 4,598 6,387 8,213 20,015 67,255 76,386 92,804 80,779 Working capital changes 34,256 (908) 1,213 34,977 (5,067) (274) (531) 2,261 Capital expenditure (5,619) (11,739) (31,613) (44,680) (22,392) (32,670) (2,560) (2,560) Investments/Goodwill (252,717) (53,863) 25,062— — — — — — Other income 1,100 1,298 1,518 2,367 81 100 120 333 Free cash flow (218,382) (58,824) (45,730) 12,679 39,878 43,542 89,834 80,814

Key assumptions Gross production ('000 boe/d) 91.0 75.4 68.1 107.8 179.9 197.8 236.7 228.4 Net production ('000 boe/d) 25.1 19.4 17.8 49.3 102.5 117.4 146.6 143.0 Dated Brent (US$/bbl) 65.3 70.3 87.4 60.0 65.0 70.0 75.0 75.0 Discount of Rajasthan crude to Dated Brent (US$/bbl) 2.1 5.3 8.1 8.0 8.0 8.0 8.0 8.0

Note: (a) 15 months period starting from January 1, 2008 to March 31, 2009

Source: Company, Kotak Institutional Equities estimates

KOTAK INSTITUTIONAL EQUITIES RESEARCH 17

.dot BUY Tata Steel (TATA)

Metals JULY 30, 2009 RESULT Coverage view: Neutral

Results below expectations. Tata Steel reported standalone 1QFY09 net income at Price (Rs): 442 Rs7.9 bn, lower by 53% yoy and flat qoq and below our estimates of Rs11.7 bn. Target price (Rs): 465 EBITDA at Rs17.4 bn was lower by 42% yoy and higher by 20% qoq and below our BSE-30: 15,173 estimate of Rs21.6 bn. Production and sales volumes were lower by 6% and 19%, respectively, on a qoq basis despite the full ramp-up of the new blast furnace. We maintain our estimates and reiterate our BUY rating.

Company data and valuation summary Tata Steel Stock data Forecasts/Valuations 2009 2010E 2011E 52-week range (Rs) (high,low)700-138 EPS (Rs) 110.0 41.2 78.8 Market Cap. (Rs bn) 392.5 EPS growth (%) 45.3 (62.6) 91.6 QUICK NUMBERS Shareholding pattern (%) P/E (X) 4.0 10.7 5.6 Promoters 34.0 Sales (Rs bn) 1,473.3 966.7 1,013.1 • Net income drops FIIs 13.2 Net profits (Rs bn) 90.5 36.5 70.0 53% yoy MFs 5.0 EBITDA (Rs bn) 181.3 115.1 149.4 Price performance (%) 1M 3M 12M EV/EBITDA (X) 5.0 8.0 6.0 • Sales volumes lower Absolute 13.2 85.8 (29.8) ROE (%) 36.3 15.5 25.7 by 19% qoq Rel. to BSE-30 10.3 39.6 (36.2) Div. Yield (%) 3.3 3.6 3.6

Steel business: Volumes drop

Tata Steel reported 1QFY09 standalone net earnings at Rs7.9 bn which were lower by 53% yoy and 1% qoq. EBITDA at Rs17.4 bn was lower by 42% qoq and higher by 20% yoy. Net sales at Rs56.2 bn were lower by 9% yoy and 14% qoq. EBITDA margins for the quarter stood at 31% compared to 49.1% yoy and 22.3% qoq. Sales volumes at 1.42 mn tons were higher by 30% yoy and down by 6% qoq were below our estimates of 1.6 mn. Steel realizations during the quarter were in line with expectations at Rs36,700, though lower by 20% yoy and higher by 7% qoq.

Ferro Alloys and others: Weakness sustains

Ferro alloys and other business reported net sales of Rs6.98 bn which was lower by 44% yoy and 7% qoq. PBIT at Rs 407 mn for the business was lower by 92% yoy, however, rose sharply by 192% on qoq basis. PBIT margins stood at 5.8% compared to 41.1% yoy.

Maintain earnings and target price

We maintain our FY2010 and FY2011 EPS estimates at Rs43.7 and Rs78.2, respectively. We reiterate our BUY rating with a target price of Rs465. More details would be available post the management conference call scheduled for tomorrow. Tata Steel would report consolidated earnings by the end of next month.

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

Tata Steel Metals

Interim results of Tata Steel (standalone), March fiscal year-ends (Rs mn)

(% chg.) 1QFY10 1QFY10E 1QFY09 4QFY09 1QFY10E 1QFY09 4QFY09 Net sales 56,156 59,408 61,650 64,979 (5.5) (8.9) (13.6) Expenditure (38,733) (37,776) (31,405) (50,500) 2.5 23.3 (23.3) Consumption of RM (16,056) — (9,530) (26,403) 68.5 (39.2) Staff Cost (5,062) — (4,719) (6,666) 7.3 (24.1) Other Expenditure (17,615) — (17,155) (17,431) 2.7 1.1 EBITDA 17,422 21,632 30,246 14,479 (19.5) (42.4) 20.3 OPM (%) 31.0 36.4 49.1 22.3 Other income 463 300 122 492 54.5 279.2 (5.8) Interest (3,422) (3,079) (2,417) (3,079) 11.1 41.5 11.1 Depreciation (2,532) (2,565) (2,168) (2,565) (1.3) 16.8 (1.3) Pretax profits 11,932 16,288 25,783 9,327 (26.7) (53.7) 27.9 Extraordinaries — — (3,034) 7,756 Tax (4,034) (4,561) (7,865) (2,491) (11.5) (48.7) 62.0 Net income 7,898 11,727 14,884 14,593 (32.6) (46.9) (45.9) Income tax rate (%) 33.8 28.0 34.6 14.6

Ratios EBITDA margin (%) 31.0 36.4 49.1 22.3 ETR (%) 33.8 28.0 34.6 14.6 EPS (Rs) 9.6 14.3 20.5 9.7 Segment revenue Steel business 52,058 — 53,032 60,065 (2) (13) Others 6,987 — 12,533 7,500 (44) (7) Segment EBIT Steel business 15,795 — 23,615 13,198 (33) 20 Others 407 — 5,147 212 (92) 92 Margins Steel business 30.3 — 44.5 22.0 (31.9) 38.1 Others 5.8 — 41.1 2.8 (85.8) 106.1

Source: Company, Kotak Institutional Equities

Tata Steel, valuation, March fiscal year-ends, 2011E basis (Rs mn)

EBITDA Multiple Enterprise value EV (Rs mn) (X) (Rs mn) (Rs/share) Valuation basis Consolidated group EBITDA 149,397 6.0 896,383 1,010 Valued on FY2011E EBITDA Total Enterprise Value 896,383 1,010 Consolidated group net debt 485,907 FY2011E, adjusted for cash and marketable securities Total borrowings 485,907 548 Arrived market capitalization 410,476 463 Based on fully diluted equity Target price (Rs) 465

Source: Kotak Institutional Equities estimates

KOTAK INSTITUTIONAL EQUITIES RESEARCH 19 Metals Tata Steel

Tata Steel (consolidated), assumption sheet, March fiscal year-ends, 2007-11E

2007 2008 2009 2010E 2011E Tata Steel (India) Volume ('000 tons) 4,794 4,780 4,800 6,000 6,500 Price (US$/ton) 636 739 882 590 606 EBITDA margin (%) 39.7 41.8 37.6 32.9 33.1 EBITDA Per ton (US$/ton) 253 308 331 194 201

International operations Volume (mn tons) 21 22 20 14 15 Price (US$/ton) 727 957 1,155 778 675 EBITDA margin (%) 7.6 8.2 9.8 7.7 12.5 EBITDA Per ton (US$/ton) 56 78 114 60 84

Raw material Iron ore (US$/ton) 69 75 113 70 66 Coking coal (US$/ton) 120 96 280 120 114

Source: Company, Kotak Institutional Equities estimates

20 KOTAK INSTITUTIONAL EQUITIES RESEARCH Tata Steel Metals

Tata Steel (consolidated), Profit model, balance sheet and cash flow model, March fiscal year- ends, 2007-2011E (Rs mn)

2007 2008 2009E 2010E 2011E Profit model (Rs mn) Net sales 252,124 1,315,359 1,473,293 966,685 1,013,106 EBITDA 70,966 174,454 181,277 115,147 149,397 Other income 4,381 5,742 2,657 8,245 10,651 Interest (4,112) (41,838) (32,902) (38,835) (30,267) Depreciaiton (10,110) (41,370) (42,654) (43,745) (44,675) Extraordinaries 2,006 66,722 (40,945) 3,207 3,207 Profit before tax 63,130 163,711 67,432 44,018 88,313 Current tax (21,629) (33,747) (18,940) (9,074) (18,205) Deferred tax 155 (6,746) - (1,814) (3,639) PAT before minority interest 41,656 123,218 48,492 33,130 66,469 Minority interest (675) (1,399) 409 450 495 Share of profits from associates 792 1,682 607 668 735 Net Profit 41,773 123,500 49,509 34,249 67,699 Adjusted net profit 42,782 77,404 80,327 35,958 69,408 Fully diluted EPS (Rs) 52.0 94.2 97.7 40.5 78.2

Balance sheet (Rs mn) Equity 146,222 341,740 378,582 397,821 450,444 Deferred tax liability 7,859 24,544 24,544 26,358 29,997 Total Borrowings 249,255 535,928 635,928 575,928 530,928 Current liabilities 86,595 339,490 362,025 261,247 268,002 Minority interest 5,984 8,327 7,918 7,467 6,972 Total liabilities 495,916 1,250,029 1,408,996 1,268,820 1,286,343 Net fixed assets 142,205 419,631 469,806 486,061 496,386 Goodwill 2,197 180,500 180,500 180,500 180,500 Investments 164,975 33,674 33,674 33,674 33,674 Cash 108,880 42,316 137,416 51,464 33,903 Other current assets 75,562 572,351 586,043 515,565 540,323 Miscellaneous expenditure 2,098 1,556 1,556 1,556 1,556 Total assets 495,916 1,250,029 1,408,996 1,268,821 1,286,343

Free cash flow (Rs mn) Operating cash flow excl. working cap 52,489 153,978 121,391 109,280 134,399 Working capital changes 2,541 (19,777) 8,842 (28,029) (15,732) Capital expenditure (29,318) (79,935) (89,927) (60,000) (55,000) Free cash flow 25,712 54,266 40,307 21,251 63,667

Ratios Debt/equity (X) 1.7 2.9 2.9 2.4 1.8 Net debt/equity (X) 0.9 2.6 2.2 2.1 1.6 RoAE (%) 28.6 46.3 36.3 15.5 25.7 RoACE (%) 8.0 13.7 12.4 7.8 11.0

Source: Company, Kotak Institutional Equities estimates

KOTAK INSTITUTIONAL EQUITIES RESEARCH 21

.dot REDUCE Hero Honda (HH)

Automobiles JULY 30, 2009 RESULT Coverage view: Cautious

Quarter not good enough for 11X EV/EBITDA. Hero Honda reported slightly better- Price (Rs): 1,637 than-expected results for 1QFY10. EBITDA margins of 16.8% in the quarter were 80 Target price (Rs): 1,330 bps higher than expected led by lower raw material costs. PAT upside was driven by a BSE-30: 15,173 lower tax rate, which the company does not expect to sustain. We raise our EPS estimates by 5% to reflect higher volume growth. Our Rs1,330 target reflects peak multiples in the face of increasing competition, monsoon uncertainty and peak margins.

Company data and valuation summary Hero Honda Stock data Forecasts/Valuations 2009 2010E 2011E 52-week range (Rs) (high,low)1,780-661 EPS (Rs) 64.2 87.5 94.9 Market Cap. (Rs bn) 326.8 EPS growth (%) 32.5 36.3 8.5 QUICK NUMBERS Shareholding pattern (%) P/E (X) 25.5 18.7 17.2 Promoters 55.0 Sales (Rs bn) 123.2 144.2 157.8 • PAT of Rs5 bn, our FIIs 27.0 Net profits (Rs bn) 12.8 17.5 19.0 estimate Rs4.55 bn MFs 4.7 EBITDA (Rs bn) 17.1 22.9 24.2 Price performance (%) 1M 3M 12M EV/EBITDA (X) 17.1 12.3 11.0 • EBITDA of Rs6.39 Absolute 17.1 38.4 109.1 ROE (%) 36.6 38.7 32.6 bn, our estimate of Rel. to BSE-30 14.1 4.0 90.0 Div. Yield (%) 1.2 1.3 1.3 Rs6.1 bn

Marginally better-than-expected PAT led by lower tax rate and raw material benefit • Raising FY2010E and FY2011E EPS Hero Honda reported PAT of Rs5 bn compared to our estimate of Rs4.55 bn. The Rs450 mn upside estimates to Rs87.5 was driven by Rs240 mn in a lower tax rate with the remainder coming from lower raw material and Rs95 from Rs84 costs. Raw material as a percentage of sales declined close to 100 bps sequentially to 68% from and Rs91 69% in 4QFY09. The company reported EBITDA of Rs6.39 bn for a 16.8% margin compared to our estimate of Rs6.1 bn and 16% margin.

Raising FY2010E and FY2011E EPS estimates to Rs87.5 and Rs95, from Rs84 and Rs91

We raised our volume growth estimate for FY2010E to 14% from 10% prior and now expect the company to sell close to 4.25 mn units for the year. The company is maintaining its volume guidance of 4.1 mn units. While it’s not seeing any impact of poor monsoon at present, management seemed guarded on sales beyond the festival season. On the margin front, the company expects higher commodity costs to start impacting raw material costs in the 2HFY010E. We have modeled full year margins at 16% compared to the 16.8% recorded in the quarter. However, we expect 2QFY10E margins to remain at current levels. 1QFY10 tax rate of 23.4% was lower than we expected, but the company maintained its guidance of 25-26% tax rate for the year. Our FY2011E estimate of Rs95 is based on a 10% volume growth and a 50 bps decline in margins. We have modeled a tax rate of 24% for FY2011E.

Raising our target to Rs1,330 as we assign peak multiples of 8.5X EV/EBITDA

Our Rs1,330 target is based on a 14X FY2011E EPS of Rs95 and 8.5X EV/EBITDA multiple on FY2011E EBITDA of Rs24 bn. Margins seem to have peaked at 16.8% in the quarter. One would have to go back to FY2004 to see margins at similar levels. SG&A expenses were under 9% of sales compared to the 10% levels running currently. Competition in the motorcycle segment is heating up with Bajaj entering the executive segment with a 100cc bike, followed by Honda later in the year. Separately, a weaker rural economy driven by a poor monsoon could hurt sales growth later in the year.

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

Hero Honda Automobiles

Interim results of Hero Honda , March fiscal year-ends (Rs mn)

(% chg.) 1QFY10 1QFY10E 1QFY09 4QFY09 1QFY10E 1QFY09 4QFY09 Net sales 38,111 38,069 28,435 34,118 0.1 34.0 11.7 Total expenditure (31,723) (31,960) (25,025) (28,734) (0.7) 26.8 10.4 Inc/(Dec) in stock (124) 50 163 (86) (348.6) (176.5) 44.7 Raw materials (25,773) (26,460) (20,616) (23,479) (2.6) 25.0 9.8 Staff cost (1,385) (1,300) (1,039) (1,190) 6.6 33.3 16.5 Other expenditure (4,441) (4,250) (3,532) (3,980) 4.5 25.7 11.6 Other operating income 114 - 75 107 51.7 6.6 EBITDA 6,387 6,109 3,410 5,384 4.6 87.3 18.6 OPM (%) 16.8 16.0 12.0 15.8 Other income 425 500 392 442 (15.0) 8.3 (4.0 ) Interest 55 80 50 96 (31.8) 9.9 (43.3 ) Depreciation (456) (450) (422) (444) 1.3 8.0 2.8 Pretax profits 6,525 6,239 3,505 5,586 4.6 86.1 16.8 Extraordinaries — — — — Tax (1,524) (1,762) (777) (1,564) (13.5) 96.2 (2.6 ) Net income 5,001 4,555 2,729 4,022 9.8 83.3 24.4 Adjusted profits 5,001 4,555 2,729 4,022 9.8 83.3 24.4 Income tax rate (%) 23.4 27.0 22.2 28.0

Ratios RM to sales (%) 68.0 69.4 71.9 69.1 EBITDA margin (%) 16.8 16.0 12.0 15.8 Net profit margin (%) 13.1 12.0 9.6 11.8 ETR (%) 23.4 27.0 22.2 28.0 EPS (Rs) 25.0 22.8 13.7 20.1 Other details Sales volumes (# vehicles) 1,118,987 1,118,987 894,244 997,855 - 25.1 12.1 Net sales realisation (Rs/vehicle) 34,058 34,021 31,798 34,192 0.1 7.1 (0.4)

Source: Company, Kotak Institutional Equities estimates

KOTAK INSTITUTIONAL EQUITIES RESEARCH 23 Automobiles Hero Honda

Hero Honda, Volume details, March fiscal year-ends, 2002-2011E

Volumes 2006 2007 2008 2009E 2010E 2011E Motorcycles 2,985,736 3,243,832 3,232,320 3,590,738 4,106,867 4,509,173 Domestic 2,893,070 3,147,219 3,144,101 3,506,930 4,023,059 4,425,365 < 125 cc 2,815,682 3,041,143 2,966,329 3,308,715 3,805,022 4,185,524 > 125 cc 77,388 106,076 177,772 198,216 218,037 239,841 Exports 92,666 96,613 88,219 83,808 83,808 83,808 < 125 cc 84,571 93,692 80,620 76,589 76,589 76,589 > 125 cc 8,095 2,921 7,599 7,219 7,219 7,219 Scooters 15,015 92,921 104,822 131,263 144,389 155,131 Domestic 15,014 91,889 102,470 128,088 140,896 151,463 Exports 1 1,032 2,352 3,175 3,493 3,667 Total 2-wheelers 3,000,751 3,336,753 3,337,142 3,722,001 4,251,256 4,664,304

Growth (yoy %) Motorcycles 13.9 8.6 (0.4) 11.1 14.4 9.8 Domestic 13.1 8.8 (0.1) 11.5 14.7 10.0 < 125 cc 15.5 8.0 (2.5) 11.5 15.0 10.0 > 125 cc (35.7) 37.1 67.6 11.5 10.0 10.0 Exports 44.8 4.3 (8.7) (5.0) - - < 125 cc 45.7 10.8 (14.0) (5.0) - - > 125 cc 35.2 (63.9) 160.2 (5.0) - - Scooters - 518.9 12.8 25.2 10.0 7.4 Domestic - 512.0 11.5 25.0 10.0 7.5 Exports - 103,100.0 127.9 35.0 10.0 5.0 Total 2-wheelers 14.5 11.2 0.0 11.5 14.2 9.7

Source: Company, Kotak Institutional Equities estimates

24 KOTAK INSTITUTIONAL EQUITIES RESEARCH Hero Honda Automobiles

Hero Honda, Profit model, balance sheet and cash flow model, March fiscal year-ends, 2006-2011E (Rs mn)

2006 2007 2008 2009E 2010E 2011E Profit model (Rs mn) Net sales 87,140 99,000 103,318 123,191 144,205 157,811 EBITDA 13,645 11,730 13,494 17,121 22,892 24,243 Other income 1,563 1,899 1,854 2,189 2,087 2,577 Interest 61 230 358 317 235 242 Depreciaiton (1,146) (1,398) (1,603) (1,807) (1,921) (2,126) Profit before tax 14,122 12,461 14,103 17,820 23,293 24,936 Current tax (4,230) (3,788) (4,412) (5,095) (5,909) (6,093) Deferred tax (179) (94) (12) 95 86 108 Net profit 9,713 8,579 9,679 12,820 17,470 18,952 Earnings per share (Rs) 48.6 43.0 48.5 64.2 87.5 94.9 Balance sheet (Rs mn) Equity 20,093 24,701 29,862 38,010 50,340 64,151 Deferred tax liability 1,188 1,282 1,254 1,158 1,072 964 Total Borrowings 1,858 1,652 1,320 785 285 - Current liabilities 15,628 14,792 18,247 21,061 22,797 23,903 Total liabilities 38,767 42,426 50,684 61,014 74,494 89,018 Net fixed assets 9,936 13,555 15,487 16,180 16,758 17,133 Investments 20,619 19,739 25,668 32,668 42,668 52,668 Cash 1,587 358 1,311 2,209 3,339 6,361 Other current assets 6,625 8,775 8,057 9,797 11,568 12,696 Miscellaneous expenditure - - 161 161 161 161 Total assets 38,767 42,426 50,684 61,014 74,494 89,018 Free cash flow (Rs mn) Operating cash flow excl. working capital 9,723 8,474 9,506 12,026 16,982 18,150 Working capital changes (362) (2,224) 2,612 1,073 (35) (22) Capital expenditure (3,937) (5,152) (3,739) (2,500) (2,500) (2,500) Free cash flow 5,424 1,099 8,379 10,599 14,448 15,628 Ratios Operating margin (%) 15.7 11.8 13.1 13.9 15.9 15.4 PAT margin (%) 11.1 8.7 9.4 10.4 12.1 12.0 Debt/equity (X) 0.1 0.1 0.0 0.0 0.0 - Net debt/equity (X) (1.0) (0.7) (0.8) (0.9) (0.9) (0.9) Book Value (Rs/share) 106.6 130.1 155.0 195.3 256.6 325.3 RoAE (%) 52.2 36.3 34.0 36.6 38.7 32.6 RoACE (%) 47.1 33.2 31.5 34.9 37.9 32.2

Source: Company, Kotak Institutional Equities estimates

KOTAK INSTITUTIONAL EQUITIES RESEARCH 25

.dot BUY Punjab National Bank (PNB)

Banks/Financial Institutions JULY 30, 2009 RESULT Coverage view: Attractive

Well managed on core front, but restructured assets are high. We continue to be Price (Rs): 748 pleasantly surprised by PNB’s management of its ALM position, resulting in strong and Target price (Rs): 800 stable margins at 3.4% in 1QFY10. NII growth was at 28%, fee income up 38% and BSE-30: 15,173 PAT up 62% yoy. However, the total restructured loans have increased to 6% of loans (incremental additions of about Rs50 bn), though reported net NPLs are at 0.2%. The stock trades at 1.3XFY2011E PBR. We maintain BUY with a target price of Rs800.

Company data and valuation summary Punjab National Bank Stock data Forecasts/Valuations 2009 2010E 2011E 52-week range (Rs) (high,low)752-286 EPS (Rs) 98.0 100.7 115.2 QUICK NUMBERS Market Cap. (Rs bn) 235.7 EPS growth (%) 50.9 2.7 14.4 Shareholding pattern (%) P/E (X) 7.6 7.4 6.5 • Margins stable at Promoters 57.8 NII (Rs bn) 70.3 80.8 95.6 3.4%; NII growth at FIIs 14.9 Net profits (Rs bn) 30.9 31.7 36.3 28% yoy MFs 5.5 BVPS 417.1 494.2 582.4 Price performance (%) 1M 3M 12M P/B (X) 1.8 1.5 1.3 • Reported net NPLs Absolute 10.3 56.4 60.8 ROE (%) 23.0 20.3 20.1 Rel. to BSE-30 7.5 17.6 46.1 Div. Yield (%) 2.6 2.7 3.1 at 0.2%, but restructured assets are high at 6% of Well managed ALMs resulting in superior margins loans PNB was one of the earliest banks to reduce its deposit as well as lending rates, which resulted in • We increase steady margins over the last couple of quarters, while margins of other public banks fell sharply. During the quarter, PNB reported margins of 3.41% (up 14 bps yoy and down 15 bps qoq). PNB earnings 2% and had last reduced its lending rates from May 2009 and the impact of that has largely been played delinquency out during this quarter. We expect margins to remain stable going forward, as decline in asset assumptions to yields would be matched by the reduction in the cost of funds. We currently assume a 20 bps 3.5% in FY2010E decline in margins in FY2010E.

Growth running strong from a low base – incremental growth has slowed down

Loans at Rs1.6 tn grew by 38% yoy as of June 2009 from a low base (PNB had seen a big growth in 2QFY09), even as incremental growth has been slow (up 2%) and was is in line with the industry. Despite paying lower interest rates compared to other public banks on the retail front, deposit growth at 27% yoy has been strong. Another notable development was that CASA ratio has remained stable at 38% as compared to 39% as of March 2009.

Reported asset quality appears strong….

Reported asset quality remained strong with gross NPL ratio being at 1.8% (flat qoq and down from 2.8% yoy) and net NPLs is at 0.19%, which are amongst the lowest in the industry. Provision coverage currently stands at 90%. The delinquency rate during the quarter was 1.4%. We model a delinquency rate at 3.5% in FY2010E (up from 3% earlier) and 3% in FY2011E, likely capturing the risk emanating from high levels of restructuring.

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

Punjab National Bank Banks/Financial Institutions

…but restructured loans have increased to Rs94 bn – now at 6%

Total restructured assets are at Rs94 bn, about 6% of the loan book (up from about 3% as of March 2009). The pending proposals at the end of March 2009 were Rs6 bn (as per the RBI scheme). Thus the actual restructured assets have been much higher than earlier estimated. As per the management, the restructured assets have been done as per facility-wise classification. It seems there have been few large CDR cases restructured during the quarter, which is pulling the number higher.

Other key operational highlights for the quarter

` Fee income was Rs4.6 bn in 1QFY10—robust growth of 38% yoy continues the trend of the past few years

` Treasury income was a high Rs3.6 bn as the company benefited from the lower interest rate environment like other banks in the quarter

` PNB made an adhoc provision of Rs1.5 bn in 1QFY10 towards likely wage liabilities on account of the wage negotiations that are currently on between IBA and employee unions. Cumulatively, the company has made wage arrear provisions of Rs7.5 bn

` The bank made higher NPL provisions of Rs2.7 bn (including Rs1.3 bn for restructured assets). The bank continues to hold Rs10 bn as floating provisions on its balance sheet, which has been used to net off the gross NPLs.

` PAT of the company was Rs8.3 bn—a growth of 62% and 32% ahead of our estimates.

KOTAK INSTITUTIONAL EQUITIES RESEARCH 27 Banks/Financial Institutions Punjab National Bank

PNB --key quarterly P&L and balance sheet items March fiscal year-ends, 1QFY09-1QFY10 (Rs mn)

Actual Vs 1QFY09 2QFY09 3QFY09 4QFY09 1QFY10 % chg 1QFY10 KS

Interest income 41,385 46,504 52,947 52,426 52,074 25.8 50,920 2.3 Loans 30,154 35,314 40,901 40,009 40,258 33.5 38,900 3.5 Investments 10,010 10,284 11,590 12,216 11,323 13.1 11,500 (1.5) Balance with RBI & banks 903 681 346 93 452 (49.9) 400 13.1 Others 318 225 111 107 41 (87.1) 120 (65.8) Interest expense 26,937 29,382 33,274 33,360 33,456 24.2 33,000 1.4 Net interest income 14,448 17,122 19,674 19,065 18,618 28.9 17,920 3.9 Non-int.income 4,561 6,628 9,452 8,556 9,702 112.7 6,107 58.8 Other income excl treasury 4,441 5,908 6,042 6,172 6,117 37.7 5,107 19.8 fee income 3,190 3,070 3,364 4,170 4,580 43.6 3,776 21.3 Sale of invts. 120 720 3,410 2,384 3,585 2,887.3 1,000 258.5 Total income 19,009 23,750 29,126 27,621 28,320 49.0 24,027 17.9 Op. expenses 9,185 10,072 11,066 11,740 12,626 37.5 11,500 9.8 Employee cost 6,442 6,898 7,890 8,014 9,076 40.9 7,800 16.4 Other cost 2,742 3,174 3,176 3,726 3,550 29.5 3,700 (4.1) Operating profit 9,824 13,678 18,059 15,882 15,693 59.7 12,527 25.3 Provisions and cont. 2,105 3,177 1,813 2,678 3,018 43.3 2,800 7.8 NPLs 571 2,459 4,253 2,337 2,730 377.8 2,800 (2.5) Investment depreciation 1,211 169 (3,124) (256) - - - PBT 7,719 10,501 16,246 13,203 12,676 64.2 9,727 30.3 Tax 2,595 3,430 6,188 4,548 4,355 67.8 3,405 27.9 Net profit 5,124 7,071 10,058 8,656 8,321 62.4 6,323 31.6 Tax rate (%) 34 33 38 34 34 35 PBT - treasury + provisions 9,381 12,409 13,965 12,900 11,821 24.8 11,527 5.0

Key balance sheet details (Rs bn) Total Deposit 1,731 1,863 1,971 2,098 2,190 26.5 CASA (%) 41% 39% 37% 39% 38% (7.3)

Advances 1,144 1,304 1,415 1,547 1,580 38.1

Investments 605 582 632 634 653 8.0

Yield management measures (%) Yield on investments 6.49 7.66 7.72 - 6.68 Yield on advances 10.74 11.74 11.51 11.32 10.80 Average cost of deposits NA 6.07 6.62 6.24 5.94 NIM 3.27 3.78 3.85 3.56 3.41

Asset quality details Gross NPLs (Rs bn) 32.6 31.2 32.6 27.7 28.6 (12.3) Gross NPL ratio (%) 2.8 2.4 2.3 1.8 1.8 Net NPLs (Rs bn) 7.1 5.4 5.5 2.6 3.0 (58.4) Net NPL ratio (%) 0.6 0.4 0.4 0.2 0.2

Asset quality details (%) CAR 13.0 12.4 13.9 14.0 14.5 Tier I 8.9 8.4 9.4 9.0 9.1 Tier II 4.1 4.0 4.5 5.1 5.4

Source: Company, Kotak Institutional Equities estimates

28 KOTAK INSTITUTIONAL EQUITIES RESEARCH Punjab National Bank Banks/Financial Institutions

We marginally change our estimates for the current year March fiscal year-ends, 2010-2010E (Rs mn)

Old estimates New estimates % change 2010E 2011E 2010E 2011E 2010E 2011E Net interest income 80,749 95,579 80,767 95,617 0.0 0.0 Loan growth 18.7 18.6 18.7 18.6 NIM 3.13 3.13 3.14 3.13 NPL Prov 16,916 22,075 16,916 22,075 - - Non-interest income 29,990 32,328 30,990 32,328 3.3 - Fee income 15,863 18,242 15,863 18,242 - - Operating expenditure 46,465 51,660 46,465 51,660 - - Employee expenses 32,612 35,873 32,612 35,873 - - PBT 46,358 54,172 47,376 54,209 2.2 0.1 PAT 31,060 36,295 31,742 36,320 2.2 0.1 PBT+inv. depr+ NPL prov-treasury 63,274 76,247 64,292 76,284 1.6 0.0

Source: Company, Kotak Institutional Equities estimates

KOTAK INSTITUTIONAL EQUITIES RESEARCH 29

.dot REDUCE Cipla (CIPLA)

Pharmaceuticals JULY 30, 2009 RESULT Coverage view: Attractive

In-line results. CIPLA results were largely in line with estimates. A higher-than- Price (Rs): 274 expected tax rate was due to a recent increase in the MAT rate, which will likely stay for Target price (Rs): 250 the next three quarters. We have revised FY2010E PAT down by 7% while retaining our BSE-30: 15,173 FY2011E estimate. The company has underperformed the benchmark for the past three months and we believe the trend will continue. We are concerned about its intention to raise Rs15 bn in equity linked instruments. We lower our rating to REDUCE; retain TP.

Company data and valuation summary Cipla Stock data Forecasts/Valuations 2009 2010E 2011E 52-week range (Rs) (high,low)292-145 EPS (Rs) 9.9 12.8 14.9 Market Cap. (Rs bn) 213.0 EPS growth (%) 9.5 29.5 16.6 QUICK NUMBERS Shareholding pattern (%) P/E (X) 27.7 21.4 18.4 Promoters 39.4 Sales (Rs bn) 49.7 56.7 66.2 • Sales 6% below FIIs 14.5 Net profits (Rs bn) 7.7 9.9 11.6 forecast and EBITDA MFs 4.5 EBITDA (Rs bn) 10.5 14.1 16.2 7% above Price performance (%) 1M 3M 12M EV/EBITDA (X) 21.1 15.4 13.2 Absolute 8.2 13.8 24.5 ROE (%) 19.1 21.4 21.3 • CIPLA may raise Rel. to BSE-30 5.4 (14.5) 13.2 Div. Yield (%) 0.9 1.1 1.3 Rs15 bn in equity- linked instruments 1QFY10 revenues were Rs13.4 bn versus estimate of Rs14.2bn • Effective tax rate of International finished dosage sales were US$112 mn versus our estimate of US$125 mn while API 19% likely to stay sales were as expected at US$29 mn. API sales had been declining since Mar’ 2008 from US$44 for FY2010E mn to US$23 mn reported in quarter ending Dec’ 2008. International finished dosage sales are impacted by the bunching of large government tenders and hence conclusions from one quarter data can be misleading.

EBITDA margins at 24% versus estimate of 21%

EBITDA margins at 24% were higher than FY2009 margins and estimate of 21%. This was despite international sales proportion dropping qoq to 51% from 58% last quarter.

CIPLA may raise Rs15 bn in equity or equity linked instruments

We are unclear about the exact capex plans that have led the company to take this decision. Our calculations suggest that CIPLA had debt of Rs8 bn and equity of Rs42 bn at end of March2009. This suggests that CIPLA should raise lower cost debt before turning to higher cost equity option. Previous equity raising experience with CIPLA shows that investors have not made money on GDR issues in April 2006 till date.

Downgrade to REDUCE on valuation

We are downgrading our rating to REDUCE from ADD rating, while retaining our SOTP-based target price of Rs250. We believe that CIPLA’s stock has risen on newsflow regarding its swine-flu- related opportunity. This is a large opportunity but its impact on profits is not material in our view. In the past 6-8 months, CIPLA may have attracted investors seeking safety as it had low exposure to riskier markets such as Russia and Latin America. It has a strong balance sheet with very low debt of Rs8 bn debt compared to equity of Rs42 bn. This may have driven the share price above the fundamental value.

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

Cipla Pharmaceuticals

1QFY10 revenues were Rs13.4 bn versus estimate of Rs14.2 bn

International finished dosage sales were US$112 mn versus our estimate of US$125 mn while API sales were as expected at US$29 mn. API sales had been declining since Mar’ 2008 from US$44 mn to US$23 mn reported in quarter ending Dec’ 2008. International finished dosage sales are impacted by bunching of large government tenders and hence conclusions from one quarter data can be misleading.

India finished dosages grew at Rs6.5 bn was 2% below estimate. Sales grew at 11% yoy versus estimate of 14%. CIPLA reported yoy growth rate of 16% in Indian finished dosages for all quarters in FY2009 except the December quarter. Winter is normally the season of high asthma sales but mild winter may have impacted sales.

EBITDA margins at 24% versus estimate of 21% due to lower materials cost

EBITDA margins at 24% were higher than FY2009 margins of 20% and estimate of 21%. This was despite international sales proportion dropping qoq to 51% from 58% last quarter.

Materials cost at 46% was lower than estimate of 47% and Other expenses adjusting for forex loss was at 23% versus estimate of 25%. Staff cost at 7% was higher than estimate of 6% possibly due to annual increments. This trend of sharp increase in staff expenses qoq in June quarter was seen in the last two years also. Staff expenses usually decline in absolute terms in the subsequent quarter.

PAT at Rs2.4 bn versus estimate of Rs2.6 bn due to lower other income and higher tax rate

Although EBITDA was 7% above estimate, PAT was 9% below estimate due to (1) forex loss of Rs270 mn versus estimate of forex gain of Rs130 mn, (2) lower other income of Rs120 mn versus estimate of Rs150 mn, and (3) higher tax rate at 19% versus estimate of 14%. The tax rate was higher due to the provision of current tax on revised MAT tax rate of 15% with surcharge and discontinuation of FBT. CIPLA indicated that this rate will likely stay for the remaining three quarters before declining in FY2011E when benefits from the new SEZ in Indore will begin to kick in.

Interest at Rs105 mn was lower than our estimate of Rs150 mn. Depreciation at Rs458 mn was lower than our estimate of Rs500 mn and lower than the previous quarter’s Rs557 mn. Last quarter, expenditure of the Indore plant was capitalized, hence depreciation increased sharply. However, we are unable to provide a reason for a qoq decline in depreciation.

KOTAK INSTITUTIONAL EQUITIES RESEARCH 31 Pharmaceuticals Cipla

Interim results- Cipla , March fiscal year-ends (Rs mn)

% change 1QFY10 1QFY10E 1QFY09 4QFY09 1QFY10E 1QFY09 4QFY09 Sales 13,395 14,233 11,870 12,487 (6) 13 7 Excise duty 142 174 162 135 (18) (12) 5 Net sales 13,253 14,059 11,708 12,352 (6) 13 7 Stock changes (592) — (481) (17) NM NM NM Raw Materials 6,659 6,608 6,117 5,682 1 9 17 Staff costs 950 900 845 779 6 12 22 Others 3,059 3,585 2,890 3,632 (15) 6 (16) Op. costs 10,075 11,093 9,371 10,076 (9) 8 (0) EBITDA 3,177 2,966 2,337 2,276 7 36 40 Interest 105 150 37 133 (30) 186 (21) Depreciation 458 500 382 557 (8) 20 (18) Other income (150) 279 (576) 55 NM NM NM Other operating income 508 500 364 1,316 2 40 (61) Technology fees 257 300 156 999 (14) 65 (74) Others 251 200 208 317 26 21 (21) PBT 2,972 3,095 1,705 2,957 (4) 74 1 Tax - current 505 308 215 328 64 135 54 Tax - deferred 50 100 73 75 (50) (31) (33) Fringe benefit tax 0 25 18 25 NM NM NM PAT 2,417 2,662 1,400 2,529 (9) 73 (4)

International 6,876 7,558 6,015 7,242 (9) 14 (5) API 1,404 1,460 1,773 1,689 (4) (21) (17) Finished dosage 5,472 6,098 4,242 5,553 (10) 29 (1) India 6,519 6,675 5,855 5,245 (2) 11 24 Total 13,395 14,233 11,870 12,487 (6) 13 7

Source: Kotak Institutional Equities

Position related to hedging and forex losses

At the beginning of FY2009, CIPLA had taken a forward cover of about US$440 mn at Rs42/US$. As of April 2009, the forward cover position has fallen to US$120 mn. This has fallen to US$96 mn at end of June 2009.

CIPLA has gross debt of Rs8 bn and most of it is dollar denominated. CIPLA mentioned that all its forex debt is fully hedged. In the current quarter, CIPLA incurred net forex loss of Rs270 mn. It gained Rs700 mn on derivative contracts and lost Rs970 mn on its debtors for international sales. Changes to estimates and key assumptions for FY2010-11E

We have revised our FY2010E following the results announcement. We are now using our new currency forecasts where Rs/US$ forecast of Rs47 for FY2010E and Rs47.75 for FY2011E.

` Indian finished dosage revenues are forecast to grow 14% yoy for the next three quarters and for FY2011E.

` International API revenues are forecast to reach US$30 mn PER quarter for the next three quarters. For FY2011E, we forecast 5% growth in dollar terms.

` International finished dosage business is expected to pick up momentum in the remaining three quarters of FY2010E and grow 20% yoy in dollar terms. We expect this growth rate to sustain in FY2011E.

` We forecast EBITDA margin of 22% in FY2010-11E. We expect to peak in 2QFY10E due to seasonal increase in demand in India to 24.7%. We forecast a decline in margin in 2HFY10E due to a combination of lower sales and strengthening Indian Rupee.

32 KOTAK INSTITUTIONAL EQUITIES RESEARCH Cipla Pharmaceuticals

` Capex was Rs9 bn in FY2009E. In FY2010E, CIPLA expects routine capex of about Rs3 bn. We think this level may be maintained over the next two years.

Profit and loss statement, March fiscal year-ends, 2007-2011E

2007 2008E 2009E 2010E 2011E Net sales 34,382 40,104 49,727 56,698 66,199 Operating expenses Materials (16,949) (21,130) (23,497) (26,469) (31,058) Selling and administration (5,085) (6,135) (7,825) (7,951) (9,253) Employee cost (1,846) (2,555) (3,181) (3,475) (3,927) R&D (1,473) (2,029) (2,735) (3,118) (3,641) Others (2,152) (1,845) (2,636) (3,118) (3,641) Total expenditure (27,505) (33,693) (39,873) (44,132) (51,519) EBITDA 6,877 6,410 9,854 12,566 14,679 Depreciation and amortisation (1,034) (1,307) (1,757) (2,033) (2,550) EBIT 5,844 5,104 8,097 10,533 12,129 Net finance cost (70) (117) (335) (465) (300) Other income 2,306 3,393 1,339 2,142 1,975 Pretax profits before extra-ordinaries 8,080 8,379 9,101 12,209 13,804 Current tax (1,218) (940) (1,023) (1,842) (1,709) Deferred tax (147) (365) (300) (350) (400) Fringe benefit tax (35) (64) (100) (75) (100) Reported net profit 6,680 7,010 7,678 9,942 11,596

Source: Kotak Institutional Equities

New estimates Old estimates % change 2010E 2011E 2010E 2011E 2010E 2011E Net sales 56,698 66,199 58,623 67,750 (3) (2) Operating expenses Materials (26,469) (31,058) (27,543) (32,133) (4) (3) Selling and administration (7,951) (9,253) (8,495) (9,838) (6) (6) Employee cost (3,475) (3,927) (3,475) (3,927) 0 0 R&D (3,118) (3,641) (3,224) (3,726) (3) (2) Others (3,118) (3,641) (3,224) (3,726) (3) (2) Total expenditure (44,132) (51,519) (45,962) (53,350) (4) (3) EBITDA 12,566 14,679 12,661 14,400 (1) 2 Depreciation and amortisation (2,033) (2,550) (2,200) (2,550) (8) 0 EBIT 10,533 12,129 10,461 11,850 1 2 Net finance cost (465) (300) (600) (300) (23) 0 Other income 2,142 1,975 2,561 1,975 (16) 0 Pretax profits before extra-ordinaries 12,209 13,804 12,422 13,525 (2) 2 Current tax (1,842) (1,709) (1,236) (1,394) 49 23 Deferred tax (350) (400) (400) (400) (13) 0 Fringe benefit tax (75) (100) (100) (100) (25) 0 Reported net profit 9,942 11,596 10,686 11,632 (7) (0)

Source: Kotak Institutional Equities

KOTAK INSTITUTIONAL EQUITIES RESEARCH 33 Pharmaceuticals Cipla

US FDA issues form 483—no resolution announced yet

US FDA conducted inspections of three manufacturing sites of CIPLA and issued form 483 containing 9 to 10 “Inspectional Observations” on various manufacturing issues. The manufacturing sites inspected by the FDA are in Goa, Kurkumbh and Bangalore. Mr Amar Lulla (MD of Cipla) said on CNBC that Cipla was in the process of submitting its response which essentially will be the compliance response. There has been no further update on this issue after June 2009 results.

CIPLA capital raising plans remain a puzzle

The board has approved a notice of Annual General Meeting including an enabling resolution to raise funds by further issue of securities upto Rs15 bn in domestic/international markets through various instruments including equity shares/warrants with Non-Convertible Debentures under Qualified Institutions Placement (QIP) or Foreign Currency Convertible Bonds (FCCBs) or American Depository Receipts (ADRs) or Global Depository Receipts (GDRs).

We are unclear about the exact capex plans that have led the company to take this decision. Our calculations suggest that CIPLA had debt of Rs8 bn and equity of Rs42 bn at end of March2009. This suggests that CIPLA should raise lower cost debt before turning to higher cost equity option.

CIPLA last issued new equity shares in April 2006 when it issued 11 mn GDRs at price of US$15.39 raising US$170 mn. The subsequent bonus issue, in the ratio of three for every two held, has brought the adjusted price down to US$6.156 per GDR. The chart below shows that GDR rarely traded above the issue price since the issue date. Clearly, investors have not made any money on this deal.

Cipla GDR price (US$)

GDR price GDR Issue price

8

7

6

5

4

3

2 Jun-06 Jun-07 Jun-08 Jun-09 Oct-06 Oct-07 Oct-08 Feb-07 Feb-08 Feb-09 Apr-06 Apr-07 Apr-08 Apr-09 Dec-06 Dec-07 Dec-08 Aug-06 Aug-07 Aug-08

Source: Kotak Institutional Equities

34 KOTAK INSTITUTIONAL EQUITIES RESEARCH Cipla Pharmaceuticals

Downgrade rating to REDUCE

We are downgrading the stock to REDUCE from ADD with an unchanged SOTP-based target price of Rs250. We believe CIPLA has gained in the recent past due to news flow relating to demand for swine flu treatment. This is a large opportunity but its impact on profits is not material in our view. In the past 6-8 months, CIPLA may have attracted investors seeking safety as it had low exposure to riskier markets such as Russia and Latin America. It has a strong balance sheet with very low debt of Rs8debt compared to equity of Rs42 bn. This may have driven the share price above its fundamental value.

SOTP-based price targets, FY2011-FY2012E

PAT (Rs mn) P/E Valuation (Rs mn) 2011E 2012E (X) 2011E 2012E Finished dosage India 3,960 4,573 20.0 79,192 91,468 API global 944 998 11.5 10,852 11,481 Finished dosage USA 1,568 1,896 15.0 23,522 28,437 Finished dosage Europe 1,380 1,668 15.0 20,699 25,024 Finished dosage RoW 3,324 4,019 15.0 49,866 60,286 Total 11,176 13,155 184,131 216,697

Value per share (Rs) 237 279 Price target 251

Source: Kotak Institutional Equities

KOTAK INSTITUTIONAL EQUITIES RESEARCH 35

.dot BUY Sesa Goa (SESA)

Metals JULY 30, 2009 RESULT Coverage view: Neutral

Weak realizations. Sesa Goa reported 1QFY09 net income at Rs4.2 bn, lower by Price (Rs): 239 33.3% yoy and 22.9% qoq and lower than our estimate of Rs4.4 bn. EBITDA at Rs4.5 Target price (Rs): 240 bn was lower by 43.7% yoy and 40% qoq and below our estimates of Rs5.8 bn. Iron BSE-30: 15,173 ore realizations for the quarter were at US$38/ton compared to US$82.5/ton yoy and US$51.3/ton qoq. We maintain our FY2010 and FY2011 EPS at Rs25.4 and Rs34, respectively.

Company data and valuation summary Sesa Goa Stock data Forecasts/Valuations 2009 2010E 2011E 52-week range (Rs) (high,low)248-60 EPS (Rs) 25.1 25.5 34.2 Market Cap. (Rs bn) 188.3 EPS growth (%) 32.6 1.3 34.3 QUICK NUMBERS Shareholding pattern (%) P/E (X) 9.5 9.4 7.0 Promoters 51.2 Sales (Rs bn) 49.3 51.0 60.8 • Net income drops FIIs 19.7 Net profits (Rs bn) 19.8 20.0 26.9 33% yoy MFs 1.6 EBITDA (Rs bn) 25.3 24.3 32.0 Price performance (%) 1M 3M 12M EV/EBITDA (X) 6.2 5.8 3.7 • Sales volumes surge Absolute 31.0 113.8 43.4 ROE (%) 53.3 36.9 35.9 by 45% yoy Rel. to BSE-30 27.6 60.7 30.3 Div. Yield (%) 1.5 1.5 1.5

Realizations take a hit. Volumes surge

Sesa Goa reported 1QFY09 net income at Rs4.2 bn, lower by 33.3% yoy and 22.9% qoq and lower than our estimates of Rs4.4 bn. EBITDA at Rs4.5 bn was lower by 43.7% yoy and 40% qoq and below our estimates of Rs5.8 bn. EBITDA margins for the quarter were 45.4% compared to 64% yoy and 52.7% qoq. Iron ore volumes rose sharply by 45.7% yoy and were lower by 5.8% qoq. Iron ore realizations for the quarter were at US$38/ton compared to US$82.5/ton yoy and US$51.3/ton qoq. However, after the last quarter, spot iron ore prices have moved higher following the recent stand-off between Rio Tinto and Chinese authorities.

Metcoke business

Metcoke business net sales at Rs1 bn were lower by 25.5% yoy and higher by 41.7% qoq. PBIT at Rs254 mn was lower by 57.9% qoq and higher by 80.9% yoy. The metcoke business is prone to sharp earnings volatility given the uncertain nature of business where the coking coal is purchased on contract basis, whereas metcoke is sold mostly on a spot basis. Maintain BUY

Results for the quarter have been below estimates following a sharper-than-expected fall in iron ore price realizations. Over the past three years, Sesa has shifted its focus largely to the spot markets which fetched a premium over the contract market. However, following the crash in commodity prices since October 2008, spot iron ore prices have seen a steep decline. The recent buoyancy in spot markets would reflect in the earnings over the next few quarters. We maintain our BUY rating and target price of Rs240/share.

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

Sesa Goa Metals

Interim results of Sesa Goa, March fiscal year-ends (Rs mn)

(% chg.) 1QFY10 1QFY10E 1QFY09 4QFY09 1QFY10E 1QFY09 4QFY09 Net sales 9,986 14,069 12,574 14,299 (29.0) (20.6) (30.2) Total expenditure 5,584 4,500 4,750 6,900 24.1 17.6 (19.1) (Inc)/Dec in stock (180) 929 882 (474) (119.4) (120.4) (62.0) Consumption of raw materials (814) (494) (476) (643) 64.8 70.9 26.6 Staff costs (395) (237) (286) (250) 66.9 38.1 57.9 Stores (535) (369) (395) (546) 45.2 35.5 (1.9) Transportation costs (2,920) (2,847) (2,900) (2,873) 2.6 0.7 1.6 Purchase of ore (273) (745) (745) (963) (63.4) (63.4) (71.6) Export tax (39) (560) (560) 128 (93.0) (93.0) (130.8) Other expenditure (502) (289) (354) (1,384) 73.4 41.6 (63.8) Expenses recovered 75 112 85 105 (33.4) (11.8) (29.0) Other operating income 129 205 226 136 (37.1) (42.9) (5.4) EBITDA 4,531 5,878 8,051 7,535 (22.9) (43.7) (39.9) OPM (%) 45.4 41.8 64.0 52.7 Other income 752 593 611 567 26.8 23.0 32.5 Interest (20) (0) (0) (7) 4,975.0 4,975.0 174.3 Depreciation (152) (98) (116) (150) 54.3 30.9 1.0 Pretax profits 5,110 6,676 8,545 7,944 (23.4) (40.2) (35.7) Extraordinaries - - - - Tax (869) (2,203) (2,185) (2,461) (60.5) (60.2) (64.7) Net income before minority interest 4,241 4,473 6,360 5,484 (5.2) (33.3) (22.7) Minority interest (18) - (30) (7) (39.1) 151.4 PAT after minority interest 4,223 4,473 6,331 5,476 (5.6) (33.3) (22.9) Income tax rate (%) 17.0 33.0 25.6 31.0

Ratios EBITDA margin (%) 45.4 41.8 64.0 52.7 ETR (%) 42.5 31.8 50.6 38.3 EPS (Rs) 5.4 5.7 8.1 7.0 Volume details ('000 tons) Iron ore sales 4,736 10,077 3,250 5,025 (53.0) 45.7 (5.8) Pig iron 71 153 57 71 (53.6) 24.6 -

Segmental revenues (Rs mn) 10,891 14,069 14,155 14,866 (23) (23) (27) Iron ore 8,557 11,961 11,170 12,825 (28.5) (23.4) (33.3) Metallurgical coke 1,008 711 1,353 711 41.7 (25.5) 41.7 Pig iron 1,326 1,397 1,632 1,330 (5.1) (18.7) (0.3) Segmental PBIT (Rs mn) 4,386 6,774 7,942 7,383 (35) (45) (41) Iron ore 3,926 6,579 6,982 7,171 (40.3) (43.8) (45.3) Metallurgical coke 254 141 604 141 80.9 (57.9) 80.9 Pig iron 207 55 357 72 275.6 (42.1) 189.0 Segmental PBIT margins (%) 40.3 48 56 50 (16) (28) (19) Iron ore 45.9 55 63 56 (16.6) (26.6) (18.0) Metallurgical coke 25.2 20 45 20 27.6 (43.5) 27.6 Pig iron 15.6 - 22 5 (28.7) 189.9

Source: Company, Kotak Institutional Equities

KOTAK INSTITUTIONAL EQUITIES RESEARCH 37 Metals Sesa Goa

Sesa Goa, Sum-of-the-parts valuation

Value (Rs mn) (Rs/share) Comments Sesa Goa (standalone) 175,333 223 Based on 1-year forward DCF Dempo industries 21,048 27 Based on 1-year forward DCF Total equity value 249

Target price (Rs) 240

Source: Kotak Institutional Equities estimates

Sesa Goa, Key assumptions, March fiscal year-ends, 2006-11E (Rs mn)

2006 2007 2008 2009 2010E 2011E Tonnages ('000 ton) Iron ore sales 9,559 10,871 12,391 15,103 18,743 22,492 Metallurgical coke sales 242 238 260 217 240 250 Realizations Weighted av erage ore realiz ation (Rs/ ton) 1,612 1,642 2,156 2,685 2,497 2,497 Average ore realization (US$/ton) 36 37 50 58 52 52 Iron ore EBITDA/ton (US$) 19 19 40 34 26 28 Metallurgical coke prices 8,671 8,531 11,901 21,415 16,376 17,609

Source: Company data, Kotak Institutional Equities estimates

38 KOTAK INSTITUTIONAL EQUITIES RESEARCH Sesa Goa Metals

Our DCF-based valuation for Sesa Goa DCF valuation of Sesa, March fiscal year-ends, 2010E-18E

Terminal 2010E 2011E 2012E 2013E 2014E 2015E 2016E 2017E 2018E Value EBITDA 24,313 32,026 39,455 39,150 49,719 45,721 46,464 47,140 47,729 Tax expense (6,681) (8,973) (11,130) (11,664) (15,040) (14,898) (16,002) (17,090) (18,155) Changes in working capital (95) (540) (546) (138) (754) 55 (226) (243) (262) Cash flow from operations 17,536 22,513 27,779 27,348 33,924 30,877 30,236 29,808 29,312 Capital expenditure (600) (600) (800) (800) (800) (1,000) (1,000) (1,000) (1,000) Free cash flow to the firm 16,936 21,913 26,979 26,548 33,124 29,877 29,236 28,808 28,312 Dicounted cash flow-now 15,556 17,734 19,236 16,678 18,334 14,569 12,561 10,905 9,443 Discounted cash flow-1 year forward - 20,128 21,833 18,929 20,809 16,536 14,257 12,377 10,717 Discounted cash flow-2 year forward - - 24,780 21,484 23,618 18,769 16,182 14,048 12,164

Discount rate 13.5% Growth from 2017 to perpetuity 0.0%

Fiscal Year end March-10 March-11 March-12 March-13 March-14 March-15 March-16 March-17 March-18 Today 29-Jul-09 29-Jul-09 29-Jul-09 29-Jul-09 29-Jul-09 29-Jul-09 29-Jul-09 29-Jul-09 29-Jul-09 Days left 245 610 975 1,340 1,705 2,070 2,435 2,800 3,165 Years left 0.7 1.7 2.7 3.7 4.7 5.7 6.7 7.7 8.7 Discount factor at WACC 0.92 0.81 0.71 0.63 0.55 0.49 0.43 0.38 0.33

+ 1-year + 2-years Sensitivity of DCF value to WACC and growth rate (Rs) Total PV of free cash flow (a) 135,586 100% 131,045 100% WACC PV of terminal value (b) - 0% - 0% Growth 223 12.5% 13.0% 13.5% 14.0% 14.5% EV (a) + (b) 135,586 131,045 rate 0.0% 228 226 223 220 217 EV (US$ mn) 2,825 2,730 Net debt (39,747) (63,379) Equity value 175,333 194,424 No. of shares 787.2 787.2 Implied share price (Rs) 223 247 Exit EV/EBITDA multiple (X) - Exit FCF multiple (X) 7.4

EBITDA multiple(X) 4.0 EBITDA - Mar 2011 (Rs mn) 32,026 Enterp rise Value (Rs m n) 128 ,103 less: Net debt (Rs mn) (63,379) Equity Value Mar 2010E(Rs mn) 191,483 No. of shares (mn) 787.2 Equity Value- March 2010 (Rs/share) 243

Source: Kotak Institutional Equities estimates

KOTAK INSTITUTIONAL EQUITIES RESEARCH 39 Metals Sesa Goa

Sesa Goa, Profit model, balance sheet and cash flow model, March fiscal year-ends, 2006-2011E (Rs mn)

2005 2006 2007 2008 2009E 2010E 2011E Profit model (Rs mn) Net sales 14,094 17,070 20,051 36,022 49,257 50,994 60,841 EBITDA 7,040 8,072 8,890 22,108 25,324 24,313 32,026 Other income 145 278 443 703 2,137 2,974 4,474 Interest (55) (33) (22) (15) (10) - - Depreciaiton (256) (247) (313) (426) (516) (561) (608) Profit before tax 6,874 8,071 8,998 22,369 26,935 26,725 35,892 Current tax (2,273) (2,691) (2,882) (7,435) (7,108) (6,681) (8,973) Deferred tax 23 14 (52) (14) (45) - - Net profit 4,624 5,394 6,064 14,920 19,783 20,044 26,919 Minority interest - - - (74) (68) (68) (68) PAT - 5,394 6,064 14,847 19,715 19,976 26,851 Earnings per share (Rs) 5.9 6.9 7.7 18.9 25.0 25.4 34.1

Balance sheet (Rs mn) Equity 7,243 10,841 15,064 27,911 44,939 62,227 86,391 Deferred tax liability 492 478 521 535 580 580 580 Total Borrowings 166 98 - - - - - Current liabilities 1,822 2,609 2,373 3,399 6,024 6,167 6,976 Total liabilities 9,722 14,027 17,957 31,845 51,542 68,974 93,947 Net fixed assets 2,875 3,291 3,988 4,139 4,199 4,237 4,230 Investments 3,460 5,162 8,678 20,004 24,567 49,567 74,567 Cash 100 311 144 132 15,525 7,680 6,312 Other current assets 3,286 5,263 5,146 7,569 7,251 7,489 8,838 Miscellaneous expenditure 2 ------Total assets 9,722 14,027 17,957 31,845 51,542 68,974 93,947

Free cash flow (Rs mn) Operating cash flow excl. working capital 4,705 5,545 5,867 14,932 20,343 20,606 27,527 Working capital changes (1,241) (1,630) (25) (1,863) 2,944 (95) (540) Capital expenditure (284) (661) (1,008) (575) (575) (600) (600) Free cash flow 3,180 3,254 4,833 12,493 22,712 19,910 26,387

Ratios Debt/equity (%) 0.0 0.0 - - - - - Net debt/equity (%) (0.4) (0.5) (0.6) (0.7) (0.9) (0.9) (0.9) RoAE (%) 82.6 56.6 45.1 67.4 53.3 36.9 35.9 RoACE (%) 76.8 56.1 45.0 67.5 53.3 36.9 35.9

Source: Company, Kotak Institutional Equities estimates

40 KOTAK INSTITUTIONAL EQUITIES RESEARCH

.dot REDUCE Sun TV Network (SUNTV)

Media JULY 30, 2009 RESULT Coverage view: Neutral

In-line 1QFY10 results; valuations limit upside potential. Sun TV reported 1QFY10 Price (Rs): 262 net income at Rs1.2 bn largely in line with our estimates. Advertising revenues (incl. Target price (Rs): 235 broadcast sales) came in at Rs1.8 bn (+7% yoy). Subscription revenues at about Rs720 BSE-30: 15,173 mn (+4% qoq) were marginally below our estimates due to a 6-7% qoq decline in cable revenues. We retain our REDUCE rating due to rich valuations but with a revised 12-month DCF-based target price of Rs235 (Rs215 previously).

Company data and valuation summary Sun TV Network Stock data Forecasts/Valuations 2009 2010E 2011E 52-week range (Rs) (high,low)285-122 EPS (Rs) 9.1 11.3 13.3 Market Cap. (Rs bn) 103.2 EPS growth (%) 9.3 24.4 18.4 Shareholding pattern (%) P/E (X) 28.9 23.3 19.7 Promoters 77.0 Sales (Rs bn) 10.4 12.5 14.6 FIIs 9.0 Net profits (Rs bn) 3.5 4.4 5.3 MFs 2.5 EBITDA (Rs bn) 6.6 7.6 9.0 Price performance (%) 1M 3M 12M EV/EBITDA (X) 15.2 12.9 10.8 Absolute 11.9 42.2 12.5 ROE (%) 22.5 24.0 24.9 Rel. to BSE-30 9.0 6.8 2.3 Div. Yield (%) 1.0 1.5 2.3

1QFY10 results review

` Advertising revenues at Rs1.8 bn (+7% yoy) are largely in line with our Rs1.85 bn estimate; IPL had a marginal impact in 1QFY10

` Subscription revenues at about Rs720 mn (+71% yoy, +4% qoq) marginally below our Rs750 mn estimate; DTH revenues at about Rs350-360 mn

` Sun Pictures released two movies, including the super-hit movie ‘Ayan’, during 1QFY10 and reported revenues around Rs200 mn

Rich valuations preclude upside potential

` Sun TV channels’ regained some of their lost GRPs (channel performance metric) in 2QFY10 post a disappointing 1QFY10 performance; however, competitive intensity in Telugu and

Kannada markets remains high and could prove challenging

` Strong growth in subscription revenues from rapidly growing DTH platforms have been the saving grace for Sun TV even as cable revenues were lower than expected

` Sun Pictures has started well but cannot escape inherent uncertainty in movie business; ‘Endhiran’ (Rs0.7 bn production) can make or break Sun’s FY2010E financials and we reiterate our cautious view on its high-budget movie plans so early in its inception

` Lack of conviction on Sun TV stock a combination of several factors—(1) weak ad revenue

market in FY2010E, (2) intense competition in Telugu and Kannada markets, (3) continued weakness in radio business and (4) uncertainty in Sun Pictures—coupled with rich valuations at 23X FY2010E consolidated EPS estimates. Key positives are (1) strong broadcasting franchise,

(2) DTH revenue upside and (3) fast-growing regional market.

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

Media Sun TV Network

1QFY10 results review

Largely in line revenue performance. Sun TV reported advertising revenues (including broadcast or slot sale revenues) of Rs1.8 bn, largely in line with our Rs1.85 bn estimate. Advertising revenue growth was likely supported by stronger revenues on account of elections during the quarter (Sun TV flagship channels across its key markets also feature news bulletins) but marginally impacted by Season 2 of the popular IPL tournament in 1QFY10. The general slowdown in the ad revenue market has impacted Sun TV as well (despite a very strong franchise) and we expect the same to continue in FY2010E. The more important area of concern has been the slow but steady decline in Sun TV channels’ GRPs in key markets like Telugu, Kannada and Malayalam. However, there were hints of stability Sun’s rating performance in 2QFY10.

Interim results of Sun TV Network (SUNTV), March fiscal year-ends (Rs mn)

(% chg) 1QFY10 1QFY10E 1QFY09 4QFY09 1QFY10E 1QFY09 4QFY09 FY2009 (a) FY2008 (a) (% chg) Total revenues 2,877 2,850 2,238 2,759 1 29 4 10,394 8,690 20 Ad revenues (incl. slot sales) 1,812 1,850 1,691 1,759 (2) 7 3 7,342 6,014 22 Subscription revenues 720 750 422 695 (4) 71 4 2,200 2,293 (4) International revenues 144 150 125 152 (4) 15 (5) 540 383 41 Others (incl. movies) 200 100 — 154 100 30 312 — Total expenditure (1,190) (1,125) (831) (1,164) 6 43 2 (5,231) (3,963) 32 Cost of revenues (208) (175) (198) (132) 19 5 58 (1,114) (766) 45 Employee costs (311) (275) (245) (263) 13 27 18 (1,155) (958) 21 SG&A expenses (122) (125) (110) (107) (3) 10 13 (757) (1,000) (24) D&A expenses (550) (550) (278) (662) (0) 98 (17) (2,205) (1,239) 78 EBIT 1,686 1,725 1,407 1,595 (2) 20 6 5,163 4,727 9 OPM (%) 58.6 60.5 62.9 57.8 49.7 54.4 Other income 142 160 164 154 (11) (13) (7) 468 556 (16) Interest expense (6) (10) (0) (10) (37) (35) (138) (159) (13) Pretax profits 1,822 1,875 1,570 1,739 (3) 16 5 5,493 5,124 7 Extraordinaries — — — — 200 — Tax provision (624) (650) (543) (607) (4) 15 3 (2,293) (2,015) 14 Minority interest — — — — 283 148 91 Net income 1,198 1,225 1,027 1,133 (2) 17 6 3,683 3,258 13 Tax rate (%) 34.3 34.7 34.6 34.9 40.3 39.3

Notes: (a) Sun's quarterly financial data is standalone and yearly (FY2009, FY2008) financial data is consolidated for FM radio subsidiaries.

Source: Company data, Kotak Institutional Equities estimates

Sun’s 1QFY10 subscription revenues exhibited strong 71% yoy (low base, see exhibit) but muted 4% qoq growth at Rs720 mn versus our Rs750 mn estimate. DTH contributed about Rs350-360 mn revenues in 1QFY10 versus Rs300-310 mn in 4QFY09, a robust 16- 17% qoq growth; however, cable revenues continued to remain muted with about 6-7% qoq decline. We highlight that South India is still a largely cable-dominated market, despite the rapid strides made by DTH platforms in recent times, with potential size of Rs30 bn (25 mn households with ARPU of Rs100 per month, excl. about 5mn DTH and 5 mn households in Malayalam market that is largely free-to-air). Sun TV’s management expects to garner only about 5% share of this market (Rs1.5 bn) despite clear leadership in markets and large bouquet (over 25 channels now).

42 KOTAK INSTITUTIONAL EQUITIES RESEARCH Sun TV Network Media

Trends in Sun TV subscription revenues over time (Rs mn)

1,000

800

600

400

200

- 1QFY08 2QFY08 3QFY08 4QFY08 1QFY09 2QFY09 3QFY09 4QFY09 1QFY10

Source: Company data, Kotak institutional Equities estimates

Sun Pictures contributed about Rs200 mn to revenues in 1QFY10 on account of two super-hit movies namely ‘Ayan’ and ‘Maasilamani’. Sun Pictures has had a sterling start with a couple of low-budget and medium-budget hit movies. We were positive about Sun’s entry into the movie production business with its initial focus on low-budget and medium-budget movies given synergies with its broadcasting platforms (marketing and promotion, monetization potential). However, we have become more cautious after Sun’s entry into the high-budget movie production with the buyout of ‘Endhiran’, a Rs0.7 bn production (versus the total budget of 0.5-0.6 bn for 10-12 smaller movies). The Hindi movie market, even with its much larger footprint and multiplex concentration, has been unable to consistently monetize high-budget movies.

Robust 20% yoy Sun TV reported robust 20% yoy growth in EBIT (Sun TV books the cost of production in Sun Pictures and cost of movies acquired for telecast in amortization), marginally below growth in EBIT the 29% yoy growth in revenues. The total operating expenditure at Rs1.2 bn was only marginally ahead of our Rs1.15 bn estimate; it represents over 43% yoy growth over 1QFY09 largely due inclusion of Sun Pictures as well as higher cost of acquisition of movies;; the latter follows from the rising competitive intensity in some key Sun TV markets, in our view. We do not believe the qoq comparison in Sun’s production costs and D&A expenses is valid since Sun changed its accounting policy for amortization of Sun Pictures cost (being booked in D&A expenses versus production costs previously) starting 4QFY09.

Earnings changes

We have revised our 12-month DCF-based target price to Rs235 (Rs215 previously) and our FY2010E and FY2011E EPS estimates to Rs11.3 (Rs11.1 previously) and Rs13.3 (Rs13.1) on account of the following factors.

` We have reduced our WACC assumption for Sun V to 12.5% from 13.0% driven by (1) higher risk appetite of investors, (2) reduction in real (corporate) interest rates in the Indian markets and (3) Sun’s strong balance sheet. However, the business risks (rising competitive intensity in broadcasting, movie production, radio) have increased over a period of time, in our view.

` Subscription revenues. We have increased our FY2010E and FY2011E subscription revenues to Rs3.05 bn (Rs2.95 bn previously) and Rs3.85 bn (Rs3.7 bn previously) on account of likely higher contribution from DTH.

KOTAK INSTITUTIONAL EQUITIES RESEARCH 43 Media Sun TV Network

Trends in all-India GRPs for key Tamil language channels (%)

2,000 Jaya TV Sun TV Kalaignar TV Vijay TV

1,600

1,200

800

400

- 4QFY07 1QFY08 2QFY08 3QFY08 4QFY08 1QFY09 2QFY09 3QFY09 4QFY09 1QFY10

Source: TAM Media Research, compiled by Kotak Institutional Equities

Trends in all-India GRPs for key Telugu language channels (%)

1,100 Eenadu TV Gemini TV Maa Telugu Zee Telugu

880

660

440

220

- 4QFY07 1QFY08 2QFY08 3QFY08 4QFY08 1QFY09 2QFY09 3QFY09 4QFY09 1QFY10

Source: TAM Media Research, compiled by Kotak Institutional Equities

44 KOTAK INSTITUTIONAL EQUITIES RESEARCH Sun TV Network Media

Trends in all-India GRPs for key Kannada language channels (%)

1,000 ETV Kannada Kasturi TV Udaya TV Zee Kannada

800

600

400

200

- 4QFY07 1QFY08 2QFY08 3QFY08 4QFY08 1QFY09 2QFY09 3QFY09 4QFY09 1QFY10

Source: TAM Media Research, compiled by Kotak Institutional Equities

Trends in all-India GRPs for key Malayalam language channels (%)

1,250 Asianet Asianet Plus Kairali Surya TV

1,000

750

500

250

- 4QFY07 1QFY08 2QFY08 3QFY08 4QFY08 1QFY09 2QFY09 3QFY09 4QFY09 1QFY10

Source: TAM Media Research, compiled by Kotak Institutional Equities

KOTAK INSTITUTIONAL EQUITIES RESEARCH 45 Media Sun TV Network

Consolidated profit model, balance sheet, cash model of Sun TV, March fiscal year-ends, 2006-2013E (Rs mn)

2006 2007 2008 2009 2010E 2011E 2012E 2013E Profit model (Rs mn) Net sales 3,219 6,780 8,699 10,394 12,471 14,631 16,848 19,216 EBITDA 2,035 3,874 5,261 6,091 7,139 8,442 9,737 11,092 Other income 172 411 556 470 490 545 673 805 Interest (expense)/income (65) (64) (159) (140) (78) (50) (25) — Depreciation (147) (294) (377) (675) (910) (916) (884) (871) Amortization — (56) (148) (234) (234) (234) (194) (194) Pretax profits 1,995 3,871 5,133 5,512 6,407 7,787 9,307 10,831 Tax-cash (709) (1,509) (1,947) (2,173) (2,139) (2,633) (3,156) (3,677) Tax-deferred 16 108 (67) (126) (48) (23) (17) (14) Minority interest — (9) 148 281 219 123 33 (59) Net profits after minority interests 1,302 2,461 3,267 3,569 4,438 5,253 6,166 7,080 Earnings per share (Rs) 5.3 6.3 8.3 9.1 11.3 13.3 15.6 18.0

Balance sheet (Rs mn) Total equity 3,071 11,932 14,485 17,025 19,619 22,106 24,584 27,054 Deferred Tax 32 (56) 11 138 186 209 227 241 Total borrowings 2,33386769550———— Currrent liabilities 741 1,693 2,516 2,629 2,781 2,889 3,009 3,144 Total capital 6,209 14,478 18,311 20,166 22,691 25,186 27,768 30,447 Cash 732 6,494 4,297 3,868 4,791 6,329 8,005 9,611 Current assets 2,440 3,221 4,542 6,446 7,653 8,970 10,155 11,444 Total fixed assets 2,830 3,543 5,048 5,729 6,318 6,152 6,068 6,047 Intangible assets 206 1,220 2,620 2,320 2,125 1,931 1,737 1,542 Total assets 6,209 14,478 18,311 20,166 22,691 25,186 27,768 30,447

Free cash flow (Rs mn) Operating cash flow, excl. working capital 1,722 3,239 4,091 5,126 6,275 7,347 8,413 9,598 Working capital (251) (1,992) (1,235) (1,790) (1,056) (1,209) (1,065) (1,153) Capital expenditure (2,091) (433) (1,811) (1,250) (1,500) (750) (800) (850) Investments (326) (849) (3,837) (1,148) (1,353) (1,589) (1,857) (2,184) Other income 80 402 523 470 490 545 673 805 Free cash flow (619) 814 1,046 2,086 3,720 5,388 6,548 7,596

Ratios (%) Debt/equity 76.0 7.3 4.8 ————— Net debt/equity 52.1 (47.2) (24.9) (22.4) (24.4) (28.6) (32.6) (35.5) RoAE 36.1 32.9 24.8 22.5 24.0 24.9 26.2 27.2 RoACE 26.6 26.8 24.2 22.5 24.2 25.4 26.7 28.0

Source: Company data, Kotak Institutional Equities estimates

46 KOTAK INSTITUTIONAL EQUITIES RESEARCH

.dot ADD Lanco Infratech (LANCI)

Utilities JULY 30, 2009 RESULT Coverage view: Attractive

Healthy growth in execution led by construction division. Lanco Infratech (LITL) Price (Rs): 420 reported 140% yoy growth in revenues, 57% yoy growth in EBITDA and 13% growth Target price (Rs): 440 in PAT for 1QFY10. Strong growth in construction revenues augurs well for LITL as it BSE-30: 15,173 indicates good traction in its power projects under development. The power business delivered steady performance with revenue surprise from power trading business. We retain our ADD rating with a revised target price of Rs440/share.

Company data and valuation summary Lanco Infratech Stock data Forecasts/Valuations 2009 2010E 2011E 52-week range (Rs) (high,low)458-83 EPS (Rs) 14.5 20.8 36.6 Market Cap. (Rs bn) 93.3 EPS growth (%) (2.5) 43.8 76.2 QUICK NUMBERS Shareholding pattern (%) P/E (X) 29.0 20.2 11.5 Promoters 73.6 Sales (Rs bn) 60.6 82.1 110.6 • 171% yoy increase FIIs 12.7 Net profits (Rs bn) 3.2 4.6 8.1 in construction MFs 0.5 EBITDA (Rs bn) 8.9 14.6 31.1 revenues Price performance (%) 1M 3M 12M EV/EBITDA (X) 24.3 16.4 8.0 Absolute 17.2 89.1 29.4 ROE (%) 16.1 18.7 25.2 • SOTP-based target Rel. to BSE-30 14.2 42.1 17.7 Div. Yield (%) 0.0 0.0 0.0 price of Rs440/share

Construction business drives revenue growth

LITL reported 140% yoy growth in consolidated revenues at Rs21.9 bn for 1QFY10 significantly higher than our estimate of 79% yoy growth. The variance in revenue growth is explained by (1) higher power trading revenues at Rs6.9 bn (Rs3.4 bn more than our estimate) – low margin business (2) increased use of naphtha (Rs1.5 bn) – fuel cost is a pass-through, (3) higher construction revenues and (4) lower elimination in inter-segment revenues (at Rs2.8 bn) compared to our estimates (Rs5.9 bn). Strong growth in standalone revenues to Rs14.5 bn (up 171% yoy) indicates good progress in execution of its power projects under construction.

PAT growth in line with estimates; revise estimates by 3-5%

LITL reported 57% yoy increase in EBITDA and 13% yoy increase in PAT for 1QFY10. Higher construction revenues led to strong growth in EBITDA. However, PAT growth was in line due to the elimination of profits booked on construction done for associates. The reported PAT includes gain of Rs190 mn pertaining to restatement of forex loans for Aban and Kondapalli power projects and Rs146 mn profit on sale of biomass plants. We have revised our earnings estimates for FY2010 to Rs20.8 (Rs20.2 previously) and FY2011 to Rs36.6 (Rs35.1 previously) to factor in (1) higher construction revenues and (2) delay in commercial generation of the Amarkantak-I project. The management indicated that Amarkantak –I is currently running on coal and supplying infirm power. The project will likely start commercial generation on settlement of dispute on the PPA.

Retain ADD rating with a higher target price of Rs440/share (Rs385 previously)

Our SOTP-based value of Rs440/share (Rs385 previously) includes—(1) DCF-equity of power project portfolio at Rs205/share, (2) construction business valued at Rs201/share (145 previously) at EV/EBITDA of 6X on FY2011E, (3) real estate project at 50% of NAV ~Rs23/share, (4) DCF- equity of BOT road projects at Rs5/share and (5) value from sale of carbon credits (Rs8/share). Media reports suggest that LITL has achieved financial closure of 76 MW hydropower plant in Uttarakhand, which is not included in our estimates. The sale of 150 MW from Amarkantak-I on merchant-basis can also add Rs33/share to our target price.

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

Utilities Lanco Infratech

Steady performance of power business, real estate languishes

Power business continues to display steady performance in the absence of any significant generation capacity addition. We factor in Amarkantak-I to start commercial generation from October 2009. The topline growth in power business was led by 466% increase in revenues from power trading business and additional use of naphtha. The use of high cost naphtha is recoverable from tariffs by Lanco Kondapalli, but the power trading business is a low-margin business (Rs69 mn in 1QFY10 compared to Rs28 mn in 1QFY09).

We note new bookings have not picked up at Lanco Hills project and construction continues for 3 mn sq.ft of residential space. LITL recorded revenues of Rs178 mn in 1QFY10 (-1% yoy).

Lanco Infratech (Consolidated), Quarterly performance, March year-ends (Rs mn)

(% Chg.) 1QFY10 1QFY10E 1QFY09 4QFY09 1QFY10E 1QFY09 4QFY09 FY2010E FY2009 (% Chg.) Net sales 21,929 12,221 9,139 20,534 79 140 7 82,051 60,592 35 Total expenses (19,185) (7,389) (17,520) (68,059) (51,846) EBITDA 2,744 2,235 1,751 3,015 23 57 (9) 13,992 8,745 60 Depreciation (328) (208) (330) (2,351) (1,073) EBIT 2,416 1,542 2,685 11,641 7,672 Other income 254 128 178 1,047 691 Net interest (605) (293) (529) (3,122) (1,773) PBT 2,065 1,525 1,378 2,334 35 50 (12) 9,566 6,590 45 Tax (813) (288) (681) (2,784) (1,690) Profit before Minority Interest 1,252 1,174 1,090 1,653 7 15 (24) 6,782 4,899 38 Minority interest (430) (363) (508) (2,159) (1,684) Net Profit 822 854 727 1,145 (4) 13 (28) 4,623 3,216 44 Extraordinary income (loss) 337 (136) (246) 337 (412)

EBITDA margin (%) 12.5 19.2 14.7 17.1 14.4 Effective tax rate (%) 39.4 20.9 29.2 29.1 25.7

Segment Revenues Construction 14,463 5,182 18,544 179 (22) 59,894 40,512 48 less inter-segment revenues (2,837) (842) (5,255) 237 (46) (17,968) (8,747) Net construction revenues 11,625 4,340 13,289 168 (13) 41,926 31,765 32 Power 10,126 4,201 7,039 141 44 35,324 27,149 30 Property development 178 474 179 (63) (1) 1,542 1,574 (2) Others 25 126 54 (80) (54) 231 Net revenues 21,954 9,140 20,561 140 7 78,791 60,832

EBIT Construction 2,134 688 2,375 210 (10) 7,208 5,445 32 Power 642 730 1,044 (12) (39) 5,245 3,203 64 Property development 38 108 (214) (65) (118) 176 91 94

EBIT Margin (%) Construction 14.8 13.3 12.8 12.0 13.4 Power 6.3 17.4 14.8 14.8 11.8 Property Development 21.1 22.7 (119.3) 11.4 5.8

Source: Company, Kotak Institutional Equities estimates

48 KOTAK INSTITUTIONAL EQUITIES RESEARCH Lanco Infratech Utilities

Strong growth in construction revenues

Strong growth in standalone revenues to Rs14.5 bn (up 171% yoy) during 1QFY10 indicates good progress in execution of its power projects under construction. Inter- segment elimination was lower at Rs2.8 bn compared to Rs5.3 bn in 4QFY09, when a significant contribution of construction emanated from subsidiaries (Kondapalli extn.). Revenue growth was led by significant progress in execution at Nagarjuna Power (~Rs5 bn) and Anpara C (~Rs3 bn), which are classified as associate companies.

LITL has an order book of Rs94.6 bn as on June 30, 2009 compared to Rs10.3 bn as on March 31, 2009. Share of power projects in the order book has reduced to 78% from 83% during the same period. We expect the order inflow to pick up as the next set of power projects achieves financial closure. Media reports suggest 76 MW hydro power project at Uttarakhand has recently achieved financial closure. LITL is additionally working on more projects at Amarkantak (1,200 MW) and Orissa (2,400 MW).

Lanco Infratech (Standalone), Quarterly performance, March year-ends (Rs mn)

(% Chg.) 1QFY10 1QFY09 4QFY09 1QFY09 4QFY09 FY2010E FY2009 (% Chg.) Net sales 14,463 5,339 18,544 171 (22) 59,894 40,512 48 Total expenses (12,369) (4,477) (16,167) (2,368) (1,602) EBITDA 2,094 861 2,377 143 (12) 57,525 38,910 48 Depreciation (143) (52) (157) (592) (405) EBIT 1,951 809 2,220 56,934 38,505 Other income 404 33 115 176 464 Net interest (464) (177) (470) (1,749) (1,386) PBT 1,891 666 1,865 184 1 55,360 37,583 47 Tax (604) (197) (671) (2,450) (1,382) Net Profit 1,287 469 1,194 174 8 52,910 36,201 46

EBITDA margin (%) 14.5 16.1 12.8 96.0 96.0 Effective tax rate (%) 32.0 29.6 36.0 4.4 3.7

Source: Company, Kotak Institutional Equities estimates

SOTP-based target price of Rs440/share (Rs385 previously)

Our SOTP-based value of Rs440/share (Rs385 previously) includes—(1) DCF-equity of power project portfolio at Rs205/share, (2) construction business valued at Rs201/share (145 previously) at EV/EBITDA of 6X on FY2011E, (3) real estate project at 50% of NAV ~Rs23/share, (4) DCF-equity of BOT road projects at Rs5/share and (5) value from sale of carbon credits (Rs8/share).

KOTAK INSTITUTIONAL EQUITIES RESEARCH 49 Utilities Lanco Infratech

SOTP value of Rs440/share

Capacity (MW)Equity value Equity Inv. Attributable value Gross Attributable Est. CoD (Rs mn) (Rs mn) P/BV (X) (%) (Rs mn)Rs/share) Operating power plants Lanco Kondapalli 368 217 6,265 3,400 1.8 59 3,696 Aban Power 120 61 1,866 1,318 1.4 51 952 Lanco Electric Utility (Power trading) 1,101 212 5.2 100 1,099 Power plants under construction Lanco Amarkantak 600 456 Sep-09/Feb-10 9,344 5,598 1.7 76 7,102 Lanco Green 70 63 Mar-10 1,219 840 1.5 90 1,097 Vamshi Hydro 10 9 Mar-09 144 155 0.9 91 132 Vamshi Industrial 10 9 Sep-09 266 153 1.7 91 243 Nagarjuna Power 1,200 1,200 Apr-10/Sep-10 16,279 9,600 1.7 100 16,279 Lanco Energy - Teesta VI 500 370 Sep-12 7,340 5,900 1.2 74 5,432 Anpara 'C' 1,200 1,200 Jun-11/Sept-11 8,280 8,800 0.9 100 8,280 Lanco Kondapalli extn. 366 216 Dec-09 15,224 59 8,982 Sub total 4,444 3,801 67,331 35,976 1.9 53,294 240 Net equity funding requirement (7,612) (34) Power (A) 45,682 205 Construction (B) 44,644 201 Property development (C) 5,117 23 Road projects (D) 1,006 5 Carbon credits (E) 1,340 6 Grand total (A+B+C+D+E) 97,789 440

Source: Kotak Institutional Equities estimates

50 KOTAK INSTITUTIONAL EQUITIES RESEARCH Lanco Infratech Utilities

Segmental breakup of LITL financials, March fiscal year-ends (Rs mn)

2007 2008 2009 2010E 2011E 2012E Revenue flows Power 10,990 17,501 27,168 38,584 64,707 81,924 Construction 5,417 15,745 40,512 59,894 51,449 36,209 Real estate — 1,039 1,732 1,542 3,220 5,649 Less inter-segmental (349) (1,873) (8,821) (17,968) (8,746) (6,155) Total 16,058 32,413 60,592 82,051 110,630 117,626 EBITDA flows Power 3,216 3,706 3,818 7,100 23,829 32,111 Construction 1,141 3,141 5,358 9,373 7,280 3,675 Real estate — 341 514 331 949 1,911 Less inter-segmental (52) (281) (1,167) (2,812) (1,238) (625) Total 4,305 6,907 8,523 13,992 30,820 37,072 Attributable EBITDA 3,056 5,576 8,033 13,181 22,343 26,903 Net profit Power 1,454 2,260 2,129 3,685 8,800 11,811 Minority interest (576) (939) (831) (1,350) (3,092) (3,170) Attributable PAT from Power 877 1,321 1,298 2,335 5,708 8,641 Construction 732 2,002 2,649 4,758 3,018 1,121 Less inter-segmental (52) (281) (450) (1,427) (513) (191) Attributable PAT from Construction 679 1,721 2,198 3,331 2,505 931 Real estate — 218 288 59 452 517 Minority interest — (57) (75) (15) (117) (134) Attributable PAT from Real Estate — 161 213 44 334 383 Attributable profit 1,557 3,203 3,709 5,709 8,547 9,954 EPS (Rs) Power 3.9 5.9 5.8 10.5 25.7 38.9 Construction 3.1 7.7 9.9 15.0 11.3 4.2 Real estate — 0.7 1.0 0.2 1.5 1.7 Total 7.0 14.4 16.7 25.7 38.4 44.8 EPS differential due to accounting for depreciation 1.5 0.4 (2.2) (4.9) (1.8) (1.5) Reported EPS 8.5 14.8 14.5 20.8 36.6 43.2 Attributable net debt Total 11,470 48,720 85,728 107,463 117,220 116,661

Source: Company, Kotak Institutional Equities estimates

Change in estimates for Lanco Infratech (consolidated), March fiscal year-ends (Rs mn)

Revenues EBITDA Net profit New Old % Chg. New Old % Chg. New Old % Chg. 2010E 82,051 64,555 27.1 15,039 14,569 3.2 4,623 4,492 2.9 2011E 110,630 104,302 6.1 31,456 29,935 5.1 8,145 7,801 4.4

Source: Kotak Institutional Equities estimates

KOTAK INSTITUTIONAL EQUITIES RESEARCH 51 Utilities Lanco Infratech

Lanco: Profit model, balance sheet, cash model 2006-2011E, March fiscal year-ends (Rs mn)

2006 2007 2008 2009 2010E 2011E Profit model (Rs mn) Net sales 1,471 16,058 32,413 60,592 82,051 110,630 EBITDA 167 4,198 6,993 8,745 13,992 30,820 Other income 13 416 708 691 1,047 636 Interest (36) (829) (920) (1,773) (3,122) (10,414) Depreciation (19) (656) (776) (1,073) (2,351) (5,660) Pretax profits 125 3,130 6,005 6,590 9,566 15,383 Tax (33) (471) (1,404) (1,690) (2,784) (3,411) Minority Interest 79 (778) (1,304) (1,684) (2,159) (3,827) Net profits 171 1,881 3,297 3,216 4,623 8,145 Extraordinary items (0) (1) 245 (412) 337— — Earnings per share (Rs) 5.5 8.5 14.8 14.4 20.8 36.6

Balance sheet (Rs mn) Total equity 954 15,105 18,333 21,587 27,974 36,632 Deferred taxation liability 31 92 173 186 696 3,412 Total borrowings 1,495 20,821 37,200 130,135 166,618 178,221 Currrent liabilities 1,581 11,424 27,038 35,069 50,719 44,735 Minority Interest 41 41 41 41 41 42 Total liabilities and equity 4,101 47,482 82,785 187,018 246,048 263,041 Cash 414 5,050 7,411 7,733 20,124 24,535 Current assets (excl cash) 2,264 12,013 30,379 37,406 52,851 51,567 Total fixed assets 409 24,390 38,029 141,073 172,270 186,135 Investments 1,015 6,029 6,966 804 803 803 Deferred Expenditure 000111 Total assets 4,101 47,482 82,785 187,018 246,048 263,041

Free cash flow (Rs mn) Operating cash flow, excl. working capital 120 3,739 5,632 6,876 11,557 26,372 Working capital (230) 95 (2,752) 1,004 205 (4,701) Capital expenditure (211) (24,637) (14,415) (104,117) (33,547) (19,525) Investments (419) (5,014) (936) 6,161 1 — Free cash flow (740) (25,817) (12,472) (90,076) (21,784) 2,147

Source: Company, Kotak Institutional Equities estimates

52 KOTAK INSTITUTIONAL EQUITIES RESEARCH

.dot ADD Housing Development & Infrastructure

Property JULY 30, 2009 RESULT Coverage view: Cautious Reinitiate with ADD as revenue visibility starts improving. After the recent QIP of Price (Rs): 268 Rs16.8 bn and the success of the project launches, HDIL’s debt/equity ratio has dropped Target price (Rs): 295 to 0.45X. We re-initiate coverage with an ADD rating and a target price to Rs295 based on 10% discount to Mar’11-based NAV of Rs330. Our EPS estimate is Rs15.5 and BSE-30: 15,173 Rs30.1 for FY2010E and FY2011E, respectively. HDIL is currently quoting at 1.4X FY2010E book value of Rs190/share which is quite reasonable, in our view.

Company data and valuation summary Housing Development & Infrastructure Stock data Forecasts/Valuations 2009 2010E 2011E 52-week range (Rs) (high,low)407-63 EPS (Rs) 26.0 12.0 23.3 Market Cap. (Rs bn) 92.6 EPS growth (%) (49.2) (53.9) 94.8 QUICK NUMBERS Shareholding pattern (%) P/E (X) 10.3 22.4 11.5 Promoters 61.5 Sales (Rs bn) 18.2 14.8 29.3 • TDR sales of 1.8 mn FIIs 4.3 Net profits (Rs bn) 9.2 5.3 11.1 sq. ft at Rs1,500/sq. MFs 0.4 EBITDA (Rs bn) 10.2 5.9 14.1 ft Price performance (%) 1M 3M 12M EV/EBITDA (X) 12.5 19.4 7.2 Absolute 14.7 82.7 (23.6) ROE (%) 22.4 9.3 14.9 • D/E reduces to 0.4X Rel. to BSE-30 11.7 37.3 (30.6) Div. Yield (%) 0.0 1.0 1.9 from 0.9X post QIP

1QFY10 revenues driven by TDR sales at an average of Rs1,500/sq. ft • NAV of Rs332/share

HDIL reported 1QFY10 revenues of Rs3.0 bn (down 48% yoy) and EBITDA of Rs1.3 bn (down 70%). Revenues comprised the sale of 1.8 mn sq. ft of TDRs in 1QFY09 at an average pricing of Rs1,500/sq. ft and sale of FSI in the Vasai-Virar region. HDIL has an EBITDA margin of 39.3% indicating cost of TDR generation is Rs900/sq. ft.

We note HDIL books revenues on a project completion basis and thus recently launched residential projects are currently not contributing to revenues. HDIL has customer advances of Rs1.3 bn accrued from these projects.

HDIL also capitalizes a large portion of the interest. HDIL had a total interest outgo of Rs1.47 bn for 1QFY10, out of which it capitalized Rs1.3 bn.

We reinitiate with ADD rating and target price of Rs295

We reinitiate with ADD rating with a target price of Rs295/share which is based on a 10% discount to our March 2011 based NAV of Rs332/share (Exhibit 2). Our NAV comprises Rs206/share for real estate projects and Rs158 for airport slum rehabilitation project and we adjust for debt/other investments. We would like to assign a discount of 10% on account of riskier nature of slum rehabilitation business. HDIL is currently quoting at 1.4X FY2010E book value of Rs190/share, which is quite reasonable, in our view.

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

Property Housing Development & Infrastructure

HDIL :1QFY2010 results

% chg Kotak estimates FY09/FY08 (in Rs mn) 1QFY09 4QFY09 1QFY10 qoq yoy 1QFY10E % deviation FY09E FY10E (%) Net sales 5,701 3,578 2,954 (17.5) (48.2) 2,577 14.6 17,193 14,785 -14%

Operating costs (1,045) (2,614) (1,793) (31.4) 71.5 (1,546) 15.9 (9,389) (8,841) -6% Cost of land/construction cost (4,210) (4,590) (4,182) (8,304) (8,025) Staff Cost (47) (41) (53) (199) (372) Other Expenditure (209) (191) (1,193) (886) (444) Increase/(Decrease) in Stock 3,420 2,208 3,636

EBITDA 4,655 964 1,161 20.4 (75.1) 1,031 12.6 7,804 5,945 -24% Other income 180 309 233 155 953 800 Interest costs (1,451) (297) (169) (387) (580) (695) Depreciation (12) (9) (9) (5) (24) (48) PBT 3,372 968 1,216 25.6 (63.9) 794 53.2 8,153 6,002 -26% Taxes (193) (350) (142) (119) (941) (687) PAT 3,179 619 1,075 73.7 (66.2) 675 59.2 7,212 5,315 -26%

Key ratios

EBITDA margin (%) 81.7 27.0 39.3 40.0 45.4 40.2 PAT margin (%) 55.8 17.3 36.4 26.2 41.9 35.9 Effective tax rate (%) 5.7 36.1 11.6 15.0 11.5 11.4

Source: Company, Kotak Institutional Equities estimates

Our March 2011 based NAV is Rs332/share NAV sensitivity to growth rate in selling prices

March '11 based NAV Growth rate in selling prices 0% 3% 5% 10% Valuation (Rs bn) 55.2 67.1 76.5 102.8 Residential projects 22 18 36 53 Commercial/retail projects 22 20 22 29 Slum rehabilitation projects 18 23 18 21 Add: BKC rental property 1.5 1.5 1.5 1.5 Add: Money to be received from promoter 4.7 4.7 4.7 4.7 Net debt (23.0) (23.0) (23.0) (23.0) Add: Mumbai slum rehabilitation project 63.7 63.7 63.7 63.7 NAV (Rs bn) 102.1 114.0 123.5 149.7 Total no of shares 371.8 NAV/share 332 Target price @10% discount to NAV 295

Source: Kotak Institutional Equities estimates

Equity raising and new launches to significantly improve balance sheet

HDIL raised Rs16.9 bn through a QIP issue of 70.4 mn shares at Rs240/share, resulting in a dilution of 25.6%. Management has indicated that HDIL has already repaid Rs13.5 bn of its outstanding debt of Rs40 bn as of March 2009. Post QIP, HDIL’s D/E reduces to 0.4X from 0.9X, thus reducing the financial strain considerably.

Further, HDIL has launched three projects in 1HCY09 with a cumulative volume of 2 mn sq. ft at prices which are 30-40% below peak levels. We give a brief description of the new launches.

` Kurla Premier. The Kurla Premier project targeted at mid-and lower income customers comprises 950 apartments with 0.9 mn sq. ft of saleable area. The project launched in March 2009 will be a nine-storey building with three wings with a 30- month completion period. As of April 2009, HDIL has sold 685 apartments at an average realization of Rs6,000/sq. ft.

54 KOTAK INSTITUTIONAL EQUITIES RESEARCH Housing Development & Infrastructure Property

` Metropolis at Four Bungalows, Andheri (West). This project targeted at mid-and- higher income customers comprises 414 apartments with 0.7 mn sq. ft of saleable area. The project launched in March 2009 will be a 27-storey building with a 33- month completion period. As of April 2009, HDIL has sold 390 apartments at an average realization of Rs8,000/sq. ft.

` Galaxy: The Galaxy project is located in Bhandari Estate, Kurla (East). The Galaxy project comprises approximately 400,000 sq. ft of saleable area. The project will be a 13-storey building with two wings, and comprising 450 apartments targeted at mid- and lower-income customers. This project was launched in March 2009 and the scheduled date of completion is expected to be April 2011. HDIL has sold 175 apartments in this project.

Project pipeline remains strong. HDIL intends to launch around 3 mn sq. ft of real estate in Mumbai at Goregaon (W) and Bhandup. The management has highlighted that it intends to keep pricing competitive and focus on generating volumes. Notably, HDIL has triggered price rationalization in Mumbai with its launches in Andheri (W) and Kurla.

HDIL has a project pipeline of around 3 mn sq. ft Recently launched projects and new launches in the near future

Sale price Volumes Sale value Cash flow (Rs/sq. ft) (mn sq. ft) (Rs mn) (Rs mn) HDIL Premier* Kurla (W) 6,000 0.6 3,450 2,490 Metropolis* Andheri (W) 8,000 0.6 5,100 4,140 Galaxy* Kurla (E) 6000 0.4 2,300 1,660 Project Goregaon 6,500 1.5 8,625 6,225 Kilburn Bhandup 5,400 1 5,750 4,150 Pant Nagar Ghatkopar 5,351 0.5 2,875 2,075 Eveready Navi Mumbai 4,500 0.8 4,600 3,320 Total 5.4 32,700 24,060

Note: (a) Assuming construction cost of Rs1,600/sq. ft * already launched

Source: Kotak Institutional Equities estimates

Large TDR generation from airport slum rehabilitation project

We note that TDR prices have been picking up over the past quarter as developers launch more projects in Mumbai. From a stress case pricing of Rs1,000/sq. ft, TDR prices have increased sharply in the last three months to Rs1,900/sq. ft/month. HDIL generates these TDRs from execution of airport slum rehabilitation project. Exhibit 4 is our financial model for airport SRA while we describe key assumptions as below

TDR prices. We assume average pricing of Rs1,700/sq. ft for FY2010E and Rs2,000/sq. ft from FY2011E onwards. We feel that Rs2,000 is sustainable since cost of TDR generation for most developers is minimum Rs1,500/sq. ft. Peak pricing for TDRs was iRs3,500+/sq. ft in mid-2007.

TDR volumes. We assume volume of 5 mn sq. ft for FY2010-12E period and total absorption of 44 mn sq. ft till FY2018E.

HDIL is currently executing the airport redevelopment project which involves rehabilitation of 85,000 families and development of part of the cleared land. With 350 sq. ft to be constructed for each family, total construction area for slum rehabilitation will likely be 29.8 mn sq. ft and HDIL will get land TDRs of 8 mn sq. ft.

KOTAK INSTITUTIONAL EQUITIES RESEARCH 55 Property Housing Development & Infrastructure

We expect sales of 5 mn sq. ft of TDRs each year in the period FY2010E-12E Mumbai airport slum rehabilitation model

FY2009 FY2010 FY2011 FY2012 FY2013 FY2014 FY2015 FY2016 FY2017 FY2018 HDIL has full benefits/ costs Rehabilitation area constructed (mn sq. ft) 6.0 6.0 6.0 6.0 Cost of construction (Rs bn) (7.4) (7.4) (7.4) (7.4) Balance purchase of land to be incurred - (5.0) Sale of TDR (mn sq. ft) 2.5 5.0 5.0 5.0 4.0 4.0 4.0 4.0 4.0 6.3 Selling price assumption of TDR (Rs/sq. ft) 1,800 1,700 1,700 2,000 2,000 2,000 2,000 2,000 2,000 2,000 Sale Inflow from TDR (Rs bn) 4.5 8.5 8.5 10.0 8.0 8.0 8.0 8.0 8.0 12.5 NPV (Rs bn) 22.7

HDIL gets 55% share of land Saleable area constructed (mn sq. ft) 0 1 2 2 2 2 2 1 1 Selling price (Rs/sq. ft) 6,000 6,000 6,000 6,000 10,500 11,025 11,025 11,025 11,576 Construction cost(Rs/sq. ft) 1,800 1,800 1,800 1,800 3,000 3,000 3,000 3,000 3,000 Sale Inflow (Rs bn) - 612122122221112 Construction cost (Rs bn) - (2) (4) (4) (6) (6) (6) (3) (3) Taxes (Rs bn) - 1 1 1 4 4 4 2 2

NPV (Rs bn) 41

Source: Kotak Institutional Equities estimates

Sale of TDRs will contribute significantly to near-term revenues

Exhibit 5 presents our revenue estimates for HDIL broken down by major business segments. We briefly highlight the key drivers and discuss the key assumptions behind our earnings model below.

` Airport slum rehabilitation revenues. We model sales of 41.3 mn sq. ft of TDRs and sales of 13 mn sq. ft of FSI over the period FY2010E-18E. We assume sales of 5 mn sq. ft of TDRs each year in the period FY2010E-12E at an average pricing of Rs1,700/sq. ft for FY2010E and Rs2,000/sq. ft from FY2011E onwards. We assume sales of 3 mn sq. ft of real estate project in FY2011E-12E at an average pricing of Rs6,000/sq. ft.

` Slum redevelopment (SRS) revenues. We model revenue booking of Rs18.6 bn from 2.1 mn sq. ft of SRA projects over the period FY2010E-12E. The projects contributing to revenue in this segment are— Pant Nagar (Ghatkopar), Malwani (Malad) and Bharat Nagar (BKC).

` Residential revenues. We project non-SRS housing revenues of Rs9.9 bn in FY2011E and Rs25.5 bn in FY2012E. We have nil housing revenues in FY2010E since none of the residential projects are getting completed and hence no revenue is booked as per HDIL’s revenue recognition accounting policy. More than 70% of the revenue booking in FY2011E-12E is from the recently launched projects and the projects to be launched post monsoon in FY2010. Residential revenues jump sharply in FY2012E due to revenue booking from recently launched projects.

` Commercial area revenues. We estimate commercial revenue booking of Rs12.5 bn over the period of FY2010E-12E from volumes of 2.1 mn sq. ft. Almost 40% of the revenue booking is coming from Harmony, Oshiwara.

56 KOTAK INSTITUTIONAL EQUITIES RESEARCH Housing Development & Infrastructure Property

Revenue model of HDIL, March fiscal year-ends, FY2010E-12E (Rs mn)

2006 2007 2008E 2009E 2010E 2011E 2012E Residential Apartment volumes (mn sq. ft) — — 0.9 0.1 — 1.92 5.94 Revenues 358 2,640 2,503 807 — 9,944 25,948 Rate/sq. ft — — 2,819 6,025 — 5,185 4,370 Commercial revenues Commercial volumes (mn sq. ft) — — 0.2 0.2 0.2 0.5 1.3 Revenues 1,683 650 1,762 2,927 2,477 3,932 6,100 Rate/sq. ft — — 10,213 13,010 14,175 7,188 4,577 Slum rehabilitation revenues Volumes (mn sq. ft) — — 1.1 1.8 0.7 1.0 0.5 Revenues 1,600 7,639 17,958 9,791 3,638 6,726 8,276 Rate/sq. ft — — 15,798 5,374 5,435 6,805 17,457 Land sales/TDR sales Volumes (mn sq. ft) — — — — — — — Revenues 581 1,106 1,500 4,500 8,500 8,500 10,000 Rate/sq. ft — — — — — — — Revenue from real estate 4,222 12,034 23,724 18,025 14,615 29,103 50,324 Others 156 130 133 160 170 182 194 Revenues 4,377 12,165 23,857 18,185 14,785 29,284 50,518 % growth 485 178 96 (24) (19) 98 73

Revenue mix (%) Residential 8.2 21.7 10.5 4.4 — 34.0 51.4 Commercial revenues 38.4 5.3 7.4 16.1 16.8 13.4 12.1 Slum rehabilitation revenues 36.5 62.8 75.3 53.8 24.6 23.0 16.4 Land sales 13.3 9.1 6.3 — — — — Others 3.6 1.1 0.6 0.9 1.2 0.6 0.4

Total 100 100 100 100 100 100 100

Source: Kotak Institutional Equities estimates

KOTAK INSTITUTIONAL EQUITIES RESEARCH 57 Property Housing Development & Infrastructure

Profit model of HDIL, March fiscal year-ends, 2006-2011E (Rs mn)

2006 2007 2008 2009 2010E 2011E Total revenues 4,377 12,165 23,804 17,193 14,785 29,284 Land/Construction costs (2,911) (5,237) (6,336) (8,304) (8,025) (13,846) Construction costs ------Employee costs (11) (84) (122) (199) (372) (421) SG&A costs (79) (222) (431) (886) (444) (879) EBITDA 1,376 6,622 16,914 7,804 5,945 14,139 Other income 24 0 529 953 800 800 Interest (106) (430) (1,408) (580) (695) (1,468) Depreciation (4) (10) (15) (24) (48) (74) Pretax profits 1,291 6,182 16,021 8,153 6,002 13,397 Profit/(loss) share of associates — — — — — — Current tax (149) (758) (1,910) (932) (673) (2,246) Deferred tax (2) (4) (7) (9) (14) (16) Net income 1,139 5,420 14,103 7,212 5,315 11,135

EPS (Rs) Primary 4.9 23.4 53.8 26.2 15.4 30.0 Fully diluted 4.9 23.4 53.8 26.2 15.4 30.0

Shares outstanding (mn) Year end 231 231 275 275 345 371 Primary 231 231 262 275 345 371 Fully diluted 231 231 262 275 345 371

Cash flow per share (Rs) Primary 5 26 53 17 5 24 Fully diluted 5 26 53 17 5 24

Growth (%) Net income (adjusted) 681 376 160 (49) (26) 110 EPS (adjusted) 134 376 130 (51) (41) 95 DCF/share 103 409 104 (68) (69) 364

Cash tax rate (%) 12 12 12 11 11 17 Effective tax rate (%) 12 12 12 12 11 17

Source: Company, Kotak Institutional Equities estimates

58 KOTAK INSTITUTIONAL EQUITIES RESEARCH Housing Development & Infrastructure Property

Inventory has increased sharply yoy on account of investment in airport slum rehabilitation project Quarter end balance sheets

FY2007 2QFY08 3QFY08 FY2008 1QFY09 2QFY09 3QFY09 4QFY09 1QFY10 Source of funds Shareholders funds 7,268 27,340 30,042 36,372 39,552 42,209 44,057 44,676 47,451 Capital 1,800 2,143 2,143 2,143 2,143 2,755 2,755 2,755 2,755 Reserves and surplus 5,468 25,197 27,899 34,229 37,409 39,454 41,302 41,922 42,996 Share application money 1,700 Loan funds 3,757 4,940 16,853 31,127 38,162 39,478 40,551 41,433 43,475 Deferred tax liability 8 10 11 15 16 18 21 24 27 11,033 32,289 46,905 67,515 77,730 81,705 84,629 86,134 90,953 Application of funds Fixed assets 239 306 311 579 614 648 669 728 979 Gross block 249 317 324 553 569 583 594 629 924 Less: Depreciation 13 17 20 26 31 36 40 49 57 Net block 236 300 304 527 538 547 554 580 867 Capital work-in-progress 3 6 7 52 76 100 115 147 111 Investment 1,650 6,295 2,044 2,126 2,810 4,107 4,362 3,029 4,871 Current assets 16,827 31,386 54,274 71,423 82,242 87,035 86,611 88,673 92,455 Inventories 11,525 18,952 28,458 51,028 54,448 55,834 62,263 64,417 68,053 Sundry Debtors 3,103 737 704 558 572 1,686 1,530 1,654 2,219 Cash and bank balances 48 5,752 8,467 3,494 3,484 4,016 972 752 582 Loans and advances 2,152 5,945 16,645 16,343 23,738 25,498 21,847 21,850 21,601 Less: Current liabilites and provisions 7,864 5,709 9,733 6,629 8,065 10,205 7,013 6,296 7,352 Liabilities 7,213 5,077 9,694 4,917 6,632 9,392 6,849 6,115 7,070 Provisions 650 632 39 1,711 1,433 813 165 181 282 Misc. expenditure 180111015128121000 11,033 32,289 46,905 67,515 77,730 81,705 84,629 86,134 90,953 Key ratios Debt/Equity 0.5 0.2 0.6 0.9 1.0 0.9 0.9 0.9 0.9 Net debt/Equity 0.5 (0.0) 0.3 0.8 0.9 0.8 0.9 0.9 0.9 Growth in inventory (%) qoq 50.2% 79.3% 6.7% 2.5% 11.5% 3.5% 5.6%

Source: Kotak Institutional Equities

KOTAK INSTITUTIONAL EQUITIES RESEARCH 59 Property Housing Development & Infrastructure

Balance sheet of HDIL, March fiscal year-ends, 2006-2011E (Rs mn)

2006 2007 2008 2009E 2010E 2011E Equity Share capital 500 1,800 2,143 2,755 3,455 3,715 Reserves/surplus 1,350 5,468 34,272 42,860 64,650 78,087 Total equity 1,850 7,268 36,415 45,614 68,105 81,802 Deferred tax liability/(asset) 4 8 15 (1,064) (1,050) (1,034) Liabilities Secured loans 1,965 3,757 19,461 37,965 25,965 22,965 Unsecured loans — — 11,667 — — — Total borrowings 1,965 3,757 31,127 37,965 25,965 22,965 Currrent liabilities 4,163 7,864 7,477 9,599 18,362 32,249 Total capital 7,982 18,897 75,034 92,114 111,382 135,982 Assets Cash 397 48 3,505 3,466 2,993 13,910 Current assets 6,387 16,947 68,903 85,502 105,139 118,668 Gross block 56 249 576 677 829 1,056 Less: accumulated depreciation 6 13 32 61 109 183 Net fixed assets 49 236 544 616 720 874 Capital work-in-progress 10 3 52 — — — Total fixed assets 60 239 596 616 720 874 Intangible assets — — — — — — Investments 1,133 1,650 2,006 2,506 2,506 2,506 Misc. expenses 6 13 24 24 24 24 Total assets 7,982 18,897 75,034 92,114 111,382 135,981

Leverage ratios (%) Debt/equity 105.9 51.6 85.4 85.2 38.7 28.4 Debt/capitalization 51.4 34.0 46.1 46.0 27.9 22.1 Net debt/equity 84.5 51.0 75.8 77.4 34.3 11.2 Net debt/capitalization 45.8 33.8 43.1 43.6 25.5 10.1 RoAE 88.7 118.7 64.5 17.8 9.5 15.1 RoACE 45.4 78.1 39.1 10.3 6.8 12.6

Source: Company, Kotak Institutional Equities estimates

60 KOTAK INSTITUTIONAL EQUITIES RESEARCH Housing Development & Infrastructure Property

Cash flow statement of HDIL, March fiscal year-ends, 2005-2011E (Rs mn)

2006 2007 2008 2009E 2010E 2011E Operating Pre-tax profits before extraordinary items 1,291 6,182 16,021 9,147 6,002 13,397 Depreciation 3 6 15 29 48 74 Taxes paid (92) (199) (1,637) (1,026) (673) (2,246) Other income (24) (0) (527) (800) (800) (800) Interest expenses 31 40 43 1,792 695 1,468 Interest paid (31) (40) (43) (4,480) (3,476) (2,936) Extraordinary items (6) (7) 7 - - - Working capital changes (a) (1,282) (7,420) (53,449) (11,789) (8,093) 1,826 Total operating (111) (1,439) (39,569) (7,128) (6,297) 10,783 Operating, excl. working capital (b) 1,177 5,989 13,872 4,661 1,796 8,957 Investing Capital expenditure (30) (186) (455) (49) (152) (228) (Purchase)/Sale of assets/businesses — - 0 - - - (Purchase)/Sale of investments (532) (518) 190 (500) - - Interest/dividend received 0 0 - 800 800 800 Total investing (c) (561) (703) (265) 251 648 572 Financing Proceeds from issue of share capital - - 17,136 - 18,360 4,680 Proceeds from borrowings 1,051 1,792 27,371 6,838 (12,000) (3,000) Dividends paid (d) - - (1,230) - (1,184) (2,118) Total financing 1,051 1,792 43,277 6,838 5,176 (438)

Net increase in cash and cash equivalents 378 (350) 3,443 (39) (473) 10,917 Beginning cash 19 397 62 3,505 3,466 2,993 Ending cash 397 47 3,505 3,466 2,993 13,910

Gross cash flow (b) 1,177 5,989 13,872 4,661 1,796 8,957 Free cash flow (b) + (a) + (c) (667) (2,135) (39,841) (6,877) (5,649) 11,355 Excess cash flow (b) +(a) + (c) + (d) (667) (2,135) (41,071) (6,877) (6,833) 9,237

Source: Kotak Institutional Equities estimates

KOTAK INSTITUTIONAL EQUITIES RESEARCH 61

.dot BUY IRB Infrastructure (IRB)

Infrastructure JULY 30, 2009 RESULT Coverage view: Attractive

Results boosted by construction business. IRB reported a strong revenue growth of Price (Rs): 188 80% yoy and PAT growth of 50% led construction segment. Surat-Dahisar toll Target price (Rs): 200 collection data implies a per-day toll collection of Rs8.6 mn. We highlight potential BSE-30: 15,173 sharp pick up in toll collection from current trough levels in the Surat-Dahisar and Bharuch-Surat projects led by economic revival. Mumbai-Pune reported a healthy toll revenue growth of about 6% yoy. Reiterate BUY with a target price of Rs200/share.

Company data and valuation summary IRB Infrastructure Stock data Forecasts/Valuations 2009 2010E 2011E 52-week range (Rs) (high,low)200-64 EPS (Rs) 5.3 10.7 13.6 Market Cap. (Rs bn) 62.3 EPS growth (%) 54.3 101.7 27.5 QUICK NUMBERS Shareholding pattern (%) P/E (X) 35.4 17.6 13.8 Promoters 74.4 Sales (Rs bn) 9.9 20.9 30.4 • Strong revenue FIIs 9.2 Net profits (Rs bn) 1.8 3.5 4.5 growth of 80% yoy MFs 4.1 EBITDA (Rs bn) 4.4 9.3 11.7 Price performance (%) 1M 3M 12M EV/EBITDA (X) 18.7 9.7 9.0 • Higher-than- Absolute 21.2 97.2 32.7 ROE (%) 10.1 17.4 18.1 expected Rel. to BSE-30 18.1 48.2 0.0 Div. Yield (%) 0.6 0.0 0.0 construction margins of 18.4% Strong revenue growth and margin expansion in construction business • Surat-Dahisar per IRB reported strong yoy revenue growth of 80% in 1QFY10 to Rs4.1 bn, about 12% higher than day toll collection our estimate of Rs3.7 bn. However, EBITDA margins came in significantly below estimates at of about Rs8.6 mn 40.1% likely led by lower-than-expected toll segment margins. The company reported a PAT of Rs815 mn, up 50% yoy, versus our estimate of Rs626 mn led by higher other income and lower- than-expected interest expense during the quarter. The construction segment reported a strong growth of 120.7% in revenues to Rs2.7 bn in 1QFY10 versus Rs1.2 bn in 1QFY09. Operating margins were also strong at 18.4% versus our full year assumption of 16% for the full year.

Surat-Dahisar per day toll collection of Rs8.6 mn; highlight potential for sharp traffic revival

The initial toll collection data of Rs778 mn in 1Q for the Surat-Dahisar project implies a per day toll collection of about Rs8.6 mn. We believe that traffic levels are likely to start picking up from 2H onwards leading to an average per day collection of Rs10 mn for the full year. However, we highlight the potential for a sharp spike in traffic levels in the Surat-Dahisar as well as Bharuch- Surat projects. We believe that current traffic levels are trough level data and hence the traffic is likely to see a sharp spike in growth along with economic revival. We note that Mumbai-Pune project reported a healthy growth of 6% yoy in toll revenues in 1QFY10.

Reiterate BUY with a revised target price of Rs200/share

We have marginally revised our earnings estimates to Rs10.7 and Rs13.6 from Rs10.6 and Rs14 for FY2010E and FY2011E respectively. We reiterate our BUY rating on the stock with a revised target price of Rs200/share based on potential upsides from (1) potential traffic growth revival in Surat-

Dahisar and Bharuch-Surat projects, (2) potential incremental project wins, (3) recent evidence of relatively low market competition, (4) strong balance sheet with cash generating assets in the portfolio, (5) management assertion that they would grow without dilution, (6) government zeal to push through the road infrastructure development program.

Although our target price of Rs200/share allows for an upside of only 6-7% on the current market price, we believe that the stock could still outperform versus the market based on limited upside potential for other sector peers.

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

IRB Infrastructure Infrastructure

Results boosted by strong construction segment performance

IRB reported strong yoy revenue growth of 80% in 1QFY10 to Rs4.1 bn, about 12% higher than our estimate of Rs3.7 bn. However, EBITDA margins came in significantly below estimates at 40.1% likely led by lower-than-expected toll segment margins. The company reported PAT of Rs815 mn, up 50% yoy, versus our estimate of Rs626 mn led by higher other income and lower-than-expected interest expense during the quarter.

IRB (consolidated) - 1QFY10 - Key numbers (Rs mn) %change 1QFY10 1QFY10E 1QFY09 4QFY09 1QFY10E 1QFY09 4QFY09 FY2010E FY2009 % change Net Sales 4,141 3,712 2,301 3,211 11.6 80.0 29.0 20,855 9,919 110.3 Total Expenses (2,480) (1,132) (2,006) 119.1 23.6 (11,533) (5,545) 108.0 Direct expenses (2,235) (901) (1,729) 147.9 29.2 (4,682) Employees cost (142) (97) (116) 46.2 22.0 (425) Other Expenditure (103) (134) (161) (22.6) (35.9) (438) EBITDA 1,662 1,900 1,170 1,205 (12.5) 42.0 37.9 9,322 4,374 113.1 Other Income 215 94 59 66 128.1 264.5 227.3 377 296 27.4 PBDIT 1,877 1,994 1,229 1,271 (5.9) 52.7 47.7 9,699 4,670 107.7 Depreciation (376) (488) (255) (331) (22.8) 47.6 13.8 (1,951) (1,144) 70.6 EBIT 1,500 1,506 974 940 (0.4) 54.0 59.7 7,748 3,526 119.7 Interest (467) (723) (305) (403) (35.4) 53.2 15.8 (2,894) (1,377) 110.2 PBT 1,033 783 669 536 32.0 54.4 92.6 4,854 2,149 125.8 Tax Expense (182) (157) (126) (101) 16.1 44.3 80.2 (988) (378) 161.4 Net Profit 851 626 543 435 36.0 56.8 95.5 3,866 1,772 118.2 Minority interest (37) — — (13) 179.5 (319) (13) 2,321.8 Reprted PAT 815 626 543 422 30.1 50.0 92.9 3,547 1,758 101.7

Key ratios (%) Direct expenses/ Sales 54.0 39.2 53.8 47.2 Employees cost/ Sales 3.4 4.2 3.6 4.3 Other expenditure/ Sales 2.5 5.8 5.0 4.4 EBITDA margin 40.1 51.2 50.8 37.5 44.7 44.1 PBDIT margin 45.3 53.7 53.4 39.6 46.5 47.1 PBT margin 24.9 21.1 29.1 16.7 23.3 21.7 PAT margin 20.6 16.9 23.6 13.6 18.5 17.9 Effective tax rate 17.6 20.0 18.8 18.8 20.3 17.6

Source: Company, Kotak Institutional Equities estimates

Strong performance of construction business at topline as well as margin level

Construction segment reported a strong growth of 120.7% in revenues to Rs2.7 bn in 1QFY10 versus Rs1.2 bn in 1QFY09. Operating margins were also strong at 18.4% versus our full year assumption of 16% for the full year.

KOTAK INSTITUTIONAL EQUITIES RESEARCH 63 Infrastructure IRB Infrastructure

IRB - key segmental numbers - 1QFY10 (Rs mn) % change 1QFY10 1QFY09 4QFY09 1QFY09 4QFY09 FY2010E FY2009 FY2008 Revenues 4,356 2,359 3,277 84.7 32.9 20,855 10,215 7,327 BOT 1,607 1,113 1,280 44.4 25.6 8,526 4,543 3,696 Construction 2,750 1,246 1,997 120.7 37.7 12,329 5,672 3,631

EBITDA 1,877 1,227 1,271 52.9 47.7 9,338 4,670 4,110 BOT 1,371 938 907 46.1 51.3 7,365 3,657 3,380 Construction 505 289 364 74.9 38.9 1,973 1,013 730

Margins (%) 43.1 52.0 38.8 44.8 45.7 56.1 BOT 85.3 84.3 70.9 86.4 80.5 91.4 Construction 18.4 23.2 18.2 16.0 17.9 20.1

PBT 1,033 667 536 54.8 92.6 4,854 2,149 1,666 BOT 720 427 334 68.5 115.3 Construction 313 240 202 30.6 55.1

PAT 852 542 422 57.2 101.6 3,547 1,759 1,139 BOT 598 378 287 58.3 108.3 Construction 253 164 135 54.5 87.5

Source: Company, Kotak Institutional Equities estimates

Toll revenue growth led by start of toll collection in Surat-Dahisar project

Toll revenues of IRB grew by about 72% yoy to Rs1.9 bn in 1QFY10 from Rs1.1 bn in 1QFY09. The growth was led by (1) start of toll collection in the Surat-Dahisar road project which contributed to Rs778 mn of toll revenues and (2) 6% growth seen in Mumbai-Pune toll revenues.

IRB - project-wise toll collection (Rs mn) 1Q10 1Q09 % chg 2H09 2H08 % chg 1H09 1H08 %chg FY2009 FY2008 % chg Toll collection 1,886 1,098 71.8 2,442 1,897 28.7 2,165 1,796 20.6 4,607 3,696 24.6 4 BOT projects 132 163 (18.6) 281 289 (2.7) 305 241 26.9 587 529 10.8 Kharpada Bridge 18 20 (10.5) 33 37 (9.9) 37 38 (1.9) 71 75 (5.9) Nagar - Karmala - Tembhurni 29 31 (6.9) 54 56 (3.9) 60 54 10.4 113 110 3.2 Pune - Solapur 36 37 (2.6) 60 73 (18.4) 67 63 6.6 127 137 (6.9) Pune - Nashik 42 40 5.1 82 81 1.6 82 79 3.4 164 160 2.8 Thane - Ghodbunder 69 68 1.5 133 140 (5.4) 132 129 2.2 265 273 (3.1) MMK 17 18 (4.9) 31 33 (5.8) 34.7 28.3 22.7 65 61 7.4 Mumbai - Pune 764 721 5.9 1,433 1,189 20.5 1,447 1,163 24.4 2,880 2,352 22.4 Surat Dahisar 778 - 336 336

Source: Company, Kotak Institutional Equities

Highlight potential for upward spike in toll collection at Surat-Dahisar and Bhrauch-Surat projects

The initial toll collection data of Rs778 mn in 1Q for the Surat-Dahisar project implies a per day toll collection of about Rs8.6 mn. We have reduced our per day toll collection assumption to Rs10 mn for FY2010E from Rs11 mn earlier. We believe traffic levels are likely to start picking up from 2H onwards leading to an average per day collection of Rs10 mn for the full year. However, we highlight a potential for a sharp spike in traffic levels in the Surat-Dahisar as well as Bharuch-Surat projects. We believe that the current traffic levels are trough level data and hence the traffic is likely to see a sharp spike in growth along with economic revival.

64 KOTAK INSTITUTIONAL EQUITIES RESEARCH IRB Infrastructure Infrastructure

Expect traffic growth to improve from 2H onwards; visible revival seen in other projects such as GVK’s Jaipur-Kishangarh expressway

We believe that the traffic levels at the various road projects could improve from 2H onwards with broad economic revival. Some recovery has already been seen reflected in traffic levels in GVK’s Jaipur-Kishangarh expressway project. Jaipur-Kishangarh reported a healthy growth of 14.1% yoy in 1QFY10 to Rs397 mn versus an average of 7% growth seen in FY2009. The PCU count has increased by about 7% yoy in 1QFY10 versus relatively flat growth in FY2009.

Trafic growth in PCU terms has revived to about 7% in 1QFY10 from about 0% during FY2009 for Jaipur-Kishengarh road project PCU analysis for traffic data of GVK Jaipur Kishengarh

Vehicle type 1QFY10 1QFY10 % chg FY2009 % chg FY2008 % chg FY2007 % chg FY2006 Car, Passenger Vehicles 645,666 554,110 16.5 2,351,060 10.5 2,128,528 11.4 1,910,398 18.1 1,618,135 Light Goods Vehicles 197,446 187,996 5.0 757,478 3.1 734,445 8.9 674,363 11.9 602,726 Bus 361,715 846,517 (57.3) 1,359,288 4.4 1,302,536 2.0 1,276,923 10.2 1,158,955 Truck 755,360 321,934 134.6 3,114,713 (13.6) 3,604,944 (16.2) 4,303,366 (12.0) 4,889,350 Multi Axel Vehicles 4,559,025 4,204,240 8.4 16,708,336 0.7 16,593,903 21.5 13,654,082 24.4 10,976,883 Heavy Vehicles 3,352 3,557 (5.8) 14,349 7.9 13,300 (31.1) 19,296 33.8 14,417 Total PCU count 6,522,563 6,118,353 6.6 24,305,224 (0.3) 24,377,655 11.6 21,838,427 13.4 19,260,466

Source: Company

Reiterate BUY with a revised target price of Rs200/share

We have marginally revised our earnings estimates to Rs10.7 and Rs13.6 from Rs10.6 and Rs14 for FY2010E and FY2011E respectively. We have revised our SOTP-based target price to Rs200/share from Rs190/share earlier based on change in FCF to equity discount rate to 12.5% from 13.5% earlier. We believe this could price in some upside from incremental projects based on using a multiple for construction business versus just the present value of EBITDA visible from the current backlog. Our SOTP-based target price is comprised of (1) Rs127/share from the BOT road projects based on FCFE valuation of individual assets, (2) Rs54/share from the construction business based on 6X FY2011E EV/EBITDA multiple, (3) Rs3/share from book value of the real estate business and (4) Rs9.2 from net cash at the parent level.

IRB Infrastructure Developers - SOTP valuation Net asset Value of Contribution to Value IRB's stake IRB's stake value of IRB Per share (Rs mn) (%) (Rs mn) (%) (Rs) Asset valuation methodology Roads 42,060 42,096 65.7 126.7 FCFE 4 BOT projects 3,504 100.0 3,504 5.5 10.5 FCFE based on FY2011E Kharpada Bridge 259 100.0 259 0.4 0.8 FCFE based on FY2011E Nagar - Karmala - Tembhurni 921 100.0 921 1.4 2.8 FCFE based on FY2011E Pune - Solapur 883 100.0 883 1.4 2.7 FCFE based on FY2011E Pune - Nashik 1,600 100.0 1,600 2.5 4.8 FCFE based on FY2011E Mumbai - Pune 14,266 100.0 14,266 22.3 42.9 FCFE based on FY2011E Thane - Ghodbunder 2,382 100.0 2,382 3.7 7.2 FCFE based on FY2011E Bharuch - Surat 6,692 100.0 6,692 10.4 20.1 FCFE based on FY2011E Surat-Dahisar (361) 90.0 (325) (0.5) (1.0) FCFE based on FY2011E Kolhapur urban road project 2,094 100.0 2,094 3.3 6.3 FCFE based on FY2011E Panaji to Goa Karnataka Border 1,666 100.0 1,666 2.6 5.0 FCFE based on FY2011E Amritsar to Pathankot 2,496 100.0 2,496 3.9 7.5 FCFE based on FY2011E Jaipur - Tonk - Deoli 4,236 100.0 4,236 6.6 12.7 FCFE based on FY2011E Talegaon to Amravati 1,422 100.0 1,422 2.2 4.3 FCFE based on FY2011E Construction 18,028 100.0 18,028 28.1 54.2 EV/EBITDA multiple of 6X based on FY2011E Real Estate 880 — 880 1.4 2.6 Book value of investment Net cash at parent level 3,046 100.0 3,046 4.8 9.2 Estimated balance at end-FY2009E Grand total 63,134 64,050 99 192.7 SOTP

Source: Kotak Institutional Equities estimates

KOTAK INSTITUTIONAL EQUITIES RESEARCH 65 Infrastructure IRB Infrastructure

We reiterate our BUY rating on the stock based on potential upsides from (1) potential traffic growth revival in Surat-Dahisar and Bharuch-Surat projects, (2) potential incremental project wins, (3) recent evidence of relatively low market competition, (4) strong balance sheet with cash generating assets in the portfolio, (5) management assertion that they would grow without dilution, (6) government zeal to push through the road infrastructure development program. Although our target price of Rs200/share allows for an upside of only 6-7% on the current market price, we believe that the stock could still outperform versus the market based on limited upside potential for other sector peers.

We highlight high sensitivity of the valuation to traffic growth assumptions and only a 1% increase in traffic throughout life of the project increases the company’s valuation by Rs25/share. Hence the stock could have huge upside potential if traffic revival is higher than expected.

IRB - Sensitivity analysis of stock price to initial traffic growth rate and cost of equity assumptions Traffic growth rate (%) 4.05.06.07.08.0 Assumed rate -2 96 126 160 197 238 Expected return on Assumed rate -1 84 112 142 176 212 equity (base case Assumed rate 74 99 127 157 190 interest cost 11% and Assumed rate +1 65 88 113 141 171 cost of equity 12.5%) Assumed rate +2 57 78 102 127 154

Source: Kotak Institutional Equities estimates

Key risks to existing projects are (1) lower-than-expected economic growth which affects traffic growth, (2) higher interest rates, affecting interest cost of BOT projects, (3) cost and time escalations in projects under execution, affecting expected returns.

66 KOTAK INSTITUTIONAL EQUITIES RESEARCH

.dot BUY Corporation Bank (CRPBK)

Banks/Financial Institutions JULY 30, 2009 RESULT Coverage view: Attractive

Strong operational performance, retain BUY. Corporation Bank’s core operational Price (Rs): 344 income was Rs3.2 bn (up 38% yoy) driven by healthy contributions from NII and fee Target price (Rs): 420 income. Robust asset quality (on a reported basis), restructured assets at 5.1% of loan BSE-30: 15,173 book, higher provisions for meeting the likely wage liabilities and PAT of Rs2.6 bn (up 62% yoy) are the other key highlights of the quarter. We revise earnings estimates upwards by 19% in FY2010E and 7% in FY2011E. We retain our BUY rating with a target price of Rs420 (Rs395 earlier).

Company data and valuation summary Corporation Bank Stock data Forecasts/Valuations 2009 2010E 2011E 52-week range (Rs) (high,low)356-155 EPS (Rs) 62.3 58.0 57.1 QUICK NUMBERS Market Cap. (Rs bn) 49.3 EPS growth (%) 19.0 (6.8) (1.6) Shareholding pattern (%) P/E (X) 5.5 5.9 6.0 • Healthy NII growth Promoters 57.2 NII (Rs bn) 16.9 18.4 22.1 of 24% yoy and fee FIIs 3.6 Net profits (Rs bn) 8.9 8.3 8.2 income contribution MFs 6.7 BVPS 341.4 385.8 429.4 Price performance (%) 1M 3M 12M P/B (X) 1.0 0.9 0.8 drive earnings Absolute 3.7 58.8 31.2 ROE (%) 19.6 16.0 14.0 Rel. to BSE-30 1.0 19.4 19.3 Div. Yield (%) 3.6 3.4 3.3 • Reported asset quality continues to be robust Net interest income growth was a healthy 24% yoy • Revise FY2010E and Corporation Bank’s net interest income (NII) in 1QFY10 was Rs4.7 bn (up 24% yoy) and 15% FY2011E earnings ahead of estimates. The company has been able to maintain its yield on advances in 1QFY10 at 10.6% which is comparable to the 10.8% reported in 4QFY09. We view this as a positive and it estimates upwards may help the company’s profitability in the current year. A hardening of rates in 2HFY10 may be by 19% and 7% positive for NIM and overall profits of the company. We currently model a 25 bps decline in NIM in

FY2010E, which may turn out to be conservative.

Asset growth slows down in the quarter

The growth in Corporation Bank’s banking aggregates, i.e. deposits at Rs722 bn (up 32% yoy) and advances at Rs474 bn (up 22% yoy) appear to be high, however, both these aggregates have declined from their March 2009 levels. The decline in deposits is largely on account of the sharp drop of Rs68 bn (52% sequential decline) in the current deposits base reflecting period end developments in the March quarter. The savings deposits and term deposits showed a fairly healthy growth of 4% qoq and 9% qoq in the quarter. The decline in current deposits also led to the CASA ratio declining to 23% as of June 2009 from 31% as of March 2009.

Better pricing of banking services and treasury income boost non-interest income Corporation Bank had Rs1.4 bn of fee income in 1QFY10 compared to Rs1 bn in 1QFY09 reflecting the better pricing of the banking services, which is in line with the strategy outlined by the management in the previous quarter. The company booked Rs1.9 bn (45% of PBT) of treasury income in 1QFY10 benefiting from the softer interest rate environment.

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

Banks/Financial Institutions Corporation Bank

Healthy asset quality and adhoc wage provisions are the other key highlights

Corporation Bank’s reported asset quality, i.e. gross NPL ratio of 1.3% and net NPL ratio of 0.3% as of June 2009 continue to be healthy. The restructured assets of the company as of June 2009 were Rs24.1 bn (5.1% of loan book) and the classification is on a borrower wise basis. The restructured assets are amongst the lowest in the industry and probably indicate lower credit risk. The company made Rs530 mn of adhoc provisions for meeting its liabilities given the negotiations currently on between IBA and employee unions. It made Rs450 mn in FY2009 assuming a 17.5% increase in salaries.

68 KOTAK INSTITUTIONAL EQUITIES RESEARCH Corporation Bank Banks/Financial Institutions

Corporation Bank quarterly results March fiscal year-ends, 1QFY09-1QFY10 (Rs mn)

1QFY09 2QFY09 3QFY09 4QFY09 1QFY10 yoy growth 1QFY10KS Actual Vs KS

Interest income 12,887 14,488 16,235 17,064 17,422 35.2 14,936 16.6 Advances 9,317 10,644 12,237 11,651 12,118 30.1 10,486 15.6 Investments 3,285 3,374 3,783 4,635 4,884 48.7 4,200 16.3 Others 285 469 215 778 420 47.3 250 68.2 Interest expenses 9,107 10,421 11,455 12,781 12,747 40.0 10,864 17.3 NII adjst for invst amort. 3,780 4,067 4,780 4,283 4,676 23.7 4,072 14.8 Non-interest income 1,576 1,744 2,820 4,933 3,593 128.1 2,730 31.6 Fee and comm. 485 468 484 526 521 Invts gains 45 237 1,234 2,909 1,854 4,029.6 1,000 85.4 Forex income 166 181 117 321 118 Dividend on shares 53 5 2 3 3 Other income 530 717 748 927 824 Bad debt recovery 296 136 235 247 272 Other income excluding treasury 1,531 1,507 1,586 2,024 1,739 13.6 1,730 0.5 Total income 5,356 5,810 7,600 9,216 8,269 54.4 6,802 21.6 Operating expenses 2,146 2,295 3,106 2,468 3,086 43.8 2,650 16.5 Employee cost 940 964 1,737 1,039 1,690 79.8 1,200 40.8 Other cost 1,207 1,331 1,369 1,429 1,397 15.8 1,450 (3.7) Pre-tax and pre-provision profit 3,210 3,515 4,494 6,747 5,182 61.5 4,152 24.8 Provisions 1,008 558 185 2,107 1,020 1.1 1,000 2.0 NPLs 320 530 540 400 600 87.5 1,000 (40.0) Invt. depreciation 638 (31) (601) 1,538 288 (54.8) - - PBT 2,201 2,957 4,309 4,640 4,163 89.1 3,152 32.0 Tax 358 1,042 1,744 2,035 1,550 332.4 1,103 40.5 Net profit 1,843 1,915 2,565 2,605 2,613 41.8 2,049 27.5 Tax rate (%) 16 35 40 44 37 35 PBT-treasury profits 1,993 2,690 2,474 3,269 2,597 30.3 2,152 20.7 PBT- treasury profits + NPL provisions 2,313 3,220 3,014 3,669 3,197 38.2 3,152 1.4

Balance sheet (Rs bn)

Capital 1.4 1.4 1.4 1.4 1.4 - Reserves and surplus 40.9 40.9 40.9 47.5 47.5 16.4 Deposits 547.4 602.8 618.9 739.8 721.3 31.8 Share of demand deposit (%) 27.4 25.4 25.2 31.4 23.3 Borrowings 32.9 21.8 29.8 20.7 13.6 (58.7) Other liabilities and provisions 42.3 46.8 55.2 59.5 92.0 117.4 P and L account balance 1.8 3.8 6.3 0.0 2.6 41.8 Total Liabilities 666.8 717.5 752.6 869.1 878.5 31.7

Cash and balances with RBI 64.5 54.0 32.3 55.9 42.0 (34.9) Bal with banks, money at call and short 8.0 8.3 10.1 49.5 6.0 (25.0) notice Investments 184.6 192.1 232.7 249.4 326.9 77.1 Advances 389.5 435.5 449.4 485.1 473.8 21.6 Retail 91.4 0.0 0.0 0.0 0.0 - Fixed assets 2.8 2.9 2.9 3.0 2.9 6.4 Other assets 17.4 24.7 25.4 26.2 26.9 54.2 Total assets 666.8 717.5 752.6 869.1 878.5 31.7

Source: Company, Kotak Institutional Equities estimates

KOTAK INSTITUTIONAL EQUITIES RESEARCH 69 Banks/Financial Institutions Corporation Bank

Corporation Bank -- key analytical parameters

1QFY09 2QFY09 3QFY09 4QFY09 1QFY10 yoy growth Asset quality details Gross NPLs (Rs mn) 5,753 5,998 5,600 5,592 6,116 6.3 Gross NPLs (%) 1.5 1.4 1.2 1.1 1.3 Net NPLs (Rs mn) 1,395 1,760 1,498 1,383 1,506 8.0 Net NPLs (%) 0.4 0.4 0.3 0.3 0.3

Yield management measures (%) Yield on advances 10.0 10.4 10.8 10.8 10.6 Cost of deposits 6.4 6.8 6.9 6.5 6.7 NIM adj for investment amtz 2.43 2.43 2.53 2.43 2.26 NIM (calc) 2.3 2.4 2.7 2.2 2.2

Capital adequacy details (%) CAR 12.4 11.8 12.8 13.7 16.3 Tier I 10.1 9.6 9.7 8.9 9.6 Tier II 2.3 2.2 3.1 4.7 6.7

Source: Company

We increase our FY2010E estimates by 19% March fiscal year-ends, 2010-2011E (Rs mn)

Old estimates New estimates % change 2010E 2011E 2010E 2011E 2010E 2011E Net interest income 18,006 22,381 18,421 22,128 2.3 (1.1) NIM (%) 2.01 2.16 2.05 2.13 Loan growth 14.45 19.75 15.54 19.75 Loan loss provisions 4,161 6,100 2,875 4,927 (30.9) (19.2) Other income 9,194 9,421 9,894 9,421 7.6 - Fee income 3,046 3,503 3,046 3,503 - - Operating expenses 12,120 13,777 12,228 13,899 0.9 0.9 Employee expenses 6,009 6,853 6,116 6,976 1.8 1.8 PBT 10,418 11,425 12,424 12,222 19.2 7.0 Net profit 6,980 7,655 8,324 8,189 19.2 7.0 PBT - treasury + provisions 14,580 17,525 15,587 17,149 6.9 (2.1)

Source: Company, Kotak Institutional Equities estimates

70 KOTAK INSTITUTIONAL EQUITIES RESEARCH

.dot BUY IVRCL (IVRC)

Constructions JULY 30, 2009 RESULT Coverage view: Attractive

Revenue disappoints—attributed to state elections. IVRCL reported lower-than- Price (Rs): 317 expected revenues of Rs10.7 bn led by a temporary slowdown in execution due to Target price (Rs): 360 elections in some states. The management expects growth to pick up in the coming BSE-30: 15,173 quarters. Margin expansion to 9.2% is also expected to continue for remaining of FY2010E. A strong order backlog of Rs139 bn, dominated by water resources segment provides high revenue visibility. We reiterate BUY with a target price of Rs360/share.

Company data and valuation summary IVRCL Stock data Forecasts/Valuations 2009 2010E 2011E 52-week range (Rs) (high,low)392-57 EPS (Rs) 16.7 18.2 22.4 Market Cap. (Rs bn) 42.9 EPS growth (%) 7.4 9.3 22.9 QUICK NUMBERS Shareholding pattern (%) P/E (X) 19.0 17.4 14.1 Promoters 9.7 Sales (Rs bn) 48.8 60.9 75.8 • Revenues down by FIIs 47.7 Net profits (Rs bn) 2.3 2.5 3.0 about Rs2.5 bn, MFs 19.1 EBITDA (Rs bn) 4.2 5.6 7.0 cramped by state Price performance (%) 1M 3M 12M EV/EBITDA (X) 13.2 10.2 8.4 Absolute (7.4) 99.4 0.3 ROE (%) 13.2 12.8 13.8 elections Rel. to BSE-30 (9.8) 49.9 (8.8) Div. Yield (%) 0.2 0.2 0.2 • EBITDA margins expand to 9.2% Management attributes slower revenue growth to state elections • Strong order IVRCL reported revenues of Rs10.7 bn in 1QFY10, up 17% yoy, about 13.6% lower than our backlog of Rs139 bn estimate of Rs12.6 bn versus an average of 30%+ growth seen in FY2009. The management highlighted that the slower revenues in this quarter were strategic—the company had decided to go slow while awaiting the completion of the elections in several states. The company’s revenues were reduced by about Rs2.5 bn (Rs2 bn from irrigation sector and Rs0.5 bn from power) during the quarter led by this slowdown. IVRCL reported slight expansion of about 40 bps in the EBITDA margin to 9.2%, broadly in line with our estimates. The management expects this margin expansion to continue in remaining of FY2010E as well. IVRCL reported a profit after tax of Rs351 mn missing our estimate of Rs434 mn led by the lower-than-expected revenues.

Strong order backlog of Rs139 bn primarily driven by water and irrigation segment

The company reported an order backlog of Rs139 bn (up 13% yoy) providing a revenue visibility of 2.1 years based on forward four quarter revenues. The order book continues to be dominated by the water resources segment which contributes to 68% of the total order backlog. We also highlight that majority of orders wins that have been recently announced by IVRCL belong to government sector spending in water and irrigation sector. The company also highlighted that additional order inflows are also likely to be mostly from the water segment with about 60-65% of the pre-qualifications received by the company belonging to this segment.

Marginally revise estimates and target price to Rs360/share; reiterate BUY

We have marginally revised our earnings estimates to Rs18.3 and Rs22.5 from Rs18 and Rs22.2 for

FY2010E and FY2011E respectively. Our estimate revisions are based on (1) slightly lower revenues for FY2010E and FY2011E led by lower 1Q revenues and (2) higher EBITDA margin assumption. We maintain our BUY rating on the stock based with a revised SOTP-based target price of Rs360/share on (1) attractive valuations post sharp decline of 7.4% seen yesterday, (2) strong likely near-term earnings growth, (3) high revenue visibility based on strong order backlog and (4) long- term outlook for infrastructural investments. Key risks to the earnings originate from (1) slower- than-expected execution, and (2) deterioration in working capital situation of the company.

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

Constructions IVRCL

Results miss estimates led by lower-than-expected execution

IVRCL reported revenues of Rs10.7 bn in 1QFY10, up 17% yoy, about 13.6% lower than our estimate of Rs12.6 bn. The company reported slight expansion of about 40 bps in the EBITDA margin to 9.2%, broadly in line with our estimates. IVRCL reported a profit after tax of Rs351 mn missing our estimate of Rs434 mn led by the lower-than-expected revenues.

IVRCL - 1QFY10 - key numbers (Rs mn) % change 1QFY10 1QFY10E 1QFY09 4QFY09 1QFY10E 1QFY09 4QFY09 FY2010E FY2009% change Net Sales 10,860 12,564 9,285 16,272 (13.6) 17.0 (33.3) 60,910 48,819 24.8 CoGS (9,263) (7,497) (14,051) 23.6 (34.1) (51,804) (41,772) 24.0 Construction, stores & spares (4,327) (3,721) (4,710) 16.3 (8.1) (16,579) Subcontracting expenditure (1,646) (2,283) (5,351) (27.9) (69.2) (13,513) Masonry and other labour (3,291) (1,493) (3,991) 120.5 (17.5) (11,681) Staff cost (418) (423) (538) (1.1) (22.3) (2,436) (1,953) 24.7 Other expenditure (183) (545) (264) (66.4) (30.5) (1,066) (876) 21.7 Expenditure (9,864) (11,433) (8,465) (14,853) (13.7) 16.5 (33.6) (55,306) (44,601) 24.0 EBITDA 996 1,131 820 1,420 (11.9) 21.5 (29.8) 5,604 4,218 32.9 Other income 39 163 26 87 (76.1) 49.4 (55.0) 794 299 165.5 PBIDT 1,035 1,294 846 1,506 (20.0) 22.3 (31.3) 6,398 4,517 41.6 Interest (389) (498) (194) (392) (21.8) 100.8 (0.6) (2,051) (1,306) 57.0 Depreciation (129) (139) (102) (134) (7.0) 26.8 (3.6) (627) (473) 32.5 Profit before tax 516 657 550 980 (21.4) (6.2) (47.3) 3,720 2,738 35.9 Tax (165) (223) (115) (181) (26.1) 43.5 (9.0) (1,250) (478) 161.4 Profit after tax 351 434 435 799 (19.0) (19.3) (56.0) 2,470 2,260 9.3

Key ratios (%) CoGS/Sales 85.3 80.7 86.3 85.1 85.6 Construction, stores & spares/Sales 39.8 40.1 28.9 34.0 Subcontracting expenditure/Sales 15.2 24.6 32.9 27.7 Masonry and other labour/Sales 30.3 16.1 24.5 23.9 Staff cost/Sales 3.8 4.6 3.3 4.0 4.0 Other expenditure/Sales 1.7 5.9 1.6 1.8 1.8 EBITDA margin 9.2 9.0 8.8 8.7 9.2 8.6 PBT Margin 4.8 6.3 5.9 6.0 6.1 5.6 Net Profit margin 3.2 4.2 4.7 4.9 4.1 4.6 Effective tax rate 32.0 34.0 20.9 18.5 33.6 17.5

Source: Company, Kotak Institutional Equities estimates

Revenue disappointment attributed to state elections

IVRCL reported revenues of Rs10.7 bn in 1QFY10, up 17% yoy, about 13.6% lower than our estimate of Rs12.6 bn. This is versus an average of 30%+ growth seen in FY2009. The management highlighted that the slower revenues in this quarter was deliberate on the part of the company while awaiting the completion of the elections in certain states. The management cited that the new ordering activity as well as due payments from the state governments would depend on the outcome of the elections and hence the company slowed down progress in certain orders dependent on the state government. The company’s revenues were reduced by about Rs2.5 bn (Rs2 bn from irrigation sector and Rs0.5 bn from power) during the quarter led by this slowdown. This is also reflected in the segmental split of revenues with only 16% (about 1.8 bn) of revenues coming from the irrigation sector while about 45% of order backlog belonging to the same.

72 KOTAK INSTITUTIONAL EQUITIES RESEARCH IVRCL Constructions

Sector-wise break up of 1QFY10 revenues

1QFY10 revenues (Rs10.8 bn) Irrigation 16%

Electrical Water resources 8% 43%

Buildings and Industrial 20% Transportation 13%

Source: Company

Margin expansion trend likely to continue

The management highlighted that the margin expansion witnessed in 1QFY10 is likely to continue going forwards as well. This margin expansion was achieved despite Rs2.5 bn of lower revenues booked during the quarter. Hence, the company expects margins to expand going forward once the revenue levels revert to earlier high growth levels.

Strong order backlog of Rs139 bn mostly comprising of government projects

The company reported an order backlog of Rs139 bn (up 13% yoy) providing a revenue visibility of 2.1 years based on forward four quarter revenues.

IVRCL Infrastructure has visibility of 2.1 years based on forward four quarter revenues Order backlog, order booking and visibility (X) of IVRCL Infrastructure, March fiscal year-ends, 2002-1Q10

(Rs bn) Order Backlog (LHS) Order Booking (LHS) Visibility (RHS) 160 3.0

140 2.5 120 2.0 100

80 1.5

60 1.0 40 0.5 20

- 0.0 FY02 FY03 FY04 FY05 FY06 FY07 1Q08 2Q08 3Q08 4Q08 1Q09 2Q09 3Q09 4Q09 1Q10

Source: Company, Kotak Institutional Equities estimates

Water segment continues to dominate the backlog

KOTAK INSTITUTIONAL EQUITIES RESEARCH 73 Constructions IVRCL

The order book continues to be dominated by the water resources segment which contributes to 68% of the total order backlog. We also highlight that majority of orders wins that have been recently announced by IVRCL belong to government sector spending in water and irrigation sector. The company also highlighted that additional order inflows are also likely to be mostly from the water segment with about 60-65% of the pre- qualifications received by the company belonging to this segment. The company is currently L1 in orders worth Rs10-12 bn.

Segment wise breakup of IVRCL's order book at the end of 1QFY10, FY2009 and 1QFY09

1QFY10 (Rs139 bn) Electrical Electrical FY2009 (Rs135 bn) Electrical 1QFY09 (Rs123.5 bn) Buildings 2% 6% 6% and Buildings Buildings Industrial and and 25% Industrial Industrial 22% 20%

Transportati Transportati on on Water 6% Water 3% Transportati Water resources resources on resources 65% 68% 7% 70%

Source: Company, Kotak Institutional Equities

Identifies road sector as a potential growth segment

The management highlighted a renewed interest in the road BOT segment led by several initiatives by NHAI and positive announcements made by the Road Transport and Highways minister. IVRCL would prefer to bid for smaller projects of about Rs5-6 bn in size.

HDO continues on strong growth path

Hindustan Dorr Oliver (HDO) more than doubled its top line as well as bottom line of 1QFY10 versus 1Q09 levels. The company reported revenues of Rs1.8 bn up 116% yoy versus Rs840 mn in 1QFY09. EBITDA margins remained relatively flat at about 13.1% during the quarter. HDO reported a profit after tax of Rs130 mn in 1QFY10 versus Rs60 mn in 1QFY09. The order backlog for HDO stood at Rs14 bn with an additional Rs4 bn in L1 orders.

Continues to remain reluctant to commit further capital/ resources to IVR Prime

IVRCL is reluctant to commit any further capital/ resources to IVR Prime citing slow realizations from its projects reflecting a slowdown in the real estate sector. The management highlighted that the outlook continues to remain bleak on the real estate front and does not plan to launch any new projects in IVR Prime in the near future.

Marginally revise estimates and target price to Rs360/share; reiterate BUY

We have marginally revised our earnings estimates to Rs18.3 and Rs22.5 from Rs18 and Rs22.2 for FY2010E and FY2011E respectively. Our estimate revisions are based on (1) slightly lower revenues for FY2010E and FY2011E led by lower 1Q revenues and (2) slightly higher EBITDA margin assumption.

74 KOTAK INSTITUTIONAL EQUITIES RESEARCH IVRCL Constructions

Revised estimates for IVRCL, March fiscal year-ends, 2010E-11E (Rs mn) New estimates Old estimates Target price (Rs) 360 350 Rating BUY BUY FY2010E FY2011E FY2010E FY2011E Revenues 60,910 75,798 62,819 79,016 EBITDA 5,604 7,011 5,622 7,111 EBITDA margin (%) 9.2 9.3 9.0 9.0 PBT 3,720 4,573 6,202 7,380 PAT 2,470 3,036 2,428 2,990 EPS (Rs) 18.3 22.5 18.0 22.2

yoy growth (%) Revenues 24.8 24.4 28.7 25.8 EBITDA 32.9 25.1 33.3 26.5 PBT 35.9 22.9 33.6 23.1 PAT 9.3 22.9 7.4 23.1 EPS 9.3 22.9 7.4 23.1

Source: Kotak Institutional Equities estimates

We have changed our SOTP-based target price to Rs360/share from Rs350/sahre earlier comprised of (1) core business valuation of Rs293/share (based on 13X FY2011E P/E multiple), (2) Rs23/share contribution from equity investments road and water projects, (3) incremental value from infrastructure projects worth Rs14/share, (4) IVR Prime’s contribution of Rs19/share, and (5) Rs12/share contribution from Hindustan Dorr Oliver.

Derivation of SOTP based target price for IVRCL Equity Commitment Valuation Project/ Business (Rs mn) (Rs mn) Rs/ share Valuation methodology Value of core construction business 0 293.0 # P/E multiple of 13X FY2011E earnigns Book value of investments in BOT assets 3,138 3,138 23.2 # 1X book Value from Hindustan Dorr Oliver 1,583 11.7 # Discount to market price Value of IVRCL Prime Developers Ltd 2,560 19.0 # NAV Incremental value from roads and water projects Jallandhar- Amristar Tollways 413 310 2.3 # Incremental P/B of 0.75 Salem - Kumarapalayam 651 488 3.6 # Incremental P/B of 0.75 Sumarapalayam Chenagmpalli 801 601 4.5 # Incremental P/B of 0.75 Chennai Water 713 534 4.0 # Incremental P/B of 0.75 Total 361 #

Source: Kotak Institutional Equities estimates

We maintain our BUY rating on the stock based on (1) attractive valuations post sharp decline of 7.4% seen yesterday, (2) strong likely near-term earnings growth, (3) high revenue visibility based on strong order backlog and (4) long-term outlook for infrastructural investments. Key risks to the earnings originate from (1) slower-than- expected execution, and (2) deterioration in working capital situation of the company.

KOTAK INSTITUTIONAL EQUITIES RESEARCH 75

.dot ADD Sobha (SOBHA)

Property JULY 30, 2009 RESULT Coverage view: Cautious

In-line quarter, maintain ADD. Sobha reported revenues of Rs1.8 bn which were in Price (Rs): 219 line with estimates (down 49% yoy). Sobha has utilized Rs5.3 bn of QIP money to repay Target price (Rs): 215 Rs4 bn of debt, which eases the financial strain. The management has guided for a D/E BSE-30: 15,173 of less than 0.5X. We maintain our ADD rating and target price of Rs215 based on 20% discount to our Mar’11 based NAV of Rs267. A positive trigger for the stock could be a revival of Bangalore’s residential market in terms of volumes or prices.

Company data and valuation summary Sobha Stock data Forecasts/Valuations 2009 2010E 2011E 52-week range (Rs) (high,low)306-61 EPS (Rs) 15.1 14.3 16.1 Market Cap. (Rs bn) 21.5 EPS growth (%) (52.3) (5.6) 12.5 QUICK NUMBERS Shareholding pattern (%) P/E (X) 14.5 15.3 13.6 Promoters 87.0 Sales (Rs bn) 9.7 13.8 16.1 • Revenues in line at FIIs 2.6 Net profits (Rs bn) 1.1 1.4 1.6 Rs1.8 bn MFs 0.0 EBITDA (Rs bn) 2.8 2.9 3.0 Price performance (%) 1M 3M 12M EV/EBITDA (X) 14.6 11.4 10.3 • Sold 48 units in June Absolute 4.9 120.6 (11.9) ROE (%) 10.4 9.8 8.8 2009 Rel. to BSE-30 2.3 65.8 (19.9) Div. Yield (%) 1.4 1.8 1.8 • We estimate sale of Results inline with expectations 2.2 mn sq. ft in FY2010E Sobha announced revenues of Rs1.8 bn, in line with our estimates (down 49% yoy) and PAT of Rs127 mn (31% below estimates, down 75% yoy). EBITDA margins were reported at 24% versus our estimate of 22%. Operational performance of various divisions is as discussed below.

Residential real estate. Sobha booked revenues of Rs1.2 bn from the residential segment. We note that Sobha has 8.9 mn sq. ft under construction in the residential category. Low affordability in Bangalore’s real estate market has severely affected sales. However, the management has indicated that enquiries have picked up in the past few months. Sobha sold 48 apartments in the month of June and is targeting sales of 60-70 units/month. We model Sobha to sell 2.2 mn sq. ft in FY2010E and 3.6 mn sq. ft in FY2011E.

Contractual business. Sobha booked revenues of Rs590 mn from contractual segment in 1QFY10. Sobha currently has 34 projects aggregating 5.6 mn sq. ft under contracts from Infosys and other leading companies in India. Sobha is currently executing projects for Infosys in Hyderabad, Bangalore and Trivandrum. A sharp slowdown has resulted in the area under execution dipping from 7.3 mn sq. ft as at end-2QFY09. However, the management is indicating a pick-up in contractual business in 2HFY10.

Three-pronged strategy to improve balance sheet quality

Sobha is in the process of improving balance sheet through a series of corrective measures— (1) equity offering, (2) PE investment, and (3) reduction in liabilities. We highlight that balance sheet restructuring of Sobha is very important to improve investor confidence in the company.

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

Sobha Property

` Equity offering through QIP. Sobha has raised Rs5.3 bn by issuing 25.2 mn shares at Rs210/share, resulting in total dilution of 34% and promoter stake falling to 65% from 87%. Sobha has reduced debt by Rs4 bn which results in a D/E of 0.9X from 1.7X. Sobha is targeting a D/E of <0.5X.

` PE investment. Purna Developers is going to invest Rs2.25 .bn to purchase stakes in various residential projects. It has already invested Rs0.95 bn.

` Reduction of liabilities. A key reason for Sobha’s balance sheet stress has been large investment into land banks. Over the past few months, Sobha has rationalized land bank which has resulted in, (1) land bank reduction to 2,875 acres from 4,030 earlier with largest reduction in Bangalore, Hosur and Gurgaon, (2) total cost reducing by 12% to Rs23 bn, and (3) sharp reduction in unpaid land cost to Rs1.7 bn from Rs6.6 bn (Exhibit 2).

Sobha Developers :1QFY2010 results

% change Kotak estimates Change (%) (in Rs mn) 1QFY09 4QFY09 1QFY10 qoq yoy 1QFY10E% deviation FY09A FY10E FY10/FY09 Net sales 3,468 1,404 1,771 26.1 (48.9) 1,782 (0.6) 9,740 13,804 41.7

Operating costs (2,452) (1,202) (1,348) 12.1 (45.0) (1,390) (3.0) (6,953) (10,921) 57.1 (Increase)/Decrease intock in inventories 514 1,135 233 (79.5) (54.7) Land cost expenses (748) (1,224) (66) (94.6) (91.2) (2,710) (961) Construction expenses & raw materials (1,370) (628) (1,070) 70.4 (21.9) (1,688) (7,033) Staff cost (331) (242) (163) (32.6) (50.8) (1,009) (995) Other administrative expenses (517) (243) (282) 16.0 (45.5) (1,546) (1,933)

EBITDA 1,016 202 423 109.4 (58.4) 392 7.9 2,788 2,883 3.4 Other income 20 115 19 (83.5) (5.0) 196 148 221 49.2 Interest costs (267) (201) (233) 15.9 (12.7) (250) (1,074) (975) (9.2) Depreciation (89) (91) (82) (9.9) (7.9) (89) (360) (412) 14.3 PBT 680 25 127 408.0 (81.3) 249 1,501 1,718 14.4 Taxes (175) 2 0 (100.0) (100.0) (64) (398) (317) (20.4) PAT 505 27 127 370.4 (74.9) 185 (31.4) 1,103 1,401 26.9

Key ratios

EBITDA margin (%) 29.3 14.4 24 22.0 28.6 20.9 PAT margin (%) 14.6 1.9 7 10.4 11.3 10.1 Effective tax rate (%) 25.7 -8.0 0.0 25.7 26.5 18.4

Source: Company, Kotak Institutional Equities estimates

Land bank has been rationalized; down ~30% yoy Land bank details as on Mar-08, Jun-08 and Jun-09

Mar-08 Jun-08 Jun-09 Location Land (acres) Paid (in mn) Payable (in mn) Land (acres) Total cost (Rs mn) Land (acres) Paid (in mn) Payable (in mn) Bangalore 1,600 7,704 4,269 1,600 11,696 915 8,454 978 Mysore 66 375 480 66 855 45 327 27 Pune 171 1,476 181 177 2,119 190 1,905 165 Chennai 540 1,434 4 540 1,475 533 2,623 — Kochi 514 2,954 — 514 3,052 456 4,400 — Trissur 49 276 — 49 276 17 44 — Coimbatore 66 56 361 66 417 77 130 341 Hosur 719 1,839 — 719 1,901 485 281 — Hyderabad 78 — 116 78 116 18 — 116 Gurgaon 220 3,237 1,192 220 4,497 141 3,461 157 Total 4,024 19,351 6,603 4,030 26,404 2,875 21,625 1,783 % of total cost 74.6 25.4 92.4 7.6

Source: Company, Kotak Institutional Equities estimates

KOTAK INSTITUTIONAL EQUITIES RESEARCH 77 Property Sobha

Maintain ADD rating and target price of Rs215

We maintain our ADD rating and target price of Rs215 based on 20% discount to our Mar’11-based NAV of Rs267. We assign a 20% discount currently on account of (1) weakness persisting in Bangalore real estate market, (2) land bank quality, and (3) lack of diversification. The discount of 20% could be lowered if residential demand strengthens while discount could increase if financial conditions deteriorate on prolonged weakness in residential markets.

We estimate March 2011 based NAV at Rs267/share

March '11 based NAV Growth rate in selling prices 0% 3% 5% 10% Valuation of land reserves 20 29 35 55 Residential projects 24.1 28.3 31.4 39.6 Commercial projects (3.4) 0.0 2.5 9.6 Retail projects (1.4) 0.1 1.2 4.3 Less: Land cost to be paid (2) (2) (2) (2) Less: Net debt (12) (12) (12) (12) Add: Contractual business 5 5 5 5 NAV 11 20 26 46 Total no. of shares (mn) 98 NAV/share 267 Target price @20% discount to NAV 214

Source: Kotak Institutional Equities estimates

Business scenario looking better but still not optimal

FY2009 turned out to be dismal year for business as residential demand became negligible on account of weak sentiment and reduced affordability. Sobha announced revenues of Rs9.7 bn (down 32% yoy) and PAT of Rs1.1 bn (down 52% yoy) for FY2009. However, we would highlight that this slowdown came on the back of 45% revenue growth and 88% PAT growth for FY2005-08 period. Including FY2009, revenue growth for FY2005-09 dips to 20% and PAT growth dips to 35%, which is still quite good, in our view. Going forward, business sentiment is looking better as discussed below.

Residential real estate. We expect Sobha to launch three projects in Bangalore— (1) Sobha Dewflower (0.5 mn sq. ft) at Jayanagar at an expected pricing of Rs4,500/sq. ft, (2) Sobha Garrison at Tumkur road, and (3) Sobha Marigold in which it currently holds 20%. Launch activity in Bangalore is expected to be the highest in two years. In fact, over the past 18 months, area under execution in Bangalore decreased to 6.6 mn sq. ft in June 2009 versus 9 mn sq. ft in June 2007 (Exhibits 4 & 5). Low affordability in Bangalore real estate market had severely affected sales and Sobha is taking steps to reduce prices in Bangalore to revive demand. Sobha has on an average undertaken a price cut of 15% with the sharpest cuts in South Bangalore.

We expect Sobha to expand its presence in Chennai while strengthening its position in Pune and Coimbatore over the next 12 months. Sobha also intends to launch its maiden project in North India (Gurgaon) by end-FY2010. Sobha has entered into JDA for land development in Gurgaon with revenue share in the region of 62-80%. We model sales of 2.3 mn sq. ft from six cities (Bangalore, Trissur, Mysore, Pune, Chennai and Coimbatore) in FY2010E with Bangalore contributing 1.8 mn sq. ft. We expect residential sales to increase to 3.8 mn sq. ft in FY2011E. We believe that is quite possible as Sobha sold 3.5 mn sq. ft of apartments in FY2006 in Bangalore itself.

78 KOTAK INSTITUTIONAL EQUITIES RESEARCH Sobha Property

The management has indicated that it currently has an unsold inventory of 4 mn sq. ft from under construction projects and recently finished projects (total of 11.3 mn sq. ft). From these projects on account of units already sold, it has booked revenues of Rs18.5 bn and is yet to book Rs8.1 bn. The management believes that Rs14 bn of revenue booking will likely come from unsold inventory. On these projects, it has incurred costs of Rs10.6 bn with Rs10.4 bn yet to be incurred.

Sobha has 8.9 mn sq. ft of saleable area under construction Details of projects under construction Area (mn sq. ft) Project Start date Location Developable Saleable No. of apartments Sobha Suncrest 7-Jul-06 South west, Bangalore 0.2 0.2 72 Sobha Lavender 4-May-07 South East, Bangalore 0.1 0.1 38 Sobha Althea 6-Jan-07 North, Bangalore 0.6 0.4 176 Sobha Adamus 27-May-07 East, Bangalore 0.1 0.1 34 Sobha Azalea 6-Jun-07 North, Bangalore 0.1 0.1 26 Sobha Cinnamon 23-Aug-08 South East, Bangalore 0.5 0.4 187 Sobha Saffron 9-Apr-08 South East, Bangalore 0.0 0.0 16 Sobha Moonstone 10-Jan-08 North, Bangalore 0.2 0.2 106 Sobha Petunia 21-May-08 North, Bangalore 0.6 0.5 156 Sobha Sunbeam I 10-Mar-06 South west, Bangalore 0.2 0.2 108 Sobha Sunbeam II 10-Mar-06 South west, Bangalore 0.2 0.2 106 Sobha Chrysanthemum 6-Jan-07 North, Bangalore 1.1 0.9 509 Sobha Beryl (Ph I) 14-May-07 West, Bangalore 0.4 0.3 160 Sobha Sunscape 10-Mar-06 South west, Bangalore 0.6 0.5 362 Sobha Basil (Ph I) 30-May-07 West, Bangalore 0.7 0.5 376 Sobha Amethyst 5-Feb-07 East, Bangalore 0.8 0.6 368 Sobha Beryl (Ph II) 14-May-07 West, Bangalore 0.4 0.3 160 Sobha Lifestyle 18-Jan-07 North, Bangalore 2.3 1.2 165 Sobha Malachite 27-Apr-07 Thrissur, kerala 0.2 0.1 25 Sobha Topaz 12-Jan-07 Thrissur, kerala 0.7 0.5 216 Sobha Jade 1-Jan-09 Thrissur, kerala 0.7 0.6 216 Sobha Lifestyle 1-Jan-09 Thrissur, kerala 0.4 0.2 40 Sobha Carnation (Ph I) 2-Jul-08 Pune 0.4 0.3 116 Sobha Emerald 20-Apr-08 Coimbatore, Tamil nadu 0.5 0.3 61 Harishree Gardens (Ph II) 15-Feb-09 Coimbatore, Tamil nadu 0.3 0.3 92 Total 12.3 8.9 3891

Source: Company, Kotak Institutional Equities

Sobha launched 2.5 mn sq. ft of projects in June'08-June'09 Details of ongoing residential projects (mn sq. ft)

Jun-07 Sep-07 Dec-07 Mar-08 Jun-08 Jun-09 Completed at beginning of the quarter/year 5.1 5.8 5.9 7.8 7.8 Ongoing at the beginning of the quarter/year 10.8 10.7 11.1 10.3 10.3 Launched during the quarter /year 1.8 0.6 0.5 1.1 1.1 2.5 Handed over during the quarter/year - 0.7 0.1 1.9 - 3.9 Completed at end of the quarter/year 5.1 5.8 5.9 7.8 7.8 11.7 Ongoing at the end of the quarter 10.8 10.7 11.1 10.3 10.3 8.9

Ongoing projects citywise Jun-07 Sep-07 Dec-07 Mar-08 Jun-08 Jun-09 Bangalore 9.0 8.6 8.8 8.0 8.0 6.6 Trissur 1.8 1.8 1.8 1.8 1.8 1.4 Pune 0.3 0.3 0.3 0.3 0.3 Coimbatore 0.2 0.3 0.3 0.5 Total 10.8 10.7 11.1 10.3 10.3 8.9

Source: Company, Kotak Institutional Equities

KOTAK INSTITUTIONAL EQUITIES RESEARCH 79 Property Sobha

Sobha has 5.8 mn sq. ft of contractual projects under construction Location wise breakup of contractual projects

Developable area Contract value Location No. of projects (sq. ft) (Rs bn) Bangalore 10 0.9 0.6 Mysore 3 0.5 0.4 Mangalore 1 0.1 0.2 Hyderabad 2 0.3 0.3 Chennai 5 1.2 1.4 Pune 7 1.7 1.8 Chandigarh 1 0.2 0.1 Trivandrum 1 0.2 0.1 Bhubneshwar 1 0.1 0.0 Roorkee (Uttaranchal) 1 0.5 0.2 Kolkata 1 0.0 0.0 Palakkad 1 0.1 0.1 Total 34 5.8 5.3

Source: Company, Kotak Institutional Equities

Revenue model of Sobha Developers, March fiscal year-ends (Rs mn)

2009 2010E 2011E 2012E Apartments Apartment volumes (mn sq. ft) 1.6 2.4 3.0 4.5 Revenues 5,173 7,701 9,915 14,109 Rate/sq. ft 3,233 3,250 3,301 3,168 Commercial Commercial volumes (mn sq. ft) 0.1 0.2 0.3 0.1 Revenues 185 542 703 371 Rate/sq. ft 2,985 2,706 2,632 3,253 Contractual sales Contractual volumes (mn sq. ft) 3.0 3.2 3.3 3.5 Revenues 3,665 4,032 4,435 4,878 Rate/sq. ft 1,222 1,280 1,341 1,405 Revenues from real estate 5,358 8,243 10,618 15,778 Contractual revenues 3,665 4,032 4,435 4,878 Others 148 30 - - Land sale+A/c policy change 1,121 1500 1,500 Revenues 10,293 13,804 16,552 20,656 % growth 34 20 25

Revenues from residential projects 5,173 7,701 9,915 14,109 Revenues from under construction projects 3,217 6,902 6,512 5,218 % of total residential revenues 62.2 89.6 65.7 37.0

Source: Kotak Institutional Equities estimates

High operating leverage makes it a good play on demand recovery

Sobha has high operating leverage with gross margins (Sales less land cost less construction cost) in the region of 42-43% and EBITDA margins of around 20% for FY2010-11E. If revenues were to surprise positive by 10%, EBITDA would increase by 21- 22%. Increase in revenues is quite possible if—(1)Sobha is able to expand faster into newer cities like Kochi/Gurgaon or increase its presence in Bangalore, (2) pricing improves and operating leverage in such a case will be even higher, and (3) contractual demand picks up. Revenue booking from contractual business dipped to Rs3.7 bn in FY2009 from Rs5.3 bn in FY2008 and Rs4.3 bn in FY2007.

80 KOTAK INSTITUTIONAL EQUITIES RESEARCH Sobha Property

Profit model of Sobha Developers, March fiscal year-ends, 2006-2011E (Rs mn)

2006 2007 2008 2009 2010E 2011E Total revenues 6,277 11,865 14,311 9,740 13,804 16,052 Land costs (781) (1,832) (4,333) (2,710) (961) (1,206) Construction costs (2,975) (5,222) (3,310) (1,688) (7,033) (8,476) Employee costs (286) (707) (1,025) (1,009) (995) (1,194) SG&A costs (829) (1,542) (1,941) (1,546) (1,933) (2,167) EBITDA 1,407 2,563 3,703 2,788 2,883 3,009 Other income 8 29 53 148 221 221 Interest (219) (481) (615) (1,074) (975) (748) Depreciation (112) (244) (350) (360) (412) (474) Pretax profits 1,083 1,866 2,791 1,501 1,718 2,009 Extraordinary items — — — — — — Current tax (188) (251) (510) (418) (357) (487) Deferred tax (0) 33 20 40 54 Net income 892 1,615 2,315 1,103 1,401 1,575 Adjusted net income 892 1,615 2,315 1,103 1,401 1,575

EPS (Rs) Primary 14.0 24.5 31.7 15 15 16 Fully diluted 14.0 24.5 31.7 15 15 16

Shares outstanding (mn) Year end 63 73 73 73 98 98 Primary 63 66 73 73 92 98 Fully diluted 63 66 73 73 92 98

Cash flow per share (Rs) Primary 15 28 28 (6) 6 10 Fully diluted 15 28 28 (6) 6 10

Growth (%) Net income (adjusted) 163 82 43 (52) 27 12 EPS (adjusted) 161 76 29 (52) 1 5 DCF/share 114 90 (1) (121) (207) 67

Cash tax rate (%) 17 13 18 28 21 24 Effective tax rate (%) 17 13 17 27 18 22

Source: Company, Kotak Institutional Equities estimates

KOTAK INSTITUTIONAL EQUITIES RESEARCH 81

Company.dot REDUCE Hexaware Technologies (HEXW)

Technology JULY 30, 2009 RESULT, CHANGE IN RECO. Coverage view: Attractive

Short-term gain may end up becoming a long-term pain. Hexaware reported a Price (Rs): 63 surprisingly strong quarter, handsomely outperforming our EBITDA and net income Target price (Rs): 60 estimates. However, we refrain from turning positive on the stock given little BSE-30: 15,173 improvement in revenue visibility. Massive cost controls undertaken by the company may aid near-term financial performance, but we fear a negative impact on future growth prospects on account of under-investment in business. Upgrade to REDUCE.

Company data and valuation summary Hexaware Technologies Stock data Forecasts/Valuations 2008 2009E 2010E 52-week range (Rs) (high,low)65-17 EPS (Rs) 4.1 8.1 8.7 Market Cap. (Rs bn) 9.0 EPS growth (%) (46.4) 97.1 7.4 Shareholding pattern (%) P/E (X) 15.3 7.7 7.2 Promoters 25.3 Sales (Rs bn) 11.5 10.4 10.8 FIIs 42.3 Net profits (Rs bn) 0.6 1.2 1.2 MFs 0.9 EBITDA (Rs bn) 1.3 1.9 1.7 Price performance (%) 1M 3M 12M EV/EBITDA (X) 4.9 2.8 2.6 Absolute 36.5 102.6 26.9 ROE (%) 8.6 16.3 15.3 Rel. to BSE-30 33.0 52.2 15.4 Div. Yield (%) 0.8 1.6 1.6

2QCY09—massive outperformance on EBITDA and PAT despite in-line revenues

Hexaware’s reported EBITDA of Rs558 mn and net income of Rs396 mn were substantially ahead of our expectation despite in-line revenues (Rs2.59 bn versus our expectation of Rs2.56 bn). EBITDA margins expanded 670 bps qoq to 21.5% (the highest in the company’s history as a listed entity), despite pressure from Rupee appreciation during the quarter. Revenues of US$53.6 mn came in ahead of the company’s guidance of US$51-53 mn and our expectation of US$52.5 mn; revenues were aided by favorable cross-currency movements. The company reduced headcount for the sixth quarter in a row; direct costs were down 9% qoq and 28% yoy, while SG&A expenses were down 12% qoq and 23% yoy. The company has guided for revenues of US$52.5 – 54.5 mn for 3QCY09, a decline of 2% qoq at the lower end to an increase of 1.8% at the upper end.

We remain negative on the outlook for the company; there are limits to cost controls

Ironical as it may appear, Hexaware has reported a quarter of historically-high margins and free cash generation in the middle of challenging demand environment for the Indian IT services industry. This has been driven by some extreme measures—the company used the benign supply- side environment to cut wages, reduced headcount by 30% over the past six quarters, cut S&M spends aggressively, and incurred negligible capex. However, we highlight the potential negative implications of the same below:

` Sustained headcount decline and capex cut-down inspires little confidence on the revenue visibility for the company.

` Slowdown in S&M investments could jeopardize the company’s chances of participating in the

incremental growth opportunities for the offshore players.

` Some of the extreme measures taken to cut employee expenses (layoffs, salary cuts, etc.) may have a long-term impact of the company’s perception as an employer.

` A shrinking bench exposes the company to project execution risks by reducing its ability to effectively manage skill-set mismatches on existing as well as potential new engagements.

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

Hexaware Technologies Technology

Massive cost rationalization across the board

Hexaware accelerated its cost control initiative in the June 2009 quarter taking several steps, the key ones being—(1) salary cuts across the organization (except technical resources in the 0-2 years experience band)—5% reduction onsite and 2-10% offshore; these were effected from April 1, 2009 and the company attributed 250 bps margin benefit qoq on account of these wage cuts, (2) infrastructure rationalization—the company vacated several of its rented premises as it cut headcount and offshore seat capacity, (3) headcount reduction—technical and G&A; the company indicated that it has maintained its market-facing channel and not downsized its S&M organization, (4) reduction in headcount-linked overheads (travel, communication, etc.). While the company intends to roll-back the salary cuts at the start of the next calendar year, it indicates that the reduced G&A cost structure is sustainable in nature.

However, we highlight the risk of higher-than-peers cost pressure on the company as growth resumes—Hexaware will have to resort to high-cost lateral hiring to avoid skill mismatches and offer higher-than-industry wage hikes in the near-future to retain key technical and S&M employees. We build in a sharp decline in margins in the coming years, accordingly.

Non-headcount operational metrics—signs of stability

Greater focus on internal efficiency and free cash generation reflected in improvement in receivables days (down to 57 from 68 at end-2QCY08) and utilization (up 260 bps qoq to 74.8%). Client metrics were stable; the company added 10 new clients during the quarter. Pressure on BFSI revenues continued (declined 1.3% qoq), but was made up by traction in some of the emerging verticals. Reported onsite and offshore pricing improved 3.1% and 2.6% qoq, respectively; more importantly, pricing improved in constant currency terms, as well (1.3% and 0.8% qoq, respectively).

Revise estimates upwards and raise target price

We note Hexaware’s cost-control measures and revise our OPM assumptions for We would wait for CY2009E and CY2010E by 610 bps (to 18.3%) and 380 bps (to 15.8%), respectively. We signs of revenue also increase our US$ revenue assumptions moderately and build in lower tax rates for turnaround before CY2010E to factor in the STPI tax benefit extension. Our revised EPS estimates for turning positive on CY2009E and CY2010E stand at Rs8.1 and Rs8.7, respectively. We raise our end- the stock CY2010E target price on the stock to Rs60/share (Rs35/share earlier). We upgrade our rating to REDUCE from SELL. The stock may appear inexpensive (7.2X CY2010E earnings), but the large discount to Tier-I players is fair, in our view, given the challenges on revenue growth and higher risk to margin sustainability. We maintain our negative bias on the stock.

KOTAK INSTITUTIONAL EQUITIES RESEARCH 83 Technology Hexaware Technologies

Hexaware Interim Results (consolidated), 2QCY09

% chg. Kotak % dev Comments Rs mn 2QCY08 1QCY09 2QCY09 qoq yoy estimates Revenues of US$53.6 mn was ahead of company guidance of US$51-53 Revenues 2,845 2,643 2,591 (2.0) (8.9) 2,556 1.4 mn and our expectation of US$52.5 mn Software Development Costs (1,883) (1,486) (1,357) (8.7) (27.9) (1,454) (6.7) Gross profit 962 1,157 1,234 6.6 28.3 1,101 12.0 Total SG&A Expenses (879) (765) (676) (11.6) (23.1) (757) (10.7)

EBITDA margins surprised positively (21.5% versus our expectation of EBITDA 83 392 558 42.3 572.0 344 62.0 13.5%), aided by massive cost control measures taken by the company Depreciation (70) (67) (71) 6.0 1.8 (70) 0.9 EBIT 13 325 487 49.8 3,559 274 77.6 Other Income 116 (120) (45) (62.5) (138.9) (109) (58.7) Profit Before Tax 129 205 442 115.5 242.3 165 167.5 Provision for Tax (34) (32) (46) 43.8 35.3 (33) 41.3 Net income outperformance driven by substantial margin Net Profit 95 173 396 128.8 316.2 133 198.5 outperformance Extraordinary items - - - - Net Profit- Reported 95 173 396 128.8 316.2 133 198.5

EPS (Rs/ share) 0.7 1.2 2.8 128.8 316.2 0.92 198.5 No of shares outstanding (mn) 143.7 143.7 143.7 - - 143.7

As % of revenues Gross Profit Margin (%) 33.8 43.8 47.6 43.1 Operating Margin 2.9 14.8 21.5 13.5 SG&A Expenses (%) 30.9 28.9 26.1 29.6

Billing Rates (US$/manhour) Onsite 69.7 66.2 68.3 3.1 (2.0) 66.1 3.4 Pricing held up better than expected Offshore 23.7 22.4 23.0 2.6 (2.7) 22.3 3.1

Revenue Mix (%) Onsite 64.5 58.8 58.9 58.4 Offshore 35.5 41.2 41.1 41.6

Hexaware has guided for US$52.5-54.5 mn revenues for 3QCY09, a growth of (2)-2% qoq

Source: Company, Kotak Institutional Equities estimates

84 KOTAK INSTITUTIONAL EQUITIES RESEARCH Hexaware Technologies Technology

Condensed consolidated financials for Hexaware, 2006-2010E, December fiscal year-ends (Rs mn)

2006 2007 2008 2009E 2010E Profit model Total income 8,482 10,398 11,520 10,369 10,818 EBITDA 1,322 1,201 1,289 1,895 1,706 Depreciation (incl amortization of intangibles) (200) (232) (270) (287) (303) Other income 241 265 (274) (280) 105 Pretax profits 1,363 1,233 744 1,327 1,508 Tax (101) (133) (155) (165) (260) Profit after tax 1,262 1,101 590 1,162 1,248 Diluted earnings per share (Rs) 8.9 7.7 4.1 8.1 8.7 Balance sheet Total equity 7,500 7,059 6,625 7,620 8,699 Deferred taxation liability 3 (45) (84) (84) (84) Total borrowings 0 — 195 195 — Current liabilities 1,708 2,793 3,711 3,341 3,485 Total liabilities and equity 9,211 9,807 10,447 11,071 12,100 Cash 3,414 3,212 2,849 3,819 4,545 Other current assets 3,296 3,319 3,101 2,557 2,697 Tangible fixed assets 2,501 3,277 4,498 4,695 4,859 Total assets 9,211 9,807 10,447 11,071 12,100 Free cash flow Operating cash flow, excl. working capital 1,470 719 1,173 1,730 1,445 Working capital changes (401) 1,062 (133) 173 4 Capital expenditure (1,742) (979) (1,275) (485) (467) Other income 241 265 (274) (280) 105 Free cash flow (432) 1,067 (509) 1,138 1,089 Ratios (%) EBITDA margin 15.6 11.5 11.2 18.3 15.8

Source: Company, Kotak Institutional Equities estimates

KOTAK INSTITUTIONAL EQUITIES RESEARCH 85

.dot BUY PSL (PSLL)

Others JULY 30, 2009 RESULT Coverage view:

Strong performance. PSL reported strong 1QFY10 results with operating margins at Price (Rs): 122 11.4%, led by low material costs. Revenues at Rs6.2 bn were below our estimated Rs7 Target price (Rs): 160 bn due to lower pipe dispatches. However, PAT of Rs226 mn was much better than our BSE-30: 15,173 estimate of Rs158 mn on account of higher-than-expected margins. We expect margins to remain strong due to execution of higher realization orders. We maintain our BUY rating and target price of Rs160.

Company data and valuation summary PSL Stock data Forecasts/Valuations 2009 2010E 2011E 52-week range (Rs) (high,low)370-60 EPS (Rs) 22.2 37.6 30.1 Market Cap. (Rs bn) 5.3 EPS growth (%) 5.3 69.2 (19.8) QUICK NUMBERS Shareholding pattern (%) P/E (X) 5.5 3.3 4.1 Promoters 49.1 Sales (Rs bn) 32.3 38.8 30.5 • Strong margins at FIIs 17.2 Net profits (Rs bn) 0.9 1.6 1.3 11.4%--highest in MFs 15.9 EBITDA (Rs bn) 3.6 4.0 3.6 the past 10 quarters Price performance (%) 1M 3M 12M EV/EBITDA (X) 4.1 3.3 2.7 Absolute (5.7) 34.6 (61.1) ROE (%) 11.9 13.4 11.3 • Order book Rel. to BSE-30 (8.1) 1.1 (64.7) Div. Yield (%) 4.0 5.2 5.2 maintained at Rs40 bn Strong margins drive 1QFY10 PAT

PSL reported better-than-expected 1QFY10 results with PAT of Rs226 mn ahead of our estimated Rs158 mn primarily led by strong margins. Operating margin at 11.4% (up 220 bps yoy and 740 bps qoq) was significantly higher than our estimate of 8.1%. This is the highest operating margin that the company has reported in the last 10 quarters.

` Revenues below estimate due to lower dispatches. PSL reported revenues of Rs6.2 bn (down 5% yoy) versus our estimated Rs7 bn. Lower pipe dispatches at 82,207 tons (expected 90,000 tons) resulted in lower-than-expected revenues. Production during the quarter was 101,604 tons, resulting in increase in stock by around 19,000 tons which will likely be dispatched in the next quarter. Average realization at Rs75,758/ton were marginally below our estimate of Rs77,600/ton.

` Lower material costs drive margins above estimate. EBITDA margins at US$158/ton (11.4%)

were higher than our estimated US$125/ton (8.1%) due to lower material costs and execution of higher proportion of oil and gas orders. Management guidance indicates similar margin trends in the subsequent quarters as well.

US progress slow, but expected to catch up in 2HFY10

The US subsidiary produced 15,000 tons of pipes during the quarter with revenues of US$22 mn. It is currently executing a US$418 mn (220,000 ton) order for the Florida Gas Company. The company indicated that majority of this order will be executed in the current year with a very small portion flowing into the next year. A majority of the execution will be in 2HFY10 as per the delivery schedule of the order.

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

PSL Others

Strong margins beat expectations PSL, interim results, March fiscal year-ends (Rs mn)

(% chg.) 1QFY10 1QFY10E 1QFY08 4QFY09 1QFY10E 1QFY08 4QFY09 Gross sales 6,228 6,984 6,523 12,166 (10.8) (4.5) (48.8) less: excise duty 615 210 87 304 193.7 605.8 102.4 Net adjusted sales 5,612 6,774 6,436 11,862 (17.2) (12.8) (52.7) Total expenditure (4,974) (6,229) (5,841) (11,382) (20.1) (14.8) (56.3) Inc/(Dec) in stock 1,507 — 1,217 (1,433) — 23.8 (205.1) Raw materials (5,196) — (6,285) (7,561) — (17.3) (31.3) Staff cost (126) — (145) (146) — (12.7) (13.3) Other expenditure (1,159) — (628) (2,242) — 84.5 (48.3) EBITDA 638 546 594 480 16.9 7.4 33.0 OPM (%) 11.4 8.1 9.2 4.0 Other income 105 87 66 145 20.3 59.3 (27.5) Interest (230) (260) (127) (297) (11.4) 82.1 (22.4) Depreciation (180) (140) (145) (139) 28.8 24.2 30.0 Pretax profits 333 233 388 189 42.7 (14.4) 75.6 Tax (107) (75) (128) (53) 43.6 (16.4) 101.9 Net income 226 158 260 136 42.4 (13.4) 65.4 Income tax rate (%) 32.2 32.0 33.0 28.0

Pipe volumes (tons) 82,207 90,000 75,240 156,937 (8.7) 9.3 (47.6)

Source: Company, Kotak Institutional Equities

Strongest margins in the past 10 quarters PSL, operating margin movement over two years, March fiscal year-ends (%)

(%) 14

12 12.2 10.5 11.4 10.7 10.7 10 10.4 8.3 9.2 8.6 8 8.4 7.4 7.6 6

4 4.0

2

0 1Q07 2Q07 3Q07 4Q07 1Q08 2Q08 3Q08 4Q08 1Q09 2Q09 3Q09 4Q09 1Q10

Source: Company, Kotak Institutional Equities

Order book maintained at Rs40 bn

PSL’s order book was maintained at Rs40 bn (including the US orders) which is to be executed over the next 9-12 months. The order book provides visibility of the current year’s revenues estimates; however, new order wins are essential to improve next year’s visibility. The management expects few domestic and international orders to be announced over the next two months and is hopeful to win a large part of the same.

KOTAK INSTITUTIONAL EQUITIES RESEARCH 87 Others PSL

Maintain estimates and target price

We maintain our estimates and target price of Rs160. We reiterate our BUY rating as current valuations at 2.7X and 4.1X FY2011E EBITDA and EPS, respectively, appear quite attractive. The large number of domestic orders to be announced over the next two years, especially from GAIL, provides a good opportunity for PSL that has largely been focused on the domestic market.

Summary financials PSL, summary financials (consolidated), March fiscal year-ends, 2006-2011E (Rs mn)

2006 2007 2008 2009 2010E 2011E Profit model Net revenues 14,503 14,433 20,734 32,305 38,819 30,498 EBITDA 1,550 1,642 2,231 2,731 3,426 3,139 Other income 193 274 448 890 554 437 Interest (expense)/income (690) (563) (887) (1,547) (991) (827) Depreciation (344) (445) (539) (688) (924) (1,047) Pretax profits 708 908 1,253 1,385 2,065 1,701 Tax (192) (280) (400) (449) (362) (381) Deferred taxation 3 25 (9) 12 5 6 Minority Interest — — — — (105) (38) Adjusted consolidated net income 519 653 844 948 1,604 1,287 Diluted Earnings per share (Rs) 14.1 15.8 19.4 21.8 36.8 29.5 Balance sheet Total equity 2,777 3,519 5,697 6,905 8,185 9,147 Deferred taxation liability 32 7 16 (147) (152) (158) Total borrowings 6,810 6,698 9,317 11,423 8,476 7,583 Minority Interest — — 178 273 378 416 Current liabilities 5,898 5,791 8,365 42,463 31,758 25,546 Total liabilities and equity 15,518 16,015 23,572 60,917 48,644 42,534 Cash 1,199 1,263 4,005 2,133 1,200 3,765 Other current assets 10,654 9,596 12,966 45,769 35,097 27,156 Total fixed assets 3,564 5,131 6,391 12,973 12,304 11,571 Miscl. Exps. not w/o 0 0 167 — — — Investments 102 25 43 43 43 43 Total assets 15,518 16,015 23,572 60,917 48,643 42,534 Free cash flow Operating cash flow, excl working capital 900 1,042 1,473 1,606 2,073 1,930 Working capital changes (1,267) 695 (1,023) 1,630 (234) 1,729 Capital expenditure (1,115) (2,012) (1,799) (7,312) (254) (314) Investments — 77 (18) — — — Other income 41 142 67 77 554 437 Free cash flow (1,441) (57) (1,300) (4,000) 2,139 3,782 Ratios (%) EBITDA margins (%) 10.7 11.4 10.8 8.5 8.8 10.3 Debt/equity 2.4 1.9 1.7 1.7 1.1 0.9 Net debt/equity 2.0 1.5 1.0 1.4 1.0 0.5 RoAE 22.6 20.7 18.3 15.1 21.3 14.9 RoACE 11.4 10.7 11.3 11.9 13.4 11.3

Source: Company, Kotak Institutional Equities estimates

88 KOTAK INSTITUTIONAL EQUITIES RESEARCH

NEUTRAL Industrials

India JULY 30, 2009 UPDATE BSE-30: 15,173

Utilities demand resilient but pricing may take a hit. Crompton management highlights slowdown in industrials space while power segment to remain resilient in terms of demand as well as pricing levels. Areva, in its analyst meeting, agreed on demand dynamics but seemed to disagree on price stability, highlighting a 15-20% cut in prices based on recent bid levels (partially led by commodity price fall). We retain REDUCE on ABB and Siemens based on likely near-term disappointments.

Crompton management highlights challenges in industrials; power remains resilient

Crompton seemed confident of growth in the domestic power segment based on relatively low exposure to industrial segment as most of the exposure is to central and state utilities. The management categorically stated that almost all capex in industrial areas is at a standstill and the company has actually observed lower activity in April-June, 2009 versus October-March, 2008. Despite the dim prognosis, the management believes margins may be sustained at current levels as industry players may not cut pricing, particularly since demand for industrial products tends to be price inelastic.

Highlights resilient demand in overseas transmission business while distribution segment continues to see a slowdown led by a slowdown in housing industry.

Other highlights - waterfall mechanism for cash flow usage; near-term PE induction in Avantha

Crompton management highlighted that it would like to follow the waterfall mechanism for cash flow utilization with the following order of priority (1) capital expenditure to grow the equipment business, (2) acquisitions in areas such as automation systems, HVDC, FACTS and (3) generation related investments.

Management cited that it is close to announcing a private equity (PE) investment in Avantha that would close out the equity financing gap for the thermal power project being taken up currently. Private equity would come at a substantial premium versus the investment opportunity that Crompton was able to avail for itself, thus demonstrating value.

Areva management reflects similar outlook on power demand; however, expect sharp price cuts

In its analyst meeting, Areva agreed on demand dynamics but seemed to disagree on the price stability issue. Areva highlighted that it is observing a 15-20% price correction (though partially on account of commodities) in the product segments and cited very aggressive bidding by Hyosung in recent PGCIL bids that were opened. We retain REDUCE on ABB and Siemens and highlight that there could be near-term disappointments in earnings performance in context of relatively high valuations. Highlight high exposure (greater than 30-40%) of revenues of ABB and Siemens to industrial segment.

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

India Industrials

Management highlights challenges in industrials; power remains resilient

No recovery in Management categorically stated that almost all capex in industrial areas is at a standstill and they have actually observed lower activity in April-June, 2009 versus October-March, industrial capex— 2008 period. Despite this dim prognosis, management believes that margins may be April-June ‘09 worse sustained at current levels as industry players may not cut pricing, particularly since than Oct-March ‘08 demand for industrial products tend to be price inelastic. We continue to maintain that industry segment would decline in topline levels by about 5-6%.

Confident of growth in domestic power segment as well as related exports

Crompton’s management seemed confident of growth in the domestic power segment based on relatively low exposure to the industrial segment as most of the exposure is to central and state utilities. Exports of standalone entity to South-East Asia as well as Middle East are also fairly resilient.

Overseas business supported by utility investments however distribution segment has faced a sharp decline; even renewable is of limited help in the near term.

Management believes that transmission business in overseas subsidiaries (about 55% of business) is resilient as it is driven by large investments by utilities in (a) project for connecting the EU-16 countries in a pan-European grid and (b) interconnecting grid for various regions of USA. Management believes that distribution (30% of business) has seen a very sharp slowdown as that is linked to incremental housing activity. Management is trying to mitigate distribution slowdown by focusing on slim transformers for renewable energy. However, despite large orders and framework contracts, the pick-up in the renewable space has also been slow.

Waterfall mechanism for cash flow utilization

Capital expenditure, related acquisitions to bridge product gaps then followed by generation.

The management highlighted that it would like to follow the waterfall mechanism for cash flow utilization with the following order of priority (a) capital expenditure to grow the equipment business, (b) acquisitions in areas such as automation systems, HVDC, FACTS (acquisition size may range from Euro100 mn to Euro1 bn) and (c) generation related investments. The management would look at opportunities in private distribution franchise business similar to Nagpur circle (which has not made any progress and may be rebid). The management believes BOOT projects in transmission are not attractive from a returns perspective.

Likely near-term PE induction in Avantha to demonstrate investment value

Crompton highlighted that it is close to announcing a private equity (PE) investment in Avantha that would close out the equity financing gap for the thermal power project being taken up currently. Private equity would come at a substantial premium versus the investment opportunity that Crompton was able to avail for itself, thus demonstrating value. Crompton has already placed order on BHEL for the first project and did not see any merit in going for Chinese equipment as the price difference was only 12% related to perception of lower quality and reliability.

90 KOTAK INSTITUTIONAL EQUITIES RESEARCH Industrials India

Small size in European market helps manage growth amidst slowdown

Crompton highlighted that it is actually a very small player with only about 5% market of the European market versus the top three players who command more than 50% of the market between them. The relatively small size allowed the company’s European business to continue to grow even during overall slow growth of the market as it continued to take away market share from numerous other smaller players based on stronger management practices. Crompton highlighted that it expects about 5% growth in overseas subsidiaries for the next two years and growth may pick up beyond that.

Areva analyst meeting—dim outlook suggesting complete slowdown

Areva-Expect price Areva in its analyst meeting offered starkly different perspective suggesting that industrial investments are on the hold and there has been price correction of the order of 15-20% correction of 15-20%, in the market place across both transmission and distribution segments. It highlighted partly related to strong competition from imports-based players such as Hyosung and cited a recent commodities tender of PGCIL where in Hyosung pricing was lower by 20% relative to the last bid also only six-seven months ago. Areva reported 21% lower order intake in 1HCY09 versus in 1HCY08. Areva had earlier reported 45% revenue growth for the quarter and almost flat EBITDA on a yoy basis as margins declined substantially (by 400 to 13.6%).

We retain our REDUCE rating on both ABB and Siemens and believe that near-term performance, particularly in case of ABB could disappoint in the context of relatively high valuations.

KOTAK INSTITUTIONAL EQUITIES RESEARCH 91

KOTAK INSTITUTIONAL EQUITIES RESEARCH EQUITIES INSTITUTIONAL KOTAK Kotak Institutional Equities: Valuation summary of key Indian companies India DailySummary O/S Target ADVT- 29-Jul-09 Mkt cap. shares EPS (Rs) EPS growth (%) PER (X) EV/EBITDA (X) Price/BV (X)Dividend yield (%) RoE (%) price Upside 3mo Company Price (Rs) Rating (Rs mn) (US$ mn) (mn) 2009 2010E 2011E 2009 2010E 2011E 2009 2010E 2011E 2009 2010E 2011E 2009 2010E 2011E 2009 2010E 2011E 2009 2010E 2011E (Rs) (%) (US$ mn) Automobiles Ashok Leyland 35 ADD 46,229 955 1,330 1.5 2.3 2.4 (57.8) 50.3 5.8 22.7 15.1 14.3 15.1 10.2 7.6 1.2 1.2 1.2 2.9 2.9 2.9 6.2 8.1 8.2 37 6.5 4.0 Bajaj Auto 1,205 ADD 174,279 3,601 145 45.2 85.0 100.9 (13.4) 87.9 18.7 26.6 14.2 11.9 15.6 8.7 7.7 9.3 6.4 4.6 1.7 1.7 1.7 37.7 53.1 44.0 1,260 4.6 5.8 Hero Honda 1,637 REDUCE 326,829 6,753 200 64.2 87.5 94.9 32.5 36.3 8.5 25.5 18.7 17.2 17.1 12.3 11.0 8.3 6.4 5.0 1.2 1.3 1.3 36.6 38.7 32.6 1,330 (18.7) 17.9 Mahindra & Mahindra 842 ADD 223,422 4,616 265 21.7 40.4 43.6 (42.9) 86.0 8.0 38.8 20.9 19.3 33.6 15.5 13.9 4.7 3.5 3.1 1.1 1.1 1.1 12.3 19.3 17.0 670 (20.5) 21.0 Maruti Suzuki 1,398 SELL 404,036 8,348 289 42.2 70.0 73.0 (29.6) 65.9 4.3 33.2 20.0 19.2 29.3 13.2 11.7 4.2 3.5 3.0 0.4 0.3 0.4 13.4 19.0 16.8 1,100 (21.3) 21.0 Tata Motors 393 SELL 218,767 4,520 556 20.8 23.7 26.0 (58.3) 14.1 9.6 18.9 16.6 15.1 23.7 11.7 10.5 1.6 1.5 1.4 1.4 1.4 1.4 9.0 9.3 335 (14.8) 42.0 Automobiles Cautious 1,393,563 28,793 (169.6) 340.5 54.9 165.7 105.4 97.1 134.4 71.7 62.4 29.4 22.5 18.2 8.6 8.7 8.8 115.1 147.5 118.6 Banks/Financial Institutions Andhra Bank 89 BUY 43,335 895 485 13.5 13.3 15.2 13.5 (1.5) 14.4 6.6 6.7 5.9 1.2 1.1 0.9 5.0 3.7 4.2 18.9 16.6 16.9 105 17.5 1.9 Axis Bank 918 BUY 329,423 6,806 359 50.6 59.1 68.2 56.9 16.8 15.6 18.1 15.5 13.4 3.5 3.2 2.7 1.1 1.3 1.5 19.1 19.2 19.2 850 (7.4) 73.4

IndiaDaily Summary-July Bank of Baroda 423 ADD 154,728 3,197 366 60.9 60.9 62.1 55.1 0.0 1.9 6.9 6.9 6.8 1.4 1.2 1.0 2.1 2.1 2.2 18.7 16.3 14.7 480 13.4 10.5 Bank of India 320 ADD 168,529 3,482 526 57.2 51.5 56.2 40.7 (9.9) 9.1 5.6 6.2 5.7 1.4 1.2 1.0 2.5 2.2 2.5 29.2 21.0 19.3 370 15.5 16.1 Canara Bank 272 ADD 111,356 2,301 410 50.5 41.4 51.1 32.4 (18.1) 23.3 5.4 6.6 5.3 1.4 1.4 1.2 2.9 2.9 3.7 18.3 13.2 14.7 295 8.6 5.7 Corporation Bank 344 BUY 49,292 1,018 143 62.3 58.0 57.1 21.5 (6.8) (1.6) 5.5 5.9 6.0 1.0 0.9 0.8 3.6 3.4 3.3 19.6 16.0 14.0 420 22.2 0.9 Federal Bank 239 BUY 40,868 844 171 27.8 31.4 38.2 (19.2) 13.1 21.5 8.6 7.6 6.3 1.0 0.9 0.8 2.2 2.4 3.0 11.5 11.8 13.0 320 33.9 3.2 Future Capital Holdings 272 BUY 17,200 355 63 4.5 28.8 (198.6) 546.1 (100.0) 61.1 9.5 2.3 1.8 3.8 21.4 440 61.7 1.2 -July30,2009 HDFC 2,368 NR 673,435 13,914 284 80.2 91.5 103.6 (6.5) 14.0 13.3 29.5 25.9 22.9 5.1 4.6 4.1 1.3 1.4 1.5 18.2 18.3 18.3 (100.0) 64.3 HDFC Bank 1,419 REDUCE 641,336 13,251 452 52.8 63.3 73.5 17.6 20.0 16.0 26.9 22.4 19.3 4.3 3.0 2.7 0.7 0.8 1.0 16.9 15.8 14.7 1,430 0.8 50.8 ICICI Bank 733 REDUCE 815,763 16,855 1,113 33.8 34.3 40.4 (15.4) 1.7 17.6 21.7 21.4 18.1 1.6 1.6 1.5 1.5 1.5 1.8 7.8 7.5 8.4 685 (6.5) 188.8 IDFC 131 ADD 169,228 3,496 1,295 5.8 7.7 8.7 1.9 33.9 12.6 22.6 16.9 15.0 2.7 2.4 2.1 0.9 1.0 1.1 12.9 15.4 15.3 120 (8.2) 51.2 India Infoline 130 ADD 40,659 840 312 5.1 7.7 8.2 (8.7) 50.5 7.3 25.5 17.0 15.8 10.1 7.5 6.3 3.6 2.9 2.5 1.8 2.3 2.7 11.9 17.5 17.2 145 11.2 15.0 Indian Bank 143 BUY 61,414 1,269 430 28.0 27.6 30.2 24.1 (1.4) 9.7 5.1 5.2 4.7 1.1 1.0 0.8 3.5 3.3 3.6 22.9 19.2 18.2 185 29.5 2.9 Indian Overseas Bank 88 BUY 47,888 989 545 24.3 16.6 22.2 10.3 (31.9) 33.8 3.6 5.3 4.0 0.8 0.7 0.6 6.0 4.3 4.7 24.7 14.5 17.0 130 47.9 4.3 J&K Bank 450 BUY 21,843 451 48 84.5 86.6 96.3 13.8 2.4 11.2 5.3 5.2 4.7 0.9 0.9 0.8 3.8 3.8 4.3 16.7 15.1 14.9 550 22.1 0.5 LIC Housing Finance 602 NR 51,185 1,058 85 62.5 68.8 80.3 37.3 10.0 16.8 9.6 8.8 7.5 2.1 1.8 1.5 2.3 2.5 2.9 26.2 23.9 23.4 (100.0) 20.7 Mahindra & Mahindra Financial 246 ADD 23,533 486 96 22.4 26.7 28.8 7.5 19.0 8.1 11.0 9.2 8.5 1.7 1.5 1.3 2.2 2.7 2.9 15.4 16.4 15.8 270 9.8 1.0 Oriental Bank of Commerce 167 REDUCE 41,715 862 251 36.1 29.1 31.5 51.4 (19.4) 8.3 4.6 5.7 5.3 0.8 0.8 0.8 4.4 3.5 3.8 13.7 9.6 9.7 190 14.1 2.9 PFC 231 SELL 264,675 5,468 1,148 13.0 18.0 20.0 14.3 38.6 11.1 17.8 12.8 11.5 2.4 2.1 1.9 1.2 2.3 2.6 13.8 17.3 17.2 185 (19.8) 6.3 Punjab National Bank 748 BUY 235,720 4,870 315 98.0 100.7 115.2 50.9 2.7 14.4 7.6 7.4 6.5 1.8 1.5 1.3 2.6 2.7 3.1 23.0 20.3 20.1 800 7.0 16.6 Reliance Capital 869 ADD 214,012 4,422 246 39.3 29.0 28.9 (5.6) (26.2) (0.5) 22.1 30.0 30.1 3.2 2.9 2.7 0.7 0.5 0.5 15.3 10.2 9.3 875 0.6 156.8 Rural Electrification Corp. 187 BUY 160,902 3,324 859 16.5 19.6 21.3 50.7 19.1 8.8 11.4 9.6 8.8 2.3 1.9 1.6 1.1 1.9 2.1 21.2 21.5 19.9 190 1.4 5.4 Shriram Transport 304 ADD 64,245 1,327 212 30.1 32.5 36.9 56.8 7.9 13.7 10.1 9.4 8.2 2.9 2.5 2.1 2.9 3.2 3.6 29.6 27.0 25.8 350 15.2 2.5 SREI 68 ADD 7,890 163 116 7.0 7.5 6.8 (38.4) 6.1 (9.5) 9.6 9.1 10.0 0.8 0.7 0.6 1.5 1.8 1.8 12.5 10.3 10.2 90 32.6 4.1 State Bank of India 1,657 BUY 1,052,036 21,736 635 143.6 121.1 139.2 34.8 (15.7) 14.9 11.5 13.7 11.9 2.1 2.1 1.8 1.8 1.8 1.9 17.1 12.7 13.3 1,870 12.9 110.2 Union Bank 226 BUY 114,030 2,356 505 34.2 32.4 35.4 24.5 (5.1) 9.2 6.6 7.0 6.4 1.6 1.4 1.2 2.2 2.1 2.3 27.2 21.2 19.5 280 24.0 7.9 Banks/Financial Institutions Attractive 5,616,241 116,038 323.7 665.9 200.8 380.1 306.6 268.7 10.1 7.5 6.3 55.1 47.8 40.5 61.6 61.7 68.7 486.2 449.1 420.3 Cement ACC 859 REDUCE 161,323 3,333 188 56.3 74.0 57.1 (12.2) 31.6 (22.8) 15.3 11.6 15.0 7.7 5.9 6.8 3.1 2.5 2.3 2.7 2.7 2.7 24.7 27.1 18.4 875 1.9 13.1 Ambuja Cements 99 REDUCE 150,791 3,116 1,522 7.2 7.9 6.6 (5.0) 10.2 (16.8) 13.8 12.5 15.0 7.4 6.9 7.7 2.5 2.2 2.0 3.0 1.9 2.2 19.7 19.1 14.1 85 (14.2) 7.1 Grasim Industries 2,719 REDUCE 249,268 5,150 92 238.6 251.9 266.5 (16.2) 5.6 5.8 11.4 10.8 10.2 6.5 5.3 5.1 2.2 1.8 1.6 1.2 1.2 1.3 21.1 18.4 16.8 2,560 (5.8) 11.7 India Cements 135 ADD 38,199 789 282 17.8 19.4 15.2 (27.4) 9.1 (21.8) 7.6 7.0 8.9 5.3 4.2 4.8 1.0 0.9 0.8 1.3 1.6 2.4 14.8 14.6 10.4 155 14.6 9.4 Shree Cement 1,582 BUY 55,116 1,139 35 174.7 209.9 195.6 93.7 20.1 (6.8) 9.1 7.5 8.1 6.1 4.3 4.0 4.6 2.8 2.1 0.7 0.7 0.7 65.7 46.0 29.4 2,000 26.4 0.7 UltraTech Cement 790 BUY 98,353 2,032 124 78.8 90.2 73.8 (3.1) 14.5 (18.2) 10.0 8.8 10.7 6.0 4.7 5.2 2.3 1.8 1.6 0.7 1.0 1.0 31.1 27.3 18.3 900 13.9 6.0 Cement Neutral 753,051 15,559 29.9 91.0 (80.7) 67.1 58.2 68.0 39.1 31.3 33.6 15.6 12.1 10.3 9.7 9.1 10.2 177.0 152.6 107.3 Constructions IVRCL 317 BUY 42,880 886 135 16.7 18.2 22.4 7.4 9.3 22.9 19.0 17.4 14.1 13.2 10.2 8.4 2.4 2.1 1.8 0.2 0.2 0.2 13.2 12.8 13.8 360 13.6 32.2 Nagarjuna Construction Co. 145 BUY 33,195 686 229 6.7 7.5 8.5 (6.4) 11.9 13.3 21.6 19.3 17.0 13.1 10.0 8.6 2.0 1.8 1.7 0.9 1.1 1.4 9.4 9.8 10.3 145 0.1 8.7 Punj Lloyd 243 BUY 75,506 1,560 311 (7.2) 17.6 20.6 (172.4) (343.2) 17.2 (33.6) 13.8 11.8 23.4 8.1 7.3 3.0 2.5 2.1 0.1 0.3 0.4 (8.6) 19.9 19.4 300 23.6 43.1 Sadbhav Engineering 727 BUY 9,085 188 13 50.6 55.6 77.9 25.0 9.8 40.2 14.4 13.1 9.3 10.1 7.7 6.3 2.6 2.2 1.8 0.7 0.8 1.0 18.0 16.8 19.4 830 14.2 0.2 Constructions Attractive 160,667 3,320 (146.4) (312.2) 93.6 21.3 63.5 52.3 59.8 36.1 30.6 10.0 8.6 7.4 2.0 2.5 3.0 32.0 59.3 62.9 Consumer Products Asian Paints 1,397 ADD 134,034 2,769 96 38.6 56.1 65.6 (1.7) 45.4 16.9 36.2 24.9 21.3 21.6 15.0 12.7 11.7 9.7 8.1 1.3 1.9 2.2 36.6 44.4 42.8 1,400 0.2 1.0 Colgate-Palmolive (India) 665 REDUCE 90,394 1,868 136 21.6 28.0 31.0 26.3 29.7 10.7 30.8 23.8 21.5 25.4 20.0 16.8 41.8 37.8 42.0 2.3 3.4 4.2 155.1 167.1 185.2 620 (6.7) 3.0 GlaxosmithKline Consumer 1,074 ADD 45,149 933 42 44.8 56.1 63.6 15.8 25.2 13.5 24.0 19.1 16.9 13.6 11.1 9.7 5.9 5.0 4.4 1.4 1.9 2.8 26.8 28.5 28.0 1,050 (2.2) 0.9 Godrej Consumer Products 215 ADD 55,583 1,148 258 6.7 8.7 10.0 (5.3) 30.3 14.9 32.2 24.7 21.5 26.0 17.7 15.4 9.7 6.0 5.2 1.9 1.9 1.9 46.9 30.2 26.0 210 (2.5) 0.9 Hindustan Unilever 268 BUY 584,859 12,084 2,179 9.5 10.6 12.2 19.0 11.1 15.0 28.2 25.4 22.1 21.6 19.0 16.4 28.4 25.4 22.7 3.3 3.5 4.1 112.4 105.9 108.9 320 19.2 25.9 ITC 238 BUY 895,799 18,508 3,769 8.7 10.3 11.8 2.8 19.3 14.3 27.4 23.0 20.1 16.8 14.2 12.5 6.1 5.4 4.7 1.6 1.7 1.9 25.3 26.3 26.0 255 7.3 36.1 Jyothy Laboratories 104 ADD 7,514 155 73 5.6 10.1 12.6 (11.2) 78.5 25.0 18.4 10.3 8.2 11.8 7.1 5.5 10.7 16.7 19.4 145 40.0 0.2 Nestle India 2,061 ADD 198,669 4,105 96 58.6 70.5 82.4 31.0 20.4 16.8 35.2 29.2 25.0 22.4 19.1 16.5 42.0 34.5 28.5 2.1 2.5 2.9 126.7 129.6 124.8 2,100 1.9 1.7 Tata Tea 803 BUY 49,651 1,026 62 57.0 62.8 69.2 5.3 10.1 10.2 14.1 12.8 11.6 7.4 6.6 5.5 1.0 1.0 0.9 2.1 2.3 2.6 9.8 10.1 10.4 900 12.1 3.2 Consumer Products Attractive 2,061,653 42,596 81.9 270.0 137.2 246.5 193.2 168.2 166.7 129.7 111.0 146.7 124.8 116.5 15.8 19.1 22.5 550.3 558.7 571.5 Energy Bharat Petroleum 469 SELL 169,527 3,503 362 20.4 38.2 41.8 (50.7) 87.6 9.5 23.0 12.3 11.2 8.4 8.7 6.5 1.2 1.2 1.1 1.5 3.2 3.5 5.2 9.1 9.4 475 1.3 10.7 Cairn India 235 REDUCE 445,243 9,199 1,897 4.3 8.8 30.8 (3,703.1) 104.9 249.9 54.7 26.7 7.6 38.5 13.4 5.3 1.3 1.3 1.2 8.5 2.5 4.9 16.2 225 (4.2) 35.3 Castrol India 462 BUY 57,066 1,179 124 21.3 31.1 32.0 20.8 45.9 3.0 21.7 14.8 14.4 12.4 8.8 8.5 12.7 11.2 10.0 3.2 4.8 5.0 61.2 80.2 73.5 480 4.0 1.0 GAIL (India) 324 ADD 410,479 8,481 1,268 22.1 20.6 22.1 8.4 (6.8) 7.2 14.6 15.7 14.7 7.7 8.9 9.0 2.5 2.2 2.0 1.4 1.6 1.6 17.6 14.4 13.9 330 2.0 17.4 GSPL 69 REDUCE 38,635 798 563 2.2 3.5 6.7 21.7 58.3 92.7 31.3 19.8 10.3 11.1 6.5 4.1 2.9 2.6 2.7 1.1 1.7 9.7 9.6 13.9 25.7 65 (5.3) 7.6 Hindustan Petroleum 333 REDUCE 112,823 2,331 339 17.0 16.7 34.9 (49.3) (1.6) 109.2 19.6 19.9 9.5 7.2 7.5 5.9 0.9 0.9 0.8 1.6 3.6 7.5 4.4 3.9 7.8 350 5.2 13.6 Indian Oil Corporation 536 REDUCE 638,693 13,196 1,192 18.9 44.3 43.1 (69.1) 133.8 (2.6) 28.3 12.1 12.4 10.3 5.5 5.4 1.4 1.3 1.2 1.4 3.4 3.3 4.6 10.2 9.3 550 2.7 8.8 Oil & Natural Gas Corporation 1,098 BUY 2,349,460 48,543 2,139 91.4 95.8 114.6 (1.5) 4.9 19.6 12.0 11.5 9.6 4.3 4.1 3.5 2.1 1.9 1.7 2.9 3.3 3.8 17.3 16.2 17.5 1,200 9.2 60.5 Petronet LNG 70 REDUCE 52,163 1,078 750 6.9 7.2 8.6 9.2 3.6 19.6 10.1 9.7 8.1 7.3 6.6 5.6 2.3 1.9 1.6 2.5 2.9 3.2 23.9 20.6 20.6 64 (8.0) 8.3 Reliance Industries 1,930 SELL 3,037,272 62,754 1,573 103.4 103.1 148.2 (1.5) (0.2) 43.6 18.7 18.7 13.0 13.5 9.8 7.0 2.6 2.3 2.0 0.6 0.7 0.9 15.1 13.0 16.6 1,600 (17.1) 236.9 Reliance Petroleum 120 NR 538,875 11,134 4,500 0.2 3.1 10.0 1,544.9 226.9 641.5 39.0 11.9 300.9 17.2 9.2 4.0 3.9 3.1 1.7 1.7 0.6 10.1 29.0 (100.0) 24.8 Energy Cautious 7,850,235 162,195 (3,815.2) 1,975.3 778.5 875.5 200.2 122.8 421.5 96.9 69.9 33.9 30.6 27.5 16.3 26.9 48.8 162.0 196.4 239.4 Industrials Source: Company, Bloomberg, Kotak Institutional Equities estimates

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3 93 IndiaDailySummary Kotak Institutional Equities: Valuation summary of key Indian companies

O/S Target ADVT- 29-Jul-09 Mkt cap. shares EPS (Rs) EPS growth (%) PER (X) EV/EBITDA (X) Price/BV (X)Dividend yield (%) RoE (%) price Upside 3mo Company Price (Rs) Rating (Rs mn) (US$ mn) (mn) 2009 2010E 2011E 2009 2010E 2011E 2009 2010E 2011E 2009 2010E 2011E 2009 2010E 2011E 2009 2010E 2011E 2009 2010E 2011E (Rs) (%) (US$ mn) ABB 700 REDUCE 148,315 3,064 212 25.0 29.6 (3.4) 18.7 (100.0) 28.0 23.6 17.7 14.5 5.8 4.8 0.4 0.4 22.6 22.2 500 (28.6) 8.7 BGR Energy Systems 360 ADD 25,942 536 72 15.6 25.9 30.9 29.0 65.4 19.2 23.0 13.9 11.7 12.8 8.6 7.1 4.5 3.6 2.9 0.8 1.2 1.5 21.6 28.8 27.4 400 11.0 1.6 Bharat Electronics 1,419 REDUCE 113,544 2,346 80 101.9 113.7 121.2 (0.0) 11.5 6.6 13.9 12.5 11.7 6.1 6.2 5.5 2.9 2.5 2.1 1.8 1.8 1.8 22.4 21.3 19.5 1,450 2.2 2.9 Bharat Heavy Electricals 2,239 REDUCE 1,096,182 22,648 490 64.1 93.0 116.3 9.8 45.0 25.0 34.9 24.1 19.3 26.2 16.4 12.5 8.5 6.7 5.3 0.7 0.9 1.1 26.4 31.0 30.7 2,100 (6.2) 57.2 Crompton Greaves 303 ADD 111,043 2,294 367 15.3 17.7 20.3 37.3 15.3 15.0 19.7 17.1 14.9 11.1 9.8 8.3 6.1 4.7 3.7 0.7 0.7 0.8 35.9 30.8 27.6 315 4.0 5.3 Larsen & Toubro 1,466 ADD 874,792 18,074 597 52.6 60.1 71.7 38.7 14.3 19.3 27.9 24.4 20.4 18.6 16.2 13.8 0.7 0.7 0.8 22.5 19.7 19.0 1,425 (2.8) 110.0 Maharashtra Seamless 250 BUY 17,643 365 71 35.9 33.0 35.3 22.2 (7.9) 6.9 7.0 7.6 7.1 4.0 4.0 3.5 1.3 1.1 1.0 2.1 2.0 2.5 20.3 16.0 15.0 285 13.9 1.3 Siemens 478 REDUCE 161,078 3,328 337 22.8 22.7 26.3 61.0 (0.5) 15.9 20.9 21.1 18.2 11.9 12.1 10.0 5.9 4.8 4.0 1.5 0.9 1.1 30.8 25.2 24.2 450 (5.8) 7.8 Suzlon Energy 101 BUY 159,112 3,287 1,571 7.4 6.4 9.4 12.8 (14.1) 47.0 13.7 15.9 10.8 10.8 10.4 8.1 1.7 1.4 1.3 0.5 0.5 1.0 12.6 9.8 12.6 140 38.2 161.0 Industrials Neutral 2,707,650 55,943 207.3 147.6 54.9 189.1 160.1 114.1 119.1 98.0 69.0 36.6 29.6 20.3 9.2 9.2 10.6 215.1 204.8 175.9 Infrastructure GVK Power & Infrastructure 44 BUY 69,564 1,437 1,579 0.8 0.8 1.0 (20.6) 3.7 31.1 57.8 55.7 42.5 52.4 17.3 16.0 3.0 2.2 2.1 0.7 4.8 4.6 5.1 50 13.5 22.1 IRB Infrastructure 188 BUY 62,318 1,288 332 5.3 10.7 13.6 54.3 101.7 27.5 35.4 17.6 13.8 18.7 9.7 9.0 3.4 2.8 2.3 0.6 10.1 17.4 18.1 200 6.7 10.6 Infrastructure Attractive 131,882 2,725 33.7 105.5 58.6 93.2 73.3 56.3 71.1 27.0 25.0 6.4 5.0 4.4 0.6 - 0.7 14.9 21.9 23.2 Media DishTV 45 REDUCE 42,823 885 946 (7.3) (4.1) (3.2) (23.9) (44.4) (22.6) (6.2) (11.1) (14.3) (26.5) (163.5) 51.6 -6.6 -21.1 -8.5 86.1 91.1 84.8 32 (29.3) 15.0 HT Media 110 ADD 25,697 531 234 0.9 4.8 6.6 (78.8) 422.4 37.4 119.7 22.9 16.7 27.3 11.2 9.1 3.0 2.8 2.6 0.4 0.7 2.3 2.5 12.8 16.3 125 13.9 0.6 Jagran Prakashan 101 ADD 30,298 626 301 3.0 4.8 5.8 (6.6) 58.0 20.0 33.1 20.9 17.4 18.9 12.1 10.0 5.4 5.0 4.6 2.0 2.9 3.2 16.7 24.9 27.4 105 4.4 1.0 Sun TV Network 262 REDUCE 103,249 2,133 394 9.1 11.3 13.3 9.3 24.4 18.4 28.9 23.3 19.7 15.2 12.9 10.8 5.9 5.2 4.6 1.0 1.5 2.3 22.5 24.0 24.9 235 (10.3) 2.5 Zee Entertainment Enterprises 175 REDUCE 76,050 1,571 435 8.3 10.0 12.0 (6.5) 20.6 19.5 21.1 17.5 14.6 15.1 12.6 10.1 2.3 2.1 2.0 1.3 1.5 1.8 11.9 13.0 14.4 160 (8.5) 7.9 Zee News 40 ADD 9,483 196 240 1.9 2.2 2.7 21.3 14.7 23.4 21.1 18.4 14.9 11.0 9.0 7.6 3.8 3.3 2.8 1.0 1.0 1.5 20.1 19.6 20.7 45 13.8 1.5 Media Neutral 287,600 5,942 (85.4) 495.7 96.1 217.7 91.9 69.0 60.9 (105.8) 99.3 13.8 -2.7 8.0 5.6 7.6 11.1 159.8 185.4 188.6 Metals Hindalco Industries 95 BUY 165,797 3,426 1,753 7.7 2.0 10.0 (44.4) (73.3) 386.0 12.3 46.1 9.5 6.8 9.5 7.2 0.5 0.4 0.4 10.3 5.2 6.7 135 42.7 25.0 Hindustan Zinc 681 BUY 287,681 5,944 423 64.6 57.3 74.1 (38.0) (11.2) 29.3 10.5 11.9 9.2 6.7 6.7 4.3 1.9 1.7 1.4 0.6 0.7 0.7 20.1 15.1 16.7 825 21.2 5.8 Jindal Steel and Power 3,119 REDUCE 480,144 9,920 154 198.0 247.1 236.4 139.3 24.8 (4.3) 15.8 12.6 13.2 10.3 8.2 7.9 6.4 4.2 3.2 0.2 0.2 0.2 51.9 40.3 27.6 2,150 (31.1) 46.7 JSW Steel 688 SELL 128,596 2,657 187 13.1 36.8 65.9 (84.7) 180.1 79.1 52.3 18.7 10.4 9.8 9.3 7.0 1.4 1.2 1.0 0.1 0.4 0.7 11.7 5.1 10.7 440 (36.0) 55.7 National Aluminium Co 299 SELL 192,713 3,982 644 19.7 13.7 20.4 (22.0) (30.6) 48.8 15.1 21.8 14.7 9.3 9.6 6.2 1.8 1.7 1.6 1.2 0.7 0.7 12.7 8.1 11.1 290 (3.0) 3.8 Sesa Goa 239 BUY 188,268 3,890 787 25.1 25.5 34.2 32.6 1.3 34.3 9.5 9.4 7.0 6.2 5.8 3.7 4.1 3.0 2.2 1.5 1.5 1.5 53.3 36.9 35.9 240 0.4 49.0 Sterlite Industries 622 REDUCE 522,829 10,802 840 49.2 29.8 38.0 (23.6) (39.3) 27.2 12.6 20.8 16.4 9.0 8.7 6.5 2.0 1.4 1.3 14.3 8.1 8.4 550 (11.6) 62.3 Tata Steel 442 BUY 392,542 8,110 887 110.0 41.2 78.8 45.3 (62.6) 91.6 4.0 10.7 5.6 5.0 8.0 6.0 1.0 0.9 0.8 3.3 3.6 3.6 36.3 15.5 25.7 465 5.1 142.2 Metals Neutral 2,358,570 48,731 4.5 (10.8) 691.9 132.2 152.1 86.0 63.1 65.8 48.8 19.1 14.6 11.9 6.8 7.1 7.4 210.7 134.4 142.8 Others Aban Offshore 1,016 SELL 38,482 795 38 87.8 125.3 214.6 21.5 42.7 71.3 11.6 8.1 4.7 9.3 7.9 6.7 2.8 2.1 1.5 0.4 0.5 0.5 33.7 33.3 36.7 365 (64.1) 88.6 Havells India 298 REDUCE 18,050 373 61 4.9 12.3 19.1 (81.6) 149.9 56.2 60.8 24.3 15.6 10.3 8.4 7.3 2.8 3.3 2.8 0.8 0.8 0.8 4.5 12.4 19.3 175 (41.3) 2.8 Jaiprakash Associates 236 REDUCE 331,216 6,843 1,403 3.0 6.7 11.4 (38.7) 123.8 70.2 78.6 35.1 20.6 25.4 15.4 13.8 6.0 5.0 4.1 0.0 0.0 0.0 8.0 15.5 21.9 220 (6.8) 105.6 Jindal Saw 474 ADD 27,271 563 58 74.3 61.5 61.1 19.8 (17.2) (0.7) 6.4 7.7 7.8 4.5 4.8 4.2 0.8 0.7 0.7 1.0 0.8 0.8 11.6 8.9 8.6 430 (9.2) 4.2 PSL 122 BUY 5,328 110 44 22.2 37.6 30.1 5.3 69.2 (19.8) 5.5 3.3 4.1 4.1 3.3 2.7 0.8 0.7 0.6 4.0 5.2 5.2 11.9 13.4 11.3 160 30.9 1.1 Sintex 212 BUY 28,930 598 136 23.8 25.2 27.6 21.9 5.6 9.6 8.9 8.4 7.7 6.4 5.8 4.9 1.5 1.3 1.1 0.5 0.5 0.6 16.6 15.0 14.2 275 29.7 4.7 Tata Chemicals 244 ADD 57,475 1,188 235 27.6 23.1 27.2 (30.4) (16.4) 17.9 8.9 10.6 9.0 5.7 4.7 4.0 1.2 1.1 1.0 3.8 3.7 3.7 17.9 12.9 13.7 200 (18.2) 5.6 United Phosphorus 170 BUY 78,470 1,621 462 10.7 13.9 18.0 27.8 29.7 29.6 15.9 12.2 9.4 11.0 7.6 6.0 2.6 2.2 1.8 0.7 0.9 1.2 18.1 19.1 20.8 160 (5.8) 6.2 Welspun Gujarat Stahl Rohren 225 REDUCE 42,522 879 189 17.3 24.0 17.8 (15.7) 38.7 (25.8) 13.0 9.4 12.6 7.3 5.3 6.2 2.4 1.8 1.6 0.9 0.7 0.8 17.8 21.7 13.4 145 (35.6) 25.7 Others - 627,745 12,970 (70.1) 426.0 208.6 209.5 119.2 91.5 84.1 63.0 55.7 20.8 18.2 15.2 12.1 13.2 13.6 140.1 152.3 159.8 Pharmaceuticals Biocon 212 BUY 42,440 877 200 4.7 14.4 18.6 (79.9) 206.8 29.3 45.2 14.7 11.4 13.6 9.5 7.6 2.8 2.4 2.1 0.0 0.1 0.1 6.2 17.8 20.0 270 27.2 5.7 Cipla 274 REDUCE 213,017 4,401 777 9.9 12.8 14.9 9.5 29.5 16.6 27.7 21.4 18.4 21.1 15.4 13.2 5.0 4.2 3.6 0.9 1.1 1.3 19.1 21.4 21.3 250 (8.8) 10.0 Dishman Pharma & chemicals 188 BUY 15,254 315 81 18.0 21.2 27.3 22.1 17.9 28.7 10.4 8.9 6.9 8.6 6.9 5.4 2.2 1.8 1.4 0.0 0.0 0.0 22.8 21.9 22.9 280 49.3 0.6 Divi's Laboratories 1,109 BUY 72,383 1,496 65 63.8 74.6 86.5 19.9 16.9 16.0 17.4 14.9 12.8 14.8 11.9 9.5 5.9 4.3 3.3 0.1 0.1 0.1 39.8 33.5 29.3 1,375 24.0 3.5 Dr Reddy's Laboratories 805 BUY 136,415 2,818 169 32.4 49.3 52.5 24.3 52.2 6.4 24.8 16.3 15.3 11.0 8.8 7.8 3.9 3.2 2.7 0.8 0.9 1.0 13.6 21.4 19.2 860 6.8 8.1 Glenmark Pharmaceuticals 246 BUY 65,307 1,349 266 11.1 11.6 15.7 (57.0) 4.2 35.1 22.1 21.2 15.7 13.1 12.3 9.9 3.1 2.8 2.4 0.0 0.0 0.0 15.9 13.8 16.2 315 28.2 11.2 Jubilant Organosys 194 BUY 33,130 684 171 16.6 24.5 32.9 (26.1) 48.2 34.2 11.7 7.9 5.9 12.7 8.0 6.3 2.5 2.0 1.6 0.7 0.7 0.9 16.2 28.7 30.8 250 29.0 0.5 Lupin 943 BUY 83,551 1,726 89 60.7 66.0 71.3 21.9 8.7 8.0 15.5 14.3 13.2 15.1 12.5 10.7 4.9 3.8 3.1 1.2 1.2 1.4 33.7 30.3 26.1 1,075 14.0 3.6 Piramal Healthcare 313 BUY 65,396 1,351 209 17.3 22.1 28.5 (1.9) 28.0 29.0 18.1 14.2 11.0 13.3 9.5 7.7 4.9 3.9 3.0 1.3 1.4 1.4 26.2 30.9 31.1 390 24.6 2.0 Ranbaxy Laboratories 272 REDUCE 116,142 2,400 427 (8.1) 4.7 5.1 (134.7) (158.6) 6.6 (33.6) 57.4 53.8 (81.3) 24.0 23.4 2.8 2.8 2.7 1.5 1.5 (9.6) 4.9 5.3 165 (39.3) 16.9 Sun Pharmaceuticals 1,188 ADD 245,955 5,082 207 87.8 78.5 82.5 17.6 (10.6) 5.2 13.5 15.1 14.4 10.8 10.9 9.7 3.6 3.0 2.5 1.2 1.1 1.1 31.6 22.6 19.9 1,665 40.2 20.7 Pharmaceuticals Attractive 1,088,989 22,500 (184.2) 243.3 215.1 173.0 206.3 178.8 52.8 129.7 111.1 41.5 34.2 28.6 6.2 8.0 8.9 215.5 247.1 242.1 Property DLF 397 REDUCE 681,257 14,076 1,716 29.3 16.3 17.5 (36.6) (44.4) 7.2 13.6 24.4 22.7 13.6 19.6 16.7 2.8 2.5 2.4 0.8 0.7 1.0 22.5 10.8 10.6 320 (19.4) 172.7 Housing Development & Infrastructur 268 ADD 92,592 1,913 345 26.0 12.0 23.3 (49.2) (53.9) 94.8 10.3 22.4 11.5 12.5 19.4 7.2 2.2 1.5 1.2 1.0 1.9 22.4 9.3 14.9 295 10.1 122.6 Indiabulls Real Estate 246 ADD 98,513 2,035 401 3.0 3.1 7.5 (81.8) 3.8 141.1 81.9 78.9 32.7 (262.0) 69.8 16.8 1.5 1.1 1.1 0.0 0.0 0.0 1.3 1.6 3.2 235 (4.3) 72.5 Mahindra Life Space Developer 291 BUY 12,244 253 42 10.2 10.8 15.4 (39.2) 5.3 42.5 28.5 27.0 19.0 44.1 25.7 13.2 1.4 1.3 1.3 1.3 1.3 1.3 4.8 4.9 6.7 410 40.8 1.1 Phoenix Mills 118 BUY 17,142 354 145 5.2 6.0 8.5 63.1 15.8 41.3 22.9 19.8 14.0 25.4 14.2 9.9 1.1 1.1 1.0 0.8 0.8 1.3 5.1 5.7 7.6 210 77.4 0.3

KOTAK INSTITUTIONAL EQUITIES RESEARCH EQUITIES INSTITUTIONAL KOTAK Puravankara Projects 95 REDUCE 20,265 419 213 6.8 7.0 7.4 (39.8) 2.8 6.9 14.0 13.6 12.8 20.6 16.8 13.6 1.5 1.4 1.3 2.1 2.1 11.5 10.8 10.7 55 (42.1) 0.3 Sobha 219 ADD 21,471 444 98 15.1 14.3 16.1 (52.3) (5.6) 12.5 14.5 15.3 13.6 14.6 11.4 10.3 1.9 1.2 1.2 1.4 1.8 1.8 10.4 9.8 8.8 215 (1.8) 2.0 Unitech 91 SELL 204,858 4,233 2,261 7.7 4.5 4.6 (25.8) (41.0) 0.9 11.8 20.0 19.9 15.7 13.5 13.2 4.5 2.1 1.9 29.4 13.5 10.1 60 (33.8) 170.6 Property Cautious 1,148,343 23,726 (261.7) (117.1) 347.2 197.5 221.5 146.2 (115.6) 190.5 100.8 16.9 12.3 11.3 4.3 7.9 9.4 107.4 66.4 72.6 Retail Titan Industries 1,257 REDUCE 55,804 1,153 44 44.3 49.4 58.5 26.4 11.6 18.4 28.4 25.4 21.5 17.1 15.7 13.1 9.7 7.4 5.9 0.8 0.8 1.0 37.5 33.1 30.5 1,040 (17.3) 2.2 -July30,2009 Retail Neutral 55,804 1,153 26.4 11.6 18.4 28.4 25.4 21.5 17.1 15.7 13.1 9.7 7.4 5.9 0.8 0.8 1.0 37.5 33.1 30.5 Source: Company, Bloomberg, Kotak Institutional Equities estimates

KOTAK INSTITUTIONAL EQUITIES RESEARCH EQUITIES INSTITUTIONAL KOTAK Kotak Institutional Equities: Valuation summary of key Indian companies India DailySummary O/S Target ADVT- 29-Jul-09 Mkt cap. shares EPS (Rs) EPS growth (%) PER (X) EV/EBITDA (X) Price/BV (X)Dividend yield (%) RoE (%) price Upside 3mo Company Price (Rs) Rating (Rs mn) (US$ mn) (mn) 2009 2010E 2011E 2009 2010E 2011E 2009 2010E 2011E 2009 2010E 2011E 2009 2010E 2011E 2009 2010E 2011E 2009 2010E 2011E (Rs) (%) (US$ mn) Technology HCL Technologies 236 REDUCE 163,742 3,383 695 16.2 13.1 17.0 6.0 (19.0) 29.5 14.5 18.0 13.9 8.1 8.0 7.6 2.6 2.5 2.4 5.1 5.1 5.1 18.6 14.4 17.7 135 (42.7) 6.3 Hexaware Technologies 63 REDUCE 9,007 186 144 8.1 8.7 97.1 7.4 (100.0) 7.7 7.2 2.8 2.6 1.2 1.0 1.6 1.6 16.3 15.3 60 (4.3) 1.6 Infosys Technologies 1,985 BUY 1,139,218 23,538 574 102.4 102.5 112.8 29.6 0.1 10.1 19.4 19.4 17.6 14.3 13.6 11.5 6.2 5.1 4.3 1.2 1.3 1.6 36.7 28.9 26.3 1,900 (4.3) 67.4 Mindtree 437 BUY 17,977 371 41 13.2 37.0 43.9 (50.5) 179.5 18.5 33.0 11.8 10.0 5.7 8.2 6.2 3.3 2.5 2.0 0.4 1.0 5.5 24.0 22.5 500 14.5 4.5 Mphasis BFL 440 REDUCE 91,631 1,893 208 14.2 38.9 33.5 15.7 174.5 (13.9) 31.0 11.3 13.1 23.6 8.1 7.6 6.4 4.3 3.4 0.9 1.0 1.1 22.8 45.4 28.8 335 (23.8) 5.0 Patni Computer Systems 292 REDUCE 37,496 775 129 24.7 26.8 (7.8) 8.5 (100.0) 11.8 10.9 4.4 4.2 1.2 1.2 1.7 1.8 11.0 11.2 220 (24.6) 2.3 Polaris Software Lab 119 SELL 11,765 243 99 13.1 13.8 12.9 76.0 5.4 (6.4) 9.1 8.6 9.2 3.6 4.3 4.5 1.5 1.3 1.2 2.3 1.7 1.7 18.1 16.4 13.6 80 (32.9) 3.7 TCS 500 ADD 978,209 20,211 1,957 26.4 30.5 33.8 3.1 15.2 10.8 18.9 16.4 14.8 13.2 11.6 10.2 6.2 5.0 4.2 1.4 1.8 2.7 36.9 33.9 31.1 510 2.0 38.2 Wipro 467 ADD 682,900 14,110 1,462 25.7 27.5 32.0 15.8 6.6 16.6 18.1 17.0 14.6 13.3 11.8 9.8 4.5 3.7 3.1 0.9 1.6 2.0 26.9 24.0 23.3 520 11.3 16.1 Technology Attractive 3,131,944 64,710 184.9 378.2 (134.8) 163.6 120.6 93.2 88.9 72.4 57.4 33.2 26.6 20.6 15.5 16.0 15.2 192.8 213.5 163.2

IndiaDaily Summary-July Telecom Bharti Airtel 425 ADD 1,610,267 33,270 3,792 22.3 26.9 30.6 26.4 20.5 13.8 19.0 15.8 13.9 11.1 9.4 8.1 5.1 3.9 3.0 0.5 0.7 0.9 31.4 28.0 24.6 425 0.1 89.5 IDEA 76 REDUCE 236,359 4,883 3,104 2.9 3.4 3.6 (26.5) 15.8 7.3 26.2 22.7 21.1 9.7 8.1 7.2 1.8 1.7 1.6 10.4 7.4 8.0 65 (14.6) 22.2 MTNL 104 SELL 65,363 1,350 630 5.1 5.5 6.5 (28.4) 7.6 17.7 20.3 18.8 16.0 6.0 5.6 5.2 0.6 0.6 0.6 5.8 5.8 5.8 2.2 2.4 2.9 50 (51.8) 5.0 Reliance Communications 283 SELL 604,143 12,482 2,133 27.7 20.3 21.1 4.7 (26.6) 3.9 10.2 13.9 13.4 9.1 8.6 6.8 1.7 1.5 1.4 0.3 18.6 11.7 10.9 200 (29.4) 80.7

Tata Communications 491 REDUCE 139,892 2,890 285 13.6 14.0 15.2 24.0 3.2 8.2 36.1 35.0 32.4 15.4 14.0 12.9 2.0 2.0 1.9 1.0 1.3 1.5 5.4 5.2 5.5 400 (18.5) 8.8 -July30,2009 Telecom Cautious 2,656,023 54,877 0.3 20.4 50.9 111.9 106.2 96.8 51.3 45.7 40.2 11.3 9.7 8.5 7.5 7.8 8.3 67.8 54.7 51.9 Transportation Container Corporation 1,124 ADD 146,117 3,019 130 64.4 67.8 80.3 11.6 5.3 18.5 17.4 16.6 14.0 12.7 11.5 9.5 3.9 3.3 2.8 1.3 1.4 1.6 24.0 21.4 21.7 1,125 0.1 1.3 Transportation Cautious 146,117 3,019 11.6 5.3 18.5 17.4 16.6 14.0 12.7 11.5 9.5 3.9 3.3 2.8 1.3 1.4 1.6 24.0 21.4 21.7 Utilities CESC 334 ADD 41,722 862 125 32.3 37.9 42.0 16.2 17.4 11.0 10.4 8.8 7.9 5.7 5.8 6.0 1.1 1.0 0.9 1.2 1.4 1.6 11.7 11.9 11.6 345 3.3 3.2 Lanco Infratech 420 ADD 93,277 1,927 222 14.5 20.8 36.6 (2.5) 43.8 76.2 29.0 20.2 11.5 24.3 16.4 8.0 4.3 3.3 2.5 16.1 18.7 25.2 440 4.9 28.8 NTPC 214 SELL 1,766,178 36,491 8,245 9.4 10.8 12.2 1.1 14.7 12.6 22.7 19.8 17.6 17.2 14.6 13.8 3.0 2.8 2.5 1.6 1.9 2.1 13.7 14.5 15.0 180 (16.0) 41.0 Reliance Infrastructure 1,165 BUY 263,860 5,452 226 64.1 58.8 62.9 70.5 (8.2) 6.9 18.2 19.8 18.5 19.5 19.9 15.5 1.6 1.5 1.4 0.6 0.7 0.8 6.3 7.0 9.0 1,250 7.3 115.7 Reliance Power 170 REDUCE 407,208 8,413 2,397 1.0 2.5 3.1 168.2 140.3 25.3 166.5 69.3 55.3 134.8 1,111.2 87.0 3.0 2.8 2.7 1.8 4.2 5.0 160 (5.8) 37.3 Tata Power 1,307 ADD 290,822 6,009 223 56.2 76.6 86.5 76.6 36.2 12.9 23.2 17.1 15.1 12.2 12.5 11.7 2.9 2.5 2.2 0.9 0.9 1.1 13.4 15.8 15.7 1,100 (15.8) 14.7 Tata Power 1,241 ADD 276,342 5,737 223 56.2 76.6 86.5 76.6 36.2 12.9 22.1 16.2 14.4 11.8 12.1 11.3 2.7 2.4 2.1 0.9 1.0 1.1 13.4 15.8 15.7 1,100 (11.4) 14.0 Utilities Attractive 3,139,410 64,891 406.8 280.3 157.8 292.1 171.2 140.3 225.5 1,192.5 153.2 18.6 16.3 14.4 5.2 5.9 6.7 76.4 87.8 97.3

KS universe (b) 24,376,367 487,771 26.0 2.0 7.8 12 12.1 11.2 7.9 8.0 7.0 2.2 1.9 1.7 1.7 1.7 2.0 17.9 15.3 14.8 KS universe (b) ex-Energy 18,082,077 361,822 30.8 5.1 (0.2) 12.1 11.5 11.5 8.6 8.6 8.1 2.3 1.9 1.7 1.7 1.7 1.9 19.2 16.8 14.9 KS universe (d) ex-Energy & ex-Commodities 16,258,901 325,341 36.0 6.2 6.9 13.6 12.8 12.0 10.6 10.3 9.0 2.6 2.2 1.9 1.7 1.7 1.9 18.7 16.8 15.9

Note: (1) For banks we have used adjusted book values. (2) 2009 means calendar year 2008, similarly for 2010 and 2011 for these particular companies. (3) EV/Sales & EV/EBITDA for KS universe excludes Banking Sector. (4) Rupee-US Dollar exchange rate (Rs/US$)= 48.40 Source: Company, Bloomberg, Kotak Institutional Equities estimates

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3 Disclosures

Kotak Institutional Equities Research coverage universe Distribution of ratings/investment banking relationships Percentage of companies covered by Kotak Institutional Equities, 70% within the specified category.

60% Percentage of companies within each category for which Kotak Institutional Equities and or its affiliates has provided investment 50% banking services within the previous 12 months.

40% * The above categories are defined as follows: Buy = We expect 31.9% this stock to outperform the BSE Sensex by 10% over the next 12 29.7% 30% 26.8% months; Add = We expect this stock to outperform the BSE Sensex by 0-10% over the next 12 months; Reduce = We expect this stock to underperform the BSE Sensex by 0-10% over the 20% next 12 months; Sell = We expect this stock to underperform the 11.6% BSE Sensex by more then 10% over the next 12 months. These 10% ratings are used illustratively to comply with applicable 2.9% 0.7% 0.7% 0.7% regulations. As of 30/6/2009 Kotak Institutional Equities Investment Research had investment ratings on 138 equity 0% securities. BUY ADD REDUCE SELL

Source: Kotak Institutional Equities As of June 30, 2009 Ratings and other definitions/identifiers

Rating system Definitions of ratings

BUY. We expect this stock to outperform the BSE Sensex by 10% over the next 12 months. ADD. We expect this stock to outperform the BSE Sensex by 0-10% over the next 12 months. REDUCE. We expect this stock to underperform the BSE Sensex by 0-10% over the next 12 months. SELL. We expect this stock to underperform the BSE Sensexby more than 10% over the next 12 months.

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

Other definitions Coverage view. The coverage view represents each analyst’s overall fundamental outlook on the Sector. The coverage view will consist of one of the following designations: Attractive (A), Neutral (N), Cautious (C).

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.

95 KOTAK INSTITUTIONAL EQUITIES RESEARCH

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