INDIA DAILY

October 25, 2013 India 24-Oct -day 1-mo 3-mo Sensex 20,725 (0.2) 4.4 4.6

Nifty 6,164 (0.2) 4.9 4.3

Contents Global/Regional indices Special Reports Dow Jones 15,509 0.6 1.5 (0.3) Nasdaq Composite 3,929 0.6 4.5 9.0

Strategy FTSE 6,713 0.6 2.5 1.9 Strategy: Party time or no party time? Nikkei 14,345 (1.0) (1.9) (1.5) Hang Seng 22,762 (0.3) (1.9) 3.9 Daily Alerts KOSPI 2,032 (0.7) 1.7 6.4 Results Value traded – India Cash (NSE+BSE) 140 131 139 IDEA: Marginally below expectations; voice volumes disappoint Derivatives (NSE) 2,051 2,309 2,450 UPL: Gaining out of depreciating currency Deri. open interest 1,583 1,680 1,607

Results, Change in Reco

NMDC: Downgrade a notch after recent rally Forex/money market Change, basis points Sector 24-Oct 1-day 1-mo 3-mo Banks/Financial Institutions: Dilute and dilution Rs/US$ 61.5 3 (77) 254 10yr govt bond, % 9.0 2 (3) 49 Technology: Building up steam Net investment (US$mn) 23-Oct MTD CYTD FIIs 105 1,891 15,293 MFs (16) (410) (3,333)

Top movers Change, % Best performers 24-Oct 1-day 1-mo 3-mo JSTL IN Equity 846.3 0.7 11.7 49.3 TATA IN Equity 332.2 (0.9) 14.1 49.0 GMRI IN Equity 22.8 1.3 4.8 44.9 SSLT IN Equity 198.8 0.1 5.3 42.1 SAIL IN Equity 61.3 0.1 17.4 41.2 Worst performers FTECH IN Equity 154.6 (5.7) 3.1 (75.2) EDSL IN Equity 23.3 (0.6) 22.3 (23.7) PNB IN Equity 494.7 (0.2) 2.0 (20.9) SHTF IN Equity 549.5 (0.5) (5.3) (16.8) UNBK IN Equity 122.7 2.1 6.4 (15.5)

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INDIA Strategy

OCTOBER 25, 2013 NEW RELEASE

BSE-30: 20,725

Party time or no party time? As India gears up for its next national elections (April- May 2014), we examine the contours of the Indian political landscape and conclude that the outcome of the 2014 national elections is quite uncertain. Political uncertainty notwithstanding, we believe India will continue for some more time with its confusing and contradictory mix of (1) gradual privatization of the economy and (2) entitlement politics. This will change for the better over the next decade as the Indian political system will have to adapt to a new economic reality.

The 2014 national elections—a difficult one to call

(1) Massive fragmentation in most large states, (2) a large number of first-time eligible voters (120 mn); actual registrations may be lower and (3) likely higher turnout make it hard to predict the outcome of the next national elections. A simple analysis of 2009 national election results shows that 236 constituencies (out of 543 for election to Lok Sabha) had a less than 6% gap between the vote shares of the winner and the runner-up. Thus, a vote swing of -3-+3% could have affected the outcome of the 2009 national elections significantly. We build a detailed constituency-wise model for ‘forecasting’ the 2014 national elections but refrain from publishing the results of our proprietary model for obvious reasons.

Too early to position portfolio for elections; good companies will always do better, anyway

It is too early to construct a ‘pre-election’ portfolio (there are other variables between now and April 2014). Also, assigning probability to outcomes and designing corresponding portfolios may be meaningless since only one of the several ex ante scenarios will play out. We recommend investors stick to good companies in light of the large uncertainty. The outcome of four important state elections in November-December 2013 may provide more clarity.

Entitlements, social identity, economic development key focus areas; next decade to be better

We expect entitlements, social identity and economic development (in that order of priority) to be the key focus areas in the 2014 national elections. However, we expect economic development to emerge as a key electoral issue over the next decade as India’s demographic profile changes meaningfully (more people in the working-age population). The demographic changes and a high proportion of middle-income and high-income households will force the political class to focus on economic development as the central election issue and concurrently reduce focus on the usual factors that currently drive Indian politics.

The Indian political system has failed to galvanize the Indian economy so far; time for a rethink

In our view, the Indian political system, with its obsession with socialism and entitlement politics, has failed to provide sufficient impetus to the Indian economy. Over the past 3-4 decades, the gap between India and its regional peers has increased dramatically. The Indian political class still believes in ‘big government’ to channelize resources and manage the economy though this is changing through creeping privatization in several areas.

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OVERVIEW: THE OLD VERSUS THE NEW Indian voters will face a confusing babble of choices in the form of various political parties vying for their votes offering (1) economic development, (2) entitlements, or (3) more likely, a ‘heady’ mix of the two. A large number of new voters, low visibility on pre-poll alliances and large fragmentation of voters and parties preclude any confident predictions of the outcome of the 2014 national elections.

2014 national elections—the outcome is highly uncertain

(1) Massive fragmentation among political parties and voters in most large states, (2) 120 mn first-time voters; actual registrations may be lower, (3) likely high turnout, (4) no visibility on pre-poll alliances for major national parties and (5) high-decibel campaigns on new media (electronic and social) preclude any confidence in the outcome of the 2014 national elections.

India’s ’first-past-the-post’ system of elections and large fragmentation in all major states (3-4 meaningful political parties in key states) result in very narrow margins of victory in several cases. Thus, very small swings in vote share can alter the outcome of elections in several constituencies and of the overall elections, quite materially.

Our analysis of the 2009 national elections highlights that the margin of victory was less than 6% of vote share in as many as 236 constituencies (out of 543). Appendix 1 lists the constituencies and vote shares of the major contestants. Extending this analysis to 2014 and incorporating data from state elections after the 2009 national elections (pro forma parliamentary constituency data ‘created’ from corresponding state assembly constituencies), we estimate that around 275 constituencies are very evenly poised. Also, we note that the ‘incumbent’ parties may be quite vulnerable in a few states that contributed meaningfully to the success of those parties in the last (2009) national elections.

The main party in the 3-4 large states (Bharatiya Janata Party or BJP and the Indian National Congress or INC) will perhaps lose ground significantly in Andhra Pradesh (INC won 33 seats out of 42 in the 2009 national elections), Karnataka (BJP won 19 out of 28), Rajasthan (INC won 20 seats out of 25) and Tamil Nadu (DMK won 18 seats out of 39). Finally, (1) splits in political parties with the exit of dominant regional leaders, (2) break-up between erstwhile coalition partners (BJP and Janata Dal (U) in Bihar) since the last national elections and (3) a proposed bifurcation of Andhra Pradesh into two states will further complicate the political landscape.

We highlight that the forthcoming state elections in four major states over November- December 2013 (see Exhibit 1) will offer some clarity on the outcome of the national elections in those states and provide some color to the outcome of the 2014 national elections. These four states account for 82 seats in the Lok Sabha (the lower house of parliament). More important, the two major national political parties in India—BJP and INC—are ‘head-on’ contenders in those four states. The INC is in power in Delhi and Rajasthan and the BJP in Chhattisgarh and Madhya Pradesh. A decisive (3-1 or 4-0) mandate in favor of any one party will be well received by the market, in our view. However, a 2-2 split will be less favorably received as it will create further confusion about the outcome of the 2014 national elections.

KOTAK INSTITUTIONAL EQUITIES RESEARCH 3 India Strategy

Four major states go to polls in November and December Upcoming state elections

Election dates States 11-Nov and 19-Nov Chhattisgarh 25-Nov-13 Madhya Pradesh 1-Dec-13 Rajasthan 4-Dec-13 Mizoram 4-Dec-13 NCT Delhi

Source: Election Commission of India, Kotak Institutional Equities

The old versus the new

The 2014 national elections will once again provide Indian citizens with an opportunity to debate, introspect and choose a new economic model (more aggressive capitalism and faith in markets for better allocation of resources) or to continue with the extant one (a confusing mix of capitalism and socialism). While the 2014 national elections may go the same way as previous elections with voters voting on non-economic issues and the political class promising entitlements and economic development, we make a few observations on India’s politics and its evolution over the next few years.

` India’s economic model, as envisaged by the political class, requires a rethink. The economic model, envisaged by the Indian political class (central and state governments), has resulted in moderate economic success over the past few decades. It has not been able to galvanize the economy on to a path of strong and sustainable growth. More important, economic development has been a secondary issue in elections, with the primary focus on entitlement politics and social identity (promises of economic and non- economic benefits to a narrow band of the population, the perceived vote bank of a political party). However, this could change over the next few years.

The relatively moderate performance of the Indian economy relative to key Asian economies over the past few decades is well documented. However, the difference in economic performance becomes quite stark over a period of time (through the simple process of compounding). In our view, the inability to put India on the path of strong and sustainable economic growth is the biggest collective failure of India’s political system.

Since most observers view China and India similarly, it may be worthwhile to measure the performance of the two political ‘systems’ although we concede other factors also contribute to economic performance. Exhibit 2 compares the GDP/capita (in US$ PPP terms) of China and India over the past six decades. Both China and India had similar levels of GDP/capita for the first three decades of the second half of the last century (1950-80). China pulled ahead meaningfully in the past three decades with its GDP/capita being 2.4X India’s, compared to 10% higher in the early 1980s. We concede that China has reaped its ‘demographic dividends’ ahead of India over the past 3-4 decades while India is just entering that phase.

4 KOTAK INSTITUTIONAL EQUITIES RESEARCH Strategy India

China has pulled ahead of India over the past three decades China and India's GDP per capita, calendar year-ends, 1950-2010 (International GK US$, base year 1990)

China India 9,000 8,000 7,000 6,000 5,000 4,000 3,000 2,000 1,000 0

1950 1953 1956 1959 1962 1965 1968 1971 1974 1977 1980 1983 1986 1989 1992 1995 1998 2001 2004 2007 2010 Notes: (1) International Geary-Khamis (GK) dollar is a unit of currency based on PPP and the international average price of commodities.

Source: Angus Maddison database, Kotak Institutional Equities

` Demographics will force a change over the next decade. We are hopeful that India’s improving demographics will force the political class to focus on economic development as the primary agenda over the next decade. We focus on two factors.

ƒ Rising number of people seeking employment. Increasing demand for employment from a large number of people will force political parties to focus on economic development and job creation. Exhibit 3 shows India’s demographics (age profile) over the next few decades. In the next decade alone, India would need to create 13-15 mn jobs every year. This is well short of the 10-15 mn cumulative jobs created over the past 6-7 years (this figure may be understated, though) as can be seen in Exhibit 4.

India will remain a young country in the foreseeable future; there will be a huge demand for jobs Table showing analysis of the population pyramid (%)

2011 2021E 2031E 0-19 493 464 457 20-64 647 774 862 64+ 71 85 121 Total 1,211 1,324 1,439

Source: Census of India, UN, Kotak Institutional Equities estimates

KOTAK INSTITUTIONAL EQUITIES RESEARCH 5 India Strategy

India has created only 10-15 mn cumulative jobs over the past 5-7 years NSSO 61st, 66th and 68th round surveys, June year-ends, 2005, 2010, 2012 (mn)

Rural Urban Rural+Urban Male Female Person Male Female Person Male Female Person NSS - 68th round: July 2011 to June 2012 Labor force population (ps+ss) 239 104 342 113 29 141 351 132 484 Worker population ratio (ps+ss) 235 102 336 109 27 137 344 129 473 Number unemployed (ps+ss) 426 325 8311 Number unemployed (cds) 13 5 17 5 2 7 18 7 25 NSS - 66th round: July 2009 to June 2010 Labor force population (ps+ss) 236 106 342 103 24 127 338 130 469 Worker population ratio (ps+ss) 232 105 336 100 23 123 332 127 459 Number unemployed (ps+ss) 426 314 7310 Number unemployed (cds) 15 6 21 5 2 7 20 8 28 NSS - 61st round: July 2004 to June 2005 Labor force population (ps+ss) 227 129 355 92 26 117 319 156 474 Worker population ratio (ps+ss) 223 126 349 89 24 112 312 153 463 Number unemployed (ps+ss) 426 425 7411 Number unemployed (cds) 333465121725444990 Difference between 68th and 66th rounds Labor force population (ps+ss) 3 (3) 1 10 5 14 13 2 15 Worker population ratio (ps+ss) 3 (3) 0 9 5 14 12 2 14 Number unemployed (ps+ss) 001 001 101 Number unemployed (cds) (2) (2) (4) 0 0 0 (2) (2) (3) Difference between 68th and 61st rounds Labor force population (ps+ss) 12 (25) (12) 21 3 24 33 (24) 10 Worker population ratio (ps+ss) 11 (25) (13) 21 3 25 32 (24) 10 Number unemployed (ps+ss) 1 (1) 0 (0) (0) (0) 1 (1) (0) Number unemployed (cds) (20) (29) (48) (7) (15) (18) (26) (42) (66)

Source: Various NSSO rounds, Kotak Institutional Equities

Finally, India’s ability to continue with its entitlement politics will be severely constrained by (1) its fiscal position and (2) the rising aspirations of its growing population. India’s fiscal deficit (see Exhibit 5 for the combined fiscal deficit of central and state governments over the past few years) is running perilously high. The Government understands this issue and is making sincere efforts to reduce the deficit through taxation and subsidy reforms. As governments (central and state) withdraw some of the entitlements (on fertilizer, fuels and power), political parties would have no option but to focus on economic development to remain relevant to the general population.

The consolidated fiscal deficit has remained high over the past few years Consolidated fiscal deficit, March fiscal year-ends, 2001-14E (%)

12 GFD/GDP (%) 10.0 9.7 9.6 9.7 9.7 9.8 10 8.6 7.8 7.7 8 7.2 7.5 6.7 6.9 5.7 6 4.9

4

2

0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014E

Source: CEIC, Kotak Institutional Equities

6 KOTAK INSTITUTIONAL EQUITIES RESEARCH Strategy India

ƒ Rising number of middle- and high-income households. The rising number of middle- and high-income households over the next decade (see Exhibit 6) will force the political class to reinvent itself and deal with an electorate with a different set of aspirations (jobs, economic and financial security, better quality of life) than what the political class has pandered to historically (modest economic and social empowerment). However, we acknowledge the role played by certain political parties (even if propelled by narrow interests with their focus on divisive politics) in empowering certain weaker sections of the population.

The proportion of middle-income and high-income households will outnumber low-income households by 2020 Distribution of Indian households by consumption expenditure, March fiscal year-ends, FY2010-25E

2011 2012 2013 2014E 2015E 2016E 2017E 2018E 2019E 2020E 2021E 2022E 2023E 2024E 2025E Rural households (mn) Real-rich — — — — — — — — — — — — — — — Upper-class — — — — — — — — — — — — — 1 3 Prospering — — 1 3 4 6 7 9 10 12 13 15 19 20 22 Evolving 11 18 18 20 24 28 31 36 42 48 56 64 70.3 80 87 Emerging 54 70 80 87 93 99 104 108 109 110 109 106 100 91 82 Surviving 103 82 73 64 55 45 37 28 21 14 8 2 — — — Total 169 170 172 174 175 177 179 181 183 184 186 188 190 192 194 Urban households (mn) Real-rich — — — — — — — — 0 1 2 3 5 6 7 Upper-class — — 1 1 2 3 4 5 6 6 6 6 8 9 10 Prospering 6 9 9 10 12 14 16 18 21 24 28 32 35 41 45 Evolving 20 25 29 33 36 39 43 47 50 52 54 57 58 59 60 Emerging 38 40 41 41 41 41 39 36 33 30 27 24 20 17 14 Surviving 17 10 8 5 3 1 — — — — — — — — — Total 81 84 88 91 95 98 102 106 110 114 118 122 126 131 135 Total households (mn) Real-rich — — — — — — — — 0 1 2 3 5 6 7 Upper-class — — 1 1 2 3 4 5 6 6 6 6 8 10 13 Prospering 6 9 10 13 16 20 23 26 31 36 42 47 55 60 66 Evolving 31 43 47 53 60 66 74 83 92 100 110 121 128 139 147 Emerging 92 111 121 128 134 140 143 144 142 140 135 130 121 108 96 Surviving 120 92 81 69 58 46 37 28 21 14 8 2 — — — Total 249 254 260 265 270 275 281 287 292 298 304 310 316 323 329

Source: Kotak Institutional Equities estimates

More important, we note that the economic needs of people are fairly similar irrespective of their social identity (race, religion, caste); the latter two are big social factors in India while race is not relevant. They would aspire to greater economic prosperity once their basic economic and social needs have been met. Thus, the political system would need to grow beyond its narrow ‘vote-bank’ politics and adopt economic development as a broader ideology to meet the rising aspirations of the population.

` The last few state elections and the 2014 national elections may be the start of a trend. Economic development is already an important issue for elections with political parties promising economic development and governments implementing certain measures for economic development. However, economic development is still understood and delivered (patchily, perhaps) by the governments/political system in the form of (1) entitlements (various rights to free or subsidized education and food, among others), (2) subsidies on various products and services (fertilizer, food, fuels, power) and (3) good intentions toward more economic progress (more investment in the country or in a state).

We do not dispute the necessity of entitlements in certain cases, especially those related to education. However, the priority of economic development perhaps needs to change with (1) focus on investment and employment preceding (2) entitlements and subsidies. As discussed above, we expect the political debate to shift increasingly towards economic development in the next decade.

The process has begun and is perhaps, irreversible. We are hopeful that India’s evolving demographics, economic needs and astute population will force the political system to change whether the political class likes it or not.

KOTAK INSTITUTIONAL EQUITIES RESEARCH 7 India Strategy

MATHEMATICS: THE 2014 NATIONAL ELECTIONS We note that the outcome of the 2014 national elections is quite difficult to predict given (1) rising fragmentation in most states with 3-4 strong national and regional parties competing in each major state; small changes in voter shares can swing the number of ‘wins’ meaningfully in India’s ‘first-past-the-post’ system, (2) a significant proportion of new voters (120 mn as per census data) and (3) possibly higher turnout as political parties galvanize their bases and individual voters exercise their rights.

A difficult one to call—fragmentation, new voters, higher turnout

We believe it is difficult (and premature) to forecast the outcome of the 2014 national elections, noting the complex nature of India’s politics. (1) India’s ‘first-past- the-post’ system of choosing its elected representatives and (2) large fragmentation in terms of number of political parties catering to different segments of the population preclude easy analysis of India’s election dynamics and rule out predictions of the 2014 national election at this stage.

` Increasing fragmentation in most key states. (1) The large number of meaningful regional parties in each state (see Exhibit 7 for the vote share of national and regional parties in each state over the past three elections—national or state) and (2) potential pre- and post-election alliances make the task of predicting the outcome of the 2014 national elections quite difficult.

There is large fragmentation in most large states, given the presence of 3-4 national and regional parties Vote share of various parties in major states across the last three elections (%)

Andhra Pradesh (42) Bihar (40) Gujarat (26) Karnataka (28) National State National State National State National State 2004 2009 2009 2004 2009 2010 2004 2009 2012 2004 2009 2013 INC 42 39 37 INC 4 10 8 INC 44 43 38 INC 37 38 37 BJP 8 4 3 BJP 15 14 16 BJP 47 47 48 BJP 35 42 20 CPI (M) 1 1 1 CPI (M) 1 1 1 CPI (M) — — — CPI (M) — — — BSP 1 1 1 BSP 4 4 3 BSP 1 2 1 BSP 1 2 1 SP — — — SP 2 — — SP 1 — — SP ——— TDP 33 25 28 RJD 31 19 19 Others 7 8 12 JD (S) 20 14 20 Others 14 30 30 JD (U) 22 24 23 Others 7 5 22 Others 21 28 30 Kerala (20) Madhya Pradesh (29) Maharashtra (48) Odisha (21) National State National State National State National State 2004 2009 2011 2004 2009 2008 2004 2009 2009 2004 2009 2009 INC 32 40 26 INC 34 40 33 INC 24 20 24 INC 40 33 29 BJP 12 6 6 BJP 48 43 38 BJP 23 18 14 BJP 19 17 15 CPI (M) 32 30 28 CPI (M) — — — CPI (M) 1 1 1 CPI (M) — — — BSP 1 1 1 BSP 5 6 9 BSP 3 5 3 BSP 2 2 2 SP — — — SP 3 3 — SP 1 1 — SP 1 — 1 CPI 8 7 9 Others 10 8 21 SS 20 17 15 BJD 30 37 39 Others 16 14 30 NCP 18 19 15 Others 7 11 15 Others 11 20 29 Rajasthan (25) Tamil Nadu (39) Uttar Pradesh (80) West Bengal (42) National State National State National State National State 2004 2009 2008 2004 2009 2011 2004 2009 2012 2004 2009 2011 INC 41 47 37 INC 14 15 9 INC 12 18 11 INC 15 13 9 BJP 49 37 35 BJP 5 2 2 BJP 22 17 15 BJP 8 6 4 CPI (M) 1 1 2 CPI (M) 3 2 2 CPI (M) — — — CPI (M) 39 33 30 BSP 3 3 8 BSP 1 1 1 BSP 25 27 26 BSP 1 1 1 SP — — 1 SP ——— SP 27 23 29 SP — — 1 Others 6 11 19 AIADMK 30 23 38 Others 14 14 19 AITC 21 31 39 DMK 25 25 22 Others 17 15 17 Others 23 32 25

Notes: (a) 2004, 2009 refer to national electons in 2004 and 2009 and state refers to the last state assembly elections and the year in which they were held. (b) The figures in parenthesis represent the number of Lok Sabha seats from that state.

Source: Election Commission of India, Kotak Institutional Equities

8 KOTAK INSTITUTIONAL EQUITIES RESEARCH Strategy India

At this stage, many regional parties have chosen not to align with either of the two major national parties (the Indian National Congress [INC] or the Bharatiya Janata Party [BJP]). They would probably wait for the outcome of the elections or more visibility on the performance of the national parties before aligning with any of them, if at all. Some regional leaders have aspirations to play a more material role at the central level, which may complicate post-election alliances if there is no decisive mandate for any single party or pre-election coalition.

We note that the composition of the current Government has been quite fluid with two erstwhile coalition partners deserting the ruling coalition and the Government having to depend on the outside support of two regional parties that are not part of the ruling coalition Government formally (see Exhibit 8, which shows the composition of the ruling coalition immediately after the 2009 national elections and currently).

The composition of the United Progressive Alliance-2 (UPA-2) coalition government has changed meaningfully over its term Composition of coalition partners in the Lok Sabha in 2009

Others, 77 Others, 78 DMK, 18 BSP, 21 INC, 206 INC, 205 SP, 23 TMC, 19 JD (U), 20 JD (U), 20 UPA Others, 3 UPA 2013 SAD, 4 2009 Others, 2 NDA SAD, 4 NCP, 9 NDA SS, 11 SS, 11 NCP, 9 RJD, 3 BJP, 116 RJD, 4 Others, 13 Others, 10 SP, BJP, 116 22 DMK, 18 TMC, 19 BSP, 21

Notes: (a) UPA refers to the United Progressive Alliance led by the INC, which is in power currently; NDA refers to the National Democratic Alliance led by the BJP. (b) The acronyms refer to the following parties: AIADMK: All India Anna Dravida Munnetra Kazhagam BJP: Bharatiya Janata Party BSP: Bahujan Samaj Party DMK: Dravida Munnetra Kazhagam JD(U): Janata Dal (United) NCP: Nationalist Congress Party RJD: Rashtriya Janata Dal SAD: Shiromani Akali Dal SP: Samajwadi Party SS: Shiv Sena TMC: Trinamool Congress (c) INC's 205 seats exclude the two nominated members of the Anglo-Indian community.

Source: Lok Sabha, Kotak Institutional Equities

As discussed in the previous section, national parties have gradually lost their preeminence over time and have been displaced by regional parties in several key states. Exhibit 9 traces the performance in national elections, of major national and regional parties since India’s independence, in terms of (1) share of votes and (2) Lok Sabha seats. More important, the data also shows the disproportionate impact of relatively small changes in the share of votes on the number of seats.

KOTAK INSTITUTIONAL EQUITIES RESEARCH 9 India Strategy

The share of popular votes of national parties has declined over time Votes, vote share and Lok Sabha seats won by national parties across elections

2009 2004 1999 1998 Votes Share Seats Votes Share Seats Votes Share Seats Votes Share Seats National parties Bahujan Samaj Party 25,728,920 6.2 21 20,765,229 5.3 19 15,175,845 4.1 14 17,186,779 4.6 5 Bharatiya Janata Party 78,435,381 18.8 116 86,371,561 22.1 138 86,562,209 23.3 182 94,266,188 25.1 182 Communist Party of India 5,951,888 1.4 4 5,484,111 1.4 10 5,395,119 1.5 4 6,429,569 1.7 9 Communist Party of India (Marxist) 22,219,111 5.3 16 22,070,614 5.7 43 19,695,767 5.3 33 18,991,867 5.1 32 Indian National Congress 119,111,019 28.6 206 103,408,949 26.5 145 103,120,330 27.7 114 95,111,131 25.3 141 Party A (see Note a) 8,521,502 2.0 9 7,023,175 1.8 9 3,332,702 0.9 1 11,930,209 3.2 6 Party B (see Note a) 5,280,084 1.3 4 — — — 11,282,084 3.0 21 6,491,639 1.7 12 Total 265,247,905 63.6 376 245,123,639 62.9 364 244,564,056 65.8 369 250,407,382 66.7 387 Total votes polled 417,159,281 389,948,330 371,669,104 375,441,739

1996 1991 1989 1984 Votes Share Seats Votes Share Seats Votes Share Seats Votes Share Seats National parties Bharatiya Janata Party 67,950,851 20.3 161 55,345,075 20.1 120 34,171,477 11.4 85 18,202,853 7.7 2 Communist Party of India 6,582,263 2.0 12 6,851,114 2.5 14 7,734,697 2.6 12 6,363,430 2.7 6 Communist Party of India (Marxist) 20,496,810 6.1 32 16,954,797 6.2 35 19,691,309 6.5 33 13,809,950 5.9 22 Indian Congress (Socialist) ——— ——— — — — 3,577,377 1.5 4 Indian National Congress 96,455,493 28.8 140 99,799,403 36.3 232 118,894,702 39.5 197 115,478,267 49.1 404 Party A (see Note b) 27,070,340 8.1 46 32,589,180 11.8 59 53,518,521 17.8 143 16,210,514 6.9 10 Party B (see Note b) — — — 9,267,096 3.4 5 — — — 14,040,064 6.0 3 Total 218,555,757 65.3 391 220,806,665 80.2 465 234,010,706 77.8 470 187,682,455 79.8 451 Total votes polled 334,873,286 275,206,990 300,776,423 235,184,209

1980 1977 1971 1967 Votes Share Seats Votes Share Seats Votes Share Seats Votes Share Seats National parties Communist Party of India 4,927,342 2.5 10 5,322,088 2.8 7 6,933,627 4.7 23 7,458,369 5.1 23 Communist Party of India (Marxist) 12,352,331 6.2 37 8,113,659 4.3 22 7,510,089 5.1 25 6,246,522 4.3 19 Indian National Congress 84,455,313 42.7 353 65,211,589 34.5 154 64,033,274 43.7 352 59,490,701 40.8 283 Party A (see Note c) 37,530,228 19.0 31 3,252,217 1.7 3 15,285,851 10.4 16 4,456,487 3.1 13 Party B (see Note c) 18,574,696 9.4 41 ——— — — — 7,171,627 4.9 23 Party C (see Note c) ——— — — — 4,497,988 3.1 8 12,646,847 8.67 44 Party D (see Note c) 10,449,859 5.3 13 78,062,828 41.3 295 10,777,119 7.4 22 13,580,935 9.3 35 Total 168,289,769 85.1 485 159,962,381 84.7 481 109,037,948 74.4 446 111,051,488 76.1 440 Total votes polled 197,824,274 188,917,504 146,602,276 145,866,510

1962 1957 1951 Votes Share Seats Votes Share Seats Votes Share Seats National parties Communist Party of India 11,450,037 9.9 29 10,754,075 8.9 27 3,487,401 3.3 16 Indian National Congress 51,509,084 44.7 361 57,579,589 47.8 371 47,665,951 45.0 364 Party A (see Note d) 7,415,170 6.4 14 7,193,267 6.0 4 6,135,978 5.8 9 Party B (see Note d) 7,848,345 6.8 12 12,542,666 10.4 19 11,216,719 10.6 12 Party C (see Note d) 3,099,397 2.7 6 Party D (see Note d) 9,085,252 7.9 18 1,003,034 0.9 4 Total 90,407,285 78.5 440 88,069,597 73.1 421 69,509,083 65.6 405 Total votes polled 115,168,890 120,513,915 105,950,083

Notes: (a) Party A refers to NCP (2004, 2009), JD (S) in 1999 and JD in 1998; Party B refers to RJD (2009 and 2004), JD (U) (1999) and Samata Party (1998). (b) Party A refers to JD (1989, 1991 and 1996) and JNP in 1984; Party B refers to JP in 1991 and LKD in 1984. (c) Party A refers to JNP in 1980, NCO (1977 and 1971) and PSP in 1967; Party C refers to SWA (1971 and 1967); Party D refers to BLD in 1997 and BJS in 1971 and 1967. (d) Some of these parties ultimately came together as BLD to form the government in 1977 and eventually emerged as the current BJP.

Source: Election Commission of India, Kotak Institutional Equities

` Significant proportion of new voters. We estimate there will be 120 mn new voters (voters who will reach the age of 18 years by the time elections are held) in the national elections. These new and young voters may have a significant bearing on the outcome of the elections as they are more likely to vote on economic matters (employment being their prime concern according to several surveys on India’s youth) rather than on religious or caste issues. Also, they may vote as a ‘bloc’ given that they will have similar concerns and views and they may vote for a personality (rather than a political party) who might best fulfill their aspirations.

10 KOTAK INSTITUTIONAL EQUITIES RESEARCH Strategy India

Exhibit 10 is the likely breakdown of voters, by age group, in the 2014 national elections. As can be seen, 37% of the 767 mn eligible voting population (as per Census data) will be less than 30 years old. This is a meaningful number and will become increasingly important in the next few elections given India’s demographic profile.

Two out of five people in the voting population are below 30 years of age Number and proportion of voters in various age groups, census year-end, March 2011

Numbers (mn) Proportion (%) 18-22 23-30 >30 Total 18-22 23-30 >30 India 121 171 475 767 16 22 62 Uttar Pradesh 21 25 68 114 18 22 60 Maharashtra 11 17 48 76 15 22 63 West Bengal 9 13 38 61 15 22 63 Andhra Pradesh 9 13 36 58 15 23 62 Bihar 9 13 34 57 16 23 60 Tamil Nadu 7 11 34 51 13 21 66

Notes: (a) The above data is tabulated from the age-wise census data; this may not perfectly correlate with the Election Commission data, if any.

Source: Census of India, Kotak Institutional Equities

We also highlight that a significant portion of the new voters resides in UP, Bihar and West Bengal, which together account for 162 seats (30% of the total) in the Lok Sabha. Given the high degree of fragmentation in UP and Bihar, the behavior of the new voters can have a significant bearing on the results of not only the states concerned but of the national elections, as well.

` Likely higher turnout. We expect turnout to be higher in the 2014 national elections as political parties will use their (1) hard infrastructure (formidable ground presence through offices, cadres and volunteers) and (2) soft infrastructure (modern technology and media reach, which is increasingly available in remote areas in India) to drive up interest in the elections and canvass their purported support bases. We expect a high-pitched advertising campaign on the traditional media but more important, on the social media as well, resulting in campaigns becoming increasingly personal (direct connect between voter and candidate). This will likely increase the involvement of potential voters in the election process and result in a higher turnout.

In any case, we have seen higher voter turnout in the past few elections (see Exhibit 11). Exhibit 12 shows our estimate of the number of voters at various levels of turnout in the 2014 national elections and compares the same with the actual voter turnout and eligible voters in the previous few elections.

KOTAK INSTITUTIONAL EQUITIES RESEARCH 11 India Strategy

There has been a meaningful increase in voter turnouts, especially of women voters, since the 2009 national elections Voter turnouts across elections in India (%)

Proportion 2009 election turn-outs Male Female Total Female - Total Female Total Female - Total Total - Total 2013 Karnataka 72 70 70 — 57 59 (2) 11 2012 Uttar Pradesh 59 60 59 1 42 48 (6) 11 Punjab 78 79 78 1 60 62 (1) 17 Uttarakhand 64 68 66 2 44 48 (4) 18 2011 Assam 77 75 76 (1) 65 69 (4) 7 Kerala 75 75 75 — 69 71 (2) 3 West Bengal 84 84 84 — 75 78 (3) 6 Tamil Nadu 78 79 78 — 57 61 (4) 17 2010 Bihar 51 54 53 2 52 58 (6) (5)

Source: Election Commission of India, Kotak Institutional Equities estimates

A higher turnout and new voters can meaningfully alter election dynamics Eligible, actual and potential voters across various elections (mn)

Voter turnout (%) Eligible voters New voters Turnout 55 60 65 70 75 1999 620 372 2004 671 52 390 2009 717 45 417 2014E 789 55 17 56 96 135 175

Source: Election Commission of India, Kotak Institutional Equities estimates

Analysis: Proprietary model throws up an interesting range of outcomes

For our proprietary model, we look at quantitative and qualitative factors for each constituency while ‘deciding’ on the likely outcome in that constituency. We tally the numbers to arrive at the national picture.

` Data analysis. We analyze vote share data for each constituency (rather than by states) in the 2004 national elections, 2009 national elections and pro forma state assembly elections (in case state assembly elections have been held subsequent to the 2009 national election) to establish voting patterns and trends. We agglomerate the data for state assembly constituencies that form part of a parliamentary constituency to get the pro forma data for the constituency. We believe the latter approach provides more updated data on vote share and voting patterns compared to an analysis of the 2009 national elections alone. We will fine tune our model when we get data for the four critical state elections in November-December 2013.

` Qualitative analysis. We look at qualitative factors (local, regional and national) to gauge possible vote swings in a constituency. We have discussed the same in detail, for key states, in the next section. We note that 12 states that we analyzed in detail account for 440 constituencies out of a total of 543 in the Lok Sabha.

For obvious reasons, we refrain from publishing the results of our analysis. However, we make a few observations, that investors may find useful, to assess the chances of major parties or coalitions in the forthcoming national elections. We caution that these are observations based on our analysis and not predictions.

12 KOTAK INSTITUTIONAL EQUITIES RESEARCH Strategy India

` 236 constituencies saw a gap of less than 6% of voter share between winner and runner-up. Exhibit 13 shows the gap between the top two positions in the 2009 national elections. We note that 113 constituencies have a gap of less than 3%, 236 a gap of less than 6%, 318 a gap of less than 9% and 225 constituencies a gap of more than 9%. In our view, a 3% swing in vote share is quite easy and thus, it is extremely difficult to predict the outcome of the elections.

225 seats saw a victory margin of >9% in the 2009 national elections Margins of victory/defeat for major parties across elections, 2004-09 (%)

2009 2004 0-3 3-6 6-9 >9 Total 0-3 3-6 6-9 >9 Total INC Winner 46 48 27 85 206 21 17 27 81 146 Runner-up 35 35 20 53 143 25 37 27 81 170 BJP Winner 29 28 19 40 116 36 27 21 54 138 Runner-up 33 17 12 48 110 34 29 19 52 134 SP Winner 3 4 6 11 24 9 8 9 11 37 Runner-up 7 2 2 7 18 5 8 3 8 24 BSP Winner 11 4 3 3 21 4 8 4 3 19 Runner-up 8 10 11 21 50 7 7 8 9 31 DMK Winner 1 2 3 13 19 — — — 16 16 Runner-up — 4 — 1 5 — ———— CPI(M) Winner3239175273044 Runner-up 4 4 10 19 37 2 2 — 6 10 AIADMK Winner 2 6— 210————— Runner-up 3 3 2 7 15 — 1 — 33 34 Others Winner 18 29 21 62 130 Runner-up 23 48 25 69 165 Total Winner 113 123 82 225 543 Runner-up 113 123 82 225 543

Source: Election Commission of India, Kotak Institutional Equities

` INC appears comfortably placed in 86 constituencies. We estimate that the INC is in a strong position in 86 constituencies versus the 112 constituencies that it won in the 2009 national elections with a lead of >6% over its nearest rival in a constituency. In our view, the INC should be in a position to form a government if it can win 150 seats or more; it currently has 206 seats. Most regional parties would be keener to form a coalition government with it as is the case currently given its more secular credentials.

We note that the INC won 94 seats in the 2009 national elections with a margin of less than 6% vote share. On the other hand, it lost 70 constituencies by the same margin. More important, the fluid political situation in Andhra Pradesh (INC’s single-biggest state with 33 seats) reduces INC’s chances of a repeat performance in that state; in fact, it could lose meaningfully. It is also vulnerable in Rajasthan and Uttar Pradesh but should see gains in Karnataka. In UP, where it has 22 seats, it performed quite poorly in the 2012 state assembly elections. However, we note that national elections are different in that the candidates and issues are different; also, the INC’s top brass will contest and are likely retain its seats in the state.

KOTAK INSTITUTIONAL EQUITIES RESEARCH 13 India Strategy

` BJP appears comfortably placed in 53 constituencies. Recent opinion polls (see Exhibit 14) suggest a strong showing for the BJP/NDA in the 2014 national elections. It won 116 seats in the last elections, out of which 59 were with a lead of >6% over the nearest rival in a constituency. In our view, the BJP will have to perform extremely well in the northern and central states to reach about 180 seats (probably enough for it to be in a position to form the next government, assuming there is a corresponding decline in the number of seats for its main rival, the INC). This would help it to overcome a likely weak performance in a few important southern and eastern states.

Opinion polls indicate a lead for the NDA, though not enough to form a government Various opinion polls over the last few months on the 2014 national elections

Pollster Seats Votes (%) Date NDA UPA Others NDA UPA Times Now-CVoter 16-Oct 186 117 240 India Today-CVoter 15-Aug 155 137 251 32 28 TimesNow-CVoter 29-Jul 156 136 251 — — CNN IBN-The Hindu-CSDS 26-Jul 172-180 149-153 — 29 29 The Week 5-Jul 197 184 — 27 23 ABP-Nielsen 21-May 206 136 — 27 26

Headlines Today CVoter 21-May 220 155 — — —

Source: Media reports

We note that the BJP won only 20 seats in six important states—the four southern states of Andhra Pradesh, Kerala, Karnataka and Tamil Nadu and two eastern states of Odisha and West Bengal—out of a theoretical maximum of 192 in the 2009 national elections. We see a moderate deterioration in the BJP’s performance in Karnataka and no meaningful gain in the other five states. This would make its performance in other states critical (practically one out of two seats in the rest of India). Extending this to cover all of south and East India, excluding Bihar and Jharkhand, the BJP currently has 24 seats out of 220 seats (see Exhibit 15).

14 KOTAK INSTITUTIONAL EQUITIES RESEARCH Strategy India

The BJP has 24 seats out of 220 in East (excluding Bihar and Jharkhand) and South India Current number of seats in Lok Sabha by states

State Members INC BJP 1 Andhra Pradesh 42 31 — 2 Arunachal Pradesh 2 2 — 3 Assam 14 7 4 4 Bihar 40 2 12 5 Chhattisgarh 11 1 9 6 Goa 2 1 1 7 Gujarat 26 9 17 8 Haryana 10 9 — 9 Himachal Pradesh 4 1 3 10 Jammu and Kashmir 6 2 — 11 Jharkhand 14 1 7 12 Karnataka 28 9 18 13 Kerala 20 13 — 14 Madhya Pradesh 29 12 16 15 Maharashtra 48 17 9 16 Manipur 2 2 — 17 Meghalaya 2 1 — 18 Mizoram 1 1 — 19 Nagaland 1 — — 20 Odisha 21 6 — 21 Punjab 13 8 1 22 Rajasthan 25 20 4 23 Sikkim 1 — — 24 Tamil Nadu 39 8 — 25 Tripura 2 — — 26 Uttar Pradesh 80 22 10 27 Uttarakhand 5 4 1 28 West Bengal 42 6 1 Union Territory Members INC BJP 1 Andaman and Nicobar Islands 1 — 1 2 Chandigarh 1 1 — 3 Dadra and Nagar Haveli 1 — 1 4 Daman and Diu 1 — 1 5 Delhi 7 7 — 6 Lakshadweep 1 1 — 7 Puducherry 1 1 — Total (a) 543 205 116 South + Odisha + WB (b) 192 73 19 Rest of India (a) - (b) 351 132 97 South + East - Bihar - Jharkhand (c) 220 88 24 Rest of India (a) - (c) 323 117 92 Notes: (a) INC's 205 seats exclude the two nominated members of the Anglo-Indian community.

Source: Lok Sabha, Election Commission, Kotak Institutional Equities

` Other parties are comfortably placed in 120 constituencies. We could see several regional parties getting between 15 and 30 seats, which would increase their importance and roles in any potential coalition government. Also, it would be interesting to see whether these parties (some of which are bitter foes in their respective states) would bury their differences to cobble together a government if neither the INC nor the BJP is in a position to form a government.

KOTAK INSTITUTIONAL EQUITIES RESEARCH 15 India Strategy

GEOGRAPHY: INCREASING FRAGMENTATION IN MOST STATES Our bottom-up analysis of states and political parties throws up a chaotic picture of the 2014 national elections. A large number of political parties in each major state, a fluid situation on pre-election alliances, factionalism in major parties in certain states and contentious local issues in several states render any analysis unpredictable, but exciting nonetheless.

The political landscape—state-wise analysis

We analyze the political landscape in each major state and highlight key issues before voters and possible outcomes based on our understanding of voting patterns, local issues and developments. Exhibit 16 shows the political map and number of seats of major parties by states in the Lok Sabha. This would help in understanding potential changes from current positions of key parties in the major states in the 2014 national elections.

Map of India showing number of seats of major parties in the Lok Sabha

Source: Lok Sabha, Election Commission, Kotak Institutional Equities

16 KOTAK INSTITUTIONAL EQUITIES RESEARCH Strategy India

` Andhra Pradesh (42 seats). This state is perhaps the most unpredictable one to forecast given (1) the ongoing Telangana issue that has driven deep rifts in political parties and the general population and (2) a four-way fight between the INC, Telangana Rashtra Samithi (TRS), Telugu Desam Party (TDP) and the YSR Congress Party. The BJP does not have a strong presence in the state. None of the aforementioned parties has announced pre-poll alliances though there is heavy media speculation on certain pre-poll alliances. Any analysis of voting patterns of the 2009 national election and the last state assembly election (also in 2009; held concurrently with the national elections) is quite meaningless in the light of the recent political developments in the state.

The Central Government has approved the bifurcation of the state into Telangana (17 seats) and Andhra Pradesh comprising Coastal Andhra Pradesh (17 seats) and Rayalseema (eight seats), collectively named Seemandhra. This has resulted in protests and strikes in the Seemandhra region and political parties adopting pro-Telangana (INC, TRS) or pro- unified Andhra Pradesh stances (YSRCP).

In our view, the INC is vulnerable to a sharp reduction in the number of seats due to (1) the death of YSR Reddy, a charismatic leader who contributed to the success of the INC in the 2009 national elections when the INC won 33 out of the 42 seats (it now has 31 seats) and (2) its pro-Telangana stance, which may upset voters in the Seemandhra region. A part of the INC, led by YSR Reddy’s son (Jagan Reddy), has split from the INC since the last national elections in 2009 and formed the YSR Congress Party. YSR Congress had a strong showing in the last by-elections for the state legislature in 2012 winning 15 out of the 18 seats it contested. It has only two seats in the current Lok Sabha but we expect its tally to increase sharply. We expect the TRS to have a strong showing in the Telangana region.

` Bihar (40 seats). The recent conviction and sentencing of the leader of the Rashtriya Janata Dal (RJD) will likely considerably weaken the RJD’s chances and strengthen the positions of BJP and Janata Dal (United) (JDU). The latter two parties performed very strongly in (1) the 2009 national elections (BJP-12 and JDU-20) and (2) the 2010 state assembly elections when they contested together with a well-defined seat-sharing arrangement. However, the two parties formally split in June 2013 and will contest the 2014 national elections separately. Nonetheless, we expect both parties to do well due to the RJD’s weakened position and INC’s historical weak position in the state. Exhibit 17 gives the vote share of major parties in the 2004, 2009 national elections and 2010 state election.

A three-way contest in Bihar but several local variables make the fight interesting Vote share of various parties in Bihar for 2004 and 2009 national elections and 2010 state election

State LS seats 2004 2009 2010 (#) Others 21 28 30 2 Janata Dal (U) 22 24 23 20 Rashtriya Janata Dal (RJD) 31 19 19 4 BJP 15 14 16 12 INC 4 10 8 2 BSP 4 4 3 — CPI (M) 1 1 1 — SP 2 — — —

Source: Election Commission of India, Kotak Institutional Equities

KOTAK INSTITUTIONAL EQUITIES RESEARCH 17 India Strategy

` Gujarat (26 seats). This state is unlikely to throw up any major surprises with the BJP likely to consolidate its already strong position (17 seats in the current Lok Sabha) in the state. The INC, which has the nine remaining nine seats, may see a small reduction in its number of seats. Exhibit 18 shows that the BJP has continued to strengthen its hold on the state in terms of popular vote share.

A two-way contest in Gujarat with the BJP likely to do better Vote share of various parties in Gujarat in the 2004 and 2009 national elections and 2012 state election

State LS seats 2004 2009 2012 (#) BJP 47 47 48 17 INC 44 43 38 9 Others 7 8 12 — BSP 121— SP 1 — — —

Source: Election Commission of India, Kotak Institutional Equities

` Karnataka (28 seats). The strong showing of the INC in the 2012 state assembly elections and the split in the BJP, with the exit of a strong local leader, will likely lead to the INC (nine seats in the current Lok Sabha) making significant gains at the expense of the BJP (18 seats) in the 2014 national elections unless the BJP can bring back the Lingayat community leader and ex-chief minister YS Yeddyurappa into its fold. The BJP performed very poorly in the recent state assembly elections (see Exhibit 19 for a vote share of the major parties in the 2012 state assembly elections) with Yeddyurappa’s party (Karnataka Janata Paksha—KJP) gaining 9.8% vote share compared with the BJP’s 20.1% and the INC’s 36.6%.

BJP likely to lose ground to INC and others in Karnataka in the 2014 national elections Vote share of various parties in Karnataka in the 2004 and 2009 national elections and 2012 state election

State LS seats 2004 2009 2012 (#) INC 37 38 37 9 Others 7 5 22 — JD (S) 20 14 20 1 BJP 35 42 20 18 BSP 1 2 1 —

Source: Election Commission of India, Kotak Institutional Equities

None of the major political parties has announced pre-poll alliances, though we would not be surprised to see formal and informal arrangements before the Lok Sabha elections. The current four-way contest between the BJP, INC, Janata Dal (S) and KJP could transform into a two-way or three-way contest, depending on pre-poll alliances.

` Kerala (20 seats). Kerala is unlikely to throw up major surprises with the INC and parties belonging to the Left Democratic Front (a coalition of leftist and communist parties) likely to repeat their 2009 showing in the 2014 national elections, too. Voters have traditionally voted for the Left Democratic Front (LDF) or the United Democratic Front (UDF), led by the INC.

The two major coalitions in Kerala—the UDF and the LDF—will battle it out in the 2014 national elections also and most likely split the voter share equally as they have in the past (see Exhibit 20 for the voter share in the past two assembly elections and the two national elections of 2004 and 2009). The BJP does not have a meaningful presence in the state and it won only 6% of the vote share in the 2011 assembly elections against 28% by the CPI (M) and 26.7% by the INC.

18 KOTAK INSTITUTIONAL EQUITIES RESEARCH Strategy India

INC likely to lose some ground in Kerala in the 2014 national elections to the LDF Vote share of various parties in Kerala in the 2004 and 2009 national elections and 2011 state election

State LS seats 2004 2009 2011 (#) Others 16 14 30 3 CPI (M) 32 30 28 4 INC 32 40 26 13 CPI 8 7 9 — BJP 12 6 6 — BSP 1 1 1 —

Source: Election Commission of India, Kotak Institutional Equities

` Madhya Pradesh (29 seats). The outcome of the state assembly elections in November 2013 will provide more color on the performance of the two leading parties (BJP, INC) in the 2014 national elections. (1) The generally good performance of the BJP Government in the state over the past decade (see Exhibit 21), during which it has been in power, and (2) a united party under a capable chief minister and administrator may offset some of the anti-incumbency sentiment for the BJP. We expect the BJP and INC to broadly repeat their performances of the 2009 national elections when they won 16 and 12 seats.

Madhya Pradesh has seen robust growth over the past 6-7 years Trend in Madhya Pradesh's real GDP growth, March fiscal year-ends (%)

Real GDP growth 20

15

10

5

0

(5)

(10)

(15)

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Source: CEIC, Kotak Institutional Equities

However, we note that the vote share has been relatively similar for the BJP and INC in the last assembly elections (2008) and national elections (2009) as can be seen in Exhibit 22, which may provide a few twists to the forecasts. Other political parties are not material in the state. Finally, we note that the BJP would need to deliver a strong showing (more than 15 seats out of 29) in the state for a reasonable chance to form the government in 2014.

KOTAK INSTITUTIONAL EQUITIES RESEARCH 19 India Strategy

A two-way contest between the BJP and the INC in Madhya Pradesh Vote share of various parties in Madhya Pradesh in the2004 and 2009 national elections and 2008 state election (%)

State LS seats 2004 2009 2008 (#) BJP 48 43 38 16 INC 34 40 33 12 Others 10 8 21 — BSP 5 6 9 1 SP 3 3 — —

Source: Election Commission of India, Kotak Institutional Equities

` Maharashtra (48 seats). Maharashtra will see a two-way contest between INC and its ally, the Nationalist Congress Party (NCP), and the BJP and its ally, the Shiv Sena, with the MNS (a breakaway faction of the Shiv Sena) in a position to cause upsets in a few seats. The extent of seat-sharing between the parties in a ‘coalition’ will be important given that no single party dominates the political landscape in Maharashtra. Exhibit 23 shows the vote share of major parties in the 2009 national and state assembly elections.

A two-way contest in Maharashtra with INC and NCP competing with BJP and Shiv Sena Vote share of various parties in Maharashtra in the 2004 and 2009 national elections and 2009 state election (%)

State LS seats 2004 2009 2009 (#) Others 11 20 29 3 INC 24 20 24 17 NCP 18 19 15 8 Shiv Sena (SS) 20 17 15 11 BJP 23 18 14 9 BSP 3 5 3 — CPI (M) 1 1 1 — SP 1 1 — —

Source: Election Commission of India, Kotak Institutional Equities

We think the BJP-Shiv Sena combine may have a slight edge over the INC-NCP one, noting their strong performance in the February 2012 municipal elections (see Exhibit 24). We note that the INC-NCP put up a very strong performance in Mumbai city and adjoining constituencies (six out of six seats in Mumbai and eight out of 10 in the region) though the BJP-Shiv Sena performed much better in the 2012 municipal elections. However, we would clarify that certain parts of the state and seats are dominated by certain parties and thus, a strong showing in the other areas of Maharashtra by any of the parties or coalitions will tilt the overall balance in their favor.

20 KOTAK INSTITUTIONAL EQUITIES RESEARCH Strategy India

Recent municipal elections in Maharashtra point to strengthening of the BJP-SS's position Seats of various parties in Maharashtra municipal elections (#)

UPA allies NDA allies INC NCP Total BJP SS Total MNS Others Total Mumbai 13 52 65 31 75 106 28 28 227 Pune 51 28 79 26 15 41 29 3 152 Nagpur 41 6 47 62 6 68 2 28 145 Thane 18 34 52 7 53 60 2 16 130 Pimpri-Chinchwad 14 83 97 3 14 17 4 10 128 Nashik 15 20 35 14 19 33 40 14 122 Solapur 45 16 61 25 8 33 — 8 102 Amravati 25 17 42 7 10 17 28 87 Ulhasnagar 8 20 28 11 19 30 1 19 78 Akola 18 5 23 18 8 26 1 23 73

Source: Election Commission of India, Kotak Institutional Equities

` Odisha (21 seats). We do not see major changes in Odisha versus the 2009 national elections noting the strong performance of Biju Janata Dal (BJD) and INC in the past. Exhibit 25 shows that the BJD steadily increased the gap over the INC in the past elections. The BJD won 14 out of 21 seats in the 2009 national elections. The BJP was a distant third in the State (based on past performances) and is unlikely to make inroads. In fact, its vote share has declined over time. We note that the BJD was a part of the NDA coalition but broke away from the NDA before the 2009 national elections.

The BJD gained at the expense of the INC in the last decade in Odisha Vote share of various parties in Odisha in the 2004 and 2009 national elections and 2009 state election (%)

State LS seats 2004 2009 2009 (#) Biju Janata Dal (BJD) 30 37 39 14 INC 40 33 29 6 BJP 19 17 15 — Others 7 11 15 1 BSP 2 2 2 —

Source: Election Commission of India, Kotak Institutional Equities

` Rajasthan (25 seats). The outcome of the state assembly elections in November- December 2013 will provide more clarity on the outcome of the national elections next year. This state typically sees a straight fight between the BJP and the INC with the INC being very successful in the 2009 national elections, winning 20 seats against the BJP’s four with a major swing in the vote share—+5.8% for the INC versus -12.4% for the BJP (see Exhibit 26).

The BJP is likely to perform better in Rajasthan in the 2014 national elections compared with its weak performance in 2009 Vote share of various parties in Rajasthan in the2004 and 2009 national elections and 2008 state election (%)

State LS seats 2004 2009 2008 (#) INC 41 47 37 20 BJP 49 37 35 4 Others 6 11 19 1 BSP 3 3 8 — CPI (M) 1 1 2 —

Source: Election Commission of India, Kotak Institutional Equities

KOTAK INSTITUTIONAL EQUITIES RESEARCH 21 India Strategy

We expect anti-incumbency to be the major issue in the state assembly elections though the INC State Government has embarked on a large entitlement (pro-poor) program. We expect the BJP to increase its tally in the 2014 national elections after its dismal performance in the 2009 national elections given (1) anti- incumbency and (2) factionalism in the INC in the state. A strong performance in Rajasthan (about 15 seats) would be important for the BJP’s aspirations to form a government at the central level.

` Tamil Nadu (39 seats). (1) The strong showing by the AIADMK in the April 2011 state assembly elections and (2) a judicious mix of entitlement politics and economic development by the AIADMK Government will likely translate into the AIADMK gaining at the expense of its arch-rival, the DMK (18 seats in the current Lok Sabha versus nine of the AIADMK). The INC has been steadily losing ground in the state in terms of share of votes and may struggle to repeat its strong performance in the 2009 national elections, when it won eight seats. The BJP is unlikely to win any seats given its very limited presence and organizational reach in the state.

More important, the role of the AIADMK and DMK in post-election alliances will be critical in the formation of a new government. Both regional parties have decided to contest independently in the 2014 national elections and avoid pre-election arrangements. We note that DMK was a part of the UPA coalition government but quit in March 2013 over disputes on certain issues. As per press reports, the BJP has been actively soliciting the AIADMK for its support. The AIADMK and DMK may play active roles in the formation of a third-front government if the BJP or INC or any pre-election alliance is not in a position to the form government post the 2014 national elections. However, this also raises the prospect of the AIADMK or DMK being part of the same coalition government, which is quite unlikely, in our view.

` Uttar Pradesh (80 seats). This gargantuan state, accounting for 15% of Lok Sabha seats, will be the most hotly contested one, given four strong parties in the fray—Bahujan Samaj Party (BSP), BJP, INC and the Samajwadi Party (SP). The outcome of the elections in Uttar Pradesh, with 200 mn people and 130 mn eligible voters will largely determine the shape of the next government. For the BJP, a strong showing (about 40 seats) is imperative to compensate for its weak presence and likely weak performance in the four southern states and in Odisha and West Bengal, which account for a combined 192 seats out of a total of 543 seats in the Lok Sabha. We note that the BJP won 20 seats (19 from Karnataka) in the 2009 national elections from these six states.

The success or failure of the BJP leadership in resuscitating UP after weak showings in the 2009 national elections and the 2012 state elections will determine its overall performance. We note that BJP’s performance (measured by share of popular vote) deteriorated in the past 10 years (see Exhibit 27). Even the INC had a poor showing in the 2012 state assembly elections (11% vote share only) though we expect it to fare better in the national elections given the presence of several party leaders contesting from long- held constituencies.

22 KOTAK INSTITUTIONAL EQUITIES RESEARCH Strategy India

Uttar Pradesh: A state in which four main parties will hotly contest 80 seats Vote share of various parties in Uttar Pradesh in the 2004 and 2009 national elections and 2012 state election (%)

State LS seats 2004 2009 2012 (#) Samajwadi Party (SP) 27 23 29 22 Bahujan Samaj Party (BSP) 25 27 26 20 Others 14 14 19 6 BJP 22 17 15 10 INC 12 18 11 22

Source: Election Commission of India, Kotak Institutional Equities

The BSP and SP may be in a position to repeat their strong showing in the 2009 national elections when they won 23 and 20 seats. However, the large support seen for the SP in the 2012 state assembly elections (see Exhibit 28) may diminish in favor of other parties, given deterioration in the law and order situation in the state. Finally, the nature of the post-election alliance will be important, given these two parties may win a meaningful number of seats between them. Both parties have decided to stay out of any pre-election alliances though they provide outside support to the UPA Government at the central level. This has not prevented them from vigorously fighting with the INC (and BJP) in state and national elections with vitriolic attacks on each other’s economic performance and character.

KOTAK INSTITUTIONAL EQUITIES RESEARCH 23 India Strategy

SP and BSP dominated the 2012 state and 2009 national elections in terms of votes polled in UP Vote share received by various prominent parties in Uttar Pradesh in the 2009 national and 2012 state election (state assembly constituencies regrouped as Lok Sabha constituencies)

Votes cast ('000) INC BJP BSP SP RLD Constituency 2012 2009 2012 2009 2012 2009 2012 2009 2012 2009 2012 2009 Agra 988 647 12.4 27.8 31.5 28.0 30.0 21.8 21.9 2.1 Akbarpur 937 637 16.3 30.2 19.9 21.5 28.8 25.2 29.6 18.0 Aligarh 961 692 9.8 24.0 14.2 18.4 23.2 28.0 18.7 25.6 18.1 Allahabad 836 550 7.8 11.4 29.0 31.7 27.1 38.1 Ambedkar Nagar 976 811 5.3 3.5 27.9 34.1 32.0 49.2 29.2 Amethi 874 647 29.7 71.8 12.4 16.7 14.5 32.2 Amroha 956 706 1.6 13.5 27.0 24.1 36.4 27.1 7.2 40.1 Aonla 970 704 14.0 13.3 30.7 25.7 24.8 29.5 29.6 Azamgarh 852 705 7.1 11.6 35.1 30.1 28.2 38.6 17.6 Badaun 955 737 7.8 26.3 10.4 24.5 27.3 40.0 31.7 Baghpat 874 614 6.0 28.7 28.6 19.6 22.3 32.5 38.9 Bahraich 836 513 20.9 31.2 20.8 21.3 23.6 22.5 23.6 Ballia 890 678 5.3 14.1 20.3 21.9 30.1 30.9 40.8 Banda 848 619 17.1 18.2 26.8 33.3 25.9 38.9 Bansgaon 830 649 8.3 12.5 34.4 30.0 26.2 27.0 17.4 Barabanki 1,065 743 13.8 44.2 10.8 25.0 21.5 35.7 21.6 Bareilly 913 706 5.4 31.3 24.6 30.0 17.9 25.8 24.6 Basti 1,009 774 16.9 14.6 15.2 29.6 34.7 28.3 21.1 Bhadohi 928 659 4.7 5.1 28.0 29.7 43.7 27.8 Bijnor 918 708 9.1 19.4 26.9 30.6 18.9 11.7 34.6 Bulandshahr 978 668 5.5 10.7 25.5 28.1 21.3 23.2 35.3 9.2 Chandauli 911 671 7.2 9.0 27.6 26.8 23.9 26.9 Deoria 909 715 12.6 24.9 24.9 17.5 30.7 24.7 21.2 Dhaurahra 798 760 16.5 51.5 7.6 32.2 27.2 32.5 Domariyaganj 848 736 10.1 31.2 17.3 20.8 17.1 20.6 30.9 Etah 859 568 9.5 10.2 15.6 20.7 26.0 28.7 Etawah 943 638 4.4 20.2 16.6 31.3 36.4 36.8 43.7 Faizabad 930 749 10.4 28.2 11.6 20.2 24.2 18.1 35.3 21.0 4.0 Farrukhabad 900 611 9.6 27.7 14.0 19.3 18.8 23.3 30.7 20.8 Fatehpur 1,032 694 14.9 19.7 16.7 26.4 24.0 21.3 31.5 Fatehpur Sikri 949 694 4.3 28.8 7.8 22.3 37.1 30.2 30.6 15.7 7.0 Firozabad 1,004 685 1.7 15.3 29.5 32.1 42.0 41.9 Gautam Buddha Nagar 1,003 739 25.6 15.7 21.1 31.1 30.5 33.2 14.6 16.1 Ghaziabad 1,149 830 12.0 32.4 25.2 43.3 33.5 21.7 15.0 7.2 Ghazipur 963 770 3.3 6.6 28.2 40.2 38.2 49.2 Ghosi 980 766 6.3 19.6 6.0 31.4 28.8 26.8 20.9 Gonda 834 605 7.2 25.7 11.5 21.7 21.8 35.4 Gorakhpur 929 749 4.3 24.2 53.8 21.5 24.4 26.6 Hamirpur 986 717 25.0 23.9 18.6 19.1 22.7 27.5 23.8 22.9 Hardoi 973 575 6.8 6.4 32.4 35.0 37.9 51.2 Hathras 934 648 5.2 10.4 34.2 32.6 26.2 17.8 13.2 38.2 Jalaun 1,092 798 19.6 12.3 16.5 27.2 34.1 27.2 35.5 Jaunpur 952 764 8.1 13.6 18.8 26.6 39.6 32.7 29.1 Jhansi 1,194 862 13.7 29.3 23.7 28.4 23.8 25.5 15.3 Kairana 572 725 20.8 13.7 36.0 23.9 39.1 21.2 17.2 9.3 Kaiserganj 951 566 11.8 19.1 21.3 24.9 21.9 25.5 34.7 Kannauj 976 742 6.4 21.0 20.3 27.5 29.9 39.3 45.5 Kanpur 743 513 24.3 41.9 33.5 38.2 14.6 22.1 Kaushambi 878 551 10.4 7.8 27.8 34.6 19.7 44.7 Kheri 1,032 708 12.0 26.1 15.2 23.0 23.0 24.9 31.8 21.7 Kushi Nagar 880 729 12.7 30.7 11.8 22.0 20.9 27.8 26.8 Lalganj 855 658 6.1 8.9 25.5 29.9 31.6 39.5 22.4 Lucknow 859 584 25.1 27.9 27.6 34.9 15.2 22.9 26.8 Machhlishahr 936 718 10.6 12.8 20.4 27.4 27.7 31.0 31.1 Maharajganj 1,016 728 16.3 36.4 18.6 20.6 18.9 21.7 26.9 Mainpuri 906 695 7.8 9.6 26.1 31.5 47.3 56.4 Mathura 987 727 5.5 14.6 25.7 28.9 8.3 30.7 52.3 Meerut 987 728 15.6 26.3 31.9 26.3 25.4 20.5 25.2 6.1 Mirzapur 985 733 12.7 10.9 19.1 23.3 27.2 32.8 29.9 Misrikh 985 608 7.0 20.7 5.3 33.4 34.2 36.5 30.3 Mohanlalganj 1,060 694 8.9 5.4 28.6 25.9 33.3 36.9 Moradabad 1,013 761 13.9 39.6 26.5 33.1 18.4 19.4 20.3 Muzaffarnagar 919 745 5.2 19.8 23.1 37.0 27.1 16.8 34.2 Nagina 871 644 4.9 17.5 30.6 27.2 26.7 36.5 7.9 25.3 Phulpur 875 552 10.7 9.1 30.8 30.4 24.8 27.7 Pilibhit 1,071 838 11.0 16.5 27.0 50.1 17.9 25.1 Pratapgarh 851 641 12.3 26.4 14.2 21.4 21.7 27.9 18.9 Rae Bareli 909 667 21.7 72.2 3.1 19.7 16.4 31.1 Rampur 880 606 23.4 33.0 14.9 17.0 15.7 30.5 38.1 Robertsganj 877 595 5.1 11.5 17.5 29.4 27.9 31.5 36.4 Saharanpur 751 821 22.5 16.3 34.3 43.2 23.6 32.9 Salempur 822 636 9.6 24.7 10.4 22.6 27.5 33.0 21.3 Sambhal 1,006 682 6.9 19.0 21.0 18.1 22.9 30.4 34.5 28.4 2.1 Sant Kabir Nagar 932 801 6.5 19.6 22.7 25.0 26.4 27.9 21.4 Shahjahanpur 1,183 792 14.9 14.2 21.3 27.5 31.7 32.4 Shrawasti 904 605 16.4 33.3 16.9 19.2 26.4 33.6 18.4 Sitapur 948 705 17.9 16.6 8.0 30.9 34.2 33.3 31.4 Sultanpur 889 708 6.7 42.4 8.2 27.3 28.5 39.4 15.2 Unnao 1,131 905 10.9 52.6 17.4 27.3 19.2 33.2 16.1 Varanasi 883 666 18.4 21.8 30.5 16.9 27.9 19.6 18.6 Total ('000) 74,793 55,285 8,451 7,891 11,196 8,030 19,255 14,817 21,844 12,004 1,716 1,812 Source: Election Commission of India, Kotak Institutional Equities

24 KOTAK INSTITUTIONAL EQUITIES RESEARCH Strategy India

` West Bengal (42 seats). Given the weak presence of the BJP and the INC in West Bengal and the decision of the Trinamool Congress (TMC) to stay independent of pre-election and post-election alliances, this state will be interesting from the perspective of the formation of a third-front government (other than NDA or UPA). We expect a strong showing by the TMC, followed by the CPI (M) and other left parties, based on the last state election results (see Exhibit 29, which shows the trends of vote share for major parties in West Bengal for 2004 and 2009 national elections and the 2011 state election). The BJP is not a material force in the state and the INC’s presence has dwindled steadily in the state.

Votes and seats are likely to be split between Trinamool Congress and the Left Front Vote share of various parties in West Bengal in the 2004 and 2009 national elections and 2011 state election (%)

State LS seats 2004 2009 2011 (#) Trinamool Congress (TMC) 21 31 39 19 CPI (M) 39 33 30 9 Others (largely Left Front parties) 17 15 17 7 INC 15 13 9 6 BJP 8 6 4 1 BSP 1 1 1 —

Source: Election Commission of India, Kotak Institutional Equities

The role of TMC and the left parties will become quite critical in case the BJP or the INC are not in a position to form a government. They may want to be part of a Third Front government (coalition of regional parties) even though it is hard to imagine them working together, given their bitter rivalry in West Bengal. Also, they may play a crucial role in case the BJP and the INC have a similar number of seats. It is extremely unlikely that these regional parties will align with the BJP given their anti-BJP stance but may be more amenable to aligning with the INC. However, we note that both the parties had walked out of the UPA due to differences on certain issues; the left parties left the UPA-1 coalition in July 2008 and TMC withdrew from the UPA-2 coalition in September 2012.

KOTAK INSTITUTIONAL EQUITIES RESEARCH 25 India Strategy

HISTORY: THE POLITICAL SYSTEM HAS NOT DELIVERED MUCH SO FAR India’s poor record of economic development over the past several decades shows that the Indian political system has failed to galvanize the Indian economy. The Indian political class has never been very comfortable with capitalism as a guiding philosophy for economic development. The under-developed nature of India’s economy at the time of India’s independence and high levels of poverty have resulted in (1) a pervasive view of ‘big’ government as a social enabler, (2) a socialistic approach to development and (3) entitlements to alleviate poverty. As we discuss in the section, the outcome has been disappointing with India lagging regional and global peers on all economic and social development parameters.

The political system and the economy—a collective failure so far

` Central politics—GDP per capita has lagged regional peers meaningfully. India’s GDP has grown at 5% CAGR over the past six decades (FY1953-FY2013). This may seem creditable. However, many countries have done far better. Exhibit 30 shows growth in GDP per capita of a few Asian countries between 1950 and 2012. More important, many of these countries started at a similar GDP/capita to India’s but they pulled ahead remarkably over the past 5-6 decades. Their absolute GDP/capita is several times India’s (see Exhibit 31).

India's growth in per capita GDP has picked up over the past couple of decades Comparison of average real GDP per capita growth, December calendar year-ends, 1961-2010 (%)

12 1961-70 1971-80 1981-90 1991-00 2001-10 10

8

6

4

2

0 China India Indonesia Japan Korea Malaysia Philippines Thailand (2)

Source: World Bank, Kotak Institutional Equities

26 KOTAK INSTITUTIONAL EQUITIES RESEARCH Strategy India

India lags in GDP per capita pick-up compared with its peers Comparison of nominal GDP per capita, December calendar year-ends, 1960-2012 (US$)

China India Indonesia Malaysia Philippines Thailand 12,000

10,000

8,000

6,000

4,000

2,000

0

1960 1963 1966 1969 1972 1975 1978 1981 1984 1987 1990 1993 1996 1999 2002 2005 2008 2011

Source: World Bank, Kotak Institutional Equities

We note that many of India’s regional peers are small economies (city states in the case of Hong Kong and Singapore), which perhaps allowed for better governance and economic management. Nonetheless, China’s superior performance undermines this argument and we can attribute some of India’s weaker performance to a different economic model and political ideology. We highlight that (1) China’s GDP/capita is now 4X India’s GDP/capita after being quite similar in CY1985 and (2) China’s GDP has grown at a CAGR of 8% since its economic ‘liberalization’ in 1977.

China’s example shows that a large economy can also grow consistently over an extended period of time, propelled by the right mix of incentives and political clarity. India can go through a similar phase, driven by ‘demographic dividends’ as we discussed in the first section of this report. However, the political class will have to be clear about India’s economic model. In our view, the support of the political system in creating the right macro-economic environment for (1) private enterprise and (2) proper functioning of markets would be critical.

India also ranks poorly on social parameters in comparison to Asian peers (see Exhibit 32). The positive news is that the Government has increased spending on education and health (see Exhibit 33) significantly over the past few years, which should translate into higher output and GDP growth over the next few decades. Several state governments have also made education and health key focus areas. The quality of education and the return on resources (output) invested by the central and state governments can be debated but the sheer magnitude of the resources being invested (input) should translate into meaningful returns for the economy and society over a period of time.

KOTAK INSTITUTIONAL EQUITIES RESEARCH 27 India Strategy

India is yet to catch up with its Asian peers on most social parameters Comparison of key Asian economies on social parameters

Life Population expectancy Literacy rate density Road density Hospital beds HDI (years) (%) (people/sq. km) (km/100 sq. km) (per 1,000 people) (HDI, 2012) China 75 94.3 144 39 4 101 India 66 74.0 411 125 1 136 Indonesia 70 92.6 135 23 1 121 Japan 83 99.0 351 88 14 10 Korea 81 97.9 513 105 10 12 Malaysia 75 93.1 88 37 2 64 Philippines 68 95.4 319 67 1 114 Thailand 74 93.5 130 35 2 103

Notes: (a) Life expectancy for all countries is for CY2011. (b) Literacy rate is defined for ages 15+; India 2011 (and for ages 7+), China and Malaysia are for CY2010, Indonesia and Philippines for CY2009, Thailand for CY2005 and Japan and Korea for CY2002. (c) Population density for all countries is for CY2011. (d) Road density for all countries (except Philippines) is for CY2008; Philippines is for CY2007. (e) Hospital beds for China, Indonesia, Malaysia and Thailand are for CY2010, Japan, Korea and Philippines are for 2009 and India for CY2005.

Source: World Bank, CIA World Factbook, UNDP, Kotak Institutional Equities

Government expenditure on health and education rose by 4-6X over the past 10 years Trend in Central Government's expenditure on health and education, March fiscal year-ends (` bn)

Health Education 900 795 800 700 661 601 600 519 500 386 400 356 355 272 278 238 244 259 300 210 178 177 200 131 144 81 97 106 100 0 2005 2006 2007 2008 2009 2010 2011 2012 2013

2014BE

Source: Union Budget documents, Kotak Institutional Equities

` State politics—very few movements in rankings of states. The failure of India’s political system in catalyzing economic growth can be seen at state-level, too. If we give credence to the argument that India’s size is an impediment for ‘stronger’ economic growth, then a few states should at least have replicated (even partly) the successful turnaround seen in several Asian economies in the past few decades. Each of the states is a reasonably self-contained economy and could have taken steps to develop the state economy faster.

28 KOTAK INSTITUTIONAL EQUITIES RESEARCH Strategy India

However, we note that state governments have also been generally unsuccessful in catalyzing strong economic growth in their respective states. The pressures of constant elections and populist politics have resulted in relatively lower focus on economic development in states too, compared to entitlements and appeasements. We note that states that ranked high on various social and economic parameters a few decades ago continue to rank high whereas states that performed poorly on the same parameters continue to languish at the bottom of the rankings (see Exhibit 34).

States that have historically performed well on the social parameters continue to do well Comparison of states based on social and economic factors, March fiscal year-ends

Infant mortality rate Life expectancy rate GDP per capita (Rs) Literacy rate (%) (Deaths per 1,000) (years) 1981 1991 2001 2011 1981 1991 2001 2011 1981 1991 2001 2011 1981 1991 2001 2011 Andhra Pradesh 1,827 6,217 20,395 67,441 36 44 60 68 55 73 66 43 63 65 68 68 Bihar 1,182 3,444 7,703 19,697 32 37 47 64 75 69 62 44 58 63 67 68 Delhi 5,547 14,839 46,813 156,074 72 75 82 86 54 32 29 28 Gujarat 2,691 8,369 24,251 87,843 45 61 69 79 78 69 60 41 63 65 69 70 Haryana 3,262 10,310 30,022 103,740 37 56 68 77 52 68 69 44 66 67 70 70 Karnataka 2,017 6,248 22,208 67,184 46 56 67 76 74 77 68 35 64 67 69 69 Kerala 2,336 6,720 26,003 80,710 79 90 91 94 42 17 16 12 70 73 73 74 Madhya Pradesh 1,902 5,848 13,385 35,841 39 45 64 71 133 122 97 59 58 61 65 66 Maharashtra 3,054 9,411 27,533 92,112 57 65 77 83 74 60 49 25 65 68 70 71 Punjab 3,196 9,943 29,702 81,650 43 59 70 77 74 53 54 30 67 70 72 71 Rajasthan 1,809 6,289 16,167 49,819 30 39 60 67 87 77 83 52 59 64 69 70 Tamil Nadu 2,148 7,217 26,210 81,079 54 63 73 80 54 57 53 22 61 66 69 70 Uttar Pradesh 1,657 4,709 11,525 30,071 33 41 56 70 99 93 85 57 58 62 66 66 West Bengal 2,062 5,560 17,594 50,602 49 58 69 77 62 70 53 32 62 66 70 70

Notes: (1) Life expectancy rate for 1981, 1991, 2001 and 2011 are for 1981-85, 19991-95, 2001-05 and 2006-10.

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

Nonetheless, we have been seeing some changes of late with less-developed states delivering faster economic growth (see Exhibit 35). This is a heartening development since many less-developed states have the best demographics (young population). Many of these states ‘benefit’ from a low base but it remains to be seen if they can grow at very high rates for an extended period of time.

Bihar, Madhya Pradesh and Uttar Pradesh have seen strong growth over the past few years Average GDP growth rates in major states, March fiscal year-ends (%)

1995-1999 2000-2004 2005-2009 2010-2012 Andhra Pradesh 5.7 6.2 9.2 7.3 Bihar 4.9 4.1 9.2 10.6 Delhi 9.0 5.2 11.6 9.2 Gujarat 9.4 6.0 9.3 9.9 Haryana 5.6 6.7 9.1 9.3 Karnataka 8.1 5.1 10.1 5.4 Kerala 5.3 6.6 8.2 8.9 Madhya Pradesh 5.4 3.9 7.0 9.6 Maharashtra 3.4 5.4 8.8 8.9 Punjab 4.6 4.0 7.3 6.2 Rajasthan 9.6 5.7 6.6 9.4 Tamil Nadu 6.8 3.6 9.9 10.5 Uttar Pradesh 4.6 4.0 6.7 7.0 West Bengal 7.2 7.0 6.8 6.8

Source: CEIC, Kotak Institutional Equities

KOTAK INSTITUTIONAL EQUITIES RESEARCH 29 India Strategy

APPENDIX 1: 2009 NATIONAL ELECTIONS—THE DETAILS We present key details of the 2009 national elections for each of the 543 constituencies in terms of votes polled and vote share of major political parties. This will help to understand the winning/losing margin of major parties in each constituency and help to extrapolate the performance of parties in each constituency to the 2014 national elections based on (1) the performance of the parties in subsequent state elections, (2) local and national events and developments and (3) ground-level feedback.

The 2009 national elections—a snapshot

Exhibit 36 gives basic data for each of the 543 constituencies in the 2009 national elections—(1) number of eligible voters, (2) number of votes polled, (3) breakdown of votes and the shares for major political parties.

The INC won 112 seats with a margin of over 6% and the BJP won 59 seats with a margin of over 6% Vote share of national and regional parties across constituencies in the 2009 national elections

Andaman & Nicobar Islands INC BJP Andaman & Nicobar Islands 42 44 Andhra Pradesh INC BJP CPI (M) CPI TDP PRAP TRS AIMIM Adilabad 30 43 Amalapuram 36 26 32 Anakapalle 35 30 28 Anantapur 46 38 Araku 45 21 16 Bapatla 44 38 Bhongir 45 32 Chevella 39 37 Chittor 41 42 Eluru 39 35 21 Guntur 39 35 22 Hindpur 40 42 Hyderabad 27 42 Kadapa 53 35 Kakinada 34 27 30 Karimnagar 32 18 27 Khammam 33 45 Kurnool 44 35 Machilipatnam 38 39 18 Mahabubabad 40 33 Mahbubnagar 37 40 Malkajgiri 32 24 20 Medak 36 37 Nagarkurnool 41 37 Nalgonda 46 32 Nandyal 40 31 22 Narasaraopet 43 43 Narsapuram 39 28 27 Nellore 43 37 Nizamabad 33 19 27 Ongole 44 36 Peddapalle 35 19 29 Rajahmundry 35 35 25 Rajampet 43 31 18 Secunderabad 39 20 16 Srikakulam 42 33 20 Tirupati 40 39 16 Vijayawada 39 38 15 Visakhapatnam 36 22 30 Vizianagaram 40 34 17 Warangal 38 26 Zahirabad 39 37

Source: Election Commission of India, Kotak Institutional Equities

The INC won 112 seats with a margin of over 6% and the BJP won 60 seats with a margin of over 6%

Arunachal Pradesh INC BJP Arunachal East 54 22 Arunachal West 49 49 Assam INC BJP IND AUDF AGP BPF ASDC Autonomous District 41 21 26 Barpeta 36 24 32 Dhubri 34 52 Dibrugarh 48 43 Gauhati 44 45 Jorhat 47 38 Kaliabor 45 21 29 Karimganj 38 22 37 Kokrajhar 30 21 49 Lakhimpur 39 16 34 Mangaldoi 26 31 18 16 Nowgong 34 38 25 Silchar 29 35 29 Tezpur 38 42

Source: Election Commission of India, Kotak Institutional Equities

30 KOTAK INSTITUTIONAL EQUITIES RESEARCH Strategy India

The INC won 112 seats with a margin of over 6% and the BJP won 60 seats with a margin of over 6%

Bihar INC BJP CPI NCP RJD BSP JD (U) IND LJP CPI (ML) Araria 39 36 Arrah 38 25 21 Aurangabad 31 43 Banka 24 17 28 Begusarai 23 29 17 Bhagalpur 36 27 Buxar 21 21 20 20 Darbhanga 44 35 Gaya 44 33 Gopalganj 31 40 Hajipur 44 38 Jahanabad 36 39 Jamui 28 33 Jhanjharpur 32 44 Karakat 31 34 Katihar 37 35 Khagaria 20 21 43 Kishanganj 38 20 25 Madhepura 26 49 Madhubani 20 29 28 Maharajganj 35 35 Munger 28 58 Muzaffarpur 17 31 24 Nalanda 53 26 Nawada 22 16 Paschim Champaran 39 29 Pataliputra 39 43 Patna Sahib 57 27 Purnia 52 25 Purvi Champaran 42 25 Samastipur 16 44 27 Saran 38 47 Sasaram 32 25 18 16 Sheohar 41 16 19 Sitamarhi 21 21 40 Siwan 27 37 Supaul 21 45 Ujiarpur 27 32 Vaishali 45 42 Valmiki Nagar 46 16 Chandigarh INC BJP BSP Chandigarh 47 30 18

Source: Election Commission of India, Kotak Institutional Equities

KOTAK INSTITUTIONAL EQUITIES RESEARCH 31 India Strategy

The INC won 112 seats with a margin of over 6% and the BJP won 60 seats with a margin of over 6%

Chhattisgarh INC BJP BSP IND Bastar 26 44 Bilaspur 43 45 Durg 30 31 29 Janjgir-Champa 29 41 24 Kanker 43 46 Korba 42 39 Mahasamund 41 48 Raigarh 41 47 Raipur 41 49 Rajnandgaon 38 53 Sarguja 32 52 Dadra & Nagar Haveli INC BJP Dadra & Nagar Haveli 46 46 Daman & Diu INC BJP Daman & Diu 29 65 Goa INC BJP NCP North Goa 47 45 South Goa 47 42 Gujarat INC BJP Ahmedabad East 39 53 Ahmedabad West 41 55 Amreli 40 47 Anand 52 42 Banaskantha 45 43 Bardoli 48 41 Bharuch 38 42 Bhavnagar 33 34 Chhota Udaipur 43 46 Dahod 47 36 Gandhinagar 39 55 Jamnagar 47 43 Junagadh 45 47 Kachchh 38 51 Kheda 47 47 Mahesana 45 48 Navsari 38 56 Panchmahal 46 47 Patan 45 42 Porbandar 50 44 Rajkot 47 44 Sabarkantha 45 47 Surat 42 52 Surendranagar 42 41 Vadodara 39 57 Valsad 46 45 Source: Election Commission of India, Kotak Institutional Equities

The INC won 112 seats with a margin of over 6% and the BJP won 60 seats with a margin of over 6%

Haryana INC BJP BSP INLD HJC (BL) Ambala 37 36 22 Bhiwani-Mahendragarh 35 29 25 Faridabad 41 30 18 Gurgaon 37 17 26 16 Hisar 25 29 30 Karnal 38 23 28 Kurukshetra 45 17 32 Rohtak 70 17 Sirsa 42 39 Sonipat 48 25 16 Himachal Pradesh INC BJP Hamirpur 43 53 Kangra 46 49 Mandi 48 46 Shimla 46 50 Jammu & Kashmir INC BJP IND JKN JKPDP Anantnag 47 45 Baramulla 46 31 Jammu 45 31 Ladakh 26 73 Srinagar 52 41 Udhampur 38 36 Jharkhand INC BJP RJD BSP IND JMM JVM CPI (ML) JKP Chatra 19 23 Dhanbad 25 32 16 Dumka 31 34 Giridih 38 22 20 Godda 23 24 22 Hazaribagh 26 32 Jamshedpur 45 28 Khunti 25 41 16 Kodarma 26 19 Lohardaga 25 28 26 Palamu 22 26 Rajmahal 26 21 25 Ranchi 43 41 Singhbhum 16 29 44

Source: Election Commission of India, Kotak Institutional Equities

32 KOTAK INSTITUTIONAL EQUITIES RESEARCH Strategy India

The INC won 112 seats with a margin of over 6% and the BJP won 60 seats with a margin of over 6%

Karnataka INC BJP JD(S) Bagalkot 44 48 Bangalore Central 36 40 19 Bangalore North 39 45 Bangalore Rural 17 33 45 Bangalore South 44 48 Belgaum 35 51 Bellary 46 47 Bidar 43 38 Bijapur 41 48 Chamarajanagar 38 38 Chikkaballapur 40 35 19 Chikkodi 44 50 Chitradurga 28 44 17 Dakshina Kannada 45 49 Davanagere 46 47 Dharwad 39 56 Gulbarga 45 44 Hassan 21 21 51 Haveri 39 49 Kolar 37 35 22 Koppal 28 39 24 Mandya 35 37 Mysore 36 36 22 Raichur 42 46 Shimoga 45 51 Tumkur 20 37 34 Udupi Chikmagalur 45 48 Uttara Kannada 42 45

Source: Election Commission of India, Kotak Institutional Equities

The INC won 112 seats with a margin of over 6% and the BJP won 60 seats with a margin of over 6%

Kerala INC BJP CPI (M) CPI NCP IND MUL KEC (M) KEC Alappuzha 52 45 Alathur 44 47 Attingal 43 45 Chalakudy 50 41 Ernakulam 46 44 Idukki 52 42 Kannur 50 45 Kasaragod 38 46 Kollam 48 45 Kottayam 41 50 Kozhikode 43 43 Malappuram 40 55 Mavelikkara 49 43 Palakkad 43 43 Pathanamthitta 51 37 Ponnani 39 50 Thiruvananthapuram 44 31 Thrissur 47 44 Vadakara 49 42 Wayanad 50 31 Lakshadweep INC BJP NCP Lakshadweep 52 46

Source: Election Commission of India, Kotak Institutional Equities

KOTAK INSTITUTIONAL EQUITIES RESEARCH 33 India Strategy

The INC won 112 seats with a margin of over 6% and the BJP won 60 seats with a margin of over 6%

Madhya Pradesh INC BJP BSP SP Balaghat 34 40 Betul 37 53 Bhind 40 43 Bhopal 41 51 Chhindwara 49 35 Damoh 39 51 Dewas 48 46 Dhar 46 46 Guna 64 25 Gwalior 39 43 Hoshangabad 48 45 Indore 47 49 Jabalpur 38 54 Khajuraho 34 39 Khandwa 49 42 Khargone 42 46 Mandla 46 38 Mandsour 49 45 Morena 28 42 20 Rajgarh 49 45 Ratlam 48 39 Rewa 28 19 28 18 Sagar 34 57 Satna 30 29 20 Shahdol 42 40 Sidhi 33 40 Tikamgarh 30 38 15 Ujjain 49 47 Vidisha 79 9

Source: Election Commission of India, Kotak Institutional Equities

The INC won 112 seats with a margin of over 6% and the BJP won 60 seats with a margin of over 6%

Maharashtra INC BJP CPI (M) NCP BSP SP SS IND MNS SWP RPI BVA BBM STBP Ahmednagar 40 34 19 Akola 25 39 30 Amravati 43 34 Aurangabad 30 35 20 Baramati 21 66 Beed 52 38 Bhandara Gondiya 15 48 23 Bhiwandi 31 24 18 Buldhana 38 41 Chandrapur 30 34 19 Dhule 36 39 Dindori 41 15 36 Gadchiroli Chimur 38 35 16 Hatkanangle 39 49 Hingoli 33 42 Jalgaon 52 38 Jalna 43 44 Kalyan 35 39 19 Kolhapur 37 17 42 Latur 45 44 Madha 24 58 Maval 40 51 Mumbai North 37 36 22 Mumbai North Central 48 22 20 Mumbai North East 32 32 29 Mumbai North West 36 30 18 Mumbai South 42 23 25 Mumbai South Central 43 30 18 Nagpur 42 38 16 Nanded 45 35 Nandurbar 36 26 31 Nashik 36 24 33 Osmanabad 44 43 Palghar 22 29 30 Parbhani 37 44 Pune 38 35 Raigad 35 54 Ramtek 41 39 Ratnagiri Sindhudurg 49 43 Raver 46 42 Sangli 49 44 Satara 65 29 Shirdi 54 34 Shirur 36 58 Solapur 52 39

Source: Election Commission of India, Kotak Institutional Equities

34 KOTAK INSTITUTIONAL EQUITIES RESEARCH Strategy India

The INC won 112 seats with a margin of over 6% and the BJP won 60 seats with a margin of over 6%

Maharashtra INC BJP CPI (M) NCP BSP SP SS IND MNS SWP RPI BVA BBM STBP Thane 40 34 18 Wardha 46 33 17 Yavatmal Washim 39 46 Manipur INC BJP CPI PDA MPP Inner Manipur 40 34 17 Outer Manipur 46 30 Meghalaya INC BJP NCP UDP HPDP Shillong 48 26 20 Tura 40 45 Mizoram INC BJP IND Mizoram 66 32 Nagaland INC BJP NPF Nagaland 29 70 NCT of Delhi INC BJP Chandni Chowk 60 34 East Delhi 60 32 New Delhi 60 35 North East Delhi 59 34 North West Delhi 57 35 South Delhi 49 37 West Delhi 54 40 Odisha INC BJP CPI NCP BJD JMM Aska 27 60 Balasore 35 25 31 Bargarh 43 17 33 Berhampur 37 45 Bhadrak 39 45 Bhubaneswar 21 56 Bolangir 34 19 43 Cuttack 28 57 Dhenkanal 25 24 47 Jagatsinghpur 39 47 Jajpur 37 53 Kalahandi 41 23 25 Kandhamal 23 21 45 Kendrapara 38 51 Keonjhar 29 18 44 Koraput 28 41 Mayurbhanj 17 18 31 23 Nabarangpur 39 20 35 Puri 25 23 48 Sambalpur 38 19 36 Sundargarh 37 35

Source: Election Commission of India, Kotak Institutional Equities

The INC won 112 seats with a margin of over 6% and the BJP won 60 seats with a margin of over 6%

Pondicherry INC BJP PMK Pondicherry 49 34 Punjab INC BJP SAD Amritsar 47 48 Anandpur Sahib 45 37 Bathinda 39 51 Faridkot 43 49 Fatehgarh Sahib 47 43 Firozpur 45 47 Gurdaspur 48 47 Hoshiarpur 43 43 Jalandhar 45 41 Khadoor Sahib 46 49 Ludhiana 53 40 Patiala 51 40 Sangrur 39 34 Rajasthan INC BJP CPI (M) IND Ajmer 53 43 Alwar 59 38 Banswara 54 28 Barmer 53 38 Bharatpur 54 39 Bhilwara 55 37 Bikaner 39 43 Chittorgarh 50 41 Churu 45 47 Dausa 87 Ganganagar 52 37 Jaipur 49 47 Jaipur Rural 41 33 19 Jalore 20 34 25 Jhalawar-Baran 43 49 Jhunjhunu 51 40 Jodhpur 53 39 Karauli-Dholpur 44 38 Kota 53 41 Nagaur 55 29 Pali 54 26 Rajsamand 50 42 Sikar 45 24 22 Tonk- Sawai Madhopur 47 47 Udaipur 54 33 Sikkim INC BJP SDF Sikkim 30 63

Source: Election Commission of India, Kotak Institutional Equities

KOTAK INSTITUTIONAL EQUITIES RESEARCH 35 India Strategy

The INC won 112 seats with a margin of over 6% and the BJP won 60 seats with a margin of over 6%

Tamil Nadu INC BJP CPI (M) CPI DMK AIADMK PMK MDMK VCK DMDK KMK PT Arakkonam 49 36 Arani 47 34 Chennai Central 47 41 Chennai North 40 43 Chennai South 38 42 Chidambaram 38 49 Coimbatore 31 36 16 Cuddalore 43 40 Dharmapuri 47 30 Dindigul 44 37 Erode 31 37 Kallakurichi 43 30 15 Kancheepuram 42 40 Kanniyakumari 33 42 Karur 40 46 Krishnagiri 45 34 Madurai 37 54 Mayiladuthurai 41 46 Nagapattinam 42 48 Namakkal 44 32 Nilgiris 45 33 Perambalur 48 39 Pollachi 34 40 Ramanathapuram 17 38 29 Salem 37 42 Sivaganga 43 43 Sriperumbudur 44 41 Tenkasi 33 38 16 Thanjavur 51 38 Theni 43 42 Thoothukkudi 47 36 Tiruchirappalli 41 42 Tirunelveli 39 36 Tiruppur 28 40 Tiruvallur 40 44 Tiruvannamalai 52 34 Vellore 50 35 Viluppuram 39 38 16 Virudhunagar 40 38 16 Tripura INC BJP CPI (M) Tripura East 27 63 Tripura West 34 60

Source: Election Commission of India, Kotak Institutional Equities

The INC won 112 seats with a margin of over 6% and the BJP won 60 seats with a margin of over 6%

Uttar Pradesh INC BJP BSP SP IND RLD AIFB RSBP AD Agra 31 30 22 Akbarpur 30 21 25 18 Aligarh 24 18 28 26 Allahabad 32 38 Ambedkar Nagar 28 32 29 Amethi 72 15 Amroha 24 27 40 Aonla 31 25 30 Azamgarh 35 28 18 Badaun 26 27 32 Baghpat 29 22 39 Bahraich 31 24 24 Ballia 20 30 41 Banda 33 39 Bansgaon 34 26 17 Barabanki 44 22 22 Bareilly 31 30 26 Basti 15 35 21 Bhadohi 30 28 Bijnor 31 35 Bulandshahr 25 21 35 Chandauli 27 27 Deoria 25 31 21 Dhaurahra 52 27 Domariyaganj 31 21 21 Etah 16 26 49 Etawah 17 36 44 Faizabad 28 20 18 21 Farrukhabad 28 19 23 21 Fatehpur 17 24 32 Fatehpur Sikri 29 22 30 16 Firozabad 32 42 Gautam Buddha Nagar 16 31 33 16 Ghaziabad 32 43 22 Ghazipur 40 49 Ghosi 20 29 21 Gonda 26 22 Gorakhpur 54 24 Hamirpur 24 19 27 23 Hardoi 35 51 Hathras 33 18 38

Source: Election Commission of India, Kotak Institutional Equities

36 KOTAK INSTITUTIONAL EQUITIES RESEARCH Strategy India

The INC won 112 seats with a margin of over 6% and the BJP won 60 seats with a margin of over 6%

Uttar Pradesh INC BJP BSP SP IND RLD AIFB RSBP AD Jalaun 16 34 35 Jaunpur 19 40 29 Jhansi 29 24 15 Kairana 36 39 17 Kaiserganj 21 22 35 Kannauj 20 30 46 Kanpur 42 38 Kaushambi 35 45 Kheri 26 23 25 22 Kushi Nagar 31 22 28 Lalganj 26 32 22 Lucknow 28 35 23 Machhlishahr 20 28 31 Maharajganj 36 21 22 Mainpuri 32 56 Mathura 29 52 Meerut 32 25 25 Mirzapur 19 27 30 Misrikh 21 34 30 Mohanlalganj 26 37 21 Moradabad 40 33 19 Muzaffarnagar 37 34 Nagina 27 36 25 Phulpur 30 28 Pilibhit 16 50 Pratapgarh 26 22 19 17 Rae Bareli 72 16 Rampur 33 16 38 Robertsganj 18 28 36 Saharanpur 43 33 Salempur 25 28 21 Sambhal 19 18 30 28 Sant Kabir Nagar 23 26 21 Shahjahanpur 21 32 24 Shrawasti 33 26 18 Sitapur 17 34 31 Sultanpur 42 28 15 Unnao 53 19 16 Varanasi 31 28 19

Source: Election Commission of India, Kotak Institutional Equities

The INC won 112 seats with a margin of over 6% and the BJP won 60 seats with a margin of over 6%

Uttarakhand INC BJP BSP Almora 42 40 Garhwal 44 41 Hardwar 42 26 23 Nainital-Udhamsingh Nagar 43 31 19 Tehri Garhwal 45 36 West Bengal INC BJP CPI (M) CPI TMC IND RSP AIFB Alipurduars 21 29 41 Arambag 37 54 Asansol 49 41 Baharampur 57 37 Balurghat 44 44 Bangaon 42 51 Bankura 37 48 Barasat 51 39 Bardhaman Purba 47 42 Bardhaman-Durgapur 41 51 Barrackpur 43 49 Basirhat 40 46 Birbhum 42 48 Bishnupur 51 39 Bolpur 38 50 Coochbehar 42 45 Darjeeling 19 52 25 Diamond Harbour 39 54 Dum Dum 45 47 Ghatal 54 41 Hooghly 42 49 Howrah 44 48 Jadavpur 45 50 Jalpaiguri 37 46 Jangipur 54 41 Jaynagar 49 43 Jhargram 26 57 Kanthi 42 54 Kolkata Dakshin 35 57 Kolkata Uttar 40 53 Krishnanagar 17 35 42 Maldaha Dakshin 53 37 Maldaha Uttar 48 41 Mathurapur 42 54 Medinipur 47 43 Murshidabad 47 44 Purulia 42 44

Source: Election Commission of India, Kotak Institutional Equities

KOTAK INSTITUTIONAL EQUITIES RESEARCH 37 India Strategy

The INC won 112 seats with a margin of over 6% and the BJP won 60 seats with a margin of over 6%

West Bengal INC BJP CPI (M) CPI TMC IND RSP AIFB Raiganj 50 39 Ranaghat 41 50 Sreerampur 40 53 Tamluk 40 56 Uluberia 41 51

Source: Election Commission of India, Kotak Institutional Equities

38 KOTAK INSTITUTIONAL EQUITIES RESEARCH Strategy India

APPENDIX 2: INDIA’S REGIONAL LEADERS AND POLITICAL DYNASTIES We profile key political leaders in major states. These regional leaders will play an important role in the formation of the next government as it appears unlikely that any one political party will cross or even get close to the halfway mark (273 seats in the Lok Sabha) to form the Government. More important, there are hardly any pre-poll alliances compared with the 2009 national elections, when regional parties identified themselves with one of the two major coalitions—the UPA or NDA.

The list

We list key political leaders in major states in Exhibits 37-48.

Key political figures and families in Andhra Pradesh

Telangana Rashtra Samiti (TRS) Telugu Desam Party YSR Congress Party

N T Rama Rao Y S R Reddy K Chandrashekar Rao (Founder, former chief (Founder, former chief (Founder) minister, deceased) minister, deceased

Y S Vijayamma (wife of YSR; MLA Chandrababu Naidu from Pulivendula ) (Son-in-law of NTR; former chief minister of AP & leader of opposition currently) Jaganmohan Reddy Y S Sharmila (Son of YSR; MP from (Sister of J Reddy; Kadapa & leader of YSRCP ) active politician )

Nara Lokesh (Son of C Naidu; heads youth wing of party)

Source: Kotak Institutional Equities

Key political figures and families in Bihar

Janata Dal (United) [JD(U)] Rashtriya Janata Dal (RJD)

Lalu Prasad Yadav Nitish Kumar (Founder, former chief (Current chief minister) minister) Sadhu Yadav (brother of Rabri; Rabri Devi active politician) (wife of Lalu; current chief of the party)

Subhash Yadav (brother of Rabri; Tejaswi Yadav Misa Bharti active politician) (Son of Lalu; active (Daughter of Lalu; politician) active politician )

Source: Kotak Institutional Equities

KOTAK INSTITUTIONAL EQUITIES RESEARCH 39 India Strategy

Key political figures and families in Gujarat

Bharatiya Janata Party (BJP) Indian National Congress

Narendra Modi Shankersinh Vaghela (Current chief minister) (Former chief minister)

Source: Kotak Institutional Equities

Key political figures and families in Karnataka

Janata Dal (Secular) [JD(S)] Karnataka Janata Paksha (KJP) Bharatiya Janata Party (BJP)

H D Deve Gowda B S Yeddyurappa B Y Raghavendra (Former prime minister) (Founder, former chief minister; (Son of B S Yeddyurappa; MP breakaway from BJP) from Shimoga constituency)

HD Kumaraswamy (Son of Deve Gowda; former chief minister)

Source: Kotak Institutional Equities

Key political figures and families in Kerala

CPI (M) Indian National Congress

V S Achuthanandan Oomen Chandy (Former chief minister) (Current chief minister)

Source: Kotak Institutional Equities

40 KOTAK INSTITUTIONAL EQUITIES RESEARCH Strategy India

Key political figures and families in Madhya Pradesh

Bharatiya Janata Party (BJP) Indian National Congress

Madhavrao Scindia Digvijaya Singh Shivraj Chouhan (Former union minister, (Former chief minister; (Current chief minister) deceased) General Secretary of INC)

Yashodhara Scindia Jyotiraditya Scindia Jaivardhan Singh (MP from Gwalior; sister of (Convenor for assemply (Contestant, Raghogarh Madhavrao) elections; son of Madhavrao) seat; son of Digvijaya)

Kailash Vijaivargiya (Current state minister)

Akash Vijayvargiya (Son of Kailash; contestant from Mhow assembly seat)

Source: Kotak Institutional Equities

Key political figures and families in Maharashtra

Indian National Congress (INC) Nationalist Congress Party (NCP) Shiv Sena Maharashtra Navnirman Sena

Dajisaheb Chavan Sharad Pawar Narayan Rane Balasaheb Thackeray (Former MP and union (Founder, former chief (Current state minister) (Founder, deceased) minister, deceased) minister; current union minister)

Uddhav Thackeray Raj Thakre Nitesh Rane Prithviraj Chavan (Son of Balasaheb; current (Founder; nephew of Supriya Sule Ajit Pawar (Son of Narayan; active (Current chief minister; leader of the party) Balasaheb Thackeray) (Daughter of Sharad; (Deputy chief minister; politician) son of Dajisaheb) MP from Baramati) nephew of Sharad)

Aditya Thackeray Vilasrao Deshmukh (Son of Uddhav; leader of (Former chief minister, the youth wing) deceased)

Amit Deshmukh (Son of Vilasrao; MLA from Latur city seat)

Source: Kotak Institutional Equities

KOTAK INSTITUTIONAL EQUITIES RESEARCH 41 India Strategy

Key political figures and families in Odisha

Biju Janata Dal (BJD) Indian National Congress

Biju Patnaik Niranjan Patnaik (Former chief minister, (INC state president) deceased)

Naveen Patnaik (Son of Biju; current chief minister of Odisha)

Source: Kotak Institutional Equities

Key political figures and families in Rajasthan

Bharatiya Janata Party (BJP) Indian National Congress

Vasundhara Raje Scindia Ashok Gehlot (Former chief minister; also (Current chief minister) related to the Scindias in MP)

Dushyant Singh (Son of Vasundhara; Lok Sabha MP from Jhalawar)

Source: Kotak Institutional Equities

Key political figures and families in Tamil Nadu

Dravida Munnetra Kazhagam (DMK) All India Anna Dravida Munnetra Kazhagam (AIADMK)

Karunanidhi Jayalalitha (Former chief minister) (Current chief minister)

M K Azhagiri M K Stalin Kanimozhi (Son of Karunanidhi; former (Son of Karunanidhi; former (Daughter of Karunanidhi; union minister) state deputy chief minister) Rajya Sabha MP)

Murasoli Maran Dayanidhi Maran (Nephew of Karunanidhi; (Son of Murasoli; former former union minister) union minister)

Source: Kotak Institutional Equities

42 KOTAK INSTITUTIONAL EQUITIES RESEARCH Strategy India

Key political figures and families in Uttar Pradesh

Bahujan Samaj Party Bharatiya Janata Party (BJP) Indian National Congress (INC) Samajwadi Party

Mulayam Singh Yadav Kumari Mayawati Rajnath Singh Motilal Nehru Shivpal Singh Yadav (Former chief minister; (Former chief minister) (President of the party) (Freedom fighter) (Brother of Mulayam; former union minister) current state minister)

Pankaj Singh Akhilesh Yadav Dimple Yadav (Son of Rajnath; general Jawaharlal Nehru (Son of Mulayam; current (Wife of Akhilesh; MP from secretary of UP) (Son of Motilal; India's first chief minister of UP) Kannauj) prime minister)

Indira Gandhi (Daughter of Jawaharlal, India's longest serving prime minister)

Maneka Gandhi Rajiv Gandhi Sonia Gandhi Daughter-in-law of Indira; (Son of Indira; former prime (Wife of Rajiv; President of MP from Aonla) minister) INC & MP from Rae Bareli)

Varun Gandhi Rahul Gandhi (Son of Maneka; MP from (Son of Rajiv and Sonia; VP Pilibhit) of INC & MP from Amethi)

Source: Kotak Institutional Equities

Key political figures and families in West Bengal

Trinamool Congress Left front Indian National Congress

Pranab Mukherjee Mamata Banerjee Biman Basu (Current President of India, (Current chief minister) (Leader of CPI (M)) former union minister)

Abhijeet Mukherjee (Son of Pranab, Lok Sabha MP from Jangipur)

Source: Kotak Institutional Equities

KOTAK INSTITUTIONAL EQUITIES RESEARCH 43

BUY IDEA (IDEA)

Telecom OCTOBER 25, 2013 RESULT Coverage view: Attractive

Marginally below expectations; voice volumes disappoint. Idea’s 2QFY14 results Price (Rs): 175 were weaker than expectations – impacted by higher-than-expected seasonal decline in Target price (Rs): 195 voice volumes with flow-through impact on revenues, EBITDA and net income. Voice BSE-30: 20,725 traffic disappointment took the sheen away from an otherwise solid quarter with further uptick in voice RPM, sustained data growth momentum and sharp reduction in net debt. We stay positive even as the extent of absolute upside from current levels would depend a lot on the underlying dynamics of the sharp volume decline. BUY.

Company data and valuation summary IDEA Stock data Forecasts/Valuations 2013 2014E 2015E 52-week range (Rs) (high,low)188-81 EPS (Rs) 3.1 6.8 9.9 Market Cap. (Rs bn) 580.8 EPS growth (%) 39.8 121.0 46.7 Shareholding pattern (%) P/E (X) 57.2 25.9 17.6 Promoters 25.1 Sales (Rs bn) 224.6 269.7 308.8 FIIs 45.2 Net profits (Rs bn) 10.1 22.3 32.8 MFs 9.6 EBITDA (Rs bn) 60.0 85.5 101.8 Price performance (%) 1M 3M 12M EV/EBITDA (X) 11.9 8.0 6.4 Absolute 6.2 14.0 115.1 ROE (%) 7.4 14.6 18.4 Rel. to BSE-30 2.1 10.5 94.2 Div. Yield (%) 0.2 0.3 0.4

Voice traffic disappointment – just seasonality or more?

We shall address the elephant in the room right away; Idea’s voice traffic decline of 5.8% (to 138.8 bn mins) qoq was higher than the 3.5% decline we had estimated. Now, there could be three key underlying reasons for the sharper-than-expected qoq decline in voice volumes:

` Amplified seasonality – seasonality in voice volume trends is a known factor now; what surprised was the extent of seasonal weakness. Management attributes the sharp decline to increasing seasonality of voice traffic as proportion of rural subs in the base increases.

` Price elasticity – operators’ discount-reduction push over the past few quarters may have started having an impact on usage. This, if true, has implications for the voice RPM uptick thesis.

` Market share loss – Idea may have lost volume market share to competitors. Even this could be seasonal in nature given that Idea derives a higher proportion of business from rural subs than most other operators. It may not be seasonal and if not, would raise valid question marks on Idea’s volume market share gain story and also indirectly on voice RPM uptick sustainability.

To be honest, we do not know which of the above is the underlying reason for the sharp decline in voice volumes. Similar decline in Sep 2012 quarter turned out to be seasonality as volumes bounced back strongly in the Dec 2012 quarter. We would watch out for earnings reports from Bharti, Vodafone, and Telenor over the next three weeks to see if there is a market share issue here. If not, we would not know for sure till Idea’s 3QFY13 earnings print. Our base assumption at this point is that the sharp voice traffic decline was just amplified seasonality.

Headline results weaker than expected

Consolidated revenues of `63.2 bn (down 3.3% qoq, +19% yoy) were 1.4% lower than our estimate. Consolidated EBITDA at `19.72 bn (down 5% qoq, +39% yoy) fell 2.6% short of our estimate of `20.25 bn. EBITDA margin for the quarter was 31.2%, down 60 bps qoq, but up a solid 440 bps yoy. Consolidated net income was `4.48 bn (down 3.2% qoq, +87% yoy).

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

IDEA Telecom

Voice RPM increase, data growth encouraging; expect volumes to bounce back strongly

Idea sustained its upward voice RPM momentum with 1.8% qoq growth to 37.4 paise/min. That it has come on the back of 5% increase in 1QFY14 gives us confidence that operators now have the pricing power to take sustained RPM increases. Data continues to see strong growth driven by increasing usage – data volumes were up 27% qoq and 100% yoy, which drove 17% qoq and 93% yoy data revenue growth.

Voice traffic, as discussed above, fell 5.8% qoq to 138.8 bn minutes. Amplified volume seasonality makes sequential comparison misleading; Idea’s voice traffic has grown 10.5% yoy, faster than market growth in our view, though challenging Idea management’s confidence of growing voice volumes at a healthier mid-double-digit levels. Our channel checks suggest that volume growth has returned and Idea will likely recoup the minutes lost this quarter, setting up the Dec quarter for strong performance. However, we would wait to watch if there was any element of negative price elasticity to the current volume disappointment.

Underlying pricing improvement better than reported RPM uptick?

Interconnect costs declined 12.7% qoq. Part of it perhaps was on account of decline in SMS interconnect costs, while part of it was on account of voice volume decline. However, these two together may not explain the decline in IC costs completely, in our view. Minutes mix perhaps moved in favor of on-net outgoing and against off-net outgoing. This minutes mix shift would have had a negative impact on overall RPM given that off-net outgoing minutes have higher RPM yields than on-net. Underlying like-on-like pricing improvement was perhaps better than what showed up in reported metrics, in our assessment.

Stay positive on Idea, retain BUY

2QFY14 did disappoint a tad and questions on voice volume growth expectations are valid. However, the quarter did have ample positives in the form of a stronger RPM uptick story, sustenance of strong data revenue growth, solid cost control, and improvement in balance sheet. We shall review our earnings model post the earnings call. We see the hitherto- conservative Street estimates being raised. We stay positive on the stock and would view any correction on the back of a weak 2QFY14 voice volume growth as an opportunity to buy.

Summary of operational metrics

` Volume growth – total voice traffic for the quarter was 138.8 bn mins, down 5.8% qoq and up 10.5% yoy.

` RPM – Idea’s reported overall RPM of 44.6 paise/min (+1.9% qoq, +8.1% yoy) was marginally ahead of our expectation. Voice RPM was 37.4 paise/min (+1.8% qoq, +7.5% yoy) as expected on account of telcos consolidating gains from the discount reduction efforts undertaken in the past few quarters. Voice RPM improvement was higher than Street expectations, in our view, though in line with ours.

` Data – total data revenue (2G+3G) for the quarter was `5.41 bn (+17% qoq and +93% yoy). Strong performance was driven by a solid 27% qoq increase in data volumes (+100% yoy). Data revenues contributed 8.7% of wireless revenues for the quarter. Idea reported a total data user base of 33.6 mn, a qoq increase of 2.7 mn. Of these, about 6.3 mn are active 3G users, up from 5.5 mn in the previous quarter. Strong 11% qoq increase in data usage per subscriber (on top of a strong 9% qoq jump in data user base) points to increasing adoption of data in the market.

KOTAK INSTITUTIONAL EQUITIES RESEARCH 45 Telecom IDEA

` Non-voice, non-data segment – revenues saw a sharp 20% sequential decline along expected lines. This segment now contributes 7.4% of wireless revenues, down from 8.8% in the previous quarter. This decline was on account of – (1) lower SMS termination revenues driven by imposition of regulatory caps, (2) increased regulatory requirements for VAS subscriptions driving usage down and (3) cannibalization of SMS due to increased data adoption and usage of OTT messaging platforms.

` Per user metrics – overall ARPU declined 5.7% qoq and increased 10.8% yoy to `164/sub/month. Overall MOU was 368 min/sub/month, down 7.5% qoq but up 2.5% yoy. MOU missed estimate by 2.3% due to the weaker-than-expected volume growth this quarter. We like what we see as far as the ARPU metric is concerned. The Indian telecom consumer is willing to spend more on wireless services – on voice (MOU is up yoy despite 7.5% higher voice RPM) as well as data.

` Capex/net debt – wireless capex for the quarter was `8.8 bn, taking 1HFY14 capex to `12.1 bn. Company’s standalone FY2014E capex (excluding spectrum payouts) guidance stands at `35 bn and is on track to meet it given that capex in the second half of the year is typically higher. Consolidated net debt was down to `105.5 bn from `116 bn at the end of the previous quarter.

` Network – total 2G cell sites at end-Sep 2013 stood at 95,970, a quarterly increase of 3,762 (strong, in our view). Idea has 18,031 3G cell sites, a qoq addition of 550. Strong 2G network expansion is encouraging even as slowdown in 3G network expansion over the past two quarters is a bit surprising.

` Churn – blended churn remains sticky at 5.3%, up marginally from 5.1% in the previous quarter.

46 KOTAK INSTITUTIONAL EQUITIES RESEARCH IDEA Telecom

Exhibit 1: Idea 2QFY14 quarterly performance, Indian GAAP, March fiscal year-ends (Rs mn)

2QFY13 1QFY14 2QFY14 qoq (%) yoy (%) 2QFY14E Deviation (%) Idea Cellular (standalone) Revenues 53,481 65,355 63,170 (3.3) 18.1 EBITDA 12,615 18,436 17,430 (5.5) 38.2 EBIT 4,734 8,029 7,619 (5.1) 60.9 PAT 3,519 4,829 3,985 (17.5) 13.2 EBITDA margin (%) 23.6 28.2 27.6 EBIT margin (%) 8.9 12.3 12.1 Consolidated Revenues 53,140 65,387 63,233 (3.3) 19.0 64,115 (1.4) Standalone 53,481 65,355 63,170 (3.3) 18.1 64,082 (1.4) Indus 5,348 5,627 5,584 (0.8) 4.4 5,683 Eliminations (5,689) (5,595) (5,522) (1.3) (2.9) (5,650) Costs Interconnection costs (9,506) (10,951) (9,563) (12.7) 0.6 (10,600) License fee and spectrum charges (5,647) (7,465) (6,959) (6.8) 23.2 (7,000) Network operating costs (13,449) (15,436) (15,862) 2.8 17.9 (15,700) Employee costs (2,779) (3,073) (3,482) 13.3 25.3 (3,300) SG&A expenses (7,534) (7,699) (7,651) (0.6) 1.6 (7,264) Costs (38,915) (44,624) (43,518) (2.5) 11.8 (43,864) (0.8)

EBITDA 14,225 20,763 19,715 (5.0) 38.6 20,252 (2.6) EBITDA margin (%) 26.8 31.8 31.2 31.6 Depreciation and Amortization (8,526) (11,353) (10,795) (4.9) 26.6 (10,600) 1.8 EBIT 5,699 9,410 8,920 (5.2) 56.5 9,652 (7.6) Net interest income/(expense) (2,164) (2,211) (1,949) (2,100) (7.2) PBT 3,535 7,199 6,971 7,552 (7.7) Taxes (1,136) (2,573) (2,495) (2,568) (2.8) PAT 2,399 4,626 4,476 (3.2) 86.6 4,984 (10.2) Extraordinaries ——— — Reported net income 2,399 4,626 4,476 (3.2) 86.6 4,984 (10.2) Wireless metrics Wireless ARPU (Rs/sub/month) 148 174 164 (5.7) 10.8 167 (1.8) Wireless MOU (min/sub/month) 359 398 368 (7.5) 2.5 376 (2.3) Wireless RPM (Rs/min) 0.412 0.437 0.446 1.9 8.1 0.444 0.4 Wireless EPM (Rs/min) 0.100 0.125 0.126 0.3 25.1 0.126 (0.7) Total minutes (bn min) 125.6 147.3 138.8 (5.8) 10.5 142.2 (2.3) Wireless subscribers (mn) 115.5 125.0 127.2 1.8 10.2 126.8 0.3 Churn (%) Prepaid 10.4 5.1 5.4 Postpaid 3.0 3.6 2.8 Blended 10.1 5.1 5.3 VAS as % of revenues 15.6 16.0 16.1 No of cellsites (2G only) 85,779 92,208 95,970 No of 3G cellsites 14,467 17,481 18,031 Capex (Rs mn) 9,720 3,298 8,838

Source: Company, Kotak Institutional Equities estimates

KOTAK INSTITUTIONAL EQUITIES RESEARCH 47 Telecom IDEA

Exhibit 2: Break-up of costs: Idea Cellular (standalone)

3QFY12 4QFY12 1QFY13 2QFY13 3QFY13 4QFY13 1QFY14 2QFY14 Revenues 50,652 54,035 55,382 53,481 56,135 60,951 65,355 63,170 Costs Interconnection costs (8,457) (9,144) (9,687) (9,506) (10,183) (10,770) (10,951) (9,563) License fee and spectrum charges (5,611) (7,373) (6,017) (5,647) (5,897) (7,191) (7,465) (6,959) Network operating costs (13,538) (14,636) (15,403) (15,603) (16,096) (16,449) (17,843) (18,228) Employee costs (2,190) (2,300) (2,467) (2,519) (2,427) (2,625) (2,723) (3,105) SG&A expenses (8,870) (8,513) (8,919) (7,590) (8,359) (8,879) (7,937) (7,885) Total costs (38,666) (41,965) (42,493) (40,866) (42,962) (45,914) (46,919) (45,740) EBITDA 11,986 12,070 12,889 12,615 13,173 15,037 18,436 17,430 Costs as % of revenues Interconnection costs 16.7 16.9 17.5 17.8 18.1 17.7 16.8 15.1 License fee and spectrum charges 11.1 13.6 10.9 10.6 10.5 11.8 11.4 11.0 Network operating costs 26.7 27.1 27.8 29.2 28.7 27.0 27.3 28.9 Employee costs 4.3 4.3 4.5 4.7 4.3 4.3 4.2 4.9 SG&A expenses 17.5 15.8 16.1 14.2 14.9 14.6 12.1 12.5 Total 76.3 77.7 76.7 76.4 76.5 75.3 71.8 72.4 EBITDA margin (%) 23.7 22.3 23.3 23.6 23.5 24.7 28.2 27.6

Notes: (a) Idea's 4QFY13 margin was impacted by a regulatory one-off of Rs760 mn in "License fee and spectrum charges" item. Adjusted standalone EBITDA margin stands at 25.9% (b) Idea's 1QFY14 margin was impacted by a regulatory one-off of Rs250 mn in "License fee and spectrum charges" item. Adjusted standalone EBITDA margin stands at 28.6%

Source: Company

Exhibit 3: Per minute metrics for Idea Voice RPM increase continues, while data contribution to overall RPM sees sharp increase

Jun-11 Sep-11 Dec-11 Mar-12 Jun-12 Sep-12 Dec-12 Mar-13 Jun-13 Sep-13 Revenue per minute 0.409 0.426 0.431 0.422 0.412 0.412 0.411 0.412 0.437 0.446 Change (%) 0.9 4.1 1.2 (2.0) (2.5) 0.2 (0.2) 0.1 6.1 1.9 Voice RPM 0.360 0.370 0.372 0.362 0.352 0.348 0.351 0.349 0.367 0.374 Change (%) 0.9 2.8 0.6 (2.7) (2.7) (1.1) 1.0 (0.6) 5.1 1.8 Non-voice RPM 0.050 0.056 0.059 0.060 0.060 0.064 0.060 0.063 0.070 0.072 Change (%) 0.9 13.5 5.0 2.3 (1.1) 7.8 (6.6) 4.2 11.7 2.6 Pure data RPM 0.018 0.022 0.024 0.027 0.031 0.039 Change (%) 24.3 5.4 14.7 16.1 23.6 SMS/VAS RPM 0.042 0.042 0.037 0.036 0.039 0.033 Change (%) 0.6 (13.0) (2.5) 8.3 (14.5) Cost per minute 0.311 0.328 0.326 0.313 0.313 0.312 0.312 0.302 0.310 0.320 Change (%) (0.5) 5.3 (0.6) (3.9) 0.1 (0.4) (0.0) (3.2) 2.8 3.1 EBITDA per minute 0.098 0.098 0.105 0.109 0.098 0.100 0.100 0.110 0.127 0.126 Change (%) 5.4 0.1 7.1 3.8 (9.8) 2.0 (0.7) 10.6 15.1 (1.0)

Note: (a) EBITDA per minute for Mar 2012, Mar 2013, Jun 2013 are adjusted for the one-off provisions/charges

Source: Company, Kotak Institutional Equities

48 KOTAK INSTITUTIONAL EQUITIES RESEARCH IDEA Telecom

Exhibit 4: Strong growth in data revenues continues

1QFY13 2QFY13 3QFY13 4QFY13 1QFY14 2QFY14 Revenues (Rs mn) Wireless 53,890 51,798 54,387 59,067 64,404 61,869 Voice 46,076 43,718 46,446 50,089 54,099 51,908 Data 2,353 2,807 3,112 3,872 4,620 5,410 Others 5,461 5,274 4,828 5,106 5,685 4,551 Contribution to revenues (%) Wireless 100.0 100.0 100.0 100.0 100.0 100.0 Voice 85.5 84.4 85.4 84.8 84.0 83.9 Data 4.4 5.4 5.7 6.6 7.2 8.7 Others 10.1 10.2 8.9 8.6 8.8 7.4 Growth qoq (%) Wireless (3.9) 5.0 8.6 9.0 (3.9) Voice (5.1) 6.2 7.8 8.0 (4.1) Data 19.3 10.9 24.4 19.3 17.1 Others (3.4) (8.4) 5.8 11.3 (19.9)

Source: Company, Kotak Institutional Equities

Exhibit 5: Key data performance indicators shared by Idea

Growth (%) 2QFY13 3QFY13 4QFY13 1QFY14 2QFY14 QoQ YoY Data (2G & 3G) KPIs Subs ('000s) 18,918 21,754 26,219 30,906 33,618 8.8 77.7 ARPU (Rs/sub/month) 50 52 55 54 55 1.9 10.0 Data usage (MB/sub/month) 157 167 163 160 178 11.3 13.4 Total volumes (mn MB) 8,744 10,040 11,421 13,791 17,452 26.5 99.6 Realization per MB (paise) 32.1 31.0 33.9 33.5 31.0 (7.5) (3.4) Implied data revenue (Rs mn) 2,807 3,112 3,872 4,620 5,410 17.1 92.7 Data revenues as % of wireless rev 5.4 5.7 6.6 7.2 8.7 % of subs base with smartphones 7.0 8.0 8.7 3G KPIs 3G subs ('000s) 3,700 4,100 5,100 5,500 6,276 14.1 69.6 3G ARPU (Rs/sub/month) 87 97 105 109 116 6.4 33.3 3G data usage (MB/sub/month) 381 390 385 398 429 7.8 12.6 3G data volumes (mn MB) 4,079 4,512 5,231 6,334 7,578 19.6 85.8 Realization per MB (paise) 21.8 25.2 27.7 27.4 27.0 (1.2) 24.3 Implied 3G revenues (Rs mn) 887 1,135 1,449 1,733 2,049 18.2 130.9 3G revenues as % of data rev 31.6 36.5 37.4 37.5 37.9 2G KPIs 2G subs ('000s) 15,218 17,654 21,119 25,406 27,342 7.6 79.7 2G ARPU (Rs/sub/month) 42 40 42 41 42 2.7 1.0 2G data usage (MB/sub/month) 102 112 106 107 125 16.8 22.1 2G data volumes (mn MB) 4,665 5,528 6,190 7,457 9,874 32.4 111.7 Realization per MB (paise) 41.1 35.8 39.1 38.7 34.0 (12.1) (17.3) Implied 2G revenues (Rs mn) 1,919 1,978 2,423 2,887 3,361 16.4 75.1 2G revenues as % of data rev 68.4 63.5 62.6 62.5 62.1

Source: Company, Kotak Institutional Equities

KOTAK INSTITUTIONAL EQUITIES RESEARCH 49 Telecom IDEA

Exhibit 6: Churn remains sticky after sharp fall in 3Q-4QFY13

Blended churn (%) 12

10

8

6

4

2

0 Jun-09 Jun-10 Jun-11 Jun-12 Jun-13 Sep-09 Dec-09 Sep-10 Dec-10 Sep-11 Dec-11 Sep-12 Dec-12 Sep-13 Mar-09 Mar-10 Mar-11 Mar-12 Mar-13

Source: Company

Exhibit 7: Segmental financials for Idea (Rs mn)

Jun-11 Sep-11 Dec-11 Mar-12 Jun-12 Sep-12 Dec-12 Mar-13 Jun-13 Sep-13 Revenues Idea - Standalone 45,559 46,554 50,652 54,035 55,382 53,481 56,135 60,951 65,355 63,170 Contribution from Indus (@16%) 3,078 3,089 3,233 5,011 5,006 5,348 5,387 5,620 5,627 5,584 Eliminations (3,430) (3,443) (3,577) (5,350) (5,351) (5,689) (5,737) (5,958) (5,595) (5,522) Total 45,207 46,200 50,308 53,696 55,037 53,140 55,785 60,613 65,387 63,232 EBITDA Idea - Standalone 10,666 10,436 11,986 12,070 12,889 12,615 13,173 15,037 18,436 17,439 Contribution from Indus (@16%) 1,374 1,430 1,460 1,501 1,467 1,610 1,561 1,693 2,327 2,285 Total 12,040 11,866 13,446 13,571 14,356 14,225 14,734 16,730 20,763 19,724 EBITDA margins (%) Idea - Standalone 23.4 22.4 23.7 22.3 23.3 23.6 23.5 24.7 28.2 27.6 Indus - Derived 44.6 46.3 45.2 30.0 29.3 30.1 29.0 30.1 41.4 40.9 Total 26.6 25.7 26.7 25.3 26.1 26.8 26.4 27.6 31.8 31.2 EBIT Idea - Standalone 4,278 3,710 5,035 4,860 5,203 4,734 4,983 6,652 8,030 7,619 Contribution from Indus (@16%) 736 788 837 868 827 966 915 987 1,381 1,301 Total 5,014 4,498 5,872 5,728 6,030 5,700 5,898 7,639 9,411 8,920

Source: Company, Kotak Institutional Equities

Exhibit 8: Performance across established and new service areas (Rs mn)

Jun-11 Sep-11 Dec-11 Mar-12 Jun-12 Sep-12 Dec-12 Mar-13 Jun-13 Sep-13 Established service areas Revenues 40,746 41,579 45,144 47,784 48,814 47,064 49,309 53,272 61,965 59,853 EBITDA 12,064 12,212 13,708 13,671 14,575 14,377 14,976 16,702 19,750 18,689 EBITDA margin (%) 29.6 29.4 30.4 28.6 29.9 30.5 30.4 31.4 31.9 31.2 New service areas Revenues 4,814 4,975 5,508 6,251 6,568 6,417 6,826 7,679 3,390 3,317 EBITDA (1,397) (1,776) (1,722) (1,601) (1,687) (1,762) (1,804) (1,665) (1,314) (1,259) EBITDA margin (%) (29.0) (35.7) (31.3) (25.6) (25.7) (27.5) (26.4) (21.7) (38.8) (38.0) Note: Bihar and Mumbai circles have been reclassified as established circles from 1QFY14.

Source: Company, Kotak Institutional Equities

50 KOTAK INSTITUTIONAL EQUITIES RESEARCH IDEA Telecom

Exhibit 9: Idea's best-in-industry balance sheet continues to improve Consolidated balance sheet, 2QFY13-2QFY14 (Rs mn)

Sep-12 Dec-12 Mar-13 Jun-13 Sep-13 Assets Net fixed assets 203,537 205,162 208,947 214,320 215,021 CWIP 7,954 24,389 8,811 6,962 8,571 Intangible assets 65,910 64,887 82,592 81,198 79,741 Goodwill 61 61 61 61 61 LT loans and advances 22,835 24,096 30,468 35,167 31,907 Total long-term assets 300,297 318,595 330,879 337,708 335,301 Current assets Current investments 7,140 17,517 10,280 10,266 8,783 Inventories 912 1,060 726 811 854 Receivables 8,274 8,972 9,601 10,027 8,533 Cash and equivalents 1,920 972 1,429 11,060 20,316 ST loans and advances 15,632 16,071 10,859 7,856 8,038 Other current assets 4 5 9 119 327 Total current assets 33,882 44,597 32,904 40,139 46,851 Current assets ex-cash and investments 24,822 26,108 21,195 18,813 17,752 Current liabilities Payables 34,219 33,730 26,871 27,525 25,791 Other current liabilities 21,741 22,147 29,902 30,185 34,680 ST provisions 128 106 87 1,855 557 Total current liabilities 56,088 55,983 56,860 59,565 61,028 Net current assets (22,206) (11,386) (23,956) (19,426) (14,177) Net current assets ex-cash and investments (31,266) (29,875) (35,665) (40,752) (43,276) Total Assets 278,091 307,209 306,923 318,282 321,124 Liabilities and shareholders' equity Share capital 33,108 33,119 33,143 33,156 33,170 Reserves and surplus 101,950 107,858 111,054 118,995 123,416 Total Equity 135,058 140,977 144,197 152,151 156,586 CCPS 19 19 19 19 19 Borrowings 127,475 149,316 140,437 137,336 134,616 DTL 8,061 9,080 11,180 15,141 15,857 Other LT liabilities and provisions 7,479 7,816 11,088 13,635 14,047 Total liabilities and equity 278,092 307,208 306,921 318,282 321,125

Net debt 118,415 130,827 128,728 116,010 105,517 Net debt/equity (X) 0.88 0.93 0.89 0.76 0.67 Net debt/TTM EBITDA (X) 2.13 2.30 2.14 1.75 1.47

Source: Company

KOTAK INSTITUTIONAL EQUITIES RESEARCH 51

REDUCE UPL (UPLL)

Others OCTOBER 25, 2013 RESULT Coverage view:

Gaining out of depreciating currency. UNTP outperformed our estimates led by 27% Price (`): 155 yoy sales growth in India (on account of good monsoons) and 70% growth in North Target price (`): 145 America as delay in the season pushed sales more into 2QFY14 (1QFY14 was weak). On BSE-30: 20,725 the balance sheet front, the company repaid gross debt of `4 bn out of its cash balance (net debt adjusted for translation is flat qoq), which takes care of our earlier concern on inefficient cash management. We will monitor the trend in that area for a couple of quarters to turn positive. We have increased our estimates led by higher sales. Retain REDUCE rating with target price of `145 (`135 earlier).

Company data and valuation summary UPL Stock data Forecasts/Valuations 2013 2014E 2015E 52-week range (Rs) (high,low) 168-102 EPS (Rs) 17.5 19.8 20.8 Market Cap. (Rs bn) 68.5 EPS growth (%) 39.4 13.2 5.0 Shareholding pattern (%) P/E (X) 8.8 7.8 7.4 Promoters 25.1 Sales (Rs bn) 91.9 107.4 114.0 FIIs 45.2 Net profits (Rs bn) 7.7 8.8 9.2 MFs 9.6 EBITDA (Rs bn) 16.6 19.6 20.7 Price performance (%) 1M 3M 12M EV/EBITDA (X) 5.1 4.8 4.3 Absolute 9.7 7.6 30.3 ROE (%) 18.0 17.8 16.2 Rel. to BSE-30 5.1 2.8 17.9 Div. Yield (%) 1.6 1.6 1.6

Better sales in India and North America lead to a beat

UNTP reported 2QFY14 consolidated sales at `23.3 bn (+26%; -5% qoq), higher than estimates. The beat on sales was led by India and North America, where sales grew 26% and 70% (+50% in US Dollar terms) yoy, respectively. In India, the company has gained on account of good monsoons even as consumption in Western and Northern parts of the country was impacted as farmers applied less sprays on account of continuous rains (otherwise, sales could have been better). In North America, on account of delayed start to the season, sales shifted to 2QFY14, partially compensating for a weak 1QFY14 (sales in 1HFY14 are up 3% in Rupee terms, down 5% yoy in US Dollar terms). Sales performance in Europe has been weak in constant currency terms; 2QFY14 sales were flat (-2%) yoy in Euro terms (1HFY14 sales are up 7% yoy in Euro terms). Similarly, sales in rest of the world (ROW) were down 9% yoy in Rupee terms. The company reported 2QFY14 consolidated EBITDA at `4.25 bn (+31% yoy; -7% qoq); EBITDA margins at 18.3% were marginally higher versus our estimates. Reported PAT at `1.54 bn was impacted by one-off cost of `199 mn on account of RBI imposing a fine on the company for issuing guarantees to step-down subsidiaries (as per RBI regulations, guarantees can only be issued to direct subsidiaries).

Some improvement on the balance sheet front

The company repaid `4 bn of debt in 2QFY14 out of its cash balances. Reported gross debt number in 2QFY14 is flat qoq, as debt has increased qoq on account translation impact of Rupee depreciation. With this, the company has started moving towards addressing our concerns on inefficient management of balance sheet (read report dated June 28). However, we will observe the trend over the next few quarters to consider changing our stance on the company. On the working capital front, there has been marginal deterioration (WC days have increased by 9, qoq).

Raising estimates; retain REDUCE with a revised target price of `145 (`135 earlier)

We have raised our earning estimates led by higher sales. We retain REDUCE rating with a revised target price of `145.

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

UPL Others

Exhibit 1: Better sales in India and North America lead to a beat; depreciating Rupee also provides a tailwind to growth numbers Interim results of United Phosphorus, consolidated, March fiscal year-ends (Rs mn)

% change 2QFY14 2QFY14E 2QFY13 1QFY14 1QFY14E 1QFY13 4QFY13 1HFY14 1HFY13 Net sales 23,316 22,250 18,560 24,558 5 26 (5) 47,874 40,782 Raw materials (11,629) (9,397) (12,274) (23,902) (20,812) Employee expenses (2,331) (1,986) (2,278) (4,609) (3,999) Other expenses (5,098) (3,915) (5,440) (10,538) (8,766) EBITDA 4,259 4,005 3,261 4,566 6 31 (7) 8,825 7,205 EBITDA (excl other inc), % 18.3 18.0 17.6 18.6 18.4 17.7 Fx loss (gain) in interest (210) (300) (110) (480) —— Interest (1,002) (900) (759) (878) (2,570) (1,978) Depreciation (968) (900) (820) (863) (1,832) (1,554) Other income 282 150 262 265 88 8 6 546 537 PBT 2,360 2,055 1,834 2,609 15 29 (10) 4,969 4,210 Tax (578) (617) (457) (683) (1,260) (1,161) PAT 1,783 1,439 1,377 1,927 24 29 (7) 3,709 3,049 Income from associate/MI (38) 50 (179) 200 NM NM NM 162 178 Extraordinary items (199) — 0 (199) 0 PAT 1,546 1,489 1,198 2,127 4 29 (27) 3,673 3,227 India 6,380 4,910 7,690 30 (17) 14,070 11,130 International 17,220 13,910 17,130 24 1 34,350 30,190 North America 3,870 2,270 4,470 70 (13) 8,340 8,090 Europe 3,160 2,710 4,980 17 (37) 8,140 6,920 Latin America 7,440 5,920 4,530 26 64 11,970 9,960 Rest of the World 2,750 3,010 3,150 (9) (13) 5,900 5,220 Total 23,600 18,820 24,820 NM 25 (5) 48,420 41,320 Margins (%) EBITDA 18.3 18.0 17.6 18.6 18.4 17.7 Gross margin 50.1 49.4 50.0 50.1 49.0 Other expenditure/sales 21.9 21.1 22.2 22.0 21.5 Employee cost/sales 10.0 10.7 9.3 9.6 9.8 Growth metrics (%) Price growth 1% 5% 2% 1% 5% Volume growth 12% 4% 7% 9% 1% Exchange rate 13% 11% 2% 8% 6%

Source: Company, Kotak Institutional Equities

Exhibit 2: Trend in sales in constant currency terms, UNTP, consolidated, March fiscal year-ends Sales 3QFY12 4QFY12 1QFY13 2QFY13 3QFY13 4QFY13 1QFY14 2QFY14 North America (US$ mn) 63 93 107 41 85 115 80 62 Europe (Euro mn) 39 85 61 39 38 107 68 38 ROW (US$ mn) 60 81 41 55 67 84 56 44 Yoy growth (%) North America 27% 2% -4% -37% 35% 24% -26% 51% Europe 17% 17% -8% 15% -3% 26% 12% -2% ROW -45% -49% -60% 1% 13% 4% 38% -19%

Source: Company, Kotak Institutional Equities

KOTAK INSTITUTIONAL EQUITIES RESEARCH 53 Others UPL

Exhibit 3: Company repaid `4 bn of gross debt in 2QFY14; reported debt is flat on account of translation impact Trend in the balance sheet numbers for United Phosphorus, March fiscal year-ends (Rs mn)

3QFY12 4QFY12 1QFY13 2QFY13 3QFY13 4QFY13 1QFY14 2QFY14 Gross debt (Rs mn) 39,000 35,448 39,000 41,000 42,000 42,000 42,000 41,000 Cash (Rs mn) 14,000 9,448 10,000 11,000 8,000 17,000 15,200 13,000 Net debt 25,000 26,000 29,000 30,000 34,000 25,000 26,800 28,000 Debtor days 98 116 115 109 115 109 103 109 Inventory days 99 87 80 96 106 84 91 110 Payable days 11790929295103102118 Days of working capital 87 113 103 113 126 90 92 101

Source: Company, Kotak Institutional Equities

Exhibit 4: Reported numbers show no improvement in profitability in the Brazilian subsidiaries Trend in profitability of Brazilian subsidiaries, March fiscal year-ends (Rs mn)

1QFY13 2QFY13 3QFY13 4QFY13 1QFY14 2QFY14 Profit from associates 52 13 106 189 7 85 Advanta (50% associate) PAT for previous quarter (c) 134 143 200 117 56 317 Contribution to associate profits 67 71 100 59 28 159 Contribution from SIPCAM (50% JV) (15) (58) 6 131 (21) (73) SIPCAM PAT (Rs mn) (31) (116) 12 261 (42) (147) Minority interest (a) (305) 192 34 63 (193) 85 Implied DVA (51% sub) PAT (b)=(a)/0.49 (623) 392 70 129 (393) 174

Notes: (c) The company reports prior quarter's profit of Advanta (and SIPCAM) under profit from associates of the current quarter.

Source: Company, Kotak Institutional Equities

Other highlights

` As per the company, out of `7 bn of operating cash flow for 1HFY14, the company has used `2.9 bn for capex and `3 bn has been used in working capital.

` As per the management, LatAm business has shown an improvement (yoy) of 300- 400 bps on the margins front. However, below EBITDA costs (higher interest) and some accounting adjustments to bridge gaps (between local and global accounting requirements) have led to a depressed PAT.

` The company has maintained guidance of 12-15% growth in earnings in FY2014. Guidance for capex has been maintained at `4.5-5 bn in FY2014.

54 KOTAK INSTITUTIONAL EQUITIES RESEARCH UPL Others

Excerpts from our earlier report in which we had highlighted our concern on cash management

Cash flow management is a concern

Almost `15 bn of cash out of total reported FY2013 cash balance of `17 bn lies in current accounts, earning almost negligible yields. This is surprising given that at the same time the company is borrowing incrementally (company has borrowed `6.4 bn in FY2013 as per the cash flow statement) at ~8%. In our view, this implies that the company expects to use that cash in the ordinary course of business, mostly as working capital. Hence, in our view, sustainable cash balances and cash generation are much lower versus the reported numbers. As per the company, sustainable cash balance (FY2013 end) is closer to `7 bn (but even `7 bn is not lying in saving instruments).

In our view, reducing/stable gross debt would be a definitive sign of cash generation in the business. In that respect, gross debt of the company has been increasing since 2005 (reduction in 2008 was on account of FCCB conversion and dilution).

As highlighted earlier, we are concerned on account of sub-optimal cash-flow management practices of the company. Retain REDUCE with a target price of `145.

Note: Refer to our note dated June 28, 2013 for detailed analysis on the above issue.

Exhibit 5: Most of the cash lies in current accounts – company expects most of it to be used in the business Details of cash balances of UNTP, consolidated, March fiscal year-ends (Rs mn)

Cash and cash equivalents 2013 2012 Balances w ith banks -Current accounts 2,145 1,111 -Foreign currency accounts 7 6 -Current accounts outside India 13,039 5,078 -Unclaimed dividend 22 17 -Fixed deposits 2 3 -Fixed deposits outside India 51 713 Cheques on hand 171 40 Cash on hand 13 10 Other bank balances 32 25 Total 15,482 7,002

Source: Company, Kotak Institutional Equities

KOTAK INSTITUTIONAL EQUITIES RESEARCH 55 Others UPL

Exhibit 6: Gross debt of the company has been increasing irrespective of underlying cash flows Trend in gross debt and cash balances of UNTP, consolidated, March fiscal year-ends (Rs mn)

45,000 Gross debt Cash 42,000

35,028 36,000

27,000 23,818 24,919 19,593 20,665 17,000 18,000 15,683 15,778 15,659 12,128

7,002 9,000 6,103 5,539 4,158 4,604 5,086 336 0

2005 2006 2007 2008 2009 2010 2011 2012 2013

Source: Company, Kotak Institutional Equities

Exhibit 7: Company has been paying interest at rates of 9-11% (including forex losses); 8% excluding forex losses Trend in interest expense for UNTP (including forex losses), consolidated, March fiscal year-ends (%)

18 16.1 16 13.8 14 12.8

12 10.8 11.1 9.6 10 8.7

8 6.6 6 4 2 0

2006 2007 2008 2009 2010 2011 2012 2013

Source: Company, Kotak Institutional Equities

56 KOTAK INSTITUTIONAL EQUITIES RESEARCH UPL Others

Change in estimates

Exhibit 8: Change in estimates for UNTP, consolidated, March fiscal year-ends (Rs mn)

Old estimates New estimates Change yoy (%) 2014E 2015E 2016E 2014E 2015E 2016E 2014E 2015E 2016E Net Sales 102,149 108,391 113,930 107,383 114,043 119,920 5% 5% 5% EBITDA 18,184 19,110 19,780 19,618 20,658 21,421 8% 8% 8% PAT 8,085 8,474 9,018 8,769 9,211 9,800 8% 9% 9%

Source: Kotak Institutional Equities

Exhibit 9: Summary financials: United Phosphorus Profit model, cash flow statement and balance sheet for UNTP, consolidated, March fiscal year-ends (Rs mn)

2009 2010 2011 2012 2013 2014E 2015E 2016E Profit model (Rs mn) Sales 49,317 54,603 57,607 76,547 91,945 107,383 114,043 119,920 EBITDA 9,449 9,991 10,699 13,674 16,618 19,618 20,658 21,421 Other income 418 343 1,375 1,089 1,000 988 779 870 Interest (2,919) (1,938) (3,120) (4,146) (4,290) (4,834) (4,661) (4,316) Depreciation (1,927) (2,147) (2,138) (2,924) (3,537) (3,964) (4,313) (4,739) Extraordinardy items (368) (302) (263) (453) (389) (539) (539) (539) Profit before tax 4,653 5,947 6,553 7,240 9,402 11,269 11,924 12,697 Tax expense (269) (814) (731) (1,280) (2,032) (2,840) (3,074) (3,258) Minority interest (25) (59) (104) (54) 16 40 60 60 Income from assoc. 200 188 (142) (351) 360 300 300 300 PAT 4,559 5,262 5,576 5,556 7,746 8,769 9,211 9,800 EPS 10.3 11.9 12.6 12.6 17.5 19.8 20.8 22.1 Balance sheet (Rs mn) Equity 26,730 29,918 37,261 41,731 46,452 53,927 61,843 70,348 Total borrowings 20,665 23,818 24,919 35,028 42,033 42,033 39,033 36,033 Deferred tax liability/minority interest 345 630 475 2,442 2,212 2,172 2,112 2,052 Current liabilities and provisions 16,260 14,616 19,358 23,332 32,533 32,849 35,017 37,004 Total liabilites 63,999 68,982 82,013 102,533 123,230 130,981 138,005 145,437 Net fixed assets 15,074 15,052 15,940 13,951 15,668 13,704 11,891 10,151 Goodwill/Intangible assets 3,420 3,076 7,926 21,335 23,000 25,000 27,500 30,500 Investments 4,332 7,612 8,232 7,945 10,252 10,552 10,852 11,152 Cash 5,539 15,778 15,659 7,002 15,482 6,635 8,056 9,855 Other current assets and miscellaneous 35,635 27,465 34,256 52,300 58,828 75,090 79,706 83,780 Total assets 63,999 68,982 82,013 102,533 123,230 130,981 138,005 145,437 Free cash flow (Rs mn) Operating cash flow 7,130 6,594 8,937 10,108 12,570 11,405 12,385 13,309 Working capital changes (7,304) 4,499 (1,884) (16,115) 1,043 (15,946) (2,449) (2,086) Capital expenditure (4,140) (2,285) (6,960) (5,665) (4,457) (4,000) (5,000) (6,000) Free cash flow (4,315) 8,808 93 (11,672) 9,156 (8,540) 4,936 5,222 Ratios EBITDA margin (%) 19.2 18.3 18.6 17.9 18.1 18.3 18.1 17.9 Net debt/equity (X) 0.57 0.27 0.25 0.67 0.57 0.66 0.50 0.37 Book value (Rs/share) 60.4 67.6 84.2 94.3 105.0 121.8 139.7 158.9 ROAE (%) 18.3 18.4 13.7 12.9 16.3 16.6 15.4 14.3 ROACE (%) 18.7 16.8 17.8 14.8 13.9 14.0 13.0 12.8

Source: Kotak Institutional Equities

KOTAK INSTITUTIONAL EQUITIES RESEARCH 57

ADD NMDC (NMDC)

Metals & Mining OCTOBER 25, 2013 RESULT, CHANGE IN RECO. Coverage view: Neutral

Downgrade a notch after recent rally. Our positive view on NMDC’s business led by Price (Rs): 140 restricted iron supply (contributed by regulatory action) remains. However, the strong Target price (Rs): 155 40% increase in NMDC’s stock price in the past three months captures some of the BSE-30: 20,725 positives. We downgrade the stock a notch to ADD; stock trades at 5.1X FY2015E EBITDA. We make minor changes to our estimates and raise 12-month forward target price to `155 (`150 earlier). For 2QFY14, NMDC reported EBITDA and net income in line with our estimate. Increase in interim dividend payout to `3/share from `2/share is a material positive and gives comfort that the total dividend payout for FY2014E will be at least or higher than FY2013 amount of `7/share.

Company data and valuation summary NMDC Stock data Forecasts/Valuations 2013 2014E 2015E 52-week range (Rs) (high,low) 188-93 EPS (Rs) 16.4 15.1 15.6 Market Cap. (Rs bn) 554.9 EPS growth (%) (11.2) (7.8) 2.9 Shareholding pattern (%) P/E (X) 8.5 9.3 9.0 Promoters 80.0 Sales (Rs bn) 107.0 107.9 115.3 FIIs 4.8 Net profits (Rs bn) 65.0 59.9 61.7 MFs 2.5 EBITDA (Rs bn) 75.3 69.2 74.9 Price performance (%) 1M 3M 12M EV/EBITDA (X) 4.6 5.0 5.1 Absolute 13.0 29.5 (24.8) ROE (%) 24.4 20.9 19.9 Rel. to BSE-30 8.6 25.6 (32.1) Div. Yield (%) 5.0 5.7 5.7

2QFY14: On expected lines, a seasonally weak volume quarter but an impressive 11% yoy growth

NMDC reported an in-line EBITDA of `14.9 bn (-23% yoy, -22% qoq). Net profit of `13.2 bn (- 22% yoy, -16% qoq) was also in line with our estimate. Key highlights of 2Q are

` NMDC’s iron ore sales were 6.5 mn tons (+11% yoy, -11% qoq) and production was 6 mn tons (+12% yoy, -12% qoq). Export sales from Chhattisgarh increased 45% qoq to 0.7 mn tons. Sales during 1HFY14 increased by 8% yoy to 13.8 mn tons. While management’s guidance for FY2014 at 30-32 mn tons could be a tad aggressive, we believe volumes of 28.5-29 mn tons is achievable, still a healthy growth of 9-10%.

` Realization for 2QFY14 was `3,817/ton (-3.5% qoq), marginally higher than our estimate due to higher export volumes in Chhattisgarh. On state-wise basis, per our calculations, (1) realizations declined 9% qoq in Karnataka to `2,970/ton (Exhibit 2) due to lower e-auction prices. We had earlier highlighted that Karnataka e-auction prices declined in 2QFY14 due to low steel prices (Exhibit 3), and (2) the blended iron ore realizations in Chhattisgarh was flat at `4,250/ton due

to higher export sales. In Chhattisgarh, NMDC had cut prices for iron ore fines by 100/ton (4%) ` and for lumps by `400/ton (9%) in 2QFY14. ` EBITDA/ton declined 12% qoq to `2,301/ton due to (1) lower realizations and (2) a 14% qoq increase in costs to `1,520/ton. Sequential cost increase was mainly due to higher exports- related costs—export duty/freight costs.

Increase in dividend payout, a positive; downgrade to ADD after stock run-up

We make marginal adjustment to our estimate and increase target price to `155 from `150. We downgrade NMDC to ADD from BUY after the recent run-up in stock prices. Stock trades at 5.1X FY2015E EBITDA and 9X FY2015E earnings, not as attractive any more. An extremely positive view from the current levels requires conviction on smart allocation of capital by the company. Management track is mixed for now—diversification into steel plants and power plant is a negative while increase in dividend payout has been a positive.

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

NMDC Metals & Mining

Investment in steel plant will increase significantly in FY2015E

NMDC’s investment in steel plant will increase significantly in FY2015E with advanced stages of project erection. The company has budgeted `155 bn (70% of current cash reserves) in the steel plant; management also expects 10%-20% cost escalations. Given limited experience in executing projects in downstream steelmaking, timely execution is critical to control project costs and ensure reasonable project returns.

NMDC has already invested `19 bn by FY2013-end of the proposed `155 bn in Jagdalpur Steel plant. The company has budgeted capex of `18.8 bn in FY2014E for the steel plant. All major technological packages have been ordered and civil and structural works have commenced. Other points

` Cash reserves increased by `15 bn in 1HFY14 to `225 bn (`57/share) as of Sep 2013-end.

` Export sales increased in 1HFY14 to 1.2 mn tons from 0.4 mn tons in 1HFY13. Company has contracted 2.8 mn tons of iron ore sales for FY2014E. As per management, 11% qoq depreciation in INR:USD rate aided export profit in 2QFY14—but still lower than domestic sales due to high export duty/freight costs.

Exhibit 1: Interim results of NMDC, March fiscal year-ends (Rs mn)

(% chg.) 2QFY14 2QFY14E 2QFY13 1QFY14 2QFY14E 2QFY13 1QFY14 1HFY14 1HFY13 (% chg.) Net revenues 24,799 24,163 26,120 28,706 2.6 (5.1) (13.6) 53,505 54,523 (1.9) Change in stock/Raw material 567 40 (425) 282 ---849 (470) (280.8) Stores and spares 615 624 398 618 (1.4) 54.6 (0.4) 1,233 935 31.9 Employee costs 1,447 1,498 1,440 1,483 (3.4) 0.5 (2.5) 2,930 2,793 4.9 Royalty and cess 1,824 1,981 2,211 2,236 (7.9) (17.5) (18.4) 4,060 4,442 (8.6) SGA 3,664 3,247 2,127 2,911 12.9 - 25.9 6,575 2,488 164.3 Other expenses (incl. miscellaneous ex 1,745 1,898 1,020 2,125 (8.1) 71.1 (17.9) 3,870 1,967 96.8 Total expenditure 9,863 9,288 6,771 9,654 6.2 45.7 2.2 19,518 12,154 60.6 EBITDA 14,936 14,875 19,349 19,052 0.4 (22.8) (21.6) 33,988 42,369 (19.8) Depreciation 348 367 332 364 (5.2) 4.9 (4.3) 711 660 7.8 EBIT 14,588 14,508 19,017 18,688 0.6 (23.3) (21.9) 33,277 41,709 Other income 5,384 5,365 5,831 5,209 0.3 (7.7) 3.4 10,593 11,352 (6.7) Profit before taxes 19,972 19,874 24,848 23,897 0.5 (19.6) (16.4) 43,869 53,062 (17.3) Current taxes 6,788 6,558 8,062 8,176 3.5 (15.8) (17.0) 14,964 17,215 (13.1) Net income 13,184 13,315 16,786 15,722 (1.0) (21.5) (16.1) 28,906 35,846 (19.4) Adjusted net income 13,184 13,315 16,786 15,722 (1.0) (21.5) (16.1) 28,906 35,846 (19.4)

Ratios EBITDA margin (%) 60.2 61.6 74.1 66.4 - - - 63.5 77.7 - ETR (%) 34.0 33.0 32.4 34.2 - - - 34.1 32.4 - EPS (Rs) 3.3 3.4 4.2 4.0 (1.0) (21.5) (16.1) 7.3 9.0 (19.4) Volume details (mn tons) Iron ore production 6.0 6.5 5.4 6.9 (7.2) 12.3 (12.1) 12.9 12.2 5.3 Iron ore sales 6.5 6.5 5.9 7.3 (0.2) 10.6 (10.6) 13.8 12.7 8.1 Export sales 0.7 0.5 0.4 0.5 42.4 89.9 44.7 1.2 0.4 221.1 Realization/Cost (Rs/ton) Iron ore - blended 3,821 3,717 4,450 3,954 2.8 (14.1) (3.4) 3,891 4,286 (9.2) Cost 1,520 1,429 1,153 1,330 6.4 31.8 14.3 1,419 956 48.6 EBITDA/ton 2,301 2,289 3,296 2,624 0.6 (30.2) (12.3) 2,472 3,331 (25.8)

Source: Company, Kotak Institutional Equities

KOTAK INSTITUTIONAL EQUITIES RESEARCH 59 Metals & Mining NMDC

Exhibit 2: NMDC's Karnataka realizations declined 9% qoq, Chhattisgarh blended realizations were flat only due to higher export sales of 0.7 mn tons Computation of NMDC’s Karnataka and Chhattisgarh realizations, March fiscal year ends, 2013-14

1QFY14 2QFY14 qoq (%) Karnataka SPV costs (Rs mn) (A) 660 591 (10.5) Karnataka Revenues (Rs mn) (A/10% x 1.1) 7,260 6,498 (10.5) Chhattisgarh Revenues (Rs mn) 21,431 18,283 (14.7) Total Revenues (Rs mn ) 28,691 24,781 (13.6) Sales volumes (mn tons) Karnataka 2.2 2.2 (1.8) Chhattisgarh 5.0 4.3 (14.5) Total 7.3 6.5 (10.6) Realization (Rs/ton) Karnataka 3,256 2,967 (8.9) Chhattisgarh 4,261 4,252 (0.2) Blended 3,954 3,817 (3.5)

Source: Company, Kotak Institutional Equities estimates

Exhibit 3: NMDC's Karnataka realizations declined qoq in 2QFY14 by 9% for fines and 7% for lumps, while 2QFY14 auction volumes increased 9% qoq, blended price declined 8% qoq NMDC’s Karnataka e-auction sales, prices on ex-royalty basis, March fiscal year-ends, 2013-14

Fines Lumps Total Blended Fe grade Quantity Prices Fe grade Quantity Price Quantity Lumps as price (%) tons Rs/ton (%) tons Rs/ton tons % Rs/ton Apr-13 61.1 356,000 2,547 62.9 272,000 3,886 628,000 43 3,127 May-13 61.0 560,000 2,236 62.5 324,000 3,950 884,000 37 2,864 Jun-13 60.5 496,000 2,524 63.1 288,000 3,990 784,000 37 3,063 1QFY14 60.9 1,412,000 2,416 62.8 884,000 3,943 2,296,000 39 3,004 Jul-13 60.4 556,000 2,038 62.3 136,000 3,826 692,000 20 2,389 Aug-13 60.7 524,000 2,172 62.6 324,000 3,656 848,000 38 2,739 Sep-13 60.4 476,000 2,452 62.9 476,000 3,627 952,000 50 3,040 2QFY14 60.5 1,556,000 2,210 62.7 936,000 3,666 2,492,000 38 2,757 qoq 10% -9% 6% -7% 9% -8% Note: (1) Difference between NMDC’s realization as per Exhibit 3 and Karnataka e-auction data is mainly due to 10% royalty. NMDC’s realization includes 10% royalty collected from customers.

Source: Department of Mines and Geology Karnataka, Kotak Institutional Equities

60 KOTAK INSTITUTIONAL EQUITIES RESEARCH NMDC Metals & Mining

Exhibit 4: NMDC, changes in estimates, March fiscal year-ends, 2014E-16E

Revised Estimate Previous Estimate Change (%) 2014E 2015E 2016E 2014E 2015E 2016E 2014E 2015E 2016E Price (Rs/ton) Domestic lumps (blended) 4,592 4,131 3,679 4476 4016 3549 2.6 2.8 3.7 Domestic fines 2,843 2,871 2,740 2763 2795 2740 2.9 2.7 0.0 Blended 3,717 3,656 3,359 3624 3574 3308 2.5 2.3 1.5 Export 6,711 6,300 5,890 6626 6275 5890 1.3 0.4 0.0 Iron-ore volumes (mn tons) Chhattisgarh 20.0 22.0 25.5 20.0 22.0 25.5 0.0 0.0 0.0 Karnataka 8.5 9.0 9.5 8.5 9.0 9.5 0.0 0.0 0.0 Total 28.5 31.0 35.0 28.5 31.0 35.0 0.0 0.0 0.0 Sales (tons) Lumps 9.1 9.7 11.1 9.1 9.7 11.1 0.0 0.0 0.0 Fines 17.1 18.0 20.6 17.1 18.0 20.6 0.0 0.0 0.0 Pellets 0.0 1.0 1.0 0.0 1.0 1.0 — 0.0 0.0 Exports 2.3 2.3 2.3 2.3 2.3 2.3 0.0 0.0 0.0 Earnings estimates (Rs mn) Revenues 107,854 115,300 119,591 105,226 112,766 117,799 2.5 2.2 1.5 EBITDA 69,212 74,886 76,568 66,827 72,680 75,024 3.6 3.0 2.1 PAT 59,910 61,671 60,612 58,396 60,483 60,107 2.6 2.0 0.8 EPS (Rs) 15.1 15.6 15.3 14.7 15.3 15.2 2.6 2.0 0.8

Re/US$ rate 61.0 63.0 62.0 60.2 62.8 62.0 1.3 0.4 0.0

Source: Kotak Institutional Equities estimates

Exhibit 5: Key assumptions, March fiscal year-ends, 2011-16E

2011 2012 2013 2014E 2015E 2016E Iron-ore realization (US$/ton) Domestic lumps 106 107 105 75 66 59 Domestic fines 786656474644 Blended 948574615854 Export 131 148 110 110 100 95 Iron-ore realization (Rs/ton) Domestic lumps (including royalty) 4,819 5,112 5,732 4,592 4,131 3,679 Domestic fines (Including royalty) 3,562 3,185 3,046 2,843 2,871 2,740 Blended (Including royalty) 4,289 4,091 4,019 3,717 3,656 3,359 Export 5,975 7,089 5,975 6,711 6,300 5,890 Iron-ore volumes (mn tons) Chhattisgarh 21.0 21.7 18.3 20.0 22.0 25.5 Karnataka 5.3 5.6 8.0 8.5 9.0 9.5 Total 26.3 27.3 26.3 28.5 31.0 35.0 Lumps 10 10 7 9 10 11 Fines 16 17 19 19 21 24 Lumps (%) 39 36 27 32 31 32 Domestic (%) 90 99 94 92 93 93 Cost per ton of ore (Rs/ton) Chhattisgarh - domestic 891 821 852 854 861 843 Karnataka (including SPV) - domestic 891 821 1,164 1,165 1,205 1,161 Exports 3,411 3,355 5,615 5,617 5,501 5,360 EBITDA/ton (Rs) 3,254 3,235 2,811 2,361 2,352 2,130 EBITDA/ton (US$) 71 68 52 39 37 34

Source: Company, Kotak Institutional Equities estimates

KOTAK INSTITUTIONAL EQUITIES RESEARCH 61 Metals & Mining NMDC

Exhibit 6: NMDC, valuation details, 1-year forward basis

Value per EBITDA EV/EBITDA EV share (Rs mn) (X) (Rs mn) (Rs) EBITDA 69,212 5.5 380,667 96 Net debt (dividend adjusted) (234,845) (59) Market capitalization 615,513 155 Target price (Rs) 155

Source: Kotak Institutional Equities estimates

Exhibit 7: NMDC, financial summary, March fiscal year-ends, 2011-16E (Rs mn)

2011 2012 2013 2014E 2015E 2016E Profit model (Rs mn) Net sales 113,689 112,619 107,043 107,854 115,300 119,591 EBITDA 86,462 89,259 75,322 69,212 74,886 76,568 Other income 12,057 20,165 22,389 20,289 17,521 14,702 Depreciaton (1,215) (1,302) (1,385) (1,398) (1,715) (2,135) Interest - (15) (132) — — — Profit before tax 97,304 108,108 96,194 88,104 90,692 89,135 Extra-ordinary items (32) (513) (1,543) — — — Taxes (32,280) (34,941) (31,228) (28,193) (29,022) (28,523) Net profit 64,992 72,654 63,424 59,910 61,671 60,612 Earnings per share (Rs) 16.4 18.5 16.4 15.1 15.6 15.3 Balance sheet (Rs mn) Equity 192,145 244,064 275,110 298,069 322,789 346,450 Deferred tax liability 1,029 1,001 1,045 1,045 1,045 1,045 Current liabilities 17,807 21,420 32,788 32,804 32,919 32,987 Total liabilities 210,981 266,484 308,943 331,918 356,753 380,482 Net fixed assets 17,764 26,830 45,008 70,809 131,426 180,649 Investments 1,357 2,478 2,497 2,496 2,496 2,496 Cash 172,281 202,646 210,258 208,361 171,776 145,483 Other current assets 19,435 34,465 51,128 50,198 51,001 51,799 Miscellaneous expenditure 145 66 54 54 54 54 Total assets 210,981 266,484 308,943 331,918 356,753 380,482 Free cash flow (Rs mn) Operating cash flow excl. working capital 53,865 54,854 33,050 41,403 46,255 48,443 Working capital changes (5,249) (8,908) (2,312) 942 (692) (733) Capital expenditure (5,163) (15,088) (19,797) (27,200) (62,332) (51,359) Free cash flow 43,453 30,857 10,942 15,145 (16,769) (3,649) Ratios Net debt/equity (X) (0.9) (0.8) (0.8) (0.7) (0.5) (0.4) RoAE (%) 38.9 33.3 24.4 20.9 19.9 18.1 RoACE (%) 38.9 33.3 24.5 20.9 19.9 18.1

Source: Company, Kotak Institutional Equities estimates

62 KOTAK INSTITUTIONAL EQUITIES RESEARCH

CAUTIOUS Banks/Financial Institutions

India OCTOBER 25, 2013 UPDATE

BSE-30: 20,725

Dilute and dilution. The Government of India (GoI) has indicated that it is likely to infuse US$2.3 bn across 20 banks, which is likely to improve tier-1 ratio by 30 bps. While capital infusion is likely to happen at a premium to current price, it would still be at significant discount to reported book, with select banks likely to dilute 20-30% of current market capitalization. We maintain our negative outlook on public banks given the slow business growth, weak operating leverage, elevated credit costs and book value dilution.

US$2.3 bn of capital infusion across banks; select infusion would be 20-30% of current market cap

As per unauthenticated media reports, GoI has a framework of US$2.3 bn capital infusion for QUICK NUMBERS FY2014 across public banks (see Exhibit 1). GoI has continued to distribute capital across most banks rather than investing it selectively. We are disappointed that banks with high tier-1 ratio like • 20 banks likely to BoB, Canara Bank and PNB are likely to accept capital, especially at these multiples. Equity infusion benefit from US$2.3 for 13 of the 20 banks, including SBI, would be negligible as the increase in net worth is <5%. bn of capital Tier-1 ratio to improve ~30 bps; 6-7 banks to see their tier-1 ratio improving by 70-100 bps infusion in FY2014

We expect tier-1 ratio to improve 30 bps post the equity infusion (see Exhibit 4) though the large • 10-20% dilution in benefit would be to 6-7 banks. Bank of Maharashtra (BoMH), Central Bank (CBoI), Dena Bank and book value/share United Bank would see their tier-1 ratio improving by 100 bps while IDBI and IOB would see an for select banks improvement of 70 bps. Most of the other banks would see a marginal increase of 10-25 bps. • US$14 bn required Dilution of book value >10% in select banks despite infusion above current price post the current Capital infusion would be a book value-dilutive exercise for most banks even as they are infused at infusion a significant premium to current market price (see Exhibit 3). We expect book value to decline 1-20% across banks with IOB, Dena, United, CBoI and IDBI like to see >10% dilution (see Exhibit 2). Note that dilution, if any, over the next few weeks would imply capital infusion at 0-35% above current market price as prices for most public banks declined 15-50% in recent months.

A long way to go as Indian banks would need US$14 bn of capital over the next few years

Indian banks, primarily public banks, would need ~US$14 bn (see Exhibit 5) over FY2015-18E as they transition to Basel-3 requirements, and have sufficient cushion for growth. However, this capital infusion by GoI and its impact on book-value dilution can be avoided if banks stop/lower dividend (25-30 bps of tier-1 ratio is declared as dividend every year) for the next few years. GoI has been receiving back ~60-80% of capital infused as dividend (see Exhibit 7). A few banks would find it very challenging to raise capital from GoI in the next round as ownership (see Exhibit 8) is closer to 90%: CBoI and United Bank (89% each), BoMH (85%), Punjab and Sind Bank (81%). These banks might need to lower their growth expectations if they are unable to access capital markets for their future requirements.

Multiple headwinds face public banks; maintain our negative outlook

Public banks face multiple headwinds that is driving our negative outlook—(1) revenue growth is likely to be under pressure on the back of slow growth (skewed balance sheet to corporate segment) and spread compression on loans, (2) low operating leverage due to the new wage- settlement cycle and consequent impact on retirement costs, (3) elevated credit costs likely to sustain in the medium term and (4) book value growth will be slow/negative as capital dilution is likely to continue at a significant discount to book value.

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

India Banks/Financial Institutions

US$2.3 bn capital infusion across 20 banks; significant dilution of book value

Media reports indicate that GoI is likely to infuse capital of US$2.3 bn (see Exhibit 1) over the next few months across 20 banks. However, these banks would receive capital at current distressed multiples, which would imply significant dilution of book value in select banks (see Exhibit 2). BoMH, CBoI and Dena would see their net worth increasing by >10% post the current infusion, but this would imply ~20-30% of the current market capitalization assuming that the infusion is likely to happen at a significant premium to the current market price. We note that the dilution is likely to happen at a significant premium to the current market price as correction has been 10-50% in many banks (see Exhibit 3).

We are quite disappointed that the GoI has looked to infuse capital across 20 banks as nearly 13 of the 20 banks are unlikely to benefit materially because the infusion would be <5% of their FY2013 net worth. Given the negative impact of infusion, we would have hoped that the larger/well-capitalized banks like BoB and PNB could have delayed their capital-raising program by a year.

Overall tier-1 ratio would improve by ~30 bps post the capital infusion (see Exhibit 4). However, the benefits would be skewed to 5-6 banks, which are likely to see higher dilution as compared to their current net worth. BoMH, CBoI and Dena Bank would see their tier-1 ratio improving by 100 bps while IDBI and IOB would see their tier-1 ratio improving by 70 bps. Most of the other public banks would see their tier-1 ratio improving by 10-25 bps. Note that these are indicative numbers based on the last available data on their capital structure and only few banks have reported their capital structure under Basel-3.

Exhibit 1: Select banks would see capital infusion that is ~30-55% of their current market cap Capital infusion across public banks, March fiscal year-end, 2014

Amount Market cap % of market cap Net worth % of net worth Bank (Rs bn) (Rs bn) (%) (Rs bn) (%) Allahabad Bank 4 42 9.5 114 3.5 Andhra Bank 2 31 6.5 84 2.4 Bank of Baroda 6 252 2.2 320 1.7 Bank of India 10 111 9.0 239 4.2 Bank of Maharashtra 8 27 29.7 58 13.8 Canara Bank 5 104 4.8 249 2.0 Central Bank of India 18 57 31.5 137 13.1 Corporation Bank 5 42 10.8 96 4.7 Dena 7 18 38.4 58 12.1 IDBI 18 91 19.8 212 8.5 IOB 12 46 26.2 135 8.9 OBC 2 47 3.2 128 1.2 PSB 1 11 9.0 44 2.3 PNB 5 175 2.9 327 1.5 SBI 20 1,175 1.7 989 2.0 Syndicate 2 46 4.3 105 1.9 UCO 2 51 3.9 79 2.5 Union Bank 5 73 6.8 172 2.9 United Bank 7 12 56.6 51 13.8 Vijaya Bank 3 20 12.6 44 5.7 140 2,431 5.8 3,639 3.8

Notes: (a) Net worth has been taken as FY2013.

Source: Company, Kotak Institutional Equities

64 KOTAK INSTITUTIONAL EQUITIES RESEARCH Banks/Financial Institutions India

Exhibit 2: Select banks would see book-value dilution exceeding 10-20% Impact on book value, EPS and valuation pre and post dilution, March fiscal year-ends, 2014-15

Pre-dilution (Rs) Post-dilution (Rs) Pre-dilution (X) Post-dilution (X) Book value EPS Book value EPS PBR PER PBR PER 2014 2015 2014 2015 2014 2015 2014 2015 2014 2015 2014 2015 2014 2015 2014 2015 ALBK 231 253 30 31 221 241 28 29 0.4 0.3 2.8 2.7 0.4 0.3 3.0 2.9 Andhra 163 179 17 21 159 174 16 20 0.3 0.3 3.3 2.6 0.3 0.3 3.4 2.7 BoB 798 878 85 105 794 873 83 103 0.7 0.7 7.0 5.7 0.8 0.7 7.2 5.8 BoI 418 460 47 57 404 444 44 54 0.4 0.4 4.0 3.3 0.5 0.4 4.2 3.5 BoMH 82 98 15 21 75 88 12 17 0.5 0.4 2.8 2.0 0.5 0.5 3.5 2.4 Canara 540 595 39 69 532 585 37 67 0.4 0.4 6.1 3.4 0.4 0.4 6.3 3.5 Corporation 687 765 81 105 653 726 75 96 0.4 0.4 3.3 2.6 0.4 0.4 3.6 2.8 CBOI 120 129 10 13 107 115 8 11 0.5 0.4 5.7 4.1 0.5 0.5 6.9 4.9 Dena 154 170 18 21 133 146 14 17 0.3 0.3 2.8 2.3 0.4 0.3 3.5 2.9 IDBI 171 200 35 40 153 178 15 29 0.4 0.3 2.0 1.7 0.4 0.4 4.7 2.4 IOB 163 163 17 20 127 127 14 17 0.3 0.3 3.0 2.4 0.4 0.4 3.6 3.0 OBC 431 470 31 50 425 463 31 49 0.4 0.3 5.2 3.2 0.4 0.3 5.3 3.3 PSB 166 194 27 37 158 184 25 34 0.3 0.2 1.6 1.2 0.3 0.2 1.8 1.3 PNB 971 1,078 114 140 963 1,068 112 137 0.5 0.5 4.3 3.5 0.5 0.5 4.4 3.6 SBI 1,568 1,721 173 206 1,572 1,724 171 205 1.1 1.0 9.9 8.3 1.1 1.0 10.0 8.4 Syndicate 177 196 24 27 174 193 24 26 0.4 0.4 3.2 2.9 0.4 0.4 3.2 2.9 UCO 110 127 29 36 109 125 28 35 0.6 0.5 2.3 1.9 0.6 0.5 2.4 1.9 Union 287 314 30 36 281 307 28 35 0.4 0.4 4.1 3.4 0.4 0.4 4.3 3.5 United 133 148 18 20 96 106 11 13 0.2 0.2 1.8 1.7 0.3 0.3 2.9 2.6 Vijaya 92 101 12 12 87 95 11 11 0.4 0.4 3.2 3.3 0.5 0.4 3.6 3.6 Notes: (a) Allahabad Bank, BoMH, CBoI, Dena, IDBI, IOB, PSB, Syndicate Bank, UCO Bank, United Bank and Vijaya Bank are not under coverage. Forward estimates have been forecasted on a best-effort basis.

Source: Company, Kotak Institutional Equities

Exhibit 3: Equity infusion is likely to be at 5-35% above current market price Premium to current market price for capital infusion in banks (%)

40

30

20

10

-

(10) SBI BoI IOB IDBI BoB PSB PNB OBC UCO CBOI ALBK Dena Union Vijaya BoMH United CRPBK Canara Andhra

Syndicate

Source: Bloomberg, Kotak Institutional Equities

KOTAK INSTITUTIONAL EQUITIES RESEARCH 65 India Banks/Financial Institutions

Exhibit 4: Overall tier-1 ratio would improve by ~35 bps post the dilution Increase in tier-1 ratio across banks, March fiscal year-end, 2QFY14 (%)

Pre-dilution Post-dilution Increase Allahabad Bank 8.0 8.3 0.3 Andhra Bank 8.4 8.6 0.2 Bank of Baroda 9.7 9.9 0.2 Bank of India 8.0 8.3 0.3 Bank of Maharashtra 7.1 8.2 1.0 Canara Bank 9.1 9.3 0.2 Central Bank of India 8.1 9.2 1.0 Corporation Bank 8.2 8.5 0.4 Dena 7.0 8.0 1.0 IDBI 7.8 8.4 0.7 IOB 7.1 7.9 0.7 OBC 8.7 8.7 0.1 PSB 8.4 8.6 0.2 PNB 9.6 9.7 0.2 SBI 8.8 9.0 0.2 Syndicate 8.5 8.6 0.2 UCO 8.8 9.0 0.2 Union Bank 8.1 8.4 0.2 United Bank 8.0 9.1 1.1 Vijaya Bank 8.5 9.0 0.4

Notes: (a) Dena Bank, IDBI, IOB and OBC, SBI numbers are as per Basel-3 norms. (b) CBoI, Vijaya numbers as of FY2013. (c) Consolidated numbers for IDBI Bank.

Source: Company, Kotak Institutional Equities

Banks would need US$14 bn of capital over the next few years

As per our estimates, public banks would need a further infusion of US$14 bn to maintain a tier-1 ratio of 9% till FY2018E, factoring the moderate growth rates, subdued ROEs, high dividend payout ratios and US$2.3 bn of capital infusion announced by GoI for FY2014. Among public banks, BOB and Canara are adequately capitalized and do not need any further capital infusion. We are surprised by GoI’s decision to infuse `5-6 bn in each of these banks. SBI (consolidated basis) alone would need up to 18% of this total capital, followed by IDBI (12%) and Union Bank (10%).

Over the past three years, GoI/LIC has infused `740 bn in public banks (see Exhibit 6) and has committed for further equity infusion in these banks, when required. GoI has been committed to infusing capital in public banks though we would have been comfortable if banks had lower their dividend payout, as the GoI is the eventual beneficiary. FY2012-13 saw banks paying ~60-80% of the capital received back to GoI as dividends. A holiday in dividend payment for the next few years would help banks as they would not need to dilute their book value at a significant discount. We note that dividends paid each year would be ~25-30 bps of tier-1 capital.

66 KOTAK INSTITUTIONAL EQUITIES RESEARCH Banks/Financial Institutions India

Exhibit 5: US$14 bn needed post the current capital infusion in Indian banks Capital required across banks, March fiscal year-ends, 2014-18E

Assumptions Capital required (Rs bn) Asset RWA growth growth (CAGR (CAGR Target Tier- Total 2012- 2012- ROE (2012- 1 capital 2014- 18E%) 18E%) 18E %) (%) 2014E 2015E 2016E 2017E 2018E 18E Public Banks Allahabad 14.0 14.0 16.0 9.0 4.0 18.1 5.7 4.7 5.1 37.5 Andhra 15.0 15.0 15.0 9.4 2.0 20.8 6.8 5.7 6.3 41.6 BoB 14.0 14.0 17.0 9.0 5.5 — — — — 5.5 BoI 14.0 14.0 16.0 9.0 10.0 37.5 11.8 9.3 9.8 78.4 BoMH 14.0 14.5 13.0 9.0 8.0 7.1 4.1 4.1 4.6 27.9 Canara 12.0 14.0 16.0 9.0 5.0 — — — — 5.0 CBoI 14.0 14.5 12.0 9.0 18.0 22.1 13.9 14.8 16.7 85.5 Corporation 14.0 14.0 15.0 9.0 5.0 2.1 2.1 3.6 4.1 17.0 Dena 15.0 15.0 17.0 9.0 7.0 9.9 2.4 1.6 1.7 22.5 IDBI 14.0 14.0 13.0 9.0 18.0 46.4 17.8 16.8 18.7 117.8 IOB 16.0 16.5 15.0 9.0 18.0 23.4 12.7 13.1 15.0 82.2 OBC 14.0 14.0 14.0 9.0 2.0 13.5 6.6 6.5 7.2 35.8 PNB 14.0 15.0 16.0 9.0 5.0 — 1.1 11.0 13.7 30.8 Punjab & Sind 14.0 15.0 14.0 9.0 1.0 6.9 3.1 3.1 3.4 17.5 SBI 14.0 14.0 16.0 9.0 20.0 43.9 36.7 39.4 43.8 183.9 Syndicate 14.0 14.5 16.0 9.0 2.0 5.2 4.3 4.6 5.0 21.1 UCO 14.0 14.5 13.5 9.0 2.0 15.3 11.4 12.4 13.9 55.0 Union 15.0 15.0 15.0 9.0 5.0 56.9 15.3 11.4 12.2 100.9 United 15.0 14.0 15.0 9.0 7.0 2.3 2.7 2.9 3.2 18.1 Vijaya 17.0 16.0 14.0 9.0 3.0 9.3 5.9 6.2 6.8 31.2 Private Banks 148 340 165 171 191 1,015 Axis 17.0 17.0 17.0 9.0 —————— HDFC Bank 19.0 19.0 18.0 9.0 —————— ICICI 14.0 13.0 14.0 9.0 —————— IndusInd 20.0 21.0 18.0 9.0 —————— Yes 20.0 21.0 19.0 9.0 11.2 3.5 5.9 7.3 8.7 36.6 Total 159 344 171 178 200 1,051

Source: Company, Kotak Institutional Equities

KOTAK INSTITUTIONAL EQUITIES RESEARCH 67 India Banks/Financial Institutions

Exhibit 6: PSU banks have witnessed capital infusion of `740 bn in the past 7 years Capital infusion by GoI and LIC, March fiscal year-ends, 2008-14 (` bn)

GoI LIC 250

200 79

150

100 157 141 140 125 50 100

- --

2008 2009 2010 2011 2012 2013 2014

Source: Company, Kotak Institutional Equities

Exhibit 7: 60-80% of capital infused is repaid through dividend Dividends declared and capital infusion by GoI, March fiscal year-ends, 2011-13 (` bn)

2011 2012 2013

Capital Net % of Capital Net % of Capital Net % of infusion Dividend recieved capital infusion Dividend recieved capital infusion Dividend recieved capital by GOI to GoI by bank infused by GOI to GoI by bank infused by GOI to GoI by bank infused Allahabad 7 2 5 75 Andhra 12 2 10 85 BoB 25 4 21 85 8 5 3 41 Bank of India 10 4 6 58 8 6 2 28 BoMH 4 1 3 78 5 1 4 78 4 1 3 70 Central Bank 2 1 1 45 7 1 6 83 24 2 22 91 Corporation 3 2 1 44 — — 2 2 0 8 Dena 5 0 5 92 — — IDBI 31 2 29 93 29 3 27 90 6 3 2 40 IOB 11 2 9 81 14 3 12 83 10 1 9 86 OBC 17 2 16 90 PSB — — 1 1 1 61 PNB 2 4 (2) (120) 7 4 2 35 12 6 7 56 SBI — — 79 16 63 79 30 20 10 33 Syndicate 6 1 5 77 UCO 9 2 7 79 0 2 (2) (355) 7 2 5 71 Union 7 2 4 65 11 3 8 75 United 3 1 2 79 1 1 0 35 Vijaya 4 1 3 81 157 33 125 79 141 30 111 79 125 52 73 58

Source: Company, Kotak Institutional Equities

68 KOTAK INSTITUTIONAL EQUITIES RESEARCH Banks/Financial Institutions India

A few banks likely to have a challenging period ahead in raising fresh capital

GoI stake in Indian banks would increase by 1-11% post the current round of capital infusion. Dena Bank would see the highest increase at 11% to 66% followed by United Bank (670 bps), IOB (500 bps) and IDBI/Vijaya (540 bps).

However, we note that a few banks would increasingly find it difficult to raise capital in the next round from GoI as ownership is closer to 90%: CBoI and United Bank (89% each), BoMH (85%), Punjab and Sind Bank (81%). A slowdown in business growth as well as a drop in dividend payout to conserve capital is likely in these banks.

Exhibit 8: Government would increase its stake by ~1-4% across banks GoI stake across banks (pre and post dilution), 2QFY14 (%)

Pre-dilution Post-dilution Increase Allahabad Bank 55.2 58.7 3.5 Andhra Bank 58.0 60.0 2.0 Bank of Baroda 55.4 56.4 1.0 Bank of India 64.1 66.6 2.5 Bank of Maharashtra 81.2 85.1 3.9 Canara Bank 67.7 68.9 1.1 Central Bank of India 85.3 88.6 3.3 Corporation Bank 59.8 63.6 3.7 Dena 55.2 65.8 10.5 IDBI 71.7 76.7 5.0 Indian Overseas Bank 73.8 79.2 5.4 Oriental Bank of Commerce 58.0 59.1 1.1 Punjab and Sind Bank 79.9 81.4 1.5 Punjab National Bank 57.9 58.8 1.0 State Bank of India 62.3 62.9 0.6 Syndicate 66.2 67.3 1.1 UCO 69.3 70.4 1.1 Union Bank 58.9 60.9 2.1 United Bank 82.2 89.0 6.7 Vijaya Bank 55.0 60.4 5.4

Source: Company, Kotak Institutional Equities

KOTAK INSTITUTIONAL EQUITIES RESEARCH 69

ATTRACTIVE Technology

India OCTOBER 25, 2013 UPDATE

BSE-30: 20,725

Building up steam. As expected, Indian IT companies delivered strong revenue and net income growth in 2QFY14, led by (1) seasonal uptick in business, (2) faster deal closures and (3) Rupee depreciation-led margin expansion and earnings growth. Except Infosys, no company delivered a surprise on revenue growth, though. The recent pullback in stock prices leaves room for upside. Our concern about stiffer competition stays. However, near-term tailwinds and a depreciating Rupee, which cushioned pricing pressure, are positives and drive our Attractive view. Infosys, TCS, Mindtree are our top picks.

2QFY14—seasonal uptick, better deal closures in key markets drive strong revenue growth

Tier-1 IT companies delivered strong sequential organic revenue growth of 2.7-4.2% in 2QFY14 against 0.2-4.1% in 1QFY14 and 1.7-4.6% a year earlier. In constant currency terms growth was 3.2-4.8%, impressive in our view. While the September quarter is traditionally strong for Indian IT, a few other factors played their part as well—(1) improving demand in key markets like North America and in BFSI and (2) faster decisions in Europe. Growth for Indian IT is impressive given global tech companies like IBM and Accenture are struggling for growth and could potentially reflect market share gains. While Indian IT will continue to gain share we believe the days of sustained market share erosion of global IT majors are unlikely to continue. Growth will be more cyclical and remain a function of demand dynamics and deal wins. Companies allow Rupee benefit to flow through and end up setting a high base for FY2015E

The sharp Rupee depreciation in 2QFY14 led to strong margin increase/defense across the board; Indian IT margin benefited 250-450 bps from the Rupee this quarter. TCS reached an all-time high EBITDA margin of 31.6% and HCLT is now the second most profitable Indian IT company with 26.3% EBITDA margin. Other factors that aided margins for tier-1 IT were (1) increase in utilization, aided by strong volume growth, (2) decrease in visa costs and (3) other cost rationalization measures. These helped to offset the impact of wage hikes and pricing pressure in the industry. We are a bit surprised that companies allowed the benefit of the Rupee depreciation to flow through the P&L. This has set a high base of margins for FY2015E. Please note that not the entire benefit of the Rupee depreciation will be retained by vendors—much of it will be passed on to clients or used to expand the addressable market. We expect an OPM decline in FY2015E for all companies, except Infosys. Key metrics—broad-based growth, weak hiring and further tightening of operations

Three factors are striking—(1) growth was broad-based, except HCLT’s. This is a departure from the trend over the past several quarters when growth for companies was restricted to core areas of competence and can be attributed to broader improvement in demand, (2) hiring was modest noting on-boarding of freshers is done in this quarter. Utilization rates increased across the board. As indicated through several of our notes, we believe the supply situation is not as constrained as it was in the past, enabling companies to move to a just-in-time approach to hiring engineers and (3) tightening of operations shows up in the decline in non-manpower costs. Some slack is created whenever the Rupee depreciates though it did not happen in 2QFY14. We retain a positive view; Infosys, TCS and Mindtree are our top picks

Improving revenue growth outlook makes IT a good sector to own in the Indian market. The recent pullback in stock prices leaves room for upside. We prefer (1) Infosys, for catch-up in revenue growth and ability to improve margins, (2) TCS for sustained broad-based profitable growth, driven by strong execution and (3) Mindtree for doing more of the same; a focused approach to areas of strength is paying dividends.

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

Technology India

Growth led by revival in key markets; demand commentary positive

Revenue growth for Indian IT was driven by an improving demand environment in key markets. North America, the largest market for Indian IT, grew 2.9-3.9% for tier-1 players. Growth was also robust in BFSI and manufacturing, which grew 2.3-6.3% and 2.2-7% respectively, with Wipro at the lower end of the range in each case. Infra management, which has been a growth driver for the industry in recent quarters, grew 2.7-8.7%for tier-1 IT. Some players indicated increased pricing competition in this space.

The commentary on demand was positive across players, all pointing to improving discretionary spending, led by greater adoption of new digital technologies. The US market continues to see broad-based recovery and Europe is becoming more open to outsourcing with a lot of cost-optimization projects on the block.

Infosys raises lower end of guidance; Wipro guidance indicates in-line 3QFY14

Following better-than-expected growth in 1HFY14, Infosys raised the lower end of its full year revenue growth guidance to 9-10% from 6-10%. The revised guidance implies a revenue decline of 0.8-2% over 3Q-4QFY14, conservative in our view, given good revenue growth momentum at Infosys on strong deal wins in recent quarters.

Wipro’s guidance indicated 1.8-3.6% revenue growth in 3QFY14, a quarter typically impacted by holidays, seasonal shutdowns and furloughs.

Strong deal wins for tier-1 IT

Improving decision making cycles and deal flow reflected in solid deal wins through the quarter for Indian IT companies. TCS indicated it had closed eight large deals and Infosys signed deals of US$450 mn in TCV taking to over US$2 bn, the value of the large deals signed over the past four quarters. Infosys has had some notable wins in traditional services as a result of its renewed focus. Wipro closed four large deals and HCLT indicated another strong quarter of deal signing with over US$1 bn in TCV (including renewals).

Currency impact

Organic revenue growth for tier-1 IT was 3.2-4.8% in constant currency terms with 10-60 bps of adverse impact from cross-currency movements. The depreciation of the Rupee and the Australian Dollar versus the US Dollar resulted in cross-currency impact for the companies.

Hiring weak for a seasonally strong period

Continuing the trend from the previous quarter, hiring by Indian IT has been one of the weakest for years in the September quarter. The second quarter is usually when large batches of fresh college graduates are inducted. As highlighted in our earlier comments, a change in the recruitment model could be responsible for this. With talent supply no longer a constraint, Indian IT has moved to a just-in-time approach to hiring engineers. Muted hiring has translated into increasing utilization across the board (expect Mindtree, which had strong fresher hiring over the past two quarters).

See Exhibits 1-12, where we highlight various aspects of the September 2013 quarter results for Indian IT.

KOTAK INSTITUTIONAL EQUITIES RESEARCH 71 India Technology

Exhibit 1: September 2013 quarter performance versus KIE estimates

vs KIE estimates Target price Revenues EBITDA margin Net Income Pre-results Post results Infosys Beat In-line Miss 3,400 3,750 TCS In-line Beat Beat 2,100 2,250 Wipro In-line Beat Beat 470 510 HCL Tech In-line Beat Beat 960 1,050 Polaris In-line Beat Beat 115 135 Mindtree Beat Beat Beat 1,150 1,540

Note: (1) Revenue and net income beat/miss implies revenues/net income more/less than estimates by 1% or more. Equivalent measure for EBITDA margin estimates is 50 bps

Source: Companies, Kotak Institutional Equities estimates

Exhibit 2: September 2013 quarter financial performance of key companies under our coverage

Sep-13 qoq (%) yoy (%) Sep-13E versus est. (%) Infosys Revenues (US$ mn) 2,066 3.8 15.0 2,042 1.2 Revenues (Rs mn) 129,650 15.1 31.5 128,520 0.9 EBITDA (Rs mn) 33,890 13.6 18.0 33,161 2.2 Net income (Rs mn) 24,070 1.4 1.6 25,651 (6.2) EBITDA margin (%) 26.1 25.8 34 bps TCS Revenues (US$ mn) 3,337 5.4 17.0 3,326 0.3 Revenues (Rs mn) 209,772 16.6 34.3 209,383 0.2 EBITDA (Rs mn) 66,390 28.8 49.5 64,982 2.2 Net income (Rs mn) 47,018 23.9 33.9 46,318 1.5 EBITDA margin (%) 31.6 31.0 61 bps Wipro Revenues (US$ mn) - Global IT Services 1,631 2.7 5.9 1,630 0.1 Revenues (Rs mn) - Wipro Limited 109,920 12.9 19.2 110,761 (0.8) EBIT (Rs mn) - Wipro Limited 22,422 26.7 29.3 21,378 4.9 Net income (Rs mn) 19,321 19.1 20.0 18,529 4.3 Global IT EBIT margin (%) 22.5 20.9 163 bps HCLT Revenues (US$ mn) 1,270 3.5 14.1 1,268 0.2 Reveneus (Rs mn) 79,610 14.1 31.2 79,825 (0.3) EBITDA (Rs mn) 20,930 29.6 57.8 19,094 9.6 Net income (Rs mn) 14,160 18.8 64.1 13,719 3.2 EBITDA margin (%) 26.3 23.9 237 bps MindTree Revenues (US$ mn) 124 5.4 15.6 123 1.1 Revenues (Rs mn) 7,696 18.8 29.1 7,679 0.2 EBITDA (Rs mn) 1,598 34.2 21.2 1,519 5.2 Net income (Rs mn) 1,287 (4.9) 78.3 1,010 27.4 EBITDA margin (%) 20.8 19.8 98 bps Polaris Revenues (US$ mn) 104 2.4 (3.1) 103 0.3 Revenues (Rs mn) 6,434 13.5 7.4 6,449 (0.2) EBITDA (Rs mn) 975 37.5 (3.9) 768 26.9 Net income (Rs mn) 598 38.4 8.5 552 8.4 EBITDA margin (%) 15.2 11.9 324 bps

Source: Companies, Kotak Institutional Equities estimates

72 KOTAK INSTITUTIONAL EQUITIES RESEARCH Technology India

Exhibit 3: Guidance issued by Indian IT companies

Guidance Guidance Guidance Guidance Actuals (lower-end) (upper-end) (lower-end) (upper-end) Sep-13 Dec-13 qoq (%) yoy (%) Dec-13 qoq yoy (%) FY2014 yoy (%) FY2014 yoy (%) Infosys Revenues (US$ mn) 2,066 8,064 9.0 8,138 10.0 Revenues (Rs bn) 130 488.3 21.0 492.3 22.0 No quarterly guidance provided EPS (Rs) 42.1 Re/US$ rate 62.8 60.5 60.5 Wipro Revenues IT services 1,631 1,660 1.8 5.2 1,690 3.6 7.2 (US$ mn) (a) Note: (a) Global IT services

Source: Companies

Exhibit 4: Earnings revision for tier-1 companies

Revised Earlier Change (%)/(bps) FY2014E FY2015E FY2014E FY2015E FY2014E FY2015E Infosys Revenues (US$ mn) 8,301 9,330 8,229 9,266 0.9 0.7 EPS (Rs) 182.5 219.7 178.7 212.0 2.1 3.6 EBITDA margin (%) 26.8 27.6 26.2 27.1 62 bps 46 bps TCS (a) Revenues (US$ mn) 13,475 15,437 13,426 15,189 0.4 1.6 EPS (Rs) 94.8 111.3 91.7 105.5 3.4 5.5 EBIT margin (%) 28.8 28.0 27.7 27.1 105 bps 93 bps Wipro IT Services Revenues (US$ mn) 6,628 7,396 6,629 7,369 (0.0) 0.4 EPS (Rs) 31.6 35.1 30.1 33.8 4.9 4.0 EBITmargin (%) 21.9 21.8 20.9 20.5 101 bps 135 bps HCLT Revenues (US$ mn) 5,314 5,974 5,304 5,918 0.2 0.9 EPS (Rs) 81.0 86.6 75.7 81.0 7.0 7.0 EBITDA margin (%) 24.7 22.4 22.2 20.8 248 bps 157 bps

Source: Kotak Institutional Equities estimates

KOTAK INSTITUTIONAL EQUITIES RESEARCH 73 India Technology

Exhibit 5: US Dollar revenue growth of Indian IT companies

Jun-11 Sep-11 Dec-11 Mar-12 Jun-12 Sep-12 Dec-12 Mar-13 Jun-13 Sep-13 Revenues (US$ mn) TCS 2,412 2,525 2,586 2,648 2,728 2,853 2,948 3,040 3,165 3,337 Infosys 1,672 1,746 1,806 1,771 1,752 1,797 1,911 1,938 1,991 2,066 Wipro IT 1,408 1,473 1,506 1,536 1,515 1,541 1,577 1,585 1,588 1,631 HCL Tech 963 1,002 1,022 1,048 1,080 1,114 1,154 1,191 1,228 1,270 Polaris 101 111 112 104 105 107 104 100 101 104 Mindtree 93 101 104 105 106 107 110 113 118 124 Total 6,647 6,958 7,136 7,211 7,285 7,519 7,804 7,967 8,191 8,532 Sequential quarter change (%) TCS 7.5 4.7 2.4 2.4 3.0 4.6 3.3 3.1 4.1 5.4 Infosys 4.3 4.5 3.4 (1.9) (1.1) 2.6 6.3 1.4 2.7 3.8 Wipro IT 0.5 4.6 2.2 2.0 (1.4) 1.7 2.4 0.5 0.2 2.7 HCL Tech 5.3 4.1 2.0 2.5 3.0 3.2 3.6 3.2 3.1 3.5 Polaris 4.1 10.6 1.0 (8.0) 1.7 1.6 (3.2) (3.2) 1.1 2.4 Mindtree 7.3 9.5 2.3 1.3 0.4 1.7 2.4 2.8 4.2 5.4 Total 4.8 4.7 2.5 1.1 1.0 3.2 3.8 2.1 2.8 4.2 YoY growth (%) Total 26.6 21.2 16.8 13.7 9.6 8.1 9.4 10.5 12.4 13.5

Source: Companies

Exhibit 6: Revenue by industry verticals (US$ mn)

Sep-13 quarter Growth (%) Sep-13 quarter Growth (%) Revenue % of revenues qoq yoy Revenues % of revenues qoq yoy Infosys TCS BFSI 690 33.4 2.8 13.9 BFSI 1,438 43.1 5.7 17.8 Manufacturing 479 23.2 7.0 20.7 Manufacturing 280 8.4 5.4 19.8 Telecom 171 8.3 1.3 (3.6) Telecom 310 9.3 2.1 5.6 Retailing 324 15.7 3.1 6.2 Healthcare 190 5.7 9.3 28.2 Others, of which 401 19.4 3.2 28.9 Retail & Distribution 464 13.9 4.7 21.3 Utilities 105 5.1 8.0 10.6 Transportation 113 3.4 5.4 10.5 Logistics & Transportation 37 1.8 3.8 21.7 Energy & Utilities 127 3.8 8.3 23.5 Others 258 12.5 1.3 39.5 Others 414 12.4 5.4 12.4 Total 2,066 100.0 3.8 15.0 Total 3,337 100.0 5.4 17.0 Wipro HCL Tech Global Media & Telecom 227 13.9 5.0 2.2 Financial services 330 26.0 6.3 23.0 Finance Solutions 431 26.4 2.3 3.5 Manufacturing 423 33.3 5.4 20.2 Manufacturing & hi-tech 310 19 2.2 5.9 Retail & CPG 105 8.3 (0.1) 2.9 Healthcare & life sciences 165 10.1 5.8 12.6 Telecom, media 116 9.1 (6.8) (0.2) Retail & transportation 241 14.8 0.7 4.5 Life sciences 147 11.6 6.2 10.3 Energy & Utilities 258 15.8 2.0 10.8 Energy & Utilities 99 7.8 0.9 28.9 Total 1,631 100.0 2.7 5.9 Others 50 3.9 0.9 (23.3) Total 1,270 100.0 3.5 14.1

Source: Companies

74 KOTAK INSTITUTIONAL EQUITIES RESEARCH Technology India

Exhibit 7: Revenue by geographies (US$ mn)

Sep-13 quarter Growth (%) Sep-13 quarter Growth (%) Revenues % of revenues qoq yoy Revenues % of revenues qoq yoy Infosys Wipro North America 1,271 61.5 3.9 10.7 North America 812 49.8 2.9 2.4 Europe 496 24.0 5.5 26.0 Europe 471 28.9 2.3 8.5 India 50 2.4 (4.2) 72.5 Rest of the world 347 21.3 2.7 11.1 Rest of the world 250 12.1 1.3 10.4 - India 135 8.3 (3.1) 2.2 Total 2,066 100.0 3.8 15.0 Total 1,631 100.0 2.7 5.9 TCS HCL Tech North America 1,775 53.2 3.7 17.9 America 727 57.2 3.8 14.5 Europe 951 28.5 11.7 25.3 Europe 384 30.2 2.5 23.5 India 230 6.9 (4.3) 7.6 Rest of the world 160 12.6 4.3 (4.8) Others 380 11.4 5.4 1.8 Total 1,270 100.0 3.5 14.1 Total 3,337 100.0 5.4 17.0 Mindtree Polaris North America 72 58.0 5.7 15.4 US/North America 49 47.2 5.8 (0.9) Europe 36 29.0 11.5 14.4 Europe 23 22.4 0.4 (0.9) India 5 4.1 (25.5) (21.0) India, APAC & ME 32 30.4 (1.2) (7.8) APAC 11 8.9 4.2 55.8 Total 104 100.0 2.4 (3.1) Total 124 100.0 5.4 15.6

Source: Companies

Exhibit 8: Revenue by service lines (US$ mn)

Sep-13 quarter Growth (%) Sep-13 quarter Growth (%) Revenues % of revenues qoq yoy Revenues % of revenues qoq yoy Infosys TCS Application development 331 16.0 5.7 8.2 ADM 1,392 41.7 3.9 13.2 Application maintenance 395 19.1 2.7 2.6 Enterprise solutions 514 15.4 7.5 20.9 Business Process Mgmt 130 6.3 3.8 20.7 Assurance services 284 8.5 10.6 29.1 Consulting & SI 688 33.3 2.8 27.6 Engineering services 157 4.7 5.4 19.5 Infrastructure Mgmt 149 7.2 6.7 21.7 Infrastructure services 394 11.8 4.5 21.1 Product Engineering 68 3.3 7.0 11.6 Global consulting 110 3.3 (0.6) 28.7 Testing Services 174 8.4 3.8 12.3 BPO 397 11.9 5.4 10.5 Others 56 2.7 0.1 3.5 Asset leverage solutions 90 2.7 13.9 17.0 Products 76 3.7 3.8 11.9 Total revenues 3,337 100.0 5.4 17.0 Total revenues 2,066 100.0 3.8 15.0 Wipro HCL Tech Tech. Infra practices 395 24.2 2.7 10.4 Engg and R&D services 215 16.9 1.1 6.6 Analytics & Info mgmt 121 7.4 1.3 10.3 Infrastructure Services 420 33.1 8.7 42.1 BAS 520 31.9 4.7 10.0 Custom applications 361 28.4 0.6 4.6 BPO 140 8.6 0.4 4.7 Enterprise application 220 17.3 1.1 (0.7) Product engg. & mobility 124 7.6 4.1 (1.9) BPO services 55 4.3 3.5 9.0 ADM 331 20.3 0.7 (2.8) Total revenues 1,270 100.0 3.5 14.1 Total revenues 1,631 100.0 2.7 5.9

Source: Companies

Exhibit 9: Operating margin trajectory of Indian IT companies

2QFY13 1QFY14 2QFY14 qoq (bps) yoy (bps) TCS 28.4 28.6 31.6 300 bps 322 bps Infosys 29.1 26.5 26.1 -34 bps -300 bps Wipro - IT services 23.6 22.6 25.0 235 bps 139 bps HCL Tech 21.8 23.3 26.3 303 bps 447 bps Mindtree 22.1 18.4 20.8 238 bps -136 bps

Source: Companies

KOTAK INSTITUTIONAL EQUITIES RESEARCH 75 India Technology

Exhibit 10: Net hiring trends for Indian IT companies Weak September quarter hiring despite seasonal strength

Sep-10 Dec-10 Mar-11 Jun-11 Sep-11 Dec-11 Mar-12 Jun-12 Sep-12 Dec-12 Mar-13 Jun-13 Sep-13 Infosys 7,646 5,311 3,041 2,740 8,262 3,266 4,906 1,157 2,610 1,868 1,059 575 2,964 Wipro 2,975 3,591 2,894 4,105 5,240 5,004 (814) 2,632 2,107 2,246 2,907 1,469 (65) TCS 10,717 12,497 11,700 3,576 12,580 11,981 11,832 4,962 10,531 9,561 12,559 1,390 7,664 HCL Tech 5,661 2,049 1,153 3,626 3,474 2,556 (612) 1,855 1,016 (141) (791) 1,102 1,691 Mindtree 572 87 (124) 30 1,003 354 66 (170) 53 69 639 648 702 Polaris 959 172 124 455 471 604 382 832 (470) (134) (38) (272) (285) Total 28,530 23,707 18,788 14,532 31,030 23,765 15,760 11,268 15,847 13,469 16,335 4,912 12,671

Source: Companies

Exhibit 11: Attrition trends were divergent this quarter Attrition at high levels for certain large companies

Sep-10 Dec-10 Mar-11 Jun-11 Sep-11 Dec-11 Mar-12 Jun-12 Sep-12 Dec-12 Mar-13 Jun-13 Sep-13 TCS (a) 13.1 13.2 13.1 13.6 12.5 11.7 11.1 10.9 10.2 9.8 9.4 9.6 9.9 TCS (e) 15.6 10.0 16.1 17.1 14.9 12.5 12.6 14.7 13.1 11.7 11.2 13.3 13.8 Infosys (b) 17.1 17.5 17.0 15.8 15.6 15.4 14.7 14.9 15.0 15.1 16.3 16.9 17.3 Infosys (e) 22.3 18.4 18.2 21.7 20.6 17.8 15.6 21.5 20.5 16.9 20.3 24.4 23.2 Wipro (c) 24.9 23.9 23.4 25.2 22.4 20.6 20.0 18.4 17.9 16.9 16.2 17.9 21.0 Mindtree 21.9 24.2 25.1 25.6 21.7 19.4 18.2 17.0 16.3 15.1 13.4 12.4 11.9 HCL Tech (d) 16.7 17.2 17.0 16.5 15.9 15.7 15.0 14.0 13.6 13.6 14.3 15.1 16.1 HCL Tech (e) 36.4 35.5 35.0 31.6 29.6 25.7 25.7 24.7 25.3 24.8 28.0 26.2 29.5

Notes: (a) LTM attrition for IT services (b) Standalone attrition numbers for last twelve months, ex BPO/subsidiaries (c) Wipro Technologies only, quarterly annualized attrition, includes involuntary attrition (d) For IT services only, excludes involuntary attrition (e) Quarterly annualized attrition computed (includes BPO)

Source: Companies, Kotak Institutional Equities

Exhibit 12: Utilization rates increased for tier-1 IT

Sep-10 Dec-10 Mar-11 Jun-11 Sep-11 Dec-11 Mar-12 Jun-12 Sep-12 Dec-12 Mar-13 Jun-13 Sep-13 Tata Consultancy Services 77.7 77.1 75.1 76.2 76.4 74.0 71.3 72.3 72.8 72.1 72.2 72.5 75.0 Infosys 73.6 70.9 65.6 67.4 68.5 67.6 64.2 64.7 67.5 67.1 68.5 70.7 73.1 Wipro (a) 78.0 75.6 76.1 76.9 76.1 73.5 74.1 75.5 73.7 71.7 71.7 71.4 73.0 HCL Technologies (b) 70.1 70.1 71.9 72.5 69.7 69.6 72.2 72.4 74.2 75.6 79.0 80.6 HCL Technologies (c) 80.3 - - 84.5 84.9 Mindtree 70.0 69.3 70.9 72.5 71.3 68.3 67.8 68.9 71.7 71.4 69.6 69.6 65.9 Polaris 76.0 78.0 80.0 81.0 80.0 81.0 81.0 80.5 81.2 80.1 77.3 82.7 82.6

Notes: (a) Wipro Technologies only (b) Utilization is for IT services for offshore only, including trainees (c) Blended utilization (including trainees) for all segments

Source: Companies, Kotak Institutional Equities

76 KOTAK INSTITUTIONAL EQUITIES RESEARCH Technology India

Exhibit 13: Valuation summary of key Indian technology companies under KIE coverage

24-Oct-13 Mkt cap. EPS (Rs) PER (X) EV/EBITDA (X) EV/Sales (X) Company Price (Rs) Rating (Rs m) (US$ m) 2013 2014E 2015E 2013 2014E 2015E 2013 2014E 2015E 2013 2014E 2015E HCL Technologies 1,055 REDUCE 748,802 12,187 56.9 81.0 86.6 18.5 13.0 12.2 12.3 8.1 7.5 2.8 2.0 1.7 Hexaware Technologies 132 REDUCE 38,753 631 11.2 12.9 12.9 11.8 10.2 10.2 9.0 6.7 6.2 1.9 1.5 1.2 Infosys 3,309 ADD 1,890,620 30,770 164.9 182.5 219.7 20.1 18.1 15.1 14.5 12.0 9.8 4.1 3.2 2.7 Mindtree 1,374 ADD 57,701 939 81.7 113.1 128.6 16.8 12.1 10.7 11.7 9.2 7.4 2.4 1.8 1.5 Mphasis 442 SELL 93,118 1,515 37.6 36.2 40.1 11.8 12.2 11.0 8.8 8.9 7.8 1.7 1.6 1.3 Polaris Financial Technology 134 REDUCE 13,315 217 20.0 19.2 22.4 6.7 7.0 6.0 3.4 2.6 2.3 0.4 0.3 0.3 TCS 2,009 ADD 3,931,428 63,984 71.2 94.8 111.3 28.2 21.2 18.0 21.1 14.9 12.7 6.1 4.5 3.7 Tech Mahindra 1,537 ADD 359,067 5,844 101.9 125.0 136.3 15.1 12.3 11.3 10.9 8.6 7.7 2.3 1.8 1.5 Wipro 471 REDUCE 1,159,704 18,874 24.9 31.6 35.1 18.9 14.9 13.4 13.2 10.1 8.3 2.9 2.3 1.9 Technology Attractive 8,292,506 134,960 22.2 17.6 15.3 16.0 11.9 10.2 4.0 3.1 2.6

KIE universe 54,571,142 888,140 15.3 14.2 12.1 10.2 8.9 7.6 1.4 1.3 1.1

Target O/S shares EPS growth (%) Net Profit (Rs mn) EBITDA (Rs mn) Sales (Rs mn) Company Price (Rs) (mn) 2013 2014E 2015E 2013 2014E 2015E 2013 2014E 2015E 2013 2014E 2015E HCL Technologies 1,050 710 64.7 42.3 7.0 40,132 57,496 61,846 57,511 82,623 84,136 257,332 334,372 376,353 Hexaware Technologies 125 293 22.8 15.4 0.3 3,276 3,782 3,794 4,074 5,073 5,384 19,482 22,765 27,023 Infosys 3,750 571 13.3 10.7 20.3 94,210 106,493 125,510 115,600 136,581 161,965 403,520 509,719 587,840 Mindtree 1,540 42 53.2 38.5 13.7 3,389 4,750 5,400 4,860 6,054 7,147 23,618 30,349 36,027 Mphasis 400 211 (3.7) (3.6) 10.6 7,923 7,636 8,446 10,512 10,538 11,943 53,574 58,667 71,167 Polaris Financial Technology 135 100 (3.8) (3.9) 16.5 1,991 1,914 2,230 2,800 3,437 3,455 22,718 25,349 27,825 TCS 2,250 1,957 31.1 33.0 17.5 139,447 185,516 217,894 180,870 251,137 287,277 629,895 829,082 972,506 Tech Mahindra 1,500 234 16.7 22.6 9.0 21,158 26,198 28,565 30,633 37,773 40,723 143,320 180,319 207,439 Wipro 510 2,463 9.9 26.7 11.4 61,347 77,713 86,573 81,150 101,373 116,246 374,256 443,880 506,607 Technology 23.2 26.4 14.6 372,873 471,496 540,258 488,009 634,588 718,276 1,927,715 2,434,501 2,812,787

KIE universe 7.8 8.0 16.9

Notes (a) HCL Technologies is June fiscal year-ending (b) Hexaware Technologies is December year-ending.

Source: Companies, Bloomberg, Kotak Institutional Equities estimates

KOTAK INSTITUTIONAL EQUITIES RESEARCH 77

KOTAK INSTITUTIONAL EQUITIES RESEARCH September 2013: Results calendar India DailyIndia Summary-October2013 25,

Mon Tue Wed Thu Fri Sat Sun 21-Oct 22-Oct 23-Oct 24-Oct 25-Oct 26-Oct 27-Oct Asian Paints Cairn India ACC Biocon Adani Ports Hindustan Unilever Dew an Housing Eros Intl Media Ambuja Cements Hindustan Media Adani Pow er JSW Energy HDFC Gujarat Pipavav Dish TV India Idea Cellular Bharat Elect Neyveli Lignite Indiabulls Sec Indiabulls Real Est Escorts India Infoline Bharat Forge Shriram City Uni Karnataka Bank ING Vysya Bank Exide Inds Indi abulls Infra Colgate Palmolive Mahindra & Mah Fin Jyothy Lab Hero MotoCorp IPCA Lab Container Corp Mahindra & Mah Fin Mahindra Lifesp Jet Air India Kotak Mah Bank Essar Oil L&T Finance Holdings Mastek Gail India Pow er Grid Corp NMDC Gujarat Petro Rallis India Jyothy Lab SKS Microfinance United Phos HT Media Rallis India Polaris Fin Tec ICICI Bank Zee Entert Wipro IOB Yes Bank ITC Z EE Media KEC Intl Shoppers Stop Shree Cement TV S Motor Wockhardt 28-Oct 29-Oct 30-Oct 31-Oct 1-Nov 2-Nov 3-Nov Bharti Infratel NTPC Bharti Airtel BOB Berger Paints Ceat JSW Steel Carborundum Uni Cadila Health Kansai Nerolac Dabur India Marico DLF Dishman Pharma Motherson Sumi Jindal Stainless Phoenix Mill G illette India Dr Reddys Lab Procter & Gamble Lanco Inds Pidilite Inds Godrej Pr operties Glenmark Pharma Punj Lloyd Maruti Suzuki Ranbaxy Laboratories Grasim Inds Hindustan Const Syndicate Bank Shriram Trans Havells India IDFC Tata Comm Jagran Prakashan Magma Fin Jindal Steel Muthoot Fin LIC Housing Fin Titan Inds Lupin Union Bank Nes tle India Oberoi Realty Oriental Bank Puravankara Proj Suzlon Energy

4-Nov 5-Nov 6-Nov 7-NovDailyIndia SummaryOctober - 8-Nov 9-Nov 10-Nov ABB Chennai Petro Aditya Birla Chem JK Cement Ashok Leyland Indian Oil Corp Glaxosmithkl Cons Pow er Finance Thermax 11-Nov 12-Nov 13-Nov 14-Nov 15-Nov Godrej Cons Apollo Hosp Aditya Birla Nuv Tata Pow er Godrej Inds CESC Apollo Tyres Tata Chemicals Coal India BGR Energy Hindalco Inds BPCL Source: BSE, NSE, Kotak Institutional Equities Mahindra & Mahindra

78

2 79 79

Kotak Institutional Equities: Valuation summary of KIE Universe stocks

O/S Target ADVT- 24-Oct-13 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) 2013 2014E 2015E 2013 2014E 2015E 2013 2014E 2015E 2013 2014E 2015E 2013 2014E 2015E 2013 2014E 2015E 2013 2014E 2015E (Rs) (%) (US$ mn) Automobiles Amara Raja Batteries 317 ADD 54,122 880 171 16.8 19.5 21.5 33.3 16.4 9.8 18.9 16.2 14.8 11.3 9.7 8.4 5.1 4.1 3.4 0.8 1.2 1.4 30.4 28.1 25.2 325 2.6 1.4 Apollo Tyres 68 REDUCE 34,329 558 504 12.2 16.6 16.0 49.5 36.5 (3.5) 5.6 4.1 4.3 3.9 3.0 2.5 0.9 0.7 0.6 0.7 1.0 1.0 19.7 22.0 17.6 64 (6.0) 4.2 Ashok Leyland 17 REDUCE 45,099 733 2,661 0.5 (2.1) 0.3 (74.5) (479.9) 116.8 31.3 (8.2) 48.9 10.0 39.1 10.0 0.9 1.0 1.0 3.5 - - 12.6 (16.7) 3.1 15 (11.5) 2.6 Bajaj Auto 2,082 BUY 602,618 9,798 289 105.2 118.9 144.2 1.3 13.1 21.2 19.8 17.5 14.4 14.6 13.4 11.3 7.5 6.1 5.0 2.2 2.3 2.8 43.2 38.5 38.1 2,500 20.1 16.0 Bharat Forge 286 SELL 67,749 1,102 237 10.4 10.7 15.0 (40.0) 2.9 39.6 27.4 26.6 19.0 11.1 11.4 9.3 2.7 2.5 2.3 1.2 0.8 1.1 13.1 9.5 10.7 220 (22.9) 2.8 Exide Industries 124 ADD 105,400 1,714 850 6.2 8.1 9.2 13.4 31.2 14.1 20.2 15.4 13.5 13.3 10.5 9.3 3.1 2.7 2.4 1.3 1.7 1.9 16.1 18.7 18.7 150 21.0 2.4 Hero Motocorp 2,082 REDUCE 415,865 6,761 200 106.1 109.6 143.2 (10.9) 3.4 30.7 19.6 19.0 14.5 15.7 13.3 9.8 7.6 6.1 4.9 2.9 1.6 2.4 44.0 37.4 38.6 2,000 (4.0) 16.0 Mahindra & Mahindra 889 BUY 499,904 8,128 562 63.0 53.0 60.7 22.7 (15.9) 14.4 14.1 16.8 14.7 9.8 11.4 10.0 3.3 3.0 2.6 1.6 1.5 1.9 24.4 16.3 17.9 1,000 12.4 22.3 Maruti Suzuki 1,514 REDUCE 457,319 7,435 302 79.2 75.6 95.5 39.9 (4.5) 26.3 19.1 20.0 15.9 11.3 11.2 8.3 2.4 2.2 1.9 0.5 0.5 0.7 13.9 11.4 13.0 1,330 (12.1) 16.4 Motherson Sumi Systems 263 BUY 154,703 2,515 588 7.6 14.2 18.8 71.2 87.5 32.8 34.8 18.6 14.0 11.1 7.3 5.7 6.8 4.9 3.5 0.8 1.6 2.1 26.8 61.6 29.8 290 10.2 1.6 Tata Motors 379 ADD 1,220,529 19,844 3,218 30.7 43.2 49.0 (31.1) 40.6 13.3 12.3 8.8 7.7 6.3 4.8 4.2 3.1 2.2 1.7 0.5 — — 27.5 29.9 25.4 370 (2.5) 49.9 Automobiles Neutral 3,657,636 59,469 (10.4) 19.9 14.1 15.3 12.8 11.2 8.7 7.4 6.2 3.5 2.8 2.3 1.3 1.0 1.3 22.7 22.1 20.8 Banks/Financial Institutions Andhra Bank 55 ADD 30,917 503 560 23.0 16.9 20.9 (4.1) (26.7) 24.1 2.4 3.3 2.6 — — — 0.4 0.5 0.5 9.0 6.6 8.2 16.2 10.7 12.2 60 8.6 2.0 Axis Bank 1,207 ADD 564,915 9,185 468 110.7 117.3 131.8 7.8 5.9 12.4 10.9 10.3 9.2 — — — 1.7 1.5 1.4 1.5 1.8 2.2 18.5 15.6 15.5 1,200 (0.6) 82.8 Bajaj Finserv 647 BUY 102,982 1,674 159 103.4 86.1 88.2 9.1 (16.8) 2.5 6.3 7.5 7.3 — — — 1.3 1.1 1.0 2.1 2.1 2.1 25.7 16.3 14.6 825 27.5 0.5 Bank of Baroda 597 REDUCE 252,412 4,104 423 106.0 84.8 104.9 (1 2.7) (20.0) 23.7 5.6 7.0 5.7 — — — 0.9 0.9 0.8 3.6 2.9 3.5 15.6 11.1 12.5 600 0.4 16.7 Bank of India 186 ADD 111,065 1,806 597 46.1 47.1 57.0 (1.1) 2.2 21.1 4.0 4.0 3.3 — — — 0.6 0.6 0.5 5.4 5.5 6.6 12.9 11.8 13.0 180 (3.3) 7.3 Canara Bank 235 REDUCE 104,238 1,695 443 64.8 38.5 68.9 (12.5) (40.6) 78.9 3.6 6.1 3.4 — — — 0.5 0.5 0.5 5.5 5.1 5.1 12.1 6.7 11.3 250 6.2 8.8 City Union Bank 48 BUY 25,654 417 539 6.0 6.4 7.1 (13.0) 7.4 10.7 8.0 7.4 6.7 — — — 1.6 1.3 1.1 1.8 2.0 2.2 22.3 18.7 17.3 60 26.1 0.3 Corporation Bank 272 BUY 41,622 677 153 93.8 81.4 104.7 (7.7) (13.2) 28.5 2.9 3.3 2.6 — — — 0.5 0.5 0.4 7.3 6.4 8.2 16.1 12.4 14.4 300 10.2 0.4 Development Credit Bank 51 BUY 12,681 206 250 4.1 6.0 6.3 78.3 46.7 5.2 12.4 8.5 8.1 — — — 1.4 1.2 1.1 — — — 11.6 14.6 13.4 60 18.3 0.7 Federal Bank 82 BUY 70,262 1,142 855 9.8 8.1 11.7 7.9 (17.1) 43.9 8.4 10.1 7.0 — — — 1.2 1.1 0.9 2.2 1.8 2.6 13.9 10.5 13.7 85 3.5 3.9 HDFC 812 ADD 1,255,868 20,419 1,546 31.4 36.1 41.1 12.3 15.2 13.7 25.9 22.5 19.8 — — — 5.0 4.5 4.0 1.5 1.8 2.0 22.0 21.1 21.4 850 4.7 59.8 HDFC Bank 669 REDUCE 1, 592,545 25,893 2,379 28.3 35.8 44.5 28.4 26.7 24.3 23.7 18.7 15.0 — — — 4.4 3.8 3.2 0.8 1.0 1.3 20.3 21.6 22.6 645 (3.6) 50.2 ICICI Bank 1,021 BUY 1,177,747 19,149 1,154 72.2 74.3 79.4 28.7 3.0 6.9 14.1 13.7 12.9 — — — 1.8 1.7 1.6 2.0 2.2 2.3 13.1 12.3 12.2 1,110 8.7 81.3 IDFC 105 BUY 158,722 2,581 1,512 12.1 13.5 15.0 18.1 10.9 11.6 8.6 7.8 7.0 — — — 1.2 1.0 0.9 2.5 2.5 2.8 14.2 14.1 14.1 150 42.9 23.6 India Infoline 57 ADD 17,370 282 304 9.2 9.8 11.2 102.9 5.7 14.9 6.2 5.9 5.1 — — — 0.9 0.8 0.7 5.4 2.9 3.4 15.1 14.8 14.8 60 5.1 0.2 IndusInd Bank 427 BUY 223,344 3,631 523 20.3 24.6 28.4 18.3 21.1 15.4 21.0 17.4 15.1 — — — 3.0 2.7 2.3 0.7 0.9 1.0 18.3 17.0 16.3 470 10.0 25.7 ING Vysya Bank 579 ADD 107,049 1,740 185 39.6 36.8 43.9 30.2 (7.1) 19.3 14.6 15.8 13.2 — — — 2.4 1.6 1.4 0.8 0.9 1.1 14.6 11.9 11.2 620 7.1 1.2 J&K Bank 1,221 REDUCE 59,202 963 48 217.6 216.9 194.7 31.4 (0.3) (10.2) 5.6 5.6 6.3 — — — 1.2 1.1 1.0 4.1 4.1 3.7 23.6 20.0 15.8 1,180 (3.3) 1.5 Karur Vysya Bank 336 ADD 36,018 586 107 51.3 48.1 62.6 9.7 (6.4) 30.2 6.5 7.0 5.4 — — — 1.2 1.1 1.0 4.2 3.6 4.7 19.0 15.8 18.2 380 13.1 0.8 LIC Housing Finance 210 BUY 105,964 1,723 505 20.3 23.9 28.3 11.9 17.9 18.5 10.4 8.8 7.4 — — — 1.7 1.5 1.3 1.9 2.3 2.7 16.8 17.4 18.0 240 14.4 14.1 L&T Finance Holdings 77 SELL 132,465 2,154 1,715 4.3 3.8 5.0 60.3 (10.1) 29.9 18.2 20.2 15.6 — — — 2.4 2.1 1.8 — — — 14.3 11.3 12.7 60 (22.3) 3.6 India Daily Summary - OctoberSummary 2013 Daily- 25, India Magma Fincorp 67 BUY 12,797 208 190 6.5 10.2 12.3 100.6 55.6 21.0 10.3 6.6 5.5 — — — 0.9 0.8 0.7 1.7 2.4 2.9 10.1 12.7 14.0 125 85.6 0.0 Mahindra & Mahindra Financial 277 REDUCE 157,174 2,555 568 15.5 18.6 21.3 28.6 20.0 14.5 17.8 14.8 13.0 — — — 3.6 3.1 2.7 1.3 1.6 1.8 23.8 21.9 21.4 240 (13.2) 8.5 Muthoot Finance 100 NR 39,647 645 397 28.2 29.9 34.9 17.3 6.1 16.7 3.5 3.3 2.9 — — — 1.0 0.8 0.6 4.0 4.5 5.2 31.2 26.2 23.7 — — — Oriental Bank of Commerce 162 ADD 56,578 920 350 45.5 26.7 43.2 16.3 (41.3) 61.8 3.6 6.0 3.7 — — — 0.6 0.5 0.5 4.7 3.3 5.4 10.7 6.9 10.2 170 5.2 5.1 PFC 129 BUY 170,128 2,766 1,319 33.5 33.6 38.2 45.6 0.3 13.7 3.8 3.8 3.4 — — — 0.7 0.7 0.7 5.4 5.4 6.2 19.8 17.2 17.2 185 43.5 7.2 Punjab National Bank 495 REDUCE 174,846 2,843 353 134.3 114.1 140.0 (6.7) (15.0) 22.6 3.7 4.3 3.5 — — — 0.7 0.6 0.5 5.5 4.6 5.7 16.5 12.3 13.7 600 21.3 15.9 Reliance Capital 359 ADD 88,248 1,435 246 26.9 23.4 28.5 27.5 (13.0) 21.7 13.3 15.3 12.6 — — — 0.8 0.7 0.7 2.3 2.0 2.4 5.9 4.9 5.8 505 40.9 25.3 Rural Electrification Corp. 187 ADD 184,889 3,006 987 38.7 44.3 47.6 35.3 14.6 7.5 4.8 4.2 3.9 — — — 1.1 1.0 0.8 4.4 4.2 5.0 23.7 22.8 20.7 270 44.2 6.3 Shriram City Union Finance 973 NR 56,682 922 58 80.2 98.3 118.7 22.6 22.6 20.7 12.1 9.9 8.2 — — — 2.5 2.0 1.6 1.0 1.3 1.6 22.3 22.5 22.0 — — 0.3 Shriram Transport 549 ADD 122,604 1,993 223 61.0 67.8 80.2 8.2 11.2 18.2 9.0 8.1 6.9 — — — 1.8 1.5 1.3 1.3 1.7 2.0 20.6 19.3 19.4 670 21.9 4.6 State Bank of India 1,718 ADD 1,175,369 19,110 684 206.2 173.0 206.4 18.2 (16.1) 19.3 8.3 9.9 8.3 — — — 1.5 1.4 1.3 2.7 2.5 2.6 15.4 11.5 12.5 1,975 14.9 77.3 Union Bank 123 ADD 73,227 1,191 597 36.0 29.6 36.4 11.5 (17.6) 22.9 3.4 4.1 3.4 — — — 0.5 0.5 0.5 6.5 5.3 6.6 15.0 10.8 12.2 150 22.2 8.9 Yes Bank 363 REDUCE 130,072 2,115 359 36.3 33.3 39.5 31.0 (8.3) 18.8 10.0 10.9 9.2 — — — 2.2 1.9 1.6 1.7 1.5 1.8 24.8 20.2 19.3 320 (11.8) 90.4 Banks/Financial Institutions Cautious 8,625,301 140,237 17.0 (2.1) 18.3 10.2 10.4 8.8 ——— 1.7 1.6 1.4 2.1 2.2 2.5 16.7 15.0 15.9 Cement KOTAK INSTITUTIONAL EQUITIES RESEARCH ACC 1,154 REDUCE 216,898 3,527 188 73.7 49.5 59.2 29.1 (32.8) 19.4 15.7 23.3 19.5 9.6 12.6 9.7 2.7 2.6 2.4 3.0 2.0 2.0 19.5 12.2 13.5 1,100 (4.7) 7.3 Ambuja Cements 194 SELL 295,569 4,806 1,522 10.3 7.7 9.5 32.8 (25.5) 23.9 18.8 25.2 20.3 10.7 14.6 12.6 3.2 3.1 2.9 1.4 1.4 2.2 17.8 12.3 14.4 155 (20.2) 9.3 Grasim Industries 2,701 ADD 247,893 4,030 92 272.4 280.3 314.3 (5.6) 2.9 12.2 9.9 9.6 8.6 7.4 5.6 4.8 1.3 1.1 1.0 0.9 1.3 1.3 13.6 12.4 12.5 3,000 11.1 3.8 India Cements 48 ADD 14,652 238 307 6.8 5.3 8.4 (24.4) (21.4) 58.5 7.0 9.0 5.7 4.1 4.1 3.1 0.3 0.3 0.3 4.5 5.6 5.7 5.2 4.0 6.0 70 46.8 1.2 Shree Cement 4,457 SELL 155,283 2,525 35 307.0 311.6 324.1 92.3 1.5 4.0 14.5 14.3 13.8 9.6 8.3 8.1 4.1 3.3 2.8 0.4 0.4 0.4 33.3 25.8 22.0 3,950 (11.4) 1.3 UltraTech Cement 1,951 REDUCE 534,870 8,696 274 101.3 87.6 105.5 13.4 (13.5) 20.4 19.3 22.3 18.5 11.9 12.4 9.9 3.1 2.7 2.4 0.5 0.5 0.5 18.9 14.7 15.5 1,650 (15.4) 7.4 Cement Cautious 1,465,166 23,822 16.2 (12.5) 16.9 15.4 17.6 15.1 9.3 9.3 7.8 2.4 2.1 1.9 1.2 1.1 1.3 15.3 12.1 12.7

Source: Company, Bloomberg, Kotak Institutional Equities estimates

KOTAK INSTITUTIONAL EQUITIES RESEARCH Kotak Institutional Equities: Valuation summary of KIE Universe stocks India DailyIndia Summary-October2013 25,

O/S Target ADVT- 24-Oct-13 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) 2013 2014E 2015E 2013 2014E 2015E 2013 2014E 2015E 2013 2014E 2015E 2013 2014E 2015E 2013 2014E 2015E 2013 2014E 2015E (Rs) (%) (US$ mn) Consumer products Asian Paints 522 SELL 500,223 8,133 959 11.6 13.1 15.3 12.7 12.9 16.9 44.9 39.8 34.0 28.5 24.0 20.6 14.1 11.8 10.0 0.9 1.1 1.3 36.3 34.0 33.6 440 (15.6) 11.0 Bajaj Corp. 236 BUY 34,810 566 148 11.3 13.0 15.6 38.4 15.8 19.6 20.9 18.1 15.1 19.2 16.9 13.6 7.2 6.4 5.6 2.8 3.2 3.8 26.4 32.3 33.0 295 25.0 0.5 Colgate-Palmolive (India) 1,278 SELL 173,819 2,826 136 36.5 39.4 45.7 11.3 7.9 16.0 35.0 32.4 28.0 25.8 23.3 20.0 37.2 29.8 27.1 2.2 2.4 2.8 107.4 97.8 97.9 1,275 (0.2) 3.1 Dabur India 177 ADD 307,883 5,006 1,743 4.4 5.4 6.4 19.0 21.8 18.4 40.1 32.9 27.8 31.5 25.7 21.6 14.5 11.6 9.4 0.8 1.1 1.4 40.0 39.2 37.4 180 1.9 4.7 GlaxoSmithKline Consumer 4,517 SELL 189,983 3,089 42 103.8 122.7 145.3 20.7 18.1 18.4 43.5 36.8 31.1 37.7 32.8 27.6 14.0 11.9 10.2 1.0 1.3 1.6 34.9 34.9 35.4 3,900 (13.7) 1.2 Godrej Consumer Products 846 REDUCE 287,775 4,679 340 20.3 23.6 29.5 20.4 16.2 25.1 41.7 35.9 28.7 31.4 25.6 20.0 8.1 6.9 5.8 0.6 0.7 0.8 22.6 22.3 23.7 760 (10.1) 3.2 Hindustan Unilever 610 SELL 1,318,044 21,430 2,163 15.4 15.9 17.4 28.1 3.3 9.6 39.6 38.3 35.0 32.5 29.3 25.1 53.4 39.3 32.0 3.0 1.7 2.0 103.1 110.4 95.7 530 (13.0) 22.2 ITC 343 ADD 2,749,472 44,703 8,022 9.3 10.7 12.6 19.0 15.1 17.1 36.7 31.9 27.2 26.3 22.3 18.9 11.7 10.5 9.4 1.5 1.8 2.2 36.1 36.3 38.1 375 9.4 46.3

Jubilant Foodworks 1,140 SELL 75,489 1,227 66 19.9 24.1 33.0 21.7 21.1 36.8 57.1 47.2 34.5 31.1 24.3 18.0 17.6 13.4 10.3 ——— — — —925 (18.8) 4.9 Jyothy Laboratories 184 ADD 33,308 542 181 3.9 6.9 11.5 40.5 77.3 67.6 47.4 26.7 15.9 30.6 19.4 14.6 5.2 3.5 3.0 1.2 1.4 1.4 — — — 215 16.8 0.5 Marico 207 REDUCE 133,609 2,172 645 5.6 7.4 8.6 8.0 31.1 16.2 36.9 28.1 24.2 22.8 18.9 15.9 6.6 5.6 4.8 0.2 0.7 1.0 18.3 20.3 20.2 215 3.7 1.7 Nestle India 5,562 SELL 536,327 8,720 96 110.8 124.1 145.6 11.1 12.0 17.3 50.2 44.8 38.2 29.6 25.0 21.7 27.4 21.4 17.2 0.9 1.0 1.3 71.6 60.2 54.9 4,200 (24.5) 2.3 Page Industries 4,477 ADD 49,935 812 11 100.9 136.9 178.9 25.1 35.7 30.7 44.4 32.7 25.0 28.7 21.7 16.7 22.8 17.0 12.6 1.1 1.3 1.7 59.3 60.9 58.9 4,700 5.0 0.5 Speciality Restaurants 124 BUY 5,821 95 47 5.0 5.5 6.8 1.8 10.2 24.3 24.9 22.6 18.1 15.6 14.1 10.9 2.0 1.9 1.7 — — — 11.6 8.5 9.7 160 29.0 0.1 Tata Global Beverages 165 ADD 102,314 1,664 618 6.3 7.6 8.6 14.8 20.1 13.4 26.1 21.7 19.2 15.4 12.7 11.0 1.8 1.7 1.6 1.3 1.7 2.0 8.4 9.5 10.2 165 (0.3) 6.0 Titan Industries 242 REDUCE 214,711 3,491 888 8.2 9.0 10.2 20.9 10.1 13.5 29.6 26.9 23.7 20.1 18.7 15.3 10.9 8.6 7.0 0.9 1.1 1.3 42.3 35.7 32.5 250 3.4 11.1 United Breweries 964 SELL 254,794 4,143 264 6.5 9.3 14.0 36.2 42.3 51.1 147.5 103.7 68.6 55.8 40.2 30.3 17.9 15.8 13.4 0.1 0.2 0.3 12.0 15.7 20.5 700 (27.4) 5.8 United Spirits 2,694 BUY 391,564 6,366 145 9.4 53.3 75.5 (30.8) 465.3 41.7 285.7 50.5 35.7 33.5 25.9 20.1 6.4 4.4 4.0 0.3 0.2 0.3 8.3 10.4 11.8 2,800 3.9 42.2 Consumer products Cautious 7,359,882 119,663 17.5 21.0 18.5 42.7 35.3 29.8 28.5 24.2 20.2 12.7 10.6 9.3 1.5 1.4 1.7 29.7 30.1 31.1 Cons tructions NCC 25 ADD 6,325 103 257 2.4 2.2 2.4 74.2 (11.0) 12.2 10.1 11.3 10.1 5.9 6.6 6.2 0.3 0.3 0.3 2.4 4.1 4.1 2.6 2.2 2.5 45 82.6 0.6 Sadbhav Engineering 65 BUY 11,170 182 171 4.9 5.4 9.2 (47.3) 9.4 71.0 13.3 12.1 7.1 11.4 6.1 4.6 1.3 1.0 0.9 0.8 0.9 0.9 8.6 7.9 12.0 160 145.6 0.2 Construction Cautious 27,377 445 (62.7) 74.1 93.0 25.4 14.6 7.6 6.4 5.9 5.2 0.4 0.4 0.4 0.9 1.4 1.8 1.8 2.9 5.3 Energy Aban Offshore 228 RS 9,933 162 44 38.6 81.1 97.4 (43.5) 110.2 20.0 5.9 2.8 2.3 7.4 6.8 6.0 0.3 0.4 0.3 1.6 2.2 2.2 6.4 15.1 14.8 — — 1.4 Bharat Petroleum 357 BUY 258,103 4,196 723 36.6 32.1 35.6 99.2 (12.2) 10.8 9.8 11.1 10.0 6.9 7.1 6.7 1.4 1.3 1.2 3.1 2.7 3.0 14.5 11.6 11.8 440 23.3 10.5 Cairn india 325 ADD 620,255 10,085 1,910 63.1 62.7 55.3 51.7 (0.7) (11.8) 5.1 5.2 5.9 4.2 3.8 4.0 1.3 1.1 0.9 3.5 3.7 3.7 24.8 22.7 17.2 370 14.0 14.8 Castrol India 311 SELL 153,610 2,498 495 9.0 9.9 10.4 (4.4) 9.0 5.7 34.3 31.5 29.8 23.7 21.4 19.9 26.3 24.8 39.3 2.3 2.6 2.7 79.0 81.1 102.1 230 (25.9) 0.7 GAIL (India) 352 ADD 446,505 7,260 1,268 35.5 30.0 31.9 16.5 (15.6) 6.4 9.9 11.8 11.0 6.6 7.3 6.6 1.7 1.5 1.4 2.7 2.6 2.8 17.2 12.9 12.4 380 8.0 6.2 GSPL 59 ADD 33,312 542 563 9.6 9.5 8.1 2.6 (0.8) (14.9) 6.2 6.2 7.3 3.9 3.8 4.0 1.0 0.9 0.8 1.7 1.7 2.7 17.6 14.9 11.2 75 26.7 0.5 Hindustan Petroleum 197 ADD 66,836 1,087 339 24.8 12.2 21.6 (7.6) (50.8) 77.4 8.0 16.2 9.1 8.1 10.1 7.8 0.4 0.4 0.4 4.3 2.0 3.5 4.7 2.2 3.9 240 21.7 5.2 Indian Oil Corporation 199 ADD 483,648 7,864 2,428 16.8 12.8 27.8 (48.8) (23.8) 116.7 11.8 15.5 7.2 9.4 8.6 5.0 0.8 0.8 0.7 3.1 3.8 7.5 6.2 4.4 9.5 250 25.5 2.3 Oil India 453 BUY 272,557 4,431 601 59.7 53.9 63.1 4.1 (9.6) 17.0 7.6 8.4 7.2 3.1 3.0 2.4 1.3 1.2 1.2 6.6 6.1 7.1 15.9 13.5 14.7 650 43.4 2.8 Oil & Natural Gas Corporation 284 BUY 2,428,057 39,477 8,556 29.4 33.1 37.6 (10.5) 12.5 13.6 9.7 8.6 7.6 3.9 3.2 2.7 1.3 1.2 1.1 3.3 3.7 4.2 13.3 13.6 13.9 350 23.3 20.1 Petronet LNG 130 BUY 97,163 1,580 750 15.3 10.4 12.0 8.7 (32.0) 15.3 8.5 12.4 10.8 6.2 7.8 6.5 2.0 1.7 1.5 1.9 1.9 2.1 25.6 14.4 14.5 165 27.4 2.7 Reliance Industries 885 BUY 2,596,892 42,222 2,936 65.0 69.4 77.9 6.2 6.7 12.3 13.6 12.7 11.3 8.9 8.7 7.1 1.4 1.2 1.1 1.0 1.0 1.1 11.3 11.1 11.3 980 10.8 52.1 Energy Attractive 7,466,871 121,403 0.0 2.3 13.3 9.8 9.6 8.5 6.1 5.6 4.6 1.3 1.2 1.1 2.6 2.7 3.2 13.0 12.1 12.5 Industrials ABB 633 SELL 134,043 2,179 212 6.7 14.1 19.6 (23.6) 111.6 39.3 95.1 44.9 32.3 55.7 26.1 19.6 5.2 4.8 4.3 0.5 0.5 0.6 5.5 11.0 13.9 400 (36.8) 0.9 Bharat Electronics 1,080 REDUCE 86,368 1,404 80 113.6 103.6 114.6 6.8 (8.8) 10.6 9.5 10.4 9.4 6.2 5.4 5.0 1.3 1.2 1.1 2.8 2.8 2.8 14.5 12.0 12.2 1,200 11.2 0.6 Bharat Heavy Electricals 140 SELL 343,154 5,579 2,448 27.0 15.0 11.7 (6.0) (44.5) (21.8) 5.2 9.4 12.0 3.2 5.9 7.1 1.1 1.0 1.0 3.9 2.3 1.8 23.7 11.5 8.4 105 (25.1) 21.4 Crompton Greaves 97 ADD 62,193 1,011 642 1.3 5.6 8.0 (77.2) 328.1 42.2 74.2 17.3 12.2 18.0 8.9 7.2 1.7 1.6 1.5 1.2 1.3 1.5 2.3 9.7 12.6 105 8.3 3.6 Cummins India 405 REDUCE 112,252 1,825 277 28.3 22.3 24.9 28.3 (21.2) 11.8 14.3 18.2 16.3 13.9 16.2 14.1 4.7 4.2 3.8 3.2 2.5 2.7 34.5 23.5 23.1 400 (1.2) 2.3 Kalpataru Power Transmission 76 BUY 11,648 189 153 8.8 13.2 15.6 (34.1) 51.1 17.9 8.7 5.7 4.9 5.9 5.1 4.7 0.6 0.5 0.5 2.0 2.0 2.0 6.4 8.8 9.5 120 58.1 0.1 KEC International 33 BUY 8,407 137 257 2.5 6.0 9.2 (63.1) 136.3 54.2 12.9 5.5 3.5 6.2 4.9 3.8 0.7 0.6 0.5 1.5 2.7 4.2 5.5 12.1 16.6 70 114.1 0.1 Larsen & Toubro 966 ADD 891,392 14,493 923 52.4 48.2 58.0 4.4 (8.1) 20.5 18.4 20.0 16.6 15.0 14.8 13.4 2.6 2.3 2.0 1.3 1.3 1.4 15.2 12.2 13.0 970 0.5 42.4 Siemens 545 REDUCE 191,664 3,116 352 4.9 17.6 22.3 (64.4) 260.6 27.0 111.6 31.0 24.4 36.2 14.4 11.7 4.9 4.6 4.2 0.5 1.0 1.0 4.4 15.4 18.0 400 (26.5) 3.3 Thermax 618 REDUCE 73,670 1,198 119 25.5 29.4 33.6 (22.5) 15.1 14.4 24.2 21.1 18.4 16.3 13.9 11.9 3.9 3.5 3.1 1.1 1.4 1.6 17.4 17.7 18.0 540 (12.7) 0.6 India DailyIndia SummaryOctober - Voltas 84 BUY 27,812 452 331 5.9 6.2 8.1 (39.7) 5.7 30.1 14.3 13.5 10.4 9.6 7.9 5.5 1.7 1.6 1.4 2.2 2.2 2.9 12.5 12.1 14.4 100 18.9 1.8 Industrials Cautious 1,942,602 31,584 (6.6) (17.6) 7.8 13.7 16.6 15.4 10.8 12.0 11.4 2.1 1.9 1.8 1.8 1.6 1.6 15.7 11.7 11.5

Source: Company, Bloomberg, Kotak Institutional Equities estimates

80

2 81 81

Kotak Institutional Equities: Valuation summary of KIE Universe stocks

O/S Target ADVT- 24-Oct-13 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) 2013 2014E 2015E 2013 2014E 2015E 2013 2014E 2015E 2013 2014E 2015E 2013 2014E 2015E 2013 2014E 2015E 2013 2014E 2015E (Rs) (%) (US$ mn) Infrastructure Adani Port and SEZ 155 BUY 312,503 5,081 2,017 8.0 9.7 12.7 47.3 20.9 30.1 19.3 15.9 12.2 18.0 11.5 9.1 4.8 3.6 2.9 0.8 1.1 1.3 28.2 25.7 26.0 180 16.2 5.0 Container Corporation 767 ADD 149,618 2,433 195 48.2 52.9 60.0 7.1 9.7 13.4 15.9 14.5 12.8 11.5 10.4 8.7 2.4 2.1 1.9 1.5 1.6 1.8 15.8 15.5 15.7 780 1.6 1.1 GMR Infrastructure 23 RS 88,552 1,440 3,892 (1.8) (0.6) (0.7) (56.2) 67.2 (19.6) (12.8) (39.2) (32.8) 18.3 9.6 6.4 1.0 1.0 1.1 — — — (9.3) (3.2) (3.9) — — 3.3 Gujarat Pipavav Port 50 BUY 24,269 395 483 1.5 3.7 4.2 29.7 138.9 16.3 32.8 13.7 11.8 13.7 10.0 9.0 2.0 1.7 1.5 ——— 7.6 16.2 14.6 62 23.5 0.4 IRB Infrastructure 80 BUY 26,456 430 332 16.7 16.7 16.4 11.1 (0.4) (1.8) 4.8 4.8 4.9 6.1 6.5 6.2 0.8 0.6 0.6 5.0 5.0 5.0 17.4 14.2 11.9 140 75.9 3.5 Infrastructure Cautious 601,398 9,778 19.5 39.7 20.1 24.0 17.2 14.3 14.6 9.8 7.5 2.3 2.0 1.8 1.0 1.2 1.4 9.5 11.6 12.6 Media DB Corp 254 ADD 46,658 759 183 11.9 14.5 16.7 7.9 22.3 15.1 21.4 17.5 15.2 12.1 9.9 8.6 4.5 4.1 3.7 2.2 2.8 3.5 22.3 24.5 25.5 300 17.9 0.3 DishTV 51 ADD 53,925 877 1,064 (1.4) (0.2) 0.9 (33.9) 82.1 457.2 (37.3) (208.2) 58.3 11.0 9.9 8.2 (33.3) (28.7) (34) — — 1.0 113.0 14.8 (54) 65 28.2 5.0 Eros International 151 ADD 13,816 225 92 16.7 20.4 23.8 1.5 22.0 16.5 9.0 7.4 6.3 6.2 5.2 4.4 1.4 1.2 1.0 — — — 16.7 17.2 16.7 150 (0.4) 0.5 Jagran Prakashan 86 BUY 27,118 441 316 4.5 5.9 7.7 (20.2) 31.0 30.8 19.0 14.5 11.1 9.7 8.0 6.4 3.3 3.1 2.9 4.1 4.7 5.2 18.0 21.9 26.7 130 51.6 0.2 Sun TV Network 424 REDUCE 167,149 2,718 394 18.0 21.0 24.6 2.3 16.9 17.1 23.6 20.2 17.2 14.8 12.4 10.6 5.7 5.2 4.8 2.4 2.8 3.8 26.5 28.1 30.2 440 3.7 5.7 Zee Entertainment Enterprises 263 REDUCE 250,088 4,066 950 7.6 9.2 10.8 25.6 20.9 17.5 34.8 28.8 24.5 24.6 19.6 16.3 5.1 4.7 4.5 0.7 0.8 0.9 15.3 17.3 19.1 240 (8.8) 12.2 Media Neutral 589,608 9,586 6.5 27.6 23.5 28.8 22.6 18.3 14.5 12.0 10.1 4.6 4.3 3.9 1.4 1.8 2.4 16.1 18.8 21.6 Metals & Mining Coal India 279 BUY 1,764,161 28,683 6,316 27.5 28.6 32.0 18.1 4.3 11.6 10.2 9.8 8.7 5.8 4.7 3.7 3.5 3.0 2.6 5.0 5.2 5.8 37.2 33.2 32.3 370 32.5 12.6 Hindalco Industries 115 REDUCE 219,375 3,567 1,915 15.8 12.0 14.0 (10.9) (24.0) 16.6 7.2 9.5 8.2 8.9 8.6 7.0 0.6 0.6 0.6 1.2 1.2 1.2 9.0 6.3 7.0 105 (8.3) 18.5 Hindustan Zinc 134 ADD 568,051 9,236 4,225 16.4 15.8 16.7 24.2 (3.5) 5.6 8.2 8.5 8.1 5.5 4.5 3.7 1.8 1.5 1.3 2.3 2.3 2.3 23.5 19.2 17.6 160 19.0 3.2 Jindal Steel and Power 242 ADD 225,754 3,671 935 31.1 26.3 30.5 (26.6) (15.5) 15.9 7.8 9.2 7.9 7.1 8.0 6.2 1.1 1.0 0.9 0.8 0.8 0.8 14.9 11.1 11.5 275 13.9 12.3 JSW Steel 846 SELL 204,554 3,326 242 32.9 88.4 96.4 (46.2) 169.0 9.0 25.7 9.6 8.8 6.5 6.1 5.6 1.0 0.9 0.8 1.1 1.1 1.1 4.2 9.8 10.0 610 (27.9) 15.3 National Aluminium Co. 36 REDUCE 92,523 1,504 2,577 2.3 2.1 3.0 (31.2) (9.9) 43.2 15.6 17.3 12.1 4.9 6.3 5.3 0.8 0.8 0.7 3.5 3.5 3.5 5.0 4.4 6.2 31 (13.6) 0.3 NMDC 140 ADD 554,860 9,021 3,965 16.4 15.1 15.6 (11.2) (7.8) 2.9 8.5 9.3 9.0 4.6 5.0 5.1 2.0 1.9 1.7 5.0 5.7 5.7 24.4 20.9 19.9 155 10.8 7.5 Sesa Sterlite 199 ADD 589,376 9,583 2,965 34.1 34.4 32.8 10.1 0.7 (4.5) 5.8 5.8 6.1 4.8 4.8 4.6 0.9 0.8 0.7 1.2 1.5 1.5 3.3 (0.7) (0.8) 200 0.6 28.4 Tata Steel 332 ADD 322,654 5,246 971 3.4 23.6 31.1 (86.9) 589.2 32.1 97.1 14.1 10.7 7.4 6.3 6.1 0.9 0.9 0.9 2.4 2.4 2.4 0.9 6.6 8.3 325 (2.2) 39.3 Metals & Mining Neutral 4,541,307 73,836 15.7 3.2 8.2 9.2 9.0 8.3 6.0 5.7 5.1 1.5 1.4 1.3 3.4 3.6 3.8 16.6 15.5 15.1 Pharmaceutical Apollo Hospitals 890 SELL 123,769 2,012 139 21.4 27.6 33.4 35.7 28.7 21.2 41.5 32.3 26.6 21.3 17.3 14.1 4.5 4.1 3.7 0.6 0.8 0.9 11.3 13.3 14.6 850 (4.5) 3.1 Biocon 341 ADD 67,306 1,094 198 15.5 19.6 24.2 (9.2) 26.5 23.1 21.9 17.3 14.1 12.0 9.6 8.2 2.5 2.3 2.1 2.2 2.2 2.2 20.5 13.9 15.6 335 (1.6) 3.9 Cipla 420 ADD 337,388 5,486 803 17.8 18.4 21.9 27.1 3.4 19.3 23.6 22.9 19.2 15.7 14.7 11.7 3.7 3.2 2.8 0.5 0.5 0.5 15.6 15.5 15.7 450 7.1 10.0 Cadila Healthcare 665 ADD 136,137 2,213 205 29.5 33.1 44.4 (7.5) 12.2 34.3 22.6 20.1 15.0 16.7 14.8 11.3 4.6 4.0 3.3 1.1 1.2 1.6 23.7 21.2 24.1 800 20.3 1.1 Divi's Laboratories 991 ADD 131,505 2,138 133 45.4 51.9 59.9 12.9 14.5 15.4 21.8 19.1 16.5 15.9 13.8 11.3 5.3 4.5 3.8 1.5 1.7 1.9 26.0 25.4 25.0 1,040 4.9 3.0 Dr Reddy's Laboratories 2,392 BUY 407,614 6,627 170 96.0 115.7 139.8 14.2 20.6 20.9 24.9 20.7 17.1 16.7 13.7 11.6 5.6 4.6 3.8 0.6 0.7 0.9 24.0 24.4 24.2 2,700 12.9 12.1 GlaxoSmithKline Pharmaceuticals 2,419 SELL 205,047 3,334 85 81.4 84.5 97.5 9.7 3.8 15.5 29.7 28.6 24.8 22.8 21.8 18.2 10.2 9.4 8.5 2.1 2.3 2.5 28.5 34.2 36.0 1,820 (24.8) 0.7

Glenmark Pharmaceuticals 548 ADD 148,537 2,415 271 22.7 27.5 33.7 3.7 21.1 22.7 24.2 20.0 16.3 17.3 13.7 11.7 5.3 4.7 3.8 0.4 0.4 0.4 23.8 25.1 25.9 570 3.9 4.7 OctoberSummary 2013 Daily- 25, India Lupin 906 ADD 404,826 6,582 447 29.5 35.3 41.8 52.3 19.4 18.7 30.7 25.7 21.6 19.1 16.1 13.1 7.7 6.2 5.0 0.4 0.7 0.8 28.6 27.0 25.9 850 (6.1) 17.0 Ranbaxy Laboratories 398 REDUCE 168,425 2,738 423 21.8 (2.5) 17.6 217.7 (111.2) 819.8 18.3 (162.5) 22.6 9.9 21.4 14.0 4.1 5.0 2.8 — — — 26.5 (2.8) 15.9 300 (24.7) 33.3 Sun Pharmaceuticals 622 SELL 1,287,217 20,929 2,071 14.4 24.8 25.1 15.3 72.3 1.1 43.2 25.0 24.8 24.8 17.4 16.8 7.7 6.7 5.4 0.4 0.4 0.5 19.9 28.8 24.1 485 (22.0) 19.7 Pharmaceuticals Attractive 3,417,771 55,569 39.5 19.6 19.8 29.9 25.0 20.9 18.7 16.0 13.7 5.9 5.2 4.2 0.6 0.7 0.8 19.7 20.7 20.1 Real Estate DLF 159 ADD 283,512 4,610 1,780 4.3 4.2 9.7 (40.5) (2.9) 132.7 37.1 38.2 16.4 19.5 14.3 11.2 1.0 1.0 0.9 1.2 0.6 0.6 2.7 2.6 5.7 255 60.1 27.8 HDIL 42 NR 17,619 286 419 1.7 11.0 14.3 (91.0) 528.0 30.4 24.1 3.8 2.9 8.3 7.3 6.3 0.2 0.2 0.2 — — — 0.7 4.3 5.4 — — 7.4 Oberoi Realty 184 BUY 60,411 982 328 14.5 20.0 25.8 9.2 37.5 29.2 12.7 9.2 7.1 8.5 5.9 3.9 1.5 1.3 1.1 1.1 1.1 1.1 12.1 14.7 16.3 290 57.6 0.5 Prestige Estates Projects 142 BUY 49,630 807 350 8.2 13.1 17.1 224.5 60.9 30.1 17.4 10.8 8.3 11.8 7.5 6.2 1.8 1.6 1.3 — — — 11.7 15.6 17.4 200 41.0 0.7 Sobha Developers 308 BUY 30,204 491 98 22.1 23.2 36.5 5.4 4.7 57.5 13.9 13.3 8.4 7.9 7.9 5.8 1.4 1.3 1.2 2.3 1.6 1.6 10.5 10.2 14.6 500 62.3 0.8 Sunteck Realty 332 BUY 19,885 323 60 0.7 76.5 25.4 29.1 11,307 (66.8) 494.3 4.3 13.0 452.7 3.3 5.9 4.1 2.1 1.9 — 0.6 0.6 0.7 64.3 15.2 560 68.9 0.1 Real Estate Cautious 489,854 7,964 (34.4) 79.5 43.9 26.0 14.5 10.1 15.0 9.7 7.7 1.0 0.9 0.8 1.0 0.7 0.7 3.8 6.3 8.4

Source: Company, Bloomberg, Kotak Institutional Equities estimates KOTAK INSTITUTIONAL EQUITIES RESEARCH

KOTAK INSTITUTIONAL EQUITIES RESEARCH Kotak Institutional Equities: Valuation summary of KIE Universe stocks India DailyIndia Summary-October2013 25,

O/S Target ADVT- 24-Oct-13 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) 2013 2014E 2015E 2013 2014E 2015E 2013 2014E 2015E 2013 2014E 2015E 2013 2014E 2015E 2013 2014E 2015E 2013 2014E 2015E (Rs) (%) (US$ mn) Technology HCL Technologies 1,055 REDUCE 748,802 12,175 710 56.9 81.0 86.6 64.7 42.3 7.0 18.5 13.0 12.2 12.3 8.1 7.5 5.7 3.8 3.0 1.1 1.3 1.5 33.7 33.0 27.9 1,050 (0.4) 26.3 Hexaware Technologies 132 REDUCE 38,753 630 293 11.2 12.9 12.9 22.8 15.4 0.3 11.8 10.2 10.2 9.0 6.7 6.2 3.2 2.8 2.6 4.5 4.9 4.9 29.5 29.5 26.4 125 (5.4) 6.9 Infosys 3,309 ADD 1,890,620 30,739 571 164.9 182.5 219.7 13.3 10.7 20.3 20.1 18.1 15.1 14.5 12.0 9.8 5.0 4.2 3.5 1.4 2.1 2.5 27.2 25.6 25.5 3,750 13.3 68.4 Mindtree 1,374 ADD 57,701 938 42 81.7 113.1 128.6 53.2 38.5 13.7 16.8 12.1 10.7 11.7 9.2 7.4 4.4 3.4 2.7 0.9 1.2 1.4 29.8 31.5 28.0 1,540 12.1 2.2 Mphasis 442 SELL 93,118 1,514 211 37.6 36.2 40.1 (3.7) (3.6) 10.6 11.8 12.2 11.0 8.8 8.9 7.8 2.1 2.0 1.8 3.8 4.1 4.5 19.1 16.7 17.2 400 (9.5) 0.7 Polaris Financial Technology 134 REDUCE 13,315 216 100 20.0 19.2 22.4 (3.8) (3.9) 16.5 6.7 7.0 6.0 3.4 2.6 2.3 1.0 0.9 0.8 3.1 3.2 3.4 15.3 13.6 14.2 135 1.1 1.3 TCS 2,009 ADD 3,931,428 63,920 1,957 71.2 94.8 111.3 31.1 33.0 17.5 28.2 21.2 18.0 21.1 14.9 12.7 9.6 7.6 6.1 1.1 1.7 1.9 38.0 39.9 37.3 2,250 12.0 53.0 Tech Mahindra 1,537 ADD 359,067 5,838 234 101.9 125.0 136.3 16.7 22.6 9.0 15.1 12.3 11.3 10.9 8.6 7.7 5.2 3.8 3.0 0.4 0.4 0.4 36.3 32.4 26.7 1,500 (2.4) 29.7

Wipro 471 REDUCE 1, 159,704 18,855 2,463 24.9 31.6 35.1 9.9 26.7 11.4 18.9 14.9 13.4 13.2 10.1 8.3 4.1 3.4 2.9 1.5 1.7 1.9 21.6 24.9 23.2 510 8.3 25.6 Technology Attractive 8,292,506 134,827 23.2 26.4 14.6 22.2 17.6 15.3 16.0 11.9 10.2 6.1 4.9 4.0 1.2 1.7 2.0 27.5 27.8 26.3 Telecom Bharti Airtel 350 ADD 1,397,715 22,725 3,997 6.0 10.5 18.2 (46.6) 75.4 73.2 58.3 33.3 19.2 8.5 7.0 5.8 2.8 2.3 2.1 0.3 0.3 1.0 4.5 7.6 11.6 375 7.3 29.1 Bharti Infratel 159 ADD 300,512 4,886 1,889 5.3 7.9 8.9 23.3 48.8 12.4 30.0 20.2 17.9 7.6 6.3 5.6 1.7 1.7 1.6 2.4 2.2 2.6 6.3 8.5 9.2 170 6.9 — IDEA 175 BUY 578,408 9,404 3,303 3.1 6.8 9.9 39.8 121.0 46.7 57.2 25.9 17.6 11.8 8.0 6.4 4.0 3.5 3.0 — — 0.4 7.4 14.6 18.4 195 11.4 16.9 Reliance Communications 149 SELL 307,330 4,997 2,064 3.3 7.9 7.3 (27.5) 143.5 (8.2) 45.7 18.8 20.4 10.5 8.0 7.9 1.1 1.0 1.0 ——— 0.4 5.5 4.8 80 (46.3) 31.9 Tata Communications 226 BUY 64,325 1,046 285 (29.4) (7.0) 5.0 (5.5) 76.3 171.5 (7.7) (32.3) 45.3 8.4 6.3 5.5 4.5 4.4 4.0 — — — (45.0) (13.8) 9.3 250 10.8 2.3 Telecom Attractive 2,648,290 43,058 (39.1) 162.1 48.2 74.1 28.3 19.1 9.2 7.2 6.2 2.4 2.1 1.9 0.5 0.5 0.9 3.2 7.4 10.1 Utilities Adani Power 35 SELL 101,379 1,648 2,872 (9.0) (9.4) (1.3) (2,023.1) (4.0) 86.6 (3.9) (3.8) (28.2) 45.5 19.9 10.1 2.4 2.4 2.7 — — — (41.7) (63.7) (9.1) 30 (15.0) 1.9 CESC 348 ADD 43,434 706 125 34.3 39.7 43.6 57.6 15.8 9.8 10.1 8.8 8.0 10.9 9.6 7.7 0.6 0.6 0.6 2.0 2.0 2.2 6.7 7.2 7.5 364 4.7 1.0 JSW Energy 47 ADD 77,736 1,264 1,640 6.7 6.8 5.8 232.1 0.9 (14.5) 7.1 7.0 8.2 6.4 4.8 4.8 1.3 1.1 0.9 — — — 18.5 16.4 12.2 50 5.5 1.4 Lanco Infratech 7 RS 14,894 242 2,223 (4.7) (6.0) 4.5 (790.4) (28.6) 174.6 (1.4) (1.1) 1.5 14.8 13.4 5.9 0.4 0.6 0.4 — — — (24.2) (41.9) 33.3 — — 0.5 NHPC 19 ADD 230,024 3,740 12,301 1.9 2.0 2.2 (22.4) 2.7 12.1 9.7 9.4 8.4 9.8 8.9 6.7 0.7 0.7 0.7 3.7 2.9 3.2 7.9 7.5 8.0 23 23.0 1.6 NTPC 143 BUY 1,181,575 19,211 8,245 13.0 13.5 14.2 20.8 3.6 5.4 11.0 10.6 10.1 10.1 8.9 8.3 1.5 1.3 1.2 4.7 2.8 3.0 14.0 13.3 12.8 160 11.7 10.1 Power Grid 99 BUY 458,343 7,452 4,630 9.1 10.1 11.1 28.7 11.6 9.8 10.9 9.8 8.9 10.8 9.8 8.6 1.7 1.6 1.4 2.8 3.1 3.4 16.9 16.9 16.7 135 36.4 8.2 Reliance Infrastructure 428 BUY 112,498 1,829 263 70.9 62.1 65.3 17.5 (12.4) 5.2 6.0 6.9 6.6 9.7 7.6 7.7 0.4 0.4 0.4 1.7 2.6 2.6 11.0 9.8 8.7 710 66.0 22.1 Reliance Power 74 SELL 208,000 3,382 2,805 3.6 3.9 3.8 16.7 8.8 (3.4) 20.6 18.9 19.6 24.9 33.6 22.9 1.1 1.1 1.0 ——— 5.6 5.8 5.3 75 1.1 13.1 Tata Power 81 BUY 200,059 3,253 2,468 4.0 5.3 5.8 (12.9) 33.1 8.6 20.2 15.2 14.0 9.2 6.9 6.5 1.5 1.4 1.3 1.4 1.5 1.5 7.4 9.5 9.6 92 13.5 5.5 Utilities Attractive 2,627,942 42,727 1.7 1.9 30.4 13.4 13.2 10.1 11.4 9.9 8.3 1.2 1.1 1.0 3.1 2.3 2.5 9.0 8.6 10.3 Others Carborundum Universal 118 BUY 22,066 359 187 5.7 8.8 13.7 (50.7) 53.7 56.3 20.6 13.4 8.6 10.2 7.2 4.9 1.9 1.7 1.4 0.8 1.3 2.0 10.3 14.4 19.2 180 52.9 0.0 Coromandel International 230 SELL 65,103 1,059 283 15.3 15.4 18.4 (32.5) 0.7 20.0 15.1 15.0 12.5 13.3 9.4 8.4 3.0 2.6 2.3 2.0 2.1 2.1 17.8 17.6 18.6 170 (26.1) 0.6 Havells India 699 REDUCE 87,230 1,418 125 33.4 36.8 41.0 6.0 10.4 11.5 21.0 19.0 17.0 13.7 11.6 10.4 5.9 4.7 3.9 1.1 1.1 1.2 33.3 27.6 25.2 625 (10.6) 4.0 Jaiprakash Associates 46 BUY 103,077 1,676 2,219 2.0 3.9 10.3 (32.9) 97.8 164.7 23.7 12.0 4.5 11.3 8.8 6.2 0.8 0.8 0.7 — — — 3.6 6.7 16.1 57 22.7 30.7 MCX India 469 ADD 23,791 387 51 58.6 33.9 34.8 (1.5) (42) 2.6 8.0 13.8 13.5 3.0 6.8 6.6 2.1 2.0 2.0 5.1 5.1 5.1 27.7 14.7 14.7 400 (14.6) 6.5 Rallis India 158 BUY 30,746 500 194 6.1 8.2 10.8 20.0 34 31.9 25.8 19.3 14.6 15.0 11.3 9.0 5.0 4.2 3.5 1.5 1.4 1.4 18.9 23.2 26.1 180 13.9 0.6 Tata Chemicals 263 BUY 67,030 1,090 255 15.7 29.0 34.6 (52.2) 84.3 19.3 16.7 9.1 7.6 5.9 5.2 4.6 0.9 0.8 0.8 3.8 3.8 3.8 5.1 9.1 10.0 300 14.0 1.5 UPL 155 REDUCE 68,493 1,114 443 17.5 19.8 20.8 39.4 13.2 5.0 8.8 7.8 7.4 5.1 4.8 4.3 1.5 1.3 1.1 1.6 1.6 1.6 18.0 17.8 16.2 145 (6.3) #VALUE! Others 817,632 13,294 (21.9) 29.0 48.3 24.9 19.3 13.0 12.1 10.0 7.9 2.4 2.2 1.9 1.0 1.1 1.2 9.7 11.4 14.8 KIE universe 54,571,142 887,264 7.8 8.0 16.9 15.3 14.2 12.1 10.2 8.9 7.6 2.3 2.1 1.9 1.8 1.8 2.1 15.1 14.7 15.3 KIE universe ex-energy 47,104,271 765,861 10.1 9.6 17.8 16.8 15.3 13.0 11.7 10.0 8.6 2.7 2.4 2.1 1.7 1.7 2.0 15.8 15.5 16.2 KIE universe ex-energy & ex-commodities 41,097,798 668,203 8.7 11.9 19.8 18.5 16.6 13.8 13.7 11.3 9.6 2.9 2.6 2.3 1.5 1.5 1.8 15.7 15.6 16.6

Notes: (a) For banks we have used adjusted book values. (b) 2012 means calendar year 2011, similarly for 2013 and 2014 for these particular companies. (c) EV/Sales & EV/EBITDA for KS universe excludes Banking Sector.

Source: Company, Bloomberg, Kotak Institutional Equities estimates DailyIndia SummaryOctober -

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

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

40% * The above categories are defined as follows: Buy = We 34.5% 32.7% expect this stock to deliver more than 15% returns over the 30% next 12 months; Add = We expect this stock to deliver 5-15% returns over the next 12 months; Reduce = We 18.8% expect this stock to deliver -5-+5% returns over the next 20% 13.9% 12 months; Sell = We expect this stock to deliver less than - 5% returns over the next 12 months. Our target prices are 10% 6.1% 5.5% also on a 12-month horizon basis. These ratings are used illustratively to comply with applicable regulations. As of 0.6% 1.8% 30/09/2013 Kotak Institutional Equities Investment Research 0% had investment ratings on 165 equity securities. BUY ADD REDUCE SELL

Source: Kotak Institutional Equities As of September 30, 2013

Ratings and other definitions/identifiers

Definitions of ratings

BUY. We expect this stock to deliver more than 15% returns over the next 12 months.

ADD. We expect this stock to deliver 5-15% returns over the next 12 months.

REDUCE. We expect this stock to deliver -5-+5% returns over the next 12 months.

SELL. We expect this stock to deliver <-5% returns over the next 12 months.

Our target prices are also on a 12-month horizon basis.

Other definitions

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

Other ratings/identifiers

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

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

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

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

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

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

Disclosures

Corporate Office Overseas Offices

Kotak Securities Ltd. Kotak Mahindra (UK) Ltd Kotak Mahindra Inc 27 BKC, Plot No. C-27, “G Block” 8th Floor, Portsoken House 50 Main Street, Ste. 890 Bandra Kurla Complex, Bandra (E) 155-157 Minories Westchester Financial Centre Mumbai 400 051, India London EC3N 1LS White Plains, New York 10606 Tel: +91-22-43360000 Tel: +44-20-7977-6900 Tel:+1-914-997-6120

Copyright 2013 Kotak Institutional Equities (Kotak Securities Limited). All rights reserved.

1. Note that the research analysts contributing to this report may not be registered/qualified as research analysts with FINRA; and

2. Such research analysts may not be associated persons of Kotak Mahindra Inc and therefore, may not be subject to NASD Rule 2711 restrictions on communications with a subject company, public appearances and trading securities held by a research analyst account.

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Kotak Securities Limited and its affiliates are a full-service, integrated investment banking, investment management, brokerage and financing group. We along with our affiliates are leading underwriter of securities and participants in virtually all securities trading markets in India. We and our affiliates have investment banking and other business relationships with a significant percentage of the companies covered by our Investment Research Department. Our research professionals provide important input into our investment banking and other business selection processes. Investors should assume that Kotak Securities Limited and/or its affiliates are seeking or will seek investment banking or other business from the company or companies that are the subject of this material and that the research professionals who were involved in preparing this material may participate in the solicitation of such business. Our research professionals are paid in part based on the profitability of Kotak Securities Limited, which include earnings from investment banking and other business. Kotak Securities Limited generally prohibits its analysts, persons reporting to analysts, and members of their households from maintaining a financial interest in the securities or derivatives of any companies that the analysts cover. Additionally, Kotak Securities Limited generally prohibits its analysts and persons reporting to analysts from serving as an officer, director, or advisory board member of any companies that the analysts cover. Our salespeople, traders, and other professionals may provide oral or written market commentary or trading strategies to our clients that reflect opinions that are contrary to the opinions expressed herein, and our proprietary trading and investing businesses may make investment decisions that are inconsistent with the recommendations expressed herein. In reviewing these materials, you should be aware that any or all of the foregoing, among other things, may give rise to real or potential conflicts of interest. Additionally, other important information regarding our relationships with the company or companies that are the subject of this material is provided herein.

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This report has not been prepared by Kotak Mahindra Inc. (KMInc). However KMInc has reviewed the report and, in so far as it includes current or historical information, it is believed to be reliable, although its accuracy and completeness cannot be guaranteed. Any reference to Kotak Securities Limited shall also be deemed to mean and include Kotak Mahindra Inc.

85 KOTAK INSTITUTIONAL EQUITIES RESEARCH