INDIA DAILY

November 1, 2012 India 31-Oct 1-day1-mo 3-mo Sensex 18,505 0.4 (1.7) 7.2

Nifty 5,620 0.4 (1.7) 7.2

Contents Global/Regional indices Special Reports Dow Jones 13,096 (0.1) (3.1) 1.0 Nasdaq Composite 2,977 (0.4) (4.4) 2.0

Strategy FTSE 5,783 (1.1) (0.6) 1.2 Strategy: Is it really difficult doing business in India? Nikkie 8,882 (0.5) 1.0 2.8 Hang Seng 21,609 (0.2) 3.7 9.0 Daily Alerts KOSPI 1,889 (1.2) (5.4) 0.5 Results Value traded – India Cash (NSE+BSE) 118 151 133 NHPC: Low realizations, high tax incidence Derivatives (NSE) 869 898 1,137 Titan Industries: Mix improvement pays off Deri. open interest 1,251 1,179 1,128

Glenmark Pharmaceuticals: Strong quarter but limited margin of safety

Tata Global Beverages: Mixed results Forex/money market Change, basis points Thermax: Near-term outlook slightly clouded, especially on margins 31-Oct 1-day 1-mo 3-mo Rs/US$ 53.9 9 147 (187) Bharat Forge: Revenue growth remains under pressure 10yr govt bond, % 8.3 2 (5) (2) Net investment (US$mn) J&K Bank: Clears an important event with limited concern 30-Oct MTD CYTD FIIs (29) - 18,051 Gujarat Pipavav Port: Weak volume on market-share loss; cautious on MFs (7) - (282) near/medium-term trajectory Top movers -3mo basis Change, % Best performers 31-Oct 1-day 1-mo 3-mo UNSP IN Equity 1175.8 2.7 (5.1) 46.4 FTECH IN Equity 995.3 1.3 2.4 35.0 MSIL IN Equity 1437.9 3.4 5.9 27.7 MM IN Equity 884.5 1.2 2.4 26.5 UTCEM IN Equity 1996.2 (0.8) (0.9) 21.8 Worst performers SUEL IN Equity 15.8 0.0 (12.0) (15.1) GMRI IN Equity 20.1 (0.5) (19.2) (14.1) NACL IN Equity 46.9 0.0 (7.3) (13.6) HPCL IN Equity 298.7 0.3 (4.2) (11.6) IVRC IN Equity 39.8 (0.4) (18.0) (10.5)

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

INDIA Strategy

GameChanger Perspectives OCTOBER 31, 2012 NEW RELEASE BSE-30: 18,505

Is it really difficult doing business in India? GameChanger Perspectives deep-dives into data that bring much opprobrium to India: India is a very difficult place to conduct business in. The authoritative source of this data is the World Bank’s Doing Business Report. India’s rank in the most recent report (2013) is 132nd out of 185 economies (same as in 2012) which means India is near the lowest quartile of countries. The advantage of numerical data is that a policymaker can work on measurable metrics, and over time, improve scores and ranking. GameChanger Perspectives looked into the data that go into defining the ranks in these aspects to get a policy prescription – but returned with mixed conclusions.

QUICK FACTS Rank bad... • India’s contract The report measures the ease (or otherwise) of doing business by comparing countries across 10 enforcement has parameters. They are broken into more granular questions that have a numerical answer/data improved point, such as time taken, procedures involved and costs of doing business, so that the data can meaningfully over be compared across countries. For cost of doing business the report does not consider an absolute the last decade number (which would make it incomparable across countries) but costs as a proportion of per capita income in respective countries. The countries are then ranked on a weighted average score • India’s tax reforms to arrive at a rank for a dimension, which is then consolidated into an overall ranking. have been In seven of the 10 dimensions of Doing Business that the report tabulates, India has a rank of meaningful – move greater than 100 (see Exhibit 1). Of these, India is worst in (1) enforcing contracts, (2) dealing with to GST should construction permits, (3) starting a business and (4) paying taxes. propel India to higher rankings …or not that bad?

` In the case of “enforcing contracts”, the data seem not to have been updated over the past nine years (see here, here). According to the data, India takes 1,420 days to enforce contracts. What is measured across countries is this: “The dispute involves the breach of a sales contract worth twice the income per capita of the economy. The case study assumes that the court hears arguments on the merits and that an expert provides an opinion on the quality of the goods in dispute. This distinguishes the case from simple debt enforcement. The time, cost and procedures are measured from the perspective of an entrepreneur (the plaintiff) pursuing standardized case through local courts.”

To see whether India has improved in this aspect, GameChanger Perspectives looked at the Consumer Court system in India, which typically looks into the kind of disputes mentioned above. Exhibit 2 suggests that over the past decade, India has dramatically cut the time it takes

to enforce contracts. If other countries have achieved similar gains, India’s relative ranking does deserve the second-last position. However, figures of the 2013 study show that India’s reduced time taken to enforce contracts is the same as that Canada, ranked 62nd, took in 2004 as well as currently.

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

` “Dealing with construction permits” gives a significant (one-third) weight to the cost (of building a stylized warehouse), the other two aspects being time and procedures involved. India’s rank slips significantly due to the cost of permits and what causes the cost to zoom is the high fees required to be paid to obtain a completion certificate (CC). Of the total cost of Rs1.09 mn, the CC fee amounts to Rs0.84 mn (for a 14,000 sq. foot warehouse). The fee is low as a proportion of the cost of the land (fee of Rs200 per sq. meter; land price at the fringes of Mumbai would be about Rs100,000 per sq. meter) and building (Rs500 per sq. meter as fees for about Rs15,000 per sq. meter for construction). However, standardizing this number as a proportion of per capita income penalizes a poorer country like India with a lower per capita income far more than it does a rich country.

Besides, in the case of procedures, India’s rank drops because it has, for example, this three-step process (out of 34 steps in India it seems): Apply for an NOC from the Tree Authority; submit to inspection from the Tree Authority; and obtain NOC from the Tree Authority. In cases of some other countries (for example, the UK), far more complicated procedures are lumped together. The learning is that many of the procedures are done through a “single window” and that seems to help to get a better rank in this report.

` In “starting a business”, four factors carry equal weight: time, procedures, cost and paid- in minimum capital. In India, minimum capital has been raised to Rs100,000 to prevent frivolous companies from being formed. Countries that dispense with this notion of minimum paid-up capital score high here. The question to ask possibly is whether the most appropriate form of organization for poorer countries is a limited liability corporation or whether proprietorship/partnership would suffice (for which there are no minimum paid-up capital requirements in India). Again, India can reduce procedures here significantly (though over time the MCA has become significantly e-enabled).

` “Paying taxes” takes into account three variables, all weighted equally: tax rates, time to file and number of payments a year. Data in the report states that in India, of the 243 hours it takes annually to file tax returns, 105 hours go in filing central sales tax returns (CST). This number possibly needs to be relooked at as (1) the importance and quantum of CST has fallen significantly over the past nine years and (2) the score does not associate any time element with state VAT and CENVAT. The learning for India is that once GST comes in, its rank here can zoom dramatically. Incidentally, the reason the number of payments made is high (33) is because 24 of them relate to monthly ESI and EPF deductions: If these were counted as two, then the number of touch-points for India would fall to 11, the same as the US (which has multiple authorities to deal with).

Simple steps to boost India’s rankings

GameChanger Perspectives believes India needs to (1) offer its business people more single-window clearances, (2) reduce the cost of interacting with the Government and (3) reduce the number of touch points. Of course, bigger payoffs may also come by better educating the market about changes that India has already worked on over the past decade. We also refer our readers to an earlier GameChanger Perspectives #LXII: Changing face of Government interaction with the Indian public.

2 KOTAK INSTITUTIONAL EQUITIES RESEARCH Strategy India

India ranks poorly across a variety of dimensions of doing business Rank of India in a group of 185 countries, years refer to the edition of the report

2013 2012 Starting a business 173 169 Dealing with construction permits 182 183 Getting electricity 105 99 Registering property 94 97 Getting credit 23 23 Protecting investors 49 46 Paying taxes 152 149 Trading across borders 127 125 Enforcing contracts 184 184 Resolving insolvency 116 109

Source: World Bank's Doing Business Report of respective years

India has improved significantly in dispensing justice Various facets of cases in consumer courts in India, March fiscal year-ends, 2003-11

2010-11 2003-05 Cases outstanding at the end of the period (a) 354,319 359,469 Cases disposed off in last one year (b) 226,534 93,727 Time required to clear outstanding cases (days, a/b*365) 571 1,400

Source: Ministry of Consumer Affairs, KIE calculations

KOTAK INSTITUTIONAL EQUITIES RESEARCH 3

BUY NHPC (NHPC)

Utilities OCTOBER 31, 2012 RESULT Coverage view: Attractive

Low realizations, high tax incidence. NHPC’s reported earnings failed to capitalize Price (Rs): 21 on the 9% yoy growth in generation owing to commercial generation from Chamera III, Target price (Rs): 25 as lower realizations, ramp-up costs for Chutak and a higher tax incidence took away BSE-30: 18,431 the cheer of recently commissioned capacities. Attractive valuations—0.9X P/B and 11X P/E coupled with limited risk to extant earnings lend credence to our positive stance, and we maintain our BUY rating and target price of Rs25/share.

Company data and valuation summary NHPC Stock data Forecasts/Valuations 2012 2013E 2014E 52-week range (Rs) (high,low)25-15 EPS (Rs) 2.5 2.0 2.3 Market Cap. (Rs bn) 265.1 EPS growth (%) 84.5 (21.6) 17.1 Shareholding pattern (%) P/E (X) 8.7 11.0 9.4 Promoters 86.4 Sales (Rs bn) 69.2 62.4 72.5 FIIs 1.4 Net profits (Rs bn) 30.6 24.0 28.1 MFs 1.2 EBITDA (Rs bn) 48.1 40.9 48.7 Price performance (%) 1M 3M 12M EV/EBITDA (X) 8.7 9.2 7.3 Absolute 11.7 18.1 (14.0) ROE (%) 11.1 8.2 9.0 Rel. to BSE-30 13.2 10.0 (17.7) Div. Yield (%) 3.1 2.4 2.9

Revenue miss exaggerated by higher tax charge

NHPC reported revenues of Rs17 bn (-7% yoy), operating profit of Rs11.3 bn (-13% yoy) and adjusted net income of Rs7.8 bn (-22% yoy) against our estimates of Rs17.8 bn, Rs12.3 bn and Rs10.5 bn respectively. Inferior realizations (Rs2.2 compared to Rs2.3 estimated) and higher administrative cost led to the miss in operating profits, while a higher tax rate, 28% likely on account of deferred tax for recently commissioned capacities, exaggerated the miss in net income.

We note that reported earnings include (1) Rs790 mn of prior-period income and (2) Rs202 mn of operating expenses pertaining to Chutak, which has not yet been declared commercial (and hence no revenues recognized), but the asset has been capitalized. We discuss the key details of the results in a subsequent section.

Capacity addition creeping in, challenges remain

NHPC has commercialized 231 MW of capacity at Chamera-III (3X 77 MW) during the quarter. Additionally, three units (out of four) at Chutak project (4X 11 MW) have been commissioned but commercial generation has been delayed owing to lack of requisite power load and evacuation infrastructure. Management has indicated a total target for commissioning of 612 MW during the entire FY2013 (see Exhibit 4).

Reiterate BUY with a revised target price of Rs25/share

We maintain our BUY rating and target price of Rs25. Attractive valuations of 0.9X FY2013E book and 11X on FY2013E EPS along with inherent security in the business model make NHPC less susceptible to earnings risk from lower off-take and/or fuel-related issues as have been experienced by coal-based generation companies.

Our valuation includes (1) Rs14/share for operational projects, (2) Rs4/share for under-construction projects and (3) Rs7/share for cash and cash equivalents. We maintain our earnings estimate of Rs2/share in FY2013E and Rs2.3/share for FY2014E. Admission of NHPCs claim for higher RoE for pondage type projects (70% of NHPCs capacity) besides the reservoir-based projects proposed in the draft guidelines could provide an earning’s catalyst in the near term.

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

Utilities NHPC

Exhibit 1: Higher tax provisioning leads to lower-than-estimated net profits Interim results for NHPC, March fiscal year-ends (Rs bn)

(% Chg.) 2QFY13 2QFY13E 2QFY12 1QFY13 2QFY13E 2QFY12 1QFY13 FY2012 FY2013E (% Chg.) Net sales 17,007 17,794 18,307 13,991 (4) (7) 22 56,547 50,519 (11) Operating cost (5,689) (5,511) (5,302) (5,178) (19,741) (20,209) EBITDA 11,318 12,283 13,005 8,813 (8) (13) 28 36,806 30,310 (18) EBITDA margin (%) 67 69 71 63 65 60 Other income 3,123 2,666 3,321 2,678 10,607 10,758 Interest & finance charges (1,047) (830) (883) (798) (3,422) (3,585) Depreciation (2,532) (2,267) (2,234) (2,218) (8,927) (9,573) PBT 10,862 11,852 13,208 8,475 (8) (18) 28 35,063 27,909 (20) Provision for tax (net) (3,028) (1,324) (3,191) (1,777) (7,369) (6,520) Net profit 7,834 10,529 10,017 6,698 (26) (22) 17 27,694 21,388 (23) Extraordinary — — (352) — 23 — Reported PAT 7,834 10,529 9,665 6,698 EBITDA margin (%) 67 69 71 63 65 60 Tax rate (%) 28 11 24 21 21 23 Key operating parameters Units generated (bn units) 7,717 7,756 7,102 6,155 (1) 9 25 18,683 19,625 Tariff (Rs/kwh) 2.10 2.30 2.58 2.27 3.03 2.57 O&M (Rs/kwh) 0.74 0.71 0.46 0.84 1.06 1.03

Source: Company, Kotak Institutional Equities estimates

Key highlights of 2QFY13 results

` Revenues. Reported revenues of Rs17 bn includes (1) Rs2.3 bn on account of water cess and RLDC charges and (2) Rs0.79 bn towards prior-period sales consequent to finalization of tariff orders by CERC.

` Generation. NHPC’s gross generation in 2QFY13 was 7,717 MU (25% qoq, 9% yoy), primarily aided by commissioning of Chamera-III unit of 231 MW, which contributed ~ 526 MU of incremental generation (see Exhibit 2).

` Realization. Average realization fell to Rs2.10/kwh (Rs2.58/kwh in 2QFY12, Rs2.27 in 1QFY13) compared to our estimates of Rs2.30/kwh leading to the miss in revenue estimates, partially compensated by prior-period sales of Rs790 mn. NHPC continues to gross up ROE component of tariff at MAT rate, as opposed to the full tax rate.

` O&M cost. O&M cost declined to Rs0.73/kwh(Rs0.70/kwh in 2QFY12, Rs0.84 in 1QFY13) sequentially due to higher generation as well as inclusion of cost pertaining to Chutak despite the lack of revenue contribution.

` Other income. Other income included interest income of Rs1 bn against deferred revenues on account of interest charge (~15%) on receivables from SEBs.

` Tax rate. Effective tax rate for 2QFY13 shot up to 28% from 24% in 2QFY12 and 21% in 1QFY13 likely on account of deferred tax pertaining to Chamera III as well as capitalization of capacities at Chutak.

6 KOTAK INSTITUTIONAL EQUITIES RESEARCH NHPC Utilities

Exhibit 2: Higher generation led by commissioning of Chamera-III Plant-wise generation during 2QFY13, NHPC

Total Design Gross Generation capacity energy 2QFY13 2QFY12 Plant (MW) (mn units) (mn units) % Chng Baira Siul 180 779 243 226 8 Chamera-I 540 1,665 1,084 1,131 (4) Chamera-II 300 1,500 608 621 (2) Chamera-III 231 1,155 526 — Dhauliganga-I 280 1,135 575 563 2 Dulihasti 390 1,907 790 798 (1) Loktak 105 448 219 206 6 Rangit 60 339 128 133 (4) SALAL 690 3,082 1,340 1,271 5 Sewa-II 120 534 118 170 (31) Tanakpur 120 452 194 196 (1) Teesta-V 510 2,573 969 1,000 (3) Uri-I 480 2,587 923 773 19 Total 4,006 18,156 7,717 7,089 9

Source: Kotak Institutional Equities

Exhibit 3: NHPC is trading at 0.9X P/B on FY2013E net worth Valuation of NHPC at CMP

2010 2011 2012 2013 2014 2015 2016 Valuations (at CMP) 533096-IN 21.6 No. of shares 12,301 12,301 12,301 12,301 12,301 12,301 12,301 Book value (Rs) 20 21 23 24 26 28 29 Networth 241,564 256,355 277,870 296,214 316,930 338,948 360,419 Market cap 265,696 265,696 265,696 265,696 265,696 265,696 265,696 P/B (X) 1.1 1.0 1.0 0.9 0.8 0.8 0.7 EPS 1.9 1.3 2.5 2.0 2.3 2.5 2.5 P/E (X) 1216911999 RoE (%) 10 7 12 8 9 10 9 RoCE (%)7586676 Net debt 101,620 125,063 117,669 74,213 51,569 15,963 (29,440) EV 367,316 390,759 383,365 339,909 317,265 281,659 236,256 EV/EBITDA (X) 8.9 10.8 8.0 8.3 6.5 5.3 4.5

Source: Company, Kotak Institutional Equities estimates

Exhibit 4: Our SOTP-based valuation yields a target price of Rs25/share SOTP, NHPC (Rs mn, Rs/share)

Value Value per share (Rs mn) (Rs/share) Power projects 227,266 18 Operational projects 175,681 14 Under-construction 51,585 4 Subhansiri Lower 16,812 1.4 Parbati II 9,349 0.8 Cash and equivalents 85,303 7 Total 312,569 25

Source: Kotak Institutional Equities estimates

KOTAK INSTITUTIONAL EQUITIES RESEARCH 7 Utilities NHPC

Exhibit 5: Pace of capacity addition remains uncertain with major projects facing significant roadblocks Details of NHPC’s projects under construction

Total Design Project capacity energy Exp. COD cost (MW) (mn units) Company KIE (Rs bn) Remarks Teesta Low Dam III 132 594 FY2012 FY2014 16.3 Delay in forest clearance coupled with frequent labor agitation Delay in forest clearance coupled with HCC's financial crunch Teesta Low Dam IV 160 720 FY2012 FY2015 15.0 delaying execution All civil & HM work completed; Slow progress due to local Uri II 240 1,124 FY2013 FY2014 20.8 protests and HCC's financial crunch Parbati II 800 3,109 FY2014 FY2017 53.7 Poor geological strata delaying progress Chamera III 231 1,108 FY2012 FY2013 20.8 All 3 units commmissioned and commercialised Nimmo-Bazgo 45 239 FY2012 FY2014 9.4 Power evacuation arrangement yet to be worked out Parbati III 520 1,963 FY2013 FY2013 27.2 Frequent local agitation coupled with delay in supply from BHEL 3 units synchronised but delay in commissioning due to lack of Chutak 44 213 FY2012 FY2013 9.1 evacuation lines and load Downstream impact assessment to be conducted post local and Subansiri (Lower) 2,000 7,422 FY2014 FY2017 106.7 activists agitation Kishanganga 330 1,350 FY2017 FY2017 36.4 River diversion achieved but further progress slow Total 4,502 17,842 315.4

Source: Company, Kotak Institutional Equities

Capex continues, receivables outstanding appears to be more moderate

NHPC has incurred an estimated capex of Rs14.7 bn in 1HFY13 compared to Rs9.3 bn in 1HFY12 and Rs24 bn in FY2012.

Receivables (excluding water cess and RLDC) were Rs14.5 bn as on September 30, 2012 (Rs11.2 bn as on June 30, 2012 and Rs26.1 bn as on September 30, 2011), indicating a possible easing of cash flow situation from cash-constrained state distribution utilities.

Exhibit 6: NHPC incurred a capex of Rs14.6 bn during 1HFY13 NHPC, standalone balance sheet as of September 2012 (Rs mn)

Sep-10 Mar-11 Sep-11 Mar-12 Sep-12 Utilization of funds Gross block+CWIP 371,702 399,974 409,352 424,107 438,791 Accumultaed depreciation (54,356) (57,740) (62,232) (66,926) (71,676) Net block 317,346 342,233 347,120 357,181 367,115 Investments 58,464 53,995 29,225 27,499 27,841 Current assets 69,343 — 127,050 — 143,993 Cash & bank balances 35,559 28,641 43,918 60,040 48,562 Accounts receivable 10,473 19,086 30,809 20,522 26,118 Inventories 471 337 365 438 671 Loans & advances 14,377 13,654 31,824 33,289 36,918 Others 8,463 6,891 20,136 28,630 31,724 Current liabilities 40,444 57,628 85,689 72,017 72,936 Net current assets 28,900 10,982 41,362 70,902 71,057 Total 404,710 407,210 417,707 455,581 466,013 Source of funds Total debt 143,993 145,693 152,396 176,411 184,866 Paid-up common stock 123,007 123,007 123,007 123,007 123,007 Reserves and surplus 122,001 122,832 140,439 140,528 155,109 Shareholders' funds 245,008 245,839 263,447 263,535 278,116 Def. tax liability 2,067 1,613 1,864 2,040 3,032 Income on AAD 13,641 14,066 — 13,594 — Total 404,710 407,210 417,707 455,581 466,013

Source: Company, Kotak Institutional Equities

8 KOTAK INSTITUTIONAL EQUITIES RESEARCH NHPC Utilities

Exhibit 7: Profit model, balance sheet, cash model of NHPC, March fiscal year-ends, 2008-15E (Rs mn)

2008 2009 2010 2011 2012 2013E 2014E 2015E Profit model Net revenues 29,726 34,767 52,273 51,437 69,203 62,357 72,465 77,264 EBITDA 22,150 23,110 41,290 36,311 48,116 40,930 48,736 52,655 Other income 4,572 5,953 6,473 8,071 12,319 11,851 13,372 14,451 Interest expense (6,377) (7,760) (7,394) (6,709) (5,739) (5,476) (7,444) (7,358) Depreciation (5,455) (6,441) (12,827) (11,666) (11,500) (12,157) (14,395) (16,045) Pretax profits 14,890 14,863 27,542 26,008 43,196 35,147 40,269 43,703 Tax (1,896) (1,552) (3,475) (6,463) (8,661) (6,343) (7,612) (8,622) Deferred taxation — — (1,292) (1,482) (730) (1,828) (1,512) (838) Minority interest (1,533) (1,462) (1,020) (1,466) (3,180) (2,954) (3,004) (3,106) Net income 11,462 11,849 21,756 16,597 30,626 24,022 28,140 31,138 Extraordinary items — — — 6,565 230 — — — Reported profit 11,462 11,849 21,756 23,162 30,856 24,022 28,140 31,138 Earnings per share (Rs) 1.0 1.1 1.9 1.3 2.5 2.0 2.3 2.5 Balance sheet Paid-up common stock 111,825 111,825 123,007 123,007 123,007 123,007 123,007 123,007 Total shareholders' equity 189,310 197,678 251,072 265,303 286,438 302,953 322,156 343,337 Advance against depreciation (AAD) 13,033 14,245 15,398 15,076 14,794 14,132 13,471 12,809 Minority interest 13,968 14,944 15,895 17,357 20,349 23,303 26,307 29,412 Total borrowings 128,555 149,310 163,515 167,716 195,622 219,198 217,006 207,496 Deferred tax liabilities — — 2,521 2,774 3,504 5,332 6,844 7,682 Total liabilities and equity 344,865 376,177 448,402 468,225 520,707 564,918 585,784 600,736 Net fixed assets 236,171 238,323 223,016 227,307 221,826 261,323 279,920 276,979 Capital work-in progress 74,098 105,050 140,620 171,696 193,987 185,863 169,728 165,220 Investments 20,468 17,912 33,455 43,194 16,559 9,000 6,880 4,759 Miscellaneous expenses not w/o 3 23 — — — — — — Cash 23,459 26,061 61,895 42,653 77,953 144,986 165,437 191,533 Net current assets (incl. cash) 14,124 14,868 51,311 26,029 88,335 108,732 129,256 153,777 Total assets 344,865 376,177 448,402 468,225 520,707 564,918 585,784 600,736 Free cash flow Operating cash flow, excl. working capital 20,594 20,964 39,277 36,223 45,985 40,300 46,390 50,465 Working capital changes 5,017 1,858 (608) 6,040 (27,006) 46,636 (73) 1,575 Capital expenditure (35,265) (39,545) (33,090) (47,032) (28,310) (43,531) (16,857) (8,596) Free cash flow (9,654) (16,723) 5,579 (4,769) (9,332) 43,405 29,460 43,443 Ratios Net debt/equity (%) 0 34 33 26 25 25 23 22 Return on equity (%) 6.7 6.5 10.3 6.7 11.6 8.5 9.4 9.7 Book value per share (Rs) 16 17 20 21 23 24 26 28 ROCE (%) 5.7 5.7 7.4 5.0 7.7 5.7 6.4 6.7

Source: Company, Kotak Institutional Equities estimates

KOTAK INSTITUTIONAL EQUITIES RESEARCH 9

ADD Titan Industries (TTAN)

Consumer products OCTOBER 31, 2012 RESULT Coverage view: Cautious

Mix improvement pays off. (1) Jewelry and watch sales grew 6% yoy and 13% yoy Price (Rs): 259 (2) jewelry margins improved by 274 bps to 12.5%, driven by an improved mix and Target price (Rs): 270 price increases, (3) watch margins declined by 452 bps to 11.6% due to a rise in input BSE-30: 18,505 costs and the impact of the Rupee depreciation. Festive demand in early 3QFY13 has been robust and the company expects the trend to continue. We like Titan’s planned efforts to expand its geographical presence in a muted economic environment. ADD.

Company data and valuation summary Titan Industries Stock data Forecasts/Valuations 2012 2013E 2014E 52-week range (Rs) (high,low) 283-154 EPS (Rs) 6.7 7.9 9.5 Market Cap. (Rs bn) 230.2 EPS growth (%) 36.5 18.1 20.3 Shareholding pattern (%) P/E (X) 38.7 32.7 27.2 Promoters 53.1 Sales (Rs bn) 88.4 99.2 118.5 FIIs 16.2 Net profits (Rs bn) 6.0 7.0 8.5 MFs 2.5 EBITDA (Rs bn) 8.3 9.9 12.0 Price performance (%) 1M 3M 12M EV/EBITDA (X) 26.5 20.4 16.5 Absolute (0.7) 16.8 19.3 ROE (%) 47.9 42.3 37.6 Rel. to BSE-30 0.7 8.8 14.2 Div. Yield (%) 0.9 1.2 0.4

Sales growth muted; jewelry margins surprise

Titan reported net sales of Rs22.1 bn (+9%, KIE estimate: Rs23.7 bn), EBITDA of Rs2.5 bn (+19%, KIE estimate: Rs2.2 bn) and PAT of Rs1.8 bn (+21%, KIE estimate: Rs1.6 bn).

` Sales grew 9%, driven by jewelry sales growth of 6% yoy and watch sales growth of 13% yoy. Within jewelry, customer growth was 7% yoy and volume decline was 11%. The silver lining for the jewelry segment was the increase in average ticket size by 10%, retail growth of 17% and growth in share of studded jewelry to 32%. Within watches, volume growth was 4% yoy for the quarter with the balance being the impact of price hikes.

` Brand-wise, like-to-like sales growth in Tanishq was 12%, in Helios 19% and in Titan Eye Plus 19%. World of Titan, Goldplus, and large-format store watches (LFS Watches) had like-to-like sales decline of 1%, 8% and 10% respectively.

` Jewelry margins improved by 274 bps to 12.5%, driven by a higher share of studded jewelry, better terms of trade (renegotiation of agreement with franchisees) and price increases. Watch margins declined by 452 bps to 11.6% due to a rise in input costs and the impact of the Rupee depreciation.

` During the quarter 32 outlets (cumulative area: 59,000 sq. ft) were added across all brands.

` Titan’s consumer sentiment improved in 2QFY13 compared with the preceding quarter and the

company expects the trend to continue in 3QFY13 with initial festive demand being robust. In our view, along with festive and wedding-related demand, the base effect will also kick-in. In 3QFY12 Titan clocked 25% sales growth with 3% volume decline.

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

Titan Industries Consumer products

Takeaways from the concall

Jewelry

` Given the late onset of the festive season this fiscal versus last fiscal, L3 stores postponed their purchases and 3QFY13 numbers are likely to benefit from this. Accordingly, while overall sales growth in 2QFY13 was low at 6% yoy, retail growth was higher at 17% yoy.

` Volume decline of 11% yoy in 2QFY13 was largely due to lower coin sales with volume decline in plain gold jewelry being ~1.5% and in coins, more than 30%.

` In 2QFY13, margins improved to 12.5% due to lower plain gold jewelry sales and a correspondingly higher share of studded jewelry. Going forward, Titan expects a step-up in volume growth in plain gold jewelry, leading to stronger sales growth but relatively lower margins.

` The company added 100,000 sq. ft in FY2012 on a base of 330,000 sq. ft in FY2011. It plans to add 200,000 sq. ft in FY2013, a large part of which is expected to be rolled out in 3QFY13. ~70% of new store additions will be in the L1 and L2 format.

` Total amount outstanding under the Golden Harvest Scheme is Rs10 bn.

Watches

` In 1HFY13, volume growth was 1% with volume growth in 2QFY13 being relatively better at 4%. The company expanded its collection with new brands such as Tagged, Sonata Super Fibre Ocean Series and expects the watch segment to deliver over 15% sales growth in 3QFY13.

` The company hiked prices in the watch segment (~5% between August and September); however a mismatch in terms of input cost inflation and price hikes led to a margin decline. The full benefit of the price hike is likely to materialize from 3QFY13.

Eyewear

` In 2QFY13 eyewear sales grew 32% yoy and Titan expects the segment to break even by 2HFY14.

Retain ADD

` We retain our ADD rating and revise our target price to Rs270 (Rs255 previously); Our EPS estimates are Rs7.9 and Rs9.5 for FY2013 and FY2014, respectively. Our long-term positive view is intact as:

` We like Titan’s planned efforts to expand its geographical presence in a muted economic environment (specifically for discretionary spending). This will likely help it to create a strong base which in turn will prove beneficial when the overall macro-economic environment improves.

` Mix improvement in favor of diamond and studded jewelry is a positive as they enjoy higher margins and reduce the vulnerability of the company to volatility in gold prices.

` The company has been given the license to import gold directly. This will likely lead to savings and boost margins. The scrapping of excise duty on branded jewelry will likely give savings of Rs500 mn in FY2013E.

` Increasing activity in the organized jewelry market will help the market to grow and Titan, having first-mover advantage, will likely benefit disproportionately – the organized jewelry market accounts for ~4% of the total jewelry retail market and is growing faster than the overall jewelry market. Industry sources indicate the branded jewelry market is expected to clock over 40% CAGR over the next 4-5 years given changing lifestyles and higher marketing investments by organized players.

Key downside risk is continuing volatility in gold price and further deterioration in consumer demand.

KOTAK INSTITUTIONAL EQUITIES RESEARCH 11 Consumer products Titan Industries

`

Titan Industries, interim results, March fiscal year-ends, (Rs mn)

(% change) 2QFY13 2QFY13E 2QFY12 1QFY13 2QFY13E 2QFY12 1QFY13 1HFY13 1HFY12 (% chg.) Net sales 22,760 23,712 20,963 22,057 (4) 9 3 44,816 41,169 9 Total expenditure (20,266) (21,531) (18,874) (19,937) 7 2 (40,203) (37,158) 8 Material cost (16,343) (17,352) (15,310) (16,250) 7 1 (32,593) (30,189) 8 Staff cost (1,161) (1,188) (906) (1,039) 28 12 (2,200) (1,856) 19 Advertising (983) (1,064) (907) (1,034) 8 (5) (2,017) (1,809) 12 Other expenditure (1,780) (1,926) (1,752) (1,613) 2 10 (3,393) (3,304) 3 EBITDA 2,494 2,182 2,089 2,120 14 19 18 4,614 4,011 15 OPM (%) 11.0 9.2 10.0 9.6 10.3 9.7 Other income 238 222 205 252 16 (5) 490 437 12 Interest (121) (110) (89) (126) 37 (4) (247) (176) 40 Depreciation (130) (128) (106) (123) 23 6 (254) (205) 24 Pretax profits 2,481 2,165 2,100 2,122 15 18 17 4,603 4,067 13 Tax (679) (600) (615) (561) 10 21 (1,241) (1,148) 8 Net income 1,801 1,565 1,485 1,561 15 21 15 3,362 2,920 15 Income tax rate (%) 27.4 27.7 29.3 26.4 27.0 27.0

Cost as % of sales Material cost 71.8 73.2 73.0 73.7 Staff cost 5.1 5.0 4.3 4.7 Advertising 4.3 4.5 4.3 4.7 Other expenditure 7.8 8.1 8.4 7.3

Segmental revenues Watches 4,718 4,174 3,607 13 31 8,325 7,328 14 Jewelry 17,239 16,315 17,755 6 (3) 34,995 32,786 7 Others 803 474 694 69 16 1,497 1,055 42 Segmental EBIT Watches 547 672 504 (19) 8 1,051 1,153 (9) Jewelry 2,150 1,587 1,806 35 19 3,956 3,249 22 Others (43) (14) (16) 212 164 (60) (50) 21 Segmental EBIT margin (%) Watches 11.6 16.1 14.0 12.6 15.7 Jewelry 12.5 9.7 10.2 11.3 9.9 Segmental capital employed Watches 5,951 4,520 5,511 32 8 5,951 4,520 32 Jewelry 8,394 6,345 7,037 32 19 8,394 6,345 32 Others 1,743 1,343 1,779 30 (2) 1,743 1,343 30 Unallocated 1,693 1,223 1,800 38 (6) 1,693 1,223 38

Source: Company, Kotak Institutional Equities estimates

12 KOTAK INSTITUTIONAL EQUITIES RESEARCH Titan Industries Consumer products

Contribution of watches and jewelry to sales (%) Contribution of watches and jewelry to EBIT (%)

120 Watches Jewelry Others 140 Watches Jewelry Others 120 100 100 80 80 60 60 40 40 20 - 20 (20) - (40) Jun-07 Jun-08 Jun-09 Jun-10 Jun-11 Jun-12 Jun-07 Jun-08 Jun-09 Jun-10 Jun-11 Jun-12 Dec-07 Dec-08 Dec-09 Dec-10 Dec-11 Dec-07 Dec-08 Dec-09 Dec-10 Dec-11

Source: Kotak Institutional Equities Source: Kotak Institutional Equities

Quarterly sales growth of watches (%) Quarterly sales growth of jewelry (%)

40 80 70 30 60 20 50 40 10 30 - 20 10 (10) - (20) (10) Jun-08 Jun-09 Jun-10 Jun-11 Jun-12 Jun-08 Jun-09 Jun-10 Jun-11 Jun-12 Sep-08 Sep-09 Sep-10 Sep-11 Sep-12 Dec-08 Dec-09 Dec-10 Dec-11 Sep-08 Sep-09 Sep-10 Sep-11 Sep-12 Dec-08 Dec-09 Dec-10 Dec-11 Mar-08 Mar-09 Mar-10 Mar-11 Mar-12 Mar-08 Mar-09 Mar-10 Mar-11 Mar-12

Source: Company, Kotak Institutional Equities Source: Company, Kotak Institutional Equities

KOTAK INSTITUTIONAL EQUITIES RESEARCH 13 Consumer products Titan Industries

Rupee depreciation hurts watch margins Quarterly EBIT margin of watches and jewelry (%)

Watches (LHS) Jewelry (RHS) 25 14

12 20 10

15 8

10 6 4 5 2

0 0 Jun-07 Jun-08 Jun-09 Jun-10 Jun-11 Jun-12 Sep-07 Dec-07 Sep-08 Dec-08 Sep-09 Dec-09 Sep-10 Dec-10 Sep-11 Dec-11 Sep-12 Mar-08 Mar-09 Mar-10 Mar-11 Mar-12

Source: Company, Kotak Institutional Equities

Jewelry volume growth and gold prices

(%) YoY jewelry volume growth (%) - LHS Gold (US$/oz) - RHS (US$/oz) 100 88 2,000 74 80 72 68 64 1,600 53 60 46 49 44 45 35 30 34 33 31 1,200 40 24 26 15 20 13 7 4 3 800 - (2) 400 (20) (8) (5)(7) (15)(11) (11) (21) (40) 0

1QFY06 3QFY06 1QFY07 3QFY07 1QFY08 3QFY08 1QFY09 3QFY09 1QFY10 3QFY10 1QFY11 3QFY11 1QFY12 3QFY12 1QFY13

Source: Kotak Institutional Equities

14 KOTAK INSTITUTIONAL EQUITIES RESEARCH Titan Industries Consumer products

Profit model, balance sheet, cash model for Titan Industries, 2010-2015E, March fiscal year-ends (Rs mn)

2010 2011 2012 2013E 2014E 2015E Profit model Net sales 46,772 65,330 88,393 99,239 118,504 141,614 EBITDA 3,960 5,895 8,338 9,940 12,014 14,635 Interest (expense) (254) (82) (437) (441) (477) (502) Depreciation (607) (351) (449) (544) (634) (706) Other income 127 571 932 812 851 855 Pretax profits 3,226 6,032 8,384 9,767 11,754 14,282 Tax (713) (1,701) (2,383) (2,735) (3,291) (3,999) Profit after tax 2,513 4,331 6,002 7,032 8,463 10,283 Earnings per share (Rs) 2.9 4.9 6.7 7.9 9.5 11.6 Balance sheet Total equity 7,319 10,356 14,499 18,886 26,310 35,373 Deferred taxation liability 54 21 (38) (93) (93) (93) Total borrowings 730 680 59 59 59 59 Current liabilities 12,949 26,512 32,424 38,494 40,126 44,484 Total liabilities and equity 21,052 37,569 46,944 57,346 66,402 79,823 Cash 1,973 11,083 9,591 27,637 32,823 39,566 Other current assets 16,262 23,382 33,256 24,742 28,246 34,230 Total fixed assets 2,801 3,078 3,936 4,941 5,307 6,002 Investments 16 26 161 26 26 26 Total assets 21,052 37,569 46,944 57,346 66,402 79,823

Key assumptions Revenue growth 22.0 39.7 35.3 12.3 19.4 19.5 EBITDA margin 8.5 9.0 9.4 10.0 10.1 10.3 EPS growth 29.3 71.7 36.5 18.1 20.3 21.5

Source: Kotak Institutional Equities estimates

KOTAK INSTITUTIONAL EQUITIES RESEARCH 15

REDUCE Glenmark Pharmaceuticals (GNP)

Pharmaceuticals OCTOBER 31, 2012 RESULT Coverage view: Attractive

Strong quarter but limited margin of safety. The beat in the current quarter was Price (Rs): 428 primarily driven by a surge in domestic sales. Growth continued to remain robust—sales Target price (Rs): 405 and EBITDA growth of 34% and 39% yoy respectively. The significant increase in R&D BSE-30: 18,505 spend reflects the relatively weaker US pipeline and efforts to accelerate filings. We maintain our REDUCE rating and increase TP to Rs405 (from Rs400; 16X one-year forward EPS). Stronger US pipeline may hold the key for further rerating of the stock.

Company data and valuation summary Glenmark Pharmaceuticals Stock data Forecasts/Valuations 2012 2013E 2014E 52-week range (Rs) (high,low) 465-265 EPS (Rs) 21.9 20.8 27.7 Market Cap. (Rs bn) 115.9 EPS growth (%) 31.1 (4.8) 32.9 Shareholding pattern (%) P/E (X) 19.6 20.6 15.5 Promoters 25.1 Sales (Rs bn) 37.7 48.9 56.9 FIIs 45.2 Net profits (Rs bn) 5.9 5.6 7.5 MFs 9.6 EBITDA (Rs bn) 8.4 9.5 11.8 Price performance (%) 1M 3M 12M EV/EBITDA (X) 15.7 13.9 11.0 Absolute 1.7 11.5 38.6 ROE (%) 20.7 21.3 23.3 Rel. to BSE-30 3.2 3.9 32.6 Div. Yield (%) 0.5 0.6 0.8

Domestic boost drives a strong quarter

Glenmark reported net profit of Rs1.6 bn (181% yoy) which was 3% ahead of estimates. Reported profits include Rs150 mn in net foreign exchange MTM gains. Adjusted for this impact, profit at Rs1.5 bn (32% yoy) was 5% lower than estimates. Performance at the EBITDA level was 5% ahead which was offset by higher tax rate (23% versus KIE 15%). EBITDA (at Rs2.6 bn; 39% yoy) beat was primarily driven by higher sales. EBITDA margin at 20.4% was 30 bps lower than estimate. Sales at Rs12.5 bn (34% yoy) was 6% ahead of estimate driven by a 35% yoy growth in India (1HFY13: 30% yoy). The growth rate in this market is expected to be 22-25% for FY2013 – implied 2HFY13 growth of 15-20% yoy (KIE 17% yoy). The higher-than-normal growth is due to inventory correction because of restructuring exercise undertaken in 2HFY12. The reported growth in domestic market is now expected to track the secondary sales.

US growth driven by market-share gains to play out in the next few quarters

The US sales for the quarter at US$78 mn (19% yoy) were marginally lower than expectations.

Unlike the past few years when US growth was primarily driven by approval/launches, we expect the growth in the next 3-4 quarters to be driven by market-share gains. We believe the US pipeline for Glenmark appears relatively weak compared to existing sales. This is likely to reflect in moderation in US sales beyond FY2014E. We believe the increased focus on generic R&D spend (50% of total R&D) also reflects efforts to sustain the US growth momentum. We remain cautious on incremental competition in oral contraceptives which could be downside risks to our US estimate and margin assumption (improved US product mix).

Working capital improvement sustains; cash generation impacted by higher capex

The net working capital days have sustained the improvement shown in the recent past with further reduction to 112 days from 120 days in FY2012. Net debt (adjusted for currency movements) increased by Rs500 mn.

Maintain REDUCE, TP at Rs405 (increased from Rs400)

We reduce FY2013/14E adjusted EPS by 7% and 3% respectively. Our TP of Rs405 is based on 16X one-year forward adjusted EPS of Rs25.3.

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

Glenmark Pharmaceuticals Pharmaceuticals

Call highlights

` Guidance provided in 4QFY12 remains indicative. Glenmark has clarified that the revenue and EBITDA guidance provided post 4QFY12 does not stand. The numbers were indicative and were given to provide a direction post a weak 4QFY12.

` Brazil growth impacted by ANVISA strike. Latin America growth for the quarter at 27% yoy (similar growth in constant currency) was impacted by strike at the Brazilian regulator. We estimate Brazil sales at 70-75% of the Latin America revenues – this implies 70-100% yoy growth in rest of the countries (Venezuela, Mexico and Peru). The company expects the growth to recover in Brazil with the strike ending in August 2012. Glenmark has received approvals for one inhaler and two dermatology products in Mexico during the current quarter.

` Increase in generics research expense driving R&D. R&D expense for the quarter at Rs1 bn (61% yoy) was at 8.4% of sales. The increase in R&D expense has been the key reason for the lower EBITDA margins on a sequential basis (20.4% in 2QFY13 versus 21.1% in 1QFY13). The company expects R&D expense to remain at 8% of sales for FY2013E.

The increase in R&D expense has been primarily due to step-up in focus on generics – 50% of total R&D expense from 40% in FY2012.

` Focus in US to remain on niche filings. Glenmark has filed for 5 ANDAs during the quarter (6 for 1HFY13) and expects to file 15-20 for the year. The focus of US filings remains on niche segments – oral contraceptives, dermatology and modified release products.

Glenmark filed for the first oncology product in US from the facility in Argentina during the quarter.

` US, emerging markets to be key margin drivers in the medium term. Glenmark expects the medium-term EBITDA margin to be driven by improvement in US product mix and turnaround in Brazil and eastern Europe. Brazil has achieved breakeven for FY2013E and is expected to deliver profits from next year. Eastern Europe is expected to achieve breakeven in FY2014E.

Glenmark expects margins to improve on annual basis over the next 2-3 years.

` Domestic margin to witness structural decline in the medium term. Glenmark holds a contrarian view on the margin in the domestic formulations business. The company expects the margin to face headwinds in the medium term on account of (1) Government pricing policy, (2) intensifying competitive pressure from global and unlisted companies and (3) product patent regime limiting the new launches. Also, there are limited opportunities in the combinations category due to stringent regulations.

` Domestic pricing policy expected to have marginal impact. Glenmark expects marginal impact due to the domestic pricing policy in the proposed form. The impact is expected to be meaningful only in the worst-case scenario of including combinations and a cost-based pricing mechanism.

KOTAK INSTITUTIONAL EQUITIES RESEARCH 17 Pharmaceuticals Glenmark Pharmaceuticals

Glenmark interim results, March fiscal year-ends (Rs mn)

(% chg.) yoy 2QFY13 2QFY13E 2QFY12 1QFY13 2QFY13E 2QFY12 1QFY13 1HFY13 1HFY12(% chg.) FY2013E Sales 12,552 11,849 9,370 10,404 5.9 34.0 20.6 22,956 16,940 35.5 48,895 Total expenditure 9,842 9,399 8,301 8,756 4.7 18.6 12.4 18,598 14,017 32.7 39,354 Raw material 4,426 4,206 3,335 3,663 5.2 32.7 20.8 8,089 5,642 43.4 17,429 Staff cost 2,016 1,969 1,575 1,656 2.4 27.9 21.7 3,671 2,922 25.7 7,741 Other expenditure 3,401 3,224 3,391 3,437 5.5 0.3 (1.0) 6,838 5,453 25.4 14,184 EBITDA 2,710 2,450 1,069 1,648 10.6 153.5 64.4 4,358 2,923 49.1 9,541 EBITDA - adjusted 2,560 2,450 1,839 2,198 4.5 39.2 16.5 4,758 3,693 28.8 9,941 Other income 69 40 (78) 29 98 47 178 Licensing income — — 1,185 — — 2,297 0 Non recurring expense/(income) — — 1,317 — — 1,317 0 Interest 384 380 291 380 764 700 1,524 Depreciation 321 290 247 275 596 511 1,276 Pretax profits 2,074 1,820 321 1,022 14.0 546.9 103.0 3,096 2,740 13.0 6,919 Tax 477 273 (238) 218 695 81 1,192 Minority interest 30 21 — 21 51 15 93 Net income 1,568 1,526 559 783 2.7 180.6 100.3 2,350 2,644 (11.1) 5,634 Adjusted net income 1,452 1,526 1,101 1,215 (4.8) 31.9 19.5 2,667 2,220 20.1 5,951 Adjusted EPS (Rs) 5.4 5.6 4.1 4.5 (4.8) 31.8 19.5 9.9 8.2 20.1 22.0 Tax rate (%) 23.0 15.0 NM 21.3 22.5 3.0 17.2 Segment wise sales US 4,307 4,320 3,001 3,924 (0.3) 43.5 9.8 8,231 5,512 49.3 17,681 Europe 389 334 185 332 16.4 109.6 16.9 721 361 99.8 1,489 Latin america - oncology 54 50 41 39 8.3 29.9 36.2 93 70 32.5 174 API 1,035 916 763 1,005 13.0 35.6 3.0 2,039 1,409 44.8 3,894 Total generics 5,784 5,619 3,990 5,300 2.9 45.0 9.1 11,084 7,352 50.8 23,238 India 3,440 2,894 2,539 2,798 18.9 35.5 23.0 6,238 4,793 30.2 12,356 Rest of the world 1,941 1,923 1,479 1,348 0.9 31.2 43.9 3,289 2,526 30.2 7,434 Latin america 937 960 738 631 (2.4) 26.9 48.6 1,567 1,330 17.8 3,568 Europe 379 453 378 270 (16.3) 0.5 40.7 649 593 9.5 2,171 Total speciality 6,697 6,230 5,134 5,046 7.5 30.5 32.7 11,744 9,242 27.1 25,529 Licensing revenues — — 1,185 — — 2,297 — Others 71 — 246 58 128 347 128 Total sales 12,552 11,849 10,554 10,404 5.9 18.9 20.6 22,956 19,237 19.3 48,895 % margin Raw material 35.3 35.5 35.6 35.2 35.2 33.3 35.6 Staff cost 16.1 16.6 16.8 15.9 16.0 17.2 15.8 Other expenditure 27.1 27.2 36.2 33.0 29.8 32.2 29.0 EBITDA 21.6 20.7 11.4 15.8 19.0 17.3 19.5 EBITDA - adjusted 20.4 20.7 19.6 21.1 20.7 21.8 20.3

Source: Company, Kotak Institutional Equities estimates

On a reported basis, the yoy comparison is impacted by the following items in the base period - (1) MTM losses of Rs770mn, (2) licensing income of Rs1.2 bn from Sanofi and (3) Rs1.3 bn in payment to Paul Capital. There was no licensing income for the current quarter.

Working capital improvement sustains; marginal increase in net debt

` Net working capital (based on quarter-end value) has decline from 120 days (in FY2012) to 112 days (1HFY13). Inventory at 70 days in 1HFY13 improved from 76 days in FY2012 while receivables stood at 117 days at the end of the quarter (120 days in FY2012).

` Net debt at Rs20.6 bn increased by Rs500 mn for 1HFY13. We do not expect any reduction in net debt for FY2013E. In FY2014E, we expect net debt reduction of Rs2.5 bn while a further reduction of Rs3.3 bn is expected in FY2015E.

` Total capital expenditure for 1HFY13 was Rs2.4 bn. Addition to tangible assets for the period was at Rs1.7 bn—Rs0.7 bn was towards setting up of the facility for Crofelemer. Including this investment, addition to tangible assets is expected to be Rs3.2 bn.

` Intangible addition of Rs300 mn for 1HFY13: The addition to intangible asset was on account of in-licensing of six products in Eastern Europe and one product in Western Europe.

18 KOTAK INSTITUTIONAL EQUITIES RESEARCH Glenmark Pharmaceuticals Pharmaceuticals

Interim balance sheet, March fiscal year-ends, 2011-1H13 (Rs mn)

2011 2012 1H13 Share capital 270 271 271 Reserves and surplus 20,102 23,746 24,723 Total equity 20,372 24,016 24,993 Minority interest 267 250 294 Long term borrowings 6,171 13,125 13,594 Deferred tax liabilities — — — Other long term liabilities 31.8 779.8 782.1 Long term provisions 69.0 145.8 167.6 Total non current liabilities 6,272 14,050 14,544 Short term borrowings 14,802 6,875 7,641 Trade payables 6,574 7,888 8,938 Other current liabilities 1,032 3,892 3,811 Short term provisions 183 363 555 Total current liabilities 22,591 19,017 20,945 Total equity and liabilities 49,501 57,334 60,776 Fixed assets 21,518 24,248 26,067 Goodwill 606 609 601 Non current investments 181 181 181 Deferred tax assets 1,081 2,674 2,984 Long term loans and advances 100 117 145 Other non current assets 28 34 35 Total non current assets 23,514 27,862 30,014 Current investments Inventories 8,070 7,877 8,327 Trade receivables 11,308 12,436 14,013 Cash and cash equivalents 1,949 3,201 3,302 Short term loans and advances 678 568 147 Other current assets 3,982 5,390 4,974 Total current assets 25,988 29,472 30,762 Total assets 49,501 57,334 60,776

Source: Company

US ramp-up to be driven by market-share gains

Glenmark has witnessed a period of strong approvals/launches in the US. The company has successfully transformed from a plain vanilla portfolio to a balanced product offering with presence in niche segments such as oral contraceptives, dermatology and modified release products. Oncology is another segment that Glenmark has identified for future filings.

US sales by segment, March fiscal year ends, 2010-15E (Rs mn)

2010 2011 2012 2013E 2014E 2015E Oral solids - base portfolio 149 152 181 190 191 195 Dermatology 1 17 43 65 72 81 Oral contraceptives — 116588985 Modified release — 12 12 12 20 30 Others (controlled substance, para IV, immediate release) 2 1 3 2 19 49 Total 152 184 254 326 390 440 % of US sales Oral solids - base portfolio 98 83 71 58 49 44 Dermatology 1 917201818 Oral contraceptives — 1 6 18 23 19 Modified release — 75457 Others (controlled substance, para IV, immediate release) 1 1 1 1 5 11

Source: Kotak Institutional Equities estimates

KOTAK INSTITUTIONAL EQUITIES RESEARCH 19 Pharmaceuticals Glenmark Pharmaceuticals

Dermatology pipeline remains weak

Dermatology was the initial niche segment which was identified and has been a key driver for improved product mix. The company has approvals for 19 ANDAs in the category across 13 molecules. Approvals for Glenmark in this category began in 2008 and there has been a significant ramp-up in sales during FY2012. We continue to see strong growth in dermatology during FY2013E with incremental additions to the dermatology portfolio moderating beyond FY2013E.

There are two known dermatology filings (both para IV) – Locoid and Vanos. The market size of both the products remains small. We expect Locoid to be more interesting given Glenmark is the only known filer.

The company has disclosed 4 pending approvals in dermatology in March 2012. The period 2013-15E is likely to see limited launches of new dermatology products with growth primarily driven by market-share gains.

While the actual extent of additions may be different from our estimates depending on the opportunity size (remains undisclosed), we highlight the mismatch between current sales and pipeline strength as the key factor to be considered for projecting sales in this segment.

Glenmark – US dermatology portfolio

US market S. No Molecule Name Brand Name Dosage form Approval size ($ mn) Competition Cream, E-cream, 1 Clobetasol propionate Temovate (Fougera) ointment, gel, topical Mar-08 28 solution Fougera (C/O), G&W (C/O), Taro 2 Mometasone furoate Elocon (Schering) Cream, Ointment May-08 30 (C), Tolmar (C), Perrigo (O) 3 Betamethasone dipropionate Diprolene AF (Schering) Cream Sep-08 60 Fougera, Perrigo, Taro, Tolmar 4 Benzoyl peroxide Creamy wash / Cleanser Mar-09 20 5 Alclometasone dipropionate Aclovate (GSK) Cream /Ointment Jun-09 10 Fougera (C/O), Taro (C/O), 6 Ciclopirox olamine Loprox (Medicis) Cream Nov-09 10 Fougera, G&W, Perrigo, Taro 7 Adapalene Differin (Galderma) Gel Jul-10 84 Teva 8 Clotrimazole Clotrimazole (Taro) Cream Aug-10 26 Fougera 9 Calcipotriene Dovonex (Leo) Ointment Sep-10 na None 10 Ciclopirox Loprox (Medicis) Gel Sep-10 10 Fougera, Paddock 11 Mupirocin Bactroban (GSK) Ointment Jun-11 55 Fougera, Taro, Perrigo 12 Fluticasone propionate Cutivate (Nycomed) Lotion Mar-12 40 Perrigo Fougera, Taro, Perrigo, Tolmar, 13 Imiquimod Aldara (Medicis) Cream Mar-12 200 Teva, Apotex

Source: Company, Kotak Institutional Equities, US FDA orange book

20 KOTAK INSTITUTIONAL EQUITIES RESEARCH Glenmark Pharmaceuticals Pharmaceuticals

Incremental addition to US dermatology sales to moderate beyond FY2013E Addition to US dermatology sales, March fiscal year-ends, 2011-15E (US$ mn)

(US$ mn) 30 26 25 22

20 15 15 9 10 7

5

0 2011 2012 2013E 2014E 2015E

Source: Kotak Institutional Equities estimates

Oral contraceptives segment getting crowded

A similar trend is likely to play out in the oral contraceptive portfolio in the US. Glenmark has had a head-start in this segment and has launched 10 products in the segment. Given most of the launches have happened in 1QFY13, we expect strong ramp-up in this segment for FY2013E and FY2014E.

Glenmark has primarily been focused on opportunities which do not involve litigation (20 of them worth filing). The company has 4 pending filings in this category while there could be a few more where a patent litigation is involved (i.e. recently filed for Ortho Tri-Cyclen Lo). There could be a few more para IV filings but we expect at least 4-5 players in each of these opportunities.

Analysis of the approvals in the oral contraceptive segment indicates at least 2-3 players who are focused on non-para IV opportunities. We expect launches by Lupin, Mylan for all products over the next 3 years (both have filed for the entire range of 30+ relevant OC products).

We expect significant competition in this segment over the next 2 years. Glenmark will benefit from the head-start and likely to benefit in the initial period. Beyond FY2014E, we believe OC sales will stay flat – fewer launches offsetting the incremental competition.

KOTAK INSTITUTIONAL EQUITIES RESEARCH 21 Pharmaceuticals Glenmark Pharmaceuticals

Glenmark US OC portfolio

US market size S. No Molecule Name Brand Name Approval ($ mn) Competition 1 Norethindrone Nor-QD (Watson) 26-Apr-10 38 Teva, Lupin 2 Norethindrone acetate Aygestin (Teva) 22-Jul-10 25 Amneal 3 Norethindrone Micronor (J&J) 23-Jul-10 18 Teva 4 Ethinyl estradiol + Norethindrone Ovcon 35 (Warner Chilcott) 23-Mar-11 30 Teva, Watson, Novast Labs 5 Ethinyl estradiol + Norgestimate Ortho Tri-Cyclen (J&J) 20-Jun-11 230 Teva, Watson, Vintage, Novast 6 Ethinyl estradiol + Norethindrone Ortho-Novum 1/35-28 (J&J) 20-Jan-12 62 Teva, Watson, Novast Labs, Vintage 7 Ethinyl estradiol + Norethindrone Ortho-Novum 7/7/7-28 (J&J) 20-Jan-12 42 Teva, Watson, Novast Labs, Vintage 8 Ethinyl estradiol + Levonorgestrel Nordette (Teva) 1-Mar-12 50 Sandoz, Watson, Lupin 9 Ethinyl estradiol + Desogestrel Mircette (Teva) 3-Apr-12 98 Watson 10 Ethinyl estradiol + Norgestimate Ortho Cyclen (J&J) 5-Apr-12 90 Teva, Watson, Vintage, Novast

Source: Company, Kotak Institutional Equities estimates

Incremental addition to US OC sales, March fiscal year-ends, 2011-15E (US$ mn)

(US$ mn) 50 42 40 31 30

20 14

10 1 0

-4 2011 2012

(10) 2013E 2014E 2015E

Source: Kotak Institutional Equities estimates

We also analyse the para IV opportunites/tentative approvals for Glenmark to assess the pipeline strength beyond FY2014E. We believe most of these filings in the period FY2013- 15E are likely to be me-too opportunities with significant competition on launch.

22 KOTAK INSTITUTIONAL EQUITIES RESEARCH Glenmark Pharmaceuticals Pharmaceuticals

Glenmark – US para IV filings

US market Molecule name Brand name (Innovator) Formulation size Remarks 1 Desloratadine Clarinex (Merck) Tablet NA Marginal opportunity. Micardis (Boehringer Launch in January or June 2014 - depending on 2 Telmisartan Tablet NA Ingelheim) FTF. 3 Eszopiclone Lunesta (Sunovion) Tablet 750 Launch in May 2014 - multiple filers. 4 Colesevelam Welchol (Daiichi) Suspension 50 Launch in April 2015. 5 Linezolid Zyvox (Pfizer) Tablet 700 Launch expected in May 2015. 6 Rosuvastatin Crestor (AstraZeneca) Tablet 3,000 Launch in January 2016 - multiple filers. Glenmark is the sole FTF. Has settled with 7 Ezetimibe Zetia (Merck) Tablet 1,300 Merck for a launch in December 2016.Glenmark is partnered with Par pharma. 8 Atomoxetine Strattera (Eli Lilly) Capsule 500 Launch in May 2017 - multiple filers.

Source: Kotak Institutional Equities

Glenmark – US tentative approvals outstanding

US market Molecule name Brand name (Innovator) Formulation size Remarks 1 Rizatriptan Benzoate Maxalt (Merck) Tablet 300 Launch in December 2012 - multiple filers. 2 Zolmitriptan Zomig (AstraZeneca) Tablet 170 Launch in May 2013 - multiple filers. 3 Zolmitriptan Zomig (AstraZeneca) ODT 35 Launch in May 2013 - multiple filers. 4 Riluzole Rilutek (Sanofi) Tablet 40 Launch in June 2013 - multiple filers.

Source: Kotak Institutional Equities

Further re-rating to be driven by pipeline strength

The re-rating of Glenmark has been driven by improved accounting practices, better disclosure, strong ramp-up in emerging markets (including India) and the transition to a differentiated US product portfolio.

We believe further re-rating of the stock is likely to be driven by ability to replicate the success in dermatology and oral contraceptives in other niche segments for the US market. In general, the number of ’niche‘ segments has been dwindling with multiple players targeting the same opportunities which pose higher barriers to generic entry. Oncology filings have recently been initiated and unlikely to have meaningful impact before FY2015E.

The increase in R&D spend on generics (for FY2013E) also reflects the need to ramp-up the pipeline to sustain the US growth momentum in the US. With R&D spend on generics in the region of Rs1-1.2 bn, Glenmark ANDA filings were restricted to 10-12 per year. This may not be enough to sustain the momentum given the larger US base.

Higher-than-normal growth in India and other emerging markets may prevail in the near term. However, the growth in emerging markets will eventually settle around the market growth rates by FY2015E. Our estimates also capture the improving profitability in emerging markets while we see US business moderate for the period beyond FY2014E.

Out-licensing deals remain tough to predict although one may expect positives given the news flow from multiple trials. These are unlikely to provide sustainable boost to the stock price. At the margins, lack of a licensing opportunity in the near term may build further pressure on the R&D spend.

KOTAK INSTITUTIONAL EQUITIES RESEARCH 23 Pharmaceuticals Glenmark Pharmaceuticals

We view Glenmark as an interesting play in the long term with proven capabilities which extend beyond generics. Our REDUCE rating is reflective of heightened expectations which results in less favourable risk-reward in the stock. Our TP of Rs405 is based on 16X one-year forward adjusted EPS of Rs25.3.

Glenmark has 43 pending ANDAs as of 1HFY13 Glenmark – US pipeline - as of March 2012

Authorized to Pending Total Market size Niche/focus area distribute approval filings (US$ mn) Immediate release 39 11 50 7,387 Derma products 19 3 22 716 OC 11 4 15 996 Modified release 7 4 11 939 Controlled substances 3 0 3 266 Para IV filings 0 17 17 10,246 Total 79 39 118 20,550

Source: Company, Kotak Institutional Equities

Glenmark NCE pipeline

Molecule name Therapy area Status Catalyst 1 Revamilast (GRC 4039) Rheumatoid Arthritis Completed recruitment for PIIb trial in europe and asia. PIIb data expected in January 2013 Asthma Recruiting patients for PIIb trial in Europe and India. PIIb data expected in 4QFY13 2 GRC17536 Pain Received approval for PII in UK and Germany. Data expected in 1QFY14 Respiratory Initiates PI/Iia study in UK Data expected in 2QFY14 3 GRC15300 Neuropathic pain Licensed to Sanofi - PIIa study is ongoing Data expected in 2QFY14 4 GBR500 Ulcerative colitis Licensed to Sanofi - PII study is ongoing Data expected in 2QFY14 5 GBR900 Pain Pre-clinical Expect to enter clinic in 1QFY14

Source: Company, Kotak Institutional Equities

Reduce estimate for FY2013/14E by 7% and 3%

We reduce our FY2013 estimate by 7% primarily due to lowering of domestic growth in 2HFY13E and higher guidance for full-year R&D which results in lower margins. For FY2014E, we reduce estimates by 3% due to higher tax rate of 17% versus our previous estimate of 15%.

Change in sales estimates, March fiscal year-ends, 2013-14E (Rs mn)

Old estimates New estimates % change 2013E 2014E 2013E 2014E 2013E 2014E Domestic formulations 11,967 14,121 12,356 14,580 3.3 3.3 Semi regulated market 7,691 9,229 7,434 8,921 (3.3) (3.3) Latin america 3,591 4,309 3,568 4,282 (0.6) (0.6) Europe 2,383 2,622 2,171 2,388 (8.9) (8.9) Speciality 25,631 30,280 25,529 30,171 (0.4) (0.4) US 17,694 20,934 17,681 20,563 (0.1) (1.8) Europe 1,422 1,635 1,489 1,713 4.7 4.7 Latin america (Argentina) 170 204 174 209 2.4 2.4 API 3,775 4,152 3,894 4,283 3.2 3.2 Generics 23,060 26,925 23,238 26,768 0.8 (0.6) Licensing income — — — — Others 58 — 128 — Total 48,749 57,205 48,895 56,939 0.3 (0.5)

Source: Kotak Institutional Equities estimates

24 KOTAK INSTITUTIONAL EQUITIES RESEARCH Glenmark Pharmaceuticals Pharmaceuticals

Change in earnings estimates, March fiscal year-ends, 2013-14E (Rs mn)

Old estimates New estimates % change 2013E 2014E 2013E 2014E 2013E 2014E Sales 48,749 57,205 48,895 56,939 0.3 (0.5) Raw material 17,412 20,079 17,429 19,929 0.1 (0.7) Staff cost 7,695 9,080 7,741 8,980 0.6 (1.1) R&D 3,412 4,004 3,765 3,986 10.3 (0.5) Other expense 10,509 12,309 10,418 12,279 EBITDA - reported 9,721 11,733 9,541 11,766 (1.8) 0.3 EBITDA - adjusted 10,271 11,733 9,941 11,766 (3.2) 0.3 PBT 7,174 9,208 6,919 9,140 (3.6) (0.7) Tax 1,098 1,381 1,192 1,554 8.6 12.5 PAT -reported 5,992 7,727 5,634 7,486 (6.0) (3.1) PAT -adjusted 6,424 7,727 5,951 7,486 (7.4) (3.1) EPS -adjusted 23.7 28.5 22.0 27.7 (7.4) (3.1)

Source: Kotak Institutional Equities estimates

Financial summary, March fiscal year-ends, 2012-15E (Rs mn)

2012 2013E 2014E 2015E Net Sales (excl licensing) 37,654 48,895 56,939 64,817 % growth 29.9% 16.5% 13.8% Reported EBITDA (excl licensing) 5,908 9,541 11,766 12,977 % margins 15.7% 19.5% 20.7% 20.0% % growth 61.5% 23.3% 10.3% Adjusted EBITDA (for MTM losses) 7,366 9,941 11,766 12,977 % margins 19.6% 20.3% 20.7% 20.0% % growth 35.0% 18.4% 10.3% Reported PAT 4,603 5,634 7,486 8,575 % growth 22.4% 32.9% 14.5% Adjusted PAT 4,531 5,951 7,486 8,575 % growth 31.3% 25.8% 14.5% Adjusted EPS 16.7 22.0 27.7 31.7 % growth 31.3% 25.8% 14.5%

Source: Company, Kotak Institutional Equities estimates

KOTAK INSTITUTIONAL EQUITIES RESEARCH 25 Pharmaceuticals Glenmark Pharmaceuticals

Profit and loss statement, March fiscal year-ends, 2009-15E (Rs mn)

2009 2010 2011 2012 2013E 2014E 2015E Net sales 20,402 23,891 28,579 37,654 48,895 56,939 64,817 Raw material (6,581) (7,843) (9,918) (13,454) (17,429) (19,929) (22,556) Employee cost (3,194) (3,321) (5,103) (6,289) (7,741) (8,980) (10,417) R& D (1,274) (1,179) (1,380) (2,916) (3,765) (3,986) (4,537) Others (3,452) (5,585) (7,166) (9,087) (10,418) (12,279) (14,330) Total expenditure (14,500) (17,928) (23,568) (31,746) (39,354) (45,173) (51,840) EBITDA 5,902 5,963 5,011 5,908 9,541 11,766 12,977 Depreciation/amortisation (1,027) (1,206) (947) (979) (1,276) (1,476) (1,676) EBIT 4,875 4,757 4,064 4,929 8,265 10,290 11,301 Net finance cost (1,405) (1,640) (1,566) (1,377) (1,524) (1,300) (1,000) Other income (782) 490 1,405 (1,207) 178 150 150 Licensing income — 232 895 2,535 — — — PBT 2,688 3,839 4,799 4,881 6,919 9,140 10,451 Current tax (754) (529) (240) (238) (1,192) (1,554) (1,777) Minority interest 18 66 46 40 93 100 100 PAT - reported 1,916 3,244 4,512 4,603 5,634 7,486 8,575 PAT - adjusted 1,347 1,986 2,272 4,531 5,951 7,486 8,575 EPS - adjusted 5.3 7.6 8.4 16.7 22.0 27.7 31.7

Source: Company, Kotak Institutional Equities estimates

Balance sheet and cash flow statement, March fiscal year-ends, 2009-15E (Rs mn)

2009 2010 2011 2012 2013E 2014E 2015E Balance sheet Total equity 15,982 23,552 20,372 24,016 28,864 35,305 42,683 Total debt 20,943 18,694 21,116 22,445 22,458 19,941 16,616 Current liabilities 4,563 5,186 7,746 10,623 11,806 13,167 14,732 Minority interest 32 130 267 250 250 250 250 Deferred tax liabilities 569 710 — — — — — Total equity and liabilities 42,089 48,273 49,501 57,334 63,378 68,663 74,281 Cash and cash equivalents 715 1,070 1,986 3,253 3,253 3,253 3,253 Current assets 20,077 23,140 24,029 26,252 29,672 33,232 37,326 Net fixed assets 7,857 9,245 10,337 10,511 12,646 13,885 14,924 Net intangibles 7,806 8,628 10,329 11,862 12,352 12,837 13,322 Capital -WIP 5,454 6,008 1,457 2,483 2,483 2,483 2,483 Investments 181 181 281 298 298 298 298 Deferred tax assets — — 1,081 2,674 2,674 2,674 2,674 Total assets 42,089 48,273 49,501 57,334 63,378 68,663 74,281 Free cash flow Operating cash flow, excl. working capital 4,036 5,618 5,775 8,392 8,527 10,362 11,350 Working capital (3,877) (2,094) 3,531 (348) (2,237) (2,199) (2,529) Capital expenditure (9,745) (3,958) (4,012) (2,854) (3,900) (3,200) (3,200) Free cash flow (9,585) (434) 5,294 5,190 2,390 4,963 5,621

Source: Company, Kotak Institutional Equities estimates

26 KOTAK INSTITUTIONAL EQUITIES RESEARCH

BUY Tata Global Beverages (TGBL)

Consumer products OCTOBER 31, 2012 RESULT Coverage view: Cautious

Mixed results. 2QFY13 results highlights: (1) Volume growth of 4% in the standalone Price (Rs): 150 entity, (2) significant gross-margin pressure in the domestic business; the company Target price (Rs): 165 hiked prices, the full impact of which is expected to materialize from 3QFY13, (3) with a BSE-30: 18,505 correction in coffee prices, EOC PAT margins expanded to 11%, (4) continued market share gains in UK. The JV with Starbucks could potentially address a significant challenge faced by TGB—of appropriate allocation of capital in growth businesses. Potential benefit of a correction in commodity prices and distribution-led gains in India are likely to act as tailwinds in 2HFY13.

Company data and valuation summary Tata Global Beverages Stock data Forecasts/Valuations 2012 2013E 2014E 52-week range (Rs) (high,low) 165-80 EPS (Rs) 5.4 6.5 7.7 Market Cap. (Rs bn) 92.9 EPS growth (%) 36.3 20.5 18.5 Shareholding pattern (%) P/E (X) 27.8 23.1 19.5 Promoters 35.2 Sales (Rs bn) 65.9 76.8 87.7 FIIs 15.4 Net profits (Rs bn) 3.3 4.8 5.5 MFs 4.3 EBITDA (Rs bn) 6.7 6.8 8.7 Price performance (%) 1M 3M 12M EV/EBITDA (X) 14.2 14.3 10.9 Absolute 3.1 18.2 63.8 ROE (%) 7.8 8.5 9.7 Rel. to BSE-30 4.9 10.2 54.8 Div. Yield (%) 1.2 1.4 1.7

Standalone business performance disappoints

On a standalone basis, Tata Global Beverages (TGB) reported net sales of Rs5.4 bn (+8%, KIE estimate: Rs5.7 bn), EBITDA of Rs181 mn (-53%, KIE estimate: Rs738 mn) and PAT of Rs466 mn (-14%, KIE estimate: Rs582 mn).

` In the domestic business, sales grew 8%, driven by volume growth of ~4%, with the balance being pricing growth. EBITDA margin declined by 431 bps to 3.4%, driven by gross margin decline of 331 bps. A mismatch between input cost inflation and price hikes impacted gross margin. The full benefit of the price hikes is likely to materialize in 3QFY13. Other expenditure was higher by 85 bps likely due to higher adspends.

` Volume and value market share in India is 19.9% and 21.5% respectively (broadly maintained).

On a consolidated basis, the company reported sales of Rs18.4 bn (+14%), EBITDA of Rs1.4 bn (+21%).

` Out of the sales growth of 14%, underlying growth is likely ~6% and the balance due to forex movement. EBITDA margin improved by 43 bps to 7.8%.

` In US Dollar terms, Eight O Clock Coffee sales declined by 12% yoy; however PAT margins improved to 11% due to a correction in Arabica coffee prices. In Rupee terms, sales of US operations increased by 9%. Volume share and value share in the US market is 7% and 3%

respectively.

` In Rupee terms, sales in Britain and the Africa region increased by 16% yoy, in Canada, South America and Australia they increased by 45% yoy and in Europe and the Middle East they declined by 1% yoy.

` The company took price hikes in India, the UK, Canada and the US.

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

Consumer products Tata Global Beverages

Takeaways from the analyst meet

` Nourish Co JV is marketing Tata Water Plus, Tata Gluco Plus and Himalayan water. ƒ Tata Water Plus has been extended beyond Tamil Nadu to Andhra Pradesh. The USP of the product is that it is fortified with zinc supplements. It is priced at Rs2 for a 200 ml pouch and Rs16.5 for a 750 ml bottle. It is the second largest selling bottled water in Chennai.

ƒ Tata Gluco Plus is available in a single-serve cup, targeted as an alternative to carbonated drinks and is priced at Rs7 for 200 ml. Cumulative sales crossed 1 mn cases. The product is available in Tamil Nadu, Andhra Pradesh and parts of Maharashtra.

ƒ Himalayan is sold under the Nourish Co banner through the premium go to market (GTM) of Pepsi, which also includes Gatorade and Tropicana.

ƒ Tata Water Plus and Tata Gluco Plus will be taken national in a couple of years.

` The proportion of tea, coffee and water in the sales mix is 70%, 20% and 2%. In five years, the company expects 5-10% higher contribution to sales from coffee and water.

` Although the UK black-tea market declined, the company improved its market share. Volume share and value share in the UK market is ~25% and ~23% respectively. While a large part of the company’s portfolio is black tea, value-added tea, such as green tea, continues to grow faster.

` Eight O’ Clock Coffee entered the single-serve coffee format through a partnership with Green Mountain Coffee Roasters, Inc. (GMCR), a player in the specialty coffee and single- serve brewing systems market in North America. The agreement will make Eight O’Clock Coffee, Tetley tea, and Good Earth tea available through GMCR’s Keurig Single-Cup Brewing systems.

` In Canada, the company entered into an agreement with Kraft to make Tetley tea discs available for Kraft’s Tassimo, a market leader in single-serve brewing machines.

` The management highlighted that operational plans on the launch of the Starbucks chain is underway but refrained from giving a timeline for the launch.

Tata Starbucks: A long term positive

Tata Starbucks Ltd (TSL), a 50:50 joint venture between Tata Global Beverages and Starbucks Ltd, opened its first store in Mumbai in October 2012 and currently has three stores in the city. The company plans to open its first store in Delhi by January 2013. TSL also has an MOU with Tata Coffee to source coffee for its retail operations.

We view TGB’s JV with Starbucks to operate a coffee shop chain in India as a long-term positive. This JV could potentially address a significant challenge faced by TGB—of appropriate allocation of capital in growth businesses. Starbucks globally prefers to go solo and there are only few exceptions (Costa Rica is an example). This deal could potentially be a win-win for TGB, if it can leverage Starbucks’ retail skills for effective use of its cash. However, a cultural match would be a key operational challenge, in our view.

A few details on the coffee market in India follow:

` The in-home consumption market of coffee is estimated to be ~Rs12 bn and the OOH (out of home) coffee market in India is estimated to be ~1.2X of the in-home market.

` The key players are Café Coffee Day, Barista Lavazza and Costa Coffee with ~1,200, ~300 and ~75 outlets respectively.

` At a tangent, we highlight the market opportunity—the OOH coffee consumption market in the US is estimated to be US$41 bn and the in-home coffee market is ~US$6 bn.

There are 11,000 Starbucks stores in the US, 800 in China and 700 in Japan.

28 KOTAK INSTITUTIONAL EQUITIES RESEARCH Tata Global Beverages Consumer products

Retain BUY

We retain our BUY rating with a revised target price of Rs165 (Rs130 earlier) as we value the stock at 21X FY14E EPS. The potential benefit of a correction in commodity prices and distribution-led gains in India are likely to act as tailwinds. Cheap valuations provide support as well, in our view. We have not ascribed any value to the Tata-Starbucks joint venture as yet. Key triggers are (1) the potential of Nourish Co., (2) media reports suggest likely stake sale in Tetley and (3) potential of Starbucks. Key risks are input-cost inflation not neutralized by price increases and increase in competitive activity forcing higher promotional spends.

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

(% chg) 2QFY13 2QFY13E 2QFY12 1QFY13 2QFY13E 2QFY12 1QFY13 Net sales 5,393 5,679 4,982 5,629 (5) 8 (4) Total expenditure (5,212) (4,941) (4,600) (4,908) 13 6 Material cost (3,825) (3,676) (3,368) (3,638) 14 5 Staff cost (271) (257) (243) (276) 12 (2) Other expenditure (1,116) (1,008) (989) (994) 13 12 EBITDA 181 738 382 722 (75) (53) (75) OPM (%) 3.4 13.0 7.7 12.8 Other income 547 142 429 139 27 293 Interest (54) (40) (44) (30) 23 80 Depreciation (35) (37) (29) (35) 20 1 Pretax profits 638 803 737 796 (21) (13) (20) Tax (172) (221) (198) (220) (13) (22) Net income (adj.) 466 582 539 576 (20) (14) (19) Extraordinary items 478 - (34) (15) Reported PAT 944 582 505 561 Income tax rate (%) 27.0 27.5 26.9 27.6

Cost as a % of sales Material cost 70.9 64.7 67.6 64.6 Staff cost 5.0 4.5 4.9 4.9 Other expenditure 20.7 17.8 19.8 17.7

Source: Company, Kotak Institutional Equities estimates

KOTAK INSTITUTIONAL EQUITIES RESEARCH 29 Consumer products Tata Global Beverages

Interim consolidated results of Tata Global Beverages, March fiscal year-ends, (Rs mn)

(%)chg 2QFY13 2QFY12 1QFY13 2QFY12 1QFY13 1HFY13 1HFY12 (% chg.) Net sales 18,426 16,120 17,149 14 7 35,575 30,680 16 Total expenditure (16,997) (14,939) (15,443) 14 10 (32,440) (28,421) 14 Material cost (9,365) (8,455) (8,658) 11 8 (18,023) (16,151) 12 Staff cost (1,769) (1,595) (1,734) 11 2 (3,503) (3,147) 11 Advertising and promotion (3,335) (2,197) (2,835) 52 18 (4,744) (4,686) 1 Other expenditure (2,528) (2,691) (2,216) (6) 14 (6,170) (4,436) 39 EBITDA 1,429 1,181 1,706 21 (16) 3,135 2,259 39 OPM (%) 7.8 7.3 9.9 8.8 7.4 Other income 524 527 289 (1) 82 812 820 (1) Interest (110) (190) (212) (42) (48) (322) (330) (2) Depreciation (251) (228) (250) 10 0 (501) (471) 6 Pretax profits 1,593 1,291 1,532 23 4 3,125 2,278 37 Tax (446) (362) (493) 23 (9) (938) (498) 89 Net income 1,147 930 1,040 23 10 2,187 1,780 23 Minority interest (91) (13) (209) (300) (144) Extraordinary items 134 (147) (54) 80 742 Reported PAT 1,190 770 777 55 53 1,967 2,379 (17) Income tax rate (%) 28.0 28.0 32.1 30.0 21.9

Cost as a % of sales Material cost 50.8 52.5 50.5 Staff cost 9.6 9.9 10.1 Advertising and promotion 18.1 13.6 16.5 Other expenditure 13.7 16.7 12.9

Segment results of Tata Tea Ltd

Revenue Tea 13,106 11,644 12,303 13 7 25,410 22,249 14 Coffee & Other Produce 5,350 4,526 4,705 18 14 10,056 8,445 19 Others 149 118 242 26 (38) 392 260 51 Unallocated 3 3 - (14) 5 EBIT Tea 946 1,124 1,249 (16) (24) 2,195 2,017 9 Coffee 842 408 626 106 34 1,468 855 72 Others (65) (46) (45) 41 46 (110) (90) 22 EBIT Margin (%) Tea 7.2 9.7 10.2 Coffee 15.7 9.0 13.3 Others (43.8) (39.1) (18.4) Capital Employed Tea 34,136 29,275 31,776 17 7 34,136 29,275 17 Coffee 19,711 16,658 19,160 18 3 19,711 16,658 18 Others 2,243 1,778 2,279 26 (2) 2,243 1,778 26 Unallocated 3,615 8,306 6,977 (56) (48) 3,615 8,306

Source: Company, Kotak Institutional Equities

30 KOTAK INSTITUTIONAL EQUITIES RESEARCH Tata Global Beverages Consumer products

Robusta coffee prices (indexed to base) Arabica coffee prices (indexed to base)

220 180

200 160

180 140

160 120

140 100

120 80

100 60 Jul-12 Jul-11 Jul-10 Jul-09 Jul-08 Jul-09 Jul-10 Jul-11 Jul-12 Jan-12 Jan-11 Jan-10 Sep-11 Nov-11 Sep-10 Nov-10 Sep-09 Nov-09 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Apr-08 Oct-08 Apr-09 Oct-09 Apr-10 Oct-10 Apr-11 Oct-11 Apr-12 Mar-12 Mar-11 Mar-10 May-12 May-11 May-10

Source: Bloomberg Source: Bloomberg

Tata Global Beverages: Consolidated profit model, balance sheet, cash model 2009-2014E, March fiscal year-ends, (Rs mn)

2010 2011 2012 2013E 2014E 2015E Profit model (Rs mn) Net sales 57,830 59,824 65,853 76,832 87,748 98,587 EBITDA 6,837 5,859 5,771 7,004 8,129 9,350 Other income 1,932 1,182 1,404 1,451 1,692 1,989 Interest (1,491) (1,197) (704) (688) (727) (748) Depreciation (1,029) (994) (961) (1,037) (1,201) (1,215) Pretax profits 6,249 4,850 5,511 6,731 7,893 9,375 Tax (2,477) (2,025) (1,417) (1,979) (2,359) (3,056) Net profits 3,772 2,825 4,094 4,752 5,534 6,319 Earnings per share (Rs) 6.1 4.0 5.4 6.5 7.7 8.5

Balance sheet (Rs mn) Total equity 37,232 39,571 45,657 47,041 49,088 52,308 Total borrowings 17,968 10,415 10,440 10,440 10,440 10,440 Currrent liabilities 26,916 27,621 26,691 33,016 36,905 41,009 Total liabilities and equity 82,116 77,607 82,788 90,497 96,434 103,757 Cash 19,038 9,973 7,362 12,832 15,145 18,915 Current assets 20,943 23,792 26,833 28,441 32,447 36,398 Total fixed assets 36,944 37,977 42,928 42,709 42,326 41,928 Investments 5,191 5,865 5,665 6,515 6,515 6,515 Total assets 82,116 77,607 82,788 90,497 96,434 103,757

Key assumptions Revenue growth (%) 19.3 3.4 10.1 16.7 14.2 12.4 EBITDA margin(%) 11.8 9.8 8.8 9.1 9.3 9.5

EPS growth (%) 14.5 (34.6) 36.3 19.7 19.6 10.0

Source: Kotak Institutional Equities estimates

KOTAK INSTITUTIONAL EQUITIES RESEARCH 31

REDUCE Thermax (TMX)

Industrials OCTOBER 31, 2012 RESULT Coverage view: Cautious

Near-term outlook slightly clouded, especially on margins. TMX hopes to maintain Price (Rs): 585 Rs11-12 bn quarterly ordering run-rate in 2H (stronger Rs14 bn rate required for double- Target price (Rs): 510 digit sales growth in FY2014E might be difficult). Near-term margins might remain muted BSE-30: 18,505 (currently bidding at sub-10% margin for large orders; captive growth potential next year in small-ticket sub-15 MW orders). The company does not expect revival in power sector ordering (10 GW p.a.) even in FY2014E which is negative for B&W JV (no active queries, needs 1.2 GW p.a. to break even). Retain REDUCE (TP: Rs510, Rs430 earlier).

Company data and valuation summary Thermax Stock data Forecasts/Valuations 2012 2013E 2014E 52-week range (Rs) (high,low)603-381 EPS (Rs) 32.9 26.4 30.9 Market Cap. (Rs bn) 69.7 EPS growth (%) 4.0 (19.9) 17.2 Shareholding pattern (%) P/E (X) 17.8 22.2 18.9 Promoters 62.0 Sales (Rs bn) 60.9 55.1 56.8 FIIs 12.4 Net profits (Rs bn) 3.9 3.1 3.7 MFs 6.2 EBITDA (Rs bn) 5.9 4.9 5.6 Price performance (%) 1M 3M 12M EV/EBITDA (X) 10.6 12.2 10.0 Absolute 4.2 21.0 25.9 ROE (%) 26.6 18.2 18.9 Rel. to BSE-30 5.6 12.7 20.4 Div. Yield (%) 1.2 1.4 1.5

2H ordering: Hopes to keep Rs12 bn quarterly rate; 10%+ FY2014E sales growth needs Rs14 bn rate

Thermax maintained its Rs11-12 bn quarterly run-rate in 2Q based on (1) large Rs2.8 bn power EPC order (33% sector share) and (2) windfall (~Rs1 bn) waste and waste water order. It expects to maintain this run-rate in 2H based on its quarterly expectation of (1) Rs5-6.5 bn of base orders (boiler and heater/chillers), (2) Rs1.5-2 bn of large boiler business and (3) one large EPC order (received 1 each in 1Q and 2Q, expects another in 3Q). It believes the double-digit sales growth rate in FY2014E would require 10-15% increase in starting backlog (Rs14 bn quarterly run-rate in 2H). Margin: Limited upside beyond 10%; bidding at sub-10% margin, relying of m/l reduction benefits

TMX cited incremental large orders are being bid at single-digit margin given scarcity of such large opportunities. It has, however, been able to transform these into double-digit margins based on (1) design-related improvements (material cost reduction through reengineering of Bills of Materials) and (2) negotiations with suppliers. At current bidding margin, it may able to sustain its double-digit EBITDA margin (risk lies in ordering/competitive environment deteriorating further). Subsidiary losses may continue in 2H; B&W JV ready for manufacturing with no active enquiries

Subsidiary losses (Rs180 mn in 1H) may continue in 2H based on (1) 1-2 quarters of execution of Meenakshi order (won at low-entry level margin, 75-80% complete), (2) B&W JV not having any current enquiries (reported Rs120 mn loss in 1H) and (3) lack of incremental business from current loss-making China subsidiary (political uncertainty delaying business decisions). The company expects power generation ordering to remain sedate (10 GW ordering p.a. rate in FY2015E) which may prolong underutilization JV facility (to be ready for manufacturing in 4Q, 1.2 GW breakeven point). In-line 2Q results with slightly higher inflows; retain REDUCE on high valuations against full estimates

TMX reported in-line sales (Rs12 bn, down 9% yoy) and EBITDA margin (10.2%, 60 bps yoy decline). PAT at Rs0.9 bn (down 10% yoy) beat estimates (Rs0.8 bn) on higher other income. We marginally revise estimates to Rs26.5 and Rs31.6 for FY2013-14E (TP: Rs510 versus Rs430 earlier on 17X one- year forward EPS). We retain REDUCE on (1) high valuations (18.5X FY2014E P/E, 10.4X EV/EBITDA), (2) weak peer feedback and (3) full estimates (inflow recovery built in, potential for margin correction).

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

Thermax Industrials

Ordering: Expects to maintain Rs11-12 bn quarterly run-rate in 2H

The company maintained its ordering rate in 2Q (Rs11.6 bn) supported by orders from (1) power sector (33% share, includes Rs2.8 bn NEEPCO EPC order and 2 other captive orders, one from cement and another from textile), (2) ferrous sector (25% share supported by windfall water and waste water order of Rs910 mn), (3) cement (9%) and (4) sugar (6%, supported by new product using distillery wash as fuel). It expects to continue the Rs11-12 bn quarterly run-rate into 2H based on its quarterly expectation of (1) Rs5-6.5 bn of base orders (boiler and heater/chillers), (2) Rs1.5-2 bn of large boiler business and (3) one large EPC order (received 1 each in 1Q and 2Q, expects another in 3Q). We build in Rs46 bn of total FY2013E order inflow implying Rs11 bn per quarter order inflow run-rate in 2HFY13E.

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

Order inflows Order backlog

25,000 Energy Environment 70,000 Energy Environment

60,000 20,000 50,000 15,000 40,000

10,000 30,000 20,000 5,000 10,000

0 0

1QFY08 2QFY08 3QFY08 4QFY08 1QFY09 2QFY09 3QFY09 4QFY09 1QFY10 2QFY10 3QFY10 4QFY10 1QFY11 2QFY11 3QFY11 4QFY11 1QFY12 2QFY12 3QFY12 4QFY12 1QFY13 2QFY13 1QFY08 2QFY08 3QFY08 4QFY08 1QFY09 2QFY09 3QFY09 4QFY09 1QFY10 2QFY10 3QFY10 4QFY10 1QFY11 2QFY11 3QFY11 4QFY11 1QFY12 2QFY12 3QFY12 4QFY12 1QFY13 2QFY13

Source: Company, Kotak Institutional Equities

Rs13-14 bn of inflow run-rate required in 2H for double-digit growth in FY2014E

Management suggested that at this point of time FY2014E execution expectations cannot be communicated as it is still too far and depends upon the 2HFY13E order inflows. Based on 10-15% growth in starting backlog at FY2013E-end versus FY2012-end to deliver 10%+ FY2014E revenue growth, we believe that Thermax may require inflows of Rs13-14 bn per quarter in the next few quarters.

Margin: Limited upside beyond 10%; bidding margin reduces to single digit

Thermax cited that incremental large orders are being bid at single-digit margin also, given scarcity of such large opportunities. The company has, however, been able to transform these orders into double-digit margins based on (1) design-related improvements (material cost reduction through reengineering of Bills of Materials) and (2) negotiations with suppliers. Given the current bidding margin, the company expects to sustain its double-digit EBITDA margin (risk lies in ordering/competitive environment deteriorating further).

KOTAK INSTITUTIONAL EQUITIES RESEARCH 33 Industrials Thermax

Subsidiary/JV losses may sustain in 2H

The company’s subsidiaries and JVs have reported about Rs180 mn of PAT-level losses in 1H based on (1) Rs120 mn loss in B&W JV (proportional share) , (2) Meenakshi order construction (won at low entry-level margin) and (3) Chinese subsidiary losses (US$1 mn losses in 2Q, quantum of losses getting lower).

Losses in 2H may continue based on (1) 1-2 quarters of more pain from Meenakshi order (5-10% of supply remaining, 75-80% complete overall), (2) supercritical JV not having any current enquiries (to be ready for manufacturing in 4Q) and (3) Chinese companies have stopped placing any incremental capital goods order for past 3-4 months (short-term strategy before forthcoming elections) affecting business of Thermax’s Chinese subsidiary.

We build in Rs150 mn of loss in FY2013E (versus loss of Rs190 mn already in 1H) and build in a gain of Rs230 mn (Rs2 EPS) in FY2014E.

B&W: Underutilization may continue; revival in sectoral ordering possibly in FY2015E

The company expects power generation ordering to reach 10 GW p.a. levels only in FY2015E as it believes that it would take another 18 months for key reforms (land acquisition bill, scrapping of go/no go zones) and support measures (high teen IRRs require 200-250 bps lower interest rate, Rs4.5+ PPA rate) to fructify. Its JV has a 3 GW capacity with breakeven at 1.2 GW. Continuation of sedate ordering in power generation would prolong underutilization of this facility (no active enquiries at present). There is scope for this facility being used for global B&W business although there is nothing significant on the table in the short term (no such global orders available at present). The facility is currently in its last stage of installation and is expected to be ready for manufacturing from 4QFY13E.

Captive: Positive on price arbitrage-led ordering, especially in sub-15 MW range

The company projects captive activity to increase over the next 2-3 quarters based on sedate power generation ordering over the next 1.5-2 years. Supply may not keep pace with power demand and hence the price arbitrage between commercial (Rs6/unit) and captive rates (Rs4/unit) would drive demand for a period of 2-3 years. Key part of this demand would come from the 5-15 MW segment comprising small industries currently using subsidized diesel to run back-up. These users may consider moving to captive power (diesel power is an expensive and short-term solution; subsidy might also get removed). Thermax has a foothold in the segment with 25-30% share in the work treatment segment (heating and chillers) and is aiming for similar market share in the captive segment once captive potential materializes. Overall captive market size (1,500 MW in FY2012) might decline further in 2013E. The company has a 20-25% market share in the business (won 80-90 MW of orders in 1H).

Exports: Cites good demand for 15-30 MW segment for split orders

The company cited strong demand seen on the 15-30 MW segment for overseas business originating from (1) Africa (note 1Q TMX order from Zambia), (2) Middle East and (3) South East Asia. Thermax expects greater potential of winning the split orders in this segment as Chinese are very aggressive on the EPC side (benefit from cheap source of funding).

Other key takeaways

` Power shortage in South driving demand for absorption chillers. There is demand from AP and TN (reeling from power shortages) to convert their electrical chillers to absorption chillers (8-9 inquiries). The company expects this trend to further improve next year (expects power shortages would continue for the next 1-2 years).

` Cites O&G opportunity in heaters business. The heater business is receiving enquiries from Reliance (RFQ stage) and Kochi refinery (Rs170 bn EPC potential). 20% of the boiler and heater business originated for overseas.

34 KOTAK INSTITUTIONAL EQUITIES RESEARCH Thermax Industrials

2QFY13 results: In-line results with higher other income leading to PAT beat

` Revenues: 9% decline in line with expectations and guidance. Thermax reported standalone sales of Rs11.9 bn in 2QFY13, 2% ahead of our estimate of Rs11.7 bn and down 8.5% yoy. Energy segment reported revenues of Rs9.3 bn, down 10% yoy while the environment segment reported revenues of Rs2.75 bn, down 7% yoy. We note that prima facie this is the second quarter of decline in the environment segment (1QFY13 was first quarter reflecting decline). Management has guided for poor business conditions, particularly in the air pollution control segment.

` EBITDA margin declines on negative operating leverage; contribution margin improves on lower large projects mix. EBITDA margin declined by 60 bps on a yoy basis to 10.2% versus our estimate of 10%. The margin contraction was led by negative operating leverage (other expenses - 90 bps impact, employee cost – 130 bps impact) despite contribution margin improving by 160 bps on a yoy basis to 31.6% (versus 33.2% in 1QFY13 and 30% in 2QFY12). Yoy EBIT margins declined across both segments with 80 bps in energy and 120 bps decline in environment. Contribution margin expansion is possibly driven by the fact the large project revenues are decreasing as a proportion of sales in the Thermax revenue mix.

` Net PAT: down 10% yoy; slight beat on higher other income. Thermax reported a standalone net PAT of Rs911 mn, down 10% yoy, higher than our estimate of Rs807 mn. PAT is higher essentially on the back of higher other income of Rs274 mn versus our expectation of Rs176 mn.

` Order backlog: flat sequentially with inflows of Rs11.6 bn. Order backlog at Rs44.1 bn was sequentially flat, though backlog is significantly lower on a yoy basis from Rs58 bn at end-2QFY12. Order inflows at Rs11.6 bn was slightly higher than our expectation but was broadly anticipated. Group order backlog also remained sequentially flat at Rs49.8 bn and lower from end-2QFY12 levels of Rs65.3 bn.

Thermax (standalone) - 2QFY13 - key numbers, March fiscal year-ends (Rs mn)

% change 2QFY13 2QFY13E 2QFY12 1QFY13 vs est. yoy qoq 1HFY13 1HFY12 % change FY2013E FY2012 % change Total income 11,924 11,666 13,025 9,835 2.2 (8.5) 21.2 21,758 23,469 (7.3) 46,664 53,041 (12.0) Expenses (10,706) (10,499) (11,620) (8,871) 2.0 (7.9) 20.7 (19,577) (20,927) (6.5) (41,811) (47,202) (11.4) Raw material (8,137) (9,137) (6,665) (10.9) 22.1 (14,802) (16,484) (10.2) (32,705) (36,842) (11.2) Employee (1,056) (985) (901) 7.2 17.3 (1,957) (1,890) 3.5 (3,579) (3,874) (7.6) Other expenses (1,494) (1,514) (1,398) (1.3) 6.8 (2,892) (2,635) 9.8 (5,527) (6,519) (15.2) EBITDA 1,218 1,167 1,405 964 4.4 (13.3) 26.3 2,182 2,542 (14.2) 4,853 5,839 (16.9) Other income 274 176 208 187 55.2 31.6 46.3 461 355 29.6 716 705 1.5 PBDIT 1,491 1,343 1,613 1,151 11.1 (7.5) 29.6 2,642 2,897 (8.8) 5,569 6,544 (14.9) Interest (35) (10) (11) (37) 256.4 212.5 (7.8) (72) (15) 385.5 (66) (66) 1.4 Depreciation (139) (129) (117) (132) 7.4 18.4 5.0 (271) (228) 18.7 (520) (470) 10.7 PBT 1,318 1,204 1,484 981 9.5 (11.2) 34.3 2,300 2,654 (13.4) 4,983 6,009 (17.1) Tax (407) (397) (468) (309) 2.5 (12.9) 31.7 (716) (838) (14.6) (1,654) (1,940) (14.7) Net profit 911 807 1,017 672 12.9 (10.4) 35.5 1,583 1,816 (12.8) 3,329 4,069 (18.2)

Order details Order booking 12,431 11,880 12,580 4.6 (1.2) 25,011 26,320 (5.0) 40,310 (100.0) Order backlog 44,120 57,700 44,740 (23.5) (1.4) 44,120 57,700 (23.5) 42,300 (100.0)

Key ratios (%) Raw material /sales 68.4 70.0 66.8 67.7 69.9 70.1 69.4 Contribution margin 31.6 30.0 33.2 32.3 30.1 29.9 30.6 Employee exp./sales 8.9 7.6 9.2 9.0 8.1 7.7 7.3 Other expenses/sales 12.5 11.6 14.2 13.3 11.2 11.8 12.3 EBITDA margin 10.2 10.0 10.8 9.8 10.0 10.8 10.4 11.0 PBT margin 11.1 10.3 11.4 10.0 10.6 11.3 10.7 11.3 PAT margin 7.6 6.9 7.8 6.8 7.3 7.7 7.1 7.7 Tax rate 30.9 33.0 31.5 31.5 31.2 31.6 33.2 32.3 EPS (Rs) 7.6 6.8 8.5 5.6 13.3 15.2 27.9 34.1

Source: Company, Kotak Institutional Equities estimates

KOTAK INSTITUTIONAL EQUITIES RESEARCH 35 Industrials Thermax

Segmental revenues and margins of Thermax for 2QFY13, March fiscal year-ends (Rs mn)

% change 2QFY13 2QFY12 1QFY13 yoy qoq 1HFY13 1HFY12 % change FY2013E FY2012 % change Revenues Energy 9,345 10,348 7,654 (9.7) 22.1 16,998 18,372 (7.5) 34,823 41,509 (16.1) Environment 2,751 2,968 2,432 (7.3) 13.1 5,183 5,616 (7.7) 12,334 12,851 (4.0) Less Intersegment (172) (282) (251) (39.1) (31.5) (423) (509) (16.9) (493) (1,320) (62.6) Total 11,924 13,035 9,835 (8.5) 21.2 21,758 23,479 (7.3) 46,664 53,041 (12.0) PBIT Energy 923 1,102 822 (16.3) 12.2 1,745 1,912 (8.7) 3,569 4,465 (20.1) Environment 265 320 246 (17.1) 7.8 511 633 (19.3) 1,480 1,605 (7.8) Net unallocable income 165 73 49 233.6 214 124 72.3 (1) 4 (126.0) Total PBIT 1,318 1,484 1,080 (11.2) 22.0 2,398 2,654 (9.6) 4,983 6,009 (17.1) EBIT margin (%) Energy 9.9 10.7 10.7 10.3 10.4 10.3 10.8 Environment 9.6 10.8 10.1 9.9 11.3 12.0 12.5 Total PBIT 11.1 11.4 11.0 11.0 11.3 10.7 11.3

Source: Company, Kotak Institutional Equities estimates

Thermax balance sheet, March fiscal year-ends, 2010-13E (Rs mn)

Sep-10 Mar-11 Sep-11 Mar-12 Sep-12 Mar-13E Shareholders funds 11,935 12,923 14,630 16,012 17,819 18,180 Share capital 238 238 238 238 238 238 Reserves & surplus 11,696 12,685 14,392 15,774 17,581 17,942 Loan funds - 480 902 1,664 1,366 664 Deferred tax liability 165 201 194 230 218 230 Total sources of funds 12,100 13,605 15,726 17,906 19,404 19,074

Fixed assets 5,080 5,163 5,331 5,736 6,030 5,846 Investments 1,874 4,044 4,233 5,527 6,616 6,277 Cash & bank balances 7,324 6,566 5,707 5,698 4,634 5,331 Current assets 17,875 20,155 19,378 22,737 21,789 20,797 Inventories 3,265 2,823 3,027 2,792 2,566 7,671 Sundry debtors 7,915 10,013 10,143 12,456 11,793 10,959 Loans & advances 3,674 3,094 3,125 1,883 2,030 1,656 Other current assets 3,022 4,225 3,084 5,606 5,400 511 Current liabilities & provisions 20,053 22,323 18,923 21,791 19,666 19,177 Current liabilities 19,741 20,756 18,547 19,334 18,443 17,259 Provisions 312 1,566 376 2,457 1,222 1,918 Net working capital (excl. cash) (2,177) (2,168) 455 946 2,123 1,620 Miscellaneous expenditure Total application of funds 12,100 13,605 15,726 17,906 19,404 19,074

Last 4-qtr revenues 38,489 48,832 53,594 53,041 51,320 46,664

As days of sales Current assets 170 151 132 156 155 163 Inventories 31 21 21 19 18 60 Sundry debtors 75 75 69 86 84 86 Loans & advances 35 23 21 13 14 13 Other current assets 29 32 21 39 38 4 Current liabilities & provisions 190 167 129 150 140 150 Current liabilities 187 155 126 133 131 135 Provisions 3 12 3 17 9 15 Net working capital (excl. cash) (21) (16) 3 7 15 13

Source: Company, Kotak Institutional Equities

36 KOTAK INSTITUTIONAL EQUITIES RESEARCH Thermax Industrials

Marginally revise estimates; retain REDUCE on high valuations against full estimates

We marginally revise estimates to Rs26.5 and 31.6 for FY2013-14E with revised target price of Rs510 versus Rs430 earlier (17X one-year forward EPS versus 15X multiple earlier). We retain REDUCE on (1) high valuations (18.5X FY2014E P/E, 10.4X EV/EBITDA), (2) weak peer feedback and (3) full estimates (inflow recovery built in, potential for margin correction).

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

` New estimates Old estimates Revision (%) FY2012 FY2013E FY2014E FY2013E FY2014E FY2013E FY2014E Order inflows (standalone) 40,310 45,778 52,644 44,341 50,992 3.2 3.2 Revenues 60,912 55,731 58,109 55,122 56,786 1.1 2.3 Standalone 53,041 47,274 48,700 46,664 47,377 1.3 2.8 Subsidiaries 7,872 8,458 9,409 8,458 9,409 0.0 0.0 EBITDA 5,920 4,878 5,699 4,851 5,563 0.6 2.5 EBITDA margin (%) 9.7 8.8 9.8 8.8 9.8 Standalone 11.0 10.3 10.9 10.4 10.9 Subsidiaries 1.0 (0.0) 4.0 (0.0) 4.0 PAT 3,922 3,156 3,769 3,142 3,683 0.4 2.3 EPS (Rs) 32.9 26.5 31.6 26.4 30.9 0.4 2.3

Growth (%) Revenues 14.1 (8.5) 4.3 (9.5) 3.0 EBITDA 3.2 (17.6) 16.8 (18.1) 14.7 PAT 4.0 (19.5) 19.4 (19.9) 17.2

Source: Company, Kotak Institutional Equities estimates

Segmental estimates for Thermax, March fiscal year-ends, 2008-15E (Rs mn)

2008 2009 2010 2011 2012 2013E 2014E 2015E Energy segment Revenue 26,207 25,173 24,082 39,082 41,509 35,325 35,460 39,230 Assume moderate growth in order Growth (%) 53.3 (3.9) (4.3) 62.3 6.2 (14.9) 0.4 10.6 inflows in the core energy business Order inflow 20,770 35,510 46,352 41,013 28,730 33,040 37,995 43,695 post sharp decline in FY2012 Growth (%) (26.7) 71.0 30.5 (11.5) (29.9) 15.0 15.0 15.0 Order backlog 19,340 24,509 44,889 46,724 33,945 31,659 34,195 38,660 Build in strong execution based on Growth (%) (21.6) 26.7 83.2 4.1 (27.3) (6.7) 8.0 13.1 absence of large order wins Bill to book ratio (%) 74.7 67.9 50.5 59.8 67.9 70.0 70.0 70.0 EBIT 3,705 3,315 2,873 3,889 4,465 3,621 3,723 4,315 EBIT Margin (%) 14.113.211.910.010.810.310.511.0 Environment segment Revenue 6,513 8,113 8,410 11,472 12,851 12,334 13,557 15,356 Growth (%) 23.8 24.6 3.7 36.4 12.0 (4.0) 9.9 13.3 Assume moderate growth in order Order inflow 7,420 7,310 11,578 12,157 11,580 12,738 14,649 16,846 inflows in FY2012E-14E Growth (%) 12.8 (1.5) 58.4 5.0 (4.7) 10.0 15.0 15.0 Order backlog 5,000 4,461 7,922 8,607 7,336 7,739 8,831 10,321 Assume slower execution as order size Growth (%) 66.7 (10.8) 77.6 8.6 (14.8) 5.5 14.1 16.9 increase, for e.g. municipal sewage Bill to book ratio (%) 97.1 93.7 82.0 81.9 89.3 90.0 90.0 89.0 plants. EBIT 792 1,140 1,173 1,437 1,606 1,449 1,695 1,996 EBIT Margin (%) 12.214.014.012.512.511.812.513.0 Sum of Segments Revenues 31,568 32,111 31,855 48,843 53,040 46,587 47,914 53,357 Decline in standalone order inflows Growth (%) 47.7 1.7 (0.8) 53.3 8.6 (12.2) 2.8 11.4 over FY2010-12 EBIT 4,296 4,211 3,935 5,442 6,071 5,070 5,418 6,312 Margin (%) 13.613.112.411.111.410.911.311.8 Order inflow 28,190 42,820 57,930 53,170 40,310 45,778 52,644 60,541 Growth (%) (19.2) 51.9 35.3 (8.2) (24.2) 13.6 15.0 15.0 Order backlog 24,340 28,970 52,810 56,060 41,281 39,399 43,026 48,981 Growth (%) (12.1) 19.0 82.3 6.2 (26.4) (4.6) 9.2 13.8

Source: Company, Kotak Institutional Equities estimates

KOTAK INSTITUTIONAL EQUITIES RESEARCH 37 Industrials Thermax

Standalone balance sheet, profit model and cash flow statement of Thermax, March fiscal year-ends, 2008-15E (Rs mn)

2008 2009 2010 2011 2012 2013E 2014E 2015E Balance sheet Shareholders funds 7,361 9,619 10,508 12,923 16,012 18,189 20,509 23,216 Loan funds — — — 480 1,664 664 664 664 Total sources of funds 7,672 9,981 10,944 13,872 18,235 19,412 21,732 24,439 Net block 2,786 4,399 4,939 4,866 5,316 5,495 5,672 5,850 CWIP 476 177 112 297 420 349 359 400 Net fixed assets 3,262 4,576 5,050 5,163 5,736 5,844 6,031 6,250 Investments 5,797 1,765 3,782 4,044 5,527 6,277 6,777 6,777 Cash balances 279 3,408 6,056 6,566 5,698 5,321 7,571 9,943 Net current assets excluding cash (1,826) 51 (4,207) (2,168) 946 1,641 1,024 1,141 Total application of funds 7,672 9,981 10,944 13,872 18,235 19,412 21,732 24,439 Profit model Total operating income 32,042 32,644 31,855 48,524 53,041 47,274 48,700 54,258 Total operating costs (27,946) (28,499) (28,013) (43,172) (47,202) (42,393) (43,378) (48,139) EBITDA 4,096 4,144 3,841 5,352 5,839 4,881 5,322 6,118 Other income 418 388 498 831 705 716 669 815 PBDIT 4,514 4,532 4,339 6,183 6,544 5,596 5,991 6,933 Financial charges (13) (33) (15) (22) (66) (66) (66) (66) Depreciation (218) (321) (404) (432) (470) (526) (573) (622) Pre-tax profit 4,283 4,178 3,920 5,730 6,009 5,004 5,352 6,245 Taxation (1,496) (1,319) (1,356) (1,906) (1,948) (1,661) (1,777) (2,073) Adjusted PAT 2,787 2,859 2,563 3,824 4,061 3,342 3,575 4,172 Extraordinary items, net of tax 21 14 (1,149) — — — — — Reported PAT 2,808 2,873 1,415 3,824 4,061 3,342 3,575 4,172 Cash flow statement Cashflow from operating activities Operating profit before working capital change 3,061 3,210 2,959 4,285 4,559 3,869 4,148 4,793 Change in working capital / other adjustments (498) (1,796) 4,428 (2,040) (3,114) (695) 618 (117) Net cashflow from operating activites 2,563 1,414 7,387 2,246 1,446 3,173 4,766 4,676 Fixed Assets (1,783) (1,635) (879) (545) (1,042) (635) (760) (841) Investments (21) 4,033 (2,017) (262) (1,483) (750) (500) — Cash (used) / realised in investing activities (1,805) 2,398 (2,896) (807) (2,525) (1,385) (1,260) (841) Dividend paid (1,115) (697) (695) (1,246) (973) (1,165) (1,255) (1,464) Cash (used) /realised in financing activities (1,115) (697) (695) (766) 211 (2,165) (1,255) (1,464) Cash generated /utilised (346) 3,129 2,648 510 (868) (377) 2,251 2,371 Net cash at begn of year 625 279 3,408 6,056 6,566 5,698 5,321 7,571 Net cash at end of year 279 3,408 6,056 6,566 5,698 5,321 7,571 9,943 Margins for standalone business (%) Raw material / sales 68.0 64.3 64.6 70.4 69.4 69.4 68.7 68.0 Other expenses / sales 11.6 15.2 14.1 11.0 12.3 11.8 11.5 11.4 Employee expense / sales 7.5 7.8 9.2 7.6 7.3 8.4 8.8 9.2 EBITDA magin 12.8 12.7 12.1 11.0 11.0 10.3 10.9 11.3 PAT margin 8.7 8.8 8.0 7.9 7.7 7.1 7.3 7.7 RoE 43.1 33.0 25.2 31.9 27.4 18.2 19.2 20.3 RoCE 43.2 33.2 25.2 30.2 24.5 16.6 18.1 19.2 EPS (standalone) (Rs) 23.4 24.0 21.5 32.1 34.1 28.1 30.0 35.0

Source: Company, Kotak Institutional Equities estimates

38 KOTAK INSTITUTIONAL EQUITIES RESEARCH Thermax Industrials

Consolidated balance sheet, profit model and cash flow statement of Thermax, March fiscal year-ends, 2008-15E (Rs mn)

2008 2009 2010 2011 2012 2013E 2014E 2015E Balance sheet Shareholders funds 7,595 9,924 10,782 13,149 16,293 18,323 20,875 23,999 Loan funds — 41 80 1,479 2,708 1,708 1,708 1,708 Total sources of funds 7,908 10,331 11,396 15,736 20,850 21,880 24,432 27,556 Net block 2,878 4,911 5,369 7,853 8,441 8,427 8,410 8,396 CWIP 607 177 115 354 2,466 2,395 2,405 2,446 Net fixed assets 3,485 5,088 5,484 8,208 10,907 10,822 10,816 10,842 Investments 5,601 1,443 3,703 2,415 2,395 3,145 3,645 3,645 Cash balances 580 3,696 6,702 7,496 7,002 8,935 11,952 15,315 Net current assets excluding cash (1,977) (103) (4,790) (2,672) 188 (1,382) (2,340) (2,605) Total application of funds 7,908 10,331 11,396 15,736 20,850 21,880 24,432 27,556 Profit model Total operating income 34,815 34,603 33,703 53,371 60,912 55,731 58,109 64,737 Total operating costs (30,528) (30,371) (29,731) (47,632) (54,993) (50,853) (52,410) (58,044) EBITDA 4,288 4,232 3,972 5,739 5,920 4,878 5,699 6,693 Other income 439 404 519 579 830 853 820 981 PBDIT 4,727 4,636 4,491 6,318 6,749 5,731 6,519 7,673 Financial charges (17) (38) (21) (41) (122) (123) (123) (123) Depreciation (232) (351) (434) (540) (663) (719) (766) (815) Pre-tax profit 4,478 4,247 4,036 5,737 5,965 4,889 5,630 6,736 Taxation (1,571) (1,357) (1,423) (1,967) (2,043) (1,733) (1,861) (2,185) Adjusted PAT 2,907 2,889 2,612 3,770 3,922 3,156 3,769 4,551 Extraordinary items, net of tax — — (1,149) — — — — — Reported PAT 2,907 2,889 1,464 3,817 4,035 3,156 3,769 4,551 Cash flow statement Cashflow from operating activities Operating profit before working capital changes 3,061 3,210 2,959 4,285 4,559 3,869 4,148 4,793 Change in working capital / other adjustments (498) (1,796) 4,428 (2,040) (3,114) (695) 618 (117) Net cashflow from operating activites 2,563 1,414 7,387 2,246 1,446 3,173 4,766 4,676 Fixed Assets (1,783) (1,635) (879) (545) (1,042) (635) (760) (841) Investments (21) 4,033 (2,017) (262) (1,483) (750) (500) — Cash (used) / realised in investing activities (1,805) 2,398 (2,896) (807) (2,525) (1,385) (1,260) (841) Dividend paid (1,115) (697) (695) (1,246) (973) (1,165) (1,255) (1,464) Cash (used) /realised in financing activities (1,115) (697) (695) (766) 211 (2,165) (1,255) (1,464) Cash generated /utilised (346) 3,129 2,648 510 (868) (377) 2,251 2,371 Net cash at begn of year 625 279 3,408 6,056 6,566 5,698 5,321 7,571 Net cash at end of year 279 3,408 6,056 6,566 5,698 5,321 7,571 9,943 Margins for standalone business (%) Raw material / sales 63.8 60.1 60.1 67.9 63.1 61.9 60.7 60.1 Other expenses / sales 16.2 19.3 18.3 12.7 18.0 18.9 18.7 18.5 Employee expense / sales 7.7 8.3 9.8 8.6 9.2 10.5 10.8 11.1 EBITDA magin 12.3 12.2 11.8 10.8 9.7 8.8 9.8 10.3 PAT margin 8.48.47.87.16.45.76.57.0 RoE 43.1 33.0 25.2 31.9 27.4 18.2 19.2 20.3 RoCE 43.2 33.2 25.2 30.2 24.5 16.6 18.1 19.2 EPS (consol) (Rs) 24.4 24.3 21.9 32.0 33.9 26.5 31.6 38.2

Source: Company, Kotak Institutional Equities estimates

KOTAK INSTITUTIONAL EQUITIES RESEARCH 39

REDUCE Bharat Forge (BHFC)

Automobiles OCTOBER 31, 2012 RESULT Coverage view: Neutral

Revenue growth remains under pressure. We believe the current weakness in the Price (Rs): 272 domestic CV cycle and non-auto segment and subdued market conditions in China and Target price (Rs): 300 Europe will continue to put pressure on revenue growth and EBITDA margins. The BSE-30: 18,505 strong growth in non-auto exports is likely to be offset by weak domestic performance, in our view. We maintain our REDUCE rating on the stock and will revise our earnings estimates on Thursday post the result concall.

Company data and valuation summary Bharat Forge Stock data Forecasts/Valuations 2012 2013E 2014E 52-week range (Rs) (high,low) 358-230 EPS (Rs) 17.4 17.5 22.0 Market Cap. (Rs bn) 64.4 EPS growth (%) 38.5 0.9 25.7 Shareholding pattern (%) P/E (X) 15.6 15.5 12.3 Promoters 42.1 Sales (Rs bn) 62.8 64.1 69.4 FIIs 9.5 Net profits (Rs bn) 4.1 4.2 5.2 MFs 7.9 EBITDA (Rs bn) 9.9 10.1 11.2 Price performance (%) 1M 3M 12M EV/EBITDA (X) 8.6 8.0 6.8 Absolute (11.1) (9.6) (9.3) ROE (%) 15.1 15.5 15.1 Rel. to BSE-30 (9.9) (15.8) (13.2) Div. Yield (%) 0.4 0.4 0.4

Domestic business remains subdued, non-auto exports jump by 30%

Bharat Forge’s reported standalone net sales of Rs8.7 bn (-5% yoy, -7% qoq) was 4% below our estimates. Domestic revenues declined by 15% yoy while exports revenues grew by 8% yoy. Exports revenues growth was driven by 62% yoy growth in exports to US while exports to Europe were down by 38% yoy due to sluggish demand. The company reported a 2.6% increase in non- auto business revenues driven by a sharp increase in non-auto exports by 30%, which was largely offset by a decline of ~30% yoy in the domestic non-auto business. The company reported a sequential decline of 6.3% in exports revenues driven by decline in demand for heavy-duty trucks in US, Europe and China. Domestic and exports auto revenues declined by 8% and 9% yoy, in our view.

Standalone EBITDA margins decline by 160 bps yoy driven by 24% jump in other expenses

Standalone EBITDA margins of 22.4% declined by 160 bps yoy, primarily driven by a sharp jump in other expenses (+24% yoy). Gross margins declined by 160 bps yoy despite (1) higher share of exports business in the mix (54% of revenues in 2QFY13 versus 47% in 2QFY12) and (2) increase in share of non-auto business in the mix (39% in 2QFY13 versus 36% in 2QFY12). Other expenses rose sharply (+24% yoy) driven by Rs130 mn forex loss in this quarter. Excluding forex loss, EBITDA margins remained steady at 23.9% versus 24% in 2QFY12 driven by increase in average realization per ton by 11% yoy and 3% qoq. Interest expenses were surprisingly lower at Rs289 mn (-47% qoq) due to reversal of Rs150 mn forex loss on translation impact on foreign- denominated borrowings in 1QFY13.

We maintain our REDUCE rating due to weak revenue growth outlook

We maintain our REDUCE rating on the stock as we believe the current pressures on revenue growth and EBITDA margins are likely to continue given the slowdown in CVs demand in domestic and international markets. We will review our earnings estimates post the concall on Thursday.

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

Bharat Forge Automobiles

Domestic business remains subdued, US exports report sharp jump

Bharat Forge’s reported standalone net sales of Rs8.7 bn (-5% yoy, -7% qoq) were 4% below our estimates. Domestic revenues declined by 15% yoy while exports revenues grew by 8% yoy. Exports revenue growth was driven by 62% yoy growth in exports to US while exports to Europe were down by 38% yoy due to sluggish demand. Domestic auto revenues reported 8% yoy decline while exports auto business declined by 9% yoy, in our view. The key disappointment was ~30% yoy decline in domestic non-auto business driven by lack of new investments from capital-intensive sectors. This decline largely negated the 30% yoy increase in non-auto exports.

The company sold 46,350 tons of forgings in 2QFY13 (-14% yoy, -10% yoy). The decline in volumes was primarily driven by a slowdown in domestic auto and non-auto businesses and auto exports. Average realization per ton grew by 11% yoy, driven by higher-valued addition due to increase in machining revenues in the mix and benefit of Rupee depreciation.

EBITDA margins decline by 160 bps yoy driven by 24% jump in other expenses

Standalone EBITDA margins of 22.4% declined by 160 bps yoy, primarily driven by a sharp jump in other expenses (+24% yoy). Gross margins declined by 160 bps yoy despite (1) higher share of exports business in the mix (54% of revenues in 2QFY13 versus 47% in 2QFY12) and (2) increase in share of non-auto business in the mix (39% in 2QFY13 versus 36% in 2QFY12). Other expenses rose sharply (+24% yoy) driven by Rs130 mn forex loss this quarter. Excluding forex loss, EBITDA margins remained steady at 23.9% versus 24% in 2QFY12 driven by increase in average realization per ton by 11% yoy and 3% qoq.

Interest expenses were surprisingly lower at Rs289 mn (-47% qoq) due to reversal of Rs150 mn forex loss on translation impact on foreign-denominated borrowings in 1QFY13. China and Europe subsidiaries report losses

The China subsidiary reported a 25% yoy decline in revenues and reported a negative EBITDA of Rs130 mn. The company reported a PBT loss of Rs239 mn in the China subsidiary versus a profit of Rs14 mn in 2QFY12. The management has said that utilization levels in China are as low as ~30% due to sharp fall in commercial vehicle demand in China.

European subsidiaries reported a 10% yoy decline in revenues in 2QFY13. EBITDA declined sharply by 42% yoy. Overall subsidiaries reported a negative PBT of Rs348 mn in 2QFY13, which was a sharp deterioration from a PBT gain of Rs40 mn in 2QFY12.

KOTAK INSTITUTIONAL EQUITIES RESEARCH 41 Automobiles Bharat Forge

Bharat Forge 2QFY13 EBITDA missed our estimates by 12% Bharat Forge standalone interim results, March fiscal year-ends (Rs mn)

% change yoy 2QFY13 2QFY13E 2QFY12 1QFY13 2QFY13E 2QFY12 1QFY13 1HFY13 1HFY12 % chg Tonnage sold 46,350 49,749 53,740 51,288 (6.8) (13.8) (9.6) 97,638 106,699 (8.5) Average realization per ton 196,177 189,619 176,971 191,019 3.5 10.9 2.7 193,468 173,307 11.6 Gross sales 9,093 9,433 9,510 9,797 (3.6) (4.4) (7.2) 18,890 18,492 2.2 Excise duty 417 425 411 433 (1.8) 1.6 (3.7) 850 815 4.3 Net sales 8,676 9,009 9,100 9,364 (3.7) (4.7) (7.3) 18,040 17,677 2.1 Inc/dec in stock 61 - (86) (32) 30 (56) Raw materials 3,721 3,924 4,201 4,078 (3.6) (8.1) (6.5) 7,799 8,023 (2.8) Mfg expenses 1,621 1,652 1,584 1,721 (1.9) 2.3 (5.8) 3,342 3,057 9.3 Staff costs 643 685 663 685 (6.1) (3.0) (6.2) 1,328 1,284 3.5 Other expenses 686 537 551 475 27.6 24.4 44.5 1,161 1,102 5.3 Total expenses 6,732 6,799 6,914 6,928 (1.0) (2.6) (2.8) 13,660 13,410 1.9 EBITDA 1,944 2,210 2,186 2,436 (12.1) (11.1) (20.2) 4,380 4,267 2.6 Other income 257 260 241 194 (1.3) 6.3 32.2 451 403 11.8 Interest expense 289 575 376 547 (49.7) (23.1) (47.1) 837 688 21.6 Depreciation expense 555 560 539 565 (0.9) 2.9 (1.8) 1,120 1,056 6.1 Profit before tax before exceptional 1,356 1,335 1,512 1,518 1.6 (10.3) (10.7) 2,874 2,927 (1.8) Extraordinary income 106 90 — — 106 — Profit before tax 1,462 1,425 1,512 1,518 2.6 (3.3) (3.7) 2,980 2,927 1.8 Tax expense 434 414 448 466 4.9 (3.2) (6.8) 900 888 1.3 Profit after tax 1,028 1,011 1,064 1,052 1.6 (3.4) (2.3) 2,080 2,038 2.0 Adj PAT 1,028 1,011 1,064 1,052 1.6 (3.4) (2.3) 2,080 2,038 2.0 Geographical breakdown Domestic 4,426 4,547 5,194 4,814 (2.7) (14.8) (8.1) 9,240 9,796 (5.7) Exports 4,667 4,461 4,316 4,983 4.6 8.1 (6.3) 9,650 8,128 18.7 US exports 3,083 2,800 1,906 2,539 10.1 61.8 21.4 5,622 3,427 64.1 Europe exports 1,283 1,300 2,075 2,163 (1.3) (38.2) (40.7) 3,446 4,107 (16.1) Asia Pacific exports 301 361 335 281 (16.6) (10.1) 7.1 582 593 (1.9) Auto/Non Auto Mix Auto revenues 5,712 6,033 6,217 6,341 (5.3) (8.1) (9.9) 12,053 12,359 (2.5) Non Auto revenues 3,381 3,400 3,293 3,456 (0.6) 2.7 (2.2) 6,837 6,133 11.5 Ratios (%) Excise duty as a % of gross sales 4.6 4.5 4.3 4.4 4.5 4.4 Raw material cost as % of net sales 43.6 43.6 45.2 43.2 43.4 45.1 Mfg expenses as % of net sales 18.7 18.3 17.4 18.4 18.5 17.3 Staff cost as % of net sales 7.4 7.6 7.3 7.3 7.4 7.3 Other expenses as % of net sales 7.9 6.0 6.1 5.1 6.4 6.2 EBITDA margin (%) 22.4 24.5 24.0 26.0 24.3 24.1 No of shares 237.4 237.4 237.4 237.4 237.4 237.4 EPS 4.3 4.3 4.5 4.4 8.8 8.6 Tax rate (%) 29.7 29.0 29.6 30.7 30.2 30.4

Source: Company, Kotak Institutional Equities estimates

Consolidated results disappoint driven by poor performance of China and Europe subsidiaries Consolidated interim results, March fiscal year-ends (Rs mn)

% change yoy 2QFY13 2QFY13E 2QFY12 1QFY13 2QFY13E 2QFY12 1QFY13 1HFY13 1HFY12 % chg Net sales 14,303 15,366 15,593 16,427 (6.9) (8.3) (12.9) 30,730 31,423 (2.2) Total expenses 12,318 12,869 13,059 13,676 (4.3) (5.7) (9.9) 25,994 26,259 (1.0) EBITDA 1,985 2,496 2,534 2,751 (20.5) (21.7) (27.9) 4,736 5,164 (8.3) EBITDA margin (%) 13.9 16.2 16.3 16.7 15.4 16.4 Profit before tax 1,114 1,524 1,552 1,521 (26.9) (28.2) (26.8) 2,635 3,132 (15.9)

Source: Company, Kotak Institutional Equities estimates

42 KOTAK INSTITUTIONAL EQUITIES RESEARCH Bharat Forge Automobiles

Non-auto revenues remained steady yoy (~+2.7%) in 2QFY13 Standalone non-auto revenues, March fiscal year-ends (Rs mn)

3,500

3,000

2,500

2,000

1,500

1,000

500

1QFY10 2QFY10 3QFY10 4QFY10 1QFY11 2QFY11 3QFY11 4QFY11 1QFY12 2QFY12 3QFY12 4QFY12 1QFY13 2QFY13

Source: Company, Kotak Institutional Equities

Sales of Class 8 trucks in US witnessing a downward trend for Sales of heavy trucks in EU witnessing a downward trend for past few months past few months Monthly sales units and yoy change (%), US class 8 trucks market Monthly sales units and yoy change (%), EU heavy trucks market

(units) (%) Heavy CVs (LHS) Class 8 sales (LHS) (units) (%) 25,000 125 YoY chg (%, RHS) YoY chg (%, RHS) 25,000 100 100 20,000 20,000 75 75 50 15,000 15,000 50 25 10,000 10,000 25 0 5,000 0 5,000 (25)

0 (25) 0 (50) Jul-10 Jul-11 Jul-12 Jul-10 Jul-11 Jul-12 Jan-10 Jan-11 Jan-12 Jan-10 Jan-11 Jan-12 Apr-10 Oct-10 Apr-11 Oct-11 Apr-12 Apr-10 Oct-10 Apr-11 Oct-11 Apr-12

Source: Wards Auto, Kotak Institutional Equities Source: ACEA, Kotak Institutional Equities

KOTAK INSTITUTIONAL EQUITIES RESEARCH 43 Automobiles Bharat Forge

We value Bharat Forge at Rs300/share based on SOTP methodology Bharat Forge sum-of-the-parts valuation table

EBITDA Multiple EV (Rs mn) (X) (Rs mn) (Rs/share) Comments 12 m forward standalone EBITDA 9,549 8.0 76,390 322 12 m forward overseas EBITDA 1,120 4.0 4,481 19 Less: consolidated net debt 16,558 70 Equity value 64,313 271 Alstom JV 24 20% discount to DCF-based valuation Valuation 295 Target price 300

Source: Kotak Institutional Equities estimates

Standalone balance sheet, Bharat Forge, March fiscal year-ends

1HFY13 2012 Equity and liabilities Shareholders' funds (a) Share Capital 466 466 (b) Reserves and surplus 23,586 20,994 Sub Total - Shareholders' Funds 24,052 21,459 Non-current liabilities (a) Long term borrowings 16,298 16,004 (b) Deferred tax liabilities (net) 1,459 1,272 (c) Other long-term borrowings 7 7 (d) Long-term provisions 283 300 Sub Total - Non-current liabilities 18,048 17,582 Current liabilities (a) Short term borrowings 769 841 (b) Trade payables 5,725 6,696 (c) Other current liabilities 4,240 5,376 (d) Short term provisions 419 1,355 Sub Total - Current liabilities 11,152 14,269 Total equity and liabilities 53,252 53,310 Assets Non-current assets (a) Fixed assets 21,665 20,853 (b) Non-current investments 5,290 5,116 (c) Long-term loans and advances 3,931 4,036 (d) Other non-current assets 432 788 (e) Foreign currency translation account 164 28 Sub Total - Non-Current assets 31,483 30,820 Current assets (a) Current investments 4,381 4,247 (b) Inventories 4,862 5,031 (c) Trade receivables 5,675 4,912 (d) Cash and bank balances 3,479 4,806 (e) Short term loans and advances 2,960 2,701 (f) Other current assets 412 793 Sub Total - Current assets 21,769 22,490 Total assets 53,252 53,310

Source: Company, Kotak Institutional Equities

44 KOTAK INSTITUTIONAL EQUITIES RESEARCH Bharat Forge Automobiles

We forecast 10% CAGR in profits over FY2012-15E for the standalone entity Bharat Forge standalone profit and loss, balance sheet and cash flow statement, March fiscal year-ends, 2009-15E (Rs mn)

2009 2010 2011 2012 2013E 2014E 2015E Profit model (Rs mn) Net sales 20,576 18,560 29,473 36,860 36,452 39,789 43,635 EBITDA 4,450 4,370 7,161 9,168 9,085 10,013 10,913 Other income 488 323 462 661 916 969 1,032 Interest (1,004) (1,028) (1,214) (1,505) (1,677) (1,078) (898) Depreciation (1,494) (1,644) (1,933) (2,149) (2,260) (2,430) (2,634) Profit before tax 2,439 2,021 4,476 6,175 6,063 7,473 8,413 Tax expense (544) (537) (1,370) (1,850) (1,880) (2,317) (2,608) Adjusted net profit 1,611 1,421 3,106 4,325 4,184 5,156 5,805 Adjusted earnings per share (Rs) 6.8 6.0 13.1 18.2 17.6 21.7 24.5 Balance sheet (Rs mn) Equity 14,869 15,272 19,954 21,431 25,337 30,216 35,743 Total Borrowings 18,079 18,528 14,734 19,817 13,729 10,229 9,729 Deferred Tax Liability 1,617 1,065 1,556 1,272 1,272 1,272 1,272 Current liabilities 6,925 9,595 11,065 10,762 14,268 15,822 17,323 Total liabilities 41,489 44,460 47,309 53,282 54,606 57,539 64,067 Net fixed assets 20,632 19,146 19,244 20,853 21,093 21,163 22,029 Investments 3,672 7,209 9,198 8,848 9,848 10,848 11,848 Cash 3,667 4,935 1,466 5,386 1,311 1,789 4,612 Other current assets 13,518 13,169 17,402 18,195 22,354 23,739 25,578 Total assets 41,489 44,460 47,309 53,282 54,606 57,539 64,067 Free cash flow (Rs mn) Operating cash flow 3,824 2,577 5,529 6,190 6,444 7,586 8,439 Working capital changes (2,838) 3,005 (2,750) (1,096) (653) 169 (338) Capital expenditure and strategic investments (2,414) (3,694) (4,018) (3,409) (3,500) (3,500) (4,500) Free cash flow (1,428) 1,888 (1,239) 1,685 2,291 4,255 3,601 Ratios EBITDA margin (%) 21.6 23.5 24.3 24.9 24.9 25.2 25.0 PAT margin (%) 7.8 7.7 10.5 11.7 11.5 13.0 13.3 Debt/equity (X) 1.2 1.2 0.7 0.9 0.5 0.3 0.3 Book Value (Rs/share) 66.8 68.6 84.1 90.3 106.8 127.3 150.6 RoAE (%) 7.0 8.4 17.6 17.5 17.9 18.6 17.6 RoACE (%) 10.9 8.8 16.0 19.5 18.7 20.8 21.1

Source: Company, Kotak Institutional Equities estimates

KOTAK INSTITUTIONAL EQUITIES RESEARCH 45 Automobiles Bharat Forge

We forecast 13% CAGR in profits over FY2012-15E for the consolidated entity Bharat Forge consolidated profit and loss, balance sheet and cash flow statement, March fiscal year-ends, 2009-15E (Rs mn)

2009 2010 2011 2012 2013E 2014E 2015E Profit model (Rs mn) Net sales 47,751 33,276 50,873 62,791 64,133 69,416 74,249 EBITDA 5,575 3,427 7,853 9,947 10,148 11,190 12,274 Other income 675 511 671 893 850 950 1,045 Interest (1,291) (1,303) (1,529) (1,837) (1,913) (1,311) (1,231) Depreciation (2,517) (2,451) (2,548) (3,018) (3,073) (3,223) (3,403) Profit before tax 2,441 184 4,447 5,984 6,013 7,606 8,685 Tax expense (696) (119) (1,402) (1,796) (1,864) (2,358) (2,692) Adjusted net profit 1,476 198 3,117 4,123 4,159 5,226 5,928 Adjusted earnings per share (Rs) 6.6 0.9 13.1 17.4 17.5 22.0 25.0 Balance sheet (Rs mn) Equity 17,388 15,413 21,072 23,860 27,721 32,714 38,493 Total Borrowings 21,908 22,527 18,950 27,615 17,390 15,390 15,390 Deferred Tax Liability 1,843 959 1,321 886 886 886 886 Current liabilities 12,081 14,062 18,075 20,982 22,758 24,988 27,010 Total liabilities 53,221 52,960 59,416 73,342 68,754 73,977 81,779 Net fixed assets 27,895 26,060 27,662 31,619 31,046 30,324 30,421 Investments 2 2,737 3,668 3,870 3,667 4,667 5,667 Cash 4,883 5,977 3,110 6,718 831 3,788 8,121 Other current assets 20,440 18,187 24,977 31,135 33,210 35,199 37,570 Total assets 53,221 52,960 59,416 73,342 68,754 73,977 81,779 Free cash flow (Rs mn) Operating cash flow 4,929 1,632 5,543 7,183 7,222 8,471 9,395 Working capital changes (3,173) 4,221 (2,324) (3,664) (299) 241 (348) Capital expenditure and strategic investments (3,821) (3,349) (5,111) (7,176) (2,297) (3,500) (4,500) Free cash flow (2,065) 2,503 (1,892) (3,657) 4,626 5,212 4,547 Ratios EBITDA margin (%) 11.7 10.3 15.4 15.8 15.8 16.1 16.5 PAT margin (%) 3.1 0.6 6.1 6.6 6.5 7.5 8.0 Debt/equity (X) 1.0 1.1 0.8 1.0 0.6 0.4 0.2 Book Value (Rs/share) 73.8 65.7 82.3 92.3 108.6 129.6 153.6 RoAE (%) 9.0 1.3 18.3 19.9 17.4 18.5 17.6 RoACE (%) 9.8 3.7 14.9 16.7 16.1 18.8 19.1

Source: Company, Kotak Institutional Equities estimates

46 KOTAK INSTITUTIONAL EQUITIES RESEARCH

ADD J&K Bank (JKBK)

Banks/Financial Institutions OCTOBER 31, 2012 RESULT Coverage view: Cautious

Clears an important event with limited concern. J&K Bank reported a strong Price (Rs): 1,225 earnings performance led by healthy revenue growth and lower provisions. Migration of Target price (Rs): 1,200 loans towards a stringent reporting platform has been completed with negligible BSE-30: 18,505 slippages – a positive but surprising. Our key concerns remain: strong coverage, healthy NIM and low credit cost are providing a foundation to accelerate balance sheet growth in an environment fraught with high risk. Maintain ADD with TP of `1,200 (from `1,000).

Company data and valuation summary J&K Bank Stock data Forecasts/Valuations 2012 2013E 2014E 52-week range (Rs) (high,low)1,239-645 EPS (Rs) 165.6 199.0 183.3 Market Cap. (Rs bn) 39.5 EPS growth (%) 30.6 20.2 (7.9) QUICK NUMBERS Shareholding pattern (%) P/E (X) 7.4 6.2 6.7 Promoters 53.2 NII (Rs bn) 18.4 22.2 23.3 • NII grew 27% yoy; FIIs 26.5 Net profits (Rs bn) 8.0 9.7 8.9 earnings grew 35% MFs 2.5 BVPS 837.5 980.5 1,106.4 yoy Price performance (%) 1M 3M 12M P/B (X) 1.5 1.2 1.1 Absolute 31.3 33.9 45.3 ROE (%) 21.2 21.6 17.2 • Slippages were at Rel. to BSE-30 33.1 24.7 39.1 Div. Yield (%) 2.7 3.3 3.0 1.2%; restructured loans at 4.4% String reporting loan classification completed with negligible slippages – positive but surprising • Maintain ADD with J&K Bank completed its classification of loans to a stringent reporting platform in the current TP at `1,200 (from quarter with negligible slippages. Slippages for the quarter were at 1.2%, a big positive but `1,000 earlier) intriguing as most of the other public sector banks which completed this exercise last year reported significantly high slippages (~3% levels). Overall gross NPLs increased 2% qoq to 1.6% of loans while net NPL increased marginally to 0.2% of loans. Coverage ratio stands comfortable at 90% levels, the best in the industry. Fresh restructuring was higher qoq (0.8% of loans), taking the total restructured loans to 4.4% of loans (evenly split between CDR, SME and others). Our cautious outlook on credit costs for FY2012-14E at 1.2% levels (0.25% currently) and slippages at 1.6% driven by weak macro and strong growth witnessed outside J&K state in recent years.

Loan growth healthy at 30% yoy; YTD growth at 4%

Overall loan growth remained strong at 30% yoy (3% qoq) at `342 bn. YTD growth has been a bit slow at 4% but we believe that the bank is likely to grow its loans aggressively in 2HFY13E. We are a bit concerned on the strong growth outside J&K state (~60% of loans with growth >25%) – large-ticket consortium-led corporate loans (~80% of loans) that are low margin in nature. The bank is running the risk of NPL or restructuring of some of these corporate exposures over the next few quarters/years. Healthy asset quality (net NPL at 0.2% and coverage at ~90%), strong revenue profile (NIM >3.5% and low CD ratio) and low cost-ratios (<35%) are giving an excellent platform to build balance sheet growth – a key risk in our view.

NIM touches 4% led by better loan re-pricing; CD ratio stable qoq at 62%

NIM improved ~15 bps qoq to ~4% on the back of strong re-pricing of loans (improved by a massive 30 bps qoq—we expected a flat quarter) probably led by better mix. We note that costs inched up marginally reflecting a higher share of retail deposits still being re-priced. We remain negative on NIM (30 bps decline in FY2013) but believe that maintaining at current levels would be driven by improvement in CD ratio (flat qoq at 62%) as yield on loans are one of the highest at 12.6%. Note that the bank enjoys strong pricing power within J&K and any adverse mix could result in sharp compression of NIMs.

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

Banks/Financial Institutions J&K Bank

Other highlights for the quarter

` Non-interest income saw a similar performance as witnessed in 1QFY13: strong performance on the back of a lower base and healthy treasury income. Overall non- interest income grew 28% yoy to `909 mn. Fee income grew 14% yoy while treasury gains tripled yoy.

` Overall CAR stands comfortable at 13.7% with tier-1 ratio at 11.6% (an improvement of 10 bps qoq).

` The bank is yet to complete the partial sale of its insurance business (total investment is about `2.2 bn or `45/share) with an implied value that could be 50-100% higher than the invested value.

Loan growth continues to remain strong at >25% levels Asset quality continues to remain healthy Credit growth and deposit growth, CD ratio, March fiscal year-ends, Gross NPA, net NPA and provision coverage (ex write-off), March fiscal 2QFY10-2QFY13 year-ends, 2QFY10-2QFY13

Credit growth (LHS) Deposits growth (LHS) Gross NPA (LHS) Net NPA (LHS) CD ratio (RHS) Provision coverage (RHS) 40 75 (Rs bn) (%) 7 100 32 70 6 88 24 65 4 76

16 60 3 64

8 55 1 52

0 50 - 40

2QFY10 3QFY10 4QFY10 1QFY11 2QFY11 3QFY11 4QFY11 1QFY12 2QFY12 3QFY12 4QFY12 1QFY13 2QFY13 2QFY10 3QFY10 4QFY10 1QFY11 2QFY11 3QFY11 4QFY11 1QFY12 2QFY12 3QFY12 4QFY12 1QFY13 2QFY13

Source: Kotak Institutional Equities, Company Source: Kotak Institutional Equities, Company

Business profile of J&K Bank March fiscal year-ends, 2QFY12-2QFY13 (` bn)

2QFY12 3QFY12 4QFY12 1QFY13 2QFY13 Growth (%) Total Deposits (Rs bn) 474 488 533 531 549 15.8 In J&K 299 320 353 350 Outside J&K 176 168 180 181 Gross Advances (Rs bn) 282 297 331 332 343 21.4 In J&K 112 120 126 135 Outside J&K 170 177 205 197 NIM (%) In J&K 6.0 6.0 6.0 Outside J&K 2.5 2.5 2.5

Source: Company, Kotak Institutional Equities

48 KOTAK INSTITUTIONAL EQUITIES RESEARCH J&K Bank Banks/Financial Institutions

Jammu and Kashmir Bank-Rolling PBR and PER October 2004-October 2012 (X)

Rolling PER (X) (LHS) Rolling PBR (X) (RHS) 15 2.0

12 1.6

9 1.2

6 0.8

3 0.4

- -

Oct-04 Apr-05 Oct-05 Apr-06 Oct-06 Apr-07 Oct-07 Apr-08 Oct-08 Apr-09 Oct-09 Apr-10 Oct-10 Apr-11 Oct-11 Apr-12 Oct-12

Source: Kotak Institutional Equities

KOTAK INSTITUTIONAL EQUITIES RESEARCH 49 Banks/Financial Institutions J&K Bank

Jammu and Kashmir Bank, quarterly results Quarterly results summary, March fiscal year-ends, 2QFY12-2QFY13 (` mn)

2QFY12 3QFY12 4QFY12 1QFY13 2QFY13 % chg 2QFY13E Actual Vs KS Interest income 11,556 12,665 13,575 14,762 15,006 30 14,701 2 Loans 8,060 8,802 9,568 10,281 10,609 32 10,425 2 Investments 3,427 3,747 3,866 4,218 4,170 22 4,101 2 Balance with RBI & banks 69 117 141 263 228 229 175 30 Interest expense 7,213 8,157 8,414 9,405 9,479 31 9,345 1 Net interest income 4,343 4,508 5,161 5,356 5,527 27 5,356 3 Non-interest income 712 738 1,223 934 909 28 987 (8) Other income exld treasury 627 650 1,138 732 648 3 765 (15) Treasury income 85 88 85 202 261 208 222 18 Total income 5,055 5,246 6,384 6,290 6,436 27 6,344 1 Operating expenses 1,927 2,009 2,208 2,138 2,209 15 2,245 (2) Employee cost 1,255 1,308 1,373 1,379 1,430 14 1,448 (1) Other cost 672 700 834 759 779 16 797 (2) Operating profit pre provisions 3,128 3,238 4,176 4,152 4,227 35 4,099 3 Provisions and contingencies 223 182 843 504 328 47 839 (61) Investment depreciation 45 (2) 43 — 6 Provisions for NPA 206 211 345 264 131 (37) 659 (80) PBT 2,904 3,056 3,334 3,648 3,899 34 3,260 20 Tax 908 922 1,252 1,187 1,203 33 1,080 11 Net profit 1,997 2,134 2,081 2,461 2,695 35 2,180 24 Tax rate (%) 31.3 30.2 37.6 32.5 30.9 - 33.1 - PBT-invt gains+ provisions 3,070 3,177 3,937 3,710 3,774 23 3,757 0 Key balance sheet items (Rs bn) Total Deposits 474 488 533 531 549 16 Savings deposits 135 150 160 161 164 21 Current deposits 46 46 57 45 46 (1) Term deposits 293 292 316 326 340 16 CASA ratio (%) 38.2 40.2 40.7 38.7 38.2 Advances 282 297 331 332 343 21 Investments 198 198 216 220 225 14 AFS 72 66 77 77 76 HTM 126 132 139 143 149 Assets 531 548 603 600 616 16 Asset quality details Gross NPLs (Rs mn) 6,419 5,450 5,166 5,410 5,516 (14) Gross NPL ratio (%) 1.9 1.8 1.5 1.6 1.6 Net NPLs (Rs mn) 630 489 493 482 553 (12) Net NPL ratio (%) 0.2 0.2 0.2 0.1 0.2 Provision coverage 90.2 91.0 90.4 91.1 90.0 Provision coverage (ex write-off) 92.0 94.1 93.8 94.1 93.3 Yield management measures (%) Cost of Deposits 6.2 6.6 6.4 6.9 7.0 Yield on Advances 12.1 12.2 12.2 12.4 12.7 Yield on Investments 7.2 7.6 7.5 7.7 7.5 Net Interest Margins 3.7 3.6 3.9 3.8 3.9 Capital adequacy details (%) CAR 13.5 13.6 13.4 13.8 13.7 Tier I 11.3 11.4 11.1 11.5 11.6 Tier II 2.3 2.2 2.2 2.3 2.1

Source: Kotak Institutional Equities, Company

50 KOTAK INSTITUTIONAL EQUITIES RESEARCH J&K Bank Banks/Financial Institutions

Break-up of balance sheet Quarterly balance sheet, March fiscal year-ends, 2QFY12-2QFY13 (` mn)

2QFY12 3QFY12 4QFY12 1QFY13 2QFY13 Balance sheet snapshot (Rs mn) Capital 485 485 485 485 485 Reserves and surplus 38,121 40,253 40,447 42,908 45,603 Deposits 474,248 487,789 533,469 531,171 549,265 Borrowings 843 8,679 12,410 11,685 9,224 Total 523,812 547,880 602,692 599,917 616,337 Cash and balance with RBI 30,421 29,585 27,837 23,566 25,560 Balance with banks etc 9,367 9,383 16,702 10,369 10,895 Investments 197,845 198,387 216,243 220,156 225,213 Advances 282,356 297,341 330,774 332,253 342,721 Fixed assets 4,041 4,083 4,203 4,241 4,284 Other assets 7,372 9,100 6,934 9,332 7,664 Total 531,402 547,880 602,692 599,917 616,337

Source: Kotak Institutional Equities, Company

Key changes in estimates March fiscal year-ends, 2013-15E (` mn)

New estimates Old estimates % change 2013E 2014E 2015E 2013E 2014E 2015E 2013E 2014E 2015E Net Interest income 22,187 23,290 25,204 21,506 22,898 24,263 3.2 1.7 3.9 NIM (%) 3.5 3.3 3.1 3.4 3.2 3.0 Loan (Rs bn) 389 456 534 389 456 534 — — — Other income 4,102 5,101 5,927 4,102 5,154 6,046 — (1.0) (2.0) Treasury 950 1,500 1,800 950 1,500 1,800 — — — Total income 26,290 28,391 31,132 25,609 28,052 30,309 2.7 1.2 2.7 Operating expense 9,279 10,667 12,114 9,279 10,545 11,975 — 1.2 1.2 Employee expense 6,061 6,984 7,904 6,061 6,861 7,766 — 1.8 1.8 Other expense 3,217 3,684 4,210 3,217 3,684 4,210 — — 0.0 Provisions 2,579 4,626 6,589 3,939 5,259 6,589 (34.5) (12.1) — NPLs 1,979 4,226 6,189 3,239 4,859 6,189 (38.9) (13.0) — Invt depreciation 200 100 100 200 100 100 — — — PBT 14,432 13,098 12,428 12,392 12,248 11,745 16.5 6.9 5.8 Tax 4,780 4,208 3,868 3,981 3,812 3,538 20.1 10.4 9.3 PAT 9,651 8,891 8,560 8,411 8,436 8,207 14.7 5.4 4.3 PBT - treasury + provisions 15,661 15,924 16,918 14,880 15,707 16,234 5.2 1.4 4.2

Source: Kotak Institutional Equities

KOTAK INSTITUTIONAL EQUITIES RESEARCH 51 Banks/Financial Institutions J&K Bank

Jammu and Kashmir Bank, growth rates and key ratios March fiscal year-ends, 2010-15E (%)

2010 2011 2012 2013E 2014E 2015E Growth rates (%) Net loan 10.2 13.6 26.3 17.6 17.3 17.1 Customer assets 11.1 14.9 26.0 15.8 16.0 16.0 Investments excld. CPs and debentures growth 10.6 21.3 61.2 11.2 8.2 6.4 Net fixed and leased assets 2.4 92.9 6.7 2.3 6.0 (2.0) Cash and bank balance (12.5) (23.1) 25.5 7.8 10.3 10.5 Total Asset 12.9 18.7 19.3 13.1 12.7 12.4 Deposits 12.8 20.0 19.4 13.4 13.1 12.9 Current 5.8 9.6 7.0 13.4 13.1 12.9 Savings 29.0 24.0 25.6 13.4 13.1 12.9 Fixed 8.1 20.4 19.0 13.4 13.1 12.9 Net interest income 11.9 37.9 19.1 20.7 5.0 8.2 Loan loss provisions 79.4 (15.4) (7.3) 41.4 113.5 46.5 Total other income 69.9 (12.4) (8.4) 22.8 24.3 16.2 Net fee income 24.5 22.4 1.5 18.0 18.0 18.0 Net capital gains 176.6 (46.7) (61.2) 164.8 57.9 20.0 Net exchange gains 25.0 25.0 25.0 25.0 25.0 25.0 Operating expenses 22.6 31.4 5.7 15.7 15.0 13.6 Employee expenses 31.4 42.9 (0.4) 16.2 15.2 13.2 Key ratios (%) Yield on average earning assets 7.8 8.2 9.0 9.6 9.2 8.9 Yield on average loans 10.6 10.7 11.5 11.9 11.4 10.8 Yield on average investments 5.8 6.5 6.9 7.5 7.0 6.7 Average cost of funds 5.3 5.1 5.9 6.5 6.4 6.2 Interest on deposits 5.2 5.1 5.9 6.5 6.4 6.2 Difference 2.5 3.1 3.0 3.1 2.8 2.7 Net interest income/earning assets 2.9 3.4 3.4 3.5 3.3 3.1 Spreads on lending business 5.3 5.6 5.5 5.4 5.0 4.7 Spreads on lending business (incl. Fees) 5.8 6.1 6.0 5.8 5.4 5.1 New provisions/average net loans 0.8 0.6 0.5 0.6 1.0 1.3 Total provisions/gross loans 3.1 3.3 3.0 3.1 3.5 4.1 Interest income/total income 72.9 80.9 84.6 84.4 82.0 81.0 Other income / total income 27.1 19.1 15.4 15.6 18.0 19.0 Fee income to total income 6.8 6.7 5.9 5.8 6.3 6.8 Fee income to advances 0.5 0.5 0.4 0.4 0.4 0.4 Fees income to PBT 13.1 13.6 10.8 10.6 13.7 17.1 Net trading income to PBT 26.8 5.5 2.0 5.2 10.7 13.7 Exchange income to PBT 1.8 2.0 1.8 1.9 2.6 3.5 Operating expenses/total income 37.6 39.8 36.9 35.3 37.6 38.9 Operating expenses/assets 1.4 1.6 1.4 1.4 1.5 1.5 Operating profit /AWF 1.6 1.9 2.2 2.1 1.6 1.3 Tax rate 35.3 34.2 33.1 33.1 32.1 31.1 Dividend payout ratio 20.8 20.5 20.2 20.2 20.2 20.2 Share of deposits Current 13.1 12.0 10.7 10.7 10.7 10.7 Savings 27.6 28.5 30.0 30.0 30.0 30.0 Loans-to-deposit ratio 61.9 58.6 62.0 64.3 66.7 69.2 Equity/assets (EoY) 7.1 6.9 6.8 7.1 7.2 7.1 Dupont analysis (%) Net interest income 2.8 3.3 3.3 3.5 3.2 3.1 Loan loss provisions 0.4 0.3 0.3 0.3 0.6 0.8 Net other income 1.0 0.8 0.6 0.6 0.7 0.7 Operating expenses 1.5 1.7 1.5 1.5 1.5 1.5 Invt. depreciation (0.1) 0.1 0.0 0.0 0.0 0.0 (1- tax rate) 64.7 65.8 66.9 66.9 67.9 68.9 ROA 1.3 1.3 1.5 1.5 1.2 1.1 Average assets/average equity 14.2 14.3 14.6 14.4 14.0 14.0 ROE 18.2 19.0 21.2 21.6 17.2 14.7

Source: Kotak Institutional Equities, Company

52 KOTAK INSTITUTIONAL EQUITIES RESEARCH J&K Bank Banks/Financial Institutions

Jammu and Kashmir Bank, income statement and balance sheet March fiscal year-ends, 2010-15E (` mn)

2010 2011 2012 2013E 2014E 2015E Income statement Total interest income 30,569 37,131 48,356 60,351 65,396 71,123 Loans 23,417 26,296 33,937 42,928 48,087 53,624 Investments 7,046 10,661 14,033 16,635 16,553 16,664 Cash and deposits 106 174 387 787 757 836 Total interest expense 19,375 21,695 29,972 38,164 42,106 45,919 Deposits from customers 18,406 20,692 29,018 37,192 41,160 44,998 Net interest income 11,193 15,437 18,384 22,187 23,290 25,204 Loan loss provisions 1,785 1,511 1,400 1,979 4,226 6,189 Net interest income (after prov.) 9,408 13,926 16,983 20,208 19,064 19,015 Other income 4,162 3,648 3,341 4,102 5,101 5,927 Net fee income 1,039 1,272 1,291 1,524 1,798 2,122 Net capital gains 1,734 924 359 950 1,500 1,800 Net exchange gains 144 188 220 275 344 430 Operating expenses 5,774 7,589 8,022 9,279 10,667 12,114 Employee expenses 3,664 5,236 5,214 6,061 6,984 7,904 Depreciation on investments (388) 410 123 200 100 100 Other Provisions 269 230 169 400 300 300 Pretax income 7,916 9,344 12,011 14,432 13,098 12,428 Tax provisions 2,792 3,192 3,979 4,780 4,208 3,868 Net Profit 5,124 6,152 8,032 9,651 8,891 8,560 % growth 25.0 20.1 30.6 20.2 (7.9) (3.7) PBT - Treasury + Provisions 7,848 10,571 13,345 16,061 16,224 17,218 % growth 10.3 34.7 26.2 20.4 1.0 6.1 Balance sheet Cash and bank balance 46,142 35,488 44,539 48,002 52,927 58,494 Cash 1,305 1,710 1,935 1,935 1,935 1,935 Balance with RBI 26,142 28,039 25,901 29,365 33,217 37,498 Balance with banks 524 4,150 5,361 5,361 6,433 7,719 Net value of investments 139,562 196,958 216,243 233,363 247,116 258,615 Govt. and other securities 84,421 103,249 115,461 183,870 199,424 212,545 Shares 633 2,919 3,080 3,080 3,080 3,080 Debentures and bonds 14,238 19,279 20,015 18,013 16,212 14,591 Net loans and advances 230,572 261,936 330,774 388,898 456,209 534,074 Fixed assets 2,041 3,938 4,203 4,301 4,558 4,467 Net leased assets — — — — — — Net Owned assets 2,041 3,938 4,203 4,301 4,558 4,467 Other assets 7,150 6,762 6,933 6,933 6,933 6,933 Total assets 425,468 505,082 602,692 681,498 767,744 862,583 Deposits 372,372 446,759 533,469 604,811 684,153 772,318 Borrowings and bills payable 14,613 14,377 15,821 15,917 16,033 16,171 Other liabilities 8,378 9,158 12,470 12,470 12,470 12,470 Total liabilities 395,363 470,295 561,760 633,198 712,655 800,960 Paid-up capital 485 485 485 485 485 485 Reserves & surplus 29,620 34,302 40,447 47,815 54,603 61,139 Total shareholders' equity 30,105 34,787 40,932 48,300 55,088 61,624

Source: Kotak Institutional Equities, Company

KOTAK INSTITUTIONAL EQUITIES RESEARCH 53

REDUCE Gujarat Pipavav Port (GPPV)

Infrastructure OCTOBER 31, 2012 RESULT Coverage view: Neutral

Weak volume on market-share loss; cautious on near/medium-term trajectory. Price (Rs): 48 Weak 3QCY12 container volumes (126,000 TEUs, down 25% yoy) implied no sequential Target price (Rs): 52 pick-up and market-share loss (major ports grew by 2.7% yoy). Bulk cargo also remained BSE-30: 18,505 relatively sedate (0.75 mn tons, down 4%) on low coal and gypsum volumes. In-line revenues (Rs943 mn) was marred by low margins (on volume decline, one-offs) leading to a PAT of Rs82 mn, down 38%. Retain REDUCE on cautious near/medium-term outlook.

Company data and valuation summary Gujarat Pipavav Port Stock data Forecasts/Valuations 2012 2013E 2014E 52-week range (Rs) (high,low)74-46 EPS (Rs) 1.4 1.4 2.2 Market Cap. (Rs bn) 23.0 EPS growth (%) (212.6) 4.1 58.4 Shareholding pattern (%) P/E (X) 35.2 33.8 21.4 Promoters 43.0 Sales (Rs bn) 4.0 4.1 4.7 FIIs 26.1 Net profits (Rs bn) 0.6 0.7 1.1 MFs 7.6 EBITDA (Rs bn) 1.8 1.8 2.2 Price performance (%) 1M 3M 12M EV/EBITDA (X) 15.1 13.8 12.1 Absolute (8.9) (13.7) (33.5) ROE (%) 10.4 7.0 10.2 Rel. to BSE-30 (7.6) (19.6) (36.4) Div. Yield (%) 0.0 0.0 0.0

Weak container volumes (as expected) imply market-share loss; risk to near/medium-term outlook

Pipavav port reported disappointing container volumes of 126,000 TEUs (down 25% yoy) for 3QCY12 – a number similar to 2QCY12 (of 123,000), carrying almost no sequential improvement. Against this, major ports recorded a 2.7% yoy growth and Mundra port reported a 16% yoy growth in container volumes – implies a market-share loss for Pipavav port. Our full-year container volumes estimate of 564,000 TEUs for CY2012E (decline of 7-8% yoy) implies a sequential pick-up of about 25,000 potentially led by (1) addition of new feeder line between Pipavav and Mumbai port (volumes of 4,000 TEUs per month) and (2) potential addition of a new container line (consortium of APL and Hyundai Shipping - company is in advanced stages of discussion).

Bulk volumes also remain relatively muted led by low coal cargo and gypsum cargo

Bulk volumes also remained relatively subdued at about 0.75 mn tons in 3QCY12, recording a yoy decline of about 4%. The decline in bulk volumes was attributed to (1) lower coal volumes (on sectoral issues) and (2) low gypsum volumes on the back of lower demand. The company handled its first export consignment (versus being only an imports port for bulk) for wheat cargo.

In-line revenues marred by disappointing margins (on lower volumes, one-offs)

GPPL reported 3QCY12 revenues of Rs943 mn, broadly in line with our estimate (of Rs931 mn) and about 3.3% decline on a yoy basis (includes Rs27 mn of SFIS benefits). EBITDA margin disappointed at 35.7% against 46% in 3QCY11 and our estimate of 42.5%. This was primarily on the back of certain one-time expenses (of Rs72 mn) related to (1) refurbishment costs for quay cranes, (2) double handling of certain bulk cargo and (3) provisions for overdue receivables. Adjusted for these and the SFIS income, GPPL would have reported an EBITDA margin of about 41%. The lower-than-expected margins led to a net PAT of Rs82 mn for 3QCY12, down 38% yoy.

Marginally revise estimates and target price to Rs52/share; retain REDUCE

Retain REDUCE (marginally revise estimates and TP to Rs52 from Rs55) on (1) potential near-term volume disappointments, (2) uncertainty on long-term volume trajectory until incremental capacity is commissioned, (3) potential negative operating leverage and (4) expensive valuations (at 12X CY2013E EV/EBITDA).

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

Gujarat Pipavav Port Infrastructure

In-line revenues marred by disappointing margins (on lower volumes, one-offs)

GPPL reported 3QCY12 revenues of Rs943 mn, broadly in line with our estimate (of Rs931 mn) and about 3.3% decline on a yoy basis. We note that these revenues include Rs27 mn of entitlements from SFIS (GPPL received entitlements of Rs115 mn under Served from India Scheme for the period till March 31, 2011; based on reasonable certainty of utilization for duty set off against imports of capital and other equipment, the company had recognized Rs87.6 mn of income in the previous quarter and Rs27 mn in this quarter).

Disappointing EBITDA margins on one-offs; adjusted margins at about 41%

The company reported disappointing EBITDA margin of 35.7% for the quarter, a sharp yoy contraction from about 46% in 3QCY11 and also significantly lower than our estimate of 42.5%. While we had expected some margin contraction, the decline has been sharper than expected. This was primarily on the back of certain one-time expenses during the quarter related to (1) Rs30 mn of one-time refurbishment costs for quay cranes on berth 3, (2) Rs30 mn of one-time costs for double handling of certain bulk cargo (necessitated due to the ongoing works for the fertilizer sheds) and (3) Rs12 mn provisions for certain overdue receivables. Adjusted for these costs and Rs27 mn of SFIS income, the company would have reported an EBITDA margin of about 41%.

The lower-than-expected margins led to a net PAT of Rs82 mn for 3QCY12, a decline of 38% yoy. The company reported sequentially lower finance charges of Rs177 mn on repayment of Rs3.5 bn of debt (finance charge includes Rs51 mn of fund raising costs – steady state interest expense of about Rs125 mn).

For the nine months ending September 30, 2012, GPPL reported revenues of Rs2.97 bn, recording a moderate growth of 6% yoy. Revenues would have been relatively flat adjusted for the Rs115 mn of SFIS income. 9MCY12 EBITDA margin at 42.4% was down 170 bps on a yoy basis. However, lower interest cost (on debt repayment) led to a 25% growth at the net PAT level – reported PAT of Rs380 mn in 9MCY12 (against Rs302 mn in 9MCY11).

KOTAK INSTITUTIONAL EQUITIES RESEARCH 55 Infrastructure Gujarat Pipavav Port

GPPL - 3QCY12 - key numbers (Rs mn)

% change 3QCY12 3QCY12E 3QCY11 2QCY12 vs est. yoy qoq 9MCY12 9MCY11 % change Net operating income 943 931 975 1,025 1.3 (3.3) (8.0) 2,972 2,804 6.0 Total expenditure (607) (535) (528) (554) 13.3 14.8 9.5 (1,713) (1,569) 9.2 Operating expenses (290) (265) (270) (259) 7.3 12.1 (822) (900) (8.6) Employee costs (91) (89) (80) (95) 12.6 (5.0) (265) (261) 1.8 Admin and other exp. (226) (181) (178) (200) 27.4 13.2 (626) (408) 53.2 EBITDA 337 396 447 472 (14.9) (24.7) (28.6) 1,259 1,236 1.9 Other income 59 25 27 27 134.6 114.6 119.7 118 108 9.9 Interest expense (177) (142) (211) (204) 24.8 (16.4) (13.6) (587) (644) (9.0) Depreciation (137) (138) (131) (137) (1.0) 4.4 0.2 (411) (397) 3.6 PBT 82 141 132 157 (41.9) (38.2) (48.0) 380 302 25.8 Tax expense ———— — — NA PAT 82 141 132 157 (41.9) (38.2) (48.0) 380 302 25.8 Extraordinary items ———— — — NA Reported PAT 82 141 132 157 (41.9) (38.2) (48.0) 380 302 25.8

Key ratios (%) Operating exp./sales 30.7 28.5 27.7 25.2 27.7 32.1 Employee costs/sales 9.6 9.6 8.2 9.3 8.9 9.3 Admin and other exp./sales 24.0 19.4 18.2 19.5 21.0 14.6 EBITDA margin 35.7 42.5 45.9 46.0 42.4 44.1 PBT margin 8.7 15.1 13.6 15.3 12.8 10.8 PAT margin 8.7 15.1 13.6 15.3 12.8 10.8

Volumes Bulk ('000 tons) 750 780 870 (3.8) (13.8) 2,251 2,790 (19.3) Container ('000 TEUs) 126 169 123 (25.5) 2.6 414 440 (5.9) Total ('000 tons) 2,261 2,808 2,343 (19.5) (3.5) 7,218 8,068 (10.5)

Avg. realization (Rs/ton) 405 347 400 16.6 1.2 412 348 18.5

Source: Company, Kotak Institutional Equities estimates

Shifts to US$-based tariffs; cites potential 5-6% revenue benefit on the back of this

GPPL reported a sharp increased in average per ton realization of just over 15% yoy to Rs405/ton in 3QCY12 from Rs347/ton last year (adjusted for Rs27 mn of SFIS revenues). This increase was attributed to lower transshipment volumes in the container business - Maersk’s ME1 line primarily brought in transshipment cargo while the new MECL line brings in import/export cargo. The management expects these levels of realizations to be sustainable going forward as well.

The company has moved to US$-denominated tariff system for international clients for cargo handling tariffs (versus INR quotes currently) from mid-August. Post this shift, about 50-55% of the company’s total revenues would be US$-denominated (versus about 10-15% currently). The management cited that at current exchange rates, this shift could potentially lead to a 5-6% benefit at the revenue line.

No sequential improvement in container volumes (as expected); risk to near/medium-term estimates

Pipavav port reported disappointing container volumes of about 126,000 TEUs for 3QCY12 – a number similar to 2QCY12, carrying almost no sequential improvement (2QCY12 volumes of 123,000 TEUs). Container volumes were down about 25% on a yoy basis. Pipavav port had reported a sharp sequential decline in 2QCY12 (by 43,000 TEUs) on (1) shift of Maersk’s ME 1 line to Mundra, (2) disappointing sectoral trends, (3) some capacity limitations and (4) some seasonality.

56 KOTAK INSTITUTIONAL EQUITIES RESEARCH Gujarat Pipavav Port Infrastructure

Quarterly container volume handled at Pipavav port, 1QCY08-4QCY12E

('000 TEUs) Quarterly container cargo (%) Container quarterly volumes yoy growth (%) 180 169 165 160 160 150 120 140 123 126 120 80 100

80 40 60

40 - 20 - (40) 3QFY12 1QCY08 2QCY08 3QCY08 4QCY08 1QCY09 2QCY09 3QCY09 4QCY09 1QCY10 2QCY10 3QCY10 4QCY10 1QCY11 2QCY11 3QCY11 4QCY11 1QCY12 2QCY12 4Q12E-imp.

Source: Company, Kotak Institutional Equities estimates

Estimates build in some sequential pick-up in volumes for 4Q on addition of new lines

We build full-year container volumes of about 564,000 TEUs for CY2012E implying 7-8% yoy decline (from 610,000 TEUs). Our full-year volumes imply volumes of 150,000 TEUs in 4QCY12E, a strong sequential pick-up of about 25,000 TEUs from 3QCY12 volumes. Some of this sequential pick-up would be led by (1) addition of new feeder line between Pipavav and Mumbai port contribution of about 4,000 TEUs per month (12,000 TEUs for the quarter) and (2) company is in advanced stages of discussion to add another container line (consortium of APL and Hyundai Shipping) which may add to volumes during the quarter.

Full-year container estimate implies sequential pick-up in 4Q Annual container volumes handled at Pipavav port, December calendar year-ends, 2006-12E (‘000 TEUs)

Annual container cargo ('000 TEUs) (%) Container volumes yoy growth (%) 700 70 610 600 564 60 50 500 466 40 400 321 30 300 192 196 20 200 135 10

100 0

0 (10) 2006 2007 2008 2009 2010 2011 2012E

Source: Company, Kotak Institutional Equities estimates

KOTAK INSTITUTIONAL EQUITIES RESEARCH 57 Infrastructure Gujarat Pipavav Port

Uncertain on longer-term volume trajectory until incremental capacity additions

We believe that volume drop this year also creates doubt on longer-term volume growth trajectory till the incremental container berth gets commissioned. The port at about 550,000-600,000 TEUs of annual volumes is currently operating at about 65-70% of its total container capacity (of 850,000 TEUs) and hence may find it difficult to attract large shipping lines incrementally until the new container capacity addition is completed.

Sedate bulk volumes led by low coal cargo volumes in the quarter

Bulk volumes also remained relatively subdued at about 0.75 mn tons in 3QCY12, recording a yoy decline of about 4% from 0.78 mn tons in 3QCY11. The management attributed the decline in bulk volumes to (1) lower coal volumes handled at the port as the power/coal sector faces various import/tariff issues and (2) low gypsum volumes on the back of lower demand. The company handled its first export consignment (versus being only an imports port for bulk) for wheat cargo.

Quarterly and annual bulk cargo handled at Pipavav port, December calendar year-ends, 2006-12E ('000 tons)

(mn tons) Bulk quarterly volumes ('000 tons) Bulk annual volumes 1.6 4,000 3,680 1.4 3,371 3,341 3,479 1.2 1.0 3,000 0.8 2,150 2,072 0.6 2,000 1,659 0.4 0.2 1,000 0.0

0 2006 2007 2008 2009 2010 2011 2012E 1QCY08 3QCY08 1QCY09 3QCY09 1QCY10 3QCY10 1QCY11 3QCY11 1QCY12 3QCY12

Source: Company, Kotak Institutional Equities estimates

Volume growth behind broad sector – implies market-share loss

Pipavav port reported a 25% yoy decline in container volumes and about 20% decline in overall port volumes for the quarter ending September 30, 2012. Against this, major ports reported a small container volume growth of about 2.7% and relatively flat overall volumes for the quarter. This implies a market-share loss in the quarter. We note that against this, Mundra port reported a yoy growth of 16% in container volumes and 21.6% in overall volumes for the same quarter.

58 KOTAK INSTITUTIONAL EQUITIES RESEARCH Gujarat Pipavav Port Infrastructure

Volumes handled at Pipavav port in 3QCY12 versus major ports of the country

Total cargo (MMT) Container ('000 TEUs) Total cargo (MMT) Container ('000 TEUs) 3QCY12 3QCY11 % chg. 3QCY12 3QCY11 % chg. 9MCY12 9MCY11 % chg. 9MCY12 9MCY11 % chg. Kolkata 3.0 3.1 (1.7) 121 106 14.2 8.6 9.2 (6.8) 331 300 10.3 Haldia 6.8 8.3 (17.9) 36 33 9.1 20.6 26.4 (21.7) 110 109 0.9 Paradip 13.9 13.4 4.0 4 2 100.0 39.4 43.0 (8.4) 11 4 175.0 Visakhapatnam 15.4 17.5 (11.7) 62 60 3.3 45.1 54.4 (17.0) 196 150 30.7 Ennore 3.8 3.4 11.5 — — NA 12.6 10.3 22.5 — — NA Chennai 13.5 14.2 (4.9) 409 382 7.1 40.9 45.0 (9.1) 1,187 1,202 (1.2) Tuticorin 6.8 6.8 (1.2) 129 122 5.7 21.3 21.3 (0.1) 360 367 (1.9) Cochin 5.1 5.4 (4.0) 94 95 (1.1) 15.4 14.4 6.7 239 270 (11.5) New Mangalore 8.1 7.5 8.2 12 11 9.1 25.4 24.0 6.0 35 33 6.1 Mormugao 2.9 4.3 (32.9) 5 4 25.0 23.3 34.0 (31.4) 14 14 - Mumbai 13.3 13.1 2.0 16 17 (5.9) 44.8 40.6 10.4 44 47 (6.4) J.N.P.T 15.9 15.9 (0.3) 1,072 1,066 0.6 48.9 48.6 0.7 3,232 3,213 0.6 Kandla 23.5 20.4 15.2 31 41 (24.4) 66.3 62.0 6.9 102 125 (18.4) Major ports 132.0 133.2 (0.8) 1,991 1,939 2.7 412.5 433.0 (4.7) 5,861 5,834 0.5 Mundra 20.4 16.8 21.6 424 365 16.4 53.4 48.2 10.7 1,275 1,020 25.0 Pipavav 2.3 2.8 (19.5) 126 169 (25.5) 7.2 8.1 (10.5) 414 440 (5.9)

Source: Company, Indian Ports Association, Kotak Institutional Equities

Balance sheet – debt declines on repayment from QIP proceeds

The company has repaid debt to the tune of Rs3.4 bn leading to a 9MCY12-end debt of Rs3.1 bn (versus Rs6.5 bn at end-1HCY12)

GPPL balance sheet, December calendar year-ends, 2009-12E (Rs mn)

Dec-09 Dec-10 Dec-11 Jun-12 Sep-12 Dec-12E Shareholders' funds 3,111 7,359 7,930 8,228 11,758 12,110 Equity share capital 3,149 4,236 4,236 4,236 4,834 4,834 Reserves and surplus (38) 3,123 3,694 3,992 6,923 7,276 Loan funds 10,891 7,973 6,759 6,657 3,066 3,169 Total sources of funds 14,002 15,332 14,688 14,885 14,824 15,279

Total fixed assets 12,986 12,907 12,819 13,574 13,961 14,347 Investments 830 830 830 830 830 830 Cash and bank balances 798 1,949 1,272 800 413 391 Current assets 913 899 912 1,190 1,128 Inventories 52 75 57 95 106 Sundry debtors 217 295 295 150 317 Loans & advances 645 530 560 946 706 Current liabilities & provisions 1,526 1,253 1,144 1,509 1,508 Current liabilities 1,199 868 759 1,132 1,107 Provisions 326 385 386 378 401 Net current assets excl. cash (612) (354) (232) (319) (380) (289) Total application of funds 14,002 15,332 14,688 14,885 14,824 15,279

Source: Company, Kotak Institutional Equities estimates

Valuations relatively expensive at 12X CY2013E EV/EBITDA

The stock (at about Rs48/share) is currently trading at relatively expensive valuations of 12X CY2013E EV/EBITDA (15X on CY2012E basis), 21.5X CY2013E P/E and 1.8X CY2013E P/B (for a potential RoE of about 9-10%). Against this, Mundra port (adjusted for value from other asset of ADSEZ) is currently trading at a valuation of about 9.3X FY2014E EV/EBITDA.

KOTAK INSTITUTIONAL EQUITIES RESEARCH 59 Infrastructure Gujarat Pipavav Port

Key numbers and valuation metrics of GPPL, December calendar year-ends, 2010-14E

CY2010 CY2011 CY2012E CY2013E CY2014E Capacity Bulk (mn tons) 5.0 5.0 6.0 6.0 6.0 Containers ('000 TEUs) 750 875 1,300 1,300 1,300 Crude (mn tons)————— Total (mn tons) 14.0 15.5 21.6 21.6 21.6 Volumes Bulk (mn tons) 3.3 3.7 3.5 3.8 4.7 Containers ('000 TEUs) 466 610 564 655 753 Crude (mn tons) ————— Total (mn tons) 9 12 11 12 14 Key ratios (%) Revenue growth 28.6 39.8 4.2 13.2 23.8 PAT growth (53.0) (204.7) 18.8 58.4 14.8 EBIDTA margin 41.3 46.2 43.8 46.5 50.0 RoE (10.5) 7.5 6.8 8.5 9.0 RoCE 2.1 7.6 7.7 8.4 8.5 Key valuation ratios (X) P/E (35.4) 33.8 32.5 20.5 17.9 P/B 2.6 2.4 1.8 1.7 1.5 EV/Sales 8.9 6.3 6.0 5.6 4.7 EV/EBITDA 21.6 13.6 13.7 12.1 9.3

Source: Company, Kotak Institutional Equities estimates

Marginally revise estimates; retain REDUCE with a target price of Rs52/share

We marginally revise our estimates and our SOTP-based target price to Rs52/share (from Rs55/share earlier).

Our target price of Rs52/share is comprised of (1) Rs43/share for the core port business (FCFE valuation), (2) Rs2.3/share for its with Pipavav Rail Corporation Ltd (PRCL, 1.5X book value) and (3) Rs6.7/share from 50% of the calculated depreciated replacement value receivable at the end of the concession period. Our target price implies an EV/EBITDA valuation of about 13X CY2013E EV/EBITDA for the port.

SOTP-based target price of Rs52/share SOTP valuation of GPPL

Value Stake GPPL stake value Per share (Rs bn) (%) (Rs bn) (Rs) Method of valuation Pipavav port 20,959 100.0 20,959 43 1-year forward FCFE valuation Pipavav Rail Corporation Ltd (PRCL) 2,940 38.0 1,117 2.3 1.5X book value DRV/ extension of concession agreement 3,247 100.0 3,247 6.7 50% of calculated DRV/ agreement extn Total value for GPPL 27,146 25,324 52

Source: Company, Kotak Institutional Equities estimates

We retain our REDUCE rating on the company based on (1) potential near-term volume disappointments, (2) uncertainty on long-term volume trajectory until incremental capacity is commissioned, (3) volume disappointment likely to have a negative impact on operating margins, (4) valuations seem expensive at about 12X CY2013E EV/EBITDA and (5) increasing competitive intensity with recent commissioning of Hazira port.

Key catalysts for the stock include (1) sharp pick-up in volumes on recovery and addition of new lines and (2) strong progress on signing of long-term contracts for bulk (coal) and/or container cargo.

60 KOTAK INSTITUTIONAL EQUITIES RESEARCH Gujarat Pipavav Port Infrastructure

Profit, balance sheet and cash model of GPPL, December calendar year-ends, 2009-15E (Rs mn)

2009 2010 2011 2012E 2013E 2014E 2015E Profit model Net sales 2,207 2,839 3,968 4,134 4,680 5,794 6,691 Total operating costs (1,831) (1,665) (2,135) (2,323) (2,506) (2,897) (3,317) EBITDA 376 1,174 1,833 1,811 2,174 2,897 3,374 EBITDA margin (%) 17.0 41.3 46.2 43.8 46.5 50.0 50.4 Other income 133 81 149 141 27 84 163 Financial charges (1,157) (1,271) (852) (710) (458) (623) (715) Depreciation (458) (493) (558) (562) (666) (812) (890) Pre-tax profit (1,105) (509) 573 680 1,078 1,546 1,932 Taxation (1) — — — — (309) (386) Adjusted PAT (1,106) (547) 573 680 1,078 1,237 1,546 EPS (Rs) (3.5) (1.3) 1.35 1.4 2.2 2.6 3.2 Balance sheet Shareholders' funds 3,111 7,359 7,930 12,110 13,188 14,425 15,970 Equity share capital 3,149 4,236 4,236 4,834 4,834 4,834 4,834 Reserves and surplus (38) 3,123 3,694 7,276 8,354 9,590 11,136 Loan funds 10,891 7,973 6,759 3,169 4,459 6,859 6,139 Total sources of funds 14,002 15,332 14,688 15,279 17,647 21,283 22,109 Total fixed assets 12,986 12,907 12,819 14,347 16,786 18,672 18,994 Investments 830 830 830 830 830 830 830 Cash and bank balances 798 1,949 1,272 391 335 1,907 2,433 Net current assets excl. cash (612) (354) (232) (289) (304) (125) (148) Total application of funds 14,002 15,332 14,688 15,279 17,647 21,283 22,109

Cash flow statement Cash flow from operations (284) 915 1,906 1,943 2,377 2,792 3,235 Cash flow from investing activities (3,226) (322) (469) (2,090) (3,105) (2,698) (1,212) Free cash flows (3,510) 594 1,437 (147) (728) 94 2,022 Cash flow from financing activities 2,774 905 (1,916) (658) 859 1,862 (1,272) Cash generated /utilised (902) 1,151 (677) (881) (55) 1,572 525 Net cash at start of year 1,700 798 1,949 1,272 391 335 1,907 Net cash at end of year 798 1,949 1,272 391 335 1,907 2,433

Source: Company, Kotak Institutional Equities estimates

KOTAK INSTITUTIONAL EQUITIES RESEARCH 61

KOTAK INSTITUTIONAL EQUITIES RESEARCH September 2012: Results calendar India DailyIndia Summary-November 2012 1,

Mon Tue Wed Thu Fri Sat Sun 29-Oct 30-Oct 31-Oct 1-Nov 2-Nov 3-Nov 4-Nov Bank of India Biocon Bata India Glaxosmithkline Consumers Apollo Tyres Divis Laboratories Bharat Electronics Dr Reddys Laboratories Bayer Corp Hexaw are Technologies Berger Paints Godrej Consumer Products BHEL Engineers India Bharat Forge JSW Energy Crompton Greaves Colgate Palmolive Glenmark Pharmaceuticals Caroborundum Universal Jyothy Laboratories Dishman Pharma Havells India GTL Century Textiles Aban Offshore Jet Airw ays

Jagran Prakashan IDBI Bank Container Corp Manglore Refinery Muthoot Finance IRB Infra Eros Mar ic o Orbit Corp KEC International Financial Technology MCX SKS Microfinance Maruti Suzuki Gujarat Pipavav Port REC Grasim Industries Mcleod Russel J&K Bank Sobha Developers Religare Enterprises Karur Vysya Bank Union Bank of India Satyam Computers LIC Housing Finance Wipro Shriram Transport Finance NHPC SJVN Oracle Financial Services Thermax Pow er Grid Shriram City Union Finance Tata Global Beverages Titan Industries 5-Nov 6-Nov 7-Nov 8-Nov 9-Nov 10-Nov 11-Nov Allahabad Bank ABB Bharti Airtel Aditya Birla Nuvo Apollo Hospitals Cipla Andhra Bank Cadila Healthcare Ashok Leyland Aurobindo Pharma Corporation Bank Bosch GSPL Cummins India BPCL Hindustan Copper Britannia Industries Indraprastha Gas Godrej Indsutries CESC Madras Cements Canara Bank Jubilant Foodw orks MMTC Coal India Piramal Enterprises Central Bank of India NMDC Ranbaxy Laboratories Eicher Motors Reliacnce Pow er Dena Bank Tata Motors Sun Pharma Essar Oil Tech Mahindra Hindalco Industries Uco Bank Glaxosmithkline Pharma Voltas Indian Hotels HPCL Motherson Sumi Systems IOCL Oil India Jindal Steel and Pow er Reliance Capital Lanco Infratech Reliance Infra Max India Tata Communications Neyveli Lignite Tata Pow er India Daily Summary -November ONGC Pipav av Def enc e Pow er Finance Corp. Tata Chemicals Tata Steel United Spirits 12-Nov 13-Nov 14-Nov 15-Nov 16-Nov 17-Nov 18-Nov GMR Inf ra

Nes tle India Source: BSE, NSE, Kotak Institutional Equities 62

63 63

Kotak Institutional Equities: Valuation summary of KIE Universe stocks

O/S Target ADVT- 31-Oct-12 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) 2012 2013E 2014E 2012 2013E 2014E 2012 2013E 2014E 2012 2013E 2014E 2012 2013E 2014E 2012 2013E 2014E 2012 2013E 2014E (Rs) (%) (US$ mn) Automobiles Apollo Tyres 86 BUY 43,251 802 504 8.1 11.7 14.0 (7.0) 43.8 20.0 10.6 7.3 6.1 6.0 4.5 3.9 1.3 1.1 1.0 0.5 0.8 0.9 15.6 19.0 19.1 110 28.2 7.3 Ashok Leyland 23 REDUCE 62,393 1,157 2,661 2.1 1.3 2.6 (10.6) (39.7) 105.3 11.1 18.3 8.9 7.4 9.2 6.3 1.3 1.3 1.2 4.3 4.3 4.3 17.7 10.3 20.3 23 (1.9) 2.2 Bajaj Auto 1,816 ADD 525,681 9,746 289 103.8 103.6 131.8 14.9 (0.2) 27.2 17.5 17.5 13.8 12.7 13.6 10.6 8.6 6.8 5.4 2.5 2.3 2.9 54.5 43.5 43.9 1,875 3.2 12.5 Bharat Forge 272 REDUCE 64,439 1,195 237 17.4 17.5 22.0 38.5 0.9 25.7 15.6 15.5 12.3 8.6 8.0 6.8 2.6 2.3 1.9 0.4 0.4 0.4 15.1 15.5 15.1 300 10.5 2.0 Exide Industries 142 SELL 120,318 2,231 850 5.4 6.9 7.9 (27.2) 27.2 14.7 26.1 20.5 17.9 17.5 13.4 12.0 3.9 3.5 3.1 1.1 1.2 1.4 15.9 18.0 18.2 115 (18.8) 4.7 Hero Motocorp 1,880 SELL 375,436 6,960 200 119.1 115.0 124.3 19.9 (3.4) 8.1 15.8 16.3 15.1 12.0 12.4 10.3 6.8 5.4 4.4 1.6 1.8 2.0 61.8 43.8 36.5 1,700 (9.6) 14.3 Mahindra & Mahindra 884 BUY 543,052 10,068 614 45.1 53.2 59.3 8.1 17.9 11.4 19.6 16.6 14.9 15.0 11.9 10.5 4.3 3.7 3.1 1.3 1.8 2.0 24.6 24.7 23.4 1,000 13.1 19.9 Maruti Suzuki 1,438 SELL 434,361 8,053 302 56.6 62.9 83.6 (28.6) 11.1 32.9 25.4 22.9 17.2 20.2 16.1 11.2 2.8 2.5 2.2 0.5 0.5 0.5 11.1 11.7 13.8 1,100 (23.5) 19.3 Motherson Sumi Systems 156 BUY 91,552 1,697 588 4.6 9.3 15.2 (31.9) 103.8 62.8 34.0 16.7 10.3 16.0 9.8 4.9 4.9 4.1 2.9 1.4 1.3 3.0 15.5 26.8 33.1 170 9.2 1.6 Tata Motors 255 BUY 819,747 15,197 3,218 44.6 35.3 51.9 58.7 (20.9) 47.1 5.7 7.2 4.9 5.0 4.7 3.5 2.5 1.9 1.4 1.6 2.1 2.1 54.8 30.0 33.5 320 25.6 49.5 Automobiles Neutral 3,080,228 57,105 25.8 (7.6) 34.4 11.7 12.7 9.4 8.5 7.9 6.0 3.5 2.9 2.3 1.5 1.7 2.0 29.7 22.8 24.7 Banks/Financial Institutions Andhra Bank 103 ADD 57,777 1,071 560 24.0 21.4 24.3 6.1 (10.9) 13.8 4.3 4.8 4.2 — — — 0.8 0.8 0.7 5.3 4.7 5.4 19.2 15.1 15.4 120 16.2 1.6 Axis Bank 1,183 ADD 488,655 9,059 413 102.7 108.5 112.9 24.4 5.6 4.1 11.5 10.9 10.5 — — — 2.2 1.9 1.7 1.4 1.4 1.5 20.3 18.2 16.4 1,250 5.7 54.1 Bajaj Finserv 852 SELL 123,202 2,284 145 94.8 74.4 75.3 21.3 (21.5) 1.1 9.0 11.4 11.3 — — — 2.5 1.8 1.6 1.8 1.8 1.8 32.2 18.1 14.7 740 (13.1) 4.1 Bank of Baroda 726 REDUCE 299,247 5,548 412 121.4 114.1 118.7 12.4 (6.0) 4.0 6.0 6.4 6.1 — — — 1.2 1.1 1.0 2.3 2.7 2.8 21.7 16.7 15.3 770 6.1 11.3 Bank of India 277 BUY 158,855 2,945 575 46.6 52.4 58.1 2.5 12.4 10.8 5.9 5.3 4.8 — — — 0.9 0.9 0.7 2.5 2.8 3.1 15.0 14.4 14.1 340 23.0 4.9 Canara Bank 401 REDUCE 177,599 3,293 443 74.1 68.6 82.8 (18.5) (7.4) 20.6 5.4 5.8 4.8 — — — 1.0 0.9 0.8 2.7 3.0 3.0 15.4 12.7 13.8 420 4.8 6.7 Corporation Bank 397 BUY 58,852 1,091 148 101.7 88.1 114.7 6.6 (13.3) 30.1 3.9 4.5 3.5 — — — 0.8 0.7 0.6 5.2 4.5 5.8 19.5 14.9 17.1 510 28.4 0.5 Federal Bank 485 ADD 82,889 1,537 171 45.4 46.2 48.1 32.3 1.7 4.2 10.7 10.5 10.1 — — — 1.5 1.4 1.3 1.9 1.9 2.0 14.4 13.1 12.4 515 6.3 4.6 HDFC 762 SELL 1,167,706 21,648 1,532 27.9 31.9 37.8 15.8 14.2 18.5 27.3 23.9 20.2 — — — 6.1 4.7 4.1 1.4 1.5 1.8 22.7 22.1 21.7 690 (9.5) 67.3 HDFC Bank 634 SELL 1,488,270 27,591 2,347 22.0 28.7 36.4 30.4 30.3 27.0 28.8 22.1 17.4 — — — 5.0 4.3 3.6 0.7 0.9 1.1 18.7 20.7 22.3 590 (7.0) 30.0 ICICI Bank 1,050 ADD 1,210,637 22,444 1,153 56.1 64.9 63.6 25.4 15.6 (2.0) 18.7 16.2 16.5 — — — 2.0 1.9 1.8 1.6 1.9 1.8 11.2 11.9 10.8 1,140 8.6 71.0 IDFC 162 ADD 245,380 4,549 1,512 10.3 12.5 14.9 17.2 21.9 18.7 15.8 12.9 10.9 — — — 2.0 1.8 1.6 1— 1.5 1.8 13.7 14.6 15.5 170 4.8 19.2 India Infoline 69 REDUCE 22,463 416 327 4.5 7.7 8.5 (38.3) 68.5 10.5 15.1 9.0 8.1 — — — 1.3 1.1 1.0 1.9 3.8 2.1 7.7 13.1 12.7 65 (5.5) 0.9 Indian Bank 168 BUY 72,201 1,339 430 39.6 39.8 41.8 1.2 0.7 5.0 4.2 4.2 4.0 — — — 0.9 0.8 0.7 4.5 4.4 4.6 19.4 17.0 15.7 260 54.8 1.0 Indian Overseas Bank 72 REDUCE 57,025 1,057 797 13.2 14.7 20.5 (24.0) 11.9 39.3 5.4 4.9 3.5 — — — 0.6 0.6 0.5 6.2 4.8 6.7 9.9 9.5 12.2 75 4.8 1.7 IndusInd Bank 364 ADD 170,290 3,157 468 17.2 20.6 23.3 38.5 20.0 13.1 21.2 17.7 15.6 — — — 3.8 3.2 2.8 0.6 0.7 0.8 20.1 19.8 18.8 380 4.4 3.6 J&K Bank 814 ADD 39,473 732 48 165.6 199.0 183.3 30.6 20.2 (7.9) 4.9 4.1 4.4 — — — 1.0 0.8 0.7 4.1 4.9 4.6 21.2 21.6 17.2 1,200 47.4 1.4 LIC Housing Finance 243 ADD 122,728 2,275 505 18.1 22.1 28.4 (11.8) 22.2 28.6 13.4 11.0 8.5 — — — 2.2 2.0 1.7 1.5 1.8 2.3 18.6 18.3 20.2 290 19.3 13.3 L&T Finance Holdings 54 ADD 92,854 1,721 1,715 2.7 3.5 4.7 (5.6) 33.6 32.0 20.4 15.3 11.6 — — — 2.0 1.7 1.5 — — — 11.9 12.0 13.9 60 10.8 1.8 DailySummary India - November 1,2012 Muthoot Finance 185 BUY 68,897 1,277 372 24.0 25.7 25.1 52.4 7.1 (2.5) 7.7 7.2 7.4 — — — 2.4 1.8 1.4 2.2 — — 41.9 29.8 22.7 220 18.7 — Oriental Bank of Commerce 310 ADD 90,563 1,679 292 39.1 52.7 57.1 (24.0) 34.6 8.4 7.9 5.9 5.4 — — — 1.0 0.9 0.8 2.5 3.4 3.7 9.9 12.3 12.2 325 4.7 3.8 PFC 185 ADD 244,538 4,534 1,319 23.0 27.7 30.6 0.9 20.3 10.3 8.1 6.7 6.1 — — — 1.2 1.2 1.1 3.2 3.9 4.3 16.9 16.6 16.4 220 18.7 12.4 Punjab National Bank 738 REDUCE 250,449 4,643 339 144.0 139.6 153.6 2.9 (3.0) 10.0 5.1 5.3 4.8 — — — 1.1 1.0 0.8 3.0 2.9 3.2 21.1 16.7 16.1 800 8.3 12.9 Reliance Capital 382 ADD 94,021 1,743 246 21.1 22.8 21.8 126.7 8.2 (4.5) 18.1 16.7 17.5 — — — 0.9 0.8 0.8 2.0 1.8 1.7 5.7 5.0 4.6 450 17.8 32.0 Rural Electrification Corp. 215 REDUCE 212,634 3,942 987 28.6 35.7 39.1 10.0 24.9 9.7 7.5 6.0 5.5 — — — 1.5 1.4 1.3 3.5 4.4 4.8 20.5 22.1 20.9 234 8.7 9.5 Shriram City Union Finance 781 BUY 43,197 801 55 65.4 81.2 97.5 34.7 24.1 20.1 11.9 9.6 8.0 — — — 2.5 1.9 1.5 0.8 1.3 1.7 23.3 22.6 22.3 905 15.9 1.6 Shriram Transport 625 ADD 139,496 2,586 223 56.4 59.5 71.5 2.3 5.6 20.2 11.1 10.5 8.7 — — — 2.4 2.1 1.8 1.1 1.9 2.3 23.1 20.4 20.9 700 12.0 3.4 SKS Microfinance 113 RS 8,257 153 73 (189.0) (32.2) 0.5 (1,304.4) (83.0) (101.4) (0.6) (3.5) 250.5 — — — 1.9 3.6 3.2 — — — (122.9) (70.7) 1.4 — — 5.0 State Bank of India 2,110 ADD 1,416,064 26,253 671 174.5 206.3 219.2 34.0 18.3 6.2 12.1 10.2 9.6 — — — 2.1 2.0 1.7 1.9 2.0 2.1 15.7 15.5 14.7 2,300 9.0 121.7 Union Bank 196 BUY 107,715 1,997 551 32.3 39.2 40.7 (18.2) 21.3 4.0 6.1 5.0 4.8 — — — 1.0 0.9 0.8 4.1 3.9 4.1 14.9 15.7 14.5 240 22.7 4.3 Yes Bank 412 ADD 145,290 2,694 353 27.7 33.2 39.6 32.1 19.9 19.3 14.9 12.4 10.4 — — — 3.1 2.6 2.2 1.0 1.2 1.4 23.1 22.7 22.4 415 0.8 22.9 Banks/Financial Institutions Cautious 9,046,211 167,709 14.6 13.5 11.2 12.5 11.0 9.9 ——— 2.0 1.9 1.6 1.7 1.9 2.1 16.4 16.9 16.6 Cement KOTAK INSTITUTIONAL EQUITIES RESEARCH ACC 1,379 SELL 259,096 4,803 188 57.1 73.6 81.4 7.8 28.9 10.6 24.2 18.7 16.9 13.9 10.0 8.5 3.4 3.0 2.7 2.4 1.7 1.7 16.9 18.4 17.9 1,300 (5.7) 8.2 Ambuja Cements 203 SELL 308,585 5,721 1,522 7.8 10.6 12.7 (1.2) 36.2 20.0 26.0 19.1 15.9 15.1 11.2 9.2 3.5 3.3 2.9 1.1 1.4 1.9 14.6 18.2 19.5 180 (11.2) 9.8 Grasim Industries 3,313 ADD 303,868 5,633 92 288.6 335.4 363.9 24.4 16.2 8.5 11.5 9.9 9.1 7.5 5.9 4.9 1.8 1.5 1.3 1.0 1.0 1.0 16.7 16.7 15.7 3,600 8.7 5.6 India Cements 96 ADD 29,366 544 307 9.0 10.5 13.4 373.8 17.2 27.3 10.7 9.1 7.2 5.4 4.8 3.8 0.7 0.6 0.6 2.2 3.3 3.3 6.9 7.8 9.2 100 4.6 3.2 Shree Cement 4,223 SELL 147,121 2,727 35 159.6 252.2 281.8 179.3 58.0 11.7 26.5 16.7 15.0 8.1 9.3 7.8 5.5 4.3 3.5 0.5 0.5 0.5 24.3 28.8 25.6 3,340 (20.9) 2.7 UltraTech Cement 1,996 SELL 547,099 10,143 274 89.3 107.8 124.7 99.0 20.8 15.6 22.4 18.5 16.0 13.7 11.0 9.1 3.7 3.1 2.6 0.5 0.5 0.5 20.8 20.8 19.9 1,510 (24.4) 5.3 Cement Cautious 1,595,136 29,572 40.8 25.0 13.5 19.5 15.6 13.7 10.7 8.7 7.3 2.9 2.5 2.2 1.0 1.0 1.1 14.9 16.1 15.9

Source: Company, Bloomberg, Kotak Institutional Equities estimates

KOTAK INSTITUTIONAL EQUITIES RESEARCH Kotak Institutional Equities: Valuation summary of KIE Universe stocks India DailyIndia Summary-November 2012 1,

O/S Target ADVT- 31-Oct-12 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) 2012 2013E 2014E 2012 2013E 2014E 2012 2013E 2014E 2012 2013E 2014E 2012 2013E 2014E 2012 2013E 2014E 2012 2013E 2014E (Rs) (%) (US$ mn) Consumer products Asian Paints 3,871 SELL 371,325 6,884 96 99.9 114.3 133.9 23.6 14.4 17.2 38.7 33.9 28.9 27.0 23.1 19.3 14.5 11.4 9.0 1.0 0.9 0.9 42.9 38.9 35.7 3,300 (14.8) 5.0 Bajaj Corp. 186 BUY 27,383 508 148 8.1 10.9 12.5 16.5 33.4 15.5 22.8 17.1 14.8 23.5 16.1 13.4 6.4 5.5 4.8 2.1 2.9 3.3 29.9 34.7 34.5 225 21.2 0.7 Colgate-Palmolive (India) 1,286 SELL 174,832 3,241 136 32.8 39.5 46.1 10.9 20.4 16.6 39.2 32.5 27.9 33.6 27.2 22.9 40.2 32.8 28.6 1.9 2.2 2.7 109.0 111.0 109.7 1,150 (10.5) 1.7 Dabur India 124 ADD 217,944 4,040 1,753 3.7 4.5 5.2 12.6 21.1 15.7 33.8 27.9 24.1 26.8 21.5 18.0 12.5 9.9 8.0 1.0 1.3 1.5 41.4 40.1 37.0 140 12.6 3.3 GlaxoSmithkline Consumer 3,037 ADD 127,723 2,368 42 84.5 104.6 122.4 18.5 23.9 17.0 36.0 29.0 24.8 27.5 22.9 19.0 11.6 9.6 8.0 1.2 1.4 1.7 33.8 35.0 34.2 3,000 (1.2) 1.4 Godrej Consumer Products 721 ADD 233,438 4,328 324 17.7 22.9 28.0 18.7 29.7 22.3 40.8 31.5 25.8 28.3 22.0 17.6 8.3 6.5 5.6 0.7 0.7 0.7 25.2 24.3 26.9 710 (1.6) 3.2 Hindustan Unilever 547 REDUCE 1, 180,348 21,883 2,159 11.9 15.4 16.8 23.9 29.5 8.6 45.9 35.4 32.6 39.2 31.0 26.0 33.6 28.8 24.9 1.6 2.3 2.5 83.4 87.5 82.5 510 (6.7) 22.3 ITC 283 ADD 2,195,683 40,706 7,771 7.9 9.5 11.2 23.7 19.3 18.4 35.6 29.9 25.2 25.2 20.5 17.0 11.2 9.9 8.5 1.6 1.9 2.0 35.5 36.6 37.7 330 16.8 31.1

Jubilant Foodworks 1,263 SELL 82,853 1,536 66 16.7 23.9 35.2 49.3 42.7 47.6 75.5 52.9 35.9 43.5 29.7 20.9 27.7 18.2 12.1 — — — 44.7 41.4 40.4 1,000 (20.8) 8.2 Jyothy Laboratories 177 ADD 29,022 538 164 5.5 4.6 6.9 (46.6) (17.3) 51.1 32.1 38.8 25.7 41.4 22.5 17.4 4.7 4.3 3.7 — — — 6.1 11.6 15.3 130 (26.7) 0.9 Marico 210 ADD 135,060 2,504 645 5.3 6.6 7.9 36.3 25.5 19.4 39.6 31.6 26.4 29.7 21.8 17.8 11.6 8.8 6.9 0.3 0.4 0.5 31.5 32.3 29.8 205 (2.2) 1.3 Nestle India 4,700 SELL 453,164 8,401 96 104.6 118.7 142.7 20.5 13.5 20.2 44.9 39.6 32.9 29.7 24.1 20.3 35.6 25.7 18.4 1.0 1.2 1.3 94.7 75.3 65.1 4,000 (14.9) 2.9 Speciality Restaurants 183 ADD 8,570 159 47 4.9 6.6 8.5 7.6 34.9 28.5 37.3 27.6 21.5 23.6 14.5 10.7 7.5 5.4 4.3 — — — 16.2 14.7 12.2 200 9.6 0.6 Tata Global Beverages 150 BUY 92,853 1,721 618 5.4 6.5 7.7 36.3 20.5 18.5 27.8 23.1 19.5 16.4 13.9 11.7 1.6 1.5 1.5 1.2 1.4 1.7 7.8 8.5 9.7 165 9.9 8.2 Titan Industries 259 ADD 230,203 4,268 888 6.7 7.9 9.5 36.5 18.1 20.3 38.7 32.7 27.2 26.5 20.4 16.5 15.9 12.2 8.8 0.9 1.2 0.4 47.9 42.3 37.6 270 4.1 7.7 United Spirits 1,176 ADD 147,667 2,738 126 16.6 33.5 38.2 (53.0) 102.2 13.9 70.9 35.1 30.8 20.7 14.9 13.5 3.2 2.9 2.7 0.1 0.2 0.3 4.7 8.7 9.1 770 (34.5) 104.6 Consumer products Cautious 5, 708,067 105,823 19.8 23.7 17.1 39.4 31.9 27.2 28.0 22.3 18.6 12.0 10.3 8.8 1.3 1.6 1.8 30.4 32.4 32.3 Constructions IVRCL 40 REDUCE 10,614 197 267 0.9 3.3 6.1 (84.7) 265.1 85.8 44.0 12.1 6.5 9.9 7.0 5.7 0.5 0.5 0.5 1.0 1.0 1.0 1.2 4.3 7.6 43 8.2 9.2 NCC 44 ADD 11,161 207 257 1.4 2.5 3.6 (78.0) 81.5 43.1 31.0 17.1 11.9 8.2 7.0 7.8 0.5 0.5 0.4 1.4 1.4 2.3 12.9 11.3 11.2 55 26.4 2.3 Punj Lloyd 50 REDUCE 17,133 318 340 3.3 3.9 7.6 (322.9) 18.7 94.5 15.2 12.8 6.6 9.7 6.5 5.6 0.6 0.6 0.5 0.3 0.7 1.3 3.8 4.5 8.2 60 18.9 2.7 Sadbhav Engineering 145 BUY 21,801 404 150 9.4 8.1 11.3 20.5 (13.4) 39.9 15.5 17.9 12.8 9.0 9.3 7.3 2.8 2.4 2.1 0.4 0.4 0.4 17.9 13.6 16.1 180 24.1 0.5 Construction Cautious 60,709 1,125 (19.2) 30.5 68.1 19.4 14.9 8.8 9.3 7.1 6.2 0.7 0.7 0.7 0.7 0.8 1.1 3.9 4.8 7.6 Energy Aban Offshore 440 RS 19,168 355 44 68.3 66.5 79.6 (49.1) (2.6) 19.7 6.4 6.6 5.5 8.4 7.2 6.5 0.7 0.7 0.6 0.8 1.0 1.1 12.3 11.6 11.6 — — 7.1 Bha rat Petroleum 338 ADD 244,076 4,525 723 18.3 16.3 21.0 (5.7) (11.1) 28.8 18.4 20.7 16.1 10.4 9.9 8.7 1.5 1.4 1.3 1.6 1.5 1.9 8.1 6.7 8.2 410 21.5 7.1 Cairn india 337 ADD 641,839 11,899 1,907 41.6 60.1 50.1 25.0 44.5 (16.7) 8.1 5.6 6.7 6.1 3.9 4.4 1.3 1.2 1.1 — 3.7 4.8 17.7 22.0 16.6 360 7.0 37.9 Castrol India 304 SELL 150,148 2,784 495 9.5 9.2 10.2 (4.4) (3.0) 11.2 32.1 33.1 29.8 22.0 22.9 20.4 27.4 26.3 24.6 2.5 2.5 2.6 87.9 81.1 85.4 200 (34.1) 1.9 GAIL (India) 349 ADD 442,573 8,205 1,268 28.8 30.9 31.3 2.3 7.2 1.4 12.1 11.3 11.1 7.9 7.4 6.9 1.9 1.7 1.5 2.5 2.7 2.7 15.7 14.9 13.5 410 17.5 7.2 GSPL 75 BUY 42,455 787 563 9.3 7.7 7.9 4.7 (17.1) 2.2 8.1 9.8 9.6 5.0 5.5 5.1 1.5 1.3 1.2 1.3 1.3 1.3 20.7 14.5 12.9 85 12.7 2.1 Hindustan Petroleum 299 REDUCE 101,262 1,877 339 26.8 19.3 25.5 (34.4) (28.2) 32.6 11.1 15.5 11.7 2.5 2.9 2.5 0.6 0.6 0.6 2.8 2.0 2.6 5.4 3.8 4.8 330 10.5 6.0 Indian Oil Corporation 261 ADD 632,481 11,726 2,428 33.0 17.7 24.4 1.9 (46.3) 37.4 7.9 14.7 10.7 6.9 8.2 6.9 1.0 1.0 0.9 1.9 1.5 2.9 13.1 6.6 8.5 280 7.5 2.1 Oil India 483 BUY 290,494 5,385 601 57.3 60.2 64.1 19.5 4.9 6.6 8.4 8.0 7.5 3.3 2.6 2.1 1.5 1.3 1.2 3.9 4.3 4.8 17.2 15.9 15.3 575 19.0 1.2 Oil & Natural Gas Corporation 269 ADD 2,297,157 42,587 8,556 32.1 31.8 33.5 30.2 (0.9) 5.4 8.4 8.4 8.0 3.5 3.3 2.9 1.4 1.2 1.1 3.6 3.7 4.1 16.5 14.6 13.8 310 15.5 15.1 Petronet LNG 168 ADD 126,150 2,339 750 14.1 15.0 14.2 70.7 6.6 (5.6) 11.9 11.2 11.8 8.1 7.9 7.0 3.2 2.6 2.1 1.5 1.6 1.8 29.7 24.8 19.0 180 7.0 4.4 Reliance Industries 806 SELL 2,401,196 44,516 2,981 61.3 61.8 60.2 (1.1) 0.9 (2.7) 13.1 13.0 13.4 7.7 8.3 7.8 1.3 1.2 1.1 1.1 1.1 1.1 11.7 10.8 9.7 775 (3.8) 59.1 Energy Neutral 7,388,997 136,985 12.1 (0.7) 2.0 9.8 9.9 9.7 5.6 5.5 5.0 1.4 1.2 1.1 2.1 2.5 2.8 13.9 12.6 11.8 Industrials ABB 738 SELL 156,357 2,899 212 8.7 19.9 23.7 192.0 128.7 19.1 84.7 37.0 31.1 54.1 22.8 19.3 6.2 5.4 4.7 0.4 0.4 0.4 7.4 15.6 16.3 500 (32.2) 0.8 BGR Energy Systems 263 REDUCE 18,956 351 72 31.1 27.9 33.9 (30.7) (10.1) 21.5 8.5 9.4 7.7 5.8 5.2 4.9 1.7 1.5 1.3 2.7 2.1 2.6 21.7 16.9 18.0 280 6.6 2.7 Bharat Electronics 1,230 REDUCE 98,396 1,824 80 106.3 110.7 125.7 (0.9) 4.1 13.5 11.6 11.1 9.8 5.9 4.7 3.4 1.7 1.5 1.4 1.7 2.4 2.4 15.3 14.3 14.6 1,300 5.7 1.1 Bharat Heavy Electricals 225 SELL 550,220 10,201 2,448 28.8 28.5 21.9 17.1 (1.0) (23.0) 7.8 7.9 10.3 5.3 5.4 6.2 2.2 1.8 1.6 2.8 2.7 2.1 30.9 24.9 16.4 205 (8.8) 23.9 Crompton Greaves 125 ADD 80,155 1,486 642 5.7 6.9 10.4 (60.0) 20.8 49.6 21.8 18.0 12.1 9.7 10.0 7.1 2.2 2.0 1.8 1.1 1.1 1.3 10.6 11.7 15.7 145 16.0 5.8 Cummins India 489 REDUCE 135,495 2,512 277 22.0 25.1 29.0 (0.9) 13.8 15.7 22.2 19.5 16.8 20.3 16.3 13.9 6.6 5.9 5.2 2.3 2.5 2.9 30.7 30.6 31.0 480 (1.8) 3.2 Kalpataru Power Transmission 88 BUY 13,505 250 153 13.3 13.9 15.8 (4.1) 4.3 14.1 6.6 6.3 5.6 4.7 4.5 4.2 0.7 0.7 0.6 1.7 1.7 1.7 10.7 10.0 10.5 120 36.4 0.5 KEC International 64 BUY 16,325 303 257 6.9 6.8 8.9 (14.1) (1.8) 31.9 9.2 9.4 7.1 5.7 6.4 5.3 1.4 1.3 1.1 1.9 1.6 2.1 16.4 14.1 16.4 80 26.0 0.4 Larsen & Toubro 1,627 REDUCE 996,283 18,470 612 75.7 86.6 96.9 12.4 14.4 11.9 21.5 18.8 16.8 16.4 13.9 12.1 3.2 2.7 2.3 0.9 0.9 0.9 16.1 15.5 14.7 1,625 (0.1) 47.9

Maharashtra Seamless 331 BUY 23,363 433 71 45.0 42.1 47.4 India Daily Summary -November (6.6) (6.5) 12.6 7.4 7.9 7.0 4.5 3.9 3.1 0.8 0.8 0.7 2.7 2.5 2.9 11.8 10.3 10.8 430 29.8 0.1 Siemens 687 REDUCE 233,817 4,335 340 18.0 26.6 31.7 (29.3) 47.8 19.2 38.1 25.8 21.6 23.5 15.8 13.2 5.4 4.6 4.0 0.5 0.8 0.9 14.9 19.3 19.8 640 (6.9) 5.2 Suzlon Energy 16 RS 28,082 521 1,777 (4.0) (3.7) (0.4) (34.1) (6.0) (88.1) (4.0) (4.2) (35.7) 7.8 8.0 6.4 0.5 0.6 0.7 — 1.3 1.3 (11.7) (13.7) (1.8) — — 5.0 Tecpro Systems 155 ADD 7,823 145 50 24.4 24.1 25.9 (9.6) (1.2) 7.5 6.4 6.4 6.0 4.9 4.9 4.6 1.0 0.9 0.8 — — — 17.1 14.7 14.0 200 29.0 0.1 Thermax 585 REDUCE 69,685 1,292 119 32.9 26.5 31.6 4.0 (19.5) 19.4 17.8 22.1 18.5 11.8 14.2 11.4 4.3 3.8 3.3 1.2 1.4 1.5 26.6 18.2 19.2 510 (12.8) 0.5 Voltas 111 REDUCE 36,646 679 331 9.4 8.3 9.1 (3.4) (11.7) 8.7 11.7 13.3 12.2 9.6 9.5 8.0 2.5 2.2 2.0 1.4 2.3 2.5 21.7 17.4 16.9 135 21.8 4.6 Industrials Cautious 2, 465,110 45,701 7.1 7.9 3.4 16.1 14.9 14.4 11.1 10.1 9.5 2.7 2.3 2.1 1.4 1.5 1.4 16.8 15.7 14.3

Source: Company, Bloomberg, Kotak Institutional Equities estimates 64

65 65

Kotak Institutional Equities: Valuation summary of KIE Universe stocks

O/S Target ADVT- 31-Oct-12 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) 2012 2013E 2014E 2012 2013E 2014E 2012 2013E 2014E 2012 2013E 2014E 2012 2013E 2014E 2012 2013E 2014E 2012 2013E 2014E (Rs) (%) (US$ mn) Infrastructure Adani Port and SEZ 127 BUY 256,720 4,759 2,017 5.5 5.9 8.8 20.0 8.3 48.8 23.3 21.5 14.5 20.8 15.1 11.1 5.2 4.3 3.5 0.8 1.0 1.3 23.8 21.9 26.6 150 17.9 3.7 Container Corporation 1,004 ADD 130,509 2,420 130 65.6 82.4 93.6 (3.0) 25.7 13.6 15.3 12.2 10.7 10.1 8.3 6.9 2.3 2.0 1.8 1.6 1.9 2.2 16.1 17.9 17.8 1,050 4.6 0.8 GMR Infrastructure 20 RS 78,043 1,447 3,892 (1.1) 0.1 1.1 236.7 (113.0) 645.0 (17.7) 136.1 18.3 18.4 7.6 4.9 0.8 0.7 0.6 — — — (5.8) 0.8 5.5 — — 3.6 Gujarat Pipavav Port 48 REDUCE 23,012 427 483 1.4 1.4 2.2 (212.6) 4.1 58.4 35.2 33.8 21.4 15.1 13.8 12.1 2.9 1.9 1.7 — — — 10.4 7.0 10.2 52 9.2 0.8 GVK Power & Infrastructure 13 RS 19,977 370 1,579 0.4 1.0 3.5 (60.3) 165.6 243.1 32.5 12.2 3.6 25.9 11.7 6.7 0.6 0.4 0.4 2.4 2.8 6.3 1.8 3.9 11.1 — — 3.4 IRB Infrastructure 122 BUY 40,565 752 332 15.1 12.2 12.5 10.8 (19.0) 2.5 8.1 10.0 9.7 6.8 7.0 6.1 1.4 0.9 0.8 — — — 18.1 11.0 9.1 170 39.3 10.7 Infrastructure Neutral 548,826 10,175 (4.0) 38.8 52.2 25.7 18.5 12.2 16.3 10.6 7.5 2.0 1.6 1.4 0.8 1.0 1.4 7.9 8.6 11.5 Media DB Corp 210 BUY 38,413 712 183 11.0 11.6 14.3 (14.5) 4.9 24.1 19.0 18.1 14.6 11.0 10.1 8.3 4.1 3.8 3.5 2.4 2.9 3.8 23.0 21.9 24.9 260 24.1 0.2 DishTV 75 ADD 80,195 1,487 1,064 (1.0) 0.4 1.4 (45.3) (143.5) 212.8 (74.4) 171.1 54.7 18.1 13.2 10.8 (85.5) (170.8) 80.5 — — — 694.0 (66.6) 557 85 12.7 6.1 Eros International 163 BUY 14,859 275 91 15.8 18.7 21.0 26.8 18.3 12.0 10.3 8.7 7.7 6.9 5.7 5.1 1.8 1.5 1.2 — — — 19.3 18.8 17.4 260 60.0 1.0 Hindustan Media Ventures 125 BUY 9,174 170 73 8.9 10.5 11.0 22.3 17.4 5.0 14.0 11.9 11.3 7.4 6.2 5.5 2.1 1.8 1.7 0.8 1.6 3.2 15.9 16.3 15.4 180 44.0 0.0 HT Media 102 ADD 24,073 446 235 7.0 6.1 8.2 (8.4) (13.3) 34.6 14.5 16.8 12.5 6.3 6.8 4.7 1.5 1.4 1.4 0.4 2.0 3.9 11.0 8.8 11.2 120 17.2 0.3 Jagran Prakashan 99 BUY 31,309 580 316 5.6 6.0 7.0 (17.4) 6.7 16.8 17.6 16.5 14.1 9.7 9.1 7.8 4.2 3.9 3.5 3.5 3.5 3.5 24.5 24.3 25.8 130 31.3 0.4 Sun TV Network 329 ADD 129,771 2,406 394 17.6 17.9 19.9 (10.0) 1.9 11.2 18.7 18.4 16.5 11.8 11.0 9.9 4.9 4.4 4.1 2.9 3.0 3.6 28.6 26.4 26.9 360 9.3 6.7 Zee Entertainment Enterprises 189 REDUCE 179,835 3,334 950 6.0 7.3 8.9 (0.5) 20.6 22.0 31.4 26.0 21.4 22.3 17.7 14.2 3.9 3.7 3.5 0.7 0.8 1.0 13.0 14.9 17.3 190 0.4 8.0 Media Attractive 507,628 9,411 (1.8) 16.9 21.8 26.5 22.7 18.6 13.7 11.9 10.0 4.3 4.0 3.7 1.4 1.6 2.0 16.4 17.6 19.6 Me tals & Mining Coal India 346 BUY 2,187,357 40,552 6,316 23.2 25.8 31.1 34.4 11.0 20.7 14.9 13.4 11.1 9.4 8.3 6.3 5.2 4.1 3.3 2.9 2.2 2.7 38.0 34.1 32.8 390 12.6 13.4 Hindalco Industries 117 REDUCE 223,182 4,138 1,915 17.7 14.9 14.5 38.9 (15.9) (2.7) 6.6 7.8 8.0 6.9 7.3 7.3 0.7 0.6 0.6 1.3 1.3 1.3 11.1 8.6 7.8 115 (1.3) 15.6 Hindustan Zinc 134 ADD 565,728 10,488 4,225 13.2 13.3 14.1 13.2 0.7 6.4 10.2 10.1 9.5 6.4 6.3 4.9 2.1 1.8 1.6 1.8 1.8 1.8 22.6 19.3 17.7 145 8.3 2.2 Jindal Steel and Power 388 REDUCE 363,030 6,730 935 42.4 34.4 45.2 5.6 (18.9) 31.3 9.2 11.3 8.6 7.8 7.9 7.1 2.0 1.7 1.4 0.5 0.5 0.5 24.8 16.5 18.3 445 14.6 24.1 JSW Steel 739 SELL 164,774 3,055 223 24.1 68.9 66.7 (69.3) 185.8 (3.1) 30.6 10.7 11.1 5.5 5.9 6.2 1.0 0.9 0.9 1.0 1.4 1.4 8.2 9.8 8.0 585 (20.8) 21.0 National Aluminium Co. 47 SELL 120,744 2,238 2,577 3.4 2.9 3.4 (19.7) (14.0) 16.9 13.9 16.2 13.8 6.3 6.2 4.7 1.0 1.0 0.9 2.1 2.1 2.1 7.6 6.2 7.0 49 4.6 0.2 Sesa Goa 171 ADD 148,747 2,758 869 31.0 28.6 28.4 (36.2) (7.8) (0.6) 5.5 6.0 6.0 5.3 19.7 14.5 1.0 0.8 0.7 2.7 0.7 0.7 11.1 1.2 2.4 185 8.1 8.1 Sterlite Industries 100 ADD 335,112 6,213 3,361 15.8 15.0 15.4 3.9 (4.8) 2.9 6.3 6.6 6.5 3.8 3.4 2.8 0.7 0.7 0.6 2.0 2.0 2.0 12.1 10.5 9.9 110 10.3 14.4 Tata Steel 392 ADD 380,987 7,063 971 17.2 34.8 49.9 (72.3) 102.1 43.2 22.8 11.3 7.9 7.7 6.5 5.8 0.9 0.8 0.8 3.1 3.1 3.1 6.4 7.7 10.4 390 (0.6) 37.0 Metals & Mining Cautious 4,489,659 83,234 (1.5) 6.5 12.7 11.3 10.7 9.4 7.0 6.8 5.9 1.8 1.6 1.4 2.3 2.0 2.2 15.7 14.9 14.9 Pharmaceutical Apollo Hospitals 780 ADD 108,501 2,012 139 15.8 21.5 27.1 19.3 35.9 26.1 49.4 36.3 28.8 21.2 18.2 15.2 4.3 3.8 3.5 — — — 9.6 11.2 12.7 700 (10.3) 2.6 Biocon 266 ADD 53,100 984 200 16.9 19.9 21.5 (8.0) 17.7 8.2 15.7 13.3 12.3 8.4 6.9 6.1 2.3 2.1 1.9 — — — 15.7 16.5 16.0 265 (0.2) 2.2 Cipla 363 REDUCE 291,701 5,408 803 14.0 18.8 19.7 13.5 34.7 4.6 26.0 19.3 18.4 17.6 13.2 12.0 3.8 3.3 2.8 0.6 0.6 0.6 15.7 16.6 16.4 400 10.1 14.6 Cadila Healthcare 871 ADD 178,377 3,307 205 31.9 39.6 49.0 (8.2) 24.2 23.7 27.3 22.0 17.8 21.0 16.1 13.0 6.9 5.7 4.6 0.9 1.2 1.5 27.8 28.3 28.7 980 12.5 1.7

Dishman Pharma & chemicals 96 REDUCE 7,771 144 81 7.0 9.7 12.0 (29.0) 38.7 23.7 13.7 9.9 8.0 7.7 6.4 5.6 0.9 0.8 0.8 — — — 4.6 7.2 8.4 50 (47.7) 2.8 DailySummary India - November 1,2012 Divi's Laboratories 1,199 ADD 159,095 2,949 133 40.2 52.1 59.9 24.0 29.7 14.8 29.8 23.0 20.0 22.6 17.4 14.3 7.5 6.2 5.2 1.1 1.4 1.6 27.1 29.5 28.2 1,197 (0.2) 5.8 Dr Reddy's Laboratories 1,757 ADD 298,916 5,542 170 84.0 101.5 106.0 29.4 20.8 4.5 20.9 17.3 16.6 13.2 11.6 10.8 5.2 4.2 3.5 0.8 0.8 0.8 23.4 24.7 21.8 1,940 10.4 11.0 GlaxoSmithkline Pharmaceuticals 2,005 SELL 169,937 3,150 85 74.3 83.2 91.1 8.8 12.0 9.6 27.0 24.1 22.0 19.1 17.7 15.8 8.8 8.3 7.7 2.2 2.6 3.2 32.4 35.3 36.4 2,035 1.5 1.3 Glenmark Pharmaceuticals 428 REDUCE 115,915 2,149 271 21.9 20.8 27.7 31.1 (4.8) 32.9 19.6 20.6 15.5 22.4 13.9 11.0 4.8 4.0 3.3 — 0.6 0.8 20.7 21.3 23.3 405 (5.4) 3.7 Jubilant Life Sciences 222 REDUCE 35,420 657 159 22.9 31.0 37.4 58.7 35.4 20.7 9.7 7.2 5.9 8.5 6.6 5.6 1.5 1.2 1.0 0.9 1.3 1.8 16.2 19.4 19.7 185 (16.8) 1.1 Lupin 566 ADD 253,203 4,694 447 19.5 28.3 29.6 1.2 45.4 4.6 29.1 20.0 19.1 20.6 12.6 11.8 6.2 5.0 4.1 0.6 0.9 0.9 23.9 28.0 23.8 600 5.9 11.5 Ranbaxy Laboratories 526 SELL 222,031 4,116 422 (18.5) 22.0 25.2 (145.7) 218.4 14.8 (28.4) 24.0 20.9 15.5 12.7 14.4 7.7 5.9 4.7 — — — (68.5) 28.0 25.3 436 (17.1) 10.6 Sun Pharmaceuticals 694 REDUCE 718,843 13,327 1,036 25.0 34.6 33.0 42.5 38.4 (4.6) 27.8 20.1 21.0 20.5 12.9 12.9 5.4 4.4 3.8 0.6 0.8 0.9 21.9 24.2 19.4 664 (4.3) 12.1 Ph armaceuticals Attractive 2,612,811 48,439 (8.2) 51.3 7.3 30.3 20.0 18.6 17.4 12.9 12.0 5.1 4.3 3.6 0.7 0.8 1.0 17.0 21.4 19.5 Real Estate DLF 203 NR 347,715 6,446 1,715 7.1 12.7 16.9 (22.1) 79.7 33.1 28.7 16.0 12.0 15.0 11.4 8.7 1.3 1.2 1.1 1.2 1.5 1.7 4.5 7.6 9.5 — — 29.7 Housing Development & Infrastructure 96 NR 40,203 745 419 22.0 28.8 28.8 11.3 30.5 0.2 4.4 3.3 3.3 5.2 4.7 4.2 0.4 0.3 0.3 — 1.6 2.1 8.3 10.8 9.6 — — 36.0 Mahindra Life Space Developer 405 NR 16,532 306 41 29.4 29.8 34.3 18.0 1.3 15.1 13.8 13.6 11.8 13.5 10.7 10.3 1.5 1.4 1.2 1.1 1.2 1.4 11.2 10.4 11.0 — — 0.2 Oberoi Realty 273 NR 90,018 1,669 330 14.1 14.3 22.4 (10.5) 1.4 57.3 19.4 19.2 12.2 15.9 12.4 7.8 2.4 2.2 1.9 0.7 0.9 1.1 13.1 12.0 16.9 — — 0.5 Phoenix Mills 201 NR 29,070 539 145 7.3 10.7 11.5 14.9 46.9 7.9 27.6 18.8 17.4 21.0 14.7 14.0 1.7 1.6 1.5 1.0 1.0 1.0 6.4 8.9 9.0 — — 0.4 Sobha Developers 359 NR 35,185 652 98 21.4 25.1 37.4 13.8 17.1 49.2 16.8 14.3 9.6 10.0 9.0 6.3 1.8 1.6 1.4 1.4 1.4 1.4 10.9 11.7 15.6 — — 0.9

KOTAK INSTITUTIONAL EQUITIES RESEARCH Unitech 23 NR 60,437 1,120 2,616 0.9 1.8 2.3 (56.1) 84.8 32.7 24.3 13.2 9.9 26.9 14.7 11.3 0.5 0.5 0.5 0.4 0.4 0.4 2.1 3.7 4.7 — — 8.8 Real Estate Cautious 619,161 11,479 (17.4) 52.1 26.7 19.6 12.9 10.1 13.4 10.3 8.1 1.1 1.0 0.9 1.2 1.5 1.7 5.4 7.7 9.0

Source: Company, Bloomberg, Kotak Institutional Equities estimates

KOTAK INSTITUTIONAL EQUITIES RESEARCH Kotak Institutional Equities: Valuation summary of KIE Universe stocks India DailyIndia Summary-November 2012 1,

O/S Target ADVT- 31-Oct-12 Mkt cap. shares EPS (Rs) EPS growth (%) PER (X) EV/EBITDA (X) Price/BV (X) RoE (%) price Upside 3mo Dividend yield (%) Company Price (Rs) Rating (Rs mn) (US$ mn) (mn) 2012 2013E 2014E 2012 2013E 2014E 2012 2013E 2014E 2012 2013E 2014E 2012 2013E 2014E 2012 2013E 2014E 2012 2013E 2014E (Rs) (%) (US$ mn) Technology HCL Technologies 608 REDUCE 434,720 8,059 715 34.6 46.8 50.0 51.2 35.5 6.8 17.6 13.0 12.2 10.9 8.2 7.6 4.4 3.4 2.8 1.3 1.3 1.3 25.1 28.9 25.2 575 (5.4) 13.5 Hexaware Technologies 112 REDUCE 32,872 609 294 9.1 12.5 12.9 207.9 37.9 3.1 12.3 8.9 8.7 10.8 6.3 5.7 3.2 2.8 2.5 2.7 5.6 5.8 26.9 33.7 30.4 130 16.1 3.6 Infosys 2,363 REDUCE 1, 356,362 25,146 574 144.9 160.5 168.5 21.0 10.8 5.0 16.3 14.7 14.0 10.7 9.5 8.5 4.3 3.7 3.1 1.9 2.2 2.3 29.0 26.9 24.1 2,350 (0.6) 50.7 Mahindra Satyam 109 ADD 128,419 2,381 1,176 10.2 10.6 11.2 142.3 4.2 5.4 10.7 10.3 9.8 9.8 6.0 5.2 4.3 3.0 2.4 — — 2.0 50.4 35.0 28.1 118 8.1 11.0 Mindtree 659 ADD 27,132 503 41 53.1 71.1 77.4 115.1 34.0 8.8 12.4 9.3 8.5 9.2 5.4 5.2 2.8 2.3 2.0 0.8 2.2 3.5 25.2 27.4 24.8 750 13.8 1.5 Mphasis 387 SELL 81,560 1,512 211 39.0 38.0 39.3 (24.6) (2.7) 3.5 9.9 10.2 9.9 8.3 7.1 6.2 2.1 1.8 1.5 1.2 1.3 1.4 22.8 18.9 16.8 375 (3.1) 1.2 Polaris Financial Technology 120 REDUCE 11,949 222 100 20.8 21.7 19.9 7.4 4.7 (8.2) 5.8 5.5 6.0 3.2 2.6 2.4 1.0 0.8 0.8 3.3 3.4 3.6 18.1 16.2 13.3 120 0.1 2.1 TCS 1,316 REDUCE 2, 574,697 47,733 1,957 54.4 69.5 76.1 22.0 27.8 9.5 24.2 18.9 17.3 17.2 13.7 12.4 7.9 6.5 5.4 1.9 2.1 2.3 36.8 37.6 34.0 1,225 (6.9) 28.7

Tech Mahindra 948 ADD 120,927 2,242 128 80.1 96.0 102.9 63.5 19.8 7.2 11.8 9.9 9.2 15.1 10.6 9.4 3.0 2.6 2.3 0.4 0.6 0.8 28.4 28.8 26.9 1,000 5.4 15.8 Wipro 351 REDUCE 861,196 15,966 2,456 22.7 27.1 29.4 5.2 19.4 8.6 15.4 12.9 11.9 10.6 8.4 7.4 3.0 2.5 2.2 1.4 1.7 1.9 21.2 21.4 19.8 375 6.9 9.8 Technology Cautious 5, 629,835 104,372 21.2 20.3 7.5 18.1 15.0 14.0 12.7 10.3 9.2 4.7 3.9 3.3 1.7 2.0 2.2 26.0 25.9 23.6 Telecom Bharti Airtel 270 ADD 1,024,023 18,984 3,798 11.2 8.6 12.9 (29.6) (23.7) 50.2 24.0 31.5 21.0 7.1 6.7 5.7 2.0 1.9 1.8 — 0.6 0.5 8.6 6.2 8.8 300 11.3 35.1 IDEA 86 ADD 282,762 5,242 3,303 2.2 3.3 6.0 (19.6) 52.3 81.4 39.1 25.7 14.2 8.2 6.9 5.4 2.2 2.0 1.8 — — — 5.7 8.1 13.2 90 5.1 3.2 MTNL 26 RS 16,569 307 630 (9.1) (8.4) (8.3) (11.9) (8.1) (1.7) (2.9) (3.1) (3.2) 0.3 0.4 0.4 0.2 0.2 0.2 — — — (5.7) (5.5) (5.8) — — 6.3 Reliance Communications 54 SELL 111,456 2,066 2,064 4.5 3.3 4.6 (31.0) (26.0) 38.2 12.0 16.2 11.7 8.3 6.9 5.9 0.3 0.3 0.3 — — — 2.4 1.9 2.5 45 (16.7) 13.1 Tata Communications 244 REDUCE 69,440 1,287 285 (27.9) (27.5) (21.2) 12.0 (1.5) (23.0) (8.7) (8.9) (11.5) 9.9 7.6 6.9 3.0 4.2 6.4 — — — (27.0) (39.7) (44.2) 215 (11.8) 0.6 Telecom Cautious 1,504,251 27,887 (34.4) (17.9) 80.0 33.1 40.4 22.4 7.7 6.9 5.8 1.3 1.3 1.2 — — 0.3 4.0 3.2 5.5 Utilities Adani Power 48 SELL 105,076 1,948 2,180 (0.4) (7.4) (1.9) (118.0) 1,645.4 (74.3) (113.7) (6.5) (25.3) 35.0 44.3 12.9 1.7 2.5 2.7 — — — (1.5) (31.3) (10.2) 33 (31.5) 2.6 CESC 275 REDUCE 34,314 636 125 21.7 25.2 35.2 (9.3) 16.0 39.7 12.6 10.9 7.8 8.1 8.5 5.6 0.6 0.5 0.5 — 1.8 2.0 4.5 5.1 6.7 350 27.4 3.1 JSW Energy 64 SELL 104,632 1,940 1,640 2.0 4.1 4.2 (60.6) 100.8 4.3 31.6 15.7 15.1 14.8 8.5 6.6 1.8 1.6 1.5 — — — 5.8 11.0 10.3 50 (21.6) 1.8 Lanco Infratech 12 RS 26,787 497 2,223 (0.5) (0.7) 1.0 (131.8) 39.2 (233.2) (23.0) (16.5) 12.4 10.5 10.3 6.9 0.6 0.6 0.6 — — — (2.5) (3.6) 4.8 — — 6.6 NHPC 22 BUY 265,081 4,914 12,301 2.5 2.0 2.3 84.5 (21.6) 17.1 8.7 11.0 9.4 8.7 9.2 7.3 0.9 0.9 0.8 3.1 2.4 2.9 11.1 8.2 9.0 25 16.0 2.8 NTPC 165 REDUCE 1, 363,388 25,276 8,245 10.8 12.7 13.7 (1.1) 17.4 7.8 15.3 13.0 12.1 12.4 10.7 9.7 1.9 1.7 1.6 2.0 2.3 2.5 12.6 13.6 13.5 180 8.9 9.6 Power Grid 114 ADD 527,789 9,785 4,630 7.1 8.1 10.0 22.9 14.3 23.8 16.1 14.1 11.4 12.8 11.5 9.1 2.2 2.0 1.8 1.9 2.2 2.7 14.6 15.1 16.9 140 22.8 7.5 Reliance Infrastructure 470 BUY 123,493 2,289 263 60.3 66.7 73.6 4.0 10.6 10.3 7.8 7.0 6.4 10.0 8.7 7.4 0.5 0.5 0.5 2.2 2.4 2.4 8.9 9.8 10.2 890 89.6 24.0 Reliance Power 92 SELL 259,334 4,808 2,805 3.1 3.2 3.1 14.0 3.0 (2.7) 29.9 29.0 29.8 47.8 26.9 16.7 1.5 1.4 1.3 — — — 5.0 4.9 4.6 76 (17.8) 10.8 Tata Power 106 ADD 261,768 4,853 2,468 4.6 5.9 6.5 (40.6) 29.0 9.8 23.0 17.8 16.3 11.4 8.5 7.2 1.9 1.8 1.7 1.4 1.6 1.6 8.1 10.6 10.8 109 2.8 7.4 Utilities Attractive 3,071,661 56,946 (1.8) 3.6 20.8 16.0 15.4 12.8 13.0 11.4 9.1 1.5 1.4 1.3 1.7 1.9 2.1 9.5 9.2 10.3 Others Carborundum Universal 153 REDUCE 28,602 530 187 11.6 10.9 12.8 27.0 (5.7) 17.3 13.2 14.0 11.9 8.1 8.0 6.7 2.8 2.4 2.0 1.6 1.5 1.8 26.0 20.7 20.6 150 (2.0) 0.1 Coromandel International 283 SELL 79,967 1,483 283 22.5 23.4 23.7 (8.5) 4.4 1.1 12.6 12.1 11.9 10.0 9.9 7.4 3.3 2.8 2.5 2.5 2.6 2.7 27.7 24.0 20.9 260 (8.1) 0.6 Havells India 577 REDUCE 71,989 1,335 125 31.5 30.5 38.4 69.0 (2.9) 25.6 18.3 18.9 15.0 11.6 10.5 8.6 7.1 4.9 3.9 1.1 1.2 1.4 45.6 30.7 28.8 600 4.0 2.9 Jaiprakash Associates 87 BUY 185,745 3,444 2,126 2.9 6.5 10.8 (51.5) 123.0 65.6 29.9 13.4 8.1 11.9 8.9 6.8 1.6 1.5 1.3 — — — 5.6 11.6 16.9 86 (1.5) 27.8 Jet Airways 336 SELL 28,972 537 86 (184.6) (34.2) 21.5 1,735.6 (81) (162.9) (1.8) (9.8) 15.6 (589.1) 10.6 7.0 22.1 (17.6) 136.7 — — — 6.0 6.0 6.0 312 (7.0) 14.6 Rallis India 142 BUY 27,527 510 194 5.1 6.7 8.6 (21.6) 32 27.4 27.8 21.1 16.5 14.1 12.2 9.1 5.0 4.3 3.7 1.6 1.6 1.6 20.4 20.9 24.1 155 9.5 0.9 SpiceJet 34 BUY 14,830 275 441 (13.7) 0.2 2.4 (650.1) (101.4) 1,103.7 (2.4) 171.2 14.2 (4.3) 19.1 7.2 (9.3) (9.9) (32.4) — — — (746) (5.6) (106.5) 45 33.9 3.4 Tata Chemicals 316 REDUCE 80,618 1,495 255 32.9 38.8 42.3 25.4 17.9 9.0 9.6 8.2 7.5 5.2 4.4 3.7 1.3 1.1 1.0 3.8 4.7 5.4 18.6 19.5 19.4 365 15.3 2.9 United Phosphorus 114 REDUCE 52,692 977 462 12.0 15.0 16.0 (0.4) 24.9 6.5 9.5 7.6 7.1 5.3 4.8 4.3 1.3 1.1 1.0 2.2 2.2 2.2 14.5 16.0 15— 120 5.2 2.1 Others 570,942 10,585 (67.4) 258.0 43.2 49.1 13.7 9.6 11.6 8.2 6.3 2.1 1.9 1.6 1.4 1.5 1.7 4.3 13.8 17.0 KS universe (b) 48,899,230 906,549 8.9 10.2 12.8 15.1 13.7 12.1 9.7 8.7 7.5 2.3 2.1 1.8 1.6 1.8 2.0 15.2 15.0 15.1 KS universe (b) ex-Energy 41,510,232 769,563 8.0 13.5 15.7 16.7 14.7 12.7 11.5 9.9 8.3 2.6 2.3 2.1 1.5 1.7 1.8 15.6 15.8 16.1 KS universe (d) ex-Energy & ex-Commodities 35,425,438 65 6,756 9.1 14.4 16.3 17.6 15.4 13.3 12.8 10.7 8.9 2.8 2.5 2.2 1.4 1.6 1.8 15.6 15.9 16.4

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. India Daily Summary -November (c) EV/Sales & EV/EBITDA for KS universe excludes Banking Sector. (d) Rupee-US Dollar exchange rate (Rs/US$)= 53.94 Source: Company, Bloomberg, Kotak Institutional Equities estimates 66

Disclosures

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% 35.5% * The above categories are defined as follows: Buy = We expect this stock to deliver more than 15% returns over the 30% next 12 months; Add = We expect this stock to deliver 23.3% 23.3% 5-15% returns over the next 12 months; Reduce = We 18.0% expect this stock to deliver -5-+5% returns over the next 20% 12 months; Sell = We expect this stock to deliver less than - 5% returns over the next 12 months. Our target prices are 10% 7.6% also on a 12-month horizon basis. These ratings are used 3.5% illustratively to comply with applicable regulations. As of 1.2% 0.0% 30/09/2012 Kotak Institutional Equities Investment Research 0% had investment ratings on 172 equity securities. BUY ADD REDUCE SELL

Source: Kotak Institutional Equities As of September 30, 2012

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.

KOTAK INSTITUTIONAL EQUITIES RESEARCH 68

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