INDIA DAILY

November 19, 2010 India 18-Nov 1-day1-mo 3-mo Sensex 19,931 0.3 (1.0) 10.4

Nifty 5,999 0.2 (1.1) 10.8

Contents Global/Regional indices New releases Dow Jones 11,181 1.6 0.3 7.4 Aviation: Clear skies indicated Nasdaq Composite 2,514 1.6 1.4 13.5 FTSE 5,769 1.3 0.5 8.8 Change in Recommendation Nikkie 10,077 0.6 5.6 7.6 SKS Microfinance: Multiple business challenges, some positive trends, crucial indicators Hang Seng 23,625 (0.1) (0.6) 12.1

awaited KOSPI 1,934 0.3 4.1 8.6 Updates Value traded – India Dabur India: Namaste acquisition: A smart bolt-on Cash (NSE+BSE) 246 214 210 Derivatives (NSE) 2,160 1,409 1,057 Tata Chemicals: Management meeting update Deri. open interest 1,735 1,839 1,808 Telecom: October GSM net-adds - everyone joins the party

Telecom: Thoughts on the CAG report and the way ahead

Industrials: Capex cycle picking up definitive momentum, recent IIP data Forex/money market notwithstanding Change, basis points Cement: When it rains, it pours 18-Nov 1-day 1-mo 3-mo Rs/US$ 45.2 (15) 85 (135) 10yr govt bond, % 8.0 (4) (7) 8 Net investment (US$mn) News Round-up 16-Nov MTD CYTD ` The promoters of Patni Computer (PATNI IN) & General Atlantic have revived FIIs (4) 3,639 28,471 attempts to sell their over 60% stake in the co. after scaling down expectations of a MFs (17) 153 (282)

price per share for above the current one. (ECNT) Top movers -3mo basis ` GAIL India (GAIL IN) has struck a long-term natural gas supply deal with National Change, % Fertilisers Ltd and Gujarat Narmada Valley Fertiliser Company Ltd, which have decided Best performers 18-Nov 1-day 1-mo 3-mo to convert their manufacturing plants from naphtha to gas, a more efficient IDBI IN Equity 188.3 1.0 18.0 43.6 feedstock. (FNLE) NEST IN Equity 3762.3 (3.4) 13.5 33.6 IBULL IN Equity 203.0 (6.3) 12.4 32.8 ` The Telecom Regulatory Authority of India on Thursday suggested to the Government DRRD IN Equity 1767.9 0.9 8.6 31.9 to cancel 69 of the 127 licenses given to six companies including Etisalat DB (earlier SUNP IN Equity 2289.0 (0.6) 11.8 27.8 known as Swan Telecom), Uninor (Unitech), Videocon (Datacom), Loop Telecom and Worst performers Aircel. (THBL) FTECH IN Equity 1043.4 (1.1) (9.7) (23.0) GMRI IN Equity 49.7 (0.2) (8.9) (22.2) ` National Aluminium co. (NACL IN), JSW Steel (JSTL IN) & Jaiprakash Ind. (JPA IN) have IVRC IN Equity 129.2 (2.7) (16.9) (22.1) evinced interest in setting up an alumina refinery & aluminium smelter in Kutch, HDIL IN Equity 240.1 1.5 (11.2) (17.2) Gujarat. (ECNT) SCS IN Equity 72.3 (2.8) (11.8) (15.1)

` Sun Pharmaceutical Industries (SUNP IN) said it had received approval from US health regulator to market generic Clarinex tablets and Tiazac capsules, used in treating nasal allergies and hypertension, respectively, in the American market. (BSTD) ` M&M (MM IN) lines up 7 new vehicles that will hit the road over the next 15-18 months. (TTOI) ` Sterlite Technologies Ltd (SOTL IN) said it has tied up with Jiangsu Tongguang Communication Company Ltd to form a joint venture company in China called Jiangsu Sterlite & Tongguang Optical Fibers Co Ltd. (BSTD) ` ITC (ITC IN) said it would increase the production of biscuits in the country by up to 20% every year, as it plans to drive growth in the segment in the wake of robust demand. (BSTD)

Source: ECNT= Economic Times, BSTD = Business Standard, FNLE = Financial Express, THBL = Business Line.

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

ATTRACTIVE Aviation

India NOVEMBER 18, 2010 INITIATING COVERAGE BSE-30: 19,865

Clear skies indicated. The aviation sector is poised for a sustained turnaround with rising profitability after battling headwinds for three years on account of excess capacity. We believe the upturn will be backed by: (1) Rising yields as capacity additions lag demand growth in the industry and (2) improving cash flows leading to deleveraging of balance sheets. We see efficient players in the industry thriving and improving their market shares in this scenario.

Strong up-cycle likely to continue for the next 2-3 years

After significant capacity rationalizations in the industry in the past two years and strong passenger growth, capacity is perfectly aligned to demand currently. We expect growth in capacity (Average Seat Kilometers, ASKMs) at 11.3% CAGR in FY2010-13E to lag growth in demand (Passenger Kilometers, Pax-kms) at 13.8% CAGR in the same period, leading to strong yields (Revenue per Passenger Kilometer or RPKM), which will likely drive strong operating results in the next two years.

Players that expand capacity would be the biggest beneficiaries

The major players in the industry are not in a position to expand capacity till their balance sheets improve. In such a scenario, players that are able to expand capacity would be the biggest beneficiaries. We believe Spicejet and Jet Airways fit the bill as they would increase their capacities in the domestic segment at CAGRs of 20% and 9%, respectively, during FY2010-13E.

Strong cash flows to deleverage the balance sheet

We expect strong yields will likely lead to strong cash-flow generation that would deleverage companies’ balance sheets. This should re-rate the sector as debt concerns wane. We expect Jet to generate free cash flows of Rs55 bn in FY2011-13E, which will likely be used to repay debt in the absence of any significant capex requirements.

We initiate coverage on the sector with an attractive view driven by strong market outlook

We initiate coverage on the sector with an attractive view based on a strong outlook for the next 2-3 years, which will likely drive strong earnings growth. We initiate coverage on Spicejet (BUY, TP: Rs120) and Jet Airways (BUY, TP: Rs1,220). We use EBITDAR-based relative valuations to arrive at our fair value. Key risks to our estimates stem from: (1) Large increase in the crude oil price and (2) adverse geo-political developments in India (epidemic outbreaks, adverse political developments leading to social unrest etc.).

Key Calls Spicejet Jet Airways

Current price (Rs) 84 900

Target price (Rs) 120 1220

Upside (%) 42.9 35.6 Rating BUY BUY

Market cap (Rs bn) 30.2 77.7

Source: Kotak Institutional Equities estimates

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

Aviation India

Valuations

We set a 12-month target price of Rs1,220 for Jet Airways (Jet) based on 7.5X FY2012E EBITDAR and a target price of Rs120 for Spicejet, based on 8.3X FY2012E EBITDAR. Our target prices imply upside potential of ~42% for Spicejet and ~35% for Jet Airways. We find the valuations of Jet and Spicejet reasonable at 6.7X and 6.8X FY2012E EBITDAR and 9.6X and 9.2X FY2012E EPS, respectively. We prefer EBITDAR-based valuations to evaluate aviation companies to neutralize the impact of varying fleet ownership structures. We believe the up-cycle in the Indian aviation market will likely last the next 2-3 years. The performance of stocks in this up-cycle will depend on the following factors: (1) Capacity addition, (2) operating leverage in the business model and (3) extent of deleveraging based on cash flows.

Attractive valuations + high earnings growth = BUY

We initiate coverage on Jet and Spicejet with a BUY rating and 12-month target prices of Rs1,220 and Rs120, based on 7.5X and 8.3X FY2012E EBITDAR. We find current valuations of aviation stocks attractive considering the strong earnings growth expected in the next two years.

` Current valuations. Jet trades at 6.7 X FY2012E EBITDAR and 9.6X FY012E EPS and Spicejet trades at 6.8X FY2012E EBITDAR and 9.2X FY2012E EPS. We find current valuations attractive given the strong earnings growth expected in the next two years.

` Strong earnings growth. Aviation is a high fixed-cost business. In an environment of rising yields, it should translate into high growth in the bottom line. We expect net profit to grow at a CAGR of 56% and 30% for Jet and Spicejet, respectively, during FY2011- 13E.

We use different target multiples Valuation summary for our coverage universe, FY2012E basis (Rs mn)

Spicejet Jet Airways EBITDAR 10,023 38,617 EV/EBITDAR multiple (X) 8.3 7.5 EV 82,689 289,627 Rentals capitalised at 7X (41,611) (84,083) Cash/(Debt) 7,265 (100,430) Implied equity value 48,343 105,114 Value per share (Rs) 120 1,218

Source: Kotak Institutional Equities estimates

We value Spicejet at a premium to Jet

We value Spicejet at 8.3X FY2012E EBITDAR—a premium of ~10% to our 7.5X multiple for Jet on account of:

` Low-cost business model; higher sustainability of operations. Spicejet’s low-cost business model is better placed to weather adverse business cycles. Typically, during business down-cycles, the premium segment is the worst hit as companies try to reduce costs by saving on travel expenses. Demand at lower price points is more resilient as compared to the premium end. In such a scenario, the ability to offer cheaper tickets on account of the lean cost structure becomes a big competitive advantage to ensure higher occupancy. At 6% lower PLF, Jet would just about break even at the PAT level at our FY2012E numbers (maintaining our cost assumptions) while Spicejet would make a reasonable profit of Rs1.9 bn.

KOTAK INSTITUTIONAL EQUITIES RESEARCH 3 India Aviation

Sensitivity for Jet, FY2012E PAT to varying PLF and crude price Sensitivity for Spicejet, FY2012E PAT to varying PLF and crude assumptions price assumptions

Jet Airways PLF (%) (0 denotes base Spicejet PLF (0 denotes base PLF of PLF of 80%) 78.5%) FY2012E PAT (Rs bn) (6.0) (3.0) 0.0 3.0 6.0 FY2012E PAT (Rs bn) (6.0) (3.0) 0.0 3.0 6.0 (10.0) 4.3 8.1 12.0 15.8 19.7 (10.0) 2.9 3.8 4.7 5.6 6.5 Crude price Crude price (5.0) 2.3 6.2 10.0 13.9 17.8 (5.0) 2.4 3.3 4.2 5.1 6.0 (0 denotes (0 denotes 0.0 0.4 4.2 8.1 12.0 15.8 0.0 1.9 2.8 3.7 4.6 5.5 base price base price 5.0 (1.6) 2.3 6.2 10.0 13.9 of $81) of $81) 5.0 1.4 2.3 3.2 4.1 5.0 10.0 (3.5) 0.4 4.2 8.1 12.0 10.0 0.9 1.8 2.7 3.6 4.5

Source: Kotak Institutional Equities estimates Source: Kotak Institutional Equities estimates

` Higher capacity additions; increasing market share: We expect Spicejet and Jet to increase capacity at CAGRs of 20% and 9%, respectively, in a market where aggregate supply in terms of ASKMs would grow at 12% CAGR during FY2010-13E. As Spicejet expands its capacity at a rate higher than growth in the market, it will likely gain market share. We expect Spicejet’s market share in the domestic segment to improve to 18.5% by FY2013E as compared to 12% at the end of FY2010. During the same period, we expect Jet’s market share to fall to 23.4% from 26% at the end of FY2010. In a capacity- constrained market, we believe a company which is able to expand at a higher rate deserves to trade at a premium.

` Stronger balance sheet: Spicejet had a net cash position (Rs4 bn) at the end of FY2010, excluding debt on account of FCCB (converted into equity). We expect Spicejet to generate ~Rs11 bn of operating cash flows during FY2011-13E, which will lead to net cash position of Rs7.6 bn in FY2013E, after paying Rs9 bn for aircraft deliveries. A strong balance sheet should provide it sufficient financial headroom to expand capacity at rates higher than the market.

On the other hand, even after generating operating cash flows of Rs55 bn during FY2011-13E, Jet would have a net debt/EBITDA ratio of three in FY2013E, which is not comfortable for a business which is cyclical.

Better return ratios: Spicejet’s business model is more efficient than Jet’s as illustrated by its higher ROE. We highlight this using numbers for FY2012-13E (FY2011E numbers could skew some of the return ratios for the companies as the period is too early in the cycle of profitable operations

4 KOTAK INSTITUTIONAL EQUITIES RESEARCH

BUY SKS Microfinance (ADD)

Banks/Financial Institutions NOVEMBER 18, 2010 CHANGE IN RECO. Coverage view: Attractive

Multiple business challenges, some positive trends. SKS’s management highlighted Price (Rs): 639 that centre meetings in AP have picked up to about 97% from about 54% the week Target price (Rs): 950 before—clearly a good development. However, collection efficiency in AP is crucial due BSE-30: 19,931 to its transition to a monthly collection cycle. SKS’s liquidity position and low (27%) exposure to AP are positive factors. The current operating environment makes it difficult to predict near-term business performance but regulatory pressures will likely constrain SKS’s growth traction in the near term even as long-term prospects remain strong. We are accordingly reducing our growth estimates and tweaking down margins. The stock has factored in most risk, we upgrade to BUY with a price target of Rs950.

Company data and valuation summary SKS Microfinance Stock data Forecasts/Valuations 2010 2011E 2012E 52-week range (Rs) (high,low)1,492-638 EPS (Rs) 26.9 35.5 55.9 Market Cap. (Rs bn) 47.1 EPS growth (%) 61.1 31.9 57.4 Shareholding pattern (%) P/E (X) 23.7 18.0 11.4 Promoters 37.1 NII (Rs bn) 6.0 10.1 14.1 FIIs 17.3 Net profits (Rs bn) 1.7 2.6 4.2 MFs 0.9 BVPS 126.1 260.1 320.6 Price performance (%) 1M 3M 12M P/B (X) 5.1 2.5 2.0 Absolute (43.9) 0.0 0.0 ROE (%) 21.7 18.0 19.3 Rel. to BSE-30 (43.3) 0.0 0.0 Div. Yield (%) 0.0 0.0 0.0

A challenging phase for MFIs, SKS is better placed

We believe that the current phase (several regulatory changes, uncertainties on near-term growth etc.) is transitionary in nature. We believe that the microfinance industry can effectively increase financial inclusion and regulators will continue to like well-run MFIs that manage the interest of all stakeholders. The current regulatory changes in AP and likely impact on the MFI industry is a cause for concern. However, SKS has just about 27% exposure to AP as compared to 50%+ for most other MFIs. Thus, the likely impact of lower collections in AP will be relatively low for SKS. Further, post the IPO, SKS is well capitalized as compared to other MFIs that have a high debt-equity ratio. As such, banks appear more comfortable with SKS. According to a recent press release, SKS holds approved credit limits of Rs25 bn from various banks. In the past month (since the AP Ordinance), about seven banks have disbursed Rs3 bn. In turn, SKS has disbursed Rs1.05 bn microfinance loans in October 2010. We believe a sharp correction in the stock price was driven by fears on the deteriorating financial heath of MFIs, ignoring its relative positives. The current stock price factors in most risk, we upgrade our rating to BUY with a target price of Rs950.

Some positive developments on the ground; yet key indicators awaited SKS held about 97% centre meetings last week. This is significantly higher than 54% meetings held in week-ended October 29, 2010. However, the company commenced collections only this week as the regulation in AP now requires SKS to shift to a monthly collection cycle.

SKS has appealed against the Ordinance and particularly the shift to a monthly collection cycle; we expect a court hearing on this very shortly. The High Court verdict in this case and the trends in collections over the next few days will likely be crucial lead indicators in medium-term business performance. Collections in other parts of India remain high as in the past. The management is in dialogue with policymakers and government officials from other states to understand their thinking in this matter.

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 SKS Microfinance

Interest rates will be gradually brought down in other states

SKS will bring down interest rates to 24% in other states over time. The timeframe for reducing the interest rates has not yet been finalized. As such it will be challenging to calculate the financial impact of the same. The impact of lower growth traction, on the back of the regulatory changes, will likely be higher.

Notably, SKS has proactively reduced lending rates in the past. Reducing lending rates to pass on benefits of higher operating leverage and better credit rating is a part of its business plan. However, it appears that the interest rate change may now be earlier than expected despite the fact that its borrowings cost will likely move up (due to higher interest rates in the system and somewhat higher risk perception of the MFI industry).

Shift to a monthly collection cycle can pose operational challenges

Based on a recent notification issued by the Government of AP, MFI’s have shifted to a monthly collection cycle from the earlier practice of a weekly cycle. This will be applicable for existing loans as well. SKS’s borrowers generate income on a daily or weekly basis. As such, a weekly collection cycle augurs well for borrowers, most of whom do not have access to bank accounts. A monthly collection cycle will increase risk of delinquencies and NPLs though operating expenses will likely be lower in this scenario. SKS is changing its operating model in AP including customer interface, MIS, passbook format etc. to adapt to the same. According to the management, the impact, if any, will likely be within the transition period only. Notably, Basix, one of the largest MFIs in India, has effectively executed a monthly collection model.

Revising earnings to factor lower near-term growth and margins

The spate of operational challenges will affect SKS growth traction over the medium-term although we remain positive on the long-term opportunity for SKS. We find it challenging to gauge the extent of impact on SKS in light of short tenure of its loans and operational leverage of its business. However, given the negative news-flows for the MFI industry, SKS rapid growth traction will clearly need to take a pause in the near term. We reduce our estimates and cut price target to Rs950 from Rs1,400 earlier. The current market price seems to have already factored most risks, upgrade to BUY from ADD.

Key changes to our model

` Lower loan growth in near term. FY2011E loan book of Rs72 bn as Rs83 bn assumed earlier.

` Decline in lending rates. Lending rates will decline to 24-24.5% over next few quarters. Borrowings costs are unlikely to decline in this environment (as interest rates move up and fear of delinquencies increases). NIMs will likely remain stable to improve marginally as due to lower leverage even as spreads contract.

` Lower other income. Other income, primarily on account of insurance distribution, will likely be lower than expected. SKS has not sold group insurance policies this year. We are assuming lower business in this segment in FY2012E and FY2013E as well.

` Credit cost rise and operating expenses will likely decline. We believe the shift to a monthly repayment cycle will increase delinquencies. SKS currently recognizes NPLs on 8 weeks past due basis. The company may revisit this policy as monthly collection cycle will imply NPL recognition if the borrower misses two installments. Our revised estimates factor about 5-7% gross NPL levels in AP. On the positive side, monthly centre meetings and slower growth will likely increase focus on cost.

6 KOTAK INSTITUTIONAL EQUITIES RESEARCH SKS Microfinance Banks/Financial Institutions

SKS Microfinance, old and new estimates March fiscal year-ends, 2011-2013E

Old estimates New estimates Old versus new (%) 2011E 2012E 2013E 2011E 2012E 2013E 2011E 2012E 2013E Net interest income 11,248 17,817 25,470 10,096 14,088 21,063 (10) (21) (17) Loan book (Rs bn) 83 125 172 72 102 172 YoY (%) 92 51 38 67 42 68 NIM (%) 25.3 22.8 17.1 25.8 22.9 15.3 2 1 (10) NPL provisions 1,069 1,954 2,915 1,098 1,845 3,153 3 (6) 8 Other operational income 1,045 1,505 2,020 676 1,046 1,811 (35) (30) (10) Other income (forex etc) Operating expenses 5,876 8,684 11,945 5,790 7,024 9,997 (1) (19) (16) Employee 3,522 5,299 7,564 3,522 4,522 6,455 - (15) (15) Others 2,354 3,385 4,381 2,269 2,503 3,542 (4) (26) (19) PBT 5,372 8,710 12,655 3,908 6,290 9,750 (27) (28) (23) Tax 1,773 2,874 4,176 1,290 2,076 3,217 (27) (28) (23) PAT 3,599 5,835 8,479 2,618 4,214 6,532 (27) (28) (23) EPS (Rs) 49 77 111 36 56 85 (27) (28) (23) BVPS (Rs) 279 355 465 266 321 405 (5) (10) (13)

Interest yeild (%) 26.0 26.0 26.0 25.5 24.5 24.0 Borrowings cost (%) 12.5 12.5 12.5 12.5 12.0 12.0 Spread (%) 13.5 13.5 13.5 13.0 12.5 12.0 RoA (%) 6 6 6 5 5 5 RoE(%) 24 25 27 18 19 24

Source: Company, Kotak Institutional Equities estimates

KOTAK INSTITUTIONAL EQUITIES RESEARCH 7 Banks/Financial Institutions SKS Microfinance

Sensitivity on yields, other income, loan growth, credit and operational cost

Base case Key financials of SKS, March fiscal year-ends, 2008-2013E

2008 2009 2010 2011E 2012E 2013E Key ratios (%) Interest income + securitisation income/ loans under management 22.6 27.9 25.3 25.5 24.5 24.0 Interest cost 10.9 14.0 12.3 12.5 12.0 12.0 Spreads 11.7 14.0 13.0 13.0 12.5 12.0

NII / loans under management 14.4 17.8 17.6 17.5 16.1 15.3

Du Pont Analysis (% of loans under management) Net interest income 14.4 17.8 17.6 17.5 16.1 15.3 Other income 2.8 2.7 2.2 1.2 1.2 1.3 Credit costs 0.6 0.8 1.5 1.9 2.1 2.3 Operating expenses 12.1 12.7 10.4 10.0 8.1 7.3 Extraordinaties 0.0 0.0 0.0 0.0 0.0 0.0 PBT post extraordinaries 4.4 7.1 7.9 6.8 7.2 7.1 1-tax rate 0.6 0.6 0.6 0.7 0.7 0.7 RoA 2.5 4.6 5.1 4.5 4.8 4.8 Average assets / average equity (X) 4.7 4.0 4.2 4.0 4.0 5.0 RoE 11.7 18.5 21.7 18.0 19.3 23.7

Loans under management 10,507 24,564 43,210 72,148 102,363 172,079 PAT 167 801 1,739 2,618 4,214 6,532 Shareholders funds 2,125 6,557 9,503 19,594 24,152 31,005 EPS (Rs) 4 17 27 36 56 85 BVPS (Rs) 48 137 147 266 321 405 PER (X) 169.8 38.1 23.7 18.0 11.4 7.5 PBR(X) 13.3 4.7 4.3 2.4 2.0 1.6

Source: Company, Kotak Institutional Equities estimates

Scenario I: RoEs decline to about 20% by FY2013E

` We reduce loan book CAGR to 35% from 41% in the base case.

` Spreads lower by about 50 bps in FY2012E—assuming immediate shift to 24% yield on loans.

` Credit cost up by 30 bps—factoring NPLs of up to 10% in AP.

` Operational expenses ratio rises by 20-60 bps despite a movement to monthly cycle which raises credit cost. In our base case estimates, we expect operational expenses to decline over the years. In this scenario, we are assuming higher operating expenses ratio to factor for errors in modeling.

Scenario II: RoEs decline further to 15%

` We reduce CAGR in loan book further to about 31%.

` Credit costs move up further by 30 bps—factoring about 12-14% NPLs in AP.

` Operating expenses ratio moves up by 50-100 bps, we now model just 1.4% decline in operating expenses ratio between FY2011E and FY2012E as compared to about 2.8% in base case.

8 KOTAK INSTITUTIONAL EQUITIES RESEARCH SKS Microfinance Banks/Financial Institutions

Scenario I: Key financials of SKS in this case, March fiscal year-ends, 2008-2013E

2008 2009 2010 2011E 2012E 2013E Key ratios (%) Interest income + securitisation income/ loans under management 22.6 27.9 25.3 25.5 24.0 24.0 Interest cost 10.9 14.0 12.3 12.5 12.0 12.0 Spreads 11.7 14.0 13.0 13.0 12.0 12.0

NII / loans under management 14.4 17.8 17.6 17.5 15.6 15.4

Du Pont Analysis (% of loans under management) Net interest income 14.4 17.8 17.6 17.5 15.6 15.4 Other income 2.8 2.7 2.2 1.2 1.0 1.0 Credit costs 0.6 0.8 1.5 2.0 2.5 2.6 Operating expenses 12.1 12.7 10.4 10.0 8.2 7.9 Extraordinaties 0.0 0.0 0.0 0.0 0.0 0.0 PBT post extraordinaries 4.4 7.1 7.9 6.6 6.0 5.9 1-tax rate 0.6 0.6 0.6 0.7 0.7 0.7 RoA 2.5 4.6 5.1 4.5 4.0 3.9 Average assets / average equity (X) 4.7 4.0 4.2 4.0 4.0 4.9 RoE 11.7 18.5 21.7 17.7 16.1 19.2

Loans under management 10,507 24,564 43,210 72,148 100,047 154,249 PAT 167 801 1,739 2,567 3,452 5,001 Shareholders funds 2,125 6,557 9,503 19,542 23,338 28,659 EPS (Rs) 4 17 27 35 46 65 BVPS (Rs) 48 137 147 265 310 374 PER (X) 169.8 38.1 23.7 18.3 13.9 9.8 PBR(X) 13.3 4.7 4.3 2.4 2.1 1.7

Source: Company, Kotak Institutional Equities estimates

KOTAK INSTITUTIONAL EQUITIES RESEARCH 9 Banks/Financial Institutions SKS Microfinance

Scenario II: Key financials of SKS in this case, March fiscal year-ends, 2008-2013E

2008 2009 2010 2011E 2012E 2013E Key ratios (%) Interest income + securitisation income/ loans under management 22.6 27.9 25.3 25.5 24.0 24.0 Interest cost 10.9 14.0 12.3 12.5 12.0 12.0 Spreads 11.7 14.0 13.0 13.0 12.0 12.0

NII / loans under management 14.4 17.8 17.6 17.5 15.7 15.5

Du Pont Analysis (% of loans under management) Net interest income 14.4 17.8 17.6 17.5 15.7 15.5 Other income 2.8 2.7 2.2 1.2 1.0 1.0 Credit costs 0.6 0.8 1.5 2.0 2.8 2.9 Operating expenses 12.1 12.7 10.4 10.0 8.6 8.6 Extraordinaties 0.0 0.0 0.0 0.0 0.0 0.0 PBT post extraordinaries 4.4 7.1 7.9 6.6 5.3 4.9 1-tax rate 0.6 0.6 0.6 0.7 0.7 0.7 RoA 2.5 4.6 5.1 4.5 3.6 3.3 Average assets / average equity (X) 4.7 4.0 4.2 4.0 4.0 4.7 RoE 11.7 18.5 21.7 17.7 14.2 15.4

Loans under management 10,507 24,564 43,210 72,148 96,574 136,477 PAT 167 801 1,739 2,567 3,023 3,843 Shareholders funds 2,125 6,557 9,503 19,542 22,909 27,073 EPS (Rs) 4 17 27 35 40 50 BVPS (Rs) 48 137 147 265 304 354 PER (X) 169.8 38.1 23.7 18.3 15.9 12.7 PBR(X) 13.3 4.7 4.3 2.4 2.1 1.8

Source: Company, Kotak Institutional Equities estimates

10 KOTAK INSTITUTIONAL EQUITIES RESEARCH SKS Microfinance Banks/Financial Institutions

SKS- Key ratios March fiscal year-ends, 2009-2013E (%)

2009 2010 2011E 2012E 2013E Growth in key parameters (%) Profit and loss statement - yoy (%) Interest income 232 71 66 52 65 Interest costs 244 48 73 55 60 Net interest income 228 91 69 40 50 Net total income 217 86 61 40 51 Provisioning expenses 221 283 112 68 71 Net income (post provisions) 216 79 57 37 48 Operating expneses 176 58 65 21 42 PBT before extraordinaties 328 116 46 61 55 PAT 381 117 51 61 55 No of shares 835142 2 EPS 345 61 32 57 53 BVPS 1868812126 Balance sheet - yoy (%) Loans 81 107 68 51 84 Loan including loans sold down 134 76 67 42 68 Fixed assets 31 28 15 15 15 Other current assets 447 (33) 10 10 10 Total assets 179 33 98 41 64 Borrowings 153 35 96 43 72 Current liabilities 153 101 15 15 15 Total liabilities 172 30 95 46 74 Share capital 835142 2 Reserves and surplus 261 46 113 24 29 Shareholders funds 209 45 106 23 28

Key ratios (%) Interest yield 40.3 34.9 32.0 31.0 30.0 Interest cost 14.0 12.3 12.5 12.0 12.0 Spreads 26.3 22.6 19.5 19.0 18.0 NIM for on-balance sheet loans 22.6 27.5 25.8 22.9 20.0 NIM on securitised loans 7.3 8.4 11.7 9.0 4.4 NII / loans under management 17.8 17.6 17.5 16.1 15.3 Operating costs/ net income (post provisions) 61.8 52.4 59.7 52.8 50.6 Tax rate 35.4 35.0 33.0 33.0 33.0 Debt/ equity (X) 3.0 2.8 2.7 3.1 4.2

Du Pont analysis (% of average loans under management) Net interest income 17.8 17.6 17.5 16.1 15.3 Other income 2.7 2.2 1.2 1.2 1.3 Credit costs 0.7 1.5 1.8 1.9 2.1 Operating expneses 12.7 10.4 10.0 8.1 7.3 Extraordinaties ————— PBT post extraordinaries 7.1 7.9 6.8 7.2 7.1 1-tax rate 0.6 0.6 0.7 0.7 0.7 RoA 4.6 5.1 4.5 4.8 4.8 Average assets / average equity (X) 4.0 4.2 4.0 4.0 5.0 RoE 18.5 21.7 18.0 19.3 23.7

Source: Company, Kotak Institutional Equities estimates

KOTAK INSTITUTIONAL EQUITIES RESEARCH 11 Banks/Financial Institutions SKS Microfinance

SKS- P&L and Balance sheet March fiscal year-ends, 2009-2013E

2009 2010 2011E 2012E 2013E Income statement (Rs mn) Interest income 4,418 7,565 12,550 19,061 31,532 Income on loan securitization 480 1,012 2,158 2,317 1,401 Other interest income 171 272 372 422 472 Interest costs 1,944 2,884 4,984 7,712 12,342 Net interest income 3,125 5,965 10,096 14,088 21,063 Fee income 456 673 676 1,046 1,811 Other income 14 65 25 25 25 Net total income 3,595 6,704 10,797 15,159 22,899 Provisioning expenses 135 517 1,098 1,845 3,153 Net income (post provisions) 3,460 6,187 9,699 13,315 19,746 Operating expneses 2,220 3,511 5,790 7,024 9,997 Staff expenses 1,377 2,164 3,522 4,522 6,455 Other operating expenses 735 1,221 2,134 2,338 3,347 Depreciation expenses 108 126 135 165 195 PBT before extraordinaties 1,240 2,676 3,908 6,290 9,750 Extraordinary income ————— PBT post extraordinaries 1,240 2,676 3,908 6,290 9,750 Tax 438 937 1,290 2,076 3,217 PAT 801 1,739 2,618 4,214 6,532 No. of shares (mn) 48 65 74 75 77 EPS (Rs) 17 27 36 56 85 BVPS (Rs) 137 147 266 321 405

Balance sheet (Rs mn) Assets Loans 14,127 29,271 49,069 73,902 136,310 Loans under joint liability group 13,228 29,257 — — — Individual loans 899 14 — — — Loans considered bad 48 96 — — — Fixed assets 190 244 365 548 822 Current assets 15,982 10,767 30,655 38,226 47,829 Cash and bank balances 15,470 9,735 14,938 18,627 23,306 Cash for securitised transactions 1,213 — 2,769 3,415 4,292 Net deferred tax asets 42 95 — — — Total assets 30,389 40,475 80,090 112,677 184,961 Liabilities Borrowings 19,960 26,946 52,799 75,733 129,969 Bank loans 14,441 17,266 — — — Loans from Fis 4,933 6,779 — — — NCDs 250 1,750 — — — Commercial papers 244 1,151 — — — Current liabilities 3,721 3,684 6,176 9,302 17,157 Provisions 151 340 1,521 3,490 6,830 NPLs 68 174 1,272 3,117 6,270 Others 83 166 249 374 560 Total liabilities 23,832 30,970 60,496 88,525 153,956 Share capital 479 645 737 753 765 Reserves and surplus 6,078 8,858 18,857 23,398 30,239 Shareholders funds 6,557 9,503 19,594 24,152 31,005 Details of loans managed Loan on books 14,175 29,367 49,069 73,902 136,310 Loans outside books 10,389 13,843 23,079 28,461 35,770 Loans under management 24,564 43,210 72,148 102,363 172,079

Source: Company, Kotak Institutional Equities estimates

12 KOTAK INSTITUTIONAL EQUITIES RESEARCH

ADD Dabur India (DABUR)

Consumer products NOVEMBER 18, 2010 UPDATE Coverage view: Cautious

Namaste acquisition: A smart bolt-on. We view Dabur’s acquisition of Namaste as a Price (Rs): 93 smart bolt-on as it could accelerate its meaningful entry into South and East Africa. At a Target price (Rs): 115 price of 8X EBITDA, the Namaste acquisition could be accretive in the first year itself, in BSE-30: 19,865 our view. However, overseas forays by Dabur (willingness to buy an asset in US), GCPL (Latin America) and Marico likely indicate that the underlying competitive environment in India is getting tougher (focus by MNCs on emerging markets).

Company data and valuation summary Dabur India Stock data Forecasts/Valuations 2010 2011E 2012E 52-week range (Rs) (high,low)112-73 EPS (Rs) 2.9 3.3 4.1 Market Cap. (Rs bn) 161.7 EPS growth (%) 28.1 13.2 25.2 QUICK NUMBERS Shareholding pattern (%) P/E (X) 32.2 28.5 22.8 Promoters 68.7 Sales (Rs bn) 33.9 38.8 45.7 • Acquisition of US- FIIs 16.2 Net profits (Rs bn) 5.0 5.7 7.1 based Namaste MFs 1.1 EBITDA (Rs bn) 6.6 7.8 9.6 Laboratories for Price performance (%) 1M 3M 12M EV/EBITDA (X) 24.3 20.2 15.9 US$100 mn, 1.1X Absolute (8.8) (7.2) 12.5 ROE (%) 57.4 49.6 45.3 Rel. to BSE-30 (7.6) (15.7) (3.5) Div. Yield (%) 1.1 1.2 1.5 Sales, 8X EBITDA • With this acquisition Continued focus on international business is positive ~25%of Dabur’s We view Dabur’s continued focus on expanding its presence in the international market positively, consolidated especially given that in the domestic market there are initial signs of slowdown in the hair oil revenue will likely industry, significant competition in shampoo and likely ramp-up issues in skin care. be from international ` We remain bullish on Dabur’s international businesses outperforming the domestic business. operations The existing international business has margins higher than the company average at ~25%. Key category growth drivers are shampoo, hair cream and toothpaste.

` Dabur already has a presence in the MENA and African region, hence, there may be an opportunity for the company to benefit from a rationalization of the distribution network such that both Dabur and Namaste Laboratories (Namaste) products may be effectively channelized through the same network.

` Dabur can potentially extend its international presence to US and leverage the distribution network of Namaste. Currently, in addition to MENA and Africa, the company has presence in South Asia and Turkey.

` Incremental capital allocation by Dabur in favor of the international market versus the domestic market is worth noting – it likely indicates that the company has resigned to its market position in the domestic market (Dabur is not a market leader in most of the categories that it operates in) and considers incremental capital allocation in the international market more profitable.

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

Consumer products Dabur India

Highlights of the acquisition of Namaste Laboratories—good long-term investment

Dabur has announced the acquisition of US-based Namaste Laboratories for US$100 mn. Key highlights of the acquisition are:

` The company operates under the brand Organic Root Stimulator and has products that is made from natural ingredients and cater to hair concerns such as hair loss, damaged hair, thinning and dry, itchy scalp.

` The company has a major presence in USA and Africa—72% of revenues is from the US market and 11% from Africa. Company is targeting to reduce the contribution of US to 50% in five years.

` 30% of Namaste’s US business is through Walmart—which likely provides access to some of Dabur’s products in Walmart stores (where there is a catchment area of Indian population).

` Namaste has overall EBITDA margin of ~13%; US ~15%, Africa ~8%. There is opportunity to penetrate the African markets better with the suite of products available now (Namaste, Hobi and Dabur products).

` In addition to US$100 mn paid now in an all-cash deal, Dabur may make additional payment of US$40 mn if revenue and EBITDA doubles over the next four years.

` The acquisition is being funded through debt at interest cost of LIBOR +1.5%.

` With this acquisition ~25%of Dabur’s consolidated revenue is expected to be contributed by international operations; management expects this to increase to >30% in few years.

Maintain positive bias, Dabur remains one of our preferred picks

We maintain estimates and retain our target price of Rs115. Our EPS estimates are Rs3.3 and Rs4.1 for FY2011E and FY2012E, respectively (EPS CAGR of 18% over FY2010-13E). We view the recent weakness in the stock (Dabur has underperformed BSE-30 index by 8% over the last one month) as an opportunity to ADD.

Key risks to our rating are (1) limited pricing power, which makes Dabur vulnerable to input cost inflation, (2) Dabur is not a market leader in many categories and (3) the company is heavily dependent on North India (40% of sales).

14 KOTAK INSTITUTIONAL EQUITIES RESEARCH Dabur India Consumer products

KIE estimates of net profit accretion for Dabur on account of acquisition of Namaste Laboratories

Assumptions Comments

Deal value (Rs mn) 4,500 As per management, acquisition cost was US$100 mn. Assuming exchange rate of 1USD = Rs45 Trailing EV/Sales 1.1x Pre tax interest cost (%) 3.5 Transaction is financed through debt at interest cost of LIBOR+1.5% Post tax interest cost (%) 3.2 Key P&L line items of Namaste, December year-end 2010 2011E 2012E As per management, sales for CY2010 is expected to be US$93 mn. Assuming exchange rate of Sales (Rs mn) 4,185 4,687 5,250 1USD = Rs45 and sales growth of 12% Growth (%) 12 12 As per management, the company's EBITDA margin for CY2010 is expected to be 13%. EBITDA margin (%) 13 13 13 Assuming flat margins in CY2011E and CY2012E EBITDA (Rs mn) 544 609 682 PBT margin (%) 12 12 12 Assuming flat PBT margins in CY2011E and CY2012E PBT (Rs mn) 505 566 634 As the company is a LLC, tax rate in CY2010 is low at 2%. After coming in the Dabur fold, tax Tax rate (%) 2 10 10 rate is expected to be 10% Tax (Rs mn) 10 57 63 PAT margin (%) 12 11 11 As per management, PAT for CY2010 is expected to be US$11 mn. Assuming exchange rate of PAT (Rs mn) 495 509 570 1USD = Rs45 Dabur, March fiscal year-end 2010 2011E 2012E As the transaction is expected to close in December2010, we have consolidated only 3 months of Namaste's financials of CY2011E (assuming even split across quarters) with Dabur's FY2011E numbers. While consolidating FY2012E numbers, we have considered 9 months of Namste's PAT to be consolidated with Dabur (Rs mn) 127 524 CY2011E financials and 3 months of its CY2012E financials Calculating interest for 3 months period in FY2011E, as the transaction will likely close in Less interest burden (Rs mn) 35 142 December2010 Incremental PAT (Rs mn) 474 428 Likely accretion (%) 8 6

Source: Kotak Institutional Equities estimates

Sales and EBITDA margin trajectory of Namaste Laboratories, December calendar year-ends, 2005- 10E

Sales (US$ mn) EBITDA margin (%)

100 14

12 80 10

60 8

40 6 4 20 2

0 - 2005 2006 2007 2008 2009 2010E

Source: Company

KOTAK INSTITUTIONAL EQUITIES RESEARCH 15 Consumer products Dabur India

Product sales mix of Namaste Laboratories (%)

Professional products 6% Hair restoration & therapy 9% Maintenance products 40%

Relaxer kits 45%

Source: Company

Geographic sales mix of Namaste Laboratories

Caribbean Others UAE 4% Europe 8%

Africa 11%

USA 72%

Source: Company

16 KOTAK INSTITUTIONAL EQUITIES RESEARCH Dabur India Consumer products

Profit model, balance sheet, cash model of Dabur India, March fiscal year-ends, 2007-2013E

2007 2008 2009 2010 2011E 2012E 2013E Profit model Net revenues 20,431 23,611 28,054 33,914 38,773 45,730 53,742 EBITDA 3,432 4,037 4,661 6,241 7,355 9,116 10,364 Other income 255 339 468 394 411 473 507 Interest (expense)/income (150) (167) (232) (123) (100) (81) (77) Depreciation (343) (364) (449) (503) (577) (636) (676) Pretax profits 3,195 3,844 4,448 6,009 7,089 8,872 10,118 Tax (373) (507) (540) (1,005) (1,413) (1,768) (2,017) Net income 2,822 3,338 3,908 5,005 5,676 7,104 8,102 Earnings per share (Rs) 1.6 1.9 2.3 2.9 3.3 4.1 4.7

Balance sheet Total shareholder's equity 4,597 6,036 8,102 9,327 13,565 17,790 22,609 Total borrowings 1,599 992 2,300 1,793 893 593 593 Deferred tax liability 245 33 70 107 107 107 107 Minority interest 45 48 46 38 38 38 38 Total liabilities and equity 6,486 7,108 10,517 11,264 14,602 18,528 23,347 Net fixed assets 3,792 4,653 5,592 6,767 7,390 7,754 7,578 Investments 807 2,037 3,470 2,641 2,636 2,636 2,636 Cash 607 766 1,484 1,923 5,883 10,064 15,175 Net current assets 1,280 (347) (29) (68) (1,308) (1,927) (2,042) Total assets 6,486 7,108 10,517 11,264 14,602 18,528 23,347

Free cash flow Operating cash flow 2,131 4,826 4,595 6,095 7,482 8,688 9,551 Working capital changes (787) 221 (929) (924) (500) (747) (839) Capital expenditure (495) (1,225) (1,289) (1,573) (1,200) (1,000) (500) Free cash flow 849 3,822 2,377 3,599 5,783 6,941 8,211

Key assumptions Revenue growth 9.5 15.6 18.8 20.9 14.3 17.9 17.5 EBITDA margin 16.8 17.1 16.6 18.4 19.0 19.9 19.3 EPS growth 24.6 17.6 17.0 28.1 13.2 25.2 14.0

Source: Kotak Institutional Equities estimates

KOTAK INSTITUTIONAL EQUITIES RESEARCH 17

REDUCE Tata Chemicals (TTCH)

Others NOVEMBER 18, 2010 UPDATE Coverage view:

Management meeting update. Our meeting with senior management at TCL Price (Rs): 377 validated our two main near-term concerns—(1) urea production for FY2011E likely to Target price (Rs): 370 be lower yoy, leading to muted 4QFY11E, and (2) according to TCL, industry production BSE-30: 19,865 levels are tight and TCL inventories are running at near-term lows even as industry data suggests soda ash remains in oversupply mode. But its ability to take price increase in synthetic soda ash is limited. We believe stock in near term will continue to be driven by impending news in urea policy. At current levels, we believe stock is fully valued with downside risks to earnings. Maintain our estimates and rating at REDUCE, PT Rs370.

Company data and valuation summary Tata Chemicals QUICK NUMBERS Stock data Forecasts/Valuations 2010 2011E 2012E 52-week range (Rs) (high,low)447-272 EPS (Rs) 26.4 27.6 35.6 • Soda ash industry Market Cap. (Rs bn) 91.8 EPS growth (%) (27.1) 4.5 29.0 remains tight Shareholding pattern (%) P/E (X) 14.3 13.7 10.6 despite industry Promoters 31.4 Sales (Rs bn) 94.5 112.6 122.6 FIIs 14.8 Net profits (Rs bn) 6.4 6.7 8.7 data suggesting MFs 7.7 EBITDA (Rs bn) 18.1 19.6 23.8 otherwise Price performance (%) 1M 3M 12M EV/EBITDA (X) 7.2 6.3 4.8 Absolute (12.5) (1.5) 33.7 ROE (%) 16.0 17.3 19.4 • Ability to increase Rel. to BSE-30 (11.4) (10.5) 14.7 Div. Yield (%) 2.4 2.5 2.5 prices in synthetic soda ash is limited Soda ash industry remains tight; however, ability to increase prices is limited • Stock in near term Industry data suggests soda ash remains in oversupply mode. However, according to TCL, industry to be driven by demand-supply mismatches remain minimal currently and production levels are tight, with TCL news in urea policy inventories running at its near-term lows. TCL expects to close FY2011E with soda ash sales Maintain REDUCE, volume of 4.5 mtpa and is currently finding it difficult to increase production levels to meet its PT of Rs370 volume commitment. However, despite that, TCL maintains that its ability to increase prices, particularly in synthetic soda ash, remains limited. According to the company, 30-40% of the cost increase in soda ash has not been passed on.

Customized fertilizer scale-up will be gradual

TCL is set to begin production at its new customized fertilizer unit starting November 2010. Initial target market will be UP, and TCL will begin by selling customized fertilizers for five key crops. These fertilizers are low-volume fertilizers with the following important characteristics—(1) these fertilizers are given as a single basal application to the crop and are (2) region-specific and plant- specific fertilizers. While response from farmers has been good towards customized fertilizers, not all states have a favorable policy towards the same. For example, Karnataka has anti-customized fertilizer policy as they believe it will lead to a shortage of DAP/NPKs while UP has a favorable policy. TCL plans to set up additional nine such plants in a phased manner with plants first being set up on company-owned land. The second plant of 0.13 mtpa will, therefore, be set up at Haldia.

Maintain REDUCE, PT of Rs370

We value TCL at (1) 9X FY2012E (5-year avg. multiple) EPS of Rs36 and (2) investment value/share of Rs47. While we estimate share of non-cyclical businesses of fertilizer/consumer segment increasing to 60% in FY2012E (50% in FY2010), we estimate chemicals will still account for 55% of consolidated EBIT in FY2012E, and therefore continue to value TCL at its 5-year average multiple.

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Tata Chemicals Others

Other key takeaways from the meeting • According to the company, availability of fertilizers to farmers and price at farm-gate level will always be governed by the government. • Hence the company wants to increase the share of profits from non-subsidized businesses in fertilizers/agri-inputs segment to 50% from 40% in 1HFY11. • Therefore, TCL also plans to get into seeds. • India along with China remain the two fastest growing markets in the world for soda ash consumption. Chinese soda ash industry demand grew by 11% from 1990-2008 and India is poised to mirror this performance, with Indian demand estimated to grow at 11%, on a conservative basis. This increasing demand may lead India to become a net importer of soda ash in the long term. TCL believes that India’s growth is an important driver underpinning its acquisition of low-cost assets in USA/Africa. TCL expects to import from these low-cost assets when India becomes a net importer. • Demerging fertilizer/consumer segment from chemicals segment is not possible as salt is an output in the former; however, it is a raw material in the latter (TCL produces 0.6 mtpa of salt; however, it utilizes 2 mtpa of salt as raw material for soda ash). • Demerging agri/fertilizer business from consumer/chemicals segment is also not possible in the near term as TCL believes it first needs to establish scale in the fertilizers business. Large-scale expansion in phosphatics is impeded by establishing backward linkages for raw material supplies; however, expansion in urea is a part of TCL’s strategy to establish scale in fertilizers.

TCL—abridged profit model, balance sheet, March fiscal year-ends, 2007-2012E (Rs mn)

2007 2008 2009 2010 2011E 2012E Profit model Net revenues 57,538 59,757 126,520 94,485 112,602 122,561 EBITDA 9,438 9,277 18,811 17,421 18,824 22,182 EBITDA margin (%) 16.4 15.5 14.9 18.4 16.7 18.1 Other income 1,726 6,909 883 681 822 1,600 Depreciation 2,739 3,138 4,226 4,468 4,485 4,800 Net finance cost 944 1,289 3,953 3,932 3,477 3,100 PBT 7,481 11,759 11,515 9,703 11,684 15,882 Tax 2,401 2,115 1,575 2,093 3,004 4,765 (Profit)/loss in minority interest — — (1,117) (1,177) (1,960) (2,450) Restructuring costs (2,342) (374) Reported net profit 5,080 9,644 6,481 6,059 6,720 8,668

Balance sheet Total equity 25,718 37,185 47,698 47,164 53,139 61,553 Total debt 18,642 48,505 62,838 49,937 44,572 39,110 Minority interests — — 1,522 3,501 5,460 7,910 Net Deferred tax liabilities 2,511 2,837 216 182 182 182 Total liabiilities and equity 46,871 88,526 112,273 100,784 103,353 108,754 Net fixed assets incl CWIP 30,561 33,712 39,959 38,389 36,903 34,103 Goodwill on consolidation 7,632 46,492 56,213 53,247 53,247 53,247 Investments 7,753 4,174 4,229 5,577 5,577 5,577 Net current assets (619) (2,620) 1,975 (8,017) (7,373) (6,173) Cash 1,545 6,767 9,899 11,589 15,000 22,000 Total assets 46,871 88,526 112,273 100,784 103,353 108,754

Ratios Diluted EPS (Rs) 20.9 39.6 36.3 26.4 27.6 35.6 ROE (%) 21.2 30.7 23.4 16.0 17.3 19.4 Debt/equity (%) 72.5 130.4 131.7 105.9 83.9 63.5

Source: Kotak Institutional Equities estimates, Company

KOTAK INSTITUTIONAL EQUITIES RESEARCH 21

CAUTIOUS Telecom

India NOVEMBER 18, 2010 UPDATE BSE-30: 19,865

October GSM net-adds – everyone joins the party. India’s GSM operators (ex-RCOM and TTSL) reported the highest ever net-adds for the month of October, adding 14.7 mn subs. Although we don’t attach much significance to net-adds numbers, nevertheless key observations are (1) Bharti after weak 2-3 months, led with 3 mn net- adds, (2) Vodafone, BSNL and Uninor added ~2.5 mn subs each, and (3) subscriber verification norms seem to have impacted net-adds in North East/Assam.

Monthly subscriber net-adds – (mostly) meaningless

We continue to find the reported monthly subs additions mostly meaningless, on account of two key factors – (1) prevalent and increasing multi-SIM usage in the market – renders reported subs base a meaningless indicator of underlying real penetration growth, and (2) inconsistent inactive subs churn norms across various players in the industry, leaving the self-reported subs data at complete discretion of operators. Subs-based metrics like ARPU and MOU also become less useful, in our view, as a byproduct of this issue with the quality of subs data.

Bharti, Vodafone, BSNL and Uninor add more than 2 mn subs each

GSM operators (ex-RCOM and TTSL) added the highest ever sim-cards-in-use net-adds of 14.7 mn and most of the players (with the exception of Aircel) reported a sharp increase in the net-adds for the month. We attribute the strong net-adds to (1) festive season offers, possibly leading to increased churn in the industry and (2) sustained strong net adds for BSNL – our channel checks suggest good off-take of 3G for BSNL in Tier-2 cities and towns. A few observations from the Oct net-adds numbers –

` Bharti after a weak 2-3 months led the industry on net-adds with subscriber additions of 3 mn. Bharti is back to rate at which it was adding subs in June quarter which had fallen to 2.2 mn in the Sep quarter, probably due to subscriber verification norms in a few circles.

` BSNL continues to report strong subscriber additions at 2.5 mn after adding more than 2 mn subs in the past 2 months. The strong net-adds number could be due to push by BSNL to market its 3G services, in our view.

` Uninor continues its strong performance and is exhibiting all signs of a serious challenger given its smart marketing and distribution strategy and increasing coverage in the 13 circles it is present in. Uninor, although operating in 13 circles only, added 2.5 mn subs and now its market share stands at 2.8% (13.7 mn subs), just 11 months post launch.

` Subscriber verification norms seem to have hit Assam and North East circles with net-adds declining significantly mom – as DoT had issued KYC/re-verification guidelines for these circles specifically. Aircel, a strong player in these circles, missed out on the net-adds party this month due to weak net-adds in its key circles by adding 1 mn subs.

` Vodafone added 2.5 mn subs versus 1.8 mn in the previous month while Idea also improved its net-adds number to 1.8 mn, up from 1.5 mn in the last month. Videocon added 1.1 mn taking it subscriber base to 5.6 mn.

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Telecom India

Exhibit 1: Monthly subscriber net-adds for leading GSM cellular operators ('000)

Nov-09 Dec-09 Jan-10 Feb-10 Mar-10 Apr-10 May-10 Jun-10 Jul-10 Aug-10 Sep-10 Oct-10 Subs ('000) Bharti 116,014 118,864 121,714 124,619 127,619 130,619 133,620 136,620 139,221 141,251 143,292 146,293 Hutchison 88,608 91,402 94,143 97,230 100,858 103,756 106,347 109,061 111,465 113,774 115,553 118,038 IDEA 50,722 52,264 54,406 56,399 57,921 59,268 60,518 62,410 64,211 66,081 67,332 68,864 BPL 2,595 2,650 2,702 2,776 2,845 2,895 2,912 2,927 2,947 2,968 2,984 3,009 Modi group 5,184 5,348 5,482 5,745 5,904 6,020 6,209 6,477 6,538 6,655 6,881 7,160 MTNL 4,508 4,565 4,610 4,697 4,784 4,818 4,858 4,902 4,948 4,990 5,025 5,053 BSNL 55,187 57,223 59,455 61,004 63,486 64,745 65,791 66,888 68,066 70,358 72,693 75,177 Aircel 29,354 31,024 33,036 34,861 36,861 38,470 40,080 41,680 43,297 44,907 46,515 47,520 Uninor 1,208 2,538 3,555 4,264 5,022 5,013 6,024 6,874 9,094 11,268 13,748 S Tel 141 506 717 1,007 1,112 1,233 1,327 1,423 1,519 1,642 1,867 Etisalat DB 5 10 18 30 44 57 71 Videocon 1,395 1,942 2,777 3,665 4,482 5,616 Total market 352,172 364,690 378,592 391,604 405,550 416,729 427,985 440,275 451,797 465,306 477,725 492,417 Market share of subs (%) Bharti 32.9 32.6 32.1 31.8 31.5 31.3 31.2 31.0 30.8 30.4 30.0 29.7 Hutchison 25.2 25.1 24.9 24.8 24.9 24.9 24.8 24.8 24.7 24.5 24.2 24.0 IDEA 14.4 14.3 14.4 14.4 14.3 14.2 14.1 14.2 14.2 14.2 14.1 14.0 BPL 0.7 0.7 0.7 0.7 0.7 0.7 0.7 0.7 0.7 0.6 0.6 0.6 Modi group 1.5 1.5 1.4 1.5 1.5 1.4 1.5 1.5 1.4 1.4 1.4 1.5 MTNL 1.3 1.3 1.2 1.2 1.2 1.2 1.1 1.1 1.1 1.1 1.1 1.0 BSNL 15.7 15.7 15.7 15.6 15.7 15.5 15.4 15.2 15.1 15.1 15.2 15.3 Aircel 8.3 8.5 8.7 8.9 9.1 9.2 9.4 9.5 9.6 9.7 9.7 9.7 Uninor 0.3 0.7 0.9 1.1 1.2 1.2 1.4 1.5 2.0 2.4 2.8 S Tel 0.0 0.1 0.2 0.2 0.3 0.3 0.3 0.3 0.3 0.3 0.4 Etisalat DB 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Videocon 0.3 0.4 0.6 0.8 0.9 1.1 Net monthly adds ('000) Bharti 2,800 2,850 2,850 2,905 3,000 3,000 3,000 3,001 2,600 2,030 2,041 3,001 Hutchison 2,781 2,794 2,741 3,087 3,628 2,898 2,591 2,713 2,405 2,309 1,779 2,485 IDEA 2,271 1,543 2,141 1,993 1,522 1,347 1,250 1,892 1,801 1,870 1,252 1,531 BPL 50 54 52 75 68 50 17 15 20 21 16 26 Modi group 279 164 134 263 159 116 189 268 61 117 226 279 MTNL 73 57 45 87 87 33 40 44 46 42 35 29 BSNL 1,225 2,037 2,231 1,550 2,482 1,259 1,046 1,097 1,178 2,292 2,336 2,484 Aircel 1,608 1,670 2,012 1,825 2,000 1,608 1,610 1,600 1,617 1,610 1,609 1,004 Uninor 1,208 1,330 1,017 709 758 (9) 1,011 850 2,220 2,174 2,481 S Tel 141 365 211 290 106 121 93 97 96 123 225 Etisalat DB 5 5 8 12 14 13 14 Videocon 1,395 548 835 888 817 1,134 Total market 11,087 12,518 13,902 13,012 13,946 11,180 11,255 12,290 11,522 13,509 12,419 14,692 Market share of net adds (%) Bharti 25.3 22.8 20.5 22.3 21.5 26.8 26.7 24.4 22.6 15.0 16.4 20.4 Hutchison 25.1 22.3 19.7 23.7 26.0 25.9 23.0 22.1 20.9 17.1 14.3 16.9 IDEA 20.5 12.3 15.4 15.3 10.9 12.1 11.1 15.4 15.6 13.8 10.1 10.4 BPL 0.5 0.4 0.4 0.6 0.5 0.4 0.2 0.1 0.2 0.2 0.1 0.2 Modi group 2.5 1.3 1.0 2.0 1.1 1.0 1.7 2.2 0.5 0.9 1.8 1.9 MTNL 0.7 0.5 0.3 0.7 0.6 0.3 0.4 0.4 0.4 0.3 0.3 0.2 BSNL 11.0 16.3 16.0 11.9 17.8 11.3 9.3 8.9 10.2 17.0 18.8 16.9 Aircel 14.5 13.3 14.5 14.0 14.3 14.4 14.3 13.0 14.0 11.9 13.0 6.8 Uninor 9.7 9.6 7.8 5.1 6.8 (0.1) 8.2 7.4 16.4 17.5 16.9 S Tel 1.1 2.6 1.6 2.1 0.9 1.1 0.8 0.8 0.7 1.0 1.5 Etisalat DB 0.0 0.0 0.1 0.1 0.1 0.1 0.1 Videocon 12.4 4.5 7.2 6.6 6.6 7.7

Note: (a) Excluding RCOM and TTSL's GSM operations.

Source: COAI, Kotak Institutional Equities

KOTAK INSTITUTIONAL EQUITIES RESEARCH 23

CAUTIOUS Telecom

India NOVEMBER 18, 2010 UPDATE BSE-30: 19,865

Thoughts on the CAG report and the way ahead. We are not surprised by the positive sentiment favoring incumbents that greeted the CAG’s report on around new license grants in early-2008 and TRAI’s recommendations to revoke the licenses of new licensees. The market’s response appears driven by a near-term focus and we would advise investors not to lose sight of the fundamental change the CAG report could bring to the sector – set a (high) base for the industry’s raw material, i.e. spectrum. Competition will continue to limit the industry’s ability to pass this additional cost burden onto the consumers. We remain Cautious.

CAG report – background and key highlights

The report of the CAG (Comptroller and Auditor General of India) on ‘issues of licenses and allocation of 2G spectrum by the DoT’ was driven to delve deeper into two key issues – (1) irregularities in the license grant process in the latest round of license grants – January 2008, and (2) allocation of start-up spectrum (2 X 4.4 MHz) to the new licensees at 2001 auction benchmark prices. In addition to these, the CAG has also commented on the excess spectrum (beyond 6.2 MHz) held by incumbents, the introduction of dual/alternative-technology clause in the UAS license agreement, and non-compliance of roll-out obligations by new licensees. The CAG has given a presumptive estimate of the loss to the exchequer on account of these – between Rs577 bn and Rs1.76 tn. Other key highlights from the report:

` DoT’s decision to take new license applications only till a cut-off date (October 1, 2007) was arbitrary and in contradiction to TRAI recommendation of no cap on number of licenses issued. Further, this date was later advanced to September 25, 2007, again arbitrarily.

` Applicants for 85 of the 122 new licenses granted (excluding the 35 issued to dual-technology players) were found to be ineligible at the time of application. As per the report, these applicants ‘had suppressed facts, disclosed incomplete information and submitted fictitious documents’. Some of the names here include Swan (now Etisalat DB), Uninor, Loop, Datacom (now Videocon Mobile), and S tel. In some cases, the minimum net worth criterion was not met, while in others the substantial equity clause was violated.

` First-come-first-served policy earlier adopted for allocation of spectrum was also not followed. Applications submitted between March 2006 and Sep 2007 were issued LoI on a single day on January 10, 2008. A notice was issued through a press release giving less than an hour to

collect the same. Some licenses who had knowledge of this were ready with demand drafts and

avail the benefit of the first right to allocation of spectrum.

` Spectrum was allotted to existing operators beyond the contractual limits without charging any spectrum charge. DoT was not processing applications of new operators on grounds of non- availability of spectrum but was allocating spectrum to existing operators beyond the contractual limits. Applications submitted between 2004 and 2006 were delayed by a period of at least 1-3 years without giving any specific reason.

` Non fulfillment of roll-out obligations – as per the conditions of the UAS licence, licensees were required to roll out the services in the 90% service area in Metros and 10% of DHQ in other service areas within 12 months but none of the 6 new licensees had met the roll-out obligations till December 2009.

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

Telecom India

The way ahead – our thoughts

‘What happens next’ is a tricky question. Nevertheless, we expect the immediate focus to be on:

` The mentioned irregularities in the license grant process, with potential revocation of licenses of the licensees found ineligible at the time of application; these irregularities include (1) applicants not meeting minimum net worth criterion at the time of application, (2) applications breaking the substantial equity clause (RCOM – Swan, as mentioned in the CAG report), and (3) the grant process being bent, arbitrary cut-off dates announced, certain policies not followed, and new clauses added to benefit specific players.

` Penal action on the new licensees for failure to meet roll-out obligations mandated in the license agreement. In fact, the TRAI has already suggested cancellation of all licenses and levy of fines where roll-out obligations have not been met (different press reports indicate the total number of such licenses to be between 62 and 81 of the total 122 granted).

Once the Government takes steps as far as the new licensees are concerned, we expect the focus to shift to the more pertinent issue*—spectrum pricing and roadmap. Here, we expect a more definitive stance on all spectrum pricing-related issues – (1) de-linkage between the UAS license and spectrum grant and clarity on the quantum of contracted spectrum with the UAS license, (2) spectrum re-pricing, if any, for the new licensees (January 2008 license grants), (3) pricing formula for ‘excess spectrum’ charge for incumbents, (4) license renewal norms; more importantly, decision on spectrum charge at the time of renewal and a decision on TRAI-recommended refarming of 900 MHz spectrum, and (5) process and pricing of further 2G/3G spectrum grants.

*only in the context of the listed stocks; the issues discussed earlier are much more broadly pertinent as far as policy setting/implementation and functioning of ministries and Govt bodies is concerned

Implications for the sector

Even as the Street appears to be viewing the event as a positive for the GSM incumbents (Bharti, Idea, and Vodafone), we would urge investors to balance the short-term sentiment positives with the potentially negative long-term implications for the sector. Before we delve deeper into our views on the potential negatives, some thoughts on the rationale for the Street’s positive reaction:

` License revocation of new licensees = less competition. Only three of the new licensees (Uninor, S Tel and Videocon) have launched so far and of these, only Uninor has been able to make an impact of the competitive intensity in the sector, if any.

` License revocation = more available free spectrum. Agreed, but this may not be available to the incumbents (especially Bharti) which already hold >=6.2 MHz spectrum in most circles (see Exhibit 1). Idea could benefit from spectrum availability in its newer circles, but then, it is not necessarily short on capacity in these circles, in any case.

` Potential retrospective 2G spectrum charges on new licensees and dual-technology players, thereby weakening their balance sheets further – we do not see this scenario panning out as the Government may not be on a sound footing (legally) to take such a step.

KOTAK INSTITUTIONAL EQUITIES RESEARCH 25 India Telecom

As discussed above, we would urge investors to look beyond these short-term sentiment boosters and focus on what change this event could bring to the sector. It could increase the price of the raw material (spectrum) for the sector, on a permanent basis, in our view. The CAG report, with its large published presumptive estimate of notional loss to the exchequer (Rs580 bn – Rs176 bn) and all the media/public attention that the report has attracted, has ensured that any allocation of spectrum in the future, and on license renewal, happens at a market-linked price. TRAI’s May 11, 2010 recommendations suggested using the 3G pricing (discovered in an auction) as the base for spectrum pricing in future. While this was not accepted by the DoT and the TRAI is working on another recommendation on this issue, we believe that this event could mean

` A base market-linked pricing formula will be arrived at, soon

` The new base pricing will likely be closer to the 2010-auction 3G pricing (Rs167.5 bn pan- India for 5 MHz for 20 years) than to the 2001-auction 2G pricing (Rs16.5 bn for up to 6.2 MHz for 10 years), and

` The Government introduces an inflation-linked index to spectrum pricing

` Further impetus on TRAI-suggested spectrum refarming – taking back 900 MHz spectrum and granting 1,800 MHz spectrum in lieu upon renewal.

The permanent increase in the cost of spectrum for the industry, coupled with the industry’s limited ability to pass on the increased cost to the customer, is a long-term negative, in our view.

Revisiting TRAI May 11 recommendations – potential March 2012 NPV impact on GSM incumbents – Rs72/share for Bharti and Rs31/share for Idea

Exhibits 2-3 summarizes the March 2012 NPV impact of various TRAI recommendations on Bharti and Idea. In addition, we also compute the potential impact of any change in roaming regulations (reduction in the number of circles in the country, as recently proposed by the TRAI) – this would be an additional negative of Rs20/share for Bharti and Rs6/share for Idea. We recall the key recommendations made by TRAI in the May 2011 report –

` One-time excess spectrum charge for GSM spectrum >6.2 MHz. Exhibit 1 depicts the current spectrum holdings of the GSM operators in various circles. TRAI had recommended basing this charge on 3G pricing. We estimate the charge to be Rs51 bn for Bharti and Rs14.5 bn for Idea.

` Spectrum renewal charges – linked to 3G pricing. These charges would have to be paid at the time of license renewal. Exhibit 4 gives the circle-wise timeline of license renewal for Bharti and idea. Estimated NPV impact – Rs25/share for Bharti and Rs16/share for Idea.

` Spectrum refarming – spectrum in the 900 MHz band to be taken back and spectrum in the 1,800 MHz band to be issued in lieu. The relatively inefficient 1,800 MHz spectrum is more capex as well as opex intensive as compared to 900 MHz. Estimated impact – Rs34/share for Bharti and Rs17/share for Idea.

` Reduction in license fees and increase in spectrum charges – neutral as a combination for Bharti and in fact, positive for Idea.

26 KOTAK INSTITUTIONAL EQUITIES RESEARCH Telecom India

Exhibit 1: Circle-wise spectrum holding for various GSM players

Bharti Reliance Vodafone/Essar Idea Aircel TTSL Metro and Circle A2G3G2G3G2G3G2G3G2G3G2G3G Calcutta 8.0 — 6.2 5.0 9.8 5.0 4.4 — 4.4 5.0 4.4 — Chennai and TN 9.2 5.0 4.4 — 8.0 5.0 4.4 — 9.8 5.0 4.4 — Delhi 10.0 5.0 4.4 5.0 10.0 5.0 8.0 — 4.4 — 4.4 — Mumbai 9.2 5.0 4.4 5.0 10.2 5.0 4.4 — 4.4 — 4.4 — Andhra Pradesh 10.0 5.0 4.4 — 6.2 — 8.0 5.0 4.4 5.0 4.4 — Gujarat 6.2 — 4.4 — 9.8 5.0 6.2 5.0 4.4 — 4.4 5.0 Karnataka 10.0 5.0 4.4 — 8.0 — 6.2 — 4.4 5.0 4.4 5.0 Maharashtra 8.2 — 4.4 — 6.2 5.0 9.8 5.0 4.4 — 4.4 5.0 Circle B Haryana 6.2 — 4.4 — 6.2 5.0 6.2 5.0 4.4 — 4.4 5.0 Kerala 6.2 — 4.4 — 6.2 — 8.0 5.0 4.4 5.0 4.4 5.0 Madhya Pradesh 8.0 — 6.2 5.0 4.4 — 8.0 5.0 4.4 — 4.4 5.0 Punjab 7.8 — 4.4 5.0 6.2 — 7.8 5.0 4.4 5.0 4.4 5.0 Rajasthan 8.2 5.0 4.4 5.0 6.2 — 6.2 — 4.4 — 4.4 5.0 Uttar Pradesh (E) 7.2 — 4.4 — 8.2 5.0 6.2 5.0 4.4 5.0 4.4 — Uttar Pradesh (W) 6.2 5.0 4.4 — 6.2 — 8.0 5.0 4.4 — 4.4 5.0 West Bengal 6.2 5.0 6.2 5.0 6.2 5.0 4.4 — 4.4 5.0 4.4 — Circle C Assam 6.2 5.0 6.2 5.0 4.4 — 4.4 — 6.2 5.0 4.4 — Bihar 9.2 5.0 8.0 5.0 4.4 — 4.4 — 4.4 5.0 4.4 — Himachal Pradesh 6.2 5.0 6.2 5.0 4.4 — 4.4 5.0 4.4 — 4.4 — North East 6.2 5.0 6.2 5.0 4.4 — 4.4 — 4.4 5.0 4.4 — Orissa 8.0 — 6.2 5.0 4.4 — 4.4 — 4.4 5.0 4.4 — J&K 6.2 5.0 4.4 5.0 4.4 — 4.4 5.0 4.4 5.0 4.4 — Source: DoT, Kotak Institutional Equities

Exhibit 2: Impact of various regulations on Bharti

Impact on Bharti Per share Impact (Rs) 1. One time excess spectrum charge fee (13) 2. Charges on spectrum renewal (NPV of the impact) (25) 3. Spectrum refarming impact (NPV of the impact) (34) 4. Reduction in licence fee 15 5. Increase in spectrum charges (15) 6. Impact of changes in roaming regulations (20) Total impact of regulations on Bharti (Rs/share) (92) Source: Kotak Institutional Equities estimates

Exhibit 3: Impact of various regulations on Idea

Impact on Idea Per share Impact (Rs) 1. One time excess spectrum charge fee (4) 2. Charges on spectrum renewal (NPV of the impact) (16) 3. Spectrum refarming impact (NPV of the impact) (17) 4. Reduction in licence fee 8 5. Increase in spectrum charges (1) 6. Impact of changes in roaming regulations (6) Total impact of regulations on Idea (Rs/share) (38) Source: Kotak Institutional Equities estimates

KOTAK INSTITUTIONAL EQUITIES RESEARCH 27 India Telecom

Exhibit 4: Spectrum validity for Bharti and Idea

Spectrum validity Bharti Idea Andhra Pradesh 7-Dec-15 14-Dec-15 Assam 3-Jul-24 20-Jan-28 Bihar 5-Feb-24 1-Dec-26 Chennai and Tamil Nadu 23-Sep-21 20-Jan-28 Delhi 24-Nov-14 30-Sep-21 Gujarat 23-Sep-21 7-Dec-15 Haryana 23-Sep-21 7-Dec-15 Himachal Pradesh 7-Dec-15 30-Sep-21 J&K 5-Feb-24 20-Jan-28 Karnataka 10-Feb-16 4-Apr-16 Kerala 23-Sep-21 7-Dec-15 Kolkata 24-Nov-14 20-Jan-28 Madhya Pradesh 23-Sep-21 7-Dec-15 Maharashtra 23-Sep-21 7-Dec-15 Mumbai 23-Sep-21 30-Nov-26 North East 7-Dec-15 20-Jan-28 Orissa 5-Feb-24 20-Jan-28 Punjab 7-Dec-15 4-Apr-16 Rajasthan 17-Apr-16 30-Sep-21 UP (East) 5-Feb-24 30-Sep-21 UP (West) 23-Sep-21 7-Dec-15 West Bengal 6-Feb-24 20-Jan-28

Source: DoT, Kotak Institutional Equities

28 KOTAK INSTITUTIONAL EQUITIES RESEARCH

ATTRACTIVE Industrials

India NOVEMBER 18, 2010 UPDATE BSE-30: 19,865

Capex cycle picking up definitive momentum, recent IIP data notwithstanding. Industrial capex cycle has picked up momentum based on (1) strong, broad-based growth (36% yoy) across short-cycle businesses as well as total revenues (21% up yoy) with buoyant order inflows, (2) pvt. financial closures (up 70% yoy) as per RBI data and (3) pick-up in global capex that helps entities like Crompton and Cummins. Margins decline on rising commodities and IIP cause concern (may have data issues).

Growth momentum across short-cycle business and broad-based growth gives confidence

` Strong and broad-based growth across short-cycle business: Based on a large sample of

listed industrial companies, we highlight that short-cycle business witnessed a strong growth in 2QFY11, registering a 36% yoy growth in revenues and 14.6% 2-year revenue CAGR. The growth was broad-based across various subsectors with about 15 of the total 21 product businesses tracked recording 15%+ growth.

` Total revenue growth also picks up: Total industrial sector revenues also picked up in this quarter at 21% yoy and 14% 2-year revenue CAGR. Projects segments have lagged products segment in terms of revenue growth led by longer execution timelines in the former. We expect these revenues to further pick up going forward based on strong order inflows in 2HFY10.

` Inflows remain strong; although growth moderates on base effect: Inflows trend remains strong across companies. However, growth momentum has softened, at 28% yoy (38% in 1Q) for all companies and 11.6% yoy (23% in 1Q) cumulative excluding BHEL and L&T.

Overseas business dependant companies pick up sharply; we observe broad global capex pick-up

Companies with large overseas exposure (for instance, Crompton—overseas subsidiary revenues up 17% in local currency terms, Cummins—export revenues at Rs2.6 bn in 2QFY11 versus Rs723 mn in 2QFY10) have reflected strong performance in the overseas business; likely to be a reflection of some revival in the global capex momentum. We observe a similar trend in the results of global industrial companies as well; recorded relatively strong pick-up in revenues/inflows.

RBI Financial closure data suggest capex cycle is going strong as ever

Financial closures achieved by private sector during FY2010 grew 70% to Rs5.56 tn from Rs3.3 tn during FY2009. Note that this is post a 36% yoy growth in financial closures in FY2009. This reflects surprising strength versus wide perception of weak credit markets during FY2009-10. We believe that financial closure activity reflects strength of corporate capex activity in the country and is a leading indicator of likely capital expenditure activity.

Margins take a beating on commodities; IIP also causes concern but may have data issues

Average margins in 2QFY11 dipped by 170 bps yoy (flat on a qoq basis) likely on the back of rising commodity prices. We believe that, going forward, the companies are likely to continue to face margin pressure but strong demand-led operating leverage would partly help support margins. Moderation of IIP growth to 6.2% in Sept-2010 with capital goods index recording a de-growth of

4.2% is cause for concern. However, data reliability remains uncertain (we highlight few examples).

Top picks: Thermax, Crompton, L&T; remain negative on ABB, Siemens, Suzlon, BHEL, Voltas

Top picks in the sector remain Thermax, Crompton and L&T based on exposure to strengthening corporate capex cycle, positive long-term outlook and expanding opportunity set.

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

India Industrials

Summary of observations from 2QFY11 results

Our analysis of results of about 25 leading industrial companies indicates:

` Growth momentum in short-cycle segment strong with about 36% yoy growth in 2QFY11; however, growth partly aided by low base effect of 1HFY10. Revenue growth has been about 14.6% CAGR over the past two year period.

` Growth in total revenues also picks up momentum, growing at 21% yoy; expect momentum to pick up going forward.

` Some moderation in order inflow growth post strong recovery in 2HFY10; inflows (excl. BHEL and L&T) registered a 11.5% yoy growth versus a 23% yoy growth in 1QFY11.

` EBITDA margins have come down by about 170 bps yoy (relatively flat on a sequential basis) possibly indicating wearing away of the benefit of low material cost.

30 KOTAK INSTITUTIONAL EQUITIES RESEARCH Industrials India

Sum of select product revenues and growth, 1QFY08-2QFY11 Sum of total revenues and growth, 1QFY08-2QFY11

Total of product segment revenues (LHS) Total revenue (LHS) YoY growth in product revenues (%) (RHS) Yoy growth in total revenue (%) (RHS) (Rs mn) (Rs mn) (%) (%) 200,000 40 100,000 60

150,000 30 75,000 40

50,000 20 100,000 20

25,000 0 50,000 10

0 (20) 0 0 Jun-07 Jun-08 Jun-09 Jun-10 Sep-07 Sep-08 Sep-09 Sep-10 Dec-07 Dec-08 Dec-09 Jun-07 Jun-08 Jun-09 Jun-10 Mar-08 Mar-09 Mar-10 Sep-07 Sep-08 Sep-09 Sep-10 Dec-07 Dec-08 Dec-09 Mar-08 Mar-09 Mar-10 Note: Note: (1) Excludes BHEL, includes Machinery & Indl. segment of L&T (1) Excludes BHEL and L&T

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

Sum of order inflow and growth, 1QFY08-2QFY11 Average EBITDA margin and yoy change, 1QFY08-2QFY11

Total order inflow (LHS) Average EBITDA margin (%) (LHS) Yoy growth in total inflow (%) (RHS) (%) Yoy change in EBITDA margin (bps) (RHS) (Rs mn) (%) (bps) 600,000 80 15 4 500,000 60 2 400,000 40 10 300,000 20 0 200,000 0 5 (2) 100,000 (20) 0 (40) 0 (4) Jun-07 Jun-08 Jun-09 Jun-10 Sep-07 Sep-08 Sep-09 Jun-07 Jun-08 Jun-09 Jun-10 Dec-07 Dec-08 Dec-09 Mar-08 Mar-09 Mar-10 Sep-07 Sep-08 Sep-09 Sep-10 Dec-07 Dec-08 Dec-09 Mar-08 Mar-09 Mar-10 Note: Note: (1 Includes BHEL and L&T (1) Excludes BHEL and L&T

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

Growth momentum for short-cycle business has strengthened sequentially

The short-cycle business segment (short-cycle) revenues have continued to record a broad- based growth in 2QFY11 (in line with the trend seen in 1QFY11). Based on our analysis of 15 industrial companies across 21 product business, this segment has recorded a broad- based growth with almost all companies recording a +10% growth. The sum total of revenues of the sampled companies recorded a 26% yoy growth in 2QFY11 (25% in 1HFY11).

We highlight that adjusted for base effect also this growth is reasonably strong and implies a CAGR growth of 14.6% for a two-year period between September 2008 and September 2010.

KOTAK INSTITUTIONAL EQUITIES RESEARCH 31 India Industrials

Strong pick-up in revenue growth of product segment aided by low base effect of 1HFY10 Segment-wise quarterly revenue numbers for various industrial companies, quarter-ends June 30, 2009 - Sept 30, 2010 (Rs mn)

change (%) Jun-08 Sep-08 Dec-08 Mar-09 Jun-09 Sep-09 Dec-09 Mar-10 Jun-10 Sep-10 yoy 2 yr CAGR L&T Electrical and Electronics 5,776 7,605 6,469 7,900 5,759 7,088 7,214 9,883 7,451 6,724 (5.1) (6.0) Machinery & Industrial products 6,335 6,846 5,293 6,206 4,370 5,096 5,911 6,819 5,482 6,981 37.0 1.0 Crompton Consumer Products 3,631 3,016 2,868 3,703 4,129 3,740 3,647 4,604 5,318 4,634 23.9 24.0 Industrial systems 2,632 2,788 2,434 2,698 2,539 2,926 2,911 3,366 3,112 3,442 17.6 11.1 Thermax Energy 5,472 5,785 6,283 7,632 4,194 5,213 5,603 9,072 6,066 8,910 70.9 24.1 Environment 1,787 2,450 1,853 2,023 1,252 1,649 2,031 3,478 2,221 2,482 50.6 0.6 EMCO Revenues 1,833 2,306 2,079 3,743 2,014 2,014 2,081 3,764 1,186 2,902 44.1 12.2 Cummins Engine business 3,377 3,612 3,179 5,709 4,843 4,652 6,651 5,199 6,270 7,154 53.8 40.7 Honeywell Revenues 2,368 2,382 2,777 2,748 2,834 2,685 3,193 2,788 3,317 3,649 35.9 23.8 Action Construction Revenues 1,373 1,451 766 775 809 980 1,069 1,438 1,305 1,646 67.9 6.5 Voltamp Revenues 1,701 1,700 1,364 1,666 1,042 1,112 1,445 1,821 1,193 1,243 11.8 (14.5) Voltas Unitary Cooling Products 4,014 1,554 1,177 2,479 4,154 1,968 1,539 4,211 5,868 2,281 15.9 21.2 Engineering agency & services 1,364 1,617 1,099 1,342 1,139 1,170 1,173 1,198 1,203 1,267 8.3 (11.5) Blue Star Engg agency and services 345 415 487 481 247 337 349 547 323 674 100.1 27.4 Unitary Cooling Products 2,160 1,290 950 1,634 1,909 1,116 954 1,869 2,534 1,439 28.9 5.6 Elecon Engineering Material handling equipment 985 1,430 1,437 1,991 1,485 1,659 1,498 2,100 1,498 1,610 (3.0) 6.1 Transmission equipments 753 1,144 1,071 976 907 943 1,052 1,358 1,010 1,251 32.7 4.6 Bharat Bijlee Revenues 1,056 1,509 1,404 1,490 1,136 1,703 1,616 2,106 1,058 1,848 8.6 10.7 TRIL Revenues 822 1,138 979 1,342 859 885 1,315 2,167 856 1,141 28.9 0.1 Kirloskar Revenues 1,963 2,617 1,696 2,134 1,992 2,061 2,125 2,270 1,828 2,071 0.5 (11.0) McNally Bharat Revenues 1,318 2,026 2,271 5,391 2,530 3,052 3,325 5,624 2,835 4,018 31.7 40.8 Total of product segment revenues 41,703 42,397 37,499 51,509 41,003 40,865 45,035 59,781 51,041 55,714 36.3 14.6 YoY growth in product revenues (%) 15.4 12.5 (4.8) 5.3 (1.7) (3.6) 20.1 16.1 24.5 36.3 2-year CAGR 33.6 23.7 14.0 12.2 6.5 4.1 6.9 10.6 10.6 14.6

Source: Company, Kotak Institutional Equities

Broad-based growth across various subsectors and companies strengthen confidence

The growth has been broad-based with about 15 of the total 21 product businesses tracked recording 15%+ growth. The growth has also been across various subsectors such as L&T’s machinery and industrial products segment which recorded a 37% growth, industrials and consumer segments of Crompton (up 17.6% and 24% yoy, respectively), energy and environment segments of Thermax etc. Even revenues of EMCO, Cummins Engine business, Honeywell, Action Construction, Transmission equipment for Elecon Engg have reported strong growth.

32 KOTAK INSTITUTIONAL EQUITIES RESEARCH Industrials India

Total industrials revenue growth also picks up; likely strong pick-up in near term The cumulative industrial segment execution has also picked up in this quarter. Total revenues have recorded a 21.3% yoy revenue growth and a 14% 2-year CAGR. Excluding BHEL and L&T, revenues have recorded a 21.1% growth and an 11.3% 2-year revenue CAGR. Projects segments have lagged products segment in terms of yoy revenue growth as the execution timelines in the former are longer. We also notice that projects businesses did not exhibit the same order of slowdown as the projects business did in 1HFY10 on account of the lag effect. Most companies registered significant contraction in order inflow during Dec-08 to Sep-09 which partially led to slow execution during FY2010. We believe that spectacular order inflows in 2HFY10 would lead to a strong pick-up in project segments and thus overall revenues of industrial companies. We expect these revenues to also pick up going forward—part of this pick-up has already been witnessed in this quarter with revenues up 21% yoy versus 10% and 15% growth seen in the past two quarters.

Project business growth also picks up; likely strong pick-up in near term Quarterly revenue numbers for various industrial companies, quarter-ends June 30, 2009 - Sep 30, 2010 (Rs mn)

yoy change Jun-08 Sep-08 Dec-08 Mar-09 Jun-09 Sep-09 Dec-09 Mar-10 Jun-10 Sep-10 Sep-10 2-yr CAGR BHEL 43,292 53,426 60,223 105,401 55,957 66,252 71,003 135,591 64,797 83,284 25.7 24.9 L&T 69,419 77,251 86,562 106,053 74,083 79,188 81,222 135,851 78,853 93,308 17.8 9.9 Crompton 10,829 10,862 10,798 13,618 11,735 12,686 12,238 16,182 13,429 14,448 13.9 15.3 Areva T&D (Dec year-ends) 6,218 5,865 9,388 8,450 7,883 7,397 11,599 7,768 8,855 10,477 41.6 33.7 ABB (Dec year-ends) 16,303 15,191 21,663 13,931 15,148 14,538 18,852 14,559 14,466 13,340 (8.2) (6.3) Voltas 10,498 9,848 8,660 15,517 12,510 10,996 9,928 14,802 14,083 10,651 (3.1) 4.0 Thermax 7,170 8,041 7,951 9,483 5,376 6,804 7,483 12,193 7,898 10,916 60.4 16.5 Elecon Engineering 1,687 2,522 2,467 2,936 2,145 2,569 2,512 3,324 2,472 2,809 9.3 5.5 EMCO 1,833 2,306 2,079 3,743 2,014 2,014 2,081 3,764 1,186 2,902 44.1 12.2 KEC 6,001 8,060 8,865 11,350 7,266 8,681 9,377 13,451 8,460 9,503 9.5 8.6 Kalpataru Power 4,750 4,326 4,181 5,584 4,873 5,525 7,192 8,383 5,378 8,315 50.5 38.6 Jyoti Structures 4,016 4,212 4,331 4,736 4,858 4,730 5,121 5,477 5,643 5,423 14.7 13.5 Blue Star 6,309 6,466 5,667 7,248 5,398 5,635 5,956 8,747 6,648 6,948 23.3 3.7 BEML 2,879 6,139 6,329 12,625 4,655 4,834 6,954 11,940 5,269 5,093 5.4 (8.9) Cummins India 7,070 8,084 7,709 10,714 6,394 6,191 8,279 7,883 9,279 10,914 76.3 16.2 Havell 5,534 5,876 4,861 5,770 5,899 5,980 5,913 7,081 7,177 6,966 16.5 8.9 Honeywell 2,368 2,382 2,777 2,748 2,834 2,685 3,193 2,788 3,317 3,649 35.9 23.8 Kirloskar Electric 1,963 2,617 1,696 2,134 1,992 2,061 2,125 2,270 1,828 2,071 0.5 (11.0) McNally 1,318 2,026 2,271 5,391 2,530 3,052 3,325 5,624 2,835 4,018 31.7 40.8 Sunil Hitech 1,112 1,311 1,475 2,084 1,945 2,009 1,546 1,746 1,347 1,500 (25.3) 7.0 Techno Electric 1,152 1,300 1,232 1,171 1,235 1,487 1,512 2,040 1,516 1,871 25.8 20.0 Texmaco 1,968 2,053 1,665 2,398 1,834 2,415 2,388 2,682 2,035 2,441 1.1 9.0 Bharat Bijlee 1,056 1,509 1,404 1,490 1,136 1,703 1,616 2,106 1,058 1,848 8.6 10.7 Indo Asian Fusegear 648 721 571 666 477 618 619 588 540 457 (25.9) (20.4) Total revenues 208,341 230,452 252,587 332,611 228,628 247,586 267,639 404,659 256,881 300,246 21.3 14.1 Yoy growth (%) 34.7 31.2 23.2 27.3 9.7 7.4 6.0 21.7 12.4 21.3 2-year CAGR (%) 33.4 31.6 27.6 24.4 21.6 18.7 14.3 24.5 11.0 14.1 Excl. BHEL and L&T Total revenue 95,629 99,775 105,802 121,157 98,589 102,146 115,414 133,217 113,231 123,654 21.1 11.3 Yoy growth (%) 23.8 23.1 15.6 15.9 3.1 2.4 9.1 10.0 14.9 21.1 2-year CAGR (%) 31.0 26.6 22.4 20.7 13.0 12.3 12.3 12.9 8.8 11.3

Source: Company, Kotak Institutional Equities

Inflows remain strong; although growth moderates little bit on base effect

Order inflows trend remains strong across companies increasing visibility for a pick-up in execution in the near term. However, the order inflow growth momentum has softened versus the past three quarter, at 28% yoy cumulative for all companies and 11.6% yoy cumulative excluding BHEL and L&T. This is versus a growth of 38% for all companies and 23.3% yoy excluding BHEL and L&T in the previous quarter. In 2HFY10 we witnessed a sharp yoy growth in inflows across the broad set of industrial companies, which is a harbinger of likely strong execution and robust revenue growth in the near term.

BHEL and L&T are key contributors to inflow growth; other companies have not yet broken trend by a big margin

KOTAK INSTITUTIONAL EQUITIES RESEARCH 33 India Industrials

BHEL and L&T were the key contributors to the order inflow growth during the quarter recording an inflow growth of 75% and 11.5%, respectively. Apart from BHEL and L&T other industrial companies have not reported exceptionally strong order inflow momentum. Crompton’s standalone business reported inflows of Rs15.7 bn, down 3.4% yoy—the inflows were at similar levels to FY2010 average quarterly order inflows of about Rs15.75 bn. Areva T&D also reported weak inflows on a yoy basis, down 17%; however, note that 2QFY10 order inflows were boosted by a few bulky orders such as from MSETCL.

Other companies such as ABB, Crompton, Areva etc. still reported relatively moderate order inflows. ABB recorded only a 7.3% yoy inflow growth while Crompton and Areva recorded a 3.4% and 17% de-growth, respectively.

Some moderation in order inflow growth post strong recovery in 2HFY10 Quarterly order inflows for various industrial companies, quarter-ends June 30, 2009 - Sept 30, 2010 (Rs mn)

% change Jun-08 Sep-08 Dec-08 Mar-09 Jun-09 Sep-09 Dec-09 Mar-10 Jun-10 Sep-10 Jun-10 Sep-10 BHEL 134,297 143,426 155,223 164,054 90,921 84,252 153,003 226,000 108,240 147,155 19.0 74.7 L&T 122,000 124,530 146,200 125,170 95,700 183,650 178,364 238,430 156,260 204,640 63.3 11.4 Crompton 13,789 13,586 10,574 14,542 11,551 16,206 13,960 21,319 18,180 15,660 57.4 (3.4) Siemens (Sept year-ends) 20,780 23,851 19,797 18,594 23,400 26,169 51,680 22,380 20,070 NA (14.2) NA Areva T&D (Dec year-ends) 14,866 9,019 7,834 9,988 7,807 10,288 14,180 10,156 10,192 8,550 30.6 (16.9) ABB (Dec year-ends) 22,086 18,891 12,610 23,033 21,116 18,932 23,767 16,887 16,887 20,310 (20.0) 7.3 Voltas 14,843 6,316 3,598 4,091 6,481 4,622 7,041 12,810 9,986 6,756 54.1 46.2 Thermax 9,140 12,560 7,310 10,010 10,030 10,490 13,790 13,620 11,510 13,198 14.8 25.8 Elecon Engineering 2,550 6,490 3,010 1,290 1,470 1,920 1,930 2,134 5,862 2,320 298.8 20.8 Total order inflow 318,705 325,799 338,524 342,191 237,268 320,072 391,855 531,200 326,924 410,038 37.8 28.1 Growth (%) 21.5 19.8 1.9 (25.6) (1.8) 15.8 55.2 37.8 28.1 Total excl. BHEL, L&T 62,408 57,843 37,102 52,966 50,648 52,170 60,488 66,770 62,424 58,243 23.3 11.6 Growth (excl. BHEL, L&T) (%) 12.8 (23.8) (23.2) (18.8) (9.8) 63.0 26.1 23.3 11.6

Source: Company, Kotak Institutional Equities

Overseas business dependant companies report sharp pick-up; we highlight broad global capex pick-up strengthening confidence on this trend Companies with large overseas exposure (for instance Crompton, Cummins) have reflected strong performance in the overseas business. Cummins reported a strong pick-up in export revenues to Rs2.8 bn in 2QFY11 post a very sharp slowdown to Rs723 mn in 2QFY10. Crompton reported a 3.5% growth in overseas revenues in Rupee terms which when adjusted for the 13% adverse Euro-INR currency movement would imply a growth of about 17% yoy in local currency terms. Order inflows for the overseas business also recorded a strong growth, up 28% yoy. We believe that this could be a reflection of some revival in the global capex momentum. We observe a similar trend in the results of the global industrial/ capital goods companies as well—have recorded relatively strong pick-up in revenues and/or order inflows. However, note that the growth for the quarter was also aided by low base effect due to the sharp slowdown witnessed in 1HFY10. The revenue/order inflow figures still broadly remain below the Sept-09 levels.

34 KOTAK INSTITUTIONAL EQUITIES RESEARCH Industrials India

Overseas business of companies as well as global companies reflect some revival in global capex Quarterly revenues/ inflows of Cummins, Crompton's overseas business and for select global industrial companies, June 30, 2008 - Sept-30, 2010

% growth Jun-08 Sep-08 Dec-08 Mar-09 Jun-09 Sep-09 Dec-09 Mar-10 Jun-10 Sep-10 yoy 2-yr CAGR Cummins exports (Rs mn) 2,779 3,447 3,551 3,053 937 723 843 1,822 2,155 2,760 281.7 (10.5) Crompton overseas (Rs mn) Revenues 9,519 10,862 10,700 10,982 10,241 9,205 10,227 8,897 9,593 9,531 3.5 (6.3) Inflows 15,159 15,095 9,000 6,418 7,895 7,800 6,330 7,741 9,140 9,980 27.9 (18.7)

Global cos ABB (US$ mn) Revenues 9,025 8,791 9,140 7,209 7,915 7,910 8,761 6,934 7,573 7,903 (0.1) (5.2) Inflows 11,271 8,885 7,183 9,150 7,309 7,060 7,450 8,067 7,665 8,197 16.1 (3.9) Siemens (Euro mn) Revenues 19,182 21,651 19,634 18,955 18,348 19,714 17,352 18,227 19,170 21,229 7.7 (1.0) Inflows 23,677 22,205 22,220 20,864 17,160 18,747 18,976 17,884 20,871 23,473 25.2 2.8 Cummins (US$ mn) Revenues 3,887 3,693 3,288 2,439 2,431 2,530 3,400 2,478 3,208 3,401 34.4 (4.0) CAT (US$ mn) Revenues 13,624 12,981 12,923 9,225 7,975 7,298 7,898 8,238 10,409 11,134 52.6 (7.4) Honeywell (US$ mn) Revenues - 9,275 8,712 7,570 7,566 7,700 8,072 7,776 8,161 8,392 9.0 (4.9) Komatsu (Yen bn) Revenues 614 613 438 387 325 330 362 433 450 416 26.0 (17.6)

Source: Company, Kotak Institutional Equities

Even T&D equipment sector starts to post recovery adjusted for one-off losses in some companies

Even the power T&D equipment companies reported some recovery in revenues as well as margins post a relatively sedate performance in the past few quarters. Apart from ABB and Indo Asian Fusegear, all companies recorded a strong positive yoy growth in revenues. Some of the revenues (for instance, ABB’s power product segment) might have been impacted by one-offs such as provisions, write-offs or other project-specific issues. The total revenues of the T&D companies have growth by 14.5% yoy in 2QFY11.

Margins of the T&D equipment companies also witnessed some recovery; however. still remain below average FY2009 levels. Excluding likely one-off losses in certain companies (ABB, EMCO, Indo Asian Fusegear), average margins for the T&D players was at 14.4%, up 130 bps on a yoy basis and about 210 bps on a sequential basis. However, these margins are still about 150-200 bps lower than average FY2009 margin of 16.1%. We note that T&D equipment manufacturers had reported decline in margins over the past four-five quarters reflecting pricing pressure in the T&D space led by higher competition (new players as well as existing players adding to capacities) and demand-supply imbalances. Areva management has cited steep price corrections, to the tune of about 20-30% in the T&D space over the past few quarters.

KOTAK INSTITUTIONAL EQUITIES RESEARCH 35 India Industrials

Even T&D equipment sector starts to post recovery adjusted for one-off losses in some companies Power T&D revenues and margins of companies in 2QFY11

Change (%) Jun-08 Sep-08 Dec-08 Mar-09 Jun-09 Sep-09 Dec-09 Mar-10 Jun-10 Sep-10 yoy 2 yr CAGR Reveneus Crompton Standalone power 4,584 5,007 5,432 7,222 5,084 6,043 5,690 8,286 5,101 6,440 6.6 13.4 ABB Power products 5,130 4,920 6,181 4,259 5,017 4,734 5,927 4,318 4,441 3,992 (15.7) (9.9) Power systems 5,321 5,109 7,502 4,472 4,643 3,813 4,265 3,825 4,173 3,919 2.8 (12.4) Areva 6,218 5,865 9,388 8,450 7,883 7,397 11,599 7,768 8,855 10,477 41.6 33.7 EMCO 1,833 2,306 2,079 3,743 2,014 2,014 2,081 3,764 1,186 2,902 44.1 12.2 Voltamp 1,701 1,700 1,364 1,666 1,042 1,112 1,445 1,821 1,193 1,243 11.8 (14.5) TRIL 822 1,138 979 1,342 859 885 1,315 2,167 856 1,141 28.9 0.1 Bharat Bijlee 1,056 1,509 1,404 1,490 1,136 1,703 1,616 2,106 1,058 1,848 8.6 10.7 Indo Asian Fusegear 648 721 571 666 477 618 619 588 540 457 (25.9) (20.4) Total revenues 27,313 28,275 34,900 33,309 28,155 28,317 34,555 34,643 27,403 32,420 14.5 7.1 Margin (%) Crompton Standalone power 13.4 14.7 15.8 17.8 15.9 18.6 19.0 19.5 16.6 17.5 ABB Some pick-up in T&D Power products 12.1 9.2 15.6 12.7 13.5 11.9 6.5 8.3 6.4 (0.7) revenue growth post Power systems 6.4 10.1 8.8 6.3 2.9 1.2 (9.2) (12.7) (5.1) (0.7) relatively flat performance Areva 17.7 16.3 14.6 12.9 13.6 8.6 12.0 5.4 9.2 12.7 in 1QFY11 EMCO 13.0 13.3 13.3 15.0 12.5 12.9 12.8 8.6 (21.5) (9.4) Voltamp 20.2 22.3 30.3 21.7 15.6 10.6 15.1 23.0 14.7 13.7 TRIL 14.4 17.4 15.4 15.8 16.9 17.9 13.6 15.8 17.2 15.1 Sequential as well as yoy Bharat Bijlee 12.5 14.1 17.5 16.2 7.7 12.4 8.6 12.7 10.7 13.8 pick up in average margins Indo Asian Fusegear 13.5 8.7 10.6 9.9 6.0 11.0 11.5 (1.3) (2.7) (75.1) (adjusted for one-offs) Avg. margin (%) 16.1 16.3 16.4 15.8 14.2 13.1 13.9 13.8 12.3 14.4

Source: Company, Kotak Institutional Equities

RBI financial closure data suggest capex cycle is going strong as ever

We highlight that amount of financial closures achieved by private sector during FY2010 grew 70% to Rs5.56 tn from Rs3.3 tn during FY2009. Note that this is post a 36% yoy growth in financial closures in FY2009. This reflects surprising strength versus wide perception of weak credit markets during FY2009-10. We believe that financial closure activity reflects strength of corporate capex activity in the country and is a leading indicator of likely capital expenditure activity.

Financial closure data is provided by Reserve Bank of India (RBI) on an annual basis and captures private corporate sector projects achieving financial closure from banks and financial institutions. Data is also adjusted for financing raised from external commercial borrowings (ECBs) and initial public offerings (IPOs). This data does not include projects of public sector entities such as NTPC etc and does not include direct government financed projects.

36 KOTAK INSTITUTIONAL EQUITIES RESEARCH Industrials India

Financial closure picks up momentum post decline in FY2008 Capital expenditure sanctioned assistance by banks/FIs, March fiscal year-ends, 1991-2010

(Rs bn) (%) Capex sanctioned in the year (LHS, Rs bn) 6,000 400.0 growth (RHS, %)

5,000 300.0 4,000 200.0 3,000 100.0 2,000 - 1,000

- (100.0) FY1991 FY1993 FY1995 FY1997 FY1999 FY2001 FY2003 FY2005 FY2007 FY2009

Source: Reserve Bank of India

Infrastructure segment, particularly power, dominates; supported by telecom and metal

We highlight concentration of financial closures in the infrastructure segment which contributed to 53.2% of total financial closures in FY2010 versus 45% in FY2009. Total financial closures in the infrastructure segment doubled to about Rs2.95 tn in FY2009 versus about Rs1.5 tn in the previous year. Power sector projects maintained its share of about 30% of total financial closures in FY2010 versus 29% in the previous financial year. We highlight higher likely investments in the telecom sector which increased its stake to 21% of total financial closures of FY2010 versus only 10% in FY2009. Other significant contributor to the total pie was metals and metal products segment which achieved financial closures for projects to the tune of about Rs1.1 tn contributing to 20% of the total financial closures in FY2010.

KOTAK INSTITUTIONAL EQUITIES RESEARCH 37 India Industrials

Power projects maintain stake; telecom sector picks up momentum Share of major Industries in aggregate project costs achieving financial closure, March fiscal year-ends, 2009-10

2008-09 (TPC: Rs3,330 bn, 722 projects) 2009-10 (TPC: Rs5,560 bn, 796 projects) Coke and Others Petroleum Others 21% Power 13% products Power Coke and 29% 1% 30% Petroleum Construction products 9% 2%

Construction Metal and 10% Telecom 10% metal products SEZ, Industrial 20% Telecom Biotech and IT 21% Metal and SEZ, Industrial parks Cement metal Biotech and IT products Cement 3% 3% Textiles Textiles parks 18% 6% 1% 2% 1%

Source: Reserve Bank of India

Margins though take beating from commodity prices across companies

Most companies reported margin expansion in 4QFY09-3QFY10 on the back of low commodity prices although some portion of the contribution margin was dissipated in the negative operating leverage led by slow execution. This trend has reversed over the past few quarters. Average margins in 2QFY11 have dipped by about 140 bps yoy, as measured across the sector (margins have remained relatively flat on a sequential basis). Margins in 1QFY11 as well had witnessed a 140 bps yoy contraction. We see some pick-up in prices of most commodities since 4QFY10 and thereby believe that the companies are likely to face potential headwinds of margin pressure. However, we expect that as the revenue growth picks up in FY2011E (partially led by low base effect), operating leverage would also help support margins irrespective of a potential increase in commodity prices.

Quarterly margin trend and yoy change for industrial companies, June 30, 2008 - Sept 30, 2010

(%) Yoy change (RHS, bps) Avg. EBITDA margin (LHS, %) 14.0 1.5

1.0 12.0 0.5

10.0 -

8.0 (0.5) (1.0) 6.0 (1.5)

4.0 (2.0) Jun-08 Jun-09 Jun-10 Sep-08 Sep-09 Sep-10 Dec-08 Dec-09 Mar-09 Mar-10

Source: Kotak Institutional Equities

38 KOTAK INSTITUTIONAL EQUITIES RESEARCH Industrials India

EBITDA margins in 2QFY11 are down on a yoy basis as raw material cycle is turning back Quarterly EBITDA margins for various industrial companies, quarter-ends June 30, 2009 - Sept 30, 2010 (Rs mn) change (bps) Jun-08 Sep-08 Dec-08 Mar-09 Jun-09 Sep-09 Dec-09 Mar-10 Jun-10 Sep-10 Mar-10 Jun-10 Sep-10 BHEL 8.6 13.3 16.9 16.1 9.2 17.0 20.2 18.3 13.0 17.7 2.3 3.8 0.6 L&T 10.1 9.2 11.1 14.0 11.2 10.6 12.4 15.1 12.8 10.8 1.1 1.5 0.2 Crompton 12.8 13.2 12.8 15.9 14.8 16.5 16.6 16.7 15.6 16.0 0.8 0.8 (0.5) Areva T&D (Dec year-ends) 17.7 16.3 14.6 12.9 13.6 8.6 12.0 5.4 9.2 12.7 (7.4) (4.4) 4.1 ABB (Dec year-ends) 12.5 8.9 12.4 9.1 9.1 8.4 8.0 0.2 3.5 1.5 (8.9) (5.6) (7.0) Voltas 8.7 8.3 5.7 6.6 8.9 11.4 9.0 10.1 9.1 10.1 3.5 0.1 (1.4) Thermax 12.7 11.6 12.2 14.1 12.8 11.6 11.9 12.0 12.2 11.8 (2.0) (0.7) 0.1 Elecon Engineering 17.0 15.2 15.4 17.0 16.2 14.6 15.5 14.2 15.3 14.2 (2.9) (0.9) (0.4) EMCO 13.0 13.3 13.3 15.0 12.5 12.9 12.8 8.6 (21.5) (9.4) (6.4) (34.0) (22.4) KEC 10.2 7.0 8.2 9.7 11.8 9.7 9.9 9.2 10.0 9.2 (0.5) (1.8) (0.6) Kalpataru Power 11.8 12.1 9.9 10.4 12.0 12.9 11.4 11.1 13.4 8.8 0.7 1.4 (4.2) Jyoti Structures 12.0 12.0 11.9 11.1 11.1 11.4 11.6 13.1 11.1 11.6 2.0 0.0 0.2 Blue Star 9.0 10.7 9.2 13.0 11.6 12.5 10.9 12.8 9.2 9.7 (0.2) (2.4) (2.8) Cummins India 13.315.223.517.018.418.322.920.421.319.93.42.91.6 Havell 9.8 10.3 4.5 11.4 12.3 13.3 13.5 12.2 11.2 12.0 0.8 (1.1) (1.3) Honeywell 10.6 18.8 13.4 16.6 17.0 17.6 15.4 14.8 7.6 8.8 (1.8) (9.4) (8.8) Texmaco 17.815.016.114.318.914.513.915.920.217.61.71.23.1 Summary (excl. BHEL, L&T) Avg. EBITDA margin (%) 11.3 11.2 11.9 12.6 11.7 11.8 12.1 10.9 10.3 10.1 (1.6) (1.4) (1.7) Yoy change (bps) (0.2) (1.0) (1.3) 0.5 0.4 0.6 0.2 (1.6) (1.4) (1.7) Qoq change (bps) (0.7) (0.1) 0.7 0.7 (0.8) 0.1 0.3 (1.2) (0.6) (0.2) Last 4 quarter avg. (%) 12.2 11.9 11.611.811.912.012.111.611.310.9

Source: Company, Kotak Institutional Equities

Margins seem to depend less on demand environment and more on commodity movement

We note that the margins of companies appear to be more dependent on commodity prices rather than the demand environment. For instance, FY2010 witnessed a sharp decline in the demand environment, reflected in the lower order inflows and slowdown of short-cycle business revenues. The commodity prices in FY2010 also witnessed a decline; average steel price in FY2010 was about 22% lower than average FY2009 prices. However, margins in the first nine months of FY2010 expanded by about 50 bps yoy.

We highlight that commodities, such as steel, aluminum and copper, are trading much above their average price over FY2010. Steel is currently trading at 663 US$/ton, about 34% higher than average FY2010 price and about 5% higher than average FY2009 price.

KOTAK INSTITUTIONAL EQUITIES RESEARCH 39 India Industrials

Price trend of key commodities, Nov 2006 - Nov 2010

Steel (US$/ton) 1,000 LME Copper (US$/ton) Steel FY2010 avg. FY2009 avg. Copper FY2010 avg. FY2009 avg. 9,000

800 7,500

6,000 600

4,500 400 3,000

200 1,500 Jul-07 Jul-08 Jul-09 Jul-10 Jul-07 Jul-08 Jul-09 Jul-10 Nov-06 Nov-07 Nov-08 Nov-09 Nov-10 Mar-07 Mar-08 Mar-09 Mar-10 Nov-06 Nov-07 Nov-08 Nov-09 Nov-10 Mar-07 Mar-08 Mar-09 Mar-10

LME Aluminium (US$/ton) 5,000 LME Zinc (US$/ton) 3,600 Aluminium FY2010 avg. FY2009 avg. Zinc FY2010 avg. FY2009 avg.

3,200 4,000 2,800

2,400 3,000

2,000 2,000 1,600

1,200 1,000 Jul-07 Jul-08 Jul-09 Jul-10 Jul-07 Jul-08 Jul-09 Jul-10 Nov-06 Nov-07 Nov-08 Nov-09 Nov-10 Mar-07 Mar-08 Mar-09 Mar-10 Nov-06 Nov-07 Nov-08 Nov-09 Nov-10 Mar-07 Mar-08 Mar-09 Mar-10

Source: Bloomberg, Kotak Institutional Equities

IIP movement on capital goods causes concern but data may be unreliable

IIP growth has moderated to about 6.2% in September 2010, from strong growth of about 15-16% in Jan-May 2010. We note that capital goods segment has recorded a de-growth of about 4.2% in September 2010 which is a cause of concern.

40 KOTAK INSTITUTIONAL EQUITIES RESEARCH Industrials India

YoY growth and 3-month YoY growth moving average in India's IIP, 2002-2010 (%)

(%) IIP growth IIP 3m MA 20

15

10

5

- May-02 May-03 May-04 May-05 May-06 May-07 May-08 May-09 May-10 (5)

90.0

75.0

60.0

45.0

30.0

15.0

-

(15.0) Jun-10 Jun-09 Jun-08 Oct-09 Oct-08 Feb-10 Feb-09 Apr-10 Apr-09 Apr-08 Dec-09 Dec-08 Aug-10 Aug-09 Aug-08

Source: Central Statistical Organization, compiled by Kotak Institutional Equities

However, we note that this data may not be very reliable; capital goods growth data has been quite spiky in the past few months. The weighted growth for the month of September 2010 works out to about 0.5% versus an index de-growth of 4.2%. Similarly for the month of July 2010, Capital goods index recorded a very strong growth of 65% versus a calculated weighted growth of 22%. We also highlight likely distortions in the data points for certain line items included in the capital goods index (highlighted in the table below).

KOTAK INSTITUTIONAL EQUITIES RESEARCH 41 India Industrials

Inconsistency in capital goods growth data: Weighted growth at about 0.5% versus Index de-growth of 4.2% yoy Weights, output, yoy % growth for capital goods items in IIP

Sudden jump in insulated Well/offshore platforms production cables figure in July-10 to over witnessed 5X increase on a m-o-m 6X previous years number basis in Sept-09 (over Aug-09) yoy growth Weight Item Unit Sep-10 Aug-10 Jul-10 Sep-09 Aug-09 Jul-09 Sep-10 Aug-10 Jul-10 9.26 IIP: Capital goods (wt 9.257) Index 567 469 717 592 460 435 (4.2) 2.1 65.0 0.83 Diesel engines (IPP) Numbers 59,214 58,716 57,420 55,160 50,250 50,560 7.3 16.8 13.6 0.71 Well/offshore platforms Rs.lakh 4,210 2,326 3,470 11,116 2,724 7,334 (62.1) (14.6) (52.7) 0.53 Industrial machinery Rs.lakh 51,371 28,534 33,769 68,471 54,039 43,992 (25.0) (47.2) (23.2) 0.46 Complete tractors Numbers 38,352 36,627 36,939 33,059 32,693 32,836 16.0 12.0 12.5 0.44 Laboratory and scientific inst. Rs.lakh 591 283 435 1,148 277 391 (48.6) 2.1 11.3 0.41 Protection system/switch board Rs.'000 551,510 555,223 495,828 611,757 567,801 488,215 (9.8) (2.2) 1.6 0.40 Computer system & peripherals Rs.lakh 26,381 25,278 25,239 29,934 27,570 23,470 (11.9) (8.3) 7.5 0.33 Process control instruments Rs.lakh 3,506 3,586 3,733 2,304 1,824 2,073 52.2 96.6 80.1 0.33 Ship building and repair Rs.lakh 35,619 41,310 33,410 37,975 40,273 35,699 (6.2) 2.6 (6.4) 0.31 Agricultural implements Rs.lakh 149 157 111 173 222 169 (13.8) (29.2) (34.2) 0.30 Power & dist. transformers (IPP) Mn KVA 8 7 6 8 7 7 (2.5) (0.6) (12.5) 0.26 Broad gauge passenger carriage Numbers 287 274 316 350 307 268 (18.0) (10.7) 17.9 0.25 Telecommunication cables Mn metres 449 593 523 482 490 449 (6.8) 21.0 16.6 0.24 Insulated cables/wires Core kms 489,519 282,334 2,688,751 765,212 512,103 435,256 (36.0) (44.9) 517.7 0.23 Boilers Rs.lakh 163,265 90,555 98,932 99,449 99,195 81,064 64.2 (8.7) 22.0 0.21 Turbines (steam/hydro) Rs.lakh 58,449 33,572 33,201 47,804 17,121 19,878 22.3 96.1 67.0 0.20 Electric generators (incl.alternators) Rs.lakh 25,231 18,596 22,190 16,722 16,383 13,575 50.9 13.5 63.5 0.19 Electric motors (IPP) Lakh HP 16 15 15 13 12 12 19.8 22.4 20.9 0.19 Power driven pumps '000 nos 151 166 191 156 158 160 (3.1) 5.0 18.8 0.17 Material handling equipment Rs.lakh 15,906 9,582 10,560 10,267 11,740 12,484 54.9 (18.4) (15.4) 0.16 Electric motors phase one Numbers 226,683 251,265 246,112 229,887 163,802 253,109 (1.4) 53.4 (2.8) 0.16 HT insulators Tons 5,553 5,490 4,924 4,676 4,706 4,513 18.8 16.7 9.1 0.14 Locomotives Numbers 34 37 42 36 46 44 (5.6) (19.6) (4.5) 0.14 Machine tools (IPP) Rs.lakh 19,925 19,074 19,267 18,306 18,531 18,119 8.8 2.9 6.3 0.13 Hydraulic machine/cylinders Rs.'000 121,554 99,583 144,689 165,743 147,370 140,060 (26.7) (32.4) 3.3 0.12 Medical and surgical instruments Rs.lakh 2,188 1,949 2,135 2,223 3,460 2,032 (1.6) (43.7) 5.1 0.11 Cutting tools (lathes etc.) '000 nos 1,225 1,205 1,173 992 1,017 1,085 23.5 18.5 8.1 0.10 Control panels/boards/disks Rs.lakh 11,475 7,486 6,562 15,541 8,361 6,050 (26.2) (10.5) 8.5 0.10 Commercial vehicles Numbers 64,401 59,042 60,869 47,108 43,750 42,052 36.7 35.0 44.7 0.09 Auto rickshaws Numbers 71,127 71,008 64,742 55,442 53,120 44,575 28.3 33.7 45.2 0.08 Wheel and axles complete set Numbers 5,741 5,274 5,791 4,531 6,205 6,810 26.7 (15.0) (15.0) 0.07 Utility vehicles Numbers 44,923 45,426 43,291 34,444 33,613 35,569 30.4 35.1 21.7 0.07 Air and gas compressor Numbers 13,999 13,618 13,332 7,679 7,100 7,637 82.3 91.8 74.6 0.06 Broad gauge covered wagons Numbers 708 655 477 224 277 204 216.1 136.5 133.8 0.06 Refrigerators & air-conditioning Rs.lakh 1,050 976 1,022 615 797 713 70.6 22.4 43.4 0.05 Dump loaders Numbers 199 170 199 150 131 110 32.7 29.8 80.9 0.05 Dumper Numbers 65 74 83 63 73 55 3.2 1.4 50.9 0.04 Switchgear (circuit breakers) Numbers 1,894,036 1,928,870 1,827,358 1,692,880 1,404,529 1,433,819 11.9 37.3 27.4 0.04 Diamond tools Numbers 207,545 225,936 190,605 151,973 181,567 191,217 36.6 24.4 (0.3) 0.03 Printing machinery Rs.lakh 1,758 1,482 1,580 1,470 1,648 1,151 19.6 (10.0) 37.3 0.03 PVC/PICL '000 metres 12,799 8,926 6,373 4,966 4,372 5,043 157.7 104.2 26.4 0.02 Cranes Tons 1,467 1,463 1,900 1,946 1,576 1,630 (24.6) (7.2) 16.6 0.02 Lifts Numbers 803 751 883 803 571 592 - 31.5 49.2 0.02 Cooling towers Rs.lakh 3,695 3,849 3,827 4,827 2,805 3,231 (23.5) 37.2 18.4 0.02 Monoblock pumps Numbers 31,556 30,036 27,158 23,297 23,290 21,443 35.5 29.0 26.7 0.02 Rubber conveyor belting Tons 2,764 2,927 2,798 2,319 2,583 1,785 19.2 13.3 56.8 0.01 Electric motors (SSI) Numbers 191,895 191,895 188,948 185,101 184,853 184,822 3.7 3.8 2.2 0.00 Furnaces Rs.lakh 1,043 1,104 1,222 762 734 580 36.8 50.3 110.8 9.21 Weighted growth in capital goods 0.5 5.5 21.7

Source: Company

42 KOTAK INSTITUTIONAL EQUITIES RESEARCH Industrials India

Top picks in the industrials sector are Thermax, Crompton and L&T

We prefer companies with relatively cheaper valuations, positive long-term outlook and expanding opportunity set. Our top picks in the industrials sector are Thermax, Crompton and L&T.

` Thermax (TP: Rs965, BUY) on (1) strong expansion of business opportunity: Company reported positive performance on scale up in supercritical JV + expansion in product portfolio to include items such as ESP and heat transfer equipment, (2) extremely strong balance sheet, negative working capital, among the strongest corporate governance and (3) among the best positioned to benefit from growing capex environment.

` Crompton (TP: Rs340, BUY) on (1) strong pick-up witnessed in overseas subsidiaries in the past quarters, (2) potential for strong near-term revenue growth and margins in international subsidiaries on strong trend witnessed in 1H and low base effect of 2HFY10, (3) likely recovery in industrial investments reflected in stronger performance in the industrial systems segment, (4) strong cash flow generation characteristics, (5) potential upside from higher participation in substation package tenders and (6) expected robust T&D spending in XII plan.

` L&T (TP: Rs2,200, ADD) on (1) expected execution to pick up in 2HFY11E, (2) scale-up of power equipment and EPC that is both less cyclical and competitive (versus other segments), (3) revival in capex activity, (4) strong investments in capacity and capability enhancement that would open new growth areas such as power equipment, nuclear energy and defense, (5) value creation in subsidiaries, particularly with incremental capital being raised form market and (6) strong balance sheet and cash flows.

We have a negative view on ABB, Siemens, Suzlon, BHEL and Voltas

` ABB (TP: Rs725, REDUCE) / Siemens (TP: Rs635, REDUCE): Pricing pressures, company specific issues, volatility in operating performance and very high valuations.

` Suzlon (TP: Rs55, REDUCE): Weak order booking traction–thus FY2011E EBITDA may not even cover interest cost, requires sharp cost and WCap. reduction.

` BHEL (TP: Rs2,500, REUCE): Expect potentially sedate traction in order inflows which may lead to sedate revenue growth post FY2012E, increase in competitive intensity.

` Voltas (TP: Rs225, REDUCE): (1) Continued slowdown in target MEP markets, (2) potential margins pressure and (3) slow execution of new projects.

KOTAK INSTITUTIONAL EQUITIES RESEARCH 43 India Industrials

Results summary

2QFY11 performance of Industrials and construction companies under coverage (Rs mn)

% change Sep-10 Sep-10E Sep-09 Jun-10 vs est. yoy qoq Comment Larsen & Toubro Net sales 93,308 91,128 79,188 78,853 2.4 17.8 18.3 Strong revenue growth led by execution of existing large backlog -inline with EBITDA 10,057 10,024 8,372 10,071 0.3 20.1 (0.1) estimates EBITDA margin (%) 10.8 11.0 10.6 12.8 PBT 10,735 9,711 8,237 9,773 10.5 30.3 9.8 Contribution margin expands by 130 bps yoy led by lower subcontracting PAT 6,941 6,506 5,530 6,662 6.7 25.5 4.2 Higher-than-expected other income helps beat PAT-level estimate BHEL Net sales 83,284 79,797 66,252 64,797 4.4 25.7 28.5 Strong revenue growth slightly higher than estimates; management confident EBITDA 14,702 13,565 11,295 8,437 8.4 30.2 74.3 of near-term growth - target of Rs500 bn in FY2012E EBITDA margin (%) 17.7 17.0 17.0 13.0 PBT 16,544 15,373 13,294 9,978 7.6 24.4 65.8 EBITDA margin expansion primarily on operating leverage; contribution PAT 11,423 10,300 8,579 6,677 10.9 33.2 71.1 margins have infact contracted by 230 bps - higher than expectations ABB Net sales 13,340 16,925 14,538 14,466 (21.2) (8.2) (7.8) Sedate revenues partly led by higher proportion of large projects in backlog EBITDA 195 1,458 1,223 500 (86.6) (84.0) (61.0) Margins impacted due to continued exit costs from rural electrification EBITDA margin (%) 1.5 8.6 8.4 3.5 business and cost overruns in certain large projects PBT 208 1,569 1,212 555 (86.7) (82.8) (62.5) Power systems continue to reel under project issues; decline in process PAT 115 1,051 831 383 (89.1) (86.1) (70.0) automation segment is a surprise Crompton Greaves Net sales 23,979 23,627 21,890 23,022 1.5 9.5 4.2 Inline results; strong growth in overseas subsidiaries (adjusted for currency EBITDA 3,332 3,249 3,067 2,973 2.6 8.6 12.1 movement) led by revival in wind transformer business EBITDA margin (%) 13.9 13.8 14.0 12.9 Strong growth continues in industrial and consumer segments; revenues up PBT 3,054 3,014 2,781 2,691 1.3 9.8 13.5 17.6% and 24% yoy respectively PAT 2,134 2,050 1,932 1,897 4.1 10.5 12.5 Power continues to be impacted by client-side delays BGR Energy Net sales 11,356 9,343 4,682 9,067 21.5 142.5 25.3 Strong revenue growth led by timely execution of the large EPC (Kalisindh EBITDA 1,323 1,074 596 1,038 23.2 122.0 27.5 and Mettur) and BoP (Chandrapur and Marwa) orders EBITDA margin (%) 11.7 11.5 12.7 11.4 Margins broadly inline with estimates PBT 1,178 926 463 917 27.2 154.4 28.5 Recent Rs22 bn BoP order win is a key positive; 1/3rd and 4/5th of FY12E and PAT 778 611 306 605 27.3 154.4 28.5 FY13E revenues depend on incremental orders Thermax Net sales 10,916 9,209 6,804 7,898 18.5 60.4 38.2 Strong revenue growth on execution pick-up in large orders and low base EBITDA 1,286 1,059 792 960 21.4 62.3 34.0 EBITDA margin inline but likely supported by operating leverage; sharp (about EBITDA margin (%) 11.8 11.5 11.6 12.2 540 bps) decline in contribution margin PBT 1,309 1,049 829 988 24.8 57.9 32.5 Both segments record strong growth; however Energy segment witnessed a PAT 895 703 541 662 27.4 65.4 35.3 160 bps yoy decline in EBIT margins Voltas Net sales 10,651 12,543 10,996 14,083 (15.1) (3.1) (24.4) All three segments disappoint on revenues front - led by EMP segment EBITDA 1,075 1,380 1,259 1,276 (22.1) (14.6) (15.7) Certain one-time adjustments (forex loss, formation-related costs for JVs etc) EBITDA margin (%) 10.1 11.0 11.4 9.1 led to lower-than-expected profitability in the EMP segment PBT 1,178 1,492 1,332 1,374 (21.0) (11.6) (14.2) UCP segment beats margin estimates; engg products segment margins PAT 784 999 917 945 (21.5) (14.5) (17.0) improve but not enough Bharat Electronics Net sales 9,779 13,975 13,082 9,242 (30.0) (25.3) 5.8 Sharp (25%) decline in revenue versus our estimate of a moderate 6-7% EBITDA 1,075 2,655 3,292 917 (59.5) (67.4) 17.2 growth EBITDA margin (%) 11.0 19.0 25.2 9.9 Sharp EBITDA margin decline likely led by negative operating leverage and PBT 1,454 3,036 3,456 1,134 (52.1) (57.9) 28.2 higher employee cost PAT 1,041 2,065 2,374 814 (49.6) (56.2) 27.9 Suzlon (Wind) Net sales 21,880 24,000 18,750 14,410 (8.8) 16.7 51.8 Reported MW sales of 361 MW versus our estimate of 400 MW sales; EBITDA 50 — (1,490) (2,920) NA NA NA dominated by domestic market sales at 290 MW; international sales remain EBITDA margin (%) 0.2 — (7.9) (20.3) Reported marginally positive EBITDA of Rs50 mn versus significant losses in PBT (2,390) (2,965) (5,490) (5,780) NA NA NA 3QFY10, 1QFY11 PAT (3,060) (2,965) (3,840) (5,580) NA NA NA High interest costs and depreciation led to a net loss of Rs3 bn

Source: Company, Kotak Institutional Equities

44 KOTAK INSTITUTIONAL EQUITIES RESEARCH

NEUTRAL Cement

India NOVEMBER 18, 2010 UPDATE BSE-30: 19,865

When it rains, it pours. Cement companies reported weaker-than-expected earnings during the quarter, led by (1) 8% yoy decline in cement realizations, and (2) 16% yoy increase in input cost leading to operating profit declining to Rs422/ton during the quarter. However, cement stocks continue to trade firm on expectations of stronger cement prices—we see the optimism as overplayed. We recommend that investors reduce positions in frontline cement stock trading at significant premium to replacement cost.

Exhibit 1: Most of the cemen stocks have out performed in the past 3 months Absolute and relative performance of cement companies under coverage (%)

Change (%) Relative change (%) 1-mo 3-mo 6-mo 1-year CYTD 1-mo 3-mo 6-mo 1-year Ambuja Cements 8.4 29.2 37.4 70.1 42.2 9.8 17.3 16.5 46.0 ACC 7.824.521.443.419.99.213.12.923.1 Grasim Industries (0.6) 9.2 14.0 31.6 21.9 0.7 (0.8) (3.4) 12.9 UltraTech Cement (5.0) 20.0 12.7 42.0 17.7 (3.8) 9.1 (4.5) 21.9 India Cements (0.3) 10.2 (1.2) 13.7 (6.9) 1.0 0.1 (16.3) (2.4) Shree Cement 7.4 18.5 3.3 25.8 13.7 8.8 7.7 (12.4) 8.0 Cement 2.0 19.8 17.8 2.0 22.1 3.3 8.9 (0.1) (12.5)

Source: Bloomberg, Kotak Institutional Equities

Low on volumes, realizations (and profitability)

As highlighted in our preview dated October 6, 2010, cement companies saw one of their worst operating quarters in the past few years as seasonal weaknesses in demand and pricing were exacerbated further by inflating input cost and prolonged monsoons. Operating margins nose- dived as profitability declined by 63% yoy for pure-play cement companies under our coverage. Average realizations were down 8% yoy, but profitability was further hit by inflated input cost (+16% yoy). We also highlight that the country saw prolonged monsoons that extended well into the month of September, thus delaying any volume pickup that is generally seen post monsoons.

Limited optimism for 2HFY11 – volume picks up, pricing still a concern

We highlight that with the end of the monsoons, cement offtake has picked up with a revival of construction activity and large pent-up demand in the system. Reported headline dispatch numbers of ACC and Ambuja for the month of October indicate this uptrend with ACC volumes at 1.9 mn tons increasing 13.6% yoy and 21.5% mom while Ambuja volumes at 1.8 mn tons growing by 20% yoy and 18% mom. However, cement prices, which gradually trended downwards during 2QFY11, have not shown any signs of revival except for the South where a sharp price hike of Rs20-25/bag was taken in the month of September.

Stock performance and valuations not factoring earnings disappointment

Cement stocks have outperformed the Sensex in the past three months, despite earnings falling

41% below estimates. Large cement companies are trading at a 30-40% premium to replacement cost (US$120/ton). We reiterate our cautious stance on the sector and advise investors to book profits on India Cement and Ambuja, both of which are trading at peak-cycle earning multiples. We continue to like Shree Cements and Grasim Industries primarily on account of relatively inexpensive valuations compared to peers.

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

India Cement

Pent-up demand may revive volumes in 2HFY11

Our volume estimates for 2HFY11 assume a 11% yoy increase in cement volumes compared to the near-stagnant volume growth reported in 1HFY11. Our optimism stems from likely pent-up demand in the system due to a prolonged monsoon season with a limited dry period that constrained construction activity, and is strengthened by the 17% yoy and 20% mom increase in cement dispatches reported by some of the companies for October 2010. Exhibit 2 highlights the distribution of cement volumes during the year.

Exhibit 2: Our volume estimates for 2HFY11 assume a 11% yoy increase in cement volumes in 2HFY11 Cement volumes of companies in KIE universe (mn tons)

Volumes (mn tons) Growth (%) FY2011E 1HFY11 2HFY11E 2HFY10 (yoy) UltraTech Cement Ltd. 37.6 14.2 23.3 20.8 12.4 Ambuja Cements Ltd. 20.4 15.1 5.4 4.6 17.7 ACC Ltd. 21.4 15.7 5.7 5.4 6.0 Shree Cement Ltd. 10.1 4.8 5.3 5.1 4.6 India Cements Ltd. 11.7 5.4 6.3 5.7 10.5 Total 46.0 41.5 10.9

Note: For ACC and Ambuja, volumes are for first three quarter of CY2010 For Ultratech, 2HFY10 volumes include Samruddhi volumes

Source: Kotak Institutional Equities estimates

Current prices offer limited sequential improvement

Average cement prices of Rs220/bag in September 2010, offer limited sequential improvement in prices over 2QFY11, though the South will likely see a ~Rs350/ton sequential price increase over 2QFY11. We note that pricing activity has so far been muted in 3QFY11, barring South where prices in Tamil Nadu have been cut by Rs10-15/bag in the month of November. The softening price trend reflects the continued supply overhang, despite profitability for large cement players such as India Cement having reached a record low of Rs106/ton in 2QFY11.

Cost pressures continue to inch upwards

Input costs for cement companies increased by Rs202/ton sequentially, led by raw material and overhead costs on account of increases in prices of fly ash and gypsum and the impact of lower operating leverage on muted volumes, respectively. We discuss some of the key cost components and likely increases in the same:

` Raw material: Raw material cost increases were led by higher prices for gypsum and fly ash. For India Cements and Ambuja, increased dependence on purchased clinker due to a shutdown of units and a transportation strike, respectively, were prime drivers for increases in raw material costs.

` Power and fuel: The ~11% yoy increase in power and fuel cost reflects the lag effect of a rise in prices of imported coal and pet coke. We note that prices of domestic coal (through linkage) had last been increased in October 2009 and prices of imported coal have remained stagnant over the past six months, we accordingly expect power and fuel costs to stabilize at current levels, though we remain cautious on the strengthening trend of pet coke prices which mainly affect players such as Shree Cement in our coverage universe.

46 KOTAK INSTITUTIONAL EQUITIES RESEARCH Cement India

` Overhead cost:: Muted cement volumes during the quarter aggravated by maintenance shut downs led to a sharp increase in overhead cost. We expect overhead cost on a per ton basis to improve by Rs25/ton on an expanded volume base in 2HFY11.

Exhibit 3: One of their worst operating quarters in the past few years 2QFY11E performance of Cement companies under KIE coverage universe (Rs mn)

Change (%) Sep-09 Jun-10 Sep-10E Sep-10 yoy yoy qoq ACC Net sales 19,694 20,207 17,390 16,372 (5.9) (16.9) (19.0) EBITDA 6,679 5,530 3,761 1,699 (54.8) (74.6) (69.3) EBIT 5,883 4,568 2,776 789 (71.6) (86.6) (82.7) PBT 6,257 5,024 3,183 1,435 (54.9) (77.1) (71.4) PAT 4,356 3,589 2,291 1,000 (56.3) (77.0) (72.1) Ambuja Cements Net sales 16,110 20,476 15,996 15,640 (2.2) (2.9) (23.6) EBITDA 4,300 6,032 3,499 2,832 (19.1) (34.2) (53.1) EBIT 3,581 5,031 2,479 1,814 (26.8) (49.4) (64.0) PBT 4,423 5,618 3,144 2,220 (29.4) (49.8) (60.5) PAT 3,185 3,912 2,263 1,521 (32.8) (52.2) (61.1) Grasim Industries Net sales 46,823 50,552 43,555 44,390 1.9 (5.2) (12.2) EBITDA 14,849 13,039 9,305 7,211 (22.5) (51.4) (44.7) EBIT 12,425 10,367 6,672 4,484 (32.8) (63.9) (56.8) PBT 13,049 11,053 7,079 5,134 (27.5) (60.7) (53.5) PAT 8,818 7,854 5,069 3,627 (28.5) (58.9) (53.8) India Cements Net sales 9,894 8,807 8,654 8,412 (2.8) (15.0) (4.5) EBITDA 2,977 1,001 179 286 60.4 (90.4) (71.4) EBIT 2,405 402 (431) (323) (25.1) (113.4) (180.4) PBT 2,086 389 (421) (580) 37.6 (127.8) (248.9) PAT 1,382 365 (421) (449) 6.5 (132.5) (222.9) Shree Cement Net sales 8,996 9,445 7,724 7,176 (7.1) (20.2) (24.0) EBITDA 4,082 2,895 1,875 1,427 (23.9) (65.0) (50.7) EBIT 3,084 1,386 475 142 (70.2) (95.4) (89.8) PBT 3,245 1,253 385 260 (32.6) (92.0) (79.3) PAT 2,918 1,068 308 180 (41.6) (93.8) (83.1) UltraTech Cement Net sales 15,408 17,898 32,932 32,147 (2.4) 108.6 79.6 EBITDA 4,700 4,057 5,650 4,078 (27.8) (13.2) 0.5 EBIT 3,733 3,042 3,472 1,894 (45.4) (49.3) (37.7) PBT 3,743 3,246 3,500 1,733 (50.5) (53.7) (46.6) PAT 2,509 2,427 2,476 1,158 (53.3) (53.9) (52.3)

Note: 2QFY10 and 1QFY11 numbers for UTCEM do not include Samruddhi sales

Source: Kotak Institutional Equities

KOTAK INSTITUTIONAL EQUITIES RESEARCH 47 India Cement

Exhibit 4: Average realizations were down 8% yoy, profitability was further hit by inflated input cost (up 16% yoy). Operating performance of Cement companies under KIE coverage in 2QFY11

ACC Ambuja Cements Sep 2010 Sep 2009 June 2010 % (yoy) % (qoq) Sep 2010 Sep 2009 June 2010 % (yoy) % (qoq) Sales, mn tons 4.8 5.0 5.3 (4) (8) 4.5 4.2 5.3 5(17) Realization (Rs/ton) 3,390 3,931 3,834 (14) (12) 3,514 3,792 3,834 (7) (8) Operating costs (Rs/ton) 3,038 2,598 2,785 17 9 2,878 2,780 2,705 46 Freight costs 467 509 512 (8) (9) 770 701 838 10 (8) Power & fuel costs 748 718 746 40 994 757 849 31 17 Other 1,822 1,372 1,526 33 19 1,114 1,322 1,018 (16) 9 Profitability (Rs/ton) 351.8 1,333.1 1,049.3 (74) (66) 636.2 1,012.3 1,129.6 (37) (44)

UltraTech Cement India Cements Sep 2010 Sep 2009 June 2010 % (yoy) % (qoq) Sep 2010 Sep 2009 June 2010 % (yoy) % (qoq) Sales, mn tons 9.1 4.2 10.5 117 (13) 2.7 2.8 2.7 (3) 2 Realization (Rs/ton) 3,533 3,669 3,807 (4) (7) 3,106 3,545 3,321 (12) (6) Operating costs (Rs/ton) 3,085 2,550 2,853 21 8 3,000 2,478 2,944 21 2 Freight costs 927 753 851 23 9 687 523 693 32 (1) Power & fuel costs 715 681 728 5(2) 966 875 1,037 10 (7) Other 1,443 1,115 1,274 29 13 1,347 1,081 1,213 25 11 Profitability (Rs/ton) 448.1 1,119.0 953.9 (60) (53) 105.7 1,066.7 377.3 (90) (72)

Source: Kotak Institutional Equities

Exhibit 5: Cement prices have gradually trended downwards in 2QFY11 Region wise cement prices in India (Rs/bag)

All India average Central East North South West 300

250

200

150

100 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Sep-05 Sep-06 Sep-07 Sep-08 Sep-09 Sep-10 May-06 May-07 May-08 May-09 May-10

Source: CMA, Kotak Institutional Equities

48 KOTAK INSTITUTIONAL EQUITIES RESEARCH Cement India

Exhibit 6: Comparative valuation summary

Market cap. CMP (Rs) Target EPS (Rs) P/E (X) Company (US$ mn) 15-Nov price (Rs) Rating 2009 2010E 2011E 2012E 2009 2010E 2011E 2012E ACC 4,423 1,065 940 REDUCE 56 83 56 64 18.9 12.8 18.9 16.7 Ambuja Cements 5,226 155 108 SELL 7.2 8.0 8.1 9.0 21.6 19.4 19.1 17.3 Grasim Industries 4,629 2,283 2,500 ADD 239 301 195 239 9.6 7.6 11.7 9.6 India Cements 793 117 90 SELL 18 10 5 7 6.6 11.6 25.6 16.6 Jaiprakash Associates 6,269 128 155 BUY 2.0 1.7 4.4 6.2 63.9 73.2 28.9 20.5 Shree Cement 1,693 2,198 2,400 BUY 175 208 152 239 12.6 10.6 14.4 9.2 UltraTech Cement 3,024 1,099 1,070 REDUCE 79 88 55 93 13.9 12.5 20.1 11.8

EV/EBITDA (X) EV/ton of production (US$) EV/ton of capacity (US$) Company 2009 2010E 2011E 2012E 2009 2010E 2011E 2012E 2009 2010E 2011E 2012E ACC 9.7 6.9 8.9 7.2 197 190 187 164 193 179 146 130 Ambuja Cements 11.7 10.5 10.4 8.6 287 263 242 214 260 244 224 193 Grasim Industries 5.9 4.8 5.9 4.4 NA NA NA NA NA NA NA NA India Cements 5.0 6.6 11.1 7.7 126 114 106 88 116 95 94 74 Jaiprakash Associates 21.7 20.5 14.9 11.2 NA NA NA NA NA NA NA NA Shree Cement 7.6 4.8 5.3 3.2 206 166 152 111 190 170 126 105 UltraTech Cement 8.1 6.5 9.9 5.9 179 148 158 132 169 128 142 128

Source: Company, Kotak Institutional Equities estimates

KOTAK INSTITUTIONAL EQUITIES RESEARCH 49

KOTAK INSTITUTIONAL EQUITIES RESEARCH EQUITIES INSTITUTIONAL KOTAK Kotak Institutional Equities: Valuation summary of key Indian companies India DailySummary-November19,2010 O/S Target 18-Nov-10 Mkt cap. shares EPS (Rs) EPS growth (%) PER (X) EV/EBITDA (X) Price/BV (X) Dividend yield (%) RoE (%) price Upside ADVT-3mo Company Price (Rs) Rating (Rs mn) (US$ mn) (mn) 2010E 2011E 2012E 2010E 2011E 2012E 2010E 2011E 2012E 2010E 2011E 2012E 2010E 2011E 2012E 2010E 2011E 2012E 2010E 2011E 2012E (Rs) (%) (US$ mn) Automobiles Ashok Leyland 76 ADD 101,302 2,240 1,330 2.8 4.9 6.5 84.5 75.1 31.9 27.0 15.4 11.7 15.4 10.5 8.4 2.5 2.2 2.0 2.0 1.3 1.3 10.9 15.4 17.9 85 11.6 8.4 Bajaj Auto 1,561 REDUCE 451,760 9,989 289 58.8 91.0 103.6 160.2 54.6 13.9 26.5 17.2 15.1 17.1 12.2 10.5 15.4 9.3 6.3 0.6 1.3 1.3 70.9 67.4 49.6 1,450 (7.1) 20.3 Bharat Forge 371 ADD 88,775 1,963 239 0.7 12.4 20.3 (92.0) 1,707.0 63.3 540.2 29.9 18.3 27.3 12.4 8.6 2.3 2.3 2.0 — — — 0.9 16.2 20.6 400 7.7 4.4 Hero Honda 1,913 REDUCE 382,096 8,449 200 111.8 109.0 126.8 74.1 (2.5) 16.3 17.1 17.6 15.1 10.8 11.2 9.3 10.6 7.5 5.6 1.6 1.5 1.8 59.0 49.9 42.5 1,775 (7.2) 19.9 Mahindra & Mahindra 780 BUY 464,705 10,275 595 33.9 47.2 54.7 125.8 39.2 15.9 23.0 16.5 14.3 15.1 11.9 10.0 5.8 4.5 3.6 1.2 1.2 1.2 30.0 30.7 28.2 805 3.2 30.6 Maruti Suzuki 1,430 REDUCE 413,243 9,137 289 86.4 80.6 93.4 105.0 (6.7) 15.8 16.5 17.7 15.3 8.9 9.2 7.6 3.5 2.9 2.5 0.4 0.4 0.5 23.3 17.8 17.5 1,330 (7.0) 17.3 Tata Motors 1,231 ADD 792,401 17,521 644 27.4 125.8 148.1 (182.5) 359.4 17.7 44.9 9.8 8.3 15.4 6.9 5.7 5.1 2.9 2.1 1.1 0.5 0.5 8.7 9.3 10.4 1,420 15.4 89.9

Automobiles IndiaDailySummary-November1 Cautious 2,694,282 59,575 276.0 82.0 19.3 25.8 14.2 11.9 13.9 9.1 7.6 5.4 3.9 3.0 1.0 0.9 0.9 20.9 27.2 25.1 Banks/Financial Institutions Andhra Bank 181 BUY 87,955 1,945 485 21.6 24.0 26.7 60.1 11.5 11.1 8.4 7.5 6.8 ———2.0 1.7 1.4 2.8 3.1 3.4 26.0 24.1 22.6 210 15.8 7.2 Axis Bank 1,426 ADD 577,778 12,776 405 62.1 78.6 99.9 22.7 26.6 27.2 23.0 18.2 14.3 ———3.6 3.1 2.7 0.8 1.1 1.4 19.2 18.4 20.2 1,700 19.2 46.2 Bank of Baroda 960 BUY 350,797 7,757 366 83.7 103.0 121.2 37.3 23.1 17.7 11.5 9.3 7.9 ———2.6 2.1 1.7 1.6 1.9 2.3 24.4 24.7 24.0 1,250 30.2 9.4 Bank of India 481 ADD 252,965 5,593 526 33.1 56.3 63.2 (42.1) 70.2 12.2 14.5 8.5 7.6 ———2.0 1.7 1.4 1.5 2.5 2.8 14.2 21.3 20.4 580 20.6 15.8 Canara Bank 780 ADD 319,903 7,074 410 73.7 90.7 102.8 45.8 23.1 13.4 10.6 8.6 7.6 ———2.6 2.0 1.6 1.3 1.3 1.5 22.5 22.8 21.4 740 (5.2) 17.3 Corporation Bank 735 ADD 105,412 2,331 143 82.0 86.7 100.7 31.8 5.7 16.2 9.0 8.5 7.3 ———1.8 1.6 1.3 2.2 2.4 2.8 22.0 19.9 19.9 800 8.9 2.0 Federal Bank 457 ADD 78,145 1,728 171 27.2 34.7 47.2 (7.1) 27.7 35.9 16.8 13.2 9.7 ———1.7 1.5 1.3 1.1 1.4 1.9 10.3 12.0 14.7 530 16.0 8.6 HDFC 700 REDUCE 1,005,387 22,231 1,436 19.7 24.0 28.1 22.7 21.8 17.2 35.6 29.2 24.9 ———6.6 5.8 5.1 1.0 1.2 1.4 20.0 21.2 21.9 720 2.8 57.1 HDFC Bank 2,340 REDUCE 1,071,279 23,688 458 64.4 84.9 111.2 22.1 31.8 31.0 36.3 27.6 21.0 ———5.0 4.4 3.8 0.5 0.7 0.9 16.1 16.9 19.2 2,500 6.8 45.5 ICICI Bank 1,164 ADD 1,340,095 29,632 1,151 36.1 45.0 58.0 6.9 24.6 29.0 32.3 25.9 20.1 ———2.6 2.4 2.3 1.0 1.2 1.5 8.0 9.7 11.6 1,230 5.6 102.8 IDFC 188 ADD 274,389 6,067 1,458 8.4 9.6 11.5 44.9 14.1 20.4 22.4 19.7 16.3 ———3.9 2.6 2.1 0.7 0.9 1.2 16.6 15.7 14.6 220 16.9 27.6 India Infoline 116 BUY 36,028 797 312 8.1 7.7 9.2 59.2 (5.2) 19.0 14.2 15.0 12.6 ———2.3 1.9 1.6 2.8 1.4 1.9 16.4 13.8 15.0 150 29.8 5.6 Indian Bank 289 ADD 124,311 2,749 430 35.1 35.7 44.9 25.5 1.6 25.9 8.2 8.1 6.4 ———1.9 1.6 1.3 2.2 2.2 2.8 24.1 20.5 21.8 350 21.0 5.1 Indian Overseas Bank 163 BUY 88,530 1,958 545 13.0 16.8 24.1 (46.7) 29.8 43.2 12.5 9.6 6.7 ———1.4 1.2 1.1 2.2 2.4 2.6 9.6 11.6 15.0 200 23.1 5.3 J&K Bank 851 ADD 41,284 913 48 105.7 123.0 143.9 25.0 16.4 17.0 8.1 6.9 5.9 ———1.4 1.2 1.1 2.6 3.0 3.5 18.2 18.4 18.7 1,000 17.5 3.4 LIC Housing Finance 1,321 REDUCE 125,468 2,774 95 69.7 109.0 119.0 11.5 56.3 9.2 18.9 12.1 11.1 ———3.9 3.2 2.7 1.1 1.8 1.9 23.6 27.4 24.6 1,325 0.3 34.1 Mahindra & Mahindra Financial 809 BUY 77,698 1,718 96 35.9 51.3 60.3 60.0 43.0 17.5 22.6 15.8 13.4 ———4.6 3.8 3.2 0.9 1.3 1.6 21.5 25.7 25.0 750 (7.3) 6.3 Oriental Bank of Commerce 482 ADD 120,760 2,670 251 45.3 59.0 65.8 25.3 30.2 11.6 10.6 8.2 7.3 ———1.6 1.4 1.2 1.9 2.5 2.7 14.5 16.8 16.6 580 20.3 8.6 PFC 351 SELL 402,408 8,898 1,148 20.5 24.1 28.7 54.0 17.5 19.1 17.1 14.5 12.2 ———3.2 2.7 2.4 1.3 1.4 1.6 19.0 19.3 19.8 325 (7.3) 3.8 Punjab National Bank 1,303 BUY 410,902 9,086 315 123.9 139.8 165.5 26.4 12.9 18.4 10.5 9.3 7.9 ———2.5 2.1 1.7 1.7 2.2 2.6 26.2 24.2 23.9 1,500 15.1 9.2 Reliance Capital 718 REDUCE 176,804 3,909 246 13.7 13.0 14.5 (65.2) (4.7) 11.5 52.5 55.1 49.5 ———2.6 2.5 2.4 0.9 0.7 0.8 5.2 4.6 5.0 800— — 29.1 Rural Electrification Corp. 338 REDUCE 333,293 7,370 987 20.3 26.5 31.8 23.2 30.8 19.8 16.6 12.7 10.6 ———3.0 2.6 2.3 1.9 2.4 2.8 22.0 22.0 22.8 350 3.7 12.0 Shriram Transport 833 ADD 185,954 4,112 223 39.2 55.4 68.1 30.1 41.4 23.0 21.3 15.0 12.2 ———5.0 4.2 3.5 1.4 2.0 2.5 28.4 29.1 29.6 850 2.0 9.0 SKS Microfinance 639 ADD 47,113 1,042 74 26.9 35.5 55.9 61.1 31.9 57.4 23.7 18.0 11.4 ———5.0 2.4 2.0 — — — 21.7 18.0 19.3 1,100 72.0 — SREI 120 NR 14,007 310 116 8.3 7.9 9.9 17.8 (4.8) 25.8 14.5 15.3 12.1 ———1.2 1.1 1.0 1.0 1.0 1.0 11.1 10.5 12.3 — — 6.6 State Bank of India 3,065 BUY 1,945,947 43,028 635 144.4 176.6 224.1 0.5 22.3 26.9 21.2 17.4 13.7 ———3.0 2.6 2.2 1.0 1.0 1.1 14.8 15.9 17.6 3,500 14.2 143.0 Union Bank 377 BUY 190,657 4,216 505 41.1 42.4 56.1 20.2 3.1 32.6 9.2 8.9 6.7 ———2.2 1.8 1.5 1.5 1.5 2.0 26.2 22.1 24.1 450 19.2 7.5 Yes Bank 322 BUY 109,441 2,420 340 15.0 21.0 26.6 46.7 40.2 26.6 21.5 15.3 12.1 ———3.5 2.9 2.4 0.4 0.7 0.8 20.3 21.0 22.0 400 24.1 15.0 Banks/Financial Institutions Attractive 9,894,711 218,789 15.0 24.0 22.6 19.6 15.8 12.9 ——— 3.0 2.6 2.3 1.1 1.3 1.6 15.5 16.6 17.6 Cement ACC 1,042 REDUCE 195,715 4,328 188 83.2 56.4 63.6 47.9 (32.3) 12.9 12.5 18.5 16.4 6.7 8.7 7.1 3.1 2.8 2.4 2.6 2.2 2.2 29.3 17.5 17.6 940 (9.8) 12.7 Ambuja Cements 150 SELL 227,671 5,034 1,522 8.0 8.1 9.0 11.4 1.4 10.6 18.7 18.4 16.7 10.4 10.2 8.5 3.3 2.9 2.6 1.3 1.4 1.4 19.3 17.1 16.8 108 (27.8) 8.6 Grasim Industries 2,267 ADD 207,834 4,596 92 301.0 194.9 238.6 26.1 (35.2) 22.4 7.5 11.6 9.5 4.5 5.6 4.1 1.7 1.5 1.3 1.5 1.5 1.5 22.9 13.5 14.7 2,500 10.3 5.8 India Cements 116 SELL 35,509 785 307 10.0 4.6 7.0 (43.5) (54.6) 54.5 11.5 25.4 16.4 6.2 10.4 7.1 0.8 0.8 0.8 1.8 2.8 2.8 8.2 3.5 5.4 90 (22.1) 5.8 Shree Cement 2,117 BUY 73,766 1,631 35 208.0 152.4 239.2 19.0 (26.7) 56.9 10.2 13.9 8.9 5.0 5.8 3.3 4.1 3.3 2.5 0.5 0.5 0.5 48.0 26.0 31.8 2,400 13.3 1.4 UltraTech Cement 1,100 REDUCE 301,439 6,665 274 88.2 54.6 93.4 12.0 (38.1) 71.1 12.5 20.1 11.8 14.5 9.9 5.9 5.5 2.4 2.0 0.2 0.3 0.3 25.9 15.1 21.6 1,070 (2.7) 7.4 Cement Neutral 1,041,934 23,039 19.3 (18.6) 33.7 13.6 16.7 12.5 7.2 7.9 5.6 2.8 2.2 1.9 1.2 1.3 1.3 20.6 13.1 15.2 Source: Company, Bloomberg, Kotak Institutional Equities estimates 50

51 IndiaDailySummary-November19,2010 Kotak Institutional Equities: Valuation summary of key Indian companies

O/S Target 18-Nov-10 Mkt cap. shares EPS (Rs) EPS growth (%) PER (X) EV/EBITDA (X) Price/BV (X)Dividend yield (%) RoE (%) price Upside ADVT-3mo Company Price (Rs) Rating (Rs mn) (US$ mn) (mn) 2010E 2011E 2012E 2010E 2011E 2012E 2010E 2011E 2012E 2010E 2011E 2012E 2010E 2011E 2012E 2010E 2011E 2012E 2010E 2011E 2012E (Rs) (%) (US$ mn) Consumer products Asian Paints 2,652 ADD 254,408 5,625 96 71.5 86.0 102.5 85.3 20.3 19.1 37.1 30.8 25.9 22.9 19.2 15.9 15.8 12.5 10.0 1.0 1.4 1.6 51.8 46.6 44.0 3,000 13.1 8.0 Colgate-Palmolive (India) 885 SELL 120,394 2,662 136 31.1 33.6 38.4 44.2 8.0 14.2 28.4 26.3 23.1 23.3 19.6 16.9 36.9 31.6 27.1 2.3 2.9 3.3 156.1 129.2 126.3 830 (6.2) 4.1 Dabur India 96 ADD 166,282 3,677 1,731 2.9 3.3 4.1 28.1 13.2 25.2 33.2 29.3 23.4 25.0 20.8 16.4 17.6 12.1 9.3 1.0 1.2 1.5 57.4 49.6 45.3 115 19.7 4.4 GlaxoSmithkline Consumer (a) 2,349 ADD 98,767 2,184 42 55.4 70.5 83.9 23.6 27.3 19.1 42.4 33.3 28.0 24.1 20.6 16.6 11.0 9.1 7.6 0.8 1.0 1.2 27.9 29.7 29.5 2,400 2.2 1.0 Godrej Consumer Products 430 BUY 139,079 3,075 324 11.3 14.3 18.9 69.5 25.8 32.6 37.9 30.1 22.7 30.1 21.6 16.3 14.5 7.7 6.9 0.9 0.7 0.7 44.6 33.5 32.1 490 14.0 2.8 Hindustan Unilever 300 SELL 653,524 14,451 2,182 9.4 10.2 12.0 (0.9) 8.4 17.5 31.8 29.3 25.0 21.9 21.0 17.2 25.3 21.9 18.9 2.5 2.8 3.3 71.1 80.2 81.3 250 (16.5) 17.1 ITC 172 ADD 1,315,511 29,088 7,651 5.3 6.5 7.6 22.6 22.0 17.8 32.4 26.5 22.5 19.7 16.7 13.9 8.9 7.4 6.3 2.9 1.6 1.7 29.2 32.0 31.5 180 4.7 29.3 Jubilant Foodworks 587 SELL 37,461 828 64 5.6 10.0 13.1 347.1 78.3 30.4 104.5 58.6 44.9 55.9 33.7 22.6 31.9 20.7 14.2 — — — 47.3 42.8 37.4 400 (31.8) 23.1 Jyothy Laboratories 275 ADD 21,061 466 77 11.0 13.6 16.4 99.6 23.3 20.9 24.9 20.2 16.7 20.1 13.6 10.6 5.1 3.5 3.0 1.6 1.3 1.8 16.1 17.6 19.3 300 9.1 0.9 Marico 142 ADD 86,841 1,920 612 4.4 5.2 6.1 32.9 16.9 17.0 31.9 27.3 23.4 21.8 19.0 15.6 13.0 9.5 7.2 0.5 0.6 0.8 48.9 40.6 35.2 140 (1.4) 1.5 Nestle India (a) 3,762 REDUCE 362,745 8,021 96 74.4 91.0 111.4 27.0 22.3 22.5 50.6 41.3 33.8 33.5 28.0 23.3 62.4 47.1 35.5 1.3 1.6 1.9 136.0 129.8 119.9 3,100 (17.6) 4.7 Tata Global Beverages 120 ADD 73,961 1,635 618 6.1 7.3 8.7 14.5 20.7 19.0 19.8 16.4 13.8 9.5 7.2 6.0 1.5 1.4 1.3 1.7 2.0 2.4 10.2 11.7 12.9 130 8.7 5.0 Consumer products Cautious 3,330,035 73,633 23.8 18.7 19.2 34.1 28.7 24.1 21.9 18.7 15.4 11.6 9.5 8.1 2.1 1.8 2.0 34.0 33.1 33.5 Constructions IVRCL 129 BUY 34,498 763 267 7.9 7.7 10.3 (6.6) (2.3) 33.7 16.3 16.7 12.5 9.2 10.0 8.1 1.9 1.7 1.5 0.6 0.3 0.3 11.5 10.6 12.7 190 47.1 6.8 Nagarjuna Construction Co. 136 BUY 34,844 770 257 7.1 8.9 11.6 6.1 24.3 31.1 19.0 15.3 11.7 10.0 8.7 7.3 1.6 1.4 1.3 1.0 1.5 1.5 9.3 9.8 11.8 205 51.0 5.0 Punj Lloyd 119 REDUCE 40,411 894 340 (3.4) 9.8 12.0 (52.6) (385.6) 22.6 (34.8) 12.2 9.9 21.6 6.9 6.3 1.3 1.2 1.1 0.1 0.4 0.9 (4.2) 10.4 11.6 140 17.6 14.0 Sadbhav Engineering 1,440 BUY 21,602 478 15 42.8 61.8 87.2 (16.3) 44.3 41.0 33.6 23.3 16.5 18.5 12.4 9.5 5.3 3.5 2.9 0.2 0.4 0.4 15.8 15.1 17.8 1,750 21.5 0.5 Construction Attractive 131,355 2,904 56.2 150.9 29.5 38.4 15.3 11.8 13.3 8.5 7.3 1.7 1.6 1.4 0.5 0.7 0.8 4.5 10.2 11.8 Energy Aban Offshore 794 ADD 34,542 764 44 94.5 129.5 130.5 (2.5) 37.0 0.8 8.4 6.1 6.1 8.3 6.8 6.5 1.6 1.5 1.3 0.5 0.5 0.5 21.7 30.1 22.3 930 17.1 24.4 Bharat Petroleum 739 BUY 267,160 5,907 362 58.6 55.7 59.9 230 (5) 7.5 13 13 12.3 7.0 6.9 6.7 1.9 1.7 1.6 1.9 2.5 2.7 14.9 13.0 12.8 860 16.4 26.3 Cairn india 318 RS 603,143 13,336 1,897 5.5 22.7 40.8 29.0 309.7 79.6 57.4 14.0 7.8 45.2 9.0 5.2 1.8 1.6 1.4 — — 4.7 3.1 11.8 18.8 — — 22.9 Castrol India (a) 460 SELL 113,749 2,515 247 15.4 21.0 21.7 45 36 3.5 30 22 21.2 17.7 13.6 13.0 24.7 23.5 22.3 2.7 3.7 3.8 83.8 109.9 107.9 390 (15.2) 2.5 GAIL (India) 489 BUY 620,477 13,720 1,268 24.8 28.4 39.7 11.7 14.9 39.7 19.8 17.2 12.3 11.1 10.4 8.4 3.4 3.0 2.5 1.5 1.7 2.6 17.4 17.6 21.1 565 15.5 16.6 GSPL 116 SELL 64,991 1,437 562 7.3 7.3 8.1 233 (0) 11.4 16 16 14.2 7.9 7.8 6.5 3.8 3.2 2.8 0.9 1.6 2.8 27.1 21.8 20.9 87 (24.7) 7.3 Hindustan Petroleum 466 BUY 157,979 3,493 339 51.6 53.4 49.8 204.2 3.4 (6.7) 9.0 8.7 9.4 3.2 3.2 3.2 1.2 1.1 1.0 2.6 3.6 3.3 13.1 12.2 10.3 600 28.8 24.2 Indian Oil Corporation 398 ADD 966,203 21,364 2,428 49.1 38.6 40.2 399 (21) 4.0 8 10 9.9 5.9 6.1 5.6 1.8 1.6 1.5 3.3 3.0 3.0 22.4 15.6 14.8 500 25.6 13.1 Oil India 1,398 ADD 336,095 7,432 240 115.2 143.7 160.0 13.9 24.8 11.3 12.1 9.7 8.7 5.5 3.8 3.3 2.3 2.0 1.7 2.4 3.2 3.6 16.8 19.3 18.8 1,640 17.3 3.3 Oil & Natural Gas Corporation 1,282 BUY 2,742,588 60,643 2,139 90.3 113.9 137.7 (1) 26 20.9 14 11 9.3 5.0 4.2 3.6 2.1 1.9 1.7 2.6 3.1 3.7 14.4 16.4 17.8 1,500 17.0 33.3 Petronet LNG 116 SELL 86,850 1,920 750 5.4 6.9 8.3 (22.0) 28.1 20.2 21.5 16.8 14.0 12.2 10.0 8.8 3.4 2.9 2.5 1.5 1.7 2.4 15.9 17.7 18.2 90 (22.3) 9.2 Reliance Industries 1,033 REDUCE 3,074,059 67,973 2,976 49.6 59.2 72.5 (2) 19 22.4 21 17 14.2 10.5 8.1 6.5 2.1 1.9 1.7 0.7 0.8 1.0 11.4 12.4 13.6 1,050 1.7 137.1 Energy Cautious 9,067,835 200,505 35.6 17.6 21.7 15.2 12.9 10.6 7.4 6.1 5.1 2.1 1.9 1.7 1.7 2.0 2.6 13.7 14.5 15.7 Industrials ABB 854 REDUCE 180,885 4,000 212 16.7 10.8 31.4 (35.2) (35.4) 190.2 51.0 79.0 27.2 29.2 41.5 15.7 7.5 7.0 5.7 0.2 0.4 0.4 15.6 9.2 23.2 725 (15.1) 3.4 BGR Energy Systems 725 BUY 52,193 1,154 72 16.0 28.0 41.7 32.2 74.6 49.1 45.2 25.9 17.4 25.4 14.7 10.6 9.3 7.4 5.6 0.4 1.0 1.2 22.3 31.8 36.6 860 18.6 4.4 Bharat Electronics 1,710 REDUCE 136,776 3,024 80 96.1 105.9 120.3 (7.4) 10.2 13.6 17.8 16.1 14.2 8.2 7.2 6.0 3.1 2.7 2.3 1.1 1.5 1.5 17.5 17.7 17.6 1,800 5.3 3.7 Bharat Heavy Electricals 2,316 REDUCE 1,133,826 25,071 490 87.9 115.5 138.6 37.7 31.4 20.0 26.3 20.1 16.7 14.6 11.5 9.4 7.1 5.6 4.5 0.8 1.1 1.3 29.8 31.3 29.9 2,500 7.9 35.0 Crompton Greaves 330 ADD 211,695 4,681 642 12.8 14.5 17.3 46.5 12.9 19.6 25.7 22.8 19.0 14.9 12.9 10.6 8.4 6.4 5.0 0.4 0.6 0.7 37.9 32.0 29.5 340 3.0 9.1 Larsen & Toubro 2,038 ADD 1,233,609 27,277 605 57.9 76.7 90.5 15.6 32.3 18.1 35.2 26.6 22.5 19.5 14.1 11.9 5.5 4.5 3.8 0.6 0.6 0.7 18.6 18.8 18.5 2,200 7.9 54.8 Maharashtra Seamless 403 BUY 28,434 629 71 38.6 44.2 50.9 7.7 14.4 15.1 10.4 9.1 7.9 5.6 4.4 3.5 1.2 1.1 1.0 1.4 2.0 2.5 14.8 12.8 13.4 518 28.5 0.6 Siemens 806 REDUCE 271,852 6,011 337 25.2 27.0 31.9 56.4 7.3 18.0 32.0 29.9 25.3 19.7 17.9 14.9 8.0 6.6 5.5 0.6 0.7 0.8 27.6 24.2 23.8 635 (21.2) 9.3 Suzlon Energy 53 REDUCE 85,025 1,880 1,594 (6.2) (0.8) 3.3 (185.4) (86.8) (504.1) (8.7) (65.7) 16.3 14.3 11.9 8.0 1.3 1.1 1.1 — — 0.4 (11.4) (1.8) 6.9 55 3.1 25.4 Thermax 889 BUY 105,865 2,341 119 21.7 31.5 42.3 (10.4) 45.0 34.3 40.9 28.2 21.0 21.4 15.7 11.7 9.8 8.0 6.4 0.6 1.0 1.4 25.0 31.2 33.8 965 8.6 1.8 Voltas 253 REDUCE 83,610 1,849 331 10.9 11.8 13.4 57.4 8.2 14.3 23.3 21.5 18.8 14.1 12.3 10.4 7.8 6.3 5.2 1.2 1.3 1.5 38.3 32.5 30.2 225 (11.0) 6.4 Industrials Attractive 3,523,770 77,916 1.2 35.7 26.8 33.3 24.5 19.4 16.7 13.2 10.6 5.6 4.7 3.9 0.7 0.8 1.0 16.9 19.0 20.2

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

KOTAK INSTITUTIONAL EQUITIES RESEARCH EQUITIES INSTITUTIONAL KOTAK Kotak Institutional Equities: Valuation summary of key Indian companies O/S Target India DailySummary-November19,2010 18-Nov-10 Mkt cap. shares EPS (Rs) EPS growth (%) PER (X) EV/EBITDA (X) Price/BV (X)Dividend yield (%) RoE (%) price Upside ADVT-3mo Company Price (Rs) Rating (Rs mn) (US$ mn) (mn) 2010E 2011E 2012E 2010E 2011E 2012E 2010E 2011E 2012E 2010E 2011E 2012E 2010E 2011E 2012E 2010E 2011E 2012E 2010E 2011E 2012E (Rs) (%) (US$ mn) Infrastructure Container Corporation 1,315 REDUCE 170,969 3,780 130 61.1 74.3 85.9 0.3 21.7 15.6 21.5 17.7 15.3 15.2 12.3 10.3 3.9 3.4 2.9 1.1 1.3 1.5 19.6 20.6 20.5 1,250 (5.0) 2.5 GMR Infrastructure 50 ADD 182,067 4,026 3,667 0.4 0.2 0.1 (43.8) (48.9) (40.0) 115.2 225.5 375.6 21.4 13.8 12.9 1.7 1.5 1.5 — — — 2.4 1.2 0.7 60 20.8 6.4 GVK Power & Infrastructure 42 BUY 66,959 1,481 1,579 1.0 1.3 1.5 29.4 27.4 18.1 43.0 33.7 28.6 23.3 14.4 14.1 2.1 2.0 1.9 — 0.7 0.7 5.7 6.1 6.9 54 27.4 7.1 IRB Infrastructure 241 RS 80,033 1,770 332 9.7 12.6 12.1 83.8 29.2 (3.7) 24.8 19.2 19.9 12.1 10.9 10.2 3.5 2.7 2.1 — — — 15.6 15.7 11.9 — — 10.8 Mundra Port and SEZ 148 REDUCE 298,078 6,591 2,017 3.3 4.5 7.2 55.7 34.2 61.6 44.3 33.0 20.4 33.3 21.8 15.2 8.4 7.0 5.4 0.5 — — 20.8 23.1 29.8 150 1.5 6.2 Infrastructure Attractive 798,106 17,647 17.8 22.0 27.1 37.9 31.1 24.5 21.0 14.9 12.7 3.3 2.9 2.6 0.4 0.3 0.4 8.8 9.2 10.5 Media DB Corp 270 BUY 49,065 1,085 182 10.6 12.5 14.2 286.5 17.6 13.4 25.4 21.6 19.1 14.2 12.1 10.5 7.6 6.0 5.1 0.7 1.1 1.9 40.3 31.1 29.0 320 18.5 0.5 DishTV IndiaDailySummary-November1 65 REDUCE 68,855 1,523 1,063 (2.5) (1.9) 0.4 (61.9) (25.7) (122.5) (25.8) (34.8) 154.6 85.0 31.9 14.6 16.8 32.5 26.8 — — — 249.0 (63.6) 19.0 57 (12.0) 4.2 HT Media 146 NR 34,310 759 235 6.1 7.7 9.2 623.3 25.9 19.8 23.9 19.0 15.8 12.0 10.0 8.3 3.5 3.1 2.9 0.7 1.4 2.7 15.6 17.5 18.9 — — 0.9 Jagran Prakashan 133 BUY 40,068 886 301 5.8 6.8 7.8 92.0 16.9 14.2 22.8 19.5 17.1 13.7 11.4 10.0 6.5 5.9 5.4 2.6 3.0 3.8 30.0 31.9 33.2 150 12.7 0.8 Sun TV Network 508 REDUCE 200,331 4,430 394 13.1 18.3 22.7 44.0 39.7 24.1 38.9 27.8 22.4 22.1 16.1 13.1 10.3 8.7 7.3 1.5 1.5 2.0 28.3 34.2 35.5 450 (11.5) 3.1 Zee Entertainment Enterprises 144 REDUCE 124,889 2,761 869 5.3 5.4 6.8 26.6 0.7 25.4 26.9 26.7 21.3 19.8 17.1 13.1 3.2 3.0 2.8 0.9 1.0 1.2 12.9 11.8 13.9 135 (6.0) 16.6 Media Neutral 517,518 11,443 185.9 31.8 39.3 42.6 32.3 23.2 20.5 15.9 12.3 6.1 5.6 5.0 1.1 1.2 1.7 14.4 17.2 21.7 Metals Hindalco Industries 222 ADD 425,291 9,404 1,914 20.0 15.0 16.9 25.0 (25.1) 12.7 11.1 14.9 13.2 6.3 8.3 8.5 2.0 1.8 1.6 0.6 0.6 0.6 20.4 12.5 12.6 255 14.8 36.9 Hindustan Zinc 1,194 BUY 504,440 11,154 423 95.6 95.4 116.4 48.2 (0.2) 22.0 12.5 12.5 10.3 8.3 7.3 4.9 2.7 2.2 1.8 0.5 0.5 0.5 25.1 20.2 20.4 1,430 19.8 4.6 Jindal Steel and Power 660 REDUCE 614,801 13,594 931 38.2 45.7 56.2 16.9 19.4 23.1 17.3 14.5 11.7 11.9 9.8 7.2 5.5 3.6 2.8 0.2 0.4 0.4 37.7 30.3 26.8 625 (5.3) 20.9 JSW Steel 1,278 REDUCE 317,100 7,012 248 80.4 73.6 108.0 481.1 (8.5) 46.8 15.9 17.4 11.8 11.4 9.8 6.7 2.9 1.8 1.4 0.6 0.7 0.7 16.0 12.6 13.0 1,115 (12.7) 32.5 National Aluminium Co. 384 SELL 247,189 5,466 644 12.2 17.0 19.1 (37.2) 39.6 12.2 31.5 22.6 20.1 14.5 10.4 8.9 2.4 2.2 2.1 0.7 1.3 1.3 7.8 10.2 10.6 285 (25.7) 1.5 Sesa Goa 341 REDUCE 303,789 6,717 890 29.6 52.5 54.0 23.5 77.6 2.8 11.6 6.5 6.3 9.5 4.3 6.0 3.8 2.4 1.8 1.0 1.0 1.0 35.8 34.9 31.5 320 (6.3) 37.2 Sterlite Industries 177 BUY 595,013 13,157 3,362 12.0 13.7 18.3 2.8 13.9 33.5 14.7 12.9 9.7 9.4 7.8 4.8 1.6 1.4 1.3 0.5 0.5 0.5 12.9 11.8 13.9 200 13.0 34.0 Tata Steel 623 NR 570,089 12,606 914 (3.6) 69.3 69.9 (103.6) (2,048.1) 0.8 (175.1) 9.0 8.9 11.3 6.1 5.9 2.5 1.8 1.5 1.2 1.3 — (1.5) 23.2 18.6 - (100.0) 111.7 Metals Cautious 3,577,711 79,109 (19.9) 47.2 16.7 17.7 12.1 10.3 9.7 7.5 6.3 2.5 2.0 1.7 0.6 0.7 0.5 14.3 16.7 16.2 Pharmaceutical Apollo Hospitals 502 BUY 64,661 1,430 129 10.9 15.3 20.5 28.8 40.2 33.6 45.9 32.7 24.5 22.1 15.5 12.2 3.9 3.6 3.1 — — — 8.3 10.7 13.1 580 15.5 1.5 Biocon 408 ADD 81,620 1,805 200 14.8 17.0 24.4 216.4 14.7 43.6 27.5 24.0 16.7 15.9 13.6 10.6 4.6 4.0 3.3 — — — 17.9 18.1 22.2 470 15.2 11.5 Cipla 354 REDUCE 284,194 6,284 803 13.7 14.0 16.6 38.1 1.9 19.2 25.8 25.4 21.3 18.5 17.0 14.5 4.8 4.2 3.6 0.6 0.7 0.7 21.1 17.6 18.2 295 (16.7) 14.9 Cadila Healthcare 787 REDUCE 161,199 3,564 205 24.7 33.9 39.3 66.9 37.2 16.1 31.9 23.2 20.0 20.5 15.8 13.6 9.9 7.4 5.8 0.6 0.9 1.0 36.0 36.4 32.3 600 (23.8) 1.9 Dishman Pharma & chemicals 156 ADD 12,712 281 81 14.4 15.8 20.7 (19.7) 9.7 30.7 10.8 9.9 7.6 8.7 7.7 6.0 1.6 1.4 1.2 — — — 15.5 15.1 17.0 210 34.4 0.9 Divi's Laboratories 690 REDUCE 90,064 1,991 131 26.1 27.4 38.4 (18.2) 5.1 40.3 26.5 25.2 17.9 19.5 18.9 12.8 5.9 5.1 4.3 — — — 24.7 21.9 26.1 700 1.5 3.2 Dr Reddy's Laboratories 1,768 REDUCE 300,286 6,640 170 48.0 68.4 72.2 48.1 42.6 5.5 36.8 25.8 24.5 20.3 14.7 13.8 8.0 6.3 5.1 0.6 0.4 0.5 22.2 27.0 22.9 1,150 (34.9) 15.4 GlaxoSmithkline Pharmaceuticals (a) 2,277 REDUCE 192,886 4,265 85 59.1 70.2 79.6 8.1 18.7 13.5 38.5 32.5 28.6 22.4 18.9 16.3 10.8 9.2 7.9 — — — 29.8 30.7 29.7 2,000 (12.2) 1.9 Glenmark Pharmaceuticals 343 NR 93,928 2,077 274 12.7 19.2 20.3 14.7 50.6 5.6 26.9 17.9 16.9 16.7 10.9 10.5 4.0 3.3 2.8 — — — 16.7 19.9 17.6 — — 7.9 Jubilant Organosys 309 BUY 49,021 1,084 159 26.5 27.0 38.9 49.0 1.8 44.0 11.6 11.4 7.9 8.8 8.8 6.4 2.2 1.9 1.5 0.6 0.8 1.0 26.3 18.9 21.6 400 29.6 1.8 Lupin 493 ADD 219,170 4,846 445 15.3 19.7 24.3 27.3 28.4 23.4 32.2 25.1 20.3 26.8 19.9 15.8 8.5 6.6 5.3 0.6 0.7 0.9 34.1 30.0 29.3 490 (0.6) 9.8 Piramal Healthcare 450 REDUCE 94,066 2,080 209 22.4 4.1 8.8 29.7 (81.7) 113.0 20.1 109.5 51.4 14.8 (11.2) (12.6) 5.6 0.7 0.6 1.2 1.3 0.8 30.7 159.4 11.4 490 8.9 29.7 Ranbaxy Laboratories 573 SELL 245,302 5,424 428 7.2 24.0 14.6 (128.9) 234.8 (39.4) 79.7 23.8 39.3 19.5 12.7 20.0 6.3 4.5 4.1 — 0.7 0.7 7.0 20.1 10.4 340 (40.6) 18.5 Sun Pharmaceuticals 2,289 REDUCE 474,098 10,483 207 65.2 90.4 87.4 (25.7) 38.6 (3.3) 35.1 25.3 26.2 27.4 19.2 18.8 5.7 4.8 4.1 0.6 0.6 0.6 17.8 21.0 17.3 1,835 (19.8) 9.3 Pharmaceuticals Attractive 2,363,207 52,254 45.3 27.5 9.7 32.0 25.1 22.9 19.8 15.1 13.7 5.9 3.9 3.3 0.4 0.5 0.5 18.5 15.5 14.6 Property DLF 319 ADD 546,719 12,089 1,714 10.6 13.6 21.1 (60.1) 27.8 55.2 30.0 23.5 15.1 21.5 15.1 11.1 1.8 1.7 1.6 0.7 0.9 1.6 6.6 7.4 10.7 375 17.6 48.1 Housing Development & Infrastructure 240 ADD 99,642 2,203 415 15.9 21.6 28.7 (24.4) 35.5 32.9 15.1 11.1 8.4 10.5 10.0 6.1 1.4 1.1 0.9 1.1 2.1 2.2 10.0 11.1 12.7 310 29.1 34.6 Indiabulls Real Estate 184 RS 73,947 1,635 401 0.3 2.5 7.4 (62.7) 777.3 195.3 647.2 73.8 25.0 (29.5) (315.4) 13.5 0.8 0.8 0.8 — — — 0.1 1.1 3.2 285 54.6 22.0 Mahindra Life Space Developer 435 ADD 17,766 393 41 19.2 20.1 32.1 69.7 4.9 59.7 22.7 21.7 13.6 20.7 16.0 7.5 1.9 1.7 1.6 0.8 0.9 0.9 8.6 8.4 12.3 546 25.4 0.7 Phoenix Mills 218 BUY 31,526 697 145 4.1 6.6 7.7 (16.7) 59.4 16.5 52.6 33.0 28.3 43.9 24.7 20.6 2.0 2.0 1.9 0.6 0.7 0.9 3.9 6.1 6.7 303 39.2 0.6 Puravankara Projects 109 REDUCE 23,221 513 213 6.8 7.4 9.0 0.6 8.6 21.8 16.0 14.7 12.1 18.5 15.8 11.6 1.6 1.5 1.4 1.8 1.8 1.8 10.5 10.6 11.9 122 12.1 0.5 Sobha Developers 321 ADD 31,503 697 98 14.1 17.0 26.2 (7.1) 20.8 54.0 22.8 18.9 12.3 17.2 13.3 8.8 1.8 1.7 1.5 0.3 0.4 0.5 9.7 9.2 12.8 414 28.9 2.4 Unitech 71 SELL 189,974 4,201 2,666 3.0 3.8 5.1 (58.8) 25.0 34.0 23.5 18.8 14.0 23.9 17.3 11.1 1.8 1.5 1.4 — — 2.1 9.0 8.7 10.6 74 3.9 49.4 Property Cautious 1,014,298 22,428 (48.8) 36.6 49.9 28.9 21.2 14.1 20.5 15.2 10.3 1.6 1.5 1.4 0.6 0.8 1.6 5.6 7.0 9.6 Source: Company, Bloomberg, Kotak Institutional Equities estimates 52

53 IndiaDailySummary-November19,2010 Kotak Institutional Equities: Valuation summary of key Indian companies

O/S Target 18-Nov-10 Mkt cap. shares EPS (Rs) EPS growth (%) PER (X) EV/EBITDA (X) Price/BV (X)Dividend yield (%) RoE (%) price Upside ADVT-3mo Company Price (Rs) Rating (Rs mn) (US$ mn) (mn) 2010E 2011E 2012E 2010E 2011E 2012E 2010E 2011E 2012E 2010E 2011E 2012E 2010E 2011E 2012E 2010E 2011E 2012E 2010E 2011E 2012E (Rs) (%) (US$ mn) Retail Titan Industries 3,719 ADD 165,090 3,650 44 57.3 83.9 110.9 29.3 46.5 32.2 64.9 44.3 33.5 41.4 29.9 22.8 22.4 15.7 11.1 0.4 0.3 0.4 38.7 41.7 38.8 3,600 (3.2) 21.3 Retail Neutral 165,090 3,650 29.3 46.5 32.2 64.9 44.3 33.5 41.4 29.9 22.8 22.4 15.7 11.1 0.4 0.3 0.4 34.5 35.4 33.2 Sugar Bajaj Hindustan 121 SELL 23,212 513 191 4.3 1.8 13.3 34.1 (57.7) 626.9 28.0 66.2 9.1 9.0 8.4 5.5 1.0 1.0 0.9 0.6 0.6 0.6 3.7 1.5 10.3 93 (23.3) 4.6 Balrampur Chini Mills 82 ADD 20,951 463 257 4.3 9.9 10.7 (44.3) 131.9 8.3 19.2 8.3 7.6 9.7 5.3 4.1 1.5 1.3 1.2 0.5 0.5 0.5 8.0 17.1 16.3 102 25.0 4.7 Shree Renuka Sugars 91 REDUCE 61,153 1,352 670 8.8 5.1 5.8 164.2 (42.4) 15.1 10.4 18.0 15.6 6.3 8.3 7.4 2.4 2.0 1.7 0.4 0.4 0.4 29.1 13.0 13.1 90 (1.4) 18.9 Sugar Cautious 105,316 2,329 62.8 (19.7) 46.5 13.5 16.8 11.4 7.7 7.6 5.9 1.7 1.5 1.3 0.5 0.5 0.5 12.6 9.0 11.4 Technology HCL Technologies 393 REDUCE 271,481 6,003 690 17.5 22.8 28.3 0.2 29.9 24.3 22.4 17.3 13.9 10.9 10.3 8.2 3.9 3.4 2.9 1.0 1.5 1.5 19.3 21.4 23.0 390 (0.9) 8.2 Hexaware Technologies 87 BUY 12,433 275 144 9.3 5.1 10.1 127.7 (45.2) 96.1 9.3 16.9 8.6 4.7 10.4 5.4 1.5 1.3 1.2 1.2 1.2 1.2 17.8 8.3 14.6 110 27.1 2.2 Infosys Technologies 3,004 BUY 1,724,267 38,126 574 108.3 122.4 153.4 5.7 13.0 25.3 27.7 24.5 19.6 20.4 16.9 13.5 7.5 6.6 5.4 0.8 2.0 1.5 30.1 28.7 30.5 3,400 13.2 72.0 Mphasis BFL 575 SELL 121,250 2,681 211 43.6 50.3 45.6 207.5 15.5 (9.3) 13.2 11.4 12.6 10.6 9.1 8.5 5.2 3.7 2.9 0.6 0.7 0.8 48.1 37.5 25.8 550 (4.4) 6.8 Mindtree 514 REDUCE 21,164 468 41 52.2 27.4 39.3 294.3 (47.5) 43.3 9.9 18.8 13.1 8.5 10.3 7.0 3.2 2.9 2.4 0.4 0.3 0.8 35.2 16.1 20.2 450 (12.5) 0.9 Patni Computer Systems 478 REDUCE 63,723 1,409 133 36.6 40.4 33.7 36.4 10.5 (16.6) 13.1 11.8 14.2 6.6 7.4 6.8 1.8 2.2 2.0 0.6 13.8 1.4 18.2 17.2 14.9 400 (16.4) 7.6 Polaris Software Lab 146 SELL 14,536 321 100 15.4 19.4 19.8 16.9 26.2 2.2 9.5 7.5 7.4 4.3 5.7 4.8 1.7 1.4 1.2 2.4 2.5 2.7 18.6 20.4 18.0 180 23.5 2.6 Satyam Computer Services 72 REDUCE 84,966 1,879 1,176 2.5 2.7 4.1 (190.7) 6.9 53.5 29.1 27.2 17.7 13.9 14.1 8.8 4.5 4.6 4.3 — — — 58.5 16.8 25.0 70 (3.1) 42.1 TCS 1,043 BUY 2,040,968 45,129 1,957 35.1 43.0 50.0 32.8 22.4 16.3 29.7 24.3 20.8 22.6 17.7 14.6 9.7 8.0 6.7 1.9 1.6 1.9 37.6 36.3 34.9 1,100 5.5 36.6 Tech Mahindra 685 REDUCE 84,865 1,877 124 65.1 62.0 65.4 (9.6) (4.8) 5.5 10.5 11.0 10.5 8.5 9.2 8.6 2.9 2.4 2.1 0.5 0.3 0.3 34.5 25.4 22.4 720 5.1 8.4 Wipro 418 ADD 1,023,685 22,635 2,447 18.9 21.1 24.3 22.1 12.1 15.0 22.2 19.8 17.2 16.8 14.0 11.6 5.2 4.3 3.6 0.9 1.0 1.2 26.5 23.8 22.8 465 11.1 15.1 Technology Attractive 5,463,339 120,804 24.0 15.3 17.5 24.8 21.5 18.3 17.9 15.2 12.4 6.5 5.6 4.7 1.2 1.7 1.6 26.3 26.1 25.6 Telecom Bharti Airtel 325 REDUCE 1,234,030 27,286 3,798 23.6 17.3 20.4 5.8 (26.9) 17.9 13.7 18.8 15.9 7.8 9.0 7.2 2.9 2.5 2.2 — — — 24.4 14.4 14.7 305 (6.1) 44.9 IDEA 70 REDUCE 232,141 5,133 3,300 2.7 1.6 0.9 (5.8) (42.7) (44.9) 25.7 44.9 81.5 8.8 10.3 8.6 2.0 2.0 1.9 — — — 7.2 4.5 2.6 55 (21.8) 8.2 MTNL 61 SELL 38,241 846 630 (15.6) (10.4) (9.1) (750.8) (33.7) (11.9) (3.9) (5.8) (6.6) (0.2) (0.2) (0.3) 0.3 0.4 0.4 — — — (8.5) (6.1) (5.7) 50 (17.6) 2.7 Reliance Communications 154 SELL 328,728 7,269 2,133 21.8 7.0 9.2 (23.0) (67.7) 30.8 7.1 21.9 16.7 8.0 9.7 8.1 0.8 0.7 0.7 0.5 — — 11.0 3.4 4.3 125 (18.9) 20.0 Tata Communications 294 REDUCE 83,733 1,851 285 14.0 15.2 15.7 3.2 8.2 3.5 21.0 19.4 18.7 8.5 7.9 7.5 1.2 1.1 1.1 2.2 2.6 2.9 5.2 5.5 5.5 225 (23.4) 2.0 Telecom Cautious 1,916,873 42,385 (12.7) (40.0) 18.0 13.6 22.6 19.2 8.3 9.5 7.6 1.7 1.6 1.4 0.2 0.1 0.1 12.3 6.9 7.5 Utilities Adani Power 139 ADD 302,039 6,679 2,180 0.8 3.5 19.0 NM 351.8 436.1 176.8 39.1 7.3 143.6 30.3 6.6 5.2 4.6 2.8 — — — 4.2 12.5 48.0 143 3.2 4.8 CESC 371 BUY 46,389 1,026 125 34.6 36.6 42.7 8.5 5.8 16.8 10.7 10.1 8.7 6.3 5.7 6.4 1.1 1.0 0.9 1.2 1.2 1.4 10.8 10.2 10.8 480 29.3 2.5 Lanco Infratech 65 BUY 155,724 3,443 2,405 2.1 3.6 4.9 46.6 67.4 36.8 30.4 18.2 13.3 16.3 10.4 7.9 4.7 3.7 2.9 — — — 17.4 21.0 22.5 80 23.6 7.0 NHPC 30 SELL 367,792 8,132 12,301 1.9 1.3 1.6 74.9 (28.2) 21.4 16.1 22.5 18.5 10.5 11.3 8.6 1.5 1.4 1.3 1.8 1.2 1.4 9.7 6.4 7.4 28 (6.4) 7.4 NTPC 188 REDUCE 1,548,910 34,249 8,245 10.8 12.5 14.7 9.6 16.2 17.4 17.5 15.0 12.8 13.4 11.8 9.9 2.4 2.2 2.0 2.1 2.5 2.9 14.5 15.4 16.6 210 11.8 16.4 Reliance Infrastructure 1,000 ADD 246,136 5,442 246 61.8 56.3 82.3 (1.5) (8.8) 46.1 16.2 17.8 12.2 17.5 16.1 11.1 1.3 1.2 1.1 0.8 0.9 1.0 6.3 7.0 9.9 1,160 16.0 23.1 Reliance Power 173 SELL 413,440 9,142 2,397 2.9 3.9 5.3 179.7 36.6 34.9 60.5 44.2 32.8 (404.9) 264.2 37.6 2.9 2.7 2.5 — — — 4.8 6.3 7.9 135 (21.7) 13.7 Tata Power 1,322 ADD 326,377 7,217 247 60.2 69.2 88.5 20.1 15.0 27.8 22.0 19.1 14.9 13.8 12.5 10.7 2.5 2.3 2.0 0.9 1.1 1.1 12.9 12.5 14.3 1,420 7.4 11.7 Utilities Attractive 3,406,807 75,330 23.8 13.8 40.7 21.5 18.9 13.5 16.3 14.9 10.4 2.3 2.1 1.9 1.3 1.4 1.7 10.6 11.1 14.0 Others Havells India 378 REDUCE 47,140 1,042 125 5.6 19.1 26.1 118.6 242.4 36.7 67.9 19.8 14.5 17.6 12.2 9.8 11.0 7.4 5.1 0.5 0.7 0.7 13.0 44.8 41.6 390 3.2 6.8 Jaiprakash Associates 124 BUY 274,136 6,062 2,214 1.7 4.4 6.2 (12.7) 153.2 41.1 70.8 28.0 19.8 25.7 16.3 11.7 3.2 2.8 2.5 — — — 5.1 10.8 13.5 155 25.2 30.1 Sintex 223 REDUCE 30,404 672 136 24.1 29.3 33.7 0.5 21.6 14.9 9.2 7.6 6.6 9.1 5.5 4.5 1.4 1.2 1.0 0.5 0.6 0.6 15.5 15.8 15.3 420 88.6 7.7 Tata Chemicals 381 REDUCE 92,729 2,050 243 26.4 27.6 35.6 (27.1) 4.5 29.0 14.4 13.8 10.7 7.2 6.3 4.8 2.0 1.7 1.5 2.4 2.5 2.5 16.0 17.3 19.4 370 (2.9) 7.9 United Phosphorus 187 BUY 86,323 1,909 462 11.9 14.7 18.4 18.1 23.4 25.8 15.7 12.7 10.1 8.5 7.3 5.8 2.9 2.4 2.0 1.0 1.0 1.0 19.1 20.6 21.2 235 25.9 8.1 Others 530,732 11,735 (8.0) 50.0 31.0 26.8 17.9 13.7 15.0 11.5 8.9 2.8 2.4 2.1 0.7 0.7 0.7 10.5 13.6 15.4 KS universe (b) 49,542,918 1,095,476 16.5 21.2 22.7 20.8 17.1 14.0 12.2 10.2 8.3 3.1 2.7 2.3 1.2 1.3 1.5 14.9 15.6 16.6 KS universe (b) ex-Energy 40,475,083 894,971 11.3 22.3 23.1 22.7 18.5 15.0 14.8 12.3 9.9 3.5 3.0 2.6 1.0 1.1 1.2 15.4 15.9 17.0

KOTAK INSTITUTIONAL EQUITIES RESEARCH EQUITIES INSTITUTIONAL KOTAK KS universe (d) ex-Energy & ex-Commodities 35,855,437 792,823 17.0 21.1 23.8 23.8 19.6 15.9 16.8 13.9 11.0 3.6 3.1 2.7 1.1 1.2 1.3 15.3 16.0 17.1

Note: (1) For banks we have used adjusted book values. (2) 2010 means calendar year 2009, similarly for 2011 and 2012 for these particular companies. (3) EV/Sales & EV/EBITDA for KS universe excludes Banking Sector. (4) Rupee-US Dollar exchange rate (Rs/US$)= 45.23

Source: Company, Bloomberg, Kotak Institutional Equities estimates

Disclosures

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

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

40% * The above categories are defined as follows: Buy = We expect 32.1% 33.3% this stock to outperform the BSE Sensex by 10% over the next 12 30% months; Add = We expect this stock to outperform the BSE 23.1% Sensex by 0-10% over the next 12 months; Reduce = We expect this stock to underperform the BSE Sensex by 0-10% over the 20% next 12 months; Sell = We expect this stock to underperform the 11.5% BSE Sensex by more then 10% over the next 12 months. These 10% 5.1% 5.1% ratings are used illustratively to comply with applicable 3.2% 0.6% regulations. As of 30/09/2010 Kotak Institutional Equities 0% Investment Research had investment ratings on 156 equity securities. BUY ADD REDUCE SELL

Source: Kotak Institutional Equities As of September 30, 2010

Ratings and other definitions/identifiers

Definitions of ratings

BUY. We expect this stock to outperform the BSE Sensex by 10% over the next 12 months.

ADD. We expect this stock to outperform the BSE Sensex by 0-10% over the next 12 months.

REDUCE. We expect this stock to underperform the BSE Sensex by 0-10% over the next 12 months.

SELL. We expect this stock to underperform the BSE Sensex by more than 10% over the next 12 months.

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

Other definitions

Coverage view. The coverage view represents each analyst’s overall fundamental outlook on the Sector. The coverage view will consist of one of the following designations: Attractive, 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 54

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