INDIA DAILY
January 22, 2013 India 21-Jan 1-day1-mo 3-mo Sensex 20,102 0.3 4.5 7.6
Nifty 6,082 0.3 4.0 7.0
Contents Global/Regional indices Daily Alerts Dow Jones 13,650 0.4 3.5 2.3 Nasdaq Composite 3,135 (0.0) 3.8 4.3
Results FTSE 6,181 0.4 4.1 4.8 NTPC: Limited adjustment for a change Nikkie 10,795 0.4 8.6 19.8 Hang Seng 23,567 (0.1) 4.7 8.6
HDFC: Earnings in line; operating trends will be key monitorable KOSPI 1,987 (0.0) 0.3 2.3
Value traded – India Cairn India: In-line results; slower ramp-up in future Cash (NSE+BSE) 139 107 37 Asian Paints: Festive season cheer; we continue to find valuations expensive Derivatives (NSE) 1,054 1,835 1,676 Deri. open interest 1,603 1,667 1,609 Shree Cement: Realizations on shaky ground, power contribution improves
DB Corp: Firing on all cylinders on advertising recovery Forex/money market SpiceJet: Beats estimates comfortably Change, basis points 21-Jan 1-day 1-mo 3-mo Economy Rs/US$ 53.7 6 (150) 10 10yr govt bond, % 7.9 - (32) (41) Economy: Golden step in the right direction Net investment (US$mn) 18-Jan MTD CYTD FIIs 221 2,511 2,511 MFs (47) (404) (401)
Top movers -3mo basis Change, % Best performers 21-Jan 1-day 1-mo 3-mo RCOM IN Equity 89.0 6.8 22.4 48.6 IDEA IN Equity 119.6 2.0 22.5 47.0 UT IN Equity 38.2 (1.7) 16.7 46.7 UNSP IN Equity 1808.6 0.4 (6.5) 40.0 IBULL IN Equity 330.0 0.3 22.2 38.4 Worst performers BHFC IN Equity 246.8 (1.0) (4.0) (18.2) MMTC IN Equity 602.9 (1.3) (6.6) (16.4) EDSL IN Equity 134.0 (1.8) (6.5) (16.1) NMDC IN Equity 161.8 0.1 2.2 (13.1) CRG IN Equity 114.0 0.0 0.8 (12.8)
For Private Circulation Only. FOR IMPORTANT INFORMATION ABOUT KOTAK SECURITIES’ RATING SYSTEM AND OTHER DISCLOSURES. REFER TO THE END OF THIS MATERIAL.
ADD NTPC (NTPC)
Utilities JANUARY 22, 2013 RESULT Coverage view: Attractive
Limited adjustment for a change. NTPC’s adjusted profits of Rs25.5 bn yield a Price (Rs): 162 reasonable 10% yoy growth in earnings, aided primarily by 7% yoy growth in Target price (Rs): 180 generation on an expanded capacity base. Absence of significant non-recurring BSE-30: 20,102 adjustments (Rs0.4 bn in 3QFY13) was a marked difference from past results. Improved pace of capacity addition (3 GW up to 3QFY13) and a resilient business model increase visibility of the curtailed XIIth plan targets. Maintain ADD rating and TP of Rs180/share.
Company data and valuation summary NTPC Stock data Forecasts/Valuations 2013 2014E 2015E 52-week range (Rs) (high,low)191-137 EPS (Rs) 13.3 13.9 14.7 Market Cap. (Rs bn) 1,332.5 EPS growth (%) 22.8 5.0 5.7 Shareholding pattern (%) P/E (X) 12.2 11.6 11.0 Promoters 84.5 Sales (Rs bn) 661.4 742.6 766.8 FIIs 4.0 Net profits (Rs bn) 109.4 114.9 121.5 MFs 1.0 EBITDA (Rs bn) 189.2 216.8 232.4 Price performance (%) 1M 3M 12M EV/EBITDA (X) 8.8 7.6 6.9 Absolute 5.5 (2.8) (7.4) ROE (%) 14.2 13.7 13.2 Rel. to BSE-30 1.0 (9.7) (22.9) Div. Yield (%) 2.5 2.6 2.7
Steady operational performance, adjusted PAT grows 10% yoy
NTPC reported revenues of Rs157.7 bn (3% yoy, -2% qoq), operating profit of Rs40 bn (23% yoy, -5% qoq) and net income of Rs26 bn (7% yoy, -17% qoq) against our estimate of Rs168.7 bn, Rs38 bn and Rs26 bn respectively. Accounting for limited prior-period adjustments of Rs0.4 bn during this quarter (Rs13.3 bn in 2QFY13), adjusted sales and net profits were Rs157.3 bn and Rs25.5 bn respectively. Revenue miss was primarily on account of lower fuel costs (-8% qoq), typical of the cost-plus scenario, even as generation continued to improve (7% yoy, 12% qoq).
Highest-ever capacity addition achieved so far in 2013, improving PLFs may allay concerns
NTPC has so far commissioned a total of 3,160 MW coal based capacities—2,160 MW at the standalone level and 1,000 MW under JVs/subsidiaries. NTPC looks reasonably on target to add another 3 GW in FY2014E as well, maintaining the improved pace of capacity addition.
We note that NTPC reported improved utilization (PLFs) for its coal-based capacities—84.1% in 3QFY13 compared to 80.6% in 1HFY12, partially allaying concerns on the drop in utilization rates. We further highlight that under the availability-based tariff structure (implemented post-FY2009), the incentive structure is less aligned to actual generation as was the case prior to FY2009.
We retain our ADD rating with a TP of Rs180/share
We retain our ADD rating on NTPC as newly commercialized capacities of ~3.2 GW improve visibility for continued earnings growth. NTPC is currently trading at 1.5X FY2014E book value and 12X FY2014E EPS—at the lower end of its historical band (see Exhibits 5 and 6). We note that the recent underperformance primarily reflects uncertainty around the pricing of the potential follow- on offering and offers over 10% upside to our fair value estimate of Rs180/share.
We have revised our FY2013E (+4.6%) estimate to Rs13.3/share accounting for aggressive commercialization of capacities and improved generation, while our earnings for FY2014E (+1.9%) remain largely unchanged.
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For private Circulation Only. FOR IMPORTANT INFORMATION ABOUT KOTAK SECURITIES’ RATING SYSTEM AND OTHER DISCLOSURES, REFER TO THE END OF THIS MATERIAL.
NTPC Utilities
Exhibit 1: Net profits in line with estimates, higher operating profits partially offset by higher depreciation and interest Interim results for NTPC, March fiscal year-ends (Rs bn)
(% Chg.) 3QFY13 3QFY13E 3QFY12 2QFY13 3QFY13E 3QFY12 2QFY13 FY2012 FY2013E (% Chg.) Net sales 157.7 168.7 153.8 161.2 (6) 3 (2) 620.5 661.4 7 Operating costs Cost of fuel (101.0) (111.2) (106.5) (99.3) (9) (5) 2 Personnel costs (6.9) (9.0) (7.8) (9.0) (23) (12) (23) Other expenses (9.9) (10.5) (7.0) (10.7) (6) 40 (7) Total expenses (117.8) (130.7) (121.4) (119.0) (476.8) (500.1) EBITDA 40.0 38.0 32.4 42.2 5 23 (5) 143.7 161.3 12 EBITDA margin (%) 25.3 22.5 21.1 26.2 23.2 24.4 Other income 7.5 10.5 10.1 10.5 27.8 34.3 Interest & finance charges (5.3) (5.5) (3.3) (3.0) (24.3) (20.2) Depreciation (8.3) (8.3) (6.6) (7.9) (27.9) (32.3) PBT 33.9 34.7 32.6 41.8 (2) 4 (19) 119.3 143.1 20 Provision for tax (net) (7.9) (8.7) (8.3) (10.4) (31.0) (34.5) Net profit 26.0 26.0 24.2 31.4 (0) 7 (17) 88.3 108.6 23 Extraordinary — ——— — —
EBITDA margin (%) 25.3 22.5 21.1 26.2 23.2 24.4 Tax rate (%) 23.4 25.0 25.6 24.9 26.0 24.1
Source: Company, Kotak Institutional Equities estimates
Exhibit 2: Limited adjustments in 3QFY13 (adjusted sales of Rs157.3 bn versus reported sales of Rs157.7 bn) One-offs and prior-period adjustment for 3QFY13 results (Rs bn)
Adjustments Comment 2QFY12 3QFY12 4QFY12 1QFY13 2QFY13 3QFY13 Impact on (1) Prior period sales Included in current sales 7.6 (1.6) 1.8 1.1 10.2 0.3 Sales and PAT On account of tariff amendements Included in current sales 0.0 0.0 0.0 0.0 0.0 0.0 Sales and PAT (2) Tax recoverable from customers in sales Income tax Included in current sales 0.5 (4.1) 0.9 (0.6) 2.9 0.0 Sales and PAT Deferred tax Included in current sales 0.1 0.1 0.1 0.1 0.1 0.1 Sales and PAT (3) Tax expense for prior period Prior period tax in current year's tax 2.7 (3.1) (0.0) 0.5 0.0 0.0 PAT (4) Fuel Expenses prior period Due to revised GCV based pricing PAT (5) Interest and finance cost Arising out of exchange difference 2.4 0.4 0.0 0.0 1.9 0.0 PAT (9) Other expenditure Forex translation —————— PAT Total adjustments-Sales 8.2 (5.5) 2.9 0.6 13.3 0.4 Adjusted Sales 145.6 158.9 164.3 159.0 147.9 157.3 Total adjustments-PAT 8.0 (2.0) 2.9 0.2 15.3 0.5 Adjusted PAT 16.2 23.3 19.1 24.8 16.1 25.5
Source: Company, Kotak Institutional Equities
3QFY13 results—financial and operational highlights
` Reported sales of Rs157.7 bn had minimal adjustments of (1) Rs0.3 bn (Rs10.2 bn in 2QFY13) from prior-period revenues, and (2) Rs0.1 bn (Rs2.9 bn in 2QFY13) of income tax recoverable from consumers.
` With the commissioning of Vallur Unit 2 (500 MW) and Jhajjar Unit 3 (500 MW) in 3QFY13, NTPC (including JVs and subsidiaries) has commissioned new capacities of 3,160 MW and commercialized new capacities of 3,820 MW so far in FY2013.
` Gross generation (standalone) for 3QFY13 was 60 BU (7% yoy, 12% qoq) based on data reported by CEA. Higher generation reflects the improved pace of capacity addition coupled with better PLFs during the quarter.
` Average PLFs for coal based capacities for NTPC improved sequentially to 84.1% during 3QFY13 (74.9% in 2QFY13, 83.6% in 2QFY12).
KOTAK INSTITUTIONAL EQUITIES RESEARCH 3 Utilities NTPC
Exhibit 3: NTPC has improved considerably on its COD targets in 2013 Capacities commissioned and commercialized for NTPC Ltd, March fiscal year-ends, 2008-13 (MW)
4,000 Commissioned Commercialised 3,820
3,500 3,160 3,000 2,820 2,490 2,500 2,000 2,000 1,740 1,600 1,5601,490 1,500 1,160 1,000 1,000 740
500
2008 2009 2010 2011 2012 2013
Notes: (1) 2013 commissioning and COD is till 3QFY13.
Source: Kotak Institutional Equities, Company
Exhibit 4: NTPC has a portfolio of 15 GW of capacities in joint ventures and subsidiaries Details of NTPC’s joint ventures and subsidiaries
Capacity Ownership Existing Upcoming FY 12 financials (%) (MW) (MW) Equity* Revenues PAT Comments Power Projects NSPCL 50 814 750 4,753 17,801 1,942 SAIL's captive capacities at Durgapur, Rourkela and Bhilai NTECL 50 1,000 500 8,440 — — 3x500 MW Power Project at Vallur, Tamil Nadu APCPL 50 1,000 500 10,895 14,089 341 3x500 MW Power Project at Jhajjar, Haryana BRBCL 74 — 1,000 5,095 — — 4x250 MW Power Plant at Nabinagar, Bihar MUNPL 50 — 1,320 1,074 — — 2x660 MW Thermal project in U.P KBUNL 65 220 390 3,572 1,278 54 Power plant in Bihar taken over from BSEB in 2008 NPGCL 50 — 1,980 1,530 — — 3x660 MW Thermal project at Nabinagar, Bihar RGPPL 32 1,940 — 7,769 52,238 10,892 1940 MW LNG plant in Maharashtra ASHVINI 49 — 1,400 1 — — 2x700 MW nuclear power project in Haryana Triconamalee 50 — 500 67 — — 2x250 MW power plant in Sri Lanka NHL 100 — 291 1,216 — — 171 MW and 120 MW hydro projects in Uttarakhand and W.B Total 4,974 8,631 44,410 85,405 13,229 Other Businesses Utility Powertech Ltd. 50 10 4,024 152 EPC and O&M services in Power Sector NASL 50 30 784 28 R&M of power plants EESL 50 6 — — Implementation of energy efficiency projects NHPTL 20 26 — — Testing of electrical equipments NPEX 17 2,227 — — Regulate and Manage power trading NESCL 100 1 557 77 Distribution and Supply of electrical energy NVVN 100 200 700 1,119 Power trading NBPPL 50 250 1,469 131 Equipment manufacturing and EPC of power plants BF-NTPC energy Ltd. 49 60 — — To manufacture castings and forgings CIL NTPC Urja 50 1 — — Development of Brahmin and Chichro Patsimal coal blocks Total 2,811 7,533 1,507 Grand Total 4,974 8,631 47,221 92,939 14,736
Source: Kotak Institutional Equities, Company
4 KOTAK INSTITUTIONAL EQUITIES RESEARCH NTPC Utilities
Exhibit 5: NTPC is trading at the lower band of its historical P/B multiple Historical P/B multiple for NTPC (X)
4.0
3.5
3.0
2.5
2.0
1.5
1.0 Jun-05 Jun-06 Jun-07 Jun-08 Jun-09 Jun-10 Jun-11 Jun-12 Dec-04 Dec-05 Dec-06 Dec-07 Dec-08 Dec-09 Dec-10 Dec-11 Dec-12
Source: Kotak Institutional Equities, Bloomberg
Exhibit 6: NTPC has been also trading at below-average historical P/E multiples Historical P/E multiple for NTPC (X)
28 26 24 22 20 18 16 14 12 10 Jun-05 Jun-06 Jun-07 Jun-08 Jun-09 Jun-10 Jun-11 Jun-12 Dec-04 Dec-05 Dec-06 Dec-07 Dec-08 Dec-09 Dec-10 Dec-11 Dec-12
Source: Kotak Institutional Equities, Bloomberg
KOTAK INSTITUTIONAL EQUITIES RESEARCH 5 Utilities NTPC
Exhibit 7: Profit model, balance sheet, cash model of NTPC, March fiscal year-ends, 2009-14E (Rs mn)
2009 2010 2011 2012 2013E 2014E Profit model (Rs mn) Net sales 419,752 463,777 549,387 620,522 661,385 742,644 EBITDA 98,989 117,076 134,129 137,375 154,955 171,328 Other income 30,607 28,562 24,608 27,784 34,258 45,506 Interest (13,396) (11,080) (14,328) (17,116) (13,009) (22,587) Depreciation (23,645) (26,501) (24,857) (27,917) (32,305) (38,608) Pretax profits 92,555 108,057 119,553 120,126 143,898 155,639 Tax (11,582) (21,573) (29,470) (31,024) (34,485) (40,764) Net profits 80,973 86,484 90,082 89,102 109,414 114,875 Extraordinary items 1,040 798 944 3,136 — — Earnings per share (Rs) 9.8 10.5 10.9 10.8 13.3 13.9 Balance sheet (Rs mn) Total equity 573,701 624,375 678,923 732,912 803,921 878,475 Deferred taxation liability 15,704 14,347 9,983 20,670 28,213 35,467 Total borrowings 346,223 378,581 432,848 502,794 561,819 555,889 Currrent liabilities 106,886 107,581 130,729 152,003 154,393 161,338 Total liabilities and equity 1,042,514 1,124,884 1,252,483 1,408,378 1,548,346 1,631,169 Cash 162,716 144,595 161,853 161,461 223,037 236,121 Current assets 146,537 163,562 192,115 263,991 277,322 298,859 Total fixed assets 593,426 668,656 775,066 870,862 935,923 984,126 Investments 139,835 148,071 123,448 112,064 112,064 112,064 Total assets 1,042,514 1,124,884 1,252,483 1,408,378 1,548,346 1,631,169 Free cash flow (Rs mn) Operating cash flow, excl. working capital 105,734 113,764 131,327 120,154 141,719 153,483 Working capital (12,794) (16,330) (5,406) (50,601) (10,941) (14,593) Capital expenditure (129,116) (101,965) (120,714) (126,323) (97,366) (86,810) Investments 12,837 (8,236) 24,623 11,385 — — Free cash flow (23,339) (12,767) 29,829 (45,385) 33,412 52,080
Source: Company, Kotak Institutional Equities estimates
6 KOTAK INSTITUTIONAL EQUITIES RESEARCH
SELL HDFC (HDFC)
Banks/Financial Institutions JANUARY 22, 2013 RESULT Coverage view: Cautious
Earnings in line; operating trends will be key monitorable. HDFC reported 16% Price (Rs): 813 yoy earnings growth, 3% ahead of estimates. Loan growth remained strong at 21% as Target price (Rs): 730 retail loans accelerated to 24% yoy. However, disbursements declined by 12% yoy BSE-30: 20,102 (likely due to lower non-retail loans), raising concerns on incremental business traction. We will continue to track this trend carefully before revisiting our medium-term NII estimates. Valuations remain rich at 4.4X PBR FY2014E; retain SELL with target price of Rs730 (from Rs690).
Company data and valuation summary HDFC Stock data Forecasts/Valuations 2013 2014E 2015E QUICK NUMBERS 52-week range (Rs) (high,low)882-611 EPS (Rs) 31.6 37.4 43.5 Market Cap. (Rs bn) 1,244.5 EPS growth (%) 13.2 18.3 16.3 • Loan growth up Shareholding pattern (%) P/E (X) 25.7 21.7 18.7 Promoters 0.0 NII (Rs bn) 63.7 75.8 88.2 21% yoy FIIs 66.7 Net profits (Rs bn) 48.4 57.2 66.6 MFs 3.0 BVPS 163.5 184.7 209.4 • Disbursements Price performance (%) 1M 3M 12M P/B (X) 5.0 4.4 3.9 down 12% yoy Absolute (2.1) 7.9 17.4 ROE (%) 22.0 21.5 22.1 Rel. to BSE-30 (6.3) 0.2 (2.2) Div. Yield (%) 1.4 1.7 2.0 • Reported spreads stable at 2.27% Operating income on track, tweak estimates; retain SELL
HDFC reported PAT of Rs11.5 bn, up 16% yoy and 3% ahead of estimates. Loan growth remained stable at 21% yoy thereby driving 18% growth in net operational income. NIM (KS-calculated) expanded by 30 bps qoq to 3.7% even as reported spreads were stable at 2.27%.
We are tweaking our estimates to factor lower fee income and higher dividend income; we currently retain our estimates for loan growth and NIM. We will closely track the trend in disbursements and explore the reasons for divergence between high loan growth (up 21% yoy) and disbursements (down 12% yoy). We raise our SOTP-based target price to Rs730 (from Rs690) to factor the rollover and higher target price of HDFC Bank in the SOTP-based valuation.
Operating trends confusing; incremental trends are key monitorable
` Non-retail loan book was sluggish during the quarter. HDFC delivered retail loan growth of 24% yoy, a two-year high. The company went slow on non-retail loans during the quarter; loan book in this segment was stable qoq thereby pulling down the overall loan growth to 21%. Increase in competition (likely from private and foreign banks) has prompted HDFC to go slow during the quarter. According to our real estate analyst, real estate developers are making concerted efforts to improve their balance sheet even as select companies remain under stress; thus, incremental trends on this front are not negative. Management has highlighted that they will resume growth in this segment from 4QFY13E; we will continue to track this trend.
` Overall disbursements decline 12% yoy. HDFC reported sharp 12% decline in disbursements even as loan growth was strong at 21% yoy. Notably, HDFC does not provide the quarterly break-up of disbursements between retail and non-retail loans and hence it is challenging to further analyze this trend. Sluggishness in non-retail lending can be one of the reasons for lower disbursements growth during the quarter. In the past, HDFC has highlighted that they are focused on medium to long-term project loans (and are not into short-term loans); as such, the trend in disbursements should be less volatile.
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 HDFC
Other highlights of the results: Lower fees during 3Q, capital gains stable
While capital gains and dividend income was stable yoy and in line with estimates, fee income was down 25% qoq. Two key reasons—(1) non-retail business was subdued during the quarter (discussed above) and (2) share of loans sourced by third-party DSAs increased to 89% from about 70% in the past; hence the net fee income declined during the period.
Exhibit 1: HDFC—P&L statement 3QFY12-3QFY13 (Rs mn)
Actual vs KS 3Q12 4Q12 1Q13 2Q13 3Q13 YoY (%) 3Q13E (%) Operating income 44,670 48,847 49,346 52,697 52,421 17 52,896 (1) Interest on loans 41,680 46,199 46,462 48,357 49,972 20 50,016 (0) Fees and other charges 721 600 617 525 392 (46) 550 (29) Dividend 530 615 1,595 1,946 452 (15) 500 (10) Sale of investment 879 790 202 941 963 10 930 4 Other op income 861 643 470 928 642 (25) 900 (29) Interest expense 30,124 29,389 33,882 35,414 35,214 17 36,149 (3) Net operating income 14,546 19,458 15,464 17,283 17,207 18 16,748 3 Op. inc. excl. gains, capital gains and lease 13,138 18,053 13,667 14,396 15,792 20 15,318 3 income Net Fund based income 13,826 18,858 14,847 16,758 16,815 22 16,198 4 Net Fund based income (int income less int exp) 11,556 16,810 12,580 12,943 14,758 28 13,868 6 Other exp. 1,264 1,220 1,691 1,821 1,780 41 1,700 5 Other exp. 756 724 1,083 1,200 1,138 50 1,100 3 Staff expenses 508 496 608 621 642 26 600 7 PBDT 13,282 18,238 13,773 15,462 15,427 16 15,048 3 Depreciation 53 59 47 56 59 11 50 18 Other income 53 63 74 78 84 59 80 5 PBT 13,282 18,242 13,799 15,484 15,452 16 15,078 2 Tax 3,470 4,980 3,780 3,970 4,050 17 3,996 1 PAT 9,812 13,262 10,019 11,514 11,402 16 11,082 3 Tax rate 26 27 27 26 26 27
Source: Company, Kotak Institutional Equities estimates
8 KOTAK INSTITUTIONAL EQUITIES RESEARCH HDFC Banks/Financial Institutions
Exhibit 2: HDFC—quarterly data 3QFY12-3QFY13 (Rs mn)
Actual vs KS Other details - Rs bn 3Q12 4Q12 1Q13 2Q13 3Q13 YoY (%) 3Q13E (%) Disbursement for the quarter 161 213 156 250 141 (12) 0 0 Outstanding (Rs bn) 1,322 1,409 1,483 1,551 1,605 21 1,586 1 Annualised NII (Rs mn) 46,226 67,240 50,320 51,772 59,032 28 55,471 NIMs (%) 3.6 4.9 3.5 3.4 3.7 3.5 Gross NPAs (Rs mn) 11,090 9,540 11,900 12,060 12,240 Gross NPL ratio (%) 0.8 0.9 0.8 0.8 0.8 CAR (%) 13.9 14.6 14.6 16.7 17.5 Tier I (%) 11.9 11.6 11.8 14.1 14.9 Avg spread(%) 2.27 2.27 2.27 2.27 2.27 ROA 2.7 3.5 2.5 2.7 2.6 ROE 21 28 20 21 18 Balance sheet (Rs mn) Sharecapital 2,948 2,954 2,977 3,078 3,082 5 Reserves 192,305 187,222 201,678 241,191 252,398 31 Term loans 249,829 406,966 374,840 197,240 136,400 (45) Bonds/debentures/CPs 673,681 621,381 663,830 794,506 851,336 26 Deposits 347,451 362,928 399,434 482,620 497,630 43 Total liabilities and shareholders funds 1,466,215 1,585,984 1,642,760 1,718,635 1,740,846 19 Loans 1,322,080 1,408,750 1,482,622 1,551,270 1,604,340 21 Individuals 842,998 887,779 954,129 994,010 1,047,300 24 Corporate bodies 461,608 501,896 509,977 537,630 539,350 17 Others 17,471 19,071 18,516 19,630 17,690 1 Investments 134,450 122,070 151,825 150,241 145,780 8 Deferred tax 6,000 6,282 6,282 6,552 6,692 12 Current assets 79,816 140,291 60,796 95,942 58,670 (26) Current liabilities 78,486 93,749 61,115 87,736 77,016 (2) Fixed assets 2,355 2,340 2,350 2,367 2,380 1 Total assets 1,466,215 1,585,984 1,642,760 1,718,635 1,740,846 19 Loan book calculations Loan on balance sheet 1,322,080 1,408,750 1,482,622 1,551,270 1,604,340 21 Loans outside balance sheet 134,840 145,560 138,720 157,480 160,490 19 Individual loans pre sell down 977,838 1,033,339 1,092,849 1,151,490 1,207,790 24 Loans under management 1,456,920 1,554,310 1,621,342 1,708,750 1,764,830 21 YoY loan growth (%) Total loan book 21 20 19 22 21 Individual loans under management 20 20 22 23 24 Non-retail loans 23 20 14 19 16 Compostition of loan book under management Total loan under management 1,456,920 1,554,310 1,621,342 1,708,750 1,764,830 Individual loans under management 977,838 1,033,339 1,092,849 1,151,490 1,207,790 Other loans 479,082 520,972 528,493 557,260 557,040 Share of non-retail (%) 33 34 33 33 32
Source: Company, Kotak Institutional Equities estimates
KOTAK INSTITUTIONAL EQUITIES RESEARCH 9 Banks/Financial Institutions HDFC
Exhibit 3: Approvals and disbursements 3QFY10-3QFY13 (Rs bn)
Approvals (Rs bn) Disbursements (Rs bn) 300
240
180
120
60
0
3Q10 4Q10 1Q11 2Q11 3Q11 4Q11 1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13
Source: Company, Kotak Institutional Equities
Exhibit 4: HDFC Ltd—change in estimates March fiscal year-ends, 2013-15E
New estimates Old estimates % change 2013E 2014E 2015E 2013E 2014E 2015E 2013E 2014E 2015E NIM (post provisions - %) 3.8 3.9 3.9 3.8 3.9 3.8 Loan book 1,689,272 2,011,018 2,385,364 1,689,272 2,011,018 2,385,364 ——— Operating income 196,154 230,129 271,304 194,720 228,872 269,218 1 1 1 Interest income 174,264 208,141 247,296 174,264 208,141 247,296 ——— Capital gains 3,000 3,500 4,000 3,000 3,500 3,500 — — 14 Interest expense 125,013 146,328 173,914 125,003 146,295 173,862 ——— Net operating income 71,142 83,801 97,389 69,717 82,577 95,356 2 1 2 Net operating inc. excl. gains 68,142 80,301 93,389 66,717 79,077 91,856 2 2 2 Loan loss provisions 2,000 2,240 2,509 1,120 1,254 1,405 79 79 79 Fee income 2,447 3,057 3,573 3,557 4,165 4,880 (31) (27) (27) Operating expenses 5,075 5,938 6,950 5,073 5,968 7,019 0 (1) (1) Employee expenses 2,481 2,855 3,286 2,413 2,829 3,316 3 1 (1) PBT 66,512 78,668 91,479 67,078 79,507 91,787 (1) (1) (0) Net profit 48,398 57,243 66,565 48,810 57,854 66,789 (1) (1) (0) PBT bef cap gains 63,512 75,168 87,479 64,078 76,007 88,287 (1) (1) (1)
Source: Company, Kotak Institutional Equities
10 KOTAK INSTITUTIONAL EQUITIES RESEARCH HDFC Banks/Financial Institutions
Exhibit 5: HDFC has been a consistent player, SBI slowed down in recent times O/s mortgage loan book of key players, 3QFY10-3QFY13 (Rs bn)
3Q10 4Q10 1Q11 2Q11 3Q11 4Q11 1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13 SBI (Rs bn) 673 712 747 793 851 899 932 959 990 1,027 1,054 1,084 NA QoQ growth (Rs bn) 48 39 35 46 59 48 33 27 31 37 26 30 YoY (%) 29 32 30 27 27 26 25 21 16 14 13 13 HDFC (Rs bn) 575 613 641 683 701 736 779 803 843 888 954 994 1,047 QoQ growth (Rs bn) 5 38 28 41 19 35 42 24 40 45 66 40 53 YoY (%) 3 12 17 20 22 20 21 18 20 21 23 24 24 ICICI Bank (Rs bn) 484 474 473 503 517 539 546 551 548 576 595 614 QoQ growth (Rs bn) (6) (10) (1) 30 14 22 7 5 (3) 28 19 19 YoY (%) (20) (17) (12) 3 7 14 15 10 6 7 9 11 LIC Housing Fin (Rs bn) 342 381 400 434 464 510 529 561 587 631 656 691 NA QoQ growth (Rs bn) 23 39 19 34 30 46 19 32 26 44 25 35 YoY (%) 35 38 37 36 36 34 32 29 27 24 24 23 Axis Bank 134 147 150 153 169 189 203 223 249 282 304 328 356 QoQ growth (Rs bn) 14 13 2 4 16 20 14 20 27 32 23 23 28 YoY (%) 34 41 37 27 26 28 35 45 48 49 50 47 43 Dewan 79 88 98 111 124 141 153 168 185 210 240 231.7 NA QoQ growth (Rs bn) 8 10 14 12 17 12 15 17 17 25 30 (8) YoY (%) 51 53 55 56 61 57 51 50 50 49 56 38 Total banks (from RBI) 2,936 3,009 3,068 3,171 3,325 3,461 3,588 3,668 3,786 3,880 4,134 4,213 NA Total Non banks 1,314 1,430 1,518 1,663 1,752 1,902 2,003 2,122 2,238 2,405 2,568 2,648 NA Total (bank+non-banks) 4,250 4,439 4,586 4,834 5,077 5,363 5,591 5,790 6,024 6,285 6,702 6,861 NA Share of Non-banks (%) 26 27 28 29 29 30 30 31 31 32 32 32
Source: Company, Kotak Institutional Equities
Exhibit 6: Spread between home loan rates and 10-year AAA yields is high HDFC's home loan rates, 10-year AAA yields, June 2002-December 2012 (%)
(%) HDFC's home loans rates 10 yr AAA yields 18
14
10
6
2 Jun-02 Jun-03 Jun-04 Jun-05 Jun-06 Jun-07 Jun-08 Jun-09 Jun-10 Jun-11 Jun-12 Dec-02 Dec-03 Dec-04 Dec-05 Dec-06 Dec-07 Dec-08 Dec-09 Dec-10 Dec-11 Dec-12
Source: Bloomberg, Kotak Institutional Equities
KOTAK INSTITUTIONAL EQUITIES RESEARCH 11 Banks/Financial Institutions HDFC
Exhibit 7: HDFC, sum-of-the-parts-based valuation
HDFC's Value of Value per Business/ subsidiaries holding companies share (%) (Rs mn) (Rs) Valuation methodology HDFC 421 Based on residual growth model; multiple of 3.4X PBR FY2014E Value of subsidiaries and associates 286 HDFC Bank 23 1,451,216 198 Based on target price HDFC Standard Life MF 60 48,480 19 4% of March 2014E AUMs -PMS business 60 1,200 0 10% of AUMs Life Insurance 72 111,520 47 11% margins and 16X NBV multiple General insurance 74 9,890 4 Based on deal with ERGO Gruh Finance 62.0 33,960 12 Based on market price IDFC 1.9 269,331 3 Based on market price HDFC Venture capital HDFC Property Fund 81 1,500 1 Rs10bn of fund assuming value of 15% HDFC IT Corridor Fund 81 697 0 Rs4.64bn of fund assuming value of 15% Real estate fund 60 2,520 1 US$800 mn assuming value of 7.5% Equity investments 17 BVPS of non-strategic investments 6 Unrealised gains on above 11 Total value per share 724
Source: Kotak Institutional Equities estimates
Exhibit 8: HDFC—one-year forward rolling PER and PBR Monthly data, January 2006 - January 2013 (X)
40 Rolling PER (X) (LHS) Rolling PBR (X) (RHS) 7.2
34 5.4
28 3.6 22
1.8 16
10 0.0 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13
Source: Company, Bloomberg, Kotak Institutional Equities estimates
12 KOTAK INSTITUTIONAL EQUITIES RESEARCH HDFC Banks/Financial Institutions
Exhibit 9: HDFC, valuation March fiscal year-ends, 2009-15E
Profit after PE on core P/B on core tax EPS EPS core P/E operations BVPS BVPS Core P/B operations RoA RoE Core RoE March y/e (Rs mn) (Rs) (Rs) (X) (X) (Rs) (Rs) (X) (X) (%) (%) (%) 2009 22,825 16 14 51 39.5 92 59 9 9.7 2.5 18.2 25.0 2010 28,265 20 17 41 34.5 106 47 8 12.3 2.6 20.0 30.3 2011 35,351 24 20 34 28.5 118 58 7 9.9 2.8 21.7 38.9 2012 41,226 28 24 29 23.9 129 67 6 8.5 2.7 22.7 38.4 2013E 48,398 32 27 26 21.4 164 103 5 5.6 2.7 22.0 32.0 2014E 57,243 37 27 22 21.4 185 122 4 4.7 2.7 21.5 28.6 2015E 66,565 43 27 19 21.4 209 147 4 3.9 2.7 22.1 27.9 Share price (Rs) 813 Market Capitalisation (Rs mn) 1,252,770 Less :value of subsidiaries and investments (Rs mn) 412,019 Price adjusted for subsidiaries and investments (Rs) 840,751 Price per share adjt for subsidiaries and investments (Rs) 573
Source: Kotak Institutional Equities
Exhibit 10: HDFC, key ratios March fiscal year-ends, 2010-15E (%)
2010 2011 2012 2013E 2014E 2015E Spread calc Average yield on assets (incl fees) 10.4 10.1 11.3 11.0 11.1 11.2 Average cost of funds 8.0 7.3 9.0 8.4 8.4 8.5 Overall spread 2.4 2.8 2.4 2.6 2.7 2.7 Spread on housing loans 2.9 3.0 2.7 2.8 2.8 2.8 NIM (pre provisions) 3.7 4.0 3.8 3.9 4.0 4.0 DU PONT Analysis Net total income 3.7 4.0 3.8 3.9 4.0 4.0 Net interest income 3.3 3.5 3.4 3.5 3.6 3.6 Capital gains 0.2 0.3 0.2 0.2 0.2 0.2 Dividend income 0.2 0.2 0.2 0.2 0.2 0.2 Net other income 0.2 0.2 0.3 0.1 0.2 0.2 Operating expenses 0.3 0.3 0.3 0.3 0.3 0.3 ROA 2.6 2.8 2.7 2.7 2.7 2.7 Average assets/average equity 7.7 7.9 8.4 8.2 7.9 8.1 ROE 20.0 21.7 22.7 22.0 21.5 22.1 Growth (%) Net loans 15 20 20 20 19 19 Total assets 15 20 20 16 17 17 PBT 22 24 16 17 18 16 PAT 24 25 17 17 18 16
Source: Company, Kotak Institutional Equities estimates
KOTAK INSTITUTIONAL EQUITIES RESEARCH 13 Banks/Financial Institutions HDFC
Exhibit 11: HDFC, standalone P&L and balance sheet March fiscal year-ends, 2010-15E (Rs mn)
2010 2011 2012 2013E 2014E 2015E Income statement Total income excluding fee income 111,066 126,325 169,530 196,154 230,129 271,304 Interest on Housing Loans 99,790 110,683 150,071 174,264 208,141 247,296 Dividends 2,327 2,252 3,096 4,305 4,384 5,066 Lease rentals 241 231 175 158 142 128 Other operating income 8,708 13,159 16,188 17,428 17,462 18,813 Income from investments 6,614 7,799 11,217 12,002 11,024 11,305 Capital gains 2,094 3,597 2,702 3,000 3,500 4,000 Interest payable 70,631 75,597 111,568 125,013 146,328 173,914 Net Income before provision 40,435 50,728 57,963 71,142 83,801 97,389 Provision 580 700 800 2,000 2,240 2,509 Fee income 2,317 2,204 3,799 2,447 3,057 3,573 Total income 113,383 128,528 173,329 198,602 233,186 274,876 Total expenses 3,056 3,619 4,313 5,075 5,938 6,950 Depreciation 182 192 205 216 226 238 Other income 226 251 213 213 213 213 Profit before tax 39,160 48,671 56,656 66,512 78,668 91,479 Tax 10,895 13,320 15,430 18,114 21,425 24,914 Profit after tax 28,265 35,351 41,226 48,398 57,243 66,565 - .EPS 20 24 28 32 37 43 EPS (core) 17 20 24 27 32 38 Book value 106 118 129 164 185 209 Book value (core) 47 58 67 103 122 147
Balance sheet Net loans 979,670 1,171,268 1,408,750 1,689,272 2,011,018 2,385,364 Total Investments 107,275 118,324 122,070 127,347 132,901 136,261 In equity 85,185 88,446 90,588 93,088 95,588 95,588 Fixed assets owned 2,221 2,340 2,340 2,527 2,729 2,947 Total assets 1,166,415 1,395,023 1,675,205 1,937,577 2,265,080 2,643,004 Total Borrowings 965,653 1,154,105 1,391,275 1,588,640 1,878,738 2,213,720 Total borowings and CL 1,014,438 1,221,856 1,485,024 1,687,076 1,982,095 2,322,246 Share capital 2,871 2,934 2,954 3,063 3,063 3,063 Reserves 149,106 170,231 187,222 247,438 279,921 317,695 Shareholders fund 151,977 173,165 190,176 250,501 282,985 320,759
Source: Company, Kotak Institutional Equities estimates
14 KOTAK INSTITUTIONAL EQUITIES RESEARCH
ADD Cairn India (CAIR)
Energy JANUARY 22, 2013 RESULT Coverage view: Attractive
In-line results; slower ramp-up in future. Cairn India’s net income (adjusted) at Price (Rs): 340 `31.6 bn was in line with our estimate of `31.3 bn; reported net income at `33.4 bn Target price (Rs): 370 was boosted by prior-period adjustment of `1.9 bn. The company has cut production BSE-30: 20,102 guidance to 200-215 kb/d by end-FY2014 due to lower production from Bhagyam field. We retain our ADD rating and DCF-based target price of `370 but see downside risks from lower-than-assumed recoverable reserves from Rajasthan block.
Company data and valuation summary Cairn India Stock data Forecasts/Valuations 2012 2013E 2014E 52-week range (Rs) (high,low)401-296 EPS (Rs) 41.6 63.9 56.1 Market Cap. (Rs bn) 649.1 EPS growth (%) 25.0 53.7 (12.3) QUICK NUMBERS Shareholding pattern (%) P/E (X) 8.2 5.3 6.1 Promoters 58.8 Sales (Rs bn) 143.3 185.4 181.3 • `2.4 bn of forex- FIIs 8.5 Net profits (Rs bn) 80.4 120.6 107.0 related gain; 1% MFs 1.1 EBITDA (Rs bn) 104.9 145.9 137.8 effective tax rate Price performance (%) 1M 3M 12M EV/EBITDA (X) 5.6 3.7 3.7 Absolute 9.1 1.9 (1.8) ROE (%) 17.7 23.3 18.4 • 170 kb/d of oil Rel. to BSE-30 4.4 (5.3) (18.2) Div. Yield (%) 0.0 3.7 5.0 production in 2QFY13; 166 kb/d in Qoq decline in revenues and EBITDA led by lower realizations December 2012 Cairn reported sequentially lower revenues at `42.8 bn (-4% qoq) and EBITDA (excluding forex • Stock is discounting gain/loss) at `32.9 bn (-5% qoq) led by (1) lower crude price realizations for the company at US$99/bbl crude US$96.2/bbl (-2%), (2) stronger exchange rate (-2%) and (3) lower oil production from Rajasthan block at 170 kb/d (-1% qoq). The company accounted foreign exchange fluctuation gain of `2.4 price in perpetuity bn in 3QFY13 versus foreign exchange fluctuation loss of `7.9 bn 2QFY13. Cairn’s net income increased 44% qoq to `33.4 bn in 3QFY13. The effective tax rate was surprisingly low at 1%.
Production from Rajasthan declined to 166 kb/d in December 2012; remains below the guidance
We are surprised by sharp decline in crude oil production from Rajasthan block to 166 kb/d in December 2012, 5.1% lower than the company’s guidance of 175 kb/d; the company had produced 173 kb/d in October and 171 kb/d in November. The management has attributed lower production to higher downtime of facilities and lower production from Bhagyam field. We remain watchful on potential disappointment in crude production in the near term. Lower production guidance of 200-215 kb/d by end-FY2014
The management has now guided to slower ramp-up in production from Rajasthan block to 200- 215 kb/d by end-FY2014 versus their earlier guidance of 210-240 kb/d by end-CY2013 noting lower-than-expected production from Bhagyam field, which may require drilling of more wells to achieve target peak production of 40 kb/d. The company expects to commence oil production from Aishwariya field by end-FY2013 and ramp up production from Bhagyam field in 2HFY14. The implementation of EOR through full field application of polymer flood in Mangala field is expected to begin in FY2015, subject to Government approvals.
Revise earnings
We compute our 12-month DCF-based fair value of `370 for Cairn India assuming (1) gross recoverable reserves at 1.55 bn bbls from the Rajasthan block, (2) crude price of US$90/bbl from FY2017E in perpetuity with an inflation of 2% and (3) long-term exchange rate of `52/US$. We have revised our FY2013-15E EPS to `63.9 (+4.2%), `56.1 (+0.1%) and `48.7 (-1.3%) to reflect (1) lower oil production, (2) lower effective tax rate and (3) other minor changes.
For private Circulation Only. FOR IMPORTANT INFORMATION ABOUT KOTAK SECURITIES’ RATING SYSTEM AND OTHER DISCLOSURES, REFER TO THE END OF THIS MATERIAL.
Energy Cairn India
Details of 3QFY13 results
Exhibit 1 gives highlights of Cairn’s 3QFY13 results and compares the same with 2QFY13 and 3QFY12. We discuss key highlights below.
Exhibit 1: Interim results of Cairn India (` mn)
(% chg.) 3QFY13 3QFY13E 3QFY12 2QFY13 3QFY13E 3QFY12 2QFY13 9MFY13 9MFY12 (% chg.) FY2013E Income from operations 42,776 43,368 30,968 44,431 (1.4) 38.1 (3.7) 131,608 82,093 60.3 176,142 Total expenditure (9,914) (10,386) (5,512) (17,774) (4.5) 79.9 (44.2) (29,309) (16,373) 79.0 (40,125) Inc/(Dec) in stock (13) 114 76 243 95 — Operating expenses (1,934) (2,185) (1,690) (1,807) (11.5) 14.5 7.1 (5,513) (4,750) 16.1 (8,028) Staff cost (155) (345) (273) (360) (55.0) (43.1) (56.9) (837) (698) 19.8 (1,067) Government taxes (7,087) (7,073) (2,963) (7,170) 0.2 139.2 (1.2) (21,203) (8,868) 139.1 (28,044) Other expenditure (725) (783) (701) (8,513) (7.4) 3.5 (91.5) (1,999) (2,151) (7.1) (2,986) EBITDA 32,862 32,982 25,456 26,658 (0.4) 29.1 23.3 102,299 65,720 55.7 136,017 Other income 4,176 5,039 4,138 2,226 (17.1) 0.9 87.6 8,171 10,589 (22.8) 9,915 Interest (52) (141) (240) (188) (62.9) (78.3) (72.2) (535) (1,914) (72.1) (594) Exploration costs written off (277) (388) (1,763) (262) (28.5) (84.3) 5.6 (892) (2,339) (61.9) (1,750) DD&A (4,824) (4,564) (3,787) (4,515) 5.7 27.4 6.8 (13,713) (10,390) 32.0 (18,726) Pretax profits 31,884 32,929 23,803 23,918 (3.2) 33.9 33.3 95,330 61,666 54.6 124,861 Extraordinaries/sales tax benefit 1,888 ——— 1,367 (1,028) 1,367 Tax (536) (1,076) (1,245) (1,359) (50.2) (57.0) (60.6) (2,712) (3,107) (12.7) (5,501) Deferred taxation 213 (570) 61 662 943 (15) 1,250 Net income 33,449 31,282 22,619 23,222 6.9 47.9 44.0 94,928 57,515 65.0 121,977 EPS (Rs) 17.5 16.4 11.9 12.2 49.8 30.2 63.9 Income tax rate (%) 1.0 5.0 5.0 2.9 1.8 5.1 3.4
Production, selling price data Production volume, gross ('000 boepd) 205.0 208.0 169.6 207.2 (1.4) 20.9 (1.1) 206.4 170.4 21.1 207.1 Production volume, net ('000 boepd) 128.1 129.4 99.0 129.4 (1.0) 29.4 (1.1) 128.2 99.3 29.2 128.5 Rajasthan 119.0 120.1 87.6 120.3 (0.9) 35.8 (1.1) 118.7 87.6 35.5 118.9 CB-OS-2 2.7 2.6 3.2 2.7 3.5 (13.7) (0.3) 2.8 3.4 (17.4) 2.8 Oil 1.8 1.6 1.9 1.7 17.2 (4.4) 6.7 1.8 2.1 (13.6) 1.8 Gas (mn cf/d) 5.2 5.8 7.6 6.0 (10.0) (31.6) (13.3) 5.7 7.7 (25.9) 5.6 Ravva 6.4 6.7 8.2 6.4 (5.6) (22.8) (1.3) 6.7 8.3 (19.1) 6.8 Oil 4.8 4.8 5.9 4.9 1.1 (18.2) (0.5) 5.0 6.3 (20.4) 4.9 Gas (mn cf/d) 9.0 10.5 14.0 9.5 (14.7) (35.5) (4.8) 10.2 12.1 (15.5) 10.2 Selling price, oil (US$/bbl) 96.2 97.7 101.1 98.1 (1.5) (4.8) (1.9) 98.4 103.3 (4.7) 99.4 Selling price, gas (US$/mcf) 4.5 4.4 4.4 4.6 1.5 1.6 (2.2) 4.5 4.5 1.3 4.6 Exchange rate (Rs/US$) 54.2 54.2 50.7 55.1 54.5 47.0 54.5
Source: Company, Kotak Institutional Equities estimates
` Qoq decline in revenues. Cairn India reported 3QFY13 consolidated net revenues at `42.8 bn (-4% qoq and +38% yoy). The qoq decline in revenues reflects (1) lower crude oil production from Rajasthan block at 170 kb/d (-1% qoq) and (2) lower crude price realization at US$96.2/bbl for the company versus US$98.1/bbl in 2QFY13. Crude realization for Rajasthan block declined to US$95.6/bbl (13.3% discount to Dated Brent crude price) versus US$97.6/bbl in 2QFY13. Gas price realization was at US$4.5/mcf versus US$4.6/mcf in 2QFY13.
` Lower oil production from Rajasthan block. Cairn’s share of production from Rajasthan block was 118,984 b/d (working interest-basis) in 3QFY13 versus 120,261 b/d in 2QFY13. We note that gross oil production from Rajasthan block at 170 kb/d was lower than company’s guidance of 175 kb/d led by maintenance shutdowns and lower oil production from Bhagyam field. The company has indicated a routine downtime of 3-5% for the facilities and processing infrastructure on an ongoing basis.
` Production continues to decline sharply from other fields. At CB-OS-2, oil production declined 4% yoy and gas production declined 32% yoy. At Ravva, oil production declined by 18% yoy and gas production declined by 36% yoy. Exhibit 2 shows Cairn’s reported production from various fields in 3QFY13.
16 KOTAK INSTITUTIONAL EQUITIES RESEARCH Cairn India Energy
Exhibit 2: Cairn's production from Ravva and Cambay fields has declined sharply in 3QFY13 Details of production from Cairn's various fields ('000 boe/d)
(% chg.) 3QFY13 2QFY13 3QFY12 qoq yoy 9MFY13 9MFY12 (% chg.) Average daily gross production 205.0 207.2 169.6 (1.1) 20.9 206.4 170.4 21.1 Rajasthan 170.0 171.8 125.1 (1.1) 35.8 169.7 125.2 35.5 Ravva 28.2 28.6 36.6 (1.3) (22.8) 29.8 36.9 (19.1) Cambay 6.8 6.8 7.9 (0.3) (13.7) 7.0 8.4 (17.4) Average daily working interest production 128.1 129.4 99.0 (1.1) 29.4 128.2 99.3 29.2 Rajasthan 119.0 120.3 87.6 (1.1) 35.8 118.8 87.6 35.5 Ravva 6.4 6.4 8.2 (1.3) (22.8) 6.7 8.3 (19.1) Cambay 2.7 2.7 3.2 (0.3) (13.7) 2.8 3.4 (17.4)
Source: Company, Kotak Institutional Equities
` Increase in other income. Cairn’s other income increased to `4.2 bn from `2.2 bn in 2QFY13. The company reported foreign exchange fluctuation gain of `2.4 bn in 3QFY13 (included in other income) versus foreign exchange fluctuation loss of `7.9 bn 2QFY13 (included in other expenditure).
` Higher DD&A charges. Cairn reported increase in DD&A expense to `4.8 bn (+7% qoq and +27% yoy). The company reported exploration cost of `277 mn versus `262 mn in 2QFY13.
` Finance charge. Cairn India reported finance cost at `52 mn in 3QFY13 versus `188 mn in 2QFY13 and `240 mn in 3QFY12.
` Prior-period adjustment. Cairn has accounted a prior-period adjustment of `1.9 bn related to differences in tax rates from recently approved Scheme of Arrangement.
` Taxation. The effective tax rate for the company was low at 1% in 3QFY13 due to MAT credit for `5.4 bn. The company booked a deferred tax asset of `213 mn in 3QFY13 versus `662 mn in 2QFY13 and `61 mn in 3QFY12.
Operational update
` Mangala field. The company is planning to maintain the oil production at current levels by drilling additional development wells and implementation of chemical EOR techniques. The management indicated that the full field implementation of the EOR technique is expected to take place in FY2015 subject to necessary Government approvals.
` Bhagyam field. The management expects to ramp up oil production from Bhagyam field to 40 kb/d by 2HFY14 by drilling additional wells. The company has attributed lower- than-anticipated oil production from Bhagyam field to the complex crude characteristics and shallow nature of the reservoir.
` Aishwariya field. Cairn India has indicated commencement of crude oil production from Aishwariya field by end-FY2013.
` Ravva and CB-OS-2 blocks. At Ravva, the company is planning (1) an infill drilling campaign of 3 wells to tap by-passes oil and (2) an exploratory well for a high-value high- risk deep prospect during FY2014. At CB-OS-2, the company has successfully completed first well of the ongoing infill drilling campaign comprising 2 wells and 1 workover well.
` KG-ONN-2003/1. The JV is planning to commence the appraisal program for two wells by 1QFY14.
KOTAK INSTITUTIONAL EQUITIES RESEARCH 17 Energy Cairn India
` Sri Lanka. The company has brought forward the exploration drilling program in SL 2007-01-001 block to February 2013 from mid-CY2013 due to early availability of a rig.
` South Africa. Cairn India has got regulatory approval to acquire 60% interest and operatorship rights in Block-1 in Orange basin in South Africa.
Earnings revision and key assumptions
We have revised our FY2013E, FY2014E and FY2015E EPS to `63.9, `56.1 and `48.7 from `61.4, `56 and `49.4 to reflect (1) lower oil production, (2) lower effective tax rate and (3) other minor changes. Exhibit 3 gives our key assumptions behind earnings estimates for Cairn India.
Exhibit 3: Key assumptions for Cairn India, March fiscal year-ends, 2010-17E
2010 2011 2012 2013E 2014E 2015E 2016E 2017E Pricing assumptions Exchange rate (Rs/US$) 47.4 45.6 47.8 54.5 54.0 53.0 52.0 52.0 Dated Brent crude price (US$/bbl) 67.0 83.8 115.5 110.0 105.0 100.0 95.0 90.0 Discount of Rajasthan crude to Dated Bre 5.0 10.0 11.5 11.3 10.0 10.0 10.0 10.0 Volume assumptions ('000 b/d) Gross production (RJ-ON-90/1) 9 101 128 170 189 225 260 270 Net production (RJ-ON-90/1) 6 75 90 119 132 158 182 189 Gross production (O+OEG) 64 151 174 207 220 251 279 285 Net production (O+OEG) 21 88 102 129 140 164 186 192
Source: Company, Kotak Institutional Equities estimates
` Recoverable reserves. We assume gross production of 1.46 bn bbls (1.02 bn bbls net to Cairn) over the remaining life of the field, which is higher versus management’s guidance of gross 2P +2C resources (including EOR and Barmer Hill formation) of 1.12 bn bbls for the block as of March 31, 2012. Exhibit 4 gives details of Cairn’s resource base and reserves including contingent resources.
Exhibit 4: Cairn India has estimated 1.63 bn boe of 2P + 2C resource potential from its various fields Estimate of hydrocarbon reserves and resources (mn boe)
Gross proved and Gross proved and Net proved and probable hydrocarbons probable reserves probable reserves initially in place and resources and resources Mar-12 Mar-11 Mar-12 Mar-11 Mar-12 Mar-11 Rajasthan MBA fields 2,090 2,054 636 656 445 459 Rajasthan MBA EOR —— 308 308 216 216 Rajasthan block other fields 2,088 1,976 178 152 125 107 Ravva fields 690 709 70 88 16 20 CBOS/2 fields 182 180 13 15 5 6 Other fields 792 707 426 364 99 40 Total 5,842 5,626 1,631 1,583 906 848
Source: Company, Kotak Institutional Equities
` Volumes. We model gross oil production from the Rajasthan block at 8.5 mn tons (170 kb/d) for FY2013E, 9.5 mn tons (189 kb/d) for FY2014E and 11.3 mn tons (225 kb/d) for FY2015E. We see downside risks to our estimates for FY2014-15E, which are contingent on (1) ramp-up in production from Bhagyam field and (2) timely commencement of production from Aishwariya field.
` Crude oil price assumption. We assume crude oil prices for FY2013E, FY2014E and FY2015E at US$110/bbl, US$105/bbl and US$100/bbl. We model FY2016E and FY2017E crude prices at US$95/bbl and US$90/bbl. We have assumed an increase in crude prices by 2% in perpetuity beyond FY2017E. We model US$10/bbl discount to Dated Brent crude price for Cairn’s Rajasthan crude in the long term.
18 KOTAK INSTITUTIONAL EQUITIES RESEARCH Cairn India Energy
` Exchange rate. We have assumed exchange rate for FY2013E, FY2014E and FY2015E at `54.5/US$, `54/US$ and `53/US$. We model long-term exchange rate from FY2016E onwards at `52/US$.
Exhibit 5: Current stock price is discounting US$99/bbl of crude price in perpetuity Crude price discounted at various levels of stock price of Cairn India
Stock price Crude price discounted (Rs/share) (US$/bbl) 430 121 415 118 400 114 385 109 370 106 355 102 340 99 325 96 310 93 295 89 280 85
Notes: (1) Long-term exchange rate assumption of Rs52/US$.
Source: Kotak Institutional Equities estimates
Exhibit 6: Cairn's earnings are highly leveraged to crude prices Earnings sensitivity of Cairn to key variables
2013E 2014E 2015E 2016E Downside Base case Upside Downside Base case Upside Downside Base case Upside Downside Base case Upside Average crude prices Crude price (US$/bbl) 108.0 110.0 112.0 103.0 105.0 107.0 98.0 100.0 102.0 93.0 95.0 97.0 Net profits (Rs mn) 118,766 121,977 125,187 103,850 106,955 110,059 89,890 92,923 95,956 69,673 72,525 75,377 Earnings per share (Rs) 62.3 63.9 65.6 54.4 56.1 57.7 47.1 48.7 50.3 36.5 38.0 39.5 % upside/(downside) (2.6) 2.6 (2.9) 2.9 (3.3) 3.3 (3.9) 3.9
Exchange rate Rs/US$ 53.5 54.5 55.5 53.0 54.0 55.0 52.0 53.0 54.0 51.0 52.0 53.0 Net profits (Rs mn) 119,081 121,977 124,872 104,220 106,955 109,690 90,386 92,923 95,460 70,284 72,525 74,766 Earnings per share (Rs) 62.4 63.9 65.5 54.6 56.1 57.5 47.4 48.7 50.0 36.8 38.0 39.2 % upside/(downside) (2.4) 2.4 (2.6) 2.6 (2.7) 2.7 (3.1) 3.1
Crude oil production Rajasthan block ('000 b/d) 161.4 169.9 178.4 179.7 189.2 198.6 213.8 225.0 236.3 247.0 260.0 273.0 Net profits (Rs mn) 116,083 121,977 127,870 101,700 106,955 112,210 88,318 92,923 97,531 68,850 72,525 76,204 Earnings per share (Rs) 60.9 63.9 67.0 53.3 56.1 58.8 46.3 48.7 51.1 36.1 38.0 40.0 % upside/(downside) (4.8) 4.8 (4.9) 4.9 (5.0) 5.0 (5.1) 5.1
Source: Kotak Institutional Equities estimates
KOTAK INSTITUTIONAL EQUITIES RESEARCH 19 Energy Cairn India
Exhibit 7: We value Cairn India stock at `370 EV and equity value of Cairn (US$ mn)
Now + 1-year + 2-years RJ-ON-90/1 10,438 10,027 9,881 CB-OS-2 50 28 12 Ravva 185 143 109 Total 10,672 10,199 10,003 Net debt (1,464) (2,426) (2,946) Equity value 12,137 12,625 12,949 Equity shares (mn) 1,907 1,907 1,907 Equity value per share (Rs/share) 347 370 389
Source: Kotak Institutional Equities estimates
Exhibit 8: Profit model, balance sheet, cash model of Cairn, March fiscal year-ends, 2010-16E (` mn)
2010 2011 2012 2013E 2014E 2015E 2016E Profit model (Rs mn) Net sales 22,627 108,977 143,279 185,403 181,280 176,001 166,225 EBITDA 9,874 84,117 95,533 136,017 127,783 113,452 94,536 Other income 4,077 1,288 9,380 9,915 10,051 11,842 13,243 Interest (148) (2,909) (2,258) (594) — — — Depreciation (3,570) (13,596) (17,391) (20,476) (22,767) (24,861) (28,387) Pretax profits 10,232 68,900 85,263 124,861 115,067 100,432 79,392 Extraordinary items (69) — (1,028) 1,367 — — — Tax (739) (4,397) (3,732) (5,501) (6,950) (6,930) (6,659) Deferred taxation 1,087 (1,159) (1,126) 1,250 (1,162) (579) (208) Net profits 10,511 63,344 79,377 121,977 106,955 92,923 72,525 Earnings per share (Rs) 5.5 33.3 41.6 63.9 56.1 48.7 38.0
Balance sheet (Rs mn) Total equity 338,683 402,932 482,921 552,120 599,775 630,629 629,068 Deferred tax liability 4,453 5,612 6,738 5,488 6,649 7,229 7,437 Total borrowings 34,007 26,782 12,518 — — — — Currrent liabilities 14,806 29,266 32,255 34,733 35,125 36,590 38,156 Total liabilities and equity 391,949 464,592 534,432 592,340 641,549 674,448 674,661 Cash 6,269 44,847 73,963 112,656 137,809 163,814 177,854 Current assets 17,465 34,761 53,559 60,309 59,728 58,983 57,603 Total fixed assets 92,904 99,054 105,145 109,105 115,523 98,174 77,258 Net producing properties 4,995 20,850 30,207 38,712 56,932 81,919 90,387 Investments 17,124 10,944 18,356 18,356 18,356 18,356 18,356 Goodwill 253,193 253,193 253,193 253,193 253,193 253,193 253,193 Deferred expenditure — 943 10 10 10 10 10 Total assets 391,949 464,592 534,432 592,340 641,549 674,448 674,661
Free cash flow (Rs mn) Operating cash flow, excl. working capital 6,501 71,403 69,417 104,470 97,469 86,232 71,087 Working capital changes (7,082) (10,088) (29) (4,273) 973 2,210 2,945 Capital expenditure (33,662) (25,648) (29,558) (31,191) (45,655) (31,050) (14,490) Investments/Goodwill 25,194 (24,004) (196) — — — — Other income 2,360 903 2,449 9,915 10,051 11,842 13,243 Free cash flow (6,689) 12,566 42,083 78,922 62,839 69,233 72,786
Key assumptions Gross production ('000 boe/d) 64 151 174 207 220 251 279 Net production ('000 boe/d) 21 88 102 129 140 164 186 Gross production from Rajasthan block ('000 boe/d) 9 101 128 170 189 225 260 Dated Brent (US$/bbl) 67 84 116 110 105 100 95 Discount of Rajasthan crude to Dated Brent (US$/bbl) 5 10 12 11 10 10 10
Source: Company, Kotak Institutional Equities estimates
20 KOTAK INSTITUTIONAL EQUITIES RESEARCH
SELL Asian Paints (APNT)
Consumer products JANUARY 22, 2013 RESULT Coverage view: Cautious
Festive season cheer; we continue to find valuations expensive. APNT reported a Price (Rs): 4,288 strong quarter with 20% domestic sales growth and 43 bps EBITDA margin expansion. Target price (Rs): 3,550 3QFY13 likely benefited from the late onset of festive season this year versus FY2012 BSE-30: 20,102 when the festive season stock build-up likely started in the Sep 2012 quarter. Titanium dioxide price has started correcting but for any meaningful impact on margins, it will have to be coupled with INR appreciation. We remain positive on the long-term prospects of APNT but find the stock expensive at 30.3X FY2014E EPS. SELL.
Company data and valuation summary Asian Paints Stock data Forecasts/Valuations 2013 2014E 2015E 52-week range (Rs) (high,low)4,498-2,750 EPS (Rs) 122.6 141.5 163.0 Market Cap. (Rs bn) 411.3 EPS growth (%) 18.9 15.5 15.1 Shareholding pattern (%) P/E (X) 35.0 30.3 26.3 Promoters 52.8 Sales (Rs bn) 112.3 130.6 151.2 FIIs 18.1 Net profits (Rs bn) 12.3 14.2 16.4 MFs 1.4 EBITDA (Rs bn) 18.2 21.4 25.0 Price performance (%) 1M 3M 12M EV/EBITDA (X) 22.4 18.9 16.1 Absolute (1.6) 10.5 56.9 ROE (%) 40.1 38.1 36.7 Rel. to BSE-30 (5.8) 2.7 30.7 Div. Yield (%) 1.1 1.4 1.7
Late onset of festive season aids a strong 3QFY13
Asian Paints reported consolidated sales of Rs30.4 bn (+19%, KIE est. Rs30 bn), EBITDA of Rs4.9 bn (+24%, KIE est. Rs4.9 bn) and PAT of Rs3.5 bn (+31%, KIE est. Rs3.3 bn). Net income beat was driven by higher-than-expected other income.
At a standalone level, domestic sales growth was 20% with likely pricing growth of ~7.5% and the balance being volume growth and mix improvement (volume growth was around 11%, in our view). 3QFY13 likely benefited from the late onset of festive season this year versus FY2012 when the festive season stock build-up (at the dealer level) likely started in the Sep 2012 quarter.
Domestic gross margin improved by 86 bps yoy. Titanium dioxide price has come off from the peak levels and if the trend sustains (coupled with INR appreciation), margin expansion momentum will likely continue. EBITDA margin expansion was limited to 43 bps yoy as other expenditure increased by 52 bps yoy likely due to higher adspends as the company revamped its brand and marketing communication.
Factors to watch out for—sales growth trajectory, trend in margins and mix improvement
Even as we remain positive on the medium-term prospects for the paints sector and APNT, rich valuations (at 30.3X FY2014E EPS) prevent us from being constructive on the stock. From a business perspective, we would closely watch for:
` Volume growth trajectory. Volume growth has weakened recently on account of steep price hikes, slowdown in discretionary spending and rising competitive intensity. APNT’s volume growth has decelerated to ~6% for 9MFY13 versus 11% in FY2012 and a CAGR of 16% over
FY2006-11. ` Margin trend. Titanium dioxide price correction needs to be coupled with INR appreciation for the margin momentum to sustain.
` Mix improvement. Over the past few years, the company’s revenue growth and margin profile has benefited from mix improvement in favor of emulsions. Emulsions now account for ~45% of sales, making further upside from this aspect increasingly challenging.
For private Circulation Only. FOR IMPORTANT INFORMATION ABOUT KOTAK SECURITIES’ RATING SYSTEM AND OTHER DISCLOSURES, REFER TO THE END OF THIS MATERIAL.
Consumer products Asian Paints
` Competitive intensity. The competitive landscape of the paint industry is changing with Akzo Nobel, Berger Paints, Kansai Nerolac and newer players such as Nippon, Sherwin Williams, Jotun, etc. eyeing for a larger share of the market. These players have been expanding their distribution reach, pursuing aggressive celebrity advertising and launching innovative basket of products. APNT has done well to thwart competitive pressure thus far; however, competitive action in the market bears a close watch.
Solid franchise, good medium-term story but expensive valuations; we remain sellers
We like the underlying medium-term volume growth drivers of the Indian paints industry— (1) gradual shift from painting being a discretionary spend to a non-discretionary one—we do expect the pace of shift to be gradual and cyclical, (2) increasing frequency of repainting, and (3) uptrading potential—we have seen a shift in favor of emulsions in the past few years; this trend will likely continue (albeit at a slower pace now that the base is higher) with sustained innovation in the high-end emulsions space (temperature control, low VOC, etc.). We also believe that APNT’s strong franchise positions it well to benefit from these growth drivers, expected increase in competitive intensity notwithstanding.
However, the stock’s valuations at 30.3X FY2013E (at a premium to our sector coverage universe) more than capture the fundamental positives, in our view. Valuations leave little room for (1) potential slowdown in discretionary spending, (2) execution slippage, and (3) reversal in titanium dioxide prices or other RM cost inflation. We also note that APNT’s return ratios (~40% ROE) are middle of the pack in the sector. Justifying higher-than-sector- average valuation multiples is hence challenging unless one has strong conviction on sustained stronger-than-sector growth rates with similar, if not lower, earnings volatility. We do not share this view and hence value APNT at 25X FY2014E EPS (versus 30X for ITC and HUL); we retain SELL with a revised target price of Rs3,550/share (Rs3,300 earlier).
Please note that we have moved to a consolidated earnings model for the company.
Exhibit 1: Interim consolidated results of Asian Paints Ltd, March fiscal year-ends (Rs mn)
(% chg) 3QFY13 3QFY13E 3QFY12 2QFY13 3QFY13E 3QFY12 2QFY13 9MFY13 9MFY12 (%chg) Net sales 30,371 30,019 25,605 26,160 1 19 16 81,923 70,623 16 Total expenditure (25,425) (21,632) (22,548) 18 13 (68,987) (59,599) 16 Material cost (18,133) (15,514) (15,714) 17 15 (48,686) (42,557) 14 Staff cost (1,532) (1,318) (1,518) 16 1 (4,635) (3,906) 19 Other expenditure (5,760) (4,800) (5,316) 20 8 (15,666) (13,136) 19 EBITDA 4,947 4,893 3,974 3,612 1 24 37 12,937 11,025 17 OPM (%) 16.3 16.3 15.5 13.8 15.8 15.6 Other income 467 265 225 422 107 11 1,216 917 33 Interest (79) (119) (90) (122) (13) (35) (309) (244) 27 Depreciation (366) (365) (307) (357) 19 2 (1,058) (898) 18 Pretax profits 4,969 4,674 3,802 3,555 6 31 40 12,786 10,800 18 Tax (1,466) (1,374) (1,138) (1,041) 29 41 (3,780) (3,241) 17 Net income 3,503 3,300 2,664 2,514 6 31 39 9,006 7,559 19 Income tax rate (%) 29.5 29.4 29.9 29.3 29.6 (30.0)
Cost as a % of Sales Material cost 59.7 60.6 60.1 59.4 60.3 Staff cost 5.0 5.1 5.8 5.7 5.5 Other expenditure 19.0 18.7 20.3 19.1 18.6
Source: Kotak Institutional Equities
22 KOTAK INSTITUTIONAL EQUITIES RESEARCH Asian Paints Consumer products
Exhibit 2: Interim standalone results of Asian Paints, March fiscal year-ends (Rs mn)
(% chg) 3QFY13 3QFY12 2QFY13 3QFY12 2QFY13 9MFY13 9MFY12 (%chg) Net sales 25,239 21,031 21,344 20 18 67,042 58,574 14 Total expenditure (20,857) (17,471) (18,090) 19 15 (55,459) (48,740) 14 Material cost (14,824) (12,533) (12,688) 18 17 (39,134) (34,941) 12 Staff cost (976) (832) (978) 17 (0) (2,997) (2,563) 17 Other expenditure (5,058) (4,105) (4,424) 23 14 (13,328) (11,236) 19 EBITDA 4,382 3,561 3,254 23 35 11,583 9,834 18 OPM (%) 17.4 16.9 15.2 17.3 16.8 Other income 472 319 350 48 35 1,174 1,238 (5) Interest (60) (62) (100) (4) (40) (237) (171) 38 Depreciation (301) (249) (294) 21 2 (869) (740) 17 Pretax profits 4,493 3,569 3,210 26 40 11,651 10,161 15 Tax (1,373) (1,064) (972) 29 41 (3,547) (3,023) 17 Net income 3,120 2,505 2,238 25 39 8,104 7,138 14 Income tax rate (%) 30.6 29.8 30.3 30.4 29.8
Cost as a % of sales Material cost 58.7 59.6 59.4 58.4 59.7 Staff cost 3.9 4.0 4.6 4.5 4.4 Other expenditure 20.0 19.5 20.7 19.9 19.2 Segment results of Asian Paints
Revenue Paints 25,224 20,885 21,273 21 19 66,848 58,281 15 Others 584 641 652 (9) (10) 1,960 1,878 4 PBIT Paints 4,631 3,864 3,292 20 41 12,075 10,508 15 Others (23) 32 81 (170) (128) 132 144 (9) Capital employed Paints 22,203 15,196 23,410 46 (5) 22,203 15,196 46 Others 715 640 679 12 5 715 640 12 Unallocated 9,006 9,996 4,714 (10) 91 9,006 9,996
Source: Kotak Institutional Equities
KOTAK INSTITUTIONAL EQUITIES RESEARCH 23 Consumer products Asian Paints
Exhibit 3: 3QFY13 benefited from late onset of the festive season Trend in volume growth (%)
35
30
25
20
15
10
5
0
(5) Jun-08 Jun-09 Jun-10 Jun-11 Jun-12 Sep-08 Sep-09 Sep-10 Sep-11 Sep-12 Dec-08 Dec-09 Dec-10 Dec-11 Dec-12 Mar-09 Mar-10 Mar-11 Mar-12 FY03-08
Source: Bloomberg, Kotak Institutional Equities
Exhibit 4: Trend in titanium dioxide price (indexed to base)
240
220
200
180
160
140
120
100 Feb-09 Feb-10 Feb-11 Feb-12 Nov-08 Nov-09 Nov-10 Nov-11 Nov-12 Aug-08 Aug-09 Aug-10 Aug-11 Aug-12 May-08 May-09 May-10 May-11 May-12
Source: Bloomberg, Kotak Institutional Equities
24 KOTAK INSTITUTIONAL EQUITIES RESEARCH Asian Paints Consumer products
Exhibit 5: Titanium dioxide price has come off peak levels Quarterly gross margins (%)
50
40
30
20
10
0 Jun-09 Jun-10 Jun-11 Jun-12 Sep-08 Sep-09 Sep-10 Sep-11 Sep-12 Dec-08 Dec-09 Dec-10 Dec-11 Dec-12 Mar-08 Mar-09 Mar-10 Mar-11 Mar-12 'Jun-08
Source: Company, Kotak Institutional Equities
Exhibit 6: EBITDA margins likely to remain well below the peak EBITDA margins, March fiscal year-ends, 2006-13E (%)
20
18
16
14
12
10 2006 2007 2008 2009 2010 2011 2012 2013E 2014E
Source: Kotak Institutional Equities estimates
KOTAK INSTITUTIONAL EQUITIES RESEARCH 25 Consumer products Asian Paints
Exhibit 7: Asian Paints: Profit model, balance sheet, March fiscal year-ends, 2010-15E (Rs mn)
2010 2011 2012 2013E 2014E 2015E Profit model (Rs mn) Net sales 66,809 77,223 96,322 112,311 130,553 151,170 EBITDA 12,274 13,281 15,088 18,173 21,353 24,989 Other income 1,405 680 1,074 1,121 1,230 1,396 Interest (285) (232) (410) (397) (404) (413) Depreciation (836) (1,131) (1,211) (1,468) (1,751) (2,093) Pretax profits 12,559 12,597 14,541 17,428 20,428 23,879 Tax (3,731) (3,784) (4,335) (5,141) (6,230) (7,522) Net profits 8,828 8,814 10,206 12,287 14,197 16,357 Earnings per share (Rs) 87.0 87.9 103.1 122.6 141.5 163.0
Balance sheet (Rs mn) Total equity 17,100 21,874 27,485 33,776 40,725 48,363 Total borrowings 2,292 2,334 3,411 3,211 3,011 2,811 Currrent liabilities 16,947 19,947 25,771 30,160 34,910 40,278 Deferred tax liability 562 852 928 928 928 928 Minority interest 945 1,099 1,367 1,897 2,518 3,244 Total liabilities and equity 37,846 46,106 58,962 69,973 82,093 95,624 Cash 1,058 6,262 6,243 6,997 9,489 12,300 Current assets 17,379 22,022 29,995 34,196 39,047 44,529 Total fixed assets 12,801 13,160 18,761 24,817 29,594 34,833 Investments 6,241 4,290 3,547 3,547 3,547 3,547 Goodwill 367 372 415 415 415 415 Total assets 37,846 46,106 58,962 69,973 82,093 95,624
Key assumptions (%) Revenue growth 22.3 15.6 24.7 16.6 16.2 15.8 EBITDA margin 18.4 17.2 15.7 16.2 16.4 16.5 EPS growth 107.9 1.0 17.3 18.9 15.5 15.1
Source: Kotak Institutional Equities estimates
26 KOTAK INSTITUTIONAL EQUITIES RESEARCH
SELL Shree Cement (SRCM)
Cement JANUARY 22, 2013 RESULT Coverage view: Cautious
Realizations on shaky ground, power contribution improves. Shree Cement’s Price (Rs): 4,479 results were in line with estimates. Lower cement realizations (-5% qoq) and power Target price (Rs): 3,427 tariffs (-10% qoq) were offset by higher external sales of power. At 13.8X EV/EBITDA BSE-30: 20,102 (2012 EBITDA), SRCM is the most expensive among cement stocks we cover and at it trades at a ~5% premium to pan-India players. Aggressive capacity additions notwithstanding, regional concentration and upward trending pet-coke prices make SRCM’s earnings significantly vulnerable. Maintain SELL with a revised target price of Rs3,427.
Company data and valuation summary Shree Cement Stock data Forecasts/Valuations 2013 2014E 2015E 52-week range (Rs) (high,low) 5,100-2,150 EPS (Rs) 272.8 286.5 308.5 Market Cap. (Rs bn) 156.0 EPS growth (%) 70.9 5.0 7.7 Shareholding pattern (%) P/E (X) 16.4 15.6 14.5 Promoters 64.8 Sales (Rs bn) 58.2 62.4 66.1 FIIs 7.9 Net profits (Rs bn) 9.5 10.0 10.7 MFs 3.6 EBITDA (Rs bn) 15.5 17.8 19.0 Price performance (%) 1M 3M 12M EV/EBITDA (X) 9.4 7.9 7.1 Absolute (0.2) 6.8 105.9 ROE (%) 31.1 25.8 22.7 Rel. to BSE-30 (4.5) (0.7) 71.4 Div. Yield (%) 0.4 0.4 0.4
Fragile performance by the cement business but power saves the day
SRCM reported revenues of Rs14.3 bn (13% yoy, 8% qoq), operating profit of Rs3.7 bn (12% yoy, -5% qoq) and net income of Rs2.2 bn (267% yoy, -5% qoq) against our estimate of Rs14 bn, Rs3.9 bn and Rs2 bn respectively. While the revenue beat was mainly due to higher external sale of power (786 MU against 307 MU during the preceding quarter), a sharp sequential decline in cement realizations (Rs3,723/ton against estimated Rs4,029/ton) led to a 3% EBITDA miss; but a lower effective tax rate (14% against 25% factored by us) allowed net income beat of 15%.
Both cement realizations and volumes decline; power volumes surge with over 90% PLFs
The cement business’ performance was fragile, registering a drop in realizations and volumes. The decline in realizations to Rs3,723/ton (-2% yoy, -5% qoq) was in line with the drop in prices in North India during the quarter and similar to industry leader Ultratech. A sharp sequential jump in freight costs (9% qoq) and other costs (17% qoq) led to erosion of profit margins in the cement segment, which reported EBIT margin of 16% (-304 bps yoy, -376 bps qoq).
However, the power business delivered a stellar performance with external sales almost tripling to 786 MUs, though realizations came off sequentially by ~10% and compensated for the underperformance in the cement business.
We maintain our SELL rating with a revised target price of Rs3,427
We maintain our SELL rating on SRCM with a revised target price of Rs3,427 (previously Rs3,340) factoring higher earnings from the power business. We have revised EBITDA estimates for FY2013 and FY2014 by ~3% and ~2% respectively to account for improved utilization in the power business. Our SOTP-base valuation comprises Rs3,300/share for cement business (valued at 7X12- month forward EBITDA) and Rs127/share for the power business. We continue to value the power business at lower-than-replacement cost due to low leverage and continued risk to earnings (from merchant tariffs and fuel prices).
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Cement Shree Cement
External sale of power improves dramatically but realizations are lower
SRCM sold 786 MUs (207% yoy, 156% qoq) at an estimated realization of Rs4.0/kWh in the quarter ending December 2012. This quantum of power sales implies a PLF of ~91% (on an installed capacity of 560 MW). SRCM reporting a healthy 22% EBIT margin for the power business (-37% in the quarter ended December 2011). However, the absence of a long-term arrangement for (1) sale of power and (2) procurement of coal makes SRCM’s power portfolio vulnerable to adverse cost-price movements.
Cement: Realizations under pressure, operations at near-capacity
We discuss the operational performance of the cement business below:
` SRCM’s average realization declined to Rs3,723/ton (-2% yoy, -5% qoq). Our channel checks had earlier indicated a sequential drop in retail cement prices in North India (SRCM’s key market) due to (1) the early onset of severe winter conditions, (2) migration of labor owing to the onset of the Rabi season and (3) shortage of raw materials such as bricks and sand from enforcement of a ban on illegal mining in a few states.
` SRCM posted robust 5% yoy volume growth in the quarter ended in December 2012 registering an overall 17% yoy growth for the nine months between March and December 2012. In this context, SRCM has significantly outperformed its larger peers, most of whose guidance indicates a muted demand outlook for the cement industry in FY2013. We however note that SRCM’s volumes declined 1% sequentially during the quarter, despite the end of the monsoon season.
` SRCM’s freight costs increased to Rs762/ton (9% qoq, -18% yoy), reflecting better absorption of freight hikes undertaken by the railways earlier in February 2012.
Capacity ramp-up moderated, reversal of working capital cycle in 1HFY13
` SRCM’s incurred a capex of Rs3 bn in 1HFY13 due to the setting up two new clinker lines aggregating a capacity of 3.2 mtpa at Ras, Rajasthan (total planned capex: Rs9 bn). SRCM aims to have an integrated cement capacity of ~19 MTPA by FY2015E and 22 MTPA by FY2017E including a grinding unit in Bihar and an integrated unit in Chhattisgarh.
` SRCM reported a significant spike in debtors to Rs3.5 bn as on December 31, 2012 (Rs 1.8 bn as on June 30, 2012), equivalent to 12 months’ annualized sales for the quarter ended December 31, 2012 (six months of sales for the quarter ended June 2012).
` Total inventory also shot up from Rs5 bn as on June 30, 2012 to Rs7 bn as on December 31, 2012.
` Net current assets (ex-cash) were Rs834 mn as on December 31, 2012 against a negative Rs2.4 bn on June 30, 2012. The reversal in working capital cycle might have resulted from an enhanced working capital requirement in the power business, which has ramped up to almost its full capacity during this quarter.
28 KOTAK INSTITUTIONAL EQUITIES RESEARCH Shree Cement Cement
Exhibit 1: Cement business disappoints with sequential drop in both realizations and volumes, external power sales improve dramatically Interim results of Shree Cement, June fiscal year-ends, (Rs mn)
(% chg.) Dec-12 Dec-12E Dec-11 Sep-12 Dec-12E Dec-11 Sep-12 Adj. FY2012 FY2013E (% chg.) Net sales 14,281 14,024 12,586 13,230 2 13 8 50,463 58,152 15 Raw material costs 1,136 1,318 936 1,300 4,828 5,182 Purchase of traded goods — — 628 — 1,671 - Power & fuel costs 4,227 3,594 3,254 3,290 12,313 16,255 Freight costs 2,284 2,246 2,655 2,130 9,390 9,534 Personnel costs 749 764 638 704 2,583 3,090 Other costs 2,167 2,253 1,149 1,875 5,809 8,559 Total expenditure (10,563) (10,175) (9,261) (9,300) (36,594) (42,621) EBITDA 3,717 3,848 3,324 3,930 (3) 12 (5) 13,870 15,531 12 EBITDA (%) 26 27 26 30 27 27 Other income 323 271 168 300 1,466 1,338 Interest (563) (488) (519) (543) (1,878) (1,963) Depreciation (818) (966) (2,351) (942) (7,133) (3,692) Pre-tax profits 2,659 2,665 622 2,745 6,325 11,215 77 Tax (365) (666) (55) (482) (1,312) (2,517) Deferred tax - — 25 27 (85) 307 Net income 2,294 1,999 592 2,291 15 287 0 4,928 9,004 83 Extraordinary (120) — 0 (10) 707 - Reported income 2,174 1,999 592 2,281 9 267 (5) 5,635 9,004 Segment results of Shree Cement Revenues Cement 11,155 12,069 10,813 11,874 3 (6) 44,004 48,345 10 Power 4,490 3,180 3,018 2,600 49 73 11,278 13,899 23 Gross turnover 15,646 15,249 13,831 14,474 13 8 55,282 62,244 13 Inter segment (1,365) (1,225) (1,245) (1,236) 10 10 (4,819) (4,092) (15) Net sales 14,280 14,024 12,586 13,238 13 8 50,463 58,152 15 EBIT Cement 1,832 2,105 2,397 (13) (24) 9,208 10,235 11 Power 986 (1,119) 602 (188) 64 (1,987) 1,604 (181) Total 2,818 986 3,000 186 (6) 7,221 11,839 64 Interest (563) (370) (543) 52 4 (1,550) (1,963) 27 Others 403 7 289 6,097 40 654 1,338 105 PBT 2,659 622 2,745 327 (3) 6,325 11,215 77 EBIT margin (%) Cement 16 19 20 21 21 1 Power 22 (37) 23 (18) 12 (166) Total 20 8 23 14 20 42
Source: Company, Kotak Institutional Equities estimates
Exhibit 2: We ascribe 7.0X multiple on adjusted cement EBITDA SOTP valuation for SRCM
FY2013 FY2014 12-month Cement Adjusted EBITDA (Rs mn) 12,944 16,619 14,782 EV/EBITDA (X) 7.0 7.0 7.0 EV (Rs mn) 90,607 116,336 103,472 Net Debt (Rs mn) (8,984) (14,030) (11,507) Equity value (Rs mn) 99,591 130,367 114,979 Power Equity value (Rs mn) 5,815 2,974 4,395 Total (Rs mn) 105,406 133,341 119,373 No. of shares 35 35 35 Value (Rs/share) 3,026 3,828 3,427
Source: Kotak Institutional Equities estimates
KOTAK INSTITUTIONAL EQUITIES RESEARCH 29 Cement Shree Cement
Exhibit 3: External power sales increase 207% yoy Key operational metrics of SRCM
Growth (%) Dec-12 Dec-11 Sep-12 yoy qoq Cement Sales (mn tons) 2,996 2,848 3,041 5 (1) Realization (Rs/ton) 3,723 3,797 3,905 (2) (5) EBIT (Rs/ton) 612 739 788 (17) (22) Power External sale 786 256 307 207 156 Realization (Rs/kwh) 4.0 4.4 4.4 (9) (10)
Source: Company, Kotak Institutional Equities estimates
Exhibit 4: Cement prices in North India fell due to the early onset of a severe winter Average retail prices of cement in North india (Rs/bag)
300
280
260
240
220
200 Jul-10 Jul-11 Jul-12 Jan-10 Jan-11 Jan-12 Sep-09 Sep-10 Sep-11 Sep-12 Nov-09 Nov-10 Nov-11 Nov-12 Mar-10 Mar-11 Mar-12 May-10 May-11 May-12
Source: Company, Kotak Institutional Equities estimates
Exhibit 5: Pet coke prices have recently increased marginally Exhibit 6: Pet coke prices have recently increased marginally Prices of Green Petroleum Coke, Sulfur less than 2% (US$/ton) Prices of Green Petroleum Coke, Sulfur more than 2% (US$/ton)
250 Low High 200 Low High
225 175
200 150 175 125 150 100 125
100 75
75 50
50 25 25 - - ar-07 ar-08 ar-09 ar-10 ar-11 ar-12 ay-07 ay-08 ay-09 ay-10 ay-11 ay-12 Jul-07 Jul-08 Jul-09 Jul-10 Jul-11 Jul-12 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Sep-07 Sep-08 Sep-09 Sep-10 Sep-11 Sep-12 Nov-07 Nov-08 Nov-09 Nov-10 Nov-11 Nov-12 M M M M M M M M M M M M Jul-07 Jul-08 Jul-09 Jul-10 Jul-11 Jul-12 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Sep-07 Sep-08 Sep-09 Sep-10 Sep-11 Sep-12 Nov-07 Nov-08 Nov-09 Nov-10 Nov-11 Nov-12 Mar-07 Mar-08 Mar-09 Mar-10 Mar-11 Mar-12 May-07 May-08 May-09 May-10 May-11 May-12
Source: PACE PCQ, Kotak Institutional Equities Source: PACE PCQ, Kotak Institutional Equities
30 KOTAK INSTITUTIONAL EQUITIES RESEARCH Shree Cement Cement
Exhibit 7: SRCM incurred capex of Rs 2.9 bn during 1HFY13 Balance sheet of SRCM as of December 31, 2012 (Rs mn)
Dec-12 Jun-12 Mar-11 Net block 17,540 16,178 21,949 Investments 26,184 25,352 11,965 Cash & bank balances 4,685 4,590 4,608 Accounts receivable 3,461 1,811 1,082 Inventories 6,988 5,033 4,042 Loans & advances 7,923 5,680 4,431 Others 479 385 225 Current liabilities 18,016 15,344 9,084 Net current assets 5,519 2,154 5,305 Def. tax assets 753 697 723 Utilization of funds 49,996 44,382 39,941 Total debt 17,354 17,042 20,079 Paid-up common stock 348 348 348 Reserves and surplus 32,293 26,991 19,513 Shareholders' funds 32,642 27,339 19,862 Source of funds 49,996 44,382 39,941
Source: Kotak Institutional Equities, Company
Exhibit 8: Shree Cement: Profit model, balance sheet, cash model, June fiscal year-ends, 2009-14E (Rs mn)
2009 2010 2011 2012 2013E 2014E Profit model (Rs mn) Net sales 27,150 36,321 35,119 58,980 58,152 62,430 EBITDA 9,508 15,025 8,856 16,456 15,531 17,809 Other income 829 1,284 1,243 1,630 1,338 1,185 Interest (744) (1,291) (1,753) (2,354) (1,963) (1,963) Depreciation (2,054) (5,704) (6,758) (8,731) (3,692) (4,415) Pretax profits 7,538 9,313 1,588 7,001 11,215 12,616 Tax (1,449) (2,066) 403 (1,440) (1,710) (2,635) Net profits 6,089 7,248 1,991 5,561 9,504 9,981 Extraordinary items (309) (487) 106 624 — — Earnings per share (Rs) 174.8 208.0 57.2 159.6 272.8 286.5
Balance sheet (Rs mn) Total equity 11,996 18,208 19,139 26,642 34,554 42,839 Total borrowings 14,962 21,062 20,079 17,042 17,042 17,042 Currrent liabilities 6,842 9,667 9,084 15,344 14,943 15,291 Total liabilities and equity 33,800 48,938 48,302 59,029 66,539 75,172 Cash 4,723 4,164 4,608 4,590 5,675 15,721 Current assets 9,571 11,545 9,556 12,909 15,705 16,714 Total fixed assets 11,057 17,194 21,949 16,178 24,325 26,904 Investments 8,448 16,035 12,189 25,352 20,834 15,834 Total assets 33,800 48,938 48,302 59,029 66,539 75,172
Free cash flow (Rs mn) Operating cash flow, excl. working capital 8,154 12,938 8,598 15,368 13,402 14,576 Working capital (1,243) 851 1,406 2,907 (3,197) (661) Capital expenditure (5,295) (11,835) (11,516) (2,719) (11,839) (6,993) Investments — — — 482— (482—) — Free cash flow 1,616 1,954 (1,513) 16,039 (2,117) 6,922
Source: Company, Kotak Institutional Equities estimates
KOTAK INSTITUTIONAL EQUITIES RESEARCH 31
BUY DB Corp. (DBCL)
Media JANUARY 22, 2013 RESULT Coverage view: Neutral
Firing on all cylinders on advertising recovery. DBCL reported strong 3QFY13 EBITDA Price (Rs): 232 at Rs1.23 bn (+18% yoy), above our Rs1.1 bn expectation, led by (1) robust 11% yoy Target price (Rs): 260 advertising growth (complete festival season in 3QFY13 versus typical split between 2Q BSE-30: 20,102 and 3Q) and (2) moderating cost inflation. 3QFY13 EBITDA margin increased to ~28% from ~21-23% in prior quarters but may not be the benchmark given seasonality; we model ~100 bps CAGR margin expansion to reach ~26% in FY2015E helped by reduced losses and maturity in new editions (Rs57 mn EBITDA losses in 3QFY13). BUY with 12-month forward fair value of Rs260 (unchanged); Rs2/share interim dividend.
Company data and valuation summary DB Corp Stock data Forecasts/Valuations 2013 2014E 2015E 52-week range (Rs) (high,low) 245-181 EPS (Rs) 11.4 13.8 16.6 Market Cap. (Rs bn) 42.5 EPS growth (%) 3.3 21.5 20.2 Shareholding pattern (%) P/E (X) 20.4 16.8 14.0 Promoters 81.5 Sales (Rs bn) 15.8 18.0 20.7 FIIs 8.2 Net profits (Rs bn) 2.1 2.5 3.0 MFs 6.3 EBITDA (Rs bn) 3.7 4.3 5.1 Price performance (%) 1M 3M 12M EV/EBITDA (X) 11.4 9.5 8.0 Absolute 4.7 3.8 25.5 ROE (%) 21.6 24.1 26.8 Rel. to BSE-30 0.2 (3.5) 4.5 Div. Yield (%) 2.6 3.4 4.3 Strong 3QFY13 driven by robust advertising growth, moderating cost inflation
` DBCL reported strong 3QFY13 EBITDA at Rs1.23 bn (+18% yoy), much above our Rs1.1 bn expectation; the positive variance was largely due to robust 11% yoy growth in advertising revenues helped by (1) complete festival season in 3QFY13 versus typical split between 2Q and 3Q as well as (2) favorable base. DB noted strong traction in both key local as well as national categories such as auto, durables, real estate, lifestyle as well as FMCG. Education and BFSI (against our expectation) were subdued but ad spends in these sectors typically peak in 4Q-1Q; we expect improved traction over time. However, auto volumes took a hit beyond festival season and it may not contribute incrementally going forward.
Firing on all cylinders but renewed expansion in FY2014E may cap margin gains
We have previously highlighted that operating margins of print media companies in general were adversely impacted by four factors in FY2012-1HFY13: (1) weak advertising, (2) sharp newsprint inflation (>15% yoy), (3) Rupee depreciation (also impact on ECB borrowings of print media companies) and (4) large new market expansion losses. The cost side (led by newsprint, Rupee and expansions) stabilized in 1HFY13 but recovery in advertising was needed to drive EBITDA margins, which reached ~28% in 3QFY13 from ~21-23% in prior quarters. However, we note (1) 3QFY13 EBITDA margins should not be seen as the benchmark given seasonality benefit and (2) renewed expansions may cap margin gains in FY2014E; we model ~100 bps CAGR margin expansion to reach ~26% levels in FY2015E, implying robust 20%+ PAT CAGR.
BUY with 12-month forward fair value of Rs260; Rs2/share interim dividend
DBCL is starting to fire on all cylinders: (1) advertising recovery, (2) moderating newsprint inflation
(~5% yoy in 3QFY13) and (3) reduced expansion losses. The turnaround from weak macro- environment (advertising, newsprint, Rs/US$) exaggerated by the timing of new market expansions (1HFY13, just before the downturn) is complete now. Retain BUY with 12-month forward fair value of Rs260 (unchanged). DBCL’s fundamentals remained intact even in the stress-case scenario given robust cash flows and balance sheet; DBCL paid Rs5/share dividend in FY2012 and has announced Rs2/share interim dividend in FY2013E.
For private Circulation Only. FOR IMPORTANT INFORMATION ABOUT KOTAK SECURITIES’ RATING SYSTEM AND OTHER DISCLOSURES, REFER TO THE END OF THIS MATERIAL.
DB Corp Media
Interim results of DB Corp (DBCL), March fiscal year-ends (Rs mn)
chg (%) 3QFY13 3QFY13E 3QFY12 2QFY13 3QFY13E 3QFY12 2QFY13 9MFY13 9MFY12 chg (%) Total revenues 4,389 4,300 3,949 3,784 2 11 16 11,942 10,995 9 Advertising revenues 3,184 3,150 2,872 2,636 1 11 21 8,521 8,199 4 Circulation revenues 729 700 630 698 4 16 4 2,083 1,799 16 Other revenues 476 450 447 450 6 7 6 1,338 997 34 Total expenditure (3,161) (3,200) (2,910) (2,970) (1) 9 6 (9,057) (8,201) 10 Raw material costs (1,447) (1,450) (1,350) (1,330) (0) 7 9 (4,109) (3,779) 9 Employee expenses (724) (750) (631) (697) (3) 15 4 (2,103) (1,819) 16 Other expenses (990) (1,000) (929) (943) (1) 7 5 (2,845) (2,602) 9 EBITDA 1,228 1,100 1,038 814 12 18 51 2,885 2,795 3 Operating margin (%) 28.0 25.6 26.3 21.5 24.2 25.4 Other income 38 50 32 38 (23) 20 2 122 118 3 Interest expense (55) (50) (108) 28 9 (49) (294) (123) (214) (43) D&A expenses (151) (150) (134) (143) 1 12 5 (430) (375) 14 PBT 1,060 950 828 736 12 28 44 2,455 2,324 6 Extraordinaries ------Tax provision (352) (325) (271) (251) 8 30 41 (825) (753) 10 Minority interest (2) - (3) 1 (1) (4) Adjusted PAT 706 625 554 486 13 28 45 1,629 1,567 4 Reported PAT 706 625 554 486 13 28 45 1,629 1,567 4 Tax rate (%) 33.2 34.2 32.8 34.0 33.6 32.4 EPS (Rs/share) 3.9 3.4 3.0 2.7 13 28 45 8.9 8.6 3
Source: Company data, Kotak Institutional Equities estimates
` DBCL noted improved traction in both yields and volumes and highlighted that both contributed almost evenly to the 11% yoy growth in 3QFY13. DBCL’s overall realizations were likely helped by increasing maturity of new markets (Jharkhand, Maharashtra) since ad yields/rates typically remain depressed in a weak environment and initial ad recovery is also volumes-driven. Our discussions with a media buyer recently indicated recognition of impact being made by Divya Marathi in Maharashtra.
` However, DBCL surprisingly noted continued strong growth in local advertising versus muted national advertising, with the share of local in DBCL’s advertising having increased to 64% from 60% yoy. This is surprising in light of traction in autos, durables and FMCG advertising noted previously. DBCL noted (1) autos and durables advertising driven by local dealers of national firms (which they later get reimbursed) and (2) regional FMCG starting to advertise heavily in local media, to explain the differential.
` DBCL also reported strong 16% yoy growth in circulation revenues led by counter-cyclical increase in cover prices across legacy markets, though the cycle may be coming to an end. Cover prices also increased in new markets of Jharkhand and Maharashtra, from very low levels, on renewal of subscriptions after one year of operation.
` DBCL reported robust 7% yoy and 9% qoq increase in RM costs. However, we believe the increase needs to be seen in context of volume-led 11% yoy growth in advertising, which necessitated higher pagination levels (had been reduced somewhat previously) and hence, higher newsprint consumption. Newsprint price inflation of ~5% yoy was due to lower 42 gsm newsprint consumption, which is priced higher than standard 45 gsm newsprint but allows for more pages/Kg of newsprint.
` Employee expenses increased 15% yoy given the hiring done during the course of the year to support new launches as well as annual increments in 1QFY13; DBCL likely also paid bonus to low-level employees during festival season.
KOTAK INSTITUTIONAL EQUITIES RESEARCH 33 Media DB Corp
` DBCL reported strong traction in both mature and emerging edition financials. Mature editions reported 9% yoy growth but only 8% yoy EBITDA growth; robust advertising likely necessitated higher pagination/newsprint consumption; EBITDA margins at ~33% were robust. Emerging editions reported 66% yoy decline in EBITDA losses on 32% yoy revenue growth, with stable costs providing operating leverage.
DBCL's breakdown of financials, 1QFY12-3QFY13 (Rs mn)
1QFY12 2QFY12 3QFY12 4QFY12 1QFY13 2QFY13 3QFY13 yoy (%) DBCL standalone Revenues 3,526 3,515 3,914 3,577 3,756 3,741 4,387 12 EBITDA 1,025 782 1,020 777 870 875 1,245 22 Margin (%) 29 22 26 22 23 23 28 MyFM radio Revenues 124 127 157 146 140 153 192 22 EBITDA 17 11 44 52 30 46 74 68 Margin (%) 14 9 28 36 21 30 39 Mature editions Revenues 3,183 3,086 3,381 3,085 3,175 3,135 3,698 9 EBITDA 1,181 1,002 1,141 923 961 928 1,227 8 Margin (%) 37 32 34 30 30 30 33 Emerging editions Revenues 219 302 376 346 441 453 497 32 EBITDA (173) (231) (165) (198) (121) (99) (57) (66) Margin (%) (79) (76) (44) (57) (27) (22) (11) Emerging/Mature EBITDA (%) 14 23 14 20 12 10 4 Expenses 392 533 541 544 562 552 554 2
Source: Company data, Kotak Institutional Equities
` DBCL’s balance sheet was marginally weaker versus expectations, given marginal accrual to net cash despite strong PAT. (1) The company spent Rs380 mn to acquire 100% stake in its subsidiaries but Rs150 mn tax benefit will flow after the demerger. (2) Debtor levels increased due to (a) festival season jump (90-day credit period to national advertisers) and (b) settlement of DAVP/Government advertising at year-end.
Balance sheet of DBCL, FY2011-9MFY13 (Rs mn)
FY2011 FY2012 1QFY13 1HFY13 9MFY13 Sources of funds Share capital 1,833 1,833 1,833 1,833 1,834 Reserves and surplus 6,456 7,757 7,880 8,372 8,656 Minority interest 4 15 15 15 12 Borrowings 2,011 2,131 2,200 1,794 1,505 Cash and balances (1,727) (1,884) (1,301) (880) (594) Net investments (163) (460) (460) (445) (827) Deferred tax 695 746 754 753 740 Total 9,109 10,138 10,921 11,442 11,326 Application of funds Net fixed assets 7,091 7,933 8,047 7,893 8,353 Inventories 728 1,186 1,421 1,430 1,425 Sundry debtors 2,401 2,480 3,151 2,928 3,513 Loans and advances 1,326 1,395 1,399 1,437 1,384 Other current assets 114 106 92 638 405 Trade payables (762) (1,084) (1,245) (998) (1,141) Other liabilities (1,248) (1,358) (1,399) (1,664) (1,956) Other provisions (541) (520) (545) (222) (657) Total 9,109 10,138 10,921 11,442 11,326
Source: Company data, Kotak Institutional Equities
34 KOTAK INSTITUTIONAL EQUITIES RESEARCH DB Corp Media
Trends in advertising revenue growth of DBCL, 1QFY10-3QFY13 (%)
40
29 27 30 20 18 18 18 20 16 11 11 11 6 7 10 4 (1) 1 - 1QFY10 3QFY10 1QFY11 3QFY11 1QFY12 3QFY12 1QFY13 3QFY13 (10)
Source: Company data, Kotak Institutional Equities
Trends in circulation revenue growth of DBCL, 1QFY10-3QFY13 (%)
20 17 16 16 15 16 15 13 11
10 9 6
5 2 2 1 1 1 1 - 1QFY10 3QFY10 1QFY11 3QFY11 1QFY12 3QFY12 1QFY13 3QFY13
Source: Company data, Kotak Institutional Equities
Trends in effective newsprint price for DBCL, 1QFY10-3QFY13 (Rs/kg)
36 33.1 33.5 31.8 31.8 32.3 31.2 32 30.5
27.9 28.0 28 26.8 25.6 25.6 25.2 25.1 24.7
24
20 1QFY10 3QFY10 1QFY11 3QFY11 1QFY12 3QFY12 1QFY13 3QFY13
Source: Company data, Kotak Institutional Equities
KOTAK INSTITUTIONAL EQUITIES RESEARCH 35 Media DB Corp
Readership of DBCL across core/legacy and new markets (mn)
Q2 2010 Q3 2010 Q4 2010 Q1 2011 Q2 2011 Q3 2011 Q4 2011 Q1 2012 Q2 2012 chg (%) MP-Chattisgarh Dainik Bhaskar 4.2 4.3 4.6 4.7 4.8 4.9 4.8 4.7 4.7 (3) DJ + Nai + Nav Dunia 1.9 2.0 2.2 2.4 2.4 2.4 2.3 2.4 2.3 (5) Patrika Dainik 0.7 0.9 1.1 1.1 1.3 1.4 1.8 1.9 2.1 66 Hari Bhoomi 1.1 1.2 1.2 1.2 1.2 1.2 1.2 1.2 1.1 (6) NavBharat 1.0 0.9 0.8 0.7 0.6 0.6 0.6 0.6 0.6 (0) Rajasthan Rajasthan Patrika 6.8 7.1 7.0 6.9 6.8 6.8 6.7 6.7 6.6 (3) Dainik Bhaskar 6.1 6.1 6.4 6.3 6.4 6.4 6.3 6.2 6.2 (3) Dainik Navjyoti 0.4 0.4 0.4 0.5 0.6 0.6 0.5 0.5 0.5 (8) Chandigarh-Punjab-Haryana Dainik Bhaskar 2.4 2.4 2.4 2.4 2.3 2.2 2.2 2.2 2.2 (4) Punjab Kesari 2.1 2.1 2.1 2.0 2.0 1.9 2.0 2.1 2.1 6 Dainik Jagran 1.8 1.8 1.8 1.7 1.7 1.6 1.6 1.6 1.6 (3) Gujarat Gujarat Samachar 4.5 4.5 4.4 4.4 4.4 4.5 4.4 4.5 4.5 1 Divya Bhaskar 3.7 3.8 3.7 3.8 3.8 3.8 3.9 3.9 3.9 3 Sandesh Dainik 3.1 3.4 3.3 3.2 3.3 3.2 3.3 3.4 3.3 (0) Jharkhand - new market (a) Hindi Hindustan 1.5 1.6 1.8 1.8 1.8 1.7 1.7 1.8 1.7 (3) Prabhat Khabar 1.0 1.1 1.3 1.4 1.4 1.4 1.3 1.3 1.3 (2) Dainik Jagran 0.8 0.8 0.9 0.9 1.0 1.0 1.0 0.9 0.9 (7) Dainik Bhaskar - - - - - 0.6 0.7 0.8 0.8
Notes: (a) DBCL's Jharkhand presense is only partially considered.
Source: Indian Readership Survey, Kotak Institutional Equities
AIR of Marathi dailies in the Maharashtra ex-Mumbai-Pune market ('000)
Q2 2010 Q3 2010 Q4 2010 Q1 2011 Q2 2011 Q3 2011 Q4 2011 Q1 2012 Q2 2012 yoy (%) Maharashtra ex-Mumbai-Pune Lokmat Dainik 6,101 6,455 6,222 6,036 6,202 6,033 6,152 6,033 6,040 (3) Daily Sakal 3,018 3,363 3,360 3,298 3,224 3,093 3,134 3,107 3,127 (3) Pudhari 2,006 2,040 1,975 1,942 1,879 1,837 1,894 1,860 1,816 (3) Punya Nagri 1,933 1,803 1,709 1,577 1,512 1,471 1,550 1,502 1,528 1 Maharashtra Times 166 125 118 87 79 113 178 198 251 218 Divya Marathi ------695 MAH cities ex-Mumbai-Pune Lokmat Dainik 970 982 940 964 974 981 980 952 970 (0) Daily Sakal 311 335 348 358 361 363 402 427 442 22 Pudhari 205 199 185 187 182 181 178 182 171 (6) Punya Nagri 248 230 221 208 195 175 172 176 165 (15) Maharashtra Times 34 27 31 22 19 51 68 81 112 489 Divya Marathi ------314
Source: Indian Readership Survey, Kotak Institutional Equities
36 KOTAK INSTITUTIONAL EQUITIES RESEARCH DB Corp Media
Valuation of Indian print media companies, FY2010-14E
EV EBITDA (Rs bn) EV/EBITDA (X) (Rs bn) 2010 2011 2012 2013E 2014E 2010 2011 2012 2013E 2014E JAGP 36 2.8 3.6 3.2 3.5 3.9 12.6 10.0 11.2 10.3 9.1 JAGP (adjusted) 36 2.8 3.6 3.2 3.6 4.0 12.6 10.0 11.2 9.9 8.9 DBCL 41 3.4 4.0 3.5 3.7 4.3 12.1 10.3 11.9 11.3 9.5 DBCL (adjusted) 41 3.4 4.2 4.2 4.3 4.7 12.1 9.8 9.9 9.7 8.7 HMVL 9 0.8 0.9 1.0 1.2 1.4 11.0 10.4 9.7 7.9 6.8 HTML 22 2.5 3.2 2.8 2.8 3.5 9.0 7.1 7.9 8.0 6.3 HTML (adjusted) 22 2.5 3.1 2.6 2.5 3.2 9.0 7.3 8.5 8.8 6.9
Price EPS (Rs/share) P/E (X) (Rs) 2010 2011 2012 2013E 2014E 2010 2011 2012 2013E 2014E JAGP 110 5.8 6.7 5.6 5.9 7.1 18.8 16.3 19.4 18.7 15.5 JAGP (adjusted) 110 5.8 6.7 5.6 6.1 7.3 18.8 16.3 19.4 18.1 15.1 DBCL 232 10.6 12.9 11.0 11.4 13.8 21.8 18.0 21.0 20.4 16.8 DBCL (adjusted) 232 10.6 13.6 13.3 13.3 15.0 21.8 17.1 17.5 17.5 15.4 HMVL 150 7.9 8.2 8.9 11.1 12.1 19.0 18.3 16.8 13.5 12.4 HTML 106 5.8 7.7 7.0 7.0 8.8 18.2 13.8 15.1 15.1 12.1
Readership (mn) EV/Reader (X) Q2 2011 Q3 2011 Q4 2011 Q1 2012 Q2 2012 Q2 2011 Q3 2011 Q4 2011 Q1 2012 Q2 2012 JAGP 19.2 19.1 19.0 19.1 18.9 1,859 1,865 1,872 1,866 1,885 DBCL 18.0 18.8 18.6 18.5 19.1 2,298 2,203 2,225 2,234 2,169 HMVL 12.0 12.0 12.0 12.2 12.2 768 765 765 758 755 Discount (%) 63 62 63 63 63
Notes: (a) Adjusted for near-term turnaround and operating losses in Mid-Day as well as Nai Dunia. (b) Adjusted for near-term startup expenses and operating losses in Jharkhand and Maharashtra. (c) Adjusted for 22% minority interest in subsidiary HMVL post IPO in October-2010.
Source: Company data, Indian Readership Survey, Kotak Institutional Equities estimates
KOTAK INSTITUTIONAL EQUITIES RESEARCH 37 Media DB Corp
Financial summary of DB Corp Limited, FY2008-15E (Rs mn)
2008 2009 2010 2011 2012 2013E 2014E 2015E Profit model Net sales 8,627 9,610 10,630 12,652 14,515 15,834 18,050 20,708 EBITDA 1,829 1,461 3,430 4,031 3,465 3,659 4,346 5,075 Other income 116 109 112 142 139 195 209 248 Interest (397) (510) (357) (153) (92) (226) (201) (151) Depreciation (220) (290) (378) (433) (506) (564) (620) (678) Pretax profits 1,328 770 2,806 3,587 3,006 3,064 3,734 4,493 Extraordinary items 8 — — 222 ———— Current tax (560) (377) (841) (1,119) (932) (921) (1,133) (1,409) Deferred taxation (70) (47) (216) (102) (51) (65) (74) (44) Net income 706 346 1,749 2,588 2,023 2,078 2,527 3,041 Adjusted net income 763 464 1,828 2,363 2,021 2,088 2,536 3,048 Earnings per share (Rs) 4.5 2.8 10.6 12.9 11.0 11.4 13.8 16.6
Balance sheet Total equity 2,198 2,577 6,487 8,289 9,271 10,087 10,926 11,852 Deferred taxation liability 346 393 609 695 746 811 885 929 Total borrowings 3,436 5,631 3,207 2,082 2,100 2,100 2,100 2,100 Current liabilities 1,714 2,189 2,073 2,479 3,320 3,405 3,930 4,511 Total capital 7,936 10,914 12,420 13,548 15,452 16,409 17,837 19,380 Cash 808 452 1,951 1,731 1,896 2,432 2,783 3,423 Other current assets 3,404 3,536 3,664 4,187 5,069 5,291 5,921 6,662 Total fixed assets 3,623 6,471 6,475 7,358 7,933 8,132 8,579 8,741 Investments 68 238 205 163 460 460 460 460 Miscellaneous expenditure 33 217 126 110 94 94 94 94 Total assets 7,936 10,914 12,420 13,548 15,452 16,409 17,837 19,380
Free cash flow Operating cash flow, excl. working c 1,556 1,016 2,566 3,297 2,662 2,739 3,214 3,666 Working capital changes 674 122 (174) (556) (421) (136) (106) (160) Capital expenditure (1,081) (2,966) (603) (1,433) (1,227) (762) (1,067) (840) Income from investments 113 109 111 142 116 195 209 248 Free cash flow 1,262 (1,718) 1,899 1,450 1,130 2,035 2,249 2,914
Ratios (%) Debt/equity 135 190 45 23 21 19 18 16 Net debt/equity 103 174 18 4 2 (3) (6) (10) ROAE (%) 34 17 36 29 21 20 22 25 ROACE (%) 15 7 23 26 20 20 23 26
Source: Company data, Kotak Institutional Equities estimates
38 KOTAK INSTITUTIONAL EQUITIES RESEARCH
BUY SpiceJet (SJET)
Others JANUARY 22, 2013 RESULT Coverage view:
Beats estimates comfortably. SpiceJet’s 3QFY13 numbers were significantly ahead of Price (Rs): 46 estimates due to higher-than-expected improvement in yields and efficiencies on the Target price (Rs): 60 cost front. Recent equity infusions by promoters have strengthened the airline and BSE-30: 20,102 allowed it to increase market share (19.5% in Nov 2012 from 13.9% in Sep 2011). The company is well-placed to gain further out of recovery (started from 1QFY13 onwards) in the sector. Increase our estimates. BUY; revised TP of Rs60 (8X FY2014E EBITDAR).
Company data and valuation summary Spicejet Stock data Forecasts/Valuations 2013 2014E 2015E 52-week range (Rs) (high,low) 51-20 EPS (Rs) 0.4 3.5 5.1 Market Cap. (Rs bn) 22.4 EPS growth (%) (103.2) 679.1 47.5 Shareholding pattern (%) P/E (X) 104.2 13.4 9.1 Promoters 48.6 Sales (Rs bn) 58.5 77.5 87.6 FIIs 3.6 Net profits (Rs bn) 0.2 1.7 2.5 MFs 12.2 EBITDA (Rs bn) 1.4 3.5 4.2 Price performance (%) 1M 3M 12M EV/EBITDA (X) 24.7 8.3 6.0 Absolute 7.3 34.2 111.2 ROE (%) (23.2) 325.1 95.5 Rel. to BSE-30 2.7 24.7 75.9 Div. Yield (%) 0.0 0.0 0.0
Blockbuster quarter—higher-than-expected yields and cost efficiency drive outperformance
SpiceJet reported 3QFY13 revenue at Rs16 bn (+36% yoy; +33% qoq), which was higher than our estimates on account of higher-than-expected qoq improvement in yields. 3QFY13 EBITDA at Rs1.4 bn is a significant improvement from EBITDA loss of Rs190 mn and Rs1.3 bn in 3QFY12 and 2QFY13, respectively. The company reported 3QFY13 PAT at Rs1 bn versus our expectation of marginal loss in the quarter.
Operationally, sequential comparison would have a bit of skew as the company had wet-leased (2QFY13) two Boeing aircraft to a Middle-Eastern carrier called NAS whose operating numbers were also included in numbers for 2QFY13. Revenue per RPKM at Rs5.03 was up 6.8% qoq and 24% yoy; higher than our expectations. Cost per ASKM (excluding fuel) at Rs1.84 (+11% yoy) in 3QFY13 was down ~3% qoq. The company closed the quarter with a fleet of 36 Boeings and 15 Q-400s.
Recent equity infusions by promoters give comfort
In 3QFY13, the company issued Unsecured Compulsorily Convertible Debentures (UCCD at 14% rate of interest) aggregating Rs1.26 bn which are convertible into equity shares at a price of Rs36.2 per share. Subsequently, 15 mn warrants have also been issued to promoters at a price of Rs36.18 per share. Recent equity infusions by promoters (Rs990 mn infused in 1QFY13) have enabled SpiceJet to expand its regional fleet of Q-400s (owned) in a scenario where the airline was not generating enough cash and domestic banks were unwilling to increase exposure to the sector. As a result, the airline has increased its market share from 13.9% in Sep 2011 to 19.5% in Nov 2012 (one of the gainers as Kingfisher shut operations) and is strongly placed for further improvement in profits if pressure on costs front reduces with appreciating Rupee and/or lower fuel costs and as consumers internalize high inflation in air tickets.
Best is yet to come; BUY with a revised target price of Rs60 (8X FY2014E EBITDAR)
In our view, the company is well-placed to gain out of recovery in the sector which started from 1QFY13 onwards. We have increased our estimates. The best is yet to come; BUY with a revised TP of Rs60 (8X FY2014E EBITDAR).
For private Circulation Only. FOR IMPORTANT INFORMATION ABOUT KOTAK SECURITIES’ RATING SYSTEM AND OTHER DISCLOSURES, REFER TO THE END OF THIS MATERIAL.
Others SpiceJet
No concern on account of recent discount scheme launched by the company SpiceJet launched a three–day discount scheme (January 11-13, 2012) which allowed consumers to book air tickets for all the domestic routes at a flat price of Rs2,013 per ticket. We don’t think that market discipline has been harmed on account of the above discount scheme launched by the company as:
` The scheme had only a three-day booking window which has not harmed pricing in the overall market. As per our channel checks, pricing is largely undisturbed in the one-week forward market.
` None of the other companies have followed SpiceJet with similar offers. In our view, impact of the discount scheme would be positive at the PBT level as most of the bookings under the scheme represent incremental revenues which otherwise would not have come. In our view, most of the bookings under the scheme would have been done by leisure travelers (corporate travel cant be planned so much in advance) who otherwise would not have travelled. As per media reports, SpiceJet has sold 0.7 mn tickets under the offer aggregating Rs1.5 bn.
Exhibit 1: Significantly ahead of estimates on higher-than-expected yields Interim results of SpiceJet, March fiscal year-ends (Rs mn)
Change (%) 9 months 3QFY13 3QFY13E 3QFY12 2QFY13 KIE est. yoy qoq FY2013 FY2012 Operating revenues 16,026 14,195 11,758 12,070 13 36 33 42,825 28,880 Total expenditure (14,638) (13,146) (11,949) (13,376) 11 23 9 (41,851) (32,029) Fuel expenses (7,183) (5,923) (6,402) 21 12 (20,282) (15,756) Aircraft lease rentals (1,969) (1,600) (2,082) 23 (5) (6,014) (4,294) Airport charges (913) (696) (813) 31 12 (2,491) (1,863) Aircraft maintenance (1,593) (1,190) (1,346) 34 18 (4,281) (3,145) Staff costs (1,352) (1,121) (1,275) 21 6 (3,940) (2,754) Other operating expenses (1,627) (1,419) (1,458) 15 12 (4,843) (4,216) EBITDAR 3,358 2,227 1,410 777 51 138 332 6,988 1,145 EBITDAR (%) 21.0 15.7 12.0 6.4 16.3 4.0 EBITDA 1,389 145 (190) (1,305) 861 974 (3,149) EBIDTA % 8.7 1.0 (1.6) (10.8) 2.3 (10.9) Other income 89 50 63 111 321 139 Depreciation (214) (200) (122) (197) (548) (184) Interest (244) (320) (143) (307) (800) (372) PBT 1,020 (325) (393) (1,698) (54) (3,566) Exceptional items — — — — — Reported PBT 1,020 (325) (393) (1,698) (54) (3,566) Provision for tax — — 63 — — PAT 1,020 (325) (393) (1,635) (413) (162) (54) (3,566)
Source: Company, Kotak Institutional Equities
Exhibit 2: Trend in quarterly operating parameters for SpiceJet, March fiscal year-ends
3QFY11 4QFY11 1QFY12 2QFY12 3QFY12 4QFY12 1QFY13 2QFY13 3QFY13 Average number of aircraft 22.4 25.7 28.3 30.6 36.7 37.1 39.0 42.9 48.0 ASKMs (mn) 2,731 2,894 3,235 3,217 3,606 3,650 3,776 3,869 4,246 RPKMs (mn) 2,398 2,344 2,553 2,168 2,888 2,716 3,032 2,565 3,185 PLF (%) 87.8 81.0 78.9 67.4 80.1 74.4 80.3 66.3 75.0 Block hours (hrs) 24,744 26,076 29,440 29,998 37,821 38,789 39,690 42,116 46,506 Departures 14,184 14,960 17,094 17,649 22,712 23,585 24,604 26,267 28,421 Aircraft utilization per day (hrs) 12.27 11.27 11.56 11.44 11.44 11.49 11.18 10.80 10.50 Rev. per passenger (Rs) 3,478 3,229 3,663 3,317 3,812 3,816 4,376 4,507 4,858 Revenue per flight (Rs) 585,259 507,218 553,201 434,298 517,715 471,911 579,142 459,527 563,895
Notes: (1) Rev per passenger in 1QFY13 has been adjusted for Rs350 mn gains on sale and lease back transactions
Source: Company, Kotak Institutional Equities
40 KOTAK INSTITUTIONAL EQUITIES RESEARCH SpiceJet Others
Exhibit 3: Yield (rev per RPKM) increased 24% yoy and 6.8% qoq; ahead of our estimate s Trend in quarterly operating parameters for SpiceJet, March fiscal year-ends (Rs)
6 Cost per ASKM (Rs) Cost per ASKM (excl. fuel) Fuel cost per ASKM Rev per RPKM 5.03 5 4.70 4.71 4.10 4.07 3.46 4 3.53 3.77 3.70 3.58 3.23 3.11 3.30 3.54 3.13 3.53 3 2.87 2.62 2.00 1.62 1.88 1.89 1.84 2 1.66 1.48 1.51 1.57 1.64 1.70 1.77 1.65 1.69 1.56 1.49 1 1.14 1.36
0
3Q11 4Q11 1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13
Source: Company, Kotak Institutional Equities
Exhibit 4: Trend in quarterly operating margins for SpiceJet, March fiscal year-ends (%)
40% 31% EBITDAR (%) EBITDA (%) 27% 30% 19% 23% 20% 16% 21% 17% 12% 16% 9% 14% 7% 10% 9% 7% 6% 1% 3% 0% -2% -3% 2% -7% -3% -12% -10% -10% -11%
-20% -18% -25% -30% -30%
-40% 2Q10 3Q10 4Q10 1Q11 2Q11 3Q11 4Q11 1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13 Note: Margins in 1QFY13 have been adjusted for Rs350 mn gains on sale and lease back transactions
Source: Company, Kotak Institutional Equities
Change in estimates and valuation
Exhibit 5: Change in estimates for SpiceJet, March fiscal year-ends (Rs mn) Old estimates New estimates Change in estimates 2013E 2014E 2015E 2013E 2014E 2015E 2013E 2014E 2015E Revenues 64,527 75,415 89574 58,488 77,457 87,618 (9) 3 (2) EBITDAR 9,080 11,827 14853 9,152 12,692 14,816 1 7 (0) EBITDA 1,423 2,945 3983 1,388 3,516 4,222 (2) 19 6
Source: Company, Kotak Institutional Equities
KOTAK INSTITUTIONAL EQUITIES RESEARCH 41 Others SpiceJet
Exhibit 6: We value SpiceJet at Rs60 per share Valuation table for SpiceJet, consolidated, March fiscal year-ends (Rs mn)
EBITDAR 12,692 EV EBITDAR multiple (X) 8.0 EV 101,533 Aircraft rentals capitalised at 7X (64,228) Cash 2,012 Gross Debt (a) (8,899) Implied equity value 30,418
Value per share (Rs) 63
Source: Company, Kotak Institutional Equities
Exhibit 7: Summary financials: SpiceJet Profit model, cash flow statement and balance sheet model, consolidated, March fiscal year-ends (Rs mn)
2008 2009 2010 2011 2012 2013E 2014E 2015E Profit model Net sales 13,275 17,192 21,990 29,205 39,940 58,488 77,457 87,618 EBITDAR 331 (305) 4,476 5,367 543 9,152 12,692 14,816 EBITDAR margin % — (2) 20 18 1 16 16 17 Aircraft rentals (2,526) (3,589) (3,983) (4,285) (6,019) (7,764) (9,175) (10,594) EBITDA (2,195) (3,894) 493 1,082 (5,477) 1,388 3,516 4,222 EBITDA margin % (17) (23) 2 4 (14) 2 5 5 Depreciation & amortization (78) (73) (76) (89) (310) (678) (875) (890) Net finance cost (137) (160) (114) (112) (522) (865) (765) (492) Other income 1,111 943 432 401 251 423 214 244 Profit before tax (1,300) (3,183) 734 1,282 (6,057) 268 2,090 3,084 Exceptional items & prior period exp (11) (309) (56) — — — — — Reported PBT (1,311) (3,492) 678 1,282 (6,057) 268 2,090 3,084 Taxes (24) 33 (64) (256) — (54) (418) (617) Reported net profit (1,335) (3,492) 615 1,025 (6,057) 215 1,672 2,467 EPS (Rs) (6) (14) 3 3 (14) — 3 5 Balance sheet Total shareholder equity 280 (4,295) (3,422) 3,211 (1,532) (322) 1,350 3,817 Total debt 5,401 4,888 4,383 850 10,086 13,399 8,899 5,399 Current liability and provisions 7,932 6,914 8,929 7,035 11,090 11,352 14,990 16,938 Total sources of funds 13,613 7,508 9,891 11,096 19,702 24,488 25,298 26,213 Cash and cash equivalents 6,081 3,080 4,506 140 2,359 1,501 2,012 2,590 Total current assets 1,892 1,900 1,464 10,087 8,841 8,067 8,891 9,769 Net fixed assets inc. CWIP 5,640 2,528 3,919 869 8,503 14,920 14,395 13,854 Total uses of funds 13,613 7,508 9,891 11,096 19,702 24,488 25,298 26,213 Free cash flow Operating cash flow excl. working capital (2,299) (3,545) 495 827 (5,514) 1,335 3,098 3,606 Working capital changes 416 506 460 (1,283) 4,461 1,036 2,814 1,070 Capital exenditure (254) (117) (93) (3,172) (6,239) (7,095) (350) (350) Free cash flow (2,137) (3,156) 862 (3,627) (7,292) (4,724) 5,562 4,326
Source: Company, Kotak Institutional Equities
42 KOTAK INSTITUTIONAL EQUITIES RESEARCH
Economy.dot INDIA Economy
JANUARY 22, 2013 UPDATE ‘Golden’ step in the right direction. We welcome the Government’s measures to reduce BSE-30: 20,102 external vulnerabilities through (1) higher gold import duty, (2) linking gold ETFs with gold deposit schemes and (3) incentivizing gold-deposit schemes. We believe there might not be much let-up in jewelry demand but there could be some erosion in investment demand. We expect a likely savings on CAD of US$5-7 bn and an upside in fiscal revenues of Rs40-45 bn in FY2014. However, we need greater clarity on the efficacy of these measures as they could depend heavily on the policing aspect to check inflows through alternative routes.
The changes in brief…
The measures announced are an attempt to reduce the CAD and hence lower external vulnerability. The key policy changes include (1) increasing the import duty on gold (and platinum) to 6% from 4%; (2) linking Gold Exchange Traded Fund (ETF) with the Gold Deposit Scheme QUICK NUMBERS (GDS) to enable mutual funds to unlock their physical gold and divert their investment in gold- linked schemes offered by banks and (3) changing GDS norms for retail investors by reducing the • Import duty on gold minimum quantity of gold to be deposited (currently 500 gms) and the tenure of deposits to six hiked to 6% from months from a minimum of three years, earlier. 4% CAD containment the key: Jewelry demand may hold up… • Attempt to make Gold imports amounted to US$56.5 bn in FY2012 and are estimated at US$38 bn FYTD13. While Gold Deposit no details are available yet, anecdotal evidence indicates the demand for gold from jewelers Scheme more increased significantly in anticipation that the Government may raise customs duty. Thus, we investor-friendly believe jewelry demand may be largely unaffected by the increase in duty. • Revenue gains for … but investment demand for gold may fall the Government The increase in the tariff barrier may affect investment demand for gold in the economy. estimated at Rs40- Investment demand of gold in the Indian economy is estimated at ~30% of last year’s imports of 45 bn in FY2014 ~950 tons. While some part of the investment demand could have been affected by the previous increase in customs duty to 4% from 2%, the reduction in investment demand for gold could be 70-100 tons. At the current gold price of ~US$1,690/oz, this could lead to a saving of US$4-6 bn. Besides, ~40 tons of gold are with mutual funds as part of their physical holdings against gold ETFs. Even if 50% of this is transferred to GDS it could lead to savings of US$1 bn more on the CAD.
Fiscal math may not be impacted much
While garnering revenue was not the intention of the Government, there could be some positivity for the fiscal math. However, there could be some leakage on the revenue front as we expect investment demand of gold to be curtailed on the official channel. We estimate lower investment demand and lower imports due to monetization of domestic holdings could lead to an erosion of ~100 tons in gold imports in FY2014. On the basis of this erosion in gold imports, the revenue upside for the fiscal is estimated at Rs40-45 bn for FY2014. Variations in this amount will depend on the (1) dollar price of gold and (2) USD/INR.
Intention is right, will have to wait for the actual outcomes
While the increased import duty may help to curb gold investment demand through the customs route, the effectiveness of these measures could depend heavily on policing to check inflows through alternative routes. The success of the GDS scheme in channelizing gold holdings into institutional channels depends heavily on the minimum size of deposits and returns payable on the deposits. With the Government showing its intent to control gold imports, further measures in this direction could be expected in the Union Budget.
For Private Circulation Only.
KOTAK INSTITUTIONAL EQUITIES RESEARCH December 2012: Results calendar India DailyIndia Summary-January22,2013
Mon Tue Wed Thu Fri Sat Sun 21-Jan 22-Jan 23-Jan 24-Jan 25-Jan 26-Jan 27-Jan Asian Paints DishTV India Havells India Andhra Bank Bharat Electronics Persistent Systems DB Corp Hindustan Unilever JSW Energy Ashok Leyland Maruti Suzuki HDFC Indiabulls Financial Services Karnataka Bank Biocon Mcleod Russel Kajaria Cements Indiabulls Real Estate Phoenix Mills Coromandel International Oriental Bank of Commerce Mastek Indiabulls Securities Reliance Communications Dhanlakshmi Bank Reliance Power NTPC Kansai Nerolac SunTV Network L&T Shriram Transport SpiceJet Kotak Mahindra Bank Syndicate Bank Religare Enterprises Zee Entertainment Enterprises Sesa Goa 28-Jan 29-Jan 30-Jan 31-Jan 1-Feb 2-Feb 3-Feb Adani Ports Container Corp Central Bank of India Allahabad Bank Adani Enterprises Adani Power Dabur India Colgate Palmolive Godrej Consumers Bharti Airtel Amar Raja Engineers India Dena Bank Grasim Industries Corporation Bank Bank of India Glenmark Pharmaceuticals Indian Overseas Bank ICICI Bank IDFC Financial Technologies GMDC IPCA Laboratories Lupin Karur Vysya Bank IL & FS Investment Managers Idea Power Finance Corp. Mahindra Satyam Marico ING Vysya Bank Mahindra Holidays SJVN Manglore Refinery BHEL JSW Steel Sterlite Indsutries Titan Industries Punjab National Bank Neyveli Lignite Torrent Pharma Siemens Reliance Infrastructure United Phosphorus Tata Global Beverages Torrent Power Reliance Capital Thermax Oracle Financial Union Bank of India Crompton Greaves
4-Feb 5-Feb 6-Feb 7-Feb 8-Feb 9-Feb 10-Feb REC Apollo Tyres ACC Cadila Healthcare J&K Bank Godrej Indsutries Ambuja Cements Emami India Daily Summary - January Bank of Baroda Apollo Hospitals Hindalco Industries Aurobindo Pharma Mahindra & Mahindra 11-Feb 12-Feb 13-Feb 14-Feb 15-Feb 16-Feb 17-Feb Hexaware Technologies Madras Cements Dr Reddys Tata Power BPCL
Source: BSE, NSE, Kotak Institutional Equities
44
2 45 45
Kotak Institutional Equities: Valuation summary of KIE Universe stocks
O/S Target ADVT- 21-Jan-13 Mkt cap. shares EPS (Rs) EPS growth (%) PER (X) EV/EBITDA (X) Price/BV (X) Dividend yield (%) RoE (%) price Upside 3mo Company Price (Rs) Rating (Rs mn) (US$ mn) (mn) 2012 2013E 2014E 2012 2013E 2014E 2012 2013E 2014E 2012 2013E 2014E 2012 2013E 2014E 2012 2013E012 2014E 2013E 2014E 2 (Rs) (%) (US$ mn) Automobiles Apollo Tyres 87 BUY 43,805 816 504 8.1 11.7 14.0 (7.0) 43.8 20.0 10.7 7.4 6.2 6.1 4.6 3.9 1.4 1.2 1.0 0.5 0.8 0.9 15.6 19.0 19.1 110 26.6 5.5 Ashok Leyland 26 ADD 70,109 1,307 2,661 2.1 1.9 2.6 (10.6) (9.0) 34.2 12.4 13.7 10.2 8.0 8.3 6.9 1.5 1.4 1.4 3.8 3.8 3.8 17.7 15.2 19.0 29 10.1 4.5 Bajaj Auto 2,058 REDUCE 595,614 11,100 289 103.8 110.3 139.3 14.9 6.3 26.3 19.8 18.7 14.8 14.4 14.4 11.2 9.8 7.6 6.0 2.2 2.1 2.7 54.5 46.0 45.5 2,100 2.0 16.7
Bharat Forge 247 REDUCE 58,554 1,091 237 17.4 13.8 19.1 38.5 (20.3) 37.9 14.2 17.8 12.9 8.0 8.7 7.2 2.4 2.1 1.9 0.4 0.4 0.4 15.1 14.2 13.2 270 9.4 2.3 Exide Industries 127 SELL 107,823 2,009 850 5.4 5.9 7.1 (27.2) 9.6 19.2 23.4 21.3 17.9 15.7 13.7 11.8 3.5 3.2 2.8 1.2 1.2 1.4 15.9 15.6 16.6 110 (13.3) 5.0 Hero Motocorp 1,772 SELL 353,858 6,594 200 119.1 104.8 115.3 19.9 (12.0) 10.0 14.9 16.9 15.4 11.2 12.6 10.4 6.4 5.2 4.2 1.7 1.8 2.0 61.8 40.4 34.9 1,600 (9.7) 13.4 Mahindra & Mahindra 882 ADD 541,609 10,093 614 45.1 53.2 59.3 8.1 17.9 11.4 19.5 16.6 14.9 14.9 11.9 10.5 4.3 3.6 3.1 1.3 1.8 2.0 24.6 24.7 23.4 1,000 13.4 22.0 Maruti Suzuki 1,575 SELL 475,655 8,864 302 56.6 62.9 83.6 (28.6) 11.1 32.9 27.8 25.0 18.8 22.5 17.9 12.4 3.1 2.8 2.5 0.5 0.5 0.5 11.1 11.7 13.8 1,100 (30.1) 21.7 Motherson Sumi Systems 200 BUY 117,688 2,193 588 4.4 7.9 15.9 (34.3) 78.9 101.9 45.3 25.3 12.6 19.2 10.9 5.6 6.3 5.4 3.7 1.1 1.2 2.0 15.5 30.7 33.3 230 14.9 2.1 Tata Motors 323 BUY 1,040,169 19,384 3,218 44.6 35.3 53.1 58.7 (20.9) 50.4 7.2 9.2 6.1 6.0 5.5 4.0 3.1 2.4 1.8 1.2 1.8 1.3 46.3 29.7 33.4 380 17.6 58.9 Automobiles Neutral 3,404,885 63,453 25.8 (3.7) 30.3 13.0 13.5 10.3 9.4 8.5 6.4 3.8 3.2 2.5 1.4 1.6 1.7 29.7 23.6 24.6 Banks/Financial Institutions Andhra Bank 122 ADD 68,437 1,275 560 24.0 22.0 23.2 6.1 (8.4) 5.2 5.1 5.6 5.3 — — — 1.0 1.0 0.9 4.5 4.1 4.3 19.2 15.5 14.6 120 (1.9) 2.5 Axis Bank 1,385 ADD 572,473 10,669 413 102.7 115.7 120.1 24.4 12.6 3.8 13.5 12.0 11.5 — — — 2.5 2.2 1.9 1.2 1.3 1.4 20.3 19.3 17.3 1,520 9.7 40.5 Bajaj Finserv 860 SELL 136,827 2,550 159 94.8 69.2 72.1 21.3 (27.1) 4.2 9.1 12.4 11.9 — — — 2.7 2.0 1.6 1.6 1.6 1.6 32.2 18.5 15.0 810 (5.8) 3.1 Bank of Baroda 881 REDUCE 363,311 6,771 412 121.4 114.1 118.7 12.4 (6.0) 4.0 7.3 7.7 7.4 — — — 1.4 1.3 1.2 1.9 2.2 2.3 21.7 16.7 15.3 770 (12.6) 10.5 Bank of India 381 BUY 218,978 4,081 575 46.6 52.4 58.1 2.5 12.4 10.8 8.2 7.3 6.6 — — — 1.3 1.2 1.0 1.8 2.0 2.3 15.0 14.4 14.1 340 (10.8) 6.4 Canara Bank 521 REDUCE 230,604 4,297 443 74.1 68.4 77.4 (18.5) (7.7) 13.2 7.0 7.6 6.7 — — — 1.3 1.2 1.1 2.1 2.3 2.3 15.4 12.7 13.0 420 (19.3) 7.9 Corporation Bank 469 BUY 69,450 1,294 148 101.7 92.9 110.5 6.6 (8.6) 18.8 4.6 5.0 4.2 — — — 0.9 0.8 0.8 4.4 4.0 4.8 19.5 15.6 16.4 480 2.4 0.9 Federal Bank 500 ADD 85,515 1,594 171 45.4 47.7 47.5 32.3 5.0 (0.3) 11.0 10.5 10.5 — — — 1.5 1.4 1.3 1.8 1.9 1.9 14.4 13.5 12.2 540 8.0 5.7 HDFC 813 SELL 1,244,521 23,193 1,532 27.9 31.6 37.4 15.8 13.2 18.3 29.1 25.7 21.7 — — — 6.5 5.0 4.4 1.3 1.4 1.7 22.7 22.0 21.5 730 (10.2) 38.3 HDFC Bank 659 SELL 1,545,412 28,800 2,347 22.0 28.6 36.5 30.4 30.1 27.3 29.9 23.0 18.1 — — — 5.2 4.4 3.8 0.7 0.8 1.1 18.7 20.7 22.3 615 (6.6) 31.4 ICICI Bank 1,178 ADD 1,357,442 25,297 1,153 56.1 64.9 63.6 25.4 15.6 (2.0) 21.0 18.2 18.5 — — — 2.3 2.1 2.0 1.4 1.7 1.6 11.2 11.9 10.8 1,140 (3.2) 57.8 IDFC 178 ADD 268,973 5,013 1,512 10.3 12.5 14.9 17.2 21.9 18.7 17.3 14.2 12.0 — — — 2.2 2.0 1.7 1.3 1.4 1.6 13.7 14.6 15.5 170 (4.4) 19.0 India Infoline 85 REDUCE 27,687 516 327 4.5 7.7 8.5 (38.3) 68.5 10.5 18.7 11.1 10.0 — — — 1.6 1.3 1.2 1.6 3.1 1.7 7.7 13.1 12.7 65 (23.3) 1.0 Indian Bank 211 BUY 90,789 1,692 430 39.6 39.8 41.8 1.2 0.7 5.0 5.3 5.3 5.0 — — — 1.1 0.9 0.8 3.6 3.5 3.7 19.4 17.0 15.7 260 23.1 1.2 Indian Overseas Bank 87 REDUCE 69,299 1,291 797 13.2 14.7 20.5 (24.0) 11.9 39.3 6.6 5.9 4.2 — — — 0.7 0.7 0.7 5.1 4.0 5.5 9.9 9.5 12.2 75 (13.7) 2.3 IndusInd Bank 413 ADD 214,730 4,002 520 17.2 19.9 22.8 38.5 16.0 14.6 24.1 20.8 18.1 — — — 4.8 3.0 2.6 0.5 0.8 0.9 20.1 17.6 15.1 460 11.4 9.6 J&K Bank 1,316 REDUCE 63,820 1,189 48 165.6 199.0 183.3 30.6 20.2 (7.9) 7.9 6.6 7.2 — — — 1.6 1.3 1.2 2.5 3.1 2.8 21.2 21.6 17.2 1,260 (4.3) 2.6 LIC Housing Finance 284 NR 143,305 2,671 505 18.1 22.1 28.4 (11.8) 22.2 28.6 15.7 12.8 10.0 — — — 2.6 2.3 1.9 1.3 1.5 2.0 18.6 18.3 20.2 — — 16.2 L&T Finance Holdings 89 SELL 151,842 2,830 1,715 2.7 3.5 4.7 (5.6) 33.6 32.0 33.4 25.0 18.9 — — — 3.2 2.8 2.5 — — — 11.9 12.0 13.9 60 (32.2) 13.8
Mahindra & Mahindra Financial 1,079 REDUCE 122,620 2,285 114 60.4 77.6 91.8 33.6 28.5 18.2 17.9 13.9 11.8 — — — 4.2 2.8 2.4 1.2 1.7 2.0 22.8 23.5 21.1 1,100 2.0 5.3 22,2013Summary -January Daily India Muthoot Finance 212 NR 78,673 1,466 372 24.0 25.7 25.1 52.4 7.1 (2.5) 8.8 8.2 8.4 — — — 2.7 2.0 1.6 1.9 — — 41.9 29.8 22.7 ——— Oriental Bank of Commerce 339 REDUCE 98,863 1,842 292 39.1 52.7 57.1 (24.0) 34.6 8.4 8.7 6.4 5.9 — — — 1.0 0.9 0.8 2.3 3.1 3.4 9.9 12.3 12.2 325 (4.1) 5.2 PFC 212 ADD 279,500 5,209 1,319 23.0 28.8 31.5 0.9 25.3 9.1 9.2 7.3 6.7 — — — 1.4 1.3 1.2 2.8 3.6 3.9 16.9 17.3 16.7 220 3.8 8.7 Punjab National Bank 892 REDUCE 302,496 5,637 339 144.0 139.6 153.6 2.9 (3.0) 10.0 6.2 6.4 5.8 — — — 1.3 1.3 1.0 2.5 2.4 2.6 21.1 16.7 16.1 800 (10.3) 11.3 Reliance Capital 490 ADD 120,655 2,249 246 21.1 36.7 21.7 126.7 74.0 (41.0) 23.2 13.3 22.6 — — — 1.1 1.0 1.0 1.5 2.2 1.3 5.7 8.0 4.5 450 (8.2) 33.4 Rural Electrification Corp. 253 REDUCE 250,155 4,662 987 28.6 35.7 39.1 10.0 24.9 9.7 8.9 7.1 6.5 — — — 1.7 1.7 1.6 3.0 3.7 4.1 20.5 22.1 20.9 234 (7.6) 7.6 Shriram City Union Finance 1,077 NR 59,582 1,110 55 65.4 83.0 100.6 34.7 26.9 21.2 16.5 13.0 10.7 — — — 3.4 2.6 2.1 0.6 1.0 1.3 23.3 23.0 22.9 — — 0.3 Shriram Transport 760 ADD 169,575 3,160 223 56.4 59.5 71.5 2.3 5.6 20.2 13.5 12.8 10.6 — — — 2.9 2.6 2.2 0.9 1.6 1.9 23.1 20.4 20.9 710 (6.6) 4.8 SKS Microfinance 179 RS 13,077 244 73 (189.0) (32.2) 0.5 (1,304.4) (83.0) (101.4) (0.9) (5.6) 396.8 — — — 3.0 5.6 5.1 — — — (122.9) (70.7) 1.4 — — 3.0 State Bank of India 2,499 ADD 1,677,233 31,257 671 174.5 209.2 218.7 34.0 19.9 4.6 14.3 11.9 11.4 — — — 2.5 2.4 2.2 1.6 1.7 1.7 15.7 15.7 14.6 2,400 (4.0) 98.7 Union Bank 269 ADD 147,933 2,757 551 32.3 37.5 40.6 (18.2) 16.3 8.1 8.3 7.2 6.6 — — — 1.3 1.3 1.1 3.0 2.7 3.0 14.9 15.1 14.5 285 6.1 9.6 Yes Bank 512 REDUCE 180,624 3,366 353 27.7 35.3 39.0 32.1 27.5 10.6 18.5 14.5 13.1 — — — 3.9 3.2 2.7 0.8 1.0 1.1 23.1 24.0 21.9 450 (12.1) 20.3 Banks/Financial Institutions Cautious 10,424,404 194,268 14.6 15.2 9.8 14.4 12.5 11.3 ——— 2.4 2.1 1.9 1.5 1.7 1.8 16.4 17.1 16.7 KOTAK INSTITUTIONAL EQUITIES RESEARCH Cement ACC 1,336 SELL 250,914 4,676 188 57.1 73.6 79.7 7.8 28.9 8.2 23.4 18.1 16.8 13.4 9.7 8.4 3.3 2.9 2.6 2.4 1.8 1.8 16.9 18.4 17.5 1,300 (2.7) 7.0
Ambuja Cements 200 SELL 303,714 5,660 1,522 7.8 10.6 12.7 (1.2) 36.2 20.0 25.6 18.8 15.7 14.9 11.0 9.1 3.5 3.2 2.9 1.1 1.4 1.9 14.6 18.2 19.5 180 (9.8) 8.5 Grasim Industries 3,030 ADD 277,884 5,179 92 288.6 335.4 363.9 24.4 16.2 8.5 10.5 9.0 8.3 7.0 5.4 4.6 1.6 1.4 1.2 1.1 1.1 1.1 16.7 16.7 15.7 3,600 18.8 4.3 India Cements 86 ADD 26,540 495 307 9.0 9.8 12.4 373.8 9.5 26.7 9.6 8.8 7.0 5.1 4.6 3.9 0.6 0.6 0.5 2.4 3.7 3.7 6.9 7.3 8.6 105 21.5 2.6 Shree Cement 4,479 SELL 156,031 2,908 35 159.6 272.8 286.5 179.3 70.9 5.0 28.1 16.4 15.6 8.7 9.4 7.9 5.9 4.5 3.6 0.4 0.4 0.4 24.3 31.1 25.8 3,427 (23.5) 1.2 UltraTech Cement 1,931 SELL 529,353 9,865 274 89.3 101.8 121.9 99.0 14.0 19.7 21.6 19.0 15.8 13.3 10.9 8.8 3.6 3.1 2.6 0.5 0.5 0.5 20.8 19.7 19.7 1,700 (12.0) 8.4 Cement Cautious 1,544,435 28,782 40.8 23.6 13.6 18.9 15.3 13.4 10.4 8.4 7.0 2.8 2.4 2.1 1.1 1.0 1.1 14.9 16.0 15.8
Source: Company, Bloomberg, Kotak Institutional Equities estimates
KOTAK INSTITUTIONAL EQUITIES RESEARCH Kotak Institutional Equities: Valuation summary of KIE Universe stocks India DailyIndia Summary-January22,2013
O/S Target ADVT- 21-Jan-13 Mkt cap. shares EPS (Rs) EPS growth (%) PER (X) EV/EBITDA (X) Price/BV (X) Dividend yield (%) RoE (%) price Upside 3mo Company Price (Rs) Rating (Rs mn) (US$ mn) (mn) 2012 2013E 2014E 2012 2013E 2014E 2012 2013E 2014E 2012 2013E 2014E 2012 2013E 2014E 2012 2013E 2014E 2 012 2013E 2014E (Rs) (%) (US$ mn) Consumer products Asian Paints 4,288 SELL 411,295 7,665 96 103.1 122.6 141.5 17.3 18.9 15.5 41.6 35.0 30.3 27.0 22.4 18.9 15.0 12.2 10.1 0.9 1.1 1.4 41.4 40.1 38.1 3,550 (17.2) 5.6 Bajaj Corp. 250 BUY 36,838 687 148 8.1 11.5 14.0 16.5 40.7 21.8 30.7 21.8 17.9 31.7 20.6 16.1 8.6 7.6 6.7 1.6 2.6 3.4 29.9 37.0 39.9 280 12.1 0.6 Colgate-Palmolive (India) 1,498 SELL 203,663 3,795 136 32.8 39.5 46.1 10.9 20.4 16.6 45.6 37.9 32.5 39.3 31.8 26.8 46.8 38.2 33.4 1.7 1.8 2.3 109.0 111.0 109.7 1,150 (23.2) 3.4 Dabur India 128 ADD 224,429 4,182 1,753 3.7 4.5 5.2 12.6 21.1 15.7 34.8 28.7 24.8 27.6 22.2 18.6 12.8 10.2 8.2 1.0 1.2 1.4 41.4 40.1 37.0 140 9.3 2.4 GlaxoSmithkline Consumer 3,773 RS 158,670 2,957 42 86.0 108.5 126.4 20.8 26.1 16.4 43.8 34.8 29.9 34.8 29.3 24.8 13.9 11.5 9.7 0.9 1.2 1.5 34.4 36.2 35.3 — — 3.0 Godrej Consumer Products 713 ADD 230,768 4,301 324 17.7 22.3 28.5 18.7 26.2 27.7 40.4 32.0 25.0 28.0 21.7 16.9 8.2 6.6 5.6 0.7 0.7 0.7 25.2 24.2 28.0 760 6.6 2.3 Hindustan Unilever 497 REDUCE 1,073,780 20,011 2,159 11.9 15.4 16.8 23.9 29.5 8.6 41.7 32.2 29.7 35.5 28.0 23.4 30.6 26.2 22.6 1.8 2.6 2.8 83.4 87.5 82.5 510 2.6 21.9 ITC 292 ADD 2,291,631 42,707 7,860 7.8 9.4 11.2 22.3 19.4 19.1 37.2 31.1 26.1 26.7 21.8 18.1 12.2 10.9 9.8 1.5 1.9 2.4 35.5 37.0 39.4 330 13.2 34.2
Jubilant Foodworks 1,265 SELL 82,961 1,546 66 16.4 23.0 34.7 46.1 40.8 50.6 77.3 54.9 36.4 44.1 31.2 21.7 28.0 18.5 12.3 — — — 44.0 40.6 40.6 1,000 (20.9) 8.5 Jyothy Laboratories 150 ADD 24,604 459 164 2.8 4.3 7.5 (73.3) 53.8 76.2 54.4 35.4 20.1 36.1 19.9 13.9 4.0 3.6 3.1 — — — 6.1 10.8 16.6 195 29.7 0.6 Marico 225 ADD 145,017 2,703 645 5.2 6.6 8.0 34.2 27.4 20.6 43.2 33.9 28.1 31.2 23.1 18.6 12.4 9.5 7.4 0.3 0.4 0.5 31.0 32.3 30.0 240 6.7 1.2 Nestle India 4,795 SELL 462,299 8,615 96 104.6 113.0 139.2 20.5 8.0 23.2 45.8 42.4 34.4 30.3 26.2 21.0 36.3 27.0 19.5 1.0 1.1 1.3 94.7 73.0 65.7 4,000 (16.6) 2.2 Speciality Restaurants 180 ADD 8,441 157 47 4.9 6.3 8.5 7.6 28.2 34.9 36.7 28.6 21.2 23.3 18.4 13.1 7.3 5.4 4.3 — — — 16.2 14.0 12.2 200 11.2 0.6 Tata Global Beverages 154 BUY 95,233 1,775 618 5.4 6.5 7.7 36.3 19.7 19.6 28.5 23.8 19.9 16.9 12.9 10.9 1.7 1.6 1.5 1.2 1.4 1.7 7.8 8.6 9.9 165 7.1 11.3 Titan Industries 276 ADD 245,340 4,572 888 6.7 8.4 10.4 36.5 25.8 23.1 41.2 32.8 26.6 28.3 21.8 17.0 17.0 12.7 8.9 0.8 1.1 0.4 47.9 44.4 39.5 325 17.6 9.8 United Breweries 742 SELL 196,268 3,658 264 4.8 8.8 13.8 (17.2) 84.3 55.9 154.8 84.0 53.9 49.8 35.1 25.3 14.4 13.3 11.2 0.1 0.2 0.4 9.3 15.9 21.9 700 (5.7) 20.8 United Spirits 1,809 ADD 230,117 4,288 127 15.8 36.8 64.8 (55.4) 133.6 76.0 114.7 49.1 27.9 29.3 18.8 14.7 4.9 2.8 2.6 0.1 0.5 0.3 4.5 7.3 11.0 1,500 (17.1) 121.9 Consumer products Cautious 6,121,355 114,077 19.7 24.5 20.7 41.8 33.5 27.8 29.5 23.4 19.1 12.7 10.4 9.0 1.2 1.6 1.9 30.4 31.1 32.6 Constructions NCC 57 ADD 14,600 272 257 1.4 2.4 3.0 (78.0) 73.5 25.1 40.6 23.4 18.7 9.1 8.4 8.9 0.6 0.6 0.6 0.5 1.1 1.8 1.5 2.6 3.1 55 (3.3) 1.8 Punj Lloyd 56 REDUCE 18,967 353 340 3.3 3.9 7.6 (322.9) 18.7 94.5 16.9 14.2 7.3 10.0 6.7 5.8 0.6 0.6 0.6 0.2 0.6 1.2 3.8 4.5 8.2 60 7.4 3.9 Sadbhav Engineering 131 BUY 19,749 368 150 9.3 5.3 9.1 20.4 (42.8) 69.4 14.1 24.6 14.5 8.2 11.3 8.1 2.5 2.3 2.0 0.5 0.5 0.5 17.9 9.4 13.9 180 37.0 0.3 Construction Cautious 53,316 994 25.9 (4.4) 71.5 18.5 19.3 11.3 9.3 7.7 6.9 0.9 0.8 0.8 0.4 0.7 1.1 4.7 4.4 7.0 Energy Aban Offshore 377 RS 16,427 306 44 68.3 70.9 92.0 (49.1) 3.8 29.9 5.5 5.3 4.1 8.2 7.1 6.4 0.6 0.6 0.5 1.0 1.2 1.3 12.3 13.2 13.8 — — 3.1 Bharat Petroleum 441 ADD 318,806 5,941 723 18.3 30.3 20.9 (5.7) 65.1 (31.1) 24.0 14.6 21.1 12.3 8.4 10.5 2.0 1.8 1.7 1.2 2.1 1.4 8.1 12.2 7.8 455 3.2 8.6 Cairn india 340 ADD 649,087 12,096 1,907 41.6 63.9 56.1 25.0 53.7 (12.3) 8.2 5.3 6.1 6.2 3.9 4.0 1.3 1.2 1.1 — 3.7 5.0 17.7 23.3 18.4 370 8.7 22.3 Castrol India 302 SELL 149,135 2,779 495 9.5 9.2 10.2 (4.4) (3.0) 11.2 31.9 32.9 29.6 21.8 22.7 20.2 27.2 26.1 24.4 2.5 2.5 2.7 87.9 81.1 85.4 200 (33.7) 1.2 GAIL (India) 388 ADD 492,170 9,172 1,268 28.8 31.2 31.4 2.3 8.4 0.6 13.5 12.4 12.3 8.7 8.0 7.6 2.1 1.9 1.7 2.2 2.4 2.4 15.7 15.1 13.5 420 8.2 6.7 GSPL 77 ADD 43,299 807 563 9.3 8.5 8.1 4.7 (8.6) (5.2) 8.3 9.0 9.5 5.1 5.1 5.1 1.6 1.3 1.2 1.3 1.3 1.3 20.7 15.8 13.0 85 10.5 1.3 Hindustan Petroleum 373 REDUCE 126,383 2,355 339 26.8 10.2 23.5 (34.4) (61.8) 129.2 13.9 36.4 15.9 3.1 4.2 3.4 0.8 0.8 0.7 2.3 0.8 1.9 5.4 2.0 4.5 370 (0.8) 8.9 Indian Oil Corporation 345 ADD 836,672 15,592 2,428 32.9 18.3 24.3 1.3 (44.3) 32.7 10.5 18.8 14.2 7.9 9.4 8.0 1.4 1.3 1.2 1.5 1.2 2.2 13.0 6.8 8.5 335 (2.8) 4.8 Oil India 560 BUY 336,329 6,268 601 57.3 58.5 62.2 19.5 2.1 6.2 9.8 9.6 9.0 4.3 3.9 3.1 1.8 1.6 1.4 3.4 3.8 4.1 17.2 15.5 14.9 700 25.1 2.0 Oil & Natural Gas Corporation 337 ADD 2,879,360 53,659 8,556 32.8 29.9 33.1 33.1 (8.8) 10.6 10.3 11.2 10.2 4.4 4.8 4.1 1.7 1.5 1.4 2.9 3.0 3.3 16.8 13.5 13.5 375 11.4 21.9 Petronet LNG 158 ADD 118,538 2,209 750 14.1 16.3 13.0 70.7 15.8 (20.6) 11.2 9.7 12.2 7.7 7.1 7.6 3.1 2.4 2.1 1.6 1.7 1.9 29.7 27.2 17.5 180 13.9 3.5 Reliance Industries 920 REDUCE 2,742,371 51,106 2,981 61.3 64.1 61.4 (1.1) 4.6 (4.2) 15.0 14.4 15.0 8.7 9.3 9.3 1.5 1.4 1.3 0.9 1.0 1.0 11.7 11.2 9.9 835 (9.2) 50.2 Energy Attractive 8,708,576 162,292 12.9 (0.6) 2.4 11.5 11.6 11.3 6.5 6.6 6.0 1.6 1.5 1.3 1.8 2.1 2.4 13.9 12.7 11.9 Industrials ABB 684 SELL 145,009 2,702 212 8.7 11.4 20.1 192.0 31.1 76.0 78.6 59.9 34.1 50.1 35.6 21.2 5.7 5.4 4.8 0.4 0.5 0.5 7.4 9.3 14.9 500 (26.9) 0.7 BGR Energy Systems 259 REDUCE 18,661 348 72 31.1 27.9 33.9 (30.7) (10.1) 21.5 8.3 9.3 7.6 5.7 5.1 4.8 1.7 1.5 1.3 2.7 2.2 2.6 21.7 16.9 18.0 280 8.3 1.1 Bharat Electronics 1,289 REDUCE 103,144 1,922 80 106.3 110.7 125.7 (0.9) 4.1 13.5 12.1 11.6 10.3 6.8 5.4 3.9 1.7 1.6 1.4 1.6 2.3 2.3 15.3 14.3 14.6 1,300 0.8 1.0 Bharat Heavy Electricals 232 SELL 567,966 10,585 2,448 28.8 28.5 21.9 17.1 (1.0) (23.0) 8.1 8.2 10.6 5.4 5.6 6.5 2.2 1.9 1.6 2.8 2.6 2.0 30.9 24.9 16.4 205 (11.7) 16.4 Crompton Greaves 114 BUY 73,131 1,363 642 5.7 4.1 10.1 (60.0) (28.6) 147.4 19.9 27.9 11.3 8.8 11.6 6.8 2.0 1.9 1.7 1.2 1.3 1.5 10.6 7.1 16.1 155 36.0 6.1 Cummins India 489 ADD 135,440 2,524 277 22.0 25.4 29.8 (0.9) 15.3 17.3 22.2 19.2 16.4 20.3 16.4 13.8 6.6 5.9 5.2 2.3 2.6 3.0 30.7 31.1 32.0 525 7.4 1.7 Kalpataru Power Transmission 101 BUY 15,515 289 153 13.3 13.6 15.5 (4.1) 2.0 14.2 7.6 7.5 6.5 5.1 5.0 4.5 0.8 0.8 0.7 1.5 1.5 1.5 10.7 9.8 10.3 120 18.7 0.4 KEC International 64 BUY 16,389 305 257 6.9 6.8 8.9 (14.1) (1.8) 31.9 9.3 9.4 7.2 5.7 6.4 5.3 1.4 1.3 1.1 1.9 1.6 2.1 16.4 14.1 16.4 80 25.5 0.4 Larsen & Toubro 1,567 REDUCE 959,845 17,888 612 75.7 83.0 93.1 12.4 9.7 12.2 20.7 18.9 16.8 16.0 14.0 12.1 3.1 2.6 2.2 0.9 0.9 0.9 16.1 14.9 14.2 1,625 3.7 44.5 Maharashtra Seamless 258 BUY 18,190 339 71 43.9 33.9 39.1 (9.0) (22.6) 15.3 5.9 7.6 6.6 3.6 4.0 3.2 0.6 0.6 0.6 2.9 2.6 3.0 11.5 8.3 9.2 400 55.1 0.1 Siemens 658 SELL 231,563 4,315 352 13.6 23.3 27.4 (46.6) 71.2 17.6 48.4 28.2 24.0 29.6 16.5 13.7 5.4 4.7 4.1 0.3 0.7 0.8 11.7 17.9 18.3 575 (12.6) 2.6 India Daily Summary - January Suzlon Energy 19 RS 33,770 629 1,777 (4.0) (3.7) (0.4) (34.1) (6.0) (88.1) (4.8) (5.1) (42.9) 8.1 8.3 6.7 0.6 0.8 0.8 — 1.1 1.1 (11.7) (13.7) (1.8) — — 10.4 Tecpro Systems 154 ADD 7,755 145 50 24.4 25.1 27.6 (9.6) 2.9 9.9 6.3 6.1 5.6 4.9 5.1 4.6 1.0 0.9 0.8 — — — 17.1 15.3 14.8 200 30.2 0.2 Thermax 585 REDUCE 69,715 1,299 119 32.9 26.5 31.6 4.0 (19.5) 19.4 17.8 22.1 18.5 11.8 14.2 11.4 4.3 3.8 3.3 1.2 1.4 1.5 26.6 18.2 19.2 510 (12.8) 0.8 Voltas 101 REDUCE 33,504 624 331 9.4 7.4 8.3 (3.4) (21.2) 11.6 10.7 13.6 12.2 8.6 9.5 7.6 2.2 2.0 1.8 1.6 2.2 2.5 21.7 15.6 15.8 115 13.5 3.7 Industrials Cautious 2,411,407 44,939 6.5 4.5 5.0 16.2 15.5 14.8 11.1 10.4 9.7 2.7 2.4 2.1 1.4 1.5 1.4 16.8 15.3 14.2
Source: Company, Bloomberg, Kotak Institutional Equities estimates
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Kotak Institutional Equities: Valuation summary of KIE Universe stocks
O/S Target ADVT- 21-Jan-13 Mkt cap. shares EPS (Rs) EPS growth (%) PER (X) EV/EBITDA (X) Price/BV (X) Dividend yield (%) RoE (%) price Upside 3mo Company Price (Rs) Rating (Rs mn) (US$ mn) (mn) 2012 2013E 2014E 2012 2013E 2014E 2012 2013E 2014E 2012 2013E 2014E 2012 2013E 2014E 2012 2013E 2014E 2012 2013E 2014E (Rs) (%) (US$ mn) Infrastructure Adani Port and SEZ 136 BUY 273,869 5,104 2,017 5.5 5.9 8.8 20.0 8.3 48.8 24.9 22.9 15.4 21.7 15.7 11.6 5.5 4.6 3.7 0.8 0.9 1.2 23.8 21.9 26.6 160 17.9 3.5 Container Corporation 941 ADD 122,372 2,281 130 67.5 75.2 83.2 (0.1) 11.4 10.7 13.9 12.5 11.3 9.3 8.3 7.3 2.2 1.9 1.7 1.7 1.8 2.0 16.6 16.4 16.1 1,000 6.2 0.9 GMR Infrastructure 20 RS 78,432 1,462 3,892 (1.1) 0.4 0.4 236.7 (132.7) (3.8) (17.8) 54.4 56.6 18.4 8.1 5.7 0.8 0.7 0.6 — — — (5.8) 1.9 1.8 — — 4.7 Gujarat Pipavav Port 45 REDUCE 21,779 406 483 1.4 1.4 2.2 (212.6) 4.1 58.4 33.3 32.0 20.2 14.4 13.1 11.5 2.7 1.8 1.7 — — — 10.4 7.0 10.2 52 15.4 0.5 GVK Power & Infrastructure 14 RS 22,030 411 1,579 0.4 1.0 3.5 (60.3) 165.6 243.1 35.8 13.5 3.9 26.4 12.9 7.5 0.6 0.5 0.4 - 2.5 5.7 1.8 3.9 11.1 — — 2.9 IRB Infrastructure 128 BUY 42,393 790 332 15.1 12.2 12.5 10.8 (19.0) 2.5 8.5 10.4 10.2 6.9 7.1 6.2 1.4 1.0 0.9 — — — 18.1 11.0 9.1 170 33.3 9.2 Infrastructure Cautious 560,875 10,452 (2.9) 36.8 38.2 26.0 19.0 13.7 16.5 10.9 7.9 2.1 1.7 1.5 0.7 0.9 1.3 8.0 8.7 10.6 Media DB Corp 232 BUY 42,537 793 183 11.0 11.4 13.8 (14.5) 3.3 21.5 21.0 20.4 16.8 12.2 11.4 9.5 4.6 4.2 3.9 2.2 2.6 3.4 23.0 21.6 24.1 260 12.0 0.3 DishTV 77 ADD 82,323 1,534 1,064 (1.0) 0.4 1.4 (45.3) (143.5) 212.8 (76.3) 175.7 56.2 18.5 13.6 11.0 (87.7) (175.3) 82.6 — — — 694.0 (66.6) 557 85 9.8 5.9 Eros International 204 ADD 18,715 349 92 16.5 18.8 20.5 31.9 13.8 9.5 12.4 10.9 9.9 9.1 7.6 7.0 2.2 1.8 1.5 — — — 20.0 18.5 16.8 230 12.7 3.1 Hindustan Media Ventures 150 BUY 10,997 205 73 8.9 11.1 12.1 21.9 25.0 8.6 16.8 13.5 12.4 9.1 7.2 6.1 2.5 2.2 2.0 0.8 1.3 2.7 15.9 17.3 16.7 200 33.5 0.0 HT Media 106 BUY 24,966 465 235 7.0 7.0 8.6 (8.5) (1.0) 23.4 15.1 15.2 12.3 6.7 6.6 5.0 1.6 1.5 1.4 0.4 1.9 3.8 11.1 10.2 11.8 130 22.5 0.3 Jagran Prakashan 110 BUY 34,661 646 316 5.6 6.0 7.0 (17.4) 6.7 16.8 19.5 18.3 15.6 10.8 10.0 8.7 4.6 4.3 3.8 3.2 3.2 3.2 24.5 24.3 25.8 130 18.6 0.2 Sun TV Network 424 REDUCE 167,070 3,113 394 17.6 17.5 19.9 (10.0) (0.3) 13.5 24.1 24.2 21.3 15.2 14.7 13.0 6.3 5.8 5.3 2.2 2.4 2.8 28.6 25.9 27.0 390 (8.0) 9.5 Zee Entertainment Enterprises 221 REDUCE 209,950 3,913 950 6.0 7.3 8.9 (0.5) 20.6 22.0 36.7 30.4 24.9 26.3 20.9 16.8 4.6 4.4 4.1 0.6 0.7 0.9 13.0 14.9 17.3 190 (14.0) 10.8 Media Neutral 591,220 11,018 (1.5) 16.9 21.5 30.8 26.3 21.7 16.1 14.0 11.8 5.1 4.7 4.3 1.2 1.4 1.8 16.5 17.7 19.7 Metals & Mining Coal India 352 BUY 2,220,834 41,387 6,316 23.2 24.8 28.4 34.4 6.5 14.5 15.1 14.2 12.4 9.6 8.3 6.9 5.2 4.2 3.4 2.8 2.1 2.4 38.0 32.8 30.4 404 14.9 12.7 Hindalco Industries 123 SELL 235,079 4,381 1,915 17.7 14.7 14.0 38.8 (16.9) (5.1) 6.9 8.3 8.8 7.0 8.2 8.4 0.7 0.7 0.6 1.2 1.2 1.2 11.1 8.5 7.5 115 (6.3) 15.5 Hindustan Zinc 131 ADD 551,363 10,275 4,225 13.2 15.5 15.6 13.2 17.6 0.9 9.9 8.4 8.3 6.1 5.4 4.3 2.1 1.7 1.5 1.8 2.0 2.0 22.6 22.3 19.0 156 19.5 2.4 Jindal Steel and Power 424 REDUCE 396,262 7,385 935 42.4 32.6 43.6 5.6 (23.2) 33.8 10.0 13.0 9.7 8.3 8.6 7.7 2.2 1.9 1.6 0.4 0.4 0.4 24.8 15.7 17.8 420 (0.9) 17.2 JSW Steel 865 SELL 193,032 3,597 223 24.1 68.9 66.7 (69.3) 185.9 (3.1) 35.9 12.6 13.0 6.0 6.4 6.6 1.2 1.1 1.0 0.9 1.2 1.2 8.2 9.8 8.0 585 (32.4) 14.8 National Aluminium Co. 49 SELL 126,027 2,349 2,577 3.4 3.2 3.6 (19.7) (5.9) 13.2 14.5 15.4 13.6 6.8 6.1 4.9 1.1 1.0 1.0 2.0 2.0 2.0 7.6 6.8 7.4 50 2.2 0.2 NMDC 162 BUY 641,488 11,955 3,965 18.5 17.0 19.1 12.6 (8.1) 12.7 8.8 9.5 8.5 4.9 5.4 4.4 2.6 2.2 1.9 2.8 3.1 3.1 33.3 25.3 24.1 190 17.4 13.8 Sesa Goa 187 ADD 162,392 3,026 869 31.0 27.8 28.0 (36.2) (10.5) 0.9 6.0 6.7 6.7 5.7 24.0 16.4 1.1 0.9 0.8 2.5 0.6 0.6 11.1 0.6 2.1 203 8.6 6.1 Sterlite Industries 114 ADD 381,664 7,113 3,361 15.8 16.2 16.9 3.9 2.7 4.2 7.2 7.0 6.7 4.2 3.6 3.0 0.8 0.8 0.7 1.8 1.8 1.8 12.1 11.2 10.7 122 7.4 12.8 Tata Steel 414 ADD 402,261 7,496 971 17.2 14.0 48.7 (72.3) (18.7) 247.1 24.0 29.5 8.5 7.9 7.8 6.0 0.9 0.9 0.9 2.9 2.9 2.9 6.4 3.2 10.6 400 (3.4) 31.4 Metals & Mining Cautious 5,310,401 98,964 0.5 0.9 14.3 11.3 11.2 9.8 7.0 7.1 6.0 1.9 1.7 1.5 2.3 2.0 2.1 17.0 15.2 15.4 Pharmaceutical Apollo Hospitals 780 ADD 108,466 2,021 139 15.8 22.0 29.2 19.3 39.6 32.6 49.4 35.4 26.7 21.2 17.6 14.1 4.3 3.8 3.5 — 0.7 1.0 9.6 11.5 13.6 820 5.2 7.6 Biocon 281 ADD 56,130 1,046 200 17.1 16.9 20.7 (6.9) (1.0) 22.0 16.4 16.6 13.6 9.3 9.7 7.9 2.5 2.3 2.0 1.8 1.8 2.2 15.7 14.2 15.7 287 2.3 3.3 Cipla 404 REDUCE 324,380 6,045 803 14.0 19.8 20.0 13.5 41.4 0.9 28.9 20.4 20.2 19.7 14.4 13.2 4.2 3.6 3.1 0.5 0.7 0.7 15.7 17.0 16.6 400 (1.0) 14.4 Cadila Healthcare 879 ADD 179,904 3,353 205 31.9 32.8 47.1 (8.2) 3.0 43.5 27.6 26.8 18.6 21.2 17.8 13.0 7.0 5.9 4.8 0.9 0.9 1.3 27.5 23.9 28.4 943 7.3 2.1 Divi's Laboratories 1,067 REDUCE 141,542 2,638 133 40.2 49.5 58.9 24.0 23.1 19.0 26.5 21.6 18.1 20.1 16.2 13.0 6.6 5.6 4.7 1.2 1.5 1.8 27.1 28.1 28.0 1,130 5.9 7.6 India Daily Summary - January 22,2013Summary -January Daily India Dr Reddy's Laboratories 1,923 ADD 327,216 6,098 170 84.0 102.3 110.1 29.4 21.7 7.6 22.9 18.8 17.5 14.4 12.5 11.4 5.7 4.6 3.8 0.7 0.7 0.8 23.4 24.9 22.5 2,100 9.2 12.6 GlaxoSmithkline Pharmaceuticals 2,174 SELL 184,257 3,434 85 74.3 79.8 90.3 8.8 7.5 13.2 29.3 27.2 24.1 21.0 20.4 17.3 9.5 9.0 8.4 2.1 2.3 2.9 32.4 34.0 36.2 1,900 (12.6) 1.4 Glenmark Pharmaceuticals 492 REDUCE 133,101 2,480 271 21.9 22.3 28.3 31.1 1.8 27.0 22.5 22.1 17.4 25.3 15.6 12.2 5.5 4.5 3.7 0.4 0.5 0.7 20.7 22.7 23.6 510 3.7 5.5 Lupin 595 ADD 265,809 4,954 447 19.5 28.3 29.6 1.2 45.4 4.6 30.5 21.0 20.1 21.6 13.2 12.4 6.5 5.2 4.3 0.5 0.8 0.9 23.9 28.0 23.8 600 0.9 8.4 Ranbaxy Laboratories 484 SELL 204,116 3,804 422 (18.5) 38.8 23.5 (145.7) 309.1 (39.5) (26.1) 12.5 20.6 14.3 9.4 14.3 7.1 4.7 3.9 — — — (68.5) 45.6 20.8 482 (0.3) 6.7 Sun Pharmaceuticals 700 REDUCE 724,746 13,506 1,036 25.0 28.5 33.3 42.5 14.1 16.7 28.0 24.5 21.0 20.7 13.2 13.5 5.4 4.6 4.0 0.6 0.7 0.9 21.9 20.4 20.3 664 (5.1) 10.1 Pharmaceuticals Attractive 2,649,666 49,379 (9.5) 51.8 7.2 32.3 21.3 19.9 18.7 13.7 13.0 5.6 4.6 3.9 0.7 0.9 1.0 17.2 21.8 19.9 Real Estate DLF 256 NR 439,530 8,191 1,715 7.1 12.7 16.9 (22.1) 79.7 33.1 36.2 20.2 15.2 17.4 13.2 10.2 1.6 1.5 1.4 1.0 1.2 1.4 4.5 7.6 9.5 — — 27.6 Housing Development & Infrastructure 121 NR 50,699 945 419 22.0 28.8 28.8 11.3 30.5 0.2 5.5 4.2 4.2 5.9 5.2 4.8 0.5 0.4 0.4 — 1.2 1.7 8.3 10.8 9.6 — — 36.1 Mahindra Life Space Developer 418 NR 17,054 318 41 29.4 29.8 34.3 18.0 1.3 15.1 14.2 14.0 12.2 13.9 11.1 10.6 1.5 1.4 1.3 1.1 1.2 1.3 11.2 10.4 11.0 — — 0.6 Oberoi Realty 304 NR 100,090 1,865 330 14.1 14.3 22.4 (10.5) 1.4 57.3 21.6 21.3 13.5 18.0 14.0 8.8 2.7 2.5 2.1 0.7 0.8 1.0 13.1 12.0 16.9 — — 0.7 Phoenix Mills 249 NR 36,045 672 145 7.3 10.7 11.5 14.9 46.9 7.9 34.2 23.3 21.6 26.0 18.2 17.4 2.2 2.0 1.9 0.8 0.8 0.8 6.4 8.9 9.0 — — 0.7 Sobha Developers 418 NR 40,986 764 98 21.4 25.1 37.4 13.8 17.1 49.2 19.5 16.7 11.2 11.2 10.2 7.1 2.0 1.9 1.6 1.2 1.2 1.2 10.9 11.7 15.6 — — 1.2 Unitech 38 NR 99,812 1,860 2,616 0.9 1.8 2.3 (56.1) 84.8 32.7 40.2 21.7 16.4 36.7 20.1 15.6 0.8 0.8 0.8 0.3 0.3 0.3 2.1 3.7 4.7 — — 27.0
KOTAK INSTITUTIONAL EQUITIES RESEARCH Real Estate Cautious 706,737 13,171 0.3 48.7 1.1 19.5 13.1 12.9 12.5 9.6 9.3 1.5 1.3 1.3 0.8 1.1 1.2 7.6 10.2 10.3
Source: Company, Bloomberg, Kotak Institutional Equities estimates
KOTAK INSTITUTIONAL EQUITIES RESEARCH Kotak Institutional Equities: Valuation summary of KIE Universe stocks India DailyIndia Summary-January22,2013
O/S Target ADVT- 21-Jan-13 Mkt cap. shares EPS (Rs) EPS growth (%) PER (X) EV/EBITDA (X) Price/BV (X) Dividend yield (%) RoE (%) price Upside 3mo Company Price (Rs) Rating (Rs mn) (US$ mn) (mn) 2012 2013E 2014E 2012 2013E 2014E 2012 2013E 2014E 2012 2013E 2014E 2012 2013E 2014E 2012 2013E 2014E 2012 2013E 2014E (Rs) (%) (US$ mn) Technology HCL Technologies 715 REDUCE 508,507 9,476 711 34.6 51.6 53.7 51.2 49.4 3.9 20.7 13.9 13.3 12.8 8.8 8.3 5.2 3.8 3.0 1.1 1.1 1.1 25.1 30.7 25.5 650 (9.1) 14.9 Hexaware Technologies 90 REDUCE 26,547 495 294 9.1 10.9 10.0 207.9 20.3 (8.2) 9.9 8.3 9.0 8.4 5.9 6.1 2.6 2.3 2.1 4.4 6.0 5.6 26.9 29.7 24.3 90 (0.5) 5.9 Infosys 2,796 REDUCE 1,605,076 29,912 574 144.9 162.9 177.2 21.0 12.5 8.7 19.3 17.2 15.8 13.1 11.7 10.1 5.1 4.3 3.7 1.6 1.9 2.2 29.0 27.3 25.3 2,700 (3.4) 61.2 Mahindra Satyam 118 ADD 139,003 2,590 1,176 10.2 10.2 11.1 142.3 0.1 9.1 11.6 11.6 10.6 10.8 6.7 5.9 4.7 3.3 2.7 — — 1.9 50.4 33.8 28.2 120 1.5 7.3 Mindtree 792 ADD 32,610 608 41 53.1 79.7 86.1 115.1 50.1 8.1 14.9 9.9 9.2 11.1 6.2 5.7 3.4 2.7 2.3 0.7 2.0 3.3 25.2 30.3 26.8 825 4.1 1.6 Mphasis 373 SELL 78,621 1,465 211 39.0 37.6 37.7 (24.6) (3.7) 0.4 9.6 9.9 9.9 8.0 7.4 7.2 2.0 1.8 1.7 1.7 4.6 5.1 22.8 19.0 17.4 375 0.5 0.9 Polaris Financial Technology 142 REDUCE 14,152 264 100 20.8 21.7 19.9 7.4 4.7 (8.2) 6.8 6.5 7.1 4.0 3.4 3.2 1.1 1.0 0.9 2.7 2.9 3.0 18.1 16.2 13.3 120 (15.5) 1.1 TCS 1,330 REDUCE 2,603,076 48,511 1,957 54.4 72.0 80.0 22.0 32.4 11.1 24.5 18.5 16.6 17.4 13.5 11.8 8.0 6.5 5.4 1.9 2.2 2.4 36.8 38.8 35.4 1,320 (0.8) 30.8
Tech Mahindra 1,004 ADD 128,055 2,386 128 80.1 96.0 104.8 63.5 19.9 9.1 12.5 10.5 9.6 15.9 10.7 9.8 3.2 2.7 2.4 0.4 0.6 0.8 28.4 28.8 27.3 1,025 2.1 10.6 Wipro 398 REDUCE 976,383 18,196 2,456 22.7 27.4 29.4 5.2 20.6 7.2 17.5 14.5 13.5 12.1 9.7 8.6 3.4 2.9 2.5 1.2 1.5 1.7 21.2 21.5 19.7 400 0.6 13.0 Technology Cautious 6,112,030 113,903 21.2 23.4 8.5 19.6 15.9 14.7 13.9 11.0 9.8 5.1 4.2 3.6 1.6 1.9 2.1 26.0 26.4 24.3 Telecom Bharti Airtel 356 ADD 1,350,237 25,163 3,798 11.2 8.1 12.9 (29.6) (27.8) 59.7 31.7 43.9 27.5 8.5 7.8 6.7 2.7 2.5 2.3 — 0.4 0.4 8.6 5.9 8.9 340 (4.4) 30.1 IDEA 120 ADD 395,075 7,363 3,303 2.2 3.3 6.0 (19.6) 52.3 81.4 54.7 35.9 19.8 10.5 8.8 6.9 3.0 2.8 2.4 — — — 5.7 8.1 13.2 116 (3.0) 6.0 MTNL 27 RS 16,695 311 630 (9.1) (8.4) (8.3) (11.9) (8.1) (1.7) (2.9) (3.2) (3.2) 0.3 0.4 0.4 0.2 0.2 0.2 — — — (5.7) (5.5) (5.8) — — 1.2 Reliance Communications 89 SELL 183,696 3,423 2,064 4.5 2.8 4.1 (31.0) (37.9) 46.5 19.8 31.9 21.8 9.6 8.1 7.2 0.5 0.5 0.5 — — — 2.4 1.6 2.2 60 (32.6) 20.0 Tata Communications 243 REDUCE 69,326 1,292 285 (27.9) (34.1) (23.7) 12.0 22.3 (30.4) (8.7) (7.1) (10.3) 9.9 8.3 7.4 3.0 4.8 9.0 — — — (27.0) (52.1) (61.4) 220 (9.6) 1.2 Telecom Neutral 2,015,029 37,552 (34.4) (28.4) 101.7 44.4 62.0 30.7 9.2 8.1 6.9 1.8 1.7 1.7 — — 0.2 4.0 2.8 5.4 Utilities Adani Power 68 SELL 147,804 2,754 2,180 (0.4) (7.4) (1.9) (118.0) 1,645.4 (74.3) (159.9) (9.2) (35.6) 38.3 48.2 14.1 2.4 3.5 3.8 — — — (1.5) (31.3) (10.2) 33 (51.3) 3.9 CESC 329 REDUCE 41,079 766 125 21.7 26.0 32.3 (9.3) 19.6 24.1 15.1 12.6 10.2 8.8 9.0 6.1 0.7 0.7 0.6 — 1.5 1.6 4.5 5.2 6.2 294 (10.6) 5.1 JSW Energy 74 SELL 121,114 2,257 1,640 2.0 4.7 5.4 (60.6) 131.8 15.5 36.6 15.8 13.7 16.0 9.1 6.9 2.1 1.9 1.6 — — — 5.8 12.6 12.8 54 (26.9) 2.5 Lanco Infratech 14 RS 30,789 574 2,223 (0.5) (0.7) 1.0 (131.8) 39.2 (233.2) (26.4) (19.0) 14.3 10.7 10.5 7.0 0.7 0.7 0.7 — — — (2.5) (3.6) 4.8 — — 5.5 NHPC 26 ADD 324,740 6,052 12,301 2.5 2.0 2.3 84.5 (21.6) 17.1 10.6 13.5 11.5 9.9 12.0 9.7 1.1 1.1 1.0 2.6 2.0 2.4 11.1 8.2 9.0 27 2.3 6.5 NTPC 162 ADD 1,332,467 24,832 8,245 10.8 13.3 13.9 (1.1) 22.8 5.0 15.0 12.2 11.6 12.2 10.8 9.6 1.8 1.7 1.5 2.1 2.5 2.6 12.6 14.2 13.7 180 11.4 8.7 Power Grid 114 ADD 527,326 9,827 4,630 7.1 8.1 10.0 22.9 14.3 23.8 16.1 14.1 11.4 12.8 11.5 9.1 2.2 2.0 1.8 1.9 2.2 2.7 14.6 15.1 16.9 140 22.9 7.7 Reliance Infrastructure 549 BUY 144,272 2,689 263 60.3 56.8 59.8 4.0 (5.8) 5.3 9.1 9.7 9.2 11.0 4.9 4.3 0.6 0.6 0.5 1.9 2.1 2.1 8.9 10.1 9.4 904 64.8 19.0 Reliance Power 97 SELL 272,097 5,071 2,805 3.1 3.7 3.2 14.0 19.8 (13.2) 31.4 26.2 30.2 70.4 27.7 20.1 1.5 1.5 1.4 — — — 5.0 5.7 4.7 79 (18.6) 12.2 Tata Power 109 ADD 267,939 4,993 2,468 4.6 3.4 6.0 (40.6) (26.8) 77.3 23.6 32.2 18.1 11.5 9.4 7.4 2.0 2.0 1.8 1.4 1.6 1.6 8.1 6.1 10.4 113 4.1 5.5 Utilities Attractive 3,209,626 59,814 (1.8) 2.8 21.3 16.7 16.2 13.4 13.6 11.9 9.4 1.6 1.5 1.4 1.6 1.8 2.0 9.5 9.2 10.3 Others Carborundum Universal 146 BUY 27,369 510 187 11.6 9.1 12.5 27.0 (21.4) 37.4 12.6 16.0 11.7 7.8 8.8 6.6 2.5 2.2 1.9 1.4 1.1 1.5 24.8 16.3 19.4 180 23.2 0.4 Coromandel International 249 SELL 70,374 1,311 283 22.6 23.2 23.4 (7.9) 2.5 0.9 11.0 10.7 10.7 9.0 8.8 6.5 2.9 2.5 2.2 2.8 3.0 3.1 27.8 23.7 20.6 260 4.4 0.7 Havells India 663 REDUCE 82,776 1,543 125 31.5 31.7 37.3 28.2 0.8 17.6 21.1 20.9 17.8 13.2 12.0 10.3 8.2 5.6 4.5 1.0 1.1 1.2 45.6 31.8 28.2 580 (12.6) 3.4 Jaiprakash Associates 91 BUY 193,826 3,612 2,126 2.9 6.6 10.7 (51.5) 127.3 60.9 31.2 13.7 8.5 13.5 9.2 7.1 1.7 1.5 1.3 — — — 5.6 11.7 16.6 100 9.7 31.8 Jet Airways 605 SELL 52,260 974 86 (184.6) (11.0) 25.7 1,735.6 (94) (333.9) (3.3) (55.2) 23.6 (677.0) 11.9 8.3 39.9 144.5 20.3 — — — (164.4) (113.4) 150.8 350 (42.2) 39.6 Rallis India 141 BUY 27,382 510 194 5.1 6.7 8.6 (21.6) 32 27.4 27.6 20.9 16.4 14.1 12.1 9.1 5.0 4.3 3.6 1.6 1.6 1.6 20.4 20.9 24.1 155 10.1 1.3 SpiceJet 46 BUY 22,354 417 484 (13.7) 0.4 3.5 (649.9) (103.2) 679.1 (3.4) 104.2 13.4 (5.5) 24.7 8.3 (14.6) (69.5) 16.6 - - - (721) (23.2) 325.1 60 30.0 4.9 Tata Chemicals 371 BUY 94,462 1,760 255 32.9 35.3 40.4 28.2 7.4 14.3 11.3 10.5 9.2 6.2 5.5 4.9 1.4 1.2 1.1 2.7 2.7 2.7 12.3 11.7 11.9 360 (2.9) 4.3 United Phosphorus 142 REDUCE 65,669 1,224 462 12.0 15.0 16.0 (0.4) 24.9 6.5 11.8 9.5 8.9 6.3 5.7 5.1 1.6 1.4 1.2 1.8 1.8 1.8 14.5 16.0 15.0 120 (15.6) 5.9 Others 636,470 11,861 (67.8) 267.8 39.0 54.6 14.9 10.7 13.1 8.8 6.9 2.3 2.0 1.7 1.1 1.2 1.2 4.2 13.7 16.3 KS universe (b) 54,460,430 1,014,917 9.4 10.0 12.5 16.4 14.9 13.3 10.4 9.4 8.1 2.5 2.3 2.0 1.5 1.7 1.8 15.4 15.2 15.3 KS universe (b) ex-Energy 45,751,854 852,625 8.4 13.1 15.1 17.9 15.8 13.7 12.0 10.4 8.8 2.9 2.5 2.3 1.4 1.6 1.7 16.0 16.1 16.4 KS universe (d) ex-Energy & ex-Commodities 38,897,018 724,879 9.5 15.5 15.4 19.4 16.8 14.5 13.7 11.4 9.6 3.1 2.7 2.4 1.3 1.5 1.7 15.8 16.2 16.6
Notes: (a) For banks we have used adjusted book values. (b) 2012 means calendar year 2011, similarly for 2013 and 2014 for these particular companies. (c) EV/Sales & EV/EBITDA for KS universe excludes Banking Sector. (d) Rupee-US Dollar exchange rate (Rs/US$)= 53.66 India Daily Summary - January Source: Company, Bloomberg, Kotak Institutional Equities estimates
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2 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% 35.3% * The above categories are defined as follows: Buy = We expect this stock to deliver more than 15% returns over the next 12 30% months; Add = We expect this stock to deliver 5-15% returns over the next 12 months; Reduce = We expect this 22.0% 23.1% 19.7% stock to deliver -5-+5% returns over the next 12 months; Sell = 20% We expect this stock to deliver less than -5% returns over the next 12 months. Our target prices are also on a 12-month horizon 10% basis. These ratings are used illustratively to comply with 4.0% 4.6% 1.7% 2.3% applicable regulations. As of 31/12/2012 Kotak Institutional Equities Investment Research had investment ratings on 173 0% equity securities. BUY ADD REDUCE SELL
Source: Kotak Institutional Equities As of December 31, 2012
Ratings and other definitions/identifiers
Definitions of ratings
BUY. We expect this stock to deliver more than 15% returns over the next 12 months.
ADD. We expect this stock to deliver 5-15% returns over the next 12 months.
REDUCE. We expect this stock to deliver -5-+5% returns over the next 12 months.
SELL. We expect this stock to deliver <-5% returns over the next 12 months.
Our target prices are also on a 12-month horizon basis.
Other definitions
Coverage view. The coverage view represents each analyst’s overall fundamental outlook on the Sector. The coverage view will consist of one of the following designations: Attractive, Neutral, Cautious.
Other ratings/identifiers
NR = Not Rated. The investment rating and target price, if any, have been suspended temporarily. Such suspension is in compliance with applicable regulation(s) and/or Kotak Securities policies in circumstances when Kotak Securities or its affiliates is acting in an advisory capacity in a merger or strategic transaction involving this company and in certain other circumstances.
CS = Coverage Suspended. Kotak Securities has suspended coverage of this company.
NC = Not Covered. Kotak Securities does not cover this company.
RS = Rating Suspended. Kotak Securities Research has suspended the investment rating and price target, if any, for this stock, because there is not a sufficient fundamental basis for determining an investment rating or target. The previous investment rating and price target, if any, are no longer in effect for this stock and should not be relied upon.
NA = Not Available or Not Applicable. The information is not available for display or is not applicable.
NM = Not Meaningful. The information is not meaningful and is therefore excluded.
KOTAK INSTITUTIONAL EQUITIES RESEARCH 50
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