SEPTEMBER 11, 2013

Economy News Equity  Trade deficit declined 23% in August - to $10.91 billion from $14.17 billion % Chg in the same month last year. The gap was narrowed as merchandise 10 Sep 13 1 Day 1 Mth 3 Mths imports fell to $37.05 billion in the month from $37.30 billion in August 2012, even as oil imports rose 18%. (BS) Indian Indices SENSEX Index 19,997 3.8 6.4 4.5  The Centre on Tuesday asked state governments to reduce value added NIFTY Index 5,897 3.8 5.9 1.9 tax (VAT) on aviation turbine fuel to 4%, to support the cash-strapped BANKEX Index 11,584 2.2 3.4 (14.3) airline industry. It also wanted the states to take steps such as reducing BSET Index 8,031 2.2 7.5 30.4 property tax on airports, provision of security, power and water supply BSETCG INDEX 7,852 5.5 4.4 (14.8) and road connectivity, to encourage development of air traffic in tier-II BSEOIL INDEX 8,697 1.5 4.2 3.9 and tier-III cities and remote areas. (BS) CNXMcap Index 6,889 1.8 2.5 (8.9) BSESMCAP INDEX 5,403 1.1 3.2 (7.0)  Car sales rose 15.37% in August, after posting a decline for nine World Indices consecutive months. Two-wheelers sales grew by around 7%. (HBL) Dow Jones 15,191 0.8 (1.5) 0.5 Nasdaq 3,729 0.6 1.9 8.5  Ahead of the festive season, India's carriers have hiked airfares on select FTSE 6,584 0.8 0.0 3.8 routes by another 10-15% during the last weekend, after raising it by at NIKKEI 14,423 1.5 6.5 8.9 least 25 per cent earlier in the week, a move which will only hurt sales HANGSENG 22,977 1.0 5.1 7.4 further, say travel industry officials. (ET) Value traded (Rs cr)  In its fourth consecutive defaults, the crisis - ridden National Spot 10 Sep 13 % Chg - Day Exchange Ltd. On Tuesday announced the disbursal of just Rs 134.5mn to investors, against the total commitment of Rs 1.7Bn. (BS) Cash BSE 2,228 8.4 Cash NSE 15,080 12.2  The Reserve Bank of India has sold a massive $5.9Bn in the spot segment Derivatives 184,420 35.7 of the foreign exchange market in July to stem the fall in the rupee. This was the highest intervention by the RBI since January 2012. (BS) Net inflows (Rs cr) 6 Sep 13 % Chg MTD YTD  Malaysia has cited legal difficulties in acceding to the CBI's request for FII 1,280 16.0 2,262 61,461 more information on one of its business tycoons, T Ananda Krishnan, who Mutual Fund (76) (65.9) (549) (13,545) Indian investigators believe holds the key in the Aircel-Maxis case that involves former Telecom Minister Dayanidhi Maran. (ET) FII open interest (Rs cr) 6 Sep 13 % Chg Corporate News FII Index Futures 12,549 24.8 FII Index Options 64,256 12.7  The Wadias are planning to sell the prime property of Britannia Garden FII Stock Futures 28,747 3.3 estate in Bangalore and a 8.5 acre property in Chennai to raise close to Rs FII Stock Options 1,580 15.7 7Bn. But due to the economic slowdown, the company is unable to find a suitable buyer. (BS) Advances / Declines (BSE) 10 Sep 13 A B T Total % total  Cummins India on Tuesday inaugurated its new high horsepower engine Advances 171 1138 187 1,496 61 plant in the special economic zone (SEZ) at its mega site in Phaltan. This is Declines 29 670 111 810 33 7th facility to open at the mega site which is said to be company's largest Unchanged 3 111 27 141 6 high horsepower manufacturing site in the world. (BS) Commodity % Chg  Wockhardt has inked a settlement of a pending patent litigation with US-based Avanir Pharmaceuticals Inc. The settlement gives Wockhardt the 10 Sep 13 1 Day 1 Mth 3 Mths rights to start selling a generic version of Nuedexta on July30, 2026 or Crude (NYMEX) (US$/BBL) 107.0 (0.4) 1.0 12.2 earlier, under certain circumstances. (BS) Gold (US$/OZ) 1,364.4 (1.5) 4.1 (0.7) Silver (US$/OZ) 23.0 (2.7) 13.3 6.5  The Securities Appellate Tribunal has passed an order in favour of cancer drugmaker Fresenius Kabi Oncology Ltd, that will allow the firm to Debt / forex market delist from the bourses without any conditions. (HBL) 10 Sep 13 1 Day 1 Mth 3 Mths  The Central Bureau of Investigation on Tuesday filed a chargesheet 10 yr G-Sec yield % N/A 9.0 N/A N/A against India Cements Managing Director N Srinivasan in the alleged Re/US$ 64.1 65.2 61.3 58.1 quid pro quo investment case involving jailed Member of Parliament Y S Sensex Jagan Mohan Reddy. (BS) 20,750

19,500

18,250

17,000 Sep-12 Dec-12 Mar-13 Jun-13 Sep-13 Source: ET = Economic Times, BS = Business Standard, FE = Financial Express, BL = Business Line, ToI: Times of India, BSE = Bombay Stock Exchange MORNING INSIGHT September 11, 2013

COMPANY UPDATE ZEE ENTERTAINMENT LTD Ritwik Rai [email protected] RICE S ECOMMENDATION +91 22 6621 6310 P : R .230 R : REDUCE TARGET PRICE: RS.227 FY14E P/E: 26.1X

News-flow in the past month indicates potential for negative earnings surprise, and/or de-rating for the stock. New channel launches, weak rupee (higher sports losses), and TDSAT order on news broadcasters is likely to have a negative impact of near-term earnings. TRAI consultation paper on regulatory changes vis-à-vis the business of content aggregators could result in a long-term negative for Zee Entertainment. Sustainability of high valuation multiples is suspect in the emerging scenario. We cut our price target to Rs 227 (26xFY14 PER), and maintain REDUCE. New launches, likely higher sports losses to cast a shadow on near-term Summary table earnings: Zee Entertainment has been surprising the street with strong growth in (Rs mn) FY13 FY14E FY15E advertising/ subscription revenues, which has led to significant margin improve- Sales 36,996 42,141 47,845 ments, and has, several times in the past quarter, led to strong earnings beat/ earn- Growth (%) 21.7 13.9 13.5 ings expectations. EBITDA 9,543 11,678 13,886 EBITDA margin (%) 25.8 27.7 29.0 Advertising revenues have been stronger than expected, we think, largely on ac- PBT 10,519 12,689 14,814 count of strong ratings of the company's channels in the past few quarters. This (Zee Net profit 7,196 8,415 9,817 channels' ratings improvement) is likely nearing an end, as pointed in our last up- EPS (Rs) 7.5 8.8 10.3 date. Our interactions with the industry suggest a significantly weaker advertising Growth (%) 24.4 16.9 16.7 CEPS (Rs) 8.0 9.3 10.7 environment than suggested by 1QFY14 results. Subscription revenues have been, BV (Rs/share) 40.5 46.4 53.5 for the past few quarters, in line with expectations, and we believe the growth is Dividend / share (Rs) 2.4 2.7 2.9 likely to be in line with expectations set by the management (+15%, y/y). ROE (%) 19.9 20.3 20.6 ROCE (%) 20.1 20.3 20.6 As likelihood of positive revenue surprise reduces, costs are likely to determine the Net cash (debt) 6,282 9,517 13,647 earnings surprises. In this context, launch of new channels in the quarter and rupee NW Capital (Days) 166 166 166 depreciation are likely to play spoilers. The company has launched two new chan- P/E (x) 30.5 26.1 22.4 nels - "&Pictures" and "Zee Anmol". The former is a Hindi movie channel, while P/BV (x) 5.7 5.0 4.3 EV/Sales (x) 5.2 4.5 3.9 the latter shall be a FTA Hindi GEC, whose programming mix shall include old shows EV/EBITDA (x) 20.2 16.3 13.4 of Zee TV, popular shows such as Khana Khazana, and Bollywood entertainment. While the content expenses on the channels are likely to be modest for now, we Source: Company, Kotak Securities - Private Client Research expect the company to incur significant distribution expenses going forward, assum- ing that the company intends for these to gather significant viewership (this links with points made later in the report). We note that these are the most significant launches of the company in so far as we measure significance by addressable audi- ence.

Zee Entertainment - Recent launches

2QFY14 Zee Anmol (Hindi GEC) , &Pictures (Hindi Movies) 3QFY13 ZeeQ (Children/ Learning) 2QFY13 Cinema (Bangla movie), (Arabic GEC) 4QFY12 Ditto TV (OTT platform), Ten Golf (niche sports)

Source: Company Reports

Reduction in sports business losses has been a strong driver of profits for Zee Enter- tainment; and weakening trajectory of losses has held out hopes of a less volatile earnings path for Zee Entertainment. The comfort of investors with ZEEL's earnings may be tested in the coming quarters, as sports losses are likely to escalate over expectations. We note that content expenses of sports properties are denominated in US dollars, and 3QFY14 could be a high expense quarter for Zee Entertainment, on account of India-SA series (assuming the confusion regarding the series and its schedule is resolved).

Kotak Securities Limited has two independent equity research groups: Institutional Equities and Private Client Group. This report has been pre- pared by the Private Client Group. The views and opinions expressed in this document may or may not match or may be contrary with the views, estimates, rating, target price of the Institutional Equities Research Group of Kotak Securities Limited.

Kotak Securities - Private Client Research Please see the disclaimer on the last page For Private Circulation 2 MORNING INSIGHT September 11, 2013

Zee Entertainment - Sports Business EBITDA Losses (Rs mn)

Source: Company Reports

TDSAT's order on exemption of news broadcasters from 10+2 rule could affect entertainment broadcasters negatively Advertising time on television channels, as per a TRAI regulation, must be reduced to twelve minutes per hour. This regulation was expected to come (uniformly, for all broadcasters) into effect on Oct 1, 2013. However, subsequently, News Broadcast- ers' Association had filed a petition to TDSAT. In a recent order, TDSAT has said that news broadcasters, until the next hearing (scheduled on November 11, 2013), shall not be required to comply with the said regulation. It is still unclear whether news broadcasters shall forever be exempt from the regu- lation. It appears from media reports that the primary contention of the news broad- casters is that imposition of such a rule in the absence of digitization would hurt the companies. We believe that arguments that apply to news broadcasters largely ap- ply also no other broadcasters - accordingly, we think that it is unlikely that news broadcasters shall be allowed to carry as much advertising as they wish. From our interactions with news broadcasters, we gather that even the news broadcasters do not expect to be fully exempt from the regulation over advertising time for an ex- tended period. Even so, since the current order does not require news broadcasters to follow any specific time limit on advertising, and assuming other broadcasters shall be following the time limits from Oct 1, 2013, it is likely that news broadcasters shall benefit in the interim period (Oct-mid Nov). We believe this is negative for Zee Entertainment/ other non-news broadcasters. TRAI consultation paper poses (long-term) threat to Zee Entertainment sub- scription revenues: TRAI has floated a consultation paper titled "Distribution of TV channels from Broadcasters to Platform Operators" (August 2013). The consultation paper highlights concerns of MSOs and LCOs with the alleged monopolistic practices of major authorized distribution agencies. It also proposes to amend the regulatory framework with the following: 1. The broadcasters (and not aggregator agencies) shall publish the reference inter- connect order and enter into agreements with various MSOs 2. If a broadcaster appoints a person as its distribution agent, it shall ensure: a. No changes in composition of bouquets formed b. No bundling of bouquets or channels of broadcaster with the bouquets or chan- nels of another broadcaster We note that Mediapro is the distribution agent of Zee Entertainment. Mediapro is a 50:50 JV between Zee Turner and Star India. The JV distributes about 80 channels. It is our belief, backed by comments from the industry as well as the strong perfor- mance of Zee Entertainment's domestic subscription revenues, that the JV has been able to strengthen the bargaining power of Zee Entertainment significantly. We also believe that, given that it is likely that Mediapro shall not be able to bundle the bouquet of Zee Entertainment with Star India shall adversely impact the revenues of Zee Entertainment going forward.

Kotak Securities - Private Client Research Please see the disclaimer on the last page For Private Circulation 3 MORNING INSIGHT September 11, 2013

We have noted in our past updates that given the rising strength of competitors' bouquets (Life OK and SAB TV have strengthened considerably in the past few quar- ters), We think Zee Entertainment is possibly lagging rivals in so far as ramping up its content offerings is concerned.

We recommend REDUCE on It is our belief that Zee Entertainment shall, if the proposals in the consultation paper Zee Entertainment with a are to be followed, be forced into aggressive content investments in the medium- price target of Rs.227 term, or it shall face prospects of weaker share in the subscription revenue market of India. Valuations rich in the face of adverse news flow, potential for upside lim- ited: Zee Entertainment currently trades at 26.1x PER FY14E. We have thus far been assuming strong valuations for Zee Entertainment on account of strong earnings trac- tion in the near-term and lack of near-term negatives. On negative news-flow and rising possibility of cuts in estimates, we cut the target multiple of Zee Entertainment by two turns (26x FY14 PER), and cut our target price to Rs 227 (Rs 247 earlier). We maintain REDUCE.

Kotak Securities - Private Client Research Please see the disclaimer on the last page For Private Circulation 4 MORNING INSIGHT September 11, 2013

Bulk deals Trade details of bulk deals Date Scrip name Name of client Buy/ Quantity Avg. Sell of shares price (Rs)

10-Sep Ankit Metal Tamanna Commotrade Pvt Ltd S 500,000 10.65 10-Sep Ankit Metal Mayank Global Finance Ltd B 500,000 10.65 10-Sep Ankush Finstock Abhishek Dashrathbhai Patel B 33,000 6.48 10-Sep Ankush Finstock Bhavesh K Desai S 31,000 6.49 10-Sep Bajaj Holdings Jamnalal Sons Pvt Ltd B 914,565 817.50 10-Sep Ctil Rakesh Jain B 150,000 5.00 10-Sep Delta Leasing Santosh Kumar B 66,000 40.85 10-Sep Delta Leasing Vaibhav Jain S 66,000 40.85 10-Sep Gemstone Invest Kiran Probuild Pvt Ltd S 440,000 0.56 10-Sep Le Waterina Miatru Agro Marketing Pvt.Ltd S 500,000 1.11 10-Sep Looks Health Affluence Commodities Pvt.Ltd. B 69,600 287.00 10-Sep Looks Health Sohni Dipak Tanna S 73,600 287.00 10-Sep Lords Chloro Srishti Dhir S 2,750,000 14.45 10-Sep Lords Chloro Alok Dhir B 2,750,000 14.45 10-Sep Mahindra Com Klg Securities Ltd S 32,900 66.08 10-Sep Sanguine Media Adamina Traders Pvt Ltd B 2,000,000 0.25 10-Sep Sanguine Media Orange Mist Productions Pvt Ltd S 3,000,000 0.25 10-Sep Stampede Shah Nishith B 120,344 89.77 10-Sep Sungold Cap Parimalsinh Raj S 95,000 3.37 10-Sep Venus Power Syed Sharim Ali S 175,000 1.41

Source: BSE

Gainers & Losers Nifty Gainers & Losers Price (Rs) chg (%) Index points Volume (mn)

Gainers ITC Ltd 336 6.2 33.4 12.1 HDFC 809 6.4 23.4 7.0 Infosys Ltd 3,159 4.3 19.5 2.7 Losers Cairn India 328 (1.2) (0.7) 3.5 Dr. Reddy's Lab 2,266 (0.8) (0.7) 0.4 Indusind Bank 410 (0.9) (0.5) 3.5

Source: Bloomberg

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Fundamental Research Team Dipen Shah Saurabh Agrawal Ruchir Khare Amit Agarwal IT Metals, Mining Capital Goods, Engineering Logistics, Transportation [email protected] [email protected] [email protected] [email protected] +91 22 6621 6301 +91 22 6621 6309 +91 22 6621 6448 +91 22 6621 6222 Sanjeev Zarbade Saday Sinha Ritwik Rai Jayesh Kumar Capital Goods, Engineering Banking, NBFC, Economy FMCG, Media Economy [email protected] [email protected] [email protected] [email protected] +91 22 6621 6305 +91 22 6621 6312 +91 22 6621 6310 +91 22 6652 9172 Teena Virmani Arun Agarwal Sumit Pokharna K. Kathirvelu Construction, Cement Auto & Auto Ancillary Oil and Gas Production [email protected] [email protected] [email protected] [email protected] +91 22 6621 6302 +91 22 6621 6143 +91 22 6621 6313 +91 22 6621 6311

Technical Research Team Shrikant Chouhan Amol Athawale Premshankar Ladha [email protected] [email protected] [email protected] +91 22 6621 6360 +91 20 6620 3350 +91 22 6621 6261

Derivatives Research Team Sahaj Agrawal Rahul Sharma Malay Gandhi Prashanth Lalu [email protected] [email protected] [email protected] [email protected] +91 79 6607 2231 +91 22 6621 6198 +91 22 6621 6350 +91 22 6621 6110

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