INDIA DAILY

August 4, 2014 India 1-Aug 1-day1-mo 3-mo Sensex 25,481 (1.6) (1.9) 13.7

Nifty 7,603 (1.5) (1.9) 13.6

Contents Global/Regional indices Special Reports Dow Jones 16,493 (0.4) (3.4) (0.1) Nasdaq Composite 4,353 (0.4) (3.0) 5.5

Coverage Transfer FTSE 6,679 (0.8) (2.7) (2.1) Lupin: Stellar execution Nikkei 15,466 (0.4) 0.2 7.0 Hang Seng 24,590 0.2 4.4 10.5 Daily Alerts KOSPI 2,075 0.1 3.2 5.9 Results Value traded – India Cash (NSE+BSE) 220 213 240 Grasim Industries: Volumes strong, margins weak Derivatives (NSE) 1,787 955 1,062

Titan Company: Jewelry segment drives beat; rich valuations underpin our Deri. open interest 1,454 1,558 1,231 caution

JSW Steel: Margins improve on lower raw material costs

Union Bank: The initiatives are slowly paying off Forex/money market Tata Global Beverages: Annual report highlights - a weak year, overall Change, basis points 1-Aug 1-day 1-mo 3-mo Karur Vysya Bank: A weak performance but we see progress Rs/US$ 61.2 63 111 85 Godrej Properties: 1QFY15 - strong start to the year 10yr govt bond, % 8.8 - 1 (25) Net investment (US$mn) Company 31-Jul MTD CYTD FIIs (251) - 11,856 DLF: Conference call highlight - lower priced products to be launched in MFs 145 - (556) Gurgaon Top movers Sector Change, % Automobiles: Volume recovery building momentum Best performers 1-Aug 1-day 1-mo 3-mo BHFC IN Equity 723.9 0.0 7.8 78.3 Economy RCAPT IN Equity 578.6 (0.9) (11.8) 65.7 UT IN Equity 25.1 (1.4) (23.7) 57.4 Economy: RBI policy preview - monsoon, budget and liquidity SSLT IN Equity 281.9 (2.9) (7.6) 56.1 AL IN Equity 34.0 (0.6) (6.0) 50.9 Worst performers UNSP IN Equity 2330.5 (1.1) (5.1) (16.0) UBBL IN Equity 711.1 0.8 (0.3) (9.1) CAIR IN Equity 312.8 (0.8) (14.0) (6.6) MMFS IN Equity 241.7 2.7 (11.3) (2.2) ADE IN Equity 420.5 (3.1) (15.7) (0.1)

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

BUY Lupin (LPC)

Pharmaceuticals AUGUST 04, 2014 RE-INITIATING COVERAGE Coverage view: Cautious

Stellar execution. Over the past two years, drugmaker Lupin’s (LPC) US generics Price (`): 1,182 portfolio has evolved from a commodity to a high-margin, resilient portfolio. We expect Target price (`): 1,370 continued growth over FY2015-16 and see 28% EBITDA margin guidance as reflective BSE-30: 25,481 of LPC’s evolving business. LPC is enhancing its efforts for the next wave of filings, particularly nasals (six in FY2015), inhalers (one pMDI filing in CY2015), C-IIs (FY2016 onwards), topicals (FY2016) and LA injectables (FY2017 onwards). With its solid execution record and prudent capital allocation policy, we see continued robust growth prospects, and re-initiate coverage with a BUY rating and target price of `1,370.

Company data and valuation summary Lupin Stock data Forecasts/Valuations 2014 2015E 2016E 52-week range (Rs) (high,low) 1,211-742 EPS (Rs) 40.8 49.4 57.8 Market Cap. (Rs bn) 530.1 EPS growth (%) 39.0 21.0 17.0 Shareholding pattern (%) P/E (X) 29.0 23.9 20.5 Promoters 46.8 Sales (Rs bn) 112.9 133.9 156.4 FIIs 31.9 Net profits (Rs bn) 18.4 22.2 26.0 MFs 5.0 EBITDA (Rs bn) 30.0 35.4 40.9 Price performance (%) 1M 3M 12M EV/EBITDA (X) 17.8 14.8 12.4 Absolute 12.6 19.4 35.2 ROE (%) 30.0 28.0 26.0 Rel. to BSE-30 10.5 3.4 1.0 Div. Yield (%) 3.0 3.6 4.2

Strong 1QFY15 performance

In 1QFY15, Lupin reported 35% yoy revenue growth, backed by strong performances from US generics (up US$82 mn yoy and up US$21 mn qoq), Japan (up 17% yoy), South Africa (up 6% yoy) and India (up 29% yoy) though EU (down 25% yoy) and RoW (up 4% yoy) disappointed. EBITDA margins of 33.1% (32% adjusted for forex) were the highlight of the quarter with the management guidance indicating 26-28% EBITDA margins on a sustained basis.

US generics momentum to continue into FY2016E

US generics was the star performer for LPC following a wave of product launches, particularly Zymaxid (October 2013), Trizivir, Trilipix and Cymbalta (December 2013) and a strong Niaspan launch (March 2014). Niaspan and Cymbalta were the big contributors in 1QFY15. We see Yaz (2QFY15E) and Renvela (October 2014E) launches as meaningful near-term catalysts and see momentum for 18-20 launches in the US in FY2015. LPC is struggling to rebuild the branded division following Antara generic competition in March 2013, and although it is trying to enhance its scale through both internal efforts (one cough/cold liquid formulation to enter Phase III shortly) and smaller in-licensed products, we see the Suprax generic threat as less of a worry following a successful switch from tablets to capsules in 1QFY15.

We re-initiate coverage with a BUY on prudent capital allocation and stellar execution record

We expect growth and margin momentum over FY2015-16, led by US launches and see 27% EBITDA margins as achievable and reflective of LPC’s evolving US portfolio. LPC is gradually evolving its US strategy and is enhancing internal efforts to launch the next wave of technologies, particularly nasals (six filings in FY2015), inhalers (filings from FY2017), C-II products (filings from

FY2016), topicals (ongoing) and LA injectables (filings from FY2017) while prudently allocating capital to biosimilars in the long term. We believe LPC’s capital allocation to these technologies is critical and is expected to plug critical gaps in its US portfolio. At 20.4X FY2016E P/E, the stock looks expensive but we see scope for surprises from the US generics pipeline with US branded launches not included in our forecasts. We re-initiate coverage with a BUY; target price: `1,370.

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

Lupin Pharmaceuticals

Evolving product portfolio helps to drive revenue growth

Over the years, Lupin (LPC) has demonstrated solid product selection, prudent capital allocation and solid execution of commercial launches, resulting in almost doubling US sales from FY2011 to FY2014, and transforming LPC’s US generics portfolio from a commodity basket to a high-margin, resilient portfolio. In FY2014, US generics generated revenue of US$730 mn, up US$212 mn yoy, driven by launches, beginning with Yasmin in 1QFY14 and including Trizivir, Trilipix, Zymaxid, Cymbalta and Niaspan towards the end of the year. 1QFY15 continued the trend with Cymbalta and Niaspan helping to drive US$20 mn qoq growth. While 1QFY15 marked the end of super-normal sales (and profits) in Cymbalta, we expect continued momentum in launches, with Yaz (expected in 2QFY15) and Renvela (expected in October2014) being significant near-term catalysts. The management guidance indicates over 15 more launches in FY2015 (LPC had 20 launches in FY2014).

Exhibit 1: LPC's US portfolio is likely to continue to transition towards high-value products

Mar-11 Mar-12 Mar-13 Mar-14 Mar-15 Mar-16 Mar-17 Mar-18 Branded business 111 139 102 88 97 117 76 58 Limited competition/P-IV's/FTF's 40 32 167 328 386 456 436 446 LPC base business 278 321 399 426 477 533 635 790 Total sales 429 492 668 842 960 1106 1147 1294 growth % 19.0 14.7 35.8 26.1 14.0 15.2 3.7 12.8 Branded as a % of sales 25.9 28.3 15.3 10.5 10.1 10.6 6.6 4.5 Limited competition/P-IV's/FTF's as % of sales 9.3 6.5 25.0 38.9 40.2 41.2 38.0 34.5 Base business as a % of sales 64.8 65.2 59.7 50.6 49.7 48.2 55.4 61.1 Source: Company, Kotak Institutional Equities estimates

Investing in the next wave of technologies

We believe the filings trajectory is the lead indicator in the US generic business, providing visibility of growth. An analysis of LPC’s R&D/filing efforts in the US over the past 12 years presents three distinct phases with increasing focus on complexity and technology barriers versus invalidation-led exclusivity. LPC’s first wave of filings (CY2005-08) was largely in cephalosporins and prils, where it leveraged its global cost competitiveness in APIs for these categories and vertically integrated into formulations. As a natural extension of its API-led strategy, LPC’s next phase of filings consisted largely of P-IVs non-infringing API forms (Geodon, Trizivir) or invalidation challenges. Simultaneously, LPC started filing several non- infringing oral modified release formulations (products like the OC basket, Tricor, Niaspan, Apriso). Since 2012, LPC intensified efforts at more complex dosage forms, initiating filings for ophthalmics while initiating initial R&D work on areas such as nasal sprays, topicals and inhalants. While, progress in topicals has been disappointing (three filings in three years), LPC has now filed 10 ophthalmic products and aims to file a complete basket of six nasal sprays by the end of FY2015. It aims to have its first filings for a pMDI inhaler in CY2016 (most likely targeting ProAir). We believe LPC has missed the first wave of launches for injectable products, though the Nanomi acquisition is expected to help to start filings from FY2016. Meanwhile, we believe LPC is likely to tie up for select products in the topicals and injectables areas to accelerate commercial efforts in these spaces.

KOTAK INSTITUTIONAL EQUITIES RESEARCH 3 Pharmaceuticals Lupin

Exhibit 2: LPC is making strong efforts to enter new technology areas to ensure future growth Generic market size for various dosage forms (US$ mn)

# of players Total (sales Market Regulatory Market 2009 2010 2011 2012 2013 5-yr CAGR players >$100m) concentration hurdles Dosage forms (example) Generics 29,322 32,574 40,843 46,076 53,641 12.8% Low Oral Solids 21,544 23,366 28,659 30,232 36,845 11.3% 196 42 Low Low Tabs, capsules, XR's Injectables 3,165 3,741 4,975 7,229 7,045 17.4% 75 16 Low Medium Vials, bags, PFS Dermatologicals 933 1,058 1,592 2,249 3,084 27.0% 71 6 Medium High Creams, gels, foams Oral liquids 1,194 1,351 1,445 1,520 1,685 7.1% 92 4 Low Low Solutions, drops, syrups Inhalants 634 706 1,230 1,333 1,569 19.9% 19 3 High Very High Aerosols, sprays, powders, solutions Transdermals 1,018 985 1,046 1,111 1,065 0.9% 12 3 High Medium Patches Opthalmics 229 540 631 780 845 29.8% 25 2 Medium Medium Liquids, ointments Nasal 180 180 469 723 661 29.8% 9 2 High High Sprays, aerosols Otics 49 64 86 89 84 11.5% 19 0 High Medium Suspensions, solutions

Source: Company, Kotak Institutional Equities

Mapping future opportunities

Our mapping of LPC’s launches highlights the diversity in its product pipeline with several medium contribution launches set over FY2015-17, even as we expect some of the recent launches, like Trizivir, to be material contributors over the period with no additional competition expected until at least FY2017. We believe recent efforts in ophthalmics are likely to deliver results from FY2017 with FY2015-16 likely to see several litigation-led limited competition launches offering a long-tailed opportunity.

Exhibit 3: LPC has a balanced product pipeline Product launch timeline v. potential matrix

2015E 2016E 2017E ≥2018E >US$1 bn Niaspan Truvada Nexium Seroquel XR Lunesta Lyrica

US$500 mn-1 bn Renvela tabs Ortho Tri-Lo Ranexa Prezista

US$250-500 mn Yaz Coreg CR Elmiron Vagifem Exforge HCT Doryx Pristiq Minastrin fe

US$100-250 mn Vibratabs Apriso Nuvigil Tykerb Fosrenol Moxeza Bepreve Welchol tabs Viread Prevacid ODT Epzicom Oracea Acular LS Vigamox Vimovo

High US$25 mn+ revenues in first 12 months of launch. Medium US$10-25 mn revenues in first 12 months of launch. Low Under US$10 mn revenues in first 12 months of launch.

Source: Company, Kotak Institutional Equities estimates

4 KOTAK INSTITUTIONAL EQUITIES RESEARCH Lupin Pharmaceuticals

Branded division scale-up will not be easy…

Apart from its success with Suprax, which it scaled up from virtually zero sales to ~US$80 mn in FY2014, LPC has struggled to expand its presence in the US brand market, as it has struggled to license new products in the pediatric segment, its focus area. Given the ongoing consolidation and rapidly changing dynamics, we believe the competitive outlook for specialty pharmaceuticals is becoming more challenging. While there is still a high level of unmet need in several indications with relatively smaller sizes, this is offset by several challenges—(1) intensifying generic competition and the rising bar for innovation, (2) increasing therapeutic competition in most areas, (3) consolidation among payors and tightening reimbursement standards. This is resulting in shorter product life cycles, forcing companies to continually in-license or to acquire products, which is also becoming tougher, given deal premiums seen and increasing regulatory hurdles.

Exhibit 4: Assessing Lupin's competitive advantages in the US specialty segment

Reimbursement protocols and Management Successful M&A Transformational products Generic threat detailing Balance sheet Specialty pharma is a much more Building a specialty pharma firm The key to building a successful Given the increasingly aggressive Commercial success of products is Short product lives, reducing peak commercial undertaking than the relies on more than organic efforts specialty pharma is great generic threat on patents, increasingly dependent on payors. sales potential and rising licensing biotech/dev model and alone. Successful M&A is key to products. For example, Cephalon specialty pharma companies need In-depth knowledge of deal premiums mean that specialty management capabilities are a bringing in new products and built its pipeline around its fast- to carefully assess the generic Medicare/Medicaid and pharma needs to be equipped with necessary starting point for rolling out the distribution acting fentanyl drug, Actiq and threat and plan life-cycle commercial insurance rebating and strong balance sheet to acquire success. footprint. Fentora, the follow-on to Actiq management accordingly formulary placing are critical for new products, particularly, in its branded products. early stages. Lupin’s management is well LPC has a commendable track Suprax has been a LPC warded off Suprax generic This is one our concerns with LPC’s Lupin has a strong balance sheet grounded in the US. The addition record in identifying acquisition transformational product for threat through successful use of strategy as Suprax is likely to face to support in-licensing/ product and of Theresa Stevens, will further opportunities, as demonstrated by Lupin, grossing over $100m in CP, however was unable to ward generic competition and despite a company acquisitions. bolster the team Supraxitself. We see recent sales, and contributing ~25% of off the generic threat to Antara. switch to capsules from tablets, acquisitions of Antara and LPC’s group operating profits. While Suprax has seen a switch gaining formulary support might AllerNazeas having mixed potential Unfortunately, we can’t say the from tabs to capsules, we believe be difficult. given low peak sales potential and same about either Antara or generic competition is likely for all early generic comeptition AllerNaze forms (except drops) by FY18

Source: company, Kotak Institutional Equities

…and transformative acquisitions will not come easy, either

We believe LPC will find it difficult to make a sizeable, transformative market-entry transaction in the specialty space globally that is value accretive for shareholders as (1) healthcare is re-rating globally, (2) lack of overseas listing puts it at a disadvantage against bidders that have an option to offer stock, (3) there is a lack of tax inversion benefits, and (4) there is a lack of US specialty distribution costs and hence lack of synergies compared to an established US specialty company.

Exhibit 5: Acquisitions will not be easy

Value Synergies Synergies to be Synergies as a % Transaction Acquirer Target ($ mn) ($ mn) achieved in year of acq. value structure Comments Apr-14 Sun Ranbaxy 4,000 250 4 6% Stock Cumulative $250m synergies at end of Year-3 Feb-14 Forest Aptalis 2,900 125 2 4% Cash and stock Replenish portfolio following patent expiries (Namenda) May-14 Actavis Warner Chilcot 8,500 400 2 5% Stock Cost and tax synergies; excludes revenue synergies Feb-14 Actavis Forest 25,800 1,000 3 4% 70/30 equtiy/debt Expects most of synergies within 12 months Feb-14 Mallinckrodt Cadence 1,324 — — — Cash Completes build-out in pain through addition of Ofirmev Dec-13 Valeant Solta 263 — — — Cash Addition to Valeant's aesthetic portfolio May-13 Valeant B+L 8,700 800 2 9% Stock Expect 20%+ IRR on EV; at least $800 mn annual run-rate cost synergies Sep-12 Valeant Medicis 2,600 225 1 9% Cash Cost synergiest at annual run rate of $225 mn within 6 months Nov-13 Shire Viropharma 4,200 150 2 4% Cash Cost synergies above revenue synergies Jul-13 Perrigo Elan 6,700 150 3 2% Cash $2bn in tax deductions available to Perrigo Jul-13 Watson Actavis 6,700 300 2 4% Stock Synergies exclude tax inversion benefits Jul-11 Teva Cephalon 6,800 500 3 7% Cash Access to Cephalon's specialty portfolio Source: Company, Kotak Institutional Equities

KOTAK INSTITUTIONAL EQUITIES RESEARCH 5 Pharmaceuticals Lupin

Domestic formulations to continue to grow

LPC has been one of the best performing companies among the top-10 Indian companies, growing at a CAGR of 17% over FY2009-14 versus market growth of 14% over CY2009-13. This was partly driven by strong growth in higher value chronic diseases like respiratory, where LPC has emerged as the second largest player in the market within three years of entry and continued growth in its key cardiovascular and anti-infectives segments. LPC is now focused on new launches in its core segments, while expanding in newer therapy areas like ophthalmology and dermatology. About 60% of LPC’s FY2014 growth came from products launched over the past three years, and we expect LPC to continue to outpace the market in terms of product launches. LPC is also focusing on brand building, and has over 15 brands with annual sales of over `250 mn. LPC has expanded its field force to 3,682 representatives who collectively cover ~120,000 physicians in India. Given LPC’s lower base (market share: 2.7%), a higher proportion of sales from chronic therapies and continued rate of new product launches we expect it to continue to outperform market growth, projecting sales growth of 18% CAGR over FY2010-14.

Exhibit 6: Lupin stacks up well in the domestic market

Piramal/ IPM Cipla Ranbaxy GSK Pharma Glenmark Abbott Sun Pharma Cadila Lupin Dr. Reddy’s FY2014 sales 793,779 38,647 30,894 2,921 14,399 52,766 36,983 30,695 22,201 16,814 Market share % 100 4.9 3.9 0.4 1.8 6.6 4.7 3.9 2.8 2.1 % growth 9.9 7.8 3.3 (3.7) 15.5 3.4 18.7 6.1 10.1 14.2 Respiratory Respiratory Anti-infect. Anti-infect. Dermat. Anti-infect. CNS GI CV GI Top 3 therapeutic classes Anti-infect. Anti-infect. CV Dermat. CV Respiratory CV CV Anti-infect CV CV CV Pain mgmt. Vaccines Anti-infect. CV GI Gynaec. Anti-TB Pain Top-3 therapeutic classes Under- Under- Under- Under- Out-perform. Out-perform. Out-perform. Out-perform. Out-perform. performance v. market perform. perform. perform. perform % from chronic & specialty 28% 40% 18% 4% 28% 31% 56% 26% 39% 29% Sales force 7500 5200 3500 2300 7000 4000 4500 4500 3800 Sales force prod. (Rs. Mn) 5.2 5.9 7.1 6.3 7.5 9.2 6.8 4.9 4.4 Sales force prod. (2008) 9.1 6.9 7 3.6 4.4 4.7 5.8 3.2 5.8

Source: Company, Kotak Institutional Equities

Japan—unlikely to see major growth in the wake of I’Rom restructuring

LPC’s Japan sales crossed US$216 mn in FY2014, even as growth slowed substantially (-1% reported growth) due to the yen’s depreciation and the loss of few large contracts for I’Rom, a contract manufacturing/generics company acquired by LPC in 2012. While growth in FY2014 is likely to be restricted to low teens due to the impact of price cuts imposed earlier this year, LPC has been looking to launch several new products in Japan, which is expected to help the division to grow in the mid-teens over the next 3-4 years.

Europe to remain steady

LPC has a smaller presence in Europe (combined ~3% of revenues), namely, Germany, the UK and France. In the UK and France, LPC is concentrating on launching its OC portfolio to build its base, akin to its US entry strategy. Growth slipped in Q1FY14 (-25% yoy) though we expect growth to return to mid-teens in the coming quarter, helped by a low base and product introductions.

South Africa to continue growth momentum

LPC acquired small companies in South Africa, Australia and the Philippines and emerging markets accounted for ~9% of FY2014 revenues with South Africa contributing ~3% of overall revenues. While market growth in South Africa has slowed in the past year due difficult macro-economic conditions, we believe the market offers potential for continued mid-teens growth for LPC, which is now also the number one company in the CV segment in the country.

6 KOTAK INSTITUTIONAL EQUITIES RESEARCH Lupin Pharmaceuticals

We re-initiate coverage with BUY on prudent capital allocation, strong execution record

At its 1QFY15 earnings conference call, the management guidance indicated 28-30% EBITDA margins (26-28% stripping out other income) for its core base business in the coming quarters, which we believe is quite achievable, given the shifts in its US portfolio towards high margin, long-tailed opportunities. LPC trades at 20.4x FY2016 P/E, a 20% discount to Sun, but at a premium to peers like Cipla and Dr Reddy’s, which we believe is warranted given its superior track record in capital allocation and excellent execution record. We value LPC using our standard three-stage DCF model with five-year forecasts, explicitly modeling for exclusive/semi-exclusive product launches, using aggressive fade assumptions for revenue growth and margins in the consolidation and maturity phase. We re-initiate coverage of LPC with a BUY rating and target price of `1,370.

Exhibit 7: One-year forward P/E chart, March fiscal year-ends, Exhibit 8: CY2013 and CY2014 share price performance can be December 2003-December 2013 (X) largely explained by EPS upgrades, 2005-YTD2014 30 P/E expansion/contraction 1-yr forward EPS growth Price change 25 (%) 150

20 125 100 15 75 10 50 25 5 0 0 (25) 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

Jul-04 Jul-05 Jul-06 Jul-07 Jul-08 Jul-09 Jul-10 Jul-11 Jul-12 Jul-13 YTD

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

Exhibit 9: Three-stage DCF assumptions (` mn)

2014 2015E 2016E 2017E 2018E 2019E 2020E 2021E 2022E 2023E 2024E 2025E 2026E 2027E 2028E Terminal Sales 112,866 133,946 156,357 170,292 197,509 228,688 263,196 301,078 342,315 386,816 435,555 488,693 546,359 608,643 675,594 EBIT 27,419 32,115 37,009 39,768 46,974 51,651 58,073 64,861 71,960 79,297 87,982 97,250 107,086 117,468 128,363 Depreciation 2,610 3,323 3,890 4,240 4,590 6,861 7,896 9,032 10,269 11,604 13,067 14,661 16,391 18,259 20,268 Working capital (4,663) (4,109) (5,040) (3,390) (4,829) (7,795) (7,592) (8,334) (8,247) (8,900) (9,748) (10,628) (11,533) (12,457) (13,390) Tax (9,622) (10,613) (12,387) (13,767) (16,228) (17,738) (20,069) (22,559) (25,182) (27,923) (31,143) (34,572) (38,208) (42,042) (46,061) Net capex 6,095 11,633 14,181 17,472 21,047 19,951 23,421 26,091 29,696 32,625 35,468 39,136 43,004 47,074 51,332 FCF 11,381 16,633 19,181 22,472 26,047 26,812 31,317 35,123 39,966 44,229 48,868 54,163 59,805 65,790 72,106 Discount factor — 1.1 1.0 0.9 0.8 0.7 0.6 0.6 0.5 0.5 0.4 0.4 0.3 0.3 0.3 Discounted cash flow — 17,803 18,540 19,613 20,527 19,080 20,123 20,379 20,939 20,924 20,875 20,893 20,830 20,692 20,478 315,714 Revenue growth (%) 17.1 18.7 16.7 8.9 16.5 15.8 15.1 14.4 13.7 13.0 12.6 12.2 11.8 11.4 11.0 Operating margin (%) 24.3 24.0 23.7 23.4 23.8 22.6 22.1 21.5 21.0 20.5 20.2 19.9 19.6 19.3 19.0 Capex/depreciation (%) 202.6 150.5 128.5 117.9 108.9 100.0 100.0 100.0 100.0 100.0 102.5 102.5 102.5 102.5 102.5 Capex/sales (%) 4.7 3.7 3.2 2.9 2.5 3.0 3.0 3.0 3.0 3.0 3.1 3.1 3.1 3.1 3.1 Tax rate (%) 34.0 32.0 32.0 33.0 33.0 33.0 33.0 33.0 33.0 33.0 33.0 33.0 33.0 33.0 33.0 FCF/sales (%) 10.1 12.4 12.3 13.2 13.2 11.7 11.9 11.7 11.7 11.4 11.2 11.1 10.9 10.8 10.7

Source: Company, Kotak Institutional Equities estimates

KOTAK INSTITUTIONAL EQUITIES RESEARCH 7 Pharmaceuticals Lupin

Exhibit 10: Lupin - segment-wise revenues, 2010-16E, March fiscal year-ends, 2010-17E (` mn)

2010 2011 2012 2013 2014 2015E 2016E 2016E 2017E Domestic formulations 13,402 15,509 19,101 23,643 24,796 29,259 35,111 35,111 42,133 Export formulations 25,399 33,001 42,514 59,526 75,077 85,533 102,466 102,466 111,280 US 16,817 20,798 25,303 35,744 48,871 55,203 65,327 65,327 65,253 - Branded 5,933 6,239 6,805 5,167 4,887 5,357 5,995 5,995 3,139 - Generics 10,536 14,559 17,498 30,578 43,984 49,846 59,331 59,331 62,114 Japan 5,339 6,212 8,607 13,040 12,954 14,508 16,685 16,685 19,521 Europe 1,395 1,813 1,976 2,357 3,119 3,119 3,742 3,742 4,491 South Africa 1,328 1,765 2,554 3,210 3,800 4,370 5,463 5,463 6,828 Others 1,848 2,412 3,607 5,175 6,333 8,333 11,249 11,249 15,187 API 7,720 8,589 8,491 9,498 11,178 12,296 13,525 13,525 14,878 Total 47,823 57,664 71,106 93,167 111,551 127,588 151,602 151,602 168,791 % yoy growth Domestic formulations 18 16 23 24 5 18 20 20 20 Export formulations 32 30 29 40 26 14 20 20 9 US 37 24 22 41 37 13 18 18 (0) - Branded 83 5 9 (24) (5) 10 12 12 (48) - Generics 16 38 20 75 44 13 19 19 5 Japan 21 16 39 52 (1) 12 15 15 17 Europe 31 30 9 19 32 — 20 20 20 South Africa 30 33 45 26 18 15 25 25 25 Others 32 31 50 43 22 32 35 35 35 API 811(1)121810101010 Total 26.5 20.6 23.3 31.0 19.7 14.4 18.8 18.8 11.3 % of sales Domestic formulations 27 27 25 22 23 23 23 25 Export formulations 57 60 64 67 67 68 68 66 US 36 36 38 44 43 43 43 39 - Branded 1110644442 - Generics 25 25 33 39 39 39 39 37 Japan 1112141211111112 Europe 33332223 South Africa 34333444 Others 45667779 API 15121010109 9 9

Source: Company, Kotak Institutional Equities estimates

8 KOTAK INSTITUTIONAL EQUITIES RESEARCH Lupin Pharmaceuticals

Exhibit 11: Lupin - profit and loss statement, March fiscal year-ends, 2010-17E (` mn)

2010 2011 2012 2013 2014 2015E 2016E 2017E Net revenues 48,708 58,916 70,829 96,413 112,866 129,088 153,102 170,291 Gross profit 29,014 36,536 44,790 60,933 74,693 83,300 97,260 108,343 Staff costs 5,872 7,677 9,695 12,488 14,646 16,379 17,948 19,845 R&D expenses 3,571 4,834 5,228 7,098 9,294 10,561 13,359 13,810 SG&A expenses 9,737 11,519 15,419 18,647 20,724 22,890 26,091 30,153 EBITDA 9,834 12,506 14,447 22,700 30,029 33,470 39,863 44,535 Depreciation & amortisation 1,239 1,712 2,275 3,322 2,610 3,323 3,890 4,240 EBIT/op. profit (reported) 8,595 10,794 12,172 19,378 27,419 30,147 35,973 40,295 Net interest 385 325 355 411 266 150 (500) (750) Other income 73 89 144 279 1,165 1,200 1,200 1,200 Profit before tax 8,283 10,559 11,961 19,246 28,318 31,197 37,673 42,245 Tax & deferred tax 1,361 1,169 3,086 5,842 9,622 9,983 12,055 13,941 Less: minority interest 112 168 199 262 331 331 331 331 Net income (reported) 6,811 9,221 8,676 13,142 18,365 20,883 25,286 27,973 Net income (adjusted) 6,811 9,221 8,676 13,142 18,365 20,883 25,286 27,973 Shares outstanding 445 445 445 448 450 450 450 450 EPS (reported) 15 21 19 29 41 46 56 62 EPS (adjusted) 15 21 19 29 41 46 56 62

Source: Company, Kotak Institutional Equities estimates

Exhibit 12: Lupin - balance sheet, March fiscal year-ends, 2010-17E (` mn)

2010 2011 2012 2013 2014 2015E 2016E 2017E Balance sheet Intangibles 5,435 8,373 10,924 9,317 10,823 10,823 10,823 10,823 Net block 17,206 18,392 23,103 27,241 29,574 31,251 32,361 33,120 Fixed assets 22,640 26,764 34,028 36,558 40,396 42,073 43,183 43,943 Investments 460 3,601 4,435 4,599 4,459 4,459 4,459 4,459 Cash & equivalents 2,015 4,201 4,025 4,349 9,739 23,592 39,181 58,902 Debtors 11,266 12,556 17,318 21,869 24,641 28,686 31,896 35,477 Inventories 9,715 12,000 17,327 19,489 21,295 26,074 30,248 31,834 Loans and advances 4,759 3,412 4,302 5,723 5,330 5,330 5,330 5,330 Current assets 27,755 32,170 42,972 51,430 61,005 83,682 106,655 131,544 Total assets 50,855 62,536 81,434 92,587 105,859 130,214 154,297 179,945 Creditors 9,649 9,930 13,978 22,699 15,941 20,031 23,897 26,863 Other ST liabilities 2,243 12,271 16,868 7,369 10,354 12,354 10,354 8,354 Current liabilities 11,893 22,201 30,846 30,068 26,296 32,385 34,251 35,217 Secured loans 11,399 2,992 4,330 2,471 1,510 1,010 510 — Other liabilities (incl. deferred) 1,630 2,725 3,313 3,963 4,270 5,268 6,474 7,868 Long term liabilities 13,029 5,716 7,642 6,433 5,780 6,278 6,983 7,868 Equity 25,933 33,326 40,852 52,636 69,985 87,751 109,264 133,061 Total equity and liabilities 50,855 61,244 79,340 89,138 102,060 126,415 150,498 176,146

Source: Company, Kotak Institutional Equities estimates

KOTAK INSTITUTIONAL EQUITIES RESEARCH 9 Pharmaceuticals Lupin

Exhibit 13: Lupin – cash flow, March fiscal year-ends, 2010-17E (` mn)

2010 2011 2012 2013 2014 2015E 2016E 2017E Cash flow PBT 8,357 10,559 11,961 19,246 28,317 31,197 37,673 42,245 Depreciation & amortization 1,239 1,712 2,275 3,322 2,610 3,323 3,890 4,240 Working capital (1,366) (1,596) (5,816) (5,494) (4,663) (2,735) (5,518) (4,202) Tax (1,670) (2,440) (3,139) (5,439) (7,719) (8,985) (10,850) (12,547) CF from operations 6,764 8,574 5,591 12,510 20,039 22,469 24,864 29,405 Capex (6,692) (4,287) (5,099) (5,511) (5,286) (5,000) (5,000) (5,000) FCF 72 4,287 493 6,999 14,753 19,469 21,864 26,405 CF from investing (6,799) (5,196) (7,413) (5,219) (8,585) (5,000) (5,000) (5,000) Dividends paid (1,262) (1,432) (1,652) (1,689) (3,234) (3,117) (3,774) (4,175) Interest paid (379) (332) (377) (423) (278) — — — Change in net debt 2,895 1 3,076 (4,645) (5,298) (500) (500) (510) CF from financing 1,361 (1,625) 1,098 (6,629) (8,571) (3,617) (4,274) (4,684) Inc./dec. in cash and equivalent 1,302 1,753 (723) 663 2,883 13,853 15,590 19,721

Source: Company, Kotak Institutional Equities estimates

Exhibit 14: Lupin - key ratios, March fiscal year-ends, 2010-17E

2010 2011 2012 2013 2014 2015E 2016E 2017E Cost margins (%) Gross profit 59.57 62.01 63.24 63.20 66.18 64.38 63.32 63.32 Employee cost 12 13 14 13 13 12 11 11 R&D 78778899 Other expenses 20 20 22 19 18 18 17 17 EBITDA 20 21 20 24 27 26 26 26 EBIT 18 18 17 20 24 24 24 24 PBT 17 18 17 20 25 25 25 25 Tax rate 16 11 26 30 34 32 32 32 PAT 1416121416171717 yoy growth (%) Sales 27 21 20 36 17 19 17 17 Employee cost 21 31 26 29 17 12 10 10 Other expenses 20 18 34 21 11 14 12 12 EBITDA 39 27 16 57 32 18 15 15 PBT 5238198566242323 Reported PAT 50 50 (8) 72 56 29 24 24 Adjusted PAT 50 50 (8) 72 56 29 24 24 Working capital (no of days) Debtor 93.2 84.0 96.1 94.1 84.8 80.0 75.0 75.0 Inventory 195.7 205.3 257.7 228.1 208.2 205.0 195.0 195.0 Creditor 129.7 112.9 133.6 171.0 101.6 105.0 105.0 105.0 Return ratios (%) RoE 33.9 31.1 23.4 28.1 30.0 28.0 26.0 26.0 RoCE 22.1 27.6 25.1 32.8 36.2 33.7 31.3 31.3

Source: Company, Kotak Institutional Equities estimates

10 KOTAK INSTITUTIONAL EQUITIES RESEARCH Lupin Pharmaceuticals

Exhibit 15: Lupin interim results, March fiscal year-ends (Rs mn)

(% chg.) yoy 1QFY15 1QFY15E 1QFY14 4QFY14 1QFY15E 1QFY14 4QFY14 FY2014 FY2013 (% chg.) Sales 33,408 31,877 24,762 31,205 4.8 34.9 7.1 112,866 96,413 17.1 Gross profit 22,335 21,437 16,014 21,401 4.2 39.5 4.4 74,693 60,933 22.6 Employee expenses 4,103 3,938 3,281 3,896 14,646 12,488 R&D expenses 2,439 2,869 1,956 2,456 (15.0) 24.7 (0.7) 9,294 7,098 30.9 Other expenses 4,644 6,248 4,882 6,280 (25.7) (4.9) (26.1) 20,724 18,647 11.1 EBITDA 11,149 8,383 5,895 8,769 33.0 89.1 27.1 30,029 22,700 Other income 289 50 1,009 52 1,165 279 Interest 26 100 54 122 266 411 Depreciation 1,086 800 624 743 2,610 3,322 Exceptional items — — — — — — Pretax profits 10,326 7,533 6,226 7,957 37.1 65.8 29.8 28,318 19,246 47.1 Tax 4,029 2,260 2,172 2,327 9,622 5,842 Minority interest 49 100 44 100 331 262 Net income - reported 6,248 5,173 4,011 5,530 20.8 55.8 13.0 18,365 13,142 39.7 Net income - adjusted 6,248 5,173 4,011 5,530 20.8 55.8 13.0 18,365 13,142 39.7 Adjusted EPS (Rs) 13.9 11.5 9.0 12.3 20.8 55.0 13.0 40.8 29.4 39.0 Tax rate (%) Segment wise sales Domestic Formulation 7,615 6,778 5,894 5,763 12.3 29.2 32.1 24,796 23,643 4.9 US 16,055 15,063 10,072 14,699 6.6 59.4 9.2 48,871 35,744 Japan 3,415 3,215 2,923 3,218 6.2 16.8 6.1 12,954 13,040 Rest of Europe 690 1,106 922 795 (37.6) (25.1) (13.2) 3,119 2,357 South Africa 869 895 746 1,067 (2.9) 16.5 (18.6) 3,800 3,210 RoW 1,272 1,526 1,221 2,059 (16.7) 4.2 (38.2) 6,333 5,175 22.4 API 2,925 2,793 2,429 2,914 4.7 20.4 0.4 11,178 9,498 17.7 Others — — — — 500 500 0.0 Total 32,841 31,377 24,207 30,515 4.7 35.7 7.6 111,551 93,167 19.7 % margin Raw material 7.3 9.0 7.9 7.9 8.2 7.4 Staff cost 13.9 19.6 19.7 20.1 18.4 19.3 R&D expenses 7.3 9.0 7.9 7.9 8.2 7.4 Other expenditure 13.9 19.6 19.7 20.1 18.4 19.3 EBITDA 33.4 26.3 23.8 28.1 26.6 23.5

Source: Company, Kotak Institutional Equities estimates

KOTAK INSTITUTIONAL EQUITIES RESEARCH 11

ADD Grasim Industries (GRASIM)

Cement AUGUST 04, 2014 RESULT Coverage view: Cautious

Volumes strong, margins weak. Grasim Industries reported weak earnings—margin Price (`): 3,218 contraction was the key feature in the cement and VSF businesses. But improved Target price (`): 3,500 volumes of 16% yoy in the cement business and 11% yoy in the VSF business indicate BSE-30: 25,481 potential improvement in the business environment. Reasonable valuations and benefits of demand-led margin recovery keep us positive on Grasim. We maintain ADD; target price of `3,500.

Company data and valuation summary Grasim Industries Stock data Forecasts/Valuations 2014 2015E 2016E 52-week range (Rs) (high,low)3,789-2,106 EPS (Rs) 214.4 209.2 244.3 Market Cap. (Rs bn) 295.5 EPS growth (%) (21.3) (2.4) 16.8 Shareholding pattern (%) P/E (X) 15.0 15.4 13.2

Promoters 25.5 Sales (Rs bn) 290.0 322.0 361.4 FIIs 22.8 Net profits (Rs bn) 19.7 19.2 22.4 MFs 5.8 EBITDA (Rs bn) 54.9 60.7 74.0 Price performance (%) 1M 3M 12M EV/EBITDA (X) 7.0 6.9 5.4 Absolute (5.7) 23.0 22.2 ROE (%) 9.6 8.7 9.4 Rel. to BSE-30 (5.6) 8.2 (7.4) Div. Yield (%) 1.1 1.1 1.1

Volumes spring a surprise, margins squeezed

Grasim reported net sales of `79.7 bn (16% yoy, -3% qoq), operating profit of `11.5 bn (-9% yoy, -15% qoq) and net income of `4.8 bn (-20% yoy, -15% qoq) against our estimates of `76 bn, `12 bn and `4.9 bn, respectively. Grasim standalone reported revenue of `14.2 bn (24% yoy, -7% qoq) and operating profit of `1.2 bn (-38% yoy, -9% qoq). Cement earnings benefited from a sharp 16% yoy growth in volumes, but EBITDA/ton declined by `180/ton yoy, resulting in a 7% yoy fall in earnings at the cement subsidiary. The VSF business was subdued in the absence of pricing improvement, though 11% yoy growth in volumes helped to ease the pain.

The chemicals division sprang a surprise with all-round improvement—33% yoy growth in volumes, continued improvement in realizations and consequent 84% yoy growth in revenue. We highlight that the volume growth was aided by a ramp-up of recently commissioned capacities.

VSF—margins lowest in a decade, realization pressures may continue

The VSF business continues to face margin pressures, 5% EBIT margin in 1QFY15 being the lowest in the past decade. Rising cost pressures and continued price weakness pose challenges for the segment in the near term. A change in China’s cotton policy will lead to offloading of its reserve inventory and consequent weakness in cotton prices and those of related fibers. Improved volume trajectory on an expanded capacity base, incremental focus on specialty fibers and price stability owing to losses incurred by players at current prices offer hope of recovery in medium-term prospects of the VSF segment.

We maintain ADD with a target price of `3,500

Prospects for the cement subsidiary look upbeat in the short term due to price increases taken through 1QFY15, revival of VSF margins hinges on favorable global demand-supply outlook as VSF capacities in China continue to incur losses at current realizations. We maintain our ADD rating noting attractive valuations (5X FY2015E EBITDA), with target price of `3,500. We factor a holding company discount of 25% (against 30% earlier) for Ultratech cement. We have revised our earnings estimates to factor (1) lower profitability in the cement business, and (2) meaningful margin erosion in the VSF business due to flat realizations and rising input costs.

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

Grasim Industries Cement

Exhibit 1: Lower-than-estimated margins offset the advantage of higher sales Quarterly results of Grasim Industries (consolidated), March fiscal year-ends (Rs mn)

Change (%) 1QFY15 1QFY15E 1QFY14 4QFY14 1QFY15E 1QFY14 4QFY14 FY2015 FY2014 (% Chg.) Net sales 79,763 76,020 68,951 82,459 5 16 (3) 322,041 290,042 11 Total expenditure (68,262) (63,983) (56,246) (68,917) (269,898) (244,096) EBITDA 11,501 12,037 12,705 13,542 (4) (9) (15) 52,143 45,946 13 EBITDA (%) 14.4 15.8 18.4 16.4 16.2 15.8 Other income 3,377 3,143 2,788 3,011 8,604 8,964 Interest (1,265) (1,425) (950) (1,082) (6,666) (4,473) Depreciation (3,578) (3,832) (3,439) (3,892) (15,939) (14,575) Pre-tax profits 10,036 9,923 11,104 11,579 1 (10) (13) 38,141 35,862 6 Tax (3,041) (2,481) (2,589) (2,711) (11,037) (8,376) Minority interest (2,124) (2,502) (2,415) (3,103) (7,893) (7,799) Net income 4,871 4,940 6,100 5,765 (1) (20) (15) 19,211 19,688 (2) Extraordinaries — — — 1,028 - 1,028 Reported net profits 4,871 4,940 6,100 6,793 (1) (20) (28) 19,211 20,715 (7)

Source: Company, Kotak Institutional Equities estimates

Exhibit 2: Higher sales but a steep decline in margins led to lower net income Quarterly results of Grasim Industries (standalone), March fiscal year-ends (Rs mn)

Change (%) 1QFY15 1QFY15E 1QFY14 4QFY14 1QFY15E 1QFY14 4QFY14 FY2015 FY2014 (% chg.) Net sales 14,236 12,525 11,489 15,284 14 24 (7) 61,058 55,386 10 Total expenditure (12,980) (11,567) (9,465) (13,902) (53,177) (47,423) EBITDA 1,257 958 2,024 1,382 31 (38) (9) 7,881 7,963 (1) EBITDA (%) 8.8 7.6 17.6 9.0 12.9 14.4 Other income 703 1,008 959 835 3,697 4,498 Interest (56) (105) (78) (109) (437) (415) Depreciation (529) (636) (484) (635) (2,267) (2,196) Pre-tax profits 1,374 1,225 2,420 1,472 8,873 9,850 Tax (316) (245) (159) (242) (1,516) (962) Net income 1,058 980 2,261 1,230 8 (53) (14) 7,357 8,888 (17) Extraordinaries — — — 72 — 72 Reported net profits 1,058 980 2,261 1,158 7,357 8,815

Source: Company, Kotak Institutional Equities estimates

KOTAK INSTITUTIONAL EQUITIES RESEARCH 13 Cement Grasim Industries

Exhibit 3: Sequential OPM decline in VSF and chemicals businesses but OPMs improved in the cement business Division-wise break-up of Grasim's interim results (consolidated), March fiscal year-ends (Rs mn)

Change (%) Proportion (%) 1QFY15 1QFY14 4QFY14 y-o-y q-o-q 1QFY15 1QFY14 4QFY14 Revenue VSF and Pulp wood 15,586 13,671 17,172 14 (9) 20 20 21 Cement (including Star Cement) 60,323 52,940 63,156 14 (4) 76 77 77 Chemicals 4,135 2,243 3,367 84 23 5 3 4 Others (280) 97 (1,235) (388) (77) (0) 0 (1) Total 79,763 68,951 82,459 16 (3) Other income 3,377 2,788 3,011 21 12 EBITDA EBITDA margin (%) VSF and Pulp wood 810 1,870 1,280 (57) (37) 5 14 7 Cement (including Star Cement) 12,960 12,680 13,890 2 (7) 21 24 22 Chemicals 910 500 550 82 65 22 22 16 Others 198 443 833 (55) (76) Total 14,878 15,493 16,553 (4) (10) 19 22 20 Interest (1265) (950) (1082) 33 17 Depreciation (3578) (3439) (3892) 4 (8) PBT 10,036 11,104 11,579 (10) (13) Tax (3041) (2589) (2711) Minority interest (2124) (2415) (3103) PAT 4,871 6,100 5,765 (20) (15) Sales volumes (tons) Viscose staple fibre 86,389 77,518 99,385 11 (13) Cement (mn tons) 11.7 10.1 12.2 16 (4) Chemicals 96,093 72,028 86,469 33 11 Per unit realization (Rs/ton) Viscose staple fibre 117,000 116,999 111,745 0 5 Cement 5,156 5,252 5,185 (2) (1) Chemicals 39,281 26,187 32,327 50 22

Source: Company, Kotak Institutional Equities estimates

Volumes higher but unchanged realizations rein in profitability

Ultratech reported steady improvement in volumes with 16% yoy growth (9% yoy reported in 4QFY14). But realizations were subdued and profitability was under pressure—down to `860/ton (-17% yoy, -8% qoq). Ultratech reported net sales of `56 bn (14% yoy, -3% qoq), operating profit of `10 bn (-4% yoy, -12% qoq) and net income of `6.2 bn (-7% yoy, -16% qoq) in 1QFY15.

` Volumes. In 1QFY15 domestic volumes improved to 11.8 mn tons (+19% yoy,-3% qoq) on inclusion of sales from the recently acquired Gujarat units of Jaypee Corp. After the acquisitions—an integrated unit at Sewagram and a grinding unit at Wanakbori—the company has cement capacity of 58.8 mtpa in India. We factor volumes of 43.7 mn tons for FY2015 (5% yoy).

` Realizations. Blended realizations fell to `4,792/ton in 1QFY15 (-5% yoy, flat qoq) despite price increases in South India in 1QFY15. We believe the marginal price improvement in the rest of the regions failed to improve realizations as the company operates across India.

14 KOTAK INSTITUTIONAL EQUITIES RESEARCH Grasim Industries Cement

Exhibit 4: 17% yoy drop in profitability as realizations fall by 2% Key performance metrics of Ultratech Cement in 1QFY15

Change (%) 1QFY15 1QFY15E 1QFY14 4QFY14 1QFY15E 1QFY14 4QFY14 Revenues (Rs mn) 56,495 55,402 49,575 58,319 2 14 (3) EBITDA (Rs mn) 10,079 11,260 10,491 11,430 (10) (4) (12) PAT (Rs mn) 6,256 6,826 6,726 7,424 (8) (7) (16) Volumes (mn tons) 11.7 11.0 10.1 12.2 6 16 (4) Realizations (Rs/ton) 4,829 5,028 4,918 4,788 (4) (2) 1 EBITDA/ton (Rs/ton) 861 1,022 1,041 938 (16) (17) (8)

Source: Company, Kotak Institutional Equities

Exhibit 5: VSF EBIT margins in 1QFY15 are at a 10-year low Average realizations and EBIT margins in the VSF business segment of Grasim, March fiscal year-ends, 4QFY07-1QFY15 (Rs/ton, %)

200,000 Average realization (Rs/ton) - LHS EBIT margin (%) - RHS 48

40 160,000

32 120,000 24 80,000 16

40,000 8

0 - 4QFY07 2QFY08 4QFY08 2QFY09 4QFY09 2QFY10 4QFY10 2QFY11 4QFY11 2QFY12 4QFY12 2QFY13 4QFY13 2QFY14 4QFY14

Source: Company, Kotak Institutional Equities

Exhibit 6: Domestic prices were flat but global prices increased marginally Monthly average prices of domestic grey VSF and international VSF, July 2012-June 2014 (Rs/kg, US$/kg)

Grey VSF domestic (Rs/kg) (LHS) VSF international ($/kg) (RHS) 130 2.3

2.2 125 2.1

2.0 120 1.9

1.8 115 1.7

110 1.6 Jul-13 Jul-12 Jan-14 Jan-13 Sep-13 Nov-13 Sep-12 Nov-12 Mar-14 Mar-13 May-14 May-13

Source: Company, Kotak Institutional Equities

KOTAK INSTITUTIONAL EQUITIES RESEARCH 15 Cement Grasim Industries

Chemicals—strong volume and realization growth

The chemicals business reported revenue of `4.1 bn (84% yoy, 23% qoq) and operating profit of `910 mn (82% yoy, 65% qoq). The revenue growth came from strong volume growth (+33% yoy) and improved realizations. We note that volumes continue to benefit from a ramp-up of the recently commissioned capacities in Vilayat.

Exhibit 7: We cut our earnings estimates by 15%/16% for FY2015/2016 Revision in earnings estimates for Grasim Industries (consolidated), March fiscal year-ends, 2015-16E (Rs mn)

Revenues EBITDA Net profit Old New % Chg. Old New % Chg. Old New % Chg. 2015E 308,151 322,041 4.5 66,473 60,747 (8.6) 22,683 19,211 (15.3) 2016E 343,620 361,402 5.2 78,997 73,952 (6.4) 26,947 22,440 (16.7)

Source: Kotak Institutional Equities estimates

Exhibit 8: Our SOTP valuation for Grasim is Rs3,500; Rs816/share attributable to the standalone business SOTP-based valuation of Grasim

Value of standalone entity Methodology VSF 20,843 DCF value implying an EV/EBITDA of 5X on FY2016E Others (Chemicals) 8,540 DCF value implying an EV/EBITDA of 5X on FY2016E Value of key investments 22,520 30% discount to current market price Standalone net debt (26,325) Net Debt in the standalone entity Total 78,227 Value of standalone business (Rs/share) 853 Value of Cement business KIE Target Price of UltraTech (Rs/share) 2,000 Value of 60% holding 246,600 Factoring holding company discount of 25% Value of Cement business (Rs/share) 2,689 Market capitalization 324,827 Sum of the standalone and cement business Number of shares o/s (mn) 91.7 Implied share price (Rs/share) 3,543

Target price (Rs/share) 3,500

Source: Kotak Institutional Equities estimates

16 KOTAK INSTITUTIONAL EQUITIES RESEARCH Grasim Industries Cement

Exhibit 9: Profit model, balance sheet, cash model of Grasim Industries (consolidated), March fiscal year-ends, 2011-17E (Rs mn)

2011 2012 2013 2014E 2015E 2016E 2017E Profit model (Rs mn) Net sales 212,690 249,878 276,397 290,042 322,041 361,402 404,229 EBITDA 46,832 53,184 56,590 45,946 52,143 64,825 78,849 Other income 7,135 10,018 8,841 8,964 8,604 9,127 8,980 Interest (4,056) (3,136) (3,241) (4,473) (6,666) (7,390) (6,337) Depreciation (11,384) (11,544) (12,521) (14,575) (15,939) (19,252) (19,957) Pretax profits 38,528 48,522 49,669 35,862 38,141 47,310 61,535 Minority interest (6,162) (8,840) (9,998) (7,799) (7,893) (10,141) (14,357) Tax (11,084) (13,208) (14,672) (8,376) (11,037) (14,729) (20,519) Net profits 21,282 26,475 25,000 19,688 19,211 22,440 26,659 Extraordinary items 1,508 — 2,044 1,028 — — — Earnings per share (Rs) 232 289 272 214 209 244 290 Balance sheet (Rs mn) Total equity 145,586 170,687 196,565 212,713 228,384 247,284 270,403 Total borrowings 111,341 122,692 157,976 129,348 158,634 153,847 110,961 Currrent liabilities 43,524 52,176 63,088 70,024 78,507 87,777 98,185 Total liabilities and equity 300,451 345,554 417,629 412,085 465,525 488,908 479,549 Cash 2,844 3,252 2,292 24,631 17,975 29,494 8,299 Current assets 55,953 83,232 91,786 79,836 85,722 95,288 105,899 Total fixed assets 157,894 175,138 236,359 224,114 285,354 292,102 295,145 Investments 79,185 78,758 80,108 80,108 80,108 80,108 80,108 Deferred Expenditure 4,575 5,174 7,084 3,397 (3,634) (8,083) (9,903) Total assets 300,450 345,554 417,629 412,085 465,525 488,908 479,549 Free cash flow (Rs mn) Operating cash flow, excl. working capital 41,887 51,296 57,513 54,197 59,496 69,306 63,530 Working capital (8,311) (18,627) 2,358 18,886 2,597 (295) (204) Capital expenditure (24,471) (28,428) (74,092) (2,329) (77,180) (26,000) (23,000) Investments (6,752) (8,441) (7,847) — — — — Free cash flow 2,353 (4,200) (22,069) 70,754 (15,087) 43,011 40,326

Source: Company, Kotak Institutional Equities estimates

KOTAK INSTITUTIONAL EQUITIES RESEARCH 17

REDUCE Titan Company (TTAN)

Consumer Products AUGUST 04, 2014 RESULT Coverage view: Neutral

Jewelry segment drives beat; rich valuations underpin our caution. Titan’s Price (`): 327 1QFY15 came in ahead of our expectations on the back of lower-than-expected volume Target price (`): 310 decline and higher-than-expected studded share in the jewelry business. The company BSE-30: 25,481 officially disclosed that the recently scrapped advance purchase schemes accounted for nearly 30% of its sales. The impact of scrapping these schemes remains difficult to gauge. Rich valuations do not discount this uncertainty. We retain REDUCE rating with an unchanged target price of `310 (implied PE of 29X FY2016E EPS).

Company data and valuation summary Titan Company Stock data Forecasts/Valuations 2014 2015E 2016E 52-week range (Rs) (high,low)363-202 EPS (Rs) 8.4 9.7 10.7 Market Cap. (Rs bn) 290.0 EPS growth (%) 3.1 15.4 9.7 Shareholding pattern (%) P/E (X) 38.8 33.6 30.6 Promoters 53.1 Sales (Rs bn) 109.3 120.0 130.8 FIIs 21.7 Net profits (Rs bn) 7.5 8.6 9.5 MFs 1.6 EBITDA (Rs bn) 10.4 12.9 14.6 Price performance (%) 1M 3M 12M EV/EBITDA (X) 27.7 22.7 19.6 Absolute (8.2) 28.2 25.9 ROE (%) 33.3 30.7 28.1 Rel. to BSE-30 (8.1) 12.8 (4.5) Div. Yield (%) 0.6 0.8 1.2

1QFY15 earnings ahead of expectations

Titan reported net sales of `28.9 bn for 1QFY15, down 7% yoy but 10% ahead of our expectations. Reported EBITDA of `2.74 bn (+12% yoy) and adjusted PAT of `1.92 bn (+5% yoy) were 7% and 9% ahead of our estimates, respectively. The estimate beat was led by better-than- expected revenues in the jewelry segment (`23.3 bn versus our forecast of `20.4 bn) even as results for other segments, including watches, came in below expectations. The jewelry segment outperformance was driven by lower-than-expected volume decline (decline of 24% versus our expected 28%) and higher-than-expected studded share (25% versus our expected 22%). We note that Titan had an abnormally solid 1QFY14 (67% volume growth) and to that extent, the scope of forecast error for 1QFY15 was high. We would hence not read too much into the jewelry segment beat. That said, performance in the jewelry segment was solid in absolute terms.

Titan’s reported PAT of `1.77 bn (down 3% yoy) was impacted by two one-offs –

` `150 mn interest provision related to the company scrapping its advance purchase schemes; foreclosure of the schemes grants customers of these schemes two options – to either purchase jewelry worth the deposit (and an additional 75% of monthly deposit) or redeem cash from the

company (with an additional 50% of monthly deposit). Titan has made provisions estimating

the likely interest paid to customers opting for the latter option, and

` `70 mn additional depreciation consequent to changes in the Companies Act. The full-year impact of the change would be `200 mn higher depreciation yoy and FY2015E depreciation

becomes the new base.

Broadly retain estimates; REDUCE rating stays with an unchanged target price of `310

We bake in only modest impact of the closing of advance purchase schemes with an expectation that the company would launch a variant conforming to the Companies Act soon. We must mention that this development makes forecasts on Titan fairly tricky for the next 12-18 months. Our target price implies a PE of 29X FY2016E EPS.

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

Titan Company Consumer Products

Sales impact of scrapping advance purchase schemes tricky to assess

As highlighted in our July 14 note on the company, scrapping of the two advance purchase schemes (Golden Harvest and Swarna Nidhi) has two levels of impact on the company –

` Takes away a source of cash; now, given that the company was not using cash deposits on such schemes for working capital funding, the financial impact of this aspect is limited to the company’s cash balances going down, and

` Takes away a sales driver/ contributor: Titan indicated that purchases made under such schemes contributed nearly 30% of the company’s sales in FY2014. Fairly substantial contribution; however, what is critical is to assess how much of such sales would not have happened in the absence of such schemes and what proportion would have happened, irrespective. In other words, what proportion of such sales was driven by such schemes and what proportion was not? The former is the extent of revenues at risk. We concede that we cannot think of a scientific or even a logical way of estimating the break-up and hence, our sales forecasts reflect our best guesstimates on this aspect, at this point.

We understand from the company that it would look to replace the scrapped schemes with new ones that prevent advances under the new schemes from being treated as deposits. Two conditions need to be met – (1) the implicit return to the customer should not exceed 12%; under the earlier schemes, customer-level IRR was nearly 16%, and (2) advance balance at any point should not exceed 25% of the company’s net worth; here again, it touched as high as 45% under the earlier schemes. As an aside, we do not know if the company decides to lower its dividend payout in order to keep the net-worth-linked headroom for such schemes high.

We note that our jewelry revenue estimates are not too conservative. Our FY2015E jewelry revenue estimate stands at `93.6 bn; this number assumes sales under the advance purchase schemes to be `20 bn (`7 bn estimated for 1Q and `13 bn for 2Q). We note that any alternative scheme launched by the company will take time for deposit build-up and hence will not contribute meaningfully to sales for the next 12-18 months. Coming back to the point, our FY2015E jewelry sales estimate, excluding sales under advance purchase schemes, works out to `74 bn. We forecast FY2016E jewelry sales to be `101 bn against this base, a healthy 37% growth; this forecast implicitly assumes that the company finds means to fill the slack created by the scrapping of advance purchase schemes.

Segmental performance highlights

Jewelry segment – modest quarter despite high base

Titan reported a 10% yoy decline (4% decline excluding coins) in jewelry segment revenues due to high base (47% yoy growth in 1QFY14 on account of strong volume growth due to fall in gold prices). Volumes for the segment declined 24% yoy (grammage) and customer growth was negative 16%. Revenue growth was aided by better mix as studded share improved to 25% (versus 17% in 1QFY14; lower due to gold rush). Segmental EBIT margins improved 150 bps yoy to 9.4% on account of – (1) better mix (higher studded share) and (2) incremental gains from currency forward premiums on international hedging of gold (only reflected for a part of the quarter).

Watches segment – a tad below expectations

Titan reported 10% yoy growth in watches segment revenues to `4.4 bn, 4% below our expectations. Revenue growth was driven purely by volumes (up 9% yoy) as price/mix-led growth dropped to just ~1% yoy (due to weaker mix, in our view). Segmental EBIT margins expanded 130 bps yoy to 11% (down 100 bps qoq). Helios posted strong like on like growth of 20% yoy while World of Titan growth was muted at 2%.

KOTAK INSTITUTIONAL EQUITIES RESEARCH 19 Consumer Products Titan Company

Key takeaways from the earnings call

` Update on jewelry market. Management highlighted that – (1) consumer demand is relatively stable versus earlier quarters, (2) issues with gold supply in the market have improved significantly and premium on gold has come down to just ~1% from ~5-10% in previous quarter and (3) studded jewelry growth has been relatively stronger, indicating modest revival in discretionary spends.

` Update on watches business. Management was upbeat on watches posting ~10% revenue growth in a challenging market environment, especially driven by 9% volume growth. It was particularly satisfied with performance of Helios stores, which posted like on like growth of 20% yoy. However, it is still trying to revive growth (through various activations) in the core Titan brand, which posted a relatively weaker growth reflected in sluggish like on like growth of 2% in World of Titan stores.

` Expansion plans on track. Titan has maintained its expansion target. For FY2015E, Titan has guided for a retail footprint expansion of 30 stores (90,000 sq. ft) under Tanishq, 140 stores (100,000 sq. ft) in watches, including 60 World of Titan and 80 Fastrack stores and 60 eyewear stores. Overall, it is looking to add 300 stores and 350,000 sq. ft of retail footprint. It is planning to spends `2 bn as capex for FY2015E.

` Other takeaways. (1) Titan has commenced exports to Singapore and Dubai with core focus on NRIs – core logic of undertaking exports is both new market development and establishing a route to import gold under the 80-20 scheme (by ramping up exports), (2) tax rate to remain stable at around 1QFY15 levels (26.3%) in FY2015E and (3) debt status – Titan is still cash positive; since redemptions under GHS scheme are essentially under jewelry, it expects cash outflow to be relatively low and will use some portion of remaining cash to unwind debt position.

Exhibit 1: Titan Company - key changes to earnings model, March fiscal year-ends, 2015-16E (Rs mn)

Revised Earlier Change (%) 2015E 2016E 2015E 2016E 2015E 2016E Net revenues 120,011 130,772 113,582 130,183 5.7 0.5 EBITDA 12,888 14,568 12,444 14,602 3.6 (0.2) PAT 8,633 9,471 8,342 9,730 3.5 (2.7) EPS (Rs/share) 9.7 10.7 9.4 11.0 3.5 (2.7) EBITDA margin (%) 10.7 11.1 11.0 11.2 RoCE (%) 33.2 35.9 35.5 40.0 RoE (%) 30.7 28.1 29.8 29.0 Net revenue break-up Jewellery 93,632 100,775 87,171 100,141 7.4 0.6 Watches 20,512 23,014 20,418 22,909 0.5 0.5 Others 5,868 6,983 5,994 7,133 (2.1) (2.1)

Source: Company, Kotak Institutional Equities estimates

20 KOTAK INSTITUTIONAL EQUITIES RESEARCH Titan Company Consumer Products

Exhibit 2: Interim standalone results - Titan Company, March fiscal year-ends (Rs mn)

(% chg.) 1QFY15 1QFY15E 1QFY14 4QFY14 KIE Est yoy qoq FY2014 FY2013 (% chg.) Net sales 28,914 26,349 31,077 28,034 10 (7) 3 109,158 101,127 8 Material cost (21,592) (19,444) (24,212) (20,585) 11 (11) 5 (80,506) (74,959) 7 Gross Profit 7,322 6,905 6,865 7,449 6 7 (2) 28,652 26,167 9 Gross Margin (%) 25.3 26.2 22.1 26.6 -89 bps 323 bps -125 bps 26.2 25.9 37 bps Employee cost (1,462) (1,265) (1,306) (1,308) 16 12 12 (5,345) (4,845) 10 Advertising and promotion (993) (1,028) (1,047) (874) (3) (5) 14 (4,044) (3,771) 7 Other expenditure (2,124) (2,055) (2,063) (2,302) 3 3 (8) (8,778) (7,445) 18 Total expenditure (26,171) (23,791) (28,627) (25,068) 10 (9) 4 (98,674) (91,020) 8 EBITDA 2,744 2,558 2,449 2,966 7 12 (7) 10,484 10,106 4 OPM (%) 9.5 9.7 7.9 10.6 -22 bps 160 bps -109 bps 9.6 10.0 -39 bps Other income 254 280 382 255 (9) (34) (0) 1,202 1,008 19 Interest (200) (200) (170) (227) (0) 17 (12) (871) (506) 72 Depreciation (243) (210) (146) (204) 16 67 19 (656) (545) 20 Pretax profits 2,555 2,428 2,515 2,789 5 2 (8) 10,159 10,063 1 Tax (632) (668) (691) (594) (5) (8) 6 (2,617) (2,811) (7) PAT 1,923 1,760 1,825 2,195 9 5 (12) 7,542 7,252 4 Extraordinary items (150) — — (131) (131) — Net profit (reported) 1,773 1,760 1,825 2,064 1 (3) (14) 7,411 7,252 2 Recurring EPS (Rs) 2.0 2.0 2.1 2.5 1 (3) (19) 8.5 8.2 4 Income tax rate (%) 24.7 27.5 27.5 21.3 -277 bps -272 bps 345 bps 25.8 27.9 -218 bps Costs as a % of sales Material cost 74.7 73.8 77.9 73.4 88 bps -324 bps 124 bps 73.8 74.1 -38 bps Employee cost 5.1 4.8 4.2 4.7 25 bps 85 bps 39 bps 4.9 4.8 10 bps Advertising and promotion 3.4 3.9 3.4 3.1 -47 bps 6 bps 31 bps 3.7 3.7 -3 bps Other expenditure 7.3 7.8 6.6 8.2 -46 bps 70 bps -87 bps 8.0 7.4 67 bps Segmental Results Revenue break-up (incl OI) Jewelry 23,253 20,390 25,866 21,573 14 (10) 8 86,320 81,080 6 Watches 4,400 4,579 3,987 5,018 (4) 10 (12) 17,908 16,759 7 Others 1,278 1,405 1,232 1,462 (9) 4 (13) 4,998 4,140 21 Unallocated 238 255 374 236 1,134 156 629 Total 29,168 26,629 31,459 28,289 10 (7) 3 110,360 102,134 8 EBIT break-up (incl OI) Jewelry 2,178 1,937 2,030 2,294 12 7 (5) 8,535 8,909 (4) Watches 482 572 385 602 (16) 25 (20) 1,889 2,019 (6) Others 5 28 28 31 38 (31) 221 Unallocated 90 90 (243) 90 568 (327) (274) Total 2,754 2,628 2,200 3,017 5 25 (9) 11,030 10,569 4 EBIT margin (%) Jewelry 9.4 9.5 7.8 10.6 -14 bps 151 bps -127 bps 9.9 11.0 -110 bps Watches 11.0 12.5 9.6 12.0 -155 bps 131 bps -105 bps 10.5 12.0 -150 bps Others 0.4 2.0 2.2 2.1 0.8 (0.8) 151 bps Total 9.4 9.9 7.0 10.7 -43 bps 245 bps -123 bps 10.0 10.3 -36 bps

Source: Company, Kotak Institutional Equities

KOTAK INSTITUTIONAL EQUITIES RESEARCH 21 Consumer Products Titan Company

Exhibit 3: Store-wise sales growth and presence

Mar-12 Jun-12 Sep-12 Dec-12 Mar-13 Jun-13 Sep-13 Dec-13 Mar-14 Jun-14 Sales value growth (%) World of Titan 18 14 4 14 4 4 (6) — 12 8 Tanishq 38 11 19 19 17 42 1 (8) 13 (8) Goldplus 36 (1) (2) 6 (3) 36 (20) (25) (14) (21) Helios 490 177 127 85 60 52 35 33 27 23 Fastrack 95 86 71 97 59 46 30 12 11 16 LFS-Watches 34 23 7 20 14 12 7 6 2 2 Titan Eye + 32 20 32 24 46 26 35 14 35 28 Like to Like growth (%) World of Titan 14 9 (1) 11 (2) (1) (11) (5) 8 2 Tanishq 25 3 12 10 8 29 (7) (15) 6 (13) Goldplus 23 (8) (8) 12 — 37 (21) (30) (18) (24) Helios (9) 19 19 18 12 5 (1) 10 5 20 Fastrack 16 12 7 31 15 8 1 (9) — 9 LFS-Watches 19 3 (10) 10 4 (2) (5) 7 1 5 Titan Eye + (1) 1 19 14 40 21 25 2 21 13 No of stores (Total Presence) Zoya 2 2 2 2 2 2 2 2 2 3 Helios 25 25 32 41 46 48 48 50 49 45 World of Titan 332 337 348 354 364 368 367 373 401 406 Fastrack 102 110 122 132 140 139 147 151 150 148 Tanishq 129 132 134 143 146 151 157 160 163 165 Titan Eye 205 209 209 215 224 229 248 270 280 300 Gold Plus 32 32 32 31 31 31 33 33 33 33 Titan One — — — — 73 80 83 83 — — Total exclusive stores 827 847 879 918 1,026 1,048 1,085 1,122 1,078 1,100 Towns 157 160 166 198 205 209 218 222 199 208 Sq ft 1mn+ 1mn+ 1mn+ 1.2mn+ 1.3mn+ 1.3mn+ 1.35mn+ 1.45mn+ 1.45mn+ 1.48mn+ Sevice Centres 728 722 726 731 742 744 748 751 755 760 International Presence Countries 31 31 31 31 32 32 32 31 31 31 No of Outlets 1,700 1,850 2,160 2,160 2,201 2,201 2,201 2,164 2,164 2,164

Source: Company, Kotak Institutional Equities

22 KOTAK INSTITUTIONAL EQUITIES RESEARCH Titan Company Consumer Products

Exhibit 4: Key segment-wise operational metrics

Mar-12 Jun-12 Sep-12 Dec-12 Mar-13 Jun-13 Sep-13 Dec-13 Mar-14 Jun-14 Jewelry business Jewelry revenue growth (%) 29.5 8.7 5.7 26.7 16.3 47.2 4.3 (16.1) 3.1 (10.1) Jewelry volume growth (%) (7.0) (21.0) (13.0) 13.0 9.0 67.0 (4.0) (21.0) (2.0) (24.0) Implied price change (%) 39.3 37.6 21.5 12.1 6.7 (11.8) 8.6 6.2 5.2 18.3

Average gold price (Rs/10 gm) 27,753 29,036 30,398 31,118 29,957 27,238 29,224 30,434 29,862 28,500 Change (%) 35.7 32.4 20.0 12.3 7.9 (6.2) (3.9) (2.2) (0.3) 4.6

Customer growth 4.0 (2.4) 7.0 12.0 12.0 49.0 (3.0) (10.0) 3.0 (16.0) Studded share (%) 32.0 25.0 32.0 22.0 32.0 17.0 37.0 26.0 37.0 25.0 Distribution Tanishq (Incl Zoya) No 131 134 136 145 148 153 159 162 165 168 Towns 79 81 81 83 84 86 89 90 91 92 Sq ft ('000s) 394 421 455 504 528 565 586 616 639 674 GoldPLus No 32 32 32 31 31 31 33 33 33 33 Towns 32 32 32 31 31 31 33 33 33 33 Sq ft ('000s) 67 67 67 72 74 75 81 81 81 81

Watches business Watches revenue growth (%) 24.9 15.2 13.0 10.6 1.5 10.5 (6.2) 6.6 19.5 10.4 Watches volume growth (%) 14.0 (3.0) 4.0 4.0 (10.0) 3.0 (22.0) (10.0) 11.0 9.0 Implied price change (%) 9.6 18.8 8.7 6.3 12.7 7.3 20.2 18.4 7.7 1.2 Distribution World of Titan No 332 337 348 354 364 368 367 373 401 406 Towns 132 133 139 141 142 142 142 144 164 173 Sq ft ('000s) 339 344 355 363 375 379 380 384 401 402 Fastrack No 102 110 122 132 140 139 147 151 150 148 Towns 49 52 57 63 65 68 71 74 77 80 Sq ft ('000s) 49 54 61 69 76 77 83 86 86 86 Helios No 25 25 32 41 46 48 48 50 49 45 Towns 11 11 13 17 19 20 21 22 22 21 Sq ft ('000s) 42 42 50 60 64 66 66 68 66 57

Others Others revenue growth (%) 16.8 15.7 49.4 4.3 40.0 37.4 17.2 18.5 13.5 3.8 Eyewear revenue growth (%) 6.0 32.0 21.0 43.0 34.0 32.0 3.0 17.0 25.0 Distribution No of outlets 205 209 209 215 224 229 248 270 280 300 Towns 69 73 78 82 85 83 91 98 103 108

Source: Company, Kotak Institutional Equities

KOTAK INSTITUTIONAL EQUITIES RESEARCH 23 Consumer Products Titan Company

Exhibit 5: Domestic gold price premium vis-à-vis international gold prices (in Re terms)

Domestic premium (%) - RHS Int gold price (Rs/10gm) Dom gold price (Rs/10gm) 35,000 25

30,000 20 25,000

20,000 15

15,000 10 10,000 5 5,000

- -

1QFY11 2QFY11 3QFY11 4QFY11 1QFY12 2QFY12 3QFY12 4QFY12 1QFY13 2QFY13 3QFY13 4QFY13 1QFY14 2QFY14 3QFY14 4QFY14 1QFY15

Source: Bloomberg, Company, Kotak Institutional Equities

Exhibit 6: International gold price and jewelry volume growth trends

Gold (US$/oz) - RHS Yoy jewelry volume growth (%) - LHS 80 67 2,000

60 1,600 36 40 22 25 1,200 20 11 13 13 9 3 800 - (2) (5) (7) (4) 400 (20) (13) (21) (21) (24) (40) -

1QFY11 2QFY11 3QFY11 4QFY11 1QFY12 2QFY12 3QFY12 4QFY12 1QFY13 2QFY13 3QFY13 4QFY13 1QFY14 2QFY14 3QFY14 4QFY14 1QFY15

Source: Bloomberg, Company, Kotak Institutional Equities

24 KOTAK INSTITUTIONAL EQUITIES RESEARCH Titan Company Consumer Products

Exhibit 7: Titan Company - key assumptions driving our earnings model, March fiscal year-ends, 2011-17E (Rs mn)

2011 2012 2013 2014 2015E 2016E 2017E Jewelry business Net revenues 50,120 69,898 80,324 86,274 93,632 100,775 113,957 Rev growth yoy (%) 39 15 7 9 8 13 EBITDA 4,507 6,393 8,360 8,728 10,768 11,891 13,561 EBITDA growth yoy (%) 42 31 4 23 10 14 EBITDA margin (%) 9.0 9.1 10.4 10.1 11.5 11.8 11.9 Total gold sold (tonnes) 18.3 19.3 19.4 20.9 22.0 22.8 25.2 Change yoy (%) 5 0 8 5 4 10 Average gold price (Rs/gm) 19,223 25,685 30,180 29,033 28,453 29,022 29,602 Change yoy (%) 34 18 (4) (2) 2 2 Studded share (%) 23.0 26.0 27.0 28.0 30.0 32.0 33.0 Total # of stores 154 163 179 198 228 248 268 Revenue/store (Rs '000) 440,998 469,729 457,688 439,586 423,423 441,693 EBITDA/store (Rs '000) 40,333 48,888 46,302 50,552 49,964 52,562 Watches business Net revenues 12,722 15,284 16,774 18,005 20,512 23,014 25,705 Rev growth yoy (%) 20 10 7 14 12 12 EBITDA 2,024 2,266 2,151 2,060 2,461 2,992 3,599 EBITDA growth yoy (%) 12 (5) (4) 19 22 20 EBITDA margin (%) 15.9 14.8 12.8 11.4 12.0 13.0 14.0 Watches sold (mn) 13.6 15.7 15.4 14.4 16.2 17.8 19.5 Change yoy (%) 15 (2) (6) 12 10 10 Others Net revenues 2,437 3,285 4,135 4,995 5,868 6,983 8,170 Rev growth yoy (%) 35 26 21 17 19 17

Source: Company, Kotak Institutional Equities estimates

KOTAK INSTITUTIONAL EQUITIES RESEARCH 25 Consumer Products Titan Company

Exhibit 8: Titan Company: Consolidated profit model, balance sheet, cash model, March fiscal year-ends, 2011-17E (Rs mn)

2011 2012 2013 2014 2015E 2016E 2017E Profit model (Rs mn) Net sales 65,331 88,484 101,233 109,274 120,011 130,772 147,831 EBITDA 6,161 8,354 10,125 10,443 12,888 14,568 16,895 Other income 568 945 1,009 1,202 831 367 633 Interest (345) (437) (506) (871) (1,025) (763) (523) Depreciation (351) (456) (562) (675) (952) (1,110) (1,278) Pretax profits 6,032 8,405 10,065 10,099 11,743 13,061 15,728 Tax (1,668) (2,343) (2,816) (2,620) (3,112) (3,592) (4,482) PAT 4,364 6,062 7,249 7,479 8,631 9,469 11,245 Share of associate earnings (0)(1)42222 PAT after Associates 4,364 6,060 7,254 7,480 8,633 9,471 11,247 Extraordinary items (32) (47) — (131) — — — Net profit (reported) 4,331 6,014 7,254 7,349 8,633 9,471 11,247 Earnings per share (Rs) 4.9 6.8 8.2 8.4 9.7 10.7 12.7 Balance sheet (Rs mn) Total equity 10,356 14,609 19,699 25,227 31,090 36,300 42,221 Total borrowings 100 59 — 8,068 6,000 — — Deferred tax liabilities (net) 21 (35) (78) (88) (88) (88) (88) Total liabilities and equity 10,477 14,633 19,620 33,208 37,002 36,212 42,133 Net fixed assets (Incl CWIP) 2,916 3,879 4,884 6,334 7,422 8,469 9,557 Intangible assets 135 209 173 137 137 137 137 Investments 26242931313131 Cash 11,099 9,671 11,390 8,927 2,844 4,000 9,900 Net current assets (excl cash) (3,699) 850 3,144 17,779 26,566 23,571 22,502 Total assets 10,477 14,633 19,620 33,208 37,000 36,209 42,127 Free cash flow (Rs mn) Operating cash flow (excl working capital) 4,479 6,132 7,256 7,639 9,784 10,983 12,421 Working capital 6,055 (4,537) (1,763) (13,188) (8,787) 2,995 1,069 Capital expenditure (652) (1,463) (1,650) (2,111) (2,040) (2,158) (2,365) Free cash flow 9,881 132 3,844 (7,660) (1,043) 11,821 11,124 Key assumptions, growth, % Net revenue growth 39.7 35.4 14.4 7.9 9.8 9.0 13.0 EBITDA growth 55.6 35.6 21.2 3.1 23.4 13.0 16.0 EPS growth 71.7 38.9 19.7 3.1 15.4 9.7 18.7 EBITDA margin (%) 9.4 9.4 10.0 9.6 10.7 11.1 11.4 Tax rate (% of PBT) 27.7 27.9 28.0 25.9 26.5 27.5 28.5 Segment revenue assumptions, growth, % Jewellery 43.3 39.5 14.9 7.4 8.5 7.6 13.1 Watches 23.7 20.1 9.8 7.3 13.9 12.2 11.7 Others 64.2 32.7 25.2 20.8 17.5 19.0 17.0 Ratios (%) ROE (%) 49.4 48.5 42.3 33.3 30.7 28.1 28.6 ROCE (%) 61.0 60.3 53.7 35.9 33.2 35.9 39.0

Source: Company, Kotak Institutional Equities estimates

26 KOTAK INSTITUTIONAL EQUITIES RESEARCH

BUY JSW Steel (JSTL)

Metals & Mining AUGUST 04, 2014 RESULT Coverage view: Cautious

Margins improve on lower raw material costs. JSW Steel reported consolidated Price (`): 1,169 EBITDA of `26.1 bn (+39% yoy, +3% qoq), 8% ahead of our estimates. The beat was Target price (`): 1,450 led by improvement in margins from lower coking coal costs, cost efficiencies from new BSE-30: 25,481 raw material projects and higher value-added products. Shipments were marginally weak in 1QFY15, but the company maintained guidance and expects improvement in quarterly volumes. We raise our EBIDTA estimate by 1-4% for FY2015-17E. Maintain BUY rating. Valuations are attractive—medium-term volume growth will help further.

Company data and valuation summary JSW Steel Stock data Forecasts/Valuations 2014 2015E 2016E 52-week range (Rs) (high,low)1,327-452 EPS (Rs) 66.2 102.1 137.4 Market Cap. (Rs bn) 282.7 EPS growth (%) 22.0 54.3 34.6 Shareholding pattern (%) P/E (X) 17.7 11.5 8.5 Promoters 38.5 Sales (Rs bn) 512.2 528.6 561.7 FIIs 19.2 Net profits (Rs bn) 16.0 24.7 33.2 MFs 1.2 EBITDA (Rs bn) 91.7 101.3 113.9 Price performance (%) 1M 3M 12M EV/EBITDA (X) 6.8 6.3 5.4 Absolute (7.9) 8.0 111.5 ROE (%) 8.1 10.7 13.0 Rel. to BSE-30 (7.8) (5.0) 60.3 Div. Yield (%) 0.9 0.9 0.9

1QFY15 results: EBITDA beat led by lower raw material costs and higher value-added products

JSW Steel reported consolidated EBITDA of `26.1 bn (+39% yoy, +3% qoq), 8% ahead of our estimates. The EBITDA beat was despite lower steel deliveries of 2.88 mn tons (-7.1% qoq); steel deliveries declined due to lower crude steel production of 3.1 mn tons (-2% qoq) and a desired product restocking. JSTL’s EBITDA/ton increased 6% qoq to `8,545 (+25% yoy) for the standalone entity. Margins improved on the back of lower raw material costs led by (1) US$15/ton qoq decline in coking coal costs from decline in international prices. JSTL expects price drop to further flow through in 2QFY15, (2) cost benefit from commencement of production from the pellet plant and coke oven battery at Dolvi and (3) higher sale of value-added steel products. JSTL value-added sales increased to 29% in 1QFY15 from 25% in 1QFY14. Blended steel realizations were flat qoq. Consolidated net profit increased 36% qoq to `6.6 bn (+58% yoy) on higher EBITDA.

Iron ore update: Karnataka’s current mine production at 18-19 mtpa, SC order can ease situation

While current iron ore availability in Karnataka stands at 18-19 mtpa, procurement from Odisha for Vijaynagar operations has dried up after the Supreme Court ban on a few merchant mines. To counter the temporary shortage, JSTL will import 0.5 mn tons of iron ore per month for Karnataka in FY2015E. However, there is a possibility of some relief if Supreme Court approves the

Karnataka government’s request to increase the production limit of miners. While unconfirmed media reports said the Karnataka government has requested to raise the limit to 40 mtpa from 30 mtpa, JSTL expects such an order can add 7 mtpa of additional iron ore supplies in Karnataka. JSTL expects overall cost impact from imports to be low due to better productivity and lower fuel rate despite higher headline costs. Beside better grades, imported ore has low alumina.

Brand usage fee included in the 1QFY15 costs, expect volumes to improve; maintain BUY JSTL’s 1QFY15 EBITDA beat is after accounting for the brand usage fee of 0.25% on the net turnover. The company has maintained its FY2015E volume guidance of 12.4 mn tons and expects volume to improve for remainder of the year. We make marginal adjustments and raise our EBITDA estimate by 1-4% for FY2015-17E but cut our EPS estimate by 1-7% due to adjustments to higher tax rate. The stock is inexpensive and trades at 5.7X FY2016E EBITDA. Maintain BUY.

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

Metals & Mining JSW Steel

JSTL has three drivers working for it—(1) reasonable volume growth prospects over the next three years led by revival of investment cycle and restocking demand, (2) value-accretive low-cost expansion of capacities through debottlenecking and (3) strong earnings growth prospects—we forecast earnings CAGR of 34% for FY2015-17E.

Changes to our estimates

Exhibit 3 highlights changes to our estimates. We raise our EBITDA estimate by 1-4% for FY2015-17E as we lower our coking coal price assumptions to US$130/ton from US$140/ton. However, we cut our EPS estimate by 1-7% for FY2015-17E to adjust for higher tax rate at the consolidated entity due to continued losses in the international subsidiaries.

Net debt increases to `358 bn due to capex of `17 bn

JSTL’s net debt increased to `358 bn in June 2014 from `340 bn in March 2014. The increase was led by `17 bn of capex spent and reduction in acceptances from US$1.07 bn in March 2014 to US$855 mn. The reduction in acceptances is temporary and management expects acceptances to increase over the next few quarters. JSTL will strive to achieve net debt/EBITDA of <3.5 by FY2015-end. Note that net debt/EBITDA as of June 2014 was 3.62.

We expect JSTL’s net debt at `355 bn/`334 bn in FY2015/16-end. Despite capex spend of `120 bn over the next two years, we expect net debt to remain flat/decline on strong operating cash flows of `65 bn/`70 bn in FY2015/16E. Note that JSTL earned cash profit of `14.5 bn in 1QFY15.

Subsidiaries performance

EBITDA contribution from JSW Steel’s subsidiaries increased to `1.5 bn in 1QFY15 from `323 mn in 4QFY14. The improvement was largely led by US mill turning EBITDA positive from loss in 4QFY14.

` US plate and pipe mill. The utilization at the US plate mill increased to 42% (from 35% in 1QFY14) while pipe mill utilization remained low at 6%. The company produced 103 kt (+10% yoy) of plates and 8.1 kt of pipes (-3% yoy). The US mill earned an EBITDA of US$4.02 mn in 1QFY15 compared to EBITDA loss of US$4 mn in 4QFY14. However, the company reported net loss of US$10.4 mn (US$18.7 mn in 4QFY14).

` Chile iron ore. Due to lower international prices of iron ore, Chilean operations reported EBITDA loss of US$0.35 mn compared to EBITDA profit of US$1.3 mn it earned in 4QFY14. Iron ore shipments were 325 kt (150 kt in 4QFY14).

` JSW Coated. This subsidiary earned an EBITDA of `950 mn (flat qoq) on sales of 0.4 mn tons. The entity earned PAT of `70 mn.

Other points

` JSW Steel exported 768 kt (27% of sales) of steel in 1QFY15 and sold 2,110 kt in the domestic market. As per management, the difference between domestic realization and export realization was only US$10/ton. Exports from the coated division were 214 kt.

` The coking coal cost was US$151/ton during the quarter. We understand this cost includes cost of freight and handling costs. Note that prevailing international contract prices of hard coking coal is US$120/ton on FOB basis (port of origination).

` JSTL has maintained cumulative capex guidance of `120 bn for FY2015/16E. The company will spend `75 bn in FY2015E and `45 bn in FY2016E.

28 KOTAK INSTITUTIONAL EQUITIES RESEARCH JSW Steel Metals & Mining

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

(% chg.) 1QFY15 1QFY15E 1QFY14 4QFY14 1QFY15E 1QFY14 4QFY14 FY2015E FY2014 (%chg) Net sales 130,675 135,405 101,411 140,881 (3.5) 28.9 (7.2) 521,162 504,089 3.4 Operating other income 1,866 2,445 1,295 2,543 (23.7) 44.0 (26.6) 7,464 8,108 Total expenditure (106,424) (113,605) (83,912) (118,138) (6.3) 26.8 (9.9) (427,287) (420,542) 1.6 Inc/(Dec) in stock 5,109 — 11,033 (4,749) — — — — 1,922 Raw materials (79,572) (81,688) (69,554) (80,790) (2.6) 14.4 (1.5) (302,780) (305,158) (0.8) Power & Fuel (9,573) (9,547) (9,510) (9,441) 0.3 0.7 1.4 (39,595) (38,532) 2.8 Staff cost (3,746) (3,243) (3,346) (3,266) 15.5 11.9 14.7 (13,341) (12,982) 2.8 Other expenditure (18,643) (19,127) (12,536) (19,893) (2.5) 48.7 (6.3) (71,572) (65,791) 8.8 EBITDA 26,116 24,245 18,795 25,286 7.7 39.0 3.3 101,338 91,655 10.6 Other income 537 281 191 11 91.0 180.4 NM 1,374 858 60.1 Interest (8,435) (7,740) (7,179) (7,842) 9.0 17.5 7.6 (31,318) (30,479) 2.8 Depreciation (7,954) (8,309) (7,504) (8,239) (4.3) 6.0 (3.5) (33,584) (31,826) 5.5 Pretax profits 10,264 8,477 4,303 9,216 21.1 138.5 11.4 37,810 30,208 25.2 Extraordinaries - - (8,617) - (17,128) Tax (3,828) (4,028) 321 (4,595) (5.0) NM (16.7) (13,743) (9,201) 8.9 Net income 6,437 4,449 (3,992) 4,621 44.7 NM 39.3 24,067 3,880 520.3 Minority interest 92 185 136 172 (50.2) (32.0) (46.2) 469 504 Share of profit from associates 36 35 39 36 2.6 (7.0) - 137 135 PAT after minority interest 6,565 4,669 (3,818) 4,828 40.6 NM 36.0 24,673 4,519 445.9 Adjusted PAT 6,565 4,669 4,157 4,828 40.6 57.9 36.0 24,673 15,995 54.3 Ratios ETR (%) 37.3 47.5 7.5 49.9 36.3 70.3 EPS (Rs) 26.8 19.3 17.2 20.0 102.1 66.2

Source: Company, Kotak Institutional Equities estimates

Exhibit 2: Interim results of JSW Steel (standalone), March fiscal year-ends (Rs mn)

(% chg.) 1QFY15 1QFY15E 1QFY14 4QFY14 1QFY15E 1QFY14 4QFY14 FY2015E FY2014 (%chg) Net sales 113,704 117,894 92,350 122,548 (3.6) 23.1 (7.2) 460,198 445,295 3.3 Other operating income 1,759 2,257 1,231 2,346 (22.1) 42.9 (25.0) 7,036 7,683 Total expenditure (90,853) (96,671) (76,090) (99,931) (6.0) 19.4 (9.1) (371,167) (365,151) 1.6 Inc/(Dec) in stock 3,844 — 8,615 (2,393) ——— — 2,441 Raw materials (68,750) (70,951) (63,542) (71,601) (3.1) 8.2 (4.0) (270,192) (271,903) (0.6) Power & Fuel (8,269) (8,197) (8,420) (7,990) 0.9 (1.8) 3.5 (34,724) (33,536) 3.5 Staff cost (2,361) (2,039) (2,093) (1,971) 15.8 12.8 19.7 (8,396) (7,996) 5.0 Other expenditure (15,318) (15,484) (10,650) (15,976) (1.1) 43.8 (4.1) (57,855) (54,159) 6.8 EBITDA 24,610 23,480 17,491 24,963 4.8 40.7 (1.4) 96,068 87,826 9.4 OPM (%) 21.3 19.5 18.7 20.0 20.6 19.4 Other income 980 781 723 773 25.5 35.6 26.8 2,600 3,311 (21.5) Interest (7,230) (7,040) (6,418) (6,902) 2.7 12.7 4.8 (28,072) (27,401) 2.4 Depreciation (6,634) (7,134) (6,439) (7,064) (7.0) 3.0 (6.1) (29,274) (27,259) 7.4 Profit before tax 11,726 10,087 5,357 11,771 16.2 118.9 (0.4) 41,322 36,476 13.3 Extraordinaries — — 8,529 — (16,923) Tax (3,713) (3,228) 965 (3,752) 15.0 NM (1.1) (13,223) (6,208) 113.0 Net income 8,014 6,859 (2,208) 8,019 16.8 NM (0.1) 28,099 13,345 110.6 Adjusted PAT 8,014 6,859 3,727 8,019 28,099 18,718 50.1 Ratios ETR (%) 31.7 32.0 30.4 31.9 32.0 31.8 EPS (Rs) 32.8 28.4 (9.5) 32.8 116.2 77.4 Per ton analyis (Rs/ton) Realization (blended) 39,481 38,831 36,216 39,532 1.7 9.0 (0.1) 37,114 37,546 (1.1) Other operating income 611 743 483 757 (17.8) 26.5 (19.3) 567 648 (12.4) Raw material consumption 22,537 23,369 21,540 23,869 (3.6) 4.6 (5.6) 21,790 22,926 (5.0) Power & Fuel 2,871 2,700 3,302 2,577 6.3 (13.0) 11.4 2,800 2,828 (1.0) Staff cost 820 672 821 636 22.0 (0.1) 28.9 677 674 0.4 Other expenditure 5,319 5,100 4,176 5,154 4.3 27.4 3.2 4,666 4,566 2.2 EBITDA 8,545 7,734 6,859 8,052 10.5 24.6 6.1 7,748 7,405 4.6 Steel deliveries ('000 tons) 2,880 3,036 2,550 3,100 (5.1) 12.9 (7.1) 12,400 11,860 4.5

Source: Company, Kotak Institutional Equities estimates

KOTAK INSTITUTIONAL EQUITIES RESEARCH 29 Metals & Mining JSW Steel

Exhibit 3: JSW Steel, change in estimates, March fiscal year-ends, 2015-17E (Rs mn)

Revised estimates Old estimates % change 2015E 2016E 2017E 2015E 2016E 2017E 2015E 2016E 2017E Consolidated Net sales 528,625 561,675 595,161 530,804 566,614 598,912 (0.4) (0.9) (0.6) EBITDA 101,338 113,876 120,868 97,489 112,539 117,975 3.9 1.2 2.5 PAT (reported) 24,673 33,222 37,587 24,884 35,851 38,491 (0.8) (7.3) (2.4) PAT (adjusted) 24,673 33,222 37,587 24,884 35,851 38,491 (0.8) (7.3) (2.4) EPS (a) 102.1 137.4 155.5 102.9 148.3 159.2 (0.8) (7.3) (2.4)

Steel volumes (mn tons) 12.4 13.4 14.2 12.4 13.4 14.2 ——— HRC price (US$/ton) 510 510 500 510 510 500 ——— EBITDA/ton (US$/ton) 136 146 144 131 144 141 4.0 1.2 2.5 EBITDA/ton (Rs/ton) 8,090 8,442 8,366 7,780 8,342 8,162 4.0 1.2 2.5 INR: USD 59.5 58.0 58.0 59.5 58.0 58.0 ———

Source: Kotak Institutional Equities estimates

Exhibit 4: JSW Steel, key assumptions, March fiscal year-ends, 2011-17E (Rs mn)

2011 2012 2013 2014 2015E 2016E 2017E Assumptions (US$/ton) Average HRC Price (US$/ton) 649 667 573 526 659 668 653 Average realization (Rs/ton) 37,978 41,103 39,998 38,386 37,682 37,527 37,639 Crude steel capacity ('000 tons) 7,800 11,000 11,000 14,300 14,300 18,000 18,000 Steel deliveries ('000 tons) 6,099 7,815 8,873 11,801 12,400 13,350 14,200 Steel ASP (US$/ ton) 833 858 735 681 679 690 690 Iron ore cost (US$/ ton) 133 115 117 124 135 132 132 Coking coal cost (US$/ ton) 300 304 225 180 159 157 156 Other raw material (US$/ton) 80 135 122 93 91 92 92 Raw material cost (US$/ ton) 513 554 465 396 384 382 380 Conversion cost (US$/ ton) 156 154 140 156 159 163 165 Employee costs 19 17 14 13 13 13 12 Power & fuel 43 45 41 46 47 51 54 Stores 38 36 33 29 29 30 30 Others 56 56 52 69 70 70 69 Total 669 708 604 553 543 545 545 EBITDA/ ton (US$) 165 150 131 128 136 146 144

Source: Kotak Institutional Equities estimates

Exhibit 5: JSW Steel, valuation details, March 2016E basis (Rs mn)

EBITDA Multiple Value Value (Rs bn) (X) (Rs bn) (Rs/share) Consolidated EBITDA 114 6 678 2,803 Net debt* 368 1,521 CWIP 41 168 Arrived market capitalization for JSW 350 1,450 Target price (Rs) 1,450

Notes: (a) Net debt includes acceptances pertaining to higher-than-normal credit period.

Source: Kotak Institutional Equities estimates

30 KOTAK INSTITUTIONAL EQUITIES RESEARCH JSW Steel Metals & Mining

Exhibit 6: JSW Steel (consolidated), profit model, balance sheet and cash flow model, March fiscal year-ends, 2011-17E (Rs mn)

2011 2012 2013 2014 2015E 2016E 2017E Profit model (Rs mn) Net sales 239,002 343,681 382,097 512,196 528,625 561,675 595,161 EBITDA 46,627 61,019 65,039 91,655 101,338 113,876 120,868 Other income 2,840 769 697 858 1,374 2,123 3,780 Interest (9,454) (14,273) (19,675) (30,479) (31,318) (30,133) (28,321) Depreciaiton (15,597) (19,332) (22,375) (31,826) (33,584) (35,616) (39,604) Profit before tax 24,417 28,183 23,687 30,208 37,810 50,251 56,723 Extra-ordinary items — (8,249) (3,694) (17,128) ——— Current tax (3,855) 2,731 (5,151) (4,441) (8,784) (11,222) (12,438) Deferred tax (3,968) (7,732) (6,243) (9,043) (4,959) (6,424) (7,092) Net profit 16,594 14,932 11,541 3,880 24,067 32,605 37,194 Minority interest 239 (189) 343 504 469 479 253 Share of earnings from associates 707 (9,366) (2,253) 135 137 138 140 PAT 17,540 5,377 9,631 4,519 24,673 33,222 37,587 Adjusted PAT 17,540 11,556 12,106 15,995 24,673 33,222 37,587 Earnings per share (Rs) 78.6 51.8 54.3 66.2 102.1 137.4 155.5 Balance sheet (Rs mn) Equity 165,293 167,496 173,437 219,383 240,531 270,229 304,290 Deferred tax liability 20,494 27,250 32,720 21,234 26,193 32,617 39,709 Total Borrowings 164,744 199,091 213,460 347,621 364,643 358,990 352,422 Current liabilities 106,014 143,120 153,539 186,490 194,303 202,334 210,432 Minority interest 2,358 2,177 1,972 1,670 1,201 722 468 Total liabilities 458,903 539,133 575,128 776,399 826,871 864,891 907,321 Net fixed assets 323,183 353,998 393,004 548,838 590,584 600,288 601,004 Goodwill on consolidation 10,932 12,440 13,143 15,619 15,619 15,619 15,619 Investments 29,138 20,896 17,500 6,627 6,764 6,902 7,042 Cash 20,480 30,470 16,534 6,630 9,696 25,107 53,744 Other current assets 75,169 121,330 134,948 198,685 204,209 216,976 229,912 Total assets 458,903 539,133 575,128 776,399 826,871 864,891 907,321 Free cash flow (Rs mn) Operating cash flow excl. working capital 41,439 45,746 52,554 61,130 62,610 74,645 83,890 Working capital changes (13,137) (10,622) 5,888 (35,195) 2,289 (4,736) (4,838) Capital expenditure (52,994) (40,660) (56,180) (57,443) (75,329) (45,321) (40,321) Free cash flow (24,691) (5,536) 2,262 (31,508) (10,430) 24,589 38,731 Ratios Debt/equity (X) 1.0 1.2 1.3 1.6 1.6 1.4 1.2 Net debt/equity (X) 0.9 1.0 1.2 1.6 1.5 1.3 1.0 RoAE (%) 13.8 3.3 5.7 2.4 11.1 13.4 13.4 RoACE (%) 8.3 10.1 8.8 8.3 9.4 10.1 9.9

Source: Company, Kotak Institutional Equities estimates

KOTAK INSTITUTIONAL EQUITIES RESEARCH 31

ADD Union Bank (UNBK)

Banks/Financial Institutions AUGUST 04, 2014 RESULT Coverage view: Neutral

The initiatives are slowly paying off. Union Bank’s recent initiatives to cut back Price (`): 197 exposure to corporate and shift to retail, focus on NIM expansion and stabilize Target price (`): 220 impairment ratios appear to be paying off. Total impaired loans are still high at 7.5% of BSE-30: 25,481 loans but there are signs of improvement as fresh accretions are slowing (declined 150 bps qoq). Capital is the pending issue that needs focus. We like the bank’s strategy and maintain our ADD rating with TP unchanged.

Company data and valuation summary Union Bank Stock data Forecasts/Valuations 2014 2015E 2016E 52-week range (Rs) (high,low)260-97 EPS (Rs) 26.7 40.5 46.1 Market Cap. (Rs bn) 124.0 EPS growth (%) (25.7) 51.6 13.6 QUICK NUMBERS Shareholding pattern (%) P/E (X) 7.4 4.9 4.3 Promoters 60.1 NII (Rs bn) 78.8 94.6 106.6 • NII grew 11% yoy; FIIs 8.5 Net profits (Rs bn) 17.0 25.7 29.1 earnings grew 19% MFs 5.5 BVPS 217.7 242.6 281.0 yoy Price performance (%) 1M 3M 12M P/B (X) 0.9 0.8 0.7 Absolute (16.1) 30.1 55.9 ROE (%) 10.3 14.1 14.2 • Gross NPLs at 4.3%; Rel. to BSE-30 (16.0) 14.5 18.2 Div. Yield (%) 2.0 3.1 3.5 restructured loans at 5% An uneventful quarter with sharp decline in provisions aiding earnings growth • Maintain ADD with Union Bank reported earnings growth of 19% yoy (PBT grew 34% yoy) on the back of 5% growth TP at `220 in revenues and 42% yoy decline in provisions (investment depreciation write-back). NIM improved (unchanged) 5 bps qoq led by marginal decline in funding costs. Operating expenses grew at the slowest pace in the past five quarters—a trend that may continue. Fresh impairment reduced 150 bps yoy with slippages at 2.2% of loans and fresh restructuring at 0.8% yoy. The bank sold loans (19 bps of loans) this quarter, of which 70% were SMA-2 loans (borrower has delayed payment by more than 60 days) and the balance written-off loans.

Growth appears to be high yoy but we see a sharp slowdown by the next quarter

After 11% yoy growth in FY2014, growth of 18% yoy comes as a surprise. However, we are not too negative about it as (1) there is a base impact as growth is off a low base—1QFY14 saw a decline of 4.4% qoq and (2) the incremental growth is still lower at 2.2% for the quarter and ~8% in the past nine months. There would again be a base impact in the next quarter but this would result in loan growth moving to ~10-12%—which we expect to sustain in the short term. Quality of growth is impressive as it is less focused on the corporate segment.

Maintain ADD: risk-reward favors a positive rating despite the bank’s shortcomings

We maintain our ADD rating and value the bank at `220 (unchanged). At our target price, we see the bank trading at 0.8X book and 5X FY2016E EPS for RoEs in the range of 14% and 30% CAGR in earnings, primarily off a low base. We see upsides to our earnings estimates as NIM expansion could be better than expected and high leverage can result in high volatility to earnings. Our valuation draws comfort primarily from the focus of the management on NIM, NPLs and loan growth. The bank has recovered well from the underperformance to its peers post May 2014 but we still see strong upsides from here. Capital is an issue but we don’t see the bank diluting its equity heavily at these multiples.

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

Union Bank Banks/Financial Institutions

A better quarter on the impairment front; fresh impairment at 3% of loans

Fresh delinquencies, which were high at 4.6% of loans in the previous quarter, hit a two- year low with a decline of ~150 bps qoq to 3% of loans. Fresh slippages were at 2.2% of loans while fresh restructurings were 0.8% of loans. A part of the decline appears to be driven by the new regulations that require banks to work with the borrower in the JLF (Joint Lending Forum). Slippages in the agriculture, retail and SME portfolios remain within trend lines while the stress is primarily emerging from the corporate loan portfolio. Gross NPLs increased 20 bps qoq to 4.3% of loans with the gross NPLs in the corporate loan portfolio increasing 30 bps qoq to 4.2%. Provision coverage ratio was stable qoq at 59%. With the strong benefit coming from a write-back in investment depreciation, the bank could have used it to further strengthen its coverage but the need to expand return ratios to improve tier-1 ratio could have resulted in the bank reporting better earnings.

The bank sold loans worth `4.5 bn this quarter, of which >70% of loans were standard but were in SMA-2. The balance loans sold were primarily loans that were written off in earlier years.

From an NPL perspective, the bank is looking to reduce it below FY2014 levels without looking at benefits of selling loans—a tall task but if achieved should provide strong comfort on earnings as credit costs are almost equal to the earnings of the bank.

Exhibit 1: Steady improvement in NPLs in most sub-segments barring corporate loans Break-up of NPLs, March fiscal year-ends, 1QFY14-1QFY15 (%)

Gross NPLs (%) Slippages (%) 1QFY14 2QFY14 3QFY14 4QFY14 1QFY15 1QFY14 2QFY14 3QFY14 4QFY14 1QFY15 Agriculture 7.4 6.9 6.9 6.1 6.1 0.6 0.6 0.6 0.5 0.4 MSE 3.8 5.1 5.1 5.0 5.1 0.6 0.4 0.5 0.5 0.4 Retail 2.6 2.3 2.2 2.0 2.2 0.4 0.3 0.3 0.2 0.4 Corporate/others 3.0 3.1 3.3 3.9 4.2 0.8 1.1 0.5 0.6 0.7 Overall 3.5 3.6 3.9 4.1 4.2 2.8 3.3 2.1 2.1 2.2

Source: Company, Kotak Institutional Equities

Exhibit 2: Loan impairment trends have been volatile Movement of NPLs and restructured loans, March fiscal year-ends, 1QFY13-1QFY15

1QFY13 2QFY13 3QFY13 4QFY13 1QFY14 2QFY14 3QFY14 4QFY14 1QFY15 Movement of NPLs (Rs bn) Opening NPL 54.5 65.4 64.7 63.8 63.1 70.9 80.6 87.8 95.6 Addition of gross NPL 16.3 7.9 6.8 8.8 14.7 16.6 11.5 12.0 12.7 Reductions 5.4 8.6 7.6 9.4 6.9 6.9 4.4 4.1 6.1 Upgradations 4.6 2.4 4.5 8.3 4.4 4.2 2.7 1.9 3.2 Write off 0.8 6.3 3.1 1.1 2.5 2.7 1.7 2.2 2.9 Closing NPL 65.4 64.7 63.8 63.1 70.9 80.6 87.8 95.6 102.3 Slippages (%) 3.6 1.8 1.5 1.8 2.8 3.3 2.1 2.1 2.2 Gross NPLs (%) 3.8 3.7 3.4 3.0 3.5 3.6 3.9 4.1 4.3 Net NPLs 37.5 35.6 31.7 33.5 38.8 46.7 50.5 53.4 57.6 Net NPLs (%) 2.2 2.1 1.7 1.6 2.0 2.2 2.3 2.3 2.5 Movement of restructured loans (Rs bn) Fresh restructuring 16.4 8.4 12.1 14.0 10.7 15.3 10.0 14.4 4.7 Fresh restructuring (%) 3.8 1.9 2.5 2.6 2.1 2.8 1.8 2.4 0.8 Outstanding restructured loans 101.0 102.5 107.0 116.3 132.4 139.5 144.8 154.3 153.3 Outstanding restructured loans (%) 5.8 5.8 5.6 5.5 6.5 6.3 6.4 6.6 6.4 Outstanding restructured loans (net) — 100.1 107.0 116.3 103.4 109.4 110.3 123.5 119.7 Outstanding restructured loans (%) — 5.7 5.6 5.5 5.1 4.9 4.8 5.3 5.0 Net NPL and restr. loans (%) 7.7 7.3 7.1 7.1 7.1 7.1 7.6 7.5 Fresh impairments (%) 7.4 3.7 4.1 4.5 4.9 6.0 3.8 4.6 3.0

Source: Company, Kotak Institutional Equities

KOTAK INSTITUTIONAL EQUITIES RESEARCH 33 Banks/Financial Institutions Union Bank

NIM expansion for the second consecutive quarter; building a bit more hope for further improvement

NIM improved 5 bps qoq led by decline in cost of deposits (5 bps qoq) while lending yields were stable qoq. NIM has expanded for the second consecutive quarter and the management expect further improvement, which we believe is possible. The management highlighted that there is less pressure on the cost of deposits and the bank has been quite careful on lending, especially corporate loans, at base rate as there is limited benefit of these low-margin capital-consuming loans. We like the focus of the management on non-retail that could essentially replace base rate corporate loans of the bank, which should help expand margins from current levels.

Deposits grew 10% yoy. Share of CASA deposits declined by 40 bps qoq to 29% of loans. Savings deposits grew 12% yoy while current account deposits grew 2% yoy.

Other highlights of the quarter

` Non-interest income declined 9% yoy on the back of ~60% yoy decline in treasury income. Core fee income growth declined 4% yoy though the bank reported better performance on loan-related fee income.

` Cost-income ratio was 51% compared to 53% in the previous quarter. Operating expenses that grew 29% yoy in previous quarter slowed to 15% yoy. The management highlighted that they have made full provisions for changes in mortality assumptions in the pension table.

` The bank provided `266 mn for unhedged foreign currency exposure in the current quarter.

Exhibit 3: Union Bank – estimate changes March fiscal year-ends, 2015-17E (` mn)

New estimates Old estimates % change 2015E 2016E 2017E 2015E 2016E 2015E 2016E Net interest income 94,624 106,590 118,975 92,007 103,430 2.8 3.1 NIM (%) 2.6 2.6 2.6 2.5 2.5 Loan growth (%) 11 12 13 11 12 Loan loss provisions 29,020 32,394 36,479 31,438 35,094 (7.7) (7.7) Other income 30,241 33,034 36,183 31,972 34,865 (5.4) (5.3) Fee income 5,051 5,657 6,336 5,024 5,627 0.5 0.5 Treasury income 5,357 6,357 7,357 6,370 7,370 (15.9) (13.7) Operating expenses 60,663 65,586 70,832 61,927 67,020 (2.0) (2.1) Employee expenses 37,871 40,177 42,624 36,455 38,675 3.9 3.9 PBT 36,657 42,218 48,423 31,189 36,755 17.5 14.9 Net profit 25,660 29,130 33,412 21,967 25,888 16.8 12.5 PBT -treasury + NPL provisions 60,320 68,255 77,544 56,257 64,479 7.2 5.9

Source: Company, Kotak Institutional Equities estimates

34 KOTAK INSTITUTIONAL EQUITIES RESEARCH Union Bank Banks/Financial Institutions

Exhibit 4: Union Bank trading at 0.7X one-year forward book Exhibit 5: Union Bank trading at discount to peers One-year forward rolling trading multiples, 2007-14 Union Bank trading premium to public banks, 2007 –14

Rolling PER (X) (LHS) Rolling PBR (X) (RHS) 1.3 12 2.0 1.1 10 1.6

0.9 7 1.2

0.7 5 0.8

0.5 2 0.4

0.3 - - Jul-07 Jul-08 Jul-09 Jul-10 Jul-11 Jul-12 Jul-13 Jul-14 Jul-07 Jul-08 Jul-09 Jul-10 Jul-11 Jul-12 Jul-13 Jul-14

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

Exhibit 6: Loan growth moderated to 4QFY14 Exhibit 7: Asset quality has deteriorated in the last few quarters March fiscal year-ends, 1QFY11-1QFY15 (%) Gross, net NPL and provision coverage ratio, 1QFY12-1QFY15

30 Gross NPL (LHS) Net NPL (LHS) (Rs bn)Prov cov (RHS) (%) 120 60 25 96 48 20 72 36 15 48 24

10 24 12

5 0 -

1QFY12 2QFY12 3QFY12 4QFY12 1QFY13 2QFY13 3QFY13 4QFY13 1QFY14 2QFY14 3QFY14 4QFY14 1QFY15 1QFY12 2QFY12 3QFY12 4QFY12 1QFY13 2QFY13 3QFY13 4QFY13 1QFY14 2QFY14 3QFY14 4QFY14 1QFY15

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

KOTAK INSTITUTIONAL EQUITIES RESEARCH 35 Banks/Financial Institutions Union Bank

Exhibit 8: Union Bank, quarterly performance March fiscal year-ends, 1QFY14-1QFY15 (` mn)

(% chg.) 1QFY15 1QFY15E 1QFY14 4QFY14 1QFY15E 1QFY14 4QFY14 FY2015E FY2014 (% chg.) Interest income 78,562 78,214 68,573 76,707 0.4 14.6 2.4 329,441 293,494 12.2 Loans 58,774 58,436 51,259 57,615 0.6 14.7 2.0 243,370 217,404 11.9 Investments 18,705 18,957 16,343 18,356 (1.3) 14.4 1.9 82,418 72,705 13.4 Others 1,084 822 971 735 31.8 11.6 47.4 3,653 5,171 (29.4) Interest expense 57,390 56,934 49,482 56,185 0.8 16.0 2.1 234,816 214,701 9.4 Net interest income 21,172 21,281 19,091 20,522 (0.5) 10.9 3.2 94,624 78,793 20.1 Non-int.income 6,914 6,749 7,563 7,743 2.4 (8.6) (10.7) 30,241 28,215 7.2 Treasury Income 990 913 2,390 830 8.4 (58.6) 19.3 5,357 4,857 10.3 Non-int income excl treasury 5,924 5,836 5,173 6,913 1.5 14.5 (14.3) 24,884 23,358 6.5 Total income 28,086 28,029 26,654 28,265 0.2 5.4 (0.6) 124,865 107,009 16.7 Op. expenses 14,366 14,723 12,536 15,067 (2.4) 14.6 (4.7) 60,663 54,828 10.6 Employee cost 9,194 8,969 7,899 8,880 2.5 16.4 3.5 37,871 33,078 14.5 Other cost 5,172 5,754 4,637 6,187 (10.1) 11.5 (16.4) 22,793 21,750 4.8 Operating profit 13,719 13,306 14,118 13,198 3.1 (2.8) 4.0 64,202 52,181 23.0 Provisions and cont. 3,928 6,790 6,816 7,988 (42.1) (42.4) (50.8) 27,545 31,511 (12.6) Investment Depreciation (1,380) (125) 690 50 (1,400) 879 (259.4) NPLs 4,330 6,570 5,710 7,300 (34.1) (24.2) (40.7) 29,020 26,697 8.7 Other provisions 708 195 (5) (122) 263.6 (680.5) (75) 3,935 (101.9) PBT 9,791 6,517 7,302 5,210 50.2 34.1 87.9 36,657 20,670 77.3 Tax 3,150 1,927 1,700 (580) 63.5 85.3 (643.1) 10,997 3,708 196.6 Net profit 6,641 4,590 5,602 5,790 44.7 18.5 14.7 25,660 16,962 51.3 Tax rate (%) 32.2 23.3 (11.1) 30 18 PBT-invt gains+ provisions 12,729 12,393 11,728 12,368 2.7 8.5 2.9 58,845 47,324 24.3 Key balance sheet items (Rs bn) Total Deposit 2,974 2,716 2,977 9.5 (0.1) Term deposits 2,108 1,925 2,099 9.6 0.5 CASA (%) 29.1 29.1 29.5 Gross loans 2,394 2,026 2,343 18.1 2.2 Investments 921 913 942 0.9 (2.2) AFS 208 229 221 (8.9) (5.6) Duration (years) 2.6 2.9 3.0 HTM 710 687 720 3.2 (1.4) Duration (years) 4.6 4.7 4.6 Yield management measures (%) Cost of funds 6.7 6.4 6.6 Yield on advances 10.5 10.6 10.5 Yield on investments 9.1 8.9 9.0 Yield of funds 9.1 8.9 9.0 NIM 2.6 2.6 2.6 Capital adequacy details (%) CAR 10.4 11.1 10.8 Tier I 7.0 8.1 7.5 Tier II 3.4 3.0 3.3 Asset quality details Gross NPLs (Rs bn) 102.3 70.9 95.6 44.3 7.0 Gross NPLs (%) 4.3 3.5 4.1 Net NPLs (Rs bn) 57.6 38.8 53.4 48.4 7.9 Net NPLs (%) 2.5 2.0 2.3 Provision coverage ratio (%) 43.7 45.3 44.2 Provision coverage ratio (tech w/o) (%) 58.9 63.4 59.9 Restructured loans (Rs bn) 119.7 103.4 123.5 15.7 (3.1) Restructured loans (%) 5.0 5.1 5.3

Source: Company, Kotak Institutional Equities

36 KOTAK INSTITUTIONAL EQUITIES RESEARCH Union Bank Banks/Financial Institutions

Exhibit 9: Union Bank: growth rates and key ratios March fiscal year-ends, 2012-17E (%)

2012 2013 2014 2015E 2016E 2017E Growth rates (%) Net loan 17.8 17.0 10.1 11.1 12.1 13.1 Customer assets 18.2 17.6 12.3 10.6 11.6 12.6 Investments excld. CPs and debentures 8.5 22.3 13.3 29.2 15.9 12.7 Net fixed and leased assets 1.9 6.1 5.2 13.1 2.4 2.4 Cash and bank balance (22.0) 3.4 42.3 (19.1) 8.7 8.9 Total Asset 11.1 19.0 13.3 11.9 11.9 11.9 Deposits 10.1 18.3 12.9 12.1 12.1 12.1 Current (1.7) 25.2 (5.9) 12.1 12.1 12.1 Savings 12.8 14.0 13.2 12.1 12.1 12.1 Fixed 10.9 18.9 15.2 12.1 12.1 12.1 Net interest income 9.3 11.0 4.5 20.1 12.6 11.6 Loan loss provisions 68.0 (10.3) 32.4 8.7 11.6 12.6 Total other income 20.1 4.2 10.6 7.2 9.2 9.5 Net fee income 0.1 (0.3) 22.8 13.0 12.0 12.0 Net capital gains (5.1) 8.3 1.8 10.3 18.7 15.7 Net exchange gains 13.9 14.6 32.8 5.0 7.5 10.0 Operating expenses 0.9 13.2 21.5 10.6 8.1 8.0 Employee expenses (4.6) 11.1 20.1 14.5 6.1 6.1 Key ratios (%) Yield on average earning assets 8.7 9.0 9.0 9.0 8.8 8.7 Yield on average loans 9.7 9.9 9.9 10.1 9.9 9.7 Yield on average investments 7.7 8.0 8.4 8.0 7.8 7.6 Average cost of funds 6.2 6.6 7.0 6.7 6.6 6.4 Interest on deposits 6.3 6.8 7.1 6.9 6.7 6.6 Difference 2.5 2.4 2.1 2.2 2.2 2.2 Net interest income/earning assets 2.8 2.7 2.4 2.6 2.6 2.6 New provisions/average net loans 1.4 1.0 1.2 1.2 1.2 1.2 Interest income/total income 77.2 78.4 77.1 79.2 80.0 80.5 Other income / total income 26.5 25.3 26.4 24.2 23.7 23.3 Operating expenses/total income 45.3 46.9 53.7 50.8 49.2 47.9 Operating profit /AWF 0.9 0.9 0.5 0.9 0.9 0.9 Tax rate 34.1 29.6 17.9 30.0 31.0 31.0 Dividend payout ratio 24.6 22.1 14.9 14.9 14.9 14.9 Current 22.6 21.8 21.9 21.9 21.9 21.9 Fixed 68.7 69.0 70.5 70.5 70.5 70.5 Savings 22.6 21.8 21.9 21.9 21.9 21.9 Loans-to-deposit ratio 79.8 78.9 77.0 76.3 76.3 77.0 Asset quality (%) Gross NPL 3.0 2.9 4.0 4.0 4.0 3.9 Net NPL 1.7 1.6 2.3 2.4 2.2 1.9 Slippages 2.5 2.2 2.6 2.4 2.3 2.3 Provision coverage (ex write-off) 44.5 46.9 44.2 42.8 48.5 53.7 Dupont analysis (%) Net interest income 2.7 2.6 2.4 2.5 2.5 2.5 Loan loss provisions 0.9 0.7 0.8 0.8 0.8 0.8 Net other income 1.0 0.9 0.9 0.8 0.8 0.8 Operating expenses 1.7 1.7 1.8 1.6 1.6 1.5 Invt. depreciation 0.0 0.1 0.0 (0.0) (0.0) (0.0) (1- tax rate) 65.9 70.4 82.1 70.0 69.0 69.0 ROA 0.7 0.8 0.5 0.7 0.7 0.7 Average assets/average equity 20.6 19.8 20.1 20.5 20.4 20.3 ROE 14.9 15.0 10.3 14.1 14.2 14.5

Source: Company, Kotak Institutional Equities

KOTAK INSTITUTIONAL EQUITIES RESEARCH 37 Banks/Financial Institutions Union Bank

Exhibit 10: Union Bank income statement and balance sheet March fiscal year-ends, 2012-17E (` mn)

2012 2013 2014 2015E 2016E 2017E Income statement Total interest income 210,285 251,247 293,494 329,441 363,256 399,255 Loans 160,266 191,405 217,404 243,370 266,177 293,648 Investments 45,701 56,710 72,705 82,418 93,533 101,772 Cash and deposits 4,317 3,132 3,386 3,653 3,546 3,835 Total interest expense 142,354 175,819 214,701 234,816 256,667 280,281 Deposits from customers 134,058 165,512 198,393 218,391 238,599 260,406 Net interest income 67,931 75,428 78,793 94,624 106,590 118,975 Loan loss provisions 22,479 20,165 26,697 29,020 32,394 36,479 Net interest income (after prov.) 45,452 55,263 52,096 65,604 74,195 82,496 Other income 24,482 25,520 28,215 30,241 33,034 36,183 Net fee income 3,651 3,640 4,470 5,051 5,657 6,336 Net capital gains 4,408 4,773 4,857 5,357 6,357 7,357 Net exchange gains 4,888 5,599 7,436 7,808 8,393 9,233 Operating expenses 39,875 45,122 54,828 60,663 65,586 70,832 Employee expenses 24,793 27,550 33,078 37,871 40,177 42,624 Depreciation on investments 550 1,975 879 (1,400) (500) (500) Other Provisions 2,381 3,045 3,935 (75) (75) (75) Pretax income 27,128 30,642 20,670 36,657 42,218 48,423 Tax provisions 9,256 9,064 3,708 10,997 13,088 15,011 Net Profit 17,871 21,579 16,962 25,660 29,130 33,412 % growth (14.1) 20.7 (21.4) 51.3 13.5 14.7 PBT - Treasury + Provisions 48,130 51,054 47,324 58,845 67,680 76,969 % growth 25.3 6.1 (7.3) 24.3 15.0 13.7 Balance sheet Cash and bank balance 156,751 162,104 230,729 186,747 202,902 220,903 Cash 6,273 7,753 7,847 8,239 8,651 9,083 Balance with RBI 110,062 99,876 176,350 131,976 147,719 165,288 Balance with banks 17,066 13,393 9,271 9,271 9,271 9,271 Net value of investments 623,636 808,305 937,232 1,145,098 1,291,920 1,427,282 Govt. and other securities 504,818 617,645 697,472 905,338 1,052,160 1,187,522 Shares 7,682 9,845 9,754 9,754 9,754 9,754 Debentures and bonds 43,886 62,589 115,655 115,655 115,655 115,655 Net loans and advances 1,778,821 2,081,022 2,291,044 2,545,622 2,853,406 3,226,357 Fixed assets 23,358 24,790 26,085 29,492 30,189 30,907 Other assets 39,549 45,117 52,720 52,720 52,720 52,720 Total assets 2,622,114 3,121,339 3,537,809 3,959,678 4,431,137 4,958,170 Deposits 2,228,689 2,637,616 2,976,756 3,337,874 3,741,447 4,192,356 Borrowings and bills payable 192,036 250,200 306,726 337,399 371,139 408,253 Other liabilities 56,168 61,670 70,683 80,367 91,194 103,295 Total liabilities 2,476,894 2,949,486 3,354,165 3,755,640 4,203,780 4,703,903 Preference shares 1,110 1,110 1,110 1,110 1,110 1,110 Paid-up capital 5,505 5,968 6,303 6,303 6,303 6,303 Reserves & surplus 139,715 165,884 177,341 197,735 221,054 247,963 Total shareholders' equity 145,221 171,852 183,644 204,038 227,357 254,266

Source: Company, Kotak Institutional Equities

38 KOTAK INSTITUTIONAL EQUITIES RESEARCH

REDUCE Tata Global Beverages (TGBL)

Consumer Products AUGUST 04, 2014 RESULT Coverage view: Neutral

Annual report highlights—a weak year, overall. FY2014 was a weak year for Price (`): 154 TGBL—(1) consolidated revenue grew 4.8% yoy despite tailwinds of the rupee Target price (`): 150 depreciation, (2) PAT/EBITDA declined yoy, (3) RoE dipped by 100 bps yoy to 7% and BSE-30: 25,481 (4) working capital deteriorated by 16 days yoy to nearly three months of sales. We cut our EPS estimates by 1-3% on higher input costs and a potential spike in competitive activity for EOC due to Nestlé’s tie-up with Keurig. We retain REDUCE and revise target price to `150 from `138.

Company data and valuation summary Tata Global Beverages Stock data Forecasts/Valuations 2014 2015E 2016E 52-week range (Rs) (high,low)177-131 EPS (Rs) 6.0 6.5 7.5 Market Cap. (Rs bn) 95.4 EPS growth (%) (1.0) 8.0 15.9 Shareholding pattern (%) P/E (X) 25.7 23.8 20.5 Promoters 35.1 Sales (Rs bn) 76.2 80.1 85.0 FIIs 21.6 Net profits (Rs bn) 4.9 5.5 6.4 MFs 2.4 EBITDA (Rs bn) 8.7 9.4 10.7 Price performance (%) 1M 3M 12M EV/EBITDA (X) 11.8 10.7 9.2 Absolute (11.7) 3.2 4.9 ROE (%) 7.0 6.9 7.6 Rel. to BSE-30 (11.6) (9.2) (20.5) Div. Yield (%) 1.4 1.5 1.6

We cut EPS estimates on input cost inflation, potential competition in EOC

We have cut our EPS estimates by 2.4% and 1.3% for FY2015 and FY2016 respectively on 20-40 bps cut in EBITDA margin assumptions due to (1) higher input costs in domestic tea and international coffee prices and (2) higher A&SP in Eight O Clock (EOC) due to a spike in competitive pressure due to Nestlé’s recent tie-up with Keurig to bring Nestle Coffee-mate branded coffee with creamer in K-Cup packs for the Keurig brewing system. We have raised our revenue estimates by 0.7% and 1.6% for FY2015 and FY2016 respectively as we bake in higher realizations in the domestic tea business due to the return of price-led growth on higher domestic tea prices.

FY2014 a weak year—working capital deteriorates; RoE in mid single digits

TGBL had a weak FY2014, posting 4.8% yoy growth in revenue, 2.2% decline in EBITDA and 1% decline in recurring PAT on a consolidated basis. EBITDA margins declined 80 bps yoy to 9.7% despite a 100 bps jump in gross margins (aided by benign tea and coffee prices) impacted by a 120 bps jump in A&SP spends. TGBL’s working capital deteriorated for the fifth consecutive year, inching up by 16 days of sales to 87 days, led by higher inventory (up three days), loans and advances (up seven days) and reduction in payables and current liabilities. RoE fell by 100 bps to

7% on lower net margins and higher working capital. FCF jumped to `2.6 bn and net debt was `7.1 bn. FCF generation and conversion to EBITDA/PAT is highly volatile.

Retain REDUCE with revised target price of `150 based on the SOTP model

While TGBL may report a good quarter or two if A&SP spends ease, we do not see a case for a multi-year robust earnings growth story. In addition, the low RoE profile of the business deserves a mid-teens PE multiple, at best. We ascribe 15X P/E to the company’s core business, add `10/share for its investments in Tata companies (apply 20% holding company discount; we previously did not assign any value to these investments) and add `24/share for potential value accretion from Starbucks JV (based on the DCF model for Starbucks) to arrive at our target price of `150 (`138) for the stock. Reiterate REDUCE.

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

Consumer Products Tata Global Beverages

Exhibit 1: Key changes to consolidated estimates, Tata Global Beverages, March fiscal year-ends, 2015-16E

Revised Earlier Change (%) 2015E 2016E 2015E 2016E 2015E 2016E Revenues (Rs mn) 81,516 86,651 80,950 85,327 0.7 1.6 EBITDA (Rs mn) 8,010 9,023 8,258 9,055 (3.0) (0.3) EBITDA margin (%) 9.8 10.4 10.2 10.6 Net income (Rs mn) 4,097 4,748 4,196 4,809 (2.4) (1.3) EPS (Rs/share) 6.5 7.5 6.6 7.6 (2.4) (1.3)

Source: Company, Kotak Institutional Equities estimates

Exhibit 2: We ascribe value of Rs10/share (based on 20% discount) to TGBL’s investments in related Tata companies

No of shares CMP Market value Book value Company Name ('000) (Rs) (Rs mn) (Rs mn) Tata Chemicals 11,346 400 4,538 546 The Indian Hotels 1,688 94 159 27 Tata Motors 117 575 67 5 Tata Motors - ‘A’ ordinary shares 17 294 5 1 Tata Investment Corp. 160 549 88 24 Tata Steel 12 505 6 2 Titan Co. 9,248 310 2,867 30 Joonktolle Tea & Industries 13 150 2 1 Total (Rs mn) 7,732 634 Fair value at 20% discount 6,185 Fair value (per share) 10

Notes: (a) Tata Chemicals, Tata Motors, Tata Steel and Titan are valued at 20% discount to KIE target price. (b) All other investments are valued at 20% discount to market price.

Source: Company, Kotak Institutional Equities estimates

Domestic business performance—key takeaways

` FY2014 was a strong year for the domestic business, which delivered 15% revenue growth, 19% EBITDA growth and 33% growth in recurring PAT. Growth was led by improved performance of the branded tea operations, aided by price (even as competition held on to prices) and volume increases.

` TGBL maintained its volume and value leadership in the domestic tea market. Growth was broad based across regional (Kanan Devan, Chakra and Gemini) and national brands (Tata Tea Premium, Tata Tea Gold, Tata Tea Agni and Tetley).

` Key initiatives during the year. (1) Tata Tea Gold was restaged with the iconic ‘Power of 49 campaign’ supported by a new TVC, packaging change, trade and visibility activation, on ground and digital activation, (2) green tea was relaunched with brand ambassador Kareena Kapoor, aided by ground-level activation with a significant visibility drive, (3) Chakra Gold was relaunched with a new pack design and modern appeal, driving improved sales and (4) timely trade promotions boosted growth in Kanan Devan and Chakra Gold.

40 KOTAK INSTITUTIONAL EQUITIES RESEARCH Tata Global Beverages Consumer Products

` TGBL has established a large presence in rural India through Gaon Chalo, its innovative last-mile rural distribution model initiated in FY2006 in UP. The (1) is a non-traditional business model that is profitable, (2) generates rural opportunities for youth and (3) provides a platform to further the company’s CSR initiatives. The model has now spread to over 18 states through a NGOs and reaches 70,000 villages.

Exhibit 3: The domestic business performance was strong in FY2014 with broad-based growth across brands TGBL standalone profit model, March fiscal year-ends, 2008-14 (Rs mn)

2008 2009 2010 2011 2012 2013 2014 Net revenues 11,347 13,615 16,979 17,926 19,956 22,778 26,099 Other operating income — — — 185 397 483 731 Net operating revenues 11,347 13,615 16,979 18,111 20,353 23,261 26,830 Cost of materials (6,744) (8,618) (10,793) (11,784) (12,853) (15,079) (17,284) Gross profit 4,603 4,998 6,186 6,328 7,500 8,182 9,545 Employee costs (682) (878) (904) (955) (1,007) (1,201) (1,316) Manufacturing costs (364) (524) (608) (649) (702) (811) (927) A&SP (1,002) (910) (1,276) (1,359) (1,380) (1,631) (2,081) Other SG&A (979) (1,337) (1,660) (1,896) (2,093) (2,155) (2,382) EBITDA 1,576 1,348 1,738 1,469 2,318 2,385 2,839 D&A (102) (106) (123) (124) (120) (164) (164) EBIT 1,474 1,241 1,614 1,345 2,197 2,221 2,676 Interest expense (464) (486) (451) (406) (270) (320) (392) Investment income 1,099 1,454 1,212 1,126 930 1,126 1,845 Other income 187 177 177 4 11 3 4 PBT 2,297 2,387 2,553 2,069 2,868 3,031 4,133 Total tax provision (730) (700) (1,040) (496) (672) (673) (982) PAT before MI and associates 1,567 1,687 1,513 1,573 2,196 2,358 3,151 EO items 1,562 (96) 2,401 233 831 229 1,319 Reported PAT 3,129 1,591 3,915 1,806 3,027 2,586 4,470 Recurring PAT 1,862 1,657 2,017 1,623 2,347 2,358 3,151 FD EPS (Rs/share) - recurring 3.0 2.7 3.3 2.6 3.8 3.8 5.1 Growth (%) Net operating revenues 7.6 20.0 24.7 6.7 12.4 14.3 15.3 EBITDA (13.3) (14.5) 28.9 (15.5) 57.8 2.9 19.1 Recurring PAT (1.9) (11.0) 21.7 (19.5) 44.6 0.5 33.6 Margins (%) Gross margin 40.6 36.7 36.4 34.9 36.9 35.2 35.6 EBITDA margin 13.9 9.9 10.2 8.1 11.4 10.3 10.6 PAT margin 13.8 12.4 8.9 8.7 10.8 10.1 11.7 Cost break-up (% of net operating revenues) Manufacturing and cultivation 1.2 1.8 1.7 1.7 1.5 1.6 1.7 Power& Fuel 1.1 1.2 1.0 1.1 1.2 1.2 1.1 Other manufacturing costs 0.9 0.9 0.9 0.8 0.7 0.7 0.6 A&SP 8.8 6.7 7.5 7.5 6.8 7.0 7.8 Freight 2.3 2.4 2.0 2.4 2.1 1.9 1.8 Misc. 4.3 5.3 5.5 6.6 6.8 5.8 5.5 Other SG&A costs 2.0 2.2 2.2 1.5 1.5 1.6 1.6 Total other costs 20.7 20.4 20.9 21.6 20.5 19.8 20.1 EBITDA margin (%) 13.9 9.9 10.2 8.1 11.4 10.3 10.6

Source: Company, Kotak Institutional Equities

KOTAK INSTITUTIONAL EQUITIES RESEARCH 41 Consumer Products Tata Global Beverages

Tata Coffee business performance—key takeaways

` Tata Coffee’s standalone business posted muted 8.8% revenue growth, 11.5% EBITDA growth and muted 3.2% growth in recurring PAT, led by challenges in the core instant coffee division. The plantations business posted significant growth, largely driven by surge in realizations in pepper and growth in coffee and tea operations was impacted by severe weather conditions.

` Eight O Clock coffee (EOC) posted a 6.6% decline in revenues to `10.26 bn and constant-currency revenue growth was lower by 14% yoy at US$175 mn. We note that while revenue growth partially declined due to steep competitive pressure and discounting by coffee majors in the US, a part of the decline can be attributed to the rising trend of single-serve sales (pods) where EOC books only royalty income compared with its traditional sales formats. EOC achieved market share of 6.2% (volume) in the coffee pods market and volumes in this segment grew 300% yoy to 7.3 mn lbs. In FY2014, TGBL re-launched the EOC brand with new packaging graphics, new blends and a television advertising campaign.

Exhibit 4: FY2014 was challenging for Tata Coffee’s domestic business due to weakness in the instant coffee business Tata Coffee standalone profit model, March fiscal year-ends, 2008-14 (Rs mn)

2008 2009 2010 2011 2012 2013 2014 Net revenues 3,012 3,122 3,275 3,929 4,894 5,740 6,216 Other operating income 61 71 80 78 191 241 293 Net operating revenues 3,073 3,194 3,355 4,007 5,085 5,981 6,509 Cost of materials (1,242) (935) (1,080) (1,358) (1,688) (2,052) (2,128) Gross profit 1,831 2,259 2,275 2,650 3,397 3,929 4,381 Employee costs (629) (796) (847) (923) (1,093) (1,202) (1,382) Other expenses (795) (1,128) (1,118) (1,188) (1,221) (1,348) (1,614) EBITDA 407 336 310 539 1,083 1,379 1,385 D&A (113) (122) (114) (121) (132) (148) (205) EBIT 294 214 196 418 950 1,231 1,180 Interest expense (104) (104) (75) (103) (73) (45) (49) Other income 196 174 379 264 81 222 352 PBT 386 284 500 580 958 1,407 1,482 Provision for taxes (139) (98) (180) (135) (253) (375) (417) PAT 247 186 320 444 705 1,033 1,066 Extraordinary items — — — 107 84 (96) — Reported PAT 247 186 320 551 789 937 1,066 PAT excl EO items 247 186 320 444 705 1,033 1,066 Growth yoy (%) Net operating revenues 15.0 3.9 5.1 19.4 26.9 17.6 8.8 EBITDA 9.2 23.3 0.7 16.5 28.2 15.7 11.5 PAT before EO items 47.5 (24.5) 71.6 38.9 58.6 46.6 3.2 Margins (%) Gross margin 59.6 70.7 67.8 66.1 66.8 65.7 67.3 EBITDA margin 13.3 10.5 9.2 13.5 21.3 23.0 21.3 PAT margin (recurring) 8.0 5.8 9.5 11.1 13.9 17.3 16.4

Source: Company, Kotak Institutional Equities

42 KOTAK INSTITUTIONAL EQUITIES RESEARCH Tata Global Beverages Consumer Products

Exhibit 5: EOC’s constant-currency revenue fell 14% yoy on competitive pressure and a shift to pod sales Eight O Clock profit model, March fiscal year-ends, 2008-14 (Rs mn)

2008 2009 2010 2011 2012 2013 2014 Revenues 6,759 8,020 9,612 9,145 10,405 10,993 10,262 PBT 465 532 1,356 1,188 (42) 929 114 PBT margin (%) 6.9 6.6 14.1 13.0 (0.4) 8.5 1.1 PAT 293 326 769 726 47 669 202 Growth (%) Revenues 40.0 18.7 19.8 (4.9) 13.8 5.7 (6.6) PBT 250.3 14.4 155.0 (12.4) (103.5) NM (87.8) PAT 167.7 11.2 136.0 (5.6) (93.5) NM (69.9) USD P&L Revenues 167 173 199 201 209 203 175 PBT 11.4 11.5 28.1 26.2 (0.8) 17.2 1.9 PAT 7.2 7.0 15.9 16.0 0.9 12.3 3.4 Growth (%) Revenues NM 4.0 14.9 1.2 3.9 (3.0) (14.0) PBT 288.4 0.3 144.6 (6.8) (103.2) NM (88.7) PAT 196.8 (2.5) 126.3 0.4 (94.1) NM (72.2)

Notes: (a) PBT/PAT in FY2014 are not comparable due to EO loss booked on divestment of Rising Beverages.

Source: Company, Kotak Institutional Equities

Other subsidiaries’ business performances—key takeaways

` Consolidated revenues of Tata Global Beverages Group, UK, under Indian GAAP, which substantially reflects the financial performance of the Tetley business and other international brands were `34.6 bn, flattish yoy, despite benefits from the rupee depreciation due to (1) challenging trading conditions, (2) intense retailer activity, (3) competitive pressure, (4) market decline in select categories, driven by consumer preferences and (5) a one-off impact of restructuring of the business model in specific markets like Canada.

ƒ The UK. Growth in the UK was impacted by lower volumes due to a sustained decline in the black tea market and higher competitive and trading intensity. However, speciality teas and green tea performed well and TGBL maintained its leadership in the Redbush category. Sales of premium Teapigs branded products continued to grow significantly and the brand is now being rolled out in other geographies. Key initiatives in the UK included (1) launch of four new Tetley flavoured green teas with a major retailer in March and (2) launch of an on-pack promotion for Tetley ‘Find Sydney on-pack promo’ which was seen on 10 mn Tetley packs.

ƒ The US. Besides the EOC coffee business, TGBL sells tea in the US under both Tetley and Good Earth brands. Key initiatives included (1) relaunch of Good Earth tea with a striking package; the brand now offers a focused collection of 14 natural tea fusions, (2) Good Earth tea was also made available in K-Cups and (3) launch of new variants like Black &Green under the Tetley brand in a new snap top box.

ƒ Canada. Tetley sales performed well and continued to maintain market leadership. The distribution model in Canada was restructured during the year. Key initiatives were (1) launch of Tetley 100% steamed green teas in three flavours, (2) launch of three new Tetley Tassimo products and (3) launch of a massive integrated promotion with Cirque du Soleil.

KOTAK INSTITUTIONAL EQUITIES RESEARCH 43 Consumer Products Tata Global Beverages

ƒ Australia. Australia registered modest growth, led by the addition of new customers and new product launches, including (1) re-launch of Tetley Fruit and Herbal range under the pyramid format and (2) launch of Tetley 100% steamed green teas in three flavours.

ƒ Acquisition of the MAP brand in Australia. In May 2014, TGBL has acquired 100% stake in Bronski Eleven, Australia, for an undisclosed amount. Bronski Eleven is engaged in the coffee business under the MAP brand and enjoys significant presence in the roast and ground coffee and in the pods (single-serve) categories in Australia. Even though the management highlighted that the acquisition was essentially a moderate size/moderate deal, it was enthused with the acquisition as (1) it offers a pilot play for TGBL to move from just tea market into a larger coffee play, (2) it gives it access to the single-serve pods business, which is the fastest growing segment in coffee, (3) it helps TGBL to move up the value chain (from royalty model as in the US to a higher realization model) and (4) it helps TGBL to tap into the food-service model (MAP is also engaged in the food-service business in Australia). To sum it up, this acquisition will enable TGBL to play fully across the beverage (tea and coffee) value spectrum and food services.

ƒ Europe and the Middle East. (1) Russia. Performance in Russia was impacted by a faster decline in traditional channels and market declines in spray and agglomerated coffees. The freeze-dried offering under the Grande brand performed well. Key initiative in Russia included the re-launch of Grande coffee. (2) Poland. TGBL implemented changes to the business model that aided margin improvement; key focus is on higher margin branded products and on improving sales efficiencies. (3) The Czech Republic. This market continued to recover, driven by improved volumes and cost-reduction initiatives. (4) France. Tetley increased both volume and value share and (5) The Middle East. Tetley test marketed in Kuwait and performed well, led by strong market share gains and a new campaign ‘Squeeze more out of life’. In the green tea bags segment, the brand has already achieved second position and TGBL is now looking to expand in other markets in the Middle East.

ƒ South Africa (Joekels). South Africa posted modest revenue growth led by increase in private-label volumes and a jump in the branded business volumes, led black tea.

Performance of the water business and Starbucks

` NourishCo Beverages recorded impressive growth yoy, aided by strong performance of Himalayan and Tata Water Plus.

ƒ Himalayan, premium water brand, recorded sales growth of 18%, driven by acquisition of several new marquee accounts. The brand’s market presence received a boost, aided by the launch of various print/TV media campaigns, relevant brand activations and merchandising. Riding on the JV with Starbucks, Himalayan has become the only water brand available in all Starbucks outlets in India and recently ventured into Singapore markets, as well.

ƒ Tata Water Plus (TWP) was re-launched with a new proposition, new packaging and new communication. Overall, TWP volumes more than doubled yoy and new variants were launched in Tata Gluco Plus like Grape, Cinnamon and Apple.

` Tata Starbucks, the JV with Starbucks made very good progress and closed the year with 43 stores (current store count over 51). Tata Starbucks is present in six cities—Mumbai, Delhi, Gurgaon, Bangalore, Pune and Chennai. Comparative metrics are healthy versus similar markets for Starbucks and food spends are significantly higher (~50% higher than other markets).

44 KOTAK INSTITUTIONAL EQUITIES RESEARCH Tata Global Beverages Consumer Products

Exhibit 6: TGBL’s revenue break-up, geography-wise, brand-wise and segment-wise, March fiscal year-ends, 2011-14

Revenues (Rs mn) Growth, yoy (%) 2011 2012 2013 2014 2012 2013 2014 Geography wise revenue break-up US 12,270 13,500 14,540 13,440 10 8 (8) Canada, South Africa and Australia 4,830 4,990 5,590 5,840 3 12 4 CAA 17,100 18,490 20,130 19,280 8 9 (4) Britain and Africa 13,520 14,690 16,050 16,620 9 9 4 Europe and the Middle East 7,090 7,640 7,360 6,810 8 (4) (7) EMEA 20,610 22,330 23,410 23,430 8 5 0 South Asia 16,880 18,860 21,750 25,110 12 15 15 Other Beverages (Nourischo & Alliances) 220 290 550 1,010 32 90 84 Total brands 54,810 59,970 65,840 68,830 9 10 5 Non-branded (plantations/extractions) 4,780 5,830 6,780 7,350 22 16 8 Others and eliminations 440 510 890 1,190 16 75 34 Total 60,030 66,310 73,554 77,370 10 11 5 Brand-wise revenue break-up Tetley 23,412 26,524 27,934 27,853 13 5 (0) India tea brands 17,409 19,893 23,523 27,080 14 18 15 Eight O Clock 10,205 11,936 12,497 11,606 17 5 (7) Others including specialty brands 9,005 7,957 9,556 10,832 (12) 20 13 Total revenue 60,030 66,310 73,510 77,370 10 11 5 Segment-wise revenue break-up Tea 42,621 46,417 51,457 54,933 9 11 7 Coffee 11,406 13,262 14,702 13,927 16 11 (5) Non-branded 4,802 5,968 6,616 7,737 24 11 17 Water & others 1,201 663 735 774 (45) 11 5 Total revenue 60,030 66,310 73,510 77,370 10 11 5

Source: Company, Kotak Institutional Equities

KOTAK INSTITUTIONAL EQUITIES RESEARCH 45 Consumer Products Tata Global Beverages

Exhibit 7: Consolidated working capital movement, March-fiscal year-ends, 2008-14 (Rs mn)

2008 2009 2010 2011 2012 2013 2014 Working Capital (Rs mn) Inventory 5,450 7,444 9,217 10,697 11,607 13,829 15,185 Receivables 4,422 4,500 5,197 5,733 6,518 7,129 6,543 Loans and advances 6,722 20,606 6,309 7,175 8,203 8,761 10,637 Other current assets 4,125 2,500 220 177 504 213 982 Creditors 7,445 8,996 9,493 8,300 8,052 7,903 7,689 Other current liabilities 3,469 3,935 3,813 4,160 4,124 4,236 4,118 Provisions 633 1,968 849 2,052 2,937 3,553 3,200 Net working capital (ex-cash) 9,172 20,151 6,788 9,269 11,720 14,240 18,340 Working Capital (Days) Inventory 46 56 58 65 64 69 72 Receivables 37 34 33 35 36 35 31 Loans and advances 57 154 40 44 45 43 50 Other current assets 35 19 1 1 3 1 5 Creditors 63 67 60 50 44 39 36 Other current liabilities 29 29 24 25 23 21 19 Provisions 5 15 5 12 16 18 15 Net working capital (ex-cash) 77 151 43 56 65 71 87 Net working capital (% of sales) 21.2 41.3 11.7 15.4 17.7 19.4 23.7

Notes: (a) Provisions exclude provisions for proposed dividend and DDT on the same.

Source: Company, Kotak Institutional Equities

Exhibit 8: Consolidated capex and return ratio trends, March-fiscal year-ends, 2008-14 (Rs mn)

2008 2009 2010 2011 2012 2013 2014 Fixed as s ets GFA 11,343 11,744 12,230 13,024 14,446 15,558 19,070 Goodw ill/intangible as s ets 31,531 32,517 31,233 32,395 36,924 38,289 44,240 CWIP 500 632 474 313 487 907 596 C apex 774 759 900 854 1,164 1,725 1,457 Asset turns on GFA (Gross) 3.8 4.2 4.8 4.6 4.6 4.7 4.1 Return ratios (%) RoE 1.5 6.1 10.3 6.5 8.0 8.0 7.0 RoCE 8.5 7.7 9.0 7.8 7.9 9.3 7.8 RoIC 10.3 7.2 7.6 6.3 6.9 7.4 6.2 DuPont analys is Net margins (%) 0.9 4.5 6.5 4.1 5.1 5.1 4.8 As s et turnov er ( X) 0.6 0.7 0.8 0.9 1.0 1.0 1.0 Equity multiplier 2.6 2.0 1.9 1.7 1.6 1.5 1.5 RoE (%) 1.5 6.1 10.3 6.5 8.0 8.0 7.0

Source: Company, Kotak Institutional Equities

46 KOTAK INSTITUTIONAL EQUITIES RESEARCH Tata Global Beverages Consumer Products

Exhibit 9: Consolidated cash-flow trends, March-fiscal year-ends, 2008-14 (Rs mn)

2008 2009 2010 2011 2012 2013 2014 Cas h flow from operations 6,244 3,329 2,884 3,184 3,751 5,456 4,134 Change in net w orking capital (342) (1,587) (1,488) (2,452) (987) (3,727) (58) Capex (774) (759) (900) (854) (1,164) (1,725) (1,457) Free cas h flow 5,128 983 496 (123) 1,601 4 2,619 Cas h from from inves ting 26,760 4,853 14,900 120 (1,971) (4,053) (1,062) Cas h from from financing (20,617) (8,935) (8,149) (9,728) (3,405) 1,939 (2,738) Net change in cas h and equivalents 11,270 (3,100) 7,247 (9,732) (3,775) (2,110) (1,182) Cas h balance 13,232 10,892 19,038 10,161 7,362 6,977 7,252

Growth in FCF (%) 19.4 (80.8) (49.5) (124.8) (1,400.7) (99.8) NM FC F as % of EBITDA 72.4 15.2 6.9 (2.0) 25.7 0.0 34.8 FC F as % of core PAT NM 45.3 13.1 (4.9) 47.2 0.1 70.5

Source: Company, Kotak Institutional Equities

Exhibit 10: Consolidated debt position, March-fiscal year-ends, 2008-14 (Rs mn)

Gros s debt 26,093 24,311 17,968 10,415 9,156 13,887 14,381 Net debt (1,049) 9,906 (6,262) (624) 1,587 6,891 7,098 Debt to equity 0.7 0.7 0.5 0.3 0.2 0.3 0.2 Net debt to equity (0.0) 0.3 (0.2) (0.0) 0.0 0.1 0.1 Interes t paid 2,198 542 279 1,210 704 844 865 Borrow ing cos t (%) 6.1 2.2 1.3 8.5 7.2 7.3 6.1

Source: Company, Kotak Institutional Equities

KOTAK INSTITUTIONAL EQUITIES RESEARCH 47 Consumer Products Tata Global Beverages

Exhibit 11: Tata Global Beverages - consolidated profit model, balance sheet, cash model, March fiscal year-ends, 2011-17E (Rs mn)

2011 2013 2014 2015E 2016E 2017E Profit model (Rs mn) Net operating revenues 60,032 73,510 77,376 81,516 86,651 92,618 EBITDA 6,081 7,685 7,519 8,010 9,023 10,055 Other income 972 860 818 829 838 1,006 Interest (1,210) (844) (865) (756) (628) (560) Depreciation (994) (1,051) (1,291) (1,472) (1,584) (1,700) Pretax profits 4,848 6,650 6,181 6,610 7,648 8,800 Tax (2,023) (1,895) (2,046) (1,785) (2,142) (2,552) PAT 2,825 4,755 4,135 4,825 5,507 6,248 Minority interest (580) (723) (290) (650) (690) (736) Share of associate earnings 202 (277) (129) (79) (69) (59) PAT after MI/associates 2,448 3,755 3,717 4,097 4,748 5,454 Extraordinary items 95 (27) 1,088 (27) — — Net profit (reported) 2,543 3,728 4,805 4,070 4,748 5,454 Recurring net profit 2,487 3,755 3,717 4,097 4,748 5,454 Earnings per share (Rs) 4.0 6.1 6.0 6.5 7.5 8.6 Balance sheet (Rs mn) Total equity 39,571 48,101 58,488 60,866 63,721 66,902 Minority interest 11,081 8,139 9,241 9,891 10,580 11,316 Total borrowings 10,415 13,887 14,381 11,381 10,381 9,381 Deferred tax liabilities (net) 637 540 463 463 463 463 Total liabilities and equity 61,704 70,667 82,573 82,601 85,145 88,062 Net fixed assets (Incl CWIP) 38,026 45,250 52,406 52,564 52,669 52,729 Investments 5,865 5,779 6,110 6,031 5,962 5,904 Cash 9,973 6,977 7,252 6,288 7,669 9,276 Net current assets (excl cash) 7,840 12,661 16,805 17,717 18,844 20,153 Total assets 61,704 70,667 82,573 82,601 85,145 88,062 Free cash flow (Rs mn) Operating cash flow (excl working capital) 5,636 9,183 4,192 7,111 8,009 8,811 Working capital (4,905) (7,454) (117) (1,825) (2,254) (2,617) Capital expenditure (854) (1,725) (1,457) (1,630) (1,690) (1,760) Free cash flow (123) 4 2,619 3,655 4,065 4,434 Key assumptions, growth % Net revenue growth 3.1 10.4 4.8 5.1 6.1 6.7 EBITDA growth (15.7) 23.3 (2.2) 6.5 12.7 11.4 EPS growth (34.7) 10.7 (1.0) 8.0 15.9 14.8 EBITDA margin (%) 10.1 10.5 9.7 9.8 10.4 10.9 Gross margin (%) 51.2 51.5 52.5 51.7 52.1 52.3 Tax rate (% of PBT) 40.9 28.6 28.1 27.0 28.0 29.0 Ratios (%) RoE (%) 6.5 8.0 7.0 6.9 7.6 8.4 RoCE (%) 7.8 9.3 7.8 7.6 8.5 9.3

Source: Company, Kotak Institutional Equities estimates

48 KOTAK INSTITUTIONAL EQUITIES RESEARCH

BUY Karur Vysya Bank (KVB)

Banks/Financial Institutions AUGUST 04, 2014 RESULT Coverage view: Neutral

A weak performance but we see progress. Karur Vysya Bank turned out a fairly Price (`): 475 weak performance with flat earnings yoy despite provisions declining 47% yoy. Target price (`): 535 Improved cost-income ratio (53% from over 60% in 4QFY14) was the key positive BSE-30: 25,481 development in 1QFY15. Fresh impairments were high with slippages from the restructured loan portfolio though it is not alarming at this stage. We maintain BUY (TP of `535 from `510) as we believe multiples can expand as RoEs move to 18%.

Company data and valuation summary Karur Vysya Bank Stock data Forecasts/Valuations 2014 2015E 2016E 52-week range (Rs) (high,low) 510-291 EPS (Rs) 40.1 57.8 70.6 QUICK NUMBERS Market Cap. (Rs bn) 50.9 EPS growth (%) (21.9) 44.1 22.2 Shareholding pattern (%) P/E (X) 11.8 8.2 6.7 NII up 3% yoy; Promoters 3.0 NII (Rs bn) 12.8 15.0 17.8 • FIIs 25.1 Net profits (Rs bn) 4.3 6.2 7.6 earnings flat yoy MFs 9.7 BVPS 301.9 336.7 381.5 Price performance (%) 1M 3M 12M P/B (X) 1.6 1.4 1.2 • Gross NPLs 1.3%; Absolute (1.5) 23.8 28.0 ROE (%) 13.4 17.5 18.8 restructured loans Rel. to BSE-30 0.4 8.9 (3.8) Div. Yield (%) 2.8 3.0 3.7 4.3%

Muted performance—earnings hit by weak non-interest income, high expenses • Maintain BUY; TP of `535 (`510 earlier) A flat earnings performance with operating profit declining 33% yoy but a sharp decline in provisions (47% yoy) cushioned the impact on earnings. Revenues declined 15% yoy as non- interest income declined 43% yoy. Loan growth slowed to 12% yoy as gold loans (23% of loans) declined 2% yoy. Gross NPLs increased 50 bps to 1.3% and restructured loans increased 20 bps yoy to 4.3% of loans. Slippages were high at 2.4% and fresh restructuring at 3% of loans. Cost- income ratio improved to 53% from 58% in the previous quarter due to slow growth in operating expenses.

Few slippages from restructured loans, low recoveries increase NPLs

Impairment ratios deteriorated marginally with gross NPLs increasing to 1.3% of loans from 0.8% in 4QFY14. Provision coverage was stable at 70%. Restructured loans increased 20 bps to 4.3% of loans. We see it as a marginal increase as we did not expect NPLs to stay as low as reported in 4QFY14. Fresh slippages were a bit high at 2.4% of loans and we notice that half the slippages came from restructured loans. Fresh restructuring was higher at 3% of loans but 40% pertains to new disbursements to existing restructured loans.

Revenue growth expected to drive confidence from hereon; maintain BUY

We maintain our positive rating on the bank and revise our target price to `535 from `510. At our TP we value the bank at 1.4X book and 8X FY2016E EPS for RoEs of 17-18% and earnings growth of 30% CAGR over FY2014-16E. While the stock has performed well over the past few months, we believe there is scope for expansion in multiples. Our view is due to (1) cost-income ratio improving due to a slowdown in operating expenses growth and (2) expected better revenue growth from hereon due to margin expansion and higher contribution from non-interest income.

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 Karur Vysya Bank

Exhibit 1: NII growth is yet to stabilize fully Exhibit 2: Strong signs of cost growth slowing NII and loan growth, March fiscal year-ends, 1QFY12-1QFY15 (%) Operating expenses growth and cost-income ratio, March fiscal year- ends, 1QFY12-1QFY15 (%) Loan NII 40 Opex (LHS) Cost-income (RHS) 60 70 30 48 62 20 36 54

10 24 50 46 43 42 37 40 32 32 - 28 12 23 24 24 25 38 11 (10) - 30 1QFY12 2QFY12 3QFY12 4QFY12 1QFY13 2QFY13 3QFY13 4QFY13 1QFY14 2QFY14 3QFY14 4QFY14 1QFY15 1QFY12 2QFY12 3QFY12 4QFY12 1QFY13 2QFY13 3QFY13 4QFY13 1QFY14 2QFY14 3QFY14 4QFY14 1QFY15

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

Loans slowed to 12% yoy; gold loan portfolio stagnant

Loan growth slowed to 12% yoy in 1QFY15 from 15% yoy against over 20% yoy reported over the past few quarters. The big portfolio of gold loans (23% of loans) remained stagnant as the recent restrictions on business appear to have hurt growth. With the RBI relaxing certain restrictions, we expect growth revival over the next few quarters.

Loan growth in 1QFY15 was driven by retail loans (18% yoy) and SME loans (12% yoy). Corporate loans grew 11% yoy and loans to agriculture grew 10% yoy. The slowdown in the large corporate portfolio was mainly in the infrastructure segment (~9% of loans) where the bank appears to have slowed fresh lending as growth was muted at 1% yoy. The contribution of term loans to the overall loan portfolio increased to 88% from 68% in FY2010. On the other hand, exposure of the top-20 borrowers has been consistently declining and is at 12% of loans against 26% in FY2010.

We expect loan growth to improve to 20% yoy over FY2015-16E, driven by growth in retail and SME loans.

50 KOTAK INSTITUTIONAL EQUITIES RESEARCH Karur Vysya Bank Banks/Financial Institutions

Exhibit 3: Loan growth has been driven by gold loans in recent quarters March fiscal year-ends, 2011-1QFY15 (%)

2011 2012 2013 2014 1QFY15 Agriculture 14.3 15.7 18.3 17.7 18.5 Retail 7.5 8.2 11.9 12.5 12.7 SME 13.4 34.0 32.3 32.5 32.5 Corporate and others 64.8 42.1 37.6 37.3 36.3 of which Gold loans 16.2 21.5 26.3 23.4 23.3

Source: Company, Kotak Institutional Equities estimates

Exhibit 4: The slowdown has been more pronounced in the non-agriculture gold loan portfolio Break-up of the gold loan portfolio, March fiscal year-ends, 2011-14 (%)

2011 2012 2013 2014 Non-agriculture gold loans 10 19 31 30 Growth (%) 90.0 63.2 (3.2) Agriculture gold loan 19 33 47 50 Growth (%) 73.7 42.4 6.4 LTV (%) 73737175 NPA - Non agriculture (%) 0.06 0.03 0.03 0.05

Source: Company, Kotak Institutional Equities

Exhibit 5: No big skew in the large corporate book Exhibit 6: Granular exposure in the SME portfolio Break-up of corporate loans, March fiscal year-end, 2014 (%) Break-up of SME loans, March fiscal year-end, 2014 (%)

Rs 50-100 Rs 100-250 mn mn >Rs1000 mn 11% 11% 31% Rs 250-500 mn 39%

Rs 500-1000 up to Rs 500 mn mn 30% 78%

Notes: Notes: (a) Average ticket size is `362 mn. (a) Average ticket size is `0.9 mn.

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

KOTAK INSTITUTIONAL EQUITIES RESEARCH 3 Banks/Financial Institutions Karur Vysya Bank

Operating expenses growth slows, cost-income ratio improves

KVB reported 12% yoy growth in staff costs against 48% yoy growth in 4QFY14 as the high base is now being reflected. Also, on the other hand, we have seen the bank slow branch expansion (6% yoy) and employees (8% yoy), helping to reduce costs.

Cost-income ratio, which increased to over 55%, softened to 53% in 1QFY15. We believe the next leg of improvement will see the benefit of revenue growth picking up well as positive performance on stable operating expenses on an absolute basis. We expect cost- income ratio to decline to 48% by FY2016.

Other highlights of the quarter

` Non-interest income declined 43% yoy, led by a weak performance from the treasury. Income from treasury declined 97% yoy.

` Tier-1 stands comfortable at 11.6% with overall capital adequacy at 12.5%.

52 KOTAK INSTITUTIONAL EQUITIES RESEARCH Karur Vysya Bank Banks/Financial Institutions

Exhibit 4: Karur Vysya Bank – quarterly details March fiscal year-ends, 1QFY14-1QFY15 (` mn)

(% chg.) ( 1QFY15 1QFY15E 1QFY14 4QFY14 1QFY15E 1QFY14 4QFY14 FY2015E FY2014 chg.) Interest Earned 13,445 13,774 12,225 13,227 (2.4) 10.0 1.6 57,111 51,516 10.9 Interest on loans 10,477 10,607 9,207 10,026 (1.2) 13.8 4.5 44,513 38,720 15.0 Interest on Investment 2,961 3,034 2,805 3,009 (2.4) 5.6 (1.6) 12,141 11,974 1.4 Interest on bal. with RBI & other inte 7 134 12 76 (95.0) (43.2) (91.2) 457 466 (1.9) Interest expense 10,045 9,942 8,907 9,744 1.0 12.8 3.1 42,095 38,323 9.8 Net interest income 3,400 3,831 3,319 3,483 (11.3) 2.5 (2.4) 15,016 13,194 13.8 Other Income 1,180 1,355 2,069 1,457 (13.0) (43.0) (19.1) 6,065 5,645 7.4 Other Income exld treasury 1,150 1,105 1,036 1,455 4.1 11.0 (21.0) 4,965 4,607 7.8 Treasury 30 250 1,033 2 (88.2) (97.1) 1,309.5 1,100 1,037 6.0 Total Income 4,580 5,186 5,388 4,940 (11.7) (15.0) (7.3) 21,081 18,838 11.9 Operating Expenses 2,445 2,585 2,201 2,848 (5.4) 11.1 (14.1) 10,880 10,104 7.7 Employee expenses 1,228 1,293 1,078 1,480 (5.1) 13.9 (17.0) 5,477 5,279 3.8 Other operating expenses 1,217 1,292 1,123 1,368 (5.8) 8.4 (11.0) 5,402 4,824 12.0 Operating Profit Before Prov. & Con 2,135 2,602 3,187 2,093 (17.9) (33.0) 2.0 10,201 8,735 16.8 Provisions & Contingencies 864 583 1,632 1,100 48.4 (47.0) (21.5) 2,263 4,423 (48.8) Loan loss provisions 1,330 600 1,421 116 121.6 (6.4) 1,046.2 2,813 2,355 19.5 Investment depreciation (505) (100) 143 832 404.9 (452.1) (160.7) (600) 2,132 (128.1) Profit before tax 1,271 2,019 1,556 993 (37.1) (18.3) 28.0 7,938 4,311 84.1 Provision for Taxes 50 545 353 (203) (90.8) (85.8) (124.6) 1,746 (341) (612.0) Net Profit 1,221 1,474 1,203 1,196 (17.2) 1.5 2.1 6,191 4,653 33.1 Tax rate 3.9 27.0 22.7 (20.5) 22.0 (7.9) PBT - treasury + investment dep. 736 1,669 666 1,823 (55.9) 10.6 (59.6) 6,238 5,407 15.4

Key balance sheet items (Rs bn) Deposits 442 418 438 5.6 0.9 CASA (%) 21.0 19.2 20.6

Advances 347 310 342 11.9 1.3 Retail 44 37 43 18.4 2.9 Agriculture 64 58 61 10.1 5.8 Commercial/SME 113 101 111 11.5 1.3 Corporate 126 113 128 10.9 (1.5) Gold loans 81 82 80 (1.7) 0.8

Yield ratios Yield on advances 12.3 12.2 12.0 Cost of deposits 8.1 8.2 8.1 NIM 2.7 2.8 2.7

Asset quality measures Gross Non Performing Assets (Rs mn) 4,510 4,664 2,792 (3.3) 61.5 Gross Non Performing Assets (%) 1.3 1.5 0.8 Net Non Performing Assets (Rs mn) 1,825 1,545 1,399 18.1 30.4 Net Non Performing Assets (%) 0.5 0.5 0.4 Provision coverage ratio (%) 59.5 66.9 49.9 Provision coverage ratio including tech 75.0 75.0 75.0 Restructured (Rs mn) 14,910 12,189 13,899 22.3 7.3 Restructured loans (%) 4.3 3.9 4.1

Capital adequacy details CAR (%) 12.5 12.9 12.8 Tier I (%) 11.6 11.7 11.6 Tier II (%) 0.9 1.2 1.2

Source: Company, Kotak Institutional Equities

KOTAK INSTITUTIONAL EQUITIES RESEARCH 53 Banks/Financial Institutions Karur Vysya Bank

Exhibit 5: KVB trades at 1.2X one-year forward book Exhibit 6: Premium to peers below long-term average One-year forward PER and PBR, March fiscal year-ends, 2007-14 Trading premium to private banks, March fiscal year-ends, 2007-14

Rolling PER (X) (LHS) Rolling PBR (X) (RHS) 1.0 15 2.0

0.8 12 1.6

0.6 9 1.2

6 0.8 0.4

3 0.4 0.2

0 0.0 0.0 Jul-07 Jul-08 Jul-09 Jul-10 Jul-11 Jul-12 Jul-13 Jul-14 Jul-07 Jul-08 Jul-09 Jul-10 Jul-11 Jul-12 Jul-13 Jul-14

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

Exhibit 7: Karur Vysya Bank - change in estimates March fiscal year-ends, 2015-17E (` mn)

New estimates Old estimates New vs old (%) 2015E 2016E 2017E 2015E 2016E 2015E 2016E Net interest income 15,016 17,780 20,973 15,394 17,913 (2) (1) Loan growth 20.7 21.0 20.3 20.7 21.0 NIM 2.76 2.76 2.74 2.83 2.77 Loan loss provisions 2,813 2,720 3,282 2,438 2,720 15 - Other income 6,065 6,889 7,616 6,358 6,980 (5) (1) Fee income 3,524 3,806 4,110 3,676 3,970 (4) (4) Operating expenses 10,880 11,914 13,046 10,995 12,060 (1) (1) Employee expenses 5,477 5,899 6,391 5,477 5,899 - - PBT 7,938 10,084 12,211 8,469 10,163 (6) (1) Tax 1,746 2,521 3,053 1,863 2,541 (6) (1) Net profit 6,191 7,563 9,158 6,606 7,622 (6) (1) PBT before treasury profits and investment depreciation 6,238 8,484 10,511 6,969 8,563 (10) (1)

Source: Company, Kotak Institutional Equities estimates

54 KOTAK INSTITUTIONAL EQUITIES RESEARCH Karur Vysya Bank Banks/Financial Institutions

Exhibit 8: Karur Vysya Bank - key ratios and growth rates March fiscal year-ends, 2012-17E (%)

2012 2013 2014 2015E 2016E 2017E Growth rates (%) Net loan 34.4 23.1 15.3 20.7 21.0 20.3 Total asset 33.3 24.2 10.4 17.8 18.4 17.8 Deposits 29.9 20.4 13.2 19.6 19.9 19.3 Current (1.0) 23.2 17.3 24.0 24.2 23.3 Savings 12.9 19.4 23.3 22.5 22.8 22.0 Fixed 36.9 20.2 11.4 18.7 19.0 18.3 Net interest income 19.6 26.3 10.8 17.0 18.4 18.0 Loan loss provisions 142.0 207.4 48.1 19.5 (3.3) 20.6 Total other income 32.5 29.2 24.7 7.4 13.6 10.6 Net fee income 17.1 22.5 20.5 5.0 8.0 8.0 Net capital gains (30.6) 237.2 17.4 6.0 36.4 13.3 Net exchange gains 20.0 21.0 21.0 10.0 12.0 15.0 Operating expenses 25.8 40.7 32.6 7.7 9.5 9.5 Employee expenses 15.2 30.0 53.6 3.8 7.7 8.3 Key ratios (%) Yield on average earning assets 10.3 10.4 10.8 10.5 10.3 10.1 Yield on average loans 12.2 12.3 12.2 11.9 11.5 11.3 Yield on average investments 7.9 7.9 8.9 8.7 8.6 8.4 Average cost of funds 7.9 8.0 8.5 8.2 7.9 7.7 Interest on deposits 7.8 8.0 8.4 8.2 8.0 7.8 Spread 2.4 2.4 2.3 2.4 2.4 2.4 Net interest income/earning assets 2.9 2.8 2.7 2.8 2.8 2.7 Spreads on lending business 4.3 4.3 3.7 3.7 3.6 3.5 New provisions/average net loans 0.2 0.6 0.7 0.8 0.6 0.6 Total provisions/gross loans 1.0 0.6 1.2 1.7 1.9 2.1 Interest income/total income 72.4 71.9 69.5 71.2 72.1 73.4 Other income / total income 27.6 28.1 30.5 28.8 27.9 26.6 Fee income to total income 17.9 17.3 18.2 16.7 15.4 14.4 Fee income to advances 1.1 1.0 1.1 0.9 0.8 0.8 Fees income to PBT 36.0 38.4 84.9 44.4 37.7 33.7 Net trading income to PBT (2.4) 17.9 (27.7) 21.4 15.9 13.9 Exchange income to PBT 5.8 2.9 9.2 5.1 4.5 4.2 Operating expenses/total income 42.7 47.3 54.7 51.6 48.3 45.6 Operating expenses/assets 1.6 1.8 2.1 1.9 1.8 1.7 Tax rate 20.6 24.1 (8.6) 22.0 25.0 25.0 Dividend payout ratio 29.9 27.3 32.6 25.0 25.0 25.0 Share of deposits Current 11.4 11.3 12.4 12.7 13.0 13.3 Fixed 80.8 80.8 79.5 78.9 78.3 77.7 Savings 11.4 11.3 12.4 12.7 13.0 13.3 Loans-to-deposit ratio 74.6 76.3 77.7 78.4 79.1 79.8 Equity/assets (EoY) 7.2 6.6 6.4 6.2 6.0 5.8 Loan impairment ratios (%) Gross NPL 1.3 1.0 0.8 1.6 1.9 2.0 Net NPL 0.3 0.4 0.4 0.6 0.7 0.6 Slippages 1.0 0.8 0.5 1.5 1.4 1.4 Provision coverage 75.5 62.0 49.9 63.4 66.3 69.7 Dupont analysis (%) Net interest income 2.8 2.7 2.6 2.7 2.7 2.7 Loan loss provisions 0.2 0.4 0.5 0.5 0.4 0.4 Net other income 1.1 1.1 1.1 1.1 1.0 1.0 Operating expenses 1.6 1.8 2.0 1.9 1.8 1.7 (1- tax rate) 79.4 75.9 108.6 78.0 75.0 75.0 ROA 1.5 1.3 0.9 1.1 1.1 1.2 Average assets/average equity 13.7 14.6 15.3 15.9 16.5 17.0 ROE 20.8 19.0 13.4 17.5 18.8 19.8

Source: Company, Kotak Institutional Equities estimates

KOTAK INSTITUTIONAL EQUITIES RESEARCH 55 Banks/Financial Institutions Karur Vysya Bank

Exhibit 9: Karur Vysya Bank - financial statements March fiscal year-ends, 2012-17E (` mn)

2012 2013 2014 2015E 2016E 2017E Income statement Total interest income 32,704 42,424 51,160 57,111 66,226 77,107 Loans 25,382 32,744 38,720 44,513 52,119 61,533 Investments 7,163 9,504 11,974 12,141 13,569 14,944 Cash and deposits 159 177 466 457 539 629 Total interest expense 23,533 30,840 38,323 42,095 48,447 56,134 Deposits from customers 22,032 28,197 34,684 39,592 45,800 53,378 Net interest income 9,171 11,585 12,837 15,016 17,780 20,973 Loan loss provisions 517 1,590 2,355 2,813 2,720 3,282 Net interest income (after prov.) 8,654 9,994 10,482 12,203 15,059 17,691 Other income 3,502 4,526 5,645 6,065 6,889 7,616 Net fee income 2,274 2,785 3,356 3,524 3,806 4,110 Net capital gains 262 884 1,037 1,100 1,500 1,700 Net exchange gains 368 210 365 402 450 518 Operating expenses 5,416 7,622 10,104 10,880 11,914 13,046 Employee expenses 2,644 3,436 5,279 5,477 5,899 6,391 Depreciation on investments 413 (413) 2,132 (600) (100) - Other provisions 7 57 (64) 50 50 50 Pretax income 6,320 7,254 3,955 7,938 10,084 12,211 Tax provisions 1,302 1,751 (341) 1,746 2,521 3,053 Net profit 5,017 5,503 4,296 6,191 7,563 9,158 % growth 21 10 (22) 44 22 21 PBT - Treasury + Provisions 6,995 7,605 7,341 9,101 11,255 13,843 % growth 24 9 (3) 24 24 23 Balance sheet Cash and bank balance 20,355 17,960 26,782 30,996 36,234 42,329 Cash 3,059 3,710 4,195 4,237 4,406 4,626 Balance with RBI 16,150 12,577 21,267 25,439 30,507 36,382 Net value of investments 105,061 138,373 132,470 149,339 169,852 190,555 Govt. and other securities 92,532 126,290 121,931 139,129 159,939 180,909 Shares 890 1,453 1,436 1,436 1,436 1,436 Debentures and bonds 2,422 2,647 3,293 2,964 2,667 2,401 Net loans and advances 239,492 294,801 339,921 410,295 496,470 597,418 Fixed assets 2,449 3,221 3,847 3,885 3,870 3,798 Net Owned assets 2,449 3,221 3,847 3,885 3,870 3,798 Other assets 9,102 13,113 13,295 13,561 13,832 14,109 Total assets 376,458 467,468 516,316 608,076 720,257 848,209 Deposits 321,116 386,530 437,577 523,409 627,687 748,573 Borrowings and bills payable 21,946 42,297 34,986 36,533 39,085 39,672 Other liabilities 6,314 7,789 10,490 10,490 10,490 10,490 Total liabilities 349,376 436,616 483,053 570,432 677,262 798,735 Paid-up capital 1,072 1,072 1,072 1,072 1,072 1,072 Reserves & surplus 26,010 29,780 32,192 36,572 41,923 48,403 Total shareholders' equity 27,082 30,852 33,263 37,644 42,995 49,475

Source: Company, Kotak Institutional Equities estimates

56 KOTAK INSTITUTIONAL EQUITIES RESEARCH

REDUCE Godrej Properties (GPL)

Real Estate AUGUST 04, 2014 RESULT Coverage view: Attractive

1QFY15—strong start to the year. Godrej Properties sold over a 1 mn sq. ft for `8.24 Price (`): 227 bn in 1QFY15 and added a JDA project on the residential platform in Gurgaon. Target price (`): 225 Reported margins were low as the contribution of low-margin projects to EBITDA was BSE-30: 25,481 68%. Approval-related payments in Mumbai, slow sales at legacy projects and deposits for projects resulted in higher net debt though gross debt declined. Cash flow will improve only as new projects gather momentum. We maintain REDUCE.

Company data and valuation summary Godrej Properties Stock data Forecasts/Valuations 2014 2015E 2016E 52-week range (Rs) (high,low)263-154 EPS (Rs) 8.0 9.7 11.7 QUICK NUMBERS Market Cap. (Rs bn) 45.2 EPS growth (%) (8.8) 20.5 20.4 Shareholding pattern (%) P/E (X) 28.2 23.4 19.5 • Another quarter of Promoters 75.0 Sales (Rs bn) 11.8 17.5 26.0 FIIs 12.5 Net profits (Rs bn) 1.6 1.9 2.3 1 mn sq. ft sales MFs 1.5 EBITDA (Rs bn) 2.8 3.4 5.5 Price performance (%) 1M 3M 12M EV/EBITDA (X) 22.0 19.2 12.1 • New launches Absolute (5.9) 6.2 2.7 ROE (%) 9.9 10.3 11.4 contribute 75% of Rel. to BSE-30 (4.2) (6.6) (22.7) Div. Yield (%) 0.9 0.9 1.1 sales value

1QFY15—BKC recognition leads to fall in margins, as expected

` GPL recognized `3.3 bn of revenue and reported consolidated PAT of `456 mn. Around 42% of revenue was from Godrej BKC (`1.2 bn) and Godrej Waterside (`275 mn) which are low- margin projects. Also, around 45% of GPL’s consolidated debt, we believe, is from the BKC project, which will start getting recognized through cost of goods sold.

` While gross debt declined by `900 mn, cash on books was used for approval payments, mainly in Mumbai, and for deposits on new and existing projects, which resulted in a net debt increase of `1.4 bn.

Operations update—strong quarter to start the year…

` GPL recorded sales over 1 mn sq. ft in 1QFY15 (the second consecutive quarter) for `8.24 bn. Most of the sales value (over 75%) was contributed by the projects launched in the quarter (and in March 2014). Sales from legacy projects were low.

` We highlight that in a new project in Gurgaon, Godrej Oasis, GPL sold around 0.35 mn sq. ft at a realization of `7,200/sq. ft. Among the major metros, Gurgaon is the weakest market. GPL’s sales performance was better than consolidated sales of some larger peers in Gurgaon.

...more launches to maintain sales momentum

Approvals dependent, GPL indicated it would make five new launches, four in the Mumbai

Metropolitan Region and one in Pune, in addition to subsequent phases of ongoing projects. Two projects in Mumbai, Godrej Prime and Godrej Trees, will contribute value while those in Panvel (Godrej City) and Pune (Keshavnagar) will add to volumes. We alter our sales estimates for changes in the Mumbai project launches and the strong response to the Gurgaon launch. We estimate sales of 4 and 5.9 mn sq. ft for `31 bn and `45 bn over FY2015 and FY2016 respectively

(from 3.8 and 5.5 mn sq. ft).

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

Real Estate Godrej Properties

1QFY15—results review

Godrej Properties (GPL) recognized `3.3 bn of revenue in 1QFY15 and consolidated PAT of `456 mn. Operating margins were low as GPL started recognition of sales from its Godrej BKC project. Although Godrej BKC is a joint venture (JV) (profit sharing) project, reported margins were low due to (a) accounting treatment for the JV partner’s share, (b) recognition being on the area sold so far, average realizations of which are about `25,200/sq. ft and (c) high interest on commercial projects—we expect around 45% of consolidated borrowings to be allocated to the Godrej BKC project. As recognition commences, interest on project debt also starts getting recognized, along with other projects costs. GPL recognized 9% and 20% revenue from Godrej Waterside, Kolkata and Godrej Garden City, Ahmedabad, both low- margin projects. Also in 1QFY15, recognition from the high-margin Godrej One declined as the project is nearing completion and most of the revenue has been booked.

Exhibit 1: Godrej BKC and Waterside pull down GPL’s margins Godrej Properties - 1QFY15 results snapshot, March fiscal year-ends (` mn)

% change 1QFY15 1QFY15E 4QFY14 1QFY14 1QFY15E qoq yoy FY2014 FY2013 % change

Net sales 3,318 3,026 4,292 2,016 10 (23) 65 11,792 10,371 14

Operating costs (2,875) (2,205) (3,534) (1,610) 30 (19) 79 (8,966) (7,513) 19

EBITDA 443 822 758 406 (46) (42) 9 2,826 2,858 (1) Other income 311 24 65 427 1,210 382 (27) 750 104 618 Interest costs (10) (22) (20) (8) (55) (51) 16 (45) (37) 20 Depreciation (23) (19) (16) (12) 20 41 89 (58) (44) 31 PBT 721 805 787 812 (10) (8) (11) 3,474 2,881 21 Taxes (194) (258) (146) (299) (25) 33 (35) (1,111) (916) 21 PAT 527 547 641 514 (4) (18) 3 2,363 1,965 20 Consol. PAT 456 434 483 395 1,594 1,377

Key ratios EBITDA margin (%) 13.3 27.2 17.7 20.1 24.0 27.6 PAT margin (%) 15.9 18.1 14.9 25.5 20.0 19.0 Effective tax rate (%) 26.9 32.0 18.6 36.8 32.0 31.8

Source: Company, Kotak Institutional Equities estimates

58 KOTAK INSTITUTIONAL EQUITIES RESEARCH Godrej Properties Real Estate

Exhibit 2: Low-margin legacy projects impact margins Godrej Properties - revenue contribution from major projects, March fiscal year-ends, 4QFY12-1QFY15 (` mn)

4QFY12 1QFY13 2QFY13 3QFY13 4QFY13 1QFY14 2QFY14 3QFY14 4QFY14 1QFY15 Godrej One Mumbai 2,191 1,006 1,181 937 1,140 600 1,021 1,190 700 208 Godrej Garden City Ahmedabad 588 419 387 491 343 580 224 232 370 624 Godrej Waterside Kolkata 309 313 — — — — 334 — 1,630 274 Godrej BKC Mumbai — — — — — — — — — 1,237 Other projects 645 590 764 1,250 1,656 1,040 1,625 1,117 1,700 832 Total 3,733 2,328 2,332 2,678 3,139 2,220 3,204 2,539 4,400 3,175 Contribution (%) Godrej One Mumbai 59 43 51 35 36 27 32 47 16 7 Godrej Garden City Ahmedabad 16 18 17 18 11 26 7 9 8 20 Godrej Waterside Kolkata 8 13 — — — — 10 — 37 9 Godrej BKC Mumbai — — — — — — — — — 39 Other projects 17 25 33 47 53 47 51 44 39 26 Consolidated EBITDA margins 23 18 31 28 32 20 26 35 18 13

Source: Company, Kotak Institutional Equities

1QFY15 operations review—new launches gather pace

According to the management, GPL launched two new projects, one each in Gurgaon and Pune, subsequent phases of a launch in 4QFY14 in Mumbai and other ongoing projects. Out of the `8.24 bn value of area sold, about three quarters were from the launch of new projects and subsequent phases of existing projects. Among commercial projects, no new sales were booked in Godrej BKC in 1QFY15, there was a small cancelation at Godrej Genesis, Kolkata and the remaining area of Godrej Waterside, Kolkata was sold.

Exhibit 3: New sales drive overall sales Godrej Properties - sales in area, value, realizations, March fiscal year-ends, 1QFY13-1QFY15

1QFY13 2QFY13 3QFY13 4QFY13 1QFY14 2QFY14 3QFY14 4QFY14 1QFY15 (a) Saes (sq. ft) Residential From new launches 0.16 1.04 0.37 0.07 — — — 0.59 0.72 From existing projects 0.50 0.44 0.57 0.46 0.43 0.38 0.43 0.31 0.33 Total residential 0.66 1.49 0.94 0.53 0.43 0.38 0.43 0.90 1.04 Commercial From new launches — — — 0.05 ————— From existing projects 0.17 0.08 0.10 0.06 0.17 0.13 0.08 0.44 0.05 Total commercial 0.17 0.08 0.10 0.11 0.17 0.13 0.08 0.44 0.05 Total sales 0.83 1.57 1.04 0.64 0.60 0.51 0.51 1.34 1.09 Sales value (Rs mn) Residential 3,511 8,490 5,510 3,800 2,250 2,000 2,490 8,350 8,060 Commercial 1,743 1,130 1,220 2,229 3,820 1,340 1,780 2,310 180 Total 5,254 9,620 6,730 6,029 6,070 3,340 4,270 10,660 8,240 Avg. realizations (Rs/sq. ft) 6,305 6,139 6,463 9,469 10,118 6,611 8,329 7,938 7,549

Notes: (a) Existing project sales in 1QFY15 include new phases of project in Ahmedabad released in 1QFY15.

Source: Company, Kotak Institutional Equities

Godrej plans to launch seven new projects in FY2015 (two of which were launched in 1QFY15) and release incremental area in nine of its ongoing projects. While the launch pipeline is strong and in different markets, it has been lowered compared with its launch tracker indication in FY2014.

KOTAK INSTITUTIONAL EQUITIES RESEARCH 59 Real Estate Godrej Properties

Exhibit 4: New projects launch pipeline for FY2015

Project City Remark Godrej Prana Pune Launched Godrej Oasis Gurgaon Launched Godrej City Panvel 2Q/3Q launch Godrej Sky Mumbai Godrej Prime Mumbai Godrej Trees Mumbai Keshav nagar Pune Godrej Oasis Hyderabad Delayed further till FY2016 Godrej Links Mumbai Delayed further

Source: Company, Kotak Institutional Equities

While certain projects are dependent on approvals and market momentum (Hyderabad), certain are dependent on regulatory issues. Two policy changes will affect GPL’s launches— (1) regulatory changes from the Delhi Development Authority (DDA) for changing industrial areas to residential will positively impact the timelines for GPL’s Ohkla project launch and (2) new regulatory issues on open spaces and EWS construction will impact smaller redevelopment projects in Mumbai (delay the launch). We alter our estimates to account for delays in Mumbai.

60 KOTAK INSTITUTIONAL EQUITIES RESEARCH Godrej Properties Real Estate

Exhibit 5: Margins to drop on Godrej BKC and other commercial projects’ revenue recognition Godrej Properties - profit model, balance sheet, cash flow model, March fiscal year-ends, 2013-17E (` mn)

2013 2014 2015E 2016E 2017E Profit model Net sales 10,371 11,792 17,502 26,017 32,211 EBITDA 2,858 2,826 3,381 5,488 7,413 Other income 104 750 614 377 373 Interest (37) (45) (58) (84) (85) Depreciation (44) (58) (69) (45) (50) Pre-tax profits 2,881 3,474 3,868 5,735 7,651 Tax (927) (1,147) (1,292) (1,916) (2,556) Deferred tax 12 (21) — — — Net income 1,965 2,306 2,576 3,820 5,096 Adjusted net income 1,377 1,594 1,921 2,313 3,075 Earnings per share (Rs) 4.4 8.0 9.7 11.7 15.5 Balance sheet Total equity 14,290 17,934 19,392 21,125 23,620 Minority interests 1,059 2,031 1,769 1,467 1,467 Non-current liabilities 3,787 2,901 3,151 2,490 2,747 Current liabilities 27,652 38,602 34,679 39,506 37,152 Total liabilities and equity 46,788 61,467 58,991 64,588 64,987 Net fixed assets 861 1,255 1,267 1,449 1,645 Other non-current loans and advances 952 1,328 1,686 1,729 1,929 Current assets 44,975 58,884 56,038 61,409 61,412 Total assets 46,788 61,467 58,991 64,588 64,987 Free cash flow Operating cash flow excl. working capital 1,409 1,674 1,981 2,358 3,125 Working capital changes 244 (6,200) (3,771) (2,812) (324) Capital expenditure (255) (452) (81) (227) (245) Free cash flow 1,398 (4,977) (1,871) (681) 2,556 Ratios (%) Debt/equity 117 144 115 117 97 Net debt/equity 105 95 101 100 81 RoAE (%) 9.6 9.5 10.3 11.4 13.7 RoACE (%) 6.0 6.3 6.1 8.9 11.2 Book value per share (Rs) 92 90 98 107 119

Source: Company, Kotak Institutional Equities estimates

KOTAK INSTITUTIONAL EQUITIES RESEARCH 61

ADD DLF (DLFU)

Real Estate AUGUST 04, 2014 UPDATE Coverage view: Attractive

Conference call highlight—lower priced products to be launched in Gurgaon. Price (`): 201 The highlight of the conference call was the management’s willingness to launch Target price (`): 220 products in Gurgaon at lower prices. The Gurgaon market is yet to improve and it’s BSE-30: 25,481 difficult for DLF to reduce prices of ongoing projects as a sizable area is already sold. With high construction and approval expenses and weak sales, we expect increased borrowings in FY2015. However, as launches pick up and rentals increase contribution to cash flows, we see an operational turnaround in 2HFY16 and maintain ADD.

Company data and valuation summary DLF Stock data Forecasts/Valuations 2014 2015E 2016E QUICK NUMBERS 52-week range (Rs) (high,low)243-120 EPS (Rs) 5.6 3.0 4.9 Market Cap. (Rs bn) 357.7 EPS growth (%) 24.8 (46.6) 63.8 Shareholding pattern (%) P/E (X) 35.8 67.1 41.0 • We lower FY2015 Promoters 74.9 Sales (Rs bn) 83.0 90.2 97.8 and FY2016 sales FIIs 19.9 Net profits (Rs bn) 10.0 5.3 8.7 estimates to 4 mn MFs 0.0 EBITDA (Rs bn) 24.9 27.5 32.4 sq. ft and 6.6 mn sq. Price performance (%) 1M 3M 12M EV/EBITDA (X) 22.7 20.5 17.3 Absolute (8.2) 43.6 56.3 ROE (%) 3.5 1.8 3.0 ft, respectively Rel. to BSE-30 (6.4) 26.3 17.5 Div. Yield (%) 1.0 1.0 1.0 • We maintain our estimate of 1QFY15 conference call highlights increased debt in FY2015 ` Outlook on the Gurgaon market. The management indicated some improvement in sentiment (more enquiries) in July in Gurgaon, but sales were low. The management believes volumes will improve over the next 3-4 quarters.

` Product offerings and price points. The management admitted that it needed to offer products at lower prices. It indicated flexibility in offerings and price points of projects to be launched in New Gurgaon. But it said it could not much about ongoing projects in Phase 5 and New Gurgaon, as 40-50% of the area had been sold.

ƒ We expect new launches in Southern Peripheral Road, Gurgaon in the form of floors and plots and believe DLF may launch them in the mid-segment range. We have been highlighting DLF’s need to change its product offerings and pricings since 2QFY14.

` FY2015 guidance unattractive. The management reiterated its weak near-term outlook (achieving last year’s sales value/marginal growth versus last year) in terms of sales value.

ƒ Although we maintain our FY2015 launch estimates for Gurgaon and Delhi, we lower our sales estimates due to the management guidance. We defer our launch and sales expectations for DLF’s projects in South India as DLF did not announce major plans . Our new sales estimates for FY2015 and FY2016 are 4 mn sq. ft and 6.6 mn sq. ft.

` Construction costs. DLF spent around `2.5 bn a month on construction in 1QFY15 and intends

to ramp this up to `3 bn/month with construction pick-up at Camelias and Crest. The focus on non-core divestments will be less and opportunistic.

ƒ As sales value for FY2015 is unlikely to see a big jump versus FY2014, we maintain estimates of increased borrowings this year, unless DLF issues equity or makes a large asset sale.

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

DLF Real Estate

Exhibit 1: Sales may pick up only in FY2016 DLF - sales (mn sq. ft) and sales value (` bn), March fiscal year-ends, 2011-16E

Sales 2011 2012 2013 2014 2015E 2016E Gurgaon 3.9 4.9 2.9 1.7 2.7 2.9 Rest of India 6.3 8.7 4.3 2.0 1.3 3.6 Total 10.2 13.6 7.2 3.8 4.0 6.6 Sales value 67 52 38 41 42 68

Source: Company, Kotak Institutional Equities estimates

Exhibit 2: We expect debt to increase in the near term DLF - profit model, balance sheet, cash flow model, March fiscal year-ends, 2013-17E (` mn)

2013 2014 2015E 2016E 2017E Profit model Net sales 77,728 82,980 90,209 97,793 117,988 EBITDA 26,262 24,852 27,518 32,437 44,528 Other income 13,229 14,916 7,339 7,503 1,477 Interest (23,140) (24,633) (20,588) (19,656) (20,367) Depreciation (7,962) (6,629) (6,960) (7,235) (7,561) Pre-tax profits 8,388 8,506 7,309 13,050 18,078 Extraordinary items 330 (3,299) — — — Tax (5,147) 836 (1,827) (3,262) (4,519) Deferred taxation 3,896 — — — — Net income 7,467 6,044 5,482 9,787 13,558 Adjusted net income 7,953 6,680 5,327 8,725 12,748 Earnings per share (Rs) 4.7 3.7 3.0 4.9 7.1 Balance sheet Total equity 275,277 291,941 291,797 296,342 309,090 Minority interests 4,020 2,023 2,023 2,023 2,023 Non-current liabilities 178,471 158,491 168,539 162,473 135,000 Current liabilities 188,500 192,568 158,226 158,114 171,623 Total liabilities and equity 646,268 645,024 620,585 618,952 617,736 Non-current assets Net fixed assets 276,829 248,133 241,822 234,580 226,208 Other non-current assets and advances 44,008 48,907 40,741 41,973 39,778 Current assets 312,094 339,071 331,689 337,356 346,706 Investments 13,337 8,912 6,333 5,044 5,044 Total assets 646,268 645,024 620,585 618,952 617,736 Free cash flow Operating cash flow excl. working capital 12,528 9,476 12,287 15,960 20,308 Working capital changes (7,911) (20,788) (9,570) (10,464) (9,435) Capital expenditure 6,456 26,491 1,930 1,297 811 Free cash flow 11,072 15,179 4,648 6,793 11,685 Ratios (%) Debt/equity 96 84 84 79 71 Net debt/equity 89 75 76 73 66 RoAE (%) 2.9 2.4 1.8 3.0 4.2 RoACE (%) 2.3 7.0 4.0 4.0 4.7 Book value per share (Rs) 151 154 154 156 163

Source: Company, Kotak Institutional Equities estimates

KOTAK INSTITUTIONAL EQUITIES RESEARCH 63

ATTRACTIVE Automobiles

India AUGUST 04, 2014 UPDATE BSE-30: 25,481

Volume recovery building momentum. Two-wheeler and four-wheeler passenger car segments registered strong sales growth in July 2014 led by (1) new model launches and (2) recovery in urban demand. However, tractor and commercial vehicle sales volumes remained under pressure. We expect sales growth to remain robust as customer sentiment has improved. We remain positive on Maruti Suzuki and Tata Motors in the large-cap. space.

Two-wheeler players maintain the growth momentum in July 2014 Hero volumes grew by ~9% yoy in July 2014 while Honda sales volumes grew sharply by 33% yoy. The strong growth in Honda Motorcycles was supported by a sharp ~61% yoy increase in scooter sales. Royal Enfield volumes grew sharply by 80% yoy in July 2014 while Yamaha Motor India reported a 36% yoy increase in domestic two-wheeler sales in July 2014. Domestic two-wheeler volumes are likely to remain strong led by (1) new model launches by different players, (2) increasing penetration in rural markets and (3) pent-up and replacement demand in urban areas. Maruti reports sharp increase in domestic sales volumes Maruti Suzuki reported a sharp 19.9% yoy increase in domestic sales volumes led by (1) a sharp 81.2% yoy increase in the Swift-Celerio segment and (2) a 22.2% yoy increase in the Dzire segment. The management has attributed the recent strong growth in demand to increase in the proportion of first-time car buyers, a segment where the company has a dominant market share. The company is optimistic of continuation of strong demand over the next few months led by continued strong growth in the rural markets and revival of demand in urban markets. Among other car manufacturers, Honda Cars India reported a sharp 40% yoy increase in domestic sales to 15,709 units. The strong growth was supported by new model launches (Mobilio and City); the company has indicated that it has received ~10,000 bookings for the recently launched Mobilio. Hyundai Motors reported a 12.7% yoy increase in domestic sales while Ford India reported a marginal decline in domestic sales during July 2014. We expect domestic passenger vehicle sales to increase by ~9-10% in FY2015. M&M disappoints with a yoy decline in UV and tractor sales volumes M&M reported a 4.7% yoy decline in total sales to 52,974 units in July 2014 led by (1) 5.3% yoy decline in UV sales volumes (our expectation was a modest growth of ~3-4% yoy) and (2) 5.8% yoy decline in tractor sales volumes to 17,407 units (in line with our expectation of ~5% yoy decline). We expect M&M sales volume growth to remain subdued in the current year in view of (1) absence of new model launches by the company in the UV segment and (2) a likely subdued growth in the domestic tractor industry due to delay in the onset of monsoon and subsequent sowing by farmers, which could impact their profitability.

Tata Motors sales remain subdued; Ashok Leyland reports 10% yoy decline in sales Tata Motors continue to report sharp yoy decline in total sales volumes. The company reported 25% yoy decline in total CV sales and 15% yoy decline in total passenger car volume sales. However, we expect the company to benefit from (1) recovery in the CV cycle during the latter half of the year led by pent-up and replacement demand and (2) new model launches—Zest and Bolt—over the next few months, which will help the company stem further market share losses. Eicher Motors reported a modest 1.4% yoy increase in domestic CV sales.

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

Automobiles India

Exhibit 1: Hero Motocorp reported ~9% yoy increase in total sales in July 2014 Hero Motocorp monthly sales volumes, March fiscal year-ends (units)

Residual volumes Residual August-March monthly run-rate Feb-14 Mar-14 Apr-14 May-14 Jun-14 Jul-14 2014YTD 2015YTD 2014 2015E 2014 2015E Total sales 504,181 524,028 571,054 602,481 541,594 529,862 2,046,827 2,244,991 4,199,068 4,520,120 524,884 565,015 Yoy change (%) 0.6 11.9 14.4 8.0 7.8 8.7 9.7 7.6 7.6

Source: Company, Kotak Institutional Equities

Exhibit 2: Honda reported ~33% yoy increase in total sales in July 2014 Honda Motorcycles India monthly sales volumes, March fiscal year-ends (units)

Feb-14 Mar-14 Apr-14 May-14 Jun-14 Jul-14 2014YTD 2015YTD Sales volume (units) Motorcycles 152,705 190,192 138,390 160,641 151,379 157,746 483,347 608,156 Scooters 175,998 201,994 175,877 195,171 172,034 223,665 544,964 766,747 Total sales 328,703 392,186 314,267 355,812 323,413 381,411 1,028,311 1,374,903 Yoy change (%) Motorcycles 40.4 57.3 12.2 76.0 25.3 6.7 25.8 Scooters 46.7 53.0 29.0 41.6 31.0 60.5 40.7 Total sales 43.7 55.1 21.0 55.3 28.3 32.8 33.7

Source: Company, Kotak Institutional Equities

Exhibit 3: Maruti’s domestic volumes increased by ~20% yoy in July 2014 Maruti Suzuki monthly sales volumes, March fiscal year-ends (units)

Residual volumes Residual August-March monthly run-rate Feb-14 Mar-14 Apr-14 May-14 Jun-14 Jul-14 2014YTD 2015YTD 2014 2015E 2014 2015E Sales volume (units) M800, Alto, A-Star, Wagonr 37,342 40,085 26,043 29,068 47,618 28,759 131,255 131,488 304,777 352,995 38,097 44,124 Swift, Estillo, Ritz, Celerio 28,672 28,285 23,659 26,394 22,293 25,156 73,560 97,502 179,148 210,866 22,394 26,358 Dzire 18,353 17,237 16,008 18,953 15,990 18,634 64,508 69,585 133,177 136,996 16,647 17,124 SX4 228 411 76 121 322 233 1,740 752 2,289 3,277 286 410 Kizashi — — — — — — — — 1 — — — Gypsy and Vitara, Ertiga 5,231 6,499 5,011 5,253 5,003 5,631 19,184 20,898 41,935 37,752 5,242 4,719 Omni and Eeco 9,932 9,752 8,322 10,771 9,738 11,680 30,244 40,511 71,871 61,604 8,984 7,701 XA Alpha, Ciaz Total domestic 99,758 102,269 79,119 90,560 100,964 90,093 320,491 360,736 733,198 825,490 91,650 103,186 Exports 9,346 11,081 7,077 10,365 11,809 11,287 29,242 40,538 72,110 70,949 9,014 8,869 Total volumes 109,104 113,350 86,196 100,925 112,773 101,380 349,733 401,274 805,308 896,439 100,664 112,055 Yoy change (%) M800, Alto, A-Star, Wagonr (9.6) (11.0) (25.4) (7.5) 52.1 (14.4) 0.2 15.8 15.8 Swift, Estillo, Ritz, Celerio 19.4 9.3 9.9 53.9 6.2 81.2 32.5 17.7 17.7 Dzire 0.2 (14.1) (17.7) 9.8 27.4 22.2 7.9 2.9 2.9 SX4 6.0 (54.5) (87.4) (75.9) 2.5 (27.6) (56.8) 43.2 43.2 Kizashi ————————— Gypsy and Vitara, Ertiga (12.2) 0.2 (5.8) 22.0 0.1 23.4 8.9 (10.0) (10.0) Omni and Eeco 22.1 2.6 (4.3) 50.2 42.5 54.8 33.9 (14.3) (14.3) Total domestic 1.8 (5.2) (12.6) 16.4 31.1 19.9 12.6 12.6 12.6 Exports (19.5) (8.0) 4.4 51.2 58.4 38.4 38.6 (1.6) (1.6) Total volumes (0.4) (5.5) (11.4) 19.2 33.5 21.7 14.7 11.3 11.3

Source: Company, Kotak Institutional Equities

KOTAK INSTITUTIONAL EQUITIES RESEARCH 65 India Automobiles

Exhibit 4: M&M sales volumes declined by 4.7% yoy in July 2014 Mahindra & Mahindra monthly sales volumes, March fiscal year-ends (units)

Residual volumes Residual August-March monthly run-rate Feb-14 Mar-14 Apr-14 May-14 Jun-14 Jul-14 2014YTD 2015YTD 2014 2015E 2014 2015E Sales volume (units) Passenger Uvs (incl. Verito) 19,308 23,433 18,148 18,085 16,780 14,708 75,754 67,721 153,401 167,422 19,175 20,928 Maxximo + Gio + pick ups 14,701 17,649 11,677 12,836 14,138 12,472 56,763 51,123 120,824 132,650 15,103 16,581 MNAL 605 1,103 750 846 995 725 3,329 3,316 4,832 4,845 604 606 3-wheelers 4,724 6,305 3,532 3,732 4,544 5,142 16,857 16,950 45,757 53,178 5,720 6,647 Exports (Auto sector) 2,828 3,146 2,181 2,370 2,014 2,520 7,377 9,085 22,283 23,541 2,785 2,943 Auto division 42,166 51,636 36,288 37,869 38,471 35,567 160,080 148,195 347,097 381,635 43,387 47,704 Tractors (Dom + Exp) 17,592 17,673 20,731 23,940 29,884 17,407 93,046 91,962 174,588 183,701 21,824 22,963 Total 59,758 69,309 57,019 61,809 68,355 52,974 253,126 240,157 521,685 565,336 65,211 70,667 Yoy change (%) Passenger Uvs (incl. Verito) (17.6) (9.3) (12.5) (18.7) (2.6) (5.3) (10.6) 9.1 9.1 Maxximo + Gio (3.1) 2.5 (19.0) (13.6) 2.7 (9.2) (9.9) 9.8 9.8 MNAL (40.0) (17.4) 6.5 (14.0) 9.2 (0.7) (0.4) 0.3 0.3 3-wheelers (1.6) 30.5 (12.5) (7.3) 5.6 14.5 0.6 16.2 16.2 Exports (Auto sector) (17.4) 17.4 42.5 74.8 6.8 (3.3) 23.2 5.6 5.6 Auto division (11.8) (0.5) (12.4) (12.9) 1.0 (4.1) (7.4) 10.0 10.0 Tractors (Dom + Exp) 18.4 2.0 (10.6) 1.3 7.7 (5.8) (1.2) 5.2 5.2 Total (4.7) 0.1 (11.8) (7.9) 3.8 (4.7) (5.1) 8.4 8.4

Source: Company, Kotak Institutional Equities

Exhibit 5: Tata Motors sales volumes declined by ~23% yoy in July 2014 Tata Motors monthly sales volumes, March fiscal year-ends (units)

Residual volumes Residual August-March monthly run-rate Feb-14 Mar-14 Apr-14 May-14 Jun-14 Jul-14 2014YTD 2015YTD 2014 2015E 2014 2015E Sales volume (units) MHCVs 10,456 14,522 9,580 10,181 10,814 10,825 44,022 41,400 78,476 93,593 9,810 11,699 LCVs 17,731 23,553 16,477 17,928 19,525 19,031 112,421 72,961 186,378 225,838 23,297 28,230 Total CVs 28,187 38,075 26,057 28,109 30,339 29,856 156,443 114,361 264,854 319,431 33,107 39,929 UVs 2,399 2,989 1,890 2,373 2,050 2,614 9,568 8,927 22,832 25,093 2,854 3,137 Cars 9,365 10,120 5,945 7,043 6,168 7,153 38,629 26,309 74,265 109,556 9,283 13,694 Total PVs 11,764 13,109 7,835 9,416 8,218 9,767 48,197 35,236 97,097 134,649 12,137 16,831 Total sales 39,951 51,184 33,892 37,525 38,557 39,623 204,640 149,597 361,951 454,080 45,244 56,760 Yoy change (%) MHCVs (8.2) (5.8) (9.9) (4.2) (7.8) (1.8) (6.0) 19.3 19.3 LCVs (55.0) (46.8) (41.4) (33.0) (31.8) (34.2) (35.1) 21.2 21.2 Total CVs (44.5) (36.2) (32.8) (24.8) (24.8) (25.3) (26.9) 20.6 20.6 UVs (17.8) (16.8) (30.4) 4.7 (8.2) 11.1 (6.7) 9.9 9.9 Cars 13.4 7.1 (38.6) (27.1) (39.0) (22.0) (31.9) 47.5 47.5 Total PVs 5.3 0.5 (36.8) (21.1) (33.4) (15.2) (26.9) 38.7 38.7 Total sales (35.6) (29.6) (33.8) (23.9) (26.8) (23.0) (26.9) 25.5 25.5

Source: Company, Kotak Institutional Equities

Exhibit 6: Ashok Leyland sales volumes declined by ~10% yoy in July 2014 Ashok Leyland monthly sales volumes, March fiscal year-ends (units)

Feb-14 Mar-14 Apr-14 May-14 Jun-14 Jul-14 2014YTD 2015YTD Sales volume (units) SCV (Dost) 2,339 2,563 1,374 1,748 1,910 2,111 9,304 7,143 CVs (ex Dost) 5,576 7,723 4,523 4,884 5,501 5,736 21,166 20,644 Total CVs 7,915 10,286 5,897 6,632 7,411 7,847 30,470 27,787 Yoy change (%) SCV (Dost) (22.1) (40.7) (38.6) (25.1) (15.2) (14.9) (23.2) CVs (ex Dost) (20.9) (20.3) (13.9) (1.0) 16.6 (8.5) (2.5) Total CVs (21.2) (26.6) (21.2) (8.7) 6.3 (10.3) (8.8)

Source: Company, Kotak Institutional Equities

66 KOTAK INSTITUTIONAL EQUITIES RESEARCH Automobiles India

Exhibit 7: Royal Enfield volumes continue to grow at a robust pace Eicher Motors monthly sales volumes, December calendar year-ends (units)

Residual volumes August-December Monthly run-rate Feb-14 Mar-14 Apr-14 May-14 Jun-14 Jul-14 2013YTD 2014YTD 2013 2014E 2013 2014E Sales volume (units) Royal Enfield 20,352 23,693 23,818 25,011 25,303 27,314 89,952 165,723 88,169 115,708 17,634 23,142 Domestic 19,849 23,170 23,180 24,510 24,519 26,796 87,490 161,832 Exports 503 523 638 501 784 518 2,462 3,891 VECV 2,801 4,307 3,388 3,656 4,130 3,341 26,415 24,205 14,836 19,690 2,967 3,938 Domestic 2,531 3,839 2,791 3,064 3,474 2,955 25,195 20,976 Exports 270 468 597 592 656 386 1,220 3,229 Total sales 23,153 28,000 27,206 28,667 29,433 30,655 116,367 189,928 103,005 135,398 20,601 27,080 Yoy change (%) Royal Enfield 82.5 95.2 86.3 86.0 83.3 80.0 84.2 31.2 31.2 Domestic 82.0 95.8 87.4 88.2 84.1 80.4 85.0 Exports 103.6 71.5 51.9 18.4 59.7 59.9 58.0 VECV (24.1) (13.2) (13.5) (0.0) 25.7 4.8 (8.4) 32.7 32.7 Domestic (28.5) (19.3) (25.9) (12.2) 12.4 1.4 (16.7) Exports 77.6 131.7 295.4 250.3 234.7 41.4 164.7 Total sales 56.0 63.7 62.9 67.6 72.2 66.9 63.2 31.4 31.4

Source: Company, Kotak Institutional Equities

KOTAK INSTITUTIONAL EQUITIES RESEARCH 67

Economy.dot INDIA Economy

Monetary Policy AUGUST 04, 2014 UPDATE BSE-30: 25,481

RBI policy preview—monsoon, budget and liquidity. Even as the August 5 policy meeting might be a non-event in terms of policy rates, we would watch for the RBI’s thoughts on (1) risks from the erratic monsoons and growth pick-up, (2) qualitative and quantitative aspects of the budget, (3) recent volatility in short-term liquidity/rates and (4) evaluation of global risks. We do not expect significant change in the RBI’s tone from the June policy meeting and maintain our call of an extended pause by the RBI until the end of CY2014.

Policy rate—no change but watch out for the tone

The August 5 policy meeting is likely to be a non-event but the policy communiqué will be important to gauge the RBI’s reaction to the (1) monsoons and (2) budget. Even as CPI inflation continues on a downward trend, secondary risks remain from higher food prices and hence inflation expectations, core inflation and a wage-price spiral, which will keep the RBI cautious about emerging trends. It is slightly premature to comment on the length of the pause, given that (1) monsoon-led inflation risks will be fully evident by 3QFY15 and (2) clarity about the nature of fiscal consolidation will take few more months. We expect the RBI’s tone to remain similar to that during the last policy meeting but a bit more cautious about food inflation and associated risks. We maintain our call for an extended pause until the end of CY2014 with clarity on future policy action likely emerging after October-November inflation prints.

Monsoon—a weak monsoon will keep the RBI on edge

Retail prices of fruits and vegetables have continued to move up (see Exhibit 1). The sowing pattern until July 25 (27% lower yoy) does not inspire much confidence for agriculture production, either. Even as the retail inflation trend may be comfortable even after factoring in higher food prices (headline inflation is unlikely to move above 10% due to the base effect), the secondary impact through wage settings and inflation expectations would be crucial inputs for the RBI. Even as the RBI is likely to take note of the government’s measures to curb hoarding and exports of essential commodities, as a central bank it would need to stay cautious about the effects of higher food prices and the secondary impact.

Budget—likely tax slippages funded by higher divestment or expenditure cuts

The RBI is likely to be appreciative of the government’s efforts to restrict GFD/GDP to 4.1%. However, chances of slippages are significant, given (1) growth momentum remaining weak in FY2015 and (2) over-optimistic growth assumptions, at least, on the indirect taxes front. 1QFY15 fiscal details do not inspire much confidence with respect to budget estimates (see Exhibits 2 and 3). The subsequent path to curtail the deficit will hinge on (1) higher divestment and non-tax revenues and (2) lower expenditure. The RBI, while being cognizant of these risks, is likely to recognize the government’s resolve on fiscal consolidation.

Liquidity—RBI’s intent on this matter will be important

The recent tightness in liquidity and consequent volatility in overnight rates have led segments of the market to believe that the RBI may attempt to reduce the requirement of daily CRR maintenance from the current 95%. However, Governor Rajan had noted at the September policy meeting that “… any further change in the minimum daily maintenance of the CRR is not contemplated”. One of the reasons that the RBI might be maintaining relatively tight liquidity conditions is because the system may see significant liquidity infusion in August when the government receives dividend payments from the RBI. We believe communication about this and the intent to manage volatility in money market rates may help the market.

For Private Circulation Only. Economy

Exhibit 1: Unusual increase in vegetable prices in July Change in average prices of select vegetables, January-July 2014 (%)

Weightage mom changes (%) CPI January February March April May June July Brinjal 0.41 (10.9) 5.3 7.3 (8.7) 13.8 5.6 23.9 Cabbage 0.33 (27.9) (6.4) (0.9) 10.0 20.0 26.0 32.2 Cauliflower 0.37 (20.8) (8.4) 4.2 11.3 38.2 33.7 18.9 Onion 0.57 (30.2) (18.4) 2.3 2.2 11.1 24.5 31.6 Potato 0.55 (16.5) (12.9) 11.9 18.1 2.1 10.0 8.2 Tomato 0.56 (44.2) (17.2) 6.8 11.5 1.3 12.9 142.7

Source: National Horticulture Board, Kotak Economic Research

Exhibit 2: Significant chances of slippages on the tax front Monthly tax receipts of the Indian government, March fiscal year-ends (` bn)

Chg (%) YTD (Apr-Jun) Chg (%) Date Jun-14 Jun-13 May-14 yoy mom 2015 2014 yoy Gross tax revenues 985 993 557 (0.8) 76.8 1,830 1,771 3.4 Direct taxes 596 621 247 (4.0) 141 993 930 6.8 Corporation tax 475 475 88 (0.1) 438 504 507 (0.6) Income tax 109 136 151 (19.2) (27.5) 464 403 15.2 Indirect taxes 389 372 310 4.6 25.5 837 841 (0.4) Customs duty 138 133 130 4.5 6.2 386 406 (4.9) Excise duty 128 143 84 (10.4) 53.0 184 211 (12.9) Service tax 122 96 96 26.9 27.7 266 223 19.5 Other taxes 12 11 8 14.7 50.3 25.0 20.0 25.3 Net tax revenues 704 741 277 (5.0) 154.5 991 1,019 (2.8)

Source: CEIC, Kotak Economic Research

Exhibit 3: Fiscal deficit in 1QFY15 at 56% of budget estimates Monthly fiscal aggregates of the Indian government, March fiscal year-ends (` bn)

chg (%) YTD (Apr-Jun) chg (%) Date Jun-14 Jun-13 May-14 yoy mom 2015 2014 yoy Total receipts 762 827 324 (7.9) 135.1 1,157 1,194 (3.1) Total expenditure 1,333 1,649 1,598 (19.2) (16.6) 4,136 3,822 8.2 Plan expenditure 522 465 366 12.2 42.7 1,118 1,148 (2.6) Non-plan expenditure 811 1,184 1,232 (31.5) (34.2) 3,018 2,674 12.9 Revenue expenditure 1,202 1,468 1,355 (18.1) (11.3) 3,638 3,277 11.0 Capital expenditure 130 181 243 (27.8) (46.4) 498 545 (8.7) Fiscal deficit 570 821 1,274 (30.6) (55.2) 2,979 2,628 13.3 Revenue deficit 443 656 1,039 (33) (57.4) 2,494 2,105 18.5 Primary deficit 212 561 958 (62.2) (77.9) 2,072 2,013 2.9

Source: CEIC, Kotak Economic Research

KOTAK ECONOMIC RESEARCH 69

KOTAK INSTITUTIONAL EQUITIES RESEARCH June 2014: Results calendar India Daily4,India Summary-August 2014 4-Aug 5-Aug 6-Aug 7-Aug 8-Aug 9-Aug 10-Aug AIA Engineering Ajanta Pharma Adani Ports Aurobindo Phar Chambal Fert Adani Enter DFL Infra Bata India ADANI POWER Bombay Dyeing Corporation Bank Dena Bank Indraprastha Gas Crompton Greav Amara Raja Chennai Petro Gujarat state Godrej Inds Kalpataru Pow er EIH Apollo Tyres Gujarat State Pet Mahindra & Mahindra Sudarshan Chem Marico Hero MotoCorp City Union Bank IL&FS Invest Mgrs Pow er Finance Oriental Bank Jubilant Glaxosmithkl Cons JUBL FOOD SBI Petronet LNG Mahindra Ugine IDBI Bank Nestle India Sobha Dev

Pow er Grid NHPC Jindal Steel Neyveli Lignite Sun TV Netw ork Punj Lloyd Tata Chemicals Jubilant Inds Puravankara Proj Tata Comm Tata Invest Maharashtra Seam ZEE MEDIA TBZ Tube Invest 11-Aug 12-Aug 13-Aug 14-Aug 15-Aug 16-Aug 17-Aug Eicher Motors Aditya Birla Nuv GMR Infra Hindalco Gail India Apollo Hosp GVK Pow er Page Inds Jet Air India BPCL Jyothy Lab National Alum Britannia Inds Siemens SAIL Coal India Sundaram Clayton Glaxosmithkl Phar Tata Steel HPCL Motherson Sumi NMDC REC Sun Pharma Tata Pow er

Source: BSE, NSE, Kotak Institutional Equities India Daily Summary - August Summary Daily- India 70

71 71

Kotak Institutional Equities: Valuation summary of KIE Universe stocks

Target O/S ADVT- Price (Rs) price Upside Mkt cap. shares EPS (Rs) EPS growth (%) PER (X) EV/EBITDA (X)Price/BV (X) Dividend yield (%) RoE (%) 3mo Company Rating 1-Aug-14 (Rs) (%) (Rs mn) (US$ mn) (mn) 2014 2015E 2016E 2014 2015E 2016E 2014 2015E 2016E 2014 2015E 2016E 2014 2015E 2016E 2014 2015E 2 016E 2014 2015E 2016E (US$ mn) Automobiles Amara Raja Batteries ADD 482 505 4.8 82,315 1,345 171 21.5 23.9 29.5 28.2 10.9 23.8 22.4 20.2 16.3 14.3 12.6 10.3 6.0 4.9 4.0 0.7 1.0 1.2 30.3 26.8 27.0 2.0 Apollo Tyres BUY 169 220 30.6 84,939 1,388 504 19.9 21.5 22.7 63.7 8.0 5.6 8.5 7.8 7.4 5.0 4.7 4.3 1.8 1.4 1.2 0.5 0.5 0.6 26.0 22.2 19.3 14.5 Bajaj Auto ADD 2,058 2,250 9.3 595,556 9,734 289 112.1 116.1 136.4 6.6 3.6 17.5 18.4 17.7 15.1 13.2 13.8 11.9 6.1 5.2 4.4 2.4 2.3 2.7 36.5 31.6 31.4 13.5 Bharat Forge SELL 724 620 (14.4) 171,781 2,808 237 22.0 27.7 34.8 110.7 26.1 25.6 32.9 26.1 20.8 18.7 13.4 11.1 6.4 5.4 4.5 0.5 0.7 0.9 21.0 22.4 23.4 10.0 Eicher Motors REDUCE 8,408 6,150 (26.9) 227,352 3,716 27 145.7 236.6 334.8 21.3 62.4 41.5 57.7 35.5 25.1 29.9 21.0 14.1 11.1 8.7 6.6 0.4 0.3 0.4 19.2 25.4 28.3 3.5 Exide Industries REDUCE 164 160 (2.4) 139,315 2,277 850 5.7 7.2 8.7 (6.8) 25.3 21.6 28.6 22.8 18.8 16.9 14.2 11.9 3.7 3.4 3.0 1.4 1.6 1.6 13.6 15.6 17.1 8.5 Hero Motocorp ADD 2,597 2,850 9.8 518,531 8,475 200 105.6 139.4 177.3 (0.4) 32.0 27.2 24.6 18.6 14.6 17.6 13.2 10.1 9.4 7.2 5.6 2.5 1.9 2.4 39.7 44.1 43.3 19.9 Mahindra & Mahindra ADD 1,174 1,310 11.6 659,990 10,787 562 68.5 63.9 74.3 8.7 (6.7) 16.2 17.1 18.4 15.8 12.9 12.6 11.0 3.7 3.4 3.1 1.7 1.0 1.3 23.2 12.2 14.9 28.6 Maruti Suzuki BUY 2,586 3,000 16.0 781,179 12,767 302 92.8 111.0 172.3 17.1 19.7 55.2 27.9 23.3 15.0 16.5 13.8 8.8 3.6 3.2 2.7 0.5 0.5 0.7 13.8 14.6 19.5 16.4 Motherson Sumi Systems ADD 353 350 (0.7) 310,949 5,082 882 8.7 12.3 18.1 72.1 41.9 47.1 40.6 28.6 19.5 13.0 10.3 6.6 10.5 7.5 5.1 0.7 1.0 1.5 34.2 29.4 30.0 9.1 Tata Motors BUY 440 575 30.7 1,415,853 23,141 3,218 46.5 43.5 59.3 51.4 (6.6) 36.3 9.5 10.1 7.4 5.0 4.7 3.9 2.1 1.8 1.4 0.4 — — 28.7 19.3 21.4 44.3 WABCO India ADD 3,299 4,000 21.2 62,578 1,023 19 61.9 77.7 133.0 (10.2) 25.4 71.2 53.3 42.5 24.8 36.7 26.6 15.7 8.3 7.1 5.9 0.2 0.4 1.0 16.7 18.1 26.1 0.4 Automobiles Attractive 5,140,668 84,018 23.3 4.6 33.9 17.2 16.4 12.2 9.2 8.3 6.5 3.6 3.0 2.5 1.1 0.8 1.1 20.9 18.6 20.6 183.5 Banks/Financial Institutions Axis Bank ADD 387 430 11.1 909,149 14,859 2,349 26.5 29.7 34.5 19.6 12.3 16.1 14.6 13.0 11.2 — — — 2.4 2.1 1.8 1.0 1.3 1.5 17.4 17.0 17.2 40.8 Bajaj Finserv BUY 950 1,175 23.6 151,220 2,472 159 96.4 102.3 111.1 (6.6) 6.1 8.6 9.9 9.3 8.6 — — — 1.6 1.5 1.3 1.4 1.4 1.4 17.9 17.0 16.3 1.8 Bank of Baroda ADD 894 1,050 17.5 384,852 6,290 431 105.4 118.2 138.3 (0.6) 12.1 17.0 8.5 7.6 6.5 — — — 1.2 1.1 1.0 2.4 2.7 3.2 13.8 13.8 14.5 28.5 Bank of India ADD 272 320 17.8 174,736 2,856 643 42.4 61.9 66.7 (7.9) 45.7 7.8 6.4 4.4 4.1 — — — 0.8 0.7 0.6 1.8 2.7 2.9 11.2 14.3 13.6 29.2 Canara Bank REDUCE 394 370 (6.0) 181,575 2,968 461 52.9 67.1 81.1 (18.5) 26.9 20.9 7.4 5.9 4.9 — — — 0.9 0.9 0.8 2.9 3.7 4.5 8.9 10.1 11.3 32.4 DCB Bank BUY 80 90 12.1 20,089 328 250 6.0 6.9 7.9 48.2 13.5 15.1 13.3 11.7 10.2 — — — 1.9 1.7 1.5 — — — 14.8 14.5 14.4 2.2 Federal Bank BUY 118 145 23.0 100,798 1,647 855 9.8 12.2 14.7 0.1 24.6 19.9 12.0 9.6 8.0 — — — 1.5 1.3 1.2 1.7 2.1 2.5 12.6 14.2 15.2 12.8 HDFC ADD 1,040 1,060 2.0 1,622,374 26,516 1,561 34.9 40.8 47.4 11.3 16.8 16.3 29.8 25.5 21.9 — — — 5.8 5.2 4.6 1.3 1.6 1.9 20.6 21.0 22.8 57.8 HDFC Bank REDUCE 815 800 (1.9) 1,956,306 31,974 2,399 35.3 42.9 51.1 25.0 21.5 18.9 23.1 19.0 16.0 — — — 4.6 3.9 3.3 0.8 1.0 1.2 21.3 21.7 21.8 32.0 ICICI Bank BUY 1,476 1,660 12.5 1,704,442 27,857 1,155 84.9 92.5 107.0 17.7 8.9 15.7 17.4 16.0 13.8 — — — 2.4 2.2 2.0 1.6 1.9 2.2 14.0 13.9 14.7 81.7 IIFL Holdings BUY 132 175 32.4 39,143 640 296 9.4 13.0 16.1 1.6 38.4 24.2 14.1 10.2 8.2 — — — 1.8 1.6 1.4 2.3 2.5 3.1 14.0 17.2 18.8 0.5 IndusInd Bank ADD 549 610 11.2 288,366 4,713 526 26.8 32.2 38.7 32.0 20.1 20.3 20.5 17.0 14.2 — — — 3.4 2.9 2.5 0.6 0.8 0.9 18.0 18.3 18.6 12.2 ING Vysya Bank BUY 611 720 17.8 115,469 1,887 189 34.8 42.3 51.6 (12.0) 21.4 22.1 17.6 14.5 11.8 — — — 1.7 1.6 1.4 1.0 1.2 1.5 11.4 11.0 12.2 2.2 J&K Bank REDUCE 1,600 1,550 (3.1) 77,589 1,268 48 243.9 226.8 222.5 12.1 (7.0) (1.9) 6.6 7.1 7.2 — — — 1.4 1.2 1.1 3.1 2.9 2.9 22.3 17.9 15.5 5.4 Karur Vysya Bank BUY 475 535 12.7 50,900 832 107 40.1 57.8 70.6 (21.9) 44.1 22.2 11.8 8.2 6.7 — — — 1.6 1.4 1.2 2.8 3.0 3.7 13.4 17.5 18.8 1.5 LIC Housing Finance BUY 286 375 31.1 144,466 2,361 505 26.1 30.5 35.2 28.8 16.7 15.7 11.0 9.4 8.1 — — — 2.0 1.7 1.5 1.6 1.8 2.1 18.8 18.9 18.8 19.1 L&T Finance Holdings SELL 68 60 (11.5) 116,511 1,904 1,718 3.5 5.8 5.4 (18.5) 68.9 (8.3) 19.6 11.6 12.6 — — — 2.0 2.0 1.8 1.1 2.4 1.3 10.5 18.3 15.2 10.4 Magma Fincorp BUY 95 125 32.1 17,974 294 190 7.2 9.4 10.9 15.6 30.9 16.6 13.2 10.1 8.7 — — — 1.2 1.1 1.0 1.3 1.6 1.8 9.7 11.1 12.2 0.5 Mahindra & Mahindra Financial SELL 242 240 (0.7) 136,176 2,226 564 15.7 16.9 20.7 0.4 7.3 22.7 15.3 14.3 11.7 — — — 2.8 2.4 2.1 1.6 1.6 2.0 18.6 17.5 18.8 8.4 Muthoot Finance BUY 174 250 43.6 69,149 1,130 397 21.0 20.7 22.9 (22.3) (1.3) 10.6 8.3 8.4 7.6 — — — 1.6 1.3 1.2 3.2 3.6 3.9 19.0 17.3 16.5 1.3 India Daily Summary India Daily - August4,2014Summary Oriental Bank of Commerce ADD 281 350 24.4 84,378 1,379 300 38.0 49.3 57.3 (16.5) 29.8 16.2 7.4 5.7 4.9 — — — 0.9 0.8 0.8 2.7 3.5 4.1 9.0 11.3 12.1 11.4 PFC ADD 266 380 43.1 350,282 5,725 1,319 41.1 43.5 43.5 22.6 5.9 0.1 6.5 6.1 6.1 — — — 1.3 1.4 1.2 3.4 3.6 3.6 21.1 19.4 17.0 28.0 Punjab National Bank REDUCE 953 960 0.7 345,216 5,642 362 92.3 145.5 166.1 (31.3) 57.6 14.1 10.3 6.6 5.7 — — — 1.2 1.1 0.9 1.0 1.7 1.9 10.2 14.3 14.4 22.5 Rural Electrification Corp. ADD 305 400 31.1 301,154 4,922 987 47.4 52.0 52.0 22.7 9.6 0.1 6.4 5.9 5.9 — — — 1.5 1.4 1.2 3.1 3.4 3.6 24.6 22.5 19.1 18.0 Shriram City Union Finance REDUCE 1,700 1,550 (8.8) 111,741 1,826 66 86.2 91.4 115.8 6.2 6.1 26.7 19.7 18.6 14.7 — — — 3.9 2.7 2.3 0.5 0.6 0.8 19.8 16.9 16.8 1.2 Shriram Transport REDUCE 885 840 (5.1) 197,568 3,229 223 56.7 69.2 85.8 (7.1) 22.1 24.1 15.6 12.8 10.3 — — — 2.5 2.1 1.8 0.8 1.1 1.4 16.3 17.3 18.5 10.2 SKS Microfinance ADD 281 305 8.6 35,354 578 126 6.5 13.0 19.8 123.6 101.5 52.1 43.4 21.5 14.2 — — — 6.4 3.5 2.8 — — — 16.5 22.2 21.8 7.2 State Bank of India ADD 2,437 3,000 23.1 1,819,540 29,738 747 146.0 200.8 234.6 (29.2) 37.6 16.8 16.7 12.1 10.4 — — — 2.0 1.8 1.6 1.2 1.3 1.4 10.0 12.1 12.7 104.8 Union Bank ADD 197 220 11.8 123,981 2,026 630 26.7 40.5 46.1 (25.7) 51.6 13.6 7.4 4.9 4.3 — — — 0.9 0.8 0.7 2.0 3.1 3.5 10.3 14.1 14.2 22.8 Yes Bank ADD 536 575 7.2 222,096 3,630 414 44.9 42.2 45.5 23.7 (5.9) 7.9 12.0 12.7 11.8 — — — 3.1 1.9 1.7 1.3 1.4 1.5 25.0 18.8 15.4 48.7 Banks/Financial Institutions Neutral 12,176,040 199,004 2.1 20.2 14.4 14.6 12.1 10.6 ——— 2.2 2.0 1.8 1.4 1.7 1.9 15.3 16.6 16.6 689.6

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

KOTAK INSTITUTIONAL EQUITIES RESEARCH Kotak Institutional Equities: Valuation summary of KIE Universe stocks India Daily4,India Summary-August 2014

Target O/S ADVT- Price (Rs) price Upside Mkt cap. shares EPS (Rs) EPS growth (%) PER (X) EV/EBITDA (X) Price/BV (X)Dividend yield (%) RoE (%) 3mo Company Rating 1-Aug-14 (Rs) (%) (Rs mn) (US$ mn) (mn) 2014 2015E 2016E 2014 2015E 2016E 2014 2015E 2016E 2014 2015E 2016E 2014 2015E 2016E 2014 2015E 2 016E 2014 2015E 2016E (US$ mn) Cement ACC SELL 1,376 1,250 (9.1) 258,438 4,224 188 46.0 48.7 64.7 (37.6) 5.8 33.0 29.9 28.2 21.2 17.1 15.4 11.1 3.1 2.9 2.7 2.6 1.7 1.7 11.6 11.3 13.8 8.8 Ambuja Cements SELL 203 195 (4.1) 309,575 5,060 1,522 6.8 9.7 11.2 (34.6) 44.0 15.6 30.1 20.9 18.1 17.1 12.1 10.2 3.1 2.9 2.7 1.4 1.5 1.7 10.5 14.2 15.2 9.2 Grasim Industries ADD 3,218 3,500 8.8 295,500 4,830 92 214.4 209.2 244.3 (21.3) (2.4) 16.8 15.0 15.4 13.2 8.3 8.0 6.2 1.4 1.3 1.2 1.1 1.1 1.1 9.6 8.7 9.4 6.6 India Cements REDUCE 102 90 (12.0) 31,424 514 307 (2.3) 4.7 7.0 (133.4) 307.4 48.9 (45.3) 21.8 14.7 9.6 7.0 5.8 0.8 0.7 0.7 2.6 2.6 2.6 (1.8) 3.5 5.2 5.5 Shree Cement SELL 7,359 4,520 (38.6) 256,401 4,191 35 230.4 302.6 365.1 (20.1) 31.4 20.7 31.9 24.3 20.2 18.5 15.3 12.0 5.8 4.8 3.9 0.3 0.3 0.3 19.7 21.6 21.4 2.3 UltraTech Cement SELL 2,472 2,000 (19.1) 678,083 11,083 274 74.8 78.4 98.9 (26.2) 4.8 26.2 33.1 31.5 25.0 18.6 16.8 12.3 3.5 3.1 2.8 0.4 0.4 0.4 12.7 11.9 13.4 16.5 Cement Cautious 1,829,422 29,900 (29.7) 15.2 22.3 27.5 23.9 19.5 14.3 12.4 9.6 2.7 2.5 2.3 1.0 0.9 0.9 9.8 10.4 11.5 48.8 Consumer products Asian Paints SELL 625 515 (17.5) 599,020 9,790 959 12.8 15.3 17.7 10.3 19.7 15.2 48.7 40.7 35.4 29.4 24.7 21.4 14.0 11.9 10.2 0.8 1.0 1.2 33.1 33.5 33.0 10.0 Bajaj Corp. ADD 229 230 0.4 33,792 552 148 12.0 13.4 15.3 6.8 11.3 14.2 19.0 17.1 15.0 17.6 15.5 13.0 6.5 5.6 4.8 2.8 2.8 3.3 33.2 31.6 30.3 0.7 Britannia Industries BUY 1,150 1,220 6.1 137,883 2,254 120 33.0 39.3 48.3 51.8 19.1 23.1 34.9 29.3 23.8 21.8 18.2 14.8 17.2 11.7 9.3 1.0 1.3 1.7 58.3 47.8 43.7 2.4 Colgate-Palmolive (India) REDUCE 1,549 1,600 3.3 210,619 3,442 136 36.1 40.9 48.0 (1.2) 13.5 17.3 42.9 37.8 32.2 31.3 25.1 20.8 36.2 34.1 32.0 1.7 2.1 2.4 90.1 90.2 99.7 2.5 Dabur India ADD 202 215 6.3 352,858 5,767 1,744 5.2 6.2 7.3 19.0 17.8 18.6 38.6 32.7 27.6 31.5 26.6 22.2 13.3 10.7 8.8 0.9 1.2 1.4 38.5 36.1 34.9 4.5 GlaxoSmithKline Consumer REDUCE 4,857 4,250 (12.5) 204,268 3,339 42 160.4 145.9 169.0 54.5 (9.1) 15.8 30.3 33.3 28.7 27.1 30.4 25.2 11.9 9.8 8.2 0.9 1.0 1.2 42.5 30.7 29.8 0.8 Godrej Consumer Products REDUCE 843 800 (5.1) 286,855 4,688 340 22.1 25.6 31.0 9.3 15.5 21.2 38.0 32.9 27.2 26.9 22.9 18.8 7.2 6.1 5.3 0.6 0.7 0.9 21.3 21.3 22.2 2.4 Hindustan Unilever REDUCE 694 630 (9.2) 1,499,941 24,515 2,163 16.4 18.8 21.0 8.4 14.1 12.1 42.2 37.0 33.0 33.0 27.9 24.1 48.1 42.4 35.8 1.9 2.0 2.2 119.5 116.3 112.9 15.2 ITC ADD 350 370 5.9 2,829,908 46,252 8,096 10.8 12.0 13.9 15.7 11.2 15.6 32.4 29.1 25.2 23.4 20.3 17.1 10.3 9.3 8.4 1.7 2.1 2.4 35.6 35.1 36.9 47.8 Jubilant Foodworks SELL 1,215 1,000 (17.7) 80,564 1,317 66 18.0 22.5 30.7 (9.9) 25.1 36.7 67.6 54.1 39.5 32.2 25.3 18.9 14.6 11.5 9.1 — — 0.3 24.1 23.8 26.0 5.0 Jyothy Laboratories REDUCE 181 205 13.2 32,783 536 181 4.7 10.6 11.8 21.4 123.7 11.8 38.4 17.2 15.4 24.6 17.7 13.6 4.4 3.8 3.3 1.7 1.7 1.9 12.4 23.9 22.9 0.6 Marico REDUCE 262 235 (10.2) 168,796 2,759 645 8.1 8.3 9.8 43.3 2.5 18.2 32.5 31.7 26.8 23.1 20.6 17.3 12.1 9.6 7.7 1.3 1.0 1.1 38.2 31.3 29.9 1.5 Nestle India SELL 5,203 4,300 (17.4) 501,683 8,199 96 114.4 118.6 138.5 3.3 3.7 16.7 45.5 43.9 37.6 25.2 24.2 21.0 19.4 16.4 13.9 0.9 1.1 1.4 56.4 46.7 45.4 4.1 Page Industries REDUCE 7,957 6,100 (23.3) 88,751 1,451 11 137.3 186.4 222.8 36.1 35.8 19.5 57.9 42.7 35.7 35.6 27.5 22.9 30.1 22.0 16.4 0.8 1.0 1.1 61.0 60.5 53.2 0.9 Speciality Restaurants BUY 146 170 16.7 6,838 112 47 4.0 4.8 6.7 (19.3) 20.3 38.2 36.2 30.1 21.8 19.8 15.4 10.6 2.3 2.1 2.0 0.7 0.9 1.0 6.4 7.2 9.2 0.2 Tata Global Beverages REDUCE 154 150 (2.8) 97,383 1,592 631 6.0 6.5 7.5 (1.0) 8.0 15.9 25.7 23.8 20.5 13.9 12.8 11.1 1.4 1.4 1.3 1.4 1.5 1.6 7.0 6.9 7.6 11.7 Titan Company REDUCE 327 310 (5.1) 289,995 4,740 888 8.4 9.7 10.7 3.1 15.4 9.7 38.8 33.6 30.6 27.7 22.7 19.6 11.5 9.3 8.0 0.6 0.8 1.2 33.3 30.7 28.1 9.2 United Breweries SELL 711 650 (8.6) 188,005 3,073 264 8.5 10.5 14.5 31.2 22.4 38.7 83.2 68.0 49.0 33.8 26.3 21.6 12.0 10.9 9.2 0.2 0.2 0.3 14.3 16.3 19.8 2.3 United Spirits BUY 2,330 3,000 28.7 338,679 5,535 145 22.2 42.8 71.2 145.3 92.4 66.4 104.7 54.4 32.7 40.6 24.9 20.0 4.3 5.0 4.4 0.2 0.2 0.3 5.1 8.5 14.3 54.0 Consumer products Neutral 7,948,621 129,911 15.7 14.3 17.6 38.4 33.6 28.6 26.9 22.9 19.3 11.4 10.3 9.0 1.3 1.6 1.8 29.6 30.6 31.6 175.8 Energy Aban Offshore RS 766 — — 43,109 705 56 83.9 91.2 98.3 117.2 8.7 7.8 9.1 8.4 7.8 8.5 7.3 7.0 1.0 0.8 0.7 0.5 0.7 0.7 10.0 10.0 9.4 27.3 Bharat Petroleum ADD 577 615 6.5 417,470 6,823 723 56.2 43.1 42.9 53.7 (23.3) (0.5) 10.3 13.4 13.5 7.1 8.1 7.9 2.0 1.9 1.7 2.9 2.2 2.2 19.9 13.8 12.5 18.3 Cairn india REDUCE 313 330 5.5 586,156 9,580 1,874 65.2 55.3 48.2 4.4 (15.1) (12.8) 4.8 5.7 6.5 3.7 4.2 4.5 1.0 0.9 0.8 4.1 3.9 3.8 23.4 14.4 13.6 17.0 Castrol India SELL 333 260 (22.0) 164,911 2,695 495 10.0 9.5 10.3 10.3 (4.8) 8.5 33.4 35.1 32.4 23.1 23.3 21.4 23.6 37.4 37.4 2.1 2.4 2.5 76.9 82.5 115.6 3.0 GAIL (India) BUY 424 520 22.7 537,392 8,783 1,268 32.6 35.3 38.5 (9.4) 8.2 9.0 13.0 12.0 11.0 8.5 7.3 6.2 1.8 1.6 1.5 2.5 2.6 3.0 13.9 13.5 13.2 14.2 GSPL ADD 87 91 4.8 48,846 798 563 7.4 7.5 8.6 (22.1) 1.2 13.8 11.7 11.5 10.1 6.1 6.0 5.4 1.3 1.2 1.1 1.2 1.7 4.0 11.9 10.9 11.4 2.9 Hindustan Petroleum REDUCE 403 425 5.6 136,485 2,231 339 51.1 36.2 38.6 106.4 (29.2) 6.4 7.9 11.1 10.4 8.0 7.6 6.6 0.7 0.7 0.6 3.8 2.7 2.9 9.1 6.0 6.0 13.5 Indian Oil Corporation ADD 330 370 12.2 800,374 13,081 2,428 23.2 29.8 36.0 38.1 28.3 20.7 14.2 11.1 9.2 9.4 6.5 5.0 1.2 1.1 1.0 2.6 3.1 3.7 8.1 9.8 10.9 7.4 Oil India BUY 565 700 23.9 339,734 5,553 601 49.6 61.4 72.6 (16.9) 23.8 18.2 11.4 9.2 7.8 5.2 3.7 2.9 1.5 1.4 1.3 3.8 4.4 5.3 12.5 14.3 15.5 5.2 Oil & Natural Gas Corporation REDUCE 386 440 13.9 3,305,425 54,023 8,556 31.2 38.6 43.3 6.2 23.9 12.1 12.4 10.0 8.9 5.6 4.3 3.8 1.6 1.4 1.3 2.5 3.1 3.5 12.7 14.1 14.2 50.8 Petronet LNG ADD 186 165 (11.3) 139,463 2,279 750 9.5 10.0 12.4 (38.1) 5.8 23.0 19.6 18.5 15.1 10.7 9.4 8.2 2.5 2.2 2.0 1.1 1.2 1.7 13.2 12.3 13.3 6.0 Reliance Industries ADD 976 1,090 11.6 2,867,393 46,864 2,937 68.0 73.6 74.7 4.6 8.2 1.4 14.4 13.3 13.1 10.7 10.1 9.4 1.4 1.2 1.1 1.0 1.1 1.1 11.0 10.8 10.0 71.9 Energy Neutral 9,386,758 153,416 7.4 9.1 6.7 11.5 10.5 9.9 7.4 6.2 5.5 1.4 1.3 1.2 2.2 2.5 2.7 12.6 12.5 12.1 237.5

Source: Company, Bloomberg, Kotak Institutional Equities estimates India Daily Summary - August Summary Daily- India 72

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Kotak Institutional Equities: Valuation summary of KIE Universe stocks

Target O/S ADVT- Price (Rs) price Upside Mkt cap. shares EPS (Rs) EPS growth (%) PER (X) EV/EBITDA (X) Price/BV (X)Dividend yield (%) RoE (%) 3mo Company Rating 1-Aug-14 (Rs) (%) (Rs mn) (US$ mn) (mn) 2014 2015E 2016E 2014 2015E 2016E 2014 2015E 2016E 2014 2015E 2016E 2014 2015E 2016E 2014 2015E 2 016E 2014 2015E 2016E (US$ mn) Industrials ABB SELL 1,032 750 (27.3) 218,596 3,573 212 8.3 15.6 25.1 25.5 86.6 61.1 123.6 66.2 41.1 58.3 39.0 26.8 8.2 7.5 6.5 0.3 0.3 0.3 6.7 11.8 16.9 2.3 Bharat Heavy Electricals SELL 224 150 (33.1) 548,507 8,965 2,448 14.1 12.3 13.6 (47.7) (13.1) 10.9 15.8 18.2 16.4 11.9 12.4 10.5 1.7 1.6 1.5 1.3 1.2 1.3 10.9 8.8 9.1 34.3 Crompton Greaves BUY 192 220 14.9 120,054 1,962 627 4.1 7.5 11.3 215.8 81.4 50.7 46.4 25.6 17.0 19.8 13.5 10.2 3.3 3.0 2.6 0.8 0.9 1.1 7.2 12.3 16.5 18.5 Cummins India REDUCE 606 570 (5.9) 167,942 2,745 277 21.3 25.3 30.0 (23.6) 18.8 18.6 28.4 23.9 20.2 26.5 21.3 16.9 6.5 5.8 5.2 1.7 1.9 2.3 24.2 25.1 26.4 2.8 Kalpataru Power Transmission ADD 160 190 18.9 24,529 401 153 8.1 12.2 12.5 (7.9) 51.7 2.4 19.8 13.0 12.7 8.6 7.0 5.8 1.2 1.1 1.0 0.9 0.9 0.9 6.0 7.4 7.4 1.0 KEC International ADD 113 125 10.7 29,021 474 257 3.3 6.7 10.4 30.4 102.5 54.9 34.2 16.9 10.9 9.9 7.9 6.4 2.3 1.9 1.7 0.5 1.4 2.1 6.9 12.4 16.4 1.4 Larsen & Toubro ADD 1,469 1,675 14.0 1,361,338 22,250 927 49.0 47.7 78.4 (6.6) (2.5) 64.3 30.0 30.8 18.7 19.7 18.7 13.9 3.6 3.1 2.7 0.9 1.0 1.2 12.5 10.7 15.1 64.7 Siemens SELL 862 510 (40.8) 306,819 5,015 356 12.9 20.7 24.5 183.6 61.2 18.3 67.0 41.6 35.1 35.0 23.7 20.2 7.1 6.4 5.6 0.4 0.6 0.7 11.1 16.2 17.0 5.7 Thermax REDUCE 864 800 (7.4) 102,987 1,683 119 20.6 22.2 34.0 (23.2) 7.6 53.0 41.9 38.9 25.4 27.1 28.3 17.7 5.1 4.7 4.2 0.7 0.9 1.3 12.6 12.5 17.4 1.6 Voltas REDUCE 191 210 10.1 63,081 1,031 331 6.8 9.4 11.5 15.0 39.1 21.6 28.1 20.2 16.6 23.0 13.2 10.5 3.4 3.1 2.8 1.2 1.5 1.8 12.9 16.1 17.6 11.0 Industrials Cautious 2,942,874 48,098 (23.7) 3.8 39.6 29.0 27.9 20.0 19.4 17.7 13.6 3.2 2.9 2.6 0.9 1.0 1.2 11.1 10.3 12.8 143.2 Infrastructure Adani Port and SEZ ADD 259 245 (5.5) 540,303 8,831 2,084 8.3 9.6 13.4 3.7 14.5 40.4 31.1 27.1 19.3 20.7 16.3 12.5 6.1 4.7 3.9 0.7 0.7 0.8 22.5 19.4 21.9 28.1 Container Corporation ADD 1,265 1,325 4.8 246,608 4,031 195 49.5 58.7 70.5 2.6 18.7 20.1 25.6 21.5 17.9 20.1 16.5 13.2 3.5 3.2 2.8 0.9 1.1 1.3 14.5 15.5 16.5 3.1 Gujarat Pipavav Port REDUCE 145 140 (3.5) 70,147 1,146 483 6.5 8.8 11.4 80.1 34.0 30.3 22.2 16.6 12.7 16.9 13.0 9.3 4.0 3.2 2.5 — — — 23.3 25.6 26.4 3.3 IRB Infrastructure REDUCE 249 210 (15.7) 82,842 1,354 332 13.8 14.3 17.1 (17.4) 3.2 20.2 18.0 17.5 14.5 9.7 8.6 7.3 2.3 1.8 1.7 1.6 1.6 1.6 13.1 11.6 12.0 29.9 Sadbhav Engineering BUY 204 225 10.2 30,949 506 152 8.3 7.2 9.3 69.1 (13.5) 29.6 24.6 28.4 21.9 15.6 12.4 10.4 3.2 2.9 2.6 0.3 0.3 0.3 12.7 10.0 11.5 1.0 Infrastructure Attractive 970,849 15,867 7.1 15.1 31.1 26.7 23.2 17.7 17.2 13.9 10.9 4.4 3.6 3.1 0.8 0.8 0.9 16.4 15.4 17.3 65.4 Media DB Corp ADD 323 350 8.2 59,349 970 183 16.7 18.6 23.0 40.5 11.0 23.7 19.4 17.4 14.1 11.8 10.0 8.2 5.2 4.6 4.0 2.2 2.8 3.4 28.2 27.9 30.3 0.7 DishTV ADD 57 60 5.3 60,705 992 1,065 (0.4) 0.0 1.5 68.2 105.0 7,286.5 (144.7) 2,887.4 39.1 11.1 10.1 8.2 (19.4) (19.5) (39) — — — 17.9 (0.7) (67) 10.8 Jagran Prakashan ADD 117 135 15.8 36,294 593 311 7.6 7.7 9.7 50.2 1.5 26.1 15.4 15.1 12.0 9.8 7.9 6.5 3.8 3.4 3.1 2.7 3.4 4.3 25.0 23.8 27.1 0.7 Sun TV Network ADD 406 420 3.5 159,957 2,614 394 18.0 21.6 24.3 0.1 19.8 12.8 22.5 18.8 16.7 13.4 11.3 10.0 5.0 4.6 4 2.5 3.2 3.9 24.1 26.5 28 5.1 Zee Entertainment Enterprises REDUCE 289 300 3.8 277,619 4,537 960 9.2 9.7 11.4 21.7 5.7 17.8 31.5 29.8 25.3 22.6 20.1 17.7 5.9 5.2 4.6 1.0 1.4 1.7 20.6 21.3 21.9 13.0 Media Neutral 593,924 9,707 25.1 19.6 22.8 28.4 23.7 19.3 15.3 13.3 11.4 6.1 5.5 4.9 1.5 2.0 2.5 21.5 23.1 25.2 30.3 Metals & Mining Coal India ADD 359 392 9.2 2,267,575 37,061 6,316 23.9 27.9 32.5 (12.9) 16.4 16.8 15.0 12.9 11.0 9.8 7.8 6.4 5.3 4.6 3.9 7.1 4.0 4.6 32.4 38.4 38.3 37.4 Hindalco Industries REDUCE 184 135 (26.7) 380,504 6,219 2,065 12.5 12.8 12.9 (15.1) 2.8 0.8 14.8 14.4 14.3 11.0 9.0 7.5 0.9 0.9 0.8 0.8 0.8 0.8 6.8 6.3 6.0 33.7 Hindustan Zinc ADD 162 180 10.9 685,718 11,207 4,225 16.5 16.5 17.0 0.7 0.2 3.1 9.8 9.8 9.5 6.2 5.8 4.8 1.8 1.6 1.4 2.2 2.2 2.2 20.1 17.5 15.9 6.8 Jindal Steel and Power REDUCE 267 260 (2.7) 244,416 3,995 915 20.9 21.5 22.8 (32.9) 3.0 6.0 12.8 12.4 11.7 10.5 8.2 7.1 1.1 1.0 0.9 0.7 0.7 0.7 8.9 8.6 8.4 21.0 JSW Steel BUY 1,169 1,450 24.0 282,667 4,620 242 66.2 102.1 137.4 22.0 54.3 34.6 17.7 11.5 8.5 6.8 6.3 5.4 1.3 1.2 1.0 0.9 0.9 0.9 8.1 10.7 13.0 12.8 National Aluminium Co. SELL 57 38 (33.2) 146,645 2,397 2,577 2.7 3.1 3.0 16.7 15.0 (3.4) 21.2 18.4 19.1 10.0 7.7 7.9 1.2 1.2 1.1 2.6 2.6 2.6 5.8 6.5 6.1 5.8 NMDC ADD 170 180 6.0 673,008 11,000 3,965 16.1 17.7 17.8 (1.8) 10.3 0.4 10.6 9.6 9.5 6.3 5.5 5.7 2.2 2.0 1.9 5.0 5.0 5.0 22.3 22.3 20.4 11.1 Sesa Sterlite REDUCE 282 280 (0.7) 835,835 13,661 2,965 16.9 27.1 21.3 (32.2) 60.1 (21.4) 16.7 10.4 13.2 5.7 5.1 4.8 1.1 1.1 1.0 1.2 1.2 1.2 7.1 9.2 7.8 46.3 Tata Steel REDUCE 549 505 (8.0) 533,061 8,712 971 37.1 44.9 47.1 986.0 20.8 5.1 14.8 12.2 11.6 7.6 7.3 7.0 1.3 1.2 1.1 1.8 1.5 1.5 9.7 10.2 9.9 56.8 India Daily - August4,2014Summary Metals & Mining Cautious 6,049,428 98,871 (6.3) 18.3 5.2 13.8 11.7 11.1 7.7 6.7 6.0 1.9 1.7 1.6 4.0 2.8 3.0 13.7 14.7 14.2 231.8 Pharmaceutical Biocon SELL 465 360 (22.6) 91,909 1,502 198 20.9 23.2 26.5 34.8 10.7 14.3 22.2 20.1 17.6 13.0 11.9 10.0 3.0 2.7 2.5 1.1 1.2 1.4 14.5 14.3 14.8 9.4 Dr Reddy's Laboratories ADD 2,759 2,930 6.2 467,936 7,648 170 126.8 131.7 147.8 23.2 3.8 12.2 21.8 20.9 18.7 18.4 16.6 14.1 5.2 4.3 3.6 0.6 0.7 0.8 23.7 20.3 19.1 21.9 Lupin BUY 1,165 1,370 17.6 524,430 8,571 450 40.8 46.4 56.2 39.0 13.7 21.1 28.6 25.1 20.7 17.6 15.5 12.6 7.5 6.0 4.8 0.5 0.5 0.6 28.1 30.0 28.0 10.6 Pharmaceuticals Cautious 1,084,275 17,721 4.2 24.1 16.0 32.7 26.4 22.7 20.6 17.9 15.2 6.4 5.2 4.4 0.5 0.6 0.6 19.5 19.8 19.3 109.3 Real Estate DLF ADD 201 220 9.6 357,627 5,845 1,781 5.6 3.0 4.9 24.8 (46.6) 63.8 35.8 67.1 41.0 22.7 20.5 17.3 1.2 1.2 1.2 1.0 1.0 1.0 3.5 1.8 3.0 46.8 Godrej Properties REDUCE 227 225 (0.9) 44,992 735 198 8.0 10.2 12.4 (8.8) 27.0 20.9 28.2 22.2 18.4 21.9 15.7 11.1 2.5 2.3 2.1 0.9 0.9 1.1 9.9 10.8 12.0 1.3 Oberoi Realty BUY 254 325 28.0 83,322 1,362 328 9.5 16.3 28.9 (38.4) 72.4 77.1 26.8 15.5 8.8 18.2 12.2 5.9 1.9 1.7 1.5 0.8 0.8 0.8 7.3 11.6 17.9 2.8 Prestige Estates Projects ADD 244 230 (5.9) 85,540 1,398 350 10.2 14.2 19.4 24.3 40.3 36.0 24.1 17.2 12.6 13.8 10.9 8.6 2.8 2.4 2.1 0.5 0.5 0.5 12.3 15.2 17.8 1.8 Sobha Developers ADD 439 520 18.6 43,006 703 98 24.0 27.3 42.5 8.2 13.8 55.7 18.3 16.1 10.3 9.3 8.3 6.5 1.9 1.7 1.5 1.6 1.6 1.6 10.6 11.2 15.7 1.9

KOTAK INSTITUTIONAL EQUITIES RESEARCH Sunteck Realty ADD 332 410 23.6 19,888 325 60 25.2 10.7 81.2 3,653.8 (57.4) 656.9 13.2 30.9 4.1 9.2 26.9 3.3 3.1 2.9 1.7 0.6 0.6 0.6 26.8 9.7 52.7 0.4 Real Estate Attractive 634,375 10,368 17.1 (5.8) 74.9 28.3 30.1 17.2 18.4 16.0 11.0 1.5 1.5 1.4 0.9 0.9 0.9 5.4 4.9 8.1 54.9

Source: Company, Bloomberg, Kotak Institutional Equities estimates

KOTAK INSTITUTIONAL EQUITIES RESEARCH Kotak Institutional Equities: Valuation summary of KIE Universe stocks India Daily4,India Summary-August 2014

Target O/S ADVT- Price (Rs) price Upside Mkt cap. shares EPS (Rs) EPS growth (%) PER (X) EV/EBITDA (X) Price/BV (X)Dividend yield (%) RoE (%) 3mo Company Rating 1-Aug-14 (Rs) (%) (Rs mn) (US$ mn) (mn) 2014 2015E 2016E 2014 2015E 2016E 2014 2015E 2016E 2014 2015E 2016E 2014 2015E 2016E 2014 2015E 2 016E 2014 2015E 2016E (US$ mn) Technology HCL Technologies REDUCE 1,515 1,450 (4.3) 1,072,797 17,534 708 89.8 97.5 102.3 57.8 8.5 4.9 16.9 15.5 14.8 11.3 10.6 9.7 5.2 4.3 3.6 1.4 1.5 1.5 36.0 31.0 26.9 27.0 Hexaware Technologies SELL 138 130 (6.1) 41,778 683 302 12.6 10.4 11.4 14.5 (18.1) 9.7 10.9 13.4 12.2 6.9 8.8 8.1 3.5 4.2 3.7 8.0 5.2 4.1 31.6 28.4 32.0 4.0 Infosys ADD 3,341 3,650 9.2 1,909,219 31,204 571 186.3 209.1 228.1 13.0 12.2 9.1 17.9 16.0 14.6 12.1 10.9 9.5 4.3 3.7 3.2 1.9 2.2 2.4 26.3 24.9 23.5 66.1 Mindtree ADD 1,050 950 (9.5) 88,188 1,441 84 53.7 61.1 66.8 31.4 13.9 9.4 19.6 17.2 15.7 14.3 12.3 10.9 5.4 4.4 3.7 1.2 1.5 1.6 30.5 28.2 25.5 3.4 Mphasis SELL 444 390 (12.1) 93,179 1,523 210 14.7 35.5 35.1 (58.4) 141.3 (1.2) 30.1 12.5 12.6 21.4 8.8 8.8 1.8 1.7 1.6 1.6 4.0 4.0 6.1 14.1 13.2 1.4 TCS ADD 2,516 2,550 1.3 4,928,873 80,557 1,959 97.6 113.4 125.0 37.4 16.2 10.2 25.8 22.2 20.1 18.9 16.5 14.6 8.9 7.8 6.5 1.3 2.5 2.0 39.7 37.6 35.3 46.1 Tech Mahindra ADD 2,127 2,300 8.1 507,285 8,291 238 128.0 138.0 153.7 25.6 7.7 11.4 16.6 15.4 13.8 11.3 10.8 9.4 5.5 4.4 3.6 1.1 1.3 0.8 33.5 28.6 25.8 28.4

Wipro ADD 536 620 15.7 1,320,168 21,577 2,463 31.7 35.2 38.6 27.1 11.2 9.6 16.9 15.2 13.9 11.7 9.9 8.6 3.8 3.2 2.8 1.5 1.7 1.9 24.9 23.1 21.5 19.4 Technology Attractive 9,961,487 162,809 29.6 13.2 9.2 20.8 18.4 16.8 14.6 12.9 11.4 5.8 5.0 4.2 1.5 2.2 2.0 27.9 27.1 25.1 195.9 Telecom Bharti Airtel ADD 380 415 9.2 1,519,212 24,830 3,997 8.3 14.1 16.7 39.0 69.8 18.0 45.6 26.9 22.8 8.0 7.2 6.1 2.5 2.3 2.2 0.5 0.5 0.9 6.0 9.1 9.9 29.8 Bharti Infratel REDUCE 262 250 (4.7) 495,784 8,103 1,889 8.0 10.7 11.8 51.4 33.1 10.4 32.7 24.5 22.2 11.0 10.0 9.1 2.7 2.8 2.7 1.7 3.6 3.2 8.6 11.2 12.3 — IDEA BUY 158 185 17.2 567,526 9,276 3,595 5.9 7.8 8.9 94.4 30.9 14.3 26.6 20.3 17.8 9.5 8.3 6.9 3.4 2.5 2.2 0.2 0.4 0.5 12.8 14.2 13.2 21.6 Reliance Communications SELL 133 95 (28.4) 327,365 5,350 2,467 3.2 3.8 6.6 (0.4) 17.1 74.0 40.9 34.9 20.1 10.0 7.8 7.1 1.2 1.0 0.9 — — — 2.4 3.1 4.7 21.3 Tata Communications BUY 374 380 1.5 106,647 1,743 285 (3.7) 4.1 4.5 87.5 211.5 9.6 (101.7) 91.2 83.2 7.3 7.0 6.5 13.2 11.4 9.9 — — — (9.4) 13.5 12.7 5.3 Telecom Neutral 3,016,534 49,302 103.6 56.2 20.2 40.9 26.2 21.8 8.8 7.7 6.7 2.5 2.1 2.0 0.6 1.0 1.1 6.0 8.2 9.2 77.9 Utilities Adani Power SELL 56 38 (31.5) 159,392 2,605 2,872 (9.4) (2.8) (0.7) (4.9) 70.5 75.6 (5.9) (19.9) (81.5) 17.0 10.8 9.7 4.7 6.2 6.7 — — — (70.7) (26.9) (7.9) 14.0 CESC ADD 647 695 7.5 80,784 1,320 125 39.3 56.2 69.9 14.9 42.8 24.4 16.4 11.5 9.3 13.0 8.8 6.9 1.0 1.0 0.9 1.1 1.2 1.2 6.8 8.8 10.1 6.3 JSW Energy SELL 75 62 (17.1) 122,590 2,004 1,640 6.9 8.6 7.6 2.9 24.0 (11.7) 10.8 8.7 9.9 6.8 5.9 5.6 1.9 1.5 1.3 — — — 17.7 19.3 14.4 4.3 NHPC REDUCE 23 24 6.7 249,090 4,071 11,071 1.7 2.2 2.4 (12.6) 30.5 7.5 13.3 10.2 9.5 11.4 9.7 8.6 0.9 0.9 0.8 1.9 2.6 2.8 6.5 8.7 8.8 7.0 NTPC REDUCE 141 135 (4.1) 1,160,549 18,968 8,245 13.3 11.2 12.4 6.8 (15.5) 10.0 10.6 12.5 11.4 9.4 10.0 8.6 1.4 1.3 1.2 4.1 2.4 2.6 13.2 10.4 10.7 30.9 Power Grid BUY 130 145 11.7 679,061 11,098 5,232 8.6 9.5 13.0 (5.0) 9.8 37.5 15.0 13.7 10.0 11.6 9.5 7.6 2.0 1.8 1.6 2.0 2.2 3.0 14.9 13.8 17.1 18.9 Reliance Infrastructure BUY 732 580 (20.8) 192,656 3,149 263 72.0 68.9 84.3 1.7 (4.4) 22.4 10.2 10.6 8.7 12.1 11.7 10.3 0.7 0.7 0.6 1.0 1.5 1.5 9.5 8.9 8.9 40.4 Reliance Power SELL 91 62 (32) 254,144 4,154 2,805 3.7 4.0 4.1 1.5 9.4 2.3 24.8 22.6 22.1 27.2 26.2 13.1 1.3 1.2 1.2 — — — 5.4 5.6 5.4 20.2 Tata Power ADD 95 115 21.1 265,990 4,347 2,800 2.1 6.9 6.4 (46.6) 221.4 (6.9) 44.3 13.8 14.8 8.2 6.3 6.1 2.1 1.6 1.5 1.1 1.3 1.3 4.1 13.3 10.6 14.7 Utilities Cautious 3,164,256 51,716 (1.9) 15.8 17.0 16.0 13.8 11.8 11.1 9.8 8.3 1.4 1.3 1.2 2.3 1.8 2.1 8.8 9.4 10.2 156.6 Others Carborundum Universal BUY 168 200 19.2 31,436 514 187 4.5 8.2 12.6 (5.8) 82.4 52.6 37.2 20.4 13.4 13.9 9.9 7.4 2.5 2.3 2.0 0.5 0.8 1.3 7.3 12.5 17.0 0.2 Coromandel International SELL 235 210 (10.7) 66,590 1,088 283 12.6 18.1 20.2 (17.5) 43.4 11.8 18.7 13.0 11.7 10.0 7.9 7.1 2.9 2.5 2.1 1.9 1.9 1.9 15.0 19.8 19.0 0.7 Havells India ADD 1,161 1,260 8.6 144,820 2,367 125 40.0 47.3 57.3 19.9 18.3 21.0 29.0 24.5 20.3 18.0 15.1 12.6 8.5 7.2 6.1 1.3 1.6 1.9 31.2 31.7 32.5 5.9 Info Edge BUY 697 750 7.7 76,080 1,243 109 8.4 11.7 17.0 (20.1) 39.4 45.7 83.0 59.5 40.9 70.0 56.3 33.4 9.4 8.7 7.8 0.4 0.6 0.9 12.8 15.2 20.2 1.2 Jaiprakash Associates REDUCE 60 60 0.8 144,710 2,365 2,432 (5.4) 4.7 6.9 (373.8) 187.3 46.5 (11.1) 12.7 8.7 11.3 7.4 6.3 1.3 1.0 0.9 — — — (9.9) 9.0 11.5 47.7 Just Dial ADD 1,690 1,650 (2.4) 118,286 1,933 70 17.1 20.6 32.6 69.2 20.4 57.8 98.6 81.9 51.9 78.5 64.0 37.7 22.1 19.1 15.6 0.4 0.4 0.7 25.0 25.0 33.1 12.7 Rallis India BUY 211 230 9.3 40,936 669 194 7.8 10.5 12.6 27.6 34.4 20.4 27.0 20.0 16.7 15.8 11.9 9.6 5.7 4.7 3.9 1.1 1.2 1.2 22.1 25.4 25.2 2.0 Tata Chemicals BUY 347 400 15.2 88,461 1,446 255 (40.5) 29.4 35.6 (357.7) 172.7 21.0 (8.6) 11.8 9.7 8.3 6.1 5.3 1.4 1.2 1.1 2.9 2.9 2.9 (15.9) 10.3 11.2 4.8 UPL ADD 333 370 11.2 142,597 2,331 429 22.0 27.5 31.6 26.0 24.6 15.2 15.1 12.1 10.5 7.8 6.7 5.8 2.6 2.2 1.8 0.8 0.8 0.8 19.1 20.0 19.3 14.7 Others 777,835 12,713 (99.3) 25,875.8 27.7 4,186.0 16.1 12.6 11.6 8.4 7.2 2.5 2.1 1.9 1.0 1.1 1.3 0.1 13.2 14.8 89.8 KIE universe 64,555,067 1,055,080 5.7 15.9 14.3 18.0 15.5 13.5 10.9 9.5 8.1 2.6 2.3 2.1 1.7 1.8 1.9 14.3 14.9 15.2 KIE universe ex-energy 55,168,309 901,664 5.2 17.9 16.4 19.8 16.8 14.5 12.2 10.6 9.0 3.0 2.7 2.4 1.6 1.7 1.8 14.9 15.8 16.3 KIE universe ex-energy & ex-commodities 47,289,459 772,893 9.4 18.0 18.4 20.8 17.6 14.9 13.5 11.8 9.9 3.2 2.9 2.5 1.3 1.6 1.7 15.4 16.2 16.9

Notes: (a) We have used adjusted book values for banking companies. (b) 2014 means calendar year 2013, similarly for 2015 and 2016 for these particular companies. (c) EV/EBITDA excludes banking Sector. (d) Exchange rate (Rs/US$)= 61.19 Source: Company, Bloomberg, Kotak Institutional Equities estimates August Summary Daily- India 74

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

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

40% 35.6% * The above categories are defined as follows: Buy = We expect this stock to deliver more than 15% returns over the 30% next 12 months; Add = We expect this stock to deliver 25.5% 23.5% 5-15% returns over the next 12 months; Reduce = We expect this stock to deliver -5-+5% returns over the next 20% 15.4% 12 months; Sell = We expect this stock to deliver less than - 5% returns over the next 12 months. Our target prices are 10% also on a 12-month horizon basis. These ratings are used illustratively to comply with applicable regulations. As of 2.0% 0.7% 2.0% 0.7% 30/06/2014 Kotak Institutional Equities Investment Research 0% had investment ratings on 149 equity securities. BUY ADD REDUCE SELL

Source: Kotak Institutional Equities As of June 30, 2014

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.

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Copyright 2014 Kotak Institutional Equities (Kotak Securities Limited). All rights reserved.

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

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

3. Any U.S. recipients of the research who wish to effect transactions in any security covered by the report should do so with or through Kotak Mahindra Inc and (ii) any transactions in the securities covered by the research by U.S. recipients must be effected only through Kotak Mahindra Inc at [email protected].

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

This material should not be construed as an offer to sell or the solicitation of an offer to buy any security in any jurisdiction where such an offer or solicitation would be illegal. We are not soliciting any action based on this material. It is for the general information of clients of Kotak Securities Limited. It does not constitute a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual clients. Before acting on any advice or recommendation in this material, clients should consider whether it is suitable for their particular circumstances and, if necessary, seek professional advice. The price and value of the investments referred to in this material and the income from them may go down as well as up, and investors may realize losses on any investments. Past performance is not a guide for future performance, future returns are not guaranteed and a loss of original capital may occur. Kotak Securities Limited does not provide tax advise to its clients, and all investors are strongly advised to consult with their tax advisers regarding any potential investment.

Certain transactions -including those involving futures, options, and other derivatives as well as non-investment-grade securities - give rise to substantial risk and are not suitable for all investors. The material is based on information that we consider reliable, but we do not represent that it is accurate or complete, and it should not be relied on as such. Opinions expressed are our current opinions as of the date appearing on this material only. We endeavor to update on a reasonable basis the information discussed in this material, but regulatory, compliance, or other reasons may prevent us from doing so. We and our affiliates, officers, directors, and employees, including persons involved in the preparation or issuance of this material, may from time to time have “long” or “short” positions in, act as principal in, and buy or sell the securities or derivatives thereof of companies mentioned herein. For the purpose of calculating whether Kotak Securities Limited and its affiliates holds beneficially owns or controls, including the right to vote for directors, 1% of more of the equity shares of the subject issuer of a research report, the holdings does not include accounts managed by Kotak Mahindra Mutual Fund. Kotak Securities Limited and its non US affiliates may, to the extent permissible under applicable laws, have acted on or used this research to the extent that it relates to non US issuers, prior to or immediately following its publication. Foreign currency denominated securities are subject to fluctuations in exchange rates that could have an adverse effect on the value or price of or income derived from the investment. In addition, investors in securities such as ADRs, the value of which are influenced by foreign currencies affectively assume currency risk. In addition options involve risks and are not suitable for all investors. Please ensure that you have read and understood the current derivatives risk disclosure document before entering into any derivative transactions.

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

This report is distributed in Singapore by Kotak Mahindra (UK) Limited (Singapore Branch) to institutional investors, accredited investors or expert investors only as defined under the Securities and Futures Act. Recipients of this analysis / report are to contact Kotak Mahindra (UK) Limited (Singapore Branch) (16 Raffles Quay,

#35-02/03, Hong Leong Building, Singapore 048581) in respect of any matters arising from, or in connection with, this analysis / report. Kotak Mahindra (UK)

Limited (Singapore Branch) is regulated by the Monetary Authority of Singapore. 77 KOTAK INSTITUTIONAL EQUITIES RESEARCH