INDIA DAILY

May 17, 2013 India 16-May 1-day1-mo 3-mo Sensex 20,247 0.2 8.1 4.0

Nifty 6,170 0.4 8.5 4.8

Contents Global/Regional indices Daily Alerts Dow Jones 15,233 (0.3) 4.2 9.0 Nasdaq Composite 3,465 (0.2) 8.1 8.6

Results FTSE 6,688 (0.1) 7.1 5.7 Bajaj Auto: Lower export average selling prices, higher other expenses impact Nikkie 15,012 (0.2) 12.2 34.4 performance Hang Seng 23,083 0.2 7.0 (1.5) United Spirits: Waiting to start a new journey KOSPI 1,987 0.8 3.3 0.3 Adani Port and SEZ: Strong operations; stake sale move in Abbot Point Value traded – India lightens balance sheet Cash (NSE+BSE) 150 127 127 Mahindra Satyam: A modest quarter, FY2014E to underperform Derivatives (NSE) 1,313 1,938 1,244 Deri. open interest 1,672 1,509 1,438 Reliance Capital: Cleaning up

J&K Bank: NPLs deteriorate

DB Corp: Growing in strength Forex/money market IRB Infrastructure: Traffic growth improves in two key projects Change, basis points 16-May 1-day 1-mo 3-mo Sector Rs/US$ 54.8 2 63 48 10yr govt bond, % 7.5 2 (38) (42) Pharmaceuticals: Drug pricing policy order released Net investment (US$mn) 15-May MTD CYTD FIIs 310 1,799 13,133 MFs (21) (347) (1,314)

Top movers Change, % Best performers 16-May 1-day 1-mo 3-mo RCOM IN Equity 114.0 (0.7) 38.8 61.2 LPC IN Equity 806.9 3.2 20.0 37.4 GMRI IN Equity 23.2 1.3 5.9 31.5 HUVR IN Equity 582.8 (0.5) 20.6 26.1 UNTP IN Equity 154.2 1.4 22.2 25.8 Worst performers MMTC IN Equity 264.3 1.7 23.0 (52.2) WLCO IN Equity 50.8 (1.0) (0.6) (44.0) EDSL IN Equity 68.1 (2.2) 15.8 (41.2) SUEL IN Equity 14.2 (1.0) 1.1 (34.8) NHPC IN Equity 20.6 (0.7) (3.5) (29.0)

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

REDUCE Bajaj Auto (BJAUT)

Automobiles MAY 17, 2013 RESULT Coverage view: Neutral

Lower export average selling prices, higher other expenses impact performance. Price (Rs): 1,807 Bajaj Auto reported a weak quarter driven by decline in domestic motorcycle volumes, Target price (Rs): 1,900 8% sequential drop in export realizations and higher other expenses due to subdued BSE-30: 20,247 domestic demand. We believe recovery in export volume growth is critical for stock performance and await signs of pick-up in export markets to get constructive on the stock.

Company data and valuation summary Bajaj Auto Stock data Forecasts/Valuations 2013 2014E 2015E 52-week range (Rs) (high,low) 2,229-1,423 EPS (Rs) 105.1 123.7 140.2 Market Cap. (Rs bn) 522.8 EPS growth (%) 1.3 17.7 13.3 Shareholding pattern (%) P/E (X) 17.2 14.6 12.9 Promoters 50.0 Sales (Rs bn) 194.9 220.8 248.3 FIIs 17.1 Net profits (Rs bn) 30.4 35.8 40.6 MFs 1.8 EBITDA (Rs bn) 39.9 46.9 51.8 Price performance (%) 1M 3M 12M EV/EBITDA (X) 13.0 11.1 10.0 Absolute 2.0 (8.3) 11.9 ROE (%) 43.1 39.9 36.9 Rel. to BSE-30 (5.5) (11.8) (11.4) Div. Yield (%) 2.5 2.7 3.1

Lower export average selling prices impact revenue growth

Bajaj Auto reported 4QFY13 net sales (including operating income) at Rs48.4 bn, 1% below our estimate of Rs48.9 bn, driven by lower-than-expected net realizations. We believe export realizations dropped by ~8% qoq presumably due to inferior product mix (higher share of export motorcycle in the mix) and partial pass-through of duty drawback reduction to customers. Domestic realizations improved by ~6% on a sequential basis reflecting price hike taken in January 2013 and richer product mix. The company reported sharp qoq decline in EBITDA to Rs9,310 mn (- 4% yoy, -16% qoq) driven by (1) higher staff costs and other expenses and (2) lower sales volumes. Net profits at Rs7,658 mn (-1% yoy, -7% qoq) were slightly ahead our estimates due to higher- than-expected other income and lower-than-expected tax rate.

Domestic motorcycle market remains subdued

The company’s domestic motorcycle sales declined by 19% qoq and 10% yoy driven by subdued market conditions and loss in market share. We note that the company has lost market share in each of the segments in the recent quarter; the company is planning to launch 6 variants of the Discover model in a bid to maintain its market share. Motorcycles exports volumes increased by

8% yoy and 1.5% qoq. On a full-year basis, the company’s export volumes have increased by 2% in FY2013. Domestic three-wheeler volumes remain strong led by success of diesel carrier segment

The company reported a marginal 1% yoy growth in total three-wheeler sales volumes driven by 13% yoy increase in domestic volumes which was offset by a sharp 8% yoy decline in export sales volumes. Domestic volumes for the quarter were boosted by market share gains in the diesel carrier segment. Exports volumes came under pressure due to restrictions placed by the Sri Lankan Government.

We maintain our REDUCE rating on the stock with a target price of Rs1,900. We will review our earnings estimates post the conference call on Friday.

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

Bajaj Auto Automobiles

Operationally weak quarter due to lower-than-expected net realizations

Bajaj Auto reported 4QFY13 net sales at Rs48.4 bn (-12.4% qoq and +3% yoy), 1% below our estimate of Rs46.9 bn, driven by lower-than-expected export realization and lower other operating income. Export average selling prices declined by 8% qoq largely driven by inferior product mix and partial pass-through of reduction in duty drawback rates. EBITDA at Rs9.3 bn (-15.8% qoq and -4.2% yoy) was 5.8% below our estimates driven by higher-than- expected other expenses. Net profits at Rs7.7 bn (-6.5% qoq and -0.8% yoy) were slightly ahead of our estimate of Rs7.6 bn led by (1) higher-than-expected other income at Rs1.5 bn and (2) lower-than-expected tax rate at 25.9%. Exhibit 1 gives highlights of Bajaj Auto’s 4QFY13 results and compares the same with 3QFY13 and 4QFY12. We discuss key highlights below.

Exhibit 1: Bajaj Auto reported a weak quarter due to lower-than-expected average selling prices and higher other expenses Bajaj Auto interim results, March fiscal year-ends (Rs mn)

% change 4QFY13 4QFY13E 4QFY12 3QFY13 KIE est yoy qoq 2013 2012 yoy chg (%) Volumes (units) 981,231 981,231 1,017,167 1,127,739 —(3.5) (13.0) 4,237,149 4,349,560 (2.6) Net realisations 47,400 47,797 44,393 47,061 (0.8) 6.8 0.7 45,995 43,407 6.0 Net sales 46,511 46,900 45,156 53,072 (0.8) 3.0 (12.4) 194,890 188,803 3.2 Operating income 1,898 2,000 1,873 1,988 (5.1) 1.4 (4.5) 8,630 9,571 (9.8) Net sales (including op income) 48,409 48,900 47,028 55,060 (1.0) 2.9 (12.1) 203,520 198,373 2.6 Inc/dec in stock (1,342) — (1,708) 1,329 240 (942) Raw materials 35,430 34,200 34,834 37,882 (0.3) 2.9 (13.1) 143,826 134,579 6.9 Staff costs 1,666 1,620 1,196 1,592 2.9 39.4 4.6 6,395 5,401 18.4 Other expenses 3,344 3,200 2,987 3,207 4.5 12.0 4.3 13,160 19,052 (30.9) Total expenses 39,099 39,020 37,309 44,010 0.2 4.8 (11.2) 163,620 158,090 3.5 EBITDA 9,310 9,880 9,720 11,051 (5.8) (4.2) (15.8) 39,900 40,284 (1.0) Other income 1,492 1,200 881 1,099 24.3 69.4 35.8 4,408 2,997 47.1 Interest expense 2 — 18 1 5 222 Depreciation expense 466 412 434 411 13.1 7.3 13.5 1,640 1,456 12.6 Profit before tax before exceptional 10,334 10,668 10,149 11,738 (3.1) 1.8 (12.0) 42,662 41,602 2.5 Extraordinary income — — (203) — — 1,340 Profit before tax 10,334 10,668 10,352 11,738 (3.1) (0.2) (12.0) 42,662 40,262 6.0 Tax expense 2,676 3,094 2,631 3,550 (13.5) 1.7 (24.6) 12,227 10,221 19.6 Profit after tax 7,658 7,574 7,720 8,187 1.1 (0.8) (6.5) 30,436 30,041 1.3 Adj PAT 7,658 7,574 7,720 8,187 1.1 (0.8) (6.5) 30,436 30,041 1.3 Raw material cost as % of net sales 70.4 69.9 70.4 71.2 70.8 67.4 Staff cost as % of net sales 3.4 3.3 2.5 2.9 3.1 2.7 Other expenses as % of net sales 6.9 6.5 6.4 5.8 6.5 9.6 EBITDA margin (%) 19.2 20.2 20.7 20.1 19.6 20.3 No of shares 289 289 289 289 289 289 EPS 26.5 26.2 26.7 28.3 105.4 104.0 Tax rate (%) 25.9 29.0 25.9 30.2 28.7 24.6 Volume breakdown (units) Economy 93,454 93,454 159,866 119,419 (41.5) (21.7) 484,600 535,648 (9.5) Executive 299,880 299,880 277,278 387,458 8.2 (22.6) 1,311,832 1,315,401 (0.3) Premium 162,814 162,814 179,372 180,474 (9.2) (9.8) 667,431 715,709 (6.7) Domestic motorcycle 556,147 556,147 616,516 687,351 (9.8) (19.1) 2,463,863 2,566,757 (4.0) Export motorcycle 303,537 303,537 280,732 298,910 8.1 1.5 1,293,229 1,267,648 2.0 Total motorcycle 859,684 859,684 897,248 986,261 (4.2) (12.8) 3,757,092 3,834,405 (2.0) Domestic 3 wheelers 60,079 60,079 53,237 64,168 12.9 (6.4) 226,131 202,979 11.4 Export 3 wh 61,468 61,468 66,682 77,310 (7.8) (20.5) 253,926 312,176 (18.7) 3 wheelers 121,547 121,547 119,919 141,478 1.4 (14.1) 480,057 515,155 (6.8) Total volumes 981,231 981,231 1,017,167 1,127,739 (3.5) (13.0) 4,237,149 4,349,560 (2.6) Volume mix (%) Economy 9.5 9.5 15.7 10.6 11.4 12.3 Executive 30.6 30.6 27.3 34.4 31.0 30.2 Premium 16.6 16.6 17.6 16.0 15.8 16.5 Domestic motorcycle 56.7 56.7 60.6 60.9 58.1 59.0 Export motorcycle 30.9 30.9 27.6 26.5 30.5 29.1 Total motorcycle 87.6 87.6 88.2 87.5 88.7 88.2 Domestic 3 wheelers 6.1 6.1 5.2 5.7 5.3 4.7 Export 3 wh 6.3 6.3 6.6 6.9 6.0 7.2 3 wheelers 12.4 12.4 11.8 12.5 11.3 11.8 Total volumes 100.0 100.0 100.0 100.0 100.0 100.0

Source: Company, Kotak Institutional Equities estimates

KOTAK INSTITUTIONAL EQUITIES RESEARCH 3 Automobiles Bajaj Auto

` Lower-than-expected net realizations. Bajaj Auto reported lower-than-expected net realizations despite the 1% price hike taken by the company in January 2013 and better product mix. We believe export realizations dropped by ~8% qoq presumably due to inferior product mix (higher share of export motorcycle in the mix) and partial pass- through of duty drawback reduction to customers. Domestic realizations improved by ~6% on a sequential basis reflecting price hike taken in January 2013 and richer product mix.

` Decline in EBITDA margin. EBITDA margin for the company declined by ~90 bps qoq despite improvement in gross margin by ~80 bps driven by ~50 bps increase in staff costs and ~110 bps increase in other expenses. Gross margin improved by 80 bps qoq driven by lower raw material costs and improvement in domestic contribution margin offset by decline in export contribution margins.

` Higher staff costs. Staff costs increased by 4.6% qoq and 39.4% yoy to Rs1.7 bn in 4QFY13.

` Higher other expenses and other income. The company reported higher other expenses at Rs3.4 bn versus Rs3.2 bn in 3QFY13 and Rs3 bn in 4QFY12. We await further details from the management if there was any one-off item in other expenses. The company reported higher other income at Rs1.5 bn versus Rs1.1 bn in 3QFY13 and Rs0.9 bn in 4QFY12.

` Higher depreciation expenses, lower tax rate qoq. The company reported higher depreciation expenses at Rs466 mn versus Rs411 mn in 3QFY13 and Rs434 mn in 4QFY12 on account of capacity addition. Tax rate for the company came at 25.9% versus 30.2% in 3QFY13.

` Dividend. The company has announced a dividend of Rs45/share for FY2013.

Domestic motorcycle segment subdued; slight improvement in exports

The company’s domestic motorcycle sales declined by 19% qoq and 10% yoy driven by weak market conditions and loss of market share. Exhibit 2 shows that Bajaj has lost market share in recent quarters in each of the segments sequentially to its competitors. We note that market share of Pulsar in the premium segment has dropped to ~35% from ~40% in 9MFY13. The company is planning to launch new models (including 6 variants of Discover model and new variants of Pulsar) in FY2014 to maintain its market share.

4 KOTAK INSTITUTIONAL EQUITIES RESEARCH Bajaj Auto Automobiles

Exhibit 2: Competition is eating into Bajaj Auto market share Quarterly market share trend in domestic motorcycle segment, 2QFY11-4QFY13 (%)

Sep-10 Dec-10 Mar-11 Jun-11 Sep-11 Dec-11 Mar-12 Jun-12 Sep-12 Dec-12 Mar-13 Economy Bajaj Auto 23.1 23.1 24.1 26.2 27.2 29.7 31.3 28.9 25.4 23.6 21.2 Hero motocorp 47.3 47.2 46.6 44.7 43.0 45.6 45.4 48.7 53.1 53.0 59.0 Executive Bajaj Auto 23.6 19.8 21.5 21.5 22.5 19.0 17.6 17.6 21.8 22.9 18.7 Hero motocorp 64.2 68.1 67.5 67.7 68.0 69.6 69.8 68.8 59.3 60.5 61.7 HMSI 9.0 8.7 8.5 8.7 7.8 9.7 11.2 12.1 16.4 14.7 15.9 Premium Bajaj Auto 51.3 47.4 44.3 40.7 42.3 43.6 41.6 41.5 41.5 41.5 38.3 Hero motocorp 18.6 19.9 23.9 21.5 20.6 16.8 19.0 15.9 8.9 18.8 19.5 HMSI 7.6 7.7 6.5 9.0 8.8 10.3 9.6 13.9 16.6 13.0 14.1 Yamaha 10.1 12.7 12.2 15.3 14.8 16.6 14.7 13.2 16.9 12.8 13.1 Total Bajaj Auto 28.5 25.6 26.1 25.3 26.8 25.1 24.5 23.5 25.7 26.0 22.5 Hero motocorp 52.9 55.5 55.9 56.5 55.0 56.2 56.2 56.5 50.0 51.9 54.0 HMSI 7.3 7.1 6.8 7.3 6.5 8.1 8.7 10.0 13.1 11.5 12.7

Source: CRISIL, Kotak Institutional Equities

Motorcycles exports volumes increased by 8% yoy and 1.5% qoq. On a full-year basis, the company’s export volumes have increased by 2% in FY2013. We believe share of Africa in the overall exports has increased due to gain in market share in Africa by the company. The company has indicated Africa two-wheeler exports grew in double digits in FY2013 while overall motorcycle exports grew by only 2% yoy.

Strong growth in domestic 3-wheeler volumes led by the diesel carrier segment

Domestic three-wheeler volumes remained strong for the quarter and increased by 13% yoy. The company outperformed the domestic diesel carrier segment by growing at 25% yoy for FY2013 against an industry growth of 9%, increasing its market share by 400 bps to 31% in the segment. In the LPG, CNG and gasoline three-wheeler segment, the company maintained its market share at 87% in 4QFY13 versus 89% in 3QFY13.

Exports volumes for the quarter came under pressure mainly due to hike in import duty by Sri Lanka. Volumes declined by 8% yoy and 21% qoq. The company has guided to a 10- 12% yoy growth in exports and domestic three-wheeler volumes in FY2014E.

KOTAK INSTITUTIONAL EQUITIES RESEARCH 5 Automobiles Bajaj Auto

Exhibit 3: Debtor days have increased slightly in FY2013 from FY2012 Bajaj Auto balance sheet statement, March fiscal year-ends, 2012-13 (Rs mn)

2013 1HFY13 2012 Equity and liabilities (a) Share capital 2,894 2,894 2,894 (b) Reserves and surplus 76,126 73,490 57,517 Sub-total - Shareholders' funds 79,020 76,384 60,411 Non-current liabilities (a) Long-term borrowings 713 1,116 975 (b) Deferred tax liabilities (net) 1,151 580 484 (c) Other long term liabilities 1,221 1,368 1,571 (d) Long term provisions 1,346 1,299 1,119 Sub-total - Non-current liabilities 4,430 4,362 4,148 Current Liabilities (a) Short-term borrowings — 15 — (b) Trade payables 19,796 23,102 19,578 (c) Other current liabilities 5,462 6,050 6,043 (d) Short term provisions 16,079 4,766 20,661 Sub-total - Current liabilities 41,336 33,932 46,282 TOTAL - Equity and liabilities 124,786 114,678 110,841 Assets Non-current assets (a) Fixed assets 20,980 18,700 15,234 (b) Non-current investments 37,192 38,048 37,862 (c) Long-term loans and advances 4,624 5,085 6,009 (d) Other non-current assets 10 19 14 Sub-total - Non-current liabilities 62,805 61,852 59,119 Current Assets (a) Current investments 27,113 13,706 10,966 (b) Inventories 6,363 6,305 6,785 (c) Trade receivables 7,676 7,999 4,228 (d) Cash and bank balances 5,589 6,400 16,538 (e) Short-term loans and advances 13,117 15,357 10,249 (f) Other Current assets 2,123 3,058 2,956 Sub-total - Current liabilities 61,981 52,826 51,722 TOTAL - Assets 124,786 114,678 110,841 Ratios Net debt/equity (x) (0.1) (0.1) (0.3) Book value (Rs per share) 273.5 264.4 209.1 Inventory turnover (days) 16.1 16.3 18.5 Debtor days 13.7 14.8 7.8 Creditor days 35.3 42.9 36.0

Source: Company, Kotak Institutional Equities

6 KOTAK INSTITUTIONAL EQUITIES RESEARCH Bajaj Auto Automobiles

Exhibit 4: We expect Bajaj Auto's volumes to rise by ~6% yoy in FY2014E Volume assumptions, March fiscal year-ends, 2012-15E (mn units)

2010 2011 2012 2013E 2014E 2015E Motorcycles 2,506,845 3,387,043 3,834,405 3,829,283 4,053,665 4,480,324 Domestic 1,781,748 2,414,606 2,566,757 2,523,605 2,591,307 2,798,611 < 125 cc 928,878 1,159,190 1,128,360 1,128,360 1,196,062 1,291,747 > 125 cc 852,870 1,255,416 1,438,397 1,395,245 1,395,245 1,506,865 Exports 725,097 972,437 1,267,648 1,305,677 1,462,359 1,681,713 < 125 cc 533,126 639,733 832,428 857,401 960,289 1,104,332 > 125 cc 191,971 332,704 435,220 448,277 502,070 577,380 Total 2-wheelers 2,511,696 3,387,043 3,834,405 3,829,283 4,053,665 4,480,324 Domestic 3-Wheelers 176,027 205,627 202,979 234,185 262,013 288,009 Passenger 3-wheelers 164,493 201,270 195,141 230,266 257,898 283,688 Goods 3-wheelers 11,534 4,357 7,838 3,919 4,115 4,321 Exports 164,909 231,281 312,176 262,228 288,451 323,065 Total 3-wheelers 340,936 436,908 515,155 496,413 550,464 611,074 Total vehicles 2,852,632 3,823,951 4,349,560 4,325,696 4,604,129 5,091,397 Growth (yoy %) Motorcycles 31.4 35.1 13.2 (0.1) 5.9 10.5 Domestic 39.6 35.5 6.3 (1.7) 2.7 8.0 < 125 cc 114.7 24.8 (2.7) — 6.0 8.0 > 125 cc 1.1 47.2 14.6 (3.0) — 8.0 Exports 14.8 34.1 30.4 3.0 12.0 15.0 < 125 cc 40.7 20.0 30.1 3.0 12.0 15.0 > 125 cc (23.9) 73.3 30.8 3.0 12.0 15.0 Total 2-wheelers 30.8 34.9 13.2 (0.1) 5.9 10.5 Domestic 3-Wheelers 29.9 16.8 (1.3) 15.4 11.9 9.9 Passenger 3-wheelers 31.3 22.4 (3.0) 18.0 12.0 10.0 Goods 3-wheelers 13.1 (62.2) 79.9 (50.0) 5.0 5.0 Exports 18.6 40.2 35.0 (16.0) 10.0 12.0 Total 3-wheelers 24.2 28.1 17.9 (3.6) 10.9 11.0 Total vehicles 30.0 34.0 13.7 (0.5) 6.4 10.6

Source: Company, Kotak Institutional Equities estimates

KOTAK INSTITUTIONAL EQUITIES RESEARCH 7 Automobiles Bajaj Auto

Exhibit 5: We expect earnings to increase to 16% CAGR over FY2013-15E Bajaj Auto profit and loss, balance sheet and cash flow statement, March fiscal year-ends, 2010-15E (Rs mn)

2010 2011 2012 2013E 2014E 2015E Profit model (Rs mn) Net sales 115,085 158,968 188,803 194,890 220,815 248,277 EBITDA 26,175 34,138 40,284 39,892 46,931 51,810 Other income 976 3,339 2,997 4,408 5,394 7,294 Interest (60) (17) (222) (5) — — Depreciation (1,365) (1,228) (1,456) (1,640) (1,895) (1,947) Profit before tax 25,726 36,232 41,602 42,655 50,430 57,157 Extra-ordinary items (1,624) 7,246 (1,340) — — — Taxes (7,075) (10,080) (10,221) (12,227) (14,625) (16,575) Net profit 17,027 33,397 30,041 30,428 35,805 40,581 Adjusted net profit 18,171 26,152 30,041 30,428 35,805 40,581 Adjusted earnings per share (Rs) 62.8 90.4 103.8 105.1 123.7 140.2 Balance sheet (Rs mn) Equity 29,283 49,102 60,411 79,020 98,069 119,659 Deferred tax liability 17 297 484 1,151 1,151 1,151 Total borrowings 13,386 4,855 2,546 1,934 1,934 1,933 Current liabilities 28,579 38,222 47,370 42,682 43,553 47,962 Total liabilities 71,265 92,476 110,811 124,786 144,706 170,705 Net fixed assets 15,211 15,483 14,914 20,980 21,585 21,889 Investments 40,215 47,219 48,828 64,305 78,027 98,027 Cash 1,014 2,288 16,538 5,589 5,396 8,458 Other current assets 14,824 27,443 30,211 33,593 39,377 42,011 Miscellaneous expenditure — 43 320 320 320 320 Total assets 71,265 92,476 110,811 124,786 144,706 170,705 Free cash flow (Rs mn) Operating cash flow excl. working capital 18,874 24,352 28,802 23,446 29,474 33,422 Working capital changes 8,498 (8,215) 797 (7,941) (4,913) 1,775 Capital expenditure (1,078) (2,006) (1,090) (7,706) (2,500) (2,250) Free cash flow 26,293 14,131 28,509 7,799 22,060 32,946 Ratios EBITDA margin (%) 21.9 20.5 20.3 19.6 20.5 20.1 PAT margin (%) 15.8 16.5 15.9 15.6 16.2 16.3 Book Value (Rs/share) 101.2 169.7 208.7 273.0 338.9 413.5 RoAE (%) 70.9 84.9 54.5 43.1 39.9 36.9 RoACE (%) 42.5 63.6 47.5 37.5 34.9 31.6

Source: Company, Kotak Institutional Equities estimates

8 KOTAK INSTITUTIONAL EQUITIES RESEARCH

ADD United Spirits (UNSP)

Consumer products MAY 17, 2013 RESULT Coverage view: Cautious

Waiting to start a new journey. UNSP’s 4QFY13 results were marginally below Price (Rs): 2,318 estimates at the operating level. Premiumization trend, though visible in volumes Target price (Rs): 2,380 (prestige and above segments up 30% yoy), is not translating into improved operating BSE-30: 20,247 metrics (margins). We (as is the Street) are eagerly awaiting consummation of the deal with Diageo post which the much-expected operational overhaul should start. In that context, current quarter’s results are not that relevant. Maintain ADD; revise target price to Rs2,380 (19X one-year forward EV/EBITDA).

Company data and valuation summary United Spirits Stock data Forecasts/Valuations 2013 2014E 2015E 52-week range (Rs) (high,low) 2,386-505 EPS (Rs) 36.8 64.8 80.9 Market Cap. (Rs bn) 336.8 EPS growth (%) 133.6 75.8 24.9 Shareholding pattern (%) P/E (X) 62.9 35.8 28.7 Promoters 27.5 Sales (Rs bn) 106.2 123.9 138.8 FIIs 46.1 Net profits (Rs bn) 4.7 9.4 11.8 MFs 6.0 EBITDA (Rs bn) 17.4 21.0 24.0 Price performance (%) 1M 3M 12M EV/EBITDA (X) 22.3 18.2 15.7 Absolute 14.0 22.1 264.4 ROE (%) 7.3 11.0 12.3 Rel. to BSE-30 5.5 17.4 188.5 Div. Yield (%) 0.3 0.2 0.3

Marginal miss in operating numbers

UNSP reported standalone 4QFY13 net sales at Rs20.9 bn (+11% yoy; -5% qoq), EBITDA of Rs2.4 bn (+21% yoy; -14% qoq) and PAT of Rs560 mn. Reported numbers marginally missed our estimates at the operating level; higher-than-estimated other income was offset by Rs217 mn of one-off losses, leading to a miss at the PAT level. 4QFY13 sales growth of 11% yoy was driven by volume and price growth of 4% and 7%, respectively. Prices increases implemented in the states of Andhra Pradesh and Karnataka in 4QFY13 contributed to pricing gains along with better mix. Volume growth has been weak (+4% and +3% in 4QFY13 and FY2013, respectively) due to (1) change in procurement norms in Tamil Nadu; UNSP volumes declined 15% yoy in TN in FY2013, and (2) consumer resistance in the face of large increase in MRP necessitated by increase in taxes in certain states like Maharashtra. W&M reported FY2013 sales and EBITDA at GBP219 mn and GBP44.6 mn, growth of 17% (yoy) and 24% (yoy), respectively.

Premiumization is visible though its impact on operating numbers is missing

Premiumization trend was visible in the quarter with prestige and above segments growing at 30% yoy (volume) versus decline of 2% yoy in regular and below segments. While the premiumization trend has been pretty strong throughout the year (prestige and above segments volumes are up 21%), it has had no impact on the operating performance with EBITDA margins declining 80 bps yoy (FY2013 EBITDA margin at 13.1% versus 13.9% in FY2012); also, gross margins are lower by 90 bps yoy (40% in FY2013 versus 40.9% in FY2012). In our view, with Diageo taking over, translation of premiumization into operating gains should be much more visible.

Retain ADD with revised TP of Rs2,380 (Rs2,000 earlier) at 19X one-year forward EV/EBITDA

We retain ADD rating on UNSP with a revised TP of Rs2,380 (Rs2,000 earlier). Our price target is based on 19X (earlier 18X) one-year forward EV/EBITDA multiple, ~10% discount to other consumer companies. In our view, the stock is discounting most of the improvement in core business performance, and there might be limited upside from current levels.

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

Consumer products United Spirits

Exhibit 1: Marginally below estimates Interim results of UNSP, standalone, March fiscal year-ends (Rs mn)

(% chg) 12 months 4QFY13 4QFY13E 4QFY12 3QFY134QFY13E 4QFY12 3QFY13 FY2013 FY2012 Change (%) Net sales 20,944 21,075 18,817 22,027 (1) 11 (5) 86,068 76,599 12 Total expenditure (18,584) (16,867) (19,281) (74,763) (65,935) 13 Material cost (12,424) (11,354) (12,945) (51,636) (45,240) 14 Staff cost (1,215) (1,007) (1,301) (4,764) (4,210) 13 Advertising and promotion (2,120) (2,089) (2,225) (7,779) (7,446) 4 Other expenditure (2,824) (2,417) (2,810) (10,583) (9,038) 17 EBITDA 2,361 2,424 1,951 2,746 (3) 21 (14) 11,305 10,664 6 OPM (%) 11.3 11.5 10.4 12.5 13.1 13.9 (6) Other income 469 300 147 185 1,032 1,035 Interest (1,570) (1,640) (1,663) (1,636) (6,562) (5,944) 10 Depreciation (195) (180) (175) (173) (718) (609) 18 Pretax profits 1,065 904 260 1,122 18 309 (5) 5,057 5,147 (2) Tax (288) (289) 24 (453) (1,632) (1,611) Net income 777 615 285 669 26 173 16 3,425 3,536 (3) Extraordinary (217) - (185) 136 (217) (108) Reported net income 560 615 100 805 (30) 3,208 3,428 (6) Income tax rate (%) 27.1 32.0 (9.3) 40.3 Cost as a % of sales Material cost 59.3 60.3 58.8 60.0 59.1 Staff cost 5.8 5.3 5.9 5.5 5.5 Advertising and promotion 10.1 11.1 10.1 9.0 9.7 Other expenditure 13.5 12.8 12.8 12.3 11.8

Source: Company, Kotak Institutional Equities

Exhibit 2: Volume growth has slowed down Trend in quarterly volume growth, standalone, March fiscal year-ends (%)

25 Destocking in Andhra Pradesh due to fresh tendering process 20 for retail licenses Disruptions in Tamil Nadu and steep excise hike in West Bengal 15

10

5

0

(5) Jun-08 Jun-09 Jun-10 Jun-11 Jun-12 Sep-08 Dec-08 Sep-09 Dec-09 Sep-10 Dec-10 Sep-11 Dec-11 Sep-12 Dec-12 Mar-09 Mar-10 Mar-11 Mar-12 Mar-13

Source: Company, Kotak Institutional Equities

10 KOTAK INSTITUTIONAL EQUITIES RESEARCH United Spirits Consumer products

Exhibit 3: Premiumization trend is visible Trend in yearly volumes for UNSP, standalone, March fiscal year-ends

2011 2012 2013 Volumes (mn cases) Prestige and above segments 19.7 23.67 28.71 Regular and below segments 92.8 96.52 94.99 Growth (%) Prestige and above segments 20 21 Regular and below segments 4 -2

Source: Company, Kotak Institutional Equities

Exhibit 4: Reported loss on account of exchange loss of Rs2.26 bn versus a gain of Rs397 mn last year Profit and loss account, consolidated, March fiscal year-ends (Rs mn)

12 months 2013 2012 Chng. (%) Net sales 107,525 93,561 15 Total expenditure (93,754) (81,262) 15 Material cost (59,524) (50,785) 17 Staff cost (7,946) (7,247) 10 Advertising and promotion (10,803) (10,111) 7 Other expenditure (15,481) (13,120) 18 EBITDA 13,771 12,298 12 OPM (%) 13 13 (3) Other income (1,234) 1,393 (189) Interest (9,849) (8,757) 12 Depreciation (1,784) (1,474) 21 Pretax profits 903 3,461 (74) Tax (1,795) (1,481) 21 Net income (892) 1,980 (145) Extraordinary (110) (108) 2 Reported net income (1,002) 1,872 (154) Cost as a % of sales Material cost 55.4 54.3 Staff cost 7.4 7.7 Advertising and promotion 10.0 10.8 Other expenditure 14.4 14.0

Source: Company, Kotak Institutional Equities

Update on the UNSP-Diageo transaction

Diageo has acquired 0.44% of the paid-up capital of UNSP through an open offer (for 26% stake) which commenced on April 10, 2013 and ended on May 13, 2013. This will be followed by a preferential issue of shares (10% of fully diluted equity; 14.5 mn shares) to Diageo, which should be completed by the end of May 2013. Subsequently, promoters would need to transfer 11.5% (fully diluted) stake to Diageo along with the sale of treasury shares (5.9% of fully diluted capital). In our view, sale of treasury shares should happen easily as they are unencumbered. However, the last leg of the transaction (transfer of 11.5% stake to Diageo) might be delayed in the light of winding up petitions filed in the Karnataka high court by unsecured creditors (Rolls Royce and Partners Finance, BNP Paribas and Avions de Transport Regional). As per the management, the company needs to resolve these court cases before transfer of stake is initiated.

KOTAK INSTITUTIONAL EQUITIES RESEARCH 11 Consumer products United Spirits

Exhibit 5: Transaction structure with Diageo

% of existing % of enlarged No of shares Form of purchase share capital share capital (mn) Outlay (Rs mn) Direct acquisition from United Breweries Holding group 12.8 11.5 16.7 24,108 Direct acquisition from UNSP subsidiaries and group trusts 6.5 5.9 8.5 12,242 Preferential allotment 10.0 14.5 20,927 Open offer (maximum) 26.0 37.8 54,411 Total 53.4 77.6 111,688

Source: Kotak Institutional Equities

Exhibit 6: Net debt remains static qoq Debt profile of UNSP, consolidated, March fiscal year-ends (Rs mn)

Break up of debt Mar-13 Dec-12 Sep-12 Jun-12 Mar-12 Dec-11 Sep-11 Jun-11 Mar-11 Dec-10 Capex loan 11539 7,575 7391 7,689 5,783 5,950 5,640 5,885 5,213 5,319 Term loan 8020 8,991 9963 11,976 12,847 13,830 15,910 15,335 15,455 15,892 Working capital 19210 20,390 19390 19,847 17,921 18,770 14,390 13,628 9,184 10,716 Term loans of SDL, PDL and others 2542 2,460 2448 2,452 2,342 2,350 Short term loans 3900 Total secured loan 45,211 39,416 39,192 41,964 38,893 40,900 35,940 34,849 29,852 31,927 Intercorporate deposit 450 500 500 500 Unsecured loan 6124 9,622 10481 10,541 12,305 12,740 13,260 12,479 10967 7,971 W&M acqusition loan w/o recourse 20,538 22,993 22,427 USL Holdings (UK) Ltd - With recourse (GBP 370 mn) 30403 33,037 31691 32,153 30,162 30,410 28,340 Total debt 82,188 82,075 81,364 84,658 81,360 84,050 77,540 67,865 63,812 62,325 Less cash 2434 2,820 3421 4524 3,632 6,910 6,480 2,950 6,322 5,693 Total net debt 79,754 79,255 77,943 80,134 77,728 77,140 71,060 64,915 57,490 56,632

Source: Company, Kotak Institutional Equities

Exhibit 7: Profit and loss account, Whyte and Mackay, March Exhibit 8: Balance sheet, Whyte and Mackay, March fiscal year- fiscal year-ends (GBP mn) ends (GBP mn)

2011 2012 2013 2011 2012 2013 Net sales 140.9 187.0 218.9 Share capital 62.3 62.3 62.3 Gross profit 68.8 85.1 97.8 Reserves and surplus 34.1 46.0 77.3 Marketing expenses (27.5) (35.0) (36.1) Net debt 112.8 142.5 90.1 Contribution 41.3 50.0 61.8 Total Sources 209.2 250.7 229.8 Overheads (11.0) (14.1) (17.1) Fixed assets 58.8 60.9 59.5 EBITDA 30.3 35.9 44.6 Goodwill 26.4 51.8 47.6 Depreciation (4.4) (5.2) (4.3) Bulk stock 111.6 122.4 110.1 Restructuring costs and goodwill (4.3) (7.5) (4.8) Other net current assets 13.4 24.0 19.0 Interest (9.3) (7.8) (3.8) Net pension (1.0) (8.3) (6.3) PBT 12.4 15.4 31.7 Total uses 209.2 250.7 229.9 Margins (%) Contribution 29.3 26.7 28.2 Source: Company, Kotak Institutional Equities EBITDA 21.5 19.2 20.4

Source: Company, Kotak Institutional Equities

Retain ADD with a revised target price of Rs2,380

We retain ADD rating on UNSP with a revised target price of Rs2,380 (Rs2,000 earlier). Our price target is based on 19X one-year forward EV/EBITDA multiple, ~10% discount to other consumer companies. In our view, the stock is discounting most of the improvement in core business performance, and there might be limited upside from current levels.

12 KOTAK INSTITUTIONAL EQUITIES RESEARCH United Spirits Consumer products

Exhibit 9: We value UNSP at Rs2,380 per share Valuation table for UNSP, consolidated, March fiscal year-ends (Rs mn)

Sept' 14 EBITDA (Rs bn) 20,262 EV/EBITDA 19 EV (Rs bn) 387,001 Net debt (Rs bn) 42,798 Equity value (Rs bn) 344,203 No. of shares (mn) 145.3 Per share equity value 2,369

Source: Company, Kotak Institutional Equities

Exhibit 10: Consumer stocks are trading at average (one-year forward) EV/EBITDA of 22.9X Valuation of consumer stocks, March fiscal year-ends

PE (X) EV/EBITDA (X) Company FY2013E FY2014E FY2015E FY2013E FY2014E FY2015E Asian Paints 40.6 34.3 28.9 25.7 21.2 17.9 Bajaj Corp. 24.2 20.1 17.2 21.4 16.9 13.6 Colgate 37.2 32.3 28.3 28.2 23.9 20.4 Dabur 35.9 29.1 24.7 27.7 22.2 18.6 GSK Cons 37.5 31.2 26.2 26.0 21.5 17.7 GCPL 36.1 31.5 26.0 30.8 22.6 17.7 HUL 39.7 37.1 33.8 36.2 30.9 26.6 ITC 37.2 32.7 27.5 25.7 22.1 18.4 Jubilant 51.1 40.7 30.0 27.2 21.1 15.3 Jyothy labs 58.6 35.0 22.9 24.6 18.7 14.3 Marico 37.5 31.4 26.8 22.4 19.4 16.7 Nestle 44.4 38.8 34.4 26.2 22.0 19.4 Specialty 40.4 27.3 22.7 23.0 15.2 11.6 TGBL 21.7 19.6 17.8 11.9 10.8 9.7 Titan 33.8 29.8 24.8 23.1 19.9 16.2 Composite 37.7 33.1 28.3 27.1 22.9 19.3

Source: Company, Kotak Institutional Equities

KOTAK INSTITUTIONAL EQUITIES RESEARCH 13 Consumer products United Spirits

Exhibit 11: Summary financials: United Spirits Profit model, cash flow statement and balance sheet for UNSP, consolidated, March fiscal year-ends (Rs mn)

2010 2011 2012 2013E 2014E 2015E Profit model Net revenues 63,623 73,762 91,865 107,525 123,853 138,842 EBITDA 11,123 10,647 10,603 13,771 18,781 21,742 Other income 967 3,041 3,089 (1,345) 3,313 3,431 Interest expense (6,187) (5,575) (8,757) (9,849) (5,915) (5,435) Depreciation (950) (1,023) (1,474) (1,784) (2,134) (2,201) Pretax profits 4,952 7,090 3,461 793 14,046 17,538 Tax (1,932) (2,652) (1,481) (1,795) (4,635) (5,788) Net income 3,021 4,437 1,980 (1,002) 9,411 11,750 Earnings per share (Rs) 27.3 35.3 15.8 36.8 64.8 80.9 Balance sheet Total shareholder's equity 37,287 41,339 46,618 81,703 90,178 100,622 Total borrowings 58,504 67,107 84,446 52,107 50,107 43,615 Deferred tax liability (715) (325) (592) (592) (592) (592) Minority interest 85 175 146 222 232 232 Total liabilities and equity 95,162 108,295 130,617 133,440 139,925 143,878 Net fixed assets 18,194 20,690 28,212 34,684 36,093 37,878 Goodwill 42,444 44,320 51,674 51,674 51,674 51,674 Investments 1,265 1,544 2,358 2,358 2,358 2,358 Cash 7,686 6,370 3,632 651 4,265 3,862 Net current assets 25,572 35,371 44,740 44,073 45,536 48,105 Total assets 95,162 108,295 130,617 133,440 139,925 143,878 Free cash flow Operating cash flow, excl. wo 4,175 5,850 3,188 6,553 11,545 13,951 Working capital changes (4,741) (11,211) (9,370) 668 (1,463) (2,569) Capital expenditure (2,586) (3,519) (8,996) (8,338) (3,542) (3,987) Free cash flow (3,153) (8,881) (15,179) (1,117) 6,539 7,395 Ratios Revenue Growth (%) 16.4 15.9 24.5 17.0 15.2 12.1 EBITDA Margin(%) 17.5 14.4 11.5 12.8 15.2 15.7 EPS Growth (%) 49.9 29.5 (55.4) 133.6 75.8 24.9

Source: Company, Kotak Institutional Equities

14 KOTAK INSTITUTIONAL EQUITIES RESEARCH

BUY Adani Port and SEZ (ADSEZ)

Infrastructure MAY 17, 2013 RESULT Coverage view: Cautious

Strong operations; stake sale move in Abbot Point lightens balance sheet. Adani Price (Rs): 153 Port and SEZ (APSEZ) reported strong standalone operations with over 40% revenue Target price (Rs): 180 growth (Rs9.15 bn), led by volume growth of 47.5% (22.9 mn tons in 4QFY13; 82 mn BSE-30: 20,247 tons in FY2013), EBITDA margin of 71.3% and PAT of Rs4.9 bn (up 45% yoy). We believe Mundra port has potential to cross the 100 mn tons in FY2014 and may become the number one port in India (in volume terms). APSEZ is close to completing its stake sale in Abbot Point to its promoter (signed SPA) at book value. We reiterate our BUY rating with target price of Rs180.

Company data and valuation summary Adani Port and SEZ Stock data Forecasts/Valuations 2013 2014E 2015E 52-week range (Rs) (high,low) 163-105 EPS (Rs) 8.1 9.9 12.7 Market Cap. (Rs bn) 307.7 EPS growth (%) 48.7 22.2 27.7 Shareholding pattern (%) P/E (X) 18.8 15.4 12.0 Promoters 77.5 Sales (Rs bn) 35.8 44.6 52.6 FIIs 10.2 Net profits (Rs bn) 16.4 20.0 25.6 MFs 1.7 EBITDA (Rs bn) 23.8 31.1 36.5 Price performance (%) 1M 3M 12M EV/EBITDA (X) 17.4 12.0 9.6 Absolute 4.3 1.7 37.4 ROE (%) 28.5 26.2 26.0 Rel. to BSE-30 (3.3) (2.0) 9.0 Div. Yield (%) 0.8 1.1 1.3

4QFY13: Strong revenues, margins, volumes; PAT of Rs4.9 bn, up 45% yoy

APSEZ reported 4QFY13 standalone revenue of Rs9.15 bn, registering very strong growth of 42.6% yoy driven mainly by strong volume growth (47.5% yoy). The company reported SEZ income of about Rs1 bn for the quarter. EBITDA margin was strong at 71.3% (about 70% adjusted for SEZ income). APSEZ reported high other income of Rs1.16 bn, led by Rs700 mn of profit on divestment of stake in its Abbot Point asset. Strong revenue growth and margins resulted in a 4QFY13 PAT of Rs4.9 bn, a 45% yoy growth (Rs3.4 bn in 4QFY12).

Strong volume growth momentum sustained; potential to cross 100 MMT in FY2014E

Mundra port reported volumes of 22.9 mn tons in 4QFY13, a very strong growth of 47.5% yoy, driven by strong growth in the three cargo segments (bulk, container and crude). In FY2013, the port handled 82.1 mn tons of cargo, up 22.8% yoy. The port remained ahead of its peers (major ports reported volume decline of 4% in FY2013). We believe Mundra port can cross the 100 mn-ton mark in FY2014 on (1) pick-up in coal volumes for power plants, (2) strong container volumes (on commissioning of CT-3) and (3) pick-up in liquid cargo (scale-up in Panipat refinery). The company aims to be the number one port in India (in terms of volumes). It currently ranks number two. We also note potential for strong growth in consolidated volumes, led by scale-up in volumes at Dahej port (handled 7.5 mn tons in FY2013), Hazira port and commissioning of Mormugao port.

Abbot Point transaction almost through; sale consideration likely accounted as receivables

The company is close to completion of its stake sale in Abbot Point (its Australian coal exports terminal) to the promoter group at book value (A$235.7 mn). The potential consideration of A$235 mn from the promoter group is likely sitting as receivables (in other current assets) on the balance sheet (as March 31, 2013 is the effective date of the transaction, based on the SPA signed).

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

Infrastructure Adani Port and SEZ

We retain our estimates; reiterate BUY with a target price of Rs180

We retain our estimates of Rs9.8 and Rs12.6 for FY2014 and FY2015 and revise our target price to Rs180 (from Rs175).

Reiterate BUY on (1) a relatively acyclical strong growth business, (2) strong cash-flows, (3) resilient competitive advantage and (4) reasonable valuations (10.4X FY2014E EV/EBITDA).

4QFY13: Strong operations on revenues, margins and volumes

Strong yoy revenue growth of over 40% driven by strong volumes

Adani Ports reported 4QFY13 standalone revenue of Rs9.15 bn, a very strong growth of 42.6% yoy and significantly ahead (by 15%) of our estimate of Rs7.9 bn. The strong revenues were primarily driven by strong volume growth (up 47.5% yoy at 22.9 mn tons) in 4QFY13 (from 15.5 mn tons in 4QFY12). The company also reported SEZ income of about Rs1 bn in 4QFY13.

EBITDA margin beats estimate at 71.3%

The company also reported a strong EBITDA margin of 71.3% in 4QFY13 versus our estimate of 69%. The margin was flat yoy. Even adjusted for SEZ sales (Rs1 bn) margins would have been strong at about 70%.

PAT up 45% yoy at Rs4.9 bn

APSEZ reported high other income of Rs1.16 bn versus about Rs352 mn reported in 3QFY13. The high other income was driven by Rs700 mn of income earned from divestment of stake in its Abbot Point asset. Strong revenue growth and margins resulted in a 4QFY13 PAT of Rs4.9 bn, up 45% yoy (from Rs3.4 bn in 4QFY12).

For the full year, ending March 31, 2013, APSEZ reported revenue of Rs24.5 bn, up 33% yoy, driven by strong volume growth of 22.8% (to 82.1 mn tons) and SEZ lease/sales revenue of Rs4.24 bn). Strong volume growth and SEZ land sales led to sharp margin expansion of about 220 bps yoy to 73.5% in FY2013. FY2013 PAT of Rs17.5 bn was up about 55% from Rs11.3 bn in FY2012.

16 KOTAK INSTITUTIONAL EQUITIES RESEARCH Adani Port and SEZ Infrastructure

Exhibit 1: Adani Ports and SEZ: 4QFY13 - key numbers (Rs mn)

% change 4QFY13 4QFY13E 4QFY12 3QFY13 vs est. yoy qoq FY2013 FY2012 % change Net operating income 9,152 7,938 6,419 8,922 15.3 42.6 2.6 33,611 24,819 35.4 Operating expenses (2,041) (1,289) (1,790) 58.3 14.0 (6,488) (5,368) 20.9 Employee costs (243) (217) (244) 12.3 (0.5) (1,044) (893) 16.9 Admin & other exp. (344) (338) (368) 1.9 (6.5) (1,377) (1,439) (4.3) Total expenditure (2,628) (2,461) (1,843) (2,402) 6.8 42.6 9.4 (8,908) (7,700) 15.7 EBITDA 6,524 5,477 4,575 6,520 19.1 42.6 0.1 24,702 17,119 44.3 Other income 1,160 352 84 352 229.6 1,288 229.6 2,032 427 376.0 PBDIT 7,683 5,829 4,659 6,872 31.8 64.9 11.8 26,735 17,546 52.4 Interest expense (1,254) (1,180) (452) (1,122) 6.2 177.3 11.7 (3,995) (2,735) 46.1 Depreciation (972) (989) (767) (915) (1.7) 26.7 6.3 (3,424) (2,115) 61.9 PBT 5,495 3,646 3,594 4,375 50.7 52.9 25.6 18,892 12,247 54.3 Tax expense (587) (182) (205) (221) 221.9 185.8 165.7 (1,350) (923) 46.2 PAT 4,908 3,464 3,389 4,154 41.7 44.8 18.1 17,542 11,324 54.9

Volumes (MMT) Total cargo volumes 22.9 15.5 21.4 47.5 7.1 82.1 66.9 22.8

Key ratios (%) Operating exp./ sales 22.3 20.1 20.1 19.3 21.6 Employee costs/ sales 2.7 3.4 2.7 3.1 3.6 Admin & other exp./ sales 3.8 5.3 4.1 4.1 5.8 EBITDA margin 71.3 69.0 71.3 73.1 73.5 69.0 PAT margin 53.6 43.6 52.8 46.6 52.2 45.6 Effective tax rate 10.7 5.0 5.7 5.0 7.1 7.5 EPS (Rs) 2.4 1.7 1.7 2.1 8.7 5.6

Source: Company, Kotak Institutional Equities estimates

Consolidated results also strong; deconsolidates Abbot Point from financials

On a consolidated basis APSEZ reported revenue of Rs10.4 bn, EBITDA margin of 63% and PAT of Rs3.8 bn. The company deconsolidated Abbot Point asset in 4QFY13 and hence the quarter’s numbers do not contain financials from this asset.

KOTAK INSTITUTIONAL EQUITIES RESEARCH 17 Infrastructure Adani Port and SEZ

Exhibit 2: Adani Ports and SEZ (consolidated) 4QFY13 key numbers (Rs mn)

% change 4QFY13 4QFY12 3QFY13 yoy qoq FY2013 FY2012 % change Net operating income 10,355 8,916 13,499 16.1 (23.3) 35,766 32,708 9.4 Operating expenses (3,162) (2,402) (3,386) 31.6 (6.6) (9,129) (9,015) 1.3 Employee costs (350) (435) (388) (19.6) (9.9) (1,308) (1,243) 5.2 Admin and other exp. (325) (189) (682) 72.1 (52.4) (1,570) (1,797) (12.6) Total expenditure (3,836) (3,026) (4,457) 26.8 (13.9) (12,007) (12,056) (0.4) EBITDA 6,519 5,890 9,042 10.7 (27.9) 23,760 20,652 15.0 Other income 462 74 397 522.4 16.4 2,644 597 343.2 Interest expense (1,540) (1,787) (3,689) (13.8) (58.3) (5,418) (4,796) 13.0 Depreciation (1,244) (1,706) (1,943) (27.0) (35.9) (4,220) (4,630) (8.9) PBT 4,197 2,471 3,807 69.8 10.2 16,766 11,823 41.8 Tax expense (413) (155) (158) 165.9 161.2 (1,231) (896) 37.4 PAT 3,784 2,316 3,649 63.4 3.7 15,535 10,927 42.2 Extraordinary items 3,401 - - 853 - Share of minority interest (82) 79 (38) (156) 94 Reported PAT 7,103 2,395 3,611 16,232 11,021

Key ratios (%) Operating exp./ sales 30.5 26.9 25.1 25.5 27.6 Employee costs/ sales 3.4 4.9 2.9 3.7 3.8 Admin and other exp./ sales 3.1 2.1 5.1 4.4 5.5 EBITDA margin 63.0 66.1 67.0 66.4 63.1 PBT margin 40.5 27.7 28.2 46.9 36.1 PAT margin 36.5 26.0 27.0 43.4 33.4 Effective tax rate 9.8 6.3 4.2 7.3 7.6 EPS (Rs) 3.5 1.2 1.8 8.0 5.5

Source: Company estimates, Kotak Institutional Equities

Strong volume growth continues (up 47.5%); ahead of sector

APSEZ reported standalone cargo volumes of 22.9 mn tons in 4QFY13, up a very strong 47.5% yoy. For the full-year FY2013, Mundra port handled 82.1 mn tons of cargo, up 22.8% yoy against our full-year growth assumption of about 20%. All three cargo segments registered strong growth, led by crude cargo (5.1 mn tons, more than double yoy from 2.5 mn tons in 4QFY12), dry bulk cargo of 10.8 mn tons (up 36.8% yoy) and container cargo of 7 mn tons, up 37% yoy.

At the consolidated level APSEZ reported cargo volumes of 26 mn tons (excluding Abbot Point terminal) led by Dahej port volumes of about 2 mn tons and Hazira port volumes of about 1 mn tons.

18 KOTAK INSTITUTIONAL EQUITIES RESEARCH Adani Port and SEZ Infrastructure

Exhibit 3: Adani Ports and SEZ: 4QFY13 Mundra port volumes (Rs mn)

% change 4QFY13 4QFY12 3QFY13 yoy qoq FY2013 FY2012 % chg. Volumes (MMT) Bulk total 10.8 7.9 10.2 36.8 6.2 37.4 31.0 20.5 Container 7.0 5.1 6.0 36.9 16.5 25.5 21.2 20.2 Crude oil 5.1 2.5 5.2 102.0 (1.9) 19.3 14.7 31.5 Total cargo 22.9 15.5 21.4 47.5 7.1 82.1 66.9 22.8 Per MT realisation (Rs) 356 382 361 (6.9) (1.4) 358 354 1.1

Volume mix (%) Bulk total 47.1 50.8 47.5 45.5 46.4 Container 30.5 32.8 28.0 31.0 31.7 Crude oil 22.4 16.4 24.5 23.5 21.9

Source: Company, Kotak Institutional Equities

Remains ahead of peers in volume growth; ranks number two among major ports

In 4QFY13, Mundra port posted cargo growth of 47.5% yoy. This is versus a yoy decline of 4% recorded by major ports in India. In the container segment, Mundra port recorded strong growth of 13% versus a yoy decline of 2% in container volumes handled at major ports.

Exhibit 4: Volumes handled at Mundra port in 4QFY13 versus major ports of the country

Total cargo (MMT) Container ('000 TEUs) Total cargo (MMT) Container ('000 TEUs) 4QFY13 4QFY12 % chg. 4QFY13 4QFY12 % chg. FY2013 FY2012 % chg. FY2013 FY2012 % chg. Kolkata 2.8 2.8 (1.7) 114 101 12.9 11.5 12.2 (6.3) 460 412 11.7 Haldia 7.0 6.6 6.2 31 35 (11.4) 27.2 31.0 (12.3) 134 139 (3.6) Paradip 16.5 13.8 19.8 4 3 NA 57.2 54.3 5.5 13 8 62.5 Visakhapatnam 14.4 14.8 (2.4) 62 66 (6.1) 58.6 67.4 (13.0) 246 234 5.1 Ennore 5.9 4.6 29.1 — — NA 18.1 15.0 21.0 — — NA Chennai 13.0 13.8 (5.4) 368 383 (3.9) 52.9 55.7 (5.0) 1,534 1,558 (1.5) Tuticorin 6.6 7.3 (8.8) 119 120 (0.8) 27.6 28.1 (1.9) 472 477 (1.0) Cochin 4.8 5.2 (7.6) 77 70 10.0 19.7 20.1 (1.8) 326 328 (0.6) New Mangalore 9.9 8.7 13.5 11 10 10.0 36.9 32.9 12.0 46 45 2.2 Mormugao 2.7 10.7 (74.6) 5 5 - 17.6 39.0 (54.8) 22 22 - Mumbai 12.8 16.0 (20.1) 5 13 (61.5) 56.9 56.2 1.2 51 58 (12.1) J.N.P.T 16.0 16.3 (1.4) 1,062 1,077 (1.4) 64 66 (2.6) 4,232 4,321 (2.1) Kandla 23.7 21.6 9.8 27 43 (37.2) 93.2 82.5 13.0 112 166 (32.5) Major ports 136.2 142.0 (4.1) 1,885 1,926 (2.1) 541.4 560.2 (3.3) 7,648 7,768 (1.5) Mundra 22.9 15.5 47.5 476 421 13.1 82.1 66.9 22.8 1,738 1,520 14.4 Pipavav 2.5 2.6 (6.0) 161 165 (2.7) 9.7 11.3 (14.4) 566 639 (11.4)

Source: Company, Indian Ports Association, Kotak Institutional Equities

Potential to cross the 100 mn ton mark in FY2014

We believe Mundra port could become the largest port in India (it ranks second) in FY2014 with potential volumes crossing 100 mn tons. Incremental volumes in FY2014 are likely to be driven by (1) strong pick-up in coal volumes for power plants (note scale-up in generation at Adani’s and Tata’s power plants at Mundra port), (2) strong growth in container volumes (driven by commissioning of CT-3) and (3) pick-up in liquid cargo volumes (due to scale-up in Panipat refinery volumes).

The management is confident of crossing this 100 mn tons mark in FY2014 and by a comfortable margin.

KOTAK INSTITUTIONAL EQUITIES RESEARCH 19 Infrastructure Adani Port and SEZ

Exhibit 5: Potential to cross 100 mn tons in FY2014E Commodity-wise break-up of incremental cargo volumes at Mundra port, March fiscal year-ends, 2013-14E

mn tons Coal (general) Coal for power plants 120 Other bulk Container Liquid

100

80

60

40 Incremental volumes in FY2014E driven by power plant coal, container and 20 liquid

- 2013E incr. 2014E 2014E

Source: Company, News flows, Kotak Institutional Equities estimates

The management aims to make Mundra the number one port in India (volume-wise). It ranked number two among major ports in India in terms of volume handled in 1HFY13 as well as in terms of container cargo handled.

Exhibit 6: Mundra ranks second in terms of volume and container volume handled Mundra's rank in terms of volume handled at the port versus major ports of the country, for 9MFY13

(mn tons) Rank amongst major ports (Total volume) ('000 TEUs) Rank amongst major ports (Container) 100 93 4,500 4,232 82 80 64 3,600 57 59 60 53 57 2,700 37 28 1,738 40 27 1,800 1,534 20 18 18 20 11 900 472 460 326 246 134 112 51 46 22 13 - - - New… New… Vizag Vizag Haldia J.N.P.T J.N.P.T Haldia Kandla Kandla Cochin Ennore Ennore Cochin Paradip Paradip Kolkata Mundra Mundra Kolkata Mumbai Mumbai Chennai Chennai Tuticorin Tuticorin Mormugao Mormugao

Source: Company, Indian Ports Association, Kotak Institutional Equities

Dahej port shows signs of strong volume build-up

The company reported good scale-up in volumes and visibility for the recently commissioned Dahej port (in mid-FY2012). The port handled volumes of about 2 mn tons in 4QFY13 and about 7.5 mn tons in FY2013.

The company is confident of scaling up operations at Dahej port and expects to handle 10- 15 mn tons of cargo in FY2014 (our estimate is 10 mn tons). Adani Ports has entered into eight medium-term agreements (for three years) with various port service users at Dahej port as well as a short-term agreement (for nine months). This provides comfort regarding volume visibility in the near term.

20 KOTAK INSTITUTIONAL EQUITIES RESEARCH Adani Port and SEZ Infrastructure

Exhibit 7: Volumes handled at Dahej port, 2QFY12-4QFY13

(mn tons) Dahej Port volumes 3.00 2.6 2.50 2.0 2.00 1.8

1.50 1.2 1.00 0.7

0.50 0.3

- 3QFY12 4QFY12 1QFY13 2QFY13 3QFY13 4QFY13

Source: Company, Kotak Institutional Equities

Hazira port to start contributing to consolidated volumes in FY2014E

The company recently completed the Hazira port project (capacity of 20 mn tons) and trial operations started in 2QFY13 – reported volumes of about 0.78 mn tons in 4QFY13. The company is confident of scaling up these volumes and expects the port to handle 5-10 mn tons of cargo in FY2014 (we build 5 mn tons of cargo in FY2014E).

Maersk line has introduced an additional stop for its Europe-Middle East line (ME3) at Hazira port. This would primarily be to transship cargo. The shipping route for this line would now be Pipavav (India) – Hazira (India) - Nhava Sheva (India) – Jebel Ali (UAE) – Salalah (Oman) – Port Said (Egypt) – Mersin (Turkey) – Ambarli (Turkey) – Izmit Korfezi (Turkey).

The company also cited good visibility/enquiries for cargo at Hazira port. Dahej and Hazira port would be operated as twin ports with Dahej port focusing on dry bulk cargo and Hazira port focusing on container and liquid cargo. Both ports would target cargo headed towards central India (Madhya Pradesh, Chhattisgarh) and North Maharashtra, apart from the key industrial areas in South Gujarat (Surat, Bharuch, Baroda).

The company is also likely to complete the Mormugao port project by end-FY2013 (90-95% of the work is complete).

Commissioning of these projects would correspondingly lead to higher revenues, margins and cash flows for the company. Abbot Point transaction almost through; sale consideration likely accounted as receivables

The company is likely close to completion of its sale of Abbot Point (its Australian coal exports terminal) to its promoter group. The stake sale is being done at book value of the investment (A$235.7 mn). The company booked a profit from this sale of about Rs700 mn due to foreign currency movements (while the sale is being done at book value only).

KOTAK INSTITUTIONAL EQUITIES RESEARCH 21 Infrastructure Adani Port and SEZ

The company had entered into a Share Purchase Agreement (SPA) on March 30, 2013 to sell its entire stake in Abbot Point terminal to its promoter group. The company received most of the regulatory and lender approvals for this stake sale, barring approval from one lender. The company expects the same to come through and the sale to be completed by the end of this month. As the SPA was signed before the end of FY2013, the company believes that it can be taken as the effective date of the stake sale and has correspondingly deconsolidated the Abbot Point terminal financials from the report of consolidated numbers. The potential consideration of A$235 mn from the promoter group is likely sitting as receivables (in other current assets) in the financials (post end-FY2013 APSEZ received about 10% of this amount).

Exhibit 8: Standalone and consolidated balance sheet for Adani Ports & SEZ, March fiscal year-ends, 2011-13 (Rs mn)

Standalone Consolidated 2012 1HFY13 2013 2012 1HFY13 2013 Debt declines by Rs88 bn Shareholders funds 52,385 60,865 67,040 48,385 51,646 63,963 from end-1HFY13 on Share capital 4,035 4,035 4,035 4,035 4,035 4,035 removal of Abbot Point Reserves & surplus 48,350 56,830 63,005 44,350 47,611 59,928 Loan funds 51,377 65,927 77,993 164,514 194,656 106,622 Deferred tax liability (net) 4,297 4,802 5,530 15,179 15,992 5,286 Other long -term liabilities 6,035 5,896 5,700 6,187 6,057 5,870 Minority interest 1,349 1,197 1,423 Total sources of funds 114,094 137,490 156,262 235,614 269,548 183,164 Includes Rs10 bn of assets held for sale (of new Net fixed assets 82,521 97,738 99,135 209,531 238,544 142,933 container terminal CT-3) Goodwill on consolidation 11,125 11,125 404 Investments 18,376 20,327 13,273 697 779 2,216 Cash & bank balance 5,359 1,391 5,936 11,184 9,460 8,306 Current assets 25,523 39,087 64,209 26,673 39,572 56,494 Investments down on removal of Abbot Point Inventories 625 822 873 691 911 980 Debtors 2,744 6,230 8,034 3,339 5,626 8,023 Loans & advances 19,290 27,266 37,127 14,117 27,236 28,982 Sharp increase on loans to SPVs and capital advances Short-term 1,634 12,170 16,454 1,977 15,295 17,472 Long-term 17,656 15,097 20,674 12,140 11,941 11,511 Other current assets 2,864 4,769 18,175 8,526 5,799 18,510 Current liabilities & provisions 17,854 21,281 26,291 23,767 30,159 27,189 Consideration from Abbot Current liabilities 15,271 19,712 22,837 19,794 28,146 23,146 Point sale likely accounted Provisions 2,583 1,568 3,454 3,973 2,013 4,043 as receivables presently Net current assets 7,669 17,806 37,918 2,906 9,413 29,305 Total application of funds 114,094 137,490 156,262 235,614 269,548 183,164

Source: Company, Indian Ports Association, Kotak Institutional Equities

We retain estimates; reiterate BUY with a target price of Rs180

We retain our consolidated estimates of Rs9.8 and Rs12.6 for FY2014 and FY2015 respectively and marginally revise our SOTP-based target price of APSEZ to Rs180 (from Rs175).

Our SOTP-based target price of Rs180 comprises (1) Rs138/share for the Mundra port business (12-month forward DCF valuation), (2) Rs14//share for the SEZ business, (3) Rs8/share for Dahej port value, (4) Rs9/share for Mormugao and Hazira ports, (5) Rs5/share for Abbot Point Coal Terminal (valued at equity invested at end-FY2012) and (6) Rs3/share for book value of investments in Adani Logistics.

Our target price implies about 12X FY2014E EV/EBITDA for the core asset (Mundra port) and we believe that is reasonable considering (1) durability of this EBITDA (non-regulated, competing facilities difficult to create), (2) likely strong growth over the next 2-3 years as utilization grows and (3) tax advantages (MAT and MAT credit).

22 KOTAK INSTITUTIONAL EQUITIES RESEARCH Adani Port and SEZ Infrastructure

Exhibit 9: We arrive at an SOTP-based target price of Rs180 for APSEZ 12-month forward sum-of-total-parts valuation of Adani Ports & SEZ

Valuation Stake Value of stake Per share FY14E implied P/B EV/EBITDA implied (Rs mn) (%) (Rs mn) (Rs) Method of valuation (X) (X) Mundra port 277,773 100.0 277,773 138 12M forward DCF 3.4 12.4 SEZ 28,283 100.0 28,283 14 12M forward DCF Dahej port 23,125 74.0 17,112 8 12M forward DCF 6.7 Mormugao port 3,620 100.0 3,620 2 12M forward DCF 2.6 Hazira port 14,863 100.0 14,863 7 12M forward DCF 2.5 Abbot Point Port 9,325 100.0 9,325 5 1X invested equity 1.0 Adani Logistics 6,237 100.0 6,237 3 2X book value Total 177

Source: Company, Kotak Institutional Equities estimates

We retain our BUY rating on APSEZ on reasonable valuations for a strong cash-flow generating business. We are positive about the business based on the following: (1) A relatively acyclical business as most port volumes are linked to energy imports (coal for upcoming power plants), (2) strong cash-flow generation assets (standalone EBITDA of about Rs25 bn in FY2013), (3) large operational assets (Mundra, Dahej, Hazira) may warrant higher P/B valuations on resilient competitive advantages, (4) few and sub-scale competing facilities, if any, particularly on the west coast and (5) likely start of phase of reaping benefits of large capex committed over the past two years. We prefer APSEZ over GPPL on better scale, scope, visibility and margins.

KOTAK INSTITUTIONAL EQUITIES RESEARCH 23 Infrastructure Adani Port and SEZ

Exhibit 11: Consolidated financials of Adani Ports & SEZ Ltd, March fiscal year-ends, 2008-15E (Rs mn)

2008 2009 2010 2011 2012 2013E 2014E 2015E Income statement Net sales 8,170 11,949 14,955 20,001 32,708 35,766 43,728 51,746 Total operating costs (2,813) (4,393) (5,293) (7,007) (12,056) (12,007) (13,119) (15,714) EBITDA 5,357 7,557 9,663 12,994 20,653 23,760 30,609 36,032 EBITDA margin (%) 65.6 63.2 64.6 65.0 63.1 66.4 70.0 69.6 Other income 279 446 321 309 596 2,644 1,357 1,624 Depreciation (1,023) (1,468) (1,868) (2,388) (4,630) (4,220) (5,903) (6,199) Financial charges (1,079) (1,459) (559) (880) (4,796) (5,418) (5,923) (5,580) Pre-tax profit 3,535 5,075 7,556 10,036 11,822 16,766 20,140 25,877 Taxation (1,534) (533) (601) (874) (896) (1,231) (416) (517) Adjusted PAT 2,001 4,542 6,955 9,162 10,927 15,535 19,724 25,360 EPS (Rs) 1.0 2.1 3.3 4.6 5.5 8.1 9.8 12.6 Balance sheet Shareholders funds 26,216 29,306 34,637 41,899 48,385 63,963 86,459 107,290 Share capital 4,051 4,045 4,035 4,035 4,035 4,035 4,035 4,035 Reserves and surplus 22,164 25,261 30,602 37,864 44,350 59,928 82,425 103,255 Loan funds 20,680 28,957 37,062 35,925 175,650 106,622 80,837 65,337 Amt received/ receivable under LT lease 6,568 6,505 6,291 6,121 5,905 5,870 5,406 5,255 Deferred tax liability (net) 1,771 2,296 2,817 3,468 15,179 5,286 5,575 5,398 Total sources of funds 55,252 67,156 81,629 88,400 246,467 183,164 179,305 184,715 Total fixed assets 36,673 51,792 67,682 84,683 209,531 142,933 132,704 131,666 Investments 8,886 2,072 2,249 1,070 11,823 2,619 4,508 4,508 Cash and bank balance 9,029 12,951 9,997 2,515 11,184 8,306 21,051 28,906 Net current assests excl cash 663 321 1,701 132 13,929 29,305 21,042 19,635 Total application of funds 55,252 67,156 81,629 88,400 246,467 183,164 179,305 184,715 Cash flows Cash flow from operations 7,243 8,336 8,524 14,649 18,267 (96) 40,103 38,370 Cash flow from investing activities (21,920) (10,094) (18,463) (18,688) (141,024) 71,581 7,858 (4,447) Free cash flows (14,678) (1,758) (9,939) (4,039) (122,756) 71,485 47,961 33,923 Cash flow from financing activities 22,806 5,519 5,927 (4,106) 130,177 (75,291) (29,399) (25,761) Cash generated /utilised 8,418 3,922 (4,539) (8,725) 6,647 (3,678) 17,948 7,783 Net cash at start of year 611 9,029 12,951 9,997 2,515 11,184 8,306 21,051 Net cash at end of year 9,029 12,951 8,413 1,272 9,162 7,506 26,253 28,834

Source: Company, Kotak Institutional Equities estimates

24 KOTAK INSTITUTIONAL EQUITIES RESEARCH

REDUCE Mahindra Satyam (SCS)

Technology MAY 17, 2013 RESULT Coverage view: Cautious

A modest quarter, FY2014E to underperform. Satyam’s 4QFY13 revenue growth of Price (Rs): 109 1% was broadly in line with our estimate. FY2013 was a year of modest 6.5% organic Target price (Rs): 120 revenue growth and marked by challenges on sales execution. Satyam has taken BSE-30: 20,247 corrective measures but they will take time to show up in results. We expect revenue growth underperformance to continue in FY2014E and forecast organic revenue growth of 7.5%. We maintain our REDUCE rating and will review our estimates after Tech Mahindra’s annual results on May 21.

Company data and valuation summary Mahindra Satyam Stock data Forecasts/Valuations 2013 2014E 2015E 52-week range (Rs) (high,low)131-66 EPS (Rs) 11.0 11.2 11.9 Market Cap. (Rs bn) 128.7 EPS growth (%) 8.4 1.2 6.9 Shareholding pattern (%) P/E (X) 9.9 9.8 9.2 Promoters 42.6 Sales (Rs bn) 77.6 84.6 92.9 FIIs 27.8 Net profits (Rs bn) 13.0 13.1 14.0 MFs 4.6 EBITDA (Rs bn) 16.5 16.5 17.8 Price performance (%) 1M 3M 12M EV/EBITDA (X) 6.0 5.5 4.6 Absolute (1.3) (4.7) 57.6 ROE (%) 37.6 29.6 25.7 Rel. to BSE-30 (8.6) (8.3) 24.8 Div. Yield (%) 0.0 2.0 2.2

A broadly in-line quarter, revenue growth trajectory slows further

` Satyam reported 4QFY13 revenue growth of 1% sequentially and 6.5% on yoy basis. Revenue growth was led by the manufacturing vertical that grew 10% qoq. On organic basis, yoy revenue growth trajectory slowed further to a mere 5.3%.

` Operating margin declined 150 bps qoq. Management attributed the decline to incremental provisions arising from change in assumptions and methodology for computing leave encashment liability. Satyam has kept a tight leash on costs which is reflected in flattish non- manpower costs and overall decline in headcount.

` Net income before extraordinary items of Rs3.2 bn was 1.7% ahead of our estimate. This was influenced by (1) Rs138 mn of miss at the EBITDA level, (2) amortization of licenses purchased for the engineering services division resulting in Rs252 mn qoq increase in depreciation costs. Impact of these factors was offset by creation of deferred tax asset resulting in low ETR of 18.9%.

Sales execution needs to improve for change in growth trajectory

A recurring theme in FY2013 for Satyam has been a good pipeline of deals but weak conversion/ win ratio. This could have been because of lack of a focused large deals group and weak sales execution. Satyam has made changes to the front-end with induction of Mr Manoj Chugh as Head of Global Sales. The company has made investments in the large deals group. Change in the S&M team and investments in front-end have the potential (or hope) for showing up in improved performance in 2HFY14E but may not be enough to prevent another year of underperformance.

Maintain REDUCE rating, estimates to be reviewed after annual results of Tech Mahindra

Satyam stock has underperformed in the past three months and corrected in absolute terms during this period. Perceived inexpensive valuations of Satyam have to be viewed against the backdrop of weak organic growth rates (mid-single digit for the consolidated entity). We maintain our REDUCE rating on the stock; we will update our estimates and target price after TM results.

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

Technology Mahindra Satyam

FY2013—a mixed year, margins normalize, revenue growth suffers

Satyam delivered organic revenue growth of 6.5% in FY2013, significantly lower than the industry. More importantly, growth decelerated through the course of the year. Growth was concentrated in the manufacturing vertical. On the positive side, the company improved margins by 520 bps courtesy (1) 12% depreciation of the Rupee against the US$ and (2) tight leash on costs – non-manpower expenses declined 220 bps in FY2013.

Key highlights from 4QFY13 earnings call

` Volume growth for the quarter was 2%, with about 1% of cross-currency impact.

` Revenue growth was led entirely by the manufacturing vertical which grew 10% sequentially, while telecom & media grew in line with the company. Every other vertical saw a decline in revenues.

` Revenues from North America grew 4.7%, while European revenues declined 7.6%.

` After a relatively poor year of deal wins, Satyam announced a 4-year US$50 mn deal with an Australian paper and packaging client.

` End-period headcount was 36,067, a net sequential decline of 889. Attrition was higher at 14.3% versus 13.1% in the previous quarter. Satyam indicated that it plans to hire around 2,000 freshers in FY2014E. The base of the employee pyramid (0-3 years experience) narrowed by ~2% over the quarter.

` Capex for FY2014E is likely to be Rs5 bn, with Satyam planning to add 1,500 seats.

` End-Mar 2013 hedge book stood at US$234 mn with an average strike rate of 57.7.

Exhibit 1: Quarterly financials for Mahindra Satyam, March fiscal year-ends (Rs mn)

4QFY12 3QFY13 4QFY13 qoq (%) yoy (%) 4QFY13E % deviation Revenues (US$ mn) 337 356 359 0.8 6.5 359 0.1 Revenues 16,658 19,395 19,357 (0.2) 16.2 19,378 (0.1) Employee costs (10,204) (11,040) (11,611) 5.2 13.8 (11,326) 2.5 Operating and administration expenses (3,539) (4,171) (3,854) (7.6) 8.9 (4,021) (4.2) Total expenses (13,743) (15,211) (15,465) 1.7 12.5 (15,347) 0.8 EBITDA 2,916 4,184 3,893 (7.0) 33.5 4,030 (3.4) Depreciation (415) (361) (613) 69.7 47.6 (392) 56.4 EBIT 2,500 3,823 3,280 (14.2) 31.2 3,638 (9.9) Other income 727 1,111 723 (34.9) (0.5) 653 10.7 Interest and financing cost (25) (33) (40) 23.6 59.3 (1) 6,400.0 PBT 3,202 4,901 3,962 (19.2) 23.8 4,291 (7.7) Tax expense 943 (1,123) (749) (33.3) (179.4) (1,076) (30.4) PAT before exceptionals 4,144 3,778 3,214 (14.9) (22.5) 3,215 (0.0) Minority interest 104 (38) (12) (68.4) (111.5) (67) (82.2) PAT before exceptionals and after minority 4,248 3,740 3,202 (14.4) (24.6) 3,148 1.7 Exceptionals 1,094 (2,940) 1,340 — Net profit after tax 5,342 800 4,541 467.8 (15.0) 3,148 44.3 EPS (Rs/share) 3.6 3.2 2.7 (14.4) (24.6) 2.7 1.7 No of shares outstanding (#) 1,176 1,176 1,176 1,176

EBITDA margin (%) 17.5 21.6 20.1 20.8

US$ revenues (US$ mn) 337 356 359 0.8 6.5 359 0.1 Realized rate 49.4 54.5 53.9 (1.0) 9.1 54.0

Source: Company, Kotak Institutional Equities estimates

26 KOTAK INSTITUTIONAL EQUITIES RESEARCH Mahindra Satyam Technology

Exhibit 2: Mahindra Satyam: Movement of key cost items

4QFY11 1QFY12 2QFY12 3QFY12 4QFY12 1QFY13 2QFY13 3QFY13 4QFY13 Revenues 13,753 14,339 15,777 17,181 16,658 18,799 19,384 19,395 19,357 Personnel expenses (9,041) (9,301) (9,620) (10,409) (10,204) (11,078) (11,427) (11,040) (11,611) Administrative expenses (2,929) (2,938) (3,740) (3,991) (3,539) (3,646) (3,784) (4,171) (3,854) EBITDA 1,783 2,100 2,417 2,781 2,916 4,075 4,173 4,184 3,893 Depreciation (443) (380) (396) (385) (415) (494) (428) (361) (613) EBIT 1,340 1,720 2,021 2,396 2,500 3,581 3,745 3,823 3,280 As % of revenues Personnel expenses 65.7 64.9 61.0 60.6 61.3 58.9 59.0 56.9 60.0 Administrative expenses 21.3 20.5 23.7 23.2 21.2 19.4 19.5 21.5 19.9 EBITDA 13.0 14.6 15.3 16.2 17.5 21.7 21.5 21.6 20.1 Depreciation 3.2 2.7 2.5 2.2 2.5 2.6 2.2 1.9 3.2 EBIT 9.7 12.0 12.8 13.9 15.0 19.1 19.3 19.7 16.9

Source: Company, Kotak Institutional Equities

Exhibit 3: Revenue growth trajectory continues to weaken

1QFY12 2QFY12 3QFY12 4QFY12 1QFY13 2QFY13 3QFY13 4QFY13 Revenues (US$ mn) 320 330 325 337 342 354 356 359 Growth (%, yoy) 19.3 21.3 14.4 10.8 6.9 7.3 9.5 6.5

Source: Kotak Institutional Equities

Exhibit 4: Key pro forma financials for the combined entity TechM-Satyam

2012 2013E 2014E 2015 Revenues (US$ mn) 2,468 2,663 3,006 3,278 Satyam 1,312 1,411 1,566 1,737 Tech M 1,156 1,252 1,440 1,541 Revenues (Rs mn) 118,853 145,250 162,345 175,283 Satyam 63,956 76,935 84,562 92,854 Tech M 54,897 68,315 77,782 82,429 EBITDA (Rs mn) 18,756 30,434 31,184 31,776 Satyam 10,240 16,325 16,457 17,797 Tech M 8,516 14,110 14,728 13,979 Other income (Rs mn) 4,026 1,489 2,215 2,112 Satyam 4,071 3,043 3,154 3,003 Tech M (45) (1,553) (940) (891) PAT (Rs mn) 15,351 19,473 19,693 21,644 Satyam 11,967 13,244 13,127 14,034 Tech M 5,385 8,229 8,315 7,610 Adjustment for deferred revenues (2,000) (2,000) (1,750)

Shares O/S (mn) 231 231 231 231 EPS (Rs/share) 66.5 84.4 85.3 93.8 EPS (Rs/share) - net of treasury shares 74.2 94.1 95.2 104.6

Margins (%) EBITDA 15.8 21.0 19.2 18.1 PAT 12.9 13.4 12.1 12.3 Growth (%) Revenues (US$) 9.5 7.9 12.9 9.1 Revenues (Rs) 15.6 22.2 11.8 8.0 EBITDA (Rs) 28.6 62.3 2.5 1.9 PAT (Rs) 46.0 26.9 1.1 9.9

Source: Company, Kotak Institutional Equities estimates

KOTAK INSTITUTIONAL EQUITIES RESEARCH 27

ADD Reliance Capital (RCAPT)

Banks/Financial Institutions MAY 17, 2013 RESULT Coverage view: Cautious

Cleaning up. Reliance Capital’s 4QFY13 performance was characterized by (1) write- Price (Rs): 374 off/provisions on investments which pulled down reported earnings and (2) merger of Target price (Rs): 500 two subsidiaries with the parent which boosted net worth by Rs1.6 bn. Key highlights BSE-30: 20,247 of group companies include—moderate (4%) rise in AUMs of the mutual fund, life insurance premium weak (down 31% yoy), general insurance delivered marginal profits, NBFC loan book up 3% qoq and 8% yoy. We revise our estimates to factor higher NIM in the lending business; retain ADD with price target of Rs500.

Company data and valuation summary Reliance Capital Stock data Forecasts/Valuations 2013 2014E 2015E QUICK NUMBERS 52-week range (Rs) (high,low)508-279 EPS (Rs) 26.9 23.4 28.5 Market Cap. (Rs bn) 92.1 EPS growth (%) 27.5 (13.0) 21.7 • Life insurance Shareholding pattern (%) P/E (X) 13.9 16.0 13.1 Promoters 54.1 NII (Rs bn) 2.2 9.5 12.4 premium down FIIs 20.2 Net profits (Rs bn) 6.6 5.8 7.0 31% yoy MFs 2.0 BVPS 467.3 482.5 500.9 Price performance (%) 1M 3M 12M P/B (X) 0.8 0.8 0.7 • NBFC loan book up Absolute 10.2 (6.5) 31.2 ROE (%) 5.9 4.9 5.8 8% yoy Rel. to BSE-30 2.0 (10.1) 3.9 Div. Yield (%) 2.2 1.9 2.3 • Retain ADD with TP Insurance: APE remains weak, marginal profits in the general insurance business of Rs500

Reliance Life reported 31% decline in APE collections during 4QFY13 as compared to 8% decline in 3QFY13. Renewal premium declined by 34% yoy; consequently, conservation ratio was low at 45% (55% in 3QFY13 and 62% in 4QFY12). The company reported NBAP margin of 20% for FY2013 as compared to 15% NBAP margin in 9MFY13; the reason for sharp rise in NBAP margin is not clear. Asset under management was down 3% to Rs181 bn.

Reliance General reported profits of Rs170 mn as compared to PAT of Rs156 mn in 3QFY13 and pre-tax losses for 12 previous quarters. Combined ratio was 115% as compared to 197% in 3QFY12. Lower losses from the third-party motor pool have driven earnings. Gross premium was up 16% yoy on low base. Management has guided for reduction in combined ratio over the next few quarters and has considerably improved the outlook for this business.

NBFC: Loan book up 3% qoq RCAP’s retail lending loan book was Rs163 bn (up 3% qoq and 8% yoy); disbursements were up 45% yoy and 6% qoq. Mortgages (loans against property) and infrastructure lending were the key growth drivers during the quarter even as auto and CV loans declined qoq. RoA increased to 2% from 1.4% in 3QFY13 on the back of higher NIM (4.2% as compared to 3.6% in 3QFY13), lower provisions (due to decline in gross NPLs) and stable operating expenses. Management highlighted that focus on high-yielding LAP and CV loans has boosted its NIM.

AUMs rise 4% qoq in 4QFY13

RCAM reported 4% qoq rise in AMC AUMs to Rs946 bn. While equity AUMs declined due to large redemptions, debt AUMs increased 9% qoq. PBT margins improved to 59% (as compared to 26% in 3QFY13), thereby driving PBT of Rs1.1 bn as compared to Rs583 mn in 3QFY13.

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

Reliance Capital Banks/Financial Institutions

Investment losses temper earnings

Reliance Capital reported standalone PAT of Rs720 mn. The company reported loss before taxes of Rs520 mn largely due to investment provisions of Rs430 mn and NPL provisions of Rs690 mn. Other expenses increased to Rs530 mn from Rs390 mn likely due to provisions of ESOPs.

Reliance Capital merged two group companies, Emerging Money Mall and Reliance Equities, with itself. The merger boosted its standalone net worth by Rs1.6 bn. Reliance Capital made large tax write-backs likely due to migration to MAT—the reasons for the write-back are not clear.

Exhibit 1: Reliance Capital – quarterly results March fiscal year-ends, 4QFY12-4QFY13 (Rs mn)

4Q12 1Q13 2Q13 3Q13 4Q13 YoY (%) Income statement (standalone) Operational income 11,356 7,190 16,650 7,480 7,360 (35) Interest and finance cost 5,186 5,280 5,470 5,540 5,510 6 Net income (pre provisions) 6,170 1,910 11,180 1,940 1,850 (70) Net total income (post provisions) 5,363 1,290 7,830 1,830 1,160 (78) Operating expenses 1,200 1,050 1,380 970 1,680 40 PBT 4,163 240 6,450 860 (520) (112) Tax 508 160 1,240 250 (1,240) (344) Net profit 3,655 80 5,210 610 720 (80)

Consumer finance business Loan book (Rs bn) 151,000 151,100 156,300 159,500 163,800 8 Mortgages 72,782 71,017 75,024 70,180 76,986 6 Auto 10,570 10,577 10,941 12,760 9,828 (7) CV loans 18,120 18,132 18,756 20,735 18,018 (1) SME 38,505 40,797 42,201 46,255 47,502 23

Extracts of P&L (Rs mn) Net interest income 2,074 1,325 1,376 1,432 1,696 (18) Provisions 547 159 286 139 85 (84) Net interest income (post provisions) 1,527 1,166 1,090 1,293 1,611 6 PBT 755 656 715 841 1,203 59

Source: Company

KOTAK INSTITUTIONAL EQUITIES RESEARCH 29 Banks/Financial Institutions Reliance Capital

Exhibit 2: Reliance Capital – quarterly data March fiscal year-ends, 4QFY12-4QFY13 (Rs mn)

4Q12 1Q13 2Q13 3Q13 4Q13 YoY (%) Reliance Asset Management AUMs Mutual fund (Rs mn) 781,000 806,937 863,300 906,400 946,000 21 PMS (Rs mn) 18,300 25,275 33,186 58,060 63,200 245 Market share (%) 16.0 16.0 16.0 16.0 16.0 Extracts of P&L Income 1792 1520 1602 2276 1949 9 Operating expneses 781 934 1,025 1,693 798 2 PBT 1,011 586 576 583 1,151 14 PBT margins (%) 56 39 36 26 59 Reliance General Insurance Gross underwritten premium 4,185 5,635 4,898 5,027 4,866 16 Combined ratio (%) 197 120 140 112 115 Reliance Life Insurance First year premium 5,668 2,221 2,871 2,860 3,932 (31) Adjusted premium 5,816 2,249 2,905 2,913 4,004 (31) Renewal premium 12,318 5,642 6,926 5,963 8,147 (34) Assets under management 187,666 185,860 194,172 193,700 181,984 (3) Persistency (%) 62 54 59 55 45 Reliance Securities Total income 1,747 575 648 631 756 (57) PBT 200 51 99 96 131 (35) Reliance Money Total income 353 147 281 356 415 18 Other expenses 251 120 288 360 357 42 PBT 102 26 (7) (4) 58 (43)

Source: Company

Exhibit 3: Reliance Capital – consolidated quarterly results March fiscal year-ends, 4QFY12-4QFY13 (Rs mn)

4QFY12 1QFY13 2QFY13 3QFY13 4QFY13 YOY (%) Interest income 7,567 7,443 7,713 8,345 8,567 13 Interest expenses 5,646 5,678 5,802 5,956 5,987 6 Net interest income 1,921 1,765 1,911 2,389 2,580 34 Other income 12,451 9,314 16,661 8,814 8,341 (33) Capital gains/Dividend 4,527 1,184 9,171 729 504 (89) Premium earned 6,402 5,780 4,938 5,079 4,936 (23) Management and advisory fees 1,927 1,229 1,453 2,063 1,672 (13) Brokerage and commission 454 597 565 503 544 20 Other income (859) 524 534 440 685 (180) Total income 14,372 11,079 18,572 11,203 10,921 (24) Operating expenses 11,562 10,347 13,140 9,789 10,209 (12) PBT 2,811 733 5,428 1,414 712 (75) Tax (482) 298 1,410 406 (1,942) 303 PAT 3,293 435 4,018 1,008 2,654 (19)

Source: Company, Kotak Institutional Equities

30 KOTAK INSTITUTIONAL EQUITIES RESEARCH Reliance Capital Banks/Financial Institutions

Exhibit 4: Reliance Capital – change in estimates March fiscal year-ends, 2013-15E

Old estimates New estimates Old vs New (Rs mn) (Rs mn) (%) 2013E 2014E 2015E 2013E 2014E 2015E 2013E 2014E 2015E Income 42,676 37,612 42,329 38,680 35,096 37,230 (9) (7) (12) Capital gains 13,000 4,500 3,000 13,500 4,000 3,000 4 (11) — Interest expenses 21,579 23,740 26,714 21,800 20,287 20,433 1 (15) (24) Net interest income 21,097 13,872 15,615 16,880 14,809 16,797 (20) 7 8 PBT 9,995 6,994 8,428 7,033 7,680 9,344 (30) 10 11 Tax 2,499 1,749 2,107 410 1,920 2,336 (84) 10 11 PAT 7,496 5,246 6,321 6,623 5,760 7,008 (12) 10 11

Source: Company, Kotak Institutional Equities estimates

Exhibit 5: Reliance Capital – Sum-of-the-parts-based valuations

Value per Valuation share (Rs mn) (Rs) Comments 74% stake, based on NPAB analysis (11% NBAP margin and 15.5X Reliance Life Insurance 74,268 201 NBV),10% holding company discount Reliance Capital Asset Management 20,904 85 3.5%of AUMs Reliance General Insurance 15,300 62 1X invested capital, 10% holding company discount Residual adjusted networth (for NBFC) 38,335 156 0.9X effective resudial networth Total 148,807 504

Source: Kotak Institutional Equities

KOTAK INSTITUTIONAL EQUITIES RESEARCH 31 Banks/Financial Institutions Reliance Capital

Exhibit 6: Reliance Capital – key ratios March fiscal year-ends, 2010-15E (%)

2010 2011 2012 2013E 2014E 2015E Growth rates (%) Profit and loss Gross total income (21) (19) 72 17 (9) 6 Interest expenses 2 (0) 64 6 (7) 1 Net income (pre-provisions) (36) (40) 85 35 (12) 13 Provisions and writeoffs 107 (46) (31) 373 (56) 17 Operating expenses 20 20 20 20 20 20 PBT (63) (49) 210 13 9 22 PAT (68) (25) 127 28 (13) 22 Balance sheet Investments 28 (2) 18 4 (8) (6) Equity shares (8) 121 (6) 7 (8) (9) Fixed assets 15 13 (14) (6) — — Total Assets (8) 33 14 11 2 8 Total borrowings (15) 55 (1) (9) (4) 6 Networth 3 2 57 4 3 4 Key ratios (%) Debt equity ratio (X) 1.7 2.6 1.7 1.4 1.3 1.4 Interest yield on consumer loans 19.8 11.9 13.2 13.0 13.5 12.8 Interest on investments 6.3 10.4 6.9 4.8 9.0 10.0 Capital gains to equity investments 26.3 1.7 16.0 10.0 10.0 10.0 Cost of borrowings 9.7 8.3 11.2 12.5 12.5 12.5 Spread on lending 10.1 3.6 1.9 0.5 1.0 0.3 Fees on consumer finance business/ loan book 0.6 0.4 0.4 0.4 0.4 0.4 Operating expenses to net total income 39.4 48.8 42.3 30.1 34.0 29.8 Tax rate 22.6 (14.2) 16.4 5.8 25.0 25.0 Dividend payout ratio 52.0 69.4 35.4 30.0 30.0 30.0 Du Pont analysis (% of average assets) Total revenues 11.4 8.3 11.7 12.1 10.3 10.4 Interest on investments 3.1 3.7 1.5 1.1 1.9 1.8 Capital gains 2.3 0.2 2.5 4.2 1.2 0.8 Interest expense 6.0 5.4 7.3 6.8 6.0 5.7 Net total income 5.4 2.9 4.4 5.3 4.4 4.7 Provisions/write offs 1.3 0.6 0.4 1.5 0.6 0.7 Operating expenses 2.1 1.4 1.9 1.6 1.5 1.4 (1-tax rate) 77.4 114.2 83.6 94.2 75.0 75.0 ROA 1.5 1.0 1.8 2.1 1.7 2.0 Average assets/ average equity (X) 3.1 3.3 3.1 2.8 2.9 2.9 RoE 4.7 3.3 5.7 5.9 4.9 5.8

Source: Company, Kotak Institutional Equities estimates

32 KOTAK INSTITUTIONAL EQUITIES RESEARCH Reliance Capital Banks/Financial Institutions

Exhibit 7: Reliance Capital – P&L and balance sheet March fiscal year-ends, 2010-15E (Rs mn)

2010 2011 2012 2013E 2014E 2015E Income statement Interest income 23,905 19,333 33,166 38,680 35,096 37,230 Interest on investments 6,490 8,627 4,169 3,562 6,297 6,529 Interest from consumer loans 11,800 9,274 18,031 20,425 23,500 26,282 Fees from consumer finance business 370 312 511 593 699 819 Dividends 100 100 1,560 100 100 100 Capital gains 4,745 520 7,170 13,500 4,000 3,000 Miscellanous income 290 500 2,236 500 500 500 Lease income (net of depreciation) 3.3 3.3 3.3 3.3 3.3 3.3 Interest and finance cost 12,596 12,566 20,647 21,800 20,287 20,433 Net operational income (pre provisions) 11,312 6,770 12,523 16,883 14,812 16,801 Net bad debts and provisions 2,712 1,459 1,008 4,770 2,096 2,456 Net operational income (post provisions) 8,601 5,311 11,515 12,113 12,716 14,345 Operating expenses 4,457 3,305 5,301 5,080 5,036 5,001 Administrative expenses 4,275 3,162 5,042 4,860 4,860 4,860 Staff expenses 1,216 1,094 1,414 1,626 1,626 1,626 Other expenses 3,059 2,068 3,628 3,234 3,234 3,234 Depreciation 182 143 259 220 176 141 PBT 3,963 2,006 6,214 7,033 7,680 9,344 Tax 894 (285) 1,020 410 1,920 2,336 Net profit 3,069 2,291 5,194 6,623 5,760 7,008 Dividend 1,596 1,590 1,840 1,987 1,728 2,102 Tax on dividend 271 20 70 338 294 357 Number of shares 246 246 246 246 246 246 EPS (Rs) 12 9 21 27 23 28 BVPS (Rs) 280 285 449 467 482 501 DPS (Rs) 6 4 7 8 7 9 Balance sheet Assets Loan book - consumer finance 33,170 123,000 132,600 163,800 185,536 223,749 Mortgages 12,200 51,660 63,913 76,986 92,383 110,860 Auto 8,150 6,150 9,282 9,828 11,007 12,328 CV loans 7,300 19,680 15,912 18,018 14,414 11,532 SME - 44,280 33,813 47,502 54,627 62,821 Personal loans 5,520 1,230 7,248 6,552 —— Investments 113,592 111,666 132,117 136,750 125,750 117,750 Equity investments 43,641 96,500 91,000 97,000 89,000 81,000 Reliance life insurance 19,210 31,210 22,403 22,403 22,403 22,403 Reliance general insurance 6,070 12,000 13,000 17,000 17,000 17,000 Reliance money 500 4,000 4,000 5,000 6,000 7,000 Prop. book 17,100 44,500 45,000 45,000 35,000 25,000 Others equity investments - affiliates 761 4,790 6,597 7,597 8,597 9,597 Preference shares 41,389 15,000 35,000 36,633 36,633 36,633 Debentures and bonds 28,445 166 6,000 3,000 —— Others 117 117 117 117 117 117 Net fixed assets 1,678 1,890 1,630 1,540 1,540 1,540 Current assets, loans and advances 51,781 29,325 35,484 33,382 30,044 27,039 Total assets 200,221 265,881 301,831 335,472 342,870 370,078 Liabilities Total borrowings 119,581 184,830 182,585 165,920 158,674 168,247 Total liabilities 131,364 195,806 191,390 220,450 224,110 246,770 Networth 68,857 70,280 110,441 115,022 118,760 123,308 Equity capital 2,462 2,462 2,462 2,462 2,462 2,462 Reserves and surplus 66,395 67,820 107,979 112,560 116,298 120,847

Source: Company, Kotak Institutional Equities estimates

KOTAK INSTITUTIONAL EQUITIES RESEARCH 33

REDUCE J&K Bank (JKBK)

Banks/Financial Institutions MAY 17, 2013 RESULT Coverage view: Cautious

NPLs deteriorate. While there was a sharp rise in restructured loans in 3QFY13, Price (Rs): 1,317 4QFY13 saw stress emerging from NPLs, primarily from the bank’s large ticket Target price (Rs): 1,320 corporate-loan portfolio. The bank’s return ratios are at a medium-term high, led by a BSE-30: 20,247 strong revenue profile (NIM more than 4%) and low credit costs (a five-year low); both are likely to normalize, given the management’s focus on growth and our conservative outlook on loan impairment. We retain our REDUCE rating with a target price of `1,320 (`1,300 earlier) as valuations are closer to fair value for a regional bank.

Company data and valuation summary J&K Bank Stock data Forecasts/Valuations 2013 2014E 2015E 52-week range (Rs) (high,low)1,575-770 EPS (Rs) 217.6 199.3 187.5 QUICK NUMBERS Market Cap. (Rs bn) 63.9 EPS growth (%) 31.4 (8.4) (5.9) Shareholding pattern (%) P/E (X) 6.1 6.6 7.0 • 4QFY13 earnings up Promoters 53.2 NII (Rs bn) 23.2 25.6 26.9 20% yoy FIIs 24.3 Net profits (Rs bn) 10.6 9.7 9.1 MFs 4.5 BVPS 995.8 1,130.8 1,247.0 • Slippages at 1.8%; Price performance (%) 1M 3M 12M P/B (X) 1.3 1.2 1.1 restructured loans Absolute 6.7 1.7 53.4 ROE (%) 23.6 18.5 15.4 decline 170 bps qoq Rel. to BSE-30 (1.3) (2.2) 21.4 Div. Yield (%) 3.8 3.5 3.3 to 3.8% of loans

Weak performance on loan impairment continues; we maintain our REDUCE rating • Maintain REDUCE; target price: `1,320 J&K Bank reported a weak performance on loan impairment though better-than-expected (`1,300 earlier) performance on revenue supported high credit costs (the bank’s coverage ratio was broadly unchanged from ~90%). The revenue profile continues to show impressive traction (NIM maintained at over 4%) led by healthy loan growth (~20% yoy) in high-yielding loans within Jammu and Kashmir (6% NIM business with loan growth of ~25% yoy).

We maintain our REDUCE rating with a target price of `1,320 (`1,300 earlier), valuing the bank at 1.1X book and 8X EPS. Our concerns about the bank are three-fold: (1) Return ratios are likely to decline as the bank’s focus on growth is high (within and outside Jammu and Kashmir) and our outlook on credit costs shows a rising trend. We are not sure about the rationale for maintaining a high growth target in the short term in such an adverse lending environment. (2) Deposits in Jammu and Kashmir are concentrated in two centers (45% of the deposits are in Jammu and Srinagar, where competition is stiffening) and (3) valuations are closer to our fair value for a mid- tier public-sector regional bank.

High on slippages while restructured loans decline sharply, giving mixed trends on loan impairment

J&K Bank reported overall slippages of 1.8% of loans, led mainly by slippages in the large corporate portfolio. The management’s commentary broadly states the concerns that we highlighted in the past—the bank’s weak bargaining power (not a primary banker) as it is a part of a consortium in the large corporate portfolio. We maintain our cautious outlook on the bank as we are not sure if the slippages or restructuring in recent quarters fully reflects the underlying stress in the portfolio. Further, growth in Jammu and Kashmir has its own challenges, especially if they are PSL in nature.

Restructured loans, on the other hand, showed a surprisingly different trend, with a decline of 25% qoq (absolute) to `15 bn (170 bps qoq to 3.8% of loans). If one uses 2QFY13 as a base for analysis and not 3QFY13 (the quarter saw a sharp rise in restructured loans), the repayment ratio works out to over 35%, which is unexpected, given that the repayment of these loans is slow, reflecting the weakness in the business environment.

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

J&K Bank Banks/Financial Institutions

FY2013 loan growth slows to 19% yoy; 4QFY13 loans grow 10% qoq

The loan book grew 19% yoy in FY2013, with most of the growth coming through only in the last quarter (10% qoq in 4QFY13). Growth in the state remained strong at 26% yoy, but loan growth was subdued outside the state (14% yoy), in line with the management’s guidance of focusing on loan growth in Jammu and Kashmir.

All segments of loans posted robust growth: Loans to agriculture, trade, SME and corporate loans grew by 19% yoy though retail loans grew by 11% yoy. Despite the management highlighting a strong business opportunity, growth continues to be driven by the personal segment in Jammu and Kashmir, which is quite unusual as 40-50% of these loans are to the staff of the state Government or its various businesses.

We derive comfort from the management’s focus on growing the balance sheet in the state, as the bank’s ability to manage loan impairment is high. Outside Jammu and Kashmir, exposure tends to be lumpy in nature and most of it is consortium-related. We shall carefully monitor the bank’s activity on priority-sector loans in Jammu and Kashmir and see whether the bank will take advantage of the restructuring benefit given by RBI.

Exhibit 1: Business profile of J&K Bank March fiscal year-ends, 4QFY12-4QFY13 (` bn)

4QFY12 1QFY13 2QFY13 3QFY13 4QFY13 Growth (%) Total Deposits (Rs bn) 533 531 549 571 642 20.4 In J&K 353 350 357 372 409 15.7 Outside J&K 180 181 192 198 234 29.5

Gross Advances (Rs bn) 331 332 343 357 392 18.5 In J&K 126 135 142 150 158 26.0 Outside J&K 205 197 200 207 234 13.9

NIM (%) In J&K 6.0 6.0 6.0 6.0 6.2 Outside J&K 2.5 2.5 2.5 2.5 2.6

Source: Company, Kotak Institutional Equities

NIM stable at 4.1%, decline in asset yields cushioned by a better mix

NIM remained sequentially stable at 4.1%, as a decline in yield on advances (17 bps qoq) was cushioned by a decline in cost of deposits (down 5 bps qoq) and increased share of loans in Jammu and Kashmir. The share of loans in the state increased 2% qoq to 60%. NIM in Jammu and Kashmir was 6.2% and outside the state it was 2.6%. CD ratio declined to 61% from 63% in December 2012. Deposits grew 13% yoy and CASA ratio was stable at 39%. Deposit growth in the state was subdued at 16%, which may be indicative of increasing competition from other private players on the liability side. The high reliance on deposits outside Jammu and Kashmir during a period of healthy mobilization within the state needs more clarity about the management’s approach to building its funding mix.

We believe loan spreads may decline over the next few years as the bank looks to build a lower yielding PSL portfolio (in Jammu and Kashmir) and faces stiffer competition from private players, especially on the liability side.

KOTAK INSTITUTIONAL EQUITIES RESEARCH 35 Banks/Financial Institutions J&K Bank

Exhibit 2: Market share in deposits declines as competition increases from private banks Total deposits in Jammu and Kashmir, March fiscal year-ends, 2010-3QFY13

2010 2011 2012 3QFY13 Total deposits 231 288 353 372 Total deposits in J&K Bank 382 457 551 602 Market share (%) 60.4 63.1 64.0 61.8

Source: Company, Kotak Institutional Equities

Other highlights of the quarter

` Non-interest reported strong growth of 71% yoy, led by ~900% increase in treasury gains. We shall seek clarification about the high treasury income, which may be due to stake sale in the insurance business. Income from insurance distribution increased 58% yoy and fee income declined 2% yoy.

` Overall CAR is comfortable at 12.8%, with tier-1 ratio at 10.9%.

Exhibit 3: Loan growth slowed in 4QFY13 to 20% yoy Exhibit 4: Asset quality remains healthy Credit growth and deposit growth, CD ratio, March year-ends, Gross NPA, net NPA and provision coverage (ex write-off), March 4QFY10-4QFY13 (%) year-ends, 4QFY10-4QFY13 (%)

40.0 Credit growth (LHS) 75.0 Gross NPA (LHS) Deposits growth (LHS) (Rs bn) Net NPA (LHS) (%) CD ratio (RHS) Provision coverage (RHS) 32.0 70.0 7 100.0

6 88.0 24.0 65.0 4 76.0 16.0 60.0 3 64.0

8.0 55.0 1 52.0

- 50.0 - 40.0 3QFY10 4QFY10 1QFY11 2QFY11 3QFY11 4QFY11 1QFY12 2QFY12 3QFY12 4QFY12 1QFY13 2QFY13 3QFY13 4QFY13 4QFY10 1QFY11 2QFY11 3QFY11 4QFY11 1QFY12 2QFY12 3QFY12 4QFY12 1QFY13 2QFY13 3QFY13 4QFY13

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

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

Exhibit 5: Gross NPLs improved outside Jammu and Kashmir state resulting in a strong performance Break-up of gross NPLs within and outside Jammu and Kashmir, March fiscal year-ends, 2009-4QFY13

2009 2010 2011 2012 1QFY13 2QFY13 3QFY13 4QFY13 Gross NPLs (Rs bn) 6 5 5 5 5 6 6 6 Gross NPLs (%) 2.6 2.0 2.0 1.5 1.6 1.6 1.6 1.6 Net NPLs (Rs bn) 3 1 1 0 0 1 0 1 Net NPLs (%) 1.4 0.3 0.2 0.2 0.1 0.2 0.1 0.1 Provision coverage (%) 48.4 86.1 89.7 90.4 91.1 90.0 91.5 91.4 Within Jammu and Kashmir Gross NPL (Rs bn) 2 2 3 4 2 4 4 Gross NPL (%) 2.2 2.0 2.6 2.9 1.8 2.9 2.8 Outside Jammu and Kashmir Gross NPL (Rs bn) 3 2 2 2 3 1 2 Gross NPL (%) 3.1 2.0 1.5 0.8 1.5 0.7 0.8

Source: Public documents, Company, Kotak Institutional Equities

Exhibit 6: J&K Bank: Rolling PBR and PER Exhibit 7: J&K Bank’s premium to peers has increased in recent May 2005-May 2013 (X) months Trading premium to private banks, May 06-May 13 15 2.0 Rolling PER (X) (LHS) 1.0 Rolling PBR (X) (RHS) 12 1.6 0.8 9 1.2 0.7 6 0.8 0.5 3 0.4 0.4 - - 0.2 Nov-05 Nov-06 Nov-07 Nov-08 Nov-09 Nov-10 Nov-11 Nov-12 May-05 May-06 May-07 May-08 May-09 May-10 May-11 May-12 May-13 May-06 May-07 May-08 May-09 May-10 May-11 May-12 May-13 Source: Company, Bloomberg, Kotak Institutional Equities Source: Company, Bloomberg, Kotak Institutional Equities

KOTAK INSTITUTIONAL EQUITIES RESEARCH 37 Banks/Financial Institutions J&K Bank

Exhibit 8: J&K Bank, quarterly results Quarterly results summary, March fiscal year-ends, 4QFY12-4QFY13 (` mn)

4QFY12 1QFY13 2QFY13 3QFY13 4QFY13 % chg 4QFY13E Actual Vs KS Interest income 13,575 14,762 15,006 15,332 16,268 20 15,497 5 Loans 9,568 10,281 10,609 10,895 11,391 19 11,144 2 Investments 3,866 4,218 4,170 4,211 4,627 20 4,284 8 Balance with RBI & banks 141 263 228 226 250 78 70 256 Interest expense 8,414 9,405 9,479 9,390 9,933 18 9,382 6 Net interest income 5,161 5,356 5,527 5,942 6,336 23 6,115 4 Non-interest income 1,223 934 909 905 2,089 71 1,354 54 Other income exld treasury 1,138 732 648 718 1,247 10 1,055 18 Treasury income 85 202 261 187 843 896 299 181 Total income 6,384 6,290 6,436 6,847 8,425 32 7,469 13 Operating expenses 2,208 2,138 2,209 2,500 3,043 38 2,819 8 Employee cost 1,373 1,379 1,430 1,638 2,076 51 1,878 11 Other cost 834 759 779 862 968 16 941 3 Operating profit pre provisions 4,176 4,152 4,227 4,348 5,381 29 4,650 16 Provisions and contingencies 843 504 328 224 1,786 112 854 109 Investment depreciation 43 - 6 1 143 Provisions for NPA 345 264 131 210 1,108 221 656 69 PBT 3,334 3,648 3,899 4,124 3,595 8 3,796 (5) Tax 1,252 1,187 1,203 1,230 1,095 (13) 1,258 (13) Net profit 2,081 2,461 2,695 2,894 2,501 20 2,539 (2) Tax rate (%) 37.6 32.5 30.9 29.8 30.4 - 33.1 - PBT-invt gains+ provisions 3,937 3,710 3,774 4,147 4,303 9 4,196 3

Key balance sheet items (Rs bn) Total Deposits 533 531 549 571 642 20 Savings deposits 160 161 164 175 188 18 Current deposits 57 45 46 50 64 12 Term deposits 316 326 340 346 390 23 CASA ratio (%) 40.7 38.7 38.2 39.4 39.2 Advances 331 332 343 357 392 19 Investments 216 220 225 227 257 19 AFS 77 77 76 74 99 HTM 139 143 149 152 157 Assets 603 600 616 638 717 19

Asset quality details Gross NPLs (Rs mn) 5,166 5,410 5,516 5,817 6,438 25 Gross NPL ratio (%) 1.5 1.6 1.6 1.6 1.6 Net NPLs (Rs mn) 493 482 553 495 553 12 Net NPL ratio (%) 0.2 0.1 0.2 0.1 0.1 Provision coverage 90.4 91.1 90.0 91.5 91.4 Provision coverage (ex write-off) 93.8 94.1 93.3 94.2 94.0

Yield management measures (%) Cost of Deposits 6.8 6.9 7.0 6.7 6.7 Yield on Advances 12.6 12.4 12.7 12.6 12.4 Yield on Investments 7.4 7.7 7.5 7.4 7.6 Net Interest Margins 4.0 3.8 3.9 4.1 4.1

Capital adequacy details (%) CAR 13.4 13.8 13.7 13.8 12.8 Tier I 11.1 11.5 11.6 11.8 10.9 Tier II 2.2 2.3 2.1 2.0 2.0

Source: Kotak Institutional Equities, Company

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

Exhibit 9: J&K Bank balance sheet snapshot Quarterly balance sheet, March fiscal year-ends, 4QFY12-4QFY13 (` mn)

4QFY12 1QFY13 2QFY13 3QFY13 4QFY13 Balance sheet snapshot (Rs mn) Capital 485 485 485 485 485 Reserves and surplus 40,447 42,908 45,603 48,497 48,162 Deposits 533,469 531,171 549,265 570,746 642,206 Borrowings 12,410 11,685 9,224 8,009 10,750 Total 602,692 599,917 616,337 637,960 717,433

Cash and balance with RBI 27,837 23,566 25,560 23,828 26,952 Balance with banks etc 16,702 10,369 10,895 15,296 27,092 Investments 216,243 220,156 225,213 226,809 257,411 Advances 330,774 332,253 342,721 356,577 392,004 Fixed assets 4,203 4,241 4,284 4,408 4,562 Other assets 6,934 9,332 7,664 11,042 9,413 Total 602,692 599,917 616,337 637,960 717,433

Source: Kotak Institutional Equities, Company

Exhibit 10: Key changes in estimates March fiscal year-ends, 2014-2015E (` mn)

New estimates Old estimates % change 2014E 2015E 2014E 2015E 2014E 2015E Net Interest income 25,646 26,943 23,950 26,220 7.1 2.8 NIM (%) 3.4 3.2 3.4 3.3 Loan (Rs bn) 454 525 456 534 (0.5) (1.7) Other income 5,731 6,172 5,101 5,927 12.3 4.1 Treasury 2,500 2,500 1,500 1,800 66.7 38.9 Total income 31,378 33,115 29,051 32,147 8.0 3.0 Operating expense 11,717 13,398 11,185 12,786 4.8 4.8 Employee expense 7,515 8,506 7,287 8,248 3.1 3.1 Other expense 4,201 4,892 3,897 4,538 7.8 7.8 Provisions 5,476 6,464 4,626 6,589 18.4 (1.9) NPLs 5,076 6,364 4,226 6,189 20.1 2.8 Invt depreciation 100 (200) 100 100 - (300.0) PBT 14,185 13,252 13,241 12,772 7.1 3.8 Tax 4,523 4,159 4,254 3,975 6.3 4.6 PAT 9,662 9,093 8,988 8,797 7.5 3.4 PBT - treasury + provisions 16,861 16,916 16,067 17,261 4.9 (2.0)

Source: Kotak Institutional Equities

KOTAK INSTITUTIONAL EQUITIES RESEARCH 39 Banks/Financial Institutions J&K Bank

Exhibit 11: J&K Bank: Growth rates and key ratios March Fiscal year-ends, 2010-2015E (%)

2010 2011 2012 2013E 2014E 2015E Growth rates (%) Net loan 10.2 13.6 26.3 18.5 15.8 15.6 Customer assets 11.1 14.9 26.0 16.7 14.6 14.6 Investments excld. CPs and debentures growth 10.6 21.3 61.2 25.2 10.6 9.5 Net fixed and leased assets 2.4 92.9 6.7 8.5 14.6 (4.0) Cash and bank balance (12.5) (23.1) 25.5 21.3 9.3 9.6 Total Asset 12.9 18.7 19.3 19.0 12.4 12.1 Deposits 12.8 20.0 19.4 20.4 12.7 12.5 Current 5.8 9.6 7.0 227.7 (58.6) 12.5 Savings 29.0 24.0 25.6 (59.9) 238.7 12.5 Fixed 8.1 20.4 19.0 23.4 10.0 12.5 Net interest income 11.9 37.9 19.1 26.0 10.7 5.1 Loan loss provisions 79.4 (15.4) (7.3) 22.2 196.6 25.4 Total other income 69.9 (12.4) (8.4) 44.8 18.5 7.7 Net fee income 24.5 22.4 1.5 18.0 15.0 15.0 Net capital gains 176.6 (46.7) (61.2) 316.2 67.4 - Net exchange gains (1.9) 30.8 17.0 17.0 15.0 15.0 Operating expenses 22.6 31.4 5.7 23.3 18.5 14.4 Employee expenses 31.4 42.9 (0.4) 25.1 15.2 13.2 Key ratios (%) Yield on average earning assets 7.8 8.2 9.0 9.5 9.1 9.0 Yield on average loans 10.6 10.7 11.5 11.9 11.5 11.3 Yield on average investments 5.8 6.5 6.9 7.4 7.0 6.7 Average cost of funds 5.3 5.1 5.9 6.3 6.1 6.2 Interest on deposits 5.2 5.1 5.9 6.1 6.1 6.2 Difference 2.5 3.1 3.0 3.2 3.1 2.8 Net interest income/earning assets 2.9 3.4 3.4 3.6 3.4 3.2 Spreads on lending business 5.3 5.6 5.5 5.6 5.4 5.1 Spreads on lending business (incl. Fees) 5.8 6.1 6.0 6.0 5.8 5.5 New provisions/average net loans 0.8 0.6 0.5 0.5 1.2 1.3 Total provisions/gross loans 3.1 3.3 3.0 3.0 3.6 4.3 Interest income/total income 72.9 80.9 84.6 82.7 81.7 81.4 Other income / total income 27.1 19.1 15.4 17.3 18.3 18.6 Fee income to total income 6.8 6.7 5.9 5.4 5.6 6.1 Fee income to advances 0.5 0.5 0.4 0.4 0.4 0.4 Fees income to PBT 13.1 13.6 10.8 10.0 12.4 15.2 Net trading income to PBT 26.8 5.5 2.0 8.8 16.9 20.4 Exchange income to PBT 1.8 2.0 1.8 1.7 2.1 2.6 Operating expenses/total income 37.6 39.8 36.9 35.3 37.3 40.5 Operating expenses/assets 1.4 1.6 1.4 1.5 1.5 1.6 Operating profit /AWF 1.6 1.9 2.2 2.1 1.6 1.3 Tax rate 35.3 34.2 33.1 30.9 31.9 31.4 Dividend payout ratio 20.8 20.5 20.2 23.0 23.0 23.0 Share of deposits Current 13.1 12.0 10.7 10.7 10.7 10.7 Savings 27.6 28.5 30.0 30.0 30.0 30.0 Loans-to-deposit ratio 61.9 58.6 62.0 61.0 62.7 64.5 Equity/assets (EoY) 7.1 6.9 6.8 6.8 6.9 6.9 Dupont analysis (%) Net interest income 2.8 3.3 3.3 3.5 3.4 3.2 Loan loss provisions 0.4 0.3 0.3 0.3 0.7 0.7 Net other income 1.0 0.8 0.6 0.7 0.8 0.7 Operating expenses 1.5 1.7 1.5 1.6 1.6 1.6 Invt. depreciation (0.1) 0.1 0.0 0.0 0.0 (0.0) (1- tax rate) 64.7 65.8 66.9 69.1 68.1 68.6 ROA 1.3 1.3 1.5 1.6 1.3 1.1 Average assets/average equity 14.2 14.3 14.6 14.7 14.6 14.5 ROE 18.2 19.0 21.2 23.6 18.5 15.4

Source: Kotak Institutional Equities, Company

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

Exhibit 12: J&K Bank: Income statement and balance sheet March Fiscal year-ends, 2010-2015E (` mn)

2010 2011 2012 2013E 2014E 2015E Income statement Total interest income 30,569 37,131 48,356 61,368 67,956 75,283 Loans 23,417 26,296 33,937 43,176 48,649 55,320 Investments 7,046 10,661 14,033 17,226 18,459 19,034 Cash and deposits 106 174 387 966 848 929 Total interest expense 19,375 21,695 29,972 38,208 42,310 48,340 Deposits from customers 18,406 20,692 29,018 35,744 41,468 47,519 Net interest income 11,193 15,437 18,384 23,160 25,646 26,943 Loan loss provisions 1,785 1,511 1,400 1,711 5,076 6,364 Net interest income (after prov.) 9,408 13,926 16,983 21,449 20,570 20,579 Other income 4,162 3,648 3,341 4,837 5,731 6,172 Net fee income 1,039 1,272 1,291 1,524 1,752 2,015 Net capital gains 1,734 924 359 1,493 2,500 2,500 Net exchange gains 144 188 220 258 297 341 Operating expenses 5,774 7,589 8,022 9,890 11,717 13,398 Employee expenses 3,664 5,236 5,214 6,523 7,515 8,506 Depreciation on investments (388) 410 123 150 100 (200) Other Provisions 269 230 169 981 300 300 Pretax income 7,916 9,344 12,011 15,266 14,185 13,252 Tax provisions 2,792 3,192 3,979 4,715 4,523 4,159 Net Profit 5,124 6,152 8,032 10,551 9,662 9,093 % growth 25.0 20.1 30.6 31.4 (8.4) (5.9) PBT - Treasury + Provisions 7,848 10,571 13,345 16,615 17,161 17,216 % growth 10.3 34.7 26.2 24.5 3.3 0.3

Balance sheet Cash and bank balance 46,142 35,488 44,539 54,043 59,076 64,757 Cash 1,305 1,710 1,935 1,935 1,935 1,935 Balance with RBI 26,142 28,039 25,901 31,181 35,141 39,536 Balance with banks 524 4,150 5,361 5,361 6,433 7,719 Net value of investments 139,562 196,958 216,243 257,411 278,401 299,257 Govt. and other securities 84,421 103,249 115,461 207,918 230,709 253,187 Shares 633 2,919 3,080 3,080 3,080 3,080 Debentures and bonds 14,238 19,279 20,015 18,013 16,212 14,591 Net loans and advances 230,572 261,936 330,774 392,004 454,070 525,048

Fixed assets 2,041 3,938 4,203 4,562 5,228 5,018 Net Owned assets 2,041 3,938 4,203 4,562 5,228 5,018 Other assets 7,150 6,762 6,933 9,413 9,413 9,413 Total assets 425,468 505,082 602,692 717,433 806,189 903,494

Deposits 372,372 446,759 533,469 642,206 723,782 814,300 Borrowings and bills payable 14,613 14,377 15,821 14,162 14,277 14,415 Other liabilities 8,378 9,158 12,470 12,418 12,418 12,418 Total liabilities 395,363 470,295 561,760 668,786 750,478 841,134 Paid-up capital 485 485 485 485 485 485 Reserves & surplus 29,620 34,302 40,447 48,162 55,226 61,875 Total shareholders' equity 30,105 34,787 40,932 48,647 55,711 62,360

Source: Kotak Institutional Equities, Company

KOTAK INSTITUTIONAL EQUITIES RESEARCH 41

BUY DB Corp (DBCL)

Media MAY 17, 2013 RESULT Coverage view: Neutral

Growing in strength. DBCL reported strong 4QFY13 EBITDA of Rs932 mn (+37% yoy, Price (Rs): 241 albeit from low base), above our Rs850 mn expectation, led by (1) strong 13% yoy print Target price (Rs): 280 advertising growth and (2) stabilizing cost environment (modest 3% yoy increase in NP BSE-30: 20,247 price; emerging edition losses reduced by 70% yoy). Operating performance remains robust: (1) >2X lead over competition in core MPCG market and (2) emerging franchise in Marathi market. BUY with 12-month forward fair value of Rs280 (Rs260 previously); ~2.3% dividend yield with ~55% payout (including tax) of FY2013 PAT.

Company data and valuation summary DB Corp Stock data Forecasts/Valuations 2013 2014E 2015E 52-week range (Rs) (high,low) 264-181 EPS (Rs) 11.9 14.0 17.5 Market Cap. (Rs bn) 44.2 EPS growth (%) 8.0 18.0 24.9 Shareholding pattern (%) P/E (X) 20.3 17.2 13.8 Promoters 75.0 Sales (Rs bn) 15.9 18.0 20.6 FIIs 13.3 Net profits (Rs bn) 2.2 2.6 3.2 MFs 6.5 EBITDA (Rs bn) 3.8 4.4 5.3 Price performance (%) 1M 3M 12M EV/EBITDA (X) 11.3 9.7 8.0 Absolute 5.9 0.9 22.3 ROE (%) 22.4 24.2 27.7 Rel. to BSE-30 (2.0) (2.9) (3.2) Div. Yield (%) 2.5 3.3 4.1

Robust 4QFY13 led by strong advertising, moderating cost inflation

` DBCL reported strong 4QFY13 EBITDA at Rs932 mn (+37% yoy, albeit from low base), much above our Rs850 mn expectation, led by (1) strong recovery in advertising revenues (+13% yoy, from low base) as well as (2) stable cost structure (benign newsprint prices, cost rationalization through newsprint consumption and overheads).

` Print media generally suffers from higher cyclicality versus other media platforms; advertising revenues, dependent on more economic growth-linked sectors (auto, durables, BFSI et al), are cyclical; newsprint costs, the largest cost item, are also cyclical/volatile. Not surprising then that print media companies tend to disappoint and surprise by large margins during down/up-cycles. DBCL has now moved firmly into an up-cycle led by robust advertising growth as well as stable newsprint prices reflecting in rising margin profile.

Growing in strength led by robust operations and strong advertising recovery

We have previously highlighted that EBITDA margins of print companies between FY2012 and 1HFY13 were impacted by (1) weak advertising, (2) sharp newsprint inflation, (3) Rupee depreciation and (4) new market expansion losses. The cost structure (newsprint, Rupee, expansion) stabilized in 1HFY13 itself and strong recovery in advertising has driven growth and margins for DBCL in 2HFY13. DBCL’s operations remain robust (1) >2X lead over competition in core MPCG market and (2) strong leadership positions in CPH, Rajasthan and Gujarat markets. DBCL is rapidly expanding its Marathi franchise (further, albeit modest, investments in FY2014) as well as targeting a leadership position in the large-potential Gujarat market. BUY with 12-month forward fair value of Rs280 (Rs260 previously). Fairly valued at ~17X FY2014E earnings given >20% PAT CAGR over FY2013-15E and rising dividend yield (~2.3 on FY2013 basis).

Key risk is rising competitive intensity in MP market (Nai Dunia and Patrika) eroding price premium commanded by DB. Our discussions with media buyers indicate price pressure on leaders in similar situations in a few markets (HT+DNA in Mumbai and AU+HH in UP market have pressured the yield of TOI and DJ). DB is investing across content (exclusive ties-up with global players), quality and marketing effort to strengthen its position further.

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

DB Corp Media

Exhibit 1: Interim results of DB Corp (DBCL), March fiscal year-ends (Rs mn)

chg (%) 4QFY13 4QFY13E 4QFY12 3QFY13 4QFY13E 4QFY12 3QFY13 FY2013 FY2012 chg (%) Total revenues 3,981 3,950 3,533 4,389 1 13 (9) 15,923 14,528 10 Advertising revenues 2,779 2,750 2,469 3,184 1 13 (13) 11,300 10,668 6 Circulation revenues 731 750 620 729 (3) 18 0 2,814 2,419 16 Other revenues 471 450 444 476 5 6 (1) 1,809 1,441 26 Total expenditure (3,049) (3,100) (2,851) (3,161) (2) 7 (4) (12,106) (11,052) 10 Raw material costs (1,337) (1,350) (1,301) (1,447) (1) 3 (8) (5,446) (5,080) 7 Employee expenses (692) (750) (610) (724) (8) 13 (4) (2,795) (2,429) 15 Other expenses (1,021) (1,000) (940) (990) 2 9 3 (3,866) (3,542) 9 EBITDA 932 850 681 1,228 10 37 (24) 3,817 3,476 10 Operating margin (%) 23.4 21.5 19.3 28.0 24.0 23.9 Other income 92 50 110 38 84 (16) 140 213 228 (6) Interest expense (14) (50) 22 (55) (72) (164) (75) (136) (192) (29) D&A expenses (151) (150) (130) (151) 1 16 - (581) (506) 15 PBT 858 700 682 1,060 23 26 (19) 3,313 3,006 10 Extraordinaries ------Tax provision (307) (250) (230) (352) 23 33 (13) (1,132) (983) 15 Minority interest 1 - 2 (2) 0 (2) Adjusted PAT 553 450 454 706 23 22 (22) 2,182 2,021 8 Reported PAT 553 450 454 706 23 22 (22) 2,182 2,021 8 Tax rate (%) 35.7 35.7 33.7 33.2 34.2 32.7 EPS (Rs/share) 3.0 2.5 2.5 3.9 23 22 (22) 11.9 11.1 7

Source: Company data, Kotak Institutional Equities estimates

` DBCL reported 4QFY13 advertising revenues of Rs2.78 bn (+13% yoy), marginally ahead of our expectations. The company noted ad growth largely by yields though volumes also witnessed a modest increase. Both local and national advertisers reported double-digit growth, growth in the latter returning after a few quarters.

` Our recent conversations with JAGP and HTML (other listed print players) also indicate focus on yields; JAGP noted ad growth in FY2011-13 has been driven entirely by volumes, with modest decline in yields. However, the leading print companies (DBCL, JAGP and HTML among them) have continued to invest in circulation growth during bad times, gaining at the expense of smaller players (few exceptions). CPT (cost per thousand reader) pricing has come down and the timing for yield push is ripe, for the top players. The consolidation trend in print market is very much intact.

` DBCL reported 4QFY13 circulation revenues at Rs731 mn (+18% yoy); the yoy increase was largely driven by cover price increases in a weak advertising environment, largely across markets. Circulation growth was limited to low single digit. 4QFY13 cover price of Rs2.74/copy for DBCL is still 3% ahead of Rs2.66/copy average FY2013 cover price. The company also noted that its cover prices remain lower versus peers (JAGP) and scope for modest increases (tactically in a few markets) during FY2014 exists.

` DBCL reported modest 3% yoy increase in newsprint costs. Newsprint prices increased 3% yoy (-2% qoq) with flat newsprint consumption. The company highlighted limited circulation increases next year (low single digits) largely concentrated on Divya Marathi expansion and targeting leadership position in Gujarat.

` Employee and overhead expenses increased 13% and 9% yoy respectively. The company has continued to enhance employee strength (numbers, quality) in light of growth plans (preparing for the future). Overhead expenses include ~Rs50 mn of excess provisions across various line items include bad debts.

KOTAK INSTITUTIONAL EQUITIES RESEARCH 43 Media DB Corp

` DBCL reported strong traction in both mature and emerging editions. We note that higher revenue growth in mature versus emerging editions is not an anomaly but a change in classification. The spillover editions launched 2-3 years back in legacy markets such as MP, Rajasthan and Gujarat have become profitable and been reclassified as mature editions in 4QFY13. Emerging edition losses remained contained at ~Rs58 mn, flat on a qoq basis but sharp decline on yoy basis.

Exhibit 2: DBCL's breakdown of financials, 1QFY12-4QFY13 (Rs mn)

1QFY12 2QFY12 3QFY12 4QFY12 1QFY13 2QFY13 3QFY13 4QFY13 yoy (%) DBCL standalone Revenues 3,526 3,515 3,914 3,577 3,756 3,741 4,387 4,082 14 EBITDA 1,025 782 1,020 777 870 875 1,245 1,096 41 Margin (%) 29 22 26 22 23 23 28 27 MyFM radio Revenues 124 127 157 146 140 153 192 185 27 EBITDA 17 11 44 52 30 46 74 69 33 Margin (%) 14 9 28 36 21 30 39 37 Mature editions Revenues 3,183 3,086 3,381 3,085 3,175 3,135 3,698 3,520 14 EBITDA 1,181 1,002 1,141 923 961 928 1,227 1,085 18 Margin (%) 37 32 34 30 30 30 33 31 Emerging editions Revenues 219 302 376 346 441 453 497 377 9 Expenses 392 533 541 544 562 552 554 435 (20) EBITDA (173) (231) (165) (198) (121) (99) (57) (58) (71) Margin (%) (79) (76) (44) (57) (27) (22) (11) (15)

Notes: (a) DB Corp includes other/interest income in its calculation of mature, emerging editions and FM radio EBITDA.

Source: Company data, Kotak Institutional Equities

` DBCL reported a robust balance sheet at end-FY2013 with net cash of ~Rs623 mn from marginal net cash position at end-FY2012. The non-linear media model is quite visible, which Street has tended to ignore at times. FY2012 operating assets increased sharply with decline in earnings/RoE (challenging environment). FY2013 earnings growth has outpaced modest increase in operating assets (RoE expanded). The only modest negative was debtor profile (70 days versus 62 days previously).

Exhibit 3: Balance sheet of DBCL, FY2011-13 (Rs mn)

FY2011 FY2012 FY2013 yoy (%) Financial liabilities Share capital 1,833 1,833 1,834 Reserves and surplus 6,456 7,438 8,456 Minority interest 4 15 11 Deferred tax 695 746 834 Borrowings 2,011 1,801 1,374 Less: Cash and balances 1,727 1,364 1,190 Less: Net investments 163 460 807 Financial liabilities 9,109 10,009 10,512 Operating assets Net fixed assets 7,091 7,933 8,008 Goodwill on consolidation - - 375 Inventories 728 1,186 1,299 Sundry debtors 2,401 2,484 3,083 Loans and advances 1,326 1,400 1,397 Other current assets 114 626 167 Less: Trade payables 762 1,078 961 Less: Other liabilities 1,248 1,701 1,910 Less: Other provisions 541 841 946 Operating assets 9,109 10,009 10,512 5 EBITDA 4,031 3,476 3,817 10

Source: Company data, Kotak Institutional Equities

44 KOTAK INSTITUTIONAL EQUITIES RESEARCH DB Corp Media

Exhibit 4: Trends in advertising revenue growth of DBCL, 4QFY10-13 (%)

40

29 27 30 20 18 18 20 16 13 11 11 7 10 5 1 (1) - 4QFY10 2QFY11 4QFY11 2QFY12 4QFY12 2QFY13 4QFY13 (10)

Source: Company data, Kotak Institutional Equities

Exhibit 5: Trends in circulation revenue growth of DBCL, 4QFY10-13 (%)

20 18 17 16 15 16 16

15 13

10 6

5 2 2 1 1 1 - 4QFY10 2QFY11 4QFY11 2QFY12 4QFY12 2QFY13 4QFY13

Source: Company data, Kotak Institutional Equities

Exhibit 6: Trends in effective newsprint price for DBCL, 4QFY10-13 (Rs/Kg)

36 33.5 33.1 32.8 31.8 31.8 32.3 31.2 32 30.5

27.9 28.0 26.8 28 25.6 24.7

24

20 4QFY10 2QFY11 4QFY11 2QFY12 4QFY12 2QFY13 4QFY13

Source: Company data, Kotak Institutional Equities

KOTAK INSTITUTIONAL EQUITIES RESEARCH 45 Media DB Corp

Exhibit 7: Readership of DBCL across core/legacy and new markets (mn)

Q4 2010 Q1 2011 Q2 2011 Q3 2011 Q4 2011 Q1 2012 Q2 2012 Q3 2012 Q4 2012 chg (%) MP-Chattisgarh Dainik Bhaskar 4.6 4.7 4.8 4.9 4.8 4.7 4.7 4.6 4.6 (4) DJ + Nai + Nav Dunia 2.2 2.4 2.4 2.4 2.3 2.4 2.3 2.2 2.1 (10) Patrika Dainik 1.1 1.1 1.3 1.4 1.8 1.9 2.1 2.1 2.1 16 Hari Bhoomi 1.2 1.2 1.2 1.2 1.2 1.2 1.1 1.1 1.1 (6) NavBharat 0.8 0.7 0.6 0.6 0.6 0.6 0.6 0.6 0.6 (5) Rajasthan Rajasthan Patrika 7.0 6.9 6.8 6.8 6.7 6.7 6.6 6.7 6.7 0 Dainik Bhaskar 6.4 6.3 6.4 6.4 6.3 6.2 6.2 6.3 6.2 (2) Dainik Navjyoti 0.4 0.5 0.6 0.6 0.5 0.5 0.5 0.5 0.5 (6) Chandigarh-Punjab-Haryana Dainik Bhaskar 2.4 2.4 2.3 2.2 2.2 2.2 2.2 2.2 2.2 2 Punjab Kesari 2.1 2.0 2.0 1.9 2.0 2.1 2.1 2.1 2.1 3 Dainik Jagran 1.8 1.7 1.7 1.6 1.6 1.6 1.6 1.7 1.7 4 Gujarat Gujarat Samachar 4.4 4.4 4.4 4.5 4.4 4.5 4.5 4.4 4.4 (1) Divya Bhaskar 3.7 3.8 3.8 3.8 3.9 3.9 3.9 3.8 3.7 (6) Sandesh Dainik 3.3 3.2 3.3 3.2 3.3 3.4 3.3 3.3 3.2 (4) Jharkhand Hindi Hindustan 1.8 1.8 1.8 1.7 1.7 1.8 1.7 1.7 1.7 (3) Prabhat Khabar 1.3 1.4 1.4 1.4 1.3 1.3 1.3 1.3 1.3 (1) Dainik Jagran 0.9 0.9 1.0 1.0 1.0 0.9 0.9 0.9 0.9 (9) Dainik Bhaskar - - - 0.6 0.7 0.8 0.8 0.8 0.8 12 Maharashtra ex-Mumbai-Pune - new market (a) Lokmat Dainik 6.4 6.2 6.4 6.2 6.3 6.2 6.2 6.1 6.0 (5) Daily Sakal 3.4 3.4 3.3 3.1 3.2 3.1 3.2 3.1 3.2 (0) Pudhari 1.9 1.9 1.9 1.8 1.9 1.8 1.8 1.7 1.6 (13) Punya Nagri 1.7 1.6 1.5 1.5 1.6 1.5 1.5 1.5 1.4 (7) Divya Marathi ------0.7 0.9 1.0

Notes: (a) DBCL's presence in Maharashtra is only partially considered.

Source: Indian Readership Survey, Kotak Institutional Equities

Exhibit 8: AIR of Marathi dailies in the Maharashtra ex-Mumbai-Pune market ('000)

Q4 2010 Q1 2011 Q2 2011 Q3 2011 Q4 2011 Q1 2012 Q2 2012 Q3 2012 Q4 2012 yoy (%) Maharashtra ex-Mumbai-Pune Lokmat Dainik 6,222 6,036 6,202 6,033 6,152 6,033 6,040 5,961 5,890 (4) Daily Sakal 3,360 3,298 3,224 3,093 3,134 3,107 3,127 3,079 3,149 0 Pudhari 1,975 1,942 1,879 1,837 1,894 1,860 1,816 1,722 1,638 (14) Punya Nagri 1,709 1,577 1,512 1,471 1,550 1,502 1,528 1,497 1,441 (7) Maharashtra Times 118 87 79 113 178 198 251 292 335 88 Divya Marathi ------695 924 1,024 MAH cities ex-Mumbai-Pune Lokmat Dainik 940 964 974 981 980 952 970 964 982 0 Daily Sakal 348 358 361 363 402 427 442 455 456 13 Pudhari 185 187 182 181 178 182 171 169 161 (10) Punya Nagri 221 208 195 175 172 176 165 160 148 (14) Maharashtra Times 31 22 19 51 68 81 112 148 193 184 Divya Marathi ------314 428 506

Source: Indian Readership Survey, Kotak Institutional Equities

46 KOTAK INSTITUTIONAL EQUITIES RESEARCH DB Corp Media

Exhibit 9: AIR of Hindi dailies in the MPCG market ('000)

Q4 2010 Q1 2011 Q2 2011 Q3 2011 Q4 2011 Q1 2012 Q2 2012 Q3 2012 Q4 2012 yoy (%) MPCG market Dainik Bhaskar 4,550 4,696 4,798 4,948 4,794 4,732 4,660 4,633 4,597 (4) DJ + Nai + Nav Dunia 2,241 2,359 2,388 2,353 2,322 2,411 2,276 2,223 2,079 (10) Patrika Dainik 1,080 1,113 1,251 1,430 1,787 1,946 2,072 2,051 2,068 16 Hari Bhoomi 1,241 1,189 1,179 1,151 1,151 1,170 1,113 1,134 1,081 (6) NavBharat 971 969 900 889 885 842 784 790 748 (15) MPCG cities Dainik Bhaskar 1,556 1,590 1,628 1,641 1,596 1,583 1,578 1,576 1,574 (1) DJ + Nai + Nav Dunia 700 717 721 676 649 650 620 580 548 (16) Patrika Dainik 635 645 712 816 971 1,021 1,019 999 1,002 3 Hari Bhoomi 295 273 253 254 267 260 265 273 256 (4) NavBharat 144 130 142 135 138 127 128 128 123 (11)

Source: Indian Readership Survey, Kotak Institutional Equities

Exhibit 10: Valuation of Indian print media companies, FY2012-15E

EV EBITDA (Rs bn) EV/EBITDA (X) (Rs bn) 2012 2013E 2014E 2015E 2012 2013E 2014E 2015E JAGP 32 3.2 3.3 3.7 4.5 9.9 9.7 8.5 6.9 JAGP (adjusted) 32 3.2 3.4 3.8 4.5 9.9 9.2 8.3 6.9 DBCL 43 3.5 3.8 4.4 5.3 12.4 11.2 9.8 8.2 DBCL (adjusted) 43 4.2 4.5 4.8 5.4 10.3 9.6 8.9 7.9 HMVL 8 1.0 1.1 1.4 1.6 8.5 7.2 5.9 5.2 HTML 21 2.8 2.8 3.5 4.6 7.4 7.5 5.9 4.5 HTML (adjusted) 21 2.6 2.5 3.2 4.3 7.9 8.2 6.4 4.9

Price EPS (Rs/share) P/E (X) (Rs) 2012 2013E 2014E 2015E 2012 2013E 2014E 2015E JAGP 96 5.6 5.5 6.5 8.4 17.0 17.6 14.7 11.4 JAGP (adjusted) 96 5.6 5.7 6.7 8.4 17.0 16.8 14.4 11.4 DBCL 241 11.0 11.9 14.2 17.6 21.9 20.3 17.0 13.7 DBCL (adjusted) 241 13.3 13.9 15.6 18.1 18.2 17.4 15.5 13.3 HMVL 135 8.9 11.5 12.4 13.7 15.2 11.7 10.9 9.8 HTML 100 7.0 7.0 8.8 11.5 14.2 14.2 11.3 8.6

Q1 2011 Q2 2012 Q3 2012 Q4 2012 Q1 2011 Q2 2012 Q3 2012 Q4 2012 JAGP 19.1 18.9 18.9 18.5 1,651 1,667 1,669 1,699 DBCL 18.5 19.1 19.2 19.2 2,318 2,251 2,229 2,234 HMVL 12.2 12.2 12.2 12.2 667 664 662 662 Discount (%) 66 66 66 66

Notes: (a) Adjusted for near-term turnaround and operating losses in Mid-Day as well as Nai Dunia. (b) Adjusted for near-term startup expenses and operating losses in Jharkhand and Maharashtra. (c) Adjusted for 22% minority interest in subsidiary HMVL post IPO in October-2010.

Source: Company data, Indian Readership Survey, Kotak Institutional Equities estimates

KOTAK INSTITUTIONAL EQUITIES RESEARCH 47 Media DB Corp

Exhibit 11: Revised earnings estimates of DBCL, FY2013E-15E (Rs mn)

Revised Previous Change (%) 2013E 2014E 2015E 2013E 2014E 2015E 2013E 2014E 2015E Print ad revenue 11,300 12,905 15,018 11,191 12,901 15,046 1.0 0.0 (0.2) Circulation revenue 2,814 3,023 3,246 2,764 3,023 3,246 1.8 (0.0) (0.0) Other revenue 1,809 2,070 2,355 1,878 2,125 2,416 (3.7) (2.6) (2.5) Total revenues 15,923 17,999 20,619 15,834 18,050 20,708 0.6 (0.3) (0.4) Production cost 7,303 8,078 8,972 7,500 8,270 9,189 (2.6) (2.3) (2.4) Employee cost 2,795 3,319 3,941 2,818 3,341 4,040 (0.8) (0.7) (2.5) SG&A expenses 2,007 2,220 2,446 1,856 2,092 2,404 8.1 6.1 1.8 Total expenditure 12,105 13,617 15,360 12,174 13,704 15,633 (0.6) (0.6) (1.7) EBITDA 3,818 4,382 5,259 3,659 4,346 5,075 4.3 0.8 3.6 EPS (Rs) 11.9 14.2 17.6 11.4 13.8 16.6 4.5 2.9 5.6

Source: Kotak Institutional Equities estimates

Exhibit 12: Financial summary of DB Corp Limited, FY2009-15E (Rs mn)

2009 2010 2011 2012 2013E 2014E 2015E Profit model Net sales 9,610 10,630 12,652 14,515 15,923 17,999 20,619 EBITDA 1,461 3,430 4,031 3,465 3,818 4,382 5,259 Other income 109 112 142 139 213 232 291 Interest (510) (357) (153) (92) (136) (151) (151) Depreciation (290) (378) (433) (506) (581) (626) (662) Pretax profits 770 2,806 3,587 3,006 3,313 3,836 4,737 Extraordinary items — — 222 ———— Current tax (377) (841) (1,119) (932) (1,072) (1,188) (1,485) Deferred taxation (47) (216) (102) (51) (60) (48) (42) Net income 346 1,749 2,588 2,023 2,182 2,600 3,211 Adjusted net income 464 1,828 2,363 2,021 2,182 2,609 3,218 Earnings per share (Rs) 2.8 10.6 12.9 11.0 11.9 14.2 17.6

Balance sheet Total equity 2,577 6,487 8,289 9,271 10,181 11,093 12,188 Deferred taxation liability 393 609 695 746 806 854 896 Total borrowings 5,631 3,207 2,082 2,100 2,100 2,100 2,100 Current liabilities 2,189 2,073 2,479 3,320 3,398 3,919 4,482 Total capital 10,914 12,420 13,548 15,452 16,500 17,972 19,664 Cash 452 1,951 1,731 1,896 2,560 3,249 4,031 Other current assets 3,536 3,664 4,187 5,069 5,271 5,880 6,613 Total fixed assets 6,471 6,475 7,358 7,933 8,115 8,288 8,467 Investments 238 205 163 460 460 460 460 Miscellaneous expenditure 217 126 110 94 94 94 94 Total assets 10,914 12,420 13,548 15,452 16,500 17,972 19,664

Free cash flow Operating cash flow, excl. work 1,016 2,566 3,297 2,662 2,746 3,193 3,775 Working capital changes 122 (174) (556) (421) (124) (88) (170) Capital expenditure (2,966) (603) (1,433) (1,227) (762) (800) (840) Income from investments 109 111 142 116 213 232 291 Free cash flow (1,718) 1,899 1,450 1,130 2,073 2,537 3,056

Ratios (%) Debt/equity 190 45 23 21 19 18 16 Net debt/equity 174 18 4 2 (4) (10) (15) ROAE (%) 17 36 29 21 21 23 26 ROACE (%) 7 23 26 20 20 23 28

Source: Company data, Kotak Institutional Equities estimates

48 KOTAK INSTITUTIONAL EQUITIES RESEARCH

BUY IRB Infrastructure (IRB)

Infrastructure MAY 17, 2013 RESULT Coverage view: Cautious

Traffic growth improves in two key projects. IRB reported traffic growth revival in Price (Rs): 124 existing projects (Bharuch-Surat up 10% yoy; Surat-Dahisar up 3% yoy; Tumkur- Target price (Rs): 170 Chitradurga traffic is expected to recover on lifting of the mining ban) though the BSE-30: 20,247 Talegaon-Amravati project had lower-than-expected initial toll collections. Construction revenue will likely moderate as four key projects near completion (contributed 90% of FY2013 revenue). Focus would shift to (1) toll collection from new projects and (2) new orders (NHAI ordering may remain sedate as it tries to start/rebid stuck projects). We retain BUY on attractive valuations, strong asset profile and execution track record.

Company data and valuation summary IRB Infrastructure Stock data Forecasts/Valuations 2013 2014E 2015E 52-week range (Rs) (high,low)161-104 EPS (Rs) 16.7 16.6 13.7 Market Cap. (Rs bn) 41.3 EPS growth (%) 11.1 (0.8) (17.5) Shareholding pattern (%) P/E (X) 7.4 7.5 9.1 Promoters 62.7 Sales (Rs bn) 36.9 40.4 38.6 FIIs 22.1 Net profits (Rs bn) 5.6 5.5 4.6 MFs 2.9 EBITDA (Rs bn) 16.3 20.0 20.0 Price performance (%) 1M 3M 12M EV/EBITDA (X) 6.6 5.7 5.8 Absolute 3.8 11.8 7.4 ROE (%) 17.4 13.3 8.8 Rel. to BSE-30 (3.7) 7.7 (14.8) Div. Yield (%) 0.0 0.0 0.0

Traffic recovers on Bharuch-Surat/Surat-Dahisar; initial traffic on Talegaon-Amravati disappoints

IRB’s 4QFY13 toll revenue (Rs2.9 bn) grew 13%. Traffic improved on the Bharuch-Surat (up 10% yoy) and Surat-Dahisar (up 3% yoy) roads partly on lower diversion at Thane Godhbundar road (four out of five flyovers functional). Traffic declined on the Tumkur Chitradurg road (may take another two quarters to benefit from lifting of the mining ban) and was lower than IRB’s initial estimate for the Talegaon-Amravati road.

Construction: Likely to moderate in FY2014 as four projects near completion

Construction revenue grew 11% in 4QFY13 and 21% in FY2013 (primarily responsible for18% overall growth in revenue). Construction business revenue though is likely to decline in FY2014 as four key projects near completion (Talegaon-Amravati and Jaipur-Deoli projects are 95% complete, Amritsar-Pathankot and Tumkur-Chitradurga projects are 75-80% complete). Note that these projects contributed 90% of FY2013 construction revenue. IRB expects to make up for this through contribution from the (1) Ahmedabad-Vadodara project (construction started; Rs34 bn backlog) and (2) Goa-Kundapur project (likely to start in 2HFY14; Rs22 bn backlog).

Margin beat, lower tax lead to 5% beat on 4QFY13 PAT; will require Rs3 bn of equity in FY2014E

Higher-than-expected 4Q EBITDA margin of 44.6% and a lower tax rate (17% against our estimate of 25% due to MAT credit) led to PAT of Rs1.54 bn, up 31% yoy (5% ahead of our estimate). IRB expects its margin to benefit from stable to declining commodity prices (cement. steel, bitumen).

We reiterate BUY; valuation attractive at 0.6X historical book (adjusted for MIPL, construction)

We retain our consolidated estimates of Rs16.6 and Rs13.7 for FY2014 and FY2015 and our BUY rating (target price: Rs170) on attractive valuations (trades at 1X P/B; 0.6X historical book adjusted for MIPL and construction), strong asset profile, healthy balance sheet and execution track record.

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

Infrastructure IRB Infrastructure

Strong traffic growth on Surat-Dahisar and Bharuch-Surat roads

IRB reported toll collection revenue of Rs2.9 bn in 4QFY13, up 13% yoy. Note that this includes toll collections from the Ommalur–Salem-Namakkal project (acquired in October 2012) and the Ahmedabad-Vadodara project (started tolling from January 2013). Traffic diversions at Thane eased in the quarter (four out of five flyovers are operational), reflective in strong growth in traffic on Bharuch-Surat and Surat-Dahisar roads though the management did not highlight this as the sole reason.

` Bharuch-Surat: 4QFY13 traffic up ~10% yoy. Toll revenue for the project increased by 18% yoy to Rs443 mn in 4QFY13, implying daily collection of Rs4.8 mn/day (versus Rs4.2 mn in 3QFY13). Toll collections implied traffic growth of about 10% yoy adjusted for the toll increase of 7.54% in July 2012.

` Surat-Dahisar: 4QFY13 traffic up 3% yoy. This project reported toll collections of Rs1.2 bn, up 12.3% yoy. This implies an average per day toll collection of Rs13 mn (Rs12.6 mn in 3QFY13). Toll collections implied 3% growth yoy traffic after taking into account the 8.94% toll revision in September 2012.

` Tumkur-Chitradurg: Traffic decline continues in 4QFY13. Toll collection of Rs394 mn grew by 4.5% yoy despite a 6% increase in tariff from April 1, 2012. This translated into declining traffic, potentially led by a mining ban in Karnataka. While a positive decision has been taken by the Supreme Court, IRB expects volumes to take two quarters to recover.

` Mumbai-Pune: Traffic growth of 4.3%. Toll collections of Rs1.04 bn on the Mumbai- Pune road increased by 4.3% yoy (18% toll revision from April 1, 2011 – so no yoy difference in tariffs, implying revenue growth was likely to have been led purely by traffic growth). The next toll increase is expected on April 1, 2014.

Exhibit 1: Traffic levels improve on Bharuch-Surat and Surat-Dahisar projects IRB:project-wise toll collection (Rs mn)

% Change 4QFY13 4QFY12 3QFY13 yoy qoq Tariff increase FY2013 FY2012 % chg. FY2012 FY2011 % chg. Total toll collection 3,948 3,234 3,568 22.1 10.7 14,111 12,291 14.8 12,291 9,644 27.4 Ahemdabad Vadodara 291 291 0 4 BOT projects 181 166 172 9.0 5.2 685 626 9.4 626 544 15.1 Kharpada Bridge 22 22 21 - 4.8 86 84 2.4 85 74 14.9 Nagar-Karmala-Tembhurni 36 35 38 2.9 (5.3) 148 142 4.2 143 146 (2.1) Pune - Solapur 46 44 43 4.5 7.0 177 168 5.4 170 144 18.1 Pune - Nashik 59 58 60 1.7 (1.7) 236 227 4.0 226 212 6.6 Thane - Ghodbunder 80 78 79 2.6 1.3 311 292 6.5 292 284 2.8 MMK 17 21 18 (19.0) (5.6) 75 79 (5.1) 78 76 2.6 Ommalur-Salem-Namakkal 146 146 NA - 292 - NA TumkurChitradurga 394 377 394 4.5 - 6% wef Apri-2012 1,596 1,258 26.9 1,257 - NA Mumbai - Pune 1,037 994 1,051 4.3 (1.3) Nil 4,162 3,977 4.7 3,977 3,215 23.7 8.94% w.e.f. Sep-2012 Surat Dahisar 1,196 1,065 1,156 12.3 3.5 10.5% w.e.f. Sep-2011 4,441 4,009 10.8 4,008 3,647 9.9 7.54% w.e.f. Jul-2012 Bharuch-Surat 443 374 390 18.4 13.6 9-10% w.e.f. Jul-2011 1,611 1,429 12.7 1,429 1,302 9.8

Source: Kotak Institutional Equities

50 KOTAK INSTITUTIONAL EQUITIES RESEARCH IRB Infrastructure Infrastructure

Initial traffic collection on Talegaon-Amravati road a little disappointing

The Talegaon-Amravati toll collection has begun (though partially), and adjusted for partial tolling, may be 10-15% below original estimates. Essentially, IRB is yet to benefit from opening a bypass lane (which has higher toll tariff and hence operates at 60-65% of full toll estimates (Rs0.8 mn per day) against tolling 80-85% of the overall length. While the management seems to be comfortable because it is a grant-based project and thus debt servicing is not a problem even with lower toll collections, a lower toll collection is a disappointment. We shall watch for collection data on the Talegaon-Amravati, Jaipur-Deoli and Amritsar-Pathankot projects. 4QFY13 results: Margin beat and low tax rate lead to 5% PAT beat

` IRB reported 4QFY13 revenue of Rs9.5 bn, a growth of 12 % yoy. Revenue growth was similar across construction (Rs6.5 bn, up 11% yoy) and BOT segments (Rs2.9 bn, up 13% yoy).

` EBITDA margin beat compensates for revenue miss. IRB reported higher-than- expected EBITDA margin of 44.6% (our estimate of 43%) in 4QFY13, down 50 bps yoy. The company cited stable to declining raw material prices, which would support margin incrementally. Prices of steel and cement were stable while bitumen prices declined (on weak international coal prices and import-parity pricing).

` Net PAT beat due to lower tax rate. IRB reported PAT of Rs1.54 bn, up 31% yoy (strong revenue growth offset by higher yoy depreciation cost) ahead of our estimate (primarily on a lower tax rate of 16% against our estimate of 25%; includes ~Rs450 mn of MAT credit).

Exhibit 2: IRB (consolidated) - 4QFY13 - key numbers (Rs mn)

%change 4QFY13 4QFY13E 4QFY12 3QFY13 vs est. yoy qoq FY2013 FY2012 % change Net Sales 9,483 9,900 8,480 9,139 (4.2) 11.8 3.8 36,872 31,307 17.8 Total Expenses (5,255) (5,656) (4,672) (5,059) (7.1) 12.5 3.9 (20,539) (17,572) 16.9 Direct expenses (4,410) (3,902) (4,343) 13.0 1.5 (15,226) Employees cost (466) (419) (368) 11.1 26.6 (1,376) Other expenditure (379) (351) (348) 8.0 8.9 (970) EBITDA 4,228 4,244 3,809 4,079 (0.4) 11.0 3.6 16,333 13,735 18.9 Other income 318 327 332 327 (2.8) (4.2) (2.8) 1,301 1,252 3.9 Depreciation (1,094) (1,128) (1,016) (1,128) (3.0) 7.7 (3.0) (4,415) (2,970) 48.7 Interest (1,575) (1,477) (1,500) (1,595) 6.6 5.0 (1.2) (6,153) (5,505) 11.8 PBT 1,877 1,966 1,625 1,684 (4.5) 15.5 11.4 7,066 6,512 8.5 Tax Expense (337) (491) (452) (271) (31.5) (25.5) 24.0 (1,530) (1,552) (1.4) Net Profit 1,540 1,474 1,173 1,413 4.5 31.2 9.0 5,536 4,960 11.6 Minority interest (29) (69) 30 15 31 (0) Reprted PAT 1,511 1,405 1,203 1,427 7.6 25.6 5.9 5,567 4,960 12.2

Key ratios (%) Direct expenses/sales 46.5 46.0 47.5 48.6 Employees cost/sales 4.9 4.9 4.0 4.4 Other expenditure/sales 4.0 4.1 3.8 3.1 EBITDA margin 44.6 42.9 44.9 44.6 44.3 43.9 PBT margin 19.8 19.9 19.2 18.4 19.2 20.8 PAT margin 16.2 14.9 13.8 15.5 15.0 15.8 Effective tax rate 17.9 25.0 27.8 16.1 21.7 23.8 4.5 4.2 3.6 4.3 16.7 14.9 EPS (Rs)

Source: Company, Kotak Institutional Equities estimates

KOTAK INSTITUTIONAL EQUITIES RESEARCH 51 Infrastructure IRB Infrastructure

Exhibit 3: IRB - key segmental numbers -4QFY13 (Rs mn)

%change 4QFY13 4QFY12 3QFY13 yoy qoq FY2013 FY2012 % change Revenues 9,483 8,480 9,139 11.8 3.8 36,872 31,307 17.8 Construction 6,590 5,914 6,334 11.4 4.0 25,988 21,498 20.9 BOT 2,893 2,566 2,804 12.8 3.2 10,884 9,809 11.0

EBITDA 4,191 3,804 4,079 10.2 2.7 16,333 13,730 19.0 Construction 1,737 1,533 1,648 13.3 5.4 6,862 5,029 36.5 BOT 2,454 2,271 2,432 8.1 0.9 9,471 8,702 8.8

Margins (%) 44.2 44.9 44.6 44.3 43.9 Construction 26.4 25.9 26.0 26.4 23.4 BOT 84.8 88.5 86.7 87.0 88.7

PBT 1,877 1,625 1,684 15.5 11.4 7,066 6,512 8.5 Construction 1,353 1,278 1,225 5.8 10.4 5,242 4,351 20.5 BOT 524 347 459 51.0 14.3 1,824 2,161 (15.6)

PAT 1,540 1,174 1,413 31.2 9.0 5,536 4,960 11.6 Construction 878 873 826 0.5 6.3 3,519 2,986 17.9 BOT 662 300 587 120.5 12.8 2,017 1,974 2.2

Source: Company, Kotak Institutional Equities estimates

Exhibit 4: Consolidated balance sheet details , March fiscal year ends (Rs mn)

FY2012 1HFY13 FY2013 Shareholders funds 28,566 30,808 32,556 Share capital 3,324 3,324 3,324 Reserves & surplus 25,243 27,484 29,232 Minority interest 1,123 1,078 1,092 Deferred tax liability (net) 259 225 259 Loan funds 68,367 73,689 81,860 Short-term 50,455 55,645 69,149 Long-term 17,913 18,044 12,712 Total sources of funds 98,315 105,800 115,766

Net fixed assets 79,994 87,751 104,248 Investments 139 720 619 Cash & bank balance 18,208 14,437 14,710 Current assets 10,238 14,662 12,495 Inventory 1,624 1,960 2,488 Debtors 141 167 80 Loans & Advances 7,780 8,800 9,696 Other current assets 693 3,736 230 Current liabilities & provisions 10,265 11,769 16,306 Current liabilities 10,016 11,319 13,196 Provisions 248 450 3,110 Net current assets (27) 2,893 (3,811) Total application of funds 98,315 105,800 115,766

Source: Company, Kotak Institutional Equities

52 KOTAK INSTITUTIONAL EQUITIES RESEARCH IRB Infrastructure Infrastructure

Construction likely to moderate in FY2014

IRB expects execution to remain steady in FY2014, in spite of impending completion of four of its projects (Talegaon-Amravati and Jaipur-Deoli are 95% complete, Amritsar-Pathankot and Tumkur-Chitradurga projects are 75-80% complete). It is factoring in contribution from (1) Ahemdabad-Vadodara (construction started; Rs34 bn backlog) and (2) Goa-Kundapur project (likely to start in 2HFY14; Rs22 bn backlog). Note that the near-completion projects) contributed most of FY2013 construction revenues (Rs23 bn out of total Rs26 bn).

Exhibit 5: Near complete projects accounted for 90% of the FY2013 construction business revenue Break-up of IRB’s construction revenues, March fiscal year-ends (%)

FY2013 construction revenue (Rs26 bn) 4QFY13 construction revenue (Rs6.5 bn) Ahemdabad- Others Talegaon Talegaon 2% Vadodara Amravati Amravati Jaipur Deoli 9% 14% 4% 11%

Ahemdabad- Tumkur Vadodara Chittradurg 36% 22% Jaipur Deoli 27% Amritsar Pathankot 25% Amritsar Tumkur Pathankot Chittradurg 26% 24%

Source: Company, Kotak Institutional Equities

KOTAK INSTITUTIONAL EQUITIES RESEARCH 53 Infrastructure IRB Infrastructure

Exhibit 6: Ahmedabad-Vadodara and Goa-Kundapur projects account for ~67% of the backlog Break-up of the backlog across various projects of IRB as of the end of March 2013 (%)

Sindhurdurg airport Order backlog (end-Mar-13 - Rs84 bn) Talegaon Amravati 4% 0% Tumkur Chitradurga Jaipur Tonk Deoli 3% 0% Amritsar Pathankot 2%

Ahemdabad Vadodara 3 projects nearing 41% completion

O&M contracts 23%

Goa Kundapur 27%

Source: Company, Kotak Institutional Equities

Increase in toll collection to partly compensate for weakness in construction business

Full-year BOT revenue increased by about 10% on a comparables basis (adjusted for new project toll) to Rs14 bn. IRB expects toll revenue from existing projects to improve by 10- 12% in FY2014, comprising 7% inflation growth and 5% traffic growth.

NHAI still resolving stuck-project issues, will cap strength of FY2014E ordering

IRB cited several projects awarded by NHAI in 2012 being stuck due to clearances and unwilling developers (most are stuck on the second count). Discussions are taking place between the developers’ association and NHAI. A resolution to the crisis reached with NHAI would be applicable to all involved projects. Ordering in FY2014 will be impacted by this though IRB believes 2,000-3,000 km of roads will be awarded in FY2014 (IRB aims to get about 300 km out of the awards).

Equity requirement of Rs3 bn for FY2014E; Rs17 bn overall requirement

IRB expects to have an equity requirement of Rs17 bn for its Ahmedabad-Vadodara project (Rs11 bn) and Goa-Kundapur project (Rs5.5 bn). Out of this, it would require Rs2.5-3 bn in FY2014E, as a large part of he equity requirement for the Ahmedabad project (Rs4 bn) has been funded.

54 KOTAK INSTITUTIONAL EQUITIES RESEARCH IRB Infrastructure Infrastructure

Consolidated debt attributable to individual projects

IRB reported consolidated net debt of about Rs73bn at the end of FY2013. The net debt can be attributable to IRB’s individual road projects. We believe this is a positive for IRB versus some other infrastructure developers, which have taken debt at the standalone/parent level with no underlying asset to support the debt servicing and repayment, creating stress on the balance sheet (for instance, acquisition loans taken by GVK at the parent level).

Exhibit 7 summarizes the outstanding debt for individual project SPVs at the end of FY2013.

Exhibit 7: Almost all the consolidated net debt is attributable to projects; implies no net debt at the standalone level, reflecting balance sheet strength Details of debt for IRB, March fiscal year-ends, 2012-9MFY13 (Rs mn)

2011 2012 2013 Consolidated debt 46,255 70,722 87,700 Standalone debt 12,409 18,010 11,352 Consolidated cash balance 18,208 14,710 Consolidated net debt 52,514 72,990 Project cost Debt Debt Road projects Thane-Bhiwandi bypass 1,040 1,023 1,671 Mumbai-Pune Expressway 13,016 9,803 8,768 Pune-Sholapur 630 513 513 Pune-Nashik 737 753 753 Ahmednagar-Karmala-Tembhurni 368 426 426 Mohol-Mandrup-Kamtee 180 200 200 Hence do not Bridge over Patalganga River-Kharpada 320 200 200 assume a separate Thane-Ghodbunder 2,462 706 1,729 cash balance in IRB's Bharuch-Surat 14,700 7,576 7,203 SOTP Integrated Road Dev. in Kolhapur 4,300 2,521 2,507 Surat-Dahisar 25,372 13,508 12,372 Pathankot-Amritsar 14,453 4,474 8,121 Talegaon-Amravati 8,880 2,872 4,466 Jaipur-Deoli 17,330 5,951 9,000 Tumkur-Chitradurg 11,420 4,704 7,267 Ahmedabad-Vadodara Expressway 49,200 - 3,589 Subtotal - Road projects 164,408 55,230 68,785

Source: Company, Kotak Institutional Equities

IRB reported a consolidated net debt of Rs73bn at the end of FY2013 against net debt of Rs52.5 bn at the end of FY2012 and Rs66 bn at the end of 3QFY13.

KOTAK INSTITUTIONAL EQUITIES RESEARCH 55 Infrastructure IRB Infrastructure

Exhibit 8: IRB’s consolidated net debt, March fiscal year-ends, 2007-4QFY13 (Rs bn)

(Rs bn) Consolidated net debt 80 73.0 66.5 70 62.0 58.7 60 52.5 46.9 50 43.2 38.6 40 34.3 30 24.1 21.5 20.7 20 15.0 10 - 2007 2008 2009 2010 2011

1QFY12 2QFY12 3QFY12 4QFY12 1QFY13 2QFY13 3QFY13 4QFY13

Source: Company, Kotak Institutional Equities

Trades at 1X P/B; valuation of less than 1X historical book (adjusted for MIPL, construction business)

We believe IRB’s current market price (at Rs125/share with a market capitalization of about Rs42 bn) implies a value of only about 0.6X invested book, adjusted for the Mumbai-Pune Expressway project (MIPL) and the construction business. IRB invested Rs29.3 bn as equity investment and loans & advances in various road BOT projects. We adjust the value of (1) MIPL, about Rs12-13 bn --- fairly conservative value for a project generating revenue of about Rs4.25 bn in FY2013E and with relatively low debt of Rs10 bn and (2) the construction business, about Rs12 bn --- business generated annual revenue of about Rs30 bn with potential EBITDA of Rs4-5 bn. Adjusted for this (and investment in the MIPL project), the current market price implies a value of about 0.6X P/B for the historical invested book in all other road projects (at the end of FY2012).

We believe this is quite a conservative value. The market may be quite negative on recent projects (Surat-Bharuch, Surat-Dahisar and Ahmedabad-Vadodara) with relatively aggressive bids (high revenue share) and traffic disappointments. However, we believe at least three under-construction projects (Amritsar-Pathankot, Jaipur-Deoli and Amravati-Talegaon) could have immense value as they were won in a low competitive environment and at high grant levels (close to 40%).

56 KOTAK INSTITUTIONAL EQUITIES RESEARCH IRB Infrastructure Infrastructure

Exhibit 9: Implied P/B valuation adjusted for MIPL and construction business (Rs mn)

Rs mn Current market price (Rs) 125 Shares outstanding (# mn) 332 Toll collection of Rs4.25 Current market cap. 41,545 bn in FY2013E, to continue for 10 years Target value for Mubai-Pune expressway 12,500 Low debt levels of only Target value for Construction business 12,000 Rs10 bn

MCap. adjusted for MIPL and Construction business 17,045 Construction revenues Investments (equity + L&A) in projects at end-FY2012 29,310 of Rs20 bn p.a. with Rs4- Investments in MIPL at end-FY2012 1,212 5 bn of EBITDA Investments adjusted for MIPL 28,098

Implied P/B (X) 0.61

Source: Company, Kotak Institutional Equities estimates

Reiterate BUY with an unchanged target price of Rs170

We retain our consolidated estimates of Rs16.6 and Rs13.7 for FY2014 and FY2015.

We retain our SOTP-based target price of Rs170, comprising (1) Rs130/share value for BOT projects based on March-2013E FCFE valuation of the projects, (2) Rs40/share value for the construction business based on NPV of cash flows until FY2015E and (3) Rs2/share value from the real estate business.

Exhibit 10: Break-up of the Rs170 SOTP-based target price for IRB

Value Stake Value of IRB's stake Contribution Per share (Rs mn) (%) (Rs mn) (%) (Rs) Asset valuation methodology Roads 44,127 44,027 75.2 132 FCFE 4 BOT projects 1,840 100.0 1,840 3.1 6 One-year forward FCFE Kharpada Bridge 97 100.0 97 0.2 0 One-year forward FCFE Nagar - Karmala - Tembhurni 675 100.0 675 1.2 2 One-year forward FCFE Pune - Solapur 567 100.0 567 1.0 2 One-year forward FCFE Pune - Nashik 1,613 100.0 1,613 2.8 5 One-year forward FCFE Mumbai - Pune 13,766 100.0 13,766 23.5 41 One-year forward FCFE Thane - Ghodbunder 2,430 100.0 2,430 4.2 7 One-year forward FCFE Bharuch - Surat 2,083 100.0 2,083 3.6 6 One-year forward FCFE Surat-Dahisar 995 90.0 896 1.5 3 One-year forward FCFE Kolhapur urban road project 4,109 100.0 4,109 7.0 12 One-year forward FCFE Amritsar to Pathankot 4,666 100.0 4,666 8.0 14 One-year forward FCFE Jaipur - Tonk - Deoli 6,861 100.0 6,861 11.7 21 One-year forward FCFE Talegaon to Amravati 4,396 100.0 4,396 7.5 13 One-year forward FCFE Tumkur-Chitradurg 3,016 100.0 3,016 5.2 9 One-year forward FCFE Ahmedabad Vadodara (2,989) 100.0 (2,989) (5.1) (9) One-year forward FCFE Construction 13,908 13,908 23.8 42 NPV of cash flows till FY2015E Real Estate 587 587 1.0 2 Book value of investment Grand total 58,622 58,523 100.0 176 SOTP Target price 170

Source: Company, Kotak Institutional Equities estimates

KOTAK INSTITUTIONAL EQUITIES RESEARCH 57

ATTRACTIVE Pharmaceuticals

India MAY 17, 2013 UPDATE BSE-30: 20,247

Drug pricing policy order released. The DOP has issued the drug pricing policy order – we believe the implementation of the policy now appears certain with this step. There have been no major changes to the policy framework. The order has tried to address some of the concerns expressed by the Supreme Court. We estimate the EPS impact to be meaningful for GSK Pharma/Ranbaxy. The policy shift will eliminate the uncertainty on the pricing front, while the market price-based structure is a long-term positive.

Implementation of new drug pricing policy appears certain

The Department of Pharmaceuticals (DOP) has released the new drug pricing policy order – to be called Drugs (Prices Control) Order, 2013. This will be effective from the date of its publication in the official gazette – it is not clear if the gazette publication has been done.

` The department is also expected to notify the ceiling prices (CP) for the 348 drugs (scheduled formulation; part of the National List of Essential Medicines or NLEM) in the near future (over the next 2 weeks). We expect the new drug pricing policy to be effective with the notification of the CP.

` Existing manufacturers of scheduled formulations will need to revise their prices below the CP. For the drugs which are already in the market, the order provides 45 days window from the date of CP notification to ensure compliance. The higher-than-normal sales reported by certain companies in the domestic formulations business for 4QFY13 (Glenmark: 30% yoy; Lupin: 50% yoy) may have been influenced by the expected implementation of the new policy.

Few positive surprises; mostly unchanged

` There has been no changes made to the pricing formula – CP will be fixed based on price to retailer (simple average price of all brands/generics with a turnover market share of >1%) and 16% retailer margin.

` Product transitioning from DPCO-95 to the new policy will be allowed a price increase (up to CY2012 WPI) in June 2013. Post the price increase, the ceiling price will be fixed. Similar will be the case for drugs which are currently under DPCO-95 and moving out of price control – will move to non-scheduled drugs in June 2013. This is a positive surprise given the earlier expectation was for the price to remain frozen for one year from the implementation of new policy. We believe the possible price increase may help partially offset the significant negative impact for companies – GSK Pharma has two key brands (Betnovate and Zantac) moving out of price control. The actual price increases may depend on the competitive scenario.

` The order also has specific aspects to overcome the objections raised by the NGOs/Supreme Court (SC) – no MRP increase for brands lower than CP, restriction on shifting the market to combinations and non-standard dosage/strengths. The date for the next SC hearing is not known.

GSK Pharma, Ranbaxy to be worst-hit

We estimate the FY2015E EPS impact of the new policy at 13%/9% for GSK and Ranbaxy. For Cadila and Cipla, the hit is expected to be 3-4%. For the other stocks, we expect marginal impact.

We view the market price-based policy structure as being a long-term structural positive despite a one-time near-term earnings hit across companies. We stay constructive on the sector.

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

Pharmaceuticals India

View market price-based policy as a structural positive

Our initial estimates suggest limited EPS impact for the domestic companies (except Ranbaxy). The earnings impact is likely to be higher for global companies.

Our workings are indicative and the actual impact over a period is likely to be lower with changes to product portfolio and incentive structures helping soften the impact. Besides, a significant part of the negative impact for most companies is due to a few molecules. In most cases, the companies tend to have a very high market share in these molecules. We expect companies to rethink their focus molecules/therapies given the changes in the pricing environment. Our workings do not capture the shift in competitive dynamics and volumes on policy implementation.

Overall, we see the market price-based policy mechanism as a structural positive in the long term. The drug pricing policy has been an overhang and eventual implementation will eliminate the prevailing uncertainty. We believe there could be changes in the competitive dynamics under the new policy framework. However, we expect the structural growth in domestic formulations to remain intact.

Exhibit 1: EPS impact of proposed policy on coverage universe

Estimated erosion due to Company name Net profit (in Rs mn) EPS impact (%) new policy (in Rs mn) FY2014E FY2015E FY2014E FY2015E Cadila Healthcare 550 8,561 10,903 4.8 3.8 Cipla 850 16,065 18,689 4.0 3.5 Dr. Reddy's 350 18,006 21,124 1.5 1.3 Lupin 200 14,502 16,732 1.0 0.8 Glenmark 100 7,502 8,748 1.1 0.9 GSK Pharma 1,600 7,161 8,268 15.2 13.2 Ranbaxy 1,350 6,980 12,078 15.5 8.9 Sun Pharma 350 36,331 41,317 0.8 0.7

Source: Industry data, Company, Kotak Institutional Equities estimates

Ceiling price calculation of a scheduled formulation

For the specific dosage/strength which is covered by the new policy, the ceiling price will be calculated as follows:

Price to retailer will be calculated as a simple average of the retail price of all brands and generic versions which have more than or equal to 1% of the total market turnover. The retail price will be on a dosage basis (per tablet, capsule or injection volume).

The ceiling price will be calculated including the retailer margin which is fixed at 16%. The maximum retail price (MRP) will be calculated including local taxes as applicable.

The ceiling price will be applicable for both domestically manufactured and imported formulations.

45 days window to align MRP with ceiling price

For formulations which fall under the new pricing policy and are available/sold in the market prior to notification of the ceiling prices, the order provides a 45-day window to ensure that the MRP does not exceed the ceiling price (including local taxes).

In addition, companies which are currently selling branded/generic versions of the formulations (under the new policy) lower than the ceiling price will have to maintain the MRP. This was a key concern raised during the Supreme Court proceedings with NGOs raising the issue of price increases post the new drug pricing policy.

KOTAK INSTITUTIONAL EQUITIES RESEARCH 59 India Pharmaceuticals

Revision to ceiling prices and MRP to be done annually in April

Under the new policy, the ceiling prices of scheduled formulations will be revised as per WPI index (for the preceding calendar year; both increase and decrease) and will be notified on or before April 01 every year.

Companies will be allowed to increase prices on scheduled formulations up to WPI index in April every year without any approval from the Government.

Other criteria for revising the ceiling price

The revision of ceiling price based on the MAT value will be carried out on:

(a) Revision of NLEM or five years from the date of fixing the ceiling price under this order

(b) When there is >25% decline in number of manufacturers who have the price >= 75% of the ceiling price (notified by the Government)

(c) When there is >25% increase in number of manufacturers who have the price <= 25% of the ceiling price (notified by the Government)

Price increase for DPCO products to be allowed in June 2013

For drugs which are common between NLEM and DPCO-1995 (notified up to May 31, 2012), the DPCO price will stay effective up to May 30, 2013. Post this date, the manufacturers may increase the prices of the formulations as per the WPI index for the previous year (CY2012) and thereafter the formula for fixing the ceiling price will be applied.

There was no specific mention of transition from DPCO-1995 to the new pricing policy which was made in the policy released in December 2012. As per the draft policy of November 2011, the prices of drugs under DPCO-1995 were to be held constant for two years post which they will move under the new policy.

This move is a positive surprise given the earlier-than-expected opportunity to increase prices for DPCO products which are moving to the new pricing policy. In addition, the policy now allows for fixing the ceiling price post the price increase up to WPI.

In the case of global pharma companies which have higher proportion of sales under DPCO (23% for GSK Pharma), we view this move as an incremental upside in the near term.Indian companies may also have specific products under DPCO which provide incremental benefit. The actual extent of price increase may still depend on the competitive scenario in the specific molecule.

For molecule which moved under DPCO post May 31, 2012, the prices fixed under the old policy will remain in place for one year from the time of price notification under the DPCO- 95.

For drugs moving our of price control, prices can be increased in June 2013

For drugs which are currently under DPCO-95 and not part of the new pricing policy, the order provides for price freeze to end on May 30, 2013. Post this date, price increase in these formulations shall be regulated as in the case of other non-scheduled formulations (can be increased up to 10% every year).

We believe this may benefit pharma companies which have significant share of sales moving out of the DPCO-95. In the case of GSK Pharma, half of the sales under DPCO-95 (primarily Betnovate and Zantac) will move out of price control. More important, price increase on these brands can be taken immediately which will aid in partly offsetting the negative impact of the new pricing policy. We had expected the price freeze to remain in place for one year from the time (until CY2014) of notifying the new policy.

60 KOTAK INSTITUTIONAL EQUITIES RESEARCH Pharmaceuticals India

Measures to plug potential loopholes

The NGOs that are fighting the Government in the Supreme Court have been highlighting some loopholes under the proposed policy. Some of these include ability of drug companies to circumvent the control by launching combinations of the NLEM drugs or by moving the market to non-standard strength/dosages/or both.

In order to curb such practices, the order has created the classification of ‘new drug’. This category refers to:

(a) Combination of the specified formulation (in NLEM) with another drug which is either listed or not listed in the NLEM.

(b) Formulation launched by changing the strength/dosage/or both.

For an existing manufacturer of a drug which is covered under the policy, the launch of a ‘new drug’ (modified version) will require to apply for prior price approval from the Government.

` In the event of the ‘new drug’ already available in the domestic market, the prices will be calculated using the same formula as the scheduled formulations (simple average with 1% market share cut-off).

` For new drugs which are currently not available, price to retailer shall be fixed by the Government on the principles of Pharmacoeconomics (compares the therapeutic value of one drug versus the other). The decision will be based on the recommendation of a standing committee of experts. The recommendation will be provided by the expert group within 30 days of receipt of the application and the Government will decide on the retail price within 30 days of the recommendation. The retail price will be fixed by adding the 16% retailer margin.

` The Government will form the standing committee of experts within 60 days of notification of the order.

` Existing manufacturer who fail to apply for prior approval of the new drug or sell the new drug at a price higher then the retail price fixed by the Government will be liable for overcharging along with interest and penalty.

` However, the definition of ‘new drug’ states that it will cover only formulations launched by existing manufacturer. The order also defines an existing manufacturer as a company existing on the date of the publication of this order in the official gazette. It is not clear if a new company launching combinations or non-standard strength/dosages will be allowed to circumvent the price control. Also, the status on companies which have already launched such products is not clear.

` The Government has also provided for measure to monitor the availability of scheduled formulations. The includes collecting the production details from the manufacturer on a quarterly basis and requirement to provide notice of at least 6 months prior to discontinuing any scheduled formulation.

Fixing the ceiling price in case of limited competition

The calculation of ceiling price for the scheduled formulations will follow a different methodology in the event of:

(a) No reduction in average price to retailer and

(b) There are less than 5 manufacturers for that formulation who have >=1% market share.

KOTAK INSTITUTIONAL EQUITIES RESEARCH 61 India Pharmaceuticals

The formula prescribed is in line with the approach mentioned in the policy document released in December 2012. We believe there may be a few such formulations with limited competition given the high competitive intensity in the Indian formulations market.

The ceiling price will be calculated in the following order based on:

(a) Other strengths or dosage forms which are under the purview of the policy

(b) Other formulations which fall in the same sub-therapeutic category

(c) Other formulations which fall in the same therapeutic category

The order has provided a formula for calculating the price to retailer for the scheduled formulation under the options which have been mentioned above.

P(s) = Pm * [1-(Pi1+Pi2+…) / (N*100)] Pm = Price of highest priced formulation taken for calculating the average price to retailer of the formulation under consideration.

Pi = % reduction in average price to retailer of other strengths/dosage form/other scheduled formulations in same sub-therapeutic category/other scheduled formulations in the same therapeutic category as that of the scheduled formulation under consideration with regard to the highest priced formulation taken for calculating the average price to retailer.

N = Number of such formulations in other strengths/dosage forms/sub-therapeutic category/therapeutic category.

The ceiling price will be calculated including the retailer margin of 16%.

Ceiling prices to be based on May 2012 MAT data

The market based data for fixing the ceiling prices will be based on Moving Average Total (MAT) for 12 months up to May 2012. The market data will be initially sourced from IMS health and may be validated by the Government if deemed necessary.

The Government may also evaluate other appropriate mechanism to collect market data in due course. The NGOs had also raised this issue in the Supreme Court on the use of data from private agencies (who are interested parties) for fixing the drug prices.

The market data for fixing the price of ‘new drugs’/revised ceiling prices on account of change to NLEM will be based on the month ending immediately before 6 months of the notification.

Amendments to NLEM

The changes to NLEM will be proposed by the Ministry of Health and Family Welfare on an ongoing basis. The Government will then decide on the proposal within 60 days of the communication from the ministry. The drugs which are omitted from NLEM will be classified as non-scheduled formulations.

62 KOTAK INSTITUTIONAL EQUITIES RESEARCH Pharmaceuticals India

Exhibit 2: NPPP-2012 versus DPCO-1995

DPCO-1995 NPPP-2012 Based on market share criteria - individual Based on essentiality criteria - drugs as listed under the Drug coverage company turnover and market share. NLEM-2011. Basis of price control Cost based pricing Market based pricing Based on cost of production and allowance for Based on simple average price of all brands with at least Ceiling price formula post production expense 1% of the total market turnover of that medicine Control of Bulk drugs Formulations 74 bulk drugs and the formulations of these bulk 348 medicines and their standard strengths and drugs (1,577) dosages Coverage (%) 15-20 30 Price increase for Base on increase in input cost and other Annual increase as per WPI index. covered drugs inflationary factors. Price increase for non- For market leaders (one of top 3 brands or >20% Up to 10% price increase per annum. price control drugs market share) - a 10% price increase is allowed.

Source: DOP, Kotak Institutional Equities

Exhibit 3: Increase in WPI, March fiscal year-ends, 2006-12 (%)

(%) 12 10.4 9.7 10 7.7 7.7 8 6.7

6 4.2 4 1.6 2

0

2006 2007 2008 2009 2010 2011 2012

Source: Bloomberg, Kotak Institutional Equities

KOTAK INSTITUTIONAL EQUITIES RESEARCH 63

KOTAK INSTITUTIONAL EQUITIES RESEARCH March 2013: Results calendar India Daily2013India Summary-May17, Mon Tue Wed Thu Fri Sat 13-May 14-May 15-May 16-May 17-May 18-May Amara Raja Batteries Dr Reddys Lab Adani Ports Bajaj Auto ITC Career Point Amtek Auto Elder Pharma Bajaj Finance Bajaj Holdings Dhanlaksmi Bank DB Realty Bank of Baroda HT Media Bajaj Finserv DB Corp Motherson Sumi Emkay Global Bank of India Muthoot Finance Care Es s ar Shipping NIIT Tec h Eic her Motor s Pf iz er GV K Pow er Reliance Capital SunTV Netw ork Hindustan Media Reliance Infra IRB Infra Satyam Computers Nestle India United Bank of India J&K Bank TTK Prestige Reliance Pow er Karnataka Bank TV18 Broadcast OnMobile Global United Spirits

20-May 21-May 22-May 23-May 24-May 25-May Adani Enterprises Prestige Estates L&T BHEL Britannia Industries Container Corp Apollo Hospitals Tech Mahindra ZEE Entertainment DishTV Crompton Greaves Bharat Forge Divi's Laboratories Hindustan Copper Jet Airw ays IFCI Indraprastha Gas Oil India Shriram City Union State Bank of India Tata Steel 27-May 28-May 29-May 30-May 31-May 1-Jun Balaji Telef ilms CESC BPCL GMR Inf ra GSPL Colgate Palmolive Mphasis Indian Oil Corp. National Aluminium Dishman Pharma NMDC IPCA Lab Tata Chemicals Engineers India ONGC Mahindra & Mahindra Wockhardt GAIL India SAIL Godrej Indsutries Tata Pow er Hav ells Hindalco

HPCL India Daily Summary - May 1 NHPC Rural Electrif ication Sun Pharma Tata Global Beverages

Source: BSE, NSE, Kotak Institutional Equities 64

65 65

Kotak Institutional Equities: Valuation summary of KIE Universe stocks

O/S Target ADVT- 16-May-13 Mkt cap. shares EPS (Rs) EPS growth (%) PER (X) EV/EBITDA (X) Price/BV (X) Dividend yield (%) RoE (%) price Upside 3mo Company Price (Rs) Rating (Rs mn) (US$ mn) (mn) 2013E 2014E 2015E 2013E 2014E 2015E 2013E 2014E 2015E 2013E 2014E 2015E 2013E 2014E 2015E 2013E2015E 2014E 2013E 2014E 2015E (Rs) (%) (US$ mn) Automobiles Amara Raja Batteries 248 SELL 42,421 774 171 16.8 17.1 17.8 33.3 1.8 4.1 14.8 14.5 14.0 8.3 8.7 7.8 4.0 3.3 2.8 1.0 1.4 1.4 30.4 24.9 21.7 240 (3.4) 1.4 Apollo Tyres 92 BUY 46,427 847 504 12.3 13.9 14.5 51.6 13.1 4.3 7.5 6.6 6.3 4.7 4.3 4.3 1.2 1.0 0.9 0.8 0.9 0.9 19.9 18.8 16.6 110 19.4 3.2 Ashok Leyland 23 ADD 62,393 1,138 2,661 0.5 0.9 2.6 (74.5) 60.7 196.7 43.3 26.9 9.1 12.2 10.3 6.6 1.3 1.2 1.2 2.6 2.2 5.0 12.6 6.4 18.0 24 2.3 1.9 Bajaj Auto 1,807 REDUCE 522,801 9,535 289 105.1 123.7 140.2 1.3 17.7 13.3 17.2 14.6 12.9 13.0 11.1 10.0 6.5 5.3 4.3 2.5 2.7 3.1 43.1 39.9 36.9 1,900 5.2 14.8 Bharat Forge 233 REDUCE 55,338 1,009 237 10.9 14.0 19.3 (37.4) 28.4 38.1 21.4 16.7 12.1 9.8 8.6 6.8 2.1 1.9 1.6 0.4 0.4 0.4 13.0 10.5 12.5 200 (14.2) 1.3 Exide Industries 142 SELL 120,785 2,203 850 6.2 7.3 8.6 13.4 18.9 17.0 23.1 19.4 16.6 15.2 13.2 11.5 3.5 3.1 2.8 1.0 1.3 1.5 16.1 17.1 17.7 120 (15.6) 3.2 Hero Motocorp 1,694 ADD 338,282 6,170 200 106.1 117.1 146.9 (10.9) 10.4 25.5 16.0 14.5 11.5 12.1 9.8 7.4 6.6 5.1 4.0 1.9 2.1 3.0 44.0 39.6 39.0 1,900 12.2 10.1 Mahindra & Mahindra 985 ADD 605,036 11,035 614 49.6 49.9 58.7 9.9 0.6 17.7 19.9 19.8 16.8 14.3 14.1 11.8 4.1 3.6 3.2 1.5 1.5 1.8 23.1 20.2 20.7 950 (3.6) 23.5 Maruti Suzuki 1,728 SELL 522,055 9,521 302 79.2 101.7 118.4 39.9 28.5 16.4 21.8 17.0 14.6 14.4 10.2 8.3 2.7 2.4 2.1 0.5 0.6 0.7 13.3 14.6 14.9 1,480 (14.4) 19.7 Motherson Sumi Systems 212 BUY 124,862 2,277 588 8.1 16.2 21.5 82.9 100.8 32.4 26.3 13.1 9.9 10.5 5.9 4.6 5.7 4.0 2.9 1.1 1.9 2.5 31.2 33.9 33.6 240 13.0 2.0 Tata Motors 304 BUY 977,099 17,821 3,218 28.9 41.4 49.2 (35.2) 43.5 18.8 10.5 7.3 6.2 5.5 4.4 3.9 2.3 1.8 1.4 1.6 0.8 1.3 24.8 27.8 25.8 335 10.3 48.8 Automobiles Neutral 3,417,499 62,329 (12.1) 22.5 19.9 14.7 12.0 10.0 8.7 7.0 6.0 3.2 2.6 2.2 1.5 1.4 1.8 21.7 21.9 21.7 Banks/Financial Institutions Andhra Bank 92 ADD 51,649 942 560 23.0 22.0 23.6 (4.1) (4.3) 7.0 4.0 4.2 3.9 — — — 0.8 0.7 0.6 5.4 5.2 5.5 16.2 13.9 13.4 110 19.2 2.3 Axis Bank 1,531 ADD 716,385 13,066 468 110.7 113.4 123.5 7.8 2.4 8.9 13.8 13.5 12.4 — — — 2.2 1.9 1.8 1.2 1.2 1.3 18.5 15.0 14.5 1,540 0.6 46.5 Bajaj Finserv 723 ADD 114,988 2,097 159 99.0 79.0 90.0 4.4 (20.2) 13.8 7.3 9.1 8.0 — — — 1.5 1.3 1.1 1.9 1.9 1.9 24.6 15.1 15.0 810 12.1 1.3 Bank of Baroda 728 REDUCE 300,151 5,474 412 109.3 115.5 119.2 (10.0) 5.7 3.2 6.7 6.3 6.1 — — — 1.1 0.9 0.8 3.0 3.1 3.2 15.7 14.5 13.5 740 1.7 11.7 Bank of India 322 ADD 191,939 3,501 597 46.1 55.4 58.3 (1.1) 20.2 5.1 7.0 5.8 5.5 — — — 1.0 0.9 0.9 3.1 3.7 3.9 12.9 13.7 13.1 365 13.5 5.9 Canara Bank 434 REDUCE 192,373 3,509 443 64.8 69.8 79.4 (12.5) 7.7 13.8 6.7 6.2 5.5 — — — 1.0 0.9 0.8 3.0 2.8 2.8 12.1 11.9 12.2 415 (4.4) 7.8 Corporation Bank 416 BUY 63,588 1,160 153 93.8 102.3 108.7 (7.7) 9.0 6.3 4.4 4.1 3.8 — — — 0.7 0.7 0.6 4.8 5.2 5.6 16.1 15.4 14.6 480 15.4 0.9 Federal Bank 480 ADD 82,169 1,499 171 49.0 49.4 58.0 7.9 0.7 17.5 9.8 9.7 8.3 — — — 1.4 1.2 1.1 1.9 1.9 2.2 13.9 12.6 13.4 530 10.3 4.2 HDFC 908 SELL 1,391,337 25,375 1,532 31.4 37.1 43.3 12.3 18.3 16.8 29.0 24.5 21.0 — — — 5.6 5.0 4.4 1.4 1.6 1.9 22.0 21.6 22.4 760 (16.3) 41.4 HDFC Bank 723 REDUCE 1,719,830 31,367 2,379 28.3 35.0 43.7 28.4 23.7 25.1 25.6 20.7 16.5 — — — 4.8 4.1 3.4 0.8 0.9 1.2 20.3 21.1 22.3 650 (10.1) 40.7 ICICI Bank 1,208 BUY 1,398,382 25,504 1,158 71.9 74.0 78.4 28.2 2.9 6.0 16.8 16.3 15.4 — — — 2.1 2.0 1.8 1.7 1.8 1.9 13.1 12.3 12.1 1,290 6.8 74.2 IDFC 163 BUY 247,044 4,506 1,512 12.1 14.0 16.3 18.1 15.1 16.4 13.5 11.7 10.0 — — — 1.8 1.6 1.4 1.4 1.7 1.9 14.2 14.6 15.2 180 10.2 19.1 India Infoline 70 ADD 21,416 391 304 9.2 10.9 13.1 102.9 17.7 20.3 7.6 6.5 5.4 — — — 1.1 0.9 0.8 4.3 2.6 3.2 15.1 16.4 16.2 75 6.5 0.3 Indian Bank 158 BUY 67,861 1,238 430 35.8 35.4 37.3 (9.5) (1.1) 5.4 4.4 4.5 4.2 — — — 0.8 0.7 0.6 4.2 4.0 4.2 15.4 13.6 13.0 230 45.7 0.8 Indian Overseas Bank 64 REDUCE 59,142 1,079 924 6.1 16.5 19.4 (53.3) 169.0 17.2 10.4 3.9 3.3 — — — 0.6 0.5 0.5 3.1 6.0 7.1 4.5 10.9 11.7 65 1.6 1.6 IndusInd Bank 525 ADD 274,271 5,002 523 20.3 23.6 27.2 18.3 16.2 15.3 25.8 22.2 19.3 — — — 3.7 3.3 2.9 0.6 0.7 0.8 18.0 15.6 15.8 490 (6.6) 15.5 J&K Bank 1,317 REDUCE 63,873 1,165 48 217.6 199.3 187.5 31.4 (8.4) (5.9) 6.1 6.6 7.0 — — — 1.3 1.2 1.1 3.8 3.5 3.3 23.6 18.5 15.4 1,320 0.2 1.1 LIC Housing Finance 263 NR 145,093 2,646 551 20.3 22.1 26.7 11.9 8.9 21.1 13.0 11.9 9.9 — — — 2.3 1.7 1.5 1.4 1.7 2.0 16.8 16.1 16.1 — — 12.7 L&T Finance Holdings 84 SELL 143,525 2,618 1,715 4.3 4.7 5.3 60.3 10.1 12.8 19.7 17.9 15.8 — — — 2.6 2.2 2.0 — — — 14.1 13.4 13.2 60 (28.3) 3.3

Mahindra & Mahindra Financial 248 REDUCE 141,093 2,573 568 15.5 18.9 21.8 28.6 21.6 15.2 16.0 13.1 11.4 — — — 3.2 2.8 2.4 1.5 1.8 2.1 23.8 22.2 21.8 220 (11.4) 5.9 2013India DailySummary-May17, Oriental Bank of Commerce 265 REDUCE 77,360 1,411 292 45.5 53.7 56.7 16.3 17.9 5.6 5.8 4.9 4.7 — — — 0.8 0.7 0.6 3.5 4.1 4.3 10.7 11.7 11.4 280 5.6 4.7 PFC 204 ADD 268,945 4,905 1,319 32.2 35.0 39.8 40.1 8.5 13.8 6.3 5.8 5.1 — — — 1.2 1.2 1.0 4.1 4.5 5.1 19.2 18.3 18.3 240 17.7 8.6 Punjab National Bank 817 REDUCE 288,767 5,267 353 134.3 132.8 147.0 (6.7) (1.1) 10.7 6.1 6.2 5.6 — — — 1.1 0.8 0.8 3.3 3.3 3.6 16.7 14.5 14.4 830 1.6 11.5 Reliance Capital 374 ADD 92,052 1,679 246 26.9 23.4 28.5 27.5 (13.0) 21.7 13.9 16.0 13.1 — — — 0.8 0.8 0.7 2.2 1.9 2.3 5.9 4.9 5.8 500 33.7 37.8 Rural Electrification Corp. 238 REDUCE 235,098 4,288 987 38.2 41.6 45.9 33.7 9.0 10.2 6.2 5.7 5.2 — — — 1.4 1.4 1.2 3.6 3.9 4.3 23.4 21.6 20.4 255 7.1 8.7 Shriram Transport 786 ADD 175,299 3,197 223 61.0 73.1 84.9 8.2 20.0 16.0 12.9 10.7 9.3 — — — 2.5 2.0 1.8 1.6 0.1 2.2 20.6 20.4 19.9 775 (1.3) 19.8 State Bank of India 2,419 ADD 1,654,907 30,183 684 208.8 214.1 232.5 19.7 2.5 8.6 11.6 11.3 10.4 — — — 2.3 2.0 1.8 1.7 1.8 1.9 15.7 14.1 13.8 2,420 0.0 92.6 Union Bank 244 ADD 145,527 2,654 597 36.0 36.4 37.4 11.5 1.3 2.6 6.8 6.7 6.5 — — — 1.1 0.9 0.8 3.3 3.3 3.4 15.0 13.1 12.3 285 16.9 7.3 Yes Bank 543 REDUCE 194,567 3,549 359 36.3 36.9 41.0 31.0 1.8 11.1 15.0 14.7 13.2 — — — 3.4 2.8 2.4 1.1 1.1 1.3 24.8 20.9 19.7 450 (17.1) 20.6 Banks/Financial Institutions Cautious 10,642,488 194,100 15.5 8.3 11.5 12.5 11.5 10.3 ——— 2.1 1.9 1.6 1.7 1.9 2.1 16.8 16.1 15.9 KOTAK INSTITUTIONAL EQUITIES RESEARCH Cement ACC 1,250 REDUCE 234,935 4,285 188 73.7 68.1 79.6 29.1 (7.7) 16.9 17.0 18.4 15.7 10.5 10.4 8.4 3.0 2.7 2.4 2.8 1.9 1.9 19.5 16.4 17.1 1,170 (6.4) 8.1 Ambuja Cements 187 REDUCE 284,075 5,181 1,522 10.3 10.1 12.3 32.8 (2.3) 21.3 18.0 18.5 15.2 10.2 10.1 8.8 3.0 2.8 2.6 1.5 1.5 2.3 17.8 16.1 17.7 175 (6.2) 7.8 Grasim Industries 3,087 ADD 283,181 5,165 92 272.6 312.6 354.8 (5.6) 14.7 13.5 11.3 9.9 8.7 6.2 5.3 4.0 1.5 1.3 1.1 0.8 1.1 1.1 13.7 13.9 14.0 3,500 13.4 4.3 India Cements 89 ADD 27,370 499 307 7.0 11.7 11.5 (22.4) 68.6 (1.6) 12.8 7.6 7.7 5.3 4.0 3.7 0.6 0.6 0.5 3.6 3.6 3.6 5.3 8.3 7.7 95 6.6 1.5 Shree Cement 4,795 SELL 167,046 3,047 35 281.2 303.0 336.2 76.1 7.7 11.0 17.1 15.8 14.3 10.2 8.1 7.0 4.9 3.9 3.2 0.4 0.4 0.4 32.2 27.3 24.4 3,700 (22.8) 1.5 UltraTech Cement 2,003 SELL 549,128 10,015 274 101.3 114.2 136.3 13.4 12.8 19.4 19.8 17.5 14.7 12.0 9.8 7.5 3.2 2.7 2.3 0.5 0.5 0.5 18.9 18.8 18.8 1,700 (15.1) 8.4 Cement Cautious 1,545,734 28,191 15.2 8.5 16.1 16.4 15.1 13.0 9.1 7.9 6.3 2.5 2.2 1.9 1.1 1.0 1.2 15.3 14.6 14.9

Source: Company, Bloomberg, Kotak Institutional Equities estimates

KOTAK INSTITUTIONAL EQUITIES RESEARCH Kotak Institutional Equities: Valuation summary of KIE Universe stocks India Daily2013India Summary-May17,

O/S Target ADVT- 16-May-13 Mkt cap. shares EPS (Rs) EPS growth (%) PER (X) EV/EBITDA (X) Price/BV (X) Dividend yield (%) RoE (%) price Upside 3mo Company Price (Rs) Rating (Rs mn) (US$ mn) (mn) 2013E 2014E 2015E 2013E 2014E 2015E 2013E 2014E 2015E 2013E 2014E 2015E 2013E 2014E 2015E 2013E 2014E 2015E 2013E 2014E 2015E (Rs) (%) (US$ mn) Consumer products Asian Paints 4,862 SELL 466,315 8,505 96 116.1 137.4 163.2 12.7 18.3 18.7 41.9 35.4 29.8 26.6 21.9 18.5 13.2 10.9 9.1 0.9 1.2 1.5 37.8 36.8 36.6 3,850 (20.8) 10.3 Bajaj Corp. 266 BUY 39,191 715 148 11.3 13.7 16.0 39.4 20.3 17.0 23.4 19.5 16.6 21.7 17.1 13.8 8.1 7.2 6.4 — — — — — — 280 5.4 0.2 Colgate-Palmolive (India) 1,542 SELL 209,708 3,825 136 37.7 44.3 50.8 14.7 17.6 14.6 40.9 34.8 30.4 34.2 29.0 24.5 39.7 34.8 30.5 1.7 2.2 2.5 106.3 106.6 107.2 1,150 (25.4) 2.8 Dabur India 158 ADD 276,163 5,037 1,743 4.4 5.4 6.4 19.1 23.3 17.8 36.2 29.3 24.9 28.3 22.7 19.0 13.0 10.5 8.5 0.9 1.4 1.6 40.0 39.8 37.9 160 1.0 3.3 GlaxoSmithkline Consumer 4,794 SELL 201,620 3,677 42 103.8 124.9 149.0 20.7 20.2 19.3 46.2 38.4 32.2 40.2 33.9 28.3 14.8 12.6 10.8 0.9 1.2 1.5 34.9 35.4 36.1 3,500 (27.0) 1.2 Godrej Consumer Products 884 REDUCE 300,757 5,485 340 19.6 26.8 32.4 26.7 36.5 21.2 45.1 33.0 27.3 32.3 23.6 18.6 8.5 7.0 5.7 0.6 0.6 0.7 21.8 24.9 24.9 795 (10.0) 3.1 Hindustan Unilever 583 REDUCE 1,260,197 22,984 2,163 14.7 15.8 17.3 23.9 6.9 9.6 39.5 37.0 33.7 36.6 31.3 26.9 40.2 36.7 30.2 3.2 1.8 2.0 103.1 111.7 98.3 550 (5.6) 27.3

ITC 337 ADD 2,648,876 48,311 7,860 9.4 10.6 12.6 19.4 13.5 19.0 36.0 31.7 26.6 25.0 21.5 17.9 12.6 11.3 10.2 1.7 2.0 2.4 37.0 37.6 40.4 320 (5.0) 41.9 Jubilant Foodworks 1,082 SELL 71,710 1,308 66 19.9 25.0 34.0 21.7 25.4 35.8 54.3 43.3 31.9 29.5 22.9 16.6 16.7 12.6 9.7 ——————900 (16.9) 9.6 Jyothy Laboratories 175 ADD 28,687 523 164 3.9 7.2 9.9 40.7 86.0 37.0 45.1 24.2 17.7 23.7 16.2 12.8 4.3 3.6 3.0 — — — 9.9 16.2 18.7 195 11.2 0.3 Marico 219 REDUCE 141,247 2,576 645 5.6 6.7 7.9 8.1 19.5 17.3 39.0 32.6 27.8 23.4 20.3 17.5 7.0 6.0 5.2 0.5 0.6 0.9 23.2 20.2 20.4 210 (4.2) 0.9 Nestle India 4,927 SELL 475,076 8,665 96 110.8 126.6 142.7 5.9 14.3 12.8 44.5 38.9 34.5 26.3 22.0 19.5 26.4 20.1 16.0 1.0 1.2 1.4 71.6 60.3 52.9 4,050 (17.8) 3.7 Speciality Restaurants 179 ADD 8,380 153 47 5.4 8.1 9.7 11.1 48.0 20.0 32.8 22.2 18.5 21.2 14.0 10.7 5.5 4.4 3.6 — — — 12.3 11.8 12.5 190 6.4 0.2 Tata Global Beverages 143 BUY 88,586 1,616 618 6.3 7.6 8.1 16.9 20.1 6.6 22.7 18.9 17.7 13.3 11.1 9.6 1.5 1.4 1.3 1.5 1.8 1.9 8.3 9.5 9.5 165 15.2 7.3 Titan Industries 281 ADD 249,157 4,544 888 8.2 9.3 11.1 20.9 13.4 20.1 34.3 30.3 25.2 23.5 20.2 16.5 12.7 10.0 7.9 0.8 1.0 1.2 42.3 36.8 34.9 295 5.1 16.5 United Breweries 764 SELL 202,032 3,685 264 8.7 12.9 17.8 81.1 48.1 38.6 88.0 59.4 42.9 39.0 27.3 20.9 13.8 11.7 9.7 0.2 0.3 0.5 15.7 20.6 23.9 700 (8.4) 7.4 United Spirits 2,318 ADD 336,804 6,143 145 36.8 64.8 80.9 133.6 75.8 24.9 62.9 35.8 28.7 25.9 20.4 17.3 4.1 3.7 3.3 0.3 0.2 0.3 7.3 11.0 12.3 2,380 2.7 65.3 Consumer products Cautious 7, 004,504 127,749 21.5 18.2 17.6 39.5 33.4 28.4 27.6 23.0 19.3 12.0 10.5 9.1 1.6 1.5 1.8 30.3 31.4 32.2 Constructions NCC 36 ADD 9,276 169 257 2.4 2.4 2.5 67.8 1.9 3.2 15.4 15.1 14.6 7.4 8.0 7.5 0.4 0.4 0.4 1.7 2.8 2.8 2.5 2.5 2.5 55 52.1 0.8 Punj Lloyd 54 REDUCE 18,423 336 340 (0.9) 1.2 4.2 (125.9) 236.3 257.6 (63.4) 46.5 13.0 6.7 6.3 5.7 0.7 0.6 0.6 (0.0) 0.2 0.7 (1.0) 1.4 4.9 45 (17.1) 5.1 Sadbhav Engineering 113 BUY 17,014 310 150 3.3 7.9 10.3 (64.8) 140.1 30.5 34.4 14.3 11.0 12.0 7.6 6.3 2.1 1.8 1.6 0.5 0.5 0.5 6.0 12.7 14.4 180 59.0 0.2 Construction Cautious 44,713 815 (72.0) 172.3 63.8 55.4 20.3 12.4 7.4 6.9 6.2 0.7 0.7 0.7 0.5 0.9 1.1 1.3 3.5 5.5 Energy Aban Offshore 321 RS 13,987 255 44 43.2 79.4 84.6 (36.7) 83.6 6.7 7.4 4.1 3.8 7.4 6.5 6.3 0.5 0.4 0.4 1.4 1.6 1.6 8.9 12.9 12.0 — — 2.1 Bharat Petroleum 422 BUY 305,067 5,564 723 38.8 21.8 24.6 111.4 (43.8) 12.6 10.9 19.4 17.2 6.8 10.0 9.0 1.7 1.6 1.5 2.8 1.6 1.8 15.4 8.0 8.5 465 10.2 7.6 Cairn india 297 BUY 567,532 10,351 1,910 63.1 56.9 48.2 51.7 (9.9) (15.3) 4.7 5.2 6.2 3.8 3.8 4.2 1.2 1.1 1.0 3.9 3.7 3.7 25.4 22.1 16.8 340 14.4 15.7 Castrol India 331 SELL 163,848 2,988 495 9.0 10.0 10.8 (4.4) 10.8 7.8 36.6 33.0 30.7 25.4 22.2 20.4 28.0 26.6 24.9 2.1 2.4 2.6 79.0 82.6 83.8 220 (33.6) 0.9 GAIL (India) 338 ADD 429,000 7,824 1,268 31.0 29.0 32.5 7.7 (6.6) 12.1 10.9 11.7 10.4 7.3 7.1 6.2 1.6 1.5 1.3 2.7 2.7 3.0 15.0 12.5 12.6 380 12.4 6.4 GSPL 62 ADD 34,971 638 563 8.8 8.3 8.1 (5.1) (6.2) (2.9) 7.0 7.5 7.7 4.1 4.0 3.9 1.1 0.9 0.8 1.6 1.6 2.6 16.4 13.3 11.5 83 33.5 0.9 Hindustan Petroleum 317 REDUCE 107,483 1,960 339 5.2 20.7 23.5 (80.5) 295.5 13.2 60.5 15.3 13.5 11.7 9.1 7.7 0.7 0.6 0.6 0.5 2.0 2.3 1.0 4.0 4.4 340 7.2 4.9 Indian Oil Corporation 311 ADD 756,185 13,791 2,428 16.5 24.9 26.7 (49.6) 50.5 7.2 18.8 12.5 11.7 9.3 7.6 6.2 1.2 1.1 1.1 1.3 2.4 2.6 6.2 8.8 8.9 345 10.8 3.5 Oil India 599 BUY 359,894 6,564 601 56.5 62.5 67.5 (1.5) 10.7 7.9 10.6 9.6 8.9 4.7 3.6 3.0 1.7 1.5 1.4 3.5 3.8 4.3 15.0 15.1 14.8 700 16.9 4.4 Oil & Natural Gas Corporation 338 BUY 2,890,910 52,725 8,556 29.4 33.0 36.5 (10.5) 12.2 10.6 11.5 10.2 9.3 4.8 4.1 3.4 1.5 1.4 1.3 3.0 3.3 3.7 13.3 13.5 13.5 375 11.0 22.3 Petronet LNG 144 BUY 107,663 1,964 750 15.3 12.8 14.6 8.7 (16.5) 14.0 9.4 11.2 9.8 6.4 7.5 5.9 2.2 1.9 1.6 1.7 1.7 2.1 25.6 17.5 16.8 175 21.9 2.7 Reliance Industries 841 REDUCE 2,468,148 45,015 2,936 65.1 63.7 68.8 6.2 (2.1) 8.1 12.9 13.2 12.2 8.2 8.3 7.4 1.3 1.2 1.1 1.1 1.1 1.2 11.3 10.2 10.1 840 (0.1) 53.5 Energy Attractive 8, 204,689 149,639 (1.4) 4.0 6.0 11.0 10.6 10.0 6.4 5.9 5.1 1.4 1.3 1.2 2.2 2.4 2.7 12.8 12.1 11.8 Industrials ABB 545 SELL 115,543 2,107 212 6.7 17.0 24.5 (23.6) 155.6 44.3 82.0 32.1 22.2 48.1 19.8 14.6 4.4 4.0 3.5 0.6 0.6 0.6 5.5 13.1 16.8 425 (22.1) 0.7 BGR Energy Systems 198 REDUCE 14,291 261 72 24.9 27.3 40.3 (19.7) 9.6 47.4 7.9 7.2 4.9 4.2 4.0 3.5 1.1 1.0 0.9 2.5 2.8 4.1 15.2 14.8 19.2 280 41.4 0.5 Bharat Electronics 1,298 REDUCE 103,812 1,893 80 110.7 125.7 138.7 4.1 13.5 10.4 11.7 10.3 9.4 5.5 4.0 3.1 1.6 1.4 1.3 2.3 2.3 2.3 14.3 14.6 14.5 1,300 0.2 0.4 Bharat Heavy Electricals 194 SELL 474,100 8,647 2,448 26.6 19.1 16.4 (7.6) (28.2) (14.2) 7.3 10.2 11.8 5.1 5.7 6.2 1.6 1.4 1.3 2.9 2.1 1.8 23.4 14.6 11.4 175 (9.7) 11.1 Crompton Greaves 97 ADD 62,290 1,136 642 1.9 8.4 10.9 (67.3) 347.9 30.1 51.8 11.6 8.9 13.7 6.8 5.4 1.7 1.5 1.3 1.3 1.5 1.7 3.3 13.9 16.1 130 33.9 2.8 Cummins India 499 REDUCE 138,254 2,521 277 28.5 26.9 29.6 29.1 (5.3) 10.0 17.5 18.5 16.8 17.2 16.1 14.2 5.8 5.2 4.6 2.9 2.7 2.9 34.5 28.1 27.6 520 4.3 2.3 Kalpataru Power Transmission 80 BUY 12,261 224 153 11.6 14.5 17.1 (12.6) 24.8 17.7 6.9 5.5 4.7 4.6 4.2 3.6 0.6 0.6 0.5 1.9 1.9 1.9 8.7 9.9 10.6 120 50.2 0.1 KEC International 46 BUY 11,878 217 257 2.5 6.5 9.3 (63.1) 154.7 44.4 18.2 7.2 5.0 7.1 5.4 4.4 1.0 0.9 0.8 0.8 2.1 3.0 5.5 13.0 16.6 70 51.5 0.3 Larsen & Toubro 1,593 ADD 975,400 17,790 612 80.7 80.3 97.4 6.6 (0.4) 21.2 19.7 19.8 16.4 15.1 13.6 12.2 2.6 2.3 2.0 0.9 0.9 0.9 14.4 12.4 13.1 1,625 2.0 45.6 Maharashtra Seamless 232 BUY 16,377 299 71 33.9 39.1 41.2 (22.6) 15.3 5.4 6.8 5.9 5.6 3.4 2.7 2.9 0.6 0.5 0.5 2.9 3.4 3.5 8.3 9.2 9.5 400 72.3 0.3 Siemens 570 SELL 200,552 3,658 352 10.0 18.6 23.2 (27.4) 86.6 24.8 57.2 30.7 24.6 24.0 14.4 11.9 5.1 4.7 4.3 0.9 1.0 1.0 8.8 15.9 18.3 425 (25.4) 3.8 India Daily Summary - May 1 Suzlon Energy 14 RS 25,150 459 1,777 (3.7) (0.4) 1.9 6.0 88.1 533.8 (3.8) (31.9) 7.4 7.8 6.3 5.5 0.6 0.6 0.6 1.4 1.4 1.4 (13.7) (1.8) 8.0 — — 9.5 Thermax 610 REDUCE 72,717 1,326 119 26.7 31.4 38.3 (19.0) 17.6 22.2 22.9 19.5 15.9 15.1 12.3 9.7 4.0 3.5 3.0 1.4 1.5 1.7 18.3 19.1 20.4 550 (9.9) 0.6 Voltas 88 REDUCE 29,139 531 331 6.2 7.7 9.3 (34.4) 23.5 21.4 14.2 11.5 9.5 10.4 7.4 5.8 1.8 1.6 1.5 2.1 2.6 3.2 13.1 14.8 16.2 100 13.5 2.3 Industrials Cautious 2,235,387 40,769 (5.2) (0.0) 12.9 16.0 16.0 14.2 11.0 10.3 9.5 2.3 2.0 1.8 1.6 1.4 1.4 14.1 12.7 12.8

Source: Company, Bloomberg, Kotak Institutional Equities estimates 66

67 67

Kotak Institutional Equities: Valuation summary of KIE Universe stocks

O/S Target ADVT- 16-May-13 Mkt cap. shares EPS (Rs) EPS growth (%) PER (X) EV/EBITDA (X) Price/BV (X) Dividend yield (%) RoE (%) price Upside 3mo Company Price (Rs) Rating (Rs mn) (US$ mn) (mn) 2013E 2014E 2015E 2013E 2014E 2015E 2013E 2014E 2015E 2013E 2014E 2015E 2013E 2014E 2015E 2013E 2014E 2015E 2013E 2014E 2015E (Rs) (%) (US$ mn) Infrastructure Adani Port and SEZ 162 BUY 326,827 5,961 2,017 8.1 9.8 12.6 48.7 20.4 28.6 19.9 16.6 12.9 18.3 12.8 10.3 5.0 3.7 3.0 0.7 1.0 1.3 28.5 25.8 25.8 180 11.1 4.5 Container Corporation 1,149 ADD 149,409 2,725 130 74.2 82.6 94.2 9.9 11.3 14.0 15.5 13.9 12.2 11.3 10.0 8.4 2.4 2.1 1.9 1.5 1.7 1.9 16.2 16.0 16.2 1,150 0.0 2.7 GMR Infrastructure 23 RS 90,109 1,643 3,892 (1.9) (0.3) (0.3) (69.5) 86.9 (37.1) (12.0) (91.8) (67.0) 21.3 9.6 6.5 1.2 1.1 1.1 — — — (10.4) (1.5) (2.0) — — 3.4 Gujarat Pipavav Port 48 BUY 23,181 423 483 1.5 3.1 3.4 29.7 104.0 7.6 31.3 15.4 14.3 13.1 10.7 9.0 1.9 1.7 1.5 — — — 7.6 14.0 11.9 60 25.1 0.6 GVK Power & Infrastructure 9 RS 14,608 266 1,579 (1.1) 0.2 0.5 (385.3) 118.8 138.5 (8.3) 44.4 18.6 22.0 9.6 7.9 0.4 0.4 0.4 — — — (5.2) 1.0 2.3 — — 1.4 IRB Infrastructure 132 BUY 43,739 798 332 16.7 16.6 13.7 11.1 (0.8) (17.5) 7.9 7.9 9.6 6.8 5.8 5.9 1.0 0.9 0.8 — — — 15.1 11.8 8.8 170 29.2 4.4 Infrastructure Cautious 647,872 11,816 7.1 59.4 17.3 28.0 17.6 15.0 16.3 9.8 7.8 2.2 1.9 1.7 0.7 0.9 1.1 7.8 11.0 11.6 Media DB Corp 241 BUY 44,233 807 183 11.9 14.0 17.5 8.0 18.0 24.9 20.3 17.2 13.8 11.3 9.7 8.0 4.3 4.0 3.6 2.5 3.3 4.1 22.4 24.2 27.7 280 16.0 0.3 DishTV 66 BUY 69,666 1,271 1,064 (1.4) 0.6 1.8 (38.0) 140.2 226.8 (46.8) 116.5 35.6 13.5 10.5 8.2 (41.9) (65.5) (197) ——1.5 114.5 (43.9) (276) 80 22.1 3.8 Eros International 166 ADD 15,210 277 92 15.8 20.1 23.5 (4.0) 27.2 16.5 10.5 8.2 7.1 7.1 5.7 4.9 1.5 1.3 1.1 — — — 15.9 17.0 16.6 230 38.7 1.0 Hindustan Media Ventures 134 BUY 9,816 179 73 11.1 12.1 13.2 25.0 8.6 9.0 12.0 11.1 10.2 6.2 5.3 4.5 1.9 1.8 1.6 1.5 3.0 4.5 17.3 16.7 16.6 200 49.5 0.0 Jagran Prakashan 96 BUY 30,360 554 316 5.4 6.5 8.4 (4.5) 20.4 29.0 17.8 14.8 11.5 9.8 8.4 6.7 3.5 3.3 3.0 3.6 4.2 4.7 21.0 22.9 27.1 130 35.4 0.2 Sun TV Network 443 REDUCE 174,577 3,184 394 17.5 20.5 24.1 (0.3) 17.2 17.5 25.3 21.6 18.4 15.3 13.2 11.3 6.0 5.5 5.1 2.3 2.7 3.6 25.9 27.7 30.1 410 (7.4) 10.1 Zee Entertainment Enterprises 246 REDUCE 233,273 4,254 950 7.3 8.9 10.4 20.6 22.0 17.4 33.8 27.7 23.6 23.4 18.8 15.9 4.8 4.6 4.4 0.6 0.8 0.9 14.9 17.3 19.4 190 (22.6) 11.4 Media Neutral 600,596 10,954 4.8 31.9 24.5 29.8 22.6 18.2 14.7 12.1 10.0 4.8 4.4 4.1 1.4 1.8 2.5 16.0 19.4 22.4 Metals & Mining Coal India 299 BUY 1,886,066 34,398 6,316 25.9 28.9 33.3 11.4 11.4 15.4 11.5 10.3 9.0 6.2 5.0 3.6 3.5 2.9 2.4 2.6 2.9 3.3 34.2 30.6 29.0 404 35.3 13.7 Hindalco Industries 111 REDUCE 212,768 3,880 1,915 14.5 9.9 8.1 (18.1) (31.8) (18.4) 7.6 11.2 13.7 9.2 8.7 8.1 0.6 0.6 0.6 1.4 1.4 1.4 8.4 5.4 4.2 100 (10.0) 15.2 Hindustan Zinc 121 ADD 512,704 9,351 4,225 16.4 14.6 14.7 24.2 (11.1) 1.1 7.4 8.3 8.2 4.6 4.2 3.6 1.6 1.4 1.2 2.6 2.6 2.6 23.5 17.8 15.9 150 23.6 1.9 Jindal Steel and Power 308 ADD 288,246 5,257 935 31.1 34.4 38.3 (26.6) 10.4 11.5 9.9 9.0 8.0 7.9 8.6 7.2 1.4 1.2 1.0 0.6 0.6 0.6 14.9 14.2 13.9 385 24.9 17.2 JSW Steel 704 SELL 157,010 2,864 223 65.6 56.3 94.0 172.3 (14.1) 66.9 10.7 12.5 7.5 5.7 6.1 5.2 0.9 0.8 0.8 1.4 1.4 1.4 11.3 6.8 10.6 585 (16.9) 15.6 National Aluminium Co. 36 REDUCE 92,136 1,680 2,577 2.1 2.6 3.0 (38.1) 25.4 14.1 17.1 13.7 12.0 5.5 4.9 5.1 0.8 0.7 0.7 2.8 2.8 2.8 4.5 5.5 6.1 38 6.3 0.5 NMDC 125 BUY 493,803 9,006 3,965 17.0 16.8 17.5 (8.0) (1.1) 4.3 7.3 7.4 7.1 3.6 3.5 3.1 1.7 1.5 1.3 4.0 4.0 4.0 25.3 21.5 19.6 175 40.5 9.1 Sesa Goa 168 ADD 146,052 2,664 869 26.2 25.8 24.9 (15.4) (1.8) (3.5) 6.4 6.5 6.8 41.0 28.4 18.9 0.8 0.7 0.7 0.1 0.1 0.1 3.3 (0.3) 1.5 180 7.1 5.5 Sterlite Industries 98 ADD 330,742 6,032 3,361 18.4 14.9 15.5 16.6 (19.1) 4.5 5.4 6.6 6.3 4.0 4.1 3.8 0.6 0.6 0.6 2.3 2.3 2.3 12.7 9.4 9.1 110 11.8 9.9 Tata Steel 312 ADD 302,886 5,524 971 (1.8) 39.4 50.5 (110.2) 2,339.5 27.9 (177.0) 7.9 6.2 8.1 5.8 5.7 0.7 0.7 0.6 3.8 3.8 3.8 (0.4) 9.0 10.7 400 28.3 30.3 Metals & Mining Neutral 4,422,413 80,657 0.4 4.4 10.8 9.4 9.0 8.1 6.4 5.8 5.0 1.4 1.3 1.1 2.5 2.6 2.8 15.2 14.2 14.1 Pharmaceutical Apollo Hospitals 1,044 ADD 145,227 2,649 139 22.4 30.1 36.8 41.7 34.7 22.1 46.6 34.6 28.4 23.4 18.2 15.0 5.1 4.6 4.1 0.6 0.7 0.9 11.6 14.0 15.5 870 (16.7) 4.9 Biocon 288 ADD 57,680 1,052 200 25.4 19.3 22.6 48.7 (24.2) 17.3 11.3 15.0 12.8 10.0 8.2 7.4 2.1 2.0 1.8 2.6 2.1 2.4 20.5 13.7 14.7 295 2.3 2.0 Cipla 422 ADD 338,913 6,181 803 19.7 20.0 23.3 40.8 1.6 16.3 21.4 21.1 18.1 15.0 13.5 11.3 3.8 3.3 2.9 0.7 0.7 0.8 17.0 16.7 16.9 440 4.2 10.0 Cadila Healthcare 832 ADD 170,342 3,107 205 25.4 41.8 53.3 (20.2) 64.4 27.4 32.7 19.9 15.6 20.3 13.7 11.0 5.8 4.8 3.9 0.8 1.3 1.6 18.9 26.3 27.7 840 1.0 1.2 Divi's Laboratories 1,129 REDUCE 149,848 2,733 133 50.6 58.6 70.5 25.9 15.8 20.2 22.3 19.3 16.0 17.1 13.7 11.3 5.9 4.9 4.1 1.4 1.7 2.0 28.7 27.8 28.0 1,140 0.9 2.8 Dr Reddy's Laboratories 2,119 BUY 359,798 6,562 170 96.3 111.8 125.6 14.6 16.0 12.4 22.0 19.0 16.9 14.9 12.6 11.2 5.0 4.1 3.4 0.7 0.8 0.9 24.1 22.5 21.9 2,230 5.2 12.2 GlaxoSmithkline Pharmaceuticals 2,271 SELL 192,491 3,511 85 81.4 84.5 97.5 9.7 3.8 15.5 27.9 26.9 23.3 21.2 20.3 16.9 9.6 8.8 8.0 2.2 2.4 2.6 28.5 34.2 36.0 1,920 (15.5) 1.2 India Daily Summary - May 17, 2013India DailySummary-May17, Glenmark Pharmaceuticals 577 REDUCE 156,235 2,849 271 22.7 27.7 32.3 3.8 22.0 16.6 25.4 20.8 17.9 18.0 14.3 12.3 5.6 4.6 3.7 0.3 0.6 0.7 23.8 24.3 23.1 520 (9.9) 5.6 Lupin 807 ADD 360,684 6,578 447 29.4 32.4 37.4 51.0 10.3 15.4 27.4 24.9 21.6 16.4 14.7 12.7 6.9 5.6 4.6 0.5 0.7 0.8 28.5 25.1 23.8 760 (5.8) 10.7 Ranbaxy Laboratories 475 REDUCE 200,926 3,665 423 21.8 16.5 28.6 217.7 (24.4) 73.0 21.8 28.8 16.6 11.8 19.6 10.4 4.9 3.6 2.3 — — — 26.5 12.8 14.8 430 (9.5) 8.3 Sun Pharmaceuticals 969 REDUCE 1,003,315 18,299 1,036 28.6 35.1 39.9 14.4 22.7 13.7 33.9 27.6 24.3 18.5 17.4 15.1 6.2 5.1 4.2 0.5 0.6 0.8 20.0 20.2 19.0 750 (22.6) 16.4 Pharmaceuticals Attractive 3, 135,457 57,185 43.4 12.3 19.2 26.7 23.8 19.9 16.8 15.3 12.6 5.4 4.5 3.7 0.7 0.8 1.0 20.4 19.1 18.7 Real Estate HDIL 59 NR 24,596 449 419 16.9 15.6 22.3 (13.5) (7.3) 42.5 3.5 3.8 2.6 5.7 6.1 4.4 0.2 0.2 0.2 — — — 6.6 5.8 7.7 — — 26.3 Oberoi Realty 248 ADD 81,320 1,483 328 14.5 28.9 42.1 9.2 99.4 45.4 17.1 8.6 5.9 12.1 6.0 3.8 2.0 1.6 1.3 0.8 0.8 0.8 12.1 20.6 24.0 307 23.9 0.3 Prestige Estates Projects 185 ADD 64,890 1,183 350 4.3 13.1 17.1 72.4 203.0 30.1 42.7 14.1 10.8 18.0 9.3 7.6 2.5 2.1 1.8 — — — 6.4 16.3 18.1 200 7.9 0.8 Sobha Developers 412 BUY 40,432 737 98 22.1 23.2 36.5 5.4 4.7 57.5 18.6 17.8 11.3 9.7 9.7 7.2 1.9 1.8 1.6 1.7 1.2 1.2 10.5 10.2 14.6 500 21.3 1.4 Real Estate Cautious 670,121 12,222 (6.3) 37.0 64.5 25.5 18.6 11.3 17.4 12.6 8.5 1.4 1.3 1.2 0.5 0.5 0.5 5.3 6.9 10.3 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 Daily2013India Summary-May17,

O/S Target ADVT- 16-May-13 Mkt cap. shares EPS (Rs) EPS growth (%) PER (X) EV/EBITDA (X) Price/BV (X) Dividend yield (%) RoE (%) price Upside 3mo Company Price (Rs) Rating (Rs mn) (US$ mn) (mn) 2013E 2014E 2015E 2013E 2014E 2015E 2013E 2014E 2015E 2013E 2014E 2015E 2013E 2014E 2015E 2013E 2014E 2015E 2013E 2014E 2015E (Rs) (%) (US$ mn) Technology HCL Technologies 739 REDUCE 525,358 9,582 711 53.9 55.9 59.7 55.8 3.9 6.6 13.7 13.2 12.4 8.8 8.2 7.4 3.9 3.1 2.7 1.1 1.4 1.6 31.7 26.1 23.4 650 (12.0) 25.5 Hexaware Technologies 78 REDUCE 22,911 418 293 11.2 10.2 10.1 22.8 (8.7) (1.1) 7.0 7.7 7.7 5.1 4.6 4.4 1.9 1.7 1.6 6.9 6.5 6.5 29.5 23.6 21.3 90 15.2 4.1 Infosys 2,333 REDUCE 1,332,848 24,309 571 164.9 163.1 178.8 13.3 (1.1) 9.6 14.1 14.3 13.0 9.6 9.1 7.9 3.5 3.1 2.7 2.0 2.4 2.6 27.2 22.9 21.9 2,450 5.0 70.5 Mahindra Satyam 109 REDUCE 128,713 2,347 1,176 11.0 11.2 11.9 8.4 1.2 6.9 9.9 9.8 9.2 6.0 5.5 4.6 3.2 2.6 2.1 — 2.0 2.2 37.6 29.6 25.7 120 9.6 6.6 Mindtree 836 ADD 34,678 632 41 81.7 87.6 96.7 53.2 7.2 10.5 10.2 9.5 8.6 6.9 6.3 5.3 2.6 2.1 1.8 1.4 1.6 1.7 30.2 24.8 22.6 900 7.7 1.0 Mphasis 449 SELL 94,530 1,724 211 37.6 35.8 35.3 (3.7) (4.7) (1.4) 11.9 12.5 12.7 8.9 9.0 8.6 2.1 2.0 1.9 3.8 4.0 3.9 19.1 16.5 15.2 350 (22.0) 0.8 Polaris Financial Technology 104 REDUCE 10,319 188 100 21.1 18.7 19.4 1.9 (11.4) 3.7 4.9 5.5 5.3 2.3 2.0 1.7 0.7 0.7 0.6 4.0 4.2 4.3 15.8 12.6 11.9 120 15.9 0.6

TCS 1,454 REDUCE 2,845,867 51,903 1,957 71.3 79.6 87.4 31.2 11.7 9.8 20.4 18.3 16.6 15.1 12.7 11.4 6.9 5.8 4.9 1.5 2.2 2.4 38.0 34.5 31.8 1,350 (7.2) 42.0 Tech Mahindra 942 REDUCE 120,143 2,191 128 105.1 106.3 103.8 31.2 1.1 (2.3) 9.0 8.9 9.1 9.5 9.0 9.1 2.5 2.2 2.0 0.6 0.8 1.1 31.2 27.1 23.4 1,025 8.8 8.8 Wipro 346 REDUCE 853,306 15,563 2,463 24.9 26.2 28.4 9.9 5.1 8.6 13.9 13.2 12.2 9.4 8.5 7.4 3.0 2.6 2.3 2.0 2.3 2.6 21.6 21.1 19.9 350 1.0 15.2 Technology Cautious 5,968,674 108,858 22.5 5.2 7.2 15.7 14.9 13.9 11.1 9.9 9.0 4.2 3.6 3.2 1.7 2.2 2.4 26.9 24.1 22.9 Telecom Bharti Airtel 322 ADD 1,220,928 22,268 3,798 6.0 11.9 17.5 (46.6) 99.1 46.4 53.7 27.0 18.4 7.8 6.7 5.5 2.4 2.2 2.1 0.3 0.4 1.1 4.5 8.7 11.7 350 8.9 32.5 Bharti Infratel 174 ADD 329,421 6,008 1,889 5.3 6.8 7.6 23.0 28.4 12.1 32.9 25.7 22.9 9.4 8.6 7.7 1.9 1.8 1.8 2.2 1.6 1.9 6.3 7.3 7.9 207 18.7 — IDEA 130 ADD 429,264 7,829 3,303 3.1 5.5 8.9 39.8 81.3 60.5 42.5 23.4 14.6 9.5 7.2 5.7 3.1 2.8 2.4 — — 0.5 7.5 12.4 17.4 142 9.3 9.0 Reliance Communications 114 SELL 235,193 4,289 2,064 3.3 9.3 8.6 (27.5) 186.7 (8.3) 35.0 12.2 13.3 9.4 6.9 6.7 0.8 0.8 0.7 — — — 0.4 6.5 5.6 65 (43.0) 43.9 Tata Communications 229 REDUCE 65,308 1,191 285 (27.0) (19.4) (12.9) 3.3 28.1 33.6 (8.5) (11.8) (17.8) 8.3 7.3 6.7 4.3 6.9 11.4 — — — (40.3) (44.7) (48.2) 220 (4.0) 0.9 Telecom Neutral 2,280,113 41,585 (37.9) 147.8 37.6 62.6 25.3 18.4 8.4 7.0 5.9 2.0 1.9 1.8 0.5 0.5 1.0 3.3 7.6 9.6 Utilities Adani Power 49 SELL 116,911 2,132 2,393 (9.0) (1.9) 4.5 (2,023.1) 79.2 341.0 (5.4) (26.0) 10.8 45.0 11.8 8.0 2.7 3.0 2.4 — — — (41.7) (11.0) 24.7 35 (28.4) 3.0 CESC 318 REDUCE 39,755 725 125 18.0 34.7 33.6 (17.2) 92.6 (3.1) 17.7 9.2 9.5 10.3 5.9 5.2 0.6 0.6 0.6 1.3 1.7 1.8 3.7 6.8 6.1 306 (3.8) 1.5 JSW Energy 67 SELL 109,470 1,997 1,640 6.7 7.5 6.0 232.1 12.3 (20.0) 9.9 8.9 11.1 7.2 5.9 6.2 1.8 1.5 1.3 — — — 18.5 18.1 12.5 61 (8.6) 1.5 Lanco Infratech 11 RS 24,231 442 2,223 (0.7) 1.0 7.7 (39.2) 233.2 696.7 (14.9) 11.2 1.4 10.2 6.8 3.6 0.5 0.5 0.4 — — — (3.6) 4.8 31.2 — — 2.0 NHPC 21 ADD 252,780 4,610 12,301 1.9 2.1 2.4 (25.2) 10.6 14.9 11.0 10.0 8.7 10.5 8.8 7.0 0.8 0.8 0.7 2.4 2.7 3.1 7.8 8.2 8.8 26 26.5 8.1 NTPC 156 ADD 1,290,003 23,527 8,245 13.0 13.3 14.2 20.8 2.3 6.3 12.0 11.7 11.0 10.6 9.2 8.6 1.6 1.5 1.4 4.3 2.6 2.7 14.0 13.1 12.8 175 11.9 20.4 Power Grid 114 BUY 527,326 9,617 4,630 9.3 10.7 12.8 32.0 14.8 19.8 12.2 10.6 8.9 10.9 8.7 7.4 2.0 1.8 1.6 2.5 2.9 3.4 17.4 17.8 18.9 140 22.9 6.9 Reliance Infrastructure 417 BUY 109,631 1,999 263 70.9 68.1 74.7 17.5 (4.0) 9.8 5.9 6.1 5.6 9.6 6.9 7.5 0.4 0.4 0.4 1.8 2.7 2.7 11.0 11.2 9.3 810 94.3 26.4 Reliance Power 80 SELL 223,709 4,080 2,805 3.6 3.7 3.9 16.7 2.4 5.1 22.1 21.6 20.6 25.9 20.0 13.3 1.2 1.1 1.1 — — — 5.6 5.4 5.4 75 (6.0) 12.1 Tata Power 93 ADD 229,926 4,193 2,468 4.2 5.6 5.8 (9.3) 34.2 2.5 22.3 16.6 16.2 8.1 6.7 6.4 1.8 1.7 1.6 1.8 1.8 1.8 7.8 10.4 9.9 113 21.3 4.7 Utilities Attractive 2, 923,742 53,324 5.5 19.0 21.1 14.4 12.1 10.0 11.4 8.9 7.5 1.4 1.3 1.2 2.8 2.1 2.4 9.4 10.4 11.5 Others Carborundum Universal 126 BUY 23,518 429 187 5.7 9.6 13.7 (50.7) 67.5 43.4 22.0 13.1 9.1 10.8 7.1 5.2 2.0 1.8 1.5 0.8 1.3 1.9 10.3 15.7 19.1 180 43.4 0.2 Coromandel International 189 SELL 53,420 974 283 18.1 18.1 20.4 (19.7) 0.0 12.4 10.4 10.4 9.3 9.1 7.1 6.5 2.0 1.8 1.6 3.9 4.1 4.1 18.8 16.9 17.3 150 (20.7) 0.4 Havells India 688 REDUCE 85,889 1,566 125 31.7 37.3 41.1 0.8 17.6 10.1 21.7 18.5 16.8 12.4 10.7 9.6 5.8 4.7 3.9 1.0 1.1 1.3 31.8 28.2 25.3 580 (15.7) 2.2 Jaiprakash Associates 80 BUY 175,362 3,198 2,191 2.0 9.6 17.1 (32.1) 383.4 78.3 40.3 8.3 4.7 9.9 7.2 5.5 1.4 1.2 1.0 — — — 3.7 16.0 23.7 100 24.9 29.8 Jet Airways 582 SELL 50,214 916 86 1.2 26.0 32.0 100.6 2,095 23.3 491.9 22.4 18.2 10.4 8.7 8.3 35.6 13.7 7.8 — — — 7.5 88.5 54.9 400 (31.2) 29.1 MCX India 945 ADD 47,995 875 51 58.1 44.3 49.9 (2.4) (24) 12.7 16.3 21.3 18.9 10.7 16.2 12.9 4.2 3.9 3.6 2.6 2.6 2.6 27.4 18.9 19.7 990 4.7 4.7 Rallis India 137 BUY 26,623 486 194 6.3 8.6 10.0 22.9 38 15.6 21.8 15.9 13.7 12.9 8.8 7.6 4.3 3.6 3.0 1.6 1.6 1.6 19.6 24.5 23.9 155 13.2 0.6 SpiceJet 40 BUY 19,133 349 484 0.4 3.5 5.1 103.2 679.1 47.5 89.1 11.4 7.8 22.4 7.4 5.2 (59.5) 14.2 5.0 — — — (23) 325.1 95.5 60 51.9 2.4 Tata Chemicals 324 ADD 82,613 1,507 255 33.6 37.7 40.7 2.2 12.2 8.0 9.7 8.6 8.0 5.8 5.0 4.4 1.1 1.0 0.9 3.1 3.1 3.1 11.1 11.2 10.9 370 14.1 1.9 United Phosphorus 154 REDUCE 71,187 1,298 462 15.0 17.3 18.2 24.9 15.4 5.2 10.3 8.9 8.5 6.0 5.5 5.0 1.5 1.3 1.2 1.6 1.6 1.6 16.0 16.2 15.0 125 (18.9) 4.6 Others 635,954 11,599 135.3 68.3 36.9 18.4 11.0 8.0 9.1 7.2 5.9 2.0 1.7 1.5 1.3 1.4 1.4 10.8 15.8 18.2 KIE universe 54,379,954 991,792 6.7 11.1 13.4 15.3 13.8 12.1 9.8 8.5 7.3 2.3 2.0 1.8 1.7 1.8 2.0 14.9 14.8 15.0 KIE universe ex-energy 46,175,266 842,153 9.0 13.0 15.3 16.4 14.5 12.6 11.0 9.3 8.0 2.6 2.3 2.0 1.6 1.7 1.9 15.6 15.7 16.0 KIE universe ex-energy & ex-commodities 40,207,119 733,305 10.8 15.0 16.1 17.9 15.6 13.4 12.4 10.2 8.8 2.8 2.5 2.2 1.5 1.6 1.8 15.7 16.0 16.5

Notes: (a) For banks we have used adjusted book values. (b) 2012 means calendar year 2011, similarly for 2013 and 2014 for these particular companies. (c) EV/Sales & EV/EBITDA for KS universe excludes Banking Sector. (d) Rupee-US Dollar exchange rate (Rs/US$)= 54.83 India Daily Summary - May 1 Source: Company, Bloomberg, Kotak Institutional Equities estimates 68

Disclosures

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

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

40% * The above categories are defined as follows: Buy = We 34.3% expect this stock to deliver more than 15% returns over the 30% next 12 months; Add = We expect this stock to deliver 24.3% 23.1% 5-15% returns over the next 12 months; Reduce = We 18.3% expect this stock to deliver -5-+5% returns over the next 20% 12 months; Sell = We expect this stock to deliver less than - 5% returns over the next 12 months. Our target prices are 10% also on a 12-month horizon basis. These ratings are used 2.4% illustratively to comply with applicable regulations. As of 1.8% 1.2% 0.6% 31/03/2013 Kotak Institutional Equities Investment Research 0% had investment ratings on 169 equity securities. BUY ADD REDUCE SELL

Source: Kotak Institutional Equities As of March 31, 2013

Ratings and other definitions/identifiers

Definitions of ratings

BUY. We expect this stock to deliver more than 15% returns over the next 12 months.

ADD. We expect this stock to deliver 5-15% returns over the next 12 months.

REDUCE. We expect this stock to deliver -5-+5% returns over the next 12 months.

SELL. We expect this stock to deliver <-5% returns over the next 12 months.

Our target prices are also on a 12-month horizon basis.

Other definitions

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

Other ratings/identifiers

NR = Not Rated. The investment rating and target price, if any, have been suspended temporarily. Such suspension is in compliance with applicable regulation(s) and/or Kotak Securities policies in circumstances when Kotak Securities or its affiliates is acting in an advisory capacity in a merger or strategic transaction involving this company and in certain other circumstances.

CS = Coverage Suspended. Kotak Securities has suspended coverage of this company.

NC = Not Covered. Kotak Securities does not cover this company.

RS = Rating Suspended. Kotak Securities Research has suspended the investment rating and price target, if any, for this stock, because there is not a sufficient fundamental basis for determining an investment rating or target. The previous investment rating and price target, if any, are no longer in effect for this stock and should not be relied upon.

NA = Not Available or Not Applicable. The information is not available for display or is not applicable.

NM = Not Meaningful. The information is not meaningful and is therefore excluded.

KOTAK INSTITUTIONAL EQUITIES RESEARCH 70

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