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22 March2010 India Daily 

 

 
 
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Slide 1: INDIA DAILY March 22, 2010 Contents Updates Economy: RBI’s surprise dose may be a preparatory one Energy: Oil is not about oil alone Telecom: Run up to the 3G/BWA spectrum auctions—part I Media: FICCI Frames 2010—industry sticks to the basics as growth accelerates India Sensex Nifty 19-Mar 1-day1-mo 3-mo 17,578 5,263 0.3 0.3 8.3 8.4 5.3 5.6 Global/Regional indices Dow Jones Nasdaq Composite FTSE Nikkie Hang Seng KOSPI Value traded - India Cash (NSE+BSE) Derivatives (NSE) 177.1 758.4 171.5 160.3 927.2 714 10,742 (0.3) 2,374 (0.7) 5,650 10,825 0.1 0.8 3.5 5.9 5.6 4.1 2.6 5.4 6.0 4.3 20,944 (2.0) 1,669 (1.0) 2.8 (0.7) 2.6 0.8 News Round-up Reliance Ind. (RIL IN) has renewed talks with the ONGC led consortium to pick up stake in the Corabobo 1 oil block in Venezuela. (ECNT) IOC (IOCL IN)-Oil India (OINL IN) may hike their combined takeover offer for Middle East focused oil firm Gulfsands Petroleum after the UK based firm rejected their 400 million pound bid. (ECNT) IOC (IOCL IN) plans to enter the petrochemicals business in June through its polymer products and expects to notch up a market share of 21% in this new initiative. (BSTD) Cipla (CIPLA IN) to replace Sun Pharma (SUNP IN) on BSE's benchmark Sensex from May 3. (ECNT) The much awaited formation of JV between Shipping Corp. (SCI IN) & SAIL (SAIL IN) could be a reality with a formal announcement to that effect expected to be made within a week. (ECNT) Bharti Airtel Ltd (BHARTI IN) said it obtained USD 8.3 bn in funding for its proposed acquisition of Zain's African assets. (BSTD) Bharti Airtel, Apple in tie-up to sell 3G iPhone. (BSTD-Sat) SBI (SBIN IN) plans to open 1,000 more branches in the next financial year, taking its total branch network to over 13,000. (BSTD) Yes Bank (YES IN) is likely to raise USD 80 mn in the first round of fund raising for its private equity fund focused on clean technology. (BSTD) The RBI today surprised banks and money market players by raising key policy rates 25 basis points. The move aimed at taming inflation and anchoring inflationary expectations, marks a reversal in the easy monetary policy regime amid signs of strong economic revival. (BSTD-Sat) The board of directors of multiplex chain PVR Ltd (PVRL IN) has approved the merger of Leisure World Private Ltd with itself. (BSTD-Sat) Fortis Healthcare (FORH IN) said on Friday it had completed the acquisition of 23.9% stake in Singapore based healthcare company Parkway Holdings for USD 685.3 mn. (BSTD-Sat) LT (LT IN) has bagged a road project worth USD 304.35mn from National Highway Authority of India. (ECNT-Sat) Source: ECNT= Economic Times, BSTD = Business Standard, FNLE = Financial Express, THBL = Business Line. Deri. open interest 1,344.7 1,233 1,166 Forex/money market Change, basis points 19-Mar 1-day Rs/US$ 10yr govt bond, % Net investment (US$mn) 18-Mar FIIs MFs 156 (11) MTD CYTD 2,575 (402) (230) (282) 45.5 7.9 1 4 1-mo (80) 3-mo (136) 32 Top movers -3mo basis Change, % Best performers MSEZ IN Equity SIEM IN Equity JSTL IN Equity FTECH IN Equity ACEM IN Equity Worst performers IBREL IN Equity IBULL IN Equity HPCL IN Equity BPCL IN Equity TCOM IN Equity 160.4 103.1 321.4 522.6 293.9 (2.7) (1.7) (0.6) (0.8) (0.4) 4.4 7.5 (11.5) (11.8) (1.0) (24.1) (18.0) (16.9) (14.1) (13.6) 19-Mar 1-day 728.7 732.8 1242.4 1635.6 118.7 2.2 0.5 (0.5) (0.4) 1.7 1-mo 12.4 10.1 20.7 9.3 13.3 3-mo 34.9 33.2 26.3 24.1 23.6 For Private Circulation Only. FOR IMPORTANT INFORMATION ABOUT KOTAK SECURITIES’ RATING SYSTEM AND OTHER DISCLOSURES. REFER TO THE END OF THIS MATERIAL.
Slide 2: Economy.dot Economy INDIA MARCH 19, 2010 UPDATE BSE-30: 17,578 RBI’s surprise dose may be a preparatory one. We see RBI’s 25 bps policy rate hike as a bid to catch up and address the problem of large negative short-term real interest rates. The timing was a major surprise to the markets as it came even before the Marchend. We see this as an indication of further monetary policy action in April 2010 in line with our earlier call of 50-100 bps policy rate hike on that day. We do not see any adverse impact of the move on liquidity or interest rates. RBI starts action to catch up with the curve RBI today after close of markets hiked its policy rates by 25 bps with immediate effect. Reverse repo rate, which is the operational policy rate today, has been hiked to 3.5% from 3.25%; Repo rate, the policy rate that sets the upper end of the overnight interest rate corridor, has been hiked to 5% from 4.75% We see this RBI move as a bid to catch up with the curve (see Exhibit 1). In our Economy note of March 15, 2010, “Would inflation and negative real interest rates damage the economy?” we had pointed out that India runs the second highest CPI inflation in the world and also the most negative short term real interest rates (see Exhibit 2 and 3). We had pointed to risks of running high negative real rates, viz., (1) possible asset price bubbles building again and (2) adverse impact on private savings. We had mentioned that RBI may need to raise policy rates by over 200 bps even with expected fall in inflation to sub-6% by end-FY11E in order to attain positive real rates. We see RBI action as the first step in that direction. We expect further monetary tightening in April 2010 We see RBI’s move as a preparatory step for more tightening on or before schedule policy date. RBI may raise policy rates by another 50 bps on April 20. A CRR hike of 25-50 bps in April is also possible if large liquidity returns. RBI may further raise policy rates by at least another 50 bps by end-July 2010, taking repo rate to 6% and reverse repo rate to 4.5% In terms of timing, today’s move was a major surprise because RBI had clearly communicated to the markets that it may act before scheduled policy date only if the underlying growth or inflation conditions change due to unforeseen events. See also our Economy note of February 15, 2010, where we said that RBI is unlikely to act to small deviations of say 1-ppt in its full year’s growth and inflation projections. Our belief was also reinforced by likely larger than expected treasury losses for banks in this quarter on account of MTM losses, which we thought would prompt RBI to act only after March 31 closing. However, RBI has chosen to act when large liquidity has been temporarily drained by March advance tax flows. We see this on account of: (1) Increased confidence amongst policy-makers that high IIP growth would sustain, (2) Inflation becoming a major political issue in India enabling RBI leeway to act, (3) further evidence that manufacturing inflation is rising and it no longer remains food inflation (see Exhibit (4) large repressed inflation coming to fore through petro price hike and likely increase in coal and steel prices RBI in its communication has cited the following reasons for its action: (1) Uptrend in IIP being maintained, (2) acceleration in capital goods production, (3) headline WPI inflation exceeding baseline projection of 8.5%, (4) CPI indices accentuating further, (5) increasing capacity utilization and (6) rising energy prices. It has also added that “it will take further action as warranted.” We retain our 10-year gilt yield call at 8% for end-FY10E and a high of 8.25% in 1QFY11E before the bond rally takes over. We see INR/USD appreciating to 45.20 in near term before weakening again. For private Circulation Only. FOR IMPORTANT INFORMATION ABOUT KOTAK SECURITIES’ RATING SYSTEM AND OTHER DISCLOSURES,REFER TO THE END OF THIS MATERIAL. QUICK NUMBERS • RBI hikes policy rates by 25 bps; first time after July 2008 • We expect further 50 bps policy rate hike on April 20 • India still runs the largest negative short term real rate at -12.7%
Slide 3: Economy Exhibit 1 : RBI hikes policy rates 25 bps after 75 bps CRR hike in January, but monetary policy remains very accommodative in relation to pre-crisis history RBI's repo, reverse repo rates and cash reserve ratio on LHS, SLR on RHS (%) 11 10 9 8 7 6 5 4 8-Dec-04 20-Dec-02 15-Dec-03 1-Dec-05 1-Jan-01 3-Jan-02 21-Nov-06 14-Nov-07 19-Sep-08 17-May-09 12-Jan-10 Egypt Pakistan Ukraine 25 Reverse repo rate CRR Repo rate SLR 23 21 19 17 15 3 Source: Reserve Bank of India, Kotak Institutional Equities Exhibit 2: India runs the second highest CPI inflation in the world CPI inflation rates in select countries, position as on March 10, 2010 (%) 30 Year-ago (%) 20 10 0 (10) Taiwan of Kuwait Mexico Spain South Hong Thailand Iceland Euro Ireland Japan USA Iran Argentina China Malaysia New Canada Greece Russia Israel Saudi Philippines Guatemala Singapore Portugal Indonesia Kenya Latvia India Czrch Rep. Venezuela France S. Korea Bolivia Sri Lanka UK Brazil Germany Hungary Vietnam Turkey Italy Current (%) Source: Bloomberg, compiled by Kotak Institutional Equities KOTAK INSTITUTIONAL EQUITIES RESEARCH 3
Slide 4: India Economy Exhibit 3: India still runs the most negative short term real interest rates Nominal and Real central bank policy rates data for key global economies (%)position as on March 19, 2010 Country India UK USA Canada Taiwan South Korea Hungary Thailand Hong Kong SAR Mexico Philippines Singapore Euro region New Zealand Malaysia Russia Japan Iceland Indonesia Australia Argentina China Brazil Nominal (%) 3.50 0.50 0.25 0.25 1.25 2.00 5.75 1.25 0.50 4.50 4.00 0.16 1.00 2.50 2.25 8.50 0.10 9.50 6.50 4.00 11.50 5.31 8.75 Central bank policy rate Real (%) Targeted rate (12.7) Reverse Repo rate (3.0) Bank rate (2.4) Fed Funds rate (1.7) Overnight rate (1.2) Rediscount rate (0.7) Call rate (0.7) Base rate (0.7) Repo rate (0.5) Lending rate (0.3) Overnight rate (0.2) Overnight rate (0.0) Overnight rate 0.0 Refinance rate 0.5 Cash rate 1.0 Overnight rate 1.3 Refinance rate 1.4 Overnight rate 2.2 Repurchase rate 2.7 Reference rate 2.8 Cash Target rate 3.3 Repo rate 3.8 Lending rate 4.0 SELIC rate Note: (1) Real rates are nominal rates minus CPI inflation Source: Bloomberg, compiled by Kotak Institutional Equities Exhibit 4: RBI acts when inflation may fall to <6% by end-FY11E from ≅10% at end-FY11E Headline WPI inflation rate (yoy), YTD price level change, March fiscal year-ends, 2009-2011E (%) 2009 14 12 10 8 6 4 2 0 (2) Apr Oct Aug May Mar Jul Sep Jun Jan Nov Dec Feb 2010E 2011E YTD09 YTD10E YTD11E Notes: Inflation is actual data till February 2010 and Kotak Institutional Equities estimates thereafter. Source: Government of India, Kotak Institutional Equities estimates 4 KOTAK INSTITUTIONAL EQUITIES RESEARCH
Slide 5: Economy Exhibit 5: RBI action, inter alia, manufacturing inflation upsurge Inflation rate (yoy change in WPI) for major commodity groups (%) WPI 25 20 15 10 5 0 (5) (10) (15) Oct-07 Oct-08 Oct-09 Feb-09 Apr-09 Aug-08 Aug-09 Feb-08 Apr-08 Aug-07 Dec-07 Dec-08 Dec-09 CPI-RL Apr-07 Feb-10 17.4 Jun-07 Jun-08 Jun-09 17.6 16.2 16 15.5 energy primary commodities manufacturing primary food Source: Office of the Economic Advisor, Ministry of Commerce & Industry Exhibit 6: RBI action also prompted by elevated CPI inflation CPI for industrial workers (IW), urban non-manual employees (UNME), agricultural labor (AL) and rural labor (RL) (%) 20 Mar-09 Sep-09 Dec-09 Jan-10 12 8.6 8 4 0 WPI CPI-IW CPI-UNME CPI-AL Source: Central Statistical Organization, compiled by Kotak Institutional Equities KOTAK INSTITUTIONAL EQUITIES RESEARCH 5
Slide 6: tl Energy India CAUTIOUS MARCH 22, 2010 UPDATE BSE-30: 17,578 Oil is not about oil alone. We continue to be puzzled by the continued strength in crude oil prices despite its weak short-term fundamentals. Meanwhile, natural gas prices continue to correct sharply, probably cramped by concerns of surplus in the peak storage season given the rising production of non-conventional gas in the US. Optimists looking at long-dated prices to support their positive thesis may have to contend with this new and unexpected source of energy that could wreck crude oil’s fundamentals. Crude firms up while natural gas prices decline; it all boils down to speculation, it would appear Crude prices have risen over the past few weeks (+8% since February 1, 2010) upon expectations of (1) strong demand recovery in CY2010E, (2) long-term supply-demand imbalance due to declining OPEC spare capacity and (3) a decline in US product inventories. However, natural gas prices have corrected 24% over the same period, probably on account of winter heating demand tapering off and signs of a large surplus in autumn. We understand the different usages of oil and gas but the 3X pricing differential is a puzzle, especially as refining capacity and availability of auto fuels is not an issue and short-term fundamentals of crude appear weak. Dollar movement, speculation can ward off weak fundamentals, only for a while Oil optimists point to the increase in long-dated crude prices to justify their bullish stance on crude oil prices. However, the rapid changes in long-dated prices in sync with near-month prices suggest that long-dated prices do not accurately assess long-term crude oil prices. In fact, they move up or down based on near-month prices. Also, the synchronized movement of crude futures with movement in the US dollar (DXY Index) and stock markets suggests that there is a strong link between the three markets and speculation in crude futures based on movements in the DXY and stock markets. Short-term and long-term views on oil no longer about oil alone In our view, the short-term and medium-term fundamentals of crude oil do not support the current level of crude oil prices. There is ample OPEC spare capacity, global inventories are comfortable and supply of alternative energy is rising sharply in CY2010E. However, speculation and DXY may have an equally big bearing on short-term crude prices. In the long term, crude will have to contend with alternative energy sources—the potential of which is difficult to even fathom at this point. In our view, it is practically impossible to factor in so many complex developments on both the demand and supply side to make any accurate assessments of long-term prices; we doubt any modeling can accurately forecast technological advancements in both conventional and non-conventional hydrocarbons and alternative fuels; a few of them would be destructive in nature. Shale gas is becoming increasingly conventional Our preliminary study of shale gas suggests that this can be a destructive force for the conventional energy world. The technology for extracting shale gas is fairly common now, resources are abundant across the world and F&D (US$1.7/mn BTU average over the past two years) and production costs (about U$0.9/mn BTU in CY2009) are in line with those of conventional gas; in fact, as the area benefits from economies of scale with more proven reserves and as conventional resources dwindle, the cost curve may shift in favor of shale gas. QUICK NUMBERS • Oil-gas price parity ratio at 3.5X currently in the US • OPEC spare capacity at around 6 mn b/d in CY2010-11E • Shale gas F&D cost at US$1.7/mn BTU and production cost (without transportation, taxes) at US$0.9/mn BTU For private Circulation Only. FOR IMPORTANT INFORMATION ABOUT KOTAK SECURITIES’ RATING SYSTEM AND OTHER DISCLOSURES, REFER TO THE END OF THIS MATERIAL.
Slide 7: Energy India Short-term and medium-term views: Oil and gas on different planes Exhibit 1 tracks price movements of oil and gas in the US. Oil prices have increased over the past few weeks while gas prices have come off over the same period. We do not deny that the markets for oil and gas are different, notwithstanding some convergence in the heating area. However, the price difference is stark and has increased over the past 5-6 years to unprecedented levels in the US, one of the few markets with unfettered oil and gas pricing. The crude oil-natural gas price ratio now stands at 3.46X compared to 1.21X in CY2004 (average prices for the year). This would suggest that crude’s fundamentals are much tighter versus gas; however, that does not appear to be the case in light of the following factors. Gap between crude oil prices and equivalent natural gas prices has increased sharply of late WTI crude price and Henry Hub gas price, 2004-10YTD (US$/bbl) 160 WTI crude oil price [LHS] 140 120 100 80 8 60 40 20 0 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Oct-04 Oct-05 Oct-06 Oct-07 Oct-08 Apr-04 Apr-05 Apr-06 Apr-07 Apr-08 Apr-09 Oct-09 Jan-10 Jul-04 Jul-05 Jul-06 Jul-07 Jul-08 Jul-09 6 4 2 0 Crude price equivalent of Henry Hub gas [LHS] (US$/mn BTU) 18 Henry Hub gas price [RHS] 16 14 12 10 Source: Bloomberg, Kotak Institutional Equities Ample OPEC spare capacity over the next two years. We estimate OPEC’s spare capacity at around 6 mn b/d in CY2010-11E (see Exhibit 2), in line with the current spare OPEC capacity of 6.25 mn b/d (see Exhibit 3). The supply-demand balance looks tighter in the outer years of our projections. However, this does not factor in likely increased supply from (1) Iraq resulting from the recent award of technical contracts to several global majors and NOCs, (2) contribution from Brazilian sub-salt plays, (3) recent award of contracts in Venezuela’s heavy oil plays and (4) new discoveries off the coast of West Africa (the belt stretching from Sierra Leone to Equatorial Guinea with two billion-barrel discoveries already off the coast of Ghana). KOTAK INSTITUTIONAL EQUITIES RESEARCH 7
Slide 8: India Energy We expect sharp deterioration in global-supply demand balance over the next few years Estimated global crude demand, supply and prices, calendar year-ends, 2005-14E (mn b/d) 2005 Demand (mn b/d) Total demand Yoy growth Supply (mn b/d) Non-OPEC Yoy growth OPEC Crude NGLs Total OPEC Total supply Total stock change OPEC crude capacity Implied OPEC spare capacity Demand growth (yoy, %) Supply growth (yoy, %) Non-OPEC OPEC Total Dated Brent (US$/bbl) 84.1 1.6 49.8 1.0 30.4 4.3 34.7 84.7 0.7 2006 85.2 1.1 50.4 0.6 30.5 4.4 34.9 85.6 0.2 2007 86.5 1.3 50.9 0.5 30.5 4.3 34.8 85.7 (1.0) 34.4 3.9 1.5 1.0 (0.3) 0.1 72.7 2008 86.2 (0.3) 50.8 (0.1) 31.2 4.4 35.6 86.4 0.1 34.2 2.9 (0.3) (0.3) 2.4 0.8 102.0 2009 85.0 (1.2) 51.5 0.8 28.9 4.7 33.5 85.0 (0.1) 34.7 5.8 (1.4) 1.5 (6.0) (1.6) 62.0 2010E 86.6 1.6 51.8 0.3 29.3 5.5 34.8 86.6 35.5 6.2 1.8 0.6 3.7 1.8 70.0 2011E 87.9 1.3 52.6 0.8 29.3 6.1 35.3 87.9 35.0 5.7 1.5 1.5 1.6 1.5 75.0 2012E 89.1 1.2 52.2 (0.4) 30.6 6.3 36.9 89.1 34.8 4.2 1.4 (0.8) 4.5 1.4 80.0 2013E 90.2 1.1 51.9 (0.3) 31.8 6.5 38.3 90.2 35.5 3.7 1.2 (0.6) 3.8 1.2 80.0 2014E 91.3 1.1 51.7 (0.2) 32.9 6.8 39.6 91.3 35.8 3.0 1.2 (0.4) 3.4 1.2 80.0 1.9 2.0 3.0 1.6 54.4 1.3 1.2 0.6 1.1 65.8 Source: IEA, Kotak Institutional Equities estimates High OPEC spare capacity despite recent lower compliance with the production cuts OPEC crude production and sustainable capacity (mn b/d) Algeria Angola Ecuador Iran Kuwait Libya Nigeria Qatar Saudi Arabia United Arab Emirates Venezuela OPEC-11 production Indonesia Iraq Total OPEC Oct-09 1.24 1.90 0.46 3.66 2.27 1.52 1.90 0.77 8.28 2.28 2.22 26.50 2.43 28.93 Production (mn b/d) Nov-09 Dec-09 Jan-10 1.24 1.25 1.25 1.88 1.85 1.89 0.46 0.46 0.46 3.70 3.72 3.70 2.28 2.29 2.29 1.52 1.52 1.52 1.98 2.01 2.00 0.77 0.80 0.80 8.22 8.12 8.20 2.27 2.28 2.29 2.20 2.19 2.22 26.52 26.49 26.62 2.45 28.97 2.48 28.97 2.43 29.04 Feb-10 1.25 1.95 0.47 3.74 2.29 1.53 1.98 0.82 8.16 2.28 2.23 26.70 2.54 29.24 Sustainable production capacity (mn b/d) 1.40 2.10 0.50 4.00 2.65 1.70 2.60 0.90 12.00 2.70 2.40 32.95 2.60 35.55 Spare capacity (mn b/d) 0.15 0.15 0.03 0.26 0.36 0.17 0.62 0.08 3.84 0.42 0.17 6.25 0.06 6.31 Cut in production (a) (mn b/d) 0.15 — 0.03 0.16 0.31 0.19 — 0.03 1.21 0.32 0.12 2.35 Compliance (%) 75 — 43 29 82 76 — 25 92 84 33 56 Note: (a) Cut in production in February 2010 versus September 2008. Source: IEA, Kotak Institutional Equities 8 KOTAK INSTITUTIONAL EQUITIES RESEARCH
Slide 9: Energy India Iraq’s production target of 12 mn b/d by CY2017 may appear ambitious compared to its current 2.5 mn b/d production but even an additional 2-3 mn b/d of supply over the next 3-4 years may dramatically alter the projections in the outer years of our forecast. Iraq has awarded several technical contracts to global majors and NOCs (see Exhibit 4) in order to exploit its 115 bn bbls of proved reserves, the third largest after Saudi Arabia’s 264 bn bbls and Iran’s 138 bn bbls. We note that Saudi Arabia currently produces about 8 mn b/d and has a sustainable production capacity of 12 mn b/d. Iran produces about 3.75 mn b/d of crude oil with a sustainable production capacity of 4 mn b/d. Iraq's crude oil production may reach 12 mn b/d in seven years Summary of Iraq oil contracts awarded, CY2009 Reserves (bn bbls) 7.3 8.7 4.0 0.1 0.9 4.1 12.6 0.9 0.8 12.9 Oil fields Consortium partners Round 1 (June 2009) South Rumaila BP, CNPC West Qurna (Phase 1) ExxonMobil, Royal Dutch Shell Zubair Eni, Sinopec, Occidental, Korean Gas Round 2 (December 2009) Badra Gazprom, Turkiye Petrolleri, Korea Gas, Petronas Gharaf Petronas, Japex CNPC, Total, Petronas Halfaya Royal Dutch Shell, Petronas Majnoon Sonangol Najma Sonangol Qayara West Qurna (Phase 2) Lukoil, Statoil Comments Production target of 2.85 mn b/d from 1.06 mn b/d currently Production target of 2.3 mn b//d from 279,000 b/d currently Plateau of 1.125 mn b/d from 200,000 b/d in seven years Production target of 170,000 b/d Production target of 230,000 b/d Plateau of 535,000 b/d Plateau of 1.8 mn b/d Production target of 110,000 b/d Production target of 120,000 b/d Production target of 1.8 mn b/d Source: Upstream Online, Kotak Institutional Equities NGL supply is rising and so is Non-OPEC supply in CY2010E. We note that the supply-demand balance of crude oil looks fairly comfortable in CY2010E, led by increased supply of NGLs (0.8 mn b/d) and from Non-OPEC countries (0.2 mn b/d). Also, OPEC capacity will likely increase by 0.8 mn b/d. Excess refining supply; in fact, refineries are being shut. A strong recovery in auto fuels demand has been one of the arguments for a more bullish view on oil. Inventory data for the US over the past few weeks shows a decline in gasoline inventories. However, we believe this merely reflects low refining capacity utilization in the US (see Exhibit 5) rather than any great resurgence in gasoline demand. Gasoline demand remains at the lowest level in the last five years (see Exhibit 6). Finally, refining is hardly a bottleneck given low global capacity utilization rates; it’s not as if the world is running out of refining capacity. KOTAK INSTITUTIONAL EQUITIES RESEARCH 9
Slide 10: India Energy US refining capacity utilization lowest in a decade Weekly refining utilization in US (%) (%) 105 95 85 75 65 US refining capacity utilization 2000-2009 range 2006 2009 2010 2007 2005 2008 Apr Mar Aug Sep Feb Oct Jan Jun May Source: IEA, Kotak Institutional Equities Gasoline demand lowest in last five years Weekly gasoline supplies in the US (mn b/d) (mn b/d) 10 2000-2009 range 2006 2007 2008 2009 Nov 2010 9 8 7 Mar Apr Feb Aug Sep Oct Jan Jun Nov May Dec Source: EIA, Kotak Institutional Equities Crude and product inventories look ample, especially in the light of declining OECD consumption. Exhibits 7 and 8 show OECD inventories in terms of absolute and number of days of forward cover. We note that OECD demand has declined over the past few years and the IEA predicts that OECD demand may in fact have peaked. OECD demand has declined 1 mn b/d on an average over the past four years although the decline in demand may have been accelerated in the past two years by the global credit crisis (see Exhibit 9). 10 KOTAK INSTITUTIONAL EQUITIES RESEARCH Dec
Slide 11: Energy India OECD stocks continue to remain high Total industry and government-controlled crude and product stocks in OECD countries (bn bbls) (bn bbls) 4.6 4.4 4.2 4.0 3.8 3.6 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Range 2002-08 2005 2009 2002 2006 2010 2003 2007 2004 2008 Source: IEA, Kotak Institutional Equities OECD stocks continue to remain high OECD inventory days of forward cover of demand (# of days) (# of days) 66 62 58 54 50 46 Jan Feb Range 2002-08 2005 2009 2002 2006 2010 2003 2007 2004 2008 Mar Apr May Jun Jul Aug Sep Oct Nov Dec Note: Days of forward cover based on average demand over the next 4 quarters Source: IEA, Kotak Institutional Equities KOTAK INSTITUTIONAL EQUITIES RESEARCH 11
Slide 12: India Energy OECD demand has declined significantly since 2006 Summary of global oil demand (mn b/d) 2006 OECD demand North America Europe Pacific Total OECD FSU Europe China Other Asia Latin America Middle East Africa Total Non-OECD Total demand 25.4 15.7 8.5 49.5 4.0 0.7 7.2 9.0 5.4 6.3 3.0 35.7 85.2 2007 25.5 15.3 8.4 49.2 4.2 0.8 7.6 9.5 5.7 6.5 3.1 37.3 86.5 2008 24.2 15.3 8.1 47.6 4.2 0.8 7.9 9.7 5.9 7.1 3.2 38.7 86.2 2009 23.3 14.5 7.7 45.5 3.9 0.7 8.5 10.0 6.0 7.2 3.2 39.5 85.0 2010E 23.4 14.5 7.5 45.4 4.1 0.7 9.0 10.3 6.2 7.5 3.3 41.2 86.6 2011E 23.7 14.7 7.5 45.9 4.3 0.7 9.3 10.4 6.2 7.8 3.4 42.0 87.9 2012E 23.9 14.7 7.4 46.0 4.4 0.7 9.6 10.6 6.4 8.3 3.4 43.2 89.1 2013E 24.0 14.6 7.2 45.8 4.6 0.7 9.8 10.8 6.5 8.6 3.5 44.4 90.2 2014E 24.0 14.5 7.1 45.6 4.7 0.7 10.2 10.9 6.7 8.9 3.5 45.8 91.3 Source: Kotak Institutional Equities estimates We would highlight that gas inventories in the US are above the five-year average for this time of the year (see Exhibit 10) and will likely build up rapidly once the winter demand starts declining in the next 2-3 weeks. Exhibit 11 shows the prices of natural gas in the US over a period of time. As can be seen, current prices are barely above same period’s price in CY2009 when industrial activity would have been presumably at a much lower level. Gas inventory in the US remains high Weekly US gas stock (bcf) (bcf) 1997-2008 range 2007 2004 2008 2005 2009 2006 2010 4,000 3,000 2,000 1,000 Jan Feb Jun Aug Mar Sep Apr May Oct Nov Dec Source: EIA, Kotak Institutional Equities 12 KOTAK INSTITUTIONAL EQUITIES RESEARCH
Slide 13: Energy India Gas prices near last year’s level despite improved industrial activity in the current year Henry Hub spot prices (US$/mn BTU) (US$/ mn BTU) 20 Henry Hub prices 15 10 5 4 Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Aug-12 Nov-12 Source: Bloomberg, Kotak Institutional Equities Long-term view: Nobody knows but it is going to be very different We have been reluctant to subscribe to the view that future crude strips accurately assess long-term crude prices. They seem to move in tandem with near-month prices. Exhibit 12 shows the changes in long-dated prices over various periods; the diverse movements over the past 12 months would suggest that long-dated prices do not accurately reflect longterm crude oil prices but merely follow near-month prices. Also, near-month prices seem to move with DXY (inverse correlation) and stock markets (positive correlation) in the short term. Exhibit 13 shows the strong inverse correlation between the DXY and crude oil prices. Long-dated prices do not accurately reflect long-term crude oil prices WTI forward crude prices, current, 3-months ago and 1 year ago (US$/bbl) (US$/bbl) 90 13-Mar-09 11-Dec-09 12-Mar-10 80 70 60 50 40 Aug-09 Feb-10 Aug-10 Feb-11 Aug-11 May-09 Nov-09 May-10 Nov-10 May-11 Nov-11 Feb-12 May-12 Source: Bloomberg, Kotak Institutional Equities KOTAK INSTITUTIONAL EQUITIES RESEARCH 13
Slide 14: India Energy Relationship between crude prices and Dollar index seems to be strong since 2003 WTI and Dated Brent crude oil prices versus DXY Index, 2003-10YTD (US$/bbl) 160 140 120 100 80 60 40 20 Jul-03 Jul-04 Jul-05 Jul-06 Jul-07 Jul-08 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jul-09 Jan-10 70 80 90 USCRWTIC Index [LHS] EUCRBRDT Index [LHS] DXY Index [RHS] 110 Correlation (Crude, DXY) = -0.8 100 Source: Bloomberg, Kotak Institutional Equities In our view, long-dated prices reflect the market’s current knowledge of future supply and demand even assuming that they are not influenced by short-term prices. However, we believe that current knowledge of geology and technology will never be able to assess (1) availability of resources in unexplored areas (most of the world’s oceans including the emerging Arctic area, non-conventional resources) and (2) future advancements of technology in areas of extraction technology, electric batteries and solar, wind and nuclear power. More often than not, these technological breakthroughs will be of a ‘game-changer’ variety. For example, the recent flurry of news on and activity around shale gas suggests that this is a very exciting area of supply of natural gas. Technological advancements have finally allowed commercial exploitation of resources that have been known to geologists for the past 3-4 decades. Various sources have estimated the resource base at 5-6X against current proved natural gas reserves of 1.2 tn boe (185 tcm). We note that shale gas is no longer in the realm of futurology but is playing an increasingly important role in the US energy scene. Shale gas now accounts for 14.7% of total US natural gas production (see Exhibit 14 that shows rising contribution of shale gas total US gas production). 14 KOTAK INSTITUTIONAL EQUITIES RESEARCH
Slide 15: Energy India Shale gas production as a percentage of total gas production has increased over the last five years in the US US natural gas production break-up, calendar year-ends, 2004-09 (tcf) (tcf) 24 20 0.6 16 12 8 4 0 2004 2005 2006 2007 2008 2009 18.0 17.3 17.4 18.1 18.8 18.0 0.8 1.1 Conventional gas Shale gas 1.5 3.1 1.2 Source: Kotak Institutional Equities More important, F&D and production costs of shale gas are quite low (see Exhibit 15). This would suggest that shale gas can emerge as a viable form of cheap energy for the next several decades and potentially a few centuries if current assessments of resources turn out to be reasonably accurate. Cost structure for key shale gas companies Production, finding and development costs, 2008-2009 (US$/mn BTU) Atlas Energy 2009 Production costs F&D costs 2008 Production costs F&D costs 0.8 1.2 0.8 1.5 Chesapeake Energy 0.9 1.0 1.0 2.3 Newfield Exploration 0.8 1.6 1.0 1.9 XTO Energy 0.9 1.5 1.1 2.6 Source: Company, Kotak Institutional Equities Even without these destructive forces at play, we estimate long-term crude price at US$80/bbl. We compute US$70-75/bbl as the required long-term price of crude oil for a new oil sands project in Canada to earn 10% post-tax IRR. For more details, we refer readers to our March 3 report titled Crude price outlook: Expect short-term weakness. KOTAK INSTITUTIONAL EQUITIES RESEARCH 15
Slide 16: Telecom India CAUTIOUS MARCH 19, 2010 UPDATE BSE-30: 17,578 Run-up to the 3G/BWA spectrum auctions—part I. In line with our expectations, the ‘fear of the known (potential value loss from not having a 3G offering)’ has attracted 9 applications for the 3 3G spectrum slots being auctioned. Rather unexpectedly, however, the ‘option value or hope from the unknown’ has attracted 11 applications for the 2 BWA slots being auctioned. As highlighted in our March 15 report, we expect (1) aggressive bidding and (2) value destruction for the sector. Retain Cautious view. 3G—9 applicants for 3 slots; BWA—11 applicants for 2 The Department of Telecommunications has received 9 applications for the 3 (in 17 circles, 4 in 5) 3G spectrum slots being auctioned, while 11 firms have submitted their applications for the 2 BWA slots being auctioned to private players. We note that BSNL/MTNL have already been allotted 3G/BWA spectrum and they would not be a part of the auction. We also highlight that we do not have any circle-level details yet—some of these applicants may not have put in an application for all the 22 circles. Exhibit 2 depicts the names of the applicants for the 3G and BWA spectrum auctions. On expected lines, the top-6 wireless operators in the country (Bharti, Vodafone, RCOM, Idea, the Tata Group— TTSL/TTML/TCOM, and Aircel) have submitted applications for both 3G and BWA spectrum auctions. Three new players viz. Etisalat DB Telecom, Videocon, and S Tel have applied for 3G spectrum auctions (though we suspect Etisalat and S Tel may not bid pan-India), while there are 5 other applicants for BWA spectrum auctions. ‘Fear of the known’ and ‘hope from the unknown’ drives high # of bids for 3G/BWA auctions 3G—fear of the known: As discussed in our March 15 report on the upcoming auctions, we had anticipated the ‘fear factor’ of not winning 3G spectrum and facing potential value loss from highARPU subs churn (see Exhibit 3), to drive serious participation from all the large 2G incumbents in the 3G spectrum auction. We expect bidding for 3G spectrum to be aggressive—we expect panIndia 3G spectrum auction clearing price to be around US$2.5 bn, with the GOI netting US$10.3 bn, including payments from BSNL and MTNL (who have to match the auction clearing price). BWA (broadband wireless access)—hope from the unknown: Wimax networks are expected to solve the last-mile access challenge that has plagued broadband penetration in India (less than 1%, compared to wireless penetration of 45%). The excitement of ‘yet unknown but potentially large BB opportunity’ will likely ensure aggressive participation in the BWA auctions as well—the large number of applications (11) for the 2 BWA slots to be auctioned can be seen as an indicator of the same. We had assumed the BWA auctions to clear at the reserve price of US$380 mn per slot (a total of US$1.14 bn from 3 slots—2 for private players and 1 for BSNL/MTNL) in our March 15 report; aggressive bidding poses upside risk to this estimate as well and the GOI could reap more than the US$11.4 bn we have estimated, from the 3G and BWA auctions. Auctions good for the fisc, negative for the sector—we remain Cautious We believe the upcoming 3G spectrum auction will be a negative for the winners as well as the losers. We expect the winning operators to end up paying more than the potential ‘tangible’ value creation from rollout of 3G services, even as the tangible ‘value accretion’ for the winners happens (at least partially) at the expense of the losers. We believe the Street would take cognizance of the potential negatives from these auctions as the auction date (April 9) comes closer, and continue to remain Cautious on the sector. We reiterate REDUCE on Bharti and Idea, and SELL on RCOM. For private Circulation Only. FOR IMPORTANT INFORMATION ABOUT KOTAK SECURITIES’ RATING SYSTEM AND OTHER DISCLOSURES, REFER TO THE END OF THIS MATERIAL.
Slide 17: Telecom India Next steps Exhibit 1 depicts the timeline of the events to follow. Indicative timeline of the 3G/BWA auction process Process Notice Inviting applications Final date for submission of applications Publication of ownership details of applicants Bidder ownership compliance certificate Pre-qualification of bidders Mock auction Start of the 3G auction Start of the BWA auction Payment of the successful bid amount Source: DoT Timeline 25-Feb-10 19-Mar-10 23-Mar-10 26-Mar-10 30-Mar-10 05/06-Apr-10 9-Apr-10 2 days from the day of close of the 3G auction Within 10 calender days of close of relevant auction Exhibit 2: List of 3G and BWA spectrum auction applicants 3G (3 slots being auctioned in 17 circles, 4 in the other 5) # Applicant Remarks Incumbent pan-India 2G operator 1 Bharti Airtel Incumbent pan-India 2G operator 2 Vodafone Essar Incumbent pan-India 2G operator 3 RCOM Incumbent pan-India 2G operator 4 TTSL Incumbent pan-India 2G operator 5 Idea Incumbent pan-India 2G operator 6 Aircel New 2G operator; yet to roll out services. May have only applied for the 14 circles where it has a 7 Etisalat DB Telecom UAS license New 2G operator; yet to roll out services. 8 Videocon New 2G operator; has rolled out services in 3 of the 7 circles it has UAS license for. May have only applied for the 14 circles where it has a UAS license 9 S Tel BWA (2 slots being auctioned in all the 22 circles) # Applicant 1 2 3 4 5 6 7 8 9 10 11 Bharti Airtel Vodafone Essar RCOM TCOM Idea Aircel Qualcomm Tikona networks Infotel Broadband Spice ISP Augere Remarks Incumbent operator; Has a fixed broadband offering in 95 cities; does not have a wireless BB offering Incumbent operator; Does not have a fixed/wireless BB offering Incumbent operator; Has fixed and wireless (EVDO) BB offering in select cities Has limited Wimax network rollout in select cities Incumbent operator; Does not have a fixed/wireless BB offering Incumbent operator; Does not have a fixed/wireless BB offering US-based chipset-maker Has a wireless BB offering in select cities (in unlicensed spectrum band) Likely a subsidiary of the HFCL group; offers BB services in the Punjab circle Likely a part of B K Modi's Spice group An international player running Wimax BB operations in Bangladesh and Pakistan; promoted by Sanjiv Ahuja, the ex-CEO of Orange Note: (a) BB: Broadband. (b) Applications yet to be processed. This is a list of applicants and does not represent the list of eligible bidders. Source: DoT, Kotak Institutional Equities KOTAK INSTITUTIONAL EQUITIES RESEARCH 17
Slide 18: India Telecom Exhibit 3: Fear of value loss from 'not winning 3G' to drive aggressive bids, in our view 3G spectrum bid drivers for an operator With 3G Value = PV of 3G FCF before spectrum payout Potential gain from winning 3G (A) 3G value for an operator, before payout = A + B This is the maximum an operator would be willing to pay for 3G spectrum 2G Potential loss from not winning 3G (B) Without 3G (when some competitors have it) Value = PV of potential CF loss, driven by (high-ARPU) subs churn Payoff scenarios for an operator Wins spectrum, pays P (a) P < A, tangible value creation = A - P (b) P = A, tangible value created = 0 (c) A < P <=B, tangible value destruction, but still a better choice than not winning 3G spectrum (d) P > (A+B), tangible value destruction, would have been better off losing 3G spectrum Tangible value loss = B Loses spectrum Source: Kotak Institutional Equities 18 KOTAK INSTITUTIONAL EQUITIES RESEARCH
Slide 19: Telecom India Exhibit 4: 3G WCDMA (GSM, 2.1GHz band) spectrum availability in various circles Blocks available for auction to private players (#) 3 3 3 3 3 3 3 3 3 3 3 4 3 3 3 4 3 4 4 3 3 4 Reserve price for 3G spectrum (Rs mn) Metro Calcutta Chennai Delhi Mumbai Circle A Andhra Pradesh Gujarat Karnataka Maharashtra Tamil Nadu Circle B Haryana Kerala Madhya Pradesh Punjab Rajasthan Uttar Pradesh (east) Uttar Pradesh (west) West Bengal Circle C Assam Bihar Himachal Pradesh North East Orissa J&K Pan-India 1,200 2X5 MHz blocks available (#) 4 Blocks allotted to MTNL/BSNL (#) 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 Clubbed with Tamil Nadu 3,200 4 3,200 4 3,200 3,200 3,200 3,200 3,200 1,200 1,200 1,200 1,200 1,200 1,200 1,200 1,200 300 300 300 300 300 300 35,000 4 4 4 4 4 4 4 4 5 4 4 4 5 4 5 5 4 4 5 Source: DoT KOTAK INSTITUTIONAL EQUITIES RESEARCH 19
Slide 20: India Telecom Exhibit 5: BWA spectrum (in 2.3 GHz band) availability in various circles Reserve price for BWA spectrum No of blocks of Blocks allotted to (Rs mn) 20 MHz available MTNL/BSNL Metro Calcutta Chennai Delhi Mumbai Circle A Andhra Pradesh Gujarat Karnataka Maharashtra Tamil Nadu Circle B Haryana Kerala Madhya Pradesh Punjab Rajasthan Uttar Pradesh (east) Uttar Pradesh (west) West Bengal Circle C Assam Bihar Himachal Pradesh North East Orissa J&K Pan-India 600 1,600 1,600 1,600 1,600 1,600 1,600 1,600 600 600 600 600 600 600 600 600 150 150 150 150 150 150 17,500 3 Clubbed with Tamil Nadu 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 Blocks available for private players 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 Source: DoT 20 KOTAK INSTITUTIONAL EQUITIES RESEARCH
Slide 21: Telecom India Exhibit 6: Indian wireless market landscape # of subs, end-Jan 2010 ('000) Total subs - Jan 2010 Current mobile market share (%) Circle-wise subscribers ('000) Metro Calcutta Chennai Delhi Mumbai Circle A Andhra Pradesh Gujarat Karnataka Maharashtra Tamil Nadu Circle B Haryana Kerala Madhya Pradesh Punjab Rajasthan Uttar Pradesh (east) Uttar Pradesh (west) West Bengal and A&N islands Circle C Assam Bihar Himachal Pradesh North East Orissa J&K Bharti 121,714 22.6% Reliance 96,599 17.9% BSNL 59,455 11.0% VOD 94,143 17.5% IDEA 59,887 11.1% TTSL 60,311 11.2% Aircel 33,036 6.1% MTNL 4,716 0.9% BPL 2,702 0.5% Others 6,410 1.2% Total 538,974 100% Penetration (%) 48.4 2,746 2,593 5,822 3,003 12,426 5,113 12,153 6,518 8,034 1,520 3,077 6,213 4,581 9,925 8,463 3,653 5,070 2,194 10,339 1,274 1,357 3,836 1,804 3,453 1,409 5,557 5,553 6,589 5,130 5,254 6,641 5,308 2,319 3,254 8,017 2,435 4,453 7,784 5,835 4,297 1,625 7,001 1,139 498 2,601 448 1,756 1,189 3,418 1,764 4,818 4,986 5,464 10,028 4,841 6,684 6,831 2,747 4,045 1,478 2,924 7,146 9,158 6,054 6,682 677 2,769 160 417 893 157 363 2,478 1,332 6,001 5,252 2,401 9,001 671 1,980 5,082 6,919 3,081 2,180 3,540 5,435 503 57 2,851 247 481 27 2,195 1,259 5,228 4,136 6,931 1,576 4,892 7,345 2,721 2,232 2,193 3,170 2,044 2,721 2,421 2,976 1,297 75 2,871 139 58 1,706 125 1,135 2,995 874 763 713 669 247 11,092 2,259 2,457 2,702 295 110 206 27 440 663 792 1 318 251 1108 319 293 483 0 808 16 0 279 15,360 11,319 27,243 24,959 42,643 29,876 34,015 40,652 39,469 13,082 22,200 28,777 18,727 31,196 39,625 27,896 22,527 8,015 33,645 4,499 4,788 13,415 5,046 86.6 146.3 127.0 106.9 50.7 51.7 57.5 45.6 63.7 65.5 63.6 30.9 66.1 47.7 31.4 37.6 31.0 26.7 26.6 66.0 33.3 32.8 43.2 4,078 2,777 3,143 4,213 4,021 2,283 3,439 2,980 3,411 3,662 7,181 2,978 2,161 1,021 4,166 1,156 859 2,084 898 793 759 672 2,034 2,366 2,842 367 1,591 1,535 1,586 Source: TRAI, Kotak Institutional Equities Exhibit 7: Indian telecom companies valuation analysis, March fiscal year-ends, 2008-2012E Price (Rs) 19-Mar-10 312 69 75 168 294 KS rating REDUCE REDUCE SELL SELL REDUCE Target price (Rs) 300 50 50 150 400 Market cap. (US$ bn) 26.0 4.7 1.0 7.6 1.8 P/E (X) 2010E 13.1 27.6 (4.8) 9.1 21.0 EV/EBITDA (X) 2009 2010E 8.3 7.6 8.9 8.4 (0.4) (1.2) 7.8 9.1 10.8 9.7 Bharti Idea MTNL RCOM TCOM 2008 17.6 17.4 10.5 6.3 26.8 2009 14.0 23.7 31.3 5.3 21.6 2011E 15.1 56.5 (7.2) 12.6 19.4 2012E 13.3 36.6 (8.2) 9.0 18.7 2008 10.8 12.2 1.9 7.3 14.1 2011E 7.9 8.8 (2.9) 9.6 8.8 2012E 6.7 7.7 (5.3) 6.4 7.2 Bharti Idea MTNL RCOM TCOM 2008 270 67 47 191 33 Revenues (Rs bn) 2009 2010E 2011E 370 394 404 101 122 135 45 37 38 229 223 231 38 42 46 Net Income (Rs bn) 2009 2010E 2011E 84 89 76 9 8 4 1 (10) (7) 67 40 29 4 4 4 2012E 466 160 40 275 49 2008 113 23 7 82 6 EBITDA (Rs bn) 2009 2010E 2011E 152 160 152 28 32 33 2 (9) (7) 93 77 71 8 9 10 EPS (Rs) 2010E 23.8 2.5 (15.6) 18.5 14.0 2012E 173 39 (5) 91 10 Bharti Idea MTNL RCOM TCOM 2008 66 10 4 56 3 2012E 86 6 (6) 40 4 2008 17.7 3.9 7.1 26.5 10.9 2009 22.3 2.9 2.4 31.6 13.6 2011E 20.6 1.2 (10.4) 13.4 15.2 2012E 23.5 1.9 (9.1) 18.6 15.7 Source: Bloomberg, Kotak Institutional Equities estimates KOTAK INSTITUTIONAL EQUITIES RESEARCH 21
Slide 22: Media India NEUTRAL MARCH 19, 2010 UPDATE BSE-30: 17,519 FICCI Frames 2010—industry sticks to the basics as growth accelerates. Continued realistic expectations were the key takeaway from FICCI Frames 2010, the flagship Indian media industry convention. Even as the industry recovers from the slowdown in CY2009, it was heartening to witness continued focus on the basics—(1) core business profitability, (2) monetization across revenue streams, (3) innovation and creativity as well as (4) renewed investment for profitable growth of media. Key trends that continue to benefit media industry—digitization and regionalization Digitization continues to remain a positive driver for the media industry across segments whether C&S TV (DTH and digital cable) or films (Digital Cinema). Digitization has been instrumental in (1) expanding the reach of media industry in India, (2) helping remove the capacity bottlenecks, (3) improving the transparency levels and (4) improving the engagement level with the consumer given wider content choice and improved quality. The penetration of digital media in India continues at a fast pace with revenue traction for C&S broadcasters and distributors as well as film producers, distributors and exhibitors. Regionalization also continues with advertisers (and media industry) willing to tap into semiurban and rural markets with rising disposable income and changing consumption patterns (more discretionary spends). The untapped potential and latent demand is incrementally driving goods and services industries (telecom for example) and media platforms to these markets. However, we also caution that the extraordinary growth phase may normalize over time given (1) regionalization has been going on for almost 5-7 years now and (2) regional markets are high-volume but low-value markets and thus, with limited potential. Key trends that have potentially exhausted their utility—consolidation phase may be over The Indian media industry went through a phase of introspection and consolidation over the last one year given the slowdown in the Indian economy. Comprehensive cost control in the core business and closure of unviable businesses were the key drivers of the industry during this period. The players that were able to weather the downturn emerged stronger even as weak players exited the market. However, we believe the consolidation phase may be nearly over though we do not believe impending competition/expansion may be negative (unless it leads to severe fragmentation) given (1) focus on creativity and innovation (2) to help expand the market and (3) stronger players expanding in new markets. Key trends that threaten the traditional media industry in India—convergence/new media Even as we welcome the growth of new media—Internet and mobile—in India, we can’t help but notice (1) the resultant audience fragmentation and (2) the limited success of traditional media brands on new media. It is a peculiar catch-22 situation the traditional media industry finds itself in with (1) limited choice but to embrace new media as consumers do so but (2) lack of clear monetization models on new media and (3) limited success (8 of the top 10 websites in India are global, the 2 local websites are unprofitable) with investments so far. We do not expect new media to be a threat to traditional media in India for the near-to-medium term (310 years) given the growth potential for all media forms in India. However, these are issues the traditional media may do well to address sooner rather than later. For private Circulation Only. FOR IMPORTANT INFORMATION ABOUT KOTAK SECURITIES’ RATING SYSTEM AND OTHER DISCLOSURES, REFER TO THE END OF THIS MATERIAL.
Slide 23: Media India Advertising revenues—on the recovery path Exhibit 1 presents the growth in advertising revenues projected by FICCI-KPMG across the various industry segments. India continues be an attractive media market with (1) low ad-spend-to-GDP ratio with potential for growth, (2) strong growth in the domestic economy, (3) a large and growing middle-class (consumer class), (4) low but rising media penetration (all forms) and (5) rising discretionary spending with greater disposable incomes in the hands of people (urban and rural). In fact, we believe the advertising revenue growth across industry segments may surprise positively versus FICCI-KPMG estimates as cyclical advertisers (BFSI, Real Estate) return. However, we highlight that all sub-segments within a segment may not grow at the same pace with likely stronger growth in regional markets (C&S TV and print). Additionally, stronger-than-industry growth in specific industry segments/sub-segments may also be an invitation to disruptive competition and fragmentation and thus, a confluence of factors may impact the growth of a media company/brand besides only market growth. Not surprisingly, the large industry players (except Zee TV due to continued fragmentation) grew faster than their industry segments (see Exhibit 2; Sun TV despite significant fragmentation across its markets). Exhibit 1: Estimates of advertising revenues across platforms, calendar year-ends, 2006-2014E 2006 Advertising revenues (Rs bn) C&S TV 61 Print 85 Outdoor 12 Radio 6 Internet 2 Total 166 Market growth (%) C&S TV Print Outdoor Radio Internet 2007 71 100 14 7 4 196 16 18 17 17 100 2008 82 108 16 8 6 220 15 8 14 14 50 2009 88 103 14 8 8 221 7 (5) (13) 33 2010E 99 114 15 9 10 247 13 11 7 13 25 2011E 113 127 17 10 14 281 14 11 13 11 40 2012E 133 141 19 12 20 325 18 11 12 20 43 2013E 155 158 21 14 26 374 17 12 11 17 30 2014E 182 176 24 16 32 430 17 11 14 14 23 Source: FICCI-KPMG 2010 report, Kotak Institutional Equities Exhibit 2: Trend of advertising revenue across large companies, March fiscal year-ends, 20092010E 1QCY08 2QCY08 3QCY08 4QCY08 1QCY09 2QCY09 3QCY09 4QCY09 Advertising revenues (Rs mn) SUNTV 1,645 1,722 1,730 1,890 1,729 1,798 2,250 2,600 ZEEL 2,466 2,798 2,851 2,684 2,284 1,980 2,476 2,707 ZEEN 888 889 1,013 1,117 1,070 1,091 1,280 1,402 JAGP 1,240 1,400 1,437 1,370 1,315 1,609 1,716 1,481 HTML 2,655 2,805 2,831 2,866 2,797 2,781 2,821 2,643 Revenue growth (%) SUNTV 5 4 30 38 ZEEL (7) (29) (13) 1 ZEEN 20 23 26 26 JAGP 6 15 19 8 HTML 5 (1) (0) (8) Source: Company data, Kotak Institutional Equities KOTAK INSTITUTIONAL EQUITIES RESEARCH 23
Slide 24: India Media C&S broadcasting—must thank FMCG sector for CY2009 Exhibit 3 presents the key advertising categories and spenders on C&S TV in India. FICCIKPMG estimates 7% growth in the C&S TV advertising revenues in CY2009 and it really has the FMCG sector to thank for this performance even as other large mediums such as print and outdoor witnessed (supposedly) declining revenue growth. With cyclical sectors such as Auto and BFSI likely to increase their marketing spends in the coming year and FMCG likely to continue to spend even more on advertising and promotion due to intense war for market share, we believe C&S TV advertising will likely grow faster-thanexpected 13% growth for CY2010 estimated by FICCI-KPMG. Within the C&S TV segment, regional markets are likely to grow faster. However, we continue to maintain that faster-than-industry growth accompanied by greater competition and fragmentation of the market may result in weaker-than-expected growth in individual industry players. Exhibit 4 presents the increase in number of channels during CY2009 across various industry sub-segments; we highlight that the number of regional channels increased by 18%, higher than the increase in number of Hindi (9%) and English channels (7%). Cost efficiency, another key driver for the C&S segment during the downturn, may not be sustainable for the regional market players given already rock-bottom prices and intense competition. Exhibit 3: Top 10 advertising categories and advertisers on C&S TV, calendar year-ends, 2008-2009 Share (%) 2009 2008 14 13 11 9 6 6 5 6 5 5 4 4 4 4 4 4 3 3 3 3 Rank (X) 2009 2008 1 1 2 2 3 5 4 10 5 4 6 8 7 7 8 3 9 6 10 NA Category Food & Beverage Personal Care Services Telecom/ISPs Hair Care Auto BFSI Personal Accessories Health Care Household Products Advertiser Hindustan Unilever Reckitt Benckiser Coka Cola Cadburys ITC Limited Smithkline Beecham Procter & Gamble Bharti Airtel Pepsi Co L'Oreal Source: FICCI-KPMG 2010 report, Kotak Institutional Equities Exhibit 4: Total number of active TV channels on C&S in India, calendar year-ends, 2008-2009 (#) 250 2008 200 150 100 58 50 Hindi Regional English 63 41 44 135 114 2009 176 219 Others Source: FICCI-KPMG 2010 report, Kotak Institutional Equities 24 KOTAK INSTITUTIONAL EQUITIES RESEARCH
Slide 25: Media India C&S distribution—waiting for profitability as growth soars Exhibit 5 presents the expected (by FICCI-KPMG) strong growth in subscribers across the various C&S distribution platforms in India. At the cost of becoming clichéd, we reiterate the rapid penetration in DTH platforms in India and expect the DTH Industry to reach over 40 mn households by CY2014 (largely in line with FICCI-KPMG). However, FICCIKPMG expects the growth in digital cable to surpass DTH over the next few years, which is a tad surprising given continued legacy issues in the cable business. The large cable networks have raised capital recently and have aggressive expansion plans but the target of 40 mn digital cable households is lofty, in our view. Exhibit 6 presents the growth in subscription revenues of broadcasters; strong growth in DTH and digital cable is likely to benefit broadcasters given higher declaration versus analog cable. However, we highlight few areas of concern—(1) significant competition among broadcasters will result in fragmentation of subscription revenues (like advertising revenues; with new channels like Imagine, Colors turning pay). (2) The high churn in DTH subscriber base; FICCI-KPMG estimates 20 mn gross subscribers by end-CY2009 but 16 mn net paying subscribers. (3) The impact of intense competition in the market on ARPUs and profitability though some players believe it is only due to the nascent stage of the development of organized C&S distribution segment in India. Exhibit 5: Trend of subscribers across distribution platforms, calendar year-ends, 2009-2014E (mn) 160 Analog cable 120 24 10 30 19 35 27 Digital cable Direct-to-Home (DTH) 39 35 43 80 16 4 69 40 40 68 63 59 56 55 2009 2010E 2011E 2012E 2013E 2014E Source: FICCI-KPMG 2010 report, Kotak Institutional Equities Exhibit 6: Trend of advertising and subscription revenues, calendar year-ends, 2009-2014E (Rs bn) 200 Advertising (LHS) 160 120 30 80 40 2009 2010E 2011E 2012E 2013E 2014E 28 26 88 31 99 39 113 49 133 59 31 32 155 74 90 33 182 Subscription (LHS) Percentage (%, RHS) 40 35 30 25 20 15 Source: FICCI-KPMG 2010 report, Kotak Institutional Equities KOTAK INSTITUTIONAL EQUITIES RESEARCH 25
Slide 26: India Media Print—Regional (including Hindi) in limelight as English suffers Exhibit 7 presents the key advertising categories and their share of advertising on print in India. The significant dependence on cyclical sectors such as Real Estate, BFSI and Autos hurt print in CY2009 as its advertising revenues declined by 5%, as per FICCI-KPMG. However, regional print (incl. Hindi) was in the limelight with growth much ahead of the industry with limited threat of fragmentation. Regional print contributes a majority share of readership but lags the English print in revenue share; however, advertisers are becoming more comfortable with regional print readership and the advertising rate gap between English and Hindi is reducing (see Exhibit 8). Cost rationalization and efficiencies were other drivers of print profitability in CY2009 as declining advertising revenues in 2HCY08 and high newsprint prices resulted in (1) consolidation in the industry (at least significant reduction in competitive intensity) and (2) cost optimization and improvement in operating efficiencies as the industry tackled an inflated cost base; certain operating efficiencies should have a long-term impact. Additionally, the industry also increased cover prices, which acted as an effective counter-cyclical tool. However, cover prices will likely reduce and costs likely increase with recovery in advertising revenues and rising competition. Exhibit 7: Top 10 advertising categories on print, calendar year-end, 2009 Category Education Services BFSI Auto Retail Durables Personal Accessories Health Care Corporate Clothing Share (%) 15 12 9 7 6 4 4 3 2 2 Source: FICCI-KPMG 2010 report, Kotak Institutional Equities Exhibit 8: Revenue and readership share of print in India, calendar year-ends, 2007-2008 Language English Hindi Tamil Marathi Malayalam Telugu Gujarati Others Total Revenue share (%) 2008 2007 33 35 27 24 8 9 8 7 7 6 6 7 4 5 7 7 100 100 Readership (mn) 17 57 13 18 17 10 11 25 168 Reader share (%) 10 34 8 11 10 6 7 15 100 Source: Pitch-Madison 2009 report, Kotak Institutional Equities 26 KOTAK INSTITUTIONAL EQUITIES RESEARCH
Slide 27: Media India Films—strong beginning post forgettable CY2009 CY2009 was a forgettable year for the Indian film industry with the dispute between multiplex operators and producers/distributors resulting in two months of movie release window lost and 15% decline in film segment revenues, as estimated by FICCI-KPMG (see Exhibit 9). Additionally, a weak economy and relatively subdued advertising revenue market also impacted the C&S telecast rights market adversely. However, the lack of compelling content was the bane of the industry with significant decline in percentage of successful films, in our view. The easy liquidity conditions in the film production market prior to the slowdown resulted in focus on quantity (and not quality) of content, which resulted in unviable and poorly-executed projects. However, the industry emerged stronger at the beginning of CY2010 with the success of ‘3 Idiots’, which proved that the revenue potential of compelling cinema had gone up considerably. The terms of the revenue sharing between multiplex operators and producers/distributors has been revised in favor of the latter (see Exhibit 10). The industry slowdown in CY2009 also resulted in significant cost rationalization (talent cost) and efficiencies (cost of production), which will hold the industry in good stead going forward. Finally, the recovery in advertising revenue markets as well as strong growth in emerging digital platforms (DTH, mobile) is positive for the ancillary revenue streams (C&S telecast rights, Video-on-Demand) for the industry. Exhibit 9: Estimates of film revenues across platforms, calendar year-ends, 2006-2014E 2006 Advertising revenues (Rs bn) Domestic Theatre 62 Overseas Theatre 6 Home Video 3 C&S Telecast 5 Other Ancillary 3 Total 79 Market growth (%) Domestic Theatre Overseas Theatre Home Video C&S Telecast Other Ancillary 2007 72 9 3 6 3 93 16 50 20 2008 80 10 4 7 4 105 11 11 33 17 33 2009 69 7 4 6 4 90 (14) (30) (14) 2010E 73 7 5 7 4 96 6 25 17 2011E 79 8 5 8 5 105 8 14 14 25 2012E 86 9 6 9 5 115 9 13 20 13 2013E 93 9 7 10 6 125 8 17 11 20 2014E 101 10 7 11 7 136 9 11 10 17 Source: FICCI-KPMG 2010 report, Kotak Institutional Equities Exhibit 10: Revised studios' share of total multiplex NBOCs (%) Week1 Previous formula High-budget movie Normal-budget movie Revised formula Successful movie Average movie Failed movie Increase in share (%) Successful movie Average movie 48.0 45.0 52.5 50.0 50.0 9.4 4.2 Week2 40.0 40.0 45.0 42.5 40.0 12.5 6.3 Week3 35.0 35.0 37.5 37.5 35.0 7.1 7.1 Source: Industry data, Kotak Institutional Equities KOTAK INSTITUTIONAL EQUITIES RESEARCH 27
Slide 28: India Media Internet—threat or opportunity? Exhibit 11 presents the trends in media spends in the UK market; Internet has been the driving force of the media industry in the UK in the last 5 years, taking away market share from traditional mediums like print (expected) but also C&S TV. We highlight two differentiating features of India in this respect—(1) all forms of media are growing in India in terms of revenues and reach and (2) broadband penetration is miniscule and growing at a low rate currently (2 mn annual subscriber addition on a total subscriber base of around 6-7 mn). Thus, we do not believe there is a significant threat to traditional media platforms in India in the medium term (5 years). However, a viable digital (Internet and mobile, which may prove to be disruptive with 3G) strategy will be critical for the growth and sustainability of existing large media businesses. Exhibit 12 presents the top 10 websites in the UK market; an important question is also whether local brands can at all compete in the digital space. Only one out of the top 10 brands in UK (BBC) is local and thus, a significant piece of the advertising revenues are captured by global brands such as Google and Facebook. This poses a significant problem for traditional, local media platforms in India even in deciding whether to invest in digital medium at all, given (1) lack of clear monetization model so far (at least one that matches their current scale) and (2) no clarity on the success of their investments (both the top Internet brands in India, Rediff.com and IN.com, are loss-making despite being among the top 10 list). This peculiar catch-22 situation needs to be resolved quickly lest the media industry lose its growth momentum over time. Exhibit 11: Estimates of media share across platforms in UK, calendar year-ends, 2005-2010E (%) Television Print Magazines Radio Cinema Outdoor Internet Total (US$ bn) 2005 30 35 13 4 1 6 11 16.7 2006 28 33 13 3 1 6 16 17.1 2007 27 30 11 3 1 6 21 18.3 2008 26 27 11 3 1 6 26 17.8 2009 26 23 10 3 1 6 30 15.3 2010E 26 23 10 3 1 6 31 14.9 Source: FICCI-KPMG 2010 report, Kotak Institutional Equities Exhibit 12: Top 10 digital brands in UK, calendar year-end, 2009 Website Google Facebook Youtube Yahoo BBC Microsoft Ebay Wikipedia Twitter Blogger Rank 1 2 3 4 5 6 7 8 9 10 Source: Alexa Research, Kotak Institutional Equities 28 KOTAK INSTITUTIONAL EQUITIES RESEARCH
Slide 29: Kotak Institutional Equities: Valuation summary of key Indian companies Company Automobiles Ashok Leyland Bajaj Auto Hero Honda Mahindra & Mahindra Maruti Suzuki Tata Motors Automobiles Banks/Financial Institutions Andhra Bank Axis Bank Bank of Baroda Bank of India Canara Bank Corporation Bank Federal Bank HDFC HDFC Bank ICICI Bank IDFC India Infoline Indian Bank Indian Overseas Bank J&K Bank LIC Housing Finance Mahindra & Mahindra Financial Oriental Bank of Commerce PFC Punjab National Bank Reliance Capital Shriram Transport SREI State Bank of India Union Bank Banks/Financial Institutions Cement ACC Ambuja Cements Grasim Industries India Cements Shree Cement UltraTech Cement Cement Consumer products Asian Paints Colgate-Palmolive (India) Dabur India GlaxoSmithkline Consumer (a) Godrej Consumer Products Hindustan Unilever ITC Jyothy Laboratories Nestle India (a) Tata Tea Consumer products Constructions IVRCL Nagarjuna Construction Co. Punj Lloyd Sadbhav Engineering Construction 19-Mar-10 Price (Rs) 54 1,865 1,968 1,073 1,429 784 Rating ADD ADD SELL ADD REDUCE ADD Cautious 101 1,156 615 326 408 443 258 2,694 1,820 957 164 121 171 89 662 818 369 296 259 962 795 507 72 2,058 273 BUY ADD BUY REDUCE ADD BUY BUY ADD BUY REDUCE REDUCE BUY BUY BUY BUY ADD BUY REDUCE SELL BUY ADD ADD NR BUY BUY Attractive 979 119 2,914 128 2,241 1,122 SELL SELL REDUCE SELL BUY SELL Neutral 1,994 715 164 1,518 270 229 261 173 2,646 950 BUY REDUCE BUY ADD ADD REDUCE BUY ADD ADD BUY Attractive BUY BUY REDUCE BUY Attractive Mkt cap. (Rs mn) (US$ mn) 71,905 269,820 393,050 316,391 413,068 447,667 1,911,900 48,743 439,288 224,891 171,632 167,178 63,486 44,058 766,436 822,679 1,064,917 212,879 37,634 73,512 48,215 32,085 73,617 35,328 74,072 297,330 303,384 195,660 117,414 8,379 1,306,869 137,746 6,981,952 183,859 180,706 267,148 36,024 78,082 139,734 885,553 191,302 97,174 142,159 63,832 69,741 498,988 984,738 12,518 255,150 58,732 2,374,333 45,071 40,746 58,983 16,166 160,965 1,580 5,929 8,638 6,953 9,077 9,838 42,015 1,071 9,654 4,942 3,772 3,674 1,395 968 16,843 18,079 23,402 4,678 827 1,615 1,060 705 1,618 776 1,628 6,534 6,667 4,300 2,580 184 28,719 3,027 153,433 4,040 3,971 5,871 792 1,716 3,071 19,461 4,204 2,135 3,124 1,403 1,533 10,966 21,640 275 5,607 1,291 52,177 990 895 1,296 355 3,537 96 136 866 42 258 2,179 3,769 73 96 62 38.6 21.6 4.5 44.8 6.7 9.5 8.7 5.5 58.6 53.7 72.9 29.4 5.8 55.3 10.8 10.3 10.5 9.7 76.7 56.9 83.4 33.4 7.0 70.3 12.4 10.6 12.3 12.1 92.2 69.7 188 1,522 92 282 35 124 56.3 7.2 238.6 17.8 174.8 78.8 83.2 8.0 297.3 13.7 267.3 90.1 53.2 6.9 289.2 12.4 228.9 64.5 485 380 366 526 410 143 171 284 452 1,113 1,295 312 430 545 48 90 96 251 1,148 315 246 232 116 635 505 13.5 50.6 60.9 57.2 50.5 62.3 29.3 80.2 52.8 33.8 5.8 5.1 28.0 24.3 84.5 62.5 22.4 36.1 13.3 98.0 39.3 30.1 7.0 143.7 34.2 19.4 63.3 75.0 38.9 75.2 71.1 30.6 98.5 64.8 37.3 8.4 7.7 34.2 22.7 105.5 82.6 31.9 41.3 19.7 116.4 17.7 36.6 8.3 154.8 37.9 14.7 74.5 77.2 47.8 69.7 65.0 38.0 115.4 84.4 47.0 9.1 9.2 34.7 13.3 112.3 77.4 37.2 47.7 21.4 124.7 17.5 48.3 7.9 174.4 38.7 O/S shares (mn) 1,330 145 200 295 289 571 2009 1.5 45.2 64.2 30.0 42.2 10.0 EPS (Rs) 2010E 2011E 3.1 110.7 108.3 64.4 85.1 26.3 3.9 137.9 121.5 72.7 90.9 30.1 EPS growth (%) 2009 2010E 2011E (57.8) (13.4) 32.4 (19.8) (29.6) (78.2) (30.7) 13.5 56.9 55.1 40.7 32.4 21.5 (14.8) (6.4) 17.6 (15.4) 1.9 (8.7) 24.1 10.3 13.8 37.3 7.5 51.4 17.4 50.9 (5.6) 56.7 (24.7) 34.8 24.5 27.0 (12.2) (5.0) (16.2) n/a 93.8 (3.1) (8.0) (1.7) 26.3 17.0 15.8 (5.3) 19.0 2.8 (12.9) 31.0 14.7 10.7 7.4 (6.3) (172.4) 26.2 (70.6) 105.8 144.8 68.8 114.5 101.7 162.7 115.2 44.1 25.1 23.1 (32.0) 48.8 14.1 4.5 22.7 22.8 10.6 45.4 50.4 22.4 (6.9) 24.8 32.0 42.2 14.3 47.7 18.7 (55.1) 21.6 17.8 7.7 11.0 15.3 47.9 11.4 24.6 (23.1) 52.9 14.3 23.6 88.8 36.2 27.6 23.6 62.0 7.8 21.7 75.4 30.8 6.1 23.3 (6.4) 28.5 (236.1) 4.4 280.3 24.5 24.5 12.1 12.8 6.9 14.4 14.3 (24.4) 17.7 2.9 22.9 (7.3) (8.5) 24.1 17.2 30.2 26.0 8.0 19.2 1.4 (41.1) 6.4 (6.2) 16.5 15.5 8.6 7.2 (1.1) 32.0 (4.8) 12.7 2.0 10.4 (36.1) (13.5) (2.7) (9.1) (14.4) (28.4) (16.2) 14.4 13.8 21.2 27.0 14.3 3.2 16.8 24.4 20.3 22.3 14.2 22.1 21.7 42.8 36.8 31.4 2009 35.3 41.2 30.7 35.8 33.9 78.2 41.0 7.5 22.9 10.1 5.7 8.1 7.1 8.8 33.6 34.5 28.3 28.4 23.6 6.1 3.6 7.8 13.1 16.5 8.2 19.4 9.8 20.2 16.9 10.2 14.3 8.0 16.0 17.4 16.5 12.2 7.2 12.8 14.2 13.8 51.7 33.1 36.3 33.9 40.4 24.1 30.2 31.2 45.2 17.7 30.9 19.9 23.6 (24.1) 25.3 73.5 PER (X) 2010E 17.2 16.8 18.2 16.7 16.8 29.8 19.0 5.2 18.3 8.2 8.4 5.4 6.2 8.4 27.4 28.1 25.6 19.5 15.7 5.0 3.9 6.3 9.9 11.6 7.2 13.2 8.3 45.0 13.9 8.7 13.3 7.2 13.9 11.8 14.8 9.8 9.3 8.4 12.5 11.1 27.4 24.3 28.4 27.4 24.9 22.3 24.8 17.8 34.5 16.7 25.0 21.3 18.4 17.7 24.2 19.3 2011E 13.8 13.5 16.2 14.8 15.7 26.0 16.7 6.8 15.5 8.0 6.8 5.9 6.8 6.8 23.3 21.6 20.3 18.1 13.2 4.9 6.6 5.9 10.6 9.9 6.2 12.1 7.7 45.5 10.5 9.1 11.8 7.0 12.6 18.4 17.2 10.1 10.3 9.8 17.4 13.3 23.9 21.4 23.5 21.6 21.8 21.6 21.2 14.3 28.7 13.6 21.9 17.4 15.1 12.4 17.7 14.7 EV/EBITDA (X) 2009 2010E 2011E 19.0 21.6 18.5 25.0 20.3 27.8 22.5 — — — — — — — — — — — — — — — — — — — — — — — — — — 8.8 9.0 6.9 5.1 8.4 8.3 7.7 30.9 27.4 27.9 19.9 27.9 18.2 18.5 21.2 28.8 10.6 20.4 14.0 13.9 19.6 16.6 16.0 11.5 10.4 11.6 10.8 9.5 15.2 11.7 — — — — — — — — — — — — — — — — — — — — — — — — — — 6.4 8.3 5.1 5.4 5.1 6.8 6.0 17.2 19.9 20.6 15.6 18.0 15.4 15.0 12.8 23.2 9.0 16.1 11.7 10.3 8.7 12.7 10.0 8.9 9.0 10.0 9.7 8.5 13.3 10.2 — — — — — — — — — — — — — — — — — — — — — — — — — — 8.1 8.7 5.1 5.6 4.7 8.3 6.5 14.8 16.6 16.5 12.9 15.1 15.0 13.1 9.2 20.0 7.5 14.1 9.6 9.1 7.0 10.1 8.3 2009 1.9 14.4 10.0 6.0 4.3 3.4 5.1 1.3 4.3 2.0 1.5 1.7 1.3 1.0 5.8 5.5 2.1 3.5 3.1 1.3 0.8 1.4 3.7 2.5 1.2 2.7 2.3 2.9 5.2 0.8 2.3 2.0 2.6 3.5 3.0 2.3 1.0 6.5 3.2 2.8 16.7 44.9 17.3 8.3 12.2 24.2 6.7 3.4 53.9 1.2 9.2 2.5 2.4 2.4 4.6 2.5 Price/BV (X) 2010E 2011E 1.8 8.7 7.0 4.0 3.5 2.6 3.8 1.1 2.8 1.7 1.3 1.3 1.1 0.9 5.3 3.9 2.0 3.0 2.5 1.1 0.7 1.2 2.2 2.1 1.1 2.4 1.9 2.8 3.0 0.7 2.0 1.6 2.2 2.9 2.6 1.9 0.9 3.7 2.6 2.3 13.6 40.2 13.5 7.2 7.1 24.1 5.9 3.0 43.6 1.2 8.1 2.2 1.8 1.7 3.9 2.0 1.6 5.7 5.2 3.2 2.9 2.3 3.2 1.0 2.4 1.4 1.1 1.1 1.0 0.8 4.7 3.4 1.9 2.7 2.0 0.9 0.6 1.1 2.0 1.9 1.0 2.1 1.6 2.6 2.7 0.7 1.8 1.3 1.9 2.6 2.3 1.6 0.8 2.7 2.3 2.0 11.2 35.8 11.0 6.3 5.9 23.9 5.2 2.6 35.5 1.1 7.2 2.0 1.7 1.5 3.2 1.8 Dividend yield (%) 2009 2010E 2011E 1.9 1.1 1.0 0.9 0.2 0.7 0.8 4.5 0.8 1.5 2.4 2.0 2.8 1.9 1.1 0.5 1.1 0.7 2.1 2.9 5.9 2.6 1.6 1.5 2.5 1.5 2.0 0.7 0.9 1.4 1.4 1.8 1.3 2.4 2.5 1.1 1.4 0.4 0.5 1.5 0.9 2.1 1.1 1.0 1.5 3.8 1.4 1.4 1.6 1.8 1.9 0.2 0.6 0.1 0.3 0.3 1.9 1.1 1.1 0.9 0.3 0.7 0.8 3.9 1.1 1.8 1.7 2.0 3.2 2.0 1.3 0.7 1.3 0.9 2.7 3.5 4.2 3.2 2.2 2.2 2.8 1.9 2.4 0.3 2.2 1.7 1.5 2.0 1.5 2.4 1.6 1.1 1.7 0.5 0.7 1.4 2.0 3.3 1.8 1.5 1.5 4.5 1.7 1.7 2.1 2.0 2.4 0.2 1.0 0.2 0.4 0.5 1.9 1.1 1.1 0.9 0.3 0.7 0.8 2.9 1.3 1.9 2.0 2.5 3.0 2.5 1.5 0.9 1.6 0.9 1.8 3.5 4.7 3.4 2.2 2.5 3.3 2.1 2.6 0.3 2.9 1.7 1.6 2.1 1.7 2.4 1.8 1.2 2.5 0.5 0.7 1.5 2.3 3.7 2.2 2.3 1.5 4.6 2.1 2.0 2.5 2.4 2.8 0.2 1.3 0.4 0.5 0.6 2009 6.2 37.7 36.4 17.1 13.5 4.4 12.4 18.9 19.1 21.4 29.2 18.3 19.6 12.1 18.2 16.9 7.8 12.9 11.9 22.9 22.1 16.7 26.2 15.4 13.7 18.9 25.8 15.3 29.6 12.8 17.1 27.2 16.1 24.7 19.7 21.1 14.8 65.7 31.1 20.0 36.6 155.1 55.3 26.8 46.9 112.4 25.3 10.7 126.7 9.4 29.9 13.2 9.4 (8.6) 18.0 3.5 RoE (%) 2010E 2011E 12.1 64.0 45.4 28.6 23.0 9.9 20.2 23.5 18.4 22.0 16.2 22.8 19.3 11.5 19.7 16.1 8.2 16.4 17.6 23.3 16.1 18.1 26.2 19.3 13.3 18.4 25.2 6.3 26.5 11.1 15.9 24.4 15.8 29.3 19.3 21.4 10.5 56.1 27.3 20.5 57.2 174.5 53.9 28.4 36.2 108.4 27.0 16.4 139.6 9.4 32.4 11.0 11.3 11.2 16.1 10.2 12.4 50.4 37.1 23.9 20.0 9.7 19.0 15.3 17.5 19.1 17.3 17.8 15.5 13.0 20.3 16.7 9.8 15.6 18.7 20.0 8.6 16.9 19.8 19.6 14.0 17.6 22.5 5.9 25.1 10.5 15.8 20.7 15.4 17.1 14.7 17.6 9.0 31.8 16.2 15.0 53.4 177.3 52.2 31.4 29.6 111.2 27.6 19.0 136.3 10.8 32.9 12.0 11.6 12.9 18.3 12.0 2,100 700 200 1,500 270 220 280 200 3,000 1,200 5.3 (2.0) 21.9 (1.2) (0.1) (3.9) 7.2 15.9 13.4 26.3 2.5 1.7 2.7 0.9 1.2 18.3 26.0 0.5 2.3 2.7 800 92 2,500 100 2,400 900 (18.3) (22.5) (14.2) (21.6) 7.1 (19.8) 11.2 6.4 12.4 4.7 0.8 5.8 125 1,160 650 360 470 540 340 2,700 1,800 910 145 170 230 150 700 925 415 280 210 1,020 875 500 115 2,400 350 24.4 0.3 5.6 10.3 15.3 22.0 32.0 0.2 (1.1) (4.9) (11.8) 40.8 34.5 69.5 5.8 13.1 12.4 (5.3) (18.9) 6.0 10.1 (1.4) 59.6 16.6 28.3 2.7 48.8 10.9 5.6 4.4 0.5 3.2 41.1 37.4 92.4 17.9 5.3 2.0 2.4 0.7 12.5 0.8 4.2 3.4 6.7 48.1 4.0 4.8 99.6 4.0 Target price Upside (Rs) 55 1,930 1,700 1,230 1,350 810 (%) 1.8 3.5 (13.6) 14.6 (5.5) 3.4 29 KOTAK INSTITUTIONAL EQUITIES RESEARCH ADVT-3mo (US$ mn) 5.2 12.1 18.3 26.1 25.1 84.6 India Daily Summary - March 22, 2010 169 159 174 1,293 267 257 339 13 8.5 6.7 (7.2) 51.1 7.9 8.6 9.8 53.4 9.7 10.5 14.0 73.0 185 180 205 1,400 9.6 13.4 17.8 8.3 15.7 3.5 18.6 0.4 Source: Company, Bloomberg, Kotak Institutional Equities estimates
Slide 30: Kotak Institutional Equities: Valuation summary of key Indian companies India Daily Summary - March 22, 2010 Company Energy Bharat Petroleum Cairn india Castrol India (a) GAIL (India) GSPL Hindustan Petroleum Indian Oil Corporation Oil India Oil & Natural Gas Corporation Petronet LNG Reliance Industries Energy Industrials ABB BGR Energy Systems Bharat Electronics Bharat Heavy Electricals Crompton Greaves Larsen & Toubro Maharashtra Seamless Siemens Suzlon Energy Thermax Voltas Industrials Infrastructure GMR Infrastructure GVK Power & Infrastructure IRB Infrastructure Mundra Port and SEZ Infrastructure Media DishTV HT Media Jagran Prakashan Sun TV Network Zee Entertainment Enterprises Zee News Media Metals Hindalco Industries National Aluminium Co. Jindal Steel and Power JSW Steel Hindustan Zinc Sesa Goa Sterlite Industries Tata Steel Metals Pharmaceutical Biocon Cipla Cadila Healthcare Dishman Pharma & chemicals Divi's Laboratories Dr Reddy's Laboratories GlaxoSmithkline Pharmaceuticals (a) Glenmark Pharmaceuticals Lupin Ranbaxy Laboratories Sun Pharmaceuticals Pharmaceuticals Property DLF Indiabulls Real Estate Mahindra Life Space Developer Phoenix Mills Puravankara Projects Sobha Unitech 19-Mar-10 Price (Rs) 523 285 682 414 88 321 302 1,112 1,057 78 1,092 Rating RS SELL REDUCE REDUCE REDUCE RS RS REDUCE REDUCE ADD SELL Cautious Mkt cap. (Rs mn) (US$ mn) 171,319 541,214 84,322 525,278 49,641 108,941 715,302 252,645 2,260,483 58,388 3,185,510 7,953,042 179,571 36,871 177,560 1,162,096 156,891 974,380 25,430 247,054 127,471 80,426 57,200 3,224,951 215,457 67,590 88,359 294,023 665,429 39,452 32,888 37,435 165,415 115,336 14,472 404,998 335,633 259,947 643,046 232,389 523,855 401,011 692,919 571,708 3,660,508 56,320 267,774 110,735 17,816 82,731 212,406 146,130 67,398 142,999 200,177 351,704 1,656,190 529,256 64,357 16,784 28,194 21,887 26,811 189,004 3,765 11,894 1,853 11,543 1,091 2,394 15,719 5,552 49,675 1,283 70,004 174,773 3,946 810 3,902 25,538 3,448 21,413 559 5,429 2,801 1,767 1,257 70,870 4,735 1,485 1,942 6,461 14,623 867 723 823 3,635 2,535 318 8,900 7,376 5,712 14,131 5,107 11,512 8,812 15,227 12,564 80,442 1,238 5,885 2,433 392 1,818 4,668 3,211 1,481 3,142 4,399 7,729 36,396 11,631 1,414 369 620 481 589 4,153 O/S shares (mn) 328 1,897 124 1,268 563 339 2,372 227 2,139 750 2,917 EPS (Rs) 2009 2010E 20.6 4.3 21.3 22.2 2.2 17.0 9.8 101.1 90.8 6.9 50.6 58.1 5.4 30.8 22.7 7.5 46.3 33.0 112.2 89.9 5.3 47.7 2011E 61.7 17.8 39.7 23.5 12.4 49.7 32.1 110.6 107.1 8.1 62.6 EPS growth (%) 2009 2010E 2011E (50.1) — 20.8 8.7 21.9 (49.3) (67.9) — (2.1) — (3.7) (9.7) 181.9 26 44.7 2.3 241.9 173.1 235.4 10.9 (1.0) (22.7) (5.6) 20.7 (35.2) 47.4 13.4 44.1 35.2 7.2 12.0 13.5 (130.8) (11.7) 36.2 5.3 (24.5) 6.7 83.8 40.8 28.0 (61.6) 572.1 92.8 32.7 25.9 28.2 144.6 56.9 (49.0) 23.7 363.6 44.8 2.5 (4.0) (97.1) (26.7) 210.6 34.9 65.8 (4.3) (40.1) 72.6 8.1 16.6 22.3 (148.7) (25.5) 28.9 (54.5) 109.7 82.4 2.5 22.4 (5.9) (48.7) 6.2 228.0 28.8 3.7 64.6 7.2 (2.7) (1.5) 19.1 51.2 31.3 22.3 65.0 27.8 7.2 25.8 14.1 20.2 2.3 52.7 (231.4) 39.2 9.0 32.5 (3.1) 33.5 29.2 59.5 38.7 (52.4) 29.5 13.2 20.8 20.3 20.0 39.2 205.5 178.6 15.9 37.5 12.8 50.5 20.7 2,331.6 77.9 24.1 13.0 20.3 19.2 76.3 20.6 14.6 27.6 24.9 105.0 38.7 29.5 32.1 151.7 7.3 51.0 (4.8) 10.4 9.7 PER (X) 2009 2010E 25.4 66 32.0 18.7 40.2 18.9 30.6 11.0 11.6 11.3 21.6 17.8 32.8 31.9 21.4 37.2 27.9 32.3 10.1 51.7 10.5 27.8 25.0 30.9 76.6 56.1 50.2 68.0 66.9 (5.6) 165.8 40.9 46.2 31.5 32.4 95.6 63.4 20.4 21.1 84.5 19.2 17.9 17.6 5.9 16.0 60.0 33.6 36.5 12.2 19.9 38.7 31.6 22.2 26.8 (38.0) 19.3 33.9 11.7 212.1 38.6 39.2 15.2 18.1 10.0 9.0 53 22.1 18.3 11.7 6.9 9.1 9.9 11.8 14.6 22.9 14.7 50.6 21.7 18.9 25.8 20.6 30.2 9.0 45.6 (34.1) 31.5 18.4 29.4 101.5 52.6 27.3 48.3 52.3 (14.7) 24.7 21.2 34.8 25.0 25.3 39.1 40.4 40.1 17.1 18.2 13.3 17.5 18.4 198.9 21.8 19.3 24.9 22.0 12.7 33.2 22.4 29.2 19.0 21.9 78.0 26.0 26.3 25.8 101.1 21.1 38.2 12.4 19.2 19.5 2011E 8.5 16.0 17.2 17.6 7.1 6.5 9.4 10.1 9.9 9.6 17.4 12.0 30.7 17.0 17.6 20.5 18.1 25.1 8.8 29.8 26.0 22.6 16.9 22.2 104.7 39.4 21.2 30.3 37.7 (30.9) 19.1 18.7 28.8 20.8 21.1 28.1 13.2 14.4 14.7 13.3 11.8 11.6 15.2 8.2 12.2 15.6 22.1 18.3 10.7 18.8 18.6 25.5 14.9 17.6 38.0 18.7 20.3 19.5 40.2 19.7 25.3 13.0 17.4 17.8 EV/EBITDA (X) 2009 2010E 2011E 5.3 46.4 18.5 10.1 13.4 2.9 8.3 5.0 4.4 7.9 14.2 8.1 19.5 18.1 11.5 20.4 14.9 20.7 5.7 25.4 7.6 16.2 13.8 17.1 27.9 51.4 24.7 39.6 32.9 (36.5) 37.4 23.3 24.6 21.7 15.8 29.3 16.6 10.1 13.8 13.3 15.6 15.8 13.1 6.1 10.6 24.0 25.5 19.5 9.2 16.2 16.2 18.0 13.9 23.8 (88.4) 15.4 21.3 12.2 (35) 56.9 45.5 21.8 16.5 17.2 4.5 36.9 13.6 10.7 6.4 2.4 5.7 3.5 4.2 8.6 11.0 6.9 28.9 12.2 9.6 14.3 11.3 16.5 4.6 22.1 12.6 16.9 10.1 14.9 20.0 18.1 13.0 31.0 21.0 57.9 11.9 12.8 20.1 19.3 12.3 18.7 8.8 17.6 10.9 9.1 9.1 14.4 10.1 19.6 11.8 11.3 17.3 14.3 9.7 19.6 13.1 16.6 11.3 18.2 18.8 19.1 16.0 16.9 (66.9) 17.3 29.4 13.7 14.8 17.6 4.0 10.0 10.7 11.0 4.1 2.2 4.8 3.0 3.5 6.1 8.4 5.6 17.5 9.5 8.6 11.2 9.7 14.1 4.3 17.6 8.0 12.5 8.9 11.9 14.7 16.6 11.6 19.9 15.8 18.9 10.0 10.9 16.3 15.1 10.5 14.5 7.6 6.9 8.9 7.9 6.8 8.5 7.7 6.6 7.5 9.2 15.4 11.9 7.9 13.4 11.1 14.4 9.3 14.3 21.0 13.4 13.3 14.6 33.6 14.1 18.9 12.9 12.6 13.7 Price/BV (X) 2009 2010E 2011E 1.3 1.6 18.8 3.3 3.7 0.9 1.5 2.5 1.9 2.6 2.3 2.0 8.5 6.5 4.5 9.0 8.5 6.4 1.9 10.9 1.2 8.1 7.1 6.1 2.6 2.9 4.8 10.0 4.3 (6.3) 3.8 6.7 9.4 3.3 5.9 6.4 1.8 2.5 8.3 2.6 3.5 8.3 2.6 1.9 3.0 3.7 6.2 9.0 2.5 6.7 6.0 9.3 4.2 9.9 6.4 4.9 6.0 2.2 1.0 1.9 1.9 1.6 2.4 3.7 1.2 1.6 18.3 2.9 3.1 0.8 1.3 1.7 1.7 2.3 2.0 1.8 7.5 5.3 3.8 7.1 6.2 4.4 1.6 9.0 1.1 7.4 5.6 4.8 2.1 2.1 3.8 8.1 3.5 9.7 3.4 6.1 8.1 3.0 4.9 5.0 1.3 2.4 5.6 2.0 2.8 5.4 1.9 2.2 2.5 3.2 4.6 6.8 2.1 5.8 5.5 8.2 2.9 6.2 6.1 4.2 5.0 2.1 0.7 1.8 1.8 1.5 1.5 1.8 1.1 1.6 16.5 2.7 2.5 0.8 1.2 1.6 1.6 1.9 1.8 1.6 6.2 4.2 3.3 5.7 4.8 3.8 1.4 7.3 1.1 6.1 4.6 4.1 2.0 2.1 2.9 6.2 3.0 14.1 3.1 5.6 7.1 2.8 4.2 4.6 1.2 2.1 4.0 1.6 2.3 3.8 1.7 1.8 2.1 2.8 3.9 5.3 1.8 4.8 4.3 7.0 2.5 4.8 5.6 3.5 4.2 1.9 0.7 1.7 1.7 1.4 1.4 1.5 Dividend yield (%) 2009 2010E 2011E 1.5 — 2.2 1.7 0.8 1.6 1.3 2.6 3.0 2.2 0.6 1.5 0.3 0.6 0.8 0.7 0.5 0.6 1.5 0.4 — 0.7 1— 0.6 — — 0.4 (0.4) (0.1) — 0.2 1.6 0.6 0.8 0.7 0.6 — 1.2 0.2 0.1 0.3 0.5 — 2.2 0.6 — 0.6 1 — — 0.5 — — 0.7 — 0.8 0.4 1.0 — 1.0 0.5 0.3 0.1 4.9 — 3.7 1.9 2.9 8.1 2.2 3.3 3.4 1.9 0.6 1.9 0.3 0.8 1.1 0.8 0.6 0.7 1.7 0.7 — 0.5 1— 0.7 — — — — — — 0.7 2.8 1.0 1.0 0.7 1.0 — 0.5 0.1 0.2 0.4 0.7 — 1.2 0.4 — 0.7 1 — — 0.6 — — 0.8 0.8 0.8 0.6 1.0 — 1.0 0.5 2.0 0.7 5.2 7.0 4.4 1.9 7.0 8.7 2.1 3.5 4.2 2.6 0.8 2.8 0.4 1.0 1.1 1.0 0.7 0.7 2.1 0.7 0.3 1.3 1.6 0.9 — 0.7 — — 0.1 — 1.4 3.2 1.4 1.2 1.2 1.4 — 0.5 0.1 0.4 0.4 0.7 — 1.2 0.4 0.0 0.7 1.1 — 0.0 0.6 — — 0.9 0.9 0.8 0.6 1.3 — 1.0 0.8 2.0 1.5 - RoE (%) 2009 2010E 2011E 5.3 2.5 61.2 17.5 9.6 4.4 4.8 20.1 16.6 23.9 13.6 11.4 29.2 22.3 20.7 26.4 35.6 21.7 20.3 23.3 11.5 33.0 33.0 19.8 4.4 4.8 10.1 15.5 6.5 83.9 2.3 16.7 22.5 11.8 20.1 6.7 2.4 12.8 50.9 11.7 20.2 46.6 14.0 27.5 18.8 6.2 19.0 26.9 22.7 39.6 13.6 31.3 17.7 37.1 (13.3) 30.2 17.7 20.7 0.3 4.8 4.9 11.5 10.4 27.3 14.1 3.0 83.8 15.9 28.7 11.2 15.3 16.5 14.4 15.8 10.6 12.2 15.7 26.9 22.0 30.8 34.6 17.4 19.2 21.6 (3.4) 24.5 34.1 16.5 3.2 4.7 15.6 18.5 6.6 248.6 14.6 30.1 25.3 13.0 21.8 12.7 3.8 6.1 39.2 12.4 23.5 32.8 11.0 1.1 11.4 18.0 21.0 35.7 18.0 18.6 25.4 29.7 17.2 35.2 5.9 17.9 18.9 8.3 0.8 8.4 4.8 12.7 9.7 10.8 13.7 9.9 101.0 15.0 38.9 11.4 13.1 15.5 15.7 20.5 12.2 13.6 22.2 27.6 20.1 30.7 29.8 16.3 16.9 27.0 4.2 29.4 29.8 18.5 3.0 5.3 15.7 23.2 8.0 (37.1) 17.0 31.1 26.3 14.2 22.0 16.2 9.7 15.4 31.8 13.3 21.3 33.8 11.9 24.7 17.0 19.4 19.1 32.7 18.2 27.1 25.9 29.5 17.5 31.2 11.5 21.1 20.5 10.2 1.8 8.5 7.0 11.1 8.5 9.1 Target price Upside (Rs) — 230 640 370 95 — — 1,150 1,200 90 940 (%) — (19.4) (6.2) (10.6) 7.6 — — 3.4 13.5 15.6 (13.9) ADVT-3mo (US$ mn) 10.0 17.7 3.0 14.7 5.8 9.2 5.6 — 23.5 4.3 145.8 KOTAK INSTITUTIONAL EQUITIES RESEARCH 30 847 512 2,220 2,374 245 1,621 361 733 76 675 173 REDUCE ADD REDUCE ADD BUY BUY BUY REDUCE REDUCE ADD BUY Attractive ADD ADD NR ADD Attractive REDUCE NR ADD REDUCE REDUCE NR Neutral 212 72 80 490 642 601 71 337 1,679 119 331 25.8 16.0 103.8 63.9 8.8 50.1 35.9 14.2 7.2 24.3 6.9 16.7 23.6 117.7 92.0 11.9 53.7 40.2 16.1 (2.2) 21.4 9.4 27.6 30.2 126.2 115.8 13.5 64.5 41.1 24.6 2.9 29.8 10.3 11.3 32.2 1.8 9.4 37.2 32.1 22.2 (22.2) 9.9 (0.6) 29.8 13.0 (33.5) (20.6) 54.3 105.6 48.6 (31.9) (80.5) (6.6) 9.5 (4.8) 20.4 (21.0) 690 500 1,870 2,500 260 1,700 400 635 80 725 185 (18.6) (2.4) (15.7) 5.3 6.3 4.9 10.9 (13.3) 5.4 7.4 7.0 6.1 3.0 4.3 32.9 7.8 60.0 1.2 8.4 52.5 2.4 4.6 59 43 266 729 3,667 1,579 332 403 0.8 0.8 5.3 10.7 0.6 0.8 9.7 15.1 0.6 1.1 12.6 24.1 68 50 — 725 15.7 16.8 — (0.5) 6.7 8.9 5.7 10.3 37 140 124 420 266 60 1,063 235 301 394 434 240 (6.6) 0.8 3.0 9.1 8.4 1.9 (2.5) 5.7 5.9 12.1 10.6 2.4 (1.2) 7.3 6.6 14.6 12.8 2.9 45 — 130 295 245 — 21.3 — 4.6 (29.7) (7.8) — 5.8 0.6 1.8 4.8 6.2 1.0 176 403 693 1,242 1,240 452 825 644 ADD SELL SELL SELL BUY REDUCE ADD BUY Cautious 1,911 644 928 187 423 887 840 887 2.8 19.7 32.8 14.7 64.6 25.3 46.8 110.1 4.3 10.1 40.6 68.1 93.5 25.9 44.9 3.2 13.3 28.0 47.0 93.7 105.4 38.9 54.2 78.7 (77.9) (22.0) 139.1 (83.2) (38.0) 29.0 (25.8) 45.3 (1.3) 160 320 530 850 1,400 350 850 700 (8.9) (20.7) (23.5) (31.6) 12.9 (22.6) 3.1 8.7 51.3 8.2 42.7 49.1 12.6 49.1 40.0 115.2 282 334 811 219 633 1,254 1,725 246 1,614 467 1,698 BUY REDUCE BUY BUY ADD REDUCE REDUCE NR ADD SELL ADD Attractive REDUCE ADD BUY BUY REDUCE ADD SELL 200 803 136 81 131 169 85 274 89 428 207 4.7 9.9 22.2 18.0 31.9 32.4 54.6 11.1 60.2 (12.3) 87.8 14.6 13.4 36.8 17.2 19.1 55.9 59.1 12.9 73.6 6.0 65.4 18.1 15.1 44.3 20.5 33.6 67.4 67.7 16.5 92.0 12.3 90.7 (79.9) 10.0 8.3 22.1 19.7 24.3 13.8 (57.0) 21.0 (152.8) 17.6 (17.1) (42.0) (95.4) (38.5) 56.8 (39.8) (52.3) (28.7) 300 295 765 265 700 1,170 1,700 — 1,600 220 1,800 6.5 (11.5) (5.7) 21.0 10.6 (6.7) (1.5) — (0.9) (52.9) 6.0 5.5 10.2 1.3 1.2 3.8 11.9 1.5 5.3 7.8 21.6 12.7 India Daily Summary - March 2 313 160 399 195 103 273 74 1,691 401 42 145 213 98 2,559 26.7 0.8 10.4 5.0 6.8 15.1 7.4 12.1 1.6 18.9 5.1 8.3 14.2 3.8 16.0 4.0 20.3 7.7 7.9 15.7 4.1 315 285 510 260 100 295 65 0.7 77.7 27.8 33.6 (2.5) 7.9 (12.0) 76.6 26.4 1.1 1.0 1.1 2.7 77.3 Source: Company, Bloomberg, Kotak Institutional Equities estimates
Slide 31: Kotak Institutional Equities: Valuation summary of key Indian companies 31 Company Retail Titan Industries Retail Sugar Bajaj Hindustan Balrampur Chini Mills Shree Renuka Sugars Sugar Technology HCL Technologies Hexaware Technologies Infosys Technologies Mphasis BFL Mindtree Patni Computer Systems Polaris Software Lab TCS Wipro Technology Telecom Bharti Airtel IDEA MTNL Reliance Communications Tata Communications Telecom Transportation Container Corporation Transportation Utilities CESC Lanco Infratech Reliance Infrastructure Reliance Power Tata Power Utilities Others Aban Offshore Havells India Jaiprakash Associates Jindal Saw PSL Sintex Tata Chemicals Welspun Gujarat Stahl Rohren United Phosphorus Others KS universe (b) KS universe (b) ex-Energy KS universe (d) ex-Energy & ex-Commodities 19-Mar-10 Price (Rs) 1,824 Rating REDUCE Neutral SELL ADD BUY Attractive 374 71 2,772 666 568 524 174 821 727 REDUCE REDUCE BUY REDUCE BUY REDUCE SELL BUY ADD Attractive 312 69 75 168 294 REDUCE REDUCE SELL SELL REDUCE Cautious 1,276 ADD Cautious 396 53 1,025 142 1,359 ADD BUY BUY REDUCE BUY Attractive BUY SELL BUY ADD BUY BUY ADD REDUCE BUY Mkt cap. (Rs mn) (US$ mn) 80,944 80,944 27,986 24,219 52,144 104,348 259,965 10,249 1,591,329 138,844 23,385 67,345 17,129 1,606,665 1,062,143 4,777,054 1,184,284 213,700 47,376 346,652 83,747 1,875,760 165,802 165,802 49,450 127,345 232,043 340,579 335,522 2,757,118 53,098 34,128 323,195 65,535 7,910 36,786 74,978 58,117 72,549 726,295 40,665,526 32,712,484 28,166,423 1,779 1,779 615 532 1,146 2,293 5,713 225 34,970 3,051 514 1,480 376 35,307 23,341 104,979 26,025 4,696 1,041 7,618 1,840 41,221 3,644 3,644 1,087 2,798 5,099 7,484 7,373 60,589 1,167 750 7,102 1,440 174 808 1,648 1,277 1,594 15,961 893,650 718,877 618,974 125 2,405 226 2,397 247 32.3 1.5 62.7 1.0 50.2 33.1 1.8 63.7 2.5 57.7 42.8 3.7 68.6 3.1 67.0 130 60.9 63.9 76.6 3,797 3,104 630 2,064 285 22.3 2.9 2.4 31.6 13.6 23.8 2.5 (15.6) 18.5 14.0 20.6 1.2 (10.4) 13.4 15.2 695 144 574 208 41 129 99 1,957 1,462 17.5 4.1 102.4 14.2 13.2 26.8 13.2 26.4 25.7 17.8 9.4 108.5 43.6 49.4 36.6 15.6 34.5 31.5 25.1 7.5 124.2 48.7 55.1 44.2 16.1 41.0 37.6 146 95 78 1,221 567 153 223 148 270 308 283 157 Note: (1) For banks we have used adjusted book values. (2) 2009 means calendar year 2008, similarly for 2010 and 2011 for these particular companies. (3) EV/Sales & EV/EBITDA for KS universe excludes Banking Sector. O/S shares (mn) 44 EPS (Rs) 2009 2010E 44.3 60.4 EPS growth (%) 2009 2010E 2011E 26.4 26.4 — — 23.9 (25.3) 14.5 (46.4) 29.6 15.7 (50.5) (19.3) 77.3 3.1 15.8 15.3 26.4 (26.5) (66.3) 19.4 24.0 16.6 5.5 5.5 16.2 (1.9) 66.7 — 57.5 15.7 34 (81) (40) (47) 5 23 (33) (16) 20 (16.3) 1.3 4.9 6.9 36.3 36.3 (92.1) 147.4 60.4 2,436.2 1.7 127.7 5.9 207.5 273.2 36.4 18.3 30.6 22.4 22.3 6.6 (13.9) (750.8) (41.4) 3.2 (20.2) 5.0 5.0 2.6 25.4 1.6 141.5 15.0 15.8 18.4 343.8 115.0 113.8 34.1 (7.6) 2.5 44.9 17.2 44.5 11.4 8.8 14.4 12.7 12.7 (2,471.7) 83.5 329.4 342.8 41.2 (19.5) 14.4 11.7 11.6 20.9 3.7 18.8 19.5 18.0 (13.5) (51.2) (33.7) (27.8) 8.2 (17.0) 19.9 19.9 29.5 105.7 7.8 24.4 16.2 15.5 131.3 33.8 65.5 (27.2) (14.8) 26.7 13.4 (8.1) 24.6 32.6 20.6 20.0 15.4 PER (X) 2009 2010E 41.2 41.2 (11.6) 30.6 36.2 649.0 21.4 17.4 27.1 47.0 42.9 19.5 13.2 31.0 28.2 28.1 14.0 23.7 31.3 5.3 21.6 11.1 20.9 20.9 12.3 36.4 16.4 139.3 27.1 23.8 12.6 111.4 76.7 18.0 6.7 11.2 11.6 16.4 15.6 23.8 20 20.7 21.9 30.2 30.2 (146.6) 12.4 22.5 25.6 21.0 7.6 25.5 15.3 11.5 14.3 11.2 23.8 23.1 22.9 13.1 27.6 (4.8) 9.1 21.0 13.9 20.0 20.0 12.0 29.1 16.1 57.7 23.6 20.5 10.6 25.1 35.7 8.4 5.0 12.2 11.3 11.3 13.3 16.5 18.0 19.0 19.1 2011E 68.1 2011E 26.8 26.8 6.2 6.7 5.3 5.8 14.9 9.5 22.3 13.7 10.3 11.8 10.8 20.0 19.3 19.5 15.1 56.5 (7.2) 12.6 19.4 16.8 16.6 16.6 9.2 14.1 14.9 46.4 20.3 17.8 4.6 18.8 21.6 11.6 5.8 9.6 9.9 12.3 10.7 12.4 14.9 15.8 16.6 EV/EBITDA (X) 2009 2010E 2011E 24.6 24.6 36.3 11.4 22.8 21.4 11.9 5.9 20.6 35.8 7.3 10.4 5.9 21.9 20.8 19.8 8.3 8.9 (0.4) 6.7 9.4 7.8 15.2 15.2 6.7 20.3 20.5 — 12.5 17.8 12.1 15.2 28.1 10.9 4.8 9.3 7.0 9.3 9.7 13.3 12.6 15.0 17.0 20.7 20.7 11.1 6.9 12.9 10.4 10.6 3.0 18.2 12.2 9.2 7.4 5.6 17.7 17.2 16.3 7.6 8.4 0.1 7.9 8.5 8.1 13.9 13.9 6.6 21.5 18.9 — 14.1 16.9 8.9 12.3 17.5 5.9 3.0 8.8 6.1 6.1 8.4 9.9 11.1 13.3 14.3 17.6 17.6 5.2 4.3 3.5 4.2 9.3 3.5 14.7 10.8 6.5 6.9 5.6 14.8 13.9 13.6 7.9 8.9 0.1 8.2 7.9 8.3 11.4 11.4 6.3 9.0 15.1 — 12.9 14.4 6.0 9.7 15.2 6.6 3.0 6.7 5.4 6.3 6.5 8.7 9.2 11.0 12.3 2009 14.0 14.0 2.3 2.1 5.9 3.2 4.5 1.5 8.7 9.7 4.2 2.7 2.2 10.3 7.1 7.9 3.8 1.5 0.4 0.8 1.2 1.8 4.4 4.4 1.3 6.1 1.4 2.5 3.4 2.6 3.0 5.6 4.9 2.2 1.2 2.0 1.6 3.2 2.7 3.1 3.1 3.5 3.6 Price/BV (X) 2010E 2011E 10.2 10.2 1.4 1.9 3.3 2.1 4.0 1.3 7.0 5.9 3.1 2.2 1.9 7.9 5.6 6.3 3.0 1.5 0.4 0.7 1.2 1.6 3.8 3.8 1.2 3.7 1.3 2.4 2.6 2.4 1.5 9.0 4.0 1.7 0.8 1.7 1.5 2.0 2.1 2.4 2.6 2.9 3.0 7.8 7.8 1.1 1.5 1.8 1.5 3.3 1.2 5.8 4.3 2.4 2.0 1.7 6.5 4.6 5.2 2.5 1.4 0.5 0.7 1.1 1.5 3.3 3.3 1.0 3.0 1.2 2.3 2.4 2.2 1.1 6.1 3.4 1.4 0.8 1.4 1.3 1.7 1.8 2.0 2.3 2.6 2.7 Dividend yield (%) 2009 2010E 2011E 0.5 0.5 0.3 0.4 0.1 0.2 1.9 0.7 0.8 0.6 0.3 0.3 1.6 0.9 0.5 0.8 0.6 — 1.3 0.5 1.7 0.6 1.1 1.1 1.0 — 0.7 — 0.8 1.2 0.3 0.4 — 0.4 2.7 0.4 2.8 0.8 0.9 0.6 1.1 1.0 1.0 0.5 0.5 0.4 — 1.2 0.8 1.1 1.4 1.0 0.5 0.4 1.4 1.7 1.1 1.2 1.0 1.0 — — — 2.2 0.7 1.2 1.2 1.0 — 0.8 — 0.9 1.4 0.3 0.4 — 0.4 4.4 0.4 2.8 0.7 1.0 0.6 1.3 1.1 1.2 0.7 0.7 0.4 0.5 0.5 0.5 1.1 1.4 1.2 0.6 1.0 1.7 1.8 2.0 1.5 1.5 1.3 — — — 2.6 0.9 1.4 1.4 1.4 — 0.9 — 1.0 1.6 0.3 0.4 — 0.4 4.4 0.4 2.8 0.7 1.3 0.6 1.6 1.3 1.4 2009 37.5 34.1 (13.1) 7.4 17.2 0.5 20.9 8.6 36.7 22.8 5.5 16.2 18.2 36.9 26.9 28.1 31.4 10.4 1.2 18.9 5.4 15.8 22.8 21.0 11.7 16.4 4.9 1.8 12.0 11.0 26.9 4.6 7.3 11.3 11.9 17.6 17.9 17.7 19.3 12.9 15.3 16.9 16.5 RoE (%) 2010E 2011E 39.1 33.7 (1.2) 16.2 18.7 8.3 20.6 18.6 30.4 48.1 31.1 19.7 18.5 37.5 27.1 27.2 25.3 5.5 (8.5) 8.9 5.2 11.3 20.4 19.0 10.4 14.7 6.1 4.2 12.6 11.5 15.0 27.7 12.3 19.8 13.6 14.1 15.6 20.6 17.4 14.4 14.5 15.4 15.8 32.9 29.1 19.3 25.3 43.9 25.3 24.7 13.1 28.4 36.2 26.3 17.9 16.7 35.6 26.3 26.6 18.0 2.8 (6.1) 6.0 5.5 8.7 21.0 19.5 12.0 21.5 7.8 5.0 12.4 12.2 27.1 39.0 17.1 13.0 11.7 15.0 15.7 14.8 18.0 16.2 15.4 16.1 16.0 Target price Upside (Rs) 1,300 (%) (28.7) ADVT-3mo (US$ mn) 4.3 191 256 670 (12.6) 3.1 2.2 (1.0) 7.6 3.5 23.7 14.0 14.8 150 140 130 2.6 48.1 67.0 21.4 10.4 27.4 350 80 3,000 570 825 450 160 900 830 (6.4) 12.1 8.2 (14.4) 45.2 (14.1) (7.8) 9.6 14.2 9.0 1.2 64.7 12.7 1.8 3.6 4.6 38.7 21.0 300 50 50 150 400 (3.8) (27.4) (33.5) (10.7) 36.1 46.7 6.0 3.8 17.3 2.6 1,250 (2.0) 2.5 410 58 1,250 160 1,485 3.6 9.5 22.0 12.6 9.2 2.1 12.4 35.1 7.4 15.5 43 60 2,107 294 53 136 243 205 463 96.9 5.1 2.0 12.4 22.2 24.0 26.6 17.3 10.1 114.8 22.6 4.3 26.5 29.8 22.2 27.3 25.1 11.8 265.5 30.2 7.1 19.3 25.4 28.1 31.0 23.0 14.7 1,500 350 170 235 175 310 340 245 195 22.9 (38.3) 10.8 5.5 18.3 15.0 10.4 (13.4) 24.4 59.8 15.8 39.9 13.0 1.4 5.3 4.4 8.8 3.5 India Daily Summary - March 22, 2010 Source: Company, Bloomberg, Kotak Institutional Equities estimates KOTAK INSTITUTIONAL EQUITIES RESEARCH
Slide 32: Disclosures Kotak Institutional Equities Research coverage universe Distribution of ratings/investment banking relationships 70% 60% 50% 40% 32.4% 30% 24.1% 20% 9.7% 10% 1.4% 0% BUY ADD REDUCE SELL 1.4% 8.3% 1.4% Percentage of companies within each category for which Kotak Institutional Equities and or its affiliates has provided investment banking services within the previous 12 months. 35.2% * The above categories are defined as follows: Buy = We expect this stock to outperform the BSE Sensex by 10% over the next 12 months; Add = We expect this stock to outperform the BSE Sensex by 0-10% over the next 12 months; Reduce = We expect this stock to underperform the BSE Sensex by 0-10% over the next 12 months; Sell = We expect this stock to underperform the BSE Sensex by more then 10% over the next 12 months. These ratings are used illustratively to comply with applicable regulations. As of 31/12/2009 Kotak Institutional Equities Investment Research had investment ratings on 145 equity securities. Percentage of companies covered by Kotak Institutional Equities, within the specified category. Source: Kotak Institutional Equities As of December 31, 2009 Ratings and other definitions/identifiers Rating system Definitions of ratings BUY. We expect this stock to outperform the BSE Sensex by 10% over the next 12 months. ADD. We expect this stock to outperform the BSE Sensex by 0-10% over the next 12 months. REDUCE. We expect this stock to underperform the BSE Sensex by 0-10% over the next 12 months. SELL. We expect this stock to underperform the BSE Sensexby more than 10% over the next 12 months. Our target price are also on 12-month horizon basis. Other definitions Coverage view. The coverage view represents each analyst’s overall fundamental outlook on the Sector. The coverage view will consist of one of the following designations: Attractive (A), Neutral (N), Cautious (C). 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 32
Slide 33: Corporate Office Kotak Securities Ltd. Bakhtawar, 1st Floor 229, Nariman Point Mumbai 400 021, India Tel: +91-22-6634-1100 Kotak Mahindra (UK) Ltd 6th Floor, Portsoken House 155-157 The Minories London EC 3N 1 LS Tel: +44-20-7977-6900 / 6940 Overseas Offices Kotak Mahindra Inc 50 Main Street, Suite No.310 Westchester Financial Centre White Plains, New York 10606 Tel:+1-914-997-6120 Copyright 2010 Kotak Institutional Equities (Kotak Securities Limited). All rights reserved. Kotak Securities Limited and its affiliates are a full-service, integrated investment banking, investment management, brokerage and financing group. We along with our affiliates are leading underwriter of securities and participants in virtually all securities trading markets in India. We and our affiliates have investment banking and other business relationships with a significant percentage of the companies covered by our Investment Research Department. Our research professionals provide important input into our investment banking and other business selection processes. Investors should assume that Kotak Securities Limited and/or its affiliates are seeking or will seek investment banking or other business from the company or companies that are the subject of this material and that the research professionals who were involved in preparing this material may participate in the solicitation of such business. Our research professionals are paid in part based on the profitability of Kotak Securities Limited, which include earnings from investment banking and other business. Kotak Securities Limited generally prohibits its analysts, persons reporting to analysts, and members of their households from maintaining a financial interest in the securities or derivatives of any companies that the analysts cover. Additionally, Kotak Securities Limited generally prohibits its analysts and persons reporting to analysts from serving as an officer, director, or advisory board member of any companies that the analysts cover. Our salespeople, traders, and other professionals may provide oral or written market commentary or trading strategies to our clients that reflect opinions that are contrary to the opinions expressed herein, and our proprietary trading and investing businesses may make investment decisions that are inconsistent with the recommendations expressed herein. In reviewing these materials, you should be aware that any or all of the foregoing, among other things, may give rise to real or potential conflicts of interest. Additionally, other important information regarding our relationships with the company or companies that are the subject of this material is provided herein. This material should not be construed as an offer to sell or the solicitation of an offer to buy any security in any jurisdiction where such an offer or solicitation would be illegal. We are not soliciting any action based on this material. It is for the general information of clients of Kotak Securities Limited. It does not constitute a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual clients. Before acting on any advice or recommendation in this material, clients should consider whether it is suitable for their particular circumstances and, if necessary, seek professional advice. The price and value of the investments referred to in this material and the income from them may go down as well as up, and investors may realize losses on any investments. Past performance is not a guide for future performance, future returns are not guaranteed and a loss of original capital may occur. 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