Election 16 April09 Strategy
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Election 16 April09 Strategy

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Election 16 April09 Strategy Election 16 April09 Strategy Document Transcript

  • Strategy INDIA INDIA April 16, 2009 BSE-30:11,285 Abstain for now. We suggest a more defensive portfolio in light of (1) the market’s fair valuations based on FY2010E earnings and (2) the impending national elections. We see limited upside to our fair valuations in most large-cap. stocks (barring banking and select commodity stocks) after the recent steep increase in their stock prices. We recommend selling certain expensive large-cap. stocks given the potential downside risks to earnings and consequent de-ratings. Defensive portfolio in light of valuations, impending national elections We have partly changed our Model Portfolio to reflect a more cautious stance in light of (1) the market’s relatively full valuations based on FY2010E earnings and (2) the impending INSIDE national elections. We have increased our weight on defensive sectors and stocks and Go defensive for proportionately reduced weight on our erstwhile favorites (commodities and banks). now…pg3 Valuations appear full without earnings upgrades Not much value in We find the Indian market’s valuations relatively full at 12.5X FY2010E EPS and 10.6X large-cap. FY2011E EPS. Our bottom-up fair valuation for the market of 11,000 (based on individual target prices of underlying stocks) suggests marginal downside for the market. We note that stocks…pg9 many of the heavyweight stocks are trading above our fair valuation with only banks and selective commodity stocks offering moderate upside to our fair valuations for those stocks. Top-five sell We believe it is too early to focus on FY2011E earnings; our bottom-up BSE-30 Index based on ideas…pg12 FY2011E target prices is 12,500. Earnings downgrades may have stopped but upgrades uncertain We see low risks of further steep downgrades to earnings for FY2010E and FY2011E. We now model FY2010E earnings (on ex-energy basis) at -2.5%, down from a peak of 16% growth in June 2008. We are less certain about the start of the earnings-upgrade cycle, if any. We have seen modest upward revisions recently in case of auto, cement and technology; the latter mostly due to the assumption of a weaker rupee. However, we have also seen downgrades in industrials and telecom of late. Top-five sell ideas: GAIL, HDFC, L&T, RCOM, Tata Motors We recommend investors sell certain large-cap. stocks in order to capitalize on the steep increase in their share prices over the past few weeks. We see earnings risks in these names Sanjeev Prasad sanjeev.prasad@kotak.com based on sector- and company-specific issues and fear a consequent de-rating of multiples if Mumbai: +91-22-6634-1229 earnings disappoint, which we see as quite likely. Bhavesh Shah bhavesh.shah@kotak.com Mumbai: +91-22-6634-1498 This report has been produced without independent discussion with the companies covered herein. Information in this report must not be relied upon as having been authorized or approved by such companies, their respective shareholders or any of their respective affiliates or advisors. In particular, any opinions contained in this report are entirely those of the authors, who have no authority whatsoever to give any information or make any representation or warranty on behalf of such companies, their respective shareholders Kotak Institutional Equities Research or any of their respective affiliates or advisors. These are professional opinions formed in good faith based on publicly available information applying professional techniques and analysis that would be reasonable in the Important disclosures appear circumstances. Neither Kotak Securities Limited nor any of these persons accepts any liability whatsoever for any at the back loss howsoever arising from any use of this report or its contents or otherwise arising in connection therewith. For Private Circulation Only. In the US, this document may only be distributed to QIBs (qualified institutional buyers) as defined under rule 144A of the Securities Act of 1933. This document is not for public distribution and has been furnished to you solely for your information and may not be reproduced or redistributed to any other person. The manner of circulation and distribution of this document may be restricted by law or regulation in certain countries, including the United States. Persons into whose possession this document may come are required to inform themselves of, and to observe, such restrictions.
  • Strategy TABLE OF CONTENTS Overview: Defensive for now..................................................................3 Valuation: Limited upside for the market and most large-cap. stocks......9 Top sells: GAIL, HDFC, L&T, RCOM, Tata motors ..................................12 The prices in this report are based on the market close of April 15, 2009. 2 KOTAK INSTITUTIONAL EQUITIES RESEARCH
  • Strategy OVERVIEW: DEFENSIVE FOR NOW We suggest investors move to a more defensive portfolio to protect recent gains and safeguard against any potential disappointments arising from (1) further deterioration in global macro-economic conditions or negative change in the current somewhat sanguine view about the pace of global recovery and (2) unfavorable outcome of India’s national elections (results due by mid-May 2009). We find the valuation of the market fair and valuations of several large-cap. stocks rich. A more defensive portfolio in light of valuations and national elections We discuss the key changes in our Model Portfolio and Top-10 list below. Model Portfolio. We discuss the key changes and highlights below. Exhibit 1 gives our Model Portfolio. Reduced weight on banking/finance sector to 200 bps overweight from 450 bps overweight previously. We have reduced weight on the sector through HDFC (no position versus 1.7% earlier) and ICICI Bank (100 bps underweight versus neutral earlier). We make up for the underweight positions in HDFC and ICICI Bank through SBI, PNB Bank, Union Bank and REC. Increased weight on consumer sector. We have increased weight on the consumer sector through HUL (100 bps overweight from 200 bps underweight) and ITC (200 bps overweight from 150 bps overweight). No change in view on energy. We retain our positive stance on upstream stocks despite their strong outperformance over the past several months and even in the past one month. We still see modest upside to our fair valuations for both Cairn and ONGC and expect the stocks to outperform any downturn in the market. We have marginally increased weight of ONGC by 50 bps to 200 bps. However, we do not expect meaningful absolute returns from current levels in the short term since we expect crude prices to be range-bound (US$45-55/bbl) over the next few months due to (1) weak seasonal demand in 2QCY09 and (2) current high global inventories; the impact of OPEC production cuts (3.5 mn b/d or 83% compliance based on March 2009 data) will be felt from 3QCY09. We continue to have a positive view on crude price over the next 1-3 years and expect crude prices to reach US$70-75/bbl (our long-term normalized price for crude price) by CY2011E. We suggest a weight of around 10% in RIL (unchanged), the maximum permissible for domestic funds and many India-dedicated overseas funds. We would have ideally liked to make this near 15% (same as weight in the BSE-30 Index) but we follow the same constraints as any real portfolio versus our ‘paper’ portfolio. Nonetheless, we see downside risks to RIL’s earnings from weaker-than-expected refining margins and stronger-than-expected rupee. We compute that (1) current refining margins will result in FY2010E EPS being lower by 37% versus our base-case estimate of Rs137 and (2) rupee-dollar exchange rate of Rs50/US$ versus our base-case forecast of Rs53.25/US$ will result in FY2010E EPS of Rs123. Reduced weight on industrials further. We recommend an underweight position in BHEL (-200 bps versus neutral previously). We see BHEL’s valuations very expensive at 18.7X FY2010E EPS after a 49% increase in our projected EPS. We also find L&T’s valuations extremely rich at 17X FY2010E EPS (15.9X adjusted for value of BOT projects and investments) in the context of a weak operating environment and related high risks to earnings. Reduced weight on metals. We have reduced our hugely overweight position on metals (9.6% weight previously versus 4% in BSE-30 Index to 8.1% versus 4.6% in BSE-30 Index) through lower weights on Tata Steel (neutral versus 100 bps overweight previously) and JSPL (300 bps overweight versus 400 bps previously). KOTAK INSTITUTIONAL EQUITIES RESEARCH 3 View slide
  • Strategy We maintain our positive view on Sterlite Industries (150 bps overweight as before) despite the fact that the stock is now trading very close to our fair valuation of Rs440. We believe our fair valuation is conservative in light of low multiples (5X FY2010E EBITDA) used by our metals team for valuation of metals businesses in the SOTP-based valuation of Sterlite. Intra-sector change in technology. We have reduced the weight of Infosys to 200 bps underweight after a relatively weak FY2010E revenue (3-7% decline in US$ revenues) and EPS guidance (Rs97-101) post its 4QFY09 results. We retain our preference for Wipro, which continues to be in our Top-10 list also. Wipro stock has outperformed Infosys 11.3% over the past one month and 8.5% since March 25, 2009, the day we introduced Wipro in our Top-10 list. Utilities. We have retained our 350 bps overweight on Tata Power (TPWR) despite the stock having delivered 33% absolute return over the past one month. We are now neutral on utilities (excluding JSPL) and see NTPC as an outright sell at current levels in light of its rich valuations (2.6X FY2010E BV and 14.4% ROE; 18.5X FY2010E EPS). We find NTPC’s valuations simply too rich for it to be considered to be a defensive play. We are not comfortable enough with RELI’s financials (particularly cash on books) currently to accord it a larger weight in the Model Portfolio and hence keep it as neutral in the portfolio. However, this stock could deliver very high returns over the next 12-15 months (see our report dated March 23, 2009 titled The Fab Fifteen) if the management can successfully address issues on (1) cash on balance sheet and (2) execution. Exhibit 1: Overweight banking, consumers, metals and pharmaceuticals Kotak Institutional Equities Model Portfolio 15-Apr Weightage (%) Diff. 15-Apr Weightage (%) Diff. Company Price (Rs) Rating BSE-30 KS reco. (bps) Company Price (Rs) Rating BSE-30 KS reco. (bps) Mahindra & Mahindra 473 ADD 1.2 1.2 — Larsen & Toubro 878 SELL 5.9 2.9 (300) Maruti Suzuki 847 REDUCE 1.5 1.5 — Industrials 9.5 4.5 (500) Tata Motors 282 SELL 1.3 — (128) Automobiles 4.0 2.7 (128) Hindalco Industries 62 ADD 1.0 — (96) Jindal Steel and Power 1,477 BUY — 3.0 300 Punjab National Bank 475 BUY — 1.5 150 Sterlite Industries 421 BUY 1.5 3.0 150 State Bank of India 1,295 BUY 4.6 7.1 250 Tata Steel 293 BUY 2.1 2.1 — Union Bank 166 BUY — 1.5 150 Metals 4.6 8.1 354 PSU Banking 4.6 10.1 550 Glenmark Pharmaceuticals 195 BUY — 1.0 100 HDFC 1,771 SELL 5.4 — (543) Ranbaxy Laboratories 200 ADD 0.4 — (42) HDFC Bank 1,083 BUY 4.6 6.6 200 Sun Pharmaceuticals 1,218 BUY 1.3 4.3 300 ICICI Bank 443 ADD 6.2 5.2 (100) Pharmaceuticals 1.7 5.3 358 Rural Electrification Corp. 99 BUY — 1.0 100 Pvt. Banking/Financing 16.2 12.8 (343) DLF 257 REDUCE 0.8 — (83) Real estate 0.8 — (83) ACC 616 REDUCE 0.8 — (80) Grasim Industries 1,621 REDUCE 1.4 1.4 — Infosys Technologies 1,371 BUY 8.4 6.4 (200) Jaiprakash Associates 123 BUY 1.3 1.3 — TCS 578 REDUCE 1.8 — (178) Cement 3.5 2.7 (80) Wipro 269 ADD 1.0 3.0 200 Technology 11.2 9.4 (178) Hindustan Unilever 235 REDUCE 3.2 4.2 100 ITC 185 ADD 6.1 8.1 200 Bharti Airtel 685 ADD 5.7 4.7 (100) Consumers 9.4 12.4 300 Reliance Communications 230 SELL 2.1 — (209) Telecom 7.8 4.7 (309) Cairn India 208 BUY — 4.0 400 Oil & Natural Gas Corporation 895 ADD 4.8 6.8 200 NTPC 198 REDUCE 3.1 — (307) Reliance Industries 1,830 REDUCE 15.8 9.9 (585) Reliance Infrastructure 710 BUY 1.3 1.3 — Energy 20.6 20.8 15 Tata Power 899 BUY 1.8 5.3 350 Utilities 6.2 6.6 43 Bharat Heavy Electricals 1,667 REDUCE 3.6 1.6 (200) BSE-30 11,285 100.0 100.0 — Note: 1. Weights are with respect to April 15, 2009 prices. Source: Bloomberg, Kotak Institutional Equities estimates 4 KOTAK INSTITUTIONAL EQUITIES RESEARCH View slide
  • Strategy Top-10 list. There is no change to our Top-10 list (see Exhibit 2). Exhibit 2: Biased towards solid long-term stocks Kotak Institutional Equities Top-10 List Mkt cap. CMP Target EPS (Rs) P/E (X) EV/EBDITA (X) Companies Sector Rating (US$ mn) (Rs) (Rs) 2008 2009E 2010E 2008 2009E 2010E 2008 2009E 2010E State Bank of India Banking BUY 16,387 1,295 1,600 107 136 124 12.2 9.6 10.4 — — — Sun Pharmaceuticals Pharmaceuticals BUY 5,056 1,218 1,800 75 87 86 16.3 14.0 14.2 13.8 10.9 10.1 ITC Consumer products ADD 13,985 185 200 8 9 10 22.4 21.4 19.0 14.3 13.2 11.7 Oil & Natural Gas Corporation Energy ADD 38,377 895 950 93 104 104 9.7 8.6 8.6 3.6 3.2 2.9 Sterlite Industries Metals BUY 5,978 421 440 64 48 47 6.5 8.8 9.0 2.8 4.7 4.7 Cairn India Energy BUY 7,794 208 225 (0.1) 4.2 4.4 0.0 49.4 47.0 48.0 28.9 21.1 HDFC Bank Banking BUY 9,186 1,083 1,250 46 54 66 23.5 20.2 16.5 — — — Tata Power Utilities BUY 4,012 899 1,000 32 65 90 28.2 13.8 10.0 13.0 9.8 9.3 Wipro Technology ADD 7,881 269 280 22 25 27 12.1 10.6 10.0 9.7 7.5 6.4 Jindal Steel and Power Metals BUY 4,558 1,477 1,400 83 180 172 17.9 8.2 8.6 13.1 5.8 5.6 BSE-30 11,285 Source: Company, Bloomberg, Kotak Institutional Equities estimates No change in investment thesis—favor solid companies with strong balance sheets; limited options now given the re-rating in our preferred picks We would recommend that investors rotate their portfolios towards high-quality, liquid stocks rather than into aggressive and high-beta stocks now. Our key underlying investment theme remains—favoring large-cap., solid stocks with strong balance sheets (low debt, high operating or free cash flow, low capex or capex accounted for by cash on balance sheet or operating cash flow). We do not believe global and domestic conditions have changed so dramatically to favor investment in companies with (1) weak balance sheets and (2) poor corporate governance. We had been selectively biased in favor of (1) large-cap., solid commodity stocks such as Cairn, JSPL, ONGC and Sterlite among others and (2) inexpensive banking names, particularly public sector banks where we believe the risks of NPLs are largely overdone and largely reflecting in the stocks’ inexpensive valuations. We stick with the same names and see a smaller correction in these names versus other high-beta names in case of a market correction. As discussed previously, we also recommend solid, defensive stocks now as a protection against any large market correction. We are not comfortable with the sudden change in risk appetite for almost all stocks, as seems to the case over the past two weeks. We attribute the recent steep increase in share prices of several stocks to (1) the market’s increased risk appetite, (2) resultant ‘re-rating’ of inexpensive valuations in many stocks and (3) related increase in liquidity. Exhibit 3 highlights the sharp recovery in high-beta stocks from their 52-week lows compared to the defensive stocks. It’s another thing that the high-beta stocks are still down significantly from their 52-week highs. KOTAK INSTITUTIONAL EQUITIES RESEARCH 5
  • Strategy Exhibit 3: Sharp recovery of stocks with high beta Performance of stocks in BSE-30 Index (%) Beta Price (Rs) Change (%) (#) Current 52-W low 52-W low 1 month High-beta stocks Jaiprakash Associates 1.8 123 47 161 73 Reliance Infrastructure 1.8 710 353 101 52 ICICI Bank 1.7 443 252 76 43 DLF 1.5 257 124 107 68 Tata Steel 1.5 293 138 113 75 Sterlite Industries India 1.5 421 165 156 48 Hindalco Industries 1.4 62 37 70 48 Reliance Communications 1.3 230 131 75 57 Larsen & Toubro 1.3 878 556 58 43 Reliance Industries 1.2 1,830 930 97 42 Mahindra & Mahindra 1.2 473 235 101 37 Low-beta stocks HDFC 1.1 1,771 1,116 59 29 HDFC Bank 1.1 1,083 774 40 30 BHEL 1.1 1,667 981 70 22 Tata Power 1.1 899 530 70 35 Tata Motors 1.1 282 122 131 74 State Bank of India 1.0 1,295 892 45 36 Wipro 0.9 269 180 49 20 ACC 0.8 616 365 69 9 Bharti Airtel 0.8 685 483 42 23 Grasim Industries 0.8 1,621 824 97 8 Maruti Suzuki India 0.7 847 428 98 19 ONGC 0.7 895 538 66 27 NTPC 0.7 198 113 75 16 ITC 0.6 185 132 40 12 Ranbaxy Laboratories 0.5 200 133 50 44 TCS 0.5 578 415 39 14 Infosys Technologies 0.5 1,371 1,040 32 6 Hindustan Unilever 0.4 235 185 27 3 Sun Pharmaceuticals 0.3 1,218 953 28 20 Note: 1. Beta is computed on last two years' weekly data. Source: Bloomberg, Kotak Institutional Equities Liquidity is a follower and not an indicator; valuations matter ultimately We note that the recent surge in liquidity in the domestic market may not last. The surge was led by (1) reversal of FII outflows, (2) investment by domestic MFs that had been hitherto sitting on large amounts of cash and (3) continued investment by life insurance companies that typically receive large amounts of premiums in the month March. Exhibit 4 shows the large investment by FIIs over the past two weeks in contrast to continuous outflows over the past several months, Exhibit 5 shows the large cash position of domestic MFs as of February, 2009, a portion of which may have got invested in March and April based on daily data on investments released by SEBI (see Exhibit 6) and Exhibit 7 shows the slowdown in premium collections (new premiums) by life insurance companies over the past few months. 6 KOTAK INSTITUTIONAL EQUITIES RESEARCH
  • Strategy Exhibit 4: FIIs have invested US$964 mn in the past 15 trading sessions Net FII flows in cash market (US$ mn) FII flows (US$ mn) 400 300 200 100 - 19-Mar 20-Mar 23-Mar 24-Mar 25-Mar 26-Mar 27-Mar 30-Mar 31-Mar 1-Apr 2-Apr 6-Apr 8-Apr 9-Apr 13-Apr (100) (200) Source: Bloomberg Exhibit 5: Cash position of mutual funds has increased to Exhibit 6: MFs have invested US$347 mn in March 2009 around 22% in February 2009 Net MF flows in cash market (US$ mn) AUM and cash of various equity schemes (US$ bn) MF flows (US$ mn) AUM (US$ bn) Cash (US$ bn) 180 Cash (%) - RHS 60 24 130 50 20 80 40 16 30 12 30 20 8 1-Mar 3-Mar 5-Mar 9-Mar 13-Mar 17-Mar 19-Mar 23-Mar 25-Mar 27-Mar 31-Mar 2-Apr 8-Apr (20) 10 4 (70) 0 0 Apr-07 Aug-07 Oct-07 Dec-07 Feb-08 Apr-08 Aug-08 Oct-08 Jun-07 Dec-08 Feb-09 Jun-08 (120) Source: Bloomberg Source: MFI explorer, Kotak Institutional Equities KOTAK INSTITUTIONAL EQUITIES RESEARCH 7
  • Strategy Exhibit 7: There is considerable slowdown in premium collections (new premium) by life insurance companies Premium income (individual business adjusted for single premium) (%) 20 15 15 14 10 5 1 0 Apr-08 May-08 Jun-08 Jul-08 Aug-08 Sep-08 Oct-08 Nov-08 Dec-08 Jan-09 Feb-09 (10) (5) (13) (20) (17) (21) (30) (25) (34) (40) Source: IRDA, Kotak Institutional Equities We would continue to focus on valuations as the only guiding principle for investment and not on liquidity or a liquidity-driven rally. We discuss valuations and the related issue of earnings in the next section. 8 KOTAK INSTITUTIONAL EQUITIES RESEARCH
  • Strategy VALUATION: LIMITED UPSIDE FOR THE MARKET AND MOST LARGE-CAP. STOCKS We see limited potential upside to the market (fair valuation of 11,000 for BSE-30 Index based on individual fair valuation of stocks on FY2010E basis) and in most large-cap. stocks under our coverage barring banking and select commodity (E&P) stocks. Even in the case of sectors/stocks with some upside to our fair valuations, we see issues that may, in the short term, constrain a further re-rating of the sectors/stocks. Not much value left on current earnings, outlook Exhibit 8 compares our fair valuation of BSE-30 stocks with their current stock prices and also gives their key valuation parameters. As can be seen, many stocks are trading near or above our fair valuations. In our view, it is too early to move to FY2011E as the basis for valuation. Exhibit 8: Many stocks in BSE-30 Index are trading near or above our fair valuations Valuation summary of BSE-30 Index stocks, March fiscal year-ends, 2008-10E P/E (X) EV/EBITDA (X) Price (Rs) Upside 2008 2009E 2010E 2008 2009E 2010E Current Target (%) Reliance Communications 8.7 8.6 11.5 6.5 6.7 6.9 230 150 (35) Tata Motors 7.7 15.2 14.8 5.6 11.6 8.5 282 195 (31) DLF 5.6 8.6 11.3 5.4 8.8 10.2 257 190 (26) Larsen & Toubro 23.1 18.2 17.0 15.2 11.3 10.3 878 650 (26) Jaiprakash Associates 25.1 23.1 17.3 14.2 12.6 10.5 123 105 (14) Hindalco Industries 4.5 8.1 26.4 5.9 5.5 7.6 62 55 (12) Bharat Heavy Electricals 28.5 27.9 18.7 15.4 14.6 10.1 1,667 1,475 (12) Reliance Industries 17.4 18.5 13.4 11.3 10.8 6.7 1,830 1,625 (11) ACC 9.6 10.9 13.5 5.0 5.4 6.5 616 550 (11) HDFC 20.6 23.1 20.6 — — — 1,771 1,600 (10) NTPC 21.2 22.4 18.5 11.8 12.5 11.9 198 180 (9) Maruti Suzuki 14.1 18.2 14.6 7.6 10.1 7.5 847 780 (8) Grasim Industries 5.7 7.2 8.6 3.7 4.4 4.4 1,621 1,500 (7) ICICI Bank 11.1 13.5 14.6 — — — 443 420 (5) Mahindra & Mahindra 12.4 21.9 13.6 9.2 14.7 8.6 473 450 (5) TCS 11.3 10.9 9.9 8.4 8.0 6.7 578 550 (5) Tata Steel 3.9 2.4 5.3 4.1 3.4 4.5 293 280 (4) Bharti Airtel 19.4 15.5 14.0 11.8 8.6 7.6 685 675 (1) Hindustan Unilever 29.0 25.7 21.9 23.5 19.0 16.1 235 245 4 Wipro 12.1 10.6 10.0 9.2 7.6 6.4 269 280 4 Sterlite Industries 6.5 8.8 9.0 2.3 3.4 3.6 421 440 5 Oil & Natural Gas Corporation 9.7 8.6 8.6 3.6 3.2 2.9 895 950 6 ITC 22.4 21.4 19.0 14.3 12.5 11.0 185 200 8 Infosys Technologies 17.3 13.4 13.2 11.8 8.8 8.0 1,371 1,500 9 Tata Power 28.2 13.8 10.0 12.6 9.3 8.9 899 1,000 11 HDFC Bank 23.5 20.2 16.5 — — — 1,083 1,250 15 State Bank of India 12.2 9.6 10.4 — — — 1,295 1,600 24 Reliance Infrastructure 18.9 11.9 12.6 7.2 6.9 7.8 710 970 37 Sun Pharmaceuticals 16.3 14.0 14.2 13.8 10.9 10.1 1,218 1,800 48 Ranbaxy Laboratories 8.6 (24.7) 22.5 8.2 (120.0) 8.2 200 340 70 Source: Kotak Institutional Equities estimates We see upside to our fair valuations in case of a few banking names and select commodity (E&P) stocks only. We do not see meaningful scope for (1) re-rating of banking stocks in the short term, in light of uncertainty surrounding the nature and policies of a new government; the banking sector will be most exposed to a new government’s economic and social policies and (2) re-rating of oil stocks given that we expect crude oil prices to be largely range-bound in US$45-55/bbl over the next 3-4 months. Exhibit 9 shows the valuation of the broad market (BSE-30 Index) on various parameters. As can be seen, the market’s valuation has increased by about 20% from recent lows of February 2009. The broad market has historically traded at 10-14X 12-month forward earnings (barring periods of excessive optimism or pessimism). However, we do not rely on broad market valuation as an investment guide and focus more on a bottom-up approach for valuation and stock selection. As a matter of caution, we note that the broad market is trading at 13.6X on ex-energy basis and 14.3X on ex-energy, ex-metals basis. KOTAK INSTITUTIONAL EQUITIES RESEARCH 9
  • Strategy Exhibit 9: Market's valuation has increased by about 20% from recent lows of February 2009 Valuation parameters of BSE-30 Index Sensex 10X 12 months rolling forward P/E (X) P/B (X) RoE (%) (RHS) 12X 15X 28 6 30 20,000 24 15,000 20 4 16 20 10,000 12 2 5,000 11,285 8 12.3 2.2 0 4 0 10 Apr-99 Apr-00 Apr-01 Apr-02 Apr-03 Apr-04 Apr-05 Apr-06 Apr-07 Apr-08 Apr-09 Apr-99 Apr-00 Apr-01 Apr-02 Apr-03 Apr-04 Apr-05 Apr-06 Apr-07 Apr-08 Apr-09 Apr-99 Apr-00 Apr-01 Apr-02 Apr-03 Apr-04 Apr-05 Apr-06 Apr-07 Apr-08 Apr-09 20 Sensex EV/EBITDA (X) M3 adj P/E (X, RHS) Poly. (M3 adj P/E (X, RHS)) 2.0 16 20,000 16,000 1.3 12 12,000 8,000 0.7 8 7.5 4,000 0.7 4 0 0.0 Apr-99 Apr-00 Apr-01 Apr-02 Apr-03 Apr-04 Apr-05 Apr-06 Apr-07 Apr-08 Apr-09 Oct-01 Apr-99 Feb-00 Oct-06 Dec-00 Aug-02 Jun-03 Apr-04 Feb-05 Dec-05 Aug-07 Jun-08 Apr-09 Source: Bloomberg, Kotak Institutional Equities estimates Earnings upgrades—too early to call Exhibit 10 has our earnings growth and valuations across different sectors. We believe the operating environment in many sectors is still fairly uncertain and it may be too early to assume that downside risks to earnings have largely abated. Exhibit 10: Valuation summary of BSE-30 sectors, March fiscal year-ends, 2008-10E Mkt cap. Adj mkt cap. EPS growth (%) PER (X) EV/EBITDA (X) Price/BV (X) Div. yield (%) RoE (%) (US$ mn) (US$ mn) 2008 2009E 2010E 2008 2009E 2010E 2008 2009E 2010E 2008 2009E 2010E 2008 2009E 2008 2009E 2010E Automobiles 10,094 6,089 6.0 (37.9) 25.0 11.1 17.9 14.3 7.0 11.6 8.2 2.4 1.8 1.6 1.9 0.7 21.6 10.3 11.2 Banking 43,907 31,998 43.9 11.7 (1.3) 15.3 13.7 13.8 — — — 2.0 1.8 1.7 1.6 1.5 13.3 13.3 12.4 Cement 5,097 3,377 25.7 (18.1) (17.3) 6.9 8.5 10.2 4.1 4.7 5.0 1.9 1.6 1.5 2.7 2.8 28.0 19.4 14.3 Consumers 23,350 14,366 14.9 7.6 14.4 24.8 23.0 20.1 17.1 14.6 12.7 8.6 7.7 6.8 3.0 2.7 34.8 33.4 33.8 Diversified 3,322 1,993 20.7 22.7 33.4 28.3 23.1 17.3 14.2 12.6 10.5 3.5 3.0 2.6 0.0 0.0 12.2 13.0 15.3 Energy 85,374 31,610 13.9 7.6 17.7 12.8 11.9 10.1 6.2 5.7 4.6 2.3 1.9 1.7 1.9 2.1 18.2 16.0 16.7 Industrials 25,774 14,541 23.7 13.9 28.5 26.3 23.1 18.0 15.3 12.8 10.2 5.9 4.6 3.8 0.9 1.0 22.4 20.1 21.1 Metals 12,504 7,028 13.2 13.1 (44.5) 4.9 4.3 7.8 4.0 3.8 4.8 0.8 0.6 0.6 1.8 1.6 16.2 14.1 7.5 Pharmaceuticals 6,482 2,593 82.1 (37.8) 47.6 14.3 22.9 15.5 11.2 16.2 9.6 4.1 2.8 2.0 1.6 2.0 28.8 12.4 12.6 Property 8,447 1,267 304.9 (35.0) (24.4) 5.6 8.6 11.3 5.4 8.8 10.2 2.2 1.8 1.6 1.6 1.6 39.9 20.9 14.0 Technology 33,654 17,136 19.1 15.7 5.7 13.7 11.8 11.2 9.8 8.2 7.1 4.5 3.6 3.0 2.4 2.2 32.7 30.4 26.4 Telecom 34,219 11,977 74.9 16.5 (4.4) 14.0 12.0 12.6 9.4 7.8 7.3 3.4 2.7 2.2 0.3 0.5 24.6 22.6 17.8 Utilities 38,455 9,472 9.9 9.0 19.6 21.5 19.7 16.5 11.4 11.2 10.9 2.5 2.3 2.1 1.6 1.7 11.7 11.8 12.9 BSE-30 330,679 153,447 28.8 4.9 3.2 13.5 12.9 12.5 7.7 7.5 6.8 2.6 2.2 1.9 1.7 1.7 19.3 16.7 15.3 BSE-30 ex-Energy 245,305 121,837 35.5 3.8 (2.5) 13.8 13.3 13.6 8.5 8.4 8.2 2.7 2.3 2.0 1.6 1.5 19.7 17.0 14.8 BSE-30 ex-Energy, Com. 227,703 111,433 40.9 3.3 6.2 15.7 15.2 14.3 10.5 10.2 9.1 3.2 2.7 2.4 1.6 1.5 20.1 17.6 16.4 Note: (a) EV/EBITDA excludes Banking sector. Source: Bloomberg, Company, Kotak Institutional Equities estimates We have seen a few upgrades recently in the earnings of auto, cement and technology sectors (mostly related to a change in views on the rupee-dollar exchange rate and would probably reverse given weak guidance by Infosys post its 4QFY09 results and recent strength in the rupee). However, we are not sure if this is a sign of further upgrades in earnings by our analyst team. On the other hand, there have been cuts in the earnings of the industrials and telecom sectors, Exhibit 11 shows that our earnings forecasts (on an ex-energy basis) have largely stabilized of late at a small negative figure, with -2.5% being the most recent. 10 KOTAK INSTITUTIONAL EQUITIES RESEARCH
  • Strategy Exhibit 11: Our earnings forecast for BSE-30 Index (ex-Energy) has stabilized of late Expected growth in BSE-30 Index (ex-Energy) earnings for FY2008, FY2009E and FY2010E (%) 2008 2009E 2010E 40 30 20 10 0 Apr-07 Jun-07 Aug-07 Oct-07 Feb-08 Apr-08 Feb-09 Apr-09 Dec-07 Jun-08 Aug-08 Oct-08 Dec-08 (10) Source: Kotak Institutional Equities estimates At this point, we see scope for meaningful upgrades to earnings only in the banking sector since we have built large loan-loss provisions into our earnings models. On the flip side, we see downside risks to earnings of energy, industrials, metals, technology and telecom sectors. Exhibit 12 gives the changes to earnings growth of various sectors over the past three months. Exhibit 12: We see downside risks to earnings of energy, industrials, metals, technology and telecom sectors Changes to earnings growth of BSE-30 Index sectors over the past three months, March fiscal year-end, 2010E (%) Dec-08 Jan-09 Feb-09 Mar-09 Current Automobiles (5.3) 18.5 21.0 20.1 25.0 Banking 5.4 2.9 0.4 0.1 (1.3) Cement (21.1) (21.9) (21.9) (21.2) (17.3) Consumers 14.7 14.4 14.4 14.4 14.4 Diversified 30.8 33.4 33.4 33.4 33.4 Energy 21.2 12.4 6.9 17.7 17.7 Industrials 26.4 29.4 29.4 26.0 28.5 Metals (19.1) (33.8) (49.3) (46.3) (44.5) Pharmaceuticals NA 48.6 44.5 47.6 47.6 Property 6.2 (26.3) (24.4) (24.4) (24.4) Technology 5.9 4.6 4.6 9.0 5.7 Telecom 22.5 2.9 2.9 (4.4) (4.4) Utilities 13.7 11.2 17.6 18.5 19.6 BSE-30 Index 10.8 3.5 — 3.0 3.2 BSE-30 ex-Energy 6.7 0.1 (2.6) (2.6) (2.5) Source: Kotak Institutional Equities estimates KOTAK INSTITUTIONAL EQUITIES RESEARCH 11
  • Strategy TOP SELLS: GAIL, HDFC, L&T, RCOM, TATA MOTORS We recommend investors cut positions in certain large-cap. stocks, which are trading well above our respective fair valuations for the stocks. We also see (1) significant downside risks to consensus earnings due to specific company and sector issues and (2) potential negative developments, which the street appears to be ignoring currently in the aforementioned stocks. Five best sell ideas—GAIL, HDFC, LT, RCOM, TTMT We discuss our five best sell ideas in detail below. GAIL (GAIL, CMP: Rs254, TP: Rs240). We find GAIL’s valuations full at current levels (see Exhibit 13, our reverse valuation exercise for GAIL) and see downside risks to consensus earnings for FY2010E and FY2011E in light of new regulations for gas transportation pipelines. Our FY2010E and FY2011E EPS estimates at Rs19.7 and Rs20.7, respectively, are significantly below consensus estimates of Rs21.8 and Rs23.5. We calculate a steep 35% decline in transportation tariffs of GAIL’s key extant pipelines (HVJ and DV) based on the new regulations, which came into effect from November 20, 2008. Exhibit 13: GAIL's stock price is ascribi ~US$1 bn to new pipelines ng Estimation of implied valuation of new pipelines of GAIL (Rs) Scenario A Scenario B Comments 1. Valuation of extant businesses Existing pipelines, LPG production and chemicals Scenario A represents base-case EPS estimates and scenario B assumes reduction in FY2009E EPS of GAIL 23 21 transmission tariffs as per the new regulations Appropriate P/E multiple (X) 7.0 7.0 Given that FY2009E were boosted by high LPG and petrochemical prices/margins Valuation of extant businesses 163 150 Valuation of extant businesses (US$ bn) 4 4 Reasonable in the context of replacement value, returns 2. Valuation of investments and E&P segment ONGC and others ONGC shares 31 31 51.4 mn shares valued at 0.8X our 12-month target price of Rs950 Others 19 19 Estimated value of Myanmar gas 10 10 Estimated value of Cambay (CB-ONN-2001/1) oil 4 4 Total value of investments 64 64 Valuation of GAIL ex-new pipelines 227 213 Current stock price 254 254 3. Valuation of new businesses New pipelines Market-ascribed value of new businesses 28 41 Market-ascribed value of new pipelines (US$ bn) 0.7 1.0 DCF value for (Dahej–Vijapur–GREP expansion [DVGREP], Dadri–Bawana–Nangal [DBN] and Estimated valuation of announced pipelines 22 22 Chainsa–Gurgaon–Jhajar–Hissar [CGJH]) Includes announced pipelines Jagdishpur–Haldia, Dabhol–Bangalore and Market-ascribed value of new pipelines 6 19 Kochi–Kanjirrkod-Bangalore/Mangalore which will take time Market-ascribed value of new pipelines (US$ bn) 0.1 0.5 Source: Kotak Institutional Equities estimates A section of the street believes the impact would be muted while GAIL management believes that the new regulations will not apply to it. We find the latter view untenable in light of the new regulations, which have already been notified by the government of India. The new regulations under a notification of the government of India dated November 20, 2008 clearly state that the regulations shall apply to entities: a) authorized by the Central Government under regulation 17 of the Petroleum and Natural Gas Regulatory Board (Authorizing Entities to Lay, Build, Operate or Expand Natural Gas Pipelines) Regulations, 2008 for laying, building, operating or expanding a natural gas pipeline before the appointed day; b) laying, building, operating or expanding a natural gas pipeline before the appointed date and authorized by the Board for such activities under regulation 18 of the Petroleum and Natural Gas Regulatory Board (Authorizing Entities to Lay, Build, Operate or Expand Natural Gas Pipelines) Regulations, 2008; 12 KOTAK INSTITUTIONAL EQUITIES RESEARCH
  • Strategy c) laying, building, operating or expanding a dedicated pipeline which is converted into a natural gas pipeline under the provisions of sub-regulation (1) or (2) of regulation 19 of Petroleum and Natural Gas Regulatory Board (Authorizing Entities to Lay, Build, Operate or Expand Natural Gas Pipelines) Regulations, 2008. We note that GAIL’s extant pipelines will be covered under the first sub-section. The appointed is defined as October 1, 2007 in the same notification. HDFC (HDFC, CMP: Rs1,771, TP: Rs1,550). We see HDFC's valuations rich at 3.1X FY2010E core PBR for RoE of about 20%. We remain concerned on the likely slowdown in its loan disbursements during FY2010E, below the long-term average. Exhibit 14 compares our expected growth in loan disbursements in FY2010E and FY2011E versus the past few years. Exhibit 14: We factor slowdown in disbursements in FY2010E Yoy growth in disbursements and outstanding loans, March fiscal year-ends, 1994-2010E (%) 50 Disbursements (%) Loan growth (%) 40 30 20 10 0 2009E 2010E 2011E 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 Source: Company, Kotak Institutional Equities estimates We find near-term risks on HDFC's valuations due to slower-than-expected growth in loan disbursements. Management guidance points to a recovery in loan disbursements in 2HFY10E. However, we believe that the overall value growth in disbursements is unlikely to be high during a period of declining real estate prices. Assuming real estate prices and average loan value decline by 20% yoy in FY2010E, HDFC will have to grow its volumes by 50% to deliver a 20% disbursements growth, which is highly unlikely. We believe HDFC may find it challenging to deliver consistently high growth in earnings in the long term given (1) the limitations of its NBFC model (ability to raise funds from debt markets, manage margins during tight liquidity conditions) and (2) the likely high cost of a merger with HDFC Bank. We note that HDFC's stock has always traded at high multiples supported by the company's consistent high growth (see Exhibit 15). However, we believe that the company will now find it challenging to achieve these multiples in light of the aforesaid concerns. We would prefer to hold private sector banks (Axis Bank and HDFC Bank) that are available at cheaper valuations and have more robust/ sustainable business models. KOTAK INSTITUTIONAL EQUITIES RESEARCH 13
  • Strategy Exhibit 15: HDFC's stock has historically traded at high multiples Rolling 12-month forward PER and PBR of HDFC (X) Rolling PER (X) (LHS) Rolling PBR (X) (RHS) 40 7 6 30 5 4 20 3 2 10 1 0 0 Apr-96 Apr-97 Apr-98 Apr-99 Apr-00 Apr-01 Apr-02 Apr-03 Apr-04 Apr-05 Apr-06 Apr-07 Apr-08 Apr-09 Source: Company, Bloomberg, Kotak Institutional Equities estimates L&T (LT, CMP: Rs878, TP: Rs650). We believe LT’s current valuations of 18.2X FY2010E EPS and 17X FY2011E EPS are unjustified in the context of 7% earnings growth in FY2010E and 5.9% in FY2011E. Furthermore, we do not rule out downside risks to earnings in case of slower-than-expected economic recovery both globally and domestically. LT’s order book has grown slowly over the last few quarters (see Exhibit 16) and we expect disappointment in order booking over the next few quarters due to (1) continued slowdown in release of new orders by infrastructure and E&P players, (2) likely standstill in award of government projects, such as BOT projects under the NHAI or new airports, ports, railway projects, due to impending national elections and formation of a new government and (3) likely continuation of tight capital markets, which will constrain the ability of private sector players to raise capital for infrastructure projects. Exhibit 16: Growth in new order bookings have moderated in the past few quarters L&T's order booking, Order backlog & visibility trend Order booking (Rs bn, LHS) Order backlog (Rs bn, LHS) Years of visibility (X, RHS) 800 1.8 600 1.5 1.2 400 0.9 0.6 200 0.3 - 0.0 Mar-04 Sep-04 Mar-05 Sep-05 Mar-06 Sep-06 Mar-07 Sep-07 Mar-08 Sep-08 Source: Company, Kotak Institutional Equities 14 KOTAK INSTITUTIONAL EQUITIES RESEARCH
  • Strategy We also note that LT has announced order booking of about Rs63.4 bn in 4QFY09, significantly lower than 4QFY08’s Rs101 bn. We also highlight that there has been a sharp increase in the proportion of infrastructure projects in LT’s order booking in 2HFY09 compared to FY2008 (see Exhibit 17). We believe that there may be downside risks to our earnings estimates due to (1) slower-than-expected economic recovery both globally and domestically, (2) dominance of infrastructure orders in recent order booking mix leading to potential margin and working capital disappointment and (3) likely continuation of tight capital markets, which will constrain private sector players’ ability to raise capital for infrastructure and industrial investment projects and thus, order booking for L&T. Exhibit 17: Increasing proportion of infrastructure projects in order inflows could lead to margin and working capital concerns Order inflow mix - 2HFY09, 9MFY09 and FY2008 (%) 2HFY09 9MFY09 FY2008 Process Others Others Process Others Process 6% 8% 3% 16% 15% 15% Oil & gas 5% Oil & gas Power 11% 22% Oil & gas Infrastructu Infrastructu Infrastructu 25% re re re Power 44% 31% 64% 21% Power 14% Source: Company, Kotak Institutional Equities Reliance Communications (RCOM, CMP: Rs230, TP: Rs150). We expect RCOM's EBITDA margin to come under severe pressure in FY2010E on account of under-utilized GSM network, aggressive introductory pricing and non-recovery of distribution costs of new GSM connections. Thus, net income would be under pressure on account of lower OPM and increased depreciation charge (a significant portion of Rs190 bn CWIP at end- December 2008 will be capitalized over the next two quarters). We estimate RCOM’s FY2010E EPS to decline by 25% yoy to Rs20.1. We also reiterate our concerns on RCOM's balance sheet, which provides little headroom for a slippage in execution. Exhibit 18 depicts RCOM's net debt position at end-FY2009- 11E; we estimate RCOM's net-debt/TTM EBITDA at 3.4X at end-FY2010E, providing little comfort on any slippage in revenues and EBITDA. Exhibit 18: RCOM's weak balance sheet provides little room for slippage in execution Assessing RCOM's debt position, March fiscal year-ends, 2008-11E (Rs mn) 2008 2009E 2010E 2011E Gross debt 258,217 328,217 398,217 395,367 Cash and equivalents 118,778 52,590 33,987 35,900 Net debt 139,439 275,627 364,230 359,467 EBITDA 81,992 92,470 108,308 135,397 Net debt/TTM EBITDA (X) 1.7 3.0 3.4 2.7 Cash interest to be paid (a) 18,657 24,257 32,943 Interest coverage ratio (X) 5.0 4.5 4.1 Note: (a) Assuming 8% pre-tax blended cost of debt. (b) Excluding cash interest on FCCBs for FY2009E and FY2010E; including accrued interest on first FCCB tranche in FY2011E. Source: Company, Kotak Institutional Equities estimates KOTAK INSTITUTIONAL EQUITIES RESEARCH 15
  • Strategy Exhibit 19 gives the valuation summary of the Indian telecom companies under our coverage. We highlight that RCOM is trading at a marginal premium to Bharti on FY2010E EV/EBITDA and a modest 3% discount on FY2011E basis. We find RCOM's valuation at the CMP (absolute as well as relative to Bharti) expensive given (1) greater risk to consensus estimates; in our view, consensus estimates of subscriber net adds (2.5- 3 mn a month for the next 18-24 months) as well as mobile EBITDA margins for the company may be at risk and (2) lower comfort on financial disclosures; we have long highlighted our concerns with the company's revenue disclosures (see Exhibit 20) and aggressive accounting policies. Exhibit 19: Indian telecom companies valuation analysis, March fiscal year-ends, 2007-2011E Price (Rs) Target price P/E (X) EV/EBITDA (X) 15-Apr-09 (Rs) 2007 2008 2009E 2010E 2011E 2007 2008 2009E 2010E 2011E Bharti 685 675 32.0 19.4 15.5 14.0 12.2 18.1 11.8 8.9 7.8 6.5 IDEA Cellular 57 50 25.8 14.4 21.6 27.4 21.6 14.2 10.9 8.6 8.0 6.8 MTNL 76 50 9.5 10.6 19.1 18.6 16.6 3.6 1.9 7.2 6.4 4.8 RCOM 230 150 16.2 8.7 8.6 11.5 11.1 10.0 8.8 8.2 7.9 6.2 TCOM 583 400 33.9 53.3 42.9 41.6 38.5 17.0 27.4 20.8 18.7 17.2 Source: Company, Bloomberg, Kotak Institutional Equities estimates Exhibit 20: Gap in revenues reported to the TRAI and the investors perplexing Quarter-wise details of revenues reported to TRAI and investors (Rs mn) Dec-06 Mar-07 Jun-07 Sep-07 Dec-07 Mar-08 Jun-08 Sep-08 Dec-08 Gross revenues 36,213 37,669 41,259 39,409 43,076 43,187 41,786 45,535 44,553 UASL 26,356 28,261 31,382 29,063 32,883 33,146 31,608 34,182 32,984 Adjusted gross revenues 23,944 25,449 28,571 27,337 30,297 29,148 30,185 28,535 30,809 UASL 20,174 21,662 24,654 22,329 25,662 25,589 24,778 22,902 24,149 License fees 2,019 2,152 2,411 2,254 2,495 2,429 2,500 2,347 2,517 UASL 1,793 1,924 2,176 1,954 2,217 2,216 2,175 2,009 2,117 Spectrum charges 416 416 507 495 518 509 491 446 475 UASL 416 416 507 495 518 509 491 446 475 Gross wireless revenues reported to investors 27,520 29,682 33,730 37,230 39,567 41,608 41,187 43,356 44,119 Net wireless revenues reported to investors 19,308 20,673 24,244 27,722 28,892 31,757 31,280 33,626 34,445 Reported interconnection & access charges 8,212 9,009 9,486 9,508 10,675 9,851 9,907 9,730 9,674 Difference between revenues disclosed to the investor community and the TRAI (%) Gross revenues 4 5 7 28 20 26 30 27 34 Net revenues 7 7 10 39 26 39 41 64 60 Source: TRAI reports, Company Tata Motors (TTMT, CMP: Rs282, TP: Rs195). We are surprised by the recent run-up in TTMT’s stock price (up 74% over the past month) and see current inflated valuations as a good opportunity to exit the stock. TTMT stock is now trading at 11.1X FY2010E consolidated EBITDA, which we find expensive. We model a sharp 45% yoy improvement in EBITDA for FY2011E, which results in more moderate valuations at 7.7X FY2011E consolidated EBITDA. However, this is contingent on several factors including significant improvement in operating conditions in both domestic and overseas markets. We continue to see serious issues with (1) TTMT’s operating performance in India in FY2010E notwithstanding the contribution of ‘Nano’ and (2) high consolidated debt and leverage. Weak operating performance in FY201E in India. We expect a modest 10% yoy growth in M&H CV volumes in FY2010E due to (1) continued over-capacity in the freight industry and (2) modest recovery in manufacturing activity in FY2010E; our economics team forecasts 4.3% growth in manufacturing segment despite a 6% growth for the broad economy. We note that the contribution of the ‘Nano’ in terms of revenues and profits will be quite small in FY2010E and even in FY2011E (see Exhibit 21). 16 KOTAK INSTITUTIONAL EQUITIES RESEARCH
  • Strategy Exhibit 21: Nano would have marginal impact on the financials of Tata Motors Nano's impact on revenues and profits, March fiscal year-ends, 2010-11E (Rs mn) 2010E 2011E Volumes (000's) 50,000 350,000 Revenues 6,000 42,000 Contribution margin 688 4,813 Contribution margin (Rs/share) 1.2 8.7 Net income impact (371) 64 EPS impact (Rs/share) (0.67) 0.12 Source: Kotak Institutional Equities estimates High leverage. In our view, TTMT’s weak balance sheet continues to be a matter of concern. The market seems to be excited by the amount of advance money to be received for booking of ‘Nano’ and its positive impact on TTMT’s cash flow and overall debt position. However, we note that the figure is quite small in the context of TTMT’s consolidated debt (see Exhibit 22). We do not see scope for a meaningful decline in debt given the weak operating performance of both TTMT on a standalone basis and of JLR. Exhibit 23 gives details of TTMT’s consolidated debt, repayment liabilities and key leverage ratios (net debt/EBITDA and EBITDA/interest paid). Exhibit 22: Cash inflows from Nano-bookings are small relative to TTMT's consolidated balance sheet Cash inflow from Nano bookings (Rs mn) Applications (000's) 500 Cash inflow from application fees and downpayment 60,150 Non-refundable cash from allotment and application fees (a) 12,150 Amount to be refunded by Tata Motors 48,000 % remaining applicants that opt to keep cash with company 30 Non-refundable deposits (b) 14,400 Cash in Tata Motors' books beyond 60 days (a) + (b) 26,550 Standalone Tata Motors + JLR debt 270,000 Cash inflow/debt (%) 9.8 Source: Kotak Institutional Equities estimates Exhibit 23: TTMT's net debt/EBITDA remain's high at 7.6X Tata Motors liquidity profile and coverage ratios, March fiscal year-end, 2010E (Rs bn) Standalone Tata Motors debt 128 JLR debt 125 Post-tax pension underfunding 20 Total debt (standalone Tata Motors + JLR) 273 Debt due in the current fiscal year 113 Tata Motors standalone EBITDA 24 JLR EBITDA 11 Consolidated EBITDA of Tata Motors and JLR 36 FY2010E net debt/EBITDA (X) 7.6 FY2010E EBITDA/Interest expense (X) 1.7 Source: Kotak Institutional Equities estimates KOTAK INSTITUTIONAL EQUITIES RESEARCH 17
  • Exhibit 24: Kotak Institutional Equities: Valuation summary of key Indian companies O/S Target ADVT- 18 15-Apr-09 Mkt cap. shares EPS (Rs) EPS growth (%) PER (X) EV/EBITDA (X) Price/BV (X) Dividend yield (%) RoE (%) price Upside 3mo Company Price (Rs) Rating (Rs mn) (US$ mn) (mn) 2008 2009E 2010E 2008 2009E 2010E 2008 2009E 2010E 2008 2009E 2010E 2008 2009E 2010E 2008 2009E 2010E 2008 2009E 2010E (Rs) (%) (US$ mn) Automobiles Bajaj Auto 635 REDUCE 91,910 1,842 145 52.2 50.7 61.5 (58.9) (2.9) 21.4 12.2 12.5 10.3 7.4 7.2 5.8 5.7 4.7 3.7 3.1 3.1 3.1 21.0 41.0 39.4 615 (3.2) 1.7 Hero Honda 1,069 REDUCE 213,399 4,277 200 48.5 63.1 81.5 12.8 30.1 29.2 22.0 16.9 13.1 12.2 9.5 7.3 6.9 5.5 4.2 1.8 1.9 1.9 34.0 36.1 36.5 950 (11.1) 12.2 Mahindra & Mahindra 473 ADD 122,146 2,448 258 38.1 21.6 34.7 (2.0) (43.2) 60.6 12.4 21.9 13.6 9.2 14.7 8.6 2.8 2.4 2.0 2.3 2.0 2.0 27.8 12.2 16.9 450 (4.9) 9.9 Maruti Suzuki 847 REDUCE 244,667 4,904 289 59.9 46.6 58.0 10.8 (22.2) 24.5 14.1 18.2 14.6 7.6 10.1 7.5 2.8 2.5 2.2 0.6 0.6 0.6 22.2 14.7 15.8 780 (7.9) 21.4 Tata Motors 282 SELL 156,637 3,139 556 36.5 18.5 19.0 (22.4) (49.2) 2.7 7.7 15.2 14.8 5.6 11.6 8.5 1.8 0.9 1.0 3.7 — — 24.7 9.1 7.3 195 (30.7) 18.2 Automobiles Cautious 828,760 16,610 (2.4) (23.5) 25.5 12.9 16.9 13.4 7.8 10.4 7.7 3.1 2.4 2.1 2.0 1.3 1.3 24.2 14.4 15.4 Banks/Financial Institutions Andhra Bank 57 ADD 27,524 552 485 11.9 12.3 11.5 7.0 3.6 (6.5) 4.8 4.6 4.9 — — — 0.9 0.8 0.8 7.0 5.4 5.1 18.0 17.2 14.4 75 32.2 0.4 Axis Bank 504 ADD 180,357 3,615 358 32.2 46.8 53.1 37.7 45.3 13.3 15.6 10.8 9.5 — — — 2.2 1.9 1.7 1.1 1.8 2.0 17.6 17.8 17.6 750 48.8 37.4 Bank of Baroda 282 ADD 102,914 2,063 366 39.3 50.2 50.4 39.8 27.8 0.5 7.2 5.6 5.6 — — — 1.2 1.0 1.0 2.8 3.6 3.6 14.6 15.7 14.3 330 17.2 5.9 Bank of India 268 ADD 141,077 2,827 526 40.6 59.2 51.3 76.6 45.7 (13.4) 6.6 4.5 5.2 — — — 1.8 1.3 1.2 1.5 2.3 2.0 27.6 30.5 21.2 330 23.0 11.2 Canara Bank 191 REDUCE 78,126 1,566 410 38.2 44.7 38.2 10.1 17.1 (14.4) 5.0 4.3 5.0 — — — 1.1 0.9 0.9 4.2 3.1 3.1 15.0 16.3 12.4 220 15.5 4.4 Corporation Bank 208 BUY 29,849 598 143 51.3 61.3 55.8 37.2 19.7 (9.1) 4.1 3.4 3.7 — — — 0.7 0.6 0.5 5.0 6.0 5.5 18.4 19.3 15.4 310 49.0 0.5 Federal Bank 175 BUY 29,974 601 171 34.4 32.0 34.0 0.5 (6.9) 6.4 5.1 5.5 5.2 — — — 0.8 0.7 0.6 2.3 3.4 3.6 13.6 13.2 12.7 280 59.8 1.3 Future Capital Holdings 145 BUY 9,193 184 63 (4.5) 4.5 28.8 (689.8) (198.6) 546.1 (32.2) 32.7 5.1 — — — 1.3 1.2 1.0 — — — (6.7) 3.8 21.4 440 202.6 0.7 HDFC 1,771 SELL 508,273 10,187 287 85.8 76.8 85.8 38.2 (10.5) 11.8 20.6 23.1 20.6 — — — 4.3 3.7 3.3 1.4 1.3 1.5 27.8 17.1 16.9 1,600 (9.6) 63.6 HDFC Bank 1,083 BUY 458,314 9,186 423 46.0 53.5 65.6 28.7 16.4 22.5 23.5 20.2 16.5 — — — 4.0 3.1 2.7 0.7 0.9 1.0 17.7 17.3 17.5 1,250 15.4 38.8 ICICI Bank 443 ADD 492,805 9,877 1,113 39.9 32.7 30.3 15.4 (18.1) (7.4) 11.1 13.5 14.6 — — — 1.1 1.0 1.0 2.5 2.2 1.9 11.7 7.6 6.7 420 (5.2) 139.3 IDFC 72 ADD 93,254 1,869 1,294 5.7 6.0 6.3 3.0 6.1 5.1 12.7 12.0 11.4 — — — 1.7 1.5 1.4 1.7 1.5 1.5 17.6 13.3 12.7 75 4.1 9.9 India Infoline 85 ADD 24,514 491 287 5.6 5.0 5.5 85.6 (10.4) 10.1 15.2 17.0 15.4 — — — 2.0 2.0 1.7 1.4 3.4 4.0 20.7 11.7 13.0 90 5.5 3.6 Indian Bank 113 BUY 48,628 975 430 22.5 26.0 26.9 33.9 15.6 3.4 5.0 4.3 4.2 — — — 1.1 0.9 0.8 2.7 2.9 3.0 23.4 21.1 18.5 195 72.3 1.4 Indian Overseas Bank 64 BUY 34,840 698 545 22.1 25.5 20.8 19.2 15.3 (18.3) 2.9 2.5 3.1 — — — 0.7 0.6 0.5 5.9 6.4 5.9 27.2 25.5 17.5 120 87.6 1.6 J&K Bank 345 ADD 16,725 335 48 74.2 82.8 72.2 31.2 11.5 (12.7) 4.6 4.2 4.8 — — — 0.8 0.7 0.7 4.5 5.0 4.4 16.8 16.5 12.9 480 39.2 0.2 LIC Housing Finance 284 BUY 24,156 484 85 45.5 58.9 59.3 38.7 29.3 0.8 6.2 4.8 4.8 — — — 1.3 1.1 0.9 3.5 4.6 4.6 — — — 330 16.1 3.5 Mahindra & Mahindra Financial 226 SELL 21,538 432 95 20.8 19.5 22.6 32.6 (6.5) 16.0 10.8 11.6 10.0 — — — 1.7 1.5 1.4 2.0 2.2 2.5 16.9 13.5 14.2 190 (15.9) 0.1 Oriental Bank of Commerce 138 ADD 34,675 695 251 23.9 34.2 27.6 (27.6) 43.5 (19.5) 5.8 4.0 5.0 — — — 0.7 0.5 0.5 3.4 4.9 4.0 6.2 13.0 9.0 200 44.5 3.2 PFC 140 ADD 160,171 3,210 1,148 11.4 12.0 15.8 2.4 5.6 31.7 12.3 11.6 8.8 — — — 1.6 1.5 1.3 2.5 2.7 3.4 13.5 13.4 15.5 145 3.9 1.7 Punjab National Bank 475 BUY 149,800 3,002 315 65.0 90.7 90.7 33.0 39.6 (0.0) 7.3 5.2 5.2 — — — 1.6 1.3 1.1 2.7 3.8 3.8 18.0 21.5 18.6 650 36.8 17.6 Rural Electrification Corp. 99 BUY 85,044 1,704 859 10.9 15.2 17.7 9.8 38.8 16.8 9.1 6.5 5.6 — — — 1.4 1.2 1.0 3.0 4.9 5.7 17.1 19.6 19.9 125 26.2 1.1 Shriram Transport 187 REDUCE 37,915 760 203 19.2 28.6 27.0 85.7 49.0 (5.6) 9.7 6.5 6.9 — — — 2.2 1.8 1.6 2.7 4.6 4.5 26.9 28.8 23.6 215 15.2 0.7 SREI 38 ADD 4,431 89 116 11.4 7.3 6.9 57.4 (36.2) (5.7) 3.3 5.2 5.5 — — — 0.7 0.4 0.4 3.1 6.0 7.3 23.1 13.1 11.5 50 31.2 1.3 State Bank of India 1,295 BUY 817,628 16,387 631 106.6 135.5 124.1 23.5 27.2 (8.4) 12.2 9.6 10.4 — — — 1.9 1.7 1.7 1.7 1.7 1.7 16.8 16.3 13.3 1,600 23.6 88.5 Union Bank 166 BUY 83,875 1,681 505 27.5 36.7 31.2 64.0 33.6 (14.9) 6.0 4.5 5.3 — — — 1.1 1.0 0.8 2.4 3.3 2.8 26.8 29.0 20.2 220 32.5 3.9 Banks/Financial Institutions Attractive 3,695,600 74,068 36.9 22.3 (1.4) 11.1 9.1 9.2 — — — 1.7 1.5 1.4 2.0 2.2 2.2 15.3 16.3 14.9 Cement ACC 616 REDUCE 115,697 2,319 188 64.1 56.3 45.6 13.0 (12.2) (19.0) 9.6 10.9 13.5 5.0 5.4 6.5 2.6 2.2 2.0 3.8 3.8 3.8 33.3 24.7 18.2 550 (10.7) 8.6 Ambuja Cements 86 REDUCE 130,696 2,619 1,522 7.6 7.6 5.8 (11.2) 0.2 (23.7) 11.3 11.3 14.8 5.8 6.2 7.2 2.6 2.1 2.0 3.0 3.5 2.2 26.6 20.8 14.1 60 (30.1) 3.0 Grasim Industries 1,621 REDUCE 148,634 2,979 92 284.6 225.7 188.5 32.6 (20.7) (16.5) 5.7 7.2 8.6 3.7 4.4 4.4 1.6 1.4 1.2 1.9 2.1 2.1 33.1 20.7 14.9 1,500 (7.5) 8.7 India Cements 130 ADD 36,699 736 282 24.5 22.7 19.8 n/a (7.3) (12.8) 5.3 5.7 6.6 4.5 4.1 4.3 1.1 1.0 0.8 1.4 1.6 1.6 25.8 15.7 14.7 130 (0.2) 3.1 Shree Cement 825 BUY 28,751 576 35 90.2 129.9 72.5 99.5 44.0 (44.2) 9.2 6.4 11.4 3.6 3.7 4.7 4.4 2.7 2.2 1.0 1.0 1.0 56.9 53.2 21.7 850 3.0 0.3 UltraTech Cement 561 ADD 70,296 1,409 125 81.4 71.4 62.3 28.5 (12.2) (12.8) 6.9 7.9 9.0 4.7 5.2 5.2 2.2 1.7 1.4 1.4 1.5 1.5 45.2 28.9 20.4 550 (2.0) 1.0 Cement Cautious 530,773 10,638 19.3 (9.3) (20.2) 7.6 8.4 10.5 4.4 4.9 5.3 2.0 1.7 1.5 2.4 2.6 2.3 26.8 20.3 14.3 Consumer (Discretionary) Radico Khaitan 70 REDUCE 7,131 143 102 2.2 2.6 3.3 (41.4) 15.0 26.3 31.0 27.0 21.4 11.7 11.9 10.1 2.8 2.6 2.3 0.8 — — 11.7 10.0 11.4 65 (6.6) 0.5 United Breweries 113 REDUCE 27,233 546 240 2.1 1.9 2.4 (2.2) (11.4) 31.0 53.9 60.8 46.4 15.9 12.8 9.9 4.5 2.6 2.4 — — — 8.0 3.6 5.4 85 (25.1) 1.3 United Spirits 757 BUY 71,320 1,429 94 28.9 32.7 48.0 (52.0) 13.2 46.9 26.2 23.2 15.8 11.4 11.1 9.5 3.1 3.1 2.3 0.2 0.2 0.3 14.0 13.5 16.8 900 18.8 63.0 Consumer (Discretionary) Neutral 105,684 2,118 (3.6) 15.4 40.5 31.0 26.8 19.1 12.1 11.4 9.6 3.4 2.6 2.3 0.2 0.2 0.2 10.9 9.9 12.3 Consumer products Asian Paints 875 REDUCE 83,954 1,683 96 39.3 35.7 44.3 40.4 (9.2) 24.3 22.3 24.5 19.7 13.5 14.7 11.4 8.7 7.6 6.4 1.9 2.0 2.3 45.0 34.2 36.2 800 (8.6) 1.0 Colgate-Palmolive (India) 460 ADD 62,597 1,255 136 17.1 20.4 23.5 16.5 19.4 15.5 27.0 22.6 19.6 22.5 19.8 16.3 34.2 37.1 41.1 2.8 4.0 4.6 100.1 157.8 200.3 490 6.5 1.6 KOTAK INSTITUTIONAL EQUITIES RESEARCH GlaxoSmithkline Consumer (a) 714 ADD 30,011 601 42 38.7 44.8 50.4 26.9 15.8 12.6 18.4 15.9 14.2 9.7 8.9 7.7 4.5 3.9 3.3 1.7 2.1 2.3 27.4 26.7 25.6 700 (1.9) 0.2 Godrej Consumer Products 133 ADD 34,277 687 258 7.1 6.7 8.7 18.7 (5.5) 31.2 18.8 19.9 15.2 16.3 17.6 12.3 19.3 5.2 4.5 2.7 3.0 3.0 109.6 42.1 43.1 160 20.5 0.5 Hindustan Unilever 235 REDUCE 513,155 10,285 2,179 8.1 9.2 10.7 15.4 12.9 17.0 29.0 25.7 21.9 23.5 20.5 16.8 35.7 33.1 30.7 4.5 3.7 4.3 85.2 134.3 145.7 245 4.1 20.0 ITC 185 ADD 697,758 13,985 3,769 8.3 8.7 9.8 15.4 4.6 12.8 22.4 21.4 19.0 14.3 13.2 11.7 5.5 4.9 4.3 1.9 2.0 2.2 27.7 25.4 25.2 200 8.0 17.7 Jyothy Laboratories 77 ADD 5,620 113 73 6.5 7.2 10.6 (8.6) 10.2 47.3 11.8 10.7 7.3 7.4 6.6 4.6 1.7 1.4 1.2 3.0 3.0 3.8 13.5 13.0 16.5 127 64.0 Nestle India (a) 1,610 ADD 155,239 3,111 96 44.5 56.4 68.1 31.3 26.8 20.7 36.2 28.5 23.6 21.8 18.0 15.2 30.1 23.0 18.0 1.7 2.1 2.6 94.8 91.4 85.4 1,740 8.1 0.9 Tata Tea 648 BUY 40,097 804 62 54.2 60.1 67.7 3.9 10.9 12.7 12.0 10.8 9.6 5.3 5.8 4.6 0.9 0.8 0.8 5.4 2.7 3.0 11.9 10.3 10.8 940 45.0 1.4 Consumer products Attractive 1,622,708 32,522 17.1 8.7 15.9 24.5 22.5 19.4 16.1 15.0 12.7 7.6 6.7 5.9 2.9 2.7 3.0 31.0 29.6 30.5 Constructions Consolidated Construction Co. 154 ADD 5,684 114 37 24.0 22.3 27.2 67.6 (7.4) 22.1 6.4 6.9 5.7 4.4 4.6 3.9 1.3 1.1 0.9 1.6 2.1 2.6 27.7 16.8 17.8 190 23.5 0.1 IVRCL 167 BUY 22,631 454 135 15.5 14.9 16.1 27.2 (4.0) 8.0 10.8 11.2 10.4 8.9 7.8 6.5 1.4 1.2 1.1 0.9 0.5 0.5 14.4 11.9 11.5 175 4.7 7.7 Nagarjuna Construction Co. 80 BUY 18,350 368 229 7.2 7.3 8.8 14.5 2.5 19.7 11.2 10.9 9.1 6.9 7.0 6.1 1.2 2.2 1.0 1.4 1.7 2.0 12.6 10.3 11.3 100 24.8 1.9 Strategy Punj Lloyd 132 REDUCE 42,679 855 323 10.0 9.6 16.4 323.5 (4.0) 71.5 13.2 13.8 8.0 7.5 8.7 5.4 1.6 1.3 1.2 0.2 0.3 0.5 16.8 10.8 16.3 105 (20.4) 15.8 Sadbhav Engineering 419 ADD 5,234 105 13 40.5 43.8 54.3 68.2 8.2 23.8 10.3 9.6 7.7 6.8 6.1 5.2 1.8 1.5 1.3 1.0 1.2 1.4 16.5 15.9 16.8 550 31.4 0.1 Construction Attractive 94,577 1,896 94.7 (2.2) 37.0 11.3 11.6 8.4 7.4 7.6 5.7 1.4 1.3 1.1 0.7 0.8 1.0 12.5 11.1 13.4 Source: Company, Bloomberg, Kotak Institutional Equities estimates
  • Strategy KOTAK INSTITUTIONAL EQUITIES RESEARCH Kotak Institutional Equities: Valuation summary of key Indian companies O/S Target ADVT- 15-Apr-09 Mkt cap. shares EPS (Rs) EPS growth (%) PER (X) EV/EBITDA (X) Price/BV (X) Dividend yield (%) RoE (%) price Upside 3mo Company Price (Rs) Rating (Rs mn) (US$ mn) (mn) 2008 2009E 2010E 2008 2009E 2010E 2008 2009E 2010E 2008 2009E 2010E 2008 2009E 2010E 2008 2009E 2010E 2008 2009E 2010E (Rs) (%) (US$ mn) Energy Bharat Petroleum 369 SELL 120,802 2,421 328 41.3 0.0 42.0 (21.1) (99.9) NA 8.9 NA 8.8 4.2 7.5 4.4 0.9 1.0 0.8 1.2 — 5.1 11.8 0.0 10.2 425 15.3 5.5 Cairn india 208 BUY 388,864 7,794 1,871 (0.1) 4.2 4.4 (105) (3,628) 5.2 (1,744) 49 47.0 48.0 28.9 21.1 1.3 1.2 1.1 — — — (0.1) 2.5 2.5 225 8.3 14.6 Castrol India (a) 327 BUY 40,449 811 124 17.6 21.3 25.6 44.4 20.7 20.2 18.5 15.4 12.8 10.2 8.6 7.2 9.8 9.0 8.1 4.3 4.6 5.5 52.2 60.9 66.3 390 19.2 0.3 GAIL (India) 254 SELL 322,573 6,465 1,268 20.4 23.3 19.7 21.0 14.2 (15.6) 12.5 10.9 12.9 6.3 5.9 7.3 2.3 2.0 1.8 2.6 2.9 2.6 18.1 18.3 13.8 240 (5.6) 10.6 GSPL 46 REDUCE 25,663 514 563 1.8 1.9 2.5 10.1 4.4 30.5 25.3 24.2 18.6 8.3 8.6 5.6 2.1 1.9 1.7 1.1 1.1 1.5 8.8 8.2 9.8 45 (1.3) 1.7 Hindustan Petroleum 253 SELL 85,617 1,716 339 33.5 (10.5) 30.2 (16.4) (131.5) (386.8) 7.5 (23.9) 8.4 7.0 6.8 4.6 0.7 0.7 0.7 1.2 — 4.8 9.6 (2.9) 7.6 300 18.8 6.7 Indian Oil Corporation 425 REDUCE 501,565 10,052 1,179 61.3 24.3 46.8 31.0 (60.3) 92.1 6.9 17.5 9.1 4.2 8.2 4.5 1.1 1.0 1.0 1.3 — 4.3 17.4 6.2 10.3 525 23.4 2.9 Oil & Natural Gas Corporation 895 ADD 1,914,839 38,377 2,139 92.7 103.9 103.9 9.1 12.0 0.0 9.7 8.6 8.6 3.6 3.2 2.9 1.9 1.7 1.5 3.6 3.8 4.0 19.6 19.5 17.2 950 6.1 31.4 Petronet LNG 51 ADD 38,025 762 750 6.3 5.5 5.9 — (12.6) 6.6 8.0 9.2 8.6 5.2 7.2 5.7 2.0 1.7 1.4 3.0 3.0 3.0 26.7 19.2 17.2 52 2.6 1.5 Reliance Industries 1,830 REDUCE 2,512,659 50,359 1,373 105.0 98.9 136.9 25.5 (5.8) 38.4 17.4 18.5 13.4 11.3 10.8 6.7 2.8 2.3 1.9 0.6 0.8 0.9 19.0 14.4 17.1 1,625 (11.2) 189.5 Reliance Petroleum 113 NR 508,950 10,200 4,500 — (0.0) 9.0 n/a n/a n/a n/a n/a 12.6 n/a n/a 9.9 3.8 3.8 3.1 — — 1.8 — (0.0) 27.0 - (100.0) 21.8 Energy Neutral 6,460,006 129,472 12.9 (7.7) 36.6 13.5 14.6 10.7 6.8 7.1 5.2 2.0 1.7 1.6 1.6 1.6 2.4 14.9 11.8 14.5 Industrials ABB 511 SELL 108,338 2,171 212 23.2 25.8 23.6 44.5 11.3 (8.8) 22.0 19.8 21.7 12.7 11.7 12.0 6.7 5.2 4.3 0.4 0.5 0.6 34.8 29.4 21.6 325 (36.4) 5.0 BGR Energy Systems 183 REDUCE 13,144 263 72 12.1 15.3 20.7 (67.4) 26.1 35.4 15.0 11.9 8.8 8.7 6.8 5.8 2.8 2.3 1.9 1.1 1.3 1.8 31.4 21.3 23.9 165 (9.6) 0.7 Bharat Electronics 972 REDUCE 77,744 1,558 80 102.0 97.8 104.6 11.2 (4.0) 6.9 9.5 9.9 9.3 4.2 3.7 3.4 2.3 2.0 1.7 2.1 2.6 2.6 27.7 21.6 19.9 950 (2.2) 0.9 Bharat Heavy Electricals 1,667 REDUCE 816,079 16,356 490 58.4 59.8 89.0 22.9 2.3 48.9 28.5 27.9 18.7 15.4 14.6 10.1 7.6 6.3 5.0 0.9 1.0 1.1 29.2 24.7 30.0 1,475 (11.5) 51.1 Crompton Greaves 168 ADD 61,440 1,231 367 11.2 14.2 15.7 43.0 27.0 10.8 15.0 11.8 10.7 8.1 6.8 6.1 4.7 3.5 2.7 1.0 1.1 1.1 36.1 34.1 28.9 185 10.4 5.0 Larsen & Toubro 878 SELL 520,539 10,433 593 37.9 48.2 51.6 20.8 27.1 7.0 23.1 18.2 17.0 15.2 11.3 10.3 4.4 3.3 2.7 1.0 1.1 1.3 22.7 20.6 17.6 650 (26.0) 58.4 Maharashtra Seamless 180 BUY 12,664 254 71 29.4 37.4 37.9 (23.5) 27.6 1.2 6.1 4.8 4.7 3.7 3.1 2.9 1.1 0.9 0.8 2.8 3.1 3.2 19.7 21.1 18.0 215 19.7 0.4 Siemens 304 REDUCE 102,463 2,054 337 18.2 14.2 15.7 60.4 (22.2) 10.5 16.7 21.4 19.4 9.4 9.5 10.4 5.6 4.5 3.9 0.8 1.2 1.4 39.9 23.1 21.3 220 (27.6) 5.1 Suzlon Energy 69 REDUCE 107,806 2,161 1,567 6.6 7.0 6.1 9.5 6.6 (13.1) 10.5 9.8 11.3 6.1 8.3 8.2 1.2 1.0 0.9 1.4 0.7 0.7 16.3 11.3 8.7 60 (12.8) 32.0 Industrials Cautious 1,820,216 36,481 25.3 9.5 17.3 20.8 19.0 16.2 11.9 10.7 9.2 4.4 3.6 3.0 1.0 1.1 1.2 21.1 18.7 18.4 Infrastructure IRB Infrastructure 112 ADD 37,241 746 332 3.4 5.6 10.4 150.9 63.5 85.5 32.7 20.0 10.8 12.2 11.6 6.5 2.3 2.0 1.6 — — — 10.7 10.6 16.8 110 (1.8) 2.1 Media DishTV 32 REDUCE 20,708 415 644 (9.6) (7.3) (4.1) n/a (23.9) (44.4) (3.3) (4.4) (7.9) (11.5) (14.9) (85.7) (4.6) (3.2) (10.2) — — — 167.9 86.1 NA 22 (31.6) 3.3 HT Media 65 BUY 15,238 305 234 4.3 2.9 4.1 4.7 (32.3) 39.3 15.0 22.2 16.0 8.3 9.9 7.0 1.8 1.7 1.6 0.6 0.6 1.2 12.2 7.8 10.2 100 53.7 0.1 Jagran Prakashan 60 BUY 18,070 362 301 3.3 2.9 4.1 33.5 (11.4) 40.5 18.4 20.8 14.8 10.2 11.5 8.1 3.4 3.1 2.9 3.3 2.4 3.4 18.7 15.6 20.3 75 25.0 0.1 Sun TV Network 202 REDUCE 79,781 1,599 394 8.3 9.2 11.0 30.7 10.9 19.2 24.4 22.0 18.5 13.1 11.7 10.2 5.3 4.7 4.3 1.2 2.0 3.0 24.8 23.4 24.9 200 (1.2) 0.8 Zee Entertainment Enterprises 136 BUY 58,965 1,182 434 8.9 8.2 9.2 62.6 (7.8) 12.4 15.3 16.6 14.8 11.3 11.9 10.6 2.0 1.8 1.6 1.5 1.7 1.9 14.2 11.8 12.0 145 6.6 6.3 Zee News 40 ADD 9,483 190 240 1.5 2.0 2.3 396.2 28.9 13.6 25.6 19.8 17.5 13.8 10.9 9.2 4.5 3.8 3.3 1.0 1.0 1.3 19.2 21.3 20.5 40 1.1 0.4 Media Attractive 202,246 4,053 30.8 (17.6) 62.5 37.7 45.8 28.2 15.4 15.1 11.1 3.6 3.3 2.8 1.3 1.6 2.2 9.5 7.2 10.1 Metals Hindalco Industries 62 ADD 109,363 2,192 1,753 13.8 7.7 2.4 (10.0) (44.4) (69.2) 4.5 8.1 26.4 5.9 5.5 7.6 0.5 0.3 0.3 — — — 14.4 10.3 5.2 55 (11.9) 8.6 National Aluminium Co. 251 SELL 161,818 3,243 644 25.3 19.7 10.3 (31.5) (22.2) (47.8) 9.9 12.8 24.4 4.6 6.2 8.0 1.7 1.5 1.5 2.4 1.4 0.8 18.3 12.7 6.2 135 (46.2) 1.8 Jindal Steel and Power 1,477 BUY 227,424 4,558 154 82.7 179.7 171.6 80.5 117.2 (4.5) 17.9 8.2 8.6 13.1 5.8 5.6 5.2 3.2 2.3 — 0.4 0.5 35.4 48.4 31.0 1,400 (5.2) 22.1 JSW Steel 368 SELL 68,750 1,378 187 86.1 20.0 23.9 16.1 (76.7) 19.4 4.3 18.3 15.4 5.4 7.2 7.4 0.8 0.7 0.6 3.8 0.5 0.5 20.7 12.3 4.2 185 (49.7) 10.8 Hindustan Zinc 486 BUY 205,477 4,118 423 104.0 63.8 64.0 (1.0) (38.6) 0.2 4.7 7.6 7.6 2.4 4.1 3.5 1.7 1.4 1.2 1.0 1.5 2.1 43.6 20.0 17.0 490 0.8 3.1 Sesa Goa 119 BUY 93,800 1,880 787 19.0 23.7 19.6 146.0 24.8 (17.0) 6.3 5.0 6.1 3.4 3.2 3.2 3.3 2.1 1.6 2.2 2.9 2.9 67.8 51.2 30.5 115 (3.5) 14.7 Sterlite Industries 421 BUY 298,276 5,978 708 64.3 48.0 46.6 (22.6) (25.4) (2.9) 6.5 8.8 9.0 2.8 4.7 4.7 1.3 1.2 1.0 — — — 26.1 13.8 12.2 440 4.5 26.2 Tata Steel 293 BUY 240,843 4,827 822 75.7 123.9 55.5 43.8 63.6 (55.2) 3.9 2.4 5.3 4.1 3.4 4.5 0.7 0.5 0.5 4.9 4.4 4.4 46.3 36.8 15.7 280 (4.4) 51.5 Metals Attractive 1,405,751 28,174 12.0 4.6 (34.0) 5.9 5.7 8.6 4.5 4.5 5.3 1.2 0.9 0.8 1.6 1.4 1.5 19.8 16.1 9.8 Pharmaceutical Biocon 159 BUY 31,890 639 200 23.3 5.6 16.0 126.0 (76.1) 187.0 6.8 28.7 10.0 8.9 12.5 6.3 2.2 2.0 1.8 0.1 0.0 0.1 17.6 7.3 18.8 235 47.4 0.6 Cipla 241 ADD 187,327 3,754 777 9.0 9.8 14.7 4.9 8.2 50.9 26.7 24.7 16.4 19.5 17.8 12.3 5.0 4.4 3.6 0.8 1.0 1.2 20.1 18.9 24.2 260 7.9 5.6 Dishman Pharma & chemicals 115 BUY 9,378 188 81 14.7 11.4 24.8 30.5 (22.7) 118.0 7.8 10.1 4.7 7.8 8.4 4.7 1.6 1.4 1.1 0.0 0.0 0.0 26.8 15.1 27.1 280 142.8 0.2 Divi's Laboratories 948 BUY 61,200 1,227 65 53.2 65.2 75.1 85.8 22.5 15.2 17.8 14.5 12.6 14.5 11.3 9.1 7.2 4.9 3.7 0.1 0.1 0.1 49.8 40.3 33.3 1,450 52.9 6.5 Dr Reddy's Laboratories 546 BUY 92,369 1,851 169 26.1 26.2 39.9 (57.2) 0.6 52.1 20.9 20.8 13.7 10.0 8.8 6.4 2.1 1.9 1.7 0.7 0.7 0.7 10.3 9.4 13.0 700 28.2 3.9 Glenmark Pharmaceuticals 195 BUY 51,895 1,040 266 25.8 15.8 18.2 98.4 (38.7) 14.7 7.6 12.3 10.7 7.1 8.4 7.1 3.4 2.3 1.9 0.1 0.0 0.0 57.4 21.9 19.8 390 99.8 9.5 Jubilant Organosys 120 BUY 21,386 429 179 22.4 (5.5) 21.7 72.3 (124.7) (492) 5.3 (21.6) 5.5 6.2 26.6 6.9 1.7 1.6 1.5 1.0 1.4 1.7 37.0 (8.4) 30.4 300 150.6 0.2 Lupin 676 BUY 59,900 1,201 89 49.8 50.8 65.3 30.2 2.0 28.7 13.6 13.3 10.4 15.9 11.7 8.9 4.6 2.9 2.4 1.4 1.4 1.7 37.9 27.4 26.0 1,100 62.7 1.8 Piramal Healthcare 230 BUY 48,143 965 209 17.7 14.8 21.3 66.8 (16.7) 44.4 13.0 15.6 10.8 9.8 11.4 7.9 4.4 3.9 3.1 1.8 1.7 2.0 30.9 19.5 32.1 340 47.6 2.2 Ranbaxy Laboratories 200 ADD 83,898 1,681 419 23.3 (8.1) 8.9 70.4 NA NA 8.6 NA 22.5 8.2 (120.0) 8.2 2.8 1.7 1.0 3.8 5.1 6.0 32.3 (8.8) 5.9 340 69.8 13.2 Sun Pharmaceuticals 1,218 BUY 252,278 5,056 207 74.7 86.8 85.7 78.9 16.3 (1.3) 16.3 14.0 14.2 13.8 10.9 10.1 4.9 3.7 3.0 0.9 0.9 1.1 38.3 31.1 24.3 1,800 47.8 15.7 Pharmaceuticals Attractive 899,663 18,031 34.1 (27.3) 57.6 15.0 20.6 13.1 11.4 13.3 8.6 3.7 2.9 2.2 1.1 1.3 1.5 24.5 14.1 17.1 Property DLF 257 REDUCE 438,048 8,779 1,705 46.1 30.0 22.7 263.2 (35.0) (24.4) 5.6 8.6 11.3 5.6 9.3 10.7 2.2 1.8 1.6 1.6 1.6 1.6 66.5 23.1 14.8 190 (26.1) 68.5 Housing Development & Infrastructure 146 REDUCE 40,263 807 275 51.2 30.6 19.8 118.6 (40.1) (35.3) 2.9 4.8 7.4 4.0 8.0 9.1 1.1 0.9 0.9 2.6 3.4 4.1 64.5 21.2 12.1 120 (17.9) 31.5 Indiabulls Real Estate 149 ADD 38,375 769 258 16.4 3.0 3.5 2,383.9 (81.9) 17.0 9.1 50.0 42.7 (1,295) (49.3) 33.1 0.7 0.6 0.6 0.2 0.0 0.0 10.6 1.2 1.3 180 20.8 20.8 Mahindra Life Space Developer 193 BUY 8,135 163 42 16.8 10.2 10.8 307.7 (39.2) 5.3 11.5 18.9 18.0 21.0 28.5 16.1 0.9 0.9 0.9 1.4 2.0 2.0 8.4 4.8 4.9 410 111.9 0.6 Phoenix Mills 95 BUY 13,782 276 145 3.2 5.4 7.3 (51.7) 70.0 34.7 30.0 17.7 13.1 24.1 19.3 10.0 1.0 0.9 0.9 1.1 1.1 1.1 5.6 5.3 6.8 210 120.7 0.2 Puravankara Projects 60 REDUCE 12,859 258 213 11.2 7.6 7.5 67.3 (32.1) (2.2) 5.4 7.9 8.1 9.0 13.2 12.4 1.1 1.0 0.9 3.3 — 3.3 34.2 12.9 11.4 55 (8.7) 0.3 Sobha 107 REDUCE 7,830 157 73 31.7 15.9 11.9 42.9 (50.0) (24.8) 3.4 6.8 9.0 6.9 8.2 11.4 0.8 0.7 0.7 6.1 3.7 3.7 25.3 11.0 7.8 90 (16.2) 0.3 Unitech 48 SELL 77,922 1,562 1,623 10.3 6.9 5.5 28.5 (33.4) (20.5) 4.6 7.0 8.8 6.7 8.5 10.1 2.2 1.7 1.4 0.5 — — 59.9 26.8 17.2 24 (50.0) 47.6 Property Cautious 637,213 12,771 187.5 (36.7) (23.4) 5.3 8.4 11.0 5.9 9.3 10.6 1.7 1.4 1.3 1.5 1.4 1.5 32.1 16.8 11.7 19 Source: Company, Bloomberg, Kotak Institutional Equities estimates
  • 20 Kotak Institutional Equities: Valuation summary of key Indian companies O/S Target ADVT- 15-Apr-09 Mkt cap. shares EPS (Rs) EPS growth (%) PER (X) EV/EBITDA (X) Price/BV (X) Dividend yield (%) RoE (%) price Upside 3mo Company Price (Rs) Rating (Rs mn) (US$ mn) (mn) 2008 2009E 2010E 2008 2009E 2010E 2008 2009E 2010E 2008 2009E 2010E 2008 2009E 2010E 2008 2009E 2010E 2008 2009E 2010E (Rs) (%) (US$ mn) Retail Pantaloon Retail 190 REDUCE 30,283 607 159 7.9 8.3 10.2 90.0 4.4 23.3 24.0 23.0 18.7 11.2 8.9 8.0 1.6 1.6 1.5 0.4 0.4 0.5 8.2 6.7 7.8 165 (13.2) 1.4 Titan Industries 826 REDUCE 36,681 735 44 35.1 41.9 48.7 55.2 19.6 16.1 23.6 19.7 17.0 16.0 12.1 10.3 7.8 5.9 4.7 1.0 1.1 1.3 37.7 34.1 30.7 830 0.4 3.2 Vishal Retail 49 ADD 1,095 22 22 18.1 10.6 10.8 37.2 (41.2) 1.9 2.7 4.6 4.5 4.7 4.5 3.6 0.4 0.4 0.3 — — — 20.2 8.3 7.8 75 53.4 0.1 Retail 68,059 1,364 31.9 6.0 17.9 21.1 19.9 16.9 11.6 9.1 7.9 2.6 2.4 2.2 0.7 0.8 1.0 12.4 12.1 12.8 Sugar Balrampur Chini Mills 76 BUY 19,370 388 256 3.1 6.5 7.0 (272.9) 106.5 8.0 24.1 11.7 10.8 9.9 6.0 5.4 1.9 1.7 1.5 0.8 0.9 1.0 7.6 13.5 12.7 70 (7.7) 3.5 Shree Renuka Sugars 109 BUY 30,572 613 280 3.9 8.2 8.4 (87.3) 107.7 2.8 27.7 13.4 13.0 14.6 7.0 6.6 3.4 2.6 2.2 0.2 0.7 0.9 19.9 24.5 20.6 100 (8.4) 8.8 Bajaj Hindustan 76 SELL 10,783 216 141 (2.6) (6.0) 0.8 375.9 126.2 NA (28.9) (12.8) 94.5 15.2 9.0 5.9 0.8 0.9 0.9 0.9 — 0.4 (6.8) (7.0) 4.6 36 (52.8) 3.9 Sugar 60,724 1,217 526.3 96.1 38.3 36.0 18.4 13.3 13.2 7.4 5.9 1.9 1.7 1.6 0.5 0.6 0.9 5.3 9.5 11.7 Technology HCL Technologies 132 REDUCE 91,566 1,835 695 15.3 16.6 13.5 (19.0) 8.8 (18.6) 8.6 7.9 9.7 4.2 4.7 4.6 1.9 1.4 1.3 6.1 9.1 9.1 21.4 18.3 13.3 110 (16.5) 3.3 Hexaware Technologies 31 SELL 4,406 88 142 7.7 4.1 3.0 (13.7) (46.4) (27.8) 4.0 7.5 10.5 1.0 1.4 2.4 0.6 0.7 0.6 2.9 3.2 3.2 15.1 8.6 6.3 25 (19.4) 2.2 Infosys Technologies 1,371 BUY 786,724 15,768 574 79.1 102.4 104.1 18.0 29.6 1.6 17.3 13.4 13.2 13.4 9.4 9.0 5.7 4.3 3.5 2.4 1.7 1.9 36.1 36.7 29.3 1,500 9.4 49.0 Mphasis BFL 221 REDUCE 46,108 924 208 12.2 14.2 32.6 67.6 15.7 129.8 18.1 15.6 6.8 10.8 11.8 4.6 4.0 3.2 2.3 1.6 1.8 2.0 23.6 22.8 39.5 190 (14.1) 2.0 Mindtree 250 BUY 9,887 198 40 26.7 21.0 37.1 12.3 (21.6) 76.9 9.4 11.9 6.8 8.2 3.6 3.4 1.9 1.6 1.3 1.0 — — 21.3 11.9 17.8 400 59.8 1.7 Patni Computer Systems 146 SELL 18,775 376 128 33.2 26.8 17.5 29.2 (19.3) (34.7) 4.4 5.5 8.4 1.1 1.0 1.1 0.7 0.8 0.6 1.5 1.2 2.4 19.2 16.2 7.9 130 (11.1) 0.8 Polaris Software Lab 62 SELL 6,119 123 98 7.4 14.9 12.7 (27.6) 100.0 (14.9) 8.4 4.2 4.9 3.6 1.6 1.6 0.9 0.8 0.7 2.8 2.8 2.8 11.7 20.4 15.0 50 (19.7) 2.4 TCS 578 REDUCE 565,343 11,331 979 51.3 53.2 58.5 21.5 3.8 10.0 11.3 10.9 9.9 9.0 7.5 6.6 4.6 3.6 3.0 2.4 3.2 4.1 47.0 37.4 33.7 550 (4.8) 17.4 Tech Mahindra 368 BUY 45,902 920 125 59.1 67.6 58.7 25.7 14.5 (13.2) 6.2 5.4 6.3 5.5 3.4 3.5 3.7 2.2 1.6 1.5 1.6 1.7 70.7 53.1 31.6 320 (13.1) 8.1 Wipro 269 ADD 393,205 7,881 1,462 22.2 25.3 26.9 12.6 13.9 6.0 12.1 10.6 10.0 9.7 7.5 6.4 3.0 2.6 2.2 2.2 1.5 2.8 27.9 26.6 23.8 280 4.1 8.0 Technology Cautious 1,968,035 39,444 15.5 15.1 4.5 12.7 11.0 10.5 9.6 7.4 6.7 3.8 3.1 2.6 2.5 2.4 3.0 30.4 28.3 24.4 Telecom Bharti Airtel 685 ADD 1,300,156 26,058 1,898 35.3 44.2 48.9 65.0 25.1 10.8 19.4 15.5 14.0 11.8 8.9 7.8 5.8 4.2 3.2 — 0.6 0.9 39.1 31.4 26.0 675 (1.5) 61.1 IDEA 57 REDUCE 184,472 3,697 3,236 3.9 2.6 2.1 78.5 (33.2) (21.0) 14.4 21.6 27.4 10.6 7.4 7.1 5.2 1.4 1.3 — — — 36.4 10.1 5.1 50 (12.3) 5.9 MTNL 76 SELL 47,786 958 630 7.1 4.0 4.1 (11.0) (44.3) 2.6 10.6 19.1 18.6 1.9 6.0 4.4 0.4 0.4 0.4 5.3 7.9 7.9 3.5 1.6 1.6 50 (34.1) 1.0 Reliance Communications 230 SELL 474,621 9,512 2,064 26.5 26.7 20.1 86.4 0.7 (24.7) 8.7 8.6 11.5 7.5 8.1 7.7 1.6 1.4 1.2 0.3 0.3 — 16.8 18.4 11.7 150 (34.8) 45.9 Tata Communications 583 REDUCE 166,169 3,330 285 10.9 13.6 14.0 (36.3) 24.0 3.2 53.3 42.9 41.6 22.0 18.2 16.5 2.5 2.4 2.3 0.8 0.9 1.1 4.4 5.4 5.2 400 (31.4) 2.4 Telecom Cautious 2,173,205 43,556 65.7 12.7 (4.8) 15.0 13.4 14.0 10.2 8.8 8.0 2.9 2.2 1.9 0.4 0.7 0.8 19.6 16.7 13.8 Transportation Container Corporation 760 REDUCE 98,824 1,981 130 57.7 63.4 67.8 7.8 9.8 7.0 13.2 12.0 11.2 9.0 8.1 7.2 3.1 2.6 2.2 1.7 1.9 2.0 25.8 23.6 21.4 735 (3.3) 0.8 Transportation Cautious 98,824 1,981 7.8 9.8 7.0 13.2 12.0 11.2 9.0 8.1 7.2 3.1 2.6 2.2 1.7 1.9 2.0 23.6 21.7 19.9 Utilities CESC 252 BUY 31,540 632 125 27.8 31.9 36.9 (23.3) 14.9 15.8 9.1 7.9 6.8 4.7 4.3 5.4 1.0 0.9 0.8 1.6 1.8 2.1 12.5 11.7 11.9 385 52.5 0.7 Lanco Infratech 231 BUY 51,251 1,027 222 14.8 14.6 17.1 75.2 (1.3) 16.6 15.5 15.7 13.5 11.6 22.6 17.0 2.8 2.3 2.0 — — — 19.7 16.2 15.8 265 14.9 5.6 NTPC 198 REDUCE 1,630,128 32,671 8,245 9.3 8.8 10.7 7.9 (5.2) 20.8 21.2 22.4 18.5 14.7 15.1 13.7 3.0 2.8 2.6 1.8 1.8 2.0 14.9 12.9 14.4 180 (9.0) 27.0 Reliance Infrastructure 710 BUY 163,992 3,287 231 37.6 59.9 56.2 13.9 59.4 (6.2) 18.9 11.9 12.6 14.4 13.0 12.7 1.0 1.0 0.9 0.9 1.0 1.2 4.3 6.2 6.7 970 36.6 88.7 Reliance Power 128 REDUCE 307,863 6,170 2,397 0.4 1.3 2.5 — 252.9 82.7 337.7 95.7 52.4 — — — 2.3 2.2 2.1 — — — 1.3 2.3 4.2 120 (6.6) 10.9 Tata Power 899 BUY 200,181 4,012 223 31.8 65.2 90.2 19.5 104.6 38.4 28.2 13.8 10.0 13.0 9.8 9.3 2.3 1.9 1.6 1.2 1.2 1.3 9.6 15.0 17.5 1,000 11.2 10.8 Utilities Attractive 2,384,956 47,799 12.2 11.3 21.2 23.8 21.4 17.6 14.9 15.4 14.7 2.4 2.3 2.1 1.4 1.4 1.6 10.3 10.6 11.8 Others Aban Offshore 488 REDUCE 18,487 371 38 72.3 142.4 185.5 (1,066) 97.0 30.3 6.8 3.4 2.6 11.2 7.8 5.9 2.1 1.2 0.8 0.7 0.8 1.0 51.7 44.5 37.6 300 (38.5) 24.2 Educomp Solutions 2,199 BUY 41,824 838 19 35.2 64.2 108.1 114 82.7 68.3 62.6 34.2 20.3 33.2 15.1 9.2 13.6 5.7 4.6 0.1 0.3 0.4 33.5 23.4 24.3 2,550 16.0 84.8 Havells India 169 REDUCE 10,219 205 61 26.6 (1.0) 10.3 40 (103.7) (1,135) 6.3 (170.2) 16.4 6.0 8.1 7.0 1.5 1.4 1.4 1.4 1.9 2.4 33.7 (0.9) 8.5 120 (28.9) 0.2 Jaiprakash Associates 123 BUY 172,275 3,453 1,403 4.9 5.3 7.1 7 8.6 33.4 25.1 23.1 17.3 16.0 13.5 11.3 3.5 3.0 2.6 0.0 0.0 0.0 15.4 13.9 16.3 105 (14.5) 39.2 Jindal Saw 239 BUY 13,126 263 55 64.8 67.8 48.2 (44) 4.6 (28.9) 3.7 3.5 5.0 3.2 2.8 2.7 0.5 0.4 0.4 2.0 2.1 1.7 12.2 11.4 7.4 300 25.4 0.8 PSL 99 BUY 4,319 87 44 21.1 24.3 43.7 4 15.3 79.6 4.7 4.1 2.3 5.0 4.7 4.0 0.6 0.5 0.5 9.1 8.1 8.1 11.3 10.6 14.2 145 46.3 0.1 Sintex 141 BUY 19,300 387 136 19.5 21.3 22.5 60 8.9 5.7 7.2 6.6 6.3 6.2 5.2 4.6 1.2 1.0 0.9 0.7 0.9 1.1 14.0 15.0 13.8 125 (11.6) 3.2 Tata Chemicals 170 BUY 40,038 802 235 39.6 25.5 23.3 90 (35.7) (8.4) 4.3 6.7 7.3 6.2 4.3 3.7 1.8 1.5 1.3 0.8 1.1 0.7 30.7 17.2 13.3 190 11.6 1.1 Welspun Gujarat Stahl Rohren 97 BUY 18,292 367 189 20.6 20.9 21.0 94 1.5 0.7 4.7 4.6 4.6 6.2 4.3 3.7 1.1 0.9 0.7 1.3 1.9 1.3 27.1 20.0 17.3 100 3.2 5.7 United Phosphorus 125 BUY 57,773 1,158 462 9.3 11.4 14.8 30 21.7 30.4 13.4 11.0 8.4 8.4 6.4 4.5 2.6 1.9 1.6 0.8 1.2 1.6 20.0 18.7 20.0 140 12.0 1.2 Others 395,652 7,930 42.5 17.1 13.1 11.9 10.2 9.0 9.2 7.6 6.4 2.0 1.6 1.4 0.9 1.0 1.1 16.9 15.8 15.5 KOTAK INSTITUTIONAL EQUITIES RESEARCH KS universe (b) 25,489,892 510,871 26.0 2.1 7.3 13 12.6 11.8 8.2 8.3 7.3 2.3 1.9 1.7 1.6 1.6 2.0 17.9 15.4 14.7 KS universe (b) ex-Energy 19,029,887 381,399 30.8 5.2 (0.9) 12.7 12.1 12.2 8.9 8.9 8.5 2.4 2.0 1.8 1.6 1.7 1.8 19.2 16.8 14.8 KS universe (d) ex-Energy & ex-Commodities 17,093,363 342,587 36.0 6.2 6.5 14.3 13.5 12.7 11.1 10.7 9.4 2.7 2.3 2.0 1.6 1.6 1.8 18.7 16.8 15.8 Note: (1) For banks we have used adjusted book values. (2) 2008 means calendar year 2007, similarly for 2009 and 2010 for these particular companies. (3) EV/Sales & EV/EBITDA for KS universe excludes Banking Sector. (4) Rupee-US Dollar exchange rate (Rs/US$)= 49.90. Source: Company, Bloomberg, Kotak Institutional Equities estimates Strategy
  • Strategy “I, Sanjeev Prasad, hereby certify that all of the views expressed in this report accurately reflect my personal views about the subject company or companies and its or their securities. I also certify that no part of my compensation was, is or will be, directly or indirectly, related to the specific recommendations or views expressed in this report.” KOTAK INSTITUTIONAL EQUITIES RESEARCH 21
  • Strategy Kotak Institutional Equities Research coverage universe Distribution of ratings/investment banking relationships Percentage of companies covered by Kotak Institutional Equities, 70% within the specified category. 60% Percentage of companies within each category for which Kotak Institutional Equities and or its affiliates has provided investment 50% banking services within the previous 12 months. 39.7% 40% * The above categories are defined as follows: Buy = We expect this stock to outperform the BSE Sensex by 10% over the next 12 30% months; Add = We expect this stock to outperform the BSE Sensex 26.0% 24.7% 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 20% months; Sell = We expect this stock to underperform the BSE 9.6% Sensex by more then 10% over the next 12 months. These ratings 10% are used illustratively to comply with applicable regulations. As of 3.5% 31/03/2009 Kotak Institutional Equities Investment Research had 2.8% 0.7% 0.7% investment ratings on 146 equity securities. 0% BUY ADD REDUCE SELL Source: Kotak Institutional Equities As of March 31, 2009 Analyst coverage Sanjeev Prasad, the lead analyst in this report, also covers the following companies Company Name Ticker Bharat Petroleum BPCL.BO Cairn India CAIL.BO Castrol India CAST.BO GAIL (India) GAIL.BO Gujarat State Petronet GSPT.BO Hindustan Petroleum HPCL.BO Indian Oil Corp. IOC.BO Oil & Natural Gas Corporation ONGC.BO Petronet LNG PLNG.BO Reliance Industries RELI.BO Reliance Petroleum RPET.BO Source: Kotak Institutional Equities Research Kotak Securities’ company-specific disclosures Kotak Securities Limited and or its affiliates have received during the last 12 months compensation for Investment Banking services from the following companies: Mahindra & Mahindra, HDFC Bank, Mahindra & Mahindra Financial Services, SREI, Nagarjuna Construction and CESC Kotak Securities Limited and or its affiliates were Lead Managers for the public /right offerings/institutional placements for the following companies: State Bank of India, Centurion Bank of Punjab, Central Bank of India, Punj Lloyd, Consolidated Construction Co.Ltd, Jyothy Laboratories, BGR Energy Systems, GMR Infrastructure, DLF, HDIL, IVR Prime Urban Developers, IDFC and Puravankara Projects. 22 KOTAK INSTITUTIONAL EQUITIES RESEARCH
  • Strategy RATINGS AND OTHER DEFINITIONS/IDENTIFIERS 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 Sensex by more than 10% over the next 12 months. 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 23
  • This report has been produced without independent discussion with the companies covered herein. Information in this report must not be relied upon as having been authorized or approved by such companies, their respective shareholders or any of their respective affiliates or advisors. In particular, any opinions contained in this report are entirely those of the authors, who have no authority whatsoever to give any information or make any representation or warranty on behalf of such companies, their respective shareholders or any of their respective affiliates or advisors. These are professional opinions formed in good faith based on publicly available information applying professional techniques and analysis that would be reasonable in the circumstances. Neither Kotak Securities Limited nor any of these persons accepts any liability whatsoever for any loss howsoever arising from any use of this report or its contents or otherwise arising in connection therewith. Corporate Office Overseas Offices Kotak Securities Ltd. Kotak Mahindra (UK) Ltd. Kotak Mahindra Inc. Bakhtawar, 1st Floor 6th Floor, Portsoken House 50 Main Street, Suite No.310 229, Nariman Point 155-157 The Minories Westchester Financial Centre Mumbai 400 021, India London EC 3N 1 LS White Plains, New York 10606 Tel: +91-22-6634-1100 Tel: +44-20-7977-6900 / 6940 Tel: +1-914-997-6120 Copyright 2009 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. 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