03July2012 India Daily

7/31/2019 03July2012 India Daily

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

INDIA DAILYJuly 3, 2012

Kotak Institutional Equities Research

[email protected] . Mumbai: +94-22-6634-1100

India 2-Jul 1-day1-mo 3-mo

Sensex 17,399 (0.2) 9.0 (1.1)

Nifty 5,279 (0.0) 9.0 (1.5)

Global/Regional indices

Dow Jones 12,871 (0.1) 6.2 (2.5)

Nasdaq Composite 2,951 0.6 7.4 (5.2)

FTSE 5,641 1.2 7.2 (3.4)

Nikkie 9,045 0.5 7.2 (10.0)

HangSeng 19,636 1.0 5.8 (4.3)

KOSPI 1,868 0.9 1.9 (8.8)

Value traded India

Cash(NSE+BSE) 116 117 117

Derivatives (NSE) 781 798 790

Deri. open interest 1,077 907 927

Forex/money market

Change, basis points

2-Jul 1-day 1-mo 3-mo

Rs/US$ 55.5 8 (2) 475

10yr govt bond, % 8.4 1 (8) (19)

Net investment (US$mn)

28-Jun MTD CYTD

FIIs (122) - 8,516

MFs 64 - (282)

Top movers -3mo basis

Change, %

Best performers 2-Jul 1-day 1-mo 3-mo

DIVI IN Equity 1044.9 1.9 15.0 37.3

GNP IN Equity 372.1 2.5 6.8 20.0

APNT IN Equity 3921.2 0.8 3.7 16.8

NMDC IN Equity 196.4 5.3 18.9 16.1

SUNP IN Equity 634.7 (0.2) 11.5 11.5

Worst performers

ADE IN Equity 235.0 5.7 (2.0) (26.7)

RCOM IN Equity 64.2 1.0 2.4 (26.3)

SUEL IN Equity 18.9 1.6 7.7 (26.2)

AL IN Equity 24.5 (1.6) (2.2) (23.4)

IVRC IN Equity 53.5 1 .1 40.3 (23.0)

Contents

Special Reports

Theme Report

Banks/Financial Institutions: Rising capitalization buffers; low valuations poserisks to book value

Daily Alerts

Company

Coal India: Coal India - potential hits and misses of FY2013E

ITC: VAT threat exists; however, fear of a blanket increase may be unfounded

Sector

Automobiles: Rough ride ahead

Pharmaceuticals: 1QFY13E preview - strong and steady

Telecom: 1QFY13E preview - pressure on RPM to sustain

Strategy

Strategy: Value (relative and absolute) gains dominance in June as pereXtractor


2/33

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

Kotak Institutional Equities [email protected]

Mumbai: +91-22-6634-1100

Leverage ratio adds another layer of concern; off-balance contributes to 18% of leverage

Maximum leverage ratio (assets to net worth), another parameter introduced in Basel-3 (maximum

of 22X), improved to 18X in FY2012 (from 20X). Public banks are on the higher side at 21X while

private banks are extremely comfortable at 12X. Leverage ratio adjusted for off-balance sheet

items is perilously close to the prescribed limit and needs to be addressed by public banks.

Contribution of off-balance sheet exposure is about 18% to overall leveragehigher for private

banks (>22%) as compared to public banks.

US$20 bn needed for transition to Basel-3; capital available but dilution below book is a worry

We see limited concern for banks meeting Basel-3 requirements as core equity is comfortable for

the sector with large public banks and most private banks comfortably positioned. However, select

banks need an adequate capital cushion for growth/replenish dividends while mid-tier public banks

would need regulatory capital. We expect a capital infusion of US$20 bn over FY2013-18E with

tier-1 ratios at 9.5% and factoring the current growth, dividend payout policy and lower RoEs. We

see limited concern on availability of capital as GoI has been regularly investing large dosages of

capital but dilution below book is a big concern.

Quality of capital continues to improve; PSU banks tier-1 (core) improves 70 bps to 8.5%

Indian banks improved their tier-1 ratios by 40 bps yoy to 9.8% with core tier-1 ratio increasing 50

bps yoy to 9% on the back of (1) capital infusion of US$4.3 bn in public banks and (2) lower RWA

growth (primarily from SBI). Public banks have overall tier-I ratio at 9.3% (core tier-1 ratio 8.5%).

However, some of the smaller public banks like IOB, UCO, Bank of Maharashtra and Union Bank

have tier-1 ratio (core) just at about 8% and will likely need to dilute over the medium term.

Expect dilution of core RoEs; asset quality risks a concern on capital ratios

We broadly expect return ratios to decline over time, as leverage is capped and core equity takes

primary focus, specifically including all forms of charges. Indian banks have delivered RoEs in the

range of 15% over the past few years and our estimates indicate that every additional 100-120 bps

of increase in core equity is likely to impact RoEs by 150-180 bps (excludes the positive impact of

NIM expansion). We expect RoEs (before dilution) at 15-17% with public banks delivering RoEs of

16-18% and private banks delivering RoEs of 14-16%.

We see a tightrope walk for Indian banks in the medium term, as RBI introduces (1) dynamic

provisions in the near future and specific provisions remain high as we retain cautious outlook on

asset quality and (2) banks strengthen capital ratios when growth is slowing and credit costs

remain high. Our strategy report titled Money for nothing and loans for free, dated June 22, 2012,

highlighted that net worth would be lower adjusted for high non-performing loans.

Banks/Financial InstitutionsIndia

Rising capitalization buffers; low valuations pose risks to book value. Selectbanks will need capital aggregating to US$20 bn over FY2013-18E; equity issuance

close to CMP (below book value) poses risks of contraction in book value. Transition toBasel-3 will be smooth but leverage ratio needs to be addressed. Tier-1 ratio improved

in FY2012 by 40 bps with core tier-1 ratio improving 50 bps yoy, as GoI continues to

invest in public banksthe biggest comforting factor for Indian banks. We continue torefer SBI, ICICI Bank and Federal Bank.

NEUTRAL

JULY 02, 2012

THEME

BSE-30: 17,399

M.B. [email protected]

Mumbai: +91-22-6634-1231

Nischint [email protected]

Mumbai: +91-22-6634-1545

Geetika [email protected]

Mumbai: +91-22-6634-1160


3/33



Mumbai: +91-22-6634-1100

Volumescan CIL step up to the 470 mn ton challenge?

20 mn tons of incremental production in FY2013E can raise earnings by 11.5% and target price by

10%. After three years of near-stagnant production levels, it remains to be seen whether CIL can

raise production levels to the targeted 470 mn tons in FY2013E (KIE estimate of 450 mn tons). In

our view, (1) improved rake availability (~180 rakes/day compared to 160 rakes/day previously),

(2) resolution of issues around the no-go classification, (3) lifting of the CEPI moratorium and

(4) base effect of 17 mn tons lost to excessively heavy rain during the period up to September

2012, could allow CIL to possibly beat our production estimates and potentially meet internal

target of 470 mn tons.

Realizationsis softening commodity cycle a matter of concern?

The recent correction in prices of imported coal (despite the depreciating local currency) has raised

concerns on CILs earnings due to potential softening in e-auction pricesRs200/ton decline

would impact earnings by 4%. We highlight that e-auction prices have not traditionally trended

with the very volatile prices of imported coal (see Exhibit 4), nonetheless, our assumptions factor a

decline in e-auction prices to Rs2,554/ton in FY2013E compared to Rs2,852/ton in 2HFY12.

CIL will further benefit from a premium for coal sold from WCL and ECLprices for the former

have been increased by 20% from June 2012. WCL/ECL saw a decline in coal realizations due to

the shift from company-wise UHV-based pricing to a uniform GCV-based pricing.

Employee costshow much of the Rs90 bn reported in 4QFY12 is recurring in nature?

Employee costs of Rs90 bn accrued in 4QFY12, included an estimated Rs25 bn of non-recurring

one-time wage charges. The quantum of recurring wage costs has been a matter of continued

conjecturewe factor Rs251 bn as wage cost for FY2013E. We factor employee attrition of 4.5%

(implying a year-end headcount of 358,000 compared to 370,000 currently).

Maintain BUY rating with revised target price of Rs390/share

Our target price of Rs390 (Rs380 previously) is based on 11X 12-month forward earnings adjusted

for overburden removal and interest income and implies an EV/EBITDA of 7.5X EBITDA.

Coal India (COAL)Metals & Mining

Coal Indiapotential hits and misses of FY2013E. We reflect on the potentialearnings surprises for Coal India from the three key value driversvolumes, realizations

and employee costs. We highlight that our earnings factor (1) a decline in e-auctionrealizations, despite a weak historical correlation with imported coal prices, and (2)

volumes of 450 mn tons, though near-term volume trends have been more

encouraging. Maintain BUY rating with a TP of Rs390/share.

Coal India

Stock data Forecasts/Valuations 2012 2013E 2014E

52-week range (Rs) (high,low) EPS (Rs) 23.3 26.6 31.9

Market Cap. (Rs bn) 2,213.3 EPS growth (%) 34.5 14.1 20.0

Shareholding pattern (%) P/E (X) 15.1 13.2 11.0

Promoters 90.0 Sales (Rs bn) 640.4 708.5 770.7

FIIs 5.4 Net profits (Rs bn) 147.0 167.7 201.3MFs 1.0 EBITDA (Rs bn) 184.9 206.1 235.7

Price performance (%) 1M 3M 12M EV/EBITDA (X) 9.0 7.4 5.8

Absolute 8.9 2.7 (8.8) ROE (%) 37.1 33.8 32.8

Rel. to BSE-30 (0.1) 3.2 (1.7) Div. Yield (%) 2.0 2.3 2.7

Company data and valuation summary

409-294

BUY

JULY 02, 2012

UPDATE

Coverage view: Cautious

Price (Rs): 350

Target price (Rs): 390

BSE-30: 17,399

Murtuza [email protected]

Mumbai: +91-22-6634-1125

Shubham [email protected]

Mumbai: +91-22-6634-1320


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Metals & Mining Coal India

4 KOTAK INSTITUTIONAL EQUITIES RESEARCH

Exhibit 1: Wagon availability has improved over the past few monthsWagon availability for Coal India, August 2010 - April 2012 (wagons/day)

6,000

7,000

8,000

9,000

10,000

11,000

12,000

Au

g-10

Se

p-10

O

ct-10

Nov-10

Dec-10

Ja

n-11

Fe

b-11

Mar-11

Apr-11

May-11

Ju

n-11

J

ul-11

Au

g-11

Se

p-11

O

ct-11

Nov-11

Dec-11

Ja

n-12

Fe

b-12

Mar-12

Apr-12

Wagon availability (Wagons/day)

Source: Infraline, Kotak Institutional Equities

Exhibit 2: CEPI-affected blocks put at risk 30 mtpa of incremental productionDetails of expansion project in three coal blocks cleared by CEPI

Estimated loss

Capacity of production in FY2012E

Cluster as per CEPI Name of project (mtpa) (mn tons) Status of Environment Clearance

Singrauli NCL

Biria Extension 6.0 - Form-I and Mining Plan submitted to MoEF. TOR awaited.

Dudhichua Ex. 5.0 5.0 Form-I and Mining Plan submitted

Jayant Ex. 5.0 4.0 Form-I and Mining Plan submitted

Krishnashila 4.0 Form-I and Mining Plan submitted

Talcher MCL

Ananta OC 3.0 3.0 Awaiting Stage I Forest clearance from state

Chhendipada OC 0.4 0.2

Gopalprasad OC 15.0 6.0 Awaiting Stage I Forest clearance from state

IB-Valley MCL

Samaleswari OC 2.0 2.0 Recommended for clearance

Basundhara (W) OC 4.6 4.6 Awaiting final Environmental clearance

Lajkura OC 1.5 1.5 Awaiting Stage I Forest clearance from state

Mine No. 1 & 2 0.4 0.3 Awaiting Stage I Forest clearance from state

Mine No. 3 0.6 0.6 Awaiting Stage I Forest clearance from state

Mine No. 4 0.1 0.1 Awaiting Stage I Forest clearance from state

HBI 0.9 0.6 Appraised by Envrionmental Assessment CommitteeBhubaneswari OC 10.0 1.0 Appraised by Envrionmental Assessment Committee

Hingula OC 7.0 1.5 Final EMP under preparation.

Total 65.4 30.4

Source: Company, Kotak Institutional Equities


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Coal India Metals & Mining

KOTAK INSTITUTIONAL EQUITIES RESEARCH 5

Exhibit 3: Imported coal prices have come off sharply in recent

times, though local currency has depreciated to offset the

declinePrice of imported coal (US$/ton) and domestic currency (Rs/$)

0

20

40

60

80

100

120

140

160

180

200

Sep-07

Dec-07

Mar-08

Jun-08

Sep-08

Dec-08

Mar-09

Jun-09

Sep-09

Dec-09

Mar-10

Jun-10

Sep-10

Dec-10

Mar-11

Jun-11

Sep-11

Dec-11

Mar-12

Jun-12

35

40

45

50

55

60

INR (Rs/US$) R ichard Bay (US$/ ton)

Source: Bloomberg, Kotak Institutional Equities

Exhibit 4: Imported coal prices have had low correlation with e-

auction pricesIndex of imported coal prices and e-auction prices

40

70

100

130

160

190

220

Jun-08

Sep-08

Dec-08

Mar-09

Jun-09

Sep-09

Dec-09

Mar-10

Jun-10

Sep-10

Dec-10

Mar-11

Jun-11

Sep-11

Dec-11

Mar-12

E-auction (Index, Base=100 June 2008)

Imported coal (Index, Base=100 June 2008)

Source: Bloomberg, Kotak Institutional Equities

Exhibit 5: Prices at WCL have been raised by 20% to compensate for the downward shift from the traditional pricing mechanismCoal prices under the old (UHV) and new system (GCV) for CIL and WCL (Rs/ton)

Old Sytem (UHV based) New System (GCV based)

Grade Power/Defence Others Power/Defence Others GCV band(kcal/kg) Power/Defence Others Power/Defence Others Power/Defence Others

A 3690 - 4,100 3690 - 4,100 4,100 4,100 >7,000 4,900 4,900

6701-7000 4,690 4,690 4,870 4,870 4,870 4,870

6401-6700 4,460 4,460 4,420 4,420 4,420 4,420

B 3590 - 3,990 3590 - 3,990 3,990 3,990 6101-6400 4,130 4,130 3,970 3,970 3,970 3,9705801-6100 3,990 3,990 2,800 2,800 2,800 2,800

C 1,050 - 1,860 1,370 - 2,420 1,410 1,830 5501-5800 2,940 3,430 1,450 1,960 1,740 2,350

D 880 -1,610 1,140 - 2,090 1,330 1,730 5201-5500 2,060 2,520 1,270 1,715 1,520 2,050

4901-5200 1,890 2,230 1,140 1,539 1,370 1,850

E 730 - 1,090 950 - 1,420 1,090 1,420 4601-4900 1,680 2,230 880 1,188 1,060 1,430

4301-4600 970 1,460 780 1,053 940 1,270

F 570 - 870 740 - 1,130 860 1,120 4001-4300 880 1,320 640 864 770 1,040

3701-4000 630 1,010 600 810 720 970

G 430 - 700 560 - 910 650 850 3401-3700 630 1,000 550 743 660 890

3101-3400 620 990 500 675 600 810

2801-3100 620 870 460 621 550 740

2501-2800 550 780 410 554 490 660

2201-2500 480 680 360 486 430 580

20th June 2012WCLCIL 31st December 2011 31st January 2012

Source: Company, Kotak Institutional Equities


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Metals & Mining Coal India


Exhibit 6: Our target price is based on 11X 1-year rolling forward EPS (adjusted)Computation of CIL's target price

2013E 2014E 1-year rolling forward

EBITDA (Rs bn) 190 220 198

OBR (Rs bn) 33 36 34

Adjusted EBITDA (Rs bn) 223 255 231Interest income (Rs bn) 58 75 62

PAT (Rs bn) 168 201 176

Adjusted PAT (Rs bn) 150 174 156

EPS (Rs/share) 27 32 28

Adjusted EPS (Rs/share) 24 27 25

P/E on FY2013E adjusted PAT (X) 11 11 11

Value of coal business (Rs bn) 1,712 1,909 1,738

Cash (Rs bn) 683 846 723

Market Cap (Rs bn) 2,394 2,754 2,461

Target price 379 436 390

Notes.

(1) Adjusted EBITDA is calculated after removing the effect OBR adjustment.

(2) Adjusted PAT is calculated after removing the effect ofOBR adjustment and interest income net of taxes.

Source: Kotak Institutional Equities estimates


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Coal India Metals & Mining


Exhibit 7: Profit model, balance sheet, cash model of CIL, March fiscal year-ends, 2009-15E (Rs mn)

2009 2010 2011 2012 2013E 2014E 2015E

Profit model

Net sales 387,888 446,153 502,336 624,154 661,847 719,648 776,985

Total income 424,142 485,774 550,877 640,390 708,465 770,698 830,833EBITDA 39,309 114,735 146,973 169,103 190,305 219,930 246,186

Interest income 28,447 26,940 29,660 47,169 58,267 75,043 95,568

Other Income (ex transport, interest) 8,051 13,209 6,121 15,775 15,775 15,775 15,775

Interest expense (1,789) (1,560) (791) (540) (434) (377) (360)

Depreciation (16,909) (13,138) (16,729) (19,692) (22,422) (23,927) (25,131)

Pretax profits 57,110 140,186 165,234 211,815 241,490 286,444 332,037

Tax (36,336) (43,996) (55,959) (64,790) (73,784) (85,193) (104,035)

Net income 20,774 96,190 109,275 147,025 167,705 201,250 228,002

Extraordinary items 13 35 (602) 857

Reported profit 20,787 96,224 108,674 147,882 167,705 201,250 228,002

Earnings per share (Rs) 3 15 17 23 27 32 36

Balance sheet

Paid-up common stock 63,164 63,164 63,164 63,164 63,164 63,164 63,164

Total shareholders' equity 191,651 257,952 333,172 423,380 525,680 648,443 787,524

Minority interest 19 236 326 326 326 326 326

Total borrowings 21,485 20,869 15,536 13,536 11,615 11,007 10,607

Shifting and rehab fund 12,238 14,774 16,214 19,967 24,478 29,593 35,731

Total liabilities and equity 225,393 293,831 365,247 457,209 562,099 689,369 834,188

Net fixed assets 110,212 120,354 128,429 154,519 169,520 174,519 168,462

Capital work-in progress 19,195 22,107 22,181 26,716 27,592 24,073 20,546

Investments 15,052 12,823 10,637 10,637 10,637 10,637 10,637

Cash 296,950 390,778 458,623 557,533 682,658 845,652 1,040,794

Current assets (excl. cash) 174,009 152,466 185,337 213,213 229,378 248,152 266,421

Current liabilities and provisions 399,293 414,316 448,725 514,447 567,216 623,479 682,812

Deferred tax asset 9,268 9,604 8,732 9,038 9,529 9,813 10,139

Misc. expenditure 15 34

Total assets 225,393 293,831 365,248 457,209 562,099 689,369 834,188

Free cash flow

Operating cash flow, excl. working capital 39,616 106,073 125,299 167,268 189,637 224,893 252,807Working capital changes 77,708 22,856 1,538 37,847 36,603 37,489 41,064

Capital expenditure (18,758) (19,804) (17,832) (50,317) (38,299) (25,408) (15,547)

Free cash flow 98,567 109,125 109,005 154,797 187,941 236,974 278,324

Ratios

Net debt/equity (%) (143.7) (143.4) (133.0) (128.5) (127.7) (128.7) (130.8)

Return on equity (%) 11 43 37 39 35 34 32

Book value per share (Rs) 30 41 53 67 83 103 125

ROCE (%) 11 43 36 40 37 36 33

Source: Company, Kotak Institutional Equities estimates


8/33



Mumbai: +91-22-6634-1100

UP increases VAT to 50% from 17.5%a surprising out-of-turn outside Budget increase

The Uttar Pradesh (UP) Government recently increased state VAT applicable for cigarettes to 50%

from 17.5%. UP accounts for ~5% of ITCs cigarette sales in value terms and the incremental tax,if absorbed by the company, impacts FY2013E EPS by ~2%.

We believe investor concerns of an across-the-board VAT increase by other states may be

unfounded as, (1) most states have already presented their annual budget for FY2013E without

any modification to VAT rates. However, we note that other states can increase the rates through

an ordinance and (2) in FY2007-08, Uttar Pradesh had levied a 33% trade tax on cigarettes when

most other states had moved to 12.5% VAT (which was reversed within a few months). According

to channel sources, trade channels took advantage of the differential tax in Uttar Pradesh thereby

limiting the impact on the industry. (For example, goods moving to high tax state from low tax

states). The probability of it happening is high as many of the contiguous states have rates

significantly lower than UP (Uttarakhand at 13.5%, Bihar 13.5%, Madhya Pradesh 12.5%, etc.).

Some topical issues on cigarettes

` There was no significant increase in VAT in most of the state budgets for FY2013E. We highlight

that the effective VAT rate for the company is ~20% (including the recent increase in UP).

` Price hikes and volume growth in cigarettes. With 22% excise hike in cigarettes, we would

watch for trend in volume growth (particularly in 1HFY13E where the base volume growth is

high at ~10%) closely as the company had taken price hikes of ~12% in April 2012. It would

require another 5% price hike by August-September 2012 in our view (when the anniversary

effect of last years price hikes kick in). We expect flat volumes for cigarettes in 1HFY13E and

closely watch the performance of recently launched 64mm cigarettes in select markets.

ITC (ITC)Consumer products

VAT threat exists; however, fear of a blanket increase may be unfounded.

The Uttar Pradesh (UP) Government recently increased state VAT applicable for

cigarettes to 50% from 17.5%. UP accounts for ~5% of ITCs cigarette sales in valueterms, in our view and the incremental tax, if absorbed by it, impacts FY2013E EPS by

~2%. We highlight that in FY2007-08, UP had levied a 33% trade tax on cigarettes

when most other states had moved to 12.5% VAT (which was reversed within a fewmonths). According to channel sources, trade channels took advantage of the

differential tax in UP thereby limiting the impact on the industry. Our positive view onITC stock remains; near-term strong stock performance limits upside though.

ITC

Stock data Forecasts/Valuations 2012 2013E 2014E

52-week range (Rs) (high,low) EPS (Rs) 8.0 9.2 10.4

Market Cap. (Rs bn) 1,920.6 EPS growth (%) 25.2 14.6 13.1

Shareholding pattern (%) P/E (X) 31.2 27.2 24.0

Promoters 0.0 Sales (Rs bn) 248.0 286.0 328.0

FIIs 17.7 Net profits (Rs bn) 61.6 70.6 79.9

MFs 2.8 EBITDA (Rs bn) 91.9 106.7 121.2

Price performance (%) 1M 3M 12M EV/EBITDA (X) 20.2 17.4 15.1

Absolute 6.9 10.2 24.1 ROE (%) 35.5 35.2 33.3

Rel. to BSE-30 (1.9) 10.7 33.8 Div. Yield (%) 1.8 2.0 1.2

Company data and valuation summary

260-185

ADD

JULY 02, 2012

UPDATE

Coverage view: Attractive

Price (Rs): 250

Target price (Rs): 265

BSE-30: 17,399

Manoj [email protected]

Mumbai: +91-22-6634-1391

Amrita [email protected]

Mumbai: +91-22-6634-1147


9/33

ITC Consumer products


` We highlight that the implementation of GST would mean bidis and chewing tobacco

could come under the ambit of state VAT (as these products are sold mainly through

wholesale traders).

` The demonstrated intention by the Government to increase tax on bidis and chewing

tobacco probably indicates rational taxation towards cigarettes. The excise of bidis was

increased by 25% (the rate is lower, though: Rs10/1,000 bidis from Rs8). The excise on

chewing tobacco was effectively doubled in March (which is anyway taxed in a stringent

way as a compounding levy, that is, the tax is based on capacity).

` Any global developments in the tobacco industry and their rub-off effect on India. (1)

Australia has implemented plain paper packaging (first country to do so; see Exhibit 2),

(2) harsh set of graphic warnings to be introduced on cigarette packs in US from

September 2012.

Retain ADD, ITC remains a preferred pick

We broadly retain our earnings estimates (EPS of Rs9.2 and Rs10.4 for FY2013E and

FY2014E, respectively); maintain ADD rating with TP of Rs265 (Rs260 earlier). Ourunderlying themes on ITC are intact(1) good EPS CAGR of ~14% over FY2012-15E, and

(2) potential for maintaining higher dividend payout; the company is likely to generate free

cash flow of Rs192 bn over FY2012-15E. Key risks are (1) unexpected higher losses in other

FMCG, and (2) any unprecedented increase in the overall taxation impact beyond FY2013E.

State-wise change in VAT on cigarettes

Contribution to

ITC cigarette sales State VAT on cigarettes (%)

State/region (Value, %) Current

Andhra Pradesh 13 20.0

Bihar 3 13.5

Gujarat 3 25.0

Haryana 4 20.0

Himachal Pradesh 2 18.0

Karnataka 9 17.0

Kerala 12 15.0

Madhya Pradesh 3 12.5

Maharashtra 9 20.0

Rajasthan 3 40.0

Tamilnadu 11 20.0

Uttar Pradesh 5 50.0

West Bengal 8 20.0

Source: Kotak Institutional Equities


10/33

Consumer products ITC


Plain paper packaging implemented by Australia

Source: Kotak Institutional Equities


11/33

ITC Consumer products


ITC: Profit model, balance sheet, cash flow model, March fiscal year-ends, 2009-15E (Rs mn)

2009 2010 2011 2012E 2013E 2014E 2015E

Profit model (Rs mn)

Net sales 156,119 181,532 211,676 247,984 286,019 328,003 374,106

EBITDA 48,686 60,823 71,636 84,732 100,549 114,767 132,153

Other income 5,349 6,147 8,188 12,007 11,610 11,923 12,253

Interest (284) (730) (583) (779) (799) (776) (788)

Depreciation (5,494) (6,087) (6,560) (6,985) (7,878) (8,778) (9,678)

Pretax profits 48,258 60,153 72,682 88,975 103,482 117,136 133,939

Tax (15,622) (19,543) (22,806) (27,352) (32,862) (37,267) (42,988)

Net profits 32,636 40,610 49,876 61,624 70,620 79,869 90,951

Earnings per share (Rs) 4.3 5.4 6.5 8.0 9.2 10.4 11.8

Balance sheet (Rs mn)

Total equity 137,351 140,644 159,533 187,919 213,609 265,936 326,919

Deferred taxation liability 8,672 7,850 8,019 8,727 8,727 8,727 8,727

Total borrowings 1,776 1,077 992 946 992 992 992Currrent liabilities 47,036 80,491 85,628 92,072 98,645 89,213 95,738

Total liabilities and equity 194,835 230,062 254,171 289,664 321,974 364,868 432,376

Cash 10,310 11,263 22,432 28,189 36,223 52,931 94,554

Current assets 71,287 70,016 79,407 84,549 104,332 119,307 134,880

Total fixed assets 84,860 91,514 96,785 113,759 125,871 137,083 147,395

Investments 28,378 57,269 55,547 63,166 55,547 55,547 55,547

Total assets 194,834 230,062 254,171 289,664 321,974 364,868 432,376

Free cash flow (Rs mn)

Operating cash flow 41,493 49,853 55,859 65,141 78,724 88,830 100,863

Working capital (4,991) 6,541 249 (2,788) (4,314) (5,407) (5,907)

Capital expenditure (17,407) (12,751) (11,841) (23,970) (20,000) (20,000) (20,000)

Free cash flow 19,095 43,643 44,267 38,383 54,410 63,422 74,956

Key ratios (%)

Sales growth 11.5 16.3 16.6 17.2 15.3 14.7 14.1

EBITDA margin 31.2 33.5 33.8 34.2 35.2 35.0 35.3

EPS growth 2.8 23.8 21.1 23.6 14.6 13.1 13.9



12/33



Mumbai: +91-22-6634-1100

Volumes are likely to remain weak in FY2013E

We believe volume growth across auto segments (except utility vehicles and light commercial

vehicles) is likely to remain weak in FY2013E. High cost of ownership and high interest rates have

impacted consumer sentiment which is likely to persist throughout FY2013E, in our view. We

believe discretionary consumption is likely to remain weak in 2HFY13E due to low wage hikes, low

consumer sentiment and high interest rates. We believe recovery in trucks will be contingent on

opening up of the mining projects and revival in construction activities. Poor monsoons could pose

further challenge for domestic auto demand in 2HFY13E. We remain cautious on the sector and

believe earnings downgrades could follow if monsoons do not revive in July.

Two-wheelers post a low single-digit growth

Domestic two-wheeler volumes for three majors (Hero Motocorp, Bajaj Auto and TVS Motors)

grew by 3% yoy in June 2012 while retail volumes could be even weaker, in our view. Our channel

checks suggest dealer inventories are rising and have reached around 30-40 days due to

slowdown in demand. Hero Motocorp reported a 4% yoy growth while Bajaj Auto reported a 6%

yoy decline in volumes. Bajaj Auto export volumes declined by 18% yoy driven by virtually nil

three-wheeler exports to Sri Lanka and low demand from Egypt due to political crises.

Maruti Suzuki surprises positively due to strong export volumes

Maruti Suzuki posted a 20% yoy volume growth driven by 27% yoy growth in export volumes and

19% yoy growth in domestic volumes. Maruti June 2011 volumes were impacted by strikes at its

plants which resulted in low base effect for the company. Alto and WagonR volumes grew by

14% mom which was a positive surprise. The company had increased discounts on petrol models

which helped it push some of the dealer stocks. Dealer inventories on petrol models continue to

remain ~40 days which is a cause of concern, in our view. Diesel vehicles continue to drive

volumes but our channel checks suggest diesel demand is also moderating, which could pose

challenges to growth in 2HFY13E.

M&M posts strong numbers while Tata Motors MHCV volumes decline significantly

Mahindra & Mahindra posted a 31% yoy growth in passenger utility vehicle volumes (driven by

XUV500) while domestic tractor volumes rose by 4% yoy. For past two months, M&M tractor

volumes have recovered but we believe volume growth momentum could disappoint if monsoons

are significantly below par. We expect a flat volume growth for tractors in FY2013E as we expect

low base effect of 2HFY13E to support moderate growth. Tata Motors reported a 21% yoy decline

in domestic MHCV volumes offset by 22% yoy growth in LCV volumes. Poor monsoons, weak

consumption demand and falling truck freight rates pose a threat to our flat yoy growth

assumptions for MHCVs in FY2013E. We believe a recovery in mining sector and industrial capex is

essential to revive the truck demand.

AutomobilesIndia

Rough ride ahead. Automakers struggled to grow volumes in June 2012 amid slowingconsumer demand and above-average dealer inventories. Domestic truck volumes of

Tata Motors declined by 21% yoy indicating weak consumption demand and slowdownin industrial capex. Two-wheeler volumes grew by 3% yoy (for three leading players)

while Maruti car volumes grew by 20% yoy on a low base. The only silver lining was

31% yoy growth in M&M utility vehicle volumes.

NEUTRAL

JULY 02, 2012

UPDATE

BSE-30: 17,399

Hitesh [email protected]

Mumbai: +91-22-6634-1327

Vinay [email protected]

Mumbai: +91-22-6634-1216


13/33

Automobiles India


Two-wheeler volumes remain sluggish in JuneTwo-wheeler June 2012 volumes (units)

Jun-12 Jun-11 May-12 YoY chg (%) MoM chg (%) YTD FY13 YTD FY12 YoY chg (%)

Hero Motocorp

Total Volumes 534,000 512,244 556,644 4.2 (4.1) 1,640,199 1,529,577 7.2

Bajaj Auto

Motorcycles

Domestic 213,500 208,883 206,751 2.2 3.3 620,479 623,164 (0.4)

Exports 104,877 113,944 115,171 (8.0) (8.9) 362,144 339,876 6.6

Total Motorcycles 318,377 322,827 321,922 (1.4) (1.1) 982,623 963,040 2.0

Total 2 wheelers 318,377 322,827 321,922 (1.4) (1.1) 982,623 963,040 2.0

3 wheelers- domestic 15,000 15,650 14,895 (4.2) 0.7 42,847 42,287 1.3

3 wheeler exports 11,185 28,180 15,402 (60.3) (27.4) 53,501 87,488 (38.8)

Total Volumes 344,562 366,657 352,219 (6.0) (2.2) 1,078,971 1,092,815 (1.3)

TVS Motors

Motorcycles

Domestic 43,729 46,522 43,022 (6.0) 1.6 141,767 155,742 (9.0)

Exports 17,545 23,337 21,112 (24.8) (16.9) 51,607 59,258 (12.9)

Total Motorcycles 61,274 69,859 64,134 (12.3) (4.5) 193,374 215,000 (10.1)

Scooters 38,166 44,281 38,833 (13.8) (1.7) 112,832 117,523 (4.0)

Mopeds 65,998 64,493 70,125 2.3 (5.9) 203,875 192,183 6.1

Total 2 wheeler volumes 165,438 178,633 173,092 (7.4) (4.4) 510,081 524,706 (2.8)

3 wheeler 3,255 3,823 2,920 (14.9) 11.5 9,079 11,424 (20.5)

Total Volumes 168,693 182,456 176,012 (7.5) (4.2) 519,160 536,130 (3.2)

Source: Company

Maruti Suzuki surprises positively due to better-than-expected Alto, WagonR and export volumesMaruti Suzuki June 2012 volumes (units)

Jun-12 yoy chg (%) mom chg (%) YTD FY13 yoy chg (%)

M800, Alto, A-Star, Wagonr 34,198 (10.4) 14.4 94,813 (22.3)

Swift, Estillo, Ritz 22,624 39.3 (6.9) 72,986 31.1

Dzire 13,741 452.7 (22.4) 46,958 87.1

SX4 408 (42.8) 0.7 1,447 (73.8)

Kizashi 6 (50.0) 21

Gypsy and Vitara, Ertiga 5,638 18,965

Omni and Eeco 6,916 (43.2) (26.7) 28,074 (31.1)

Total Domestic 83,531 19.3 (6.6) 263,264 5.0

Exports 13,066 27.1 38.9 32,632 5.8

Total Volumes 96,597 20.3 (2.3) 295,896 5.1

Source: Company


14/33

India Automobiles


Tractor volumes surprise positively but may not sustain in the near term due to poor monsoonsMahindra & Mahindra June 2012 volumes (units)


Passenger Uvs 19,092 31.3 (5.5) 58,360 31.4

Maxximo + Gio + pick ups 13,103 13.3 (1.1) 39,411 26.9

MNAL 1,220 20.8 0.8 3,458 17.13-wheelers 4,836 (6.1) 11.9 13,815 (1.7)

Exports (Auto sector) 2,371 30.8 (41.5) 7,841 37.2

Verito 700 (53.6) (25.8) 3,144 (17.4)

Auto division 41,322 16.1 (6.1) 126,029 23.6

Tractors (Dom + Exp) 23,765 4.6 25.0 59,581 (0.9)

Total 65,087 11.6 3.3 185,607 14.5

Source: Company

Tata Motors domestic MHCV volumes decline by 21% yoy in June 2012Tata Motors June 2012 volumes (units)


MHCVs 14,063 (19.9) 8.0 37,425 (23.8)

LCVs 32,163 23.2 6.0 89,038 15.6

Total CVs 46,226 5.9 6.6 126,463 0.2

UVs 3,749 4.7 16.2 11,117 4.6

Cars 14,366 (24.9) (19.0) 51,194 (9.0)

Total PV 18,115 (20.2) (13.6) 62,311 (6.8)

Total Sales 64,341 (3.0) - 188,774 (2.2)

Source: Company

Residual volume growth required by companies to achieve our FY2013E volume estimatesMarch fiscal year-ends (units)

1QFY13 2013E 9MFY13 9MFY12 yoy chg (%)

Maruti 295,896 1,245,756 949,860 773,361 22.8

M&M 182,149 781,146 598,997 522,311 14.7

Tata Motors 188,774 1,000,767 811,993 717,998 13.1

Hero Motocorp 1,640,199 6,667,605 5,027,406 4,705,628 6.8

Bajaj Auto 1,078,971 4,648,746 3,569,775 3,256,745 9.6

Source: Kotak Institutional estimates


15/33



Mumbai: +91-22-6634-1100

Strong quarter sales growth to remain strong at >25% for all front-line generic companies

Overall, we expect 1QFY13E to be one of the stronger quarters in FY2013E driven by low base of

revenues in 1QFY12, ongoing exclusivities in US, pick-up in base business sales from the slew of

launches in US since FY2012 and benefits from Rupee depreciation. We expect most of the front-

line generic companies to report strong sales growth of above 25% boosted by (1) higher

realization in Rupee terms, (2) exclusivity sales in US for DRL, Lupin Ranbaxy, Glenmark and SUN

on account of Ziprasidone, Lipitor, Cutivate and Stalevo and Lipodox respectively and (3) pick-up indomestic sales growth due to (a) pick-up in underlying growth, (b) low base in 1QFY12; Ranbaxy,

DRL, Cipla and Cadila reported single-digit growth rates in 1QFY12 (see Exhibit 1), (c) addition of

sales from Eli Lilly deal for Lupin and (d) consolidation of Biochem sales (acquired in 3QFY12) for

Cadila. We expect SUN to report a low growth of 4% in its domestic business due to a high base

in 4QFY12; however, we factor in underlying base business growth of 18%.

EBITDA margin trends vary across companies

Despite strong sales growth, we expect mixed EBITDA margin trends across companies and expect

EBITDA margin to decline yoy for Glenmark, Cadila and Glaxo on account of (1) high base last

year, (2) higher import content leading to higher import cost for Glaxo and (3) consolidation of

lower-margin businesses of Biochem and Bremer Pharma which were not present in 1QFY12 for

Cadila. We expect DRL, SUN, Lupin and Ranbaxy to report highest EBITDA margin improvement

yoy of over 100 bps due to (1) ongoing sales from exclusivities in US and (2) operating leverage

benefits due to pick-up in base business sales growth for SUN and Ranbaxy. However, we expect

PAT to remain flat/decline yoy for Cadila, Glenmark, Dishman, Jubilant and Ranbaxy due to (1)

lower EBITDA margin yoy, (2) forex losses in 1QFY13E versus forex gains in 1QFY12, (3) absence of

research/licensing income (Glenmark, Cadila) and (4) hikes in tax rates (Cadila, Dishman).

Key trends to watch out for

` Improvement in base business EBITDA margin. 4QFY12 results were mixed with many

companies reporting lower-than-expected EBITDA margin on account of (1) lower gross margin

due to charge-backs undertaken in US (SUN, DRL) and (2) higher import cost (Glenmark) and

consolidation of the low-margin Japanese business in 4QFY12 (Lupin). We factor inimprovement in base business margin qoq for most of these companies.

` Update on regulatory status. We expect DRL, Cadila and SUN to provide updates on

regulatory status of their affected facilities. While Cadila has guided for a resolution by July

2012E, SUN and DRL have not given any firm timelines.

` Heavy forex losses for Jubilant, Glenmark, Ranbaxy and Cadila. In our coverage universe,

these four companies have high forex debt which is unhedged. We expect these companies to

report heavy forex losses.

` Management commentary on US product flow. We believe the following products are

critical additions to FY2013E earnings and any hint of delay/loss of approvals presents a

downside risk to our FY2013E earnings: Lupin (Tricor, OCs), Ranbaxy (Actos, Diovan FTFs), DRL

(certain unknown products).

PharmaceuticalsIndia

1QFY13E preview strong and steady. We expect 1QFY13E to be a strong and

steady quarter though not a spectacular one, marred by hikes in tax rates and forex

losses for certain companies. While yoy sales growth is expected to remain strong for

all, we expect PAT growth to be mixed with a few companies reporting flat/PAT declineyoy due to (1) hikes in tax rates, (2) lower EBITDA margin yoy, (3) forex losses and (4)

absence of licensing income. SUN and Divis remain our top picks; we advise using anyweakness to add ahead of results.

ATTRACTIVE

JULY 02, 2012

UPDATE

BSE-30: 17,399

QUICK NUMBERS

Sales growth to

remain strong at>25% for all front-

line generic

companies

Heavy forex losses

for Jubilant,

Glenmark, Ranbaxy

Priti [email protected]

Mumbai: +91-22-6634-1551


16/33

India Pharmaceuticals


India sales growth (%)

1QFY12 2QFY12 3QFY12 4QFY12 1QFY13E

Cadila 8.9 6.6 17.7 38.0 35.0Cipla 10.1 12.0 18.4 15.5 17.0

DRL 5.7 9.5 10.8 16.7 0.0

Glaxo 12.8 4.4 15.4 3.3 16.1

Glenmark 20.0 19.7 11.3 24.2 24.0

Lupin 17.1 22.2 29.8 14.5 20.4

Ranbaxy 0.0 5.8 10.8 10.9 15.0

SUN (adj.) 18.0 18.0 18.0 21.0 18.0

Source: Kotak Institutional Equities estimates, Company

Hedges/debt position

Debt (Mar 2012) Debt (Mar 2012) Forex debt Hedges Amount(Rs mn) (US$ mn) (US$ mn) (US$ mn) (US$ mn)

SUN Minimal

Divis No

Biocon 2,572 50 Majority is forex debt Yes

Cipla 2,200 43 Majority is forex debt and is hedged Minimal 215

Glenmark 22,200 433 350 No

Jubilant 38,150 744 617 Yes 300

Ranbaxy 41,810 815 Majority Yes 1,500

Dr Reddys 32,210 628 Majority, partly hedged 770

Cadila 22,950 447 200 177Lupin 16,200 316 200

Dishman 8,900 173

Source: Kotak Institutional Equities estimates, Company


17/33

Pharmaceuticals India


Results preview for the quarter ending Jun 2012 (Rs mn)

Jun-11 Mar-12 Jun-12E yoy qoq Comments What to look for ?

Apollo Hospitals

Net sales 6,410 7,446 7,699 20.1 3.4

EBITDA 1,059 1,200 1,306 23.3 8.8

EBIT 862 960 1,056 22.6 10.1

PBT 759 869 906 19.4 4.2

PAT 513 593 607 18.4 2.3

Extraordinari - - - - -

PAT-reported 513 593 607 18.4 2.3

Biocon (25th July)

Net sales 4,417 6,102 6,084 37.7 (0.3) Fidaxomicin API ramp-up to US

EBITDA 1,204 1,546 1,656 37.5 7.1

EBIT 753 1,115 1,156 53.5 3.7

PBT 819 1,098 1,251 52.7 13.9

PAT 700 978 1,001 42.9 2.3


PAT-reported 700 978 1,001 42.9 2.3

Cadila Healthcare (2nd week of August)

Net sales 11,735 13,444 15,402 31.2 14.6

EBITDA 2,302 2,292 2,776 20.6 21.1

EBIT 1,955 1,901 2,276 16.4 19.7

PBT 2,628 2,238 1,676 (36.2) (25.1)PAT 2,298 1,709 1,249 (45.7) (26.9)


PAT-reported 2,298 1,709 1,249 (45.7) (26.9)

Cipla

Net sales 15,503 18,141 19,618 26.5 8.1

EBITDA 3,285 3,473 4,378 33.3 26.1

EBIT 2,582 2,768 3,618 40.1 30.7

PBT 3,199 3,650 4,243 32.6 16.2

PAT 2,533 2,917 3,352 32.3 14.9


PAT-reported 2,533 2,917 3,352 32.3 14.9

Divi's Laboratories

Net sales 3,586 7,180 5,410 50.9 (24.7)

EBITDA 1,293 2,869 1,930 49.3 (32.7)

EBIT 1,153 2,702 1,760 52.7 (34.9)

PBT 1,315 2,720 1,859 41.4 (31.7)

PAT 1,041 2,169 1,468 41.0 (32.3)


PAT-reported 1,041 2,169 1,468 41.0 (32.3)

Dishman Pharma & Chemicals

Net sales 2,372 3,502 3,028 27.7 (13.5)

EBITDA 437 825 568 30.0 (31.1)

EBIT 250 644 368 47.0 (42.8)

PBT 169 522 203 20.4 (61.1)

PAT 151 313 154 2.1 (50.7)


PAT-reported 151 313 154 2.1 (50.7)

Dr Reddy's Laboratories (19th July)

Net sales 19,784 26,583 27,889 41.0 4.9 Status of product flow in US

EBITDA 4,022 5,574 6,731 67.4 20.8 Update on Mexico plant approval

EBIT 2,789 4,170 5,431 94.7 30.2

PBT 2,747 4,263 5,231 90.4 22.7

PAT 2,627 3,425 4,028 53.3 17.6Yoy comparison not meaningful due to presence of exclusivity sales(Ziprasidone) in US

What is the pick-up in US base business?


PAT-reported 2,627 3,425 4,028 53.3 17.6

GlaxoSmithkline (India)

Net sales 5,615 6,228 6,520 16.1 4.7

EBITDA 1,993 2,028 2,167 8.7 6.9

EBIT 1,944 1,987 2,117 8.9 6.6

PBT 2,242 2,720 2,467 10.1 (9.3)

PAT 1,517 1,857 1,653 9.0 (11.0)

Extraordinari - (628) - - (100.0)

PAT-reported 1,517 1,229 1,653 9.0 34.5

Glenmark Pharmaceuticals

Net sales 7,570 10,659 10,915 44.2 2.4 EBITDA margin outlook for the year

EBITDA 1,854 2,214 1,017 (45.1) (54.1) Update on NCE pipeline and licensing deals

EBIT 1,590 1,978 767 (51.8) (61.2)

PBT 2,420 1,595 457 (81.1) (71.3)

PAT 2,101 1,522 393 (81.3) (74.2)Extraordinari - - - - -

PAT-reported 2,101 1,503 393 (81.3) (73.9)

Excluding extraordinary income, PAT is expected to decline qoq due

to lower other income as treasury income was booked last quarter

We estimate strong sales growth at 44% led by strong India sales

growth at 24%

What is the pick-up in US base business?

India sales growth guidance for FY2013E and

possible revision due to high secondary

growth rates

We expect PAT to decline yoy due to (1) no research income this

quarter versus last year, (2) lower EBITDA margin at 18.5% versus24.5% last year and (3) net forex losses of Rs1 bn this quarter. Ex

forex and research income, we expect PAT growth at 18% yoy

Insights into FY2013E sales guidance of

US$2.5-2.7

EBITDA margin expected to remain weak at 33%, down 230 bps yoy

due to increased import cost

We expect EBITDA margin to stay flat yoy at 36%

We expect sales growth to remain strong on a low base last year

boosted by higher realisation in Rupee termsSales growth guidance for FY2013E

We expect PAT to remain flat yoy due to lower tax of 10% last year,

we expect tax rate at 24% this quarter

We estimate India sales growth at 17% yoy on a low base last year

We expect sales growth at 51% yoy and 25% in Dollar terms Ramp-up of sales from new SEZ

We expect strong yoy sales growth boosted by (1) exclusivity sales in

US (US$30 mn), (2) double-digit growth in India on a lower base

Update on FDA clearance for facility under

warning letter

We expect reported PAT to decline yoy due to (1) lower EBITDA

margin at 18%, down 150 bps yoy, however up 30 bps qoq, (2) pick-

up in tax rate to 21% versus 11% last year, (3) forex loss this quarter

versus gains last year.

EBITDA margin improvement in light of

acquisitions made last year

Revenues estimated at Rs19.6 bn, up 27% yoy driven by higher

realisation in Rupee terms, strong formulation export sales growth on

a weak base last year

Ramp-up of sales from Lexapro finished

dosage supplies to Teva

EBITDA margin, expected at 17%, up 50 bps yoy

Update on acquisitions of hospitals,

something which management spoke of for

first time last quarter

Inpatient volume pick-up at Chennai cluster,

which was a drag in FY2012

We expect sales growth at 20% yoy

We expect EBITDA margin at 27%, flat yoy Scale-up in Atorvastatin API sales and any fall

in Simva API sales

We have included US$6 mn of technology licensing income in our

revenue estimate

Licensing income and associated R&D

expense from Pfizer deal

We expect India pharma growth at 35% led by consolidation of

Biochem sales and strong organic growth on a low base last year

Source: Company, Kotak Institutional Equities estimates


18/33


19/33



Mumbai: +91-22-6634-1100

1QFY13E earnings pressure on RPM likely to sustain

Exhibits 1, 2 and 3 give our Jun 2012 quarter earnings estimates for Bharti, Idea and RCOM

respectively. We expect sequential volume growth to remain robust though the pace of growth

will likely be lower than the previous quarter. Expect Idea to once again lead the industry on

volume growth. Renewed aggressive price competition and reduction in processing fees on

recharges (post regulatory changes on this front) could drive another quarter of meaningful RPM

decline (2-3% for various players, in our view; around 50% of this on account of lower processing

fees on recharges). We discuss the key factors to watch, from an India wireless perspective

` Price/ volume/ EBITDA equation, especially Bhartis Bhartis aggressive pricing moves since

the beginning of this calendar year have forced almost all operators to cut tariffs to maintain

their pricing differential versus Bharti. This is the trouble with using pricing as a strategic tool

it is by nature not strategic, since it is the easiest to replicate (can be replicated overnight in

these days of e-recharges) competitive tool. We do see the utility of pricing as a tactical tool;

but taken too far, it carries the downside risk of being a negative sum game for the industry.

We would closely watch if Bharti is able to derive a meaningful absolute positive (within what is

likely to become an overall negative sum game for the industry) from the moves. Metric wewould watch for the same would be Bhartis India/SA wireless EBITDA (absolute), which has

(largely) not grown for 11 quarters now.

` Detailed indicators on 3G Idea started providing some details a couple of quarters back. We

would welcome additional disclosures (beyond activated and active 3G SIMs) from the market

leader Bharti.

Bharti earnings likely to be subdued again; see more downgrades ahead

We expect Bharti to report a 3.5% qoq growth in consol revenues to Rs193.9 bn and a 4.8%

growth in consol EBITDA to Rs65.3 bn. Both consol revenue and EBITDA growths benefit from

strong Re-denominated growth in the Africa business, driven by Re depreciation versus the Africancurrencies. Ex-Africa, we expect Bhartis revenue growth to be a modest 1.4% qoq and EBITDA

growth to be 3.3% qoq. Below-EBITDA, Bharti faces sequential pressure from (1) amortization of

BWA license fees in Kolkata and Karnataka, where they launched 4G last quarter, (2) higher

effective interest cost, as the company has moved some of the US$ debt in local Africa opcos to

local currency debt, (3) higher forex losses, and (4) share of losses on Qualcomm India entity for

part of the quarter. We expect net income to grow a modest 6% qoq and decline 12% yoy.

Idea expect a decent quarter

We estimate consolidated revenues to come in at Rs55 bn (+2.4% qoq) and EBITDA to come in at

Rs15.3 bn, implying a flat adjusted OPM qoq. Expect strong 5.5% wireless minutes growth and an

RPM decline of 2.5% qoq. Our PAT estimate of Rs3 bn builds in forex loss of Rs450 mn versus a

gain of Rs135 mn in the previous quarter.

TelecomIndia

1QFY13E preview pressure on RPM to sustain. Across-the-board increase in priceaggression in the market and the impact of regulator-driven cap on processing fee on

recharges will likely result in 2-3% RPM decline qoq for most players. Volumes shouldhold up well, even as we expect deceleration from 4QFY12 levels. Bharti faces below-

EBITDA line pressure from increased BWA amortization, higher interest costs, sequential

jump in forex losses and proportionate accrual of Qualcomm India losses.

NEUTRAL

JULY 02, 2012

UPDATE

BSE-30: 17,399

Rohit [email protected]

Mumbai: +91-22-6634-1397

Shyam [email protected]

Mumbai: +91-22-6634-1470


20/33

India Telecom


Exhibit 1: Bharti - 1QFY13E preview, IFRS, March fiscal year-ends (Rs mn)

1QFY12 4QFY12 1QFY13E qoq yoy

Consolidated results

Revenues 169,828 187,294 193,865 3.5 14.2Operating costs (112,769) (124,965) (128,533)

EBITDA 57,059 62,329 65,333 4.8 14.5

EBITDA margin (%) 33.6 33.3 33.7

Depreciation and Amortization (31,314) (34,683) (36,081)

EBIT 25,745 27,646 29,251 5.8 13.6

EBIT margin (%) 15.2 14.8 15.1

Net finance (cost)/income (8,550) (10,572) (12,179)

Other non-financial income/(expense)

PBT 17,195 17,074 17,072 (0.0) (0.7)

Tax provision (5,141) (6,976) (5,975)

PAT before minority interest 12,054 10,098 11,097

Minority interest 98 (21) (137)

Equity in earnings of affiliates (18) (300)

Reported net income 12,152 10,059 10,660 6.0 (12.3)Reported EPS 3.20 2.65 2.81 6.0 (12.3)

Segmental performance

Wireless - India and SA

Revenues 98,404 105,096 107,168 2.0 8.9

EBITDA 33,614 35,719 36,973 3.5 10.0

OPM (%) 34.2 34.0 34.5

ARPU (Rs/sub/month) 191 188 186 (1.3) (2.4)

MOU (min/sub/month) 446 430 435 1.2 (2.3)

RPM (Rs/min) 0.428 0.438 0.427 (2.5) (0.1)

EPM (Rs/min) 0.152 0.155 0.154 (0.9) 1.2

Total minutes (bn) 221.6 230.4 240.7 4.5 8.7

Bharti Africa

Revenues (b) 43,784 53,874 58,615 8.8 33.9EBITDA 11,053 14,983 16,412 9.5 48.5

EBITDA margin (%) 25.2 27.8 28.0

Telemedia services

Revenues 9,457 9,159 9,296 1.5 (1.7)

EBITDA 4,304 3,754 3,942 5.0 (8.4)

OPM (%) 45.5 41.0 42.4

Long distance + Enterprise

Revenues 10,410 11,209 11,265 0.5 8.2

EBITDA 2,303 1,631 1,690 3.6 (26.6)

OPM (%) 22.1 14.6 15.0

Passive infra business

Revenues 22,767 24,183 24,522 1.4 7.7

EBITDA 8,585 9,346 9,490 1.5 10.5

OPM (%) 37.7 38.6 38.7Others

Revenues 3,700 4,303 4,540 5.5 22.7

EBITDA (2,017) (2,296) (2,270) (1.1) 12.5

OPM (%) (54.5) (53.4) (50.0)

Change (%)



21/33

Telecom India


Exhibit 2: Idea - 1QFY13E preview, Indian GAAP, March fiscal year-ends (Rs mn)

1QFY12 4QFY12 1QFY12E qoq (%) yoy (%)

Consolidated

Revenues 45,207 53,696 55,011 2.4 21.7Standalone 45,559 54,035 55,537 2.8 21.9

Indus 3,078 3,317 3,340 0.7 8.5

Eliminations (3,430) (3,656) (3,866) 5.8 12.7

Costs (33,167) (40,126) (39,718) (1.0) 19.8

EBITDA 12,040 13,570 15,293 12.7 27.0

EBITDA margin (%) 26.6 25.3 27.8

Depreciation and Amortization (7,026) (7,844) (8,180) 4.3 16.4

EBIT 5,014 5,726 7,113 24.2 41.9

Net interest income/(expense) (2,463) (2,275) (2,755)

PBT 2,550 3,451 4,358

Taxes (778) (1,063) (1,351)

PAT 1,772 2,389 3,007 25.9 69.7Wireless metrics

Wireless ARPU (Rs/sub/month) 160 160 156 (2.2) (2.2)

Wireless MOU (min/sub/month) 391 379 380 0.3 (2.8)

Wireless RPM (Rs/min) 0.409 0.422 0.412 (2.5) 0.6

Wireless EPM (Rs/min) 0.098 0.097 0.106 9.0 7.8

Total minutes (bn min) 108.6 124.3 131.1 5.5 20.7

Change



22/33

India Telecom


Exhibit 3: RCOM - 1QFY13E preview, Indian GAAP, March fiscal year-ends (Rs mn)

(Rs mn) 1QFY12 4QFY12 1QFY13E qoq (%) yoy (%)

Consolidated results

Revenues 49,401 53,100 54,036 1.8 9.4

Operating costs (33,380) (36,778) (37,610) 2.3 12.7

EBITDA 16,021 16,322 16,427 0.6 2.5

EBITDA margin (%) 32.4 30.7 30.4

Depreciation and Amortization (9,760) (9,703) (9,800) 1.0 0.4

EBIT 6,261 6,619 6,627 0.1 5.8

EBIT margin (%) 12.7 12.5 12.3

Net finance (cost)/income (4,050) (5,795) (5,000) (13.7) 23.5

PBT 2,211 824 1,627 97.4 (26.4)

Tax provision 24 1,192 (81) (106.8) (438.9)

PAT before minority interest 2,235 2,016 1,545 (23.3) (30.9)

Minority interest (651) 1,287 (150) (111.7) (77.0)

Extraoridnaries (10) 12 -

Reported net income 1,574 3,315 1,395 (57.9) (11.3)

Segmental performance

Wireless

Revenues 43,267 45,055 45,356 0.7 4.8

EBITDA 11,727 12,022 12,019 (0.0) 2.5

OPM (%) 27.1 26.7 26.5

ARPU (Rs/sub/month) 103 99 98 (0.8) (4.9)

MOU (min/sub/month) 233 227 228 0.6 (1.9)

RPM (Rs/min) 0.44 0.44 0.43 (1.5) (3.1)

EPM (Rs/min) 0.12 0.12 0.11 (2.1) (5.2)

Total minutes (bn) 97.3 103.0 105.2 2.2 8.1

Enterprise business

Revenues 22,916 24,395 24,961 2.3 8.9

EBITDA 5,643 5,893 6,073 3.1 7.6

OPM (%) 24.6 24.2 24.3

Others

Revenues 2,780 2,700 2,970 10.0 6.8

EBITDA (1,284) (1,561) (1,634) 4.6 27.2

OPM (%) (46.2) (57.8) (55.0)

Change (%)



23/33

Telecom India


Exhibit 4: India telecom - valuation summary, March fiscal year-ends, 2010-14E

` Price (Rs) Target price

2-Jul-12 (Rs) 2010 2011 2012 2013E 2014E 2010 2011 2012 2013E 2014E

Bharti 310 375 13.1 19.5 27.7 17.2 13.9 7.5 8.9 7.8 6.3 5.3

Idea 78 95 28.4 28.5 35.5 16.6 11.0 9.4 9.5 7.6 5.7 4.5MTNL 24 (1.5) (2.3) (2.6) (2.8) (2.9) 2.4 1.6 0.6 (0.2) (1.7)

RCOM 64 60 2.8 9.8 14.3 27.5 12.6 5.9 5.6 7.6 6.6 5.6

TCOM 235 210 (8.2) (9.4) (8.4) (9.7) (12.9) 13.6 11.8 9.8 7.7 6.8

KS Market cap.

rating (US$ bn) 2010 2011 2012 2013E 2014E 2010 2011 2012 2013E 2014E

Bharti ADD 21.2 418 595 715 814 894 168 200 237 286 323

Idea ADD 4.6 124 155 195 233 267 34 38 51 67 81

MTNL RS 0.3 37 38 40 42 43 (9) (7) (5) (4) (4)

RCOM SELL 2.4 215 224 203 220 238 72 84 65 71 79

TCOM REDUCE 1.2 110 119 142 169 181 10 12 18 24 28

2010 2011 2012 2013E 2014E 2010 2011 2012 2013E 2014E

Bharti 90 60 38 62 75 23.6 15.9 11.2 18.0 22.3

Idea 9 9 7 15 23 2.73 2.72 2.19 4.68 7.04

MTNL (10) (7) (6) (5) (5) (15.6) (10.4) (9.1) (8.4) (8.3)RCOM 47 13 9 5 10 22.6 6.5 4.5 2.3 5.1

TCOM (8) (7) (8) (7) (5) (28.6) (24.9) (28.0) (24.2) (18.3)

Net Income (Rs bn) EPS (Rs/share)

P/E (X) EV/EBITDA (X)

Revenues (Rs bn) EBITDA (Rs bn)

Source: Bloomberg, Kotak Institutional Equities estimates


24/33


Kotak Institutional Equities Research

[email protected]

Mumbai: +91-22-6634-1100

Introducing eXtractor, KIEs proprietary data-analytics tool

We introduce KIEs proprietary data-analytics tool, eXtractor, which mines a universe of Indian

stocks based on nine factors: value, relative value, growth, profitability, momentum, leverage, size,sentiment and our proprietary factor iQ, or investment quotient. The data-mining is comprehensive

in nature with iQ, deriving higher concepts from basic financial parameters by unifying various

traditional investment parameters under a single factor. This bridges the gap between data and

inference. eXtractor will soon be available on our website, where clients can screen and test

various investment styles, using their own parameters for universe, investment horizons, churn

periods, portfolio size and more.

Portfolio performance for different investment styles relative value and value dominate

Within the CNX Nifty 50, portfolios ranked on factors like relative value and value were the best

performers in June 2012 yielding 12.1% and 8.9% respectively. The portfolio based on relative

value was assisted by RIIL and JPA gaining ~24% and ~18% respectively. The value portfolioperformed on the back of ONGC (up 12.5%) and BHEL (up 9.6%). Momentum was the worst

performer in the month with HCL, Ranbaxy and Asian Paints losing 3-5% on an mom basis.

iQ, our composite factor, had a lackluster month (0.7% up) as Cairn India and Ranbaxy fell ~8%

and ~5% respectively. In terms of information coefficient, relative value and momentum

(surprisingly) showed the highest performance-predictability in the CNX Nifty 50 universe.

Portfolio change for July 2012 Ranbaxy makes way for ONGC in the iQ-based portfolio

The iQ-based portfolio for July 2012 comprises CAIR, ONGC, COAL, TTMT and SBIN. The only

change from the June portfolio was RBXY being removed in favor of ONGC. After correcting ~8%

last month, Cairn gets added into the value and relative value portfolio for July 2012. As per the

eXtractor framework, the sentiment-based portfolio for July 2012 comprises PWGR, RBXY, SESA

and INFO.

Strategy.dot

StrategyIndia Quantitative

Value (relative and absolute) gains dominance in June as per eXtractor. Usingour proprietary data analytics tool, eXtractor, we observed that portfolios based on

relative value and value were the best performers in June. With the exception ofmomentum, most investment styles ended in the green even as the CNX Nifty 50

gained 7.2% during the period.

INDIA

JULY 02, 2012

UPDATE

BSE-30: 17,399

QUICK NUMBERS

Relative value and

value were the best-performing

investment styles in

the CNX Nifty 50 for

June 2012

Momentum-based

portfolio saw the

worst performance

Ranbaxy makes way

for ONGC in the iQ-

based portfolio

Saifullah [email protected]: +91-22-6634-1275


25/33

Strategy India


Value (relative and absolute) clearly the outperforming investment styles in June 2012Performance of the portfolios based on different investment styles, June 2012

Portfolio returns for June 2012

Minimum Maximum Average

Investment style Company Returns (%) Company Returns (%) (%)

iQ Cairn India Ltd (7.9) Coal India Ltd 7.8 0.7

Growth Ranbaxy Laboratories Ltd (5.3) Jaiprakash Associates Ltd 18.3 4.4

Value Punjab National Bank 7.0 Oil & Natural Gas Corp Ltd 12.5 8.9

Relative value Reliance Infrastructure Ltd 24.4 Tata Motors Ltd 4.1 12.1

Profitability Cairn India Ltd (7.9) Hero Motocorp Ltd 17.4 6.5

Size Tata Consultancy Services Ltd 3.2 ICICI Bank Ltd 14.8 8.0

Momentum HCL Technologies Ltd (5.5) Bharat Petroleum Corp Ltd 6.6 (0.2)

Sentiments Asian Paints Ltd (3.3) Jaiprakash Associates Ltd 18.3 8.0

Leverage Infosys Ltd 3.3 Hero Motocorp Ltd 17.4 9.4

Source: eXtractor, Factset estimates, Kotak Institutional Equities


26/33

India Strategy


RIIL and JPA were the key performers in the portfolio ranked on relative valueThe portfolios based on different investment strategies within the CNX Nifty 50 universe for June 2012

eXtractor factor ranks Price change MoM

Current Portfolio Growth Value Relative value Profitability Size Momentum Sentiments Leverage iQ (%)

iQ

Cairn India Ltd 9 9 11 5 25 17 7 24 1 (7.9)

Tata Motors Ltd 4 7 5 12 7 21 23 41 2 4.1

State Bank of India 31 18 27 44 1 16 4 0 3 5.0

Coal India Ltd 26 22 29 7 6 25 6 9 4 7.8

Ranbaxy Laboratories Ltd 1 37 42 18 45 4 12 33 5 (5.3)

Growth


Bharti Airtel Ltd 2 35 18 25 9 36 19 42 13 0.8

Bajaj Auto Ltd 3 21 35 2 32 22 31 26 6 4.1

Tata Motors Ltd 4 7 5 12 7 21 23 41 2 4.1

Jaiprakash Associates Ltd 5 36 2 40 47 45 2 49 29 18.3

Value

Punjab National Bank 23 1 15 38 16 46 49 0 43 7.0

Oil & Natural Gas Corp Ltd 47 2 25 13 3 26 34 21 9 12.5

Bank of Baroda 20 3 22 39 17 34 41 0 32 6.4

Sterlite Industries India Ltd 33 4 3 28 26 48 17 31 19 9.2

Bharat Heavy Electricals Ltd 39 5 7 22 22 49 44 15 37 9.6

Relative value

Reliance Infrastructure Ltd 48 17 1 47 40 43 48 36 44 24.4


Sterlite Industries India Ltd 33 4 3 28 26 48 17 31 19 9.2

Axis Bank Ltd 14 15 4 37 21 38 30 0 17 4.6

Tata Motors Ltd 4 7 5 12 7 21 23 41 2 4.1

Profitability

Hero Motocorp Ltd 11 24 37 1 34 32 28 11 11 17.4

Bajaj Auto Ltd 3 21 35 2 32 22 31 26 6 4.1

Hindustan Unilever Ltd 24 48 46 3 20 2 10 14 23 6.2

ITC Ltd 32 47 47 4 13 6 5 20 21 12.9

Cairn India Ltd 9 9 11 5 25 17 7 24 1 (7.9)

Size


Reliance Industries Ltd 41 20 16 42 2 35 45 32 30 4.6

Oil & Natural Gas Corp Ltd 47 2 25 13 3 26 34 21 9 12.5

Tata Consultancy Services Ltd 12 44 44 6 4 7 20 19 8 3.2ICICI Bank Ltd 35 16 8 48 5 30 24 0 22 14.8

Momentum

Asian Paints Ltd 18 49 49 8 39 1 3 22 14 (3.3)

Hindustan Unilever Ltd 24 48 46 3 20 2 10 14 23 6.2

Bharat Petroleum Corp Ltd 22 23 48 49 10 3 21 40 27 6.6


HCL Technologies Ltd 10 30 38 17 38 5 16 29 10 (5.5)

Sentiments

Power Grid Corp of India Ltd 21 38 24 10 30 14 1 48 18 7.0


Asian Paints Ltd 18 49 49 8 39 1 3 22 14 (3.3)


ITC Ltd 32 47 47 4 13 6 5 20 21 12.9

Leverage

Coal India Ltd 20 16 23 7 3 21 5 1 3 7.8

Maruti Suzuki India Ltd 9 23 18 32 25 25 30 2 18 6.3Hero Motocorp Ltd 11 17 29 2 32 28 22 3 11 17.4

Sun Pharmaceutical Industries 7 38 32 11 29 8 7 4 16 12.1

Infosys Ltd 29 25 22 9 11 19 27 5 20 3.3

Source: Factset estimates, eXtractor, Kotak Institutional Equities


27/33

Strategy India


ONGC displaces RBXY in our iQ-based portfolio for July 2012The portfolios based on different investment strategies within the CNX Nifty 50 universe for July 2012

eXtractor factor ranks

Current Portfolio Growth Value Relative value Profitability Size Momentum Sentiments Leverage iQ

iQ

Cairn India Ltd 1 5 2 6 24 47 5 18 1Oil & Natural Gas Corp Ltd 35 3 32 12 3 13 19 26 2

Coal India Ltd 11 23 33 7 5 21 10 10 3

Tata Motors Ltd 2 8 6 13 7 34 43 37 4

State Bank of India 20 14 25 44 1 20 25 5

Growth

Tata Motors Ltd 1 6 5 10 7 32 41 34 2

HCL Technologies Ltd 2 21 27 15 37 30 9 24 8

Tata Consultancy Services Ltd 3 42 39 4 4 14 5 16 5

HDFC Bank Ltd 4 41 38 31 8 6 23 11

Sun Pharmaceutical Industries 5 44 42 8 28 4 8 13 22

Value

Punjab National Bank 16 1 12 38 17 41 27 17

Bank of Baroda 13 2 20 39 18 35 40 23

Oil & Natural Gas Corp Ltd 35 3 32 12 3 13 19 26 2

Sterlite Industries India Ltd 33 4 5 27 27 39 38 32 21Cairn India Ltd 1 5 2 6 24 47 5 18 1

Relative value

Reliance Infrastructure Ltd 27 24 1 46 39 3 20 38 7

Cairn India Ltd 1 5 2 6 24 47 5 18 1

Axis Bank Ltd 8 13 3 37 21 38 28 13

Jaiprakash Associates Ltd 37 33 4 40 40 12 32 49 43

Sterlite Industries India Ltd 33 4 5 27 27 39 38 32 21

Profitability

Hero Motocorp Ltd 21 29 42 1 33 11 17 12 10

Bajaj Auto Ltd 42 19 34 2 34 32 30 25 26

Hindustan Unilever Ltd 14 49 43 3 9 8 8 14 28

ITC Ltd 29 47 48 4 10 2 18 20 29


Size

State Bank of India 20 13 23 38 1 18 22 4

Reliance Industries Ltd 42 16 13 39 2 29 45 28 28

Oil & Natural Gas Corp Ltd 33 3 30 12 3 11 16 23 1

ICICI Bank Ltd 31 15 12 42 4 17 6 7


Momentum

Asian Paints Ltd 22 48 46 8 41 1 13 22 38

ITC Ltd 29 47 48 4 10 2 18 20 29

Reliance Infrastructure Ltd 27 24 1 46 39 3 20 38 7


Bharat Petroleum Corp Ltd 26 22 49 49 12 5 21 41 32

Sentiments

Power Grid Corp of India Ltd 15 39 19 10 29 19 1 46 16

Ranbaxy Laboratories Ltd 7 37 38 19 47 27 2 35 18

Sesa Goa Ltd 47 10 8 16 48 33 3 31 14

Infosys Ltd 28 30 22 9 15 45 4 11 11

Cairn India Ltd 1 5 2 6 24 47 5 18 1

Leverage

Maruti Suzuki India Ltd 18 20 16 32 28 22 35 1 28

Coal India Ltd 9 17 26 7 3 17 8 2 3

Infosys Ltd 21 24 17 9 13 37 4 3 8

Hero Motocorp Ltd 13 23 34 2 31 9 16 4 9


Source: Factset estimates, eXtractor, Kotak Institutional Equities


28/33


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Disclosures

"Each of the analysts named below hereby certifies that, with respect to each subject company and its securities for which the analyst is

responsible in this report, (1) all of the views expressed in this report accurately reflect his or her personal views about the subject companiesand securities, and (2) no part of his or her compensation was, is, or will be, directly or indirectly, related to the specific recommendations or

views expressed in this report: Saifullah Rais, Rohit Chordia, Hitesh Goel, Murtuza Arsiwalla, Manoj Menon, M.B. Mahesh, Priti Arora."

Kotak Institutional Equities Research coverage universeDistribution of ratings/investment banking relationships

Source: Kotak Institutional Equities As of March 31, 2012

Percentage of companies covered by Kotak Institutional Equities,

within the specified category.

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.

* The above categories are defined as fol lows: Buy = We expect

this stock to deliver more than 15% returns over the next 12

months; Add = We expect this stock to deliver

5-15% returns over the next 12 months; Reduce = We expect this

stock to deliver -5-+5% returns over the next 12 months; Sell =

We expect this stock to deliver less than -5% returns over the next

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

basis. These ratings are used illustratively to comply with applicable

regulations. As of 31/03/2012 Kotak Institutional Equities

Investment Research had investment ratings on 166 equitysecurities.

18.7%

30.7% 31.9%

18.7%

1.8%0.0% 1.2% 0.6%

0%

10%

20%

30%

40%

50%

60%

70%

BUY ADD REDUCE SELL

Ratings and other definitions/identifiers

Definitions of ratings

Definitions of ratings

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

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

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

SELL. We expect this stock to deliver


33/33

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communications with a subject company, public appearances and trading securities held by a research analyst account.

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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

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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

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Documents

03July2012 India Daily