10 february 2011 india daily

8/7/2019 10 February 2011 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 DAILYFebruary 10, 2011 India 9-Feb 1-day1-mo 3-mo

Sensex 17,593 (1.0) (8.5) (15.7)

Nifty 5,254 (1.1) (8.8) (16.3)

Global/Regional indices

Dow Jones 12,240 0.1 5.2 7.8

Nasdaq Composite 2,789 (0.3) 3.0 8.2

FTSE 6,052 (0.6) 1.6 4.0

Nikkie 10,614 (0.0) 0.7 8.0

HangSeng 23,016 (0.6) (2.2) (6.1)

KOSPI 2,036 (0.5) (2.2) 3.4

Value traded India

Cash(NSE+BSE) 195 163 70

Derivatives (NSE) 1,459 1,600 1,149

Deri. open interest 1,410 1,343 1,640

Forex/money market

Change, basis points

9-Feb 1-day 1-mo 3-mo

Rs/US$ 45.5 5 20 124

10yr govt bond, % 8.2 (1) (1) 13

Net investment (US$mn)

8-Feb MTD CYTD

FIIs (117) 42 (1,345)

MFs (4) 84 (282)

Top movers -3mo basis

Change, %

Best performers 9-Feb 1-day 1-mo 3-mo

HCLT IN Equity 462.7 (0.6) (0.5) 14.2SIEM IN Equity 847.6 (0.2) 9.8 2.4

BHARTI IN Equity 332.2 (0.3) (2.0) 1.6

INFO IN Equity 3130.7 1.1 (7.8) 1.6

TCS IN Equity 1098.3 (2.4) (2.9) 0.5

Worst performers

UT IN Equity 37.7 (8.3) (36.4) (58.0)

IVRC IN Equity 63.4 (12.0) (45.4) (57.1)

HDIL IN Equity 128.4 (6.8) (24.3) (51.6)

IBREL IN Equity 106.7 (6.1) (11.7) (49.4)

RELI IN Equity 531.7 (19.3) (34.2) (49.4)

Contents

New release

Strategy: Day 1 takeaways from Chasing Growth, KIE's annual global investor conference

Results

Mahindra & Mahindra: Maintain margins despite sharp spike in raw material costs

Rural Electrification Corporation: Lower growth though margins surprise, retainREDUCE

BPCL: Positive net income given cash bounty

United Spirits: In line results; mixed outlook

Update

Telecom: 2G spectrum pricing report - from known unknown to better known known

News Round-up

Telecom regulator Trai has proposed that mobile phone cos. be charged a one-timefee of USD 1.01bn for every unit of airwave they hold beyond the contracted limit, in

what may be a further blow to dipping profits & revenues of the sector. The move is

set to impact all incumbent GSM based operators & calculations by ECNT reveal that

the industry will have to shell out USD 3.89bn if the govt. accepts the regulator's

recommendations. (ECNT)

Car sales hit a record high in Jan. up 26%, pushed by a growing middle class, easieraccess to loans & a wider choice of new models, but rising fuel prices & interest ratesare likely to moderate growth in next few months. (ECNT)

The environment ministry has given SAIL (SAIL IN) the go-ahead to divert 595 hectareof forest land in Chiria. (BSTD)

Falling gas production has prompted Reliance Industries Ltd (RIL IN) to seek help fromUS oil major Shell International to rectify technical glitches in its D6 block in the

Krishna-Godavari basin on the country's eastern coast. (BSTD)

Coal India (COAL IN) may by a stake of up to 15% in US-based Peabody EnergyCorp's Australian assets early in the next financial year for an estimated USD 100 mn.

(BSTD)

Coal India (COAL IN) plans to start exploratory drilling in Mozambique by June & hasinvited bids from coal exploration cos. for the blocks it has acquired in the country.

(ECNT)

M&M (MM IN) approved the acquisition of 38% equity in EPC Industries, a listedcompany engaged in micro irrigation systems, for USD 9 mn. (BSTD)

DLF (DLFU IN) approach apex court against order to demolish Gurgaon SEZ. ThePunjab and Haryana high court had ruled that the land was acquired for other

purpose and not for SEZ. (BSTD)

Natco Pharma (NTCPH IN) said its abbreviated new drug application for the genericversion of Oseltamivir Phosphate capsules had been accepted by the USFDA. (BSTD)

Source: ECNT= Economic Times, BSTD = Business Standard, FNLE = Financial Express, THBL = Business Line.


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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.

Day 1 Feb 9 companies at KIEs Chasing Growth conference

Strategy.dot

Strategy

Day 1 takeaways from Chasing Growth, KIEs annual global investor conference.Feb 9, the first day of our conference saw eight expert speakers and 21 companies rivet

our institutional investors. Our speakers today included Arun Shourie, Varad Pande, Dr.Narendra Jadhav, Mani Shankar Aiyar, Labanyendu Mansingh, Adi Godrej, TN Ninan

and YM Deosthalee. More on their insights and our takeaways inside. Watch this space

for todays speakers six more experts will take the stage and 39 more companies willmeet investors in an action-packed day.

INDIA

FEBRUARY 9, 2011

NEW RELEASE

BSE-30: 17,593

1. Axis Bank

2. Bharat Forge

3. Bharti Airtel

4. CESC

5. Dish TV

6. Godrej Consumer Products

7. HCL Technologies

8. HDFC

9. IRB Infrastructure

10. ITC

11. Jindal Steel and Power

12. Kotak Mahindra Bank

13. NTPC

14. Oil & Natural Gas Corporation

15. Power Grid Corporation

16. Reliance Capital

17. Sesa Goa

18. Shriram Transport Finance Company

19. Tata Chemicals

20. Tech Mahindra / Mahindra Satyam

21. Yes Bank


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Strategy India

KOTAK INSTITUTIONAL EQUITIES RESEARCH 3

SPEAKER SESSIONS: CRYSTAL ROOM, THE TAJ MAHAL PALACE

1. ARUN SHOURIE: Getting things done in a parliamentary democracy

Key takeaways

Removal of dead hand of the government in the early 1990s led to faster growth in theeconomy; reforms have taken place in spurts and not on a sustained basis

The next two years will be difficult as the opposition will likely become moreconfrontational as the government is in disarray; elections will play an important role in

determining policies of the government over the next two years; disarray in government is

not democracy

Leadership is a problem at every level in India; how we select the right leaders isimportant; the parliamentary system has not delivered the kind of leadership that is

important for taking the country forward

Race with China is important for India; China can learn from India three things(1) de-fanging secessionism, (2) respect for basic life and (3) innovation in a free world is more

than in a state-controlled regime; India can learn from China several things(1) sourcing

of resources from various parts of the world with promise of Chinese aid, (2) national

strength and (3) exercise of power

Freedom is not going to solve things automatically; it is just as an add-on; the system hasto deliver; entrepreneurs and middle-class professionals have to keep on doing the right

things; otherwise, we will fall into the middle-income class trap

2. VARAD PANDE: Ecology and economy: the twain shall meet

Key takeaways

Five main laws that determine the policies of the government of India; forest cover inIndia has increased as a result of strict implementation of the Forest Conservation Act,

1980

Current contextpressure on ecology, a perception that the system can be managed,judicial activism, growing environmental movement; the ministry has been working on a

culture of compliance

Core principles of the MoEF(1) inclusiveness (based on national consultations), (2)objectivity and (3) transparency (decisions put on the website immediately)

Approach of the MoEF(1) a clear No for certain projects or ideas, (2) over 90% of theprojects are approved and within stipulated timelines, (3) find solutions that work for all

stakeholders (POSCO, Navi Mumbai airports are good examples)

Proactive domestic agendareduce emissions intensity of GDP (reduce by 20-25%between 2005 and 2020), eight missions on climate change; the ministry is also working

on institution building (National Environmental Assessment and Monitoring Authority, or

NEAMA, an autonomous body for assessing projects and National Green Tribunal)

Former UnionMinister, Scholar

and Writer

Officer on Special

Duty to the Minister

of Environment &

Forests,

Mr. Jairam Ramesh


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India Strategy

4 KOTAK INSTITUTIONAL EQUITIES RESEARCH

3. DR. NARENDRA JADHAV: Inclusive growth in the context of Indias demographic surge

Key takeaways

Dr Jadhav had a new definition of LPG in the context of economic reformsliberalization,privatization and globalization

The three key achievements of the Indian economy in the past two decades since LPGbegan have been(1) distinct improvement in the rate of economic growth, (2) the

number of people below the poverty line has come down to 27% currently, (3) forex

reserves have increased significantly; at US$300 bn, India is the seventh-largest forex

holder in the world; India is a net lender to the IMF

The three major negatives or challenges facing the Indian economy(1) poor ranking bymost social indicators, (2) benefits of reforms have not been uniform and (3) inflation; it is

the most iniquitous form of taxation

The positives of Indian economy are favorable demographics; average age is 24 years andaverage in 2020 will be 29; in the same year, median age of China and USA will be 37

years,

Areas of development are (1) gross enrolment ratio (access to college education) is 12.4%in FY2007; expenditure on education is about 3.5% of GDP, (2) 10% of people have

access to proper training, (3) health sector; expenditure on health is about 1% of GDP

4. MANI SHANKAR AIYAR: Why is India prospering but Indians are not?

Key takeaways

17% of the GDP is contributed by the agriculture sector, which employs 65% of Indiaspopulation

The process of growth has become very skewed; the fruits of growth are being corneredby a small section of the population

Governments capacity to spend on anti-poverty programs has increased due to aspectacular increase in governments revenues; in the past 15 years (1994-2009),

expenditure on social welfare programs has increased 15X; however, Indias rank in HDI

has not improved much (its #134 currently)

The size of the unaccounted economy has grown to 43% from 27% in 1991 of GDP

Empowerment of people took place immediately after independence; middle class soughtits entitlement and secured it and this resulted in enrichment; the rural population has not

felt the benefits though; so far, the rural class has sought to show its dissatisfaction

through changing the government in elections; however, it could lead to more radical

forms of dissatisfaction and it could be in the form of insurgency and armed rebellion

It is important for basic services to be provided to the rural population, which will lead totrue empowerment of these people; there are 3.2 mn elected representatives in local

bodies out of which 1.2 mn are women representativesa little known fact that is not

lauded enough

Member,

Planning Commission

Member of

Parliament,Rajya Sabha


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Strategy India


5. LABANYENDU MANSINGH: Development of the gas market in India

Key takeaways

8 EOIs received for additional long-distance pipelines; four pipelines put through biddingprocess after public consultation

73 EOIs received for building city gas distribution networks; PNGRB has identified 243cities additionally for building CGDs

Currently there are 0.7 mn CNG vehicles but this could rise to 2.5 mn in the next threeyears and 3.3 mn in the next five years; the number of city gas distribution networks

could increase to 125 in the next five years from 25 currently

In PNGRBs view, a competitive market would lead to price discovery, optimal use ofscarce energy resource, optimization of infrastructure and lead to flow of investment for

E&P, development of infrastructure for transportation and distribution

6. ADI GODREJ: Understanding the Indian multinational

Key takeaways

470 mn Indians use at least one Godrej product daily 35% of Godrej Consumer Products Ltd comes from outside India; it has a very sizeable

presence in Indonesia

Godrej Properties has projects in 11 cities in India; it has a joint development model,which results in an asset-light model

Overseas strategy driven by desire to grow faster than what is available in India (about15% CAGR in revenues on an organic basis); acquisitions can add another 10% to the

growth per annum but the acquisitions have to make strategic sense

Godrej group has ambitions to grow the palm oil business, which is a cooperation modelwith farmers; farmers grow the crops on behalf of Godrej and Godrej purchases the fruit

from farmers

Chairperson, PNGRB

Chairman,

Godrej Group


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India Strategy


7. T. N. NINAN: Can India make the journey from functional anarchy to future global power?

Key takeaways

Indias per capital income can increase to US$4,000 by FY2021; growth is underwrittenby a high savings rate

Key vulnerabilities include areas such as (1) institutional including among others weakregulators, scarcely functional parliament and judicial delays, (2) political including

populist politics, weak reforms impulse and corruption and (3) economical such as twin

deficits with combined fiscal deficit of 7.7% and CAD of 3.7%, high public debt

Some East Asian economies grew rapidly driven by openness, high savings andinvestment, stable macro-economy, good leadership and administration and commitment

to growth and inclusion

India could easily get to a middle-income economy (US$4,000 per capita) over the next10 years but transformation to a high-income economy may be more difficult since thiswould require moving up the value chain, specialization and transformation to a

knowledge economy

Escaping the middle-income trap for India would require skills acquisition, infrastructuredevelopment (electricity, highways, and telecom connectivity), focus on soft infrastructure;

Mr. Ninan highlighted that certain changes such as RTI, UIDAI, rise of BIMARU sites,

growth of manufacturing (frugal engineering and innovation) could lead to stronger

performance

India likely to be a great power (one among a few)

8. Y. M. DEOSTHALEE: Overcoming Indias infrastructure deficit

Key takeaways

Infrastructure development would require strong government, monetary and fiscalpolicies

Globally, infrastructure has been developed by governments; in India, 50% of theinvestment in infrastructure development has been left to private companies but they are

handicapped due to procedural issues (land, demolition) and other issues

Processes need to be strengthened in the areas of award of coal blocks, highways andother infrastructure projects; also, project preparation can be higher before inviting

private sector participation

Availability of skilled manpower is a big issue; it is just not about engineers but alsomanual labor such as welders and carpenters; only 25% of the population entering the

construction sector is properly trained

Long-term funding is also a big issue for developing infrastructure projects; banks haveshort-term deposits typically with only one-third of their deposits under the long-term

category; thus, bank funding is not appropriate for long-term infrastructure projects,

which require loans of 10-15 years; long-term corporate debt market is virtually absent

currently; India can facilitate investment through fiscal measures

Chairman & Editorial

Director,

Business Standard

Whole-time Director

& Chief Financial

Officer,

Larsen & Toubro


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Strategy India


BRIEF TAKEAWAYS FROM COMPANY MEETINGS

AXIS BANK: FEB 9, 2011

Key takeaways

Margins outlook remains stable with a marginal negative bias. Full impact of recenthikes (December50 bps PLR and 25 bps base rate and January25 bps of base rate

and PLR). Pricing power remains with banks on the backdrop of relatively strong credit

growth. However, the bank would continuously evaluate margins and asset quality.

Trends on loan growth improving. There is a perceptible shift towards working capitalrequirements apart from infrastructure (which led credit growth in recent quarters) in

3QFY11. Credit growth is relatively weak only in the SME segment. In retail, expectations

of a price decline are driving down home loan volume growth.

1HFY11 saw peak slippages for the bank. Barring any episodic events, the bank is notwitnessing any concern in any of the sectors within its loan portfolio.

Investments in new branches to continue at similar trends levels. The bank will lookto close FY2011E at about 1,250-1,300 branches and a further 250-300 branches in

FY2012E. The bank is looking at maintaining CASA ratio at 40% levels (average CASA

ratio) and would calibrate growth, if needed.

BHARAT FORGE: FEB 9, 2011

Key takeaways

Demand outlook is very buoyant.The company guided for very strong demandoutlook on US and European exports driven by new TARP projects which are being

executed in US and new order wins in European market. Company expects to double

standalone revenues in the next three years, driven by (1) strong growth in non-auto

revenues and (2) sharp increase in US and European exports.

Capacity utilization expected to improve.The company indicated that capacityutilization in India is at around 75% for the automotive business, 40-45% for the non-

auto business, 65-70% for China operations and 55% for the European operations. The

company plans to increase machining capacities by 50% over the next few years to

increase the value-added content of the product.

Subsidiaries expected to report profits in FY2012E:The company indicated thatsubsidiaries are expected to report profits in FY2012E driven by improvement in demand,

increase in machining mix in the product mix. The company guided that EBITDA margins

in subsidiaries should improve from 5% to 10% in the next 2 years.

Update on Alstom joint venture.The company indicated that the Bharat Forge-Alstomjoint venture of turbine gensets will start commercial production from FY2013E and

company plans to achieve full utilization of capacity by FY2017E. The company has also

received letter of intent from NTPC for supplying turbine gensets for 5X 660 MW orders

that the Bharat Forge-Alstom JV won recently.


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India Strategy


BHARTI AIRTEL: FEB 9, 2011

Key takeaways

India markets. The company is comfortable with the competitive scenario in the Indianwireless markets. The company believes that the new players do not have the balance

sheet strength to sustain the price wars and some of them will struggle for even a

graceful exit from the market. Bhartis India wireless strategy continues to revolve around

revenue market share protection with a focused eye on EBITDA market share.

Recent events. The company does not see MNP changing the competitive dynamicsmuch in the Indian wireless industry beyond some price rationalization in the post-paid

segment. The company sees the TRAI recommendations on spectrum pricing as just the

start of a long process of telecom policy reformulation in the country. The company

believes that their balance sheet strength places them in the relatively better position to

absorb any spectrum related charges compared to peers. 3G to be rolled out in 25-30

cities by end March 2011 and to around 100 cities in the next 12 months.

Africa three-pronged strategy. (1) driving affordability-led penetration; Bhartibelieves that current unique subscriber penetration in their African markets is just about

25%, (2) gaining subscriber and revenue market share from competitors through smart

pricing and distribution management and (3) EBITDA margin expansion driven by ironing

out inefficiencies in the cost structure.

Capex for India business. Excluding towercos, this is pitched in the range of US$1.8-2bn for the next 2-3 years, Africa capex to be in the vicinity of US$800 mn for the next 2-3

years.


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Strategy India


CESC: FEB 9, 2011

Key takeaways

CESC has a current operational portfolio of 1,225 MW all of which caters to its Kolkatadistribution business. CESC plans to add another 2,520 MW by end-FY2015E which

includes 600 MW at Dhariwal (likely commissioning in FY2013E), 600 MW Haldia (likely

commissioning by FY2014E) and 1,320 MW at Orissa (likely commissioning by FY2015E).

Status of the power projects Dhariwal (660 MW). Construction is in progress and management has indicated

likely commissioning by FY2013E. Dhariwal has already tied up 220 MW at a

levelized tariff of Rs3.3/kwh and plans to tie up another 220 MW. Depending on the

status of merchant tariffs, CESC will sell the balance 220 MW on a merchant basis.

Haldia (660 MW). BTG supplier has been shortlisted and construction work is likelyto commence by March 2011E. The management has indicated commissioning byFY2014E. Haldia will sell 450 MW to CESCs Kolkata distribution arm while balance

will be free for merchant sale.

Orissa (1,320 MW). Project has achieved key milestone and has applied for coallinkage. The project has been recommended by CEA to Ministry of Coal for linkage

and secured 90 pointssignificantly higher than competing projects. Management

has indicated that construction could start by end-FY2012E with likely

commissioning by FY2016E.

Total capex requirement for these three projects will be Rs130 bnof which equityfunding would be Rs31 bn. CESC has already infused Rs5 bn of equity and internal

accruals will likely fund another Rs16 bn. For the balance Rs10 bn of equity funding, thecompany will likely look for private equity investment.

ICML (a group company of RPG Enterprises) has acquired 10% stake in ResourceGeneration Ltd (Australia) for a consideration of AU$10.5 mn. The company has access to

proven reserves of 600 mn tons (South African coal) and mining operations are expected

to start by FY2013E. CESC was not directly involved in the transaction and has just

entered into a supply agreement with ICML. CESC has secured a supply of 1 mn tons for

the first three years followed by 2 mtpa for next 20 years.

CESC continues to make corporate level losses in its retail business though the retailbusiness has moved into positive store level EBITDA in 2HFY11. However, it will take

another 2.5 years for CESC to break into corporate level profitability. CESCs store level

EBITDA was Rs21/sq. ft in 2QFY11 while total loss was Rs117 mn in 2QFY11.

Management has indicated that to move into corporate level profitability, CESC needs toachieve scale and add on to its current store area of 0.9 mn sq. ft. CESC plans to add 0.3

mn sq. ft in FY2012E capex which will be funded by the parent entity. However, long-

term plans are to achieve operational efficiencies through calling up of business, to be

funded through private equity placement.


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India Strategy


DISH TV INDIA: FEB 9, 2011

Key takeaways

Volume growth momentum remains strong. Dish TV expected growth momentum toslacken a tad post the festival period but subscriber additions remain robust. Dish TV has

added >300K subscribers in January and is on course for another >1 mn quarter in

4QFY11E, led by the upcoming ICC Cricket World Cup. Dish TV would be advertising

heavily during the event though largely its HD service. Dish TV was confident of the

industry crossing 60 mn gross subscriber mark by end-FY2013E (~32 mn gross subscriber

base currently, ~15% of the same may be inactive). A significant chunk of subscribers

(~75%) are coming from beyond the top-100 cities, with conversion of cable-dark, weak

cable and DD Direct TV subscribers as key drivers.

ARPU growth may be modest though key focus area. Dish TV expects ARPU in4QFY11 to be ~Rs145-150, marginally below the guidance given at the start of the year.

However, the company noted the land grab stage of the market and stronger-than-

expected subscriber volumes (~3.5 mn in FY2011E versus ~2.5 mn guidance given at thestart of the year). Dish TV highlighted (1) ongoing pass-through of prices hikes taken in

September 2010, (2) improving mix of packages (proactive marketing) and (3) value-

added services and add-on packages as key driver of continued traction in ARPUs, even

though it may be range-bound (4-5%) for some time.

Positive operating leverage as cost structure remains in controltaxes are the bte-noir. Dish TV noted that 19% yoy growth in 3QFY11 programming and other costs was

on account of retrospective payments due to delayed renegotiation with one broadcaster

and otherwise, content cost inflation will remain within guidance (~10%). Some of the

content deals come up for renegotiation in FY2012E (one broadcaster) and FY2013E (two)

but (1) rising and highest DTH subscriber base, (2) continued fragmentation in the

broadcasting segment and (3) TAM ratings system taking cognizance of DTH platforms in

their panel implies greater negotiating power. Tax incidence at ~30% of revenues is a

bigger issue (Service tax, VAT, Entertainment tax and License fees).

HD-DTH service would be another key focus area. The company re-iterated renewedfocus on HD-DTH services, also as an important piece of arsenal in the strategy to diversify

away from low-value subscribers and break into high-value subscribers (in the top 100

cities). The company plans to utilize a significant proportion of the recently added

transponder capacity to add HD content to the platform. The companys strategy would

unfold with the upcoming ICC Cricket World (lets not spoil the surprise), and Dish TV

would aggressively market its revamped HD-DTH service during the event. (1) Long lead

time in securing transponder capacity and (2) need to align new capacity with existingsatellite makes it harder for competition to follow. Dish TV noted existing base of 4 mn

high-end LCD TV household base in India.

Dismal state of C&S regulations in India but impact of Dish TV/DTH minimalhenceforth. Dish TV expressed continued disappointment with the state of affairs as

regards C&S regulation in India. Most notably, regulations related to License fee reduction

(from high level of 10% of revenues), content costs (revised DTH rate cap at 35% of non-

CAS cable channel rates versus 50% previously) and digitization (public and political

pressure may preclude speedy implementation) remain under the cloud. Nonetheless,

Dish TV/DTH being a B2C-oriented business and with strong volume growth will likely

have limited incremental impact of regulation. A majority of the states have already

implemented Entertainment tax as well, resulting in stable payout (~6% of revenues);

GST may subsume E-tax though there is limited clarity on the same.


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Strategy India


GODREJ CONSUMER: FEB 9, 2011

Key takeaways

Category growth expectations soaps ~8%, household insecticides ~20% and hair color~15%. GCPL likely to grow ahead of market growth in soaps and household insecticides

and in line with market growth in hair color.

The company is having forward covers for palm oil till April/May 2011. Full impact ofinflation in palm oil will likely be seen in 2QFY12E. Company has implemented a price

increase of 4% in soaps in January 2011.

The company is in the process of appointing Mr. Vivek Mathur as Head of domesticbusiness (he has earlier worked with GHPL and Godrej Hersheys). GCPL will also appoint

a new Head for international business.

The company is likely to revisit the marketing mix for hair color in India in 1QFY12E. It is targeting organic growth of 15-20% CAGR and inorganic growth of ~10% CAGR.

HCL TECHNOLOGIES: FEB 9, 2011

Key takeaways

Different approach to client engagement delivery to partly blame for the marginweakness. The company expressed that its cost base is higher as it uses higher proportion

of laterals for project delivery. The company does not want to broaden its pyramid for

project delivery as it believes that using higher proportion of laterals increases their win-

rate in new deals and also leads to higher customer satisfaction.

Pricing for HCL Tech is quite similar to its peers; the company refuted resorting toaggressive pricing tactics to win deals in the market.

The company expects the client budgets for CY2011 to be more or less flat withincreased off-shoring. The clients are still spending cautiously on smaller size projects.

More spends would be on the change-the-business kind of projects as clients have spent

most of their budgets in the past 2 years on run-the-business.

HCL Tech uses its near-shore delivery centers mainly to cater to local clients in nearbygeographies (centers in Brazil and Mexico to cater to Latam market).

The company derives 12% of its revenues from non-linear projects.


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India Strategy


HOUSING DEVELOPMENT FINANCE CORPORATION: FEB 9, 2011

Key takeaways

Loan growth target of about 25%. HDFC expects to grow its loan book (gross) by25% by FY2011E. The share of developer loans will likely be about 32% of total (as

against its long term target of 35%) on the back of sharp growth in the retail segment in

1HFY11.

Stable margins. HDFC is confident of maintaining spreads of 2.2% in the medium term.HDFC has raised home loan rates three times in last six months- 50 bps in September, 75

bps in January and 25 bps in February. In last two months, HDFC has raised developer

loan rates by about 1.25%. A tight liquidity environment and the bribes-for-loan scam

has affected the ability of developers to raise funds in the current environment; this will

likely augur well for HDFC.

Mix view on real estate markets. Real estate prices in Mumbai are above historic peaksand will likely remain under pressure. In NCR, prices have risen in certain pockets. Gujarat,Bangalore and Chennai continue to be buoyant markets.

Education loans an untapped opportunity. HDFC has acquired a majority in Credilia,an education loan company having loan book of Rs2 bn. HDFC believes that education

sector will provide a big opportunity. The opportunity could be in providing education

loans and/or developing and managing schools. Most cities have a deficit of good quality

schools. Several developers set up schools in residential complexes but do not have the

competencies to manage these schools. HDFC is currently working on planning its

business model in this segment.


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Strategy India


IRB INFRASTRUCTURE DEVELOPERS: FEB 9, 2011

Key takeaways

About Rs20 bn of equity remains to be invested in existing projects in the portfolio of thecompany. IRB invested about Rs7 bn as equity in projects in FY2011 so far. The company

would meet this requirement thought internal accruals. The management also indicated

that the company has the ability to take on new projects to the tune of about Rs40-50 bn

without the need to raise capital.

NHAI likely to award four large projects in the near-term (RFP/RFQ stage)(1) four-laningof BeawarPaliPindwara in Rajasthan worth Rs23 bn (244 km), (2) four laning of Kota

DarahJhalawar, Rajasthan worth Rs5.1 bn (88 km), (3) Rs22 bn (102 km) project in

Gujarat for six-laning of Ahmedabad-Vadodara, and (4) Rs17.5 bn (213 km) project in AP

for six-laning of IccahpuramSrikakulamAnandapuram section. Management expects

NHAI projects to the tune of about 5,000 km potentially to be awarded over the next 3-4

months.

Has achieved financial closure of most projects in the portfolio except for Tumkur-Chitradurg. Has already started execution of the Amritsar-Pathankot, Jaipur-Tonk-Deoli

and Talegaon-Amritsar projects and expects to start execution of the Panaji-Goa project in

the next month.

Likely reduction in Surat-Dahisar project cost to the tune of about Rs5-7 bn (from Rs28.4bn to about Rs23-25 bn) based on savings on construction materials. This would help in

offsetting potential disappointment in traffic levels (toll collections of about Rs10.5 mn

per day versus estimate of about Rs11.5 mn).

Management attributed strong margins in the construction arm (of about 18-120%) tohigh proportion of in-house works and strong asset base (own mining set-up, ready mixconcrete plant, hot mix plant etc.). Expects to maintain these margins level going forward

as well.

Bids for projects based on an equity IRR benchmark of about 16-20%key assumptionsin bidding include (1) traffic growth of about 5-7%, (2) interest rate of 10-11% and (3)

cost of capital of 12%.


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India Strategy


ITC: FEB 9, 2011

Key takeaways

Company has implemented a price increase of ~4% in cigarettes in January 2011. Cigarette business can grow at >5% in volumes if the excise increase is moderate (in low

single digits, in our view).

Most of the stringent global regulations on tobacco usage control are alreadyimplemented in India (due to India being a signatory to WHO charter). Hence, it is likely

that regulatory regime for cigarettes could potentially remain stable.

Foods business has achieved break even in FY2011, all business lines are profitable exceptBingo snacks. Breakeven in overall FMCG segment is likely to be achieved in FY2013E.

ITC has achieved a market share of ~6% in soaps and ~3% in shampoo. Revisit ofmarketing mix is underway in shampoo.

JINDAL STEEL AND POWER: FEB 9, 2011

Key takeaways

Company articulated three growth drivers for FY2012 - (1) expects sale of 2 mn pellets inFY2012 vs 500-600K in FY2011. At current pellet prices the company expects to generate

US$275 mn of EBITDA in FY2012, (2) commissioning of captive power plants at least 4

X 135 MW units would be available in FY2012E, (3) increase in finished steel sales likely at

2.5 mn tons vs 1.8 mn in FY2011.

Company has started mining and extracted ~400K tons of iron ore (iron ore grade is~55% Fe) from Bolivian mines. Company expects shipments of 2 mn tones of iron ore in

FY2012E which will increase to 3 mn tones in FY2013E. Company has invested in

requisite logistics to carry the ore up to the Argentinean port. Company expects

extraction cost of US$15 and transportation cost of US$25 taking the total FOB cost

US$40.

JSPL expects average merchant tariff Rs3.5- 4 / KWH in FY2012 versus Rs4+ in FY2011.Company indicated that it can get into a one-year contract at a rate of Rs3.8/KWh.

The company has outlined aggressive capex plans for the next three years for JSPLstandalone business. Company expects to spend Rs50 bn in FY2011E, Rs70 in FY2012Eand Rs75 bn in FY2013E. For the power business, company has outlined capex of Rs40

bn in FY2012E and Rs50 bn in FY2013E.

Shadeed HBI plant is running at 80% capacity. Total cost of production at the current ironprices is US$370 per ton comprising of pellet cost of US$300/ ton (1.5 tons of pellets are

required per ton of HBR, cost of pellets is US$200/ ton), gas cost at US$10/ ton, other

variable costs of US$20/ton and other fixed cost at US$40/ton


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Strategy India


NTPC: FEB 9, 2011

Key takeaways

NTPC has a current operational capacity of 32,194 MW (including JVs) and has a portfolioof another 15,700 MW under construction likely to commission by end-FY2014E which

would take the total operational capacity to ~48 GW. The regulated equity base of the

company stands at Rs250 bn. NTPC has a CWIP of Rs370 bn out of which 30% is the

equity contribution.

Management has guided for commissioning of 3,150 MW in FY2011E of which 1,490MW (including 500 MW Korba Super Thermal Power Station, 490 MW Dadri and 500

MW of Jhajjar) are already operational.

Management has guided for a capex of Rs157 bn in FY2011E and Rs270 bn in FY2012E. NTPC will sell 15% of power from 500 MW units under construction at Farakka and

Kahalgaon in the merchant market implying a total merchant sale of 150 MW uponcommissioning of these units.

Management has indicated that NTPC has limited risk to state SEBs backing down onpurchase of power (a trend witnessed in last few months) as they would continue to

receive payment linked to availability. Management has highlighted that most of the SEBs

are currently drawing power only to the extent of their financial strength and that has

resulted in some SEBs backing down on purchase.

In terms of payment-related risk from SEBs, management highlighted that theirreceivables are under check and have not faced any difficulties in payment. Further, NTPC

has signed additional escrow which gives them the first right on receivables from SEBs.

NTPC has signed PPAs worth 100 GW which includes the PPAs for extant capacities.Entire 100 GW PPA is on a CERC-determined tariff arrangement thus reducing the

likelihood of NTPC aggressively pursuing competitively bid projects.

NTPC has a portfolio of eight coal mining blocks with geological reserves of 5.7 bn tons,of which two coal blocks with reserves of 2 bn tons are being developed under a joint

venture with Coal India Ltd (CIL).

For Pakri Barwadih, Kerandari and Chatti Bariatu, NTPC is in advance stages of landacquisition. Environmental clearances have been received for these mines and

production is expected to commence by FY2012E.

Management has guided for production of 15 mtpa by FY2012E from PakriBarwadih.

NTPC plans to attain a peak production of 47 mtpa by FY2017E from all these mines.


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India Strategy


OIL & NATURAL GAS CORPORATION: FEB 9, 2011

Key takeaways

Increase in oil and gas production. ONGC has guided to an increase in oil and gasproduction to 28 mn tons and 72 mcm/d by FY2014E from 24.7 mn tons and 63.3

mcm/d in FY2010. The company expects the increase in oil and gas production to come

from the discovered fields under development which includes Cluster-7, WO series, B-193,

B-1, B-22, G-1 & GS-15. The company also expects incremental gas production from

Tripura, Daman and North Tapti region.

Subsidy burden. ONGC highlighted oil ministrys statement that subsidy burden onupstream companies will be restricted to one-third of overall under-recoveries. The

subsidy losses for upstream companies have been restricted to one-third of gross under-

recoveries in 9MFY11 and the company doesnt expect it to change.

Royalty on Rajasthan block. ONGC has officially communicated to government thatroyalty issue for Rajasthan block needs to be addressed before the ministry gives in-principle approval for Cairn-Vedanta deal. The inclusion of royalty as part of the project

cost has been stated as one of the pre-conditions set by the government for approval of

Cairn-Vedanta transaction.

Development in KG-DWN-98/2. ONGC has submitted the declaration of commercialityto DGH for approval. The company has the required technology for development of the

Northern region in the block and is likely to start production by FY2015-16. The company

is also seeking technology partner for Southern region of the block, which has discoveries

below 2,800 m of water depth.

Gas price. The company highlighted that government has authorized ONGC to sell gasfrom nominated fields at market price with prior approval from government. ONGC iscurrently selling gas produced from C-Series fields at US$5.25/mn BTU as approved by the

government.

Tripura power project. ONGC has a50% stake in ONGC Tripura Power Company (OTPC)which is currently executing power project to commission two units of 726 MW each. The

project is scheduled to complete by April-May 2012. The company plans to increase gas

production from Tripura to 6 mcm/d from 1.5 mcm/d once the power plant is fully

operational.


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Strategy India


SESA GOA: FEB 9, 2011

Key takeaways

The company reiterated its FY2013 exit iron ore capacity of 40mn tons comprising of30MT in Goa and 10MT in Karnataka. Approvals for Karnataka expansion (current

capacity of 6MT and FY2011E shipments of 3.4MT) to 10MT is at an advanced stage and

will likely come through by FY2012. The time frame for Goa capacity expansion is

uncertain and contingent on announcement of new mineral policy by the Goa Government.

The company has started making investments in logistics infrastructure to meet itscapacity expansion targets. Company has invested in private road corridor, barges and

transhippers to facilitate movement of iron ore to the port of export.

The cost of production has increased by ~US$10/ton (excluding export duties). The costincrease comprise of US$4/ ton for demurrage, US$4/ton for royalty and US$2/ton for

other costs. Increase in cost attributed to demurrage is non-recurring in nature; note that

heavy monsoons increased the turnaround time of the ships at the port in this year.

The company expects significant increase in reserves and resources for at least the nexttwo years based on the current iron ore cut off grade of 50% iron ore content.

The government in Karnataka recently increased the freight rates by Rs550/ton thistakes the rail transportation cost to Rs2,000/ton from Karnataka. The company expects

the total cost of iron ore to increase to US$80/ ton on FOB basis from Karnataka mines

versus an average of US$37/ton for 9MFY10 and US$61/ton in 9MFY11.

SHRIRAM TRANSPORT FINANCE: FEB 9, 2011

Key takeaways

Loan growth of 20-22%. Shriram Transport Finance (STFC) proposes to grow its loanbook by 20-22% CAGR over the next two years. The company expects to have a achieve

loan book of Rs500 bn by March 2013 as compared to current loan book Rs333 bn. Loan

assets outside balance sheet (securitized loans) will likely be about 30-35% of its overall

loan book. About 75% of the loan book will comprise of used vehicles.

Loan sell-down to support NIM. STFC sells down (securitizes) loans to banks Theseloans can be classified as priority sector loans by banks and are rated AAA due to the

credit enhancement provided by STFC. Hence, the company can raise fund through this

route at about 1.3% lower than bonds raised on its balance sheet.

Loan sell down augurs well in ALM management as well. STFC raises bank loans,bonds, retail bonds. Typically, bank loans are linked to base rate (PLR in the past) and

hence have a risk of being priced upwards in a rising rate scenario; the auto loan portfolio

however does not have a provision of passing on interest rate hike thereby putting

pressure on NIM in a rising rate scenario. In case of loan sell-down transaction, the rate of

discount is generally a fixed rate and as such these instruments do not increase interest

rate risk on its balance sheet.

CE business commences operations. STFC has just commenced operations of itsconstruction equipment finance business. The company has recruited a separate

management to run the same. About 30% of the vehicles in this loan book will likely be

used vehicles. The management believes the CE industry provides immense opportunities

and some of the larger players like GE and ICICI Bank have reduced their focus in this

segment thereby making it easier for STFC. The company proposes to earn ROE of about

18% in this business.


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India Strategy


TATA CHEMICALS: FEB 9, 2011

Key takeaways

Urea plant running at peak capacity of 3,600 ton/day, but on refurbished converter. TCLplans to hook up the new converter by mid March 2011. Since it takes at least a month

to hook up a new converter, the plant will run sub-optimally in March-April.

Due to a lack of clarity in government policy on gas allocation/pricing/lifting of cap-collarrate on urea pricing for debottlenecked capacity, TCL is evaluating setting up urea plant

overseas in locations where gas cost is low. However, since this will imply increased cost

(by at least 30% to US$1.3 bn), TCL may explore partnerships for overseas Greenfield

projects

TCL feels the government has been aggressive in the recent subsidy cut for NPK fertilizersunder NBS regime. With increasing global demand for NPKs, the fertilizer output and

input prices are likely to remain high. In order to protect margin, TCL may take a (1) price

increase; however, full price increase at farmers end to compensate for cost increase isnot likely or (2) it may curtail DAP production in FY2012E.

100,000 ton capacity expansion at GCIP will come on stream by end-2011E which willtake GCIP capacity to 2.6 mn tones. Further expansion of 400,000 tons per annum is

being considered. This will require significant capex and may happen over next three years.

Future areas of growth are (1) debottlenecking of capacity at GCIP as above, (2) increasein high-margin branded salt capacity to 800,000 tons from 500,000 tons, some of which

will come on stream by end FY2011E, (3) customized plant, 2 more to be set up after the

first plant at Babrala, (4) small SSP plant at Haldia, (5) evaluating setting up additional

capacity at IMACID.

TECH MAHINDRA / MAHINDRA SATYAM: FEB 9, 2011

Key takeaways

The management expects demand recovery to happen in 2HCY11 for the Tech Mahindrabusiness.

Tech Mahindra expects the attrition to come down in the coming quarters at both TechMahindra as well as Mahindra Satyam.

The telecom vertical for IT services has been impacted as upgrade cycle of networks /

transformation of networks was stopped suddenly during the recession. Generally the

trend is that total IT spends for telecom companies come down with increased offshoring.

Revenues from the top client have been stable at GBP72 mn for the past 7-8 quarters.Although the entire BT IT spend has come down, Tech M has been able to increase its

share within the BT account.

Emerging markets is growing robustly for Tech M and now contributes ~15% of revenues.Tech M has helped 15 telcos launch operations in the past three years.

Mahindra Satyam the organization is geared for growth, most of the cost alignment hasbeen done and further increase in margins would be driven by revenue growth.

Most of the liabilities regarding the Satyam dispute have been taken care of apart fromthe class action law suits which could take anywhere between six months and three years

to settle.


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Strategy India


YES BANK: FEB 9, 2011

Key takeaways

Near-term pressure on margins to ease as liquidity improves (management expects by4QFY11E). With expenditure from government visible, overall pressure in liquidity to

gradually ease from current levels. This would result in lower borrowing costs for short

term deposits.

Loan growth to remain near 2X of industry average. No near-term concern on assetquality including sensitive sectors like microfinance (less than 1% of loans) and telecom

(about 7% of loans).

Fee income growth to improve from current levels. Importantly, the bank is witnessinggranularity in fee income especially in segments like transaction banking.

Target remains unchanged on Version 2.0. The bank will open 750 branches by FY2015E.Productivity of these branches would be important. With presence in important businesscenters, the bank is looking at a concentrated approach in key geographies.


20/55


3QFY2011 EBITDA was 4.4% below our estimates

3QFY2011 EBITDA of Rs 9.23 bn was 4.4% below estimates driven by higherthan-expectedraw material expenses. Automotive EBIT margins declined by 1.5% qoq while tractor EBIT

margins increased by 20 bps qoq (key positive in our view) which led to a overall decline of 20

bps qoq in the EBITDA margins.

Automotive segment revenues grew by 7% qoq while tractor revenues were up 27% qoqwhich led to an improvement in product mix and offset the impact of escalating raw material

cost pressures. Tractor revenues as a % of parent revenues increased to 43% in 3QFY11 vs

39% in 2QFY11.

Company also reported a one-time gain of Rs 1,175 mn due to sale of their investment inOwens Corning India Limited. Tax rate increased to 25.3% in 3QFY11 vs 24.7% in 2QFY11.

Company has taken a 5% price increase in tractors in 9MFY11 while utility vehicle prices havebeen increased by 3% during this period. Company also took a 0.5-2% increase in prices on

utility vehicles while no price increase was taken on tractors. Company guided that raw material

cost escalation on tractor business increased by 8-9% during 9MFY11.

Ssangyong Motors has received formal approval from creditors for Mahindras bid to acquirethe company. Creditors have taken a $100 mn haircut on the amount owed to them. M&M will

acquire a 70% stake in Ssangyong Motors for a consideration of US$463 mn.

Maintain BUY rating but reduce target price to Rs800

We maintain our BUY rating on the stock but reduce our target price to Rs800 (factoring in a 4-6%

cut in earnings over FY2011-2013Edue to higher-than-expected raw material cost pressures). Ourvaluation is based on sum of parts valuation methodology. We ascribe Rs632/share value to parent

business (14X PER on our FY2012E EPS) and Rs 169/share value to subsidiaries.

Mahindra & Mahindra (MM)Automobiles

Maintain margins despite sharp spike in raw material costs. Mahindra andMahindra maintained EBITDA margins at 15% in 3QFY11, in line with last two quarters

driven by price increases, improvement in product mix and cost reduction efforts whichallays some street concerns on pressure on margins due to hike in rubber and steel

costs. We maintain BUY rating on the stock but cut our target price to Rs800 (from

Rs850) as we build higher raw material expenses going forward.

Mahindra & Mahindra

Stock data Forecasts/Valuations 2011 2012E 2013E

52-week range (Rs) (high,low) EPS (Rs) 42.4 47.7 53.8

Market Cap. (Rs bn) 403.0 EPS growth (%) 25.2 12.5 12.8

Shareholding pattern (%) P/E (X) 15.4 13.7 12.2

Promoters 25.8 Sales (Rs bn) 233.5 270.8 311.9

FIIs 28.2 Net profits (Rs bn) 26.1 29.4 33.1

MFs 4.7 EBITDA (Rs bn) 35.2 39.4 44.8Price performance (%) 1M 3M 12M EV/EBITDA (X) 11.7 10.4 9.0

Absolute (11.5) (16.1) 32.4 ROE (%) 27.6 24.5 23.0

Rel. to BSE-30 (0.9) (0.2) 20.7 Div. Yield (%) 1.4 1.5 1.7

Company data and valuation summary

827-474

BUY

FEBRUARY 09, 2011

RESULT

Coverage view: Cautious

Price (Rs): 655

Target price (Rs): 800

BSE-30: 17,593

QUICK NUMBERS

3QFY11 adjustedprofits missestimates by 13%

but EBITDA miss

was only 4.4%

Company maintainsEBITDA margins of

15% despite raw

material pressures

Maintain BUY butreduce target price

to Rs800 (from

Rs850)


21/55

Mahindra & Mahindra Automobiles


3QFY2011 results: 13% below estimates

3QFY11 adjusted profit of Rs6,172 mn (was 13% below estimates) driven by lower EBITDA

margins, lower other income and higher tax rate. EBITDA margins of 15.1% were 80 bps

below estimates driven by higher raw material expenses. Automotive EBIT margins declined

by 1.5% qoq while tractor EBIT margins increased marginally by 20 bps qoq driven by price

increases. Company also reported a one time gain of Rs1,175 mn due to sale of theirinvestment in Owens Corning India Limited. Tax rate increased to 25.3% in 3QFY11 vs

24.7% in 2QFY11.

Automotive segment revenues grew by 7% qoq while tractor revenues were up 27% qoq

which led to an improvement in product mix and offset the impact of escalating raw

material cost pressures. Tractor revenues as a % of parent revenues increased to 43% in

3QFY11 vs 39% in 2QFY11.

Automotive EBIT margins came in at 12.3% (-1.5% qoq) while tractor EBIT margins were

18.5% (+20 bps qoq).

Key highlights in the conference call hosted by the management were:

1) Company increased its tractor market share by 1.6% qoq. Yuvraj is selling at 800units/month run rate.

2) Company has taken a 5% price increase in tractors in 9MFY11 while utility vehicleprices have been increased by 3% during this period. Company also took a 0.5-2%

increase in prices on utility vehicles while no price increase was taken on tractors.

Company guided that raw material cost escalation on tractor business increased by 8-

9% during 9MFY11.

3) Maxximo has gained a 25% market share in the less than 1 ton segment. It is currentlyselling at 4,000 units/month run rate. Gios monthly run rate is ~1,000 vehicles/month.

Companys new offering Xylo pick up will be positioned for captive business purposes

which is 45% of the pick-up market.

4) Ssangyong Motors has received formal approval from creditors for Mahindras bid toacquire the company. Creditors have taken a $100 mn haircut on the amount owed to

them. M&M will acquire a 70% stake in Ssangyong Motors for a consideration of

US$463 mn. 10% of the amount has been paid already while rest 90% will be paid in

next couple of days. We have not incorporated Ssangyong Motors financials in our

estimates due to lack of clarity on product development expenses likely to be incurred in

that business.

5) Powerol engine business which supplies gensets to telecom segment is under pressureaccording to the management. Despite which tractor EBIT margins have been stable.

6) Company indicated that raw material cost pressures are a major concern but expectedvolume growth to remain between 15-18% for utility vehicle industry and 10-12% for

the tractor industry for FY2012E.


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Automobiles Mahindra & Mahindra


3QFY2011 Quarterly PerformanceMarch fiscal year-ends

3QFY2011 3QFY2010 2QFY2011 % YoY chg % QoQ chg 9MFY2011 9MFY2010 % YoY chg Kotak est % variance

Volumes 148,631 112,706 131,285 31.9 13.2 407,215 324,280 25.6 148,631

Net realisations 411,832 399,012 408,402 3.2 0.8 408,701 407,827 0.2 409,840 0.5

Net sales 61,211 44,971 53,617 36.1 14.2 166,429 132,250 25.8 60,915 0.5

Inc/dec in stock (323) (475) 2,408 1,390 2,020 (550)

Raw materials 42,034 29,665 38,901 41.7 8.1 116146.3 89503.4 29.8 41,055 3.0

% of net sales 69.2 67.0 68.1 69.0 66.2 68.3

Staff costs 3,475 3,300 3,582 5.3 (3.0) 10,195 9,324 9.3 3,797 (8.5)

% of net sales 5.7 7.3 6.7 6.1 7.1 6.2

Other expenses 6,140 4,837 5,318 26.9 15.5 16,261 15,071 7.9 5,849 5.0

% of net sales 10.0 10.8 9.9 9.8 11.4 9.6

Total expenses 51,973 38,276 45,394 35.8 14.5 141,213 111,879 26.2 51,251 1.4

% of net sales 84.9 85.1 84.7 84.8 84.6 84.1

EBITDA 9,238 6,695 8,223 38.0 12.3 25,217 20,371 23.8 9,664 (4.4)% of net sales 15.1 14.9 15.3 15.2 15.4 15.9

Other income 419 244 1,998 72.0 (79.0) 2,621 1,812 44.6 500 (16.3)

Interest expense (27) 82 (91) (133.0) (70.1) (345) 269 (228.3) (95) (71.5)

Depreciation expense 1,022 984 970 3.9 5.3 2,968 2,760 7.5 1,000 2.2

Extraordinary income 1,175 727 1,902 1,632

Extraordinary exp

Profit before tax 9,837 5,873 10,068 67.5 (2.3) 27,117 20,786 30.5 9,259 6.2

Tax expense 2,490 1,736 2,483 43.4 0.3 6,560 5,612 16.9 2,129 16.9

Profit after tax 7,347 4,137 7,585 77.6 (3.1) 20,557 15,174 35.5 7,129 3.1

Adj PAT 6,172 4,137 7,076 49.2 (12.8) 18,873 14,478 30.4 7,129 (13.4)

No of shares 615 596 596 615 596 615

EPS 11.9 6.9 12.7 33.4 25.5 11.6

Source: Company, Kotak Institutional Equities

Segmental EBIT margins (%)March fiscal year-ends

5

7

9

11

13

15

17

19

21

23

1QFY2010

2QFY2010

3QFY2010

4QFY2010

1QFY2011

2QFY2011

3QFY2011

Automotive Tractor



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Mahindra & Mahindra Automobiles


Earnings revision table

We have revised our volume estimates upwards by 4-5% over FY2011-2013E due to strong

volume growth expected in 4QFY11E while we have cut our EBITDA margin estimates by

4.4-5.8% over the same period to factor in higher raw material cost pressures.

Earnings Revision TableMarch fiscal year-ends

FY2011E FY2012E FY2013E

Old New % change Old New % change Old New % change

Volumes 547,775 572,512 4.5 632,610 656,939 3.8 721,382 746,920 3.5

Net sales 227,127 233,478 2.8 263,046 270,813 3.0 301,954 311,870 3.3

EBITDA 36,108 35,166 (2.6) 40,825 39,373 (3.6) 46,061 44,805 (2.7)

EBITDA margin (%) 15.9 15.1 15.5 14.5 15.3 14.4

Profit after tax 27,525 26,322 (4.4) 31,085 29,364 (5.5) 34,663 33,110 (4.5)

EPS FD 44.9 42.9 (4.4) 50.7 47.9 (5.5) 56.5 54.0 (4.5)

EPS FD ex dividends from subs 42.8 40.9 (4.4) 47.9 45.1 (5.8) 53.4 50.9 (4.7)


M&M: Sum of parts valuation tableMarch fiscal year-ends

EPS Multiple

Value per

share Comment

(Rs/share) (X) (Rs)

M&M standalone business 45.1 14.0 632 Based on 14X FY2012E EPS less dividend income from subs

Subsidiaries 169

Tech Mahindra 57 Based on KIE target price of Rs 720/share

Mahindra Holidays 31 Based on current price of Rs342/share

M&M Financial Services Ltd 58 Based on KIE target price of Rs750/share

Mahindra Lifespace Developers Ltd 12 Based on KIE target price of Rs435/share

Mahindra Forgings 4 Based on current price of Rs67/share

Mahindra Navistar Automotive 5 Based on FY2010 book value at 51% stake

Mahindra two wheelers 2 Based on FY2010 book value

SOTP-based value 801

Target price 800

Source: Kotak Institutional Equities


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Automobiles Mahindra & Mahindra


Financial Summary: 2009-2013EMarch fiscal year-ends

2009 2010 2011E 2012E 2013E

Profit model (Rs mn)

Net sales 130,937 186,021 233,478 270,813 311,870

EBITDA 10,926 29,552 35,166 39,373 44,805Other income 2,703 1,994 3,396 3,914 4,239

Interest (453) (278) 510 808 895

Depreciaiton (2,915) (3,708) (4,034) (4,942) (5,792)

Profit before tax 10,262 27,560 35,039 39,152 44,147

Current tax (585) (7,493) (8,760) (9,788) (11,037)

Deferred tax (1,412) (97) (175) - -

Net profit 8,368 20,878 28,006 29,364 33,110

Adjusted earnings per share (Rs) 14.8 33.9 42.8 47.7 53.8

Adjusted earnings per share ex subs dividends (Rs) 12.6 32.5 40.9 45.1 50.9

Balance sheet (Rs mn)

Equity 52,621 80,671 108,654 131,154 156,713

Total Borrowings 40,528 28,802 18,677 18,293 18,293

Current liabilities 47,978 52,000 63,095 70,730 79,354

Total liabilities 141,126 161,473 190,427 220,177 254,359Net fixed assets 32,143 37,027 47,993 58,051 67,259

Investments 57,864 63,980 78,636 86,136 93,636

Cash 15,744 17,432 8,868 12,224 20,002

Other current assets 35,249 42,992 54,902 63,738 73,434

Miscellaneous expenditure 126 41 28 29 29

Total assets 141,126 161,473 190,427 220,178 254,359

Free cash flow (Rs mn)

Operating cash flow excl. working capital 10,395 23,409 26,407 29,585 33,769

Working capital changes 5,918 (45) (815) (1,201) (1,073)

Capital expenditure (9,152) (9,607) (15,000) (15,000) (15,000)

Free cash flow 7,161 13,758 10,592 13,383 17,696

Ratios

Operating margin (%) 8.3 15.9 15.1 14.5 14.4

PAT margin (%) 6.4 11.2 12.0 10.8 10.6Debt/equity (X) 0.8 0.4 0.2 0.1 0.1

Net debt/equity (X) 0.5 0.1 0.1 0.0 (0.0)

Book Value (Rs/share) 89.1 135.4 176.6 213.2 254.7

RoAE (%) 17.1 30.0 27.6 24.5 23.0

RoACE (%) 10.6 19.9 21.7 20.8 20.0



25/55


Growth moderated qoq

RECs reported NII was up 37% yoy to Rs9 bn on the back of 20% loan growth and higher

margins. Loan approvals were up 2% yoy while disbursements were down 1% yoy. While

disbursements to T&D segment picked up in 3QFY11, a high base of short-term loans in 3QFY10

pulled down growth. We believe that infrastructure finance business tends to be lumpy and

challenging to track on a qoq basis; However, consistent decline in loan growth is a cause ofconcern. Notably, RECs loan growth has reported a declining trend29% in 4QFY10, 27% in

1QFY11, 25% in 2QFY11 and 20% in 3QFY11. We believe that growth at REC will moderate to

about 20-22% levels from 27% loan book CAGR between FY2007 and FY2010 likely due to high

base and lower traction in the T&D segment.

Spreads surprise during the quarter, trend in spreads crucial

REC reported margins of 4.8% during the quarter, somewhat above 4.6% in 2QFY11 and 4.3% in

3QFY10. Spreads, as per KIE estimates, were up to 3.3% versus 3.1% in 2QFY11.

While RECs loan yields were stable qoq at 11.1%, its borrowings cost declined by 17 bps boosting

its spreads. Marginal borrowings cost was up to 7.8% in 3QFY11 from 7.4% in 2QFY11.

However, repayment of some of the high-priced borrowings and converting floating rate liabilitiesinto fixed rate liabilities has boosted spreads during the quarter. The company has un-hedged

forex debt of about US$270 mn on which the company booked marginal capital gainsincluded

in other income.

We believe that rise in bulk borrowings rates will likely be reflected in RECs financials in the near

term. We are modeling 40 bps spread compression in our model in light of the following risks:

In FY2011E, about Rs100 bn of RECs loan assets are due for re-pricing as compared to Rs50-60bn of borrowingsfavorable re-pricing of assets as compared to liabilities supported RECs

spreads, the benefit is unlikely to extend in FY2012E.

Rural Electrification Corp. (RECL)Banks/Financial Institutions

Lower growth though margins surprise, retain REDUCE. REC reported PAT of Rs6.6bn, up 40% yoy and 10% above estimates. Business traction was somewhat lower

flat disbursements, loan growth at 20% as compared to 27-29% in the past thoughlower borrowings cost supported margins for the quarter. We tweak estimates, retain

REDUCE with price target of Rs275 (Rs300 earlier).

Rural Electrification Corp.



Market Cap. (Rs bn) 243.3 EPS growth (%) 25.9 14.5 13.8


Promoters 66.8 NII (Rs bn) 32.6 37.5 42.8


MFs 3.1 BVPS 128.7 147.7 169.3

Price performance (%) 1M 3M 12M P/B (X) 1.9 1.7 1.5

Absolute (8.5) (34.1) 7.3 ROE (%) 21.2 21.2 21.0

Rel. to BSE-30 2.4 (21.6) (2.1) Div. Yield (%) 3.1 3.6 4.1


414-205

REDUCE

FEBRUARY 09, 2011

RESULT

Coverage view: Attractive

Price (Rs): 246


BSE-30: 17,593


26/55

Banks/Financial Institutions Rural Electrification Corp.


Higher share of private sector business (in the XII 5- year Plan) will likely increasecompetition for these companies and put pressure on margins.

Lending rates have been stable for last few quarters, the company has the option to raiseits PLR to support spreadsthis provides some upside risk.

Asset quality performance stable, standard asset provisions pose downside risk

RECs gross NPLs remained stable at 0.03%. Consequently, NPL cost was nil. The RBI

notification dated Jan 17, 2011, requires banks to make provisions of 25 bps on all standard

assets. REC has not made this provisions during the quarter. According to the company,

Government-owned NBFCs (like PFC and REC) do not need to follow most norms applicable

to other NBFCs, as such REC may not have to make this provision though we still dont have

full clarity on this. REC will need to make provisions of Rs2 bn, i.e. 25% of 4QFY11E PBT in

case the company has to comply with the same, we are not factoring standard asset

provisions in our estimates.


27/55

Rural Electrification Corp. Banks/Financial Institutions


Rural Electrification Corporation - Quarterly data(Rs mn)

1Q10 2Q10 3Q10 4Q10 1Q11 2Q11 3Q11 YoY (%) 3Q11E

Actual vs KS

(%)

Income statement

Interest income 14,494 15,330 16,532 17,959 18,771 19,877 20,860Other income 480 410 345 360 225 555 560

Interest costs 8,735 9,413 10,279 10,685 11,012 12,076 12,380

Net interest income 6,239 6,327 6,598 7,634 7,984 8,356 9,040 37 8,225 10

Other operational income 115 490 185 377 292 390 360 95 275 31

Net total income 6,354 6,817 6,783 8,011 8,275 8,746 9,400 39 8,500 11

Provisioning expenses 1 1

Net income (post provisions) 6,353 6,817 6,783 8,011 8,275 8,744 9,400 39 8,500 11

Operating expenses 300 351 338 482 343 385 390 15 375 4

Staff expenses 252 282 265 373 261 260 390 47 265 47

Other operating expenses 45 65 70 98 75 118 (100) 100 (100)

Depreciation expenses 4 4 4 11 7 8 (100) 10 (100)

PBT before extraordinaties 6,053 6,466 6,445 7,529 7,933 8,360 9,010 40 8,125 11

Extraordinary expenses

PBT post extraordinaries 6,053 6,466 6,445 7,529 7,933 8,360 9,010 40 8,125 11

Tax 1,598 1,628 1,705 1,917 2,059 2,178 2,370 39 2,112 12

Provision for DTL (263) (107)

PAT 4,718 4,945 4,741 5,612 5,874 6,182 6,640 40 6,012 10

EPS (Rs) 5.5 5.8 5.8 5.8 6.0 6.3 6.7 16.8

Tax rate (%) 22 24 26 25 26 26 26

Balance sheet

Assets

Loans 547,510 586,650 636,310 664,520 697,910 735,433 764,550 20 769,935 (1)

Loan book

Accrued interest on loans

Investments 10,040 10,040 9,570 9,100 9,330 10,321 8,850 (8)

Fixed assets 810 860 890 900 890 889 880 (1)

Current assets (13,810) (310) (12,370) (4,310) (16,590) 18,123 (16,560) 34

Total assets 544,550 597,240 634,400 670,210 691,540 764,766 757,720 19

Liabilities

Borrowings 468,370 516,020 530,000 559,480 574,930 604,277 632,245 19

Deferred tax liability 9,560 (70) (70) (70) (70) (77) (100)Current liabilities and provisions 70 21,530 37,707 (100)

Total liabilities 477,930 516,020 551,460 559,410 574,860 641,907 632,250 15

Shareholders funds 66,620 81,220 82,940 110,800 116,680 122,859 125,470 51

Key operating parameters (%)

Approvals (Rs bn) 151 164 106 33 228 103 108

YoY(%) 26 8 69 -53 51 (37) 2

Disbursements (Rs mn) 36 55 60 60 46 56 60

YoY(%) 35 16 14 14 28 1 (1)

Interest yield (KS - calc) 10.59 10.81 10.81 11.04 11.02 11.09 11.13

Interest cost (KS- calc) 7.61 7.65 7.86 7.85 7.77 7.96 7.79

Spreads (KS- calc) 2.97 3.16 2.95 3.20 3.26 3.14 3.34

NIMs (KS- calc) 4.36 4.46 4.32 4.69 4.69 4.66 4.82 4.37

Opex/ net income (post provisions) 4.72 5.14 4.98 6.01 4.14 4.40 4.15

Incremental yields 12.23 11.52 11.72

Incremental borrowings 6.66 7.89 7.54 7.75 6.12 7.41 7.84Incremental spreads 5.57 3.63 4.18 (7.75) 4.00

Yield on loans 11.13 11.01 10.96 11.03 11.10 11.20 11.24

Borrowings cost 7.61 7.66 7.70 7.67 7.75 7.95 7.80

NIMs 4.42 4.25 4.15 4.45 4.59 4.40 4.56

Reported spreads 3.52 3.35 3.26 3.36 3.35 3.25 3.44

Gross NPLs (Rs mn) 320 210 200 200 200 200 200

Net NPLs (Rs mn) 20 20 20 20 20 20 20

Gross NPLs (%) 0.06 0.04 0.03 0.03 0.03 0.03 0.03

Net NPLs (%) 0.03 0.00 0.00 0.00 0.00 0.00 0.00

Debt/ equity (X) 7.03 6.35 6.39 5.05 4.93 4.92 5.04

RoE (reported) 29.37 26.76 23.10 23.17 20.66 20.65 21.39

Source: Company, Kotak Institutional Equities estimates


28/55



REC- Quarterly data(Rs mn)

1Q10 2Q10 3Q10 4Q10 1Q11 2Q11 3Q11 YoY (%)

Other loan book detailsLoan book 535,300 578,940 627,910 659,790 692,170 728,990 757,440 21

Generation 205,270 194,950 223,980 239,580 285,490 306,620 314,620 40

T&D 292,290 340,590 344,750 367,230 353,370 372,610 391,590 14

Short term loan 37,740 43,400 59,180 52,980 53,310 49,760 51,230 (13)

State 452,790 485,740 528,890 555,740 595,050 626,710 633,100 20

Central 48,770 55,000 58,480 61,450 51,340 54,070 55,350 (5)

Private 33,740 38,200 40,540 42,600 45,780 48,220 68,990 70

Disbursements 36,180 55,040 60,240 59,860 46,440 55,470 60,080 (0)

Generation 19,930 20,290 18,170 25,100 32,390 27,590 21,850 20

T&D 12,250 22,950 22,970 31,760 12,050 19,880 25,230 10

Short term loan 4,000 11,800 19,100 3,000 2,000 8,000 13,000 (32)

Approvals 151,370 163,390 105,880 32,930 228,820 103,880 105,910 0Generation 111,820 79,200 43,440 5,860 111,770 47,960 63,250 46

T&D 33,650 67,690 46,940 24,070 112,050 44,920 32,660 (30)

Short term loan 5,900 16,500 15,500 3,000 5,000 11,000 10,000 (35)

Borrowings o/s 468,370 516,020 545,910 559,480 574,930 604,280 632,349 16

Capital gains 145,280 112,250 116,500 99,490 108,390 102,650 105,410 (10)

Institutional bonds 191,580 269,380 288,130 309,090 319,300 338,800 369,970 28

Banks 92,910 99,610 96,860 105,640 102,700 107,640 110,350 14

Foreign currency 15,650 16,830 18,670 20,760 21,540 40,690 44,020 136

Commercial paper 22,950 17,950 25,750 24,500 23,000 14,500 2,599 (90)

Average cost (%) 7.61 7.66 7.71 7.75 7.76 7.96 7.8 -

Funds raised

Capital gain bonds

Amt 5,080 5,260 6,660 13,580 9,250 10,930 11,160Rate (%) 6.3 6.3 6.3 6.3 6.0 6.0 6

Taxable bonds

Amt 9,270 82,090 19,390 24,540 12,500 20,000 38,040

Rate (%) 7.2 8.3 8.3 8.2 6.9 7.8 8.65

Banks, FIs etc

Amt 14,300 17,410 15,050 21,590 9,000 22,000 11,260

Rate (%) 6.4 6.6 6.6 6.4 5.1 8.1 8.52

Foreign currency

Amt 700 1,190 2,070 2,100 1,000 19,420 3,580

Rate (%) 7.6 6.7 6.6 7.0 6.1 7.0 3

Total

Amt 29,350 105,950 43,170 61,810 31,750 72,350 64,040

Rate (%) 6.7 7.9 6.6 7.2 6.1 7.4 7.84

Source: Company


29/55



REC, old and new estimatesMarch fiscal year-ends, 2011-2013E (Rs mn)

Old estimates New estimates % change

2011E 2012E 2013E 2011E 2012E 2013E 2011E 2012E 2013E

Net interest income 32,805 38,531 44,811 32,594 37,474 42,810 (1) (3) (4)

Loan growth (%) 25 23 23 21 21 21

NIM (%) 4.4 4.1 3.9 4.4 4.2 4.0 2.2 1.8

NPL provisions 3 3 4 3 3 4

Other operational income 2,927 3,362 3,870 2,927 3,362 3,870

Other income (forex etc)

Operating expenses 1,678 1,943 2,252 1,678 1,943 2,252

Employee 1,323 1,522 1,750 1,323 1,522 1,750 (0)

Others 355 422 502 355 422 502 (0)

PBT 34,051 39,946 46,425 33,840 38,889 44,424 (1) (3) (4)

Tax 8,683 10,286 12,071 8,629 10,014 11,550 (1) (3) (4)

PAT 25,368 29,660 34,355 25,211 28,875 32,874 (1) (3) (4)

Source: Kotak Institutional Equities estimates

Rural Electrification Corporation Rolling PBR and PERMarch 2008-February 2011 (X)

-

3

6

9

12

15

Mar-08

May-08

Jul-08

Sep-08

Nov-08

Jan-09

Mar-09

May-09

Jul-09

Sep-09

Nov-09

Jan-10

Mar-10

May-10

Jul-10

Sep-10

Nov-10

Jan-11

-

0.6

1.2

1.8

2.4

3.0Rolling PER (X) (LHS) Rolling PBR (X) (RHS)



30/55



Rural Electrification Corporation, Key ratios, March fiscal year-ends, 2008-2013E (%)

2008 2009 2010E 2011E 2012E 2013E

Growth in key parameters (%)

Interest income 28.5 32.6 37.9 26.8 24.1 17.2

Interest costs 17.5 39.8 35.0 25.2 30.2 19.0Net interest income 48.5 22.4 42.5 29.4 15.0 14.2

PAT 30.3 47.9 57.3 26.0 14.5 13.8

Disbursements 19.3 34.0 24.9 4.0 21.3 21.5

Loans 22.5 30.7 29.3 20.5 20.9 21.3

Borrowings 13.2 31.1 24.5 20.8 21.4 21.8

Shareholders funds 33.8 15.3 79.0 14.8 14.7 14.6

Key ratios (%)

Interest yield 9.85 10.29 10.92 11.13 11.44 11.08

Interest cost 6.42 7.31 7.75 7.93 8.53 8.34

Spreads 3.43 2.97 3.16 3.20 2.92 2.73

NIMs 4.05 3.90 4.28 4.45 4.24 3.99

Tax rate 29 26 24 26 26 26

Debt/ equity+DTL (X) 5.5 6.3 5.1 5.3 5.6 6.0

Du Pont analysis(% of average assets)

Net interest income 3.7 3.6 4.0 4.2 4.0 3.8

Other income 0.1 0.5 0.4 0.4 0.4 0.3

Credit costs 0.1 0.0

Operating expneses 0.3 0.2 0.2 0.2 0.2 0.2

PBT post extraordinaries 3.3 3.9 4.2 4.3 4.1 3.9

1-tax rate 0.7 0.7 0.8 0.7 0.7 0.7

RoA 2.2 2.6 3.1 3.2 3.1 2.9

Average assets / average equity (X) 8.4 8.6 7.4 6.6 6.9 7.2

RoE 18.3 22.0 23.2 21.2 21.1 21.0



31/55



Rural Electrification Corporation, Key financials, March fiscal year-ends, 2008-2013E (Rs mn)

2008 2009 2010E 2011E 2012E 2013E

Income statement (Rs mn)

Interest income 35,174 46,650 64,309 81,568 101,259 118,725

Interest costs (20,728) (28,970) (39,112) (48,975) 63,785 75,915Net interest income 14,447 17,680 25,197 32,594 37,474 42,810

Other income 202 2,660 2,768 2,927 3,362 3,870

Fees 177 1,740 1,189 1,427 1,712 2,055

Net total income 14,649 20,340 27,965 35,521 40,836 46,680

Provisioning expenses (400) (20) (2) (3) 3 4

Net income (post provisions) 14,249 20,320 27,962 35,518 40,833 46,676

Operating expneses (1,119) (1,120) (1,470) (1,678) 1,943 2,252

PBT before extraordinaties 13,130 19,200 26,492 33,840 38,889 44,424

Extraordinary income (6)

PBT post extraordinaries 13,124 19,200 26,492 33,840 38,889 44,424

Tax (3,749) (5,070) (6,473) (8,629) 10,014 11,550

Provision for DTL (774) (1,410) (5) - - 1

PAT 8,602 12,720 20,014 25,211 28,875 32,873

PAT (add. back DTL) 9,376 14,130 20,019 25,211 28,875 32,874

EPS (adding back DTL) (Rs) 11 16 20 26 29 33BVPS (adding back DTL) (Rs) 72 83 112 129 148 169

ABVPS (adding back DTL) (Rs) 69 83 112 129 148 169

Balance sheet (Rs mn)

Assets

Loans 393,165 513,810 664,520 800,931 968,687 1,174,805

Investments 11,474 10,060 9,100 9,100 9,100 9,100

Fixed assets 779 810 900 1,035 1,190 1,369

Current assets 23,725 34,890 37,876 42,419 47,791 54,151

Total assets 429,143 559,570 712,396 853,485 1,026,769 1,239,424

Liabilities

Borrowings 342,828 449,360 559,480 675,763 820,173 999,334

Deferred tax liability 8,170 9,570 (70) (70) (70) (69)

Current liabilities and provisions 24,468 38,740 42,186 50,623 60,747 72,897

Total liabilities 375,466 497,670 601,596 726,315 880,851 1,072,162

Share capital 8,586 8,586 9,874 9,874 9,874 9,874

Reserves and surplus 45,090 53,314 100,926 117,295 136,044 157,389

Shareholders funds 53,676 61,900 110,800 127,169 145,918 167,262



32/55


Compensation from government boosts earnings

BPCL reported 3QFY11 EBITDA at`7.5 bn versus `24.9 bn in 2QFY11 and `6.4 bn in 3QFY10; our

estimate was at -`8.2 bn. The stronger-than-expected performance was due to compensation of

`18.1 bn from the government in 3QFY11 versus nil assumed by us. We note that BPCL has borne

`23.3 bn as net under-recovery in 9MFY11. However, we would not extrapolate the subsidy-

sharing arrangement for 9MFY11 to estimate FY2011E earnings as the final subsidy-sharing

arrangement will not be known until 4QFY11 results.

Refining margins improve; sales volumes increased 5.7% yoy

BPCLs 3QFY11 refining margin was US$4.6/bbl versus US$2.8/bbl in 2QFY11 and US$1.3/bbl in

3QFY10. The qoq improvement in refining margins reflects adventitious gains in 3QFY11 versus

adventitious/inventory loss in 2QFY11. 3QFY11 sales volumes (domestic) increased 5.7% yoy to

7.4 mn tons. The yoy growth in sales was led by strong growth in gasoline, diesel, LPG and ATF

sales which was partially offset by decline in sales of fuel oil and naphtha.

Fourth gas discovery in Mozambique gives greater confidence on potential of BPCLs E&P portfolio

We see the announcement of fourth successful gas discovery (net gas pay > 110 feet) at Tubarao

exploration well in Area 1 in Mozambique as giving confidence about the prospectivity of theblock. The company has not yet disclosed the reserves but the value of the E&P portfolio could be

meaningful in the context of BPCLs current market capitalization of US$4.7 bn. We believe

visibility on the development of BPCLs E&P discoveries will likely boost sentiment for the stock

which has been subdued due to (1) the recent surge in crude oil prices, (2) lack of clarity on the

subsidy-sharing scheme and (3) delay in diesel deregulation.

Revised earnings; stock offering good upside to current target price

We retain our BUY rating on the stock noting 26% upside to our revised target price of`740

(`860 previously) based on 11X FY2012E EPS plus value of investments. We have revised our

FY2011-13E EPS to`53 (-2.5%),`50 (-19.6%) and`66 (-0.6%) to reflect (1) higher net under-

recoveries in FY2011-12E, (2) delay in diesel deregulation to FY2013E, (3) modestly higher refining

margins and (4) other minor changes.

Bharat Petroleum (BPCL)Energy

Positive net income given cash bounty. BPCL reported 3QFY11 net income at`1.9bn versus our estimate of -`9.3 bn; the positive variance reflects compensation of`18.1

bn from the government in 3QFY11 versus nil assumed by us. We maintain our BUYrating with a revised target price of`740 (`860 previously). We see the recent

announcement of gas discovery in its Mozambique block as giving greater confidence

of the potential of BPCLs overseas E&P portfolio. Key downside risk to earnings stemsfrom higher-than-expected net under-recoveries.

Bharat Petroleum



Market Cap. (Rs bn) 211.5 EPS growth (%) 230.2 (9.7) (6.4)


Promoters 54.9 Sales (Rs bn) 1,202.2 1,458.4 1,561.9


MFs 8.2 EBITDA (Rs bn) 32.6 38.9 37.6

Price performance (%) 1M 3M 12M EV/EBITDA (X) 10.1 8.7 8.8

Absolute (5.2) (21.4) 4.4 ROE (%) 14.9 12.4 10.7

Rel. to BSE-30 6.1 (6.5) (4.8) Div. Yield (%) 2.4 2.8 2.8


840-488

BUY

FEBRUARY 09, 2011

RESULT

Coverage view: Neutral

Price (Rs): 584


BSE-30: 17,593

QUICK NUMBERS

3QFY11 refiningmargin atUS$4.6/bbl versus

US$2.8/bbl in

2QFY11

Change of US$1/bblin refining margin

impacts FY2012E

EPS by 28%

26% potentialupside from current

levels


33/55

Bharat Petroleum Energy


Key financial and operating details of 3QFY11 results

Exhibit 1 gives key highlights of BPCLs 3QFY11 results and compares the same on yoy and

qoq basis. We do not see significant merit in comparison of quarterly results given high

volatility in the timing and quantum of compensation from the government of India and

contribution from upstream companies.

Interim results of BPCL, March fiscal year-ends (Rs mn)

(% chg.) yoy

3QFY11 3QFY11E 3QFY10 2QFY11 3QFY11E 3QFY10 2QFY11 9MFY11 9MFY10 (% chg.)

Net sales 366,859 348,384 321,829 354,348 5.3 14.0 3.5 1,063,532 847,896 25.4

Increase/(decrease) in stock (8,362) (7,155) 21,187 16,056 32,988

Raw material (147,450) (152,644) (141,267) (156,616) (3.4) 4.4 (5.9) (457,391) (355,904) 28.5

Trading purchase (178,431) (193,130) (149,852) (166,127) (7.6) 19.1 7.4 (524,750) (450,459) 16.5

Staff cost (5,696) (4,750) (3,982) (4,526) 19.9 43.0 25.8 (15,634) (13,757) 13.7

Other expenses (19,433) (6,082) (13,129) (23,401) 219.5 48.0 (17.0) (63,518) (47,600) 33.4

Total expenditure (359,371) (356,605) (315,385) (329,483) 0.8 13.9 9.1 (1,045,238) (834,732) 25.2

EBITDA 7,488 (8,221) 6,444 24,865 (191) 16 (70) 18,294 13,164 39.0

Other income 3,103 4,050 4,656 5,336 (23.4) (33.4) (41.8) 11,648 15,679 (25.7)

Interest (2,747) (2,900) (2,513) (2,780) (5.3) 9.3 (1.2) (7,851) (8,051) (2.5)

Depreciation (3,700) (4,050) (3,816) (4,019) (8.6) (3.0) (7.9) (11,726) (9,215) 27.2

Pretax profits 4,144 (11,121) 4,771 23,402 (137) (13) (82) 10,365 11,577 (10.5)

Extraordinary item (1,050) (1,050)

Tax (1,220) 2,217 (980) (1,980) (3,200) (3,233)

Deferred tax (389)

Net income 1,874 (9,294) 3,791 21,422 (120) (51) (91) 6,115 8,344 (26.7)

Adjusted net income 2,924 (9,294) 3,791 21,422 (131) (23) (86) 7,165 8,344 (14.1)

EPS (Rs) 8.1 (25.7) 10.5 59.3 19.8 23.1

Tax rate (%) 29.4 16.4 20.5 8.5 30.9 27.9

Volume data

Crude throughput (mn tons) 5.0 5.3 5.6 5.6 (9.4) (10.2) 16.2 14.7 10.1

Domestic sales volume (mn tons) 7.4 7.0 7.0 6.6 5.7 12.1 21.5 20.4 5.2

Exports sales volume (mn tons) 0.6 0.9 0.9 (33.0) (26.7) 1.9 1.8 4.3

Refining margin (US$/bbl) 4.6 3.3 1.3 2.8 253.8 63.8 3.6 2.7 34.4

Inventory gain/(loss) 3,190 3,626 1,000 (780) 7,120 7,000

Gross subsidy gain/(loss) (35,120) (39,201) (29,914) (24,630) (106,250) (63,094)

Receipt from upstream companies 11,706 13,067 11,214 8,214 35,415 21,618

Receipt of oil bonds/cash from govt 18,099 15,107 29,479 47,577 15,107

Net under-recovery (5,316) (26,134) (3,594) 13,062 (23,258) (26,370)

Exchange gain/(loss) (181) 1,278 2,989 (575) 3,619


Compensation (cash) from the government and discounts from the upstream oilcompanies. BPCL received`18.1 bn as compensation from the government in 3QFY11.

BPCL received`11.7 bn of discounts from the upstream companies in 3QFY11 comparedto`8.2 bn in 2QFY11. Its net under-recovery was`5.3 bn compared to over-recovery of

`13.1 bn in 2QFY11 and under-recovery of`3.6 bn in 3QFY10.

Refining margins improve sharply qoq. BPCLs 3QFY11 refining margin wasUS$4.6/bbl versus US$2.8/bbl in 2QFY11 and US$1.3/bbl in 3QFY10. The qoq

improvement in margins was higher than improvement in global refining margins

reflecting high adventitious gains. The company reported adventitious gains of`3.2 bn in

3QFY11 versus a loss of`0.8 bn in 2QFY11.

Refining throughput lower; sales volumes increased moderately yoy . BPCLs tworefineries processed 5 mn tons of crude in 3QFY11 compared to 5.6 mn tons in 2QFY11

and 3QFY10. The decline in crude throughput reflects shutdown of crude distillation unit

at its Mumbai refinery. BPCLs sales volume was 7.4 mn tons for 3QFY11 (+5.7% yoy,

+12.1% qoq).


34/55

Energy Bharat Petroleum


Employee cost increases sharply qoq. The company reported a 26% qoq increase inemployee cost at`5.7 bn versus`4.5 bn in 2QFY11. The management a

10 february 2011 india daily

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