AUGUST 3, 2010

Economy News Equity

4 The capital market regulator has asked key Anil Dhirubhai Ambani % Chg
(ADA) Group executives, including chairman Anil Ambani, to appear 2 Aug 10 1 Day 1 Mth 3 Mths
before it on September 3, after they failed to respond to show-cause
Indian Indices
notices issued to them. (ET)
SENSEX Index 18,081 1.2 3.6 4.0
4 The SC has asked the high courts not to interfere with the debt recovery NIFTY Index 5,432 1.2 3.7 4.0
proceedings initiated against defaulters, upholding the right of lenders BANKEX Index 11,817 2.4 10.8 6.6
to recover their dues. All alternatives available to the borrowers should BSET Index 5,489 0.3 4.8 3.5
be exercised before the high courts exercise their discretion to interfere BSETCG INDEX 14,689 0.7 1.3 6.0
with recovery proceedings. (ET) BSEOIL INDEX 10,265 1.0 (4.2) 3.9
CNXMcap Index 8,499 1.0 5.0 5.6
4 India’s manufacturing grew at a strong rate in July, helped by a pick-up BSESMCAP INDEX 9,435 0.9 3.6 2.9
in new orders and better export demand, a private survey showed, but World Indices
there was no commensurate increase in hiring in the month. (ET) Dow Jones 10,674 2.0 10.2 (4.3)
Nasdaq 2,295 1.8 9.7 (8.1)

Corporate News FTSE

Nikkei
5,397
9,570
2.6
0.3
11.6
5.3
(2.8)
(12.4)
4 Power Finance Corporation is likely to ask the government not to sell Hangseng 21,413 1.8 8.2 3.5
stake in the company,and instead allow it to raise fresh equity to meet
Value traded (Rs cr)
the regulatory capital requirements of its fast-expanding business. The
2 Aug 10 % Chg - Day
public sector power financier may write a letter to the power ministry to
seek a relaxation on grounds that divestment by government could Cash BSE 3,637 (13.9)
affect its own equity raising plans. (ET) Cash NSE 11,690 (12.5)
Derivatives 61,661.9 (9.9)
4 Tata Steel is negotiating with Thailands Sahaviriya Steel Industries to sell
its UK-based Teesside plant. The talks are based on the advise of Net inflows (Rs cr)
Citigroup, but a deal is not a certainty. (ET) 30 Jul 10 % Chg MTD YTD

4 Citibank International, a company incorporated in the UK, had invested FII 1,040 (76.6) 17,658 47,902
$150 million in convertible securities issued by Emmar MGF three years Mutual Fund (636) 10.1 (2,417) (10,544)
ago. In the past one month Citibank India officials have approached banks
FII open interest (Rs cr)
with real estate exposure, including mortgage giant HDFC, for offloading
30 Jul 10 % Chg
the papers at a discount, said two bankers who were sounded out by Citi.
(ET) FII Index Futures 15,337 2.9
FII Index Options 46,312 4.6
4 Saudi Arabia-based Saudi BinLadin Group (SBG) on Monday said it has FII Stock Futures 33,489 2.7
acquired a 20% stake in infrastructure firm Maytas Infra for Rs 3 bn. FII Stock Options 639 7.1
SBG purchased a 20% stake in Maytas Infra at Rs 196.1 a share, a
discount of Rs 10 on the current market price of the scrip. (ET) Advances / Declines (BSE)
2 Aug 10 A B S Total % total
4 Bilcare said it is buying the plastic film-making unit of petrochemical
company INEOS for Rs 6.0 bn.The acquired business has revenue of Rs Advances 158 1,112 265 1,535 59
14.6 bn, but its operating margin will be disclosed only later. (ET) Declines 45 753 169 967 37
Unchanged 0 90 15 105 4
4 Uflex is exiting the solid waste processing business by selling 70% stake
in AKC Developers to its joint venture partner Hanjer Biotech for Rs 980 Commodity % Chg
mn, a top company executive said. (ET) 2 Aug 10 1 Day 1 Mth 3 Mths

4 Larsen and Toubro (L&T) today announced its biggest order of the Crude (NYMEX) (US$/BBL) 81 0.1 12.9 (5.5)
financial year — a Rs 65 bn order from Jaiprakash Power Ventures. L&T’s Gold (US$/OZ) 1,183 0.2 (2.3) 0.1
power equipment division bagged this order to supply boiler, turbine and Silver (US$/OZ) 18 2.0 2.9 (2.2)
generator package, and commission Jaiprakash’s 1,980-Mw power
project in Karchana district, Uttar Pradesh. (ET) Debt / forex market
2 Aug 10 1 Day 1 Mth 3 Mths

10 yr G-Sec yield % 7.86 7.80 7.56 7.74

Re/US$ 46.25 46.41 46.79 44.53

Sensex

18,400

17,300

16,200

15,100

14,000
Source: ET = Economic Times, BS = Business Standard, FE = Financial Express, Aug-09 Oct-09 Dec-09 Feb-10 Apr-10 Jun-10
BL = Business Line, ToI: Times of India, BSE = Bombay Stock Exchange
 MORNING INSIGHT August 3, 2010

RESULT UPDATE GRASIM INDUSTRIES

Teena Virmani
teena.virmani@kotak.com
+91 22 6621 6302 PRICE : RS.1856 RECOMMENDATION : ACCUMULATE
TARGET PRICE : RS.2141 FY11E P/E: 6.7X

Consolidated result highlights

q Revenues of the company for Q1FY11 remained flattish on YoY basis,
inline with our estimates. This was due to decline in cement realizations
but compensated to some extent by improvement in VSF realizations as
well as volume expansion in cement division on YoY basis.
q Operating margins stood at 25.8% for Q1FY11, inline with our expecta-
tions.
q Net profit declined by 47% for Q1FY11 led by decline in operating mar-
gins, higher depreciation charges as well as no extraordinary income as
against Rs 3.5 bn in Q1FY10 on sale of sponge iron division.

Summary table Consolidated financials

(Rs mn) FY09 FY10 FY11E (Rs mn) Q1FY11 Q1FY10 YoY (%)
Revenues 184,039 199,337 206,186
Net sales 50,552 50,803 -0.5
% change YoY 8.4 8.3 3.4
EBITDA 43,296 57,870 52,585 Expenditure 37,514 34,987 7.2
% change YoY (12.7) 33.7 (9.1) Dec/(Inc) in stock -1,400 568
Other Income 4,532 5,356 5,200 Raw material consumed 10,040 9,391
Depreciation 8,658 9,947 11,231
As a % of sales 19.9 18.5
EBIT 39,170 53,279 46,554
% change YoY (17.6) 36.0 (12.6) Purchase of finished goods 290 300
Net interest 3,105 3,346 3,150 As a % of sales 0.6 0.6
Surplus on sales tax loan - - -
Staff cost 2,748 2,582
Profit before tax 36,066 49,933 43,404
Tax 9,914 15,705 13,651 As a % of sales 5.4 5.1
as % of PBT 27.5 31.5 31.5 Power and fuel 10,224 8,545
Profit after tax 26,152 34,228 29,753
As a % of sales 20.2 16.8
Minority Interest 4,445 7,141 4,432
Profit on sale of
Freight, handling and other expense 7,893 6,679
subsidiary shares 159 3,872 - As a % of sales 15.6 13.1
Net income 21,867 30,959 25,321 Other expenditure 7,719 6,922
% change YoY (24.4) 41.6 (18.2)
As a % of sales 15.3 13.6
Shares OS (m) 91.7 91.7 91.7
EPS (adjusted) (Rs) 238.5 295.4 276.2 Operating profit 13,038 15,816 -17.6
P/E(x) 7.8 6.3 6.7 Operating margin 25.8% 31.1%
EV/EBITDA(x) 4.8 3.3 3.4
Depreciation 2672 2,400
RoE(%) 21.7 25.0 17.1
RoCE(%) 24.0 28.2 22.2 EBIT 10,366 13,416 -22.7
Interest 912 823
Source: Company, Kotak Securities - Private
Client Research EBT(exc other income) 9,454 12,593 -24.9
Other income 1,598 991
Write back of provisions
EBT 11,052 13,584 -18.6
Tax 3199 4,409
Tax% 28.9% 32.5%
PAT 7,853 9,175 -14.4
- Minority share 2,215 1,902
+ Share of profit/(loss) of associate 112 3,527
Net profit 5,750 10,800 -46.8
Equity capital 916.9 916.9
EPS (Rs) 62.7 117.8

Source: Company

Kotak Securities - Private Client Research Please see the disclaimer on the last page For Private Circulation 2
 MORNING INSIGHT August 3, 2010

q At current market price of Rs 1856, stock is trading at 6.7x P/E and 3.4x
EV/EBITDA for FY11. Though cement prices are under pressure but VSF
prices have stabilized. VSF realizations are expected to remain stable in
near to medium term. Overall cost pressures are likely to increase for
both VSF and cement divisions but our estimates already factor in corre-
sponding decline in the overall margins for FY11.
q We thus continue to maintain our estimates as well as recommendation
on the stock. We recommend ACCUMULATE with a price target of Rs 2141
as against Rs 2214 earlier on FY11 estimates.

Revenue growth inline with our estimates

n Revenues of the company for Q1FY11 remained flattish on YoY basis, inline with
our estimates. This was impacted by decline in cement realizations but compen-
sated to some extent by improvement in VSF realizations as well as volume ex-
pansion in cement division on YoY basis.
n Segment wise performance of the company is shown below -
l Cement - For Q1FY11, cement volumes for Grasim (Samruddhi) registered
10.6% increase as against Q1FY10 while for Ultratech Cements, volumes
registered an increase of 7.2% as against Q1FY10. Consolidated cement vol-
umes including clinker stood at 9.85 MT for Q1FY11. Blended cement real-
izations in Q1FY11 have witnessed an improvement sequentially but on YoY
basis, blended realizations stood at Rs 3500 per tonne in Q1FY11 as against
Rs 3564 per tonne in Q1FY10. White cement volumes have witnessed an in-
crease of 24.5% and realizations remained almost flattish in Q1FY11 as
against Q1FY10. On a sequential basis, white cement realizations have wit-
nessed a decline. Wall Care putty segment has witnessed a sharp improve-
ment in demand and volumes registered an increase of 40% YoY.
Overall cement division continues to contribute a significant proportion of to-
tal revenues and is currently at 78% of the total revenues. Company is also
venturing into international business by acquisition of ETA Star Cement
through Ultratech Cement. It also plans to start brownfield expansion of
9.2MT by Q4FY11 after understanding the market scenario in order to main-
tain its market share.
l VSF - VSF volumes have witnessed an increase in Q1FY11 primarily due to
overall improvement in demand from emerging markets as against last year.
VSF realizations have also improved sequentially and stood at Rs 118 per kg.
VSF prices seem to have stabilized now in this range but with increase in in-
ventory build up and continued uncertainty from European region may restrict
further improvement in VSF prices going forward. Overall margins in VSF seg-
ment are likely to decline from the current levels due to increase in pulp and
sulphur prices going forward.
l Chemicals - Chemicals' division volumes registered an increase of 9% and
average realizations declined by 11% YoY for Q1FY11. Sequentially there is
an improvement in chemical prices due to increase in chlorine and HCL
prices. Chemical prices are recovering due to improvement in global markets.
Chemicals and VSF division together contribute 22% of the total revenues.

Kotak Securities - Private Client Research Please see the disclaimer on the last page For Private Circulation 3
 MORNING INSIGHT August 3, 2010

Segmental revenue breakup

(Rs mn) Q1FY11 Q1FY10 YoY (%)

Fibre and Pulp 9676 8063 20.0

Cement 39737 40505 -1.9
Sponge iron 0 1108 -100.0
Chemicals 1186 1202 -1.3
Textiles 934 726 28.6
Others 2 2 -4.3
Total 51536 51605 -0.1
(Less) intersegmental revenue 349.5 377.5
Net sales 51186 51228 -0.1

Source: Company

Division wise comparision

Q1FY11 Q1FY10 YoY (%)

Cement division details

Grey Cement
Sales Volumes(MT) 5.33 4.82 10.6
Realisations(Rs/tonne) 3,378 3,448 -2.0
Ultratech Cement Sales volumes(MT) 5.04 4.7 7.2
Realisations(Rs/tonne) 3,332 3,533 -5.7
White Cement sales volume(MT) 133,052 106,898 24.5
Realisations(Rs/tonne) 8,172 8,137 0.4
VSF division details
VSF volumes(MT) 67,302 67,418 -0.2
VSF realisations(Rs/tonne) 117,910 97,543 20.9
Chemical division details
Sales volumes(MT) 54,386 49,845 9.1
Realisation(Rs/Tonne) 18,455 20,753 -11.1

Source: Company

n Company will commence the work on brownfield expansion of 9.2MT at

Chattisgarh and Karnataka by Q4FY11 at an outlay of Rs 56 bn. Capex on
Vilayat plant for expanding overall VSF capacity is on track and commercial pro-
duction is expected to commence in FY13.
n We continue to maintain our estimates for revenues going forward and expect
company to post revenues of Rs 206 bn for FY11.

Operating margins impacted by higher costs in cement and VSF

division
n Operating margins stood at 25.8% for Q1FY11, inline with our expectations Op-
erating margins in Q1FY11 are impacted by increase in costs in the cement as
well as VSF division. Cement division has witnessed increase in imported as well
as domestic coal prices which resulted in increasing power and fuel cost. Higher
diesel prices also resulted in higher freight costs which impacted margins ad-
versely. In VSF division, prices of pulp and sulphur have witnessed a jump.
n Along with this, cement division realizations have also gone down due to mod-
eration in cement demand and higher supplies in the market.
n However, improvement in VSF prices helped offset cost increases.
n Our estimates already factor in cost pressures in the cement and VSF division and
we thus continue to maintain our estimates and expect margins to be 25.5% for
FY11.

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 MORNING INSIGHT August 3, 2010

Net profit growth impacted by decline in operating margins

n Net profit declined by 47% for Q1FY11 led by decline in operating margins,
higher depreciation charges as well as no extraordinary income as against Rs 3.5
bn in Q1FY10 on sale of sponge iron division.
n We continue to maintain our estimates and expect net profits to be around Rs
25.3bn for FY11.

Restructuring update
Grasim shareholders have received shares of Samruddhi Cements in the ratio of 1:1
as a part of the demerger process. Post amalgamation scheme, shareholders of
Samruddhi Cements will receive 4 shares of Ultratech for every 7 shares held. Thus,
post merger with Samruddhi Cements and completion of acquisition of ETA Star,
Ultratech would emerge as key player in cement sector with an overall capacity of
nearly 52 MT and a pan India presence.

Valuation and recommendation

n At current market price of Rs 1856, stock is trading at 6.7x P/E and 3.4x EV/
EBITDA for FY11.
We recommend n Though cement prices are under pressure and are likely to remain subdued for
ACCUMULATE on Grasim next 6-8 quarters but VSF prices have stabilized. VSF realizations are expected to
Industries with a price target remain stable in near to medium term. Overall cost pressures are likely to in-
of Rs.2141 crease for both VSF and cement divisions but our estimates already factor in cor-
responding decline in the overall margins for FY11.
n We thus continue to maintain our estimates as well as recommendation on the
stock. We recommend ACCUMULATE with a revised price target of Rs 2141 as
against Rs 2214 on FY11 estimates. Our price target is changed due to change in
the market price of Ultratech Cements and Idea Cellular.

Sum of the parts valuation based on FY11 estimates

Division EBITDA EV/EBITDA EV
(Rs mn) (x) (Rs mn) Rationale

Valuation of VSF division 9,942 4.5 44,740 Based on relative

valuations
Valuation of chemical division 1,026 4 4,102 Based on relative
valuations
Total
Valuation of 60.3% 113,673 At 20% discount to
holding in merged entity current price of Rs.860
Investments 9,713 At 20% discount to
current market price
of Rs 71
Net debt 24,078
Total valuation 196,306
Value per share (Rs) 2141

Source: Kotak Securities - Private Client Research

Kotak Securities - Private Client Research Please see the disclaimer on the last page For Private Circulation 5
 MORNING INSIGHT August 3, 2010

RESULT UPDATE INDIA CEMENTS

Teena Virmani
teena.virmani@kotak.com
+91 22 6621 6302 PRICE : RS.105 RECOMMENDATION: REDUCE
TARGET PRICE : RS.95 FY11E P/E: 11.6X
q Revenues for Q1FY11 declined by 8% YoY, which was inline with our es-
timates. Revenues were impacted by lower cement realizations but were
boosted to some extent by freight earnings to the tune of Rs 114 mn,
wind mill earnings to the tune of Rs 25 mn and IPL earnings to the tune
of Rs 129 mn in Q1FY11.
q Operating margins of the company stood at 11.4% for Q1FY11 as against
30% for Q1FY10. Margins have been impacted by decline in cement
prices and increase in power and fuel, raw material and freight expenses.
q Net profits for Q1FY11 declined by 83% YoY, primarily impacted by
lower cement realizations as well as increase in costs.
q We reduce our margin estimates for the company going forward due to
the above mentioned factors.
q At current market price of Rs 105, stock is trading at 11.6x P/E and 6.1x
EV/EBITDA multiples for FY11 respectively. We arrive at a revised price
target of Rs 95 based on average of 6x EV/EBITDA and 9.5x PE for FY11.
Maintain REDUCE

Summary table Financial highlights

(Rs mn) FY09 FY10 FY11E (Rs mn) Q1FY11 Q1FY10 YoY (%)
Revenues 34,268 37,713 40,926
Net Sales 8,807 9,535 -8
% change YoY 12.5 10.1 8.5
EBITDA 9,962 8,266 7,746 Expenditure 7,806 6,671
% change YoY (7) (17) (6) Inc/Dec in trade -224 -279
Other Income (325) 805 400 RM 1,387 1,123
Depreciation 2,033 2,331 2,529
EBIT 7,604 6,740 5,617
As a % of net sales 15.7 11.8
% change YoY (24.4) (11.4) (16.7) Staff cost 630 516
Net interest 1,122 1,426 1,456 As a % of net sales 7.1 5.4
Profit before tax 6,483 5,313 4,161
Power and fuel 2,751 2,438
% change YoY (28) (18) (22)
Tax 2,161 1,770 1,373 As a % of net sales 31.2 25.6
as % of PBT 33.3 33.3 33.0 Transportation & Handling 1,838 1,308
Profit after tax 4,322 3,543 2,788
As a % of net sales 20.9 13.7
Net extra-ordinary income - -
- Other expenditure 1,424 1,566
Net income 4,322 3,543 2,788 As a % of net sales 16.2 16.4
% change YoY (32.6) (18.0) (21.3)
Operating Profit 1,001 2,863 -65
Shares outstanding (m) 281.9 307.0 307.0
EPS (reported) (Rs) 15.3 11.5 9.1 Operating Profit Margin (%) 11.4 30.0
P/E(x) 6.8 9.1 11.6 Depreciation 599 571
EV/EBITDA(x) 4.7 5.5 6.1
EBIT 402 2,293 -82
RoE(%) 12.4 9.0 6.5
RoCE(%) 14.1 11.3 8.6 Interest 298 385
EBT(exc other income) 105 1,908
Source: Company, Kotak Securities - Private
Client Research Other Income 285 68
Exceptional gains -116 210
EBT 274 2,186 -87
Tax 24 743
Tax Rate (%) 8.8% 34.0%
PAT 250 1,443
Net Profit 250 1,443 -83
NPM (%) 2.8% 15.1%
Equity Capital 3,071.7 2,824.4
EPS (Rs) 0.8 5.1

Source: Company

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 MORNING INSIGHT August 3, 2010

Revenues impacted by steep decline in cement realizations

n Revenues for Q1FY11 declined by 8% YoY, which was inline with our estimates.
n Revenues were impacted by lower cement realizations but were boosted to
some extent by freight earnings to the tune of Rs 114 mn, wind mill earnings to
the tune of Rs 25 mn and IPL earnings to the tune of Rs 129 mn in Q1FY11.
n Cement dispatches (including clinker) in Q1FY11 stood at 2.749 MT (up 11.7%
YoY) while adjusted cement realizations stood at Rs 3106 per tonne (down 16%
YoY). Cement volumes are impacted by stoppage of work at Chilamkur for up-
grading the facility and unscheduled maintenance at Dalavoi plant.
n During Q1FY11, upgradation of Chilamkur plant was completed and cement
plant at Banswara, Rajasthan being put up by Indo Zinc Ltd will commence com-
mercial production by Sep, 2010.Work is also on schedule on coal based power
plants in Tamil Nadu and Andhra Pradesh. Power plant at TN is expected to
commission by Q1FY12 and AP plant by Q4FY12.
n Cement realizations remained sluggish in Q1FY11 on a sequential basis because
increases witnessed between Feb-Mar, 2010 were negated by declines seen be-
tween May-Jun, 2010. Thus, on an average, cement realizations improved mar-
ginally by Rs 5 per bag. Going forward also, due to bunching up of capacities in
southern india, we expect prices to continue to remain under pressure. This
would have an adverse impact on overall revenues for the company going for-
ward.
n Demand supply scenario is also unfavorable in southern India. During Q1FY11,
south has registered almost a nil growth. Within south, Karnataka registered a
growth of over 10%, Tamil Nadu grew by 3% while there was a negative
growth of 5% in Andhra Pradesh and Kerala. This resulted in almost nil growth
in southern markets in Q1FY11. This coupled with incremental supplies resulted
in over supply in the market, thereby impacting prices adversely. We expect that
cement prices may not recover in near to medium term especially in the south-
ern region due to bunching up of capacities.
n India Cements plans to change the market mix by reducing the exposure to AP
and increasing focus in TN and Karnataka where realizations are much better
than AP. Thus, overall cement realizations of company on a sequential basis may
witness an improvement in next quarter. We continue to maintain our estimates
for the company and expect dispatches of 12MT, translating into revenues of Rs
41bn for FY11.

Operating margins impacted by rise in costs and fall in realiza-

tions
n Operating margins of the company stood at 11.4% for Q1FY11 as against 30%
for Q1FY10. Margins have been impacted by decline in cement prices and in-
crease in power and fuel, raw material and freight expenses.
n Company has made EBITDA of Rs 57.2mn on shipping while a loss of Rs 800 mn
for IPL during Q1FY11.
n Overall costs for the company have seen an increase as compared to last year as
well as sequentially due to increase in the following heads -
l Raw material costs have witnessed an increase due to increase in the fly ash
cost as well as increase in duty on limestone.
l Freight costs have been witnessing an increase in line with increase in the
petrol and diesel prices. Along with this, overall lead distance for the com-
pany has also increase since the company is transporting cement to eastern
and north eastern markets due to lower realizations seen in the southern
markets from past few quarters. This is expected to remain high till price dif-
ferential between eastern and southern region remains huge.
l Power and fuel cost per tonne have remained high inline with the increase in
coal prices.

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 MORNING INSIGHT August 3, 2010

Cost per tonne analysis

Q1FY11 Q1FY10

Despatches(mn tonne) 2.749 2.461

Adj cem realisation/tonne 3106 3677
YoY(%) -15.5%
Cost Per tonne
Raw material 423 343
Staff cost 229 210
Power and fuel 1001 991
Transporation &Handling 669 532
Other expenditure 518 636
Total cost per tonne 2840 2711
EBITDA per tonne 266 966

Source: Company

n We thus reduce our margin estimates going forward to factor in higher power
and fuel and freight expenses going forward. We now expect operating margins
to be 18.9% for FY11. Our margin estimates are still better than Q1FY11 due to
change in the market mix towards TN and Karnataka which may improve real-
izations going forward as compared to Q1FY11.
n Key risks to our estimates would be further decline in cement prices from current
levels. Further decline of Rs 10-15 per bag in cement prices may result in loss at
the EBITDA level for the company going forward.

Net profits registered a de-growth, inline with our expectations

n Net profits for Q1FY11 declined by 83% YoY, primarily impacted by lower ce-
ment realizations as well as decline in the operating margins.
n Post revising our margin estimates downwards, we expect net profits to be Rs 2.8
bn for FY11.

Valuation and recommendation

n At current market price of Rs 105, stock is trading at 11.6x P/E and 6.1x EV/
EBITDA multiples for FY11 respectively.
n Southern region is worst impacted by the cement price declines due to bunching
up of capacities. Thus in order to maintain dispatch growth, cement companies
in southern India dispatched to the eastern and western regions also due to huge
price differential between these regions. But with oversupply expected in the
western region also, prices have started correcting. Going forward also, we ex-
pect demand supply gap to widen all over the country with commissioning of
new capacities.

We recommend REDUCE on n Pricing pressures are also coupled with rising costs such as higher raw material,
India Cements with a price freight as well as power and fuel expenses. Thus we expect margins to decline
target of Rs.95 sharply going forward for the cement companies due to lack of pricing power in
the hands of manufacturers. This would have an adverse impact on overall prof-
itability of cement companies, especially in southern India where price declines
have been very steep.
n We thus continue to maintain negative stance on the cement sector and a RE-
DUCE recommendation on the stock.
n We arrive at a revised price target of Rs 95 based on average of 6x EV/EBITDA
and 9.5x PE for FY11. Maintain REDUCE.

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 MORNING INSIGHT August 3, 2010

RESULT UPDATE INDIAN OVERSEAS BANK (IOB)

Saday Sinha
saday.sinha@kotak.com
+91 22 6621 6312 PRICE : RS.116 RECOMMENDATION: REDUCE
TARGET PRICE : RS.100 FY11E P/E: 8.8X; P/ABV: 1.3X

Q1FY11 results slightly better than our expectations; higher

NPAs likely to remain as an overhang to the stock performance,
in our view. We maintain REDUCE with TP of Rs.100 (Rs.90 ear-
lier).
q The bank's net interest income (NII) increased 17.9% to Rs.9.06 bn in
Q1FY11 on back of better funding costs with 388 bps (YoY) improve-
ments in CASA mix, despite moderate growth in loan book (7.9%) and
deterioration in C/D ratio from 76.2% at the end of Q1FY10 to 75.8% at
the end of Q1FY11.
q Its net profit declined 33.6% in Q1FY11 on account of higher provisions
& contingencies (Rs.768 mn in Q1FY11 as against write-back of Rs.167in
Q1FY10), 6.8% decline in non-interest income and Rs.822 mn expense (ex-
traordinary item) during the quarter.
q Although NPAs have stabilized sequentially, it remains at the elevated
levels, which is a cause of concern, in our view. Gross NPA and net NPA
stands at 4.30% and 2.21%, respectively, at the end of Q1FY11, higher
than its peers.
q We are slightly tweaking earning estimates for FY11E & FY12E and main-
tain REDUCE rating on the stock with the target price of Rs.100 (earlier
Rs.90) based on P/ABV of 1.1x its FY11E adjusted book value.
q Currently, stock is trading at a cheap valuation vis-à-vis its peers. How-
ever, in our view, higher NPAs are likely to remain as an overhang to the
stock performance. Therefore, we would advice our clients to look for
better entry points.

Result Performance
(Rs mn) Q1FY11 Q1FY10 YoY (%)

Interest on advances 19,438 19,581 -0.7

Interest on Investment 6,677 5,680 17.6
Interest on RBI/ banks' balances 559 518 8.1
Other interest - - NM
Total Interest earned 26,675 25,779 3.5
Interest expenses 17,613 18,094 -2.7
Net interest income 9,063 7,684 17.9
Other income 2,149 2,307 -6.8
Net Revenue (NII + Other income) 11,211 9,991 12.2
Operating Expenses 6,572 5,705 15.2
Payments to / Provisions for employees 4,745 4,075 16.4
Other operating expenses 1,828 1,629 12.2
Operating profit 4,639 4,286 8.2
Provisions & contingencies 768 (167) -558.9
Provision for taxes 1,045 1,436 -27.3
Extraordinary Items 822 - NM
Net profit 2,004 3,018 -33.6
EPS (Rs.) 3.68 5.54 -33.6

Source: Company

Kotak Securities - Private Client Research Please see the disclaimer on the last page For Private Circulation 9
 MORNING INSIGHT August 3, 2010

Earnings slightly better than our estimates

The bank's net interest income (NII) increased 17.9% to Rs.9.06 bn in Q1FY11 from
Rs.7.68 bn in Q1FY10 on back of better funding costs with 388 bps (YoY) improve-
ments in CASA mix, despite moderate growth in loan book (7.9%) and deterioration
in C/D ratio from 76.2% at the end of Q1FY10 to 75.8% at the end of Q1FY11.
Its net profit declined 33.6% in Q1FY11 to Rs.2.00 bn in Q1FY11 from Rs.3.02 bn in
Q1FY10 on account of higher provisions & contingencies (Rs.768 mn in Q1FY11 as
against write-back of Rs.167in Q1FY10), 6.8% decline in non-interest income and
Rs.822 mn expense (extraordinary item) during the quarter.
IOB has absorbed 1/3 of excess liabilities to assets during Q1FY11 which it had ac-
quired earlier amounting to Rs.2.47 bn. The balance Rs.822 mn would be absorbed
by FY12.

Subdued business growth

The bank witnessed subdued business growth which rose by only 8.3% to Rs.1924.1
bn at the end of Q1FY11 from Rs.1776.7 bn at the end of Q1FY10.
n Total deposits of the bank rose 8.6% YoY to Rs.1094.6 bn at the end of Q1FY11
from Rs.1008.1 bn at the end of Q1FY10. Its CASA mix improved from 29.2% at
the end of Q1FY10 to 33.1% at the end of Q1FY11 due to slower growth in term
deposits, which increased by only 2.6% (YoY) as compared to 23.0% YoY
growth in CASA mix.
n Loan growth was also subdued at 7.9% to Rs.829.5 bn at the end of Q1FY11
from Rs.768.6 bn at the end of Q1FY10. Lower loan growth compared to deposit
growth led to decline in C/D ratio from 76.2% at the end of Q1FY10 to 75.8%
at the end of Q1FY11.

NPAs stabilized QoQ; however remains at the elevated levels, a

cause of concern, in our view.
Although NPAs have stabilized sequentially, it remains at the elevated levels, which
is a cause of concern, in our view. Gross NPA and net NPA stood at 4.30% and
2.21%, respectively, at the end of Q1FY11.
In absolute terms, gross NPA and net NPA increased 52.8% (YoY) and 49.3%
(YoY), respectively, at the end of Q1FY11. However, sequentially both came down
by 1.1% and 8.0%, respectively.
In percentage terms, gross NPA improved from 4.47% at the end of Q4FY10 to
4.30% at the end of Q1FY11. However, it deteriorated from 3.04% at the end of
Q1FY10. Similarly, net NPA improved to 2.21% at the end of Q1FY11 from 2.52%
at the end of Q4FY10, however, deteriorated from 1.59% at the end of Q1FY10.

Trend in NPAs
(Rs bn) 1QFY09 2QFY09 3QFY09 4QFY09 1QFY10 2QFY10 3QFY10 4QFY10 1QFY11

Gross NPA 10.99 17.25 17.18 19.23 23.37 26.85 32.18 36.11 35.71
Gross (%) 1.73 2.47 2.40 2.54 3.04 3.42 4.05 4.47 4.30
Net NPA 4.73 9.97 9.20 9.99 12.02 12.24 16.90 19.50 17.94
Net (%) 0.75 1.44 1.30 1.33 1.59 1.59 2.17 2.52 2.21

Source: Company

Its provision coverage ratio stands at 57.9% at the end of Q1FY11. To meet the RBI
guidelines of 70% provision coverage by September 2010, it has to provide addi-
tional Rs.7.23 bn (~102% of FY10 profit). Here, we are not including the cumulative
technical write-offs to reach the guideline of 70% PCR, which if included would re-
quire lower provisions (due to non-availability of data). In our view, its low provision
coverage remains a significant risk to its earnings, going forward.

Kotak Securities - Private Client Research Please see the disclaimer on the last page For Private Circulation 10
 MORNING INSIGHT August 3, 2010

Valuations
We are slightly tweaked earning estimates for FY11E and FY12E now expect net
profit for FY11E and FY12E to be Rs.7.16 bn and Rs.8.31 bn, respectively. This would
result into an EPS of Rs.13.1 and Rs.15.3 for FY11E and FY12E, respectively. The
ABV is forecast at Rs.92.2 and Rs.104.5 respectively for FY11E & FY12E.

Rolling 1-year forward P/ABV band

300
CMP 0.5x 0.75x 1.0x 1.25x
240 1.5x 1.75x 2.0x 2.25x

180

120

60

0
Apr-02 Mar-03 Feb-04 Jan-05 Dec-05 Nov-06 Oct-07 Sep-08 Aug-09 Jul-10

Source: Company, Kotak Securities - Private Client Research

Rolling 1-year forward P/E band

300
CMP 2x 4x
240
6x 8x 10x

180

120

60

0
Apr-02 Mar-03 Feb-04 Jan-05 Dec-05 Nov-06 Oct-07 Sep-08 Aug-09 Jul-10

Source: Company, Kotak Securities - Private Client Research

Key data
(Rs bn) 2008 2009 2010E 2011E

Interest income 77.39 96.41 102.46 109.12

Interest expense 52.89 67.72 70.78 74.25
Net interest income 24.50 28.70 31.68 34.88
Other income 10.37 15.96 11.43 11.06
Gross profit 20.02 25.24 18.45 18.42
Net profit 12.02 13.26 7.07 7.16
Gross NPA (%) 1.6 2.6 4.6 4.0
Net NPA (%) 0.6 1.3 2.5 2.1
Net int. margin (%) 3.0 2.9 2.8 2.9
RoE (%) 27.9 24.8 11.5 10.9
RoAA (%) 1.3 1.2 0.6 0.5
Dividend Yield (%) 3.2 4.5 3.0 3.4
EPS (Rs) 22.1 24.3 13.0 13.1
Adjusted BVPS (Rs) 80.6 90.7 79.9 92.2
P/E (x) 5.3 4.8 8.9 8.8
P/ABV (x) 1.4 1.3 1.5 1.3

Source: Company, Kotak Securities - Private Client Research

Kotak Securities - Private Client Research Please see the disclaimer on the last page For Private Circulation 11
 MORNING INSIGHT August 3, 2010

At the current market price of Rs.116, the stock is trading at 8.8x its FY11E earnings
and 1.3x its FY11E ABV.
We maintain REDUCE on Indian We maintain REDUCE rating on the stock with the target price of Rs.100 (earlier
Overseas Bank with a revised Rs.90) based on P/ABV of 1.1x its FY11E adjusted book value.
price target of Rs.100
Currently, stock is trading at a cheap valuation vis-à-vis its peers. However, in our
view, higher NPAs are likely to remain as an overhang to the stock performance.
Therefore, we would advice our clients to look for better entry points.

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 MORNING INSIGHT August 3, 2010

RESULT UPDATE JAMMU & KASHMIR BANK

Saday Sinha
saday.sinha@kotak.com
+91 22 6621 6312 PRICE : RS.816 RECOMMENDATION: BUY
TARGET PRICE : RS.989 FY11E P/E: 7.1X; P/ABV: 1.2X

Q1FY11 results: Core performance better than our expectations;

Improvement in asset quality is a big positive for the stock, in
our view…
q J&K bank's NII (net interest income) grew 40.1% (YoY) on back of sharp
improvement in NIM from 3.04% in Q1FY10 to 3.70% in Q1FY11 along
with moderate growth in loan book (11.7% YoY). Margin improved due
to 91 bps decline in cost of deposits vis-à-vis only 69 bps decline in yield
on advances.
q Net profit rose 23.0% mainly aided by strong NII growth (40.1% YoY)
and decline in provisions for bad debts (Rs.440 mn in Q1FY11 as against
Rs.800 mn in Q1FY10), despite 23.0% decline in non-interest income.
q CASA mix improved to 37.8% at the end of Q1FY11 from 36.2% at the
end of Q1FY10. Re-pricing of deposits along with improvement in CASA
mix has helped the bank in improving its NIM from 3.04% in Q1FY10 to
3.70% in Q1FY11.
q Improvement in asset quality is a big positive for the stock. Its gross NPA
declined 12.0% YoY (2.6% QoQ) and now stands at 1.92% (Q1FY11) as
against 2.44% (Q1FY10) and 1.97% (4FY10). The decline in net NPA is
even sharper at 95.0% YoY (87.5% QoQ). Bank has enhanced its provision
coverage ratio from 68.8% at the end of Q1FY10 to 98.2% at the end of
Q1FY11.
q We have slightly revised our earning estimates upward for FY11E and
maintain BUY rating on the stock with the revised target price of Rs.989
(earlier Rs.880) based on P/ABV of 1.4x its FY11E adjusted book value.

Result Performance
(Rs mn) Q1FY11 Q1FY10 % (YOY)

Int. on advances 6259.6 5999.3 4.3

Int. on investments 2364.1 1656.1 42.8
Int. on RBI/Other balances 33.3 59.7 -44.2
Total interest earned 8657.0 7715.1 12.2
Interest expenses 4999.2 5103.6 -2.0
Net interest income 3657.8 2611.5 40.1
Other income 936.9 1216.1 -23.0
Net Revenue (NII + Other Income) 4594.7 3827.6 20.0
Operating Expenses 1711.8 1251.5 36.8
Employee cost 1197.4 804.1 48.9
Other operating exp 514.4 447.4 15.0
Operating profit 2882.9 2576.1 11.9
Provisions 700.7 802.9 -12.7
Taxes 728.7 591.8 23.1
Net profit 1453.5 1181.4 23.0
EPS (Rs.) 29.98 24.15 24.1

Source: Company

Kotak Securities - Private Client Research Please see the disclaimer on the last page For Private Circulation 13
 MORNING INSIGHT August 3, 2010

Earning growth better than our expectations

J&K bank's NII (net interest income) grew 40.1% to Rs.3.66 bn in Q1FY11 from
Rs.2.61 bn in Q1FY10 on back of sharp improvement in NIM from 3.04% in Q1FY10
to 3.70% in Q1FY11 along with moderate growth in loan book (11.7% YoY). Mar-
gin improved due to 91 bps decline in cost of deposits vis-à-vis only 69 bps decline in
yield on advances.
Net profit rose 23.0% to Rs.1.45 bn in Q1FY11 from Rs.1.18 bn in Q1FY10 mainly
aided by strong NII growth (40.1% YoY) and decline in provisions for bad debts
(Rs.440 mn in Q1FY11 as against Rs.800 mn in Q1FY10), despite 23.0% decline in
non-interest income.

Muted non-interest income due to lower treasury gains

Non-interest income declined 23.0% YoY to Rs.0.94 bn during Q1FY11 as compared
to Rs.1.22 bn during Q1FY10 on back of lower trading profit which contracted to
Rs.336.3 mn in Q1FY11 as against Rs.724.3 mn in Q1FY10 (decline of 53.6% YoY).
However, during the same period, C/E/B income witnessed robust growth of 48.7%
YoY (12.6% QoQ). Similarly, insurance income also rose 37.6% YoY to Rs.64.4 mn.

Trend in non-interest income

(Rs mn) 1QFY10 2QFY10 3QFY10 4QFY10 1QFY11 Gth % (YoY)

Other Income 1,216.1 1,011.9 958.1 1,016.9 936.9 -23.0

Commission/ Exchange 238.0 299.0 331.5 314.4 353.9 48.7
Trading Income (Net of Amortization) 724.3 506.8 408.4 135.7 336.3 -53.6
Insurance Income 46.8 57.3 74.4 127.5 64.4 37.6
Misc. Income 206.9 148.8 143.8 439.3 182.3 -11.9

Source: Company

Business grew at moderate pace

Bank has been focusing on the effective balance sheet management which is now
paying dividend. Total business of the bank rose moderately by 16.6% to Rs.606.6
bn at the end of Q1FY11 from Rs.520.3 bn in Q1FY10.
n Total deposits of the bank rose 19.8% to Rs.376.3 bn at the end of Q1FY11 from
Rs.314.1 bn at the end of Q1FY10. CASA mix improved to 37.8% at the end of
Q1FY11 from 36.2% at the end of Q1FY10. Re-pricing of deposits along with im-
provement in CASA mix has helped the bank in improving its NIM from 3.04%
in Q1FY10 to 3.70% in Q1FY11.
n Advances of the bank grew moderately at 11.7% (YoY) to Rs.230.4 bn at the
end of Q1FY11 from Rs.206.2 bn at the end of Q1FY10. The slower growth in
advances vis-à-vis deposit growth (YoY) led to decline in C/D ratio from 65.6%
at the end of Q1FY10 to 61.2% at the end of Q1FY11.

NIM improved both YoY as well as QoQ

Net interest margin (NIM) improved to 3.70% in Q1FY11 as compared to 3.04% in
Q1FY10 and 3.27% in Q4FY10 due to improvement in liability franchise and re-pric-
ing of deposits at lower rates. The sequential improvement in margin is against the
industry trend where other banks have witnessed some pressure on their NIM due to
higher interest outgo on their saving deposits (interest is calculated on daily basis
since April 1, 2010).
Bank has well managed its liability mix which is visible from 91 bps decline in cost of
deposits vis-à-vis only 69 bps decline in yield on advances. In our view, re-pricing of
deposits along with improvement in CASA mix has helped the bank in improving its
NIM. We are factoring in 3.27% NIM for FY11 as against 3.04% achieved during
FY10.

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 MORNING INSIGHT August 3, 2010

Improvement in asset quality is a big positive; coverage ratio

improved to 98.2%
Improvement in asset quality is a big positive for the stock. Its gross NPA declined
12.0% YoY (2.6% QoQ) and now stands at 1.92% (Q1FY11) as against 2.44%
(Q1FY10) and 1.97% (4FY10). The decline in net NPA is even sharper at 95.0% YoY
(87.5% QoQ).
Bank has enhanced its provision coverage ratio from 68.8% at the end of Q1FY10 to
98.2% at the end of Q1FY11. Including technical write-offs, PCR would further im-
prove to 98.72% at the end Q1FY11, which would be best in the industry by any
means.
Lower net NPA in our forecast on back of its commendable performance on the
asset quality front has led to rise in adjusted book value, a key factor for raising our
target price.

Valuation & recommendation

At the current market price of Rs.816, the stock is trading at 7.1x its FY11E earnings
and 1.2x its FY11E ABV. We have slightly revised our earning estimates upward for
FY11E and now expect full year profits of Rs.5.60 bn resulting into an EPS of
Rs.115.4 and ABV (adjusted book value) at Rs.706.2.

Rolling 1-year forward P/ABV band

1500 CMP 0.5x 0.75x 1.0x

1.25x 1.5x 1.75x 2.0x
1200

900

600

300

0
Apr-02 Apr-03 Apr-04 Apr-05 Apr-06 Apr-07 Apr-08 Apr-09 Apr-10

Source: Company, Kotak Securities - Private Client Research

Rolling 1-year forward P/E band

1500
CMP 2x 4x 6x
1200 8x 10x 12x

900

600

300

0
Apr-02 Apr-03 Apr-04 Apr-05 Apr-06 Apr-07 Apr-08 Apr-09 Apr-10

Source: Company, Kotak Securities - Private Client Research

We maintain BUY on J&K Bank We maintain BUY rating on the stock with the revised target price of Rs.989 (earlier
with a revised price target of Rs.880) based on P/ABV of 1.4x its FY11E adjusted book value.
Rs.989

Kotak Securities - Private Client Research Please see the disclaimer on the last page For Private Circulation 15
 MORNING INSIGHT August 3, 2010

Key Financials:
(Rs bn) FY09 FY10 FY11E FY12E

Interest income 29.88 30.57 35.34 40.20

Interest expense 19.88 19.38 21.73 24.68
Net interest income 10.00 11.19 13.61 15.52

Other income 2.45 4.16 4.09 4.52

Gross profit 7.74 9.58 10.82 12.26
Net profit 4.10 5.12 5.60 6.46

Gross NPA (%) 2.6 2.0 1.9 1.9

Net NPA (%) 1.4 0.3 0.1 0.1
Net int. margin (%) 3.2 3.0 3.3 3.3
RoE (%) 16.7 18.2 17.3 17.5
RoAA (%) 1.2 1.3 1.2 1.3
Dividend Yield (%) 2.1 2.7 2.8 3.1

EPS (Rs) 84.5 105.7 115.4 133.3

Adjusted BVPS (Rs) 481.6 607.7 706.2 810.3

P/E (x) 9.7 7.7 7.1 6.1

P/ABV (x) 1.7 1.3 1.2 1.0

Source: Company, Kotak Securities - Private Client Research

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 MORNING INSIGHT August 3, 2010

RESULT UPDATE VOLTAMP LTD

Sanjeev Zarbade
sanjeev.zarbade@kotak.com
+91 22 6621 6305 PRICE : RS.933 RECOMMENDATION : ACCUMULATE
TARGET PRICE : RS.1026 FY11E P/E: 12.2X
q Voltamp's first quarter numbers are well below expectations as EBITDA
margin has come under severe pressure. While the management had
been guiding margin pressure for quite some time, the magnitude of
margin decline has come as a significant negative surprise. Moreover, the
company has indicated that margin pressure may not be a one-quarter
aberration but may last longer. We have thus aligned our earnings in line
with the current scenario.
q Industry scenario remains unfavourable as of now for T&D equipment
makers with leading companies reporting significant margin loss in Q1
FY11.
q We had downgraded the stock to "Reduce at Rs 1045" in our previous up-
date citing inadequate upside. The stock has corrected since our previous
update, hence we upgrade the stock to Accumulate.
q We rate Voltamp as our preferred stock within the midcap transformer
space in view of debt-free, cash surplus of Rs 141 per share and manage-
ment quality. Thus, despite the poor numbers we prefer not being overly
negative on the stock and would recommend investors to "Accumulate"
the stock on declines.

Summary table Quarterly performance

(Rs mn) FY09 FY10 FY11E (Rs mn) Q1FY11 Q1FY10 YoY (%)
Sales 6431 5420 7124 Gross sales 1341 1142 17
Growth % 16 -16 31
Excise 147 100 47
EBITDA 1511 1058 1034
EBITDA margin % 24 20 15 Net Sales / Income from Operations 1193 1042 15
PBT 1689 1223 1169 Other Income 46 72 -37
Growth % 36 -28 -4 Total Income 1239 1114 11
Net profit 1148 823 771
Net cash (debt) 60 43 543
(Increase) / decrease in Stock
EPS (Rs) 114 81 76 Consumption of Raw Materials 996 804 24
Growth % 44 (28) (6) Staff Cost 41 44 -8
CEPS 118 87 84
Other Expenditure 26 31 -15
DPS (Rs) 13 13 13
ROE % 53 27.6 21.2 Operating Expenditures 1063 879 21
ROCE % 79 41.2 32.4 PBDIT 130 163 -20
EV/Sales (x) 1.2 1.5 1.1
Interest & Finance Charges 2.4 1.8 33
EV/EBITDA (x) 5.3 7.5 7.3
P/E (x) 8.2 11.5 12.2 Depreciation 18 10 78
P/Cash Earnings 7.9 10.7 11.0 Profit / (Loss) before tax 155 223 -30
P/BV (x) 3.7 2.9 2.5
Tax provision 48 74 -35
CEPS (Rs) 118.1 87.4 84.5
Operng cash flow 894.0 183.1 541.7
Profit / (Loss) after tax 107 149 -28
Net work cap (days) 51.4 92.9 75.6 EPS (Rs) 10.6 14.8 -28
Volume MVA 1908 1590 20
Source: Company, Kotak Securities - Private
Client Research Gross revenues per MVA 702621 718428 -2
EBITDA/MVA 68,108 102,516
Raw Matl cost per MVA 522170 505660
Excise rate (%) 11.0 8.8
OPM (%) 10.9 15.6
Raw material cost to sales (%) 83.5 77.2
Other exp to sales (%) 2.2 3.0
Tax rate (%) 31.1 33.2

Source: Company

Kotak Securities - Private Client Research Please see the disclaimer on the last page For Private Circulation 17
 MORNING INSIGHT August 3, 2010

Improved volumes but severe margin pressure

n Net sales grew 15% YoY primarily driven by 20% increase in volumes. The com-
pany sold transformers of 1980 MVA during the quarter. Sales to SEBs formed 60
MVA of the total volumes.
n Order backlog stands at Rs 4.2 bn (6985 MVA), which is healthy as the company
tends to maintain six months of revenue visibility.
n While there has been revival in industrial production, it is yet to translate into
improved offtake for Transformer companies. The sector has added capacity in
anticipation of demand potential, however actual T&D spending by utilities has
been sluggish. This is resulting in price undercutting by corporates with a view to
utilize their expanded capacities.
n Other income for the company is less than our estimates and is reported Rs.46
mn vis-à-vis Rs. 72 mn in Q1FY11.
n The company managed to keep its overheads under control but could not con-
tain the sharp decline in margins. The management has indicated that in a bid to
garner market share, players are resorting to severe price cuts.
n It is likely that the company may have accepted orders at low margins. For the
T&D equipment industry it has been a difficult quarter with (except Crompton
Greaves) several leading producers reporting sharp margin contraction.
n Cash and investment stands at Rs 1.6 bn.

Transformer Industry Scenario

n Demand is increasing with slower pace for transformers. PGCIL spending has re-
mained sluggish in H1CY10.
n Currently industry is operating at 70-75% capacity utilization.
n Competition is intensifying between various players leading to margins compres-
sion. Chinese and Korean manufacturers are also tightening their grip especially
in 765 KV segment.
n Industry observed significant capacity addition in last two years with Areva dou-
bling its capacity to and Siemens carrying out of Greenfield expansion in 765 KV
segment.

Earnings Revision: Margin loss prompts earnings downgrade

The Q1 margin posted by the company has been the lowest in FY07 and we believe
margins can bounce back in the future.

Earnings estimate (FY11)

Earlier Revised

Revenue (Rs mn) 6483 7124

EBITDA (%) 19 15
EPS (Rs) 96.0 76.4
% change -20

Source: Kotak Securities - Private Client Research

Stock Outlook
The stock has reacted to the poor numbers with a 9% fall in a single day. We be-
lieve that the pains that the industry is going through may be temporary and funda-
mentals should improve once momentum in T&D spends by utilities gain steam.
T&D spending is currently lagging the generation capacity growth and the situation
should correct in the future. Within the madcap transformer industry, Voltamp is a
quality stock with strong balance sheet. Hence we do not see significant downside
from these levels.

Kotak Securities - Private Client Research Please see the disclaimer on the last page For Private Circulation 18
 MORNING INSIGHT August 3, 2010

Valuation
Following the earnings downgrade, Voltamp is currently trading at 12.2x FY11 earn-
ings.
We now recommend to We upgrade the stock to ACCUMULATE from Reduce earlier. Target price based on
ACCUMULATE on Voltamp DCF works out to Rs 1026 (Rs 1050 earlier). At our target price, the stock would
with a price target of Rs.1026 trade at 15.3x FY11 earnings.

DCF Summary (Rs mn)

FCF in FY11 694
NPV of cash flows 4583
TV 4365
PAT growth CAGR between FY11-16 (%) 11
WACC (%) 13.9
Surplus Cash 1412
PV of FCF 8948
Fair Value 1026

Source: Kotak Securities - Private Client Research

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 MORNING INSIGHT August 3, 2010

RESULT UPDATE JAGRAN PRAKASHAN LTD (JPL)

Ruchir Khare
ruchir.khare@kotak.com
+91 22 6621 6448 PRICE : RS.123 RECOMMENDATION : ACCUMULATE
TARGET PRICE : RS.130 FY11E EV/EBITDA: 11.1X; PE: 18.2X
q JPL reported robust Q1FY11 results, inline with our estimates; revenues
up 16.36% YoY at Rs 2.7 bn mainly driven by meaningful growth in ad-
vertising revenues.
q Benign NP prices and efficient cost control measures across the board re-
sulted in EBITDA margins by 300 bps to 33.4%; PAT as a result grows
12% YY. Going forward we expect NP prices to firm up, and stabilize at
higher levels over FY11E.
q We believe that JPL's strong franchise, positioning in key markets; a
large market opportunity and a reasonable management team remain
strengths.
q Valuations remain expensive in our opinion and we maintain 'ACCUMU-
LATE' rating with a target price of Rs.130 for the stock.

Quarterly performance
Summary table
(Rs mn) FY09 FY10 FY11E
(Rs mn) Q1FY11 Q1FY10 YoY (%) Q4FY10 QoQ (%)

Sales 8,234 9,419 10,692 Net sales 2698.16 2318.73 16 2362.68 14

Growth (%) 9.8 14.4 13.5 Expenditure 1796.46 1613.44 1730.21
EBITDA 1,567 2,823 3,326
PBIDT 901.70 705.30 28 632.48 43
EBITDA margin (%) 19.0 30.0 31.1
Net profit 858 1759 2,038 Depreciation 124.90 123.66 134.90
Net cash (debt) -981 -1,563 -2,158 PBIT 776.80 581.64 34 497.58 56
EPS (Rs) 2.9 5.8 6.8
Net Interest 12.27 13.70 23.90
Growth (%) -12.5 104.9 15.9
CEPS 4.3 7.5 8.5
Other Income 57.46 156.60 66.00
DPS (Rs) 2.0 3.5 3.0 PBT 821.99 724.54 13 539.68 52
ROE (%) 15.6 30.0 30.8 Tax 266.00 229.30 175.90
ROCE (%) 21.4 37.0 40.9
Profit After Tax 555.98 495.24 12 363.78 53
EV/Sales (x) 4.6 4.0 3.4
EV/EBITDA (x) 24.0 13.3 11.1 EPS 1.85 1.64 1.21
P/E (x) 43.2 21.1 18.2 NPM (%) 21 21 15
P/Cash Earnings 28.5 16.3 14.5
EBITDA (%) 33 30 27
P/BV (x) 6.6 6.0 5.2
Source: Company
Source: Company, Kotak Securities - Private
Client Research

Result Highlights- Advertising revenues grow 21% YY; while cir-

culation remains flattish. PAT in line with estimates
n JPL's 1QFY11 results inline with our estimates; revenues came in at Rs.2.7bn (up
16.36% YoY), EBITDA and PAT were up YoY at Rs 901 mn and Rs 556 mn.
n While we attribute the revenue growth of JPL in Q1FY11 to the relative resilience
of regional advertising, strength of JPL's franchise and also readership gains in
key new geographies has been relevant for the overall business growth. EBITDA
margins for the quarter stood at 33% up 300 bps YoY
n During the quarter RM costs (28% of revenues, Rs.755.7 mn) increased by 7.7%
YoY. We also highlight that the low cost inventory has benefited the company
and would increase going forward on account of increase in NP prices and also
companies expansion in newer geographies.
n For FY11E, we expect NP prices to firm up from the current levels ($610-620/MT)
and believe that NP prices have likely made their low in FY10. We note NP
prices have declined from the levels of $800/MT seen in early 2008 to lows of
close to $540/MT. Our revised assumptions for NP build in an increase of nearly
10-11% in NP price cost head for FY11E.

Kotak Securities - Private Client Research Please see the disclaimer on the last page For Private Circulation 20
 MORNING INSIGHT August 3, 2010

n While other income fell sharply YoY due to forex gain of 40 mn and treasury
gain of 70 mn in Q1FY10, PAT grew by 12% YoY on back of higher operating
income and flat depreciation and interest expense.
n Reiterating that going forward for FY11E, we expect buoyant advertising markets
in lieu of stable economic growth. We expect the advertising market to grow 13-
15% with market leaders and established mediums (print, broadcasting) likely
leading this revival.

Competitive intensity to climb in Bihar & Jharkhand; we believe

it will only grow the markets as penetration levels remain low
n With the announcement of DB Corp's plans to enter the Bihar & Jharkhand mar-
kets over 2HFY11-1HFY12E the competitive intensity is set to increase for JPL.
n While cover prices dropped in these areas in response to the competition, an
estimated combined Rs.2.3bn these advertising markets are currently penetrated
at much lower levels than other regional markets.
n According to industry sources, the current ad markets size of Bihar & Jharkhand
markets are growing at a higher than industry average growth. We believe fu-
ture growth for players would be driven by an expansion in the market itself
owing to increasing penetration (DB Corp management estimates penetration of
only 18-20%) and robust advertising market growth (Bihar has been witnessing
higher GDP growth rates compared to national avg. in the recent past).
n While the recent GDP numbers emanating from Bihar are of a low base and
mask the years of sub-par growth given a host of factors, we believe even a
steady growth of closer to the national average (7.5-8.5%) is enough to attract
meaningful private sector advertiser interest. According to the JPL management
close to 60-70% of the Bihar advertising market (Rs.1.7-1.8bn) is made up by
Government advertising, significantly higher than other markets.
n We believe JPL may be reasonably placed to tackle emerging competition in
Uttar Pradesh and Uttaranchal given its leadership position and attempts at
broad-basing its portfolio through the launch of a flanking youth targeted brand,
I-Next.
n Also JPL could consider expanding its core 'Dainik Jagran' brand with greater
number of local editions in emerging cities of the Uttar Pradesh market.

Mid-Day acquisition is likely get accomplished by Q4FY11E; ex-

pect earnings neutral and estimates does not reflect financial
impact from the transaction
n As per the scheme of arrangement between JPL and MML, print business of
MML which is run by its 100% subsidiary MIL will be de-merged and, then trans-
ferred to JPL. The print business comprises publication brands Mid-Day, Sunday
Mid-Day, Gujarati Mid-Day and 'Inquilab'.
n The radio business of MML, operated via its subsidiary Radio Mid-Day, will stay
with the present shareholders of MML. As part of the transaction, JPL will issue
two shares of itself for every seven shares held in MML and will assume debt of
Rs.200mn, implying deal value of Rs1.95bn. The deal also involves acquisition of
a printing facility with daily capacity of 300,000 copies.
n The share-swap deal will dilute JPL's equity by close to 5%, but valuations were
reasonable at 2x EV/sales. However, we are concerned by management's strate-
gic shift to focus on newer opportunities in the Mumbai market and English print.
In our opinion both are hyper competitive and market-share gain may be diffi-
cult.

Kotak Securities - Private Client Research Please see the disclaimer on the last page For Private Circulation 21
 MORNING INSIGHT August 3, 2010

n We believe this transaction will entail a 4.8% equity dilution for JPL share hold-
ers; estimated accretive earnings from the acquired business is likely to offset the
above making the MML deal EPS neutral in FY11E.
n Our financial estimates for FY11E have not incorporated the financial impact of
the MML transaction as we await greater details on the consolidated balance
sheet.

Rich valuations at 18.2x FY11E earnings; maintain accumulate

with price target of Rs 130
We recommend ACCUMULATE n At the CMP, the stock trades at 18.2x FY11E EPS and 11.1x EV/EBITDA. Histori-
on Jagran Prakashan with a cally the JPL stock has traded at c20-21x fwd EPS; our current price target of
price target of Rs.130 Rs.130 is based on FY11E estimates.
n We believe that the stock is fairly priced at the current price and thus maintain
'ACCUMULATE' rating on the stock with a price target of Rs 130

Kotak Securities - Private Client Research Please see the disclaimer on the last page For Private Circulation 22
 MORNING INSIGHT August 3, 2010

RESULT UPDATE EDELWEISS CAPITAL (ECL)

Sarika Lohra
sarika.lohra@kotak.com
+91 22 6621 6301 PRICE : RS.489 RECOMMENDATION : ACCUMULATE
TARGET PRICE : RS.525 FY11E P/E: 12.6 X; P/ABV:1.5X
q ECL's Q1FY11 results better than our expectation. Its topline grew by
25% yoy to Rs.2793mn; PAT grew by 18% qoq and 8% yoy to Rs. 623mn
as compared to Rs 525mn in Q4FY10.
q Core brokerage fee income remained muted during Q1FY11, however
strong growth in arbitrage and treasury related business and strong
growth in interest was the key driver for the top-line growth.
q Margins were under pressure due to increase in operating and interest
costs; stood at 31.8% (28.6% in Q4FY10) PAT margin stood at 22.3%
(20.2% in Q4FY10)
q At the current market price, ECL trades at P/E of 12.6x its FY11 earnings
estimates. We maintain our positive outlook on Edelweiss capital. De-
cline in the stock should be used as an opportunity to ACCUMULATE the
stock.

Summary table Result Highlights

(Rs mn) FY10 FY11E FY12E (Rs mn) Q1FY10 Q4FY10 Q1FY11 % qoq % yoy
Income from opns 9,690 12,710 14,679
Fee and commission income 671 1172 934 -20.3 39.2
Other income 88 95 105
Total income 9,778 12,805 14,784 Tradition and arbitrage income 790 339.4 562 65.6 -28.8
EBITDA 5,306 7,879 9,504 Investment and dividend income 83 1 40 3920.0 -51.6
PAT 2,205 2,816 3,307 Interest income 682 1082.5 1257 16.1 84.3
Oprt margin (%) 34.3 36.4 36.9
PAT margin (%) 23.7 22.9 23.2
Total income from operations 2226 2595 2793 7.6 25.5
Op Exp/ Total Inc (%) 59.2 57.1 56.7 Other income 20 29.3 47 59.4 133.5
Emp Cost/Total Inc (%) 8.5 7.1 6.4 Total income 2246 2624 2840 8.2 26.4
EPS (Rs) 30.6 38.9 45.5
Employee cost 391 462.7 498 7.7 27.5
Book Value (Rs) 301.2 325.4 356.3
RoE (%) 10.5 12.4 13.4 Operating and other expenses 652 803.5 627 -22.0 -3.8
RoA (%) 5.8 5.5 5.6 Financial expenses 311 569.4 776 36.2 149.4
P/E(x) 16.0 12.6 10.7
Depreciation 28 39.3 37 -6.6 31.1
P/BV(x) 1.6 1.5 1.4
Total Expenses 1382 1874.9 1938 3.3 40.2
Source: Company, Kotak Securities - Private
PBT 864 749 902 20.4 4.4
Client Research
Provision for Tax expenses 249 184 238 29.1 -4.6
PAT 615 565 665 17.6 8.1
Share of minority interests in profits 32 40.7 41 1.5 29.1
PAT after minority interest 583 525 623
% chg qoq 43 -2 19
% chg yoy -9 28 7
EPS (Rs) 7.78 7.00 8 18.8 6.9
PBT margin (%) 38.47 28.55 31.77
PAT margin (%) 27.6 20.2 22.3
Cost/Income ratio (%) 61.5 71.4 68.2

Source: Company

Kotak Securities - Private Client Research Please see the disclaimer on the last page For Private Circulation 23
 MORNING INSIGHT August 3, 2010

ECL's Q1FY11 results better than our expectation. Its topline

grew by 25% yoy to Rs.2793mn; PAT grew by 19% qoq and 7%
yoy to Rs. 623mn as compared to Rs 525mn in Q4FY10
n ECL's reported a revenue growth of 25% yoy and 7.6% qoq to Rs.2793mn from
Rs.2595mn in Q4FY10. We opine that diversification into related business has
aided a healthy top-line growth for ECL. Its revenues growth was mainly driven
by a strong growth in financing and investment businesses. Interest income grew
by 84% yoy and 16% qoq to Rs 1257mn, while income arbitrage business grew
by and 65% qoq. The core brokerage fee and commission income grew by 39%
yoy, while it de-grew by 20% qoq to Rs 934mn (includes income from invest-
ment banking business).
n Edelweiss Capital remains more focused on wholesale financing and investment
banking businesses, which have registered significant growth. It continued to
scale up financing business, with its loan book size increased to Rs 25.6bn (Rs
20bn in Q4FY10) in Q1FY11.
n An uptick in the short term deposit rates which forms part of ECL's interest in-
come has also added a healthy growth in its interest income during Q1FY11.
Scaling up of financing book will aid strong growth in ECLs financing income.

Investment banking business remained healthy during Q1FY11,

muted capital market volumes and pressure on brokerage yield
impacted the core brokerage fee income
n Despite a dull quarter from investment banking prospective, ECL's investment
banking business witnessed healthy growth during Q1FY11, it conclude close to
10 deals (including ECM, Advisory & DCM). The management has indicated that
its deal pipelines remains strong.
n We are of the view that its strong relations with large corporate as well as
emerging and mid market companies has helped in maintaining traction in its in-
vestment banking fee income.
n Equity broking business witnessed muted earning growth during Q1FY11, follow-
ing subdued capital market volumes and pressure on brokerage yields. ECL's
average daily volumes (ADV) stood at Rs. 40.8bn (lower from Rs. 47bn in
Q4FY10 and Rs. 43.5bn in Q1FY10). ECL's ADV also includes volumes in its arbi-
trage business.
n ECL's brokerage remained under pressure during Q1FY11 and stood at 4.6bps as
compared to 5.7bn in Q4FY10 and 5.5bps in Q1FY10. This has been mainly due
to increase in share of low brokerage yield F&O segment and increasing compe-
tition.
n ECL has not consolidated the recently acquired retail broking business - Anagram
Capital in Q1FY11. Consolidated will become effective from Q2FY11. Anagram
added 139 owned offices and 122 franchisee led offices with over 2.7lakh cus-
tomers.
n New business initiative- ECL is venturing into mortgage finance business with
Edelweiss Housing Finance Limited, which has received NHB approval. This is
with a view to diversify its financing business.

Kotak Securities - Private Client Research Please see the disclaimer on the last page For Private Circulation 24
 MORNING INSIGHT August 3, 2010

Margins were under pressure due to increase in operating and

interest costs; stood at 31.8% (28.6% in Q4FY10) PAT margin
stood at 22.3% (20.2% in Q4FY10)
n ECL's operating cost increased by 8.5% yoy, this was mainly due to 7.7% qoq
and 27.5% yoy increase in its employee cost.
n Further, with a swift ramp up in the financing book, which grew by 39% qoq to
Rs.25.6bn, interest cost has also increased in the wake of increased borrowings.
n This has impacted ECL's operating (PBT level) and net profit margins during
Q1FY11. Its PBT margins stood at 31.8% (as compared to 28.6% in Q4FY10 and
38.5% in Q1FY10), while its net profit margin stood at 22.3% (as compared to
20.2% in Q4FY10 and 27.6% in Q1FY10).

Valuation and recommendation

We recommend ACCUMULATE on n We maintain our positive outlook on Edelweiss capital and maintain our earnings
Edelweiss Capital with a price estimates for FY11 and FY12 at Rs. 2.8bn and Rs.3.3bn respectively. Our earn-
target of Rs.525 ings estimates factor in consolidation of Anagram Capital.
n At current market price the stock is trading at P/E of 12.6x 10.7x its FY11 and
FY12 earnings estimates. We opine that ECL is well placed in the capital market
intermediary space and recommend investors to accumulating on declines. We
maintain our price target of Rs. 525, (7.5% upside from current levels).

Kotak Securities - Private Client Research Please see the disclaimer on the last page For Private Circulation 25
 MORNING INSIGHT August 3, 2010

AUTO INDUSTRY UPDATE AUTO INDUSTRY VOLUME UPDATE - JULY 2010

Arun Agarwal
arun.agarwal@kotak.com Auto players reported volumes for the month of July 2010 did not see any
+91 22 6621 6143 major deviation from our expectations. While volumes increased over July
2009 volumes, the same remained flat as against June 2010 volumes.
Volumes generally tend to be on the lower side in the monsoon period and
therefore majority of the players reported flat sequential growth. We expect
volumes to remain more or less the same in the month of August 2010 as
compared to July 2010. Auto volumes were once again plagued by
component shortage but we expect the situation to start improving from
September onwards. We continue to adopt an optimistic view for the auto
volumes over the next 3-4 months post which high base effect will come
into picture.

Summary - July 2010 volumes

July June July YoY MoM YTD YTD Growth
2009 2010 2010 gth (%) gth (%) FY10 FY11 (%)

Hero Honda
2W 366,808 426,454 427,686 17 0 1,485,795 1,661,725 12
Bajaj Auto
Motorcycles 168,163 282,808 279,781 66 (1) 650,890 1,108,172 70
Total 2W 168,731 282,808 279,781 66 (1) 653,151 1,108,199 70
3W 24,104 32,614 38,634 60 18 87,346 138,552 59
Total 2W+3W 192,835 315,422 318,415 65 1 740,497 1,246,751 68
Exports out of the above 73,170 114,024 106,794 46 (6) 251,465 430,693 71
TVS Motor
Scooters 27,582 36,742 40,357 46 10 94,752 135,843 43
Motorcycles 42,998 66,452 61,051 42 (8) 195,776 261,409 34
Mopeds 50,364 53,491 61,698 23 15 177,557 221,895 25
Total sales 120,944 156,685 163,106 35 4 468,085 619,147 32
Exports 13,061 16,780 20,067 54 20 44,417 74,111 67
Maruti Suzuki
A1 (M800) 2,796 2,090 1,680 (40) (20) 9,915 8,586 (13)
A2 48,115 51,418 64,079 33 25 194,848 234,592 20
A3 (SX4, D'zire) 9,101 8,081 10,352 14 28 29,048 39,310 35
MUV (Grand Vitara, Gypsy) 214 1,309 386 80 (71) 1,597 3,375 111
C (OMNI, Eeco) 7,302 9,914 13,617 86 37 29,535 47,138 60
Total Domestic 67,528 72,812 90,114 33 24 264,943 333,001 26
Export 10,546 15,279 10,743 2 (30) 39,860 51,180 28
Total Sales 78,074 88,091 100,857 29 14 304,803 384,181 26
M&M
UV 16,688 17,010 16,720 0 (2) 65,408 70,668 8
3W/Gio/Maxximo 3,806 7,559 7,824 106 4 12,838 27,900 117
LCV 1,019 1,111 1,007 (1) (9) 3,513 3,985 13
Car (Logan) 444 563 752 69 34 1,922 2,068 8
Total Domestic 21,957 26,243 26,303 20 0 83,681 104,621 25
Export 606 1,319 1,746 188 32 1,751 5,521 215
Total Sales 22,563 27,562 28,049 24 2 85,432 110,142 29
Tractors 12,850 16,590 14,592 14 (12) 56,235 64,740 15
Tata Motors
M&HCV 10,658 15,139 15,256 43 1 37,284 57,412 54
LCV 17,750 19,652 20,438 15 4 63,180 75,511 20
Utility 2,654 3,602 3,251 22 (10) 10,719 12,901 20
Cars 14,537 24,209 24,613 69 2 52,309 87,202 67
Total Domestic 45,599 62,602 63,558 39 2 163,492 233,026 43
Export 2,455 5,128 4,241 73 (17) 7,675 16,484 115
Total Sales 48,054 67,730 67,799 41 0 171,167 249,510 46

Source: Companies

Kotak Securities - Private Client Research Please see the disclaimer on the last page For Private Circulation 26
 MORNING INSIGHT August 3, 2010

HERO HONDA (HH)

HH - 2W sales volume
July June July YoY MoM YTD YTD Growth
2009 2010 2010 gth (%) gth (%) FY10 FY11 (%)

2W 366,808 426,454 427,686 16.6 0.3 1,485,795 1,661,725 11.8

Source: Company

n HHML reported another month of strong 2W volumes of 427,686 units. The com-
pany reported 16% YoY growth despite its high base. MoM volumes remained
flat.
n Company is witnessing growth in all the segments. Scooter segment grew by
more than 60% YoY in July 2010.
n FY11 YTD monthly run-rate of the company stands at 415,431 units as against
our FY11 estimated monthly run-rate of ~421,000 unit.
n HHML have a series of new launches that should help the company encash in
the upcoming festive season.
n HHML have lost significant market share in the past one year and we expect the
trend will continue in FY11. Despite loss in market share we expect the
company's volumes in FY11 to grow by 10%.

HHML - 2W sales volume

500,000 80

400,000
60
300,000
40
200,000
20
100,000

- -
Jul-09

Jul-10
Feb-10

Mar-10
Jan-10

May-10

Jun-10
Nov-09

Dec-09
Oct-09
Sep-09
Aug-09

Apr-10

Source: Company

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 MORNING INSIGHT August 3, 2010

BAJAJ AUTO LIMITED (BAL)

BAL - sales volume
July June July YoY MoM YTD YTD Growth
2009 2010 2010 gth (%) gth (%) FY10 FY11 (%)

Motorcycles 168,163 282,808 279,781 66.4 (1.1) 650,890 1,108,172 70.3

Total 2W 168,731 282,808 279,781 65.8 (1.1) 653,151 1,108,199 69.7
3W 24,104 32,614 38,634 60.3 18.5 87,346 138,552 58.6
Total 2W+3W 192,835 315,422 318,415 65.1 0.9 740,497 1,246,751 68.4
Exports out of the above 73,170 114,024 106,794 46.0 (6.3) 251,465 430,693 71.3

Source: Company

n Bajaj Auto posted their highest monthly volumes of 318,415 units in the month
of July 2010. Strong 3W volumes was the main highlight for July 2010 volumes.
Overall volumes grew by 65% YoY with domestic volumes growing by 77% and
exports rising by 46%. Volumes continued to be impacted by production con-
straints.
n In the motorcycle space, the company sold 279,781 units, 66% higher than July
2009 2W sales of 168,731 units. Discover and Pulsar continues to fuel the motor-
cycle growth for the company. On sequential basis, motorcycle sales were down
marginally.
(continued ....)

2W sales volume trend 3W sales volume trend

Volume (Units - LHS) % YoY growth (RHS) Volume (Units - LHS)

50,000 % YoY growth (RHS) 120
300,000 125
240,000 100 40,000 90
180,000 75 30,000
120,000 50 60
20,000
60,000 25
10,000 30
- -
(60,000) (25) - -
Jul-09

Jul-10
Feb-10
Mar-10
Jan-10

May-10
Jun-10
Nov-09
Dec-09
Oct-09
Sep-09
Aug-09

Apr-10
Jul-09

Jul-10
Feb-10
Mar-10
Jan-10

May-10
Jun-10
Nov-09
Dec-09
Oct-09
Sep-09
Aug-09

Apr-10

Source: Company Source: Company

Export volume trend Market Mix

Domestic Export
Volume (Units - LHS)
120,000 150 100%
% YoY growth (RHS)
120 75%
90,000
90
60,000 50%
60
30,000 25%
30

- - 0%
Jul-09

Jul-10
Feb-10
Mar-10
Jan-10

May-10
Jun-10
Nov-09
Dec-09
Oct-09
Sep-09
Aug-09

Apr-10

Jul-09

Jul-10
Mar-10
Jan-10

May-10
Nov-09
Sep-09

Source: Company Source: Company

Kotak Securities - Private Client Research Please see the disclaimer on the last page For Private Circulation 28
 MORNING INSIGHT August 3, 2010

n Company remains confident of hitting the 300,000 motorcycles sales mark by

September 2010. Additional volumes are expected to come from "Discover 150"
that was launched in May 2010. Company expects to sell around 40,000-45,000
units of Discover 150 in the next few months as against current sale of ~25,000
units per month.
n In the 3W segment, the company reported its highest ever monthly sales of
38,634 units on the back of strong 3W demand from both the domestic and the
export market. Additional demand in the domestic market because of removal
of permit system from Tamil Nadu is expected to keep the 3W volumes strong
over the next couple of months.
n BAL exported 106,794 units in July 2010, 46% more than July 2009 export vol-
ume of 73,170 units. In FY11, the company has witnessed considerable improve-
ment in exports and we expect the company to cross sales of more than a mil-
lion units in exports in FY11.
n We expect monthly volumes to touch the 350,000 units by September - October
2010. Company remains confident of selling 4mn units in FY11. We remain posi-
tive on the volume growth prospects of the company in FY11.

Kotak Securities - Private Client Research Please see the disclaimer on the last page For Private Circulation 29
 MORNING INSIGHT August 3, 2010

TVS MOTORS
TVS Motors - sales volume
July June July YoY MoM YTD YTD Growth
2009 2010 2010 gth (%) gth (%) FY10 FY11 (%)

Scooters 27,582 36,742 40,357 46.3 9.8 94,752 135,843 43.4

Motorcycles 42,998 66,452 61,051 42.0 (8.1) 195,776 261,409 33.5
Mopeds 50,364 53,491 61,698 22.5 15.3 177,557 221,895 25.0
Total sales 120,944 156,685 163,106 34.9 4.1 468,085 619,147 32.3
Exports 13,061 16,780 20,067 53.6 19.6 44,417 74,111 66.9

Source: Company

n 2W sales for the company increased from 120,944 units in July 2009 to 163,106
units in July 2010. Volumes for July 2010 were higher by 4% over June 2010
volumes. The company is showing increase in sequential volumes from April
2010 on back of healthy performance from its new launches.
n TVSM has significantly improved its scooters sales in the past few months. TVS
has received tremendous response for Wego and the same are been reflected in
the monthly scooter numbers. TVSM sold 40,357 scooters in July 2010 as against
27,582 units sold in July 2009. Scooters jumped by 10% over June 2010 volumes
of 36,742 units. Scooter demand have increased considerably and therefore de-
spite new products been launched in the markets, the existing products continue
to do well. Company is expecting to sell 480,000 scooters in FY11E translating
into 40,000 units per month.
(continued ....)

Scooters sales volume trend Motorcycles sales volume trend

Volume (Units - LHS) Volume (Units - LHS)
80,000 % YoY growth (RHS) 80
36,000 % YoY growth (RHS) 60
60,000 60
27,000 45
40,000 40
18,000 30
20,000 20
9,000 15
- -

- - (20,000) (20)
Jul-09

Jul-10
Feb-10
Mar-10
Jan-10

May-10
Jun-10
Nov-09
Dec-09
Oct-09
Sep-09

Jul-09

Jul-10
Feb-10
Mar-10
Jan-10

May-10
Jun-10
Nov-09
Dec-09
Oct-09
Aug-09

Sep-09
Apr-10

Aug-09

Apr-10

Source: Company Source: Company

Mopeds sales volume trend Exports sales volume trend

Volume (Units - LHS) Volume (Units - LHS)
% YoY growth (RHS) 24,000 % YoY growth (RHS) 100
75,000 44
18,000 75
60,000
33 12,000 50
45,000
22 6,000 25
30,000
- -
11
15,000
(6,000) (25)
- - (12,000) (50)
Jul-09

Jul-10
Feb-10
Mar-10
Jan-10

May-10
Jun-10
Nov-09
Dec-09
Oct-09
Sep-09
Aug-09

Apr-10

Jul-09

Jul-10
Feb-10
Mar-10
Jan-10

May-10
Jun-10
Nov-09
Dec-09
Oct-09
Sep-09
Aug-09

Apr-10

Source: Company Source: Company

Kotak Securities - Private Client Research Please see the disclaimer on the last page For Private Circulation 30
 MORNING INSIGHT August 3, 2010

n Motorcycle sales for the month were a bit disappointing despite 42% YoY jump.
Company sold 61,051 motorcycles, the lowest in the past seven months.
Company's motorcycle sales had improved over the past few months because of
their new launch Jive and overall strong demand momentum. Lower motorcycle
sales will lead to detoriation in the company's product mix.
n TVS posted its highest ever moped sales of 61,698 units as against July 2009 and
June 2010 sales of 50,364 units and 53,491 units respectively. Increased moped
share in the overall volumes will impact the company's margin negatively.
n Exports for the month saw a good improvement both on YoY and MoM. Exports
for the month at 20,067 units increased by 54% YoY and 20% MoM.
n TVSM sold 3,108 3W's in the month of July 2010 as against 1,026 sold during
corresponding period previous year. Volumes were marginally higher than June
2010 volumes of 3,003 units. With Tamil Nadu doing away with the permit sys-
tem, we expect the company to continue its 3000+ units sales during 2QFY10.
n We expect the company to perform well on the volumes front with strong perfor-
mance from the scooter segments and export markets.

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 MORNING INSIGHT August 3, 2010

MARUTI SUZUKI LTD (MSIL)

MSIL - sales volume
July June July YoY MoM YTD YTD Growth
2009 2010 2010 gth (%) gth (%) FY10 FY11 (%)

A1 (M800) 2,796 2,090 1,680 (39.9) (19.6) 9,915 8,586 (13.4)

A2 48,115 51,418 64,079 33.2 24.6 194,848 234,592 20.4
A3 (SX4, D'zire) 9,101 8,081 10,352 13.7 28.1 29,048 39,310 35.3
MUV (Grand Vitara, Gypsy) 214 1,309 386 80.4 (70.5) 1,597 3,375 111.3
C (OMNI, Eeco) 7,302 9,914 13,617 86.5 37.4 29,535 47,138 59.6
Total Domestic 67,528 72,812 90,114 33.4 23.8 264,943 333,001 25.7
Export 10,546 15,279 10,743 1.9 (29.7) 39,860 51,180 28.4
Total Sales 78,074 88,091 100,857 29.2 14.5 304,803 384,181 26.0

Source: Company

n After the maintenance shut down in June 2010, the company returned to nor-
malcy with volumes of 100,857 units for the month of July 2010. Sequential
comparison is not logical as the company's June 2010 volumes were impacted by
plant shut down.
n MSIL July 2010 sales of 100,857 were higher by 29% over July 2009 sales of
78,074 units. Domestic volumes grew by 33% and exports increased marginally
by 2%.
(continued ....)

A2 segment domestic volume trend Domestic sales volume trend

Volume (Units - LHS) Volume (Units - LHS)
% YoY growth (RHS) 100,000 % YoY growth (RHS) 80
64,000 64
48,000 48 75,000 60

32,000 32 50,000 40
16,000 16
25,000 20
- -
- -
(16,000) (16)
Jul-09

Jul-10
Feb-10
Mar-10
Jan-10

May-10
Jun-10
Nov-09
Dec-09
Oct-09
Sep-09
Aug-09

Apr-10
Jan-10

Jun-10
Jul-09

Jul-10
Feb-10
Mar-10

May-10
Sep-09

Nov-09
Dec-09
Oct-09
Aug-09

Apr-10

Source: Company Source: Company

Export volume trend Business Mix (Domestic)

Volume (Units - LHS) 100% C
20,000 % YoY growth (RHS) 240 MUV
80%
A3
15,000 180 A2
60%
A1
10,000 120 40%

5,000 60 20%

- - 0%
Jul-09

Jul-10
Mar-10
Jan-10

May-10
Nov-09
Sep-09
Jul-09

Jul-10
Feb-10
Mar-10
Jan-10

May-10
Jun-10
Nov-09
Dec-09
Oct-09
Sep-09
Aug-09

Apr-10

Source: Company Source: Company

Kotak Securities - Private Client Research Please see the disclaimer on the last page For Private Circulation 32
 MORNING INSIGHT August 3, 2010

n Domestic A2 segment sales increased by 33% (YoY) to 64,079 units and the
domestic A3 segment was higher by 14% (YoY).
n Launch of Ecco has substantially boosted the company's sales in the C segment
from 7,302 units in July 2009 to 13,617 units in July 2010.
n MSIL's export volumes of 10,743 units are its lowest in the past 12 months. Ex-
ports were expected to slowdown and moving ahead we expect export volumes
to show YoY de-growth.
n Despite competition concerns the company continues to post good growth in the
domestic market. With slowdown in export sales, the company will be able to
bring the waiting period down in some of its models in the domestic market and
the same will help the company improve its market share.
n MSIL will be launching a new Alto with K-series engine and CNG variants of few
of its exiting models. We expect these new launches to help the company in
defending its market share. We expect the company's FY11E volumes to grow
by 13% to 1.15mn units.

Kotak Securities - Private Client Research Please see the disclaimer on the last page For Private Circulation 33
 MORNING INSIGHT August 3, 2010

MAHINDRA AND MAHINDRA (M&M)

M&M - sales volume
July June July YoY MoM YTD YTD Growth
2009 2010 2010 gth (%) gth (%) FY10 FY11 (%)

UV 16,688 17,010 16,720 0.2 (1.7) 65,408 70,668 8.0

3W/Gio/Maxximo 3,806 7,559 7,824 105.6 3.5 12,838 27,900 117.3
LCV 1,019 1,111 1,007 (1.2) (9.4) 3,513 3,985 13.4
Car (Logan) 444 563 752 69.4 33.6 1,922 2,068 7.6
Total Domestic 21,957 26,243 26,303 19.8 0.2 83,681 104,621 25.0
Export 606 1,319 1,746 188.1 32.4 1,751 5,521 215.3
Total Sales 22,563 27,562 28,049 24.3 1.8 85,432 110,142 28.9
Tractors 12,850 16,590 14,592 13.6 (12.0) 56,235 64,740 15.1

Source: Company

n M&M's auto division's domestic volumes increased by 20% primarily driven by

Gio and Maxximo sales. Tractor sales grew by 14% YoY.
n Domestic UV sales almost remained flat both on YoY and MoM. FY11 YTD UV
sales for the company stand at 17,667 units almost similar to FY10 monthly aver-
age of 17,844 units. Even though the UV sales are impacted by component
shortages, we believe that lack of new launches in this segment have stagnated
the company's sales.
(continued ....)

UV - domestic volume trend Tractor - volume trend

Volume (Units - LHS) Volume (Units - LHS)
25,000 % YoY growth (RHS) 150 % YoY growth (RHS)
20,000 160
20,000 120
120
15,000 90 15,000
80
10,000 60 10,000
5,000 30 40
5,000
- - -
(5,000) (30) - (40)
Jul-09

Jul-10
Feb-10
Mar-10
Jan-10

May-10
Jun-10
Nov-09
Dec-09
Oct-09
Sep-09

Jul-09

Jul-10
Feb-10
Mar-10
Jan-10

May-10
Jun-10
Nov-09
Dec-09
Oct-09
Aug-09

Sep-09
Apr-10

Aug-09

Apr-10

Source: Company Source: Company

Domestic volume trend (Automotive) Export volume trend (Automotive)

Volume (Units - LHS) Volume (Units - LHS)

2,000 % YoY growth (RHS) 440
36,000 % YoY growth (RHS) 160
1,500 330
27,000 120
1,000 220
18,000 80
500 110
9,000 40
- -
- -
(500) (110)
Jul-09

Jul-10
Feb-10
Mar-10
Jan-10

May-10
Jun-10
Nov-09
Dec-09
Oct-09
Sep-09
Aug-09

Apr-10

Jul-09

Feb-10

Jul-10
Mar-10
Jan-10

May-10
Jun-10
Nov-09
Dec-09
Oct-09
Sep-09
Aug-09

Apr-10

Source: Company Source: Company

Kotak Securities - Private Client Research Please see the disclaimer on the last page For Private Circulation 34
 MORNING INSIGHT August 3, 2010

n 3W/4W LCV sales continues to be the main growth driver for the company for
the past many months. 3W/Gio/Maxximo sales increased by 106% from 3,806
units in July 2009 to 7,824 units for the period under consideration. Due to lower
base effect, this segment will continue to report strong YoY growth rates for the
next few months and will be the key volume growth driver for the company.
n Logan sales for the month stood at 752 units. Exports for the month jumped
188% YoY from 606 units to 1,746 units.
n Tractor sales grew by 14% to 14,592 units in July 2010 from 12,850 units a year
ago. Tractor industry volumes in FY11 are expected to grow by 15%.

Kotak Securities - Private Client Research Please see the disclaimer on the last page For Private Circulation 35
 MORNING INSIGHT August 3, 2010

TATA MOTORS
Tata Motors - sales volume
July June July YoY MoM YTD YTD Growth
2009 2010 2010 gth (%) gth (%) FY10 FY11 (%)

M&HCV 10,658 15,139 15,256 43.1 0.8 37,284 57,412 54.0

LCV 17,750 19,652 20,438 15.1 4.0 63,180 75,511 19.5
Utility 2,654 3,602 3,251 22.5 (9.7) 10,719 12,901 20.4
Cars 14,537 24,209 24,613 69.3 1.7 52,309 87,202 66.7
Total Domestic 45,599 62,602 63,558 39.4 1.5 163,492 233,026 42.5
Export 2,455 5,128 4,241 72.7 (17.3) 7,675 16,484 114.8
Total Sales 48,054 67,730 67,799 41.1 0.1 171,167 249,510 45.8

Source: Company

n Tata Motors reported solid YoY growth rate of 40% for the month of July 2010.
The company reported growth in all the segments. However MoM growth re-
mained flat. July 2010 sales for the company stood at 67,799 units.
n In the passenger car category, the company sold 24,613 units, 69% more than
July 2009 car sales of 14,537. Nano sales of 9000 units was one of the prime
reason for strong growth. Indica sales at 8,606 remained flat YoY and Indigo
range sales of 7,007 units grew by 100% YoY. UV sales for the company in the
month of July 2010 were higher by 22% YoY at 3,251 units.

(continued ....)

M&HCV - domestic volume trend LCV - domestic volume trend

Volume (Units - LHS) Volume (Units - LHS)
25,000 % YoY growth (RHS) 250 24,000 % YoY growth (RHS) 120
20,000 200
18,000 90
15,000 150
10,000 100 12,000 60
5,000 50
6,000 30
- -
(5,000) (50) - -
Jul-09

Jul-10
Feb-10
Mar-10
Jan-10

May-10
Jun-10
Nov-09
Dec-09
Oct-09
Sep-09
Aug-09

Apr-10

Jul-09

Jul-10
Feb-10
Mar-10
Jan-10

May-10
Jun-10
Nov-09
Dec-09
Oct-09
Sep-09
Aug-09

Apr-10

Source: Company Source: Company

Cars - domestic volume trend Business Mix ( Domestic)

Volume (Units - LHS) 100%
28,000 80 Cars
% YoY growth (RHS)
UV
75%
21,000 60 LCV

50% M&HCV
14,000 40

25%
7,000 20

- - 0%
Jul-09

Jul-10
Mar-10
Jan-10

May-10
Nov-09
Sep-09
Jul-09

Jul-10
Feb-10
Mar-10
Jan-10

May-10
Jun-10
Nov-09
Dec-09
Oct-09
Sep-09
Aug-09

Apr-10

Source: Company Source: Company

Kotak Securities - Private Client Research Please see the disclaimer on the last page For Private Circulation 36
 MORNING INSIGHT August 3, 2010

n LCV segment witnessed 15% growth in volumes that increased from 17,750 ve-
hicles in July 2009 units to 20,438 units in July 2010. Competition has intensified
in the LCV segment, however due to positive outlook, we expect the company
to perform well moving forward.
n M&HCV volumes for July 2010 were 15,256 units, 43% higher YoY and flat se-
quentially. We expect the company YoY growth during 2QFY11 to remain strong
in the M&HCV segment.
n Export volumes increased 73% YoY but declined 17% MoM to 4,241 vehicles.
n Tata Motors is expected to continue its strong volume growth across segments
over the next few months, post which growth rates will start tapering off because
of high base effect.

Kotak Securities - Private Client Research Please see the disclaimer on the last page For Private Circulation 37
 MORNING INSIGHT August 3, 2010

Gainers & Losers Nifty Gainers & Losers

Price (Rs) chg (%) Index points Volume (mn)

Gainers
ICICI Bank 940 3.8 13.3 6.4
SBI 2,586 3.3 7.4 2.1
Bharti Airtel 318 3.7 4.7 8.2
Losers
NTPC 198 (0.3) (0.3) 1.0
ABB 803 (1.0) (0.3) 0.4
TCS 838 (0.2) (0.3) 1.41

Source: Bloomberg

Research Team
Dipen Shah Apurva Doshi Sarika Lohra Jayesh Kumar
IT, Media Logistics, Textiles, Mid Cap NBFCs Economy
dipen.shah@kotak.com doshi.apurva@kotak.com sarika.lohra@kotak.com kumar.jayesh@kotak.com
+91 22 6621 6301 +91 22 6621 6308 +91 22 6621 6301 +91 22 6652 9172
Sanjeev Zarbade Saurabh Agrawal Arun Agarwal Shrikant Chouhan
Capital Goods, Engineering Metals, Mining Automobiles Technical analyst
sanjeev.zarbade@kotak.com agrawal.saurabh@kotak.com arun.agarwal@kotak.com shrikant.chouhan@kotak.com
+91 22 6621 6305 +91 22 6621 6309 +91 22 6621 6143 +91 22 6621 6360

Teena Virmani Saday Sinha Ruchir Khare K. Kathirvelu

Construction, Cement, Mid Cap Banking, Economy Capital Goods, Engineering Production
teena.virmani@kotak.com saday.sinha@kotak.com ruchir.khare@kotak.com k.kathirvelu@kotak.com
+91 22 6621 6302 +91 22 6621 6312 +91 22 6621 6448 +91 22 6621 6311

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