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® Daily Morning Brief January 22, 2008 FOR PRIVATE CIRCULATION Equity ECONOMY NEWS % Chg 21 Jan 08 1 Day 1 Mth 3 Mths q The RBI is likely to keep its monetary policy tight in view of the uncertainties Indian Indices in global financial markets and high prices of crude oil and food items, RBI Sensex 17,605 (7.4) (8.1) (0.0) Governor YV Reddy has said. (ET) Nifty 5,209 (8.7) (9.7) 0.5 q The Commerce Minister has said that high global food prices posed a Banking 10,582 (7.0) (1.5) 17.2 challenge to economies around the world, and nations needed to work IT 3,215 (7.6) (14.9) (16.7) together to tackle the problem. (ET) Healthcare 3,702 (8.0) (12.8) (0.8) FMCG 2,173 (5.6) (1.1) 6.3 q The existing 10% surcharge on personal and corporation income tax may be PSU 8,629 (10.7) (9.3) 5.5 halved or scrapped entirely in the coming Budget. (ET) CNX Midcap 7,374 (11.9) (13.3) 10.6 World indices q Trai has recommended abolishing the existing practice of levying access deficit Nasdaq 2,340 (0.3) (13.1) (14.1) charge from private operators. (BS) Nikkei 13,326 (3.9) (16.4) (22.4) q The RBI has decided to put on hold approvals for about 30 foreign venture Hangseng 23,819 (5.5) (18.5) (20.6) capital funds wanting to invest in the real estate sector. (BS) Value traded (Rs cr) 21 Jan 08 % Chg - 1 Day CORPORATE NEWS Cash BSE 9,019 8.9 Cash NSE 24,526 23.3 q ONGC has reported a 6.46% decline in net profit at Rs.43.66 bn for Q3FY08 Derivatives 82,242 12.9 when compared with Rs.46.68 bn in Q3FY07. Total income during the period declined to Rs.159.84 bn from Rs.162.69 bn in Q3FY07. (BS) Net inflows (Rs cr) q Satyam Computer Services will list its existing American depository shares 18 Jan 08 % Chg MTD YTD on NYSE Euronext. (BS) FII (1,356) (38) (3,702) (3,702) Mutual Fund (272) (175) (21) (21) q NRI industrialist Swraj Paul-owned Caparo Group, a key vendor for Tata Motors' Nano project, is setting up a Rs.1.2-bn facility at Singur to supply FII open interest (Rs cr) sheet metal and vehicle frames for the Nano. (BL) 18 Jan 08 % chg q Bharat Forge has reported an 8% decline in consolidated net profit at FII Index Futures 25,548 (7.2) Rs.709.6 mn for Q3FY08 when compared with Rs.769.6 mn in Q3FY07. Total FII Index Options 10,607 (6.8) income increased to Rs.10.99 bn from Rs.10.37 bn in Q3FY07. (BS) FII Stock Futures 45,489 (18.3) FII Stock Options 230 (8.8) q L&T has said it has received an order for reactors worth Rs.16.95 bn ($430 mn) from Kuwait National Petroleum Co. (BL) Advances/Declines (BSE) q Dr Reddy's Laboratories has said it has settled with Novartis on litigation 21 Jan 08 A B1 B2 Total % Total related to a generic version of the Swiss firm's Exelon drug. (BL) Advances 3 4 45 52 3 q Subex has bagged a contract from Umniah, a subsidiary of Bateleco Bahrain, Declines 214 658 580 1,452 96 to provide fraud management and revenue assurance solutions. (BS) Unchanged - - 5 5 0 q Aurobindo Pharma has received approval from the USFDA to market its 300 Commodity mg Cefdinir capsules in the US market. (BL) % Chg q Saudi Arabian Airlines has announced that it has awarded a long-term IT 21 Jan 08 1 Day 1 Mth 3 Mths infrastructure transformation contract to Wipro Arabia (a JV between Wipro Crude (NYMEX) (US$/BBL) 90.6 0.5 (2.9) 2.2 and Dar Al Riyadh Group, which provides IT solutions and services in Saudi Gold (US$/OZ) 865.0 (2.1) 6.3 14.4 Arabia). (BS) Silver (US$/OZ) 15.6 (3.6) 8.3 15.5 q Neyveli Lignite has reported a 33.94% increase in net profit at Rs.2.04 bn Debt/forex market for Q3FY08 as compared to Rs.1.53 bn during Q3FY07. Total income rose 26.94% to Rs.8.16 bn for Q3FY08 from Rs.6.43 bn in Q3FY07. (BL) 21 Jan 08 1 Day 1 Mth 3 Mths 10 yr G-Sec yield % 7.58 7.58 7.83 7.90 q Spice Communications has said its board will meet on January 30 to Re/US$ 39.56 39.30 39.55 39.90 consider a proposal to buy back equity shares. (BL) Sensex q Nucleus Software Exports has registered an 11.41% growth in its net profit 20,900 at Rs.155.3 mn for Q3FY08. (BL) 18,600 q MRPL and Shell Aviation have entered into an exclusive joint venture to market and supply aviation fuel at the Bangalore and Hyderabad airports. (BS) 16,300 14,000 11,700 Jan-07 Mar-07 May-07 Jul-07 Sep-07 Nov-07 Jan-08 Source: Bloomberg Source: ET = Economic Times, BS = Business Standard, FE = Financial Express, BL = Business Line, ToI: Times of India, BSE = Bombay Stock Exchange Registered Office: Kotak S ecurities Limited, B akhtaw ar, 1st floor, 229 Nariman P oint, Mumbai 400021 India. Please see the disclaimer on the last page January 22, 2008 Kotak Securities - Private Client Research FROM OUR RESEARCH TEAM RESULT UPDATE SATYAM COMPUTER SYSTEMS LTD Dipen Shah PRICE : RS.390 RECOMMENDATION : BUY email@example.com +91 22 66341376 T ARGET PRICE : RS.560 FY09E PE : 13X Saurabh Gurnurkar Highlights firstname.lastname@example.org +91 22 66341273 n A strong volume growth of 9.4% lead to an 8.1% QoQ rise in revenues for the quarter. Q3FY08 has been the fourth consecutive quarter of 9%-plus volume growth. This reflects positive business momentum and Satyam's client-account management abilities. n Q3FY08 has also seen Satyam registering the highest volume growth among comparable peers. The company also saw the most significant increases for Satyam in client pricing ever - 2.4% for onsite and 2.3% for offshore projects. n The management sees no perceptible impact on outsourcing and offshoring due to US the sub-prime issue, yet. n Satyam's revised guidance of 45.2% revenue growth (42% earlier) and 39.6% EPS growth in US dollar terms indicates high visibility in volumes. Growth in INR terms for FY08 was guided at 29% and 19%, respectively. n We estimate Satyam's EPS at Rs.25.8 (Rs.25.7 earlier) in FY08 and Rs.30.7 (Rs.30) in FY09E. We recommend a BUY on n We re-iterate a BUY recommendation on the stock with a price target of Rs.560, Satyam Computers with a a 44% upside from current levels. We have assigned a target multiple of 18.2x price target of Rs.560 FY09E earnings. This is a discount to our target valuations for a larger peer like Infosys. n An accelerated slowdown/recession in major user economies and a sharper- than-expected appreciation in the rupee v/s major currencies are key risks to our call. Q3FY08 results (Rs mn) Q3FY08 Q2FY08 QoQ (%) Q3FY07 YoY (%) Income 21,956 20,317 8.1 16,611 32.2 Expenditure 17,244 16,284 12,511 Operating profit 4,712 4,033 16.8 4,100 14.9 Depreciation 423 391 394 Gross profit 4,289 3,643 17.7 3,706 15.7 Interest 81 41 32 Other income 705 1,105 102 PBT 4,913 4,706 4.4 3,776 30.1 Tax 576 609 403 PAT 4,336 4,097 5.8 3,372 28.6 PAT after E.O. items 4,336 4,097 5.8 3,372 28.6 Shares (mn) 669 669 667 EPS (Rs) 6.5 6.1 5.1 OPM (%) 21.5 19.9 24.7 GPM (%) 19.5 17.9 22.3 NPM (%) 19.8 20.2 20.3 Source : Company Daily Morning Brief Please see the disclaimer on the last page For Private Circulation 2 January 22, 2008 Kotak Securities - Private Client Research Volume growth at 9.4% QoQ; fourth consecutive quarter of 9%- plus growth, higher than larger peers n Volumes continued to show high growth of 9.4% in Q2FY08. We also note that the 9.4% volume growth is higher than the growth reported for the quarter by larger peers. n In our opinion, Satyam's relationship management initiatives and broadening of the service profile have allowed it to further penetrate its existing clients. n The company continued to reduce its client concentration risk with the largest client forming less than 6% of its revenues during the quarter v/s 6.6% in FY07. n The retail and transportation as well as the healthcare and pharma verticals grew faster than others during the quarter, indicating Satyam's penetration within these new verticals. n Within verticals, BFSI posted 2% QoQ growth. The management has stated that it is not seeing any impact on business from this vertical on account of sub- prime and credit crisis related issues in the US, yet. BFSI contributes to 22.4% (lower than comparable peers) of overall revenues and the US geography 60% to overall revenues for Satyam. Vertical-wise revenue break-up (% of revenues) Q3FY08 Q2FY08 BFSI 22.40 23.81 Manufacturing 23.22 23.73 Times 23.07 23.52 Healthcare / Pharma 8.02 7.94 Retail / Trans / Logi 9.13 7.48 Others 14.16 13.52 Source : Company Geographical break up of revenues (% of revenues) Q3FY08 Q2FY08 USA 60.02 58.43 Europe 20.52 20.95 ROW 19.46 20.62 Source :Company n Europe continued to grow at a healthy clip (6% QoQ), US revenues in Q3 grew at higher than company average of 11% QoQ. n We opine that this growth from US accounts, 60% of revenues, reflect Satyam's account management abilities and the positive momentum it is witnessing on account of an extended breadth of offerings. n Average realizations were higher by 240 bps and 230 bps for on-site and offshore projects respectively. This reflects the billing rate productivity Satyam is able to drive in its business. n According to the management, it has been able to get higher than average realizations from new clients and has also been able to successfully re-negotiate contracts from several new clients. Margins up 150 bps QoQ - higher offshore, better offshore utilization & beneficial pricing n Satyam's EBIDTA margins at 21.5% were higher by about 150 bps QoQ. Margins increased due to the higher offshore proportion (52.1% from the 50.4% in Q2FY08 and 49% in Q3FY07), better utilization offshore (78.21% v/s 76% in Q2FY08) and the better average realizations registered by the company. n In our opinion, the company has utilized these levers to control the impact on margins. Margin headwinds for Satyam were the adverse rupee, on-going investments in its subsidiaries and wage costs. Daily Morning Brief Please see the disclaimer on the last page For Private Circulation 3 January 22, 2008 Kotak Securities - Private Client Research Other income, positive for PAT n Satyam reported other income of Rs.704 mn as its translation losses were lower than the hedging and MTM gains. n The company continues to adopt a policy of hedging about 75% of its next 12 months' receivables. As on Q3FY08 end, the company had $1 bn of outstanding hedges. Macro trends intact… as of now; customer additions, employee additions and low attrition are positives n The management has indicated that it has not witnessed any slowdown in demand from its clients due to the macroeconomic changes in user economies. However, we believe a sharp deceleration or a recession in major economies can impact revenue growth for Indian vendors. n Satyam has in the recent past won a large deal from Nestle. The company is pursuing several such large deals at present and enjoys a healthy pipeline that is reflected in the new client wins registered in Q3. In Q3, Satyam added 32 new customers including eight Fortune Global and US 500 corporations. n Satyam also added 3424 associates in Q3 and reported a decreased attrition number of 13.1%. This was the sixth quarter in a row where Satyam has decreased its attrition number. Satyam acquires Bridge Strategy - a US management consulting company n Satyam will pay $35 mn to acquire the firm, which generated $17 mn in annual revenues last fiscal. n The company has 36 management consultants on its rolls. Satyam hopes this acquisition will strengthen its consulting capabilities. Satyam uses multiple levers to protect, and grow margins n Improvement in realizations, higher operational efficiency, and scale benefits in terms of SG&A, better profitability in subsidiaries and higher productivity in FP projects are the margin levers the company plans to utilize. n While the levers for improvement do exist, we will closely watch the implementing of these initiatives as achieving cost improvement is crucial especially in the backdrop of the rupee appreciation and salary pressures. Future prospects (Rs mn) FY07 FY08E % chg FY09E % chg Income 64,851 83,698 29.1 103,028 23.1 Expenditure 49,474 65,416 80,666 Operating profit 15,377 18,282 18.9 22,362 22.3 Depreciation 1,484 1,641 1,930 Gross profit 13,893 16,641 19.8 20,432 22.8 Interest 159 185 120 Other income 1,833 3,191 3,400 PBT 15,566 19,647 26.2 23,712 20.7 Tax 1,520 2,403 3,201 PAT 14,046 17,245 22.8 20,511 18.9 Sh of Pft/(loss) / Min int 1 - - PAT after E.O. items 14,047 17,245 22.8 20,511 18.9 Shares (mn) 669 669 669 EPS (Rs) 21.0 25.8 30.7 OPM (%) 23.7 21.8 21.7 GPM (%) 21.4 19.9 19.8 NPM (%) 21.7 20.6 19.9 Source : Company, Kotak Securities - Private Client Research Daily Morning Brief Please see the disclaimer on the last page For Private Circulation 4 January 22, 2008 Kotak Securities - Private Client Research n We have made changes to our earnings estimates in view of the Q3FY08 numbers and the appreciation in the rupee. n We have assumed a 200 bps fall in margins in FY08 v/s FY07 to 21.8%. We expect margins to further settle at 21.7% in FY09E n Based on these, we arrive at an EPS of Rs.25.8 and Rs.30.7 for FY08E and FY09E, respectively. Valuations n We value Satyam based on the P/E method. We have accorded a valuation of about 18.2x FY09E earnings, a 20% discount to the valuations accorded by us to Infosys. n We believe this discount is fair, based on the revenue and earnings visibility and the growth expected in FY08-09E on a larger base. n At those valuations, the price target works out to Rs.560, implying an upside of 44% from current levels. We maintain BUY on Satyam. Concerns n An accelerated slowdown/recession in major user economies may impact our projections. n Appreciation of the rupee v/s the US dollar above our assumed levels of Rs.38.5 by FY09 end will impact our projected financials negatively. Daily Morning Brief Please see the disclaimer on the last page For Private Circulation 5 January 22, 2008 Kotak Securities - Private Client Research RESULT UPDATE ALLSEC TECHNOLOGIES Dipen Shah PRICE : RS.108 RECOMMENDATION : REDUCE email@example.com +91 22 66341376 T ARGET PRICE : RS.108 FY09E PE : 27X Saurabh Gurnurkar Highlights firstname.lastname@example.org +91 22 66341273 n Allsec's Q3FY08 results were significantly below OUR estimates. Revenues de- grew 18% QoQ to Rs.230 mn and PAT de-grew multi-fold to a loss of Rs.68 mn in the quarter. Q2FY08 revenues and PAT stood at Rs.282 mn and Rs.17 mn, respectively. n Continuing scale up issues with a couple of clients including one in the student loan consolidation segment led to the below par performance. Seasonality on account of lower working days in Q3FY08 was also an additional headwind for Allsec. n Revenue visibility for Allsec has also depreciated significantly, in our opinion, given the reduction of 650-odd employees during Q3. n We have revised our earnings post the Q3 numbers and recommend a REDUCE on the stock with a DCF-based target price of Rs.108. We opine that depreciated revenue visibility, continuing client scale up issues, an appreciated rupee and an uncertain macro environment will be significant headwinds for the stock in the medium-term. n Our previous notes have consistently highlighted the headwinds, which Allsec was facing. In light of this we have had a cautious approach to the stock post the Q2 results. We have also preferred the larger IT services players and back them to cope with the sector headwinds more effectively than smaller companies. n In financials, we estimate a loss of Rs.48 mn in FY08 and a PAT of Rs.63 mn in FY09. We expect an EPS of Rs.4 in FY09E. We recommend a REDUCE with a DCF-based price target of Rs.108. n An accelerated slowdown/recession in major user economies and a sharper- than-expected appreciation in the rupee v/s major currencies are key risks to our call. Consistent client scale-ups, if they materialize, may make us more optimistic on the company's prospects. Q3FY08 results (Rs mn) Q2FY08 * Q3FY08 * QoQ (%) Q3FY07 YoY (%) Income 281.5 230.1 -18.2 272.3 -15.5 Expenditure 289.0 261.8 192.4 EBDITA -7.5 -31.7 - 79.9 - Depreciation 22.0 21.0 19.9 EBIT -29.5 -52.7 60.0 Interest 0.0 1.6 1.3 Other income 11.8 12.2 11.2 PBT -17.7 -42.1 - 69.8 - Tax -0.4 25.5 0.3 PAT -17.4 -67.6 - 69.5 - Shares (mn) 15.7 15.7 15.7 EPS (Rs.) -1.1 -4.3 4.4 Margins (%) EBDITA -2.7 -13.8 29.3 EBIT -10.5 -22.9 22.0 PAT -6.2 -29.4 25.5 Source : Company * - Consolidated with B2K Daily Morning Brief Please see the disclaimer on the last page For Private Circulation 6 January 22, 2008 Kotak Securities - Private Client Research Revenues - down due to client issues and rupee appreciation n Revenues during the quarter de-grew 18% QoQ. While the rupee appreciation and seasonal factors did impact the company, revenue growth slowed down more because of scale up issues with a couple of clients, in our opinion. Student loan consolidation business - impacted negatively by regulatory changes n The company is present in the student loan consolidation business. We believe this business contributed about 10% of FY07 revenues. n Student loans have been guaranteed by the US Government, thus, facilitating the consolidation and selling of portfolios. According to the management, the US Government has recently increased the fees, which have to be paid to the Government by the consolidators. The fees were charged by the Government for facilitating consolidation of loans by making necessary changes in records. n We understand that the increase in fees has made consolidation and sale of student loan portfolios unviable for private companies. n This has forced them to curtail business activities, in turn, impacting Allsec. While the new fees came into effect from end of September 2007, companies had already curtailed operations. This has impacted Allsec's Q3FY08 revenues, significantly, in our opinion. Credit squeeze likely impacts CCRT revenue stream n On the other hand, the overall credit squeeze may impact the scale up of CCRT revenues. n CCRT revenues likely fell by about 29% QoQ and contributed about 34% to Allsec's Q3FY08 results v/s 39% in the previous quarter. n We expect revenues from CCRT to remain under pressure in the near term, impacting our visibility for the company negatively. New initiatives - still to scale up n Allsec had entered into an agreement to acquire 100% stake in M/s Kingdom Builders Inc, a company in Philippines engaged in BPO operations. This is in line with its intention of setting up an alternative delivery base in that country. n The total cost of acquisition would be around US$1.5 mn of which, 50% is to be paid upfront. The balance will be paid on achievement of mile-stones. This acquisition is expected to scale up towards FY09 with a contribution of $5 mn from a Q2 run rate of $0.25 mn per month. n While the relationship with another client - SalesForce in Australia is progressing, it has not been able to scale-up to the desired extent. With the progress in this geography being slower than estimated, Allsec is looking for an acquisition to scale up the business. EBIDTA margins plummet - low revenue growth, rupee appreciation and falling utilization levels. Employee retrenchment - a negative surprise for us n The company incurred a loss at the EBIDTA levels because of de-growth in revenues and also rupee appreciation. n Allsec also retrenched close to 670 employees due to continuing issues with client scale up- in the business segments. n This came as a major surprise for us as it came on the back of significant additions in the first two quarters of the fiscal. n The management had indicated in Q2FY08 that the additions reflect the revenue visibility. We believe this reduction does not bode well for the company's revenue visibility going ahead. n The company believes this reduction in employee base will help it to curtail employee costs. This is vital, more so in a scenario where visibility has dropped on account of client issues. Daily Morning Brief Please see the disclaimer on the last page For Private Circulation 7 January 22, 2008 Kotak Securities - Private Client Research Future prospects (Rs mn) FY07 FY08E YoY (%) FY09E YoY (%) Income 1132.8 1014.5 -10.4 1131.1 11.5 Expenditure 807.4 1000.4 1040.0 EBDITA 325.4 14.1 -95.7 91.1 546.2 Depreciation 79.4 85.1 97.0 EBIT 246.0 -71.0 -5.9 Interest 3.9 1.9 0.0 Other income 38.5 47.9 70.2 PBT 280.6 -25.0 - 64.3 - Tax -0.6 23.1 1.3 PAT 281.2 -48.1 - 63.1 - Shares (mn) 15.7 15.7 15.7 EPS (Rs) * 17.9 -3.1 4.0 Margins (%) EBDITA 28.7 1.4 8.1 EBIT 21.7 -7.0 -0.5 PAT 24.8 -4.7 5.6 Source: Company, Kotak PCG estimates * - On fully diluted equity n Post the Q3 numbers we expect consolidated revenues to de-grow 10% YoY to Rs.1 bn in FY08 and then grow 11.5% to Rs.1.13 bn in FY09. n The company is expected to post a positive EBITDA in FY09 as gains from better resource utilization, a pick up in revenues and savings on employee front are expected to alleviate the performance. n Margins are expected to come down significantly from FY07 levels because of relatively lower revenue growth, rupee appreciation and salary increases. n Consequently, PAT is expected to stand at Rs.63 mn in FY09, an EPS of Rs.4 on the enhanced equity capital. Valuations n Based on our DCF analysis, we arrive at a price target of Rs.108. We recommend a REDUCE due to the likely reduced revenue visibility, aggravated by uncertain economic conditions in the US. Concerns n Rupee appreciation beyond our assumed levels of Rs.38.5 per US dollar by FY09-end could provide a downward bias to our earnings estimates. n A steep deceleration in major global economies could impact revenue growth of Indian vendors, including Allsec. Daily Morning Brief Please see the disclaimer on the last page For Private Circulation 8 January 22, 2008 Kotak Securities - Private Client Research RESULT UPDATE NIIT L TD. Dipen Shah PRICE : RS.121 RECOMMENDATION : HOLD email@example.com +91 22 66341376 T ARGET PRICE : RS.137 FY09E PE : 14X The Q3FY08 results of NIIT Ltd were below our expectations. Revenues disappointed while margins also came in lower-than- expected. The corporate learning business continues to be impacted. We have made marginal changes to our earnings estimates. We continue to recommend HOLD. Upsides are possible from potential divestment of NIITT's stake. n NIIT's results for Q3FY08 were below our expectations n The performance was impacted by the rupee appreciation (corporate learning) and discontinuance of one BOT project from the Andhra Pradesh Government in school learning solutions business. n EBIDTA margins were lower in most cases except the schools learning business. n Enrolments were up 28% YoY. India enrolments were up 29% YoY. n We have made changes to our earnings estimates. EPS is expected to be Rs.4.7 in FY08E and Rs.8.7 in FY09E. n Our DCF-based fair price works out to Rs.137. n We believe the current price adequately discounts our earnings estimates and recommend a HOLD. Divestment of NIITT's stake, if any, may provide upsides. We recommend HOLD on n The key risk to our call stems from better-than-expected margins in the NIIT Ltd with a price individual learning business. On the other hand, lower-than-expected margins target of Rs.137 in this business may impact the company's performance adversely. Also, the rupee appreciation and any slowdown in major user economies may impact growth adversely. Q3FY08 results (Rs. mn) Q3FY08 Q3FY07 YoY (%) Q2FY08 QoQ (%) Income 2388 2250 6.1 2702 -11.6 Expenditure 2160 2072 2343 EBIDTA 228 178 28.1 359 -36.5 Depreciation 127 125 142 EBIT 101 53 90.5 217 -53.5 Interest 42 42 47 Other Income 10 -4 -2 PBT 69 7 881.3 168 -58.9 Tax 15 -9 41 PAT 54 16 127 Share of profit 85 92 84 Adjusted PAT 139 108 28.7 211 -34.1 Shares (mn) 164.6 164.6 164.6 EPS (Rs) 7.0 5.6 10.7 EBIDTA (%) 9.5 7.9 13.3 EBIT (%) 4.2 2.4 8.0 Net Profit (%) 2.3 0.7 4.7 Source : Company Daily Morning Brief Please see the disclaimer on the last page For Private Circulation 9 January 22, 2008 Kotak Securities - Private Client Research Revenues n On a YoY basis, revenues grew 6%. n The individual learning business recorded 30% rise in revenues on a YoY basis. n However, the schools business and the corporate learning business reported lower-than-expected growth rates. Revenue break up Rs mn Q2FY08 Q3FY08 Q3FY07 Individual 975.00 728.00 560.03 Institution 242.00 213.00 226.00 Corporate 1409.00 1371.01 1439.00 New initiatives 76.00 76.00 25.00 Source : Company Individual learning business n The individual business saw revenues grow 30% on the back of strong demand from India and China. n The company has been witnessing improved demand for its career courses. It increased the capacity by 22% YoY and 4% QoQ. The utilization levels were at 46%. n Overall, the enrollments grew 28% with those in India growing 29%.The company has been enrolling engineering students and the same grew by 30% on a YoY basis to 36385 in Q2FY08, in India. Corporate business and Element K n Overall, the corporate business saw a 5% dip YoY and a 3% dip QoQ. n We believe it was because of the rupee appreciation and also delays in technology integration and implementation of the technology platform. n The technology platform/delivery engine of EK is being integrated with CLICKS. The company will now provide integrated services including content development, library sharing and content delivery. n Post SkillSoft's acquisition of NETg, Element K has become the second largest content library provider. It had added 963 courses to its library in H1FY08, to take the total to nearly 4500. n On a normalized basis (excluding exchange rate impact), Element K revenues grew about 7% YoY in US dollar terms (5% margins). Similarly, organic revenues grew by about 8% YoY (8% margins). New initiatives n IFBI and Imperia continued to scale up the business. n The division reported sequentially flat revenues of Rs.76 mn and had an order intake of Rs.91 mn during the quarter. n The business achieved break-even at the EBIDTA level in Q3FY08. Schools businesses n The non Government schools business contributed about 28% of the quarter's revenues and grew 22% YoY. n Revenues were impacted to the extent of Rs.37 mn a quarter as the BOT project from Andhra Pradesh scaled down from a quarterly run-rate of Rs.75 mn to Rs.38 mn (now providing only services). Daily Morning Brief Please see the disclaimer on the last page For Private Circulation 10 January 22, 2008 Kotak Securities - Private Client Research EBIDTA margins rose on a YoY basis and QoQ basis EBIDTA margins (%) Q2FY08 Q3FY08 Q3FY07 Individual 23.90 17.86 16.61 Institution 14.46 14.08 11.95 Corporate 6.39 4.74 13.57 New initiatives 1.32 2.63 -192.00 Source : Company n EBIDTA margins rose YoY mainly due to the improved profitability in the individual learning business and new businesses. This came about on the back of higher capacity utilization in individual business and higher volumes in the new businesses. n The corporate learning business had lower margins YoY. We believe that margins in the corporate business were impacted mainly because of the rupee appreciation. n The company paid relatively higher tax because of a higher proportion of profits coming from the domestic business. Future prospects We have made changes to our FY08E and FY09E earnings. Revenue break up Rs mn FY06 FY07 FY08E FY09E Individual 1670.00 2473.03 3246.17 4227.18 Institution 1175.00 846.00 882.80 974.62 Corporate 1661.00 4560.00 5756.03 6680.98 New initiatives 0.00 71.00 286.00 630.00 Total 4506.00 7950.03 10171.00 12512.78 Source : Company, Kotak Securities - Private Client Research n We expect the individual learning business to continue to show robust growth on the back of higher enrolments and increase in realizations. n New initiatives are expected to gather steam over the quarters with higher acceptance of the courses, launch of new courses and increased geographic coverage by the company n We expect Element K revenues to grow at a steady clip as NIIT leverages on its expertise, offering an integrated suite of services and increases the offshore content. n We have assumed margins to improve in most businesses on the back of better capacity utilization, higher volumes and better leverage on costs. EBIDTA margins (%) FY06 FY07 FY08E FY09E Individual 7.66 17.47 20.61 22.60 Institution 18.21 11.58 13.55 14.00 Corporate 15.65 7.81 6.05 10.24 New initiatives 0.00 -154.93 -5.94 16.60 Total 13.41 9.72 11.02 15.03 Source : Company, Kotak Securities - Private Client Research n We have assumed tax at lower levels because of the deferred tax benefits available to the company in its US business and also EK. n After accounting for its 25% share in NIIT Technologies' profits, we expect the net profit to go up to Rs.1.43 bn in FY09, translating into an EPS of Rs.8.7. Daily Morning Brief Please see the disclaimer on the last page For Private Circulation 11 January 22, 2008 Kotak Securities - Private Client Research Financials (Rs. mn) FY07^ FY08E YoY (%) FY09E YoY (%) Income 7949 10171 28.0 12513 23.0 Expenditure 7176 9050 10632 EBIDTA 773 1121 45.0 1880 67.7 Depreciation 474 542 680 EBIT 299 579 93.6 1200 107.3 Interest 125 130 166 Other Income 71 -36 42 PBT 245 412 68.3 1076 161.0 Tax 4 -17 41 PAT 241 430 1035 Share of profit 331 345 392 Adjusted PAT 572 774 35.3 1427 84.3 Shares (mn) 19.3 164.6 164.6 EPS (Rs) 29.0 4.7 8.7 EBIDTA (%) 9.7 11.0 15.0 EBIT (%) 3.8 5.7 9.6 Net Profit (%) 3.0 4.2 8.3 Source : Company, Kotak Securities - Private Client Research ^ - Element K consolidated WEF August 06 Concerns n A steep deceleration/recession in major global economies could impact the revenue growth of NIIT. n Steep rupee appreciation v/s major global currencies may impact the financials of NIIT. Daily Morning Brief Please see the disclaimer on the last page For Private Circulation 12 January 22, 2008 Kotak Securities - Private Client Research RESULT UPDATE IPCA LABORATORIES LTD Awadhesh Garg PRICE : RS.700 RECOMMENDATION : HOLD firstname.lastname@example.org +91 22 6634 1406 T ARGET PRICE : RS.800 FY09E PE : 10.5X Key result highlights n Ipca Laboratories has announced its results for Q3FY08, which are in line with our estimates. Net sales grew 20% to Rs.2.8 bn as compared to Rs.2.3 bn in the corresponding quarter of last year. This was led by strong growth in domestic and export formulation sales. n Domestic formulation sales grew around 31% to Rs.1.2 bn while exports formulation grew around 19% to Rs.864 mn. Total domestic and exports sales for the quarter grew 32% and 14% to Rs.1.4 bn and Rs.1.41 bn, respectively. n Net profit for the quarter grew 10% to Rs.383 mn as compared to Rs.348 mn in the corresponding quarter of last year, implying an EPS of Rs.15.3. n For 9MFY08, revenues grew 18.7% to Rs.8.29 bn as compared to Rs.6.98 bn. Net profit for the period grew 25.3% to Rs.1.18 bn as compared to Rs.946 mn during the corresponding period of last year. EBITDA margins for the nine months period is up 30 bps at 22.9%. n The company posted EPS of Rs.47.4 for 9MFY08, achieving 82% of our FY08 EPS estimate. We maintain our EPS estimates of Rs.57.2 and Rs.66.4 for FY08 and FY09, respectively. We maintain HOLD with a one-year target price of Rs.800. Summary table Financial Performance - Q3 FY08 (Rs mn) FY07 FY08E FY09E (Rs mn) Q3FY08 Q3FY07 YoY (%) Q2FY08 QoQ (%) FY07 Revenues 9,366 10,749 12,222 Net Sales 2,818 2,344 20.2 3,001 -6.1 9,180 Growth (%) 23.6 14.8 13.7 Expenditure 2,202 1,757 2,275 7,201 EBITDA 2,038 2,277 2,586 Operating Profit 616 587 4.9 726 -15.2 1,980 EBITDA margin (%) 22.0 21.2 21.2 Depreciation 81 74 80 292 Net profit 1,258 1,433 1,662 EBIT 534 513 4.2 646 -17.3 1,688 Net Margin (%) 13.5 13.4 13.6 Interest 55 53 52 217 EPS (Rs) 50.2 57.2 66.4 Growth (%) 109.2 13.9 15.9 Other Income 6 4 3 33 DPS (Rs) 5.5 10.0 10.0 PBT 485 464 4.5 598 -18.9 1,504 RoE (%) 29.8 27.0 25.3 Tax 102 124 144 290 RoCE (%) 25.8 24.6 24.1 Reported PAT 383 340 12.8 454 -15.6 1,214 EV/Sales (x) 1.2 1.7 1.4 Extra-Ordinary Items - 8 - 8 EV/EBITDA (x) 5.4 8.2 6.7 P/E (x) 13.9 12.2 10.5 Adjusted PAT 383 348 10.0 454 -15.6 1,222 P/BV (x) 1.8 3.0 2.4 Equity Shares (Mn) 25 25 25 25 Source: Company & Kotak Securities - EPS (Rs) 15.3 13.9 10.0 18.2 -15.6 48.9 Private Client Research EBIDTA Margin (%) 21.8 25.0 24.2 21.6 PAT Margin (%) 13.6 14.5 15.1 13.2 Source: Company Branded formulation business to drive growth We believe Ipca's focus on the branded formulations business and emerging economies (mainly India, Africa, South Asia and CIS, which constitute about 55% of sales) should drive growth. On a high base, we expect net profit growth of 15% over the next two years. We expect sales to grow at 15% CAGR over the next two years. Daily Morning Brief Please see the disclaimer on the last page For Private Circulation 13 January 22, 2008 Kotak Securities - Private Client Research Detailed Sales Break-up Q3FY08 Q3FY07 YoY (%) FY07 YoY (%) Domestic Sales Formulations 1,184 898 31.8 3,540 21.5 APIs 220 165 33.2 707 26.4 Total 1,404 1,063 32.0 4,247 22.3 % Sales 49.8 46.1 46.7 Exports Sales Formulations 864 725 19.3 2,732 30.1 APIs 550 516 6.5 2,113 10.1 Total 1,414 1,241 14.0 4,845 20.6 % Sales 50.2 53.9 53.3 Net Sales 2,818 2,304 22.3 9,091 21.4 Source: Company Press Release Domestic formulation business doing very well Domestic formulation sales (38% of net sales) have grown 19% to Rs.3.54 bn for the year. We expect domestic formulation sales to grow 16% in FY08E, mainly driven by therapeutic expansion through new product introduction, especially in the fast growing lifestyle segment, and increased focus on marketing of mature brands. The company plans to introduce eight to 10 new products (including line extensions) in various therapeutic areas. New products launched in the last three years now constitute nearly 25% of the domestic formulation sales. While the company is still a leader in anti-malarial, therapy mix has changed significantly and chronic categories are close to achieving half of segment sales. During the last two years, the company expanded its sales force. Product flow has also improved, and focused marketing divisions are resulting into brand building. Diverse geographic portfolio, emerging economies likely to remain key growth drivers We expect about 25% growth in the international formulation business during the next two years on the back of new products launches, increased sales from branded formulation business in Africa, Asia and CIS countries. The company is also preparing to enter the US market and expects to launch five to six generic products in FY08E. So far, it has filed eight ANDA applications with the USFDA and has got the approval for two ANDAs. It is planning to file 20 ANDAs by March 2008. Revenues from US generics are likely to begin next year, on the back of own ANDAs (including APIs) and distribution agreement with Ranbaxy. The company is focusing on products with its own APIs. The product development team is also beginning to deliver new generics early. All this, we believe, should result in sustained growth in the medium-term. However, emerging economies are likely to remain growth drivers for some time. APIs continue to be steady business; likely to grow at 8-10% APIs, which constitute around 31% of total sales, have grown 14% in FY07 (8% in FY06). For FY08E, we expect growth of 9% in APIs. The management has been indicating traction in the APIs business, which could potentially help beat estimates from next year. Visibility of shipments to generic companies is high for some old APIs. We highlight that Ipca is a very competitive manufacturer and has dominant shares in several products. Some of its APIs (off-patent) are even sold to innovator companies. Now, shipment for the Japanese market too has been made. The list of APIs has doubled to 55 in the last two years. The target is to add about 10 products each year. Daily Morning Brief Please see the disclaimer on the last page For Private Circulation 14 January 22, 2008 Kotak Securities - Private Client Research Expansion on way to meet growing demand Ipca has started commercial production from it's newly set up formulation plant in Dehradun from May 2006 to meet the growing demand. It is also setting up a greenfield facility at Indore in the SEZ area, to manufacture various APIs, intermediates and formulations at an investment of approximately Rs.600-700 mn over the next two years, funded through internal accruals. We expect this plant to start commercial production by the end of FY08E. This plant will be approved by USFDA and will meet all demands of regulated markets of the US and European countries. Valuation & recommendation We believe the company is doing very well in branded generics and promotional markets and valuations are reasonable with high earnings visibility. We believe Ipca continues to offer a mix of both growth and value. The company has achieved 82% of our FY08 EPS estimates in the nine months period. We maintain our EPS estimate of Rs.57.2 and Rs.66.4 for FY08 and FY09, respectively. At the current market price of Rs.700, the stock is trading at 12.2x FY08 and 10.5x FY09 expected earnings. The stock has run up significantly from our previous recommendation. We recommend HOLD on the stock with a target price of Rs.800, which provides 14% potential upside from current levels. Key risks & concerns n Greater than anticipated pricing pressure in generic APIs/formulation business and/or lower market share would impact profitability adversely. n Delay in DMF filings and/or supply of APIs. n Delay in ANDA filing and/or approval and any delay in new product launch in domestic or promotional markets. n Risk arising from expanding the coverage of drug price control order. At present, 16% of sales come from price-controlled products. n Foreign currency fluctuation. Daily Morning Brief Please see the disclaimer on the last page For Private Circulation 15 January 22, 2008 Kotak Securities - Private Client Research RESULT UPDATE GLENMARK PHARMACEUTICALS LTD Awadhesh Garg PRICE : RS.485 RECOMMENDATION : BUY email@example.com +91 22 6634 1406 T ARGET PRICE : RS.610 FY09E PE : 18.2X Key result highlights n Glenmark has announced its results for Q3FY08, which are above our estimates. Consolidated net sales grew sharply by 55% to Rs.6.79 bn as compared to Rs.4.4 bn in the corresponding quarter of last year, driven by strong growth in APIs and exports formulation. n Domestic formulation sales grew 8% to Rs.1.2 bn against Rs.1.1 bn in Q3FY07. However, major growth came from the international markets of US and Latin America. The US and Latin America market grew 144% and 109% to Rs.2.0 bn and Rs.610 mn, respectively. This was driven by ramping up existing products and new products launches (including one Para-IV product). The company now has a portfolio of 23 generic products in the US market. n During the quarter, Glenmark out-licensed its GRC-6211 molecule to Eli Lilly. The company received an upfront fee of US$45 mn in Q3FY08. Glenmark could receive up to an additional US$215 mn in potential development and sales milestones for the initial indication, as well as royalties on sales if the molecule is successfully commercialized. n EBIDTA grew impressively by 54% to Rs.3.6 bn from Rs.2.3 bn led by strong sales growth and NCE milestone payment. Net profit after tax grew 48% to Rs.2.8 bn as compared to Rs.1.9 bn. EBITDA and net margins for the quarter were 52.8% and 41.2%, respectively. n Overall, the result reflects Glenmark's efforts to grow its business internationally. The company's progress in NCE research has also yielded encouraging results with the progress demonstrated by GRC-8200 (diabetes), GRC-3886 (Oglemilast - Asthma/COPD), and GRC-6211 (TRPV1 antagonist). Summary table Consolidated financial performance - Q3FY08 (Rs mn) FY07 FY08E FY09E (Rs mn) Q3FY08 Q3FY07 YoY (%) Q2FY08 QoQ (%) FY07 Revenues 11,892 18,536 23,096 Net Sales 6,794 4,380 55.1 3,749 81.2 12,070 Growth (%) 75.9 55.9 24.6 Expenditure 3,205 2,052 2,565 7,790 EBITDA 4,263 7,661 9,166 EBIDTA 3,589 2,328 54.2 1,184 203.1 4,280 EBITDA margin (%) 35.8 41.3 39.7 Depreciation 169 118 162 426 Net profit 3,101 5,480 6,815 EBIT 3,420 2,209 54.8 1,022 234.7 3,854 Net Margin (%) 26.1 29.6 29.5 EPS diluted (Rs) 12.9 21.7 26.7 Interest 175 100 158 404 Growth (%) 248.6 68.3 22.9 Other Income 27 31 53 161 DPS (Rs) 0.4 0.5 0.6 PBT 3,272 2,140 52.9 916 257.1 3,611 RoE (%) 57.4 49.9 35.7 Tax 472 250 165 500 RoCE (%) 27.9 37.0 33.9 Profit After Tax 2,800 1,890 48.2 751 272.7 3,111 EV/Sales (x) 6.8 6.5 5.1 EV/EBITDA (x) 19.1 15.8 12.7 Equity Shares (Mn) 247 239 242 240 P/E (x) 37.6 22.3 18.1 EPS (Rs) 11.3 7.9 43.7 3.1 265.6 13.0 P/BV (x) 10.7 8.1 5.3 EBIDTA Margin (%) 52.8 53.1 31.6 35.5 Source: Company & Kotak Securities - PAT Margin (%) 41.2 43.1 20.0 25.8 Private Client Research Source: Company Press Release Daily Morning Brief Please see the disclaimer on the last page For Private Circulation 16 January 22, 2008 Kotak Securities - Private Client Research Strong revenue growth driven by APIs and international formulations Consolidated net sales grew sharply by 55% to Rs.6.79 bn as compared to Rs.4.4 bn in the corresponding quarter of last year, driven by strong growth in APIs and international formulations. The total formulation business during the quarter was at Rs.4.5 bn, an increase of 69%, and accounted for 89% of total sales. The APIs business registered a growth of 40% to Rs.548 mn as compared to Rs.390 mn in the corresponding quarter of last year. Domestic formulations sales grew 8% to Rs.1.2 bn against Rs.1.1 bn in Q3FY07. The company registered a value growth of 19.7% vis-à-vis industry growth of 13.7% (IMS ORG November 2007). It has launched eight new products during the quarter. However, major growth came from the international markets of US and Latin America, which grew 144% and 109% to Rs.2.0 bn and Rs.610 mn, respectively, driven by ramping up existing products and new products launches (including one Para-IV product). The company now has a portfolio of 23 generic products in the US market. Revenues from the generics business (that the company intends to spin off into a 100% subsidiary and subsequent listing in Q1FY09) were Rs.2.7 bn as compared to Rs.1.3 bn in Q3FY07, registering a growth of 105%. The specialty business (including out licensing revenues) will continue to be a part of Glenmark Pharma. This grew 32% and posted revenues of Rs.4.2 bn as against Rs.3.2 bn for the quarter of the previous year. Net profit grew 48% to Rs.2.8 bn Consolidated profits for the quarter increased 48.2% to Rs.2.8 bn from Rs.1.9 bn. The company estimates profit from the generics business at Rs.893mn and from specialty business (including out licensing revenues) at Rs.1.9 bn for the quarter. US formulations remain key growth driver Glenmark has received two ANDA approvals during the quarter. In this, one was 180 day shared exclusivity to market product for the first generic version of Trileptal (Oxcarbazepine), and the second was Pravastatin 80 mg. In addition, the company filed five ANDAs during the quarter, which makes total filings to 19 (14 internal and five external). Glenmark is well on track to file over 30 ANDAs in FY08 with over 25 being done internally. The company now has a portfolio of over 23 generic products for the US market and has over 40 ANDAs in the USFDA approval process. The company anticipates launching at least an additional five products in Q4FY08 bringing it's total to over 28 products on the US generic market. Consolidated Revenue Break-Up (Rs mn) Q3FY08 Q3FY07 YoY (%) Q2FY08 QoQ (%) FY07 Formulations - USA 2,041 835 144 811 152 2,207 - Latin America 610 292 109 572 7 1,421 - Semi Regulated Markets (SRM) 522 425 23 545 -4 1,789 - Europe 124 - 68 82 - - India 1,214 1,123 8 1,418 -14 4,290 Total Formulations (A) 4,510 2,676 69 3,414 32 9,706 % of Sales 89 87 89 88 APIs (B) 548 390 40 426 29 1,318 % of Sales 11 13 11 12 Revenue from Business (A+B) 5,058 3,066 65 3,839 32 11,025 Out-licensing Revenues (C) 1,793 1,395 0 1,395 Cons Revenues (A+B+C) 6,851 4,461 54 3,839 78 12,420 Source: Company Press Release Daily Morning Brief Please see the disclaimer on the last page For Private Circulation 17 January 22, 2008 Kotak Securities - Private Client Research Glenmark confirms ANDA filing with a Para-IV certification for Tarka ® tablets Glenmark has filed an ANDA with the USFDA seeking regulatory approval to market a generic version of Trandolapril-Verapamil Hydrochloride, which included a paragraph-IV certification with respect to patent listed by Abbott in the FDA "Orange Book." The company believes it is the only applicant to have filed an ANDA for this product with a paragraph IV certification. In the event that Glenmark successfully challenges Abbott's patent, Glenmark will be entitled to a 180 day exclusivity period. Tarka®, Extended Release Oral tablets are indicated for the treatment of hypertension. This had sales of approximately US$100 mn in the US market. Further, potential first to file Para-IV challenges filed by Glenmark includes Ezetimibe, Trandolapril +Verapamil Hydrochloride, Atomoxetine Hydrochloride, Desloratadine and Rosuvastatin Calcium. If successful, Glenmark could be the only company to have the 180 day exclusivity on Ezetimibe and Trandolapril and Verapamil combination. NCE pipeline getting bigger and valuable Glenmark's NCE pipeline is getting bigger and valuable with the recent out-licensing of GRC-6211 (pain management) to Eli Lilly for upfront license fees of US$45 mn and total potential milestone payments of US$350 mn. This licensing deal has reduced Glenmark's dependence on GRC 3886 (asthma/COPD) and GRC 8200 (diabetes) to drive its R&D value and re-enforce confidence in its R&D capabilities. Demerger of generics business into separate company Glenmark has announced plans to separate its specialty and generics business in a bid to improve focus on different parts of the business. According to the plan, the company will demerge its generics business (generic formulations and APIs) into a separate subsidiary company called - Glenmark Generics Ltd (GGL). This will be listed on Indian bourses by Q1FY09. The residual core business will consist of branded generics and NCE portfolio. Glenmark would hold at least 70% of Glenmark Generics Ltd. The new company will handle the development, manufacture and marketing of generic formulations and API business in the US, EU and Argentina while Glenmark Pharma will continue to manage the novel R&D and branded formulations business in India, Latin America, Europe and other emerging markets. The generics business will inherit Glenmark's Goa plant for formulations, three API plants in India, sales units in the US and UK and the Argentina oncology operations. The branded business will remain with Glenmark Pharma and retain all remaining R&D operations related to NCEs, biologics and formulations development for brands. We believe the reorganization will hold its benefits over the long-term as the management will be able to focus better on both areas given the growing traction across geographies and diverse nature of the two businesses. We, however, do not accord any value to the restructuring, as we believe it will not have any material impact on business and valuations. Daily Morning Brief Please see the disclaimer on the last page For Private Circulation 18 January 22, 2008 Kotak Securities - Private Client Research Valuation attractive; many catalysts exist, maintain BUY We expect 39% and 48% compounded annual growth in base business and earnings over FY07-09E, respectively. We expect fully diluted EPS of Rs.21.7 and Rs.26.7 for FY08 and FY09, respectively. This is assuming US$75 mn and US$69 mn income from NCE out-licensed in FY08 and FY09, respectively. EPS from the core business is expected to be Rs.13.4 in FY08 and Rs.19.1 in FY09. At the current market price of Rs.485, the stock is trading at 22.3x FY08 and 18.1x FY09 fully diluted earning estimates. We use sum-of-the-parts method (SOTP) to value the stock, valuing the R&D deals and the core generic business separately. We believe probability-adjusted DCF is appropriate to calculate the option value from NCE compound as it captures the reducing probability of success as the molecules progress on the clinical path. We have valued the core business (excluding R&D income) at Rs.326 attaching 17x P/ E multiple to FY09 fully diluted earning and an option value IP Assets at Rs.284 (Rs.124 for GRC 3886, Rs.51 for GRC 8200 and Rs.109 for GRC 6211). Hence, we have arrived at a target price of Rs.610. We recommend a BUY on We believe valuations are attractive and many potential catalysts exist in the stock, Glenmark with a price namely, expected milestone payments, potential out-licensing deal for GRC-3886 target of Rs.610 to European region, and potential acquisition in EU/US countries. We recommend BUY. Key risks n Greater than anticipated pricing pressure or lower market share in generic or API business n Any delay in ANDA filings and/or approval and any delay in launch by its global partners would impact the growth and profitability of the company n Suspension of key molecules GRC-3886/8200/6211 from phase II clinical trials due to toxicity or in-efficacy n Regulatory delays to conduct advance clinical studies n Reduction in drug prices in domestic market could affect profitability negatively. Daily Morning Brief Please see the disclaimer on the last page For Private Circulation 19 January 22, 2008 Kotak Securities - Private Client Research EVENT UPDATE RANBAXY LABORATORIES LTD Awadhesh Garg PRICE : RS.363 RECOMMENDATION : BUY firstname.lastname@example.org +91 22 6634 1406 T ARGET PRICE : RS.490 CY09E PE : 13.7X Ranbaxy, GlaxoSmithKline reach settlement over Imitrex Ranbaxy likely to launch Imitrex in US in December 2008 Ranbaxy Laboratories has settled all matters relating to possible patent litigation with GlaxoSmithKline Inc. relating to Sumatriptan Succinate tablets, used for treating migraine. Sumatriptan Succinate tablets are the generic version of GlaxoSmithKline's Imitrex® tablets. As per the terms of the settlement, Ranbaxy will distribute a generic version of Sumatriptan Succinate Tablets in multiple strengths of 25mg, 50mg and 100mg in the US markets. The company likely to launch Imitrex in US markets in December 2008. The company, however, has not disclosed additional terms of the settlement agreement like monetary compensation etc. The annual market sales for Imitrex were US$985 million, as per IMS MAT September 2007 data. Earlier, Ranbaxy had entered into a similar out-of-court settlement with Summary table GlaxoSmithKline over Valacyclovir hydrochloride, the active ingredient of anti-viral (Rs mn) CY07 CY08E CY09E drug Valtrex, which has annual market sales of US$1.3 billion. Sales 69,427 76,944 86,655 We estimate that Ranbaxy may clock revenues of around US$90-100mn from Growth (%) 13.0 10.8 12.6 Imitrex launch during the exclusivity period, the financial impact of which will come EBITDA 9,981 13,242 15,545 in CY09. In our estimate, we have assumed 50% price erosion during the exclusivity EBITDA margin (%) 15.1 17.7 18.4 period and a 40% market share. Dr Reddy’s will also sell the drug during the same Net profit 7,901 8,534 9,923 period as an authorised generic as per the agreement with GlaxoSmithKline. Net Margin (%) 11.4 11.1 11.5 EPS (Rs) 21.1 22.8 26.5 We expect 13.3% and 12.1% compounded growth in revenues and earnings over Growth (%) 53.3 8.0 16.3 the next two years. For CY08, we expect revenue growth of 10.8% to Rs.74.9bn DPS (Rs) 8.5 8.5 8.5 and net profit growth of 8% to Rs.8.53bn. For CY09, we expect revenue growth of RoE (%) 28.2 26.2 26.0 12.6% to Rs.84.65bn and net profit growth of 16.3% to Rs.9.92bn. EBIDTA margins RoCE (%) 16.7 16.4 18.0 are likely to improve by 100 bps to 17.5% in CY08 v/s 16.5% in CY07 led by EV/Sales (x) 2.7 2.2 1.9 improved product flow (exclusivity products) and saving in R&D and SG&A EV/EBITDA (x) 18.6 12.6 10.3 expenses. We have not taken any upside from Imitrex launch in our CY08 earning P/E (x) 17.2 15.9 13.7 estimates. However, CY09 revenue and earnings will be better that our estimates. P/BV (x) 5.0 3.9 3.3 Source: Company & Kotak Securities - Ranbaxy to emphasize on monetizing Para-IV ANDAs Private Client Research Ranbaxy's Para-IV pipeline comprises 18-20 first-to-file products representing a market size of ~ US$26 bn valued at innovator prices. We believe the company will continue to monetize its Para-IV (first-to-file) abbreviate new drug applications (ANDAs) in the US market. The company plans to launch at least one exclusivity product in the US market each year for the next three to four years. New therapies/alliances likely to fuel growth in the next two years In the next two years, the company is expected to benefit from the launch of complex injectables in the area of Penems and Limuses, which has a market potential of over US$3 bn. Ranbaxy has also made strategic investments into smaller Indian companies that give it access to new products/ technology, mainly in the area of oncology and bio-similars. Such investments are likely to broaden the portfolio with the limited use of corporate resources. Acquisitions to help maintain growth momentum in respective geographies Ranbaxy has been very active in inorganic growth in the last two years where it acquired nine businesses in European, CIS and African region valued close to US$450 mn. These acquisitions have significantly expanded Ranbaxy's presence in emerging and profitable markets such as Romania and South Africa. We believe these acquisitions will help Ranbaxy to maintain its growth momentum in the respective regions. We expect these geographies to grow at 15-20% for the next few years. Daily Morning Brief Please see the disclaimer on the last page For Private Circulation 20 January 22, 2008 Kotak Securities - Private Client Research Demerging drug discovery research The company is demerging its drug discovery research operation into a separate company in a bid to de-risk its core business and infuse outside funding in R&D. We believe this is a positive step in creating an independent pathway for drug discovery research with dedicated resources and enhanced focus for long-term value building. The revenue R&D expenditure in CY06 and CY07 was at Rs.3.95 bn (6.6% of sales) and Rs.4.24 bn (6.4% of sales), respectively. The move may allow the company to decrease its annual R&D spent by 30%. Therefore, after the spin- off happens, it would be earnings accretive for the parent company. Valuation & recommendation We expect net profits of Rs.8.53 bn in CY08 and Rs.9.92 bn in CY09. This implies an EPS of Rs.22.8 and Rs.26.5, respectively. At the current market price of Rs.363, the stock is trading at 15.9x CY08 and 13.7x CY09 earning estimates. We believe We recommend a BUY on the potential advantage arising out of a strong Para-IV pipeline (20 first-to-file Ranbaxy with a price products) and strong growth from domestic and semi-regulated markets will be key target of Rs.490 growth drivers. We maintain BUY with a target price of Rs.490 over a one-year time horizon. Key risks & concerns n If the company is unable to resolve the issues raised by the USFDA, at its Paonta facility, then its US business may come under risk (28% of revenues) n Any unfavorable outcome from the search of its US facilities in February 2007 may impact the company's future business n Other risks include unfavorable pricing in key markets by competition and inability to improve cost efficiency Daily Morning Brief Please see the disclaimer on the last page For Private Circulation 21 January 22, 2008 Kotak Securities - Private Client Research RESULT UPDATE ULTRA TECH CEMENTS Teena Virmani PRICE : RS.820 RECOMMENDATION : REDUCE email@example.com +91 22 6634 1237 T ARGET PRICE : RS.937 FY09E PE : 9.2X Result highlights n Revenues for Q3FY08 grew 10% YoY, which was lower than our estimates. Revenue growth was primarily led by 13% YoY growth in net realizations. This stood at Rs.3163 per ton as compared to Rs.2803 per ton in Q3FY07. The lower- than-expected dispatch growth was impacted by elections in Gujarat. n Operating margins for Q3FY08 stood at 33.9%, ahead of our estimates of 30.1% due to higher realizations. n Net profit for the current quarter grew 32% YoY due to higher realizations, lower than expected interest outgo and depreciation. n We have fine-tuned our estimates based on higher operating margins as well as lower-than-expected interest cost. We recommend REDUCE on the stock with a price target of Rs.937. At our target price, the stock would be trading at 10.5x FY09 estimates and 6x on EV/EBITDA on FY09 estimates. Summary table Result highlights for Q3FY08 (Rs mn) FY07 FY08E FY09E (Rs mn) Q3FY08 Q3FY07 YoY (%) Sales 49,108 56,197 65,513 Net Sales 13,821 12,605 10 Growth (%) 49.0 14.0 17.0 Expenditure 9,137 8,802 EBITDA 14,179 17,489 19,637 Inc/Dec in trade -308 40 EBITDA margin (%) 28.9 31.1 30.0 Net profit 7,824 10,098 11,110 RM 1,357 1,044 EPS (Rs) 62.8 81.1 89.2 As a % of net sales 9.8 8.3 Growth (%) 247.0 29.0 10.0 Purchase of finished goods 0 490 ROE (%) 55.8 44.5 33.4 As a % of net sales 0.0 3.9 ROCE (%) 43.0 41.2 37.5 Staff cost 436 315 EV/Sales (x) 2.3 2.0 1.6 As a % of net sales 3.2 2.5 EV/EBITDA (x) 7.9 6.4 5.3 P/E (x) 13.0 10.1 9.2 Power and fuel 3,239 2,893 P/BV (x) 5.8 3.7 2.6 As a % of net sales 23.4 23.0 Source: Company & Kotak Securities - Transportation & Handling 2,367 2,509 Private Client Research As a % of net sales 17.1 19.9 Other expenditure 2,045 1,511 As a % of net sales 14.8 12.0 Operating Profit 4,685 3,802 23 Operating Profit Margin 33.9 30.2 Depreciation 583 571 EBIT 4,102 3,231 27 Interest 174 202 EBT(exc other income) 3,927 3,030 Other Income 201 167 EBT 4,129 3,196 29 Tax 1,334 1,072 Tax Rate (%) 32.3 33.5 PAT 2,795 2,125 Net Profit 2,795 2,125 32 NPM (%) 20.2 16.9 Equity Capital 1,244.9 1244.9 EPS (Rs) 22.5 17.1 Source: Company Daily Morning Brief Please see the disclaimer on the last page For Private Circulation 22 January 22, 2008 Kotak Securities - Private Client Research Revenue growth impacted by lower-than-expected dispatch growth n Revenues for the company grew 10% YoY in Q3FY08. This was driven by a 13% increase in cement prices as compared to Q3FY07. However, the dispatch growth of UltraTech Cement was impacted by elections in Gujarat during the current quarter. n The company's capex plan of Rs.33 bn, which will be spent over the next three years, is well on track. The incremental capacity at the Andhra Pradesh plant is 4.9 MT. The first phase of the captive power plant is expected to get operational by Q4FY08. The other projects related to split grinding unit are also on track. Thus, with additional capacities during the next fiscal, we expect volumes to grow 14% in FY09 as compared to FY08. We expect UltraTech to post revenues of Rs.56 bn and Rs.65.5bn in FY08 and FY09, respectively. Operating margins impacted by higher staff, power as well as other expenditure The operating margins of the company for Q3FY08 were better than our expectations on account of higher realizations. However, they were impacted by higher staff costs, higher power costs as well as higher other expenditure on account of improvement in production efficiencies. This has resulted in EBITDA/ ton of Rs.1072 for Q3FY08 as compared to Rs.846 for Q3FY07. We are fine-tuning our estimates for operating margins of the company based on 9MFY08 results. We expect operating margins of 31.1% and 30% in FY08 and FY09, respectively. Cost per tonne analysis Q3FY08 Q3FY07 Q2FY08 Dispatches (mn ton) 4.37 4.50 3.61 Net Realization/ton 3,163 2,803 3,250 YoY% 13 QoQ% -3 Per ton analysis Raw material 240 241 250 Finished goods 0 109 0 Staff cost 100 70 125 Power and fuel 741 644 713 Transportation &Handling 542 558 552 Other expenditure 468 336 697 EBITDA per ton 1,072 846 913 Source: Company Net profit grew 32% YoY Net profits for the company grew 32% YoY. Though we expect a flat volume growth in FY08, we expect volumes to grow 14% in FY09 on account of new capacities getting operational by Q4FY08. We are fine-tuning our estimates to factor in higher operating margins and lower interest cost. We expect the company to achieve net profits of Rs.10 bn and Rs.11.1 bn in FY08 and FY09, respectively. Valuation & Recommendation We recommend REDUCE At the current market price of Rs.820, the stock is trading at 10.1x and 9.2x on on UltraTech Cements FY08 and FY09 P/E multiples, respectively. On EV/EBITDA basis, it is trading at with a price target of 6.4x and 5.3x for FY08 and FY09 estimates, respectively. We believe the company Rs.937 is expected to benefit from higher volumes in the next financial year. With pricing pressure expected by the second half of FY09, it would be difficult for companies to pass on the increased cost to end users. Hence, profitability is expected to be impacted with restricted price increases and higher expenditure. Based on fine-tuning of our estimates, we arrive at a target of Rs.937. At our target price, the stock would trade at 10.5x P/E multiple and 6x EV/EBITDA multiple for FY09. We recommend REDUCE. Daily Morning Brief Please see the disclaimer on the last page For Private Circulation 23 January 22, 2008 Kotak Securities - Private Client Research RESULT UPDATE GATI LTD Apurva Doshi PRICE : RS.142 RECOMMENDATION : HOLD firstname.lastname@example.org +91 22 6634 1366 T ARGET PRICE : RS.168 C ONS. FY09E PE : 21.3X The results of Gati were above our estimates on the profitability side Consolidated summary table due to extra ordinary income. We upgrade our recommendation to (Rs mn) FY07 FY08E FY09E HOLD due to the sharp correction during the last few days. Sales 5,680 7,420 9,501 Growth (%) 23.5 30.6 28.0 n Net sales for Q2FY08 were at Rs.1.4 bn. This was down 3.2% YoY due to hiving EBITDA 434 773 1,103 off of the fuel stations business into a separate subsidiary. If we exclude this, EBITDA margin (%) 7.6 10.4 11.6 then there was YoY growth of 18.8%. This is primarily due to robust 25.7% Net profit 214 428 622 YoY and 17.2% sequential growth in revenues of the express distribution and Net debt 1,420 773 1,164 supply chain division that included revenues of approximately Rs.150 mn out EPS (Rs) 3.0 4.6 6.7 of airfreight operations. Growth (%) 11.7 99.8 45.3 DPS (Rs) 0.8 0.9 1.0 n EBIDTA margins during Q2FY08 were down 160 bps YoY and also down 420 ROE (%) 12.3 14.9 14.6 bps on a sequential basis due to significant rise in freight cost as a percentage ROCE (%) 10.0 15.2 17.4 of net sales that went up form 43.4% in Q2FY07 to 56.6% in Q2FY08. This EV/Sales (x) 2.6 1.9 1.5 EV/EBITDA (x) 33.8 18.1 13.1 was primarily due to the commencement of airfreight operations. The company P/E (x) 48.0 30.9 21.3 had to incur some expenses for ramping up the airfreight business. P/BV (x) 7.6 3.3 2.9 n EBIDTA for Q2FY08 was at Rs.101.4 mn, down 19.5% YoY and down 26.0% on Source: Company (FY07) & Kotak a sequential basis. Securities - Private Client Research Standalone Results GATI Ltd. - June end (Rs mn) Q2FY08 Q2FY07 YoY (%) Q1FY08 QoQ (%) H1FY08 H1FY07 YoY (%) Net Sales 1,345 1,390 (3.2) 1,171 14.9 2,516 2,721 (7.5) cost of goods sold - 254 (100.0) - - - 512 (100.0) staff cost 176 134 31.2 164 6.8 340 277 23.0 Freight hire charges 762 603 26.3 613 24.2 1,375 1,205 14.1 operating exp. 128 129 (0.4) 124 2.9 252 216 17.0 Admin exp. 153 125 22.7 119 28.7 272 237 14.7 Repairs & Maintenance 26 20 26.9 13 99.2 38 34 13.3 Total Expenditure 1,244 1,264 (1.6) 1,034 20.3 2,278 2,480 (8.2) EBIDTA 101 126 (19.5) 137 (26.0) 238 241 (1.1) Other income 10 5 88.2 4 146.2 14 9 53.4 Depreciation 31 27 12.8 31 (0.6) 62 53 17.6 EBIT 80 104 (22.7) 110 (27.0) 190 197 (3.7) Interest 16 18 (12.5) 18 (12.5) 35 31 11.7 PBT 64 85 (24.9) 91 (30.0) 155 166 (6.6) Extraordinary (loss) / gain 79 (27) - - - 79 (30) - Tax & deferred tax 18 16 9.9 26 (31.9) 44 38 15.6 PAT 125 43 193.2 65 91.0 190 99 92.6 Equity share Capital 151.1 141.7 144.7 151.1 141.7 Eqty shares o/s (mn) FV Rs.2 75.6 70.9 72.4 75.6 70.9 Diluted shares mn 93.3 93.3 93.3 93.3 93.3 Ratios Operting profit margin (%) 7.5 9.1 - 160 bps 11.7 - 420 bps 9.5 8.9 + 60 bps Cost of goods / net sales (%) - 18.2 - - 36.8 Staff cost / net sales (%) 13.1 9.6 14.0 25.3 19.9 Freight / net sales (%) 56.6 43.4 52.4 102.2 86.7 Operating exp / net sales (%) 9.5 9.2 10.6 18.8 15.5 Admin / net sales (%) 11.4 9.0 10.2 20.2 17.1 Tax / PBT (%) 12.4 18.9 28.4 18.7 22.7 EPS Reported (Rs) 1.7 0.6 0.9 2.5 1.4 Diluted EPS 1.3 0.5 0.7 2.0 1.1 Diluted CEPS 1.7 0.8 1.0 2.7 1.6 Source: Company Daily Morning Brief Please see the disclaimer on the last page For Private Circulation 24 January 22, 2008 Kotak Securities - Private Client Research n PBT for Q2FY08 was down 24.9% YoY to Rs.64 mn. n The company recoded one time extraordinary income of Rs.78.6 mn on account of re-instatement of FCCBs that are pending conversion as on December 31 2007. n Thus, PAT for Q2FY08 was at Rs.124.9 mn, up 193.2% YoY and up 91.0% on a sequential basis, thereby translating into quarterly diluted EPS of Rs.1.3 and CEPS of Rs.1.7. n PAT for H1FY08 was at Rs.190.3 mn, up 92.6% YoY, thereby translating into half-yearly diluted EPS of Rs.2.0 and CEPS of Rs.2.7. Segmental table (Rs mn) Q2FY08 Q2FY07 YoY (%) Q1FY08 QoQ (%) H1FY08 H1FY07 YoY (%) Segmental revenue Express Distribution & Supply Chain 1,244 990 25.7 1,062 17.2 2,306 1,903 21.2 Coast to Coast - shipping 103 143 (27.9) 111 (6.6) 214 301 (28.9) Fuel Station* - 257 - - - - 519 - PBIT Express Distribution & Supply Chain 131 109 20.2 123 6.9 254 196 29.1 Coast to Coast - shipping 19 24 (22.1) 18 5.0 37 50 (25.4) Fuel Station* - 3 (100.0) - - 6 - PBIT (%) Express Distribution & Supply Chain 11 11 (4.4) 12 (8.8) 11 10 6.6 Coast to Coast - shipping 18 17 8.0 16 12.4 17 17 5.0 Fuel Station* - 1 - - - - - - * fuel station business hived off into subsidiary Net sales (Rs bn) Cold chain foray with Kausar acquisition 10.0 Gati has forayed into cold chain logistics with the acquisition of Delhi-based cold chain logistics firm Kausar with a 73.7% stake. Kausar has become a subsidiary of 8.0 the company from December 14 2007. There is huge potential for cold chain 6.0 logistics in India. However, we would like to wait for Gati's strategy to integrate the refrigerated logistics business into its core business. We feel there would not 4.0 be any immediate significant impact on the financials of Gati as it contributes 2.0 around 3% of its revenues. FY08E FY09E FY04 FY05 FY06 FY07 Two freighter aircrafts operational n In May 2007, Gati entered into an agreement with state-owned airline Air-India Source: Company, Kotak Securities - to operate freighter aircrafts, which would carry parcels, documents and cargo. Private Client Research Gati has commenced operations with two freighter aircraft in October 2007. n The cargo freighters are being run on the Delhi-Mumbai-Bangalore route. In EPS (Rs) - FV Rs.2 Q2FY08, the company recorded revenues of approximately Rs.150 mn out of 8.0 freighter operations. Another three freighter aircraft would be inducted by June 2008. We expect the company to end FY08 with air-freight revenues of Rs.800 6.0 mn. 4.0 n According to the management, the initial performance of the freighter operations 2.0 is in line with their business plans. They hope it will turn profitable by Q4FY08. - n We feel the foray into air cargo with its own freighters is very positive for the overall growth prospect of the company as it can now offer complete end-to- FY08E FY09E FY04 FY05 FY06 FY07 end logistics services with quick and efficient deliveries. Source: Company, Kotak Securities - Private Client Research Daily Morning Brief Please see the disclaimer on the last page For Private Circulation 25 January 22, 2008 Kotak Securities - Private Client Research Valuation & Recommendation n Going forward, we expect strong growth in revenues due to ramping up of the airfreight business and addition of new vessel of 8150 DWT that is expected to be commissioned in February 2008. n We maintain our earnings estimates and expect the company to report EPS of Rs.4.6 in FY08E moving upto Rs.6.7 in FY09E. n At Rs.142, the stock is trading at 2.9x book value, 21.3x earnings and 16.4x cash earnings based on FY09E. We recommend HOLD on n We remain positive on the growth prospects of Gati as we feel it is ideally poised Gati with a price target of to take advantage of the booming logistics sector in India. Rs.168 (upside 18%) n Due to the recent sharp correction in stock price, we are upgrading the stock from BOOK PARTIAL PROFITS to HOLD with an unchanged price target of Rs.168 that provides an upside potential of 18%. Daily Morning Brief Please see the disclaimer on the last page For Private Circulation 26 January 22, 2008 Kotak Securities - Private Client Research RESULT UPDATE RIDDHI SIDDHI GLUCO BIOLS Apurva Doshi PRICE : RS.265 RECOMMENDATION : BUY email@example.com +91 22 6634 1366 T ARGET PRICE : RS.390 FY09E PE : 5.5X The Q3FY08 results of Riddhi Siddhi Gluco Biols were above our expectations on the profitability side. We remain positive and continue to recommend BUY on the stock with a price target of Rs.390 (47% upside). n Net sales for Q3FY08 were at Rs.883 mn as against Rs.1.03 bn in Q3FY07, thereby registering a decline of 14.7% YoY. This is primarily because its Gokak plant operated at only around 60% capacity in Q3FY08 due to a fire in its starch drying section in May 2007. Summary table n The company recorded an EBIDTA margin of 17.9% for Q3FY08, which is up (Rs mn) FY07 FY08E FY09E 230 bps YoY and up 80 bps on a sequential basis. The higher EBIDTA margin Sales 3,326 3,496 5,408 was on account of higher proportion of sales of value added derivatives of Growth (%) 36.8 5.1 54.7 cornstarch. EBITDA 540 556 969 n The EBIDTA stood at Rs.158 mn in Q3FY08, which is down 2.1% YoY and up EBITDA margin (%) 16.2 15.9 17.9 54% on a sequential basis. Net profit 268 254 538 Net debt 1,948 2,192 2,667 n Depreciation during Q3FY08 was higher by 7.0% YoY to Rs.34 mn. This was EPS (Rs) 25.4 22.8 48.2 due to the increase in the provisioning of depreciation due to the expansion of Growth (%) 135.9 (5.1) 111.7 the Viramgam unit from 100 TPD to 250 TPD. DPS (Rs) 3.0 4.0 5.0 n The interest is down 20.0% YoY to Rs.29 mn on reduced working capital ROE (%) 18.8 16.6 28.7 requirements as the Gokak plant operated at around 60% capacity utilization ROCE (%) 12.7 11.2 18.2 levels in Q3FY08. EV/Sales (x) 1.5 1.5 1.0 EV/EBITDA (x) 9.1 9.3 5.8 n PBT for Q3FY08 was at Rs.95 mn, up 1.7% YoY and up 107.7% on a sequential P/E (x) 10.4 11.6 5.5 basis. P/BV (x) 2.1 1.8 1.4 n PAT for Q3FY08 was up 1.8% YoY and up 108.2% on a sequential basis to Rs.85 Source: Company & Kotak Securities - Private Client Research mn, translating into a quarterly EPS of Rs.7.6 and quarterly CEPS of Rs.10.6 on a fully diluted basis. n PAT for 9MFY08 was down 0.7% YoY to Rs.172 mn translating into 9MFY08 EPS of Rs.15.5 and CEPS of Rs.23.5 on a fully diluted basis. Quarterly performance - RSGB (Rs mn) Q3FY08 Q3FY07 YoY (%) Q2FY08 QoQ (%) 9MFY08 9MFY07 YoY (%) Net Sales 883 1,035 (14.7) 600 47.1 2,166 2,285 (5.2) Total exp. 725 874 (17.0) 498 45.7 1,790 1,902 (5.9) EBIDTA 158 161 (2.1) 102 54.0 376 383 (1.9) Depreciation 34 31 7.0 29 17.5 90 78 14.2 EBIT 124 130 (4.3) 74 68.0 287 305 (6.0) Interest 29 36 (20.0) 28 3.1 93 110 (14.8) PBT 95 94 1.7 46 107.7 193 195 (1.0) Tax & deferred tax 11 11 1.0 5 103.8 21 22 (3.2) NPAT 85 83 1.8 41 108.2 172 174 (0.7) Equity sh o/s (mn) 11.1 10.6 10.6 10.6 10.6 Equity sh o/s (mn) diluted 11.1 11.1 11.1 11.1 11.1 Ratios Operting profit margin (%) 17.9 15.6 +230 bps 17.1 +80 bps 17.4 16.8 +60 bps Tax / PBT (%) 11.1 11.2 11.3 11.0 11.2 EPS Reported(Rs) 7.6 7.9 3.9 16.3 16.4 EPS (Rs) - Fully Diluted 7.6 7.5 3.6 15.5 15.6 CEPS (Rs) - Fully Diluted 10.6 10.3 6.2 23.5 22.6 Source: Company Daily Morning Brief Please see the disclaimer on the last page For Private Circulation 27 January 22, 2008 Kotak Securities - Private Client Research Combined maize crushing capacity of 0.5 mn TPA - largest in India n With the expected commencement of operations at Uttarakhand of 500 TPD very shortly and expansion at Viramgam to 250 TPD, the combined maize crushing capacity of the company would almost double from 0.28 mn TPA to 0.5 mn TPA. n In terms of TPD, the total capacity of the company would expand from 850 TPD to 1500 TPD. Thus, it would retain its status as India's largest and fastest growing corn wet milling company. n The financial performance of the company is poised for aggressive growth in the coming years in line with capacity addition and strong growth in demand for the products of RSGB. Recommendation and Valuation n The starch division of the Gokak plant, that had caught fire, has resumed operations from October 2007. The plant that operated around 40% capacity utilization levels in Q2FY08 has moved up to around 80% capacity utilization during December 2007. Going forward, it is expected to further ramp up to 90% levels in Q4FY08. n Over the last six months, the stock had underperformed the markets due to fire at its Gokak plant and a couple of months delay at its Uttarakhand plant. With the Gokak plant back to normal and aggressive capacity expansion to 1500 TPD that would become operational very shortly, the financial performance of the company is expected to improve significantly from now on. n We maintain our earnings estimates and expect the company to report EPS of Rs.22.8 in FY08E and moving up to Rs.48.2 in FY09E. We recommend a BUY on n At Rs.265, the stock trades at 1.4x book value, 5.5x earnings and 4.3x cash RSGB with a price target of earnings based on FY09E. Rs.390 (47% upside) n We remain positive and reiterate our BUY on RSGB with a price target of Rs.390. This provides an upside potential of 47% from current levels. Net sales (Rs bn) EPS (Rs) 5.0 60 50 4.0 40 3.0 30 2.0 20 1.0 10 - 0 FY08E FY09E FY04 FY05 FY06 FY07 FY08E FY09E FY04 FY05 FY06 FY07 Source: Company, Kotak Securities - Source: Company, Kotak Securities - Private Client Research Private Client Research Daily Morning Brief Please see the disclaimer on the last page For Private Circulation 28 January 22, 2008 Kotak Securities - Private Client Research RESULT UPDATE EVEREST KANTO CYLINDERS Apurva Doshi PRICE : RS.295 RECOMMENDATION : BUY firstname.lastname@example.org +91 22 6634 1366 T ARGET PRICE : RS.450 C ONS. FY10E PER : 12.5X The Q3FY08 results of EKC are above our estimate on the profitability side. We maintain BUY with an unchanged price target of Rs.450 (53% upside potential). n On a consolidated basis, EKC reported net sales of Rs.1.3 bn in Q3FY08. This Summary table: consolidated was compared to Rs.1.1 bn in Q3FY07, thereby recording YoY revenue growth (Rs mn) FY08E FY09E FY10E of 12.3%. This was primarily driven by a ramp up of its second unit at Dubai. Sales 5248 8676 12735 The revenue growth was negatively impacted by rupee appreciation of around Growth % 23.5 65.3 46.8 EBITDA 1550 2474 3507 11% against the US dollar for consolidating purposes. EBITDA margin % 29.5 28.5 27.5 Net profit 1062 1624 2492 n EBIDTA margin during Q3FY08 was up 810 bps YoY and up 560 bps on a Net cash (debt) -164 558 951 sequential basis to 36.6%. This was primarily due to lower raw materials to EPS (Rs) 10.5 15.4 23.6 sales ratio at 45.3% in Q3FY08 as against 55.0% in Q3FY07. This was due to Growth % 48.0 52.9 53.5 additional contribution from the ramping up of the second unit at Dubai as CEPS 12.7 18.4 27.0 DPS (Rs) 4.0 1.0 1.3 typically Dubai operations generate higher operating margins compared to ROE % 29.5 21.1 28.6 Indian operations. However, there were also some one time discounts that the ROCE % 24.7 27.9 34.6 company received on purchases. Hence we expect the operating margins to EV/Sales (x) 5.7 3.5 2.4 remain around 28-30% levels in future. EV/EBITDA (x) 19.3 12.4 8.6 P/E (x) 28.1 19.2 12.5 n Depreciation increased 72.7% YoY to Rs.83.4 mn in Q3FY08 due to expansions P/Cash Earnings 23.3 16.0 10.9 at Gandhidham and ramping up of second unit at Dubai. P/BV (x) 6.4 4.1 3.2 Source: Company & Kotak Securities - n Interest cost increased significantly by 149.6% YoY to Rs.29.2 mn in Q3FY08 Private Client Research due to additional working capital requirements for the Gandhidham and second unit at Dubai. Consolidated quarterly performance - EKC (Rs mn) Q3FY08 Q3FY07 YoY (%) Q2FY08 QoQ (%) 9MFY08 9MFY07 YoY (%) Net Sales 1,255 1,118 12.3 1,277 (1.7) 3,646 2,914 25.1 Increase / decrease in stock (308) (260) 18.6 38 (902.1) (261) (439) (40.5) raw materials 877 874 0.3 613 43.0 2,097 2,038 2.9 staff cost 58 37 56.1 51 14.2 155 100 54.4 other exp. 170 148 14.8 179 (5.0) 491 414 18.7 total exp. 796 800 (0.4) 881 (9.6) 2,481 2,112 17.5 EBIDTA 459 318 44.3 397 15.8 1,165 802 45.2 Other income 28 12 133.9 32 (12.9) 68 24 181.1 Depreciation 83 48 72.7 49 69.5 176 135 30.5 EBIT 404 282 43.2 379 6.4 1,057 692 52.8 Interest 29 12 149.6 26 11.9 71 38 89.4 PBT 374 270 38.6 353 6.0 986 654 50.7 Tax & deferred tax 80 66 21.0 69 15.9 185 200 (7.2) PAT 294 204 44.4 284 3.6 801 455 76.1 Equity Rs. mn 202 195 195 202 195 Diluted sh. Mn FV Rs. 2 106 106 106 106 106 Ratios Operting profit margin (%) 36.6 28.5 up 810 bps 31.0 up 560 bps 31.9 27.5 up bps Raw Materials / Sales (%) 45.3 55.0 51.0 50.4 54.9 Other Exp / sales (%) 13.5 13.2 14.0 13.5 14.2 Tax / PBT (%) 21.4 24.5 19.6 18.8 30.5 EPS (Rs) - Reported 3.0 2.2 2.9 Diluted EPS (Rs.) 2.8 1.9 2.7 7.6 4.3 CEPS (Rs) 3.6 2.4 3.2 9.2 5.6 Source: Company Daily Morning Brief Please see the disclaimer on the last page For Private Circulation 29 January 22, 2008 Kotak Securities - Private Client Research Net sales (Rs bn) Segmental table 15.0 (Rs mn) Q3FY08 9MFY08 FY07 Revenue 12.0 India 815.7 2,255.5 2,422.0 9.0 Dubai 706.0 1,753.9 2,127.4 China - - - 6.0 PBIT 3.0 India 237.6 555.9 379.3 Dubai 145.0 462.6 611.4 - China - - - FY08E FY09E FY10E FY05 FY06 FY07 PBIT % India 29.1 24.6 15.7 Source: Company, Kotak Securities - Dubai 20.5 26.4 28.7 Private Client Research China - - - Source: Company EPS (Rs) n PBT for Q3FY08 stood at Rs.374.3 mn, up 38.6% YoY and 6.0% on a sequential 25.0 basis. 20.0 n For Q3FY08, the company reported PAT of Rs.294.2 mn, up 44.4% YoY and 3.6% on a sequential basis, thereby translating into quarterly EPS of Rs.2.8 and 15.0 CEPS of Rs.3.6 on a diluted basis. 10.0 n For 9MFY08, the company reported PAT of Rs.800.6 mn, up 76.1% YoY, thereby 5.0 translating into 9MFY08 EPS of Rs.7.6 and CEPS of Rs.9.2 on a diluted basis. - Expansion on track FY08E FY09E FY10E FY05 FY06 FY07 n The company has an annual consolidated capacity of 700,000 cylinders as of March 2007. The second unit of Dubai has commenced commercial production Source: Company, Kotak Securities - in Q2FY08 while the China unit is expected to commence commercial production Private Client Research in March 2008. n With expansions in Dubai, China and India, the capacity would expand to 1 mn cylinders by March 2008. It would further rise to 1.7 mn cylinders by March 2009 and 1.9 mn cylinders by March 2010. n Such aggressive capacity expansion is expected to lead to a CAGR of 44.2% in revenues and 51.4% in net profits over the next three years, that is, from FY07 to FY10E. Valuation & Recommendation n We remain positive on the growth prospects of the company. We maintain our earnings estimates and expect the company to report EPS of Rs.10.5 in FY08E moving upto Rs.15.4 in FY09E and Rs.23.6 in FY10E. We maintain BUY on EKC n The current price of Rs.295, discounts 3.2x book value, 12.5x earnings and with a price target of 10.9x cash earnings based on FY10E. We believe this is attractive considering Rs.450 (53% upside) the clear growth prospects of the company, going forward, on the back of expanded capacities both in India and overseas. n We maintain BUY on EKC with an unchanged price target of Rs.450 that provides 53% upside potential from current levels. Daily Morning Brief Please see the disclaimer on the last page For Private Circulation 30 January 22, 2008 Kotak Securities - Private Client Research RESULT UPDATE HDFC BANK Saday Sinha PRICE : RS.1507 RECOMMENDATION : BUY email@example.com +91 22 66341440 T ARGET PRICE : RS.1722 FY10E P/E: 18.1X, P/ABV: 4.0X HDFC Bank continued the stellar performances it had recorded during the past 23 consecutive quarters. The bank delivered Q3FY08 results ahead of our expectations. Net interest income (NII) and net profits rose 65.6% and 45.2%, respectively. Mainly robust asset growth and improvement in core net interest margin have contributed to this. We are revising our earnings estimates slightly upward and incorporating FY10 numbers in our workings. We are upgrading the stock to BUY with a target price of Rs.1722 (revised upward from Rs.1480) mainly due to shifting the basis to FY10 and recent correction in its stock price. Key highlghts Quarterly Performance, Rs mn Q3FY08 Q3FY07 YoY (%) Interest on advances 18672.5 11372.9 64.2 Interest on Investment 7701.9 5244.3 46.9 Int on RBI/ other assets 880.6 358.8 145.4 Other interests 14.0 13.1 6.9 Total interest earned 27269.0 16989.1 60.5 Interest expended 12893.2 8306.8 55.2 Net interest income 14375.8 8682.3 65.6 Other income 6788.9 3733.0 81.9 Fee Income 4601.0 3314.0 38.8 Foreign exchange Income 742.0 630.0 17.8 Profit on sale of Investments 1315.0 -212.0 NM Net Revenue 21164.7 12415.3 70.5 Operating Expenses 10501.2 6050.2 73.6 Employee expenses 3528.3 2138.4 65.0 Other operating expenses 6972.9 3911.8 78.3 Operating profit 10663.5 6365.1 67.5 Prov. & contingencies 4231.3 2059.9 105.4 Taxes 2138.6 1348.8 58.6 Net profit 4293.6 2956.4 45.2 EPS (Rs.) 12.10 9.40 28.7 Source: Company Asset growth, core net interest margin drive robust net interest Net Interest Income (Rs bn) income 16 Net interest income rose 65.6% YoY to Rs.14.38 bn in Q3FY08 from Rs.8.68 bn in 14 Q3FY07. This was mainly driven by strong growth of 48.1% in net advances and 12 improvement in core net interest margin to around 4.3% (adjusted for the HTM 10 premia amortization) as against around 3.9% (adjusted for the HTM premia 8 6 amortization) for the corresponding quarter of last year. 4 Net revenue (NII and other income) rose 70.5% in Q3FY08 to Rs.21.16 bn from 2 0 Rs.12.42 bn in the corresponding quarter last year. Jun_05 Jun-06 Jun-07 Dec-05 Dec-06 Dec-07 Source: Company Daily Morning Brief Please see the disclaimer on the last page For Private Circulation 31 January 22, 2008 Kotak Securities - Private Client Research Continued traction in fee Income Other income rose 81.9% to Rs.6.79 bn in Q3FY08 from Rs.3.73 bn in the corresponding quarter last year. This increase is largely due to an increase in fee- based income and profit on sale on investments. Fees and commissions contributed Rs.4.6 bn as against Rs.3.31 bn for the corresponding quarter of last year. Other two components are foreign exchange/derivatives revenues of Rs.742 mn (YoY increase of 17.8%) and profit on sale of investments of Rs.1.32 bn (against a loss of Rs.212 mn last year), respectively. Car, personal loans drive strong asset growth Total customer assets (including advances, corporate debentures, investments in securitized paper, etc) at the end of Q3FY08 were Rs.749.79 bn, an increase of 39.1% YoY, with gross retail loans now forming 52.6% of gross advances. The growth in car loans, business banking and personal loans in Q3FY08 was robust as compared to that of last year. During the same period, businesses like two-wheelers Breakup of retail loans (Q3FY08) and loan against securities saw some decline. Overall retail loans grew 45% YoY. Car Loans Personal Trends in Retail loans Loan against Sec Retail Loans (Rs bn) Dec-06 Sep-07 Dec-07 Growth Growth (YoY) (QoQ) 2 Wheelers Car Loans 61.50 98.00 103.50 68.3 5.6 Business banking Personal 40.00 57.00 61.00 52.5 7.0 CV Loan against Securities 13.00 11.50 12.50 -3.8 8.7 Credit Cards 2 Wheelers 20.00 17.00 17.50 -12.5 2.9 Others Business banking 44.00 67.50 77.00 75.0 14.1 Total CV 47.00 52.50 55.50 18.1 5.7 Credit Cards 19.00 23.50 28.00 47.4 19.1 Source: Company Others 16.40 18.50 23.40 42.7 26.5 Total 260.90 345.50 378.40 45.0 9.5 Source: Company Total deposits were up 48.9% to Rs.993.87 bn at the end of this quarter. Out of this, savings account deposits and current account deposits stand at Rs.249.61 bn and Rs.256.02 bn, respectively. Its current account and saving account (CASA) stands at 50.9% of total deposits at the end of Q3FY08. Trends in deposits (Rs bn) Dec-06 Sep-07 Dec-07 Growth Growth (YoY) (QoQ) Demand 366.71 478.29 505.63 37.9% 5.7% Current 192.38 254.56 249.61 29.7% -1.9% Saving 174.33 223.73 256.02 46.9% 14.4% Term 300.78 432.40 488.24 62.3% 12.9% Total 667.49 910.69 993.87 48.9% 9.1% Source: Company NIMs improve, set to stabilize The core NIM rose to 4.3% for Q3FY08 (adjusted for the HTM premia amortization) as against around 3.9% (adjusted for the HTM premia amortization) for the corresponding quarter of last year. We believe, going forward, margins would stabilize around 4.0% levels, as banks will not compromise on growth to maintain such high margins. Daily Morning Brief Please see the disclaimer on the last page For Private Circulation 32 January 22, 2008 Kotak Securities - Private Client Research Prudent NPA management Asset quality at the end of Q3FY08 remained healthy with gross NPA at 1.2% as against 1.3% at the corresponding quarter of the last year and net NPA at 0.4% at the end of Q3FY08 at the of customer assets. Capital adequacy ratio remains healthy Capital adequacy ratio stood at 13.8% as against the regulatory requirement of 9%. Out of this, Tier I capital is healthy at 10.5%. The bank's business momentum remained healthy in both its retail and wholesale customer franchises. At the end of the Q3FY08, its distribution network had 754 branch outlets and 1906 ATMs. Valuation & recommendation At the current market price of Rs.1507, the stock is trading at 18.1x its FY10E earnings and 4.0x its FY10E ABV. We have slightly revised our FY08E and FY09E earnings forecast upward and are incorporating FY10 numbers in our workings. We now expect net profit for FY08E, FY09E and FY10E to be Rs.16.59 bn, Rs.21.61 bn and Rs.29.47 bn, respectively. This will result into an EPS of Rs.46.85, Rs.61.03 and Rs.83.23 for FY08E, FY09E and FY10E, respectively. The adjusted book value for FY08E, FY09E and FY10E is forecast at Rs.305.92, Rs.336.18 and Rs.378.75, respectively. Rolling 1-year forward P/ABV band CMP 2.0x 2.5x 3.0x 3.5x 4.0x 4.5x 5.0x 5.5x 2000 1500 1000 500 0 1-Apr-03 1-Dec-03 1-Aug-04 1-Apr-05 1-Dec-05 1-Aug-06 1-Apr-07 1-Dec-07 Source: Company, Kotak Securities - Private Client Research We upgrade the stock to BUY with a target price of Rs.1722 (revising upward from earlier price target Rs.1480) based on a P/ABV of 4.5x its FY10E adjusted book value for the bank (assigning some premium with respect to Axis bank, where we have assigned 4.0x multiple of FY10 ABV). We are giving some premium to HDFC Bank as it has consistently delivered a growth of around 30% (YoY) in net profit for the past 23 quarters and continues to maintain its leadership among domestic banks with its robust credit growth, high CASA, high NIM, clean asset quality, a large component of fee income in its total income. The bank is one of the leading players in the new generation private sector banks, which is going to benefit from the robust economic growth. This has enabled the stock to get a premium over its competitors, which we believe will continue in the future as well. So, we recommend a BUY on the stock with a price target of Rs.1722, which could provide upside of 14.3% from current levels. Daily Morning Brief Please see the disclaimer on the last page For Private Circulation 33 January 22, 2008 Kotak Securities - Private Client Research Key data (Rs bn) FY06 FY07 FY08E FY09E FY10E Interest income 44.75 66.46 95.85 125.88 158.26 Interest expense 19.30 31.79 46.65 62.36 78.63 Net interest income 25.46 34.67 49.20 63.52 79.63 Other income 11.24 15.16 21.39 27.67 35.68 Gross profit 19.79 25.62 38.55 50.39 66.18 Net profit 8.71 11.36 16.59 21.61 29.47 Gross NPA (%) 1.7 1.6 1.3 1.3 1.3 Net NPA (%) 0.5 0.5 0.5 0.4 0.2 Net interest margin (%) 3.5 3.9 4.0 3.9 4.0 RoE (%) 10.8 19.3 18.9 18.5 22.8 RoAA (%) 0.8 1.4 1.5 1.5 1.6 Dividend Yield (%) 0.4 0.4 0.4 0.4 0.4 EPS (Rs) 16.9 35.6 46.8 61.0 83.2 Adjusted BVPS (Rs) 164.5 195.3 305.9 336.2 378.8 P/E (x) 89.1 42.4 32.2 24.7 18.1 P/ABV (x) 9.2 7.7 4.9 4.5 4.0 Source: Company, Kotak Securities - Private Client Research Daily Morning Brief Please see the disclaimer on the last page For Private Circulation 34 January 22, 2008 Kotak Securities - Private Client Research EVENT UPDATE POWER FINANCE CORPORATION (PFC) Sarika Lohra PRICE : RS.208 RECOMMENDATION : BUY firstname.lastname@example.org +91 22 6634 1480 T ARGET PRICE : RS.245 FY09E P/ABV : 2.4X PFC reported 37% growth in net profit to Rs.3.2 bn for Q3FY08, following strong NIMs of 3.74%. Business growth of the company remained moderate at 16% YoY growth in the loan book at Rs.471.3 bn following de-growth of 10% in the disbursement during the quarter. Business growth will be lumpy, being of larger size in nature, involving significantly larger capex. However, we opine that business growth will accelerate, going forward, as loan sanctions start adding up to disbursements. However, for FY08 and FY09, we have marginally lowered our business growth estimates from 24% to 23% over FY08-09. We believe the company is likely to witness stronger growth in its loan book towards the later half of the Tenth Five Year Plan as the power generation and distribution capacities would be nearing completion. Based on this, we have lowered our target price to Rs.245, from Rs.252 previously. Given the recent correction, the stock at our target price of Rs.245 offers a decent upside of 17.8%. Hence, we recommend BUY on the stock with a 12-month price target of Rs.245. Result Review Q3FY08 n Revenue growth of PFC for Q3FY08 remained strong. Interest income of the company grew 36% to Rs.12.63 bn from Rs.9.28 bn. On the other hand, interest expenses of the company rose 33% to Rs.8.00 bn. The net interest income (NII) of the company grew significantly by 42% to Rs.4.63 bn. n The strong growth in earnings was seen mainly on the back of strong margins during the quarter and a decent growth in the loan book. n For 9MFY08, interest income grew 37% to Rs.35.75 bn from Rs.26.16 bn. NII of PFC during the period under review has gone up 39% to Rs.13.25 bn as against Rs.9.52 bn in the previous year. Summary table Quarterly performance (Rs bn) FY07 FY08E FY09E (Rs mn) Q2FY08 Q2FY07 % chg H1FY08 H1FY07 % chg Income from operation 37.4 48.8 60.7 Interest Income 12,630.0 9,280.0 36.1 35,750.0 26,159.0 36.7 Interest expenses 23.1 30.7 39.3 Interest Expenses 8,000.0 6,020.0 32.9 22,503.0 16,644.0 35.2 Net interest income 14.3 18.2 21.4 Net Interest Income 4,630.0 3,260.0 42.0 13,247.0 9,515.0 39.2 Other Income 0.4 0.5 0.7 Other Income 120.0 60.0 100.0 377.0 185.0 103.8 Total Income 14.7 18.7 22.1 Total Income 4,750.0 3,320.0 43.1 13,624.0 9,700.0 40.5 Operating Profit 14.1 17.9 21.2 PAT 9.9 11.9 14.1 Operating Expenses 220.0 110.0 100.0 496.0 352.0 40.9 Gross NPA (%) 0.1 0.1 0.1 Operating Profit 4,530.0 3,210.0 41.1 13,128.0 9,348.0 40.4 Net NPA (%) 0.1 0.1 0.1 Provisions (140.0) (10.0) - (99.0) 55.0 -280.0 NIMs (%) 3.6 3.7 3.6 Extra-ordinary items 30.0 180.0 -83.3 209.0 45.0 364.4 RoA (%) 2.3 2.3 2.2 PBT 4,700.0 3,400.0 38.2 13,436.0 9,338.0 43.9 RoE (%) 13.1 13.3 14.5 Div Payout Ratio (%) 30.4 35.0 35.0 Provision for Tax 1,500.0 1,060.0 41.5 4,330.0 3,178.0 36.2 EPS (Rs) 8.6 10.4 12.3 PAT 3,200.0 2,340.0 36.8 9,106.0 6,160.0 47.8 BV (Rs) 74.9 81.1 88.5 PAT+ DTL* 3,220.0 2,740.0 17.5 9,902.0 7,259.0 36.4 Adj Book Value (Rs) 74.5 80.6 87.8 P/E (x) 24.2 20.0 16.9 *DTL- Deferred Tax Liability; Source: Company P/ABV (x) 2.8 2.6 2.4 Source: Company & Kotak Securities - Private Client Research Daily Morning Brief Please see the disclaimer on the last page For Private Circulation 35 January 22, 2008 Kotak Securities - Private Client Research Firm NIMs following asset re-pricing n PFC's NIMs remained firm during the period under review following the re- pricing of the assets. Yield on assets remained firm at 10.21% up by 85 bps YoY and 16 bps QoQ. Cost of funds rose 45 bps YoY and 18 bps QoQ to 8.19%. n Following the re-pricing of loans, the spreads of the company remained firm on a sequential basis at 2.02%, while improving by 40 bps YoY. n Going forward, NIMs of the company are likely to remain firm. However, it is likely to witness marginal pressure, which we have already factored in our working. This is because the company may have to raise long dated liabilities to meet its business growth requirements. Asset quality remains strong n Gross NPAs ratio decreased to 0.03% from 0.21% in Q3FY08 and 0.06% in Q2FY08. n Net NPA ratio of the company declined to 0.02% from 0.14% in the previous year. n The company has also written back provisions amounting to Rs 140mn during the period. Rs 140mn during the period. Slower business growth: likely to accelerate going forward n Growth in disbursement during the quarter witnessed de-growth of around 10% YoY at Rs 31.7bn as against Rs 35.3bn. While PFC's sanctions grew by 11.4% YoY to Rs 84.7bn. n For 9MFY08, disbursements have gone up by 2% YoY to Rs 97.36bn from Rs95.32bn in the corresponding period last year. Growth in the sanctions during the 9MFY08 remained significantly strong, clocking a growth of 58% YoY to Rs 436.07bn against Rs 275.75bn n The overall loan book of the company showed a moderate 16%YoY growth, amount to Rs 471.29bn, from Rs 405.73bn. n Management at PFC is of the view that the growth in Disbursement of the company is likely to pick up in the Q4FY08. However we have marginally lowered our business growth estimates from 24% previously to 23% over FY08- FY09. n Considering the strong sanction book of the company, we opine that the growth in loan book will accelerate as and when the sanctions add up to the loan book. Therefore we maintain our view that PFC's loan book will witness strong growth in the coming quarter following strong demand from the power sector. Recommendation: n We believe that the business growth of the company will be lumpy in nature. However, given the de-growth in the disbursement, we have marginally reduced our earning estimates with a 23% growth in loan book over FY08-09. n Outlook for the company remains positive given its proficiency in the power sector financing and the strong capex requirement in the space. Given PFC's 20% market share, we expect that PFC's loan book would witness a CAGR of 24% over FY07-12 i.e. during the 10th Five year plan. While the loan book growth will be higher towards the mid and closure of the 10th Plan as the capacity addition would be near to its closures. We recommend a BUY on n We continue to value the company on dividend discount model and P/BV PFC with a price target of multiple. Based on which we value the company at Rs 245 per share. With the Rs.245 recent correction in the stock price, at Rs 208 the stock currently trades at 2.4x its FY09E ABV of Rs 88 and 16.9 x its FY09 EPS of Rs 12.3 and offers a decent upside of 17.8%. We upgrade the stock to a BUY from HOLD. Daily Morning Brief Please see the disclaimer on the last page For Private Circulation 36 January 22, 2008 Kotak Securities - Private Client Research EVENT UPDATE LIC H OUSING FINANCE Sarika Lohra PRICE : RS.283 RECOMMENDATION : BUY email@example.com +91 22 6634 1480 T ARGET PRICE : RS.455 FY09E P/ABV : 1.2X LIC Housing Finance has made a preferential placement of 8.4 mn shares to First Gulf Bank (5 mn) and LIC of India (3.4 mn) at Rs.410 per share for a total consideration of Rs.3.44 bn. On a post diluted equity capital of Rs.934 mn, the allotment of shares has lead to a 9% equity dilution. Post allotment of shares, the Tier I capital adequacy of LICHF would improve to 14% from 12% previously. We opine that with the fresh capital infusion, the strong growth in business is likely to continue. We continue to maintain our estimates for the company, as we had incorporated the dilution in our working. At the current price of Rs.283, the stock is trading at 6.3x FY09 P/E (EPS of Rs 44.8), and 1.2x its FY09E ABV of Rs.243. We reiterate BUY on the stock with a price target of Rs.455. n The Boards of Directors of LIC Housing Finance has approved plans to make a Summary table preferential allotment of 8.4 mn shares at Rs.410 to First Gulf Bank (5 mn (Rs bn) FY07 FY08E FY09E shares) and LIC of India (3.4 mn shares) at a premium of Rs.400 per share. Interest Income 15.0 20.3 24.8 The preferential issue was made for a total consideration of Rs.3.44 bn, leading Interest expenses 11.0 15.0 18.3 to a post equity dilution of 9%. NII 4.0 5.3 6.5 Non-Int Income 0.8 1.0 1.2 n The equity capital of the company post equity dilution would amount to Rs.934 Total Income 4.8 6.4 7.7 Optg Profit 3.7 5.1 6.1 mn (93.4 mn shares) from Rs.850 mn shares previously. PAT 2.8 3.5 4.2 Gross NPA (%) 2.6 2.2 1.8 n The company has issued shares to LIC of India to maintain its shareholding at Net NPA (%) 1.3 1.0 0.7 40.5%, in LIC Housing Finance. NIMs (%) 2.5 2.7 2.7 RoA (%) 1.7 1.7 1.7 n With this preferential placement, LIC Housing Finance's Tier I capital adequacy RoE (%) 19.3 18.8 18.2 Divi. Payout Ratio (%) 26.1 27.3 27.1 will improve to 14% from 12% previously. The capital adequacy ratio of the EPS (Rs) 32.9 37.1 44.8 company will improve to 17% from 15% as on December 31 2007. BV (Rs) 181.6 229.2 261.9 Adj. BV (Rs) 154.5 207.0 243.1 n Since we had factored in the growth in business following the augmentation of P/E (x) 8.6 7.6 6.3 the capital in the business, and robust performance demonstrated by the P/ABV (x) 1.8 1.4 1.2 company in 9MFY08, we continue to maintain our earning estimates for FY08 Source: Company & Kotak Securities - and FY09. Private Client Research n We maintain our net profit estimates for the company for FY08E at Rs.3.47 bn and for FY09E at Rs.4.18 bn. Only the estimated EPS has changed marginally following the issuance of shares at a significant premium. We recommend a BUY on n We maintain positive outlook on the stock, given the strong business growth LIC Housing Finance with improving asset quality and firm NIMs. We maintain a BUY on the stock with a a price target of Rs.455 price target of Rs 455. At the current market price, the stock is trading at 1.2x its FY09E ABV of Rs 243 and 6.3x its FY09 EPS of Rs 44.8. Daily Morning Brief Please see the disclaimer on the last page For Private Circulation 37 January 22, 2008 Kotak Securities - Private Client Research Bulk deals Trade details of bulk deals Date Scrip name Name of client Buy/ Quantity Avg. Price Sell of shares (Rs) 21-Jan Axon Infotec Avinash Arvind Jagushte S 5,324 65.09 21-Jan Choksi Imag Nirmal Invesments S 20,000 27.64 21-Jan Cmm Broadcas Manmohan Damani HUF S 36,751 7.23 21-Jan Diamon Cable Reliance Amc Account PMS S 85,543 501.21 21-Jan Flap Prod Eq Photon Infotech Private Ltd B 33,601 450.17 21-Jan Flap Prod Eq Mingel Zav Tuscano S 26,000 464.44 21-Jan Garnet Intl Nickunj G Shah B 101,701 91.29 21-Jan Genus Power Talma Chemicals Inds. Pvt. Ltd. B 300,000 727.00 21-Jan Genus Power Prism Impex Pvt Ltd S 100,000 752.00 21-Jan Glory Poly Mavi Impex Ltd B 313,200 96.99 21-Jan Glory Poly Axiom Impex Int Limited S 300,000 96.82 21-Jan KEW Industr Sudip A Patel B 70,250 46.64 21-Jan KEW Industr Bliss Investment Consultancy S 70,000 46.56 21-Jan MCD Holding Ruanne Cunniff and Gold Farb Inc Acacia Parterslp B 84,638 335.38 21-Jan Rajesh Expot JM Financial MF B 331,520 711.06 21-Jan Rama Paper Susamma Mathew S 71,850 27.14 21-Jan Southern Isp North Delhi Construction and Investment Pvt Ltd B 40,000 39.09 21-Jan Usher Agro Mavi Investment Fund Ltd B 200,000 218.49 Source: BSE Daily Morning Brief Please see the disclaimer on the last page For Private Circulation 38 January 22, 2008 Kotak Securities - Private Client Research Gainers & Losers Nifty Gainers & Losers Price (Rs) % change Index points Volume (mn) Gainers Satyam Comp 367 (2.0) (0.9) 4.9 GlaxoSmithkline 946 (6.4) (0.9) 0.05 Sun Pharma 1,060 (2.6) (1.0) 0.2 Losers Reliance Ind 2,541 (9.2) (65.5) 8.3 NTPC 206 (14.0) (48.0) 25.8 ONGC 1,117 (7.9) (35.5) 2.2 Source: Bloomberg Forthcoming COMPANY/MARKET events Date Event 22-Jan Balaji Telefilms, Tech Mahindra, Pidilite Industries, Zandu Pharmaceutical, Tamil Nadu Newsprint & Papers, Bank of India, Lupin, Corporation Bank, Tata Elxsi, United Spirits, Grasim Ind, Punjab Tractors, Asahi India Glass, I-flex Solutions, Sesa Goa, Amara Raja Batteries, GSFC, India Infoline, Pantaloon Retail, Tata Teleservices, Vijaya Bank earnings expected; IRB Infrastructure holds press conference to discuss on IPO 23-Jan Polaris Software, Ballarpur Industries, BRPL, Fortis Healthcare, Sonata Software, Mirc Electronics, Chennai Petroleum Corpn, Bajaj Hindustan, Union Bank of India, D-Link India, Dena Bank, Canara Bank earnings expected 24-Jan 3i Infotech, Wyeth, GTL, Apollo Hospitals, GMR Infrastructure, Central Bank of India, Punjab National Bank, HDIL, SBI, Engineers India, ICI India earnings expected Source: Bloomberg Research Team Name Sector Tel No E-mail id Dipen Shah IT, Media, Telecom +91 22 6634 1376 firstname.lastname@example.org Sanjeev Zarbade Capital Goods, Engineering +91 22 6634 1258 email@example.com Teena Virmani Construction, Cement, Mid Cap +91 22 6634 1237 firstname.lastname@example.org Awadhesh Garg Pharmaceuticals, Hotels +91 22 6634 1406 email@example.com Apurva Doshi Logistics, Textiles, Mid Cap +91 22 6634 1366 firstname.lastname@example.org Saurabh Gurnurkar IT, Media, Telecom +91 22 6634 1273 email@example.com Saurabh Agrawal Metals, Mining +91 22 6634 1291 firstname.lastname@example.org Saday Sinha Banking, Economy +91 22 6634 1440 email@example.com Rohit Ledwani Retail +91 22 6634 1507 firstname.lastname@example.org Sarika Lohra NBFCs +91 22 6634 1480 email@example.com Chetan Shet FMCG, Power +91 22 6634 1382 firstname.lastname@example.org Shrikant Chouhan Technical analyst +91 22 6634 1439 email@example.com Kaustav Ray Editor +91 22 6634 1223 firstname.lastname@example.org K. Kathirvelu Production +91 22 6634 1557 email@example.com Disclaimer This document is not for public distribution and has been furnished to you solely for your information and must not be reproduced or redistributed to any other person. Persons into whose possession this document may come are required to observe these restrictions. This material is for the personal information of the authorized recipient, and we are not soliciting any action based upon it. This report is not to be construed as an offer to sell or the solicitation of an offer to buy any security in any jurisdiction where such an offer or solicitation would be illegal. It is for the general information of clients of Kotak Securities Ltd. It does not constitute a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual clients. 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"Daily Morning Brief"