INDIA DAILY February 13, 2012 India 10-Feb 1-day1-mo 3-mo

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1 Contents Daily Alerts Results INDIA DAILY February 13, 2012 India 10-Feb 1-day1-mo 3-mo DLF: Right course but still in rough waters Oil India: Country cousin steals a march Tata Power: Coal production ramps up, low cost coal gives Mundra hope IDFC: Growth strong, core in line Reliance Communications: Weak results but do they matter? Shriram Transport: A flat quarter Reliance Capital: A mixed quarter Eros International: Growing up MTNL: Operational strife continues Puravankara Projects: In-line results, poor sales Results, Change in Reco JSW Steel: Reports consolidated loss; stock expensive Sun TV Network: A rainy quarter; Sun hides behind the clouds Sensex 17,749 (0.5) Nifty 5, Global/Regional indices Dow Jones 12,801 (0.7) Nasdaq Composite 2,904 (0.8) FTSE 5,852 (0.7) Nikkie 8, Hang Seng 20, KOSPI 2, Value traded India Cash (NSE+BSE) Derivatives (NSE) 1,371 1,079 1,107 Deri. open interest 1,372 1,112 1,260 Forex/money market Change, basis points 10-Feb 1-day 1-mo 3-mo Rs/US$ 49.4 (5) (204) (97) 10yr govt bond, % (8) (64) Net investment (US$mn) 9-Feb MTD CYTD FIIs 294 1,810 3,994 MFs (77) (95) (282) Change in Reco Tata Steel: Negatives out of the way IndusInd Bank: Limited risks to business; valuations cap returns in the near term Sector Consumer products: Hale and hearty, for now Economy Economy: IIP growth likely to be near the bottom Top movers -3mo basis Change, % Best performers 10-Feb 1-day 1-mo 3-mo IVRC IN Equity 56.7 (4.4) TTMT IN Equity WLCO IN Equity MMTC IN Equity (1.1) (8.0) 36.5 TGBL IN Equity (3.3) Worst performers UNSP IN Equity (2.3) 11.8 (19.8) BHEL IN Equity (0.5) (2.3) (19.7) ESOIL IN Equity 66.0 (3.1) 6.5 (18.6) MM IN Equity (1.5) (0.1) (17.8) NMDC IN Equity (0.8) 8.0 (14.2) For Private Circulation Only. FOR IMPORTANT INFORMATION ABOUT KOTAK SECURITIES RATING SYSTEM AND OTHER DISCLOSURES. REFER TO THE END OF THIS MATERIAL.

2 DLF (DLFU) Property Right course but still in rough waters. We believe DLF is moving in the right direction with (1) aggressive asset sale plans and visible intent of sticking to core areas, (2) outsourcing of construction once again and (3) a pick-up in deliveries and sales. Key negatives include (1) weak revenue recognition, (2) a subdued demand (residential and office space) environment and (3) high D/E of 0.9X. We cut our FY2012E/13E/14E earnings by 19%/19%/15% and maintain ADD rating at a revised target price of Rs260/share (earlier Rs270) factoring delays in execution and revised debt estimates. ADD FEBRUARY 13, 2012 RESULT Coverage view: Cautious Price (Rs): 231 Target price (Rs): 260 BSE-30: 17,749 Company data and valuation summary DLF Stock data Forecasts/Valuations E 2014E 52-week range (Rs) (high,low) EPS (Rs) Market Cap. (Rs bn) EPS growth (%) Shareholding pattern (%) P/E (X) Promoters 78.6 Sales (Rs bn) FIIs 15.5 Net profits (Rs bn) MFs 0.1 EBITDA (Rs bn) Price performance (%) 1M 3M 12M EV/EBITDA (X) Absolute 25.0 (1.0) (6.1) ROE (%) Rel. to BSE (3.2) (7.6) Div. Yield (%) Reported financials disappoint on lower execution DLF reported revenues of Rs20.3 bn (-18% yoy, -20% qoq) and PAT of Rs2.6 bn (-45% yoy, -31% qoq) due to slowdown in execution (revenue recognition) as the company moved over to thirdparty contractors from in-house construction which caused associated delays. EBITDA came in at Rs8.2 bn (-30% yoy and qoq) while EBITDA margins dropped by 5.9% qoq and 7.1% yoy to 40.4% due to an increase in construction cost and other expenditure as a proportion of sales (53% versus 48% in 2QFY12 and 47% in 3QFY11). PAT also got impacted by increase in interest costs (average COD is now 12.75% on a debt of Rs250 bn) and lower interest capitalization of 25%. Sales and deliveries have picked up and debt is marginally down qoq QUICK NUMBERS Revenues of Rs20.3 bn in 3QFY12 (-18% yoy, -20% qoq) EBITDA of Rs8.2 bn in 3QFY12 (-30% yoy and qoq) Sales of 3.3 mn sq. ft versus 1.3 mn sq. ft in 2QFY12 DLF sold 3.3 mn sq. ft in 3QFY12 versus 1.3 mn sq. ft in 2QFY12 and 2.5 mn sq. ft in 3QFY11 and the company has guided for a slow and cautious 4QFY12/1QFY13 due to high interest rates. DLF has plans to launch 9.25 mn sq. ft under plots, 6 mn sq. ft under group housing and 0.5 mn sq. ft of commercial space and has indicated that approvals for several micro-markets are already in place. DLF s area under execution has declined to 45 mn sq. ft from 53 mn sq. ft in 2QFY12 due to handovers of 10.5 mn sq. ft in the quarter. DLF s handover of projects (both development and rental) in 3QFY12 is higher than total of FY2010 and FY2011 (9.2 mn sq. ft) and is now targeting to deliver >1.5 mn sq. ft in 4QFY12E and >12 mn sq. ft in FY2013E. Asset sales release cash though debt reduction not as much as expected DLF raised Rs12 bn through assets sales in 3QFY12 (1) Rs7.9 bn from Noida and Pune IT Park, (2) Rs3.4 bn from FSI sales in Gurgaon and (3) Rs0.8 bn from other assets. Net debt, however, has only reduced by Rs4.9 bn as the company utilized (1) Rs4.5 bn in capex and land buying, (2) Rs1.2 bn to purchase Hilton stake in hotel JV and (3) Rs0.8 bn on new launches. DLF is now targeting Rs60 bn of asset sales by end-fy2013e from (1) Aman Resorts (Rs20 bn), (2) Wind/utilities/miscellaneous (Rs20 bn) and (3) Chennai and Mumbai project disposal including Hindoostan Mills land (Rs35-40 bn). For private Circulation Only. FOR IMPORTANT INFORMATION ABOUT KOTAK SECURITIES RATING SYSTEM AND OTHER DISCLOSURES, REFER TO THE END OF THIS MATERIAL.

3 DLF Property Revenue impacted due to slowdown in execution Interim results, DLF, March fiscal year-ends (Rs mn) (% change) 3QFY12 3QFY12E 2QFY12 3QFY11 3QFY12E qoq yoy 9HFY12 9HFY11 % change Net sales 20,344 25,505 25,324 24,799 (20) (20) (18) 70,126 68,775 2 Total cost (12,116) (13,805) (13,594) (13,020) (12) (11) (7) (39,059) (37,910) 3 Construction cost (8,103) (9,466) (9,526) (14) (15) (26,991) (27,005) (0) Staff cost (1,379) (1,539) (1,338) (10) 3 (4,374) (4,250) 3 Other expenditure (2,635) (2,589) (2,156) 2 22 (7,694) (6,656) 16 EBITDA 8,227 11,699 11,730 11,780 (30) (30) (30) 31,067 30,865 1 Other income 3, , ,638 3, Interest costs (6,199) (5,300) (5,263) (4,277) (16,426) (12,499) 31 Depreciation (1,797) (1,775) (1,753) (1,612) (5,252) (4,650) 13 Pretax profits 3,848 5,135 5,161 7,034 (25) (25) (45) 14,027 17,688 (21) Tax (1,353) (1,489) (1,475) (2,026) (9) (8) (33) (4,106) (4,439) (7) Net income 2,495 3,646 3,686 5,008 (32) (32) (50) 9,921 13,249 (25) Minority interest (284) (57) (385) Share of profit/(loss) in associates (17) (5) (2) (60) Net income before prior period adjustments 2,587 3,646 3,682 4,722 (29) (30) (45) 9,885 12,916 (23) Prior period adjustments (4) 42 (65) (94) 7 35 Reported net income 2,584 3,646 3,724 4,657 (29) (31) (45) 9,891 12,951 (24) Key ratios EBITDA margin (%) PAT margin (%) Effective tax rate (%) Source: Company, Kotak Institutional Equities estimates EBITDA margin declines to 40.4% Quarterly revenues, EBITDA, EBITDA margins and gross margins, DLF, March fiscal year-ends Revenues (Rs bn) EBITDA (Rs bn) EBITDA margins (%) Gross margins (%) QFY08 2QFY08 3QFY08 4QFY08 1QFY09 2QFY09 3QFY09 4QFY09 1QFY10 2QFY10 3QFY10 4QFY10 1QFY11 2QFY11 3QFY11 4QFY11 1QFY12 2QFY12 3QFY12 Source: Company, Kotak Institutional Equities KOTAK INSTITUTIONAL EQUITIES RESEARCH 3

4 Property DLF Operational performance Development for sale. After declining to 1.3 mn sq. ft in 2QFY12 (lowest since 4QFY09) sales picked up to 3.3 mn sq. ft versus 2.5 mn sq. ft in 3QFY11. The company has, however, guided for a cautious 4QFY12/1QFY13 due to high interest rates which is making buyers delay their purchases. Majority of the sales have happened from plotted development launches in 3QFY12 in Lucknow and Mullanpur, New Chandigarh. DLF is targeting to launch 9.25 mn sq. ft of plots, 6 mn sq. ft of group housing and 0.5 mn sq. ft of commercial projects and has indicated that it has approvals to launch in most of the target micromarkets. DLF is in a good position to scale up its launches once approvals are in place since (1) it has embarked on a strategy to use third-party contractors and so scaling up should not be a problem and (2) area under execution has declined to 44.9 mn sq. ft from 52.5 mn sq. ft at end-2qfy12 as DLF has readied 10.5 mn sq. ft for handing over. Plans launches of 16 mn sq. ft Status of launch plans of DLF as of end-jan 2012 Product type Location Launched Pipeline Plots Gurgaon Plots Lucknow Plots Mullanpur, New Chandigarh - Ph Plots Panchkula - Ph Plots Hyderabad Subtotal plots Group Housing New Gurgaon 2.0 Group Housing Bengaluru Group Housing Jallandhar Super Premium Golf Links, Gurgaon 2.5 Subtotal Commercial Delhi 0.5 Source: Company, Kotak Institutional Equities Lease portfolio. On a net basis, incremental leasing (including 2.4 mn sq. ft sold which was earlier meant to be leased) increased to 2.6 mn sq. ft versus 0.2 mn sq. ft in 2QFY12 and 1.7 mn sq. ft in 3QFY11. DLF earned Rs 3.9 bn (Rs15.7 bn annualized) rental income from its retail and commercial offices in 3QFY12 which is steady qoq. Execution. On the conference call, the company indicated that it is targeting 28 mn sq. ft of deliveries over the next two years. In 3QFY12, DLF handed over 10.5 mn sq. ft of projects (both development and rental) which is higher than FY2010 and FY2011 combined (9.2 mn sq. ft) and is targeting to deliver >1.5 mn sq. ft in 4QFY12E and >12 mn sq. ft in FY2013E. As a result of the deliveries in the quarter (readies 10.5 mn sq. ft for deliveries, adds 5 mn sq. ft of projects and suspends 2.2 mn sq. ft), area under execution has declined by 7.6 mn sq. ft qoq to 45 mn sq. ft which puts DLF in a good position to launch and add more projects to its portfolio from an execution angle. 4 KOTAK INSTITUTIONAL EQUITIES RESEARCH

5 DLF Property Area under execution declines as DLF readies 10.5 mn sq. ft for handover Area under execution, DLF, March fiscal year-ends 3QFY12 2QFY12 3QFY11 Gurgaon Super Metro Rest of India Rental Company Total Source: Company, Kotak Institutional Equities Targeting to deliver 28 mn sq. ft over next two years Delivery plans of DLF Project Segment Area (mn sq. ft) Phase V, Gurgaon Group Housing 9.5 SIEL, Delhi Commercial Complex 0.5 OMR, Chennai (21 Towers) Group Housing 3 Kolkata Group Housing and Commercial C 2 Corporate Greens, Kolkata Commercial Complex 1.8 NTH, Gurgaon Group Housing 10 Rental Company Offices 1.5 Total 28.3 Source: Company, Kotak Institutional Equities Asset monetization. Non-core asset monetization yielded Rs12 bn in 3QFY12 versus Rs2.4 bn in 2QFY12 as the company raised - (1) Rs7.9 bn from Noida and Pune IT Park, (2) Rs3.4 bn from FSI sales in Gurgaon and (3) Rs0.8 bn. DLF is now targeting Rs60 bn of asset sales by end-fy2013 from (1) Aman Resorts (Rs20 bn), Wind/utilities/miscellaneous (Rs20 bn) and (3) Chennai and Mumbai project disposal including Hindoostan Mills land (Rs35-40 bn). The management has indicated that the company is in advanced talks for the sale of Aman Resorts and several buyers are waiting for global conditions to improve/stabilize before taking a decision. KOTAK INSTITUTIONAL EQUITIES RESEARCH 5

6 Property DLF Asset disposal plans targeting Rs60 bn from asset sales by March 2013 Visible non-core asset disposal plans Non-core asset Value realizable (Rs bn) Description Hospitality 20 In deep negotiations; delays due to adverse global macro conditions Wind/Utilities 10 Misc. assets 10 Strategic proects in Mumbai and Chennai Includes Hindoostan Mills land in Lower Parel Total across medium term Targetting Rs60 bn by March 2013 from 3 key assets Source: Company, Kotak Institutional Equities Land bank. DLF s land bank has now been declining since 3QFY10 and now stands at 349 mn sq. ft (due to land sales, handovers, business proposition changes from group housing to plotted which has a lower FSI). The company spends Rs3-4 bn every quarter on land purchases associated with plot sales (land aggregation). Land bank declines as 10.3 mn sq. ft is ready for handing over Land bank details, DLF, March fiscal year-ends, 1QFY10-3QFY12 (mn sq. ft) 1QFY10 2QFY10 3QFY10 4QFY10 1QFY11 2QFY11 3QFY11 4QFY11 1QFY12 2QFY12 3QFY12 Total land (mn sq. ft) Gross area (beginning of quarter) Add: New Land 10 Less: Projects disposed off (net) Less: Handed over/business proposition changes Net land bank (end of quarter) Other land (mn sq. ft) Gross area (beginning of quarter) Add: New Land 10 Less: Projects disposed off (net) Less: Handed over/business proposition changes Net land bank (end of quarter) Hotel land (mn sq. ft) Gross area (beginning of quarter) Add: New Land Less: Projects disposed off (net) Less: Handed over/business proposition changes 3 Net land bank (end of quarter) Source: Company, Kotak Institutional Equities 6 KOTAK INSTITUTIONAL EQUITIES RESEARCH

7 DLF Property Sales subdued due to high interest rates and high property prices while leasing is subdued due to global uncertainty DLF, March fiscal year-ends 4QFY09 1QFY10 2QFY10 3QFY10 4QFY10 1QFY11 2QFY11 3QFY11 4QFY11 1QFY12 2QFY12 3QFY12 Development business Sales status (mn sq. ft) Opening balance Add: sales booked during quarter Less: handed over/suspended Closing balance Under Construction (mn sq. ft) Opening Balance Add: new launches/additions/suspended Less: handed Over Closing Balance Rental business Lease status (mn sq. ft) Opening balance Add: lease booked during quarter (0.1) 0.0 (0.4) Less: cancellation/adjustment/sold Closing balance Under Construction (mn sq. ft) Opening Balance Add: new launches/additions (0.2) Less: handed Over Less: Suspension/adjustment Closing balance Source: Company, Kotak Institutional Equities Net-debt declines 2%; cost of debt at 12.75% DLF s net debt has dropped by 2% qoq to Rs238 bn as DLF utilized cash from assets sales to reduce its debt burden and net-d/e is now at 0.86X versus 0.88X at end-2qfy12 and 0.82X at end-3qfy11. DLF s average cost of debt is now at 12.75% on a gross debt of Rs250 bn out of which Rs12 bn is linked to rental properties and likely funded through lease rental inflows. Net fixed assets declined by Rs6.3 bn due to sale of the IT Parks in Pune and Noida. Loans and advances have increased by Rs4.3 bn as the company had to pay Rs1-1.5 bn while shifting to third party contractors and tax outflow connected to properties under litigation (taxes on SEZs) have been classified under loans and advances. KOTAK INSTITUTIONAL EQUITIES RESEARCH 7

8 Property DLF Consolidated summary statement of assets and liabilities Quarterly Balance Sheet, DLF, March fiscal year-ends (Rs mn) Change Particulars Dec-09 Mar-10 Jun-10 Sep-10 Dec-10 Mar-11 Jun-11 Sep-11 Dec-11 yoy qoq Net fixed assets 143, , , , , , , , ,690 15,230 (6,380) Investments 29,750 55,200 30,060 16,816 13,110 9,958 9,610 15,039 11,800 (1,310) (3,239) Current assets, loans and advances 309, , , , , , , , ,350 40,540 2,718 Stocks 115, , , , , , , , ,690 6,840 2,352 Sundry debtors 19,830 16,660 14,390 19,177 19,460 17,257 18,180 19,540 18,480 (980) (1,060) Cash and bank balances 8,140 9,130 12,970 15,560 11,780 13,461 11,040 11,820 12, Other current assets 82,630 44,830 47,680 47,337 49,720 78,900 77,030 79,361 75,870 26,150 (3,491) Loans and advances 83,290 86,000 73,640 75,477 77,000 72,712 75,850 80,572 84,850 7,850 4,278 Goodwill 20,070 12,670 12,580 12,769 13,730 13,840 15,060 15,086 15,200 1, Total use of funds 502, , , , , , , , ,040 55,930 (6,787) Total loans 171, , , , , , , , ,260 14,150 (4,238) Secured loans 146, , , , , ,762 Unsecured loans 24,840 23,750 24,280 24,288 16,640 17,141 Current liabilities and provisions 70,580 92,510 86,110 89,146 88, , , , ,450 37,610 (2,964) Deferred tax liability (net) (800) 2,620 2,970 (774) (820) (1,633) (1,260) (1,469) (1,840) (1,020) (371) Shareholders funds 261, , , , , , , , ,170 5, Total sources of fund 502, , , , , , , , ,040 55,930 (6,787) Source: Company, Kotak Institutional Equities Changes to our model maintain ADD at a revised target price of Rs260/share We make the following changes to our model Delay execution in projects noting (1) delay in launches, (2) the shift over to third-party contractors from in-house construction which implies projects were likely delayed than earlier expected. Increase gross debt to Rs260 bn for FY2012E from Rs235 bn earlier. We are cutting our revenues and earnings estimate by 12%/15%/16% and 19%/19%/15% for FY2012E/13E/14E respectively. Cut revenue estimates by 12%/15%/16% for FY2012E/13E/14E Changes in estimates, DLF New estimates Old estimates % change 2012E 2013E 2014E 2012E 2013E 2014E 2012E 2013E 2014E Revenue (Rs mn) 97, , , , , ,744 (12) (15) (16) EBITDA (Rs mn) 41,630 51,142 64,237 47,624 62,124 73,566 (13) (18) (13) Net income (Rs mn) 16,402 21,576 28,720 20,224 26,649 33,985 (19) (19) (15) Source: Company, Kotak Institutional Equities estimates 8 KOTAK INSTITUTIONAL EQUITIES RESEARCH

9 DLF Property We set our target price at Rs260/share NAV-based valuation, DLF, March fiscal year-ends (Rs bn) March '13 based NAV Growth rate in selling prices Valuation Methodology 0% 3% 5% 10% Valuation of land reserves Residential Retail Commercial (sold) Commercial (leased) Add: 22 Hotel sites 1X land acquisition cost Add: Construction JV 10X FY2013E P/E Add: Investments in power business Less: Net debt as on March 31, 2013 (235) (235) (235) (235) Less: Land cost to be paid (1) (1) (1) (1) NAV (Rs bn) NAV/share (Rs) Total no. of shares including ESOPs of 17 mn shares (mn) 1,716 Target price/share (Rs) 260 Source: Kotak Institutional Equities estimates Profit model of DLF March fiscal year-ends, E (Rs mn) E 2013E 2014E Total revenues 144, ,354 74,229 95,606 97, , ,352 Land and construction cost (39,998) (32,295) (25,795) (42,999) (39,750) (48,758) (70,375) Employee costs (2,998) (4,537) (4,668) (5,721) (6,825) (8,651) (11,420) SG&A costs (4,229) (7,622) (8,650) (9,358) (9,259) (9,183) (9,321) EBITDA 97,105 55,900 35,116 37,527 41,630 51,142 64,237 Other income 2,464 3,960 4,280 5,839 5,314 6,762 7,222 Interest (3,100) (5,548) (11,100) (17,056) (16,818) (17,929) (20,239) Depreciation (901) (2,390) (3,249) (6,307) (6,855) (10,259) (12,926) Pretax profits 95,568 51,922 25,046 20,002 23,271 29,715 38,294 Current tax (17,146) (6,754) (7,762) (4,594) (8,114) (10,210) (12,613) Deferred tax (176) 739-1,246 2,071 3,039 Net income 78,247 45,168 18,024 15,408 16,402 21,576 28,720 Reported net income 78,156 44,682 18,140 15,424 16,402 21,576 28,720 EPS (Rs) Primary Fully diluted Shares outstanding (mn) Year end 1,705 1,697 1,697 1,698 1,698 1,698 1,698 Primary 1,661 1,697 1,697 1,698 1,698 1,698 1,698 Fully diluted 1,678 1,714 1,714 1,715 1,715 1,715 1,715 Cash flow per share (Rs) Primary Fully diluted Growth (%) Net income (adjusted) 302 (43) (59) (15) EPS (adjusted) 259 (44) (61) (11) DCF/share 1,000 (61) (75) 294 (71) Cash tax rate (%) Effective tax rate (%) DPS Source: Company, Kotak Institutional Equities estimates KOTAK INSTITUTIONAL EQUITIES RESEARCH 9

10 Property DLF Balance Sheet of DLF March fiscal year-ends, E (Rs mn) E 2013E 2014E Equity Share capital 12,905 17,354 62,593 21,498 21,498 21,498 21,498 Reserves/surplus 183, , , , , , ,100 Total equity 196, , , , , , ,598 Deferred tax liability/(asset) 359 (414) 2,515 (1,633) (2,878) (4,949) (7,989) Liabilities Secured loans 80, , , , , , ,903 Unsecured loans 42,237 30,578 23,751 Total borrowings 122, , , , , , ,903 Currrent liabilities 72,157 78,244 87, , , , ,869 Total capital 396, , , , , , ,134 Assets Cash 21,421 11,956 9,282 13,461 12,794 13,227 22,857 Current assets 244, , , , , , ,549 Gross block 51,626 84, , , , , ,431 Less: accumulated depreciation 3,435 5,743 13,265 19,572 22,853 33,113 46,038 Net fixed assets 48,191 79, , , , , ,392 Capital work-in-progress 51,840 56, , ,727 75,782 73,572 71,538 Total fixed assets 100, , , , , , ,930 Intangible assets 20,931 22,651 12,680 13,840 13,840 13,840 13,840 Investments 9,102 14,025 55,052 9,958 9,958 9,958 9,958 Misc. expenses Total assets 396, , , , , , ,134 Leverage ratios (%) Debt/equity Debt/capitalization Net debt/equity Net debt/capitalization RoAE RoACE Source: Company, Kotak Institutional Equities estimates 10 KOTAK INSTITUTIONAL EQUITIES RESEARCH

11 Oil India (OINL) Energy Country cousin steals a march. OIL reported better-than-expected net income of `10.1 bn (-16% qoq and +12% yoy) in 3QFY12 versus our estimate of `8.8 bn, led by (1) higher oil and gas sales volumes, (2) lower operating costs and (3) lower DD&A expenses. The company reported EPS (adjusted) of `128 in 9MFY12, higher than FY2011 EPS of `120. We reiterate our BUY rating on OIL with a revised target price of `1,750 (`1,720 previously) noting (1) attractive valuations with the stock trading at 9X FY2012E EPS and (2) strong long-term growth prospects. BUY FEBRUARY 12, 2012 RESULT Coverage view: Attractive Price (Rs): 1,321 Target price (Rs): 1,750 BSE-30: 17,749 Company data and valuation summary Oil India Stock data Forecasts/Valuations E 2013E 52-week range (Rs) (high,low) 1,424-1,101 EPS (Rs) Market Cap. (Rs bn) EPS growth (%) Shareholding pattern (%) P/E (X) Promoters 78.4 Sales (Rs bn) FIIs 2.3 Net profits (Rs bn) MFs 4.2 EBITDA (Rs bn) Price performance (%) 1M 3M 12M EV/EBITDA (X) Absolute ROE (%) Rel. to BSE Div. Yield (%) Better-than-expected EBITDA led by lower operating costs; net income boosted by lower DD&A OIL reported 3QFY12 EBITDA of `14.3 bn (-27% qoq and +8.8% yoy), 11% higher than our estimate of `12.9 bn. 3QFY12 reported net income was `10.1 bn (-16.2% qoq and +11.7% yoy), 15.5% higher than our estimate of `8.8 bn. The positive variance against our estimates reflects (1) higher-than-expected oil and gas sales volumes, (2) lower staff costs and other expenditure and (3) lower DD&A expenses. The qoq decline in net income reflects (1) lower net realized price of US$57/bbl (-US$29.3/bbl qoq) and (2) a sharp decline in DD&A expense to `2.9 bn (-51% qoq). Stock trades at 2.9X FY2012E EBITDA despite assuming a conservative subsidy burden We highlight that OIL stock trades at an inexpensive 2.9X FY2012E EBITDA of `68 bn, out of which the company reported `58 bn in 9MFY12. Besides, we have modeled a fairly conservative scenario of upstream companies bearing 45% of gross under-recoveries of `1.4 tn in FY2012E versus actual sharing of ~38% in 9MFY12. We note that OIL has a large net cash balance of `552/share (as of September 30, 2011). More important, OIL continues to perform well operationally with its 9MFY12 crude sales volumes growing 9% yoy and gas sales volumes jumping 19% yoy. We note that OIL s volume trajectory is better than ONGC s. Maintain BUY with a target price of `1,750 (`1,720 previously) We maintain our BUY rating on the stock with a revised target price of `1,750 (`1,720 previously) based on 9X FY2013E EPS plus value of investments, potential upside of 32% from current levels. We find OIL s valuations attractive with the stock trading at 9X FY2012E EPS and 7X FY2013E EPS. The earnings are rather depressed given higher subsidy burden assumed by us. Revise earnings for FY E We have revised our FY EPS estimates to `146 (-5.4%), `190 (+1.6%) and `219 (+14.2%) respectively to reflect (1) higher subsidy sharing by upstream companies, (2) higher crude price assumptions, (3) revised exchange rates and (4) other minor changes. We have assumed that upstream companies will bear 45% of total under-recoveries in FY2012 and 50% in FY versus 37.9% in 9MFY12 and 38.7% in FY2011. QUICK NUMBERS 13.6% yoy growth in gas sales; 4.1% yoy growth in crude oil sales OIL s share of the subsidy burden on upstream in 9MFY12 was 12.1% 32% potential upside from current levels For private Circulation Only. FOR IMPORTANT INFORMATION ABOUT KOTAK SECURITIES RATING SYSTEM AND OTHER DISCLOSURES, REFER TO THE END OF THIS MATERIAL.

12 Energy Oil India Key highlights of 3QFY12 results We highlight the key highlights of 3QFY12 results (see Exhibit 1) below. OIL interim results, March fiscal year-ends, (` mn) (% chg.) yoy 3QFY12 3QFY12E 3QFY11 2QFY12 3QFY12E 3QFY11 2QFY12 9MFY12 9MFY11 (% chg.) 2012E Net sales 25,898 25,405 24,734 33, (22.9) 83,130 65, ,233 Total expenditure (11,616) (12,532) (11,606) (14,020) (7.3) 0.1 (17.1) (36,885) (31,149) 18.4 (47,244) Increase/(decrease) in stock Raw materials (a) (381) (443) (375) (335) (14.1) (1,015) (1,066) (4.8) (1,265) Staff expenditure (2,611) (3,233) (2,867) (3,502) (19.2) (8.9) (25.4) (9,117) (7,635) 19.4 (12,086) Statutory levies (7,172) (7,019) (6,762) (8,784) (18.3) (22,716) (18,341) 23.9 (27,334) Other expenditure (1,457) (1,836) (1,732) (1,666) (20.6) (15.9) (12.5) (4,244) (4,323) (1.8) (6,560) EBITDA 14,282 12,873 13,128 19, (27.0) 46,245 33, ,988 Other income 3,756 3,615 2,773 4, (17.5) 11,337 6, ,690 Interest (11) (59) (12) (5) (104) (27) (162) DD&A (2,887) (3,433) (2,261) (5,901) (15.9) 27.7 (51.1) (11,572) (6,065) 90.8 (15,136) Depletion (1,040) (896) (932) (2,830) (2,344) 20.7 Depreciation (388) (427) (373) (9.3) 3.8 (1,119) (1,296) (13.7) Dry wells (including provision) (1,459) (938) (4,596) 55.6 (68.3) (7,624) (2,425) Pretax profits 15,140 12,996 13,629 18, (16.8) 45,906 34, ,381 Extraordinary/Prior period adjustment (1,081) (1,081) (1,081) Tax (5,000) (4,228) (4,549) (5,734) (12.8) (14,804) (11,513) 28.6 (16,891) Deferred tax 11 (4) Net income 10,140 8,780 9,080 11, (10.9) 30,021 23, ,405 Adjusted net income 10,140 8,780 9,080 12, (16.2) 30,754 23, ,137 EPS (Rs) Tax rate (%) Volume data Subsidy loss 18,530 18,529 5,586 8, ,781 16, ,060 Crude sales ('000 tons) (1.7) 2,883 2, ,832 Gas sales (mcm) ,595 1, ,123 Crude production ('000 tons) (2.9) 2,918 2, Gas production (mcm) (0.1) 1,994 1, Pricing data (US$/bbl) Gross crude price realization (2.1) Subsidy discount Net crude price realization (15.1) (33.9) Notes: (a) Represents consumption of stores & spares. Source: Company, Kotak Institutional Equities estimates A sharp decline in net realized price for crude oil. OIL s 3QFY12 net realized crude price was US$57bbl versus US$86.3/bbl in 2QFY12 and US$67.1/bbl in 3QFY11. OIL s subsidy burden in 3QFY12 was `18.5 bn or US$53.1/bbl in crude price oil equivalent terms versus crude price equivalent of US$26.2/bbl in 2QFY12 and US$18.5/bbl in 3QFY11. Oil and gas sales volumes increase yoy. 3QFY12 gas sales volume increased 13.6% yoy and 0.2% qoq to 544 mcm (equivalent of 5.9 mcm/d). 3QFY12 crude sales volume increased 4.1% yoy and declined 1.7% qoq to 0.95 mn tons. Lower employee cost. OIL s employee cost declined 25.4% qoq and 8.9% yoy to `2.6 bn in 3QFY12. The employee cost in 3QFY12 includes a provision of `192 mn due to differential superannuation benefits to employees versus `376 mn accounted in the previous quarter. Other expenditure declines. OIL s other expenditure declined 12.5% qoq and 15.9% yoy to `1.5 bn. 12 KOTAK INSTITUTIONAL EQUITIES RESEARCH

13 Oil India Energy Lower DD&A expenses qoq. DD&A expenses declined sharply by 51.1% qoq to `2.9 bn (+27.7% yoy). The sharp qoq decline in DD&A expenses represents lower write-off of dry wells and provisions, which declined to `1.5 bn (-68.3% qoq and +55.6% yoy). We note that the company made a provision of ~`4 bn in 2QFY12 to cover prospective liabilities related to Minimum Work Program (MWP) requirements for its NELP blocks. Other income declines qoq. OIL s adjusted other income declined by 17.5% qoq to `3.8 bn (+35.4% yoy). We note that reported other income in 2QFY12 included pipeline revenues of `1.4 bn for FY due to revision in forward pumping transportation tariff effective from April Additional interim dividend and bonus issue. OIL s Board declared a second interim dividend of `10/share in addition to the interim dividend of `25/share paid earlier. The Board has also recommended a bonus issue of 3:2 scheduled to be completed by April 10, 2012, subject to shareholder approval. Key assumptions behind our earnings model We discuss the key assumptions behind our earnings model below. Exhibit 2 gives the major assumptions behind our earnings model and Exhibit 3 gives sensitivity of OIL s EPS to key variables (INR/USD rate, crude oil price, natural gas price). Strong growth in net crude price realizations over the next few years Key assumptions, March fiscal year-ends, E E 2013E 2014E Rs/US$ rate Subsidy share scheme loss (Rs mn) 19,938 23,051 30,233 15,488 32,931 74,060 53,400 33,571 Import tariff on crude oil (%) Crude/natural gas prices Crude price Crude price, Bonny Light (US$/bbl) Net crude price, OIL-India (US$/bbl) Natural gas price Ceiling natural gas price, India (Rs/cu m) Ceiling natural gas price, India (US$/mn BTU) Net natural gas price, OIL-India (Rs/cu m) Net natural gas price, OIL-India (US$/mn BTU) Sales volumes Domestic fields Crude oil (mn tons) Natural gas (bcm) Total sales (mn toe) Total sales (mn boe) Crude oil (%) Natural gas (%) Source: Company, Kotak Institutional Equities estimates KOTAK INSTITUTIONAL EQUITIES RESEARCH 13

14 Energy Oil India OIL's earnings are highly sensitive to crude and gas price assumptions Earnings sensitivity of OIL to key variables 2012E 2013E 2014E Downside Base case Upside Downside Base case Upside Downside Base case Upside Exchange rate Rs/US$ Net profits (Rs mn) 33,126 35,137 37,149 43,753 45,670 47,587 50,824 52,706 54,588 Earnings per share (Rs) % upside/(downside) (5.7) 5.7 (4.2) 4.2 (3.6) 3.6 Average crude prices Crude price (US$/bbl) Net profits (Rs mn) 33,568 35,137 36,706 43,998 45,670 47,343 51,018 52,706 54,394 Earnings per share (Rs) % upside/(downside) (4.5) 4.5 (3.7) 3.7 (3.2) 3.2 Cess Cess on domestic crude (Rs/ton) 3,090 2,575 2,060 3,090 2,575 2,060 3,090 2,575 2,060 Net profits (Rs mn) 33,821 35,137 36,453 44,328 45,670 47,013 51,337 52,706 54,075 Earnings per share (Rs) % upside/(downside) (3.7) 3.7 (2.9) 2.9 (2.6) 2.6 Natural gas prices Natural gas price (US$/mn BTU) Net profits (Rs mn) 33,053 35,137 37,221 43,408 45,670 47,932 50,280 52,706 55,132 Earnings per share (Rs) % upside/(downside) (5.9) 5.9 (5.0) 5.0 (4.6) 4.6 Source: Kotak Institutional Equities estimates Subsidy amount. We model a subsidy amount for FY2012, FY2013 and FY2014 of `74.1 bn, `53.4 bn and `33.6 bn respectively. We assume that upstream companies will bear 45% of gross under-recoveries in FY2012 and 50% in FY versus 37.9% in 9MFY12 and 38.7% in FY2011. We assume (1) moderate price increases in diesel, kerosene and LPG, and (2) lower crude oil prices, which result in gross under-recoveries declining to `921 bn in FY2013E versus `1.4 tn in FY2012E. We model OIL bearing 12.2% of the subsidy burden on upstream companies in FY2012 and ~12% in FY versus 12.1% in 9MFY12. We assume a modest decline in OIL s share in FY due to an increase in GAIL s share, given a lower proportion of under-recoveries on diesel in the overall under-recoveries over the next two years, led by lower crude prices. Oil and gas volumes. We model crude oil sales volumes of 3.83 mn tons in FY2012, 3.91 mn tons in FY2013 and 3.98 mn tons in FY2014 versus a run-rate of 3.84 mtpa in 9MFY12 and 3.6 mn tons in FY2011. We model gas volumes at 5.8 mcm/d for FY2012, 6 mcm/d in FY2013 and 6.5 mcm/d in FY2014 versus 5.8 mcm/d in 9MFY12 and 5 mcm/d for FY2011. Implementation of EOR/IOR techniques in OIL s existing producing fields will contribute to higher volumes. We note that OIL s 2P reserves are meaningfully higher than its 1P reserves (see Exhibit 4 for details of OIL s reserves), which offers OIL scope to increase its production volumes significantly from current levels. 14 KOTAK INSTITUTIONAL EQUITIES RESEARCH

15 Oil India Energy 2P reserves are 87% higher than proven reserves for Oil India Oil India s reserves, March fiscal year-ends, (mn boe) P reserves Crude oil Natural gas Overall P reserves Crude oil Natural gas Overall P reserves Crude oil 1,000 1, Natural gas Overall 1,471 1,511 1,542 1,437 1,372 Source: Company, Kotak Institutional Equities Crude oil price assumption. We have assumed higher crude oil (Dated Brent) prices for FY2012, FY2013 and FY2014 at US$113/bbl, US$105/bbl and US$100/bbl respectively versus US$110/bbl, US$100/bbl and US$95/bbl previously. However, we would focus more on OIL s net realized crude price and our long-term crude price assumption. Exhibit 5 gives OIL s historical net realized price and our expectations for FY2012 (US$58/bbl), FY2013 (US$67.8/bbl) and FY2014 (US$76.7/bbl). OIL s net realization has improved over the past few years OIL's net crude price realization, March fiscal year-ends, E (US$/bbl) (US$/bbl) E 2013E 2014E Source: Company, Kotak Institutional Equities estimates The lower net realization for FY2012E (US$58/bbl) versus 9MFY12 s US$67.3/bbl reflects our assumption of higher subsidy burden on upstream companies at 45% of gross underrecoveries in FY2012E. Natural gas price assumption. We assume FY natural gas price at US$4.2/mn BTU. INR-USD exchange rate. We have revised our exchange rate assumptions for FY2012, FY2013 and FY2014 to `48/US$, `50.5/US$ and `50/US$ respectively versus `48.7/US$, `52.5/US$ and `51/US$ previously. KOTAK INSTITUTIONAL EQUITIES RESEARCH 15

16 Energy Oil India Fair value of OIL (`/share) FY2013E EPS 190 P/E (X) 9 Valuation 1,709 Investments 41 Numaligarh Refinery Limited 24 Other investments 17 Fair value 1,750 Source: Kotak Institutional Equities estimates Profit model, balance sheet, cash model of OIL, March fiscal year-ends, E (` mn) E 2013E 2014E Profit model (Rs mn) Net sales 53,892 60,819 72,414 79,056 83, , , ,321 EBITDA 22,280 23,812 28,400 34,486 36,160 52,988 67,679 77,505 Other income 5,335 6,770 9,372 9,371 11,851 14,690 14,090 15,450 Interest (140) (344) (87) (37) (139) (162) (2) Depreciation and depletion (2,595) (3,093) (3,768) (4,811) (4,781) (15,136) (14,162) (14,935) Pretax profits 24,881 27,145 33,916 39,010 43,091 52,381 67,605 78,019 Tax (7,406) (8,538) (11,910) (11,598) (12,973) (16,891) (21,917) (25,300) Deferred tax (1,020) (707) (343) (1,211) (1,282) (4) (17) (14) Adjusted net profits 16,436 17,897 21,646 26,169 28,850 35,137 45,670 52,706 Earnings per share (Rs) Balance sheet (Rs mn) Total equity 68,491 79,330 93, , , , , ,716 Deferred tax liability 8,033 8,655 8,998 10,209 11,491 11,495 11,512 11,526 Liability for abandonment cost ,645 1,645 1,645 1,645 Total borrowings 8,140 1, , Currrent liabilities 10,320 17,541 30,914 32,693 33,216 32,180 37,194 38,671 Total liabilities and equity 94, , , , , , , ,558 Cash 32,757 42,808 60,700 85, , , , ,182 Current assets 22,350 18,957 22,853 37,266 30,318 29,447 31,735 33,357 Total fixed assets 35,813 40,633 45,361 49,460 55,723 67,712 78,050 90,115 Investments 4,075 4,887 4,887 8,594 8,904 8,904 8,904 8,904 Deferred expenditure 184 Total assets 94, , , , , , , ,558 Free cash flow (Rs mn) Operating cash flow, excl. working capital 18,357 20,104 27,246 23,621 26,353 25,104 38,510 45,205 Working capital changes (8,696) 7,435 2,368 (9,113) 4,034 (166) 2,726 (145) Capital expenditure (9,370) (9,492) (8,496) (11,485) (9,518) (17,374) (17,250) (20,000) Investments 226 (811) (3,201) (310) Other income 2,892 4,214 5,470 7,268 6,343 14,690 14,090 15,450 Free cash flow 3,409 21,450 26,587 7,091 26,902 22,254 38,076 40,510 Ratios (%) Debt/equity Net debt/equity (32.8) (31.9) (31.9) (38.3) (54.1) (46.9) (47.2) (47.9) RoAE RoACE Key assumptions Rs/dollar rate Crude fob price (US$/bbl) Ceiling/actual natural gas price (Rs/'000 cm) 3,200 3,200 3,200 3,200 6,783 7,544 7,937 7,858 Subsidy loss (Rs bn) Source: Company, Kotak Institutional Equities estimates 16 KOTAK INSTITUTIONAL EQUITIES RESEARCH

17 Tata Power (TPWR) Utilities Coal production ramps up, low cost coal gives Mundra hope. An aggressive production ramp-up at the Indonesian mines could tilt the equation between losses at Mundra and profitability of coal mines in favor of the latter. Contained losses at Mundra through low cost coal or compensation through tariffs could significantly alter the earnings profile. We maintain our BUY rating and target price of Rs125 as ownership of resources and stable utility business better insulate TPWR from macrorisks affecting the power sector. BUY FEBRUARY 13, 2012 RESULT Coverage view: Cautious Price (Rs): 111 Target price (Rs): 125 BSE-30: 17,749 Company data and valuation summary Tata Power Stock data Forecasts/Valuations E 2013E 52-week range (Rs) (high,low) EPS (Rs) Market Cap. (Rs bn) EPS growth (%) 21.5 (36.3) 77.6 Shareholding pattern (%) P/E (X) Promoters 31.8 Sales (Rs bn) FIIs 23.3 Net profits (Rs bn) MFs 4.3 EBITDA (Rs bn) Price performance (%) 1M 3M 12M EV/EBITDA (X) Absolute (8.8) ROE (%) Rel. to BSE (10.3) Div. Yield (%) Consolidated operations hit by write-offs in the coal business TPWR reported standalone revenue of Rs21.6 bn (35% yoy, 16% qoq), operating profit of Rs3.8 bn (39% yoy, 15% qoq) and adjusted net profit of Rs2.5 bn (70% yoy, -20% qoq) in 3QFY12 against our estimates of Rs20.3 bn, Rs3.5 bn and Rs2.5 bn respectively. TPWR posted consolidated revenues of Rs66.5 bn (51% yoy, 6% qoq), operating profit of Rs9.9 bn (-4% yoy, -27% qoq) and adjusted net profit of Rs2 bn (-50% yoy, -45% qoq) in 3QFY12. Despite robust volume and realization in the coal business (aided further by currency depreciation), consolidated profitability was dented by a Rs6.5 bn write-off of deferred stripping costs in the coal business.. We discuss key highlights of the performance subsequently. Bumi guidance of mn tons production in CY2012, ramp-up to 100 mn tons by CY2013 According to media reports, Bumi Resources guidance is for production of mn tons in CY2012 from 63 mn tons in CY2011 to be subsequently ramped up to 100 mn tons from KPC and Arutmin (mines in which TPWR has effective stake of 30%) by CY2013E. As we highlighted in our note dated August 24, 2011, Revisiting the coal equation, higher production at coal mines is crucial for TPWR to absorb losses at Mundra and maximize benefits of higher coal prices. We note that our estimates factor 70 mn tons in FY2013 and sustainable volumes of 80 mn tons. Higher-than-estimated production volumes at Bumi could be the key upside to earnings and a strong catalyst for the stock. Mundra losses contained through low costs, better tariffs could be a strong trigger Our interactions with industry sources and power and coal companies highlighted increased deliberations on a way to compensate power producers with fixed-price tariffs for the increased cost of imported coal. While we are skeptical about such an arrangement coming through, the same could be significantly beneficial for TPWR. We are however more optimistic about prospects of blending low-grade Indonesian coal available at 10-30% lower energy-adjusted value to help to contain generation costs. The management indicated that it was successfully blending low-grade coal during the first few days of operations at Mundra. For private Circulation Only. FOR IMPORTANT INFORMATION ABOUT KOTAK SECURITIES RATING SYSTEM AND OTHER DISCLOSURES, REFER TO THE END OF THIS MATERIAL.

18 Tata Power Utilities Maintain BUY rating with a target price of Rs125 We like TPWR s core distribution business, which earns a stable return and is insulated from risks of deteriorating financial health of SEBs. Further, potential blending of low-grade coal could reduce losses at Mundra and could be a key upside to our estimates. We have revised our FY2012 EPS estimate downwards by 32% to account for a write-off in the coal business in 3QFY12. Exhibit 1: Reported net income boosted by forex gains Interim results for Tata Power (standalone), March fiscal year-ends (Rs mn) (% Chg.) 3QFY12 3QFY12E 3QFY11 2QFY12 3QFY12E 3QFY11 2QFY12 FY2011 FY2012E (% Chg.) Net sales 21,611 20,313 15,959 18, ,880 17,706 (78) Cost of electrical energy purchased (1,258) (975) (1,743) (1,798) (7,607) (1,669) Cost of fuel (13,299) (12,553) (8,556) (10,220) (46,472) (8,828) Personnel costs, other expenses and provisions (3,210) (3,286) (2,901) (3,272) 11 (2) (13,062) (3,390) Total expenses (17,767) (16,815) (13,200) (15,290) (67,141) (13,887) EBITDA 3,843 3,499 2,759 3, ,740 3,819 (72) Depreciation (1,512) (1,354) (1,286) (1,353) (5,730) (1,286) EBIT 2,332 2,145 1,473 2,001 8,010 2,533 Other income 2,275 2,680 1,355 4, (45) 12,267 1,086 Net interest (1,280) (1,196) (1,095) (1,165) (4,843) (1,105) PBT 3,327 3,629 1,732 4,996 (8) 92 (33) 15,434 2,513 (84) Tax (826) (1,089) (260) (1,865) (5,711) (619) Net profit 2,501 2,541 1,473 3,130 (2) 70 (20) 9,723 1,895 (81) Statutory appropriations (353) 10 (315) (787) - Extraordinary 2, Reported PAT after statutory appropriation 4,229 2,541 1,541 2,815 EBITDA margin (%) Key operating parameters Units generated (MU) 3,970 3,713 3, Units sold (MU) 3,922 3,824 3, Per unit price realization (Rs) Fuel cost per unit sold (Rs) Source: Company, Kotak Institutional Equities estimates Standalone: reported net income boosted by forex gain TPWR reported standalone revenue of Rs21.6 bn (35% yoy, 16% qoq), operating profit of Rs3.8 bn (39% yoy, 15% qoq) and adjusted net profit of Rs2.5 bn (70% yoy, -20% qoq) in 3QFY12 compared with our estimates of Rs20.3 bn, Rs3.5 bn and Rs2.5 bn respectively. Net income miss of 27% was mainly due to (1) higher-than-estimated depreciation due to capitalization of wind capacities, (2) lower other income and (3) higher taxes on account of deferred taxes arising out of commissioning of wind capacities. We highlight some key details of the 3QFY12 standalone results: TPWR s gross generation was 3,970 MU (7% yoy, 5% qoq) and total unit sales were 3,922 MU (3% yoy, 3% qoq). Generation in Mumbai license area increased 16% yoy driven by (1) higher hydro generation and (2) conversion of Unit 8 to regulated capacity from merchant capacity earlier. Total sales in Mumbai area increased by 10% yoy to 2,901 MU. During the quarter, fuel cost increased 15% sequentially to Rs3.6/kwh likely due to currency depreciation. TPWR sold 218 MU in the short-term market at an average realization of Rs3.4/kwh. We note that all the merchant sales came from Haldia since Unit 8 at Trombay was converted to regulated capacity (as highlighted above). The effective tax rate increased to 44% in 3QFY12 primarily on account of deferred tax arising out of commissioning of wind capacities. KOTAK INSTITUTIONAL EQUITIES RESEARCH 19

19 Utilities Tata Power Reported net income of Rs4.2 bn includes forex gain of Rs2.7 bn, mainly due to a retrospective (effective April 2011) change in accounting policy to capitalize forex gain/loss arising out of revaluation of long-term foreign currency monetary items. We note that as per the previous policy (such forex gain/losses being carried through P&L), forex loss for the quarter would have been Rs1.7 bn. Consolidated: profitability hit by write-off of deferred stripping costs TPWR reported consolidated revenues of Rs66.5 bn (51% yoy, 6% qoq), operating profit of Rs9.9 bn (-4% yoy, -27% qoq) and adjusted net profit of Rs2 bn (-50% yoy, -45% qoq) in 3QFY12. Despite robust volume and realization in the coal business (aided further by currency depreciation), consolidated profitability was dented by (1) a Rs6.5 bn write-off of deferred stripping costs in one of the coal companies (KPC), (2) unscheduled outage of the generation plant for Delhi distribution and (3) losses at Maithon. We note that during the quarter, KPC, in light of uncertainty involved in estimated strip ratio, wrote off the entire stripping cost accumulated over years. We note that adjustment from stripping costs would henceforth be done only in Arutmin. Reported net income of Rs2.6 bn includes a forex gain of Rs3.9 bn, mainly due to a retrospective (effective April 2011) change in accounting policy to capitalize forex gain/loss arising out of revaluation of long-term foreign currency monetary items. We note that as per the previous policy (such forex gain/losses being carried through P&L), forex loss for the quarter would have been Rs1.7 bn. Further, reported net income also includes Rs1.6 bn of provision for impairment of assets of the Mundra project. We discuss below performance of businesses in detail Coal: robust volume and realizations, margins dented TPWR s coal business reported volumes of 17.5 mn tons (9.5% yoy, 9.5% qoq) and realization of US$95/ton (30% yoy, flat qoq) and cash cost declined sequentially from US$46/ton to US$40.9/ton. The management attributed the reduction in cash costs to automation capex being carried out in coal mines and expects the full impact to flow in from September We note that during the quarter, KPC, in light of uncertainty involved in estimates of strip ratio, wrote down the entire stripping cost (Rs6.5 bn) accumulated over years. We note that adjustment from stripping cost would henceforth be done only for Arutmin. Delhi distribution TPWR s Delhi distribution reported revenues of Rs10.6 bn (35% yoy, -39% qoq), operating profit of Rs1.3 bn (41% yoy, -26% qoq) and PAT of Rs304 mn (-13% yoy, -65% qoq). The decline in PAT was primarily on account of unscheduled outage of generation assets. The management indicated that at current costs, once the tariff hike is carried out (as per automatic adjustment to be carried out with a lag of a quarter), NDPL would operationally break even. Maithon: still stabilizing operational efficiencies Maithon reported revenues of Rs1 bn, operating loss of Rs1 mn and losses before taxes of Rs858 mn. Loss at Maithon was mainly due to (1) higher fuel and O&M cost on account of stabilization of unit 1, (2) lower PLFs due to unavailability of coal during 3QFY12. The management has highlighted that Unit 1 has completely stabilized and coal supply has ramped up and is stable. The management s guidance for synchronization of the second unit is 4QFY KOTAK INSTITUTIONAL EQUITIES RESEARCH