Economy News. Corporate News NOVEMBER 30, 2011

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1 NOVEMBER 30, 2011 Economy News The government is formulating an iron ore utilization policy on the lines of a similar policy currently operating in the domestic gas sector. The move, fuelled by concerns over improper exploitation and wastage, coupled with huge exports of the major mineral out of the country, is likely to include prioritizing consuming sectors. (BS) Coal shortage is beginning to reflect in the spot electricity rates, which have risen steadily to an average of around Rs 5 per unit in the Southern region and close to Rs 4 per unit in the rest of the country. (BL) Prime Minister Manmohan Singh has rebuffed calls to reverse a decision to open up India's retail sector to global giants such as Walmart Inc, asserting the move will help farmers and consumers, increase employment and modernise a sector dominated by small stores. (ET) Corporate News Reeling from losses due to the acquisition of Ispat Industries, JSW Steel is now staring at two big events. The first is a December 15 deadline for the promoters to infuse Rs bn into the company and, second, maturing of foreign currency convertible bonds (FCCBs) six months down the line. (BS) L&T Infrastructure Finance Company is looking at raising funds through external commercial borrowings (ECB). The company, which has made equity investments only in a very limited manner, will not rule out more equity options though it will focus on debt investments while enlarge its scope of investments to seaports, airports. (FE) Bangalore-based GMR Group could face hurdles in expansion of the Male airport in Maldives. A local political party has threatened to file a case in a civil court in the country against GMR's proposal to levy $25 as airport development from January. (BS) Reliance Industries has shut four wells in its flagship KG-D6 gas fields off the east coast due to high water ingress leading to output dipping to 41 million cubic meters per day. (FE) State-run SAIL-led consortium is likely to make an initial investment of Rs 3.75 bn for detailed exploration of three iron ore mines bagged at Hajigak in Afghanistan (BS) In yet another warning from Infosys about the economic environment, the company has said clients are asking for slower start and deployment of work. (ET) Chennai based Everonn Education Ltd has got market regulator Securities and Exchange Board of India's (SEBI's) clearance for its open offer to Dubai based Varkey Group, which was scheduled to open on Nov,16. (BS) Reliance Industries (RIL) plans to raise more than $1 billion by selling bonds to foreign investors to fund shale gas ventures in the US and investments at its refinery at Jamnagar (ET) Infrastructure development company RPP Infra Projects has bagged two orders from IGCAR Kalpakkam and Public Works Department of Andaman and Nicobar Islands totally valued at Rs about 340 million. (ET) Equity % Chg 29 Nov 11 1 Day 1 Mth 3 Mths Indian Indices SENSEX Index 16,008 (1.0) (10.1) (2.5) NIFTY Index 4,805 (1.0) (10.4) (2.3) BANKEX Index 9,911 (1.9) (12.9) (7.1) BSET Index 5,464 (0.7) (6.3) 10.2 BSETCG INDEX 9,685 (0.4) (12.2) (19.3) BSEOIL INDEX 8,022 (1.8) (12.6) (2.8) CNXMcap Index 6,655 (0.9) (8.1) (7.6) BSESMCAP INDEX 6,142 (0.2) (11.7) (12.9) World Indices Dow Jones 11, (5.5) 0.1 Nasdaq 2,516 (0.5) (8.1) (1.8) FTSE 5, (6.4) 4.0 NIKKEI 8, (6.5) (6.2) HANGSENG 18, (8.9) (11.8) Value traded (Rs cr) 29 Nov 11 % Chg - Day Cash BSE 1,874 (0.6) Cash NSE 9, Derivatives 92, Net inflows (Rs cr) 28 Nov 11 % Chg MTD YTD FII (221) (70.8) (4,498) (3,557) Mutual Fund ,075 5,671 FII open interest (Rs cr) 28 Nov 11 % Chg FII Index Futures 13, FII Index Options 41,089 (1.8) FII Stock Futures 24,854 (2.3) FII Stock Options Advances / Declines (BSE) 29 Nov 11 A B S Total % total Advances , Declines 138 1, , Unchanged Commodity % Chg 29 Nov 11 1 Day 1 Mth 3 Mths Crude (NYMEX) (US$/BBL) 99.6 (0.2) Gold (US$/OZ) 1, (6.0) Silver (US$/OZ) 32.0 (0.4) (6.9) (23.3) Debt / forex market 29 Nov 11 1 Day 1 Mth 3 Mths 10 yr G-Sec yield % Re/US$ Sensex 21,500 20,000 18,500 17,000 Source: ET = Economic Times, BS = Business Standard, FE = Financial Express, BL = Business Line, ToI: Times of India, BSE = Bombay Stock Exchange 15,500 Nov-10 Feb-11 May-11 Aug-11 Nov-11

2 COMPANY UPDATE Saday Sinha HDFC BANK PRICE: RS.435 RECOMMENDATION: BUY TARGET PRICE: RS.575 FY13E P/E: 17.8X, P/ABV: 3.4X HDFC bank is best positioned vis-à-vis its peers in the prevailing uncertain macro-economic environment with better loan profile (higher exposure to retail & working capital loans), strong liability franchise aiding superior NIM and high coverage ratio, in our view. We are modeling earnings to grow at 27.9% CAGR during FY11-13E on back of healthy loan growth (3-4% higher than the system), robust NIM and lower credit costs. HDFC bank has been delivering consistent earnings growth (~30% growth in last 38 consecutive quarters) and hence it would continue to retain premium valuation vis-à-vis its peers. We maintain BUY rating on the stock with unchanged price target of Rs.575 based on P/ABV of 4.0x its FY13E ABV. In the current uncertain macro-economic environment, we believe HDFC bank is best positioned vis-à-vis its peers to smoothly traverse the credit cycle with better loan profile (higher exposure to retail & working capital loans), strong liability franchise aiding superior NIM and high coverage ratio. Superior liability franchise; NIM has been underpinned by strong CASA mix One of the characteristics of HDFC bank, which keeps it way above its peers, is its liability franchise. It has consistently delivered one of the highest CASA mix in the industry. Although its CASA mix has come down (47.3%: Q2FY12) in last 2-3 quarters in line with the industry trends, it still remains one of the best in the industry. Trend in CASA (%) Decline in CASA mix has to do more with the systemic trend; lazy/idle money is moving out of this bucket to FDs, as the gap between interest rate paid on saving deposits and term deposits has increased in recent times and thus negatively impacting the whole system. HDFC Bank has always delivered one of the highest NIM in the industry. Its resilient NIM has been aided by its robust liability franchise. Its NIM came down by 10 bps (QoQ) to 4.1% for Q2FY12. Management has guided that its NIM is likely to remain in the range of %, going forward. Kotak Securities - Private Client Research Please see the disclaimer on the last page For Private Circulation 2

3 Trends in NIM (%) Loan book growing faster than the system; future loan growth to track the deposit mobilization HDFC bank has the ability to gain market share in advances by leveraging its distribution networks. Over the years its loan book has grown 4-5% faster than the system growth. The bank's gross advances grew 25.6% YoY (adjusting for one-off items during Q2FY11) to Rs bn at the end of Q2FY12. Retail book saw robust growth (34.2% YoY; 10.7% QoQ) on back of strong growth in segments like CV & equipment financing (63.1% YoY; ~40% after adjusting for one-off items), business banking (46.6% YoY; 9.5% QoQ), credit cards (41.6% YoY; 8.3% QoQ) and mortgages (34.5% YoY). Corporate loan book grew at slightly moderate pace; after adjusting for one-off item like telecom loans during Q2FY11 growth came at 16.6%. Break-up of retail book (Q2FY12) However, deposit growth remained relatively subdued at 18.1% YoY, as a part of conscious strategy which led to improvement in C/D ratio from 80.4% in Q2FY11 to 81.7% in Q2FY12. We believe, going forward, loan growth will track the overall deposit mobilization. Kotak Securities - Private Client Research Please see the disclaimer on the last page For Private Circulation 3

4 Comfortable asset quality with lower slippage; lower restructured book further reduces the risk of any big negative surprise in the future. HDFC bank had managed its asset quality well during the previous downturn. Its asset quality has remained comfortable with lower slippage (Rs.4.0 bn; 100 bps on the annualized basis). At the end of Q2FY12, gross and net NPAs stand at 1.0% and 0.2%, respectively. Trends in asset quality (Rs Bn) Q1FY11 Q2FY11 Q3FY11 Q4FY11 Q1FY12 Q2 FY12 Gross NPA % of Gross Advances Net NPA % of Net Advances Provision Coverage Ratio (%) Its provision coverage ratio is also healthy at 81.3% at the end of Q2FY12, which provides cushion to its earnings from any unforeseen deterioration in its asset quality in the future. Lower restructured book (0.4% at the end of Q2FY12) further reduces the risk of any big negative surprise in the future. We maintain BUY on HDFC Bank with a price target of Rs.575 Valuation & recommendations We are modeling earnings to grow at 27.9% CAGR during FY11-13E on back of healthy loan growth (3-4% higher than the system), robust NIM and lower credit costs. We are modeling in healthy return profile (FY13E - RoE: 20.3%, RoA: 1.8%) during FY12-13E. HDFC bank has been delivering consistent earnings growth (~30% growth in last 38 consecutive quarters) and hence it would continue to retain premium valuation vis-àvis its peers. We maintain BUY rating on the stock with unchanged price target of Rs.575 based on P/ABV of 4.0x its FY13E ABV. Rolling 1-year forward P/ABV band, Kotak Securities - Private Client Research Kotak Securities - Private Client Research Please see the disclaimer on the last page For Private Circulation 4

5 Rolling 1-year forward P/E band, Kotak Securities - Private Client Research Key data (Rs bn) FY10 FY11 FY12E FY13E Interest income Interest expense Net interest income Growth (%) Other income Gross profit Net profit Growth (%) Gross NPA (%) Net NPA (%) Net interest margin (%) CAR (%) RoE (%) RoA (%) Dividend per share (Rs) EPS (Rs) Adjusted BVPS (Rs) P/E (x) P/ABV (x) , Kotak Securities - Private Client Research Kotak Securities - Private Client Research Please see the disclaimer on the last page For Private Circulation 5

6 Bulk deals Trade details of bulk deals Date Scrip name Name of client Buy/ Quantity Avg. Sell of shares price (Rs) 29-Nov Aanjaneya Life Dome - Bell Electronics India Pvt Ltd B 80, Nov Aanjaneya Life Jhelum Holding Pvt Ltd S 80, Nov Bannari Amman Trupti Petroleums Pvt Ltd B 222, Nov BGIL Films Cnb Finwiz Ltd S 32, Nov Birla Pacific Med Linus Holdings Ltd B 700, Nov Birla Pacific Med Divyadrishti Traders P Ltd S 742, Nov BNK Cap Markets Patrex Vyapaar Pvt Ltd B 260, Nov BNK Cap Markets Primestar Exim Private Ltd. S 259, Nov Concurrent India Manjusha Ganesh Nibhe B 1,500, Nov Concurrent India Rudh Equities & Investment Advisors S 250, Nov Concurrent India Rudh Equities & Investment Advisors S 1,250, Nov Concurrent India Firstcall India Equity Advisors Pvt Ltd S 482, Nov Dhoot Indl Fin Raj Kumar Lohia (HUF) B 39, Nov Dhoot Indl Fin Dheeraj Kumar Lohia S 40, Nov Indowind Ener Subuthi Investments Pvt Ltd B 567, Nov Indowind Ener Icici Bank Ltd S 567, Nov Jaihind Syn Nirav Harshad Sheth B 50, Nov Kanchan Intl Maverick Investment Solutions Pvt Ltd B 24, Nov Kanchan Intl Mahan Trading Pvt Ltd B 38, Nov Kanchan Intl Hitesh Asoo Nihalani S 24, Nov Kanchan Intl Alpabean Dilipgiri Goshwami S 38, Nov Ken Fin Serv Rakesh Maneklal Jain S 19, Nov MB Switch Decent Financial Services Pvt Ltd B 100, Nov Nihar Info Arihant Klocker Marketing Pvt Ltd S 37, Nov Parsharti Inv Pooja Pukhraj Bansal B 20, Nov Pasupati Fin Vipul Mohanlal Joshi B 25, Nov Renaissance Jew Shroff B 101, Nov Renaissance Jew South Yarra Holdings S 101, Nov Rockon Fin Ascron Consultant Pvt Ltd B 1,200, Nov Sancia Glob Gvrs Securities Pvt Ltd S 200, Nov Scope Ind K V Ramana Reddy B 47, Nov Shreejal Info Nanjibhai Surani B 22, Nov Shreejal Info Ghanshyam Khubchandani S 22, Nov Supertex Inds Super Infincon Pvt Ltd S 82, Nov Tijaria Polypipes Santosh Bhansali HUF B 132, Nov Tijaria Polypipes Sanket P Jain S 132, Source: BSE Kotak Securities - Private Client Research Please see the disclaimer on the last page For Private Circulation 6

7 Gainers & Losers Nifty Gainers & Losers Gainers Price (Rs) chg (%) Index points Volume (mn) ITC Hindustan Unilever M&M Losers Reliance Ind 765 (2.4) (10.4) 4.8 Infosys 2,598 (1.5) (6.1) 1.3 ICICI Bank 734 (2.1) (6.0) 8.7 Source: Bloomberg Fundamental Research Team Dipen Shah IT, Media Saurabh Agrawal Metals, Mining Ruchir Khare Capital Goods, Engineering Amit Agarwal Logistics, Transportation Sanjeev Zarbade Capital Goods, Engineering Saday Sinha Banking, NBFC, Economy Ritwik Rai FMCG, Media Jayesh Kumar Economy Teena Virmani Construction, Cement, Mid Cap Arun Agarwal Automobiles Sumit Pokharna Oil and Gas K. Kathirvelu Production Technical Research Team Shrikant Chouhan Amol Athawale Premshankar Ladha Derivatives Research Team Sahaj Agrawal Rahul Sharma Malay Gandhi Prashanth Lalu 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. 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