Economy News. Corporate News DECEMBER 23, 2008

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1 DECEMBER 23, 2008 Economy News The RBI has started a review of the non-performing asset (NPA) or bad loan classification norms to ease the flow of credit to corporate groups. The move follows a reference from the government and is aimed at relaxing the norms temporarily to enable companies to access funds during the economic downturn that is putting pressure on cash flows and repayment capabilities. (BS) The government may further reduce petrol, diesel and domestic LPG prices just before the General Elections are announced in February, a senior official said. (ET) India has lifted a ban on cement exports, the trade ministry said, as price pressures eased and domestic demand is depressed due to a slowdown in construction activity. (ET) The government today introduced a bill to raise the minimum capital of the state-owned Life Insurance Corporation (LIC) to Rs 1,000mn amid din and protest in the Lok Sabha. The rupee fell the most in six weeks as importers stepped up purchase to meet their dollar needs, while others, including banks, opted to take buy the US currency, which gained last week. The Indian currency declined 1.6% to Rs against the dollar, according to data compiled by Bloomberg. (BS) Corporate News Cairn India has announced that it has made an oil and gas discovery adjacent to its Raageshwari oil field in the Rajasthan block. The new well encountered about 10 meters of net oil pay and 1.4 meters of gas pay. (ET) Jaypee Group is merging its hotel, cement, real estate and construction subsidiaries Jaypee Hotels (JHL), Jaypee Cement (JCL), Gujarat Anjan Cement (GACL) and Jaiprakash Enterprises (JEL) with the flagship publiclisted company Jaiprakash Associates (JAL). The share swap ratio for the merger will be 1:11 for GACL (one share of JAL for 11 share of GACL), 1:10 for JCL, 1:1 for JHL and 3: 1 for JEL (ET) BHEL has said that, it has won a contract worth Rs bn ($247 million) from Jaiprakash Power Ventures to set up a 500-megawatt thermal power plant in central India. (ET) Reliance Communications said it expects to repair by next week its damaged submarine cable which, along with cuts in two other cables, had disrupted Internet and phone services in some parts of the Middle East and South Asia. (ET) ONGC, BHP-Billiton - GVK Power combine and Reliance Industries - BP Plc joint venture were among the firms that signed contracts on Monday for exploring for oil and gas in 44 oil and gas areas, committing $1.5 billion in investment. (BL) Unitech said it plans to raise Rs50bn through issue of securities. The board also approved for increasing the authorized share capital of the company to Rs.10bn from he current Rs5bn. (BS) IVRCL Infrastructures & Projects has issued 2,000 secured redeemable non-convertible debentures (NCDs) of Rs 10 lakh aggregating Rs.2bn to the Life Insurance Corporation (LIC) of India with a coupon rate of 12.15% a year, repayable at the end of five years. (BS) BGR Energy Systems has entered into technical collaboration and license agreement with Italy-based TME SpA Termomeccanica Ecologia for condensate polishing plants in India. (BS) The Tata Group may have to invest at least $1 billion about Rs.47bn at current exchange rates to revive Jaguar and Land Rover, which were acquired by Tata Motors last year (ET) Source: ET = Economic Times, BS = Business Standard, FE = Financial Express, BL = Business Line, ToI: Times of India, BSE = Bombay Stock Exchange Equity % Chg 22 Dec 08 1 Day 1 Mth 3 Mths Indian Indices SENSEX Index 9,928 (1.7) 11.4 (26.8) NIFTY Index 3,039 (1.2) 12.8 (26.4) BANKEX Index 5,492 (2.5) 19.4 (19.3) BSET Index 2,335 (0.5) (5.0) (32.4) BSETCG INDEX 7,125 (1.0) 8.7 (36.5) BSEOIL INDEX 6,249 (3.0) 12.6 (33.0) CNXMcap Index 3,748 (0.6) 13.6 (27.9) BSESMCAP INDEX 3,735 (0.2) 10.2 (38.7) World Indices Dow Jones 8,520 (0.7) 5.9 (21.5) Nasdaq 1,532 (2.0) 10.7 (28.8) FTSE 4,249 (0.9) 12.4 (17.3) Nikkei 8,589 (0.9) 10.3 (27.8) Hangseng 14,622 (3.3) 12.9 (24.3) Value traded (Rs cr) 22 Dec 08 % Chg - Day Cash BSE 3,819 (23.8) Cash NSE 10,149 (23.4) Derivatives 47,321 (6.6) Net inflows (Rs cr) 19 Dec 08 % Chg MTD YTD FII 463 (954) 1,627 (53,489) Mutual Fund 295 (263) (716) 13,058 FII open interest (Rs cr) 19 Dec 08 % Chg FII Index Futures 10, FII Index Options 15, FII Stock Futures 12,151 (1.3) FII Stock Options 413 (4.2) Advances / Declines (BSE) 22 Dec 08 A B S Total % total Advances , Declines , Unchanged Commodity % Chg 22 Dec 08 1 Day 1 Mth 3 Mths Crude (NYMEX) (US$/BBL) 39.3 (1.6) (21.4) (63.2) Gold (US$/OZ) (5.3) Silver (US$/OZ) 10.8 (0.4) 11.7 (18.6) Debt / forex market 22 Dec 08 1 Day 1 Mth 3 Mths 10 yr G-Sec yield % Re/US$ Sensex 21,100 17,925 14,750 11,575 8,400 Dec-07 Feb-08 Apr-08 Jun-08 Aug-08 Oct-08 Dec-08

2 MANAGEMENT MEET UPDATE Apurva Doshi GUJARAT AMBUJA EXPORTS LTD (GAEL) PRICE: RS.22 RECOMMENDATION: ACCUMULATE TARGET PRICE: RS.30 FY09E P/E: 4.9X Impact of slowdown in economy, lower commodity prices and forex loses Revise FY09 EPS downwards by 10.1%. Revise price target downwards to Rs.30 (Rs.35 earlier) Maintain ACCUMULATE due to concerns of overall slowdown in economy and falling commodity prices. We recently me the management of GAEL and following are our key takeaways: Summary table (Rs mn) FY07 FY08 FY09E Sales 14,002 18,291 15,132 Growth (%) (17.3) EBITDA 1,013 1,546 1,494 EBITDA margin (%) Net profit Net debt 1,694 3,736 2,987 EPS (Rs) Growth (%) (13.2) DPS (Rs) ROE (%) ROCE (%) EV/Sales (x) EV/EBITDA (x) P/E (x) P/BV (x) Source: Company, Kotak Securities - Private Client Research Likely impact of slowdown in economy On account of slowdown in the economy we could see flattish consumer demand in terms of demand for the products of the company like edible oil, de-oiled cakes and maize starch and its derivatives. It is important to note that the absolute demand may not fall significantly as these are necessary items for day to day life. Continuing lower price trend in solvent extraction and edible oil refining business of the company On crushing one ton of Soya seed, we get 83% de-oiled cake and 17% oil, which is then refined to make it edible oil. The prices of De-oil cakes have been steadily going down from around $400 per MT in March 2008 to currently around $260 per MT. Also on the edible oil front the prices have declined significantly from around Rs per MT in June 2008 to around Rs per MT in the month of November Price trend Jun-08 Nov-08 % Shift Soya Seed Rs./ MT (40.0) Soya Refined Oil Rs./ MT (35.1) Palm Oil Rs./ MT (53.1) Soya De-oiled cakes Rs./ MT (34.0) Crude Palm Oil US $ / MT (61.3) Degummed Soybean Oil US $ / MT (36.1) Source: Company Refinery running at optimal capacities The CIF prices of crude palm oil have fallen from around $1190 per MT in June 2008 to around $460 per MT in November Similarly the CIF prices of degummed soybean oil have fallen from around $1440 per MT in June 2008 to around $920 per MT in November Due to such a sharp fall of 61.3% in crude palm oil, it is more profitable for the company to import, refine and sell the edible oil. Thus the refinery of the company is running at optimal capacities. Sharp fall in prices to affect financials Even if we account for 20% rupee depreciation it still results into a significant reduction in prices of crude palm oil as compared to what it was six months back. This is likely to translate into lower revenues for the solvent extraction and edible oil refining business of the company. Overall it contributes more then 80% of the revenues of the company and hence its impact is likely to be significant on the overall financials of the company. Kotak Securities - Private Client Research Please see the disclaimer on the last page For Private Circulation 2

3 Maize processing plant expansions The company has already commissioned the first phase of 300 TPD maize crushing capacity plant in Uttarakhand in March However going forward due to demand slowdown on account of overall economic slowdown we expect it to operate below peak capacities. Also the final product prices have come down which has offset the benefits of fall in prices of their main raw material i.e. maize. Due to overall slowdown in economy we expect significant delays in the construction of the 500 TPD plant at Nashik with facilities to make ethanol and ENA. Maize starch and its derivatives price trend (Rs per kg) Jul-08 Nov-08 % shift Maize price (11.1) Starch powder (10.3) Liquid glucose (8.6) Malto dextrin (9.9) Sorbitol (15.7) Dextrose monohydrate (7.9) Source: Company Losses due to forex forward cover As of September 2008 the company has outstanding forex cover of $100 mn at an average exchange rate of Rs.44 to one $ in relation to its exports. The company is consciously is getting out of these contracts and thus we expect this to be trimmed down to $50 mn by the end of current month. Due to adverse exchange rate movement we expect mark to market loss of Rs.400 mn in FY09E. Forex losses to be partially offset by export incentives The company is expected to record income out of Vishesh Krishi Yojana (VKY). This is incentive offered by the government which is 5% of the FOB of soybean de-oiled cakes exports. We estimate 5% of Rs.5 bn which is Rs.250 mn to be recorded as export incentives in FY09E. This would help to partially offset the losses on account of forex forward cover. Change in earning estimates and price target Accommodating for the overall slowdown in economy, falling commodity prices and forex loses. we have revised the earning estimates for GAEL. For FY09E, we now expect GAEL to report revenues of Rs.15.1 bn (down 8.8%, EBIDTA margin of 9.9% (as against 9.6%) and PAT of Rs.618 mn (down 10.1%). Accordingly we expect GAEL to report lower consolidated EPS of Rs.4.5 in FY09E as against our earlier estimate of Rs.5.0. We have valued GAEL on DCF method of valuation with 13.2% WACC and 3% terminal growth rate. Thus the price target is revised to Rs.30. (Rs.35 earlier). Change in Estimates - FY09E (Rs mn) Old Revised Net sales 16,594 15,132 EBIDTA (%) PAT Equity EPS (Rs) CEPS (Rs) Price Target (Rs) Source: Kotak Securities - Private Client Research Kotak Securities - Private Client Research Please see the disclaimer on the last page For Private Circulation 3

4 We recommend ACCUMULATE on GAEL with a price target of Rs.30 Valuation and recommendation At the current market price of Rs.22, GAEL trades at 0.8x book value, 4.9x earnings and 3.1x cash earnings based on FY09E. In view of the slowdown in economy and significant correction in commodity prices we had downgraded the stock of GAEL to ACCUMULATE at Rs.26 on 31st October Since then the stock has corrected by ~ 19% in one and half months. We continue to remain positive on the medium to long term growth prospects of GAEL However due to near term concerns of overall slowdown in economy and falling commodity prices we continue to recommend ACCUMULATE on GAEL with revised price target of Rs.30 (Rs.35 earlier). Net sales (Rs bn) 20 EPS (Rs.) FV Rs FY05 FY06 FY07 FY08 FY09E FY05 FY06 FY07 FY08 FY09E Source: Company, Kotak Securities - Private Client Research Source: Company, Kotak Securities - Private Client Research Kotak Securities - Private Client Research Please see the disclaimer on the last page For Private Circulation 4

5 Bulk Deals Trade details of bulk deals Date Scrip name Name of client Buy/ Quantity Avg. Sell of shares price (Rs) 22-Dec Ambal Sara E The Methoni Tea Co Ltd B 600, Dec Ambal Sara E Indi Stock P Ltd S 635, Dec Camlin Limit Vinod Kumar Saraogi B 450, Dec Camlin Limit Meridian Investments S 470, Dec Divyajyo Ind Sandeep Rathi S 135, Dec Enso Secut Punni Sanghavi B 75, Dec Enso Secut Corporate Strategies Pvt Ltd S 67, Dec Sanguine Md Sanghavi Fincap Ltd B 95, Dec Sanguine Md Vishu Enterprise S 135, Source: BSE Kotak Securities - Private Client Research Please see the disclaimer on the last page For Private Circulation 5

6 Gainers & Losers Nifty Gainers & Losers Price (Rs) chg (%) Index points Volume (mn) Gainers DLF Cairn India Tata Motors Losers Reliance Ind 1, (16.7) 4.9 ICICI Bank (4.9) 6.5 BHEL 1, (3.2) 1.3 Source: Bloomberg Forthcoming events Company/Market Date Event 23-Dec BILT hosts press conference to brief on BILT open 2008 Marico Parachute holds press meet to launch new product Source: Bloomberg Research Team Dipen Shah IT, Media Sanjeev Zarbade Capital Goods, Engineering Teena Virmani Construction, Cement, Mid Cap Awadhesh Garg Pharmaceuticals, Hotels Apurva Doshi Logistics, Textiles, Mid Cap Saurabh Gurnurkar Media, IT Saurabh Agrawal Metals, Mining Saday Sinha Banking, Economy Sarika Lohra NBFCs Siddharth Shah Telecom Shrikant Chouhan Technical analyst K. Kathirvelu Production 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. We have reviewed the report, and in so far as it includes current or historical information, it is believed to be reliable though its accuracy or completeness cannot be guaranteed. Neither Kotak Securities Limited, nor any person connected with it, accepts any liability arising from the use of this document. The recipients of this material should rely on their own investigations and take their own professional advice. Price and value of the investments referred to in this material may go up or down. Past performance is not a guide for future performance. Certain transactions -including those involving futures, options and other derivatives as well as non-investment grade securities - involve substantial risk and are not suitable for all investors. Reports based on technical analysis centers on studying charts of a stock s price movement and trading volume, as opposed to focusing on a company s fundamentals and as such, may not match with a report on a company s fundamentals. Opinions expressed are our current opinions as of the date appearing on this material only. While we endeavor to update on a reasonable basis the information discussed in this material, there may be regulatory, compliance, or other reasons that prevent us from doing so. Prospective investors and others are cautioned that any forward-looking statements are not predictions and may be subject to change without notice. Our proprietary trading and investment businesses may make investment decisions that are inconsistent with the recommendations expressed herein. Kotak Securities Limited has two independent equity research groups: Institutional Equities and Private Client Group. This report has been prepared by the Private Client Group. The views and opinions expressed in this document may or may not match or may be contrary with the views, estimates, rating, target price of the Institutional Equities Research Group of Kotak Securities Limited. We and our affiliates, officers, directors, and employees world wide may: (a) from time to time, have long or short positions in, and buy or sell the securities thereof, of company (ies) mentioned herein or (b) be engaged in any other transaction involving such securities and earn brokerage or other compensation or act as a market maker in the financial instruments of the company (ies) discussed herein or act as advisor or lender / borrower to such company (ies) or have other potential conflict of interest with respect to any recommendation and related information and opinions. The analyst for this report certifies that all of the views expressed in this report accurately reflect his or her personal views about the subject company or companies and its or their securities, and no part of his or her compensation was, is or will be, directly or indirectly related to specific recommendations or views expressed in this report. No part of this material may be duplicated in any form and/or redistributed without Kotak Securities prior written consent. Kotak Securities - Private Client Research Please see the disclaimer on the last page For Private Circulation 6 Registered Office: Kotak Securities Limited, Bakhtawar, 1st floor, 229 Nariman Point, Mumbai India.