Lets start with Naukari:

Religare Date -05-09-07

Info Edge India

Accumulate Current Price: Rs842 Target price: Rs980

‘EDGES’ out rivals but rich on valuations We are bullish on Info Edge’s growth prospects because of the strong and buoyant job market, shift of share from print classifieds to job portals, the number one position of Naukri.com (its flagship portal) and high growth of internet ad revenues. Sharp growth in non-recruitment revenues will be the icing on the cake. We expect a CAGR of 48% and 50% respectively in revenues and profits over FY07-10. However, valuations are now rich and hence our Accumulate rating.

A buoyant job market will drive growth. The job market will grow at 15.3% CAGR over FY07-10 in India on the back of strong GDP growth and a large working population.

The shift from print classifieds to job portals will continue. The share of job portals has increased from 3% in FY04 to 14% in FY07 largely at the expense of print classifieds. Cost advantage, targeting the right audience, a faster recruitment process and interactive capability has  driven this growth. India will see one of the fastest growth rates in the internet user base and is expected to have 90mn internet users by FY10 up from 42mn users in FY07.

As the number one job portal, Naukri.com is well poised to capture this growth. Naukri.com has leveraged its first mover advantage and has garnered a market share of more than 50%. We expect Naukri.com to maintain its leadership position. Its high marketing spends, well-qualified technology team which continually innovates and improves the website, strong geographical reach and sales force will help it maintain its edge. Sharp growth in non-recruitment revenues and Quadrangle will be the icing on the cake.

Sharp growth in earnings. We expect a CAGR of 48% and 50% respectively in revenues and  profits over FY07-10 of Info Edge. Naukri.com, Quadrangle, Jeevansathi.com and 99acres revenues will grow at 50%, 27%, 32% and 70% CAGR respectively over FY07-10.

Valuations are rich and offer limited upside in the near term. Info Edge currently trades at 46x 1-year forward earnings and EV/EBITDA multiple of 36.8x FY08 and 23.1x FY09. We have valued Info Edge at 36x 2-year forward earnings and at EV/EBIDTA multiple of 32x, which gives us a target price of Rs980. So, much as we like the story, we recommend buying only on dips, as the upside from current levels is limited.

Disclaimer- I do not hold any position in Infoedge and I only use research reports to validate certain facts and do not follow Buy/Sell recommendations by them without doing my homework.

RELIANCE ENERGY LTD-HOLD

RESEARCH- Indiabulls -31-08-07

EQUITY RESEARCH August 31, 2007

EPC business: the growth engine: Reliance Energy Limited (REL) reported 41% yoy increase in its sales figure for the first quarter FY08. However, EBITDA decreased 70% yoy to Rs. 376 mn on account of Rs. 826.7 mn charge for accounting policy changes and increased tariffs. Net income grew by 25% yoy from 1,766.1 mn to Rs. 2,216 mn due to increased forex gains, higher interest income and lower depreciation expenses.

The Company plans to spend Rs. 600 bn for generation of additional capacity of 15,000 MW over the next five years. REL’s spree to grow with the country’s power requirements gives greater growth visibility.

However, the stock looks fairly valued at the current PE of 20.3x FY07 and forward PE of 19.1x FY08E earnings. Therefore, we maintain our Hold rating.

Result Highlights

REL’s net revenues grew by 41% yoy to Rs. 16.2 bn as a result of higher volumes, increased electricity tariffs and higher order inflow. REL’s revenues from the electrical energy increased 39% yoy resulting from increased sales of electrical units to 2,489 mn (increase of 12% yoy) and 24.5% yoy increase in realization rate to Rs. 5.22 per unit from Rs. 4.19 per unit. EPC division’s revenue and net income grew by 40% yoy and 14% yoy respectively driven by a robust order book to Rs. 50.3 bn (50% yoy growth).

RESULTS REVIEW

Key Events

Ultra mega power project (UMPP)

REL bagged the 4,000 MW UMPP Sasan power project in Madhya Pradesh during the quarter. It is India’s largest domestic coal based power project, involving a capital outlay of Rs. 200 bn to be capitalized through a separate special purpose vehicle (SPV) named Sasan Power Limited. The Company received the project at lowest levelised Tariff of Rs. 1.196 per unit thus gives better visibility about the long term growth as it is one of the nine projects that the Government is planning to add in the 11th Plan.Two more UMPPs with the capacity contribution of 4,000 MW each are expected to be put to competitive bidding later this year. They

are coal based Krishnanpattanam project in Andhra Pradesh and pithead based Tilaiya project in Jharkhand. Both of them involve an investment outlay of Rs. 400 bn.

Order book expansion plan

REL is on the edge to acquire a Rs. 40 bn contract in order to set up 1,000 MW thermal power plant at Raghunathpur in Purulia district of West Bengal for Damodar Valley Corporation (DVC). The Order reinforces confidence in the Company’s EPC division growth in the years to come.

Backward integration

REL has applied to the Union ministry of Coal for the allotment of 8 coal blocks, generating the 13,333 MW of additional power with the investment of Rs. 640 bn. These blocks will allow power producers to exercise degree of control over input costs thus ensuring more competitive tariffs and better security of supply.

Development of Infrastructure facilities

To diversify its operations into the infrastructure business, REL promoted three special purpose vehicles (SPVs) through three concession agreements with the National Highways Authority of India (NHAI) to build three national highways of four-lane sections totaling 400 km on NH-7 in Tamil Nadu on Build-Operate-Transfer (BOT) basis. The project entails an investment of Rs. 23.2 bn including government grant of Rs. 7.6 bn.

Step in the real estate

REL led consortium emerged as the preferred bidder for development of business district in Hyderabad over 75 acres, with a constructed area of 11 msf. This includes the construction of 100 storey trade tower in Hyderabad city at an estimated cost of Rs. 65 bn, thus foraying into the booming real estate sector. REL has 66% stake in the project

Key Risks

Dadri power project dispute

Dadri power project is yet to become operational as there is dispute over the gas supply. The agreement with Reliance Natural Resources Ltd (RNRL) is under dispute and Mumbai High Court has restricted RIL to sell share of RNRL to other gas consumers. The settlement in this case would act as a catalyst for further shoot up in the share price.

Delay in project execution

Since all the projects are capital intensive thus raising the question on the Company’s development due to longer gestation period, statutory clearance, financial infrastructural requirement, delay in completion of projects, performance risk and cost over run.

Outlook

Due to increasing capacity and decreasing T&D losses the power situation is likely to become better in the years to come. With the emerging opportunities and diversification into MRTS, infrastructure  and real estate business, we feel the stock has limited downside. subject to the risk of successful implementation and execution of projects combined with the macro risk hampering the overall power sector’s growth. The settlement of Dadri project would act as a trigger for its currently stalled projects. Driven by the strong financial background of REL and the high growth prospect of Company’s we expect the revenues to grow at CAGR of 9.8% and earnings to grow to Rs. 45.8 by FY09E. We believe that the stock is fairly valued at the current levels and maintain Hold rating on the stock.

Disclaimer- I do not hold any position in this stock and I only use research reports to validate certain facts and do not follow Buy/Sell recommendations by them without doing my homework.

OIL AND NATURAL GAS CORPORATION LTD

RESEARCH- INDIABULL-HOLD- DT 04.09.2007

EQUITY RESEARCH September 04, 2007

Uncertainty surrounding subsidy sharing mechanism:

In the first quarter, Oil and Natural Gas Corporation Limited (ONGC) reported a 6.3% yoy decline in net sales to Rs. 136,877 mn as a result of rupee appreciation and decline in production. However, lower subsidy discounts to the oil marketing companies (OMC) prevented any further reduction in net sales. The Company’s EBITDA declined 2.3% yoy to Rs. 79,222.8 mn negatively impacted by lower sales volume; however EBITDA margins improved by 235 bps to 57.9% due to reduction in subsidy discounts coupled with lower operating expenses. In addition, ONGC reported an 11.9% yoy increase in net profits to Rs. 46,105.3 mn driven by higher other income and reduced depreciation.

With a positive demand outlook, rising average realisation price and growing production, net sales are expected to increase from Rs. 822.5 bn in FY07 to Rs. 1,015.9 bn in FY09E, representing a CAGR of 11.1%. However, further rupee appreciation and lack of clarity over subsidy sharing mechanism remain a concern. We maintain our Hold rating on the stock with a 12 month target price of Rs. 943.

Result Highlights

ONGC’s net sales for Q1’08 declined 6.3% yoy to Rs. 136,877 mn as a result of 9.3% rupee appreciation and lower production of crude oil and natural gas. However, higher net realisation at USD 50.21 per barrel (Q1’07 USD 45), due to lower subsidy discounts to oil marketing companies, shielded the Company from any further decline in net sales.

The Company’s crude oil production was 6.9 MMT and natural gas production was 6.1 BCM, down 0.7% and 5% yoy respectively. The decline in crude oil production was due to the processing problems at Nawagam Desalter plant which affected the production from Mehsana and Ahmedabad assets.

EBITDA declined 2.3% yoy to Rs. 79,222.8 mn as a result of lower sales volume; however, EBITDA margins recorded an increase of 235 bps yoy to 57.9% driven by reduction in staff costs, statutory levies and purchase costs coupled with declining subsidy discounts. ONGC’s net profit after tax for Q1’08 increased 11.9% yoy to Rs. 46,105.3 mn due to increase in other income and reduction in recouped costs. Recouped costs declined by 21.4% yoy to Rs. 17.5 bn as a result of change in depreciation rate (27.82% to 100%) for trunk pipeline and onshore flow lines resulting in higher depreciation in Q1’07. Also contributing to the increase was higher other income due to the transfer of Rs. 890 mn surplus from gas pool account. Moreover, during the quarter, ONGC changed its accounting policy of recognising certain employee benefit charges, which increased the net profit before taxes by Rs. 950 mn.

Key Events

• During the quarter, ONGC made five oil and gas discoveries with one discovery each in Mahanadi block, KG basin and Agartala Dome and two discoveries in the Assam Shelf.

• ONGC entered into service contracts for the development of 14 onshore marginal fields which in turn will increase the production by 30 MMT of Oil plus Oil Equivalent Gas (O+OEG) during the XI plan period.

• The Company’s board approved the development of B-Cluster Marginal Gas fields (B-46, B-48, B-105 & B-188) located North West of Mumbai High field. The total cost of the project is approximately Rs. 12.9 bn and these fields hold in-place gas volume of 11.298 BCM.

TY RESEARCH September 04, 2007

Outlook

We expect the revenues to grow at a CAGR of 11.1% for FY07-09E driven by higher average realization price per barrel coupled with a slight increase in production. Though, ONGC experienced a decline in subsidy discounts during Q1’08 as compared to Q1’07, we still have concerns over the uncertainty surrounding the government’s policy on the subsidy sharing mechanism, and thus, expect ONGC to continue sharing the burden of subsidies.

At the current price of Rs. 833.35, the stock is trading at a forward PE of 9.0x FY08E and 8.0x FY09E. We maintain our Hold rating on the stock with a 12 month target price of Rs. 943.

Disclaimer- I do not hold any position in this stock and I only use research reports to validate certain facts and do not follow Buy/Sell recommendations by them without doing my homework.

LOGISTICS SECTOR UPDATE - CENTRUM 2007

Research- Kotak  DT -05.09.2007

Containerization - Building global trade competitiveness

We recently attended the Centrum 2007 conference held in Delhi that was organized by the CII Institute of Logistics. The event was on the logistics industry in India  and the container segment, in particular. Almost all participants at the event were convinced that India could handle 20 mn TEUs by 2016, if not earlier. If we add  transshipment containers, then India could handle approximately 30 mn TEUs by 2016. In FY07, India handled 6 mn TEUs. Thus, we are likely to see four to five fold growth in container traffic. This provides a huge opportunity for container logistics service providers.

The event witnessed all-round participation from Government officials like GK Pillai - Senior Advisor, Transport, Planning Commission, VN Mathur, Member Traffic, Railways, MS Rao, ED Planning, Ministry of Railways, Sanjeev Garg, ED projects,Rail Vikas Nigam Ltd among others. Major industry players like Concor, Shipping Corporation of India, Gateway Distriparks, TCI, Reliance Logistics, various other shipping and logistics service providers and foreign players like Transcare Logistics also attended the two-day summit.

The following are our key takeaways from the summit:

Container traffic may touch 30 mn TEUs by 2016

For the last five years, India's exports have grown at a CAGR of 18.4% in value terms. Imports have grown at a CAGR of 21.6% in value terms. The share of containerized cargo to total cargo is also growing at an increasing pace. The share of cargo that can be containerised has also increased from 60% to 68%. With this, the container traffic has grown at CAGR of 15.8% in the last five years. In FY07, India's container traffic grew at 20% to 6 mn TEUs. That is commendable considering the severe capacity constraints at Indian ports. Hence, projecting a CAGR of 15%, going forward, we expect India to handle 10 mn TEUs by 2011.

This would increase to 20 mn TEUs by 2016.

EVENT UPDATE

In terms of total port traffic, for every transshipment container handled at a hub port, two more handlings would be required at ports, one at the same hub and another at the feeder port. India has the potential to handle approximately 10 mn TEUs of transshipped containers. Thus, the total works out to 30 mn TEUs by 2016. This is a five-fold jump in traffic of containers to be handled at Indian ports by 2016. This leads to substantial opportunities for service providers for handling these containers.

Penetration of containerization

Currently, the containerized cargo represents about 30% by value of India's external trade. Going forward, this proportion is likely to grow as the general cargo gets more and more containerized. Some of the commodities that India trades in containers include engineering goods, agricultural commodities, textiles, readymade garments, pharmaceuticals products, auto and electronics.

Currently, 68% of the cargo that can be containerized is being containerized. With growing awareness of the benefits of containerization we expect this to go up to the international standards of 75% to 80%. This would lead to increased handling of containers and, thus, offer huge potential for the container logistics service providers.

Connectivity to port, key to evacuation - Rail

With GDP growth and increasing penetration, the container traffic is set to explode in India. To increase capacity at ports and improve connectivity to the port Rs.140 bn of investments have been cleared. Out of these, Rs.110 bn are for berths and Rs.30 bn for port connectivity to be implemented by 2012.

The Tughlakabad-JNPT, i.e., Delhi-Mumbai line is one of the most highly trafficked corridors in the country. As compared to an average line capacity of 50 trains per day, it has been handling over 67 trains per day operating at capacity utilization levels of 135%. Several other sections are being operated at 160% utilisation levels.

Out of this, roughly 40 trains on this corridor are passenger trains leaving very little capacity for freight trains. Also, it has lower priority compared to passenger trains. Considering this, the Government of India has cleared the dedicated rail freight corridor. It will be operational anywhere between 2012 and 2015 depending on the financing and execution of the project. This would lead to a shift of containers from road to rail. At present, 30% of the hinterland containers are moved by rail. The Railway Ministry is planning to double this to 60% after dedicated rail freight corridors become operational. Also, railways are the cheaper mode of transporting

containers over longer distances as compared to road.

Inland Haulage costs for Delhi Container Traffic to JNPT v/s other ports

Concor is the leading service provider of transportation for containers by railways.

Recently, the Government has allowed private players to operate container trains. A total of 15 companies have obtained the license to operate container trains.However, out of them, only seven players have started operations. The rest have problems of land acquisition to set up ICD and rolling stocks.However, as many as seven players including Gateway Distriparks have tied up with Concor for the rolling stock. According to Centrum 2007, this is a serious concern

because even after allowing private players, in the real sense, Concor is the sole

source of the rolling stock in the medium-term.

Top ten Indian container ports in FY07 (‘000 TEU)

Currently, about 40 container trains are operated per day all over India. Out of this, over 25 trains are on the Delhi JNPT route. For handling 20 mn TEUs, at 30% movement by rail and at 90 TEUs per train, we would need around 190 trains per day. If we run double stack container trains then this requirement could come down to 120 trains a day. This is a huge opportunity for the companies involved in the transportation of containers by train.

Connectivity to port, key to evacuation - Road

Apart from rail, the road infrastructure has to be in place to improve connectivity to the port. We need expressway connectivity to the port beyond just four laning of the highways. Currently, trucks have to wait for hours on the roads connecting to the ports. This is leading to significant delay and cost escalations, thereby impacting the overall efficiency of the ports.Four laning of roads would solve the problem in the near term. However, if we have to plan to handle 20 mn TEUs by 2016 then we need dedicated expressway connectivity to the port to handle the humungous growth in container traffic.

Similarly, we need proper planning for trailer parking, maintenance, facilities for drivers etc to complement the roads and avoid congestion at the ports. Currently 70% of inland containers move by road. This proportion is likely to reduce to 40% by 2016 once the dedicated rail freight corridor becomes fully operational. Thus, till then, the expressway connectivity to the ports is extremely crucial to handle the growth in container traffic.

Developing ports on hub and feeder strategy a must for India

The share of global throughput of the top 20 container ports was 75.9% in 1970.It dropped to 49.6% in 1980 due to proliferation of container ports. However, since then the share of top-20 container ports has been rising steadily to reach 56.3% in 2006. Thus it has shown a trend of concentration due to transshipment and scale economies at bigger ports.To handle the humungous growth in container traffic to be handled at Indian ports we need to develop ports based on hub and feeder strategy. We need four to five hub ports with at least 16 meters draft to handle larger mother vessels of 6000 to 8000 TEU capacity. Then, we need feeder ports with relatively lower draft of 12 meters to carry the cargo from major ports to feeder ports. This would, thereby,reduce the dependence on road and rail connectivity. This would lead to faster evacuation of containers leading to efficiency in the port operation.

In future, we may also have ships which can handle even 12000-14000 TEUs. These would make only a few calls at mega hub ports to/from where cargo movement would be transshipped and feedering would take place through present age ships of 4000 TEU capacity. Thus, ports would require infrastructure facilities like wide berthing, high crane handling capacity, quicker and safe loading and unloading capabilities and direct shift of containers to feeder vessels.

The next generation will be the Malaccamax ship, with 18000 TEUs of 200,000 DWT,

470 m long, 60 m wide, and 16 m of draft, with more then 100 MW power for 25.5 knots. Container traffic and transshipment at major Ports

India's handling of transshipment containers as a percentage of total containers has steadily decreased from 5.9% in FY02 to 3.9% in FY06. This is primarily because in the absence of a hub port in India, a majority of the country's containers are currently transshipped through other ports like Colombo, Singapore and Dubai. Handling these through India transshipment terminal would result in savings between Rs.6000 and Rs.16000 per TEU for India exporters. About 50% of containers exported through Indian ports are transshipped at some point prior to reaching their overseas destination. Approximately, 30% of the containers are transshipped in either Colombo or Singapore/Klang and another 5% in Dubai or Salalah. About 50% of the container traffic is not transshipped and moves on the same vessel to the final destination port. While 80% of the JNPT traffic is direct, almost 87% of all other ports are through a hub. Of Indian containers  transshipped in Singapore/Klang, Chennai and Kolkata account for 68%, while for Colombo the eastern and southern ports account for 87%.

Direct and Hub shipments

According to discussions at Centrum 2007, on the west coast, JNPT looks the best option for making it a hub port considering the investments that are being made to upgrade and expand its operations. However, if we consider draft and evacuation possibilities then Mundra Port seems a better option. On the east coast,Visakhapatnam is the most viable port for hub operations as it has natural water depth of 20 metres and is in the center of India's east coast.However, Chennai Port possesses commercial advantage in terms of large investments being planned at Chennai port. Also, Vallarpadam and Vizhinjam are possibilities from the South.

Decrease in transshipment containers due to inadequate facilities -JNPT looks the best option for a hub port 50% of containers exported through Indian ports are transshipped

JNPT v/s other Asian ports

JNPT, which is the largest container port of India, has depth of only 12 metres. Colombo, on the other hand, has a depth of 15 meters, which is proposed to be increased to 17 metres and eventually to 20 metres. JNPT currently handles vessels of up to 4000 TEUs compared to 8500 TEUs at Colombo. In 2006, JNPT handled 3.3 mn TEUs whereas Colombo port handles 3.1 mn TEUs. This is despite handling a higher volume of traffic than Colombo port.JNPT is constrained by its deficient draft from offering cheaper and higher quality services, that is, higher frequency and lower transit times. Other ports in the region like Singapore, Dubai, and Port Klang etc. have drafts of at least 15 meters and can accommodate vessels up to 11000 TEUs. Thus, we need massive investments in the port sector to handle the multifold expected rise in container traffic.

Conclusion

At the end of the summit, we believe growth in the Indian economy and increasing penetration of containerization would lead to faster growth in the handling of containers in the country. Currently, we handle about 6 mn TEUs. If we are to handle 30 mn TEUs, it calls for huge growth in opportunities for logistics service providers. Thus, we are positive on the overall logistics scenario in the country.

The companies under our coverage that are likely to benefit from the increased

handling of containers are Concor, Gateway Distriparks and Allcargo Global Logistics.

We estimate Concor will report EPS of Rs.126.7 and Rs.149.3 in FY08E and FY09E, respectively. At Rs.2214, the stock trades at 14.8x FY09E earnings. We maintain BUY on Concor with a price target of Rs.3000, which provides 36% upside potential.

We estimate Gateway Distriparks will report EPS of Rs.8.2 and Rs.10.7 in FY08E and FY09E, respectively. At Rs.132, the stock trades at 12.3x FY09E earnings. We maintain BUY on GDL with a price target of Rs.180, which provides 37% upside potential.

We estimate Allcargo Global Logistics will report EPS of Rs.56.5 and Rs.70.8 in CY07E and CY08E, respectively. At Rs.889, the stock trades at 12.6x CY08E earnings. We maintain BUY on Allcargo with a price target of Rs.1346, which provides 52% upside potential.

Disclaimer- I do not hold any position in this stock and I only use research reports to validate certain facts and do not follow Buy/Sell recommendations by them without doing my homework.

Asia Connect

3 September 2007

 Citigroup Global Markets | Equity Research

India: 1QFY08 results: Wireless Tide Raises Telcos

Bharti: Going from fourth to sixth gear — we prefer Bharti, Idea and RCOM (in order of preference) with Bharti remaining the top pick on the back of its undiluted leverage to growth and stellar execution track record.

Q1FY08 results: Wireless EBITDA for all major operators – Bharti, Idea and RCOM – was in line with expectations with strong revenue & subscriber growth. Margins also expanded moderately with rising operating leverage. Appreciating rupee expectedly supported bottom line with strong forex gains.

TRAI's spectrum reco – Setback for GSM incumbents — In an out of turn development, TRAI prescribed higher sub base requirement (up 2-6x) for allocating additional spectrum, potentially allowing the new entrants to have a good look at the 20MHz to be released by Defence in next few months. While a

revision in the old criteria was expected due to its inefficiencies, timing of TRAI reco is critical given the upcoming spectrum release by Defence. We don’t expect this to be the last word on this issue though, as the recos go to DoT and will be subject of intense debate.

Lifetime rentals accounting changes— Bharti increased time period for recognising revenues from life time validity schemes from 18 to 24 months (decreasing 1Q revenues by Rs700m), RCOM adjusted this period downwards from 48 months (increasing 1Q revenues by Rs950m). Adjusting for the same

1) Wireless revenue growth – Bharti's at 12.4% would have been slightly higher than RCOM's 10.4%

 2) ARPU - Bharti's decline of 2.6% slightly lower than RCOM's decline of 3.1% and

3) EBITDA margins – Bharti's up sharply by 220bps versus RCOM's decline of 50 bps.

RCOM's towerco stake sale first off the block — RCOM offloaded 5% stake in RTIL (Towerco) valuing it at US$6.7bn, material surprise vs. our estimates. While aggressive capex recovery assumptions would imply some value dilution for the parent co (RCOM) in the process, it creates valuation benchmarks that could potentially rub-off on Bharti’s towerco.

Watch points —

1) Spectrum policy recommendations by TRAI;

2) Release of additional spectrum by Defence;

TRAI's spectrum reco – Tightening of spectrum allocation criteria

In an out of turn development, TRAI prescribed higher sub base requirement (up 2-6x) for allocating additional spectrum, potentially allowing the new entrants to have a good look at the 20MHz to be released by Defence in next few months. While a revision in the old criteria was expected due to its inefficiencies, timing of TRAI reco is critical given the upcoming spectrum release by Defence. If accepted by DoT, this could reduce the spectrumimposed entry barriers though we don’t expect this to be the last word on this

issue as the recos go to DoT and will be subject of intense debate.

Impact on GSM incumbents

Impact on the GSM incumbents will be proportionate to current access to spectrum. Bharti (top pick), with operations across all circles, has nothing to gain though its sub adds are likely to remain immune for the next 2-3 quarters and we do not expect much impact on its capex/min from the new spectrum criteria. Besides, we have factored in a 300-400bps decline in Bharti’s FY09 market share. Idea and Vodafone to benefit slightly with entry into remaining circles although they could face higher competition in their existing circles.

Who benefits?

RCOM benefits the maximum though it will have to pay additional entry fee. As per the new sub criteria, RCOM can potentially get spectrum in all 15 circles (as against 7 in earlier criteria). However, RCOM has a tough choice to make as an entry fee of Rs15bn for the 15 GSM circles can fund ~40m CDMA subs (@handset discount of say US$10).

Removal of spectrum cap = M&A opportunities

TRAI has further removed the existing 12.4-15 MHz cap on spectrum allowed for a post merger entity. Smaller players such as Aircel and Spice could become prime M&A targets as the biggest barrier for telcos to acquire, fear of surrendering excess spectrum, disappears.

Higher levies to be offset by other proposed cuts

TRAI also recommended 1% higher spectrum fees and one-time payments (only for 10Mhz and beyond), which though small was unexpected. The impact will however be offset by progressively lower ADC and proposed lower USO (3% from 5%) based on rural rollout.

Lifetime rental accounting changes – quantifying the impact

Bharti increased its time period for recognising revenue of its life time validity schemes from 18 to 24 months thereby decreasing 1Q revenues by Rs700m; RCOM adjusted this period downwards from 48 months (to adjust for churn rates) thereby increasing its 1Q revenues by Rs950m. We have quantified the impact of the accounting change on revenues, ARPU and margins for Bharti and RCOM to compare their quarterly performance on a like-to-like basis as large part of these revenues flow directly to EBITDA, except license fee & spectrum charges of 10-13%, thus having a material impact on respective reported Wireless EBITDA and margins.

1. Revenue growth — Adjusted for the accounting changes on rentals, the reported numbers reverse with Bharti's wireless revenue growth at 12.4% qoq slightly higher than RCOM's 10.4% growth

2. ARPU — Adjusting for the accounting change, Bharti's ARPU decline of 2.6% was slightly lower than RCOM's decline of 3.1%.

3. EBITDA margins — The adjusted wireless EBITDA margins for Bharti were up sharply by 220bps qoq, whereas RCOM's EBITDA margin compressed by 50 bps during the same period

RCOM's towerco stake sale – first off the block but not the last

RCOM offloaded 5% stake in RTIL (Towerco) to P/Es valuing RTIL at US$6.7bn (vs. our estimate of US$3bn), translating to Rs135/share. Valuation upside from towercos surprised us, but it will help create valuation benchmarks which will rub-off on Bharti’s towerco (valued at Rs160/share). The difference in valuations stemmed from aggressive assumptions related to yields of 11-13% for every tenant. For example, for a 2-tenant scenario, RCOM’s valuations probably factors in capex recovery/yield of ~20% as against our base case assumption of 14%. While not impossible to achieve since the two megatowercos will control 60-65% of the market, it is contingent on Bharti's stance on the pricing that is still evolving. The hive off process of Bharti Infratel (Towerco) has also gathered pace with the court convened meeting of shareholders scheduled for September 7, 2007.

Wireless subscriber additions – Ever higher peaks every month

Net monthly additions continue to accelerate with on ground capex starting to show desired results in a supply driven market. The net monthly additions have been creating ever higher peaks in the last 3-4 months, touching 8m net adds in July. We, however, believe that the peak is yet to come as the telcos strive for ever-higher coverage over the next 12 months

Watch points

Spectrum issues relating to its availability and allocation criteria are the main watch points over the next 12 months.

Release of 20 MHz of spectrum by Defence to ease situation

Defence is expected to vacate 20 MHz for 2G services in the next 3-6 months post roll out of its fibre optic network. Our analysis had showed that release of spectrum by Defence would help ease the situation for the incumbents even while leaving surplus spectrum in some circles for potential entrants waiting in the "informal" queue.

TRAI's spectrum recommendations expected in next two weeks, but likely to

get brushed under the carpet with the current political turmoil

We attended TRAI's open house on “cap on number of operators” with the discussions mainly centered on spectrum. Main issues relating to 1) Priority in spectrum allocation; 2) Fairness of subscriber linked spectrum allocation criteria; 3) Is spectrum really a constraint? and 4) Pricing of spectrum were discussed.

TRAI is expected to give its recommendations to DoT in the next couple of weeks and is likely to take a middle approach due to the polarization between GSM/CDMA and incumbents/new entrants. However, with the current political turmoil, any policy decision on changing the spectrum allocation criteria is

unlikely to be taken up by the Government.

M&A activity – No smoke without fire

We believe that media reports suggesting Spice/Idea merger previously and RCOM/Aircel merger talks recently are not entirely baseless. M&A makes good sense for all parties involved:

1. Continued lack of spectrum availability for aspirants (RCOM, Idea etc) with national ambitions will eventually force them to go for inorganic growth to acquire spectrum.

2. Foreign parents of India telcos – Maxis (Aircel) and Telekom Malaysia (Spice) would prefer to have a stake (albeit smaller) in a larger Indian wireless play than to have a larger stake in a smaller entity.

Disclaimer- I  hold  position in the stocks discussed and I only use research reports to validate certain facts and do not follow Buy/Sell recommendations by them without doing my homework.

India Mini Conference - London 2007 31 August 2007

Citigroup Global Markets | Equity Research

Dish TV (DSTV.BO)

Company overview — Dish TV is India’s largest direct-to-home (DTH) player with a subscriber base of 2.1m. The company is growing rapidly and is present in 4,300 towns across India, with more than 400 distributors and  more than a 30,000-strong dealer network.

Business strategy — Dish TV intends to sustain its leadership in the DTH market. It has so far focused on tier-II and tier-III cities, but has increased its focus on tier-I cities. The company expects 50% of its subscribers to come from tier-I cities. In addition to rapid subscriber addition, Dish is looking to increase contribution from value-added services like movies-on-demand and gaming. Management targets a subscriber base of 8m by 2011 and expects revenues to grow from Rs0.8bn in FY06 to Rs35.2bn by FY11, with an EBITDA margin of about 28%, as stated on its website.

Industry overview — The pay-TV market in India is growing strongly, driven by increasing TV ownership. With more than 110m TV households, India is the third-largest TV market in the world and provides significant opportunities for pay-TV service providers

Competitive analysis — Competition for Dish TV is on the rise, with Star-Tata offering marketing and consumer subsidies. Entry of new players such as Sun TV, Reliance and Bharti may significantly increase the competitive intensity.

 Recent results — For the quarter ending June 2007, standalone revenues for Dish TV increased 35%qoq. Additional subscribers numbered 1.8m. The company continues to invest in infrastructure and services.

Strengths — Being the first entrant, Dish already has a large subscriber base.Dish TV has strong operating infrastructure and content tie-up, an established brand and the backing of a strong group.

Weaknesses — Competitive intensity is likely to increase in the next 3 years,with Tata Sky's aggressive expansion plans and the entry of new players. Increasing competition from existing and emerging new technologies like digital cable and IPTV could slow the growth of the industry.

Company description

Dish TV is the first company to provide DTH satellite broadcast operations in India. The company has a strong backing of the Essel Group, the parent company of Zee Network. Launched in 2005, the company has more than 2.1m subscribers and has a deep distribution network of distributors and dealers.

With the advent of digital technology, Dish has been able to offer superior services covering a good range of 148 TV and 22 audio channels.

Recent developments

Industry trends: The Indian pay-TV market looks set to grow rapidly, driven by increasing penetration of television and rising consumer preference for cable & satellite TV. Besides lower penetration, pay TV is cheaper in India than in other markets, thus there is scope for expansion of broadcast services and valueadded services. In conjunction with the recent roll-out of Conditional Access System being mandated in key metro cities in India, it is likely to drive strong growth for DTH players.

News flow and developments: In 1Q FY08, Dish TV’s top line increased 35.3%qoq. There were 1.8m new subscribers and 8 channels added during this quarter. Aggressive investments continue for customer acquisitions and service to maintain market share. According to management, going forward the company will concentrate on increasing ARPUs, value-added services, service capability ramp-up and commercial sales (i.e. hotels, restaurants, malls, etc).

Disclaimer- I  do not hold  position in this stock and I only use research reports to validate certain facts and do not follow Buy/Sell recommendations by them without doing my homework.

India Mini Conference - London 2007

31 August 2007

Citigroup Global Markets | Equity Research

DLF (DLF.BO)

Big Player, Opportunity, Ambition

Tier-one developer — DLF is India's largest developer with an emerging pan-India presence. The company has a large diversified landbank of ~ 615m sqft spread across more than 10,255 acres and a development mix that is leveraged toward commercial and retail development.

 What differentiates DLF? —

1) Focus on scale with a portfolio mix of ~615m sq. ft spread across top-tier cities;

 2) strong cash reserves in this liquidity srained environment,

 3 a de-risked business model, with JVs in construction and hotels aiding growth, and

 4) a robust earnings CAGR of 81% for FY07-10E.

 Relatively good proxy to play yield compression — DLF's large pipeline of IT SEZ projects and strategy to sell assets to DLF Assets or others at lower cap rates of 9% vs.10% earlier should boost cash flows. However, this remains contingent on capital. We expect more such structures for its retail/hotel assets.

Development mix geared toward commercial and retail space — DLF has 49m sq ft under construction, which is largely geared toward commercial and retail projects — less sensitive to interest rates. In residential, the focus is super luxury-premium projects, most of which are pre-sold. While residential

remains a core area, growth will likely be more back-ended. We believe this to an extent insulates DLF from the current slowdown in the residential space.

Key risks —

 1) Concentration risk in NCR (40% of portfolio),

 2) high exposure to DLF Assets and its ability to raise capital;

3) price, demand and execution risks.

Company description

DLF is one of India's oldest real estate developers. Established in Delhi in 1946,it has continued to expand and diversify its real estate businesses, and is among the largest developers in India. It has historically built its businesses in Delhi and adjoining areas, known as the National Capital Region (NCR). While, Gurgaon in the NCR continues to be the hub of its business, DLF has meaningfully diversified into other geographic locations over the past few years.These expansions are spread across India, with a particular focus on the

Northern India Belt, Calcutta, Mumbai, Chennai, and a number of other large and rapidly growing cities. DLF's initial real estate development was focused on residential colonies and townships, and remained so until a decade ago. It further diversified into the development of commercial office space in the early

1990s, and with significant success, has substantially scaled up these developments. DLF also entered retail mall developments in the early 2000s, and is pursuing this business aggressively. DLF also has a very strong brand, with a reputation as one of the foremost and most credible developers in the

country. The company recently made a primary offering of 175m shares at Rs525 per share. DLF is a family owned and controlled business with promoters holding 90% stake (post the recent IPO).

Recent developments

Industry trends: The Indian real estate development opportunity is structural, large and will last for long, in our view. However, we believe the sector is in for some cyclical pain in the near-term — sustained high interest rates are damaging affordability; there is significant slowdown in volumes; property prices are cooling off, particularly in the residential segment; and supply risks exist.

In this scenario, we see markets increasingly distinguishing between tier-one developers and the surfeit of small developers.

Results: DLF's standalone 1Q FY08 revenues were Rs11,219m. Standalone EBITDA increased 26% yoy to Rs8,8710m and net profit increased 42% to Rs5,793m. Standalone EBITDA margin increased from 61% in 1Q FY07 to 78% in 1Q FY08. 1Q FY08 consolidated revenues, EBITDA and net profit were Rs30,738m, Rs22,039m and Rs15,155m, respectively.

News flow & developments

DLF purchased 38 acres of prime land in Delhi at a cost of Rs16bn, making it the largest private sector land deal in the country.

Awarded an esteemed project worth Rs60bn to develop and operate an international convention centre at Dwarka in Delhi.

Announced a 95-acre township at Durgapur in West Bengal.

Signed an MOU with American realty firm Hines to develop a landmark  commercial complex covering more than 2.5m sq ft in Gurgaon.

Investment thesis

We rate DLF Buy/Medium Risk (1M), with a target price of Rs725. DLF's focus on scale, integrated development with execution record, and a large land holding spread across top-tier growth cities differentiates it from its peers. Its diversified portfolio of ~615m sq.ft is relatively leveraged toward commercial/IT Parks/Retail mall (35% of total development) assets, which should provide a good hedge particularly in the near-term, when the residential segment is seeing some slowdown. Strong cash flows (Rs94.7bn) and a de-leveraged balance sheet give it a competitive advantage in the current liquidity-strained environment. We expect its new joint ventures in construction and hotels to complement the core business, aid growth and offer valuation upside.

Valuation

Our target price of Rs725 is based on a 25% premium to an estimated core NAV of Rs530, and Rs62 for other asset holdings and new JV businesses (Rs45/share for the existing 4.6m sq.ft leased assets and 7.2m sq.ft plot, and Rs17/share for DLF's share in construction and hotel JVs). We believe an NAV based valuation methodology is most appropriate for developers, as it factors the varied development projects and spread out time frame. Our NAV estimate of Rs530 is based on the following assumptions:

1) current market prices will persist, without any price inflation;

 2) development volume will be 606m sq.ft (as ~9m is already recognized as revenue in FY07);

3) a cap rate of 9% for commercial/IT Park, IT SEZs in Super Metros and Metros, and 10% for other

locations;

4) all projects undertaken by DLF will be completed largely on schedule; though given the scale of the roll-out, we expect risk of delays;

5) an average cost of capital of 14%; and

6) a tax rate of 25%.

Risks

We rate DLF Medium Risk. This is different from the Speculative Risk rating assigned by our  quantitative risk-rating system (which measures the stock's volatility over a 260-day period) to stocks that have less than one year's trading history. The key reasons for assigning a Medium Risk rating include:

1) the company's robust business model;

2) pan-India land bank with initiatives to derisk the business model through new business JVs; and

3) relatively healthy cash flows, at a time when most developers are facing funding constraints.

The main downside risks to our investment thesis and target price include:

 1) Concentration in the NCR region, particularly Gurgaon (33% of development), where risk of excess supply over the next 2-3 years is high;

2) Related party transaction and conflict of interest risks with DLF Assets;

3) Delays in execution of projects and planned developments would impact the company's reputation

and our NAV assumptions; and

4) A rapidly changing property market environment could lead to property price-demand risks, regulatory risks and potential supply risks.

Disclaimer- I  hold DLF and I only use research reports to validate certain facts and do not follow Buy/Sell recommendations by them without doing my homework.

Kulmanjee,

SHAREKHAN-05-09-07.

Elder Pharmaceuticals    
Cluster: Apple Green
Recommendation: Buy
Price target: Rs508
Current market price: Rs399

Biomeda acquisition to be earnings accretive from FY2009

Key points

• Elder Pharmaceuticals (Elder) has acquired a 51% stake in Biomeda Group in Bulgaria for 5 million euros (around Rs28 crore) in an all-cash deal.
• Biomeda is among Bulgaria's top ten oral dosage formulation manufacturer and distributor. The manufacturing division of the company includes a manufacturing facility to produce oral formulations and hard gelatin capsules. The company imports products from the global players and distributes them to clients all across the European Union through its warehouses.
• In line with its strategy to expand its global footprint, Elder's acquisition of a 51% stake in Bulgaria's Biomeda group is expected to provide it with an entry point into the European markets. With Biomeda's stable of nine products and its strong relationships with global pharmaceutical companies, Elder hopes to grow the existing business of Biomeda at an annual rate of 15-20% in the next two-three years. Further, Elder is also planning to introduce products from its own portfolio into Bulgaria and the other European countries through Biomeda. 
• We believe that through the introduction of Elder's products into the Bulgarian and other key European markets, Biomeda's sales will grow by 20% to 12 million euros in CY2008/FY2009 and by 50% to 18 million euros in CY2009/FY2010. Further, cheaper sourcing of the raw materials and rationalisation of operating costs will improve Biomeda's margins from the current level of 8-10% to 12% in the next three years. Our back-of-the-envelope calculations indicate that after minority interest, the Biomeda acquisition will dilute Elder's earnings by Rs0.06 per share in FY2008, but add Rs0.8 per share in FY2009 and Rs2.3 per share in FY2010. 
• At the current market price of Rs399, Elder is quoting at 9.9x its estimated FY2008 earnings and at 8.8x its estimated FY2009 earnings. We maintain our Buy recommendation on the stock with a price target of Rs508. 
  

Disclaimer- I  do not hold  position in this stock and I only use research reports to validate certain facts and do not follow Buy/Sell recommendations by them without doing my homework.

Price target revised to Rs300 

Key points

• With a revised capital expenditure (capex) plan of 14 million metric tonne (MMT) by the end of FY2009, India Cements will emerge as one of the top five cement players in India in terms of capacity. The company will witness a robust volume growth of 23% over FY2007-09. 
• South India is expected to witness a strong cement demand in the next couple of years due to heightened industrial activity and upcoming government projects.
• The company received the Madras High Court's approval for merger of Visaka Cements in Q1FY2008.
• For Q1FY2008, the combined turnover of the company stood at Rs701 crore. The turnover was much in line with our expectations. Backed by higher realisations, the operating profit margin (OPM) improved by 400 basis points year on year (yoy) to 38%, whereas the earnings before interest, tax, depreciation and amortisation (EBITDA) per tonne stood at Rs1,150. Consequently, the profit before tax (PBT) stood higher at Rs215 crore beating our expectation of Rs200 crore for the same.
• In the last couple of months, the cement retail price have touched Rs280 per bag in certain regions and the dealers expect it to touch Rs300 per bag in the coming months. Considering the rise in prices, we are upgrading our estimates by 33.9% for FY2008 and 32.5% for FY2009.
• The company's strategy of augmenting its capacity through the brownfield route at a lower capital cost will enhance the company’s return on capital employed (RoCE) going forward. The Lower capital cost coupled with higher profitability will put the company's financials in an enviable position.
• Healthy financials, a leadership position in the South and a lower promoter stake make the company a potential target for acquisition. Whether the promoters will sell their stake is a question that time will answer but in case that happens we believe the acquirer will have to pay a hefty premium to the company as it will directly make them the market leader in the South.
• We expect the earnings of the company to grow at a compounded annual growth rate (CAGR) of 27% over FY2007-09 on an enhanced equity capital of Rs260 crore. At the current market price of Rs263, the stock is currently trading at 9.5x its FY2009E earnings per share (EPS) and at an enterprise value (EV)/EBITDA of 5.1x. Considering all these aspects, we maintain our positive outlook on the stock with a revised price target of Rs300.

Disclaimer- I  do not hold  position in this stock and I only use research reports to validate certain facts and do not follow Buy/Sell recommendations by them without doing my homework.

Sharekhan

International Combustion (India)    
Cluster: Cannonball
Recommendation: Buy
Price target: Rs519
Current market price: Rs391

Sharp increase in margins

Result highlights

• The revenues of International Combustion India Ltd (ICIL) grew by 27.2% year on year (yoy) to Rs20.2 crore in Q1FY2008. The revenue growth was in line with our estimates. 
• The revenues of the Heavy Engineering Division (HED) of the company grew by 18.9% yoy to Rs16.5 crore. The Geared Motor and Geared Box Division's (GMGBD) revenues rose by an impressive 78.9% yoy to Rs3.8 crore.
• The operating profit margin (OPM) expanded by 560 basis point yoy to 24%. The OPM rise was due to a reduced raw material cost to sales ratio, which declined by 380 basis points to 46.8% in Q1FY2008. The staff cost to sales ratio and the other expenses to sales ratio both saw a decline of 90 basis points yoy.
• The HED reported a profit before interest and tax (PBIT) margin of 38.4%, which was up 670 basis points yoy. The GMGBD, which incurred a loss in the corresponding quarter last year reported a PBIT margin of 1.3% for this quarter. 
• The net profit jumped by a whopping 104.4% yoy to Rs2.8 crore led by a higher other income and robust expansion of margins. The profit after tax (PAT) margin for the quarter was 13.9%.
• The outstanding order book of the company at the end of July 2007 was Rs64 crore. The HED has an order backlog of Rs52 crore while the GMGBD has pending orders worth Rs12 crore.
• The company plans a capital expenditure (capex) of Rs8 crore in FY2008 towards capacity addition in the HED and the GMGBD to meet the rising demand for its products.

India Mini Conference - London 2007

31 August 2007

Citigroup Global Markets | Equity Research

Hindustan Unilever (HLL.BO)

Earnings Picking Up, Share Buyback Support

Growth turning around — Sales and earnings growth momentum is picking up. EBITDA profits in June quarter grew 23.5%, highest in the last six years.After significant investment into brands, HUL seems to be now in a position to scale back its ad spend (already coming off a high base), which should aid margins further.

Strong improvement in operating performance — HUL reported 2Q net profit growth of 24.4%, aided by 30.6% yoy growth in other income. Adjusted for the water business losses, we estimate net profit to have grown by 30%. Net sales growth of 12.9% was driven by 11.1% growth in HPC and 25% growth in the foods business.

Valuations look attractive — Valuations have abated and the stock trades near historical lows. Premium to Sensex has shrunk to only 25%, against the historical average of 80-100%.

 Stock buyback support — Historically, HUL's capital structuring has been shareholder friendly (high dividend payout, bonus debenture issue in 2003 etc.). A buyback of up to 27.4m at Rs230/share has been approved, which is marginally dilutive to EPS (1.3% for 2007E and 0.9% for 2008E). The buyback should provide downside support to the stock. We have a target price of Rs254.

Company description

HUL is the largest consumer non-durables company in Asia. 51%-owned by the Unilever Group, HUL has one of the best-managed businesses in India, in our view, and a record of steady growth spanning decades. It has a diversified product portfolio, including fabric wash, personal care, tea, coffee and staple foods. Some of the strongest brands in India such as Lifebuoy, Lux, Surf, Wheel, Lakme, Ponds and Lipton are from the HUL stable.

Recent developments

Industry trends: 1Q FY08 was a strong quarter for the Indian consumer sector. Competition has become more rational, allowing for pricing power; margins are improving despite cost pressures. Markets have continued to ignore the significant pick-up in the growth profile. The sector’s absolute and relative valuations are near historical lows. The sector’s de-rating was quick following irrational competition (P&G, HUL price war) and growth slowdown, but the market has been slow to reward a turn in fundamentals. Consumer company managements believe the growth outlook remains strong. More price hikes are not ruled out and earnings windfall is likely in the event of input commodity prices cooling off.

Results: In the April-June 2007 quarter, HUL's earnings growth was the fastest in the last 6 years. HUL’s operating performance showed a dramatic improvement in 2Q despite losses associated with the new water business. Adjusting for the new water losses, we estimate that the EBITDA for the core business would have grown 30.5% yoy. Sales growth of 12.9% is in line with our expectation with HPC growing by 11.1%, led by soaps and detergents. Slow growth in personal care remains a concern. Growth in the foods segment remains strong at 32%.Net profit in 2Q grew 24.4%, aided by 30.6% yoy growth in other income. Adjusted for the water business losses, we estimate net profit to have grown by 30%. Advertising expenses were down 155bps as HUL has now scaled back its ad-spend after making significant investment in brands. News flow & developments: In its board meeting, HUL has approved a buyback of up to 27.4m at Rs230/share. Historically, the company’s capital structuring has been shareholder friendly (high dividend payout, bonus debenture issue in 2003 etc.). Our analysis shows that this would be marginally dilutive to EPS (1.3% for 2007E and 0.9% for 2008E). However, we believe that the significant improvement in operating profits overshadows the marginal dilution and we would advise investors not to tender at Rs230, which is below our target price of Rs254.

Investment thesis

We have a Buy/Low Risk (1L) rating on the stock. HUL's valuations look attractive after the recent sell-off. The stock is trading at the lower end of its historical trading range and offers downside protection, in our view. HUL's fundamentals are looking up, with a significant pick-up in growth on improving demand from the urban as well as rural segments, especially in the rural areas. Management has increased its focus on market-share gains and as a result investment in brands has picked up. The company has been aggressively launching new product variants and has also undertaken product re-launches, which we believe will continue. With the high-end personal-care segment growing faster, the product mix is also improving. We believe margins could also surprise on the upside, driven by price hikes and declines in commodity prices. Margins have been under pressure in the past few quarters, and we believe theyhave bottomed.

Valuation

HUL's fairly steady stream of earnings makes P/E a good tool to value the stock.Our target price of Rs254 is based on what we think is a conservative multiple of 27x 2008E P/E, at the mid-end of the stock's historical trading band of 20-35x, over the past 8 years. We choose mid-end as we expect a re-rating for the stock

given that its operating parameters are improving. We do not use a top-end multiple, as competitive intensity has increased over the last few years and the environment in which HUL operates is not as conducive as before. At 27x P/E, HUL would trade at a 40% premium to the Sensex. The company has historically enjoyed more than a 100% premium to the Sensex owing to its high capital-efficiency ratios and consistent earnings growth. However, we do not expect the stock to re-trace to its historical high premium, given that the company now operates in a different competitive landscape, with higher competitive intensity and a lower margin profile. On EV/EBITDA, we believe the stock should trade at 24x 2008E EV/EBITDA, which gives a fair value of close to Rs250. The stock's trading band has been 20-30x over the past 3 years.

Risks

We rate HUL as Low Risk because the company operates in branded consumer products and has a  diversified product portfolio. The Low Risk rating is consistent with our quantitative risk-rating system which tracks the 260-day share-price volatility of the shares. The most significant risk to our target price is the possibility of a prolonged battle for market share with other MNC peers as well as Indian companies. HUL is leveraged equally to the rural and the urban economies and, as such, any dislocation would affect the company's performance. Although the company's brands have strong pricing power, in a challenging external environment price increases are limited. PG is aggressively seeking to increase its market share in detergents, shampoos and some other categories. Other downside risks include higher-than-expected raw-material costs and the company's inability to deliver on top-line growth.

India Mini Conference - London 2007

31 August 2007

Citigroup Global Markets | Equity Research

Infosys Technologies (INFY.BO)

Offshore Bellwether

 Impact of "subprime" issues — The impact of "sub-prime" issue remains the most important investor focus at this point in time. Infosys's exposure to the mortgage/subprime space and the likely impact on revenues/profits is a key focus area.

 Outlook on IT budgets for next year — IT budgets could suffer if the situation in the US mortgage market worsens and spreads to other financial services.What is Infosys's view based on its discussion with customers.

 Margin outlook and impact of INR — The INR has appreciated ~8% YTD against the US dollar. What is Infosys doing to mitigate this, and what are the other margin levers?

Tax rates post 2009 — With the STPI benefits ending (as per current regulations) in FY09 and SEZ's still taking time to ramp up, the impact on tax rates post 2009 is another area worth focusing on.

 Pricing trends — Infosys has witnessed a strong improvement of ~5-6% in revenue per employee on a YoY basis in 1Q FY08. Going forward, the trends in pricing should be a key focus area as pricing remains one of the key margin levers for the sector.

India Mini Conference - London 2007

Company description

Infosys is the second-largest IT services company in India with more than 66,000 professionals. It also is among the fastest-growing IT services organization in the world, and is a leader in the offshore services space. Infosys provides business consulting, application development and maintenance and engineering services to more than 475 active clients across verticals such as Banking, Financial Services, Insurance, Retail, Manufacturing, and Utilities in the Americas, Europe and Asia Pacific. Infosys sells a core banking application, Finacle, which is used by leading banks in India, the Middle East, Africa and Europe. Its subsidiary, Infosys BPO (formerly Progeon), which employs more than 11,000 people, is a provider of BPO services. It launched a subsidiary in April 2004, Infosys Consulting, which provides high-end IT consulting services.

Recent developments

Industry trends: Indian IT companies have seen strong volume growth of 30-35% yoy over past few years. Last year saw improving trends in pricing, led by industry leaders Infosys and TCS. However, a sharp INR appreciation has led to a decline in operating margins, though partly recovered by forex gains at the net

level. The subprime crisis in US has led to a few mortgage companies shutting down, leading to loss of business for some Indian IT companies – First Magnus for WNS, GreenPoint for Infosys BPO, etc. However, most offshore IT companies have said that their subprime exposure has been less than 1% of revenue.

Results: Revenue of US$928m (up 7.5% qoq) and EBITDA of Rs10.8bn (margins down ~300bp) were in line with expectations. Higher other income (driven by better forex gains and higher cash yields) and tax write-backs saw net profit at Rs10.8bn — better than expectations. Realization per employee was up 6.7% yoy onsite and 5.3% qoq offshore. In QoQ terms, it was 1%+. Management has reiterated their view of 3-4% pricing increase for renegotiations. The US$ revenue guidance was raised ~1% while INR EPS guidance was revised down 3% to factor in stronger revenue visibility and the appreciation in the INR. Upward revenue revision was below expectations, while INR EPS revision was broadly in-line. News flow and development: Infosys has announced a seven-year BPO contract with Royal Philips Electronics where Infosys BPO would provide Finance & Accounting (F&A) and Procurement processing services. As part of this contract, it will acquire three centers with employees in Poland (755 employees), India (445), and Thailand (190) and would pay US$28m as consideration for this takeover. Green Point Mortgage, a client of Infosys BPO, has shut shop due to the subprime crisis in the US. Infosys received US$1.2m (~0.1% of its revenue) from this client in the recent quarter and had net receivables of ~US$0.4m.

Investment thesis

We rate Infosys as Buy/Low Risk (1L). We are positive on the stock from a fundamental 12-month view. Offshore IT outsourcing has now become a mainstream option, and we think scale and scalability, along with an ability to move up the value chain, are key criteria for successful offshore IT vendors. In this respect, Infosys appears well positioned and continues to gain ground given its strong branding and industry-leading sales force. Infosys should see above industry average volume growth along with modest pricing improvement. We expect Infosys to deliver a revenue CAGR of 24.5% and EPS CAGR of 19.1% for FY07-10. Unlike many other high-growth firms in other industries, Infosys continues to generate solid FCF, and its RoE of 40%+ continues to be well above its cost of capital.

Valuation

Our target price of Rs2,440 is based on 25x FY09E EPS. This is close to the midpoint of the last one-year trading band of 20-28x 1-year forward earnings and factors in some deceleration in growth. We are now forecasting 19% earnings growth (on a high base of FY07) with some upside potential from pricing improvement and/or rupee depreciation. This is also supported by comparing it with global peers and the broader Indian market. The 25x multiple was also derived from a P/E band analysis of Infosys' trading pattern. During slowdowns in tech and offshore IT services, Infosys has traded at an average one-year rolling P/E of 25.1x with a low of 13x. Our estimates continue to assume a certain P/E premium to the market; this is justified, in our view, given the strong FCF, ROIC and growth rates for Infosys vs. the overall market. We believe P/E remains the most appropriate valuation measure given Infosys' profitable record and high earnings visibility.

Risks

We rate Infosys shares as Low Risk, which is consistent with our quantitative risk-rating system that tracks historical share price volatility. The key downside risks to the shares reaching our target price include:

(1) any significant appreciation of the rupee against the US dollar/euro/pound;

(2) pressure on billing rates (as Infosys continues to enjoy a 10-15% premium in its billing rates);

(3) a sharp slowdown in the US economy; and

(4) limited H1B visa quotas.

India Mini Conference - London 2007

31 August 2007

Citigroup Global Markets | Equity Research

Larsen & Toubro (LART.BO)

Building India at a Rapid Pace

Infrastructure opportunity gets bigger — According to the latest plan documents, India is targeting infrastructure investments of Rs14,717 bn in the XIth Plan (FY07-12), 133% growth over the Xth Plan (FY02-07).

 Top Indian E&C pick — L&T, in our view, is still the safest play on India capex and is part of our “India Model Portfolio” given its unparalleled diversity in skill sets, strong corporate governance and risk- management procedures, and one of the best execution capabilities. Buoyed by strong infrastructure  tailwinds, it is in an envious position of picking and choosing orders.

Strong PAT and order inflow growth in 1Q FY08 — L&T’s 1Q FY08 PAT at Rs2.9bn (up 57% yoy) was driven by 30% sales growth and a 259bp margin expansion. Reported PAT was Rs3.8bn (up 140% yoy) on forex gains in 1Q FY08. L&T booked Rs99bn (up 32% yoy) of order in 1Q FY08, taking the order backlog at end-1Q FY08 to Rs416bn, up 45% yoy.

 EPS CAGR of 35% over FY07-10E — Stronger-than-expected order inflows in 1Q FY08E gives an early indication of the likely order inflows in the remaining 9 months of the year. We forecast that L&T will end 1Q FY08E with an order backlog of Rs400bn-plus. We expect L&T to grow its EPS at a CAGR of 35% over FY07-10E vis-à-vis 31% earlier with RoEs at the 29 -32% levels.

Manpower is the single biggest constraint — Recovery in the Middle East capex typically leads to increased pressure on Indian E&C companies, as India is the preferred source of manpower for MNC contractors working in the Middle East.

Company description

L&T is a diversified conglomerate with market leadership in the engineering and construction (E&C) and electrical-equipment businesses in India. L&T Information Technology is its 100% subsidiary engaged in software services. L&T has demerged its cement business into a separate company, and sold it to Grasim. L&T holds a residual stake of 11.5% in Ultratech Cemco.

Recent developments

Industry trends: According to the latest plan documents India is targeting infrastructure investment of  Rs14,717bn in the XIth Plan (FY07-FY12), 133% growth over that seen in the Xth Plan (FY02-07). India Infrastructure Investments

Results: L&T’s 1Q FY08 PAT at Rs2.9bn (up 57% yoy) was 18% ahead of the consensus estimate of Rs2.4bn, driven by 30% sales growth and a 259bp margin expansion. Reported PAT was Rs3.8bn, up 140% yoy due to forex gains in 1Q FY08 (forex losses in 1Q FY07) on foreign currency borrowings. Order inflow momentum continues to be robust, with L&T booking orders worth Rs99bn, up 32% yoy, which took the order backlog at end-1Q FY08 to Rs416bn, up 45% yoy. L&T Finance’s PAT of Rs200m was up 136% yoy,

helped by the equity infusion in the previous year, whereas L&T Infotech had a tepid PAT of Rs430m, up 16% yoy, impacted by the rupee’s appreciation.

News flow & developments: L&T is seeking shareholder approval for raising fresh capital up to US$700m through domestic or foreign capital issue. The company is also seeking specific shareholder approval for converting its existing GDRs to ADRs for listing them on NASDAQ or NYSE. The company has sought

permission for listing any new issues in quite a few global stock exchanges, such as London, Singapore and Hong Kong.

Investment thesis

We rate L&T Buy/Low Risk (1L) with a target price of Rs2,765. L&T's order backlog of Rs400bn plus and forecast stable margins provide good earnings visibility. That most process industries are operating at near peak capacity utilization, together with the thrust on hydrocarbon and infrastructure spending, should augur well for the order pipeline. We are positive on management's efforts at improving the company's product mix by increasing the share of hightechnology products for process industries, defense, nuclear, and aerospace

applications; and of engineering and embedded services. These segments have better growth potential and margins than the projects business, in our view. The initial response to the new initiative has been  encouraging. Management also appears to be on course to decrease its vulnerability to the business from the local cycle by increasing international sales as a proportion of total revenues.

Valuation

Using a comps-based P/E of 26x FY09E, we get a core business value of Rs2,326 for L&T's core business. We also believe that the parent numbers do not capture the value inherent in the subsidiaries of L&T. We use a sum-of-the parts (SOTP) methodology to value the L&T group, resulting in a target price of Rs2,765. We value L&T's subsidiaries at Rs439 with L&T Infotech at Rs222 (16x FY09E EPS, in-line with second-tier peers) and L&T IDPL at Rs79 (a 20% premium to private equity valuations, because a number of projects will be commissioned over the next couple of years).

Risks

We rate L&T Low Risk, as opposed to the High Risk suggested by our quantitative risk-rating system, because L&T's order backlog of c.Rs369bn represents two years' sales and provides earnings visibility. Downside risks to our target price include:

1) Attracting and retaining talent;

 2) the E&C and electrical equipment businesses are sensitive to economic variables;

 3) Competitive pressures, and

 4) L&T needs to keep abreast of technology trends to sustain valuations and earnings.

India Mini Conference - London 2007

31 August 2007

 Citigroup Global Markets | Equity Research

Reliance Industries (RELI.BO)

Valuing Sustained Exploration Success

 Life beyond KG-D6 — Reliance has confirmed exploration success in CYDWN-2001/2 (100% interest), first deepwater discovery in Cauvery basin. Presence of gas and oil in this 14,325 sq. km block has been termed as “good”, though any comparison with the flagship KG-D6 block is very premature. This was one of the three blocks awarded to RIL in the Cauvery basin in NELP-III. Recent media reports also suggest that the company has struck oil in the D4 block in the KG Basin (100% interest).

Discoveries provide sustainability of cash flows — Cauvery discovery and further potential in D9, D3 (with Hardy Oil), and D4 (with Niko), for which drilling is planned over 6-18 months, does two things:

 i) sustains oil/gas production when D6 goes into decline and, more importantly,

 ii) sustains RIL’s share of cash flows especially when D6 investment multiple becomes >2.5x. Though rig shortage and pre-occupation with D6 will stagger exploratory drilling activity, the recently  contracted drillship (Neptune Explorer) will come in handy.

 Low global refining supply — Growing risks to refinery expansions in the Middle East due to cost inflation should bode well for RIL’s margins in FY08-10E. Besides, RIL’s differentials over benchmarks have expanded to US$5- 8/bbl over the last five quarters. RPL’s green field capacity addition in FY09 would leverage it further.

 Petrochemicals: Stable FY08E, but expect pressure in FY09E — Tightness in naphtha supplies and commissioning of ME projects (ex. Iran) in 2H08-2009 imply increased possibility of cycle downturn beyond 2008. However, stable to improving trends in PX and PVC should partially offset the impact.

Company description

Reliance Industries is a conglomerate with interests in upstream oil & gas (E&P), refining, and petrochemicals. It is building a super-size refinery project through its 75% subsidiary (RPL) and is now undertaking development of a large gas find in KG basin. RIL is foraying into organized retailing and has plans to undertake SEZ projects over the medium to long term. In FY07, RIL derived 53% o f its EBITDA from refining, 37% from petrochemicals, and the rest from its E&P business. The promoter group led by Mr. Mukesh Ambani holds a 51% stake in the company, FIIs hold 20%, while domestic FIs and public hold the

remaining.

Recent developments

Industry trends: Delayed refining capacity expansions (esp. Middle Eastern and North African greenfield expansions), sustained strength in product spreads, and light-heavy crude spreads bode well for RIL's refining profitability over FY08-10E. In addition, RIL has continued to deliver strong differentials over

regional margins in recent times, with differentials over Singapore GRMs in excess of US$6/bbl over the last 3 quarters. While petrochem should remain stable in FY08E, we anticipate a downcycle beyond 2008, especially given RIL's exposure to PE/PP spreads where we forecast declining spreads. On the E&P

side, RIL continues to sustain its exploration success, with the Cauvery discovery and further potential in D9, D3, and D4, for which drilling is planned over the next 6-18 months. Results: RIL’s 1Q FY08 net profit of Rs32.6bn (up 28% yoy and 14% qoq) beat estimates driven by robust polyester margins, forex gains (Rs1.8bn on WC loans) and the absence of one-off payments incurred in 4Q FY07. Polyesters had a strong quarter (EBIT margins up 8-15% yoy) plus volume growth across the petchem chain negated the QoQ decline in PE/PP deltas. In addition, oneoff PX royalty expense in 4Q FY07 drove a sharp 310bp qoq improvement in petchem EBIT.

Refining performance was par for the course as RIL's GRM rose in line with global trends. Refining margins at US$15.4/bbl implied differentials over Singapore benchmark (adjusted for marketing losses) remained steady on a qoq basis at ~US$6.5/bbl.

News flow & developments: RIL has submitted FDPs for NEC-25 (plateau 6.5mmscmd, first gas FY12) and CBM (5mmscmd, FY10), indicating progress on blocks other than D6. Reliance has confirmed  exploration success in CY-DWN-2001/2 (100% interest), the first deepwater discovery in Cauvery basin. RIL will undertake appraisal wells in this block over the next 8-12 months. Management has also indicated 3 more deep water rigs to be mobilized in 2H

FY08 (from existing 3) to drill exploratory wells in 11 out of the 26 blocks (incl.D9, D3, and D4).

In organized retail, RIL's total investment went up by Rs12bn in 1Q FY08 to Rs60bn, with a total of 201 stores.

India Mini Conference - London 2007

31 August 2007

Investment thesis

We rate RIL Buy/Low Risk with a target price of Rs2,005. We expect regional refining margins to remain robust due to project delays in the Middle East, with RIL enjoying an enhanced premium for its superior complexity. E&P business has delivered positive surprise and looks set to become more meaningful in the

next 3-4 years as KG D6 field commences production and new discoveries are brought on stream. Upgrade of reserves in KG basin adds to the value, although the NAV of the gas find depends on development capex and the demand profile from anchor customers. Given the track record of exploratory success and the

evolving portfolio (much beyond KG D6), RIL's E&P business needs to be valued as a going concern rather than a combination of assets. We have therefore valued E&P business (Rs631/share) on a more traditional EV/FCF multiple rather than the consensus NAV approach. While petrochemicals will likely face pressure in FY09E, this will be offset by diversity of products to some extent.

Factors such as diversity of revenues, integration across product chains, and volume growth should help RIL tide over downturns in product cycles.

Valuation

Our target price of Rs2,005 is based on a sum-of-the-parts value:

1) RIL's core petrochem and downstream oil business is valued on an EV/EBITDA of 6.5x mid-FY09E, in line with the regional chemicals and refining peers;

 2) Total E&P assets including oil & gas prospects and other blocks are valued at Rs631/share based on 10x steady state (FY11E) FCF;

 3) Investment in IPCL and RPL valued at 8x profit contribution to consolidated profits;

4) Organized retail business is factored in at Rs125/share; and

5) Treasury stock is valued at RIL's target price.

Risks

We rate RIL Low Risk, as opposed to the Medium Risk suggested by our quantitative risk-rating system, which tracks 260-day historical share-price volatility. Diversified earnings and significant value contribution from the emerging E&P business and investment in listed subsidiaries have led to qualitative changes in the value constituents of the stock. Risks that could impede the stock from reaching our target price are: RIL's margins are exposed to the global petrochemical and refining cycles; the group could be asked to offer larger discounts on products sold to oil public sector units; delays in the key KG-D6 gas development and RPL refinery project; delays in the drilling programme for the new blocks (D9, D3, D4); and the organized retail business would call for significant investment in non-core areas.