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INDIA DAILY EQUITY MARKETS

India Daily Summary - June 18, 2008 June 18, 2008
Change, %
India 17-Jun 1-day 1-mo 3-mo
Sensex 15,697 2.0 (10.0) 5.8
Nifty 4,653 1.8 (9.8) 2.6

Contents Global/Regional indices

Dow Jones 12,160 (0.9) (6.4) (1.9)
Results Nasdaq Composite 2,458 (0.7) (2.8) 8.4
BPCL: Weak 4QFY08 results; uncertainty of earnings remains pending lack of FTSE 5,862 1.2 (7.0) 4.6

clarity on subsidy-sharing scheme Nikkie 14,406 0.4 1.3 20.4

Hang Seng 22,994 (0.3) (10.2) 7.5
Srei Infrastructure Finance: PAT above estimates, one-time items and technical KOSPI 1,760 0.5 (6.8) 10.8
differences distort earnings Value traded - India

Moving avg, Rs bn
Updates 17-Jun 1-mo 3-mo

Zee Entertainment Enterprises: Announces aggressive push into the film Cash (NSE+BSE) 162.2 192.2 195.3
Derivatives (NSE) 401.7 378.8 402
production business in India
Deri. open interest 836.1 788 679

Forex/money market

Change, basis points

News Roundup 17-Jun 1-day 1-mo 3-mo
Rs/US$ 42.9 0 31 235

Corporate 6mo fwd prem, % 0.7 (25) 71 24

10yr govt bond, % 8.4 (1) 34 73
• The Reserve Bank of India set a three-year sunset window on Sahara India
Financial Corp., India’s largest residuary non-banking company allowing it to Net investment (US$mn)
accept fresh deposits maturing until 30 June 2011. The central bank is in favor of 16-Jun MTD CYTD
the winding down of Sahara India’s close to Rs200 bn public deposit base in FIIs (132) (1,382) (5,255)
seven years. It has directed Sahara India to repay the deposits as and when they MFs 66 135 1,660
mature and bring down the aggregate liability to depositors to zero on or before
30 June 2015. Sahara India has also been instructed to appoint statutory auditors Top movers -3mo basis
from the panel of auditors suggested by RBI by 31 August and continue to Change, %
appoint statutory auditors each year from a panel suggested by the regulator till Best performers 17-Jun 1-day 1-mo 3-mo
all depositors are repaid in full. (Mint) Chambal Fert 91 0.8 15.5 91.9

• Financial services group Religare Enterprises Ltd intends to enter the banking i-Flex 1,368 4.4 (2.5) 46.1

business, taking advantage of the Rs100 bn that its owners will receive when Infosys 1,912 0.2 2.1 45.4

they complete the sale of their stake in Ranbaxy Laboratories Ltd, India’s biggest Wipro 494 1.4 (2.3) 37.6

drug maker, to a Japanese acquirer. (Mint) Shipping Corp 255 1.8 (9.6) 35.0
Worst performers
• Reliance Natural Resources, a Reliance Anil Dhirubhai Ambani group company, BPCL 280 1.2 (21.9) (30.6)
has moved an application in the Bombay High Court alleging that RIL has signed HPCL 194 2.0 (21.8) (25.9)
MoUs with fertilizer and power firms to sell gas from the Krishna Godavari basin. Siemens India 494 1.5 (15.2) (24.6)
The company claims this is against the order of the Bombay HC, which Thermax 425 (0.2) (7.1) (23.0)
restrained RIL from entering into any contracts to sell gas to third parties or Grasim 2,171 0.1 (5.2) (17.4)
create any third party interest with respect to the 80 mmscmd of gas likely to
come from KG basin in the later part of 2008. (ET)

Economic and political

• India may resume exports of non-basmati rice from November, which were
suspended in the wake of rising domestic prices. India’s export contribution of up
to four million tons to the international rice market of 28 mn tons may help
lower global rice futures, and cheer farmers who stand to gain from higher
export prices. (ET)
• The government has made it clear that unlisted Indian companies should not be
allowed to list abroad and that neither American depository receipt (ADR) nor
global depository receipt (GDR) rules would be altered to enable them to raise
capital on overseas bourses. (FE)

Source: ET = Economic Times, BS = Business Standard, FE = Financial Express, BL = Business Line.

Kotak Institutional Equities Research

[email protected]

Kotak Institutional Equities Research Mumbai: +91-22-6634-1100 1

For Private Circulation Only. FOR IMPORTANT INFORMATION ABOUT KOTAK SECURITIES’ RATING SYSTEM AND OTHER DISCLOSURES, REFER TO THE END
OF THIS MATERIAL, GO TO HEDGES AT http://www.kotaksecurities.com.
 India Daily Summary - June 18, 2008

Energy BPCL : Weak 4QFY08 results; uncertainty of earnings remains pending

lack of clarity on subsidy-sharing scheme
BPCL.BO, Rs280
Rating REDUCE
Sanjeev Prasad : [email protected], +91-22-6634-1229
Sector coverage view Cautious
Target Price (Rs) 350
Gundeep Singh : [email protected], +91-22-6634-1286
52W High -Low (Rs) 560 - 260
• Lower-than-expected inventory gains and higher-than-expected employee costs
Market Cap (Rs bn) 91.9 dampen 4QFY08 results

Financials • Further government action may be required in FY2009E to protect earnings

March y/e 2008 2009E 2010E
• Fine-tuned estimates; maintain REDUCE and 12-month TP of Rs350
Sales (Rs bn) 1,105 1,546 1,556
Net Profit (Rs bn) 14.7 13.9 14.2
BPCL reported 4QFY08 adjusted net income at Rs548 mn versus our expected net
EPS (Rs) 40.7 38.4 39.1 income of Rs10 bn; the variance was due to (1) inventory gain of Rs3.5 bn versus Rs4.5
EPS gth (22.2) (5.6) 1.8 bn assumed by us, (2) higher other expenditure at Rs14 bn, (3) higher employee costs
P/E (x) 6.9 7.3 7.2 at Rs4.6 bn versus Rs2.9 bn assumed by us. BPCL’s FY2008 reported net income is
EV/EBITDA (x) 2.9 3.5 2.5 Rs15.8 bn (Rs43.7 EPS; adjusted EPS is Rs40.9). We have made modest earnings
Div yield (%) 1.6 1.4 1.4 revisions for FY2009E-2011E EPS based on FY2008 results. Our revised FY2009E,
FY2010E and FY2011E EPS estimates Rs38.4, Rs39.1 and Rs42.3, respectively, versus
Rs39.7, Rs39.7 and Rs41.8, respectively, previously. However, estimating earnings for
Shareholding, March 2008 downstream companies remains an academic exercise given lack of clarity on the
% of Over/(under) subsidy-sharing scheme. We retain our REDUCE rating with 12-month fair valuation of
Pattern Portfolio weight Rs350 based on 8X FY2010E EPS plus value of treasury shares. Key downside risk
Promoters 64.3 - -
stems from higher-than-expected subsidy losses.
FIIs 10.1 0.2 (0.2)
MFs 4.4 0.5 0.1 4QFY08 results dampened by higher employee costs and lower inventory
UTI - - (0.4) gains. Exhibit 1 gives details of BPCL’s 4QFY08 results. BPCL reported net income of
LIC 10.0 0.9 0.5 Rs548 mn compared to Rs1.6 bn in 3QFY08 and Rs6.7 bn in 4QFY07. BPCL’s FY2008
reported net income is Rs15 bn versus Rs18.1 bn in FY2007. Employee costs were
higher at Rs4.6 bn (+62.6% qoq and +57.7% yoy) due to provision of Rs1.7 bn on
account of pending revision in salary for management staff with effect from January 1,
2007. BPCL reported inventory gains at Rs3.5 bn for 4QFY08, which was moderately
lower versus our estimate of Rs4.5 bn and in line with the sharp rise in crude prices in
the period. This is in contrast to moderate inventory gains of Rs1.9 bn reported by IOCL
and inventory loss of Rs940 mn reported by HPCL.

BPCL received oil bonds of Rs86 bn for FY2008 resulting in a share of 24.3% of total
oil bonds of Rs353 bn issued by the government. Other expenditure increased sharply
to Rs13.8 bn versus Rs7.2 bn in 3QFY08. Other income was lower at Rs1.3 bn versus
Rs2.2 bn estimated by us.

More required from government to protect FY2009E earnings. We believe the

recent increase in retail prices and cut in duties announced by the government on June
4, 2008 only partly alleviates the problem given the high level of under-recoveries; in
spite of the measures announced by the government, there is still a gap of Rs419 bn,
which needs to be covered. In our view, the government may need to (1) lower crude
prices (likely, in our view), which will result in lower under-recoveries, (2) issue of more
oil bonds (possible but depends on the government’s fiscal position (already under
severe stress) and (3) higher retail price through another round of price increase (highly
unlikely, in our view). We believe the underlying philosophy will be that the
government will ensure profits of the downstream oil companies at a certain
‘minimum’ level over the next few years (until the situation improves); there is no
other basis to forecast earnings of the downstream oil companies in the current
environment.

2 Kotak Institutional Equities Research

 India Daily Summary - June 18, 2008

Other financial and operating details of 4QFY08 and FY2008 results

1. Good refining margins. BPCL’s overall 4QFY08 refining margin was US$6.8/bbl
versus US$5.4/bbl in 3QFY08 and US$5.6/bbl in 4QFY07. BPCL’s FY2008 refining
margin was US$5.6/bbl versus US$3.6/bbl in FY2007. However, we expect refining
margins to decline in FY2009E due to a decline in global benchmark margins led by
(1) demand weakness and (2) significant refining capacity addition from 2HCY08.
We model refining margin for BPCL at US$4.2/bbl in FY2009E and US$3.4/bbl in
FY2010E against US$5.6/bbl in FY2008.
2. Compensation (oil bonds) from the government. BPCL received Rs86 bn of oil
bonds for FY2008 resulting in a share of 24.3% of oil bonds of Rs353 bn issued by
the government. Based on the same share of oil bonds for BPCL in the future also,
we model BPCL will receive Rs271 bn and Rs227 bn of oil bonds in FY2009E and
FY2010E, respectively, based on total issue of Rs1.1 tn and Rs935 bn of bonds to the
industry in FY2009E and FY2010E, respectively.
3. Higher refining throughput in FY2008. BPCL’s two refineries processed 21 mn
tons of crude in FY2008 compared to 19.8 mn tons in FY2007. BPCL’s Mumbai
refinery processed 12.75 mn tons of crude in FY2008 and its Kochi refinery
processed 8.2 mn tons of crude. BPCL will expand its refining capacity (Kochi
refinery) by 2 mtpa in FY2011E, which will boost its throughput significantly. We
model crude throughput at 21 mn tons in FY2009E, 21.5 mn tons in FY2010E and
23 mn tons in FY2011E.

Interim results of Bharat Petroleum, March fiscal year-ends (Rs mn)

qoq yoy yoy

2009E 4Q 2008 3Q 2008 % chg 4Q 2008 4Q 2007 % chg 2008 2007 % chg
Net sales 1,545,557 325,786 289,284 12.6 325,786 241,265 35.0 1,105,468 975,602 13.3
Increase/(decrease) in stock (2,841) (11,096) (2,841) (343) (3,925) 2,054
Raw material (684,792) (128,568) (125,911) 2.1 (128,568) (97,597) 31.7 (489,219) (422,033) 15.9
Trading purchase (800,719) (167,363) (137,893) 21.4 (167,363) (113,433) 47.5 (526,646) (463,904) 13.5
Staff cost (12,864) (4,550) (2,798) 62.6 (4,550) (2,885) 57.7 (12,972) (10,037) 29.2
Other expenses (15,860) (13,864) (7,215) 92.2 (13,864) (14,269) (2.8) (42,980) (47,522) (9.6)
Total expenditure (1,514,235) (317,186) (284,913) 11.3 (317,186) (228,527) 38.8 (1,075,742) (941,442) 14.3
EBITDA 31,322 8,600 4,371 96.8 8,600 12,738 (32.5) 29,726 34,160 (13.0)
Other income 9,046 1,343 1,904 (29.5) 1,343 2,547 (47.3) 12,394 7,332 69.0
Interest (9,660) (2,156) (1,620) 33.1 (2,156) (1,648) 30.8 (6,725) (4,774) 40.9
Depreciation (9,649) (3,319) (3,065) 8.3 (3,319) (2,778) 19.5 (10,982) (9,041) 21.5
Pretax profits 21,059 4,468 1,590 181.0 4,468 10,859 (58.9) 24,413 27,677 (11.8)
Extraordinary item — — 1,279 — (68) 1,560 (68)
Tax (5,880) (3,486) (57) (3,486) (3,951) (9,059) (9,286)
Deferred tax (1,277) (398) 101 (398) (140) (1,108) (268)
Net income 13,901 584 2,913 (80.0) 584 6,700 (91.3) 15,806 18,055 (12.5)
Adjusted net income 13,901 584 1,614 (63.8) 584 6,742 (91.3) 14,857 18,099 (17.9)
Tax rate (%) 34.0 86.9 (1.5) 86.9 37.9 39.1 34.6

Volume data
Crude throughput (mn tons) 5.0 5.2 (4.0) 5.0 5.3 (4.9) 21.0 19.8 5.9
Domestic sales volume (mn tons) 7.0 6.7 3.9 7.0 6.3 10.5 25.8 23.5 10.0
Refining margin (US$/bbl) 6.8 5.4 6.8 5.6 5.6 3.6
Inventory gain/(loss) 3,500 4,000 3,500 2,000 10,000 1,000
Receipt from upstream companies 23,692 16,229 23,692 11,845 59,751 44,622
Receipt from refining companies — — — — — —
Reciept of oil bonds from government 39,715 20,789 39,715 9,009 85,895 52,479
Subsidy gain/(loss) (69,500) (50,500) (69,500) (9,170) (179,000) (107,501)

Source: Company, Kotak Institutional Equities estimates.

Kotak Institutional Equities Research 3

 India Daily Summary - June 18, 2008

Earnings sensitivity of BPCL to refining margins, import duties and marketing margins, March fiscal year-ends (Rs mn)

2009E 2010E 2011E

Downside Base case Upside Downside Base case Upside Downside Base case Upside
Refining margins
Refining margins (US$/bbl) 3.2 4.2 5.2 2.4 3.4 4.4 3.0 4.0 5.0
Net profits (Rs mn) 9,609 13,901 18,192 9,911 14,152 18,392 10,885 15,310 19,735
EPS (Rs) 26.6 38.4 50.3 27.4 39.1 50.9 30.1 42.3 54.6
% upside/(downside) (30.9) 30.9 (30.0) 30.0 (28.9) 28.9

Import tariffs
Tariff protection 1.9 2.4 2.9 2.1 2.6 3.1 2.1 2.6 3.1
Net profits (Rs mn) 12,451 13,901 15,351 12,697 14,152 15,606 13,763 15,310 16,857
EPS (Rs) 34.4 38.4 42.5 35.1 39.1 43.2 38.1 42.3 46.6
% upside/(downside) (10.4) 10.4 (10.3) 10.3 (10.1) 10.1

Marketing margins
Auto fuels marketing margin (Rs/ton) (19,206) (19,056) (18,906) (14,219) (14,069) (13,919) (5,441) (5,291) (5,141)
Net profits (Rs mn) 12,901 13,901 14,901 13,100 14,152 15,204 14,203 15,310 16,417
EPS (Rs) 35.7 38.4 41.2 36.2 39.1 42.1 39.3 42.3 45.4
% upside/(downside) (7.2) 7.2 (7.4) 7.4 (7.2) 7.2

Source: Kotak Institutional Equities estimates.

4 Kotak Institutional Equities Research

 India Daily Summary - June 18, 2008

Consolidated profit model, balance sheet, cash model of BPCL, March fiscal year-ends, 2004-2011E (Rs mn)

2004 2005 2006 2007 2008E 2009E 2010E 2011E

Profit model (Rs mn)
Net sales 479,840 578,774 755,333 965,569 1,105,468 1,545,557 1,555,889 1,595,894
EBITDA 38,686 26,231 9,407 35,362 29,726 31,322 35,896 45,786
Other income 4,348 4,015 4,653 7,332 12,394 9,046 19,271 24,087
Interest (1,447) (1,748) (2,474) (4,774) (6,725) (9,660) (23,115) (35,106)
Depreciation (6,754) (7,130) (7,680) (9,041) (10,982) (9,649) (10,614) (11,573)
Pretax profits 34,833 21,368 3,906 28,879 24,413 21,059 21,439 23,194
Extraordinary items (420) 810 176 (68) 1,560 — — —
Tax (12,026) (7,250) (140) (9,286) (9,059) (5,880) (4,613) (6,503)
Deferred taxation (805) (1,230) (1,025) (268) (1,108) (1,277) (2,674) (1,380)
Net profits 21,582 13,698 2,916 18,055 15,806 13,901 14,152 15,310
Net profits after minority interests 19,086 11,334 2,916 18,055 15,806 13,901 14,152 15,310
Earnings per share (Rs) 64.6 37.2 7.6 50.1 40.9 38.4 39.1 42.3

Balance sheet (Rs mn)

Total equity 69,960 82,887 91,394 102,735 116,849 129,262 141,899 155,570
Deferred taxation liability 11,304 12,533 13,558 13,826 14,934 16,211 18,885 20,266
Total borrowings 32,701 46,589 83,736 108,292 85,166 152,666 440,166 459,666
Currrent liabilities 95,495 104,462 94,070 112,767 97,971 119,666 121,167 126,191
Total liabilities and equity 209,459 246,472 282,758 337,620 314,921 417,806 722,117 761,693
Cash 9,319 6,644 4,921 8,640 8,071 5,067 4,293 6,176
Current assets 97,729 130,393 128,208 127,698 114,517 153,246 153,624 157,396
Goodwill — — — — — — — —
Total fixed assets 88,484 98,542 110,855 118,334 131,730 143,891 158,599 157,519
Investments 13,927 10,893 38,774 82,949 60,602 115,602 405,602 440,602
Total assets 209,459 246,472 282,758 337,621 314,921 417,806 722,117 761,693

Free cash flow (Rs mn)

Operating cash flow, excl. working capital 30,727 21,118 9,275 29,920 13,952 15,782 8,168 4,177
Working capital 1,025 (18,393) 1,577 11,451 1,133 (18,739) 2,314 2,559
Capital expenditure (17,001) (17,120) (19,945) (17,908) (22,828) (21,810) (25,322) (10,494)
Investments 1,278 2,992 (28,146) (45,481) 22,347 (55,000) (290,000) (35,000)
Other income 1,985 2,445 1,785 4,337 9,645 10,750 18,081 22,779
Free cash flow 18,015 (8,957) (35,455) (17,682) 24,250 (69,016) (286,759) (15,978)

Ratios (%)
Debt/equity 40.2 48.8 91.6 105.4 72.9 118.1 310.2 295.5
Net debt/equity 28.8 41.9 86.2 97.0 66.0 114.2 307.2 291.5
RoAE 28.8 14.4 3.3 16.3 12.7 10.0 9.2 9.1
RoACE 21.2 12.0 4.1 11.0 9.2 8.6 7.8 6.8

Key assumptions (standalone until FY2005)

Crude throughput (mn tons) 8.8 9.1 17.2 19.8 21.0 21.0 21.5 23.0
Effective tariff protection (%) 7.2 4.8 2.9 1.6 1.4 2.4 2.6 2.6
Net refining margin (US$/bbl) 4.2 3.8 2.1 3.2 5.6 4.2 3.4 4.0
Sales volume (mn tons) 20.9 21.5 23.3 24.2 26.4 27.4 28.5 29.6
Marketing margin (Rs/ton) 1,893 1,732 (671) (1,140) (2,983) (13,536) (10,127) (3,691)
Subsidy under-recoveries (Rs mn) (13,518) (25,821) (31,847) (20,159) (25,551) (28,043) (14,324) (8,276)

Source: Kotak Institutional Equities estimates.

Kotak Institutional Equities Research 5

 India Daily Summary - June 18, 2008

Banking Srei Infrastructure Finance : PAT above estimates, one-time items and
technical differences distort earnings
SREI.BO, Rs125
Rating BUY
Nischint Chawathe : [email protected], +91-22-6749-3588
Sector coverage view Neutral
Target Price (Rs) 200
Tabassum Inamdar : [email protected], +91-22-6634-1252
52W High -Low (Rs) 292 - 80 • PAT (after minority interest) up 61% yoy to Rs507 mn vs our estimate of Rs209 mn
Market Cap (Rs bn) 16.8
• Key highlights—strong asset growth in JV, one-time items in the parent company,
Financials consolidation of the entire earnings of the JV v/s 50% economic stake considered in
March y/e 2008 2009E 2010E our estimates
Sales (Rs bn) 2.4 4.1 6.2
• PBT from construction equipment finance business (JV) in line, tax liability higher
Net Profit (Rs bn) 1.0 1.0 1.9
than estimates
EPS (Rs) 9.6 7.6 13.8
EPS gth 32.4 (20.6) 80.7 Srei reported 61% growth in 4QFY08 PAT (post minority interest) of Rs507 mn
P/E (x) 13.0 16.4 9.1 comprising net earnings from JV - Rs268 mn and parent company - Rs267 mn. While
P/B (x) 3.0 1.4 1.3 the construction equipment finance business reported strong net operational income on
Div yield (%) 1.3 1.8 2.2 the back of healthy asset growth (46%), operating expenses and tax liability were
higher than estimates. Srei (parent) booked large income on deferred tax liability (DTL)
writeback which supported its reported earnings. The company made investments of
Shareholding, March 2008 Rs8 bn (including warehousing investments of Rs6.5 bn) which will likely realize
% of Over/(under) income in the subsequent quarters. Given the lack of information, we find it difficult to
Pattern Portfolio weight
analyze the results; we will revisit our estimates and recommendation post discussion
Promoters 25.1 - -
with the management.
FIIs 45.6 0.1 0.1
MFs 9.9 0.1 0.1
Key highlights
UTI - - -
LIC - - - JV: Consolidation of 100% stake in 4QFY08. In January 2008, Srei transferred its
construction equipment finance business to a separate company—the proposed 50:50
JV with BNP. While BNP had proposed to join the JV in 4QFY08, the actual agreement
was executed in April 2008. As such, Srei had a 100% share in the JV as of March
2008 as compared to 50% consolidation factored in our estimates (based on
management guidance). Note that the consideration paid by BNP will not be change
despite a delay in infusing capital.

Warehousing assets for Quipo. Srei (parent) made investments of Rs8 bn during the
quarter comprising the following:
(a) Purchase of Spice Telecom’s towers– Rs6.5 bn on behalf of Quipo telcom. Srei’s
management has highlighted that investment is for a temporary period and the
company will eventually transfer the towers to Quipo Telecom. Srei will earn fees/
interest from Quipo for the warehousing facility but has not booked any income
during 4Q08 resulting in subdued operating income from the parent company.
(b) Equity investments in various road projects—Rs1.5 bn. Note that Srei, in partnership
with construction companies, has development rights for seven road projects.

Accounting income from DTL writeback supports earnings, entry confusing.

Srei (parent) has written back deferred tax liabilities (DTL) of Rs640 mn during the
quarter largely supporting its reported profits. According to the management, the DTL
was created due to difference in depreciation rates on its assets which were
transferred to the JV. We are surprised with the entry given that the benefit of DTL
should also have been transferred to the JV. At the same time, the JV has not created
a corresponding liability in its books and will likely have to make higher provisions in
the future.

Forex losses of Rs120 mn surprising. Srei has booked M2M losses of Rs120mn
(US$3 mn) during the quarter. We are surprised with the quantum of loss considering
the fact that the company had a small unhedged exposure of US$13 mn as of
December 2007. It did not have any open position on Yen as on December 2007. We
are awaiting clarification on this item from the management.

6 Kotak Institutional Equities Research

 India Daily Summary - June 18, 2008

Srei Infrastructure Finance—quarterly results

4Q07-4Q08 (Rs mn)

4Q07 1Q08 2Q08 3Q08 4Q08 YoY (%)

Interest income 1,234 1,214 1,493 1,735 2,859 132
Depreciation on leased assets 115 110 112 116 124 8
Interest income (net of lease depreciation) 1,120 1,104 1,381 1,619 2,735 144
Interest expenses 610 675 866 992 2,059 238
Net interest income 510 428 515 627 675 32
Provisions and write/off 103 28 39 105 106 3
Net interest income (after prov.) 407 400 476 522 569 40
Other income 13 3 15 20 670 5,175
Total income pre loan loss provision 522 431 529 647 1,345 158
Operating expenses 202 153 162 238 594 194
Employee expenses 72 58 61 117 215 197
Admin and other expenses 122 88 94 114 373 205
Depreciation 7 7 7 8 6 (18)
Pretax income 218 251 328 304 645 196
Tax provisions (97) 18 32 20 111 (214)
Net Profit 315 233 296 284 535 70
Net profit after minority interest 315 507 61
PBT before extraordinary items 218 125 (42)
Tax rate(%) (44.7) 7.1 9.8 6.6 17.1

Source: Company.

Srei 4Q08 results (Rs mn)

Reported financials KS estimates
Actual vs KS
Parent JV Consolidated JV (%) Consolidated
Operational income 150 2,585 2,735 1,700 52
Interest expenses 370 1,569 2,059 1,024 53
Provision for forex 120
Net operational income (340) 1,015 675 677 50
Provision expenses 106 106 40 166
Provisions for forex —
Operating expenses 50 544 594 255 113
Other income 640 30 670 —
Profit before tax 250 395 645 382 3
Tax (17) 127 111 32 300
Profit after tax 267 268 535 350 (23) 384
Profit after tax (after minority interest) 507 175 209
Profit before tax (excluding extraordinaries) (270)
Tax rate (%) (7) 32 17 8

Source: Company, Kotak Institutional Equities estimates.

Kotak Institutional Equities Research 7

 India Daily Summary - June 18, 2008

Media Zee Entertainment Enterprises : Announces aggressive push into the

film production business in India
ZEE.BO, Rs234
Rating ADD
Sanjeev Prasad : [email protected], +91-22-6634-1229
Sector coverage view Neutral
Target Price (Rs) 260
Amit Kumar : [email protected], +91-22-6749-3392
52W High -Low (Rs) 410 - 169 • Aims to execute over 180 film projects in six languages over the next three years
Market Cap (Rs bn) 101.6
• Zee Next to be demerged from the ZEEL given massive investment in marketing
Financials and distribution over the next few years; details still unclear
March y/e 2008 2009E 2010E
• Retain ADD rating with a 12-month DCF-based target price of Rs260 pending
Sales (Rs bn) 18.3 20.8 24.2
further clarity on announced plans
Net Profit (Rs bn) 3.5 4.6 6.0
EPS (Rs) 8.2 10.6 13.7 The management of ZEEL in an analysts meeting outlined its plans for an aggressive
EPS gth 49.4 29.7 29.8 foray into the film production business in India. The company is looking to execute
P/E (x) 28.7 22 17.1 over 180 film projects in six Indian languages over the next three years; ZEEL has
EV/EBITDA (x) 18.8 14.7 11.1 already established six internal teams to lead in-house film production as well as
Div yield (%) 0.9 1.1 1.4 signed output deals with about 8-10 directors. The company is targeting revenues of
Rs14 bn and EBITDA margin of 34% from the business in FY2011E. ZEEL has also
decided to demerge Zee Next, the youth-focused flanking Hindi general entertainment
(GE) channel, into a separate entity. The details of the demerger process are not yet
Shareholding, March 2008
clear but the management has guided a loss of Rs500 mn due to Zee Next in the
% of Over/(under)
FY2009E ZEEL financials. We retain our ADD rating and 12-month DCF-based target
Pattern Portfolio weight
Promoters 41.5 - -
price of Rs260 for ZEEL stock pending clarifications on the demerger process and film
production business. We believe the flanking strategy of a second Hindi GEC to
FIIs 27.4 0.4 0.1
support the flagship channel has not worked and thus, the Zee Next demerger may be
MFs 13.6 1.0 0.7
positive for ZEEL.
UTI - - (0.3)
LIC 7.5 0.5 0.2 Aggressive push into film production business. The ZEEL management
announced an aggressive push into the film production business in India with the
formation of Zee Entertainment Studios (ZES); the company is looking to execute over
180 film projects in six Indian languages (Hindi, Tamil, Telugu, Marathi, Bengali and
Gujarati) over the next three years. The management noted the experience of the
group and synergies with other group companies (exhibition, broadcasting and
distribution) for this business. ZEEL plans to establish two production studios—(1) Zee
Motion Pictures for mainstream films and (2) Zee Limelight for niche films—to kick-
start its in-house production. However, the company also plans to aggressively delve
into co-productions, output deals and complete film acquisitions to achieve its targets;
ZES has already signed 8-10 output deals with experienced directors.

The financing for the venture will be done using a mix of internal accruals and equity
dilution in ZES. ZEEL plans to shift its entire library of over 3,300 movie titles to ZES in
addition to the initial financing of Rs1 bn. Thereafter, the company will dilute a
minority stake in ZES, the details of which are being worked out currently, to raise
financing for the next 2-3 years of operations. ZES will utilize the services of group
companies in the exhibition (E-city), broadcasting (ZEEL, Zee News) and distribution
(WWIL, Dish TV) segments to monetize the developed film content. The international
distribution of film content will be handled through the overseas television distribution
arm of ZEEL. The IPR rights of all film content produced and acquired will be globally
managed and monetized by ZES, though some rights will be sold to third parties
initially given the large scale of operations.

8 Kotak Institutional Equities Research

 India Daily Summary - June 18, 2008

Demerger of Zee Next. ZEEL also announced the demerger of Zee Next, the youth-
focused flanking Hindi GE channel, into a separate entity. The management did not
disclose the exact structure of the demerger process since the details are still being
worked out; however, the company did note that the impact of losses in Zee Next
channel will be capped at Rs500 mn in FY2009E ZEEL financials. The company plans
to raise fresh capital in the demerged entity to continue investments in programming,
distribution and marketing of the channel over the next 2-3 years. As we have
previously highlighted, the flanking strategy of a second Hindi GE channel to support
the flagship channel has not worked well in the past for either STAR or Sony, the other
leading broadcasters in India, and we are not sure if the strategy will work for ZEEL.
We note that the channel has had a disappointing run since December, 2007 and the
demerger may be viewed in a positive light by the street depending upon the details of
the demerger process.

Other developments
1. Modest changes to FY2008 financials. The audited FY2008 financial results of
ZEEL were released (see Exhibit 1) and there are modest changes from the financial
results released previously. The key change is reduction in FY2008 consolidated tax
to Rs1.6 bn from Rs1.7 bn previously; the management attributed this to taxation
benefit from accumulated losses of Rs360 mn in the education business (ZILS) which
were included in FY2008 ZEEL financials.
2. Clarification on extraordinary items. The management reiterated that the loss in
its open forex derivative position, which the company entered into three years ago,
is capped at Rs470 mn (US$10.9 mn) for FY2009E at current cross currency rates.
The management also noted the tax credit of Rs574 mn from the Income Tax
department which was paid by the company under protest and for which the
company has recently won the appeal process. Thus, the company will likely report
an extraordinary income of Rs104 mn in FY2009E.
3. Financial guidance for FY2009E—aggressive in our view. ZEEL reiterated its
guidance of 25% revenue growth and 37% EBITDA growth, including the loss of
Rs500 mn in Zee Next but excluding gains from the film production business, for
FY2009E. We find the guidance given by the company to be aggressive given (1)
entry of new Hindi GE channels will further fragment the ad revenue market and (2)
increased competition will also result in greater spending on content and marketing.
We model FY2009E ad and subscription (domestic and overseas) revenue growth of
15.3% and 15.8%, respectively, for ZEEL.
4. Ratings set to improve going forward. The TRP ratings of Zee TV (see Exhibit 2)
have seen a marked improvement in the past few weeks with the close of IPL and
new programming during weekends; we note that ZTV continues to have a strong
lineup of weekday programs in the list of top Hindi GEC programs (see Exhibit 3)
and it is now scaling up its weekend slots with the launch of new action and reality
content, most notably the return of its prime property ‘SaReGaMaPa Challenge’ in
July, 2008. We believe ZTV will likely maintain its strong number two position in the
Hindi GEC genre and improve its TRP ratings going forward driven by continued
investment in content, distribution and marketing.

Kotak Institutional Equities Research 9

 India Daily Summary - June 18, 2008

Zee Entertainment (ZEEL) consolidated interim results, March fiscal year-ends (Rs mn)

qoq yoy yoy

2009E 4QFY08 3QFY08 % chg. 4QFY08 4Q 2007 % chg. 2008 2007 % chg.
Net sales 20,845 5,260 5,182 1.5 5,260 3,844 36.8 18,354 14,412 27.4
Advertisement revenues 10,770 2,466 2,638 (6.5) 2,466 1,849 33.3 9,307 7,064 31.8
Subscription revenues 8,483 2,071 1,950 6.2 2,071 1,849 12.0 7,436 6,606 12.6
Domestic pay-TV 4,425 987 878 12.4 987 854 15.5 3,394 3,064 10.8
International 4,058 1,084 1,072 1.1 1,084 995 8.9 3,933 3,542 11.0
Other sales 1,592 723 594 21.8 723 146 394.1 1,611 742 117.0
Total expenditure (14,093) (3,957) (3,613) 9.5 (3,957) (2,893) 36.8 (13,031) (11,224) 16.1
Transmission and programming cost (8,880) (2,192) (2,549) (14.0) (2,192) (1,632) 34.3 (7,918) (7,353) 7.7
Staff cost (1,558) (406) (312) 30.3 (406) (292) 39.1 (1,438) (1,008) 42.7
Administrative & other costs (3,654) (1,359) (753) 80.5 (1,359) (969) 40.2 (3,675) (2,863) 28.4
EBITDA 6,753 1,303 1,569 (17.0) 1,303 951 36.9 5,323 3,188 67.0
EBITDA margin (%) 32.4 24.8 30.3 24.8 24.8 29.0 22.1
Other income 945 435 238 83.3 435 177 146.5 1,138 630 80.7
Interest (507) (184) (167) 10.4 (184) (8) 2,094.0 (516) (220) 135.0
Depreciation (271) (54) (47) 14.3 (54) (56) (4.1) (232) (228) 2.1
Pretax profits 6,920 1,500 1,592 (5.8) 1,500 1,064 41.0 5,713 3,370 69.5
Extraordinaries — (26) — (26) — (26) — -
Tax (2,135) (430) (458) (6.0) (430) (365) 18.0 (1,627) (964) 68.8
Net income 4,785 1,044 1,135 (8.0) 1,044 699 49.3 4,061 2,407 68.7
Minority interest (187) (120) (38) (120) (95) (333) (212)
Net income after minority interest 4,598 924 1,097 (15.7) 924 604 53.1 3,728 2,195 69.8
Tax rate (%) 30.9 29.2 28.7 29.2 34.3 28.6 28.6

Source: Kotak Institutional Equities estimates.

Zee TV and Star Plus have created a strong positioning for themselves even as other Hindi GE channels faltered
Prime time (7:30-11:30 PM) ratings for Hindi general entertainment channels (%)

(%)
6
NDTV Imagine Sahara One Sony TV 9X Star Plus Zee TV
5

-
Dec-04 Jun-05 Dec-05 Jun-06 Dec-06 Jun-07 Dec-07

Source: TAM Media Research, compiled by Kotak Institutional Equities.

10 Kotak Institutional Equities Research

 India Daily Summary - June 18, 2008

Share of top programs amongst Hindi general entertainment channels (#)

Historical data Recent weeks' data
Week beginning: 27-Mar-05 25-Sep-05 26-Mar-06 24-Sep-06 25-Mar-07 23-Sep-07 23-Mar-08 13-Apr 20-Apr 27-Apr 4-May 11-May 18-May 25-May 1-Jun
Share of top 25 programs amongst Zee, Star, Sony and Imagine
Zee TV — — — 2 4 9 16 13 9 13 10 12 13 12 14
Star Plus 25 25 25 23 21 15 9 12 16 12 15 13 12 13 11
Star One — — — — — — — — — — — — — — —
Sony — — — — — 1 — — — — — — — — —
Imagine — — — — — — — — — — — — — — —
Share of top 50 programs amongst Zee, Star, Sony and Imagine
Zee TV — — 1 10 19 21 22 22 21 22 21 23 22 22 22
Star Plus 42 46 46 39 31 27 27 28 29 28 29 27 28 28 27
Star One — — 1 1 — — — — — — — — — — —
Sony 8 3 1 — — 2 1 — — — — — — — 1
Imagine — — 1 — — — — — — — — — — — —
Share of top 100 programs amongst Zee, Star, Sony and Imagine
Zee TV 8 — 11 23 29 38 37 34 35 35 33 35 32 31 31
Star Plus 68 74 75 73 64 54 55 61 60 60 64 62 65 67 60
Star One — — 1 2 2 — 2 — — — — — — — 1
Sony 24 21 7 2 3 6 2 1 1 1 1 1 1 1 4
Imagine — 4 6 — — — 4 4 4 3 2 2 2 1 4

Source: TAM Media Research, Compiled by Kotak Institutional Equities.

Kotak Institutional Equities Research 11

 India Daily Summary - June 18, 2008

Consolidated profit and loss statement for Zee Telefilms, March fiscal year-ends, 2004-2006, ZEEL, 2007-2012E (Rs mn)

2004 2005 2006 2007 2008E 2009E 2010E 2011E 2012E

Revenues
National Hindi (Zee TV) 2,539 1,826 2,119 3,303 5,099 5,826 6,597 7,542 8,526
National Hindi (Zee Cinema) 756 914 996 1,574 1,830 2,063 2,378 2,719 3,073
Niche channels (English, Music, Zee Next) 965 956 1,081 400 504 716 954 1,161 1,366
Regional channels 1,365 1,324 1,486 — — — — — —
Zee Sports + Taj TV — — 72 1,279 1,436 1,680 1,898 2,140 2,403
Cable TV (Siti) 220 266 261 — — — — — —
Overseas - ZMWL 460 505 557 526 472 485 483 487 498
Others 50 (92) (6) (47) — — — — —
Advertisement 6,355 5,698 6,566 7,035 9,342 10,770 12,309 14,049 15,867
Domestic pay-TV 2,173 2,696 2,801 3,113 3,393 4,425 5,928 7,358 8,839
Overseas 2,569 2,909 3,030 3,933 3,933 4,058 4,244 4,378 4,567
Domestic subscription 1,168 1,002 978 — — — — — —
Others 115 (74) 364 (399) — — — — —
Subscription revenues 6,026 6,533 7,174 6,648 7,326 8,483 10,172 11,736 13,406
Education 131 106 162 205 392 432 475 523 575
Others 1,190 742 2,641 1,271 1,283 1,160 1,217 1,277 1,340
Total revenues 13,702 13,079 16,544 15,159 18,343 20,845 24,173 27,585 31,188
Programming/Content (2,520) (2,611) (4,247) (4,783) (5,067) (5,646) (6,594) (7,476) (8,293)
Broadcasting (618) (675) (515) (564) (516) (506) (503) (506) (516)
Distribution (1,837) (1,534) (2,565) (1,967) (1,538) (1,736) (1,793) (1,841) (1,915)
Other direct operating — — (262) (766) (864) (992) (1,044)
Employees (727) (858) (1,089) (1,017) (1,431) (1,558) (1,682) (1,822) (1,983)
SG&A (3,691) (3,051) (3,431) (2,858) (3,539) (3,654) (3,904) (3,991) (4,396)
Total expenses (9,393) (8,728) (13,848) (11,955) (12,955) (14,093) (15,519) (16,735) (18,260)
EBITDA 4,309 4,351 2,695 3,204 5,388 6,753 8,654 10,850 12,928
Other income 776 521 639 747 911 945 1,019 1,225 1,503
Interest expense (583) (207) (188) (334) (554) (507) (2) — —
Depreciation (320) (329) (360) (185) (222) (271) (283) (290) (300)
Amortization — — — — — — — — —
Pretax profits 4,183 4,336 2,787 3,432 5,524 6,920 9,388 11,785 14,132
Extraordinary items 26 (140) 19 — 174 — — — —
Tax (1,103) (1,123) (528) (926) (1,732) (2,141) (3,230) (4,105) (4,946)
Deferred tax 54 99 (9) (76) (3) 6 12 16 19
Minority interest (192) (50) (117) (58) (245) (187) (205) (271) (303)
Net income 2,969 3,123 2,153 2,373 3,718 4,598 5,966 7,424 8,901
Recurring net income 2,942 3,263 2,134 2,373 3,544 4,598 5,966 7,424 8,901
Fully diluted EPS 7.1 7.5 4.9 5.5 8.2 10.6 13.7 17.1 20.5
Key ratios
EBITDA growth (%) 14.7 1.0 (38.1) 18.9 68.2 25.3 28.2 25.4 19.2
EPS growth (%) 18.2 5.2 (34.6) 11.2 49.4 29.7 29.8 24.8 19.9
EBITDA margin (%) 31.5 33.3 16.3 21.1 29.4 32.4 35.8 39.3 41.5
Tax rate (%) 24.9 24.4 19.1 29.2 30.5 30.9 34.3 34.7 34.9
Shares o/s year end (mn) 412 412 413 434 434 434 434 434 434
Shares o/s fully diluted (mn) 412 435 435 435 435 435 435 434 434

Source: Kotak Institutional Equities estimates.

12 Kotak Institutional Equities Research

 India Daily Summary - June 18, 2008

Consolidated profit model, balance sheet, cash model of Zee Telefilms 2006 and of ZEEL 2007-2012E, March fiscal year-ends (Rs mn)

2006 2007 2008E 2009E 2010E 2011E 2012E

Profit model (Rs mn)
Total revenues 16,544 15,159 18,343 20,845 24,173 27,585 31,188
EBITDA 2,695 3,204 5,388 6,753 8,654 10,850 12,928
Other income 639 747 911 945 1,019 1,225 1,503
Interest (188) (334) (554) (507) (2) — —
Depreciation (360) (185) (222) (271) (283) (290) (300)
Amortization — — — — — — —
Pretax profits 2,787 3,432 5,524 6,920 9,388 11,785 14,132
Extraordinary items 19 — 174 — — — —
Tax (528) (926) (1,732) (2,141) (3,230) (4,105) (4,946)
Deferred tax (9) (76) (3) 6 12 16 19
Minority interest (117) (58) (245) (187) (205) (271) (303)
Net income 2,153 2,373 3,718 4,598 5,966 7,424 8,901
Recurring net income 2,134 2,373 3,544 4,598 5,966 7,424 8,901
Earnings per share (Rs) 4.9 5.5 8.2 10.6 13.7 17.1 20.5

Balance sheet (Rs mn)

Total equity 21,286 26,181 28,885 32,167 36,425 41,724 48,077
Deferred tax balance (148) (75) (72) (78) (91) (106) (125)
Minority interest 458 819 1,063 1,250 1,454 1,726 2,029
Total borrowings 4,901 3,226 2,646 274 — — —
Currrent liabilities 4,346 5,106 3,374 3,669 4,021 4,359 4,694
Total capital 30,844 35,256 35,896 37,281 41,810 47,702 54,675
Cash 1,286 955 2,984 2,695 5,436 9,549 14,726
Current assets 13,574 17,133 15,765 17,510 19,381 21,249 23,145
Net fixed assets 12,948 14,841 14,819 14,749 14,665 14,576 14,476
Investments 3,024 2,326 2,326 2,326 2,326 2,326 2,326
Deferred expenditure 12 2 2 2 2 2 2
Total assets 30,844 35,256 35,896 37,281 41,810 47,702 54,675

Free cash flow (Rs mn)

Operating cash flow, excl. working capital 1,931 1,812 3,277 4,104 5,423 6,745 7,981
Working capital (3,950) (486) (364) (1,450) (1,518) (1,531) (1,560)
Capital expenditure (383) (460) (200) (200) (200) (200) (200)
Investments 418 (4,289) — — — — —
Other income 488 469 911 945 1,019 1,225 1,503
Free cash flow (1,496) (2,954) 3,624 3,399 4,723 6,238 7,724

Revenue model (Rs mn)

Advertising revenues 6,566 7,035 9,342 10,770 12,309 14,049 15,867
Subscription-domestic 2,801 3,113 3,393 4,425 5,928 7,358 8,839
Subscription-overseas 3,030 3,933 3,933 4,058 4,244 4,378 4,567
Subscription-cable 978 — — — — — —
Others 3,168 1,078 1,675 1,592 1,692 1,800 1,915
Total revenues 16,544 15,159 18,343 20,845 24,173 27,585 31,188

Source: Kotak Institutional Equities estimates.

Kotak Institutional Equities Research 13

 India Daily Summary - June 18, 2008

"Each of the analysts named below hereby certifies that, with respect to each subject company and its securities for which the analyst is
responsible in this report, (1) all of the views expressed in this report accurately reflect his or her personal views about the subject
companies and securities, and (2) no part of his or her compensation was, is, or will be, directly or indirectly, related
to the specific recommendations or views expressed in this report: Sanjeev Prasad, Nischint Chawathe."

Kotak Institutional Equities Research coverage universe

Distribution of ratings/investment banking relationships
Percentage of companies covered by Kotak Institutional
70% Equities, within the specified category.

60%
Percentage of companies within each category for which
Kotak Institutional Equities and or its affiliates has provided
50%
investment banking services within the previous 12 months.

40% 37.1%

30.8%
30% * The above categories are defined as follows: Buy = OP;
24.5% Hold = IL; Sell = U. Buy, Hold and Sell are not defined
Kotak Institutional Equities ratings and should not be
20% constructed as investment opinions. Rather, these ratings
are used illustratively to comply with applicable regulations.
10% 3.0% As of 31/03/2008 Kotak Institutional Equities Investment
4.9%
5.2% Research had investment ratings on 143 equity
3.0% 0.0% securities.
0%
BUY ADD REDUCE SELL

Source: Kotak Institutional Equities. As of March 31, 2008

Ratings and other definitions/identifiers

New rating system

Definitions of ratings

BUY. We expect this stock to outperform the BSE Sensex by 10% over the next 12 months.
ADD. We expect this stock to outperform the BSE Sensex by 0-10% over the next 12 months.
REDUCE: We expect this stock to underperform the BSE Sensex by 0-10% over the next 12 months.
SELL: We expect this stock to underperform the BSE Sensexby more than 10% over the next 12 months.

Old rating system

Definitions of ratings

OP = Outperform. We expect this stock to outperform the BSE Sensex over the next 12 months.
IL = In-Line. We expect this stock to perform in line with the BSE Sensex over the next 12 months.
U = Underperform. We expect this stock to underperform the BSE Sensex over the next 12 months.

Our target price are also on 12-month horizon basis.

Other definitions
Coverage view. The coverage view represents each analyst’s overall fundamental outlook on the Sector. The coverage view will consist of one of the following designations:
Attractive (A), Neutral (N), Cautious (C).

Other ratings/identifiers
NR = Not Rated. The investment rating and target price, if any, have been suspended temporarily. Such suspension is in compliance with applicable regulation(s) and/or
Kotak Securities policies in circumstances when Kotak Securities or its affiliates is acting in an advisory capacity in a merger or strategic transaction involving this company
and in certain other circumstances.
CS = Coverage Suspended. Kotak Securities has suspended coverage of this company.
NC = Not Covered. Kotak Securities does not cover this company.
RS = Rating Suspended. Kotak Securities Research has suspended the investment rating and price target, if any, for this stock, because there is not a sufficient fundamental
basis for determining an investment rating or target. The previous investment rating and price target, if any, are no longer in effect for this stock and should not be relied
upon.
NA = Not Available or Not Applicable. The information is not available for display or is not applicable.
NM = Not Meaningful. The information is not meaningful and is therefore excluded.

14 Kotak Institutional Equities Research

 India Daily Summary - June 18, 2008

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