APRIL 25, 2012

Economy News
The Supreme Court has extended the deadline for fresh auction of the 2G spectrum to August 31, 2012 from the earlier June 2 time limit. The court also extended the validity of the 122 cancelled licenses till September 7 (BL). Food inflation in March stood at a five-month high of 9.94 per cent. Food prices are unlikely to decline in the next six months, due to factors ranging from increasing demand to production shortfall, especially of vegetables (BS) Sugar production in India could decline by 5% to 24.5 million tonne in 2012-13, according to the International Sugar Organization (ISO) (ET). Paving way for highway builders to avail easy bank loans, the government has relaxed the taxation norms, allowing depreciation for the full concession period of the toll projects (ET).

Equity
% Chg 24 Apr 12 Indian Indices SENSEX Index NIFTY Index BANKEX Index BSET Index BSETCG INDEX BSEOIL INDEX CNXMcap Index BSESMCAP INDEX World Indices Dow Jones Nasdaq FTSE NIKKEI HANGSENG 1 Day 1 Mth 3 Mths

17,207 5,223 11,768 5,562 9,469 7,935 7,490 6,790 13,002 2,962 5,709 9,468 20,677

0.6 0.4 (0.3) 4.9 (1.3) (0.0) (0.3) (0.1) 0.6 (0.3) 0.8 (0.8) 0.3

(0.9) (1.1) (0.8) (8.7) (6.4) (1.5) (2.4) 2.5 (0.6) (3.5) (2.5) (4.6) 0.1

0.8 1.2 3.9 (1.2) (6.9) (4.6) 6.2 6.0 1.9 5.1 (0.2) 7.6 2.9

Corporate News
Tech Mahindra and Mahindra Satyam has tied up with CA Technologies for system integration partnership globally. The global framework agreement (GFA) is aimed at building a business model where shared and managed services can be provided to new and existing customers through a joint and strategic approach (ET). CCI has approved the merger of Sterlite Industries and Sesa Goa that was announced by its parent company Vedanta Resources on February 25 this year. The merger will create the seventh largest natural resources company in the world in terms of operating profits (ET). Gulf Oil Corporation, a Hinduja Group venture, and L&T Komatsu have signed up to market co-branded range of lubricants. L&T-Komatsu Ltd is a joint venture of L&T and Komatsu Ltd, the latter a major manufacturer of hydraulic excavators (BL) Power producers including the country's largest player NTPC have refused to sign the new fuel supply agreement with Coal India stating that the proposed contract is biased and absolves the state-owned company of all obligations (ET). The Alstom-Bharat Forge venture has bagged an order worth Rs 15.7 bn from NTPC Ltd. The joint venture, expected to be commissioned by 2013, will have an annual capacity to make power equipment of 5,000 megawatt (MW) at Mundra, in Gujarat (BL). Essar Shipping is planning to cut its $1.1 billion debt . Company stated that fine-tuning of finance costs would help improve margins. In the quarter ended December, interest and finance expenses increased 39 per cent as compared to the year before (BL). Talks between Godrej Properties and GIC Real Estate, part of Singapore government's sovereign fund GIC, to invest over $100 million into the developer's Bandra-Kurla Complex project has been called off (ET). Diageo has mandated investment banking firm JM Financials to negotiate a deal that could result in it owning a minority stake in United Spirits. Negotiations are underway to structure a deal that would arm Mallya with enough cash to revoke pledges on shares of United Spirits (ET).

Value traded (Rs cr)

24 Apr 12 Cash BSE Cash NSE Derivatives 2,268 11,852 150,123 % Chg - Day 14.6 26.8 12.8

Net inflows (Rs cr)

23 Apr 12 FII Mutual Fund (339) (101) % Chg (203.2) (201.5) MTD 538 (431) YTD 44,575 (5,861)

FII open interest (Rs cr)

23 Apr 12 FII FII FII FII Index Index Stock Stock Futures Options Futures Options 11,965 39,957 24,154 1,214 % Chg 4.7 1.5 1.2 (4.2)

Advances / Declines (BSE)

24 Apr 12 Advances Declines Unchanged A 103 97 3 B 992 1,069 78 T 235 233 32 Total % total 1,330 1,399 113 47 49 4

Commodity

% Chg
24 Apr 12 1 Day 1 Mth 3 Mths

Crude (NYMEX) (US$/BBL) 103.7 Gold (US$/OZ) 1,641.4 Silver (US$/OZ) 30.8

0.1 0.6 0.7

(3.0) (1.3) (4.4)

4.3 (2.8) (6.1)

Debt / forex market

24 Apr 12 1 Day 1 Mth 3 Mths 10 yr G-Sec yield % Re/US$ 8.57 52.8 8.57 52.5 N/A 51.3 8.40 50.1

Sensex
21,400 19,800 18,200 16,600

Source: ET = Economic Times, BS = Business Standard, FE = Financial Express, BL = Business Line, ToI: Times of India, BSE = Bombay Stock Exchange

15,000 Apr-11

Jul-11

Oct-11

Jan-12

Apr-12

MORNING INSIGHT

April 25, 2012

INDUSTRY UPDATE
Sanjeev Zarbade sanjeev.zarbade@kotak.com +91 22 6621 6305

AIRCONDITIONING INDUSTRY
We spoke with the President of Refrigeration and Airconditioning Association (RAMA) on the outlook for the Airconditioning industry in context of the ongoing busy summer season. In view of subdued market condition for AC manufacturers, we recommend ACCUMULATE on Voltas and Blue Star. Investors can buy on decline.

Market scenario The April-June quarter is the busiest season for the room AC industry (accounting for roughly 35-40% of annual sales). For the ongoing quarter, the expectation is of 10-15% growth on a yoy basis.
There are reports of unseasonal rains and thunder squall across states in northern India, which has kept temperatures at tolerable levels. Reportedly, this has slowed down sales of ACs. Northern India is the biggest contributor to AC sales and is estimated to contribute 35-40% to overall volumes. Other than the North, most other regions are reeling under high temperature and offtake has been healthy. In the previous fiscal, the offtake during the peak Summer season turned out to be much lower than expectations. Consequently, manufacturers were saddled with excess inventory. We understand that excess inventory has been largely liquidated. The worry for the industry is that the slow start to the season comes over a poor 2011, where sales had dropped year-on-year. Against the estimated 3.3 million AC units sold in 2010, sales fell to about 3.1 million units last year. For the current year, it is expected that overall growth in volumes should be in the range of 10-15%.
Region-wise Room AC volume mix

Competitive Scenario The Japanese have traditionally been catering to the premium range of ACs. However, there appears to be a change in strategy since past year wherein the Japanese manufacturers are rationalizing prices in an effort to gain market share in the mass segment. In the previous year, Daikin had resorted to aggressive pricing, while in the current year, Panasonic is reported to have priced its models competitively.
It is largely expected that Panasonic and Hitachi would gain market share at the expense of incumbents like Samsung and LG. Blue Star has never been a serious contender in the retail segment of room ACs though it has recently increased its focus in this segment. To that extent, it may have also gained some market share. The company's products are priced at the higher end of the price range.

Source: Industry data

Cost pressures at elevated levels In addition to the poor demand, cost pressures have also been building up for manufacturers. Prices of Copper and Aluminum have been higher during the year. Also, due to the depreciation in INR, cost of imported components has increased. Some manufacturers have shifted to offering condensor coils made of aluminum instead of copper as the former costs less.
Manufacturers have also taken price hikes across product categories in the range of 5-25% over the past twelve months in response to elevated cost pressures. A 1.5 ton split AC is being offered in a price range of Rs 26000-35000 (3 star). Panasonic, Eletctrolux and Whirlpool ACs are in the lower range while Blue star, Hitachi and Carrier ACs are priced at the higher end. Established players like Samsung, LG and Voltas have priced their models in between. Most ACs are available in the 3 star and 5 star category with difference in the price varying between Rs 3000-5000.

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MORNING INSIGHT

April 25, 2012

Stock Performance AC manufacturing stocks have done well in the since March on the back of expectations of a strong summer season driving demand for ACs. The upmove is stronger in case of pure consumer durables stocks like Hitachi and Whirlpool.
Stock performance
(Rs) Voltas Blue Star Hitachi Whirlpool Fedders 1/3/2012 113 185 128 180 58 CMP 116 184 143 218 57 % change 2.0 (1.0) 12.0 21.0 (3.0)

Source: Kotak Securities - Private client Research

Outlook and Recommendation AC (room as well as central) manufacturers and contractors have struggled in past two years due to sluggish demand and elevated cost pressures.
Voltas (CMP Rs 115, TP Rs 122, Accumulate): In Q3FY12, Voltas accounted for the entire estimated loss pertaining to its ongoing project for Sidra Medical in Qatar as extraordinary loss. Consequently, sans Sidra Medical, the profitability in the projects division appears to be much healthier than previously believed. Key determining factors in the future would be order intake, material prices (aluminum) and INR movement Blue Star (CMP Rs 186, TP Rs 215, Accumulate): The company has continued its process of reviewing the project costs and expects to take further cost increase of Rs 300 mn at EBITDA level in Q4 FY12. Sequentially, EBITDA margins should expand in FY13 but may still remain below historical levels. The company has indicated that projects won in FY12 are at reasonably good margins, which should support margin improvement in FY13 and beyond. The company has been able to reduce its working capital and borrowings in FY12. This process would continue in FY13 as well. We believe the worst is over for the company in terms of deterioration in balance sheet and earnings. Upgrade to ACCUMULATE with a unchanged price target of Rs..215.

Valuation
Rs mn Voltas Blue Star Hitachi Home Fedders Loyd CMP (Rs) 116 185 128 58 Mcap (Rs mn) 38338 16721 3508 1774 EBITDA (%) 9MFY12 9MFY11 6.20 1.30 1.9 10.6 9.20 7.70 7.6 11.1 FY11 9.6 17.1 12.8 13.1 EPS (Rs) FY12E 7.3 -1.6 na na FY13E 9.2 13 na na FY11 12.1 10.9 10.0 4.4 PE (x) FY12E 15.9 -116.3 na na FY13E 12.6 14.3 na na

Source: Companies, Kotak Securities - Private Client Research

Kotak Securities - Private Client Research

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MORNING INSIGHT

April 25, 2012

Bulk deals

Trade details of bulk deals

Date Scrip name Name of client Buy/ Sell Quantity of shares Avg. price (Rs) 0.4 40.5 87.2 48.4 19.1 19.2 53.5 13.2 13.2 2.4 2.4 2.4 2.4 80.9 81.0 67.5 65.1 63.0 67.7 67.7 61.3 29.8 29.8 69.2 48.9 48.9 48.9 19.7

24-Apr 24-Apr 24-Apr 24-Apr 24-Apr 24-Apr 24-Apr 24-Apr 24-Apr 24-Apr 24-Apr 24-Apr 24-Apr 24-Apr 24-Apr 24-Apr 24-Apr 24-Apr 24-Apr 24-Apr 24-Apr 24-Apr 24-Apr 24-Apr 24-Apr 24-Apr 24-Apr 24-Apr

ACIL Action Fin Dinesh Allorga Finalysis Cred Global Sec Global Sec Jaihind Syn Jaihind Syn Jayant Merc Jayant Merc Jayant Merc Jayant Merc Mathew Easow Mathew Easow Parichay Invest Parichay Invest Parichay Invest Parichay Invest Parichay Invest Parichay Invest Raymed Labs Raymed Labs Shalibhadra Fin Suryanagri Fin Suryanagri Fin Suryanagri Fin Venus Power

Pragati Shares & Stock Services Somya Traders Pvt Ltd Payal Udaybhai Mehta Dharmendra Harilal Bhojak Nishith Babulal Shah Dharmendra Harilal Bhojak Ankit Sodhani Jemin Vijay Rathod Kantilal Mehta Atulbhai Aristo Media & Entertainment Supriyaben Atulbhai Mehta Laxmidevi Gopikumar Singhania Amrabathi Investra Pvt Ltd Priti A Doshi Jhaveri Sanjeev Burman Brijesh Pravinchandra Parmar Vipul Virendrakumar Patel Virendrakumar Jayantilal Patel Bhavnaben Virendrakumar Patel Bhavanaben M Virwani Narottam Kumar Singh Vinod Gupta Jigneshkumar Harshvadan Gandhi Brain Business Pvt. Ltd Digvijay Vinimay Pvt Ltd Sanjay Chimanlal Agrawal Naval Kishore Loya

S B S B B S B B B B B B S B S B B B S S S B S S B B S B

3,111,789 118,525 24,000 49,600 200,000 214,500 40,000 24,000 25,000 125,000 500,000 125,000 750,000 125,900 93,015 41,910 10,774 10,636 10,670 27,615 7,000 28,191 30,000 25,994 40,000 40,000 100,000 105,000

Gujarat Narm Fly Namdeo Shantaram Gole

Source: BSE

Kotak Securities - Private Client Research

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MORNING INSIGHT

April 25, 2012

Gainers & Losers

Nifty Gainers & Losers

Price (Rs) Gainers TCS Infosys Wipro Losers L&T HDFC Bank Bharti Airtel
Source: Bloomberg

chg (%)

Index points

Volume (mn)

1,194 2,350 442

12.2 1.7 4.2

21.4 6.0 3.0

9.1 6.6 1.9

1,219 542 307

(2.8) (0.6) (1.7)

(6.2) (2.0) (2.0)

2.8 2.2 13.8

Fundamental Research Team

Dipen Shah IT, Media dipen.shah@kotak.com +91 22 6621 6301 Sanjeev Zarbade Capital Goods, Engineering sanjeev.zarbade@kotak.com +91 22 6621 6305 Teena Virmani Construction, Cement, Mid Cap teena.virmani@kotak.com +91 22 6621 6302 Saurabh Agrawal Metals, Mining agrawal.saurabh@kotak.com +91 22 6621 6309 Saday Sinha Banking, NBFC, Economy saday.sinha@kotak.com +91 22 6621 6312 Arun Agarwal Auto & Auto Ancillary arun.agarwal@kotak.com +91 22 6621 6143 Ruchir Khare Capital Goods, Engineering ruchir.khare@kotak.com +91 22 6621 6448 Ritwik Rai FMCG, Media ritwik.rai@kotak.com +91 22 6621 6310 Sumit Pokharna Oil and Gas sumit.pokharna@kotak.com +91 22 6621 6313 Amit Agarwal Logistics, Transportation agarwal.amit@kotak.com +91 22 6621 6222 Jayesh Kumar Economy kumar.jayesh@kotak.com +91 22 6652 9172 K. Kathirvelu Production k.kathirvelu@kotak.com +91 22 6621 6311

Technical Research Team

Shrikant Chouhan shrikant.chouhan@kotak.com +91 22 6621 6360 Amol Athawale amol.athawale@kotak.com +91 20 6620 3350 Premshankar Ladha premshankar.ladha@kotak.com +91 22 6621 6261

Derivatives Research Team

Sahaj Agrawal sahaj.agrawal@kotak.com +91 22 6621 6343 Rahul Sharma sharma.rahul@kotak.com +91 22 6621 6198 Malay Gandhi malay.gandhi@kotak.com +91 22 6621 6350 Prashanth Lalu prashanth.lalu@kotak.com +91 22 6621 6110

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