DECEMBER 8, 2011

Economy News
4 The Government on Wednesday suspended its November 24 decision to allow 51 per cent FDI in multi-brand retail. At an all-party meeting, the Finance Minister, Mr Pranab Mukherjee, said the Government would move a proposal in Parliament on Thursday stating, "The decision to permit 51 per cent FDI in multi-brand retail will be suspended till a consensus is developed through consultations with various stakeholders." (BL) 4 The government is likely to allow full foreign ownership in single-brand retail stores, even as it may introduce some riders to avoid a repeat of the furore over its twin proposal to permit the entry of multi-brand global retailers into the country. (ET) 4 The Reserve Bank of India is considering a cut in cash reserve ratio, among other things, amid tight liquidity in the money market and rising demand for easing of monetary conditions to face economic slowdown, a senior central banker said. (ET) 4 Finance minister Pranab Mukherjee on Wednesday told the Lok Sabha that India's economy was in a "difficult situation" due to slowing growth, stubborn inflation and a widening fiscal deficit, but its fundamentals were strong. The finance minister said because of high oil and commodity prices in the international market, expenditure on oil, fertiliser and food subsidies had shot up which could widen the fiscal deficit. (TOI)

Equity
7 Dec 11 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 16,877 5,063 10,553 5,809 10,088 8,441 6,835 6,208 12,196 2,649 5,547 8,722 19,241

% Chg 1 Day 1 Mth 3 Mths 0.4 0.5 0.0 1.4 0.8 0.5 0.2 0.2 0.4 (0.0) (0.4) 1.7 1.6 (3.9) (4.2) (6.6) 0.8 (8.3) (6.5) (6.6) (10.8) 1.1 (1.7) 0.7 (0.2) (3.5) 0.1 (0.0) (4.5) 16.6 (17.4) (2.0) (7.6) (13.7) 6.8 3.9 4.3 (1.8) (4.6)

Value traded (Rs cr)

7 Dec 11 Cash BSE Cash NSE Derivatives 3,071 10,564 111,622 % Chg - Day 70.1 29.6 25.8

Corporate News
4 As currency fluctuation and rising commodity costs put pressure on profit margins, nearly all carmakers such as Maruti Suzuki, Ford, General Motors (GM) and Hyundai have announced price increases from January. While GM and Hyundai plan to increase prices by up to 2%, Ford will increase model prices by a maximum of 3%. Toyota Kirloskar had also recently said that it would up car prices by up to 3%. (BL) 4 SKS Microfinance said it would raise Rs 5bn through qualified institutional placement (QIP) route in the current fiscal. The company's board had given its approval for raising upto Rs 9bn, a top official of the company said. (ET) 4 State-run Power Grid Corporation of India (PGCIL) is in the process of finalising a $ 750 million loan from the Asian Development Bank for one of its transmission projects. (ET) 4 Petronet LNG Ltd will soon finalise an agreement for sourcing liquefied natural gas (LNG) from Russia under a pact with energy giant Gazprom, government statement said on Wednesday. In June, Gazprom had signed a preliminary deal with Petronet for the supply of 2.5 million tonnes of LNG annually. (ET) 4 Fertiliser maker Coromandel International said it has acquired an additional 27.75 per cent stake in Sabero Organics Gujarat. With the acquisition of additional shares, Coromandel International's total stake in Sabero increases to 36.75 per cent. (ET) 4 Engineering major Larsen and Toubro on Wednesday said it has managed to bag five orders in various segments like construction, infrastructure and electricity worth over $500 million. (ET) 4 After pushing the Government to allow foreign airlines to invest in domestic airlines and seeking a debt recast from banks, debt-ridden Kingfisher Airlines may be looking for investment from China. Hong Kong-based private equity firm, Bravia Capital is said to be eyeing an investment in Kingfisher Airlines. (BL)
Source: ET = Economic Times, BS = Business Standard, FE = Financial Express, BL = Business Line, ToI: Times of India, BSE = Bombay Stock Exchange

Net inflows (Rs cr)

5 Dec 11 FII Mutual Fund 212 163 % Chg (70.2) (166.9) MTD 1,829 (80) YTD (1,771) 5,326

FII open interest (Rs cr)

5 Dec 11 FII Index Futures FII Index Options FII Stock Futures FII Stock Options 13,804 46,870 26,136 703 % Chg 0.4 1.7 1.4 5.0

Advances / Declines (BSE)

7 Dec 11 Advances Declines Unchanged A 112 90 2 B 1,146 1,111 91 S 193 159 20 Total % total 1,451 1,360 113 50 47 4

Commodity

% Chg
7 Dec 11 1 Day 1 Mth 3 Mths

Crude (NYMEX) (US$/BBL) 100.4 Gold (US$/OZ) Silver (US$/OZ) 1,738.6 32.7

(0.1) 0.8 0.4

3.7 (3.5) (7.8)

12.7 (6.3) (23.3)

Debt / forex market

7 Dec 11 1 Day 1 Mth 3 Mths 10 yr G-Sec yield % Re/US$ 8.58 51.6 8.60 51.4 9.00 49.1 8.41 46.2

Sensex
21,500 20,000 18,500 17,000 15,500 Dec-10

Mar-11

Jun-11

Sep-11

Dec-11

MORNING INSIGHT

December 8, 2011

MANAGEMENT MEET UPDATE

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

EVEREST KANTO CYLINDER LTD (EKC)

PRICE : RS.41 TARGET PRICE : RS.50 RECOMMENDATION : ACCUMULATE FY13E P/E: 10.1X

q Weak CNG cylinder demand in the country due to factors like delay in rollout of CGD network and increase in price of CNG in Gujarat. q The offtake from Iran continues to remain adversely affected due to geopolitical developments. q The company's FCCB is up for redemption in Oct 2012. The outgo on maturity would be of the order of USD 50 mn (Rs.2.2 bn). The company plans to repay the FCCB through combination of ECB (around USD 25 mn) and interal accruals (cash flow from operations of Rs 1.0 bn in FY13). However, interest outgo would shoot up in FY13 as the FCCB would be replaced by ECB.
Summary table - Consolidated
(Rs mn) Sales Growth (%) EBITDA EBITDA margin (%) PBT Net profit EPS (Rs) Growth (%) CEPS (Rs) FY11 7,763 19.5 1,296 16.7 746 740 6.9 516.6 13.3 FY12E 7,847 1.1 1,444 18.4 763 735 6.9 -0.6 13.2 76.0 1.2 9.4 FY13E 8,788 12.0 1,512 17.2 565 435 4.1 -40.8 11.1 78.5 1.2 5.3 5.7 (3,497) 213 0.9 5.3 10.1 3.8 0.5

q Since our previous update (Reduce at Rs 55), the stock has corrected 24%. While valuations have turned reasonable but near-term outlook for the company remains worrisome. In view of this, we upgrade the stock to ACCUMULATE with a revised price target of Rs.50 (Rs.62 earlier). We have built in further stress in DCF forecast to consider rising working capital (due to inventory accumulation) and margin decline as a result of lower offtake from Iran geography. q Risks and Concerns: Low return ratios and high working capital.

Business Update
n In the domestic market, the company caters to the auto CNG (OEM and after market) and industrial cylinder market. There has been softening of demand for Auto CNG due to factors like delays in rollout of the CGD network in cities, increase in price of CNG in Ahmedabad and overall decline in auto demand. n Adani Group's city gas distribution (CGD) arm Adani Gas that caters to CNG consumers in Ahmedabad and Vadodara has recently announced price increase from Rs 40.50 per kg to Rs 45.50 with effect from November 16. This price hike has been followed by state owned GSPC Gas Company Limited who also took an upward revision in CNG price. As a result, the competitiveness of CNG vs Diesel has diminished in the very important Gujarat market. n Under the Petroleum Ministry's "Vision 2015 document for consumer satisfaction and beyond", the CNG network will be expanded to 200 cities from the present coverage in 35 cities. The PNGRB had called for EOI for rolling out CGD networks in several cities but actual implementation has been dismal partly due to regulatory issues. Hence, despite the advantages of CNG, development of cylinder market in India has been stymied (penetration substantially lower than even Pakistan). n In response to the increase in material prices, EKC had taken a price increase in July 2011. However, competitors have continued to adopt an aggressive pricing strategy. Consequently, EKC may have lost market share in the after-market segment. n Finished Goods inventory has gone up significantly in the domestic CNG segment. For the second quarter, while the company produced 71886 cylinder it could sell only 42403 cylinders. n Volumes from Dubai unit (caters to Iran and Pakistan) declined 14% yoy to 44427 cylinders in Q2FY12. The offtake from Iran was severely curtailed due to payment security issues given the heightened geopolitical risks in the region. The situation has not improved as we write. n Supplies to Pakistan were affected partly due to new norms which required even older players like EKC to go through the entire registration process.

BV (Rs/share) 70.8 Dividend / share (Rs) 1.8 ROE (%) 10.7

ROCE (%) 6.5 7.0 Net cash (debt) (3,210) (3,956) NW Capital (Days) 167 225 EV/Sales (x) EV/EBITDA (x) P/E (x) P/Cash Earnings P/BV (x) 1.0 5.9 5.6 3.2 0.6 1.1 5.9 6.0 3.2 0.6

Source: Company, Kotak Securities - Private Client Research

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MORNING INSIGHT

December 8, 2011

Volumes (cylinders)
Q2FY12 India Dubai China USA Total
Source: Company

Q2FY11 135,364 51,404 17,524 195 204,487

Q1FY12 158,447 63,118 21,393 559 243,517

YoY (%) -7.0 -13.6 52.7 171.8 -3.4

QoQ (%) -20.6 -29.6 25.1 -5.2 -18.9

125,827 44,427 26,767 530 197,551

Capacity (Cylinders nos)

Jumbo Gandhidham Tarapur Dubai China US Kandla Gandhidham II Total
Source: Company

CNG 230,000 100,000 196,000 200,000 0 300,000 0 1026,000

Industrial 140,000 60,000 0 0 0 0 200,000 400,000

1,000 0 0 1,000 3,000 0 0 5,000

Business Outlook
n The company expects to see adverse market conditions in the near future. The status quo on supplies to Iran remains thereby affecting volumes from Dubai unit. n Even in the domestic market, unless there is activity on rollout of the CGD network and improvement in gas-filling infrastructure, the market growth for CNG cylinders would continue to grow at sub-optimal rate. n Competition from smaller players continues to remain strong. Brand loyalty is not high as even smaller players manage to secure ISI certification and are offering competitive prices. n Inventory has increased significantly especially in the auto CNG segment. At the end of Q2 FY12, inventory was up to Rs 2.2 bn vs Rs 1.58 bn in Q2 FY11. n In our view, inventory remains a key monitorable for the company not just because it accounts for a large part of working capital but also because in the past the company had suffered due to accumulation of high cost raw material inventory.

Forex Risk - Highly susceptible to rupee depreciation

n EKC is highly susceptible to foreign exchange fluctuation. The company has foreign currency borrowings of around USD 62 mn. Due to rupee depreciation of 9.7% in Q2 FY12, the company booked a forex loss of Rs 234 mn in that quarter. Even in the current quarter, the Rupee is already down 5%, which may entail further MTM hit in Q3 FY12. n In addition to this, EKC imports its raw material (tubes) from suppliers in South America and China. These imports are also denominated in USD. Thus, we see further pressure on profitability in Q3 FY12 quarter due to forex fluctuation.

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December 8, 2011

Foreign Currency Borrowings

USD (mn) FCCB ECB Working Capital Total
Source: Company

Repayable Oct-12 Mar-2012 and Sep-2012

35 7 20 62

Financial Outlook - Interest burden to depress profitability in FY13

n The company has FCCB outstanding of USD 35 mn convertible at Rs 271 per share and maturing October 2012. Given that conversion appears unlikely, the company will have to redeem the bonds which on maturity amount to USD 50 mn (Rs 2.2 bn). We project free cash flow of Rs 533 mn and Rs 1382 mn in FY12 and FY13 respectively. n The company plans to refinance the USD 50 mn payment through a fresh ECB loan of USD 25 mn. It expects to repay the balance USD 25 mn (Rs 1.3 bn) through internal accruals. n Redemption premium paid on FCCB shall be accounted as securities premium reserves in the balance sheet. n Since the company is not booking any interest on FCCB loan, we expect interest expenses to go up as the company would be refinancing the FCBB with an ECB borrowing. We forecast interest expenses to grow 184% in FY13. n The company has increased its capacity substantially in the past two years and foresees minimal capex in FY12 and FY13. Thus it expects to generate adequate surplus to meet the repayment. n Capex is likely to remain in the range of Rs 100-150 mn in FY13. n Tax rate is likely to remain between 20-25% since the company's Dubai operations enjoy zero tax status and its operations at China may continue to remain in red. Thus, we project 41% decline in earnings in FY13.
Earnings Revision
FY12 (Rs mn) Revenue EBITDA (%) EPS (Rs) % change
Source: Kotak Securities - Private Client Research

FY13 Revised 7,847 18.4 6.9 -8.0 Earlier 9,086 19.0 4.5 Revised 8,788 17.2 4.1 -10.0

Earlier 8,113 19.1 7.5

Valuation & Recommendation

n At the current price of Rs.42, EKC is trading at 0.5x book value, 10.1x earnings and 3.8x cash earnings based on FY13E.
We recommend ACCUMULATE on EKC with a revised price target of Rs.50

n Since our previous update (Reduce at Rs 55), the stock has corrected 24%. While valuations have turned reasonable but near-term outlook for the company remains worrisome. In view of this, we upgrade the stock to Accumulate with a revised price target of Rs 50 (Rs 62 earlier). We have built in further stress in DCF forecast to consider rising working capital (due to inventory accumulation) and margin decline as a result of lower offtake from Iran geography.

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MORNING INSIGHT

December 8, 2011

Bulk deals

Trade details of bulk deals

Date Scrip name Name of client Buy/ Sell S B S B B B S S B S B B S B B B B S S S B S B B B S S B B S B S S B S B S S B B B S S S B Quantity of shares 10,756 24,307,241 28,807,241 100,000 100,000 255,000 100,000 165,000 35,000 150,000 245,902 100,550 100,550 37,500 37,500 55,000 32,200 33,200 40,200 36,000 560,220 560,220 45,499 26,300 33,000 39,300 99,975 30,000 37,071 37,071 249,001 106,318 103,155 32,000 24,000 31,858 25,598 48,000 40,800 40,335 40,000 92,000 38,732 25,000 50,000 Avg. price (Rs) 23.3 325.0 325.0 44.4 44.5 44.4 44.5 44.5 27.6 27.6 10.2 215.3 215.3 15.5 15.5 15.5 15.5 15.5 15.5 15.5 138.8 138.8 70.0 151.9 154.4 152.3 19.7 54.0 76.1 76.1 87.4 87.6 87.7 349.1 31.1 20.2 13.0 25.2 245.1 23.3 23.6 23.2 22.2 13.8 60.1

7-Dec 7-Dec 7-Dec 7-Dec 7-Dec 7-Dec 7-Dec 7-Dec 7-Dec 7-Dec 7-Dec 7-Dec 7-Dec 7-Dec 7-Dec 7-Dec 7-Dec 7-Dec 7-Dec 7-Dec 7-Dec 7-Dec 7-Dec 7-Dec 7-Dec 7-Dec 7-Dec 7-Dec 7-Dec 7-Dec 7-Dec 7-Dec 7-Dec 7-Dec 7-Dec 7-Dec 7-Dec 7-Dec 7-Dec 7-Dec 7-Dec 7-Dec 7-Dec 7-Dec 7-Dec

Aviva Inds Cairn India Cairn India Clarus Finance Clarus Finance Clarus Finance Clarus Finance Clarus Finance Dhvanil Chem Dhvanil Chem Excel Info Exedy Ind Exedy Ind Gflfin Gflfin Gflfin Gflfin Gflfin Gflfin Gflfin Kanani Inds Kanani Inds Kanchan Intl Krishna Deep Krishna Deep Krishna Deep Kwality Cred Maestros Med-$ Master Trust Master Trust Mb Switch Mb Switch Mb Switch Nikki Global Parichay Invest Pasupati Fin Raj Packaging Ram Kaashyap Ravinay Trad Scope Ind Scope Ind Scope Ind Scope Ind Sheetal Diam Tricomfru

Dave Harihar Kiritbhai Sesa Goa Ltd Cairn Uk Holdings Ltd Muskan Agencies & Trading Ltd Variety Trade Link Pvt Ltd Shree Thirumalai Mktg & Investmts Swift Tie Up Pvt Ltd Jineshwar Enterprises (P) Ltd Ganesh Bhagoji Khaire Deep Capital Services Pvt Ltd Arcadia Share & Stock Brokers LkpfinanceLtd Tass Overseas Pvt Ltd Jayshree Shankar Bhosle Chirag Dineshkumar Shah Namdeo Shantaram Gole Ronak Ashwin Sanghavi Sitara Fincom Pvt Ltd Aditi Trade And Finance Pvt Ltd Garima Vanijya (P) Ltd Alpesh Vinubhai Kanani Vinubhai L Kanani Ganesh Anant Ghadge Hotel Polo Towers Pvt Ltd Money Managers Shiv Sharma Miatru Agro Marketing Pvt Ltd Balkrishna Kamalakar Tendulkar Shivalik Securities Ltd. Sanjeev Arora Regency Trust Ltd Sohit Infrabuild Pvt Ltd Rupak Trading Pvt Ltd Ram Chandra Mourya Dipali Tejas Thadesar Usmanbhai Kadadbhai Nurani Madanchand Prasanchand Sangeeta Management Cons Pvt Ltd Hotel Polo Towers Pvt Ltd Reddy Sreenivas Kallem Gopala Krishna Bonam Umadevi Alluri Pratiksha Moralkumar Jani Bindiya Shah Nilesh Chandulal Panchamia

Source: BSE

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MORNING INSIGHT

December 8, 2011

Gainers & Losers

Nifty Gainers & Losers

Price (Rs) Gainers Infosys HDFC SBI Losers Bharti Airtel ICICI Bank NTPC'
Source: Bloomberg

chg (%)

Index points

Volume (mn)

2,759 676 1,945 377 768 170

2.1 2.0 1.8 (3.4) (1.5) (3.3)

9.2 5.8 2.9 (5.2) (4.4) (2.4)

1.0 3.5 3.3 7.5 6.5 2.4

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 Automobiles 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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