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AUGUST 23, 2011

Economy News
4 The global steel production in July rose by 11.5% to 127 million tonne over the same month last year, the World Steel Association (WSA) said. India's contribution to the world's kitty was nearly 5% or 6.16 million tonne. This is, however, an increase of 6.3% from 5.79 million tonne recorded in the same month last year. (BS) 4 Suggesting strong measures to track black money, accounting regulator the Institute of Chartered Accountants of India (ICAI) said new foreign banks should be granted licences only if they agree to furnish details on "investment made by Indian people outside India". Apart from this, the ICAI also pitched for making it compulsory for revealing the source of funds of foreign donations coming into India to prevent money laundering. (BS) 4 Most of the developed nations witnessed slowing economic activities in the June quarter, latest OECD data showed indicating that the global economy is heading towards slowdown. The overall GDP in the OECD region, a grouping of mostly industrialised nations, slipped to 0.2% in three months ended June 2011 -- a decline in growth for the fourth consecutive quarter. (BS) 4 One of the major assumptions that helped the Planning Commission project an ambitious 9 per cent growth in the gross domestic product over the next five years is an improving energy elasticity of the economy. But this assumption, which forms a vital base for the government's approach paper for the 12th Five-Year Plan, could be misplaced, experts believe. (BS)

Equity
22 Aug 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 16,342 4,899 10,749 4,710 11,724 8,357 7,239 7,113 10,855 2,345 5,095 8,628 19,487

% Chg 1 Day 1 Mth 3 Mths 1.2 1.1 (0.1) (0.6) 1.6 2.5 1.5 1.5 0.3 0.2 1.1 (1.0) 0.4 (12.7) (13.0) (16.7) (20.6) (14.5) (9.1) (11.2) (16.0) (14.4) (18.0) (14.1) (14.8) (13.5) (9.2) (9.1) (9.0) (21.7) (8.5) (9.2) (6.9) (11.7) (12.3) (15.0) (12.7) (8.7) (14.5)

Value traded (Rs cr)


22 Aug 11 Cash BSE Cash NSE Derivatives 1,960 9,618 163,236 % Chg - Day (10.8) (8.5) (14.4)

Net inflows (Rs cr)


19 Aug 11 FII Mutual Fund (1,281) (33) % Chg 214.3 (137.1) MTD (7,514) 1,584 YTD 1,951 5,461

Corporate News
4 India's largest real estate developer, DLF, plans to reduce its debt by Rs 25-30 Bn by the end of this financial year, according to group executive director Rajeev Talwar. The company aims to cut debt through the divestment of non-core assets, including hotels and plots of land that cannot be developed in the next five years . (BS) 4 JSW Ispat Ltd has completed the Rs 60 Bn debt refinancing deal. A source close to the development confirmed the new average interest rate for the refinance is 11.75 per cent, lower than the earlier rates. (BS) 4 Hyderabad-based GVK Power & Infrastructure is all set to become the single largest shareholder of Bangalore International Airport. The company said it was paying Rs. 114 for each equity share to Siemens Project Ventures to buy the latter's 14 per cent stake in Bangalore International Airport Ltd. The company, which also runs Mumbai International Airport, will pay close to Rs. 6.14 Bn, valuing the Bangalore project at almost Rs 44.4 Bn. (BS) 4 BL Bagra, chairman and managing director of National Aluminium Company (Nalco), said the aluminium major does not need to tap the markets in the next three years for expansion, but it is up to the government to take a call on disinvesting its stake in the company. The government, with 87.15% holding in Nalco, has put the company on its disinvestment radar during the current fiscal. (BS) 4 The downturn in global markets has taken a toll on Essar Oil's plans to raise $1.5 billion in foreign currency loans to finance its expansion plans and forced the company to look for options in a difficult environment. (ET)

FII open interest (Rs cr)


19 Aug 11 FII Index Futures FII Index Options FII Stock Futures FII Stock Options 14,005 52,844 30,355 698 % Chg (5.1) 6.9 5.0 13.7

Advances / Declines (BSE)


22 Aug 11 Advances Declines Unchanged A 149 52 0 B 1,412 700 74 S 240 264 27 Total % total 1,801 1,016 101 62 35 3

Commodity

% Chg
22 Aug 11 1 Day 1 Mth 3 Mths

Crude (NYMEX) (US$/BBL) Gold (US$/OZ) Silver (US$/OZ)

84.6

0.3 1.9 2.4

(15.2) 18.6 8.8

(13.4) 25.3 24.6

1,887.5 43.4

Debt / forex market


22 Aug 11 1 Day 1 Mth 3 Mths 10 yr G-Sec yield % Re/US$ 8.38 45.73 N/A 45.75 8.43 44.36 8.48 45.24

Sensex
21,100 19,400 17,700 16,000 Aug-10

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

Nov-10

Feb-11

May-11

Aug-11

MORNING INSIGHT

August 23, 2011

SECTOR UPDATE
Sanjeev Zarbade sanjeev.zarbade@kotak.com +91 22 6621 6305 Ruchir Khare ruchir.khare@kotak.com +91 22 6621 6448

CONSUMER DURABLES INDUSTRY


q The consumer durables industry has slowed down considerably in recent months as reflected by the Q1 FY12 numbers. Fan industry that constitutes a major part of Indian consumer appliances market, grew by 3% YoY in Q1FY12 due to lighter summer season in north Indian region q The room AC industry is witnessing higher competition through entry of new players and excess inventory levels. Margins could continue to be under pressure. q We prefer Voltas, Bajaj Electricals and Havells within our consumer durables coverage. We maintain reduce on Blue Star.

Consumer durables index has slowed down sharply in recent months


The index for consumer durables has slowed down significantly in the past few months. While for FY11, the sector recorded a growth of 14%, the same in the Q1 FY12 has slowed down to 3.3% yoy. Apart from the impact of higher base of FY11, the slowdown in the index reflects moderation in demand trends most likely due to higher interest rates. Some of the consumer durable companies under our universe of coverage posted lower than expected revenue growth in the quarter. The situation has been aggravated by volatility in the commodity prices, which has eroded sector profitability.
YoY change in monthly consumer durables index
25.0% 20.0% 15.0% 10.0% 5.0% 0.0% Apr-10 Jun-10 Aug-10 Oct-10 Dec-10 Feb-11 Apr-11 Jun-11

Source: Bloomberg

Fans & luminaries also hit by lower demand


Fan industry that constitutes to a major part of Indian consumer appliances market, grew by 3% YoY in Q1FY12 due to lighter summer season in north Indian region. This is reflected in weaker set of nos reported by key players like Havells India, Bajaj electrical and Crompton Greaves. Weaker summer has also resulted in the piling up of inventory (mainly coolers and fans) resulting in higher working capital interest charges for almost all the companies in the quarter. We interacted with the managements of various companies post Q1FY12 results. Crompton Greaves has outlined a cautious outlook for next few quarters. However management of Havells and Bajaj electricals are confident of maintaining margins going ahead on account of 1) steady cost management across the board 2) increase in contribution from new product launches going ahead.

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MORNING INSIGHT

August 23, 2011

EBITDA
(%) Havells India Bajaj Electricals Crompton Greaves V-Guard Industries Khaitan Electricals IFB Industries
Source: Company

Q1FY12 11.03 5.66 13.77 9.65 5.59 10.98

Q1FY11 11.18 8.69 16.69 12.04 5.31 10.86

Room Airconditioning industry logged lower volumes in Q1 FY12


The room Airconditioning industry reported strong volume growth of 35% in 2010 driven by severe summer season coupled with rising disposable incomes. However, due to a compressed summer season during 2011, volumes in Q1 FY12 have seen a drop of 15% yoy. The general slowdown in economic growth also aided to the downturn in industry volumes. Companywise, Voltas managed to contain the drop in volumes at 11% and in the process consolidated its market share and position at number 2 in the industry. Despite the drop in industry volumes, Blue Star clocked strong volumes in the quarter due to company's foray into retail channels and widening of the range of models. The company also extended its coverage through dealer network. In recent months, there has been some changes in market shares with the Korean companies LG and Samsung losing market share to Japanese companies like Hitachi, Daikin and Panasonic. These Japanese companies have traditionally positioned their product in the premium range but have now reduced the price gap. The market is also getting increasingly fragmented with the entry of new players - the top 3 players now account for roughly 60% of the total opportunity as compared to greater than 65% some months ago. As indicated earlier, the demand for room ACs was robust in 2010 but fell from cliff since March 2011. As a result, manufacturers were taken for a surprise in this seasonally strong quarter. Consequently, the industry is now grappling with excess inventory. Given the competitive nature of the industry, pricing could remain constrained as manufacturers seek to liquidate the inventory.
EBIT (Room ACs)
(%) Voltas* Blue star* Hitachi Whirlpool Symphony IFB
Source: Company; *Segment margins

Q1 FY12 11.3 13.5 8.9 8.0 26.7 7.3

Q1 FY11 9.3 13.9 7.4 9.7 34.8 9.4

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MORNING INSIGHT

August 23, 2011

Business Outlook - Corporate profits to continue to be under pressure in near term


In the shorter term, continuing inflationary pressures and high interest rates is expected to have an impact on the consumer durables business. Higher inventory levels in the AC segment remains a concern. However, the longer-term drivers remain in place. With just 3% households having an AC, there is huge scope for growth in the segment in the country. The domestic Room AC industry is expected to continue to grow at the rate of 20-25% in the years ahead, though there exists a distinct possibility of slightly tempered growth this year, on account of factors discussed earlier. Higher disposable incomes and rising wages, coupled with low penetration of ACs, will continue to drive demand. We opine that the Indian consumer space has been undergoing a major change in terms of consumer preference toward the branded products, manufactured by the organized players over the unorganized sector. We therefore believe that strengthening of dealer network and introduction of new products on constant basis are likely to be the two fold strategy employed by any player to succeed in the highly competitive and challenging business environment.

Recommendation
In the universe of consumer durable companies under our coverage, we prefer Bajaj Electricals, Havells India and Voltas. n Voltas - Well entrenched position in domestic and Middle East markets. Unleveraged balance sheet and attractive valuations at 12.2x FY12 earnings. Target price of Rs 171. n Bajaj Electricals - We recommend Bajaj Electricals for being the direct play on the domestic market. Company has a pan India presence and enjoys dominating position in its key geographies. PEx at current price11.4, TP: Rs.285. n Havells - We also prefer Havells India for being geographically diversified player in the consumer appliances space. Company enjoys strong brand positioning in north and east India and is constantly gaining ground in the western region as well. Havells has successfully aligned the operations of its key subsidiary Sylvania in last two years. PEx at current price13, TP: Rs.410.

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MORNING INSIGHT

August 23, 2011

Bulk deals

Trade details of bulk deals


Date Scrip name Name of client Buy/ Sell B S S B B S B B B B B B B S S B S S B B S B B S B S Quantity of shares 78,441 80,000 152,730 1,105,000 800,000 1,000,000 1,458,453 1,460,000 2,045,680 22,000 19,200 30,000 30,000 30,000 50,000 50,000 40,000 134,500 65,500 69,590 27,000 27,000 59,067 161,570 162,702 97,332 110,000 Avg. price (Rs) 4.8 4.8 17.9 19.3 19.2 19.5 68.0 68.0 80.9 108.5 108.8 108.8 108.9 108.9 108.9 108.9 24.7 24.7 24.7 215.9 11.0 11.0 25.0 51.0 51.0 70.0 70.1

22-Aug BGIL Films 22-Aug BGIL Films 22-Aug Bhoruka Alum

Inder Pal Kailash Chandra Vanrajsingh Kahor

22-Aug Birla Pacific Med Gagan Ashok Kumar Khemka 22-Aug Birla Pacific Med Spark Finwiz Pvt Ltd 22-Aug Birla Pacific Med Jalan Cement Works Ltd 22-Aug Gammon India 22-Aug Gammon India 22-Aug Indiabulls Real 22-Aug Krishna Deep 22-Aug Krishna Deep 22-Aug Krishna Deep 22-Aug Krishna Deep 22-Aug Krishna Deep 22-Aug Krishna Deep 22-Aug Krishna Deep 22-Aug Midland Poly 22-Aug Midland Poly 22-Aug Midland Poly 22-Aug Polytex India 22-Aug Sheetal Diam 22-Aug Sheetal Diam 22-Aug Sungold Cap 22-Aug Suryalakshmi 22-Aug Suryalakshmi 22-Aug Vas Infra 22-Aug Vas Infra
Source: BSE

Ambit Capital Pvt Ltd (Prop) Macquarie Bank Ltd Sudhir Credit Pvt Ltd Sai Kanaka Mahalakshmi Finance Tanisha Business Pvt Ltd Parkin Marketing Pvt Ltd Falcon Holdings P Ltd Shiv Sharma Chandra Gupta Brijmohan Chandulal Alka Lakhotia Krishan Kumar Jora Kiran Bhiku Bhanaes Arun Dashrathbhai Prajapati Pankaj Vinod Shah Vijaybhai Kanubhai Thakor Vinodchandra Mansukhlal Parekh Teck Consultancy & Services Sanjay Balkrishna Bane Kaizen Stoktrade Pvt Ltd

Tree Line Asia Mastr Fnd (Singapore) S

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MORNING INSIGHT

August 23, 2011

Gainers & Losers

Nifty Gainers & Losers


Price (Rs) Gainers Reliance Ind ICICI Bank ITC Losers Infosys Ltd HDFC Bank GAIL India
Source: Bloomberg

chg (%)

Index points

Volume (mn)

757 851 202 2,195 453 415

3.3 2.3 1.4 (1.4) (1.7) (3.4)

13.8 7.2 5.0 (4.8) (4.7) (2.2)

3.6 3.7 6.1 2.0 3.0 2.1

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 Shrikant Chouhan Technical analyst shrikant.chouhan@kotak.com +91 22 6621 6360 K. Kathirvelu Production k.kathirvelu@kotak.com +91 22 6621 6311

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