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Just Dial : Takeaways from Citi India Internet Corporate Day

Just Dial (JUST.BO)
Alert: Takeaways from Citi India Internet Corporate Day
 Takeaways from Mumbai – Just Dial (JUST) presented at the Citi India Internet
Corporate Day in Mumbai today. We present key takeaways below:
 Focus is on new services beyond the legacy search business –
– Quick Quote – Plans to launch quick quote service in the next 1 month, which
will be an enhanced service over existing best deal. In addition to competitive
pricing, JUST believes that its tie-up with local vendors should help the customer
potentially get same-day fulfillment (delivery) given their proximity.
– Transaction services – The company believes its long history and brand should
help increase user comfort, the biggest challenge for online transactions. JUST
has already launched service for ordering food, wine and booking a table in a
restaurant and has a host of other services in the pipeline. The goal over the next
3-4 quarters is to create awareness and win consumer mindshare rather than
revenue/profit generation. Eventually, it could start charging based on a
commission structure (on value of transaction). Longer term, the company’s
ambition is to try and charge 1% of the household spend across transactions as
commission. However, all services would remain free for the end consumer.
 Little impact from economic slowdown – Management believes that the
economic slowdown has little impact on the company’s growth prospects given the
high reliance of many SMEs on attracting business from Just Dial’s user queries.
However, churn does go up in a slowdown as incidence of SME failure rate
increases (anyways is an ongoing trend).
 Focus on margins vs. accelerating topline – The company could accelerate
topline from the current ~30%yoy by sacrificing margins (increase sales force;
reduce target productivity metric for the sales force). However the aim is to sustain
and grow margins. Currently, it tries to generate 3x returns on its sales force spend.

Brokerage Notes on FED: Citi

U.S. Macro Flash
Comment on FOMC Decision: Accommodation Full Speed Ahead
 The FOMC's announcement today that asset purchases will remain at $85 billion for
now was not our call. While we still believe that the start of tapering may be
resolved by year-end, the bar is higher than we thought and we can't rule out a
lengthier debate dragging into next year. The emphasis on maximum
accommodation extended to forward guidance on both QE and rates. Updated
economic and interest rate projections show the economy at or near full
employment in 2016, while expectations for the funds rate remain far below what
previous experience would anticipate.
 The logic behind the Committee's hesitancy was laid out by the Chairman.
Policymakers were less confident that improvements in the economy and labor
markets would be sustained, despite much progress. They also expressed concern
about recent "rapid" tightening in financial conditions and want to see the response
to higher rates in housing and across economic activity. And, they were more
uncertain about the effects of fiscal restraint, highlighting the possibility that the
upcoming debate over government spending and debt authority enhances downside
risks.
 On all counts, the Fed's points surprised us. Financial conditions are tighter but still
highly supportive with historically low interest rates. It is especially notable that the
policy statement echoed our own judgments about fiscal effects to date, namely that
"taking account of federal fiscal retrenchment, the Committee sees the improvement
in economic activity as consistent with growing underlying strength..." This view
suggests today's decision was a tough one and that tapering may still be a meeting
to meeting call, down to a small handful of data points, market developments and
safe passage through fiscal legislation. The last of these could prove the most
problematic for tapering this year.
 The summary of economic projections underscored the view that policy would likely
remain very accommodative deep into recovery. The updated forecasts were well in
line with expectations that we outlined in the weekly. The median expectation is that
unemployment will be well within ranges most officials view as normal or consistent
with full employment by 2016. Rate forecasts anticipate a 1% funds rate in late-
2015 and 2% in 2016. Both would be about 150bps below what even relatively
dovish policy rules would prescribe. On initiating rate hikes, Bernanke indicated that
"fed funds rate increases might not occur until the jobless rate is considerably below
6.5%.” Message sent.

Citi Global THEME-book September 2013

Energy 2020
“The Unimaginable: Peak Coal in China” is the title of another “Must C” report from Citi’s global commodity team. This
builds on their extensive Energy 2020 shale work & well read report “Global Oil Demand Growth – The End is Nigh.”
The rapid build out of coal plants for power generation in China caused capacity to double between 2004-10 to near
700-GW. This growth was almost equivalent to the entire size of the US coal fleet ! By 2012 China’s thermal coal
demand accounted for 50% of global consumption, yet forecasts for continued strong growth look optimistic.
The team argue that downward shifts in China’s GDP & energy intensity, robust growth in renewables & strong
improvements in energy efficiency point to a possible peaking before 2020. They offer a range of scenarios.

Pollution is important & the global increase in carbon emissions by 2020 could be cut by a quarter. However this work
has significant repercussions for multiple global commodity markets & would impact coal export countries (e.g.
Mongolia, Australia, Indonesia, Russia & the US). Coal prices have fallen, but forward curves are in steep contango.
Heath Jansen & team highlight stocks exposed to coal, including Sell rated Bumi Resources & New World Resources.
For the diversified miners 21% of Glencore’s revenues are from coal, & 12% for African Rainbow Materials.
Adding to the changing mix in energy, the US DOE authorization of Lake Charles (2-Bcf/d) raises total US LNG export
capacity to 5.6-Bcf/d. Our commodities team’s initial estimate of 12-Bcf/d by 2020 may yet prove conservative

Equity Inflows Moderate in DM, Outflows Continue in EM  Citi Research

 Equity Inflows Moderate in DM, Outflows Continue in EM
 7
th week of inflow into equity funds — In the week ended 8/14/2013, bond funds saw
US$1.4bn of outflow, and US$1.3bn of inflow went into equity funds. This was the 7th
week of inflow into equities even though it has slowed from the previous week’s
US$9.6bn. European equity funds were the largest sources of inflows with US$2.3bn,
while US equity funds ended its 6-week outflow streak with an outflow of US$2.1bn.
 US$761mn (0.1%AUM) of outflow from EM — EM Asia funds saw US$588mn of
outflow, within which China funds had the largest outflow at US$241mn. This has been
the 13th week of outflow from China funds. GEM funds, LatAm and EMEA funds all had
moderate outflows.
 Foreigners net sell Japan and Asia— In the week ended 8/14/2013, foreigners sold
US$710mn of Asian equities. The Taiwan stock exchange saw foreigners net sell
US$622mn. Korea, however, had foreigners buying US$215mn of equities. Japan, as
of 8/9/2013, saw the 3rd week of net selling by US$1.1bn, showing some profit taking
by investors after TOPIX rose by 20+% YTD in US$ term..

Bajaj Auto : Riding on the Rupee :: Citi Research

Bajaj Auto (BAJA.BO)
Alert: Riding on the Rupee
 1QFY14 Con Call Takeaways: Outlook is fairly positive for FY14 — given a) the
current weakness in the INR, and b) a pick-up in domestic 3W volumes. Mgmt
noted that export hedges are in place for the remaining 3Qs of FY14 for ~740mn
USD of exports. 2Q hedges should yield a realization of ~Rs58.5/US$, vs Rs55.56
in 1Q. Our FY14/15 estimates remain unchanged, given that currency will buoy
margins and offset weak volumes.
 Domestic 3W outlook is also healthy — as fresh permits are opening up -
~20,000 in Hyderabad, another 30k-35k in Maharashtra. Overall, the 3W run-rate
from Aug should stabilize at ~45k units / month – implying around ~520k units for
FY14.
 Export volume weakness continues — For FY14, mgmt reckons that overall 2W
export volume growth will be ~5% (10-12% earlier). Key end markets like Nigeria
remain weak (volumes down ~12% YoY for Bajaj, -22% for industry). Mgmt is
seeding new markets like Kenya, Ivory Coast and Uganda. In the long term, the
association with Kawasaki in Indonesia and possibly markets in Lat Am should yield
benefits too (citing Philippines as precedence, wherein market share for the
Kawasaki/Bajaj combine rose to 45% from 10% when Kawasaki was on its own).
Mgmt might contemplate taking actions to grow export markets, but doesn’t see the
need to cut prices as of now, to stimulate market growth.
 Domestic 2W outlook remains challenged, at least for 1H — Mgmt noted
industry retail volumes declined ~11% in June and expects volumes to decline 5%
in July. A recovery, if any, will be in 2H post monsoons. Bajaj will launch around six
variants under the Discover brand, with some of the focus being on the Economy
100cc space, given the down-trading that’s occurring due to fuel costs. Inventory
remains at around 5 weeks for the Discover; the Pulsar is lower at around 3 weeks.
Maintain Neutral. For detailed analysis of 1QFY14 results, see our note dated 19
July 2013 Bajaj Auto (BAJA.BO) - 1QFY14: Exports Offset Domestic Weakness

Asian Paints 1QFY14: Results Disappoint; Unfavourable Risk Reward Balance :: Citi Research

Asian Paints (ASPN.BO)
 1QFY14: Results Disappoint; Unfavourable Risk Reward Balance
 PAT declines 5% YoY despite a weak base — Consol revenues at Rs28.2bn rose
11% YoY - below expectations (Citi / consensus: Rs28.8/ Rs28.3bn). Decorative paints
volume growth is est. ~10% YoY on a low base (no growth in 1QFY13). Despite input
cost tailwinds, EBITDA was flat & PAT down 5% to Rs4.4bn & Rs2.8bn - missing our /
street ests by >10%. While some cost pressures (operating / capital costs on Khandala
plant + higher fuel & freight costs) were known - but the revenues miss, lower than
expected GM expansion & certain negative surprises (discount rate change for
gratuity/leave liabilities + FX loss) led to the sharp profit miss.
 Rupee plays spoilsport — ~40-45% of inputs are imported & thus weak INR is a net
negative (offsets any translation gains from international revs). Soft global commodity
prices haven’t flown through entirely; TiO2 was flat-to-marginally higher in INR terms.
 Paring ests, TP — We cut EPS ests by 3-6% (lower revenues, GMs & cost pressures)
& consequently TP to Rs4,050 (28x Sept14E EPS). Retain Sell.
 There are structural positives… — APNT is a solid business benefiting from: a) its
dominant positioning, b) pricing power, c) extensive portfolio, d) slow, but steady
premiumisation trends, and, e) high entry barriers given the extensive dealer network.
 ... but priced into current valuations (+3 std. deviations above mean) — However,
expectations on the stock are fairly high & we see downside risks to consensus nos.
Valuations at ~36x 1-yr fwd P/E are ~3 std. deviations above its historical mean,
providing limited comfort and making the risk reward balance unfavorable.
 And the business negatives / imponderables? — a) The economy is still slow & we
think it is early to call a demand recovery; base effect going forward isn’t as favourable
as 1Q. b) Mgmt admits operating margins may be capped given sharp increase in
manufacturing & distribution costs. c) Diversification into home improvement is a
strategic change – questions around capital allocation, higher capital intensity, limited
scalability, APNT’s USP, and, lower near/medium-term profitability remain.

UltraTech Cement (ULTC.BO) 1QFY14 – Volumes on a Weak Trajectory  :: Citi Research

UltraTech Cement (ULTC.BO)
 1QFY14 – Volumes on a Weak Trajectory
 1Q PAT inline — ULTC’s 1QFY14 PAT fell 14% yoy to Rs6.7bn (in line with our
estimates) on a yoy decline in volumes (cement + clinker) and realizations; and higher
costs. PAT would have been lower but for the surge (>2x) in other income to Rs1.9bn.
ULTC’s EBITDA/t fell to ~Rs1,040 from Rs1,250 last year and Rs1,080 in 4QFY13.
 ULTC loses market share — 1Q sales (cement + clinker) fell 2% yoy to 10.1mt.
Domestic volumes fell 1% to 9.9mt vs. India’s demand growth of ~3-4% during the
quarter (industry sources). ULTC’s volumes would have been particularly weak in
May/June as it had reported >10% volume growth in Apr13. ULTC’s overall capacity
utilization in 1QFY14 was ~79% (on FY13 exit capacity). ULTC’s markets: North 30%,
West 30%, South 20%, East 20%.
 Realizations fall yoy — ULTC’s avg. realizations fell ~2% yoy – conversations with
dealers suggest prices declined almost across India (yoy) in 1Q. On a sequential basis,
ULTC’s realizations were marginally higher (+1.5%). Prices have been largely stable
across regions since June13; except Calcutta (East) where prices have fallen ~10%;
Hyderabad (South) where producers have hiked prices by ~7% by restricting supply.
 Costs (per tonne) up 5% yoy — Hikes were seen mainly in raw material per tonne
(+6%) and freight per tonne (+8%) impacted by higher rail freight/diesel prices. Power
costs fell 7% yoy (lower imported coal/pet coke costs; higher pet coke usage). Imports
accounted for ~20% of ULTC’s coal consumption; pet coke 25-30%.
 Demand is key; maintain Sell – Production discipline is unlikely to sustain post the
monsoon: 1) Expect >22mt of capacity in FY14 (on a base of 350mt, +27mt in FY13) –
with weak demand the struggle for market share will continue; 2) The Competition
Appellate Tribunal’s order to deposit 10% of the penalty imposed by the CCI does not
help the cement producers’ case. For pricing to track a sustained upward trajectory,
demand would need to recover. At an EV/t of $164 (Sep14, 57mt capacity); ULTC
appears expensive.

Jindal Steel and Power : Tepid 1QFY14; Buy-Back Looks the Right Thing to Do :: Citi Research

Jindal Steel and Power (JNSP.BO)
Alert: Tepid 1QFY14; Buy-Back Looks the Right Thing to Do
 To consider buy-back - JSPL’s board of directors has constituted a sub-committee
to consider the buy-back of shares and seek relevant approvals from lenders.
 Buy-back makes sense in our view - JSPL’s stock has corrected sharply due to
controversies related to captive coal, iron ore, concerns on new SBD and a decline
in steel/power realizations. The stock is now below FY13A book value of Rs226 and
replacement cost of assets of Rs258/share. Despite muted performance in FY13,
JSPL still generated RoE of 18% (adjusting for one-offs) and 15% on reported PAT
basis with operating cash flow of ~US$840mn. In such a situation, we believe
buying back the stock is a sensible step for long-term shareholder value creation.
 1QFY14 recurring PAT was 13% below estimate – 1QFY14 consolidated
recurring PAT at Rs6.5bn was below Citi’s estimate of Rs7.5bn. The miss was
mainly due to lower profitability of overseas operations. 1QFY14 Oman EBITDA at
US$15mn was below expectations. The South African mines had lower profits due
to a decline in coal prices. Further, the Mozambique mines had initial high start-up
costs. However, 1QFY14 reported PAT (including MTM on forex loans) at Rs4.9bn
was ahead of Citi at Rs4.2bn.
 Jindal Power’s realizations remain flat QoQ – JPL’s blended realizations at
Rs3.25/kwh were flat QoQ. PLF at 100% was high and generation increased 2%
QoQ. JPL PAT at Rs3.2bn was 9% ahead of Citi at Rs2.9bn.
 Steel sales remain strong – Blended steel realizations rose ~5-6% QoQ as
discounts were reduced. Realizations have fallen more than 10% vs last year. Sales
volume rose 18% YoY to 665kt; this compares to flat YoY demand for the country as
a whole. JSPL has increased its focus on exports – export volumes rose 220% YoY
and exports are now ~18-20% of the Indian steel business sales.

Prestige Estates Projects (PREG.BO) Buy: Good Start to FY14 – Well Begun Is Half Done! :: Citi Research

Prestige Estates Projects (PREG.BO)
 Buy: Good Start to FY14 – Well Begun Is Half Done!
 Top pick in India Property — We continue to like Prestige given its strong operational
performance, transparent NAV with high visibility, good disclosures and exposure to the
relatively better markets in South India. Post the ~25% correction in the last 2 months
(~20% underperformance vs Sensex), valuations at ~1.45x P/BV look reasonable.
 Strong start to FY14 — Strong sales in Q1 at Rs10.2bn (1.77msf) means Prestige is
well on track to achieve its FY14 guidance of ~Rs37bn. New launches at ~4msf (FY14
guidance of 14msf) helped fuel the strong sales. New leasing at 0.44msf (Prestige's
share of 0.16msf) was in line with FY14 target of 2msf. With an exit rental income of
Rs2.8bn, we believe the FY14 guidance of Rs3.2bn should be comfortably achievable.
 ~Rs56bn unrecognized revenue provides visibility — Prestige plans to launch
~10msf over the next three quarters and has unrecognized revenues of ~Rs56b, which
should support strong EPS CAGR over FY13-15E (even on a high base). Management
expects projects with accumulated revenues of ~Rs16bn to hit the ~25% recognition
threshold in FY14.
 Deliveries pick up; execution is key in the sector — Prestige delivered 2.48msf in
Q1, a big pick-up vs ~2.3msf in FY13. Execution remains the biggest ask from
investors in the property sector – sustenance is key.
 Dividends could go up over the next two years — Once the rental portfolio matures
and reaches ~Rs5bn run rate, the company plans to finalize a dividend policy wherein
~50% of rental income is paid out and the balance reinvested – helping Prestige add
~1msf annually without incremental borrowing.
 Change in Est; TP to Rs170 — We trim our ests marginally by ~1-2% incorporating
recent results, higher margins and interest/tax assumptions. We trim our TP to Rs170
factoring in: (1) revisions in net debt, customer advances and land bank, (2) marginal
increase in the tax rates to ~29%, (3) some push backs in the development portfolio,
(4) roll forward to Sep'14E from Mar'14E earlier. Our TP equates to ~1.8x Sep'14E BV.

Wockhardt (WCKH.BO) Alert: Warning Letter Issues Not Trivial Warning Letter Issues Not Trivial :: Citi Research

Wockhardt (WCKH.BO)
Alert: Warning Letter Issues Not Trivial
Warning Letter Issues Not Trivial – A first read of the Warning Letter for
Wockhardt's Waluj facility indicates that the issues are not trivial in nature. We
maintain our view that it could take around two years or so for full resolution
although the company may be able to contain the financial impact through some
mitigation initiatives outlined earlier. We do not see further risk to our estimates and
valuations appear very attractive, leading us to retain our Buy rating while
acknowledging that upside may be limited till there is some sign of progress on
either resolution or the mitigation initiatives outlined by management.
Warning Letter First Read – As expected, the FDA has issued a Warning Letter
(WL) to Wockhardt’s Waluj facility and it is now available on the USFDA website
(link here). Deficiencies highlighted include:
1. Efforts to delay, deny or limit FDA inspection of the facility - some examples cited.
2. Failure to prepare batch production & control records for each batch of product.
3. Inadequate lab records - did not contain all data from all tests conducted in order
to make sure that the product complies to established specifications & standards.
4. Failure to record and justify any deviations from required laboratory control
mechanisms + the investigation towards the deviations was not comprehensive
enough to determine the extent and impact of the problem.
5. Inadequate training / experience for each person involved with the production
process to perform the function(s) properly - advises Wockhardt to develop a
robust CGMP training program to ensure the same.
6. Failure to provide adequate washing and toilet facilities in working areas as well
as documented evidence that updated cleaning procedures and studies
demonstrate effectiveness.
The WL advises Wockhardt to engage an independent CGMP expert to undertake
comprehensive inspection of the facilities, method, and controls used to
manufacture drugs, and determine whether the facilities, method, and controls used
to manufacture drugs are in compliance with CGMP requirements.
No Added Financial Implication – as we have already built in that complete
resolution could take around two years (as with Aurobindo's & Claris' facilities in the
past). Our estimates do not factor in any upside from the various measures initiated
by the Management to minimize the impact from the Import Alert.
Please refer to our past research on this issue for more details: 1) FDA Overhang
Queers the Pitch; 2) Worst Case on Waluj; Cut TP to Rs1,620; 3) Management
Call Takeaways – Worst Priced In; 4) It Gets Worse at Waluj – UK MHRA Import
A

India Macro View Revising Our GDP Estimate to 5.4%YoY; External Imbalances Take a Toll :: Citi Research

India Macro View
 Revising Our GDP Estimate to 5.4%YoY; External Imbalances
Take a Toll
 We Revise Our FY14 GDP Estimate Down to 5.4%YoY from 5.7% — For as long as
monetary policy is geared towards managing external risks while putting domestic
growth inflation dynamics on the sidelines, the economic recovery is likely to remain
tentative at best. Since risks on the external front are far from over – the RBI macro
review report aptly sums it up as “overall situation remains in flux”- we reassess our
growth estimate in light of following developments:
– Focus of Monetary Policy Has Shifted towards Managing External Risks- A
sharp and swift depreciation in INR on fears of Fed tapering led to RBI hiking MSF
rates by 200bps on 15 July. Subsequently, in its quarterly policy, RBI adjusted the
stance of monetary policy to assign highest priority to management of external risks.
This shift in policy stance (see RBI Policy), albeit time-bound, imposes additional
costs for the real economy through tightening of the credit channel.
– Investment Demand Remains Lackluster – Several factors, such as structural
bottlenecks in the core sector, slowing consumption, weak export demand, and
policy uncertainty have kept investment demand in the slow lane. The sluggish
investment activity can be seen in recent project data with new project
announcements down by 18%QoQ in 1QFY14 (see Report). While the government
continues to take steps to address supply-side concerns, a revival in investments
rests on effective implementation, which is a challenge in the run-up to the general
elections.
 However, Some Bright Spots Have Also Emerged —
– Southwest Monsoon and Improved Agricultural Outlook – The monsoon season
has been progressing extremely well this year with rainfall higher by 16%YoY and a
corresponding increase in sowing areas by 18%YoY for the kharif season so far.
With kharif crops contributing close to half of total grain production, we have
upgraded our estimate of agriculture output. Robust agriculture production is also
expected to support a pick-up in rural consumption demand.
– Core Inflation has Moderated; Could Provide Space for Monetary Easing – The
headline WPI has averaged at 4.8% in 1QFY14 vs 7.4% last year. Core WPI
inflation is down to a 42 month low of 2.1%. Improved kharif outlook and a lower
hike in minimum support prices augurs well on price front going forward. Slowing
inflation is likely to provide necessary space for the monetary policy to stimulate the
economy once normalcy returns on the external front.
 On balance, we estimate GDP at factor cost to grow at 5.4% - Agriculture growth is
now estimated at 4.8%, industry at 2.3% and the services sector at 7%

Larsen & Toubro (LART.BO) Hold Your Horses, Don’t Bottom Fish :: Citi Research

Larsen & Toubro (LART.BO)
 Hold Your Horses, Don’t Bottom Fish
 What bothers us? — Over the next 2 years if standalone sales grow 12-15%, margins
contract 100bps given internationalization drive, bottom-line growth would be < 10%
(ex dividends from S&A companies). How much loss could Gujarat roads, shipyard &
forging facilities contribute in FY14E when they run for the full year? When will Rajpura
& Hyderabad Metro come online (FY15E, 16E or 17E) and what will be the quantum of
losses in initial years? Will finance/ IT subsidiaries’ growth negate the impact of the
above subsidiaries? Are our consolidated estimates too aggressive?”
 Disappointing 1Q — L&T’s Recurring PAT at Rs7.6bn -15% YoY was 25% below Citi
on tepid +5% sales growth, 56bps margin decline and lower other income. Inflows were
strong at Rs252bn +28% YoY resulting in backlog growth of +8% YoY (post order
cancellation of Rs6bn). The QoQ spike up in working capital and debt is worrying.
 View on sales growth post 1Q — Adjusting for slow moving orders, underlying
backlog growth in FY13 was 11%, which is what L&T should achieve as sales growth in
FY14E (unless execution cycle changes). Pre 1QFY14 we gave L&T the benefit of the
doubt and assumed +15% sales growth. We take that down to 12% now.
 View on margins post 1Q — 1Q EBITDA margins were -56bps YoY. Adjusted for MTM
on loans they were -104bps. We assume margins would contract 50bps (vs. 30bps pre
1Q) in FY14E and 50bps (vs. 30bps pre 1Q) in FY15E. We are more worried about
FY15E given plans to increase international inflows from FY13 - 17% to FY14E - 24%.
 View on inflows post 1Q — Achieving the inflow guidance is not impossible and is a
function of the inflows vs. margins compromise. We assume +15% in our estimates.
 Maintain Neutral - Target price cut to Rs1,007 — To factor in consolidated and
parent EPS cut of 7-8% and 5-9% respectively (on 3% lower sales, 22-42bps lower
margins and change in subsidiary estimates), roll forward of target P/E to Dec14E and
lower parent multiple of 14x on a deteriorating operating environment.

Reliance Industries (RELI.BO) 1Q: Repeat of 4Q Trends; Operationally Muted, Headline In-line :: Citi Research

Reliance Industries (RELI.BO)
 1Q: Repeat of 4Q Trends; Operationally Muted, Headline In-line
 4Q déjà vu; operationally muted1Q, higher other income — PAT of Rs53.5bn was
in-line, though in a near repeat of 4Q, was largely supported by higher other income
(rose even further to Rs25.3bn; ~34% of EBIT vs. ~27% in FY13), while overall
EBITDA fell 10% qoq. Operational weakness continued, with flat petchem profitability, a
continued decline in KG gas (15 mmscmd), and lower GRMs ($8.4 vs. $10.1 in 4Q).
 Refining in-line, petchem disappoints again — GRMs in-line (at a premium to Sing.
GRMs of $6.5), as cracks weakened seasonally and L-H spreads narrowed, though
partly offset by higher throughput qoq (17.1 MMT; 4Q impacted by a shutdown).
Petchem, however, disappointed, with strong PE and PET margins being offset by
weak PX, MEG, and BD cracks, leading to sequentially flat EBIT.
 E&P updates and other analyst meet takeaways — (1) All pending approvals for
producing fields (D1,D3,MA) have been received ($1.2bn capex approved for FY14),
though no major boost in vols is expected and stabilisation may take c12-18 mths; (2)
2-3 well appraisal prog. for MJ-1 discovery to be submitted shortly and to commence in
2HFY14; (3) R-series FDP approval expected in c2-3 mths; production from all new
fields (satellite, R-series, MJ-1) targeted for FY18; (4) NEC-25 FDP approval has been
delayed; (5) ROGC and petcoke gasifier on schedule for mid-CY15 commissioning; (6)
Shale EBITDA rose to $165m (+6% qoq), though capital employed rose to $6.0bn; (7)
INR depreciation is favourable, though LT $ borrowings partly act as a natural hedge.
 Maintain Neutral — We raise our FY14/15E earnings 6/5% to factor in changes to our
currency assumptions, partly offset by lower KG gas volumes and a delayed petchem
recovery. Our GRMs remain unchanged at $9.0/8.5. Given the recent run-up in the
stock (+17% in 3M) on the back of the weaker rupee, seasonally strong GRMs, and the
gas price hike announcement, valns at ~12/11x P/E and ~1.3/1.2x P/B are no more
compelling. In addition, E&P volume recovery will be protracted notwithstanding the
much-anticipated gas price hike, while refining is at its seasonal peak with margins in
Europe already buckling, and near-term earnings growth remains subdued barring the
rupee weakness persisting/worsening. Reiterate Neutral, new TP Rs988.

Kotak Mahindra Bank (KTKM.BO) Results: Caution Out, Bear In  Citi,

Kotak Mahindra Bank (KTKM.BO)
Results: Caution Out, Bear In
 A beat...but actually beating a retreat — It’s a strong P&L quarter and a bad BS
quarter. But the key takeaway/guidance is management’s almost bearish big picture
view; loan growth guidance cut to 15% (20-30%), credit costs up to 60bps (40-45bps),
GDP outlook – 5% almost a best case and cautious on RBI’s recent moves (high risk of
rising rates, growth likely to suffer). Now, the macro bear amongst the private banks.
 BS: Some pain, sloth and not ready to risk — The miss – a relatively large corporate
asset brings asset quality strain, growth is held back (more CV/CE) though still at 20%,
but most importantly, management guides down decisively on growth (15%) and the
broader economic outlook. There should not be more material/lumpy asset quality
pressures (nothing brewing for now), its retail over corporate assets but as an overlay,
it’s now risk over growth / return.
 P&L: Looks pretty good — Kotak has recorded a strong 42% yoy profit growth, and
it’s a good mix: margins are up a bit, fee income is strong (+29%), operating costs
under check and there’s a substantial trading boost. There’s offset in sharply higher
credit costs; but the qtr’s P&L is good – helped by some flirting with fixed income
trading, and gains of easy liquidity. This trading / liquidity party though may be over.
 Market Turmoil – pain, but seems largely ok — Kotak is – theoretically at least –
more vulnerable to the current market turmoil; wholesale funding, recent fixed income
trading bias and relatively market sensitive. While there probably will be some bond
trading pain (long positions halved before RBI move – but still there); mgmt suggests
they are liquidity surplus, so no big squeeze here. This should only boost its reputation
as a good risk manager – but the P&L will not be as good as this qtr.
 You’re playing safety, P&L and a diversified biz…not growth or optimism — The
last time there was a problem in the system (GFC), Kotak effectively shut shop. This
time, it’s keeping the shutters up – will stay in the game, focus on the P&L, stay away
from all things risky and lag peers in growth. This should keep it and investors safe –
probably the safest in the pvt. banks system. So Kotak looks good if things get bad, but
it won’t look so nice if things get better. Maintain Neutral.

MindTree (MINT.BO) Strong Quarter; Decent Outlook  Citi

MindTree (MINT.BO)
 Strong Quarter; Decent Outlook
 Top mid-cap IT pick; Raise TP to Rs. 1,100 — Mindtree remains our top mid-cap
sector pick given (a) Good revenue growth trajectory (+4% qoq in Q1) – expect 13%
yoy growth in FY14; (b) Big beneficiary of INR depreciation – management confident of
flattish margins at constant currency in Q2 despite wage hikes, and currency benefits
will flow (+40-50bps per 1% depreciation in INR); (c) Valuations of ~9x FY14E.
 Good start to FY14 — Mindtree delivered ~4% qoq growth (Citi exp: 3% qoq) with
EBITDA margins of 18.4% (down 60 bps qoq, Citi exp: 18.1%). Net profit at Rs. 1.35b
(Citi exp: Rs. 1.15b) also benefitted from high forex gains. Growth was led by IT
Services - BFSI and manufacturing/retail verticals and US geography. PES revenues
increased marginally by ~1% qoq. Mindtree signed deals of ~$95mn in the quarter.
 Outlook for Q2 — Management expects good growth to continue into Q2 with margins
remaining stable at constant currency. The negatives of wage hike and significant
campus hiring will be offset by growth and lower visa costs qoq. Part of the INR
benefits will likely flow through as margin gains – although they could partly be offset by
forex losses (~$5m if INR remains at current levels, as per the management).
 Other key takeaways — (a) Hiring was strong with addition of ~700 employees qoq.
(b) Attrition on a LTM basis was 12.4%, lowest level in the past 3 years. (c) DSOs
increased to 77 days from 70 in Q4 – management suggested that it was a slippage on
collections and there was no concern on quality of receivables. (d) PES (~30% of rev)
now reorganized as a separate 'Hi-Tech' vertical to enable cross-selling of services.
 Raise earnings by ~14%; trim multiple marginally — We raise earnings by ~14% for
FY14E/FY15E on account of (a) Significant beat in 1Q – on revenues/margins/forex;
(b) Good revenue momentum and hiring; (c) INR benefits flowing through into margins.
However, we trim our multiple from 11x to 10.5x (~30% discount to HCLT’s target
multiple) given high sensitivity to currency, which remains volatile.

Marico (MRCO.BO) Buy: Changing Business Mix Is Positive; Look Beyond A Quarter :Citi

 Mix shift within hair oils — Marico’s business profile is changing – dependence on
coconut oils reduces (~30% of revenues now vs. >40%, 5 yrs ago) as superior growth
& share gains across high margin segments emerge. Despite Marico’s entry into many
categories, the share of other hair oils has moved up (16% of revs vs. 13%, 5 yrs ago)
– and mgmt is confident of mid to high teens volume growth medium term, driven by
continued share gains, wider offering & distribution initiatives. We think other hair oils
will be >20% of consol revs by FY15E, which coupled with improving overseas/
personal care share buoys growth, profit mix & reduces impact of copra price volatility.

NMDC (NMDC.BO) Upgrade to Buy: Bottom Fishing: Citi

 Upgrade to Buy, TP Rs120 — NMDC has fallen 25% in three months (global $ ore
prices down 17%). The stock price seems to reflect one of two scenarios: 1) implied PE
of 6.7x (global peers at 6-10x); or 2) earnings downgrade expectations. We think
NMDC should trade at the global average (~8x) − high margins, rich ore, domestic
exposure, a cash rich balance sheet may warrant a premium; pricing uncertainty
perhaps offsets these benefits. Asset value (20+ yrs life, low costs) and dividend yield
(~6%) suggest upside; even as we lower ore price estimates (-10% vs. NMDC’s current
prices).

Coal India (COAL.BO) Buy: Value in the Coal Colossus  Citi

Coal India (COAL.BO)
Buy: Value in the Coal Colossus
 Buy — Post a 16% YTD correction, we see CIL as offering enhanced value. While the
commodities environment remains volatile, we like CIL given: 1) inexpensive valuations
– 9.2x Sep14E PE (Indonesian peers at 7-11x; CIL’s trading avg since Dec10 is 11.5x);
2) a cash-rich balance sheet (~35% of mkt cap; dividend yield ~5%); 3) earnings
upside (we forecast FY14 despatch growth at 3.4% vs CIL’s 6% target and lower yoy eauction
volumes/price); and 4) potential hikes in coal prices.
 Price hikes: by no means impossible — Though the timing/quantum of price hikes is
hard to predict, trends so far indicate CIL’s desire for margin protection. The board
approved a price rationalization wef 28th May13, namely: 1) +10% for low grade coal;
2) -12% for high grade coal; 3) special hikes for higher cost mines. Overall, according
to CIL, the price hike is likely to be ~4.8% (excl e-auction). Note: we forecast a blended
rise of 2% pa in FY14 and FY15 (potential upside).
 6% despatch growth target — CIL’s FY13 despatches grew at 7% vs. a 4% CAGR
through FY07-12. We believe if CIL attains its 6% despatch growth target for FY14
(492mt), it would provide comfort on the earnings trajectory. However, for now, we
conservatively assume 3.4% yoy growth in despatches to 481mt (488mt earlier) and a
rake requirement of ~198/day – leaving room for upside.
 TP incorporates Draft Mining Bill — Our TP of Rs360 (vs prior Rs365) is based on
two scenarios (50:50 weighting): #1 assumes no profit sharing – derived value of
Rs374; #2 assumes 26% profit sharing from FY15, for a value of Rs347. At our TP, CIL
would trade at 11.2x Sep14PE (excl OBR adj). We see upside to our TP if the draft bill
is amended so CIL has to share an amount equal to royalty with the locals (vs 26% of
profits), as CIL would likely pass the burden to end consumers.
 Sensitivity — PAT would rise ~3% if average realizations rise 1%. A 1% change in
despatches would impact PAT by ~1.5%.

The Bull Case, Not the Bull Chase  Citi

 The Bull Case, Not the Bull Chase
 Several indicators suggest that the next six months may not be as rewarding as
the past half year. The Panic/Euphoria Model's latest reading suggest a more cautious
stance might be appropriate as levels have begun to approach "euphoria" territory.
Moreover, lower intra-stock correlation also implies a more upbeat investment
community focused on stock selection and less concerned about macro dynamics,
thereby adding to the risk profile as economic, political or geopolitical events are no
longer being considered by fund managers by virtue of their actions.
 Normalized earnings yield gap analysis suggests only a random probability for
further appreciation by late 2013. With the current weekly normalized gap between
one and two standard deviations below the 40-year average, there is a 70% chance of
market upside in the next six months, in line with the 67% random outcome and down
from the 98% opportunity seen earlier this year. Keep in mind that the 12-month
figures still offer up a 90% probability of equity index strength and accordingly support
a generally constructive tone looking out to mid-2014 but not necessarily the back half
of this year.
 Forecasts for 2H13 US economic strengthening provide a hurdle that needs to be
overcome. Investors believed that first half 2013 would be hampered by the effects of
both the fiscal cliff and the sequester when the year began and thus had low
expectations that could be more easily beaten. Such a set of circumstances are not
present heading towards the balance of the year with Europe potentially being a
significant spoiler.
 Hedge fund positioning and money flows also show a more positive investment
community that needs to see a continuous stream of good news to keep things
in a happy place. Negative headlines about possible Fed policy tapering, Chinese
PMI or more challenging Italian bond auctions already have generated some increased
market volatility and underscore the change in investor attitude. Reports of extended
net long positioning by hedge funds and US equity mutual fund inflows have been
sustained even as some international trends have been less encouraging.
 Nonetheless, the longer term Raging Bull Thesis is still in place for equities. The
secular bull argument for US stocks beginning in 2013 retains its key tenets even as
"chasing the tape" nearer term may be a bit overdone. A revival in US manufacturing
competitiveness, a rebound in housing, mobile technology benefits and the trend
towards energy independence all sustain more growth potential for America, while
demographics and asset class returns surprisingly argue for more equity focused
money over the next few years. Hence, 2013’s double-digit performance may be only
the beginning of a multi-year (and possibly decade long) climb for stock investors who
are still scarred by the sharp bear declines during the 2000s.