INDIA DAILY EQUITY MARKETS

India Daily Summary - August 18, 2008 August 18, 2008

Change, %
India 14-Aug 1-day 1-mo 3-mo
Sensex 14,724 (2.4) 16.2 (15.2)
Nifty 4,431 (2.2) 14.8 (13.4)
Contents Global/Regional indices
Dow Jones 11,660 0.4 1.4 (10.2)
Economy: Capex in large projects peaked in FY2008; unlikely to drop much in
FTSE 5,455 (0.8) 1.5 (13.5)
FY2009E
Nikkie 13,250 1.8 3.5 (6.8)
Hang Seng 20,989 (0.8) (4.0) (18.1)
KOSPI 1,570 (0.1) 4.0 (16.7)
News Roundup Value traded - India

Moving avg, Rs bn
Corporate
14-Aug 1-mo 3-mo
< With the prospects of Indias access to global nuclear reactor technology Cash (NSE+BSE) 157.9 190.8 186.5
brightening, several companies are vying for new projects planned across the Derivatives (NSE) 476.4 401.0 329
country, including Westinghouse Electric Company (AO1,000 series of Deri. open interest 782.6 728 756
reactors), GE-Hitachi (ABWR reactor series), Areva (1,000 MW European
pressurized reactors) and the Russian atomic energy agency Rosatom
(VVER1,000 reactors). (BL)
Forex/money market
< Trai will ask the Department of Telecom to take action against GSM operators
like Bharti Airtel, Vodafone Essar and Idea Cellular if they fail to connect Change, basis points

their networks to Reliance Communications GS network by August 21, 2008. 14-Aug 1-day 1-mo 3-mo

(ET) Rs/US$ 42.7 0 (10) 15

6mo fwd prem, % 0.7 (25) 71 24
< Reliance Big Entertainment, which earlier this year announced that global
investor George Soros will invest US$100 mn for a 3% stake in the company, is Net investment (US$mn)
yet to close the deal. (ET)
13-Aug MTD CYTD
< Fortis Healthworld, a Religare Group company, will acquire pharmacy retail chain FIIs (160) (168) (6,914)
CRS Health as part of its expansion, while rechristening itself as Religare MFs (62) 28 2,710
Wellness. (BS)
Top movers -3mo basis
< Hearst Corporation-owned merchandising licensing firm King Features
Syndicate is looking for multi-level non-exclusive deals with consumer product Change, %
Best performers 14-Aug 1-day 1-mo 3-mo
firms in India and is in talks with Frito-Lay, Titan, Bombay Dyeing, Lilliput
and retail chain Lifestyle, among others. (ET) OIL & NATURAL GAS CORP
1,066
LTD (1.6) 13.0 12.1
CIPLA LTD 234 0.9 8.8 9.8
< Lemon Tree, the upscale mid-market hotel, has invested around Rs500 crore in CROMPTON GREAVES LIMITED
261 (4.9) 14.0 9.5
the domestic market and around Rs200 crore in New York in the past two INDIAN OIL CORPORATION441
LTD (2.6) 15.5 7.2
months. (ET) DIVI'S LABORATORIES LTD
1,530 (4.1) 16.2 5.8
< A consortium of real estate developer Indu Projects, US-based healthcare Worst performers
major John Hopkins and Hyderabad-based CARE Hospital is setting p a 2,000 HOUSING DEVELOPMENT432
& INFRAS
(7.5) (0.1) (47.0)
bed health city in Nagpur with an investment of Rs750 crore through a INDIABULLS REAL ESTATE304
LTD (13.3) 4.8 (43.6)
combination of debt and equity. (ET) INFRASTRUCTURE DEV FINANCE
96 (7.9) (12.2) (42.9)
UNITECH LIMITED 169 (6.8) 13.3 (41.0)
CENTURY TEXTILES & INDS
497LTD (4.6) 7.6 (39.3)
Economic and political
< Commodities tumbled across the board prior to the weekend, with gold sinking
below US$800 an ounce to almost a nine-month low as evidence mounted that
slowing economic growth was hitting global demand. (BL)
< Public sector banks have placed a new claim on the central government for their
successful implantation of the farm debt waiver and debt relief scheme in a
record time - they want the government to pay interest on the amount involved.
(BL)
< The Finance Ministry has granted excise duty exemption to goods procured for
setting up ultra mega power projects with installed capacity of 3,960 MW or
above. (BL)
< IRDA is on course to develop commonly accepted benchmarks and disclosures to
value insurance companies as this would be crucial when Indian partners dilute
their shareholding from 74% to 26%. (ET)
Source: ET = Economic Times, BS = Business Standard, FE = Financial Express, BL = Business Line.
Kotak Institutional Equities Research
kotak.research@kotak.com

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
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 India Daily Summary - August 18, 2008

Economy Capex in large projects peaked in FY2008; unlikely to drop much in

FY2009E
Sector coverage view N/A

Mridul Saggar : mridul.saggar@kotak.com, +91-22-6634-1245

New projects assisted by banks/FIs in FY2008 envisage capex of Rs2.84 tn (Rs2.83 tn

in FY2007)

Envisaged capex in FY2008 at Rs.2.45 tn or US$60.9 bn Rs2.19 tn in FY2007)

Pipeline capex in FY2009 at Rs1.73 tn from projects till FY2008

We expect envisaged capex to drop marginally to Rs2.3 tn in FY2009E, but fall more
steeply to Rs1.6-1.9 tn in FY2010E

Reinforcing our view that bulwarks against headwinds are firmly in place (see our
Economy report of May 29, 2008), a new RBI study (August Bulletin) maintains that
capex has reached a new peak in FY2008 and is likely to stay high in FY2009. We
reiterate that fears of investment stalling in FY2009 are indeed overblown. Capex in
large projects may have peaked in FY2008 but a sharp drop is unlikely in FY2009E. We
had estimated large projects capex in a range of Rs2.0-2.5 tn, stating that it could still
be at least 6X of the trough in FY2002. However, we repeat that investment could
drop in FY2010 on the back of rising interest rates.

RBI: New projects capex stays high in FY2008

The investment cycle that started from the trough in FY2002 sustained momentum at
least till FY2008:
910 new projects (which were sanctioned financial assistance by banks/FIs in
FY2008) have envisaged capex of Rs2.84 bn (US$70.6 bn) which, though the
highest ever, is only marginally up from Rs2.83 bn (US$62.6 bn) for FY2007 when
1,054 new projects were sanctioned such assistance (see Exhibit 1).

Capex in FY2008 at Rs2.45 tn (Rs2.19 tn in FY2007) was 6.5X the FY2002 trough
Total envisaged capex in FY2008 in new and past projects was Rs2.45 tn (US$60.9
bn), 11.7% higher than Rs2.19 tn (US$48.5 bn) in FY2007 (see Exhibit 2). While
capex peaked in FY2008, the investment cycle had decelerated from jumps in
FY2007 (72.7%) and FY2005 (64.9%). RBI capex data for FY2007 was slightly
below our May economy report estimate of Rs2.7 tn.
Capex in FY2008 was 6.5X of Rs377 bn in FY2002 which was the trough. Clearly
the amplitude and the length of the present investment cycle have been large.
Considering the above, we reiterate that while investment could drop ahead, the
drop coming from a much higher base is unlikely to be as severe as in the 1990s.

It may be added that project capex as captured in the RBI study amounts to Rs2.19 tn
in FY2007, which is 41.3% of the gross fixed capital formation (GFCF) of Rs.5.3 tn as
per the national accounts data.

Strong pipeline capex likely to sustain investment momentum in FY2009

RBI study confirms that pipeline investment in FY2009 was strong.
Pipeline envisaged capex for FY2009 from past projects till FY2008 were Rs.1.73 tn
(US$52.3 bn). This included Rs1.48 tn from projects sanctioned financial assistance
from banks/FIs (Rs1.25 tn in FY2008), Rs197 bn from ECBs without funding from
banks/FIs and Rs51 bn from capital markets without funding from banks/FIs).
With Rs1.73 tn of fixed investment in pipeline from large projects, new projects with
envisaged investment of Rs0.72 tn or more in FY2009 would be necessary for capex
of FY2008 to be surpassed this year. RBI expects this to be realized.

2 Kotak Institutional Equities Research

 India Daily Summary - August 18, 2008

However, in our view, this is less likely in the current macroeconomic environment
of tight monetary policy contributing to high interest rates and large increase in
government liabilities that are likely to crowd out private investment. Anecdotal
evidence suggests, new investments being planned might drop in FY2009 to about
0.5 tn or slightly above that.
We believe that even as the capex cycle turns in FY2009, total capex in FY2009E
could still be about Rs2.3 tn on the back of strong pipeline investment. As such,
capex in FY2009E could still be over 6X of the trough in FY2002.

We expect investment in FY2010 to drop on back of high interest rates

Investment climate has deteriorated significantly in 2009 as a result of high interest
rates and fiscal drag. So, unless there is a perceptible improvement in the investment
climate, capex could decelerate further in FY2010 as pipeline investment may drop to
about Rs1.0 tn in FY2010E. We expect total fixed investment from large projects to fall
to a range of Rs1.6-1.9 tn in FY2010E. Monetary policy tightening in FY2009 in the
backdrop of supply-side shock transmitted from abroad has been large. Higher nominal
interest rates have raised the user cost of capital and would impact new investment
unless monetary policy tightening is quickly unwound in FY2010. With inflation
passthrough still incomplete, we recognize that rate cuts may not be large over the
next year. As such, we consider the possibility of investment falling ahead as highly
probable. Some of the projects already in pipeline can also see deferring of investment
plans, but this amount is unlikely to be very large.

Power projects, metals industry driving present investment boom

The current capex cycle has been heavily driven by thrust to the infrastructure
investments. Power projects accounted for 33.9% of envisaged capex in 910 projects
sanctioned assistance FY2008 (see Exhibit 3). Telecom, ports & airports, roads, SEZs,
etc accounted for another 13.1%. Metal industry accounted for 15.6%. A capex in
power projects of Rs10.3 tn was planned during 11th Five Year Plan (FY2008-12), but
most of this has already been sanctioned assistance and got covered in new projects
till FY2008.

Gujarat continued to be the top destination for new project investment, while
Chhattisgarh appeared as the new hot spot (see Exhibit 4)

Exhibit 1: Projects sanctioned assistance in FY2007 & FY2008 have fixed investments of
Rs1.4 tn for FY2009
Capex in large projects by year of sanction of financial assistance by banks/Fis with
breakups detailing phasing of investment over the period 2005-2013, March fiscal year-ends

2005 2006 2007 2008 2009 2010 2011 2012 2013

3,500

2,800

2,100

1,400

700

0
FY2006 FY2007 FY2008

Source: Reserve Bank of India

Kotak Institutional Equities Research 3

 India Daily Summary - August 18, 2008

Exhibit 2: Investment cycle peaked with Rs2.45 tn capex in FY2008, but investments
unlikely to drop much
Capex during the year in large projects (pipeline+new projects), 1997-2009E, March fiscal year-ends,

3,000
Capex without FIs
Capex from projects sanctioned assistance in other years
Capex from projects sanctioned assistance in the year
2,000

1,000

0
1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009E
Source: Reserve Bank of India, Kotak Institutional Equities estimates.

Exhibit 3: Power, metals industry capex driving investment boom

Industry-wise distribution of envisaged capex in large projects by year of sanction of financial assistance

FY2007 FY2008
No. of capex % share in No. of capex % share in
projects (in Rs bn) total projects (in Rs bn) total
1 Infrastructure 125 1,017 35.9 142 1,337 47.0
(i) Power 64 515 18.2 71 964 33.9
(ii) SEZ, industrial, biotech & IT parks 37 85 3.0 52 185 6.5
(iii) Telecom 9 180 6.3 9 119 4.2
(iv) Roads, storage & water management 8 131 4.6 4 49 1.7
(v) Ports & Airports 7 107 3.8 6 20 0.7
2 Metal & metal products 130 399 14.1 128 445 15.6
3 Coke & petroleum products 11 441 15.6 5 172 6.0
4 Others 183 106 3.8 181 168 5.9
5 Cement 27 106 3.7 26 140 4.9
6 Textiles 258 259 9.1 120 107 3.8
7 Hotels & restaurants 74 111 3.9 54 93 3.3
8 Construction 34 93 3.3 39 90 3.2
9 Transport equipents 29 52 1.8 38 81 2.9
10 Pharmaceuticals & drugs 33 17 0.6 39 52 1.8
11 Transport services 17 16 0.6 18 36 1.3
12 Hospitals 21 14 0.5 28 30 1.1
13 Sugar 33 89 3.1 16 30 1.1
14 Chemical & petrochemicals 35 41 1.5 27 27 0.9
15 Paper & paper products 24 29 1.0 18 22 0.8
16 Electrical & non-electrical machinery 20 45 1.6 31 14 0.5
Total 1,054 2,834 100.0 910 2,844 100.0

Source: Reserve Bank of India

4 Kotak Institutional Equities Research

 India Daily Summary - August 18, 2008

Exhibit 4: Gujarat, Maharashtra, Orissa, A.P. and Chhatisgarh account for nearly 70% of new projects capex
State-wise distribution of envisaged capex in large projects by year of sanction of financial assistance

FY2007 FY2008
No. of capex % share in No. of capex % share in
projects (in Rs bn) total projects (in Rs bn) total
1 Gujarat 86 732 28.4 100 624 25.2
2 Maharshtra 142 243 9.4 149 362 14.6
3 Orissa 23 148 5.7 23 309 12.5
4 Andhra Pradesh 105 252 9.8 92 242 9.8
5 Chhattisgarh 13 24 0.9 12 177 7.1
6 Tamil Nadu 157 243 9.4 95 160 6.5
7 Karnataka 91 199 7.7 65 106 4.3
8 Uttar Pradesh 60 98 3.8 42 98 4.0
9 Jharkahnd 13 72 2.8 16 69 2.8
10 Madhya Pradesh 23 49 1.9 19 63 2.5
11 West Bengal 37 34 1.3 42 60 2.4
12 Himanchal Pradesh 30 26 1.0 23 37 1.5
13 Delhi 19 64 2.5 19 33 1.3
14 Rajasthan 38 98 3.8 23 28 1.1
15 Haryana 42 39 1.5 30 28 1.1
16 Punjab 48 59 2.3 31 20 0.8
17 Uttarakhand 31 56 2.2 27 17 0.7
18 Sikkim 3 94 3.7 1 1 0.0
19 Others 47 50 1.9 34 42 1.7
20 Multi-state 46 254 9.9 67 367 14.8
Total 1,008 2,580 100.0 843 2,477 100.0

Source: Reserve Bank of India

Kotak Institutional Equities Research 5

 India Daily Summary - August 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: Mridul Saggar."

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%
33.8% 34.5%

30% * The above categories are defined as follows: Buy = OP;

Hold = IL; Sell = U. Buy, Hold and Sell are not defined
20.9% Kotak Institutional Equities ratings and should not be
20% constructed as investment opinions. Rather, these ratings
are used illustratively to comply with applicable regulations.
3.0% 8.1% As of 30/06/2008 Kotak Institutional Equities Investment
10%
5.2% Research had investment ratings on 143 equity
3.0% 0.7% securities.
0%
BUY ADD REDUCE SELL

Source: Kotak Institutional Equities. As of June 30, 2008

Ratings and other definitions/identifiers

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.

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

Other definitions
Coverage view. The coverage view represents each analysts 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.

6 Kotak Institutional Equities Research

 India Daily Summary - August 18, 2008

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