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JUNE 27, 2008

Economy News Equity


% Chg
4 Railways levy special supplementary charge on carriage of commodities
such as coal, ores, minerals, and crude and petroleum products. While 26 June 08 1 Day 1 Mth 3 Mths
the rate of the charge would be 5% on coal, other items would attract Indian Indices
7% on the freight cost. (ET) BSE Sensex 14,422 1.4 (11.4) (10.0)
4 FDI inflows in April 2008 rose by 127% to $3.7 billion over the same Nifty 4,316 1.5 (11.2) (10.7)
month of the previous year. Manufacturing sector received 53 % of the BSE Banking 6,472 (0.1) (16.5) (20.9)
total FDI. (ET) BSE IT 4,182 2.1 (6.0) 16.8
BSE Capital Goods 10,887 0.8 (14.8) (20.6)
4 In a move aimed at encouraging the fertilizer industry to raise their BSE Oil & Gas 9,677 2.8 (9.6) (4.8)
production outlay in the longer term, the government announced a NSE Midcap 5,575 (0.6) (14.5) (9.2)
concession scheme for decontrolled phosphatic and potassic (P&K) BSE Small-cap 7,129 1.0 (13.2) (5.3)
fertilizers. (ET)
World Indices
4 Facing a steep rise in raw material and interest costs, pharmaceutical Dow Jones 11,453 (3.0) (8.7) (6.9)
companies have sought an increase in prices of regulated medicines. (BS) Nasdaq 2,321 (3.3) (6.4) 1.8
FTSE 5,518 (2.6) (8.9) (3.5)
4 According to the Finance minister, Mr. P. Chidambaram, double-digit Nikkei 13,822 (0.1) (2.7) 7.2
inflation is likely to continue for a few more weeks before government Hangseng 22,456 (0.8) (9.5) (3.1)
efforts kick in to ease the rate of price rise. (BL)
Value traded (Rs cr)
26 June 08 % Chg - Day

Corporate News Cash BSE 5,119 (0.7)


Cash NSE 15,804 28.2
4 Sun Pharmaceutical Industries has decided to launch a hostile bid for Derivatives 79,104 (2.3)
Israel’s Taro Pharmaceutical Industries. Sun will offer to purchase all
Net inflows (Rs cr)
outstanding shares of Taro in the next few days at $7.75 a share, the rate
25 June 08 % Chg MTD YTD
that both the companies had agreed upon a year ago. (ET)
FII (104) (138) (9,135) (25,049)
4 Essar has pulled out of the race to acquire US steel maker Esmark after it Mutual Fund 325 54 2,608 8,578
was outpriced by Russian mining firm Severstal, ending a two-month-
long tussle. Severstal has launched a fresh offer of $19.25 a share, 25 FII open interest (Rs cr)
cents higher than Essar’s renewed bid, and has signed a definitive merger 25 June 08 % Chg
agreement with Esmark. (ET)
FII Index Futures 20,059 (11.0)
4 Tata Steel, the largest steel maker in the country, registered an 11 per FII Index Options 13,816 (36.5)
cent rise in standalone net profit to Rs 4,687 crore for the year ended FII Stock Futures 15,098 (17.6)
March 31, 2008 as compared with Rs 4,222.15 crore in the previous year. FII Stock Options 482 (63.8)
Total income of the company shot up to Rs 13,2110.09 crore from Rs
25,650.45 crore. (BS) Advances / Declines (BSE)
24 June 08 A B S Total % total
4 Tulip Telecom, the leading enterprise communications service provider,
posted a 88 per cent growth in net profit at Rs 187.1 crore in the Advances 94 1,027 265 1,386 56
financial year end March 31, 2008 as compared to Rs 99.71 crore in the Declines 111 753 170 1,034 42
corresponding period last year. (BS) Unchanged 1 52 9 62 2

4 BHEL has bagged a Rs 506 crore contract for upgradation of 12 onshore Commodity % Chg
Drilling rigs and supply of new rig equipment from ONGC. (BS) 24 June 08 1 Day 1 Mth 3 Mths

4 Reliance Industries will begin oil and gas production from its prolific Crude (NYMEX) (US$/BBL) 1 3 9 . 0 (0.5) 7.9 29.2
eastern offshore D6 block in the third quarter of 2008 calendar year, Gold (US$/OZ) 917.3 3.5 0.7 (3.7)
partner Niko Resources has said. Volumes will ramp up to a targeted rate Silver (US$/OZ) 17.2 2.3 (1.2) (6.6)
of 2.8 billion cubic feet per day (80 million standard cubic meters per
day) of gas within first year of production. Peak oil output is seen at Debt / forex market
40,000 barrels per day (2 million tons per annum). (BS) 24 June 08 1 Day 1 Mth 3 Mths

10 yr G-Sec yield % 8.92 8.98 8.13 7.77


4 SBI and Union Bank have taken the lead among PSU banks to raise
Re/US$ 42.71 42.74 42.73 40.14
lending rates by 50 basis. SBI has increased its prime lending rate (PLR) to
12.75% from Friday while Union Bank has raised its rate to 13.25% from Sensex
July 1. Union Bank on Thursday also raised deposit rates by 25-100 bps.
21,100
(ET)
19,075

17,050

15,025

13,000
Source: ET = Economic Times, BS = Business Standard, FE = Financial Express, Jun-07 Aug-07 Oct-07 Dec-07 Feb-08 Apr-08 Jun-08

BL = Business Line, ToI: Times of India, BSE = Bombay Stock Exchange


MORNING STAR June 27, 2008

EVENT UPDATE GATI LTD


Apurva Doshi
doshi.apurva@kotak.com
+91 22 6634 1366 PRICE : RS.80 RECOMMENDATION: BUY
TARGET PRICE : RS.120 CONS. FY09E P/E: 16.6X
q Fuel price hikes to impact financials
q Revise earning estimates downwards.
q However continue to maintain BUY with reduced price target of Rs.120
(from Rs.150 earlier)
q 50% upside potential form current levels

Cons. summary table (Rs mn)* Fuel price hike to impact financials
Year end June FY07 FY08E FY09E n The recent fuel price hike would negatively impact the profitability of the
company. Almost 90% of the business comes form the institutional clients and
Sales 5,680 6,818 8,754
Growth (%) 23.5 20.0 28.4 balance 10% is the retail business. The company has already hiked the prices in
EBITDA 434 488 753 its retail segment however price increases with the institutional clients is in
EBITDA margin (%) 7.6 7.2 8.6 process.
Net profit 214 258 451
Net debt 1,420 885 1,434 n Though the company would pass on the price hikes with a lag we feel that due
EPS (Rs) 3.0 2.8 4.8 to fierce competition it will not be able to pass on the complete hike in fuel
Growth (%) 11.7 20.2 74.9 costs. This would lead to lower operating margins then our expectations and
DPS (Rs) 0.8 0.9 1.0
thereby impact the overall profitability of the company going forward.
ROE (%) 12.3 9.2 11.2
ROCE (%) 10.0 10.0 13.0
EV/Sales (x) 1.6 1.2 1.0 Air freight business to take some more time to stabilize - hit
EV/EBITDA (x) 20.5 17.1 11.8 by rising ATF prices
P/E (x) 27.0 29.0 16.6
P/BV (x) 4.3 1.9 1.8 n Currently the company is operating two air freighters on the Delhi-Mumbai-
Bangalore route. The Delhi-Mumbai route has received good response and is
Source: Company, Kotak Securities - Private
Client Research operating optimal capacities. The third freighter has currently gone for some
* Face Value Rs.2 clearances and it will join the fleet in couple of weeks. The fourth freighter is
expected to be commissioned by August 2008.
n The ATF prices have risen sharply by around 20% in last one month and are
currently at Rs.76.6 per liter of ATF in Mumbai. ATF costs account for almost 50
- 60% of the total operational cost of running a cargo airline. Although the
company is raising its prices we feel that due to stiff competition it will not be
able to pass on the complete hike in fuel costs. This would lead to lower
operating margins then our expectations and thereby impact the overall
profitability of the airfreight business of the company going forward.
n Also due to expansion of the airfreight operations the company is likely to incur
several start up expenses for ramping up the airfreight business. As and when
the third and the fourth freighters are added, such expenses would shoot up.
Thus we expect the company to report lower profitability then our earlier
estimates.

Cons. Net sales (Rs bn) Cons. EPS (Rs) - Face value Rs.2

10 5

8 4

6 3

4 2

2 1
0 0
FY08E
FY09E
FY02
FY03
FY04
FY05
FY06
FY07

FY08E

FY09E
FY04

FY05

FY06

FY07

Source: Company, Kotak Securities - Private Source: Company, Kotak Securities - Private
Client Research Client Research

Kotak Securities - Private Client Research Please see the disclaimer on the last page For Private Circulation 2
MORNING STAR June 27, 2008

Change in estimates
n Accommodating for lower then expected profitability due to fuel price hike
impact, start up costs of air freight business and expenses related to brand
development we have revised our earning estimates for GATI.

Change in Estimates (Rs mn)


Old Revised
FY08E FY09E FY08E FY09E

Revenues 6,818 8754 6,818 8,754


EBIDTA 504 868 488 753
EBIDTA (%) 7.4 9.9 7.2 8.6
Profit 287 559 258 451
Equity 187 187 187 187
EPS (Rs.) 3.1 6.0 2.8 4.8
CEPS (Rs.) 4.5 7.9 4.2 6.7

Source: Kotak Securities - Private Client Research

n We now expect GATI to report revenues of Rs.6.8 bn, EBIDTA margin of 7.2%
and PAT of Rs.258 mn. This translates into lower EPS of Rs.2.8 as against our
earlier estimate of Rs.3.1 for FY08E.
n For FY09E, we now expect GATI to report revenues of Rs.8.7 bn, EBIDTA
margin of 8.6% and PAT of Rs.451 mn. This translates into lower EPS of Rs.4.8
as against our earlier estimate of Rs.6.0 for FY09E.

Valuation & Recommendation


n Going forward we expect strong growth in revenues due to ramping up of the
airfreight business due to expected induction of the fourth air freighter by
August 2008. Also GATI has inducted new vessel of 8150 DWT in Q3FY08.
n Also the expenses related to start up of air freight business and brand
development would be significantly reduced in the following quarters. This
would lead to increased revenues and profitability for the company going
forward.
n At Rs.80, the stock trades at 1.8x book value, 16.6x earnings and 11.9x cash
earnings based on FY09E.
n We have also done a one-year forward rolling band analysis for GATI, which
revealed that currently the stock is trading at the lower end of the band of 15x-
45x one year forward earning estimates. This makes it very attractive at current
levels.

One year forward rolling PE band - Gati

250
Price 15x 25x 35x 45x
200

150

100

50

-
Jul-04

Jul-05

Jul-06

Jul-07
Mar-05

Mar-06

Mar-07

Mar-08
Jan-05

May-05

Jan-06

May-06

Jan-07

May-07

Jan-08

May-08
Nov-04

Nov-05

Nov-06

Nov-07
Sep-04

Sep-05

Sep-06

Sep-07

Source: Capitaline, Kotak Securities - Private Client Research

Kotak Securities - Private Client Research Please see the disclaimer on the last page For Private Circulation 3
MORNING STAR June 27, 2008

n We remain positive on the growth prospects of GATI as we feel that it is ideally


poised to take advantage of the booming logistics sector in India with its
express distribution, coastal shipping and air freight services.

We recommend BUY on GATI n We continue to recommend BUY on GATI with revised price target of Rs.120
with a revised price target of which provides 50% upside potential form current levels.
Rs.120 (50% upside)
n The price target is derived by assigning a multiple of 25x one year forward
earnings estimate of Rs.4.8 for FY09E which yields fair value of Rs.120 (Rs.150
earlier) for GATI.
n We recommend BUY on GATI.

Kotak Securities - Private Client Research Please see the disclaimer on the last page For Private Circulation 4
MORNING STAR June 27, 2008

RESULT UPDATE NITIN FIRE PROTECTION LTD


Apurva Doshi
doshi.apurva@kotak.com
+91 22 6634 1366 PRICE : RS.345 RECOMMENDATION: BUY
TARGET PRICE : RS.600 CONS. FY09E P/E: 8.4X
q The Q4FY08 and FY08 results of NFPIL are slightly below our estimates
both on revenues and profitability side
q We maintain FY09 earning estimates
q Recommend BUY with revised price target of Rs. 600 (from Rs. 650
earlier)
q 74% upside potential from current levels

Consolidated summary table Consolidated Q4FY08 results table - Nitin Fire Protection
Rs mn FY07 FY08E FY09E (Rs mn) Q4FY08 Q4FY07 YoY(%) Q3FY08 QoQ(%) FY08 FY07 YoY(%)
Sales 1,005 1,324 3,982
Net Sales 309 301 2.5 396 (22.0) 1,324 1,005 31.7
Growth (%) 46.9 31.7 200.7
EBITDA 168 254 808 Incr. / dec. in stock 47 77 (38.1) (38) (226) (22) (10) 124.9
EBITDA margin (%) 16.7 19.2 20.3 Raw materials 62 61 0.8 309 (80) 218 199 9.5
Net profit 100 194 516 Pur. of traded goods 78 85 (8.3) - - 699 509 37.3
Net debt 57 795 855
EPS (Rs) 11.3 15.4 41.0
Staff cost 21 12 69.5 10 110 51 37 36.2
Growth (%) 53.0 94.7 165.5 Other exp. 40 41 (2.8) 37 8 123 101 21.4
DPS (Rs) - 1.0 1.0 Total exp. 247 276 (10.3) 318 (22) 1,070 838 27.7
ROE (%) 40.1 25.7 37.0
EBIDTA 61 26 138.8 77 (20.5) 254 168 51.7
ROCE (%) 48.9 20.6 29.1
EV/Sales (x) 4.4 3.9 1.3 Other income 5 1 357.1 11 (54) 31 2 1,334.9
EV/EBITDA (x) 26.3 20.2 6.4 Depreciation 4 3 37.6 4 9 14 13 13.4
P/E (x) 30.7 22.4 8.4
EBIT 63 24 161.2 85 (26) 271 157 72.1
P/BV (x) 12.7 3.7 2.6
Interest 4 0 1,034.4 1 273 8 3 160.3
Source: Company, Kotak Securities - Private PBT 58 24 147.3 84 (30.4) 263 154 70.4
Client Research
Tax & def tax 17 9 96.1 21 (18) 68 54 25.9
PAT 41 15 177.8 62 (34) 194 100 94.5
Minority Interest 0.3 (0.0) - - 0 0.1
NPAT 41 15 174.9 62 (34.9) 194 100 94.3
Equity sh. o/s (mn) 12.6 8.9 12.6 12.6 8.9
Ratios
Optg profit margin (%) 19.9 8.5 +11.4 19.5 +40 19.2 16.7 +2.5
Raw Matls / Sales (%) 60.5 73.8 68.7 67.7 69.5
Staff cost / Sales (5) 6.7 4.0 2.5 3.8 3.7
Other Exp. / Sales (%) 12.9 13.6 9.3 9.3 10.1
Tax / PBT % 29.7 37.4 25.3 26.0 35.2
EPS (Rs) 3.2 1.7 5.0 15.4 11.3
CEPS (Rs) 3.5 2.0 5.3 16.5 12.7

Source: Company

n For Q4FY08 the company reported net sales of Rs.309 mn thereby registering
YoY growth rate of 2.5%. However sequentially there was de-growth of 22.0%
as in Q4FY08 the company could not import cylinders from China due to heavy
domestic demand in China for CNG cylinders.
n For FY08 the revenues grew by 31.7% on YoY basis to Rs.1.3 bn.

n For Q4FY08, the company reported EBIDTA of Rs.61 mn thereby registering


YoY growth rate of 138.8%.
n The company reported higher EBIDTA margin of 19.9% in Q4FY08 as against
8.5% in Q4FY07. This is primarily due to decrease in raw materials to sales ratio
from 73.8% in Q4FY07 to 60.5% in Q4FY08. Also the other expenditure to
sales has declined from 13.6% in Q4FY07 to 12.9% in Q4FY08.

Kotak Securities - Private Client Research Please see the disclaimer on the last page For Private Circulation 5
MORNING STAR June 27, 2008

n For FY08, the company reported higher EBIDTA margin of 19.2% up 2.5% on
YoY basis.
n PBT for Q4FY08 stood at Rs.58 mn up 147.3% YoY basis.

n PAT for Q4FY08 stood at Rs.41 mn up 174.9% YoY and down 34.9% on
sequential basis thereby translating into quarterly EPS of Rs3.2. and CEPS of
Rs.3.5.
n PAT for FY08 stood at Rs.194 mn up 94.3% on YoY basis thereby translating
into FY08 EPS of Rs.15.4 and CEPS of Rs.16.5.

Net sales (Rs mn) CNG cylinders plant at Vizag has stabilized
5,000 n The company's five lakh CNG cylinders per annum manufacturing plant at Vizag
has commenced commercial production in the beginning of the April 2008 and
4,000 has successfully stabilized its operations.
3,000 n Currently, it is operating at around 400-500 cylinders per day and is expected to
2,000 ramp up to 700-800 cylinders per day by August 2008. The company will
further ramp up to 1000 cylinders per day by September 2008.
1,000
n NFPIL has already received export orders for supplying CNG cylinders of a mix of
- large and small diameter of Rs.1.1 bn (around 175,000 cylinders) to be
FY09E
FY05

FY06

FY07

FY08

executed by December 2008. The order contains around 40:60 mix of both
large and small cylinders. Thus, there is clear revenue visibility for the company,
going forward.
Source: Company, Kotak Securities - Private
Client Research
Strong growth in fire protection business
The company's fire protection, safety and security business is doing well. The
current thrust on infrastructure creation and increase in industrialization is expected
to result in an increase in demand for the products of the company. NFPIL, with its
excellent quality, knowledge, wide range of products and adherence to strict
delivery schedules is ideally poised to take advantage of this opportunity.

Valuation and recommendation


EPS (Rs) n The FY08 results represent numbers excluding cylinder-manufacturing business,
as the plant commenced commercial production only in April 2008. This is
50
expected to lead to robust sequential growth in terms of both revenues and
40 profitability going forward.
30
n Post the recent sharp correction in stock price, due to the overall market
20
correction and concerns about stabilization of its cylinders manufacturing plant,
10 the stock, at Rs.345, trades at 2.6x BV, 8.4x earnings and 6.9x cash earnings
0 based on FY09E.
FY09E
FY05

FY06

FY07

FY08

n We believe the current valuations are very attractive considering the clear
growth prospects of the company, going forward. This is due to the strong
Source: Company, Kotak Securities - Private
order book for its CNG cylinders business. This would lead to 99.0% CAGR in
Client Research revenues and 129.8% CAGR in net profits from FY07 to FY09E.
n We have also done a one-year forward rolling band analysis for NFPIL, which
revealed that currently the stock is trading at the lower end of the band of 8x-
20x one year forward earning estimates. This makes it very attractive at current
levels.

Kotak Securities - Private Client Research Please see the disclaimer on the last page For Private Circulation 6
MORNING STAR June 27, 2008

One year forward rolling band - NFPIL

1,000 Price 8x 12x 16x 20x

750

500

250

-
Jun-07 Aug-07 Oct-07 Dec-07 Feb-08 Apr-08 Jun-08

Source: Capitaline, Kotak Securities - Private Client Research

n We are changing our cost of equity assumptions in our valuation model on the
back of interest rate hikes and change in risk perception. We now use risk free
rate of 8.0% and risk premium of 6.5%, WACC of 13.6% and terminal growth
rate of 4.0%.
We maintain our BUY n Using revised assumptions and DCF method of valuation we arrive at revised
recommendation on Nitin Fire price target of Rs.600. (Rs.650 earlier)
with a revised price target of
Rs.600 (74% upside) n We remain positive on the growth prospects of the company and continue to
recommend a BUY on Nitin Fire Protection with a revised price target of Rs.600
with 74% upside potential.

Kotak Securities - Private Client Research Please see the disclaimer on the last page For Private Circulation 7
MORNING STAR June 27, 2008

Bulk Deals Trade details of bulk deals


Date Scrip name Name of client Buy/ Quantity Avg. price
Sell of shares (Rs)

26-Jun Anjani Synth Jitendra Harivansh Joshi S 61,209 38.90


26-Jun Anu Labs Summit Communications Pvt Ltd B 75,000 370.18
26-Jun Bang Acme Craft Pvt. Ltd S 88,939 268.32
26-Jun Bihar Spon I Modi Rubber Ltd S 434,796 14.46
26-Jun Birla Cap Shearson Inv and Trading Co Pvt Ltd B 3,000,000 5.85
26-Jun Birla Cap Birla Bombay Pvt Ltd S 3,000,000 5.85
26-Jun Ceekay Diaki I S F Securities Ltd B 54,125 60.56
26-Jun Crazy Infote Pratibha Vilas Kakade B 425,376 4.15
26-Jun Filat Fash Jitendra Harivansh Joshi B 45,000 28.50
26-Jun Flap Prod Eq Tilakraj Mehta B 97,086 324.00
26-Jun Flap Prod Eq Ritu Kochar S 97,086 324.00
26-Jun Hexaware Ltd Dali Limited B 6,390,000 54.25
26-Jun Hexaware Ltd CLSA Mauritius Ltd S 6,390,000 54.25
26-Jun Koff Br Pict Laxmi Cap Broking Pvt Ltd S 51,659 24.50
26-Jun Natraj Fin Pari Stock Trading Pvt Ltd B 83,000 48.35
26-Jun Natraj Fin Hemal Pradip Mehta S 71,150 48.35
26-Jun Niraj Cement Dharmrajbhai Bhabhlubhai Wala S 83,160 203.12
26-Jun Rayban Sun O Globe Capital Market Ltd B 190,528 109.16
26-Jun Shiva Cement I S F Securities Ltd B 619,540 8.89
26-Jun Shri Bajrang JDM Securities B 55,298 27.00
26-Jun Well Pack Pa Samir Sureshbhai Shah HUF B 22,210 23.11

Source: BSE

Kotak Securities - Private Client Research Please see the disclaimer on the last page For Private Circulation 8
MORNING STAR June 27, 2008

Gainers & Losers Nifty Gainers & Losers


Price (Rs) % change Index points Volume (mn)

Gainers
Reliance Ind 2,240 4.9 25.0 9.5
Wipro 483 6.3 7.0 1.6
Infosys Tech 1,785 2.2 3.6 2.2
Losers
Reliance Com 496 (2.5) (4.4) 6.6
Bharti Airtel 769 (1.3) (3.3) 4.1
NTPC 155 (1.0) (2.1) 9.9

Source: Bloomberg

Forthcoming events Company/Market


Date Event

27-Jun Bafna Pharmaceuticals hosts listing ceremony at BSE


30-Jun Wyeth Ltd, Trent, India Cements earnings expected
1-Jul Tata Consultancy Services holds shareholders meeting
2-Jul Indo Rama holds shareholders meeting
10-Jul Bajaj Auto holds shareholders meeting
11-Jul Infosys Technologies earnings expected
16-Jul HDFC, Power Finance Corporation earnings expected
17-Jul Polaris Software earnings expected

Source: Bloomberg

Research Team
Dipen Shah Awadhesh Garg Saurabh Agrawal Siddharth Shah
IT, Media, Telecom Pharmaceuticals, Hotels Metals, Mining Telecom
dipen.shah@kotak.com awadhesh.garg@kotak.com agrawal.saurabh@kotak.com siddharth.s@kotak.com
+91 22 6634 1376 +91 22 6634 1406 +91 22 6634 1291 +91 22 6634 1261
Sanjeev Zarbade Apurva Doshi Saday Sinha Shrikant Chouhan
Capital Goods, Engineering Logistics, Textiles, Mid Cap Banking, Economy Technical analyst
sanjeev.zarbade@kotak.com doshi.apurva@kotak.com saday.sinha@kotak.com shrikant.chouhan@kotak.com
+91 22 6634 1258 +91 22 6634 1366 +91 22 6634 1440 +91 22 6621 6360
Teena Virmani Saurabh Gurnurkar Sarika Lohra K. Kathirvelu
Construction, Cement, Mid Cap IT, Media, Telecom NBFCs Production
teena.virmani@kotak.com saurabh.gurnurkar@kotak.com sarika.lohra@kotak.com k.kathirvelu@kotak.com
+91 22 6634 1237 +91 22 6634 1273 +91 22 6634 1480 +91 22 6634 1557

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