News Round-up :: Kotak Securities: December 7, 2010

News Round-up
` The govt. has agreed in principle to ensure a minimum 10% return on investment to
ONGC (ONGC IN) in Cairn India's (CAIR IN) Rajasthan blocks, boosting the firm's
valuation ahead of its follow-on public offer & removing a big obstacle for the USD
9.6bn Cairn-Vedanta deal. (ECNT)
` ONGC (ONGC IN) will pick up 25% in Kazakhstan's Satpayev block after 6 year delay.
(ECNT)

` SBI (SBIN IN) has raised deposit rates by 50 to 150 basis points giving a clear
indication that lending rates are set to rise by the end of this month. (ECNT)
` Maruti Suzuki India (MSIL IN) said it would increase prices of its vehicles soon, to
offset rising input costs and impact of the strengthening yen. (BSTD)
` Mukesh Ambani is planning to provide USD 222 mn seed capital to begin a new
venture that would invest in innovative business ideas, including technology and
healthcare segments. (BSTD)
` Suzlon Energy (SUEL IN) said it would acquire the tower business division of fullyowned unit, Suzlon Towers & Structures, and the operations and maintenance
division of wholly-owned Suzlon Infrastructure Services. (BSTD)
` Glenmark (GNP IN) gets FDA nod for painkiller drug. (BSTD)
` Siemens (SIEM IN) bags USD 28 mn order from Jaypee. (BSTD)
` Mahindra Finance (MMFS IN) to raise up to USD 127 mn in January. (FNLE)
` M&M (MM IN) in pact with Italian firm for supply of tillers. (THBL)
` The shares of Tata Steel (TATA IN) surged 3.4% after news that global mining major
Rio Tinto had made a USD 3.5bn bid for Africa focused Riversdale Mining, in which
the Tata own a 24% equity stake. (ECNT)
` Religare Enterprises (RELG IN)  is close to buying 85% of the Ajay Piramal Group
promoted real estate fund Indiareit Fund Advisors, valuing the entire fund at around
USD 55.55mn. (ECNT)
` JSW Steel (JSTL IN) has got shareholder's nod to  issue 0.97mn shares equity shares
on a preferential basis to Japanese steelmaker JFE Steel. (ECNT) 
` Piramal Healthcare's (PIHC IN) shareholders have approved a proposal to buyback
20% of its total shares that will entail an outgo of USD 557.37mn. (ECNT)
` NRI businessman C Sivasankaran has acquired 2.99% stake through open market
purchases in the Bangalore based  Karuturi Global (KARG IN) in the past few weeks.
(TTOI)
Source: ECNT= Economic Times, BSTD = Business Standard, FNLE = Financial Express, THBL = Business Line

Economy & Corporate News:: Kotak Sec: 07/12/10

Economy News
4 Foreign direct investment (FDI) in multi-brand retail and insurance may
be opened up soon in India, Mr Montek Singh Ahluwalia, Deputy
Chairman, Planning Commission, indicated on the sidelines of  a
Federation of Indian Chambers of Commerce and Industry (FICCI) event.
(BL)

4 France on Monday signed deals with India worth euro 13.3 billion in the
nuclear power, civil aviation and defence sectors. India and France have
signed as many as five agreements in the civil nuclear power sector. They
included a framework agreement to construct two civil nuclear plants in
Jaitapur, Maharashtra, costing euro 7 billion (roughly $9.5 billion). The
sixth agreement was on film co-production and one MoU on cooperation
on earth system science and climate. Plans are also afoot to construct
another four nuclear power plants (a total of six), all by French nuclear
giant Areva, at a total cost of $25 billion. (BS)

Corporate News
4 State Bank of India, on Monday, hiked interest rates on fixed deposits
by 50-150 basis points. The sharp rise of 150 basis points is for short-term
deposits having maturity up to three months, while for longer term
deposits; the hike is between 50 and 100 basis points, which indicate tight
liquidity in the system. (BL)
4 Engineers India Limited said it is mulling to bid under the ninth round
of the New Exploration and Licencing Policy (NELP) of oil and gas blocks
and enter city gas distribution projects. The company is looking to enter
city gas distribution projects and provide consultancy for nuclear power
projects. (BS)
4 Piramal Healthcare on Monday said its shareholders have approved a
proposal to buyback 20 per cent of its total number of shares that will
entail an outgo of Rs 25.08bn. A resolution seeking shareholders nod for
contributing to charitable and other funds up to an amount of Rs 2bn, has
also been approved by the shareholders. (BS)
4 Shares of Tata Steel, surged 3.4% on Monday after news that global
mining major Rio Tinto had made a $3.5-billion bid for Africa-focused
Riversdale Mining, in which the Tatas own a 24% equity stake. While the
development sparked speculation that Tata Steel, one of the three major
shareholders in Riversdale Mining, could launch a counter bid, people
familiar with the group said the Mumbai-based conglomerate would not
go alone in putting in such a bid. (ET)
4 India and Kazakhstan will iron out some unspecified commercial issues by
February next year, paving way for state-run ONGC to pick up 25% stake
in Kazakhstan’s Satpayev block after six years of delay. The Cabinet
Committee on Economic Affairs (CCEA), India’s apex body on economic
matters, has already approved the deal last year. (ET)
4 Suzlon Energy Ltd has informed BSE that the board of directors of the
company has approved the acquisition of tower business division of
Suzlon Towers and Structures Ltd and operations and maintenance
division of Suzlon Infrastructure Services Ltd, both are wholly owned
subsidiaries of the company, under a composite scheme of arrangement,
subject to receipt of all statutory and regulatory approvals. (BL)

SBI:Aligning deposit rates to market rates:: Kotak Sec

State Bank of India (SBIN)
Banks/Financial Institutions
Aligning deposit rates to market rates. We see SBI’s recent move to increase rates as
a measure to counter the rising cost of tight liquidity and normalize its interest rates in
line with market rates. We expect a marginal decline in NIMs in 2HFY11E from the
elevated levels of 2QFY11 and our earnings estimates capture that. We believe high
CASA banks will have a lower impact of rising funding costs compared to peers. We
maintain our estimates and believe the bank would benefit from better operating
leverage and lower provisions in FY2012. Maintain BUY.




Deposit rates across buckets increased by 50-150 bps; move aimed at normalization 
SBI today announced a hike in its deposit rates by 50-150 bps across various buckets as the
liquidity environment continues to remain tight (advance tax outflows in December). Lending rates
remain unchanged. The overall increase looks sharper, regardless, we believe this rate hike is
aimed at aligning SBI’s interest rates towards market rates and the tight liquidity environment
experienced by the industry. The sharpest rise has been in the 46-90 day bucket at 150 bps (5.5%
and one of the highest in the industry), indicating that SBI is probably looking at the current
liquidity deficit to be temporary in nature, a situation likely to reverse in 4QFY11 as government
spending improves. This rate however, continues to be lower than prevailing call money rates.
However, the rates have been increased by 100 bps in the 1-3 year categories (7.75-8.5%)   

Strong CASA ratio of 48% to cushion rising costs; building NIM decline in estimates
In light of tight liquidity environment, we favor high CASA banks like SBI to cushion the impact of
steep rise in deposit costs. As of 2QFY11, SBI had a CASA ratio of 48% (domestic deposits),
second highest in the industry following HDFC Bank. 

We anyways build reasonable cushions in our 2HFY11 estimates as we expect FY2011
improvement in NIM (calc) of about 45 bps while the bank has been running at about 60 bps
higher NIMs during 1HFY11, as compared to FY2010 NIMs. Also, our earnings already factor NIMs
to decline in FY2012 by about 10 bps to 2.8% (calc). 

Logical to expect lending rate hike as well; credit growth is also picking up 
We believe SBI will also raise lending rates in due course. Even in the past, lending rate hikes have
followed deposit rate hikes. Further credit growth has just started to pick up – bankers have been
highlighting that credit growth has been firm during recent times and is getting more diversified.
We believe pricing power remains with bankers on the back of steady loan demand coupled with
tighter liquidity in the system

Earnings impact limited as strong levers available 
We believe SBI has multiple levers to deliver over 20% earnings growth and RoAs of 1%
despite NIM pressure in FY2010-12E, mainly from better operating leverage and lower loan
loss provisions. A cost-income ratio of 47% and opex/assets at 2% has scope for further
improvement as the bank has completed near-term investments in branches, technology and
employees. 2HFY12 would see loan loss provisions to ease as the bank reaches 70%
provision coverage ratios as mandated by RBI. Also, strong improvement in the underlying
economy would also see lower slippages and higher recovery cycle resulting in lower loan
loss provisions (we are building FY2012 loan loss provisions to remain at FY2011 levels).

HDFC -Rising home loan rates will temper loan growth:: Kotak Sec

HDFC (HDFC)
Banks/Financial Institutions
Rising home loan rates will temper loan growth. HDFC has raised home loan rates
for existing customers by 75 bps with effect from December 1, 2010. HDFC has
withdrawn the dual rate home loan scheme and now offers new home loans at 9.5%
as against 8.75-9% earlier. The management expects margins to remain stable post the
current hike. We believe that the rise in real estate prices coupled with rise in lending
rates will likely affect loan growth in the retail lending business. Valuations remain rich,
retain REDUCE.




HDFC has increased home loan rates, others to follow suit 
HDFC has increased its PLR by 75 bps with effect from December 2010. This hike follows a 50 bps
rise in PLR in September 2010. Home loan rates for new customers have also been increased to
9.5% for loans up to Rs3 mn, 9.75% for loans between Rs3 mn and Rs7.5 mn, and 10% for loans
above Rs7.5 mn. HDFC and ICICI Bank have withdrawn their dual rate (teaser) home loan schemes
following sharp rise in interest rates. In the recent credit policy review, RBI has increased standard
asset provisions for dual rate loans offered by banks to 2% from 0.4% earlier. 
Over the weekend, ICICI Bank has also increased their home loan rates by 50 bps. SBI will review
the rates in January 2011; however, most other banks are currently reviewing their home loan
rates and will likely announce rate hikes over the next few weeks. 

Borrowings cost has increased, hike will support margins
The bulk borrowings rates have increased by about 100-300 bps over the last two quarters. CP
rates have now increased to about 9.5% due to the liquidity crunch. Last week, liquidity in the
system was at a peak deficit of about Rs800 bn. We believe that the rise in bulk borrowings rates
in the system will prompt the bank to hike lending rates. Banks with high CASA—HDFC Bank,
PNB, BoB and Union Bank—will likely be better-placed in the current environment. HDFC’s
management has highlighted that the company will be able to maintain margins post the current
hike. The entire portfolio will be re-priced within next three months. 




SOTP-based target price of Rs720; retain REDUCE
We retain SOTP-based target price of Rs720. In our fair value estimate, we value HDFC’s
mortgage business at Rs400/share—6X core PBR and 19X core PER FY2012E. In order to
capture the impact of the likely warrant conversion in FY2013E, we have valued the business
using a residual growth model as of March 2013E and discounted back the value to March
2011E at 12.5%. At our fair value estimate, the mortgage business will trade at 4X core PBR
and 15X core PER FY2013E for RoEs of about 26-30% (2% core RoA and leverage of 13-
15X).

Sterlite completes acquisition of Skorpion zinc mine., Kotak Sec,

Sterlite Industries (STLT)
Metals
Sterlite completes acquisition of Skorpion zinc mine. Sterlite completed acquisition
of Skorpion zinc mine in Namibia at a consideration of US$707 mn from Anglo
American plc. Sterlite expects to complete acquisition of remaining two zinc mines from
Anglo American by end-FY2011E. Acquisition of the entire portfolio of Anglo American
zinc mines will be EPS accretive though value accretion will be contingent on (1) longterm zinc price sustaining above US$1,900/ton and/or (2) significant accretion to
reserves.




Sterlite completes acquisition of Skorpion zinc mine; remaining two likely by end-FY2011E
Vedanta Resources had entered into a definitive agreement to acquire zinc assets of Anglo
American (Anglo) for a cash consideration of US$1.33 bn in May 2010. Vedanta stated at the time
of acquisition that (1) consummation of each of the three operational zinc assets in South Africa,
Namibia and Ireland would be done separately and (2) it would seek approval from HZ board and
Indian Government to complete acquisition through Hindustan Zinc (HZ), failing which the
acquisition will be done by Sterlite Industries. 

Sterlite completed acquisition of Skorpion zinc mine in Namibia (after HZ failed to get approvals in
time) at a consideration US$707 mn (increase in consideration by US$9 mn since the initial
announcement is entirely attributable to accrued cash). Sterlite standalone entity can easily fund
the acquisition through its cash reserves of US$2 bn at end-Sep ’10. However, the acquisition of
Anglo zinc assets by Sterlite leads to inefficient capital and corporate structure. 

Skorpion mine acquisition will be EPS accretive though value neutral
Skorpion mine has reserves of 911 kt of contained zinc metal, resources of 24 kt and annual
production of 150.4 kt of zinc at end-2009. Financials will be consolidated with retrospective
effect from Jan 1, 2010. Cost of production is at ~US$904/ton. We expect this acquisition to add
4.2% and 4.1% to our FY2012E and FY2013E EPS, at a zinc price of US$2,150 and US$2,250/ton.
We expect the acquisition to be value-neutral on disclosed reserves and long-term zinc price of
US$1,850/ ton. At the spot price of US$2,208/ ton, the acquisition will add Rs4 to our fair value. 

Completion of remaining mines by end-FY11E and will entail further cash outflow of US$640 mn
Sterlite expects to complete acquisition of Lisheen mine in Ireland (935 kt of reserves and 102 kt of
resources) and Black Mountain mine in South Africa (480 kt of reserves and 378 kt of resources)
by end-FY2011E at a consideration of US$640 mn. Total consideration of all three mines stands at
US$1,347 bn, which Sterlite can easily fund through its cash reserves. Acquisition will add 8.3%
and 8.4% to our FY2012E and FY2013E EPS at zinc price of US$2,150/ton and US$2,250/ton,
respectively.


Acquisition of Anglo American zinc assets will make the company one of the largest zinclead producers in the world. Anglo American will add close to 400 ktpa of zinc-lead
production. The entire acquisition is value neutral; assuming mine life ends at the current
disclosed proven and probable reserves and assuming zinc prices of US$2,000, US$2,150
and US$2,250/ton for the next three years and long-term average of US$1,850/ton. The
entire acquisition becomes value accretive on (1) conversion of mineral resources of existing
mines to reserves and (2) option value of Gamsberg undeveloped mines. The conversion of
resources to reserves will add Rs10 to our fair value. 
We compute value accretion of Rs7/share assuming long-term zinc prices stay at the current
level of US$2,208/ton. Anglo assets will likely generate EBITDA of US$310 mn in FY2012E at
the current zinc price; the acquisition consideration will appear inexpensive at 4.3X FY2012E
EBITDA. 


Operating zinc assets are of high quality  
Operating mines acquired/to be acquired from Anglo is of high quality; the cash costs of
these mines would in the 2
nd
 quartile (range US$639/ton to US$1,018/ton). The three mines
acquired/to be acquired generated revenues of US$340 mn, EBITDA of US$171 mn and net
income of US$137 mn in 1HCY10 at an average LME zinc price of US$2,161/ton.

Details of mines acquired 
` Integrated zinc mining and refining facilities named Skorpion in Namibia with annual
production capacity of 150 ktpa. The mine has reserves of 911 kt of contained zinc and
total resources of 24 kt at end-2009 with mine life of seven years. Vedanta has paid
US$707 mn for this mine. Cash cost of production in 1HCY10 was US$911/ton.
` Underground mine named Lisheen in Ireland with zinc and lead metal in concentrate
reserve of 935 kt (mine life of six years) and resources of 86 kt. Vedanta is expected to
pay US$308 mn for this mine. Cash cost of production in 1HCY10 was US$639/ton.  
` 74% stake in Black Mountain mine in South Africa. Black Mountain is an underground
mine producing zinc (28.2 ktpa) and lead (49.1 ktpa) concentrate. Black Mountain mine
reported revenues, EBITDA and net income of US$54 mn, US$15 mn and US$11 mn in
CY2009. 
In addition, Vedanta gets rights to the Gamsberg mine, one of the largest undeveloped zinc
deposits with potential resources of 186 mn tons. Vedanta indicates the potential to
produce 400 ktpa of zinc and lead. Vedanta has paid US$1.3 bn for these assets. Note that
the Gamsberg mine will ramp up to 400 ktpa of production only by 2018E. Press reports
indicate a capex of US$1.8 bn to ramp up the projected capacity.